Mahesh

Telangana & Andhra Pradesh BIEAP TS AP Intermediate Inter 2nd Year Telugu Study Material Textbook Solutions Guide Questions and Answers PDF Free Download, TS AP Inter 2nd Year Telugu Blue Print Weightage 2022-2023, Telugu Academy Intermediate 2nd Year Telugu Textbook Pdf Download are part of AP Inter 2nd Year Study Material Pdf.

Students can also read the AP Inter 2nd Year Telugu Syllabus & AP Inter 2nd Year Telugu Important Questions for exam preparation.

AP Intermediate 2nd Year Telugu Study Material Pdf Download | Sr Inter 2nd Year Telugu Textbook Solutions

Inter 2nd Year Telugu Poems పద్య భాగం

• Poem 1 సత్య ప్రాశస్త్యము
• Poem 2 శాంతి కాంక్ష
• Poem 3 హనుమత్సందేశము
• Poem 4 కన్యక
• Poem 5 కర్మభూమిలో పూసిన ఓ పువ్వా….!
• Poem 6 ఈ దారి ఎక్కడికి పోతుంది?

Inter 2nd Year Telugu Textbook Lessons గద్య భాగం

• Chapter 1 మన ఆటలు
• Chapter 2 అర్థ విపరిణామం
• Chapter 3 చాటువులు
• Chapter 4 వేమన కవిత్వము
• Chapter 5 నా జీవిత యాత్ర
• Chapter 6 జాతీయోద్యమ కవిత్వం

Inter 2nd Year Telugu Non-Detailed ఉపవాచకం నందిని

• Chapter 1 గవేషణ
• Chapter 2 తెరచిన కళ్ళు
• Chapter 3 ఆశ ఖరీదు అణా

Inter 2nd Year Telugu Grammar

Intermediate 2nd Year Telugu Grammar Pdf

• భాషాభాగాలు
• వాక్య విజ్ఞానం
• ఛందస్సు
• అలంకారాలు
• సంక్షిప్తీకరణ

Intermediate 2nd Year Telugu Syllabus

AP Inter 2nd Year Telugu Syllabus

We hope that this Telangana & Andhra Pradesh BIEAP TS AP Intermediate Inter 2nd Year Telugu Study Material Textbook PDF Download 2022-2023 helps the student to come out successful with flying colors in this examination. This Sr Inter 2nd Year Telugu Study Material will help students to gain the right knowledge to tackle any type of questions that can be asked during the exams.

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 10th Lesson Accounts from Incomplete Records Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 10th Lesson Accounts from Incomplete Records

Short Answer Questions

Question 1.
What is meant by accounts from Incomplete records?
Answer:
Accounting records that are not strictly kept according to the double entry system are known as accounts from incomplete records. It simply means the principles of the double entry system are not being followed for all transactions.

Question 2.
Define accounts from Incomplete records.
Answer:
Definition: According to R.N. Carter, a single entry cannot be termed as a system, as it is hot based on any scientific system like a double entry system, for this purpose, a single entry is nowadays known as the preparation of accounts from incomplete records.

Question 3.
What are the uses of Incomplete records?
Answer:
Uses of accounts from incomplete records:

• Single entry is a simple method of recording transactions.
• It is less expensive when compared to the double-entry system of bookkeeping.
• It is mainly suitable for small business concerns with a limited number of transactions.
• It is very easy to follow, a person without any adequate knowledge of the principles of accounting can understand it.
• Ascertainment of profit or loss is very easy.

Question 4.
Write briefly the salient features of Incomplete records.
Answer:
Features of accounts from incomplete records:

• It is not a systematic method of recording transactions.
• It is very common to keep only personal accounts.
• It avoids real and nominal accounts.
• It is very common to keep a cashbook to record cash receipts and cash payments.
• This system lacks uniformity as it differs from firm to firm.
• It is most suitable and used by sole traders and partnership concerns.

Question 5.
Give two main differences between a statement of affairs and a balance sheet.
Answer:
The following are the differences between a Statement of Affairs and a Balance Sheet.

Basis	Statement of Affairs	Balance Sheet
1. Purpose	It shows the financial position as well as finding out capital in ascertaining profit/loss.	It shows the financial position on a particular date.
2. Source	It is prepared from ledger balances and partly from other particulars and estimates etc.	It is prepared from balances only.
3. Accounting Method	It is prepared when accounts are prepared under a single entry.	It is prepared when accounts are maintained double-entry system.
4. Reliability	It is not regarded as reliable as it is based partly on accounts and partly on other information.	It is reliable as it is based on actual figures.
5. Capital Account	Capital is the excess of assets over liabilities.	Capital is taken from the ledger.
6. Trail Balance	Trail balance is not prepared.	Trail balance is prepared.
7. Omission	In this statement, omission assets and liabilities cannot be tracked.	Any omission of an asset or liability can be easily traced as the total will not agree.

Question 6.
How to ascertain profit under Incomplete records?
Answer:
Under a single-entry system, net profit is ascertained by calculating capital at the end and capital at the beginning by preparing two statements of affairs. Then the capital at the end will be added by drawings during the year and subtracting additional capital brought in. The difference between the adjusted capital and capital at the beginning is either a net profit or a net loss.

Question 7.
Write in brief the limitations of Incomplete records of bookkeeping.
Answer:
The following are the limitations of accounts from incomplete records.

• It is not a scientific method of accounting because it does not record the two-fold aspect of each transaction.
• No trail balance can be prepared as it does not record the duel aspect of each transaction, so, the arithmetical accuracy of the books cannot be checked.
• In the absence of nominal accounts, trading and profit and loss account cannot be prepared.
• In the absence of real accounts, it is not possible to know the exact financial position of the business.
• An internal check is not possible, so the possibility of fraud or misappropriation is greater in the case of a single entry.
• Accounts prepared under a single entry do not inspire confidence in outsiders.
• It is difficult to ascertain the value of a business, specifically goodwill if the owner wishes to sell his business.

Question 8.
Write any differences between the double-entry system and the single-entry system.
Answer:
The following are the differences between a double-entry system and a single-entry system.

Basis	Double Entry System	Single Entry System
1. Type	It is a perfect and complete system of bookkeeping.	It is an incomplete system and a crude method.
2. Nature	This system is scientific and follows certain accounting principles.	This system is unscientific and does not follow accounting principles.
3. Two Aspects	Both the debit and credit aspects of each transaction are recorded.	Both aspects are not recorded.
4. Records	It provides complete and detailed records of the business.	It does not provide complete and detailed records of the business.
5. Accounts	In this, all types of accounts, namely personal, real and nominal accounts are maintained.	In this, personal accounts are maintained except the cashbook. Real and nominal accounts are ignored.
6. Trail Balance	The arithmetical accuracy of accounts can be checked by preparing a trial balance.	Trail balance cannot be prepared to check the arithmetical accuracy.
7. Ascertainment of Profit	Profit can be ascertained by preparing trading and profit and loss a/c.	The difference between capital at the beginning and end is treated as profit.
8. Cost	Relatively it is more expensive.	Relatively it is less expensive.
9. Suitability	It is suitable for all types of business organisations.	It is suitable for only small business concerns.
10. Errors	Errors can be easily detected and rectified.	Errors cannot be detected and rectified.
11. True Financial Position	The balance sheet can be prepared to know the true and fair financial position.	The balance sheet cannot be prepared and only a statement of affairs can be prepared to know the financial position in a rough manner.

Textual Exercises

Question 1.
From the following find the profit earned by a trader.
Capital at the beginning of the year – ₹ 7,500
Capital at the end of the year – ₹ 10,000
Solution:
Statement of Profit or Loss

Question 2.
Calculate the profit or loss of a concern
Capital at the beginning of the year – ₹ 15,000
Capital at the end of the year – ₹ 14,000
Solution:
Statement of Profit or Loss

Question 3.
Calculate the missing figure
Capital at the beginning – ?
Capital at the end – ₹ 36,000
Capital introduced – ₹ 9,400
Drawings – ₹ 5,600
Loss – ₹ 2,800
Solution:

Question 4.
Find out the profit from the following data:
Capital at the beginning of the year – ₹ 40,000
Capital at the end of the year – ₹ 45,000
Drawings during the year – ₹ 5,000
Capital introduced during the year – ₹ 2,500
Solution:
Statement showing Profit or Loss

Question 5.
Find out the profit from the following data:
Capital at the beginning of the year – ₹ 60,000
Capital at the end of the year – ₹ 67,500
Drawings during the year – ₹ 7,500
Additional capital introduced during the year – ₹ 3,750
Solution:
Statement showing Profit or Loss

Question 6.
Ascertain profit earned by a trader who keeps these books under a single entry system.
(i) Excess of assets over liabilities as of 31-12-2014 – ₹ 26,150
(ii) Additional capital introduced during the year – ₹ 7,500
(iii) Drawings during the year – ₹ 4,800
(iv) Capital as on 01-01-2014 – ₹ 15,000
Solution:
Statement showing Profit or Loss

Question 7.
Following the information given below prepare this statement of profit or loss.
(i) Capital at the end of the year – ₹ 2,00,000
(ii) Capital at the beginning of the year – ₹ 1,20,000
(iii) Drawings made during the period – ₹ 30,000
(iv) Additional capital introduced – ₹ 50,000
Solution:
Statement showing Profit or Loss

Question 8.
Mr. Gopal maintains his books on single entry method he was given the following information:
Capital on 01-04-2013 – ₹ 38,000
Capital on 31-3-2014 – ₹ 44,000
Drawings during the year – ₹ 14,000
Additional capital introduced during the year – ₹ 8,000
You are required to calculate profit or loss.
Solution:
Statement showing Profit or Loss

Question 9.
Mr. Jeevan maintains his books in the single entry system he gives the following information.
Capital on 01-04-2013 – ₹ 48,000
Drawings dining the year – ₹ 15,000
Capital as on 31-03-2014 – ₹ 54,000
Additional capital introduced during the year – ₹ 9,000
You are requested to prepare a statement of profit or loss for the 31-03-2014
Solution:
Statement showing Profit or Loss

Question 10.
Mr. Ramesh commenced business on 1st April 2013 with a capital of ₹ 35,000. On 31st March 2014, his position was as follows.
Furniture – ₹ 2,000
Cash in hand – ₹ 10,000
Machinery – ₹ 18,000
Creditors – ₹ 5,000
Debtors – ₹ 20,000
Bills Payable – ₹ 3,000
During the year he withdrew ₹ 12,000 for his personal use and introduced additional capital ₹ 6,000 to find out the profit or loss made by Mr. Ramesh during the year.
Solution:
Statement of Affairs as of 31st March 2014

Statement showing Profit or Loss

Question 11.
Mr. Harsha maintains his books on single-entry systems he gives you the following information.
Capital on 01-04-2013 – ₹ 8,000
Capital on 31-03-2014 – ₹ 9,500
Drawings for the year – ₹ 2,000
Capital introduced during the year – ₹ 1,500
You are required to calculate the profit that Harsha earned.
Solution:
Statement showing Profit or Loss

Question 12
Mr. Ganesh maintains his books on single entry method. He gives you the following information.
Capital on 01-01-2013 – ₹ 40,000
Drawings during the year – ₹ 15,000
Capital on 31-12-2014 – ₹ 45,000
Fresh capital during the year – ₹ 6,000
Prepare the statement of profit or loss.
Solution:
Statement showing Profit or Loss

Question 13.
Mr. X keeps books in the single-entry system. Find the profit from the following particulars.
Capital on 31-03-2014 – ₹ 80,000
Capital on 1-04-2013 – ₹ 70,000
Additional capital as of 2013-2014 – ₹ 4,000
Drawings made during the year – ₹ 3,000
Solution:
Statement showing Profit or Loss

Question 14.
From the following details, ascertain Raju’s capital as of 01-01-2014.
Cash in hand – ₹ 20,000
Building- ₹ 80,000
Cash at Bank – ₹ 80,000
Plant – ₹ 1,20,000
Debtors – ₹ 1,20,000
Creditors – ₹ 60,000
Stock – ₹ 60,000
Bills Payable – ₹ 20,000
Solution:
Statement of Affairs as on 1-1-2014

Question 15.
Mr. Mehta started his readymade garments business on April 1, 2013, with a capital of ₹ 50,000. He did not maintain his books according to the double entry system. During the year he introduced fresh capital of ₹ 15,000. He withdrew ₹ 10,000 for personal use. On March 31, 2014, his assets and liabilities were as follows:
Total creditors ₹ 90,000; Total debtors ₹ 1,25,600; Stock ₹ 24,750; Cash at bank ₹ 24,980.
Calculate the profit or loss made by Mr. Mehta during the first year of his business using the statement of affairs method.
Solution:
Statement of Affairs as of 31st March 2014

Statement showing Profit or Loss

Question 16.
Mr. J. Keeps his books by a single entry. He started the business on 1st January 2014 with ₹ 20,000 on 31st December 2014 his position was as under.
Assets: Cash in hand ₹ 500; Cash at bank ₹ 1,000; Furniture ₹ 2,500; Plant ₹ 10,000; Sundry debtors ₹ 5,000; Stock ₹ 9,000 and Bills receivables ₹ 1,000.
Liabilities: Sunday creditors ₹ 4,000; Bills payable ₹ 500 and Outstanding expenses ₹ 500. Ascertain the profit or loss made by J.
Solution:
Statement of Affairs as on 31-12-2014

Statement showing Profit or Loss

Question 17.
Mr. Ravikumar keeps his books on single entry his position on 31st December 2013 was as follows:
Cash at bank ₹ 3,000, Stock ₹ 20,000; Debtors ₹ 30,000, Machinery ₹ 50,000 and Creditors ₹ 25,000. His position
on 31st December 2014 was as follows. Cash at bank ₹ 4,000; Stock ₹ 25,000; Debtors ₹ 45,000; Machinery ₹ 50,000 and Creditors ₹ 25,000. During the year he introduced ₹ 10,000 as further capital and withdrew from business ₹ 3,000 per month.
From the above information ascertain the profit or loss made by Mr. Ravikumar for the year ended 31st December 2014.
Note: Drawings ₹ 3,000 per month, per year 36,000 (3,000 × 12 months)
Solution:
Statement of Affairs as on 31-12-2013

Statement of Affairs as on 31-12-2014

Statement showing Profit or Loss

Question 18.
From the following particulars prepare a statement of profit and loss for the year ended 31st December 2014.

The proprietor drew at the rate of ₹ 750 per month he introduced ₹ 3,000 as fresh capital.
Solution:
Statement of Affairs as on 1-1-2014

Statement of Affairs as on 31-12-2014

Statement showing Profit or Loss

Question 19.
A Trader keeps his books by the single entry method. His position on 31st December 2013 is as follows. Cash at bank ₹ 9,000, Stock ₹ 60,000 Debtors ₹ 90,000, Machinery ₹ 1,50,000 and creditors ₹ 69,000. His position on 31st December 2014 was as follows. Cash at bank ₹ 12,000, Stock ₹ 75,000, Debtors ₹ 1,35,000, Machinery ₹ 1,35,000 and Creditors ₹ 75,000.
During the year the trader introduced ₹ 30,000 as further capital in the business and withdrew ₹ 900 per month. From the above, you are required to ascertain the profit or loss made by the trader for the year ended 31-12-2014.
Solution:
Statement of Affairs as on 31-12-2013

Statement of Affairs as on 31-12-2014

Statement showing Profit or Loss

Question 20.
The assets and liabilities of Mr. well on 01-01-14 and 31-12-2014 were as follows.

Calculate the profit after charging interest on capital in the beginning at 5 percent per annum after providing interest on drawings at 6 percent. Drawings were ₹ 14,000
Solution:
Statement of Affairs as on 1-1-2014

Statement of Affairs as on 31-12-2014

Statement showing Profit or Loss

Question 21.
Mr. Vijay starts his business with ₹ 30,000 in cash as his capital on 1st April 2013, At the end of the year, his position was as follows. Creditors ₹ 7,500; Debtors ₹ 6,000; Cash at Bank ₹ 12,750; Stock ₹ 7,500; and Machinery ₹ 15,000. During the year he withdrew ₹ 1,125 every month. On 1st October 2013, he introduced a further capital of ₹ 7,500. You are required to ascertain the profit or loss made by him during the year after considering the following adjustments. Machinery was to depreciate at 12% and a reserve of 2% was to be raised against Debtors; Also prepare a statement of affairs on 31 March 2014.
Solution:
Statement of Affairs as on 31-3-2014


Statement showing Profit or Loss

Question 22.
Gopal and Krishna kept their books of accounts under a single entry system. Their capital accounts on 1st April 2013 show a balance of ₹ 2,00,000 and ₹ 1,00,000 respectively. The net profits are to be shared as Gopal 2/3 and Krishna 1/3. During the year they have withdrawn ₹ 10,000 and ₹ 7,500. On March 2014 their assets and liabilities were as follows. Assets: Furniture ₹ 75,000; Stock ₹ 1,75,000; Debtors ₹ 1,25,000; Bills receivable ₹ 25,000; Cash at bank ₹ 10,000.
Liabilities: Sundry creditors ₹ 25,000; Bills payable ₹ 12,500.
Prepare a statement of affairs on 31st March 2014 and calculate the divisible profits of the partners.
Solution:
Statement of Affairs as on 31-3-2014


Statement of profit or loss for the year ending 31-3-2014

Question 23.
Ramesh and Rajesh are partners sharing the profit and losses in the ratio of 4 : 1 on 31st March 2013, their capital accounts show a credit balance of ₹ 1,00,000 and ₹ 25,000 respectively. During the year they introduced a fresh capital of ₹ 25,000 and ₹ 6,250 respectively. Also, they have withdrawn ₹ 1,875 and ₹ 625 each month respectively for their personal use. On 31st March 2014. Their business position was as follows:
Assets: Machinery ₹ 58,750; Stock ₹ 61,500; Sundry debtors ₹ 33,125; Bills receivable ₹ 5,375; Cash in hand ₹ 3,750.
Liabilities: Sundry creditors ₹ 25,000. You are asked to prepare a statement of affairs and statement of profit on 31st March 2014 and calculate the divisible profits or losses of the partners.
Solution:
Statement of Affairs as of 31st March 2014


Statement showing profit or loss for the year 2014

Question 24.
Anil and Sunil are partners sharing the profit and losses in the ratio of 3 : 2 on 31 March 2013, their capital accounts show a credit balance of ₹ 12,000 and ₹ 8,000 respectively. On 31st March 2014, their business position was as follows.
Assets: Machinery ₹ 15,000; Stock ₹ 4,000; Bills Receivables ₹ 5,000; Sundry debtors ₹ 7,000;
Liabilities: Sundry creditors ₹ 8,000; Bills payable ₹ 3,000.
You are required to prepare a profit and loss statement of affairs as of the date after taking into the following.
(a) Drawings made during the year by Anil ₹ 3,000, Sunil ₹ 2,000.
(b) Interest on capital is to be allowed at 6%.
Solution:
Statement of Affairs as on 31-3-2014

Statement showing profit or loss for the year ended 31st March 2014

Textual Examples

Question 1.
From the following information prepare the statement of affairs and find out the capital at the beginning.
Cash in Hand – ₹ 10,000
Cash in Bank – ₹ 40,000
Debtors – ₹ 60,000
Stock – ₹ 30,000
Building – ₹ 40,000
Plant – ₹ 60,000
Creditors – ₹ 30,000
Bills payable – ₹ 10,000
Solution:
Statement of affairs at the beginning

Question 2.
Prepare a statement of affairs from the following information and find out the capital at the end of the year.
Stock – ₹ 95,000
Debtors – ₹ 1,30,000
Cash – ₹ 8,000
Bills receivables – ₹ 1,000
Bank overdraft – ₹ 6,000
Creditors – ₹ 37,000
Machinery – ₹ 15,000
Furniture – ₹ 1,000
Solution:
Statement of affairs at the end of the year

Question 3.
From the following information compute the net profit of a trader under a single entry.
Capital at the beginning of the year – ₹ 1,00000
Capital at the end of the year – ₹ 1,50,000
Solution:

Question 4.
Compute the net profit for the year ending 31-03-2014 from the information given below.
Capital as of 1-4-2013 – ₹ 80,000
Capital as on 31-3-2014 – ₹ 75,000
Solution:
Statement of profits or loss

Question 5.
The following information is given below to prepare the statement of profit or loss.
Capital at the beginning of the year, i.e., April 01, 2013 – ₹ 7,50,000
Capital at the end of the year, i.e., March 31, 2014 – ₹ 5,00,000
Capital brought in by the proprietor during the year – ₹ 50,000
Withdrawals by the proprietor during the year – ₹ 3,75,000
Solution:
Statement of profit or loss for the year ended on March 31, 2014

Question 6.
Find out the missing value.
Capital at the beginning of the year – ₹ 30,000
Capital at the end of the year – ₹ 45,000
Drawings – ₹ 5,000
Profit – ₹ 4,000
Additional capital brought in?
Solution:

Question 7.
Gopal started his business on January 01, 2014, with a capital of ₹ 4,50,000 on December 31, 2014, his position was as under.
Cash – ₹ 99,000
Bills Receivables – ₹ 75,000
Plant – ₹ 48,000
Land and Building – ₹ 1,80,000
Furniture – ₹ 50,000
Creditors – ₹ 30,000
He owned ₹ 45,000 from his friend Sukumar on that date. He withdrew ₹ 8000 per month for his household purposes. Ascertain his profit or loss for this year ended December 31, 2014.
Solution:
Books of Mr. Gopal’s Statement of affairs as on December 31, 2014

Statement of profit or loss for the year ended December 31, 2014

Note: Drawing per month (₹ 8,000 × 12 = ₹ 96,000).

Question 8.
Mr. Ashok keeps his books on incomplete records following information is given below.

During the year he withdrew ₹ 45,000 and introduced ₹ 25,000 as further capital in the business to compute the profit or loss of the business.
Solution:
Books of Mr. Ashok Statement of affairs as on April 01, 2013, and as on March 31, 2014

Statement of profit or loss for the year ended on March 31, 2014

Question 9.
Mr. Shankar keeps his books under single-entry system and the following information is available from his records.

Shankar commenced business on 1st April 2013 with a capital of ₹ 1,27,000. During the year he withdrew ₹ 750 per month for his personal use. Charge depreciation on the plant at 10% and on furniture at 5% you are required to prepare a statement showing profit or loss for the year ended 31-3-2014.
Solution:
Statement of affairs as of 31-03-2014 (Before adjustments)

Statement of profit or loss for the year ended 31-03-2014

Question 10.
Suresh and Ramesh are equal partners in a business in which the books of accounts are kept by a single-entry system. Their combined capital stood at the beginning of the year at ₹ 1,25,000 and the combined capital at the end of the year stood at ₹ 1,75,000. During the year they have withdrawn ₹ 50,000 equally for their personal use and introduced ₹ 37,500 as fresh capital. Compute the profit for the year by preparing a statement of profit.
Solution:
Statement showing Profit or Loss

Question 11.
X and Y are partners sharing profits and losses in the ratio of 3 : 2 who keep their books on a single entry system on 1st April 2013. Their capital accounts show a balance of ₹ 60,000 and 70,000 respectively. During the year they have withdrawn ₹ 2,000 and ₹ 3,000 for their personal use. Find out the capitals at the end of the year. Also, calculate the divisible profit for the year ending 31-03-2014.

Solution:
Statement of affairs as on 31-03-2014

Statement of Profit or Loss as on 31-03-2014

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 9th Lesson Computerised Accounting System Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 9th Lesson Computerised Accounting System

Essay Questions

Question 1.
Define a computerised accounting system. Distinguish between a manual and computerised accounting system.
Answer:
Computerised accounting is a system of accounting in which one can use computers and different accounting software for a digital record of each transaction. The aim of both manual and computerised accounting is to record, classify and summarise accounting transactions. But the following are the differences between manual accounting and computerised accounting.

Differences between manual and computerised accounting systems

Basis	Manual Accounting	Computerised Accounting
1. Definition	Manual accounting system in which we keep a physical register of journals and a ledger for keeping the records of each transaction.	In this system of accounting, we use computers and different accounting software for a digital record of each transaction.
2. Calculation	In manual accounting, all calculations of adding and subtracting are done manually. For example, to find the balance of any ledger account, we will calculate the debit and credit sides, and then we will find the difference for showing the balance.	In computerised accounting, our duty is to record the transactions manually in the database. All the calculations are done by computer System we need not calculate each accounts balance. It is calculated automatically by computerised accounting system.
3. Ledger Accounts	In manual accounting, we check the journal and then transfer figures to related accounts’ debit or credit side through manual posting.	Computerised accounting system will automatically process the system and will make all the accounts, and ledgers because we have pass voucher entries under its respected ledger account.
4. Trail Balance	In this system of accounting, we have to collect information on the balances of all accounts in our ledger. On this basis, we have to prepare a trial balance.	Our computerising accounting system will produce a trial balance automatically.
5. Adjustment Entries Record	Both adjustment journal entries and its posting in the ledger accounts will be done manually one by one.	Only adjustment entries will pass in the computerised accounting system, post in the ledger accounts will be done automatically.
6. Financial Statements	We have to make the financial statements manually by carefully transferring trial balance figures in the income statement and balance sheet.	We need not prepare financial statements manually. Financial statements will become automatic. It will also change after each voucher entry in the system. This facility is not available in the manual accounting system.

Question 2.
Discuss the advantages of computerised accounting system over a manual accounting system.
Answer:
Computerised accounting offers the following advantages.
1. Speed: Accounting data is processed faster by using a computerised accounting system than it is achieved through manual efforts.

2. Accuracy: The possibility of error is eliminated in a computerised accounting system because the primary accounting data is entered for all the subsequent usage and the process is preparing the accounting reports.

3. Reliability: The computer system is well-adapted to performing repetitive operations. They are immune to tiredness, boredom, or fatigue. As a result, computers are highly reliable compared to human beings.

4. Up-to-date information: The accounting records, in a computerised accounting system, is updated automatically as and when accounting data is entered and stored. Therefore, the latest information pertaining to discounts gets reflected when accounting reports are produced and printed.

5. Real-time user interface: Most automated accounting systems are interlinked through a network of computers. This facilitates the availability of information to various users at the same time on a real-time basis (That is spontaneous).

6. Automated Document Production: Most computerised accounting systems have standardised, user-defined formats of accounting reports that are generated automatically. The accounting reports such as cash books, trail balances, and statements of accounts are obtained just by the click of a mouse in a computerised accounting environment.

7. Scalability: In a computerised accounting system, the requirement of additional manpower is confined to data entry operators for strong additional vouchers. The additional cost of processing additional transactions is almost negligible. As a result, computerised accounting systems are highly scalable.

8. Legibility: The data displayed on the computer monitor is legible. This is because the characters (alphabets, numerals, etc.) are typewritten using standard fonts. This helps in avoiding errors caused by untidy written figures in a manual accounting system.

9. Efficiency: The computer-based accounting systems ensure better use of resources and time. This brings about efficiency in generating decisions, useful information, and reports.

10. Quality reports: The inbuilt checks and untouchable features of data handling facilitate hygienic and true accounting reports that are highly objective and can be relied upon.

11. MIS Reports: The computerised accounting system facilitate the real-time production of management information reports, which will help management to monitor and control the business effectively. Debtors analysis would indicate the possibilities of defaults and also the concentration of debt and its impact on the balance sheet.

12. Storage retrieval: The computerised accounting system allows the users to store data in a manner that does not require a large amount of physical space. This is because the accounting data is stored in hard disks, pen drives, CD/DVD-ROMS, and floppies that occupy a fraction of physical space.

13. Motivation and employees’ interest: The computer system requires specialised training of staff, which makes them feel more valued. This motivates them to develop an interest in the job.

Question 3.
Explain the limitations of the computerised accounting system.
Answer:
The following are the limitations of the computerised accounting system.
1. Cost of training: The sophisticated computerised accounting packages generally require specialised staff personnel. As a result, a huge training cost is incurred to understand the use of hardware and software on a continuous basis because newer types of hardware and software are acquired to ensure efficient and effective use of computerised accounting systems.

2. Staff opposition: Whenever the accounting system is computerised, there is a significant degree of resistance from the existing staff, partly because of the fear that they shall be made redundant and largely because of the perception that they shall be less important to the organisation.

3. Disruption: The accounting processes suffer a significant loss of work time when an organisation switches over to computerised accounting system. This is due to changes in the working environment that requires accounting staff to adapt to new systems and procedures.

4. System failure: The danger of the system crashing due to hardware failures and the subsequent loss of work is a serious limitation of computerised accounting system. However, providing backup arrangements can initially check unanticipated errors. Since the computers lack capability to judge, they cannot defect the unanticipated errors as human being commit. This is because the software defect and check errors are a set of programmes for known and anticipated errors.

