Advanced Financial Accounting Solved Question Papers: Nov' 2017 | B.Com 3rd Sem

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 minimizing the bonus.  

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

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

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

Ans: Purpose of maintaining an investment ledger is as follows:

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

Ans: 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.

Ans:

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

(b) From the following information, prepare Profit & Loss A/c of Jai Bharat Bank Ltd. For the year ended 31^st March, 2017. Working should from a part of your answer: 14

Additional information:

Profit & Loss A/c of Jai Bharat Bank Ltd.

For the year ended 31^st March, 2017

4. (a) What is Life Insurance? What are the statutory and subsidiary books maintained by a life insurance company. 2+6+6=14

Ans: Insurance is an arrangement which is represented by a policy in which an individual or entity financial protection from insurance company against losses such as theft, fire, accident, illness, death etc, in return for payment of a specified premium. Insurance is of two types – Life insurance also known as contract of guarantee and general insurance also known as contract of indemnity.

Life Insurance is defined as a contract between the policy holder and the insurance company, where the life insurance company pays a specific sum to the insured individual or his family upon the maturity of the term for which the life is insured or on the death of the insured. That is why life insurance is called a contract of guaranteed. The life insurance sum is paid in exchange for a specific amount of premium.

Books maintained by All 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’.

In addition to the statutory books mentioned above, insurance companies also maintain the following subsidiary books for recording the transactions:

OR

Particulars	Schedule	Amount
Premium Earned (Net) Income from Investments: Interest, Dividend and Rent Surplus on Revaluation of Reversions Other Income: Consideration for Annuities Granted Fees	1	3,72,000 2,26,000 1,500 12,500 200
Total (A)		6,12,200
Commission Operating Expenses relating to Insurance Business Bad debt (Re-insurance irrecoverable) Income Tax	2 3	16,000 35,000 400 32,000
Total (B)		83,400
Benefits Paid (Net)	4	1,05,000
Total (C)		1,05,000
Surplus (D) = (A) – (B) – (C)		4,23,800

Particulars	Amount
Premiums Earned (Net)	3,72,000

Particulars	Amount
Commission Paid	16,000

Particulars	Amount
Management Expenses	35,000

Particulars	Amount
Claims less Reinsurance Claims Annuities Surrenders Bonus in cash Bonus in Reduction in Premium	42,500 18,500 25,500 18,000 500
	1,05,000

5. (a) What is General Insurance? Point the main features of accounts of general insurance companies. How profit or loss is ascertained in general insurance business? 2+7+5=14

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

Features of General Insurance Companies:

Final Accounts of General Insurance Companies

Final account of general insurance business is 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: Revenue account of a general insurance is a account which is prepared at the end of accounting year to know the operating profit or loss of a general insurance companies. A separate Revenue Account (Form B-RA) is prepared for each type of business e.g., fire, marine and others. It records the incomes and expenses of a particular business and profit/loss is transferred to Profit and Loss Account.

Incomes of general insurance companies include premium after adjusting reinsurance ceded and reinsurance accepted and incomes from investments. Expenses of general insurance companies includes commission, operating expenses, benefits paid, bonus and change in reserve for unexpired risk during a particular period. The difference between incomes and expenses is the operating profit or loss of insurance companies.

2. Profit and Loss Account: (Form B-PL) Besides, profit/loss of different business, it records incomes and expenses of general nature and it shows how the profit has been appropriated. Its balance is shown in the Balance Sheet.

3. Balance Sheet: (Form B-BS) It records various assets and liabilities of the General Insurance Companies.

Determination of Profits in case of general insurance companies

It must be observed that difference in revenue account does reveal profit or loss of business. The revenue account is closed by transfer to respective fund account viz., fire fund, marine fund etc. Ascertainment of profit under General Insurance Business. General insurance policies are normally issued for short terms renewable every year.

It is quite possible that on the accounting date, some of the contracts are still alive and hence represent unexpired risk. A suitable provision is made for that unexpired risk on a generalized basis as it is impractical to create it for specific policies. Sometimes an additional provision is also created. The total of reserve for unexpired risk and additional risk is collectively termed as ‘Respective Fund’ which may be fire fund, marine fund, motor vehicle fund, etc. The revenue account starts and ends with respective value of the fund besides recording normal revenue and expenditure. The difference of the account is called profits or loss and is transferred to Profit and Loss Account.

It must be observed that difference in revenue account does reveal profit or loss of business. The revenue account is closed by transfer to respective fund account viz., fire fund, marine fund etc. Ascertainment of profit under General Insurance Business. General insurance policies are normally issued for short terms renewable every year.

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

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

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

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

Additional reserve for unexpired risk

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

OR

Particulars	S. No.	Amount
Premium (Net) Interest Divided & Rent	1	3,89,000 10,000
Total (A)		3,99,000
Claims (Net) Commission Operating Expenses	2 3 4	2,10,000 24,730 87,800
Total (B)		3,22,530
Operating Profit (Total: C = A – B)		76,470

Particulars	Amount
Premium recovered	4,00,000 11,000
Adjustment for unexpired risk: Closing balance of unexpired risk: 44% of Net Premium                                                                                                                   1,76,000 Add: Additional reserve                                                                                                             1,55,000                                                                                                                                                          3,31,000 Less: Opening unexpired risk including opening additional reserve (1,65,000+1,55,000)                                                                  3,20,000
	3,89,000

Particulars	Amount
Claims	2,10,000
	2,10,000

Particulars	Amount
Commission on direct business	24,730
	24,730

Particulars	Amount
Fire insurance expenses Contribution to fire brigade	85,000 2,800
	87,800

6. (a) What is Investment Account? Why is it prepared? Mention the special features of Investment Account. How are stock exchange transactions (sale and purchase of securities) recorded in books?                           2+2+6+4=14

Ans: 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.

