2016 (November)
COMMERCE
(Speciality)
Course: 301
(Advanced Financial Accounting)
The
figures in the margin indicate full marks for the questions
1. (a) Write True or False: 1x4=4
a) Banking
companies are governed by the Banking Regulations Act, 1949. TRUE
b) Life
Assurance Fund represents profit of the life insurance companies. FALSE
c) General
insurance includes all types of insurance. FALSE
d) Cum-dividend
price is not the real price of investment. TRUE
(b)
Fill in the blanks: 1x4=4
a)
A bank can open a branch only at the permission
of the RBI.
b)
Consideration for annuities granted is a source
of Fund for a life insurance
company.
c)
In case of marine insurance, the provision
against unexpired risk is maintained at 100%
of the net premium.
d)
Investment Account is a real Account.
2.
Write short notes on any four of the following: 4x4=16
a) Rebate
on Bills Discounted.
Ans: Rebate on Bills
Discounted and its Accounting Treatment
Discounting of bills means
making the payment of the bill before the maturity date of the bill. While
making payment of the bill, the bank deducts discount for the unexpired period
for the amount of the bill discounted. Such discount is called rebate on bills
discounted. It is treated as interest received in advance. In profit and loss
account, closing balance of rebate on bills discounted is deducted and opening
balance of rebate on bills discounted is added with the interest and discount
for the year. Closing balance of rebate on bills discounted is shown as
liability in balance sheet under the heading ‘other liabilities’. At the
commencement of next year, a reverse entry is passed for the unexpired discount
of the previous year expiring this year and treated as income.
Rebate on bills discounted is calculated with
the help of following formula = (Total annual discount x no. of days after the
close of the year)/365.
b) Valuation
Balance Sheet.
Ans: Determination of
Profit in Life Insurance Business by preparing valuation balance sheet
A life policy is generally taken for a number
of years. The premium received for such long-term contracts cannot be treated
as income for ascertaining the profits for that year. For example, under a
contract of annuity only one premium as initial payment is received whereas the
annuitant is required to be paid annuity till he dies. In case of life
insurance, the claim must arise either on death or expiry of the period of the
policy, whichever is earlier. That the future premium may or may not be
received depends on the existence of the insured. Thus on a particular date a
liability of the corporation is to be calculated as the premiums to be received
in future will generally be less than the amount payable as claims. There is a
gap between claims which are expected to arise and premiums which are expected
to be received. This gap is known as net liability. Thus it becomes desirable
to create a reserve equal to its net liability in order to ascertain the profit
made by the corporation. The Life Insurance Corporation of India makes the
valuation of its net liability every year in order to ascertain its profit.
This is done by a person known as actuary and is a highly complicated
mathematical process. For calculating net liability, the actuaries calculate
the present value of future liability on all the policies in force as well as
present value of future premium to be received on policies in force. The excess
of the present value of future liability over the present value of future
premium is called net liability as per actuarial valuation.
The balance in the life assurance fund cannot
be taken as the profit made by the life insurance business. For the purpose of
ascertaining the profit, the insurance company should calculate its net
liability as per actuary and compared it with life assurance fund on a
particular date in order to calculate the surplus/deficiency. This comparison
is made by preparing a valuation Balance Sheet. If the life insurance fund is
more than the net liability, the difference represents the surplus. On the
other hand, the excess of net liability over the life assurance fund represents
deficiency for the inter-valuation period. A specimen form of valuation balance
sheet is given as follows:
Valuation
Balance Sheet
As on date……………………………..
To Net Liabilities per actuary’s
valuation
To Surplus
|
By Life Assurance funds as per
Balance Sheet
By Deficiency
|
Only surplus (and not deficiency) will be
shown in the Balance sheet. With profit policyholder have a right to
participate in the profit of life insurance business to the extent of 95% of
true profit and remaining 5% is shareholder’s share. For calculation of true
profit, surplus as disclosed by valuation Balance Sheet must be adjusted by:
a) Adding
interim bonus (if any) as it is really advance payment of bonus.
b) Deducting
any expenses still to be incurred.
Out of 95% of true profit, interim bonus
already paid should be deducted to calculate the amount due to the
policyholder.
c) Fire
Insurance Revenue Account.
Ans: Final account of general insurance business are required to
be prepared as per IRDA Regulations, 2002 which consist of:
(a) Revenue Account (as per Form B-RA);
(b) Profit and Loss Account (Form B-PL);
(c) Balance Sheet (Form B-BS).
1. Revenue Account: A
separate Revenue Account (Form B-RA) is prepared for each type of business
e.g., fire, marine etc. It records the incomes and expenses of a particular
business and profit/loss is transferred to Profit and Loss Account.
FORM
B-RA
REVENUE ACCOUNT FOR
THE YEAR ENDED 31ST MARCH, 20…..
Policyholder’s
Account (Technical Account)
No.
|
Particulars
|
Schedule
|
Current Year
(Rs.’000)
|
Previous Year
(Rs.’000)
|
1.
2.
3.
4.
1.
2.
