Paper/Subject Code: 46012/Finance: Financial Accounting
TYBMS SEM 5
Financial Accounting
(Q.P. November 2018 with Solution)
Note-All questions are compulsory with internal choice.
Q1A. Multiple Choice Questions (any 8) : (08)
1) Which of the following should be deducted from the share capital to find out paid-up capital?
a) Call in advance
b) Call in arrears
c) Security Premium
d) Bonus
2) Dividend are usually paid on
a) Authorized capital
b) Issued Capital
c) Paid up Capital
d) Reserve Capital
3) Which of the following is not classified as inventory in the financial statements?
a) Finished Goods
b) Work in Progress
c) Stores & Spares
d) Advance payment made to suppliers for raw materials
4) If the whole of the issue of shares or debentures is underwritten it is known as ________
a) Partial underwriting
b) Sole underwriting
c) Complete of Full underwriting
d) None of the above
5) If a part of the issue of shares or debentures is underwritten, it is termed as ________
a) Partial underwriting
b) Complete underwriting
c) Firm underwriting
d) None of the above
6) The mean of the exchange rates in force during a period is known as ________.
a) Average rate
b) Closing rate
c) Reporting rate
d) Fair rate
7) The exchange rate at the balance sheet date is known as ________.
a) Average rate
b) Closing rate
c) Non-Monetary rate
d) Monetary rate
8) Following is not a fixed income bearing security _________.
a) Debentures
b) Equity Shares
c) Preference Shares.
d) Government Security
9) Interest is always calculated on the ________.
a) Market Value of the security
b) Nominal value of the security
c) Book Value of the security
d) Weighted average cost of the security
10) Interest on bonds accrues _________.
a) On the last day of the financial year
b) On due dates fixed in advance
c) On the date fixed by board resolution
d) As declared by the company in the beginning of every financial year.
Q1 B. State whether following statements are true or false (any7) (07)
1) Dividend can be paid out of capital, but interest cannot be paid out of capital.
Ans: False
2) Future bad debts are usually estimated as percentage of debtors.
Ans: True
3) Trade Receivable are always shown under current assets.
Ans: True
4) Shareholders funds are always non-current
Ans: True
5) Capital profit realized in cash can be used for paying dividend.
Ans: True
6) The underwriting commission is payable in cash
Ans: True
7) Unmarked applications are known as direct applications.
Ans: True
8) Inventories is a non-monetary item.
Ans: True
9) Foreign currency is a currency other than the Indian rupee.
Ans: True
10) Interest is always calculated on Market Value of the security.
Ans: False
Q.2 A) Ajay Ltd. Issued 50,00,000 equity shares of Rs.10 each. The whole issue was underwritten by A, B and C as below: (08)
A 15,00,000 shares
B 25,00,000 shares
C 10,00,000 shares
Applications were received for 48,50,000 shares of which the marked applications were as follow:
A 12,00,000 shares
B 25,00,000 shares
C 8,50,000 shares
Calculate the number of shares to be taken up by the underwriters. Unmarked applications are to be distributed amongst the underwriters in the ratio of their gross liability.
Q.2 B) Pooja Ltd. Of Mumbai sold goods worth $ 10,00,000 to Utkarsha Ltd. Of America on 31 January 2014. (07)
Amounts were received from Utkarsha Ltd. As follows:
|
Date |
$ |
|
01-02-2014 |
4,00,000 |
|
01-03-2014 |
1,00,000 |
|
30-03-2014 |
5,00,000 |
Accounts are closed on 31 march every year. Exchange rates of $ 1:
|
31-01-2014 |
Rs. 61 |
|
01-02-2014 |
Rs. 60 |
|
01-03-2014 |
Rs. 62 |
|
30-03-2014 |
Rs.58 |
Pass Journal entries in the books of Pooja Ltd. For the year ended 31 march 2014.
