ZENEX VISION DEGREE COLLEGE ADVANCED CORPORATE ACCOUNTING

II- B.Sc. Accountancy Syllabus

SEMESTER – IV (SYLLABUS)

COURSE IV : ADVANCE CORPORATE ACCOUNTING

Unit –I : HIRE PURCASE ACCOUNTS:

Hire purchase account – features of hire purchases system – calculation of

interest and calculation of cash price – journal and ledger in the books of buyer and
in the books of buyer and vendor (excluding default and Repossession and Hire
purchase trading account.)

Unit – II : BANK ACCOUNTS :

Bank Accounts – Books and Registers to be maintained by Banks – Banking

Regulation Act, 1969 – Legal Provisions Relating to preparation of profit and loss
Accounts only, Rebate on bills discounted. (Including problems).

Unit –III : ACCOUNTS OF INSURANCE COMPANIES :

Life Insurance Companies – Preparation of Revenue Account , Profit and Loss

Account, Balance Sheet (including problems) – LIC Act, 1956. Preparation and
valuation of balance sheet – correct life assurance fund including problems.

Unit – IV : ISSUE OF SHARES :

Issue of shares at par – at premium at discount – calls in arrears – Forfeiture of

shares – Reissue of shares.

Unit – V : INTERNAL RECONSTRUCTION :

Alteration of Shares capital – reduction – procedure for capital reduction –

Accounting entries for Internal reconstruction – preparation of Balance sheet after
internal reconstruction – Simple problems.

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Unit I
HIRE PURCHASE SYSTEM

Meaning: The Hire purchase system is a combination of two modes of possessing the goods-by
hiring them or by purchasing them. Hire purchase is an agreement between two parties in
which one party purchase any asset from other party. Because he has no money to pay, so he
pays per month hire charges. Vendor has the right on the asset even asset is at purchaser of
asset. When buyer pays total price of assets in the form of hire charges, then asset is
transferred to its purchaser. If buyer will become defaulter, vendor has right to get his asset
from hire purchaser.

Definition : According to the Hire Purchase Act of 1972, it is an agreement under which the
goods are let on hire and under which the hirer has an option to purchase them in accordance
with the terms of the agreement and includes an agreement, under which (i) Possession of
goods is delivered by the owner thereof to a person on condition that such person pays the
agreed amount in periodical installments, and (ii) The property in the goods is to pass to such
person on the payment of the last of such instalment and (iii) such person has a right to
terminate the agreement on any time, before the property so possess.

The Act further specifies that the agreement must state the following: (a) The hire-purchase
price, (b) The cash price, (c) The date of commencement of agreement (d) The number of
installments with the amount of each instalment, (e) Other details such as the dates, the
manner in which the installments are to be paid, the person to whom they are payable, the
place and (f) The description of the goods covered by the agreement.
Features:
1. Possession of goods is given at the time of agreement,
2. The ownership passes to the buyer only after payment of the last installment and in
the case of any default in payment of the installments, the owner can repossess the
goods,
3. The hirer may terminate the agreement at any time, before he becomes the owner i.e.
before, the payment of the last instalment and
4. The amount paid through installments is treated as hire, until the hirer exercises his
option to purchase the goods by paying the last instalment.

Instalment purchase system: It is similar to that of hire purchase system. Its legal position is
quite different from Hire purchase system. When goods are sold in this system, it is like a credit

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sale. But the selling price is paid in installments along with interest. The rights of goods sold is
transferred to buyer immediately after the agreement.

Features :

(1) The agreement of instalment purchase system is the agreement of sale.

(2) The ownership is transferred to buyer immediately after the agreement.
(3) In the case of default of installments, the vendor has no right to repossess such goods.
(4) It is not possible to return such goods to the vendor.
(5) The instalment purchaser can deal with the asset or goods as he chooses.
Differences between Hire-purchase system and Instalment purchase system :

1. Contact : The agreement under hire-purchase system is for hiring the asset, while the
agreement under instalment purchase system is an agreement for sale.

2. Ownership : The ownership in respect of goods sold on H.P. basis passes to the buyer only
when he pays the last instalment. Until that the vendor is the owner, even though the goods
are held by the buyer. But, in the case of instalment system, the ownership is transferred to the
buyer immediately after agreement..

3. Default : The vendor has the right to take back the asset under hire purchase system, when
the buyer made the default in paying the installments. In instalment system, he has no such
right.

4. Return of goods : The hire purchaser can terminate the contract and return the asset or
goods to the vendor under hire purchase system. In instalment purchase system he has no such
right.

5. Dealing with the asset : The hire-purchaser has no right to destroy or damage or dispose the
goods, because he has no right on the goods till the payment of last instalment. The instalment
purchaser can deal with them in the manner as he likes.

Entries in the books of hire Purchaser:

a) When any cash paid on delivery of an asset ( down payment)

Asset a/c Dr
To bank account
b) When installment is due
Asset a/c Dr (payment towards cash price)
Interest a/c Dr (with interest amount)
To hire vendors a/c

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c) When installment amount paid

Hire vendor a/c Dr
To bank a/c
d) When depreciation is charged
Depreciation a/c Dr
To asset a/c
e) When interest and depreciation transferred to P&L a/c
P&L a/c Dr
To interest a/c
To depreciation a/c
Note: Entries (c) to (e) will be repeated in subsequent years.
Entries in the books of hire vendor:

a) When asset is sold on hire purchase

Hire purchaser a/c Dr
To sales a/c
b) When cash is received on delivery of asset ( down payment)
Bank a/c Dr
To Hire purchaser a/c
c) When interest due on installment at the end of the year
Hire purchaser a/c Dr
To interest a/c
d) When installment amount received
Bank a/c Dr
To Hire purchaser a/c
e) When interest is transfer to P&L a/c
Interest a/c Dr
To P&L a/c

Note: Entries (c) to (e) will be repeated in subsequent years.

DEFAULT AND REPOSSESSION

when the purchaser fails to pay any of the instalments, the hire vendor can take back the possession of
the goods. The amount already paid to the vendor as a part of the payment for the asset is treated as
the hire charge. So far as the repossession of goods is concerned, the vendor can either take back the
whole of the asset or a part of it. (i) complete repossession and (ii) the partial repossession.

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Complete Repossession :When the hire purchaser does not pay the installment, the vendor can take
back the possession of goods. In case the vendor takes the possession of all the goods, it is called
complete repossession. It means the vendor will close Hire Purchaser’s Account in his books and vice
versa.

Problems:

1. Sarada purchased a vehicle under Hire purchase agreement, the cash price being Rs. 12,894. As
per the terms. Rs. 2000 is to be paid on signing the agreement and balance in three equal
installments of Rs. 4,000 of the end of each year. The rate of interest is 5% per annum. Calculate
interest chargeable at the end of each year.
2. Roopa bought a machine under hire - purchase system agreement, the cash price of the
machine being Rs. 18,000. As per the terms the buyer has to pay Rs. 4,000 on signing the
agreement and the balance in four instalments of Rs. 4,000 each payable at the end of each
year. Calculate the interest chargeable at the end of each year.

3. Sekhar purchased a T.V. on hire purchase system. The cash price of the T.V. was Rs. 18,000. He
paid four quarterly installments of Rs. 5,000 each. Calculate the interest paid for each quarter.

4. Calculate cash price from the following information. On 1st January Ram purchased a machine
on hire purchase system and paid initial payment of Rs. 1,500 and balance in three installments
of Rs. 2,000 each. Rate of interest is 6% p.a.

5. Renuka purchased a machine on January 1,1986 on hire purchase basis for Rs. 5,000 payable as
under :
Down Payment 930, At the end of 1st year I 1,426 (1st-instalment)
At the end LE 2nd year 1,804 (2nd instalment), At the end of 3rd year 840 (3rd instalment)
Rate of Interest 5% p.a
Calculate the Cash Price of the machine and interest paid with each instalment

6. Ram purchased a machine on hire purchase system and pays Rs.10000 down and Rs.8000,
Rs.7000 and Rs.6000 at the end of the 2nd,4th and 6th year respectively. Interest is charged by the
vendor at 10%.p.a. Determine the cash price.

7. Ramesh purchased a plant on hire purchase paying Rs.15000 down and Rs.15000 at the end of
successive year. The rate of interest charged by the vendor is 5% p.a. , Given the present value
of an annuity of Rs.1 p.a. of 5% interest for three years is 2.7232. calculate cash price.

8. Varma purchased a plant on hire purchase paying Rs.7767 down and Rs.10000 at the end of
1st,2nd and 3rd year. The rate of interest charged by the vendor is 5% p.a. , Given the present
value of an annuity of Rs.1 p.a. of 5% interest for one, two and three years is
0.9524,0.9070,0.8639. Calculate cash price.

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9. Preneeth Ltd. purchased motor lorry on hire purchase over a period of 4 years. Rs. 12,000
payable on Jan 1, 2003 and the balance by four annual installments at Rs. 12,000 each on 31st
December. The seller charges interest @ 5% p.a. on yearly balance. The cash price was Rs.
54,550. Depreciation @ 25% on diminishing balance was written off each year. Show necessary
ledger accounts in the books of Hire Purchaser.

10. On 1.1.2005, A purchased a machine from B on hire purchase basis. The cash price of the
machine was Rs. 2,50,000, payable Rs. 50,000 on signing the agreement and the balance in four
annual installments of Rs. 50,000 plus interest at 5% payable on 31st December each year.
Depreciation at the rate of 10% per annum on the diminishing value of machinery. Show
machinery account and B account in the books of A.

11. The Chennai Transport Company purchases motor car from Mumbai Motor company on hire
purchase agreement on 01-04-2010 paying cash Rs. 50,000 and agreeing to pay further three
installments of Rs. 50,000 each on 31st march each year. The cash price of the car is Rs. 1,86,250
and the Mumbai Motor Company charges interest at 5% p.a. The Chennai. Transport Company
writes off 10% depreciation on the reducing balance method. Show necessary ledger accounts in
the books of both the parties.

12. Dinesh Ltd., on 'April 1, 1989, purchased a machine from Rajesh Ltd., on hire purchase basis. The
c-sh price of the machine was Rs. 25,000. The payment was to be made Rs. 5,000 on the date of
the contract and the balance in four annual installments of Rs. 5,000 each plus interest at 5%
per annum payable on December 31 each year, and the first such installment being payable on
31.12.89. .Depreciation is to be charged @ 10% on original cost, Show the journal entries and
ledger accounts in the books of both the parties.

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Unit – II

BANK ACCOUNTS
Banking : Under Section 5(b) of the said Act “Banking” means:
“Accepting deposits of money from public for the purpose of lending these
deposits are repayable on demand and can be withdrawn by cheque, draft or otherwise.”

Banking Company: Any bank which transacts this business as stated in section 5 (b) of the
act in India is called a banking company. However merely accepting public deposits by a
company for financing its own business shall not make it a bank.

Books, Ledgers and Registers Maintained by a Bank :

Books Section:

(a) Cash Book: For recording different types of cash transactions two types of cash books are
recorded, viz.

(i) Rough Cash Book which deals with cash receipts and cash payments maintained by a
receiving cashier and paying cashier, respectively. It records serial number,
depositor’s name, amount received etc. in cash, whereas, in case of cash payment,
serial number, payee’s name, amount paid, number of token etc. are recorded.

(ii) A Fair Cash Book, on the other hand, is one when a separate person, after receiving
the above information from the paying and receiving cashier, records the
transactions in a separate book. Naturally, the transaction of the fair cash book must
tally with the sum total of the above two rough cash books.

Cash Balance: The cash balance at the close of the day is written in the book which is duly
signed by the cashier and the manager.

Day Book: It records day-to-day transactions of the book relating to cash transfers, clearings
etc. Besides the above, Received Waste Book, Sectional Cash Book etc. are also to
be maintained.

Ledger and Register Sections:

Ledger Section:

Current Account Ledger: It records the transactions of those customers who open current
account. Generally, the bank does not pay interest on the balance of this account but a nominal

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charge is taken by the bank for rendering the services. If there are many current accounts, those
are to be serially numbered.

Savings Bank Ledger: It records the transactions of those customers who open savings account
in a bank. The detailed description of the customer, viz., name, address, occupation, are recorded
along with an account number. If there are many Savings Account ledgers, they are to be serially
numbered.

