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Advanced Financial Accounting Solved Question Papers: Nov' 2014

2014 (November)
COMMERCE
(Speciality)
(Advanced Financial Accounting)
The figures in the margin indicate full marks for the questions.
1. (a) Choose the correct answer:                             1x3=3
(i)      As per RBI’s Prudential Accounting Norms, provision required for standard assets is @ 0.40% / @ 10% / @20%.
(ii)    Commission on reinsurance ceded deals with Schedule 2 / Schedule 3 / Schedule 4 in Revenue Account.
(iii)   Accounting for investments deals in AS-13 / AS-14 / AS-15.
(b) Fill in the blanks:      1x3=3

(i)      In current cost accounting method, depreciation is to be computed on the book value of fixed assets.
(ii)    Under the Presidency Towns Insolvency Act, 1909, rent is considered as preferential creditors up to_____.
(iii)   In banking company’s final accounts, Schedule 12 is associated with contingent liabilities.
(c) Write True or False:                 1x2=2
(i)      Partly paid-up investments in an insurance company are considered as contingent liabilities.               True
(ii)    According to the provisions of the Insolvency Act, any amount due to government or local authority is known as preferential creditor.                     True
2. Write brief answer of the following: 4x4=16
a)      What is rebate on bill discounted and how is it treated in the final accounts of banking companies?
Ans: Rebate on Bills Discounted and its Accounting Treatment
Discounting of bills means making the payment of the bill before the maturity date of the bill. While making payment of the bill, the bank deducts discount for the unexpired period for the amount of the bill discounted. Such discount is called rebate on bills discounted. It is treated as interest received in advance. In profit and loss account, closing balance of rebate on bills discounted is deducted and opening balance of rebate on bills discounted is added with the interest and discount for the year. Closing balance of rebate on bills discounted is shown as liability in balance sheet under the heading ‘other liabilities’. At the commencement of next year, a reverse entry is passed for the unexpired discount of the previous year expiring this year and treated as income.
Rebate on bills discounted is calculated with the help of following formula = (Total annual discount x no. of days after the close of the year)/365.
Accounting treatment of Rebate on Bill Discounted
a) At the end of current accounting period:
Discount on Bills A/c                                       Dr.
To Rebate on Bills discounted A/c
b) At the beginning of next accounting period:
Rebate on Bills discounted A/c                                   Dr.
To Discount on Bills A/c
c) Transferring balance of interest and discount to Profit and loss Account:
Discount on Bills A/c                       Dr.
To Profit and Loss A/c

b)      Explain the list of creditors to be prepared by a debtor when he / she become insolvent.
c)       What are the limitations of historical accounting in a period of inflation?
d)      Explain cum-interest purchase and ex-interest purchase.
Ans: 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.

(a) From the following information, prepare Profit & Loss A/c of Assam Bank Ltd. for the year ended 31st March, 2014 (working should form part of your answer):               11
Interest on Loan
3,00,000
Interest on Fixed Deposits
2,75,000
Commission
   10,000
Exchange and Brokerage
   20,000
Salaries and Allowances
1,50,000
Discount on Bills (Gross)
1,52,000
Interest on cash credits
2,40,000
Interest on Temporary Overdrafts in  Current Account
   30,000
Interest on Savings Bank Deposits
   87,000
Postage, Telegram and Stamps
   10,000
Printing and Stationery
   20,000
Sundry expenses
   10,000
Rent
   15,000
Taxes and Licenses
   10,000
Audit Fees
   10,000
Additional information:
a)      Rebate on bill discounted – Rs. 30,000
b)      Director’s Fees and allowances Rs. – Rs. 30,000
c)       Bad Debts – Rs. 40,000
d)      Provision for Income Tax is to be made @ 55% (round off to nearest thousand)
e)      Interest of Rs. 4,000 on doubtful debts was wrongly credited to interest on Loan Account
f)       Transfer 20% of Net Profit to statutory reserve and provide Rs. 15,000 as dividend.
Profit & Loss A/c of Assam Bank Ltd.
For the year ended 31st March, 2013
Particular
S. No.
Rs. (000)
                    i.             Income:
Interest earned
Other Income

