Category: Class 12

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 2 Sources of Corporate Finance Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 2 Sources of Corporate Finance

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
___________ is the smallest unit in the total share capital of the company.
(a) Debenture
(b) Bonds
(c) Share
Answer:
(c) Share

Question 2.
The benefit of Depository Receipt is ability to raise capital in ___________ market.
(a) national
(b) local
(c) international
Answer:
(c) international

Question 3.
___________ are residual claimants against the income or assets of the company.
(a) Bondholders
(b) Equity shareholders
(c) Debenture holders
Answer:
(b) Equity shareholders

Question 4.
___________ participate in the management of their company.
(a) Preference shareholders
(b) Depositors
(c) Equity shareholders.
Answer:
(c) Equity shareholders

Question 5.
___________ shares are issued free of cost to existing equity shareholders.
(a) Bonus
(b) Right
(c) Equity
Answer:
(a) Bonus

Question 6.
The holder of preference share has the right to receive ___________ rate of dividend.
(a) fixed
(b) fluctuating
(c) lower
Answer:
(a) Fixed

Question 7.
Accumulated dividend is paid to ___________ preference shares.
(a) redeemable
(b) cumulative
(c) convertible
Answer:
(b) Cumulative

Question 8.
The holder of ___________ preference shares has the right to convert their shares into equity shares.
(a) cumulative
(b) convertible
(c) redeemable
Answer:
(b) Convertible

Question 9.
Debenture holders are ___________ of the company.
(a) creditors
(b) owners
(c) suppliers
Answer:
(a) creditors

Question 10.
___________ is paid on borrowed capital.
(a) Interest
(b) Discount
(c) Dividend
Answer:
(a) Interest

Question 11.
Debenture holders get fixed rate of ___________ return on their investment.
(a) interest
(b) dividend
(c) discount
Answer:
(a) interest

Question 12.
Convertible debentures are converted into ___________ after a specific period.
(a) equity shares
(b) deposits
(c) bonds
Answer:
(a) equity shares

Question 13.
Retained earnings are ___________ source of financing.
(a) internal
(b) external
(c) additional
Answer:
(a) internal

Question 14.
The holder of bond is ___________ of the company.
(a) secretary
(b) owner
(c) creditor
Answer:
(c) creditor

Question 15.
Company can accept deposits from public, minimum for ___________ months.
(a) six
(b) nine
(c) twelve
Answer:
(a) six

Question 16.
Company can accept deposits from public maximum for ___________ months.
(a) 12
(b) 24
(c) 36
Answer:
(c) 36

Question 17.
A depository receipt traded in ___________ is called American Depository Receipt.
(a) London
(b) Japan
(c) USA
Answer:
(c) the USA

1B. Match the pairs.

Question 1.

Answer:

Group ‘A’	Group ‘B’
(a) Equity share capital	(1) Venture capital
(b) Debenture Trustees	(2) Trust Deed
(c) Preference shareholders	(3) Cautious investor
(d) Debenture Certificate	(4) Instrument of Debt
(e) Bonus shares	(5) Capitalisation of profit

1C. Write a word or a term or a phrase that can substitute each of the following statements.

Question 1.
The real masters of the company.
Answer:
Equity shareholders

Question 2.
A document of ownership of shares.
Answer:
Share certificate

Question 3.
The holders of these shares are entitled to participate in surplus profits.
Answer:
Participating preference shares

Question 4.
A party through whom the company deals with debenture holders.
Answer:
Debenture trustees

Question 5.
Name the shareholder who participates in the management.
Answer:
Equity shareholders

Question 6.
The value of a share is written on the share certificate.
Answer:
Face value

Question 7.
The value of a share is determined by demand and supply forces in the share market.
Answer:
Market value

Question 8.
The policy of using undistributed profit for the business.
Answer:
Retained earnings/ploughing back of profit

Question 9.
It is an acknowledgment of a loan issued by the company to the depositor.
Answer:
Deposit receipt

Question 10.
A dollar-denominated instrument trader in the USA.
Answer:
American Depository Receipt

Question 11.
The Depository Receipt is traded in a country other than the USA.
Answer:
Global depository receipt

Question 12.
Money raised by the company from the public for a minimum of 6 months to a maximum of 39 months.
Answer:
Public Deposits

Question 13.
Credit extended by the suppliers with an intention to increase their sales.
Answer:
Trade Credit

Question 14.
The credit facility is provided to a company having a current account with the bank.
Answer:
Overdraft

1D. State Whether the following statements are True or False.

Question 1.
Equity share capital is known as venture capital.
Answer:
True

Question 2.
Equity shareholders enjoy a fixed rate of dividends.
Answer:
False

Question 3.
Debenture holders have the right to vote at a general meeting of the company.
Answer:
False

Question 4.
Equity shareholders are described as ‘shock absorbers’ when a company has a financial crisis.
Answer:
True

Question 5.
Bondholders are owners of the company.
Answer:
True

Question 6.
Cash credit is given against hypothecation of goods and security.
Answer:
True

Question 7.
Trade credit is a major source of long-term finance.
Answer:
False

Question 8.
Depository bank stores the shares on behalf of the GDR holder.
Answer:
True

Question 9.
Financial institutions underwrite the issue of securities.
Answer:
True

1E. Find the odd one.

Question 1.
Debenture, Public Deposit, Retained Earnings
Answer:
Retained earnings

Question 2.
Face value, Market value, Redemption value
Answer:
Redemption value

Question 3.
Share certificate, Debenture certificate, ADR
Answer:
ADR

Question 4.
Trade credit, Overdraft, Cash credit
Answer:
Trade credit

1F. Complete the sentences.

Question 1.
The finance needed by business organisation is termed as ___________
Answer:
Capital

Question 2.
The convertible preference shareholders have a right to convert their shares into ___________
Answer:
Equity shares

Question 3.
Equity shareholders elect their representative Called ___________
Answer:
Directors

Question 4.
Bonus shares are issued as gift to ___________
Answer:
Equity share holders

Question 5.
The bondholders are ___________of the company.
Answer:
Creditors

Question 6.
Depository receipt traded in a country other than USA is called ___________
Answer:
Global Depository Receipt

Question 7.
First Industrial policy was declared in the year ___________
Answer:
1948

Question 8.
When goods are delivered by the supplier to the customer on the basis of deferred payment is called as ___________
Answer:
Trade credit

1G. Select the correct option from the bracket.

Question 1.

(Fluctuating rate of dividend, Preference shares, Interest at fixed rate, Retained earnings, short term loan)
Answer:

Group ‘A’	Group ‘B’
(a) Equity shares	(1) Fluctuating rate of dividend
(b) Preference shares	(2) Dividend at a fixed rate
(c) Debentures	(3) Interest at a fixed rate
(d) Retained earnings	(4) Accumulated corporate profit
(e) Public Deposit	(5) short term loan

1H. Answer in one sentence.

Question 1.
What is a share?
Answer:
A share is the smallest unit of the share capital of a company.

Question 2.
What are equity shares?
Answer:
Equity shares are shares that do not preference shares and do not carry priority in receiving dividends nor repayment of capital.

Question 3.
What are preference shares?
Answer:
Preference shares are shares that have preferential rights with regard to receiving dividends and repayment of capital.

Question 4.
What are retained earnings?
Answer:
A part of the net profit which is not distributed to shareholders as dividend but retained by the company as reserve fund is retained earnings.

Question 5.
What is a debenture?
Answer:
It is a document/instrument issued in the form of a debenture certificate under the common seal of the company acknowledging/evidencing the debt.

Question 6.
What is a bond?
Answer:
A bond is a debt security and a formal contract to repay borrowed money with interest.

Question 7.
In which country can ADR be issued?
Answer:
ADR (American Depository Receipt) is a depository Receipt that is issued in the USA.

Question 8.
In which country can GDR be issued?
Answer:
GDR (Global depository receipt) can be issued in countries other than the USA.

Question 9.
What are convertible debentures?
Answer:
Convertible debentures are debentures that are converted into equity shares after a specific period as specified at the time of issue.

Question 10.
What are cumulative preference shares?
Answer:
Cumulative preference shares are shares where dividend, if not paid in a year accumulates till it is paid.

1I. Correct the underlined words and rewrite the following sentences.

Question 1.
Owned capital is temporary capital.
Answer:
Owned capital is permanent capital.

Question 2.
Equity shares get dividends at a fixed rate.
Answer:
Equity shares get dividends at fluctuating rates.

Question 3.
Preference shares get dividends at fluctuating rates.
Answer:
Preference shares get dividends at a fixed rate.

Question 4.
Retained earnings are an external source of finance.
Answer:
Retained earnings are an internal source of finance.

Question 5.
The debenture holder is the owner of the company.
Answer:
The debenture holder is a creditor of the company.

Question 6.
Bond is a source of short-term finance.
Answer:
Bond is a source of long-term finance.

Question 7.
Depository receipt traded in the USA is called Global Depository Receipt.
Answer:
Depository receipt traded in the USA is called American Depository Receipt.

2. Explain the following terms/Concepts.

Question 1.
Borrowed capital
Answer:

• It consists of capital that is raised through borrowings.
• It can be raised by issuing debentures, deposits, loans from banks or financial institutions.

Question 2.
Owned capital
Answer:

• Owned capital is the capital raised by the company with the help of owners (shareholders).
• It can be raised by issuing equity and preference shares.

Question 3.
Ploughing back of profit
Answer:

• Ploughing back of profit or retained earnings is a management policy under which all profits are not distributed amongst shareholders.
• It is an internal source of financing or self-financing as when the need arises, such reserves are ploughed back, brought into the business to meet the financial needs.

Question 4.
Overdraft
Answer:

• It is a credit agreement made with a bank that allows an account holder to withdraw more money than what a company has in its account up to a specific/prescribed limit.
• This facility is available to current account holders.

Question 5.
Trade Credit
Answer:

• Trade credit is credit extended by one trader to another when goods and services are bought/sold on credit.
• It facilitates the purchase of supplies without making an immediate payment.
• It is used by business organisations as a source of short-term financing and granted to those having reasonable standing and goodwill.

3. Study the following case/situation and express your opinion.

1. The Balance sheet of a Donald Company for the year 2018-19 reveals equity share capital of Rs. 25,00,000 and retained earnings of Rs. 50,00,000.

Question (a).
Is the company financially sound?
Answer:
The company is financially sound as it has double the amount as reserves or retained earnings or kept aside profits.

Question (b).
Can the retained earnings be converted into capital?
Answer:
Yes, the retained earnings can be converted into capital by means of capitalisation of reserves.

Question (c).
What type of source retained earning is?
Answer:
Retained earning is self-financing or an internal source of finance.

2. Mr. Satish is a speculator. He desires to take advantage of the growing market for the company’s products and earn handsomely.

Question (a).
According to you, which type of share Mr. Satish will choose to invest in.
Answer:
As Mr. Satish is a speculator, he will choose equity shares to invest in because if there are good earnings/profits, so will be the rate of dividend.

Question (b).
What does he receive as a return on investment?
Answer:
He receives a fluctuating rate of dividends.

Question (C).
State anyone, right he will enjoy as a shareholder.
Answer:
The right to attend the meeting and vote on resolutions can be the right Mr. Satish can exercise as a member.

3. Mr. Rohit, an individual investor, invests his own funds in the securities. He depends on investment income and does not want to take any risk. He is interested in the definite rate of income and safety of the principal.

Question (a).
Name the type of security that Mr. Rohit will opt for.
Answer:
As Mr. Rohit does not want to take risks, he will opt for preference shares which will assure him of steady income and safety of his investment.

Question (b).
What does he receive as a return on his investment?
Answer:
Mr. Rohit will receive dividends in return.

Question (c).
The return on investment which he receives is fixed or fluctuating.
Answer:
The return on his investment will be fixed and not fluctuating.

4. Distinguish between the following.

Question 1.
Equity Shares and Preference Shares
Answer:

Points	Equity Shares	Preference Shares
1. Meaning	Shares that are not preference shares are called equity shares i.e. these shares do not have the preferential rights for payment of dividends and repayment of capital.	Preferences shares are shares that carry preferential rights as to payment of: Dividend and Repayment of capital.
2. Rate of Dividend	Equity shares are given dividends at a fluctuating rate depending upon the profits of the company.	Preference shareholders get dividends at a fixed rate.
3. Voting Right	Equity shareholders enjoy normal voting rights. They participate in the management of their company.	Preference shareholders do not enjoy normal voting right. They can vote only on matters affecting their interest.
4. Return of Capital	Equity capital can not be returned during the lifetime of the company, (except in case of buyback).	A company can issue redeemable preference shares, which can be repaid during the lifetime of the company.
5. Nature of capital	Equity capital is known as ‘Risk Capital’.	Preference capital is ‘Safe Capital’ with a stable return.
6. Nature of investor	The investors who are ready to take risks to invest in equity shares.	Investors who are cautious about the safety of their investment invest in preference shares.
7. Face Value	The face value of equity shares is generally ₹ 1/- or ₹ 10/- it is relatively low.	The face value of preference shares is relatively higher i.e. ₹ 100/- and so on.
8. Right and bonus issue	Equity shareholder is entitled to get bonus and right issue.	Preference shareholders are not eligible for bonuses and right issues.
9. Capital appreciation	The market value of equity shares increases with the prosperity of the company. It leads to an increase in the value of shares.	The market value of preference shares does not fluctuate, so there is no possibility/cheques of capital appreciation.
10. Risk	Equity shares are subject to higher risk.	Preference shares are subject to less risk.
11. Types	Equity shares are classified into: Equity shares with normal voting rights. Equity shares with differential voting rights.	Preference shares are classified as: Cumulative Preference Shares Non-Cumulative Preference Shares Convertible Preference Shares Non-Convertible Preference Shares Redeemable Preference Shares Irredeemable Preference Shares Participating Preference Shares Non-Participating Preference Shares

Question 2.
Shares and Debentures
Answer:

Points	Shares	Debentures
1. Meaning	Share is the smallest unit in the total share capital of the company. It is known as ownership securities.	A debenture is an instrument evidencing debt under the seal of the Company. They are also known as creditor ship securities.
2. Status	A holder of shares is the owner of the company. Hence, share capital is owned capital.	A holder of debenture is the creditor of the company. Hence, Debenture capital is loan capital or borrowed capital.
3. Nature	It is permanent capital. It is not repaid during the lifetime of the company.	It is temporary capital. Generally, it is repaid after a specific period.
4. Voting/Right	Shareholders being owners enjoy normal voting rights in general meetings and can participate in the management of the company.	Debenture holders being creditors, do not have any voting right and can not participate in the management of the company.
5. Return on Investment	Return on shares is called a dividend. Equity shareholders receive dividends at a fluctuating rate whereas preference shareholders receive dividends at a fixed rate.	Return on debenture is called interest. It is fixed at the time of issue. Interest is paid even when a company has no profit.
6. Security	Share capital is unsecured capital. No security is offered to the shareholder.	Debenture capital being loan capital is secured by creating a charge on Company’s property.
7. Time of Issue	Shares are issued in the initial stages of the company formation.	Debentures are issued at a later stage when the company has properties to offer as security.
8. Suitability	Shares are suitable for long-term finance.	Debentures are suitable for medium-term finance.
9. Types	Shares are classified into: Equity shares Preference	A debenture is classified as: Registered Debentures Bearer Debentures Secured Debentures Unsecured Debentures Redeemable Debentures Irredeemable Debentures Convertible Debentures Non-Convertible Debentures
10. Position on liquidation	On liquidation of a company, shareholders rank last in the list of claimants.	Debenture holders being creditors, rank prior to shareholders for repayment on liquidation of the company.

Question 3.
Owned Capital and Borrowed Capital
Answer:

Points	Owned Capital	Borrowed Capital
1. Meaning	It is that capital that is contributed by shareholders.	It is that capital that is borrowed from creditors. It is also known as debt capital.
2. Sources	This capital is collected by the issue of equity shares and preference shares, ploughing back of profits (ownership securities).	It is collected by way of the issue of debentures, fixed deposits, loans from banks/financial institutions, etc. (loan, borrowings).
3. Return on Investment	The shareholders get dividends as income on their investment. The rate of dividend is fluctuating, in the case of equity shares but is fixed in the case of preference shares.	The debt capital holders get interested as income on their investment. Interest is paid at a fixed rate.
4. Status	The shareholders are owners of the company.	The debt holders are creditors of the company.
5. Voting right	The equity shareholders enjoy normal voting right at the general meetings.	The creditors do not enjoy voting rights at the general meeting.
6. Repayment of Capital Redemption	The shareholders do not enjoy priority over creditors. They are eligible for repayment of Capital only after making payment to creditors at the time of windings up of the company.	The creditors get priority over the shareholders in case of return of principal amount at the time of winding up of the company.
7. Charge on assets	The shareholders do not have any charge on the assets of the company.	The secured debenture holders have a change on the assets of the company.

5. Answer in brief:

Question 1.
What is a public deposit?
Answer:

• Public deposit is an important source of financing short-term requirements of the company.
• Companies generally receive public deposits for a period ranging from 6 months to 36 months.
• Interest is paid by the companies on such deposits.
• The company issues a’ Deposit Receipt’ to the depositor.
• The receipt is an acknowledgment of debt/loan by the company.
• Deposits are either secured or unsecured loans offered by a company.
• It is considered a risky investment but investors can earn high returns on public deposits.

Advantages of deposits to the company

• It is an easier method of mobilizing funds during periods of credit squeeze.
• The rate of interest payable by the company on public deposits is lower than the interest from banks and financial institutions.
• It helps the company to borrow funds from a larger segment and thus, reduces dependence on financial institutions.

Question 2.
What are Global Depository Receipt and American Depository Receipt?
Answer:

• The shares that are issued by public limited companies are traded in various share markets.
• In India, shares are traded in the Bombay Stock Exchange (BSE) National Stock Exchange (NSE), etc.
• Similarly, Shares are traded in foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation).
• Companies that cannot list directly on foreign stock exchange get listed indirectly using GDR & ADR.
• GDR and ADR are Dollar/Euro denominated instruments traded on stock exchanges of foreign countries and are depository receipts containing a fixed number of shares.
• The Depository Receipts which are traded in the USA are called ADRs and Depository Receipts which are traded in all foreign countries other than the USA are called GDR.
• Indian Companies raise equity capital in the international market through GDR and ADR.
• Companies issue shares to an intermediary called ‘depository’.
• Bank of New York, Citigroup, etc act as Foreign Depository Bank.
• The Depository Banks issue GDRs or ADRs to investors against Indian Company’s shares.
• These ‘Depository Receipts’ are then, sold to foreign investors who wish to invest their savings in Indian Cost.
• The Depository Receipts are listed on the stock exchanges like regular shares.
• It is a depository bank that stores the shares on behalf of the receipt holder.
• NRI and foreign investors buy Depository Receipt Using their regular equity trading account.
• The company pays dividends in the home currency to the depository and the depository converts them into the currency of investor and pays dividends.
• Indian Companies like HDFC, ICICI, Infosys Technologies, MTNL, WIPRO have ADR and GDR.
  • Tata Motors and VSNL have ADRs.
  • Bajaj Auto Limited ITC, L&T, Hindalco, Ranbaxy Laboratories, and SBI have GDRs.
  • ADR allows the sale of securities only in the American market whereas GDR allows the sale of securities globally.

Question 3.
What is Trade Credit?
Answer:

• Every business requires trade credit and is common to all business types.
• Credit sales or granting of credit is inevitable in the present competitive business world.
• It is short-term financing to businesses.
• The small retailers, to a large extent, rely on obtaining trade credit from their suppliers.
• The cheapest method of financing; it is an easy kind of credit that can be obtained without signing any debt instrument.
• This is not a cash loan. It results from a sale of goods services which have to be paid sometime after the sale takes place.
• It is given by one trader to another trader to delay payment for goods and services involved in the transaction.
• Suppliers sell goods and willingly allow 30 days or more credit period for the bill to be paid.
• They offer discounts if bills are cleared within a short period such as 10 or 15 days.
• Such credit is given/granted to those having reasonable standing and goodwill.

Advantages of Trade Credit:

• Trade Credit is the cheapest and easiest method for raising short-term finance.
• It can be obtained without making any formal and written agreement or signing the same.
• It is readily available whenever goods and services are purchased on credit in bulk.
• It is free of cost source of financing.
• The terms of trade are lenient and not rigid.

Question 4.
What are the schemes for disbursement of credit by banks?
Answer:
Meaning: Banks play an important role in terms of providing finance to the companies.
They provide short-term finance for working capital, in the form of bank and trade credits.

The innovative schemes by banks for disbursement of credit are as follows:
(i) Overdraft:

• A company having a current account with the bank is allowed an overdraft facility.
• The borrower can withdraw funds/overdraw on his current account up to the credit limit sanctioned by the bank.
• Any number of drawings up to the sanctioned limit is allowed for a stipulated term period.
• Interest is determined/calculated on the basis of the actual amount overdrawn.
• Repayments can be made during the time period.

(ii) Cash Credit:

• The borrower can withdraw the amount from his cash credit up to a stipulated/granted limit based on security margin.
• Cash credit is given against pledge or hypothecation of goods or by providing alternate securities.
• Interest is charged on the outstanding amount borrowed and not on the credit limit sanctioned.

(iii) Cash Loans:

• In this, the total amount of the loan is credited by the bank to the borrower’s account.
• Interest is payable on the actual outstanding balance.

(iv) Discounting bills of exchange:

• In the bill of exchange, the drawer of the bill (seller) receives money from the drawee (buyer) on the date or after the due date (the term mentioned in the bill).
• But due to discounting facility the drawer can receive money before the due date by discounting the bill with the bank (by giving the bill as security to the bank).
• The bank gives money to the drawer less than the face value of the bill (amount mentioned in the bill) after deducting a certain amount known as discounting charges.
• The bills are usually traded bills i.e. outcome of trade transactions.
• The bills are accepted by the banks and cash is advanced against them.

Question 5.
State the features of bonds.
Answer:
Definition:
According to Webster Dictionary, “a bond is an interest bearing certificate issued by a Government or business firm promising to pay the holder a specific sum at a specified date”.
A bond is thus-

• A formal contract to repay borrowed money with interest.
• Interest is payable at a fixed internal or on the maturity of the bond.
• A bond is a loan.
• The holder is a lender to the company.
• He gets a fixed rate of interest.

Features:
(i) Nature of finance:

• It is debt or loan finance.
• It provides long-term finance of 5 years, 10 years, 25 years, 50 years.

(ii) Status of investor:

• The bondholders are creditors.
• They are non-owners and hence, not entitled to participate in the general meetings.
• The bondholder has no right to vote.

(iii) Return on bonds:

• The bondholders get a fixed rate of interest.
• It is payable on maturity or at a regular interval.
• Interest is paid to the bondholder at a fixed rate.

(iv) Repayment:

• A bond is a formal contract to repay borrowed money.
• Bonds have a specific maturity date, on which the principal amount is repaid.

6. Justify the following statements:

Question 1.
Equity shareholders are real owners and controllers of the company.
Answer:

• They do not have special preferential rights as to dividends or returns of capital in the event of the winding-up of the company.
• They are joint owners and thus, have ownership rights.
• They have the right to participate in the management of the company and to vote on every resolution in the meetings thus, having exclusive voting rights.
• They use the right to vote to appoint directors, amend Memorandum of Association, Articles of Association, can remove directors appoint bankers, etc.
• Their shares bear ultimate risks associated with ownership.
• Thus, it is rightly said, that the equity shareholders are real owners and controllers of the company.

Question 2.
Preference Shares do not carry normal voting rights.
Answer:

• Preference shares enjoy priority or preference over equity shareholders as regards payment of dividends and repayment of capital.
• They carry a fixed rate of dividend.
• They do not take much risk as they are cautious investors.
• They attend class meetings if they have any problem affecting their interests or dividend is not paid to them for two or more consecutive years.
• As they do not take risks, they do not attend general meetings or take part in the management nor vote at the meetings.
• Thus, it is rightly said, that the preference shares do not carry voting rights.

Question 3.
The debenture is secured by a charge on assets of the company.
Answer:

• A debenture is a document that grants lenders a charge over a company’s assets giving them a means of collecting debt if a default occurs.
• The charges may be floating or fixed.
• A specific property is pledged as security.
• In case the debenture is not redeemed or exercised, the lenders can recover the cost by selling the fixed assets.
• Thus, it is rightly said, that the debenture is secured by a charge on assets of the company.

Question 4.
Retained earnings are the simple and cheapest method of raising finance.
Answer:

• Retained earnings is an internal source of financing used by established companies.
• Retained earnings is a kept aside profit by the company instead of distributing all the dividends to the shareholders.
• The accumulated profits are re-invested by the companies by issuing bonus shares.
• It does not create a charge on assets, nor dilute the shareholdings.
• Thus, it is rightly said, that the retained earnings also known as ploughing back of profit/capitalization of reserves/self-financing are the simple and cheapest methods of raising finance.

Question 5.
Public deposit is a good source of short-term financing.
Answer:

• Deposits can be accepted by the general public by public limited companies and not private limited companies.
• Deposits are accepted from the general public for a short term i.e. minimum 6 months and a maximum of 36 months or a 3-year term.
• The amount so raised is used for short-term financial requirements.
• The time of deposit is predetermined in advance and paid after the expiry of such period as per terms and conditions agreed.
• The depositors form the general public not necessarily equity shareholders.
• The administrative cost of deposits of the company is lower than that involved in the issue of shares and debentures.
• The rate of interest payable is lower than other loans. Thus, it is rightly said, that the public deposit is a good source for meeting short-term requirements.

Question 6.
The bondholder is a creditor of the company.
Answer:

• A bond is a debt security which the company borrows for long-term finance and issues certificates under its seal as acknowledgment.
• The owners get interested as a return on their investment which is decided and fixed at the time of issue.
• The interest payable to bondholders is a fixed charge and a direct expenditure.
• It has to be paid whether the company makes a profit or not.
• As the bondholders are creditors they do not have the right to attend meetings or participate in management.
• Thus, it is rightly said, that the bondholder is a creditor of the company.

Question 7.
Trade credit is not a cash loan.
Answer:

• Trade credit is a business-to-business agreement wherein there is an arrangement to purchase goods and services on credit and pays at a later date and not immediately.
• The credit period extends up to a month.
• Discount is given if the same is paid earlier.
• It is an interest-free loan given by one businessman to another.
• It does not involve loan formalities but only a trade transaction. Hence, not a cash loan.
• Thus, it is rightly said, that the trade credit is not a cash loan.

Question 8.
Different investors have different preferences.
Answer:

• Investors make different decisions and have different risk preferences when getting gains and losses.
• Educated ones may opt for capital markets as compared to others who may invest in gold or silver.
• Cautious investors are ready to have steady income rather than fluctuations.
• Risk-takers are ready to face the ups and downs of their invested money and on their returns.
• Active investors try to beat the market while passive track the market index.
• Thus, it is rightly said, that the different investors have different choices and preferences.

Question 9.
Equity Capital is risk capital.
Answer:

• Equity shareholders have a claim over residual proceeds of the company.
• In the event of winding up, they are the last to be paid off after setting the claims of creditors and external liabilities.
• They have fluctuating returns and risk of fluctuating market value.
• Equity capital is permanent capital and not refunded during the lifetime of the company.
• Not having any assurance as regards dividend, repayment of capital Equity Capital becomes risk capital.
• Thus, it is rightly said, that equity capital is risk capital.

