Friday, October 27, 2017

Advanced Financial Accounting Solved Question Papers: Nov' 2015

2015 (November)
COMMERCE
(Speciality)
Course: 301
(Advanced Financial Accounting)
The figures in the margin indicate full marks for the questions
1. (a) Choose the correct answer:                                                             1x3=3

a)      According to Sec. 17, every banking company shall transfer a sum equal to 20% / 22% / 25% of its net profits to a reserve fund as statutory reserve.
b)      In Life Insurance Business, interim dividends paid during the year are an appropriation / income / expenses.
c)       Accounting for investments is associated with AS-13 / AS-14 / AS-15.
(b) Fill in the blanks:                                                                                      1x3=3
a)      As per RBI’s Prudential Accounting Norms, provision required to be made against the standard assets is @ 0.40%.                   TRUE
b)      In case of ex-interest / ex-dividend sales of securities, quoted prices do not include accrued interest.
2. Write short notes on the following:                                                   4x4=16
a)      NPA.
b)      Cash credit.
c)       Investment account.
d)      Bonus.
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.
Cash Credit: It is an arrangement by which the customer is granted the right to borrow money from time to time upto a certain limit. Cash credit is usually given on hypothecation or pledge of stocks. The bank usually charges a higher banks interest on the actual amount withdrawn than that charged on loan because the bank has to keep the amount allowed as cash credit always ready under the fear that money allowed may be demanded at any time.
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.
Bonus: If the insurer has with profit policy, he will get the bonus from the corporation. If the bonus is paid in cash, it is shown on the debit side of the revenue A/c as an expense. This gives the policyholder an opportunity to receive the bonus year on year rather than the usual way of accruing till bonus maturity.
Types of bonuses given by a Life Insurance Company
a)      Simple Reversionary bonus (SRB) This type of bonus is calculated on the sum assured only. This bonus is declared annually and is accrued to be paid out at the time of a claim or maturity.
b)      Compound Reversionary bonus (CRB) CRB is calculated as a percentage of the sum assured and all previously accrued bonuses. The bonus of each year is added to the sum assured and the next year's bonus is calculated on the enhanced amount.
c)       Terminal Bonus: The terminal bonus, also known as a persistency bonus, is a bonus paid to indicate an overall performance of a participating policy. The terminal bonus is paid at the time of maturity or death of the life assured. This form of bonus may be given after staying in the policy for a pre-determined time period and is offered at the discretion of the insurer.
d)      Interim Bonus: Interim bonus is payable for those policies that mature or result in a death claim in between two bonus declaration dates. While the policy has already accrued the bonus declared at the end of the last financial year, there may be a short period in between the bonus declaration date and the maturity/claim date for which the policy has not received bonus. In such instances, bonus is added on a pro-rata basis using the interim bonus rates declared by the company. An interim bonus ensures that policyholders who claim benefits in midst of a year will receive credit for keeping the policy in force for that part of the year.
e)      Cash Bonus The insurance company may decide to give the bonus in cash, i.e. bonus accruing in a year will be paid to the policyholder at the end of the year. This gives the policyholder an opportunity to receive the bonus year on year rather than the usual way of accruing till bonus maturity.

3. (a) The following figures are extracted from the books of Guwahati Bank Ltd. as on 31.03.2014:
Particulars
Rs.
Interest and discount received
Interest paid on deposits
Issued and subscribed capital
Reserve under Section 17
Commission, exchange and brokerage
Rent received
Profit on sale of investment
Salaries and allowances
Directors’ fees and allowances
Rent and taxes paid
Stationary and printing
Postage
Other expenses
Audit fees
Depreciation on bank’s properties
40,30,000
24,04,000
10,00,000
7,00,000
1,80,000
60,000
1,90,000
2,10,000
24,000
1,08,000
24,000
50,000
24,000
8,000
25,000
Other information:
                    i.            Provision for bad and doubtful debts necessary Rs. 1,00,000
                  ii.            Rebate on bills discounted as on 31.03.2014 Rs. 15,000
                iii.            Provide Rs. 7,00,000 for income tax
                 iv.            The Directors’ desire to declare dividend @ 10%
Prepare the Profit and Loss Account of Guwahati Bank Ltd. for the year ended 31st March, 2014                14
Profit & Loss A/c of Guwahati Bank Ltd.
For the year ended 31st March, 2014
Particular
S. No.
Rs. (000)
        i.            Income:
Interest earned
Other Income

13
14

40,15,000
4,30,000


44,45,000
      ii.            Expenses:
Interest Expended
Operating Expenses
Provisions and contingencies
Provisions for bad debt
Provide for income tax

