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Advanced Financial Accounting Solved Question Papers: Nov' 2013

Dibrugarh University Previous Year’s Question Papers
2013 (November)
COMMERCE (Speciality)
(Advanced Financial Accounting)
Course: 203
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1. (a) Choose the correct answer:                             1X3=3
a)      Preferential creditors are shown under List A/ List B/ List E.
b)      Revenue account of life insurance Act, A-RA/ A-PL / A-BS.
c)       A term loan is treated as non performing asset (NPA), if interest n it remains unpaid for a period exceeding 90 days/ 100 days / 120 days
(b) Fill the blanks:                            1X3=3
a)      The IRDA was set up in the year 1996.
b)      During the period of inflation, profits are reduced.
c)       Banking companies are governed by the Banking Regulation Act, 1949.
(c) Write true or false:                   1X2=2
a)      Adjusting account to changing prices is a never-ending process.        True
b)      In case of marine insurance, the provision against unexpired risks 100%.                       True
2. Write brief answer of the following: 4x4=16
a)      Distinction between the Presidency Town Insolvency Act and the Provincial Insolvency Act.
b)      Explain the accounting for price level changes under current cost accounting (CCA) method.
c)       Discuss briefly how the following are treated in preparing Revenue Account of insurance company :
Ø  Bonus is reduction of premium
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.
Ø  Premium
Ans: Premium: The premium received during the accounting period plus outstanding at the end of the period, plus bonus in reduction of premium minus outstanding premium at the beginning of the period minus reinsurance premium is to be shown under the heading “Premium earned (Net)” (Schedule1)
d)      Explain money at call and short notice.
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.

3. (a) From the following information, prepare Profit & Loss Account of thirty Bank for the year ended on 31st March, 2012 by showing necessary schedules: (in’000)                                            12
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
Additional Information:
a)      Provisions for contingencies—Rs. 200000
b)      Transfer to reserves Rs. 1557000
c)       Transfer to Central Government—Rs.200000
Thirty Bank
PROFIT AND LOSS ACCOUNT
For the year ended 31st March, 2012

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
Working Note:
SCHEDULE 13 – INTEREST EARNED

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
SCHEDULE 14 – OTHER INCOME

Rs. (000)
1.       Commission
82

Total
82
SCHEDULE 15 – INTEREST EXPENDED

Rs. (000)
1.      Interest on Fixed Deposits
2.      Interest on Saving Bank Deposits
3,170
680
Total
3,850
SCHEDULE 16 – OPERATING EXPENSES


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
1.       Standard Assets
2.       Substandard Assets
3.       Doubtful Assets
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;
a)      Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
b)      The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
c)       The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
d)      Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
e)      Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
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:
a)      Sub-standard Assets
b)      Doubtful Assets
c)       Loss Assets
B. Sub-standard Assets: Such assets have been classified as NPA for a period not exceeding one year with effect from 31st 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
Assets
% of Provisions
Standard Assets
Sub-standard
Doubtful (secure)
-upto 1 year
-1 – 3 years
More then 3 years
Doubtful (unsecure)
Loss Assets
0.40%
15%

25%
40%
100%
100%
100%
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 31st march, 2012 was Rs.9600000 and as on 31st 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 31st march, 1012: (in’000)                                             11
Premium Less Re-insurance Premium
Interest, Dividend and Rent
Fees
Income Tax
Management Expenses
Annuities Paid
Commission
Surrenders
Surplus on Revaluation of Reversions
Re-insurance Irrecoverable
Claim Less Re-insurance Claims
Consideration for annuities granted
5720
2800
16
440
700
50
220
320
20
16
3400
160
Prepare Revenue Account.  
Sunrise Life Insurance Co. Ltd.
REVENUE ACCOUNT
For the year ended 31st March, 2012
Particulars
Schedule
Amount
Premium Earned (Net)
Income from Investments:
Interest, Dividend and Rent
Surplus on Revaluation of Reversions

Other Income:
Consideration for Annuities Granted
Fees
1
57,20,000

28,00,000
20,000


1,60,000
16,000
Total (A)

87,16,000
Commission
Operating Expenses relating to Insurance Business
Re-insurance irrecoverable
Income Tax
2
3
2,20,000
7,00,000
16,000
4,40,000
Total (B)

13,76,000
Benefits Paid (Net)
Interim Bonus Paid
Change in Valuation of Liability in respect of Life Policies:
Net Liability on all Contracts in force on
31-3-12                                                        96,00,000
Less: Net Liability on all Contracts
In force on 31-3-2011                               84,00,000
4
37,70,000
2,60,000




12,00,000
Total (C)

52,30,000
Surplus (D) = (A) – (B) – (C)

21,10,000
Appropriations:
Transfer to Shareholders A/c (20% of Rs. 21,10,000)
Transfer to Reserve (20% of Rs. 21,10,000)
Balance being Fund for Future Appropriations


4,22,000
4,22,000
12,66,000
Total (D)

21,10,000
Schedule Forming Part of Revenue A/c
SCHEDULE 1 – PREMIUMS EARNED (NET)
Particulars
Amount
Claims less Reinsurance Claims

57,20,000

57,20,000
SCHEDULE 2 – COMMISSION EXPENSES
Particulars
Amount
Commission Paid

2,20,000

2,20,000
SCHEDULE 3 – OPEERATING EXPENSES RELATED TO INSURANCE BUSINESS
Particulars
Amount
Management Expenses

7,00,000

7,00,000
SCHEDULE 4 – BENEFITS PAID
Particulars
Amount
Claims less Reinsurance Claims
Annuities
Surrenders
34,00,000
50,000
3,20,000

