7

Final Accounts of Companies

Each and every form of business organization has to assess the achievements of the concern at specified intervals. The business concerns present the profit earned or loss suffered during the particular period and all the relevant and significant factors contributing to such result, i.e., profit or loss. Students are already well acquainted in assessing the profit and loss of sole (trader) proprietorship and (firm) partnership form of business concerns at regular intervals by preparing the final accounts. However, the preparation of final accounts of the companies (Joint stock company— another form of business organization) requires the skill of understanding and applying the salient provisions of the Companies Act, Accounting Standards issued there and there by ICAI, and the Income Tax Act in order to present a true and fair view of the company for the particular period. This chapter aims at explaining all the relevant factors relating to the preparation and presentation of final accounts of companies in a crystal clear manner.

7.1 MEANING OF FINAL ACCOUNTS

The term “final accounts” generally denotes trading and profit & loss account and the balance sheet in case of sole traders and partnership firms. One should observe here that the same principles that have been used in the preparation of final accounts of sole proprietorship or a partnership firm will hold good for the company accounts also. However, there are some similarities and few differences in the preparation of final accounts of partnership firms and joint stock companies.

The following factors are similar to both forms of businesses:

1. The main principle applied is that of matching revenue and expenditure.
2. Expenditure of revenue nature alone should be debited.
3. Expenses and revenue pertaining to that accounting period alone are to be taken into account.
4. All incomes with respect to that accounting period are to be credited to P&L A/c.
5. Any losses suffered by some other reasons are also to be debited to P&L A/c.
6. Depreciation on fixed assets is also to be charged to P&L A/c.
7. Adjustments for prior years are to be shown separately.

The main differences in the preparation of final accounts with respect to company and partnership firms are as follows:

Particulars or Item	Company	Partnership Firm
1. Heading of the Account	Profit & Loss A/c	Trading and Profit & Loss A/c
2. Appearance of Special Items	Some Items such as Debentures, Director’s Fees Appear in Company’s P&L A/c	Such Items Will Not Appear in Accounts of a Partnership Firm
3. Transfer of profit or Loss	Profit or Loss of a Company is Not Transferred to (Share) Capital A/c	Profit or Loss of a Firm is Transferred to the Capital Accounts of the Partners (Current A/cs)
4. Appropriation (Divisible Profits)	There Are Special Features to the Appropriation of Profits of the Company	There Are No Such Special Features in Firms
5. Above the Line and Below the Line Items	Some Items are Shown “Above the Line” and Some Items are Shown “Below the Line” in Company Accounts	There is No Such Procedure in Partnership Firms

To explain in detail, in other than joint stock company forms of business concerns, the final accounts of such entities are split into two sections, viz. trading account and profit & loss account. But in company’s final accounts, there is only account but comprises all the following in a single Profit & Loss A/c: Trading A/c; Profit & Loss A/c and Profit & Loss Appropriation A/c. An imaginary line is presumed to exist between Profit & Loss A/c and Profit & Loss appropriation A/c. Items that are to be shown in Trading and Profit & Loss A/c are called “above the line” items and the items that are to be shown in Profit & Loss appropriation A/c are called “below the line” items in company Accounts.

Now, we have to study the statutory provisions relating to P&L A/c & balance sheet of the companies. The Company’s Act stipulates certain provisions regarding this. Some of these are as follows:

1. Section 209 deals with “books of account” to be kept by the company.

2. Section 210

1. Stipulates that at every annual general meeting of a company held in pursuance of Section 166, the Board of Directors of the company shall lay before the company
   1. A balance sheet as at the end of the period specified in Sub-section (3)
   2. A profit and loss account for that period
2. In the case of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its general meeting instead of a profit and loss account.
3. The profit and loss account shall relate
   1. In the case of the first annual general meeting of the company, to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months
   2. In the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in case where an extension of time has been granted for holding the meeting under the second proviso to Sub-section (1) of Section 166, by more than six months and the extension so granted.
4. The period to which the account aforesaid relates is referred to in this Act as a “financial year”; and it may be less or more than a calendar year, but it shall not exceed 15 months. Provided that it may extend to 18 months, where special permission has been granted in that behalf by the Registrar.

3. Section 211 deals with forms and contents of balance sheet and profit and loss account.

4. Section 211(1)

1. Every balance sheet of company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule V1… and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading “Notes” at the end of that part.

2. Every profit and loss account of a company shall give true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule V1.

3A. Every profit and loss account and balance sheet of the company shall comply with the accounting standards.

3B. Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose the following in its profit and loss account and balance sheet:

1. The deviation from the accounting standards
2. The reasons for such deviation
3. The financial effect, if any, arising to such deviation

5. Section 212 stipulates that the balance sheet of holding company to include certain particulars as to its subsidiaries.

6. Section 213 provides the financial year of holding company and subsidiary.

7. Section 215 speaks about authentication of balance sheet and profit and loss account. In case of a company other than a banking company, every balance sheet and every profit and loss account shall be signed on behalf of the Board of Directors by its manager or secretary, if any, and by not less than two directors of the company, one of whom shall be managing director where there is one. The balance sheet and profit and loss account shall be approved by the Board of Directors before they are signed.

According to Section 216, the profit and loss account shall be annexed to the balance sheet and the auditor’s report shall be attached.

According to Section 220, after the balance sheet and the profit and loss account have been laid before a company at an annual general meeting as aforesaid, three copies of the balance sheet and the profit and loss account signed by the managing director, manager or secretary or director of the company together with three copies of all documents which are required by this Act to be annexed or attached to the balance sheet or profit and loss account. These should be filed within 30 days from the date on which the balance sheet and the profit and loss account were so said.

Schedule V1—Part I (Section 211) exposes the format of balance sheet: Horizontal form and vertical form, which are shown in page 4 & 15 of this chapter.

Schedule V1—Part II: The provisions of this part relate to “Requirements As To Profit and Loss Account”.

These two parts are reproduced from the bare Acts as it is:

 

 

²[The balance sheet of a company shall be either in horizontal form or in vertical form:

 

BALANCE SHEET OF …………………………

 

AS AT …………………………

 

NOTES

 

(a) The information required to be given under any of the items or sub-items in this Form, if it cannot be conveniently included in the balance sheet itself, shall be furnished in a separate Schedule or Schedules to be annexed to and to form part of the balance sheet. This is recommended when items are numerous.

(b) Naye Paise can also be given in addition to Rupees, if desired.

(c) In the case of subsidiary companies, the number of shares held by the holding company as well as by the ultimate holding company and its subsidiaries must be separately stated.

²⁷[(cc) The item “Share Premium Account” shall include details of its utilization in the manner provided in section 78 in the year of utilization.]

(d) Short-term loans will include those which are due for not more than one year as at the date of the balance sheet.

(e) Depreciation written off or provided shall be allocated under the different asset heads and deducted in arriving at the value of fixed assets.

(f) Dividends declared by subsidiary companies after the date of the balance sheet [should] not be included unless they are in respect of period which closed on/ or before the date of the balance sheet.

(g) Any reference to benefits expected from the contacts to the extent not executed shall not be made in the balance sheet but shall be made in the Board’s report.

²⁸[(h) The debit balance in the Profit and Loss Account shall be shown as a deduction from the uncommitted reserves, if any.]

(i) As regards Loans and Advances, [amounts due by the Managing Agents or Secretaries and Treasure, either severely or jointly with any persons to be separately stated;] [the amounts due from other companies under the same management within the meaning of sub-section (1B) of section 370 should also given with the names of the companies] the maximum amount due from everyone of these at any time during the year must be shown.

(j) Particulars of any redeemed debentures which the company has power to issue should be given.

(k) Where any of the company’s debentures are held by a nominee or a trustee for the company, the nominal amount of the debentures and the amount at which they are stated in the books of the company shall be stated.

²⁹ [(l) A statement of investments (whether shown under “Investment” or under “Current Assets” as stock-in-trade) separately classifying trade investments and other investments should be annexed to the balance sheet, showing the names of the body’s corporate (indicating separately the names of the bodies corporate under the same management) in whose shares or debentures, investments have been made (including all investments, whether existing or not, made subsequent to the date as at which the previous balance sheet was made out) and the nature and extent of the investment so made in each such body corporate; provided that in case of an investment company, that is to say, a company whose principal business is the acquisition of shares, stock, debentures or other securities, it shall be sufficient if the statement shows only the investments existing on the date as at which the balance sheet has been made out. In regard to the investments in the capital of partnership firms the names of the firms (with the names of all their partners, total capital and the shares of each partner), shall be given in the statement.]

(m) If, in the opinion of the Board, any of the current assets, loans and advances have not a value on realization in the ordinary case of business at least equal to the amount at which they are stated, the fact that the Board is of that opinion shall be stated.

(n) Except in the case of the first balance sheet laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items shown in the balance sheet shall be also given in the balance sheet. The requirement in this behalf shall in the case of companies preparing quarterly or half yearly accounts, etc., relate to the balance sheet for the corresponding date in the previous year.

(o) The amounts to be shown under the Sundry Debtors shall include the amounts due in respect of goods sold or services rendered or in respect of other contractual obligations but shall not include the amounts which are in the nature of loans or advances.

³⁰ [(p) Current accounts with directors [managing agents, secretaries and treasurers] and manager, whether they are in credit, or debit, shall be shown separately.]

³¹ [(q) A small scale industrial undertaking has the same meaning as assigned to it under clause (j) of section 3 of the Industries (Development and Regulation) Act, 1951.]

Note: ^1$ References to managing agents, secretaries & treasurers should be omitted.

 

 

Notes:

1. Details under each of the above items shall be given in separate Schedules. The Schedules shall incorporate all the information required to be given under A-Horizontal Form read with notes containing general instructions for preparation of balance sheet.

2. The Schedules, referred to above, accounting policies and explanatory notes may be attached shall form an integral part of the balance sheet.

^32a[3. The figures in the balance sheet may be rounded off as under:-

Where the turnover of the company in any financial year is:	Round off permissible
(i) less than one hundred crore rupees	to the nearest hundreds or thousands, or decimals thereof.
(ii) one hundred crore rupees or more but less than five hundred crore rupees	to the nearest hundreds, thousands, lakhs or millions, or decimals thereof.
(iii) five hundred crore rupees or more	to the nearest hundreds, thousands, lakhs or millions, or crores, or decimals thereof.

3. A footnote to the balance sheet may be added to show separately contingent liabilities.]

3. The figures in the balance sheet may be rounded off to the nearest ‘000’ or ‘00’ as may be convenient or may be expressed in terms of decimals of thousands.”

 

1. The provisions of this Part shall apply to the income and expenditure account referred to in sub-section (2) of section 210 of the Act, in like manner as they apply to a profit and loss account, but subject to the modification of references as specified in that sub-section.

2. The profit and loss account

1. shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account; and
2. shall disclose every material failure, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.

3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and in particular, shall disclose the following information in respect of the period covered by the account:

³³[(i) (a) The turnover, that is, the aggregate amount for which sales are affected by the company, giving the amount of sales in respect of each class of goods dealt with by the company, and indicating the quantities of such sales for each class separately.]

  ³⁴[(b) Commission paid to sole selling agents within the meaning of section 294 of the Act.

  (c) Commission paid to other selling agents.

  (d) Brokerage and discount on sales, other than the usual trade discount.]

^34a[(ii) (a) In case of manufacturing companies

      ³⁵(1) The value of the raw materials consumed, giving item-wise break-up and indicating the quantities thereof. In this break-up, as far as possible, all important basic raw materials shall be shown as separate items. The intermediates or components procured from other manufacturers may, if their list is too large, to be included in the break-up, be grouped under suitable headings without mentioning the quantities, provided all those items which in value individually account for 10% or more of the total value of the raw material consumed shall be shown as separate and distinct items with quantities thereof in the break-up.

      (2) The opening and closing stocks of goods produced, giving break-up in respect of each class of goods and indicating the quantities thereof.

  (b) In the case of trading companies, the purchases made and the opening and closing stocks, giving break-up in respect of each class of goods traded in by the company and indicating the quantities thereof.

  (c) In the case of companies rendering or supplying services, the gross income derived from services rendered or supplied.

  (d) In the case of a company, which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if the till amounts are shown ill respect of the opening and closing stocks, purchases, sales and consumption of raw material with value and quantitative break-up and the gross income from services rendered is shown.

  (e) In the case of other companies, the gross income derived under different heads.

       Note 1: The quantities of raw materials, purchases, stocks and the turnover, shall be expressed in quantitative denominations in which these are normally purchased or sold in the market.

       Note 2: For the purpose of items (ii) (a), (ii) (b) and (ii) (d), the items for which the company is holding separate industrial licences, shall be treated as separate classes of goods, but where company has more than one industrial licence for production of the same item at different places or for expansion of the licensed capacity, the item covered by all such licences shall be treated as one class. In the case of trading companies, the imported items shall be classified in accordance with the classification adopted by the Chief Controller of Imports and Exports in granting the import licences.

       Note 3: In giving the break-up of purchases, stocks and turnover, items like spare parts and accessories, the list of which is too large to be included in the break-up, may be grouped under suitable headings without quantities, provided all those items, which in value individually account for 10% or more of the total value of the purchases, stocks, or turnover, as the case may be, are shown as separate and distinct items with quantities thereof in the break-up.]

(iii) In the case of all concerns having works-in-progress, the amounts for which ³⁶[such works have been completed] at the commencement and at the end of the accounting period.

(iv) The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision.

If no provision is made for depreciation, the fact that no provision has been made shall be stated ³⁷[and the quantum of arrears of depreciation computed in accordance with section 205(2) of the Act shall be disclosed by way of a note].

(v) The amount of interest on the company’s debentures and other fixed loans, that is to say, loans for fixed periods, stating separately the amount of interest, if any, ³⁷ [paid or payable] to the managing director ^2$[the managing agent, the secretaries and treasurers] and the manager, if any.

(vi) The amount of charge for Indian income-tax and other Indian taxation on profits, including, where practicable, with Indian income-tax any taxation imposed elsewhere to the extent of the relief, if any, from Indian income-tax and distinguishing, where practicable, between income-tax and other taxation.

(vii) The ³⁸[amounts reserved for-]

1. repayment of share capital; and
2. repayment of loans.

(viii)

1. The aggregate, if material, of any amounts set aside or proposed to be set aside, to reserves, but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date as at which the balance sheet is made up.
2. The aggregate, if material, of any amounts withdrawn from such reserves.

(ix)

1. The aggregate, if material, of the amounts set aside to provisions made for meeting specific liabilities, contingencies or commitments.
2. The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required.

(x) Expenditure incurred on each of the following items, separately for each item:-

       (a) Consumption of stores and spare parts.

       (b) Power and fuel.

       (c) Rent.

       (d) Repairs to buildings.

       (e) Repairs to machinery.

  (f) (1) Salaries, wages and bonus.

      (2) Contribution to provident and other funds.

      (3) Workmen and staff welfare expenses ³⁹[to the extent not adjusted from any previous provision or reserve.

    Note ⁴⁰[1: Information in respect of this item should also be given in the balance sheet under the relevant provision or reserve account.]

    Note 2: ⁴¹[***]

   (g) Insurance.

   (h) Rates and taxes, excluding taxes on income.

   (i) Miscellaneous expenses:

    ⁴²[Provided that any item under which the expenses exceed 1 per cent of the total revenue of the company or 5,000, whichever is higher, shall be shown as a separate and distinct item against an appropriate account head in the Profit and Loss Account and shall not be combined with any other item to be shown under ‘Miscellaneous expenses’.]

(xi) (a) The amount of income from investments, distinguishing between trade investments and other investments.

     (b) Other income by way of interest, specifying the nature of the income.

     (c) The amount of income tax deducted if the gross income is stated under sub-paragraphs (a) and (b) above.

(xii) (a) Profits or losses on investments ⁴²[showing distinctly the extent of the profits or losses earned or incurred on account of membership of a partnership firm] ⁴³[to the extent not adjusted from any previous provision or reserve.

Note: Information in respect of this item should also be given in the balance sheet under the relevant provision or reserve account.]

      (b) Profits or losses in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount

      (c) Miscellaneous income.

(xiii) (a) Dividends from subsidiary companies.

    (b) Provisions for losses of subsidiary companies.

(xiv) The aggregate amount of the dividends paid, and proposed, and stating whether such amounts are subject to deduction of income-tax or not.

(xiv) Amount, if material, by which any items shown in the profit and loss account are affected by any change in the basis of accounting.

⁴⁴[4.⁴⁵[The profit and loss account shall also contain or give by way of a note detailed information, showing separately the following payments provided or made during the financial year to the directors (including managing directors) [the managing agents, secretaries and treasurers] or manager, if any, by the company, the subsidiaries of the company and any other person:-]

(h) ⁴⁵ [managerial remuneration under section 198 of the Act paid or payable] during the financial year to the directors (including managing directors), ^3$[the managing agent, secretaries and treasurers] or manager, if any;

       ^$[(ii) expenses reimbursed to the managing agent under section 354;

       (iii) commission or other remuneration payable separately to a managing agent or his associate under sections 356, 357 and 358;

^4$[⁴⁵[(iv) commission received or receivable under section 359 of the Act by the managing agent or his associate as selling or buying agent of other concerns in respect of contracts entered into by such concerns with the company;]]

(v) the money value of the contracts for the sale or purchase of goods and materials or supply of services, entered into by the company with the managing agent or his associate under section 360 during the financial year;]

⁴⁶[(vi) other allowances and commission including guarantee commission (details to be given);]

(vii) any other perquisites or benefits in cash or in kind (stating approximate money value where practicable);

(viii) pensions, etc.,-

1. pensions,
2. gratuities,
3. payments from provident funds, in excess of own subscriptions and interest thereon,
4. compensation for loss of office,
5. consideration ill connection with retirement from office.]

4A. The profit and loss account shall contain or give by way of a note a statement showing the computation of net profits in accordance with section 349 of the Act with relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors (including managing director), ^5$[the managing agents, secretaries and treasurers] or manager (if any).

