Advanced Financial Accounting Solved Question Papers 2019, Dibrugarh University

Advanced Financial Accounting Solved Question Paper 2019 (November)
Commerce (Speciality)
Course: 301: Advance Financial Accounting)
Full Marks: 80
Pass Marks: 32
The figures in the margin indicate full marks for the questions.

1. (a) Fill in the blanks:      1x4=4

1) As per the Finance Act, 2005, banks are allowed to issue preference shares.

2) Life insurance business is carried on by Life Insurance Corporation of India since 1956.

3) The general insurance business was taken over by the Central Government with effect from 1972

4) Purchase price is not the real price of investment.

(b) State whether the following statements are True or False:           1x4=4

1) Banks in India are under the general supervision of the Central Government. False, RBI

2) Life insurance is more appropriate to be called life assurance. True

3) Commission on re-insurance ceded is an income.         True

4) Only FIFO method is used to calculate cost of closing balance of investment.   False

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

a) Slip System of Posting.

Ans: 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 entry 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.

b) Insurance Regulatory and Development Authority.

c) Life Assurance Fund.

Ans: Life Fund, also known as Life Assurance Fund is concerned with Life Insurance (Assurance) business. It is an item that appears on the liability side of the company's Balance Sheet. For insurance business, claim is an expenditure while premium is an income. As we all know, the difference between income (premium received) and expenditure (claims paid) should be the profit. In case of life insurance business this approach would pose a problem.

The income premium, is collected periodically (monthly, quarterly, annually) on policies that mature over a long period of time. The expenditure claim, has to be paid either on the maturity of the policy or on the death of the policy holder. Claim as an expenditure is definite while premium as an income is uncertain. The expected amount of premium on a policy will be received only if the policy holder is alive up to the maturity of the policy.

Therefore life insurance companies treat the difference between income and expenditure as a surplus and not profits. This surplus from the revenue account is transferred to the Life Fund, where it gets accumulated. Life fund is shown in schedule – 6 of the balance sheet under the head “Reserves and Surplus”.

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.

d) Marine Insurance.

Ans: Marine insurance is a type of general insurance which covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination. This insurance mainly covers the risk which are associated with the goods transported through water mode of transported. Marine insurance plays an important role in domestic trade as well as in international trade. Most contracts of sale require that the goods must be covered, either by the seller or the buyer, against loss or damage.

e) Cum-interest and Ex-Interest Quotations.

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.

3. (a) Discuss the following items which are related to a banking company:                3½ x 4=14

1) Rebate on Bills Discounted.

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.

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

2) Non-performing Assets.

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 installment 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 installment 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 installment 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.

3) Statutory Reserve.

Ans: Ans: According to Sec 17 of the Banking Regulation Act, 1949 it is obligatory for a banking company operating in India to create a reserve fund and transfer at least 20% of its annual profits as disclosed by its profit and loss account prepared under Sec. 29 and before any appropriations. But this provision is not applicable to banking companies whose reserves together with the amount in the share premium account is not less than the paid-up capital of the banking company.

Where a banking company appropriates any sum or sums from the reserve fund or the share premium account, it shall, within twen­ty-one days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances relating to such appropriation.

4) Statutory Liquidity Ratio.

Ans: Statutory liquidity ratio (SLR): Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers.  Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as % of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. The maximum limit of SLR is 40% and minimum limit of SLR is 15% In India. Present SLR is 18%.

If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that particular day. But, according to the circular, released by the Department of Banking Operations and Development, Reserve Bank of India; if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5% per annum above the Bank Rate.

The main objectives for maintaining the SLR ratio are the following:

1)      To control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.

2)      To ensure the solvency of commercial banks.

3)      To compel the commercial banks to invest in government securities like government bonds.


(b) Following figures are extracted from the books of J. K. Bank Ltd. as on 31.03.2019:


Rs. (‘000)

Interest and discount received

Interest paid on deposits

Share Capital

Commission and exchange

Rent received

Profit on sale of Investment

Salaries paid to employees

Rent paid


Postal expenses

Audit fees

Depreciation on Bank’s properties

Director’s fees

Preliminary expenses















Further Information:

1)    A customer to whom a sum of Rs. 5, 00,000 has been advanced has become insolvent and 40% recovered from his estate.

2)    Provision for bad and doubtful debts necessary Rs. 1, 00,000.

3)    Rebate on bills discounted as on 31.03.2018 Rs. 10,000.

1)    Rebate on bills discounted as on 31.03.2019 Rs. 15,000.

4)    Provide Rs. 7, 00,000 for income tax.