7. Answer the following questions.

Question 1.
What are a share and state its features?
Answer:

• The term share is defined by section 2(84) of the Companies Act 2013 ‘Share means a share in the share capital of a company and includes stock.’ The capital of a company is divided into a large number of shares.
• It facilitates the public to subscribe to the company’s capital in smaller amounts.
• The share is thus, an indivisible unit of share capital.
• It is a unit by which the share capital is divided.
• The total capital is divided into small parts and each such part is called a share.
• The value of each part/unit is known as face value.
• A person can purchase any number of shares as and when he or she desires.
• A person who purchases shares of the company is known as a shareholder of the company.
• Generally, companies issue equity shares and preference shares in the market.

Features of shares:
(i) Meaning:

• Share is the smallest unit in the total share capital of a company.
• The total share capital of a company is divided into small parts and each part is called a share.

(ii) Ownership:

• A share shows the ownership of the shareholder.
• The owner of the share is called a shareholder.

(iii) Distinctive number:

• Unless dematerialized, each share has a distinct number, which is noted in the share certificate.
• A share has a distinct number for identification.

(iv) Evidence of title:

• The company issues a share certificate under its common seal.
• It is a document of title of ownership of the share.
• A share is not a visible thing.
• It is shown by share certificate or in the form of ‘Demat share’

(v) Value of a share:

• Each share has a value expressed in terms of money.
• Face value: This value is written on the share certificate and mentioned in the Memorandum of Association.
• Issue Value: It is the price at which a company sells its shares. At par – equal to face value; At premium – more than the face value; At discount – Less than the face value.

(vi) Rights:

• A share confers/gives certain rights to the shareholders.
• Rights such as the right to receive dividends, right to inspect statutory books, right to attend shareholders’ meetings, right to vote in meetings, etc. (group rights), and right to receive notice, circulars, dividends, bonus shares, rights issue, etc. (individual rights).

(vii) Income:

• A shareholder is entitled to get a share in the net profit of the company.
• It is called a dividend.

(viii) Transferability:

• The shares of the public Ltd. company are freely transferable as per the rules laid down in the Articles of Association.
• Shares of a private company cannot be transferred.

(ix) Property of shareholder:

• A share is a movable property of a member.
• It can be transferred (gifted, sold) or transmitted (passed on to the legal heir after/due to death, insolvency or insanity of a member).

(x) Kinds of shares:

• A company issues two types of shares depending upon the right to control, income and risk.
• Equity shares – which do not carry preferential right to receive dividend or repayment of capital when the company winds up its activities.
• Preference shares – which carry preferential rights as regards dividend and repayment of capital in the event of winding up of the company.

Question 2.
What is an equity share? Explain its features.
Answer:

• Equity shares are the fundamental and basic source of financing activities of the business.
• Equity shares are also known as ordinary shares.
• Indian Companies Act 1956 defines equity shares as those shares which do not preference shares.
• The equity shares do not enjoy a preference in getting dividends.

Features of equity shares:
(i) Permanent Capital:

• Equity shares are irredeemable shares. It is permanent capital.
• The amount received from equity shares is not refunded by the company during its lifetime.
• Equity shares become redeemable/refundable only in the event of the winding-up of the company or the company decides to buy back shares.
• Equity shareholders provide long-term and permanent capital to the company.

(ii) Fluctuating dividend:

• Equity shares do not have a fixed rate of dividend.
• The rate of dividend depends upon the amount of profit earned by the company.
• If a company earns more profit, the dividend is paid at a higher rate.
• If there is insufficient profit, the Board of Directors may postpone the payment of dividends.
• The shareholders cannot compel them to declare and pay the dividend.
• The dividend is thus, always uncertain and fluctuating.
• The income of equity shares is uncertain and irregular.

(iii) Rights:

• Equity shareholders enjoy certain rights.
• Right to share in profit when distributed as dividend.
• Right to vote by which they elect Directors, amend Memorandum, Articles, etc.
• Right to inspect books of account of their company.
• Right to transfer shares.
• Participation in management.
• Enjoy Right Issue and Bonus Issue.

(iv) No preferential right:

• Equity shareholders do not enjoy preferential rights in respect to the payment of dividends.
• They are paid dividends only after the dividend is paid to preference shareholders.
• At the time of winding up, they are the last claimants. They are paid last after all the other claims are settled.

(v) Controlling power:

• The control of a company vests in the hands of equity shareholders.
• They are often described as real masters of the company as they enjoy exclusive voting rights.
• Equity shareholders may exercise their voting right by proxies, without attending the meeting in person.
• The Act provides the right to cast vote in proportion to the number of shareholdings.
• They participate in the management of the company.
• They elect their representatives called the Board of Directors for management of the company.

(vi) Risk:

• Equity shareholders bear maximum risk in the company.
• They are described as ‘shock absorbers when the company is in a financial crisis.
• The rate of dividend falls if the income of the company falls.
• The market value of shares goes down resulting in capital loss.

(vii) Residual claimants:

• A residual claim means the last claim on the earnings of the company.
• Equity shareholders are owners and they are residual claimants to all earnings after expenses, taxes, dividends, interests are paid.
• Even though equity shareholders are the last claimants, they have the advantage of receiving the entire earnings that are leftover.

(viii) No charge on assets:

• The equity share does not create any charge over the assets of the company.
• There is no security/guarantee of capital invested being returned.

(ix) Bonus issue:

• Bonus shares are issued as gifts to equity shareholders.
• They are issued ‘free of cost’.
• These shares are issued out of accumulated profits.
• These shares are issued to existing equity shareholders in a certain ratio or proportion of their existing shareholdings.
• Capital investment of equity shareholders grows on its own.
• This facility is available only to equity shareholders.

(x) Rights issue:

• Equity shareholders get the benefit of rights issues.
• When a company raises further capital by issue of shares, the existing shareholders are given priority to get newly offered shares, known as a rights issue.

(xi) Face value:

• The face value of equity share is very less.
• It can be ₹ 10 per share or even ₹ 1/- per share

(xii) Market value:

• Market value fluctuates, according to the demand and supply of shares.
• The demand and supply of equity shares depend on profits earned and dividends declared.
• When a company earns huge profits, the market value of shares increases.
• When it incurs a loss, the market value of shares decreases.
• There are frequent fluctuations in the market value of shares in comparison to other securities.
• Equity shares are more appealing to speculators.

(xiii) Capital Appreciation:

• Share capital appreciation takes place when the market value of share increases in the share market.
• The profitability and prosperity of a company enhance the reputation of the company in the share market and thus, facilitates appreciation of the market value of equity shares.

Question 3.
Define preference shares/What are preference shares? What are the different types of preference shares?
Answer:

• These shares have certain privileges and preferential rights such as to payment of dividends, return of capital, etc.
• Preference Share has which fixed rate of dividend is prescribed at the time of issue.
• The preference shareholders are co-owners but not controllers.
• They are cautious investors as they are interested in the safety of the investment.

(i) Cumulative Preference Shares:

• Cumulative preference shares are those shares on which dividend accumulates until it is fully paid.
• That is if the dividend is not paid in one or more years due to inadequate profit, then such unpaid dividend gets accumulated and is carried forward till next year.
• The accumulated dividend is paid when the company performs well.
• The arrears of dividends are paid before making payment to equity shareholders.
• The preference shares are always cumulative unless otherwise stated in Articles of Association.

(ii) Non-Cumulative Preference Shares:

• The dividend on these shares does not accumulate.
• That is the dividend on shares can be paid only out of profits of that particular year.
• The right to claim dividends will lapse if the company does not make a profit in that particular year.
• If the dividend is not paid in a year, it is lost.

(iii) Participating Preference Shares:

• The holders of these shares are entitled to participate in surplus profit besides preferential dividends. They participate in the high-profit condition of the company.
• Surplus profit here means excess profit that remains after making payment of dividends to equity shareholders.
• Such surplus profit up to a certain limit is distributed to preference shareholders.

(iv) Non-Participating Preference Shares:

• The preference shares are deemed to be non-participating if there is no clear provision in Articles of Association regarding participation in surplus profit.
• Such shareholders are entitled to receive a fixed rate of a dividend prescribed in the issue.

(v) Convertible Preference Shares:

• These shares have a right to convert their preference shares into equity shares.
• The conversion takes place within a certain agreed fixed period.

(vi) Non-Convertible Preference Shares:

• These shares are not converted into equity shares.
• They will remain as preference shares forever till paid back.

(vii) Redeemable Preference Shares:

• Shares that can be redeemed after a certain fixed period are called redeemable preference shares.
• A company limited by shares if authorized by Articles of Association issues redeemable preference shares.
• Such shares must be fully paid.
• The shares are redeemed out of divisible profit or out of the fresh issue of shares made for this purpose.

(viii) Irredeemable Preference Shares:

• Shares which are not redeemable are payable only on winding up of the company and are called irredeemable preference shares.
• As per section 55(1) of the Companies Act 2013, the company cannot issue irredeemable preference shares in India.
• Thus, are the types of preference shares.

Question 4.
What are preference shares? State its features.
Answer:

• The shares which carry preferential rights are termed preference shares.
• These shares have certain privileges and preferential rights such as payment of dividend, return of capital, etc.
• The preference shareholders are co-owners but not controllers.
• They are cautious investors as they are interested in the safety of the investment.
• They prefer a steady rate of returns on investment.

Features of preference shares:
(i) Preference for dividend:

• They have the first charge on the distributable amount of annual profits.
• The dividend is payable to preference shareholders before anything else is paid to equity shares, but after the settlement of dues of debentures, bonds and loans.

(ii) Prior repayment of capital:

• Preference shareholders have a preference over equity shareholders in respect of return of capital when the company is liquidated.
• It saves preference shareholders from capital losses.

(iii) Fixed return:

• These shares carry dividends at a fixed rate.
• The rate of dividend is predetermined at the time of issue.
• It may be in the form of a fixed sum or may be calculated at a fixed rate.
• The preference shareholders are entitled to dividends which can be paid only out of profit.
• Though the rate of dividend is fixed, the director in the financial crisis of the company may decide that no dividend be paid if there are no profits, the preference shareholders would have no claims for the dividend.

(iv) Nature of capital:

• Preference share capital is safe capital as the rate of dividend and market value do not fluctuate.
• Preference shares do not provide permanent share capital.
• They are redeemed after a certain period of time.
• It is generally issued at a later stage when a company gets established business.
• They are used to satisfy the need for additional capital of the company.

(v) Market value:

• The market value of preference shares does not change as the rate of dividend payable to them is fixed.
• The capital appreciation is considered to be low as compared with equity shares.

(vi) Voting right:

• The preference shares do not have normal voting rights.
• They have voting rights in matters that affect their interests – change of rights in terms of repayment of capital, or dividend payable to them are in arrears for two or more years.

(vii) Risk:

• Cautious investors generally purchase preference shares.
• Safety of capital and fixed return on investment are advantages attached with preference shares.
• These shares are a boon for shareholders during the depression when the interest rate is continuously falling.

(viii) Face value:

• The face value of preference shares is relatively higher than equity shares.
• They are normally issued at a face value of ₹ 100/-

(ix) Right or Bonus issue:

• Preference shareholders are not entitled to bonus or rights issues.
• It can be issued to the equity shares only.

(x) Nature of investor:

• Preference shares attract a moderate type of investors.
• Investors who are conservative, cautious, interested in the safety of capital, expect a steady rate of returns on investment purchase preference shares.

Question 5.
What is Debenture/Define Debenture. Discuss the different types of Debentures.
Answer:

• Debentures are one of the main sources of raising debt capital for meeting long-term and medium-term financial needs.
• Debentures represent borrowed capital.
• A person who purchased debenture is called a debenture holder.
• The holders get a fixed rate of interest as a return on their investment.
• The Board of Directors has the power to issue debentures.

Definitions:
Topham defines: “A debenture is a document given by a company as evidence of debt to the holder, usually arising out of the loan and most commonly secured by the charge.”

They are as follows:
(i) Secured Debentures:

• The debentures can be secured.
• The property of a company is charged as security for the loan.
• The security may be for some particular asset (fixed charge) or it may be the asset in general (floating charge).
• The debentures are secured through ‘Trust Deed’.

(ii) Unsecured Debentures:

• These debentures do not have security.
• The issue of unsecured debentures is prohibited by the Companies Act, 2013.

(iii) Registered Debentures:

• They are the ones whose details are mentioned in the Register of debenture maintained by the company.
• The details include the name, address, particulars of
• The transfer of such debentures requires the execution of regular transfer deeds.
• Interest is paid through Dividend warrants.

(iv) Bearer Debentures:

• The details of the debentures are not recorded in the register of the debenture.
• Their names do not appear in the Register of Debenture Holders.
• Such debentures are transferred by mere delivery.
• Payment of interest is made by means of coupons attached to the debentures certificate.

(v) Redeemable Debentures:

• Debentures are mostly redeemable i.e. payable at the end of some fixed period, mentioned on the Debentures Certificate.
• Repayment may be made at a fixed date, at the end of a specific period, or six installments during the lifetime of the company.
• The provision of repayment is normally made in Trust Deed.

(vi) Irredeemable Debentures:

• These debentures are not repayable during the lifetime of the company.
• They are repayable only on liquidation of the company or when there is a breach of any condition or in contingencies.

(vii) Convertible Debentures:

• These debentures give the right to the holder to convert the debentures into equity shares after a specific period.
  the period of conversion is mentioned in the debenture certificate.
• The issue must be approved by a special resolution in the general meeting before they are issued to the public.
• A Convertible debentures holder is hence entitled to equity shares at a rate lower than the market value after which he can participate in the profits and meetings of the company.

(viii) Non-Convertible Debentures:

• These are not convertible into equity shares on maturity.
• They are normally redeemed on the maturity date.
• There is no appreciation in their value which acts as a disadvantage.

Question 6.
Define Debenture/What is a debenture? Explain the features of debenture?
Answer:

• A debenture is one of the main sources of raising debt capital for meeting long-term and medium-term financial needs.
• Debentures represent borrowed capital.
• A person who purchases debenture is called a debenture holder.
• The holders get a fixed rate of interest as a return on their investment.
• The Board of Directors has the power to issue debentures.

Definitions:
Topham defines: “A debenture is a document given by a company as evidence of debt to the holder, usually arising out of the loan and most commonly secured by the charge.”
A debenture is evidence of indebtedness.

Features of Debenture:
(i) Written Promise:

• A debenture is a written promise by a company that it owes a specified sum of money to the holder of the debenture.

(ii) Face Value:

• The face value of debenture normally carries a high denomination.
• It is ₹ 100 or multiples of ₹ 100.

(iii) Time of payment:

• A debenture is issued with the due date stated in the Debenture Certificate.
• It provides for repayment of the principal amount on the maturity date.

(iv) Priority of Payment:

• Debenture holders have a priority in repayment of their capital over other claimants of the company.
• The amounts of debentures are settled before shareholders.

(v) Assurance of repayment:

• Debenture constitutes a long-term debt.
• They carry an assurance of repayment on the due date.

(vi) Terms of issue and redemption of Debenture:

• Debenture can be issued at par, premium, and even at discount.
• Its redemption takes place only at par and premium.

(vii) Authority to issue:
Board of Directors has the authority/power to issue debenture as per Companies Act 2013 Section 179(3).

(viii) Interest:

• A fixed-rate of interest is agreed upon and is paid periodically.
• The rate of interest that a company pays/offers depends upon the market conditions and nature of the business.
• Payment of interest is a liability of the company. It has to be paid whether the company makes a profit or not.

(ix) Parties to Debenture:

• Company: This is an entity that borrows money.
• Trustees: The company has to appoint Debenture Trust if it is offering debenture to more than 500 people.
• Trust is a party through whom the company deals with debenture holders and enters into an agreement known as Trust Deed.
• Trust Deed contains obligations of the company rights of debenture holders, power of trustees, etc.
• Debenture holders: They are the parties who provide loans to the company and receive a ‘Debenture Certificate’ as evidence.

(x) Status of debenture holder:

• The debenture holder is a creditor of the company.
• Debenture being loan taken by the company interest is payable on it at a fixed interval and fixed-rate till redeemed/paid.
• They cannot participate in the management of the company.

(xi) No Voting Right:

• According to sec. 71 (2) of Companies Act 2013, no company shall issue debenture carrying voting rights.
• Debenture holders do not have the right to vote in the general meetings of the company.

(xii) Security:

• Debenture can be secured with some property of the company by fixed or floating charge.
• Debenture holders can sell of charged property of the company and recover their money if the company is not in a position to make payment of interest or repayment of capital.

(xiii) Issuers:

• Debenture can be issued by both, private as well as public limited companies.

(xiv) Listing:

• A debenture must be listed with at least one recognized stock exchange.

(xv) Transferability:

• Debentures can be easily transferred through instruments of transfer.

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 1 Introduction to Corporate Finance Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 1 Introduction to Corporate Finance

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
_____________ is related to money and money management.
(a) Production
(b) Marketing
(c) Finance
Answer:
(c) Finance

Question 2.
Finance is the management of _____________ affairs of the company.
(a) monetary
(b) marketing
(c) production
Answer:
(a) monetary

Question 3.
Corporation finance deals with the acquisition and use of _____________ by business corporation.
(a) goods
(b) capital
(c) land
Answer:
(b) capital

Question 4.
Company has to pay _____________ to government.
(a) taxes
(b) dividend
(c) interest
Answer:
(a) taxes

Question 5.
_____________ refers to any kind of fixed assets.
(a) Authorised capital
(b) Issued capital
(c) Fixed capital
Answer:
(c) Fixed capital

Question 6.
_____________ refers to the excess of current assets over current liabilities.
(a) Working capital
(b) Paid-up capital
(c) Subscribed capital
Answer:
(a) Working capital

Question 7.
Manufacturing industries have to invest _____________ amount of funds to acquire fixed assets.
(a) huge
(b) less
(c) minimal
Answer:
(a) huge

Question 8.
When the population is increasing at a high rate, certain manufacturers find this as an opportunity to _____________ business.
(a) close
(b) expand
(c) contract
Answer:
(b) expand

Question 9.
The sum of all _____________ is gross working capital.
(a) expenses
(b) current assets
(c) current liabilities
Answer:
(b) current assets

Question 10.
_____________ means mix up of various sources of funds in desired proportion.
(a) Capital budgeting
(b) Capital structure
(c) Capital goods
Answer:
(b) Capital structure

1B. Match the pairs:

Question 1.

Answer:

Group ‘A’	Group ‘B’
(a) Capital budgeting	(6) Investment decision
(b) Fixed capital	(5) Fixed assets
(c) Working capital	(1) Sum of current assets
(d) Capital structure	(9) Mix up various sources of funds
(e) Corporate finance	(2) Deals with acquisition and use of capital

1C. Write a word or term or a phrase that can substitute each of the following statements:

Question 1.
A key determinant of the success of any business function.
Answer:
Finance

Question 2.
The decision of the finance manager ensures that the firm is well-capitalized.
Answer:
Financing decision

Question 3.
The decision of the finance manager to deploy the funds in a systematic manner.
Answer:
Investment decision

Question 4.
Capital is needed to acquire fixed assets that are used for a longer period of time.
Answer:
Fixed capital

Question 5.
The sum of current assets.
Answer:
Gross working capital

Question 6.
The excess of current assets over current liabilities.
Answer:
Networking capital

Question 7.
The process of converting raw material into finished goods.
Answer:
Production cycle

Question 8.
The boom and recession cycle in the economy.
Answer:
Economic Trend

Question 9.
The ratio of different sources of funds in the total capital.
Answer:
Capital Structure

Question 10.
The internal source of financing.
Answer:
Retained earnings

1D. State whether the following statements are True or False:

Question 1.
Finance is related to money and money management.
Answer:
True

Question 2.
The business firm gives a green signal to the project only when it is profitable.
Answer:
True

Question 3.
Corporate finance brings coordination between various business activities.
Answer:
True

Question 4.
Fixed capital is also referred as circulating capital.
Answer:
False

Question 5.
Working capital stays in the business almost permanently.
Answer:
False

Question 6.
The business will require huge funds if assets are acquired on a lease basis.
Answer:
False

Question 7.
The business dealing in luxurious products will require a huge amount of working capital.
Answer:
True

Question 8.
A firm with large-scale operations will require more working capital.
Answer:
True

Question 9.
Liberal credit policy creates a problem of bad debt.
Answer:
True

Question 10.
Financial institutions and banks cater to the working capital requirement of the business.
Answer:
True

1E. Find the odd one.

Question 1.
Land and Building, Plant and Machinery, Cash.
Answer:
Cash

Question 2.
Debenture Capital, Equity Share Capital, Preference Share Capital.
Answer:
Debenture Capital

Question 3.
Fixed Capital, Capital Structure, Working Capital.
Answer:
Capital Structure

1F. Complete the sentences.

Question 1.
Initial planning of capital requirement is made by _____________
Answer:
entrepreneur

Question 2.
When there is boom in economy, sales will _____________
Answer:
increase

Question 3.
The process of converting raw material into finished goods is called _____________
Answer:
production cycle

Question 4.
During recession period sales will _____________
Answer:
decrease

1G. Select the correct option from the bracket.

Question 1.

(To have the right amount of capital, deploy funds in a systematic manner, fixed capital, working capital, capital structure, carry dividend at a fixed rate)
Answer:

Group ‘A’	Group ‘B’
(a) Financing decision	(1) To have the right amount of capital
(b) Fixed capital	(2) Longer period of time
(c) Investment decision	(3) Deploy funds in a systematic manner
(d) Working capital	(4) Circulating capital
(e) Combination of various sources of funds	(5) capital structure

1H. Answer in one sentence.

Question 1.
Define corporate finance.
Answer:
Corporate finance deals with the raising and using of finance by a corporation.

Question 2.
What is fixed capital?
Answer:
Fixed capital is the capital that is used for buying fixed assets that are used for a longer period of time in the business eg. Capital for plant and machinery etc.

Question 3.
What is working capital?/Define working capital.
Answer:
Working capital is the capital that is used to carry out day-to-day business activities and takes into consideration all current assets of the company.
Eg: for building up inventories.

Question 4.
What is the production cycle?
Answer:
The process of converting raw material into finished goods is called the production cycle.

Question 5.
Define capital structure.
Answer:
Capital structure means to mix up various sources of funds in the desired proportion. To decide capital structure means to decide upon the ratio of different types of capital.

1I. Correct the underlined word and rewrite the following sentences.

Question 1.
Finance is needed to pay dividends to debenture holders.
Answer:
Finance is needed to pay interest to debenture holders.

Question 2.
When there is a recession in the economy sales will increase.
Answer:
When there is a boom in the economy sales will increase.

Question 3.
Share is an acknowledgment of a loan raised by the company.
Answer:
A debenture is an acknowledgment of a loan raised by a company.

Question 4.
Equity shares carry dividends at a fixed rate.
Answer:
Preference shares carry dividends at a fixed rate.

2. Explain the following terms/concepts.

Question 1.
Financing decision
Answer:
A financing decision is a right decision that is made by a finance manager of any corporation ensuring that the firm is well capitalized with the right combination of debt and equity, having access to multiple choices of sources of financing.

Question 2.
Investment decision
Answer:
Investment decisions mean capital budgeting i.e. finding investments and deploying them successfully in the business for greater profits.

Question 3.
Fixed capital
Answer:
Fixed capital is the capital that is used for buying fixed assets that are used for a longer period of time in the business. These assets are not meant for. resale. Examples of fixed capital are capital used for purchasing land and building, furniture, plant, and machinery, etc.

Question 4.
Working Capital
Answer:
Working capital is the capital that is used to carry out day-to-day business activities. It takes into consideration all current assets, of the company. It also refers to ‘Gross Working Capital’.
Examples of working capital are

• for building up inventories.
• for financing receivables.
• for covering day-to-day operating expenses.

3. Study the following case/situation and express your opinion.

1. The management of ‘Maharashtra State Road Transport Corporation’ wants to determine the size of working capital.

Question (a).
Being a public utility service provider will it need less working capital or more?
Answer:
MSRTC being a public utility service provider will need less working capital because of a continuous flow of cash from there, customers thus liabilities are taken care of.

Question (b).
Being a public utility service provider, will it need more fixed capital?
Answer:
Being a public utility service provider MSRTC will need a huge amount of funds to acquire fixed assets thus it will need more fixed capital.

Question (c).
Give one example of a public utility service that you come across on a day-to-day basis.
Answer:
The Indian Railways.

2. A company is planning to enhance its production capacity and is evaluating the possibility of purchasing new machinery whose cost is ₹ 2 crore or has alternative of machinery available on a lease basis.

Question (a).
What type of asset is machinery?
Answer:
Machinery is a Fixed Asset.
A fixed asset may be held for 5, 10 or 20 years and more. But if assets are acquired on a lease or rental basis, then less amount of funds for fixed assets will be needed for business.

Question (b).
Capital used for the purchase of machinery is fixed capital or working capital.
Answer:
Capital used for the purchase of machinery is fixed capital.

Question (c).
Does the size of a business determine the fixed capital requirement?
Answer:
Yes. Where a business firm is set up to carry on large-scale operations, its fixed capital requirements are likely to be high.

4. Distinguish between the following.

Question 1.
Fixed Capital and Working Capital
Answer:

Points	Fixed Capital	Working Capital
1. Meaning	Fixed capital refers to any kind of physical asset, a portion of total capital that is invested in fixed assets.	Working capital refers to the sum of current assets or gross working capital.
2. Nature	It stays in the business almost permanently.	Working capital is circulatory capital. It keeps changing.
3. Purpose	It is invested in fixed assets such as land, building, equipment, etc.	Working capital is invested in short-term assets such as cash, account receivable, inventory, etc.
4. Sources	Fixed capital funding can come from selling shares, debentures, bonds, long-term loans, etc.	Working capital can be funded with short-term loans, deposits, trade credit, etc.
5. Objectives of investors	Investors invest money in fixed capital hoping to make a future profit.	Investors invest money in working capital for getting immediate returns.
6. Risk	Investment in fixed capital implies more risk.	Investment in working capital is less risky. Eg. Land, building, plant and machinery
7. Decisions	Decisions relating to fixed capital investment are generally made by top-level management. Eg. Cash, bills receivable, inventories, cash at the bank	Decisions relating to working capital needs are generally made by middle-level or lower-level management.

5. Answer in brief:

Question 1.
Define capital structure and state its components.
Answer:
Definition: R.H. Wessel “The long term sources of funds employed in a business enterprise.”
John H. Hampton “A firm’s capital structure is the relation between the debt and equity securities that make up the firm’s financing of its assets.” Thus, the term capital structure means security mix. It refers to the proportion of different securities raised by a firm for long-term finance.

Components/Parts of Capital Structure:
There are four basic components of capital structure. They are as follows:
(i) Equity Share Capital:

• It is the basic source of financing activities of the business. Equity share capital is provided by equity shareholders.
• They buy equity shares and help a business firm to raise necessary funds. They bear the ultimate risk associated with ownership.
• Equity shares carry dividends at a fluctuating rate depending upon profit.

(ii) Preference Share Capital:

• Preference shares carry preferential rights as to payment of dividends and have priority over equity shares for return of capital when the company is liquidated.
• These shares carry dividends at a fixed rate.
• They enjoy limited voting rights.

(iii) Retained earnings:

• It is an internal source of financing.
• It is nothing but ploughing back of profit.

(iv) Borrowed capital: It comprises of the following:

• Debentures: A debenture is an acknowledgment of a loan raised by the company. The company has to pay interest at an agreed rate.
• Term Loan: Term loans are provided by the bank and other financial institutions. They carry fixed rate of interest.