3.
|
Premium Earned (Net)
Profit/Loss on sale/Redemption of
Investments
Other (to be specified)
Interest, Dividend & Rent –
Gross
Total (A)
Claims Incurred (Net)
Commission
Operating Expenses related to
Insurance Business
Total (B)
Operating Profit/Loss from
Fire/Marine/
Miscellaneous Business C = (A-B)
APPROPRIATIONS
Transfer to Shareholders’ Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves (to be
specified)
Total ©
|
1
2
3
4
|
ADVANCED FINANCIAL ACCOUNTING PAST EXAM QUESTION PAPERS
NON-CBCS PATTERN: 2012 2013 2014 2015 2016 2017 2018 2019
CBCS PATTERN: 2021 (HELD IN 2022)
ADVANCED FINANCIAL ACCOUNTING PAST EXAM SOLVED PAPERS
NON-CBCS PATTERN: 2013 2014 2015 2016 2017 2018 2019
CBCS PATTERN: 2021 (Held in 2022)
d) Cum-dividend.
e)
Ex-dividend.
Ans: The term ‘Cum’ and ‘Ex’ are latin words. ‘Cum’ means with
and ‘Ex’ means without. The term ‘Cum-dividend’ and ‘Ex-dividend’ relates to
shares. Cum-dividend can be expanded as share price inclusive of dividend and
Ex-dividend can be expanded as share price exclusive of dividend. Cum
dividend is the amount of dividend accrued in the duration between the dividend
declaration date and the settlement date or transaction date. The cum-dividend
price includes not only the cost of investment but also includes the dividend
accrued upto the date of purchase, and when dividend is declared it would be
the right of the buyer to claim dividend. Conversely, the quotation,
Ex-dividend, covers only the cost of the investment and the buyer is liable to
pay additional amount as dividend accrued upto the date of purchase of Shares.
3. (a) What is investment? Is it treated as fixed asset?
Discuss the various purposes of maintaining an investment ledger. What journal
entries are required to be passed in the books of buyer, when an investment is
purchases cum-dividend and dividend is received by cheque? 2+2+6+4=14
Ans: Meaning of
Investment and its types
The term ‘Investment’ refers to funds invested
in various securities consisting of government and semi-government loans,
debentures of local authorities such as port trusts, municipal corporations and
the like and debentures and shares of companies. Accounting Standard 13 issued
by the Institute of Chartered Accountants of India defines investment as, “Investments are assets held by an
enterprise for earning income by way of dividends, interests and rentals, for
capital appreciation, or for other benefits to the investing enterprise. Assets
held as stock-in-trade are non-investments”. Securities may be fixed
interest securities and variable yield securities. Fixed interest securities
are those securities which carry a fixed rate of interest while the securities
(such as shares of companies) on which dividend may fluctuate from year to year
are called variable yield securities.
Investments may be a fixed asset or current
asset. If the investments are held permanently for a long period time, they
will be regarded as fixed assets and known as ‘trade investments’. But where
the object of the business is to buy and sell securities or these are held as a
temporary investment of surplus liquid resources for not more than one year,
then they will be regarded as current assets or marketable securities.
(a) As Trade Investments: The
investments which are made permanently for a regular income outside the
business is known as Trade Investment. These are treated as fixed assets. That
is why if this type of investments are sold at a profit, profit on such sale of
investment is transferred to Capital Reserve Account and not to Profit and Loss
Account.
(b) As Marketable Securities: Sometimes
a business wants to invest its idle cash purely on a temporary basis (of
course, if the rate of earning is higher than cost of capital). This type of
investment is known as Marketable Securities and is treated as Current Assets.
That is why profit or sale of such investments is transferred to Profit and
Loss Account and not to Capital Reserve.
Investment Accounts:
The accounts of investments are kept in the
same way as the accounts of any other asset. A separate investment account
should be opened for each kind of security and on the head of the account
particulars regarding the nature of the security, dates when interest or
dividend is due, the date of redemption etc. should be stated. When the number
of investments carried is large, a separate investment Ledger is employed for
recording all investment accounts.
Features
of Investment accounts:
1. It is a real account.
2. Investment account is divided into three
columns. First column show nominal value of investment, second column show
interest and dividend and third column shows cost of investment or sale
proceeds of investment.
Purpose
of maintaining an investment ledger is as follows:
1.
It helps in keeping a record of each investment
separately.
2.
It helps to ascertain the value of securities at
the end of the account period.
3.
It is helpful in collection of interest and
dividend as and when they become due.
4.
It is helpful in ascertaining the amount of
accrued income at the end of the accounting period.
5.
It facilitates the determination of the profit
or loss on sale of any security.
Journal Entries
In the books of buyer
a)
When an investment being purchased cum-dividend:
Investment
A/C Dr. (Capital Cost)
Dividend
or Interest A/C Dr. (Dividend or Interest)
To Bank A/C (Capital
Cost + Dividend/Interest
b)
On receipt of dividend or interest
Bank
A/C Dr.
To Dividend or Interest A/C
c)
For Accrued Interest
Accrued
Interest A/C Dr.