4B. The profit and loss account shall further contain or give by way of a note detailed information in regard to amounts paid to the auditor, ⁴⁷[whether as fees, expenses or otherwise for services rendered-]

(a) as auditor; ⁴⁸[***]

⁴⁹[(b) as adviser, or in any other capacity, in respect of –

       (i) taxation matters;

       (ii) company law matters;

       (iii) management services; and

   (c) in any other manner.]]

⁵⁰[4C. In the case of manufacturing companies, the profit and loss account shall also contain, by way of a note in respect of each class of goods manufactured, detailed quantitative information in regard to the following, namely:-

1. the licensed capacity (where licence is in force);
2. the installed capacity; and
3. the actual production.

Note 1: The licensed capacity and installed capacity of the company as on the last date of the year to which the profit and loss account relates, shall be mentioned against items (a) and (b) above, respectively.

Note 2: Against item (c), the actual production in respect of the finished products meant for sale shall be mentioned. In cases where semi-processed products are also sold by the company, separate details thereof shall be given.

Note 3: For the purposes of this paragraph, the items for which the company is holding separate industrial licences shall be treated as separate classes of goods but where company has more than one industrial licence for production of the same item at different places or for expansion of the licensed capacity, the item covered by all such licences shall be treated as one class.

4D. The profit and loss account shall also contain by way of a note the following information, namely:

1. value of imports calculated on C.I.F. basis by the company during the, financial year in respect of:-
   1. raw materials;
   2. components and spare parts;
   3. capital goods;
2. expenditure in foreign currency during the financial year on account of royalty, know-how, professional, consultation fees, interest, and other matters;
3. value of all imported raw materials, spare parts and components consumed during the financial year and the value of all indigenous raw materials, spare parts and components similarly consumed and the percentage of each to the total consumption;
4. the amount remitted during the year in foreign currencies on account of dividends, with a specific mention of the number of non-resident shareholders, the number of shares held by them on which the dividends were due and the year to which the dividends related;
5. earnings in foreign exchange classified under the following heads, namely:-
   1. export of goods calculated on F.O.B. basis;
   2. royalty, know-how, professional and consultation fees;
   3. interest and dividend;
   4. other income, indicating the nature thereof.]

5. The Central Government may direct that a company shall not be obliged to show the amount set aside to provisions other than those relating to depreciation, renewal or diminution in value or assets, if the Central Government is satisfied that the information should not be disclosed in the public interest and would prejudice the company, but subject to the condition that in any heading stating an amount arrived at after taking into account the amount set aside as such, the provision shall be so framed or marked as to indicate that fact.

6. (1) Except in the case or the first profit and loss account laid before the company after the commencement of the Act, the corresponding amounts fir the immediately preceding financial year for all items shown in the profit and loss account shall also be given in the profit and loss account.

(2) The requirement in sub-clause (1) shall, in the case of companies preparing quarterly or half-yearly accounts, relate to the profit and loss account for the period which entered on the corresponding date or the previous year.

Note: Reference to managing agents, secretaries & treasurers should be omitted.

After having discussed the Statutory Provisions, now we have to understand the Accounting Standards, AS-4 (Revised) and AS-5 (Revised) relates to “Contingencies and Events Occurring After the Balance Sheet Date” and “Net Profit or Loss For the Period, Prior Period Items and Changes in Accounting Policies”, respectively. The original text, issued by the Council of the Institute of Charted Accountants of India, is reproduced as follows:

AS-5 (REVISED)—NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES

The following is the text of the revised Accounting Standard (AS)-5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, issued by the Council of the Institute of Chartered Accountants of India.

This revised standard comes into effect in respect of accounting periods commencing on or after 1.4.1996, and is mandatory in nature. It is clarified that in respect of accounting periods commencing on a date prior to 1.4.1996. Accounting Standard (AS) 5 as originally issued in November 1982 (and subsequently made mandatory) will apply.

OBJECTIVE

The objective of this Statement is to prescribe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises prepare and present such a statement on a uniform basis. This enhances the comparability of the financial statements of an enterprise over time and with the financial statements of other enterprises. Accordingly, this Statement requires the classification and disclosure of extraordinary and prior period items, and the disclosure of certain items, within profit or loss from ordinary activities. It also specifies the accounting treatment for changes in accounting estimates and the disclosures to be made in the financial statements regarding changes in accounting policies.

SCOPE

1. This Statement should be applied by an enterprise in presenting profit or loss from ordinary activities, extraordinary items and prior period items in the statement of profit and loss, in accounting for changes in accounting estimates, and in disclosure of changes in accounting policies.
2. This Statement deals with, among other matters, the disclosure of certain items of net profit or loss for the period. These disclosures are made in addition to any other disclosures required by other Accounting Standards.
3. This Statement does not deal with the tax implications of extraordinary items, prior period items, changes in accounting estimates, and changes in accounting policies for which appropriate adjustments will have to be made depending on the circumstances.

DEFINITIONS

4. The following terms are used in this Statement with the meanings specified:

Ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities.

Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.

Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements.

NET PROFIT OR LOSS FOR THE PERIOD

5. All items of income and expenses which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise.

6. Normally, all items of income and expense which are recognised in a period are included in the determination of the net profit or loss for the period. This includes extraordinary items and the effects of changes in accounting estimates.

7. The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss:

1. Profit or loss from ordinary activities and
2. Extraordinary items.

EXTRAORDINARY ITEMS

8. Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.

9. Virtually all items of income and expense included in the determination of net profit or loss for the period arise in the course of the ordinary activities of the enterprise. Therefore, only on rare occasions does an event or transaction give rise to an extraordinary item.

10. Whether an event or transaction is clearly distinct from the ordinary activities of the enterprise is determined by the nature of the event or transaction in relation to the business ordinarily carried on by the enterprise rather than by the frequency with which such events are expected to occur. Therefore, an event or transaction may be extraordinary for one enterprise but not for another enterprise because of the differences between their respective ordinary activities. For example, losses sustained as a result of an earthquake may qualify as an extraordinary item for many enterprises. However, claims from policyholders arising from an earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against such risks.

11. Examples of events or transactions that generally give rise to extraordinary items for most enterprises are:—

Attachment of property of the enterprise; or an earthquake.

PROFIT OR LOSS FROM ORDINARY ACTIVITIES

12. When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.

13. Although the items of income and expense described in paragraph 12 are not extraordinary items, the nature and amount of such items may be relevant to users of financial statements in understanding the financial position and performance of an enterprise and in making projections about financial position and performance. Disclosure of such information is sometimes made in the notes to the financial statements.

14. Circumstances which may give rise to the separate disclosure of items of income and expense in accordance with paragraph 12 include:

1. the write-down of inventories to net realisable value as well as the reversal of such write-downs;
2. a restructuring of the activities of an enterprise and the reversal of any provisions for the costs of restructuring;
3. disposals of items of fixed assets;
4. disposals of long-term investments;
5. legislative changes having retrospective application;
6. litigation settlements; and
7. other reversals of provisions.

PRIOR PERIOD ITEMS

15. The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.

16. The term ‘prior period items’, as defined in this statement, refers only to income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. The term does not include other adjustments necessitated by circumstances, which though related to prior periods, are determined in the current period e.g., arrears payable to workers as a result of revision of wages with retrospective effect during the current period.

17. Errors in the preparation of the financial statements of one or more prior periods may be discovered in the current period. Errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight.

18. Prior period items are generally infrequent in nature and can be distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision as additional information becomes known. For example, income or expense recognised on the outcome of a contingency which previously could not be estimated reliably does not constitute a prior period item.

19. Prior period items are normally included in the determination of net profit or loss for the current period. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss.

CHANGES IN ACCOUNTING ESTIMATES

20. As a result of the uncertainties inherent in business activities, many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgements based on the latest information available. Estimates may be required, for example, of bad debts, inventory obsolescence, or the useful lives of depreciable assets. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.

21. An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based, or as a result of new information, more experience or subsequent developments. The revision of the estimate, by its nature, does not bring the adjustment within the definitions of an extraordinary item or a prior period item.

22. Sometimes, it is difficult to distinguish between a change in an accounting policy and a change in an accounting estimate. In such cases, the change is treated as a change in an accounting estimate, with appropriate disclosure.

23. The effect of a change in an accounting estimate should be included in the determination of net profit or loss in:

1. the period of the change, if the change affects the period only; or
2. the period of the change and future periods, if the change affects both.

24. A change in an accounting estimate may affect the current period only or both the current period and future periods. For example, a change in the estimate of the amount of bad debts is recognised immediately and, therefore, affects only the current period. However, a change in estimated useful life of a depreciable asset affects the depreciation in the current period and in each period during the remaining useful life of the asset. In both cases, the effect of the change relating to the current period is recognised as income or expense in the current period. The effect, if any, on future periods, is recognised in future periods.

25. The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate.

26. To-ensure the comparability of financial statements of different periods, the effect of a change in an accounting estimate which was previously included in the profit or loss from ordinary activities is included in that component of net profit or loss. The effect of a change in an accounting estimate that was previously included as an extraordinary item is reported as an extraordinary item.

27. The nature and amount of a change in an accounting estimate which has a material effect in the current period, or which is expected to have a material effect in subsequent periods, should be disclosed. If it is impracticable to quantify the amount, this fact should be disclosed.

CHANGES IN ACCOUNTING POLICIES

28. Users need to be able to compare the financial statements of an enterprise over a period of time in order to identify trends in its financial position, performance and cash flows. Therefore, the same accounting policies are normally adopted for similar events or transactions in each period.

29. A change in an accounting policy should be made only if the adoption of a different accounting policy is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.

30. A more appropriate presentation of events or transactions in the financial statements occurs when the new accounting policy results in more relevant or reliable information about the financial position, performance or cash flows of the enterprise.

31. The following are not changes in accounting policies:

1. the adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions e.g., introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement; and
2. the adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial.

32. Any change in an accounting policy which has a material effect should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such a change is made, to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

33. ^6*A change in accounting policy consequent upon the adoption of an Accounting Standard should be accounted for in accordance with the specific transitional provisions, if any, contained in that Accounting Standard. However, disclosures required by paragraph 32 of this Standard should be made unless the transitional provisions of any other Accounting Standard require alternative disclosures in this regard.

5. Contingencies and Events Occurring after the Balance Sheet Date.

In its Accounting Standard 4 (Revised), the Institute of Chartered Accountants of India deals with these two classes of events. Results of contingencies, as the term implies, lie in the future though the seed is already sown, i.e., the ultimate outcome, gain or loss, will be known or determined only on the occurrence, or nonoccurrence, of one or more uncertain future events. Contingencies are disclosed by way of notes at the foot of the balance sheet. But if there is a probability of a loss arising, it would be better to make a provision in this regard; judgment of management is naturally to be relied upon.

“Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors…”. Such events are of two types:

1. those that provide further evidence of conditions that existed at the balance sheet date, and
2. those that are indicative of conditions that arose subsequent to the balance sheet date.

The former type of events are considered for preparing estimates etc. relating to the year under report; for example, insolvency of a debtor after the balance sheet date is considered for estimating the doubtful debts so that a proper provision is made. Proper provision for taxation cannot be made till the profit before tax is known. Events of the second type generally are not considered, though the Directors in their report to the shareholders should touch upon the important events. “Proposed dividend” is an event after the balance sheet date but it is required to be statutorily disclosed. Also, if the event concerned is so serious as to affect the existence of substratum of the enterprise (e.g., destruction of a major factory by fire), disclosure is usually made.

Now study the revised Accounting Standard-4.]

AS-4 (REVISED)^7*—CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

The following is the text of the revised Accounting Standard (AS) 4, “Contingencies and Events Occurring After the Balance Sheet Date” issued by the Council of the Institute of Chartered Accountant of India.

This revised standard comes into effect in respect of accounting periods commencing on or after 1 April 1995 and is mandatory in nature. It is clarified that in respect of accounting periods commencing on a date prior to 1 April 1995, Accounting Standard 4 as originally issued in November 1982 (and subsequently made mandatory) applies.

Introduction

1. This Statement deals with the treatment in financial statements of:

1. contingencies, and
2. events occurring after the balance sheet date.

2. The following subjects, which may result in contingencies, are excluded from the scope of this Statement in view of special considerations applicable to them;

1. liability of life assurance and general insurance enterprises arising from policies issued;
2. obligations under retirement benefit plans; and
3. commitments arising from long-term lease contracts.*

Definitions

3. The following terms are used in this Statement with the meanings specified:

3.1 A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events.

3.2 Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and by the corresponding approving authority in the case of any other entity.

Two types of events can be identified:

1. those which provide further evidence of conditions that existed at the balance sheet date; and
2. those which are indicative of conditions that arose subsequent to the balance sheet date.

Explanation

4. Contingencies.

4.1 The term “contingencies” used in this Statement is restricted to conditions or situations at the balance sheet date, the financial effect of which is to be determined by future events which may or may not occur.

4.2 Estimates are required for determining the amounts to be stated in the financial statements for many ongoing and recurring activities of an enterprise. One must, however, distinguish between an event which is certain and one which is uncertain. The fact that an estimate is involved does not, of itself, create the type of uncertainty which characterizes a contingency. For example, the fact that estimates of useful life are used to determine depreciation, does not make depreciation a contingency; the eventual expiry of the useful life of the asset is not uncertain. Also, amounts owed for services received are not contingencies as defined in paragraph 3.1, even though the amounts may have been estimated, as there is nothing uncertain about the fact that these obligations have been incurred.

4.3 The uncertainty relating to future events can be expressed by a range of outcomes. This range may be presented as quantified probabilities, but in most circumstances, this suggests a level of precision that is not supported by the available information. The possible outcomes can, therefore, usually be generally described except where reasonable quantification is practicable.

4.4 The estimate of the outcome and of the financial effect of contingencies are determined by the judgement of the management of the enterprise. This judgement is based on consideration of information available up to the date on which the financial statements are approved and will include a review of events occurring after the balance sheet date, supplemented by experience of similar transactions and, in some cases, reports from independent experts.

5. Accounting Treatment of Contingent losses

5.1 The accounting treatment of a contingent loss is determined by the expected outcome of the contingency. If it is likely that a contingency will result in a loss to the enterprise, then it is prudent to provide for that loss in the financial statements.

5.2 The estimation of the amount of a contingent loss to be provided for in the financial statements may be based on information referred to in paragraph 4.4.

5.3 If there is conflicting or insufficient evidence for estimating the amount of a contingent LOSS, then disclosure is made of the existence and nature of the contingency.

5.4 A potential loss to an enterprise may be reduced or avoided because a contingent liability is matched by a related counter-claim or claim against a third party. In such cases, the amount of the provision is determined after taking into account the probable recovery under the claim if no significant uncertainty as to its measurability or collectability exists. Suitable disclosure regarding: Mature and gross amount of the contingent liability is also made.

5.5 The existence and amount of guarantees, obligations arising from discounted bills of exchange and similar obligations undertaken by an enterprise are generally disclosed in financial statements by way of note, even though the possibility that a loss to the enterprise will occur, is remote

5.6 Provisions for contingencies are not made in respect of general or unspecified business risks, Since they do not relate to conditions or situations existing at the balance sheet date.

Accounting Treatment of Contingent Gains

6. Contingent gains are not recognized in financial statements since their recognition may result in the recognition of revenue which may never be realized. However, when the realization of again virtually certain, then such gain is not a contingency and accounting for the gain is appropriate.

7. Determination of the amounts at which Contingencies are included in Financial Statements

7.1 The amount at which a contingency is stated in the financial statement is based on the information which is available at the date on which the financial statements are approved. Events occurring after the balance sheet date that indicate that an asset may have been impaired, or that a liability may have existed, at the balance sheet date are, therefore, taken into account in identifying contingencies and in determining the amounts at which such contingencies are included in financial statements.

7.2 In some cases, each contingency can be separately identified, and the special circumstances of each situation considered in the determination of the amount of contingency. A substantial legal claim against the enterprise may represent such a contingency. Among the factors taken into account by management in evaluating such a contingency are the progress of the claim at the date on which the financial statements are approved, the opinions, wherever necessary, of legal experts or other advisers, the experience of the enterprise in similar cases and the experience of other enterprises in similar situations.

7.3 If the uncertainties which created a contingency in respect of an individual transaction are common to a large number of similar transactions, then the amount of the contingency need not be individually determined, but may be based on the group of similar transactions. An example of such contingencies may be the estimated uncollectable portion of accounts receivable. Another example of such contingencies may be the warranties for products sold. These costs are usually incurred frequently and experience provides a means by which the amount of the liability or loss can be estimated with reasonable precision although the particular transactions that may result in a liability or a loss are not identified. Provision for these costs results in their recognition in the same accounting period in which the related transactions took place.

8. Events Occurring after the Balance Sheet Date

8.1 Events which occur between the balance sheet date and the date on which the financial statements are approved, may indicate the need for adjustments to assets and liabilities as at the balance sheet date or may require disclosure.

8.2 Adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. For example, an adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of a customer which occurs after the balance sheet date.

8.3 Adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. An example is the decline in market value of investments between the balance sheet date and the date on which the financial statements are approved. Ordinary fluctuations in market values do not normally relate to the condition of the investments at the balance sheet date, but reflect circumstances which have occurred in the following period.

8.4 Events occurring after the balance sheet date which do not affect the figures stated in the financial statements would not normally require disclosure in the financial statements although they may be of such significance that they may require a disclosure in the report of the approving authority to enable users of financial statements to make proper evaluations and decisions.

8.5 There are events which, although they take place after the balance sheet date, are sometimes reflected in the financial statements because of statutory requirements or because of their special nature. Such items include the amount of dividend proposed or declared by the enterprise after the balance sheet date in respect of the period covered by the financial statements.

8.6 Events occurring after the balance sheet date may indicate that the enterprise ceases to be a going concern. A deterioration in operating results and financial position, or unusual changes affecting the existence or substratum of the enterprise after the balance sheet date (e.g., destruction of a major production plant by a fire after the balance sheet date) may indicate a need to consider whether it is proper to use the fundamental accounting assumption of going concern in the preparation of the financial statements.

9. Disclosure

9.1 The disclosure requirements herein referred to apply only in respect of those contingencies or events which affect the financial position to a material extent.

