Financial Accounting Question Paper 2024
Dibrugarh University BCOM 2nd SEM FYUGP
COMMERCE (Core)
Paper: COMFINC2/COMBNIC2/COMHRMC2/COMMKTC2
(Financial Accounting)
Full Marks: 80, Pass Marks: 24, Time: 3 hours
The figures in the margin indicate full marks for the questions
1. (a) State whether the following statements are True or False: 1x4=4
(i) Arrears of fixed cumulative dividend is a contingent liability.
(ii) Memorandum revaluation is a Real Account.
(iii) Depreciation is a non-cash expense.
(iv) There is no difference between installment purchase and credit sale.
Answer:
(i) True (ii) False (iii) True (iv) False
1. (b) Fill in the blanks with appropriate word(s): 1x4=4
(i) _______ is the difference between assets and outside liabilities.
(ii) On _______ of the firm, the books of account will have to be closed.
(iii) Donation received for a specific purpose is a _______ receipt.
(iv) Profit and Loss Account is also known as _______ statement.
Answer:
(i) Capital (ii) Dissolution (iii) Capital (iv) Income
3. (a) From the following Trial Balance of Siraj and additional information, prepare Trading and Profit & Loss A/c for the year ended 31st March, 2023 and Balance Sheet as on that date: 4+5+5=14
Trial Balance as on 31st March, 2023
Additional Information:
(i) Depreciate furniture by 10% on original cost.
(ii) A provision for doubtful debts is to be created to the extent of 5% on sundry debtors.
(iii) Salaries for the month of March 2023 amounting to Rs. 3,000 were unpaid which must be provided for. However, salaries, included Rs. 2,000 paid in advance.
(iv) Insurance amounting to Rs. 2,000 is prepaid.
(v) Outstanding office expenses Rs. 8,000.
(vi) Stock used for private purposes Rs. 6,000.
Solution:
Trading Account for the year ended 31st March 2023
Profit & Loss Account for the year ended 31st March 2023
Balance Sheet as on 31st March 2023
Or
(b) What are adjusting entries? Why are these necessary for preparing Final Account? Explain with examples. 4+10=14
Answer: Adjusting entries are a fundamental aspect of accounting that ensure financial statements accurately reflect the financial position and performance of a business. In the context of India, where businesses range from small enterprises to large corporations, adjusting entries play a crucial role in adhering to the accounting standards and principles set by regulatory bodies such as the Institute of Chartered Accountants of India (ICAI) and the Companies Act, 2013.
Importance of Adjusting Entries:
Compliance with Accounting Standards:
In India, businesses are required to follow the Indian Accounting Standards (Ind AS), which are converged with the International Financial Reporting Standards (IFRS). Adjusting entries help in complying with these standards, ensuring that financial statements are prepared on an accrual basis.
Taxation:
Accurate financial reporting is essential for tax compliance. Adjusting entries ensure that revenues and expenses are recorded in the correct accounting period, which is crucial for calculating taxable income and adhering to the Income Tax Act, 1961.
Financial Reporting:
Adjusting entries provide a true and fair view of the financial position, which is a requirement under the Companies Act, 2013. This is important for stakeholders, including investors, creditors, and regulatory authorities.
Audit and Assurance:
In India, audits are mandatory for certain types of companies. Adjusting entries ensure that the financial statements are accurate and reliable, facilitating the audit process and providing assurance to stakeholders.
Examples of Adjusting Entries in the Indian Context
Accrued Revenues:
Scenario: An Indian software company has completed a project worth ₹50,000 for a client in March but has not yet billed the client.
Adjusting Entry:
Accounts Receivable ₹50,000
Service Revenue ₹50,000
Explanation: This entry records the revenue earned in March, ensuring compliance with the accrual basis of accounting.
Accrued Expenses:
Scenario: A manufacturing company in India has incurred electricity expenses of ₹10,000 for March, but the bill will be received and paid in April.
Adjusting Entry:
Electricity Expense ₹10,000
Accounts Payable ₹10,000
Explanation: This entry records the expense in March, matching it with the revenue it helped generate.
Prepaid Expenses:
Scenario: A retail business in India pays ₹12,000 for a one-year insurance policy on October 1. By the end of March, six months of the policy have been used.
Adjusting Entry:
Insurance Expense ₹6,000
Prepaid Insurance ₹6,000
Explanation: This entry records the expense for the six months of insurance coverage used in the current financial year.
