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Question Paper

Financial Accounting (MB131) : April 2004


Section A : Basic Concepts (100 Marks)
• This section consists of questions with serial number 1 - 73.
• Answer all questions.
• Each question carries one mark.
< Answ
1. Which of the following appears under the head ‘Miscellaneous expenditure’ on the assets side of
Balance Sheet of a company?
(a) Bills discounted from bank (b) Prepaid insurance
(c) Directors’ remuneration (d) Discount allowed on issue of shares
(e) Income tax paid in advance.
(1 mark)
< Answ
2. Dividends are usually paid on

(a) Authorized capital (b) Issued capital


(c) Called-up capital (d) Paid-up capital (e) Reserve capital.
(1 mark)
< Answ
3. Which of the following can be utilized for redemption of preference shares?

(a) The proceeds from fresh issue of equity shares


(b) The proceeds from issue of debentures
(c) The proceeds from issue of fixed deposit
(d) The sale proceeds of investments
(e) Both (a) and (b) above.
(1 mark)
< Answ
4. Which of the following costs is not categorized as Research and Development Costs?
(a) Cost of materials consumed in the process of research and development
(b) Amortization of patents and licenses related to research and development
(c) Depreciation of premises that is used for carrying the work of research
(d) Salaries and wages paid to personnel engaged in the research and development activities
(e) Promotional expenses on market research for existing products.
(1 mark)
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5. The maximum amount beyond which a company is not allowed to raise funds by issue of shares is
(a) Issued capital (b) Reserve capital
(c) Nominal capital (d) Subscribed capital
(e) Paid-up capital.
(1 mark)
< Answ
6. According to which of the following accounting concepts, are consolidated financial statements
prepared when a parent-subsidiary relationship exists?
(a) Going concern (b) Business entity (c) Materiality (d) Cost (e) Periodicity.
(1 mark)
< Answ
7. Rights shares are the shares
(a) Issued by a newly formed company (b) Legally issued to the public at large
(c) Offered to the existing equity shareholders (d) That have a right of redemption
(e) That have a right to cumulative dividends.
(1 mark)
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8. Which of the following data is essential for calculation of value of an equity share under the intrinsic
value method?
(a) Normal rate of return (b) Expected rate of return
(c) Market value per share (d) Dividend per share
(e) Net equity.
(1 mark)
< Answ
9. Premium on redemption of debentures account is
(a) A real account (b) A nominal account (c) A personal account
(d) An asset (e) A capital reserve.
(1 mark)
< Answ
10. The maximum rate of discount that is allowed as per the provisions of the Companies Act in the event
of a company issuing shares at a discount is
(a) 5% (b) 8% (c) 10% (d) 12% (e)
15%.
(1 mark)
< Answ
11. The trade discount on purchases is recorded
(a) When it is received (b) When the inventory is purchased
(c) When the inventory is sold (d) When the inventory is returned
(e) Not at all recorded in the books.
(1 mark)
< Answ
12. In a funds flow statement prepared on working capital basis, a short term loan repaid by the
organization
(a) Is shown as a source of working capital
(b) Is shown as an increase in cash
(c) Is shown as a decrease in cash
(d) Does not affect the working capital
(e) Is not shown either as a source or a use of funds.
(1 mark)
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13. Which of the following is a leverage ratio?
(a) Debt-Equity ratio (b) Current ratio (c) Quick ratio (d) Earning power
(e) Inventory turnover ratio.
(1 mark)
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14. The document inviting offers from public to subscribe for the debentures or shares of a body corporate
is a
(a) Share certificate (b) Debenture (c) Fixed deposit receipt (d) Prospectus
(e) Share Warrant.
(1 mark)
< Answ
15. Which of the following is not an asset?
(a) Stock of stationery (b) Goodwill
(c) Profit and loss account (credit balance) (d) Accounts Receivable
(e) Cash at bank.
(1 mark)
< Answ
16. The portion of the acquisition cost of an asset yet to be allocated is known as
(a) Written down value (b) Accumulated value
(c) Realisable value (d) Salvage value
(e) Residual value.
(1 mark)
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17. Which of the following items is/are covered under Accounting Standard-2 with regard to accounting for
inventory?
I. Financial instruments held as stock-in-trade
II. Work in progress arising under construction contracts
III. Work in progress of service providers
IV. Work in progress of a manufacturing industry.

(a) Only (I) above (b) Only (IV) above


(c) Both (I) and (II) above (d) Both (III) and (IV) above
(e) (II), (III) and (IV) above.
(1 mark)
< Answ
18. Which of the following statements is/are true?
I. Drawings account is a nominal account
II. Capital account is a real account
III. Prepaid rent is a personal account
IV. Outstanding salaries account is a nominal account
V. Patents account is a personal account.
(a) Only (I) above (b) Only (III) above
(c) Both (II) and (IV) above (d) (II), (IV) and (V) above
(e) (I), (II), (III) and (IV) above.
(1 mark)
< Answ
19. Which of the following events is/are not recorded in the books of a business?
(a) Significant monetary events after the balance sheet date
(b) Death of a chief executive of the business
(c) Government investigations into the pricing policies of the business
(d) Both (b) and (c) above
(e) (a), (b) and (c) above.
(1 mark)
< Answ
20. Which of the following appears in the profit & loss appropriation account?
(a) Interest on debentures (b) Dividend (c) Provision for taxation
(d) Provision for bad debts (e) Penalty paid for defective works.
(1 mark)
< Answ
21. Which of the following inventory valuation methods shows higher profits during the period of rising
prices?
(a) FIFO method (b) LIFO method
(c) Weighted average method (d) Simple average method
(e) Specific identification method.
(1 mark)
< Answ
22. At the time of preparation of final accounts, bad debts recovered account will be transferred to
(a) Debtor’s account (b) Profit & loss account
(c) Profit & loss adjustment account (d) Profit & loss appropriation account
(e) Provision for discount on debtors account.
(1 mark)
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23. Which of the following is not an intangible asset?
(a) Goodwill (b) Trade mark (c) Franchise (d) Accounts receivable
(e) Secret process.
(1 mark)
< Answ
24. If machinery account is debited with the amount of repairs incurred on the machine, this is an example
of
(a) Compensating error (b) Error of principle (c) Error of commission
(d) Error of omission (e) Error of partial omission.
(1 mark)
< Answ
25. If the opening inventory of a business is undercast, it will
(a) Increase gross profit and decrease net profit
(b) Decrease gross profit as well as net profit
(c) Increase value of assets
(d) Increase gross profit as well as net profit
(e) Decrease value of assets.
(1 mark)
< Answ
26. Which of the following is not a financial statement?
(a) Profit and loss account (b) Profit and loss appropriation account
(c) Balance sheet (d) Funds flow statement
(e) Trial Balance.
(1 mark)
< Answ
27. Based on which of the following concepts, is share capital account shown on the liabilities side of a
balance sheet?
(a) Business entity concept (b) Money measurement concept
(c) Duality concept (d) Going concern concept
(e) Matching concept.
(1 mark)
< Answ
28. Which of the following is a liability of a firm?
(a) Debit balance of analytical petty cash book
(b) Credit balance of bank pass book
(c) Debit balance of bank column of cash book
(d) Debit balance of cash column of cash book
(e) Credit balance of bank column of cash book.
(1 mark)
< Answ
29. Which of the following statements is true?
(a) Inventory valuation affects only the income statement
(b) Undercasting or overcasting of subsidiary book is an example of error of commission
(c) Capital expenditure wrongly treated as revenue is an example of error of commission
(d) The sum total of assets is equal to the sum total of outside liabilities
(e) Inventories should be valued at lower of historical cost and current replacement cost.
(1 mark)
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30. Provision for bad debts is made as per the
(a) Conservatism concept (b) Cost concept
(c) Consistency concept (d) Going concern concept
(e) Time period concept.
(1 mark)
< Answ
31. Purchase of fixed assets on credit is originally recorded in
(a) Purchases book (b) Ledger
(c) Cash book (d) Journal proper
(e) Both (b) and (d) above.
(1 mark)
< Answ
32. Double entry book keeping involves
(a) Two accounts being affected for each transaction which are equal and opposite to one another
(b) Two sets of books being kept for the business
(c) Business book-keeping being kept by more than one person
(d) Every entry in the business books being checked twice
(e) Every transaction is recorded once in the journal and again in the ledger.
(1 mark)
< Answ
33. Which of the following are current assets of a business?
I. Income received in advance II. Stock
III. Debtors IV. Pre-paid expenses
V. Accrued income.