13
14

688
30


718
                  ii.            Expenses:
Interest Expended
Operating Expenses
Provisions and contingencies:
Provisions for doubtful debt
Provide for tax

15
16


362
255

40
34


691
                iii.      Net surplus: I and II

27
                 iv.      Appropriation:
Transfer to Statutory reserve @ 20%
Proposed Dividend
Balance carried forward


5.4
15
6.6


27


S. No.
Particular
Rs. (000)
13


Interest Earned:
Interest/Discounts on advance/bills (300+152 +240 + 30 -4 – 30)

688


688
14
Other Income:
Commission, Exchange and brokerage (10 + 20)

30


30
15
Interest expended:
Interest on deposit (275 + 87)

362


362
16
Operating Expenses:
Salaries and allowances (Add: O/S salaries of a director fees) [150+30]
Postage, telegram, and stamps
Printing and stationary
Sundry Expenses
Rent
Taxes and license
Audit fees

180
10
20
10
15
10
10


255

Or
(b) Explain the RBI’s prudential Accounting Norms as recommended by the Narasimham Committee.
Ans: Narasimham Committee: Suggestion for Banking Sectors
1. Capital Adequacy Norms: To avoid risk, the RBI laid down capital adequacy norms in April 1992 to be complied by banks by March, 1996. All banks in India were required to achieve a risk-weighted capital adequacy ratio of 4 per cent by 31 March 1993 and of 8 per cent by 31 March, 1996. Foreign banks operating in India and Indian banks with branches abroad were to attain 8 percent by March, 1993. This has been raised to 9 per cent from March 2000 for all banks.
2. Recapitalisation: In order to enable the public sector banks to meet the prescribed capital adequacy ratio, the Government of India has been contributing to the capital of such banks. During 1993-94, the Government provided Rs.5, 700 crores towards recapitalisation of 19 nationalised banks; during 1994-95 Rs.5, 293 crores to 13 banks; Rs.850 crores to 6 banks; during 1995-96 and Rs.909 crores to 4 banks during 1996-97; and Rs.297 crores to one bank in 1999-2000.
3. Partial Privatisation of Public Sector Banks: But recapitalisation is not a permanent solution of the problem. As the Government resources are limited, banks have been allowed to mobilise equity resources from the public. First, the State Bank of India Act was amended to enable the Bank to have access to the capital market.
4. Prudential Accounting Norms: The RBI has introduced prudential accounting norms for banks since 1992-93. A credit facility is required to be treated as non-performing asset (NPA) if interest or instalment of principal are in arrears for any two quarters in the accounting year.
5. Recovery of Debts: Indian banks suffer from large debt arrears which adversely affect their current cash flow position and reduce profits. To recover bad debts, a new Act known as the “Recovery of Debts due to Banks and Financial Institutions Act, 1993” has been passed to set up Debt Recovery Tribunals. Such tribunals have been set up at major centres.
6. Freedom about Bank Branches: Banks have been given freedom to open new branches and upgrade extension counters on attaining capital adequacy norm of 8 per cent, net profits for last 3 consecutive years, NPAs of less than 15 per cent and minimum owned funds of Rs.110 crores. They are also permitted to close non-viable branches except in rural and semi-urban areas.
7. Entry of Private Sector Banks: To introduce greater competition in banking so as to improve banking services to customers, private banks have been allowed entry as per RBI guidelines. Approval has been given to a few proposals for setting up new private sector banks. Private banks have been allowed to raise capital from institutional investors up to 20 per cent and from NRIs up to 40 per cent.
