Friday, October 27, 2017

Advanced Financial Accounting Solved Question Papers: Nov' 2016

2016 (November)
COMMERCE
(Speciality)
Course: 301
(Advanced Financial Accounting)
The figures in the margin indicate full marks for the questions
1. (a) Write True or False:                                            1x4=4
a)      Banking companies are governed by the Banking Regulations Act, 1949.       TRUE
b)      Life Assurance Fund represents profit of the life insurance companies.   FALSE
c)       General insurance includes all types of insurance.                    FALSE
d)      Cum-dividend price is not the real price of investment.                         TRUE    
(b) Fill in the blanks:                                                      1x4=4

a)      A bank can open a branch only at the permission of the RBI.
b)      Consideration for annuities granted is a source of Fund for a life insurance company.
c)       In case of marine insurance, the provision against unexpired risk is maintained at 100% of the net premium.
d)      Investment Account is a real Account.
2. Write short notes on any four of the following:                                           4x4=16
a)      Rebate on Bills Discounted.
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.
b)      Valuation Balance Sheet.
Ans: Determination of Profit in Life Insurance Business by preparing valuation balance sheet
A life policy is generally taken for a number of years. The premium received for such long-term contracts cannot be treated as income for ascertaining the profits for that year. For example, under a contract of annuity only one premium as initial payment is received whereas the annuitant is required to be paid annuity till he dies. In case of life insurance, the claim must arise either on death or expiry of the period of the policy, whichever is earlier. That the future premium may or may not be received depends on the existence of the insured. Thus on a particular date a liability of the corporation is to be calculated as the premiums to be received in future will generally be less than the amount payable as claims. There is a gap between claims which are expected to arise and premiums which are expected to be received. This gap is known as net liability. Thus it becomes desirable to create a reserve equal to its net liability in order to ascertain the profit made by the corporation. The Life Insurance Corporation of India makes the valuation of its net liability every year in order to ascertain its profit. This is done by a person known as actuary and is a highly complicated mathematical process. For calculating net liability, the actuaries calculate the present value of future liability on all the policies in force as well as present value of future premium to be received on policies in force. The excess of the present value of future liability over the present value of future premium is called net liability as per actuarial valuation.
The balance in the life assurance fund cannot be taken as the profit made by the life insurance business. For the purpose of ascertaining the profit, the insurance company should calculate its net liability as per actuary and compared it with life assurance fund on a particular date in order to calculate the surplus/deficiency. This comparison is made by preparing a valuation Balance Sheet. If the life insurance fund is more than the net liability, the difference represents the surplus. On the other hand, the excess of net liability over the life assurance fund represents deficiency for the inter-valuation period. A specimen form of valuation balance sheet is given as follows:
Valuation Balance Sheet
As on date……………………………..
To Net Liabilities per actuary’s valuation
To Surplus

By Life Assurance funds as per Balance Sheet
By Deficiency

Only surplus (and not deficiency) will be shown in the Balance sheet. With profit policyholder have a right to participate in the profit of life insurance business to the extent of 95% of true profit and remaining 5% is shareholder’s share. For calculation of true profit, surplus as disclosed by valuation Balance Sheet must be adjusted by:
a)      Adding interim bonus (if any) as it is really advance payment of bonus.
b)      Deducting any expenses still to be incurred.
Out of 95% of true profit, interim bonus already paid should be deducted to calculate the amount due to the policyholder.
c)       Fire Insurance Revenue Account.
Ans: Final account of general insurance business are required to be prepared as per IRDA Regulations, 2002 which consist of:
(a) Revenue Account (as per Form B-RA);
(b) Profit and Loss Account (Form B-PL);
(c) Balance Sheet (Form B-BS).
1. Revenue Account: A separate Revenue Account (Form B-RA) is prepared for each type of business e.g., fire, marine etc. It records the incomes and expenses of a particular business and profit/loss is transferred to Profit and Loss Account.
Rounded Rectangle: Name of the Insurer: 
Registration No. and Date of Registration with the IRDA

FORM B-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)
1.
2.
3.
4.