5. Breaches of security: Computer-related crimes are difficult to defect as any alteration of data may go unnoticed. The alteration of records in a manual accounting system is easily detected at first sight. Fraud and embezzlement are usually committed on a computerised accounting system by altering the data or programmes. Hacking passwords or user rights may change accounting records. This is achieved by tapping telecommunications lines, wiretapping, or decoding programmes. Also, the people responsible for tampering with data cannot be located.

6. Ill-effects on health: The extensive use of computers system may lead to the development of various health problems: bad backs, eyestrain, muscular pains, etc. This effects adversely the working efficiency of accounting staff on one hand and increased medical expenditure on such staff on the other software damage and failure may occur due to attacks by viruses. This is of particular relevance to accounting systems that extensively use internet facilities for their online operations. No foolproof solutions are available as of now to tackle the menaces of attacks on software by a virus.

Question 4.
Explain the various categories of accounting packages.
Answer:
Every computerised accounting system is implemented to perform the accounting activity of recording and storing accounting data and generating reports as per the requirements of the user. From this perspective, the accounting packages are classified into the following categories.

1. Ready-to-use: Ready-to-use accounting software is suited to organisations running small conventional businesses where the frequency or volume of accounting transactions is very low. This is because the cost of installation is generally low and the number of users is limited. Ready-to-use software is relatively easier to learn and people (accountant) adaptability is very high. This also implies that the level of secrecy is relatively low and software is prone to data fraud. The training needs are simple and sometimes the supplier of software offers the training of the software for free. However, this software offers little scope for linking to other information systems.

2. Customised: Accounting software may be customized to meet the special requirement of the user. Standardised accounting software available in the market may not suit or fulfill user requirements. For example, standardised accounting software may contain the sales voucher and inventory status as separate options. However, when the user requires that inventory status be updated immediately upon entry of the sales voucher and report to be printed, the software needs to be customised.

Customised software is suitable for large and medium businesses and can be linked to other information systems. The cost of installation and maintenance is relatively high because of the high cost to be paid to the vendor for customisation. The customisation includes modification and addition to the software contents, provision for the specified number of users and their authentication, etc. Secrecy of data and software can be better maintained in customised software. Since the need to train the software use is important, the training costs are therefore high.

3. Tailored: This accounting software is generally tailored in large business organisations with multi-users and geographically scattered locations. This software requires specialised training for the users. The tailored software is designed to meet the specific requirements of the users and form an important part of the organizational MIS. The secrecy and authenticity checks and robust in such softwares and they offer high flexibility in terms of the number of users.

Very Short Answer Questions

Question 1.
What is computerised accounting?
Answer:
Computerised accounting is a system of accounting in which one can use computers and different accounting software for a digital record of each transaction.

Question 2.
What is MIS?
Answer:
The computerised accounting system facilitates the real-time production of management information reports, which will help management to monitor and control. The business effectively. Debtors analysis indicates the possibilities of bad debts and also the concentration of debt and its impact on the balance sheet.

Question 3.
Ready to use accounting software.
Answer:
Ready-to-use accounting software is suited to organisations running small/conventional businesses when the frequency or volume of accounting transactions is very low. This is because the cost of installation is generally low and the number of users is limited.

Question 4.
Customised accounting software.
Answer:
Accounting software may be customised to meet the special requirement of the user. For example, standardised accounting software may contain the sales voucher and inventory status as separate options. However, when the user requires that inventory status be updated immediately upon entry of sales voucher and report be printed, the software needs to be customised.

Question 5.
Tailored accounting software.
Answer:
Accounting software is generally tailored to large business organisations with multi-users and geographically scattered locations. This software requires specialised training for the users. The tailored software is designed to meet the specific requirements of the users and forms an important part of the organisational MIS.

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 8th Lesson Company Accounts Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 8th Lesson Company Accounts

Essay Questions

Question 1.
Explain the categories of share capital.
Answer:
From the accounting point of view the share capital of the company can be classified as follows:
1. Authorised capital: Authorised capital is the amount of share capital that a company is authorized to issue to the public by the memorandum of association. It is also called nominal or registered capital.

2. Issued capital: Issued capital is that part of authorised capital which is actually issued to the public for subscription. A company may issue its entire authorised capital or may issue in parts from time to time as per the needs of the company.

3. Subscribed capital: It is that part of the issued capital which has been actually subscribed by the public. This capital can be equal to or less than the issued capital.

4. Called-up capital: It is that part of the subscribed capital which is called up by the company to pay on the allotted shares. The company may decide to call the entire amount or part of the face value of shares.

5. Paid-up capital: That part of the called-up capital has been actually paid by the shareholders.

6. Reserve capital: A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such an uncalled amount is called the reserve capital of the company.

Question 2.
Explain the classes of shares.
Answer:
Shares refer to the units into which the total share capital of the company is divided. Thus, a share is a fractional part of the share capital and forms the bases of ownership interest in the company. The persons who contribute money through shares are all called shareholders.

As per section, 86 of the Companies Act a company can issue two types of shares 1. Preference shares, 2. Equity shares.

1. Preference shares: According to section, 85 of the Companies Act, 1956, a preference share is one that fulfills the following two conditions.

• That it carries a preferential right to dividend, to be paid as a fixed amount or an amount calculated by a fixed rate of the nominal value of each share before any dividend is paid to the equity shareholders.
• With respect to the capital, it carries or will carry, on the winding up of the company, the preferential right to the repayment of capital before anything is paid to equity shareholders.

2. Equity shares: Equity shares are also called ordinary shares. According to section 85 of the Companies Act, of 1956, an equity share is a share that is not a preference share. In other words, shares that do not enjoy any preferential right in the payment of dividends or repayment of capital are called as equity shares. The equity shareholders are entitled to share the distributable profits of the company after satisfying the dividend rights of preference shareholders. The dividend on equity shares is not fixed and it varies from time to time depending upon the profits available for distribution.

Question 3.
Explain the types of issues of shares.
Answer:
A salient feature of the share capital of a company is that the amount on its shares can be gradually collected in easy installments spread over a period of time depending upon its growing financial requirement. The first installment is collected along with the application and is known as application money. The second installment is termed allotment money and the remaining money is collected in installments are termed a first call, second call, and final call. The word final is suffixed to the last installment. However, this in no way prevents a company from calling the full amount on shares right at the time of application.

Short Answer Questions

Question 1.
What is authorised capital?
Answer:
Authorised capital is the amount of share capital that a company is authorised to issue to the public by the memorandum of association. It is also called Nominal or Registered capital.

Question 2.
What is a preference share?
Answer:
A preference share is a share that carries preferential rights regarding the payment of dividends by a fixed rate and repayment of capital at the time of winding up the company.

Question 3.
What is an Equity share?
Answer:
Equity shares are also called ordinary shares. According to section 85 of the Companies Act, of 1956 an equity share is a share that is not a preference share. In other words, shares that do not enjoy any preferential right in the payment of dividend or repayment of capital is called equity share.

Question 4.
Explain the issue of shares at par.
Answer:
When a company issues its shares at their face value, the shares are known to have been issued at par.
Ex: The face value of the share is ₹ 100 and it is issued for ₹ 100.

Question 5.
Explain the issue of shares at a premium.
Answer:
When a company issues its shares at a price than the face value, it is said to have been issued at a premium. The money collected more than the face value is called the premium.
Ex: If the face value of a share is ₹ 100 and it is issued for ₹ 110.

Question 6.
Explain the issue of shares at a discount.
Answer:
When the company issues its shares at a price less than the face value, it is said to be an issue at a discount. The difference between the face value and the issue price is called ‘Discount’.
Ex: If the face value of the share is ₹ 100 and it is issued at ₹ 90.

Textual Exercises

Question 1.
Dhana Ltd. issued 20,000 shares of ₹ 100 each for the subscription. Payable at ₹ 40 per share on application, ₹ 40 per share on the allotment, and the balance ₹ 20 on the first and final call. All the amounts were duly received. Make journal entries in the books of the company.
Solution:
Journal entries in the books

Question 2.
Charan Ltd. decided to issue 10,000 shares of ₹ 200 each for the subscription. Payable at ₹ 50 per share on application, ₹ 100 per share on the allotment, and the balance ₹ 50 on the first and final call. All the money was duly received. Write journal entries in the books of the company.
Solution:
Journal entries in the books of Charan Ltd.

Question 3.
Gayatri cloths Ltd. issued 15,000 shares of ₹ 150 each, payable at ₹ 50 per share on the application, ₹ 50 per share on the allotment, and the balance of ₹ 20 on the first call, ₹ 20 on the second call, and ₹ 10 final calls. All the money was duly received. Prepare journal entries in the books of the company.
Solution:
Journal entries in the books of Gayatri Cloths Ltd.

Question 4.
Jayaram Furniture’s Ltd. issued 20,000shares of ₹ 100 each at a premium of ₹ 10 per share payable as follows, on application ₹ 40 (including premium per share), on allotment ₹ 40 (including premium ₹ 5 per share) the remaining balance ₹ 30 on first and final call, the Issue was hilly subscribed. All the money was duly received. Make the Journal entries in the books of the company.
Solution:
Journal entries in the books of Jayaram Furniture Ltd.

Question 5.
Anusha Ltd. has an authorized capital of ₹ 1,00,00,000 in shares of 10 each issued 10,000 at a premium of ₹ 2 per share payable at ₹ 4 on application (including premium ₹ 1 per share), ₹ 5 on the allotment (including premium ₹ 1 per share) the remaining balance is ₹ 3 on first and final call, the issue was fully subscribed. All the money was duly received. Prepare the Journal entries in the books of the company.
Solution:
Journal entries in the books of Anusha Ltd.

Question 6.
Karthik Ltd. issued 50,000 shares of ₹ 100 at a premium of ₹ 10 per share, payable at ₹ 40 on the application including premium ₹ 5 per share), ₹ 40 on allotment 0ncluding a premium of ₹ 5 per share) the remaining balance of ₹ 30 on the first and final call, the issue was fully subscribed. All the money was duly received. Record the Journal entries in the books of the company.
Solution:
Journal entries in the books of Karthik Ltd.

Question 7.
Padmavati Ltd. issued to the public for the subscription of 10,000 shares of ₹ 100 each at a discount of 10% per share, payable at ₹ 30 on application, ₹ 40 on the allotment, and ₹ 20 on the first and final call, the issue was fully subscribed. All the money was duly received. Write the Journal entries in the books of the company.
Solution:
Journal entries in the books of Padmavathi Ltd.

Question 8.
Abishek Ltd. issued 20,000 shares of ₹ 100 each at a discount of 10% per share, the shares were payable at ₹ 40 on application, ₹ 30 on the allotment, and ₹ 20 on the first and final call, the issue was fully subscribed. All the money was duly received. Record the Journal entries in the books of the company.
Solution:
Journal entries in the books of Abishek Ltd.

Question 9.
Venkat Ltd. issued 50,000 shares of ₹ 10 each at a discount of 10% per share, the shares were payable at ₹ 3 on application, ₹ 3 on an allotment, and ₹ 3 on the first and final call, and the issue was fully subscribed. All the money was duly received. Give Journal entries in the books of the company.
Solution:
Journal entries in the books of Venkat Ltd.

Textual Examples

Question 1.
Pavithra Ltd. issued 10,000 shares of ₹ 10 each for the subscription. Payable at ₹ 3 per share on application, ₹ 4 per share on the allotment, and the balance on the first and final call. All the amounts were duly received. Make journal entries in the books of the company.
Solution:
Books of Pavithra Ltd. Journal

Question 2.
Bhavani Ltd. issued 20,000 shares of ₹ 20 each to the public for subscription as follows, payable ₹ 5 on application, ₹ 10 on the allotment, and the remaining balance on the first and final call.
Give the Journal entries in the books of the company.
Solution:
Books of Bhavani Ltd. Journal

Question 3.
Siva Ltd. issued 30,000 shares of ₹ 30 each to the public for subscription as follows, payable ₹ 5 on application, ₹ 10 on the allotment, and the remaining balance on the first call ₹ 5, second call ₹ 5, and final call ₹ 5. Give the journal entries in the books of the company.
Solution:
Books of Siva Ltd. Journal

Question 4.
Sarojanamma Ltd. issued 20,000 shares of ₹ 10 each at a premium of ₹ 5 per share, payable as follows, on application, ₹ 5 (including ₹ 2 premium) per share, on allotment ₹ 7 (including premium ₹ 3) per share, and the balance on first and final call ₹ 3. Applications were received for 20,000 shares and allotment was made to all, to make journal entries.
Solution:
Books of Sarojanamma Ltd. Journal

Question 5.
Ramaiah Ltd. issued 50,000 shares of ₹ 10 each at a premium of ₹ 5 per share, payable as follows, on application ₹ 5 (including premium ₹ 2) per share, on allotment ₹ 6 (including premium ₹ 3) per share, the remaining balance ₹ 4 on first and final call, the issue was fully subscribed. All the money was duly received. Make Journal entries.
Solution:
Books of Ramaiah Ltd. Journal

Question 6.
Suguna Motors Ltd. issued to the public for the subscription of 10,000 shares of ₹ 10 each at a discount of 10% per share, payable at ₹ 4 on the application, ₹ 3 on the allotment, and ₹ 2 on the first and final call, the issue was fully subscribed. All the money was duly received. Write the Journal entries in the books of Suguna Motors Ltd.
Solution:
In the books of Suguna Motors Ltd. Journal Entries

Question 7.
Ravi Tractor Ltd. issued to the public for the subscription of 20,000 shares of ₹ 10 each at a discount of 10% per share, payable at ₹ 2 on application, ₹ 3 on the allotment, and ₹ 4 on the first and final call, the issue was fully subscribed. All the money was duly received. Prepare the Journal entries in the books of the company.
Solution:
In the books of Ravi Tractor Ltd. Journal Entries

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 7th Lesson Retirement / Death of a Partner Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 7th Lesson Retirement / Death of a Partner

Very Short Answer Questions

Question 1.
What is meant by the retirement of a partner?
Answer:
A partner who opts to retire from an existing partnership firm is called ‘Retirement of a partner.

Question 2.
What do you understand by a Gaining ratio?
Answer:
The ratio in which the share of the retiring partner is taken over by other partners is called the ‘Gaining ratio’. To calculate the new profit sharing ratio, the share of profit of the retiring partner taken over by each continuing partner is added to his respective share of profit before the retirement of the outgoing partner.
Gaining ratio = New ratio – Old ratio

Question 3.
What are the adjustments required for the retirement or death of a partner?
Answer:
On the retirement or death of a partner, the existing partnership deed comes to an end and in its place, a new partnership deed needs to be framed whereby the remaining partners continue to do their business on changed terms and conditions. There is not much difference in accounting at the time of retirement or in the event of death. In both cases, we are required to determine the amount due to the retiring partner (in case of retirement) and to the legal representatives (in case of deceased partner) after making necessary adjustments in respect of goodwill, revaluation of assets and liabilities, and transfer of accumulated profits and losses. In addition to the above, the new profit-sharing ratio of the remaining partners and the gaining ratio is to be computed.

Question 4.
How is the account of the deceased partner settled?
Answer:
The deceased partner’s capital account is credited with the balance of capital at the beginning of the year, interest on capital, the share of profit on revaluation of assets and liabilities, the share of undistributed profits, the share of profit to the date of death, and his share of goodwill. The account is debited with drawings to the date of death, interest on drawings, and the balance is transferred to the executor’s account of the deceased partner.

Question 5.
Explain the modes of payment to the retiring partner.
Answer:
The outgoing partner’s account is settled as per the terms of the partnership deed i.e., in lumpsum immediately or in various installments with or without interest. In the absence of any agreement section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive either 6% interest till the date of payment or such share of profits that have been earned with his money (based on capital ratio). If the firm is not in a position to make payment immediately, the amount due is transferred to the retiring partner’s loan account.

Textual Exercises

Question 1.
Madhu, Nehra, and Tina are partners sharing profits in the ratio of 5 : 3 : 2. Calculate the new profit sharing ratio if
1. Madhu retires
2. Nehra retires
3. Tina retires
Solution:
1. New profit sharing ratio, if Madhu retires 3 : 2.
2. New profit sharing ratio, if Nehra retires 5 : 2.
3. New profit sharing ratio, if Tina retires 5 : 3.

Question 2.
Hari, Prasad, and Anwar are partners sharing profits in the ratio of 3 : 2 : 1. Hari retires and his share is taken up by Prasad and Anwar in the ratio of 3 : 2. Calculate the new profit sharing ratio.
Solution:
Old ratio of Hari, Prasad, Anwar = 3 : 2 : 1
Gaining ratio on the retirement of Hari = 3 : 2
New share of continuing partner = Old share + Acquired share from retiring partner
Prasad gets \(\frac{3}{5}\) of Hari share = \(\frac{3}{5} \times \frac{3}{6}=\frac{9}{30}\)
New share = \(\frac{2}{6}+\frac{9}{30}=\frac{10+9}{30}=\frac{19}{30}\)
Anwar gets \(\frac{2}{5}\) of Hari share = \(\frac{2}{5} \times \frac{3}{6}=\frac{6}{30}\)
New share = \(\frac{1}{6}+\frac{6}{30}=\frac{5+6}{30}=\frac{11}{30}\)
∴ New profit sharing ratio = 19 : 11.

Question 3.
Ranjana, Sadhna, and Kamana are partners sharing profits in the ratio 4 : 3 : 2. Ranjana retires, and Sadhna and Kamana decided to share future profits in the ratio of 5 : 3. Calculate the Gaining Ratio.
Solution:
Old profit sharing ratio = 4 : 3 : 2
New ratio = 5 : 3
Sadhna gaining ratio = New ratio – Old ratio
= \(\frac{5}{8}-\frac{3}{9}=\frac{45-24}{72}=\frac{21}{72}\)
Kamana gaining ratio = \(\frac{3}{8}-\frac{2}{9}=\frac{27-16}{72}=\frac{11}{72}\)
Gaining ratio = 21 : 11

Question 4.
Murali, Naveen, and Omprakash are partners sharing profits in the ratio of 3 : 4 : 1. Murali retires and surrenders 2/3rd of his share in favour of Naveen and the remaining share in favour of Omprakash. Calculate new profit sharing and the gaining ratio of the remaining partners.
Solution:
Naveen gets \(\frac{2}{3}\) of Murali share = \(\frac{2}{3} \times \frac{3}{8}=\frac{6}{24}\)
Omprakash gets \(\frac{1}{3}\) of Murali share = \(\frac{1}{3} \times \frac{3}{8}=\frac{3}{24}\)
Naveen new share = \(\frac{4}{8}+\frac{6}{24}=\frac{12+6}{24}=\frac{18}{24}\)
Omprakash new share = \(\frac{1}{8}+\frac{3}{24}=\frac{3+3}{24}=\frac{6}{24}\)
New gaining ratio = 18 : 6 = 3 : 1
Gaining ratio = New ratio – Old ratio
Naveen = \(\frac{3}{4}-\frac{4}{8}=\frac{6-4}{8}=\frac{2}{8}\)
Omprakash = \(\frac{1}{4}-\frac{1}{8}=\frac{2-1}{8}=\frac{1}{8}\)
Gaining ratio = 2 : 1

Question 5.
Vasu, Dasu, and Bosu are partners sharing profits in the ratio of 1 : 2 : 3. Dasu retires and at the time of retirement, goodwill is valued at ₹ 84,000. Vasu and Bosu decided to share future profits in the ratio of 2 : 1. Record the necessary journal entries.
Solution:
Journal Entry

Question 6.
Rama, Krishna, and Reddy are partners in a firm sharing profits and losses in the ratio of 2 : 2 : 1. On Rama’s retirement, the goodwill of the firm is valued at ₹ 46,000. Krishna and Reddy decided to share future profits equally. Record the necessary journal entry for the treatment of goodwill without opening a’ Goodwill Account’.
Solution:
Old ratio = 2 : 2 : 1
New ratio =1 : 1
Krishna gaining ratio = New ratio – Old ratio
= \(\frac{1}{2}-\frac{2}{5} \text { (or) } \frac{5}{10}-\frac{4}{10}=\frac{1}{10}\)
Reddy’s gaining ratio = \(\frac{1}{2}-\frac{1}{5}=\frac{5}{10}-\frac{2}{10}=\frac{3}{10}\) = 1 : 3
Journal Entry

Question 7.
Shanu, Nicee, and Jwalitha are partners sharing profits in the ratio of 1 : 3 : 5. Goodwill is appearing in the books at a value of ₹ 60,000. Nicee retires and goodwill is valued at ₹ 90,000. Shanu and Jwalitha decided to share future profits equally. Record necessary journal entries.
Solution:
Journal Entry

Question 8.
Asha, Deepa, and Lata are partners in the firm sharing profits in the ratio of 3 : 2 : 1. Deepa retires. After making all adjustments relating to revaluation, goodwill and accumulated profit, etc., the capital accounts of Asha and Lata showed a credit balance of ₹ 1,60,000 and ₹ 80,000 respectively. It was decided to adjust the capitals of Asha and Lata in their new profit-sharing ratio. They decided that the requirement of capital is ₹ 2,50,000. You are required to calculate the new capitals of the partners and record necessary journal entries for bringing in or withdrawing of the necessary amounts involved.
Solution:
New profit sharing ratio = 3 : 1
Total capital = 2,50,000
Asha capital = 2,50,000 × \(\frac{3}{4}\) = ₹ 1,87,500
Lata capital = 2,50,000 × \(\frac{3}{4}\) = ₹ 62,500

Question 9.
A, B and C are partners in a firm. B retires from the firm on 1st Jan 2015. On the date of his retirement ₹ 55,000 were due to him. It was decided that the payment will be done in 3 equal yearly installments together with interest @ 10% p.a. on the unpaid balance. Prepare necessary entries.
Solution:
B’s Loan a/c

Question 10.
The Balance Sheet of Mohit, Neeraj, and Sohan who are partners in firm sharing profits according to their capitals as on March 31, 2015, was as under:

On that date, Neeraj decided to retire from the firm and was paid for his share in the firm subject to the following:
1. Buildings to be appreciated by 20%.
2. Provision for Bad debts to be increased to 15% on Debtors.
3. Machinery to be depreciated by 20%.
Prepare necessary accounts and a new Balance Sheet after retirement.
Solution:

Question 11.
Siva, Rama, and Krishna were partners in firm sharing profits in the ratio of 2 : 2 : 1. Their Balance Sheet as on March 31, 2015, was as follows:

Rama retired on March 31, 2015, on the following terms:
(i) Goodwill of the firm was valued at ₹ 70,000 and was not to appear in the books.
(ii) Bad debts amounting to ₹ 2,000 were to be written off.
(iii) Patents were considered valueless.
Prepare Revaluation Account, Partner’s Capital Accounts, and the Balance Sheet.
Solution:

Question 12.
Radha, Krishna, and Satya were in partnership sharing profit and losses in the ratio of 4 : 2 : 1. On April 1, 2015, Krishna retires from the firm. On that date, their Balance Sheet was as follows:

The terms were:
(a) Goodwill of the firm was valued at ₹ 13,000.
(b) Expenses owing to be brought down to ₹ 3,750.
(c) Machinery and Loose Tools are to be valued at 10% less than their book value.
(d) Factory premises are to be revalued at ₹ 24,300.
Prepare:
1. Revaluation account
2. Partner’s capital accounts and
3. Balance sheet of the firm after the retirement of Krishna
Solution:

Question 13.
Suresh, Naresh, and Ramesh are partners sharing profits in the ratio of 3 : 2 : 1. Naresh retired from the firm due to his illness. On that date the Balance Sheet of the firm was as follows:
Books of Suresh, Naresh, and Ramesh Balance Sheet as on March 31, 2015.


Additional information:
(i) Premises have appreciated by 20%, stock depreciated by 10%, and provision for doubtful debts was to be made 5% on debtors.
(ii) Goodwill of the firm valued at ₹ 42,000.
(iii) ₹ 46,000 from Naresh’s capital account be transferred to his loan account and the balance be paid through the bank.
(iv) New profit sharing ratio of Suresh and Ramesh is decided to be 5 : 1.
Give the necessary ledger accounts and balance sheet of the firm after Naresh’s retirement.
Solution:

Question 14.
R, S, and T were carrying on business in partnership sharing profits in the ratio of 3 : 2 : 1 respectively. On March 31, 2015, the Balance Sheet of the firm stood as follows:

S retired on the above-mentioned date on the following terms:
(a) Buildings to be appreciated by ₹ 8,800.
(b) Provision for doubtful debts to be made @ 5% on debtors.
(c) Goodwill of the firm to be valued at ₹ 9,000.
(d) ₹ 5,000 to be paid to S immediately and the balance due to him is to be treated as a loan carrying interest @ 6% per annum.
Prepare the balance sheet of the reconstituted firm.
Solution:

Question 15.
The balance sheet of A, B, and C who were sharing the profits in proportion to their capitals stood on March 31, 2015.
Balance Sheet as on March 31, 2015

B retired on the date of the Balance Sheet and the following adjustments were to be made:
(a) Stock was depreciated by 10%.
(b) Factory building was appreciated by 12%.
(c) Provision for doubtful debts to be created upto 5%.
(d) Provision for legal charges to be made at Rs. 265.
(e) The goodwill of the firm is to be fixed at Rs. 10,000.
(f) The capital of the new firm is to be fixed at Rs. 30,000.
The continuing partners decide to keep their capitals in the new profit sharing ratio of 3 : 2. Work out the final balances in the capital accounts of the firm, and the amounts to be brought in and/or withdrawn by A and C to make their capitals proportionate to the new profit sharing ratio.
Solution:


Note: Capital of the new firm = ₹ 30,000
A’s capital should according to his share = \(\frac{3}{5}\) × 30,000 = ₹ 18,000
C’s capital = \(\frac{3}{5}\) × 30,000 = ₹ 12,000

Question 16.
N, S, and B are partners in firm sharing profits and losses in the ratio of 3 : 1 : 2. The Balance Sheet on April 1, 2015, was as follows:

B retires from the business and the partners agree to the following:
(a) Freehold premises and stock are to be appreciated by 20% and 15% respectively.
(b) Machinery and furniture are to be depreciated by 10% and 7% respectively.
(c) Bad debts reserve is to be increased to ₹ 1,500.
(d) Goodwill is valued at ₹ 21,000 on B’s retirement.
(e) The continuing partners have decided to adjust their capitals in their new profit-sharing ratio after the retirement of B. The capital requirement to continue the firm is ₹ 72,000. Surplus/deficit, if any, in their capital accounts will be adjusted.
Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.
Solution:


Note: Total capital of the firm = ₹ 72,000
The profit sharing ratio of N and S is 3 : 1
Capital of N = 72,000 × \(\frac{3}{4}\) = ₹ 54,000
Capital of S = 72,000 × \(\frac{1}{4}\) = ₹ 18,000

Question 17.
On December 31, 2014, the Balance Sheet of P, Q, and R showed as under:

The partnership deed provides that the profit be shared to the ratio of 2 : 1 : 1 and that in the event of the death of a partner, his executors are entitled to be paid out.
(a) The capital of his credit at the date of the last Balance Sheet.
(b) His proportion of reserves at the date of the last Balance Sheet.
(c) His proportion of profits to the date of death is based on the average profits of the last three completed years.
(d) By way of goodwill, his proportion of the total profits for the three preceding years.
The net profits for the last three years were:
2012 – 16,000; 2013 – 16,000; 2014 – 15,400.
R died on April 1, 2015. He had withdrawn ₹ 5,000 to the date of his death.
Prepare R’s Capital Account that of his executors.
Solution:
Working Notes:
(i) Share of profits (upto the date of death)

Average profits = \(\frac{47,400}{3}\) = ₹ 15,800
Share of profit upto 1st April 2015 = 15,800 × \(\frac{1}{4} \times \frac{3}{12}\) = ₹ 988

(ii) Goodwill:
Total profits = ₹ 47,400
Average profits = \(\frac{47,400}{3}\) = ₹ 15,800
R share of goodwill = 15,800 × \(\frac{1}{4}\) = ₹ 3,950

Question 18.
Following is the Balance Sheet of P, Q, and R as on March 31, 2014.