8. Department of Supervision: A Department of Supervision has been set up in the RBI with effect from 22 December 1993 to supervise the working of commercial banks. It undertakes inspection, surveillance and special investigations including those connected with frauds, and appointment of statutory auditors.
9. Board for Financial Supervision (BFS): The BFS has been set up within the RBI in November, 1994. The Board ensures implementation of regulations in the areas of credit management, asset classification, income recognition, provisioning, capital adequacy and treasury operations.
10. Disclosure on Defaulting Borrowers: To enforce payments discipline among borrowers, a scheme for disclosure of information regarding defaulting borrowers of banks with outstanding aggregating to Rs.1 crore and above as on 31 March and 30 September every year has been in operation since April, 1994.
11. Banking Ombudsman Scheme: The Banking Ombudsman Scheme has been started from June, 1995 for speedy and inexpensive settlement of customer complaints about the deficiencies in banking services. Ten Ombudsmen are functioning at important centres in the country.
12. Central Board of Bank Frauds (CBBF): The Finance Ministry has set up the CBBF in January, 1997 to advise it on the merits of the cases being pursued by the CBI against bank officials up to the level of the general manager. The Board is to scrutinize banking transactions referred to it and give its opinion within 3 months as to whether there is sufficient basis for proceeding with criminal investigations against the officials.
13. Consortium Arrangements: To encourage competition and slow-down disintermediation, lending restrictions on banks have been reduced. Large borrowers above a specified credit limit have been allowed to borrow through a consortium of scheduled commercial banks headed by a lead bank.
14. Lending Norms Liberalised: Bank lending norms have been liberalised subject to the observance of prescribed prudential norms and quarterly reporting requirements, as laid down by the RBI. They are free to decide levels of holding of individual items of inventory and receivables to be permitted to borrowers. They are also free to decide about the quantum and period of adhoc credit limits without charging additional interest.
15. Measures to Streamline Working of Banks: A number of measures have been adopted by the RBI to improve the quality of performance and management of banks. These include: management information systems and the internal audit and control mechanisms; computerisation of banking operations; prudential norms for income recognition assets, etc.
16. Liberal Credit Control Measures: A number of steps have been taken to reduce controls and distortions in the working of banks. Statutory Liquidity Ratio (SLR) on incremental net demand and time liabilities (NDTL) has been reduced to 25 per cent. SLR on total NDTL has been brought down to 25 per cent by 1996.
17. Entry of New Private Banks: The RBI issued in January 2001 guidelines for the entry of new private sector banks other than 10 previous banks. They are:
(i) Minimum paid-up capital of Rs.200 crores to be raised to Rs.300 crores within three years of opening;
(ii) Promoters’ contribution of minimum 40 per cent;
(iii) NRI contribution in primary equity 40 per cent;
(iv) No large industrial house can promote a new bank but individual companies can contribute up to 10 per cent equity;
(v) NBFCs with AAA rating and 12 per cent capital adequacy can become private sector banks;
(vi) 10 per cent capital adequacy ratio to be maintained by the new bank;
(vii) 40 per cent of net bank credit for priority sector lending, and
(viii) 25 per cent branches in rural/semi-urban areas.
18. Entry of Banks into Insurance: All banks have been allowed to enter insurance business subject to having a minimum net worth of Rs.500 crores and satisfying other criteria in regard to capital adequacy, profitability, etc.

