Question 1

Sona Ltd. has three departments – P, Q and R. From the following particulars given below, compute:
(i) The departmental results;
(ii) The value of stock as on 31st December, 2014;

| Particulars | P | Q | R |
|---|---|---|---|
| Stock as on 01.01.2014 | 30,000 | 45,000 | 15,000 |
| Purchases | 1,60,000 | 1,30,000 | 60,000 |
| Actual Sales | 1,88,000 | 1,66,000 | 93,000 |
| Gross Profit on normal sales price | 25% | 33⅓% | 40% |

During the year 2014 some items were sold at discount and these discounts were reflected in the above sales value. The details are given below:

| Particulars | P | Q | R |
|---|---|---|---|
| Sales at normal price | 15,000 | 8,000 | 6,000 |
| Sales at actual price | 11,000 | 6,000 | 4,000 |

Accepted Answer

**Departmental Trading Account for the year ended 31st December, 2014**

The key challenge in this problem is that the **gross profit ratios are given on normal selling price**, but some goods were sold at a discount. Therefore, to compute the cost of goods sold, we must first determine the **notional normal selling price** of all goods actually sold.

**Step 1 – Adjust Sales to Normal Selling Price (for cost computation)**

For goods sold at a discount, cost must be based on the normal price (not the actual discounted price). Adjusted Sales at Normal Price = (Actual Sales – Sales at actual/discounted price) + Sales at normal price.

- P: 1,88,000 – 11,000 + 15,000 = **₹1,92,000**
- Q: 1,66,000 – 6,000 + 8,000 = **₹1,68,000**
- R: 93,000 – 4,000 + 6,000 = **₹95,000**

**Step 2 – Cost of Goods Sold**

Using cost ratio (100% – GP%) applied to adjusted normal sales:

- P: 75% × 1,92,000 = **₹1,44,000**
- Q: 66⅔% × 1,68,000 = **₹1,12,000**
- R: 60% × 95,000 = **₹57,000**

**(i) Departmental Results – Gross Profit**

GP = Actual Sales – Cost of Goods Sold:

- P: 1,88,000 – 1,44,000 = **₹44,000**
- Q: 1,66,000 – 1,12,000 = **₹54,000**
- R: 93,000 – 57,000 = **₹36,000**

Cross-check: GP on normal sales less discount given → P: 48,000 – 4,000 = 44,000 ✓; Q: 56,000 – 2,000 = 54,000 ✓; R: 38,000 – 2,000 = 36,000 ✓

**(ii) Value of Closing Stock as on 31st December, 2014**

Closing Stock = Opening Stock + Purchases – Cost of Goods Sold:

- P: 30,000 + 1,60,000 – 1,44,000 = **₹46,000**
-…

Question 2

What are the contents of 'Liquidators' statement of account'?

Accepted Answer

The **Liquidators' statement of account** is a periodic statement prepared by the liquidator to account for all transactions during the winding up process and is filed with the Registrar of Companies. The contents typically include:

**Opening Position**: Details of assets and liabilities at the commencement of liquidation, including the balance sheet position transferred to the liquidation account.

**Receipts**: All monies received by the liquidator during the period, including (i) amounts from realization of fixed and current assets, (ii) proceeds from sale of investments and other property, (iii) amounts received from debtors and trade receivables, (iv) interest and income earned on bank deposits, (v) refunds received, and (vi) any other miscellaneous receipts.

**Payments Made**: All amounts disbursed by the liquidator, classified as (i) **preferential creditors** - wages, salaries, and gratuity dues of employees, (ii) **secured creditors** - amounts paid against secured claims, (iii) **unsecured creditors** - dividends distributed to unsecured creditors, (iv) **government dues** - income tax, GST, and other statutory liabilities, (v) **liquidator's remuneration and expenses** - commission, traveling, postage, and professional fees, and (vi) **other payments** - court fees, printing charges, and other liquidation costs.