Fixed Deposit Ledger: It contains transactions of those customers who have deposited their
money into the bank for a fixed period. Generally, at the top of the account, depositor’s name
and address, rates of interest, period of deposit, the amount so deposited etc. are to be recorded.

General Ledger: It is actually the key ledger of the accounting system of a bank. It contains a
total amount in respect of total Current Accounts, total Savings Bank Account, total Loans
Account, total Bills Payable Account, total Expenses and total Revenue Accounts. Each ledger is
kept under self-balancing system. A trial balance can easily be prepared which helps to prepare
the final account as Well.

Besides the above ledgers overdue fixed deposit ledger, fixed deposit interest ledger, loan ledger,
investment ledger may also be prepared.

Register Section:

The register section includes:

Bills for Collection Register, Securities Register, Document Register, Standing Order Register,
Cheques Dishonored Register, Drafts Issue Register, Drafts Payable Register, D.D. Register,
Foreign Letters of Credit Register etc.

The cash book and general ledger are principal books while others are subsidiary books.

A Non-performing asset (NPA) : It is defined as a credit facility in respect of which the interest
and/or installment of Bond finance principal has remained ‘past due’ for a specified period of
time. NPA is used by financial institutions that refer to loans that are in jeopardy of default. Once
the borrower has failed to make interest or principle payments for 90 days the loan is considered
to be a non-performing asset.

Non-performing assets are problematic for financial institutions since they depend on interest
payments for income. Troublesome pressure from the economy can lead to a sharp increase in
non-performing loans and often results in massive write-downs.

With a view to moving towards international best practices and to ensure greater transparency, it
has been decided to adopt the ‘90 days’ overdue’ norm for identification of NPA, from the year

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ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset
(NPA)is a loan or an advance where;

 Interest and/or installment of principal remain overdue for a period of more than 91 days
in respect of a term loan,
 The account remains ‘out of order’ for a period of more than 90 days, in respect of an
Overdraft /Cash Credit (OD/CC),
 The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,
 Interest and/or installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural
purposes, and
 Any amount to be received remains overdue for a period of more than 90 days in respect
of other accounts.
 Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit
Facility.
 No active transactions in the account (Cash Credit/Over Draft) for more than 91days

Further classify non-performing assets further into the following three categories based on the
period for which the asset has remained non-performing and the realisability of the dues:

1. Sub-standard assets: a sub standard asset is one which has been classified as NPA for a
period not exceeding 12 months.
2. Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding
12 months.
3. Loss assets: where loss has been identified by the bank, internal or external auditor or
central bank inspectors. But the amount has not been written off, wholly or partly.

Non- banking assets : No banking company can directly or indirectly deal in the buying or selling or
bartering of goods, except in connection with the realization of security given to or held by it. A
bank cannot acquire certain asset but can lend against such assets. this means that sometimes,
in case of failure on the part of the loanee to repay the loans, the bank may have to take
possessions of such assets. In that case, the assets will be shown in the balance sheet as "non
banking assets."

Disposal of non-banking assets:

Notwithstanding anything contained in section 6, no banking company shall hold any immovable
property howsoever acquired, except such as is required for its own use, for any period
exceeding seven years from the acquisition thereof or from the commencement of this Act,
whichever is later or any extension of such period as in this section provided, and such property
shall be disposed of within such period or extended period.

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Meaning of Rebate on Bills Discounted:

Rebate on Bills Discounted is also known as Discount Received in Advance, or, Unexpired
Discount or, Discount Received but not earned. Its treatment is same as we do in the case of
Interest Received in Advance.

(i) If it is given only in the Trial Balance: It will be shown as a liability and will appear in the
liability side of the Balance Sheet.

(ii) If it is given in adjustment: In that case, it is deducted from the Income from Interest and
Discount in Profit and Loss Account and the same also will appear in the liability side of the
Balance Sheet

Final Accounts:
According to Section 29 of the Banking Regulation Act, 1949, every banking company is
required to prepare with reference to that year a Balance Sheet and a Profit and Loss Account as
on the last working day of the year in the ‘Form A’ and ‘Form B’ respectively set-out in the
‘Third Schedule’ or as near thereto as circumstances admit.

Profit and Loss Account:

Profit and Loss Account of banking companies also prepared in vertical form. ‘Form B ’ of the Third
Schedule of the Banking Regulation Act, 1949 is to be used for preparing Profit and Loss Account. It is
divided into four sections : I. Income II. Expenditure III. Profit/Loss IV. Appropriations.

Form – ‘B’
FORM OF PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH

Schedule Year ended Year ended

No. 31.3..... 31.3….
(Current Year) (Previous
Year)
I. Income :
Interest earned 13
Other- income 14
Total

II. Expenditure :
Interest expended 15
Operating expenses 16
Provisions and contingencies

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Total

III. Net profit / loss:

Profit /loss for the year

Pofjt| Loss brought forward
Total
IV. Appropriations :

Transfer to statutory Reserves

Transfer to other reserves
Transfer to Govt. / proposed reserves
Balance carried over to Balance Sheet

Total
Total Schedule – 13 : INTEREST AND DISCOUNT EARNED
Current year Previous year
(Rs.) (Rs.)
Interest on overdraft Xxx Xxx
Interest on loans Xxx xxx
Interest on cash credits Xxx Xxx
Interest on overdraft Xxx Xxx
discount on bills discounted Xxx Xxx
Income from investments Xxx Xxx
Interest on balances with RBI and inter- bank funds Xxx Xxx
Others
Total Xxx xxx

Schedule – 14 : OTHER INCOMES

Current year Previous year
(Rs.) (Rs.)
Commission, exchange and brokerage Xxx Xxx
Profit on sale of investments
Xxx Xxx
less : Loss on sale of investments
Profit on revaluation of investments
Less: Loss on revaluation of investments Xxx Xxx
Profit on sale of other assets
Xxx Xxx
Less: Loss on sale of other assets
Miscellaneous income Xxx Xxx

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Total Xxx xxx

Schedule – 15 : INTEREST EXPENDED

Current year Previous year
(Rs.) (Rs.)
Interest on deposits (savings, term, recurring, current) Xxx Xxx
Interest on with RBI and inter- bank borrowings Xxx xxx
Others Xxx Xxx

Total Xxx xxx

Schedule – 16 : OPERATING EXPENSES

Year ended Year ended

(Current Year) (Previous Year
Payments to and provisions for employees Xxx Xxx
Rent, taxes and lighting Xxx Xxx
Printing and stationery Xxx Xxx
Advertisement and publicity Xxx Xxx
Depreciation on bank’s property Xxx Xxx
Directors’ fees, allowances and expenses Xxx Xxx
Auditors’ fees and expenses Law charges Xxx Xxx
Postages, telegrams, telephones, etc. Xxx Xxx
Repairs and maintenance Xxx Xxx
Insurance Xxx Xxx
Other expenditure Xxx Xxx

Xxx Xxx
xxx
Total

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PROBLEMS

1. From the following particulars of safety bank for the year ended 30.09.09 prepares P&L A/C.

PARTICULARS AMOUNT RS.

Interest on loan 2490000
Interest on deposits 3200000
Interest on over draft 1600000
Interest on cash credits 2320000
Commission/Bank charges 400000
Director Fee 16000
Auditor Fee 35000
Bad debts 300000
Discount on Bills Discounted 1490000
Sundry charges 100000
Rent & drwences 500000
P&L A/C Brought Forward for previous year nil.

2. Prepare P&L A/C for the year ended 31-12-2002. Of very sound bank LTD from the following Transactions.
PARTICULARS AMOUNT (in thousands).
Interest on loan 250
Interest on savings 150
Interest on cash credits 160
Interest on fixed deposits 190
Salary Allowances 120
Discount on Bills Discounted 40
Rent taxes insurance & lighting 5
Dearness Allowances 35
Commission Exchange & Brokarage 15
Managing director salary 15
Contribution to Provident fund 50
Amount charge against current A/C (Bank Charges) 20

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3. 3. From the following particulars prepare P&L A/C of Andhra Bank LTD as on 31-12-2009.
PARTICULARS AMOUNT
Interest on cash credits 500000
Interest on current A/C (deposit) 300000
Interest on OD 600000
Postage & Telegram 40000
Discount on Bills Discounted 700000
Bank charges & Commission 100000
Interest on recurring deposits 60000
Salary & Allowances 40000
Interest on borrowing 80000
Interest on loan 200000
Profit on sale of business 40000
Printing & Stationary 10000
Bad debts return of 5000

4. 4. From the following information prepare P&L A/C of SBI for the year ended 31.12.2009.
PARTICULARS AMOUNT
Intrest on loan 518000
Intrest on credit 446000
Intrest on current A/C 84000
Discount on Bills Discounted 390000
Intrest on OD 700000
Intrest on saving A/C 136000
Interest on recurring deposits 60000
Comission 16000
Exchange 400
Rent & Taxes 36000
Depreciation on bank Property 10000
Postage & Telegram 2800
Sundry Charges 2000
Provident fund 1400
Director & Auditor fee 8400
Printing 400
Law charges 1800
Salary & Allowances 10800
Locker rent 700
Trans for free 1400
Adjustments:-
1. Rebate on bills discounted 98000
2. Bad debts 58000

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5. From the following information prepare P&L A/C of Rich Bank for the year ended 31-03-2012.
PARTICULARS AMOUNT (In thousands)
Interest on loan 2590
Interest on Fixed deposits 3170
Commission 82
Payments to Employees 540
Discount on bills discounted 1550
Interest on cash credits 2230
Sundry Charges 17
Rent & Taxes lighting 180
Interest on OD 15400
Director fee allowances and expenses 130
Auditor fee & Expenses 12
Interest on saving bank deposits 680
Postage & Telegram 14
Printing & stationary 29

Adjustment:-
1. Rebate on bills discounted 480000
2. Provide for contingencies 200000
3. Trans for 1557000 to reserve fund
4. Trans for 200000 to central Government (income tax)

6. 6. Prepare P&L A/C of waste bank incorporated under the banking regulation Act. The following are the
balances as on 31-12-2009. The management decides to create a provision for doubtful debts Rs.100000.

Credit
PARTICULARS Debit (000) (000)
Interest recived 400
Interest paid on deposits 210
Salary other than managing directors 150
Allowances other managing directors 70
Commission received 300
Brokarage 150
Stamps used 5
Advertising 15
Printing & stationary 48
Postage & Telegram 24
Interest on borrowing 250
Managing director salary 36
Allowances to managing director 12
Director Allowences & Remmunaration 20

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local comitee fee and allowances 10

Rent & Taxes 70
Discount 210
Exchange 110
Locker Rent 180
Miscellaneous Receipts 150
Depreciation on Bank Property 30
Repairs to Bank property 20
Loss on sale of government securities 5
Miscellaneous Expenses 25
Profit & Loss A/C balance of previous year 500
1500 1500

9. From the following particulars of a syndicate bank prepare Final Accounts as on 31-03-2006.

Particulars Amount particulars Amount

Interest on loan 600000 Interest on cash credits 480000
Interest on fixed deposits 550000 Interest on saving bank deposits 174000
Commission 20000 Postage & telegram 20000
Salary and allowances 300000 Sundry expenses 20000
Exchange and brokerage 40000 Discount on bills discounted 304000
Taxes and insurance 20000 Auditor fee 20000
Interest on OD 60000 Printing and stationary 40000
Rent 30000 Director fee 60000
Adjustments:-
1. 10% dividend on capital of Rs.1000000.
2. Rebate on bills discounted Rs. 15000.
3. Income tax provision 35%.
4. Bad debts Rs. 20000.

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MODEL -II

1. The following is an extract from the trial balance of Vijayam Bank as at 31st March 2004.

Rs.
Bills discounted 20,35,000
Rebate on bills discounted on March 31,2003 24,000
Discount received 1,50,000

An analysis of the bills discounted as follows:

Amount (Rs.) Due date 2004 Rate of discount

1,09,500 June 9th 15 %
1,46,000 June 19th 10 %
1,82,500 July 9th 15 %
2,55,000 July 29th 15 %
Find out the amount of discount received credited to profit and loss account and pass necessary
journal entries and prepare discount received account.