To Interest A/C
Or
(b) On 1st April, 2015, AB &
Co. held 9% debentures in Star Ltd. of the face value of Rs. 10,000 at a cost
of Rs. 8,000, Market value on that date was Rs. 9,000. Interest is payable on
31st December, 2015, debentures of nominal value of Rs. 6,000 were
purchased for Rs. 5,000 ex-interest and on 31st December, 2015,
debentures of nominal value of Rs. 2,000 were sold cum-interest for Rs. 1,900.
On 1st January, 2016, debentures of nominal value of Rs. 6,000 were
bought at Rs. 5,800. The market value of the debentures on 31st
March, 2016 was at Rs. 90.
Make out Investment Account in the books of AB
& Co. showing profit or loss on sale of investment. Stocks on 31st
March each year are valued at lower of cost (apply FIFO method) and market
price. 14
9% debenture in Star
Ltd. A/c
For the year ended 31st
March, 2016
Date
|
Particular
|
Face Value
|
Interest
|
Cost
|
Date
|
Particular
|
Face Value
|
Interest
|
Cost
|
1/4/15
31/12/15
31/12/15
1/1/16
31/03/16
|
To
Balance b/d
To
Bank A/c
To
Bank, P/L A/c
To
Bank A/c
To
P/L A/c (Interest for the year)
|
10,000
6,000
-
6,000
-
|
225
(10,000 x 9% x 3/12)
-
-
-
630
|
8,000
5,000
120
5,800
-
|
31/12/15
31/12/15
31/03/16
|
By
Bank A/c
By
Bank A/c
By
Balance c/d
|
-
2,000
20,000
|
675
(10,000 x 9% x 9/12)
180
(2,000 x 9%)
|
-
1,720
(1,900 – 180)
17,200
|
22,000
|
855
|
18,920
|
22,000
|
855
|
18,920
|
Interest
dates 30 Dec 2015
Closing
dates 31 March 2016
Calculation
P/L
Sale
value
= 1,720
CoI
=> 
= (1,600)
= (1,600)
Profit 120
4. (a) Give a proforma of Balance Sheet of a banking
company. Also distinguish between performing and non-performing assets of a
bank. 10+4=14
Ans: Refer your book for the format of
Or
(b) From the following information, prepare Profit & Loss A/c of
Good Luck Bank Ltd. for the year ended on 31st March, 2016: 14
Rs. (‘000)
|
|
Interest on Loans
Interest on Fixed Deposits
Commission
Payment to Employees
Discount on Bills Discounted
Interest on Cash Credit
Rent, Taxes and Lighting
Interest on Overdrafts
Director’s Fees
Auditor’s Fees
Interest on Saving Bank Deposits
Postage and Telephone expenses
Printing and Stationery
Sundry Expenses
Additional Information:
Provide for Contingencies
Transfer to Reserves
Transfer to Central Government
|
5,180
6,340
164
1,080
2,120
4,460
360
3,080
60
24
1,360
28
58
34
400
300
400
|
Profit & Loss A/c
of Good Luck Bank Ltd.
For the year ended 31st
March, 2016
Particular
|
S.
No.
|
Rs.
(000)
|
i.
Income:
Interest earned
Other Income
|
13
14
|
14,840
164
|
15,004
|
||
ii.
Expenses:
Interest Expended
Operating Expenses
Provisions and
contingencies
|
15
16
40
|
7,700
1,644
400
|
9,744
|
||
iii.
Net
surplus: I and II
|
5,260
|
|
iv.
Appropriation:
Transfer to
statutory reserve
Transfer to
reserve
Transfer to
central government
Balance carried
forward
|
1,315
300
400
3,245
|
|
5,260
|
S.
No.
|
Particular
|
Rs.
(000)
|
13
|
Interest Earned:
Interest/Discount
on loans and advances (5180+4460+3080+2120)
|
14,840
|
14,840
|
||
14
|
Other Income:
Commission
|
164
|
164
|
||
15
|
Interest expended:
Interest
on deposits (6340+1360)
|
7,700
|
7,700
|
||
16
|
Operating Expenses:
Payment
to employees
Rent,
taxes, & lighting
Directors
fees
Auditors
fees
Postage
and telegram
Printing
and stationary
Sundry
Expenses
|
1,080
360
60
24
28
58
34
|
1,644
|
5. (a) What are the statutory and subsidiary books
maintained by a life insurance company? What purposes do they serve? (6+6)+2=14
Ans: Books maintained
by Life Insurance Companies
Under the Insurance Act, 1938 it is
obligatory on the part of all insurance companies including the general
insurance companies to maintain the following books which may be called
‘statutory books’.
1. The
registrar of policies: This book contains the following particulars in respect
of each policy issued:
a) The
name and address of the policyholders.
b) The
date when the policy was affected.
c) A
record of any assignment of the policy.
2. The
registrar of claims: This book should contain the following particulars in
respect of each claim:
a) The
date of claim.
b) The
name and address of the claimant.
c) The
date on which the claim was discharged.
d) In
the case of a claim which is rejected, the date of rejection and the ground for
rejection.