**Assets Not Yet Realized**: A schedule showing movable and immovable property not yet converted into cash, with reasons for non-realization and estimat…

Question 3

Specify the conditions when cash credit overdraft account is treated as 'Out of order'?

Accepted Answer

An account is treated as 'Out of Order' when it does not conform to the agreed-upon terms and conditions of operation. For Cash Credit and Overdraft accounts, the RBI has specified the following conditions under the Master Circular on Asset Classification:

**Condition 1: Continuous Debit beyond 90 Days** – The account remains continuously in debit (i.e., borrowing outstanding without any credit) for a period exceeding 90 days from the date it first went into debit. This indicates the borrower is not repaying as expected and the facility is being misused as a long-term loan.

**Condition 2: No Credit Balance for 90 Days** – The account has not been credited with any amount (no credit operation) for more than 90 days. In other words, the account does not have a credit balance even for a single day during the preceding 90-day period. This shows the account is not being operated as a CC/OD facility should be—intermittently, with periodic repayments.

**Condition 3: Non-operation for 90 Days** – The account remains completely inoperative (neither debited nor credited) for a period exceeding 90 days, indicating abandonment or stagnation of the facility.

**Condition 4: Principal Amount Unpaid** – Any principal amount due under the CC/OD arrangement remains unpaid for more than 90 days from the due date.

**Condition 5: Extension for Seasonal Accounts** – For accounts classified as having a seasonal pattern of operation, the period of 90 days is extended to **180 days** before trea…

Question 4

Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2014-15 for its residential project at LIBOR + 3%. The interest is payable at the end of the Financial Year. At the time of availment, exchange rate was ₹ 56 per US $ and the rate as on 31st March, 2015 was ₹ 62 per US $. If Shan Builders Limited borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%. Compute Borrowing Cost and exchange difference for the year ending 31st March, 2015 as per applicable Accounting Standards. (Applicable LIBOR is 1%)

Accepted Answer

This question is governed by **AS 16 – Borrowing Costs** (issued by ICAI). AS 16 defines borrowing costs to include **exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs** (AS 16, Para 4(e)).

**Step 1 – Identify the foreign currency loan details**
Loan principal: US$ 10,00,000. Interest rate: LIBOR (1%) + 3% = **4% p.a.** Exchange rate at inception: ₹56/US$. Exchange rate at 31st March 2015: ₹62/US$.

**Step 2 – Actual interest on the foreign currency loan (in ₹)**
Interest in USD = US$ 10,00,000 × 4% = US$ 40,000. Since interest is payable at year-end, it is translated at the closing rate: US$ 40,000 × ₹62 = **₹24,80,000**.

**Step 3 – Exchange difference on the principal**
The loan principal in ₹ has increased due to depreciation of INR. Exchange difference = US$ 10,00,000 × (₹62 – ₹56) = **₹60,00,000**.

**Step 4 – Determine the INR equivalent borrowing cost (benchmark cap)**
Had the loan been raised in India in INR, the rate would have been 10.50%. INR principal = US$ 10,00,000 × ₹56 = ₹5,60,00,000. INR equivalent interest = ₹5,60,00,000 × 10.50% = **₹58,80,000**.

**Step 5 – Exchange difference treated as Borrowing Cost**
AS 16 limits the exchange difference capitalised (or expensed as borrowing cost) to: INR equivalent interest – Actual foreign currency interest in ₹ = ₹58,80,000 – ₹24,80,000 = **₹34,00,000**.

**Step 6 – Exchange difference NOT treated as Borrowing Cost**
Total exchange diffe…

Question 5

Write the LISTS which should accompany the Statement of Affairs, in case of a winding up by Court.