OR
Q2.C) Following is the trial balance of Supriya Ltd. As on 31 march 2017. (15)
|
Particulars |
Dr. Rs. |
Cr. Rs. |
|
Cash in hand |
39,000 |
|
|
Cash at bank |
68.600 |
|
|
Share capital |
|
18,40,000 |
|
9% Debentures |
|
6,00,000 |
|
Bank Overdraft(Union Bank) |
|
4,00,000 |
|
Investments (Long Term) |
20,000 |
|
|
Bills Receivables-Trade |
2,80,000 |
|
|
Sundry Debtors |
11,00,000 |
|
|
Sundry Creditors |
|
4,80,000 |
|
Security Deposit (Long Term) |
8,000 |
|
|
Profit and loss account |
|
5,80,000 |
|
Security Premium |
|
1,80,000 |
|
Interest on Debentures accrued and due |
|
13,500 |
|
Goodwill |
1,30,000 |
|
|
Land and Building (Cost Rs. 5,00,000) |
3,80,000
|
|
|
Plant and machinery (Cost Rs. 10,00,000) |
6,00,000 |
|
|
Furniture(Cost Rs.1,60,000) |
90,000 |
|
|
Provisions for taxation |
|
2,41,000 |
|
Advance Tax |
2,00,000 |
|
|
Bills Payable |
|
60,000 |
|
General Reserve |
|
2,00,000 |
|
Stock in Trade |
16,98,900 |
|
|
Capital Reserve |
|
20,000 |
|
Total |
46,14,500 |
46,14,500 |
Additional Information:
a) The Authorized share capital of the company was Rs. 60,00,000 divided into 6,00,000 equity shares of Rs. 10 each.
b) The sundry Debtors, which are all unsecured and considered good, include Rs. 1,80,000 for more than 6 months.
c) Investments represent 5,000 equity shares in X Ltd. of Rs. 10 each, Rs. 4 per share called and paid up.
d) Bills Receivable discounted with the bank not matured till the balance sheet date, amounted to Rs. 15,000.
You are required to prepare balance sheet of Supriya Ltd. As on 31 march 2017. As per provisions of the companies Act. Ignore previous year figures.
Q.3 A) On 1 April 2010 Shyam had 50,000 equity shares in A Ltd. The face value of the shares were Rs. 10 each but their book value was Rs. 24 per share.
On 2 june 2010 Shyam purchased 10,000 euiqty shares in A Ltd. At a premium of Rs. 6 per share.
On 1 july 2010 The Directors of A Ltd. Issued bonus shares at the rate of one share for every three shares held.
On 1ª January 2011 Shyam purchased 5,000 right shares in A Ltd. Of Rs. 10 each at Rs. 15 per share.
On 31 January 2011 he sold 20,000 equity shares in A Ltd. Of Rs. 10 each at Rs. 30 per shares. Show investment account as it would appear in Shyam's books for the year ended 31 march 2011. (07)
Q.3 B) Raj Ltd. Issued 50,000,9% preference shares of Rs. 10 each. 75% of the issue was underwritten by Suraj.
In addition there is a firm underwriting of 5,000 shares from Suraj. In all the company received applications for 42,000 shares, 30,000 share applications had the seal of Mr. Suraj. Determine the liability of Mr. Suraj. Firm underwriting applications to be treated like marked applications. Ascertain the respective liabilities of the underwriter and the company. (08)
OR
Q3.C) On 1 January 2013. David Ltd. An Indian importer, purchased $ 2,50,000 worth goods from komal Trading company of USA. (15)
The payment for the import was made as follows:
|
On 10 February 2013 |
$ 1,00,000 |
|
On 15th March 2013 |
$ 75,000 |
|
On 20 April 2013 |
$ 75,000 |
David Ltd. Closes its books on 31 March every year.
The exchange rate for 51 was follows:
|
1 January 2013 |
Rs. 49.00 |
|
10th February 2013 |
Rs. 49.50 |
|
15th March 2013 |
Rs. 47.60 |
|
31 March 2013 |
Rs. 45.00 |
|
20 April 2013 |
Rs. 46.75 |
1) Pass journal entries.
