CORPORATE ACCOUNTING

QUESTION BANK

CA Mayank Sharma
+91- 83051-34143
 1

Index
1. Accounting For Share Capital (Including Bonus and Right Share)

2. Accounting for Debenture

3. Underwriting

4. Ratio Analysis

5. Forecasting

6. Consolidation

7. Cash Flow Statement

CA Mayank Sharma | +91- 83051-34143

 2

Chapter:01
Accounting for Share Capital
ILLUSTRATION 1
A company had an authorised capital of ` 10,00,000 divided into 1,00,000 equity shares of ` 10 each.
It decided to issue 60,000 shares for subscription and received applications for 70,000 shares. It
allotted 60,000 shares and rejected remaining applications. Upto 31-3 -2022, it has demanded or
called ` 9 per share. All shareholders have duly paid the amount called, except one shareholder,
holding 5,000 shares who has paid only ` 7 per share.
Prepare a balance sheet assuming there are no other details.

SOLUTION
Balance Sheet as at 31st March, 2022

Particulars Notes No. `

EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1 5,30,000
Total 5,30,000

ASSETS
Current assets
Cash and cash equivalents 2 5,30,000
Total 5,30,000

Notes to accounts

` `
1. Share Capital
Equity share capital
Authorised share capital
1,00,000 Equity shares of ` 10 each 10,00,000
Issued share capital
60,000 Equity shares of ` 10 each 6,00,000
Subscribed share capital
60,000 Equity shares of ` 10 each 6,00,000

CA Mayank Sharma | +91- 83051-34143

 3

Called up and Paid up share capital

5,40,000
60,000 Equity shares of ` 10 each ` 9 called up
(10,000) 5,30,000
Less: Calls unpaid on 5,000 shares @ ` 2 per share
2.
Cash and cash equivalents
5,30,000
Balances with banks

ILLUSTRATION 2
A company invited applications for 10,000 equity shares of ` 50 each payable on application
` 15, on Allotment ` 20, on first and final call `15. Applications are received for 10,000 shares
and all the applicants are allotted the number of shares they have applied for and instalment money
was duly received by the company. Show Journal entries in the books of the company.

SOLUTION
Journal entries in the books of a company
For application money received: Amount received along with application is accounted as follows:
Bank A/c Dr. (Application money on allotted share
i.e.,10,000 × `15 = `1,50,000)

To Equity Share Application A/c

At the time of allotment: Application money received from successful applicants become part of
share capital and is transferred to share capital as under:

Equity Share Application A/c Dr. (Application money on allotted share i.e.,10,000 ×
` 15 = ` 1,50,000)

To Equity Share Capital A/c

To record amount due on allotment: When the decision is taken to allot shares, allotment
money on allotted shares falls due and is recorded as follows:
Equity Share Allotment A/c Dr. (Allotment money due at the allotted share
i.e.,10,000 × ` 20 = ` 2,00,000)

To Equity Share Capital A/c

For allotment money received: Allotment money received from shareholders is recorded as
follows:
Bank A/c Dr. (Allotment money received from shareholders
i.e.10,000 × ` 20 =` 2,00,000)
To Equity Share Allotment A/c

CA Mayank Sharma | +91- 83051-34143

 4

When decision to demand first call is made: After allotment of share, when the Board of Directors
decide to demand the next instalment from shareholders, first call money falls due and is
accounted for, as under:
Equity Share First Call A/c Dr. (No. of shares × first call money per share
i.e.,10,000 × ` 15 = ` 1,50,000)

To Equity Share Capital A/c

On receiving first and final call money: The journal entry passed to record the money received
on account of first call is as under:
Bank A/c Dr. (Amount actually received on account of
first call i.e., ` 10,000 × ` 15 = ` 1,50,000)

To Equity First Call A/c

ILLUSTRATION 3
On 1st April, 2021, A Ltd. issued 43,000 shares of ` 100 each payable as follows:
` 20 on application;
` 30 on allotment;
` 25 on 1st October, 2021; and
` 25 on 1st February, 2022.
By 20th May, 40,000 shares were applied for and all applications were accepted. Allotment was
made on 1st June. All sums due on allotment were received on 15th July; those on 1st call were
received on 20th October. Journalise the transactions when accounts were closed on 31st March,
2022.

