Final Advanced Accounting & Auditing - 5,2025

SEM – 4 MANAKAMANA EDUCATION CENTRE B.
COM
ADVANCED ACCOUNTING & AUDITING – III (CORPORATE ACCOUNTING)

1 Redemption of Redeemable Preference Shares (Theory and Examples)
Procedure & Provision of The Companies Act regarding Redemption of Redeemable 25 %
Preference Shares, Sources of Bonus Shares
Examples based on:
Redemption of Redeemable Preference Shares excluding Bonus to convert partly paid up
Equity Shares into fully paid up) (Preparation of Balance Sheet as per The Companies Act,
2013 Revised Schedule III only)
2 Issue and Redemption of Debentures (Theory and Examples)
Meaning and Types of Debentures, Procedure of Issuing Debentures, Methods of 25 %
Redemption of Debentures
Examples based on:
Journal Entries regarding Issue and Redemption of Debentures under various
circumstances (Excluding Own Debentures from Open Market) Debenture Redemption
Fund Method
3 Accounting Standards ( Only Theory)
Concept and Meaning of Accounting Standards, Ind AS, IFRS
Utilities of Accounting Standards 25 %
Accounting Standard (AS) 9 Revenue Recognition
Accounting Standard (AS) 10 Property, Plant & Equipment
4 Ratio Analysis (Theory and Examples)

Meaning, Advantages and Limitations of Accounting Ratios
Classification of Ratios (Traditional and Functional Classification) 25 %
Examples for Computation and Interpretation of the following Ratios: (based on
Two Years Balance Sheet as per The Companies Act, 2013 Revised Schedule-III):
(1) Liquidity Ratios
(2) Leverage Ratios (3) Efficiency/ Solvency Ratios (4) Profitability Ratios
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LAXMAN GAUTAM 9825571010 Page 1 NIRMALA GAUTAM 9825819189

SEM – 4 MANAKAMANA EDUCATION CENTRE B.COM
UNIT:-1 REDEMPTION OF PREFERENCE SHARES

AND ISSUE OF BONUS SHARES
TOPIC -1 REDEMPTION OF PREFERENCE SHARES

INTRODUCTION:-
Generally a company is not allowed to purchase its own shares. If-it-does so, it
amounts to reduce its share capital which is not permitted, unless certain conditions
are fulfilled. A special resolution must be passed in the general meeting and sanction
from the court must be obtained. But, the companies act has provided for an
exception to this rule and accordingly company can issue redeemable preference
shares. Money received on these shares can be returned by the company in future.
Redeemable preference shares are a hybrid form of shares and
debentures. The provisions relating to redeemable preference shares are set-out in
section 80 of the company's act. The conditions laid down are such that the share
capital can be returned and yet the interest of the creditors is not adversely affected.
 PROVISION OF COMPANY'S ACT FOR REDEMPTION OF PREFERENCE

SHARES
1. The issue of preference shares should be authorized by the articles of the

company.'
2. The shares can be redeemed, only if they are fully paid up.
3. The shares may be redeemed out of the profit available for dividend or out of
the fresh issue of shares for the purpose of redemption.
4. Where the shares are redeemed out of profit a sum equal to nominal amount of
Shares redeemed are to be transferred from profit to the capital redemption
Reserve.
5. The premium, if any, payable on redemption will have to be written off out of
Share premium account or profits, before the shares are redeemed.
6. The capital redemption reserve account may be utilized by the company in
paying of un-issued shares of the company, to be issued to the members of the
company as fully paid bonus shares.
7. The redemption of preference shares under this section shall not be taken as
reducing the amount of its authorised share capital.
 PROFIT AVAILABLE FOR DIVIDEND:-

1. General Reserve
2. Profit & Loss A/C (Cr. Balances)
3. Dividend Equalization Fund
4. Reserve Fund
5. Workmen Compensation Fund
6. Insurance Fund
7. Debenture Redemption Fund

 PROFIT NOT AVAILABLE FOR DIVIDEND :-

1. Share Premium
2. Capital Reserve
3. Balance of Forfeited Share Account
4. Profit Prior to Incorporation
5. Development Rebate Reserve
TOPIC-2 ISSUE OF BONUS SHARES
BONUS SHARES: (SHORT NOTE)
It is the prudent policy of the company, not to distribute its entire profit as
dividend to share holders but, to transfer a portion of such profit to reserves to meet
unknown contingencies and to make strong financial position of the Company. When
the amount so transferred to various reserves, accumulate and forms a substantial
amount, then generally a company would like to give the benefit of such accumulate
profit to the shareholders. However, many companies do not like to distribute it by
the way of cash dividend, as it likely to affect adversely the working capital of the
company. If the company wants to utilize the amount of reserve for the expansion of
the business, the company may distribute it in the form of shares without payment
being made by the existing equity shareholders.
The shares so issued are known as bonus Shares. Thus, by issuing bonus
shares the profit is capitalized and the accumulated profit is utilized for the
expansion of the business.
Sources of Bonus Shares:

1. Credit balance of P&L A/c.
2. General reserve.
3. Debenture Redemption Fund or Sinking Fund
3. Capital Redemption Reserve A/c.
4. Share Premium A/c.
5. Capital Reserve
6. Profit prior to Incorporation.
Legal Provision in Respect of Bonus Shares:

While issuing bonus shares, the following legal formalities have to be followed:
1. Article of Association should permit the issue of bonus shares.

2. Permission of the controller of capital issue has to be obtained.
3. The proposal of the BOD for issue of bonus shares must be approved in the general
meeting of share holders.
EXAMPLES
REDEMPTION OF PREFERENCE SHARES AND ISSUE BONUS SHARES
EX.1 S.P.U-2000
The following is the Balance sheet of M/S Sachin Limited as on 31-3-99
Capital & liability Rs. Assets Rs.

Equity shares of Rs.10 each 1000000 Fixed assets 2110000
fully paid Investments 340000
10% Redeemable Current assets (including
preference shares of cash / bank of Rs.350000) 1150000
Rs. l00 each, Rs.80 paid up 400000
12% Redeemable
preference shares of Rs.50
each, Rs.30 paid up. 600000
General reserve 250000
Profit and loss A/c 360000
Share premium 200000
14% debentures 500000
Creditors 290000
360000 3600000
0
Directors of the company decided as under:
1. To redeem both the classes of redeemable preference shares of 10% premium

satisfying the provisions of the company law. For this purpose, necessary number
of equity shares of Rs.10 each issued at 5% premium.
2. To issue one equity share for every three equity shares as bonus. New equity
share holders have also right in the bonus shares.
Pass necessary journal entries and prepare balance sheet after implementation of the
above scheme.
EX-2 S.P.U-2000
The balance sheet of Parikh limited as on 31.3.99 are as under:

Capital liability Rs. Assets Rs.

6000 Equity shares of Land and building 700000
Rs.l00 each fully-paid up 600000 Plant and machinery 200000
2000;8 Redeemable Investments 150000
preference shares of Stock 120000
Rs. l00 each fully paid up 200000 Debtors 280000
2000; 7% Redeemable Cash balance 150000
preference shares of
Rs.100 each, Rs.80 per
share paid up 160000
Share premium 40000
Profit and loss a/c 100000
6% debentures 100000
Creditors 200000
1600000 1600000
On this date the company decided to redeem both the classes of preference shares at
10% premium after complying with the prevision laid down under sec.80 of the company
act 1956. Also decide to redeem 6% debentures at 3% premium.
For this purpose necessary numbers of equity shares of rs.100 each are issues at par.
Cash balance of Rs.7000 is to be maintained in the business. All the investments are sold
away for Rs.160000. All the preference shareholders are paid in full. The company then
decided to utilize the resultant reserve created out of redemption of preference shares
for issuing fully paid bonus shares to its equity share holders. Pass necessary journal
entries and prepare balance sheet.
Ex.3 S.P.U.-2002
The following is the balance sheet of Meena limited as on 31-3-2002.

Liabilities Rs. Assets Rs.

Equity shares each of Rs10 fully paid 250000 Fixed assets 527500
10% Red. Pref. Share/each of 100000 Investments 85000
Rs.100,Rs.80 paid up
12% Red. Pref. Shares, each of 150000 Current Assets (including 287500
Rs.50, Rs.30 paid up cash of Rs 87500)

P/L A/c 90000
Share premium 50000
14% Debentures 125000
Creditors 72500
900000 900000
Director of the company decided as under:

1. To redeem both the classes of Red. Pref. shares at 10% premium after satisfying
the revisions of company's law. For this purpose necessary number of equity
shares of Rs.10 each, issued at 5% premium.
2. To issue one equity share for every three equity shares as bonus shares. New equity
Share holders have also right in the bonus shares.
above scheme.
S.P.U.-2003
Ex.4 The balance sheet of "Rashmi" Ltd on 31.12.99 is as under.

Equity share capital of Rs.10 each 900000 Fixed assets 1950000
paid up amount Rs.9 per share
12% Redeemable pref. share 400000 Investment 200000
capital of Rs.10 each,Rs.8paid up
per share
14% redeemable pref. share 300000 Bank balance 500000
capital of Rs.10 each fully paid
General reserve 1500000 Current assets 800000
Share premium 50000
Creditors 250000
3450000 345000
0
It was decided to redeem 12% redeemable preference shares at a premium of
10% and 14% redeemable preference shares at a premium of 5% on the date of
balance sheet after abiding by necessary provisions of companies act. Investments
were sold Rs.150000. Now bank balance to be maintained in the business is Rs.50000.

for this purpose 15% cumulative preference share were issued at a premium of 10% in
adequate number.
Afterwards on the same date one bonus shares for two equity shares held to be
given and bonus was declared. For converting partly paid up equity shares into fully
paid shares. Write Journal entries and prepare Balance sheet.
S.P.U.-2001
Ex.5 The following is the balance sheet of Seema co Ltd as on 31st March 2001:
Capital Liabilities Rs. Assets Rs.
Equity shares of Rs. 10 each fully paid 500000 Fixed assets 1055000
10% Red. Pref. Shares of Rs.100 200000 Investments 170000
each ,Rs.80 paid up
12% Red. Pref. Shares of Rs.50 each 300000 Current assets (including 575000
, Rs.30, paid up cashRs.175000)
Profit and loss account 180000
Share premium 100000
Creditors 145000
1800000 1800000
Directors of the company decided as under:

1. To redeem both the classes of Red. Pref. shares at 10% premium, satisfying the
provisions of the company law. For this purpose necessary numbers of equity shares of
Rs.10 each are issued at 5% premium.
2. To issue one equity share for three equity shares as bonus, new equity shareholders
have also right in the bonus shares.
above scheme.
Ex.6 S.P.U.-2001
(A) Calculate the amount to be transferred to capita redemption reserve account under
the following cases:
Redeemable Pref. shares Fresh issue of shares
Rs.300000 to be redeemed at par Rs.150000 at par
Rs.400000 to be redeemed Rs.200000 at a discount of 10%
Rs.600000 to be redeemed at 2.5% Rs.150000 at a premium of at 10%
premium
(B) The balance sheet of "Y" ltd as on 31-3-2001 was as follows:
Equity shares capital 600000 Fixed assets 937500
(each of Rs.100 fully paid

Share premium 150000 Current assets 525000

Creditors 60000
1462500 1462500
The company in its general meeting decided to issue bonus shares at the rate of three
shares for every four shares held and decided for this purpose to utilize the total
amount of share premium, Rs.180000 out of general reserve and the balance from
profit and loss A/c.
S.P.U-2003
Ex.7 “Krishna" ltd declared bonus to make its partly paid shares as fully paid shares
out of General reserve. Then capital redemption reserve account and share premium
account were utilized to issue 2 fully paid equity shares for each 5 shares held as
bonus.
The balances as on 31st December 99 are given below:
Share capital (Rs.100)Rs.80 paid up 400000

Capital redemption reserve 200000
share premium 40000
Pass necessary entries in the books of company.
SP.2003
Ex.8 On 31.12.99 the balance sheet of "Sundaram" ltd is as under.

