Test Series: April 2019

MOCK TEST PAPER - 2

INTERMEDIATE (IPC): GROUP – I
PAPER – 1: ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) (i) As per AS 1, any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be
disclosed. In the case of a change in accounting policies which has a material effect in the
current period, the amount by which any item in the financial statements is affected by such
change should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on
accounts should properly disclose the change and its effect.
Notes on Accounts: So far, the company has been providing 2% of sales for meeting “after
sales expenses during the warranty period. With the improved method of production, the
probability of defects occurring in the products has reduced considerably. Hence, the
company has decided not to make provision for such expenses but to account for the same
as and when expenses are incurred. Due to this change, the profit for the year is increased
by Rs. 12 crores than would have been the case if the old policy were to continue.
(b) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a pri ce or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived
from the sale of the goods.
Case (i): 25% goods lying unsold with consignee should be treated as closing inventory and
sales should be recognized for Rs. 3,00,000 (75% of Rs. 4,00,000) for the year ended on
31.3.17. In case of consignment sale, revenue should not be recognized until the goods are
sold to a third party.
Case (ii): The sale is complete but delivery has been postponed at buyer’s request. Fashion
Ltd. should recognize the entire sale of Rs.1,95,000 for the year ended 31 st March, 2017.
Case (iii): In case of goods sold on approval basis, revenue should not be recognized until
the goods have been formally accepted by the buyer or the buyer has done an act accepting
the transaction or the time period for rejection has elapsed or where no time has been fixed,
a reasonable time has elapsed. Therefore, revenue should be recognized for the total sales
amounting Rs. 2,50,000 as the time period for rejecting the goods had expired.
Thus total revenue amounting Rs. 7,45,000 (3,00,000+1,95,000+2,50,000) will be recognized
for the year ended 31st March, 2017 in the books of Fashion Ltd.
(c) As per para AS 2 ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and
other production costs are excluded from cost of inventories and such costs are recognized as
expenses in the period in which they are incurred. The normal loss will be included in determining
the cost of inventories (finished goods) at the year end.

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 Amount of Normal Loss and Abnormal Loss:
Material used 12,000 MT @ Rs. 150 = Rs. 18,00,000
Normal Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT (630 MT less 480 MT)
Abnormal Loss Rs. 23,437.50 [150 units @ Rs. 156.25
(Rs.18,00,000/11,520)]
Amount of Rs. 23,437.50 will be charged to the Profit and Loss statement.
(d) General Ledger Adjustment Account in Debtors Ledger
Date Particulars Rs. Date Particulars Rs.
01.04.2017 To Balance b/d 4,700 1.4.2017 By Balance b/d 1,79,100
01.04.2017 To Debtors ledger 01.04.2017 By Debtors ledger
to adjustment A/c: to adjustment A/c:
30.4.2017 Cash received 8,62,850 30.4.2017 Credit sales 9,97,700
Sales Returns 16,550 Cash paid for returns 3,000
Bills receivable BR dishonoured
received 47,500 3,750
Transfer to creditors 8,000 30.04.2017 By Balance c/d 4,900
ledger
30.04.2017 To Balance c/d
(bal.fig) 2,48,850
11,88,450 11,88,450
2. Partners’ Capital Accounts as on 1.4.2017
Anuj Ayush Piyush Anuj Ayush Piyush
To Anuj 22,950 68,850 By Balance 3,75,000 2,80,000 2,25,000
b/d
To Revaluation 37,400 37,400 18,700 By General 75,200 75,200 37,600
Loss Reserves
To Bank FD 2,34,000 By Ayush 91,800
To 8% Loan 2,70,600 and Piyush
To Balance c/d* 3,03,450 3,03,450 By Cash
(Bal. fig.) - 8,600 1,28,400
5,42,000 3,63,800 3,91,000 5,42,000 3,63,800 3,91,000
Balance Sheet as on 1.4.2017 after Anuj’s retirement
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Anuj’s Loan 2,70,600 Plant (90% of Rs. 7,87,000) 7,08,300
Creditors (2,16,000+10,000) 2,26,000 Stock (Rs. 1,03,000 less Rs. 6,000) 97,000

