PAPER – 1: PRINCIPLES & PRACTICE OF ACCOUNTING

QUESTIONS
True and False
1. State with reasons, whether the following statements are true or false:
(i) The gain from sale of capital assets need not be added to revenue to ascertain the
net profit of a business.
(ii) Sale of office furniture should be credited to Profit and Loss Account.
(iii) The additional commission to the consignee who agrees to bear the loss on account
of bad debts is called overriding commission.
(iv) A partnership firm can acquire fixed assets in the name of the firm.
(v) Debenture holders enjoy the voting rights in the company.
Theoretical Framework
2. (a) Distinguish between fundamental accounting assumption and accounting policies.
(b) Change in accounting policy may have a material effect on the items of financial
statements.” Explain the statement with the help of an example.
Journal Entries
3. (a) You are required to pass necessary journal entries in the books of Kewal:
(i) Cheque amounting ` 9,000 from Hari Krishan in full settlement of his account
for ` 10,000.
(ii) Withdrawn for personal use: Goods (Sales Price ` 8,000, Cost ` 6,000), cash
`1,000
(iii) Goods costing ` 3,000 (Sale price `4,000) distributed as free samples.
(iv) Received commission ` 10,000, half of which does not relate of current year
and is received in advance.
(v) Purchased second hand machinery from Jawahar for `30,000 against a
cheque. Goods of ` 12,000 (Cost ` 9,000) used in repairs of this machinery
which is necessary to make it ready for working.
Capital or Revenue Expenditure
(b) Classify the following expenditures as capital or revenue expenditure:
(i) An extension of railway tracks in the factory area.
(ii) Amount spent on painting the factory.

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 2 FOUNDATION EXAMINATION: MAY, 2022

(iii) Payment of wages for building a new office extension.

(iv) Amount paid for removal of stock to a new site.
(v) Rings and Pistons of an engine were changed to get full efficiency.
Cash Book
4. (a) Prepare a Petty Cash Book on the Imprest System from the following:
2021 `
April 1 Received ` 40,000 for petty cash
“ 2 Paid auto fare 1,000
“ 3 Paid cartage 5,000
“ 4 Paid for Courier 1,000
“ 5 Paid wages 1,200
“ 5 Paid for stationery 800
“ 6 Paid for the repairs to machinery 3,000
“ 6 Bus fare 200
“ 7 Cartage 800
“ 7 Courier 1,400
“ 8 Cartage 6,000
“ 9 Stationery 4,000
“ 10 Sundry expenses 10,000

Rectification of Errors
(b) The books of accounts of Dime Ltd. for the year ending 31.3.2021 were closed with
a difference in books carried forward. The following errors were detected
subsequently:
(i) Return outward book was under cast by ` 100.
(ii) ` 1,500 being the total of discount column on the credit side of the cash book
was not posted.
(iii) ` 6,000 being the cost of purchase of office furniture was debited to Purchase
A/c.
(iv) A credit sale of ` 760 was wrongly posted as ` 670 to the customers’ A/c. in
the sales ledger.
(v) The Sales of ` 10,000 was omitted to be recorded.
Pass rectification entries in the next year.

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 3

Bank Reconciliation Statement

5. From the following particulars of M/s Swapnil enterprises, prepare a Bank reconciliation
statement:
(1) Bank overdraft as per Pass Book as on 31st March, 2021 was ` 8,800
(2) Cheques deposited in Bank for ` 5,800 but only ` 2,000 were cleared till 31st
March.
(3) Cheques issued were ` 2,500, ` 3,800 and ` 2,000 during the month. The
cheque of ` 5,800 is still with supplier.
(4) Dividend collected by Bank ` 1,250 was wrongly entered as ` 1,520 in Cash
Book.
(5) Amount transferred from fixed deposit A/c into the current A/c ` 2,000
appeared only in Pass Book
(6) Interest on overdraft ` 930 was debited by Bank in Pass Book and the
information was received only on 3rd April 2021.
(7) Direct deposit by M/s Rajesh Trader ` 400 not entered in Cash Book.
(8) Corporation tax ` 1,200 paid by Bank as per standing instruction appears in
Pass Book only.
Valuation of Inventories
6. A trader prepared his accounts on 31st March, each year. Due to some unavoidable
reasons, no stock taking could be possible till 15 th April, 2021 on which date the total cost
of goods in his godown came to ` 1,50,000. The following facts were established
between 31st March and 15 th April, 2021.
(i) Sales ` 1,23,000 (including cash sales ` 30,000)
(ii) Purchases ` 15,102 (including cash purchases ` 5970)
(iii) Sales Return ` 3,000.
(iv) On 15th March, goods of the sale value of ` 30,000 were sent on sale or return
basis to a customer, the period of approval being four weeks. He returned 40% of
the goods on 10th April, approving the rest; the customer was billed on 16th April.
(v) The trader had also received goods costing ` 24,000 in March, for sale on
consignment basis; 20% of the goods had been sold by 31st March, and another
50% by the 15th April. These sales are not included in above sales.
Goods are sold by the trader at a profit of 20% on sales.
You are required to ascertain the value of Inventory as on 31st March, 2021.