3000 equity shares of Rs.100 each 270000 Goodwill 50000
Rs.90 per share paid up
1500 12% redeemable pref. Share of 120000 Land building 300000

Rs.100 each Rs.80 per share paid up
Share premium 5000 Machinery 190000

Dividend equalizations fund 50000 Furniture 35000
General reserve 210000 Investment 45000
Profit loss A/c 90000 Stock 80000
Creditors 75000 Debtors 95000
Cash bank 25000
820000 820000
Redeemable preference shares are to be redeemed at 5% premium after all the
legal Provisions are observed. Cash and bank balance of Rs.30000 is to be kept in
business. The Company decided to issue only necessary new equity shares each of

Rs.100 at 10% discount. Investment is sold for Rs.42500. All the preference share
holders are paid in full. After Redemption of preference Share the company decided
that the full amount of capital Redemption fund and part of general reserve be applies
in the following manner:
1. To declaration of bonus at the rate of Rs.10 per share on equity share for the
purpose of making the said equity shares fully paid.
2. To declare a bonus of two Shares for every five shares held to the equity share
holders.
Journalize the above transaction in the books of the company and prepare a balance
sheet thereafter.
S.P.U-2004
Ex.9 The balance sheet of Keval ltd as on 31st December 2002 was as follows:
Issued and paid up capital 1500000 Fixed assets
15000 equity shares of Rs.100 Land and building 1200000
each fully paid up plant and 400000
machinery
4000 7.5% redeemable preference 400000 C.A. & L.A.
shares of Rs.100 each fully paid Stock 150000
up
Debtors 175000
3000 9% redeemable pref. shares
270000 Bank balance 415000
of Rs.100 each, Rs.90 Per share
paid up
Reserve and surplus
Capital reserve 30000
Share premium 30000
Dividend equalization fund 20000
2340000 2340000
On this date company decided to redeem both the class redeemable preference
shares at 10% premium after complying with the provisions laid down under section
80 of the company act, 1956.
For the purpose of redemption of preference shares necessary numbers of Equity
shares of Rs.100 each were issued at a discount of 10%. All the preference shares
holders were paid in full.
Pass necessary journal entries to record the above transactions and
prepare balance sheet of the company after redemption of preference shares.
S.P.2004

EX.10 The following was the balance sheet of "Meera" ltd as on 31.12.2002.
Equity shares of Rs.1O each fully 1600000 Fixed assets 1800000
paid up Other current 680000
assets Bank 120000
General reserve 750000 balance
Current liabilities 150000
2600000 2600000
On 1.1.2003 the company decided to issue bonus shares on the basis of one fully paid
equity share of Rs.l0each for every four equity shares held.
After the issue of bonus shares the company issued new equity shares as right shares
on the capital as enhanced by issue of bonus shares at the rate of one new equity
share of Rs.10 each at 10% premium, for every four equity sharesheld,which were fully
paid up.
From the above information pass necessary journal entries in the books of
the company and prepare a new balance sheet immediately thereafter.
S.P.U.-2005
Ex.11 The balance sheet of Hari limited as on 31.3.04 are as follows
Capital & Liabilities Rs. Assets Rs.
5000 Equity shares of Rs.100 each, Fixed assets 60000
Rs.80 paid up per share 400000 Investments 0
2000, 10% redeemable preference Stock 50000
shares of Rs.100 each, Rs.80 paid 160000 Debtors 80000
up per share 15000 Cash and bank 20000
Share premium 240000 0
General reserve 40000 40000
Profit and Loss A/c 115000
Creditors
970000 97000
0
The preference shares are redeemed at 5% premium after complying with the
provisions laid down under sec.80 of the complains act. For this purpose necessary
number of Equity shares of Rs.100 each are issued at per. Cash balance of Rs.50000
is to be maintained in the business. All the investment are sold way for Rs.40000. All
the preference shareholders are paid in full.
After redemption of the preference shares the company decided that the full
amount of capital redemption reserve and part of the general reserve be applied in
the following manner.

1. The declaration of bonus at the rate of Rs.20 per share for the purpose of making
the said equity shares fully paid.
2. The issue of bonus shares to the equity holders in the radio of one share for every
five shares held by them.
Write the journal entries and prepare balance sheet.
S.P.2005
Ex12 The issue share capital of Ganesh limited consists of 18000 Equity shares of
Rs.10 each, Rs.8 paid up and 10000, 11% redeemable preference shares of Rs.50
each, Rs.40 Paid up. After complying the provision laid down under act, redeemable
preference shares are redeemed at 10% premium. The balance sheet of the company
shows the following balances:
Capital reserve Rs.18000
Share premium Rs.18000
Profit & loss A/c (Cr.) Rs.252000
For this purpose of redemption of preference shares necessary numbers of 12%

cumulative preference shares are issued at 10% premium. All the investments worth
Rs.116000 are sold away for Rs.144000. All payments are made except to holder of
400 redeemable preference shares.
Pass necessary journal entries in the book of the company.
S.P.2006
Ex.13 Balance sheet of Gujarat Ltd as on 31.2.2005.
BALANCE SHEET
3000 Equity Shares of Rs.100 Land and Building 350000
each fully paid 300000 Plant & Machinery 100000
1000,8% Redeemable pref. Investments, 75000
Shares of Rs.100 each full paid 100000 Stock. 60000
1000, 7% Red. Pref. Shares of Debtors 140000
Rs.100 each,Rs.80 per Share Cash balance 75000
Paid up 80000
Shares Premium 20000
General Reserve 100000
Profit & Loss Account 50000
6% Debentures 50000
Creditors 100000
800000 800000
♦ »• ♦

On this date, the company decided to redeem both the classes of preference
shares at 10% premium after complying with the provision laid down under section 80
of the Companies Act 1956. Also to decide to redeem 6% Debentures at 3% premium.
For this purpose necessary numbers of equity shares of Rs.100 each are issued at par.
Cash balance of Rs.3500 is to be maintained in the business.
All investment is sold away for Rs.80000. All the pref. Share holders are paid in full.
The company then decided to utilize the resultant reserve created out of redemption
of reference shares for issuing fully paid Bonus share to its Equity Share holders. Pass
necessary journal entries and prepare Balance Sheet.
S.P.U.-2006 (14)
Ex.14 On 1.7.2005, the issued capital of Shah Ltd consisted of 4000 equity shares of
Rs.l00 each, Rs.80 per share paid up and 1500, 8% Redeemable pref. Shares of Rs.l00
each full paid up.
On this date, the company decided to redeem its pref. shares at premium of 10%.
On the same date, the Company's balance sheet showed Profit & loss Account (Credit
balance) of Rs.70000, General Reserve of Rs.l0000 and Share Premium Account of
Rs.1000.
For the purpose of redemption of pref. shares, necessary number of Equity Shares of
Rs.100 each were issued at a premium of 20% and investment worth Rs.50000 were
sold for Rs.70000.
All payments were made except to the holders of 100 pref. shares who could not be
traced.
The Company then decided to utilize the resultant Reserve created out of the
redemption of pref. shares to declare a bonus at the rate of Rs.20 per share on its old
Equity Share for the purpose of making the said Equity fully paid.
Pass necessary journal entries in the books of Shah Ltd for the above:
S.P.2007
Ex.15 The Balance Sheet of BHAVIKA Ltd .as on 31.4.2005 is as follows.

3000 Equity shares of Ra.100 Goodwill 50000
eachRs.90 paid 270000 Land and Building 300000
1500,12% Redeemable Pref. Plant & Machinery 190000
Shares of Rs.100 each Rs.80 120000 Furniture 35000
paid premium
Share 5000 Investment 45000
Dividend Equalization Fund 50000 Stock 80000
General Reserve 210000 Bank-cash balance 25000
Profit & Loss Account 90000 Debtors 95000
Creditors 75000
820000 820000

On this date the company decides to redeem redeemable preference shares at 5%

premium after complying with the provision of the company Act. Cash balance of
Rs.30000 is to be maintained.
For this purpose company has decided to issue new equity shares (of Rs.l00 each)
at l0% discount.
All investments are sold away for Rs.42500. All the pref. share holders are paid in
full.
The company then decided to utilize the resultant reserve created out of
redemption of preference shares and necessary general reserves to be used for Bonus
to equity share holders as
(1) To make fully paid equity share

(2) To issue Bonus share in the ratio of 5:2
Pass necessary entries and prepare the Balance Sheet of a Company.
S.P.2007
Ex.16 The balance sheet of "MANSI Ltd''as on 31 st March 2005 is as follow.
Liabilities Amt. Assets Amt.

Share Capital Fixed Assets 150000
15000 equity shares of Rs.10 each Stock 75000
full paid 150000 Debtors 30000
6000,6% Redeemable pref. share Bank balance 80000
of Rs.10 fully paid 60000
Profit & Loss Ace. 83000
Creditors 25000
Proposed dividend 17000
335000 335000
According to the conditions to redeem, company has to redeem redeemable

preference shares at 5% premium.
For this purpose 2000 preference shares of Rs.10 each, issued at the premium of Rs.5
per share which fully subscribed.
On 1st April 2005, all payments were made except to the holders of 20 preference shares
who could not be traced.
The company declared one (1) equity share for 10 equity shares as bonus (10:1)
Pass necessary entries in the books of a company and prepare new Balance Sheet.

S.P.2008
Ex.17. Following is the Balance Sheet of RK Ltd as on 31.3.2007.
Capital & Liabilities Rs. Assets Rs.

8% Red. Pref. Share capital. Shares of Goodwill 150000
Rs.100 each Rs.90 paid up per share 225000
Equity share capital Shares
of Rs.10 each Land-Building 350000
Fully paid up 500000
Reserves 750000 Plant Machinery 450000
6% Debenture 150000 Debtors 200000
Creditors 50000 Stock 300000
Cash and Bank 225000
1675000 1675000
*
On 1.4.2007 the Board of Directors made following decisions.
(1) To pay. 10% dividend/to equity shareholders (ignore dividend tax)
(2) To redeem the redeemable preference share with 5% premium after observing
legal provisions.
(3) To repay debentures with 3% premium.
(4) To retain the cash and bank balance Rs.25000 and only necessary number of
new equity shares of Rs.10 each will be issued at 10% premium.
(5) Bonus shares are to be issued to exiting equity shareholder s at one share for
every two shares held. Pass necessary journal entries and a Fresh Balance
Sheet of the company after giving effect of the above decisions.
S.P.2008
EX.18 Following is the Balance Sheet of RK Ltd as on 31.3.2007.
(a) The issued and paid up share capital of MK Limited consists of 3200 equity shares
of
Rs.10 each, Rs.8 paid up per share. The company has sufficient balance of general
reserve. The company decided to give bonus to the share holders at follows:
(1) To make the existing partly paid up shares as fully paid up.
(2) To issued one equity share of Rs.10 each. Full paid up as bonus share for
every
Five shares held.
Pass necessary journal entries in the books of company.

S.P.2009
Ex .19 Following is the Balance sheet of Ghansyam Limited as on 31.3.08.

Capital & Liabilities Amt. Assets Amt
Equity share capital shares fixed Assets 620000
of Rs.10 each full paid up 500000 Investments
9% redeemable preference (Face value Rs.100000) 140000
share capital Cash and Bank 80000
-Shares of Rs.100 each, Other Current Assets 230000
Rs.90 paid per share 180000
Share premium 10000
Profit & Loss A/c 55000
Other liabilities 245000
1070000 1070000
On 1.4.2008 the company decided to redeem the preference shares with 10%
premium after observing the legal provision. For this purpose half of the investments
sold at l20% of the face value. The company reserved to utilize the profit & loss a/c
and other reserves for the redemption of preference shares after retaining the
balance of Rs.25000 in the profit & Loss a/c. Only a necessary number of equity
shares of Rs.l0 each were issue at 10% premium. Thereafter the existing equity
shares holders were given bonus shares in the ratio of one equity share of Rs.10 each
for every five share held. Pass necessary journal entries and prepare the Balance
sheet of the company.
S.P.U-2009
Ex.20 (A) Following balance appeared in the books of Swami Limited as on
01.04.2007
Rs.
Equity share capital: Shares of Rs.10 each, Rs.8 800000
paid per share
Capital Redemption Reserve 160000
Capital reserve (Rs.50000 earned in cash) 90000
Share premium 70000
Profit & Loss A/c. 85000
On 15.4.2007 the director decided to give bonus to the equity share holders by
making the partly paid up shares into fully paid up shares and there after issuing one
equity share of Rs.10 each as bonus share to the holder of every five shares. It was

also resolved to make a minimum utilization of Free revenue reserve Write necessary
journal entries.
(b) Nirav Limited wants to redeem 2000, .8% redeemable preference shares of
Rs.100 each at 5% premium. Work out the minimum number of equity shares of
Rs.10 each of the following situations.
(1) Share premium Rs.5000, divisible profit: Rs.150000 and new shares are to be
issued at10% premium.
(2) Share premium: Rs.20000. Divisible profit Rs.150000 and new shares to be
issued at par.
(3) Divisible profit: Rs.l65000 and new shares to be issued at Rs.9 per share.
S.P.2010
Ex.21The balance sheet of Cipla Ltd. as on 31st March, 2009 is given below:
Liabilities Rs Assets Rs
Issued & Subscribed & Fixed Assets 45,00,000
Paid up Capital
12%, 10,000 redeemable
preference share of Rs 10,00,000
100 each fully paid
3,00,000 Equity shares of
Rs 100 each 30,00,000
Share Premium 1,00,000 Investments 1,50,000
General Reserve 6,00,000 Other Current Assets 15,00,000
Current Liabilities 28,00,000 Bank Balance 13,50,000
75,00,00 75,00,00
0 0
On 1st April, 2009, the 12% redeemable preference shares were to be redeemed at a
premium of 10%. The company had no sufficient profit for redeeming preference
share capital. Therefore the co. issued to public minimum necessary fresh 13%
Cumulative preference Shares of Rs 100 each at par. These Shares were fully
subscribed and paid.
After the completion of the process of redemption of redeemable preference shares

the company resolved to distribute one equity share of Rs 10 each fully paid for every
five shares held by equity shareholders as bonus shares.
Write Journal entries to record above transactions in the books of a company and
prepare balance sheet after redemption.