4. (a) From the following particulars, you are required to prepare Fire Revenue A/c for the year ended 31st March, 2013:                                                                11
Claims paid
4,80,000
Claims outstanding on 1st April, 2012
   40,000
Claims intimated but not accepted  on 31st March, 2013
   10,000
Claims intimated and accepted but not paid on 31st March, 2013
   60,000
Premium Received
12,12,000
Reinsurance premium paid
  1,20,000
Commission
  2,00,000
Commission on reinsurance ceded
     10,000
Commission on reinsurance accepted
       5,000
Expenses of management
  3,17,000
Reserve for unexpired risk on 1st April, 2012
  4,00,000
Additional reserve for unexpired risk
     20,000
Reinsurance recoveries of claims
      8,000
Sundry expenses regarding claims
      5,000
Loss on sale of motorcar
      5,000
Bad debts
      3,000
Refund of double taxation
      5,000
Interest and dividends
      6,000
Income tax deducted thereon
      1,000
Legal expenses regarding claims
      3,000
Profit on sale of investments
      2,000
Rent of staff quarters deducted from salaries
      2,000
Depreciation on furniture
      6,000
You are required to provide an additional reserve for unexpired risks at 1% of the net premium in addition to the opening balance.              
Fire Revenue A/c
For the year ended 31/03/2013
Particulars
S. No.
Amount
1. Premium (Net)
2. Profit on sale of investment
3. Other Income
Refund of double taxation
Rent of staff quarters
4. Interest, dividend & rent (gross)
1
9,35,080
2,000

5,000
2,000
6,000
Total (A)

9,50,080
1. Claims incurred Net
2. Commission
3. Operating Expenses
2
3
4
5,10,000
1,95,000
3,31,000
Total (B)

10,36,000
Surplus Operating loss
Total: C = A – B


85,920
1. Premium (Net)
Particulars
Amount
Premium received
Less: Re-insurance premium paid (ceded)
12,12,000
1,20,000

Adjustment for risk:
50% of Net Premium       10,92,000                                                5,46,000
Add: Additional reserve + 1% of 10,92,000                                      30,920
(20,000 + 10,920)                                                                          5,76,920
Less: reserve for unexpired risk
At the beginning of the year                   4,00,000
Add: Additional reserve                              20,000                        (4,20,000)

10,92,000






(1,56,920)
Total
9,35,080
2. Claims incurred (Net):
Particulars
Amount
Claims Paid
Less: Re-insurance claim recoveries
Less: Claims o/s at the beginning of the year
4,80,000
8,000
40,000
Add: Claims initiated but not accepted at the end of the year
Add: Claims initiated and accepted at the end of the year
Add: Sundry expenses
Add: Legal expenses
10,000
60,000
5,000
3,000
Total
5,10,000
3. Commission:
Particulars
Amount
Commission paid
Add: Commission on reinsurance accepted
Less Commission on reinsurance ceded
2,00,000
5,000
10,000
Total
1,95,000
4. Operating Expenses:
Particulars
Amount
Expenses of mgt.
Loss on sale of motor car
Depreciation on furniture
Bad Debts
3,17,000
5,000
6,000
3,000
Total
3,31,000
Or
(b) Explain the financial statements that are to be prepared by the life insurance companies as per the IRDA Regulations, 2002
Ans: Financial statements of a life insurance companies are divided into three parts:
1.       Revenue account of Life Insurance companies: Form A - RA
2.       Profit and loss account of Life Insurance companies: Form A – PL
3.       Balance sheet of Life Insurance companies: Form A – BS. (For format, refer your book)
General Instruction for Preparation of Financial Statements of life insurance companies
1.       The corresponding amounts for the immediately preceding financial year for all items shown in the Balance Sheet, Revenue Account, Profit and Loss Account and Receipts and Payments Accounts shall be given.
2.       The figures in the financial statements may be rounded off to the nearest thousands.
3.       Interest, dividends and rentals receivable in connection with an investment should be stated at gross amount, the amount of income tax deducted at source should be included under ‘advances taxes paid and taxes deducted at source’.
4.       For the purposes of financial statements, unless the context otherwise requires:
a)      The expression ‘provision’ shall, subject to (II) below mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability or loss of which the amount cannot be determined with substantial accuracy;
b)      The expression ‘reserve’ shall not, subject to as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability or loss;
c)       The expression ‘capital reserve’ shall not included any amount regarded as free for distribution through the profit and loss account; and the expression ‘revenue reserve’ shall mean any reserve other than a capital reserve.
d)      The expression ‘liability’ shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.
5.       Where:
a)      Any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or
b)      Any amount retained by way of providing for any known liability or loss, is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated as a reserve and not provision.
6.       The company shall make provisions for damages under lawsuits where the management is of the opinion that the award may go against the insurer.
7.       Extent of risk retained and re-insured shall be separately disclosed.
8.       Any debit balance of the Profit & Loss Account shall be shown as deduction from uncommitted reserves and the balances, if any, shall be shown separately.
PROFORMA OF REVENUE ACCOUNT AND PROFIT AND LOSS ACCOUNT OF A LIFE INSURANCE COMPANY
Rounded Rectangle: Name of the Insurer: 
Registration No. and Date of Registration with the IRDA

