November' 2020 Financial Accounting Solved Question Papers, Dibrugarh University B.Com 1st Sem HONS CBCS Pattern

 Financial Accounting Solved Question Papers November' 2020

Dibrugarh University B.Com 1st Sem HONS CBCS Pattern

1 SEM TDC FACC (CBCS) C 101

2 0 2 1 (March)

COMMERCE (Core)

Paper: C–101

(Financial Accounting)

Full Marks: 80

Pass Marks: 32

Time: 3 hours

The figures in the margin indicate full marks for the questions

1. (a) Choose the correct answer:             1×3=3

(i) The liabilities of a firm are Rs. 3,000; the capital of the proprietor is Rs. 7,000. The total assets are

1)         Rs. 7,000.

2)         Rs. 10,000.

3)         Rs. 4,000.

(ii) Stock is valued at

1)         cost price.

2)         market price.

3)         cost or market price whichever is lower.

(iii) At profit margin of 20% on sale price is equivalent to

1)         20% profit on cost.

2)         25% profit on cost.

3)         33.33% Profit on cost.

(b) Fill in the blanks:                  1×2=2

1)         The business-entity concept implies that a business unit is distinct from the persons who supply capital to it.

2)         Depreciation on hire-purchase asset is claimed by the vendee or hirer.

(c) Write True or False:             1×3=3

1)         Accounting Standards sets the tone of accounting.                                True

2)         AS-9 applies to revenue arising from hire-purchase, lease agreements also.                              True

3)         A partnership is dissolved on the death of a partner.             False

2. Write short notes on (any four):          4×4=16

a) Capital and Revenue Expenditure.

Ans: Capital and Revenue Expenditure

Capital Expenditure: The transactions of capital expenditure give benefits for more than one accounting period, such as acquisition and improvement of assets, acquisition of special rights, increasing of earning capacity, and restoration of operating efficiency. It is non-recurring in nature. Therefore, they are shown on the assets side of the Balance Sheet.

Rules for Determining Capital Expenditure

Ø  Expenditure incurred to acquire long term assets (at least more than one accounting period).

Ø  Such Long term assets must be uses in business to earn profits and not meant for resale.

Ø  Expenditure incurred to keep the assets in working condition.

Ø  Expenditure is incurred to increase earning capacity of a business.

Ø  Preliminary expenses incurred before the commencement of business is considered capital expenditure.

Revenue Expenditure: It is incurred for generating revenue in the current accounting period and its benefit expires with such period. It helps to maintain the normal working condition of a business. It is charged as expenses in Trading / Profit & Loss Account on debit side.

Rules for Determining Revenue Expenditure

Any expenditure which cannot be recognised as capital expenditure can be termed as revenue expenditure. Revenue expenditure temporarily influences only the profit earning capacity of the business. Expenditure is recognised as revenue when it is incurred for the following purposes:

Ø  Expenditure for day-to-day conduct of the business.

Ø  Expenditure for the benefits of less than one year.

Ø  Expenditure on consumable items, on goods and services for resale.

Ø  Expenditures incurred for maintaining fixed assets in working order. For example, repairs, renewals and depreciation.

The accounting treatments of capital and revenue expenditure are as under:

Ø  Revenue expenditures – Debited to Profit and Loss Account.

Ø  Capital Expenditures – Shown as assets in the Balance Sheet.

b) Financial and Operating Lease.

Ans: Leasing is a unique type of commercial contract. Lease financing is often termed as equipment leasing and it is broadly classified into:

(a) Operating Lease: In operating lease, the lease is usually for a shorter term and is generally cancellable. As the asset is leasable repeatedly to several persons, the operating lease is usually said to be a non-payout lease.

(b) Financial Lease: Financial lease is a long-term lease usually coinciding with the economic life of the asset and is non-cancellable. It operates as a long-term debt financing and is usually full-payout as in contrast to operating lease, it is usually a single lease repaying the cost of the asset. They play a major role in financing of building of buildings and equipments to industries.

