Advanced Financial Accounting Solved Question Papers: Nov' 2013 | B.Com 3rd Sem

(b) Fill the blanks:                            1x3=3

(c) Write true or false:                   1x2=2

2. Write brief answer of the following: 4x4=16

Ans: Bonus in Reduction of Premium: Instead of paying bonus in cash, the insurer may deduct the bonus from the premium due from the insured. This is known as bonus in reduction of premium. It is added with premium and also included in Benefits paid schedule.

Ans: Money at call & short notice (Schedule 7): Money at call and Short money means a very short term loan given by banker for a period ranging from 1 day to 14 days. If the loan is given for one day, it is called ‘money at call’ and if the loan is given for a maximum period of 14 days and cannot be back on demand and will require at least a notice of 3 days for calling back, it is called ‘money at short notice’. These items appear on the assets side of a banks balance sheet and represents temporary loans to Bill Brokers, Stock Brokers & other banks. Call money are normally unsecured in our country.

Interest on Loans Interest on fix Deposits Commission Payment to Employees Discount on Bills Discounted Interest on Cash Credits Rent, Taxes and lighting Interest on overdrafts Directors’ Fees, Allowance and Expenses Auditors’ Fees and Expenses Interest on saving Bank Deposits Postage, Telegrams and Telephone Printing and Stationary Sunday Charges

2590 3170 82 540 1060 2230 180 1540 30 12 680 14 29 17

	Schedule No.	Year ended (31-3-12)
I.            Income: Interest Earned Other Income	13 14	Rs. (‘000) 7,420 82
Total		7,502
II.            Expenditure: Interest Expended Operating Expenses Provisions & Contingencies	15 16	3,850 822 200
Total		4,872
III.            Profit/Loss: Net profit for the year (I – II) Profit brought forward		2,630 -
		2,630
IV.            Appropriations: Transfer to Statutory Reserve (25% of Rs.(000) 2,630) Transfer to Other Reserves Transfer to Central Govt. Balance carried to B/S (2,630 – 658 – 1,557 – 200)		658 1,557 200 215
		2,630

	Rs. (000)
1.       Interest/Discount on Advances/Bills (1,060 + 2,590 + 2,230 + 1,540) 2.       Interest on Investments 3.       Interest on Balances with RBI & Other Interbank Funds 4.       Others	7,420 - - -
Total	7,420

	Rs. (000)
1.       Commission	82
Total	82

	Rs. (000)
1.      Interest on Fixed Deposits 2.      Interest on Saving Bank Deposits	3,170 680
Total	3,850

	Rs. (000)
1.       Payment to Employees 2.       Rent, Taxes & Lighting 3.       Printing and Stationery 4.       Directors’ Fees, Allowance and Expenses 5.       Auditors’ Fees and Expenses 6.       Postage Telegrams & Telephones 7.       Sundry Charges	540 180 29 30 12 14 17
Total	822

Or

(b) Explain the following in the context of the Banking Companies Accounts:                  12

Ans: Non-performing Assets (NPA)

NPA indicates Non-Performing asset, it means assets of a bank which ceases to generate income for the bank. Non-performing assets means a credit facility in respect of which interest/or principal repayment instalment is in arrears for more than 90 days. A non-performing asset (NPA) shall be a loan or an advance where;

Categories of NPA

A. Standard assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan does not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories.

Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

B. Sub-standard Assets: Such assets have been classified as NPA for a period not exceeding one year with effect from 31^st March, 2005. The earlier period of 18 months has been reduced to 12 months. The current net worth of the borrower/guarantor or the current market value of the security charged under such cases isn’t enough to ensure recovery of the dues to the bank in full.

C. Doubtful Assets: An asset which has remained NPA for a period of one year. In term loans if the instalments of the principal have remained overdue for a period of one year should be treated as doubtful.

D. Loss Assets: Where the loss on an asset has been identified by banks/internal auditor or the RBI inspector but the amount hasn’t been written off wholly/partly is known as loss asset.

Provisions required on various types of NPA

4. (a) Sunrise Life Insurance Co. Ltd. Had a paid up capital of Rs.1000000 divided into 100000 shares of Rs. 10 each. Its net liability on all contracts its faces on 31^st march, 2012 was Rs.9600000 and as on 31^st march, 2011 was 8400000. The company had paid interim bounds of Rs. 260000 and 20% 0f the surplus is to be allowed to shareholders, 20% to reserves and balance being carried forward. The following figures are extracted from the books of the company for the year ended on 31^st march, 1012: (in’000)                                             11

Prepare Revenue Account.  

Sunrise Life Insurance Co. Ltd.

REVENUE ACCOUNT

For the year ended 31^st March, 2012

Schedule Forming Part of Revenue A/c

SCHEDULE 1 – PREMIUMS EARNED (NET)

SCHEDULE 2 – COMMISSION EXPENSES

SCHEDULE 3 – OPEERATING EXPENSES RELATED TO INSURANCE BUSINESS

SCHEDULE 4 – BENEFITS PAID

Or

(b) Point out the main features of Accounts of ‘General Insurance Companies’. Explain the purpose of creating reserve for unexpired risk in insurance business. State its accounting treatment.                    11

Ans: Meaning of General Insurance

Insurance contracts that do not come under the ambit of life insurance are called general insurance. The different forms of general insurance are fire, marine, motor, accident and other miscellaneous non-life insurance. The tangible assets are susceptible to damages and a need to protect the economic value of the assets is needed. For this purpose, general insurance products are bought as they provide protection against unforeseeable contingencies like damage and loss of the asset. Like life insurance, general insurance products come at a price in the form of premium. 