15
16


24,04,000
4,73,000

1,00,000
7,00,000


36,77,000
    iii.            Net surplus: I and II

7,68,000
     iv.            Appropriation:
Transfer to reserve (25% of the Net Surplus)
Dividend
Balance carried forward


1,92,000
1,00,000
4,76,000


4,68,000


S. No.
Particular
Rs. (000)
13


Interest Earned:
Interest and discount received  Less Rebate on bill discounted (40,30,000 – 15,000)

40,30,000
15,000


40,15,000
14
Other Income:
Commission, exchange and brokerage
Rent Received
Profit on sale of Investments

1,80,000
60,000
1,90,000


4,30,000
15
Interest expended
Interest paid on deposits

24,04,000


24,04,000
16
Operating Expenses:
Salaries and allowances
Director’s fees and allowances
Rent & taxes paid
Printing & stationary
Postage
Other expenses
Audit fees
Depreciation on bank properties

2,10,000
24,000
1,08,000
24,000
50,000
24,000
8,000
25,000


4,73,000

Or
(b) What is slip system of ledger posting? Discuss the advantages and disadvantages.  8+3+3=14
Ans: Slip (or Voucher) System of Ledger Posting
The bank has to ensure that customers (depositors) ledger accounts are up-to-date so that when a cheque is presented to the bank for payment, the bank can immediately decide whether to honour or dishonour the cheque. Thus transactions in the bank are immediately recorded.
For this purpose slip system of ledger posting is adopted. Under this system entries are made in the (personal) accounts of customers in the ledger directly from various slips rather than from subsidiary books or journals and then a Day Book is written up. Subsequently, entries in the accounts of the customers are tallied with the Day Book. In this way the posting in the ledger accounts and writing of the day-book can be carried out simultaneously without any loss of time. A slip is also called voucher. In general, the types of slips used in bank book-keeping are: pay-in-slips, cheques or withdrawals forms.  In these slips are filled by the customers there is much saving of time and labour of the employees of the bank.
a)      Pay-in-slip: When a customer deposits money with a bank, he has to fill-up a printed pay-in-slip form and submit it to the ‘receiving cashier’ of the bank along with cash. The form of pay-in-slip has two parts. The left-hand side portion of the pay-in-slip is called ‘counterfoil’. It is returned by the receiving cashier after the received and counts the cash. The counterfoil bears signature of the receiving cashier and it is duly stamped with the rubber stamp of the bank. Pay-in-slip serves as an acknowledgement of the deposit by the customer with the bank. The remaining portion of pay-in-slip that is, its right-hand side part remains with the bank for making entry in the cash book, after which it is given to the ‘personal accounts ledger keeper’ for crediting the ledger account of the customer.
b)      Withdrawal slip or cheque: When a customer withdraws money from the bank, he has to fill-up or write a cheque or withdrawal form and submit it to the paying cashier who makes payment, after checking the signature of the customer and adequacy of amount in his ledger account. The paying cashier credits the cash account and the ledger-keeper debits the customer’s account. These days the cashier may himself debit the customer’s account in the computer based ledger immediately before making the payment.
c)       Dockets: Sometimes the bank staff also prepares slips for making entries in the ledger accounts for which there are no original vouchers. For example, the loan department of a bank prepares vouchers when the interest is due. This slip for voucher is knows as docket.
Need of the Slip System
The need for slip system arises due to following reasons:
1)      Updated Accurate Accounts: The bank must keep its customers’ accounts accurate and up-to-date because a customer may present a cheque or withdrawal slip anytime during business hours of the bank.
2)      Division of Work: As the number of transactions in bank is very large, the slip system permits the distribution of work of posting simultaneously amongst the persons of the bank staff.
3)      Smooth Flow of Work: The accounting work moves smoothly without any interruption.
Main advantages of the slip system are:
1.       Saving of time and labour: The bank saves a lot of time and clerical labour as most of the slips are filled in by its customers.
2.       No need of subsidiary books: Subsidiary books are avoided as posting is done from slips.
3.       Minimum delay: Entries can be recorded with minimum delay as slips can easily pass from hand to hand among clerks concerned.
4.       Division of labour: the slip system enables the division of work of posting among employees due to a large number of transactions in a bank.
5.       Smooth accounting: The writing of the day book and posting of the ledger can be done simultaneously without loss of time.
6.       Reliable accounting system: Slips system provides a basis for reliable accounting system as most of the slips are prepared by customers themselves. Moreover, each transaction is recorded in different books which are maintained on self balancing system.
7.       Perfect basis of auditing: Individual slips (known as vouchers) are filled up by customers and becomes a proof for transaction to the satisfaction of the auditor.
8.       Proper evidence: Slip duly filled by a customer provides evidence of a transaction. When needed slips preserved by the banks can be shown to the customers for their satisfaction.
Disadvantages of the slip system are:
1.       Risk of loss or destruction of slips: Slips may be lost, destroyed or misappropriated as these are loose.
2.       Difficulty in verification: Books cannot be verified if subsidiary books are not kept.
3.       Inconvenience to customers: This system causes great inconvenience to the illiterate and semi-literate customers as slips are to be filled in (especially the amount in words and figures) with the help of other customers and arrogant bank employees.
4.       Risk of manipulation and misappropriation: Dishonest employees can embezzle the money by destroying the loose and large number of slips and manipulating the amounts.
5.       Expensive system: Slips system becomes difficult due to large number of daily transactions in a bank and becomes expensive to keep it date-wise record of such slips.
4. (a) From the following figures of Live Saving Life Assurance Co. Ltd., prepare a valuation Balance Sheet and Profit Distribution Statement for the year ended 31st March, 2014. Also pass necessary Journal Entries to record the transactions:                                                                 14