1.
2.
3.
Premium Earned (Net)
Profit/Loss on sale/Redemption of Investments
Other (to be specified)
Interest, Dividend & Rent – Gross
Total (A)
Claims Incurred (Net)
Commission
Operating Expenses related to Insurance Business
Total (B)
Operating Profit/Loss from Fire/Marine/
Miscellaneous Business C = (A-B)
APPROPRIATIONS

Transfer to Shareholders’ Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves (to be specified)
Total ©
1




2
3
4



d)      Cum-dividend.
e)      Ex-dividend.
Ans: 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 Shares.
3. (a) What is investment? Is it treated as fixed asset? Discuss the various purposes of maintaining an investment ledger. What journal entries are required to be passed in the books of buyer, when an investment is purchases cum-dividend and dividend is received by cheque?                                                     2+2+6+4=14
Ans: Meaning of Investment and its types
The term ‘Investment’ refers to funds invested in various securities consisting of government and semi-government loans, debentures of local authorities such as port trusts, municipal corporations and the like and debentures and shares of companies. Accounting Standard 13 issued by the Institute of Chartered Accountants of India defines investment as, “Investments are assets held by an enterprise for earning income by way of dividends, interests and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are non-investments”. Securities may be fixed interest securities and variable yield securities. Fixed interest securities are those securities which carry a fixed rate of interest while the securities (such as shares of companies) on which dividend may fluctuate from year to year are called variable yield securities.
Investments may be a fixed asset or current asset. If the investments are held permanently for a long period time, they will be regarded as fixed assets and known as ‘trade investments’. But where the object of the business is to buy and sell securities or these are held as a temporary investment of surplus liquid resources for not more than one year, then they will be regarded as current assets or marketable securities.
(a) As Trade Investments: The investments which are made permanently for a regular income outside the business is known as Trade Investment. These are treated as fixed assets. That is why if this type of investments are sold at a profit, profit on such sale of investment is transferred to Capital Reserve Account and not to Profit and Loss Account.
(b) As Marketable Securities: Sometimes a business wants to invest its idle cash purely on a temporary basis (of course, if the rate of earning is higher than cost of capital). This type of investment is known as Marketable Securities and is treated as Current Assets. That is why profit or sale of such investments is transferred to Profit and Loss Account and not to Capital Reserve.
Investment Accounts:
The accounts of investments are kept in the same way as the accounts of any other asset. A separate investment account should be opened for each kind of security and on the head of the account particulars regarding the nature of the security, dates when interest or dividend is due, the date of redemption etc. should be stated. When the number of investments carried is large, a separate investment Ledger is employed for recording all investment accounts.
Features of Investment accounts:
1. It is a real account.
2. Investment account is divided into three columns. First column show nominal value of investment, second column show interest and dividend and third column shows cost of investment or sale proceeds of investment.
Purpose of maintaining an investment ledger is as follows:
1.       It helps in keeping a record of each investment separately.
2.       It helps to ascertain the value of securities at the end of the account period.
3.       It is helpful in collection of interest and dividend as and when they become due.
4.       It is helpful in ascertaining the amount of accrued income at the end of the accounting period.
5.       It facilitates the determination of the profit or loss on sale of any security.
Journal Entries
In the books of buyer
a) When an investment being purchased cum-dividend:
Investment A/C                                                Dr.          (Capital Cost)
Dividend or Interest A/C               Dr.          (Dividend or Interest)
To Bank A/C                                       (Capital Cost + Dividend/Interest
b) On receipt of dividend or interest
Bank A/C                             Dr.
To Dividend or Interest A/C
c) For Accrued Interest
Accrued Interest A/C                     Dr.
To Interest A/C
Or
(b) On 1st April, 2015, AB & Co. held 9% debentures in Star Ltd. of the face value of Rs. 10,000 at a cost of Rs. 8,000, Market value on that date was Rs. 9,000. Interest is payable on 31st December, 2015, debentures of nominal value of Rs. 6,000 were purchased for Rs. 5,000 ex-interest and on 31st December, 2015, debentures of nominal value of Rs. 2,000 were sold cum-interest for Rs. 1,900. On 1st January, 2016, debentures of nominal value of Rs. 6,000 were bought at Rs. 5,800. The market value of the debentures on 31st March, 2016 was at Rs. 90.
Make out Investment Account in the books of AB & Co. showing profit or loss on sale of investment. Stocks on 31st March each year are valued at lower of cost (apply FIFO method) and market price.                                                      14
9% debenture in Star Ltd. A/c
For the year ended 31st March, 2016
Date
Particular
Face Value
Interest
Cost
Date
Particular
Face Value
Interest
Cost
1/4/15





