Worked Solution
✓ VerifiedPART (A): REVENUE ACCOUNT - BACHAN INSURANCE CO LTD (31st March, 2013)
Note: The specific figures (premiums, claims, commissions, expenses) are not provided in the question statement. The following shows the standard format and methodology required.
Revenue Account Format:
To Commissions Paid | By Premiums (less rebates)
To Claims Paid | By Commission Received
To Management Expenses | By Interest/Other Income
To Reserve for Unexpired Risks (40% of Net Premiums)
To Additional Reserve: ₹50,000
To Net Profit (Balance)
Key Points:
1. Net Premiums = Gross Premiums less rebates allowed
2. Reserve for Unexpired Risks = 40% × Net Premiums (as specified)
3. Additional Reserve = ₹50,000 (fixed amount)
4. Net Profit = Premiums + Other Income - Claims - Expenses - Reserves
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PART (B): REBATE ON BILLS DISCOUNTED - X BANK LIMITED (31st March, 2013)
Note: The specific bill details (face value, due date, rate of interest) are not provided in the question statement. The following shows the standard methodology.
Calculation Methodology:
For each bill discounted, calculate rebate using simple interest formula:
Rebate = (Face Value × Rate of Interest × Days Unexpired) / (365 × 100)
Where:
- Face Value = Amount of the bill
- Rate = Bank's rate of interest (typically given in question)
- Days Unexpired = Days from 31st March 2013 to maturity date of bill
Total Rebate on Bills Discounted = Sum of rebates on all outstanding bills
Journal Entry (as on 31st March, 2013):
Debit: Rebate on Bills Discounted A/c | ₹[Amount]
Credit: Bills Discounted A/c | ₹[Amount]
(To record the rebate/unearned interest on bills discounted and reverse-adjust the bills discounted value to actual cash received)
Alternatively, if rebate is calculated as a provision:
Debit: Profit & Loss A/c | ₹[Amount]
Credit: Provision for Rebate on Bills Discounted A/c | ₹[Amount]
(To create a provision for the rebate/unearned income that will be earned over the remaining period of the bills)
Treatment: The rebate represents unearned interest income that will be credited to profit & loss account as the bills mature and reach their due dates. On maturity of each bill, the corresponding rebate is transferred to interest received.
Write it like this
1The skeleton
- Split the answer into two clearly labelled parts immediately — write 'Part (A): Revenue Account' and 'Part (B): Rebate on Bills Discounted' as headings before touching any numbers, because examiners scan for structure and a wall of calculations with no labels loses easy presentation marks.
- In Part (A), show Net Premiums as a separate working line — 'Net Premiums = Gross Premiums Received + Re-insurance accepted − Re-insurance ceded', then apply 40% on THAT figure, because if you apply 40% on gross premiums you drop marks even if everything else is correct.
- Box the two reserve lines distinctly in the Revenue Account — 'Reserve for Unexpired Risks: 40% × Net Premiums = ₹X' on one line and 'Additional Reserve: ₹50,000' on the next, never club them together, because the question specifically tests whether you treat them as two separate debits.
- In Part (B), show the rebate formula explicitly before the table — write 'Rebate = (Face Value × Rate% × Unexpired Days) / (365 × 100)' as a stated formula, then build a columnar working for each bill, because the examiner awards a method mark for the formula separately from the computation marks.
- Write both journal entries in T-format with narrations — the closing entry (Dr. Discount Received / Cr. Rebate on Bills Discounted) AND the reversal/opening entry, because the 16-mark split almost always expects both entries and a one-entry answer forfeits roughly 3–4 marks.
- End Part (B) with a one-line treatment note — 'The rebate represents unearned income carried forward to the next period and credited to P&L as bills mature', because ICAI model answers always include this sentence and it signals conceptual clarity to the examiner.',
2Examiner-rewarded phrases
3Common trap
Watch out — most students apply the 40% reserve on gross premiums instead of NET premiums (after re-insurance adjustments), and separately, in the bill discounting part, they count days FROM 31st March TO maturity but forget to add 3 days of grace, which throws off every single rebate figure. Both errors together can cost you 5–6 marks on an otherwise correct answer.