Question 2.
State any four factors affecting fixed capital requirements?
Answer:
(i) Nature of business:

• The nature of business certainly plays a role in determining fixed capital requirements. They need to invest a huge amount of money in fixed assets.
• e.g. Rail, road, and other public utility services have large fixed investments.
• Their working capital requirements are nominal because they supply services and not the product.
• They deal in cash sales only.

(ii) Size of business:
The size of a business also affects fixed capital needs. A general rule applies that the bigger the business, the higher the need for fixed capital. The size of the firm, either in terms of its assets or sales, affects the need for fixed capital.

(iii) Scope of business:
Some business firms that manufacture the entire range of their production would require a huge investment in fixed capital. However, those companies that are labour intensive and who do not use the latest technology may require less fixed capital and vice versa.

(iv) Extent of lease or rent:
Companies who take their assets on a lease basis or on a rental basis will require less amount of funds for fixed assets. On the other side, firms that purchase assets will naturally require more fixed capital in the initial stages.

Question 3.
What are Corporate Finance and State’s two decisions which are basic of corporate finance?
OR
Write short note on Corporate Finance
Answer:
Corporate finance deals with the raising and using of finance by a corporation. It includes various financial activities like capital structuring and making investment decisions, financial planning, capital formation, and foreign capital, etc. Even financial organisations and banks play a vital role in corporate financing.

Henry Hoagland expresses, “Corporate Finance deals primarily with the acquisition and use of capital by the business corporation”.

Following two decisions are the basis of corporate finances:
(i) Financing decision:
Every business firm must carefully estimate its capital needs i.e. working capital and fixed capital. The firm needs to mobilize funds from the right sources also maintaining the right combination of debt capital and equity capital. For this balance, a company may go for or raise equity capital or even opt for borrowed funds by way of debentures, public deposits term loans, etc. to raise funds.

(ii) Investment decision:
Once the capital needs are accessed, the finance manager needs to take correct decisions regarding the use of the funds in a systematic manner, productively, using effective cost control measures to generate high profits. Finding investments through proper decisions and using them successfully in business is called ‘capital budgeting

6. Justify the following statements.

Question 1.
The firm has multiple choices of sources of financing.
Answer:

• Business firms require finance in terms of working capital and fixed capital.
• Funds are required at different stages of business.
• The company can raise funds from various sources i.e. from internal and external sources.
• Internal sources could be cash inflows on sales turnover, income from investments, and retained earnings.
• External sources can be obtained for short-term requirements through cash credit, overdraft trade credit, discounting bills of Exchange issues of commercial paper, etc.
• For long-term needs, a firm can meet its financing needs through the issue of shares, debentures, bonds, public deposits, etc. Thus, it is rightly said that the firm has multiple choices of sources of financing.

Question 2.
There are various factors affecting the requirements of fixed capital.
Answer:

• Fixed capital being long-term capital is required for the development and expansion of the company.
• The nature and size of a business have a great impact on fixed capital. Manufacturing businesses require huge fixed capital whereas trading organizations like retailers require less fixed capital.
• Methods of acquiring assets on rentals or on a lease/installment basis will require less amount of fixed assets.
• If fixed assets are available at low prices and concessional rates then it would reduce the need for investment in fixed assets.
• International conditions and economic trends like a boom period will require high investment in fixed assets and a recession will lead to less requirement.
• Similarly, consumer preferences, competition, and highly demanded goods and services will require a large amount of fixed capital. E.g. Mobile phones. Thus, it is rightly said that there are various factors affecting the requirements of fixed capital.

Question 3.
Fixed capital stays in the business almost permanently.
Answer:
Factors determining fixed capital requirements are:

• Fixed capital refers to capital invested for acquiring fixed assets.
• These assets are not meant for resale.
• Fixed capital is capital used for purchasing land and building, furniture, plant, and machinery, etc.
• Such cap al is usually required at the time of the establishment of a new company.
• Existing companies may also need such capital for their expansion and development, replacement of equipment, etc.
• Modern industrial processes require the increased use of heavy automated machinery. Thus, it is rightly said that fixed capital stays in the business almost permanently.

Question 4.
Capital structure is composed of owned funds and borrowed funds.
Answer:

• Capital structure means to mix up of various sources of funds in desired proportions.
• To decide capital structures means to decide upon the ratio of different types of capital.
• A firm’s capital structure is the relation between the debt and equity securities that make up the firm’s financing of its assets.
• The capital structure is composed of own funds which include share capital, free serves, and surplus, and borrowed funds which represent debentures, bank loans, and long-term loans provided by financial institutions.
• Thus capital structure = Equity share capital + preference share capital + reserves + debentures.
• Thus, it is rightly said that capital structure is composed of owned funds and borrowed funds.

Question 5.
There are various factors affecting the requirement of working capital.
Answer:

• The nature and size of a business affect the requirement of working capital. Trading or merchandising firms and big retail enterprises need a large amount of capital compared to small firms which need a small amount of working capital.
• If the period of the production cycle is longer then the firm needs more amount of working capital. If the manufacturing cycle is short, it requires less working capital.
• During the boom period sales will increase leading to increased investment in stocks, thus requiring additional working capital and during the recession, it is vice versa.
• Along with the expansion and growth of the firm or company in terms of sales and fixed assets, the requirement of working capital increases.
• If there is proper coordination, communication, and co-operation between production and sales departments then the requirement of working capital is less.
• A liberal credit policy increases the possibility of bad debts and in such cases, the requirement of working capital is high, whereas a firm making cash sales requires less working capital.

7. Answer the following questions.

Question 1.
Discuss the importance of Corporate Finance?
Answer:
Corporate finance deals with the raising and utilizing of finance by a corporation. It also deals with capital structuring and making investment decisions, financial planning of capital, and the money market. The finance manager should ensure that:
The firm has adequate finance and it’s being utilized effectively;
Generate minimum return for its owners.

The importance of Corporate Finance are as follows:
(i) Helps in decision making:
Most important decisions of business enterprises are made on the basis of availability of funds, as without finance any function of business enterprise is difficult to be performed independently. Obtaining the funds from the right sources at a lower cost and productive utilization of funds would lead to higher profits. Thus corporate finance plays a significant role in the decision-making process.

(ii) Helps in raising capital for a project:
A new business venture needs to raise capital. Business firms can raise funds by issuing shares, debentures, bonds or even by taking loans from the banks.

(iii) Helps in Research and Development
Research and Development need to be undertaken by firms for growth and expansion of business and to enjoy a competitive advantage. Research and development mostly involve lengthy and detailed technical work for the execution of projects. Through surveys and market analysis etc. companies may have to upgrade old products or develop new products to face competition and attract consumers. Thus the availability of adequate finance helps to generate high efficiency.

(iv) Helps in the smooth running of the business firm:
A smooth flow of corporate finance is important to pay the salaries of employees on time, pay loans, and purchase the required raw materials. At the same time finance is needed for sales promotion of existing products and more so for the launch of new products effectively.

(v) Brings co-ordination between various activities:
Corporate finance plays a significant role in the coordination and control of all activities in an organization. Production activity requires adequate finance for the purchase of raw materials and meeting other day-to-day financial requirements for the smooth running of the production unit. If the production increases, sales will also increase by contributing the income of the concern and profit to increase.

(vi) Promotes expansion and diversification:
Corporate finance provides money for the purchase of modern machines and sophisticated technology. Modern machines and technology help to improve the performance of the firm in terms of profits. It also helps the firm to expand and diversify the business.

(vii) Managing risk:
Companies have to manage several risks such as sudden fall in sales, loss due to natural calamity, loss due to workers strikes, change in government policies, etc. Financial aids help in such situations to manage such risks.

(viii) Replace old assets:
Assets like plants and machinery have become old and outdated over the years. Finance is required to purchase new assets or replace the old assets with new assets having new technology and features.

(ix) Payment of dividend and interest:
Finance is needed to pay the dividend to shareholders, interest to creditors, bank, etc.

(x) Payment of taxes/fees:
The company has to pay taxes to the government such as Income tax, Goods and Service Tax (GST), and fees to the Registrar of Companies on various occasions. Finance is needed for paying these taxes and fees.

Question 2.
Discuss the factors determining working capital requirements?
Answer:
Working Capital = Current Assets – Current Liabilities.
In other words, it is also called ‘Circulating Capital’. Also, refer to ‘GROSS WORKING CAPITAL.’ Management needs to determine the size of working capital with reference to the economic environment and other aspects within the business firm.

Factors determining/influencing working capital requirements are as follows:
(i) Nature of Business:
The working capital requirements are highly influenced by the nature of the business. Trading/ merchandising forms concerned with the distribution of goods require a huge amount of working capital to maintain a large stock of the variety of goods to meet customers’ demands are extend credit facilities to attract them. Whereas public utility concerns have to maintain small working capital because of a continuous flow of cash from their customers.

(ii) Size of business:
The size of a business also affects the requirements of working capital. Size of the firm refers to the scale of operation i.e. a firm with large scale operations will require more working capital and vice versa.

(iii) Volume of Sales:
The volume of sales and the size of the working capital have a direct relationship with each other. If the volume of sales increases there is an increase in the amount of working capital.

(iv) Production cycle:
The process of converting raw material into finished goods is called the ‘production cycle’. If the production cycle period is longer, the firm needs more amount of working capital. If the manufacturing cycle is short, it requires less working capital.

(v) Business cycle:
When there is a boom in the economy, sales will increase resulting in to increase in investment in stock. This will require additional working capital. During a recession period, sales will decline and consequently, the need for working capital will also decrease.

(vi) Terms of purchases and sales:
If credit terms of purchase are favourable and terms of sales are less liberal, then the requirement of cash will be less. Thus, the working capital requirement will be reduced.
A firm that enjoys more credit facilities needs less working capital. On the other hand, if a firm does not get proper credit for purchases and adopts a liberal credit policy for sales if requires more working capital.

(vii) Credit Control:
Credit control includes the factors such as volume of credit sales, the terms of credit sales, the collection policy etc. A firm with a good credit control policy will have more cash flow reducing the working capital requirement. Whereas if the firm’s credit policy is liberal there would be more requirements of the working capital.

(viii) Growth and Expansion:
Those firms which are growing and expanding at a rapid pace need more working capital compared to those firms which are stable in their growth.

(ix) Management ability:
The requirement of working capital is reduced if there is proper coordination in the production and distribution of goods. A firm stocking on heavy inventory calls for a higher level of working capital.

(x) External factors:
If the financial institutions and banks provide funds to the firm as and when required, the need for working capital is reduced.

Balbharti Maharashtra State Board 12th Commerce Book Keeping & Accountancy Solutions Chapter 10 Computer in Accounting Textbook Exercise Questions and Answers.

Maharashtra State Board 12th Book Keeping & Accountancy Solutions Chapter 10 Computer in Accounting

1. Objective questions:

A. Select the most appropriate alternatives from those given below and rewrite the statements.

Question 1.
The primary document for recording all financial transactions in Tally is the ______________
(a) Journal
(b) Trial sheet
(c) Voucher
(d) File
Answer:
(c) Voucher

Question 2.
______________ displays the balance day-wise for a selected voucher type.
(a) Record book
(b) Ledger book
(c) Journal book
(d) Daybook
Answer:
(d) Daybook

Question 3.
Fixed Deposit A/c comes under ______________ group.
(a) Investments
(b) Current liability
(c) Bank A/c
(d) Current asset
Answer:
(a) Investments

B. Give the word term or phrase which can substitute each of the following statements:

Question 1.
The details of Bills receivable are maintained in this record.
Answer:
Sundry Debtors

Question 2.
Tally software is classified into this category.
Answer:
Mercantile

Question 3.
The short key is used to save or accept the information.
Answer:
Ctrl + A

Question 4.
It is a damaged software, cracked, nearly fully functional.
Answer:
Pirated Software

Question 5.
The process by which all the calculations are automatically done by the accounting software.
Answer:
Automation

C. State whether the following statements are true or false with reason:

Question 1.
Alt + D is the short key for delete voucher entries.
Answer:
This statement is True.
To delete voucher entries, people use the Alt + D key.

Question 2.
In Tally, the F6 Function key is for the payment vouchers.
Answer:
This statement is False.
In Tally, the F6 Function key is useful for receipt vouchers.

Question 3.
Legal software is fully functional software without any restriction.
Answer:
This statement is True.
The base of the legal software is fully functional, safe, and legal, so one can use this kind of software without any hesitation and restriction.

Question 4.
Salary Account comes under Indirect expenses.
Answer:
This statement is True.
When the expenses are made for the purchase of goods, and for the manufacturing process, they are known as a direct expense. Salary does not fall in that category and so it comes under the indirect expense category.

Question 5.
Accounting software may not be customized to meet the special requirement of the user.
Answer:
This statement is False.
Customized Accounting software is prepared to meet the special requirement of the user which is not readily available in the market.

D. Answer in One Sentences:

Question 1.
What is CAS?
Answer:
CAS means Computerized Accounting System which helps business firms to implement accounting processes and makes it user friendly with automation.

Question 2.
Write the steps to create a ledger account in tally.
Answer:
Steps to create a ledger account in the tally are as follows:

• From Gateway of Tally Screen, click on accounts info.
• Path gateway to Tally – Accounts Info – Ledgers – Single ledger – Choses create.

Question 3.
How to view reports in Tally?
Answer:
For viewing accounting reports in accounting software to click on the report option and select the Display option.

Question 4.
State the various types of vouchers.
Answer:
Following are the various voucher types:

1. F4 Contra voucher – For cash deposited in the bank and cash withdrawn from the bank, Transfer from one cash A/c to another Cash A/c and Bank to Bank transfer.
2. F5 Payment voucher – For all types of payments are recorded through this voucher type (Cash and Bank) Cash or Bank.
3. F6 Receipt voucher – For Cash and Bank receipts
4. F7 Journal voucher – For non-cash transactions
5. F8 Sales voucher – For cash as well as credit sales
6. F9 Purchase voucher – For cash as well as a credit purchase

Question 5.
Write the steps to create a company.
Answer:
Following are the steps to create a company:

1. After entering into Accounting software Tally, double click on the option, create a company, under company information. Then follow the navigation path.
   Gateway of Tally > Company Info > Create Company
2. Fill in the detailed information in the company creation form, displayed on the screen – Company creation window.

Balbharti Maharashtra State Board 12th Commerce Book Keeping & Accountancy Solutions Chapter 7 Bills of Exchange Textbook Exercise Questions and Answers.

Maharashtra State Board 12th Book Keeping & Accountancy Solutions Chapter 7 Bills of Exchange

Objective Questions

A. Select the correct option and rewrite the sentence:

Question 1.
The person on whom a bill is drawn is called a ______________
(a) Drawee
(b) Payee
(c) Drawer
(d) Acceptor
Answer:
(a) Drawee

Question 2.
Before acceptance the bill is called a ______________
(a) Order
(b) Request
(c) Draft
(d) Instrument
Answer:
(c) Draft

Question 3.
When the due date of the bill drawn falls due on a public holiday, the payment must be made on the ______________ day.
(a) same
(b) preceding
(c) next
(d) any
Answer:
(b) preceding

Question 4.
The due date of the bill drawn for 2 months on 23rd Nov. 2019 will be ______________
(a) 23rd Jan. 2020
(b) 25th Jan. 2019
(c) 26th Jan. 2019
(d) 25th Jan. 2020
Answer:
(d) 25th Jan. 2020

Question 5.
Noting charges are borne by ______________
(a) Notary Public
(b) Drawee
(c) Drawer
(d) Endorsee
Answer:
(b) Drawee

Question 6.
There are ______________ parties to bill of exchange.
(a) five
(b) four
(c) three
(d) two
Answer:
(c) three

Question 7.
When a bill is drawn for 2 months after date on 3rd Jan. 2020, its due date will be ______________
(a) 3rd Jan. 2020
(b) 3rd Mar. 2020
(c) 5th Mar. 2020
(d) 6th Mar. 2020
Answer:
(d) 6th Mar. 2020

Question 8.
Notary Public is ______________
(a) Govt. Officer
(b) Drawer
(c) Payee
(d) Endorsee
Answer:
(a) Govt. Officer

Question 9.
When Acceptor or Drawee does not pay the amount of bill to the holder on the due date it is known as ______________ the bill.
(a) returning
(b) discounting
(c) honouring
(d) dishonouring
Answer:
(d) dishonouring

Question 10.
The person who accepts the bill treats the bill as ______________
(a) Bills Payable
(b) Promissory Note
(c) Draft
(d) Bills Receivable
Answer:
(a) Bills Payable

B. Write the word/phrase/term, which can substitute each of the following statements:

Question 1.
Three extra days are allowed over and above the term of the bill.
Answer:
Grace days

Question 2.
Fees charged by Notary Public for getting the fact of dishonour noted.
Answer:
Noting Charges

Question 3.
A person who is entitled to receive the amount of bill of exchange.
Answer:
Payee

Question 4.
A person in whose favour a bill endorsed.
Answer:
Endorsee

Question 5.
Officer appointed by the government for noting of dishonour of bill.
Answer:
Notary Public

Question 6.
Cancellation of the bill on maturity in return for a new bill for an extended period of credit.
Answer:
Renewal of Bill

Question 7.
Bill of exchange drawn and accepted without any valuable consideration.
Answer:
Accommodation bill

Question 8.
A person who is in possession of the Bill of Exchange.
Answer:
Holder

Question 9.
Conversion of Bill of Exchange into its present value.
Answer:
Discounting of the bill

Question 10.
The amount is not recoverable from Drawee on account of insolvency.
Answer:
Bad debts

C. State whether the following statements are True or False with reasons:

Question 1.
An Inland bill is one that is drawn in one country and payable in another country.
Answer:
This statement is False.
Inland bill means, a bill drawn, accepted, and made payable within the territory of one and same, country. So, a bill is drawn in one country and payable in another country can’t be an inland bill.

Question 2.
Retirement of the bill means payment of the bill before the due date.
Answer:
This statement is True.
Payment of the bill, by the acceptor of the bill to the holder of the bill before the due date, is known as Retirement of the bill. So retirement of the bill means payment of the bill before the due date.

Question 3.
Drawee can transfer the ownership of the bill.
Answer:
This statement is False.
Drawee is a debtor. He has to pay the amount of the bill to its holder on the due date. Hence he cannot transfer its ownership to other people. The drawer can transfer the ownership of the bill as he is the owner of the bill.

Question 4.
Acceptance of the bill without making any changes in the terms of the bill is called qualified acceptance.
Answer:
This statement is False.
Acceptance of the bill with some changes as regards the terms, amount, place, etc. of a bill is known as qualified acceptance. Acceptance of the bill without making changes as regards the term is called general acceptance.

Question 5.
Discounting is a device to convert the bill into its present value.
Answer:
This statement is True.
When the drawer or holder of the bill approaches the bank to discount the bill, the bank pays the bill amount after deducting a certain amount (which is known as discounting charges). It means conversion of the bill into its present value in cash. So, we can say that discounting is a device to convert the bill into its present value.

Question 6.
A bill of exchange must be presented to the acceptor on the due date.
Answer:
This statement is True.
To get the payment of the bill from the acceptor, the holder of the bill is required to present it to the acceptor on its due date. Acceptor either honours the bill or dishonours the bill.

Question 7.
If a bill is discounted by the holder, no entry is passed in his book when the bill is honoured on the due date.
Answer:
This statement is True.
On discounting the bill the holder gives the possession of the bill to the bank. On the maturity date, the bank has to present the bill to the drawee to collect the payment. When the discounted bill is honoured, the transaction takes place between drawee and bank.

Question 8.
Noting charges are to be borne by the drawer.
Answer:
This statement is False.
Noting charges are to be borne by the drawee only as due to his act of non-payment, the bill is dishonoured and the drawer is not able to get money on its due date.

Question 9.
If a bill is drawn payable ‘on demand’ no grace days are allowed.
Answer:
This statement is True.
‘On demand’ means the amount of the bill is to be paid by drawee immediately on presentation of the bill as no time period is mentioned on it. In demand bill, 3 days grace is not allowed by law.

Question 10.
There are three parties to a promissory note.
Answer:
This statement is False.
There are only two parties to a promissory note, i.e. Drawer or maker of the note and drawee or payee of the note.

D. Find the odd one:

Question 1.
(a) Retaining
(b) Noting
(c) Discounting
(d) Endorsing
Answer:
(b) Noting

Question 2.
(a) Trade bill
(b) Accommodation bill
(c) After date bill
(d) Demand bill
Answer:
(d) Demand bill

Question 3.
(a) Notary public
(b) Drawer
(c) Drawee
(d) Payee
Answer:
(a) Notary public

Question 4.
(a) Discounting charges
(b) Rebate
(c) Bank charges
(d) Noting charges
Answer:
(d) Noting charges

Question 5.
(a) Stamp
(b) Acceptance
(c) Draft
(d) Amount
Answer:
(c) Draft

E. Complete the sentences:

Question 1.
Making payment of bill before the due date of maturity is known as ______________
Answer:
Retirement of Bill

Question 2.
A person whose liabilities are more than his assets and is not in a position to pay off his liabilities is ______________
Answer:
Insolvent person

Question 3.
Amount that cannot be paid by acceptor on account of insolvency is known as ______________
Answer:
Deficiency

Question 4.
A bill of exchange payable after certain period is known as ______________
Answer:
After date bill

Question 5.
A bill which is drawn and accepted with valuable consideration is known as ______________
Answer:
Trade Bill

Question 6.
A person who draws the bill of exchange is known as ______________
Answer:
Drawer

Question 7.
A bill whose due date is calculated from the date of acceptance is known as ______________
Answer:
After sight bill

Question 8.
Recording the fact of dishonour of bill is known as ______________
Answer:
Noting

Question 9.
When drawee accepts the bill payable at a particular place only, it is known as ______________
Answer:
qualified acceptance as to place

Question 10.
Fees charged by the bank for collection of bill on behalf of holder is ______________
Answer:
bank charges

F. Answer in a sentence:

Question 1.
What do you mean by Bill of Exchange?
Answer:
A Bill of Exchange is a written order signed by the drawer, directing a certain person to pay a certain sum of money on-demand or on a certain future date to a certain person or as per his order.

Question 2.
What are Days of Grace?
Answer:
The three extra days allowed to the drawee or the acceptor of a bill for making payment on it are called Days of Grace.

Question 3.
What do you mean by Discounting a Bill of Exchange?
Answer:
Encashment of a bill of exchange with the bank for certain cash which is less than the face value of the bill, before its due date by its drawer or holder is called Discounting of a Bill of Exchange.

Question 4.
What is Noting of the Bill?
Answer:
Noting of a Bill of Exchange is the recording of the facts of its dishonour by a Notary public.

Question 5.
What are Noting Charges?
Answer:
Noting Charges are the fees charged by the Notary public for noting the facts of dishonour on the face of the bill and in his official register.

Question 6.
What is the relationship between drawer and drawee?
Answer:
The relationship between the drawer and the drawee is that of the creditor and debtor.

Question 7.
Who is the Payee of the Bill?
Answer:
The Payee of a Bill is the person to whom the bill is made payable or in whose favour the bill is drawn.

Question 8.
What do you mean by Rebate?
Answer:
Any concession or discount in monetary terms given by the holder of the bill of exchange to the drawee or acceptor, when a bill is retired is called a Rebate.

Question 9.
What is the Legal Due Date?
Answer:
The date which is arrived at after adding three days of grace to the nominal due date is known as Legal Due Date.

Question 10.
What are Bills Payable on Demand?
Answer:
When the amount of bill is payable by a drawee on the presentation of a bill, in which time period is not mentioned and grace days are not allowed is known as Bills Payable on Demand.

G. Do you agree or disagree with the following statements:

Question 1.
A bill of exchange is a conditional order.
Answer:
Disagree

Question 2.
The party which is ordered to pay the amount is known as the payee.
Answer:
Disagree

Question 3.
The person in whose favour the bill is endorsed is known as the endorsee.
Answer:
Agree

Question 4.
Rebate or discount given on retiring a bill is an income to the Drawee.
Answer:
Agree

Question 5.
A bill from the point of view of the debtor is called Bills payable.
Answer:
Agree

Question 6.
In case of bill drawn payable ‘on demand,’ no grace days are allowed.
Answer:
Agree

Question 7.
A bill is required to be accepted by Drawer.
Answer:
Disagree

Question 8.
A bill of exchange need not be dated.
Answer:
Disagree

Question 9.
A bill before acceptance is called Promissory Note.
Answer:
Disagree

Question 10.
Renewal is requested by the drawee to extend the credit period of the bill.
Answer:
Agree

H. Calculations:

Question 1.
Ganesh draws a bill for ₹ 40,260 on 15th Jan. 2020 for 50 days. He discounted the bill with the Bank of India @ 15 % p.a. on the same day. Calculate the amount of discount.
Solution:
Discount = Amount of Bill × \(\frac{\text { Rate }}{100} \times \frac{\text { Unexpired days }}{366}\)
= 40,260 × \(\frac{15}{100} \times \frac{50}{366}\)
= ₹ 825
(Note: 2020 is a Leap year, so the total number of days = 366)

Question 2.
Shefali Traders drew a bill on Maya for ₹ 30,000 on 1st Oct. 2019 payable after 3 months.
Calculate the amount of discount in the following cases:
(i) Shefali Traders discounted the bill on the same day @ 12 % p.a.
(ii) Shefali Traders discounted the bill on 1st Nov. 2019 @ 12 % p.a.
(iii) Shefali Traders discounted the bill on 1st Dec. 2019 @ 12 % p.a.
Solution:
Discount = Amount of Bill × \(\frac{\text { Rate }}{100} \times \frac{\text { Unexpired days }}{365}\)
(i) Discount = 30,000 × \(\frac{12}{100} \times \frac{3}{12}\) = ₹ 900
(ii) Discount = 30,000 × \(\frac{12}{100} \times \frac{2}{12}\) = ₹ 600
(iii) Discount = 30,000 × \(\frac{12}{100} \times \frac{1}{12}\) = ₹ 300

Question 3.
Veena who had accepted Sudha’s bill for ₹ 28,000 was declared bankrupt and only 35 paise in a rupee could be recovered from her estate. Calculate the amount of bad debts.
Solution:
From Veena, only 35 paise in a rupee could be recovered i.e. 65 paise in a rupee is bad debt for Sudha. So 65% of ₹ 28,000 = ₹ 18,200 is the amount of bad debts.

Question 4.
Nitin renewed his acceptance for ₹ 72,000 by paying ₹ 22,000 in cash and accepting a new bill for the balance plus interest @ 18%. p.a. for 4 months. Calculate the amount of the new bill.
Selution:
For Nitin,
Total outstanding = ₹ 72,000
Nitin paid in cash= ₹ 22,000
Remaining dues = ₹ 50,000
Now, on this ₹ 50,000 we have to calculate interest @ 18% for 4 months
I = \(\frac{\mathrm{PRN}}{100}\)
= 50,000 × \(\frac{18}{100} \times \frac{4}{12}\)
= ₹ 3,000
So, amount of new bill = Remaining dues + Interest
= 50,000 + 3,000
= ₹ 53,000

Question 5.
Nisha’s acceptance for ₹ 16,850 sent to the bank for the collection was honoured and bank charges debited were ₹ 125. Find out the amount actually received by Drawer.
Solution:
Bill of ₹ 16,850 sent to the bank for collection and it is honoured and bank charges = ₹ 125
So, actual amount received by drawer = 16,850 – 125 = ₹ 16,725.

