CA Foundation May 2022 Suggested Answers Paper 1 Principles and Practice of Accounting (Old Scheme)

FOR CA FOUNDATION EXAM PREPARATION

CA Foundation 2022
Suggested Answers ·
Paper 1 Principles and
Practice of Accounting
(Old Scheme)
EXAM YEAR TYPE

CA Foundation 2022 Suggested Answers
SUBJECT DATE

Paper 1 Principles and Practice of Accounting (Old Scheme) May 2022

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 1: PRINCIPLES AND PRACTICE OF ACCOUNTING

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Question No. 1 is compulsory.

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Attempt any four questions from the remaining five questions.
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Wherever necessary, suitable assumptions should be made and disclosed by way of note
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l 1s Working Notes should form part of the answer.
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a(a) State with reasons, whether the following statements are True or False:
Question

(i) A claim that an enterprise is pursuing through legal process, where the outcome is
uncertain, is a Contingent Liability. ·
(ii) At the end of the accounting year, all the nominal accounts of the ledger book are
balanced.
(iii) The specific due date excludes the addition of grace days to arrive at the due date.

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(iv) Any amount spent for replacement of worn out part of a machine is capital
expenditure.
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. on the Liability side of the Balance Sheet of
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(v) Debentures Suspense Account appears

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l preparing trial balance, then all the errors are rectified
a Company.

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(vi) If the errors are detected after
through suspense account. (6 x 2 = 12 Marks)
(b) Briefly explain the following Concepts of Accounting:
(i) Money Measurement Concept
(ii) Periodicity Concept. (4 Marks)
(c) One of your clients Mr. X asked you to finalize his account for the year ended
31st March,2022. As a basis for audit, Mr. X furnished you with the following statement:

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Dr. Cr.

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X's Capital 4,668
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X's Drawings 1,692

s em Leasehold Premises 2,250
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gla Sales 8,250
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a Due from customers
Purchases 3,777
1,590

Purchase Return 792

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2 FOUNDATION EXAMINATION: MAY, 2022

Loan from Bank 768
Trade Expense 2,100
Trade Payable 1,584
Bills Payable 300
Salaries and Wages 1,800
Cash at Bank 678
Opening Inventory 792
Rent and Rates 1,389
Sales Return 294
16,362 16,362
The closing inventory was `1,722. Mr. X claims that he has recorded every transaction
correctly as the trial balance is tallied. Check the accuracy of the above trial balance and
give reasons for the errors, if any. (4 Marks)
Answer
(a) (i) False: A claim that an enterprise is pursuing through legal process, where the
outcome is uncertain, is a contingent asset.
(ii) False: At the end of the accounting year, all the nominal accounts of the ledger book
are totalled and transferred to Profit & Loss A/c.
(iii) True: Where the due date is specifically given, then there is no need of further
addition of 3 days grace to it.
(iv) False: Amount spent for replacement of any worn- out part of a machine is revenue
expense since it is part of its maintenance cost.
(v) False: Debentures Suspense Account appears on asset side of Balance Sheet under
Non-Current Asset.
(vi) False: If the errors are detected after preparing trial balance, then all the errors are
not rectified through suspense account. There may be Errors of Principle and/or
Errors of Omission, which can be rectified without opening a suspense account.
(b) Money Measurement concept: As per this concept, only those transactions, which can be
measured in terms of money are recorded. Since money is the medium of exchange and
the standard of economic value, this concept requires that those transactions alone that
are capable of being measured in terms of money be only to be recorded in the books of
accounts. Transactions and events that cannot be expressed in terms of money are not
recorded in the business books.

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 3

Periodicity concept: According to this concept, accounts should be prepared after every
period not at the end of the life of the entity. This is also called the concept of definite

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accounting period. Usually, this period is one accounting year. We generally follow from

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1st April of a year to 31st March of the immediately following year.
(c)
.c o Corrected Trial Balance of Mr. X as on 31 st March, 2022
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eCapital l a s
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Particulars Dr. Amount ` Cr. Amount `

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l X’s Drawings ag
X’s 4,668
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a Leasehold premises 1,692
2,250
Sales 8,250
Due from customers 1,590
Purchases 3,777
Purchases returns 792
Loan from Bank 768

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Trade expenses 2,100
Trade Payable
. c 1,584
Bills payable
s em 300
Salaries and Wages
g l a 1,800
Cash at Bank
Inventory (1.4.2021)
a 678
792
Rent and rates 1,389
Sales return 294
16,362 16,362
Reasons:

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1. Due from customers is an asset, so its balance will be a debit balance.

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2. Purchases return account always shows a credit balance because assets goes out.

