(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.

List any two items appearing on the credit side of a partner's capital account, when capitals are fluctuating. (2)

(ii) Partner's Salary.

(a) A and B are partners in a firm sharing profits in the ratio of 3:2. They had advanced to the firm a sum of Rs. 30,000/- as a loan in their profit sharing ratio on July 1st, 1998. The partnership deed is silent on the question of interest on loan from partners. Compute the interest payable by the firm to the partners, assuming the firm closes its books on December 31st. (3)

(a) According to the provisions of the Indian Partnership Act, 1932 interest @ 6% p.a. is payable on the amount of loan from 1st July to 31st December i.e., 6 months.

Interest = Rs. 30,000 x 6/100 x 6/12 = Rs. 900.

On April 1st, 1998 an existing firm had assets of Rs. 75,000/- including cash of Rs. 5,000/-. The partner's capital accounts showed a balance of Rs. 60,000/- and reserve constituted the rest. If the normal rate of return is 10 % and the goodwill of the firm is valued at Rs. 24,000/- at 4 years purchase of super profits, find the average profits of the firm.(3)

24,000 = Super Profits x 4

Super Profits = 24,000/4 = Rs. 6,000.

Normal Profits = Capital employed x Normal Rate of Return

= 75,000 x 10/1000 = Rs. 7,500

Super Profits = Average Profits - Normal Profits

Rs. 6,000 = Average Profit - Rs. 7,500

Average Profit = Rs. 13,500.

As a director of a Company you had invited applications for 30,000 equity shares of Rs. 10/- each at a premium of Rs. 2/- each. the total application money received at Rs. 2/- per share was Rs. 72,000/-. Name the kind of subscription. List the three alternatives for allotting these shares. (3)

It is a case of over-subscription. Shares are said to be over-subscribed when the numbers of shares applied is more than the number of shares offered. In the present case, a company has offered 30,000 shares to public but the public applied for 36,000 shares, it called a case of over - subscription.

Three alternatives for alloting these shares are given below :

(i) Total rejection of some applications because of some technical defect e.g., insufficient application money.

(ii) Acceptance of some application in full, that is, full allotment,

(iii) Allotment to the remaining applicants on pro-rata basis.

A limited Company has issued Rs. 1,00,000/- 9% Debentures at a discount of 6 %. These debentures are to be redeemed equally, spread over 5 annual instalments. Show Discount on Issue of Debentures A/c for five years. (5)

= Rs. 1,00,000 x 6/100 = Rs. 6,000

2. Calculation of the amount of discount on issue of debentures to be written of each year.

A,B and C were partners in a firm. On 1.1.98 their capitals stood at Rs. 50,000/-, Rs. 25,000/- and Rs. 25,000/- respectively. As per the provisions of the partnership deed :

(a) C was entitleld for a salary of Rs. 1,500/- p.m.

(b) Partners were entitled to enterest on capital at 5 % p.a.

(c) Profits were to be shared in the ratio of capitals.

The net profit for the year 1998 of Ts. 45,000/- was divided equally without providing for the above terms.

Pass an adjustment entry to rectify. (4)

Q.7

The public applied for 15,000 shares. The shares were alloted on a pro-rata basis to the applicants of 12,000 shares. All shareholders paid the allotment money excepting one shareholder who was alloted 200 shares. These shares were forfeited. The first call was made thereafter. The forfeited shares were re-issued @Rs.9/- per share Rs. 8/- paid up. the final call was not yet made.

You are required to prepare the Cash Book and pass journal entries. (10)

JOURNAL

1. 10,000 shares were issued to the applicants for 12,000 shares

RAtio of allotment = 5:6

One who was alloted 5 shares had applied for = 6 shares

One shareholder who was alloted 200 shares had applied for = 6/5 x 200 = 240

Total application money paid by him on 240 shares - (240x2) = Rs. 480

Less : Trransferred to share

Capital on 200 shares

alloted to him at

Rs. 2 per share 400

Allotment money received 80

in advance from him

Allotment money due from him = Rs. 600

(200 shares x Rs. 3)

Less : Advance adjusted 80

Allotment in arrears 520

2. Calculation of allotment money received later on :

Allotment money due (Gross) = Rs, 30,000

Less : Advance adjusted 4,000

(2,000 x 2) 26,000

Less : Allotment in arrears 520

25,480

M and N were partners sharing profits in the ratio of 3:2. On the date of dissolution their capitals were - M : Rs. 7,650 / - N : Rs. 4,300/-. The creditirs ammounted to Rs. 27,500/-. The balance of cash was Rs. 760 /- The assets realised Rs. 25,430/-, the expenses on dissolution were Rs. 1,540/- all partners were solvent.

Close the books of the firm, showing the Realisation, Capital and Cash accounts. (Show the workings clearly.) (12)

For preparing realisation account, the value of sundry assets at the time of dissolution of the firm is needed. Since that is not given in the question, that can be found out by preparing Balance Sheet at the date of dissolution of firm. The Balance Sheet, so prepared, will form part of working.

Balance Sheet on the date of dissolution

Realisation Account

Share Capital 10,000 equity shares of Rs. 10/- each fully paid :

Contingent Liability: A possible future liability which depends on the happening of certain uncertain event is called contingent liability. contingent liabilities are not included in the total of liabilities - side. Rather, contnigent liabilities are shown as a foot-note to the Balance Sheet.

Example of Contingent Liabilities : The following are the usual types of contigent liabilities :

(i) Claims against a company not acknowledged as debt.

(ii) Arrears of fixed cumulative divided on cumulative preference shares.

(iii) Estimated amount of contract remaining to be executed and not provided for .

(iv) Uncalled liability on shares partly paid.