Question 6.
A bill of ₹ 16,000 was drawn by Keshav on Gopal on 12th June 2019 for 2 months, what will be the due date, if all of sudden, the legal due date is declared as an emergency holiday?
Solution:
Consider immediate or next working day as the due date in case the legal due date is declared as an emergency holiday.

∴ The legal due date is 16th August 2019 (The next day).

I. Prepare the following specimens:

Question 1.
Prepare a bill of exchange from the following information:
Drawer: Shankar, Vadodara, Gujarat
Drawee: Vinayak, Somwar Peth, Pune
Amount: ₹ 16,000
Period: 3 months
Date of Bill: 6th Sept. 2019
Date of acceptance: 11th Sept. 2019
Solution:

Question 2.
Prepare a bill of exchange from the following information:
Drawer: Dinesh, P. R. Road, Andheri (West)
Drawee: Mahesh, L. B. S. Road, Mulund
Payee: Amit, Thane (West)
Amount: ₹ 9,500
Period of Bill: 4 months after sight
Date of Bill: 26th Nov. 2019
Date of acceptance: 29th Nov. 2019
Solution:

Question 3.
Kantilal, 343/D, Palm Heights, Jogeshwari, drew a bill on 10th Oct. 2019 for ₹ 63,490 for 45 days after the date on Shantilal, B2, Himalaya Towers, Baramati, payable to Priyanka, Satara. The bill was accepted on 13th Oct. 2019 for 60 days.
Prepare a format of bill of exchange from the above details.
Solution:

Question 4.
Prepare a format of bill exchange from the following:
Rahul Sane, 86-D, Raviwar Peth, Nagpur accepted the bill drawn on him by Prithviraj, Icon Heights, Wardha for ₹ 87,000 on 30th July 2019.
The bill was drawn on 26th July 2019 for ₹ 1,00,000 for 90 days after the date.
Solution:

Question 5.
Prepare a format of bill of exchange from the following.
Drawer: Kashmira Shah, Partner M/S Shah, and Shah, 2 – C, Matruchhaya Building, Akola
Drawee: Dhanashree Traders, Bangalore Road, Belgaum (Signed by Jayshree, Partner)
Payee: M/S Janki Traders, Akola
Amount: ₹ 64,500
Period of Bill: 3 months
Date of drawing: 12th Sept. 2019
Date of acceptance: 15th Sept. 2019
Solution:

Question 6.
Prepare a format Bill of Exchange with imaginary Drawer, Drawee, Address, Amount, Dates.
Drawer: Dhanesh Shah, 24/c, Amir Mahal, Borivali, Mumbai
Drawee: Kalpana Shah, 33, Sharadashram, Dadar (West), Mumbai
Amount: ₹ 80,500
Period: 60 days
Date of the bill: 2nd December 2020
Accepted on: 5th December 2020
Solution:

J. Complete the following Table.

Question 1.

Answer:

Question 2.

Answer:

S.No.	Date of Drawing	Date of Acceptance	Tenure	Type	Nominal due Date	Legal due Date
(i)	3rd January, 2020	5th January, 2020	45 days	after date	17th Feb. 2020	20th Feb. 2020
(ii)	9th April, 2019	12th April, 2019	4 months	after sight	12th Aug. 2019	14th Aug. 2019
(iii)	23rd November, 2019	23rd November, 2019	2 months	after date	23rd Jan. 2020	25th Jan. 2020
(iv)	16th August, 2019	20th August, 2019	4 months	after sight	20th Dec. 2019	23rd Dec. 2019
(v)	23rd December, 2018	24th December, 2018	60 days	after date	21st Feb. 2019	24th Feb. 2019

Practical Problems

Question 1.
On 1st Jan., 2020 Hemant sold goods of ₹ 18,500 to Nitin. On the same date Hemant drew a bill of exchange for ₹ 18,500 at 2 months. On the due date the bill was duly honoured.
Give Journal Entries in the books of Hemant and Nitin. Prepare Hamant’s Account in the books of Nitin.
Solution:
In the books of Hemant
Journal Entries

In the books of Nitin
Journal Entries

Question 2.
Neha sold goods to Rohan ₹ 42,000 on 6th Sept. 2019. Neha drew a bill of exchange at 3 months for the amount which was accepted by Rohan. Neha discounted the bill with her bankers at ₹ 41,000. On the due date of the bill Rohan dishonoured the bill and bank paid ₹ 300 as Noting Charges.
Show Journal Entries in the books of Neha and Rohan.
Solution:
In the books of Neha
Journal Entries

In the books of Rohan
Journal Entries

Question 3.
Jyoti owes ₹ 31,000 to Swati for which she draws a bill on Jyoti for 2 months. The bill was duly accepted by Jyoti. Swati sends the bill to bank for collection. Jyoti honoured the bill on the due date and bank charges ₹ 475 as bank charges.
Give Journal Entries in the books of Swati.
Solution:
In the books of Swati
Journal Entries

Question 4.
Pankaj purchased goods of ₹ 20,000 from Omprakash on credit on 15th April, 2019. Omprakash draws After Sight bill for the amount due on Pankaj for 3 months which was accepted by Pankaj on 18th April, 2019. On 20th April, 2019 Omprakash endorsed the bill to his creditor Jagdish in full settlement of his amount ₹ 21,000. On the due date the bill was dishonoured by Pankaj.
Give Journal Entries in the books of Omprakash, Pankaj and Jagdish.
Solution:
In the books of Omprakash
Journal Entries

In the books of Pankaj
Journal Entries

In the books of Jagdish
Journal Entries

Question 5.
Siddhant sold goods to Sudhir of ₹ 43,800 on 18th March, 2019. Siddhant draws a bill on Sudhir on the same day for ₹ 43,800 for 3 months which was duly accepted by Sudhir. Siddhant discounted the bill on the same day at 8% p.a. The bill was dishonoured on the due date and Sudhir requested Siddhant to accept ₹ 13,800 and interest in cash on remaining amount at 12% p. a. Siddhant agreed and for the balance amount accepted a new bill at 2 months. Before the due date of new bill Sudhir retired the bill by paying ₹ 29,700.
Pass necessary Journal Entries in the books of Siddhant.
Solution:
In the books of Siddhant
Journal Entries

Working Notes:
1. March 18, Discount = 43,800 × \(\frac{3}{12} \times \frac{8}{100}\) = ₹ 876

2. March 21, calculation of interest balance amount:
I = \(\frac{\mathrm{PRN}}{100}\)
= 30,000 × \(\frac{12}{100} \times \frac{2}{12}\) (for 2 months on remaining amount ₹ 30,000)
= ₹ 600

3. Before due date bill was retired by Sudhir by paying ₹ 300 less which is considered as discount and as date is not given, here it is not recorded.

Question 6.
Sangeeta accepted a bill for ₹ 18,000 drawn by Geeta at 3 months. Geeta discounted the bill for ₹ 17,400. Before the due date Sangeeta approached Geeta for renewal of the bill. Geeta agreed on the condition that Sangeeta should pay ₹ 6,000 immediately and for the balance she should accept a new bill for 4 months along with interest ₹ 550. The arrangements were carried through. But on the due date of new bill Sangeeta became insolvent and 35 paise in a rupee could be recovered from her estate.
Give Journal Entries in the books of Sangeeta and prepare Sangeeta’s Account in the books of Geeta.
Solution:
In the books of Sangeeta
Journal Entries

Working Notes:
1. It is advisable to write journal entries in the books of Geeta also to get entries in ‘Sangeeta’s Account’ property.
In the books of Geeta
Journal Entries

Question 7.
Priyanka owed Meena ₹ 18,000, Priyanka accepted a bill drawn by Meena for the amount at 4 months. Meena endorsed the same bill to Sagar. Before due date Priyanka approached Meena for renewal of bill. Meena agreed on condition that ₹ 6,000 be paid immediately together with interest on the remaining amount of 8% p.a. for 3 months and Priyanka should accept a new bill for the balance amount. These arrangements were carried through. However, before the due date Priyanka became insolvent and only 50% of the amount could be recovered from her estate.
Give Journal Entries in the books of Meena.
Solution:
In the books of Meena
Journal Entries

Working Note:
Calculation of interest on remaining amount ₹ 12,000 @ 8 % p.a. and for 3 months
I = \(\frac{\mathrm{PRN}}{100}\)
= 12,000 × \(\frac{8}{100} \times \frac{3}{12}\)
= ₹ 240

Question 8.
Seema purchased goods from Roma on credit on 1st August, 2019 for ₹ 37,000. Seema accepts bill for 2 months drawn by Roma for the same amount. On the same day, Roma discounts the bill with the bank for ₹ 36,200 on 3rd August, 2019. On the due date the bill is dishonoured and Noting Charges of ₹ 160 is paid by the bank. Seema pays ₹ 19,000 and Noting Charges in cash immediately. A new bill is drawn by Roma for the balance including interest ₹ 650 for 2 months, which is accepted by Seema. The new bill is retired one month before the due date at a rebate of ₹ 300.
Give Journal Entries in the books of Seema and prepare Seema’s Account in the books of Roma.
Solution:
In the books of Seema
Journal Entries

Question 9.
Uday purchased goods from Shankar on credit for ₹ 35,000 at 10 % trade discount. Uday paid ₹ 1,500 immediately and for the balance accepted a bill for 3 months. Before due date Uday approached Shankar with a request to renew the bill. Shankar agreed but with condition that Uday should accept a new bill for 3 months including interest at 12% p.a.
Give Journal Entries in the books of Shankar.
Solution:
In the books of Shankar
Journal Entries

Working Note:
I = \(\frac{\text { PRN }}{100}\)
= 30,000 × \(\frac{3}{12} \times \frac{12}{100}\)
= ₹ 900

Question 10.
Sagar drawn an after sight bill on 21st Nov., 2019 for ₹ 21,000 at 3 months on Prasad. The bill is discounted by Sagar at 8% p.a. with his bank. On maturity. Prasad finds himself unable to make payment of the bill and requests Sagar to renew it. Sagar accepts the request and draws a new bill at one month for ₹ 21,750 including interest which was duly accepted by Prasad. Sagar deposits the bill into bank for the collection. Prasad honours the bill on the due date and bank charges ₹ 250 as bank charges.
Pass necessary Journal Entries in the books of Sagar and prepare Sagar’s Account in the books of Prasad.
Solution:
In the books of Sagar
Journal Entries

Question 11.
Journalise the following transaction in the books of Abhishek:
(a) Siddhant informs Abhishek that Vineet’s acceptance for ₹ 23,000 endorsed to Siddhant has been dishonoured. Noting Charges amounted to ₹ 430.
(b) Kajal renews her acceptance to Abhishek for ₹ 39,000 by paying ₹ 3,000 in cash and accepting a fresh bill for the balance along with interest at 11.5% p.a. for 3 months.
(c) Radhika retired her acceptance to Abhishek for ₹ 23,000 by paying ₹ 22,250 by cheque.
(d) Abhishek sent a bill of Subodh for ₹ 9,000 to bank for collection. Bank informed that the bill has been dishonoured by Subodh.
Solution:
In the books of Abhishek
Journal Entries

Working Note:
Amount of interest = 36,000 × \(\frac{3}{12} \times \frac{11.5}{100}\) = ₹ 1,035.

Question 12.
Journalise the following transaction in the books of Narendra:
(a) Narendra retires his acceptance to Upendra by paying ₹ 4,000 in cash and endorsing a bill accepted by Ramlal for ₹ 5,000.
(b) Vikram’s acceptance to Narendra ₹ 6,000 retired one month before the due date at rebate of 12% p.a.
(c) Dilip renews his acceptance to Narendra for ₹ 12,000 by paying ₹ 4,000 in cash and accepting a fresh bill for the balance plus interest at 12% p.a. for 3 months.
(d) Bank informed Narendra that, Kartik’s acceptance for ₹ 13,000 to Narendra, discounted with the bank was dishonoured and Noting Charges paid by bank ₹ 140.
Solution:
In the books of Narendra
Journal Entries

Question 13.
Journalise the following transaction in the books of Bharti:
(a) Bank informed that Amit’s acceptance for ₹ 15,750 sent to bank for collection was honoured and bank charges debited were ₹ 150.
(b) Nitin renewed his acceptance for ₹ 22,200 by paying ₹ 2,200 in cash along with interest on balance amount at 10% and accepted a fresh bill for the balance for 3 months.
(c) Dhanshri who had accepted Bharti’s bill for ₹ 17,500 was declared insolvent and only 40% of the amount due could be recovered from her estate.
(d) Discharged our acceptance to Savita for ₹ 9,450 by endorsing Pravin’s acceptance to us ₹ 9,000.
Solution:
In the books of Bharti
Journal Entries

Question 14.
Journalise the following transaction in the books of Sudha:
(a) Endorsed Sonali’s acceptance at 2 months for ₹ 6,000 in favour of Urmila and paid cash ₹ 3,500 in full settlement of her account ₹ 10,000.
(b) Discounted 2 months acceptance of Surya for ₹ 7,800 with bank at 10% p.a.
(c) Bank informed that Anuradha’s acceptance of ₹ 4,800 which was discounted was dishonoured and bank paid Noting Charges ₹ 125.
(d) Pooja honoured her acceptance of ₹ 16,400 which was deposited into bank for collection.
Solution:
In the books of Sudha
Journal Entries

Question 15.
Journalise the following transaction in the books of Mrunal:
(a) Bank informed that Aishwarya’s acceptance of ₹ 24,000 which was discounted had been dishonoured and bank paid Noting Charges ₹ 220. Bill was renewed at the request of Aishwarya for 2 months with interest of ₹ 480.
(b) Received ₹ 4,630 from private estate of Ankur who was declared insolvent against bill accepted by him for ₹ 6,000.
(c) Accepted a bill of ₹ 15,000 at 3 months drawn by Anushka for the amount due to her ₹ 20,000 and balance paid by cheque.
(d) Dishonoured our acceptance to Vivek ₹ 27,000 and Noting Charges paid by Vivek ₹ 700.
Solution:
In the books of Mrunal
Journal Entries

Balbharti Maharashtra State Board 12th Commerce Book Keeping & Accountancy Solutions Chapter 6 Dissolution of Partnership Firm Textbook Exercise Questions and Answers.

Maharashtra State Board 12th Book Keeping & Accountancy Solutions Chapter 6 Dissolution of Partnership Firm

1. Objective Questions.

A. Select the most appropriate answer from the alternatives given below and rewrite the sentences.

Question 1.
In case of dissolution assets and liabilities cire transferred to ______________ Account.
(a) Bank Account
(b) Partner’s Capital Account
(c) Realisation Account
(d) Partner’s Current Account
Answer:
(c) Realisation Account

Question 2.
Dissolution expenses are credited to ______________ Account.
(a) Realisation Account
(b) Cash/Bank Account
(c) Partner’s Capital Account
(d) Partner’s Loan Account
Answer:
(b) Cash/Bank Account

Question 3.
Deficiency of insolvent partner will be suffered by solvent partners in their ______________ ratio.
(a) capital ratio
(b) profit sharing ratio
(c) sale ratio
(d) liquidity ratio
Answer:
(b) profit sharing ratio

Question 4.
If any asset is taken over by partner from firm his Capital Account will be ______________
(a) credited
(b) debited
(c) added
(d) divided
Answer:
(b) debited

Question 5.
If any unrecorded liability is paid on dissolution of the firm ______________ account is debited.
(a) Cash/Bank Account
(b) Realisation Account
(c) Partner’s Capital Account
(d) Loan Account
Answer:
(b) Realisation Account

Question 6.
Partnership is completely dissolved when the partners of the firm become ______________
(a) solvent
(b) insolvent
(c) creditor
(d) debtors
Answer:
(b) insolvent

Question 7.
Assets and liabilities are transferred to Realisation Account at their ______________ values.
(a) market
(b) purchase
(c) sale
(d) book
Answer:
(d) book

Question 8.
If the number of partners in a firm falls below two, the firm stands ______________
(a) dissolved
(b) established
(c) realisation
(d) restructured
Answer:
(a) dissolved

Question 9.
Realisation Account is ______________ on realisation of asset.
(a) debited
(b) credited
(c) deducted
(d) closed
Answer:
(b) credited

Question 10.
All activities of partnership firm ceases on ______________ of firm.
(a) dissolution
(b) admission
(c) retirement
(d) death
Answer:
(a) dissolution

B. Write a word/phrase/term which can substitute each of the following statements.

Question 1.
Debit balance of Realisation Account.
Answer:
Realization Loss

Question 2.
Winding up of partnership business.
Answer:
Dissolution of Partnership

Question 3.
An account is opened to find out the profit or loss on sale of assets and settlement of liabilities.
Answer:
Realization A/c

Question 4.
Debit balance of an Insolvent Partner’s Capital Account.
Answer:
Capital Deficiency

Question 5.
The credit balance of the Realisation Account.
Answer:
Realization Profit

Question 6.
Conversion of asset into cash on the dissolution of the firm.
Answer:
Realisation

Question 7.
Liability is likely to arise in the future on the happening of certain events.
Answer:
Contingent Liabilities

Question 8.
Assets that are not recorded in the books of accounts.
Answer:
Unrecorded Assets

Question 9.
The account shows the realization of assets and discharge of liabilities.
Answer:
Realization A/c

Question 10.
Expenses incurred on the dissolution of the firm.
Answer:
Dissolution/Realisation Expenses

C. State whether the following statements are True or False with reasons.

Question 1.
The firm must be dissolved on the retirement of a partner.
Answer:
This statement is False.
On the retirement of a partner, if the partnership agreement allows, then the remaining partner can continue the business activities. It means the firm is not to dissolve.

Question 2.
On dissolution Cash/Bank Account is closed automatically.
Answer:
This statement is True.
As the firm is dissolved, there is no question of any business activities to be carried out further and so Cash/Bank Account is also not necessary. Therefore on dissolution Cash/Bank Account is closed automatically.

Question 3.
On dissolution, Bank overdraft is transferred to Realisation Account.
Answer:
This statement is True.
As a sundry liability of the business, bank overdraft is a liability of a firm and hence, it is transferred to Realisation Account at the time of dissolution and paid a third party Liability.

Question 4.
A solvent partner having a debit balance to his Capital Account does not share the deficiency of insolvent partner Capital Account.
Answer:
This statement is False.
In the partnership, the partner’s liability is unlimited so, a solvent partner having a debit balance to his Capital Account should share the deficiency of the insolvent partner capital account.

Question 5.
At the time of dissolution of the partnership, all assets should be transferred to Realisation Account.
Answer:
This statement is False.
At the time of dissolution of the partnership, the cash account and Bank A/c are not transferred to Realisation A/c. Similarly, if an asset is taken over by a partner or by any creditor then that asset is transferred to the concerned person’s account and not to the Realisation Account.

Question 6.
The debit balance of an insolvent partner’s Capital Account is known as a capital deficiency.
Answer:
This statement is True.
Debit balance of Partners’ Capital Account means the excess of drawings than the capital credit balance. In the case of an insolvent partner, the debit balance of the Capital Account means liabilities which he cannot pay. It means capital deficiency.

Question 7.
At the time of dissolution, a loan from a partner will be transferred to Realisation Account.
Answer:
This statement is False.
At the time of dissolution, a loan from a partner will be paid after the payment of liabilities of third parties to the firm. It is not transferred to Realisation Account. Partner’s Loan A/c is separately opened and paid accordingly.

Question 8.
Dissolution takes place when the relationship among the partners comes to an end.
Answer:
This statement is True.
As per definition, Dissolution means to wind up or to close down, and it is possible only when relations among the partners in a partnership firm come to an end.

Question 9.
The insolvency loss at the time of dissolution of the firm is shared by the solvent partners in their profit sharing ratio.
Answer:
This statement is True.
In the partnership, partners’ liability is unlimited and in case of insolvency loss, legally solvent partners are ultimately liable and are suppose to bear the loss of an insolvent partner in their profit sharing ratio.

Question 10.
Realization loss is not transferred to insolvent partner’s Capital Account.
Answer:
This statement is False.
All partners of the firm are responsible for Loss on realization and hence loss on realization is supposed to be transferred to all Partners’ Capital Account, without any discrimination of solvent or insolvent.

D. Calculate the following:

Question 1.
Vinod, Vijay, and Vishal are partners in a firm sharing profit and losses in the ratio of 3 : 2 : 1. Vishal becomes insolvent and his capital deficiency is ₹ 6000. Distribute the capital deficiency among the solvent partner.
Answer:
Here, capital deficiency of ₹ 6000 is to be distributed among continuing partners in their profit and loss sharing ratio, i.e. 3 : 2
Share of deficiency for Vinod = 6,000 × \(\frac{3}{5}\) = ₹ 3,600
Share of deficiency for Vijay = 6,000 × \(\frac{2}{5}\) = ₹ 2,400
Vinod and Vijay will bear ₹ 3,600 and ₹ 2,400 of Vishal’s capital deficiency.

Question 2.
Creditors ₹ 30,000, Bills Payable ₹ 20,000, and Bank Loan ₹ 10,000. Available Bank balance ₹ 40,000. What will be the amount that creditors will get in case of all partner’s insolvency?
Answer:
Ratio of creditors, Bills payable and Bank Loan = 30,000 : 20,000 : 10,000 i.e., 3 : 2 : 1
Amount received by creditors = \(\frac{3}{3+2+1}\) × 40,000
= \(\frac{3}{6}\) × 40,000
= ₹ 20,000.

Question 3.
Insolvent Partner Capital A/c debit side total is ₹ 10,000 and credit side total is ₹ 6,000. Calculate deficiency.
Answer:
Deficiency of insolvent partner = Debit side total – Credit side total
= 10,000 – 6,000
= ₹ 4,000.

Question 4.
Insolvent Partners Capital A/c debit side is ₹ 15,000 and insolvent partner brought cash ₹ 6,000. Calculate the amount of insolvency loss to be distributed among the solvent partners.
Answer:
₹ 9,000 (15,000 – 6,000) is the amount of insolvency loss to be distributed among the solvent partners.

Question 5.
The realization profit of a firm is ₹ 6,000, partners share profit and loss in the ratio of 3 : 2 : 1. Calculate the amount of realization profit to be credited to Partners’ Capital A/c.
Answer:
Distribution of ₹ 6,000 in 3 : 2 : 1 ratio
6,000 × \(\frac{3}{6}\) = ₹ 3,000, 6,000 × \(\frac{2}{6}\) = ₹ 2,000, 6,000 × \(\frac{1}{6}\) = ₹ 1,000
Amount of realisation profit ₹ 3,000, ₹ 2,000 and ₹ 1,000 is to be credited to Partner’s Capital A/c respectively.

E. Answer in one sentence only.

Question 1.
What is the dissolution of the partnership firm?
Answer:
Dissolution of the partnership firm means complete closure of business activities and stoppage of partnership relations among all the partners.

Question 2.
When is Realisation Account opened?
Answer:
Realisation Account is opened at the time of dissolution of the partnership firm.

Question 3.
Which accounts are not transferred to Realisation Account?
Answer:
Cash/Bank balance, Reserve funds, Profit and Loss A/c balance, Partners’ Loan accounts, etc. are not transferred to Realisation Account.

Question 4.
Who is called an insolvent person?
Answer:
Whose capital A/c shows debit balance and who is not in a position to meet his capital deficiency even from his private property is called an insolvent person.

Question 5.
What is capital deficiency?
Answer:
The debit balance of the insolvent partner’s Capital Account which the insolvent partner cannot pay is called a capital deficiency.

Question 6.
In what proportion is the balance on Realisation Account transferred to Partners Capital/Current Accounts?
Answer:
The balance on the Realisation Account is transferred to Partners Capital/Current Accounts in their profit sharing ratio.

Question 7.
Who should bear the capital deficiency of insolvent partners?
Answer:
The capital deficiency of insolvent partners should be borne by the solvent partners.

Question 8.
Which account is debited on repayment of partner’s loan?
Answer:
Partner’s Loan Account is debited on repayment of partner’s loan.

Question 9.
Which account is debited on payment of dissolution expenses?
Answer:
Realisation Account is debited on payment of dissolution expenses.

F. Complete the table.

Question 1.

Answer:

Practical Problems

(Simple Dissolution)

Question 1.
Ganesh and Kartik are partners sharing profits and losses equally. They decided to dissolve the firm on 31st March 2018. Their Balance Sheet was as under:
Balance Sheet as of 31st March 2018

Assets were realised as under:
Building ₹ 82,000, Debtors ₹ 22,000, Stock ₹ 20,000. Bills Receivable ₹ 3,200 and Ganesh agreed to take over Furniture for ₹ 10,000. Realisation Expenses amounted to ₹ 2,000.
Show Realisation A/c, Partners’ Capital A/c, and Cash A/c.
Solution:
In the books of Ganesh and Kartik


Working Notes:
1. Amount paid to Ganesh and Kartik are ₹ 27,600 and ₹ 77,600 respectively.
2. Loss on Realisation and Reserve fund amounts are equally distributed.
3. Furniture is taken over by Ganesh so his Capital A/c is debited.

Question 2.
Leela, Manda, and Kunda are partners in the firm ‘Janki Stores’ sharing profits and losses in the ratio of 3 : 2 : 1 respectively. On 31st March 2018, they decided to dissolve the firm when their Balance Sheet was as under.
Balance Sheet as of 31st March 2018

Leela agreed to take over the Building at ₹ 1,23,600. Manda took over Goodwill, Stock, and Debtors at book values and agreed to pay Creditors and Bills payable. Motor car and Machinery realized ₹ 1,51,080 and ₹ 31,680 respectively. Investments were taken by Kunda at an agreed value of ₹ 55,440. Realisation expenses amounted to ₹ 6,800.
Pass necessary entries in the books of ‘Janki Stores’.
Solution:
In the books of ‘Janki Stores’
Journal Entries


Working Notes:
In the books of Leela, Manda, and Kunda

Question 3.
Shailesh and Shashank were partners sharing profits and losses in the ratio of 3 : 2. Their Balance Sheet as of 31st March 2019 was as follows:
Balance Sheet as of 31st March 2019

The firm was dissolved on the above date and the assets realised as under:
1. Plant ₹ 8,000, Building ₹ 6,000, Stock ₹ 4,000 and Debtors ₹ 12,000.
2. Shailesh agreed to pay off the Bills Payable.
3. Creditors were paid in full.
4. Dissolution expenses were ₹ 1,400.
Prepare Realisation A/c, Partners’ Current A/c, Partners’ Capital A/c, and Bank A/c.
Solution:
In the books of Shailesh and Shashank

Question 4.
Asha, Usha, and Nisha were partners sharing profits and losses in the ratio of 2 : 2 : 1. The following is the Balance Sheet as of 31st March 2019.
Balance Sheet as of 31st March 2019

On the above date, the partners decided to dissolve the firm.
1. Assets were realised at: Machinery ₹ 90,000, Stock ₹ 36,000, Investment ₹ 42,000 and Debtors ₹ 90,000.
2. Dissolution expenses were ₹ 6,000.
3. Goodwill of the firm realized ₹ 48,000.
Pass Journal Entries to close the books of the firm.
Solution:
In the books of Asha, Usha, and Nisha
Journal Entries


Working Notes:
In the books of Asha, Usha, and Nisha

Question 5.
Seeta and Geeta are partners in the firm sharing profits and losses in the ratio of 4 : 1. They decided to dissolve the partnership on 31st March 2020 on which date their Balance Sheet stood as follows:
Balance Sheet as of 31st March 2020

Additional Information:
1. Plant and Stock took over by Seeta at ₹ 78,000 and ₹ 22,000 respectively.
2. Debtors realised 90% of the book value and Trademark at ₹ 5,000 and Goodwill was realised for ₹ 27,000.
3. Unrecorded assets estimated at ₹ 4,500 were sold for ₹ 1,500.
4. ₹ 1,000 Discounts were allowed by creditors while paying their claim.
5. The Realisation expenses amounted to ₹ 3,500.
You are required to prepare Realisation A/c, Cash A/c, and Partners’ Capital A/c.
Solution:
In the books of Seeta and Geeta


Working Notes:
1. Bank Loan is an external liability of the firm and therefore it is transferred to Realisation A/c.
2. Amount recovered from Debtors = 90% of Gross Debtors = \(\frac {90}{100}\) × 48,000 = ₹ 43,200.
3. Amount paid to creditors = Value of Creditors – Discount given = 35,000 – 1,000 = ₹ 34,000.
4. Sale of unrecorded assets for ₹ 1,500 is recorded on the credit side of Realisation A/c and debit side of Cash A/c.
5. It is presumed that Furniture realised nothing.