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3. Trade Payable is a liability, so its balance will be a credit balance.
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la a assets come in.
5. Inventory (opening) represents assets, so it will have a debit balance.

ag 6. Sales return account always shows a debit balance because

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4 FOUNDATION EXAMINATION: MAY, 2022

Question 2
(a) The Machinery Account of a Factory showed a balance of ` 95 Lakhs on 1st April,2020.
The Books of Accounts
Depreciation is written off of the Factory are closed on 31st March every year and @ 10%
per annum under the Diminishing Balance Method. On 1st September,2020 a new machine
was acquired at a cost of ` 14 Lakhs and ` 44,600 was incurred on the same day as
installation charges for erecting the machine. On 1st September,2020 a machine which had
cost ` 21,87,000 on 1st April,2018 was sold for ` 3,75,000. Another machine which had
cost ` 21,85,000 on 1st April,2019 was scrapped on 1st September,2020 and it realized
nothing.
Prepare Machinery Account for the year ended 31st March,2021. Allow the same rate of
depreciation as in the past and calculate depreciation to the nearest multiple of a rupee.
Also show all the necessary working notes. (10 Marks)
(b) Zed Enterprises furnishes the following information for the year ended 31st March,2021.
Particulars Amount (`)
Value of Stock as on 1st April,2020 28,00,000
Purchases during the year 1,38,40,000
Manufacturing Expenses during the year 28,00,000
Sales during the year 2,08,80,000
The following further information is also provided:
(i) At the time of valuing stock on 31st March,2020 a sum of ` 2,40,000 was written off
for a particular item which was originally purchased for ` 8,00,000. This item was sold
during the year ended 31st March,2021 for ` 6,40,000.
(ii) Except for the above transaction, the rate of gross profit during the year was 1/3rd on
cost.
Ascertain the value of Stock as on 31st March,2021. (5 Marks)
(c) From the following particulars, prepare a Bank Reconciliation Statement on 31st March
2021·
Particulars Amount (`)
Bank balance as per Pass Book 25,00,000
Bills discounted dishonored not recorded in Cash Book 12,50,000
Cheque received entered twice in Cash Book 25,000
Bank charges entered twice in Cash Book 5,000
Insurance premium paid directly by Bank under-standing instruction 1,50,000
Cheque issued but not presented to Bank for payment 12,50,000

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 5

Cheque received, but not sent to Bank 28,00,000
Cheque deposited in Bank, but no entry passed in the Cash Book 12,50,000

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Credit side of the Bank column cast short 5,000

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(5 Marks)

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Answer

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(a) Plant and Machinery Account for the year ended 31 st March,2021

ag 01-04-20 To Balance b/d
` `
95,00,000 01-09-20 By Bank (Sales) 3,75,000
01-09-20 To Bank By Depreciation
(14,00,000 + 14,44,600 (on sold machine) 73,811
44,600)
By Loss on sale 13,22,659
By Loss on
scrapping the 18,84,562

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machine

. By Depreciation

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(on Scrapped 81,938

l a s machinery)

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(Note iii)
6,60,471

By Balance c/d 65,46,159
109,44,600 109,44,600
Working Note:
(i) Calculation of loss on sale of machine on 01-09-2020
`

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Cost on 1-4-2018 21,87,000

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Less: Depreciation @ 10% on ` 21,87,000 (2,18,700)

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W.D.V. on 31-03-2019 19,68,300

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Less: Depreciation @ 10% on ` 19,68,300 (1,96,830)

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W.D.V. on 31-03-2020 17,71,470

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Less: Depreciation @ 10% on ` 17,71,470 for 5
a (73,811)

a months
16,97,659
Less: Sale proceeds on 01-09-2020 (3,75,000)
Loss 13,22,659

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6 FOUNDATION EXAMINATION: MAY, 2022

(ii) Calculation of loss on scrapped machine
Cost on 1-4-2019 21,85,000
Less: Depreciation @ 10% on ` 21,85,000 (2,18,500)
W.D.V. on 31-3-2020 19,66,500
Less: Depreciation @ 10% on `19,66,500 for 5
(81,938)
months
Loss 18,84,562
(iii) Depreciation
Balance of machinery account on 1-4-2020 95,00,000
Less: W.D.V of machinery sold 17,71,470
W.D.V. of machinery scrapped 19,66,500 (37,37,970)
Balance of other machinery after sale and scrap on
57,62,030
1-4-2020
Depreciation @ 10% on ` 57,62,030 for 12 months 5,76,203
Depreciation @ 10% on ` 14,44,600 for 7 months 84,268
6,60,471
Note: The figures are rounded off to nearest rupee.
(b) Statement of Valuation of Stock as on 31 st March, 2021
`
Value of stock as on 1st April, 2020 28,00,000
Add: Purchases during the year 1,38,40,000
Add: Manufacturing expenses during the above period 28,00,000
1,94,40,000
Less: Cost of sales during the period:
Sales 2,08,80,000
Less: Gross profit 51,40,000 1,57,40,000
Value of stock as on 31.3.2021 37,00,000
Working Note:
`
Calculation of gross profit:
Gross profit on normal sales 25/100 x (2,08,80,000 -6,40,000) 50,60,000
Gross profit on the particular (abnormal) item 6,40,000 - (8,00,000 – 80,000
2,40,000)
51,40,000