SOLUTION
A Ltd.
Journal

CA Mayank Sharma | +91- 83051-34143

 5

2021 ` `
May 20 Bank Account Dr. 8,00,000
To Share Application A/c 8,00,000
(Application money on 40,000 shares at ` 20 per
share received.)
June 1 Share Application A/c Dr. 8,00,000
To Share Capital A/c 8,00,000
(The amount transferred to Capital Account on
40,000 shares at - ` 20 on application. Directors’
resolution no...... dated )
Share Allotment A/c Dr. 12,00,000
To Share Capital A/c 12,00,000
(Being share allotment made due at ` 30 per
share. Directors’ resolution no...... dated ......... )
July 15 Bank Account Dr. 12,00,000
To Share Allotment A/c 12,00,000
(The sums due on allotment received.)
Oct. 1 Share First Call Account Dr. 10,00,000
To Share Capital Account 10,00,000
(Amount due from members in respect of first call-
on 40,000 shares at ` 25 as per Directors,
resolution no... dated...)
Oct. 20 Bank Account Dr. 10,00,000
To Share First Call Account 10,00,000
(Receipt of the amounts due on first call.)
2022
Feb. 1 Share Second and Final Call A/c Dr. 10,00,000
To Share Capital A/c 10,00,000
(Amount due on 40,000 share at ` 25 per share on
second and final call, as per Directors resolution
no... dated...)

CA Mayank Sharma | +91- 83051-34143

 6

Mar. 31 Bank Account Dr. 10,00,000

To Share Second & Final Call A/c 10,00,000
(Amount received against the final call on 40,000
shares at ` 25 per share.)

ILLUSTRATION 4
Pant Ltd. invited applications for 50,000 equity shares at ` 50 each, which are payable as on
application ` 20, on allotment ` 10 and on first and final call ` 20. The company received applications
for 60,000 shares. The directors accepted application for 50,000 shares and rejected the rest. Show
Journal entries if company refunded the application money to rejected applicants and allotment
money was received for 45,000 shares.

SOLUTION
Pant Ltd.
Journal

` `
Bank A/c Dr. 12,00,000
To Equity Share Application A/c 12,00,000
(Being the application money received for 60,000 shares at
` 20 per share)
Equity Share Application A/c Dr. 12,00,000
To Equity Share Capital A/c 10,00,000
To Bank A/c 2,00,000
(Being share allotment made for 50,000 shares and excess
refunded.)
Equity Share Allotment A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000

(Being allotment amount due on 50,000 equity shares at ` 10

per share as per Directors’ resolution no... dated...)
Bank A/c Dr. 4,50,000
Calls in Arrears A/c Dr. 50,000
To Equity Share Allotment A/c 5,00,000

(Being allotment money received for 45,000 shares at ` 10

per share.)

CA Mayank Sharma | +91- 83051-34143

 7

ILLUSTRATION 5
The Delhi Artware Ltd. issued 50,000 equity shares of ` 100 each and 1,00,000 preference shares
of ` 100 each. The Share Capital was to be collected as under:

Equity Shares (`) Preference Shares (`)

On Application 25 20
On Allotment 20 30
First Call 30 20
Final Call 25 30

All these shares were subscribed. Final call was received on 42,000 equity shares and 88,000
preference shares. Prepare the cash book and journalise the remaining transactions in the books of
the company.

SOLUTION
Delhi Artware Ltd.

Cash Book
Dr. Cr.

` `
To Equity Shares Applications 12,50,000 By Balance c/d 14,440,000
Account (application money on
50,000 shares at ` 25)
To Preference Share Application 20,00,000
A/c
(application money on 1,00,000
shares at ` 20)
To Equity Share Allotment A/c 10,00,000
(allotment money on 50,000
shares at ` 20)
To Preference Share Allotment A/c 30,00,000
(allotment money on 1,00,000
shares at ` 30)
To Equity Shares First Call A/c (` 30 15,00,000
on 50,000 shares)

CA Mayank Sharma | +91- 83051-34143

 8

To Preference Share First Call A/c 20,00,000

(` 20 on 1,00,000 shares)
To Equity Shares Final Call A/c (` 10,50,000
25 on 42,000 shares)
To Preference Share Final A/c (` 30 26,40,000
on 88,000 shares)
1,44,40,000 1,44,40,000
To Balance b/d 1,44,40,000

Journal

` `
Equity Share Application A/c Dr. 12,50,000
Equity Share Allotment A/c Dr. 10,00,000
To Equity Share Capital A/c 22,50,000
[The Credit to share capital on allotment of 50,000 equity
shares at ` 45 per share (` 25 on application and ` 20 on allotment)
allotted as per Directors resolution no.... dated ]
Preference Share Application A/c Dr. 20,00,000
Preference Share Allotment A/c Dr. 30,00,000
To Preference Share Capital A/c 50,00,000
[The credit to Preference Share Capital on allotment of 1,00,000
preference shares at ` 50 per share (` 20 on application and `30
on allotment), allotted as per Directors’ resolution no... dated...]