Question 6.
Sangeeta, Anita, and Smita were in partnership sharing profits and losses in the ratio 2 : 2 : 1. Their Balance Sheet as of 31st March 2019 was as under:
Balance Sheet as of 31st March 2019

They decided to dissolve the firm as follows:
1. Assets realised as; Land recovered ₹ 1,80,000; Goodwill for ₹ 75,000; Loans and Advance realised ₹ 12,000; 10% of the Debts proved bad.
2. Sangeeta took Plant at book value.
3. Creditors and Bills payable paid at 5% discount.
4. Sandhya’s loan was discharged along with ₹ 6,000 as interest.
5. There was a contingent liability in respect of bills of ₹ 1,00,000 which was under discount. Out of them, a holder of one bill of ₹ 20,000 became insolvent.
Show Realisation Account, Partners’ Capital Account, and Bank Account.
Solution:
In the books of Sangeeta, Anita, and Smita


Working Notes:
1. Amount paid towards Sandhya’s Loan = Loan amount + Interest due on loan
= 1,20,000 + 6,000
= ₹ 1,26,000

2. Amount received from Debtors = Debtors – Bad debts
= 1,25,000 – 10% of 1,25,000
= 1,25,000 – 12,500
= ₹ 1,12,500

3. Amount paid to Creditors = Creditor – 5% discount
= 1,20,000 – 5% on 1,20,000
= 1,20,000 – 6,000
= ₹ 1,14,000

4. Amount paid towards Bills payable = Bills payable – 5% discount
= 20,000 – 5% on 20,000
= 20,000 – 1,000
= ₹ 19,000

5. Bill of ₹ 1,00,000 was discounted with the Bank. On the due date, bank could not recover ₹ 20,000 from one bill holder as he was declared insolvent. Therefore, we are required to settle that contingent liability of ₹ 20,000.

Question 7.
Saiesh, Sumit, and Hemant were in partnership sharing Profits and Losses in the ratio 2 : 2 : 1. They decided to dissolve their partnership firm on 31st March 2019 and their Balance Sheet on that date stood as;
Balance Sheet as of 31st March 2019

It was agreed that;
1. Sailesh to discharge Loan and to take Debtors at book value.
2. Plant realised ₹ 1,35,000.
3. Stock realised ₹ 72,000.
4. Creditors were paid off at a discount of ₹ 45.
Show Realisation Account, Partners’ Capital Account, and Bank Account.
Solution:
In the books of Sailesh, Sumit, and Hemant

(When one partner become Insolvent)

Question 8.
Sitaram, Gangaram, and Rajaram are partners sharing profits and losses in the ratio of 4 : 2 : 3. On 1st April 2019 they agreed to dissolve the partnership, their Balance Sheet was as follows:
Balance Sheet as of 31st March 2019

The assets realised: Building ₹ 46,750; Machinery ₹ 18,550; Furniture ₹ 9,600; Investment ₹ 10,650; Bill Receivable and Debtors ₹ 20,750. All the liabilities were paid off. The cost of realisation was ₹ 800. Rajaram becomes bankrupt and ₹ 1,100 only was recovered from his estate.
Show Realisation Account, Bank Account, and Capital Account of the partners.
Solution:
In the books of Sitaram, Gangaram and Rajaram


Working Notes:
1. ₹ 1,100 is recovered from Rajaram’s estate which is recorded on the credit side of Rajaram’s Capital Account and on the debit side of Bank A/c.

2. Capital deficiency of Rajaram = Debit total of Capital A/c – Credit total of Capital A/c
= 18,000 – 15,900
= ₹ 2,100
The deficit amount of Rajaram A/c ₹ 2,100 is distributed among continuing partners’ in 2 : 1 ratio.

Question 9.
Following is the Balance Sheet of Vaibhav, Sanjay, and Santosh
Balance Sheet as of 31st March 2019

Santosh is declared insolvent so the firm is dissolved and assets realised as follows:
1. Stock and Debtors ₹ 54,000, Goodwill – NIL, Machinery at book value.
2. Creditors allowed a discount of 10%.
3. Santosh could pay only 25 paise in the rupee of the balance due.
4. Profit sharing ratio was 8 : 4 : 3.
5. A contingent liability against the firm ₹ 9,000 is cleared.
Give Ledger Account to close to books of the firm.
Solution:
In the books of Vaibhav, Sanjay, and Santosh


Working Notes:
1. Contingent liability paid, so Realisation A/c is debited and Bank A/c is credited.
2. Santosh could pay only 25 paise in a rupee of the balance due i.e.
Balance due from Santosh (Debit side of Partners Capital A/c) = ₹ 10,560
25% of ₹ 10,560 = ₹ 2,640 (Amount recorded on debit side of Bank A/c)
Capital deficiency of Santosh = 10,560 – 2,640 = ₹ 7,920
₹ 7,920 to be distributed among continuing partner in their profit-loss ratio = 8 : 4 i.e. 2 : 1.
7,920 × \(\frac{2}{3}\) = ₹ 5,280
7,920 × \(\frac{1}{3}\) = ₹ 2,640

(When Two Partners become Insolvent)

Question 10.
Shweta, Nupur, and Sanika are partners sharing profits and losses in the ratio of 3 : 2 : 1. Their Balance Sheet as of 31st March 2019 was as follows:
Balance Sheet as of 31st March 2019

The firm is dissolved on 31st March 2019. Sundry assets realised @ 60% of its book value. Realisation expenses ₹ 2,000 paid by Shweta. Nupur and Sanika both are insolvent.
Nupur’s private estate has got a surplus of ₹ 3,000 and that of Sanika ₹ 8,000.
Show necessary Ledger Accounts to close the books of the firm.
Solution:
In the books of Shweta, Nupur and Sanika

(When All Partners become Insolvent)

Question 11.
Following is the Balance Sheet as of 31st March 2019 of a firm having three partners Priti, Priya, and Prachi.
Balance Sheet as of 31st March 2019

The firm was dissolved due to the insolvency of all the partners. Machinery was sold for ₹ 18,000, while Furniture fetched ₹ 14,000, Stock realized ₹ 35,000. Realisation expenses amounted to ₹ 2,000. Nothing could be recovered from Priya and Prachi, but ₹ 3,400 could be collected from Priti’s private estate.
Close the books of accounts of the firm.
Solution:
In the books of Priti, Priya, and Prachi



Working Notes:
1. Amount paid to loan from sale of machinery = ₹ 18,000
Balance of Loan 30,000 – 18,000 = ₹ 12,000

2. Ratio of Trade creditors and Loan = 50,000 : 12,000
= 50 : 12
= 25 : 6

3. Balance of cash available = 10,000 + 67,000 + 3,400 – 18,000 – 2,000
= 80,400 – 20,000
= ₹ 60,400
Amount paid towards loan = \(\frac{6}{31} \times \frac{60,400}{1}\) = ₹ 11,690
Amount paid to Trade creditors = \(\frac {25}{31}\) × 60,400 = ₹ 48,710
Amount paid towards loan = 18,000 + 11,690 = ₹ 29,690.

Question 12.
Shashwat and Shiv are equal partners. Their Balance Sheet stood as under:
Balance Sheet as of 31st March 2019

Due to weak financial position, all partners were declared bankrupt.
The Assets were realised as follows:
Stock ₹ 3,500, Furniture ₹ 2,000, Debtors ₹ 5,000 and Machinery ₹ 7,000.
The cost of collection and distributing the estate amounted to ₹ 1,500. Shashwat’s private estate is not sufficient even to pay his private debts, whereas in Shiv’s private estate there is a surplus of ₹ 500.
Prepare necessary Ledger Accounts to close the books of the firm.
Solution:
In the books of Shashwat and Shiv


Working Note:
As partners we’re not able to pay their loss amount, a difference of amount is considered as deficiency of partners.

Balbharti Maharashtra State Board 12th Commerce Book Keeping & Accountancy Solutions Chapter 5 Reconstitution of Partnership (Death of Partner) Textbook Exercise Questions and Answers.

Maharashtra State Board 12th Book Keeping & Accountancy Solutions Chapter 5 Reconstitution of Partnership (Death of Partner)

1. Objective questions:

A. Select the most appropriate answer from the alternative given below and rewrite the sentences.

Question 1.
Benefit Ratio is the ratio in which _______________
(a) The old partner gain on the admission of a new partner
(b) The Goodwill of a new partner on admission is credited to old partners
(c) The continuing partners’ benefits on retirement or death of a partner
(d) All partners are benefitted.
Answer:
(c) The continuing partner’s benefits on retirement or death of a partner

Question 2.
The ratio by which existing partners are benefitted _______________
(a) gain ratio
(b) sacrifice ratio
(c) profit ratio
(d) capital ratio
Answer:
(a) gain ratio

Question 3.
Profit and Loss Suspense Account is shown in the new Balance Sheet on _______________ side.
(a) debit
(b) credit
(c) asset
(d) liabilities
Answer:
(c) asset

Question 4.
Death is a compulsory _______________
(a) Dissolution
(b) Admission
(c) Retirement
(d) Winding up
Answer:
(c) Retirement

Question 5.
The balance on the Capital Account of a partners, on his death is transferred to _______________ Account.
(a) Relatives
(b) Legal Heir’s Loan/Executors Loan
(c) Partners’ Capital
(d) Partners’ Loan
Answer:
(b) Legal Heir’s Loan/Executors Loan.

B. Write a word, term, phrase, which can substitute each of the following statements.

Question 1.
Excess of credit side over the debit side of Profit and Loss Adjustment Account.
Answer:
Profit

Question 2.
A person who represents the deceased partner on the death of the partner.
Answer:
Legal Heir’s or Executor

Question 3.
Accumulated past profit kept in the form of reserve.
Answer:
Reserve fund or General reserve

Question 4.
The partner who died.
Answer:
Deceased partner

Question 5.
The proportion in which the continuing partners benefit due to the death of a partner.
Answer:
Gain/Benefit ratio

C. State whether the following statements are True or False with reasons.

Question 1.
A deceased partner is not entitled to the Goodwill of the firm.
Answer:
This statement is False.
A deceased partner’s contribution was there in the development of business and goodwill is the value of the business in terms of money. Hence, a deceased partner is entitled to receive goodwill from the firm.

Question 2.
A deceased partner is entitled to his share of General Reserve.
Answer:
This statement is True.
General reserve is created out of past undistributed profit. Past profit is earned due to the efforts and hard work of all the partners including the partner who is now dead. Hence a deceased partner has right on it and therefore a deceased partner is entitled to receive his share of General reserve.

Question 3.
If goodwill is written off, a Deceased Partner’s Capital Account is debited.
Answer:
This statement is False.
When the benefits of goodwill are given to the deceased partner, his capital account is credited and when such goodwill is written off, capital accounts of remaining partners are debited.

Question 4.
After the death of a partner, the entire amount due to the deceased partner is paid to the legal representative of the deceased partner.
Answer:
This statement is True.
After the death of a partner, the entire amount due to the deceased partner is paid to the legal representative of the deceased partner as he is the only person who has the legal right to that amount.

Question 5.
For recording the profit or loss up to the death, the Profit and Loss Appropriation Account is operated.
Answer:
This statement is False.
For recording the profit or loss up to the death, the Profit and Loss suspense Account is created and operated. This is because final accounts cannot be prepared on the date of death of a partner. Till that period a separate account called Profit and Loss Suspense A/c is prepared.

D. Fill in the blanks and rewrite the following sentence.

Question 1.
Deceased Partners’ Executors Account is shown on the _______________ side of the Balance Sheet.
Answer:
Liabilities

Question 2.
On the death of a partner, a ratio in which the continuing partners get more share of profits in future is called as _______________ Ratio.
Answer:
Gain

Question 3.
Deceased partners share of profit up to the death is shown on _______________ side of Balance Sheet.
Answer:
Assets

Question 4.
Benefit Ratio = New Ratio – _______________
Answer:
Old Ratio

Question 5.
When Goodwill is raised at its full value and it is written off _______________ Account is to be credited.
Answer:
Goodwill

E. Answer in one sentence only.

Question 1.
What is Gain Ratio?
Answer:
The profit-sharing ratio which is acquired by the surviving or continuing partners on account of the death of any partner is called gain ratio or benefit ratio.

Question 2.
In which ratio general reserve is distributed on the death of a partner?
Answer:
General reserve is distributed on the death of a partner in their old profit sharing ratio.

Question 3.
To whom do you distribute general reserve on the death of a partner?
Answer:
On the death of a partner general reserve is distributed among all partners in their old profit and loss ratio.

Question 4.
How the death of a partner is a compulsory retirement?
Answer:
After the death of a partner, the business is not able to get any kind of services from the deceased partner and so we can say that the death of a partner is like a compulsory retirement.

Question 5.
To which account profit is to be transferred up to the date of his death?
Answer:
Profit of the deceased partner, up to the date of his death, is transferred to his Legal Heir’s/Executor’s Account.

Practical Problems

Question 1.
Rajesh, Rakesh, and Mahesh were equal Partners on 31st March 2019. Their Balance Sheet was as follows 31st March 2019.
Balance Sheet as of 31st March 2019

Mr. Rajesh died on 30th June 2019 and the following adjustment was agreed as:
1. Furniture was to be adjusted to its market price of ₹ 3,40,000.
2. Land and Building were to be depreciated by 10%.
3. Provide R.D.D. @ 5% on debtors.
4. The profit up to the date of death of Mr. Rajesh is to be calculated on the basis of last year’s profit which was ₹ 1,80,000.
Prepare:
1. Profit and Loss Adjustment A/c
2. Partners’ Capital Account
3. Balance Sheet of the continuing firm.
Solution:
In the books of the Partnership Firm


Balance Sheet as of 1st July 2019

Working Note:
The profit of the firm of last year was ₹ 1,80,000.
Proportionate profit up to the date of death for Rajesh is as follows
= 1,80,000 × \(\frac{3}{12} \times \frac{1}{3}\) (Period) (P & L ratio)
= ₹ 15,000 (Profit and Loss Suspense A/c)

Question 2.
Rahul, Rohit, and Ramesh are in a business sharing profits and losses in the ratio of 3 : 2 : 1 respectively. Their Balance Sheet as of 31st March, 2017 was as follows:
Balance Sheet as of 31st March 2017

On 1st October 2017, Ramesh died and the Partnership deed provided that
1. R.D.D. was maintained at 5% on Debtors.
2. Plant and Machinery and Investment were valued at ₹ 80,000 and ₹ 4,10,000 respectively.
3. Of the creditors an item of ₹ 6,000 was no longer a liability and hence was properly adjusted.
4. Profit for 2017-18 was estimated at ₹ 1,20,000 and Ramesh’s share in it up to the date of his death was given to him.
5. Goodwill of the firm was valued at two times the average profit of the last five years, which were
2012-13 – ₹ 1,80,000
2013-14 – ₹ 2,00,000
2014-15 – ₹ 2,50,000
2015-16 – ₹ 1,50,000
2016-17 – ₹ 1,20,000
Ramesh’s share in it was to be given to him.
6. Salary ₹ 5,000 p.m. was payable to him.
7. Interest on capital at 5% i.e. was payable and on Drawings ₹ 2,000 were charged.
8. Drawings made by Ramesh up to September 2017 were ₹ 5,000 p.m.
Prepare Ramesh’s Capital A/c showing the amount payable to his executors.
Give working of Profit and Goodwill.
Ramesh Capital Balance ₹ 3,41,000
Solution:
In the books of the Partnership Firm

Working Notes:
1. Calculation of share of Goodwill:
(a) Average profit = \(\frac{Total Profit}{No. of years}\)
= \(\frac{1,80,000+2,00,000+2,50,000+1,50,000+1,20,000}{5}\)
= \(\frac{9,00,000}{5}\)
= ₹ 1,80,000

(b) Goodwill = Average profit × No. of years
= 1,80.000 × 2
= ₹ 3,60,000

(c) Share of Goodwill to Ramesh = Goodwill of the firm × Ramesh’s share
= 3,60,000 × \(\frac{1}{6}\)
= ₹ 60,000

2. Calculation of share of profit due to Ramesh:
Share of profit = Last year profit × Share of profit × Period
= 1,20,000 × \(\frac{1}{6} \times \frac{6}{12}\)
= ₹ 10,000 (Profit and Loss Suspense A/c)

3. Interest on Capital is calculated for six months.
∴ Interest = 2,40,000 × \(\frac{6}{12} \times \frac{5}{100}\) = ₹ 6,000

4.

Question 3.
Ram, Madhav, and Keshav are partners sharing profit and losses in the ratio 5 : 3 : 2 respectively. Their Balance Sheet as of 31st March, 2018 was as follows:
Balance Sheet as of 31st March 2018

Keshav died on 31st July 2018 and the following adjustments were agreed by as per the partnership deed.
1. Creditors have increased by ₹ 10,000.
2. Goodwill is to be calculated at 2 years purchase of average profits of 5 years.
3. The profits of the preceding 5 years was
2013-14 – ₹ 90,000
2014-15 – ₹ 1,00,000
2015-16 – ₹ 60,000
2016-17 – ₹ 50,000
2017-18 – ₹ 50,000 (Loss)
Keshav’s share in it was to be given to him.
4. Loose Tools and livestock were valued at ₹ 80,000 and ₹ 1,20,000 respectively.
5. R.D.D. was maintained at ₹ 10,000.
6. Commission ₹ 2,000 p.m. was payable to Keshav. Profit for 2018-19 was estimated at ₹ 45,000 and Keshav’s share in it up to the date of his death was given to him.
Prepare Revaluation A/c, Keshav’s Capital A/c showing the amount payable to his executors.
Solution:
In the books of the Partnership Firm

Working Notes:
1. Calculation of share of Goodwill:
(a) Average profit = \(\frac{\text { Total profit }}{\text { No. of years }}\)
= \(\frac{90,000+1,00,000+60,000+50,000-50,000}{5}\)
= \(\frac{2,50,000}{5}\)
= ₹ 50,000

(b) Goodwill = Average profit × No. of years
= 50,000 × 2
= ₹ 1,00,000

(c) Share of Goodwill to Keshav = Goodwill of the firm × Keshav’s share
= 1,00,000 × \(\frac{2}{10}\)
= ₹ 20,000

2. Calculation of share of profit due to Keshav
Share of profit = Last year profit × Share of Keshav × Period
= 45,000 × \(\frac{2}{10} \times \frac{4}{12}\)
= ₹ 3,000 (Profit and Loss Suspense Account)

Question 4.
Virendra, Devendra, and Narendra were partners sharing profit and losses in the ratio of 3 : 2 : 1. Their Balance Sheet as of 31st March 2019 was as follows.
Balance Sheet as of 31st March 2019

Mr. Virendra died on 31st August 2019 and the partnership deed provided that the event of the death of Mr. Virendra his executors be entitled to be paid out.
1. The capital to his credit at the date of death.
2. His proportion of Reserve at the date of last Balance Sheet.
3. His proportion of Profits to date of death is based on the average profits of the last four years.
4. His share of Goodwill should be calculated at two years purchase of the profits of the last four years for the year ended 31st March were as follows:
2016 – ₹ 40,000
2017 – ₹ 60,000
2018 – ₹ 70,000
2019 – ₹ 30,000
5. Mr. Virendra has drawn ₹ 3,000 p.m. to date of death, There is no increase and decrease in the value of assets and liabilities.
Prepare Mr. Virendra Executors A/c.
Solution:
In the books of the Partnership Firm

Working Notes:
1. Calculation of share of profit:
(a) Average Profit = \(\frac{\text { Total profit }}{\text { No. of years }}\)
= \(\frac{40,000+60,000+70,000+30,000}{4}\)
= \(\frac{2,00,000}{4}\)
= ₹ 50,000

(b) Goodwill = Average profit × No. of years
= 50,000 × 2
= ₹ 1,00,000

(c) Share of Goodwill to Virendra = Goodwill of the firm × Virendra’s share
= 1,00,000 × \(\frac{3}{6}\)
= ₹ 50,000

2. Share of profit due to Virendra
Share of profit = Last year profit × Share of Virendra × Period
= 50,000 × \(\frac{3}{6} \times \frac{5}{12}\)
= ₹ 10,417 (Profit and Loss Suspense A/c)

Question 5.
The Balance Sheet of Sohan, Rohan, and Mohan who were sharing profits and losses in the ratio of 3 : 2 : 1 is as follows:
Balance Sheet as of 31st March 2019

Mr. Rohan died on 1st October 2019 and the following adjustments were made:
1. Goodwill of the firm is valued at ₹ 30,000.
2. Land and Building and Machinery were found to be undervalued by 20%.
3. Investments are valued at ₹ 60,000.
4. Stock to be undervalued by ₹ 5,000 and a provision of 10% as debtors were required.
5. Patents were valueless.
6. Mr. Rohan was entitled to share in profits up to the date of death and it was decided that he may be allowed to retain his drawings as his share of profit. Rohan’s drawings till the date of death were ₹ 25,000.
Prepare Partners’ Capital Accounts.
Solution:
In the books of the Partnership firm

Working Notes:
1.

2. Firm’s goodwill = ₹ 30,000.
DistrIbute among partners in their profit and loss ratio 3 : 2 : 1.

3. Revised value of Land & Building = \(\frac{\text { Book value }}{(100-20)} \times 100\)
= \(\frac{40,000}{80} \times 100\)
= ₹ 50,000.
∴ Increase In the value of Land & Building = Revised value – Book value
= 50,000 – 40,000
= ₹ 10,000.

4. Revised value of Machinery = \(\frac{\text { Book value }}{(100-20)} \times 100\)
= \(\frac{80,000}{80} \times 100\)
= ₹ 1 ,00,000.
∴ Increase in the value of Machinery = 1,00,000 – 80,000 = ₹ 20,000.

5. Patents were valueless means it is a loss for the business.

6. Rohan’s share In profit is ₹ 25,000 and his drawings are ₹ 25,000. Rohan is allowed to retain his drawings as his share of profit. Means write ₹ 25,000 as drawings on the debit side and write ₹ 25,000 as Profit and Loss Suspense A/c on the Credit side of Partners’ Capital A/c.

Balbharti Maharashtra State Board 12th Commerce Book Keeping & Accountancy Solutions Chapter 4 Reconstitution of Partnership (Retirement of Partner) Textbook Exercise Questions and Answers.

Maharashtra State Board 12th Book Keeping & Accountancy Solutions Chapter 4 Reconstitution of Partnership (Retirement of Partner)

A. Select the most appropriate alternatives from those given below and rewrite the sentence.

Question 1.
The profit or loss from revaluation on retirement of partner is shared by ______________
(a) the remaining partners
(b) all the partners
(c) only retiring partner
(d) bank
Answer:
(b) all the partners

Question 2.
Descrease in the value of assets should be ______________ to Profit and Loss Adjustment Account.
(a) debited
(b) credited
(c) added
(d) equal
Answer:
(a) debited

Question 3.
The balance of the capital account of retired partner is transferred to his ______________ account if it is not paid.
(a) loan
(b) personal
(c) current
(d) son’s
Answer:
(a) loan

Question 4.
Gain ratio = ______________ Ratio less Old Ratio.
(a) New
(b) Equal
(c) Capital
(d) Sacrifice
Answer:
(a) New

Question 5.
New Ratio = Old Ratio + ______________ Ratio.
(a) Gain
(b) Capital
(c) Sacrifice
(d) Current
Answer:
(a) Gain

Question 6.
Apte, Bhate and Chitale are sharing 1/2, 3/10, and 1/5 if Apte retire their new ratio will be ______________
(a) 5 : 2
(b) 3 : 2
(c) 5 : 3
(d) 2 : 5
Answer:
(b) 3 : 2

B. Write the word, term, phrase, which can substitute each of the following statement.

Question 1.
Credit balance of Profit and Loss Adjustment Account.
Answer:
Profit on Revaluation Accounts

Question 2.
The ratio in which the continuing partners are benefited due to retirement of partner.
Answer:
Gain Ratio

Question 3.
Debit balance of Revaluation Account.
Answer:
Loss on Revaluation

Question 4.
The ratio which is obtained by deducting Old Ratio from New Ratio.
Answer:
Gain Ratio

Question 5.
Money value of business reputation earned by the firm over a number of years.
Answer:
Goodwill

Question 6.
Partner’s Account where Loss or Profit on revaluation is transferred.
Answer:
Capital/Current Account

C. State whether the following statement are true or false with reasons.

Question 1.
Gain ratio means New ratio minus Old ratio.
Answer:
This statement is True.
As per definition, profit sharing ratio which is acquired by the continuing partners from the retiring partner is called gain ratio. If gain ratio added to old ratio we will get New ratio. It means New ratio = Old ratio + Gain ratio by interchanging the terms, we will get Gain ratio = New ratio – Old ratio.

Question 2.
Retiring partner’s share in profit up to the date of his retirement will be debited to Profit and Loss Suspense Account.
Answer:
This statement is True.
If a partner retires from the firm during the accounting year, the profit or loss for the period from the date of last balance sheet to the date of retirement is calculated on the basis of last year’s profit or average profit and it is credited to retiring partner’s capital A/c and for time being it debited to new account called Profit and Loss Expense A/c. This is because final accounts cannot be prepared on any date during the accounting year.

Question 3.
On retirement of a partner, sacrifice ratio is considered.
Answer:
This statement is False.
On retirement of a partner, his share is acquired by continuing partners in certain proportion and it is nothing but gain for them. Therefore, on retirement of a partner instead of sacrifice ratio gain ratio is considered.

Question 4.
Retiring partner is called an outgoing partner.
Answer:
This statement is True.
When a person retires from the firm due to health issues, financial issues or personal reasons then it is known as person retires from the business and for the business, he is an outgoing partner.

Question 5.
On retirement of a partner, remaining partner will share the goodwill in their profit sharing ratio.
Answer:
This statement is False.
On retirement of a partner, after giving retiring, partner’s share in goodwill and if goodwill is written off, then remaining partners will adjust the goodwill in their new profit sharing ratio. (If raised to full extent and written off)

Question 6.
Retiring partner is not entitled to share in general reserve and accumulated profit.
Answer:
This statement is False.
General reserve and accumulated profit are created out of past undistributed profit, such profits are the outcome of hard work of all the partners including retiring partner. Hence, retiring partner’s has right to share general reserve and accumulated profit. He is therefore, entitled to get share in general reserve and accumlated profit.