Q died on June 30, 2014. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:
(a) Amount standing to the credit of the Partner’s Capital account.
(b) Interest on capital at 5% per annum.
(c) Share of goodwill on the basis of twice the average of the past three year’s profit.
(d) Share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit.
Profits for the year ending on March 31, 2012, 2013, and 2014 were ₹ 12,000; ₹ 16,000, and ₹ 14,000 respectively. Profits were shared in the ratio of capital.
Pass the necessary journal entries and draw up Q’s capital account to be rendered to his executor.
Solution:
Working Notes:
(i) Interest on capital = 20,000 × \(\frac{5}{100} \times \frac{3}{12}\) = ₹ 250
(ii) Goodwill:
3 years profits = 12,000 + 16,000 + 14,000 = ₹ 42,000
Average profits = \(\frac{42,000}{3}\) = ₹ 14,000
Goodwill = 2 × 14,000 = ₹ 28,000
Share of goodwill = 28,000 × \(\frac{2}{7}\) = ₹ 8,000
Share of profit:
Profit of 2014 = 14,000 × \(\frac{2}{7} \times \frac{3}{12}\) = ₹ 1,000
Share in reserve = 16,000 × \(\frac{2}{7}\) = ₹ 4,571

Textual Examples

Question 1.
Naveen, Suresh, and Tarun are partners sharing profits and losses in the ratio of 5 : 3 : 2. Tarun retires from the firm, and his share was acquired by Naveen and Tarun in the ratio of 2 : 1. In such a case, calculate the new profit sharing ratio.
Solution:
The old ratio of Naveen, Suresh, and Tarun = 5 : 3 : 2
Gaining ratio of Naveen and Suresh after the retirement of Tarun = 2 : 1
New share of continuing partner = Old share + Acquired share from the outgoing partner
Share acquired by Naveen = \(\frac{2}{10} \times \frac{2}{3}=\frac{4}{30}\)
Naveen’s new share = \(\frac{5}{10}+\frac{4}{30}=\frac{15+4}{30}=\frac{19}{30}\)
Share acquired by Suresh = \(\frac{2}{10} \times \frac{1}{3}=\frac{2}{30}\)
Suresh’s new share = \(\frac{3}{10}+\frac{2}{30}=\frac{9+2}{30}=\frac{11}{30}\)
New ratio = \(\frac{19}{30}: \frac{11}{30}\)
Thus, the new profit sharing ratio of Naveen and Suresh will be = 19 : 11.

Question 2.
Anil, Dinesh, and Ganga are partners sharing profits in the ratio of 6 : 5 : 4. Dinesh retires. Anil and Ganga decide to share the profits of the new firm in the ratio of 3 : 2. Calculate the gaining ratio.
Solution:
The old ratio of all partners = 6 : 5 : 4
New ratio of continuing partners = 3 : 2
Gaining share of continuing partners = New share – Old share
Ami’s gaining share = \(\frac{3}{5}-\frac{6}{15}=\frac{9-6}{15}=\frac{3}{15}\)
Ganga’s gaining share = \(\frac{2}{5}-\frac{4}{15}=\frac{6-4}{15}=\frac{2}{15}\)
Gaining ratio = \(\frac{3}{15}: \frac{2}{15}\)
Thus, the gaining ratio of Anil and Ganga = 3 : 2

Question 3.
M, I, and G are partners sharing profits and losses in the ratio of 2 : 2 : 1 respectively. On March 31, 2015, their Balance Sheet was as under:


G retires on the above date. It was agreed that Machinery is valued at ₹ 1,40,000; Patents at ₹ 40,000; and Buildings at ₹ 1,25,000. Record the necessary journal entries and prepare the Revaluation Account.
Solution:

Question 4.
A, B, and Care partners in firm share profits in the ratio of 3 : 2 : 1. B retires. The goodwill of the firm is valued at ₹ 60,000 and the remaining partner A and C continue to share profits in the ratio of 3 : 1. Pass the journal entries under various alternatives:
(a) If goodwill is raised at full value and retained in books.
(b) If goodwill is raised at full value and written off immediately.
(c) If goodwill is raised to the extent of retiring partner’s share and written off immediately.
(d) If goodwill is not after in the firm’s books at all.
Solution:
(a) If goodwill is raised at full value and retained in books.

(b) If goodwill is raised at full value and written off immediately.

(c) If goodwill is raised to the extent of retiring partner’s share and written off immediately.

(d) If goodwill is not after in the firm’s book at all.

Working Notes:
Calculation of gaining ratio:
Old ratio of all partners = 3 : 2 : 1
New ratio of continuing ratio = 3 : 1
Gaining share of continuing partners = New share – Old share
A’s gaining share = \(\frac{3}{4}-\frac{3}{6}=\frac{9-6}{12}=\frac{3}{12}\)
C’s gaining share = \(\frac{1}{4}-\frac{1}{6}=\frac{3-2}{12}=\frac{1}{12}\)
Gaining ratio = \(\frac{3}{12}: \frac{1}{12}\)
Thus, the gaining ratio of A and C = 3 : 1

Question 5.
D, P, and R are partners sharing profits in the ratio of 5 : 3 : 2. Goodwill appears in the books at a value of ₹ 20,000. P retires from the business. Pass the necessary journal entries in the following cases:
(a) On the day of P’s retirement, goodwill is valued at ₹ 24,000 and
(b) At the time of retirement goodwill is valued ₹ 18,000.
Solution:
(a) On the day of P’s retirement, goodwill is valued at ₹ 24,000.

(b) At the time of retirement goodwill is valued ₹ 18,000.

Question 6.
John, Sundar, and Rao are partners in the firm sharing profits in the ratio of 2 : 1 : 1. John retired from the firm, and Sundar and Rao decided that the capital of the new firm will be fixed at ₹ 1,20,000. The capital accounts of Sundarand Rao show a credit balance of ₹ 82,000 and ₹ 41,000 respectively after making all the adjustments. Calculate the actual cash to be paid off or to be brought in by the continuing partners and pass the necessary journal entries.
Solution:
The new profit sharing ratio between Sundar and Rao = 2 : 1
Total capital of the firm = ₹ 1,20,000
New capital based on new ratio of Sundar = 1,20,000 × \(\frac{2}{3}\) = ₹ 80,000
Existing capital (after adjustments) = ₹ 82,000
Cash to be paid off = ₹ 2,000
New capital based on new ratio of Rao = 1,20,000 × \(\frac{1}{3}\) = ₹ 40,000
Existing capital (after adjustments) = ₹ 41,000
Cash to be paid off = ₹ 1,000
Journal entries in the books of Sundar and Rao

Question 7.
Geethika, Rishitha, and Pravalika are partners in a firm. Geethika retires from the firm. On her date of retirement, ₹ 50,000 becomes due to her.
Prepare necessary entries in the following cases:
1. When payment is made immediately;
2. When payment is not made immediately;
3. When they agree to pay 50% immediately.
Solution:
1. When payment is made immediately.

2. When payment is not made immediately.

3. When they agree to pay 50% immediately.

Question 8.
X, Y, and Z were partners in firm sharing profits in 3 : 2 : 1 ratio. On 31.3.2015, Z retires from the firm. On the date of Z’s retirement the balance sheet of the firm was as follows:

On Z’s retirement, it was agreed that;
(i) Premises will be appreciated by 5% and furniture will be appreciated by ₹ 2,000.
(ii) Stock will be depreciated by 10%.
(iii) Provision for bad debts was to be made at 10% on debtors.
(iv) Goodwill of the firm is valued at ₹ 48,000.
(v) Z’s amount will be paid by cheque.
Prepare Revaluation a/c, Partner’s capital a/cs and New Balance Sheet.
Solution:

Question 9.
Sai, Suresh, and Naresh were sharing profits in the ratio of 2 : 3 : 5. Balance sheet of Sai, Suresh, and Naresh has on March 31, 2015.

Suresh retires on the above date and the following adjustments are agreed upon his retirement.
1. Stock was valued at ₹ 1,80,000.
2. Furniture and fittings were valued at ₹ 90,000.
3. An amount of ₹ 12,000 was doubtful and a provision for the same was required.
4. Goodwill of the firm was valued at ₹ 2,00,000.
5. Suresh was paid ₹ 40,000 immediately on retirement and the balance was transferred to his loan account.
6. Sai and Naresh were to share future profits in the ratio of 3 : 2.
Prepare the Revaluation account, Capital account, and Balance Sheet of the Reconstituted firm.
Solution:

Question 10.
B, C, and D were partners in the firm sharing profits in the ratio of 5 : 4 : 1. the profit of the firm for the year ending on March 31, 2014, was ₹ 1,00,000. C dies on June 30, 2014. Calculate C’s share of profit and pass journal entry.
Solution:
Profit for the period from April 1 to June 30, 2014, shall be calculated as follows:
Total profit for the year ending on 31st March 2014 = ₹ 1,00,000
C’s share of profit = Preceding year’s profit × Proportionate period × Share of a deceased partner
= ₹ 1,00,000 × \(\frac{3}{12} \times \frac{4}{10}\)
= ₹ 10,000
The journal entry will be recorded as follows:

Question 11.
Anil, Bhanu, and Chandu were partners in firm sharing profits in the ratio of 5 : 3 : 2. On March 31, 2014, their Balance Sheet was as under:

Anil died on October 1, 2014. it was agreed between his executors and the remaining partners that:
(a) Goodwill to be valued at 2\(\frac{1}{2}\) years’ purchase of the average profits of the previous four years which were:
2010-11 – ₹ 13,000
2011-12 – ₹ 12,000
2012-13 – ₹ 20,000
2013-14 – ₹ 15,000
(b) Patents be valued at ₹ 8,000; Machinery at ₹ 28,000; and Building at ₹ 25,000.
(c) Profit for the year 2014-15 to be taken as having accrued at the same rate as that of the previous year.
(d) Interest on capital provided at 10% p.a.
(e) Half of the amount due to Anil is to be paid immediately.
Prepare Anil’s capital account and Anil’s executor’s account as on October 1, 2014.
Solution:

Working Notes:
1. Goodwill = Average Profit × 2\(\frac{1}{2}\) year’s purchase
Average profit for 4 years = ₹ 60,000 ÷ 4 = ₹ 15,000
Goodwill = 15,000 × \(\frac{5}{2}\) = ₹ 37,500
Anil’s share of goodwill = 37,500 × \(\frac{5}{10}\) = ₹ 18,750
This goodwill amount will adjust with 3 : 2 ratio between Bhanu and Chandu.

2. Profit from the date of last balance sheet to date of death (April 1, 2014, to October 1, 2014) = 6 months.
Profit for 6 months = ₹ 15,000 × \(\frac{6}{12}\) = ₹ 7,500
Anil’s share of profit = ₹ 7,500 × \(\frac{5}{10}\) = ₹ 3,750

3. Interest on Anil’s capital (April 1, 2014 to October 1, 2014) = ₹ 30,000 × \(\frac{10}{100} \times \frac{6}{12}\) = ₹ 1,500

Question 12.
You are given the Balance Sheet of Mohit, Sohan, and Rahul who are partners sharing profits in the ratio of 2 : 2 : 1, as on March 31, 2014.

Sohan died on June 15, 2014. According to the Deed, his legal representatives are entitled to:
(a) Balance in the capital account.
(b) Share of goodwill valued on the basis of thrice the average of the past 4 years’ profits.
(c) Share in profits up to the date of death on the basis of average profits for the past 4 years.
(d) Interest on capital account @ 12% p.a.
Profits for the year ending on March 31 of 2011, 2012, 2013 and 2014 were ₹ 15,000, ₹ 17,000, ₹ 19,000 and ₹ 13,000 respectively.
Mobit and Rahul continued as partners by taking over Sohan’s share equally. Work out the amount payable to Sohan’s legal representatives.
Solution:

Working Notes:
1. Goodwill = Average Profit × 3 year’s purchase
Average profit for 4 years = ₹ 64,000 ÷ 4 = ₹ 16,000
Goodwill = ₹ 16,000 × 3 = ₹ 48,000
Sohan’ share of goodwill = 48,000 × \(\frac{2}{5}\) = ₹ 19,200

2. Profit from the date of last balance sheet to date of death (April 1, 2014, to June 15, 2014) = 2\(\frac{1}{2}\) months.
Profit for 2\(\frac{1}{2}\) months = ₹ 16,000 × \(\frac{2.5}{12}\) = ₹ 3,333
Sohan’s share of profit = ₹ 3,333 × \(\frac{2}{5}\) = ₹ 1,333

3. Interest on Sohan’s capital (April 1, 2014) to June 15, 2014) = ₹ 25,000 × \(\frac{12}{100} \times \frac{2.5}{12}\) = ₹ 625

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 6th Lesson Admission of a Partner Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 6th Lesson Admission of a Partner

Very Short Answer Questions

Question 1.
What are the aspects that need adjustment at the time of admission of a new partner?
Answer:
When a new partner is admitted to the firm the agreement among the existing partners terminates and a new agreement will come into force.
The following adjustments must be made at the time of admission.

• New profit sharing ratio.
• Revaluation of assets and liabilities.
• Distribution of accumulated reserves, profits/losses.
• Treatment of goodwill.
• Adjustment of partners’ capitals.

Question 2.
Sacrificing Ratio
Answer:
The ratio in which the old partners agree to sacrifice their share of profit in favour of the incoming partner is called sacrificing ratio.
Sacrificing Ratio = Old share of Profit – New share of Profit.

Question 3.
Revaluation Account
Answer:
For the purpose of revaluation of assets and liabilities at the time of admission of a new partner, an account called a revaluation account is opened. It is a nominal account. The account is credited with all increases in the value of assets and decreases in the value of liabilities. Similarly, it is debited with a decrease in the value of assets and an increase in the value of liabilities. The balance of this account is again or lost on revaluation which is transferred to the old partners’ capital accounts in the old profit sharing ratio.

Question 4.
Goodwill
Answer:
Over a period of time, a well-established business develops the advantage of a good name and reputation which helps the business to earn more profits. The monetary value is called goodwill. It is regarded as an intangible asset. So, goodwill is the value of the reputation of a firm in respect of profits expected in the future over and above normal profits.

Question 5.
What are the methods of goodwill valuation?
Answer:
The important methods of valuation of Goodwill are:
1. Average profits method: Under this method, the goodwill is valued at an agreed number of years of the purchase of the average profits of the past few years.
Goodwill = Average profit × No. of years purchase

2. Super profit method: Super profit is the profit earned by the business in excess of the usual profit goodwill is valued by multiplying the super profit by the number of years purchased.

3. Capitalisation method: Under capitalisation method, the capitalized value of the business is determined by capitalizing the average profits by the normal rate of return. Out of the value so determined, the value of net assets/ capital employed is deducted, and the balance amount is the value of goodwill.

Textual Problems

Question 1.
M and N are partners sharing profit and losses in the 1 : 2 ratio. They have decided to admit ‘O’ by giving him 1/4th share in future profits. Calculate the New profit sharing ratio.
Solution:
If we assume the total share is 1
The new partners share is a \(\frac{1}{4}\)
Remaining share = 1 – \(\frac{1}{4}\) = \(\frac{3}{4}\)
Old Ratio = 1 : 2
New Share = Rest of the share × old ratio
M new share = \(\frac{3}{4} \times \frac{1}{3}=\frac{3}{12}\)
N new share = \(\frac{3}{4} \times \frac{2}{3}=\frac{6}{12}\)
O’s Share = \(\frac{1}{4}\) or \(\frac{3}{12}\)
New Share = 1 : 2 : 1

Question 2.
P & Q are partners sharing in the ratio of 2 : 3. They admit R for 1/4th share and he gets this share equally from P & Q. Calculate the new ratio.
Solution:
New partner R share \(\frac{1}{4}\)
He gets this equally from P and Q. That is \(\frac{1}{4} \times \frac{1}{2}=\frac{1}{8}\)
Old Ratio = 2 : 3
New Share = Old share – Sacrificing ratio
P = \(\frac{2}{5}-\frac{1}{8}=\frac{16}{40}-\frac{5}{40}=\frac{11}{40}\)
Q = \(\frac{3}{5}-\frac{1}{8}=\frac{24}{40}-\frac{5}{40}=\frac{19}{40}\)
R = \(\frac{1}{4}\) or \(\frac{10}{40}\)

Question 3.
X and Y share profits and losses in the Ratio of 4 : 3, they admit Z with 3/7th share; which he gets 2/7th from X and 1/7th from Y. What is the new profit sharing ratio?
Solution:
New partner Z’s share = \(\frac{3}{7}\) (This acquired \(\frac{2}{7}\) from X and \(\frac{1}{7}\) from Y)
Old ratio = 4 : 3
New share = Old share – Sacrificing ratio
X = \(\frac{4}{7}-\frac{2}{7}=\frac{2}{7}\)
Y = \(\frac{3}{7}-\frac{1}{7}=\frac{2}{7}\)
Z = \(\frac{3}{7}\)

Question 4.
A & B are partners sharing in the ratio of 3 : 2. C is admitted and he gets 3/20th from A and 1/20th from B. Calculate the new ratio.
Solution:
C’s share = \(\frac{4}{20}\) (Acquires \(\frac{3}{20}\) from A, \(\frac{1}{20}\) from B)
Old ratio = 3 : 2
New share = Old share – Sacrificing ratio
A = \(\frac{3}{5}-\frac{3}{20} \text { or } \frac{12}{20}-\frac{3}{20}=\frac{9}{20}\)
B = \(\frac{2}{5}-\frac{1}{20} \text { or } \frac{8}{20}-\frac{1}{20}=\frac{7}{20}\)
C = \(\frac{4}{20}\)
New ratio = 9 : 7 : 4

Question 5.
X & Y are partners who share profits in the ratio of 5 : 3. Z the new partner gets 1/5 of X’s share and 1/3rd of Y’s share. Calculate the new ratio.
Solution:
Z gets \(\frac{1}{5}\) share from X and \(\frac{1}{3}\) share from Y
Old ratio = 5 : 3
New ratio = Old ratio – Sacrificing ratio
X share = \(\frac{5}{8}-\frac{1}{5} \text { or } \frac{25}{40}-\frac{8}{40}=\frac{17}{40}\)
Y share = \(\frac{3}{8}-\frac{1}{3}=\frac{9}{24}-\frac{8}{24}=\frac{1}{24}\)
Z share = \(\frac{1}{5}+\frac{1}{3} \text { or } \frac{3}{15}+\frac{5}{15}=\frac{8}{15}\)

Question 6.
If Tarun and Nisha are partners sharing profits in the ratio of 5 : 3. What will be their sacrificing ratio if Rahul is admitted for 1/8 share of profit in the firm?
Solution:
Rahul share = \(\frac{1}{8}\)
Remaining share = 1 – \(\frac{1}{8}\) = \(\frac{7}{8}\)
New ratio:
Tarun = \(\frac{7}{8} \times \frac{5}{8}=\frac{35}{64}\)
Nisha = \(\frac{7}{8} \times \frac{3}{8}=\frac{21}{64}\)
Rahul \(\frac{1}{8}\) or \(\frac{8}{64}\)
Sacrificing ratio = Old ratio – New ratio
Tarun = \(\frac{5}{8}-\frac{35}{64} \text { or } \frac{40}{64}-\frac{35}{64}=\frac{5}{64}\)
Nisha = \(\frac{3}{8}-\frac{21}{64}=\frac{24}{64}-\frac{21}{24}=\frac{3}{24}\)
So Sacrificing ratio = 5 : 3

Question 7.
Amar and Bahadur are partners in firm sharing profits in the ratio of 5 : 2. They admitted Mary as a new partner for 1/4 share. The new profit sharing ratio of the partners will be 2 : 1 : 1. Calculate their sacrificing ratio.
Solution:
Old ratio = 5 : 2
New ratio = 2 : 1 : 1
Amar old ratio = \(\frac{5}{7}\)
Amar new ratio = \(\frac{2}{4}\)
Sacrificing ratio = old ratio – new ratio
Amar = \(\frac{5}{7}-\frac{2}{4}=\frac{20-14}{18}=\frac{6}{28}\)
Bahadur = \(\frac{2}{7}-\frac{1}{4}=\frac{8-7}{28}=\frac{1}{28}\)
∴ So sacrificing ratio = 6 : 1

Question 8.
Vijay and Sanjay are partners in the firm sharing profits and losses in the ratio of 1 : 2. They decide to admit Ajay into partnership with 1/4 share in profits. Ajay brings in ₹ 30,000 for capital and ₹ 15,000 for goodwill. Give necessary journal entries,
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
Solution:
(a) When the amount of goodwill is retained in the business.

(b) When the amount of goodwill is fully withdrawn

(c) When 50% of the amount of goodwill is withdrawn

Question 9.
A and B are partners sharing profits and losses equally. They admit C into partnership and the new ratio is fixed as 4 : 3 : 2. C is unable to bring anything for goodwill but brings ₹ 25,000 as capital. Goodwill of the firm is valued at ₹ 18,000. Give the necessary journal entries assuming that the partners do not want goodwill to appear on the Balance Sheet.
Solution:

Question 10.
Rahul and Gandhi are partners sharing profit in the ratio of 4 : 5. On 1st April 2015, they admit Sonia as a new partner for 1/6 share in profits. On that date, the balance sheet of the firm shows a balance of ₹ 60,000 in general reserve and a debit balance of Profit and Loss A/c of ₹ 25,000.
Make the necessary journal entries.
Solution:

Question 11.
A & B are equal partners in a firm. They decide to admit C as a new partner for 1/5th share in profit. On the date of admission the balance sheet of the firm was as follows:

The terms of the agreement on C’s admission were as follows:
(a) Building will be valued at ₹ 65,000 and machinery at ₹ 20,000
(b) Creditors included ₹ 1,000 no longer payable.
Pass necessary Journal entries for revaluation of assets and liabilities.
Solution:

Question 12.
Kama and Balaram are partners sharing profit and losses in the ratio of 4 : 1. Their Balance Sheet was as follows:
Balance Sheet of Kama and Balaram as of December 31st, 2014

Nikhil is admitted as a partner and assets are revalued and liabilities reassessed as follows:
(i) Create a Provision for doubtful debt on debtors at ₹ 800
(ii) Building and investment are appreciated by 10%.
(iii) Machinery is deprecated at 5%
(iv) Creditors were overestimated by ₹ 500
Make journal entries and Prepare a revaluation account before the admission of Nikhil.
Solution:

Question 13.
Balance Sheet of A and B as on 31.03.2014

The other terms of the agreement on C’s admission were as follows:
(i) C will bring ₹ 12,000 for his share of capital.
(ii) Building will be valued at ₹ 1,85,000 and Machinery at ₹ 40,000
(iii) A provision of 6% will be created for debtors with bad debts.
Prepare Revaluation Account and Partners Capital Accounts.
Solution:

Question 14.
The following is the balance sheet of Ram and Shyam, who are sharing profit as 2/3 and 1/3 on 31st March 2014.

They agree to admit Mohan into partnership on the following terms:
(a) Mohan was to be given 1/3 share in the profit and to bring ₹ 7,500 as his capital and ₹ 3,000 as his share of goodwill.
(b) That the value of stock and plant & Machinery was to be reduced by 5%.
(c) That a reserve of 10% was to be created in respect of Sundry Debtors.
(d) The buildings were to be depreciated by 10%.
Pass Journal Entries and necessary Accounts.
Solution:

Question 15.
A and B are partners in a firm, sharing profits and losses in the ratio of 5 : 3, on 31st December 2014 their Balance sheet was as under:

On the above date they decided to admit C as a partner on the following terms:
(a) C will bring ₹ 90,000 as his capital and ₹ 24,000 for his share of goodwill for 1/4th share in the profit.
(b) Machinery is to be valued at ₹ 1,50,000, stock ₹ 1,00,000, and provision for bad debts of ₹ 10,000 is to be created.
Prepare Revaluation A/c, partners’ capital A/c and new Balance Sheet.
Solution:

Question 16.
Rashmi and Pooja are partners in a firm. They share profits and losses in the ratio of 2 : 1. They admit Santoshi into a partnership firm on the condition that she will bring ₹ 1,50,000 for capital and she will be given 1/3 share in future profits. At the time of admission on the Balance Sheet of Rashmi and Pooja was as under.

It was decided to:
(a) Revaluate stock at ₹ 45,000.
(b) Depreciate furniture by 10% and machinery by 5%.
(c) Make provision of ₹ 3,000 on sundry debtors for doubtful debts.
Prepare Revaluation Accounts, Partners Capital Accounts, and Balance Sheet of the new firm.
Solution:

Question 17.
Venu & Venkat are partners in a business sharing profits and losses equally. Their Balance Sheet on 31-3-2014 stood as under;

They decided to admit Naidu into the firm on 1st April 2014 on the following terms and conditions:
(a) Naidu has to pay ₹ 1,25,000/- for 1/4 share in future profits.
(b) Naidu has to pay ₹ 38,000/- for goodwill.
(c) Plant and Machinery to be depreciated by 10%.
(d) Buildings to be appreciated by 20%.
(e) 5% reserve for doubt full debts to be created on debtors.
Prepare necessary accounts in the books of the firm after admission of Naidu with the new Balance Sheet.
Solution:

Question 18.
Rao and Raju are carrying on business in a partnership, sharing profit & loss in the ratio of 2 : 3. Their Balance sheet as of 31-12-2014 was as under.

On that day they admitted Reddy into partnership and gave him 1/6th share in the future profits on the following terms.
(a) Reddy is to bring in ₹ 1,50,000 as his capital and ₹ 50,000 as goodwill, which sum is to remain in the business.
(b) Stock and furniture are to be reduced in value by 5%.
(c) Buildings are to be appreciated by ₹ 25,000.
(d) A provision of 5% to be created on sundry debtor for doubtful debts.
Write Journal entries to record the above arrangement and show the opening Balance sheet of the new firm.
Solution:

Question 19.
Bhanu and Prasad are partners sharing profit and losses in the ratio of 3 : 2 respectively. Their Balance Sheet as on March 31, 2015, was as under:

On that date they admit Deepak into a partnership for 1/3 share in future profit on the following terms:
(i) Furniture and stock are to be depreciated by 10%.
(ii) Building is appreciated by ₹ 20,000.
(iii) 5% provision is to be created on Debtors for doubtful debts.
(iv) Deepak is to bring in ₹ 50,000 as his capital and ₹ 30,000 as goodwill.
Make necessary Ledger Account and Balance Sheet of the new firm.
Solution:

Question 20.
The following is the Balance sheet of Arun and Tarun sharing profit and losses in the ratio of 2 : 1.

They agreed to admit Vanin into partnership on the following terms:
(i) Varun to pay ₹ 9,000 as Goodwill.
(ii) Varun brings ₹ 11,000 as Capital for 1/4 share of profit in the business.
(iii) Budding and furniture to be depreciated at 5%. Stock is reduced by ₹ 1,600 and Bad Debt Reserve ₹ 1,300 to be provided for.
Prepare necessary ledger accounts and balance sheets after admission.
Solution:

Question 21.
A and B are partners in the firm sharing profits in the ratio 2 : 1. C is admitted into the firm with 1/4 share in profits. He will bring in ₹ 30,000 as capital and the capitals of A and B are to be adjusted in the profit sharing ratio. The Balance Sheet of A and B as on March 31, 2014 (before C’s admission) was as under:

Other terms of the agreement are as under:
1. C will bring in ₹ 12,000 as his share of goodwill.
2. Building was valued at ₹ 45,000 and Machinery at ₹ 23,000
3. A provision for bad debts is to be created @ 6% on debtors.
4. The capital accounts of A and B are to adjust.
Record necessary journal entries, show necessary ledger accounts, and prepare a Balance Sheet after C’s admission.
Solution:
Calculation of New profit sharing ratio:
C’s share = \(\frac{1}{4}\)
Remaining share = 1 – \(\frac{1}{4}\) = \(\frac{3}{4}\)
Old ratio = \(\frac{2}{3}: \frac{1}{3}\)
New profit sharing ratio
A = \(\frac{2}{3} \times \frac{3}{4}=\frac{6}{12}\)
B = \(\frac{1}{3} \times \frac{3}{4}=\frac{3}{12}\)
C s share = \(\frac{1}{4} \text { or } \frac{3}{12}\)
A’s Capital = \(\frac{2}{4} \times \frac{4}{1} \times 30,000\) = 60,000
B’s Capital for \(\frac{1}{4}\) share = 30,000

Question 22.
Ashish and Pankaj are partners sharing profit in the ratio of 5 : 2, their Balance sheet on March 31, 2015, was as follows:

They admitted Gurudeep into partnership on the following terms on March 31, 2015.
(a) New profit sharing ratio is agreed upon as 3 : 2 : 1.
(b) He will bring in ₹ 1,00,000 as his shared capital and ₹ 30,000 as his share of goodwill.
(c) Machinery is appreciated by 10%
(d) Stock is valued at ₹ 87,000.
(e) Creditors are unrecorded to the extent of ₹ 6,000
(f) A provision for doubtful debts is to be created by 4% on debtors.
Prepare the Revaluation account, Capital Accounts, Bank account, and Balance Sheet of the new firm after the admission of Gurdeep.
Solution:

Question 23.
The Balance Sheet of Sarath and Sindhu as of 31.12.2014 who are sharing profits and losses in the ratio of 4 : 1 is as follows:

They have agreed to admit Sameer under the following conditions:
(a) Sameer has to bring the capital of ₹ 2,00,000 for his 1/5th share of profits.
(b) Furniture and stock have to be depreciated by 10% and a reserve of 5% have to be created on debtors for bad and doubtful debts.
(c) Land and Buildings have to be appreciated by 20%.
(d) Goodwill has to be raised by ₹ 80,000.
Prepare necessary ledger A/c and the balance sheet of the new firm.
Solution:

Question 24.
Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2014. A and B are sharing profits and losses in the ratio of 2 : 1.