(a) Both (I) and (IV) above (b) Both (II) and (III) above
(c) (I), (II) and (III) above (d) (II), (III), (IV) and (V) above
(e) (I), (II), (III) and (IV) above.
(1 mark)
< Answ
34. The excess price received over the par value of shares should be credited to
(a) Calls-in-advance account (b) Share capital account
(c) Reserve capital account (d) Share premium account
(e) Share allotment account.
(1 mark)
< Answ
35. The claims against the company not acknowledged as debts are shown as
(a) Current liabilities (b) Loans and advances
(c) Notes to balance sheet (d) Directors’ report
(e) No separate disclosure is required.
(1 mark)
< Answ
36. The amount of any transaction incorrectly recorded, either wholly or partly, is

(a) Error of omission (b) Error of commission


(c) Error of principle (d) Compensating error
(e) Error of computation.
(1 mark)
< Answ
37. The discount allowed on re-issue of forfeited shares is debited to
(a) General reserve account (b) Capital reserve account
(c) Revaluation reserve account (d) Capital redemption reserve account
(e) Forfeited shares account.
(1 mark)
< Answ
38. Under cash basis of accounting, revenue is recognized when
(a) Sale is made (b) Cash is received
(c) Goods are delivered (d) Services are rendered
(e) Both (a) and (d) above.
(1 mark)
< Answ
39. Which of the following factors is used as a multiplier of super profits in valuation of goodwill of a
business?
(a) Average capital employed in the business (b) Simple profits
(c) Number of years’ purchase (d) Normal rate of return
(e) Normal profits.
(1 mark)
< Answ
40. Declared dividend should be classified in the Balance Sheet as a
(a) Provision (b) Current liability
(c) Reserve (d) Current asset
(e) Miscellaneous expenditure.
(1 mark)
< Answ
41. ESS Ltd. issued 2,000, 10% debentures at the rate of Rs.100 each during the year 2000–2001. Interest
on debentures is payable half yearly on September 30 and March 31 every year. The company has
power to purchase its own 10% debentures in the open market for cancellation. The following purchases
were made during the year 2003–2004:
Only July 01, 2003 - 400 of its own 10% debentures at the rate of Rs.96 ex-interest.
On December 01, 2003 - 300 of its own 10% debentures at the rate of Rs.102 cum-
interest.
The total amount debited to own debenture investment account was
(a) Rs.70,000 (b) Rs.68,500 (c) Rs.69,000 (d) Rs.70,600 (e)
Rs.71,600.
(2 marks)
< Answ
42.Silver Coats Ltd. invited applications for 1,00,000 equity shares of Rs.10/- each at a premium of Rs.2 per
share. The entire issue was underwritten by three underwriters in the following percentages:
Anil 30%
Vimal 40%
Sunil 30%
The details of marked and unmarked applications received are:
Marked applications of Anil 22,000 shares
Vimal 24,000 shares
Sunil 28,000 shares
Unmarked applications 16,000 shares
The final liability of Vimal in terms of number of shares is
(a) Nil (b) 9,600 (c) 3,200 (d) 16,000 (e)
8,000.
(2 marks)
< Answ
43. Sonic Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20%. The share amount was
payable as:
On application Rs.2
On allotment (including premium) Rs.5
On first call Rs.3
On second and final call Rs.2
Applications were received for 9,500 shares and the shares were allotted to applicants in full. Vikas,
who was allotted 300 shares, failed to pay the first call. On his subsequent failure to pay the second and
final call, all his shares were forfeited. Out of the forfeited shares, 200 shares were re-issued @ Rs.9
per share. The amount transferred to capital reserve is
.
(a) Rs.200 (b) Rs.1,000 (c) Rs.800 (d) Rs.1,300 (e)
Rs.1,200
(2 marks)
< Answ
44. The issued capital of Marval Ltd. is Rs.12,00,000 divided into 1,20,000 shares which were issued at a
premium of 100%. The company offers two shares for every three shares held to its existing
shareholders. If the rights issue price is Rs.410 per share and the market value at the time of rights issue
is Rs.560 per share, the value of right is
(a) Rs.60 (b) Rs.20 (c) Rs.150 (d) Rs.410 (e)
Rs.560.
(1 mark)
< Answ
45. AVON Ltd. purchased a machinery in exchange of its debentures. The machinery was installed on
March 31, 2003. The value of securities exchanged is Rs.1,85,000. It is expected that the machinery will
have a useful life of 10 years after which it will have a salvage value of Rs.5,000. The machinery was
put to use with effect from April 01, 2003. The company follows straight line method of depreciation,
the amount of depreciation charged for the year 2003-04 is
(a) Rs.18,000 (b) Rs.20,500 (c) Rs.15,500 (d) Rs.15,000 (e)
Rs.17,500.

(1 mark)
< Answ
46. While finalizing the accounts of M/s. Novelty India for the year ended March 31, 2004, the following
errors were noticed:
Salaries overstated Rs.15,000
Repairs understated Rs. 7,000
Income from investments understated Rs. 7,000
The impact of the above errors on the net profit is
(a) Overstatement of Rs.22,000 (b) Understatement of Rs.22,000
(c) Understatement of Rs.15,000 (d) Understatement of Rs. 7,000
(e) Overstatement of Rs. 7,000.
(1 mark)
< Answ
47. As on March 31, 2004, the favourable balance of Mr.Prahlad as per bank pass book is Rs.20,000. The
pass book balance did not agree with the balance as per cash book. On scrutiny, the following omissions
and commissions were noticed:
• A cheque for Rs.4,000 issued to Mr.Pramod has not been presented for payment till
date.
• Mr.Jeevan, a tenant, directly deposited into the bank account an amount of Rs.10,000
towards rent and the same is not accounted in the cash book.
• A cheque for Rs.15,000 deposited in the bank is not yet realized.
• The interest on debentures for this year, directly collected by the bank, amounted to
Rs.10,000 and the same is not accounted in the cash book.
The bank balance as per cash book is
(a) Debit balance of Rs.11,000 (b) Credit balance of Rs.11,000
(c) Credit balance of Rs.20,000 (d) Debit balance of Rs. 40,000
(e) Debit balance of Rs.19,000.
(2 marks)
< Answ
48. Consider the following information pertaining to Xylofone Ltd.:
On April 01, 2003, the Provision for bad debts account showed a credit balance of Rs.30,000. As on
March 31, 2004, the status of the following debtors is
• Mr. A had become insolvent and only 40 paise in a rupee is expected to be
realized out of his estate in full settlement. He owed a total amount of Rs.20,000
• Mr. B who owes an amount of Rs.10,000 became bankrupt and it was understood
that no amount will be recovered from him.
• Mr. C has agreed to pay Rs.3,000 as final settlement against his due of Rs.10,000
and the balance is irrecoverable.
If the company decided to maintain the provision at Rs.35,000 as on March 31, 2004, the amount to be
debited to Profit and loss account for the year ending March 31, 2004, after considering the above, is

(a) Rs. 34,000 (b) Rs. 29,000 (c) Rs. 26,000 (d) Rs. 35,000 (e) Rs.
64,000.
(2 marks)
< Answ
49. On April 01, 2002, Ray Ltd. purchased furniture for Rs.60,000. The book value of the furniture on
March 31, 2004 is Rs.43,350. If the company charges depreciation on furniture under written down
value method, the rate of depreciation is
(a) 35% (b) 30% (c) 25% (d) 20% (e)
15%.
(1 mark)
< Answ
50. M/s.Pie Company, a dealer in herbal creams records its stock under First-in-First-out method, so as to
minimize accumulation of outdated stock. The opening stock as on
March 01, 2004 is 150 units at the rate of Rs.20 per unit. The purchases and sales made during the
month are:
Purchases:
Date No. of units Cost price per unit
04-03-2004 200 Rs.25
14-03-2004 100 Rs.22
21-03-2004 300 Rs.30
26-03-2004 150 Rs.40
Sales:
Date No. of units
03-03-2004 100
10-03-2004 150
15-03-2004 100
25-03-2004 200
28-03-2004 200
Closing stock of the company as on March 31, 2004 is
(a) Rs.1,500 (b) Rs.6,000 (c) Rs.3,000 (d) Rs.4,500 (e)
Rs.7,500.
(2 marks)
Consider the following data pertaining to Mr. Krishnan for the year ended March 31, 2004, and answer
Question No.s 51 and 52
Trial Balance as on March 31, 2004

Particulars Rs. Particulars Rs.


