Friday, November 15, 2019

Advanced Financial Accounting Solved Question Papers: Nov' 2018

2018 (November)
COMMERCE (Speciality)
Course: 301 (Advanced Financial Accounting)
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80
Pass Marks: 24
Time: 3 hours
1. (a) Fill in the blanks:                                                                  1x4=4

1)         A Non Performing asset is an asset that ceases to generate income for the bank.
2)         Consideration for annuities granted is a source of income for a life insurance company.
3)         In case of marine insurance, the provision against unexpired risk is maintained at 100 % of net premium.
4)         Investments are freely bought and sold in the stock exchange through banks and brokers.
(b) Write True or False:                                                                1x4=4
1)         Rebate on bills discounted for a banking company is an income.      False, advance income
2)         Balance Sheet of a life insurance business is prepared in the prescribed from A-BS of the Insurance Act.  True
3)         Revenue Account of a general insurance company has five Schedules.         False, 4
4)         Brokerage is added in the cost of investment in the books of purchaser of investment.        True
2. Write short notes on any four of the following:                           4x4=16
a)      Money at Call and Short Notice.
Ans: Money at call & short notice (Schedule 7): Money at call and Short money means a very short term loan given by banker for a period ranging from 1 day to 14 days. If the loan is given for one day, it is called ‘money at call’ and if the loan is given for a maximum period of 14 days and cannot be back on demand and will require at least a notice of 3 days for calling back, it is called ‘money at short notice’. These items appear on the assets side of a bank’s balance sheet and represents temporary loans to Bill Brokers, Stock Brokers & other banks. Call money are normally unsecured in our country.
b)      Double Insurance.
Ans: 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.
c)       Fire Insurance Revenue Account.
Ans: 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.
d)      Cub-dividend and 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.
e)      Columnar Investment Accounts.
Ans: 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.
3. (a) What is bank accounting? What are the main features of bank’s accounting system? Point out the main advantages and disadvantages of slip system of posting in Bank Accounts.                 2+6+3+3=14
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.
Main Characteristics of a Bank’s Book-Keeping System
The book-keeping system of a banking company is substantially different from that of a trading or manufacturing enterprise. A bank maintains a large number of accounts of various types for its customers. As a safeguard against any payment being made in the account of a customer in excess of the amount standing to his credit or a cheque of a customer being dishonoured due to a mistake in the balance in his account, it is necessary that customers’ accounts should be kept up-to-date and checked regularly. In many other mercantile enterprises, books of primary entry (i.e. day books) are generally kept up-to-date while their ledgers including the general ledger and subsidiary ledgers for debtors, creditors etc. are written afterwards. However a bank cannot afford to ignore its ledgers, particularly those concerning the accounts of its customers and has to enter into the ledgers every transaction as soon as it takes place. In bank accounting, relatively less emphasis is placed on day books. There are merely treated as a means to an end-the end being to keep up-to-date detailed ledgers and to balance the trial balance everyday and to keep all control accounts in agreement with the detailed ledgers.
Presently most if not all of the Banks’ accounting is done on Core Banking Solutions (CBS) wherein all accounts are maintained on huge servers with posting being effected instantly through vouchers, debit cards, internet banking etc. The main characteristics of a bank’s system of book-keeping are as follows:
a)      Voucher posting: Vouchers are nothing but loose leaves of journals or cash books on which transactions are recorded as they occur. Entries in the personal ledger are made directly from vouchers instead of being posted from the books of prime entry.
b)      Voucher summary sheets: The vouchers entered into different personal ledgers each day are summarized on summary sheets, totals of which are posted to the control accounts in the general ledger.
c)       Daily trial balance: The general ledger trial balance is extracted and agreed every-day.
d)      Continuous checks: All entries in the detailed personal ledgers and summary sheets are checked by persons other than those who have made the entries. A considerable force of such check is employed, with the general result that most clerical mistakes are detected before another day begins.
e)      Control Accounts: A trial balance of the detailed personal ledgers is prepared periodically, usually every two weeks, agreed with general ledger control accounts.
f)       Double voucher system: Two vouchers are prepared for every transaction not involving cash-one debit voucher and another credit voucher.
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.
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.
Or

(b) The following are the figures extracted from the books of XYZ Bank Ltd. as on 31st March, 2018:                        14

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
Director’s Fees and Allowances
Rent and Taxes paid
Stationery and Printing
Postage, Telephone and Internet Charges
Audit Fees
Depreciation on Bank’s Properties
Other Expenses
20,30,000
12,02,000
5,00,000
3,50,000
90,000
30,000
95,000
1,05,000
12,000
54,000
12,000
25,000
4,000
12,500
12,000
Other Information:
1)         A customer to whom a sum of Rs. 2,50,000 has been advanced, has become insolvent and it is expected that 40% of the sum can be recovered from his estate. Interest due at 15% on his debt has not been provided in the books.
2)         Provision for bad and doubtful debts on other debts necessary Rs. 50,000.
3)         Provide Rs. 3,50,000 for Income-tax.
4)         The directors desire to declare 10% dividend.
Make the necessary assumptions and prepare the Profit and Loss Account of XYZ Bank Ltd. in accordance with law.