31/12/15




31/12/15



1/1/16

31/03/16
To Balance b/d





To Bank A/c




To Bank, P/L A/c



To Bank A/c

To P/L A/c (Interest for the year)
10,000





6,000




-



6,000

-


225
(10,000 x 9% x 3/12)


-




-



-

630
8,000





5,000




120



5,800

-
31/12/15





31/12/15




31/03/16
By Bank A/c





By Bank A/c




By Balance c/d
-





2,000




20,000
675
(10,000 x 9% x 9/12)



180
(2,000 x 9%)

-





1,720
(1,900 – 180)



17,200


22,000
855
18,920


22,000
855
18,920
Interest dates 30 Dec 2015
Closing dates 31 March 2016
Calculation P/L
Sale value                                     = 1,720
CoI =>               = (1,600)       
                                Profit                   120

4. (a) Give a proforma of Balance Sheet of a banking company. Also distinguish between performing and non-performing assets of a bank.                                                              10+4=14
Ans: Refer your book for the format of
Or

(b) From the following information, prepare Profit & Loss A/c of Good Luck Bank Ltd. for the year ended on 31st March, 2016:     14

Rs. (‘000)
Interest on Loans
Interest on Fixed Deposits
Commission
Payment to Employees
Discount on Bills Discounted
Interest on Cash Credit
Rent, Taxes and Lighting
Interest on Overdrafts
Director’s Fees
Auditor’s Fees
Interest on Saving Bank Deposits
Postage and Telephone expenses
Printing and Stationery
Sundry Expenses
Additional Information:
Provide for Contingencies
Transfer to Reserves
Transfer to Central Government
5,180
6,340
164
1,080
2,120
4,460
360
3,080
60
24
1,360
28
58
34

400
300
400

Profit & Loss A/c of Good Luck Bank Ltd.
For the year ended 31st March, 2016
Particular
S. No.
Rs. (000)
        i.            Income:
Interest earned
Other Income

13
14

14,840
164


15,004
      ii.            Expenses:
Interest Expended
Operating Expenses
Provisions and contingencies

15
16
40

7,700
1,644
400


9,744
    iii.            Net surplus: I and II

5,260
     iv.            Appropriation:
Transfer to statutory reserve
Transfer to reserve
Transfer to central government
Balance carried forward


1,315
300
400
3,245


5,260


S. No.
Particular
Rs. (000)
13


Interest Earned:
Interest/Discount on loans and advances (5180+4460+3080+2120)

14,840


14,840
14
Other Income:
Commission

164


164
15
Interest expended:
Interest on deposits (6340+1360)

7,700


7,700
16
Operating Expenses:
Payment to employees
Rent, taxes, & lighting
Directors fees
Auditors fees
Postage and telegram
Printing and stationary
Sundry Expenses

