TUTOR MARKED ASSIGNMENT
Course Code : ECO - 14
Course Title : Accountancy - II
Assignment Code : ECO – 14/TMA/2014-15
Coverage : All Blocks
Maximum Marks: 100
Attempt all the questions.
Answer of Q.N.1.
Revaluation of Assets and Liabilities on
admission of a new partner:
Whenever a new
partner is admitted, it is desirable to revalue the assets and liabilities of
the firm to show them at their true and fair values. Revaluation of assets and
liabilities is necessary because with the passage of time the value of some
assets might have been increased while the value of some assets might have been
decreased; the same is the case with the liabilities. Generally, no adjustments
are made in this respect. Therefore, the actual values of various assets and
liabilities may be different from the values stated in the balance sheet. It
is, therefore, desirable from the point of view of the new partner as well as
old partners the value of assets and liabilities should be revalued.
For the purpose
of revaluation, a separate account is opened which is called Revaluation
Account. It is a nominal account. The Revaluation account is credited if there
is an increase in the value of assets or decrease in the value of liabilities.
On the other hand it is debited if there is any decrease in the value of assets
or an increase in the value of liabilities. This account is a nominal account
and is sometimes also called Profit and Loss adjustment account. The profit or
Loss arising due to revaluation is divided among the old partners in their old
ratio. A Proforma of revaluation account is given below:
Revaluation Account
Particulars
|
Amount
|
Particulars
|
Amount
|
Assets [decrease
in value]
Liabilities
[increase in value]
Liabilities[unrecorded]
Profit
transferred to Capital A/c
[Individually in
existing ratio]
|
Assets [Increase
in value]
Liabilities[Decrease
in value]
Assets
[unrecorded]
Loss transferred
to Capital A/c
[Individually in
existing ratio]
|
Example
of Revaluation Account
Manu and Tanu
are partners sharing profit and losses in the ratio of 5:4. Their Balance Sheet was as follows:
Balance Sheet of Manu and Tanu as on December 31, 2013
Liabilities
|
Amount
(Rs.)
|
Assets
|
Amount
(Rs.)
|
Creditors
Bills Payable
Capital:
Manu
Tanu
|
10,000
7,000
40,000
30,000
|
Cash in hand
Building
Machinery
Investments
Debtors
Stock
|
7,000
30,000
20,000
10,000
10,000
10,000
|
87,000
|
87,000
|
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 Rs.800.
(ii) Building and investment are
appreciated by 10%.
(iii) Machinery is deprecated by 5%
(iv) Creditors were overestimated
by Rs.500.
Prepare revaluation account on the admission of Nikhil.
Revaluation Account
Particulars
|
Amount
|
Particulars
|
Amount
|
To Provision for doubtful debts
To Machinery
To Profit on Revaluation
- Manu = (2700*5/9)
- Tanu = (2700*4/9)
|
800
1,000
1,500
1,200
|
By Building
By Investments
By Creditors
|
3,000
1,000
500
|
4,500
|
4,500
|
Answer of Q.N.2.
Journal Entries
In the Books of AB Ltd.
Particulars
|
Dr.
|
Cr
|
Bank
Account
Dr.
To
Equity Share Application Account
(Application for
3,00,000 shares received)
|
6,00,000
|
6,00,000
|
Equity Share
Application
Account Dr.
To
Equity Share Capital Account
To
Equity Share Allotment Account
To
Bank Account
(Share application
money transferred to respective accounts refund made on rejected
applications.)
|
6,00,000
|
2,00,000
3,00,000
1,00,000
|
Equity Share
Allotment
Account Dr.
To
Equity Share Capital Account
(Allotment money
and premium credited)
|
3,00,000
|
3,00,000
|
Equity Share 1st
and Final Call
Account
Dr.
To
Equity Share Capital
(First call amount
credited to share capital)
|
5,00,000
|
5,00,000
|
Bank Account
Dr.
Calls in Arrear
Account Dr.
To
Equity Share 1st and Final Call Account
(First call amount
received with default on 3,000 shares)
|
4,85,000
15,000
|
5,00,000
|
Equity Share
Capital
Account Dr.
To
Share forfeiture Account
To
Calls in Arrear Account
(Shares with
default forfeited)
|
30,000
|
15,000
15000
|
Bank
Account
Dr.
Share Forfeiture
Account
Dr
To Equity Share Capital Account
(Forfeited shares
reissued)
|
24,000
6,000
|
30,000
|
Share Forfeiture
Account
Dr.
To Capital Reserve
(Surplus in the
share forfeiture account transferred to Capital reserve )
|
9,000
|
9,000
|
Answer of Q.N.3.
Ledger Accounts
In the Books of Chaudhary Harpal Singh
Escorts Ltd.