S.P. Nov 2003

Ex.22 Following is the balance sheet of Micky ltd as on 31-3-2003.
Issued & Subscribed & Fixed Assets 16,50,000
Paid up Capital
10%, 5,000 redeemable
preferences share of Rs 4,00,000
100 each, 80 paid up per
share.
1,00,000 Equity shares of 10,00,000
Rs 100 each
Share Premium 30,000 Cash & Bank Balance 3,00,000
General Reserve 2,00,000 Other Current Assets 5,50,000
Profit & Loss A/c 1,20,000
Sundry Creditors 7,50,000
25,00,00 25,00,00
0 0
On 1-4-2002 the redeemable preference shares were to be redeemed at 10%

premium after complying with the all the provisions for the Companies Act. In addition
the directors want to maintain the credit balance of Rs 100000 in the Profit & Loss A/C
even after the redemption of preference shares. Only required number of 7%
cumulative preference shares of Rs 100 each have to be issued for cash at par.
After the redemption of preference shares the company issued bonus shares to
equity shareholders in the ratio of one share for every five shares held.
Write Journal entries to record above transactions in the books of a company
and prepare balance sheet after redemption.
S.P.U. NOV 2002

Ex.23 On 31-12-2001 the Balance sheet of Sujata Co Ltd is as follows:
6000 Equity shares of Rs 6,00,000 Land & Building 4,50,000
100 each
2000, 8% redeemable 1,80,000 Plant & Machinery 2,60,000
Preference share of Rs 100
each, 90 per share paid up
1000, 10% redeemable 1,00,000 Investments 80,000
Preference share of Rs 100

each fully paid up

Share Premium 10,000 Stock 1,42,000
General Reserve 85,000 Debtors 65,000
Profit & Loss A/c 50,000 Cash 58,000
Creditors 30,000
10,55,00 10,55,00
0 0
On the above date, the company decided to redeem both the classes of preference
share at 10% premium after complying with the provision under section 80 of the
companies Act, 1956.
For this purpose, necessary numbers of equity shares of Rs 100 each are issued
at par. Cash Balance of Rs 23000 is to be maintained in the business. All the
investments are sold away for Rs 75000. The entire preference shareholders are paid
in Full.
The company then decided to utilize the resultant reserve created out of the
redemption of preference shares for issuing fully paid Bonus shares to Equity
shareholders.
Pass necessary journal entries to record the above transactions in the books of
Sujata co. ltd and prepare Balance sheet thereafter.
S.P.U. 1999
Ex .24 On 31st March, 1999 the Balance sheet of Ishita Ltd is as under:
Issued & Subscribed & Land & Building 6,00,000
Paid up Capital
70,000 Equity shares of Rs 7,00,000
10 each fully paid
3,000 redeemable
preference share of Rs 100 3,00,000
each fully paid
General Reserve 1,50,000 Plant & Machinery 4,00,000

Profit & Loss A/c 30,000 Investments 1,00,000
Current Liabilities 2,00,000 Stock 1,50,000
Debtors 1,20,000
Cash Balance 10,000
13,80,00 13,80,000
0
On this date company decided to redeem the preference share at 5% premium as per
sec 80 of Companies Act. For this purpose company issued 23000 equity share of Rs

10 each are issued at par. All the investments are sold away at 10% discount and
redeemable preference shareholders are paid in full.
The company then decided to utilize the resultant reserve created out of the
redemption of preference shares for issuing fully paid Bonus shares to Equity
shareholders.
Pass necessary journal entries in the books of a Co. and prepare New Balance sheet.
Ex.25 On 31st March 2009 the Balance sheet of Manakamana Ltd is as under:
35000 equity shares each of 350000 Land & Building 300000
Rs 10 fully paid
15000 10% Redeemable 120000 Plant & Machinery 200000
preference share each of Rs
10, 8 paid up
General Reserve 75000 Investments 50000
Profit & Loss A/c 15000 Stock 75000
Current Liabilities 100000 Debtors 60000
Share Premium 30000 Cash 5000
690000 690000
On this date, as per Sec 80 of Companies Act, the company decided to redeem the
preference share at 10% premium. For this purpose company issued 11,500 equity
shares each of Rs 10 at par. All Investments are sold away at Rs 45000 and
redeemable preference shareholder paid in full.
Pass necessary journal entries in the books of a company.
Ex.26 The Balance sheet of Manakamana Pvt. Ltd as on 31-12-2002 as follows:
15000 equity shares each 150000 Land & Building 120000
of Rs 100 fully paid 0 0
4000 7.5% Redeemable 400000 Plant & Machinery 350000
preference share each of
Rs 100 fully paid
General Reserve 300000 Investments 50000
Profit & Loss A/c 60000 Stock 160000
Capital Reserve 40000 Debtors 175000
Share Premium 30000 Cash 415000
Dividend Equalization fund 20000
235000 235000

0 0
On this date, as per Sec 80 of Companies Act, the company decided to redeem the
preference share at 5% premium. For this purpose company issued 20000 equity
shares each of Rs 10 at 10% Discount. All Investments are sold away at Rs 45000 and
redeemable preference shareholder paid in full.
Pass necessary journal entries in the books of a company.
S.P.1998
Ex.27 Calculate the Amount to be transfer to Capital Redemption Reserve Account in
each of the following cases:
Redeemable Preference Shares Fresh Issues of Shares

1.RS 300000 to be redeemed at par 1.Rs 150000 at par
2. Rs 400000 to be redeemed at par 2. Rs 200000 at a discount of 10%
3. Rs 600000 to be redeemed at 3. Rs 1,50,000 at a premium of 10%
2.5% premium
S.P.2003 S.Y. B.com/ 2014 BBABBB

Ex.28 Calculate the Amount to be transfer to Capital Redemption Reserve Account in
each of the following cases:

2. Rs 500000 to be redeemed at premium 2. Rs 300000 at par
of 5%
3. Rs 500000 to be redeemed at par 3. Rs 3,00,000 at a premium of 10%
5. Rs 500000 to be redeemed at 5% 5. Rs 3,00,000 at a premium of 10%
premium
Eg.29
Calculate the Amount to be transfer to Capital Redemption Reserve Account in each of
the following cases:

2. Rs 1000000 to be redeemed at 2. Rs 600000 at par
premium of 5%
3. Rs 1000000 to be redeemed at par 3. Rs 6,00,000 at a premium of 10%

5. Rs 1000000 to be redeemed at 5% 5. Rs 6,00,000 at a premium of 10%

premium
Eg. 30 S.P. 2013

The balance sheet of Shiv Ltd. as on 31-3-12 is as under:

20000 Equity shares of Rs.10 200000 Fixed assets 304000
each fully paid up Other current assets 171250
10% Red. Pref. shares of Rs.100 125000 Bank balance 225000
each fully paid up
8% Red. Pref. shares of Rs.100
each 125000
Less: calls in amount 7250
at Rs.25 per share 118750
Share premium 20000
Dividend equalization fund 30000
Current liabilities 47500
700250 700250
The company on 1-4-12 decided to redeem both the classes of preference shares at
10% premium, after complying with companies Act, 1956. Out of 250, 8% Red.
Preference shares on which calls are in arrear, the amount of the call could be
received only on 100 shares. For the purpose of redemption, the company issued
necessary equity shares at a discount of 10%. The Preference shareholders were paid
off the amount.
Pass necessary journal entries in the books of the company and prepare Balance
sheet after redemption.
E.g.32 S.P. 2013

The balance sheet of Harsh Co.LTd. on 31-3-2012 is as under :
Equity share capital of Rs.10 450000 Fixed assets 975000

each paid up Rs.9 per share Investments 100000

12% Red.Pref.Share capital of Bank balance 250000
Rs.10 each, paid up Rs.8 per 200000 Other current assets 400000
share
14% Red.Pref.Share capital of 150000
Rs.10 each fully paid up
Share premium 25000
Creditors 125000
1725000 1725000
It was decided to redeem 12% red.Preference shares at a premium of 10% and

14% Red. Preference share at a premium of 5% on the date of the balance sheet,
after abiding by necessary provisions of Companies Act. Investments were sold at
Rs.75000. now bank balance to be maintained in the business is Rs.25000. For this
purpose 15% Cumulative Preference shares were issued at a premium of 10% in
adequate number.
Afterwards on the same date one bonus share for two equity shares held to be
given and bonus was declared for converting partly paid up equity shares into fully
paid shares. Write journal entries in the book of Harsh Co. Ltd.
SP 2014 BCOM
33) Dhwani Ltd. presented the following balance sheet as on 31 st March, 2013.

50000, equity shares of Rs.10 500000 Stock 250000
each fully paid up
2000, 10% preference shares of 200000 Debtors 150000
Rs.100 each fully paid up
2000, 8% preference shares of 160000 Cash and bank 210000
Rs.100 each, Rs.80 paid up
Securities premium 50000 Plant and machinery 500000
General reserve 100000 Investment 100000
Creditors 100000
1210000 1210000
On 1st April, 2013 the company redeemed its 10% preference shares at a premium of
10%. For this purpose the company had followed:
Sells investment for Rs.80000.

A part of plant and machinery WDV Rs.150000 was sold for Rs.120000.
Took a loan from ICICI bank at the interest rate of 12% amounting to Rs.100000.

Minimum reduction is to be made from general reserve account.

Issued 6000 equity shares @ Rs.10 each fully paid up.
Pass necessary journal entries and balance sheet immediately after redemption.
E.g.34 S.P. 2014 BBA

On 31st March 2012 the Balance sheet of Morari Ltd is as follows:
2000 Equity shares of Rs 100 2,00,000 Land 1,00,000
each
500, 7% Redeemable preference 40,000 Buildings 82,500
share of Rs 100 each, 80 paid up
500, 8% Redeemable preference 50,000 Plant & Machinery 50,000
shares of Rs 100 each fully paid
up
Share Premium 5,000 Investments 35,000
General Reserve 37,500 Stock 50,000
Profit & Loss A/c 17,500 Debtors 45,000
Creditors 40,000 Cash Balances 27,500
Total 3,90,00 Total 3,90,000
0
On this data, the company decided to redeem both the classes of preference shares
at 10% premium after complying with the provisions laid down under section 80 of the
Companies Act, 1956.
For this purpose, necessary numbers of equity shares of Rs 100 each are issued
at par. Cash Balance of Rs 15000 is to be maintained in the business. All the
investments are sold away at Rs 30,000. All the preference shareholders are paid in
full. The company has then decided to utilize the resultant reserve created out of the
redemption of prefrence shares for issuing fully paid Bonus shares to Equity
shareholders.
Pass necessary journal entries in the books of Morari Co. Ltd.

UNIT 2: ISSUE AND REDEMPTION OF DEBENTURES
INTRODUCTION & DEFINITION:

Debenture is an instrument by which the company can borrow money from the public
or others. A joint stock company can borrow from the members of the public by 2
ways, by issuing shares or debentures. It invites them to lend money and in return
issues them acknowledgement that the company owes a particular amount from
them, this is known as "debentures". It is a debts of a company divided into equal
parts of small amounts.
A debenture is a written acknowledgement of the debt by a company usually issued
under its common seal. It generally contains provision as to return of money borrowed
and also as to the payment of interest. Floating charge is usually created of the assets
of the company while issuing debentures.
TYPE OF DEBENTURES:
(A) On The Basis Of Security:
(1) Simple Debenture: They are issued without offering any security. Only the debt
is acknowledged by means of debentures.
(2) Mortgaged Debenture: They are secured by charge assets of the company. It
may be fixed charge on a particular asset of a company or it may be floating charge
on all the assets of the company.
(B) On the basis of facility of transfer:
(1) Bearer Debenture: These debenture are like currency notes and transferable by
hand delivery. The transfer is not to be registered with the company; neither does the
company maintain any record of its debenture holders.

(2) Registered Debenture: Name, address and other details of debenture holders
are recorded in the register of debenture holders maintained by the company. The
transfer of such debenture is necessary to be registered with the company.
(C) On the basis of redemption:
(1) Redeemable Debenture: Money received on such debenture are to be repaid by

the company within a specified period, the date of redemption may be stated in terms
of issue of debentures.
(2) Irredeemable Debenture: It is not fixed in advance, when money received on
such debentures are to be repaid. They are not repaid after a fixed period of time.
Money is definitely redeemed when the company goes into liquidation.
(D) On the basis f convertibility:
(1) Convertible Debenture: The debenture which are fully or party convertible into
equity Shares after Specific period are called convertible debenture.
(2) Non-Convertible Debenture: These are the debentures which are not so
convertible into equity shares. They are repaid on maturity or on time of Liquidation in
Cash.
SHORT NOTES ON: DEBENTURE REDEMPTION FUND/SINKIMG

FUND METHOD:
A fixed sum is transferred from profit to a fund for the purpose of redemption of
debenture is called sinking fund. Every year the same is generally invested outside
the business which earns interest at a fixed rate. The exact amount to be transferred
to this every year is determined from the sinking fund table. The sum so transferred
along with interest will amount to the exact sum to be repaid. When this fund is
invested outside the business the interest received on such investment is also
invested along with the fixed annual installment (i.e. Provision amount). Interest
received on sinking Fund investment is not credited to P & L a/c but credited to
sinking fund a/c. At the end of last year all the sinking fund investment are be sale out
and profit or loss on sale of investment also transferred to sinking fund account.
SHORT NOTES ON: DEBENTURES ISSURED AS COLLATERAL

SECURITY:
Sometimes the company may make out debentures in proper form and lodge (apply)
them with the bank as an additional security, in addition to any other security that
may be a agreed upon for loan or overdraft granted by the bank. When the company
makes regular payment of interest and repays the loan in time, such debenture are

returned to it by the bank. In such a case, the company makes default in repayment
of loan or over draft; the bank will treat such debentures as alive. It will either sell off
the debentures to outsiders or recover its dues. Or, it can keep the debenture with it
and become debenture holder itself. If it elects to dispose off debentures in the
market, the purchasers will get all the right of debenture holders.
Generally, no entry is passed for debentures issued to bank as collateral Security.