Profit and Loss Account of XYZ Bank Ltd
For the year ended on 31-3-15
Particular
S. No.
Amt.
        i.            Income:
Interest earned
Other Income

13
14

20,67,500
2,15,000
Total

22,82,500
      ii.            Expenses:
Interest Expended
Operating Expenses
Provisions and contingencies
(1,50,000+50,000+3,50,000)

15
16


12,02,000
2,36,500
5,50,000
Total

19,88,500
    iii.            Net Surplus for the year: (I – II)

2,94,000


2,94,000

    iv.            Appropriation:
Transfer to Statutory Reserve( @ 25%)
Transfer to other reserves
Dividend to shareholders (on capital @ 10%)
Balance carried forward



73,500
--------
50,000
1,70,500


2,94,000
SCHEDULE 13 – INTEREST EARNED

Amount
Interest and Discount received (20,30,000+37,500)
       20,67,500

SCHEDULE 14 – OTHER INCOME

Amount
Commission, Exchange and brokerage
Profit on sale of investment                          
Rent received  
90,000
95,000
30,000

2,15,000
SCHEDULE 15 – INTEREST EXPENDED

Amount
Interest paid on deposit (12,02,000
12,02,000


SCHEDULE 16 – OPERATING EXPENSES


Amount
Payment to Employees
Rent Paid
Stationary
Postage
Audit Fees
Depreciation on Bank Properties
Director’s fees
Other Expenses 
1,05,000
54,000
12,000
25,000
4,000
12,500
12,000
12,000

2,36,500

4. (a) (1) Draw a proforma of Revenue Account of life insurance company with imaginary figures.           10
Ans: PROFORMA OF REVENUE ACCOUNT AND PROFIT AND LOSS ACCOUNT OF A LIFE INSURANCE COMPANY
Rounded Rectangle: Name of the Insurer: 
Registration No. and Date of Registration with the IRDA

FORM A-RA



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

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

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

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

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

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

1












2


3






4



(2) How is bonus is reduction of premium treated in the Revenue Account?
Ans: Bonus in Reduction of Premium: Instead of paying bonus in cash, the insurer may deduct the bonus from the premium due from the insured. This is known as bonus in reduction of premium. If it is given in trial balance, then it is shown as expense in revenue account. But if it is given as adjustment, then it is shown both as expense and income in revenue account. The following journal entry is passed:
Bonus in reduction of Premium A/c                    Dr.
To Premium Account
Or

(b) The Young India Life Assurance Co. Ltd. had a paid-up share capital of Rs. 25,00,000 dividend into 25,000 equity shares of Rs. 100 each. Its net liability on all contracts in force as on 31st March, 2018 was Rs. 2,25,00,000 and on 31st March, 2017, this liability was Rs. 2,00,00,000. From the following figures, extracted from the books of the company for the year ended 31st March, 2018, prepare Revenue Account. The company has paid an interim bonus of Rs. 11,00,000 and 20% of the surplus is to be allocated to shareholders, 10% to catastrophe reserve and the balance being carried forward:                                                                                 14

Rs.
Life fund as on 1st April, 2017
Premium less re-insurance
Interest, dividend and rent
Fines and fees
Income-tax
Management expenses
Annuities paid
Commission
Surrenders
Bad debts
Claims less re-insurance claims
Consideration for annuities granted
2,45,00,000
1,38,00,000
75,00,000
40,000
11,80,000
17,50,000
1,00,000
5,40,000
8,50,000
10,000
89,00,000
4,90,000

Young India Life Insurance Co. Ltd.
REVENUE ACCOUNT
For the year ended 31st March, 2018
Particulars
Schedule
Amount
Premium Earned (Net)
Income from Investments:
Interest, Dividend and Rent
Surplus on Revaluation of Reversions
Other Income:
Consideration for Annuities Granted
Fines and Fees
1
1,38,00,000

75,00,000
40,0000

4,50,000
40,000
Total (A)

2,18,30,000
Commission
Operating Expenses relating to Insurance Business
Re-insurance irrecoverable
Income Tax
2
3
5,40,000
17,50,000
10,000
11,80,000
Total (B)