Accepted Answer

In a court winding up of a company, the Official Liquidator prepares a **Statement of Affairs** which is accompanied by the following lists:

**1. Schedule of Assets** — This list shows all assets of the company classified as: (a) **Fully Realized Assets** — those converted into cash or amounts realized; (b) **Partly Realized Assets** — those subject to mortgages, charges, or pledges showing the net amount available; and (c) **Unrealized Assets** — those not yet converted, listed with estimated values based on expected realization.

**2. Schedule of Liabilities** — This categorizes all debts and obligations of the company as: (a) **Preferential Debts** — wages, salaries, gratuity, and other benefits due to employees up to prescribed limits; (b) **Secured Debts** — amounts due to creditors who hold security over specific assets; and (c) **Unsecured Debts** — amounts due to general creditors with no security.

**3. List of Creditors** — A detailed list containing the names of all creditors, the amounts due to each, and their classification (whether secured, preferential, unsecured, or contingent). Contingent creditors are those whose claim is dependent on a future event.

**4. List of Contributories** — This shows: (a) **Present Members** — shareholders holding shares at the time of liquidation and their liability; (b) **Past Members** — those who ceased to be members within two years prior to the commencement of winding up, with their contingent liability on calls.

**5. State…

Question 6

Pass necessary Journal Entries (with narration) in the books of branch to rectify or adjust the following:
(i) Branch Paid ₹ 24,000 as salary to HO Supervisor and the amount was debited to Salaries Account by the branch.
(ii) Head Office Expenses allocated to branch were ₹ 22,500, but these expenditure were not recorded by the branch.
(iii) HO collected ₹ 50,000 directly from the customer on branch's behalf.
(iv) Branch has sent remittance of ₹ 1,20,000 but the same has not yet been received by HO.

Accepted Answer

**Journal Entries in the Books of Branch**

**(i) Salary paid to HO Supervisor — wrongly debited to Salaries Account:**

Since the salary relates to HO's Supervisor, it is an expense of HO, not the branch. The branch has effectively made a payment on behalf of HO. Therefore, **HO Account** should be debited (as HO owes this amount to the branch), and Salaries Account should be reversed.

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| **HO Account** Dr. | 24,000 | |
| To Salaries Account | | 24,000 |
*(Being salary of HO Supervisor wrongly debited to Salaries A/c, now transferred to HO A/c)*

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**(ii) HO Expenses allocated to Branch — not recorded:**

The branch must recognise the expenses allocated by HO. This increases the branch's expenses and creates a liability towards HO.

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| **HO Expenses Allocated A/c** Dr. | 22,500 | |
| To HO Account | | 22,500 |
*(Being HO expenses allocated to branch, now recorded in branch books)*

---

**(iii) HO collected ₹50,000 from branch's customer:**

HO has collected cash on behalf of the branch, so the branch's debtor stands settled and the amount is now receivable from HO.

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| **HO Account** Dr. | 50,000 | |
| To Debtors A/c (Customer) | | 50,000 |
*(Being amount collected by HO directly from branch customer on branch's behalf)*

---

**(iv) Remittance of ₹1,20,000 sent by Branch but not yet received by HO:**

The branch would have *…

Question 7

Yash, Tanish and Ruchika were partners sharing Profit & Loss in ratio of 3:2:1. Balance Sheet of the firm as on 31st March, 2014:

Liabilities: Fixed Capital - Yash ₹ 50,000, Tanish ₹ 20,000, Ruchika ₹ 10,000; Current Accounts - Yash ₹ 6,000, Ruchika ₹ 4,000; Unsecured Loans ₹ 15,000; Current Liabilities ₹ 15,000. Total ₹ 1,20,000

Assets: Fixed Assets ₹ 45,000; Investments ₹ 15,000; Current Assets - Stock ₹ 10,000, Debtors ₹ 27,500, Cash & Bank ₹ 12,500; Current Account - Tanish ₹ 10,000. Total ₹ 1,20,000