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 7

The value of closing stock on 31 st March, 2021 may, alternatively, be found out by
preparing Trading Account for the year ended 31st March, 2021.

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Alternatively the solution can be presented in the following manner:

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Dr Trading account for the year ended 31 st March, 2021 Cr

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Normal Abnormal Total Normal Abnormal Total

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To Opening 22,40,000 5,60,000 28,00,000 By Sales 2,02,40,000 6,40,000 2,08,80,000

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Stock

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13,8,40,000 0 1,38,40,000 By Closing 37,00,000 0 37,00,000
To Purchases 28,00,000 0 28,00,000 Stock
To Manufacturing
Expenses 50,60,000 80,000 51,40,000
To Gross Profit
(Working Note)*
Total 2,39,40,000 6,40,000 2,45,80,000 2,39,40,000 6,40,000 2,45,80,000

(c) Bank Reconciliation Statement as on 31 st March,2021
` `

o mbook 12,50,000
Bank balance as per Pass book 25,00,000

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Cheque received entered twice in the. cash book
Add: Bills dishonoured not recorded in the cash

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25,000

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Insurance premium paid directly not recorded in the
1,50,000

Cheque received but a
cash book
not sent to the bank 28,00,000
Credit side of the bank column cast short 5,000 42,30,000
67,30,000
Less: Cheque deposited into the bank but no entry was
12,50,000
passed in the cash book
Bank charges recorded twice in the cash book 5,000

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Cheque issued but not presented to the bank 12,50,000 (25,05,000)

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Bank balance as per Cash book
.c o 42,25,000

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(a) M of Mumbai sent on consignment, goods valued ` 4,00,000 s
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to A of Agra on

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1 March,2020. He incurred the expenditure of `48,000 on freight
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st

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accounting year closes on 31 December. A was entitled to a commission
st of 5% on gross
sales plus a del-credere commission of 3%. A took delivery of the consignment by incurring
expenses of ` 12,000 for the goods consigned.

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8 FOUNDATION EXAMINATION: MAY, 2022

On 31/12/2020, A informed on phone that he had sold all the goods for ` 6,00,000 by
incurring selling expenses of ` 8,000. He further informed that only ` 5,92,000 had been
realized and rest was considered irrecoverable, and would be sending the cheque in a day
or so for the amount due along with the accounts sale.
On 5/1/2021, M received the cheque for the amount due from A and incurred bank charges
of `1,040 for collecting the cheque. The amount was credited by the bank on 9/1/2021.
Write up the consignment account finding out the profit/loss on the consignment and A's
account in the books of M. (10 Marks)
(b) P sends out goods on approval to few customers and includes the same in the Sales
Account. On 31.3.2021, the Trade receivables balance stood at ` 3,00,000 which included
` 21,000 goods sent on approval against which no intimation was received during the year.
These goods were sent out at 25% over and above cost price and were sent to Mr. A
`12,000 and Mr. B ` 9,000.
Mr. A sent intimation of acceptance on 30th April and Mr. B returned the goods on
10th April,2021.
Make the adjustment entries and show how these items will appear in the Balance Sheet
on 31st March,2021. Also show the entries to be made during April,2021. Value of closing
inventories as on 31st March,2021 was ` 1,80,000. (5 Marks)
(c) Attempt any ONE of the following two sub-parts i.e. either (i) or (ii):
(i) The following particulars are sent by Mr. A to Mr. K:
Date Particulars Amount
(` )
15/7/2021 Balance due from Mr. K 6,000
20/8/2021 Sold goods to Mr. K 10,000
25/8/2021 Goods returned by Mr. K 1,600
15/9/2021 Cheque paid by Mr. K 6,400
20/10/2021 Cash received from Mr. K 4,000
Prepare an Account Current as sent by Mr. A to Mr. K as on 31 st October,2021 by
means of product method charging interest @ 8% per annum. Round off the amounts
to the nearest rupee. (5 Marks)
(ii) Mr. X gives the following particulars in respect of business carried on by him:
Particulars Amount (`)
Capital Invested in business 9,00,000
Market rate of interest on investment 8%
Rate of risk return on capital invested in business 3%

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 9

Remuneration per annum from alternative employment of 36,000
proprietor if he was not engaged in business

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The business earned profits of ` 2,40,000, ` 2,16,000 and ` 3,00,000 in the years 2018,

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2019 and 2021 respectively but made a loss of ` 36,000 in the year 2020.