9.2 If a contingent loss is not provided for, its nature and an estimate of its financial effect are generally disclosed by way of note unless the possibility of a loss is remote (other than the circumstances mentioned in paragraph 5.5). If a reliable estimate of the financial effect cannot be made, this fact is disclosed.

9.3 When the events occurring after the balance sheet date are disclosed in the report of the approving authority, the information given comprises the nature of the events and an estimate of their financial effects or a statement that such an estimate cannot be made.

Accounting Standard

Contingencies

10. The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if:

1. it is probable that future events will confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and
2. a reasonable estimate of the amount of the resulting loss can be made.

11. The existence of a contingent loss should be disclosed in the financial statements if either of the conditions in paragraph 10 is not met, unless the possibility of a loss is remote.

12. Contingent gains should not be recognized in the financial statements.

Events Occurring after the Balance Sheet Date

13. Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.

14. Dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted.

15. Disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise.

Disclosure

16. If disclosure of contingencies is required by paragraph 11 of this Statement, the following information should be provided:

1. the nature of the contingency;
2. the uncertainties which may affect the future outcome.
3. an estimate of the financial effect, or a statement that such an estimate cannot be made.

17. If disclosure of events occurring after the balance sheet date in the report of the approving authority is required by paragraph 15 of this Statement, the following information should be provided:

1. the nature of the event;
2. an estimate of the financial effect, or a statement that such an estimate cannot be made.

7.2 PREPARATION OF FINAL ACCOUNTS

7.2.1 Stage I—Preparation of Profit and Loss Account

To comply with the statutory provisions of the Companies Act, every company has to prepare the profit and loss of the company at the end of financial year periodically. In order to prepare and present a fair and true view of the profit and Loss of the company, one has to understand the following principles and treatment of various items

7.2.2 Principles

7.2.2.1 Materiality

The concept of materiality is very important for the term preparation of final accounts of a company. But the term “materiality” is a relative term. That means what is to be considered as material for one company may not be considered as material for another company. For instance, a loss of 2,000 in the transit of goods if the value of goods is in the order of millions of rupees, then 2,000 is a negligible amount for that company. But the same will not be the situation if the value of goods runs only into thousands. To overcome this, the following guidelines may help in the preparation of the final accounts:

1. Figures requiring adjustments, relating to previous years, should be shown as an item separately “below the line”. That means they should be shown preferably in the profit and loss appropriation account
2. Items have to be judged on the quantum of the net profit and the size of the sub-group to which they belong

7.2.2.2 Extraordinary Items

The Institute of Chartered Accountants of India defines extraordinary items as, “income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are no expected to recur frequently or regularly.” Examples: Profit or loss on speculation, which is not a regular occurrence; Profit or loss on sale of raw materials (that should not occur frequently); Loss due to natural calamities; upward revision of wages with retrospective effect and the like.

Treatment: It should be separately disclosed preferably “below the line”, i.e., profit and loss appropriation account.

7.2.2.3 Prior Period Items

The Institute of Chartered Accountant of India defines prior period items as “income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements one or more periods”.

Treatment: It will be suffice if these items are shown separately in the profit and loss account. However, such items are to be shown “below the line”, preferably. Prior period items should not be confused with the revision of any estimates because revision of estimates is not to be treated as prior period items.

Illustration 7.1

Model: Treatment of (extraordinary) items in the final accounts of the company

The draft accounts of Balaji Ltd. showed a profit for the year ended 31 March 2011 of 10,00,00 after tax but before taking into account the following items. It had retained earnings of 7,50,000 at the beginning of the year.

1. Cost of closing a plant during the year was 1,25,000. Another plant was closed 6 years ago.
2. The directors have decided to write off goodwill appearing 1,00,000 in the beginning of the year.
3. The sale for 1,00,000 of an investment acquired 5 years ago at a cost of 30,000.
4. A debt of 1,90,000 from a customer company (now in liquidation) has remained outstanding since 31 March 2010, when no provision was made; the expected dividend is 20p. in the rupee.
5. The taxation liability for prior year was agreed, and showed that 20,000 had been underprovided; the provision for tax for the year was 5,00,000.
6. It was announced on 15 April 2011, by a foreign Govt., that one of the overseas plants would be nationalized, but compensation has been promised based on five items of the expected annual profit. This has averaged 60,000 for the last 5 years. The net assets attributable to the plant and included in the balance sheet as on 31 March 2000 are 5, 00,000.
7. A professional valuation of buildings owned by the company has shown a surplus over book values of 3,00,000.
8. Research and development expenditure carried forward at the beginning of the year amounted to 4,00,000. The previous policy has not changed and on the new basis only 2,75,000 would have been carried forward.

   You are required to state how the above items will be dealt with in final statements of account.

Solution

1. Cost of Closing a Plant: 1,25,000

   Accounting Treatment: This is an “extraordinary item”.

   Hence, it should be shown separately in P&L A/c.

   Reasons:

   1. This item is “material” in nature.
   2. This is an unusual activity, which did not occur often. The same category of event happened 6 year ago.
   3. Abnormal expense
2. Writing Off “Goodwill”: 1,00,000

   Accounting Treatment: This is an “extraordinary item”.

   Hence, it should be shown separately in P&L A/c.

   Reasons:

   1. This item is “material” in nature, i.e., it has material effect
   2. It is not related to ordinary activities of the business
3. Sale of an Investment: 1,00,000 – Purchase Cost 30,000.

   A profit of 70,000 on this sale occurred.

   Accounting Treatment: Profit of 70,000 on sale is an extraordinary item.

   It should be shown separately in P&L A/c.

   Reasons:

   1. It is “material” is nature
   2. It is not an ordinary event
   3. Abnormal income of & 70,000, which will not occur regularly
4. Bad Debt:

    

   Debt	= 1,90,000
   Less: Divided Yield @ 20p in Rupee	= 38,000
   Bad Debt	= 1,52,000

   Accounting Treatment: Extraordinary item should be shown separately in P&L A/c

   Reasons:

   1. It has material effect to the tune of 1,52,000
   2. It is not an ordinary event
   3. Abnormal
5. Under Provision of Tax in Previous Years: 20,000

   Accounting Treatment: It is not an extraordinary or exceptional item.

    

   	20,000 should be included with the tax.
   	Should not be shown separately.
   Reasons:	It is NOT material.

6. Nationalization of Overseas Plant:

    

   Net Assets:	5,00,000
   Less: Compensation:	3,00,000
   ( 60,000 × 5)
   Loss:	2,00,000

7. Surplus on revaluation of building: 3,00,000

   Accounting Treatment: The entire amount has to be taken to capital reserves.

   Reasons:

   1. It is capital gain
   2. It is not available for payment of dividend
8. R&D expenditure:

    

   Previous Reserve:	4,00,000
   Less: To Be Carried Forward:	2,75,000
   Reduced Amount on Opening Reserve:	1,25,000

   Accounting Treatment: Opening Reserves Reduced by 1,25,000.

   Should be shown “below the line”, as prior year adjustment.

   Reason:

   This previous year adjustment is due to change in accounting policy.

   Because of this adjustment, the current year’s result will not get affected.

7.2.2.4 Transfer of Profit

In case of sole proprietor of partnership firm, the net profit/loss is transferred to the capital account.

But, in case of a company, the balance of profit in profit and loss appropriation A/c is to be transferred and shown in the balance Sheet under the head “Reserves and Surplus”.

7.2.2.5 Preliminary Expenses

Expenses incurred at the time of formation of a company are called preliminary expenses. There are two ways of dealing with these expenses:

1. Profit and loss account is to be debited with a part amount of expenses and written off; the remaining part amount which is not written off is to be shown in balance sheet under the head “Miscellaneous Expenditure”.
2. No part is taken to P&L A/c; the entire amount is to be shown in the balance sheet under the head “Miscellaneous Expenditure”.

7.2.2.6 Tax Adjustments

7.2.2.6.1 Tax Deducted at Source

A company in the course of running a business makes payment on various items such as interest on securities, dividends, salaries to employees and the like. While making such payments, the company usually deducts tax on the amount paid. Such deduction on the amount is to be made “at the rate in force”. The rate is being determined by the Finance Bill passed by the parliament every year.

Accounting treatment: While making payment for interest on debentures, the tax deducted at source (TDS) is to be shown on the liabilities side of the balance sheet till it is paid to the Government by the company. While receiving interest on securities, TDS is shown as an asset in the company’s balance sheet. Later, this is to be adjusted with income tax payable after the assessment is over. It is to be deducted from current year’s provision for tax, shown on the liabilities side of the balance sheet.

7.2.2.6.2 Advance Payment of Tax

1. When tax is paid in advance, the journal entry to be passed is:

    

   Advance Payment of Income Tax A/c	Dr.	…
   To Bank A/c			…

2. Advance payment of income tax is to be shown as an asset in the balance sheet
3. Later, it is adjusted towards income tax payable, after the assessment has been completed

7.2.2.6.3 Income Tax

Income tax payable is to be debited to income tax A/c and TDS and advance payment of tax is to be adjusted in this account.

For instance, if the tax payable on assessed income is 2,00,000 and the company has already paid 1,40,000 in advance, the balance tax amount payable is 60,000. The following is the journal entry that has to be passed:

In case the assessment is not completed, then TDS and advance payment of tax are to be shown on the asset side of the balance sheet under the head “Current Asset Loans and Advance”.

7.2.2.6.4 Provision for Taxation

Provision for taxation is to be made on the basis of estimate of profit. This is to be debited to P&L A/c “above the line” and credited to “Provision for Taxation A/c” shown in the balance sheet under the head “Current Liabilities and Provisions”. Journal entry is:

 

Profit and Loss A/c	Dr.	…
To Provision for Taxation A/c			…

The above discussion relates to provision made in the current accounting year .Such provision, which is known as “existing provision”, would have been made in the previous year also. This generally appears on the credit side of trial balance. In such a case, income tax paid is to be debited to provision for taxation account. In case the existing provision exceeds the income tax paid, that excess is to be shown on the credit side of P&L appropriation account. If the existing provision is less than the income tax paid, that difference is to be debited further to P&L appropriation A/c.

Illustration 7.2

Model: Tax adjustments

On 31 December 2010, the trial balance of ABC Ltd shows provision for tax of 2,50,000 representing the provision for the previous year. The trial balance also shows income tax paid of 2,00,000.

It is estimated than a provision of 3,00,000 is required for the current year’s income. Tax deducted as source while receiving interest on investments amounted to 65,000. The gross amount of interest was shown in P&L A/c.

Write the provision for income tax account incorporating the above details.

Solution

 

Illustration 7.3

Model: Tax adjustments—Journal and final

The following are the extracts from the trial balance of a limited company on 31 December 2010:

Particulars	Dr.	Cr.
Provision for Taxation (2009)	—	1,00,000
Advance Tax Paid for 2009	90,000	—
Advance Tax Paid for 2010	1,00,000	—
Tax Deducted at Source 2010	8,000	12,000
Profit & Loss A/c Balance 2009	—	2,00,000

Assessment for the year 2009 was finalized during the year 2010.The final total tax liability for that year was fixed at 1,10,000. The net profit earned by the company during 2010 before tax amounts to 3,50,000. The company is in 50% tax bracket.

You are required to pass the necessary journal entries and show how the various items will appear in the company’s final accounts.

Solution

 

Illustration 7.4

Model: Tax adjustments

From the following items found in the trial balance of Exe Ltd on 31 December 2010 and the adjustment given in the following, show how the items would appear in the relevant accounts:

 

Particulars
Advance Tax Paid (2009)	50,000
Provision for Taxation (2009)	—	75,000
Tax Deducted at Source (TDS)	10,000

Adjustments:

1. Income tax for 2009 has been assessed at 90,000 against which the advance payment of tax and TD are to be adjusted
2. Provide 50,000 for taxation on current profits

Solution

STAGE I:

 

STAGE II: Preparation of Provision for Taxation A/c:

 

STAGE III: Preparation of P&L A/c:

 

STAGE IV: Preparation of Balance Sheet:

 

Important notes for taxation adjustments:

1. Income tax payable is to be arrived at by deducting advance tax and TDS from the assessed amount and this is again to be shown in the balance sheet.
2. Provision for taxation for the concerned accounting period is to be taken to P&L A/c.
3. TDS (Cr.) is a current liability.
4. TDS (Dr.) may be treated in either of the following ways:
   1. It may be deducted from current year’s provision
   2. It may be shown directly on the assets side of the balance sheet

7.2.2.7 Debentures

7.2.2.7.1 Interest on Debentures

The company should provide interest on debentures for the full year even if a part or whole of interest is not paid. Interest on debentures is a charge against profit. Total amount of interest is to be debited to P&L A/c and it is immaterial whether the company has earned profit or suffered loss during that accounting period.

To illustrate, following is the extract of a limited company’s trial balance at the end of the year:

 

	Dr.	Cr.
	()	()
12 % Debentures	—	5, 00,000
Interest on Debentures	25,000	—

The accounting treatment will be as follows:

 

Step 1:	Interest for the Full Year:
Step 2:	From the Trial Balance, It Can Be Understood that the Amount Paid as Interest on Debentures is 25,000. But for the Whole Year It Is 60,000. Balance ( 60,000 - 25,000) 35,000 is due.
Step 3:	Usually, Interest on Debentures Is Paid Half Yearly.
Step 4:	Hence for 6 months, Interest of 30,000 is Already Due for Payment. Apart from this, 25,000 is also yet payable.
Step 5:	At this juncture, one should understand the following terms: (a) “Accrued & Due” or “Outstanding” (b) “Accrued” or “Accrued but Not Due”
Step 6:	Now Go to Step 4 again: 30,000 is to be termed as “Accrued & Due” and 25,000 is to be termed as “Accrued but Not Due”
Step 7:	Accounting Treatment: (a) “Accrued & Due” and “Accrued but Not Due” are both to be treated as short-term liabilities (b) However, 30,000, i.e., “Accrued & Due” or “Outstanding”, Is to Be Shown in the Balance Sheet Along with Debentures (c) 25,000, i.e., “Accrued but Not Due” or “Accrued” Is to Be Shown as a Current Liability in the Balance Sheet (d) Profit and Loss A/C Is to Be Debited by the Total Amount, i.e., 60,000

Important note: It is to be noted with CAUTION. If interest paid on money borrowed for construction of an asset is to be ADDED TO THE COST OF THE ASSET, when such asset comes in to use, the interest paid is to be debited to P&L A/C.

7.2.2.7.2 Income Tax on Interest on Debentures

As per the Income Tax Act provisions, interest on securing has to be deducted at “source”. While paying interest on debentures, the company must deduct tax “at rate in force” envisaged in the Finance Act, which tends to vary from year to year. To explain the concept here, the tax rate is assumed as 20% and surcharge and education cess combined together at 5% on tax and calculated as follows:

Example: A person holds 25,000 12% debentures of a company.

 

Step 1:	Then, Interest Payable to Him by the Company
		= 3,000.
Step 2:	Company Has to Deduct Tax as Source	= 3,000 × 20% + 5% of 20%
		= 3,000. × (20 + 1%) = 21%
Step 3:	The Company Must Deduct as TDS	= 630
Step 4:	Hence, Interest Payable to Debenture Shareholder (Interest – TDS)	= 3, 000 − 630
Step 5:	Accounting Treatment:

 

(a) Journal Entry:
Interest on Debentures A/c	Dr. 3,000
To Sundry Debentures Holders A/c		2370
To Income Tax Payable A/c		630

(b) Balance Sheet:

As Income Tax Payable is a Liability, It Is to Be Shown on the Liabilities Side of the Balance Sheet till It Is Paid Off to the Government.

Sometimes, the interest on debentures is shown in trial balance directly. (We calculated in the above illustration.) Then the amount given in the trial balance has to be taken as the gross amount of interest.

[Accounting treatment: This gross amount has to be debited to P&L A/c and the tax deducted at source is to be credited to “Income Tax Payable A/c”.

On the other hand, if net interest is given in the trial balance, the amount should be grossed up. The gross interest in such a situation has to be computed by applying the formula as:

(As explained in above illustration)

Note: 20%—Rate of income tax

5%—Surcharge + Cess on tax

This will vary from year to year as per the latest Finance Act

After determining gross interest (as explained above), accounting treatment is to be carried out.

(c) Discount or Cost of Issue of Debentures:

Discount or commission or cost of issue of debentures is to be shown in the assets side of the balance sheet under the head “Miscellaneous Expenditure”.

In practice, a part of the amount is written off and this written off part is to be debited to P&L A/c; the remaining unwritten part is to be shown on the assets side of the balance sheet under “Miscellaneous Expenditure”.

To illustrate, the following is the extract of a trial balance on 31 March 2011:

 

12% Debentures (to Be Redeemed on 31 March 2015)	—	5,00,000
Discount on Issue of Debentures	50,000	—

Note that the debentures are to be redeemed in 2015, i.e., five years’ time (from 1 April 2010).

One-fifth of the amount of 50,000, i.e. 10,000, written each year is to be debited to P&L A/c and the unwritten part, i.e., 40,000, is to be shown in the balance sheet as “Miscellaneous Expenditure” in the first year. In the second year, 10,000 is to be written off and debited to P&L A/c and the balance 30,000 is to be shown in the balance sheet under the head “Miscellaneous Expenditure” and so on for the next three more years, till it is written off completely.

7.2.2.8 Managerial Remuneration

The term “managerial remuneration” denotes a wider concept which covers remuneration payable to the (a) manager, (b) managing director and (c) directors, including part-time directors. Remuneration to such personnel is governed by various sections of the Company’s Act namely Sections 198 and 200, Section 309, Sections 349 to 351 and Section 387, which imposes a number of restrictions.