Insurance 4,000 Sales 5,10,000
Purchases 4,50,000 Returns outward 15,000
Opening stock 30,000 Capital 2,00,000
Salaries and wages 10,000 Sundry creditors 45,500
Rent paid 5,000
Insurance Prepaid 1,000
Freight inward 5,500
Cash on hand 23,800
Returns inward 10,000
Closing stock 10,000
Managerial commission 500
Fixed Assets 1,25,500
Sundry debtors 35,000
Land 60,000
Bad debts 200
Total 7,70,500 Total 7,70,500
Additional information:
‰ Depreciate the fixed assets at the rate of 10% per annum.
Make a provision for bad and doubtful debts at the rate 5% on debtors.
< Answ
51. The net profit/loss of Mr. Krishnan for the year ending March 31, 2004 is
(a) Rs.4,500(loss) (b) Rs.3,500 (profit) (c) Rs.4,300 (loss) (d) Rs14,500 (loss)
(e) Rs.6,500 (profit).
(3 marks)
< Answ
52. The total of Balance Sheet of Mr.Krishnan as on March 31, 2004 is
(a) Rs.2,30,000 (b) Rs.2,41,000 (c) Rs.2,51,000 (d) Rs.2,46,500 (e)
Rs.2,30,800.
(2 marks)
< Answ
53. Consider the following data pertaining to XLNT Ltd.

i. Original cost of furniture (Rs.) 5,000


ii. Rate of depreciation under written down value method 20
(%)
iii. Residual value of furniture at the end of useful life (Rs.) 2,048
The estimated useful life of the furniture is
(a) 3 years (b) 4 years (c) 5 years (d) 6 years (e) 7
years.
(1 mark)
< Answ
54. Kohinoor Ltd. started its operations on April 15, 2003. Consider the following data pertaining to the
company for the year 2003-2004:

Particulars Rs.
Cash Sales 6,80,000
Credit Sales 1,20,000
Bad debts written off 2,000
Issue of shares for cash 5,00,000
Purchase of fixed assets for cash 4,00,000
Depreciation 40,000
Amount received from bank by way of short-term loan 1,00,000
Short-term loan repaid during the year 25,000
Manufacturing and administrative expenses paid 3,50,000
Cash Purchases 1,50,000
Credit purchases 2,90,000
Amount deposited in bank 2,00,000
The balance of cash as on March 31, 2004 is
(a) Rs.1,15,000 (b) Rs.1,55,000 (c) Rs.1,13,000 (d) Rs.2,75,000 (e) Rs.2,33,000.
(2 marks)
< Answ
55. Consider the following data pertaining to Dhamaka Ltd.:
The company has issued 10,000 shares of Rs.100 each at a premium of Rs.15. M/s Underwriters &
Brokers have taken 100 percent underwriting at a percentage of maximum allowable commission under
the Companies Act, 1956. The applications were received for 10,000 shares and allotment was made in
full.
The commission payable to M/s Underwriters & Brokers is
(a) Rs.10,000 (b) Rs.57,500 (c) Rs.50,000 (d) Rs.25,000 (e)
Rs.28,750.
(2 marks)
< Answ
56. In the books of Pyramid Ltd. goods worth Rs.7,850 returned by Mr. Prakash were entered in the returns
inward day book. Therefrom, the inexperienced accountant posted the amount to the debit of
Mr.Prakash account.
At the time of preparation of trial balance, the difference in books was placed to suspense account. The
entry to be passed to rectify the mistake is
Rs. Rs.
(a) Returns inward account Dr. 7,850
To Suspense account 7,850
(b) Returns inward account Dr. 7,850
To Prakash account 7,850
(c) Suspense account 15,700
Dr.
To Prakash account 15,700
(d) Returns inward account Dr. 15,700
To Prakash account 15,700
(e) Prakash account Dr. 15,700
To Suspense account 15,700.
(2 marks)
< Answ
57. On March 31, 2004, the bank column of cash book of Sree Ltd. showed an overdraft balance of
Rs.3,400 and this balance did not agree with the balance as per bank pass book. On verification, the
following facts were noticed:
i. An outstation cheque for Rs.6,300 deposited in the bank on March 28, 2004 was not collected by
the bank till March 31, 2004.
ii. Bank charges amounting to Rs.120 and interest charges amounting to Rs.790 were not recorded in the cash
book.
iii. Cheques issued amounting to Rs.5,650 were not presented for payment as on March 31,
2004.
iv. Interest on investment of Rs.5,200 collected by the banker appeared only in the bank
statement.
The bank balance as per pass book as on March 31, 2004 was
(a) Rs. 2,060 (debit) (c) Rs.10,160 (debit)
(b) Rs. 2,060 (credit) (d) Rs. 240 (credit) (e) Rs. 240 (debit).
(2 marks)
< Answ
58. Consider the following particulars pertaining to the sole proprietor business of Mr. Katyal:

Particulars As on April 01, 2003 (Rs.) As on March 31, 2004 (Rs.)


Capital 3,40,000 ?
Loan from bank 1,85,000 1,20,000
Sundry creditors 25,000 40,000
Fixed assets 2,70,000 2,45,000
Inventory 1,50,000 1,85,000
Sundry debtors 70,000 95,000
Cash and bank 60,000 80,000
The profit for the year 2003-2004 was
(a) Rs.4,45,000 (b) Rs. 65,000 (c) Rs. 30,000 (d) Rs. 1,05,000 (e)
Rs. 85,000
(2 marks)
< Answ
59. VNL Enterprises, which started its operations on April 01, 2003, provided the following untallied Trial
Balance as on March 31, 2004:

Particulars Rs.
Sales 5,65,000
Carriage inward 28,000
Other expenses 31,000
Fixed assets 10,90,000
Sundry debtors 1,25,000
Sundry creditors 95,000
Cash and bank 65,000
Capital 9,00,000
On verification, it was noticed that the difference in trial balance is on account of omission of
purchases. If the value of stock as on March 31, 2004 was Rs. 50,000, the gross profit for the year 2003-
2004 was
(a) Rs.3,66,000 (b) Rs.3,94,000 (c) Rs.3,48,000 (d) Rs.2,08,000 (e)
Rs.6,15,000.
(2 marks)
< Answ
60. The total of debit side of trial balance of M&M Company is Rs.2,45,000 and that of the credit side is
excess by Rs.2,68,900. Subsequently the following mistakes are discovered.

Correct Amount Amount which appears in trial


Particulars
(Rs.) balance (Rs.)
Opening stock 40,500 40,600
Advertisement expenses 15,000 15,000 (credit side)
Interest from investments 6,000 Omitted
The total of the corrected trial balance is
(a) Rs.2,60,100 (b) Rs.2,59,900 (c) Rs.2,30,100 (d) Rs.2,65,900 (e)
Rs.2,51,100.

(2 marks)
< Answ
61. M/s.Saketha Enterprises introduced the imprest system of petty cash book, the amount of imprest being
Rs.1,000. The petty cash transactions during the month of March 2004 are as under:
Particulars Amount
(Rs.)
Stamps 145
Conveyance 186
Repairs 228
Stationery 154
Other office expenses 93
The amount of cash received on April 01, 2004 to make up the imprest balance is
(a) Rs.578 (b) Rs.194 (c) Rs.806 (d) Rs.422 (e)
Rs.1,000.
(1 mark)
< Answ
62. Brijesh Ltd. issued 10,000 equity shares of Rs.100 each at a premium of Rs.20 payable as follows:
On application Rs.30
On allotment Rs.50 (inclusive of premium)
On first call Rs.20
On final call Rs.20
Applications were received for 10,500 shares. The company rejected the excess applications for 500
shares and the balance were allotted in full. The company forfeited 500 shares of
Mrs. Mithili for non-payment of first call of Rs.20 per share after making the second call. On forfeiture,
the Share Capital account will be
(a) Debited by Rs.60,000 (b) Credited by Rs.10,000
(c) Debited by Rs.50,000 (d) Credited by Rs.50,000
(e) Debited by Rs.35,000.
(2 marks)
< Answ
63. Consider the following data pertaining to Jagriti Ltd. as on March 31, 2004:

Particulars Amount (Rs.) Amount (Rs.)