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 4 FOUNDATION EXAMINATION: MAY, 2022

Concept and Accounting of Depreciation

7. M/s. Seven Seas purchased a second-hand machine on 1st April, 2017 for
` 1,60,000. Overhauling and erection charges amounted to ` 40,000.
Another machine was purchased for ` 80,000 on 1st Oct, 2017.
On 1st Oct, 2019, the machine installed on 1st April, 2017 was sold for ` 1,00,000.
Another machine for `30,000 was purchased and was installed on
31st December, 2019.
Under the existing practice the company provides depreciation @ 10% p.a. on original
cost. However, from 1st April,2020 it decided to adopt WDV method and to charge
depreciation @ 15% p.a. You are required to prepare Machinery account for the years
2017 to 2021.
Bills of Exchange
8. On 1st January 2021, Swapnil draws two bills of exchange for ` 32,000 and ` 50,000.
The bill of exchange for ` 32,000 is for two months while the bill of exchange for
` 50,000 is for three months. These bills are accepted by Vishal. On 4th March, 2021,
Vishal requests Swapnil to renew the first bill with interest at 15% p.a. for a period of two
months. Swapnil agreed to this proposal. On 25th March, 2021, Vishal retires the
acceptance for ` 50,000, the interest rebate i.e. discount being ` 500. Before the due
date of the renewed bill, Vishal becomes insolvent and only 50 paisa in a rupee could be
recovered from his estate.
Show the Journal Entries (with narrations) in the books of Swapnil.
Consignment
9. On 1.1.2021, Mr. Sam of Kerala consigned to Mr. Alex of Chennai goods for sale at
invoice price. Mr. Alex is entitled to a commission of 5% on sales at invoice price and
20% of any surplus price realized over and above the invoice price. Goods costing
` 5,00,000 were consigned to Chennai at the invoice price of ` 7,50,000. The direct
expenses of the consignor amounted to ` 50,000. On 31.3.2021, an account sales was
received by Mr. Sam from Mr. Alex showing that he had effected sales of ` 6,00,000 in
respect of 4/5th of the quantity of goods consigned to him. Mr. Alex’s direct expenses
were ` 15,000. Mr. Alex accepted a bill drawn by Mr. Sam for ` 5,00,000 and remitted
the balance due in cash.
You are required to prepare the consignment account and the account of Mr. Alex in the
books of Mr. Sam.
Sales of goods on approval or return basis
10. S Ltd. sells goods on Sale or Return basis. Customers having the choice of returning the
goods within 15 days. During April 2021, the following are the details of the goods sent:

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 5

Date of dispatch Party’s name Amount `

April 2 M/s G 20,000
4 M/s H 36,000
16 M/s I 50,000
20 M/s J 16,000
24 M/s K 42,000
28 M/s L 60,000
Within the stipulated time G and I returned the goods while H, J and K informed that they
have accepted the goods. Prepare the following in the books of ‘S’.
(i) Goods on “sales or return, sold and returned day books”.
(ii) Goods on sales or return total account.
Average Due Date
11. Sunder purchases goods on credit. His due dates for payments were as under:
Transaction Date ` Due Date
March 5 1,200 April 08
April 15 800 May 18
May 10 1,100 June 13
June 5 1,600 July 10
Calculate Average due date.
Account current
12. The following are the transactions that took place between X and Y during the period
from 1st October, 2020 to 31st March, 2021:
2020 `
Oct.1 Balance due to X by Y 3,000
Oct 18 Goods sold by X to Y 2,500
Nov. 16 Goods sold by Y to X (invoice dated November, 26) 4,000
Dec.7 Goods sold by Y to X (invoice dated December, 17) 3,500
2021 `
Jan. 3 Promissory note given by X to Y, at three months 5,000
Feb. 4 Cash paid by X to Y 1,000
Mar. 21 Goods sold by X to Y 4,300
Mar.28 Goods sold by Y to X (invoice dated April, 8) 2,700

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 6 FOUNDATION EXAMINATION: MAY, 2022

Draw up an Account Current up to March 31 st, 2021 to be rendered by X to Y, charging

interest at 10% per annum. Interest is to be calculated to the nearest rupee.
Final accounts and Rectification of entries
13. Mr. Bansal submitted to you the following trial balance, which he has not been able to
agree. Rewrite the trial balance and prepare trading and profit and loss account for the
year ended 31.3.2021 and a balance sheet as on that date after giving effect to the
undermentioned adjustments:
Particulars Dr. Cr.
` `
Capital - 16,000
Opening stock 17,500 -
Closing stock - 18,790
Drawings 3,305 -
Returns inward - 550
Carriage inward 1,240 -
Deposit with X - 1,400
Returns outward 840 -
Carriage outward - 725
Rent paid 800 -
Rent outstanding 150 -
Purchases 13,000 -
Sundry debtors 5,000 -
Sundry creditors - 2,200
Furniture 1,500 -
Sales - 29,000
Wages 850 -
Cash 1,370 -
Advertisement __950 _____
46,505 68,665
Adjustments:
1. Write off ` 600 as bad debt and make a provision for doubtful debts at 5% on
balance sundry debtors.
2. Stock valued at ` 2,000 was destroyed by fire on 25th March,2021, but insurance
company admitted a claim for ` 1,500 only and paid the sum in April,2021.

