Advanced Financial Accounting Solved Question Papers 2021, Dibrugarh University B.Com 5th Sem CBCS Pattern

1. (a) Write ‘True’ or ‘False’: 1x4=4

a) Banking companies are governed by the Banking Regulation Act, 1989.

Ans: False, 1949

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

Ans: True

c) General insurance includes all types of insurances.

Ans: False

d) Investments may be fixed or current asset.

Ans: True

(b) Fill in the blanks:       1x4=4

a) A banking company cannot grant loan to any of its directors.

b) Valuation Balance Sheet is prepared to know surplus or deficiency of life insurance.

c) In case of marine insurance, the provision against unexpired risk is 100%.

d) Investments are freely bought and sold in the stock exchange through banks and brokers.

2. Write short notes on (any four):          4x4=16

a) 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

b) Surrender Value.

Ans: Surrender Value: The term surrender value indicates the value that we receive from the insurance issuer after we surrender the policy before maturity. Surrender, here, means termination or cancellation of the life policy or returning the policy to the insurance company before the stipulated time. The policy no longer exists after the company clears off the payment to the policyholder. There can be a number of reasons behind surrendering our policy. One of the most common reasons is inability to pay the premiums. The policyholders often feel they have chewed more than they can swallow. Surrendering our policy means we will not have to pay premiums any further. When we terminate a policy, the company pays us certain amount because we have paid premiums in the previous years of which a portion has been used to cover risk, and another portion has been used as an investment. The investment portion with its increased value will be returned to us after deducting some termination charges. We might even get some bonus as well. This amount is known as the surrender value. However, keep in mind that the surrender value factor plays a key role in minimizing the bonus.  

c) Fire Insurance.

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. 

A contract of fire insurance is a contract where in the insurer, in consideration of the premium paid, undertakes to compensate the insured for any loss or damage caused by fire. It is a contract of indemnity.

d) Valuation Balance Sheet.

Ans: A life policy is generally taken for a number of years. The premium received for such long-term contracts cannot be treated as income for ascertaining the profits for that year. For example, under a contract of annuity only one premium as initial payment is received whereas the annuitant is required to be paid annuity till he dies. In case of life insurance, the claim must arise either on death or expiry of the period of the policy, whichever is earlier. That the future premium may or may not be received depends on the existence of the insured. Thus on a particular date a liability of the corporation is to be calculated as the premiums to be received in future will generally be less than the amount payable as claims. There is a gap between claims which are expected to arise and premiums which are expected to be received. This gap is known as net liability. Thus it becomes desirable to create a reserve equal to its net liability in order to ascertain the profit made by the corporation. The Life Insurance Corporation of India makes the valuation of its net liability every year in order to ascertain its profit. This is done by a person known as actuary and is a highly complicated mathematical process. For calculating net liability, the actuaries calculate the present value of future liability on all the policies in force as well as present value of future premium to be received on policies in force. The excess of the present value of future liability over the present value of future premium is called net liability as per actuarial valuation.

The balance in the life assurance fund cannot be taken as the profit made by the life insurance business. For the purpose of ascertaining the profit, the insurance company should calculate its net liability as per actuary and compared it with life assurance fund on a particular date in order to calculate the surplus/deficiency. This comparison is made by preparing a valuation Balance Sheet. If the life insurance fund is more than the net liability, the difference represents the surplus. On the other hand, the excess of net liability over the life assurance fund represents deficiency for the inter-valuation period. A specimen form of valuation balance sheet is given as follows:

Valuation Balance Sheet

As on date……………………………...

To Net Liabilities per actuary’s valuation To Surplus

By Life Assurance funds as per Balance Sheet By Deficiency

Only surplus (and not deficiency) will be shown in the Balance sheet. With profit policyholder have a right to participate in the profit of life insurance business to the extent of 95% of true profit and remaining 5% is shareholder’s share. For calculation of true profit, surplus as disclosed by valuation Balance Sheet must be adjusted by:

a)       Adding interim bonus (if any) as it is really advance payment of bonus.

b)      Deducting any expenses still to be incurred.

Out of 95% of true profit, interim bonus already paid should be deducted to calculate the amount due to the policyholder.

e) Columnar Investment Account.

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) Discuss the following items relating to a banking company:             3½ x 4=14

a) Cash Credit and Overdraft.

Ans: Cash Credit: It is an arrangement by which the customer is granted the right to borrow money from time to time upto a certain limit. Cash credit is usually given on hypothecation or pledge of stocks. The bank usually charges a higher banks interest on the actual amount withdrawn than that charged on loan because the bank has to keep the amount allowed as cash credit always ready under the fear that money allowed may be demanded at any time.

Overdraft: This facility is available to a customer who operates a current account with the bank. This facility is granted to customers who have high goodwill & name for honest dealings. In case of bank overdraft, customer is permitted to overdraw money upto a certain level. The facility of overdraft is beneficial to the customer as he has to pay interest only upon the sum overdrawn by him & not upon the maximum limit of the overdraft.

b) Non-performing Assets.

Ans: 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.

c) Statutory Reserve.

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.

d) Liability for 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.