5)    The directors desire to declare 10% dividend.

Prepare Profit & Loss A/c of J. K. Bank Ltd. in accordance with law.           14


NON-CBCS PATTERN: 2012 2013 2014 2015 2016 2017 2018 2019



NON-CBCS PATTERN: 2013 2014 2015 2016 2017 2018 2019

CBCS PATTERN: 2021 (Held in 2022)

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

Ans: 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’.

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.


(b) Best Life Insurance Co. Ltd. had a paid-up capital of Rs. 10, 00,000 divided into 1, 00,000 shares of Rs. 10 each. Its net liability on all contracts in force as on 31st March, 2019 was Rs. 96, 00,000 and on 31st March, 2018, this liability was Rs. 84, 00,000. The company has paid an interim bonus of Rs. 2,60,000 and 20% of the surplus is to be allocated to shareholders, 20% to reserves and balance being carried forward. Following figures are extracted from the books of the company for the year ended 31st March, 2019:



Premium less re-insurance premium

Interest, dividend and rent


Income tax

Management expenses

Annuities paid



Surplus on revaluation of reversions

Re-insurance irrecoverable

Claims less re-insurance claims

Consideration for annuities granted













Prepare Revenue A/c of Best Life Insurance Co. Ltd. for the year ended 31st March, 2019.       14

5. (a) What do you mean by ‘Reserve for Unexpired Risk’? How and why is it created in General Insurance? Also distinguish between General Insurance and Life Insurance.            2+4+4+4=14

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

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

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

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

Additional reserve for unexpired risk

Ø  In a particular year the management may feel that the percentage of premium recommended by the General Insurance Council is not sufficient to meet the unexpired risks. In such a situation they may provide additional reserve. Such additional reserve for unexpired risk will also be debited to the revenue account.

Ø  The balance will be shown in the balance sheet as in the case of normal reserve for unexpired risk, and will be transferred to the credit of next year’s revenue account.

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

Difference between Life insurance and General Insurance

Basis of difference

Life Insurance

General Insurance

Subject Matter

The subject matter of insurance is human life.

The subject matter is any physical property, assets, ship or cargo etc.


Life Insurance has the elements of protection and investment or both.

General insurance has only the element of protection and not the element of investment.

Insurable Interest

Insurable Interest must be present at the time of affecting the policy.

Insurable interest on the subject matter must be present both at the time of effecting policy as well as when the claim falls due.


Life Insurance policy usually exceeds a year and is taken for longer period ranging from 5 to 30 years or whole life.

General insurance policy usually does not exceed a year.


(b) Prepare a Revenue A/c in respect of Fire Business from the following details for the year ended 31st March, 2019:   14



Reserve for unexpired risk on 01.04.2018 @ 50%

Additional Reserve as on 01.04.2018

Estimated liabilities for claims:

Intimated on 01.04.2018


Claims paid

Legal expenses

Medical expenses

Re-insurance, recoveries of claims

Bad debts

Premium recovered

Premium on re-insurance accepted

Premium on re-insurance ceded

Commission on re-insurance accepted

Commission on direct business

Commission on re-insurance ceded

Expenses of management

Interest, dividend and rent

Profit on sale of investments




















Create Reserve on 31st March, 2019 on the same extent as on 1st April, 2018.

6. (a) (1) What is Investment A/c? Discuss about the features and purposes of Investment A/c. 2+4+4=10

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 shows nominal value of investment, second column show interest and dividend and third column shows cost of investment or sale proceeds of investment.

3. It is prepared for each share, bond and debenture separately.

4. It is prepared on cost basis.

5. Balance of Investments are valued at cost or market price whichever is lower in case of short term investments and at cost in case of long term investments.

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.

(2) Distinguish between Cum-interest and Ex-interest in Investment A/c.          4

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.

Difference between Cum-interest and Ex-interest





It means the price of debentures with interest

It means price of debentures without interest.

Right to interest

The buyer gets the right to received interest paid after the sale.

The seller retains the right to receive interest accrued during his holding.


The price is higher than what would have to be paid otherwise.

The price is lower than what would have to be paid otherwise.

Accrued interest

In case of cum-interest nothing is payable for interest accrued.

In case of ex-interest, accrued interest is payable.


(b) Mr. Babu bhai furnishes the following details relating to his holding in 6% Government Bonds:

Opening Balance

(On 01.04.2018)





: 1,200 bonds of Rs. 100 each at a cost of Rs. 1, 18,000.


: 200 bonds purchased ex-interest at Rs. 98.

: Sold 400 bonds ex-interest out of the original holding at Rs. 100.

