NCERT Solutions Class 12 Accountancy Chapter 3 Financial Statements of a Company

Test Your Understanding I

 

Question 1. State whether the following statements are true or false.
(a) Financial statements are the end products of accounting process.
(b) Financial statements are primarily directed towards the needs of owners.
(c) Facts and figures presented in financial statements are not at all based on personal judgements.
(d) Recorded facts are based on replacement cost.
(e) Going Concern concept assumes that the enterprise continues for a long-period of time.
Answer:
(a) True. Financial statements mark the final stage of the accounting cycle.
(b) True. These statements are prepared mainly to serve the requirements of company owners.
(c) False. Personal opinions and estimations often influence the preparation of financial records.
(d) False. Transactions are documented using historical costs rather than replacement values.
(e) True. The going concern premise relies on the assumption that a business will operate indefinitely.
In simple words: This exercise checks your basic knowledge of accounting rules. Financial statements are the final reports, made mostly for owners using past costs and some personal estimates, assuming the business keeps running.
Exam Tip: Remember that financial statements rely on historical costs, not replacement costs, and going concern assumes a long, indefinite operational life.

 

Question 2. Fill in the blanks with appropriate word(s)
(a) Financial statements are the- - - - -of information to interested parties.
(b) the owners of a company are called - - - - - - -
(c) For income measurement- - - - -basis of accounting is followed.
(d) The statement which shows the assets and liabilities of a company is known as- - - - -.
(e) Profit and loss account is also called- - - - -statement.
Answer:
(a) Basic sources. They act as the primary medium of financial communication.
(b) Shareholders. The individuals who hold shares own the company.
(c) Accrual. Income is tracked when earned, not just when cash changes hands.
(d) Balance sheet. This document details the financial position at a specific date.
(e) Income. It reflects the profitability over a given period.
In simple words: Financial statements act as primary reports for shareholders, using the accrual method, with the balance sheet showing position and the profit and loss account showing income.
Exam Tip: Memorize synonyms like "Income Statement" for the Profit and Loss Account and know that "Shareholders" are the ultimate owners of a company.

 

Test Your Understanding II

 

Question 1. What are the items shown under heading 'Reserve and Surplus'?
Answer: Under this category, we list items like Capital Reserves and Capital Redemption Reserves. It also includes the Securities Premium, other general reserves, and the remaining balance of the profit and loss statement.
In simple words: This section shows all the saved profits and special funds that the company keeps for future use instead of giving them away.
Exam Tip: Be sure to list specific reserves such as Capital Reserve and Securities Premium, as these are distinct components under the Reserves and Surplus head.

 

Question 2. What are the items shown under heading ‘Miscellaneous Expenditure?
Answer: This head includes initial business set-up costs like preliminary expenses, as well as discounts allowed on the issuance of shares or debentures. Other deferred revenue costs and any negative balance (debit balance) of the profit and loss statement are also presented here.
In simple words: This head is for costs that have been paid now but will be spread out and shown as expenses over several future years.
Exam Tip: Remember that a debit balance in the Profit and Loss Account represents an unadjusted loss and is shown on the asset side under miscellaneous expenditures.

 

Question 3. Match the following

Answer:
(i) - (d) Gross profit corresponds to Sales minus the cost of goods sold.
(ii) - (e) Operating profit is calculated by subtracting operating expenses from gross profit.
(iii) - (b) Sundry Debtors represents the total amounts receivable by the business.
(iv) - (c) Sundry Creditors represents the total amounts payable by the business.
(v) - (a) Schedules are the additional explanatory notes attached to financial statements.
(vi) - (f) Net Profit is determined by deducting interest and tax from the operating profit.
In simple words: This match-up links common financial terms to their definitions or formulas, helping you understand how different profits and accounts are calculated.
Exam Tip: Understanding these basic formulas (like Gross Profit and Operating Profit) is crucial because they frequently appear in practical numerical problems.