34,80,000
Benefits Paid (Net)
Interim Bonus Paid
Change in Valuation of Liability in respect of Life Policies:
Net Liability on all Contracts in
force on 31-3-12                                        2,25,00,000        
Less: Net Liability on all Contracts
In force on 31-3-2011                               2,00,00,000
4
98,50,000
11,00,000




2,50,000
Total (C)

1,34,50,000
Surplus (D) = (A) – (B) – (C)

49,00,000
Appropriations:
Transfer to Shareholders A/c (20% of Rs.49,00,000)
Transfer to Catastrophe Reserve (10% of Rs. 49,00,000)
Balance being Fund for Future Appropriations


9,80,000
4,90,000
34,30,000
Total (D)

49,00,000
Schedule Forming Part of Revenue A/c
SCHEDULE 1 – PREMIUMS EARNED (NET)
Particulars
Amount
Premium less Reinsurance Premium
1,38,00,000
SCHEDULE 2 – COMMISSION EXPENSES
Particulars
Amount
Commission Paid
5,40,000
SCHEDULE 3 – OPEERATING EXPENSES RELATED TO INSURANCE BUSINESS
Particulars
Amount
Management Expenses
17,50,000
SCHEDULE 4 – BENEFITS PAID

Particulars
Amount
Claims less Reinsurance Claims
Annuities
Surrenders
89,00,000
1,00,000
8,50,000

98,50,000

5. (a) Point out the main features of accounts of general insurance companies. What statutory books are required to be maintained by a general insurance company under the Insurance Act? 6+8=14
Ans: Insurance contracts that do not come under the ambit of life insurance are called general insurance. The different forms of general insurance are fire, marine, motor, accident and other miscellaneous non-life insurance. The tangible assets are susceptible to damages and a need to protect the economic value of the assets is needed. For this purpose, general insurance products are bought as they provide protection against unforeseeable contingencies like damage and loss of the asset. Like life insurance, general insurance products come at a price in the form of premium. 
Features of General Insurance Companies:
a)      General Insurance policy is a contract of indemnity in which the insurer agrees to reimburse only the actual loss suffered subject to the average clause.
b)      General Insurance contract is for a short period usually a year.
c)       The subject matter is any physical property, assets, ship or cargo etc.
d)      General insurance has only the element of protection and not the element of investment.
e)      Insurable interest on the subject matter must be present both at the time of effecting policy as well as when the claim falls due.
f)       General insurance is a contract of indemnity. The insured can claim only the actual amount of loss from the insurer.
g)      General insurance does not have any surrender value or paid up value.
h)      In case of general insurance, business profit is determined after making provision for unexpired risks.
i)        Loss is measurable in case of general insurance.
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’.
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) From the following particulars, you are required to prepare Fire Revenue Account for the year ended 31st March, 2018:                 14

Rs.
Reserve for unexpired risk as on 1st April, 2017
Additional reserve as on 1st April, 2017
Claims paid
Management expenses
Insurance Premium
Interest and dividends
Income-tax on interest and dividends
Re-insurance premium
Profit on sale of investments
Legal charges regarding claims
Re-insurance claims recoveries
Commission on direct business
Commission on re-insurance ceded
Commission on re-insurance accepted
Outstanding claims:
On 31st March, 2018
On 31st March, 2017
52,000
12,000
65,000
28,250
1,14,000
6,400
800
7,000
1,600
400
2,800
11,200
600
400

7,000
9,000
The company calculates the Reserve for unexpired risks @ 50% of the net premium each year and increase additional reserve by 5% of net premium annually.

Fire Revenue A/c
For the year ended 31/03/2018
Seven Star Fire Insurance Company Limited
Particulars
S. No.
Amount
Premium (Net)
Profit on sale of investment
Interest Divided & Rent
1
1,0,6,950
1,600
6,400
Total (A)

1,14,950
Claims (Net)
Commission
Operating Expenses
2
3
4
60,600
11,000
28,250
Total (B)

99,850
Operating Profit (Total: C = A – B)

15,100
Schedules forming Part of the Revenue account:
1. Premium (Net)
Particulars
Amount
Premium recovered
Less: Premium on reinsurance ceded
1,14,000
7,000

Adjustment for unexpired risk:
Closing balance of unexpired risk:
50% of Net Premium                                                                            60,500
Add: Additional reserve (6,050+12,000)                                           18,050
                                                                                                                    78,050             
Less: Opening unexpired risk:
Unexpired risk                                               52,000
Add: Additional reserve                              12,000                             (64,000)
1,21,000







(14,050)

