Question.1
A company XYZ pays a
fixed rate of interest on Debentures issued for cash to the public. At what
rate, will the interest be payable on debentures issued as a collateral
security?.
Solution
The holder of debenture
as a collateral security is not entitled to receive any interest on such
debenture from the company. But, in case of company’s failure to meet its
obligation of re-payment of loan, the holder of such debenture can exercise his
right to claim interest from the company on such debenture held by him.
Question.2
At the dissolution of a
partnership firm, there is partner’s Loan existing for Rs. 42,000 which is
settled for Rs. 38,000. Write the journal entry?.
Solution
Journal
Question.3
Can P & L
Appropriation A/c have a debit balance?
Solution
No, it cannot have a
debit balance.
Question.4
Explain ‘’Unlimited
Liability of a partner”
Solution
Unlimited Liability of
a partner means that a partner is liable to repay the debts of the firm from
their personal assets also in case the assets of the firm are insufficient to
meet its debts.
Question.5
Give the meaning of
called-up capital.
Solution
According to section
2(15) of the Companies Act, 2013, “Called-up Capital” means such part of the
capital, which has been called for payment.
Question.6
Why are shares more
preferred than debentures while investing in a company?
Solution
The investors prefer to
invest in shares of a company to benefit from variable and higher dividend
income rather than from fixed return.
Question.7
RAM and TANU are
partners in affirm sharing profits in the ratio of 3:2. SURAJ joins the firm. RAM
surrenders 
of his share and TANU
of his share in favor of SURAJ.
Find the new profit-sharing ratio.
Solution
RAM’s share =3/5
RAM’s sacrifice=3/5 X
1/4=3/20
TANU’s share =2/5
TANU’s sacrifice=2/5 X
1/5=2/25
RAM’s new share = 3/5
-3/20 =12-3/20 =9/20
TANU’s new share = 2/5
-2/25 =10-2/25 =8/25
SURAJ’s share
=3/20+2/25=15+8/100=23/100
New profit-sharing
ratio of RAM, TANU and SURAJ
=9/20 : 8/25 : 23/100
=45 : 32 :23
Question.8
Why is it necessary to
revalue the assets and reassess the liabilities on the reconstitution of firm?
Solution
Assets and liabilities
of a firm may also revalued at the time of change in profit sharing ratio of
existing partners.
The reason being the
realizable value of assets & liabilities can be different from those shown
in the balance sheet. Itstherefore necessary because the change in the value of
assets and liabilities belongs to the period before change in profit sharing
ratio and therefore profit or loss on revaluation must be shared by the
partners in their old profit sharing ratio. .
For this purpose, there
are two options -
1. If revised value are
to be recorded in the books: It has been discussed in the chapter of ‘Admission
of a partner’.
2. If revised values
are not to be recorded in the books: In this case, the gaining partner must
compensate the sacrificing partner with that share of profit on revaluation of
assets and liabilities which proportionate to the share gained by him.
Question.9
X,
Y and Z are partners in a firm. Total capital employed is Rs.3,60,000
contributed by them in their profit sharing ratio. Y retires from the firm. On
the day of retirement the firm had a balance of Rs.60,000 in the General
Reserve Account. Y took one of the unrecorded assets of the firm valued at Rs. 36,000
in part payment and, balance amount was paid in cash.
Pass
necessary entries on Y's retirement.
Solution
Question.10
What
do you mean by “Preference Share Capital”?
Solution
According
to section 43 explanation (ii) of the companies act, 2013, “Preference Share
Capital” with reference to any company limited by shares, means that part of
the company which carries or would carry a preferential right with respect to:
- Payment
of dividend, either as affixed amount or an amount calculated at affixed rate,
which may either be free of or subject to income tax; and
- Repayment,
in the case of winding up or repayment of capital, of the amount of share
capital paid-up or demand to have been paid-up, whether or not, there is a
preferential right to the payment of any fixed premium or premium on any fixed
scale A/c, specified in the memorandum or articles of a company.
Question.11
Specify the rules
relating to the following in the absence of partnership deed:
- Sharing of profits
and losses.
- Interest on
partner's capital.
- Interest on
Partner's drawings.
- Interest on
Partner's loan
- Salary to a
partner.
Solution
Following are the
main provisions of the Indian Partnership Act, 1932 that are relevant to
partnership accounts if there is no partnership deed:
Sharing of
profits and losses:
If the partnership
deed is silent on sharing of profit or losses among the partners of a firm,
then according to the Partnership Act of 1932, profits and losses are to be
shared equally by all the partners of the firm.