Remuneration payable to different categories of managerial personnel are as follows:

1. Manger: Section 387 governs the remuneration to a manger. The manger is an employee of a company. According to Section 387, a manger is entitled to receive remuneration—The remuneration may be in the form of (i) monthly payment or (ii) a specific percentage of the net profits of the company or (iii) partly monthly payment and partly percentage of profits of the company. However, in any form, the total remuneration should not exceed 5% of the net profits of the company, subject to Section 198
2. Managing director (whole-time director): The Company Act prohibits to have both a manger and managing director at a single time. A managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly a monthly payment and partly as a specified percentage of net profits.
   1. If there is only one managing director, or whole time director, the remuneration cannot exceed 5% of the net profits
   2. If there are more than one whole time directors or managing directors, the remuneration cannot exceed 10% of the net profits for all them together.
3. Part-time directors: They are neither whole time directors nor managing directors. They receive monthly, quarterly or annual payment with the approval of the Central Government. They may also receive commission, if the company authorizes it by passing a special resolution to that effect.

   The total remuneration cannot exceed 1% of the net profits of the company, if the company has a managing or whole time director or manager; [OR] 3% of the net profits if the company has no manager, managing director or whole time director. The specified rates may be increased in general meeting with the approval of the Central Government.

Overall managerial remuneration: According to Section 198, maximum remuneration payable to different categories of managerial personnel (as explained so far) is tabulated as follows:

Managerial Personnel (Category)	Max. Percentage
All Managerial Personnel	11%
Manager	5%
Managing Director or Whole-time director	5%
Managing Director or if there Is More than One	10%
Part-time Directors if the Company is Not Having Manager or Managing Director or Whole-time Director	3%
Part-time Directors if Assisted by a Manager or Managing Director or Whole-time Director	1%

Appointment and remuneration of managing director—Conditions and guidelines are provided in Schedule XIII, Part I & Part II, respectively [Companies (Amendment Act 1988)].

Schedule XIII, Part II—Section I deals with remuneration payable by companies having profits: According to this, a company having profits in a financial year may pay any remuneration, by way of salary, dearness allowance, perquisites, commission and other allowance, which shall not exceed 5% of its net profits if there is one such managerial person. If there is more than one managerial person, it cannot exceed 10% of its net profits for all of them together.

Section II deals with remuneration payable by companies having no or insufficient profits:

In case a company has no profits or inadequate profits, it may pay remuneration by way of salary, dearness allowance, perquisites and any other allowances which must be limited to amounts varying from 75,000 to 2,00,000 per month, to be fixed as per the following table , in accordance with Press Note No. 3/2000 dated 6 March 2000, issued by Ministry of Law, Justice and Company Affairs (Department of Company Affairs):

Where the “Effective Capital” of the Company is	Monthly Remuneration Limit
(i) Less than 1 crore	75,000
(ii) 1 crore or more but less than 5 crore	1,00,000
(iii) 5 crore or more but less than 25 crore	1,25,000
(iv) 25 crore or more but less than 100 crore	1,50,000
(v) 100 crore or more	2,00,000

Effective capital: For the purposes of Section II of this Part, “effective capital” means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount standing to the credit of securities premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc. and other short-term arrangements); accumulated losses and preliminary expenses not written off.

If the appointment of the managerial person is made in the year in which the company has been incorporated, their effective capital is to be calculated as on the date of such appointments.

In all other cases, the effective capital is to be calculated on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

Perquisites: A managerial person is entitled to enjoy the following perquisites which should not be included in the computation of ceiling on remuneration as explained above.

1. Contribution to provident fund, superannuation fund or annuity fund to the extent that either singly or put together are not taxable under the Income Tax Act
2. Gratuity payable at a rate not exceeding half a month’s salary for each completed year of service
3. Encashment of leave at the end of the tenure

Perquisites for expatriates: In addition to the above, an expatriate managerial person is eligible for the following which should not be included in the computation of ceiling on remuneration:

1. Children’s education allowance: For children studying in India or abroad, an allowance of 5,000 per child per month or actual expenses whichever is less, subject to a maximum of two children.
2. Leave travel concession: Return passage for self and family members in accordance with the rules specified by the company where it is proposed that the leave be spent in home country instead of anywhere in India. Here, family means the spouse, dependent children and dependent parents of the managerial person.

Section III: Remuneration payable to a managerial person in two companies:

Subject to the provisions of Sections I and II, a managerial person shall draw remuneration from one or both companies provided the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

7.2.2.8.1 Ascertainment of Net Profits for Managerial Remuneration

Section 349 lays down certain provisions as to how the net profits of the company should be ascertained for the purpose of the calculation of remuneration to directors, managers and managing directors.

The profit for managerial remuneration has to be calculated before deducting director’s remuneration, in general.

1. Items to be included in profits:
   1. Gross profit
   2. In addition to gross profit, the following credits or incomes should be included: Bounties and subsidies received from any government or any public authority in this behalf by any government unless and except in so far as the Central Government otherwise directs.
2. Items not to be included in profits:

   The following “incomes” or credits should not be included:

   1. Premium on shares or debentures issued or sold by the company
   2. Profits on sale of forfeited shares
   3. Profits of a capital nature including profits from the sale of undertaking or any of the undertaking of the company, or any part thereof
   4. Profits from the sale of any immovable property or fixed assets of a capital nature comprised in the undertaking of any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling such property or assets

      But where the amount for which any fixed asset is sold exceeds its written down value (calculated as per Section 350), credit should be given for so much of the excess as is not higher than the difference between the original cost, that is, fixed asset and its written down value.

      To illustrate, a machine purchased for 1,00,000, written down to 60,000 by writing off depreciation, is sold for 1,25,000. The managerial personnel are entitled to commission on ( 1,00,000 - 60,000) 40,000, i.e., excluding the profit over and above the original cost. (Even if it is sold for 1,25,000 it is limited to its original cost 1,00,000 only)

3. Items to be deducted from the incomes of the company: From the incomes of the company, the following have to be deducted:
   1. All the usual working charges
   2. Director’s remuneration
   3. Bonus or commission paid or payable to any member of the company’s staff, or to any engineer, technician or personally employed or engaged by the company, whether on a whole-time or on a part-time basis
   4. Any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits
   5. Any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in this behalf
   6. Interest on debentures issued by the company
   7. Interest on mortgages executed by the company and loans and advances secured by a charge on its fixed or floating assets
   8. Interest on unsecured loans and advances
   9. Expenses on repairs, whether to immovable property or to movable property, provided the repairs are not of a capital nature
   10. Contributions to charitable and other funds not directly relating to the business of the company not exceeding 50,000 or 5% of its average net profits during the three financial years immediately preceding, whichever is greater. These limits can be exceeded with the consent of the company in general meeting
   11. Depreciation as stipulated in Section 350. Depreciation is to be calculated as per the rates given in Schedule XIV of the Companies Act.

       According to Section 350, the deductions are allowed on Normal depreciation (including extra and multiple shift allowance), excluding any special, initial or other depreciation or any development rebate) calculated at WDV at specified rates.

   12. The excess of expenditure over income which arises in computing the net profit in accordance with Section 349
   13. Any compensation or damages to be paid in virtue of any legal liability including a liability arising from a breach of contract
   14. Any sum paid by way of insurance risk of meeting, any liability such as is referred to in (xiii)
   15. Debts considered bad and written off or adjusted during the year of account
4. Items not to be deducted:
   1. Income tax, super tax and other taxes on income
   2. Any compensation, damages or payments made voluntarily
   3. Losses of capital nature including the loss on sale of the undertakings of the company or of any part there of not including any excess of written down value over its sales proceeds or scrap value of any asset sold, discard, demolished or destroyed

Note:

1. The profit and loss account should have a statement attached showing how the profit has been ascertained for the purpose of commission due to directors, managing directors or managers.
2. The company is empowered to ascertain the managerial remuneration on the net profit of the company:
   1. before charging such commission or
   2. after charging such commission

Illustration 7.5

Model: Computation of managerial remuneration

From the particulars given below, determine the maximum remuneration available to a full-time director of a manufacturing company:

The P&L A/c showed a net profit of 65,00,000 after taking into account the following terms:

 

(i) Depreciation (Including Special Depreciation of 60,000)	: 1,50,000
(ii) Provision for Income Tax	: 2,25,000
(iii) Donation to Political Parties	: 25,000
(iv) Ex-gratia Payment to a Worker	: 25,000
(v) Capital Profit on Sale of Assets	: 30,000

Solution

First choose the items to be added to net profit:

1. Special depreciation only, i.e., 60,000
2. Provision for income tax
3. Ex-gratia payment to worker

   Next, items to be deducted have to be picked. Here capital profit is the only item.

   Statement of Profit for the Purpose of Managerial Remuneration as per Section 349:

Particulars
Step 1:   NET PROFIT (Given in the Question)		65,00,000
Step2:    ADD: (Items to Be Added)
(i) Special Depreciation	60,000
(ii) Provision for Income Tax	2,25,000
(iii) Ex-gratia Payment to a Worker	25,000	3,10,000
Step 3:   Sub-total (Step 1 + Step 2)		68,10,000
Step 4:    Less: (Items to be Deducted) Capital Profit on Sale of Assets		30,000
Step 5:    Net Profit Available for Managerial Remuneration (Step 3 – Step 4)		67,80,000

As he is a full time director, remuneration is allowed at a maximum of 5% on net profits, as per the statutory provisions.

Hence, Remuneration

Illustration 7.6

Model: Remuneration to the managing director

The following is the profit and loss A/c of X Ltd for the year ended 31 March 2011:

The amount of depreciation is 1,64,000 as per schedule XIV.

Calculate the remuneration payable to the managing director

Solution

CALCULATION OF PROFIT (AS PER SECTION 349)

Particulars
Step 1:   Gross Profit (Shown in P&L A/c)		12,16,000
Step 2:    Add: (Items to be Added) Subsidy Received from the State Govt.		1,00,000
Step 2A:    Sub-total (Step 1 + Step 2)		13,16,000
Step 3:    Less: (Items to Be Deducted)
(i) Salaries & Wages	2,56,000
(ii) Director’s Fees	2,000
(iii) Repairs	54,000
(iv) Depreciation (As per Schedule XIV) (Given Information)	1,64,000
(v) General Charges	36,000
(vi) Interest on Debenture	48,000	5,60,000
Step 4:   Profit Available for Calculation of Remuneration U/S 349 (Step 2A – Step 3)		7,56,000

Hence, remuneration payable to managing director @ 5%

APPROACH II The same may be calculated by taking the balance of profit as the base. Then the following adjustments will have to be made:

Particulars
Step 1:   Balance of Profit as per P&L A/c		2,96,000
Step 2:   ADD: (Items to Be Added)
(i) Proposed Dividend (Appropriation)	2,00,000
(ii) Provision for Corporate Dividend Tax	22,000
(iii) Income Tax	2,32,000
(iv) Scientific Research (Capital Nature)	40,000
(v) Excess Depreciation ( 1,80,000 − 1,64,000)	16,000	5,10,000
Step 3:   Sub-total (Step 1 + Step 2)		8,06,000
Step 4:   Less: (Items to Be Deducted) Capital Profit on Sale of Land		50,000
Step 5:  Profit Available for Determination of Managerial Remuneration According to Section 349		7,56,000

Hence, remuneration payable to managing director at 5% according to statutory

Calculation of commission to managerial personnel: Commission is calculated on net profit in the following two ways:

1. Calculation of commission on net profit before taking into account the commission:
   1. To illustrate, if the profits are 6,20,000, then the managing director is entitled (if there is only one) to receive 5% of net profit, i.e.,
   2. In case there are more than one whole-time directors, the total remuneration to all of them cannot exceed 10%, i.e.,
   3. If there is no whole-time director or manager, the part-time directors put together can receive 3% of the net profits, i.e., 3% of 6,20,000 = 18,600.
   4. If there are two full-time directors and others are part-time directors, the full-time directors put together can be paid up to 10%, i.e., 10% of 6,20,000 = 62,000 of all; and all part-time directors put together can get 1%, i.e., 1% of 6,20,000 = 6,200.
2. The company is empowered to calculate the commission on profits remaining after charging commission:
   

   Take the case of (i) above, if there is only one managing director, under this method, commission will be:

   

   In the same way, for (ii), (iii) and (iv), commission can be computed and the students can do themselves.

Illustration 7.7

Model: Calculation of commission

Determine the maximum remuneration payable to the part-time directors and manager of Tex Mills Ltd (a manufacturing company) under Sections 309 and 387 of the Companies Act, 1956 from the following particulars:

Before charging any commission, the profit and loss account showed a credit balance of 25,00,000 for the year ended 31 March 2011, after taking into account the following matters:

 

(a) Capital Expenditure	3,10,000
(b) Subsidiary Received from Government	5,20,000
(c) Special Depreciation	80,000
(d) Bonus to Foreign Technician	2,25,000
(e) Provision for Taxation	2,15,000
(f) Compensation Paid to Injured Workman	90,000
(g) Ex-gratia to an Employee	30,000
(h) Multiple Shift Allowance	1,10,000
(i) Loss on Sale of Fixed Assets	50,000
(j) Profit on Sale of Investments	1,70,000

The company is providing depreciation as per Section 350 of the Company’s Act, 1956.

Solution

Calculation of profit for the purpose of ascertaining managerial remuneration:

Illustration 7.8

Model: Managerial remuneration salary as part of commission

From the following profit and loss account of Seven Hills Ltd for the year ended 31 December 2010 and additional data given, calculate commission due to managing director @ 5% of net profit. Salary of managing director is to be treated as part statement of the commission.

The book value of fixed assets sold was 4,000 and their original cost was 5,000.

Solution

Statement Showing Managing Director’s Remuneration

Illustration 7.9

Model: Managerial commission—Excess remuneration after charging commission

The manager of M/S Rainbow Ltd is entitled to get a salary of 10,000 per month plus 1% commission on the net profits of the company after such salary and commission.

The following is the profit and loss A/c of the company for the year ended 31 March 2011:

Depreciation as per income tax rules amount to 3,24,000. Calculate the remuneration payable to the manager.

 

[C.S. (Inter). Modified]

[Solution

Commission has to be calculated on the net profits of the company, after charging salary and commission. Hence the formula Commission has to be applied.

 

Step 6:    Maximum Commissions as per Statutory Provision

After Charging Commission

Step 7:

Step 8:    The manager should get as per agreement, 1,840 only.

Step 9:    Payment of Commission of 14,000 ( 1,44,000 - 1,30,000) Is Excess. Hence the Company Has to Recover from the Manger the amount of 14,000.

7.2.2.9 Depreciation

The company law does not make it compulsory for a company to provide for depreciation on fixed assets. However, Section 205 of the Company’s Act requires that dividends cannot be declared without providing for depreciation. Before the commencement of the Companies (Amendment) Act, 1960, the companies could declare dividends without writing off depreciation on fixed assets and without providing for previous losses. But for financial years falling after the commencement of the Companies (Amendment) Act of 1960, dividends cannot be declared unless

1. Depreciation has been written off the fixed assets in respect of the financial year for which dividend is to be declared as per Section 205(2)
2. Arrears of depreciation on fixed assets in respect of any previous year, falling after the commencement of the Companies (Amendment) Act of 1960, have been deducted from the profits
3. Losses incurred by the company in the previous years falling after the commencement of the Companies (Amendment) Act of 1960 or the amounts of depreciation provided whichever are less have been deducted

Further, Section 205(2) of the Companies Act stipulates the following methods of providing for depreciation:

1. The written down value (WDV) method to the extent specified in Section 350: A company may provide for depreciation on the W.D.V of fixed assets at the end of the financial year at the rates specified for the assets by the Income Tax Act and Rules and at rates specified in Schedule XIV
   • Normal depreciation is to be provided
   • Extra and multiple shift allowances have to be included
   • Any special or initial depreciation need not be provided
   • Similarly, development rebate also may not be provided
   • When an asset is sold, discarded, demolished or destroyed, the excess of WDV over its sale proceeds or over its scrap value should be written off in the financial year in which such thing occurred.
2. Straight line method (SLM): Under this method, depreciation may be calculated by dividing 95% of the original cost of a depreciable asset by its specified period. Here, specified period means the number of years at the end of which at least 95% of the original cost of an asset is written off by way of depreciation, if depreciation is to be computed U/S 350.

To illustrate, cost of an asset is 1,00,000 and the prescribed rate of depreciation on this category of assets is 25%. It will require about 11 years to write off 95% of the original cost by way of depreciation.

Any other basis: Any other method approved by the Central Govt. which has the effect of writing off by way of depreciation 95% of the original cost to the company of each such depreciable assets on the year of the specified period.

Accounting treatment:

The amount of depreciation is debited to depreciation A/c and credited to provision for depreciation A/c (This provision accumulates from year to year). Then depreciation A/c is to be transferred to P&L A/c. (It may also be debited to P&L A/c directly). The balance of provision for depreciation A/c is to be shown in the balance sheet by way of a deduction from the cost of fixed assets.

During the process of accounting treatment, care must be taken to distinguish between “depreciation provided for” and not provided for. After the commencement of the Companies (Amendment) Act, 1960, depreciation not provided for should be first deducted before paying dividend out of the profits of the year for which dividend is to be paid or out of profits of any of the previous years. If there is loss in a year, the amount of depreciation or the amount of total loss is to be deducted out of subsequent profits before payment of dividend. Dividend may be declared out of past profits without providing for subsequent depreciation or losses.

To illustrate, the proper amount of depreciation to be written off for the year ended 31 March 2010 comes out to be 19,00,000, out of which the company provides for only 12,00,000, leaving depreciation amounting to 7,00,000 unprovided for and the P&L A/c shows a loss of 16,00,000. Further, it is assumed that for the year ended 31 March 2011, the P&L A/c shows a profit of 30,00,000 after providing in full for the depreciation for 2010–11. Suppose, if the company wants to declare a dividend out of the profits for the year 2010–11, the company has to deduct the following from the profits:

1. 7,00,000, depreciation not provided for 2009–10
2. Either 16,00,000, the loss for 2010–11; or 12,00,000 the amount of depreciation actually provided for 2010–11 fair accounting policy may permit to deduct the loss of 16,00,000 there by leaving the profit for 2010–11 at 7,00,000 only. But, here the statutory provision permit to deduct only 12,00,000 leaving profit for 2010–11 at 11,00,000. The remaining loss of 4,00,000 may be provided out of profits for the later years before a dividend for that later year is declared.