2) Prepare Komal Trading Company account and foreign exchange fluctuation account in the books of David Ltd.
Q.4 A) From the following trial balance of Amol Ltd. Prepare the balance sheet of the company as on 31 march 2017 as per the companies Act. (07)
Trial balance as on 31 march 2017
|
Debit |
Rs. |
Credit |
Rs. |
|
Advances to Employees |
3,00,000 |
Equity share Capital |
52,00,000 |
|
Cash at bank |
3,14,320 |
Capital Reserve |
60,000 |
|
Furniture and fixture |
7.50.000 |
Loan from SBI |
8,00,000 |
|
Premises |
41,09,940 |
Provision for Employees Welfare Fund |
6,00,000 |
|
Patents |
10,00,000 |
Provision for Expenses |
1,64,000 |
|
Expenses on issue of shares (unwritten off) |
25,000 |
Short term loan from bank |
4,90,200 |
|
Trade receivables |
3,66,240 |
Unpaid Dividend |
64,800 |
|
Advance Tax |
50,000 |
Profit and loss A/C |
42,980 |
|
8% Government Bonds |
3,36,000 |
Bills Payable |
85,100 |
|
Stock in Trade |
3,55,600 |
Sundry Creditors |
1,00,020 |
|
|
76,07,100 |
|
76,07,100 |
Q.4 B) Manisha Ltd. Has authorized capital of Rs.25,00,000 divided into 1,00,000 equity shares of Rs. 25 each. The company issued for the subscription 25,000 shares at a premium of Rs. 10 each. The entire issue was underwritten as follows:
A-15,000 shares (firm underwriting-2,500 shares)
B-7,500 shares (firm underwriting-1,000 shares)
C-2,500 shares (firm underwriting-500 shares)
Out of the total issue 22,500 shares including firm underwriting per subscribed.
The following were the marked forms:
A-8,000 shares
B-5,000 shares
C-2,000 shares
Calculate the liability of each underwriter. (08)
OR
Q.4 C) On 1 April 2012 Mr. Kailas held 500, 6% Central Government Bonds of Rs.100 each at a cost of Rs. 48,000. Interest is payable on 30th June and 31" December every year. He entered into following transactions in respect of 6% Central Government Bonds during the Year ending on 31 march 2013.
Purchases:
A) On 1 may 2012, face value of Rs. 10,000 at Rs. 102 cum-interest.
B) On 1 September 2012, face value of Rs. 30,000 at Rs. 105 ex-interest. Sales:
Sales:
A) On 1 august 2012, face value of Rs. 15,000 at Rs. 104 cum-interest.
B) On 1" February 2013, face value of Rs. 15,000 at Rs. 102 ex-interest.
Show 6% Central Government Bonds Account in the books of Mr. Kailas for the year ended 31 march 2013. (Investments are to be valued at Weighted Average Cost.)
Q.5) a) What does the Accounting Profession mean by Ethical Behavior?
The accounting profession places a significant emphasis on ethical behavior, which is essential for maintaining trust and integrity in financial reporting and auditing. This document explores the concept of ethical behavior within the accounting field, highlighting its importance, key principles, and the implications of ethical conduct for accountants and their clients.
Definition of Ethical Behavior in Accounting
Ethical behavior in accounting refers to the adherence to moral principles and professional standards that guide accountants in their decision-making processes. It encompasses honesty, integrity, transparency, and accountability in all financial dealings. Ethical behavior is crucial for ensuring that financial information is accurate, reliable, and free from manipulation or misrepresentation.
Importance of Ethical Behavior
Trust and Credibility: Ethical behavior fosters trust between accountants, clients, and stakeholders. When accountants adhere to ethical standards, they enhance their credibility and the reliability of financial statements.
Regulatory Compliance: The accounting profession is governed by various laws and regulations. Ethical behavior ensures compliance with these regulations, reducing the risk of legal issues and penalties.