Date
|
Particulars
|
Amount
|
Date
|
Particulars
|
Amount
|
1st Year
|
To Bank Account
(Down Payment)
To Bank Account
(1st Instalment)
To Balance C/d
|
2,000
6,600
15,000
|
1st Year
|
By Tractor Account
By Interest Account
(20,000 * 8%)
|
22,000
1,600
|
23,600
|
23,600
|
||||
2nd Year
|
To Bank Account
(2nd Instalment)
To Balance C/d
|
6,200
10,000
|
2nd Year
|
By Balance B/d
By Interest Account
(15,000 * 8%)
|
15,000
1,200
|
16,200
|
16,200
|
||||
3rd Year
|
To Tractor Account
|
19,800
|
3rd Year
|
By Balance B/d
By Interest Account
(10,000 * 8%)
By Bank Account
|
10,000
800
9,000
|
19,800
|
19,800
|
Tractor Account
Date
|
Particulars
|
Amount
|
Date
|
Particulars
|
Amount
|
1st Year
|
To Escorts Ltd.
|
22,000
|
1st Year
|
By Depreciation Account
(22,000*10%)
By Balance C/d
|
2,200
19,800
|
22,000
|
22,000
|
||||
2nd Year
|
To Balance B/d
(2nd Instalment)
To Balance C/d
|
19,800
|
2nd Year
|
By Depreciation Account
(19,800*10%)
By Balance C/d
|
1,980
17,820
|
19,800
|
19,800
|
||||
3rd Year
|
To Tractor Account
To Profit and Loss Account
|
17,820
3,762
|
3rd Year
|
By Depreciation Account
(17,820*10%)
By Escorts Ltd.
|
1,782
19,800
|
21,582
|
21,582
|
Answer
of Q.N.4.
(a) Goods in Transit
Normally, the
head office sends goods to the branch and it is immediately recorded by
head office in its books. But, the branch will record it when the goods are
physically received by the branch. Similarly, sometimes the branch returns
goods to the head office and is immediately recorded by branch. But
the return of goods will be recorded by head office when the returned goods are
duly received by them. These goods which are on the way
to branch/head office but not received till the end of the accounting year
are called 'Goods in Transit'.
Sometimes accounting adjustments is
required, if there are goods in transit at the end of the year. It is quite
understandable that a difference should arise in the balances of head office
and branch accounts due to these transactions. Therefore, to reconcile the
accounts, the following journal entry will be passed either in head office
books or in branch books:
(a) When the
adjustment entry passed in the books of the head office:
Goods in Transit a/c Dr.
To Branch a/c
(Goods in transit taken into books)
(b) When the
adjustment entry passed in the books of the branch:
Goods in Transit a/c Dr.
To Head office a/c
(Goods in transit taken into books)
It should be remembered that the above
adjustment entry should be passed in one set of books either in the books of
head office or in the books of the branch. In the Balance Sheet of Head office,
the above item will be shown as an asset. In the next accounting year,
the following reverse adjustments entry is passed for goods in transit in the
books of head office:
Branch A/c Dr.
To Goods in
Transit A/c
(b) Cash in Transit
All
the branches send cash at regular interval to head office. But, at the end
of accounting period, some cash sent by the branch are still in transit. Similarly,
Head office also send cash to Branch to meet its day to day expenses but such
cash is not received by the branch till the end of the accounting year. The
cash which are on the way to branch/ head office till the end of the accounting
year is called “Cash-in-transit”.
It
is quite understandable that
a difference should be arises in the balances of head office and branch
accounts due to Cash in transit. Therefore, to reconcile the head office
accounts with branch accounts, the following journal entry will be passed
either in head office books or in branch books:
(a) When the
adjustment entry passed in the books of the head office:
Cash in Transit a/c Dr.
To Branch a/c
(Cash in transit taken into books)
(b) When the
adjustment entry passed in the books of the branch:
Cash in Transit a/c Dr.
To Head office a/c
(Cash in transit taken into books)
It should be remembered that the above
adjustment entry should be passed in one set of books either in the books of
head office or in the books of the branch. In the Balance Sheet of Head office,
the above items will be shown as an asset. In the next accounting year,
the following reverse adjustments entry is passed for goods in transit in the
books of head office:
Branch A/c Dr.
To Cash in
Transit A/c
Answer
of Q.N.5.
Meaning of funds flow statement:
The financial statement of the business indicates assets, liabilities
and capital on a particular date and also the profit or loss during a
period. But it is possible that there is enough profit in the business and the
financial position is also good and still there may be deficiency of cash or of
working capital in business. Financial statements are not helpful in analysing
such situation. Therefore, a statement of the sources and applications of funds
is prepared which indicates the utilisation of working capital during an accounting
period. This statement is called Funds Flow statement.
In popular sense the term ‘fund’ is used to denote excess of current
assets over current liabilities.
According to R.N. Anthony, “Fund
Flow is a statement prepared to indicate the increase in cash resources and the
utilization of such resources of a business during the accounting period.”
According to Smith Brown, “Fund
Flow is prepared in summary form to indicate changes occurring in items of
financial condition between two different balance sheet dates.”
From the above discussion, it is clear that the fund flow statement is
statement summarising the significant financial change which have occurred
between the beginning and the end of a company’s accounting period.