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 Capital Accounts*: Debtors (95% of Rs. 1,56,000) 1,48,200
Ayush 3,03,450 Bank Balance 1,50,000
Piyush 3,03,450
11,03,500 11,03,500
*Total of capital balances should be Rs. 6,06,900 which is proportioned to individual partners in their
profit sharing ratio.
Working Notes:
1. Profit / Loss on revaluation
Revaluation Account
Amount Amount
(Rs.) (Rs.)
To Plant 78,700 By Interest on FD 9,000
To Creditors 10,000 By Loss on revaluation 93,500
To Inventory 6,000
To Provision for doubtful debts 7,800
1,02,500 1,02,500
2. Calculation of Goodwill
Goodwill Valuation
Profit of year ended Rs.
31.3.2017 (Rs. 3,30,000 less Rs. 93,500) 2,36,500
31.3.2016 2,32,000
31.3.2015 2,20,000
Total Profits 6,88,500
Average Profit = 6,88,500/3 = 2,29,500
Goodwill valued at 1 year purchase amounting Rs. 2,29,500.
3. Adjustment for goodwill among partners
Anuj’s share of goodwill (2,29,500 x 2/5) = 91,800
Gaining ratio of Ayush and Piyush
Ayush Piyush
1 2 1 1
 
2 5 2 5
54 1 52 3
 
10 10 10 10
Gaining Ratio = 1: 3

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 Entry for adjustment of goodwill
Rs. Rs.
Ayush’s capital A/c Dr. 22,950
Piyush’s capital A/c Dr. 68,850
To Anuj’s capital A/c 91,800
(Being Anuj’s share of goodwill debited to remaining
partners in their gaining ratio)
3. (a) Investment Account of Gopal
For the year ended 31.3.2019
(Script: 15% Debentures in Ritu Industries Ltd.)
(Interest payable on 30 th June and 31st December)
Date Particulars Nominal Interes Cost Date Particulars Nominal Interest Cost
Value t Rs. Rs. Value Rs. Rs. Rs.
Rs.
1.04.18 To Balance 2,00,000 7,500 2,10,000 30.06.18 By Bank A/c - 22,500
A/c
1.05.18 To Bank A/c 1,00,000 5,000 1,02,000 1.11.18 By Bank A/c 1,20,000 6,000 1,14,600
30.11.18 To Bank A/c 80,000 5,000 76,800 1.11.18 By Profit & Loss - - 11,400
A/c
31.12.18 To Profit & 20,000 31.12.18 By Bank A/c 80,000 6,000 1,04,000
Loss A/c
31.03.19 To Profit & 37,250 31.12.18 By Bank A/c - 13,500 -
Loss A/c
(Bal. fig.) 31.12.18 By Bank A/c - 6,750 -
31.3.19 By Bal. c/d 1,80,000 - 1,78,800
3,80,000 54,750 4,08,800 3,80,000 54,750 4,08,800

Working Notes:
15 3
(i) Accrued Interest as on 1st April, 2018 = Rs. 2,00,000 x x  ` 7,500
100 12
15 4
(ii) Accrued Interest as on 1.5.2018 = Rs. 1,00,000 x x  ` 5,000
100 12
(iii) Cost of Investment for purchase on 1 st May = Rs. 1,07,000 – Rs. 5,000 = Rs. 1,02,000
15 6
(iv) Interest received as on 30.6.2018 = Rs. 3,00,000 x x ` 22,500
100 12
(v) Accrued Interest on debentures sold on 1.11.2018
15 4
= Rs. 1,20,000 x x ` 6,000
100 12
15 5
(vi) Accrued Interest = Rs. 80,000 x x  ` 5,000
100 12