Professional Reputation: Accountants who demonstrate ethical behavior build a strong professional reputation. This reputation can lead to increased business opportunities and career advancement.
Public Interest: Accountants have a responsibility to act in the public interest. Ethical behavior ensures that financial reporting serves the needs of stakeholders, including investors, creditors, and the general public.
Principles of Ethical Behavior
The accounting profession is guided by several key principles that define ethical behavior:
Integrity: Accountants should be straightforward and honest in all professional and business relationships.
Objectivity: Accountants must remain impartial and free from conflicts of interest, ensuring that their judgments are not influenced by personal biases.
Professional Competence: Accountants are required to maintain their professional knowledge and skills to provide competent services.
Confidentiality: Accountants must respect the confidentiality of information acquired during the course of their work and not disclose it without proper authority.
Professional Behavior: Accountants should comply with relevant laws and regulations and avoid any conduct that discredits the profession.
Implications of Ethical Conduct
The implications of ethical conduct in accounting are far-reaching. Ethical behavior not only protects the interests of clients and stakeholders but also contributes to the overall stability of financial markets. Unethical behavior, on the other hand, can lead to financial scandals, loss of public trust, and severe repercussions for both individuals and firms.
Q.5) b) Explain the types of Underwriting.
Underwriting is a critical process in the financial and insurance industries, where an underwriter assesses the risk of insuring a client or lending money. This document explores the various types of underwriting, highlighting their unique characteristics and applications across different sectors.
1. Insurance Underwriting
Insurance underwriting involves evaluating the risk associated with insuring individuals or entities. The underwriter determines the terms and conditions of the insurance policy, including premiums and coverage limits. There are several subtypes of insurance underwriting:
a. Life Insurance Underwriting
This type focuses on assessing the risk of insuring an individual's life. Factors such as age, health history, lifestyle choices, and occupation are considered to determine the premium rates.
b. Health Insurance Underwriting
Health insurance underwriting evaluates the medical history and current health status of applicants. This process helps insurers decide on coverage options and premium pricing.
c. Property and Casualty Underwriting
This involves assessing risks related to property (homes, vehicles) and liability (businesses). Underwriters analyze factors like location, property value, and claims history to determine coverage and premiums.
2. Mortgage Underwriting
Mortgage underwriting is the process of evaluating a borrower's creditworthiness and ability to repay a loan. Key components include:
a. Credit Analysis
Underwriters review the borrower's credit score, credit history, and debt-to-income ratio to assess financial stability.
b. Property Appraisal
An appraisal is conducted to determine the property's market value, ensuring it aligns with the loan amount requested.
c. Documentation Review
Underwriters verify income, employment, and other financial documents to confirm the borrower's ability to meet mortgage obligations.
3. Securities Underwriting
In the context of finance, securities underwriting refers to the process by which investment banks assess the risk of new securities being issued. This can be broken down into:
a. Firm Commitment Underwriting
The underwriter buys the entire issue of securities from the issuer and resells them to the public, assuming full financial risk.
b. Best Efforts Underwriting
The underwriter agrees to sell as much of the issue as possible but does not guarantee the sale of the entire amount, thus sharing the risk with the issuer.
c. Standby Underwriting
This type involves the underwriter agreeing to purchase any unsold shares after a public offering, providing a safety net for the issuer.
4. Reinsurance Underwriting
Reinsurance underwriting involves assessing the risks that insurance companies transfer to reinsurance firms. Underwriters evaluate the original insurance policies and the associated risks to determine the terms of the reinsurance agreement.
OR
Q.5) c) Write a Short notes (Any Three) (15)
i) Schedule III
Schedule III is a crucial part of the Companies Act, 2013, which governs the financial reporting of companies in India. It was introduced to enhance the clarity and comparability of financial statements, thereby improving the overall quality of financial reporting. The schedule specifies the format in which companies must present their financial statements, including the balance sheet and the statement of profit and loss.
Components of Schedule III
1. Balance Sheet
The balance sheet under Schedule III is divided into two parts:
Part I: This section includes the assets and liabilities of the company, categorized into current and non-current items. It provides a clear view of the financial position of the company at a specific point in time.