2. The following is an extract from the trial balance of a Bank as at 31st March 2013.

Rs.
Bills discounted 5,15,000
Rebate on bills discounted on 1st April 2012 35,501
Discount received 1,45,500

An analysis of the bills discounted as follows:

Date of bill Amount (Rs.) Term in months Rate of discount(%)

Jan 13 1,09,500 4 12
Feb 17 1,46,000 3 10
Mar 16 1,82,500 4 11
Mar 16 2,55,000 2 10
Find out the amount of discount received credited to profit and loss account and pass necessary
journal entries and prepare discount received account.

3. The following is an extract from the trial balance of a Bank as at 31st Dec 2010.

Debit(Rs.) Credit(Rs.)
Bills discounted 12,64,000
Rebate on bills discounted on 1.1.2010 8,340
Discount received 85,912

An analysis of the bills discounted as follows:

Amount (Rs.) Due date 2011 (excluding grace days) Rate of discount
1,40,000 Mar 6th 5%
4,36,000 Mar 12th 4.5 %

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2,82,000 mar 26th 6%

4,06,000 Apr 6th 4%
Find out the amount of discount received credited to profit and loss account and pass necessary
journal entries and prepare discount received account.

4. The following is an extract from the trial balance of a Bank as at 31 st Mar 2009.

Rs.(‘000 s)
Bills discounted 1500
Rebate on bills discounted on 1.4.2008 10
Discount received 90

An analysis of the bills discounted as follows:

Amount (Rs.) Due date 2009 (including grace days) Rate of discount
1,60,000 Jun 19th 6%
4,50,000 May 28th 5%
3,00,000 Jun 27th 6%
3,50,000 Jul 29th 5%
Find out the amount of discount received credited to profit and loss account and pass necessary
journal entries and prepare discount received account.

5. The following is an extract from the trial balance of a Bank as at 31st March 2013.

Rs.
Bills discounted 15,00,000
Rebate on bills discounted on 1st April 2012 26,000
Discount received 2,00,000

An analysis of the bills discounted as follows:

Date of bill Amount (Rs.) Term in months Rate of discount

Nov 10 1,50,000 4 6%
Dec 12 2,00,000 3 5%
Oct 31 1,75,000 4 6.5 %
Dec 26 2,50,000 3 8%
Find out the amount of discount received credited to profit and loss account and pass necessary
journal entries and prepare discount received account.

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UNIT – III
INSURANCE COMPANIES
Insurance is a contract. Here one party the Insurance Company called “Insurer” undertakes to indemnify
specified losses suffered by the other party called “Insured” for a special consideration called
Premium”. The term of the Insurance contract is called “Insurance Policy”.

Various Types of Insurance: Basically insurance is divided into two broad types viz;

1. Life insurance policy 2. General insurance policy

1. Life insurance policy : It covers the “life-risk” of the insured person. In case of death, the nominee
will get the Insurance Policy amount. In life insurance the amount is payable on the happening of an
event which is bound to occur i.e. death. So this form of Insurance is also described as “Assurance”.

However, the life insurance policy also provides for payment of the policy value at maturity or by
instalments and an agreed bonus. This payment may either be in lumpsum on maturity of the policy or
may be paid in instalments called annuity.

The uses of the terms "insurance" and "assurance" are sometimes confused. “Insurance" refers to
providing cover for an event that might happen (fire, theft, flood, etc.), while "Assurance" is the
provision of cover for an event that is certain to happen like death and so Life insurance is actually Life
Assurance.

Life Insurance can be further classified into 4 types:

1. Whole life Policy : Under this policy the insured has to. pay the premiums throughout his life
term or till he reach 80 years. The insurer i.e., insurance company pays money in lumpsum on the
death of insured or completion of 80 years. The premium payable on this type of policy is low.

2. Endowment Policy: Under this policy the assured sum payable to the-beneficiary only on the
attaining of specified age or after the death which is earlier. The premium on this type of policy
is a little higher than whole life policy. This is most popular type of policy in our country.

3. With Profit Policies : This policy is also known as participating policy. Under this policy the
insured gets not only the assured policy amount on attaining the Specified age or at death
whichever is earlier-but also a share in the profits declared by the insurance company from time
to time. The rate of premium payable on this policy is; higher than other types of policies.

4. Without Profit Policies: Under this policy the insured get only the assured policy amount on
attaining specified age or at death whichever is earlier the policy holder will not get any share in
the profits declared by Insurance company.

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2. General insurance : It means insurance other than life insurance Section 2(6B) of the Insurance Act
defines ‘General Insurance Business’ as fire, marine or miscellaneous insurance business whether
carried on singly or in combination with one or more of them.

Some common types of miscellaneous insurance in India are: exchange risk insurance, motor vehicle
insurance, credit insurance, burglary insurance, workmen’s compensation insurance, professional
liability insurance, cash in transit insurance, etc.

Some Important terms used in Insurance Business:-

1. Insurance Policy: It is the document issued by the insurance company containing terms of

the insurance contract. It specifies the losses that are covered by the Policies and also the maximum
amount that can be paid out in the event of a loss/death. This is called Policy Amount.

2. Premium: The payment made by the insured to the Insurance Company in consideration of the
contract of Insurance. The premium is generally paid annually. In some cases it may be paid at shorter
intervals. A point to be noted is the premium amount has to be paid “front end” i.e. before the
commencement of the insurance cover/policy.

3. Claims: A claim occurs when a policy fall due for payment. In Life Insurance it arises on death or on
maturity of policy. while calculating the claim outstanding at the end, the claim intimated as well as the
claim intimated and accepted both are considered

4. Surrender Value: When the policy holder wishes to realise the amount of policy before the expiry of
the full period of the policy, he surrenders his right under the policy and is paid an amount calculated by
a fixed formula. “Surrender Value” applies only to Life Insurance policies and comes into play only after
two annual premiums have been paid.

5. Commission: Generally, Insurance Companies get business through agents; these agents receive
commission on the basis of the amount of premium they generate for the Insurance Company.
Commission paid to Agents is shown as a debit (expense) in the Revenue Accounts

6. Bonus : A life insurance policy may be “with profit” or “without profits”. The holder of a “without
profits” policy is entitled to receive on maturity only the amount specified in the policy; but on a “with
profits” policy he is entitled to receive in addition, the amount of bonuses declared on each valuation.
On each valuation, the amount standing to the credit of Life Fund which is in excess over net liability, as
determined by the actuary, is distributed among the shareholders and the policyholders. The share of
the policyholders is paid to them as bonus, either in cash on declaration or by reduction of future
premiums, or on maturity of the policy. Until the bonus is paid, it does not figure in the Revenue
Account and is not payable in cash immediately but is to be payable at the time of the claim; it is
described as Reversionary Bonus. The amount of Reversionary Bonus is included in claims.

Interim Bonus: It is a bonus paid to a policyholder for a period for which valuation is not complete and,
therefore, the exact profit or bonus has not been determined. Such a bonus is also included in claims.

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7. Reinsurance: If Insurance Company does not wish to bear the whole of risk of a policy, then it will
reinsure a part of risk with some other insurer. In such a case the insurer is said to have ceded

a part of its business to other insurer .i.e. the risk of the insurance is being underwritten by another

Insurance Company.

In other words, in Re Insurance business transaction is defined as an agreement between the Ceding
Company and the Reinsurer, where the former agrees to cede (give) and the later agrees to accept
certain specified share of risk in return for a share of the premium. In such a case, on a claim arising, the
claim will be shared between the two companies in the proportion they had agreed to underwrite the
risk.

8. Ceding Company: An insurance company that shifts part or all of a risk it has assumed to another
insurance company. The Ceding company shares the premium amount it has received to cover the risk,
with the second insurance company called the Reinsurer. In return the Reinsurer company pays
commission to the Ceding company for getting the business.

9. Commission on re-insurance ceded /accepted: Insurance companies get business through its agents.
Such agents receive commission on the basis of the amount of business they generate for the company.
When company gets re-insurance business it has to pay commission to the Ceding company also. This
commission paid by the reinsurance company is called ‘commission on re-insurance accepted’ and is
shown as an expense in the revenue account of the re insurance company.

Statutory and subsidiary books maintained by insurance companies: For maintaining accounts, the
insurance concerns has to maintain two types of books:

1. Statutory books:
(a) Register of policies: this register contains the names and addresses of all policy holders
the date from which the policy was effected and record of the assignment of the policy
if any.
(b) Register of claims : It Contains the particulars of each claim such as date of claim,
the name and address of claimants ' the date on which the claim was discharged, the
date and ground for rejection, in case the claim is rejected.
(c) Register of licenced insurance agents : It contains the particulars of insurance agents
such as names, address, the date from which working as agent, particulars of business
done and commission due to him.
2. Subsidiary books: Insurance concerns should also maintain the, following books along
with statutory books.
a) Register of proposals
b) First year's premium cash book
c) Renewal premium cash book
d) Agency and branches cash book
e) Petty cash book
f) Claims Cash book
g) General cash book (containing the summary of all previous books)

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h) Bank cash book

i) Commission register.
j) Lapsed and cancelled policies book.
k) Agency ledger
l) policy loan ledger
m) General loan ledger
n) Investment ledger.
valuation balance sheet of an insurance Company.
The net liability is compared with the life assurance fund on a particular date in order
to calculate the surplus or deficiency. This comparison is made by preparing a valuation
balance sheet, a specimen form of Which is given as follows :

Rs. Rs.
To Net liability as per actual XXX By Life assurance fund as per XXX
Valuation balance sheet
To Surplus XX
XXX XXX

Financial Statements of Insurance Companies:

The insurance company carrying life insurance business is required to prepare Balance sheet

Form A – BS, Revenue account [Policy holders’ account] Form A- RA, Profit and loss account

Form A-PL. These forms have been given in the IRDA Regulations, 2002.

Balance sheet (Form A – RA )

Premium earned - Net 1 ***

Income from investments :

(a) Interest, dividends and rent ***

(b) profit on sale/redemption of investments ***

(c)loss on sale /redemption of investments ***

Other incomes:

(a) consideration for annuities granted ***

(b) fines for renewal of policies ***

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(c)policy renewal fee ***

(d)transfer fee ***

(e) registration fee ***

(f) endorsement fee ***

Total (A) ****

Commission 2 ***

Operating Expenses relating to Insurance business 3 ***

Bad debts ***

Provision for Bad Debts ***

Provision for Taxation ***

Income Tax ***

Other provisions ***

Bad debts ***

Total (B) ****

Benefits Paid (Net) ***

****

Total(C) 4

Surplus (A-B-C) ****

Less: Appropriations:-

Transfer to share holders Account (Dividends paid) ***

Transfer to other reserves ***

Funds for Future Appropriations (Balance) ***

Total ****

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SHEDULE NO1: PREMIUM EARNED

First year premium ***

renewal Premium ***

single Premium ***

Other Premiums received ***

SHEDULE NO2: COMMISSION

Commission Paid ***

SHEDULE NO3: OPERATING EXPENSES RELATING TO INSURANCE BUSINESS:-

Employees remuneration and Welfare Benefits ***

Traveling Expenses ***

Rent Rates and Taxes ***

Repairs ***

Printing and stationary ***

Telephone, Legal Charges ***

Medical Fee ***

Audit Fee ***

Advertising and Publicity ***

Interest and Bank Charges ***

Depreciation ***

Other Expenses ***

SHEDULE NO4: BENFITS PAID

Claims by death ***

claims by Maturity ***

Annuities Paid or Granted ***

Surrenders ***

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Bonus paid in Cash ***

Bonus In reduction of Premium Paid ***

Other Bonus Paid ***

Balance sheet (Form A – BS )