D. Fill in the blanks and rewrite the following sentence:

Question 1.
New Ratio (less) ______________ = Gain ratio.
Answer:
Old ratio

Question 2.
Retiring partner’s share of goodwill is ______________ to remaining Partner’s Capital Account.
Answer:
debited

Question 3.
Revaluation A/c is also known as ______________ Account.
Answer:
Profit and Loss Adjustment

Question 4.
On retirement, the balance at a Current Account of a partner is transferred to his ______________ Account.
Answer:
Capital

Question 5.
A proportion in which the continuing partners get the share of retiring partner is known as ______________ Ratio.
Answer:
Gain

E. Answer in one sentence.

Question 1.
What is meant by Retirement of a Partner?
Answer:
Retirement of a partner refers to a process in which a partner leaves the firm or severes his relations with other partners on account of his old age, continued ill health, loss of interest in the firm, misunderstanding amongst the partners, etc.

Question 2.
What is Benefit Ratio?
Answer:
Profit sharing ratio which is acquired by the continuing partners on account of retirement or death of a partner is called Benefit Ratio or Gain Ratio.

Question 3.
What is New Ratio?
Answer:
The ratio in which profits or losses are shared by the continuing partners after retirement of a partner is called New Profit Sharing Ratio.

Question 4.
How is the amount due to the retiring partner settled?
Answer:
The amount due to a retiring partner is settled as per the terms of partnership agreement or otherwise mutually agreed upon either in lumpsum or in instalments.

Question 5.
How is Gain Ratio calculated?
Answer:
Gain ratio is calculated at the time of retirement of a partner by deducting old ratio from new ratio.

Question 6.
Why is retiring partner’s capital account credited with goodwill?
Answer:
Goodwill is an intangible assets or benefits accrued to the firm and its benefits are transferred to retiring partner’s Capital A/c by giving credit.

Practical Problems

Question 1.
The Balance Sheet of Mr Mama, Kaka and Mr Baba who shared profits and losses as 4 : 3 : 3 respectively.
Balance Sheet as on 31st March, 2018

Kaka retires on 1st April, 2018 on the following terms.
1. The share of Kaka in Goodwill of the firm is valued at ₹ 2,700.
2. Furniture to be depreciated by 10% and Motor car by 12.5%.
3. Live Stock to be appreciated by 10% and Plant by 20%.
4. A provision of ₹ 2,000 to be made for a claim of compensation.
5. R.D.D. is no longer necessary.
6. The amount payable to Kaka should be transferred to his Loan A/c.
Prepare Profit and Loss Adjustment A/c, Partners’ Capital A/cs and Balance Sheet of the new firm.
Solution:
In the books of Partnership Firm

Balance Sheet as on 1st April, 2018


Working Notes:
1. R.D.D. is no longer require means it is a gain for firm.
2. A provision of ₹ 2,000 to be made for a claim of compensation, ₹ 2,000 is recorded on debit side of Profit and Loss Adjustments A/c and then on liability side of Balance Sheet.
3. Total payable amount to Kaka ₹ 20,175 is recorded as Kaka’s Loan A/c.

Question 2.
The Balance Sheet of Ram, Shyam and Ghanshyam sharing profits and losses in 3 : 2 : 1 respectively and their position on 31-3-19 were as follows:
Balance Sheet as on 31st March, 2019

Ghanshyam retired on 1st April, 2019 on the following terms:
1. Building and Investment to be appreciated by 5% and 10% respectively.
2. Provision for Doubtful Debts to be created at 5% on Debtors.
3. The provision of ₹ 3,000 be made in respect of Outstanding Salary.
4. Goodwill of the firm is valued at ₹ 90,000 and partners decide that goodwill should be written back.
5. The amount payable to the retiring partner be transferred to his Loan A/c.
Prepare: Profit and Loss Adjustment A/c, Partners’ Capital A/c, Balance Sheet of new firm.
Solution:
In the books of Partnership Firm


Balance Sheet as on 1st April, 2019

Working Notes:
1. Provision of ₹ 3,000 for outstanding salary is recorded on debit side of Profit and Loss Adjustment A/c and then on the Liability side of Balance Sheet.
2. Goodwill of the firm is valued at ₹ 90,000 and share of retiring partner in it is ₹ 15,000 (\(\frac{1}{6}\)th part) and it is to be written back means it is to be shared by remaining partners in their profit-loss ratio.

Question 3.
The Balance Sheet of the Anu, Renu and Dinu is as follows, and the partners are sharing profits and losses in the proportion of 2 : 2 : 1 respectively.
Balance Sheet as on 31st March, 2019

Dinu retires from the firms on 1st April, 2019 on the following terms:
1. The assets are to be revalued as : freehold property ₹ 30,000, Machinery ₹ 5,000, Furniture ₹ 12,000, All debtors are good.
2. Goodwill of the firm be valued at thrice the average profit for preceding five years. Profits of the firm for the year.
2014-15 – ₹ 14,500
2015-16 – ₹ 10,500
2016-17 – ₹ 10,000
2017-18 – ₹ 16,000
2018-19 – ₹ 10,000
3. Dinu should be paid ₹ 3,000 by cheque.
4. The Balance of Dinu’s Capital A/c should be kept in the business as loan.
Prepare: Profit and Loss Adjustment A/c, Capital Accounts of Partners, Balance Sheet of the new firm.
Solution:
In the books of Partnership Firm

Balance Sheet as on 1st April 2019

Working Notes:
1. Average profit = \(\frac{\text { Total Profit }}{\text { No. of years }}\)
= \(\frac{1000+10,500+10,000+16,000+10,000}{5}\)
= \(\frac{47,500}{5}\)
= ₹ 9,500
Goodwill = Avg. profit × No. of years
= 9,500 × 3 years
= ₹ 28,500
Goodwill value given in balance sheet = ₹ 30,000
New value arrived at = ₹ 28,500
Loss due to revaluation = ₹ 1,500
To be recorded in P & L Adj. A/c – Dr. Side.
In asset side of Balance sheet, write ₹ 28,500 for Goodwill.

2. Balance of Bank A/c = Opening Balance – Cheque given to Dinu
= 5,000 – 3,000
= ₹ 2,000

Question 4.
Rohan, Rohit and Sachin are partners in a firm sharing profits and losses in the proportion 3 : 1 : 1 respectively. Their balance sheet as on 31st March, 2018 is as shown below:
Balance Sheet as on 31st March, 2018

On 1st April, 2018 Sachin retired and the following adjustments have been agreed upon:
1. Goodwill was revalued on ₹ 50,000.
2. Assets and Liabilities were revalued as follows:
Debtors ₹ 50,000, Live stock ₹ 45,000, Building ₹ 1,25,000, Plant and Machinery ₹ 30,000, Motor truck ₹ 95,000 and Creditors ₹ 30,000.
3. Rohan and Rohit contributed additional capital through Net Banking of ₹ 50,000 and ₹ 25,000 respectively.
4. Balance of Sachin’s Capital Account is transferred to his Loan Account.
Give Journal entries in the books of new firm.
Solution:
Journal entries in the books of Partnership Firm

Working Notes:
1. Calculation of Profit on Revaluation of Assets and Liabilities.

Question 5.
Shah, Lodha and Dhole were partners sharing profits and losses in the ratio of 4 : 3 : 3. Their Balance Sheet as on 31st March, 2019 is given below:
Balance Sheet as on 31st March, 2019

On 1st April, 2019 Mr. Lodha retired from the firm on the following terms:
1. Goodwill is to be valued at an average profits and losses of the last five years which were as follows:
Year – Profit/Loss
2015 – ₹ 35,000
2016 – ₹ 20,000
2017 – ₹ 30,000
2018 – ₹ 20,000
2019 – ₹ 25,000
2. Computers to be depreciated by 10%.
3. Furniture to be revalued at ₹ 27,500.
4. Vehicles appreciated by 20%.
5. R.D.D. was no longer necessary.
6. Shah and Dhole will share the future profits and losses in the ratio of 2 : 1.
7. It was decided that goodwill should not appear in the books of a new firm and amount payable to Lodha is to be transferred to his Loan A/c.
Prepare: Profit and Loss Adjustment A/c, Partners’ Capital Accounts, Balance Sheet of new firm.
Solution:
In the books of Partnership Firm

Balance Sheet as on 1st April 2019

Working Note:
Average profit = \(\frac{\text { Total Profit }}{\text { No. of Years }}\)
= \(\frac{35,000+20,000+30,000+20,000+25,000}{5}\)
= \(\frac{1,30,000}{5}\)
= ₹ 26,000
∴ Goodwill = ₹ 26,000
Goodwill should not appear in the books of accounts.
Therefore, ₹ 26,000 credited in Partners’ Capital Account in partners’ old profit and loss ratio. ₹ 26,000 will be debited in Partners’ Capital Account in partners’ new profit-loss ratio.

Balbharti Maharashtra State Board 12th Commerce Book Keeping & Accountancy Solutions Chapter 3 Reconstitution of Partnership (Admission of Partner) Textbook Exercise Questions and Answers.

Maharashtra State Board 12th Book Keeping & Accountancy Solutions Chapter 3 Reconstitution of Partnership (Admission of Partner)

1. Objetive type questions.

A. Select the most appropriate alternatives from the following and rewrite the sentences.

Question 1.
Anuj and Eeshan are two partners sharing profits and losses in the ratio of 3 : 2. They decided to admit Aaroh for 1/5th share, the new profit sharing ratio will be __________
(a) 12 : 8 : 5
(b) 4 : 3 : 1
(c) 12 : 8 : 1
(d) 12 : 3 : 1
Answer:
(a) 12 : 8 : 5

Question 2.
Excess of proportionate capital over actual capital represents __________
(a) equal capital
(b) surplus capital
(c) deficit capital
(d) gain
Answer:
(c) deficit capital

Question 3.
__________ is credited when unrecorded asset is brought into business.
(a) Revaluation Account
(b) Balance Sheet
(c) Trading Account
(d) Partners Capital Account
Answer:
(a) Revaluation Account

Question 4.
When goodwill is withdrawn by the partner __________ account is credited.
(a) Revaluation
(b) Cash/Bank
(c) Current
(d) Profit and Loss Adjustment
Answer:
(b) Cash/Bank

Question 5.
If asset is taken over by the partner __________ Account is debited.
(a) Revaluation
(b) Capital
(c) Asset
(d) Balance Sheet
Answer:
(b) Capital

B. Write the word/phrase/term, which can substitute each of the following statements.

Question 1.
The method under which calculation of goodwill is done on the basis of extra profit earned above the normal profit.
Answer:
Super Profit Method

Question 2.
An account is opened to adjust the value of assets and liabilities at the time of admission of a partner.
Answer:
Revaluation A/c or Profit and Loss A/c

Question 3.
The reputation of a business is measured in terms of money.
Answer:
Goodwill

Question 4.
The ratio in which general reserve is distributed to the old partners.
Answer:
Old Ratio

Question 5.
Name the method of the treatment of goodwill where a new partner will bring his share of goodwill in cash.
Answer:
Premium Method

Question 6.
The proportion in which old partners make a sacrifice.
Answer:
Sacrifice Ratio

Question 7.
Capital employed × NRR/100 = __________
Answer:
Normal Profit

Question 8.
An Account is debited when the partner takes over the asset.
Answer:
Partner’s Capital A/c or Partner’s Current A/c

Question 9.
Profit and Loss Account balance appearing on the liability side of the Balance Sheet.
Answer:
Undistributed Profit or Accumulated Profit

Question 10.
Old ratio – New ratio = __________
Answer:
Sacrifice Ratio

C. State True or False with reasons:

Question 1.
A new partner can bring capital in cash or kind.
Answer:
This statement is True.
As per the provision of partnership deed, when any person is admitted in the firm, he has to bring some amount as capital which can be in cash or in-kind of assets to get rights in the assets and definite share in the future profit of the firm.

Question 2.
When goodwill is paid privately to the partners, it is not recorded in the books.
Answer:
This statement is True.
When goodwill is paid privately to the partners, by a newly admitted person, then in such case no transaction takes place in the business, and the firm as such is not all benefited. Hence it is not recorded in the books of accounts.

Question 3.
The gain ratio is calculated at the time of admission of a partner.
Answer:
This statement is False.
At the time of admission of a person, in the business, sacrifices are made by the old partners in favour of the new partner. It means there is no question of any gain to the partners, so we can say that the Gain ratio is not calculated at the time of admission of a partner.

Question 4.
Revaluation profit is distributed among all partners including new partners.
Answer:
This statement is False.
Revaluation profit arises due to efforts and hardworking of the old partners in the past and hence profit earned on revaluation of assets and liabilities at the time of admission of a person as a partner in the business belongs to old partners. So, such profit is not distributed among all partners including the new partners. It is distributed only among old partners.

Question 5.
Change in the relationship between the partners is called as Reconstitution of Partnership.
Answer:
This statement is True.
When any person joins the business as a partner, a change in the relationship takes place. The old agreement is terminated and a new agreement is prepared. There is the change in profit or loss sharing ratio and relationship of the partners which is known as Reconstitution of Partnership.

Question 6.
New partners always bring their share of goodwill in cash.
Answer:
This statement is False.
When a new person is admitted to the partnership firm, the old partners surrender a certain share in profit and give it to a new partner. In exchange for that new partner is required to bring goodwill in cash or in kind. If he is unable to bring cash for goodwill, then Goodwill is raised and adjusted to the new partner’s capital A/c.

Question 7.
When the goodwill is written off, the goodwill account is debited.
Answer:
This statement is False.
To write off goodwill means to decrease or wipe out the value of goodwill. When goodwill as an asset of the business is raised, Goodwill A/c is debited in the books of Account. Conversely, when Goodwill is written off from the business, the Goodwill A/c is credited in the books of business.

Question 8.
The new ratio minus the old ratio is equal to the sacrifice ratio.
Answer:
This statement is False.
When a new partner is admitted, old partners have to sacrifice their profit share in favour of the new partner and their old ratio gets reduced and whatever ratio is left becomes a new ratio. Hence, as per equation:
New Ratio = Old Ratio – Sacrifice Ratio.
By interchanging the terms,
Sacrifice Ratio = Old Ratio – New Ratio.

Question 9.
Usually, when a new partner is admitted to the firm, there will be an increase in the capital of the firm.
Answer:
This statement is True.
When a new partner is admitted to the firm, he brings his share of capital and goodwill, in cash or in-kind, to enjoy the right of sharing the future profit, and hence there will be an increase in the capital of the firm.

Question 10.
Cash/Bank Account is credited when goodwill is withdrawn by the old partners.
Answer:
This statement is True.
When a new partner brings his share of goodwill, old partners have the right to withdraw it in cash. Therefore, when old partners withdraw the amount of goodwill, cash goes out from the firm and not goodwill. Hence Cash/Bank A/c is credited.

D. Find the odd one.

Question 1.
General reserve, Creditors, Machinery, Capital
Answer:
Machinery

Question 2.
Decrease in Furniture, Patents wrote off, Increase in Bills payable, R.D.D. written off
Answer:
R.D.D. written off

Question 3.
Super profit method, Valuation method, Average profit method, Fluctuating capital method
Answer:
Fluctuating capital method

E. Calculate the following:

Question 1.
A and B are partners in a firm sharing profit and losses in the ratio of 1 : 1. C is admitted. A surrenders 1/4th share and B surrenders 1/5th of his share in favour of C. Calculate new profit sharing ratio.
Solution:
Old ratio of A and B = 1 : 1 or \(\frac{1}{2}\) : \(\frac{1}{2}\)
A’s sacrifice = \(\frac{1}{4} \times \frac{1}{2}=\frac{1}{8}\)
B’s sacrifice = \(\frac{1}{5} \times \frac{1}{2}=\frac{1}{10}\)
Sacrificing ratio of A and B = \(\frac{1}{8}\) : \(\frac{1}{10}\) = 5 : 4
C’s share = A’s share + B’s share = \(\frac{1}{8}+\frac{1}{10}=\frac{5+4}{40}=\frac{9}{40}\)
A’s new share = Old ratio – Sacrifice ratio = \(\frac{1}{2}-\frac{1}{8}=\frac{4-1}{8}=\frac{3}{8}\)
B’s new share = Old ratio – Sacrifice ratio = \(\frac{1}{2}-\frac{1}{10}=\frac{5-1}{10}=\frac{4}{10}\)
Therefore, New ratio of A, B and C = \(\frac{3}{8}: \frac{4}{10}: \frac{9}{40}\) = 15 : 16 : 9
(Making denominator equal)

Question 2.
Anika and Radhika are partners sharing profit in the ratio of 5 : 1. They decide to admit Sanika to the firm for 1/5th share. Calculate the Sacrifice ratio of Anika and Radhika.
Solution:
Balance = 1 – share of new partner
= 1 – \(\frac{1}{5}\)
= \(\frac{4}{5}\) (Remaining share)
New ratio = Old ratio x Balance of 1
Anika’s New ratio = \(\frac{5}{6} \times \frac{4}{5}=\frac{20}{30}\)
Radhika’s New ratio = \(\frac{1}{6} \times \frac{4}{5}=\frac{4}{30}\)
Sanika’s New ratio = \(\frac{1}{5} \times \frac{6}{6}=\frac{6}{30}\) (Making denominator equal)
∴ New Profit and Loss ratio = \(\frac{20}{30}: \frac{4}{30}: \frac{6}{30}\) = 20 : 4 : 6 i.e. 10 : 2 : 3
Sacrifice ratio = old ratio – New ratio
Anika’s Sacrifice ratio = \(\frac{5}{6}-\frac{20}{30}=\frac{25-20}{30}=\frac{5}{30}\)
Radhika’s Sacrifice ratio = \(\frac{1}{6}-\frac{4}{30}=\frac{5-4}{30}=\frac{1}{30}\)
∴ Sacrifice ratio = \(\frac{5}{30}: \frac{1}{30}\) = 5 : 1

Question 3.
Pramod and Vinod are partners sharing profits and losses in the ratio of 3 : 2. After the admission of Ramesh the New ratio of Pramod, Vinod and Ramesh are 4 : 3 : 2. Find out the Sacrifice ratio.
Solution:
Sacrifice Ratio = Old ratio – New ratio
Pramod’s Sacrifice ratio = \(\frac{3}{5}-\frac{4}{9}=\frac{27-20}{45}=\frac{7}{45}\)
Vinod’s Sacrifice ratio = \(\frac{2}{5}-\frac{3}{9}=\frac{18-15}{45}=\frac{3}{45}\)
∴ Sacrifice ratio = \(\frac{7}{45}: \frac{3}{45}\) = 7 : 3.

F. Answer in one sentence.

Question 1.
What is Revaluation Account?
Answer:
An account opened and operated by any partnership firm for recording changes in the value of assets and liabilities and to ascertain profit or loss made on revaluation of assets and liabilities is called Revaluation Account.

Question 2.
What is meant by Reconstitution of Partnership?
Answer:
Reconstitution of partnership means a change in the relationship between/among partners and in the form of partnership.

Question 3.
Why is the new partner admitted?
Answer:
A new partner is admitted to the existing partnership firm to increase the capital resources of the firm and to secure advantages of a new entrant’s skill and business connections, i.e. goodwill.

Question 4.
What is the sacrifice ratio?
Answer:
A ratio that is surrendered or given up by the old partners in favour of a newly admitted partner is called the sacrifice ratio.

Question 5.
What do you mean by raising the goodwill at the time of admission of a new partner?
Answer:
Raising the Goodwill at the time of admission of a new partner means debiting Goodwill Account up to the value it is raised and crediting. Old partners’ Capital Accounts in their old ratio in the books of the firm.

Question 6.
What is the super profit method of calculation of goodwill?
Answer:
Super profit method of calculation of Goodwill is a method in which Goodwill is valued at a certain number of years purchases of the super profit of the partnership firm.

Question 7.
When is the ratio of sacrifice calculated for the distribution of goodwill?
Answer:
The ratio of sacrifice is calculated when the benefits of goodwill contributed by a new partner in cash is to be transferred to existing partners’ Capital/Current Account.

Question 8.
What is the treatment of accumulated profits at the time of admission of a partner?
Answer:
Accumulated profits at the time of admission of a partner are transferred to old partners’ Capital/Current Accounts in their old profit sharing ratio.

Question 9.
State the ratio in which the old partner’s Capital A/c will be credited for goodwill when the new partner does not bring his share of goodwill in cash.
Answer:
When the new partner does not bring his share of goodwill in cash, Goodwill is raised up to a certain value and credited to old partners’ Capital/Current A/cs in their old profit sharing ratio.

Question 10.
What does the excess of debit over credits in the Profit and Loss Adjustment Account indicate?
Answer:
The excess of debit over credits in the Profit and Loss Adjustment Account indicates loss on revaluation of assets and liabilities.

G. Complete the table.

Question 1.

Answer:
Average Profit = \(\frac{Total Profit}{Number of years}\)

Question 2.

Answer:
Normal Profit = Capital Employed × \(\frac{NPR}{100}\)

Question 3.

Answer:
The stock shown in Balance Sheet → Stock undervalued by 20% → Cost of Stock
₹ 1,60,000 → ₹ 40,000 → ₹ 2,00,000

Practical Problems

Question 1.
Vikram and Pradnya share profits and losses in the ratio 2 : 3 respectively. Their Balance Sheet as of 31st March 2018 was as under.
Balance Sheet as of 31st March 2018

They agreed to admit Avani as a partner on 1st April 2018 on the following terms:
1. Avani shall have 1/4th share in future profits.
2. He shall bring ₹ 37,500 as his capital and ₹ 30,000 as his share of goodwill.
3. Land and building to be valued at ₹ 45,000 and furniture to be depreciated by 10%.
4. Provision for bad and doubtful debts is to be maintained at 5% on the Sundry Debtors.
5. Stock to be valued ₹ 82,500.
The Capital A/c of all partners to be adjusted in their new profit and loss ratio and excess amount be transferred to their loan accounts.
Prepare Profit and Loss Adjustment Account, Capital Accounts, and New Balance Sheet.
Solution:
In the books of Partnership Firm

Balance Sheet as of 1st April 2018

Working Notes:
1. Calculation of new profit ratio = 1 – share of new partner
= 1 – \(\frac{1}{4}\)
= \(\frac{3}{4}\) (Remaining share)
New ratio = old ratio × balance 1 (Remaining share)
Vikram’s new ratio = \(\frac{2}{5} \times \frac{3}{4}=\frac{6}{20}\)
Pradnya’s new ratio = \(\frac{3}{5} \times \frac{3}{4}=\frac{9}{20}\)
Avani’s ratio = \(\frac{1}{4}=\frac{1}{4} \times \frac{5}{5}=\frac{5}{20}\)
∴ New profit sharing ratio = 6 : 9 : 5.
Capital amount adjusted in their new profit and loss ratio:
Total Capital of the Partnership Firm = (Reciprocal of New Partner’s Share) × (Capital of New Partner)
= (Reciprocal of \(\frac{1}{4}\)) × 37,500
= 4 × 37,500
= ₹ 1,50,000
Vikram’s Capital balance = (Vikram’s New Ratio) × (Total Capital of the firm)
= \(\frac{6}{20}\) × 1,50,000 = ₹ 45,000
Pradnya’s Capital balance = \(\frac{9}{20}\) × 1,50,000 = ₹ 67,500

Question 2.
Amalendu and Sameer share profits and losses in the ratio 3 : 2 respectively. Their Balance Sheet as of 31st March 2017 was as under:
Balance Sheet as of 31st March 2017

On 1st April 2017 they admit Paresh into partnership. The term being that:
1. He shall pay ₹ 16,000 as his share of Goodwill 50% amount of Goodwill shall be withdrawn by the old partners.
2. He shall have to bring in ₹ 20,000 as his Capital for 1/4 share in future profits.
3. For the purpose of Paresh’s admission it was agreed that the assets would be revalued as follows:
A. Land and Building is to be valued at ₹ 60,000.
B. Plant and Machinery to be valued at ₹ 16,000.
C. Stock valued at ₹ 20,000 and Furniture and Fixtures at ₹ 4,000.
D. A Provision of 5% on Debtors would be made for Doubtful Debts.
Pass the necessary Journal Entries in the books of a new firm.
Solution:
Journal entries in the books of Partnership Firm


Working Notes:

Question 3.
Vasu and Viraj share profits and losses in the ratio of 3 : 2 respectively. Their Balance Sheet as on 31st March, 2019 was as under:
Balance Sheet as on 31st March, 2019

They admit Hari into partnership on 1-4-2019. The terms being that:
1. He shall have to bring in ₹ 60,000 as his Capital for 1/4 share in future profits.
2. Value of Goodwill of the firm is to be fixed at the average profits for the last three years.
The Profit were:
2015-16 – ₹ 48,000
2016-17 – ₹ 81,000
2017-18 – ₹ 73,500
Hari is unable to bring the value of Goodwill in cash. It is decided to raise Goodwill in the books of accounts.
3. Reserve for Doubtful debts is to be created at ₹ 1,500.
4. Closing stock is valued at ₹ 22,500.
5. Plant and Building are to be depreciated by 5%.
Prepare Profit and Loss-Adjustment A/c, Capital Accounts of Partners and Balance Sheet of the new firm.
Solution:
In the books of the firm __________

Balance Sheet as on 1st April 2019

Working Notes:
1. Average Profit = \(\frac{Total Profit}{No. of years}\)
= \(\frac{48,000+81,000+73,500}{3}\)
= ₹ 67,500
∴ Goodwill value = ₹ 67,500
Vasu’s share in Goodwill = ₹ 40,500 (67,500 × \(\frac{3}{5}\))
Viraj’s share in Goodwill = ₹ 27,000 (67,500 × \(\frac{2}{5}\))

2. Hari is not able to bring a share in goodwill and it is decided to raise the goodwill in the book.
Therefore, Goodwill is recorded in the Asset side ₹ 67,500.

Question 4.
Mr. Deep & Mr. Karan were in partnership sharing profits & losses in the proportion of 3 : 1 respectively. Their Balance Sheet on 31st March 2018 stood as follows:
Balance Sheet as of 31st March 2018

They admit Shubham into Partnership on 1 April 2018. The terms being that:
1. He shall have to bring in ₹ 20,000 as his capital for 1/5 share in future profits & ₹ 10,000 as his share of Goodwill.
2. A provision for 5% doubtful debts to be created on sundry debtors.
3. Furniture to be depreciated by 20%.
4. Stock should be appreciated by 5% and Building be appreciated by 20%.
5. Capital A/c of all partners be adjusted in their new profit sharing ratio through cash account.
Prepare Profit and Loss-Adjustment A/c, Partners’ Capital A/c, Balance Sheet of the new firm.
Solution:
In the books of the firm __________


Balance Sheet as of 1st April 2018

Working Note:
Calculation of new ratio : Balance of 1 = 1 – share of new partner
= 1 – \(\frac{1}{5}\)
= \(\frac{4}{5}\) (Remaining share)
New ratio = Old ratio × balance 1 (Remaining share)
Deep’s new ratio = \(\frac{3}{4} \times \frac{4}{5}=\frac{3}{5}\)
Karan’s new ratio = \(\frac{1}{4} \times \frac{4}{5}=\frac{1}{5}\)
Shubham’s new ratio = \(\frac{1}{5}=\frac{1}{5}\)
∴ New profit and loss sharing ratio = 3 : 1 : 1
Capital amount to be adjusted in Partner’s new profit and loss ratio:
Total Capital of the firm = (Reciprocal of New partner’s share) × (New partner’s capital)
= 5 × 20,000
= ₹ 1,00,000
Deep’s capital balance = \(\frac {3}{5}\) × 1,00,000 = ₹ 60,000
Karan’s capital balance = \(\frac {1}{5}\) × 1,00,000 = ₹ 20,000

Question 5.
Mr. Kishor & Mr. Lai were in partnership sharing profits & losses in the proportion of 3/4 and 1/4 respectively.