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 15 6
(vii) Accrued Interest on sold debentures 31.12.2018 = Rs. 80,000 x x ` 6,000
100 12
(viii) Sale Price of Investment on 31 st Dec. = Rs. 1,10,000-Rs. 6,000 = Rs. 1,04,000
(ix) Loss on Sale of Debenture on 1.1.2018
Sale Price of debenture 1,14,600
Less: Cost Price of debenture
2,10,000
x ` 1,20,000 1,26,000
2,00,000
Loss on sale 11,400
15 6
(x) Accrued interest as on 31.12.2018 = Rs. 1,80,000 x x  ` 13,500
100 12
15 3
(xi) Accrued Interest = Rs. 1,80,000 x x  ` 6,750
100 12
(xii) Cost of investment as on 31 st March = Rs. 1,02,000 + Rs. 76,800 = Rs. 1,78,800
(xiii) Profit on debentures sold on 31 st December
= Rs. 1,04,000 –(Rs. 2,10,000x800/2,000) =Rs. 20,000
(b) Calculation of Interest and Cash Price
No. of Outstanding Amount Outstanding Interest Outstanding
installment balance at the end due at the balance at the balance at
s after the payment time of end before the the
of installment installme payment of beginning
nt installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x [6] = 4-5
10/110
3rd - 5,50,000 5,50,000 50,000 5,00,000
2nd 5,00,000 4,90,000 9,90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000
Total cash price = Rs. 12,00,000+ 6,00,000 (down payment) = Rs. 18,00,000.
Cars Account in the books of Krishan
Date Particulars Rs. Date Particulars Rs.
1.4.2015 To Fair Value 31.3.2016 By Depreciation A/c 4,50,000
Motors A/c 18,00,000 By Balance c/d 13,50,000
18,00,000 18,00,000
1.4.2016 To Balance b/d 13,50,000 31.3.2017 By Depreciation A/c 3,37,500
By Balance c/d 10,12,500
13,50,000 13,50,000
1.4.2017 To Balance b/d 10,12,500 31.3.2018 By Depreciation A/c 2,53,125
By Fair Value Motors A/c
(Value of 1 Car taken over

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 after depreciation for 3
years @ 40%
p.a.) [9,00,000 - (3,60,000 1,94,400
+ 2,16,000 + 1,29,600)]
By Loss transferred to
Profit and Loss A/c on
surrender (Bal. fig.) 1,85,288
By Balance c/d
½ (10,12,500-2,53,125) 3,79,687
10,12,500 10,12,500
4. (a) Journal Entries related to internal reconstruction
in the books of Planet Ltd. (Rs. in lakh)
Particulars Debit Credit
Rs. Rs.
i 8% Preference share capital A/c (Rs. 100 each) Dr. 600
To 8% Preference share capital A/c 450
(Rs. 75 each)
To Capital reduction A/c 150
(Being the Preference shares of Rs. 100 each reduced to Rs.
75 each as per the approved scheme)
ii Equity share capital A/c (Rs. 10 each) Dr. 1,500
To Equity share capital A/c (Rs. 2 each) 300
To Capital reduction A/c 1,200
(Being the equity shares of Rs. 10 each reduced to Rs. 2 each)
iii Capital reduction A/c Dr. 48
To Equity share capital A/c (Rs. 2 each) 48
(Being 1/3rd of arrears of preference share dividend of three
years to be satisfied by issue of 24 lakh equity shares of Rs.
2 each)
iv 6% Debentures A/c Dr. 450
To Freehold property A/c 450
(Being claim settled in part by transfer of freehold property)
v Accrued debenture interest A/c Dr. 36
To Bank A/c 36
(Being accrued debenture interest paid)
vi Freehold property A/c Dr. 175
To Capital reduction A/c 175
(Being appreciation Rs. (550-375) in the value of freehold
property)

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 vii Bank A/c Dr. 425
To Investment A/c 300
To Capital reduction A/c 125
(Being investment sold on profit)
viii Director’s loan A/c Dr. 450
To Equity share capital A/c (Rs. 2 each) 135
To Capital reduction A/c 315
(Being director’s loan waived by 70% and balance being
discharged by issue of 67.5 lakh equity shares of Rs. 2 each)
ix Capital reduction A/c Dr. 1,485
To Profit and loss A/c 783
To Trade receivables A/c (Rs. 675 x 40%) 270
To Inventories-in-trade A/c (450 x 80%) 360
To Bank A/c 72
(Being various assets, penalty on cancellation of contract,
profit and loss account debit balance written off through
capital reduction account)
x Capital reduction A/c Dr. 432
To Capital reserve A/c 432
(Being balance transferred to capital reserve account as per
the scheme)
(b) Capital Reduction Account (Rs. in lakh)

To Equity Share Capital 48 By 8% Pref. Share Capital 150

To P & L A/c 783 By Equity Share Capital 1,200
To Trade Receivables 270 By Freehold property 175
To Inventories 360 By Bank (profit on sale of 125
investment)
To Bank 72 By Director’s loan 315
To Capital Reserve 432
1,965 1,965
Bank Account (Rs. in lakh)