37,70,000
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:
a)      General Insurance policy is a contract of indemnity in which the insurer agrees to reimburse only the actual loss suffered subject to the average clause.
b)      General Insurance contract is for a short period usually a year.
c)       The subject matter is any physical property, assets, ship or cargo etc.
d)      General insurance has only the element of protection and not the element of investment.
e)      Insurable interest on the subject matter must be present both at the time of effecting policy as well as when the claim falls due.
f)       General insurance is a contract of indemnity. The insured can claim only the actual amount of loss from the insurer.
g)      General insurance does not have any surrender value or paid up value.
h)      In case of general insurance, business profit is determined after making provision for unexpired risks.
i)        Loss is measurable in case of general insurance.
Reserve for unexpired risk and its significance at the time of calculating profits
Insurance Company, close their accounts on 31st 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
Ø  In a particular year the management may feel that the percentage of premium recommended by the General Insurance Council is not sufficient to meet the unexpired risks. In such a situation they may provide additional reserve. Such additional reserve for unexpired risk will also be debited to the revenue account.
Ø  The balance will be shown in the balance sheet as in the case of normal reserve for unexpired risk, and will be transferred to the credit of next year’s revenue account.
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 30th June. His books showed the following balances:                        11
Cash in Hand
Fixture and Fittings (estimated to produce Rs.80)
Stock in Trade (estimated to produce Rs.1200)
Sundry Creditors :
Trade Creditors
Bills Payable
Sundry Debtors :                                    
Good: (Rs.)       1000
Doubtful: (Rs.) 2000 (Expected to realize 50%)
Bad                     2000
Bank Overdraft
Capital
10
250
1800






5000




2000
2200




1200
1660
7060
7060
a)      Liability on Bills discounted Rs. 500
b)      Expected to rank Rs. 100
c)       His household furniture was valued at Rs. 250
d)      He owned a house valued at Rs. 750 having a mortgage on it of Rs.600 at 4% interest paid Up to the preceding 31st December.
e)      Preferential Creditors amounted to Rs. 35 (included in Sundry Creditors) and Rs. 15 for the rate and house.
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 31st March and 30th September and was created by the bank on 3rd April and 4th October respectively. The price of the security on 31/12/2011 was Rs. 94. Mukesh closes his books on 31st December each year. Draw up Investment Account in the books of Mukesh.                       11
In the Books of XY Corporation Ltd
In the books of Investment
Mukesh Account
12% Government Security
For the year ended 31st March, 2016
Dr.                                                                                                                                                                                                                                                                                                          Cr.
Date
Particular
Face Value
Interest
Cost
Date
Particular
Face Value
Interest
Cost
1/1/11





1/6/11






31/12/11




To Balance b/d




To Bank A/c






To P/L A/c (Interest for the year)
3,00,000





2,00,000






-

9,000
(3,00,000 x 12% x 3/12)


4,000
(2,00,000 x 12% x 2/12)



36,500
2,82,500





1,90,000
(2,000 x 96.5 + 0.5% of 2,00,000 – 4,000)

-
31/3/11





31/7/11




30/09/11




1/12/11




31/7/11


1/12/11


31/12/11
By Bank A/c





By Bank A/c




By Bank A/c




By Bank A/c




By P/L A/c (sale of investment)

By P/L A/c (sale of investment)
By P/L A/c

By Balance c/d
-





2,50,000




-




1,00,000




-


-



1,50,000
18,000
(3,00,000 x 12% x 6/12)


10,000
(2,50,000 x 12% x 4/12)

15,000
(2,50,000 x 12% x 6/12)

2,000
(1,00,000 x 12% x 2/12)

-


-



4,500
-





2,35,000
(2,500 x 94.5 – 0.5% on 2,50,000)

-




94,000
(1,000 x 96 – 2,000)


417


583

1,500

1,41,000


5,00,000
49,500
4,72,500


5,00,000
49,500
4,72,500


Or
(b) Distinguish between the following:                                5.5x2=11
(i)     Cum-dividend and Ex-dividend transactions
(ii)   Cum-interest and Ex-interest transactions
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
Basis
Cum-interest
Ex-interest
Meaning
It means the price of debentures with interest
It means price of debentures without interest.
Right to interest
The buyer gets the right to received interest paid after the sale.
The seller retains the right to receive interest accrued during his holding.
Price
The price is higher than what would have to be paid otherwise.
The price is lower than what would have to be paid otherwise.
Accrued interest
In case of cum-interest nothing is payable for interest accrued.
In case of ex-interest, accrued interest is payable.

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
Basis
Ex-dividend
Cum-Dividend
Meaning
It means price of shares without dividend.
It means price of shares with dividend.
Right to dividend
The seller retains the right to receive any dividend declared or paid after sale.
The buyer gets the right to dividend received dividend declared or paid after the sale.
Price
The price is lower than what would have to be paid otherwise.
The price is higher than what would have to be paid otherwise.
Accrued Dividend
In case of cum-Dividend nothing is payable for interest Dividend.
In case of ex-dividend, accrued dividend is payable.

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
1)      First-in-First out (i.e., FIFO) system
2)      Last-in-First out (i.e., LIFO) system

Inventory on 31.03.2011
Purchase during 2011-12
Inventor on 31.03.12 (Average for 2011-12)
Historical Cost (Rs.)
General Price Index
40000
310000
50000
200
220
230
Or
 (b) Discuss the methods which can be adopted to adjust price level charges in determining income.       11

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