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Compute the value of Goodwill on the basis of 6 years' purchase of super profits of the

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business, calculated on the basis of average profit of last four years. (5 Marks)
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Answer
In the books of Mr. M
Consignment to Agra Account
2020 ` 2020 `
March 1 To Goods sent on consignment A/c 4,00,000 Dec. 31 By A’s A/cs 6,00,000
To Cash A/c (freight and insurance) 48,000
Dec. 31 To A’s A/c:
Clearance expenses 12,000
Selling expenses
o m8,000

@ 5% on ` 6,00,000 = 30,000 .
Commission
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Del-credere commission @s3%

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a (bank 1,040
on ` 6,00,000 =
Dec. 31 To Provision for expenses
charges)
To Profit and loss A/c (profit on 82,960
consignment)
6,00,000 6,00,000

A’s Account

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2020 ` 2020 `

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Dec. To Consignment A/c 6,00,000 Dec. By Consignment A/c-
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31 31

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Clearance expenses 12,000

s g la 30,000
Selling expenses 8,000

gla Del-credere a
Commission

a commission
18,000 68,000

By Balance c/d 5,32,000
6,00,000 6,00,000

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10 FOUNDATION EXAMINATION: MAY, 2022

(b) In the Books of P
Journal Entries
Date Particulars L.F. ` `
2021 Sales A/c Dr. 21,000
Mar, 31 To Trade receivables A/c* 21,000
(Being the cancellation of original entry for
sale in respect of goods lying with
customers awaiting approval)
*To Mr. A ` 12,000 and To Mr. B ` 9,000
can be given
Mar,31 Inventories with Customers on Sale or Dr. 16,800
Return A/c
To Trading A/c 16,800
(Being the adjustment for cost of goods
lying with customers awaiting approval)
April,30 Trade receivables A/c or Mr. A A/c Dr. 12,000
To Sales A/c 12,000
(Being goods costing ` 9,600 sent to
Mr. A on sale or return basis has been
accepted by him)

Balance Sheet of P as on 31 st March, 2021 (Extracts)
Assets ` `
Trade receivables ( `3,00,000 - ` 21,000) 2,79,000
Inventories-in-trade 1,80,000
Add: Inventories with customers on Sale or Return 16,800 1,96,800
100/125 x ` 21,000 = ` 16,800
4,75,800
(c) (i) K in Account Current with A
(Interest to 31st October 2021, @ 8% p.a.)
Date Particulars Amount Days Products Date Particulars Amount Days Products
2021 ` 2021 `
15.7.21 To Balance 6,000 109 6,54,000 25.8.21 By Sales 1,600 67 1,07,200
b/d Returns
20.8.21 To Sales 10,000 72 7,20,000 15.9.21 By Bank 6,400 46 2,94,400
A/c A/c

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 11

31.10.21 To Interest 203 - - 20.10.21 By Cash 4,000 11 44,000
A/c A/c

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31.10.21 By Balance - - 9,28,400

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of products

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By Balance 4,203 - -

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c/d

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16,203 13,74,000 16,203 13,74,000

s eCalculation of interest: l
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9,28,400 8
Interest = × 100 = ` 203
365
OR
(ii) Computation of Goodwill of Mr. X
Average maintainable profits: `
Trading profit during 2018 2,40,000
2019 2,16,000

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2021 3,00,000

. co 7,56,000

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Less: Loss during 2020 (36,000)
Total
l a s 7,20,000

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Average Profits ( ` 7,20,000 / 4)
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Less: Remuneration for the proprietor
1,80,000
(36,000)
Average maintainable Profit 1,44,000
Less: Normal Profit (11% on capital employed of (99,000)
` 9,00,000)
Super Profit 45,000
Goodwill at 6 year’s purchase of Super Profit 2,70,000

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Alternative: `

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Total profit (` 2,40,000 + ` 2,16,000 + ` 3,00,000 - ` 36,000) = ` 7,20,000

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= s(36,000)
Normal Profit (11% on capital employed of ` 9,00,000) = (99,000)