Rs.
Balance of Life Assurance Fund as on 01.04.2013
Interim bonus paid in the valuation period
Balance of Revenue Account for the year ended 31.03.2014
Net liability as per valuers’ certificates as on 31.03.2014
1,67,15,000
25,00,000
2,40,00,000
1,65,00,000
The company declares a reversionary bonus of Rs. 185 per Rs. 1,000 and gave the policy holders as option to take bonus in cash Rs. 105 per Rs. 1,000. Total business conducted by the company was Rs. 600 lakhs. The Company issued profit policy only ¾th of the policyholders in value opted for cash bonus.
Valuation Balance Sheet
As on 31st March, 2014
To Net Liabilities per actuary’s valuation
To Surplus
1,65,00,000
2,42,15,000
By Life Assurance funds as per
Balance Sheet (1,67,15,000 + 2,40,00,000)


4,07,15,000


4,07,15,000

4,07,15,000
Surplus as disclosed by Valuation Balance sheet = 2,42,15,000
And: Interim Bonus                                                         =    25,00,000
True Surplus subject to Taxation                                               = 2,67,15,000
Policyholders will get @ 95%                       = 2,53,79,250
Less: Interim bonus                                        =    25,00,000
Amount due to policyholders                     = 2,28,79,250
Journal Entries
Date
Particulars
LF
Amount (Dr)
Amount (Cr)
31 – mar
Life Assurance Fund A/C                                                          Dr.
To Profit and Loss A/C
(Being the profit revealed by valuation balance sheet transferred to P/L A/c)

2,42,15,000

2,42,15,000

Profit and Loss A/c                                                                    Dr.
To Bonus in Cash A/c
(Being the immediate bonus payable @ Rs.105 per 1,000  on 4,50,00,000)

47,25,000

47,25,000

Profit and Loss A/c                                                                    Dr.
To Life Assurance Fund A/c
(Being the transfer of the sum to life assurance fund of net liability at present value in respect of reversionary bonus @ Rs.105 per 1,000  on 1,50,00,000)