1,080
360
60
24
28
58
34


1,644

5. (a) What are the statutory and subsidiary books maintained by a life insurance company? What purposes do they serve?                                  (6+6)+2=14
Ans: Books maintained by Life Insurance Companies
Under the Insurance Act, 1938 it is obligatory on the part of all insurance companies including the general insurance companies to maintain the following books which may be called ‘statutory books’.
1.       The registrar of policies: This book contains the following particulars in respect of each policy issued:
a)      The name and address of the policyholders.
b)      The date when the policy was affected.
c)       A record of any assignment of the policy.
2.       The registrar of claims: This book should contain the following particulars in respect of each claim:
a)      The date of claim.
b)      The name and address of the claimant.
c)       The date on which the claim was discharged.
d)      In the case of a claim which is rejected, the date of rejection and the ground for rejection.
3.       The register of licensed insurance agents: This book should contain the following particulars in respect of each agent:
a)      Name and address of every insurance agent appointed.
b)      The date of appointment.
c)       The date on which appointment ceased, if any.
In addition to the statutory books mentioned above, insurance companies also maintain the following subsidiary books for recording the transactions:
a)      Proposal register.
b)      New premium cash book.
c)       Renewal premium cash book.
d)      Agency and branch cash book.
e)      Petty cash book.
f)       Claims cash book.
g)      General cash book.
h)      Agency credit journal.
i)        Agency debit journal.
j)        Lapsed and cancelled policies book.
k)      Chief journal.
l)        Commission book.
m)    Agency ledger.
n)      Policy loan ledger.
o)      General loan ledger.
p)      Investment ledger.
Or
(b) Prepare a Revenue A/c of Ganpati Life Assurance Company for the year ended on 31st March, 2016 from the following balances extracted from its books of account:                                                   14

Rs.
Life Assurance Fund
Premium Received
Re-insurance Premium
Consideration for Annuities Granted
Claims:
By Death
By Maturity
Re-insurance Claims
Management Expenses
Annuity Paid
Outstanding Premium on 01.04.2015
Interest, Dividend and Rent
Commission on Direct Business
Commission on Re-insurance Accepted
Commission on Re-insurance ceded
51,00,000
17,30,000
70,000
1,90,000

3,50,000
2,20,000
30,000
2,60,000
15,000
30,000
6,40,000
70,000
10,000
6,000
    Additional Information:
a)      Outstanding premium – Rs. 40,000
b)      Bonus in reduction of premium – Rs. 10,000
c)       Interest accrued – Rs. 15,000
d)      Net liability on all contracts in force:
As on 31st March, 2015 – Rs. 32, 00,000
As on 31st March, 2016 – Rs. 38, 00,000
e)      Transfer 30% of surplus to Shareholder’s A/c.

Ganpati 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 (Including accrued interest)

Other Income:
Consideration for Annuities Granted
1
16,80,000

6,55,000


1,90,000
Total (A)

25,25,000
Commission
Operating Expenses relating to Insurance Business
2
3
74,000
2,60,000
Total (B)

3,34,000
Benefits Paid (Net)
Change in Valuation of Liability in respect of Life Policies:
Net Liability on all Contracts in force on
31-3-16                                                        38,00,000
Less: Net Liability on all Contracts
In force on 31-3-2015                               32,00,000
4
5,65,000




6,00,000
Total (C)

11,65,000
Surplus (D) = (A) – (B) – (C)

10,26,000
Appropriations:
Transfer to Shareholders A/c (30% of Surplus i.e. 10,26,000)
Balance being Fund for Future Appropriations


3,07,800
7,18,200
Total (D)

10,26,000
Schedule Forming Part of Revenue A/c
SCHEDULE 1 – PREMIUMS EARNED (NET)
Particulars
Amount
Premium less reinsurance premium
Less: Reinsurance
Add: Premium due at the end
Less: Premium due in the beginning
17,30,000
(70,000)
40,000
(30,000)

Bonus in reduction of premium
16,70,000
10,000

16,80,000
SCHEDULE 2 – COMMISSION EXPENSES
Particulars
Amount
Commission on direct business
Add: Commission on re-insurance accepted
Less: Commission on re-insurance ceded
70,000
10,000
6,000

74,000
SCHEDULE 3 – OPEERATING EXPENSES RELATED TO INSURANCE BUSINESS
Particulars
Amount
Management Expenses
2,60,000
SCHEDULE 4 – BENEFITS PAID