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ag (1,35,000)
Remuneration for the proprietor

gla
a Average Profits (` 7,20,000 / 4)
Super Profit
1,80,000
45,000
Goodwill at 6 year’s purchase of Super Profit = 2,70,000

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12 FOUNDATION EXAMINATION: MAY, 2022

Question 4
(a) The following is the Receipts and Payments Account of Mumbai Club for the year ended
March 31, 2021:
Receipt and Payment Account of Mumbai Club
Receipts Amount Payments Amount
(` ) (` )
Cash in hand 20,000 Ground man's Fee 75,000
Balance at Bank as per Purchase of Equipment’s 1,55,000
Pass Book:
Saving Account 1,93,000 Rent of Ground 25,000
Current Account 60,000 Club night expenses 38,000
Bank Interest 5,000 Printing and Office Expenses 30,000
Donations and Subscriptions 2,50,000 Repairs to Equipment 50,000
Entrance fees 18,000 Honorarium to Secretary 40,000
(2019-20)
Contribution to Club night 10,000 Balance at Bank as per Pass
Book:
Sale of Equipment 8,000 Saving Account 2,04,000
Bar Room receipts 20,000 Current Account 20,000
Proceeds from club night 78,000 Cash in hand 25,000
6,62,000 6,62,000
You are given the following additional information (All figures are in `)
01.04.20 31.03.21
Subscription due 15,000 10,000
Amount due for printing etc. 10,000 8,000
Cheques unpresented being payment for repairs 30,000 25,000
Interest not yet entered in the Pass book - 2,000
Estimated value of machinery and equipment 80,000 1,75,000
For the year ended March 31, 2021, the honorarium to the Secretary is to be increased by
a total of ` 20,000 and Ground man is to receive a bonus of ` 20,000. Prepare the Income
and Expenditure Account for period ended 31st March,2021 and the Balance Sheet as at
that date. (10 Marks)

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 13

(b) X, Y and Z are partners sharing profits and losses in the ratio of 1:2:3. Their Balance Sheet
as on 31st March,2021 was as follows:

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Liabilities Amount (`) Assets Amount (`)

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Capitals: Building 2,50,000
X
m . 1,75,000 Machinery 3,37,500
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Y 2,50,000 Debtors 3,25,000

l a Z 4,00,000 Stock 4,00,000

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General Reserve 3,00,000 Bank 62,500
Trade Creditors 2,50;000
Total 13,75,000 Total 13,75,000
Z retired from business on 1st April,2021 on the following terms:
(i) Building to be appreciated by 25%.
(ii) X and Y to bring in additional capital of ` 5,00,000 each.
(iii) Machinery to be depreciated by 10%.

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(iv) Stock is revalued at ` 3,72,250.

e m purchase of average profits of past 3 years.
(v) Provision for Doubtful Debts to be created at 4%.

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a ` 2,75,000, ` 2,50,000 and ` 1,95,000 respectively.
(vi) Goodwill was to be valued at 3 years'

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a in the Books of Accounts.
The profits of past 3 years were
(vii) Goodwill was not to be raised
(viii) Balance payable to Z was to be paid immediately.
Prepare Revaluation Account, Bank Account and Partners' Capital Accounts after giving
effect to Z's retirement, Also show the valuation of Goodwill and pass a Journal Entry for
adjustment of Goodwill. (10 Marks)
Answer

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(a) Income and Expenditure Account of Mumbai Club

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for the year ending 31 st March, 2021
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c. o Expenditure ` Income
Donations sand
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e 2,45,000
s em la
To Groundsman’s 75,000 By

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fee
a g
Subscription (W.N.2)

ag To Rent of Ground
To Club night’ 38,000
25,000
By Receipts from bar 20,000
Expenses room
Less: Contribution (10,000) 28,000*

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14 FOUNDATION EXAMINATION: MAY, 2022

To Printing & Office 28,000 By Proceeds of club night 78,000*
Expenses (W.N. 3)
To Repairs to 45,000 By Interest (5,000+2,000) 7,000
Equipment (W.N.4)
To Depreciation on 52,000
Machinery (W.N. 5)
To Honorarium to 60,000
Secretary