FORM A-RA



REVENUE ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20…..
Policyholder’s Account (Technical Account)
No.
Particulars
Schedule
Current Year
(Rs.’000)
Previous Year
(Rs.’000)

Premiums earned – net
(a) Premium
(b) Reinsurance ceded
(c) Reinsurance accepted

Income from Investments
(a) Interest, Dividends & Rent – Gross
(b) Profit on sale/redemption of investments
(c) (Loss on sale/redemption of investments.)
(d) Transfer/Gain on revaluation/change in fair value’

Other income (to be specified)
Total (A)
Commission
Operating Expenses related to insurance Business
Provision for doubtful debts
Bad debts written off
Provisions (other than taxation)
(a) For diminution in the value of investments (Net)
(b) Others (to be specified)
Total (B)

Benefits Paid (Net)
Interim Bonuses Paid
Change in valuation of liability in respect of life policies
(a) Gross”
(b) Amount ceded in Reinsurance
(c) Amount accepted in Reinsurance
Total (C)

Surplus (Deficit) (D) = (A) – (B) – (C)
Appropriations
Transfer to Shareholders’ Account
Transfer to Other Reserves (to be specified)
Balance being Funds for Future Appropriation
Total (D)

1












2


3






4


Rounded Rectangle: Name of the Insurer: 
Registration No. and Date of Registration with the IRDA

FROM A-PL



PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20…..
Shareholder’s Account (Non-technical Account)
No.
Particulars
Schedule
Current Year
(Rs.’000)
Previous Year
(Rs.’000)

Amounts transferred from/to the Policyholders account (Technical Account)
Income From Investments
(a) Interest, Dividends & Rent – Gross
(b) Profit on sale/redemption of investments
(c) (Loss on sale/redemption of investments)
Other Income (To be specified)
Total (A)

Expenses other than those directly related to the insurance business
Bad debts written off
Provisions (Other than taxation)
(a) For diminution in the value of investments (Net)
(b) Provision for doubtful debts
(c) Others (To be specified)
Total (B)

Profit (Loss) before tax
Provision for Taxation
Profit/(Loss after tax
Appropriations
(a) balance at the beginning of the year
(b) Interim dividends paid during the year
(c) Proposed final dividend
(d) Dividend distribution tax
(e) Transfer to reserves/other account (to be specified)
Profit carried…………………….to the Balance Sheet




5. (a) From the following Trial Balance of Mr. X, who commenced business on 1st January, 2012, you are asked to prepare a Statement of Affairs and a Deficiency A/c :                 11
Cash
     2,300
Creditors
1,80,000
Stock-in-trade
     6,660
Secured Creditors
   25,000
Debtors (all goods)
1,30,000
Preferential  Claims for Rent
    1,900
Furniture
     2,820
Capital
   13,500
Investment in Shares
     5,000
Profit (2010, 2011)
   55,540
Value of  Securities  held by Creditors
   35,000