Particulars
Amount
Claims
By Death
By Maturity

Less Reinsurance Claims

Annuities
Bonus in reduction in premium

3,50,000
2,20,000
5,70,000
30,000
5,40,000
15,000
10,000

5,65,000

6. (a) What is meant by ‘reserve for unexpired risk? Why is it created in general insurance? What provisions should be made by a fire insurance company in regard to unexpired risks at the end of each financial period?          3+6+5=14
Ans: 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.
Or

(b) Prepare a Revenue A/c in respect of Seven-star Fire Insurance Co. Ltd. from the following details for the year 2015-16:                                                 14

Rs.
Reserve for Unexpired Risk on 01.04.2015 @ 50%
Additional Reserve
Estimated Liability for Claims Intimated on:
01.04.2015
31.03.2016
Claims paid
Legal Expenses
Medical Expenses
Re-insurance Recoveries
Bad debts
Premium Recovered
Premium on Re-insurance Accepted
Premium on Re-insurance Ceded
Commission on Direct Business
Commission on Re-insurance Accepted
Commission on Re-insurance Ceded
Expenses of Management
Interest, Dividend and Rent
Profit on sale of investments
1,80,000
36,000

31,000
42,000
3,65,000
6,000
4,000
32,000
800
4,86,000
32,000
43,000
48,000
1,600
2,150
90,000
24,000
3,000
Create Reserve on 31st March, 2016 to the same extent as on 1st April, 2015.
Revenue A/c
For the year ended 31/03/2016
Seven Star Fire Insurance Company Limited
Particulars
S. No.
Amount
Premium (Net)
Profit on sale of investment
Interest Divided & Rent
1
4,17,500
3,000
24,000
Total (A)

4,44,500
Claims (Net)
Commission
Operating Expenses
2
3
4
3,50,000
48,050
94,800
Total (B)

4,92,250
Surplus Operating loss
Total: C = A – B


(48,350)

Schedules forming Part of the Revenue account:
1. Premium (Net)
Particulars
Amount
Premium recovered
Add: Premium or reinsurance accepted
Less: Premium on reinsurance ceded
4,86,000
32,000
43,000

Adjustment for unexpired risk:
Closing balance of unexpired risk:
50% of Net Premium                                                                         2,37,500
Add: Additional reserve                                                                       36,000
                                                                                                                              2,73,500
Less: Opening unexpired risk:
Unexpired risk                                           1,80,000
Add: Additional reserve                              36,000                        (2,16,000)
4,75,000







(57,500)

4,17,500
2. Claims Incurred (Net):
Particulars
Amount
Claims Paid
Add: Legal expenses (Assuming associated with claim)
3,65,000
6,000

Less: Reinsurance recoveries (ceded)
Less: Estimate liability in beginning.
Add: Estimated liability in the end
3,71,000
32,000
31,000
42,000

3,50,000

3. Commission:
Particulars
Amount
Commission on direct business
Add: Commission accepted
Less Commission ceded
48,600
1,600
2,150

48,050

4. Operating Expenses:

Particulars
Amount
Expenses of management
Medical Expenses
Bad Debt
90,000
4,000
800

