Advanced Financial Accounting Solved Question Papers 2021
Dibrugarh University B.Com 5th Sem CBCS Pattern
2021
(Held in January/February, 2022)
(Discipline
Specific Elective)
(For
Honours/Non-Honours)
Paper:
DSE-502 (Group-I)
(Accounting
and Finance)
(Advanced
Financial Accounting)
Full
Marks: 80
Pass
Marks: 32
Time:
3 hours.
The
figures in the margin indicate full marks for the questions.
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
CBCS PATTERN: 2021 (HELD IN 2022)
ADVANCED FINANCIAL ACCOUNTING PAST EXAM SOLVED PAPERS
NON-CBCS PATTERN: 2013 2014 2015 2016 2017 2018 2019
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 31st 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 31st 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 31st
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 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.
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 1st April, 2020 at a cost of Rs. 1,05,000.
Interest is payable on 30th June and 31st December every
year. On 1st May, 2020, 500 Debentures are purchased cum-interest at
Rs. 53,500. On 1st November, 2020, 600 Debentures are sold
ex-interest at Rs. 57,300. On 30th November, 2020, 400 Debentures
are purchased ex-interest at Rs. 38,400. On 31st December, 2020, 400
Debentures are sold cum-interest for Rs. 55,000. Prepare Investment A/c valuing
holdings on 31st March, 2021 at cost. 14
***
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