The companies have been asked to adhere to the recommendations of ICAI’S Guidance Notes on “Accounting for Depreciation in Companies” by the Ministry of Law Justice & Company Affairs, Department of Company Affairs in its Notification dated 4 November 1994. They are:

1. A company following the WDV method of depreciation in respect of its assets should apply the relevant WDV rates prescribed in Schedule XIV to WDV at the end of the previous financial year as per the books of the company.
2. A company following the SLM method of depreciation in respect of its assets existing on the date of Schedule XIV into force may adopt any of the following alternative bases of computing the depreciation charge:
   1. The specified period may be recomputed by applying to the original cost, the revised rate as prescribed in Schedule XIV and depreciation charge calculated by allocating the unamortized value as per the books of account over the remaining part of the recomputed specified period.
   2. The company can continue to charge depreciation on straight line basis at old rates in respect of assets existing on the date on which the new provision relating to depreciation came into force.
   3. The SLM rates prescribed in Schedule XIV can be straightaway applied to the original cost of all the assets including the existing assets from the year of change of rate.

7.2.2.10 Dividends

According to the provisions of Section 205, the dividend can be declared or paid by a company for any financial year only:

1. Out of current year’s or previous year’s profit after providing for depreciation
2. Out of both current and previous years’ profits
3. Out of moneys provided by the Central Government or a state government for the payment of dividend in pursuance of guarantee given by that government.

However, the Central Govt. may permit a company to declare or pay dividend without providing for depreciation. Dividend payable in cash can be made by cheque or warranty to the concerned shareholders.

According to Section 205A (Companies Amendment Act, 1974), a dividend has been declared by the company but has not been paid or claimed, within 30 days from the date of the declaration to any shareholder entitled, to the payment of the dividend, the company shall within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of such dividend to a special account called “unpaid dividend account”. Further, if any money transferred to this account remains unpaid of unclaimed for a period of 7 years from the date of transfer, it will be transferred by the company to the “Investor Education & Protection Fund” established as per Section 205(c), subsection (1). Once it gets transferred to this account, such unpaid dividend cannot be claimed as per the Company’s (Amendment) Act, 1999.

7.2.2.10.1 Dividends on Paid-up Capital

Declaration of dividend is done in the general meeting of shareholders. However, the rate of dividend cannot be enhanced beyond the level of Board of Directors’ recommendation. If the articles permit, interim dividend can be declared by the Board of Directors. The rate of dividend is determined on the paid- up capital. To illustrate, if a company has issued 1,00,000 shares of 10 each on which 8 per share has been paid up and if the dividend declared is 10%, total dividend payable will be 10% of 8,00,000 (the paid-up capital). i.e., 80,000. If the articles permit, dividend can be declared on the memorial value of shares, i.e. on 10,00,000, and in such a case, the dividend will be 1,00,000.

Calls-in-advance cannot be treated as part of paid-up capital. Similar is the treatment for calls-in-arrear. If the articles permit, payment of dividend can be made on shares on which there are calls-in-arrear.

As per Table A, the period is also to be taken into account for calculation of dividend. To illustrate, X Ltd has issued 1,00,000 equity of shares of 10 each, on which 7.50 per share was paid on 1 April 2010 and the call on 2.50 per share was made and paid on 1 July 2010, a dividend of 20% for 2010-11 is to be calculated as follows:

7.2.2.10.2 Interim Dividend

Dividend paid for the current year before the year is closed is termed as interim dividend. The profits of the company may not be ascertained accurately before the end of the year because accounts are not closed. In such a situation, the directors have to exercise caution. If an interim dividend is paid arbitrarily, it will result in inadequate company’s profits. Then the directors will have to make good the amount, as they are responsible for declaration of interim dividend.

Interim dividend is paid for a period of 6 months. Hence, the declaration of interim dividend should be carefully “worded”. When a company pays interim dividend @ 9% per annum on a capital of 10,00,000, total dividend (interim) on 10,00,000 for 6 months is 45,000 only. When the company declares the interim dividend simply as 9%, then total interim dividend is 90,000. Hence, it should be mentioned carefully. To avoid this sort of affairs, the directors mention the interim, dividend in amount such as so many paise or rupees per share.

According to Section 205(1A), the Board of Directors is empowered to declare interim dividend, and such interim dividend has to be deposited in a bank within 5 days from the date of its declaration.

Accounting treatment: Interim dividend is to be recorded in the debit side of profit and loss appropriation A/c.

7.2.2.10.3 Final Dividend

Final dividend is the dividend declared in the general meeting of a company, after scrutinizing the final figures for the profit available at the end of accounting year.

The final dividend is paid in addition to interim dividend.

Interim dividend is not adjusted against unless the resolution mentions it specifically.

Total dividend is to be calculated as follows:

A company pays dividend at 10% p.a. on its paid-up capital of 10,00,000 as interim dividend and final dividend of 20%, their the total amount of dividend = Interim dividend on 10,00,000 at 10% for 6 months:

Accounting treatment:

1. If final dividend paid is given in the trial balance itself, it is to be recorded on the debit side of P&L appropriation A/c.
2. If final dividend proposed for the current year is given in adjustments, it is to be recorded in the debit side of P&L appropriation A/c and again it is to be shown on the liabilities side of the balance sheet under the heading “PROVISIONS”.

Dividend: Income tax on dividends with respect to shareholders and the company.

Any release of assets in favour of shareholders (to the extent of profits in the respective accounting period) is to be treated as dividend in the eyes of IT Department. Usually, dividend is paid in the form of cash. But here, one has to observe that even if cash is paid not as dividend but as return of capital, it is to be treated as dividend according to IT laws. Issue of bonus shares is not to be treated as dividend as it is not related to release of assets. However, bonus debentures should be treated as dividend.

Dividends are not subject to TDS. They are free from tax for the shareholders.

7.2.2.10.4 Corporate Dividend Tax

Tax on (declaration, distribution or payment of) dividend is called “corporate dividend tax”. The Finance Act 1997, imposed additional income tax—tax on distributed profit, on joint stock companies on the amounts of profits distribution by then among the shareholders as dividends, which is called dividend tax.

According to Section 115–0(1) of the Income Tax Act, any amount declared distributed or paid by a domestic company by way of dividends interim or otherwise shall be charged tax @ 10%. The rate varies from year to year as per the provisions envisaged in the Finance Act.

Corporate Dividend Tax was withdrawn in the year 2002, but reintroduced in 2003 (the rate was 12.52% plus surcharge).

Accounting treatment: It should be shown “below the line”. For interim dividend, it is to be taken to P&L appropriation A/c. For proposed dividend, it is to be shown as proposed dividend in the P&L appropriation A/c and it should be shown under the heading “Provisions” along with provision for income tax.

7.2.2.10.5 Dividends Paid Out Of Revenue Reserves

A company can declare dividend out of reserves subject to the following as per Section 205 A (3) of the Company Act:

1. The rate of dividend should be 10% (or) the average of the rates of the five preceding years, whichever is less;
2. The amount drawn from such reserves should not exceed an amount equal to one-tenth of the sum of the paid-up capital and free reserves. The amount so drawn should be utilized in the following order:
   1. To set off losses incurred in that financial year, if any
   2. To declare dividend from the balance, if any
3. The balance of reserves after such draw should not fall below 15% of its paid up share capital.

The reserves include amounts transferred from the development rebate reserve and should not include all capital reserves.

7.2.2.10.6 Dividends Paid Out Of Capital Profits

Capital profits arise on account of transactions of capital nature items and they are not connected to ordinary course of business transactions of the company.

Capital profits can be distributed only if:

1. They are realized in cash
2. Surplus remains after a revaluation of all assets
3. The Articles do not forbid such distribution

In case if it is to be utilized for dividend distribution, then they cannot be transferred to capital reserve.

Capital profits that cannot be used for payment of dividend are as follows:

1. Profits prior to incorporation
2. Premium on issue of shares. This amount has to be credited to “Securities Premium A/c” which in turn can be utilized as per the provisions envisaged in the Section 78 of the Companies Act
3. Profit left out on the reissue of forfeited shares
4. Capital redemption reserve
5. Profit on issue and redemption of debentures
6. Profit on acquisition of business, i.e., excess of the value of tangible assets acquired over the liabilities taken over
7. Profit on sale of fixed assets (to the extent the sale value exceeds the book value of the assets).

7.2.2.10.7 Interest on Capital

As already mentioned, the capital must not be used for divided purposes. However, interest can be paid out of capital U/S 208 of the Companies Act, subject to the following conditions:

1. The articles should permit
2. The rate of interest should not exceed 4%

7.2.2.10.8 Preference Share Dividend

The rate of dividend for preference shares is to be predetermined. The preference share dividends can be paid only if there are adequate profits. If the preference shares are of cumulative type, dividends shall be payable in future when there are sufficient funds available.

7.2.2.10.9 profit from Subsidiary Companies

Profits of subsidiary companies cannot be in divisible profit unless the subsidiary company paid dividend.

   Journal entries that are to be passed with respect to dividend are as follows:

7.2.3 Stage II—Profit and Loss Appropriation Account

So far we have discussed some important terms to be dealt with for the preparation of the first stage of preparation of final accounts—the Profit and Loss A/c.

Now, we proceed to the next stage—preparation of profit and loss appropriation A/c. Though it is not recognized as a separate account in company account/c, for the sake of better understanding of students, it is discussed here as a second part of P&L A/c.

The P&L appropriation account mainly deals with the net profit/loss made during the year and appropriations made during the year. This is mainly concerned with “divisible profits”. P&L appropriation A/c shows how the profits are disposed off.

How to prepare P&L appropriation account?

 

Step 1:	Any Amount Brought Forward from the Previous Year Is to Be Recorded on the Credit Side of P&L Appropriation A/c.
Step 2:	Net Profit of the Current Year Is to Be Shown on the Credit Side.
Step 3:	Transfer from General Reserve or Any Other Reserve Will Be Shown on the Credit Side.
Step 4:	Provisions that Are No Longer Required Have to Be Shown on the Credit Side.
Step 5:	On the Debit Side of P&L Appropriation A/c, the Following Items Are to Be Shown:
	(i) Transfer to General Reserve
	(ii) Income Tax for the Previous Year Not Provided
	(iii) Dividend (Interim, Final, Paid, Proposed, etc.)
	(iv) Corporate Dividend Paid
	(v) Transfer to Sinking Fund for Redemption of Debentures
	(vi) Surplus (Balancing Figure)—the Balance That Is to Be Transferred to Balance Sheet

7.2.3.1 Proforma of Profit & Loss Appropriation Account

(Students should note that this is not a separate account but continued part of Profit & Loss A/c. At the same time this account alone can be prepared separately)

7.2.3.2 Transfer to Reserves

The Companies Rules 1975 stipulate the companies to transfer to reserves (a certain percentage of profits). Such transfer to reserve should be out of after-tax profits. The Central Government framed the rules regarding transfer to reserves which are reproduced as follows:

1. No dividend shall be declared or paid by a company for any financial year out of the profits of a company for their year arrived at after providing for depreciation in accordance with the provisions of Sub-section (2) of Section 205 of the Companies Act except after the transfer to the reserves of the company of a percentage of its profits for that year as specified below:

1. If the dividend proposed exceeds 10% but not 12.5% of the paid-up capital, the amount to be transferred to the reserves shall not be less than 2.5% of the current profits
2. If the dividend proposed exceeds 12.5% but does not exceed 15% of the paid-up capital, the amount to be transferred to the reserves shall not be less than 5% of the current profits
3. If the dividend exceeds 15%., but does not exceed 20% of the paid-up capital, the amount to be transferred to the reserves shall not be less than 7.5% of the current profits
4. If the dividend proposed exceeds 20% of the paid-up capital, the amount to be transferred to reserves shall not be less than 10% of the current profits

2. Nothing in (1) above shall be deemed to prohibit the voluntary transfer by a company of a percentage higher than 10% of its profits to its reserves for any financial year so, however, that:

1. Where a dividend is declared,
   1. a minimum distribution sufficient for the maintenance of dividends to shareholders at rate equal to the average of the rates as which dividends declared by it over the three years immediately preceding the financial year; or
   2. In a case where bonus share have been issued in the financial year in which the dividend is declared or in the three years immediately preceding the financial year, a minimum distribution sufficient for the maintenance of dividends to shareholders at an amount equal to the average amount (quantum) of dividend declared over the three years immediately preceding the financial year is ensured.

   Provided that a case where the net profits after tax are lower by 20% or more than the average net profits after tax of the two financial years immediately preceding, it shall not be necessary to ensure such minimum distribution

2. Where no dividend is declared, the amount proposed to transfer to its reserves from the current profits shall be lower than the average amount of the dividends to the shareholders declared by it over the three years immediately preceding the financial year.

7.2.3.3 Declaration of Dividend Out of Reserve

The Government have promulgated the following rules regarding utilization of reserves for payment of dividend. In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that:(i) The rate of the dividend declared shall not exceed the average rates at which dividend was declared by it in five years immediately preceding that year or 10% of its paid-up capital; whichever is less(ii) The total amount to be drawn from the accumulated profit earned in previous years and transferred to the reserves shall not exceed the amount equal to one-tenth of the sum of its paid-up capital and free reserves and the amount so drawn shall first be utilized to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared (iii) The balance of reserves after such drawal shall not fall below 15% of its paid-up capital

7.2.3.3.1 Explanation

The rule “Profits earned by a company in previous years and transferred by it to the reserves” means the total amount of net profits after tax, transferred to reserves at the beginning of the year for which the dividend is to be declared. To compute the amount, all items of capital reserves including reserves created by revaluation of assets should not be included. “Transfer to reserve” is clearly explained by way of illustrations. (Ref: Illustrations 7.17, 7.18, 7.21 and 7.22.)

Illustration 7.10

Model: P &L appropriation A/c

M/s Yogan Ltd had 40, 00,000 profit on 31 March 2011 after making provision for depreciation and taxation 2,10,000. Profit was brought forward from last year following recommendations made by the directors of the company to appropriate the profits:

1. To transfer to general reserve: 10,25,000
2. To pay 1,45,000 as ex-gratia bonus to employee of the company
3. To declare dividend @ 5% on equity shares
4. To transfer 80,000 to staff gratuity reserve
5. To transfer 95,000 to development rebate reserve
6. To transfer 1, 20,000 to deferred taxation reserve

The company’s capital consisted of 20,000 equity shares of each fully paid. For the year ended 31 March 2011, the directors transferred 90,000 to dividend equalization reserve and 75,000 to debenture redemption fund. You are required to prepare profit and loss appropriation A/c.

[Solution

Profit brought forward from last year and current year’s profit are to be taken to the credit side and all the other items (in this problem) are to be shown on the debit side of the P&L appropriation A/c.

 

Illustration 7.11

Model: Appropriation of profits

Senthil Ltd. had a credit balance of P&L A/c of 9,00,000 on 1 April 2010 and the net profit for the year 2010-11 is 90,00,000. It was decided that the following decisions be carried out regarding provisions, reserves and dividends:

1. General reserve: 10,50,000
2. Investment allowance reserve: 10,50,000
3. Provision for taxation @ 50%
4. Dividend equalization fund A/c 6,00,000
5. Dividend on 10% preference shares of 60,00,000
6. Dividend at 15% on 9,000 equity shares of 100 each fully paid

   You are required to give P&L appropriation A/c and journal entries for payment of dividend.

[B.Com (Hons). Delhi Modified]

[Solution

 

Step 1:	Provision for Taxation has to be calculated as:
	Provision for Taxation = 50% (Given)
	Net Profit Before Tax = 90, 00,000 (Given)
	∴ Provision for Taxation = 50% of 90, 00,000
	= 45, 00,000.
Step 2:	This Provision for Taxation is a Charge Against Profit. It has to be subtracted from Current Year’s Profit.
	90, 00,000 – 45, 00,000 = 45,00,000, which is the Net Profit After Tax.
	The same may be depicted through P&L A/c as follows:

 

Step 3:

 

7.2.4 Stage III—Preparation of Balance Sheet

According to Section 210 of the Companies Act, Balance Sheet has to be prepared at the end of each specific period. Further, Section 211 requires the balance sheet to be prepared in the prescribed form. But, banking, insurance and electricity companies and companies governed by special acts are exempted from this.

The form of the balance sheet as shown in Schedule VI of the Companies Act is to be adopted. The main object of insisting such a prescribed form is that every company has to present a true and fair view of the state of affairs of the company as at the end of each specific period. In case adequate information cannot be provided for any items in the balance sheet itself, then it can be shown in a separate schedule which has to be annexed to the balance sheet.

Illustration 7.12

Model: Preparation of P&L A/c and balance sheet

The following is the trial balance of Vir Ltd. as on 31 March 2011:

Prepare the profit and loss account for the year ended 31 March 2011 and a balance sheet as on that date after considering the following adjustments:

1. Stock as on 31 March 2011 was valued at 8,81,000
2. Make a provision for income tax as 35%
3. Depreciate plant and machinery at 15%; furniture at 10% and patents at 5%
4. On 31 March 2011, outstanding rent amount to 8,000
5. The Board recommends payment of dividend @15% p.a. Then transfer the minimum amount required to general reserve. Also make a provision for corporate dividend tax @10% of the amount proposed to be distributed.
6. Provide 3,100 for doubtful debts
7. Provide 52,000 for managerial remuneration

    

   [C.S. (Inter). Modified]

[Solution

From the particulars given in trial balance, first the P&L A/c has to be prepared comprising (i) trading, (ii) P&L A/c and (iii) P&L appropriation A/c; and then the balance sheet has to be prepared as follows.

 

Illustration 7.13

Netaji Co. Ltd. had an authorized capital of 25,00,000 divided into 2,50,000 equity shares of 10 each on 31 December 2010 of which 1,25,000 shares were fully called up. The following are the balances extracted from the ledger as on 31 December 2010:

 

Further information:

1. Closing stock was valued at 9,57,500
2. Depreciate plants @ 15% and furniture @10%
3. Provide a tax provision of 40,000
4. The directors declared an interim dividend on 15 August 2010 for 6 months ending June 2010 @ 6%.