 

Short Answer Type Questions

 

Question 1. State the nature of financial statements.
Answer: Financial statements serve as condensed reports that outline recorded facts, structured in line with accounting principles, conventions, and legal mandates.

As per the American Institute of Certified Public Accountants, these reports are designed "the statements prepared for the purpose of presenting a periodical review of report on progress by the management and deal with the status of investment in the business and the results achieved during the period under review."

The nature of these reports is defined by several key features:

(i) Recorded Facts: The entries in financial reports are drawn from actual cost details documented in the ledgers. These transactions are recorded using historical or original acquisition costs. For instance, balances like cash, bank holdings, bills receivable, and plant assets reflect their book values. Since assets bought at various times and prices are bundled together at historical cost, these statements do not reflect the current market worth of the business.

(ii) Accounting Conventions: Standard guidelines are applied during preparation. An example is the valuation of stock at either cost or net realizable value, whichever is lower. Similarly, long-term assets are presented at cost minus accumulated depreciation. The concept of materiality ensures minor expenses like stationery are simplified. Applying these standards makes the statements realistic, easy to understand, and comparable.

(iii) Underlying Concepts: Preparation rests on core postulates like the going concern assumption, money measurement, and revenue recognition. The going concern premise assumes the business will run for an extended period, which justifies using historical costs for assets. The money measurement concept assumes that currency values remain stable across periods. Under the realization concept, sales revenue is recorded when the transaction occurs, regardless of when cash is collected.

(iv) Personal Judgements: Financial disclosures often rely on subjective choices, estimates, and individual opinions. Calculating depreciation, for example, requires estimating the asset's useful life. Estimating bad debts and choosing valuation options (like cost or market value for stock) similarly depend on the accountant's professional judgement.
In simple words: Financial statements are summary reports based on past costs, standard accounting rules, basic concepts, and some personal estimates. They show the financial progress and health of a business, though they do not show today's exact market prices.
Exam Tip: When describing the nature of financial statements, structure your answer around the four pillars: recorded facts, conventions, concepts, and personal judgements to secure full marks.

 

Question 2. Briefly explain the importance of preparing financial statements.
Answer: Financial reports are vital because they supply essential data to stakeholders like shareholders, financiers, creditors, customers, management, and government agencies. These statements support key decision-making processes by presenting a clear picture of the company's financial status.

The significance of financial statements is detailed below:

(i) Reporting to Shareholders: These reports allow management to show how effectively they have run the company. This helps owners see if actual performance aligns with their initial expectations.

(ii) Basis for Fiscal Policies: The state relies on these summaries to shape taxation and industrial policies. Corporate financial records serve as critical inputs for formulating national economic strategies.

(iii) Basis for Granting Credit: Financial institutions and commercial lenders evaluate these reports before lending funds. They help creditors measure the borrower's repayment capacity and overall financial health.

(iv) Basis for Prospective Investors: Potential backers look at solvency and profit trends to determine if their investments will remain secure and liquid. These disclosures assist them in judging long-term viability.

(v) Aids Trade Associations in helping their Members: Industrial groups study these accounts to offer better guidance to their member firms. They use the data to set standard industry ratios and unified accounting systems.

(vi) Helps Stock Exchanges: Market regulators and stock exchanges use these records to verify reporting transparency, which helps protect the interests of retail investors.
In simple words: Financial statements are important because they show owners, banks, tax officers, and investors how well a company is doing, helping them make smart decisions about money, loans, or investments.
Exam Tip: Be sure to write distinct headings for each stakeholder (such as Shareholders, Creditors, and Government) to make your answer easy for the examiner to read and grade.

 

Question 3. What are the limitations of financial statements?
Answer: Although highly useful, financial reports have several inherent constraints:

(i) Historical Data: These reports rely on original cost figures. Because currency values fluctuate over time, the balance sheet items do not reflect actual current market conditions.