If, however an entry is to be made for such debentures, then
Debenture Suspense A/c Dr.

To Debentures A/c
'Debenture Suspense Account' wills appear on the assets side of the balance sheet
and 'Debentures Account' will appears as a liability. When the bank loan will be
repaid, the bank would return these debentures, which would be cancelled. The above
entry would then be reserved.
METHOD 1 SIMPLE JOURNAL ENTRIES
Eg.1 S.P.2005
On 1.1.2000 Madhav company limited issued 8000, 6% debenture of Rs.100 each at a
10% discount, these debenture are issued with condition that these are repayable
after 5 years at a 5% premium. Write journal entries in the books of company.
Eg.2 S.P.U.-2010
DLP Ltd. issued 10000, 12% debentures of Rs.100 each. Given journal entries if the
debentures are-
(1) Issued at a discount of 10% and redeemable at par.
(2) Issued at a premium of 10% and redeemable at par.
(3) Issued at par and redeemable at 10% premium and
(4) Issued at a discount of 10% and redeemable at a premium of 10%.
Eg.3 S.P.2004
Keshav ltd. issued 7500, 10% debentures of Rs.100 each at a discount of 8% to be
redeemed at a premium of 10% after six years.
Pass necessary journal entries.
Eg.4 S.P. Nov 2002

On 1-1-95 Radha Ltd issued 3500, 7% Debenture of Rs 100 each at a discount of 10%
and repayable on 31-12-2000 at 8% premium.
Give journal entry for Issue and Redemption.
Eg.5 SP.1999
X ltd issued 5000, 12% Debentures of Rs 100 each at a discount of 5% & it is to be
redeemed at a premium of 10% after 5 years.
Give journal entry for Issue and Redemption.

Ex.6
X Ltd Issued 2000, 10% Debentures of Rs 100 each at Rs 95 and it is to be redeem at
5% premium after 6 years. Give journal entry for Issue and Redemption.
Eg. 7. S.P. 2012

On 1/1/03 Lux Co. Ltd. issued 9000, 8% Debentures of Rs.100 each at par. These
debentures were issued with condition that these are repayable after 5 years at 5%
premium. Write journal entries of issue and redemption of debentures in the books of
the company.
METHOD 2 DEBENTURE DISCOUNT METHOD
Eg.1 S.P. 2007

Sonara ltd issued Rs 10, 00,000 Debentures at 10% Discount on 1-1-2001 which are
redeemable every year by Rs 2, 50,000. The Discount on Debentures is to be written
off in the proportion to the amount utilized every year. Make necessary calculations
and prepare the Debenture discount in the books of the Company.
Eg.2 S.P 2004

Akash ltd. issued 8%, 4500 debenture of Rs.100 each at a discount of 10% on 1-1-
1998, repayable by annual drawings of Rs.90000.
Give journal entry of issue of debentures and show the discount Account.
Eg.3
Dolly ltd. issued on 1.1.97 10% debentures Of Rs.1000000 at a discount of 6%. The
company received the full amount. The company will redeem debentures of Rs
200000 every year. Prepare discount on issued of debentures Account from 1.1.97 to
31.12.99.
Eg.4 S.P.U-2001
"B" Com. Ltd. Issued 10%, 6000 Debenture of Rs.100 each at a discount of 5½ % on
1-1-96. These debentures are redemption as follows:
On 31-12-96 - Rs.120000
On 31-12-97 - Rs.180000
On 31-12-98 - Rs. 90000
On 31-12-99 - Rs.150000
On 31-12-00 - Rs. 60000

Prepare Debenture Discount account with the help of above information.
Eg.5 S.P 2003

Ami ltd issued 12% 4000 debentures of Rs.100 each at a discount of 5.5 % on 1.1.91.
These debentures are redeemable as follows:
On 31-12-91 80000
On 31-12-92 120000
On 31-12-93 60000
0n 31-12-94 100000
On 31-12-95 40000
Prepare Debenture Discount account with the help of above information.
Eg.6 S.P 2002

Patel ltd. Issued 4500, 10% debentures of Rs.100 each at 5% discount on 1st Jan,
1998. It undertakes to repay the debentures at par as under:
31-12-1998 1800 Debentures

31-12-1999 1350 Debentures
31-12-2000 900 Debentures
31-12-2001 450 Debentures
Prepare "Debentures Discount A/c" in company's books.
Eg.7 S.P.2006
Patel Ltd issued Rs.800000 Debentures at 10% Discount which are redeemable every
year by Rs.200000. The discount on Debentures is to be written off in proportion to
the amount utilized every year. Make necessary calculations prepare the Debenture
Discount Account in the books of the company.
Eg. 8 S.P.1999
Samata company ltd issued 3000, 10% debentures of Rs 100 each at 5% Discount on
1-1-98.
It undertakes to repay the debentures at par as under:

31-12-98 1200 Debenture
31-12-99 900Debenture
31-12-00 600 Debenture
31-12-01 300 Debenture
Prepare the Debenture Discount Account in the books of the company.
E.g. 9 S.P. 2012

On 1/1/06 Star Ltd. issued 4000, 15% debentures of Rs.100 each at a discount of 7%.
Debentures have to be redeemed at the rate of Rs.100000 each year commencing
with the end of second year. Prepare Discount on Debentures account for all the
years.
SP 2014 BCOM
10) Ajay co. ltd. has issued 8000, 9% debentures of Rs.100 each at 6% discount on 1-
4-2009. The company has redeemed 2000 debentures every year from 31-3-2010 for
four years. Prepare debenture discount account assuming that accounting year ends
on March 31.
METHOD 3 PAYMENT BY DIFFERENT KIND OF CONSIDERATION
Eg.1 S.P. 2006

Anand Ltd. gave the following three alternatives for redemption of 8%, 5000
Debentures each of Rs.100 at 5% Premium.
(1) To pay Cash

(2) To issue 10% Redeemable Preference shares of Rs 100 each at Rs 120.
(3) T0 issue 9% Debentures of Rs.100 each at Rs 90.
2000 Debenture holders accepted preference shares, 1800 Debenture holders'

accepted new debentures and the remaining accepted cash.
Write up the journal entries in the books of the company.
Eg.2 S.P.2008
On 1.4.2001 RP Ltd had issued 8000, 10% debentures of Rs.100 each. As per the
terms of issue company gave a notice for the redemption of these debentures at 5%
premium on 1.1.2007 and gave three options to the debenture holders. The details of
the options are as under.
Option Accepted by
(1) 14% Preference shares of Rs.100 - Holders of 3200 debentures
each to be given at Rs.120 per share.
(2) 15% unsecured debentures of Rs100 - Holders of 3800 Debentures
each at 5% discount
(3) Cash payment - Remaining debentures

Give necessary journal entries.
Eg.3 S.P Nov 2002

Dharatri Co ltd issued 9%, 18000 Debentures of Rs 100 each at a discount of 8%.
They are to be redeemed at 5% premium after six years.
Following three alternatives have been given at the time of redemption.

1) 7% preference shares of Rs 100 each to be issued at a price of Rs 125.
2) 9% new debentures of Rs 100 each at Rs 90 each.
3) Payment in cash
Holders of 6000 debenture accepted 7% preferences shares, 7200 debenture holders

accepted 9% new debentures and remaining holders demanded cash.
Eg.4 S.P.Nov 2003

Kalpana ltd issued 20,000 debentures of Rs 100 each. On 1-1-2003 the debentures
are to be redeemed at 5% premium. The company gave following options to the
debenture holders.
1) To issue 10% Cumulative preference shares of Rs 100 each at an issue price of
Rs 120.
2) To issue 11% secured debentures of Rs 100 each at 5% discount.
3) Payment by cheque.
Debenture holders having 9600 debenture exercised the option of preference shares,
7600 debenture holders opted for new debentures and remaining requested for
cheque.
Pass journal entries in the books of Company.
Ex.5 S.P. 2012

The following three alternatives have been given to redeem 5000, 8%debentures of
Rs.100 each at a premium of 5%.
1. Payment in cash
2. 10% Redeemable Pref. shares to be issued at Rs.120 (face value Rs.100).
3. 9% New debentures of Rs.100 each at 10% discount.
2000 debentures holders accepted 10% redeemable pref. shares, 1800

debentureholders accepted new debentures and remaining have accepted the option
of cash.
Pass journal entries for redemption of debentures in the books of the company with
necessary calculation.
SP 2014 BCOM

6) Ravi Co. Ltd. has offered 12000, 8% debentures of Rs.10 each at 10% discount on
1-4-2007. The company has decided to collect Rs.3 with application, Rs.4 with
allotment and remaining amount with final call.
The company has received applications for 15000 debentures out of which the
excess applications have been rejected. All transactions have taken place duly. After
10 years, company has decided to redeem all debentures with 10% premium. Various
options were given to debenture holders. They have agreed as under:
1. 5000 debenture holders have agreed for new equity shares of Rs.10 each which
are to be given with 10% premium.
2. 3600 debenture holders have agreed for new equity shares of Rs.10 each which
are to be given with 10% premium.
3. Remaining debenture holders have agreed for cash.
Pass journal entries for above transactions in books of the company.
METHOD 4 SINKING FUND METHOD OR DEBENTURE REDEMPTION

FUND METHOD
Eg.1 S.P.1996
On 1-1-90 Patel Ltd issued 6000, 10% debentures of Rs 100 each, at 10% discount,
which was repayable at a premium of 2%. It was decided to transfer from profit
Rs 132000 to sinking fund at the end of every year and to invest the same in
investment, earning 10% interest. On 31st December 1994, the company sold the
investments for Rs 618000 and repaid the debentures.
Pass the entries for issue of debentures and redemption of debenture and also
prepare Sinking Fund Account and Sinking Fund investment Account for all the years.
Eg.2S.P.2009
On 1.4.2002 Mona Limited issued 10000, 12% secured debentures of Rs.100 each for
cash at par. The debentures were to be redeemed with 5% premium at the end of Five
years. For mobilizing funds at the time of redemption the company resolved to set
aside Rs.180000 as debenture redemption funds and invest the same into marketable
securities at 10% compound interest every year. On 31.3.2007 the debenture
redemption fund investments were sold at Rs.99 and the debentures were redeemed.
Prepare:
(1) Debenture Redemption Fund A/c
(2) Debenture Redemption Fund investment A/c.