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 7

3. Depreciation to be provided on furniture at 10% per annum.

Partnership Accounts
Profit and Loss Appropriation Account
14. (a) A and B are partners in a firm sharing profits and losses equally. On 1st April, 20 20
the balance of their Capital Accounts were : A ` 50,000 and B ` 40,000. On that
date the balances of their Current Accounts were: A ` 10,000 (credit) and B `
3,000 (debit). Interest @ 5% p.a. is to be allowed on the balance of Capital
Accounts as on 1.4.2020. B is to get annual salary of ` 3,000 which had not been
withdrawn. Drawings of A and B during the year were ` 1,000 and ` 2,000
respectively. The profit for the year ended 31st March, 2021 before charging
interest on capital but after charging B’s salary was ` 70,000. It is decided to
transfer 10% of divisible profit to a Reserve Account. Prepare Profit & L oss
Appropriation Account for the year ended 31st March, 2021 and show Capital and
Current Accounts of the Partners for the year.
Calculation of goodwill
(b) Tina and Rita are partners in a firm. Their capitals are: Tina ` 6,00,000 and Rita
` 4,00,000. During the year ended 31st March, 2021 the firm earned a profit of
` 3,00,000. Assuming that the normal rate of return is 20%, calculate the value of
goodwill on the firm:
(i) By Capitalization Method; and
(ii) By Super Profit Method if the goodwill is valued at 3 years purchase of Super
Profit.
Admission and Retirement of Partner
15. Acme & Co. is a partnership firm with partners Mr. A, Mr. B and Mr. C, sharing profits and
losses in the ratio of 10:6:4. The balance sheet of the firm as at 31 st March, 2021 is as
under:
Liabilities ` Assets `
Capitals: Land 30,000
Mr. A 2,40,000 Buildings 6,00,000
Mr. B 60,000 Plant and machinery 3,90,000
Mr. C 90,000 3,90,000 Furniture 1,29,000
Reserves Investments 36,000
(un-appropriated profit) 60,000 Inventories 3,90,000
Long Term Debt 9,00,000 Trade receivables 4,17,000
Bank Overdraft 1,32,000

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 8 FOUNDATION EXAMINATION: MAY, 2022

Trade payables 5,10,000

19,92,000 19,92,000
It was mutually agreed that Mr. B will retire from partnership and in his place Mr. F will be
admitted as a partner with effect from 1st April, 2021. For this purpose, the following
adjustments are to be made:
(a) Goodwill is to be valued at `3 lakh but the same will not appear as an asset in the
books of the reconstituted firm.
(b) Buildings and plant and machinery are to be depreciated by 5% and 20%
respectively. Investments are to be taken over by the retiring partner at ` 45,000.
Provision of 20% is to be made on Trade receivables to cover doubtful debts.
(c) In the reconstituted firm, the total capital will be ` 6 lakhs which will be contributed
by Mr. A, Mr. B and Mr. C in their new profit sharing ratio, which is 2:2:1.
(i) The surplus funds, if any, will be used for repaying bank overdraft.
(ii) The amount due to retiring partner shall be transferred to his loan account.
You are required to prepare
(a) Revaluation account;
(b) Partners capital accounts;
(c) Bank account; and
(d) Balance sheet of the reconstituted firm as on 1st April, 2021.
Financial Statements of Not for Profit Organizations
16. From the following receipts and payments account of Pune Club, prepare income and
expenditure account for the year ended 31.03.2021 and its balance sheet as on that
date:
Receipts ` Payments `
Cash in hand 4,000 Salary 2,000
Cash at bank 10,000 Repair expenses 500
Donations 5,000 Purchase of furniture 6,000
Subscriptions 12,000 Misc. expenses 500
Entrance fees 1,000 Purchase of investments 6,000
Interest received from bank 500 Insurance premium 200
Sale of old newspaper 150 Snooker table 8,000
Sale of drama tickets 1,050 Stationary 150
Drama expenses 500

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 9

Cash in hand (closing) 2,650

Cash at bank (closing) 7,200
33,700 33,700
The following adjustments are to be made while drawing up the accounts:
1. Subscriptions in arrear for year 2020-21 `900 and subscriptions in advance for
2021-22 ` 350.
2. Insurance premium outstanding ` 40 and Misc. expenses prepaid `90.
3. 50% of donation is to be capitalized.
4. Entrance fees are to be treated as revenue income.
5. 8% interest has accrued on investment for five months.
6. Snooker table costing ` 30,000 was purchased on 31st March,2020 and `22,000
were paid for it.
Issue of Shares
17. On 1st June, 2020, Suraj Ltd. issued 43,000 shares of ` 100 each payable as follows:
` 20 on application;
` 20 on allotment;
First call of ` 30 on 1st Dec, 2020; and
Second and final call of ` 30 on 1st March, 2021.
By 20th July, 40,000 shares were applied for and all applications were accepted.
Allotment was made on 1st Aug. All sums due on allotment were received on 15th Sept;
those on 1st call were received on 20th Dec.
You are required to journalise the transactions when accounts were closed on
31st March, 2021
Forfeiture of Shares
18. Delta Ltd. forfeited 600 shares of ` 10 each issued at a premium of 10% to W for non-
payment of first and final call money of ` 3 (including ` 1 premium). At different intervals
of time out of these 400 shares were re-issued to Z, credited as fully paid for ` 9 per
share and 100 shares were re-issued to X as ` 10 paid up for ` 11 per share. Record the
journal entries for forfeiture and reissue of shares.
Issue of Debentures
19. On 1st April 2020, XY Ltd. took over assets of `4,50,000 and liabilities of 60,000 of
Himalayan Ltd. for the purchase consideration of ` 4,40,000. It paid the purchase
consideration by issuing 8% debenture of ` 100 each at 10% premium on same date.

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 10 FOUNDATION EXAMINATION: MAY, 2022

XY Ltd. issued another 3000, 8% debenture of ` 100 at discount of 10% redeemable at

premium of 5 % after 5 years. According to the terms of the issue ` 30 is payable on
application and the balance on the allotment on debentures. It has been decided to write
off the entire loss on issue of discount in the current year itself.
You are required to pass the journal entries in the books of XY Ltd. for the financial year
2020-21
20. Write short notes on:
(i) Noting Charges.
(ii) Objective of Accounting Standards.
(iii) Retirement of bills of exchange.
(iv) Over-riding Commission.