(ii) Interest on partner's capital:
If the partnership
deed is silent on interest on partner's capital, then according to the
Partnership Act of 1932,nointerest on capital should be given to
the partners of the firm.
(iii) Interest on partner's drawings:
If the partnership
deed is silent on interest on partner's drawings, then according to the
Partnership Act of 1932,nointerest on drawing should be charged
from the partners of the firm for the amount of capital withdrawn in form of
drawings.
(iv) Interest on partner's loan:
If the partnership
deed is silent on interest on partner's loan, then according to the Partnership
Act of 1932, the partners are entitled for 6% p.a. interest on the loan
forwarded by them to the firm.
(v) Salary to a partner:
If the partnership
deed is silent on salary to a partner, then according to the Partnership Act of
1932,nosalary should be given to any partner.
Question.12
Mohit
Ltd. Took over assets of Rs. 7,20,000 and liabilities of Rs. 80,000 of Ram Ltd.
At an agreed value of Rs6,00,000. Mohit Ltd. Paid to Ram Ltd. By issue of 9%
debenture of Rs. 100 each at a premium of 20%.Pass necessary Journal Entries to
record the above transactions in the books of Mohit ltd.
Solution
Journal
Working
note:
Calculation
of No. of 9% Debentures.
Amount
due to ram Ltd. =Rs. 6,00,000.
Issue
Price of 9% Debenture at 20% Premium = Rs 120
No.
of Debenture =6,00,000/120=5,000.
Question.13
Rajan andTina entered
into Partnership with fixed capital of Rs. 7,00,000 and Rs. 3,00,000
respectively. They were doing good business and were interested in its
expansion but could not do the same because of lack of capital. Therefore, to
have more capital, they admitted Krishna as a new partner two years later. Krishna
brought Rs. 10,00,000 as capital and the new profit sharing ratio decided was 3
: 2: 5. After few years, another new partner Sanjay was admitted with a capital
of Rs. 8,00,000 for 1/10th share in the profits, which he acquired
equally from Rajan, Tina and Krishna. On 1.1.2015Krishna died and his share was
taken over by Rajan and Sanjay equally.
Calculate:
- The Sacrificing ratio
of Rajan and Tina on Krishna’s admission.
- New profit sharing
ratio, of Rajan, Tina, Krishna and Sanjay on Sanjay, admission.
- New Profit sharing
ratio of Rajan, Tina and Sanjay on Krishna’s death.
Solution
(i)
Rajan sacrifice =
1/2-3/10
=5-3/10=2/10
Kushal’s Sacrifice =
1/2-2/10
=5-2/10 = 3/10
Therefore Sacrificing
Ratio of Rajan and Tina = 2:3
(ii)
New Profit Sharing
Ratio
= Old Ratio 
Sacrificing/gaining Ratio
Sanjay’s share = 1/10
Sanjay’s Gain from all
three existing partners equally =1/10 X 1/3 i.e., 1/30 from each .
Rajan’sNew share
=3/10 – 1/130
= 9-1/30
= 8/30
Kushal’s new share =
2/10 – 1/30
=6-1/30 =5/30
Krishna’s New Share
=5/10-1/30
= 15-1/30
=14/30
Sanjay’s new share
=1/10 or 3/30
New sharing Profit
Ratio OfRajan, Tina, Krishna and Sanjay
=8/30 : 5/30 : 14/30 :
3/30
=8 : 5 : 14 : 3
(iii)
Krishna’s share = 14/30
Rajan’s Gain = 14/30 X 1/2
=14/60 =7/30
Sanjay’s Gain = 14/30 X
1/2 =14/60 =7/30
Rajan’s New ratio =8/30
+ 7/30 =15/30
Sanjay’s New Ratio =
3/30 +7/30 = 10/30
New Ratio of Rajan, Tina
and Sanjay after Krishna’s Death
= 15/30 : 5/30 : 10/30
=15 : 5 :10
= 3 : 1 : 2
Question.14
Simran
and Jahanvi started their partnership firm sharing profits in the ratio of 3:2
on 1't April, 2013. After three years, their friend, Raghavi completed her
course in legal studies. So, they decided to request her to join their firm to
provide all legal advices to which Raghavi agreed with 1/5 t h share in profits
of the firm. Raghavi contributed Rs. 2,00,000for capital and premium for
goodwill. Goodwill of the firm was valued at Rs. 3,50,000. Simran and Jahanvi
decided to share the remaining profit in the ratio of 4:3. Pass the necessary
journal entries if half of the premium for goodwill credited to the partners is
withdrawn by them.