Opening stock 90,000
Sales 6,35,000
Purchases 4,56,000
Salaries 86,000
Other expenses 73,000
Fixed assets 5,00,000
Sundry debtors 45,000
Sundry creditors 32,000
Cash and bank 53,000
Share capital 6,00,000
Short term loan 36,000
13,03,000 13,03,000
The value of stock as on March 31, 2004 is Rs.75,000. The company has the practice of charging
depreciation on the fixed assets at the rate of 15% on written down value method. The total of liabilities
side of Balance Sheet as on March 31, 2004 is
(a) Rs.7,38,000 (b) Rs.6,68,000 (c) Rs.6,73,000 (d) Rs.5,93,000 (e)
Rs.7,43,000.
(3 marks)
< Answ
64. In the year 2003- 2004, Ross Ltd. imported a new machine and made the following payments in relation
to it:
Cost as per supplier’s list Rs.5,20,000
Less: Agreed discount Rs. 50,000 Rs.4,70,000
Delivery charges 10,000
Erection charges 20,000
Annual maintenance charges paid for the period 2003-04 30,000
Customs duty 40,000
Annual insurance premium 5,000
The cost of the machine is
(a) Rs.5,40,000 (b) Rs.5,45,000 (c) Rs.4,70,000 (d) Rs.5,50,000 (e)
Rs.5,70,000.
(1 mark)
< Answ
65. The following Trial Balance pertaining to John Vicky as on March 31, 2004 was prepared by an
inexperienced accountant:
Trial Balance of John Vicky as at March 31, 2004
Debit Credit
Particulars
(Rs.) (Rs.)
Capital (1st April, 2003) 89,000
Drawings 10,000
Stock (1st April, 2003) 37,000
Purchases 2,31,250
Sales 3,94,000
Motor vehicles 14,500
Cash in hand 1,350
Sundry creditors 49,760
Sundry debtors 1,39,700
Bank overdraft 9,000
Administrative expenses 76,360
Office equipment 35,000
Carriage outward 2,310
Returns inward 2,050
Provision for bad debts 4,250
Returns outward 3,160
Discount allowed 2,800
Discount received 3,150
Total 5,52,320 5,52,320
Though, the Trial Balance has tallied, it has certain errors which were subsequently rectified. The total
of corrected Trial Balance as on March 31, 2004 is
(a) Rs.5,52,320 (b) Rs.4,64,200 (c) Rs.5,55,510 (d) Rs.5,43,200 (e)
Rs.5,03,440.
(2 marks)
< Answ
66. Consider the following data pertaining to Leo Ltd.:
Profit for 2001-2002 Rs. 4,38,000
Profit for 2002-2003 Rs. 4,62,000
Profit for 2003-2004 Rs. 4,50,000
Normal rate of return 12%
Capital employed Rs.35,00,000
The super profit of the company is
(a) Rs.50,000 (b) Rs.42,000 (c) Rs.40,000 (d) Rs.30,000 (e)
Rs.18,000.
(2 marks)
< Answ
67. Consider the following data pertaining to Universe Ltd. as on March 31, 2004:

ƒ Total sundry debtors as per Trial Balance Rs.40,600


ƒ Bad debts identified after the preparation of Trial Balance Rs.600
ƒ Provision for bad debts to be created @ 5% on sundry debtors
ƒ Provision for discount on sundry debtors to be created @ 2%.

The amount of provision for discount on sundry debtors to be created for the period ended
March 31, 2004 is

(a) Rs.760 (b) Rs.2,000 (c) Rs.771 (d) Rs.800 (e)


Rs.812.
(2 marks)
< Answ
68. Consider the following data in respect of material traded by Success Ltd. during the month of March
2004:
Opening stock as on March 01 2004 is 1,000 kg. @ Rs.20 per kg.
Purchases Issues
Date
Quantity (Kg) Rate per Kg Rs. Quantity (Kg)
March 10,2004 500 23.00
March 15, 2004 750
March 20, 2004 1000 26.25
March 31, 2004 750
On March 31, 2004, the value of stock held by the company under the Weighted Average Method is
(a) Rs.23,083 (b) Rs.23,000 (c) Rs.24,000 (d) Rs.28,000 (e)
Rs.26,250.
(2 marks)
< Answ
69. Mr. Mohan sold goods to Mr. Raju for Rs.900. The catalogue price of the goods is Rs.1,000. Mr. Mohan
also offered a further discount of Rs.50 for spot payment of cash. Mr. Raju took delivery of goods by
paying cash.
The journal entry to record the transaction in the books of Mr. Mohan is
(a) Cash a/c. – Dr. Rs.850
Trade discount a/c. – Dr. Rs.100
Cash discount a/c. – Dr. Rs. 50
To Sales a/c. Rs.1,000
(b) Cash a/c. – Dr. Rs.850
Discount a/c. – Dr. Rs.150
To Sales a/c. Rs.1,000
(c) Cash a/c. – Dr. Rs.850
Discount a/c. – Dr. Rs. 50
To Sales a/c. Rs. 900
(d) Cash a/c. – Dr. Rs.850
To Sales a/c. Rs. 850
(e) Mr. Raju’s a/c. – Dr. Rs.850
To Sales a/c. Rs. 850.
(2 marks)
< Answ
70. H. Ltd. acquired 80% shares of S. Ltd. on October 01, 2003. At the time of acquisition, the plant and
machinery of S. Ltd. was revalued by H. Ltd. at 20% above its book value of Rs.5,00,000. At the time
of consolidation of Balance Sheet on March 31, 2004, the share of
H. Ltd. in the profit on revaluation is
(a) Rs.80,000 (Capital profit) (b) Rs.80,000 (Revenue profit)
(c) Rs.40,000 (Capital profit) (d) Rs.40,000 (Revenue profit)
(e) Rs.20,000 (Capital profit).
(1 mark)
< Answ
71. For the year 2003-04, the directors of Anuhya Ltd. proposed a dividend of 19%. The capital structure of
the company as on the date of proposal of dividend is :

Rs.
Authorised Capital 10,00,000
Issued and Called-up capital 8,00,000
Calls-in-arrear 10,000
Calls-in-advance 20,000
Securities Premium 80,000
If the profit for the year 2003-04 is Rs.2,25,000, the minimum amount of profits that will have to be
compulsorily transferred to general reserve is
(a) Rs.16,875 (b) Rs.11,250 (c) Rs.22,500 (d) Rs.1,52,000 (e)
Rs.1,50,100.
(2 marks)
< Answ
72. Consider the following profits pertaining to Vennela Ltd. for the last 3 years:

Year Rs.
1 3,30,000
2 4,20,000
3 4,80,000
The weighted average profit of the company is

(a) Rs.4,50,000 (b) Rs.4,35,000 (c) Rs.4,10,000 (d) Rs.3,85,000 (e)


Rs.3,50,000.
(2 marks)
< Answ
73. The following information is given about PS Ltd.:

Inventories Rs.4.0 lakhs


Sundry debtors Rs.3.0 lakhs
Cash and Bank balances Rs.5.0 lakhs
Short-term bank borrowings Rs.1.0 lakhs
Accounts payable Rs.2.2 lakhs
The quick ratio for the firm is
(a) 5.45 (b) 3.75 (c) 3.64 (d) 2.50 (e)
1.56.
(2 marks)
END OF SECTION B
Suggested Answers
Financial Accounting (MB131) : April 2004
1. Answer : (d) < TOP
>
Reason : Discount allowed on issue of shares appears under the head ‘miscellaneous expenditure’ on the asset side
of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and
income tax paid in advance appears under current assets of the balance sheet. Directors’ remuneration
will be entered in the debit side of profit and loss account. Hence (d) is correct.
2. Answer : (d) < TOP
>
Reason : Dividends may be termed as the share of profits that is payable to the shareholders of a company. The
Companies Act lays down the do’s and don’ts associated with declaration/payment of dividends. As per
the Companies Act, that dividends are paid on paid up capital which is part of the called up capital that
has been paid up by the shareholders and made available with the company for utilization. Hence, it is
proper to pay dividends on paid-up capital. Thus, alternative (d) is the correct answer.
The other alternatives–
(a) Authorized capital is the capital authorized to issue by its memorandum. It is only nominal in
nature unless and until the entire amount is issued, called up and paid up. Since the entire amount is
not made available for utility, dividends cannot be declared on authorized capital.
(b) Issued capital is the part of nominal capital that is offered to the public for subscription and the
entire amount is not available for claiming dividend.
(c) Called-up capital is that part of the subscribed capital which has been called-up and cannot be a
base for calculation of dividend.
(e) Reserve capital is that part of uncalled capital, which is to be called up in the event of winding up
of a company and under any circumstances, dividend cannot be declared on it.
Thus, the statements (a), (b), (c) and (e) are not correct.
3. Answer : (a) < TOP
>
Reason : Preference shares are redeemed from the proceeds of fresh issue of shares. It cannot be redeemed out of
the proceeds of issue of debentures, fixed deposit and the sale proceeds of investment. Hence, (a) is
correct answer.
4. Answer : (e) < TOP
>
Reason : All costs incurred to maintain production or to promote sales of existing products are excluded from the
research and development costs. Any routine or promotional costs of market research of existing products
cannot be called as research and development costs. The cost of materials consumed in the process of
research and development (a), amortization of patents and licenses related to research and development
(b), depreciation of premises that is used for carrying the work of research (c), salaries and wages paid to
personnel engaged in the research and development activities (d) can be considered as research and
development expenses, and hence they are not the correct answers. Therefore, alternative (e) is the correct
answer.
5. Answer : (c) < TOP
>
Reason : The maximum amount beyond which a company is not allowed to raise funds by issue of shares is called
nominal capital or authorized capital (c). Thus, alternative (e) is the correct answer. The issued capital (a)
is that part of the nominal capital issued to the public and subscribed capital (d) is that part of the issued
capital which is subscribed by the public, Paid up capital (e) is the amount which is paid-up by the
shareholders, and Reserve capital (b) is that capital which will be called-up only in case of liquidation.
Therefore, alternative (c) is the correct answer.
6. Answer : (b) < TOP
>
Reason : Consolidated financial statements should reflect the economic activities of a business enterprise
measured without regard to the boundaries of the legal entity. A parent and subsidiary are legally separate
but are treated as a single business enterprise in consolidated statements, in recognition of Business entity
concept (b). The other concepts do not explain about consolidation of financial statements. The Going
concern concept (a) assumes that the business entity will continue to operate or an indefinite period of
time. Materiality concept (c) requires reporting the information that has a value significant enough to
affect decisions of those using the financial statements. Cost concept (d) explains how the assets are to be
recorded in the books of accounts. According to this, fixed assets are to be recorded at cost less
accumulated depreciation. Periodicity (e) explains that the financial accounting process is meant to
provide the information about the economic activities of the business enterprise at regular intervals. It does not
speak about consolidation of financial statements. Therefore, alternative (b) is the correct answer.