You are required to prepare P&L A/c for the year ended 31 December 2010 and a balance sheet on that date.

 

[Madras University Modified]

 

Illustration 7.14

The authorized capital of Durai Ltd. is 24,00,000 consisting of 12,000 equity shares of 100 each and 12,000 preferences shares of 100 each. The balances appearing in the books on 31 December 2010 were given as follows:

You are required to prepare profit and loss account for the year ended 31 December 2010 and balance sheet as on that date after taking into account the following:

1. Closing stock was valued at 5,70,000
2. Purchases included 20,000 worth of goods and articles for distribution among valued customers
3. Salaries and wages include 8,000 being wages incurred for installation of electrical fittings in the factory. Electrical fittings have been recorded under “Furniture”
4. Bills receivable include 6,000 which has been considered to be irrecoverable
5. Bills of 8,000 maturing after December 2010 were discounted
6. Charge depreciation @20% on furniture
7. Write off 50% of discount on debenture
8. Dividend as 5% proposed on equity share capital
9. Provision for taxation 32,000
10. Technical know-how is to be written off over a period of 15 years
11. Salaries and wages include 40,000 being the director’s remuneration
12. Previous year’s figures not to be mentioned.

[Solution

 

Important notes:

1. Preference dividend for the next half-year is provided. The reason being that pref. dividend is payable before equity dividend.
2. Dividend tax is provided on current year’s pref. and equity dividends.

Illustration 7.15

The following balances were extracted from the books of M/s Madhura Co. Ltd. as on 30 September 2010:

The following further particulars were available:

1. Share Capital is represented by 3,000 equity shares of 100 each fully called up; 3,000 8% cumulative preference shares of 100 each fully called up
2. Amounts of development rebate reserve and P&L A/c are as at 30 September 2009.
3. 5,400 to be transferred to development rebate reserve for the year ended 30 September 2010.
4. Bank overdraft is secured by hypothecation stock.
5. The managing director is entitled to a remuneration of 5% on the yearly net profits of the company.
6. Addition made to plant during the year ended 30 September 2010 was 48,000.
7. Depreciation written off up to last year at rates mentioned against each are as follows:

    

   Asset	Amounts ()	Rate %
   Plant	12,000	15
   Furniture	6,000	10
   Motor Car	60,000	20

    

8. Provisions for taxation to be made at 57,600.
9. The amount shown against share forfeited account represents unadjusted profit on re-issue of forfeited shares made during the year.
10. Recommendation for payment of dividend on preference shares had been made.
11. Of sundry debtors, 6,000 is outstanding for more than 6 months.
12. Administrative expenses include 9,000 paid to the auditor as audit fee and 3,000 as his expenses.

You are required to draw up the P&L A/c for the year ended 30 September 2010 and the balance sheet on that date.

 

[Madras University Modified]

[Solution

 

Illustration 7.16

Cauvery Tex Ltd. Tiruchirapalli was registered with a nominal capital of 36,00,000 in equity shares of 100 each. The following is the list of balances extracted from its books on 31 March 2011:

The following adjustments have to be made:

1. Stock on 31 March 2011 was valued at 5,70,000
2. Write off 6,000 from preliminary expenses
3. Provide for half year’s debenture interest
4. The provision for doubtful debts on 31 March 2011 should be equal to 1% on sales
5. Director’s is are outstanding to the extent of 1,650 and salaries 3,000
6. Depreciate plant and machinery by 5%; premises by 2% and write off 7,200 on furniture
7. Goods to the value of 9,000 were distributed as free samples during the year. But no entry in this respect has been made

You are required to prepare the trading and profit and loss account, profit and loss appropriation account for the year ended 31 March 2011 and the balance sheet as on that date.

[Solution

 

 

Illustration 7.17

The following is the trial balance of Naveen Ltd. as on 31 March 2011:

 

(Rs. in 000’s)

Particulars
Stock: 1 April 2010	15,000	—
Purchase Returns	—	2,000
Purchases & Sales	49,000	68,000
Wages	6,000	—
Discount	—	600
Carriage Inwards	190	—
Furniture & Fittings	3,400	—
Salaries	1,500	—
Rent	800	—
Sundry Expenses	1,410	—
Profit & Loss Appropriation A/c (31 March 2010)	—	3,180
Dividend Paid for 2009−10	1,800	—
Corporate Dividend Tax Paid	180	—
Equity Share Capital	—	20,000
Debtors and Creditors	5,500	3,500
Plant & Machinery	5,800	—
Cash at Bank	9,240	—
General Reserve	—	3,100
Patents & Trademarks	960	—
Bills Receivable & Bills Payable	1,000	1,400
	1,01,780	1,01,780

Prepare trading account, profit & loss A/c, profit & loss appropriation A/c for the year ended 31 March 2011 and balance sheet at that date. Take into consideration the following adjustments:

1. Stock on 31 March 2011 was valued at 1,58,48,000
2. Make a provision for income tax @35%
3. Depreciation plant & machinery @15%; furniture & fitting @10% and patents and trademarks @5%
4. On 31 March 2011, outstanding rent amounted to 1,60,000 while outstanding salaries totaled 1,30,000
5. Provide managerial remuneration @10% of the net profits before tax but after such managerial remuneration
6. The directors propose a dividend @15% p.a. for the year ended 31 March 2011 after the minimum transfer to general reserve as required by law
7. Make a provision for corporate dividend tax @10%

Solution

 

Illustration 7.18

The articles of association of Kavya Ltd. provide for the following:

1. That 10% of the profits of each year shall be transferred to reserve fund
2. That an amount equal to 10% of the equity dividend shall be set aside for bonus to staff
3. That the balance available for distribution shall be applied:
   1. In paying 7% on cumulative preference shares
   2. In paying 10% on equity shares
   3. One-third of the balance available as additional dividend on preference shares and two-third as additional equity dividend

Further condition was also imposed by the Articles, viz. that the balance carried forwards shall not-be reduced by the provisions under (2), (3b) or (3c) below a sum equal to 6% of the preference share capital.

The Company has issued 78,000 7% cumulative participating preference shares of 100 each fully paid up, and 7,80,000 equity shares of 10 each fully paid up. The profit for the year 2010–11 was 43,28,967 and the balance brought forward from the previous year was 4,71,510. Provide 18,81,900 for taxation before making other appropriations.

Prepare the profit and loss appropriation account. Ignore corporate dividend tax.

 

[C.A. (Final). Modified]

[Solution

 

CALCULATIONS:

1. Without taking into account (a) the additional dividends; and (b) the bonus payable to the staff on additional equity dividend, the remaining amount in P&L appropriation A/c is 12,69,870. Out of this, as per articles, 6% on 78,00,000 is to be carried forward, i.e. 4,68,000. In this question, the amount has been increased to 4,77,870.
2. After 4,77,870 is carried forward to balance sheet, the balance of 7,92,000 is to be shared among the preference shareholders, equity shareholders and the staff.

   As per articles, preference shareholders get half of what equity shareholders get by way of additional dividend. Assume, equity shareholders get ‘x’.

   Then, preference shareholders will get x

   The staff will get x

   

Illustration 7.19

Due to inadequacy of profit during the year, the company proposes to declare dividend out of general reserves, from the following particulars. You are required to ascertain the amount that can be drawn by applying the Companies (Declaration of dividend out of reserves) Rules 1975:

 

(i)	52,500 % Preference shares of 100 each fully paid	=	52,50,000
(ii)	21,00,000 Equity shares of 10 each fully paid	=	2,10,00,000
(iii)	Capital reserve on revaluation of assets	=	10,50,000
(iv)	General reserve	=	63,00,000
(v)	Securities Premium	=	10,50,000
(vi)	P&L A/c balance (Cr.)	=	1,89,000
(vii)	Net profit for the year	=	10,71,000

Average rate of dividend during the last five years is 15%.

 

[C.S. (Inter).Modified]

[Solution

1. First condition: 10% is lower than average rate 15% . Hence, only 10% dividend can be declared
2. Second condition: Maximum amount that can be drawn must not exceed 10% of Paid up capital + Reserves, i.e. 2,10,00,000 + 52,50,000 + 63,00,000

   = 3,25,50,000 10% = 32,55,000

3. Third condition:
   

   where Q = quantum of dividend

   FR = free reserve

   C = paid-up capital

   Substituting the figures in the above equation we get:

   

   Less: Preference Dividend 52,50,000 × 8%	=	4,20,000
   			= 8,40,000
   Less: Dividend Tax (21,00,000 + 4,20,000)10%	=	2,52,000	5,88,000
   ∴ Transfer Needed from Reserve	=		15,12,0002234;
   * 10 % Dividend Needs Transfer of 15,12,000 from Reserves.
   * This amount, i.e. 15,12,000 is less than condition (ii) i.e. 32,55,000 and condition (iii) 23,62,500.
   * Therefore, 10% dividend can be easily paid.

Illustration 7.20

Prepare the profit and loss account for the year ended 31 March 2011 and a balance sheet as on that date from the following ledger balances:

Further available information:

1. Closing stock valued at cost:

   Finished Goods         2,01,000

   Work-in-Progress      2,85,000

2. Managing director is entitled to a maximum commission @5% of profits as per Companies Act, subject to a minimum of 3,000 per month.
3. Details of fixed assets;
   
4. An old motor car having original cost of 54,000 and depreciation allowed 45,000 up to last year was sold on 30 September 2010 for 27,000 and proceeds were credited to Motor Car Sales A/c without any adjustment.
5. Depreciation allowed under income tax rule is 1,35,000.
6. Provision for taxation to be made at 50%.
7. Directors recommend payment of dividend @10% on paid-up capital.
8. Excess provision for doubtful debts is no longer required.

[I.C.W.A. Modified]

[Solution

CALCULATIONS:

STAGE I: Computation of managerial remuneration:

STAGE II:	Computation of Provision for Taxation:
Step 1:	Profit (Ref: Stage I Step 5)	= 7,35,900
Step 2:	Less: Managing Director’s Remuneration	= 36,795
	(Ref: Stage I Step 6)
Step 3:	Profit Available for Taxation	= 6,99,105
Step 4:	Provision for Taxation	= 3,49,553
	(at 50% on 6,99,105)

STAGE III:

 

STAGE IV: Preparation of Balance Sheet

 

Illustration 7.21

Trial Balance of Nirmal Ltd. as on 30 September 2010

The following additional information is available:

1. The preference shares were redeemed on 1 April 2010 at a premium of 20% but no entries were passed for giving effect there to except payment standing to the debit of preference share redemption account.
2. Depreciation as per income tax rules provided up to 30 September 2010 is as follows: Building: 1,05,000; furniture: 10,000; Motor vehicles: 30,000.
3. Payment to auditors includes 500 for taxation work in addition to audit fees.
4. Market value of investment as on 30 September 2010 90,000.
5. Interim dividend includes dividend on equity shares 37,500 and dividend on preference shares 800.
6. Sundry debtors include 10,000 due for a period exceeding 6 months.
7. All receivables and deposits are considered good.
8. Income tax demand for provided for in full against which an appeal is pending.
9. Directors have recommended payment of a further dividend on equity shares at 0.50 per share after appropriating 15,000 to general reserve.
10. Ignore previous year’s figures.

Prepare the profit and loss account for the year ended 30 September 2010 and the balance sheet on that date.

 

[I.C. W.A. Modified]

[Solution

 

Illustration 7.22

Vas Ltd closes its accounts on 31 March each year. Its paid-up share capital consists of:

1. 10 lakh 11% Preference shares of 10 each fully paid 1 crore
2. 40 lakh Equity shares of 10 each fully paid 4 crore

The profit earned after tax and dividends paid by the company have been given in the following:

 

Year	Profit (In Lakhs)	Total Dividend Paid (In Lakhs)
2005–06	104	51
2006–07	96	51
2007–08	106	59
2008–09	112	63
2009–10	120	67

During 2010–11, the company earned a profit of 108 lakh

The Company desires to transfer 50 lakh each to reserves because of a contemplated project. Comment on the proposal.

Will your answer differ if the profit earned during 2010-11 was only 90 lakh?

[Solution

Step 1:

[Pref. dividend: 11% on 1 crore: 11 lakh

Equity Dividend: Total Dividend − Pref. Dividend

Rate of Equity Dividend: Equity Dividend Equity Share Capital × 100]

 

Step 2:	The Average of Equity Dividend for the Preceding Three
	Years = = 13%
Step 3:	The Minimum Distribution Required as per the Government Rules Is a Rate Equal to the Average for the Three Immediately Preceding Years Is 13% here.
Step 4:	The Minimum Distribution Required is:
Step 5:	The Average of the Profit for 2008–09— 112 and 2009–10— 120
	232/2 = 116 lakh.
	The Profit for 2010-11 = 108 lakh.
	This is Less than the Average by Only 10%
Step 6:	Coming to the Question,
	If the Company Transfers 50 lakh to Reserves, it Is Not in Accordance with the Govt. Rules with Respect to Transfer to Reserve.
	As per the Rules, the Company Must Pay 63 lakh on (Ref: Step 4) Dividend and the Balance ( 108 – 63): 45 lakh to Reserves.
Step 7:	If the Profit Earned Is 90 lakh (As Desired in Question), the Company Need Not Be Required to Adopt Minimum Distribution as Computed Above. The Reason Is that the Profit Is Below the Average Profit for Two Years by More than 20%.

Illustration 7.23

Z Ltd. has only one type of capital, viz. 40 lakh equity shares of 10 each. It has got reserves totaling 2 crore. The company closes its books every year on 31 March. It has been paying dividends at the rate of 12.5% up to 2007–08 and 15% thereafter. In 2010–11, the company suffered a loss of 25 lakh. Hence, it wants to draw from reserves on account to pay dividend at 12%.

You are required to advise the Company.

[Solution

 

Step 1:	What does the Government Rule say on this, i.e., Declaration of Dividend Out of Reserve”:
	The Rule Restricts the Withdrawal from Reserves to the Lower of:
	(i) An Amount Sufficient to Declare Dividend at the Average Rate of Preceding Five Years or 10% Whichever is Less
	(ii) One-Tenth of Paid-up Capital and Free Reserves Subject to the Remaining Balance in Reserves Being at least 15% of the Paid-up Capital.
Step 2:	Compute the Average Rate of Dividend for Preceding 5 Year as Follows:
	(i) First 3 Years = 12.5%
	(ii) Next 2 Years = 15 %
	(iii) Average for 5 Years
Step 3:	Because Only 10% Dividend Can Be Possible, It Will Absorb 65 lakh. (Loss 25 lakh + Dividend as 10% 40 lakh = 65 lakh)
Step 4:	But, the Other Condition Stipulates that More than One-Tenth of the Paid-up Capital and Reserve Cannot Be Withdrawn from Reserve.
	Here, the Paid-up Capital Is 4 crore and the Reserve 2 crore. Total Is 6 crore. One-Tenth of 6 crore = 60 lakh. Hence, the Amount that Can Be Withdrawn Is 60 lakh.
Step 5:	60 Lakh: Out of This, First Loss Has to Be Made Set off; 60 lakh— 25 Lakh; Balance 35 lakh: Which May Be Utilized to Pay Dividend.
Step 6:	The Rate of Dividend Will Be 8%.
Step 7:	Advise: Feasible and Satisfactory Solution to the Company.

Final accounts of companies comprise profit and loss A/c and balance sheet. Profit and loss A/c of companies differ from other forms of business organizations. Here, P&L A/c consists of P&L A/c an P&L appropriation A/c. Items that are shown in P&L A/c are referred to as “above the line” items and that shown in P&L appropriation A/c are called “below the line” items.

The form, contents and preparation of final accounts are governed by the Companies Act, Income Tax Act and The Accounting Standards issued by ICAI.

The relevant sections of the companies Act, AS-4 (Revised), AS-5 (Revised) (issued by ICAI) and relevant provision of the IT Act with respect to dividend, interest there on and net profit before tax all are explained in detail (Ref: the text).

Preparation of P&L A/c: Treatment of certain items such as (i) depreciation; (ii) interest on debenture’s; (iii) dividends; (iv) preliminary expenses; (v) extraordinary items; (vi) tax adjustment—TDS, advance payment of tax, provision for taxation, income tax, tax on dividends, corporate dividends tax; (vi) transfer to reserves and (vii) managerial remuneration including computation of profits to assess their remuneration are all discussed with apt illustrations (Ref: main part of text).

Preparation of P&L appropriation A/c: Meaning of divisible profits, appropriation of profits and the items that are to be included in P&L appropriation A/c are explained in the text.

Preparation of balance sheet: Forms of balance Sheet Schedule VI Sec.211 are shown.

Assets that are to be grouped under the main headings fixed assets, investments, current assets, loans & advances (I:—current assets II: loans & advances), miscellaneous expenses (to the extent not written off) and P&L A/c (Dr.); and the liabilities that are to the be grouped under headings share capital, reserves & surplus, secured loan, unsecured loans and current liabilities & provisions (I: Current liabilities II: Provision) are discussed in detail (Ref: the text).

Rules governing transfer to reserves and declaration of dividend on of reserves are explained by way of illustrations (Ref: Illustrations 7.17, 7.18, 7.21 and 7.22).

Above the Line & Below the Line: Presumption of an imaginary line between P&L and P&L appropriation A/c. Items shown in P&L are termed as “above the line” items and that shown in P&L appropriation A/c are termed as “below the line” items.

Contingent Liability: Amounts which shall become payable on the happening of unforeseen event.

Corporate Dividend Tax: Tax on dividend declared, distributed or paid.

Extraordinary Items: Transactions that do not occur often and distinct from ordinary activities of an enterprise.

Interim Dividend: Dividend paid (before the ascertainment of profit) in the middle of an accounting period.

Miscellaneous Expenditure: A separate head under which preliminary expenses of a company are to be shown in the balance sheet.