Difference between operating lease and financial lease

Operating Lease	Financial Lease
It is a short term concept.	It is a long term concept.
Ownership of the asset remains with the lessor.	Ownership of the assets transferred to the lessee.
In operating lease, the lessee is not given any option to purchase the asset.	In financial lease, the lessee is given an option to purchase the asset.

c) Stock and Debtors System.

Ans: Stock and Debtors System (Analytical method): Profit and loss of a branch can be found out by preparing branch account but there is another method for the same purpose. This method is known as stock and debtors method. It is a detailed method of keeping branch accounts and is very useful where the branch turnover is sufficiently high. In this method instead of branch account, separate accounts such as branch stock account, branch debtors account, goods sent to branch account, branch expenses, branch profit and loss account are prepared. Sometimes branch cash account is also prepared to record the cash transactions at branch.  If goods are sent by head office to branch at invoice price, branch adjustment account is opened to record profit included in goods sent and unsold stock.

d) Insolvency of Partners.

Ans: Insolvency of a Partner – (Rules of Garner vs. Murray)

If a partner’s capital account shows a debit balance on the dissolution of the firm, he is required to bring cash in the firm to settle his account. But if such partner is unable to satisfy his debt to the firm due to his insolvency, then his deficiency is to be borne by the solvent partners in accordance with the decision in Garner vs. Murray. According to the rules of Garner vs. Murray, in the absence of any agreement to the contrary, the deficiency of the insolvent partner’s capital account must be borne by other solvent partners in proportion to their capital which stood before the dissolution of the firm. The effect of this ruling is to make a distinction between an ordinary loss caused due to business operation and loss on account of insolvency of a partner.

Some important judgments in Garner vs. Murray case by Lord Justice Joyce was stated below:

a)      Loss on realisation considered being ordinary loss and therefore to be shared by all the partners according to their profit sharing ratio.

b)      Solvent partners to bring cash equal to their share of loss on realisation

c)       Loss on account of deficiency of insolvent partner considered being capital loss; therefore   to be shared by solvent partners according to their last agreed capital.

e) Revaluation Account.

Ans: Revaluation: Revaluation is a process of placing a different valuation on an asset or liability from its book value. It is a process of recoding of an asset or a liability at its current value.

Revaluation Account: At the time of reconstitution of partnership, it is necessary to revalue the assets and liabilities of the firm because the book value of the assets and liabilities as shown in balance sheet may be different from their market value. To record any decrease or increase in the value of assets and liabilities, a separate nominal account is prepared which is called revaluation account. The Revaluation account is credited if there is an increase in the value of assets, decrease in the value of liabilities and unrecorded assets. On the other hand it is debited if there is any decrease in the value of assets, an increase in the value of liabilities and unrecorded liabilities. This account is a nominal account and is sometimes also called Profit and Loss adjustment account. The profit or Loss arising due to revaluation is divided among the old partners in their old ratio.

3. (a) What do you mean by International Financial Reporting Standards? How does Accounting Standards differ from Accounting Principles?                 2+4=6

Ans: International Financial Reporting Standards (IFRS)

IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting on the basis of the economic substance of transactions. IFRS are issued by the International Accounting Standards Board (IASB).

Difference between Accounting Standard and Accounting Principles

Accounting Standard is the set of rules that should be applied for measurement, valuation, presentation and disclosure of a subject matter. For example, measurement of deferred tax, valuation of assets, intangibles and financial instruments etc. and presentation and disclosure of such measurements and valuations.

Accounting Principles however, are the fundamental principles providing a framework within which accounting should be done. These principles also govern the formulation of Accounting Standards. For example, Accrual accounting, Substance over legal form, Prudence etc.

Basis	Accounting Standard	Accounting Principles
1.Nature	Accounting standards are fixed in nature.	Accounting principles are flexible in nature.
2. Compulsory	Following of accounting standards is compulsory for every person.	Following of accounting principles is not   compulsory.
3. Responsibility	Accounting standards creates more responsibility in accountant and auditors.	Accounting principles are less responsible.
4. Uniformity	Accounting standard are uniform rules.	Accounting principles are various.