SUGGESTED ANSWERS

1. (i) True: The profit on sale of capital assets should not be added to revenue to
ascertain profit since it has not been earned due to normal business operations.
(ii) False: Sale of office furniture should be credited to Furniture account since it is a
capital receipt.
(iii) False: The additional commission to the consignee who agrees to bear the loss on
account of bad debts is called del-credere commission.
(iv) False: A partnership firm cannot acquire fixed assets in its name since it is not a
separate legal entity. It can acquire fixed assets in the name of its partners.
(v) False: Debenture holders do not enjoy voting rights in company.
2. (a)
Fundamental Accounting Assumption Accounting Policies
There are three fundamental accounting There is no single list of
assumptions viz. Going Concern, accounting policies which are
Consistency and Accrual. applied in all circumstances. As a
result, there may be different
accounting policies adopted by
different enterprises.
No disclosures is required if all the Disclosure is required if a
fundamental assumptions have been particular accounting policy has
followed. been followed.
If fundamental accounting assumption is If the policy is changed in
not followed, it is to be disclosed in the subsequent year, the effect of

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 11

financial statements together with the such change should be disclosed

reasons. in the financial statements.
There is no option to choose The firm has an option to select a
fundamental accounting assumptions. particular policy.
(b) Change in accounting policy may have a material effect on the items of financial
statements. For example, cost formula used for inventory valuation is changed from
weighted average to FIFO. Unless the effect of such change in accounting policy is
quantified, the financial statements may not help the users of accounts.
3. (a) In the books of Kewal
Journal entries
Particulars Dr. Cr.
Amount Amount
` `
(i) Bank A/c Dr. 9,000
Discount allowed A/c Dr. 1,000
To Hari Krishan A/c 10,000
(Amount received from Hari Krishan after allowing
discount of 1,000).
(ii) Drawings Dr. 7,000
To Purchases A/c 6,000
To Cash A/c 1,000
(Goods and cash withdrawn for personal use).
(iii) Free Samples/Sales promotion A/c Dr. 3,000
To Purchases A/c 3,000
(Being the goods distributes as free samples).
(iv) Bank A/c Dr. 10,000
To Commission A/c 10,000
(Commission received).
Commission A/c Dr. 5,000
To Commission received in Advance A/c 5,000
(Commission received in advance adjusted).
(v) Machinery A/c Dr. 30,000
To Bank A/c 30,000
(Machinery purchased from Jawahar)
Machinery A/c Dr. 9,000

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 12 FOUNDATION EXAMINATION: MAY, 2022

To Purchases A/c 9,000

(Goods used in repairs of Machinery).
(b) (i) Expenses incurred for extension of railway tracks in the factory area should be
treated as a Capital Expenditure because it will yield benefit for more than one
accounting period.
(ii) Painting of the factory should be treated as a Revenue Expenditure because it
has been incurred to maintain the factory building.
(iii) Payment of wages for building a new office extension should be treated as a
Capital Expenditure.
(iv) Amount paid for removal of stock to a new site is treated as a Revenue
Expenditure because it is not enhancing the value of any asset.
(v) Expenditure incurred for changing Rings and Pistons of an engine is a
Revenue Expenditure because, the change of rings and piston will restore the
efficiency of the engine only and it will not add anything to the capacity of the
engine.
4. (a) PETTY CASH BOOK
Receipts Date V. Particulars Total Con- Cartage Statio- Courier Wages Sundries
No. veyance nery
` 2021 ` ` ` ` ` ` `
40,000 April1 To Cash
2 1 By Conveyance
1,000
1,000
3 2 By Cartage 5,000 5,000
4 3 By Courier 1,000 1,000
5 4 By Wages 1,200 1,200
5 5 By Stationery 800 800
6 6 By Repairs to 3,000
3,000
machine
6 7 By Conveyance
200
200
7 8 By Cartage 800 800
7 9 By Courier 1,400 1,400
8 10 By Cartage 6,000 6,000
9 11 By Stationery 4,000 4,000
10 12 By Sundry 10,000
10,000
Expenses
34,400 1,200 11,800 4,800 2,400 1,200 13,000
By Balance c/d 5,600

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 13

40,000 40,000
5,600 To Balance b/d
28,800 11 To Cash

(b) In the Books of Dime Ltd.

Particulars Dr. Cr.
Amount Amount
2021 ` `
(i) Suspense A/c Dr. 100
To Profit & Loss Adjustment A/c 100
(Returns outward book was under cast now
rectified).
(ii) Suspense A/c Dr. 1,500
To Profit & Loss Adjustment A/c 1,500
(Discount received was not recorded, now
rectified)
(iii) Office Furniture A/c Dr. 6000
To Profit & Loss Adjustment A/c 6000
(Office furniture purchased wrongly debited to
Purchase A/c. now rectified.)
(iv) Debtors A/c Dr. 90
To Suspense A/c 90
(Debtors account was posted ` 670 in place of
760 now rectified.)
(v) Debtors A/c Dr. 10,000
To Profit & Loss Adjustment A/c 10,000
(Sales of `10,000 omitted to be recorded, now
rectified)
5. Bank Reconciliation Statement as on 31 st March, 2021
Particulars Amount
`
Overdraft as per Pass Book 8,800
Add: (i) Cheques issued but not presented till 31st March 5,800
(ii) Transfer from fixed deposit 2,000
(iii) Direct deposit by M/s Rajesh Trader 400 8,200
17,000

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Less: (i) Cheques deposited but not cleared (5,800 - 2,000) 3,800
(ii) Dividend collected excess recorded in Cash Book (1,520-1,250) 270
(iii) Interest on overdraft debited in Pass Book only 930
(iv) Corporation tax paid appeared in Pass Book only 1200 6,200