To Bonus to 20,000
Groundsman
To Excess of Income
over
Expenditure 17,000
3,50,000 3,50,000
* Alternatively, the profits from club night can be shown as the net amount of ` 50,000
(` 78,000 - ` 28,000) on the credit side of Income and Expenditure Account.
Balance Sheet of Mumbai Club as on 31 st March,2021
Liabilities ` Assets `
Outstanding Expenses:
Groundsman Bonus 20,000 Cash in hand 25,000
Printing 8,000 Cash in Saving A/c 2,04,000
Honorarium 60,000 Subscription Receivable 10,000
(40,000+20,000)
Bank Overdraft 5,000 Interest Due 2,000
(25,000-20,000)
Capital Fund: Opening 2,88,000 Machinery & Equipment’s 1,75,000
Add: Surplus for the year 17,000
Add: Entrance Fees 18,000 3,23,000
4,16,000 4,16,000
Balance Sheet as on 1 st April,2020
Liabilities ` Assets `
Outstanding Expenses Cash in hand 20,000
Printing 10,000 Cash in Saving A/c 1,93,000

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 15

Honorarium to Secretary 40,000 Cash in Current A/c 30,000
Capital Fund (Balancing Figure) 2,88,000

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Subscription Receivable 15,000

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Machinery & Equipment’s

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3,38,000 3,38,000

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Calculation of Donations and Subscriptions `

a Donations and Subscriptions as per Receipt and Payments A/c 2,50,000
Add: Outstanding as on 31.03.21 10,000
Less: Outstanding as on 01.04.20 15,000
2,45,000
Printing and Office Expenses `
Printing and Office Expenses as per Receipt and Payments A/c 30,000

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Add: Outstanding as on 31.03.21 8,000

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Less: Outstanding as on 01.04.20 10,000

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28,000

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Repairs to Equipment `
Repairs as per Receipt andaPayments 50,000
Add: Outstanding as on 31.03.21 25,000
Less: Outstanding as on 01.04.20 30,000
45,000
Depreciation on Machinery and equipment `
Balance as on 01.04.20 80,000

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Add: Purchases during the year 1,55,000

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Less: Sale of Equipment 8,000

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Less: Balance as on 31.03.21 1,75,000

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l as (b) In The Books of X, Y and Z
a g
ag Particulars
Revaluation A/c
` Particulars `
To Provision for Doubtful Debts 13,000 By Building 62,500

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16 FOUNDATION EXAMINATION: MAY, 2022

To Machinery 33,750 By Loss on revaluation
To Stock 27,750 X 2,000
Y 4,000
Z 6,000 12,000
74,500 74,500
Partners’ Capital A/c
Particulars X Y Z Particulars X Y Z
To Loss on 2,000 4,000 6,000 By Balance b/d 1,75,000 2,50,000 4,00,000
Revaluation
To Bank - - 9,04,000 By General 50,000 1,00,000 1,50,000
Reserve
To Z’s 1,20,000 2,40,000 - By X and Y’s - - 3,60,000
Capital Capital
To Balance 6,03,000 6,06,000 - By Bank 5,00,000 5,00,000 -
c/d
7,25,000 8,50,000 9,10,000 7,25,000 8,50,000 9,10,000

Bank A/c
Particulars ` Particulars `
To Balance b/d 62,500 By Z’s Capital 9,04,000
To X’s Capital 5,00,000 By Balance c/d 1,58,500
To Y’s Capital 5,00,000
10,62,500 10,62,500
Valuation of Goodwill:
Total Profit of past 3 years = ` 2,75,000 + ` 2,50,000 + ` 1,95,000 = ` 7,20,000
Average profit = ` 7,20,000 / 3 = ` 2,40,000
Goodwill (3 years purchase) = ` 2,40,000 x 3 = ` 7,20,000
Z’s share = (3/6)th = ` 7,20,000 X 1/2 = ` 3,60,000
Journal entry for adjustment of goodwill
X’s capital A/c Dr. 1,20,000
Y’s capital A/c Dr. 2,40,000
To Z’s capital A/c 3,60,000
(Being Goodwill adjusted through Partners Capital account as per gaining ratio)

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 17

Question 5
The following is the trial balance of Mr. B for the year ended 31st March,2021:

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Particulars Dr. Particulars Cr.

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Opening Stock: Sundry Creditors 1,75,000

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Raw Material 5,25,000 Purchase Return 17,500
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l a sFinished Goods 2,62,500 Capital 3,50,000
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Purchase of Raw Material 17,50,000 Bills Payable 84,000
Land & Building 3,50,000 Long Term Loan 7,00,000
Loose Tools 1,05,000 Provision for bad
Plant and Machinery 1,05,000 and doubtful debts 7,000
Investments 87,500 Sales 29,75,000
Cash in Hand 70,000 Bank Overdraft 80,500
Cash at Bank 17,500
Furniture and Fixtures 52,500

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Bills Receivables 52,500
Sundry Debtors 1,40,000
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Drawings 70,000
Salaries
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70,000

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Coal and Fuel 52,500
Factory rent and rates 70,000
General Expenses 14,000
Advertisement 17,500
Sales Return 35,000
Bad Debts 14,000
Direct Wages (Factory) 2,80,000