15,75,000

15,75,000
Or
(b) Distinguish between:                                                                                                             7x2=14
1. Surrender value and Paid-up value:
Ans: Surrender Value: The term surrender value indicates the value that we receive from the insurance issuer after we surrender the policy before maturity. Surrender, here, means termination or cancellation of the life policy or returning the policy to the insurance company before the stipulated time. The policy no longer exists after the company clears off the payment to the policyholder. There can be a number of reasons behind surrendering our policy. One of the most common reasons is inability to pay the premiums. The policyholders often feel they have chewed more than they can swallow. Surrendering our policy means we will not have to pay premiums any further. When we terminate a policy, the company pays us certain amount because we have paid premiums in the previous years of which a portion has been used to cover risk, and another portion has been used as an investment. The investment portion with its increased value will be returned to us after deducting some termination charges. We might even get some bonus as well. This amount is known as the surrender value. However, keep in mind that the surrender value factor plays a key role in minimising the bonus.  
Paid-up Value: It may occur that we do not want to pay the premiums of the policy, but you want to keep the policy. The insurance companies have a solution for this one too. The insurance company will offers us an option where we can have our policy, but the company will have no premium expectations from us. But there is a catch in this. The assured sum of the policy, when it was taken will be reduced considerably. This is done through a calculation called paid-up process. The calculated amount is known as the paid-up value.
2. Re-insurance and Double insurance.
Re-Insurance
In general insurance there are risks which, because of their magnitude or nature, one insurance company cannot afford to cover, e.g. aviation insurance. Generally, in such cases, an insurance company insures the whole risk itself and lays off the amount it has accepted to other insurance of reinsurance companies, retaining only that much risks which it can absorb.
A reinsurance transaction may thus be defined as an agreement between a ‘ceding company’ and a ‘re-insurer’ whereby the former agrees to ‘cede’ and the latter agrees to accept a certain specified share of risk or liability upon terms as set out in the agreement.
A ‘ceding company’ is the original insurance company which has accepted the risk and has agreed to ‘cede’ or pass on that risk to another insurance company or a reinsurance company. It may however be emphasized that the original insured does not acquire any right under a reinsurance contact. In the event of loss, therefore, the insured’s claim for full amount is against the original insurer.
In other words, if an insurer is not willing to bear the whole of the risk, it reinsures itself. Some risk retains with some other insurer. This is called as reinsurance. Both re-insurer and original insurer share the premium and risk in the same proportion and decided by them earlier.
Double insurance
Double insurance is the insuring of an individual, dependent, or personal property by two or more insurance companies. Such dual insurance allows those with coverage to claim the full amount from the policies; however the total claim cannot exceed the actual loss or cost associated with the underwritten subject of the policies. Insurance companies are law bound to honor double insurance policies, but the recipient of such policies must satisfy certain eligibility requirements. Underwriters of double insurance policies have the ability to reject or appeal certain claims based on deception or unjust enrichment. Consequently, it is important that individuals insurable under double insurance have an understanding of the independent insurance policies that comprise their dual coverage and know the process for claims and payouts.
Difference between reinsurance and double insurance
 The concept of double insurance differs from the concept of reinsurance the following respects: 
(a) MEANING:  The reinsurance business is entered into by the original insurer with the order insurers.  But in double insurance, but the insured gets the same subject  matter insured  with more than one insurer or under more than one policy  with the same insurer. 
(b) FILLING CLAIM:  In reinsurance, the insured cannot be claim any part of the his loss from the insurer.  But in the double insurance the insured can claims only his actual loss from each of the insurers up to the amount insured with them. 
(C) CONTRIBUTION:  In reinsurance, the reinsured will claim a part of the loss proportionate to the risk reinsured by the him with the reinsurers. But in double insurance, each insurer is liable to contributions on pro-rata basis towards the loss suffered by the insured.
5. (a) From the following information as on 31st March, 2014, prepare the Revenue Accounts of Sagar Co. Ltd. engaged in Marine Insurance Business:                        14
Particulars
Direct Business
Re-Insurance
I. Premium:
Received
Receivable
1st April, 2013
31st March, 2014
Premium paid
Payable
1st April, 2013
31st March, 2014
II. Claims:
Paid
Payable
1st April, 2013
31st March, 2014
Received
Receivable
1st April, 2013
31st March, 2014
III. Commission:
On insurance accepted
On insurance ceded

24,00,000

1,20,000
1,80,000





16,50,000

95,000
1,75,000





1,50,000


3,60,000

21,000
28,000
2,40,000

20,000
42,000

1,25,000

13,000
22,000
1,00,000


9,000
12,000
11,000
14,000
Other Expenses and Income:
Salaries – Rs. 2,60,000, Rent, Rates and Taxes – Rs. 18,000, Printing and Stationery – Rs. 23,000, Indian Income tax paid - Rs. 2,40,000, Interest, Dividend and Rent received (Net) - Rs. 1,15,500, Income tax deducted at source – Rs. 24,500, Legal expenses – Rs. 40,000, Bad debts – Rs. 5,000, Double income tax refund – Rs. 12,000, Profit on sale of motor car – Rs. 5,000.
Balance of Fund as on 1st April, 2013 was Rs. 26, 50,000 including additional reserve of Rs. 3, 25,000. Additional Reserve has to be maintained at 5% of the net premium of the year.
Revenue A/c
For the year ended 31/03/2014
Marine Insurance (Sagar Co. Ltd.)
Particulars
S. No.
Amount
Premium (Net)
Profit on sale of investment
Other Income
Income Tax refunded
Interest, Dividend & Rent (115.5 + 24.5)
1
2,521.75
5

12
140
Total (A)

2,678.75
Claims
Commission
Operating Expenses
2
3
4
1,801
147
306
Total (B)

2,254
Operating Profit
Total: C = A – B


424.75
Schedule forming part of statement
1. Premium (Net)
Particulars
Amount
Premium on direct business                                      2,400
Add: Due at the end                                                       180
Less: Due at the beginning                                            120


2,460.00

Add: Premium on re-insurance accept                       360
Add: Due at the end                                                         28
Less: Due at the beginning                                              21