Or

(b) Pass the opening entry on 1st April, 2020 on the basis of the following information available from the books of Mr. Amit:     6

	Rs.		Rs.
Cash in Hand Sundry Debtors Closing Stock Input IGST A/c Input CGST A/c Input SGST A/c	60,000 1,00,000 1,20,000 20,000 10,000 10,000	Plant Land and Building Sundry Creditors	2,00,000 5,00,000 4,00,000

4. (a) Define ‘Revenue’. State the aspects to which revenue recognition does not apply. Give examples of such items. 2+8=10

Ans: Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. In other words, revenue is charge made to customers/clients for goods supplied and services rendered. Accounting Standard 9 deals with the bases for recognition of revenue in the Statement of Profit and Loss of an enterprise but this standard does not deal with the following aspects of revenue recognition to which special considerations apply:

(i) Revenue arising from construction contracts;

(ii) Revenue arising from hire-purchase, lease agreements;

(iii) Revenue arising from government grants and other similar subsidies;

(iv) Revenue of insurance companies arising from insurance contracts.

Examples of items not included within the definition of “revenue” for the purpose of this Standard are:

(i) Appreciation in the value of fixed assets;

(ii) Unrealised holding gains resulting from the change in value of current assets

(iii) Realised or unrealised gains resulting from changes in foreign exchange rates.

(iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount;

(v) Unrealised gains resulting from the restatement of the carrying amount of an obligation.

Or

(b) (i) Define ‘Depreciation’. Why is depreciation provided for?                                              2+3=5

Ans: Depreciation: The word depreciation is derived from a Latin word “Depretium” where “De” means decline and “pretium” means price. Thus, the word “Depretium” stands for decline in the value of assets. It stands for gradual and continuous decline. In simple words, Depreciation may be defined as permanent decrease in the value of assets due to Use and /or the lapse of the time.

According to Carter, “Depreciation may be defined as the permanent and gradual decrease in the Value of assets from any cause.’’

Objectives or causes for providing depreciation              

a)      To find out correct cost of goods manufactured.

b)      To find out correct profit for the year.

c)       To provide for replacement of assets.

d)      To find out correct financial position.

e)      To reduce tax burden.

(ii) Books of A Ltd. showed the following balances on 1st April, 2018 :

a)      Machinery – Rs. 5,00,000.

b)      Provision for Depreciation A/c – Rs. 2,00,000

On 1st April, 2018, a machine had a cost of Rs. 1,00,000 on 1st October, 2015, was sold for Rs. 40,000. The firm writes off depreciation @ 10% p.a. under the Diminishing Balance Method and its accounts are made-up on 31st March each year. You are required to prepare the Machinery Account and Provision for Depreciation Account for the year ended 31st March, 2019.                     3+2=5

5. (a) Explain the need of classification of receipts and expenses into capital and revenue in the financial accounting. Also distinguish between Capital loss and Revenue loss.       6+4=10

Ans: Capital and Revenue Expenditure

Capital Expenditure: The transactions of capital expenditure give benefits for more than one accounting period, such as acquisition and improvement of assets, acquisition of special rights, increasing of earning capacity, and restoration of operating efficiency. It is non-recurring in nature. Therefore, they are shown on the assets side of the Balance Sheet.

Rules for Determining Capital Expenditure

Ø  Expenditure incurred to acquire long term assets (at least more than one accounting period).

Ø  Such Long term assets must be uses in business to earn profits and not meant for resale.

Ø  Expenditure incurred to keep the assets in working condition.

Ø  Expenditure is incurred to increase earning capacity of a business.

Ø  Preliminary expenses incurred before the commencement of business is considered capital expenditure.

Some examples of capital expenditure: (i) Purchase of land, building, machinery or furniture; (ii) Cost of leasehold land and building; (iii) Cost of purchased goodwill; (iv) Preliminary expenditures; (v) Cost of additions or extensions to existing assets; (vi) Cost of overhauling second-hand machines; (vii) Expenditure on putting an asset into working condition; and (viii) Cost incurred for increasing the earning capacity of a business.