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Power 1,05,000

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Interest paid 24,500

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Discount allowed 10,500

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Carriage inwards 52,500

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Carriage outwards 24,500

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Commission paid 17,500
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a Dividend paid 14,000
43,89,000 43,89,000

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18 FOUNDATION EXAMINATION: MAY, 2022

Additional Information:
(i) Stock of finished goods at the end of the year was ` 3,50,000.
(ii) A provision for doubtful debts is to be created @ 5% on Sundry Debtors. Provide
Depreciation on building 3,500 and Plant and Machinery 10,500.
(iii) Accrued commission is 43,750. Interest has accrued on investment ` 52,500.
(iv Salary Outstanding is ` 7,000 and Prepaid Interest is ` 5,250.
You are required to prepare Manufacturing, Trading and Profit & Loss Account for the year
ended 31st March,2021 and Balance Sheet as at that date. (20 Marks)
Answer
In the books of Mr. B
Manufacturing Account for the year ended 31 st March, 2021
Particulars ` Particulars `
To Opening Stock of 5,25,000 By Cost of Manufactured 28,28,000
Raw Materials goods transferred to
Trading A/c
To Purchase 17,50,000
Less: Purchase Return 17,500 17,32,500
To Carriage Inwards 52,500
To Direct Wages 2,80,000
To Power 1,05,000
To Coal and fuel 52,500
To Factory Rent and
70,000
Rates
To Depreciation on
10,500
Machinery
28,28,000 28,28,000
Trading Account for the year ended 31 st March, 2021
Particulars ` Particulars `
To Opening Stock of finished By Sales
2,62,500 29,75,000
goods
To Cost of goods transferred Less: Sales Return 35,000 29,40,000
from Manufacturing A/c 28,28,000
By Closing Stock 3,50,000
To Gross Profit c/d 1,99,500
32,90,000 32,90,000

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 19

Profit and Loss Account for the year ended 31 st March, 2021
Particulars ` Particulars
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To Carriage Outward 24,500 By Gross Profit b/d 1,99,500

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To Discount Allowed 10,500 By Accrued Commission* 43,750

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To Commission Paid 17,500 By Accrued Interest 52,500

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To Dividend Paid
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14,000
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agTo Advertisement
To General Expenses 14,000
17,500
To Salaries 70,000
Add: Outstanding 7,000 77,000
To Interest Paid 24,500
Less: Prepaid 5,250 19,250
To Provision for Bad &
7,000
Doubtful Debts

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Add: Bad Debts 14,000
Less: Old Provision for
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e 3,500
7,000 14,000
s
Doubtful Debts

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l 84,000
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To Depreciation on Building
To Net Profit c/d
2,95,750 2,95,750
*Alternatively Accrued Commission may be treated as Expenses, in that case total Commission
will be ` 61,250 (`17,500 + `43,750) and Net Loss will be ` 3,500.
Balance Sheet as on 31 st March, 2021
Capital and Liabilities ` Assets `

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Capital 3,50,000 Plant & Machinery 1,05,000

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Add: Net Profit** 84,000
3,50,000 .
Less: Depreciation
c o 10,500
94,500

c. o 4,34,000 Land & Building
s em 3,46,500
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Less: Drawings 70,000 3,64,000 Less: Depreciation 3,500

las Bills Payable 84,000 Furniture & Fixtures
a g 52,500

ag Sundry Creditors
Salary Outstanding
1,75,000 Investments
7,000 Closing Stock
87,500
3,50,000
Long-Term Loans 7,00,000 Loose Tools 1,05,000
Bank Overdraft 80,500 Sundry Debtors 1,40,000

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20 FOUNDATION EXAMINATION: MAY, 2022

Less: Provision for
7,000 1,33,000
Bad & Doubtful Debts
Bills Receivable 52,500
Accrued Commission 43,750
Accrued Interest 52,500
Prepaid Interest 5,250
Cash in Hand 70,000
Cash at Bank 17,500
14,10,500 14,10,500
**If Accrued Commission is treated as expenses in that case Net Loss of ` 3,500 will be
deducted from Capital Account and Closing Capital figure will be ` 2,76,500 and Accrued
Commission ` 43,750 will appear under liability side of Balance Sheet.
Question 6
(a) A Limited issued 20,000 Equity shares of, 10 each at a premium of 10%, payable ` 2 on
application; ` 4 on allotment (including premium); ` 2 on first call and balance on the final
call. All the shares were fully subscribed. Mr. M who held 2000 shares paid full remaining
amount on first call itself. The final call which was made after 4 months from the first call
was fully paid except a shareholder having 200 shares and one another shareholder having
100 shares. They paid their due amount after 3 months and 4 months respectively along
with interest on calls in arrears, Company also paid interest on calls in advance to Mr. M.
The Company maintains Calls in Arrear and Calls in Advance A/c. Give journal entries to
record these transactions. Show workings of Interest calculation. (Ignore dates).
(15 Marks)
(b) What is petty cash book? Write it's any two advantages. (5 Marks)
Answer
(a)
Entry Particulars L.F. Debit Credit
No. Amount Amount
(`) (`)
Bank A/c Dr. 40,000
1 To Equity Share Application A/c 40,000
(Money received on applications for 20,000
shares @ ` 2 per share)
Equity Share Application A/c Dr. 40,000