Purpose of maintaining an investment ledger is as follows:

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.

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.

OR

(b) On 1^st April, 2016 , 400 12% debentures 0f Rs. 100 in X Ltd. held as investment by Y Ltd. at a cost of Rs. 36,800. Interest is payable on 31^st March every year. On 1^st August, 2016, 50 debentures were purchased @ Rs. 96 cum-interest and on 1^st February 2017, 250 debentures were sold at Rs. 99 ex-interest. On 1^st march 2017, 100 debentures were purchased at Rs. 94 ex-interest. On 31^st March 2017, 150 debentures were sold at Rs. 98 cum-interest. Prepare investment A/c from the above for the year ending 31^st March, 2017 using FIFO method. Market price of using debentures on 31^st March 2017 is at par.                                 14

For the year ended 31-12-2011

Working Note: Calculation of P/L on sale of investment 

1. (a) Fill in the blanks:                                   1x4=4

(b) Write True and False:                              1x4=4

2. Write short notes on any four of the following:                                                             4x4=16

3. (a) From the following information, prepare the profit & Loss A/c with necessary schedules of AB Bank Ltd. for the year ended 31^st March 2017:                                 12

                                                                                                                Rs.

Interest on Loans                                                                             25,90,000

Interest on Deposits                                                                       38,50,000

Rebate on Bills Discounted                                                          4,90,000

Commission                                                                                       82,000

Establishment Charges                                                                  5,40,000

Discount on Bills Discounted (Net)                                           14,60,000

Interest on Cash Credit                                                                 22,30,000

Rent and rates                                                                                  1,80,000

Interest on overdrafts                                                                   15,40,000

Directors fees                                                                                    30,000

Auditor’s fees                                                                                   12,000

Postal expenses                                                                                               14,000

Printing and Stationery                                                                  29,000

Sundry Expenses                                                                             17,000

Other information:

Profit & Loss A/c of AB Bank Ltd.

For the year ended 31^st March, 2017

SCHEDULE 13 – INTEREST EARNED

SCHEDULE 14 – OTHER INCOME

SCHEDULE 15 – INTEREST EXPENDED

SCHEDULE 16 – OPERATING EXPENSES

OR

(b) Explain in relation to bank Accounting:                                                            3x4=12

4. (a) What is meant by Reserve for Unexpired Risk? How and why is it created in general insurance? Also distinguish between general insurance and life insurance.     2+3+3+3=11

OR

(b) The Life Assurance Fund of an insurance company showed a balance of Rs. 64,24,000. It is found that the following adjustments are yet to be made:                             Rs.

Dividend from investments                                                         3,21,000

Income tax on above                                                                     65,200

Bonus in reduction of premium                                                                 9,35,400

Claims covered under reinsurance                                           3,79,000

Claims intimated but not accepted                                           9,40,000

Pass necessary Journal Entries and compute the actual Life Assurance fund 8+3=11

5. (a) What is Statement of Affairs? How is it prepared? Distinguish between a statement of Affairs and a Deficiency account.                                                               2+5+4=11

OR

(b) Mr. Rajen filed his petition for bankruptcy on 31^st March 2017, 2017 on which date his books showed the following balance:               11

Preferential creditors included trade creditors amounting to Rs. 700. Liabilities on bills discounted was Rs. 10,000, out of which Rs. 2,000 were expected to rank. His household furniture etc. was valued at Rs. 5,000. He owned a house valued Rs. 15,000 having a mortgage on it Rs. 12,000 at 4%. Interest was paid up to September 30,2016. Creditors for rates on the house amounted to Rs. 300. Prepare the Statement of Affairs and the Deficiency A/c of Mr. Rajen. 7+4=11

6. (a) What are Investment Accounts? What are the special features of Investment Accounts? Discuss the purposes of Investment Accounts                     2+5+4=11

(b) Mr. A held on 1^st January 2016 Rs. 1,00,000 of 3.5% Government Loan at Rs. 95,000. Three months interest had accrued. On 31^st May, he purchased a further Rs. 40,000 of the loan @ Rs. 96 (net) cum interest. On 31^st July, Rs. 30,000 of the loan was sold at Rs. 94 (net) ex interest. On 31 March and 30 September and was collected on 4^th April and 5^th October. The price of the loan on 31^st December 2016 was Rs. 96. Draw up the loan A/c. Ignore income tax and paise. 11

2017 (OLD COURSE)

For the year ended

Working Note: Calculation of cost on sale of Investments

7. (a) What do you mean by Accounting for Price Level Changes? Explain clearly accounting for price level changes under Current Purchasing Power (CPP) method.            3+8=11

OR

(b) Ram Ltd. followed the LIFO system. From the particulars given below, ascertain the cost of sales and closing inventory under CPP method:                                        11