: Purchased 100 bonds at Rs. 98 cum-interest.

: Sold 400 bonds ex-interest at Rs. 99 out of the original holdings.

Interests are calculated as on 30th June and 31st December. Mr. Babu Bhai closes his books on every 31st March. Show the Investment A/c as it would appear in his books. Working note should be a part of your answer.    14

(Old Course)

Full Marks: 80

Pass Marks: 32

Time: 3 hours

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

1)    Non-banking assets are shown in Schedule _________ of a bank Balance Sheet.

2)    In case of marine insurance, the provision against unexpired risk is maintained at _________% of net premium.

3)    The Presidency Towns Insolvency Act, _________ applies to the persons residing in the Presidency Towns of Mumbai, Kolkata and Chennai.

4)    Investment A/c is a _________ A/c.

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

1)    A bank can open a branch only at the permission of the Reserve Bank of India.

2)    Valuation Balance Sheet is prepared to know surplus or deficiency of the life insurance business.

3)    Preferential creditors are shown under List C of the Statement of Affairs.

4)    By the term inflation, we mean a rise in the value of money and a fall in general price level.

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

a)    Rebate on Bills Discounted.

b)    Life Insurance Corporation Act, 1956.

c)    Deficiency A/c.

d)    Objectives of Investment Accounting.

e)    Mid-period Conversion.

3. (a) Explain in relation to Bank Accounting:               3x4=12

1)    Cash credit and overdraft.

2)    Cash reserve ratio.

3)    Core banking.

4)    Non-performing assets.


(b) Prepare the Profit & Loss A/c with necessary schedule of Trinity Bank Ltd. for the year ended 31st March, 2019:  12


Rs. (‘000)

Interest on loans

Interest on deposits

Commission, exchange and brokerage

Discount on bills discounted (gross)

Payment to employees

Interest on cash credit

Rent and rates

Interest on overdrafts

Directors’ fees

Auditors’ fees

Postal expenses

Printing and stationery

Sundry expenses














Other Information:


Rs. (‘000)

(1) Rebate on bills discounted

(2) Bad debts

(3) Provision for Income Tax




 4. (a) (1) What are the different types of insurance contracts? Explain them in brief.

(2) How is profit or surplus ascertained and distributed by a life insurance company?         7+4=11


(b) From the following information, prepare a Revenue A/c of North-East Life Insurance Company for the year ended 31st March, 2019:      11


Rs. (‘000)

Life assurance fund as on 1st April, 2018


Interest, dividends and rents

Consideration for annuities granted

Fines for revival of lapsed policies

Claims paid

Bad debts

Expenses of management


Bonus in reduction of premiums

Annuities paid


Surplus on revaluation of reversions purchased

Income tax paid

Bonus in cash
















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


(b) Mr. Ramesh Kumar filed a petition of insolvency on 30th June, 2018. His books showed the following balances:




Cash in Hand

Fixture and Fittings  (estimated to produce Rs. 1,200)

Stock-in-Trade  (estimated to produce Rs. 18,000)

Sundry Creditors:

Trade Creditors

Bills Payable

Sundry Debtors:


Doubtful (estimated at 50%)


Bank Overdraft




























Other Information:

1)    Liability on bills discounted amounting to Rs. 7,500 (expected to rank Rs. 1,500)

2)    His household furniture, etc. was valued at Rs. 3,750. He owned a house valued at Rs. 11,250, having a mortgage on it of Rs. 9,000 at 4% p.a. Interest thereon was paid up to the preceding 31st December.

3)    Preferential creditors amounted to Rs. 525 (include in Sundry Creditors) and Rs. 225 for rates on the house.

Prepare a Statement of Affairs and Deficiency A/c.          7+4=11

6. (a) What are the special features of Investment Accounts? How are stock exchange transactions (sale and purchase of securities) recorded in books?          6+5=11


(b) Jaipur Investment Ltd. holds 1,000, 15% debentures of Rs. 100 each in Udaipur Industries Ltd. as on 1st April, 2018, at a cost of Rs. 1,05,000. Interest is payable on 30th June and 31st December each year. On 1st May, 2018, 500 debentures are purchased cum-interest at Rs. 53,500. On 1st November, 2018, 600 debentures are sold ex-interest at Rs. 57,300. On 30th November, 2018, 400 debentures are purchased ex-interest at Rs. 38,400. On 31st December, 2018, 400 debentures are sold cum-interest for Rs. 55,000. Prepare Investment A/c valuing holding on 31st March, 2019 at cost (applying FIFO method).                 11

7. Out of Syllabus

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