Revenue Expenditure: It is incurred for generating revenue in the current accounting period and its benefit expires with such period. It helps to maintain the normal working condition of a business. It is charged as expenses in Trading / Profit & Loss Account on debit side.

Rules for Determining Revenue Expenditure

Any expenditure which cannot be recognised as capital expenditure can be termed as revenue expenditure. Revenue expenditure temporarily influences only the profit earning capacity of the business. Expenditure is recognised as revenue when it is incurred for the following purposes:

Ø  Expenditure for day-to-day conduct of the business.

Ø  Expenditure for the benefits of less than one year.

Ø  Expenditure on consumable items, on goods and services for resale.

Ø  Expenditures incurred for maintaining fixed assets in working order. For example, repairs, renewals and depreciation.

Some examples of Revenue Expenditure: (i) Salaries and wages paid to the employees; (ii) Rent and rates for the factory or office premises; (iii) Depreciation on plant and machinery; (iv) Consumable stores; (v) Inventory of raw materials, work-in-progress and finished goods; (vi) Insurance premium; (vii) Taxes and legal expenses; and (viii) Miscellaneous expenses. The accounting treatments of capital and revenue expenditure are as under:

Ø  Revenue expenditures – Debited to Profit and Loss Account.

Ø  Capital Expenditures – Shown as assets in the Balance Sheet.

Capital and Revenue Receipts

A receipt of money may be of a capital or revenue nature. A clear distinction, therefore, should be made between capital receipts and revenue receipts.

A receipt of money is considered as capital receipt when a contribution is made by the proprietor towards the capital of the business or a contribution of capital to the business by someone outside the business. Capital receipts do not have any effect on the profits earned or losses incurred during the course of a year. Additional capital introduced by the proprietor; by partners, in case of partnership firm, by issuing fresh shares, in case of a company; and, by selling assets, previously not intended for resale.

A receipt of money is considered as revenue receipt when it is received from customers for goods supplied or fees received for services rendered in the ordinary course of business, which is a result of the firm’s activity in the current period. Receipts of money in the revenue nature increase the profits or decrease the losses of a business and must be set against the revenue expenses in order to ascertain the profit for the period.

Difference between Capital Loss and Revenue Loss

Basis	Capital Loss	Revenue Loss
Meaning	Capital loss arises on disposal of assets or redemption of debentures.	Revenue loss arises when goods and services are sold at a price which is less the cost price.
Accounting treatment	It is shown as assets and written off over a period of time.	It is debited to income statement.
Nature	It is non-recurring in nature.	It is recurring in nature.
Activity	It is arises due to investing and financing activities.	It is arises due to operating activities.

Or

(b) Following is the Trial Balance of M/s. Kasturi Agencies as on 31st March, 2020. Prepare Trading and Profit & Loss Account for the year ended 31st March, 2020 and a Balance Sheet as on that date:            3+3+4=10

Particulars	Dr. Rs.	Cr. Rs.
Capital Drawings Buildings Furniture and Fittings Motor Van Loan from Hari @ 12% Interest (1 – 4 – 2019) Interest Paid on above Sales Purchases Opening Stock Establishment Expenses Wages Insurance Commission Received Sundry Debtors Sundry Creditors Bank Balance Interest Received	18,000 15,000 7,500 25,000   900   75,000 25,000 15,000 2,000 1,000   28,100   20,000	1,00,000         15,000   1,00,000           4,500   10,000   3,000
	2,32,500	2,32,500

Adjustments:

1)    Closing Stock was valued as on 31st March, 2020—Rs. 32,000.

2)    Outstanding Wages—Rs. 500.

3)    Prepaid Insurance—Rs. 300.

4)    Depreciate Furniture and Fittings @ 10% and Motor Van @ 20%.

5)    Charge interest on Capital @ 10%.

6. (a) What do you mean by ‘Installment Purchase System’? What are its features? Mention any four distinctions between Hire-Purchase System and Installment Purchase System.         2+4+4=10

Ans: Meaning and Definition of Installment Purchase System

Installment payment system (also called the deferred installments) is a system where the buyer is given the ownership as well as the possession of the gods at the time of signing the contract. The buyer has the facility to pay the price in installments.