To Balance b/d 6 By Accrued debenture interest 36

To Investments 300 By Capital Reduction Account (Penalty on 72
cancellation of contract)

To Capital reduction 125 By Balance c/d 323

431 431

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 (c) Note to Accounts on Share Capital and Tangible Assets
after implementation of internal reconstruction
Share Capital (Rs. in lakh)
Authorised:
300 lakh shares of Rs. 2 each 600
12 lakh, 8% Preference shares of Rs. 75 each 900
1,500
Issued, subscribed and paid up:
241.5 lakh Equity shares of Rs. 2 each 483
(out of which 91.5 lakh shares have been issued for consideration other than cash)
6 lakh, 8% Preference shares of Rs. 75 each fully paid up 450
Total 933
Tangible assets
Freehold property 825
Less: Utilized to pay Debenture holders (450)
Add: Appreciation 175 550
Plant and machinery 300
Total 850
Working Note:
Calculation of number of equity shares issued:
Equity shareholders 150 Lakh
Preference shareholders (in lieu of arrear of preference dividend) 24 Lakh
Directors 67.5 Lakh
5. (a) Surbhi Ltd. Cash Flow Statement for
the year ended 31 st March, 20X1
Cash Flow from Operating Activities
Rs. Rs.
Increase in balance of Profit and Loss Account (1,00,000 – 40,000
60,000)
Dividend payable 2,00,000
Provision for taxation (W.N.1) 80,000
Transfer to General Reserve (2,00,000 – 1,50,000) 50,000
Depreciation (W.N.2) 1,25,000
Profit on sale of Plant and Machinery (15,000)
Operating Profit before Working Capital changes 4,80,000
Increase in Inventories (2,00,000)
Decrease in Trade receivables 2,00,000

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 Decrease in Trade payables (1,20,000)
Cash generated from operations 3,60,000
Income tax paid (50,000)
Net Cash from operating activities 3,10,000
Cash Flow from Investing Activities
Purchase of fixed assets (3,45,000)
Expenses on building (2,00,000)
(6,00,000 – 4,00,000)
Increase in investments (1,00,000)
Sale of old machine 35,000
Net Cash used in investing activities (6,10,000)
Cash Flow from Financing activities
Proceeds from issue of shares (10,00,000 – 8,00,000) 2,00,000
Proceeds from issue of debentures 2,00,000
Dividend paid (1,00,000)
Net cash used in financing activities 3,00,000
Net increase in cash or cash equivalents NIL
Cash and Cash equivalents at the beginning of the year 2,00,000
Cash and Cash equivalents at the end of the year 2,00,000
Working Notes:
1. Provision for taxation account
Rs. Rs.
To Cash (Paid) 50,000 By Balance b/d 70,000
To Balance c/d 1,00,000 By Profit and Loss A/c 80,000
(Balancing figure)
1,50,000 1,50,000
2. Plant and Machinery account
Rs. Rs.
To Balance b/d 5,00,000 By Depreciation 1,25,000
To Profit and Loss A/c 15,000
(profit on sale of
machine)
To Cash (Balancing figure) 3,45,000 By Cash 35,000
(sale of machine)
_______ By Balance c/d 7,00,000
8,60,000 8,60,000