They decided to admit Ram on 1 April 2018 on the following terms:
1. He should be given 1/5th share in profit and for that, he brought in ₹ 60,000 as capital through RTGS.
2. Goodwill should be raised at ₹ 60,000.
3. Appreciate Land and Building by 20%.
4. Furniture and Stock are to be depreciated by 10%.
5. The capitals of all partners should be adjusted in their new profit sharing ratio through Bank A/c.
Pass necessary Journal Entries in the books of the partnership firm and a Balance Sheet of the new firm.
Solution:
Journal entries in the books of the firm


Balance Sheet as of 1st April 2018

Working Notes:
1.

2. Calculation of new profit sharing ratio:
New Ratio = (Balance of 1) × (old ratio)
Kishor’s New ratio = \(\left(1-\frac{1}{5}\right) \times \frac{3}{4}=\frac{4}{5} \times \frac{3}{4}=\frac{3}{5}\)
Lal’s New ratio = \(\left(1-\frac{1}{5}\right) \times \frac{1}{4}=\frac{4}{5} \times \frac{1}{4}=\frac{1}{5}\)
Ram’s ratio = \(\frac{1}{5}\)

3. Total capital of the firm = (Reciprocal of Ram’s ratio) × (His capital contribution)
= \(\frac{5}{1}\) × 60,000 = ₹ 3,00,000
Kishor’s new closing capital balance = 3,00,000 × \(\frac{3}{5}\) = ₹ 1,80,000
Lai’s new closing capital balance = 3,00,000 × \(\frac{1}{5}\) = ₹ 60,000
Ram’s new closing capital balance = ₹ 60,000

Question 6.
Vrushali and Leena are equal partners in the business. Their Balance Sheet as of 31st March 2013 stood as under.
Balance Sheet as of 31st March 2018

They decided to admit Aparna on 1st April 2018 on the following terms:
1. The Machinery and Building be depreciated by 10%. Reserve for Doubtful Debts to be increased by ₹ 5,000.
2. Bills receivable are taken over by Vrushali at a discount of 10%.
3. Aparna should bring ₹ 60,000 as capital for her 1/4th share in future profits.
4. The Capital accounts of all the partners be adjusted in proportion to the new profit sharing ratio by opening the Current accounts of the partners.
Prepare Profit and Loss-Adjustment A/c, Partners’ Capital A/c, Balance Sheet of the new firm.
Solution:

Balance Sheet as on 1st April 2018

Working Notes:
1. R.D.D. to be increased by ₹ 5,000 means subtract ₹ 5,000 from Debtors.

2. Bills receivable taken by Vrushali at 10 % discount i.e. 12,000 – 1,200 = ₹ 10,800.
Write this amount on the debit side of the partners’ Capital Account in Vrushali’s column.

3. Calculation of new ratio = 1 – share of new partner
= 1 – \(\frac{1}{4}\)
= \(\frac{3}{4}\) (Remaining share)
New ratio = Old ratio × Balance 1 (Remaining Share)
Vrushali’s new ratio = \(\frac{1}{2} \times \frac{3}{4}=\frac{3}{8}\)
Leena’s new ratio = \(\frac{1}{2} \times \frac{3}{4}=\frac{3}{8}\)
Aparna’s ratio = \(\frac{1}{4}\)
∴ Partner’s new profit and loss ratio = \(\frac{3}{8}: \frac{3}{8}: \frac{1}{4}\) = 3 : 3 : 2
Now, capital amount to be adjusted in partners new profit and loss ratio.
Total capital of the firm = (Reciprocal of New Partner’s Share) × (New Partner’s Capital)
= (Reciprocal of \(\frac{1}{4}\)) × 60,000
= 4 × 60,000
= ₹ 2,40,000
Vrushali’s capital balance = \(\frac {3}{8}\) × 2,40,000 = ₹ 90,000
Leela’s capital balance = \(\frac {3}{8}\) × 2,40,000 = ₹ 90,000
The deficit of these capital balances is to be adjusted through the Current account.
To keep the balance of Vrushali’s and Leena’s capital ₹ 90,000 each, deficit of ₹ 53,850 and ₹ 58,050 are incurred which is transferred to the respective Partner’s Current A/cs and recorded on the Asset side of Balance Sheet [As it is to be recovered from Partners].

Question 7.
The balance sheet of Medha and Radha who share profit and loss in the ratio 3 : 1 is as follows:
Balance Sheet as of 31st March 2018

They decided to admit Krutika on 1st April 2018 on the following terms:
1. Krutika is taken as a partner on 1st April 2017. She will pay 40,000 as her capital for 1/5th share in future profits and ₹ 2,500 as goodwill.
2. 5% provision for bad and doubtful debt be created on debtors.
3. Furniture be depreciated by 20%.
4. Stocks be appreciated by 5% and plant & machinery by 20 %.
5. The Capital accounts of all partners be adjusted in their new profit sharing ratio by adjusting the amount through a loan.
6. The new profit sharing ratio will be 3/5 : 1/5 : 1/5 respectively.
You are required to prepare Profit and Loss-Adjustment A/c, Partners’ Capital A/c, Balance Sheet of the new firm.
Solution:


Balance Sheet as of 1st April 2018

Working Notes:
1. Total capital of the firm = (Reciprocal of New Partner’s Profit Sharing ratio) × (Capital contributed by new partner)
= (Reciprocal of \(\frac{1}{5}\)) × 40,000
= 5 × 40,000
= ₹ 2,00,000
Medha’s closing capital, balance = \(\frac{3}{5}\) × 2,00,000 = ₹ 1,20,000
Radha’s closing capital balance = \(\frac{1}{5}\) × 2,00,000 = ₹ 40,000

2. General reserve is distributed among old partners in their old profit and loss ratio.

3. Cash Balance = 78,000 + 40,000 + 2,500 = ₹ 1,20,500 [Amount brought in by new partner.]

Question 8.
The Balance Sheet of Sahil and Nikhil who share profits in the ratio of 3 : 2 as of 31st March 2017 is as follows:
Balance Sheet as of 31st March 2017

Varad admitted on 1st April 2017 on the following terms:
1. Varad was to pay ₹ 1,00,000 for his share of capital.
2. He was also to pay ₹ 40,000 as his share of goodwill.
3. The new profit sharing ratio was 3 : 2 : 3.
4. Old partners decided to revalue the assets as follows:
Building ₹ 1,00,000. Furniture ₹ 48,000, Debtors ₹ 38,000 (in view of likely bad debts)
5. It was found that there was a liability for ₹ 3,000 for goods in March 2017 but recorded on 2nd April 2017.
You are required to prepare:
(a) Profit and Loss-Adjustment account
(b) Capital accounts of the partners
(c) Balance Sheet after the admission of Varad.
Solution:


Balance Sheet as of 1st April 2017

Working Notes:
1. Cash in hand = Opening balance + Varad’s capital + Varad’s goodwill (amount brought in)
= 20,000 + 1,00,000 + 40,000
= ₹ 1,60,000

2. Sacrifice ratio = Old ratio – New ratio
Sahil’s sacrifice = \(\frac{3}{5}-\frac{3}{8}=\frac{24-15}{40}=\frac{9}{40}\)
Nikhil’s sacrifice = \(\frac{2}{5}-\frac{2}{8}=\frac{16-10}{40}=\frac{6}{40}\)
i.e. sacrifice ratio = \(\frac{9}{40}: \frac{6}{40}\) = 9 : 6 = 3 : 2.
Goodwill is distributed among old partners in the sacrifice ratio.

Question 9.
Mr. Amit and Baban share profits and losses in the ratio 2 : 3 respectively. Their Balance Sheet as of 31st March 2018 was as under:
Balance Sheet as of 31st March 2018

They agreed decided to admit Kamal on 1st April 2018 on the following terms:
1. Kamal shall have 1/4th share in future profits.
2. She shall bring 50,000 as her capital and 40,000 as her share of goodwill.
3. Land and building to be valued at 60,000 and furniture to be depreciated by 10%.
4. Provision for bad and doubtful debts is to be maintained at 5% on the sundry debtors.
5. Stocks to be valued at 1,10,000.
The Capital A/c of all partners to be adjusted in their new profit and loss ratio and excess amount be transferred to their loan accounts.
Prepare Profit and Loss-Adjustment A/c, Capital A/cs, and New Balance Sheet.
Solution:

Balance Sheet as of 1st April 2018

Working Notes:
1. Cash balance = Opening balance + Amount brought in by Kamal
= 1,10,000 + 50,000 + 40,000
= ₹ 2,00,000

2. For calculation of new profit and loss ratio:
Calculation of new profit ratio = 1 – share of new partner
= 1 – \(\frac{1}{4}\)
= \(\frac{3}{4}\) (Remaining share)
New ratio = old ratio × balance 1 (Remaining share)
Amit’s new ratio = \(\frac{2}{5} \times \frac{3}{4}=\frac{6}{20}\)
Baban’s new ratio = \(\frac{3}{5} \times \frac{3}{4}=\frac{9}{20}\)
Kamal’s ratio = \(\frac{1}{4}=\frac{1}{4} \times \frac{5}{5}=\frac{5}{20}\)

3. New profit and loss ratio = 6 : 9 : 5
Capital amount adjusted in their new profit and loss ratio by taking new partner Kamal’s capital (₹ 50,000) as a base.
For part 5 capital = ₹ 50,000 (Kamal’s capital)
For part 6 capital = ₹ 60,000 (Amit’s capital)
For part 9 capital = ₹ 90,000 (Baban’s capital)

4. After keeping these capital balances difference of the amount of Amit’s capital ₹ 63,520 and of Baban’s capital ₹ 45,280 are taken as partner’s loan to the firm and as a liability of the firm it is recorded in the Liabilities side of the Balance Sheet.

Question 10.
The following is the Balance Sheet of Om and Jay on 31st March 2018, they share profits and losses in the ratio 3 : 2.
Balance Sheet as of 31st March 2018

They take Jagdish into partnership on 1st April 2018. The terms being:
1. Jagdish should pay ₹ 3,000 as his share of Goodwill. 50% of goodwill withdrawn by partners in cash.
2. He should bring ₹ 9,000 as capital for 1/4th share in future profits.
3. Building to be valued at 18,000, Machinery and Furniture to be reduced by 10 %.
4. A provision of 5% on debtors to be made for doubtful debts.
5. Stock to be taken at the value of ₹ 15,000.
Prepare Profit and Loss A/c, Partners’ Current A/c, Balance Sheet of the new firm.
Solution:

Balance Sheet as of 1st April 2018

Working Notes:
1.

2. Write partner’s capital accounts balance as fixed capital balance in the Balance Sheet and transferred current account balance in the Balance Sheet as Partners Current A/c.

3. As shown in the cash account partners’ withdrew half amount of goodwill amount share.

Balbharti Maharashtra State Board 12th Commerce Book Keeping & Accountancy Solutions Chapter 1 Introduction to Partnership and Partnership Final Accounts Textbook Exercise Questions and Answers.

Maharashtra State Board 12th Book Keeping & Accountancy Solutions Chapter 1 Introduction to Partnership and Partnership Final Accounts

I. Objective Questions:

A. Select the most appropriate alternatives from the following and rewrite the sentences:

Question 1.
When there is no partnership agreement between partners, the division of profits takes place in ____________ ratio.
(a) equal
(b) capital ratio
(c) initial contribution
(d) experience and tenure of partners
Answer:
(a) equal

Question 2.
To find out Net Profit or Net Loss of the business ____________ Account is prepared.
(a) Trading
(b) Capital
(c) Current
(d) Profit & Loss
Answer:
(d) Profit & Loss

Question 3.
A ____________ is an Intangible Asset.
(a) Goodwill
(b) Stock
(c) Cash
(d) Furniture
Answer:
(a) Goodwill

Question 4.
In the absence of an agreement, interest on a loan advanced by the partner to the firm is allowed at the rate of ____________
(a) 5%
(b) 6%
(c) 10%
(d) 9%
Answer:
(b) 6%

Question 5.
Liability of partners in a partnership business is ____________
(a) limited
(b) unlimited
(c) limited and unlimited
(d) none of the above
Answer:
(b) unlimited

Question 6.
The Indian Partnership Act is in force since ____________
(a) 1932
(b) 1881
(c) 1956
(d) 1984
Answer:
(a) 1932

Question 7.
Maximum number of Partners in a firm are ____________ according to Companies Act, 2013.
(a) 10
(b) 25
(c) 20
(d) 50
Answer:
(d) 50

B. Write the word/phrase/term, which can substitute each of the following statements.

Question 1.
Persons who form the partnership firm.
Answer:
Partners

Question 2.
Amount of cash or goods withdrawn by partners from the business from time to time.
Answer:
Drawings

Question 3.
An association of two or more persons according to Indian Partnership Act 1932.
Answer:
Partnership firm

Question 4.
Act under which partnership firms are regulated.
Answer:
Indian Partnership Act

Question 5.
Process of entering the name of the partnership firm in the register of the Registrar.
Answer:
Registration

Question 6.
Partnership agreement in written form.
Answer:
Partnership Deed

Question 7.
Under this method capital, balances of partners remain constant.
Answer:
Fixed Capital Method

Question 8.
Proportion in which partners share profit.
Answer:
Profit-Sharing Ratio

Question 9.
Such a capital method in which only Capital Account is maintained for each partner.
Answer:
Fluctuating Capital Method

Question 10.
The account to which all adjustments are made when capital is fixed.
Answer:
Current Account

Question 11.
Expenses that are paid before they are due.
Answer:
Prepaid expenses

Question 12.
The accounts are prepared at the end of each accounting year.
Answer:
Final Accounts

Question 13.
An asset that can be converted into cash easily.
Answer:
Current Assets or Liquid Assets

Question 14.
Order in which fixed assets are recorded first in the Balance Sheet.
Answer:
Order of liquidation

Question 15.
The account in which selling expenses of the business are recorded.
Answer:
Profit and Loss Account

Question 16.
Debit balance of Trading Account.
Answer:
Gross loss

Question 17.
The credit balance of Profit and Loss Account.
Answer:
Net profit

C. State whether the following statements are True or False with reasons:

Question 1.
A partnership firm is a Non-Trading concern.
Answer:
This statement is False.
The main aim of a partnership firm Is to earn maximum profit. The partnership is a trading concern. It undertakes either manufacturing or distributive activities with the sole aim of earning profit and distribute that profit among the partners in a specific ratio. It is never formed for charitable purposes.

Question 2.
A profit and Loss Account is a Real Account.
Answer:
This statement is False.
Account of expenses, losses, gains, and incomes is called a Nominal account. The profit and Loss Account contains all indirect expenses and indirect incomes of the firm. Therefore, a Profit and Loss Account is a Nominal Account and not a real account.

Question 3.
Carriage inward is carriage on purchase.
Answer:
This statement is True.
Total transport expenses incurred on bringing the goods from market to the place of business is called the carriage. When goods are purchased, the carriage is supposed to be borne by the firm. It is known as carriage inward. It means carriage paid on purchase.

Question 4.
Adjustments are recorded in Partners Current Account in Fixed Capital Method.
Answer:
This statement is True.
In Fixed Capital Method, as the name suggests capital balances (opening and closing) are generally remain fixed. Under this method, adjustments are not to be recorded in Capital Account. All adjustments are recorded in a separate account called Partners’ Current Accounts.

Question 5.
Prepaid expenses are treated as liabilities.
Answer:
This statement is False.
Prepaid expenses are expenses that are paid before they are due. Therefore, they are considered an asset of the business organization.

Question 6.
If the partnership deed is silent, partners share profits and losses in proportion to their capital.
Answer:
This statement is False.
As per the provisions made under the Indian Partnership Act 1932, when a partnership deed is silent about profit and loss sharing ratio, partners are supposed to share profits and losses in equal proportion, and not in their capital ratio.

Question 7.
Balance Sheet is an Account.
Answer:
This statement is False.
A financial statement showing all assets and liabilities is called a Balance sheet. It is not an account. It is a position statement that shows various assets owned by the firm and various liabilities owned by it. On the left-hand side, all liabilities are listed and on the right-hand side, all assets are recorded.

Question 8.
Wages paid for the installation of machinery is a Revenue expenditure.
Answer:
This statement is False.
Wages paid for the installation of machinery is a capital expenditure and therefore it is added to the cost of machinery. It is generally, paid once in a life of an asset. It is a long-term and capital expenditure.

Question 9.
Income received in advance is a liability.
Answer:
This statement is True.
When Income in respect to next year, it received in the current year, it is known as income received in advance. So, in next year firm will not be able to receive that amount and therefore it is considered as a liability for the current year.

Question 10.
R.D.D. is created on Creditors.
Answer:
This statement is Raise.
R.D.D. stands for Reserve for Doubtful Debts. It is created on the value of debtors. Such provision is made against profit and loss accounts. In the future, if the loss is incurred on account of bad debts, such an amount is used to run the business.

Question 11.
Depreciation is not calculated on Current Assets.
Answer:
This statement is True.
Current Assets mean liquid assets having no fixed tenure therefore depreciation cannot be calculated on it. Depreciation is calculated and charged on fixed assets for their use, wear and tear, etc.

Question 12.
Goodwill is an intangible asset.
Answer:
This statement is True.
Goodwill is a reputation of business computed in terms of money. Reputation can be experienced but can’t be seen or felt. Therefore, Goodwill is an intangible asset.

Question 13.
Indirect expenses are debited to Trading Account.
Answer:
This statement is Raise.
Indirect expenses mean expenses that are not directly related to the production of goods and services. Therefore, indirect expenses cannot be debited to Trading Account. All indirect expenses are debited to the Profit and Loss Account.

Question 14.
A bank loan is a current liability.
Answer:
This statement is Raise.
A loan usually taken for the period of more than 1 year say 5 years from the bank is called Bank Loan. It is a long term loan. It is not repaid within 1 year but paid in installments over a number of years. It might be paid in lumpsum at the expiry of the term.

Question 15.
Net profit is the debit balance of Profit and Loss Account.
Answer:
This statement is Raise.
In a Profit and Loss Account, when the credit side total i.e. a total of incomes is more than the debit side total, i.e. expenses it is known as a credit balance. When incomes exceed expenses there is profit. Therefore credit balance of the Profit and Loss Account indicates net profit.

D. Find an odd one.

Question 1.
Wages, Salary, Royalty, Import Duty
Answer:
Salary

Question 2.
Postage, Stationery, Advertising, Purchases
Answer:
Purchases

Question 3.
Capital, Bills Receivable, Reserve fund, Bank overdraft
Answer:
Bills Receivable

Question 4.
Building, Machinery, Furniture, Bills Payable
Answer:
Bill Payable

Question 5.
Discount received, Dividend received, Interest received, Depreciation
Answer:
Depreciation

E. Complete the sentences.

Question 1.
Partners share profits & losses in ____________ ratio in the absence of partnership deed.
Answer:
equal

Question 2.
Registration of partnership is ____________ in India.
Answer:
optional

Question 3.
Partnership business must be ____________
Answer:
lawful

Question 4.
Liabilities of partners in partnership firm is ____________
Answer:
unlimited

Question 5.
The balance of the Drawings Account of a partner is transferred to his ____________ account under the Fixed Capital Method.
Answer:
Current

Question 6.
The interest on capital of a partner is debited to ____________ account.
Answer:
Profit and Loss

Question 7.
Partners are ____________ liable for the debts of the firm.
Answer:
joint & several

Question 8.
Partnership Deed is an ____________ of Partnership.
Answer:
Article

Question 9.
The withdrawal by the partner for personal use from the firm is ____________ to his account.
Answer:
debited

Question 10.
Commission payable to partner is ____________ to the firm.
Answer:
liability/outstanding expense

Question 11.
When partners adopt Fixed Capital Method then they have to operate ____________ Account.
Answer:
Partner’s Current

Question 12.
If the partners Current Account shows ____________ balance it is shown to the Liability side of the Balance Sheet.
Answer:
credit

Question 13.
The expenses paid for trading purpose are known as ____________ expenses.
Answer:
trade

Question 14.
Cash receipts which are recurring in nature are called as ____________ Receipts.
Answer:
Revenue

Question 15.
Return outward are deducted from ____________
Answer:
purchase

Question 16.
Expenses which are paid before due date are called as ____________
Answer:
Prepaid Expenses

Question 17.
Assets which are held in the business for a long period are called ____________
Answer:
Fixed Assets

Question 18.
Trading Account is prepared on the basis of ____________ expenses.
Answer:
direct

Question 19.
When commission is allowed to any partner, it is ____________ of the business.
Answer:
expenditure

Question 20.
When goods are distributed as free samples, it is treated as ____________ of the business.
Answer:
advertisement expense

F. Answer in one sentence only:

Question 1.
What is Fluctuating Capital?
Answer:
When capital balances of the partners go on changing every year due to transactions of partners with the firm, it is known as Fluctuating Capital.

Question 2.
Why is Partnership Deed necessary?
Answer:
Partnership Deed is necessary to prevent disputes or misunderstandings among the partners in the future.

Question 3.
If the Partnership Deed is silent, in which ratio, the partners will share the profit or loss?
Answer:
If the Partnership Deed is silent, partners will share profits and losses in equal ratio.

Question 4.
What is the Fixed Capital Method?
Answer:
Fixed Capital Method is one in which capital balances of the partners remain the same at the end of every financial year unless any amount of additional capital is introduced or part of the capital is withdrawn by the partner from the business.

Question 5.
How many partners are required to form a partnership firm?
Answer:
Minimum two persons are required to form a partnership firm.

Question 6.
What is Partnership Deed?
Answer:
A partnership deed is a written agreement duly stamped and signed document containing the terms and conditions of the partnership.

Question 7.
What are the objectives of the Partnership Firm?
Answer:
To earn a maximum profit is the main objective of the partnership firm.

Question 8.
What rate of interest is allowed on a partner’s loan in the absence of an agreement?
Answer:
6 % is the rate of interest to be allowed on a partner’s loan in the absence of an agreement.

Question 9.
What is the minimum number of partners in a partnership firm according to the Indian Partnership Act 1932?
Answer:
Minimum two persons are required a number of partners in a partnership firm according to Indian Partnership Act 1932.

Question 10.
What is the liability of a partner?
Answer:
The liability of a partner (except minor partner) is unlimited.

Question 11.
In the absence of Partnership Deed, what is the rate of interest on a loan advanced by the partner to the firm is allowed?
Answer:
In the absence of Partnership Deed, 6% is the rate of interest on a loan advanced by the partner to the firm.

Question 12.
What do you mean by pre-received income?
Answer:
Income that is received by the partnership firm before it is due is called pre-received income.

Question 13.
What is the effect of the adjustment of provision for discount on debtors in the final accounts of partnership?
Answer:
The effects of the adjustment of provision for discount on debtors in the final accounts of partnership are as follows:
Debit Profit and Loss A/c and deduct the amount of provision for discount on debtors from the number of debtors.

Question 14.
When are the Partners Current Account is opened?
Answer:
When Fixed Capital Method is adopted by the firm, Partners’s Current Account is opened.

Question 15.
As per which principle of accounting, closing stock is valued at cost price or at market price whichever is less?
Answer:
As per the Conservatism principle of accounting, the closing stock is valued at cost price or at market price whichever is less.

Question 16.
What is the provision of the Indian Partnership Act with regard to Interest on Capital?
Answer:
As per the provision of the Indian Partnership Act, Interest in Capital is not to be allowed.

Question 17.
Why is the Balance Sheet prepared?
Answer:
The Balance Sheet is prepared to know the financial position of the business in the form of its assets and liabilities on a particular date.

Question 18.
Why wages paid for the installation of machinery are not shown in Trading Account?
Answer:
Wages paid for the installation of machinery is a capital expenditure and it is not to be recorded in Trading Account.

Question 19.
What do you mean by indirect incomes?
Answer:
All incomes other than direct incomes are called indirect incomes.
[e.g. Interest received on investments, Incomes like discount, commission, dividend, rent, etc. received].

Question 20.
Why partners capital is treated as a long-term liability of business?
Answer:
Partner’s Capital is not refunded during the existence of the partnership firm unless the partner is retired or expired.

G. Do you agree/disagree with the following statements:

Question 1.
When Partnership Deed is silent, partners share profits of the firm according to capital ratio.
Answer:
Disagree

Question 2.
The current Account always shows a debit balance.
Answer:
Disagree

Question 3.
It is compulsory to have a partnership agreement in writing.
Answer:
Disagree

Question 4.
Partnership Firm is a trading concern.
Answer:
Agree

Question 5.
Interest in the capital is an expenditure for the partnership firm.
Answer:
Agree

Question 6.
A partnership is an association of two or more persons.
Answer:
Agree

Question 7.
Partners are entitled to get a Salary or Commission.
Answer:
Disagree

Question 8.
The balance of the Capital Account remains constant under Fixed Capital Method.
Answer:
Agree

Question 9.
The Indian Partnership Act came into existence in the year 1945.
Answer:
Disagree

Question 10.
Profit and Loss Account reflects the true financial position.
Answer:
Disagree

Question 11.
The amount borrowed by a partner from his business will be debited to the Current Account.
Answer:
Agree

Question 12.
Sold but undispatched goods must be part of the valuation of closing stock.
Answer:
Disagree

Question 13.
Carriage inward is a selling and distribution overhead.
Answer:
Disagree

Question 14.
Gross profit is an operating profit.
Answer:
Disagree

Question 15.
All financial expenditures are debited to the Profit and Loss Account.
Answer:
Agree

Question 16.
Free distribution of goods is debited to Trading Account.
Answer:
Disagree

H. Calculate the following:

Question 1.
Undervaluation of closing stock by 10%, closing stock was ₹ 30,000. Find out the value of the closing stock.
Solution:
Undervaluation of closing stock by 10 %
Revised value = \(\frac{\text { Book value }}{100-\% \text { of undervaluation }} \times 100\)
= \(\frac{30,000}{100-10} \times 100\)
= ₹ 33,333.
∴ Value of closing stock = ₹ 33,333.

Question 2.
Calculate 12.5% P.A. depreciation on Furniture:
(a) on ₹ 220,000 for 1 year
(b) on ₹ 10,000 for 6 months
Solution:
Depreciation = Amount of asset × Period × %
(a) Depreciation on furniture = 220,000 × 1 × \(\frac{12.5}{100}\) = ₹ 27,500
∴ Deprecation on furniture for 1 year = ₹ 27,500

(b) Depreciation on furniture = 10,000 × \(\frac{6}{12} \times \frac{12.5}{100}\) = ₹ 625
∴ Depreciation on furniture for 6 months = ₹ 625

Question 3.
The insurance premium is paid for the year ending on 1st September 2019 amounted to ₹ 1500. Calculate prepaid insurance assuming that the year-end is 31st March 2019.
Solution:
From 31st March to 1st September, 5 months period prepaid insurance amount we have to find.
An insurance premium paid for the 12 months = ₹ 1500
∴ for 5 months period it is 1500 × \(\frac{5}{12}\) = ₹ 625
Thus, prepaid insurance premium amount = ₹ 625.