On 1st April, 2014 all the partners agreed to form a new company YTR Pvt. Ltd., which shall take over the firm as going concern including goodwill, but excluding cash and bank balances. The following matters were also agreed upon:
(i) Goodwill shall be valued at 3 years' purchase of sup…

Accepted Answer

**Working Note 1 — Goodwill Calculation**

Normal Capital (Fixed Capital only) = ₹50,000 + ₹20,000 + ₹10,000 = **₹80,000**
Normal Profit = 17.50% × ₹80,000 = ₹14,000
Actual Profit = ₹20,000
**Super Profit** = ₹20,000 − ₹14,000 = ₹6,000
**Goodwill** = 3 years × ₹6,000 = **₹18,000**

**Working Note 2 — Purchase Consideration**

Assets taken over: Goodwill ₹18,000 + Fixed Assets ₹45,000 + Investments ₹15,000 + Stock ₹10,000 + Debtors ₹27,500 = ₹1,15,500
Less: Liabilities taken over: Unsecured Loans ₹15,000 + Current Liabilities ₹15,000 = ₹30,000
**Purchase Consideration (P.C.) = ₹85,500**

Note: Cash & Bank ₹12,500 and Tanish's debit current account ₹10,000 are excluded from transfer; the current account is merged with partners' capital accounts.

---

**REALIZATION ACCOUNT**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Fixed Assets | 45,000 | Unsecured Loans | 15,000 |
| Investments | 15,000 | Current Liabilities | 15,000 |
| Stock | 10,000 | YTR Pvt. Ltd. A/c (P.C.) | 85,500 |
| Debtors | 27,500 | | |
| Cash & Bank A/c (Exp.) | 5,000 | | |
| Partners' Capital — Profit: | | | |
| Yash (3/6) | 6,500 | | |
| Tanish (2/6) | 4,333 | | |
| Ruchika (1/6) | 2,167 | | |
| **Total** | **1,15,500** | **Total** | **1,15,500** |

---

**YTR PRIVATE LIMITED ACCOUNT**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Realisation A/c | 85,500 | Yash Capital A/c (Shares) | 46,100 |
| | | Tanish Capital A/c (Shares) | 30,733 |
| | | Cash & Bank A/c | 8,667 |
| **Total** | **85,500** | **Total** | **85,500**…

Question 8

Based on the following information about VFS:
(ii) Firm's sales and purchases for the year 2014-15 amounted to ₹ 5 lacs and ₹ 4.50 lacs respectively.
(iii) The cost and net realizable value of the stock were ₹ 34,000 and ₹ 38,000 respectively.
(iv) General Expenses for the year 2014-15 were ₹ 16,500.
(v) Deferred Expenditure is normally amortized equally over 4 years starting from F.Y. 2013-14 i.e. ₹ 5,000 per year.
(vi) Out of debtors worth ₹ 10,000, collection of ₹ 4,000 depends on successful re-design of certain product already supplied to the customer.
(vii) Closing trade payable is ₹ 10,000, which is likely to be settled at 95%.
(viii) There is pre-payment penalty of ₹ 2,000 for Bank loan outstanding.
Prepare Profit & Loss Account for the year ended 31st March, 2015 by assuming it is …

Accepted Answer

**Profit & Loss Account of VFS for the year ended 31st March, 2015 (Non-Going Concern Basis)**

On a **non-going concern basis**, assets are valued at their net realisable values (not at cost/historical values), deferred costs are fully written off, contingent losses are fully recognised, and any expected gains on liability settlements are also recorded. The following adjustments distinguish this account from a going concern P&L:

**Adjustment 1 – Closing Stock at NRV:** Under going concern, stock is valued at lower of cost or NRV (₹34,000). On non-going concern basis, stock is valued at **NRV = ₹38,000**, since the business is being wound up and realisation value is the relevant measure.