QUESTION BANK

I: State whether the following statements are true or false

1. The Companies Act has made mandatory for a company to prepare final accounts in the prescribed format.
2. While preparing P&L accounts of companies, it is necessary to split it into three parts, viz. trading accounts; P&L A/c and P&L appropriation A/c.
3. It is not necessary to provide for depreciation before declaration of dividend.
4. No other method, other than written down value and straight line method, has seen prescribed by the Government.
5. Interest on debentures is a charge against profit.
6. When net interest is given in the trial balance, it is not necessary to gross up.
7. All companies are permitted to make political contribution.
8. After ascertaining the gross dividend, is will be debited to P&L.
9. Items of abnormal nature should be shown as separate item and should not be combined with any other item.
10. Provision for taxation is made after computing the net profits of the company.
11. Provision for taxation made in the previous year is termed as “Existing Provision”.
12. A company cannot pay dividend other than its profits.
13. Dividend is computed on authorized capital of a company.
14. Directors are empowered to declare interim dividend.
15. Calls-in-advance shall have to be considered for paying any dividend.
16. Until dividend on preference share capital is paid, it has to be shown as a contingent liability.
17. Corporate Dividend Tax is to be recorded in P&L appropriation A/c.
18. A public limited company must have at least two directors.
19. Loss making companies or companies with inadequate profits need not be compelled to pay remuneration to their managers.
20. It is the company’s option to compute the managerial remuneration either before charging such commission or after charging such commission.

Answers:

1. True
2. False
3. False
4. True
5. True
6. False
7. False
8. False
9. True
10. False
11. True
12. False
13. False
14. True
15. False
16. True
17. True
18. False
19. False
20. True

II: Fill in the blanks with apt word(s)

1. The statutory form of balance sheet is set out in Part I ._______ of the Companies Act. 1956.
2. According to Section 216 of the Companies Act, __________ A/c shall be treated as an annexure to the balance sheet.
3. Section _________ of the Companies Act deals with the preparation of profit & loss A/c and the balance sheet of a joint stock company.
4. The items that are shown in the profit & loss A/c are known as items “___________”.
5. The items which are shown in the profit & loss appropriation A/c are known as “_________” items.
6. All expenses which are more than 1% of the total revenue of the company or Rs. 5,000 (whichever is more) should not be grouped under _________ but should not be stated ________.
7. According to Section 205 of the Companies Act, it is compulsory to provide for _________ before dividends are declared out of the profits.
8. Discount and cost of issue of debentures should be shown in the balance sheet under the heading “________”
9. TDS is shown as an ________ in the balance sheet.
10. Provision for taxation is to be to P&L A/c.
11. U/S 205 A (3) of the Companies Act, dividend can be declared out of ________ subject to certain conditions.
12. In general, dividend is computed at the rate recommended by the Board on its _________ capital.
13. Interim dividend paid is to be recorded on the debit side of ________ A/c.
14. Tax on dividend is known as __________ .
15. According to the Companies Rules 1975, companies are required to transfer a certain percentage of profits to ____________.
16. According to Section 198 of the Companies Act, the total managerial remuneration should not exceed _______ of the net profits.
17. The remuneration payable to the managing director shall not exceed _________ of the net profits.
18. Contingent liabilities shall be shown as ____________.
19. Unclaimed dividend is shown under the heading ___________.
20. Securities premium A/c is shown under the heading _________.

Answers:

1. Schedule VI
2. profit & loss A/c
3. 210
4. above the line
5. below the line
6. miscellaneous expenditure; separately
7. depreciation
8. miscellaneous expenditure
9. asset
10. debited
11. revenue reserve
12. paid-up
13. P&L appropriation A/c
14. corporate dividend tax
15. reserves
16. 11%
17. 5%
18. footnote to balance sheet
19. current liabilities; balance sheet
20. reserve & surplus

III: Multiple choice questions—Choose the correct answer

1. Balance of profit in P&L appropriation A/c has to be carried to balance sheet under the heading
   1. share capital
   2. reserves & surplus
   3. provision
   4. miscellaneous expenditure
2. Which of the following method is used to provide for depreciation; according to the provision of the Companies Act:
   1. written down value method
   2. straight line method
   3. method prescribed by the Govt
   4. one of the above
3. TDS on interest on debentures is
   1. current asset
   2. reserve
   3. current liabilities
   4. appropriation of profit
4. Interest paid on money borrowed for construction is a
   1. capital expenditure
   2. revenue expenditure
   3. deferred revenue expenditure
   4. none of these
5. Speculation loss is
   1. preliminary expense
   2. extraordinary item
   3. miscellaneous expenditure
   4. contingent liability
6. For which of the following purpose, capital profit can be used:
   1. issue of bonus shares
   2. write off fictitious assets
   3. provide premium on redemption of shares and debentures
   4. all of the above
7. Dividend is computed on
   1. paid-up capital
   2. issued capital
   3. authorized capital
   4. subscribed capital
8. The power to declare interim dividend lies with the
   1. government
   2. SEBI
   3. board of directors
   4. shareholders in general meeting
9. Corporate dividend tax is shown in
   1. profit & loss A/c
   2. profit & loss appropriation A/c
   3. trading A/c
   4. all of these
10. When the proposed dividend is more than 10% but more than of the paid-up capital, the percentage of profits to be transferred to reserve is
    1. 10%
    2. 5%
    3. 7½%
    4. 2½%
11. Where the directors are assisted by whole-time directors or managers or managing directors, remuneration shall not exceed
    1. 3% of net profits
    2. 1% of net profits
    3. 11% of net profits
    4. 5% of net profits
12. Which one of the following perquisites may be included in computing ceiling on remuneration of managerial personnel:
    1. dearness allowance
    2. gratuity
    3. encashment of leave
    4. leave travel concession
13. According to Section 350 of the Companies Act, which of the following is allowed as deduction:
    1. special depreciation
    2. initial depreciation
    3. normal depreciation
    4. development rebate reserve
14. According to Section 349, which of the following items is not allowed as deduction from the profits of the company:
    1. all taxes and income
    2. managerial remuneration
    3. any compensation paid voluntarily
    4. all of these
15. Unclaimed dividend is to be shown under the heading
    1. current asset
    2. provision
    3. current liabilities
    4. miscellaneous expenditure
16. Calls-in-arrears are to be shown under the heading
    1. reserves & surplus
    2. deducting from called-up capital
    3. secured loans
    4. provisions
17. Forfeited shares A/c is to be shown under the heading
    1. current assets
    2. current liabilities
    3. adding with paid-up capital
    4. secured loans
18. Which one of the following is not included in “divisible profits” of a company:
    1. revaluation reserve
    2. reserve fund
    3. insurance fund
    4. none of these
19. Debentures are shown in the balance sheet under
    1. authorized capital
    2. issued capital
    3. current liabilities
    4. secured loans
20. Securities premium A/c is to be shown under the heading
    1. share capital
    2. reserves & surplus
    3. secured loans
    4. currents assets

Answers:

 

1. (b)	2. (d)	3. (c)	4. (a)
5. (b)	6. (d)	7. (a)	8. (c)
9. (b)	10. (d)	11. (b)	12. (a)
13. (c)	14. (d)	15. (b)	16. (c)
17. (c)	18. (a)	19. (d)	20. (b)

1. What do you mean by “above the line” items?
2. What do you mean by “below the line” items?
3. Explain the provisions of Section 211 of the Companies Act?
4. Name the items that are to be recorded in the P&L appropriation A/c?
5. Explain the important provision of Section 205 of the Companies Act.
6. How would you compute gross interest?
7. Write a short note on “extraordinary items”.
8. How would you treat items of abnormal nature?
9. How would you treat TDS?
10. How would you treat advance payment of tax?
11. How would you treat provision for taxation?
12. Name the important sources for declaration of dividend.
13. Write a short note on “payment of interest out of capital”.
14. How will you deal will preference share dividend?
15. Explain: Corporate dividend tax.
16. Name the perquisites to the included in ascertaining managerial remuneration.
17. What are the items that cannot be included in the net profits of the company while determining remuneration of managerial personnel?
18. According to Section 349, what are the items that cannot be deducted from profits?
19. Name the main headings for grouping assets in the balance sheet.
20. Name the main headings for grouping liabilities.
21. How will you treat “calls-in-arrears” while drafting the balance sheet of a company?
22. What is meant by “interim dividend”?
23. Write a short note on “contingent liabilities”.
24. How does “reserve” differ from “reserve fund”?
25. What is meant by “unclaimed dividend”? How is it treated?

1. Explain the relevant provisions of the Companies Act with respect to form, content and preparation of final accounts of a joint stock company.
2. Draw a format of P&L A/c and P&L appropriation A/c.
3. Draw the two formats of the balance sheet as shown in Schedule VI (Section 211) of the Companies Act.
4. Explain the legal provisions relating to “managerial remuneration”.
5. Explain in detail how will you deal with “tax adjustments” while preparing the final accounts of companies?
6. Explain the term “dividend”. Explain the legal provisions for (i) declaring dividend out of revenue reserve and (ii) out of capital profits of a company.
7. Explain the legal provisions for transfer to reserves.
8. How will you compute net profits for remuneration of managerial personnel?
9. How will you deal will the following items while preparing the P&L A/c of a company:
   1. Depreciation
   2. Interest on debentures
   3. Dividend received
   4. Interest received
   5. Interim dividend
   6. Preference share dividend
   7. Tax on dividends
   8. Political contribution
   9. Preliminary expenses
   10. Extraordinary items
10. How will you treat the following items white preparing the balance sheet of a company?
    1. Forfeited shares A/c
    2. Goodwill
    3. Calls-in-arrears
    4. Unclaimed dividend
    5. Securities premium A/c
    6. Discounts on issue of shares & debentures
    7. Underwriting commissions
    8. Sinking fund and
    9. Export subsidy &drawback

 

[Model: Profit for managerial remuneration

 

1. From the following particulars of Everest Ltd, compute profit for managerial remuneration:

 

Net Profit Before Provision of Income Tax and
Managerial Remuneration but After Depreciation	=	12,50,720
Deprecation Provided in the Books	=	2,70,000
Depreciation Allowable under Schedule XIV	=	2,15,000

[Ans: ? 13,05,720]

[Model: Calculation of managerial remuneration]

 

2. From the following particulars relating to a public limited company, calculate the managerial remuneration assuming that there are two whole-time directors, a part-time director and a manager:

 

Profit Earned by the Company
During the Year Ended 31 March 2011	=	10,00,000
After Taking into Account the Following:
Depreciation on fixed Assets:	=	1,91,200
(Depreciation Admissible as per Income Tax Rules is 1,31, 200)	=	4,90,000
Provision for Income Tax:
Capital Expenditure Included in General Expenses Charged to P&L A/c	=	50,000

[Ans: Managerial remuneration: 1,76,000]

 

3. From the following particulars, calculate the maximum commission permissible to directors when not assisted by managing director, or manager or whole-time directors:

 

[Madras University Modified]

[Ans: Max. commission at 3% = 80,100]

 

4. The following profit & Loss A/c is presented by CD Ltd for the year ended 31 March 2011:

 

The amount of depreciation as per Schedule XIV comes to 16,40,000. The effective capital of the company is 80,00,000.

You are required to calculate the remuneration payable to the managing director of the company.

[Ans: Remuneration payable to the managing director at 5% is 3,78,000]

[Model: P&L appropriation A/c]

 

5. On 1 April 2010, the subscribed capital of M/s Swamy Ltd. stood at 1.25 crore divided into 10 lakh fully paid equity shares of 10 each and 25,000 fully paid 12% preference shares of 100 each.

On the same date, profit and loss appropriation A/c showed an opening balance of 14,20,000. During the year ended 31 March 2011, the company paid an interim dividend @ 10% on its equity shares, paying preference dividend for the entire year 2010–11. On 31 March 2011, the company’s profit and loss A/c showed that the company had earned for the year 37,00,000 as profit after tax. The Board of Directors decided to transfer 6,00,000 to debenture redemption reserve and 10% of the net profit to general reserve. The Board also decided a final dividend @ 11% on equity shares over and above the interim dividend already distributed. The Company is required to pay corporate dividend tax @ 10.2%

You are required to prepare P&L appropriation A/c for the year ended 31 March 2011.

[Ans: Balance carried to balance sheet: 15,05,200]

 

6. The accounts of X Ltd showed amounts of 9,00,000 to the credit of profit and loss A/c on 31 March 2010 out of which the directors decided to transfer 1,80,000 to general reserve and 1,26,000 to debenture redemption fund. At the annual general meeting held on 15 June 2010, it was decided to place 60,000 to of development reserve and to pay a bonus of 2½% of the profit to the directors as additional remuneration. The payment of the half-yearly dividends on 15,00,000 6% cumulative preference shares on 30 Septembers 2009 and 31 March 2010 was confirmed and a dividend @ 10% was declassed on the equity share capital of the face above of 18,00,000. The balance of profits & loss A/c is to be carried forward to next year.
You are required to prepare the profit & loss appropriation accounts.

[Ans: Balance profit carried forward to b/a is 2,14,500]

 

7. Y Ltd has a credit balance on P&L A/c of 30 lakh on 1 April 2010 and the net profit for the year 2010–11 is 3 crore. It is decided that the following decisions be carried out regarding provisions, reserves and dividend:

1. General reserve 35 lakh
2. Investment allowance reserve 35 lakh
3. Provision for taxation @ 50%
4. Dividend equalization fund A/c 2 lakh
5. Dividend on 10% preference shares of 20 lakh
6. Dividend @ 15 % on 30 lakh equity shares of 10 lakh fully paid

You are required to prepare the P&L appropriation A/c.

[Ans: Hint: Net profit as per P&L A/c: 1.5 crore. Balance carried forward to b/s: 18.5 lakh]

 

8. Z Ltd. had 63,00,000 profit on 31 March 2011 after making provision for depreciation and taxation 3,91,200 profit as brought forward from last year. Following recommendations were made by the directors of the company to appropriate the profits:

1. To transfer 18,90,000 to general reserve
2. To pay 2,55,000 as ex-gratia bonus employees
3. To déclassé dividend as 5% on equity shares
4. To transfer 1,35,000 to staff gratuity reserve
5. To transfer 1,50,000 to development rebate reserve
6. To transfer 2,70, 000 to deferred taxation reserve

The company’s capital consisted of 3,00,000 equity shares of 10 each fully paid. For the year ended 31 March 2011. The directors transferred 1,20,000 to dividend equalization reserve and 90,000 to debenture redemption fund account. Prepare profit & loss appropriation account.

[Ans: Balance carried forward to b/s: 36,16,200]

 

9. The following is the list of balances of a public limited company as on 31 March 2011:

Prepare profit and loss appropriation account for the year ended 31 March 2011 after providing for

1. Depreciation @ 20% on fixed assets
2. Provision for doubtful debts at 5%
3. Provide for 15% dividend

[Ans: Proposed dividend: 75,000; Dividend tax @ 10% 7,500; Balance carried forward to balance sheet: 2,52,125]

 

10. The accounts of Devan Ltd showed an amount of Rs. 7,00,000 on the credit of profit and loss A/c on 31 March 2011 out of which the directors decided to place 1,00,000 to general reserve and 28,0000 to debenture redemption fund. At the annual general body meeting held on 15June 2011, it was decided to place 48,000 to a development reserve and to pay a bonus of 3% of profit to the directors as additional remuneration. The payment of the half-yearly dividends on 12,00,000 6% cumulative preference shares on 30 September 2010 and 31 March 2011 was confirmed and a dividend @10% was declared on the equity share capital of the face value of 20,00,000.

The balance of P&L A/c is to be carried forward to next year. Prepare profit and loss appropriation account.

[Ans: Bonus to directors: 21,000; Balance of profit carried forward to balance sheet: 2,03,800]

 

11. A limited company has a paid up equity share capital of 4.5 crore divided into 45 lakh shares of 10 each and 11% preference share capital of 1.5 crore divided into 1,50,000 shares of 100 each. The balance of profit brought forward from the previous balance sheet was 1,40,000. The profit for the year ended on 31 March 2011 amounted to 1.74 crore after tax. The directors propose a dividend of 24% on equity share capital, after the following provisions:

1. Statutory minimum transfer to general reserve
2. Provision of dividend on preference shares Draw up the profit & loss appropriation A/c.

[Ans: Transfer to general reserve: 17,40,000; Corporate dividend tax: 12,45,000;

Balance of profit carried forward to balance sheet: 31,05,000]

12. Model: Preparation of P&L A/c

Figures same as in Q. No. 9.

[Ans: Net profit: 3,04,625]

[Model: Preparation of balance sheet]

 

13. From the following balances, prepare the balance sheet of a company in the prescribed format: (Schedule VI) Goodwill: 9,00,000, Investments: 12,00,000; Share capital: 30,00,000; Reserves: 6,60,000; Share premium: 90,000; Preliminary expenses: 60,000; Profit and loss A/c (Cr.): 1,50,000; Debentures: 15,00,000; Other fixed assets: 28,20,000; Stock: 4,80,000; Debtors: 3,60,000; Bank balance: 1,80,000; Unsecured loan 3,90,000; Sundry creditors: 2,10,00.