94,800
(Old Course)
Full Marks: 80
Pass Marks: 32
Time: 3 hours

1. (a) Choose the correct answer:                                             1x5=5
a)      Rebate on Bills Discounted is an expired discount/unexpired discount.
b)      According to Insurance Regulatory and Development Authority (IRDA) Regulations, 2002, every general insurance company must prepare its Financial Statements as per Schedule B/C/D.
c)       In Insolvency Accounts, the Provincial Insolvency Act, 1920 is applicable to Bombay, Calcutta and Madras/rest of India.
d)      When investments are sold at cum-interest, the amount of interest is deducted from/added to the quoted selling price.
e)      During inflation, the monetary unit shrinks in value as the prices rise/fall.
    (b) Fill in the blanks:                                                    1x3=3
a)      In India, banking companies are governed by the Banking Regulation Act, 1949.
b)      As 13 deals with accounting for investments.
c)       As per the provisions of the IRDA Act, 2002, the Revenue Account of the life insurance companies is to be prepared as per Schedule B.
2. Write short notes on the following:                                                   4x4=16
a)      Rebate on Bills Discounted.
Ans: Rebate on Bills Discounted: 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.
b)      Revenue Account of Life Insurance Companies.
Ans: Life Fund, also known as Life Assurance Fund is concerned with Life Insurance (Assurance) business. It is an item that appears on the liability side of the company's Balance Sheet. For insurance business, claim is an expenditure while premium is an income. As we all know, the difference between income (premium received) and expenditure (claims paid) should be the profit. In case of life insurance business this approach would pose a problem.
The income premium, is collected periodically (monthly, quarterly, annually) on policies that mature over a long period of time. The expenditure claim, has to be paid either on the maturity of the policy or on the death of the policy holder. Claim as an expenditure is definite while premium as an income is uncertain. The expected amount of premium on a policy will be received only if the policy holder is alive up to the maturity of the policy.
Therefore life insurance companies treat the difference between income and expenditure as a surplus and not profits. This surplus from the revenue account is transferred to the Life Fund, where it gets accumulated. Life fund is shown in schedule – 6 of the balance sheet under the head “Reserves and Surplus”.
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)

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2


3






4



c)       Preferential Creditors in Insolvency Account.
d)      Limitations of Historical Cost Accounting.
3. (a) From the following information, prepare P/L A/c of Assam Bank Ltd. for the year ended on 31st March, 2016:

Rs.
Commission
Interest on Loan
Interest on Fixed Deposits
Salaries & Allowances
Exchange & Brokerage
Discount on Bills (Gross)
Interest on Cash Credits
Interest on Temporary Overdraft on Current A/c
Interest on Savings Bank Deposits
Postage, Telegram and Stamps
Printing and Stationery
Sundry Expenses
Rent
Taxes and Licenses
Audit Fee
10,000
3,00,000
2,75,000
1,50,000
20,000
1,52,000
2,40,000
30,000
87,000
10,000
20,000
10,000
15,000
10,000
10,000
Additional Information:                                                                                                                                 12
a)      Provision for income tax is to be maintained @ 55%.
b)      Rebate on Bills Discounted – Rs. 30,000.
c)       Bad Debts – Rs. 40,000.
d)      Provide for Directors’ fees and allowances – Rs. 30,000.
e)      Transfer 20% net profit to Statutory Reserve and provide Rs. 15,000 as dividends.
f)       Interest of Rs. 4,000 on doubtful debts was wrongly credited to interest on Loan Account.
Or
(b) Explain the principal provisions of the Banking Regulation Act, 1949.                              12
Ans: Meaning of Banking and Banking Company
As per Section 5(b) of the Banking Regulation Act, 1949, "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
As per Section 5(d) of the Banking Regulation Act, 1949, "company" means any company as defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the meaning of Section 591 of that Act.
As per Section 5(c) of the Banking Regulation Act, 1949 a "Banking Company" means any company which transacts the business of banking in India.
Business in which a banking company may engage or features of a Banking Company
Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in which a banking company may engage. These are:
1)      Borrowing, raising or taking up of money, lending or advancing of money; handling in all manners Bills of exchange/hundies/promissory notes.
2)      Acting as agents for any government or local authority or any other person,
3)      Managing issues of shares, stock, debentures etc. including underwriting guaranteeing,
4)      Carrying on and transacting every kind of guarantee and indemnity business.
5)      Managing, selling and realizing property which may come into the possession of the banking company in satisfaction of its claims.
6)      Acquiring and holding and generally dealing with any property or any right, title or interest in such property which may form the security for any loans and advances.
7)      Underwriting and executing trusts.
8)      Establishing and supporting or aiding in the establishment and support of institutions, funds, trusts etc.
9)      Acquisition, construction, maintenance and alteration of any building and works necessary for the purpose of the banking company.
10)   Selling, improving, managing, developing, or otherwise dealing with property and rights of the company.
11)   Acquiring and undertaking whole or any part of the business of any person or company.
12)   Doing all such other things as are incidental or conductive to the promotion or advancement of the business of the banking company.
13)   Any other business which the Central Government may specify.
The provisions of the Banking Regulation Act relating to annual accounts and audit of a banking company are given in Section 29-34A and are as follows:
1.       Preparation of Annual Accounts: On 31st March each and every banking company incorporated in India, in respect of all business transacted by it, and every banking company incorporated outside India, in respect of all business transacted through its branches in India shall prepare with reference to that year a Balance Sheet and Profit and Loss Account as on the working of the year in the Forms set out in third schedule or as near thereto as circumstances admit. Form A in third schedule is the Balance Sheet and Form B is the Profit and Loss Account. Forms A and B have been revised w.e.f 1st April, 1991. In other words the annual accounts for the year ending 31st March 1992 and onwards are to be prepared in the new formats as given in the book. The requirements of the Companies Act relating to the Balance Sheet and Statement of Profit and Loss of a company shall, is so far as they are not inconsistent with the Banking Companies Act, apply to the Balance Sheet and Profit and Loss Account of a banking company.
2.       Audit of Accounts: The Balance Sheet and the Profit and Loss Account of a banking company is required to be audited by a Chartered Accountant. The appointment of the auditor of a banking company is made as per the provisions of the Companies Act. His powers, duties and liabilities are also governed by the Companies Act, but the auditor’s report on the accounts of a banking company must include certain additional particulars. Every banking company is required to take previous approval of the Reserve Bank of India before appointing or reappointing auditors. In addition, the Reserve Bank can order special audit of the banking companies Accounts if it thinks fit in the public interest of the banking company or its depositors.
3.       Filing of Accounts: Three copies of the audited Balance Sheet and Profit and Loss Account together with the auditors’ report shall be furnished as returns to the Reserve Bank of India within three months from the end of the accounting year to which they relate. This period of three months can be extended by the Reserve Bank for a further period upto three months. Reserve Bank is authorized to call for any further information as it may think proper from a banking company relating to the business of such company. A banking company is also required to send to the Registrar of Companies three copies of its audited Balance Sheet and Profit and Loss Account and Auditor’s Report and when the Reserve Bank requires any additional information in connection with the accounts, a copy of any such additional information shall also be sent to the Registrar.
4.       Publication of Accounts: The Balance Sheet, Profit and Loss Account and the Auditor’s Report of every banking company shall be published in any newspaper circulating at the place where it has principal office, within six months from the end of the accounting year.
4. (a) Jorhat Fire Insurance Co. Ltd. commenced its business on 01.04.2015. It submits you the following information for the year ended 31.03.2016:

Rs.
Re-insurance premium paid
Premium received
Claims paid
Expenses of management
Commission paid
Claims outstanding on 31.03.2016
Create reserve for unexpired risk @ 40%
1,00,000
15,00,000
7,00,000
3,00,000
50,000
1,00,000
Prepare Revenue A/c for the year ended 31.03.2016.                                                                     11
Or
(b) What is Valuation Balance Sheet? How is it prepared?                                                           4+7=11
Ans: Determination of Profit in Life Insurance Business by preparing valuation balance sheet
A life policy is generally taken for a number of years. The premium received for such long-term contracts cannot be treated as income for ascertaining the profits for that year. For example, under a contract of annuity only one premium as initial payment is received whereas the annuitant is required to be paid annuity till he dies. In case of life insurance, the claim must arise either on death or expiry of the period of the policy, whichever is earlier. That the future premium may or may not be received depends on the existence of the insured. Thus on a particular date a liability of the corporation is to be calculated as the premiums to be received in future will generally be less than the amount payable as claims. There is a gap between claims which are expected to arise and premiums which are expected to be received. This gap is known as net liability. Thus it becomes desirable to create a reserve equal to its net liability in order to ascertain the profit made by the corporation. The Life Insurance Corporation of India makes the valuation of its net liability every year in order to ascertain its profit. This is done by a person known as actuary and is a highly complicated mathematical process. For calculating net liability, the actuaries calculate the present value of future liability on all the policies in force as well as present value of future premium to be received on policies in force. The excess of the present value of future liability over the present value of future premium is called net liability as per actuarial valuation.
The balance in the life assurance fund cannot be taken as the profit made by the life insurance business. For the purpose of ascertaining the profit, the insurance company should calculate its net liability as per actuary and compared it with life assurance fund on a particular date in order to calculate the surplus/deficiency. This comparison is made by preparing a valuation Balance Sheet. If the life insurance fund is more than the net liability, the difference represents the surplus. On the other hand, the excess of net liability over the life assurance fund represents deficiency for the inter-valuation period. A specimen form of valuation balance sheet is given as follows:
Valuation Balance Sheet
As on date……………………………..
To Net Liabilities per actuary’s valuation
To Surplus

By Life Assurance funds as per Balance Sheet
By Deficiency

Only surplus (and not deficiency) will be shown in the Balance sheet. With profit policyholder have a right to participate in the profit of life insurance business to the extent of 95% of true profit and remaining 5% is shareholder’s share. For calculation of true profit, surplus as disclosed by valuation Balance Sheet must be adjusted by:
c)       Adding interim bonus (if any) as it is really advance payment of bonus.
d)      Deducting any expenses still to be incurred.
Out of 95% of true profit, interim bonus already paid should be deducted to calculate the amount due to the policyholder.
5. (a) From the following Trial Balance of Mr. Ashok who commenced business on January 1, 2015, you are required to prepare a Statement of Affairs and a Deficiency A/c:                                                                       11

Rs.

Rs.
Cash
Stock-in-Trade
Debtors (all good)
Furniture
Investment in shares
Value of Securities held by creditors
Loss (2015)
Drawings (up to December, 2015)
2,300
6,660
1,30,000
2,820
5,000
35,000
25,000
69,160
Creditors (unsecured)
Secured Creditors
Preferential Claims for Rent, Rates & Taxes
Capital
Profit (2013, 2014)
1,80,000
25,000

1,900
13,500
55,540

2,75,940

2,75,940
Or
(b) (i) Who are preferential creditors?
(ii) Distinguish between Statement of Affairs and Balance Sheet.                                              5+6=11
6. (a) Assam Investments Ltd. holds 1000, 15% debentures of Rs. 100 each in Udaipur Industries Ltd. as on 1st April, 2010, at a cost of Rs. 1,05,000. Interest is payable on 30th June and 31st December every year. On 1st May, 2010, 500 Debentures are purchased cum-interest at Rs. 53,500. On 1st November, 2010, 600 Debentures are sold ex-interest at Rs. 57,300. On 30th November, 2010, 400 Debentures are purchased ex-interest at Rs. 38,400. On 31st December, 2010, 400 Debentures are sold cum-interest for Rs. 55,000. Prepare Investment A/c valuing holdings on 31st March, 2010 at cost. 11

Or
(b) Write notes on the following:                                            5+6=11
a)      Cum-interest purchase and Ex-interest purchase.
b)      Cum-interest sale and Ex-interest sale.
Ans:
7. (a) The following data relate to ABC Company Ltd. You are required to compute cost of sales and cost of sales adjustment:                                                       11

Rs.
Opening Inventory
Purchases
Closing Inventory
2,000
4,000
1,000
Price Level during the year: 

Rs.
Beginning
Closing
Average
100
120
110
Give you opinion on Monetary Working Capital Adjustment (MWCA)
Or
(b) What do you mean by Inflation Accounting? “Financial Statements based on historical cost basis are meaningless and highly distorted.” Explain.                                                            4+7=11

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