**Adjustment 2 – Deferred Expenditure fully written off:** Normally amortised at ₹5,000/year over 4 years starting 2013-14. Total deferred expenditure = ₹20,000. Amount amortised in 2013-14 = ₹5,000. **Balance remaining at start of 2014-15 = ₹15,000.** On non-going concern basis, the entire unamortised balance of ₹15,000 is written off in 2014-15 (instead of only ₹5,000).

**Adjustment 3 – Provision for Doubtful Debts:** Out of debtors of ₹10,000, collection of **₹4,000 depends on successful redesign** of a product already supplied — this is uncertain on wind-up. A full provision of ₹4,000 is created.

**Adjustment 4 – Gain on Trade Payables:** Trade payable of ₹10,000 is likely to be settled at 95% = ₹9,500. The **gain of ₹500** (₹10,000 − ₹9,500) is credited to P&L.

**Adjustment 5 – Pre-…

Question 9

Prepare Revenue Account of M/s Ishan Insurance Co. engaged in marine insurance business:

Accepted Answer

**Note:** The question as submitted does not include the numerical data (figures/trial balance) required to prepare the Revenue Account. The solution below presents the **standard proforma and methodology** for a Marine Insurance Revenue Account as per the **Insurance Act, 1938** and **IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002**, which is fully exam-applicable for 12-mark questions.

**M/s Ishan Insurance Co. — Marine Revenue Account**
**For the year ended 31st March, 20XX**

**INCOME SIDE (Cr.):**

**Net Premium Earned** is computed as: Premium received during the year **Add** Outstanding premium at close **Less** Outstanding premium at beginning **Less** Reinsurance premium ceded **Add** Reinsurance premium accepted.

**Commission on Reinsurance Ceded** — amount received from reinsurers as commission.

**Interest, Dividend and Rent** — investment income attributable to marine fund.

**Profit on Sale of Investments** (if any).

**EXPENDITURE SIDE (Dr.):**

**Net Claims Incurred** = Claims paid during the year **Add** Outstanding claims at close **Less** Outstanding claims at opening **Less** Claims recovered from reinsurers.

**Net Commission** = Commission paid to agents **Less** Commission received on reinsurance accepted.

**Expenses of Management** — allocated to marine business.

**Transfer to Catastrophe Reserve** (if directed).

**Profit/Loss** — balancing figure transferred to **Profit & Loss Account**.

…

Question 10

Raju Industries, Kolkata has a branch in Delhi to which office goods are invoiced at cost plus 25%. The branch sells both for cash and on credit. Branch expenses are paid direct from head office, and branch has to remit all cash received to the Head office Bank Account. From the following details, relating to calendar year 2014, prepare the accounts in the Head Office Ledger and ascertain the Branch Profit. Branch does not maintain any books of account, but sends weekly returns to the Head Office. Goods received from Head Office at Invoice Price: ₹ 6,00,000; Returns to Head Office at Invoice Price: ₹ 12,000; Stock at Delhi as on 1st Jan., 2014: ₹ 60,000; Sales during the year - Cash: ₹ 1,80,000; Credit: ₹ 3,80,000; Sundry Debtors at Delhi as on 1st Jan., 2014: ₹ 72,000; Discount allowed to…

Accepted Answer

**DELHI BRANCH ACCOUNTS - YEAR 2014**

**Preliminary Calculation:**
Since goods are invoiced at cost plus 25%, Cost Price = Invoice Price ÷ 1.25

Goods Received at Cost Price: ₹6,00,000 ÷ 1.25 = ₹4,80,000
Returns at Cost Price: ₹12,000 ÷ 1.25 = ₹9,600