Question 4.
Find out Gross Profit/Gross Loss: Purchases ₹ 30,000, Sales ₹ 15,000, Carriage inward ₹ 2400, Opening stock ₹ 10,000, Purchase return ₹ 1000, Closing stock ₹ 36,000.
Solution:

Question 5.
A borrowed loan from Bank of Maharashtra ₹ 2,00,000 on 1st October 2019 @15 % p.a. Calculate interest on a bank loan for the year 2019 – 20 assuming that the financial year ends on 31st March, every year.
Solution:
From 1st October to 31st March, 6 months period interest on loan is to be calculated.
Interest (I) = \(\frac{\text { PRN }}{100}\)
∴ Interest on loan = 2,00,000 × \(\frac{15}{100} \times \frac{6}{12}\) = ₹ 15,000
∴ Interest on loan on ₹ 2,00,000 for 6 months = ₹ 15,000

Practical Problems

Question 1.
Amitbhai and Narendrabhai are in Partnership Sharing Profits and Losses equally. From the following Trial Balance and Adjustments given below, you are required to prepare the Trading and Profit and Loss Account for the year ended 31st March 2019 and Balance Sheet as of that date.

Trial Balance as of 31st March 2019

Adjustments:
1. Stock on hand on 31st March 2019 was valued at ₹ 43,000.
2. Uninsured goods worth ₹ 8,000 were stolen.
3. Create R.D.D. at 2 % on sundry debtors.
4. Mr. Patil, our customer becomes insolvent and could not pay his debts of ₹ 500.
5. Outstanding Expenses – Rent ₹ 800 and salaries ₹ 300.
6. Depreciate Factory Building by ₹ 2,500 and Furniture by ₹ 1,800.
Solution:
In the books of Amitbhai and Narendrabhai

Balance Sheet as of 31st March 2019


Notes:
1. Import duty, Motive power, and Depreciation on Factory building are recorded in the Trading A/c.

2. 10% govt, the bond is an investment. It was purchased on 1 – 10 – 2018.
∴ Interest is calculated for six months.
Interest on Govt. Bond = \(\frac{40,000}{1} \times \frac{6}{12} \times \frac{10}{100}\) = ₹ 2,000

3. Adv. exp. paid for 2 years from 01 – 01 – 2019. Upto 31 – 3 – 2019, 3 months adv. exp. is written off to Profit and Loss A/c. It is calculated as below:
= 10,000 × \(\frac{3}{24}\) = ₹ 1,250
∴ Prepaid adv. exp. = 10,000 – 1,250 = ₹ 8,750

Question 2.
From the following Trial Balance of M/s Mitesh and Mangesh, you are required to prepare Trading and Profit and Loss Account for the year ended 31st March 2019 and Balance Sheet as of that date.

Trial Balance as of 31st March 2019

Adjustments:
1. Mitesh and Mangesh are sharing profit and losses in the ratio 3 : 1.
2. Partners are entitled to get commission @ 1% each on gross profit.
3. The closing stock is valued at ₹ 23,700.
4. Outstanding Expenses – Audit fees ₹ 400; Carriage ₹ 600.
5. Building is valued at ₹ 46,500.
6. Furniture is depreciated by 5%.
7. Provide interest on partner’s capital at 2.5% p.a.
8. Goods of ₹ 900 were taken by Mangesh for his personal use.
9. Write off ₹ 1,000 as Bad debts and maintain R.D.D. at 3 % on Sundry Debtors.
Solution:
In the books of M/s Mitesh and Mangesh



Balance Sheet as of 31st March 2019


Working Notes:
1. In this problem, Current Account balances are given. So, the total amount of fixed capital is directly shown in the Liabilities side of the Balance Sheet. Effects of adjustments related to commission to partners, interest on capital, goods are withdrawn by Mangesh are given in the Current Account. Closing balances of the Current Account are shown separately on the Liability side of the Balance Sheet.

2. Building is valued at ₹ 46,500 whereas the opening balance of Building given is ₹ 48,500. Therefore, a difference of the amount of ₹ 2,000 (48,500 – 46,500) is nothing but Depreciation charged on Building.

3. Return Inward ⇒ Sales Return
Return Outward ⇒ Purchase Return

4. Commission payable to partners:
Mitesh = 1% on Gross Profit = \(\frac{1}{100} \times \frac{99,000}{1}\) = ₹ 990/-
Mangesh = 1% on Gross Profit = \(\frac{1}{100}\) × 99,000 = ₹ 990/-

Question 3.
From the following Trial Balance and Adjustments given below of Reena and Aarti, you are required to prepare Trading and Profit and Loss Account for the year ended 31st March 2019 and Balance Sheet as of that date.
Trial Balance as of 31st March 2019

Adjustments:
1. Closing stock valued at ₹ 22,000.
2. Write off ₹ 900 for bad & doubtful debts and create a provision for reserve for doubtful debts ₹ 1,000.
3. Create a provision for discount on debtors @ 3 % and on creditors @ 5%.
4. Outstanding Expenses – Wages ₹ 700 and Salaries ₹ 800.
5. Insurance is paid for 15 months, w.e.f. 1st April 2018.
6. Depreciate land and building @ 5%.
7. Reena & Aarti are sharing Profits & Losses in their Capital Ratio.
Solution:
In the books of Reena and Aarti

Balance Sheet as of 31st March 2019

Working Notes:
1. Insurance premium ₹ 1,500 is paid for 15 months, i.e. prepaid insurance premium for 3 months = ₹ 300.

2. Reserve for Discount on Debtors = 3% on (Debtors – New Bad debts – New Reserve)
= \(\frac{3}{100}\) × (40,000 – 900 – 1,000)
= \(\frac{3}{100}\) × (40,000 – 1,900)
= \(\frac{3}{100}\) × 38,100
= ₹ 1,143

3. Reserve for Discount on Creditors = 5% on (Value of Creditors)
= \(\frac{5}{100}\) × 25,700
= ₹ 1,285

4. Profit and Loss ratio = Capital ratio = 50,000 : 30,000 = 5 : 3

Question 4.
From the following Trial Balance of M/s Meera and Madhav. Prepare Trading and Profit and Loss Account for the year ended 31st March 2019 and Balance Sheet as on that date.
Trial Balance as of 31st March, 2019

Adjustments:
1. Closing stock is valued at ₹ 32,000.
2. Provide provision for doubtful debts ₹ 2,000.
3. Create a reserve for a discount on debtors @ 3%.
4. Value of leasehold premises on 31st March 2019 ₹ 1,00,000.
5. Outstanding Expenses: Printing & stationery ₹ 500.
Solution:
In the books of M/s Meera and Madhav

Balance Sheet as of 31st March 2019

Working Notes:
1. Advertisement expenses written off to Profit and Loss account during the year 2018-19 for six months i.e. from 1/10/18 to 31/03/19.
Advertisement expenses W/off = (Advertisement bill paid) × \(\frac{1}{3} \times \frac{6}{12}\)
= 4,800 × \(\frac{1}{3} \times \frac{6}{12}\)
= ₹ 800.
Prepaid advertisement = 4,800 – 800 = ₹ 4,000.

2. Reserve for Discount on Debtors = 3% (Balance in debtors)
= \(\frac{3}{100}\) × (80,500 – 2,000)
= \(\frac{3}{100}\) × 78,500
= ₹ 2,355.

3. Difference between the opening balance (₹ 1,10,000) and the closing balance (₹ 1,00,000) for leasehold premises is to be considered as written off on leasehold premises.

Question 5.
Sucheta & Gayatri are partners sharing Profit and Losses in the ratio 3 : 2. From the following Trial Balance and additional information, you are required to prepare Trading and Profit and Loss Account for the year ended 31st March 2019 and Balance Sheet as of that date.
Trial Balance as of 31st March 2019

Adjustments:
1. Stock on 31st March 2019 was valued at ₹ 19,700.
2. Goods costing ₹ 3,000 distributed as a free sample.
3. Motive power includes ₹ 500 paid for deposit of Power Meter.
4. Depreciate building @ 5 %.
5. Write off ₹ 2000 for bad debts and maintain R.D.D. at 3% on debtors.
6. Bills receivable included dishonored of Bill of ₹ 4,000.
Solution:
In the books of Sucheta and Gayatri


Balance Sheet as of 31st March, 2019

Working Notes:
1. Rate of interest on the partner’s loan is not mentioned, therefore interest on the loan is calculated at 6% p.a.
∴ Interest on Sucheta’s Loan = 6,150 × 1 × \(\frac{6}{100}\) = ₹ 369
2. Add dishonored bill amount to debtors amount and then calculate B.D. and R.D.D.
3. Subtract dishonored bill amount from bills receivable amount.

Question 6.
Archana and Prerana are partners, sharing Profits and Losses in the ratio 2 : 1 with the help of the following Trial Balance and Adjustments given below. You are required to prepare a Trading and Profit and Loss Account for the year ended 31st March 2019 and a Balance Sheet as of that date.
Trial Balance as of 31st March, 2019

Adjustments:
1. Stock on 31st March 2019 is valued at Cost Price ₹ 12,000 and Market Price ₹ 17,000.
2. Our customer Mr. Shekhar failed to pay his dues of ₹ 800.
3. 1/8th of Patents are to be written off.
4. A part of Furniture ₹ 5,000 is purchased on 1st Oct. 2018.
5. Depreciation on Land & Building 10% and on Furniture 5%.
6. Outstanding Expenses Wages ₹ 300 and Electricity Charges ₹ 200.
7. Allow Interest on Capital 3%.
Solution:
In the books of Archana and Prema


Balance Sheet as of 31st March 2019

Working Notes:
1. Stationery stock is an asset.
2. Depreciation of furniture:

∴ Total Depreciation = 400 + 125 = ₹ 525
3. \(\frac{1}{8}\) patents to be written off = 2,000 × \(\frac{1}{8}\) = ₹ 250.
4. As no other expenses are given, Trade Expense is recorded in Profit and Loss Account.

Question 7.
Satish and Pramod are partners. Prepare Trading Account and Profit and Loss Account for the year 31st March 2019. You have to find out Gross Profit and Net Profit only.
Trial Balance as of 31st March 2019

Adjustments:
1. The Closing stock is valued at ₹ 15,400.
2. Outstanding wages ₹ 500.
3. Create provision for Bad debts ₹ 800 and maintain R.D.D. 3 % on Sundry Debtors.
4. Goods of ₹ 1,800 distributed as a free sample.
5. Goods of ₹ 2,000 were sold and delivered on 31st March 2019 but no entry is passed in the Books of Account.
Solution:
In the books of Satish and Pramod

Working Notes :
1. Here only gross profit and net profit is to find out. Therefore, the Balance Sheet is not prepared.

2. Interest on a 10% bank loan is calculated for 9 months (From 1/7/2018 to 31/3/2019)
I = \(\frac{\mathrm{PRN}}{100}\) = 8,000 × \(\frac{10}{100} \times \frac{9}{12}\) = ₹ 600

3. Goods distributed as free samples is an advertisement expense for business.

4. Sundry Debtors = 40,000
Add: Unrecorded Sales = 2,000
Less: Provision for Bad Debts = 800
Total = 41,200
Less: R.D.D. (New) (3% of 41,200 = 1,236) = 39,964

Question 8.
Nana and Nani are partners in a Partnership Firm sharing Profits and Losses equally. You are required to give effects of Adjustments in Profit & Loss A/c and Balance Sheet with the help of the following information.
Trial Balance as of 31st March 2019

Adjustments:
1. Gross profit amounted to ₹ 34,500.
2. Insurance paid for 15 months w.e.f. 1-4-2018.
3. Depreciate Land and Building at 10 % p.a. and Furniture at 5% p.a.
4. Write off ₹ 1,000 for Bad debts and maintain R.D.D. at 5 % on Sundry debtors.
5. Closing stock is valued at ₹ 34,500.
Solution:
In the books of Nana and Nani

Balance Sheet as of 31st March 2019

Working Notes:
1. Here, the Profit and Loss Account and Balance Sheet are to be prepared. Therefore, Trading Account is not prepared. Gross profit (given) is recorded on the Credit side of the Profit and Loss Account.

2. Land and Building

Total Depreciation = ₹ 4,500

3. Interest on 10% bank loan is calculated for 6 months. (From 1/10/2018 to 31/3/2019)
I = \(\frac{\text { PRN }}{100}\)
= 30,000 × \(\frac{10}{100} \times \frac{6}{12}\)
= ₹ 1,500

4. Prepaid insurance = \(\frac{3}{15}\) × (Insurance Amount)
= \(\frac{3}{15}\) × 15,000
= ₹ 3,000

5. RDD = 5% on (Debtors – New Bad debts)
= \(\frac{5}{100}\) × (26,000 – 1,000)
= \(\frac{5}{100}\) × 25,000
= ₹ 1,250

Question 9.
Sun and Moon are partners in a Partnership Firm sharing Profits and Losses equally. You are required to give effects of Adjustments with the help of the following information:
Trial Balance as of 31st March 2019

Adjustments:
1. Partners are entitled to get a salary of ₹ 6,000 p.a. in addition to their profit & loss sharing.
2. Depreciation on Land & Building, Furniture and Machinery @ 10%, 5% and 3% respectively.
3. Interest in Capital 5% p.a.
4. Closing stock ₹ 60,743.
5. Wages included ₹ 1,000 as advance is given to workers.
6. Interest due but not paid ₹ 800.
7. Total net profit amounted to ₹ 38,113.
You are required to prepare the Balance Sheet and Partners Current A/c only.
Solution:
In the books of Sun and Moon

Balance Sheet as of 31st March 2019


Working Notes:
1. Depreciation on machinery is calculated for 9 months. (i.e. from 1/7/18 to 31/3/19)
Depreciation = 40,000 × \(\frac{3}{100} \times \frac{9}{12}\) = ₹ 900

2. Interest on 8% debentures, calculated for 6 months. (i.e. from 1/10/18 to 31/3/19)
I = \(\frac{\text { PRN }}{100}\)
= 8,000 × \(\frac{8}{100} \times \frac{6}{12}\)
= ₹ 320

3. Advance given to workers (by firm) ₹ 1,000 is an asset for the firm, so, it is shown on the Assets side.

4. Interest due but not paid is a liability for the firm, so, it is shown on the Liabilities side.

Question 10.
Kshipra and Manisha are partners sharing Profit and Losses in their Capital ratio. You are required to prepare Trading Account and Profit and Loss Account for the year ended 31st March 2019 and a Balance Sheet as of that date.
Trial Balance as of 31st March 2019

Adjustments:
1. Stock on 31st March 2019 was at ₹ 37,000.
2. Sales include the sale of machinery of ₹ 2,000, which is sold on 1st April 2018.
3. Depreciation on fixed assets @ 5%
4. Each partner is entitled to get a commission at 1% of Gross profit and interest on Capital 5% p.a.
5. Outstanding Expenses wages ₹ 200 & Salaries ₹ 500.
6. Create provision for Doubtful debts @ 3% on Sundry debtors.
Solution:
In the books of Kshipra and Manisha


Balance Sheet as of 31st March 2019

Working Notes:
1. Depreciation on fixed assets means depreciation on Furniture, Plant & Machinery, and Building.

2. Sales includes the sale of Machinery of ₹ 2,000 is subtracted from sales and from Plant & Machinery.
On balance amount of Plant & Machinery ₹ 58,000, calculate 5 % depreciation i.e. 60,000 – 2,000 = ₹ 58,000 × 5% = ₹ 2,900

3. Here on gross profit calculate 1% commission for partners and record it to Profit and Loss A/c and in Current A/cs. Commission payable to each partner = \(\frac{1}{100}\) × Gross profit
= \(\frac{1}{100}\) × 81,700
= ₹ 817.

Balbharti Maharashtra State Board Class 12 Economics Solutions Chapter 10 Foreign Trade of India Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Economics Solutions Chapter 10 Foreign Trade of India

1. Choose the correct option:

Question 1.
Types of foreign trade
a) Import trade
b) Export trade
c) Entrepot trade
d) Internal trade
Options:
1) a and b
2) a, b and c
3) a, b, c and d
4) None of these
Answer:
2) a, b and c

Question 2.
Export trends of India’s foreign trade includes
a) Engineering goods
b) Gems and Jewellery
c) Textiles and ready-made garments
d) Gold
Options:
1) a and c
2) a, b and c
3) b, c and d
4) None of these
Answer:
2) a, b and c

Question 3.
Role of foreign trade is
a) To earn foreign exchange
b) To encourage investment
c) Lead to division of labour
d) Bring change in composition of exports
Options:
1) a and b
2) a, b and c
3) b and d
4) None of these
Answer:
2) a, b and c

2. Identify and explain the concepts from the given illustrations:

Question 1.
India purchased petroleum from Iran.
Answer:
Concept: Import trade
Explanation: Import trade means purchase of goods and services by one country from another country.

Question 2.
Maharashtra purchased wheat from Punjab.
Answer:
Concept: Internal/Home/Domestic trade Explanation : Internal trade is also known as home trade or domestic trade. This trade is within the country. It is between two or more states of the country.

Question 3.
England imported cotton from India, made readymade garments from it and sold them to Malaysia.
Answer:
Concept: Entrepot trade
Explanation : It means purchase of goods and services from one country and selling the same to another country.

Question 4.
Japan sells smart phones to Myanmar.
Answer:
Concept: Export trade
Explanation : It means sell of goods and services by one country to another country.

3. Distinguish between the following:

Question 1.
Internal trade and International trade.
Answer:

Internal / Domestic / Home trade	External / Foreign / International trade
(a) It means exchange of goods and services within the country.	(a) It means exchange of goods and services between two or more countries.
(b) The goods and services are produced and sold within the country.	(b) The goods and services are produced in one country and sold in other country.
(c) E.g. Kashmir apples sold in Maharashtra.	(c) E.g. Kashmir apples sold in Dubai.

Question 2.
Trends in imports and Trends in exports of foreign trade.
Answer:

Trends in imports	Trends in exports
(a) It means year wise numerical changes in imports of a country.	(a) It means year wise numerical changes in exports of a country.
(b) India’s major imported goods are – petroleum, gold, fertilizers, iron and steel, etc.	(b) India’s major exported goods are engineering goods, petroleum and chemical products, gems and jewellery, etc.
(c) Petroleum has highest import percent of 22.6 in 2016-17.	(c) Engineering goods has highest export percent 23.7 in 2016-17.

Question 3.
Balance of payments and Balance of trade.
Answer:

Balance in payment	Balance in trade
(a) It means systematic recording of all international economic transactions of that country during a year.	(a) It means the difference between the value of a country’s exports and imports in a year.
(b) It is a broad concept.	(b) It is narrow concept.

4. Answer the following:

Question 1.
Explain the concept of foreign trade and its types.
Answer:

Foreign trade is the exchange of goods and c services between two or more countries, Foreign trade is the trade across the j boundaries of a country.

There are three important types of foreign trade.

• Import trade : It is a buying of goods and services from other country by home country. Excessive import can have a negative impact on home country. E.g. India buying petroleum from Iraq, Kuwait, etc.
• Export trade : It is selling of goods and services by home country to another country.
  Excessive export can have a positive impact on the home country. E.g. India exporting tea and spices to USA, China, etc.
• Entrepot trade : It means buying of goods and services from one country and selling them to another country. E.g. England importing cotton from India, making readymade garments from it and selling them to Malaysia.

Question 2.
Explain any four features of composition of Indias foreign trade.
Answer:
There are many changes in India’s foreign trade from last seven decades (70 years)

• Gross National Income : India’s foreign trade has great significance for its GNP. It increased upto 48.8% in the year 2016-17.
• Change in composition of exports : After independence there was change in the composition of India’s export trade from primary products to manufactured goods.
• Change in composition of imports :
  After independence there was change in the composition of India’s import trade from consumer goods to capital goods.
• Development of new ports : India’s foreign trade is handled mainly by Mumbai, Calcutta and Chennai ports. India has developed more new ports at Kandla, Cochin, Vishakhapatnam.
• Oceanic trade : Most of India’s foreign trade is by sea. About 68% of India’s trade is by sea.

Question 3.
Explain the trend in India’s imports.
Answer:
India is importing various goods from other countries. Following are the major imported goods of India :

• Petroleum : It has largest share in India’s import. In the year 2016-17, it has 22.6% share in India’s total import.
• Gold: After petroleum, the second most imported item is gold. In the year 2011, ) India’s import of gold was $53.9 billion and in the year 2018-19 it declined upto $32.8 billion.
• Fertilizers: The share of fertilizers in import expenditure declined from 4.1% in 1990-91 to only 1.3% in 2016-17.
• Iron and Steel: In the year 2016-17, the share of iron and steel in India’s total import was 2.1%.

5. State with reasons whether you agree or disagree with the following statements:

Question 1.
During British nile, indigenous handicrafts suffered a severe blow.
Answer:
Yes, I do agree with this statement.

• During the British rule India was exporting raw materials to England and was importing final goods from England.
• Indian handicraft was unable to face competition with imported goods from England.
• An imported goods were cheaper as compared to handicraft goods.
• The demand for machine made cheap commodity had raised in Indian market.
• That’s why Indian handicraft industries suffered during the British rule.

Question 2.
Trade is an engine of growth for an economy.
Answer:
Yes, I agree with this statement.

• Trade permits a more efficient allocation of national resources.
• Foreign trade provide foreign exchange which can be used to import modern machinery and technology from advanced countries.
• Foreign trade encourages producers to produce more goods for export.
• It leads to an increase in total investment in an economy.
• Thus, we can say, trade is an engine to growth for an economy.

Question 3.
Foreign trade leads to division of labour and specialization at world level.
Answer:
Yes, I agree with this statement.

• Some countries have abundant natural resources.
• These countries should export raw material and import finished goods from countries which are advanced in skilled man power
• Under specialisation specific work is given to the workers within a production process.
• Specialisation can increase the productivity of a firm or economy.
• Eg. Incase of car manufacturing company, some workers will design the cars, some workers will work on different section of assembly line, some workers will work on j testing cars, some workers will work on marketing of cars.

6. Observe the following table and answer the questions geven below it.

Direction of Indias imports

Questions:

Question 1.
Which organisation has the least share in the direction of India’s imports in 2015-16?
Answer:
Eastern Europe has the least share in the direction of India’s import.

Question 2.
Which orgamsation has maximum share in India’s direction of imports in 1990-91?
Answer:
OECD [Organisation for Economic Co-operation and Development has maximum share in India’s direction of imports in 1990-91.

Question 3.
Expand the abbreviations of OECD and OPEC
Answer:
OECD : Organisation for Economic Co-operation and Development.
OPEC : Organisation of Petroleum Exporting Countries.

Question 4.
State your opinion regarding the direction of India’s imports from 1990-91 to 2015-16.
Answer:
In the year 1990-91, OECD (54.0%) and in the year 2015-16, Developing nations (43.2%) has the highest share in the direction of India’s imports. India should encourage industries those are producing import substitute goods,which will help to reduce import from developing nations and help to save foreign exchange.

Question 5.
How much is the percentage of increase in the imports of developing nations in 2015-16 as
compared to 1990-9 1?
Answer:
There is 24.6% increase in the imports of developing nations.

7. Answer in detail :

Question 1.
Explain the meaning and role of foreign trade.
Answer:
Trade means buying and selling of goods and services. Foreign trade means when goods and services are exchanged between two or more countries.
According to Wasserman and Hultman “International trade consists of transaction between residents of different countries”.
Role of foreign trade :

• Brings reputation and helps earn goodwill : Exporting country can earn reputation and goodwill in the international market. Eg. Japan in electronic goods- Panasonic, Canon, Sony, Hitachi. Germany in Automobile – BMW, Audi, Mercedes- Benz, Volkswagen, Porsche. USA in food- McDonalds, KFC, USA in computers – Dell HP, IBM.
• Division of labour and specialisation: It helps to increase the productivity of a firm or economy. Under specialisation specific work is given to the workers within a production process. Eg. Some workers will design cars, some workers will work on assembly lines, some workers will work on testing cars, some workers will work on marketing of cars.
• To earn foreign exchange: Foreign trade is playing very important role in earning foreign exchange. This foreign exchange can be used to import advanced technology and machinery from developed countries.
• Encourages investment : Foreign trade leads to an increase in total investment in an economy. The rise in investment help to produce more goods and services for export.
• Availability of multiple choices : Due to availability of imported goods, it helps to improve standard of living of the people in the country.
• Stability in price level : Foreign trade helps to control the changes in price level by keeping demand and supply position stable,
• Helpful during natural calamities : Foreign trade enables a country to import food grains and medicines from other countries to help the affected people.
• Optimum allocation and utlization of resources : Due to foreign trade those goods are produced which have demand in international market. There is maximum allocation and utlisation of resources to produce more goods and services for export.
• Promotes world peace : Foreign trade is bringing countries closer which leads to better understanding, co-operation and integration.

Question 2.
Explain the recent trends in India’s exports.
Answer:
Export means selling of goods and services by home country to another country. Excessive export can have a positive impact on the home country.

(i) Engineering Goods : Engineering goods includes transport equipment, automobiles and auto components, machinery and instruments. India’s top export item is engineering goods accounting for 22.5% in India’s total export in 2014-15 and this share has increased upto 25% in the year 2017-18. India is exporting engineering goods to Sri Lanka, UAE and USA.

(ii) Petroleum Products : India’s refining capacity increased significantly since 2001-02 due to which India turned a net exporter of petroleum refinery products. In the year 2013-14 the share of petroleum products in total export was 20.1% and in the year 2016-17 it declined upto 11.7%.

(iii) Chemicals and chemical products:
It includes drugs (Medicines) and pharmaceuticals. This is one sector where India is highly competitive on both quality and pricing factor. India became global hub for pharma production. India is exporting its chemicals and chemical products to USA, China and Germany. The share of this item was 10.4% in 2014-15.

(iv) Gems and Jewellery: Gems and Jewellery plays an important role in earning the foreign exchange for India. In the year 2014¬15 the share of Gems and Jewellery was 13.3% in India’s total export and it declined upto 5.32% in the year 2018-19.

(v) Textiles and readymade garments :
India’s readymade garments have huge demand in the international market. India is exporting textiles to USA, China and Bangladesh. India is exporting readymade garments to USA, UAE and UK. In the year 2014-15 India’s export of textile and garments was 11.3% of total export of India and it has declined upto 6.3% in the year 2016-17.

Intext Questions

Try this : (Text Book Page No. 94)

Name the goods exported to and imported from India to China and Japan in recent years
Answer:

Goods exported by India	Goods imported by India
To China :	From China :
raw materials and industrial inputs like organic chemicals, mineral fuels, cotton, ores, plastic materials, etc.	electronic items, machinery, and plastic items.
To Japan :	From Japan :
fisheries products, wheat, tea, coffee, species and herbs.	mineral   fuels, machinery and food items.

Find out: (Text Book Page No. 95)

Find the recent share of India’s foreign trade in Gross National Income.
Answer:
India’s foreign trade accounts for 48.8% of her Gross National Income.

Find out: (Text Book Page No. 97)

List the countries coming under OPEC and OECD.
Answer:
The countries coming under OPEC (Organisation of Petroleum Exporting Countries) are :
(a) Algeria, (b) Angola, (c) Congo, (d) Equatorial Guinea, (e) Gabon, (f) Iran, (g) Iraq, (h) Kuwait, (i) Libya, (j) Nigeria, (k) Saudi Arabia (1) United Arab Emirates, 0 Venezuela.