1,06,950
2. Claims Incurred (Net):
Particulars
Amount
Claims Paid
Add: Legal expenses (associated with claim)
65,000
400

Less: Reinsurance recoveries (ceded)
Less: Estimate liability in beginning.
Add: Estimated liability in the end
65,400
2,800
9,000
7,000

60,600

3. Commission:
Particulars
Amount
Commission on direct business
Add: Commission accepted
Less Commission ceded
11,200
400
600

11,000

4. Operating Expenses:
Particulars
Amount
Management Expenses
28,250

28,250

6. (a) What is Investment Account? Explain about the nature and purposes of an Investment Account. How are Investment Accounts prepared when there is issue of bonus shares and right shares by the company? 2+3+3+6=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.
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.
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.
Treatment of Bonus shares, Rights Shares and Brokerage in investment account
Bonus Shares: When successful companies issue bonus shares to capitalize their reserves, the shareholders are not required to pay any amount for such shares. The number of shares will be entered in the number column and nothing will be added in the amount of principal or capital column. When bonus shares are sold, the profit on such shares is calculated by deducting average cost of shares sold from sale price of bonus shares. Valuation of investment in shares should be made at market value or average cost price of shares, whichever is lower.
Right shares: If shares are first offered to the existing shareholders as a matter of their right, such shares are called right shares. Such shares may be purchased by the shareholder or the right may be renunciated in favour of a third party for a consideration. If the shares are purchased, the number of shares & amount paid will be entered in the number & principal columns actively. If the shares are not subscribed for but are sold in the market, the amount received will be entered only in the profit and loss account.
Brokers and Brokerage: 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. Such commission is called brokerage. Brokerage is added with cost of investments and deducted with sale proceeds of investments.
Or
(b) Mr. Investor furnishes the following details relating to his holding in 6% Government Bonds of Rs. 100 each:
Opening balance face value Rs. 60,000 (cost Rs. 59,000)
1.3.2017 100 units purchased ex-interest at Rs. 98.
1.7.2017 Sold 200 units ex-interest of the original holding at Rs. 100.
1.10.2017 Purchased 50 units at Rs. 98 cum-interest.
1.11.2017 Sold 200 units ex-interest at Rs. 99 out of the original holdings.
Interest dates are 30th September and 31st March. Mr. Investor closes his books every 31st December. Show the Investment Account as it would appear in his books.       14


















Investment A/c
For the year ended 31-12-2011
Date
Particulars
Face Value
Interest
Cost
Date
Particulars
Face Value
Interest
Cost
1.1.11



1.3.11



1.10.11






31.12.11


To Bal b/d



To Bank



To Bank






To P/L A/c
(Bal. fig.)

60,000



10,000



5,800






-
900
(60,000x6%x3/12)

200
(10,000x6%x4/12)

-






3,425
59,000



9,800



4,900






467

31.3.11



1.7.11



30.9.11






1.11.11

31.12.11




31.12.11
By Bank



By Bank



By Bank






By Bank

By Accrued Interest


Balance c/d
(4,900+9,800+59,000/60,000x20,000)

-



20,000



-






20,000



-


35,800



2,100
(70,000x6%x1/2)

300



1,500
(50,000x6%x1/2)




100



525


-


-



20,000



-






19,800



-


34,367



75,800
4,525
74,167


75,800
4,525
74,167

 (OLD COURSE)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions
1. (a) Fill in the blanks:                                                                                                                                   1x4=4
1)         Banks in India are under the general supervision of the RBI.
2)         In the contract of insurance, there are two parties namely the insurer and the insured.
3)         All properties of the insolvent, both movable and immovable are shown under _______ of Statement of Affairs.
4)         Changes in the price level are not taken into account in the preparation of _______ Accounts.
(b) Write True or False:                                                                                                                                             1x4=4
1)         Rebate on bills discounted for a banking company is an income.      False, advance income
2)         General insurance includes all types of insurance. false
3)         The insolvency proceedings begin with an insolvency petition field in a proper court of law.
4)         In an Investment Account, cum-interest means including accrued interest on an investment.  True
2. Write short notes on any four of the following:                                                                             4x4=16
a)         Slip System of Posting.
b)         Bonus in Reduction of Premium.
c)          Statement of Affairs.
d)         Cum-dividend and Ex-dividend.
e)         General Price Level Accounting.
3. (a) From the following particulars, prepare Profit and Loss Account of Safety Bank Ltd. for the year ended on 31st March, 2018:                                                                     12