Less: Premium on re-insurance ceded                        240
Add: Due at the end                                                         42
Less: Due at the beginning                                              20



367.00



262.00
Net Premium

Adjustment for Reserve for Unexpired Risk
Closing Balance of U/R (Marine) 100% on Net Premium                                            2,565.00
Add: Additional Reserve (5% of the net premium)                                                          128.25
                                                                                                                                                     2,693.25
Less: Opening U/R + Additional Reserve                                                                                       2,650.00
2,565.00





(43.25)

2,521.75

2. Claims Incurred (Net)
Particulars
Amount
Claims paid                                                                   1,650
Add: Due at the end                                                       175
Less: Due at the beginning                                              95


1,730

Add: Claims on re-insurance accepted                       125
Add: Due at the end                                                        22
Less Due at the beginning                                              13

Less: Claims on re-insurance ceded                           100
Add: Due at the end                                                       12
Less: Due at the beginning                                              9

Add: Legal expenses                                                     



134



103

40

1,801

3. Commission:
Particulars
Amount
Commission paid
Add: Commission on reinsurance accepted
Less Commission on reinsurance ceded
150
11
14
Total
147

4. Operating Expenses:
Particulars
Amount
Salaries
Rent, Rates and Taxes
Printing and Stationary
Bad Debt
260
18
23
5
Total
306
Or
(b) Briefly explain schedules to be shown in the financial statements of General Insurance Companies as prescribed by IRDA Regulation, 2002.                                  14
Ans: Refer format given in your book
6. (a) On 1st January, 2014, ABC Ltd. held as investment Rs. 50,000, 6% Government Stock costing Rs. 47,000. On 31st March, a purchase of Rs. 2, 00,000 of same Government Stock was made at Rs. 95 cum-interest. On 1st July, the company sold Rs. 1, 00,000 Stock @ 96. On 1st October, a further Rs. 70,000 of the investment was sold at LRs. 98 cum-interest. The market price of the stock on 31.12.2014 was Rs. 99 (ex-interest). Half-yearly interest is payable on 30th June and 31st December every year.  Prepare the Investment Ledger of the company ignoring income tax and brokerage. 14
6% Government Stock A/c
For the year ended 31st December, 2014
Date
Particular
Face Value
Interest
Cost
Date
Particular
Face Value
Interest
Cost
1/1/14





31/3/14




1/7/14



1/10/14

31/12/14
To Balance b/d





To Bank A/c




To Bank, P/L A/c (Sale on investment)


To Bank, P/L A/c (Sale on investment)
To P/L A/c (Interest for the year)
50,000





2,00,000




-



-

-
-





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

-



-

7,950
47,000





1,87,000
(2000 x 95 – 3,000)


2,250



2,100

-
30/6/14





1/7/14




1/10/14



31/12/14

31/12/14
By Bank A/c





By Bank A/c




By Bank A/c



By Bank A/c

By Balance c/d
-





1,00,000




70,000



-

80,000

7,500
(2,50,000 x 6% x 6/12)



-




1,050
(70,000 x 6% x 3/12))

2,400

-


-





96,000




67,550
(700 x 98 -1,050)