Or

ADVANCED FINANCIAL ACCOUNTING PAST EXAM QUESTION PAPERS

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

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CBCS PATTERN: 2021 (Held in 2022)

(b) From the following information, prepare Profit & Loss A/c of North East Bank Ltd. for the year ended on 31^st March, 2021:     14

	Rs. (‘000)
Interest on Loans Interest on Fixed Deposits Commission Payment to Employees Discount on Bills Discounted Interest on Cash Credit Rent, Taxes and Lighting Interest on Overdraft Directors’ fees Auditors’ fees Interest on Savings Bank Deposits Postage and Telephone Expenses Printing and Stationery Sundry Expenses	5,180 6,340 164 1,080 2,120 4,460 360 3,080 60 24 1,360 28 58 34

Additional information:

	Rs. (‘000)
(1) Provide for contingencies (2) Transfer to reserve (3) Transfer to Central Government	400 300 400

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 life Insurance Companies

Under the Insurance Act, 1938 it is obligatory on the part of all insurance companies including the general insurance companies to maintain the following books which may be called ‘statutory books’.

1.       The registrar of policies: This book contains the following particulars in respect of each policy issued:

a)       The name and address of the policyholders.

b)      The date when the policy was affected.

c)       A record of any assignment of the policy.

2.       The registrar of claims: This book should contain the following particulars in respect of each claim:

a)       The date of claim.

b)      The name and address of the claimant.

c)       The date on which the claim was discharged.

d)      In the case of a claim which is rejected, the date of rejection and the ground for rejection.

3.       The register of licensed insurance agents: This book should contain the following particulars in respect of each agent:

a)       Name and address of every insurance agent appointed.

b)      The date of appointment.

c)       The date on which appointment ceased, if any.

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

a)       Proposal register.

b)      New premium cash book.

c)       Renewal premium cash book.

d)      Agency and branch cash book.

e)      Petty cash book.

f)        Claims cash book.

g)       General cash book.

h)      Agency credit journal.

i)        Agency debit journal.

j)        Lapsed and cancelled policies book.

k)       Chief journal.

l)        Commission book.

m)    Agency ledger.

n)      Policy loan ledger.

o)      General loan ledger.

p)      Investment ledger.

Or

(b) The following information has been supplied relating to Jai Bharat Life Insurance Company for the year ending on 31^st March, 2021:

	Rs.
Life Assurance Fund Insurance Premium Interest, Dividend and Rent Received Fines and Fees Bonus in cash Income Tax Management Expenses Bonus in Reduction of Premium Commission Surrender Value Surplus on Revaluation of Reversion Purchased Reassurance Balance Irrecoverable Claims Consideration for Annuities Granted	24,50,000 13,80,000 7,50,000 720 1,58,400 1,18,500 1,75,000 1,976 54,000 85,200 4,800 1,250 8,90,000 45,000

According to actuarial valuation, the net liability on the policies of the company including the annuity transactions amounted to Rs. 22,50,000. The surplus is to be allocated as 25% to shareholders, 70% to policyholders and the balance to be carried forward to the next period. The company also paid interim bonus amounting to Rs. 1,03,806. Prepare the Revenue a/c on the basis of the above information and also show the Valuation Balance Sheet.    10+4=14

5. (a) From the following particulars, you are required to prepare the Fire Revenue A/c of the North Bank Fire Insurance Company Ltd. for the year ending on 31^st March, 2021:                                            14

	Rs.
Claims Paid Claims Outstanding on 01-04-2020 Claims Intimated and Accepted but not Paid Premium Received Reinsurance Premium Commission on Direct Business Claims Intimated but not Accepted on 31-03-2021 Commission: Reinsurance Ceded Reinsurance Accepted Expenses of Management Reserve for Unexpired Risk on 01-04-2020 Additional Reserve for Unexpired Risk on 01-04-2020 Bonus in Reduction of Premium	4,20,000 42,000 65,000 10,60,000 1,80,000 2,20,000 8,000   12,000 6,000 2,80,000 3,90,000 40,000 15,000

You are asked by the management to provide for additional reserve for unexpired risk at 1% of the net premium in addition to the opening balance.

Or

(b) What is ‘general insurance’? How does it differ from life insurance? Explain ‘reserve for unexpired risk’ in case of general insurance.           3+5+6=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. 

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.
Element	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.
Duration	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.
Indemnity	Life insurance is not based on the principle of indemnity.	General insurance is a contract of indemnity. The insured can claim only the actual amount of loss from the insurer.
Loss measurement	Loss is not measurable.	Loss is measurable.
Surrender value or paid up value	Life insurance policy has a surrender value or paid value.	General insurance does not have any surrender value or paid up value.
Contingency of risk	There is an element of certainty.	There is an element of uncertainty and there may be no claim.

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

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.

6. (a) Write notes on the following:        5+5+4=14

a) Cum-interest purchase and ex-interest purchase.

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.

b) Cum-interest sale and ex-interest sale.

Ans: 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.

c) Features of Investment Account.

Ans: 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.

Or

(b) Assam Investment Ltd. holds 1,000, 15% Debentures of Rs. 100 each in Brahmaputra Industries Ltd. as on 1^st April, 2020 at a cost of Rs. 1,05,000. Interest is payable on 30^th June and 31^st December every year. On 1^st May, 2020, 500 Debentures are purchased cum-interest at Rs. 53,500. On 1^st November, 2020, 600 Debentures are sold ex-interest at Rs. 57,300. On 30^th November, 2020, 400 Debentures are purchased ex-interest at Rs. 38,400. On 31^st December, 2020, 400 Debentures are sold cum-interest for Rs. 55,000. Prepare Investment A/c valuing holdings on 31^st March, 2021 at cost.  14

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