Accounts Class - XII 
Sample Paper - 1999 (Part - 3)
(Solved)

Q1) List any two items appearing on the credit side of a partner's capital account, when capitals are fluctuating.  (Marks 2)
Ans1)  (i) Interest on capital of the partner.
(ii) Partner's salary.

Q2) (a) A and B are partners in a firm sharing profits in the ratio of 3 : 2. They had advanced to the firm a sum of Rs. 30,000/- as a loan in their profit sharing ratio on July 1st, 1998. The partnership deed is silent on the question of interest on loan from partners. Compute the interest payable by the firm to the partners, assuming the firm closes its books on December 31st.
(Marks 3)
Ans. 2) (a) According to the provisions of the Indian Partnership Act, 1932, interest @ 6% p.a. is payable to the partners on the amount of loan advanced by them to the firm.
A's loan = 30000 x 3/5 = 18000
B's loan = 30000 x 2/5 = 12000
Interest on A's loan = 18000 x 6/100 x 6/12 = 540
Interest on B's loan = 12000 x 6/100 x 6/12 = 360
Total Interest payable by firm to partners = 540 + 360 = Rs. 900

Q2) (b) A, B and C are partners sharing profits in the ratio of 5 : 4 : 1. C is given a guarantee that his share of profits in any given year would be Rs. 5000/-. Deficiency, if any, would be borne by A and B equally. The profits for the year 1998 amounted to Rs. 40000/-. Pass necessary entries in the books of the firm.  (Marks 3)

Ans. 2) (b) Working Notes :
C's share in profit = 1/10 x 40000 = 40000
C's guarantee = 5000
C's deficiency = 5000 - 4000 = 1000
The deficiency is to be borne equally by A and B.
A's share of profit = 5/10 x 40000 = 20000
Less : C's guarantee 500
A' profit = 19500
B's share of profit = 4/10 x 40000 = 16000
Less: C's guarantee 500
B's profit = 15500
Thus, the entry is :

Journal

Q3) On April 1st, 1998 an existing firm had assets of Rs. 75,000/- including cash of Rs. 5,000/-. The partner's capital account showed a balance of Rs. 60,000/- and reserve constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at Rs. 24,000/- at 4 year purchase of super profits, find the average profits of the firm.  (Marks 3)
Ans3) Goodwill = super profits x 4 year purchase
24000 = super profits x 4
Super profits = 6000
Normal profits = Capital employed x Normal rate of return
Capital employed = Partner's capital + Reserve
= 60000 + 15000
= 75000
Net profit = 75000 x 10/100
= 7500
Super profits = Average profits - Normal profits
6000 = Average profits - 7500
Average profit = Rs. 13,500

Q4) As a director of a company you had invited applications for 30,000 equity shares of Rs. 10/- each at a premium of Rs. 2/- each. The total application money received at Rs. 2/- per share was Rs. 72,000/-. Name the kind of subscription. List the three alternatives for allotting these shares.  (Marks 3)
Ans4) This is a case of over-subscription as the number of share applied (36000 in this case) is more than the number of shares offered by the company. (30000 for this case)
The alternatives for allotting these shares :
(i) Allot shares on pro-rata basis to all the applicants.
(ii) Not to allot any share to some applicants full allotment may be made to some other applicants and pro-rata allotment may be made to the rest.
(iii) May not allot any share to some applicants make pro-rata allotment to other applicants.