-

74,800


2,50,000
10,950
2,38,350


2,50,000
10,950
2,38,350
Or
(b) (i) Define ‘Investment’ and ‘Jobbers and brokers’.                                                6
Ans: 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.
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.
(ii) What are the cum-interest and ex-interest purchase and sale of investment? Show its treatment in investment ledger.                                                                 8
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.
Preparation of Investments Account
Concerns holding a large number of investments may find it more convenient to use a separate ledger called an Investment Ledger, for keeping the accounts of all their investments. Such a ledger is kept on the columnar system and is ruled differently from an ordinary ledger. As the issuing authority of a security pays interest to the holder at a certain rate calculated on its face value, it is desirable that the face value (also known as the nominal value) as well as the interest or dividend received should appear side by side with the capital invested in it. Therefore, the investment Ledger is provided with three columns on either side headed ‘Nominal Value’,’ Interest or Dividend’ and ‘Capital or Principal’. The name of each investment is written at the tip of the account followed by the rate of interest or dividend and the dates on when it is payable; when an investment is purchased “cum-dividend”, ‘ex-dividend” its cost is analyzed into the nominal price and the dividend or interest accrued and as entry is made on the credit side of the Cash Book, from where it is posted to the respective columns on the debit side of the particular Investment Account in the Investment Ledger. When the whole or part of the investment is sold, the price received, similarly split up into the nominal price and the dividend or interest accrued, is entered on the debit side of the Cash Book, from where it is posted to the respective columns on the credit side of the particular Investment Account in the Investment Ledger. Expenses by way of brokerage, stamps etc., will be debited to the capital account. When dividend or interest accrued on an investment is received, it is first entered on the debit side of the Cash Book and then posted to the credit side of the particular Investment Account in the ‘Dividend or Interest’ column in the investment Ledger. At the close of the financial year, the dividend or interest accrued on different investments, but not received, is brought into account by crediting the ‘Dividend or Interest’ columns of the different Investment accounts in the Investment Ledger and bringing down such balances as an asset after the accounts have been balanced.
The first column is of Nominal Value and in it on the credit side is entered the nominal value of investments on hand and the totals on both sides will then agree.
The second column is of Interest or Dividend and it will always show a credit balance representing interest or dividend on investments for the period and it will be carried to Profit and Loss Account.
The third column is for Capital or Principal. In this column against the closing balance will be entered the value of securities is hand and the difference of the two sides will show profit or loss on the sale of investments during the period. Value of securities in hand is the lower of cost and fair values as per Para 14 of AS – 13.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
1. (a) Choose the correct answer:                                                                                             1x5=5
a)      Banking companies are governed by the Banking Regulation Act, 1949 / 1950 / 1951.
b)      Every General Insurance Company must prepare its Financial Statements as per Schedule B / C / D of the IRDA Regulation, 2002.
c)       According to the Provincial Insolvency Act, 1920, salary Rs. 20 / Rs. 40 / Rs. 60 per head is considered as preferential creditors.
d)      Profit on sale of marketable securities is transferred to Profit and Loss Account / Capital Reserve.
e)      Accounting for changing prices is also known as Inflation Accounting / Deflation Accounting.
f)       (b) Fill in the blanks:                                                                                                                                1x3=3
g)      According to the provisions of the Insolvency Act, any amount due to Government or local authority is known as ____.
h)      AS – 13 is associated with accounting for investments.
i)        Presidency Towns Insolvency Act was enacted in the year ____.
2. Write short notes on the following:                                                                                   4x4=16
a)      Slip system of accounting for banking companies.
Ans: Slip (or Voucher) System of Ledger Posting
The bank has to ensure that customers (depositors) ledger accounts are up-to-date so that when a cheque is presented to the bank for payment, the bank can immediately decide whether to honour or dishonour the cheque. Thus transactions in the bank are immediately recorded.
For this purpose slip system of ledger posting is adopted. Under this system entries are made in the (personal) accounts of customers in the ledger directly from various slips rather than from subsidiary books or journals and then a Day Book is written up. Subsequently, entries in the accounts of the customers are tallied with the Day Book. In this way the posting in the ledger accounts and writing of the day-book can be carried out simultaneously without any loss of time. A slip is also called voucher. In general, the types of slips used in bank book-keeping are: pay-in-slips, cheques or withdrawals forms.  In these slips are filled by the customers there is much saving of time and labour of the employees of the bank.
d)      Pay-in-slip: When a customer deposits money with a bank, he has to fill-up a printed pay-in-slip form and submit it to the ‘receiving cashier’ of the bank along with cash. The form of pay-in-slip has two parts. The left-hand side portion of the pay-in-slip is called ‘counterfoil’. It is returned by the receiving cashier after the received and counts the cash. The counterfoil bears signature of the receiving cashier and it is duly stamped with the rubber stamp of the bank. Pay-in-slip serves as an acknowledgement of the deposit by the customer with the bank. The remaining portion of pay-in-slip that is, its right-hand side part remains with the bank for making entry in the cash book, after which it is given to the ‘personal accounts ledger keeper’ for crediting the ledger account of the customer.
e)      Withdrawal slip or cheque: When a customer withdraws money from the bank, he has to fill-up or write a cheque or withdrawal form and submit it to the paying cashier who makes payment, after checking the signature of the customer and adequacy of amount in his ledger account. The paying cashier credits the cash account and the ledger-keeper debits the customer’s account. These days the cashier may himself debit the customer’s account in the computer based ledger immediately before making the payment.
f)       Dockets: Sometimes the bank staff also prepares slips for making entries in the ledger accounts for which there are no original vouchers. For example, the loan department of a bank prepares vouchers when the interest is due. This slip for voucher is knows as docket.