Solution
Working Notes:
New
Share
Sacrifice
=Old share - New share
Simran4/5
x 4/7 = 16/35
3/5
- 16/35 =5/35
Jahanvi
4/5
x 3/7 = 12/35
2/5-
12/35 =2/35
Question.15
Rajesh
Limited issued 50,000 10% Debentures of Rs. 100 each at a discount of 4% on 1st
April, 2015, Rs.40 on application and the balance on allotment. The Debentures
are redeemable after 4 years. Give necessary Journal entries and the Balance
Sheet of the Company on the above date. (Ignore interest).
Solution
In
the books of Rajesh Ltd.
Journal
Balance sheet
(Extract)
On at 1st
April, 2015
Notes to Accounts:
Question.16
The
Balance Sheet of Ram &Shyam who were sharing profits in the ratio of 3:1 as
on 31st March 2012 was as follows :
They
decided to admit Mohan on April 1st 2012 for 1/5 share on the following terms.
- Mohan
shall bring Rs. 60,000 as his share of premium.
- The
unaccounted accrued income of Rs.1000 be provided for.
- The
market value of investment was Rs.45,000.
- A
debtor whose dues of Rs.5,000 was written of as bad debts paid Rs.4000 in full
settlement.
- Mohan
to bring in capital to the extent of 1/5 of total capital of the new firm.
Prepare
Revaluation A/c. Partners’ Capital A/c & Balance Sheet of the new firm.
Solution
Revaluation Account
Partner’s Capital Account
Working Notes :
- Combined
capital of Ram &Shyam = Rs. 1,20,000 + Rs. 60,000 = Rs. 1,80,000.
- Total
Capital of firm = 1,80,000 X 5/4 =Rs. 2,25,000.
- Mohan’s
share = Rs. 2,25,000 X 1/5 = Rs. 45,000.
- Cash
at Bank = Opening Balance + Bad Debts Recovered + Mohan’s Capital + Premium =
20,000 + 4000 + 45000 + 60,000 = Rs. 1,29,000.
- There
is no effect of bad debts recovered on the amount of debtor appearing in
balance sheet.
Question.17
Sahara Ltd. was formed
for the purchase of X Ltd. and was registered with a nominal capital of Rs.
5,00,000 divided into 2000 shares of Rs. 250 each 1000 shares were offered for
public subscription at a premium of Rs. 50 payable as.
On Application Rs. 80.
On Allotment Rs. 120
(including premium).
On First all Rs. 60.
On Second call Rs. 40.
1000 shares were also
issued to vendors as fully paid for the payment of purchase consideration.
Application were
received for 900 shares which were duly allotted. Allotment money was received
in full but when first call was made a holder of 200 shares failed to pay first
call money and his shares were forfeited. These shares were revised as 210 paid
up at rate of 180 per share. The final call was not made. Pass necessary
journal entries.
Solution
Question.18
X
Ltd. has a Debt-Equity at 3:1. According to the management it should maintained
at 1:1. What are the two choice to do so?.
Solution
The
two choices to maintain Debt equity at 1 : 1 form 3 : 1 are :
(i)
To increase equity
(ii)
To reduce Debt
(iii)
Both i.e. increase in equity and reduce Debt.
Question.19
The Quick Ratio of the
company is 1.5:1. Explain with reason what will be the change in the ratio on
payment of dividend by the company?.
Solution
The ratio will decline,
because quick asset (Cash) will decline on payment of dividend by the company.
Question.20
Current
Assets of a company are Rs. 15,00,000. Its current Ratio is 2.5 and liquid
Ratio is 0.85. Calculate Current liabilities, Liquid Assets and Inventory.
Solution
Current Ratio =Current
Assets / Current Liabilities
2.5 = Rs. 15,00,000 /
Current Liabilities.
Current Liabilities
=15,00,000 / 2.5= Rs. 6,00,000.
Liquid Ratio = Liquid
Assets / Current Liabilities
0.85 = Liquid Assets/
6,00,000.
Liquid Assets = Rs.
6,00,000 × 0.85 = Rs. 5,10,000.
= Rs. 15,00,000 – Rs.
5,10,000.
= Rs. 9,90,00.
Solvency
Ratios :Solvency
ratios convey an enterprise’s ability to meet its long term obligations as and
when they becomes due.
Important
solvency ratios are :
1.
Debt Equity Ratio.