Q5) A limited company has issued Rs. 1,00,000/- 9% debentures at a discount of 6%. These debentures are to be redeemed equally, spread over 5 annual installments. Show discount on issue of debentures A/C for five years.  (Marks 5)
Ans5) Discount on issue of debentures = 6/100 x 100000 = 6000
Amount of discount to be written off each year:

Q6) A, B and C were partners in a firm. On 1.1.98 their capitals stood at Rs. 50,000/-, Rs. 25,000/- and Rs. 25,000/- respectively. As per the provisions of the partnership deed:
(a) C was entitled for a salary of Rs. 1,500/- pm.
(b) Partners were entitled to interest on capital at 5% pa.
(c) Profits were to be shared in the ratio of capitals.
The net profit for the year 1998 of Rs. 45,000/- was divided equally without providing for the above terms.
Pass an adjustment entry to rectify the above errors.   (Marks 4)

Ans6)  Working Notes :

Statement 

Thus, the adjustment entry is,

Journal

Q7) A company offered 10,000 shares of Rs. 10/- each payable as Rs. 2/- on application, Rs. 3/- on allotment, Rs. 3/- on first call and Rs. 2/- on final call.
The public applied for 15,000 shares. The shares were allotted on pro-rata basis to the applicants of 12,000 shares. All shareholders paid the allotted money excepting one shareholder who was allotted 200 shares. These shares were forfeited. The first call was made thereafter. The forfeited shares were re-issued @ Rs. 9 per share Rs. 8/- paid up. The final call was not yet made.
You are required to prepare the cash book and pass journal entries.

Ans7) Working notes :
10000 x 10 (2, 3, 3, 2)
 Applied for           Allotted
   12000 
     3000   Pro rata   10000
   15000                  10000

Share allotted = 200
Applied for = 12000/10000 x 200 = 240
.^..Amount paid by allottee = 240 x 2 = 480
Due = 200 x 2 = 400
Surplus paid   = 80
Due on allotment = 200 x 3       = 600
Less: Amount received in advance   =  80
                           Not received = 520

Amount due on allotment = 10000 x 3 = 30000
Less : Received in advance =  4000
Less : Not received from pro-rata allottee =  520
Amount received. on allotment = 25480

Journal

Cash Book
(Bank column only)

OR

On 1.1.95 a company issued 10,000 9% debentures of Rs 100/- each at a discount of 5%. The terms of issue provide for redemption of Rs. 1,00,000/- worth Debentures every year commencing from the end of 1996 either by purchasing in the open market or by draw of lots at the company's option. The company also wrote off Rs. 10,000/- during the year 1995 and 1996 from the Debentures Discount Account. During the year 1996 the company purchased 400 debentures @ Rs. 95/- and 500 Debentures @ Rs. 96/- for cancellation. Journalise these transactions and also show how you would deal with the profits on redemption of debentures.  (Marks 10)
Ans. Working notes :
Debentures purchased by company
= 400 x 95 = 38000
Actual cost = 400 x 100 = 40000
Profit on redeemed of debentures = 2000
Similarly, 500 x 96 = 48000
Cost 500 x 100 = 50000
Profit = 2000

Journal

The profit on redemption of debentures is a capital profit transferred to capital Reserve. This is shown on the liabilities side of Balance sheet under the heading Reserve and Surplus.

Q8) M and N were partners sharing profits in the ratio of 3 : 2. On the date of dissolution their capitals were - M: Rs. 7,650/-, N: Rs. 4,300/-. The creditors amounted to Rs. 27,500/-. The balance cash was Rs. 760/-. The assets realised Rs. 25,430/-, the expenses on dissolution were Rs. 1,540/-. All partners were solvent. Close the books of the firm, showing the Realisation, Capital and Cash accounts. (Show the working clearly).
Ans8) Working notes :
The amount of sundry assets at the time of dissolution of the firm is not given in the question. Thus, the Balance Sheet on the date of dissolution is prepared to know that.