Unearned Revenues:
Scenario: A training institute in India receives ₹60,000 in advance for a six-month course. By the end of the first month, one month of the course has been completed.
Adjusting Entry:
Unearned Revenue ₹10,000
Service Revenue ₹10,000
Explanation: This entry records the revenue earned for the one month of the course completed.
Depreciation:
Scenario: A company in India has machinery worth ₹100,000 with a useful life of 10 years and no salvage value. The annual depreciation is ₹10,000.
Adjusting Entry:
Depreciation Expense ₹10,000
Accumulated Depreciation ₹10,000
Explanation: This entry records the depreciation expense for the year, reflecting the wear and tear on the machinery.
Conclusion
In the Indian context, adjusting entries are essential for accurate financial reporting, compliance with accounting standards, and tax regulations. They ensure that financial statements reflect the true financial position and performance of a business, aiding stakeholders in making informed decisions. By adhering to the principles of accrual accounting and the matching principle, businesses in India can present reliable financial information that meets the requirements of regulatory bodies and stakeholders.
4. (a) The Balance Sheet of P, Q and R as at 31st March, 2023, the date of P’s retirement, was as follows:
The following terms have been agreed upon:
(i) The value of Land and Building should be appreciated by Rs. 10,000.
(ii) Plant and Machinery should be reduced to Rs. 23,000.
(iii) Create provision at 5% on debtors for bad and doubtful debts.
(iv) Create provision of Rs. 700 on creditors.
(v) The entire sum payable to P is to be bought by Q and R in such a manner that their Capital Accounts are in the proportion to their profit-sharing ratio which is to be equal.
(vi) The remaining partners decided not to show goodwill as an asset.
Prepare Revaluation A/c, Capital Accounts, Bank A/c and Balance Sheet. 4+3+3+4=14
Solution:
Revaluation Account
Calculations:
Decrease in Plant and Machinery: Rs. 28,000 to Rs. 23,000 = Rs. 5,000 loss.
Provision for Bad Debts: 5% of Rs. 24,000 = Rs. 1,200 (loss).
Increase in Land and Building: Rs. 10,000 gain.
Provision on Creditors: Rs. 700 (gain, as it reduces the liability).
Net Gain on Revaluation = Gains - Losses = (10,000 + 700) - (5,000 + 1,200) = 10,700 - 6,200 = Rs. 4,500.
Profit shared equally (1:1:1): 4,500 / 3 = Rs. 1,500 each for P, Q, and R.
Capital Accounts of P, Q, and R
Adjusted Capital Accounts After P’s Payment
Q and R contribute Rs. 25,750 each. Q has Rs. 27,000, so after paying 25,750, Q’s balance is 1,250. R has Rs. 19,000, so R needs an additional 25,750 - 19,000 = Rs. 6,750, which Q may temporarily cover (or it’s paid via Bank, adjusted below).
Bank Account
Notes:
Opening Cash at Bank: Rs. 26,000.
Payment to P: Rs. 51,500.
Q contributes Rs. 24,500 (adjusting to leave some capital), and R contributes Rs. 1,000 (limited by available capital). The remaining amount is assumed to be covered by the Bank, leading to a zero balance (or overdraft if not sufficient, but we’ll adjust in the Balance Sheet).
Balance Sheet of Q and R as on 31st March 2023
Calculations:
Land and Building: 40,000 + 10,000 = 50,000.
Plant and Machinery: Reduced to 23,000.
Debtors: 24,000 - 1,200 (provision) = 22,800.
Creditors: 50,000 - 700 (provision) = 49,300.
Bank: After paying P, the Bank balance becomes zero, and a Bank Overdraft of Rs. 42,000 is needed to balance the sheet (total assets = 50,000 + 23,000 + 27,000 + 22,800 = 1,22,800; liabilities = 49,300 + 1,250 + 6,750 = 57,300; overdraft = 1,22,800 - 57,300 = 65,500, adjusted with contributions).
Or
(b) What is conversion method under single-entry system? Discuss how you would convert a set of books, which you had been kept on the single-entry system into double-entry with perspective and retrospective effect. 4+10=14
Answer: The conversion method is used to convert books maintained under the single-entry system to the double-entry system. In the single-entry system, only one side of each transaction (either the debit or credit) is recorded. It typically records cash receipts and payments, personal accounts, and sometimes, some revenue and capital expenses, without maintaining a systematic record of assets, liabilities, and income.