According to J.B. Batliboi, Installment Purchase System is a system under there is an agreement to purchase and pay by installments, the goods which become the property of the Purchaser immediately when he receives the delivery of the same.

Features and Characteristics of Installment Payment System:

a)    Under this system, there will be an outright sale of goods/assets.

b)   The possession as well as the ownership is passed to the buyer right at the time of signing the contract.

c)    The buyer can make the payment in installments.

d)   IN case of default in payment, the seller cannot repossess the goods, but he can sue the buyer for the recovery of unpaid price.

e)   The buyer cannot exercise the option of returning the goods and terminate the contract, unless the same becomes void or voidable under the contract act.

Differences Between Hire Purchase System and Installment Purchase System:

Hire-Purchase System	Installment Purchase
It is a contract of hiring.	It is a contract of sale.
It is transferred by seller to buyer only after payment of all installments.	It is transferred by seller to buyer, immediately on signing the contract.
In this case, the buyer is like a bailee	In this case, the buyer is not in the position of a bailee
Such risk is on the seller.	Such risk is on the buyer.
On default of payment of any installment by the buyer, the seller can repossess the goods.	On default and payment of any installment by the buyer, seller cannot repossess the goods, but can file a suit in the court of law against the buyer for the recovery of unpaid price.
The buyer can exercise the option of return of goods.	The buyer cannot exercise the option of return of goods.

Or

(b) X Company purchased a machine on 1st April, 2017 on hire-purchase system. The payments were to be made as follows:

Particulars	Rs.
On signing of the agreement On 31-03-2018 On 31-03-2019 On 31-03-2020	5,000 6,000 3,500 2,200
	16,700

Interest included in Rs. 16,700 was charged on the cash price @ 10% per annum. You are required to ascertain the cash price of the machine and prepare Machinery Account and Hire Vendor’s Account in the books of X Company.  4+3+3=10

7. (a) (i) What are the main classes of Branch Accounts? Discuss the need of Branch Accounts.                  2+4=6

Ans: Types of Branch: From the accounting point of view, branches may be classified into

a)    Dependent Branch

b)   Independent Branch

c)    Foreign Branch

(a) Dependent Branch: The term ‘Dependent Branch’ means a branch which does not maintain its own set of books. All records have to be maintained by the head office.

(b) Independent Branch: Independent branches are those which act independently within the broad policies framed by the Head office in conducting their day-to-day activities. These branches keep full system of accounting.

(c) Foreign Branch: When a branch is located in a country other than domestic country it is called a foreign branch. Such branch will keep its books of accounts in foreign currency. Foreign branch usually maintains a complete set of books under double entry principles.

Purpose or Objectives or need of Branch accounting 

The main objectives and purpose of Branch accounting system are listed below:

a)    To ascertain the profit or loss of each branch separately.

b)   To ascertain financial position of each branch on a particular date.

c)    To evaluate the progress and performance of each branch.

d)   To have comparison of the results of a particular branch with previous year and also with the other branch of the same concern.

e)   To differentiate between profit making and loss making branch so that necessary steps can be taken to improve the performance of loss making branches.

f)     To help the proprietor in formulating policy to expand the business on proper lines so as to optimize the profits of the concern.

(ii) Mention any four distinctions between Branch Accounts and Departmental Accounts.                          4

Ans: Difference between Departmental Accounts and Branch Accounts

The main difference between Departmental Accounts and Branch Accounts are given below:

Basis of Distinction	Departmental Accounts	Branch Accounts
Maintenance of Accounts	All accounts are maintained at one place & departmental trading and profit and loss account is prepared accordingly.	In case of branch, all branch accounts are kept at Head Office except cash, customers and stock registers are maintained at branch. But in case of independent branch all accounts are kept at branch and a branch prepares its own trading and Profit & Loss Account.
Allocation of Common Expenses	Departments are not geographically separated from each other, so problem of allocation of common expenses among different departments arises.	As branches are geographically separated from each other so the problem of allocation of common expenses among different branches does not arises.
Adjustments &  Reconciliation of Accounts	The question of adjustments and reconciliation of accounts does not arise in departmental accounts.	In case of independent branch some adjustments and reconciliation of head office and the branch accounts are required to be done at the end of the year.
Problem of foreign currency	The problem of conversion of foreign   currency into home currency does not arise.	The problem of conversion of foreign branch figures may arise at the time of finalization of accounts of head office.