b)      Valuation of Balance Sheet.
Ans: 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)       Deficiency Accounts.
d)      Cum-interest or cum-dividend purchases and sales.
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.
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.
3. (a) From the following information, prepare the Profit and Loss Account of ABC Bank Ltd. for the year ended 31st March, 2014:                                                                                                     11
Particulars
Rs.
Interest on fixed deposits
Interest on loans
Commission
Rebates on bill discounted
Establishment charges
Discount on bills discounted (net)
Interest on cash credit
Interest in Current Accounts
Rent and rates
Interest on overdrafts
Directors’ fees
Auditors’ fees
Interest on savings bank deposits
Postage and telegrams
Sundry charges
Printing and stationery
27,50,000
25,90,000
82,000
4,90,000
5,40,000
14,60,000
22,30,000
4,20,000
1,80,000
15,40,000
30,000
12,000
6,80,000
14,000
17,000
29,000
Bad debts to be written-off amounted to Rs. 4,00,000. Provision for taxation may be made at 55%.
Or
(b) What is rebate on bill discounted? How is rebate on bill discounted treated in preparation of accounts of banking companies?                                                                                                       4+7=11
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
4. (a) Zenith Fire Insurance Co. Ltd. commenced its business on 01.04.2013. It submits the following information for the year ended 31.03.2014.                                                                                                                                                                 11

Rs.
Claims paid
Commission paid
Premium received
Re-insurance premium paid
Expenses of management
Claims outstanding on 31.03.2014
Create reserve for unexpired risk @ 40%
Rent, Rates and Taxes
Printing and Stationery
Salaries
Premium receivable on 31.03.2014
7,00,000
50,000
15,00,000
1,00,000
3,00,000
1,00,000

18,000
23,000
2,60,000
3,01,000
Prepare Revenue Account for the year ended 31.03.2014
Or
(b) Define the following:                                                                                                                              3+4+4=11
         i.            Claims.
       ii.            Re-insurance.
      iii.            Life Insurance Fund.
Ans: Claims: Any amount payable by the insurance company is called a claim. In life insurance business, claims may arise due to two reasons i.e. by death or maturity. While calculating the figure for claims, all claims intimated & accepted or not accepted at the end of the year, expenses relating to claims are to be added & out of the total, claims outstanding at the beginning of the year and reinsurance recoveries are to be deducted.
Re-Insurance: In general insurance there are risks which, because of their magnitude or nature, one insurance company cannot afford to cover, e.g. aviation insurance. Generally, in such cases, an insurance company insures the whole risk itself and lays off the amount it has accepted to other insurance of reinsurance companies, retaining only that much risks which it can absorb.
A reinsurance transaction may thus be defined as an agreement between a ‘ceding company’ and a ‘re-insurer’ whereby the former agrees to ‘cede’ and the latter agrees to accept a certain specified share of risk or liability upon terms as set out in the agreement.
A ‘ceding company’ is the original insurance company which has accepted the risk and has agreed to ‘cede’ or pass on that risk to another insurance company or a reinsurance company. It may however be emphasized that the original insured does not acquire any right under a reinsurance contact. In the event of loss, therefore, the insured’s claim for full amount is against the original insurer.
In other words, if an insurer is not willing to bear the whole of the risk, it reinsures itself. Some risk retains with some other insurer. This is called as reinsurance. Both re-insurer and original insurer share the premium and risk in the same proportion and decided by them earlier.
Concept of Life fund of an Insurance Company
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”.
Net Liability is useful to compute the profits of a life insurance business. It is the estimated liability on all the policies that are in force. The Net Liability is valued by an actuary. Hence it is called Net Liability as per actuarial valuation. The difference between Life Fund and Net Liability is the profits. Once in every two/three year’s life insurance companies calculate profits and distribute it among policy holders and shareholders in the ratio of 19:1 or in any other suitable ratio.
5. (a) Rakesh commenced business on 01.07.2011 with a capital of Rs. 2, 00,000. On 31st March, 2015, an adjudication order for insolvency was made against him. Following are the other details available relating to his business as on 31.03.2015.                                                                                                                                                                                 12