C is admitted as a partner on the date of the balance sheet on the following terms:
(i) C will bring in ₹ 1,00,000 as his capital and ₹ 60,000 as his share of goodwill for 1/4 share in the profits.
(ii) Plant is to be appreciated to ₹ 1,20,000 and the value of buildings is to be appreciated by 10%.
(iii) Stock is found overvalued by ₹ 4,000.
(iv) A provision for bad and doubtful debts is to be created at 5% of debtors.
(v) Creditors were unrecorded to the extent of ₹ 1,000.
Pass the necessary journal entries, prepare the revaluation account and partners’ capital accounts, and show the Balance Sheet after the admission of C.
Solution:

Question 25.
Following is the Balance Sheet of Satyam and Murthi sharing profit as 3 : 2.

On admission of Tayaru for 1/6th share in the profit, it was decided that:
(i) Provision for doubtful debts to be increased by 1,500.
(ii) Value of land and buildings to be increased to 21,000.
(iii) Value of stock to be increased by 2,500.
(iv) The liability of the workmen’s compensation fund was determined to be 12,000.
(v) Tayaru brought in as her share of goodwill 10,000 in cash.
(vi) Tayaru was to bring further cash of 15,000 for her capital.
Prepare Revaluation AJc, Capital A/c, and the Balance Sheet of the new firm.
Solution:

Question 26.
Ramesh, Suresh, and Naresh are partners sharing profits and losses in the ratio of 1 : 2 : 3. On 31st March 2014, their Balance Sheet was as follows;

They admit Dinesh into partnership on the following terms:
(i) Furniture and Machinery to be depreciated by 5%.
(ii) Stock is evaluated at 48,000.
(iii) Outstanding rent amount to 1,880
(iv) Dinesh to bring 32,000 towards his capital for 1/6th share.
Prepare the Revaluation Account, Partners Capital Accounts, and Balance Sheet of the new firm.
Solution:

Question 27.
Ashish and Dattu were partners in the firm sharing profits in 3 : 2 ratio. On Jan 01, 2014, they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dattu as on Jan. 01, 2014, was as follows:

It was agreed that:
(i) The value of Land and Buildings be increased by ₹ 15,000.
(ii) The value of the plant be increased by ₹ 10,000.
(iii) Goodwill of the firm be valued at ₹ 20,000
(iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the new firm.
Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimal’s admission.
Solution:



Note: Vimal is given a share of \(\frac{1}{5}\).
The remaining share is 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
The total capitals of Ashish and Dattu after adjustments for \(\frac{4}{5}\) share = 1,60,000 (1,07,000 + 53,000)
The capital to be brought by Vimal for \(\frac{1}{5}\) share = \(\frac{1}{5} \times \frac{5}{4} \times 1,60,000\) = ₹ 40,000

Question 28.
The following was the Balance Sheet of Arun, Bhanu, and Charan sharing profits and losses in the ratio of 6 : 5 : 3 respectively.

They agreed to take Deepak into partnership and give him a share of 1/8 on the following terms:
(a) that Deepak should bring in ₹ 4,200 as goodwill and ₹ 7,000 as his Capital;
(b) that furniture be depreciated by 12%;
(c) that stock be depreciated by 10%;
(d) that a Reserve of 5% be created for doubtful debts;
(e) that the value of land and buildings having appreciated being brought upto ₹ 31,000;
(f) that after making the adjustments the capital accounts of the old partners be adjusted on the basis of the proportion of Deepak’s Capital to his share in the business, i.e., actual cash to be paid off, or brought in by the old partners as the case may be.
Prepare Necessary Accounts and the Opening Balance Sheet of the new firm.
Solution:
Old profit sharing ratio = \(\frac{6}{14}: \frac{5}{14}: \frac{3}{14}\)
Share given to Deepak = \(\frac{1}{8}\)
Remaining share = 1 – \(\frac{1}{8}\) = \(\frac{7}{8}\)
New profit sharing ratio
Arun = \(\frac{7}{8} \times \frac{6}{14}=\frac{42}{112}\)
Babu = \(\frac{7}{8} \times \frac{5}{14}=\frac{35}{112}\)
Charan = \(\frac{7}{8} \times \frac{3}{14}=\frac{21}{112}\)
Deepak = \(\frac{1}{8} \text { or } \frac{14}{112}\)
Total Ratio = 6 : 5 : 3 : 2
Arun capital = \(\frac{6}{16} \times \frac{16}{2} \times 7000\) = 21,000
Babu capital = \(\frac{5}{16} \times \frac{16}{2} \times 7000\) = 17,500
Charan capital = \(\frac{3}{16} \times \frac{16}{2} \times 7000\) = 10,500

Textual Examples

Case 1: If the new partner share is given along with the old ratio

Question 1.
Anil and Vishal are partners sharing profits in the ratio of 3 : 2. They admitted Sumit as a new partner for 1/5 share in the future profits of the firm. Calculate the new profit sharing ratio of Anil, Vishal, and Sumit.
Solution:
If we assume the total share is 1
The new partner sumit’s share = \(\frac{1}{5}\) share out of 1
Rest of the share = 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
Old Ratio = 3 : 2
New Share = Rest of the share × old share
Anil’s new share = \(\frac{4}{5} \times \frac{3}{5}=\frac{12}{25}\)
Vishal’s new share = \(\frac{4}{5} \times \frac{2}{5}=\frac{8}{25}\)
New Ratio = \(\frac{12}{25}: \frac{8}{25}: \frac{1}{5}\)
New profit sharing ratio of Anil, Vishal, and Sumit = 12 : 8 : 5

Case 2: If the new partner gets his share equally from the old partner

Question 2.
Akshay and Bharat are partners sharing profits in the ratio of 3 : 2. They admit Dinesh as a new partner for 1/5th share in the future profits of the firm which he gets equally from Akshay and Bharat. Calculate the new profit-sharing ratio of Akshay, Bharat, and Dinesh.
Solution:
New partner Dinesh’s share = \(\frac{1}{5}\)
This is shared equally between Akshay and Bharat,
i.e., 1/2 of the Dinesh share = \(\frac{1}{5} \times \frac{1}{2}\) = \(\frac{1}{10}\) from each partner.
Old Ratio = 3 : 2
New share = Old share – Sacrificing share
Akshay’s new share = \(\frac{3}{5}-\frac{1}{10}=\frac{5}{10}\)
Bharat’s new share = \(\frac{2}{5}-\frac{1}{10}=\frac{3}{10}\)
New Ratio = \(\frac{5}{10}: \frac{3}{10}: \frac{1}{5}\)
The new profit sharing ratio among Akshay, Bharat, and Dinesh will be 5 : 3 : 2

Case 3: If the profit share of a new partner takes a particular ratio from the old partner

Question 3.
Anusha and Nitu are partners sharing profits in the ratio of 3 : 2. They admitted Jyoti as a new partner for 3/10 shares, which she acquired 2/10 from Anusha and 1/10 from Nitu. Calculate the new profit-sharing ratio of Anusha, Nitu, and Jyoti.
Solution:
New partner Jyoti’s share = \(\frac{3}{10}\) (this acquired 2/10 from Anusha and 1/10 from Nitu)
Old Ratio = 3 : 2
New share = Old share – Sacrificing share
Anusha’s new share = \(\frac{3}{5}-\frac{2}{10}=\frac{4}{10}\)
Nitu’s new share = \(\frac{2}{5}-\frac{1}{10}=\frac{3}{10}\)
The new ratio = \(\frac{4}{10}: \frac{3}{10}: \frac{3}{10}\)
The new profit sharing ratio among Anusha, Nitu, and Jyoti will be 4 : 3 : 3.

Case 4: If the old partners sacrifice a particular proportion of their shares to a new partner

Question 4.
Ram and Shyam are partners in firm sharing profits in the ratio of 3 : 2. They admit Ganesh as a new partner. Ram surrenders 1/4 of his share and Shyam 1/3 of his share in favour of Ganesh. Calculate the new profit-sharing ratio of Ram, Shyam, and Ganesh.
Solution:
New partner Ganesh’s profit share = 1/4 of Ram’s share + 1/3 of Shyam’s share
= \(\frac{3}{5} \times \frac{1}{4}+\frac{2}{5} \times \frac{1}{3}\)
= \(\frac{3}{20}+\frac{2}{15}\)
= \(\frac{17}{60}\)
Old Ratio = 3 : 2
Ram’s new share = Old Share – Scarifying Share
= \(\frac{3}{5}-\frac{3}{20}\)
= \(\frac{9}{20}\)
Shyam’s new share = \(\frac{2}{5}-\frac{2}{15}\)
= \(\frac{4}{15}\)
New ratio = \(\frac{9}{20}: \frac{4}{15}: \frac{17}{60}\)
The new profit sharing ratio among Ram, Shyam, and Ganesh will be 27 : 16 : 17

Case 5: If the new partner share takes entire from one partner

Question 5.
Das and Sinha are partners in the firm sharing profits in 3 : 2 ratio. They admitted Pal as a new partner for 1/4 share in the profits, which he acquired wholly from Das. Determine the new profit-sharing ratio of the partners.
Solution:
New partner Pal’s share = \(\frac{1}{4}\)
Das’s new share = \(\frac{3}{5}-\frac{1}{4}=\frac{7}{20}\)
Sinha’s old and new share = \(\frac{2}{5}\)
New ratio = \(\frac{7}{20}: \frac{2}{5}: \frac{1}{4}\)
The new profit sharing ratio among Das, Sinha, and Pal will be 7 : 8 : 5

Question 6.
Rohit and Mohit are partners in firm sharing profits in the ratio of 5:3. They admit Sarma as a new partner for 1/7 share in the profit. The new profit sharing ratio will be 4 : 2 : 1. Calculate the sacrificing ratio of Rohit and Mohit.
Solution:
Rohit and Mohits’s old Ratio = 5 : 3
Rohit, Mohit, and Sarmas’ New Ratio = 4 : 2 : 1
Rohit’s old share = \(\frac{5}{8}\)
Rohit’s new share = \(\frac{4}{7}\)
Sacrifice share = Old Share of Profit – New Share of Profit
Rohit’s sacrifice share = \(\frac{5}{8}-\frac{4}{7}=\frac{3}{56}\)
Mohit’s old share = \(\frac{3}{8}\)
Mohit’s new share = \(\frac{2}{7}\)
Mohit’s sacrifice share = \(\frac{3}{8}-\frac{2}{7}=\frac{5}{56}\)
Sacrificing ratio = \(\frac{3}{56}: \frac{5}{56}\)
Sacrificing ratio of Rohit and Mohit will be 3 : 5
Note: The old partner’s sacrificing ratio is equal to the old ratio if the new partner’s share is given along with the old ratio (i.e. case – I).

Question 7.
R and S are partners, sharing profits in the ratio of 1 : 2. T admits for 1/5 share. State the sacrificing ratio.
Solution:
If we assume the total share is 1
The new partner T’s share = \(\frac{1}{5}\) share out of 1
Rest of the share = 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
Old Ratio = 1 : 2
New Share = Rest of the share × old share
R’s new share = \(\frac{4}{5} \times \frac{1}{3}=\frac{4}{15}\)
S’ s new share = \(\frac{4}{5} \times \frac{2}{3}=\frac{8}{15}\)
Sacrifice share = Old Share of Profit – New Share of Profit
R’s sacrificing share = \(\frac{1}{3}-\frac{4}{15}=\frac{1}{15}\)
S’s sacrificing share = \(\frac{2}{3}-\frac{8}{15}=\frac{2}{15}\)
Sacrificing Ratio = \(\frac{1}{15}: \frac{2}{15}\)
Sacrificing ratio of R and S = 1 : 2

Question 8.
Following is the Balance Sheet of Anusha and Pranusha sharing profit as 3 : 2.

On admission of Tanusha for 1/6th share in the profit, it was decided that
(i) Provision for doubtful debts to be created by ₹ 1,500.
(ii) Value of land and building to be increased to ₹ 21,000.
(iii) Value of stock to be increased to ₹ 13,500.
(iv) Tanusha was to bring further cash of ₹ 15,000 for her capital.
Prepare Revaluation A/c and Capital Accounts.
Solution:

Question 9.
Following is the Balance Sheet of A and B who share profits in the ratio of 3 : 2.
Balance Sheet of A and B as on April 1, 2015

On that date C is admitted into the partnership on the following terms:
1. C is to bring in ₹ 15,000 as capital for 1/6 share.
2. The value of a stock is reduced by 10% while plant and machinery are appreciated by 10%.
3. Furniture is revalued at ₹ 9,000.
4. A provision for doubtful debts is to be created on sundry debtors at 5%.
5. Investment worth ₹ 1,000 and electricity bills outstanding ₹ 200 (not mentioned in the balance sheet) are to be taken into account.
6. A creditor of ₹ 100 is not likely to claim his money and is to be written off.
Record journal entries and prepare the Revaluation Account, Partners’ Capital Account, and New Balance Sheet of the firm.
Solution:

Question 10.
Rajendra and Surendra are partners in a firm sharing profits in the ratio of 4 : 1. On April 1, 2015, they admit Narendra as a new partner. On that date, there was a balance of ₹ 20,000 in general reserve and a debit balance (loss) of ₹ 10,000 in the profit and loss account of the firm. Pass necessary journal entries regarding adjustment of accumulated profit or loss.
Solution:
Journals in the Books of Rajendra, Surendra and Narendra

Question 11.
A & B are partners in a firm, sharing Profits and Loss in the ratio of 5 : 3. On 31 Dec 2014 their Balance Sheet was as under;
Balance Sheet as of 31st Dec 2014

On the above date they decided to admit C as a new partner on the following terms;
(a) A, B, and C’s new profit sharing ratio will be 7 : 5 : 4
(b) C will bring ₹ 1,00,000 as his capital.
(c) Machine is to be valued at ₹ 1,50,000, Stock ₹ 1,00,000, and a provision for the doubtful debt of ₹ 10,000 is to be created.
Prepare Revaluation A/c, Partners’ Capital A/C, and new Balance Sheet of the firm.
Solution:

Question 12.
The profit for the five years of a firm are as follows – year 2009 ₹ 4,00,000; year 2010 ₹ 3,98,000; year 2011 ₹ 4,50,000; year 2012 ₹ 4,45,000 and year 2013 ₹ 5,00,000. Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits.
Solution:

= \(\frac{21,93,000}{5}\)
= ₹ 4,38,600
Goodwill = Average Profit × No. of years’ purchase
= ₹ 4,38,600 × 4
= ₹ 17,54,400
2. Super Profit Method: Super Profit is the profit earned by the business that is in excess of the normal profit. Goodwill is determined by multiplying the super profit by the number of years’ purchase.
Normal Profit = Capital Employed × Normal Rate of Return /100.
Actual Profit = This is the profit earned by the firm during the year or it is also taken as the average of the last few years’ profit.
Super Profit = Actual Profit – Normal Profit.
Goodwill = Super Profit × No. of Years’ Purchase.

Question 13.
A firm earns a profit of ₹ 65,000 on a capital of ₹ 4,80,000 and the normal rate of return in a similar business is 10%. 3 years’ purchase value of super profit will be treated as goodwill.
Solution:
Normal Profit = Capital employed × Normal rate of return/100
= 4,80,000 × 10/100
= 48,000
Actual Profit = ₹ 65,000
Super Profit = Actual profit – Normal profit
= ₹ 65,000 – ₹ 48,000
= ₹ 17,000
Goodwill = Super Profit × No. of Years’ Purchase
= 17,000 × 3
= ₹ 51,000

Question 14.
A firm earned average profit during the last few years is ₹ 40,000 and the normal rate of return in a similar business is 10%. The total assets are ₹ 3,60,000 and outside liabilities are ₹ 50,000. Calculate the value of goodwill with the help of the Capitalisation of the Average profit method.
Solution:
Capital employed = Total assets – Outside liabilities
= ₹ 3,60,000 – ₹ 50,000
= ₹ 3,10,000
Capitalised value of average profit = Average Profit × 100 / Normal rate of profit
= ₹ 40,000 × 100 /10
= ₹ 4,00,000
Goodwill = Capitalised value – Capital employed
= ₹ 4,00,000 – ₹ 3,10,000
= ₹ 90,000

Question 15.
Sunil and Gavaskar are partners in the firm sharing profits and losses in the ratio of 5 : 3. Sachin is admitted to the firm for 1/5 share of profits. He is to bring in ₹ 20,000 as capital and ₹ 4,000 as bis share of goodwill. Give the necessary journal entries,
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is hilly withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
Solution:
(a) When the amount of goodwill is retained in the business.

(b) When the amount of goodwill is fully withdrawn.


(c) When 50% of the amount of goodwill is withdrawn.

Question 16.
Srikant and Ramana are partners in the firm sharing profits and losses in the ratio of 3 : 2. They decide to admit Venkat into a partnership firm with 1/3 share in the profits. Venkat brings in ₹ 30,000 as his capital. On the date of admission, the goodwill has been valued at ₹ 24,000. Record the necessary journal entries in the books of the firm.
Solution:

Question 17.
Dinesh and Ramesh are partners in the firm sharing profits and losses in the ratio of 3 : 2. They decided to admit Vasu as a partner with 1/5 share in the profits. Their Balance Sheet as on March 31, 2015, was as follows:

It was also decided that:
1. The fixed assets should be valued at ₹ 3,31,000.
2. A provision of 5% on sundry debtors to be made for doubtful debts.
3. The value of stock be reduced to ₹ 1,12,000.
4. Vasu brings ₹ 75,000 as capital and ₹ 15,000 as Goodwill.
Prepare the revised Balance sheet of the firm after admission of the partner.
Solution:

Question 18.
M and N were partners in the firm sharing profits in 5 : 3 ratios. They admitted O as a new partner for 1/3rd share in the profits. O was to contribute ₹ 20,000 as his capital. The Balance Sheet of M and N as of 1.4.2015 was as follows:

Other terms agreed upon were:
(i) Goodwill of the firm was valued at ₹ 12,000.
(ii) Land and buildings were to be valued at ₹ 35,000 and Plant and Machinery at ₹ 25,000.
(iii) The provision for doubtful debts was found to be in excess of ₹ 400.
(iv) A liability for ₹ 1,000 included in sundry creditors was not likely to arise.
Prepare the Revaluation Account, Partners’ Capital Accounts, and the Balance sheet of the new firm.
Solution:

Question 19.
A and B are partners in a firm who are sharing profits in the ratio of 2 : 1. C is admitted into the firm for 1/5 share in profits and he is to bring in cash of ₹ 40,000 amount as his capital. The capitals of other partners are to be adjusted according to the new partner. The capital of A and B after all adjustments are ₹ 1,00,000 and ₹ 70,000 respectively. Calculate the new capitals of A and B, and record the necessary journal entries.
Solution:
Calculation of new profit sharing ratio:
If we assume the total share is 1
The new partner C’s share = \(\frac{1}{5}\) share out of 1
Rest of the share = 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
A’s new share = \(\frac{4}{5} \times \frac{2}{3}=\frac{8}{15}\)
B’s new share = \(\frac{4}{5} \times \frac{1}{3}=\frac{4}{15}\)
New partner C’s capital for 1/5th share = 40,000
The total capital of the firm = 40,000 × \(\frac{5}{1}\) = ₹ 2,00,000
A’s new capital = 2,00,000 × \(\frac{8}{15}\) = ₹ 1,06,667
B’s new capital = 2,00,000 × \(\frac{4}{15}\) = ₹ 53,333
Hence, a will bring in ₹ 6,667 (₹ 1,06,667 – ₹ 1,00,000)
B will withdraw ₹ 16,667 (₹ 70,000 – ₹ 53,333)
The journal entries in this regard will be recorded as follows:

Question 20.
A and B share profits in the proportions of 3/5 and 2/5. Their Balance Sheet on Dec. 31, 2014, was as follows:

On that date C was admitted into partnership on the following terms:
(a) That C pays ₹ 10,000 as his capital and ₹ 5,000 as goodwill for his 1/6th share in profits.
(b) That stock and fixtures be reduced by 10% and 5% provision for doubtful debts be created on Sundry Debtors and Bills Receivables.
(c) That the value of land and buildings be appreciated by 20%.
Prepare necessary Accounts and the new Balance Sheet on the admission of C.
Solution:

Question 21.
On 31st March 2014, the Balance sheet of P and Q shared profits in 3 : 2 ratio was as follows:

On that date, R was admitted as a partner on the following conditions:
(a) R will get a 4/15th share of profits. R had to bring ₹ 60,000 as his capital.
(b) The assets would be revalued as under:
Sundry debtors at book value less 5% provision for bad debts. Stock at ₹ 40,000, plant and Machinery at ₹ 80,000.
Prepare Revaluation A/c, Partner’s Capital A/c, and the Balance Sheet of the new firm.
Solution:

Question 22.
Sanjay and Ramaswamy were partners in a firm sharing the profits in the ratio of 2 : 3. On 31-03-2015 they admitted Mehra as a new partner for 1/5th share in the profits. Their balance sheet was as follows:

On Mehra’s admission, it was agreed that:
1. Mehra will bring ₹ 4,00,000 as his capital and ₹ 16,000 for his share of goodwill, half of which was withdrawn by Sanjay and Ramaswamy.
2. A provision of 5% for bad and doubtful debts was to be created.
3. A provision was to be made for outstanding telephone bills of ₹ 3,000.
4. Land and Buildings are valued at ₹ 3,50,000.
After the above adjustments prepare the necessary accounts and the new balance sheet.
Solution:

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 5th Lesson Partnership Accounts Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 5th Lesson Partnership Accounts

Very Short Answer Questions

Question 1.
Define Partnership.
Answer:
Section 4 of the Indian Partnership Act, of 1932 defines partnership as “The relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”.

Question 2.
What are the features of a Partnership firm?
Answer:
The essential features of a partnership are

• There must be atleast two persons to form a partnership.
• The partnership is the result of an agreement.
• The agreement should be to carry on some business.
• The partnership may be carried on by all partners or any one of them acting for all.
• The partner should share the profits and losses of the business.
• The liability of partners is joint, several, and unlimited.

Question 3.
What is meant by a partnership deed?
Answer:
The document which contains the terms and conditions of the agreement is called the partnership deed.

Question 4.
Why it is important to have a partnership deed in writing?
Answer:
The partnership comes into existence as a result of an agreement. The agreement or partnership deed may be oral or written. A written agreement is safe to settle disputes between the partners that may arise in the future.

Question 5.
In the absence of a partnership deed, what are the rules applicable to a partnership firm?
Answer:
When there is no agreement among the partners, the following rules will be applicable as per section 13 of the partnership Act.

• Profits and Losses are shared equally by the partners.
• Interest on capital will not be allowed.
• No interest will be charged on the drawings of partners.
• No salary or commission will be allowed to any partner.
• If any partner has given a loan to the firm, he is entitled to get interest @ 6% per annum.

Question 6.
Why is the Profit and Loss Appropriation Account prepared? Explain.
Answer:
The profit and Loss Appropriation Account is merely an extension of the Profit and Loss Account. It shows how the profits are appropriated or distributed among the partners. All adjustments in respect of partners are made through this account. It starts with the profit/loss as per P & L a/c transferred to this account.

Question 7.
What do you understand by the fixed capital of the partners?
Answer:
Under the fixed capital method, the capitals of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per agreement among the partners. Items like a share of profit/ loss, interest on capital, drawings, interest on drawings, etc., are recorded in a separate account called partner current account.

Question 8.
How do you understand by fluctuating capital of partners?
Answer:
Under the fluctuating capital method, only one account i.e., the capital account is maintained for each partner. All the adjustments such as share of profit/loss, interest on capital, drawings, interest on drawings, salary etc., are recorded directly in this account. This makes the balance in the capital account fluctuate from time to time which is why it is called as fluctuating capital method.

Question 9.
How will you deal with the following terms while preparing partnership accounts?
(i) Interest on Capital
(ii) Interest on Drawings
(iii) Interest on Loan
Answer:
(i) Interest on Capital: The interest on partner capital is not allowed unless it is specifically mentioned in the partnership deed. It should be calculated on a time basis after considering additional capital or withdrawal of capital.

(ii) Interest on Drawings: Interest on drawings is charged by the firm only when it is clearly mentioned in the partnership deed. It is calculated with reference to the period of time for which the money was withdrawn.

(iii) Interest on Loan: When the partner gives a loan to the firm, it should be credited to a separate loan account and calculated interest as per the interest rate in the agreement. In the absence of an agreement, the partnership Act provides that interest @ 6% p.a. shall be allowed on such loan irrespective of the profit.

Textual Exercise

Question 1.
Ram and Shyam started a partnership firm on 1st January 2014. Their capital contributions were ₹ 2,00,000 and ₹ 1,00,000 respectively. The partnership deed provided:
(i) Interest on capitals @10% p.a.
(ii) Ram to get a salary of ₹ 2,000 p.a. and Shyam ₹ 3,000 p.a.
(iii) Profits are to be shared in the ratio of 1 : 2.
The profits for the year ended 31st December 2014 before making the above appropriations were ₹ 2,16,000. Prepare Profit and Loss Appropriation Account.
Solution:

Question 2.
Lakshmi and Bhuvaneswari are partners with capitals of ₹ 15,00,000 and ₹ 10,00,000 respectively. They agree to share profits in the ratio of 3 : 2. Show how the following transactions will be recorded in the capital accounts of the partners in case the capitals are fixed. The books are closed on March 31, every year.
Solution:

Question 3.
On March 31, 2013, after the close of books of accounts, the capital accounts of Seenu, Prasad, and Sudarsan showed balances of ₹ 24,000, ₹ 18,000, and ₹ 12,000 respectively. After all adjustments profit for the year ended March 31, 2014, amounted to ₹ 36,000 and the partner’s drawings had been Seenu, ₹ 3,600; Prasad, ₹ 4,500 and Sudarsan, ₹ 2,700. The interest on capital @ 8% and the profit sharing ratio of Seenu, Prasad, and Sudarsan was 3 : 2 : 1. Prepare Partners’ Capital Accounts.
Solution:

Question 4.
Venu and Subbu are partners sharing profits in the ratio of 3 : 2, with capitals of ₹ 1,00,000 and ₹ 60,000 respectively. Interest on capital is agreed @ 10% p.a. Subbu is to be allowed an annual salary of ₹ 2,500. During the year 2014-15, the profits prior to the calculation of interest on capital but after charging Subbu’s salary amounted to ₹ 22,500.
Prepare the Profit and Loss Appropriation Account and the partners’ capital account for the year ending March 31, 2015.
Solution:

Question 5.
A and B are partners sharing profits in the ratio of 3 : 2, with capitals of ₹ 50,000 and ₹ 30,000 respectively. Interest on capital is agreed to be paid @ 6% p.a. Calculate interest on capital.
Solution:
Calculation of Interest on Capital:
A: 50,000 × \(\frac{6}{100}\) = ₹ 3,000
B: 30,000 × \(\frac{6}{100}\) = ₹ 1,800

Question 6.
P and Q are partners sharing profits and losses in the ratio of 3 : 2. On 1st April 2014 their capital balances was ₹ 50,000 and ₹ 40,000 respectively. On 1st July 2014, P brought ₹ 10,000 as his additional capital, whereas Q brought ₹ 20,000 as additional capital on 1st October 2014. Interest on capital was provided @ 10% p.a. Calculate the interest on capital of P and Q on 31st March 2015.
Solution:
Calculation of Interest on Capital:

Question 7.
Rama and Krishna are partners sharing profits and losses in the ratio of 5 : 1. Their capitals at the end of the financial year 2013-14 were ₹ 1,50,000 and ₹ 75,000. On October 1st, 2014 Rama and Krishna brought additional capitals of ₹ 16,000 and ₹ 14,000 respectively. On November 1st, 2014 Rama withdrew ₹ 6,000 and on December 1st, 2014 Krishna withdrew ₹ 9,000 from their capitals. Calculate interest on capital @ 15% p.a. for the year 2014-15.
Solution:
Calculation of Interest on Capital:

Question 8.
Priya and Mani are partners, sharing profits and losses in the ratio of 5 : 3. The balances in their capital accounts as on April 1, 2013, were; Priya, ₹ 6,00,000, and Mani, ₹ 8,00,000. Calculate interest on capital;
(a) when there is no agreement in respect of interest on capital, and
(b) when there is an agreement that the interest on capital will be allowed @ 7% p.a.
Solution:
(a) No interest on capital.
(b) Priya: 6,00,000 × \(\frac{7}{100}\) = ₹ 42,000
Mani: 8,00,000 × \(\frac{7}{100}\) = ₹ 56,000

Question 9.
Mohith is a partner, who withdrew ₹ 5,500 at the end of June 2014. The Partnership deed provides for charging the interest on drawings @ 12% p.a. Calculate interest on Mohith’s drawings for the year ending 31st December 2014.
Solution:
Mohit interest on drawings = 5,500 × \(\frac{12}{100} \times \frac{6}{12}\) = ₹ 330

Question 10.
Amar and Gul are partners in a firm. They share profits in the ratio of 3 : 2. As per their partnership agreement, interest on drawings is to be charged @10% p.a. Their drawings during 2014 were ₹ 24,000 and ₹ 16,000, respectively. Calculate interest in drawings.
(Hint: If the date of Drawings is not given in the question, interest on drawings will be charged an average period of 6 months.)
Solution:
Calculation of interest on drawings:
Amar: 24,000 × \(\frac{10}{100} \times \frac{6}{12}\) = ₹ 1,200
Gul’s: 16,000 × \(\frac{10}{100} \times \frac{6}{12}\) = ₹ 800
Note: In the absence of the date of withdrawal, it is assumed that withdrawals are made evenly throughout the year. Hence, interest is charged for the average period of the year i.e., 6 months.