Equity Share First Call A/c Dr. 15,00,000

To Equity Share Capital A/c 15,00,000
(Amount due on 50,000 equity shares at ` 30 per share as per
Directors’ resolution no... dated...)
Preference Share First Call A/c Dr. 20,00,000
To Preference Share Capital A/c 20,00,000
(Amount due on 1,00,000 preference shares at ` 20 per share,
as per Directors’ resolution no...dated...)
Equity Share Final Call A/c Dr. 12,50,000
To Equity Share Capital A/c 12,50,000
(Amount due on final call on 50,000 equity shares at ` 25 per
share, as per Directors’ resolution no... dated...)

CA Mayank Sharma | +91- 83051-34143

 9

Preference Share Final Call A/c Dr. 30,00,000

To Preference Share Capital A/c 30,00,000
(Amount due on final call on 1,00,000 preference shares at ` 30
per share, as per Directors’ resolution no... dated...)

ILLUSTRATION 6
On 1st October, 2022 Pioneer Equipment Limited received applications for 2,50,000 Equity
Shares of ` 100 each to be issued at a premium of 25 per cent payable as :

On Application ` 25
On Allotment ` 75 (including premium)
Balance Amount on Shares As and when required
The shares were allotted by the Company on October 20, 2022 and the allotment money was
duly received on October 31, 2022.
Record journal entries in the books of the company to record the transactions in connection with
the issue of shares.

SOLUTION
Pioneer Equipment Limited

Journal

Date Particulars L.F. Debit Credit

Amount Amount

2022 (`000) (`000)

Oct. 1 Bank A/c Dr. 6,250
To Equity Share Application A/c 6,250
(Money received on applications for 2,50,000
shares @ ` 25 per share)
Oct. 20 Equity Share Application A/c Dr. 6,250
To Equity Share Capital A/c 6,250

(Transfer of application money on allotment to

share capital)
Oct. 20 Equity Share Allotment A/c Dr. 18,750
To Equity Share Capital A/c 12,500

CA Mayank Sharma | +91- 83051-34143

 10

To Securities Premium A/c 6,250

(Amount due on allotment of 2,50,000 shares @
` 75 per share including premium)
Oct. 31 Bank A/c Dr. 18,750
To Equity Share Allotment A/c 18,750

(Money received including premium consequent

upon allotment)

Note: Bifurcation of Allotment amount

Security premium per share = 25% x `100
= ` 25
Money received on allotment per share = ` 75

Premium Capital

Per Share (75) ` 25 ` 50

No. of Shares (in '000) 250 250
Total Amount (In '000) ` 6,250 `12,500

Illustration 7

JHP Limited is a company with an authorised share capital of 10,00,000 in equity shares of ` 10
each, of which 6,00,000 shares had been issued and fully paid on 30th June, 2021. The company
proposed to make a further issue of 1,00,000 of these ` 10 shares at a price of ` 14 each, the
arrangements for payment being:

(a) ` 2 per share payable on application, to be received by 1st July, 2021;

(b) Allotment to be made on 10th July, 2021 and a further ` 5 per share (including the
premium) to be payable;
(c) The final call for the balance to be made, and the money received by 30th April, 2022.
Applications were received for 3,55,000 shares and were dealt with as follows:
(i) Applicants for 5,000 shares received allotment in full;

(ii) Applicants for 30,000 shares received an allotment of one share for every two applied
for; no money was returned to these applicants, the surplus on application being used to
reduce the amount due on allotment;
(iii) Applicants for 3,20,000 shares received an allotment of one share for every four applied for;
the money due on allotment was retained by the company, the excess being returned to the

CA Mayank Sharma | +91- 83051-34143

 11

applicants; and

(iv) the money due on final call was received on the due date.
You are required to record these transactions (including cash items) in the Journal of JHP
Limited.

SOLUTION
Journal of JHP Limited

Date Particulars DR` CR`

Bank A/c (Note 1 – Column 3) Dr. 7,10,000
July 1 To Equity Share Application A/c 7,10,000
(Being application money received on 3,55,000 shares
@ ` 2 per share)

July 10 Equity Share Application A/c Dr. 7,10,000

To Equity Share Capital A/c 2,00,000
To Equity Share Allotment A/c (Note 1 4,30,000
Column 5)
To Bank A/c (Note 1 – Column 6) 80,000
(Being application money on 1,00,000 shares transferred
to Equity Share Capital Account; on 2,15,000 shares
adjusted with allotment and on 40,000 shares refunded
as per Board’s Resolution No…..dated…)

Equity Share Allotment A/c Dr. 5,00,000

To Equity Share Capital A/c 1,00,000
To Securities Premium a/c 4,00,000
(Being allotment money due on 1,00,000 shares @
` 5 each including premium at ` 4 each as per Board’s
Resolution No….dated….)
Bank A/c (Note 1 – Column 8) Dr. 70,000
To Equity Share Allotment A/c 70,000
(Being balance allotment money received)
2022 Equity Share Final Call A/c Dr. 7,00,000
To Equity Share Capital A/c 7,00,000
(Being final call money due on 1,00,000 shares @ ` 7
per share as per Board’s Resolution No…..dated….)