Schedule Current Previous

Particulars
No Year Year

SOURCES OF FUNDS:-

Share Capital 5 ***

reserves and Surplus 6 ***

Borrowings 7 ***

Total ***

Application of Funds:-

Investments 8 ***

Loans 9 ***

Fixed Assets 10 ***

Sub Total (A) ***

Current Assets:-

Cash and Bank balance 11 ***

Advances and other assets 12 ***

Sub Total (B) ***

Less: Current Liabilities 13 ***

Less: Provisions 14 ***

Sub Total (C) ***

Net Current Assets (B-C)(D) ***

Miscellaneous Expenses 15 ***

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Sub Total (E) ***

Total (A+D+E) ***

SHEDULE NO5: SHARE CAPITAL

Authorized, Subscribed and Issued Capital ***

Called up Capital ***

Less: Calls in arrears ***

***

Add: forfeited Shares Account ***

***

Lees: Preliminary Expenses ***

***

SHEDULE NO6: RESERVES AND SURPLUS

General reserve or Reserve Fund ***

Capital Reserve ***

Capital Reduction Reserve ***

Share Premium ***

Opening balance of life assurance or insurance fund ***

Add: Surplus or balance from revenue A/c ***

***

SHEDULE NO7: BORROWINGS

Debentures ***

Fixed Deposits ***

Loan From banks ***

SHEDULE NO8: INVESTMENTS

Government Securities or Bonds ***

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Treasury Bonds ***

Municipal and Railway Securities ***

Shares Purchase in other Companies ***

Foreign Government Securities ***

Debentures ***

Freehold Ground Rents ***

Amount Invested in Mutual funds ***

SHEDULE NO9: LOANS

Mortgages in India ***

Mortgages outside India ***

Loans against Policies ***

Loans on Government Securities ***

Loans on Personal Securities ***

Loans on Reversions ***

Loans on Life Interests ***

SHEDULE NO10: FIXED ASSETS

Good will ***

Free hold and Lease hold Property ***

Furniture and Fittings ***

Motor Vehicles ***

Office Equipment ***

Buildings ***

SHEDULE NO11: CASH AND BANK BALANCE

Cash in Hand ***

Cash at Bank in current Accounts ***

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SHEDULE NO12: ADVANCESS AND OTHER ASSETS

Prepaid Expenses ***

Advance Taxes Paid or Tax paid in Advance ***

Income Tax on interest, Dividend and Rents ***

Accrued Income or Income Receivable ***

Outstanding Premium ***

Agent Balances ***

Re - Insurance Claims ***

Deposits with RBI ***

Stock of Stamps ***

Outstanding Interest, Dividend and Rents ***

Sundry Debtors ***

Bills Receivable ***

Amount Due from re Insurer ***

SHEDULE NO13: CURRENT LIABILITIES

Re - Insurance Premium ***

Premium received in Advance ***

Sundry Creditors ***

Outstanding Claims ***

Outstanding Annuities ***

Bills Payable ***

Other Current Liabilities ***

SHEDULE NO14: PROVISIONS

Provision for Taxation ***

Proposed Dividends ***

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SHEDULE NO15: MISCELLANEOUS EXPENSES

Discount on Issue of Shares ***

Discount on Issue of Debentures ***

PROBLEMS:

1. The following trial balance were extracted from the books of the LIC as on 31-12-2010:

Particulars Dr. (Rs) Cr.(Rs)

Mortgages on property within India 8,00,000
Mortgages on property out of India 1,00,000
Loans on life interest 2,00,000
Loans on investments 4,00,000
Loans on policies within their surrenders value 12,00,000
Outstanding premium 1,00,000
Investments :
Municipal securities 10,00,000
Indian’s & Foreign Govt . securities 20,00,000.
Free-hold ground 16,00,000
Cash with R.B.I 10,00,000
Outstanding interest, dividend & rent 20,000
Surrenders on business with in India 40,000
Surrenders on business outside India 2,000
Cash in hand 1,00,000
Claims on business with in India 4,00,000
Claims on business outside India 20,000
Expenses of management 40,000
Claims admitted but not paid 20,000
Sundry creditors 30,000
Amount of life insurance fund at the beginning of the year 80,00,000
Premiums on business with in India 9,60,000
Premiums on business outside India 12000
90,22,000/- 90,22,000/-
Prepare revenue account and balance sheet.

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2. Prepare the Revenue Account for the year ended 31 -12-2011 and the Balance sheet as on that date
of a Life Insurance Co,, Ltd., from the following Balance extracted from its books as on 31 -l 2-2011:

DEBIT BALANCES AMOUNT CREDIT BALANCES AMOUNT

Claims paid and out standing 1,15,200 Fines & fees 300

Surrenders 3,300 Interest Received 2,25,300

Reversionary bonus 12,300 Premium 3,30,800
Establishment Charges 23,500 Premium received in advance 9,000
bonus Received
Commission to agents 48,500 Claims admitted but not paid 2,10,000
Medical Fees. 10,100 Claims intimated but not admitted 18,000
Directors fees 24,000 Sundry creditors 20,000
Stationary & Printings 4,800 Life fund (1 -1-2011) 37,80,000

Postage & telegrams 1,050

Office rent 4,200
Sundry expenses 1,750
Investments 40,47,400
Loan on policies 1,74,700
Out striding interest 69,800
Out standing premium 23,200

Cash at bank 29,600

TOTAL 45,93,400 45,93,400

3. The Following Trial Balance was extracted from the books of LIC of India as on 31-12-2010
Prepare revenue A/C and Balance Sheet of LIC for year ending 2010:

DEBIT BALANCES Rs. CREDIT BALANCES Rs.

Dividends Paid 1,50,000 Paid up capital 10,00,000
Bonus in reduction of premium 3,15,000 Life fund (1-1-2010) 2,97,23,000

Claims paid 19,70,000 Premiums 16,15,000

Commissions 93,000 Outstanding claims 70,000
Management expenses 4,00,000 Consideration for annuities 5,00,000
granted
Mortgages 49,22,000 Creditors 77,000
Annuities 1,00,000 .Interest, dividends and rents 11,27,000

Medical fees 70,000

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Agents balances 93,000

Surrenders 70,000
Free hold premises 4,00,000
Cash on current A/C 4,73,000
Investments 2,30,50,000
Cash on deposits 2,70,000
Loans on policies 17,36,000
3,41,12,000 3,41,12,000

4. The following balances extracted in the books of A Insurance co as on 31.12.2014:

PARTICULARS DEBIT CREDIT

AMOUNT AMOUNT
Paid up share capital (10,000 shares of Rs.10/-) 1,00,000
Life insurance fund as on Jan 1st 29,72,300
Dividends paid 15,000
Bonus to policy holders 31500
Premium Received 1,61,500
Claims paid 1,97,000
Commission paid 9,300
Management Exp 32,300
Mortgages in India 4,92,200
Interest& Dividends received 1,12,700
Agents balances 9,300
Free hold Premises 40,000
Investments 23,05,000
Loan on company policies 1,73,600
Cash on fixed deposits 27,000
Cash in hand & Current account 7,300
Surrenders 7,000
33,46,500 33,46,500

ADJUSTMENTS:

1. Claims admitted but not paid Rs.9000/-

2. Management expenses due Rs 200 -
3. Interest accrued Rs. 19,300
4. Premium outstanding Rs 10,000
5. Bonus utilized in reduction of premium Rs 2,.000
6. Claims covered under re insurance Rs. 2,300.
Prepare revenue account and balance sheet.

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5. The following balances extracted in the books of Bharath Insurance co as on 31.12.2014:

PARTICULARS AMOUNT

Life fund on 1-1-2014 15,70,000

Claims by death 1,16,980
Claims by maturity 96,420
Premises 2,72,572
Management expenses 29,890
Commission 36,541

Income tax on profit 3060

Surrenders 21,768
Annuities 29,420
Bonus paid in cash 9,450
Bonus paid in reduction of premium 3,500
Preliminary expenses 600

Claims admitted but not paid at the end of year 80,034

Annuities due but not paid 22,380

Capital paid up 6,00,000

Government securities 16,90,890
Sundry assets 5,69,548
Consideration for annuities granted 10,620
Interest, dividend & Rent 52,461

ADDITIONAL INFORMATION:
1. Claims covered under reinsurance Rs 10,000
2. Further claims intimated Rs 8,000
3. Further Bonus utilized in reduction of premium Rs 1,500
4. Interest accrued Rs 15,400
5. Premium outstanding Rs 7400
PREPARE REVENUE A/C & BALANCE SHEET

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6. From the following-particulars prepare Revenue A/C of the Bharat-Life Insurance Corporation and
Balance Sheet as on 31 -12-2011 :

Claims by death 9,00,000 Management expenses 50,000

Claims by maturity 6,00,000 Loams 5,00,000
Annuities 1,50,000 Investments 5,00,000
Surrenders 50,000 Balance with agents 1,00,000
Premiums 10,00,000 Reserve fund 1,00,000
Capital 4,00,000 Life fund 1-1-2011 15,00,000
Interest & dividends 2,00,000 Buildings 5,00,000
Registration fees 50,000 Creditors 1,00,000

Adjustments:

1. Accrued interest - Rs. 50,000/-

2. Claims admitted but not paid - Rs.40,000/-
3. Outstanding management expenses -Rs.10,000/-.
4. Premium outstanding Rs.14000
5. Bonus in reduction of premium Rs. 12000
7. Given below is Trail balance extracted from the books of Gujarat Mutual Life Assurance Ltd.,
on 31 -12-2009.
Dr. (Rs) Cr. (Rs)
Claims paid and outstanding 1,15,200
Reversionary Bonus paid and due 12,300
Surrenders 3,300
Establishment charges 23,500
Commission to agents 48,500
Medical fees 10,100
Directors & Auditors fees 24,000
Stationary & Printing 4,800
Postage & printing 1,050
Office Rent 4,200
Sundry expenses 800
Bank charges & commission 950
Investments 40,47,000
Loans on policies 1,74,700
Outstanding Interest 69,800
Outstanding premium 23,600
Cash at Bank 29,600
Fines & fees received 300

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Interest & dividend Received &accrued 2,25,300

Premium received & outstanding 3,30,800
Premium received in advance 9,000
Claims admitted but not paid 10,000
Claims intimated but not admitted 20,000
Sundry creditors 18,000
Funds life assurance fund 33,80,000
Reserve fund 6,00,000
45,93,400 45,93,400
Prepare Revenue A/c. and Balance Sheet of Association Ltd.,

8. From the following figures of Hindu Life Mutual Asstiran.ee Co.-, Ltd., as on 31-12-2010,
prepare Revenue A/c, and Balance Sheet. The Assurance Fund balance on 1-1-2010 was
Rs.55,76,700/-.

Claims (By Death) 1,68,990 Surrender values paid 28,120

Single premium 8,585 First year Premium 1,36,042
Claims (By Maturity) 84,153 Interest received 1,90,627
Rent, Rates Taxes 17,848 Commission to gents 19,975
Govt. Loans 15,50,000 Loans on mortgage 29,05,655
Cash on current A/c with Bank 7,17,660 Expenses payable 2,838

Consideration for annuities 28,536 Interest accrued 9,040

Depreciation on furniture 250 Reserve 60,000

Renewal premium 6,28,362 Claims, admitted but not paid 68,081

Bonus in reduction of premium 2,710 Annuities paid 3,415

Cash on fixed deposit 4,68,000 Furniture & Fittings 4,630
Salaries & allowances 55,650 Medical fees 10,800
Free hold premises 2,32,250 Agents balances 4,200
Bonus s paid in cash 30,240 Loans on policies 3,47,947
General charges Travelling
Outstanding interest I0,400 expenses 27,838

Adjustments: -

a. Outstanding premium was Rs. 7,060/-

b. Further Bonus utilised for reduction of premium Rs.2,400/-
c. Claims covered under reinsurance amounted to Rs. 15,000/-

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9. From the following balances extracted from the hooks of Tirumala LTD as on 31-12-1990 :

PARTICULARS DEBIT CREDIT

AMOUNT AMOUNT
Paid up capital (2,000 shares of Rs 100 each) 20,00,000
Life fund (1-4-90) 59,44,600
Dividends paid 30,000
Bonus in reduction of premium 63,000
Premium less reinsurance premium (commission there on 3,23,000
Rs 10,000) (Re insurance commission)
Claims paid 3,94,000
Outstanding claims (1-1-90) 14000
Commission 18,600
Management expenses 64,600
Mortgages in India 9,84,400
Interest ,Dividends and Rents 2,25,400
Agents balances 2,88,600
Free hold premises 2,80,000
Loans on policies 8,77,200
Cash on current accounts 14,600
Cash on deposits 54,000
Surrenders 16,000
Medical fees 12,000
Consideration for annuities granted 20,000
Annuities 20,000
Free hold property 54,10,000
TOTAL 85,27,000 85,27,000

10. From the following figures extracted from the books of Navya Life Insurance Company
prepare its revenue account for the year ending 31st March 2008.
Rs.
Life fund 24,50,000
Premiums less: Reinsurance 13,80,000
Interest, dividends and rents 7,50,000
Fines 4,000
Income tax 1,18,000

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Management expenses 1,75,000

Annuities paid 10,000
Commission 54,000
Surrenders 85,000
Surplus on revaluation of reversions 4,000
Reinsurances irrecoverable 1,000
Claims less: Reinsurance claims 8,90,000
Consideration for annuities granted 45,000

II MODEL
1. A Life Assurance corporation gets its valuation made once’ in every two year& The Life
Assurance Fund on 31-12-2000 amounted to Rs., 41,92,000/- before providing for Rs.
32,000/- for share holders dividend for year 2000, its actual valuation on 31 -12-2000,
disclosed net liability of Rs. 40,40,000. Under the assurance and annuity contract, An interim
Bonus of Rs. 40,000/- was paid to the policy holders, during the period ending 31- 12-2000.