The conversion method helps in shifting from the incomplete record-keeping of single-entry to the more structured, comprehensive double-entry system. This process ensures that the accounts become balanced and complete according to the double-entry principles.
Steps to Convert Single-Entry to Double-Entry System:
1. Perspective Effect Conversion (Future Adjustment):
This method involves converting the current year's single-entry system records into double-entry accounts, starting from the conversion date.
Step 1: Prepare a Trial Balance: Begin by preparing a trial balance based on the available single-entry records. These include cash, bank balances, personal accounts, and the income/expense details. This will be the opening balance for double-entry bookkeeping.
Step 2: Identify Assets and Liabilities: Identify and list the assets and liabilities (such as fixed assets, loans, accounts receivable, and payable) from the available data. This can be done through the physical verification of assets or by estimating values based on past records.
Step 3: Prepare Opening Balances: Set up the opening balances for all accounts that would be affected by the conversion. For example, create accounts for capital, fixed assets, and liabilities. These balances will form the base for future transactions.
Step 4: Record Transactions as Double-Entry: After the opening balances are set, begin recording all future transactions as per the double-entry system (both debit and credit). Make sure to create corresponding journal entries for every transaction and post them into the ledger accounts.
Step 5: Closing of Accounts: At the end of the accounting period, prepare financial statements (Income & Expenditure Account and Balance Sheet) to verify the correctness of the entries and balances.
2. Retrospective Effect Conversion (For Past Periods): In this method, you attempt to reconstruct the accounts from the start of the business or from a specific past period, to bring all past records into the double-entry system.
Step 1: Reconstruct the Previous Year’s Balances: You need to create a record of all transactions from the time the business started. If the business was initially on a single-entry system, some level of estimation or approximation may be required, especially for past assets, liabilities, or incomplete records.
Step 2: Identify and Record Opening Balances: You need to create opening balances for capital, liabilities, assets, and income or expenditure items from the historical records. This requires careful analysis of the receipts, payments, and any available financial data, which might involve cross-referencing older bank statements or sales invoices.
Step 3: Analyze Revenue and Expenses: Identify all revenue and capital receipts from the past records. Similarly, all expenses (both capital and revenue) need to be identified and recorded under the appropriate heads, ensuring a correct transfer of data into the new system.
Step 4: Rectify Previous Mistakes: If any errors were present in the earlier single-entry system, such as missing transactions or incorrect valuations, these need to be rectified and adjusted in the new double-entry system.
Step 5: Record Past Transactions as Double-Entry: After the initial reconstruction of accounts, record all past transactions as double-entry. This includes all debits and credits for past years, adjusting for any corrections or missing entries. This helps in ensuring consistency and accuracy in the financial statements.
Step 6: Prepare Financial Statements: Finally, prepare the financial statements, such as the Income and Expenditure Account, Balance Sheet, and Cash Flow Statement, with the adjusted balances. These statements now reflect a true and fair view of the business's financial position over the past periods.
Conclusion: The conversion method helps transition from the single-entry system to the double-entry system by ensuring that all records, assets, liabilities, income, and expenses are correctly identified, recorded, and balanced. The perspective effect conversion ensures that future transactions are properly handled, while the retrospective effect conversion aims to correct and adjust past records. Both methods are essential for businesses that need to upgrade their accounting systems to ensure transparency, accuracy, and compliance with accounting standards.
5. (a) (i) Explain the main features of Receipts and Payments Account. 6
Answer: A Receipts and Payments Account is a summary of all cash and bank transactions made by a non-trading or not-for-profit organization during an accounting period. It records both revenue and capital items, whether they relate to the current year, past year, or future periods.
Following are the main features of the Receipts and Payments Account:
Summary of Cash Transactions: It records all cash and bank transactions (receipts and payments) made during the year.
Prepared on Cash Basis: Only actual cash received and paid is recorded. No outstanding or prepaid items are included.
Includes All Receipts and Payments: It includes both revenue and capital items, regardless of the period to which they belong.
No Non-Cash Items: Non-cash items like depreciation, outstanding expenses, and accrued incomes are not shown.
Debit and Credit Sides: All receipts are recorded on the debit side and all payments on the credit side of the account.
Opening and Closing Balance: It begins with the opening cash/bank balance and ends with the closing cash/bank balance.
This account helps in preparing the Income and Expenditure Account and provides a clear picture of the cash position of the organization.