Rs. (‘000)
Interest on Deposits
Commission (Cr.)
Interest on Loans
Sundry Charges (Dr.)
Rent and Taxes
Payment to Employees
Discount on Bills Discounted
Interest on Overdrafts
Interest on Cash-credit
Auditor’s fees
Director’s fees
Bad debts to be written off
3,200
100
2,490
100
200
500
1,490
1,600
2,320
30
20
130
Or
(b) Give a proforma of Balance Sheet of a banking company, showing imaginary figures.                                               12
4. (a) What is general insurance? How does it differ from life insurance? Explain ‘Reserve for Unexpired Risk’ in case of general insurance.                                           2+4+5=11
Or
(b) From the following particular, prepare a Fire Revenue A/c of Tinsukia Fire Insurance Company for the year ended on 31st March, 2018:                                              11

Rs.
Reserve for unexpired risk on 1st April, 2017
Additional Reserve as on 1st April, 2017
Claims paid
Re-insurance claim
Management expenses
Premium
Re-insurance premium
Commission on direct business
Commission on re-insurance ceded
Commission on re-insurance accepted
Legal charges regarding claim
Survey expenses
Profit on sale of investments
Interest and Dividend
Income-tax thereon
Contribution to fire brigade
Outstanding claims
1,40,000
30,000
80,000
10,000
20,000
2,00,000
12,000
20,000
2,000
1,000
2,000
1,000
1,000
20,000
2,000
1,000
5,000
The company calculates its reserve for unexpired risks at 50% of the net premium each year and maintain additional reserve same as in the last year.
5. (a) (1) Mention the various lists that have to be prepared in support of the Statement of Affairs, prepared under the Indian Insolvency Act, giving short particulars as to the contents of each of them.                                             6
(2) Distinguish between a Statement of Affairs and a Balance Sheet.                                                           5
Or
(b) From the following information prepare a Statement of Affairs of Mr. Dukhi Ram who is declared insolvent on 31st March, 2018:                                                                      11

Rs.
Cash in hand
Debtors:
Good                                                                                             12,500
Doubtful (expected to realize Rs. 2,000)                                  6,000
Bad                                                                                                10,000
Shares in X Ltd.
Bills receivable (Good)
Other securities (Rs. 30,000 pledged with partly secured creditors and the balance with fully secured creditors)
Drawings
Trade expenses
Creditors (unsecured)
Creditors (partly secured)
Creditors (fully secured)
Preferential claims
2,500



28,500
50,000
42,500

2,80,000
1,74,000
74,000
2,50,000
1,70,000
2,37,000
7,500
6. (a) (1) Discuss about the nature and purposes of an Investment Account.                                        3+4=7
(2) Distinguish between Cum-interest and Ex-interest.                                                  4
Or
(b) On 1.1.2017, 6% 200 debentures of Rs. 100 each in Y Ltd. were held as investments by X Ltd. at a cost of Rs. 18,200. Interest is payable on 31st December. On 1.4.2017, Rs. 4,000 of such debentures were purchased by X Ltd. @ Rs. 98 cum-interest and on 1.9.2017, Rs. 6,000 debentures were sold @ Rs. 96 ex-interest. On 1.12.2017, Rs. 8,000 debentures were sold @ Rs. 99 cum-interest. On 31.12.2017, X Ltd. sold Rs. 10,000 debentures @ Rs. 95 ex-interest. Prepare Investment Account for 6% Debentures in Y Ltd. in the books of X Ltd. Ignore income-tax (apply FIFO method). 11
Investment A/c
Date
Particulars
Face Value
Interest
Cost
Date
Particulars
Face Value
Interest
Cost
1.1.11


1.4.11



31.12.11


To Balance


To Bank



To P/L A/c

20,000


4,000


-


60
(40,000x6%x3/12)

1,220
18,200


3,860
(40x98 – 60)

680
1.9.11


1.12.11



31.12.11

By Bank


By Bank



By Bank

6,000


8,000



10,000
240
(6,000x6%x8/12)
440
(8,000x6%x11/12)

600
5,760
(60x96)

7,480



9,500


24,000
1,280
22,740


24,000
1,280
22,740

7. (a) What is Inflation Accounting? What are its objectives? Discuss in brief the CPP method of Inflation Accounting. 2+4+5=11
Or
(b) The Balance Sheet of PK Ltd. revealed the following among other things:

31.3.2016 (Rs.)
31.3.2017 (Rs.)
Investments
Book Debts
Cash at Bank
Advances for supply of Materials
Due to Suppliers
5,50,000
4,50,000
60,000
1,00,000
2,50,000
6,10,000
5,50,000
80,000
1,26,500
3,22,000
During 2016 – 17, material prices rose by 15% and those of finished goods by 10%. Calculate the Monetary Working Capital Adjustment to be made under Current Cost Accounting System.                               11

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