OR

Rohit and Bal sharing profits in the ratio of 5 : 3 had following balance Sheet as on December 31,1998:

On January 1st, 1999, they decided to admit Khosla into the partnership giving him 1/5 th share. He brings in Rs. 25,000/- as his share of capital. The partners decide to revalue the assets as follows:
Goodwill Rs. 25,000/-, Plant Rs. 12,500/-, Debtors Rs. 15,500/-, Stock Rs. 16,250/-, Building Rs. 20,000/-, Furniture Rs. 1,000/-, Bills Receivables Rs. 6,250/-. The partners also decided not to show goodwill in the books of the new firm.
You are required to show the journal entries and prepare the Revaluation A/C. (Marks 12)

Ans. 8

Journal

Q9) The following figures were extracted from the Trial Balance of X Ltd. Share Capital 10,000 equity shares of Rs. 10/- each fully paid :

Part B

Q10) Define the terms 'Funds' and 'Flow' in the context of Funds Flow Statement.  (Marks 2)
Ans10) Funds : The term funds has two interpretations. In narrower sense, the term means cash.
In broader sense, the term means working capital i.e. the difference between current assets and current liabilities. Thus in the context of funds flow statement, the term funds means working capital. The term flow means change. Thus, the term flow of funds means change of funds or any increase or decrease in working capital.

Q11) Explain the meaning and significance of:
(a) Return on Equity
(b) Interest Coverage Ratio   (Marks 4)
Ans11)  Meaning and significance of :

(a) Return on Equity: 
This ratio indicates the rate of return available to equity shareholders. The profit that is available to the equity shareholders is the net profit after interest, tax and dividend payable on preference share capital.
Return on Equity = (Net profit after int., tax, pref dividend)/ Eq. shareholder's funds
Equity shareholders' funds = paid up equity share capital, reserves and application of profits

Sig: This ratio is used to compare the performance of a company's equity capital with that of other companies alike in quality, The company with higher returns on equity is preferred by investors and has greater market value of its share.

(b) Interest coverage Ratio :
This ratio is computed by dividing net profit before interest and tax by fixed interest charges. It indicates how many times the profit covers the interest. 
= (Net profit before interest and income tax)/Fixed interest charges

Sig: This ratio measures the safety margins for long term lenders. Higher the ratio, the more secure the lender regarding regular payment of interest. If the profit just equals interest, it is bad state of affairs for the company as there will be nothing left for shareholders.

Q12) From the following information, prepare a comparative Balance Sheet of Depth Ltd. :  (Marks 5)

Ans12)  

Depth Ltd.
Comparative Balance Sheet as at

* figures in bracket indicates negative figure.

Q13) The current ratio of a company is 2 : 1. State giving reasons which of the following would improve, reduce, or not change the ratio :
(a) repayment of current liabilities,
(b) purchasing goods on cash,
(c) sale of office equipment for Rs. 4,000/- (Book value Rs. 5,000/-),
(d) sale of goods Rs. 11,000/- (cost Rs 10,000/-),
(e) payment of dividend.  (Marks 5)

Ans13)  (a) Repayment of current liabilities :
The ratio will improve because both current assets and current liabilities will reduce by the same amount.
For example, assuming, current assets = 20000
Current liabilities = 10000
If Rs. 5000 are paid, the ratio will be = 15000/5000 = 3 : 1
Thus, the ratio will improve.

(b) Purchasing goods on cash :
There will be no changes in the current ratio because the current assets will increase and decrease by the same amount without any changes in the current liabilities and hence the current ratio.

(c) Sale of office equipment :
There will be an increase in the current ratio because the current assets will increase by Rs. 4000 and there will be no change in the current liabilities.

(d) Sale of goods for 11000 costing 10000 will improve the current ratio for there will be a net increase of 1000 in current assets (goods will decrease by 10000 and cash increase by 11000) without any change in current liabilities.

(e) Payment of dividend :
The ratio will decrease as there will be a reduction of current assets without any decrease in the current liabilities.

Q14) State the reasons whether the following would result in an inflow, outflow or no flow of funds. Attempt any four :
(a) Issue of debentures;
(b) Debentures converted as preference shares;
(c) Amount transferred to provision for taxation;
(d) Tax refund;
(e) Repaid loan on mortgage.  (Marks 5)

Ans14) (a) Issue of debentures :
Inflow of funds. This is because of the items involved in the transaction - cash and debentures, cash is current and will increase whereas Debentures is non current. Flow of funds takes place when one is current and the other is non-current.
(b) Debentures converted as preference shares :
No flow of funds because both the items of the transaction, i.e. debentures and preference shares are non-current.
(c) Amount transferred to prov. for taxation :
No flow of funds because the terms involved are non-current.