3. The
register of licensed insurance agents: This book should contain the following particulars
in respect of each agent:
a) Name
and address of every insurance agent appointed.
b) The
date of appointment.
c) The
date on which appointment ceased, if any.
In addition to the statutory books mentioned
above, insurance companies also maintain the following subsidiary books for
recording the transactions:
a)
Proposal register.
b)
New premium cash book.
c)
Renewal premium cash book.
d)
Agency and branch cash book.
e)
Petty cash book.
f)
Claims cash book.
g)
General cash book.
h)
Agency credit journal.
i)
Agency debit journal.
j)
Lapsed and cancelled policies book.
k)
Chief journal.
l)
Commission book.
m)
Agency ledger.
n)
Policy loan ledger.
o)
General loan ledger.
p)
Investment ledger.
Or
(b) Prepare a Revenue A/c of Ganpati Life Assurance Company for the
year ended on 31st March, 2016 from the following balances extracted
from its books of account: 14
|
|
Rs.
|
|
Life Assurance Fund
Premium Received
Re-insurance Premium
Consideration for Annuities
Granted
Claims:
By
Death
By
Maturity
Re-insurance Claims
Management Expenses
Annuity Paid
Outstanding Premium on 01.04.2015
Interest, Dividend and Rent
Commission on Direct Business
Commission on Re-insurance
Accepted
Commission on Re-insurance ceded
|
51,00,000
17,30,000
70,000
1,90,000
3,50,000
2,20,000
30,000
2,60,000
15,000
30,000
6,40,000
70,000
10,000
6,000
|
Additional Information:
a) Outstanding premium – Rs. 40,000
b) Bonus in reduction of premium – Rs. 10,000
c) Interest accrued – Rs. 15,000
d) Net liability on all contracts in force:
As on 31st March, 2015
– Rs. 32, 00,000
As on 31st March, 2016
– Rs. 38, 00,000
e) Transfer 30% of surplus to Shareholder’s
A/c.
Ganpati Life
Insurance Co. Ltd.
REVENUE ACCOUNT
For the year ended 31st
March, 2012
|
Particulars
|
Schedule
|
Amount
|
|
Premium Earned (Net)
Income from Investments:
Interest,
Dividend and Rent (Including accrued interest)
Other Income:
Consideration
for Annuities Granted
|
1
|
16,80,000
6,55,000
1,90,000
|
|
Total (A)
|
|
25,25,000
|
|
Commission
Operating Expenses relating to Insurance Business
|
2
3
|
74,000
2,60,000
|
|
Total (B)
|
|
3,34,000
|
|
Benefits Paid (Net)
Change in Valuation of Liability in respect of Life Policies:
Net
Liability on all Contracts in force on
31-3-16 38,00,000
Less:
Net Liability on all Contracts
In
force on 31-3-2015 32,00,000
|
4
|
5,65,000
6,00,000
|
|
Total (C)
|
|
11,65,000
|
|
Surplus (D) = (A) – (B) – (C)
|
|
10,26,000
|
|
Appropriations:
Transfer to Shareholders A/c (30% of Surplus i.e. 10,26,000)
Balance being Fund for Future Appropriations
|
|
3,07,800
7,18,200
|
|
Total (D)
|
|
10,26,000
|
Schedule Forming Part
of Revenue A/c
SCHEDULE 1 – PREMIUMS
EARNED (NET)
|
Particulars
|
Amount
|
|
Premium less reinsurance premium
Less: Reinsurance
Add: Premium due at the end
Less: Premium due in the beginning
|
17,30,000
(70,000)
40,000
(30,000)
|
|
Bonus in reduction of premium
|
16,70,000
10,000
|
|
|
16,80,000
|
SCHEDULE 2 –
COMMISSION EXPENSES
|
Particulars
|
Amount
|
|
Commission on direct business
Add: Commission on re-insurance accepted
Less: Commission on re-insurance ceded
|
70,000
10,000
6,000
|
|
|
74,000
|
SCHEDULE 3 –
OPEERATING EXPENSES RELATED TO INSURANCE BUSINESS
|
Particulars
|
Amount
|
|
Management Expenses
|
2,60,000
|
SCHEDULE 4 – BENEFITS
PAID
|
Particulars
|
Amount
|
|
Claims
By Death
By Maturity
Less Reinsurance Claims
Annuities
Bonus in reduction in premium
|
3,50,000
2,20,000
5,70,000
30,000
5,40,000
15,000
10,000
|
|
|
5,65,000
|
6. (a) What is meant by ‘reserve for unexpired
risk? Why is it created in general insurance? What
provisions should be made by a fire insurance company in regard to unexpired
risks at the end of each financial period? 3+6+5=14
Ans: Reserve for unexpired risk and its significance at the
time of calculating profits
Insurance Company, close their accounts on 31st
March but not all risks under different policies expire on that date. Many
policies extend into the following accounting year during which the risk
continues. Therefore on the closing date there is an unexpired liability under
various policies which may occur during the remaining term of the policy beyond
the year and therefore, a provision for unexpired risks is made. This reserve
is based on the Net Premium income earned by the insurance company during the
year.