Eg.3 S.P.2010
On April 1st 2005, Unitech Ltd. issued 10000, 9% debentures of Rs.100 each
repayable at the end four year at a premium of 10%. It has been decided to institute
a Sinking fund for the purpose, the investment being expected to realize 5% net.
Sinking fund table shows that Re.0.232012 invested annually amounts to be Rs.1 at
5% in four years. Investments were made in multiples of hundreds only.
On 31st March 2009, the balance at the bank was Rs.400000 and the investment
realized Rs.820000. The debenture was paid off. Give journal entries expect for
debenture interest.
Eg. 4. S.P.2013
Shivam Hotel Co. issued 1000, 15% Debentures of Rs.100 each on 1 st January, 2010
redeemable at a premium of 10%. Terms of issue provided that the company should
set aside every year a sum of Rs.34893 to be invested at 12% outside the business.
The investments were sold at Rs.71580 at the end of the third year and the
debentures were paid off.
Prepare Sinking Fund a/c and Sinking Fund Investment a/c.
METHOD 5
Eg.1 S.P.2003
The books of Usha company ltd showed the following balances on 31-12-2000:
Rs.
15% Mortgaged Debentures 1000000
Debenture redemption fund 1082000
Debenture redemption fund investments:
1. 10% central govt loan 528000
(Purchased at face value)
2. 9% National Defense Bonds 542000 10, 70,000
(Face value Rs.560000)
On 31-3-2001, 10% central Govt. loan and 9% National bonds were sold at Rs.110 and
Rs.98 respectively and on the same day Debentures were redeemed at Rs.107.50
including unpaid interest. Debenture interest was paid upto 31-12-2000.
Prepare Debenture Redemption fund A/c and Debenture redemption fund investment
A/c in the books of Usha Co. ltd.
Eg.2 S.P.2003
The following balance appeared in the books of" Apexa" ltd as on 31.12.99.
Rs.
1.15% mortgage debenture 500000
2. Debenture discount 10000

3. Interest received on sinking fund investment 45000
4. Sinking fund 492500
5. Bank balance 100000
6. Sinking fund investment:
a.7% National Defense Bond of Rs.162500 157500
b.8% N.S.C. of Rs.110000 115000
c.9% Narmada bond of Rs.137500 142500
d.10% units of unit trust of Rs.60000 77500 492500
On the same day national Defense Bond were sold at Rs.90, NSC were sold at Rs.105
and Narmada bond were sold at Rs.80 and investment in Unit trust at Rs.130.
On 1.1.2000 debentures of Rs.400000 were redeemed at 5% premium and Punjab
govt. loan of Rs.40000 was purchased at Rs.105.
The company transfers Rs.15000 every to Debenture redemption fund from profit.
Write necessary journal entries and prepare necessary accounts in the company's
books of account from the information given above.
Eg.3 S.P.2004
The following were the balances in the books of Riya ltd as on 31st December 2002.
10% Mortgage debentures Rs.1600000

Debenture redemption fund Rs.1700000
Debenture redemption fund investments:
1. 8% Guj. Govt. loan (Purchase at par) Rs.650000
2.10% National Defense bond Rs.950000 Rs 16,00,000
On 31st March 2003 8% Gujarat Govt. loan was sold at Rs.110 and 10% national
debenture bonds at Rs.98.
On the same day debentures were redeemed at Rs.105 together with accrued
interest. The interest on debentures had been paid up to 31st December 2002.
Prepare necessary accounts in the books of company.
Eg.4 S.P 2005

On 31st march 2004 the following balances stood in the kiran limited.
8% Mortgage debentures 500000

Interest received on debenture redemption fund 15000
investment 20000
Discount on issue of debentures 360000
Debenture redemption fund

Debenture redemption investments:

5% Gujarat govt. loan (Purchase at par) 120000
4½% National defense bonds (face value Rs.250000) 240000
On the same day the investments were sold:

Gujarat govt. loan at Rs.105.
National defense bonds at Rs.95.
On the 1st April 2004, the debentures of Rs.350000 were redeemed at a premium of
5%. On the same day central Govt. Loan of Rs.120000 was purchased at 5% premium.
Annual contribution for redemption of debentures was Rs.60000.
Pass journal entries in the books of the company to record the above transactions.
Show your working.
Eg.5 S.P 2006

The following were the balance in the books of Vrunda Limited as on 31st December
2005.
Rs
15% Mortgage Debentures 800000
Debenture Redemption Fund 880000
Debenture Redemption Fund investment:
(1)10% Central Govt. loan 600000
(2) 8% National Defense Bonds 280000 880000
On 31st March 2006, 10% Central Govt. loan was sold at Rs 110 and 8% National
Defense Bonds were sold at Rs 95.
Debentures were redeemed Rs.108 together with accrued interest.
The interest on debenture had been paid up to 31st December 2005.
Prepare the following accounts in the books of Vrunda ltd.
(1) Debenture Accounts
(2) Debenture holders Accounts
(3) Debenture Redemption Fund Account
(4) Debenture Redemption Fund Investment account.
Eg.6 Following balance appeared in the books of RCK limited as 1.4.2006

Rs.
10% secured debentures 200000
Debentures Redemption fund 150000

Deb. Red. Fund investments

(10% Govt. Securities) 150000
The company appropriates Rs.40000 towards Deb. Red. Fund every year. On
31.3.2007 the Deb. Red. Fund investments were sold at Rs.95 and the debentures
were redeem with 2.5% premium.
Prepare Deb. Red. Fund investment A/c and Deb. Red. Fund A/c.
Eg.7S.P 2009
Following balances appeared in the books of Manan limited as on 01.04.2007
Rs.
8% Mortgage Debentures 500000
Deb. Red. Fund investments 455000
(6% Government securities: Face Value Rs.450000)
Debenture discount 6000
The interest debenture is paid and payable on 31st march every year. The same date
is the due date of interest on investment. The company appropriates Rs.35000 every
year for debenture redemption fund.
On 01.04.2008 the company resolved to redeem the debentures with 5% premium.

Hence, the Debenture Redemption Fund investments were sold at Rs.99 and the
debentures were redeemed.
Give all necessary journal entries.
Eg.8 S.P.2000
On 31st March 1999 the following balances stood in the books of Ashok limited.
Rs
Interest received on DRF Investment 43000
Debenture Discount 60000
Debenture Redemption fund 540000
Debenture Redemption fund Investments
7% Central Government Loan (Face value 260000) 240000
8% Gujarat Government loan (Purchase at par) 300000
On the same day investment were sold:

Central Govt. loan at Rs 103, Gujarat Government loan at Rs 95.
On 1-4-99 the debentures of Rs 360000 were redeemed at a premium of 5%. On the
same day Maharashtra Government loan of Rs 140000 were purchased at Rs 102.
Annual Contribution for Redemption of Debentures was 100000.
Pass Journal entries in the books of a Company.

Eg.9 S.P Nov 2002

The Books of Krupa Co. ltd showed the following balances on 31-12-2000.
Rs
8% Mortgage Debentures 10,00,000
Debenture Redemption Fund 10,50,000
Debenture redemption fund Investments
1) Central Government Loan(Purchase at face value) 3,70,000
2) 10% National Defence Bonds (face value Rs 6,50,000) 6,30,000
10,00,000
On 31-3-2001 8% Central Government Loan and 10% National Defence Bonds were
sold at Rs 110 and Rs 98 respectively and on the same date debentures were
redeemed at Rs 104 including unpaid interest.
Debenture interest was paid upto 31-12-2000.

From the above particulars prepare necessary accounts in the books of a company.
Eg.10. S.P.2012
The following were the balances in the books of Sakshi Ltd. as on 31-3-11

Debenture Redemption fund Investment:
6% Gujarat Govt. Loan (purchased at par) 600000
5% National Defence Bonds 380000
(face value Rs.400000) 980000
On 31/5/11, 6% Gujarat Govt. Loan was sold at Rs.110 and 5% National Defense
Bonds at Rs.98. On the same day, debentures were redeemed at Rs.106 together with
accrued interest. The interest on debentures has been paid upto 31-3-11.
Prepare Debentures Redemption Fund a/c, Debentures Redemption Fund Investment

a/c, Debenture holders a/c, Premium on redemption of Debentures a/c.
Eg.11. S.P.2013
On 31st March, 2012 the following balances stood in the books of Sagar Ltd.
Interest received on sinking fund investments 20000
Discount on issued of debentures 50000
Sinking fund 450000
8%Gujarat Govt.Loan (purchased at par) 200000
9% National Defence Bond(face value Rs.280000) 250000

On the same day investments were sold:

Gujarat Govt. loan at Rs.97 and National Defence Bond at Rs.102.
On 1st April, 2012 the debentures of Rs.300000 were redeemed at a premium of 10%.
On the same day Central Govt. securities of Rs.100000 were purchased at premium of
2%. Annual contribution for redemption of debentures was Rs.50000.
Pass necessary journal entries in the books of the company and prepare Debenture
Redemption Fund Investment a/c and Debenture Redemption Fund a/c.
Eg.12. S.P.2013
The books of Milin Ltd. showed the following balances on 31-12-2006.
15% Debenture 1000000

Debentures R. Fund 1082000
Debentures R. Fund Investment
10% Central Govt. loan purchased at face value 528000
9% National Defence Bond (face value Rs 560000) 542000 1070000
On 31-3-2006 10% Central Govt. loan and 9% National Defense Bond were sold at
Rs.110 and Rs.98 respectively and on the same date debentures were redeemed at
107.50 including unpaid interest. Debenture interest was paid upto 31-12-2005.
Prepare: Debenture a/c

Debenture holder a/c
Debenture redemption a/c
Debenture R. Fund Investment a/c
Eg.13 S.P.2014BBA
The following were the balances in the books of a company as on 1-1-202.
12% Debentures Rs. 3, 00,000
12% Debenture Redemption fund Rs. 2, 25,000
8% D.R.F Investments Rs 2,25,000
Company transfers Rs 25000 every year to Debenture Redemption Fund

Account. After receiving interest on investments, company sold out the said
investments at 20% profit on 31-12-2012 and debenture amounting to Rs 2,40,000
were redeemed at 10% premium.

Write journal entries in the books of the company and also prepare
ledger Accounts.
UNIT 3 : ACCOUNTING STANDARDS
CONCEPT OF ACCOUNTING STANDARDS:

Accounting Standards may be defined as uniform rules for external financial reporting, which may be
applicable either to all or to a certain class of entity. Accounting Standards are the policy documents issued
by the recognized expert accountancy body relating to various aspects of measurement, treatment and
disclosure of accounting transaction and events.
HISTORY OF ACCOUNTING STANDARDS

Accounting Standards began to be issued after 1970 and now they have become extremely important
for the accountants and accounting bodies
On the international level on 29th June, 1973, 16 accounting bodies from nine countries entered into
an agreement and form the International Accounting Standards Committee. The objective of the committee
was to work generally for the improvement and harmonization of regulations, accounting standards and
procedures relating to the presentation of financial statements.
In 1970 The Institute of Chartered Accountants of England set up the Accounting Standards
Committee. Its purpose was to narrow down the differences found in accounting policies. This body first
prepares a rough draft of the standard which the accountants and public discuss and send their
recommendations. Within a span of 10 years between 1970-80 it published nearly 18 standards.
In India, the Accounting Standards Board was constituted to the Institute of Chartered Accountants
of India on 1St April, 1972 with object of formulating accounting standards. It was decided initially these
accounting standards should be applicable to the public sector companies, private sector companies listed on
recognized stock exchanges, etc. The institute has so far issued 29 Accounting Standards.
UTILITY OR USEFULNESS OR OBJECTIVES OF ACCOUNTING STANDARDS

1. To increase the credibility of financial statements: There are many users of financial statement
like shareholders, creditors, etc, Hence the statements must be so prepared that they can depend on
them and can understand them properly. The accounting standards provide structure for such
reliable statements.
2. Useful to Auditors: If the auditors cannot detect any frauds in accounts, they may be held liable to
compensate their clients. If the auditors are well aware of the accounting standards, they can very
well perform their duties. Thus accounting standards help auditor in their professional work.
3. Useful to Accountants: If there is no accounting standards there would be problem in preparation
and presentation of accounts. As the accounts are to be prepared according to the accounting
standards, there would be no scope for malpractices or inefficiency.
4. Useful in determining efficiency of management: the profitability of business is measured from the
accounts only. The progress, the solvency and soundness, the liquidity of the business are all
revealed by accounts. If accounts are prepared on the basis of accounting standards, the users of
financial statements get good idea about these aspects which reliable and dependable.
ACCOUNTING STANDARD 9- REVENUE RECOGNITION
AS 9 for Revenue recognition is mainly concerned with timing of recognition of revenue in the profit
and loss account, amount of revenue arising on a transaction and influence of uncertainties existing
regarding the determination of the amount, or its cost on timing of revenue recognition.
There are few exceptions where the special consideration applies: –
 Revenue arising from Construction Contracts ·
 Revenue arising from hire-purchase, lease agreements
 Revenue arising from government grants and other similar subsidies
 Revenue of Insurance companies arising from insurance contracts
Meaning of revenue
Revenue is nothing but the inflow of cash, receivables or other consideration arising in the course of the
ordinary activities of an enterprise.
Accounting standard 9 is concerned with the recognition of revenue arising in the course of the ordinary
activities of the enterprise from:
 From sale of goods,
 From rendering of services, and
 From the use by others of enterprise resources yielding interest, royalties and dividends
A. Sale of goods
Revenue from a transaction involving sale of goods is recognized when the seller has transferred the
property in the goods to the buyer for a consideration which mostly coincides with the transfer of
significant risk and rewards of ownership.
However, certain situations may arise where the transfer of property does not result or coincide with
the transfer of risk and rewards. Revenue in such cases is recognized at the times of the transfer of
significant risk and rewards of ownership to the buyer. This may be due to:
 Delay in delivery due to fault from either the buyer or the seller or