Rs.
Sundry creditors
Mortgage loan (building)
Godown rent (2 months)
Wages due
Loan of Mrs. Rakesh (given out of her own sources)
Cost of building (estimated to realize Rs. 1,00,000)
Debtors (including bad of Rs. 10,000)
Stock-in-trade (realization value Rs. 10,000)
Cash in hand / bank
1,50,000
1,00,000
5,000
8,000
25,000
1,60,000
90,000
15,000
10,000
He maintained books up to 31st March, 2014 and profit up to 31st March, 2014 was Rs. 1, 40,000. He did not maintain books from 1st April, 2014 onwards. He has been drawing Rs. 4,000 p.m. and goods worth Rs. 1,500 p.m. uniformly from April 2014 onwards. Prepare Statement of Affairs.
Or
(b) Distinguish between:                                                                                                              6+6=12
                                 i.            Statement of Affairs and a Balance Sheet.
                               ii.            Statement of Affairs and a Deficiency Account.
6. (a) On 01.04.2013, Vinoy Ltd. had 12% Govt. 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 01.06.2013, Vinoy Ltd. sold 12% Govt. Bonds of Rs. 1, 00,000 at Rs. 98 ex-interest. Show 12% Govt. Bonds Account for the year ended 31st March, 2014. At the end of the year the market value of the bonds were Rs. 99 each (ex-interest).                                   11
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
Interest payable – 12% as on 31st March, 30th Sept. Closing dates 31/3/13
Calculation P/L
Sale value                                     = 98,000
CoI =>  = (96,000)
                             Profit                 2,000
Or
(b) Define investment. How do you balance the Investment Account at the end of the year, when market price is less than the cost price?                                                        4+7=11
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:
6.       It helps in keeping a record of each investment separately.
7.       It helps to ascertain the value of securities at the end of the account period.
8.       It is helpful in collection of interest and dividend as and when they become due.
9.       It is helpful in ascertaining the amount of accrued income at the end of the accounting period.
10.   It facilitates the determination of the profit or loss on sale of any security.
Preparation of Investments Account
Concerns holding a large number of investments may find it more convenient to use a separate ledger called an Investment Ledger, for keeping the accounts of all their investments. Such a ledger is kept on the columnar system and is ruled differently from an ordinary ledger. As the issuing authority of a security pays interest to the holder at a certain rate calculated on its face value, it is desirable that the face value (also known as the nominal value) as well as the interest or dividend received should appear side by side with the capital invested in it. Therefore, the investment Ledger is provided with three columns on either side headed ‘Nominal Value’,’ Interest or Dividend’ and ‘Capital or Principal’. The name of each investment is written at the tip of the account followed by the rate of interest or dividend and the dates on when it is payable; when an investment is purchased “cum-dividend”, ‘ex-dividend” its cost is analyzed into the nominal price and the dividend or interest accrued and as entry is made on the credit side of the Cash Book, from where it is posted to the respective columns on the debit side of the particular Investment Account in the Investment Ledger. When the whole or part of the investment is sold, the price received, similarly split up into the nominal price and the dividend or interest accrued, is entered on the debit side of the Cash Book, from where it is posted to the respective columns on the credit side of the particular Investment Account in the Investment Ledger. Expenses by way of brokerage, stamps etc., will be debited to the capital account. When dividend or interest accrued on an investment is received, it is first entered on the debit side of the Cash Book and then posted to the credit side of the particular Investment Account in the ‘Dividend or Interest’ column in the investment Ledger. At the close of the financial year, the dividend or interest accrued on different investments, but not received, is brought into account by crediting the ‘Dividend or Interest’ columns of the different Investment accounts in the Investment Ledger and bringing down such balances as an asset after the accounts have been balanced.
The first column is of Nominal Value and in it on the credit side is entered the nominal value of investments on hand and the totals on both sides will then agree.
The second column is of Interest or Dividend and it will always show a credit balance representing interest or dividend on investments for the period and it will be carried to Profit and Loss Account.
The third column is for Capital or Principal. In this column against the closing balance will be entered the value of securities is hand and the difference of the two sides will show profit or loss on the sale of investments during the period. Value of securities in hand is the lower of cost and fair values as per Para 14 of AS – 13.
Balancing the Investment Account
When the whole of an investment has been sold, the difference between the two sides of an Investment Account will be profit or loss on the sale. Where only part of an investment has been sold during the year, the cost of the remaining investment will be brought down as a balance in the Investment Account and the difference between its two sides will be profit or loss on the investments sold. When the investment is a fixed asset, any profit or loss made on the sale thereof will be of a capital nature and should be treated accordingly.
7. (a) A company buys and sells goods. During the three months ending March 31, 2014, the company entered into the following transactions:
2014 January 1:
By 500 units costing Rs. 750
2014 January 31:
Sell 400 units for Rs. 2,000 and replace them with units costing Rs. 1,400
2014 February 28:
Sell 200 units for Rs. 1,000. Buy 50 units costing Rs. 200
2014 March 31:
Sell 200 units for Rs. 1,100. Buy 100 units costing Rs. 500
The retail price index during the period was as follows:
January 1, 2014
January 31, 2014
February 28, 2014
March 31, 2014
Rs. 200
Rs. 220
Rs. 230
Rs. 240
You are required to Prepare Trading Account under the following situations:                                                                       11
a)      Historical Cost Accounting.
b)      Current Purchasing Power Accounting.
c)       Current Cost Accounting.
Or
(b) Define Inflation Accounting. Write four objectives of Inflation Accounting. Discuss five points in favour of Inflation Accounting in the context of Indian Companies.                                                                                                3+4+4=11

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