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TitleAccounting Problems With Solutions
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Page 1

PAPER  1 : ACCOUNTING

QUESTIONS

Branch Accounting
1. Pappu Limited with its head office in Kolkata invoiced goods to its branch at Mumbai at

20% less than the catalogue price which is cost plus 50% with instructions that cash
sales were to be made at invoice price and credit sales at catalogue price. Head office
also gave the instruction to provide discount @ 15% of catalogue price on prompt
payments by debtors. From the particulars available from the branch, prepare the
Branch Stock Account, Branch Adjustment Account and Branch Profit and Loss Account
for the year ended 31st March, 2008 (showing workings) in the head office books:

Rs.
Stock on 1st April, 2007 (Invoice Price) 12,000
Debtors on 1st April, 2007 10,000
Goods received from H.O. (Invoice Price) 1,32,000
Sales (Cash) 46,000
Sales (Credit) 1,00,000
Cash received from Debtors 85,635
Discount allowed to Debtors 13,365
Expenses at the Branch 6,000
Remittances to H.O. 1,20,000
Debtors on 31st March, 2008 11,000
Cash in hand on 31st March, 2008 5,635

Stock on 31st March, 2008 (Invoice Price) 15,000

It was further reported that a part of the stock was lost by fire (not covered by insurance)
during the year whose value is to be ascertained and a provision should be made for
discount to be allowed to debtors as on 31st March, 2008 on the basis of year’s trend of
prompt payments.

Hire Purchase System
2. Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase

basis. The cost of a washing machine to the company is Rs. 10,500. The company has
fixed cash price of the machine at Rs. 12,300 and hire-purchase price at Rs. 13,500
payable as to Rs. 1,500 down and the balance in 24 equal monthly instalments of
Rs. 500 each.

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On 1st April, 2007 the company had 26 washing machines lying in its showroom. On that
date 3 instalments had fallen due, but not yet received and 675 instalments were yet to
fall due in respect of machines lying with the hire purchase customers.
During the year ended 31st March, 2008 the company sold 130 machines on cash basis
and 80 machines on hire-purchase basis. After paying five monthly installments, one
customer failed to pay subsequent installments and the company had to repossess the
washing machine. After spending Rs. 1,000 on it, the company resold it for Rs. 11,500.
On 31st March, 2008 there were 21 washing machines in stock, 810 installments were yet
to fall due and 5 installments had fallen due, but not yet received in respect of washing
machines lying with the hire-purchase customers. Total selling expenses and office
expenses including depreciation on fixed assets totalled Rs. 1,60,000 for the year.
You are required to prepare for the accounting year ended 31st March, 2008:
1. Hire purchase Trading Account, and
2. Trading and Profit and Loss Account showing net profit earned by the company

after making provision for income-tax @ 35%.
Partnership Accounts (Piecemeal Distribution System)
3. A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals

were Rs. 9,600, Rs. 6,000 and Rs. 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:

Rs. Rs.
Liability for interest on loans from : Investments 1,000
Spouses of partners 2,000 Furniture 2,000
Partners 1,000 Machinery 1,200

Stock 4,000

The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when
available, applying maximum possible loss procedure.

Partnership Accounts: (Profit and Loss Adjustment A/c)
4. M/s Neptune & Co.’s Balance Sheet as at 31st March, 2008:

Liabilities Rs. Assets Rs.
Bank overdraft
(State Bank) 54,000

Cash at Bank of India 800

Sundry Creditors 1,56,000 Sundry Debtors 2,80,000
Stock 1,00,000

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Bank A/c Dr. 21,200
To Calls in Arrear A/c 20,000
To Interest on Calls in Arrear A/c 1,200

(Being interest on calls in arrear received)
Profit & Loss A/c Dr. 6,000

To Interest on Calls in Advance A/c 6,000
(Being interest @ 10% on Rs. 1,20,000 for 6 months
allowed on calls in advance)
Profit & Loss A/c Dr. 90,000

To Preference Dividend 20,000
To Equity Dividend 70,000

(Being dividend @ 10% on Preference share capital &
20% on Equity share capital proposed)
Profit & Loss A/c Dr. 1,50,000

To Bonus to Equity Shareholders A/c 1,50,000
(Being bonus dividend declared)
Share Final Call A/c Dr. 1,50,000

To Equity Share Capital A/c 1,50,000
(Being final call made @ Rs. 3 on 50,000 shares)
Bonus to Equity shareholders A/c Dr. 1,50,000

To Share Final Call A/c 1,50,000
(Being adjustment of bonus dividend against final call)
Calls in Advance A/c Dr. 1,20,000
Interest on Calls in Advance A/c Dr. 6,000

To Bank A/c 1,26,000
(Being amount of calls in advance along with interest
refuned)
Bank A/c Dr. 2,20,000

To 10% Debentures A/c 2,20,000
(Being 2,200 Debentures of Rs.100 each issued in cash)

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Profit & Loss A/c Dr. 20,000
To Premium on Redemption of Preference shares A/c 20,000

(Being premium payable on redemption)

Profit & Loss A/c Dr. 5,200
General Reserve A/c Dr. 1,94,800

To Capital Redemption Reserve A/c 2,00,000
(Transfer to capital redemption reserve)

Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000

To Preference Shareholders A/c 2,20,000
(Amount due on redemption of preference shares)

Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000

(Amount paid to preference shareholders)

Profit & Loss Account of P Ltd.
for the year ended 31st March, 2008

Rs. Rs.