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 21

2 To Equity Share Capital A/c 40,000
(Transfer of application money on 20,000

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shares to share capital)

m Share Capital A/c
c. oToTo Equity
Equity Share Allotment A/c Dr. 80,000

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m Securities Premium A/c s
3 60,000

s e (Amount due on the allotment of 20,000 shares l a
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20,000

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l @ ` 3 per share and Securities Premium @ `1
a per share)
Bank A/c Dr. 80,000
4 To Equity Share Allotment A/c 80,000
(Allotment money received)
Equity Share First Call A/c Dr. 40,000
5 To Equity Share Capital A/c 40,000

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(Being first call made due on 20,000 shares at

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` 2 per share)

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Bank A/c Dr. 46,000
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To Equity Share First Call A/c 40,000

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(Being first call money
g received along with
To Calls in Advance A/c 6,000

calls in advance on 2,000 shares at ` 3 per
share)
Equity Share Final Call A/c Dr. 60,000
7 To Equity Share Capital A/c 60,000
(Being final call made due on 20,000 shares at
` 3 each)
Bank A/c Dr. 53,100
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Calls in Advance A/c Dr. 6,000
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em se 60,000
8 Calls in Arrears A/c Dr. 900

s g la
To Equity Share Final Call A/c

gla (Being final call received for 17,700 shares,
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calls in advance for 2,000 shares and calls in
arrears on 300 shares adjusted)
Interest on Calls in Advance A/c Dr. 240
9 To Shareholders A/c 240

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22 FOUNDATION EXAMINATION: MAY, 2022

(Being interest made due on calls in advance
of `6,000 at the rate of 12% p.a.)
Shareholders A/c Dr. 240
10 To Bank A/c 240
(Being payment of interest made to
shareholder)
Shareholders A/c Dr. 15
11 To Interest on Calls in Arrears A/c 15
(Being interest on calls in arrears made due at
the rate of 10%)
Bank A/c Dr. 615
12 To Calls in Arrears A/c 600
To Shareholders A/c 15
(Being money received from shareholder
having 200 shares for calls in arrears and
interest thereupon)
13 Shareholders A/c Dr. 10
To Interest on Calls in Arrears A/c 10
(Being interest on calls in arrears made due at
the rate of 10%)
14 Bank A/c Dr. 310
To Calls in Arrears A/c 300
To Shareholders A/c 10
(Being money received from shareholder
having 100 share for calls in arrears and
interest thereupon)
Calculation of Interest on Calls in Advance & Calls in Arrears:
Interest on Calls in Advance = ` 6,000 x 12% x 4 / 12 = ` 240
Interest on Calls in Arrears ` 600 x 10% x 3 / 12 = ` 15
Interest on Calls in Arrears ` 300 x 10% x 4 / 12 = ` 10
Table F of The Companies Act,2013 prescribes 10% and 12% p.a. as the maximum rates
respectively for calls in arrears and calls in advance. Accordingly these rates have been
considered while passing the above entries,
Note: For entry no 9&10, 11&12,13&14 combined entry can also be passed.

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PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 23

(b) • In a business house a number of small payments, such as for taxi fare, cartage, etc.,
have to be made. If all these payments are recorded in the cash book, it will become

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unnecessarily heavy. Also, the main cashier will be overburdened with work.

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• Therefore, it is usual for firms to appoint a person as ‘Petty Cashier’ and to entrust

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the task of making small payments. of-course he will be reimbursed for the payments
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eLater, on an analysis, the respective account may be debited.
made.

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l•a Imprest system of petty cash is followed, under this system a fixed sum of money isag
•

ag given to petty cashier for meeting expenses for a prescribed period.
Advantages of Petty cash book are:
(i) Saving of time of the chief cashier
(ii) Saving in labour in writing up the cash book and posting into the ledger
(iii) Control over small payments

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