7. Answer : (c) < TOP


>
Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not issued
by a newly formed company (a).They are not the shares issued to the public at large (b). They are issued
only to the existing shareholders. It does not indicate the right of redemption of shares issue (d). These
are not the shares with cumulative dividend right (e). Therefore, alternative (c) is the correct answer.
8. Answer : (e) < TOP
>
Reason : Under intrinsic value method the value per share is arrived by valuing the assets of a company and
deducting therefrom all the liabilities and claims of preference shareholders and dividing the net assets by
the number of shares. The value of net assets is nothing but the net equity. Therefore, the information
regarding net equity is essential for calculating the value of equity share under intrinsic value method.
Thus, alternative (e) is the correct answer.
Net equity
Value per share = No.of shares
9. Answer : (c) < TOP
>
Reason : Premium on redemption of debentures account represents the additional amount payable to debenture
holders at the time of redemption of debentures and is a personal account. It is not an asset (d) and
therefore it cannot be a real account (a). It is not a an expenditure for the current year and therefore it
cannot be a nominal account (b). It is not a capital reserve (e). Thus, alternative (c) is the correct answer.
10. Answer : (c) < TOP
>
Reason : A company cannot issue shares at a discount except as provided in Section 79 of the Companies Act.
According to the said section the maximum rate of discount at which the shares can be issued is 10%. If
it exceeds 10%, an approval from the Company Law Board is required. These conditions are intended to
ensure that the discount is not unreasonable.
11. Answer : (e) < TOP
>
Reason : A trade discount is not at all recorded in books of accounts (e). It will be reduced from the invoice price
and the net amount after deducting the trade discount will be recorded as purchases. Thus, alternative (e)
is the correct answer. when it is not recorded in the books at all, the other four alternatives are incorrect.
12. Answer : (c) < TOP
>
Reason : Repayment of short term loan is shown as a decrease in cash (c). Therefore, alternative (c) is the correct
answer. It is not a source of working capital. Therefore, alternative (a) is not the correct answer. It is
shown as increase in cash (b), is also not a correct answer. Does not affect the working capital (d) is also
not a correct answer, since it is affecting the working capital. Is not shown either as a source or a use of
funds (e) is also not the correct answer. Therefore, alternative (c) is the correct answer.
13. Answer : (a) < TOP
>
Reason : Debt-Equity ratio is also called as leverage ratio. Thus, alternative (a) is the correct answer. Current ratio
(b) and Quick ratio (c) are liquidity ratios and not leverage ratios. Earning power (d) and Inventory
turnover ratio (e) are not leverage ratios. Therefore, alternative (a) is the correct answer.
14. Answer : (d) < TOP
>
Reason : A prospectus (d) means any document described or issued as a prospectus and includes any notice,
circular, advertisement or other document inviting deposits from the public or inviting offers from the
public for the subscription or purchase of shares or debentures of a body corporate. Total capital of a
company is divided into units of small denominations which are called as shares. Share certificate (a) is
an ownership security. Debenture (b) is a formal document constituting acknowledgement of a debt
given under the seal of the company. Fixed deposit receipt (c) is the acknowledgement of deposit of a
certain sum of money repayable after a fixed tenure as per the contract and share warrant (e) is a financial
instrument that gives the holder the right to acquire equity shares. Thus, alternatives (a), (b), (c) and (e)
are not correct. (d) is the correct answer.
15. Answer : (c) < TOP
>
Reason : Stock of stationery (a), Goodwill (b), Accounts receivable (d) and cash at bank (e) are the assets and not
the correct answers. Profit and loss account (credit balance) (c) is the amount belongs to the owner of the
business and it is a liability to the business. Hence it is not an asset and (c) is the correct answer.
16. Answer : (a) < TOP
>
Reason : The portion of the acquisition cost of the asset yet to be allocated is known as written down value (a)
Accumulated value (b) is the value of a thing accumulated over a period of time and not the correct
answer. Realizable value (c) is the value which can be realized in the event of sale and is not correct
answer. Salvage value (d) is the value of an asset that remains as scrap value after its usage over a period
of time and is not the correct answer. Residual value (e) is the value remaining as residue and is not the
correct answer. Alternative (a) is the correct answer
17. Answer : (b) < TOP
>
Reason : The Accounting Standard-2 deals with regard to accounting for inventory. According to the statement,
Work in progress of a manufacturing industry is covered. Thus, the alternative (b) is the correct answer.
The items of inventory stated in other alternatives are not covered under AS-2 Financial instruments held
as stock-in-trade, Work in progress arising under construction contracts and Work in progress of service
providers. Hence, alternatives (a) reflecting statement (I); (c) combination of statements (I) and (II);
alternative (d) combination of statements (III) and (IV) and alternative (e) combination of statements II,
III and IV are incorrect.
18. Answer : (b) < TOP
>
Reason : Prepaid rent account is a personal account is the correct statement and alternative (b) is the correct
answer. The alternative (a) is incorrect because drawings is not a nominal account and it is a personal
account of the owner which indicates the value of money or goods withdrawn by him for personal
consumption. The alternative (c) is incorrect because it is the combination of wrong statement (II)
Capital account is a personal account and not a real account with statement (III), which is a correct
statement. The alternative (d) is incorrect because the statement (IV) is incorrect as outstanding salaries
is a representative personal account and not a nominal account and the statement (V) is incorrect as
patents account is a real account and not personal account and the combination of (II), (IV) and (V) is not
the correct answer. The alternative (e) is incorrect because the combination of one correct statement (III)
with incorrect statements (I), (II) and (IV). Thus, the correct answer is (b).
19. Answer : (d) < TOP
>
Reason : In recognition of money measurement concept, the events and transactions which are of monetary in
nature are recorded in the books of a business. The statement in alternative (b) i.e., death of a chief
executive, though significant cannot be expressed in terms of money as such does not finds place in the
books. The statement in alternative (c) the Government investigation into the pricing activities of the
business does not involve any monetary treatment to be made as such does not find place in the books.
Thus, the alternative (d) the combination of (b) and (c) is the correct answer. The significant monetary
events after the balance sheet date (a) are to be recorded in the books of the business hence is not the
correct answer. Alternative (e), i.e., combination of an incorrect answer and two correct answers is also
not the correct answer. Thus, alternative (d) is the correct answer.
20. Answer : (b) < TOP
>
Reason : Interest on debentures, provision for taxation, provision for bad debts and penalty for defective works are
charged to profit and loss account, it means these are all charged against profit. Dividend is the part of
profit and not a charge against profit, so it appears in the profit & loss appropriation account.
21. Answer : (a) < TOP
>
Reason : FIFO method is based on the assumption that costs are charged against revenue in the order in which
they occur. It means, the first unit in stock is the first unit to be out. The closing inventory consists of the
units purchased last. If the prices are rising, goods are issued at lower price and closing stocks are valued
at higher price. It will help to create more profit. Other inventory methods stated in Last in first out
method (b), under this method, the last unit in the stock is the first unit to be out and the costs are charged
against revenue in the reverse order of the FIFO method and during the periods of rising prices, the
closing stock consists of stock with remote prices. Under Weighted average method (c), the stocks are
valued with certain weights as per the movement of stocks and the prices are restated at every stage of
purchase. Under simple average method (d) the stock procured at various prices is computed on the
average price of the stock. Under specific identification method (e), the physical stock is verified on daily
basis where the stock dealt is of high value Hence, (a) is true.
< TOP
22. Answer : (b) >
Reason : Bad debts recovered is a wind fall gain and it is transferred to profit and loss account at the time of
preparation of final accounts. If provision for bad and doubtful account is maintained in the books of
accounts it will be transferred to provision account and the balance if any in the provision account will be
transferred to profit and loss account. It is recovery of bad debt written off and hence it is not transferred
to debtor’s account. It is not transferred to profit and loss adjustment account. It is not an appropriation
to be transferred to profit and loss appropriation account. Provision for discount on debtors is the account
created to record the discount allowed to debtors and not to record either the bad debts or bad debts recovered. Thus,
the answer is (b).
< TOP
23. Answer : (d) >
Reason : An accounts receivable is not an intangible asset. It is the amount that the business has to receive from
its debtors. The other assets mentioned in alternatives (a), (b), (c), and (e) i.e., goodwill, trademark,
franchises and secret processes are intangible assets. Hence, the correct answer is (d).
24. Answer : (b) < TOP
>
Reason : Error of principle denotes wrong classification of expenditure or revenue. If a company pays for repairs
on a machine, it should be debited to repairs account. If it is charged to machinery account, it is an error
of principle. Compensating error (b) is the one where one error is compensated by another error or series
of errors and the debit to machinery account on account of repairs is neither compensated by another
error or by series of errors and hence it is incorrect. Error of commission (c) is incorrect because this is an
error made in recording the amount involved in a transaction while journalizing or posting to ledger
accounts. Error of omission may be partial or complete. Under complete omission, the recording of an
entry is completely omitted and it is incorrect answer. Error of partial omission is result of omission one
aspect of a transaction and it is not the correct answer (e). Thus, (b) is the correct answer.
