(SET-I)

Time allowed : 3 Hours

M.M. : 100

Note :

(i) This paper is divided into four parts - A,B, C,D.

(ii) Part A is compulsory; attempt one out of parts B,C and D.

(iii) Each part carries 50 marks.

(iv) Each question carries marks indicated against it.

PART-'A'

Goodwill may be defined as the capacity of a business to earn super profits in the future. It is an untangible but a valuable asset. It is not fictitious asset in the case of a profitable concern .

Methods of valuation of Goodwill :

1. Average Profit Method

2. Super Profit Method

R and S are partners sharing profits in the ratio of 5:3, T joins the firm as a new partner. R gives 1/4 of his share and S gives 2/5 of his share to the new partner. Find out the new ratio. (3)

S's Share = 3/8

R surrenders 1/4 of his share is favour of T and S surrenders 2/5 of his share in favour of T.

Thus, R will surrender = 5/8 x 1/4 = 5/32

and

S will surrender = 3/8 X 2/5 = 6/40

Therefore,

R's new profit sharing ratio = 5/8 - 5/32 = 20-5/32 = 15/32

S/s new profit sharing ratio = 3/8-6/40 = 15-6/40 = 9/40

T's profit sharing ration = 5/32 + 6/40 = 25+24 / 160 = 49/160

Or New Ratio of R:S:T = 15/32 : 9/40 : 49/160

or

= 75 : 36 : 49

OR

State any three purposes for which share premium amount can be utilised. (3)

"Comparison with the help of ratios is not possible if different firms follow different accounting policies" : Different firms adopt diffeent accounting policies. The difference in the method of valuation of stock, depreciation on fixed assets, creation of provision for doubtful debts, will not provide identical data, thus make the comparison task between various firms difficult.

As per the provisions of the deed :

(i) R was to be alloweod a remuneration of Rs. 3,000 p.a.,

(ii) Interest at 5 % p.a. was to be provided on capital,

(iii) Profits were to be divided in the ratio of 2:2:1, Ignoring the above terms, net profit of Rs. 18,000 for the year ended 1996 was divided among the three partners equally.

Pass an adjustment entry to rectify the error. Show the working clearly. (4)

Journal

Working Notes :

Adjustment of Capital

X Limited issued 12 % debentures of Rs. 10,00,000 at 8 % discount redeemable at Par. Assume that the debentures are redeemed by drawings methods in the following manner : (5)

"Discount on issue of debentures Rs. 80,000 will be written off proportionately from profit and loss account for five years. The proportion in which it is to be written off will be found out as follows :

(a) M and N are partners in a firm. M has given a loan of Rs. 8,000 to the firm on 1 April, 1994. The partnership deed is silent upon the question of provision of interest on partners' loan.

Compute the amount of interest payable on the loan advanced by M to the firm assuming the books are closed on 31 December each year.

(b) P,R and S are in partnership sharing profits in the ratio of 4:3:1 respectively. It is provided in the partnership deed that, on the death of any partner, his share of goodwill is to be valued at half of the profits credited to his account during the previous four completed years.

R dies on 1 January, 1997. The firm's profits for the last four years 1993 : Rs. 120,000, 1994 : Rs. 80,000, 1995 : Rs. 40,000, 1996 : Rs. 80,000.

Determine the amount that should be credited to R in respect of his share of goodwill. (6)

(b) Calculation of Goodwill :

Total profits for last 4 years = Rs. 3,20,000

R's Share = 3,20,000 X 3/8 = Rs. 1,20,000

Goodwill = 1,20,000 x 1/2 = Rs. 60,000.

K Limited has been registered with an authorised capital of Rs. 2,00,000 divided into 2000 shares of Rs. 100 each of which, 1000 shares were offered for public subscription at a premium of Rs. 5 per share, payable as under :

Applications were received for 1800 shares, of which applications for 300 shares were rejected outright; the rest of the applications were allotted 1000 shares on pro-rata basis. Excess application money was transferred to allotment.

all the monies were duly received except from Sundar, holder of 100 shares, who failed to pay allotment and first call money. His shares were later forfeited, and reissued to Shyam at Rs. 60 per share Rs. 70 paid up. Final Call has not been made.

Pass necessary Cash Book and journal entries in the books of L Limited. (10)

CASH BOOK

(Bank Column only)

1. Mr. Sundir, who had been alloted 100 shares must have applied for 1500/1000 x 100, i.e., 150 shares. His excess application money, viz., Rs. 10 per share on 50 shares, i.e., Rs. 500 has been adjusted towards sum due on allotment. Total money due from him on allotment is Rs. 2,000 arrived at as follows :

3. On 100 shares forfeited, amount received is Rs. 1,500 Mr. Sundar paid Rs. 10 per share as application money on 150 shares applied by him.