(d) Tax refund will have inflow of funds as the refund of tax will increase the cash balance.

(e) Repaid loan on mortgage :
Outflow of funds as cash is decreasing for repayment of loans.

Q15) From the following information, prepare a Cash-Budget for the months of January, February and March, 1998:

Selling Price is Rs. 80/- per unit
Purchase Price is Rs. 50/- per unit
Office Expenses are 1,500/- per month. Drawings are Rs. 600/- per month. Every month 10% of the sales are on credit for one month and the remaining for cash. Cash in hand on January 1, 1998 is Rs. 12,000/-. There is no opening and closing stock. (Marks 6)

Ans15)  

Cash Budget

Q16) What is analysis of financial statements? State any four of its limitations. (Marks 6)
Ans16)  Analysis of financial statements is a study of relationships among the various financial factors in a business. It is an attempt to determine the meaning and significance of financial statement data so that the forecast may be made regarding future earnings, profitability and the likes. Thus it is such treatment to information disclosed in financial statement to afford a full diagnosis of profitability and financial position of the firm.

Limitations :
(1) Limitations of financial statements :
As the analysis is based on financial statements so all the limitations of financial statements are its limitations like giving of incomplete, biased information.
(2) Affected by window dressing :
The firm resorting to this practice cover up their bad financial position on the eve of accounting period end example by overvaluing their closing stock and the likes and hence the result are misleading.
(3) Different accounting policies :
Firms adopting different accounting policies may not have the result which may be comparable. For example the method of valuing closing stock of two firms may differ.
(4) Lack of Qualitative analysis :
The financial statements record only those events that can be expressed in terms of money. Qualitative aspect like cordial management-labour relations, efficiency of management and more which may have a vital bearing on the firm's profitability are ignored.

Q17) The following information is provided to you :

From the above information, calculate any three of the following ratios :

(a) Debt Equity Ratio
(b) Capital Turnover Ratio
(c) Interest coverage ratio
(d) Return on Investment
(e) Debt to total funds ratio  (Marks 6)

Ans17) (a) Debt Equity Ratio = Long term debts/Shareholders funds
Shareholders funds = Share capital + General Reserve + Profit
                             = 80000 + 40000 + 40000
                             = 160000
Thus, the ratio = 50000/160000
                      = 5 : 16

(b) Capital Turnover Ratio = Sales/Capital Employed
Capital Employed = Share capital + General Reserve + 15% loan + Profit
= 80000 + 40000 + 50000 + 40000
= 210000
Thus, the ratio = 100000/210000
= .47 times

(c) Interest coverage ratio = (Net profit before interest, tax and dividend) / Interest charges
Net profit before interest, tax = Net profit after interest, tax + tax + interest
= 40000 + 20000 + 7500
= 67500
Interest charges = 15/100 x 50000
= 7500
.^.. Interest coverage ratio = 67500/7500
= 9 times

(d) Return on Investment = (Net profit before interest, tax, dividend/Capital Employed) x 100
= (67500/210000) x 100
= 32.14%

(e) Debt to total funds ratio = Long term debts/capital employed
= 50000/210000
1 : 4.2

Q18) From the following Balance Sheets prepare Schedule showing  changes in Working Capital and  Funds Flow Statement :

Balance Sheet

Additional information :
(a) Depreciation charged on Fixed Assets was Rs. 60,000/-.
(b) A machine of book value of Rs. 40,000/- was sold for Rs. 30,000/-.  (Marks 12)

Ans18)  

Schedule of changes in Working Capital

Funds flow Statement for the year ended

Fixed Assets A/C

Adjusted P/L A/C