(ii) Unrealizable Asset Values: Book values of assets are based on standard conventions. In the event of an abrupt liquidation, the assets might not fetch their recorded values, which represent merely unamortized historic costs.

(iii) Subjective Bias: The final figures depend on accounting concepts, choices of conventions, and personal evaluations made by accountants. This subjectivity can lead to biased and unrealistic financial reflections.

(iv) Aggregated Information: Financial statements summarize high-level numbers rather than presenting itemized, minute details. Consequently, they offer limited help for micro-level decisions.

(v) Omission of Vital Information: The accounts exclude critical business developments like the termination of key agreements or loss of market share, which can heavily impact the company's future.

(vi) Lack of Qualitative Information: Only transactions that can be measured in monetary terms are included. Essential non-monetary aspects such as workplace atmosphere, employee relations, and management quality are ignored.

(vii) Interim Nature: The statement of profit and loss covers only a specific timeframe and cannot predict future earnings. Similarly, the balance sheet is a static snapshot showing the financial state at a single point in time, failing to capture upcoming trends.
In simple words: Financial statements have limits: they show old prices instead of today's values, ignore non-money things like staff happiness, depend on personal opinions, and only show a summary of the past rather than predicting the future.
Exam Tip: Highlighting qualitative limitations (like ignoring employee relations) and the reliance on historical cost are key points that examiners look for when grading this question.

 

Question 4. Prepare the format of income statement and discuss its elements.
Answer: The income statement can be presented in a vertical layout with detailed calculations. This structure is highly useful for in-depth analysis and management decision-making. Below is the format of a vertical income statement:

Income Statement of ... Company Limited
for the year ended...

The primary elements of the income statement include:

• Operating Revenues: This reflects earnings generated through standard business operations, mainly sales from credit and cash transactions, after deducting returns.
• Operating Expenses: These are the running costs of the firm, such as salaries, administration, sales, logistics, and depreciation.
• Cost of Goods Sold (COGS): Represents direct expenses linked to production, calculated using opening stock, direct costs, purchases, and closing stock.
• Non-Operating Incomes/Expenses: Financial items not arising from primary business operations, like investment returns or losses from fire.
• Financial Costs and Taxes: Financing charges like interest on debentures/loans, along with statutory income tax provisions.

In simple words: An income statement starts with total sales, subtracts direct manufacturing costs to find gross profit, removes daily operating expenses to find operating profit, and finally adjusts for non-operating items, interest, and taxes to reveal the net profit.
Exam Tip: Memorize the step-by-step subtraction hierarchy (Gross Profit - Operating Profit - Net Profit Before Tax - Net Profit After Tax) because examiners look for these intermediate stages in multi-step problems.

 

Question 5. Prepare the format of balance sheet and discuss its elements.
Answer: Below is the structured vertical layout of a balance sheet, followed by a discussion of its main elements:

Vertical Form of Balance Sheet
Balance Sheet of ... as on......

Discussion of Key Elements:

(i) Share Capital: This is shown at the top of the liabilities section. It comprises:

• Authorized Capital
• Issued Capital (both equity and preference shares)
• Subscribed Capital (adjusting for calls in arrears and adding forfeited shares)

(ii) Reserves and Surplus: This section holds accumulated reserves, such as:

• Capital Reserves and Capital Redemption Reserves
• Security Premium Account
• Sinking Funds and other specific reserves
• Accumulated balance of the Profit and Loss Account

(iii) Secured Loans: Debentures and direct bank borrowings that are backed by collateral assets.

(iv) Unsecured Loans: Short-term or long-term liabilities like fixed deposits and loans from sister companies that carry no charge on assets.

(v) Current Liabilities: Short-term obligations expected to be cleared within a normal operating cycle of twelve months, such as bills payable, outstanding salaries, bank overdrafts, and sundry creditors.

(vi) Fixed Assets: Assets held for long-term operational use (over one year), such as plant machinery, buildings, trademarks, patents, and goodwill.