Part II: This part includes the equity and liabilities, detailing the shareholders' equity, long-term and short-term borrowings, and other financial obligations.
2. Statement of Profit and Loss
The statement of profit and loss is structured to present the company's financial performance over a specific period. It includes:
Revenue from Operations: This section captures the income generated from the core business activities.
Other Income: Any income not derived from the primary business operations is recorded here.
Expenses: This includes all costs incurred during the period, categorized into various heads such as cost of goods sold, operating expenses, and finance costs.
Profit or Loss: The final section calculates the net profit or loss for the period, providing insights into the company's profitability.
Significance of Schedule III
The implementation of Schedule III has several significant implications for companies:
Standardization: It promotes uniformity in financial reporting, making it easier for stakeholders to compare financial statements across different companies.
Transparency: By adhering to the prescribed format, companies enhance the transparency of their financial information, which is crucial for investors, creditors, and regulatory bodies.
Compliance: Companies are required to comply with the provisions of Schedule III to avoid penalties and ensure legal adherence.
ii) Fundamental of Principles
Principles are fundamental truths or propositions that serve as the foundation for a system of belief or behavior. They guide decision-making, influence actions, and provide a framework for understanding complex phenomena. Whether in science, ethics, or everyday life, principles help us navigate challenges and make informed choices.
Types of Principles
Scientific Principles
Scientific principles are the basic laws that govern the natural world. They are derived from empirical observations and experiments. Examples include the laws of thermodynamics, Newton's laws of motion, and the principle of conservation of energy. These principles are essential for scientific inquiry and technological advancement.
Ethical Principles
Ethical principles guide moral conduct and decision-making. They help individuals and organizations determine what is right or wrong. Common ethical principles include honesty, integrity, fairness, and respect for others. These principles are crucial in fields such as law, medicine, and business, where ethical dilemmas frequently arise.
Economic Principles
Economic principles explain how resources are allocated and how markets function. Key concepts include supply and demand, opportunity cost, and the principle of diminishing returns. Understanding these principles is vital for making informed economic decisions and analyzing market behaviors.
The Importance of Principles
Principles provide a sense of direction and consistency in various aspects of life. They help individuals and organizations establish standards, create policies, and foster accountability. By adhering to established principles, we can build trust and credibility in our interactions with others.
iii) Corporate Governance
Corporate governance refers to the systems, principles, and processes by which corporations are directed and controlled. It encompasses the mechanisms through which companies, and particularly their management, are held accountable to stakeholders, including shareholders, employees, customers, and the broader community. This document explores the key components of corporate governance, its importance, and the various frameworks that guide effective governance practices.
Components of Corporate Governance
Board of Directors: The board is responsible for overseeing the management of the company and ensuring that it acts in the best interests of shareholders. The composition, independence, and diversity of the board are critical factors in effective governance.
Shareholder Rights: Protecting the rights of shareholders is fundamental to corporate governance. This includes the right to vote on key issues, access to information, and the ability to influence corporate decisions.
Transparency and Disclosure: Companies must provide accurate and timely information to stakeholders. Transparency fosters trust and enables informed decision-making by investors and other stakeholders.
Ethical Conduct: A strong ethical framework is essential for corporate governance. Companies should establish codes of conduct that promote integrity and accountability at all levels of the organization.
Risk Management: Effective governance includes identifying, assessing, and managing risks that could impact the company's performance and reputation. This involves establishing robust internal controls and compliance mechanisms.
Importance of Corporate Governance
Corporate governance is crucial for several reasons:
Enhances Accountability: It ensures that management is accountable to shareholders and other stakeholders, fostering a culture of responsibility.
Promotes Investor Confidence: Strong governance practices can enhance investor trust, leading to increased investment and potentially higher stock prices.
Mitigates Risks: Effective governance frameworks help identify and manage risks, reducing the likelihood of corporate scandals and financial crises.