25. Answer : (d) < TOP
>
Reason : If the opening inventory of a business was undercast it will increase the gross profit and net profit (d).
The opening stock plus net purchases are the cost of goods sold for a given period and its understatement
will result in increase in gross profit and ultimately increases net profit. The alternative (a) is incorrect
because, the increase in gross profit as a result of understatement of opening stock will not decrease the
net profit. The alternative (c) and (e) are incorrect because opening stock is not reflected in balance
sheet of a business either to increase assets or decrease the value of assets. The alternative (b) is incorrect
because the decrease in cost of goods sold will not decrease gross profit and net profit.
26. Answer : (e) < TOP
>
Reason : Trial Balance (e) is not a financial statement. It is a list of all accounts showing outstanding balances at
the end of the accounting period. It helps in the preparation of financial statements. The Profit and Loss
account (a); Profit and Loss appropriation account (b) Balance Sheet (c) and Funds flow statement (d) are
the financial statements prepared by a business entity. Funds flow statement is categorized as one of the
financial statements, but its preparation is not mandatory. Thus, (e) is the correct answer.
27. Answer : (a) < TOP
>
Reason : Share capital is the contribution made by the owner(s) and is regarded as a liability to the business in the
nature of owner’s equity. The underlying feature for this treatment is the distinction between the owner(s)
and that of the business owned by them. According to business entity concept whenever an owner brings
capital into the business, the business in turn is deemed to owe the capital to the owner. As such the share
capital account is treated as a liability to the business and shown under liabilities. The other concepts are
not correct because
(b) Money measurement concept explains that in financial accountancy, a record is made only of
information that can be expressed in monetary terms and ignores other events, however significant
they may be. It is silent about the treatment of share capital account.
(c) Cost concept implies that in accounting all transactions are generally recorded at cost and not at
market value. It does not explain why share capital account is to be treated as liability.
(d) The Going concern concept assumes that the business entity will continue to operate or an
indefinite period of time It does not deal with the treatment of share capital account.
(e) Conservatism concept: The theme behind this principle is that recognition of revenue requires
better evidence than recognition of expenses. It deals with revenues and expenses and not the share
capital account.
28. Answer : (e) < TOP
>
Reason : The credit balance in bank column of cashbook (e) represents overdraft and it is a liability of a business.
Thus, (e) is the correct answer. Debit balance of analytical petty cash book(a), Credit balance of bank
pass book (b), debit balance of bank column of the Cashbook (c) and debit balance of cash column of the
Cashbook (d) represent assets and therefore not the correct answers. Therefore, alternative (e) is the
correct answer.
29. Answer : (b) < TOP
>
Reason : Under casting or over casting of subsidiary book is the example of error of commission. Hence (b) is the
correct answer. Inventory valuation affects not only income statement, but also balance sheet. If capital
expenditure is treated as revenue expenditure, it is an error of principle but not the error of commission. The sum
total of assets is equal to the sum total of equity and outside liabilities but not the sum total of liabilities
alone. Inventories should be valued at lower of historical cost and market value but not replacement cost.
All these statements given in (a), (c), (d) and (e) are false. Therefore, alternative (b) is the correct answer.
30. Answer : (a) < TOP
>
Reason : Conservatism concept means the early recognition of unfavorable events. Under this concept, the
business must provide all expected losses but does not account for anticipated profit. In the given
situation, provision for bad debt made out of profit for future bad debt loss is as per the conservative
approach. Thus, alternative (a) is the correct answer. Cost concept implies that in accounting all
transactions are generally recorded at cost and not at market value (b), Consistency concept states that all
the accounting policies should be followed consistently from one accounting period to another, the Going
concern concept (d) assumes that the business entity will continue to operate or an indefinite period of
time and Time period concept (e) states that all the transactions pertaining to one accounting period
should be accounted for and these four alternatives does not deal with provision for bad debts. Therefore,
alternative (a) is the correct answer.
31. Answer : (d) < TOP
>
Reason : Purchase of fixed assets on credit is entered in journal proper (d) and subsequently posted into the ledger.
Hence (d) is the correct answer. It is not recorded in purchases book (a) as only purchase of goods will be
recorded in purchases book. Ledger (b) is not original book of entry and therefore, is not the correct
answer. In cash book (c), only cash transactions will be recorded. As the fixed assets were purchased on
credit, this transaction will not be recorded in the cashbook. Alternative (e), which is the combination of
one correct answer and one incorrect answer is also not the correct answer. Therefore, alternative (d) is
the correct answer.
32. Answer : (a) < TOP
>
Reason : The fundamental principle is that every transaction has dual aspect, an aspect of giving and an aspect of
receiving. Under double entry system of accounting, both these aspects of receiving and giving are
recorded in terms of account. Thus, the receiving and giving entries are being made in the business books,
which are equal and opposite of one another because every debit has equal, and opposite credit. Hence
alternative (a) is the correct answer. Alternative (b) is incorrect because double entry does not involve
keeping two sets of books for the business. Alternative (c) is incorrect because business bookkeeping
being kept by more than one person is not the principle of double entry system of accounting. Alternative
(d) is incorrect because whether double entry or single entry business books may be checked twice.
Double entry system of accounting does not involve in checking of the entries once or twice. Alternative
(e) is incorrect because under double entry system of accounting if an entry is recorded once in the cash
book it will not find its place in any other subsidiary book. If it is recorded in the journal it will not be
recorded again in the cash book. Hence correct answer is (a).
33. Answer : (d) < TOP
>
Reason : Current assets are the assets which can be converted into cash with in an accounting period i.e., usually
twelve months. Stock (II), debtors (III), pre-paid expenses (III) and accrued income (IV) are current
assets of a business and therefore alternative (d), which is the combination of the above four statements is
the correct answer. Income received in advance is a liability of a business and is not a current asset.
Therefore, alternative (d) is the correct answer.
34. Answer : (d) < TOP
>
Reason : If by the terms of issue, the price payable is above the par value of shares, it is called an issue at
premium. The amount so received is to be credited to securities premium account.
< TOP
35. Answer : (c) >
Reason : The claims against the company not acknowledged as debts represent contingent liabilities and should be
included in the notes to balance sheet. They are neither current liabilities (a) nor can be categorized under
Loans and advances (b). it should not shown in Directors’ report (d). Alternative (e), i.e., no separate
disclosure is required is also not a correct answer. Therefore, alternative (c) is the correct answer.
36. Answer : (b) < TOP
>
Reason : The mistake made by recording the amount incorrectly, either wholly or partly is known as error of
commission. Hence the correct answer is (b). If any transaction is omitted to be recorded, it is known as
error of omission (a). If the principles of accounting are not followed in recording the transaction, it is
known as error of principle (c). If two or more errors are made and the amount compensates in such a
way that the error is not disclosed by trial balance, such errors are compensating errors (d). If any mistake
is made in calculation (like the calculation of depreciation), such error is known as error of computation
(e). thus alternatives (a), (c), (d) and (e) are not the correct answers. Therefore, alternative (b) is the correct answer.
37. Answer : (e) < TOP
>
Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot be
debited to general reserve account, capital reserve account, revaluation reserve account and capital
redemption reserve account
38. Answer : (b) < TOP
>
Reason : Under cash basis of accounting, revenue is recognized when cash is received (b). Revenue is recognized
under accrual basis when sale is made (a) or goods are delivered (c) or services are rendered (d) when
there is reasonable certainty regarding the amount of consideration and is not under cash basis of
accounting and therefore not the correct answers. Therefore, alternative (b) is the correct answer.
39. Answer : (c) < TOP
>
Reason : Number of years’ purchase is the factor with which the super profits will have to be multiplied in order to
arrive at the value of goodwill.
Super profits : Average annual profits – (Average capital employed x Normal rate of return)
Goodwill : Number of years’ purchase x super profits
40. Answer : (b) < TOP
>
Reason : The proposed dividend is classified as a provision (a) and shown on the liability side of the balance sheet.
The dividend finally decided by the shareholders in the annual general meeting as payable is termed as
Declared Dividend. Any dividend declared must be paid with thirty days from the date of declaration.
Hence, a declared dividend must be classified as a current liability (b) in the balance sheet of the
company. Thus the answer is (b). Declared dividend is not a reserve(c), not a current asset (d) and also
not a miscellaneous expenditure (e). Therefore, alternative (b) is the correct answer.
41. Answer : (b) < TOP
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Reason :
01.07.2003
400 × Rs.96 ex. interest Rs.38,400
01.12.2003
300 × Rs.102 cum. Interest = Rs.30,600 – Rs.500 Rs.30,100
(Interest for 2 months 30,000 ×
2 10
×
12 100 = Rs.500)
Rs.68,500
Amount debited to own debenture investment account is Rs.68,500.
42. Answer : (e) < TOP
>
Reason : (No.
of shares)
Particulars Anil Vimal Sunil Total
Liability 30,000 40,000 30,000 1,00,000
Less: Unmarked
applications in the ratio of 4,800 6,400 4,800 16,000
3:4:3
25,200 33,600 25,200 84,000
Less: Marked (Stamped) 22,000 24,000 28,000 74,000
applications
3,200 9,600 (2,800) 10,000
Less: Division of Sunil’s surplus
(in the ratio of 3:4) 1,200 1,600 2,800 –

Final liability of each underwriter 2,000 8,000 Nil 10,000


43. Answer : (c) < TOP
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Reason : Amount transferred to capital reserve is Rs.800.
Working Note:
Particulars Rs.
Amount received on 300 shares that were cancelled 300 x Rs.5 = 1500
Amount received on 200 forfeited shares which were reissued (200 x Rs.5) 1,000
Less: Amount of discount allowed on 200 shares which were reissued (200 x 200
Re1.)
Amount to be transferred to Capital Reserve 800
Amount lying in share forfeiture account Rs.500
44. Answer : (a) < TOP
>
 r 
  (M − S)
Reason : Value of right =  N + r 
Where r = No of rights issued
N = No of old shares
M = Market price
S = Issue price of rights
 2 
 3 + 2  (Rs.560 − Rs.410)
∴ Value of rights =   = Rs.60
45. Answer : (a) < TOP
>
Rs.1,85, 000 − Rs.5, 000
= Rs.18, 000
Reason : Depreciation = 10 years
The cost as on March 31, 2002 is irrelevant (cost concept).
46. Answer : (c) < TOP
>
Reason : The impact on net profit:
Salaries overstatement – net profit is reduced by Rs.15,000
Repairs understatement – net profit is increased by Rs.7,000
Income understatement – net profit is reduced by Rs.7,000
Net impact on net profit is understatement by Rs.15,000
47. Answer : (a) < TOP
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Reason : Bank Reconciliation Statement
Particulars Rs. Rs.
Favourable balance as per Pass book 20,000
Add: Cheque deposited, yet to be realised 15,000 15,000
35,000
Less: Cheques issued to Mr. Y but not presented for
4,000
payment
Rent deposited by Mr. Z directly into the bank 10,000
Interest on debentures directly collected by bank 10,000 24,000
Favourable balance as per cash book 11,000
48. Answer : (a) < TOP
>
Reason : Dr. Provision for Bad debts Account Cr.
Date Particulars Rs. Date Particulars Rs.
March 31, April 01, 2003 By Opening
To A 12,000 30,000
2004 balance
March 31,
To B 10,000 By P & L a/c 34,000
2004
To C 7,000
To Closing
35,000
balance
64,000 64,000
49. Answer : (e) < TOP
>
S
n
Reason : Rate of depreciation = 1– C

43,350
2
= 1– 60, 000
= 1 – 0.85 = 15%.
50. Answer : (b) < TOP
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Reason :
Particulars Units
Total
750
Purchases
Opening stock 150
900
Less Sales 750
Closing stock 150
Since FIFO method of valuation is followed, the stock in hand will be that purchased on the latest date.
i.e 26-03-2004.
Hence closing stock = 150 Units × Rs.40 per Unit
= Rs.6,000
51. Answer : (a) < TOP
>
Reason : Trading account and Profit and loss account for the year ended March 31, 2003.
Dr. Cr.
Particulars Rs. Particulars Rs.
To Opening stock 30,000 By Sales 5,10,000
Less: Returns
To Purchases 4,50,000 10,000 5,00,000
inward
Less: Returns
15,000 4,35,000
outward
To Salaries and wages 10,000
To Rent paid 5,000
To Insurance 4,000
To freight inward 5,500
To Manager’s commission 500 By Net loss 4,500
To depreciation 12,550
To provision for bad debts 1,750
To bad debts 200
5,04,500 5,04,500
52. Answer: (b)
Reason:
Balance sheet of Krishnan as on March 31st, 2004
Liabilities Rs. Rs. Assets Rs. Rs.
Capital 2,00,000 Fixex assets 1,25,500
Less net loss 4,500 Less 12,550
depreciation
1,95,500 1,12,950
Sundry 45,500 Land 60,000
creditors
Sundry 35,000
debtors
Less 1,750
provision
33,250
Prepaid 1,000
insurance
Closing stock 10,000
Cash in hand 23,800
2,41,000 2,41,000
53. Answer : (b) < TOP
>
Reason :
Particulars Rs.
Original cost of furniture 5,000
Less Depreciation at the rate of
20%
Year – 1 1,000
4,000
Year – 2 800
3,200
Year – 3 640
2,560
Year – 4 512
Residual Value 2,048
Useful life – 4 years
54. Answer : (b) < TOP
>
Reason :
Particulars Rs.
Cash Sales 6,80,000
Issue of shares 5,00,000
Amount received from bank by way of 1,00,000
short-term loan
12,80,000
Less: Purchase of fixed assets 4,00,000
Short tem loan repaid 25,000
Payment towards expenses 3,50,000
Cash purchases 1,50,000
Amount deposited in bank 2,00,000
Cash balance as on March 31, 2004 1,55,000
55. Answer : (b) < TOP
>
Reason : Maximum underwriting commission Permissible under the companies Act, 1956 is 5% of issue price of
shares.
= 10,000 shares x Rs.115 X 5% = Rs.57,500.
56. Answer : (c) < TOP
>
Reason : The correct entry which must have been recorded is
Returns inward account Dr. Rs.7,850
To Prakash account Rs.7,850