(vii) Investments: Holdings in government bonds, securities, debentures, or shares of other corporate entities.

(viii) Current Assets: Liquidable items converted into cash within one year, including inventories, outstanding debtors, bank balances, and short-term advances.

(ix) Miscellaneous Expenditure: Unamortized initial expenses such as share issue discounts or preliminary setting-up costs.
In simple words: A balance sheet has two main parts: "Sources of Funds" (where the money came from, like share capital or loans) and "Application of Funds" (how that money is used, like buying fixed assets, making investments, or running day-to-day current assets).
Exam Tip: Always subtract "Current Liabilities and Provisions" from "Current Assets" to show "Net Current Assets" in the vertical balance sheet presentation.

 

Long Answer Type Questions

 

Question 1. Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?
Answer: Stakeholders with a direct or indirect stake in an organization's affairs are divided into two main categories:

(i) Internal Parties:

(a) Owners: Proprietary stakeholders need to evaluate the profits earned or losses sustained during the accounting year. These statements help them assess the overall returns and safety of their invested funds.

(b) Management: Business leaders utilize these reports to formulate administrative policies, streamline long-term planning, and guide general decision-making.

(c) Employees and Workers: Workforce members review these accounts to check if the enterprise is profitable enough to ensure steady salary payments, year-end bonuses, and wage increments.

(ii) External Parties:

(a) Creditors: Trade suppliers evaluate these statements to determine the business's short-term repayment capacity before extending credit terms.

(b) Investors and Potential Investors: Capital providers need to know the financial health and earning capacity of the company to gauge the risk and profitability of their investment.

(c) Consumers: Customers are interested in business stability and production costs. Transparent records help them verify if the prices being charged are fair.

(d) Banks and Financial Institutions: Commercial lenders study liquidity and solvency metrics within the statements to ensure safe debt recovery before approving business loans.

(e) Tax Authorities: Revenue departments use sales, profit, and revenue data to accurately assess and levy corporate taxes.

(f) Government: Government bodies analyze corporate records to calculate national output, evaluate industrial growth, and craft broad economic strategies.

(g) Researchers: Analysts and academic institutions utilize historical accounting data to conduct market research and corporate studies.
In simple words: People inside the company (like owners and workers) and people outside (like banks, investors, and tax officers) use financial statements to check profits, see if loans can be paid back, or calculate taxes.
Exam Tip: Structure long-answer points with separate subheadings for "Internal" and "External" parties to show a well-organized conceptual understanding.

 

Question 2. Financial statements reflect a combination of recorded facts, accounting conventions and personal judgements. Discuss.
Answer: Financial statements do not merely present absolute mathematical facts; they represent a synthesized mix of recorded cost data, standardized accounting norms, and individual choices.

This combination is explained through three primary elements:

(i) Recorded Facts: Financial records are compiled using historical costs - the actual transaction values when items were originally bought. Consequently, they do not reflect today's market values or adjusting factors like inflation.

(ii) Accounting Conventions: To keep reports consistent and comparable, accountants follow standard conventions such as conservatism, materiality, and matching principles. Adhering to these conventions helps stakeholders make fair comparisons between different accounting periods.

(iii) Personal Judgements: Even within set rules, accountants must make subjective estimates. Deciding the estimated useful life of a plant asset for depreciation, valuing inventory at cost or market price (whichever is lower), and determining provision percentages for bad debts all rely on subjective professional estimates.
In simple words: Financial reports are not purely exact calculations; they are a mix of actual past costs, standard accounting rules, and the accountant's personal opinions on things like asset life or bad debt risks.
Exam Tip: Be sure to provide concrete examples for each of the three terms - historical cost for recorded facts, prudence for conventions, and depreciation life for personal judgements.

 

Question 3. Explain the process of preparing income statement and balance sheet.
Answer: The step-by-step preparation of the income statement and balance sheet is outlined below:

Preparation of the Income Statement:

(i) Trial Balance: The initial step involves compiling a Trial Balance from the closing ledger balances.