Overdraft as per Cash Book 10,800

6. Statement of Valuation of Stock on 31st March, 2021
` `
Value of stock as on 15th April, 2021 1,50,000
Add: Cost of sales during the period from 31 st March, 2021
to 15th April, 2021
Sales (` 1,23,000 – ` 3,000) 1,20,000
Less: Gross Profit (20% of ` 1,20,000) 24,000 96,000
Cost of goods sent on approval basis
(80% of ` 18,000) 14,400
260400
Less: Purchases during the period from 31 st March, 2021 to
15th April, 2021 15,102
Unsold stock out of goods received on consignment
basis (30% of ` 24,000) 7,200 22,302
2,38,098
7. Machinery Account in the books of M/s. Seven Seas
Date Particulars Amount Date Particulars Amount
` `
1.4.2017 To Bank A/c 1,60,000 31.03.2018 By Depreciation A/c 24,000
To Bank A/c 40,000 (` 20,000 + ` 4,000)
(Erection charges) 31.03.2018 By Balance c/d 2,56,000
1.10.2017 To Bank A/c 80,000 (` 1,80,000 + `76,000) _______
2,80,000 2,80,000
1.4.2018 To Balance 2,56,000 31.03.2019 By Depreciation A/c 28,000
b/d (` 20,000 + ` 8,000)
31.03.2019 By Balance c/d 2,28,000
(` 1,60,000 +` 68,000)
_______ _______
2,56,000 2,56,000
1.4.2019 To Balance 2,28,000 1.10.2019 By Bank A/c 1,00,000

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b/d
31.12.2019 To Bank A/c 30,000 1.10.2019 By Profit and Loss A/c 50,000
(Loss on Sale –
W.N. 1)
31.03.2020 By Depreciation A/c 18,750
(` 10,000 + ` 8,000 +
` 750)
31.03.2020 By Balance c/d 89,250
_______ (` 60,000 + ` 29,250) _______
2,58,000 2,58,000
1.4.2020 To Balance 89,250 31.3.2021 By Depreciation A/c 13,387.5
b/d (` 9,000 + ` 4,387.5)
31.3.2021 By Balance c/d 75,862.5
______ (` 51,000 + ` ______
24,862.5)
89,250 89,250
Working Notes:
Book Value of machines (Straight line method)
Machine I Machine II Machine III
` ` `
Cost 2,00,000 80,000 30,000
Depreciation for 2017-18 20,000 4,000
Written down value as on 31.03.2018 1,80,000 76,000
Depreciation for 2018-19 20,000 8,000
Written down value as on 31.03.2019 1,60,000 68,000
Depreciation for 2019-20 (Mach I- 6 months) 10,000 8,000 750
Written down value as on 01.10.2019 1,50,000
Written down value as on 31.03.2020 60,000 29,250
Sale proceeds 1,00,000
Loss on sale 50,000
8. Journal Entries in the books of Swapnil
2021 Dr. Cr.
(`) (`)
Jan. 1 Bills receivable (No. 1) A/c Dr. 32,000
Bills receivable (No. 2) A/c Dr. 50,000

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 16 FOUNDATION EXAMINATION: MAY, 2022

To Vishal A/c 82,000

(Being drawing of bills receivable No. 1
due for maturity on 4.3.2021 and bills
receivable No. 2 due for maturity on
4.4.2021)
March 4 Vishal’s A/c Dr. 32,000
To Bills receivable (No.1) A/c 32,000
(Being the reversal entry for bill No.1 on
renewal)
March 4 Bills receivable (No. 3) A/c Dr. 32,800
To Interest A/c 800
To Vishal ’s A/c 32,000
(Being the drawing of bill of exchange no. 3
due for maturity on 7.5.2021 together with
interest at 15%p.a. in lieu of the original
acceptance of Vishal)
March 25 Bank A/c Dr. 49,500
Discount A/c Dr. 500
To Bills receivable (No. 2) A/c 50,000
(Being the amount received on retirement
of bills No.2 before the due date)
May 7 Vishal’s A/c Dr. 32,800
To Bills receivable (No. 3) A/c 32,800
(Being the amount due from Vishal on
dishonour of his acceptance on
presentation on the due date)
May 7 Bank A/c Dr. 16,400
To Vishal’s A/c 16,400
(Being the amount received from official
assignee of Vishal at 50 paise per rupee
against dishonoured bill)
May 7 Bad debts A/c Dr. 16,400
To Vishal’s A/c 16,400
(Being the balance 50% debt in Vishal’s
Account arising out of dishonoured bill
written off as bad debts)

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 17

9. In the books of Mr. Sam

Consignment Account
Date Particulars Amount` Date Particulars Amount`
2021 2021
Jan. 1 To Goods sent on Jan. 1 By Goods sent on
Consignment A/c Consignment A/c
(Loading)
(Invoice price) 7,50,000 ` (7,50,000 – 5,00,000) 2,50,000
To Bank A/c – Mar.31 By Alex – Sales 6,00,000
Consignor’s 50,000 By Stock on Consignment
Expenses A/c
Mar.31 To Alex – Expenses 15,000 1/5  ` (7,50,000 + 1,63,000
– Commission* 50,000 + 15,000)
(0.05  30,000
` 6,00,000)
Mar.31 To Stock Reserve
A/c 50,000
(` 2,50,000 
1/5)
To Profit on
Consignment A/c
(transferred to
Profit and Loss
A/c) 1,18,000 _______
10,13,000 10,13,000

*Invoice price of goods sold: = 4/5 of ` 7,50,000 = ` 6,00,000.