Loss (2012)
   25,000


Drawings  (up to  December, 2012)
   69,160



2,75,940

2,75,940
Or
(b) Distinguish between the following:                                                  5.5 x2=11
a)      A statement of Affairs and a Balance Sheet
b)      The Presidency Towns Insolvency Act and the provincial Insolvency Act.
6.    (a) On 1st April, 2012 Ashok Ltd. had 12% government bonds amounting to Rs. 4,00,000 at Rs. 96 (face value being Rs. 100 each), interest being payable on 31st March and 30th September every year. On 1st June, 2012, Ashok Ltd. sold 12% government bonds of Rs. 1, 00,000 at Rs. 98 ex-interest.                               12
Investment
12% Government Bonds in Ashok Ltd. A/c
For the year ended 31st March, 2013
Date
Particular
Face Value
Interest
Cost
Date
Particular
Face Value
Interest
Cost
1/4/12


1/6/12


31/03/13
To Balance b/d


To P/L A/c (Sales of investment)


To P/L A/c (Interest for the year)
4,00,000






38,000
3,84,000
(4,000 x 96)

2,000

1/6/12


30/9/12


31/03/13

31/3/13
By Bank A/c


By Bank A/c


By Bank A/c

By Balance c/d
1,00,000







3,00,000
2,000
(1,00,000 x
12% x 2/12)
18,000
(3,00,000 x
12% x 6/12)
18,000

98,000
(1,000 x 98)






28,800


4,00,000
38,000
3,86,000


4,00,000
38,000
3,86,000

Or
(b) Write explanatory notes on the following:                  6+6=12
1)      Cum-interest sale and Ex-interest sale
2)      Jobbers and Brokers
Ans: Concept of Jobbers and Brokers and their difference
Jobbers: Jobbers are security merchants dealing in shares, debentures as independent operators. They buy & sell securities on their own behalf and try to earn through price changes. They directly deal with brokers who make transactions on the behalf of public. They generally quote two price, one – for purchase and other for sell. The difference between the two prices constitutes his remuneration. This system enables specialisation in the dealings and each jobber specialises is certain group of securities. It also ensures smooth and prompt execution of transactions. The double quotation of a jobber assures fair-trading to investors.
Brokers: Brokers are primarily Commission agents and act as an intermediary between buyer & seller of securities. They do not purchase & sell securities on their behalf. They bring together buyers & seller and help them making a deal. They charges commission from both parties. They are experts in estimating prices and advise their clients in getting gain. They get orders from public and execute the orders through jobbers.
Difference between Jobber and Broker
Basis
Jobber
Broker
Meaning
Jobber is a dealer who deals in buying and selling of securities.
Broker is an agent who deals in buying and selling of securities on behalf of his client.
Specialisation
Jobber is a specialist mercantile agent.
Broker is a general mercantile agent.
Nature of trading
A jobber carries out trading activities only with the broker.
A broker carries out trading activities with the jobber on behalf of his investors.
Restrictions on dealings
A jobber is prohibited from buying or selling securities directly in the stock exchange. Also he cannot directly deal with the investors.
A broker Acts as a link between the jobber and the investors. He trades i.e. buyers and sells securities on behalf of its investors.
Agent
Jobber is an independent dealer or a merchant willing to buy and sell securities.
Broker is merely an agent to buy or sell on behalf of his clients.
Form of consideration
A jobber gets consideration in the form of profit.
A broker gets consideration of commission or brokerage.
Price Quotations
Jobbers quote two prices to the broker, one for buying and one for selling. Sale quotation is higher than the purchase quotations.
Broker has to negotiate terms and conditions of sale or purchase and safeguard his client’s interest.

7.    (a) A company has the following transactions at the given dated and price indices for the first quarter, 2014:

Amount
Price index
Opening balance (January 1)
6,000
100
Cash sale (February 1)
17,500
105
Payment to creditors(March1)
12,000
108
Cash purchase (March 1)
2,000
108
Payment of  expenses (March31)
2,000
110
Closing balance (March 31)
7,500
110
Calculate monetary gain or loss.                11
Or
(b) What do you mean by Inflation Accounting? Discuss the limitations of historical accounting in a period of inflation.                     5+6=11

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