Prepare statement showing now available as Bonus to policy holders.

2. Bharat Life Assurance Co., gets its valuation made once in every -two years. Its Life
Assurance Fund on 31-12-2010 was Rs. 45,65,000/- before providing for Rs. 45,000/- being
the share holders dividend for 2010. Its actual valuation on 31-12-2010 disclosed a net
liability of Rs. 32,20,000/-.An in term bonus of Rs. 80,000/- was paid to the policy holders
during the previous two years. Prepare a statement showing the amount now available as
bonus to policy holders. Assume that the policy holder are entitled to the same percentage of
surplus as under L.I.C Act.

3. The Life Assurance Fund of oriental Life Assurance Co., Ltd., was Rs. 68,20,000/- on 31-12-
2002. It is actual valuation on 31-12-2002, disclosed a net Liability of Rs. 57,60,000/- and in
term bonus of Rs. 60,000/- was paid to the policy holders during the previous two years. It is
now proposed to carry forward Rs. 2,20,000/- and to divide the balance between the policy
holders and the share holders at 3:1. Show

1. Valuation of Balance Sheet.

2. The net profit for the two years period and
3. The distribution of the profits.

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4. The Life Fund of a Life Insurance Co., was Rs, 26,80,000/- on 31-12-2009. The in term
Bonus paid during the previous 3 years was Rs. 12,420/-. The net liability as per actual
valuation was Rs. 19,65,000/-. It is proposed to carry forward Rs. 1,87,420/-, And to divide
the balance between the share holders and the policy holders in the radon of 1:4 show:
1. The Valuation Balance Sheet.
2. The new profit for the 3 years period
3. The distribution of the surplus.

5. From the Following figures prepare Revenue Account and A valuation Balance Sheet as at
31-12-2007. Show Surplus for policy holders

1. Life Assurance Fund (opening) -Rs. 40,00,000/-

2. Interest, Dividends and Rents -Rs. 15,00,000/-
3. Claims Paid -Rs. 3,00.000/-
4. Surplus on revaluation of previous year -Rs. 8,000/-
5. Surrenders -Rs. 1,00,000/-
6. Premiums -Rs. 25,00,000/-
7. Consideration for Annuities granted -Rs. 1,00,000/-
8. Bonus in reduction of premium - Rs. 5,000/-
9. Commission -Rs. 50,000/-
10. Net Liability on policies in force on 31 -12-2007 for -Rs. 56,53,000/-

6. The Life Fund of a Life Assurance Co., was Rs, 86,48,000/-as. pm 31-12-2003. The in term
Bonus during the inter valuation period was Rs. 1,48,000/-. The Actual valuation determined
the net liability at Rs. 74,25,000/-. Surplus brought forward from previous valuation was Rs.
8,50,000. The directors of the Co., proposed to carry forward Rs. 9,31,000/- and divide the
balance between the share holders and policy holders in the ratio of 1:10, Show
1. The valuation Balance Sheet.
2. The net profit for the valuation period,
3. The distribution of surplus.

7. The New India Assurance Co., Ltd., had a paid up capital of Rs. 2,50,000/- divided
into 25000Shares ofRs.10 - each* Its net liability on all contract in force has on 31 -12-
2002 was/Rs, 22,50,000/-. From the following figures . extracted from its books for
fee year ended 31-12-2002. Prepare Revenue Account. The company has paid interim
bonus Rs. 1,03,866/- and 25% of the surplus is to be allotted to the share holders and
70% to the policy holders and the balance being carry forward.

Life Fund at the beginning - Rs. 24,50,000/-

Premiums - Rs. 13,80,000/-
Interest, Dividend & Rent - Rs. 7,50,000/-

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Fines and fees - Rs. 720/-

Commission - Rs. 54,000/-
Surplus'on Revaluation - Rs.4,800/-
Claims - Rs. 8,90,000/-
Bonus in cash - Rs.1,58,400/-
Income-tax - Rs.1,18,500/-
Management expense - Rs.1,75,000/-
Bonus in reduction of premium - Rs.1,976/-
Surrenders - Rs.85,200/-
Reassurances irrecoverable (bad debts) - Rs.1,250/-
Consideration for Annuities granted - Rs.45,000/-

8. The valuation of Republic of India Life Assurance Co. Ltd., having a paid up
capital of Rs. 5,00,000/- disclosed a liability of Rs. 46,50,000/- on all their policies
and contracts in force on 31-12-2003 from the figures set out below prepare
Revenue Account for the year ended 31-12-2003 and a valuation Balance Sheet as
on that date showing the surplus for the share holders and policy holders:
Life Assurance Fund as on 1-1-2003 - Rs. 50,00,000/-
Premiums received - Rs. 25,80,000/-
Interest, Dividend & Rents received -Rs. 15,20,000/-
Fines and fees -Rs. 1,250/-
Consideration for Annuities granted - Rs. 85000/-
Claims Paid - Rs. 2,80,000/-'
Reassurance Irrecoverable balance -Rs. 2,000/-
Expenses of management - Rs. 2,30,000/-
Commission paid to agents -Rs. 1,15,000/-
Bonus paid reduction for premium - Rs. 3,550/-
Annuities paid -Rs. 1,14,000/-
Surplus on revaluation - Rs. 9,000/-
Surrenders - Rs. 170,000/-
Income-tax -Rs. 240,000/-
Bonus in cash -Rs.1,12,500/-

9. Jeevandhara Assurance Co., Ltd., had a paid up capital of Rs. 2,50*000/- dividend into
Rs. 25,000/- shares of Rs. 10/- each its net liability on all contracts in force on 31-12-
2007 was R$, 22,50,000/-. From the following figures extracted from its book for the
year ended 31-12-2007. Prepare Revenue Account and valuation Balance Sheet
Life Fund -Rs. 24,50,000/-
Premiums -Rs. 13,80,000/-
Interest, Dividends & Rents -Rs. 7,50,000/-
Fines and Fees -Rs. 720/-

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Bonus in cash -Rs. 1,58,400/-

Income-tax -Rs. 1,18,500/-
Management expenses -Rs. 1,75,000/-
Bonus in reduction of premium -Rs. 3,226
Commission - Rs. 54,000/-
Surrenders -Rs. 85,000/-
Surplus on revaluation -Rs. 4,800/-
Claims -Rs. 8,90,000/-
Consideration for Annuities Granted -Rs. 45,000/-

III MODEL
1. Mr. Mistaken, chief of L.I.C after hard work shows the fund as 31-12-2001 at Rs. 59,00,000.
Auditors while auditing observed that the following has not been taken in to A/c.

a. Interest on securities Rs. 1,16,000/-. Income-tax deducted Rs. 22,000/-

b. Bonus utilized in reduction of premium Rs. 20,000/-
c. Claims under reinsurance Rs.60,000/-
d. Claims intimated but not admitted by a party amounting to Rs.2,50,000/-

Pass necessary Journal Entries and recomputed the Life Assurance Fund as on 31 -12-2001.

2. The Revenue Account of a Life Insurance Co., shows the Life Assurance Fund tm 31-12-
2011 at Rs.62,21,310/- before taking into account the following items.

1. Claims covered under reinsurance Rs. i2,000/-

2. Bonus utilized in reduction of life insurance premium Rs. 4,500/-
3. Interest accrued on securities Rs, 8,250/-
4. Outstanding premium Rs, 5,410/-
5. Claims intimated but not admitted Rs.26,500/-
Pass necessary Journal Entries and recompute the Life Assurance Fund as on 31-12-
2011. After taking into Account the above missions.

3. The Great Life Assurance Co., Ltd., prepaid its Revenue A/c. for the year ended 31 - 12-
2008 and ascertained its Life Assurance Fund to be Rs. 56,70,000/-. It was found later that
the following have been emitted from die accounts.
1) Interest accrued on Investments Rs.78.000 -. Income-tax liable to be deducted
estimated to be Rs. 210000.
2) Outstanding premiums Rs. 65,600/-
3) Bonus utilized for reduction of premium Rs. 13,500/-
4) Claims intimated but not yet admitted Rs. 34,800/-
5) Claims covered under reinsurance Rs.13,000/-

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4. Pass necessary Journal Entries and find out what is true Life Assurance Fund.
Bharat Life Insurance Co., Ltd., prepared its Revenue A/c. for the year ended 31-12-2006
and ascertained its life assurance fund Rs..40,50,000/-. It was found later that the following
have been omitted from tile accounts.

a) Interest accrued to investments Rs. 35,000/-, Income-tax liable to be deducted

estimated to be Rs. 2,000/-
b) Outstanding premiums Rs. 70,000/-
c) Bonus utlised for reduction of premium Rs, 20,000/-
d) Claims intimated but not yet admitted Rs. 1,00,000/-
e) Claims covered under reinsurance Rs. 30,000/-

Write the adjustment entries and find the Life Assurance Fund.
5. Life Insurance Co,, disclosed a fund of Rs. 20,00,000/- and the balance sheet total
is Rs. 45,00,000/- on 31-12-2005 before taking the following into consideration.
1. A claim of Rs. 10,000/- was intimated and admitted but not paid during the year.
2. Interest on securities accrued Rs. 2,000/-
3. Bonus utilized in reduction of premium Rs. 10,000/-
4. Agents commission to be paid Rs. 8,000/-
5. Reinsurance recoveries Rs. 26,000/-
6. Premium of Rs.600/- is payable under reinsurance.
7. A claim of Rs. 6,000/- outstanding in the books for 8 years is written back
8. Rent of own Building occupied Rs.2,000/-

Pass necessary Journal Entries for the above omission recompute the fund and who the
Balance Sheet total after making the above adjustments.

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UNIT – IV
ISSUE OF SHARES
MEANING :- Total capital of the company is divided into a number of small indivisible units
of a fixed amount and each such unit is called a share. The fixed value of a share, printed on the
share certificate, is called nominal/par/face value of a share. However, a company can issue
shares at a price different from the face value of a share. The liability of holder of shares is
limited to the issue price of shares acquired by them.
The total capital of the company is divided into shares, the capital of the company is called
‘Share Capital’. At the time of issue of shares, every Company is required to follow SEBI
Regulations. Share capital of a company is divided into following categories:

(i) Authorised Share Capital or Nominal Capital : A company estimates its maximum capital
requirements. This amount of capital is mentioned in ‘Capital Clause’ of the ‘Memorandum
of Association’ registered with the Registrar of Companies. It puts a limit on the amount of
capital, which a company is authorised to raise during its lifetime and is called ‘Authorised
Capital’. It is shown in the balance sheet at face value.

(ii) Issued Share Capital : A company need not issue total authorised capital. Whatever portion
of the share capital is issued by the company, it is called ‘Issued Capital’. Issued capital
means and includes the nominal value of shares issued by the company for:
1. Cash, and
2. Consideration other than cash to:
(i) Promoters of a company; and
(ii) Others.
It is also shown in the balance sheet at nominal value.
The remaining portion of the authorised capital which is not issued either in cash or
consideration may be termed as ‘Un-issued Capital’. It is not shown in the balance sheet.

(iii) Subscribed Share Capital : It is that part of the issued share capital, which is subscribed by
the public i.e., applied by the public and allotted by the company. It also includes the face
value of shares issued by the company for consideration other than cash.

(iv) Called-up Share Capital : Companies generally receive the issue price of shares in
installments. The portion of the issue price of shares which a company has demanded or called
from shareholders is known as ‘Called-up Capital’ and the balance, which the company has
decided to demand in future may be referred to as Uncalled Capital
.
(v) Paid-up Share Capital : It is the portion of called up capital which is paid by the
shareholders. Whenever a particular amount is called by the company and the shareholder(s) fails
to pay the amount fully or partially, it is known as ‘unpaid calls’ or ‘Calls in Arrears’.
Thus, calls in arrears mean the amount not paid although it has been demanded by the
company as payment towards the issue price of shares. To calculate paid-up capital, the

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amount of calls in arrears is deducted from called up capital.

In balance sheet, called-up and paid-up capitals are shown together.
(vi) Reserve Share Capital: As per Section 65 of the Companies Act, 2013, a Company may
decide by passing a resolution that a certain portion of its subscribed uncalled capital shall
not be called up except in the event of winding up of the company. Portion of the uncalled
capital which a company has decided to call only in case of liquidation of the company is
called Reserve Capital.

TYPES OF SHARES
Share issued by a company can be divided into following categories:
(i) Preference Shares: According to section 43 of the Companies Act, 2013 persons holding
preference shares, called preference shareholders, are assured of a preferential dividend at a
fixed rate during the life of the company. They also carry a preferential right over other
shareholders to be paid first in case of winding up of the company. Thus, they enjoy
preferential rights in the matter of :
(a) Payment of dividend, and
(b) Repayment of capital
Generally, holders of these shares do not get voting rights. Companies use this mode of
financing as it is cheaper than raising debt. Dividend is generally cumulative in nature and
need not be paid every year in case of deficiency of profits. The Companies Act, 2013
prohibits the issue of any preference share which is irredeemable. Preference shares are
cumulative and non-participating unless expressly stated otherwise.

Types of Preference Shares

Preference shares can be of various types, which are as follows :

(a) Cumulative Preference Shares : A cumulative preference share is one that carries
the right to a fixed amount of dividend or dividend at a fixed rate. Such a dividend is
payable even out of future profit if current year’s profits are insufficient for the
purpose. This means that dividend on these shares accumulates unless it is paid in
full and, therefore, the shares are called Cumulative Preference Shares.

(b) Non-cumulative Preference Shares : A non-cumulative preference share carries

with it the right to a fixed amount of dividend. In case no dividend is declared in a
year due to any reason, the right to receive such dividend for that year expires. It
implies that holder of such a share is not entitled to arrears of dividend in future.

(c) Participating Preference Shares : Notwithstanding the right to a fixed dividend,

this category of preference share confers on the holder the right to participate in the
surplus profits, if any, after the equity shareholders have been paid dividend at a
stipulated rate. Similarly, in the event of winding up of the company, this type of
share carries the right to receive a pre-determined proportion of surplus as well once
the equity shareholders have been paid off.
(d) Non-participating Preference Shares : A share on which only a fixed rate of

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dividend is paid every year, without any accompanying additional rights in profits
and in the surplus on winding-up, is called ‘Non-participating Preference Shares.’
Unless otherwise specified, the preference shares are generally non-participating.
(e) Redeemable Preference Shares : These are shares that a company may issue on
the condition that the company will repay after the fixed period or even earlier at
company’s discretion. The repayment on these shares is called redemption and is
governed by Section 55 of the Companies Act, 2013.

(f) Non-redeemable Preference Shares : The preference shares, which do not carry
with them the arrangement regarding redemption, are called Non-redeemable
Preference Shares. According to Section 55, no company limited by shares shall
issue irredeemable preference shares or preference shares redeemable after the
expiry of 20 years from the date of issue. However a Company may issue preference
shares redeemable after 20 years for such infrastructure projects as may be specified,
under the Companies Act, 2013.

(g) Convertible Preference Shares : These shares give the right to the holder to get
them converted into equity shares at their option according to the terms and
conditions of their issue.

(h) Non-convertible Preference Shares : When the holder of a preference share has not
been conferred the right to get his holding converted into equity share, it is called
Non- convertible Preference Shares. Preference shares are non-convertible unless
otherwise stated.

(ii) Equity Shares : Equity shares are those shares, which are not preference shares. It means
that they do not enjoy any preferential rights in the matter of payment of dividend or
repayment of capital. The rate of dividend on equity shares is recommended by the Board
of Directors and may vary from year to year. Rate of dividend depends upon the dividend
policy and the availability of profits after satisfying the rights of preference shareholders.
These shares carry voting rights. Companies Act, 2013 permits issue of equity share capital
with differential rights as to dividend, voting or otherwise in accordance with prescribed
rules.
The shares can be issued by a company either
(1) for cash (or)
(2) for consideration other than cash.

(1)Issue of shares for cash :

Public companies issue a ‘Prospectus’ and invite general public to subscribe for shares. On
the basis of prospectus, applications are deposited in a scheduled bank by the interested parties
along with the amount payable at the time of application, in cash. First installment paid along
with application is called ‘Application Money’. As per Section 39 of the Companies Act, 2013.
Application money must be at least 5% of the nominal value of shares.
Minimum Subscription : A public limited company cannot make any allotment of shares unless
the amount of minimum subscription stated in the prospectus has been subscribed and the sum

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payable as application money for such shares has been paid to and received by the company. The
amount of minimum subscription to be disclosed in prospectus by the Board of Directors taking
into account the following:
(a) Preliminary expenses of the company,
(b) Commission payable on issue of shares,
(c) Cost of fixed assets purchased or to be purchased,
(d) Working capital requirements of the company, and
(e) Any other expenditure for the day to day operation of the business.

As per guidelines of the Securities Exchange Board of India (SEBI), a company must receive a
minimum of 90% subscription against the entire issue before making any allotment of shares or
debentures to the public.
The issue price of shares is generally received by the company in installments and these
installments are known as under :
First instalment ………….. Application Money
Second Instalment ………….. Allotment Money
Third Instalment ………….. First Call Money
Fourth Instalment ………….. Second Call Money and so on.
Last Instalment Final Call Money

JOURNAL ENTRIES FOR ISSUE OF SHARES FOR CASH

Upon the issue of share capital by a company, the following entries are made in the financial
books:
(1) On receipt of the application money
Bank Account Dr. (With the actual amount received.)
To Shares Application Account

(2) On application money is transferred to Share Capital A/c

Share Application A/c Dr
To Share Capital A/c

(3) on allotment money due

Share Allotment A/c Dr

To Share Capital A/c

(4) On receipt of allotment money

Bank A/c Dr
To Share Allotment A/c.

(5) On a call being made

Share First and Final Call A/c Dr
To Share Capital A/c.

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(6) On receipt of call money

Bank A/c Dr
To Share First & Final call A/c

SUBSCRIPTION OF SHARES:

Accounting for issue of shares depends upon the type of subscription. Whenever a company
decides to issue shares to public, it invites applications for subscription by issuing a prospectus.
It is not necessary that company receives applications for the number of shares to be issued by
it. There are three possibilities :

i) Full subscription
Issue is fully subscribed if the number of shares offered for subscription and the number of
shares actually subscribed by the public are same. Company may receive applications equal to
the number of shares company has offered to people. It is called full subscription.

ii) Under subscription

The issue is said to have been under subscribed when the company receives applications for less
number of shares than offered to the public for subscription. In this case company is not to face
any problem regarding allotment since every applicant will be alloted all the shares applied for.
But the company can proceed with allotment provided the subscription for shares is at least equal
to the minimum required number of shares termed as minimum subscription.

(ii) Over Subscription

When company receives applications for more number of shares than the number of shares
offered to the public for subscription it is a case of over subscription. A company cannot allot
more shares than what it has offered. In case of over subscription, company has the following
options :

Option I

(i) Rejection of Excess Applications and Money Returned

The company may reject the applications for shares in excess of the shares offered for issue and
a letter of rejection is sent to such applicants. In this case the application money received from
these applicants is refunded to them in full. The journal entry made is as follows:
Share Application A/c Dr
To Bank A/c
(Application money on … shares refunded to the applicants)

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Option II

Partial acceptance of Applications(Prorata allotment).

In some cases the company accepts the applications for subscription partially. It means that the
company does not allot the full number of shares applied for. The company may evolve some
formula of accepting applications partially or making proportionate allotment/ the Prorata allotment
which means that the applicants are allotted shares proportionately. In such a case the company
adjusts the excess share money received on application towards share allotment money due on
partially accepted applications. The journal entry recording the adjustment of application money
towards share allotment money and calls is as under :
Shares Application A/c Dr
To Share Allotment A/c
To Share Calls A/c

(Being Share application money transferred to Share Allotment and share calls Account).

TYPES OF ISSUE OF SHARES :

A company can issue its shares in any of the following ways:

(a) Issue at par : A company can issue its shares at their face value. When company issues its
shares at their face value, the shares are said to have been issued at par.

(b) Issue of shares at premium :

If a company issues its shares at a price more than its face value, the shares are said to have been
issued at Premium. The difference between the issue price and face value or nominal value is
called ‘Premium’. If a share of Rs 10 is issued at Rs 12, it is said to have been issued at a
premium of Rs 2 per share. The money received as premium is transferred to Securities Premium
A/c.

Accounting Treatment of premium on Issue of Shares

Following is the accounting treatment of Premium on issue of shares :

(a) Securities premium collected with share Application money :

If the Securities premium is collected on application and the company has taken decision about
the allotment of shares, the following journal entry is made :

Share Application A/c. Dr

To Securities Premium A/c

(The amount of Securities premium received on application of the alloted shares is transferred to
Securities Premium A/c)

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(b) Premium collected with Allotment money or Calls:

If the company decides to demand the premium with share Allotment or/and share call money,
the journal entry made is:

Share Allotment A/c Dr

(Or)
Share Calls A/c Dr
To Securities Premium A/c

(c) Issue of shares at discount :

Shares are said to be issued at a discount, if issue is at an amount less than the nominal or par
value of shares. The excess of the nominal value over the issue price represents discount on
the issue of shares. For example, when a share of the nominal value of ` 100 is issued at ` 98, it
is said to have been issued at a discount of 2 per cent.

According to Section 53 of the Companies Act, 2013, a Company cannot issue shares at a
discount except in the case of issue of sweat equity shares (issued to employees and
directors). Thus any issue of shares at discount shall be void.

CALLS-IN-ARREARS:
Sometimes shareholders fail to pay the amount due on allotment or calls. The total unpaid
amount on one or more instalments is known as Calls-in-Arrears or Unpaid Calls. Such
amount represents the uncollected amount of capital from the shareholders; hence, it is shown
by way of deduction from ‘called-up capital’ to arrive at paid-up value of the share capital.
For recording ‘Calls-in-Arrears’, the following journal entry is recorded :

Calls-in-Arrears A/c Dr.

To Share Allotment A/c
To Share Calls A/c
CALLS-IN-ADVANCE
Some shareholders may sometimes pay a part, or whole, of the amount not yet called up, such
amount is known as Calls-in-advance. According to Table F, interest at a rate not exceeding
12 per cent p.a. is to be paid on such advance call money. This amount is credited in Calls-in-
Advance Account. The following entry is recorded:

Bank A/c Dr.

To Call-in-Advance A/c
When calls become actually due, calls-in-advance account is adjusted at the time of the call.
Forthis the following journal entry is recorded:
Calls-in-Advance A/c Dr.
To Particular Call A/c

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FORFEITURE OF SHARES:
If the shareholders fail to pay the allotment money or calls money , the directors of a company as
provided by articles are powered to cancel the shares allotted to them. Such cancellation of
shares in case of default to pay is termed as share forfeiture.

(1) FORFEITURE OF SHARES WHICH WERE ISSUED AT PAR:

In this case, Share Capital Account will be debited with the called-up value of shares
forfeited. Allotment or Calls Account will be credited with the amount due but not paid by the
shareholder(s). Forfeited Shares Account or Shares Forfeiture Account will be credited with
the amount already received in respect of those shares.
Share Capital Account Dr.
To Forfeited Shares Account
To Share Allotment Account
To Share First Call Account
To Share Final Call Account

(2) FORFEITURE OF SHARES WHICH WERE ISSUED AT A PREMIUM :

In this case, Share Capital Account will be debited with the called-up value of shares
forfeited. If the premium on such shares has not been paid by the shareholder, the
Securities Premium Account will be debited to cancel it (if it was credited earlier).
Allotment, Calls and Forfeited Accounts will be credited in the usual manner.
(a) If premium not received
Share capital A/c Dr.
Securities Premium A/c Dr.
To Share Allotment A/c
To Share First Call A/c
To Share Final Call A/c
To Forfeited Shares A/c

(b) If premium received

Share capital A/c Dr.
To Share Allotment Account
To Share First Call Account
To Share Final Call Account
To Forfeited Shares Account

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RE-ISSUE OF FORFEITED SHARES:

If the forfeited shares are sold , then such sale of forfeited shares is known as Re-issue. When
the shares are sold less than the share value such loss is transfer to share forfeitured account and
balance of forfeitured shares is transferred to capital reserve account. the entries are:

(a) When Re-issue made at loss:

Bank Account Dr.
Forfeited Shares Account Dr.
To Share Capital Account
(b) When forfeited shares account transfer to capital reserve A/c:
Forfeited Shares Account Dr.
To Capital Reserve Account

ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH :

Sometimes, however, a company may issue shares in a direct exchange for land, buildings or
other assets. Shares may also be issued in payment for services rendered by promoters, lawyers
in the formation of the company. These shares should be shown separately under the heading
‘Share Capital’.

Accounting Entries :
(a) When assets are purchased in exchange of shares
Assets Account Dr.
To Share Capital Account
(b) When shares are issued to promoters
Goodwill Account Dr.
To Share Capital Account
PROBLEMS

1. ABC Ltd., having an authorized capital of Rs. 5000000 of Rs.100 each. The company issued
40000 shares to public. Applications were received for 40000 shares. The amount was paid in
installments. The installments were :

Application money Rs.25

Allotment money Rs.35
First call money Rs.20
Final call money – the remaining balance.
All the installments money was duly received. Journalise them and prepare ledger

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2. XYZ Ltd., having an authorized capital of Rs. 4000000 of Rs.100 each. The company issued
35000 shares to public. Applications were received for 32000 shares. The amount was paid in
installments. The installments were:

Application money Rs. 15

Allotment money Rs. 30
First call money Rs. 20
Final call money – the remaining balance.
All the installments money was duly received. Journalise them and prepare balance sheet .

3. Y Ltd., having an authorized capital of Rs. 600000 of Rs.10 each. The company issued 50000
shares to public at a premium of 10%. Applications were received for 46000 shares. The amount
was paid in installments. The installments were :

Application money Rs. 3

Allotment money Rs. 4 (including premium)
First call money Rs. 2
Final call money – the remaining balance.
All the installments money was duly received. Journalise them and prepare ledger.

4. Z Ltd., having an authorized capital of Rs. 8000000 of Rs.100 each. The company issued
60000 shares to public at a premium of 10%. Applications were received for 55000 shares. The
amount was paid as follows:

Application money Rs. 30

Allotment money Rs. 40 (including premium)
First call money Rs. 15
Final call money – the remaining balance.
All the installments money was duly received. Journalise them and prepare ledger.

5. A company issued 60000 shares to public of Rs. 100 with a premium of Rs.20 payable Rs.30
on application, Rs. 50 including premium, Rs.25 on first call and the balance on second and final
call. All the installment amounts are received in full. A share holder holding 200 shares failed to
pay first and final calls money.

The applications were received for 58000 shares. Journalise them

6. X Ltd., having an authorized capital of Rs. 5000000 of Rs.100 each. The company issued
45000 shares to public at a premium of 10%. Applications were received for 42000 shares. The
amount was paid in installments.

Application money Rs. 30(including premium)

Allotment money Rs. 40
First call money Rs. 20
Final call money – the remaining balance.

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All the installments money was duly received except from a share holder having 500 shares, who
failed to pay first and final call money. Journalise them and prepare ledger.

7. Atlas Limited issued 10,000 equity shares of Rs 10 each at a discount of 10%. The amount is
payable as follows: On application Rs 2; On allotment Rs 4; and On final call Rs 3.
All the shares offered were subscribed for and money was duly received. You are required to
pass entries in the books of the company and also show the Balance Sheet of the company.

8. Y Ltd., invited applications for 10000 shares of Rs.100 each payable as follows:
On application Rs. 20, On Allotment money Rs. 30 ,On First call money Rs. 30,On Final call
money – the remaining balance. All the shares were applied for and allotted. A share holder
holding 200 shares paid the whole of the amount due along with allotment. Journalise the
transactions assuming all sums due were received.

9. K Limited issued 10,000 equity shares of Rs 10 each payable as follows: On application Rs 3;

On allotment Rs 4; and On final call Rs.3. These shares were originally issued at par. Mr. H
holding 500 shares not paid final call money and his shares are forfeited.
Give Journal entries and prepare balance sheet. (Assume all money due was transferred to Calls-
in-Arrear Account).

10. H. Limited forfeited 300 equity shares of Rs 10 each, Rs 8 called up for non-payment of first
call money @ Rs 2 each. Application money @ Rs 2 per share and allotment money @ Rs 4 per
share have already been received by the Company. Give Journal Entries for the forfeiture.
(Assume that all money due was transferred to Calls-in-Arrear Account.)

11. M Ltd., invited applications for 20000 shares of Rs.100 each payable as follows:

On application Rs. 25,On Allotment money Rs. 35 ,on First call money Rs. 15,on Final call
money – the remaining balance.

Applications were received for 25000 shares and allotment was made on pro-rata basis.
The excess application money was adjusted to allotment. All the instalments due were recived
except from a shareholder holding 400 shares failed to pay calls money. Journalise the above
transactions
12. Hero Limited has an authorised capital of Rs 10,00,000 divided into 1,00,000 equity shares
of Rs 10 each. The company issued 80,000 equity shares. The share money is payable as follows

On application Rs 3 per share; On allotment Rs 3 per share; On final call Rs 4 per share.
The shares are fully subscribed. The company received all money except final call money on
1,000 shares The company decided to forfeit those shares and re-issue at par.

Pass necessary Journal Entries in the books of the company.

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13. X Limited made an issue of 10,000 equity shares of Rs 10 each payable as follows :
On application Rs 2 per share
On allotment Rs 4 per share
On final call Rs 4 per share
All these shares were subscribed. Money due on all shares was received excepting Ram
holding 100 shares failed to pay the final call. These shares were forfeited after giving due notice
to the shareholder and re-issued at Rs. 9 per share.
You are required to pass necessary Journal Entries in the books of the company and also show
the Balance Sheet of the company

14. Jindal Limited issued a prospectus inviting applications for 90,000 equity shares of Rs 100
each at a premium of Rs 20 per share, payable as follows :
On application Rs. 50(including premium) , on allotment Rs.45 and on final call Rs. 25.
All shares were applied for and allotted. The entire money payable by shareholders was received
except from Mr X who had taken 1,000 shares, but failed to pay the final call. His shares were re
issued at Rs.95 per share. You are required to pass Journal Entries in the books of the company
to record the above transactions.

15. The authorised capital of Ajanta Company Limited was Rs 2,00,000 divided into shares of Rs
1,000 each. The Board of Directors arranged for distribution of 60% of such shares to the public
payable as follows :
On application — Rs 200; On allotment (including premium Rs 50) — Rs 250
On first call, and the second and final call the balance amount equally. All the shares were
subscribed for and all the monies were called for. Karim, a holder of 5 shares failed to pay the
first call money and his shares are forfeited and re-issued at par.. The rest money was received in
full. Show the Journal Entries and give the Balance Sheet.

16. X Ltd wanted to issue 10,000 shares of Rs.10 each of which Rs 2 per share was payable on
Application. Rs.3 per share on Allotment, Rs.3 per share on First Call and Rs.2 per share on
Final Call.
The company received application money for 13,000 shares, out of which those for 1,000 shares
were refunded. Excess applied was adjusted towards allotment money due. A shareholder, Raja,
who was allotted 600 shares failed to pay first call money. His shares were forfeited and re-
issued at par. Except this, the company received all the money due on allotment, first and final
call. Show all the Journal Entries relating to issue of shares in the books of the company.

17. P Ltd issued 10,000 equity shares of Rs 100 each at a premium of Rs 20 per share payable at
Rs 30 per share on application; Rs 50 per share on allotment including premium , Rs 40 per
share on final call.
All the shares were subscribed, money due on all shares was fully received excepting Anil,
holding 100 shares failed to pay allotment and final call money and Sunil holding 200 shares,
failed to pay the final call money. All these 300 shares were forfeited and subsequently reissued
to Amar @ Rs 8 per share as fully paid-up.
Pass necessary Journal Entries in the books of the company

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18. A limited company issued a prospectus inviting applications for 90,000 equity shares of Rs
10 each at a premium of Rs 2 per share, payable as follows: Rs
On Application 4.50
On Allotment (including premium) 4.50
On First and Final Call 3.00
All money payable by shareholders was received except from Mr. Unlucky who had taken 1,000
shares, but failed to pay the final call. His shares were forfeited and re-issued to Mr. Fortunate at
Rs.6.00 each. Show the Journal Entries in the books of the company in respect of the above
transactions.

19. Amrit Ltd issued a prospectus, inviting applications for 20,000 shares at a premium of Rs 2
per share payable as follows : on application Rs 5 (including premium); on allotment Rs 4; on
call Rs 3.
Applications were received for 30,000 shares and pro-rata allotment was made on application
for 24,000 shares. Excess money paid on application for these shares was utilised towards
allotment money. Arun, who applied for 600 shares, failed to pay the allotment money and on his
subsequent failure to pay the call, his shares were forfeited. Pass the necessary entries in the
books of Amrit Limited.

20. Sunder Ltd issued a prospectus, inviting applications for 40,000 shares at a premium of Rs 20
per share payable as follows : on application Rs 40 ;on allotment Rs 50(including premium); on
call Rs 30.
Applications were received for 55,000 shares and pro-rata allotment was made on application
for 50,000 shares. Excess money paid on application for these shares was utilized towards
allotment money. Lasya, who was allotted 2000 shares, failed to pay the allotment money and on
his subsequent failure to pay the call, his shares were forfeited and re-issue at Rs.90 per share.
Pass the necessary entries in the books of Sunder Limited.

21. The authorised capital of pooja Company Limited was Rs.20,00,000 divided into shares of
Rs 100 each. The Board of Directors arranged for distribution of 60% of such shares to the
public payable as follows :
On application — Rs 20; On allotment (including premium Rs 10) — Rs 40
On first call Rs.30, and the second and final call the balance amount.All the shares were
subscribed for and all the monies were called for. Karim, a holder of 50 shares failed to pay the
first call money and his shares are forfeited and re-issued at par.. The rest money was received in
full.
The company directors purchased a machinery from Sundaram motors by issuing 20% of
shares. Show the Journal Entries and give the Balance Sheet.

22. Honda Limited has an authorised capital of Rs 10,00,000 divided into 1,00,000 equity shares
of Rs 10 each. The company issued 80,000 equity shares. The share money is payable as follows
On application Rs 3 per share; On allotment Rs 3 per share; On final call Rs 4 per share.
The shares are fully subscribed. The company received all money except final call money on
1,000 shares The company decided to forfeit those shares and re-issue at Rs.12 per share.
Pass necessary Journal Entries in the books of the company.

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UNIT-V
CAPITAL REDUCTION (OR) INTERNAL RCONSTRUCTION
In case of internal reconstruction, the company will not be liquidated but accumulated losses and
fictitious assets will be written off by reducing the capital of the company. Internal
reconstruction(or)capital reduction means the same. The share holders and some items even creditors
are suitably adjusted to write of accumulative losses and fictitious assets. Now a new company is formed
and the old company with its reconstructed capitals, continuous to carry on the business. If the claims of
creditors and debenture holders are also reduced. If the claims of creditors and debenture holders are
also reduced, then it is more appropriate to call it as reconstruction.

A company can reduce its share capital according to the provisions in sections 100 to 105 of company’s
act. The provisions are :

a) It should authorized by the articles of association.

b) The company should pass a special reservation for capital reduction.
c) The company must apply to the court for an order conforming the capital reduction.

Journal Entries:-

a) For financially sound companies:

Some portion of capital refund to share holders:
Equity share capital A/c Dr
To bank A/c
b) For financially weak companies:
1) For reducing the equity share capital
Old equity share capital A/c Dr
To New equity share capital A/c
To capital reduction A/c
2) For reducing the preferential capital
Old preferential share capital A/c Dr
To New preference share capital A/c
To capital reduction A/c
3) If any amount sacrificed by creditors, debenture holders
Creditors A/c Dr
Debenture holders A/c Dr
To capital reduction A/c
4) When capital reduction is utilized for accumulated losses, fictitious assets etc
Capital reduction A/c Dr
To P&L A/c
To preliminary expenses A/c
To good will A/c

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To trade marks A/c

To patents A/c
To discount on issue of share A/c
To other assets A/c
To capital reserve A/c(Balancing figure)

PROBLEMS
1. The balance sheet of AP Industries Ltd as on 31-12-2011 was as follows.

Liabilities Amo Assets Amount

unt
Share capital: Good will 15000
2000 preference shares of 100 each 200000 Free hold property 200000
4000 equity shares of 100 each 400000 Plant & machinery 300000
8% debentures 100000 Stock 50000
Bank OD 50000 Debtors 40000
Creditors 100000 P&L A/c 245000
850000 850000

The company adopt the following scheme of capital reduction approved by the court:

a) The preference shares to be reduced to 75 fully paid and the equity shares to be reduced to Rs.37.50
b) The good will amount to be eliminated.
Give Journal entries and prepare balance sheet

2. The following is the balance sheet of ‘B’ industry Ltd has on 30-6-2012.
Liabilities Amount Assets Amount

Authorised capital: Good will 20000

50000 preferential shares of 10 each 500000 Lease hold premises 107000
50000 equity shares of 10 each 500000 Plant & machinery 60000
Patents 73900
Issued Capital: Preliminary expenses 2000
25000 preferential shares of 10 each 250000 Stock 34000
25000 equity shares of 10 each 250000 Debtors 56000
Sundry creditors 40000 Cash in hand 100
Bank over droft 36000 P&L A/c 123000
576000 576000

The company provided for capital reduction and obtained an order from the court. The company passed
the following scheme of capital reduction.

a) The equity shares be reduced to an equitant member of fully paid shares of 2.50 each.
b) The preference shares be reduced to an equal number of fully paid shares of 5 each.
The amount available be utilized towards writing up the following assets as follows:

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Preliminary expenses, Good will and P&L A/c to be return of entirely.Rs.27000 to be return of lease hold
premises.Rs.14000 to be written of stock, Rs.6000 to be transfer to reserve for doubt full debts. P&M to
be written @ 20% and the balance available is to be written of patents. Pass journal entries and prepare
balance sheet.

3. The balance sheet of PP industries was as follows.

Liabilities Amount Assets Amount

10000 equity shares of 10 each 100000 Good will 10000

10000,7% preference shares of 100000 Other assets 90000
10 each Stock 25000
Debtors 30000
P&L A/c 45000

200000 200000

It was decided that the equity share of 10 each to be reduced to 6 each fully paid.7% preference shares
of 10 each to be reduced to 7% each fully paid. The amount available is to be used to write off P&L A/c,
Good will. Complete and other assets as far as possible.

There was arrears of divided to preference share holders for last 3 years and it was decided to be cancel.
Prepare journal entries and balance sheet.

4. The balance sheet X Ltd was as follows.

Liabilities Amount Assets Amount

Share capital: Good will 15000

2000 preference shares of 100 each 200000 Free hold 200000
4000 equity shares of 100 each 400000 premises 300000
5% mortgage debentures 100000 P&M 50000
Bank OD 50000 Stock 40000
Creditors 100000 Debtors 245000
P&L A/c
850000 850000

The company received the following scheme of capital reduction approved by court.

a) The preference shares to be reduced to Rs.75 per share.

b) Equity shares to be reduced to 37.50 per share
c) Good will account is to be eliminated
d) Free hold premises to be depreciated by 50%
e) Plant & machinery increased by Rs.50000
f) The debenture holders took over the stock in trade and book debts in full satisfaction of their dues.
Prepare journal entries and balance sheet.

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5. The summarized balance sheet of new hope company as on 30-6-2004 was given below.
Liabilities Amount Assets Amount

5000 equity shares of 100 each 500000 Land & Building 100000
8% debentures 200000 Plant & machinery 200000
Bank OD 150000 Good will 90000
Profit priority incorporation 10000 Patents 30000
Cash 5000
Sundry debtors 100000
Stock 95000
P&L A/c 220000
Preliminary expenses 20000

860000 860000

The following scheme of reconstruction was adopted:

a) Each shares was to be reduced to Rs.20 each

b) Each share holders was to subscribe for half off the number of shares already held by them and pay
immediately in cash for the shares available
c) Fictitious assets including good will and paytents were eliminated.
d) A provision of 5% to be created for doubt full debts.
e) Plant & machinery to be written down by Rs.40000.
f) Reconstruction expenses paid were 2000.

6. The Golden eyes Ltd submits the following balance sheet.

Liabilities Amount Assets Amount

5000 equity shares of 100 each 500000 Good will 90000

6% debentures 200000 L&B 100000
Profit prior to incorporation 4000 P&M 240000
Reserve fund 5000 Patents 30000
Share premium 1000 Bank 5000
Creditor 140000 Debtors 90000
Bank OD 5000 Motor car 10000
Stock in trade 95000
P&L A/c 200000
Priliminary expenses 40000
900000 900000

The following scheme of reconstruction is adopted:

a) Each share was to be reduced to 1/5 of its value.

b) Each share holders was to subscribe for half of the member of shares already held by them and pay
immediately.
c) All fictitious assets including good will and patents were to be eliminated

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d) A provision of 5% on debtors was to be kept.

e) Motor car was to be reduced to half of it value.
f) Plant & machinery was to be written down by the balance amount available
Give journal entries and prepare balance sheet.
7. Unlucky company Ltd presents the following balance sheet as on 30-6-2004
The following scheme of reconstruction was approved by the court.

Liabilities Amount Assets Amount

Share capital (share of 100 each Good will 60000

fully paid) 400000 Land & Building 150000
7% preference shares 300000 P&M 300000
Profit prior to incorporation 10000 Patents 30000
6% debentures 300000 Stock 220000
Sundry creditors 200000 Debtors 150000
Cash 5000
Preliminary expenses 20000
P&L A/c 270000

1210000 1210000
a) 7% preference shares to be converted in to 9% preference shares, the amount being reduced by 30%.
b) Equity share be reduced to fully paid shares of 50 each
c) L&B be appreciated by 20%
d) All wasting assets are to be eliminated
e) Rs.100000 new equity share are issued. The amount so received (realized) to be utilized for purchase
of new plant & Machinery
f) Debentures reduced by 20%
g) Profit prior to incorporation is to be utilized if necessary.
8. The balance sheet of Sitha company Ltd as on 31-12-2010 was as follows.

Liabilities Amount Assets Amount

Authorised capital: Good will 25000

3000 preference shares of 100 each 300000 Free hold property 175000
5000 equity shares of 100 each 500000 Machinery 300000
Issued & paid up capital: Stock 105000
2000 preference shares of 100 each 200000 Debtors 85000
4000 equity shares of Rs.100 each 400000 P&L A/c 190000
6% Debentures 120000
Bank over droft 55000
Current liabilities 105000

880000 880000

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The following scheme of reconstruction (Capital reduction) was approved by the court.

a) The preference shares and equity shares were reduced to 80 and 50 per share fully paid up.
b) Debenture holders agreed to take 1000 preference shares in full satisfaction of their dues.
c) The good will and P&L A/c were written off
d) Free hold property and machinery were depreciated by 20% and 10% respectively.
Give journal entries and prepare balance sheet.

9. The following is the balance sheet of Seema Ltd as on 31-3-2006.

Liabilities Amount Assets Amount

3000,5% cumulative preference shares of 10 each 300000 Land&Buildings 300000

5000 equity shares of 10 each 500000 Machinary 250000
Debentures 250000 Good will 70000
Loan 50000 Furniture 2000
Sundry creditors 193000 Stock 30000
Sundry debtors 120000
Bills receivable 95000
Cash at bank 6000
P&L A/c 420000

1293000 1293000

In the view of heavy losses,the company decided:

a) Preference shares dividend is in arrears for 2 years. Now the devided is to be cancel.
b) Preference shares reduced to Rs& per share fully paid. But the dividend to be increased by 25% on
the existing date.
c) Equity shares to be reduced to Rs.2 each,Rs.1 paid up and the unpaid up amount of balance Rs.1 to
be called to provide additional capital.
d) Debit balance of P&L A/c, Good will to be written off. Rs 20000 depreciated in to be provided for
plant & machinery.

10. X company Ltd to decided to adopt in a capital reduction scheme with the approval all parties and
court. Their balance sheet was as under.
Liabilities Amount Assets Amount

Share capital: Building 1600000

12000,6% preference shares of 100 each 1200000 Machinery 2000000
300000 equity shares of 10 each 3000000 Stock 500000
Capital reserve 120000 Debtors 100000
Share premium 80000 Cash 50000
6000,10% debentures of 100 each 600000 P&L a/c 800000
Creditors 50000

5050000 5050000

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The details of the scheme are given below.

a) For every 10% old debentures,the following are issued.

1.One 12% debenture of Rs.50 each
2.Three 8% preference shares of Rs.10 each
3.Four equity shares of Rs.5 each
b) For every 6% preference shares the following are issued:
1.Five 8% preference shares of rs.10 each
2.Five equity shares of Rs.5 each
c) For every old equity shares of Rs.10,New equity shares of 5 each are issued
d) Use available amount to write off P&L A/c debit balance and the following assets with the amounts
given below.
1. Buildings 200000 2.machinary 600000 3.Stock 200000

Give journal entries and prepare balance sheet.

11. Sonu company Ltd passed necessary resolution and received sessions from the court,for the reduction
of share capital by Rs.250000.For this purpose the following scheme to be adopted:
a) To reduced the value of P&M by 45000 and good will 20000
b) To write off the debit of P&L A/c Rs.105000
c) To reduce the value of investments to the market value by 40000
d) The reduction was made by converting 25000 preference shares of 20 each fully paid to
the same number of preference shares of Rs.15 each and 25000 equity shares of Rs.20
each but Rs.15 paid up converted in to equity shares of Rs.10 each fully paid up pass
necessary journal entries for capital reduction.

12. On the reconstruction of a company.The following terms were agreed upon.The share holders were to
receive the following instead of their present holding of 50000 shares of Rs.10 each:
a) Fully paid equity share equal to 2/5 of their holding
b) 5% preference shares fully paid to the extent of 1/5 of the above new equity shares
c) Rs.60000 valued 6% second debentures
d) An issue of Rs.50000 valued 5% first debentures was allotted and the payment for the
same have been received in cash. The good will balance of 300000 have written down to
150000.The P&M balance of 100000 was written down to 75000.The free hold premises
of 150000 was written down to 125000. Make journal entries.

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13. The following is the balance sheet of Siva company Ltd as 31-12-2008.

Liabilities Amount Assets Amount

13% cumulative preference shares of 100 Fixed assets 1500000

each 100000 Current assets 3500000
Equity shares of 10 each 700000 P&L A/c 300000
8%Debentures 300000
Current liabilities 3900000
Provisions for taxation 300000

5300000 5300000

The following scheme of reorganization is sanctioned :

1
a) The fixed assets are to be written down by 33 %
3
b) Current assets are to be revalued at 2700000
c) Preference share holders decided to forego their right to arrears of dividend which are
in arrears for 3years
d) The taxation liability of the company is set filled at Rs.400000
e) One of the creditors of the company to whom Rs.2500000 owed decided to forego 50%
of his claim. He has allotted 100000 equity shares of Rs.5 each in part satisfaction of the
balance of his claim.
f) To write off interest on debentures and interest rate increased to 11% .The debenture
holders surrender existing debentures of Rs.100 each they exchange the same for fresh
debentures of Rs.75 each.
g) All equity shares are to be reduced to Rs.5
h) All preference shares are reduced to Rs.75.

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