The goods were sold for ` 6,00,000 and hence there was no surplus price. Therefore,
extra commission @ 20% will not be given to Mr. Alex.
Alex’s Account
Particulars Amount` Particulars ` Amount`
To Consignment A/c – By Consignment A/c:
Sales 6,00,000 Expenses 15,000
Commission 30,000 45,000
By Bills Receivable A/c 5,00,000
By Bank A/c (Balancing
figure) 55,000
6,00,000 6,00,000

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 18 FOUNDATION EXAMINATION: MAY, 2022

10. (i) Goods on sales or return, sold and returned day book in the books of ‘S’
Date Party to whom L.F Amount Date Sold Returned
2021 goods sent ` 2021 ` `
Apr. 2 M/s G 20,000 Apr. 17 20,000
Apr. 4 M/s H 36,000 Apr. 19 36,000
Apr. 16 M/s I 50,000 May 1 50,000
Apr. 20 M/s J 16,000 May 5 16,000 -
Apr. 24 M/s K 42,000 May 9 42,000 -
Apr. 28 M/s L 60,000 May 13 _____ _____
2,24,000 94,000 70,000
In the books of S Ltd.
(ii) Goods on Sales or Return Total Account
Amount Amount
2021 ` 2021 `
Apr. To Customers for May. 31 By Goods sent on
Sale on Approval sales or return 20,000
A/c M/s G
2 Returned by G 20,000 M/s H 36,000
4 Sold to H 36,000 M/s I 50,000
16 Returned by I 50,000 M/s J 16,000
20 Sold to J 16,000 M/s K 42,000
24 Sold to K 42,000 M/s L 60,000
30 To bal c/d 60,000
2,24,000 2,24,000
11. Calculation of average due date (Base date: 8th April)
Due Date Amount No. of days from base date Product
` `
8th April 1,200 0 0
18th May 800 40 32,000
13th June 1,100 66 72,600
10th July 1,600 93 1,48,800
4,700 2,53,400

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 19

Total Product
Average due date = Base date +
Total Amount
= 8th April + 2,53,400/4,700
= 8th April + 54 days = 1st June
12. In the books of G
H in Account Current with G
(interest to 31st March,2021@10%p.a.)
Date Due Particulars No. of Amt. Product Date Due Particulars No. of Amt. Product
date days till date days till
31.3.21 31.3.21
2020 2020 ` ` 2020 2020 ` `
Oct 1, Oct 1, To Balance 182 3,000 5,46,000 Nov 16 Nov 26 By 125 4,000 5,00,000
b/d Purchases
Oct 18, Oct 18 To Sales 164 2,500 4,10,000 Dec 7 Dec. By 104 3,500 3,64,000
17 Purchases
2021 2021 2021 2021
Jan 3 Apr 6 To Bills (6) 5,000 (30,000) Mar 28 Apr 8 By (8) 2,700 (21,600)
payable Purchases
Feb 4 Feb 4 To Cash 55 1,000 55,000 Mar 31 Mar 31 By Balance 1,81,600
of product
Mar 21 Mar. To Sales 10 4,300 43,000 By Balance 5,650
21 c/d
Mar 31 Mar To Interest 50 -
31
15,850 10,24,000 15,850 10,24,000
1,81,600 x 10 x 1
Interest for the period = = ` 50 (approx.)
100 x 365
13. Redrafted Trial Balance of Mr. Bansal as on 31st March,2021
Particulars Dr. Cr.
` `
Capital - 16,000
Opening stock 17,500 -
Drawings 3,305 -
Returns inward 550 -
Carriage inward 1,240 -
Deposit with X 1,400 -
Returns outward - 840

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 20 FOUNDATION EXAMINATION: MAY, 2022

Carriage outward 725 -

Rent paid 800 -
Rent outstanding - 150
Purchases 13,000 -
Sundry debtors 5,000 -
Sundry creditors - 2,200
Furniture 1,500 -
Sales - 29,000
Wages 850 -
Cash 1,370 -
Advertisement ___950 ___-__
48,190 48,190
Trading and Profit and Loss Account of Mr. Bansal
for the year ended 31 st March,2021
Dr. Cr.
Particulars ` Amount` Particulars ` Amount`
To Opening stock 17,500 By Sales 29,000
To Purchases 13,000 Less: Returns (550) 28,450
inward
Less: Returns outward (840) 12,160 By Stock 2,000
destroyed by fire
To Wages 850 By Closing stock 18,790
To Carriage inward 1,240
To Gross profit 17,490 ______
49,240 49,240
To Carriage outward 725 By Gross profit 17,490
To Rent 800
To Advertisement 950
To Bad debts 600
To Provision for 220
doubtful debts (5% of
` 4,400)
To Loss of stock by fire 500

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 21

To Depreciation on furniture 150

(10% of `1,500)
To Net profit 13,545
17,490 17,490
Balance Sheet of Mr. Bansal
as at 31st March,2021
Liabilities ` Assets `
Capital 16,000
Add: Net profit 13,545 Furniture 1,500
29,545 Less: Depreciation 150 1,350
Less: Drawings 3,305 26,240 Deposit with X 1,400
Sundry creditors 2,200 Closing Stock 18,790
Outstanding rent 150 Sundry debtors 5,000
Less: Bad debts 600
4,400
Less: Provision for 220 4,180
Doubtful
Debts
Insurance claim receivable 1,500
______ Cash 1,370
28,590 28,590
14 (a) Profit and Loss Appropriation Account
for the year ended 31st March, 2021
` ` `
To Salary - B 3,000 By Net profit 73,000
To Interest on Capitals:
A 2,500
B 2,000 4,500
To Reserve (10% of 65,500) 6,550
To Partners’ current accounts:
A 29,475
B 29,475 58,950
73,000 73,000

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 22 FOUNDATION EXAMINATION: MAY, 2022

Partners’ Capital Accounts

Date A B Date A B
31.03.21 To Balance 50,000 40,000 01.04.20 By Balance b/d 50,000 40,000
c/d
50,000 40,000 50,000 40,000
Partners’ Current Accounts
Date A B Date A B
01.04.20 To Balance - 3,000 01.04.20 By Balance b/d 10,000
b/d
31.03.21 To 1,000 2,000 31.03.21 By Interest on Capital 2,500 2,000
Drawings
A/c
31.03.21 To Balance 40,975 29,475 31.03.21 By Salary 3,000
c/d
31.03.21 By Profit and Loss App 29,475 29,475
A/c