The effort involved in calculating unexpired
portion of premium under each policy is very time consuming. Therefore, a
simple formula to derive a percentage of premium income to be allocated to
reserve for unexpired risks is adopted.
According to the requirements of the
Insurance Act, it is sufficient if the provision is made for unexpired risks at
50 per cent for Fire, Marine Cargo and Miscellaneous business except for Marine
Hull which has to be 100 per cent. It may be mentioned that the insurance
companies are governed by the provisions of Section 44 of the Income-tax Act, 1961.
In this regard, Rule 5 of the First Schedule to the Income-tax Rules –
computation of Profit & Loss of General Insurance Business – provides for
creation of a reserve for unexpired risks as prescribed under Rule 6E of the
said Rules. According to this Rule, the insurance companies are allowed a
deduction of 50 per cent of net premium income in respect of Fire and
Miscellaneous Business and 100 per cent of the net premium income relating to
Marine Insurance business. In view of this the reserves are created at the
rates allowed under the Income-tax Act.
Additional
reserve for unexpired risk
Ø In
a particular year the management may feel that the percentage of premium
recommended by the General Insurance Council is not sufficient to meet the
unexpired risks. In such a situation they may provide additional reserve. Such
additional reserve for unexpired risk will also be debited to the revenue
account.
Ø The
balance will be shown in the balance sheet as in the case of normal reserve for
unexpired risk, and will be transferred to the credit of next year’s revenue
account.
Treatment of reserves
for unexpired risk: Reserve for unexpired risk is adjusted with premium
earned in schedule – 1 of the Revenue account of a general insurance company.
Difference in opening and closing balance of reserve for unexpired risk is
calculated and increase in reserves during the year is deducted with premium
earned or vice-versa. In balance sheet,
reserve for unexpired risk is shown in schedule – 14 under the head provisions.
Or
(b) Prepare a Revenue A/c in respect of Seven-star Fire Insurance Co.
Ltd. from the following details for the year 2015-16: 14
Rs.
|
|
Reserve for Unexpired Risk on 01.04.2015 @ 50%
Additional Reserve
Estimated Liability for Claims Intimated on:
01.04.2015
31.03.2016
Claims paid
Legal Expenses
Medical Expenses
Re-insurance Recoveries
Bad debts
Premium Recovered
Premium on Re-insurance Accepted
Premium on Re-insurance Ceded
Commission on Direct Business
Commission on Re-insurance Accepted
Commission on Re-insurance Ceded
Expenses of Management
Interest, Dividend and Rent
Profit on sale of investments
|
1,80,000
36,000
31,000
42,000
3,65,000
6,000
4,000
32,000
800
4,86,000
32,000
43,000
48,000
1,600
2,150
90,000
24,000
3,000
|
Create Reserve on 31st March, 2016 to the same extent as on 1st
April, 2015.
Revenue
A/c
For
the year ended 31/03/2016
Seven
Star Fire Insurance Company Limited
Particulars
|
S. No.
|
Amount
|
Premium (Net)
Profit on sale of investment
Interest Divided & Rent
|
1
|
4,17,500
3,000
24,000
|
Total (A)
|
4,44,500
|
|
Claims (Net)
Commission
Operating Expenses
|
2
3
4
|
3,50,000
48,050
94,800
|
Total (B)
|
4,92,250
|
|
Surplus Operating loss
Total: C = A – B
|
(48,350)
|
Schedules forming Part of the Revenue
account:
1. Premium (Net)
Particulars
|
Amount
|
Premium recovered
Add: Premium or reinsurance
accepted
Less: Premium on reinsurance
ceded
|
4,86,000
32,000
43,000
|
Adjustment for unexpired risk:
Closing balance
of unexpired risk:
50% of Net
Premium
2,37,500
Add:
Additional reserve
36,000
2,73,500
Less: Opening
unexpired risk:
Unexpired
risk
1,80,000
Add:
Additional reserve
36,000 (2,16,000)
|
4,75,000
(57,500)
|
4,17,500
|
2. Claims Incurred (Net):
Particulars
|
Amount
|
Claims Paid
Add: Legal expenses (Assuming
associated with claim)
|
3,65,000
6,000
|
Less: Reinsurance recoveries
(ceded)
Less: Estimate liability in
beginning.
Add: Estimated liability in
the end
|
3,71,000
32,000
31,000
42,000
|
3,50,000
|
3. Commission:
Particulars
|
Amount
|
Commission on direct business
Add: Commission accepted
Less Commission ceded
|
48,600
1,600
2,150
|
48,050
|
4. Operating Expenses:
Particulars
|
Amount
|
Expenses of management
Medical Expenses
Bad Debt
|
90,000
4,000
800
|
94,800
|
Full
Marks: 80
Pass
Marks: 32
Time:
3 hours
1. (a) Choose the correct answer: 1x5=5
a) Rebate
on Bills Discounted is an expired discount/unexpired
discount.
b) According
to Insurance Regulatory and Development Authority (IRDA) Regulations, 2002,
every general insurance company must prepare its Financial Statements as per Schedule B/C/D.
c) In Insolvency Accounts, the Provincial Insolvency Act, 1920
is applicable to Bombay, Calcutta and Madras/rest of India.
d) When
investments are sold at cum-interest, the amount of interest is deducted from/added to the
quoted selling price.
e) During
inflation, the monetary unit shrinks in value as the prices rise/fall.