Features of General Insurance Companies:

Reserve for unexpired risk and its significance at the time of calculating profits

Insurance Company, close their accounts on 31^st March but not all risks under different policies expire on that date. Many policies extend into the following accounting year during which the risk continues. Therefore on the closing date there is an unexpired liability under various policies which may occur during the remaining term of the policy beyond the year and therefore, a provision for unexpired risks is made. This reserve is based on the Net Premium income earned by the insurance company during the year.

The effort involved in calculating unexpired portion of premium under each policy is very time consuming. Therefore, a simple formula to derive a percentage of premium income to be allocated to reserve for unexpired risks is adopted.

According to the requirements of the Insurance Act, it is sufficient if the provision is made for unexpired risks at 50 per cent for Fire, Marine Cargo and Miscellaneous business except for Marine Hull which has to be 100 per cent. It may be mentioned that the insurance companies are governed by the provisions of Section 44 of the Income-tax Act, 1961. In this regard, Rule 5 of the First Schedule to the Income-tax Rules – computation of Profit & Loss of General Insurance Business – provides for creation of a reserve for unexpired risks as prescribed under Rule 6E of the said Rules. According to this Rule, the insurance companies are allowed a deduction of 50 per cent of net premium income in respect of Fire and Miscellaneous Business and 100 per cent of the net premium income relating to Marine Insurance business. In view of this the reserves are created at the rates allowed under the Income-tax Act.

Additional reserve for unexpired risk

Treatment of reserves for unexpired risk: Reserve for unexpired risk is adjusted with premium earned in schedule – 1 of the Revenue account of a general insurance company. Difference in opening and closing balance of reserve for unexpired risk is calculated and increase in reserves during the year is deducted with premium earned or vice-versa.  In balance sheet, reserve for unexpired risk is shown in schedule – 14 under the head provisions.

5. (a) Mohan filed a position for bankruptcy on 30^th June. His books showed the following balances:                        11

Prepare a statement of affairs and Deficiency Account of Mohan.

Or

(b) Mention various lists that have to be prepared in support of The Statement of Affairs under the Insolvency Law, giving short particulars as to the contents of each of them.                                       11

6. (a) Mukesh held on 1/1/2011, Rs. 300000 of 12% Government Securities (tax free) of Rs. 100 each at Rs. 282500. On 1/6/2011, Mukesh purchase a furniture Rs. 200000 of the security at Rs. 96*1/2 cum-interest, brokerage being ½% on face value. On 31/7/2011, Rs 250000 of the security was sold at Rs. 94*1/2 % ex-interest, brokerage being ½% on face value. On 1/12/2011, Rs. 100000 of the security was again sold at Rs. 96 Cum-interest.

Interest on security was paid each year on 31^st March and 30^th September and was created by the bank on 3^rd April and 4^th October respectively. The price of the security on 31/12/2011 was Rs. 94. Mukesh closes his books on 31^st December each year. Draw up Investment Account in the books of Mukesh.                       11

In the Books of XY Corporation Ltd

Or

(b) Distinguish between the following:                                5.5x2=11

Ans: Cum-interest and Ex-interest price

The term ‘Cum’ and ‘Ex’ are latin words. ‘Cum’ means with and ‘Ex’ means without. The term ‘Cum-interest’ and ‘Ex-interest’ relate to debentures and bonds. Cum-interest can be expanded as inclusive of interest and Ex-interest can be expanded as exclusive of interest. Cum interest is the amount of interest accrued in the duration between the last interest date and the settlement date or transaction date. The cum-interest price includes not only the cost but also includes the interest accrued upto the date of purchase, and when interest becomes due it would be the right of the buyer to claim interest. Conversely, the quotation, Ex-interest, covers only the cost of the debentures and the buyer is liable to pay additional amount as interest accrued upto the date of purchase of debentures.

Difference between Cum-interest and Ex-interest

Cum-Dividend and Ex- Dividend price

The term ‘Cum’ and ‘Ex’ are latin words. ‘Cum’ means with and ‘Ex’ means without. The term ‘Cum-dividend’ and ‘Ex-dividend’ relates to shares. Cum-dividend can be expanded as share price inclusive of dividend and Ex-dividend can be expanded as share price exclusive of dividend. Cum dividend is the amount of dividend accrued in the duration between the dividend declaration date and the settlement date or transaction date. The cum-dividend price includes not only the cost of investment but also includes the dividend accrued upto the date of purchase, and when dividend is declared it would be the right of the buyer to claim dividend. Conversely, the quotation, Ex-dividend, covers only the cost of the investment and the buyer is liable to pay additional amount as dividend accrued upto the date of purchase of debentures.

Difference between Ex-dividend and cum-dividend

7. (a) From the information given below, ascertain the cost of sales and closing inventory under current purchasing power method if the organization follows:                                                         11

Or

 (b) Discuss the methods which can be adopted to adjust price level charges in determining income.  11