**DELHI BRANCH PROFIT & LOSS ACCOUNT FOR 2014**

*Dr.* | | *Cr.* | |
---|---|---|---
To Opening Stock | ₹60,000 | By Cash Sales | ₹1,80,000
To Goods sent at Cost Price | ₹4,80,000 | By Credit Sales | ₹3,80,000
To Rent, Rates, Taxes | ₹16,000 | By Returns from Branch (at cost) | ₹9,600
To Salaries, Wages, Bonus | ₹62,000 | By Sales Returns | ₹6,000
To Office Expenses | ₹6,000 | By Closing Stock | ₹1,20,000
To Bad Debts | ₹6,000 | |
To Discount allowed | ₹8,000 | |
To Closing Debtors outstanding* | ₹3,66,000 | |
To **Branch Profit** | **₹45,600** | |
| **₹7,68,600** | | | **₹7,68,600**

*Closing Debtors = Opening Debtors (₹72,000) + Credit Sales (₹3,80,000) - Bad Debts (₹6,000) - Discount (₹8,000) - Assumed collection of opening debtors (₹72,000) = ₹3,66,000

**Alternatively, as Profit & Loss Statement:**

Sales:
- Cash Sales: ₹1,80,000
- Credit Sales: ₹3,80,000
- Less: Sales Returns: (₹6,000)
- **Net Sales: ₹5,54,000**

Cost of Goods Sold:
- Opening Stock: ₹60,000
- Add: Goods Received at Cost: ₹4,80,000
- Less: Returns to HO: (₹9,600)
- Available for Sale: ₹5,30,400
- Less: Closing Stock: (₹1,20,000)
- **Cost of Goods Sold: ₹4,10,400**

**Gross Profit: ₹1,43,600**

Less: Expenses and Losses:
- Bad Debts: ₹6,000
- Discount allow…

Question 11

A reconstruction scheme was prepared and duly approved. The salient features of the scheme were as follows: (i) Paid up value of 8% Preference Share to be reduced to ₹ 80, but the rate of dividend being raised to 9%. (ii) Paid up value of Equity Shares to be reduced to ₹ 10. (iii) The directors to refund ₹ 50,000 of the fees previously received by them. (iv) Debenture holders forego their interest of ₹ 26,000 which is included among the Sundry Creditors. (v) The preference shareholders agreed to waive their claims for preference share dividend, which is in arrears for the last three years. (vi) "B" 6% Debenture holders agreed to take over the Chennai Works at ₹ 4,25,000 and to accept an allotment of 1,500 equity shares of ₹ 10 each at par, and upon their forming a company called Zia Ltd. (…

Accepted Answer

**Journal Entries in the Books of Star Ltd. after the Reconstruction Scheme**

*Note: The following entries are based on the scheme features provided. Amounts for Preference Share Capital, Equity Share Capital, and Worksmen's Compensation Fund require the Balance Sheet figures (not supplied in this question). Placeholders are used where balance sheet data is essential; all derivable amounts are shown in full.*

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**Entry 1 — Reduction in Preference Share Capital (Scheme Feature i)**

8% Preference Share Capital A/c Dr [₹100 × N shares]
  To 9% Preference Share Capital A/c [₹80 × N shares]
  To Capital Reduction A/c [₹20 × N shares]

*(Being paid-up value of 8% Preference Shares reduced from ₹100 to ₹80 per share; rate raised to 9%; difference credited to Capital Reduction Account as per the approved scheme)*

---

**Entry 2 — Reduction in Equity Share Capital (Scheme Feature ii)**

Equity Share Capital A/c Dr [Old paid-up value × M shares]
  To New Equity Share Capital A/c [₹10 × M shares]
  To Capital Reduction A/c [Difference]

*(Being paid-up value of equity shares reduced to ₹10 per share; excess credited to Capital Reduction Account)*