Part - II

In a narrow sense, the word fund is synonymous with cash. Ther term "Funds", however, is broader than cash; it means working capital, i.e., the difference between current assets and current liabilities or the excess of current assets over current liabilities. Therefore, in accounting, 'funds' and "working capital" are used in the same sense.

The term "Flow" means change, therefore, the term, 'flow of funds' means 'change in funds' or 'change in working capital'. According to this concept, the term of 'flow of funds' refers to the movement of funds as a flow in and out of the working capital area.

Give two areas of interest each for investors and management while analysing the Financial Statements. (4)

(i) Knowledge of short - term and long-term solvency.

(ii) Knowledge of 'Return on Investment'.

(b) Two areas of interest for management :

(i) Knowledge of performance of enterprise as a whole and its various division like profitability solvencey etc.

(ii) Help in decision - making.

From the following information, prepare a comparative Balance Sheet of Depth Ltd., : (5)

Depth Ltd.

Comparative Balance - Sheet

as at 31st Dec., 1995 and 1996

The current ratio of a company is 2:1 . State giving reasons which of the folowing would improve, reduce, or not change the ratio :

(a) repayment of a current liability

(b) purchasing goods on cash

(c) sale of office equipment for Rs. 4,000/- (Book Value Rs. 5,000/-)

(d) sale of goods Rs. 11,000/- (cost Rs. 10,000/-)

(e) payment of dividend (5)

In such like question it is advisable to assume some figure as current asset and current liability, then it becomes easy to see the effect of the transaction on the ratio in the question. Since current ratio is 2:1, let us assume the CA=Rs. 20,000 and CL = Rs. 10,000.

(a) Repayment of current liability will improve current Ratio because fall in current asset will be less than twice the fall in current liability.

(Suppose Rs. 5,000 are repaid out of current liability, balance would by CA = Rs. 15,000 and CL = Rs. 5,000

\Ratio will improve to 3:1.

(b) Purchase of goods on cash will not change the ratio. Neither the total current. Assets nor the total current liabilities are affected since there is only a conversion of one Current Asset into other Current Asset.

(c) Sale of office equipment will Improve the ratio because current asset (cash) will increase without any change in current liability.

(d) Sale of goods for Rs. 11,000; cost being Rs. 10,000 will Improve the current ratio because current asset will increase by Rs. 1,000.

(e) Payment of dividend will reduce the current ratio because current asset will decrease without decrease in current liability.

State with reasons whether the following would result in an inflow, outflow or no flow of funds. Attempt any four :

(a) Issue of Debentures;

(b) Debentures converted as redeemable preference shares;

(c) Amount transferred to Provisions for Taxation;

(d) Tax Refund;

(e) Repaid loan an mortgage. (4)

(ii) No flow of funds.

(iii) No flow of funds.

(iv) Inflow of funds.

(v) Outflow of funds.

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

Purchase Price is Rs. 50/- per unit.

Office Expenses are Rs. 1,500/- per month. Drawings are Rs. 600/- per month. Every month 10 % of the sales are on credit for the month and the remaining for cash. Cash in hand on January 1, 1998 is Rs. 12,000/-. There is no opening and closing stock. (6)

Cash Budget for the month of January to March'1998

Working Notes :

1. Calculation of Cash Sales and Amount Collected from Debtors

What is analysis of financial statements ? State any four of its limitations. (6)

Analysis of Financial Statements is the process of identifying the financial strengths and weaknesses of the firm by properly 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 disclosed by a single set of statements and a study of the trend of these factors as shown in a series of statements."

Limitations :

1. A number of parties are interested in the financial statements. But the interest of all the parties cannot be met.

2. The financial statements are prepared on basis of certain concepts and conventions so that actual position of the firm cannot be obtained with the analysis of financial statements.

3. Different firms may adopt the different methods and techniques of accounting. so while making the inter-firm comparison the reliable results may bot be obtained.

4. Financial Statements fail to depict one and the most valuable asset and that asset is the value of man behind the whole show, i.e., man deeply concerned with the operation of business. The success of a business concern depends, to a greater extent, upon the energy, ability and efficiency of the management.

(a) Debt - Equity Ratio

(b) Capital Turnoveor Ratio

(c) Interest Coverage Ratio

(d) Return on Investment

(e) Debt to total funds Ratio (6)

= 50,000 / 80,000+40,000+40,000

50,000/1,60,000 = 5:16

(b) Capital Turn over Ratio = Sales / Capital Employed

Capaital Employed =- Share Capital + Long term loans + Reserves and Surplus + Profit

= 80,000 + 40,000 + 50,000 + 40,000 = Rs. 2,10,000

\ Capital Turnover = 1,00,000 / 2,10,000 = 0.47 times

(c) Interest Coverage Ratio =

= Net Profit before Interest, tax and Dividend / Interest Charges

+ NEt Profit After Interest and tax + Tax + Interest / Interest Charges

= 40,000 + 20,000 + 7,500 / 7,500 = 67,500 / 7,500 = 9 Times.

(d) Return on Investment =

= NEt Profit before Interest, Tax and Dividend / Capital Employed x 100

= 67,500 / 2,10,000 = 32.14 %

(e) Debt to total Fund Ratio =

= Long term Debts / Capital Employed = 50,000 / 2,10,000 = 5:21 or 1:4.2.

1. Depreciation charged on Fixed Assets was Rs. 60,000/-

2. A machine of the book value of Rs. 40,000/- was sold for Rs. 30,000/-. (12)

Schedule of Changes in Working Capital

FUNDS FLOW STATEMENT

Working Notes : 1. Calculation of Funds from Operation Adjusted Profit & Loss A/c

2. Fixed Assets Account