Question 11.
Bose is a partner in a firm. He withdraws ₹ 3,000 at the start of each month for 12 months. The books of the firm close on March 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.
Solution:
When the amount is withdrawn at the beginning of every month:
Total drawings = 3,000 × 12 = ₹ 36,000
Interest on drawings = 36,000 × \(\frac{10}{100} \times \frac{6.5}{12}\) = ₹ 1,950

Question 12.
Vishnu and Thomas are partners in a firm. They share profits equally. Vishnu’s monthly drawings are ₹ 2,000. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Vishnu’s drawings for the year 2014, assuming that money is withdrawn:
(i) at the beginning of every month
(ii) in the middle of every month
(iii) at the end of every month.
Solution:
(i) When the amount is withdrawn at the beginning of every month:
Total drawings = 2,000 × 12 = ₹ 24,000
Interest on drawings = 24,000 × \(\frac{10}{100} \times \frac{6.5}{12}\) = ₹ 1,300

(ii) When the amount is withdrawn in the middle of every month:
Interest on drawings = 24,000 × \(\frac{10}{100} \times \frac{6}{12}\) = ₹ 1,200

(iii) When the amount is withdrawn at the end of every month:
Interest on drawings = 24,000 × \(\frac{10}{100} \times \frac{5.5}{12}\) = ₹ 1,100

Question 13.
A and B are partners sharing profits and losses in the ratio of 4 : 1. A withdraws ₹ 2,500 at the beginning of each month and B withdrew ₹ 1,500 at the end of each month for 12 months period. Interest on drawings was charged @ 8% p.a. Calculate the interest on drawings of A and B for the year ended 31st December 2014.
Solution:
A’s total drawings = 2,500 × 12 = ₹ 30,000
Interest on drawings = 30,000 × \(\frac{8}{100} \times \frac{6.5}{12}\) = ₹ 1,300
B’s total drawings = 1,500 × 12 = ₹ 18,000
Interest on drawings = 18,000 × \(\frac{8}{100} \times \frac{5.5}{12}\) = ₹ 660

Question 14.
Apama is a partner in a firm. She withdrew the following amounts during the year ended March 31, 2015.
May 01, 2014 – ₹ 12,000
July 31, 2014 – ₹ 6,000
September 30, 2014 – ₹ 9,000
November 30, 2014 – ₹ 12,000
January 01, 2015 – ₹ 8,000
March 31, 2015 – ₹ 7,000
Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.
Solution:
Statement showing the calculation of interest on drawings

Interest on drawings = Sum of products × \(\frac{\text { Rate }}{100} \times \frac{1}{12}\)
= 3,06,000 × \(\frac{9}{100} \times \frac{1}{12}\)
= ₹ 2,295

Question 15.
John, a partner in Kaveri Tours and Travels withdrew money for his personal use from his capital account during the year ending March 31, 2015. Calculate interest on drawings in each of the following alternative situations, if the rate of interest is 9 percent per annum.
(a) If they withdrew ₹ 3,000 at beginning of each month.
(b) If an amount of ₹ 3,000 per month was withdrawn by him at the end of each month.
(c) If the amounts withdrawn were:
₹ 12,000 on June 01, 2014
₹ 8,000 on August 31, 2014
₹ 3,000 on September 30, 2014
₹ 7,000 on November 30, 2014, and
₹ 6,000 on January 3, 2015.
Solution:
(a) When the amount is withdrawn at the beginning of every month:
Total drawings = 3,000 × 12 = ₹ 36,000
Interest on drawings = 36,000 × \(\frac{9}{100} \times \frac{6.5}{12}\) = ₹ 1,755
(b) When the amount is withdrawn at the end of each month:
Interest on drawings = 36,000 × \(\frac{9}{100} \times \frac{5.5}{12}\) = ₹ 1,485

Interest on drawings = Sum of product × rate × \(\frac{1}{12}\)
= 2,34,000 × \(\frac{9}{100} \times \frac{1}{12}\)
= ₹ 1,755

Textual Examples

Question 1.
A, B and C set up a partnership firm on January 1, 2014. They contributed ₹ 50,000, ₹ 40,000 and ₹ 30,000 respectively as their capitals and agreed to share profits and losses in the ratio of 3 : 2 : 1. A is to be paid a salary of ₹ 1,000 per month and a Commission for B of ₹ 5,000. It is also provided that interest be allowed on capital at 6% p.a. The drawings for the year were A – ₹ 6,000, B – ₹ 4,000, and C – ₹ 2,000. Interest on drawings was charged ₹ 270 on A’s drawings, ₹ 180 on B’s drawings, and ₹ 90 on C’s drawings. The net profit as per the Profit and Loss Account for the year ending December 31, 2014, was ₹ 35,660. Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners.
Solution:

Question 2.
Vijay and Kumar are partners in a firm. The following information is provided as of 31st December 2014:

Solution:

Question 3.
X, Y, and Z entered into a partnership on 1st April 2013 to share profits & losses in the ratio of 4 : 3 : 3. Interest on Capital @ 5% p.a. The Capital contributions were: X – ₹ 3,00,000; Y – ₹ 2,00,000 and Z – ₹ 1,50,000 and drawings were: X – ₹ 10,000, Y – ₹ 8,000, and Z – ₹ 6,000 in this year. The profit for the year ended 31st March 2014 amounted to ₹ 1,60,000. Show the necessary Accounts.
Solution:

Question 4.
Amar and Kalesha commenced business as partners on April 1, 2013. Amar ₹ 40,000 and Kalesha ₹ 25,000 contributed as their capital. The partners decided to share their profits ¡n the ratio of 2 : 1. Amar was entitled to a salary of ₹ 6,000 p.a. Interest on capital was to be provided @ 6% p.a. The drawings of Amar and Kalesha for the year ending March 31, 2014, were ₹ 4,000 and ₹ 8,000 respectively. The profits of the firm after providing Amar’s salary and interest on capital were ₹ 12,000.
Draw up the Capital Accounts of the partners; (i) When capitals are fixed, and (ii) When capitals are fluctuating.
Solution:
(i) When capitals are fixed:

(ii) When capitals are fluctuating:

Question 5.
A and B are partners sharing profits in the ratio of 3 : 2 with capitals of ₹ 5,00,000 and ₹ 3,00,000 respectively. Interest on capital is agreed @ 6% p.a. B is be allowed an annual salary of ₹ 25,000. During the year 2014, the profit prior to the calculation of interest on capital but after charging B’s salary amounted to ₹ 1,25,000. A provision of 5% of the profits is to be made in respect of the Manager’s commission.
Prepare an account showing the allocation of profits and partner’s capital accounts.
Solution:

Question 6.
P, Q, and R entered into a partnership, bringing capital in ₹ 3,00,000, ₹ 2,00,000, and ₹ 1,00,000 respectively into the business. They decided to share profits and losses equally and agreed that interest on capital will be provided to the partners @ 10 percent per annum.
Solution:
The interest on capital:
For P = ₹ 30,000 (10% on 3,00,000)
For Q = ₹ 20,000 (10% on 2,00,000)
For R = ₹ 10,000 (10% on 1,00,000)

Question 7.
M and N who are partners in a firm and their capital accounts showed a balance of ₹ 4,00,000 and ₹ 2,50,000 respectively on April 1, 2014. M introduced additional capital of ₹ 1,00,000 on August 1, 2014, and N brought in further capital of ₹ 1,50,000 on October 1, 2014. Interest is to be allowed @ 6% p.a. on the capital.
Solution:
Interest on capital shall be worked as follows:
For M = \(\left[4,00,000 \times \frac{6}{1,000}\right]+\left[1,00,000 \times \frac{6}{1,000} \times \frac{8}{12}\right]\)
= 24,000 + 4,000
= ₹ 28,000
For N = \(\left[2,50,000 \times \frac{6}{1,000}\right]+\left[1,50,000 \times \frac{6}{1,000} \times \frac{6}{12}\right]\)
= 15,000 + 4,500
= ₹ 19,500

Question 8.
Lal and Pal are partners in a firm. Their capital accounts as on April 01, 2013, showed a balance of ₹ 4,00,000 and ₹ 6,00,000 respectively. On July 01, 2013, Lal introduced additional capital of ₹ 1,00,000 and Pal, ₹ 60,000. On October 01, 2013, Lal withdrew ₹ 50,000, and on January 01, 2014, Pal withdrew, ₹ 25,000 from their capitals. Interest is allowed @ 8% p.a. Calculate interest payable on capital to both partners during the financial year 2013-2014.
Solution:
Calculation of Interest on Capital:
For Lal = \(\left[4,00,000 \times \frac{8}{100}\right]+\left[1,00,000 \times \frac{8}{100} \times \frac{9}{12}\right]-\left[50,000 \times \frac{8}{100} \times \frac{6}{12}\right]\)
= 32,000 + 6,000 – 2,000
= ₹ 36,000
For Pal = \(\left[6,00,000 \times \frac{8}{100}\right]+\left[25,000 \times \frac{9}{12}\right]-\left[50,000 \times \frac{8}{100} \times \frac{3}{12}\right]\)
= 48,000 + 3,600 – 500
= ₹ 51,100

Question 9.
X and Y are Partners sharing Profit and Loss in the ratio of 2 : 3 with a capital of ₹ 20,000 and ₹ 10,000 respectively. Show distribution of Profit/Losses for the year ended 31st March 2015 by preparing P & L Appropriation a/c in each of the alternative cases.
Case 1: If the Partnership deed is silent as to the interest on capital and the profit for the year ended is ₹ 2,000.
Case 2: If the Partnership deed provides for the interest on capital @ 6% p.a. and the loss for the year is ₹ 1,500.
Case 3: If the Partnership deed provides for interest on capital @ 6% p.a. and trading profit is ₹ 2,100.
Solution:
Case 1:

Case 2:

Note: No interest on capital will be allowed if the firm has a net loss, even though they have an agreement.
Case 3:

Question 10.
Johnson is a partner who withdrew ₹ 20,000 on October 1, 2014. Interest on drawings is charged @ 10% per annum and the accounts were closed every year on December 31. Calculate interest on drawings.
Solution:
Interest on Drawings = 20,000 × \(\frac{10}{100} \times \frac{3}{12}\) = ₹ 500

Question 11.
Amount and rate of interest are given but the date of withdrawal is not specified:
Ahmed is a partner who withdraws ₹ 30,000 and interest on drawings is charged @ 15% per annum. Calculate interest on drawings:
Solution:
Interest on Drawings = 30,000 × \(\frac{15}{100} \times \frac{6}{12}\) = ₹ 2,250
Here, it is noted that in the absence of any particular date of withdrawal, it is assumed that withdrawals are made evenly throughout the year. Hence, interest is charged for the average of the period of the year, i.e., six months.

Question 12.
Shanu withdrew ₹ 10,000 per month from the firm for her personal use during the year 2014. Find out the interest on drawings, in different situations @ 8% p.a
Solution:
(a) When the amount is withdrawn at the beginning of every month:
Total drawings = 10,000 × 12 = ₹ 1,20,000
Interest on drawings = 1,20,000 × \(\frac{8}{100} \times \frac{6.5}{12}\) = ₹ 5,200
(b) When the amount is withdrawn at the end of every month:
Interest on drawings = 1,20,000 × \(\frac{8}{100} \times \frac{5.5}{12}\) = ₹ 4,400
(c) When money is withdrawn in the middle of every month/date of Drawings is not given:
Interest on drawings = 1,20,000 × \(\frac{8}{100} \times \frac{6}{12}\) = ₹ 4,800

Question 13.
Ratna and Manikyam are partners in a firm, sharing profits and losses equally. During the financial year 2014 – 2015, Ratna withdrew ₹ 50,000 quarterly. If interest is to be charged on drawings @ 10% per annum, calculate interest on drawings in different situations.
Solution:
(a) If the amount is withdrawn at the beginning of each quarter:
Total drawings = 50,000 × 4 = ₹ 2,00,000
Interest on drawings = 2,00,000 × \(\frac{10}{100} \times \frac{7.5}{12}\) = ₹ 12,500

(b) If the amount is withdrawn at the end of every quarter:
Interest on drawings = 2,00,000 × \(\frac{10}{100} \times \frac{4.5}{12}\) = ₹ 7,500
When different amounts are withdrawn on different dates:
The following are the two methods to calculate the amount of Interest on Drawings:

Question 14.
Vamshi and Krishna are partners in a firm. During the year ended 31st March 2015, Vamshi makes the drawings as under:

Partnership Deed provided that partners are to be charged interest on drawings @ 12% p.a. Calculate the interest on Vamshi’s drawings by using Simple Interest Method and Product Method.
Solution:
1. Simple Interest Method:

2. Product Method:

Interest on Drawings = Sum of Products × \(\frac{\text { Rate }}{100} \times \frac{1}{12}\)
= 70,000 × \(\frac{12}{100} \times \frac{1}{12}\)
= ₹ 700

Question 15.
Thanvika withdrew the following amounts for her personal use from her firm during the year ending March 31, 2014. Calculate interest on drawings with the product method, if the rate of interest to be charged is 7% per annum.
April 1, 2013, ₹ 16,000
June 30, 2013, ₹ 15,000
October 31, 2013, ₹ 10,000
December 31, 2013, ₹ 14,000, and
March 1, 2014, ₹ 11,000.
Solution:
Statement Showing Calculation of Interest on Drawings

Interest on Drawings = Sum of Products × \(\frac{\text { Rate }}{100} \times \frac{1}{12}\)
= 4,30,000 × \(\frac{7}{100} \times \frac{1}{12}\)
= ₹ 2,508 (approx.)

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 4th Lesson Not-for-Profit Organizations Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 4th Lesson Not-for-Profit Organizations

Short Answer Questions

Question 1.
State the meaning of Not-for-profit organisations. Give suitable examples.
Answer:
There are certain organizations like schools, colleges, libraries, athletic clubs, hospitals, charitable trusts, welfare societies, co-operative societies, clubs, etc. were established for providing service to its members or to the public. The main objective of this type of organisations is to do service rather than earn profits. This organization calls not-for-profit organisations.

Question 2.
Write the characteristics of not-for-profit organisations.
Answer:
The following are the characteristics of not-for-profit organisations:

• Working without profit motive: Not-for-Profit organisations are formed for providing services to a specific group or public at large such as education, recreation, health, and so on.
• Its sole aim is to provide service either free or cost or at nominal cost and not to earn profits.
• Organised bodies: These are organised as charitable trusts, and societies and subscribers to such organisations are called members.
• Source of income: The main source of income of such organisations is donations, legacies, grant-in-aid, subscriptions, income from investments, etc.
• Elected management: The organisation is managed by a managing committee or executive committee elected by members.
• No diffusion of surplus: The surplus generated in the form of income over expenditure is not distributed amongst the members. It is added to the capital fund.
• Reputation: Not-for-profit organisations earn their reputation by their contribution to the welfare of society.
• Accounting information: The account information provided by such organisations is meant for present and potential contributors and meets the statutory requirements.

Question 3.
Distinguish between profitable organisations and not-for-profitable organisations.
Answer:
Differences between profitable and not-for-profit organisations.

Baste of distinction	Profitable organization	Not-for-profit organization
1. Motive	The main motive is to earn profit.	The main motive is to render service to the members and society.
2. Funds	Funds are represented by capital contributed by proprietors.	Funds are represented by capital funds comprising the form of surplus, legacies, and life membership fees. etc.
3. Financial statements	These include the manufacturing account, trading and profit, loss account, and balance sheet.	They include receipts and payment accounts, income and expenditure accounts, and balance sheets.
4. Surplus/Profit	The balance of profit and loss account is either net profit or a net loss.	The balance in the income and expenditure account is either surplus or deficit.

Question 4.
List out the accounts prepared by not-for-profit organisations.
Answer:
Not-for-profit organisations prepare the following accounts.

1. Receipts and Payment Account
2. Income and Expenditure Account
3. Balance Sheet

Question 5.
What are the final accounts prepared by not-for-profit organisations?
Answer:
Not-for-profit organisations prepare at the end of the financial period receipts and payments account, an Income and expenditure account, and a Balance Sheet in order to ascertain cash in hand or at the bank, surplus or deficit, and various assets and liabilities and capital funds respectively. So the final accounts in not-for-profit organisations consist of the following.

1. Receipts and Payments Account
2. Income and Expenditure Account
3. Balance Sheet

Question 6.
What do you mean by Receipts and Payment Accounts?
Answer:
The receipts and payments account is a mere summary of the cash book for a year. It is maintained and prepared by not-for-profit organisations in lieu of a cash book. Like cash books, receipts of cash are written on the debit side and payments on the credit side. All receipts and payments whether they are relating to the current, preceding, or succeeding period, or all the receipts and payments of capital and revenue nature and written in this account. The closing balance of this account shows the cash in hand/at the bank at the end of the accounting period.

Question 7.
What are the characteristics of receipts and payments accounts?
Answer:
Features of Receipts and Payment Account:

• It is a summary of the cash book.
• All the amounts of receipts and payments irrespective of the period are recorded.
• Irrespective of capital or revenue nature all the receipts and payments are recorded.
• Noncash items like depreciation and outstanding expenses are not shown in this account.
• It begins with an opening balance of cash in hand and cash at a bank or bank overdraft and closes with the year-end balance of cash in hand/cash at a bank or bank overdraft.

Question 8.
In what way do receipts and payment accounts differ from cash books?
Answer:
The distinction between receipts and payment account and cash book.

Basis of Distinction	Receipts and Payment Accounts	Cashbook
1. Cash transactions	It is a summary of the cash book and all transactions are recorded.	All cash transactions are recorded.
2. Period	It is prepared at the end of the accounting year.	It is written daily.
3. Chronological order	The transactions are written date-wise.	Transactions are written in chronological order.

Question 9.
What is an income and expenditure account?
Answer:
The income and expenditure account is prepared in non-profit concerns in the lien of profit and loss account. The income and expenditure account is credited with all incomes, both realized and unrealized, and debit with all expenses, both paid and unpaid. There is no opening balance but the closing balance will show either surplus i.e. excess of income over expenditure or deficit i.e. excess of expenditure over income only revenue items are taken into consideration. It consists of income and expenditure relating to the current year and those incomes and expenditures relating to preceding and succeeding periods are excluded. This account is prepared on the accrual basis of accountancy and all adjustments relating to prepaid, outstanding expenses and incomes, provision for depreciation, or doubtful debts will be made.

Question 10.
Explain the basic features of the income and expenditure accounts.
Answer:
The following are the features of income and expenditure.

• It is a nominal account.
• It is similar to a profit and loss account.
• Expenditure and losses are recorded on the debit side and incomes are recorded on the credit side.
• Only revenue incomes and expenditures are recorded.
• Expenses and incomes relating to the current year are only taken into consideration.
• Adjustments for prepaid, and outstanding, provisions are made in this account.
• Differences between the two sides will show either surplus or deficit and it is transferred to the capital fund on the liabilities side of the balance sheet.

Question 11.
Differences between receipts and payments account and income and expenditure.
Answer:
Differences between Receipts and Payment Account and Income and Expenditure Account.

Basis of distinction	Receipts and Payment Account	Income and Expenditure Account
1. Type of account	Real account.	Nominal account.
2. In lieu of	It is prepared in lieu of a cash book.	It is prepared in lieu of a profit and loss account.
3. Sides	Debit side receipts and credit side payments.	Debit side payments and Credit side receipts.
4. Opening balance	There can be an opening balance which represents cash in hand/cash at the bank.	No opening balance.
5. Closing balance	This shows cash in hand/cash at the bank at the end of the accounting period.	There is no closing balance but the difference represents either surplus or deficit.
6. Capital and Revenue	All items are taken irrespective of capital and revenue.	Only revenue items are taken. Capital items are excluded.
7. Period	All receipts and payments whether relating to current succeeding or preceding periods are taken into consideration.	Only current period incomes and expenditures are taken into consideration. Preceding and Succeeding period items are excluded.
8. Balance sheet	It is not necessary to prepare a Balance sheet along with this account.	The balance sheet must be prepared along with this account.
9. Adjustments	No adjustments are required to be made at the end of the year.	All adjustments are made at the end of the year.
10. Non-cash items	It does not record noncash items such as depreciation etc.	It records non-cash items.
11. Basis of accountancy	It is prepared on a cash basis.	It is prepared on an accrual basis.

Question 12.
In what way income expenditure account differs from the profit and loss account?
Answer:

Basis of distinction	Income and Expenditure A/c	Profit and Loss A/c
1. Object	The object of this account is to find a surplus or deficit.	The object of this account is to find net profit or loss.
2. Concerns	This account is prepared by non-trading concerns.	This account is prepared by trading concerns.
3. Basis of preparation	This account is prepared on the basis of receipts and payment account and additional information.	This account is prepared on the basis of trial balance and additional information.
4. Balance	The balance of this account is termed as surplus or deficit.	The balance of this account is called net profit or a net loss.

Question 13.
What do you mean by Revenue expenditure? Give examples.
Answer:
Any amount spent to earn revenue or profits is called revenue expenditure. These expenses are recurring in nature. Its useful life also would be less than one year.
e.g. salaries, rent, wages, insurance, etc.

Question 14.
What do mean by capital expenditure? Give examples.
Answer:
Capital expenditure is that expenditure that is generally incurred for the acquisition of assets and to increase the earning capacity of the business. The expenditure gives benefits for a number of years.
e.g. purchase of tangible and intangible assets like plant and machinery, furniture, buildings, patents, trademarks, goodwill, etc.

Question 15.
How do you prepare receipts and payment accounts?
Answer:
The following procedure is adopted for preparing receipts and payment accounts.

• Take the opening balances of cash in hand and cash at the bank and enter them on the debit side. In case of bank overdraft at the beginning of the year enter the same on the credit side of the account.
• Show all items of receipts on the debit side and payments on the credit side irrespective of nature, whether capital or revenue, and whether pertaining to past, current and future periods.
• Neither the receivable income nor payable income is considered.
• Find the difference between the debit side and the credit side of the account. If the total on the debit side is more, show the difference on the credit side and vice-versa and close the account.

Question 16.
Explain the procedure to convert receipts and payments account into income and expenditure accounts.
Answer:
Conversion of receipts and payment account into income and expenditure account.

1. Opening and closing balance of cash and bank given in receipts and payments accounts should be excluded.
2. Consider only revenue items of income and expenditure and exclude the items of capital receipts and payments.
3. Make all adjustments regarding outstanding, prepaid incomes and expenses, depreciation, and provision for bad debts.
4. Take only items for the current year and exclude all items from preceding and succeeding years.
5. Consider the following items not appearing in receipts and payments accounts and need to be taken for determination of surplus or deficit.
   • Depreciation on fixed assets.
   • Provision for doubtful debts.
   • Profit or Loss on the sale of fixed assets.

Question 17.
What is capital income? Give two examples.
Answer:
Any amount received as investment by owners or raised by way of loans and sale of fixed assets is known as capital receipts. These amounts lie in huge amounts. These are non-recurring in nature. All the items of capital receipts are to be shown on the liabilities side of the balance sheet.

Question 18.
What is revenue income? Give two examples.
Answer:
Any amount received in the normal course of the business is called revenue receipts, which are recurring in nature.
e.g. sales, interest, discounts, commission, rent received, etc.

Question 19.
Distinguish between capital income and revenue income.
Answer:
Any amount received as investment by owners or raised by way of loans and sale of fixed assets are capital receipts that are non-recurring in nature.
Any amount received in the normal course of the business is called revenue receipts, which are recurring in nature.

Question 20.
Distinguish between revenue expenditure and capital expenditure.
Answer:
Capital expenditure is that expenditure that is generally incurred in the acquisition of assets and to increase the earning capacity of the business. This expenditure gives benefits for a number of years. Any expenditure spent to earn revenue or profits is called revenue expenditure. It is useful for less than one year.

Question 21.
What is a subscription?
Answer:
Subscriptions are a major recurring source of income for non-profit entities that are paid by members periodically. Subscriptions relating to the current year are shown as income.

Question 22.
What is the capital fund?
Answer:
Excess of assets over liabilities is called capital or (General) fund and it is made up of a surplus of income over expenditure and certain items which are capitalized like life membership fees, donations, legacies, entrance fees, etc.

Question 23.
What is a legacy?
Answer:
It is the amount that a not-for-profit concern will receive as per the will of a deceased person. It should be capitalised being an item of non-recurring nature and should be shown on the liabilities side of the balance sheet.

Question 24.
What differs from revenue expenditure? Give examples.
Answer:
It is in the nature of revenue expenditure. But when the huge amount is paid, the benefit of which may be for more than one year, a portion will be debited to P & L A/c, and the balance is shown as an asset on the balance sheet.
e.g. for differed revenue expenditure is the huge amount spent on advertisement.

Question 25.
What is the Entrance fee?
Answer:
Entrance fees or admission fees are received from the members. When they were admitted into the concern. In the absence of specific instructions, this amount should be treated as revenue income.

Question 26.
What is meant by life membership?
Answer:
It is paid to a member once in a lifetime. So it should be capitalised and shown on the liabilities side of the balance sheet.

Question 27.
What are donations? Explain different types.
Answer:
Donations are the amounts that are given to the organisation as gifts by the public. These are two types.

• General donations: When they do lay down any specific conditions for their use, it is called general donations and treated as revenue and shown on the credit side of the income and expenditure account. If the amount is huge, then it should be capitalised.
• Specific donations: If the donation is for a specific purpose, then they are called a specific donation.
  e.g. Building Fund. This is shown on the liabilities side of the balance sheet.

Textual Exercises

Question 1.
From the following particulars, prepare Receipts and Payments A/c

Solution:

Question 2.
Prepare Receipts and Payments Accounts.

Solution:

Question 3.
From the following details prepare receipts and payments A/c

Solution:

Question 4.
From the following particulars Prepare Receipts and Payments A/c.

Solution:

Question 5.
Following is the receipts and payments A/c of Gandhi cultural club for the year ended 31-Dec-2014.


Subscriptions are receivable for the year 2014 ₹ 600.
Outstanding Salaries ₹ 400.
Half of the Donations are to be capitalized, with accrued interest of ₹ 60.
Prepaid Insurance ₹ 70.
Prepare income and Expenditure A/c for the year ended 31-Dec-2014.
Solution:
Income and expenditure account of Gandhi Cultural club for the year ended 31st Dec. 2014

Question 6.
Prepare income and expenditure A/c of Tirupathi Club from the following receipts and payments A/c, for the year ending 31-Dec-2014.


Adjustments:
(a) Rent paid included ₹ 200 for December 2013
(b) Salaries Payable ₹ 900.
(c) Subscriptions received included ₹ 600 for the year 2013.
(d) Subscriptions Due for the year 2014, ₹ 400.
(e) Cost of furniture sold ₹ 800.
Solution:
Income and expenditure account of Tirupathi club for the year ending 31st Dec. 2014.