2.
Total Assets to Debt Ratio.
3.
Proprietary Ratio.
4.
Interest Coverage Ratio.
Debt
Equity Ratio: It
shows relationship between Debts (Long term Liabilities or Non-Current Liabilities)
and Equity (Shareholders’ Funds).
Debt Equity Ratio =
Debts or Long Term Liabilities / Equity or Shareholder's Funds
Debts
= Long-term borrowings + Long-term provisions
Equity/Shareholders’
Funds = Share
Capital + Reserves and Surplus – Non-Trading Investments
OR
Equity/Shareholders’
Funds = Fixed
Assets (Tangible and Intangible) + Non-Current Investment (Excluding Non-Trading
investment) + Long Terms Loans and Advances + Current Assets (Excluding Fictitious
Assets included in other Current Assets) – Current Liabilities - Long-term
borrowings Long - term provision
1. Significance :
It
assesses the long term soundness of financial position of a business.
2. Ideal Ratio :
2: 1 is considered as
best but it should not be more than this.
Question21
From
the following information, calculate the net cash flow from Financing
Activities
Additional
Information
- Interest
paid on Debentures Rs. 12,500.
- During
the year 2010-2011, company issued bonus shares to equity shareholders in the
ratio of 2:1 by capitalizing reserve.
- The
interim dividend of Rs. 75,000 has been paid during the year.
- 9%
Debentures were redeemed as 5% premium.
- 10%
preference shares were issued at 2% discount.
Solution
Cash Flow from
Financing Activities
Note:
- Bonus
shares worth Rs. 5,00,000 issued to equity shareholder are not to be shown in
the cash flow statement because there is no flow of cash by this activity.
- If
any other information is not given in the question about final dividend paid
amount then the previous year proposed dividend is assumed as dividend payable
in current year. Current year proposed dividend amount is assumed as proposed
dividend in current year and to be added in operating activities to calculated
net profit before tax and extraordinary item.
- Previous
year proposed dividend- unpaid dividend = final dividend paid during the
current year is cash used in financing activities.
Financing Business Enterprise Transaction Treatment in Cash Flow Statement
Financing
business enterprises are the business enterprises which deal in financelike
investment companies, mutual fund house, banks. These enterprises purchasesand
sale of securities as their stock, so it is treated as operating activities and
interest received, dividend received and interest aid are considered as routine
business activities and included in their operating activities.
Question.22
From the following
information calculate the amount of cash flows Investing Activities :
Solution
Calculations of Cash
Flows From Investing Activities
Question.23
A company’ Inventory Turnover
is 5 Times. Inventory at the end is Rs 20,000 more than that at the beginning.
Revenue from operations are Rs. 8,00,000. Rate of Gross Profit on Cost 1/4;
Current liabilities Rs. 2,40,000. Acid Test Ratio.
Solution
Revenue from Operation
= Rs. 8,00,000.
Rate of Gross Profit on
Cost of Revenue from Operations =1/4
Let Cost of Revenue
from Operations=100
Hence, profit =100 X ¼
=25
Revenue from Operations
=100+25 =125
Rate of Profit to
Revenue from Operations = 1-1/5= 4/5 of Revenue from Operations
Cost of Revenue from
Operations =Rs. 8,00,000 X 4/5 = Rs. 6,40,000.
Inventory Turnover
ratio =5 (given)
Inventory Turnover
Ratio =Cost of Revenue From Operations / Average Inventory = 5
Cost
of Revenue From Operations / 5 = Average Inventory
6,40,000
/ 5= Average Inventory
Average
Inventory = 1,28,000
Let
Opening Inventory = x
Then,
Closing Inventory = x + 20,000
Average
Inventory = x + 20,000 + x / 2
2x
+ 20,000 / 2 =1,28,000
x
+ 10,000 = 1,28,000
x
=Rs. 1,28,000 - Rs. 10,000.
x=
Rs. 1,18,000.
Closing
Inventory = Rs. 1,18,000 + Rs. 20,000= Rs. 1,38,000.
Acid
Test Ratio= Quick Assets / Current Liabilities =0.75.
Quick
Assets = 0.75 X Current Liabilities.
= 0.75 X 2,40,000 = Rs. 1,80,000.
Current
Assets = Quick Assets + Closing Inventory
= Rs. 1,80,000 + Rs. 1,38,000 = Rs. 3,18,000.
Current
Ratio = Current Assets/ Current Liabilities
= 3,18,000/2,40,000
= 1.325 : 1.