(ii) Debit Entries in Trading Account: The debit column of the trading account is used to record initial stock, fresh purchases, and direct manufacturing outlays.

(iii) Credit Entries in Trading Account: Sales revenue and unsold closing stock are recorded on the credit side.

(iv) Determining Gross Results: Comparing both sides reveals either a Gross Profit (if credit exceeds debit) or a Gross Loss (if debit exceeds credit).

(v) Transfer to Profit and Loss Account: The gross margin is transferred over to the Profit and Loss Account.

(vi) Incomes and Expenses: Operating and non-operating revenue incomes are credited, while corresponding operating and non-operating expenses are debited.

(vii) Ascertaining Net Income: The final balance shows Net Profit (if credit is higher) or Net Loss (if debit is higher).

Preparation of the Balance Sheet:

(i) Trial Balance Check: The total debit and credit columns must match. Any unadjusted difference is placed on the respective side of the statement (assets or liabilities) using temporary balances.

(ii) Recording Assets: Real and personal ledger accounts showing debit balances are placed on the asset side after adjusting for provisions.

(iii) Recording Liabilities: Real and personal accounts with credit balances are listed on the liabilities side.

(iv) Adjusting Capital: Net Profit is added to the starting capital, whereas a Net Loss is deducted from it.

(v) Balancing: Finally, both sides are totaled, and they must be equal to confirm mathematical accuracy.
In simple words: First, you make an income statement by comparing sales with expenses to find the net profit. Then, you put all remaining assets and liabilities on a balance sheet, adjust the capital for profits or losses, and make sure both sides balance out perfectly.
Exam Tip: Remember to transfer the net profit from your income statement directly to the capital section of your balance sheet before attempting to total it.

 

Question 1. The following is the trial balance on June 30, 2011 of the Modern Manufacturing Company Ltd.

stock, on June 30, 2011 Rs. 8,200, you are required to make out the trading account, and profit and loss account for the year ended June 30, 2011 and the balance sheet as on the date, you are also to make provision in respect of the following: (i)Depreciate , machinery @10% per annum; (ii) Reserve 5% for discount on debtors; (iii) One month rent Rs. 45 was due on 30th june; and (iv)six moth’s insurance, included in general expenses, was unexpired at Rs.75.
Answer:

 

Note: The reserve for discount on debtors is rounded up to the nearest rupee. The precise calculated figure was Rs. 187.50.

We assume that the dividend of Rs. 500 paid in August 2005 was both declared and paid within the same accounting year.

According to the Revised Schedule VI, the Balance Sheet is formatted as follows:

Note to Accounts

Note No 1
Share Capital
Issued and Subscribed:
10,000 Shares of Rs. 1 each: Rs. 10,000

Note No 2
Reserves and Surplus
Reserve: Rs. 1,550
(+) Profit and Loss: Rs. 3,047
Total: Rs. 4,597

Note No 3
Trade Payables
Creditors: Rs. 1,750

Note No 4
Short Term Provisions
Rent Outstanding: Rs. 45

Note No 5
Fixed Tangible Assets
Plant and Machinery: Rs. 2,900
(-) Depreciation: Rs. (290)
Total: Rs. 2,610

Note No 6
Trade Receivables
Debtors: Rs. 3,750
(-) Reserve for Discount: Rs. (188)
Total: Rs. 3,562

Note No 7
Short Term Loan and Advances
Loan to Managing Director: Rs. 325

Note No 8
Other Current Assets
Prepaid Insurance: Rs. 75

In simple words: This solution shows how we adjust for unpaid rent and prepaid insurance first, calculate the company's net profit, and then list all assets and liabilities in both the traditional format and the revised Schedule VI format to ensure they balance out.
Exam Tip: Pay close attention to prepaid and outstanding adjustments like outstanding rent and prepaid insurance, ensuring they are correctly added or subtracted from their respective expenses.