Question 7.
From the following receipts and payments a/c of the Venkateswara Society for the year ended 31-Dec-2014. Prepare income and expenditure a/c for the year ended 31 -Dec-2014.


The entrance fees and donations are to be capitalized. Sports materials value ₹ 4,000 as of 31-Dec-2014.
Solution:
Income and expenditure of Venkateswara society for the year ending 31st December 2014.

Question 8.
Visakha Sports Association extracts the following receipts and payments A/c for the year ended 31-Dec-2014. From the particulars given, prepare income and expenditure a/c.

Adjustments:
(a) Subscriptions are outstanding on 31-Dec-2013, ₹ 450, and on 31-Dec-2014, ₹ 400. Subscriptions received include ₹ 100 on account of the year 2015.
(b) Sports equipments was valued on 31-Dec-2013, @ ₹ 550, and on 31-Dec-2014, @ ₹ 1090.
(c) Office expenses include ₹ 150, for the year 2013 whereas ₹ 200 is still payable on this account for 2014.
Solution:
Income and expenditure of Visakha sports association for the year ended 31st Dec. 2014

Question 9.
From the following, Prepare income and expenditure A/c of Tirupathi Sportsmen Club for the year ended 31-Dec-2010.

Adjustments:
Locker rent ₹ 420 pertaining to 2009 and ₹ 630 is still owing. Rent ₹ 9,100 Pertaining to 2009 and ₹ 9,100 is still due. Stationary expenses ₹ 2,184 relating to 2009 and ₹ 2,548 is still owing, Subscriptions receivable for the year 2010, ₹ 3,276.
Solution:
Income and expenditure a/c of Tirupathi sportsmen club for the year ended 31st Dec. 2010.

Question 10.
Sri Hari Sports Club’s, Ongole receipts and payments for the year ending 31-Dec-2014. Is given below.

Additional Information:
(a) Subscription receivable for 2013 were ₹ 1,000 and for 2014 ₹ 1,050. A subscription has already been received including ₹ 400 for the year 2015.
(b) Games equipment, in the beginning, was ₹ 1,000 and at the end ₹ 1,250.
(c) Provide depreciation @ 10% Grass cutting machine.
Prepare income and expenditure A/c for the year ending 31-Dec-2014. And opening, and closing the balance sheet.
Solution:
Balance sheet as on 1-1-2014

Income and expenditure A/c for the year ended 31-12-2014

Balance sheet as on 31-12-2014

Question 11.
From the following receipts and payments accounts of other information of Kadapa City Club, Prepare income and expenditure A/c as of 31-Dec-2014 and balance sheet as of that date.
Adjustments:
(a) Subscription received included ₹ 1,200 for the year 2013, and ₹ 2,400 for the year 2015.
(b) Subscriptions due for the year 2014 – ₹ 1,800
(c) Printing Charges payable for 2014 – ₹ 240
(d) Salaries payable for the year 2014 – ₹ 3,600

Solution:
Balance sheet as on 1-1-2014

Income and expenditure account for the year ended 31st December 2014.

Balance sheet as on 31.12.2014

Question 12.
From the following Receipts and payments a/c of Amaravathi Sports Club for the year ended 31st Dec-2008, prepare income and expenditure account.

Lockers rent ₹ 60, pertaining to 2007 and ₹ 90 is still owing. Rent ₹ 1,300 pertained to 2007 and ₹ 1,300 is still due. Stationery Expenses ₹ 312 relating to 2007 and ₹ 364 is still owing.
Subscriptions Receivable for 2008 is ₹ 468.
Solution:
Income and expenditure A/c of Amaravathi sports club for the year ended 31st December 2008

Note: Entrance fees are capitalized.

Question 13.
From the following Receipts and Payments of Nethajee Sports Club, prepare income and Expenditure A/c for the year ended on 31 -Mar-2012.

Additional Information:
(a) Subscriptions Include ₹ 1,000 Received for the last year.
(b) Rent Includes ₹ 600 paid for the last year.
From the above particulars Prepare Income and Expenditure A/c for the year ending 31-03-2012.
Solution:
Income and expenditure of Nethajee sports club for the year ended 31st March 2012

Question 14.
Visakha Town Club provided Receipts and Payments A/c for the year ended 31-Mar-2013. Prepare Income and Expenditure A/c.


Adjustments:
(a) Subscriptions Include ₹ 500 received for the last year.
(b) Rent Includes ₹ 300 paid for the last year.
(c) Book value of Furniture sold ₹ 1,000
Solution:
Income and expenditure A/c for the year ended 31.3.2013

Question 15.
From the following Receipts and Payments A/c of Guntur Sports Club for the year ending 31-Mar-2012, Prepare income and Expenditure A/c.

Additional Information:
(a) Outstanding Salaries ₹ 600
(b) Opening value of sports equipments ₹ 1,000, closing value ₹ 500
(c) Interest accrued on investments of ₹ 200
(d) Subscription receivable for the year 2012, ₹ 3,000
Solution:
Income and expenditure of Guntur sports club for the year ended 31st March 2012

Question 16.
From the following Receipts and Payments A/c of Sai Charitable Trust, Anantapur, Prepare Income and Expenditure A/c.

Additional Information:
(a) Subscriptions Receivable for the year 2011 – ₹ 2,500.
(b) Prepaid Rent ₹ 300.
(c) Outstanding Stationery Bill ₹ 150.
(d) Capitalize donations.
(e) Half of the Entrance fees are capitalized.
(f) Interest Receivable for the year 2011 – ₹ 200.
Solution:
Income and expenditure A/c of Sai Charitable Trust for the year ended Dec 31, 2011

Question 17.
Nellore Sports Club started on 01-01-2010. Their Receipts and Payments A/c for the year ended 31-Dec-2010.

Additional Information:
(a) Subscription is receivable for 2010 – ₹ 300.
(b) Salaries Unpaid – ₹ 170.
(c) Entrance fees are to be capitalized.
(d) Insurance includes 9 months’ premium for 2011.
Solution:
Income and expenditure of Nellore Sports Club for the year ended 31st Dec. 2010.

Question 18.
From the following Receipts and Payments A/c of Balaji Trust, prepare Income and Expenditure A/c for the year ending 31-December-2008.

Adjustments:
Subscriptions for the year 2008 still receivable were ₹ 700, interest due on Government Bonds ₹ 100, and rent outstanding ₹ 60.
Solution:
Income and expenditure account of Balaji trust for the year ended 31st, Dec. 2008

Textual Examples

Question 1.
From the following particulars, prepare Receipts and Payments Account.

Solution:

Question 2.
Prepare Receipts and Payments Account of Kurnool Sports Club for the year ended on 31-3-2015

Solution:
Receipts & Payments of Kurnool Sports Club for the year ending 31-3-2015

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 3rd Lesson Consignment Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 3rd Lesson Consignment

Essay Questions

Question 1.
What do you mean about consignment? Explain the differences between consignment and sale.
Answer:
Consignment means sending goods to another person. In the case of consignment, goods are sent by the owner of the goods to the agent for the purpose of sale. The ownership of the goods remains with the sender. The agent sells the goods on behalf of the sender according to his instructions. The sender of the goods is known as the consignor and the agent is called the consignee.
Differences between consignment and sale

Basis	Consignment	Sale
1. Ownership of goods	The ownership of goods remains with the consignor and the possession is transferred to the consignee.	Ownership and possession of goods are transferred to the buyer immediately.
2. Parties	Two parties involved are known as consignors and consignees.	Two parties involved are known as the buyer and seller.
3. Relation between parties	The relation between them is that of a principal and agent which continues for long period, till it is ended.	The relationship between them is between buyer and seller, which ends immediately after the delivery and payment of goods.
4. Risk	The risk of loss or damage is of the consignor.	The risk passes with ownership to the buyer.
5. Consideration	The consignee sells goods for consideration.	The goods are sold for profit against the price.
6. Expenses	The expenses are borne by the consignor.	After-sales, the expenses are borne by the buyer.
7. Account sales	Consignee sends consignor account sales from time to time.	The buyer does not need to send any account sales to the seller.
8. Profit/Loss	The profit or loss on the consignment belongs to the consignor.	The profit or loss on the sales belongs to the seller.

Question 2.
What are account sales? Give a specimen copy of account sales.
Answer:
Account sales is a document or statement sent by the consignee to the consignor from time to time. Since the consignee sells the goods on behalf of the consignor, so he has to send a proper statement either on the sale of goods or at the end of a particular period.

In account sales, the consignee shows the details of the gross sale proceeds of the consignment. The various expenses, and charges incurred by him, and the commission due to him are deducted. Any advance payment to the consignor is deducted from the total amount due and the net amount payable is shown. The net amount payable is sent to the consignor by a bank draft or bill of exchange agreed.

Specimen of Account Sales
Account sales sent by Gwaliar Ltd to Sony Ltd regarding 200 T.V.s

Question 3.
What is meant by commission? Explain different types of commission.
Answer:
The consignee is remunerated by a commission which is usually calculated as an agreed percentage of the gross sale proceeds of the sale.
Commission payable to consignee can be divided into 3 types. They are:

• Ordinary commission
• Del credre commission
• Overriding commission

(a) Ordinary commission: Ordinary commission is the commission generally paid by the consignor to the consignee. It is calculated as a fixed percentage of gross sale proceeds. The such commission does not provide any security to the consignor from bad debts.

(b) Del credre commission: The consignee may sell some part of the goods on credit. When goods are sold on credit, there is always a risk of some amount as bad debt. In order to avoid the risk of bad debts, the consignor provides an additional commission known as Del credre commission to the consignee who guarantees the payment in case of credit sale. Del credre commission is paid at a predetermined percentage of gross sale proceeds. However, as regards payment of del credre commission there may be a separate agreement for its payment.

(c) Overriding commission: It is an extra commission allowed over the normal commission. This commission is generally offered when an agent is required to work hard either to introduce a new product in the market or to handle the work of supervising the performance of other agents in a particular area. It is the commission paid by the consignor to the consignee for executing sales on consignment at a price higher than the price fixed by the consignor. In other words, it is the surplus. the commission allowed to consignee, calculated on the surplus price realized by him.

Short Answer Questions

Question 1.
What do you mean by Consignment?
Answer:
The word consignment originated from the French word ‘consigner’ which means to hand over or transmit. To consign means ‘to send’; therefore, consignment means sending goods to another person. In the case of consignment, goods are sent by the owner of the goods to the agent for the purpose of sale. The ownership of the goods remains with the sender. The agent sells the goods on behalf of the sender, according to his instructions. The sender of the goods is known as the consignor and the agent is known as the consignee.

Question 2.
Briefly explain about Consignor and Consignee.
Answer:
Consignor: The person who sends the goods is known as a consignor. In other words, the consignor is the person who consigns the goods. He is the owner of the goods. He sends goods where in the physical delivery is delivered to the receiver without transfer of ownership.

Consignee: The person who receives the goods sent by the consignor is known as the consignee. In other words, the consignee is the person who acts as an agent of the consignor. He receives the goods on behalf of the consignor, stores them, incurs expenses, and sells the goods as per the specifications of the consignor for a consideration called ‘commission’.

Question 3.
What is a Proforma Invoice?
Answer:
Along with the goods, a statement is usually forwarded by the consignor to the consignee, giving a description of the goods consigned, the weight, quantity, price, and other relevant details. The statement is known as a proforma invoice. It resembles a sales invoice in appearance, but its purpose is quite different. It is intended as an evidence record of the consignment and the minimum price at which the consignee is expected to sell the goods sent to him.

Question 4.
What is Account Sales?
Answer:
Account sales is a document sent by the consignee to the consignor showing the details of the gross sale proceeds, the various expenses incurred by him, the commission amount due, any advance payment to the consignor which is deducted from the total amount due, and the net amount payable is shown.

Question 5.
What is Commission?
Answer:
The consignee is remunerated by a commission which is usually calculated as an agreed percentage of the gross proceeds of sale and such commission does not provide any security to the consigner from bad debts.

Question 6.
What is the Del Credre commission?
Answer:
The consignee may sell some part of the goods on credit. When goods are sold on credit, there is always a risk of some amount of bad debt. In order to avoid the risk of bad debts, the consignor provides an additional commission known as the Del-Credre commission to the consignee who guarantees the payment in case of credit sale. Del credre commission is paid at a predetermined percentage of gross sale proceeds.

Question 7.
What is Overriding Commission?
Answer:
It is an extra commission allowed over the normal commission. This commission is generally offered when an agent is required to work hard either to introduce a new product or to supervise the work of other agents in a particular area.

Question 8.
Briefly explain recurring expenses and nonrecurring expenses.
Answer:
All the expenses incurred to bring the goods to the godown of the consignee are treated as nonrecurring or direct expenses. Examples of non-recurring expenses which may be incurred by the consignor or consignee are freight, carriage or cartage insurance, packing, dock dues, loading and unloading charges, customs duty, octroi, etc. All the expenses incurred by the consignee after the goods reach the godown are treated as recurring or indirect expenses.
e.g: Go down rent, godown insurance, salary to salesmen, advertisement selling expenses, commission, bank charges, etc.

Question 9.
Explain the procedure for valuation of unsold stock in consignment.
Answer:
At the end of the accounting period, the unsold goods left with the consignee should be valued properly. Otherwise, true profit cannot be ascertained. Unsold stock is valued at either market price or cost price whichever is less. The cost price of the goods for this purpose does not mean only the cost at which the consignor purchased goods. But the proportion of non-recurring or direct expenses incurred by the consignor as well as the consignee should be added to the cost price.

Question 10.
Explain the term normal loss.
Answer:
In the case of some goods, even after taking all the precautions, some loss of quantity is bound to take place. Therefore, the loss which is unavoidable, natural, and due to the inherent nature of goods is called normal loss. For example, if coal is consigned a small portion of coal is bound to lose while loading and unloading. Similarly, in the case of oil and petroleum products, a portion may last due to evaporation and leakage when they are stored.

Question 11.
Accounting treatment for normal loss.
Answer:
Normal loss is unavoidable. Therefore, it forms part of the cost of consignment. Since this loss is usual, no journal entry is required to be passed but the normal loss is to be considered for calculating the cost of unsold stock left with the consignee, normal loss is spread over the remaining stock. Therefore, for calculating the value of the unsold stock, the following formula can be applied.

Textual Exercises

Question 1.
On 1st January 2009, Sudha of Srinagar consigned goods valued at ₹ 20,000 to Indira of Warangal. Sudha paid cartage and other expenses ₹ 1,500. On 1st April 2009, Indira sent on account sales with the following information.
(a) 1/2 of the goods sold for ₹ 15,000
(b) Indira incurred expenses of ₹ 750
(c) Indira is entitled to receive commission @ 5% on sales.
A bank draft was enclosed for the balance due. Prepare necessary Ledger accounts in the books of Sudha.
Solution:

Question 2.
On 1st January 2012, Gopi of Hyderabad consigned goods valued at ₹ 30,000 to Sudheer of Madras. Gopi paid cartage and other expenses ₹ 2,000 on 1st April 2012. Sudheer sent the account sales with the following information:
(a) 50% of the goods sold for ₹ 22,000
(b) Sudheer incurred expenses amounting to ₹ 1,200
(c) Sudheer is entitled to receive a commission @ 5% on sales.
A bank draft was enclosed for the balance due. Prepare the necessary ledger accounts in the books of Gopi.
Solution:

Question 3.
Sai and Co., of Chennai, consigned 100 Radios to Deepthi and Co. of Hyderabad. The cost of each Ratio was ₹ 500. Sai and Co. paid insurance ₹ 500; Freight ₹ 800. Account sales were received from Deepthi and Co., showing the sale of 80 Radios at ₹ 600 each. The following expenses were deducted by them.
Carriage – ₹ 20
Selling expenses – ₹ 130
Commission = ₹ 2,400
Sai and Co. received a bank draft for the balance due. Prepare important Ledger accounts in the books of Deepthi and Co.
Solution:

Question 4.
Raj of Bandar sends 200 T V. sets each costing ₹ 15,000 to Rani of Guntur to be sold on a consignment basis. He incurred the following expenses.
Freight ₹ 2,000; Loading and unloading charges ₹ 2,000 and Insurance ₹ 5,000.
Rani sold 185 TVs for ₹ 30,00,000 and paid ₹ 10,000 as shop rent which is to be borne by Raj as per terms and conditions of consignment.
The consignee is entitled to a commission of ₹ 200 per T V. sold. Assuming that Rani settled the account by sending a bank draft to Raj.
Prepare the necessary Ledger Accounts in the books of Raj.
Solution:

Question 5.
Vishnu of Vijayawada consigned goods valued at ₹ 50,000 to Shiva of Secundrabad. Vishnu paid transport charges ₹ 4,000 and drew a bill of two months on Shiva for ₹ 30,000 as advance. The bill was discounted with bankers for ₹ 29,500. Shiva sent the account sales of the consignment stating that the entire stock was sold for ₹ 72,000; Cartage ₹ 2,000; Commission ₹ 3,000 and a Bank Draft for the balance.
Prepare necessary accounts in the books of Vishnu.
Solution:

Question 6.
Laxmi of Vijayawada consigned goods worth ₹ 20,000 to his agent Saraswathi of Kodad on consignment Laxmi spent ₹ 1,000 on transport, ₹ 500 on insurance: Saraswathi sent ₹ 5,000 as advance. After two months, Laxmi received the account sales as follows:
(a) Half of the goods were sold for ₹ 24,000
(b) Selling expenses were ₹ 1,200
(c) 10% commission on sales
Give ledger accounts in the books of Laxmi.
Solution:

Question 7.
On 1st January 2009, Sudha of Srinagar consigned goods valued at ₹ 20,000 to Indira of Warangal. Sudha paid cartage and other expenses ₹ 1500. On 1st April 2009, Indira sent account sales with the following information:
(a) 50% of the goods sold for ₹ 15,000
(b) Indira incurred expenses amounting to ₹ 750
(c) Indira is entitled to receive commission @ 5% on sales.
A bank draft was enclosed for the balance due. Prepare the necessary ledger accounts in the books of Sudha.
Answer:

Question 8.
Robert consigned goods to Rahim valued at ₹ 5,000 to be sold on a 5% commission basis. Robert has paid ₹ 500 freight and ₹ 550 towards insurance.
Robert received account sales and a draft for the balance from Rahim showing the following particulars.
Gross Sales – ₹ 7500
Selling Expenses – ₹ 450
Commission – ₹ 375
Pass necessary entries journal in the and prepare ledger accounts in the books of both parties.
Solution:

Question 9.
Krishna of Mumbai and Gopal of Chennai is in the consignment business. Gopal sent goods to Krishna for ₹ 10,000. Gopal paid freight ₹ 500. Insurance ₹ 1,500 Krishna met sales expenses ₹ 900, Krishna sold the entire stock for ₹ 20,000 and he is entitled to a commission of 5% on sales.
Write the necessary entries in the books of Gopal and Krishna.
Solution:
In the books of Gopal Journal Entries

In the book of Krishna Journal Entries

Question 10.
Manikanta of Vijayawada Consigned goods of value of ₹ 20,000 to Ayyappa of Ahmedabad. Manikanta paid forwarding charges of ₹ 1,000 and drew a bill of two months on Ayyappa for ₹ 10,000. The bill was discounted with bankers for ₹ 9,500. Ayyappa sent received the account sales of the consignment stating that the entire stock was sold for ₹ 28,000 agents commission ₹ 2,000 and a bank draft for the balance.
Prepare necessary accounts.
Solution:

Question 11.
Mrs. Murali sent 50 Bicycles on consignment to Mr. Deepthi invoiced at ₹ 800 each on Jan 1st, 2009. She has paid the following expenses:
₹ 1,350 – freight, ₹ 600 – Insurance, ₹ 1,500 – other expenses.
On 5th January, she received a bill from Deepthi for ₹ 40,000. On Feb 20th Deepthi sent an account sales showing that the bicycles have realized ₹ 1,000 each. He incurred expenditures on carriage ₹ 500, warehousing ₹ 460, and ₹ 300 miscellaneous expenses. He charged a commission of 10% on sales. Prepare the books of the consignor and consignee.
Solution:

Question 12.
M/s. Robert & Co. of Bangalore consigned 100 cases @ 50 each to Mahathi & Co., of Calcutta. M/s. Robert & Co. spent ₹ 700 on Carriage and paid insurance ₹ 250.
In due course account sales were received with the following details:

Pass necessary entries in the books of both parties.
Solution:
In the books of Robert & Co. Journal Entries

In the books of Mahathi & Co. Journal Entries

Question 13.
A & Co., of Hyderabad, consigned 100 Video Games to B & Co., of Delhi to be sold on consignment @ ₹ 500 each. He paid transport ₹ 2,000 and warehouse charges ₹ 3,000. B & Co. sent account sales stating that

Prepare necessary ledger accounts of both books.
Solution:

Question 14.
X of Chirala consigned 200 bales of Tobacco @ 250 per bale to V of Vijayawada. X paid cartage of freight etc., ₹ 1,250. X drew a bill on V for 3 months for ₹ 30,000. V sold the entire consignment and rendered account sales showing that the goods realized ₹ 60,000 out of which he deducted his charges amounting to ₹ 400 and commission at 5% on sales. Make entries in the journal and show necessary ledger accounts in the books of both parties.
Solution:

Question 15.
Amar consigned 100 bales of cloth to Akbar at ₹ 5,000 per bale. Amar incurred the following expenses:
Packing and Forwarding Charges – ₹ 500
Insurance in Transit – ₹ 2,000
Akbar received the consignment and sold 80 bales at ₹ 8,000 per bale.
They incurred the following expenses:
Freight and Cartage – ₹ 3,000
Insurance of godown – ₹ 400
Salesmen’s Salary – ₹ 1,600
Ascertain the value of the consignment.
Solution:

Question 16.
On January 15, 2009, Dharani of Hyderabad sent 400 Bicycles to be sold on consignment to Dheeraj of Warangal. The Bicycles were invoiced at ₹ 1,000 per piece carriage and other expenses amounted to ₹ 6,000.
Dharani received the following account sales.
On 15th March 100 Bicycles were sold at ₹ 1,450 per piece on which 5% commission was charged and ₹ 3,750 were deducted as expenses.
10th April – 150 Bicycles were sold at ₹ 1,400 per piece on which 5% commission was charged and ₹ 2,900 were deducted as expenses incurred after 15 March.
Prepare consignment Accounts and Accounts in the books of Dharani.
Pass the necessary journal entries in the books of Bhagavan and Lakshman.
Solution:

Textual Examples

Question 1.
When the consignee sold total goods.
Sri Manikanta of Guntur consigned goods of the value of ₹ 1,00,000 to their agent Sri Rama of Hyderabad. Sri Manikanta paid loading and insurance in transit ₹ 5,000. On receiving the consignment Sri Rama sent ₹ 50,000 worth of Bank draft as advance.
Sri Rama sent account sales which show the following particulars.
Gross Sales – ₹ 2,00,000
Godown Rent – ₹ 1,000
Advertisements – ₹ 2,000
Commission 10% on sales
Sri Rama attached a bank draft for the balance due to Sri Manikanta your required to pass journal entries and prepare necessary ledger accounts in the books of Sri Manikanta and Sri Rama.
Solution:

Question 2.
Bhaskar of Rajahmundry consign 500 radio sets each at ₹ 600 to Prasad to Tenali on consignment Bhaskar paid ₹ 12,000 as freight and insurance in transit Bhaskar drawn a bill on Prasad for 3 months for ₹ 1,00,000. Prasad sends account sales which show the following particulars.
(1) Gross sale proceeds are ₹ 4,50,000.
(2) Unloading and godown rent ₹ 10,000.
(3) Commission 5% on Gross sales.
Prasad sends a bank draft for the balance due to Bhaskar.
You are required to prepare necessary ledger accounts in the books of the consignor and consignee.
Solution:

Question 3.
Kishore of Guntur sends 200 bicycles costing ₹ 1,20,000 to Pavan of Vijayawada on consignment. Kishore spends ₹ 6,000 on freight and insurance in transit. Pavan spent unloading charges ₹ 1,200 godown rent ₹ 800, consignee sold 180 bicycles at ₹ 2,00,000. Calculate the value of the closing stock.
Solution:

Note: Godown rent paid by the consignee is a recurring expense. Hence godown rent is not included in the valuation of closing stock.

Question 4.
X Send 500 radios costing ₹ 1,000 each to Y on consignment. X spends ₹ 50,000 on expenses. Y spent ₹ 12,000 as an advertisement. Consignee sold 400 radios each at ₹ 1,200. Calculate the value of the closing stock.
Solution:

Question 5.
Murali and Co of Warangal consign 500 radio sets to Han and Co of Hyderabad. The cost of each radio is ₹ 500. Murali and Co paid insurance ₹ 10,000 and freights ₹ 15,000. Account sales were received from Hari and Co showing the following particulars.
1. 400 radio sets sold each at ₹ 600.
2. Advertisement expenses ₹ 20,000.
3. Commission 10% on sales.
Hari and Co send a bank draft for the balance due to the consignor.
Show journal entries and ledger accounts in the books of both parties.
Solution:

Question 6.
A dealer is apple consign 1,000 tonnes of apples at a cost of ₹ 10,000 and paid ₹ 2,000 towards freight and insurance. The consignee received 950 tonnes of apples. Consignee sold 500 tonnes of apples. 50 tonnes of apples were treated as an unavoidable loss. Calculate the value of the unsold stock.
Solution:
Cost of 1,000 tonnes of apples = ₹ 10,000
Add: Consignor expenses = ₹ 2,000
Total = ₹ 12,000
Total quantity of goods less normal loss in quantity = 1,000 – 50 = 950 tonnes
Stock of unsold goods = 950 – 500 = 450 tonnes

Value of unsold stock = 12000 × \(\frac{450}{950}\)
= ₹ 5,684.21
= ₹ 5684

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 2nd Lesson Depreciation Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 2nd Lesson Depreciation

Essay Questions

Question 1.
Define depreciation. What are the main causes of depreciation?
Answer:
Spicer and Pegler define depreciation as follows ‘Depreciation is the measure of exhaustion of the effective life of an asset from any cause during a given period. Depreciation means a decline in the value of fixed assets due to use, the passage of time, obsolescence, or any other cause.
Causes of depreciation: The main causes of depreciation include the following:

• Wear and tear: When fixed assets are put to use in business operations for earning revenue, the value of such assets may decrease. Such a decrease in the value of assets is said to be due to wear and tear.
• Physical forces: When the assets are exposed to the forces of nature like weather, winds, rains, etc. The value of such assets may decrease even if they are not being put to use.
• Expiration of legal rights: When the use of the assets like patents, copyrights, leases, etc., is governed by a time-bound agreement, the value of such assets may decrease with the passage of time.
• Obsolescence: Obsolescence implies an existing asset becoming out of date on account of the availability of a better type of asset due to technological changes or improvements in production methods.
• Accidents: A decline in the usefulness of the asset may be caused by accidents due to fire, earthquakes, floods, etc. Accidental loss is permanent.
• Depletion: Assets of wasting character such as mines, quarries, oil wells, etc., get depleted with the extraction of raw materials them.

Question 2.
Define depreciation. Explain the need of providing depreciation.
Answer:
“Depreciation is the diminution in the intrinsic value of the asset due to use and or the lapse of time”.
So, depreciation is a permanent, continuous, and gradual decrease in the book value of an asset due to various causes.
Need for Depreciation:

• To ascertain true profit or loss: The true profit or loss can be ascertained only when the depreciation is debited to the profit and loss account along with other revenue expenses like salaries, postage, etc. Which are incurred for the purpose of earning revenue.
• To disclose true and fair financial position: If reasonable depreciation is not deducted from the value of assets, the balance sheet will not reflect the true and fair financial position of business concerns. Hence depreciation should be provided every year to present a true and fair financial position.
• To have funds for the replacement of assets: A portion of profits is set aside in the form of depreciation every year. The amount accumulates and is available for replacement of the asset at the end of its life or when it is discarded.
• To ascertain the true cost of production: For ascertaining the cost of production, it is necessary to charge depreciation as an item of cost of production. If the depreciation is not charged, the cost records would not present the true cost of production.
• To fulfill legal requirements: In the case of joint stock companies, it is compulsory to provide depreciation on fixed assets. Without providing depreciation dividends cannot be declared.

Question 3.
Explain the meaning, merits, and demerits of the Straight Line Method.
Answer:
The straight-line method is the simplest and one of the most widely used methods of providing depreciation. This method is called as Fixed Instalment Method or Equal Instalment Method or Original Cost Method. Under this method, depreciation is calculated at a fixed percentage of the original value of the asset every year. Thus the amount of annual depreciation is uniform throughout the year.
The annual depreciation amount and rate of depreciation is calculated as follows.