 Due to an agreement entered into by the parties as to the timing of transfer of significant risk
and rewards of ownership.
B. Rendering of Services
Revenue from service transactions is primarily recognized as the service is performed, either by
 Proportionate completion method or
 Completed service contract method.
Completed service contract method
It is a method of accounting which recognizes revenue in the statement of profit and loss only when
the rendering of services under a contract is completed or substantially completed.
Proportionate completion method
It is a method of accounting which recognizes revenue in the statement of profit and loss
proportionately with the degree of completion of services under a contract.
C. Interest, royalties & dividends
The use by others of such enterprise resources gives rise to:
(1) Interest: Revenue is recognized on the time proportion basis after taking into account the
amount outstanding and the rate applicable.
For Example: If the interest on FD is due on 30th June and 31st Dec. On 31st March when the
books will be closed, though the interest for the period of Jan-March will be received in June,
still we have to recognize the revenue in March itself.
(2) Royalties: Royalty includes the charge for the use of patents, know-how, trademarks, and
copyrights. Revenue has to be recognized on the basis of accrual basis and in accordance with
the relevant agreement.
For Example: If the royalty is payable based on the number of copies of the book, then it has to
be recognized on that basis only.
(3) Dividends: Revenue has to be recognized when the owner’s right to receive payment is
established. It is only certain when the company declare the dividends on the shares and the
directors actually decide to pay the dividends to their shareholders.
Practical Questions on Accounting Standard 9: Revenue Recognition
Q.(1)
Y Ltd. used certain resources of X Ltd. In return X Ltd. receives Rs. 10 lakhs and Rs. 15 lakhs as interest
and royalties respectively, from Y Ltd. during the year 2007 –2008. State on what basis X Ltd. should
recognize their revenue, as per AS 9.
Answer :
As per AS 9 on ‘Revenue Recognition’, interest of Rs.10 lakhs received in the year 2007-2008 should be
recognized on the time basis, whereas royalty of Rs. 15 lakhs received in the same year should be
recognized on accrual basis as per the terms of relevant agreement.
Q.(2)
M/s. Sea Ltd. recognized Rs. 5.00 lakhs, on accrual basis, income from dividend during the year 2010-11,
on shares of the face value of Rs. 25.00 lakhs held by it in Rock Ltd. as at 31st March, 2011. Rock Ltd.
proposed dividend @ 20% on 10th April, 2011. However, dividend was declared on 30th June, 2011. Please
state with reference to relevant Accounting Standard, whether the treatment accorded by Sea Ltd. is in order.
Answer
In the given case, the dividend is proposed on 10th April, 2011, while it was declared on 30th June, 2011.
Hence, the right to receive dividend is established on 30th June, 2011 only. Therefore, on applying the

provisions stated in the standard, income from dividend on shares should be recognized by Sea Ltd. in the
financial year 2011-2012 only. Therefore, the recognition of income from dividend of Rs. 5 lakhs, on
accrual basis, in the financial year 2010-11 is not in accordance with AS 9.
Q.(3)
The Board of Directors of X Ltd. decided on 31.3.2011 to increase sale price of certain items of goods sold
retrospectively from 1st January, 2011. As a result of this decision the company has to receive ` 5 lakhs from
its customers in respect of sales made from 1.1.2011 to 31.3.2011. But the Company’s Accountant was
reluctant to make-up his mind. You are asked to offer your suggestion.
Answer :
The additional revenue on account of increase in sales price with retrospective effect, as decided by Board of
Directors of X Ltd., of ` 5 lakhs to be recognised as income for financial year 2010- 11, only if the company
is able to assess the ultimate collection with reasonable certainty. If at the time of raising of any claim it is
unreasonable to expect ultimate collection, revenue recognition should be postponed.
AS 10 - PROPERTY, PLANT AND EQUIPMENT

Objective
The main objective of AS 10 is to prescribe the accounting treatment for properties, plant, and equipment. It
enables the users to understand the accounting treatment for investments made by an entity.
AS 10 do not apply in the following cases
1. Biological assets related to agricultural activities excluding produce on bearer plants.
2. Wasting assets including mineral rights, expenditure on exploration and extraction of mineral oil,
natural gas and similar non-regenerative resources.
Agriculture produce is the harvested product of biological assets of an entity.
Bearer plant is a plant which is used in the production and supply of agriculture produce. Following are not
bearer plants: –
3. Plants cultivated to be harvested as agriculture produce.
4. Annual crops like wheat, maize etc.
Biological assets are living animals or plants.
Recognition of Assets
The cost of an asset that comes under Property, Plant and Equipment as per AS 10 is identified as an asset
only if:
 The future economic benefits expected to arise from such an asset would come to the
business entity
 Cost of such an asset can be reliably measure
Determination of Cost
As per AS 10, the cost of property, plant and equipment of a business entity may include the:
 initial cost to acquire or construct an item of property, plant and equipment
 Subsequent costs of adding, replacing or servicing the property, plant and equipment so
acquired
Initial Costs

As per AS 10, PPE covers all tangible assets that are held for use or administrative purposes. Here,
administrative purposes include all business purposes other than the production or supply of goods or
services or giving PPE on rent to others.
Thus, PPE used for administrative purposes include assets used for:
 selling and distribution
 Finance and accounting
 Personnel and other functions of an enterprise
Further, PPE may also include assets acquired for safety or environmental purposes.
Subsequent Costs
While recording items of PPE and their carrying amount in the books of accounts, the business entity does
not include the cost incurred on the day to day servicing of such items. Such costs are rather recognized in
the statement of Profit and Loss at the time they are incurred.
The day – to day costs of servicing include costs such as labour, small parts and consumables. These day to
day servicing costs are basically incurred on account of repairs and maintenance of an item of PPE
Measurement of Cost
Once assets are recognized as an item under PPE as per AS 10, the business entity can use one of the two
models to determine the carrying amount of the assets so acquired.
Cost Model
Once an asset is recognized, the item of PPE may be carried at its cost less accumulated depreciation and
any accumulated impairment losses as per the Cost Model.
Here cost of an item of PPE includes:
 Acquisition Cost including import duties and non-refundable purchase taxes less any trade
discounts and rebates
 Costs directly associated with bringing the asset to the location as well the condition
essential so as to make the asset capable of operation in a way as planned by the
management.
 Costs of dismantling, removing the item and restoring the site on which the asset is located
Revaluation Model
Under the revaluation model, after the asset is recognized, an item of PPE should be carried at a revalued
amount. Provided the fair value of such an item of PPE can be reliably measured.
The revalued amount is nothing but the Fair Value of the item of PPE at the date of revaluation less any
subsequent accumulated depreciation as well as impairment losses.
Depreciation
 Each part of an item of PPE with a cost that is significant in relation to the total cost of the
item should be depreciated separately.
 The depreciable amount should be allocated on a systematic basis over its useful life.
 Depreciation charge for each period should be recognized in the Statement of Profit and Loss
unless it is included in the carrying amount of another asset.
 Residual value & useful life to be reviewed at each balance sheet date.
 Depreciation method used should reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the enterprise.
 Depreciation method to be reviewed at least at each financial year end.
 Depreciation methods include SLM, WDV & Units of Production method
Derecognized
The carrying amount of an item of PPE should be derecognized on disposal or when no future economic
benefits are expected from its use or disposal.

Gain/loss on derecognition should be recognized in Statement of Profit and Loss (unless AS 19 requires
otherwise in a sale and leaseback) and should not be classified as revenue.
Gain/loss on derecognition is the difference between net disposal proceeds, if any, and the carrying amount
of the derecognized item of PPE.
Practical Questions
Q. 1
A company has purchased plant and machinery in the year 2001-2002 for `45 lakhs. A balance of `5 lakhs is
still payable to the suppliers for the same. The supplier waived off the balance amount during the financial
year 2004-2005. The company treated it as income and credited to profit and loss account during 2004-2005.
Whether accounting treatment of the company is correct. If not, state with reasons.
Solution:
As per AS 10 the cost of fixed assets may undergo changes subsequent to its acquisition or construction on
account of exchange fluctuation, price adjustments, changes in duties or similar factors. The treatment done
by the company is not correct. `5 lakhs should be deducted from the cost of fixed assets.
Q. 2
ABC Ltd. gave 50,000 equity shares of `10 each (fully paid up) in consideration for supply of certain
machinery by X & Co. The shares exchanged for machinery are quoted on Bombay Stock Exchange (BSE)
at `15 per share, at the time of transaction. In the absence of fair market value of the machinery acquired,
how the value of machinery would be recorded in the books of the company?
Solution:
As per AS-10 fixed asset acquired in exchange for shares or other securities should be recorded at its fair
market value or the fair market value of the securities issued, whichever is more clearly evident. Since, the
market value of the shares exchanged for the asset is more clearly evident, the company should record the
value of machinery at `7,50,000. (i.e., 50,000 shares x 15 per share being the market price)

CHAPTER 4 RATIO ANALYSIS

CLASSIFICATION OF RATIOS:
Ratios are classified as follows:

1. Traditional classification
2. Functional classification
1) Traditional Classification: The ratios are group into three categories on the
basis of the statements from which the figures are taken for computing the ratios. The
ratios according to this classification are:
 Revenue statement Ratios: These are the ratios computed on the basis of
items taken from revenue statement i.e. profit and loss account. Ex- net profit is
computed by dividing Net profit by Sales. Here both net profit and sales are
items appearing in profit and loss account.
 Balance sheet Ratios: When two items or group of items appearing in the
balance sheet are compared the ratio so obtained is a balance sheet ratio. Ex- a
ratio establishing relationship between current assets and current liabilities is a
balance sheet ratio.
 Composite Ratios: A ratio showing the relationship between one item taken
from balance sheet and another taken from Profit and loss account is a
composite ratio or a combined ratio. A return on capital employed shows the
proportion of the profit to capital employed and it is a composite ratio.

2) Functional Classification: Ratios are also grouped in according with certain

tests. On this basis there are four categories of ratios.
 Liquidity Ratio: These ratios indicate the position of liquidity. This are
computed to ascertain whether the company is capable of meeting short term
obligations from its short term resources. For ex- the current ratio shows the
capacity of a firm to meet its current liabilities as and when they mature. Ex-
current ratio, liquidity ratio, acid test ratio.
 Profitability Ratio: A number of ratios are designed to indicate the profitability

of the business and are grouped into the category of profitability ratios. For ex-
return on capital employed is an example of profitability ratio. Ex- Gross profit
ratio, net profit ratio, expenses ratio, operating ratio, etc.
 Leverage Ratio: The composition of capital of business and the proportion of

owner’s capital and capital provided by outsiders are reflected by leverage
ratios. For ex- gearing ratio showing the relationship between the preference
capital and ordinary capital is a leverage ratio. Ex- proprietary ratio, debt equity
ratio, gearing ratio, capital-fixed assets ratio.
 Activity or efficiency Ratios: These are the ratios showing the effectiveness
with which the resources of the business are employed. It signifies the efficiency
of the management. For ex- stock turnover ratio is an activity ratio showing the
number of times the average stock is turned over during the year. Debtor’s
turnover ratio, creditors’ ratio turnover, fixed assets turnover, etc.
In order to easily understand the ratios, the traditional classifications are more useful.
Hence the ratios have been discussed according to this classification,
1. Revenue statement ratios

2. Balance sheet ratios
REVENUE STATEMENT RATIOS:
 Gross profit Ratio: It is a ratio expressing relationship between gross profits

earned to net sales. It is a useful indication of the profitability of business.
Gross profit ratio = Gross profit x 100

Sales
 Operating Ratio: It is a ratio showing relationship between cost of goods sold

plus operating expenses and net sales. It shows the efficiency of the
management. The higher the ratio, the less will be the margin available to
proprietors.

Operating ratio = Cost of goods sold + operating expenses x 100

Net sales
 Expense Ratio: For the purpose of ascertaining relationship between operating

expenses and net sales, expense ratios are computed. For ex- the proportion of
selling expenses or administrative expenses in relation to net sales is an
operating ratio.
Expense ratio = Expense x 100

Sales
 Net Profit Ratio: The ratio is valuable for the purpose of ascertaining the
overall profitability of business and shows the efficiency of operating the
business.
Net profit ratio = Net profit x 100

Sales
 Stock Turnover Ratio: The number of times the average stock is turned over
during the year is known as stock turnover. It is computed by dividing the cost
of goods sold by the average stock in the business.
Stock turnover = Cost of goods sold

Average stock
BALANCE SHEET RATIOS
 Current ratios: This most widely used ratio shows the proportion of current
assets to current liabilities. It is a measure of short term financial strength of the
business and show whether the business will be able to meet its current
liabilities, as and when they mature.
Current ratios = Current assets

Current liabilities
 Liquid ratios: A variant of current ratio is the liquid ratio or quick ratio which is
designed to show the amount of cash available to meet immediate payments.
Liquid assets are obtained by deducting stock in trade from current assets.
Stock is not treated as a liquid asset because it cannot be readily converted into
cash as and when required. The liquid liabilities are obtained by deducting bank
overdraft from current liabilities.
Liquid ratio = Liquid assets Current Assets-Stock)

Liquid liabilities (Current Liabilities-BOD)

 Acid Test Ratio: the measure of absolute liquidity may be obtained by

comparing only cash and bank balance as well as readily marketable securities
with liquid liabilities. It is computed by dividing value of quick assets by liquid
liabilities. Here quick assets do not include both stock and debtors, because
payments from debtors would not be received immediately when liquid
liabilities are to be paid. Thus the quick assets comprise only cash balance, bank
balance and readily marketable securities only.
Acid –test ratio = Quick assets

Liquid liabilities
 Proprietary Ratio: The ratio shows the proportion of proprietor funds to the
assets employed in the business. The proprietor fund consists of share capital
and reserve and surplus.
Proprietary ratio = Proprietor’s fund x 100

Total assets
 Debt Equity Ratio: The ratio is only another form of proprietary ratio and
establishes relationship between the outside liabilities and owner’s funds.
Debt equity ratio = long term debt + current liabilities

Owner funds
COMPOSITE RATIOS
 Return on Capital Employed: It is an index of profitability of business and is

obtained by comparing net profit with capital employed. The ratio is normally
expressed in the percentage. The capital employed includes share capital,
reserves and long term liabilities.
Return on capital employed = Net profit before interest and taxes x 100
Capital employed
 Return on Shareholders’ fund: In order to judge the efficiency with which the
proprietor funds are employed in business, this ratio is ascertained. It is of great
importance to the investors, as it enables the profitability of a company to the
compared with that of the other company. It also indicates whether the return
on proprietors funds enough in relation to the risks that they undertake.
Return on shareholder fund = Net profit x 100

Shareholders fund
 Return on equity shareholders fund: It shows what percentage of profit is

earned on the capital invested by ordinary shareholders.