Difference
between Funds Flow Statement and Cash Flow Statement
Basis of Difference
|
Funds Flow Statement
|
Cash Flow Statement
|
Basis of
Analysis
|
Funds flow
statement is based on broader concept i.e. working capital.
|
Cash flow
statement is based on narrow concept i.e. cash, which is only one of the
elements of working capital.
|
Objective
|
The object funds
flow statement is to disclose the magnitude, direction and causes of changes
in working capital.
|
The object of
cash flow is to disclose the magnitude, direction and causes of changes in
cash and cash equivalents.
|
Source
|
Funds flow
statement tells about the various sources from where the funds generated with
various uses to which they are put.
|
Cash flow
statement starts with the opening balance of cash and reaches to the closing
balance of cash by proceeding through sources and uses.
|
Usefulness
|
Funds flow
statement is more useful in assessing the long-term financial position.
|
Cash flow statement
is more useful in assessing the short-term financial position of the
business.
|
Schedule of
Changes in Working Capital
|
In funds flow
statement changes in current assets and current liabilities are shown through
the schedule of changes in working capital.
|
In cash flow
statement changes in current assets and current liabilities are shown in the
cash flow statement.
|
Causes
|
Funds flow
statement shows the causes of changes in net working capital.
|
Cash flow
statement shows the causes of changes in cash.
|
Principal
of Accounting
|
Funds flow
statement is based on the accrual basis of accounting.
|
In cash flow
statement, data are obtained on accrual basis which are converted into cash
basis.
|
Compulsion
|
There is no
prescribed form for preparation of Funds flow statement.
|
Cash flow
statement is compulsory to be prepared in prescribed proforma as given in AS
– 3.
|
Relationship
|
Funds flow
statement can be prepared from the cash flow statement under indirect method.
|
But a cash flow
statement cannot be prepared from funds flow statement.
|
Financial
Health
|
Sound fund
position does not necessarily mean sound cash position.
|
But sound cash
position is always followed by sound fund position.
|
Significance of Funds Flow statement in
Financial Management
Funds Flow
Statement is an analytical tool in the hands of financial manager. The basic
purpose of this statement is to indicate on historical basis the changes in the
working capital i.e., where funds came from and where there are used during a
given period. The utility of this statement can be measured on the basis of its
contributions to the financial management. It generally serves the following
purposes:
(1) Analysis
of Financial Position. The basic purpose of preparing the statement is
to have a rich into the financial operations of the concern. It analyses how
the funds were obtained and used in the past. In this sense, it is a valuable
tool for the finance manager for analyzing the past and future plans of the
firm and their impact on the liquidity. He can deduce the reasons for the
imbalances in uses of funds in the past and take necessary corrective actions. In
analyzing the financial position of the firm, the Funds Flow Statement answers
to such questions as-
1. Why
were the net current assets of the firm down, though the net income was up or
vice versa?
2. How
was it possible to distribute dividends in absence of or in excess of current
income for the period?
3. How
was the sale proceeds of plant and machinery used?
4. How
was the sale proceeds of plant and machinery used?
5. How
were the debts retired?
6. What
became to the proceeds of share issue or debenture issue?
7. How
was the increase in working capital financed?
8. Where
did the profits go?
Though it is not
an easy job to find the definite answerers to such questions because funds
derived from a particular source re rarely used for a particular purpose.
However, certain useful assumptions can often be made and reasonable
conclusions are usually not difficult to arrive at.
(2)
Evaluation of the Firm's Financing. One important use of the statement
is that it evaluates the firm' financing capacity. The analysis of sources of
funds reveals how the firm's financed its development projects in the past
i.e., from internal sources or from external sources. It also reveals the rate
of growth of the firm.
(3) An
Instrument for Allocation of Resources. In modern large scale
business, available funds are always short for expansion programmes and there
is always a problem of allocation of resources. It is, therefore, a need of
evolving an order of priorities for putting through their expansion programmes
which are phased accordingly, and funds have to be arranged as different phases
of programmes get into their stride. The amount of funds to be available for
these projects shall be estimated by the finance with the help of Funds Flow
Statement. This prevents the business from becoming a helpless victim of
unplanned action.
(4) A Tool of
Communication to Outside World. Funds Flow Statement helps in
gathering the financial states of Business. It gives an insight into the
evolution of the present financial position and gives answer to the problem
'where have our resources been moving'? In the present world of credit
financing, it provides a useful information to bankers, creditors, financial,
it provides a useful information and government etc. regarding amount of loan
required, its proposes, the terms of repayment an sources for repayment of loan
etc. the financial manager gains a confidence born out of a study of Funds Flow
Statement. In fact, it carries information regarding firm's financial policies
to the outside world.
(5) Future
Guide. An analysis of Funds Flow Statements of several years reveals
certain valuable information for the financial manager for planning the future
financial requirements of the firm and their nature too i.e. Short term,
long-term or midterm. The management can formulate its financial policies based
on information gathered from the analysis of such statements. Financial manager
can rearrange the firm's financing more effectively on the basis of such
information along with the expected changes in trade payables and the various
accruals. In this way, it guides the management in arranging its financing more
effectively.