(b)
Fill in the blanks: 1x3=3
a) In
India, banking companies are governed by the Banking Regulation Act, 1949.
b) As
13 deals with accounting for
investments.
c) As
per the provisions of the IRDA Act, 2002, the Revenue Account of the life
insurance companies is to be prepared as per Schedule B.
2.
Write short notes on the following: 4x4=16
a) Rebate
on Bills Discounted.
Ans: Rebate on Bills
Discounted: Discounting of bills
means making the payment of the bill before the maturity date of the bill.
While making payment of the bill, the bank deducts discount for the unexpired
period for the amount of the bill discounted. Such discount is called rebate on
bills discounted. It is treated as interest received in advance. In profit and
loss account, closing balance of rebate on bills discounted is deducted and
opening balance of rebate on bills discounted is added with the interest and
discount for the year. Closing balance of rebate on bills discounted is shown
as liability in balance sheet under the heading ‘other liabilities’. At the
commencement of next year, a reverse entry is passed for the unexpired discount
of the previous year expiring this year and treated as income. Rebate
on bills discounted is calculated with the help of following formula = (Total
annual discount x no. of days after the close of the year)/365.
b) Revenue
Account of Life Insurance Companies.
Ans: Life Fund, also known as Life Assurance Fund is concerned
with Life Insurance (Assurance) business. It is an item that appears on the
liability side of the company's Balance Sheet. For insurance business, claim is
an expenditure while premium is an income. As we all know, the difference
between income (premium received) and expenditure (claims paid) should be the
profit. In case of life insurance business this approach would pose a problem.
The income premium, is collected periodically
(monthly, quarterly, annually) on policies that mature over a long period of
time. The expenditure claim, has to be paid either on the maturity of the
policy or on the death of the policy holder. Claim as an expenditure is
definite while premium as an income is uncertain. The expected amount of
premium on a policy will be received only if the policy holder is alive up to
the maturity of the policy.
Therefore life insurance companies treat the
difference between income and expenditure as a surplus and not
profits. This surplus from the revenue account is transferred
to the Life Fund, where it gets accumulated. Life fund is shown in
schedule – 6 of the balance sheet under the head “Reserves and Surplus”.
PROFORMA OF REVENUE ACCOUNT AND
PROFIT AND LOSS ACCOUNT OF A LIFE INSURANCE COMPANY
FORM
A-RA
REVENUE ACCOUNT FOR
THE YEAR ENDED 31ST MARCH, 20…..
Policyholder’s
Account (Technical Account)
No.
|
Particulars
|
Schedule
|
Current Year
(Rs.’000)
|
Previous Year
(Rs.’000)
|
Premiums earned – net
(a) Premium
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from Investments
(a) Interest, Dividends &
Rent – Gross
(b) Profit on sale/redemption of
investments
(c) (Loss on sale/redemption of
investments.)
(d) Transfer/Gain on
revaluation/change in fair value’
Other income (to be specified)
Total (A)
Commission
Operating Expenses related to
insurance Business
Provision for doubtful debts
Bad debts written off
Provisions (other than taxation)
(a) For diminution in the value
of investments (Net)
(b) Others (to be specified)
Total (B)
Benefits Paid (Net)
Interim Bonuses Paid
Change in valuation of liability
in respect of life policies
(a) Gross”
(b) Amount ceded in Reinsurance
(c) Amount accepted in
Reinsurance
Total (C)
Surplus (Deficit) (D) = (A) – (B)
– (C)
Appropriations
Transfer to Shareholders’ Account
Transfer to Other Reserves (to be
specified)
Balance being Funds for Future
Appropriation
Total (D)
|
1
2
3
4
|
c)
Preferential Creditors
in Insolvency Account.
d)
Limitations of
Historical Cost Accounting.
3. (a) From the following information, prepare
P/L A/c of Assam Bank Ltd. for the year ended on 31st March, 2016:
Rs.
|
|
Commission
Interest on Loan
Interest on Fixed Deposits
Salaries & Allowances
Exchange & Brokerage
Discount on Bills (Gross)
Interest on Cash Credits
Interest on Temporary Overdraft
on Current A/c
Interest on Savings Bank Deposits
Postage, Telegram and Stamps
Printing and Stationery
Sundry Expenses
Rent
Taxes and Licenses
Audit Fee
|
10,000
3,00,000
2,75,000
1,50,000
20,000
1,52,000
2,40,000
30,000
87,000
10,000
20,000
10,000
15,000
10,000
10,000
|
Additional Information: 12
a)
Provision for income tax is to be maintained @
55%.
b)
Rebate on Bills Discounted – Rs. 30,000.
c)
Bad Debts – Rs. 40,000.
d)
Provide for Directors’ fees and allowances – Rs.