41,975 34,475 41,975 34,475

Note: Profit before charging interest on Capital and Salary to B = 70,000+3,000 =73,000
(b) (i) Capitalisation Method:
Total Capitalised Value of the firm
Average Profit × 100 ` 3,00,000×100
= = = ` 15,00,000
Normal Rate of Return 20
Goodwill = Total Capitalised Value of Business – Capital Employed
= ` 15,00,000 – ` 10,00,000 [i.e., ` 6,00,000 + ` 4,00,000]
Goodwill = ` 5,00,000
(ii) Super Profit Method:
Normal Profit = Capital Employed x 20/100 = ` 2,00,000
Average Profit = ` 3,00,000
Super Profit = Average profit – Normal Profit
=` 3,00,000 – ` 2,00,000 = ` 1,00,000
Goodwill = Super Profit x Number of years purchase
= `1,00,000 x 3 = ` 3,00,000

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 23

15. (a) Revaluation Account

Particulars Amount` Particulars Amount`
To Buildings A/c 30,000 By Investments A/c 9,000
To Plant and Machinery A/c 78,000 By Loss to Partners:
To Provision for Doubtful Debts A/c 83,400 A 91,200
B 54,720
C 36,480 1,82,400
1,91,400 1,91,400
Partners’ Capital A/c
Particulars A B C F Particulars A B C F
` ` ` ` ` ` ` `
To Revaluation 91,200 54,720 36,480 - By Balance b/d 2,40,000 60,000 90,000 -
A/c
To Investments - 45,000 -- By Reserves 30,000 18,000 12,000 -
A/c A/c
To B’s Loan A/c - 68,280 -- By C and F’s 30,000 90,000 - -
Capital A/c
To A and B’s 60,000 60,000 By Bank A/c 31,200 - 2,34,480 1,80,000
Capital A/c (balancing
figure)
To Balance c/d 2,40,000 - 2,40,000 1,20,000
3,31,200 1.68,000 3,36,480 1,80,000 3,31,200 1,68,000 3,36,480 1,80,000

Bank Account
Particulars Amount` Particulars Amount`
To A’s capital A/c 31,200 By Bank Overdraft A/c 1,32,000
To C’s capital A/c 2,34,480 By Balance c/d 3,13,680
To F’s capital A/c 1,80,000
4,45,680 4,45,680
Balance Sheet of Acme & Co.
as at 1st April, 2021
Liabilities ` Assets `
Capital Accounts: Land 30,000
A 2,40,000 Buildings 5,70,000
C 2,40,000 Plant and Machinery 3,12,000

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 24 FOUNDATION EXAMINATION: MAY, 2022

F 1,20,000 6,00,000 Furniture 1,29,000

Long Term Debts 9,00,000 Inventories 3,90,000
Trade payables 5,10,000 Trade receivables 4,17,000
Q’s Loan Account 68,280 Less: Provision for
Doubtful Debts (83,400) 3,33,600
Balance at Bank 3,13,680
20,78,280 20,78,280
16. Income and Expenditure Account of Pune Club
for the year ended 31st March,2021
Dr. Cr.
Expenditure ` ` Income ` `
To Salary 2,000 By Donation 5,000
To Repair expenses 500 Less: Capitalised (50%) (2,500) 2,500
To Misc expenses 500 By Subscriptions (WN-2) 12,550
Less: Prepaid (90) 410 By Entrance fees 1,000
To Insurance 200 By Interest on investment 200
premium [8/100x6,000x5/12]
Add: Outstanding 40 240 By Interest received from 500
bank
To Stationary 150 By Sale of old newspapers 150
To Drama expenses 500 By Sale of drama tickets 1,050
To Surplus-excess of 14,150
income over
expenditure
17,950 17,950

Balance Sheet of Pune Club

as on 31st March,2021
Liabilities ` ` Assets `
Capital fund (WN-1) Snooker table 30,000
Opening balance 36,000 Furniture 6,000
Add: Surplus 14,150 Investments 6,000
Donations 2,500 52,650 Interest accrued 200

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 25

Outstanding insurance premium 40 Prepaid Misc. expenses 90

Subscription received in advance 350 Subscriptions receivable 900
Cash in hand 2,650
______ Cash at bank 7,200
53,040 53,040
Working Note:
1. Balance Sheet of Pune Club
as on 31st March,2020
Liabilities ` Assets `
Capital fund (balancing figure) 36,000 Snooker table 30,000
Creditors for Snooker table 8,000 Cash in hand 4,000
Cash at bank 10,000
44,000 44,000
2. Subscriptions `
Subscription as per Receipt and Payment A/c 12,000
Add: Outstanding for year 2020-21 900
12,900
Less: Advance for year 2021-22 (350)
12,550
17. In the books of Suraj Ltd.
Journal Entries
2020 Dr. Cr.
` `
July 20 Bank Account Dr. 8,00,000
To Share Application A/c 8,00,000
(Application money on 40,000 shares
at ` 20 per share received.)
Aug 1 Share Application A/c Dr. 8,00,000
To Share Capital A/c 8,00,000
(The amount transferred to Capital
Account on 40,000 shares ` 20 on
application. Directors’ resolution
no........ dated ......)