4. Share premium account is debited because on shares forfeited no premium money has been assumed to be received.

J,S and R were in partnership sharing profits and losses in the ratio of 3:2:1. Their Balance Sheet as on 31 December, 1994 was as follows :

(i) J took over Building at book value and agreed to pay off creditors.

(ii) Accrued interest was not collected whereas there was a contingent liability of Rs. 600 which was met.

(iii) Other assets realised : Plant : Rs. 25,000, Stock : Rs. 5,000, Debtros : Rs. 4,600.

(iv) Realisation expenses Rs. 600.

Prepare Realisation account, Capital accounts and Cash account. (12)

Part - B

Indicate which of the following transactions would result in (a) source, (b) use, and (c) neither source nor use of the fund :

(i) Collection from debtoros Rs. 5,000, (ii) Sale of old machinery Rs. 2,000, (iii) Redemption of Debentures of Rs. 10,000. (3)

(b) Source of fund.

(c) Use of fund.

Calculation of Cash from Operation

(i) Return on Investment, and (ii) Fixed Assets Turnover Ratio. (4)

(i) Return on Investment : Return on Investment (ROI) is the basic profitability ratio. It is found out by comparing the profit earned and capital employed to earn it.

The objective of calculating this ratio is to find out how much income the use of Rs. 100 of Capital generals.

The ratio is completed as follows :

ROI = Profit before interest, tax and dividends / Capital Employed x 100

Capital Employed = Long -term debts + Shareholders' Funds.

Objective - The objective of computing this ratio is to measure overall profitability of the enterprise.

Fixed Assets Turnover Ratio : This ratio measures a relationship between net sales and fixed assets. It is calculated by dividing net sales by fixed assets with the help of following formula :

Fixed Assets Turnover Ratio = Net Sales or Cost of Sales/ Fixed assets Less depreciation Significance : It indicates how efficiently fixed assets are utilised . In general, higher the ratio, the more efficient the management and utilization of fixed assets and vice-versa.

(a) Issue of Equity shares, (b) Cash received from Debtors, (c) Sale of goods on cash basis, (d) Redemption of Debentures, (e) Purchase of goods on credit. (5)

(ii) No change.

(iii) Increase if there is profit

(v) No change.

Analysis of Financial Statements is the process of identifying the financial strengths and weaknesses of the firm by property establishing relationship between the items of the Balance - Sheet and Income Statement. In the words of Myers, "Financial statement analysis is largely a study of relationships among the various financial factors in a business as discloseod by a single set of statements and a study of the trend of these factors as shown in a series of statements.

Importance of analysis of financial statements for creditors : On the basis of analysis of financial statement short -term creditors determine whether the amounts owing to them will be paid when due . Long - term creditors determine whether their principals ( Capital amounts )and the interest thereon will be paid when due.

For Management : On the basis of analysis on financial statements management can consider the firm's (i) short - term solvency (ii) Long -term solvency, (iii) activity (viz., effective utilization of its resources)

(iv) profitability in relation to Turnover (v) profitability in relation to investments.

From the following information calculate Stock Turnover ratio. Operating ratio and Capital turnover ratio : (6)

Cost of goods sold = Opening stock + Purchases + Carriage inwards - Closing Stock

= 28,000 + 46,000 + 4,000 - 22,000

= Rs. 56,000

Average Stock = Opening Stock + Closing Stock / 2

= 28,000 + 22,000 /2 = Rs. 25,000

Stock Turnover Ratio = 56,000/25,000 = 2.24 Times

Operating Ratio + Cost of goods sold + All operating exp. / Net Sales X 100

Net Sales = Sales - Sales return

= 56,000 + 4,000 + 2,000 / 80,000 X 100 = 77.5 %

Capital Turnover Ratio = Net sales / Capital employed

= 80,000 / 2,00,000 = .4 Times.

From the following information, prepare a Cash Budget for January, February and March, 1998 :

Cash Budget

for the month of January - March, 1998

From the following Balance - Sheet, prepare (i) Schedule of Changes in working Capital and (ii) Funds Flow Statement :

(a) Plant costing Rs. 15,000 was sold for Rs. 6,000. Accumulated Depreciation on the same was Rs. 5,000.

(b) No Depreciation was provided on buildings during the year.

for the year ended on 31-12-1995

1. Calculation of funds from operations

Adjusted Profit and Loss A/c