---

**Entry 3 — Directors Refund Fees (Scheme Feature iii)**

Bank A/c Dr ₹50,000
  To Capital Reduction A/c ₹50,000

*(Being fees previously received by directors refunded as per the scheme)*

---

**Entry 4 — Debenture Holders Forego Interest (Scheme Feature iv)**

Sundry Creditors A/c Dr ₹26,000
  To Capital Reduction A/c ₹26,000

*…

Question 12

What do you mean by 'Weighted average number of equity shares outstanding during the period' and why is it required to be calculated? Compute weighted average number of equity shares in the following case:

| Date | Particulars | Shares |
|---|---|---|
| 1st April, 2014 | Balance of Equity Shares | 500000 |
| 30th June, 2014 | Equity Shares issued for cash | 100000 |
| 15th January, 2015 | Equity Shares bought back | 50000 |
| 31st March, 2015 | Balance of Equity Shares | 550000 |

Accepted Answer

**Weighted Average Number of Equity Shares Outstanding** refers to the average number of equity shares that would have been outstanding throughout the reporting period if share transactions (issuances, buybacks, bonus issues, splits) had occurred on a proportionate basis. It weights the number of shares outstanding by the time period for which they remained outstanding.

**Why it is required:** Under **Ind AS 33 (Earnings Per Share)**, the denominator for EPS calculation must reflect shares outstanding for the entire period in proportion to their time outstanding. The numerator (profit attributable to equity shareholders) represents earnings for the full period; therefore, the denominator must be equally representative. Using only the closing balance would be misleading because shares issued or bought back during the year did not contribute to earnings for the full period.

**Calculation:**

The financial year is 1st April 2014 to 31st March 2015 (365 days).

**Period 1: 1st April 2014 to 30th June 2014**
- Days outstanding: 91 days
- Shares outstanding: 500,000
- Weighted shares: 500,000 × 91 days = 45,500,000 share-days

**Period 2: 1st July 2014 to 14th January 2015**
- Days outstanding: 198 days (31+31+30+31+30+31+14)
- Shares outstanding: 600,000 (500,000 + 100,000 issued on 30th June)
- Weighted shares: 600,000 × 198 days = 118,800,000 share-days

**Period 3: 15th January 2015 to 31st March 2015**
- Days outstanding: 76 days (17+28+31)
- Shares outstanding: 550,000 (600…

Question 13

ABC Bank Ltd. has a balance of ₹ 40 crores in "Rebate on bills discounted" account as on 31st March, 2014. The Bank provides you the following information: (i) During the financial year ending 31st March, 2015 ABC Bank Ltd. discounted bills of exchange of ₹ 5000 crores charging interest @ 14% and the average period of discount being 146 days. (ii) Bills of exchange of ₹ 500 crores were due for realization from the acceptors/customers after 31st March, 2015. The average period of outstanding after 31st March, 2015 being 73 days. These bills of exchange of ₹ 500 crores were discounted charging interest @ 14 % p.a. You are requested to pass necessary Journal Entries in the books of ABC Bank Ltd. for the above transactions.

Accepted Answer

**Banking Accounting: Bills of Exchange and Rebate on Bills Discounted**

When a bank discounts bills of exchange, it charges interest upfront. This interest is initially credited to **Rebate on bills discounted** (an unearned income account). As bills mature, the earned portion is transferred to **Interest earned**. Outstanding bills retain their accrued interest in the Rebate account.

**Calculations:**

1. **Total interest on ₹5000 crores bills @ 14% p.a. for 146 days average:** (5000 × 14 × 146) ÷ (100 × 365) = **₹280 crores**

2. **Interest on ₹500 crores outstanding bills @ 14% p.a. for 73 days remaining:** (500 × 14 × 73) ÷ (100 × 365) = **₹14 crores** (to be earned after 31st March 2015)

3. **Interest earned during FY 2014-15 on current year bills:** ₹280 - ₹14 = **₹266 crores**

4. **Total interest to be transferred at year-end:** Opening balance (₹40 crores) + Current year earned interest (₹266 crores) = **₹306 crores**

**Journal Entries:**

**Entry 1: Upon discounting bills of exchange (₹5000 crores)**
Dr. Cash/Bank                                                  ₹4720 crores
Cr. Bills Receivable                       …

CA Inter Audit & Ethics

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap