Mock Test Accounts 2

Accounting (Test 002)

PAPER - 1 : ACCOUNTING

MOCK TEST - 002
CA Sachin Jain, Kolkata
09331122556

Answers all questions
Wherever appropriate, suitable assumptions should be made by the candidate.
Working notes should form part of the answer.

Question 1

(10 X 2 = 20 Marks)

Answer all the following questions:
a.	All significant accounting policies adopted in preparation and presentation of financial statements must be disclosed. State whether the statement is true or false.
b.	A, B and C share profits and losses in the proportion of 6/14, 5/14 and 3/14 respectively: They agreed to take D into partnership and give him 1/8th share. Compute new profit sharing ratio between A B, C and D.
c.	As per the decision in Garner vs. Murray the loss on account of insolvency of a partner should be borne by the solvent partners in their profit sharing ratio. State the validity of the statement.
d.	M/s Dogra & Co. installed a machinery for Rs. 5,00,000 on 1.1.2000. They were charging deprecation on straight line basis taking useful life of the machine as 10 years. In December, 2006 they found that the machine became obsolete which could not be used. The machine can fetch only Rs. 50,000. Classify this loss into capital or revenue.
e.	During 2005, subscription received in cash in Rs. 42,000. It includes Rs. 1,600 for 2004 and Rs. 600 for 2006. Also Rs. 3,000 has still to be received for 2005. Calculate amount to be credited to income and Expenditure Account in respect of subscription.
f.	The company deals in two products, A and B, which are neither similar nor interchangeable. At the time of closing of its account for the year 2005-06, the Historical Cost and Net Realizable Value of the items of closing stock are determined as follows:
	Items	Historical Cost	Net Realisable Value
		(Rs. in lakhs)	(Rs. in lakhs)
	A	40	28
	B	16	24
	What will be the value of Closing Stock?
g.	A plant was depreciated under two different methods as under:
	Year	SLM (Rs. in lakhs)	WDV (Rs. in lakhs)
	1	7.80	21.38
	2	7.80	15.80
		15.60	37.18
	3	7.80	6.38
	What should be the amount of resultant surplus/deficiency, if the company decides to switch over from W.D.V. method to SLM method for first two years?
h.	A Ltd. take over B Ltd. on April 01, 2007 and discharges consideration for the business as follows:
	(i) Issued 42,000 fully paid equity shares of Rs. 10 each at par to the equity shareholders of B Ltd.
	(ii) Issued fully paid up 15% preference shares of Rs. 100 each to discharge the preference shareholders (Rs. 1,70,000) of B Ltd. at a premium of 10%.
	(iii) It is agreed that the debentures of B Ltd. (Rs. 50,000) will be converted into equal number and amount of 13% debentures of A Ltd.
	Calculate the amount of purchase consideration.
i.	ABC Ltd. is constructing a fixed asset. Following are the expenses incurred on the construction: - Materials Rs.10,00,000 - Direct Expenses Rs. 2,50,000 - Total Direct Labour Rs. 5,00,000 (1/10th of the total labour time was chargeable to the construction) - Total office & administrative expenses Rs. 8,00,000 (5% is chargeable to the construction) - Depreciation on the assets used for the construction of this assets Rs. 10,000 Calculate the cost of fixed assets.
j.	In Account current, red-ink interest is treated as negative interest. Judge the validity of the statement.

Question 2

(16 Marks)

Following is the Balance Sheet as at March 31, 2005 :
Liabilities	Max Ltd.	Mini Ltd.	Assets	Max Ltd.	Mini Ltd.
Share capital:			Googdwill	20	-
Equity shares of			Other fixed assets	1,500	760
Rs. 100 each	1,500	1,000	Sundry debtors	651	440
9% Preference shares			Stock	393	680
of Rs. 100 each	500	400	Cash at bank	26	130
General reserve	180	170	Own debentures
Profit & loss account	-	15	Nominal value Rs.2 lakh	192	-
12% Debentures			Discount on issue of
of Rs.100 each	600	200	Debentures	2
Sundry creditors	415	225	Profit & loss account	411	-
	3,195	2,010		3,195	2,010