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 26 FOUNDATION EXAMINATION: MAY, 2022

Share Allotment A/c Dr. 8,00,000

To Share Capital A/c 8,00,000
(Being share allotment made due at
` 20 per share. Directors’ resolution
no...... dated ......)
Sept 15 Bank Account Dr. 8,00,000
To Share Allotment A/c 8,00,000
(The sums due on allotment received.)
Dec. 1 Share First Call Account Dr. 12,00,000
To Share Capital Account 12,00,000
(Amount due from members in respect
of first call-on 80,000 shares at ` 30
as per Directors, resolution no...
dated...)
Dec. 20 Bank Account Dr. 12,00,000
To Share First Call Account 12,00,000
(Receipt of the amounts due on first
call.)
2021
March 1 Share Second and Final Call A/c Dr. 12,00,000
To Share Capital A/c 12,00,000
(Amount due on 40,000 share at ` 30
per share on second and final call, as
per Directors resolution no... dated...)
March 31 Bank Account Dr. 12,00,000
To Share Second & Final Call A/c 12,00,000
(Amount received against the final call
on
40,000 shares at ` 30 per share.)
18. In the Books of Delta Ltd.
Journal Entries
Date Particulars L.F. Dr. (`) Cr. (`)
1. Share capital A/c (600 × ` 10) Dr. 6,000
Securities Premium A/c (600 × ` 1) Dr. 600
To Calls-in-arrears A/c (600 × ` 3) 1,800

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 27

To forfeited Shares A/c (600 × ` 8) 4,800

(Being 600 shares forfeited for non-payment of
call money)
2. Bank A/c (400 × ` 9) Dr. 3,600
Forfeited Shares A/c (400 × ` 1) Dr. 400
To Share Capital A/c ( 400 × ` 10) 4,000
(Being 400 shares re-issued as fully paid-up for
` 9 per share)
3. Forfeited Shares A/c Dr. 2,800
To Capital Reserve A/c 2,800
(Being the transfer of profit on re-issue of 400
shares to Z)
4. Bank A/c (100 × ` 11) Dr. 1,100
To Share Capital A/c (100 × ` 10) 1,000
To Securities Premium A/c (100 × ` 1) 100
(Being 100 shares re-issued to X as fully paid-up
for ` 11 per share)
5. Forfeited Shares A/c (` 4,800 × 100/600) Dr. 800
To Capital Reserve A/c 800
(Being the transfer of profit on re-issue of 100
shares to X)
19. Journal Entries
Date Particular L.F Dr. Cr.
2020 Sundry Assets A/c Dr. 4,50,000
April Goodwill A/c (Bal. fig) Dr. 50,000
To Himalayan Ltd. A/c 4,40,000
To Sundry Liabilities A/c 60,000
(Being Assets and liabilities taken over for a
net consideration of ` 4,40,000)
Himalyan Ltd. A/c Dr. 4,40,000
To 8% Debentures A/c 4,00,000
To Securities Premium A/c 40,000
(Being 4000; 8% Debenture of ` 100 each
issued at a premium of 10%)

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 28 FOUNDATION EXAMINATION: MAY, 2022

Bank A/c Dr. 90,000

To Debenture Application A/c 90,000
(Being the application money received for
3000, 8% Debenture)
Debenture Application A/c Dr. 90,000
To 8% Debenture A/c 90,000
(Being 3000; 8% Debenture allotted)
Debentures allotment A/c Dr. 1,80,000
Loss on issue of debenture A/c Dr. 45,000
To 8% Debentures A/c 2,10,000
To Premium on redemption of debentures 15,000
A/c
(Being allotment money due on 3000; 8%
Debentures at 10% discount and redeemable
at 5% premium)
Bank A/c Dr. 1,80,000
To Debentures Allotment A/c 1,80,000
(Being the allotment money received)
2021
Mar,31 Profit and Loss A/c Dr. 45,000
To Loss on issue of Debenture A/c 45,000
(Being the Loss on issue of debenture written
off)
20. (i) Noting Charges: It is necessary that the fact of dishonour and the causes of
dishonour should be established. If there is a fear of dishonour, the bill will be given
to the public official known as “Notary Public”. These officials present the bill for
payment and if the money is received, they will hand over the money to the original
party. But, if the bill is dishonoured they will note the fact of dishonour, and the
reasons given and give the bill back to their client. For this service, they charge a
small fee. This fee is known as noting charges. The amount of noting charges is
recoverable from the party who is responsible for dishonour.
(ii) Accounting Standards are selected set of accounting policies or broad guidelines
regarding the principles and methods to be chosen out of several alternatives. The
main objective of Accounting Standards is to establish standards which have to be
complied with, to ensure that financial statements are prepared in accordance with
generally accepted accounting principles. Accounting Standards seek to suggest

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 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 29

rules and criteria of accounting measurements. These standards harmonize the

diverse accounting policies and practices at present in use in India.
(iii) Retirement of bills of exchange: Sometimes, the acceptor of a bill of exchange
has spare funds much before the maturity date of the bill of exchange accepted by
him. He may, therefore, desire to pay the bill before the due date. In such a
circumstance, the acceptor shall ask the payee or the holder of the bill to accept
cash before the maturity date. If the payee agrees, the acceptor may be allowed a
rebate or discount on such early payment. This rebate is generally the interest at
an agreed rate for the period between the date of payment and date of maturity.
The interest/rebate/discount becomes the income of the acceptor and expense of
the payee. It is a consideration for premature payment. When a bill is paid before
due date, it is said to be retired under rebate.
(iv) Over-riding Commission: In the case of consignment accounts, the consignor
pays a commission to the consignee in consideration of services rendered by the
latter for selling the goods consigned. This commission may be either normal
commission or special commission. Again, the special commission may be del-
credere commission or over riding commission.
Over-riding commission is an extra commission allowed to the consignee in addition
to the normal commission. Such additional commission is generally allowed:-
(i) To provide additional incentive to the consignee for the purpose of introducing
and creating a market for a new product.
(ii) To provide incentive for supervising the performance of other agents in a
particular area.
(iii) To provide incentive for ensuring that the goods are sold by the consignee at
the highest possible price.

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