Merits of straight-line method:

• It is veiy easy to understand.
• It is very simple to calculate depreciation.
• Assets can be depreciated up to net scrap value or zero value.
• This method is suitable for those assets whose estimated life can be estimated accurately.
• Depreciation will remain the same throughout the life of the asset.

Demerits of straight-line method:

• In this method, the depreciation amount will remain the same throughout the life of the asset.
• But in reality depreciation and repairs will be less in the earlier years and gradually increase in the later part of the life of the asset.
• It becomes difficult to ascertain the amount of depreciation if additions are made during the year.
• This method is not recognized by the income tax authorities.
• No provision is made for interest on the amount invested in the asset.
• It is very difficult to estimate the life of the asset.

Question 4.
Explain the meaning, merits, and demerits of the Reducing Balance Method.
Answer:
This method is known as Diminishing Balance Method or Written Down Value Method. Under this method, depreciation is charged at a fixed percentage on the book value of the asset. Since the book value keeps on reducing by the annual charge of depreciation, it is known as the reducing balance method.
The amount of depreciation decreases year after year. Depreciation is calculated on the diminishing value of the asset. Under this method, the amount of depreciation is larger in the earlier years than in the later years.
Merits:

• The total charge i.e., depreciation and repairs remain uniform year after year. In the earlier years, the amount of depreciation is more and the amount of repairs is less, whereas in later years, the depreciation amount is less and the amount of repairs is more.
• This method is logical in the sense that as an asset grows older, the amount of depreciation also goes on decreasing.
• Income Tax Act, 1961 accept this method for tax purpose.
• This method can be used where obsolescence is high.
• This method is suitable for those assets which have a longer life.

Demerits:

• It is difficult to calculate depreciation.
• The book value of the asset doesn’t become zero.
• It doesn’t take into account the interest on the amount invested in the asset.
• It doesn’t provide for the replacement of assets on the expiry of its life.

Question 5.
What are the differences between the Straight Line Method and the Reducing balance method?
Answer:

Basis of difference	Straight line method	Reducing balance method
1. Basis of calculation	Depreciation is calculated on the original cost.	Depreciation is calculated on the book value (i.e., original cost – depreciation charged till date).
2. Amount of depreciation	The amount of depreciation remains constant.	The amount of depreciation decreases year after year.
3. Total change against Profit and Loss a/c in respect of depreciation and repairs	The total charge against the Profit and Loss account in respect of depreciation and repairs expenses in later years under this method.	The depreciation charge declined in later years. Therefore total depreciation and repair expenses remain similar or equal every year.
4. Recognition by Income Tax Law	This method is not recognized by Income Tax Act.	This method is recognized by Income Tax Act.
5. Suitability	This method is suitable for assets in which repair charges are more, and the possibility of obsolescence is low.	This method is suitable for assets that are affected by technological changes and more repair expenses with the passage of time.

Short Answer Questions

Question 1.
What is depreciation?
Answer:
Depreciation is the gradual reduction or loss in the value of fixed assets like building plants, furniture, etc. If a company purchases a plant for ₹ 1,00,000 with an estimated life of 10 years, the plant will lose a value of ₹ 10,000 every year. This reduction loss is called depreciation.

Question 2.
What are the causes of depreciation?
Answer:
The main causes of depreciation are:

• Wear and tear
• Physical forces
• Expiration of legal rights
• Obsolescence
• Accidents
• Depletion

Question 3.
What is obsolescence?
Answer:
Obsolescence implies an existing asset becoming out of date on account of the availability of a better type of asset due to technological changes or improvements in production methods.

Question 4.
What is depletion?
Answer:
Assets of wasting in nature such as mines, quarries, etc., get depleted with the extraction of raw materials them.

Question 5.
Write different methods of providing depreciation.
Answer:
The following are the different methods of providing depreciation.

• Straight line method
• Reducing balance method
• Annuity method
• Depreciation fund method
• Insurance policy method
• Revaluation method
• Depletion method
• Machine hour rate method

Question 6.
What is the Straight Line Method?
Answer:
The straight-line method is the simple and widely used method of providing depreciation. Under this method, depreciation is calculated at a fixed percentage of the original cost of the asset every year.

Question 7.
What is the Reducing Balance Method?
Answer:
This method is also known as the written down value method. Under this method, depreciation is charged at a fixed percentage on the book value of the asset. Since the book value keeps on reducing by the annual charge of depreciation, it is known as the reducing balance method.

Textual Exercises

Question 1.
Praveen traders purchased a machine for ₹ 80,000. The life of the machine is estimated at 10 years and the residual value is ₹ 10,000. Calculate the annual amount of depreciation according to the Straight Line Method.
Solution:

Question 2.
A machine is purchased for ₹ 40,000. It is estimated that the useful life of the machine is 9 years and the residual value is ₹ 4,000. You are required to find out the annual amount of depreciation and the rate of depreciation under the Straight Line Method.
Solution:

Question 3.
A truck is purchased for ₹ 50,000. It is estimated that the useful life of the truck is 10 years and the residual value is ₹ 5,000. Calculate the annual amount of depreciation and the rate of depreciation under the Straight Line method.
Solution:

Question 4.
On 1st April 2010, Anand traders purchased a machine for ₹ 2,60,000 and spent ₹ 40,000 on its installation. It is estimated that working life is 10 years and after 10 years its scrap value will be ₹ 20,000. Books are closed on 31st March every year.
Write necessary journal entries and prepare machine accounts for the first three years in the books of Anand traders according to the Straight Line Method.
Solution:
Original cost = Purchase price + Installation expenses
= 2,60,000 + 40,000
= ₹ 3,00,000

Question 5.
On 1st July 2011, Neeharika & Co purchased a printing machine for ₹ 2,16,000 and spent ₹ 24,000 on its installation. It was estimated that the effective useful life of the printing machine will be 12 years and its scrap value will be ₹ 24,000. The books are closed on 31st December every year.
Prepare printing machine account and depreciation account for the first three years according to the Straight Line Method.
Solution:

Question 6.
Madan & Company purchased machinery on 1st January 2011 for ₹ 80,000 and spent ₹ 4,000 for its installation. The estimated life of the machinery is 10 years with a scrap value of ₹ 4,000. Books are closed on 31st December every year.
Calculate the amount of annual depreciation under the Straight Line Method and prepare the machinery account for the first three years.
Solution:



Note: 2 and 3 entries are to be passed for another three years.

Question 7.
On 1st January 2011, Raghavendra traders purchased Furniture for ₹ 60,000. Depreciation is to be calculated at the rate of 10% p.a. on Straight Line method. The books are closed on 31st December every year. Write necessary journal entries and prepare Furniture Account for the first four years.
Solution:

Question 8.
On 1st October 2011 Jagannadham & Sons purchased a machine for ₹ 90,000 and spent ₹ 10,000 for its installation. The books are closed on 31st March every year. The firm writes off depreciation at the rate of 10% on the original cost every year.
Prepare Machine Account and Depreciation Account for the first three years.
Solution:

Question 9.
Venugopal traders limited purchased machinery on 1st July 2010 for ₹ 50,000 and spent ₹ 2,000 on its installation. Depreciation is to be provided at @10% p.a. under the Straight Line Method. Books of account are closed on 31st December every year.
Show the machinery account for the first three years.
Solution:

Question 10.
On 1st January 2011 Suma purchased Furniture for ₹ 80,000. Depreciation is to be provided annually at 10% under the Straight Line Method. On 31st December 2013 furniture was sold for ₹ 40,000.
Show the Furniture Account assuming that the books are closed on 31st December every year.
Solution:

Question 11.
Suneetha traders purchased a second-hand machine for ₹ 72,000 on 1st January 2011 and spent ₹ 8,000 on repairs and installed the same. Depreciation is written off at 10% p.a.on the Straight Line Method. On 30th June 2013, the machine was sold for ₹ 50,000.
Prepare machinery accounts assuming that the accounts are closed on 31st December every year.
Solution:

Question 12.
Ranadheer & Co purchased a machine for ₹ 60,000 on 1st January 2011. Depreciation is calculated at @10% on the Straight Line Method. On 1st April 2013, the company sold the machine for ₹ 36,000.
Prepare machine accounts assuming that the accounts are closed on 31st December every year.
Solution:

Question 13.
On 1st January 2011, Siva traders purchased a second-hand machine for ₹ 40,000 and spent ₹ 5,000 on repairs and installed the same. It is estimated that the working life of the machine is 10 years and the scrap value is ₹ 2,500. On 31st December 2013, the machine was sold for ₹ 25,000. Prepare machine account assuming that the books are closed on 31st December every year according to the Straight Line Method.
Solution:

Question 14.
Manoj & Company purchased a second-hand machine for ₹ 18,000 on 1st April 2011 and spent ₹ 2,000 on repairs and installed the same. Depreciation is written off at 10% p.a. on the Straight Line Method. On 30th June 2013, it was sold for ₹ 13,000.
Prepare machine accounts assuming that the accounts are closed on 31st December every year.
Solution:

Question 15.
Ramesh & Co purchased machinery on 1st January 2011 for ₹ 3,00,000. On 1st September 2011, another machine was purchased for ₹ 4,20,000. Depreciation is provided on machinery at 10% p.a. on the Straight Line Method. Books are closed on 31st December every year.
Prepare machinery account for three years.
Solution:

Question 16.
Andhra sugars Ltd. purchased a plant for ₹ 1,00,000 on 1st January 2011. On 1st July of the same year, an additional plant was purchased for ₹ 50,000. On 1st October 2013, the plant purchased on 1st January 2011 has become obsolete and was sold for ₹ 60,000. On the same date, a fresh plant was purchased for ₹ 1,25,000. Depreciation is provided at 10% p.a. on the Straight Line Method.
Prepare plant account for the years assuming that the accounts are closed on 31st December every year.
Solution:

Question 17.
On 1st July 2010 Ganga & Co purchased a secondhand machine for ₹ 40,000 and spent ₹ 6,000 on repairs. On 1st January 2011, a new machine was purchased for ₹ 24,000. On 30th June 2012 the machine purchased on 1st January 2011 was sold for ₹ 16,000 and another machine was installed at a cost of ₹ 30,000. The company writes off depreciation @ 10% p.a. on the original cost every year on 31st March.
Show the machinery account for three years.
Solution:

Question 18.
Rama transport company purchased 6 trucks at ₹ 5,00,000 each on 1st January 2011. The company writes off the depreciation of @10% p.a. on the original cost. The books of account are closed on 31st December every year. On 1st July 2013, one of the trucks is involved in an accident and completely destroyed. A sum of ₹ 2,50,000 is received from the insurance company in full settlement. Prepare Trucks Account for the first three years.
Solution:

Reducing Balance Method

Question 19.
Kushal textile mills purchased machinery on 1st April 2011 for ₹ 4,00,000 and spent ₹ 20,000 for its installation. Depreciation is provided at @ 10% p.a. on the Reducing Balance Method. Books are closed on 31st March every year.
Write necessary journal entries and prepare Machinery Account and Depreciation Account for the first three years.
Solution:

Question 20.
On 1st July 2010, Pradeep & Co purchased machinery for ₹ 50,000. Depreciation is written off at the rate of 10% p.a. under the Reducing Balance Method. Show the Machinery Account for 3 years assuming that the books are closed on 31st December every year.
Solution:

Question 21.
On 1st January 2012, Siva & Co purchased second-hand machinery for ₹ 34,000 and spent ₹ 6,000 on its repairs and installed the same. On 31st December 2014, the machinery was sold for ₹ 26,000. The books are closed on 31st December every year. Depreciation is provided @ 10% p.a. on the Reducing Balance Method. Show the Machinery Account.
Solution:

Question 22.
On 1st January 2011, Geetha traders purchased a printing machine for ₹ 3,00,000. On 1st July 2013, the printing machine was sold for ₹ 1,30,000. Depreciation is provided @ 10% p.a. on the Reducing Balance Method. The books are closed on 31st December every year.
Prepare Printing Machine Account.
Solution:

Question 23.
Sravanthi enterprises purchased a machine for ₹ 40,000 on 1st July 2011 and spent ₹ 5,000 on its installation. Another Machine for ₹ 35,000 was purchased on 1st January 2013. Depreciation is charged @ 20% p.a. on the Reducing Balance Method. Books are closed on 31st March every year. Prepare Machinery Account for three years.
Solution:

Question 24.
On 1st January 2012, Swathi & Co purchased the plant for ₹ 3,00,000. On 1st October 2012, another plant was purchased for ₹ 1,00,000. Depreciation is charged @10% p.a. on the Reducing Balance Method. On 1st October 2013, the first plant was Sold for ₹ 2,20,000.
Prepare plant account for three years assuming that the accounts are closed on 31st December every year.
Solution:

Textual Examples

Illustrations of Straight Line Method

Question 1.
An Asset is purchased for ₹ 40,000. The useful life of the asset is 10 years and the residual value is ₹ 4,000. Find out the annual depreciation and the rate of depreciation under the straight-line method.
Solution:

Question 2.
Radha & Company purchased machinery for ₹ 45,000 on 1st Jan 2010. The estimated life of the machinery is 8 years and the residual value at the end of its life period is ₹ 5,000. The books are closed on 31st December every year.
Write journal entries and show the Machinery Account and Depreciation Account for 3 years on the Straight Line Method.
Solution:

Question 3.
Vasavi & Co purchased machinery for ₹ 80,000 on 1st January 2011. Depreciation is provided annually at 10% on the original cost every year. Die books are closed on 31st December every year.
Prepare Machinery Account for the first 3 years.
Solution:

Question 4.
Narayana and Bros purchased a plant for ₹ 2,00,000 on 1st January 2010 and spent ₹ 50,000 for its installation. The salvage value of the plant after its useful life of 10 years is estimated to be ₹ 20,000. The Books are closed on 31st December every year.
Prepare Plant account and Depreciation Account for the first 3 years using the Straight Line Method.
Solution:
The original cost of Plant = Purchase price + Installation expenses
= 2,00,000 + 50,000
= ₹ 2,50,000

Question 5.
Rama Rao and his sons purchased a machine for ₹ 1,40,000 on 1st July 2011 and spent ₹ 10,000 for its installation. The firm writes off depreciation at the rate of 10% on the original cost every year. The books are closed on December 31st every year.
Prepare Machine Account and Depreciation Account for the three years.
Solution:
1. Original cost of Machine = Purchase price + Installation expenses
= 1,40,000 + 10,000
= ₹ 1,50,000
2. Annual depreciation = 1,50,000 × \(\frac{10}{100}\) = ₹ 15,000
3. Depreciation for the year 2011 = the Asset is used only 6 months from 01-07-2011.
Depreciation shall be provided only for 6 months i.e. ₹ 7,500

Question 6.
On 1st January 2010, Sahithi & Co purchased a second-hand machine for ₹ 80,000 and spent ₹ 4,000 on carriage inwards, ₹ 40,000 as repair charges, and ₹ 2,000 on installation expenses. It is estimated that the machine will have a scrap value of ₹ 5,000 at end of its useful life which is 10 years. On 31st December 2012, the machine was sold for ₹ 50,000. The books are closed on 31st December every year.
Prepare Machine Account.
Solution:

Question 7.
Nagaraju & Co purchased a second-hand machine on 1st January 2011, for ₹ 45,000 and spent ₹ 5,000 on repairs and installed the same. Depreciation is provided at the rate of 10% p.a. under the Straight Line Method. On 1st July 2014, the machine was sold for ₹ 30,000. The books are closed on 31st December every year.
Prepare the Machine Account.
Solution:

Question 8.
Bhavani traders purchased a machine for ₹ 50,000 on 01-01-2010. Another machine was bought on 01-01-2011 for ₹ 60,000 and used from 1st July 2011 onwards. The depreciation is provided at 10% per annum under the Straight Line Method. The books are closed on 31st December every year.
Prepare the machinery account for 3 years.
Solution:

Working Notes:
1. Annual depreciation is calculated as under.
1st Machine = 50,000 × \(\frac{10}{100}\) = ₹ 5,000
2nd Machine = 60,000 × \(\frac{10}{100}\) = ₹ 6,000
2. The Second machine was purchased on 1st January 2011, but started working from 1st July 2011. Hence the depreciation is calculated for 6 months only, i.e. from the date of use to the closing date of the year 2011.
Depreciation on 2nd machine for 6 months = 60,000 × \(\frac{6}{12}\) = ₹ 3,000

Question 9.
On 1st July 2011, Anupama Traders purchased a machine for ₹ 80,000. On 1st April 2012, the firm purchased another machine for ₹ 40,000. on 31st March 2014, the machine which was purchased on 1st April 2012 was sold for ₹ 29,000. The firm writes off 10% depreciation on the original cost. The books are closed on 31st March every year.
Show the machinery account for three years.
Solution:

Question 10.
On 1st April 2011 Rajesh transport company purchased 4 trucks at ₹ 6,00,000 each. The company writes off depreciation @ 10% per annum on the original cost. On 1st July 2013, one of the trucks is involved in an accident and completely destroyed. Insurance company paid ₹ 3,00,000 in full settlement of the claim. The books are closed on 31st December every year.
Prepare trucks to account for three years.
Solution:

Difference between Straight Line Method and Reducing Balance Method

Question 11.
Nagarjuna & Co purchased plant and machinery for ₹ 70,000 on 1st January 2011 and spent ₹ 10,000. for installation expenses. Depreciation is to be provided at 10% on the Reducing Balance Method. Books are closed on 31st December every year.
Write the necessary journal entries and prepare the Plant and Machinery Account and Depreciation Account for three years.
Solution:
Journal Entries in the Books of Nagarjuna & Co

Question 12.
Sujatha enterprises purchased machinery on 1st April 2011 for ₹ 4,00,000. Depreciation is calculated @ 10% per annum on the Reducing Balance Method. Books are closed on 31st December every year.
Prepare Machinery Account for the first three years.
Solution:

Question 13.
Kiran enterprises purchased a printing machine for ₹ 80,000 on 1st July 2011 and spent ₹ 10,000 on its transport and installation expenses. Another machine for ₹ 70,000 was purchased on 1st January 2013. Depreciation is charged at the rate of 20% on the Reducing Balance Method. Books are closed on 31st March every year.
Prepare printing Machine Account for three years.
Solution:

Question 14.
On 1st July 2010, Venkatesh & Co purchased a machine for ₹ 40,000. On 30th June 2013, the machine was disposed of for ₹ 26,000. The books are closed on 31st December every year. Depreciation is to be calculated @ 10% per annum on the Reducing Balance Method.
Show the Machine Account.
Solution:

Question 15.
On 1st January 2011, Bhargava traders purchased machinery for ₹ 40,000. On 1st July of the same year, the firm purchased additional machinery for ₹ 20,000. On 1st July 2013, the machinery purchased on 1st January 2011 has become obsolete, it was sold for ₹ 32,000. The books are closed on 31st December every year.
Prepare Machinery Account for three years providing depreciation @ 10% p.a. on Reducing Balance Method.
Solution:

Question 16.
On 1st January 2010, Manjula & Co purchased a plant for ₹ 30,000. The company purchased another plant on 1st January 2011 for ₹ 28,000 and spent ₹ 2,000 on installation expenses. The books are closed on 31st December every year.
Show the plant account for the first three years providing depreciation at 10% on the first plant and 15% on the second plant on the Reducing Balance Method.
Solution:

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 1st Lesson Bills of Exchange Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 1st Lesson Bills of Exchange

Essay Questions

Question 1.
Define a bill of exchange. Explain the main features of a bill of exchange.
Answer:
Sec. 5 of the Negotiable Instruments Act, of 1881 defines a bill of exchange as follows:
“A bill of exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”.
Features of a bill of exchange: The following are the features of a bill of exchange.

• A bill of exchange must be in writing.
• It must contain an order and not a request to make payment.
• The order of payment must be unconditional.
• The amount of the bill of exchange must be certain.
• The date of the bill of exchange should be clearly mentioned.
• It must be signed by the maker or drawer of the bill.
• It must be accepted by the drawee by signing on it.
• The amount is payable either to a certain person or to his order or to the bearer of the bill.
• The amount of the bill of exchange is payable either on demand or on the expiry of a certain period.
• It must be properly stamped as per legal requirements.

Question 2.
What are the advantages of a bill of exchange?
Answer:
A bill of exchange as an instrument or credit is used frequently in business because of the following advantages.

• It helps in the purchase and sale of goods on a credit basis.
• It is a legally valid document in the eyes of law. It assures an easier recovery to the drawer if the drawee fails to make payments.
• It acts as a source of finance since it can be discounted from the file bank before the due date.
• It is a written and signed acknowledgment of debt.
• It can be easily transferred from one person to another person by endorsement.
• By drawing accommodation bills on one another traders can raise money.

Question 3.
What are the different types of bills of exchange?
Answer:
Bills of exchange can be classified as follows:

• Time bill: When the payment of a bill of exchange is to be made after a particular period of time. The bill is termed a time bill. In such a case, the date of maturity is always calculated by adding three days of grace.
• Demand bill: In the case of a demand bill, payment is to be made on demand. Neither the acceptance of the drawee is necessary nor any days of grace allowed.
• Trade bill: When a bill of exchange has been drawn and accepted for a genuine trade transaction, it is termed a trade bill.
  Ex: A sold goods to B on credit and draws a bill of exchange on B who accepted it. It is a trade bill.
• Accommodation bill: Accommodation bills refer to those bills which are drawn, accepted endorsed without any consideration. These bills are drawn and accepted to meet the financial needs of drawer/drawee/both for a temporary period by getting bills disconnected at the bank.
• Inland bill: A bill is termed as an Inland bill if it is drawn in India on a person residing in India whether payable in or outside India.
  Or
  It is drawn in India on a person residing outside India but payable in India.
• Foreign bill: A bill that is not an inland bill is a foreign bill. A foreign bill is generally drawn up in triplicate and each copy is sent by separate post so that atleast one copy reaches the concerned party at the earliest. Of course, the drawer of the acceptor will sign on a single set. It becomes the actual bill and the payment will be made on the such bill.

Question 4.
Explain the differences between a bill of exchange and a promissory note.
Answer:
The differences between bill of exchange and promissory note are as follows:

Basis of difference	Bills of exchange	Promissory note
1. Drawer	It is drawn by the creditor.	It is drawn by the debtor.
2. Order or promise	It contains an order to make payment.	It contains a promise to make payment.
3. No. of parties	It has three parties namely Drawer Drawee Payee	It has two parties namely The maker Payee
4. Acceptance	It is valid only when it is accepted by the drawee.	It does not require any acceptance.
5. Payee	The drawer and payee can be the same person.	The drawer cannot be the payee of it.
6. Noting	In case of dishonour of bill noting becomes important.	Noting is not necessary in case of dishonour of promissory note.

Question 5.
Explain the differences between a bill of exchange and a cheque.
Answer:
A cheque is a bill of exchange drawn on a specified banker and payable on demand (sec 6 of N.I Act, 1881). A cheque is similar to a bill of exchange with two additional conditions. They are:

• It is always drawn by a specified banker.
• It is always payable on demand.

Differences between Bill of exchange and Cheque

Basis of difference	Bills of exchange	Cheque
1. Acceptance	It requires acceptance to become a legal instrument.	It does not require any acceptance.
2. Stamp duty	It requires the necessary stamp as per the act.	It does not require any stamp.
3. Crossing	It will not have any crossing on the instrument.	It may be crossed.
4. Due date for payment	The proceeds of the bill will be payable on the due date of the instrument.	The cheque amount should be paid immediately as and when it is presented to the bank for payment.
5. Days of Grace	Three days of grace are allowed after the due date of the bill for payment of the bill amount.	Days of grace are not applicable in the case of cheques.
6. Withdrawal	Once accepted the bill cannot be withdrawn by the drawee.	It can be withdrawn by the maker by giving a stop payment order to the bank.

Short Answer Questions

Question 1.
What is a bill of exchange?
Answer:
When goods are sold on credit, the buyer promises the seller that he will pay the number of goods purchased after a certain period. The buyer has to give a promise in writing. The bill of exchange contains an unconditional order to pay a certain amount on an agreed date.

Question 2.
State the three parties involved in a bill of exchange.
Answer:
There are three parties to a bill of exchange.

• Drawer: The drawer is the person who writes the bill of exchange or the person who granted credit.
• Drawee: Drawee is the person on whom the bill of exchange is drawn or to whom the credit is granted.
• Payee: Payee is the person who receives the amount of the bill on maturity. Usually, the drawer and payee are the same people. But when the bill is discounted with a bank by the drawer then the payee is the banker. Similarly, when the bill is endorsed by the drawer to a third party then the payee is the endorsee.

Question 3.
What is a Promissory Note?
Answer:
A promissory note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

Question 4.
What is the due date of a bill?
Answer:
A bill payable on demand or at sight, presentment becomes due as soon as the bill is presented. A bill payable a certain period after the date or after sight becomes nominally due after the expiry of such period. The date which becomes after adding 3 days of grace to be nominally due date of a bill is called the date of maturity.

Question 5.
What are the days of Grace?
Answer:
For making the payment of the bill, the drawee is allowed three extra days after the normal due date. Such three days are known as ‘Days of Grace. If the due date is a public holiday previous day is the due date. If the due date is a sudden holiday, the next day is the due date.

Question 6.
What do you mean by Noting Charges?
Answer:
To obtain proof of dishonour, the bill is re-sent to the drawee through a legally authorized person called a notary public. Notary public charges a small fee for providing this service known as noting charges. Noting charges are paid to the notary public first by the holder of the bill but are ultimately recovered from the drawee because he is the responsible person for the dishonour.

Question 7.
What is meant by acceptance of a bill of exchange?
Answer:
The drawee has to accept the bill prepared by the drawer. Unless the drawee gives his acceptance by writing the word ‘accepted’ and also putting his signature along with the date, the bill does not become a legal document. Before the acceptance, the bill is called ‘Draft’. After acceptance, the bill is returned to the drawer. This is called acceptance of a bill of exchange.

Question 8.
What is meant by discounting a bill?
Answer:
When the bill is encashed from the bank before its due date, it is known as discounting of the bill. Bank deducts a small sum of money as a discount from the amount of the bill and disburses the balance amount to the drawer of the bill.

Question 9.
What is the retirement of the bill of exchange?
Answer:
When the drawee makes the payment of the bill before its due date it is called ‘retirement of the bill’. In such a case, the holder of the bill usually allows a certain amount as a rebate to the drawee.

Question 10.
What do you mean by the renewal of the bill of exchange?
Answer:
Sometimes the drawee of a bill finds himself unable to meet the bill on the due date. To avoid dishonouring of the bill, he may request the holder of the bill to cancel the original bill and draw a new bill in place of the old one. If the holder agrees, the old bill is cancelled and a new bill with new terms is drawn on the drawee and also accepted by him. This is called ‘Renewal of a bill’.

Question 11.
What is meant by ‘Dishonour of a Bill’?
Answer:
When the drawee or acceptor of the bill fails to make payment of the bill on the date of maturity it is called ‘Dishonour of the bill’.