To Interest on calls in advance 6,000 By Balance b/d 2,70,000
To Balance c/d 2,65,200 By Interest on calls in arrear 1,200

2,71,200 2,71,200
To Premium on redemption 20,000 By Balance b/d 2,65,200
To Preference Dividend 20,000
To Equity Dividend 70,000
To Bonus Dividend 1,50,000
To Capital Redemption Reserve 5,200

2,65,200 2,65,200

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Students are advised to refer the following rates of Non-Performing Assets in case of
Banking Companies

PROVISIONS
Taking into account the time lag between an account becoming doubtful of recovery, its
recognition as such, the realisation of the security and the erosion over time in the value of
security charged to the banks, it has been decided that banks should make provision against
sub-standard assets, doubtful assets and loss assets on the following basis:
(a) Loss assets : The entire amount should be written off or full provision should be made for
the amount outstanding.
(b) Doubtful assets : (i) Full provision to the extent of the unsecured portion should be
made. In doing so, the realisable value of the security available to the bank should be
determined on a realistic basis. DICGC/ECGC cover is also taken into account (this aspect is
discussed later in this chapter). In case the advance covered by CGTSI guarantee becomes
non-performing, no provision need be made towards the guaranteed portion. The amount
outstanding in excess of the guaranteed portion should be provided for as per the extant
guidelines on provisioning for non-performing advances.
(ii) Additionally, 20% - 100% of the secured portion should be provided for, depending upon
the period for which the advance has been considered as a doubtful asset, as follows:

Period for which the advance has been considered as doubtful % of provision on secured
portion

Upto 1 year 20%
More than 1 year and upto 3 years 30%
More than three years
i. Outstanding stock of NPA’s as on 31.03.2004 60% w.e.f. 31.03.2005

75% w.e.f. 31.03.2006
100% w.e.f. 31.03.2007

ii. Advances classified as doubtful for more than three years on or
after 01.04.2004

100% w.e.f. 31.03.2005

(iii) Banks are permitted to phase the additional provisioning consequent upon the reduction
in the transition period from substandard to doubtful asset from 18 to 12 months over a four
year period commencing from the year ending March 31, 2005, with a minimum of 20% each
year.
(c) Sub-standard assets : A general provision of 10% on total outstanding should be made
without making any allowance for DICGC/ECGC cover and securities available. An additional
provision of 10% (i.e., total 20% of total outstanding) is required to be made on ‘unsecured
exposure’ ab initio sanction of loan. Generally such a situation may arise in case of personal
and education loans etc. Unsecured exposure is defined as ‘an exposure where the realizable
value of security is not more than 10% of the outstanding exposure (fund based and non-fund
based). Security should not include guarantees, comfort letters etc

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(d) Standard assets : A general provision of a minimum of 0.40% of total standard assets
should be made. It has been clarified that the provision should be made on global loan
portfolio basis and not on domestic advances alone.

For the practice of students following illustrations are given below:
Illustration 1 (Existing stock of advances classified as ‘doubtful more than 3 years’ as on 31
March, 2004.)

The outstanding amount as on 31st March, 2004: Rs.25,000.
Realisable value of security: Rs.20,000.
Period for which the advance has remained in ‘doubtful’ category as on 31st March, 2004: 4
years (i.e., Doubtful more than 3 years)
Solution:
Provisioning requirement:

As on…. Provisions on secured
portion

Provisions on unsecured portion Total (Rs.)

Rate (in %) Amount Rate (in %) Amount
31 March 2004 50 10,000 100 5,000 15,000
31 March 2005 60 12,000 100 5,000 17,000
31 March 2006 75 15,000 100 5,000 20,000
31 March 2007 100 20,000 100 5,000 25,000

Illustration 2 (Advances classified as ‘doubtful more than three years’ on or after 1 April, 2004.)
The outstanding amount (funded as well as unfunded) as on 31st March, 2004: Rs.10,000
Realisable value of security: Rs.8,000
Period for which the advance has remained in ‘doubtful’ category as on 31st March, 2004: 2.5
years.
Solution:
Provisioning requirement:
As on… Asset Classification Provisions on

secured portion
Provisions on
unsecured
portion

Total
(Rs.)

% Amount % Amount
31 March, 2004 Doubtful 1 to 3 years 30 2,400 100 2,000 4,400
31 March, 2005 Doubtful more than 3

years
100 8,000 100 2,000 10,000

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