On 1.4.2005, Max Ltd. adopted the following scheme of reconstruction:

a.	Each equity share shall be sub-divided into 10 equity shares of Rs. 10 each fully paid up. 50% of the equity share capital would be surrendered to the company.
b.	Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 90% of the dividend claim and accept payment for the balance.
c.	Own debentures of Rs. 80,000 were sold at Rs. 98 cum-interest and remaining own debentures were cancelled.
d.	Debentureholders of Rs. 2,80,000 agreed to accept one machinery of book value of Rs. 3,00,000 in full settlement.
e.	Creditors, debtors and stocks were valued at Rs. 3,50,000, Rs. 5,90,000 and Rs. 3,60,000 respectively. The goodwill, discount on issue of debentures and profit and loss (Dr.) are to be written off.
f.	The Company paid Rs. 15,000 as penalty to avoid capital commitments of Rs. 3,00,000.
On 2.4.2005 a scheme of absorption was adopted. Max Ltd. would take over Mini Ltd. The purchase consideration was fixed as below:
i.	Equity shareholders of Mini Ltd. will be given 50 equity shares of Rs. 10 each fully paid up, in exchange for every 5 shares held in Mini Ltd.
ii.	Issue of 9% preference shares of Rs. 100 each in the ratio of 4 preference shares of Max Ltd. for every 5 preference shares held in Mini Ltd.
iii.	Issue of one 12% debenture of Rs. 100 each of Max Ltd. for every 12% debentures in Mini Ltd.
You are required to give Journal entries in the books of Max Ltd. and draw the resultant Balance Sheet as at 2nd April, 2005 .

(16 Marks)

Question 3

(a) The following is the Income and Expenditure Account of the Gorakhpur Club for the year ended 31st March, 2008 :

	Rs.		Rs.
To Salaries	15,750	By Subscriptions	55,000
To Stationery	1,250	By Donations	7,500
To Rates and Taxes	6,210	By Profit on Annual Meet	16,000
To Postage, Telephone etc.	2,520	By Sale of Souvenirs	5,250
To Sundry Expenses	8,210	By Profit on sale of Billiard Table	1,410
To Repairs and Maintenance	5,260
To Table Tennis Balls	1,210
To Printing of Souvenir	2,500
To Affiliation Fee to Main Club
(till 31.3.2008)	500
To Electricity	6,250
To Water Charges	1,210
To Billiard Room Expenditure	2,460
To Depreciation on Sundry Assets	1,560
To Excess of Income over Exp.	30,270

	85,160		85,160

The following further information is available:
(i)		1.4.07	31.3.08
		Rs.	Rs.
	Sundry Assets	46,500	47,650
	Outstanding Subscriptions	1,560	2,610
	Advance Subscriptions	2,500	1,600
	Expenses Outstanding:
	Printing and Stationery	150	210
	Telephone Bills	220	240
	Electricity	125	225
	Due towards purchase of Billiards Balls	-	165
	Office Bearers' Fund	3,465	4,260
(ii)	The Billiard Table was used for six months during the year and its book value was Rs. 10,240 as on 30th September, 2007 .
(iii)	Cash in hand at the beginning was Rs. 1,750.
(iv)	The club is affiliated to the Main Club. It has paid one year's subscription in advance Rs.1,000. Out of the donation, a sum of Rs. 1,000 announced at the Annual Meet was duly taken into account but had not been received till 31st March, 2008 .
(v)	All amounts received towards Office Bearers' Fund were credited to the Fund and the expenses amounting Rs. 2,785 were also charged to the Fund directly.
	From the above particulars, prepare a Receipts and Payments Account for the year and draw the Balance Sheet as on 31st March, 2008 .
(12 Marks)