[Ans: Total: 60,00,000]

[Model: Balance sheet preparation]

 

14. Prepare a balance sheet as 31 March 2011 from the following information of public limited company as requires under the Companies Act, 1956:

Further information:

1. Share capital consists of:
   1. 90,000 equity shares of 100 each fully paid up
   2. 30,000 10% Preference shares of 100 each
2. Term loan is secured
3. Depreciation on assets: 15,00,000
4. Schedules need not be given

[Ans: Balance sheet total: 2,62,20,000] [Model: Comprehensive]

 

15. From the below-mentioned trial balance of Ansul Ltd., prepare a trading and profit and loss account for the year ended 31 December 2010:

Further information:

1. The authorized capital of the company is 12,00,000
2. Stock on 31 December 2010 is 12,00,000
3. Depreciate plants and machinery @ 9%
4. Revalue tools at 24,600
5. Allow 2.5% discount on debtors
6. Provide 2% as bad debts reserve

[Ans: Gross profit: 13,51,530; Net profit 12,08,010; Balance sheet total: 20,71,760]

 

16. From the following balances as on 31 March 2011, of XY Ltd. prepare profit & loss A/c for the year ended and the balance sheet as on that date:

The following adjustments have to be made:

1. Stock on 31 March 2011: 1,77,300
2. Depreciate plant & machinery @ 10% and furniture @ 10%
3. Provided 10% for bad and doubtful debts
4. Customer’s deposit has been forfeited
5. Proposed dividend @ 10%
6. Provision for taxation: 37,500
7. The managing director is entitled to 10% commission on net profits before charging such commission

[Ans: Gross profit: 2,18,320; Net profit: 89,775; Surplus carried to balances sheet: 37,475 B/s total: 6,36,925]

 

17.Rainbow Manufacturing Company Ltd. was registered with a nominal capital of 18,00,000 in equity shares of 100 each. The following is the list of balances extracted from its books on 31 March 2011:

Prepare trading and profit and loss account and the balance sheet in proper form after making the following adjustments:

1. Depreciate plants & machinery by 10%
2. Write off 1,500 from preliminary expenses
3. Provide half years debentures interest due
4. Leave bad and doubtful debts reserve at 5% on sundry debtors
5. Closing stock: 2,85,000

[Ans: Gross profit: 4,56,060;

Net profit: 1,81,500;

Surplus carried to b/s 1,01,250;

Balance sheet total: 25,56,000]

 

18. Excellent Engineering Ltd. has an authorized capital of 1 crore. Divided into 1 lakh equity shares of 100 each. Their books show the following balances as on 31 December 2010:

1. The stock (value as cost or market value whichever is lower) as 31 December 2010 was 14,16,000.
2. Outstanding liabilities for wages: 50,000; business expenses: 50,000
3. Dividends declared 10% on paid-up capital
4. Charge depreciation: Plants & machinery @ 5%; engineering tools @ 20%; patents @ 10% and furniture & fittings @ 10%
5. Provide 2% on debtors as doubtful debts after writing off 43,000 as bad debts
6. Write off preliminary expenses: 10,000 and create debenture redemption reserve 1,00,000
7. Provided 4,80,000 for income tax

You are required to prepare profit & loss A/c for the year ended 31 December 2010 and balance sheet as on that date.

[Ans: Gross profit: 19,54,000; Net profit: 5,25,220; Surplus carried to balances sheet: 1,20,420;

Balance sheet total: 80,90,220]

 

19. The following balances appeared in the books of Kamal & Co. Ltd. as on 31 March 2011:

 

Particulars	Dr.	Cr.
Stock (1 April 2010)	2,55,000	—
Purchases	40,50,000	—
Sales	—	55,50,000
Manufacturing Expenses	9,00,000	—
Salaries & Wages	1,32,000	—
General Charges	55,000	—
Interest	—	13,000
Profit & Loss A/c	—	1,50,000
Directors’ Fees	2,000	—
Dividend (2009–10)	90,000	—
Buildings	5,05,000	—
Plants & Machinery	3,52,000
Furniture	51,000
Motor Vehicles	2,04,000	—
Stores & Spare Parts	1,50,000
Bills Receivable	2,25,000	—
Book Debts	5,70,000	—
Investments	40,000
Share Capital		7,20,000
Pension Fund		2,30,000
Dividend Equalization Fund		1,00,000
Taxation Provision	—	85,000
Unclaimed Dividend	—	10,000
Deposits	—	16,000
Trade Creditors	—	12,40,000
Cash at Bank	5,30,000	—
	81,14,000	81,14,000

Adjustments:

1. Stock on 31 March 2011: 3,60,000
2. Outstanding expenses—Manufacturing expenses: 2,25,000; Wages: 15,000
3. Interest accrued on securities: 1,000
4. General charges pre-paid: 8,000
5. Provide depreciation—Buildings @ 2% p.a.; furniture: 10%; plants & machinery 10%; motor vehicles: 20%
6. The directors propose dividends @ 20%
7. The taxation provisions shown in the trial balance is after payment of taxes for assessments year up to 31 March. 2010

The only liability for taxes in respect f profit for 2010-11 for which a provision of 60% on net profit is considered. Prepare trading and profit & loss A/c for the year ended 31 March 2011 and the balance sheet as on that date.

[Ans: Gross profit: 4,71,000; Net profit: 85,120; Surplus carried to balance sheet: NIL; Balance sheet total: 29,13,800]

 

20. The below-mentioned balances appeared in the books of a public limited company as or 31 March 2011:

 

Share Capital (Authorized & Issued 30,000 Shares of 100 Each)	30,00,000
General Reserve	12,50,000
Unclaimed Dividends	32,630
Trade Creditors	1,84,290
Buildings	5,00,000
Purchases	25,04,515
Sales	49,19,735
Manufacturing Expenses	17,95,000
Establishment	1,34,070
General Charges	1,55,390
Machinery	10,00,000
Motor Vehicle	75,000
Furniture	25,000
Stocks	8,60,290
Book Debts	11,16,900
Investments	14,44,750
Depreciation Reserve	3,55,000
Cash Balances	3,61,200
Director’s Dividend	75,000
Interest (Cr.)	42,740
Profit & Loss A/c 1 April 2010 (Credit Balances)	84,240
Stock Provident fund	1,87,500

From these balances and the following information, prepare the company’s balance sheet as on 31 March 2011 after preparing the trading and profit and loss for the year ended on that date:

1. The stocks on 31 March 2011 were valued as 7,43,420
2. Provide 50,000 for depreciation of gross block and 7,500 for the company’s contribution to the staff PF.
3. Interest accrued on investment amounted to 13,750
4. Aclaim of 12,500 for workers compensation is being disputed by the company
5. Establishment includes 30,000 paid to the manager, who is entitled to remuneration at 5% of profit as per the Companies Act subject to a minimum of 50,000 p.a. You may make necessary adjustments.

[Ans: Hint: Profit before remuneration: 2,33,840. Gross profit: 5,03,330; Net profit: 1,83,840; Surplus carried forward to balance sheet: 1,85,580; Balance sheet total: 48,75,000]

 

 

21. The following balances appeared in the books of Raza Ltd. as on 31 March 2011:

Particulars	Dr.	Cr.
Equity Shares of 100 Each, Fully Paid up	—	18,00,000
General Reserve	—	6,90,000
Unclaimed Dividend	—	1,578
Trade Creditors	—	1,28,574
Building (At Cost)	7,50,000	—
Purchases	15,02,709	—
Sales	—	32,51,841
Manufacturing Expenses	10,50,000	—
Establishment Charges	80,442	—
General Charges	93,234	—
Machinery (At Cost)	6,90,000	—
Furniture (At Cost)	1,05,000	—
Opening Stock	5,16,174	—
Book Debts	3,07,140	—
Investments	8,66,850	—
Provision for Depreciation on Fixed Assets	—	2,73,000
Advance Payment of Income Tax	1,50,000	—
Cash at Bank	2,16,720	—
Director’s Fees	54,000	—
Interest on Investments	—	25,632
Profit & Loss A/c (1 April 2010)		50,544
Staff Provident Fund	—	1,12,500
	63,33,669	63,33,669

From the above-mentioned balances and the following information, prepare the company’s balance sheet as on 31 March 2011 and its profit and loss account for the year ended on that date:

1. The stock on 31 March 2011 was valued as 4,46,040
2. Provide 87,000 for depreciation on fixed assets and 24,000 for managing director’s remuneration
3. Interest accrued on investments amounted to 8,250
4. Make a provision of 1,50,000 for income tax
5. The directors propose a dividend @ 8% after transfer of 75,000 to general reserves

Also provide for dividend tax @ 10% of the proposed dividend

[C.S. (Inter). Modified]

[Ans: Gross profit: 6,28,998; Net profit: 2,22,804;

Balance sheet total: 31,80,000]

 

22. The following are the balance from the ledger of Sungam Hotels Ltd. on 31 March 2011:

 

Share Capital—Credit Balance on 1 April 2010	2,83,425
Preliminary Expenses	37,500
Freehold Premises	2,34,000
Furniture & Fittings	44,670
Glass & China	5,505
Linen	4,200
Cutlery & Plate	1,950
Rates, Taxes & Insurances	8,565
Salaries	12,000
Wages	21,525
Stocks on 1 April 2010:
Wines: 6,195; Spirits: 1,890; Beer: 825	8,910
Minerals: 735; Cigars & Cigarettes: 570	1,305
Sundry Provision & Stores: 915; Coal: 750	1,665
Purchase:
Meat: 18,135; Fish & Poultry: 19,800	37,935
Sundry Provision and Stores: 26,100	26,100
Wines: 9,405; Spirits: 10,950; Beer: 5,760	26,115
Minerals: 5,250: Cigars & Cigarettes: 1,200	6,450
Laundry	4,755
Coal and Gas	20,800
Electric Light	5,640
General Expenses	8,550
Sales:
Wines: 29,350; Spirits: 31,675; Beer: 19,315	80,340
Minerals: 10,800; Cigars & Cigarettes: 1950	12,750
Meals	1,19,145
Rooms	46,875
Tires in Bedrooms	2,910
Washing Charges	1,095
Repairs, Renewals and Depreciation:
Premises: 1,740; Furniture & Fittings: 3,300	5,040
Glass & China: 3,045; Linen : 1,950	4,995
Cutlery & Plate	1,035
Cashbook—Debit Balances:
In Bank	40,740
In Hand	1,095
Visitors Accounts Unpaid	2,445
Sundry Creditors	16,950

 

Stock on 31 March 2011 were valued as follows:

Wines: 5,985; Spirits: 1,665; Beer: 870 Minerals: 1,785; Cigars & Cigarettes: 345 Sundry Provisions and Stores: 705; Coal: 495 The manager is entitled to a commission on 5% of the net profits after charging his commission. The authorized share capital is 5,00,000 shares of 10 each of which 28,5000 shares were issued, The whole of the amount being called up. The final call on 1,050 shares @ 1.50 per share was unpaid. the directors forfeited these shares at their meeting held on 15 March 2011. The tax liabilities is to be provided for @ 35% and the directors propose to declare a dividend at 10%. Provision for corporate dividend tax @ 10% is also to be made.

Prepare the final accounts for presentation to the shareholders.

[C.A. (Final). Modified]

[Ans: Commission: 3,980; Net profit after tax: 51,740; Balance sheet total: 3,83,955]

 

23. The following is the trial balance of X Ltd. as on 31 March 2011:

The following additional information is provided to you:

1. On 31 March 2011, the issued share capital consists of 20,000 equity shares of 100 each fully paid up. Share re-issue account represents discounts allowed at the time of re-issue of 400 forfeited equity shares which were earlier forfeited for the non-payment of the final call.
2. Subsequent to the reissue of equity shares as noted above, the preference share capital was redeemed out of profits otherwise available for dividend. The directors deciding to pay a premium of 10% to the preference shareholders. The Company also issued bonus shares to equity shareholders in the ratio of 2:5 out of capital redemption reserve account. Both the redemption of preference shares and re-issue of bonus shares have not been recorded in the books except that the amount paid to the preference shareholders has been debited to the capital redemption account.
3. Provision for tax is required at 35%.
4. The Board of Directors has proposed a final dividend of 20% on equity shares after appropriating profits as per law. Provision for corporate dividend tax @ 11% of the proposed dividend is also made.
5. The Board of Directors has decided to record the upward revaluation of fixed on issue of debenture account is yet to be written off against the profit of the current year.

You are required to prepare the profit and loss account of the company for the year ended 31 March 2011 and its balance sheet as on that date after passing journal entries for the necessary adjustments.

[Ans: Net profit: 15,60,000; P&L appropriation account balance: 11,62400; Balance sheet total: 78,36,000]

 

24. The following balances have been extracted from the books of account of Amma Ltd. as on 31 March 2011:

Additional information:

1. Depreciate plant by 15% and furniture by 10%
2. Write off preliminary expenses to the extent of 1,000
3. Half year’s interest on debentures is due
4. Crease a provision for bad debts @ 5% on debtors
5. Provide for income tax @ 38.%5 on book profits
6. Stock on 31 March 2011 was valued at 2,02,000
7. A claim of 5,000 for worker’s compensation is being disputed by the company
8. Issued and subscribed capital consists of 80,000 equity shares of 10 each, fully called up

Prepare profit and loss accounts for the year ended 31 March 2011 and the balance sheet as at that date.

 

[B.Com (Hons) Delhi Modified]

[Ans: Gross profit: 3,16,040, Net profit: 49,200; Balance of P&L appropriated A/c: 23,200; B/s total: 18,79,000]

 

25 A manufacturing ltd. company was registered with a nominal capital of 20 crore divided into shares of 100 each, out of which 8 lakh shares had been issued and fully called. The following is the trial balance extricated on 31 March 2011:

Partciulars	in 000’s	in 000’s
Stock 1 April 2010	37,284	—
Manufacturing Wages	21,948	—
Manufacturing Expenses	3,848	—
Purchases & Sales	1,42,642	2,33,980
Machinery Repairs	1,722	—
Carriage Inwards	982	—
Carriage Outwards	1,952	—
Advance Payments of Income Tax	2,858
Bank Loan as 18%	—	10,000
Interests on Loan	900	—
Debtors & Creditors	32,880	18,444
P&L A/c 1 April 2010	—	1,628
Bank Current A/c	21,372	—
Cash in Hand	384	—
Leasehold Factory	32,842	—
Plant & Machinery	25,680	—
Loose Tools	2,500	—
Share Capital	—	80,000
Calls-in-Arrear	200	—
Rates & Electricity	3,522	—
(Factory: 2,842; Office: 680 bolts
in thousands)
Directors’ Fees & Remuneration	2,400	—
Office Salaries & Expenses	2,600	—
Auditor’s Fees	250	—
Office Furniture	1,000	—
Commission	1,620	—
Returns	2,428	1,962
Preliminary Expenses	1,200	—
	3,46,114	3,46,114

You are required to prepare trading and profit and loss account for the year ended 31 March 2011 and balance sheet at that date after taking into consideration the following adjustments:

1. Write off one-third of preliminary expenses
2. Depreciation is to be provided on:
   1. Plant furniture @ 15%
   2. Office furniture @ 10%
3. Manufacturing wages 378 thousand and office salaries 240 thousand had accrued due
4. Provide for interest on bank loan for 6 months
5. The stock was valued at 24,968 thousands for discount on debtors
6. Make a provision for income tax @ 40%
7. Provide 1,700 thousands on debtors for doubtful debts
8. The Directors recommend dividend at 15% for the year ending 31 March 2011 after transferring 5% of net profits to general reserve.

Make a provision for corporate dividend tax at 10%.

[Ans: Net profit: 16,210; Balance of profit carried to balance sheet: 3,958; Balance sheet total: 1,38,508 in 000’s]

 

26 The following balances appeared in the books of X Ltd. as on 31 March 2008:

Partciulars
Equity Shares of 10 Each Fully Paid up		12,00,000
General Reserve	—	4,60,000
Unclaimed Dividend	—	1,052
Trade Creditors	—	85,716
Building at Cost	3,00,000	—
Purchases and Sales	10,01,806	21,67,894
Manufacturing Expenses	7,00,000	—
Establishment Charges	53,628	—
General Charges	62,156	—
Machinery (At Cost)	4,60,000	—
Furniture (At Cost)	10,000	—
Opening Stock	3,44,116	—
Book Debts	4,64,760	—
Investments	5,77,900	—
Provision for Depreciation on Fixed
Assets	—	1,82,000
Advance Payments of Income Tax	1,00,000	—
Cash as Bank	1,44,480	—
Director’s Fees	3,600	—
Interest on Investments	—	17,088
Profit & Loss A/c (1 April 2007)	—	33,696
Staff Provident Fund	—	75,000
	42,22,446	42,22,446

From the above-mentioned balances and the following information, prepare company’s balance sheet as at 31 March 2008 and profit and loss A/c ended on that date:

1. Stock on 31 March 2008 was valued at 2,97,360
2. Provided 38,000 for depreciation on fixed assets and 16,000 for managing director’s remuneration
3. Interest accrued on investments amounts to 3,500
4. Make a provision of 1,00,000 for income tax
5. The directors propose a dividend of 8% after transfer of 70,000 to general reserve.

[B.Com (Hons) Delhi 2008]

[Ans: Gross profit: 4,19332; Net profit: 1,66,536; Net profit 17,917; B/s total: 20,38,000]

 

27. From the following trial of Bharat Braket Ltd. as at 31 March 2009, prepare profit & loss A/c for the year ended 31 March 2009 and the balance sheet as on that date:

[Additional information:

1. Closing stock on 31 March 2009 was 58,000
2. Make a provision for tax 50,000
3. Depreciation is to be provided @ 2% on land & building and @ 10% on plant & machinery
4. Write off 5,000 from preliminary expenses
5. The directors recommended that 25,000 be transferred to general reserve and final dividend @ 9% of equity shares (in addition to interim dividend) is to be provided. Assume tax on dividend (corporate) tax dividend, surcharge and education cess) @ 17%
6. 10,000 is to be appropriated for sinking fund
7. Debentures were issued 6 years ago.

[Ans: Gross profit: 2,98,000; Net profit: 74,000;

Balance of profit carried forward: 1,37,100; Total of balance sheet: 11,00,000]

 

28. Sonal Antriksh Ltd. has authorized share capital of 30,00,000 consisting of 3,00,000 equity shares of 10 each. The following is the trial balance of the company as at 31 March 2009:

Additional information:

1. Rent 20,000 is outstanding
2. Plants include plant costing 2,50,000 purchased on 1 October 2008. Provide depreciation on plant at 20% p.a. and on furniture at 10% p.a. on written down value basis
3. Maintain a provision for doubtful debts at 5% on debtors
4. The company proposed a dividend at 10% on paid-up share capital
5. Make a provision of 30% for income tax (including recharge and cess)
6. Corporate dividend tax is at 16.995% (including recharge and cess)
7. Closing stock is 20,00,000.
8. You are required to prepare: (i) Trading and profit & loss A/c (ii) Profit & loss appropriation A/c for the year ending 31 March 2009 (iii) Balance sheet in the prescribed form as at 31 March 2009.

[B.Com (Hons) Delhi 2010]

[Ans: Gross profit: 84,00,000; Net profit: 24,67,500; Balance of profit carried forward: 23,76,909; Total of balance sheet: 92,65,000]

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