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 (b) Memorandum Trading Account for the period 1st April, 2016 to 29th August 2016
Rs. Rs.
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. 4,41,300
fig.)
Less: (20,500)
Advertisement
Drawings (1,000) 16,33,850
To Gross Profit
[30% of Sales] 6,80,400
[W N]
27,09,300 27,09,300
Statement of Insurance Claim
Rs.
Value of stock destroyed by fire 4,41,300
Less: Salvaged Stock (54,000)
Add: Fire Fighting Expenses 2,350
Insurance Claim 3,89,650
Note: Since policy amount is more than claim amount, average clause will not apply. Therefore,
claim amount of Rs. 3,89,650 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31 st March, 2016
Rs. Rs.
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2015-16
Gross Pr ofit
 100 = 12,00,000/40,00,000 x 100 = 30%
Sales
6. (a) Mahaveer hospital
Income & Expenditure Account
for the year ended 31 December, 2016
Expenditure Rs. Income Rs.
To Salaries 24,000 By Subscriptions 24,500
To Diet expenses 15,600 By Govt. Grants (Maintenance) 20,000
To Rent & Rates 1,700 By Fees, Sundry Patients 4,800
To Printing & Stationery 2,400 By Donations 8,000
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 To Electricity & Water- 2,400 By Benefit shows (net collections) 6,000
charges
To Office expenses 2,000 By Interest on Investments 800
To Excess of Income over
expenditure transferred to
Capital Fund 16,000
64,100 64,100
Balance Sheet as at 31 st Dec., 2016
Liabilities Rs. Rs. Assets Rs. Rs.
Capital Fund : Building :
Opening balance 49,300 Opening balance 90,000
Excess of Income Addition 50,000 1,40,000
Over Expenditure 16,000 65,300 Hospital Equipment :
Building Fund : Opening balance 34,000
Opening balance 80,000 Addition 17,000 51,000
Add : Govt. Grant 80,000 1,60,000 Furniture 6,000
Subscriptions Investments-
received in advance 2,400 8% Govt. Securities 20,000
Subscriptions receivable 1,400
Accrued interest 800
Prepaid expenses (Rent) 300
Cash at Bank 6,800
Cash in hand 1,400
2,27,700 2,27,700
Working Notes:
(1) Balance sheet as at 31st Dec., 2015
Liabilities Rs. Assets Rs.
Capital Fund Building 90,000
(Balancing Figure) 49,300 Equipment 34,000
Building Fund 80,000 Subscription Receivable 6,500
Creditors for Expenses: Cash at Bank 5,200
Salaries payable 7,200 Cash in hand 800
1,36,500 1,36,500
(2) Building Rs.
Balance on 31st Dec. 2016 1,40,000
Paid during the year (50,000)
Balance on 31st Dec. 2015 90,000

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 (3) Equipment
Balance on 31st Dec. 2016 51,000
Paid during the year (17,000)
Balance on 31st Dec. 2015 34,000
(4) Subscription due for 2015
Receivable on 31st Dec. 2015 6,500
Received in 2016 (5,100)
Still Receivable for 2015 1,400
(b) Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Being capitalization of Profit)
7. (a) (i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
(vi) Fixed Assets
(vii) Shareholders' Fund / Money received against share warrants
(viii) Current Assets
(b) The entity has charged depreciation using the straight-line method at Rs. 1,00,000 per annum i.e
(5,00,000/5 years). On 1st January 2017, the asset's net book value is [5,00,000 – (1,00,000 x 4)]
Rs. 1,00,000. The remaining useful life is 4 years. The company should amend the annual provision
for depreciation to charge the unamortized cost over the revised remaining life of four years.
Consequently, it should charge depreciation for the next 4 years at Rs. 25,000 per annum i.e.
(1,00,000 / 4 years).
(c) (i) Operating Activities: c, e, f, g, j, m, o.
(ii) Investing Activities: a, h, k, l, p.
(iii) Financing Activities: b, d, i, n.
(d) Accounting Standards (ASs) are written policy documents issued by expert accounting body or
by government or other regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements. Accounting
Standards reduce the accounting alternatives in the preparation of financial statements and ensure
12

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 standardization of alternative accounting treatments and comparability of financial statements of
different enterprises.
Accounting Standards deal with the issues of
(i) Recognition of events and transactions in the financial statements,
(ii) Measurement of these transactions and events,
(iii) Presentation of these transactions and events in the financial statements in a manner that is
meaningful and understandable to the reader, and
(iv) Disclosure requirements which should be there to enable the public at large and the
stakeholders and the potential investors, in particular, to get an insight into what these
financial statements are trying to reflect and thereby facilitating them to take prudent and
informed business decisions.
(e) In modern time, computerized accounting systems are used in various areas. The significance of
the computerized accounting system is as follows:
(1) Increase speed, accuracy and security - In computerized accounting system, the speed with
which accounts can be maintained is several fold higher. Besides speed, level of accuracy is
also high in computerized accounting system.
(2) Reduce errors - In computerized accounting, the possibilities of errors are also very less
unless some mistake is made while recording the data.
(3) Immediate information - In this system, with an entry of a transaction, corresponding ledger
posting is done automatically. Hence, trial balance will also be automatically tallied and the
user will get the information immediately.
(4) Avoid duplication of work - Computerized accounting systems also remove the duplication of
the work.

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