 

Question 2. The following is the trial balance of Alfa Ltd, for the year ended June 30, 2011

Prepare the profit and loss account and balance sheet of the company after taking the following particulars into consideration
(a) The original cost of land and building plant and machinery and furniture and fittings was Rs. 2,50,000, Rs. 6,00,000 and Rs. 60,000 respectively- Additions during the year were building Rs. 50,000 and plant Rs. 20,000.
(b) Depreciation is to be charged on plant and machinery and furniture and fitting at 10 per cent on original cost
(c) Of the sundry debtors, Rs. 10,000 is outstanding for a period exceeding 6 months, Rs. 5,000 are considered doubtful, while the others are considered good.
(d) The directors are entitled to a commission at 1 per cent of the net profits before charging such commission.
(e) Stock on 30th June, 2005 is Rs. 1,30,000.
(f) Provide Rs.34,800 for income tax.
Answer:

 

Working Note: Computing the Book Value of Plant and Machinery
Plant and Machinery Book Value = Rs. 4,50,000 - Rs. 60,000 (representing 10% depreciation on the original historical cost) = Rs. 3,90,000.
Accumulated Depreciation = Original cost + Additions during the year - Current book value = Rs. 6,00,000 + Rs. 20,000 - Rs. 3,90,000 = Rs. 2,30,000.

Computing the Book Value of Furniture and Fittings
Book Value = Rs. 40,000 - Rs. 6,000 (10% depreciation on original cost) = Rs. 34,000.
Accumulated Depreciation = Rs. 60,000 - Rs. 34,000 = Rs. 26,000.

According to the Revised Schedule VI, the Balance Sheet is prepared as follows:

Note to Accounts

Note No 1
Share Capital
Equity Share Capital: Rs. 5,00,000
(+) 8% Preference Share Capital: Rs. 2,00,000
Total: Rs. 7,00,000

Note No 2
Reserves and Surplus
General Reserve: Rs. 2,00,000
(+) Profit and Loss Account: Rs. 1,06,376
Sub-Total: Rs. 3,06,376
(-) Preliminary Expenses: Rs. (29,000)
Total: Rs. 2,77,376

Note No 3
Trade Payables
Sundry Creditors: Rs. 40,000
(+) Bills Payable: Rs. 20,000
Total: Rs. 60,000

Note No 4
Other Current Liabilities
Director's Commission: Rs. 324

Note No 5
Short Term Provisions
Provisions for Income Tax: Rs. 34,800
(+) Proposed Dividend on Preference Shares: Rs. 16,000
Total: Rs. 50,800

Note No 6
Tangible Fixed Assets
Land and Buildings: Rs. 2,50,000
(+) Addition during the year: Rs. 50,000
Total Land and Buildings: Rs. 3,00,000

Plant and Machinery: Rs. 6,00,000
(+) Addition during the year: Rs. 20,000
Sub-Total: Rs. 6,20,000
(-) Accumulated Depreciation: Rs. (2,30,000)
Total Plant and Machinery: Rs. 3,90,000

Furniture and Fittings: Rs. 60,000
(-) Accumulated Depreciation: Rs. (26,000)
Total Furniture: Rs. 34,000

Grand Total Tangible Assets: Rs. 7,24,000

Note No 7
Intangible Fixed Assets
Goodwill: Rs. 60,000

Note No 8
Non-Current Investments
Investment (5% Government Securities): Rs. 30,000

Note No 9
Other Non-Current Assets
Accrued Interest on 5% Government Securities: Rs. 1,500

Note No 10
Trade Receivables
Sundry Debtors:
Debtors Outstanding for the period exceeding six months: Rs. 5,000
Less than Six Months Good: Rs. 50,000
Sub-Total: Rs. 55,000
Doubtful: Rs. 5,000
Total Debtors: Rs. 60,000
(+) Bills Receivable: Rs. 26,000
Grand Total Trade Receivables: Rs. 86,000

Note No 11
Cash and Cash Equivalents
Cash in Hand: Rs. 2,000
(+) Cash at Bank: Rs. 55,000
Total: Rs. 57,000

In simple words: This statement calculates the final net profit of Rs. 32,373 after processing adding-back operations, depreciation adjustments, and income tax, ensuring all accounts balance to Rs. 11,17,500.
Exam Tip: For depreciation on original cost, ensure you calculate the percentage on the historical cost of the asset rather than its current book value.