Textual Exercises

A. Bills of Exchange Honoured

Question 1.
On 1st July 2014, Madhu sold goods to Pavan for ₹ 5,000 on credit and drew a bill of exchange for 3 months for the same amount. Pavan accepted the bill and returned it to Madhu. Pavan met his acceptance on maturity.
Pass the necessary Journal entries in the books of Madhu and Pavan.
Solution:
Journal entries in the books of Madhu


Journal entries in the books of Pavan

Question 2.
On 1st March 2013, Radhika sold goods to Harika worth ₹ 9,000 and drew a bill for 2 months for the same amount. Harika accepted the bill and returned it to Radhika. The bill is honoured on the date of maturity.
Pass the necessary Journal entries in the books of Radhika and Harika.
Solution:
Journal entries in the books of Radhika

Journal entries in the books of Harika

Question 3.
On 25th March 2014, Vinod drew a bill for 3 months on Prakash for ₹ 3,000. Prakash accepted the bill and handed it over the bill to Vinod. The bill is honoured on the date of maturity.
Show the journal entries in the books of Vinod and Prakash.
Solution:
Journal entries in the books of Vinod

Journal entries in the books of Prakash

Question 4.
On 1st January 2014, Rajendra sold goods to Narendra worth ₹ 4,000 and drew a bill on Narendra payable after three months. After securing Narendra’s acceptance, Rajendra discounted the bill with his bank at 12% p.a. on 1st February 2014. On the due date, the bill is honoured.
Pass necessary journal entries in the books of Rajendra and Narendra.
Solution:
Journal entries in the books of Rajendra

Journal entries in the books of Narendra

Question 5.
Amar sold goods for ₹ 10,000 to Sundar OD credit on 1st July 2014. Amar drew a bill of exchange on Sundar for the same amount for three months. Sundar accepted the bill and returned it to Amar. Amar discounted the bill with his bank at 10% per annum on the same day. Sundar met bis acceptance on maturity.
Pass necessary journal entries in the books of Amar and Sundar.
Solution:
Journal entries in the books of Amar

Journal entries in the books of Sundar

Question 6.
Sandhya sold goods for ₹ 14,000 to Rajeswari on 1st March 2014 and drew upon her a bill of exchange payable after 2 months. Rajeswari accepted the bill and handed over the same to Sandhya. Sandhya immediately discounted the bill with her bank @ 12% p.a. On the due date, Rajeswari met her acceptance.
Pass the necessary journal entries in the books of Sandhya and Rajeswari.
Solution:
Journal entries in the books of Sandhya

Journal entries in the books of Rajeswari

Question 7.
Satyam sold goods to Sivam worth ₹ 9,000 on 1st June 2013 and drew a bill for 2 months for the same amount. Sivam accepted the bill and returned it to Satyam. Satyam endorsed the bill to his creditor Sundaram on 1st July 2013. The bill was honoured on the due date.
Pass necessary journal entries in the books of Satyam, Sivam, and Sundaram.
Solution:
Journal entries in the books of Satyam

Journal entries in the books of Sivam

Journal entries in the books of Sundaram

Question 8.
On 1st July 2014, Ajay purchased goods worth ₹ 8,000 from Kiran and accepted the bill which was drawn by Kiran payable after three months for the same amount. Kiran sent the bill to his bank for collection. The bill was honoured on the date of maturity.
Pass necessary journal entries in the books of Kiran and Ajay.
Solution:
Journal entries in the books of Kiran

Journal entries in the books of Ajay

Question 9.
Jayaram sold goods for ₹ 20,000 to Sivaram on 15th March 2014 and drew upon him a bill of exchange payable after two months. Sivaram accepted the bill and returned the same to Jayaram. On the due date, the bill was honoured.
Pass the necessary journal entries in the books of Jayaram and Sivaram in the following circumstances.
I. When the bill was retained by Jayaram till the date of its maturity.
II. When Jayaram immediately discounted the bill @ 6% p.a. with his bank.
III. When the bill was endorsed immediately by Jayaram in favour of his creditor Seetharam.
IV. When the bill was sent by Jayaram to his bank for collection on 25th April 2014.
Solution:
Journal entries in the books of Jayaram


Journal entries in the books of Sivaram

B. Dishonour of bills of exchange

Question 10.
Kotireddy purchased goods worth ₹ 12,000 from Rajareddy on 25th March 2014 and accepted a bill of exchange drawn upon him by Rajareddy payable after two months. On the date of maturity, Kotireddy dishonoured the bill. Rajareddy paid ₹ 80 as noting charges.
Pass the necessary journal entries in the books of Rajareddy and Kotireddy.
Solution:
Journal entries in the books of Kotireddy

Journal entries in the books of Rajareddy

Question 11.
Parvathi sold goods worth ₹ 14,000 to Suneetha on 1st January 2014. Suneetha paid ₹ 4,000 immediately and for the balance, she accepted a bill of exchange drawn upon her by Parvathi payable after 3 months. Parvathi discounted the bill immediately with her bank @ 10% p.a. On the due date, Suneetha dishonoured the bill and the bank paid ₹ 30 as noting charges.
Pass the necessary journal entries in the books of Parvathi and Suneetha.
Solution:
Journal entries in the books of Parvathi

Journal entries in the books of Suneetha

Question 12.
On 1st January 2014, Hari accepted 3 months bill for ₹ 12,000 drawn on him by Raju. Raju discounted the bill with his bank @ 9% p.a. on the Same day. On the due date, Hari dishonoured his acceptance.
Pass the necessary journal entries in the books of Raju and Hari.
Solution:
Journal entries in the books of Raju

Journal entries in the books of Hari

Question 13.
On 25th April 2013, Bhagavan sold goods for ₹ 13,000 to Lakshman and drew upon him a bill of exchange for 3 months for the same amount Lakshman accepted the bill and sent the same to Bhagavan. Bhagavan endorsed the bill in favour of his creditor Raman. On the due date, the bill was dishonoured and Raman paid ₹ 90 as Noting charges.
Pass the necessary journal entries in the books of Bhagavan and Lakshman.
Solution:
Journal entries in the books of Bhagavan

Journal entries in the books of Lakshman

Question 14.
Manga purchased goods for ₹ 20,000 from Gangs on 1st February 2013 and accepted a bill of exchange drawn by Gangs for the same amount payable after 2 months. On 20th February 2013 Gangs sent the bill to her bank for collection. On the due date, Manga dishonoured the bill and the bank paid ₹ 100 as noting charges.
Pass the necessary journal entries in the books of Gangs and Manga.
Solution:
Journal entries in the books of Ganga

Journal entries in the books of Manga

Question 15.
Mohan sold goods for ₹ 15,000 to Vinod on 1st January 2014 and drew upon him a bill of exchange for the same amount to payable after two months. Vinod accepted the bill and handed it over the bill to Mohan. On the due date, the bill was dishonoured.
Pass the necessary journal entries in the books of Mohan and Vinod in the following cases.
I. When Mohan retained the bill till the due date and paid ₹ 150 as noting charges.
II. When Mohan discounted the bill @ 12% p.a. on 4th February 2014 and the bank paid ₹ 150 as noting charges.
III. When Mohan endorsed the bill immediately in favour of his creditor Amar and paid ₹ 150 as noting charges.
IV. When Mohan sent the bill to his bank for collection on 25th January 2014 and bank paid ₹ 150 as noting charges.
Solution:
Journal entries in the books of Mohan


Journal entries in the books of Vinod

C. Renewal of a bill

Question 16.
On 1st July 2013, Kalyan sold goods to Kapil for ₹ 24,000 and drew upon him a bill for the same amount payable after 3 months. Kapil accepted the bill and returned it to Kalyan. On the due date, Kapil expressed his inability to honour the bill and offered to pay ₹ 12,000 in cash and to accept a new bill for the balance amount including interest at 10% p.a. for 2 months. Kalyan agreed to this proposal. On the due date, the new bill was honoured.
Pass the necessary journal entries in the books of Kalyan and Kapil.
Solution:
Journal entries in the books of Kalyan

Journal entries in the books of Kapil

Question 17.
Anasuya sold goods worth ₹ 6,000 to the Padma on 1st March 2013 and drew upon her a bill for the same amount payable after three months. The Padma accepted the bill and sent it back to Anasuya. On the due date, Padma expressed her inability to honour the bill and requested Anasuya to cancel the original bill and draw a new bill for three months. Anasuya agreed the proposal provided interest at 12% was paid immediately in cash. The Padma paid such interest in cash and accepted a new bill. The new bill was dishonoured on the due date.
Pass the necessary journal entries in the books of Anasuya and Padma.
Solution:
Journal entries in the books of Anasuya


Journal entries in the books of Padma

Question 18.
On 1st May 2014 Akhil sold goods to Nikhil for ₹ 6,000 on credit and drew a bill on him for three months for the same amount. Nikhil accepted the bill and returned it to Akhil. On 4th August 2014, Nikhil requested Akhil to draw a new bill for the amount due. Akhil agreed to draw a new bill for 2 months but he charged interest @ 12% p.a. This bill was honoured on its maturity.
Pass necessary journal entries in the books of Akhil and Nikhil.
Solution:
Journal entries in the books of Akhil

Journal entries in the books of Nikhil

D. Retiring of a bill under rebate

Question 19.
On 1st January 2013, Nagababu sold goods for ₹ 10,000 to Damodhar and drew upon him a bill of exchange payable after two months. Damodhar accepted the bill and handed over the same to Nagababu. One month before the maturity of the bill Damodhar approached Nagababu to accept the payment against the bill under a rebate of 9% p.a. Nagababu agreed to the request Damodhar. Damodhar retired the bill under the agreed rate of rebate.
Pass the necessary journal entries in the books of Nagababu and Damodhar.
Solution:
Journal entries in the books of Nagababu

Journal entries in the books of Damodhar

Question 20.
On 1st June 2014, Meghana sold goods for ₹ 13,000 to Kaveri and drew upon her a bill of exchange payable after 3 months. Kaveri accepted the bill and returned it to Meghana. One month before the maturity of the bill Kaveri approached Meghana to accept the payment against the bill under a rebate of 12% p.a. Meghana agreed to the request of Kaveri to retire the bill under the agreed rate of rebate.
Pass the necessary journal entries in the books of Meghana and Kaveri.
Solution:
Journal entries in the books of Meghana

Journal entries in the books of Kaveri

E. Insolvency of Drawee

Question 21.
Jayababu purchased goods for ₹ 25,000 from Tatababu on 1st February 2014 and accepted a bill of exchange drawn by Tatababu for the same amount The bill was payable after 2 months. Before the due date of the bill, Jayababu became insolvent and nothing could be recovered from his estate.
Write necessary journal entries in the books of Tatababu and Jayababu.
Solution:
Journal entries in the books of Tatababu

Journal entries in the books of Jayababu

Question 22.
Anil sold goods worth ₹ 17,000 to Sunil on 1st March 2014 and drew upon him a bill for three months for the same amount Sunil accepted the bill and handed over it to Anil. On the same day, Anil discounted the bill @ 12% p.a. with his bank. Before the due date of the bill, Sunil became insolvent and only 50 paise in a rupee could be recovered from his estate.
Pass necessary journal entries in the books of Anil and Sunil.
Solution:
Journal entries in the books of Anil

Journal entries in the books of Sunil

Textual Examples

Question 1.
On 1st March 2014, Ravi sold goods for ₹ 10,000 to Vikas on credit and drew a bill for 3 months for the same amount Vikas accepted the bill and returned it to Ravi. This bill is honoured on the date of maturity.
Pass the necessary journal entries in the books of Ravi and Vikas.
Solution:
Journal entries in the books of Ravi (Drawer)

Journal entries in the books of Vikas (Drawee)

Question 2.
On 1st January 2013, Sankar sold goods worth ₹ 20,000 to Bhaskar on credit and drew a bill for 3 months for the same amount. Bhaskar accepted the bill and returned it to Sankar. On the same day, Sankar discounted the bill with his bank at 10% per annum. On the due date, the bill is honoured.
Pass the necessary journal entries in the books of Sankar and Bhaskar.
Solution:
Journal entries in the books of Sankar (Drawer)

Journal entries in the books of Bhaskar (Drawee)

Question 3.
On 1st March 2014, Sumathi purchased goods for ₹ 8,000 from Lakshmi and accepted a bill for the same amount drawn by Lakshmi payable after 3 months. Lakshmi discounted the bill with her bank on 1st April 2014 at 12% per annum. Sumathi met her acceptance on the due date.
Pass the necessary journal entries in the books of Lakshmi and Sumathi.
Solution:
Journal entries in the books of Lakshmi (Drawer)

Journal entries in the books of Sumathi (Drawee)

Question 4.
On 1st January 2014, Venkatesh sold goods worth ₹ 5,000 to Nagarjuna and drew a bill on Nagarjuna for 3 months for the same amount Nagaijuna accepted the bill and returned it to Venkatesh. On 1st February 2014, Venkatesh endorsed the bill in favour of his creditor Prabhakar in the settlement of his debt. The bill was honoured on the due date.
Pass the necessary journal entries in the books of Venkatesh, Nagarjuna, and Prabhakar.
Solution:
Journal entries in the books of Venkatesh (Drawer)

Journal entries in the books of Nagarjuna (Drawee)

Journal entries in the books of Prabhakar (Endorsee)

Question 5.
On 1st July 2014, Parasuram sold goods to Rama Krishna for ₹ 7,000 and drew a bill on him for the same amount for two months. Rama Krishna accepted the bill and returned the same to Parasuram. Immediately after its acceptance, Parasuram sent the bill to his bank for collection. On the due date, bill is honoured.
Pass necessary journal entries in the books of Parasuram and Rama Krishna.
Solution:
Journal entries in the books of Parasuram (Drawer)


Journal entries in the books of Rama Krishna (Drawee)

Question 6.
Ashok sold goods to Rajesh on 1st April 2014 for ₹ 10,000 on credit and drew upon him a bill for the same amount payable after 3 months. Rajesh accepted the bill and returned it to Ashok. On the date of maturity, a bill was presented to Rajesh for payment and he honoured it.
Pass the journal entries in the books of Ashok and Rajesh when
Case I: Bill is retained by Ashok till the date of maturity.
Case II: Bill is discounted by Ashok with his bank on the same date @ 12% p.a.
Case III: Bill is endorsed in favour of Santosh on 4th May 2014.
Case IV: Bill is sent to the bank for collection on 1st June 2014.
Also, record the journal entries in the books of Santosh.
Solution:
Journal entries in the books of Ashok (Drawer)

Journal entries in the books of Rajesh (Drawee)

Journal entries in the books of Santosh (Endorsee)

Question 7.
On 15th March 2014, Suresh sold goods for ₹ 3,000 to Naresh on credit. Naresh accepted the bill of exchange drawn upon him by Suresh payable after 2 months. On the due date, the bill was dishonoured and Suresh paid ₹ 40 as noting charges.
Pass the journal entries in the books of Suresh and Naresh.
Solution:
Journal entries in the books of Suresh (Drawer)


Journal entries in the books of Naresh (Drawee)

Question 8.
Narayana purchased goods for ₹ 15,000 from Ravindra on 1st March 2013. Ravindra drew upon Narayana a bill of exchange for the same amount payable after two months. The bill was immediately discounted by Ravindra with his bank @ 6% p.a. On the due date, the bill was dishonoured and Bank paid ₹ 100 as noting charges.
Pass the necessary journal entries in the books of Ravindra and Narayana.
Solution:
Journal entries in the books of Ravindra (Drawer)


Journal entries in the books of Narayana (Drawee)

Question 9.
On 1st January 2013, Leela purchased goods for ₹ 15,000 from Neela. She immediately made a payment of ₹ 5,000 by cash and for the balance accepted the bill of exchange for 3 months drawn upon her by Neela. On 25th January 2013, Neela purchased goods worth ₹ 10,000 from Bala and endorsed the above bill to Bala. On the due date, the bill was dishonoured and Bala paid ₹ 50 as noting charges.
Pass the necessary journal entries in the books of Neela, Leela, and Bala.
Solution:
Journal entries in the books of Neela (Drawer)

Journal entries in the books of Leela (Drawee)


Journal entries in the books of Bala (Endorsee)

Question 10.
On 1st June 2014 Jaya sold goods to Surya for ₹ 8,000 on credit and drew a bill on Surya for the above amount payable after 3 months. Immediately after its acceptance, Jaya sent the bill to her bank for collection. On the due date, the bill was dishonoured and the noting charges amounted to ₹ 70.
Pass the necessary journal entries in the books of Jaya and Surya.
Solution:
Journal entries in the books of Jaya (Drawer)


Journal entries in the books of Surya (Drawee)

Question 11.
Siva sold goods to Pradeep on 1st May 2014 for ₹ 6,000 on credit and drew upon him a bill for the same amount payable after 2 months. Pradeep accepted the bill and returned it to Siva. On the date of maturity, Pradeep failed to make payment of the bill.
Pass the necessary journal entries in the books of Siva and Pradeep in the following cases:
Case I: When Siva retained the bill till the due date and paid noting charges of ₹ 100.
Case II: When Siva discounted the bill with his bank on 4th June 2014 @ 12% p.a. and the bank paid noting charges of ₹ 100.
Case III: When Siva endorsed the bill in favour of his creditor Rahul on 1st June 2014 and Rahul paid noting charges of ₹ 100.
Case IV: When Siva sent the bill to his bank for collection on 1st June 2014 and bank paid noting charges of ₹ 100.
Solution:
Journal entries in the books of Siva (Drawer)

Case I: When the bill is retained by Siva till the date of maturity

Case II: When the bill is discounted by Siva with his bank

Case III: When the bill is endorsed in favour of Rahul

Case IV: When the bill is sent to the bank for collection

Journal entries in the books of Pradeep (Drawee)

Question 12.
On 1st September 2014, Hari purchased goods for ₹ 12,000 from Sekhar and accepted a bill for the same amount drawn by Sekhar payable after 3 months. On the date of maturity, Hari offered to pay ₹ 6,000 and requested Sekhar to draw a new bill for 3 months for the balance amount including interest at 12% p.a. Sekhar agreed to this proposal.
Pass the necessary journal entries in the books of Sekhar and Hari.
Solution:
Journal entries in the books of Sekhar (Drawer)


Journal entries in the books of Hari (Drawee)

Question 13.
Viswanath sold goods to Srinivas on 1st April 2014 for ₹ 4,000 and drew a bill for 3 months on Srinivas for the same amount Srinivas accepted the bill and returned it to Viswanath. On the due date, Srinivas requested Viswanadh to draw a new bill for the period of 3 months. Srinivas agreed to pay interest in cash @ 9% p.a. immediately. Viswanath agreed to this proposal. The new bill was honoured on the due date.
Pass the necessary journal entries in the books of Viswanath and Srinivas.
Solution:
Journal entries in the books of Viswanath (Drawer)

Journal entries in the books of Srinivas (Drawee)

Question 14.
On 1st March 2013 Jagannadham sold goods to Chidambaram for ₹ 24,000 and drew upon him a bill for the same amount payable after 3 months. On the due date, Chidambaram requested Jagannadham to renew the bill for a further period of 3 months at 9% interest per annum. Jagannadham agreed to this proposal. Chidambaram accepted a new bill drawn by Jagannadham for the amount of the old bill including interest payable after 3 months. On the due date, a new bill was dishonoured.
Pass the necessary journal entries in the books of Jagannadham and Chidambaram.
Solution:
Journal entries in the books of Jagannadham (Drawer)


Journal entries in the books of Chidambaram (Drawee)

Question 15.
On 1st March 2013, Prudhvi sold goods to Akbar for ₹ 6,000 and drew upon him a bill for the same amount payable after 3 months. Akbar accepted the bill and returned it to Prudhvi. On 4th April 2013, Akbar retired the bill under a rebate of 12% p.a.
Pass the necessary journal entries in the books of Prudhvi and Akbar
Solution:
Journal entries in the books of Prudhvi (Drawer)

Journal entries in the books of Akbar (Drawee)

Question 16.
On 1st January 2014 Revathi drew a bill for ₹ 4,000 on Savithri payable after 3 months. Savithri accepted the bill and returned it to Revathi. On 4th February 2014, Savithri retired the bill under a rebate of 9% p.a.
Pass the necessary journal entries in the books of Revathi and Savithri.
Solution:
Journal entries in the books of Revathi (Drawer)

Journal entries in the books of Savithri (Drawee)

Question 17.
Damayanthi sold goods worth ₹ 9,000 to Jayanthi on 1st June 2014 and drew a bill for 2 months for the same amount Jayanthi accepted the bill and returned it to Damayanthi. Before the due date of the bill, Jayanthi became insolvent and nothing could be recovered from her estate.
Pass the necessary journal entries in the books of Damayanthi and Jayanthi.
Solution:
Journal entries in the books of Damayanthi (Drawer)

Journal entries in the books of Jayanthi (Drawee)

Question 18.
Kumar sold goods worth ₹ 7,000 to Murali on 1st January 2014 and drew upon him a bill for 3 months for the same amount Murali accepted the bill and returned it to Kumar. On the due date, murali requested Kumar to draw a new bill for the amount due. Kumar agreed to draw a new bill for 2 months but he charged interest @ 12% p.a. Murali accepted the new bill which was drawn by Kumar. Before the due date of the bill, Murali became insolvent and only 50 paise in a rupee could be recovered from his estate.
Pass the necessary journal entries in the books of Kumar and Murali.
Solution:
Journal entries in the books of Kumar (Drawer)

Journal entries in the books of Murali (Drawee)

Andhra Pradesh BIEAP AP Inter 2nd Year Economics Study Material 10th Lesson Economic Statistics Textbook Questions and Answers.

AP Inter 2nd Year Economics Study Material 10th Lesson Economic Statistics

Essay Questions

Question 1.
What are the uses of dispersion?
Answer:
According to A.L.Bowley “Dispersion is the measure of the variation of the items”.
According to Brooks and Dick “Dispersion or spread is the degree of the scatter or variation of the variable about a central value”.
Uses of Dispersion :

1. To use other statistical methods: After getting the value of dispersion we can proceed to other techniques such as locating co-relation or lines of regression (Regression Analysis).
2. To compare variability: We are in the general habit of comparison, may it be income, weight, or temperature. To achieve the required degree of result one tries to improve to achieve the required result.
3. To test reliability of average: If the total of differences between the central value and the given value is smaller, the uniformity is less i.e., it means that this sum should be minimum for the reliability of the average.
4. To establish trends in time series : In time series we remove, cyclical, seasonal or random fluctuations, which we from after studying central values.
5. To control the undesired variability: According to Spurr and Bonini “In industrial production, efficient operation requires control of quantity variation, the causes of which are sought through inspection and quality control programmes”.

Thus it is clear from above definition that we have to find the cause for variation when we compare the degree of variability between two series.

Question 2.
What is meant by dispersion ? Explain the various measures of dispersion.
Answer:
The measurement of the scatteredness of the mass of figures in a series about an average is called a measure of variation or dispersion. According to A.LBowley “Disper-sion is the measure of the variation of the items”.

According to Brooks and Dick “Dispersion or spread is the scatter or variation of the variable about a central value.
Methods of studying variation :

1. The range
2. The interquartile range and the quartile deviation
3. The mean deviation or average deviation
4. The standard deviation and
5. The Lorenz curve

1) Range : It is the simplest of the values of dispersion. It is merely the difference between the largest and smallest term- symbolically,
R = L – S

2) Inter – quartile range or quartile deviation: In range we used to calculate L – S terms. But in this case we leave the 1^st 25% and last 25% terms to avoid the undue importance of extreme values.
Q.D = \(\frac{\mathrm{Q}_3-\mathrm{Q}_1}{2}\)

3) Mean deviation : It is the average difference between the items in a series from the mean or median or mode.
M.D. = \(\frac{\Sigma f|D|}{N}\)

4) Standard deviation : It is also called Root – Mean Square deviation, as it is the square root of the mean of the squared deviations from the actual mean.
S.D = \(\sqrt{\Sigma \frac{(x-\bar{x})^2}{N}}\)
σ = \(\sqrt{\frac{\sum \mathrm{x}^2}{\mathrm{~N}}}\)

5) Lorenz curve : It is graphic method to study dispersion. It helps in studying the variability in different components of distribution.

Question 3.
Calculate the quartile deviation for frequency distribution.

Solution:

Q₁ = L + \(\frac{\frac{\mathrm{n}}{4}-\mathrm{CF}}{\mathrm{f}}\) × i
Where Q₁ = Size of \(\left(\frac{\mathrm{n}}{4}\right)^{\mathrm{th}}\) value = \(\left(\frac{\mathrm{10}}{4}\right)^{\mathrm{th}}\) = 10^th item
L = Lower limit = 10
C.F = 5 (value of C.F for the class preceeding the quartile class)
i = 10 (frequency of the quartile class)
Q₁ = 10 + \(\frac{10-5}{8}\) × 10 = 16.25
Similarly Q₃ = L + \(\frac{3\left(\frac{n}{4}\right)-\text { C.F }}{f}\) × i
Where Q₃ =\(\frac{3(n)}{4}=\frac{3(40)}{4}=\frac{120}{4}\) = (30)^th item
C.F = 29, f = 7, i = 20, L = 40
L = 40
Q₃ = 40 + \(\frac{30-29}{7}\) × 20 = 42.87
Q₃ = 42.87
Q.D. = \(\frac{\mathrm{Q}_3-\mathrm{Q}_1}{2}\)
Q.D. = \(\frac{42.87-16.25}{2}\) = 13.31
∴ Q.D. = 13.31

Question 4.
Calculate the Karl Pearson’s coefficient of correlation.

Solution:

Short Answer Questions

Question 1.
Define relation between M.D, S.D and Q.D.
Answer:
Measures of dispersion can be classified into five types.

1. The range
2. The inter quartile range and the quartile deviation
3. The mean deviation or average deviation
4. The standard deviation
5. The Lorenz curve

The range and quartile deviations are positional measures because they depend on the values at a particular position in the distribution.

The average deviation and the standard deviation are called calculation measures of deviation because all of the values are employed in their calculation while the last method is a graphic method.

Question 2.
Calculate the standard deviation of the following values 5, 10, 25, 30, 50. [A.P. Mar. 17]
Solution:

Question 3.
Define Lorenz Curve. When is it used ?
Answer:
This curve was given by Dr. Max.O.Lorenz, a popular Economic statistician. He studied the distribution of wealth and income with its help. It is graphic method to study dispersion. It helps in studying the variability in different components of the distribution. The base of Lorenz curve is that we take cumulative percentage along X & Y axis. Joining these points we get the Lorenz curve.

Lorenz curve uses the information expressed in a cumulative manner to indicate the degree of variability.
For example: The monthly incomes of employees of a company given below.

Solution:

Question 4.
What is correlation ? State its importance.
Answer:
Correlation is an analysis of the co-variation between two or more variables.

1. The correlation is a statistical device which help to analyzing the co-variation between two or more variables.
2. If the value of a variable is given, we can know the value of another variable.
3. With the help of correlation we can predict about the future.
4. It helps us in knowing the important variables on which other depend.
5. In the field of commerce and industry, the technique of correlation coefficient helps to make estimates like sales, price or costs.

Question 5.
How many types of index numbers ?
Answer:
The first index was constructed in 1764 to compose the Italian price index in 1750 with the price level in 1500. Index numbers are devices for measuring difference in the magnitude of groups of related variabilities.
There are four types of index numbers. They are :

1. Price index number
   a) Wholesale price index number
   b) Retail price index number
2. Quantity index number
3. Cost living index number
4. Special purpose index number

Very Short Answer Questions

Question 1.
Range. [A.P. Mar. 17, 16]
Answer:
Range is the simplest method of studying dispersion. It is defined as the difference between the value of the smallest item and the value of the largest item included in the distribution.
Range = L – S
Where L = Largest item; S = Smallest item.

Question 2.
Mean deviation.
Answer:
Mean deviation also called as average deviation. It is the average difference between the items in a series from the mean or median or mode. In this mean deviation we ignored ± signs.
M.D. = \(\frac{\Sigma \mathrm{f}|\mathrm{D}|}{\mathrm{N}}\)

Question 3.
Correlation. [A.P. Mar 17]
Answer:
Correlation is an analysis of the co-variation between two or more variables. There are two types of correlation.

1. Karl Pearson’s method
2. Spearman’s Rank method
   Karl Pearson’s correlation (r) = \(\frac{\Sigma x y}{\sqrt{\Sigma x^2 \times \Sigma y^2}}\)
   Spearman’s correlation (rk) = \(\frac{6 \Sigma D^2}{N\left(N^2-1\right)}\)
   (Or) 1 – \(\frac{6 \Sigma D^2}{N^3-\mathrm{N}}\)

Question 4.
Rank correlation.
Answer:
In 1904, Prof. Charter Edward Spearman had devised a method of rank correlation. It is based on the ranking of different items in the variable. This method is useful where actual item values are not given simply their ranks in the series are known.

Question 5.
Index number. [A.P. Mar. 18]
Answer:
Index numbers are devices for measuring difference in the magnitude of groups related variabilities. There are four types of index numbers.

1. Price index number
2. Quantity index number
3. Cost living index number
4. Special purpose index number

Question 6.
Laspeyre’s price index formula.
Answer:
P₀₁ = \(\frac{\Sigma \mathrm{P}_1 \mathrm{Q}_0}{\Sigma \mathrm{P}_0 \mathrm{Q}_0}\) × 100

Question 7.
Paasche’s price index formula. [A.P. Mar 16]
Answer:
P₀₁ = \(\frac{\Sigma \mathrm{P}_1 \mathrm{Q}_1}{\Sigma \mathrm{P}_0 \mathrm{Q}_1}\) × 100

Question 8.
Fisher’s price index formula.
Answer:
P₀₁ = \(\sqrt{\mathrm{L} \times \mathrm{P}}\)
= \(\sqrt{\frac{\Sigma \mathrm{P}_1 \mathrm{Q}_0}{\Sigma \mathrm{P}_0 \mathrm{Q}_0} \times \frac{\Sigma \mathrm{P}_1 \mathrm{Q}_1}{\Sigma \mathrm{P}_0 \mathrm{Q}_0}}\) × 100