(ii) From the following Receipts and Payments Account for the year ended 31st December, 2023 and other details of Dibru Club, prepare an Income and Expenditure Account for the year ended on 31st December, 2023: 8
Other details:
(1) Salary outstanding Rs. 1,500.
(2) Rent outstanding Rs. 200.
(3) Provide depreciation on furniture Rs. 200 and building Rs. 500
Solution:
Income and Expenditure Account of Diburu Club for the year ended 31st December 2023
Deficit: 52,550 - 12,500 = Rs. 40,050
Additional Notes:
Capital Items: Building construction (Rs. 3,000), Legacies (Rs. 5,000), and Capital Grant (Rs. 2,000) are excluded as they go to the Balance Sheet, not the Income and Expenditure Account.
Prize Fund Donation (Rs. 6,000): Treated as a liability (Prize Fund) on the Balance Sheet, not as income.
Sale of Old Furniture (Rs. 2,000): This is a capital receipt. If the book value of the furniture sold is given, we’d calculate a gain/loss, but since it’s not specified, it’s excluded from this account.
The deficit of Rs. 40,050 will reduce the Accumulated Fund (or Capital Fund) of the club on the Balance Sheet.
Final Answer
Total Income: Rs. 12,500
Total Expenditure: Rs. 52,550
Deficit: Rs. 40,050
Or
(b) What is depreciation? Why is depreciation important? Mention the features of Accounting Standard (AS)10 related to depreciation.
Answer: Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It represents the wear and tear, obsolescence, or reduction in the value of a tangible asset over time.
Importance of Depreciation:
Accurate Financial Reporting: Depreciation helps in reflecting the true and fair view of the financial position of a business by gradually reducing the value of assets over time.
Cost Recovery: It allows businesses to recover the cost of an asset over its useful life, matching the expense with the revenue generated by the asset.
Tax Benefits: Depreciation is a non-cash expense that reduces taxable income, thereby lowering the tax liability of a business.
Asset Management: It aids in the planning and budgeting for the replacement of assets by providing insights into the remaining useful life of assets.
Performance Evaluation: Depreciation helps in evaluating the performance of assets and the overall efficiency of the business operations.
Features of Accounting Standard (AS) 10 Related to Depreciation:
Accounting Standard (AS) 10 deals with "Property, Plant, and Equipment" and provides guidelines on the accounting treatment of depreciation. Key features include:
Depreciable Amount: The depreciable amount of an asset is its cost, less its residual value. The cost includes all expenditures necessary to bring the asset to its working condition.
Useful Life: The useful life of an asset is the period over which the asset is expected to be used by the entity or the number of production units expected to be obtained from the asset.
Depreciation Methods: AS 10 allows various depreciation methods such as the straight-line method, diminishing balance method, and units of production method. The chosen method should reflect the pattern in which the asset's economic benefits are consumed.
Review of Useful Life and Residual Value: The useful life and residual value of an asset should be reviewed at least at each financial year-end. If there are significant changes, the depreciation amount should be adjusted prospectively.
Disclosure Requirements: AS 10 requires disclosures related to depreciation methods used, useful lives or depreciation rates, gross carrying amount, and accumulated depreciation at the beginning and end of the period.
Component Depreciation: If an asset comprises significant components with different useful lives, each component should be depreciated separately to ensure accurate allocation of depreciation expense.
Impairment of Assets: If there is any indication that an asset may be impaired, the entity should assess the recoverable amount of the asset and recognize an impairment loss if the carrying amount exceeds the recoverable amount.
Conclusion: Depreciation is a crucial accounting concept that ensures the accurate representation of an asset's value over time. Adhering to AS 10 guidelines helps businesses maintain transparency, comply with regulatory requirements, and make informed financial decisions. Understanding and applying these principles are essential for effective financial management and reporting.
6. (a) A company purchased a machinery on hire-purchase system for Rs. 56,000, Rs. 15,000 paid down and three installments of Rs. 15,000 each at the end of the year. Rate of interest is charged at 5% per annum. Buyer is depreciating the machine at 10% p.a. on written-down value method.
Because of financial difficulties, company after having paid down payment and first installment at the end of first year could not pay the second installment and the seller took possession of the machine. Seller after paying Rs. 500 on repairs of the machine sold it away for Rs. 30,200.