Return on equity shareholders’ fund =

Net profit after int.& tax & pref. dividend x 100
Shareholders fund
 Debtor’s Ratio: The ratio shows the number of days taken to collect the dues
of credit sales. It shows the efficiency of the collection policy of the enterprise.
Debtors ratio = Debtors + Bills Receivable

Credit sales
 Creditor’s ratio: The number of days within which we make payment to our
creditors for credit purchases is obtained from creditor’s velocity.
Creditors turnover ratio = Creditors + Bills Payables

Credit purchase
ADVANTAGES/UTILITY OF RATIO ANALYSIS
1. Profitability: Useful information about the trend of profitability is available

from profitability ratios. The gross profit ratio, net profit ratio and ratio of return
on investment give a good idea of the profitability of business. On the basis of
these ratios, investors get an idea about the overall efficiency of business, the
management gets an idea about the efficiency of manager and bank as well as
creditors draws useful conclusions about repaying capacity of the concern.
2. Liquidity: In fact, the use of ratios was made initially to ascertain the liquidity
of business. The current ratio, liquid ratio, etc will tell whether the business will
be able to meet its current liabilities as and when they mature. Bank and other
lenders will be able to conclude from these ratios whether the firm will be able
to pay regularly the interest and loan installments.
3. Efficiency: The turnover ratios are excellent guides to measure the efficiency of
managers, ex- the stock turnover will indicate how efficiently the sale is being
made, the debtor’s turnover will indicate the efficiency of collection department
and assets turnover shows the efficiency with which the assets are used in
business.
4. Inter firm comparison: The absolute ratios of a firm are not of much use,
unless they are compared with similar ratios of other firm belonging to the same
industry. This is inter firm comparison, which shows the strength and weakness
of the firm as compared to other firms and will indicate corrective measures.
5. Indicate Trend: The ratios of the last three to five years will indicate the trend
in the respective fields. For ex- the current ratio of a firm is lower than the
industry average, but if the ratio of last five years shows an improving trend, it
is an encouraging trend.

6. Useful for budgetary control: Regular budgetary reports are prepared in a

business where the system of budgetary control is in use. If various ratios are
presented in these reports, it will give a fairly good idea about various aspects
of financial position.
7. Useful for decision making: Ratios guide the management in making some of
the important decisions. Suppose the liquidity ratios show an unsatisfactory
position, the management may decide to get additional liquid funds. Even for
capital expenditure decisions, the ratio of return on investment will guide the
management. The efficiency of various departments can be judged on the basis
of their profitability ratios and efficiency of each department can thus be
determined.
LIMITATIONS OF RATIO ANALYSIS
1. Single year’s ratios have limited utility: The utility of ratios computed from
the financial statements of one year only is obviously limited. They must be
compared with the past results of the company as also with the results of other
business firms in the same industry.
2. Other factors must be considered: While comparing ratios of different firms,

it must be remembered that different firms follow different accountancy plans
and policies. For ex- some may use a straight line method of depreciation, while
others may make use of a diminishing balance method. Hence, great care has
to be exercised before an conclusions are drawn from such comparison.
3. Limited utility of historical ratios: While comparing ratios of past several

years, it should be remembered that changes in price level may render such
comparison useless. An asset purchased some 10 years before may be shown at
its historical value and comparison of these assets with sales may be of no
value as sales are expressed in current market value.
4. Use of one ratio misleading: One ratio used without reference to other ratios
may be misleading. If some conclusions are to be drawn, then the combined
effect of a few related ratios must be considered.
5. Lack of standard ratios: There is practically no standard ratio against which

the actual performance can be compared. The satisfactory level of various ratios
may differ from one industry to another only because circumstances differ from
industry to industry and even from firm to firm.

6. Other factors important: Financial results of the business depend on a

number of factors such as general economic conditions and competition, local
factors and the policy adopted by the management. Hence before giving any
opinion on the basis of accounting ratios all such factors must be kept in mind.
7. Inaccurate base: the accounting ratios can never be more correct than the
information from which they are computed. If the accounting data is not
accurate, the accounting ratios based on these figures would give misleading
results.
8. Investigation necessary: It must be remembered that accurate ratios are

only a preliminary step in investigation. They suggest areas were investigation
or inquiry is necessary. Hence before taking any action on the basis of
accounting ratios, a investigation must be made.
9. Rigidity harmful: If in the use of ratios, the manager remains rigid and sticks
to them, it will lead to dangerous situation. For ex- if the manager believes the
current ratio should not fall below 2:1, then many profitable opportunities will
have to be foregone.
10. Ratios of two irrelevant figures: Ratios must be established between

related matters. It is of no use if the ratios are found between two figures which
have no relation with each other. Ex- ratio of factory expenses to selling
expenses is illogical and does not give any useful conclusion.

FORMULAS
1) Gross Profit Ratio = Gross profit x 100

Sales
2) Net Profit Ratio = Net profit ratio (after interest and tax) x 100
Sales
3) Operating Ratio = (Cost of goods sold + Operating exp. + debenture interest) x

100
Sales
4) Stock Turnover Ratio = cost of goods sold

Average stock (opening stock + closing stock)
2
5) Current Ratio = Current assets ( Stock + Debtors + B.R. + Prepaid exp. +

Cash & bank)
Current liabilities (Creditors + Bills payable + Bank O/D + O/S
expenses)
6) Liquid ratio = Liquid assets (Current assets – stock)

Liquid liabilities (Current liabilities – Bank O/D)
7) Debt Equity ratio = Debt (Long term (debenture) + Short term (Current liabilities)
Equity (Proprietary fund)
8) Proprietary Fund = Proprietary Fund x 100

Total assets (B/S total – Miscll.exp.)

9) Debtors Ratio = (Debtors + Bills Receivable) x 360 days

Credit sales
10) Return on shareholders’ fund = Net profit (after interest and tax ) x100
Shareholders fund
11) Return on Equity share capital =

Net profit (after int. & tax & Preference dividend) x 100
Equity share capital
12) Return on capital employed = Net profit (before int. and tax) x 100
Capital employed (Proprietary fund + debenture)
13) Capital Gearing ratio = Preference share capital + Debenture

Equity share capital
Proprietary Fund = Equity share capital + Preference share capital + reserve &
surplus – Misc. Expenses
EXAMPLES
1) Following balances stood in the book of “N.D. Ltd.” on 31 st March, 2004
Particulars Rs.
Gross profit 180000
Cost of goods sold 270000
Net profit (before taxes) rate of taxes is 50% 90000
Equity share capital of Rs.100 each 150000
8% Preference share capital of Rs.10 each 50000
Reserve & Surplus 105000
Cash and bank balance 20000
Creditors 30000
Bank Overdraft 40000
Land & Building 290000
Furniture 20000
Bills Payable 20000
Stock (closing) 60000
Debtors 80000
Bills Receivable 20000
Preliminary expenses 5000
Additional information
1) Total sales are credit sales.
2) For calculation of ratios 360 days to be considered for the year.

From the above information you are required to calculate the following
ratios:
1. Gross profit ratio 2. Net Profit ratio 3. Debtor’s Ratio 4. Current ratio
5.Debt-equity ratio and 6.Proprietary ratio.
S.Y.BBA 2007
2) Following is the summarized balance sheet of Priyanka Ltd. as on 31-3-06.
Equity share capital 500000 Fixed assets 960000
10% Pref.share capital 200000 Stock 225000
General reserve 225000 Debtors 175000
12% debentures 300000 Bills receivable 50000
Bank Overdraft 50000 Cash balance 90000
Creditors 200000 P & L a/c 25000
Bills payable 50000
152500 152500
0 0
Additional information:
A) Total sales (cash sales are 1/5th of credit sales) Rs.1800000
b) Cost of goods sold Rs.1080000
c) Net Profit (before int. & tax, tax rate is 50%) Rs.486000
d) Stock on 1-4-05 Rs.207000
From the above information calculate accounting ratios for the year and
make brief comment on each of them.
In bracket standard ratios are shown. (300 days to be taken for the year)
Current ratio (2:1)
Liquid ratio (1.25:1)
Return on capital employed (25%)
Debtor’s ratio (45days)
Stock turnover ratio (5 times)

Capital gearing ratio (0.75)
3) Balance sheets and details of Keshav Co. Ltd. are as under:
Liabilities 31-3-03 31-3-04 Assets 31-3-03 31-3-04

Equity share 300000 400000 Fixed assets 700000 700000
capital 200000 100000 Debtors 146000 182000
10% Preference Cash 130000 210000
share capital 100000 150000 Bank 24000 8000
Reserves 200000 200000
6% debentures 200000 250000
Current debts 100000 110000 100000 110000
0 0 0 0
2003 (Rs.) 2004 (Rs.)
Sales (of which 20% is cash sales) 900000 1080000
Gross profits 225000 237000
Net profits (before int. & taxes) 160000 187000
Calculate: Current ratio, Gross profit ratio, Net profit Ratio, Return on
capital Employed, Debtors’ ratio, and Return on equity share capital.
4) Following is the balance sheets of Sincere Ltd.

Rs. Rs. Rs. Rs.
Equity share 600000 1000000 Land & Buildings 700000 800000
capital Machinery 500000 600000
(shares of Rs.10) 200000 200000 Furniture 80000 160000
12% Pref. share 200000 240000 Stock 200000 240000
capital 230000 180000 Debtors 300000 380000
General reserve 400000 400000 Bills receivable 100000 120000
Profit & Loss a/c 120000 120000 Bank balance 40000 100000
10% Debentures 140000 210000 Preliminary 30000 20000
Bank Overdraft 60000 70000 expenses
Creditors 195000 242000 195000 242000
Bills payable 0 0 0 0
2000-01 2001-02
Rs. Rs.
Total sales (cash sales = 20%) 2250000 2500000
Cost of goods sold 1500000 1600000
Profit before int. & tax 400000 600000
(Tax rate = 40%)
Stock on 1-4-2000 = Rs.300000

Find out the following ratios and make a brief analysis of the company’s financial
position:
1. Net profit (after tax) ratio, 2.Return on investments (capital employed), 3.Earning
per equity share, 4.Current ratio, 5.Liquidity ratio, 6.Stock turnover, 7.Debt collection
period, 8.Proprietory ratio
S.Y.BCOM 2008
5) Following information is given by PK Ltd. Abstract from the Profit & loss a/c for year
2006-07
Particulars Rs.
1. Total sales (cash sales = 33 1/3% of credit sales) 900000
2. Cost of goods sold 570000
3. Profit before int. & 40% tax 243000
Stock on 1-4-06 was Rs.75000
Balance sheet of PK Ltd. as on 31-3-07

Equity share capital 300000 Land & building 362500

(share of Rs.10 each) Machinery 200000
10% Pref. share capital 150000 Stock 105000
Reserves 75000 Debtors 82500
12% debentures 150000 Bills receivable 22500
Creditors 45000 Cash and bank 15000
Bills payable 22500
Provident fund 7500
Bank overdraft 37500
787500 787500

Work out the following ratios and make brief comments on the basis of the
industrial average given against each ratio.
Ratio Industrial average
1. Net profit (after tax) 12%
2. Earnings per share 25%
3. Current ratio 2.4:1
4. Stock turnover 5 times
5. Debt collection period (360 days) 45 days
6. Debt equity ratio 60%
7. Capital Gearing ratio 100%
B.COM 2009
6) Following is the balance sheet of PK Ltd. on 31-03-08.