Supports Sustainable Growth: Good governance practices contribute to long-term sustainability by aligning the interests of various stakeholders and promoting ethical business practices.
Frameworks for Corporate Governance
Various frameworks and guidelines exist to promote effective corporate governance, including:
OECD Principles of Corporate Governance: These principles provide a comprehensive framework for policymakers and companies to enhance governance practices globally.
Sarbanes-Oxley Act (SOX): Enacted in the United States, SOX aims to protect investors by improving the accuracy and reliability of corporate disclosures.
UK Corporate Governance Code: This code sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability, and relations with shareholders.
iv) Company code of Ethics
This document outlines the ethical principles and standards that guide the behavior of all employees within our organization. It serves as a framework for decision-making and establishes a culture of integrity, respect, and accountability. Adhering to this code is essential for maintaining the trust of our clients, stakeholders, and the communities in which we operate.
1. Integrity and Honesty
All employees are expected to conduct themselves with integrity and honesty in all business dealings. This includes being truthful in communications, avoiding conflicts of interest, and ensuring transparency in all transactions.
2. Respect and Fairness
We are committed to treating all individuals with respect and fairness. Discrimination, harassment, or any form of unfair treatment based on race, gender, religion, sexual orientation, or any other characteristic will not be tolerated.
3. Compliance with Laws and Regulations
Employees must comply with all applicable laws, regulations, and company policies. This includes understanding and adhering to industry standards, as well as reporting any violations or unethical behavior.
4. Confidentiality
Protecting the confidentiality of sensitive information is paramount. Employees must safeguard proprietary information and respect the privacy of clients, colleagues, and the organization.
5. Accountability
We hold ourselves accountable for our actions and decisions. Employees are encouraged to take responsibility for their work and to report any unethical behavior or violations of this code.
6. Commitment to Quality
We strive for excellence in all aspects of our work. Employees are expected to deliver high-quality products and services, continuously seeking improvement and innovation.
7. Community Engagement
We recognize our responsibility to the communities we serve. Employees are encouraged to engage in community service and support initiatives that promote social responsibility and environmental sustainability.
8. Reporting Violations
Employees are encouraged to report any suspected violations of this code without fear of retaliation. The company will investigate all reports thoroughly and take appropriate action.
v) Conflict of Interest
This document explores the concept of conflict of interest, a critical issue in various fields such as business, law, and public service. A conflict of interest occurs when an individual's personal interests—whether financial, familial, or otherwise—could potentially influence their professional decisions or actions. Understanding and managing conflicts of interest is essential for maintaining integrity, transparency, and trust in any organization or profession.
Definition of Conflict of Interest
A conflict of interest arises when an individual has competing interests or loyalties that could potentially interfere with their ability to make impartial decisions. This can occur in many contexts, including:
Corporate Settings: Employees or executives may have personal financial interests in companies that compete with their employer.
Government and Public Service: Officials may have personal relationships or financial interests that could affect their decision-making on behalf of the public.
Healthcare: Medical professionals may face conflicts when they have financial ties to pharmaceutical companies or medical device manufacturers.
Types of Conflicts of Interest
Financial Conflicts: Involves monetary interests that could influence professional judgment.
Personal Conflicts: Relationships with family or friends that could affect decision-making.
Professional Conflicts: Situations where an individual holds multiple roles that could lead to divided loyalties.
Importance of Managing Conflicts of Interest
Managing conflicts of interest is crucial for several reasons:
Trust: Maintaining public trust is essential for the credibility of organizations and professionals.
Integrity: Upholding ethical standards is vital for the reputation of individuals and institutions.
Legal Compliance: Many industries have regulations that require disclosure and management of conflicts of interest.
Strategies for Managing Conflicts of Interest
Disclosure: Individuals should disclose any potential conflicts to relevant parties.
Policies and Procedures: Organizations should implement clear policies to identify and manage conflicts of interest.
Training and Awareness: Regular training can help individuals recognize and navigate conflicts of interest effectively.
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