Whereas, Prakash’s account is debited with Rs.7,850. Hence the rectification entry is
Suspense account Dr. Rs.15,700
To Prakash account Rs.15,700
57. Answer : (d) < TOP
>
Reason :
Particulars Rs. Rs.
Overdraft balance as per bank column of cash book 3,400
Add:
Cheques deposited not yet collected 6,300
Bank and interest charges not recorded in cash book 910
7,210
Less: 10,610
Cheques issued not yet presented for payment 5,650
Interest directly collected by bank 5,200 10,850
Credit balance as per pass book 240
58. Answer : (d) < TOP
>
Reason : According to the basic accounting equation, assets = liabilities + owners equity.
Hence owners equity = assets – liabilities.
Capital = Rs.2,45,000 + Rs.1,85,000 + Rs.95,000 + Rs.80,000 – (Rs.1,20,000 + Rs.40,000)
= Rs.6,05,000 – Rs.1,60,000 = Rs.4,45,000
Profit for the year 2003-2004 = Capital as on March 31, 2004 – Capital as on April 01, 2003
= Rs.4,45,000 – Rs.3,40,000 = Rs.1,05,000
Alternatively,
Liabilities Rs. Assets Rs.
Capital 4,45,000 Fixed Assets 2,45,000
(balancing figure)
Loan from bank 1,20,000 Inventory 1,85,000
Sundry Creditors 40,000 Sundry Debtors 95,000
Cash & Bank 80,000
6,05,000 6,05,000
Profit for the year 2003-2004 = Capital as on March 31, 2004 – Capital as on April 01, 2003
= Rs.4,45,000 – Rs.3,40,000 = Rs.1,05,000
59. Answer : (a) < TOP
>
Reason : Trial balance as on March 31, 2004
Dr. Cr.
Particulars
Amount (Rs) Amount (Rs)
Sales 5,65,000
Purchases (balancing figure) 2,21,000
Carriage inward 28,000
Other expenses 31,000
Fixed assets 10,90,000
Sundry debtors 1,25,000
Sundry creditors 95,000
Cash and bank 65,000
Capital 9,00,000
15,60,000 15,60,000
Trading account for the year ended March 31, 2004
Particulars Rs. Particulars Rs.
To Purchases 2,21,000 By Sales 5,65,000
To Carriage inward 28,000 By Closing stock 50,000
To Gross profit 3,66,000
6,15,000 6,15,000
60. Answer : (b) < TOP
>
Reason :
Particulars Rs.
Total of debit side of trial balance 2,45,000
Add: Advertisement expenses 15,000
Less: Opening stock (excess taken) 100
Total of trial balance (Debit side) 2,59,900

Particulars Rs.
Total of credit side of trial balance 2,68,900
Add: Interest on investments (less taken) 6,000
2,74,900
Less: Advertisement expenses (wrongly taken) 15,000
Total of trial balance (credit side) 2,59,900
61. Answer : (c) < TOP
>
Reason :
Amount Amount
Particulars
(Rs.) (Rs.)
Petty cash 1,000
Less: Stamps 145
Conveyance 186
Repairs 228
Stationery 154
Other office 93 806
expenses
194
Amount reimbursed 806
1,000
62. Answer : (c) < TOP
>
Reason : Since share money is called in full, the share capital account will be debited with Rs.50,000
i.e. No. of shares x Face value of share
= 500 x Rs.100 = 50,000.
63. Answer : (b) < TOP
>
Reason :
Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr.
Particulars Rs. Particulars Rs.
To Opening stock 90,000 By Sales 6,35,000
To Purchases 4,56,000 By closing stock 75,000
To Gross profit 1,64,000
7,10,000 7,10,000
To Salaries 86,000 By Gross profit 1,64,000
To other expenses 73,000 By Net loss 70,000
To Depreciation 75,000
2,34,000 2,34,000
Balance sheet as on March 31, 2004
Liabilities Rs. Assets Rs.
Share capital 6,00,000 Fixed assets 4,25,000
Sundry creditors 32,000 Sundry debtors 45,000
Short tem loan 36,000 Closing stock 75,000
Cash and bank 53,000
Net loss 70,000
6,68,000 6,68,000
64. Answer : (a) < TOP
>
Reason : Costs that improve the revenue earning capability of an asset should be capatilised as part of the cost of
the asset (for example, Rs.40,000 paid for additional component for increasing the earning capacity).
However, costs that maintain the revenue earning capability (such as the maintenance charges and the
replacement parts) should be treated as revenue expenses and they are to be charged to the Profit and
Loss Account. The correct figure for depreciation calculation is therefore, as under:
Particulars Rs. Rs.
Cost less discount 4,70,000
Delivery charges 10,000
Erection charges 20,000
Customs duty 40,000 5,40,000
65. Answer : (a) < TOP
>
Reason :
Trial Balance of John Vicky as at March 31, 2004
Debt Balance Credit Balance
Sl.No Heads of Account
(Rs.) (Rs.)
1. Capital (1st April, 2002) 89,000
2. Drawings 10,000
3. Stock (1stApril, 2002) 37,000
4. Purchases 2,31,250
5. Sales 3,94,000
6. Motor Vehicles 14,500
7. Cash in Hand 1,350
8. Sundry Creditors 49,760
9. Sundry Debtors 139,700
10. Bank Overdraft 9,000
11. Administrative expenses 76,360
12. Office Equipment 35,000
13. Carriage Outward 2,310
14. Returns Inward 2,050
15. Provision for Bad Debts 4,250
16. Returns Outward 3,160
17. Discount Allowed 2,800
18. Discount Received 3,150
TOTAL 5,52,320 5,52,320
66. Answer : (d) < TOP
>
Rs.4,38,000 + Rs.4,62,000 + 4,50,000
Reason : Average profit = 3
Rs.13,50,000
= 3 = Rs.4,50,000
Average profit Rs.4,50,000
Normal rate of return on capital employed 12% on Rs.4,20,000
Rs.35,00,000
Super profit Rs. 30,000
67. Answer : (a) < TOP
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Reason : Debtors as per trail balance Rs.40,600
Less: Bad debts written-off Rs. 600
Rs.40,000
Less: Provision for bad debts@ 5% Rs. 2,000
Rs.38,000
2
× Rs.38, 000 = Rs.760
Provision for discount on sundry debtors will be 100
68. Answer : (c) < TOP
>
Reason : Valuation of closing stock under Weighted Average Method
Purchases Issues Balance
Date Mar. 2004 Value Value Value
Quantity Rate Quantity Rate Quantity Rate
(Rs.) (Rs.) (Rs.)
1 Opening 1,000 20 20,000
Stock
10 500 23 11,500 1,500 21 31,500
15 750 21 15,750 750 21 15,750
20 1,000 26.25 26,250 1,750 24 42,000
31 750 24 18,000 1,000 24 24,000
Value of closing stock 1,000 24,000
69. Answer : (c) < TOP
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Reason : Whenever trade discount is given, the same will not be separately disclosed and the sales will be shown
at net figure. However, cash discount should be taken to discount account. Hence cash account should be
debited with actual cash received (Rs.850), discount account should be debited with cash discount
allowed (Rs.50) and sales should be credited with catalogue price less trade discount (i.e Rs.900).
Cash a/c Dr. Rs.850
Discount a/c Dr. Rs. 50
To Sales a/c Rs. 900
70. Answer : (a) < TOP
>
Reason : Book value of the machinery = Rs.5,00,000
Value of machinery on revaluation = 20% above book value
Profit on revaluation = 20% of Rs.5,00,000
= Rs.1,00,000
Share of H. Ltd. = 80% of Rs.1,00,000
= Rs.80,000 (Capital profit)
If the value of assets of the subsidiary company are revalued at the time of acquisition of shares, profit
or loss on such revaluation is treated as capital profit or capital loss and is divided among minority
shareholders and holding company according to their share.
There is no revenue profit in the instant problem.
71. Answer : (a) < TOP
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Reason : If the proposed dividend exceeds 15% but less than 20%, the minimum percentage of current profits that
will have to be transferred is 7.5% of current profits.
Rs.2,25,000 x 7.5% = Rs.16,875.
72. Answer : (b) < TOP
>
Reason :
Weighted average profit
Year 1 Rs.3,30,000 × 1 Rs. 3,30,000
Year 2 Rs.4,20,000 × 2 Rs. 8,40,000
Year 3 Rs.4,80,000 × 3 Rs.14,40,000
6 Rs.26,10,000
∴ Weighted average profit = Rs.26,10,000 ÷ 6 = Rs.4,35,000
The alternative amounts of (a), (c), (d) and (e) are not correct.
73. Answer : (d) < TOP
>
Current assets other than inventories 3 + 5
= = 2.5.
Reason : Quick ratio = Current liabilities 3.2
Hence, option (d) is the correct choice.
< TOP OF THE DOCUMENT >

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