10% Pref. share capital 100000 Trade Investments 145000
Reserves & Surplus 206000 Stock 150000
8% secured debentures 200000 Sundry debtors 165000
Sundry creditors 90000 Bills receivables 75000
Bills payable 30000 Prepaid expenses 25000
Provision for taxation 50000 Cash & bank 70000
Provident fund 24000 Underwriting commission 6000
100000 100000
0 0
1. Gross profit ratio is 30%
2. Net profit before interest and 40% tax : Rs.216000
3. Stock on 1-04-07 was Rs.270000
4. Debt collection period : 73 days (year is of 365 days)
5. Cash sales was 20% of total sales
Work out the following ratios

1. Net profit (after tax) ratios.
2. Return on capital employed
3. Earning on equity share capital
4. Stock turnover
5. Current ratio
6. External debt equity ratio.
B.COM 2004
7) Following are the Balance sheets of Riddhi Ltd.
Liabilities 31-3-02 31-03- Assets 31-03- 31-03-

Rs. 03 02 03
Rs. Rs. Rs.
Share capital 100000 250000 Land & Machinery 100000 150000
General reserve 50000 75000 Machinery 208000 312000
P & L a/c 140000 75000 Debtors 150000 250000
Debentures 140000 300000 Bills receivable 10000 20000
Creditors 40000 20000 Stock 50000 60000
Bank O/D 50000 75000 Cash balance 7000 16000
Income tax 10000 15000 Bank balance 15000 14000
provision 10000 12000
Outstanding 540000 82200 54000 82200
expenses 0 0 0
Particulars 31-3-02 31-3-03

Rs. Rs.
Sales 600000 900000
-Cost of goods sold 480000 750000
Gross profit 120000 150000
-Administrative exp. 30000 30000
Selling exp. 20000 20000
Net profit 70000 100000
On 1-4-01 stock was Rs.45000
Calculate: Gross profit ratio, Net profit ratio, Current ratio, Return on capital
employed, Liquidity ratio, and Debtors ratio (considering 360 days)
B.COM NOV 2002
8) Following are the balance sheets of Priyanshu Co. Ltd.

capital 200000 200000 Stock 100000 150000
10% Pref.share 162000 182000 Debtors 300000 250000
capital 200000 200000 Bank balance 60000 80000
Preliminary
Reserves 60000 50000 expenses 2000 2000

15% Debentures 40000 50000
Creditors 106200 118200 106200 118200
Bank Overdraft 0 0 0 0
1999-2000 2000-2001
Total sales 2100000 2600000
(Cash sales 3/5 of credit sales)
th
Cost of goods sold 1500000 1750000

Net profit before int. & tax 340000 370000
Stock on 1-4-99 60000 -
From the above information work out the following ratios:

Gross profit ratio, Net profit ratio, Stock turnover, Current ratio, Debtors ratio (days of
year 300), Return on shareholders’ funds.
B.COM 2007
9) Following is the summarized balance sheet of Anjana Ltd. as on 31 st March, 2006

10% Pref. share capital 150000 Stock 120000
Reserve & Surplus 115000 Debtors 100000
8% Debenture 200000 Bills receivable 30000
Bank O.D. 30000 Cash and bank 50000
Creditors 110000 Prepaid expenses 20000
Bills payable 20000 Preliminary expenses 15000
Outstanding expenses 10000
935000 935000
1. Total sales (cash sales are 20% of credit sales) Rs.1080000
2. Cost of goods sold Rs.540000
3. Net profit (before interest & tax provision) Rs.300000
4. Stock on 1-4-2005 Rs.100000
From the above information, calculate the following ratios. While calculating
Debtors ratio 360 days are to be taken for the year.

1. Current ratio, 2.Debtors ratio, 3.Return on capital employed, 4.Net profit

ratio, 5.Capital gearing ratio, 6.Debt equity ratio (on the basis of long term
debt), 7.Liquid ratio, 8.Operating ratio.
B.COM 2010
10) Following are the summarized balance sheet of Novino Ltd.

Rs. Rs. Rs. Rs.
capital Stock 1320000 900000
10% Pref.share 1200000 1200000 Debtors 690000 774000
capital 720000 672000 Bills receivable 150000 90000
General reserve 600000 600000 Bank balance 360000 96000
12% Debentures 660000 600000 Preliminary
Creditors 300000 300000 expenses 120000 72000
Bank Overdraft
Provision for 240000 180000 612000 595200
taxation 612000 595200 0 0
0 0
31-3-08 31-3-09
Rs. Rs.
Total sales 7200000 9600000
(60% credit sales)
Gross profit 2400000 3660000
Net profit before int. & tax 1500000 1800000
(Rate of tax is 50%)
The stock as on 1-4-07 Rs.1080000. assumes 360 days in the year.

From the above information calculate the following ratio for both the year
and comment critically in brief.
1. Net profit ratio, 2. Stock turnover Ratio, 3. Current Ratio, 4. Debtor’s

ratio, 5. Debt Equity ratio, 6.Gross profit ratio.
BCOM 2006
11) The balance sheet of Krishna Co.Ltd. as on 31-3-05 is as under :


Reserve & Surplus 108000 Investments (temporary) 100000
10% Debentures 100000 Stock 75000
Creditors 45000 Debtors 82500
Bills Payable 15000 Prepaid expenses 10000
Outstanding expenses 10000 Prepaid income tax 1000
Provident Fund 18000 Bills receivable 37500
Provision for taxation 4000 Bank balance 40000
Underwriting commission 2000
500000 500000
1. Gross profit is 40% of the sales
2. Net profit is Rs.100000 before int. & tax
3. Tax rate is 50%
4. Cash sales are 25% of the credit sales
5. On 1-4-04 the stock was worth Rs.45000
6. The collection are received in 108 days from debtors
(360 days of the year to be considered)
Calculate the following ratios

1. Rate of return on capital employed
2. Stock turnover
3. Current ratio
4. Net profit ratio
5. Operating ratio
SPU 2012 S.Y.BBA

12) Following are the summarized balance sheets of CD Ltd.
Liabilities 2010 2011 Assets 2010 2011
Equity shares of Rs.10 600000 100000 Buildings 700000 800000
each 0 Machinery 500000 600000
10% Preference share 200000 Furniture 80000 160000
capital 200000 Stock 200000 240000
General reserve 250000 Debtors 300000 300000
P and L a/c 150000 280000 Bills receivable 100000 200000
12% Debentures 400000 120000 Cash and bank 40000 100000
Bank overdraft 120000 400000
Other current liabilities 140000 120000
Provisions 60000 200000
192000 80000 192000 240000
0 240000 0 0
0

2010 (Rs.) 2011 (Rs.)

Total sales (cash sales 20%) 2250000 2500000
Net profit before interest and tax 408000 598000
Stock on 1-1-2010 was Rs.180000. Company is liable to 40% tax. Take 360 days a
year.
Calculate the following ratio and make comments:

1. Net Profit ratio 4. Stock turnover
2. Current ratio 5. Debtor’s ratio (collection period)
3. Earning per equity share 6. Debt Equity ratio (based on external debts)
SPU B.COM 2013

13) The following are the balance sheets of Rashmi Ltd.
Liabilities 2005 2006 Assets 2005 2006
Equity share capital 200000 250000 Building 15000 25000
10% Pref. share 100000 100000 Machinery 0 0
capital 81000 91000 Furniture 10000 50000
General reserve 100000 100000 Stock 0 50000
15% Debentures 8000 10000 Debtors 50000 75000
Creditors 4000 6000 Bills receivable 50000 12500
Bills payable 8000 4000 Cash and bank 15000 0
Provident fund 10000 5000 Preliminary 0 15000
Provision for tax 20000 25000 expenses 10000 25000
Bank overdraft 531000 591000 20000 1000
1000
59100
53100 0
0
2005 2006
Total sales
(Cash sales - 3/5 of credit sales) 500000 625000
Net profit before interest and taxes 135000 155000
Opening stock (1-1-2005) 30000 --
SHORT EXAMPLES
BCOM 2010 MIMP

EX.1 Work out stock turnover Ratio.

1. Current ratio=2.5:1, Liquid Ratio=1.25:1
2. Working capital= Rs 18,00,000,Bank Overdraft Rs 240000 and Gross profit Rs
27,00,000.
3. Gross profit ratio= 25%
4. The opening stock is 2/3 of closing stock.
BCOM 2008
Ex.2 Work out stock turnover Ratio.

1. Current ratio=2.5:1, Liquid Ratio=1.25:1
2. Working capital= Rs 6,00,000,Bank Overdraft Rs 80,000 and Gross profit Rs
9,00,000.
3. Gross profit ratio= 25%
4. The opening stock is 2/3 of closing stock.
BCOM 2005
Ex.3
Sales 5, 00,000
Opening stock 76,250
Purchases 312000
Purchases Exp 10250
Closing stock 98500
Administrative Exp 98000
Interest 12000
Selling expenses 10000
Find out operating Ratio.
NOV 2003
Ex.4 Calculate current ratio from the following details:

1) Gross profit=25%, while gross profit for the year Rs 80,000
2) Stock turnover= 4 times. The closing stock is Rs 2000 more than the opening stock.
3) Liquid ratio=1.25:1. The current liabilities (including BOD Rs 20000)= Rs 1,80,000.
BCom 2002
Ex.5 Calculate Stock Turnover Ratio from the following information:

Opening stock 43500
Closing stock 46500
Sales 480000
Gross profit Ratio 25% on sales.

BCOM 2000
Ex.6 Calculate:
1) If the current ratio is 2.20:1 and net current assets is Rs 36000 then find out
current assets and current liabilities.
2) If gross profit is 40% and cost of goods sold Rs 156000. Find out gross profit.
S.P.U 2012 SYBBA

Ex. 7 (A) Calculate Return on Equity Shareholders Funds from the following
details:
Net profit after interest but before tax 580000

Equity share capital 100000
15% Preference share capital 200000
Reserves 200000
Preliminary Expenses 100000
Current Liabilities 200000
Tax rate 50%
(B) From the following information determine opening and closing stock:
Stock Turnover: 5 times
Total sales: Rs.200000
Gross profit: 25% of sales
The closing stock value was more by Rs.4000 than the opening stock.
(C) Nisha Ltd. has a current ratio of 3:1. If its stock is Rs.40000 and total current
Liabilities are Rs.75000. Find out quick ratio.

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SEM – 4 MANAKAMANA EDUCATION CENTRE B.

ADVANCED ACCOUNTING & AUDITING – III (CORPORATE ACCOUNTING)

4 Ratio Analysis (Theory and Examples)

MANAKAMANA EDUCATION CENTER

LAXMAN GAUTAM 9825571010 Page 1 NIRMALA GAUTAM 9825819189

UNIT:-1 REDEMPTION OF PREFERENCE SHARES

TOPIC -1 REDEMPTION OF PREFERENCE SHARES

 PROVISION OF COMPANY'S ACT FOR REDEMPTION OF PREFERENCE

1. The issue of preference shares should be authorized by the articles of the

 PROFIT AVAILABLE FOR DIVIDEND:-

LAXMAN GAUTAM 9825571010 Page 2 NIRMALA GAUTAM 9825819189

 PROFIT NOT AVAILABLE FOR DIVIDEND :-

TOPIC-2 ISSUE OF BONUS SHARES

BONUS SHARES: (SHORT NOTE)

Sources of Bonus Shares:

Legal Provision in Respect of Bonus Shares:

1. Article of Association should permit the issue of bonus shares.

REDEMPTION OF PREFERENCE SHARES AND ISSUE BONUS SHARES

Capital & liability Rs. Assets Rs.

1. To redeem both the classes of redeemable preference shares of 10% premium

LAXMAN GAUTAM 9825571010 Page 4 NIRMALA GAUTAM 9825819189

Capital liability Rs. Assets Rs.

LAXMAN GAUTAM 9825571010 Page 5 NIRMALA GAUTAM 9825819189

Liabilities Rs. Assets Rs.

General reserve 62500

Director of the company decided as under:

Liabilities Rs. Assets Rs.

LAXMAN GAUTAM 9825571010 Page 6 NIRMALA GAUTAM 9825819189

Directors of the company decided as under:

LAXMAN GAUTAM 9825571010 Page 7 NIRMALA GAUTAM 9825819189

Share premium 150000 Current assets 525000

Share capital (Rs.100)Rs.80 paid up 400000

Pass necessary entries in the books of company.

Ex.8 On 31.12.99 the balance sheet of "Sundaram" ltd is as under.

1500 12% redeemable pref. Share of 120000 Land building 300000

Share premium 5000 Machinery 190000

LAXMAN GAUTAM 9825571010 Page 8 NIRMALA GAUTAM 9825819189

LAXMAN GAUTAM 9825571010 Page 9 NIRMALA GAUTAM 9825819189

LAXMAN GAUTAM 9825571010 Page 10 NIRMALA GAUTAM 9825819189

For this purpose of redemption of preference shares necessary numbers of 12%

Pass necessary journal entries in the book of the company.

LAXMAN GAUTAM 9825571010 Page 11 NIRMALA GAUTAM 9825819189

Liabilities Rs. Assets Rs.

LAXMAN GAUTAM 9825571010 Page 12 NIRMALA GAUTAM 9825819189

On this date the company decides to redeem redeemable preference shares at 5%

(1) To make fully paid equity share

Liabilities Amt. Assets Amt.

According to the conditions to redeem, company has to redeem redeemable

LAXMAN GAUTAM 9825571010 Page 13 NIRMALA GAUTAM 9825819189

Ex.17. Following is the Balance Sheet of RK Ltd as on 31.3.2007.

Capital & Liabilities Rs. Assets Rs.

LAXMAN GAUTAM 9825571010 Page 14 NIRMALA GAUTAM 9825819189

Ex .19 Following is the Balance sheet of Ghansyam Limited as on 31.3.08.

LAXMAN GAUTAM 9825571010 Page 15 NIRMALA GAUTAM 9825819189

After the completion of the process of redemption of redeemable preference shares

LAXMAN GAUTAM 9825571010 Page 16 NIRMALA GAUTAM 9825819189

S.P. Nov 2003

On 1-4-2002 the redeemable preference shares were to be redeemed at 10%