30,000.
e)
Transfer 20% net profit to Statutory Reserve and
provide Rs. 15,000 as dividends.
f)
Interest of Rs. 4,000 on doubtful debts was
wrongly credited to interest on Loan Account.
Or
(b) Explain the
principal provisions of the Banking Regulation Act, 1949. 12
Ans: Meaning of Banking and Banking Company
As
per Section 5(b) of the Banking Regulation Act, 1949, "banking" means
the accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdrawable by cheque,
draft, order or otherwise.
As
per Section 5(d) of the Banking Regulation Act, 1949, "company" means
any company as defined in Section 3 of the Companies Act, 1956 and includes a
foreign company within the meaning of Section 591 of that Act.
As
per Section 5(c) of the Banking Regulation Act, 1949 a "Banking
Company" means any company which transacts the business of banking in
India.
Business in which a banking
company may engage or features of a Banking Company
Section 6 of the Banking Regulation Act, 1949
specifies the forms of business in which a banking company may engage. These
are:
1) Borrowing,
raising or taking up of money, lending or advancing of money; handling in all
manners Bills of exchange/hundies/promissory notes.
2) Acting
as agents for any government or local authority or any other person,
3) Managing
issues of shares, stock, debentures etc. including underwriting guaranteeing,
4) Carrying
on and transacting every kind of guarantee and indemnity business.
5) Managing,
selling and realizing property which may come into the possession of the
banking company in satisfaction of its claims.
6) Acquiring
and holding and generally dealing with any property or any right, title or
interest in such property which may form the security for any loans and
advances.
7) Underwriting
and executing trusts.
8) Establishing
and supporting or aiding in the establishment and support of institutions,
funds, trusts etc.
9) Acquisition,
construction, maintenance and alteration of any building and works necessary
for the purpose of the banking company.
10) Selling,
improving, managing, developing, or otherwise dealing with property and rights
of the company.
11) Acquiring
and undertaking whole or any part of the business of any person or company.
12) Doing
all such other things as are incidental or conductive to the promotion or
advancement of the business of the banking company.
13) Any
other business which the Central Government may specify.
The provisions of
the Banking Regulation Act relating to annual accounts and audit of a banking
company are given in Section 29-34A and are as follows:
1. Preparation of Annual Accounts: On 31st
March each and every banking company incorporated in India, in respect of all
business transacted by it, and every banking company incorporated outside
India, in respect of all business transacted through its branches in India
shall prepare with reference to that year a Balance Sheet and Profit and Loss
Account as on the working of the year in the Forms set out in third schedule or
as near thereto as circumstances admit. Form A in third schedule is the Balance
Sheet and Form B is the Profit and Loss Account. Forms A and B have been
revised w.e.f 1st April, 1991. In other words the annual accounts
for the year ending 31st March 1992 and onwards are to be prepared
in the new formats as given in the book. The requirements of the Companies Act
relating to the Balance Sheet and Statement of Profit and Loss of a company
shall, is so far as they are not inconsistent with the Banking Companies Act,
apply to the Balance Sheet and Profit and Loss Account of a banking company.
2. Audit of Accounts: The Balance Sheet
and the Profit and Loss Account of a banking company is required to be audited
by a Chartered Accountant. The appointment of the auditor of a banking company
is made as per the provisions of the Companies Act. His powers, duties and
liabilities are also governed by the Companies Act, but the auditor’s report on
the accounts of a banking company must include certain additional particulars.
Every banking company is required to take previous approval of the Reserve Bank
of India before appointing or reappointing auditors. In addition, the Reserve
Bank can order special audit of the banking companies Accounts if it thinks fit
in the public interest of the banking company or its depositors.
3. Filing of Accounts: Three copies of the
audited Balance Sheet and Profit and Loss Account together with the auditors’
report shall be furnished as returns to the Reserve Bank of India within three
months from the end of the accounting year to which they relate. This period of
three months can be extended by the Reserve Bank for a further period upto
three months. Reserve Bank is authorized to call for any further information as
it may think proper from a banking company relating to the business of such
company. A banking company is also required to send to the Registrar of
Companies three copies of its audited Balance Sheet and Profit and Loss Account
and Auditor’s Report and when the Reserve Bank requires any additional
information in connection with the accounts, a copy of any such additional
information shall also be sent to the Registrar.
4. Publication of Accounts: The Balance
Sheet, Profit and Loss Account and the Auditor’s Report of every banking
company shall be published in any newspaper circulating at the place where it
has principal office, within six months from the end of the accounting year.