 

Question 3. The following balances appeared in the books of Parasuram Flour Mills Ltd., as on December 31, 2005 :

Prepare the company’s trading and profit and loss account for the year and balance sheet as on December 31, 2005 after taking the following adjustments into account:
(a) Stock on December 31, 2005 were: Wheat at cost, Rs. 14,900: Flour at market price, Rs. 21,700;
(b) Outstanding expenses: Manufacturing expenses, Rs. 23,500; and salaries and wages, Rs. 1,200;
(c) Provide depreciation : Building at 2% ; Plant and machinery at 10%: Furniture at 10% ; and Vehicle 20%.
(d) Interest accrued on Government Securities, Rs.100:
(e) A tax provision of Rs. 8,000 is considered necessary.
(f) The directors propose a dividend of 20%.
(g) The authorised capital consists of 12,000 equity shares of Rs. 10 each of which 7,200 shares were issued and fully paid up.
Answer:

 

 

Note: Pension fund is assumed to be created out of profits. Dividend of Rs. 9,000 is considered as declared and paid in same year.

As per Revised Schedule VI applicable from 2013 Board examinations, balance sheet will be prepared as given below.

Note to Accounts

Note No 1
Share Capital
Authorised Capital:
12,000 Shares of Rs. 10 each: Rs. 1,20,000

Issued and Subscribed and Paid up:
7,200 Shares of Rs. 10 each: Rs. 72,000

Note No 2
Reserves and Surplus
Pension Fund: Rs. 23,000
(+) Dividend Equalisation Fund: Rs. 10,000
(+) Profit and Loss: Rs. 13,410
Total: Rs. 46,410

Note No 3
Long Term Borrowings
Deposits: Rs. 1,600

Note No 4
Trade Payables
Trade Creditors: Rs. 1,24,000

Note No 5
Other Current Liabilities
Unclaimed Dividends: Rs. 900
(+) Outstanding Manufacturing Expenses: Rs. 23,500
(+) Outstanding Salaries and Wages: Rs. 1,200
Total: Rs. 25,600

Note No 6
Short Term Provisions
Proposed Dividend: Rs. 14,400
(+) Provisions for Taxation: Rs. 8,000
Total: Rs. 22,400

Note No 7
Tangible Fixed Assets
Land: Rs. 12,000

Buildings: Rs. 50,500
(-) Depreciation: Rs. (1,010)
Total Buildings: Rs. 49,490

Plants and Machinery: Rs. 50,500
(-) Depreciation: Rs. (5,050)
Total Plants and Machinery: Rs. 45,450

Furniture: Rs. 5,100
(-) Depreciation: Rs. (510)
Total Furniture: Rs. 4,590

Vehicles: Rs. 5,100
(-) Depreciation: Rs. (1,020)
Total Vehicles: Rs. 4,080

Grand Total Tangible Fixed Assets: Rs. 1,15,610

Note No 8
Long Term Borrowing
Investment: Rs. 4,000

Note No 9
Other Non-Current Assets
Accrued Interest on Investment: Rs. 100

Note No 10
Inventories
Closing Stock:
Wheat (at cost): Rs. 14,900
(+) Flour (at market price): Rs. 21,700
(+) Stores and Space Parts: Rs. 18,300
Total: Rs. 54,900

Note No 11
Trade Receivables
Book Debts: Rs. 51,700

Note No 12
Cash and Cash Equivalents
Cash in Hand: Rs. 1,200
(+) Cash at Bank: Rs. 40,000
Total: Rs. 41,200

In simple words: This solution correctly balances the flour mill's accounts at Rs. 2,92,010 by incorporating outstanding expenses, interest accrued on securities, and the required depreciation on all assets.
Exam Tip: Always cross-check that outstanding manufacturing expenses are added to the manufacturing account, and proposed dividends are processed through short-term provisions.