(b)	Mr. A prepares accounts on 30th September each year, but on 31st December, 2008 fire destroyed the greater part of his stock. Following information was collected from his book:
		Rs.
	Stock as on 1.10.2008	29,700
	Purchases from 1.10.2008 to 31.12.2008	75,000
	Wages from 1.10.2008 to 31.12.2008	33,000
	Sales from 1.10.2008 to 31.12.2008	1,40,000
	The rate of gross profit is 33.33% on cost. Stock to the value of Rs. 3,000 was salvaged. Insurance policy was for Rs. 25,000 and claim was subject to average clause.
	Additional informations:
(i)	Stock in the beginning was calculated at 10% less than cost.
(ii)	A plant was installed by firm's own worker. He was paid Rs. 500, which was included in wages.
(iii)	Purchases include the purchase of the plant for Rs. 5,000
You are required to calculate the claim for the loss of stock.
	(4 Marks)

Question 4

(a). F, G and K were partners sharing profit and losses at the 2:2:1 K wants to retire on 31-12-2000 . Given below the Balance Sheet of the Partnership as well as other information:
Liabilities		Rs.	Assets	Rs.
Capital accounts:			Sundry Fixed Asset	1,50,000
F	1,20,000		Stock	50,000
G	80,000		Debtors	50,000
K	60,000	2,60,000	Bills Receivable	20,000
Reserve		10,000	Cash at bank	50,000
Sundry creditors		50,000
		3,20,000		3,20,000
F and G agree to share profits and losses at the ratio of 3:2 in future. Value of goodwill is taken to be Rs. 50,000. Sundry Fixed Assets are revalued upward by Rs. 30,000 and stock by Rs. 10,000. Bills Receivable dishonoured Rs. 5,000 on 31-12-2000 but not recorded in the books. Dishonour of bill was due to insolvency of the customer. F and G agree to bring sufficient cash to discharge claim of K and to make their capital proportionate. Also they wanted to maintain Rs. 75,000 bank balance for working capital. However they did not want to show goodwill in the books of accounts. Pass necessary journal entries and draft the Balance Sheet of M/s. F and G.
(8 Marks)

b)	Irfan carried out the following transactions in the shares of Sky Ltd.:
i.	On 1 st April, 2007 he purchased 20,000 equity shares of Re. 1 each fully paid up for Rs. 30,000.
ii.	On 15 th May 2007 , Irfan sold 4,000 shares for Rs. 7,600.
iii.	At a meeting on 15 th June 2007 , the company decided:
	A.	To make a bonus issue of one fully paid up share for every four shares held on 1 st June 2007, and
	B.	To give its members the right to apply for one share for every five shares held on 1 st June 2007 at a price of Rs. 1.50 per share of which 75 paise is payable on or before 15 th July 2007 and the balance, 75 paise per share, on or before 15 th September, 2007.
	The shares issued under (A) and (B) were not to rank for dividend for the year ending 31 st December 2007.
	1.	Irfan received his bonus shares and took up 2000 shares under the right issue, paying the sum thereon when due and selling the rights of the remaining shares at 40 paise per share; the proceeds were received on 30 th September 2007.
	2.	On 15 th March 2008 , he received a dividend from Sky Ltd. of 15 per cent in respect of the year ended 31 st Dec 2007.
	3.	On 30 th March he received Rs. 14,000 from the sale of 10,000 shares.
v.	You are required to record these transactions in the Investment Account in Irfan's books for the year ended 31 st March 2008 transferring any profits or losses on these transactions to Profit and Loss account. Apply average basis.
vi.	Expenses and tax to be ignored.
	*(8 marks)*

Question 5

(16 Marks)

Following incomplete information of X Ltd. are given below:

Trading and Profit & Loss Account for the year ended 31st March, 2008
	Rs. '000		Rs. '000
To Opening stock	700	By Sales	?
To Purchases	?	By Closing stock	?
To Direct expenses	175
To Gross profit c/d	?
	?		?
To Establishment expenses	740	By Gross profit b/d	?
To Interest on loan	60	By Commission	100
To Provision for taxation	?
To Net profit c/d	?
	?		?
To Proposed dividends	?	By Balance b/f	?
To Transfer to general reserve	?	By Net profit b/d	?
To Balance transferred to
Balance Sheet	?
	?		?
Balance Sheet as at 31st March, 2008
Liabilities	Rs. '000	Assets	Rs. '000
Paid-up capital	1,000	Fixed assets:
General reserve:	?	Plant & machinery	1,400
		(Balance at the beginning of the year)
Proposed addition	?	Other fixed assets	?
Profit and loss account	?
10% Loan account	?	Current assets:
Current liabilities	?	Stock	?
		Sundry debtors	?
		Cash at bank	125
	?		?

Other information:
(i)	Current ratio is 2:1
(ii)	Closing stock is 25% of sales.
(iii)	Proposed dividends to paid-up capital ratio is 2:3.
(iv)	Gross profit ratio is 60% of turnover.
(v)	Loan is half of current liabilities.
(vi)	Transfer to general reserves to proposed dividends ratio is 1:1.
(vii)	Profit carried forward is 10% of proposed dividends.
(viii)	Provision for taxation is equal to the amount of net profit of the year.
(ix)	Balance to credit of general reserve at the beginning of the year is twice the amount transferred to that account from the current year's profits.
All working notes should be part of your answer. You are required to complete:
a.	Trading and Profit and Loss account for the year ended 31st March, 2008 and
b.	The Balance Sheet as on that date.
You are required to calculate the claim for the loss of stock.

Question 6

(4 X 4 = 16 Marks)

Answer any four of the foloowing :
(i)	Heera Ltd. has two divisions. It provides depreciation for both divisions on straight line basis as per rates prescribed by Schedule XIV to the Companies Act. While finalizing the accounts for the year ended 31-3-2007 , it however wants to change the method to Written Down Value method for one of its divisions since in the opinion of the management the assets of the said division suffer faster wear and tear. Please advise the company on the above and also whether the change should be prospective or retrospective.
(ii)	A firm of contractors obtained a contract for construction of bridges across river Revathi. The following details are available in the records kept for the year ended 31st March, 2007 .
		(Rs. in lakhs)
	Total Contract Price	1,000
	Work Certified	500
	Work not Certified	105
	Estimated further Cost to Completion	495
	Progress Payment Received	400
	To be Received	140
	The firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements of AS 7 (Revised) issued by ICAI.
(iii)	Daya Ltd. acquired a machine on 1-1-2004 for Rs. 10,00,000. The useful life is 5 years. The company had applied on 1-4-2004 , for a subsidy to the tune of 80% of the cost. The sanction letter for subsidy, was received in November 2007. The company's Fixed Assets Account as at 31-3-2008 shows a credit balance as under:
	Machine (original cost)	10,00,000
	Accumulated depreciation
	(from 2004-2005 to 2006-2007 at straight line method)	(6,00,000)
		4,00,000
	Less: Grant received	(8,00,000)
		(4,00,000)
	How should the company deal with this asset in its account for 2007-08? Does it need to charge depreciation or negative depreciation for 2007-08? Can it credit Rs. 4,00,000 to capital reserve?
(iv)	A newly set up Private Ltd. manufacturing company has incurred following expenditures for the acquisition of plant & Machinery:
	a. Foreign tour expenses of directors for purchasing Plant & Machinery.
	b. Technical staff's salary for erection of Plant & Machinery.
	c. Non-techincal staff's salary during the period of installation of Plant & Machinery
	d. Other sundry expenses such as stationery, printing, postage, telegram and telephone and local conveyance charge etc.
	The company intends to capitalize the above expenses. Is the company justified? State with reasons.
(v)	What criteria is applied for rating a Company as "Small and Medium Sized Company" (SMC) for the purpose of compliance of Accounting Standards in India as per Cpmpanies (Accounting Standard) Rules, 2006?
(vi)	Explain the factors to be considered before selecting the pre-packaged accounting software.

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