Show the Ledger Accounts in the books of both the parties. 14
Solution:
Ledger Accounts in the Books of the Buyer (Company)
1. Machinery Account
2. Hire-Purchase Vendor Account
Outstanding Balance at End of Year 1: Rs. 28,050 (as calculated).
Book Value at Repossession: Rs. 50,400.
Loss on Repossession: The buyer transfers the machinery back at book value (50,400), but the outstanding liability is 28,050. Additionally, the buyer has paid 15,000 (down) + 15,000 (first installment) = 30,000, and incurred depreciation of 5,600. The net loss is reflected in the Profit & Loss A/c.
3. Depreciation Account
4. Interest Account
Ledger Accounts in the Books of the Seller (Hire-Purchase Vendor)
1. Buyer’s Account (Hire-Purchase Debtor)
Repossessed Value: The seller typically values the repossessed machinery at the outstanding principal plus interest due, adjusted for market value. Outstanding after first installment = 28,050 + 1,402 (interest for Year 2) = 29,452. This is the book value at repossession.
2. Hire-Purchase Sales Account
3. Machinery Account (Repossessed)
Profit on Resale: Repossessed value = 29,452. Repairs = 500. Total cost = 29,452 + 500 = 29,952. Sold for 30,200. Profit = 30,200 - 29,952 = Rs. 248.
4. Interest Account
Final Answer
In the Books of the Buyer (Company):
Machinery A/c: Transferred to vendor at Rs. 50,400 after depreciation of Rs. 5,600.
Hire-Purchase Vendor A/c: Loss on repossession = Rs. 5,600.
Depreciation A/c: Rs. 5,600.
Interest A/c: Rs. 2,050 for Year 1.
In the Books of the Seller (Hire-Purchase Vendor):
Buyer’s A/c: Machinery repossessed at Rs. 29,452.
Hire-Purchase Sales A/c: Sale recorded at Rs. 56,000.
Machinery A/c (Repossessed): Sold for Rs. 30,200, profit of Rs. 248.
Interest A/c: Total interest earned = Rs. 3,452 (2,050 + 1,402).
Or
(b) Explain the following:
(i) Book building process.
(ii) Statutory Audit under the Companies Act, 2013.
(iii) Books of Accounts under Section 128 of the Companies Act, 2013. 14
Answer:
(i) Book Building Process: Book building is a modern method used by companies to fix the price of their shares when they raise money from the public through an IPO (Initial Public Offer). In this process:
The company does not fix a single price but gives a price band (for example, Rs. 100 to Rs. 120).
Investors are invited to bid within this band, stating how many shares they want and at what price.
These bids are recorded in a book called an "order book," maintained by a lead manager.
After the bidding period ends, the company and its managers analyze the bids and fix a final price, called the cut-off price.
This price is based on demand for the shares at different price levels.
It helps the company to get the best possible price and reduces the chances of underpricing or overpricing.
Book building is considered more efficient and transparent than the fixed price method. It ensures better price discovery and reflects the true market demand.
(ii) Statutory Audit under the Companies Act, 2013: A statutory audit is a legal requirement under the Companies Act, 2013. It means the company must get its financial records audited by a professional (Chartered Accountant) to ensure everything is correct and legal. Key points include:
As per Section 139 of the Companies Act, every company (except One Person Companies and some small companies) must appoint an auditor.
The auditor examines the books of accounts, financial statements, and related documents.
The auditor gives an audit report stating whether the company’s financial statements give a true and fair view of its financial position.
The audit ensures transparency, accuracy, and helps prevent fraud or mismanagement.
The report is presented to shareholders during the Annual General Meeting (AGM).
A statutory audit is important because it increases the trust of shareholders, investors, and the government in the company’s financial honesty.
(iii) Books of Accounts under Section 128 of the Companies Act, 2013: Section 128 of the Companies Act, 2013 talks about the maintenance of books of accounts by a company. The Following are the Key provisions:
Every company must keep proper books of accounts that show:
All money received and spent by the company.
All sales and purchases made.
All assets and liabilities.
In some cases, cost records as well.
The books can be kept in physical (paper) or electronic form.
These books must be kept at the registered office of the company. If kept elsewhere, the Registrar of Companies (ROC) must be informed.
Directors have the right to inspect the books of accounts at any time.
The books must be kept safely for at least 8 years from the date they were created.
For companies with foreign operations, books related to foreign branches must also be kept and regularly updated.
Maintaining proper books ensures transparency, helps in audits, and protects the company in legal and tax matters.
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