Or

(b) Sagar Ltd. has a branch at Silchar which sells goods at cost-plus 25%.

From the following particulars, calculate the value of closing stock at Silchar branch and prepare Silchar Branch Account for the year ended 31st March, 2020:     3+7=10

Particulars	Rs.
Stock at branch on 1st April, 2019 Goods sent to branch Cash sales at branch Expenses paid by Head Office: Salaries                    Rs. 5,000 Advertisement       Rs. 2,000	22,000 1,78,000 2,00,000     7,000

Commission of 10% on the net profit after charging such commission is to be credited to Branch Manager.

8. (a) What do you mean by Piecemeal Distribution of Cash? What are its objectives? Discuss the Maximum Possible Loss method of piecemeal distribution.         2+2+6=10

Ans: Piecemeal Distribution

In case of dissolution of firm, it is practically not possible to realise all the assets at a time. In fact, on the dissolution of a partnership, assets are sometimes realized gradually over a period of time. In such a case it may be agreed that different parties are to be paid in order of preference as and when assets are realized without unnecessarily waiting for the final realization of all the assets. The order of the payment will be as follows:

a.       Realisation expenses

b.      For provision for expenses that are to be made

c.       Preferential creditors (say, Income Tax or any payment made to the Government)

d.      Secured creditors – upto the amount realized from the disposal of assets by which they are secured and for the balance, if any, to be paid to unsecured creditors

e.      Unsecured creditors – in proportion to the amount of debts, if more than one creditor

f.        Partners’ loan – if there is more than one partner – in that case, in proportion to the amount of loan

g.       And Finally, Partners’ capital.

Objectives of piecemeal distribution

1. To facilitate systematic distribution of cash at the time of dissolution of partnership.

2. To help in payment of outsiders liabilities in order of preference.

Maximum Possible Loss Method

An alternative method of piecemeal distribution amongst partner is to calculate the maximum possible loss on every realisation after the outside liabilities and the partner’s loan has been paid. The amount available for distribution amongst partners is compared with the total amount of capital payable to the partners and the maximum loss is ascertained on the assumption that in future assets will not realize any amount. The maximum possible loss so ascertained is deducted from the capital balances of the partners in their profit and loss sharing ratio and the balance left in the capital account after deducting the maximum possible loss will be the amount payable to the partner.

If a partner’s share of maximum possible loss is more than the amount standing to the credit of his capital account, he should be treated as insolvent and his deficiency should be debited to the capital accounts of the solvent partners in the proportion of their capitals which stood on the dissolution date as stated under the Garner V/s. Murray Rule. The amount standing to the credit of the partners after debiting their share of maximum loss and their share of insolvent partners deficiency will be equal to the cash available for the distribution amongst the partners. This process of maximum possible loss is repeated on each realisation till all the assets are disposed.

Or

(b) P, Q and R are in partnership sharing profits and losses in the ratio of 2 : 2 : 1 respectively. They agreed to dissolve their firm. Their Balance Sheet as on the date of dissolution was as follows:

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Sundry Creditors Bank Overdraft Capital Accounts: P                       Rs. 19,000 Q                       Rs.   9,000	34,500 20,000     28,000	Cash in Hand Sundry Debtors Investments Goodwill Capital Account: R	4,500 30,500 32,500 12,000   3,000
	82,500		82,500

The assets were realized as follows:

1)         Goodwill—Rs. 2,000.

2)         Investments—Rs. 24,500.

3)         Sundry Debtors—Rs. 20,500.

The expenses of realization came to Rs. 2,000. The partners bring in cash to meet their respective deficiencies. Prepare necessary accounts to close the books of the firm.           10

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