 

Question 4. An unexperienced accountant prepared the following trial balance of Bang Vikas Ltd., for the year ending 31.12.2005. The cash in hand on 31.12.2005 was Rs. 750.

After locating the mistakes and making the following adjustments prepare trading and profit and loss account and balance sheet in the prescribed form. Adjustments: (i) Stock on 31.12.2005 Rs. 95,000 and (ii) Write-off preliminary expenses.
Answer:
To begin, we construct a corrected trial balance before drafting the final statements. If a trial balance fails to match, we balance both sides by placing the variance in a suspense account, which is subsequently shown in the balance sheet.

Rectified Trial Balance

Profit and Loss Account for the year ended December 31, 2011

Traditional Balance Sheet as on December 31, 2011

Balance Sheet of Bang Vikas Ltd as on December 31, 2011 (As per Revised Schedule VI)

Notes to Accounts

Note 1: Share Capital

Note 2: Reserve and Surplus

Note 3: Long Term Borrowings

Note 4: Trade Payables

Note 5: Other Current Liabilities

Note 6: Tangible Fixed Assets

Note 7: Trade Receivables

In simple words: First, we correct the mismatched trial balance using a suspense account for the difference. Then, we construct the Trading and Profit and Loss account to calculate the gross and net profits, adjusting for closing stock and outstanding debenture interest, and write off preliminary expenses. Finally, we present these figures in both traditional and Schedule VI balance sheet formats, grouping liabilities under Shareholder's Funds and Assets under Tangible and Current categories.
Exam Tip: Pay special attention to the difference in the trial balance (Rs. 750) and place it correctly in the suspense account under current assets. Always ensure that outstanding interest on debentures is added to the finance costs in the Profit and Loss statement and shown under Current Liabilities in the balance sheet.

 

Question 5. The Silver Ore Co. Ltd. was formed on April 1, 2005 with an authorised capital of Rs.6,00,000 in shares of Rs. 10 each. Of these 52,000 shares had been issued and subscribed but there were calls in arrears on 100 shares @ Rs. 2.50. From the following trial balance as on March 31, 2006 prepare the trading and profit and loss account and the balance sheet:

(i) Depreciate plant and railways by 10%; furniture and building by 5%;
(ii) Write off a third of the promotion expenses;
(iii) Value of silver ore on March 31, 1969 Rs.15,000. The directors forfeited on December 20, 1968, 100 shares on which only Rs. 7.50 had been paid
Answer:

Profit and Loss Account for the year ended March 31, 2012

 

Traditional Balance Sheet as on March 31, 2012

Balance Sheet of Silver Ore Co Ltd as on March 31, 2012 (As per Revised Schedule VI)

Notes to Accounts

Note 1: Share Capital

Note 2: Reserve and Surplus

Note 3: Tangible Fixed Assets

Note 4: Non-Current Investment

Note 5: Cash and Cash Equivalents

Note 6: Other Current Assets

In simple words: This problem involves preparing final accounts for a mining company. We prepare the Profit and Loss Account to determine the net profit, taking into account mine wages, depreciation on plants and railways, and writing off a third of the promotion expenses. Under Schedule VI, the unamortized promotion expenses are deducted from Reserves and Surplus instead of being shown under Assets, and the forfeited shares are added to the Share Capital.
Exam Tip: Be careful with the treatment of cartage on plant and brokerage on investment; these are capital expenditures and must be added to the respective assets. Also, remember that in Revised Schedule VI, preliminary or promotion expenses not yet written off are shown as a negative item under Reserves and Surplus instead of miscellaneous expenditure on the asset side.