4. (a) Jorhat Fire Insurance Co. Ltd.
commenced its business on 01.04.2015. It submits you the following information
for the year ended 31.03.2016:
Rs.
|
|
Re-insurance premium paid
Premium received
Claims paid
Expenses of management
Commission paid
Claims outstanding on 31.03.2016
Create reserve for unexpired risk
@ 40%
|
1,00,000
15,00,000
7,00,000
3,00,000
50,000
1,00,000
|
Prepare Revenue A/c for the year ended 31.03.2016. 11
Or
(b) What is Valuation
Balance Sheet? How is it prepared? 4+7=11
Ans: Determination of Profit in
Life Insurance Business by preparing valuation balance sheet
A life policy is generally taken for a number
of years. The premium received for such long-term contracts cannot be treated
as income for ascertaining the profits for that year. For example, under a
contract of annuity only one premium as initial payment is received whereas the
annuitant is required to be paid annuity till he dies. In case of life
insurance, the claim must arise either on death or expiry of the period of the
policy, whichever is earlier. That the future premium may or may not be
received depends on the existence of the insured. Thus on a particular date a
liability of the corporation is to be calculated as the premiums to be received
in future will generally be less than the amount payable as claims. There is a
gap between claims which are expected to arise and premiums which are expected
to be received. This gap is known as net liability. Thus it becomes desirable
to create a reserve equal to its net liability in order to ascertain the profit
made by the corporation. The Life Insurance Corporation of India makes the
valuation of its net liability every year in order to ascertain its profit.
This is done by a person known as actuary and is a highly complicated
mathematical process. For calculating net liability, the actuaries calculate
the present value of future liability on all the policies in force as well as
present value of future premium to be received on policies in force. The excess
of the present value of future liability over the present value of future
premium is called net liability as per actuarial valuation.
The balance in the life assurance fund cannot
be taken as the profit made by the life insurance business. For the purpose of
ascertaining the profit, the insurance company should calculate its net
liability as per actuary and compared it with life assurance fund on a
particular date in order to calculate the surplus/deficiency. This comparison
is made by preparing a valuation Balance Sheet. If the life insurance fund is
more than the net liability, the difference represents the surplus. On the
other hand, the excess of net liability over the life assurance fund represents
deficiency for the inter-valuation period. A specimen form of valuation balance
sheet is given as follows:
Valuation
Balance Sheet
As on date……………………………..
To Net Liabilities per actuary’s
valuation
To Surplus
|
By Life Assurance funds as per
Balance Sheet
By Deficiency
|
Only surplus (and not deficiency) will be
shown in the Balance sheet. With profit policyholder have a right to
participate in the profit of life insurance business to the extent of 95% of
true profit and remaining 5% is shareholder’s share. For calculation of true
profit, surplus as disclosed by valuation Balance Sheet must be adjusted by:
c) Adding
interim bonus (if any) as it is really advance payment of bonus.
d) Deducting
any expenses still to be incurred.
Out of 95% of true profit, interim bonus
already paid should be deducted to calculate the amount due to the
policyholder.
5. (a) From the
following Trial Balance of Mr. Ashok who commenced business on January 1, 2015,
you are required to prepare a Statement of Affairs and a Deficiency A/c: 11
Rs.
|
Rs.
|
||
Cash
Stock-in-Trade
Debtors (all good)
Furniture
Investment in shares
Value of Securities
held by creditors
Loss (2015)
Drawings (up to
December, 2015)
|
2,300
6,660
1,30,000
2,820
5,000
35,000
25,000
69,160
|
Creditors (unsecured)
Secured Creditors
Preferential Claims for
Rent, Rates & Taxes
Capital
Profit (2013, 2014)
|
1,80,000
25,000
1,900
13,500
55,540
|
2,75,940
|
2,75,940
|
Or
(b) (i) Who are preferential
creditors?
(ii)
Distinguish between Statement of Affairs and Balance Sheet. 5+6=11
6. (a) Assam Investments Ltd. holds
1000, 15% debentures of Rs. 100 each in Udaipur Industries Ltd. as on 1st
April, 2010, at a cost of Rs. 1,05,000. Interest is payable on 30th
June and 31st December every year. On 1st May, 2010, 500
Debentures are purchased cum-interest at Rs. 53,500. On 1st
November, 2010, 600 Debentures are sold ex-interest at Rs. 57,300. On 30th
November, 2010, 400 Debentures are purchased ex-interest at Rs. 38,400. On 31st
December, 2010, 400 Debentures are sold cum-interest for Rs. 55,000. Prepare
Investment A/c valuing holdings on 31st March, 2010 at cost. 11
Or
(b) Write notes on the
following: 5+6=11
a)
Cum-interest purchase and
Ex-interest purchase.
b) Cum-interest sale and Ex-interest sale.
Ans:
7. (a) The following
data relate to ABC Company Ltd. You are required to compute cost of sales and
cost of sales adjustment: 11
Rs.
|
|
Opening Inventory
Purchases
Closing Inventory
|
2,000
4,000
1,000
|
Price Level during the year:
Rs.
|
|
Beginning
Closing
Average
|
100
120
110
|
Give you opinion on Monetary Working
Capital Adjustment (MWCA)
Or
(b) What do you mean by Inflation
Accounting? “Financial Statements based on historical cost basis are
meaningless and highly distorted.” Explain. 4+7=11
***