CA Mayank Sharma | +91- 83051-34143

 12

April 30 Bank A/c Dr. 7,00,000

To Equity Share Final Call A/c 7,00,000
(Being final call money on 1,00,000 shares @ ` 7 each
received)

Working Notes:
Calculation for Adjustment and Refund

Category No. of No. of Amount Amount Amount Refund Amount Amount

Shares Shares Received Required on adjusted [3 - 4 + due on received
Applied Allotted on Application on 5] Allotment on
for Application Allotment Allotment
(1) (2) (3) (4) (5) (6) (7) (8)
(i) 5,000 5,000 10,000 10,000 Nil Nil 25,000 25,000
(ii) 30,000 15,000 60,000 30,000 30,000 Nil 75,000 45,000
(iii) 3,20,000 80,000 6,40,000 1,60,000 4,00,000 80,000 4,00,000 Nil
TOTAL 3,55,000 1,00,000 7,10,000 2,00,000 4,30,000 80,000 5,00,000 70,000

Also,

(i) Amount Received on Application (3) = No. of shares applied for (1) x ` 2

(ii) Amount Required on Application (4) = No. of shares allotted (2) x ` 2

CA Mayank Sharma | +91- 83051-34143

 13

CALLS-IN-ARREARS AND CALLS-IN-ADVANCE

ILLUSTRATION 8
Shreyas Ltd. did not receive the first call on 10,000 equity shares @ ` 3 per share which was due
on 1.7.2021. This amount was received on 1.4.2022.
Open Calls in arrears account and journalise the entries in the books of the company on 1.7.2021
and 1.4.2022.

SOLUTION
Shreyas Ltd
Journal

Date Particulars L.F. Amount Amount

Dr. Cr.
1.7.2021 Calls in Arrears A/c Dr. 30,000
To Equity Share First Call A/c 30,000
(Being amount due on first call on 10,000 shares at
` 3 per share transferred to calls in arrears account)

1.4.2022 Bank A/c Dr. 30,000

To Calls in Arrears A/c 30,000
(Being calls in arrears received)

ILLUSTRATION 9
Rashmi Limited issued at par 1,00,000 Equity shares of `10 each payable `2.50 on application;
`3 on allotment; ` 2 on first call and balance on the final call. All the shares were fully subscribed.
Mr. Nair who held 10,000 shares paid full remaining amount on first call itself. The final call
which was made after 3 months from first call was fully paid except a shareholder having 1000
shares who paid his due amount after 2 months along with interest on calls in arrears. Company
also paid interest on calls in advance to Mr. Nair. Give journal entries to record these
transactions.
SOLUTION

Date Particulars L.F. Debit Credit

Amount Amount
(`) (`)
Bank A/c Dr. 2,50,000

CA Mayank Sharma | +91- 83051-34143

 14

To Equity Share Application A/c 2,50,000

(Money received on applications for

1,00,000 shares @ ` 2.50 per share)
Equity Share Application A/c Dr. 2,50,000
To Equity Share Capital A/c 2,50,000
(Transfer of application money on 1,00,000
shares to share capital)
Equity Share Allotment A/c Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(Amount due on the allotment of 1,00,000
shares @ ` 3 per share)
Bank A/c Dr. 3,00,000
To Equity Share Allotment A/c 3,00,000
(Allotment money received)
Equity Share First Call A/c Dr. 2,00,000
To Equity Share Capital A/c 2,00,000
(Being first call made due on 1,00,000 shares
at ` 2 per share)
Bank A/c Dr. 2,25,000
To Equity Share First Call A/c 2,00,000
To Calls in Advance A/c 25,000
(Being first call money received along with
calls in advance on 10,000 shares at ` 2.50 per
share)
Equity Share Final Call A/c Dr. 2,50,000
To Equity Share Capital A/c 2,50,000
(Being final call made due on 1,00,000 shares
at ` 2.50 each)
Bank A/c Dr. 2,22,500
Calls in Advance A/c Dr. 25,000
Calls in Arrears A/c Dr. 2,500
To Equity Share Final Call A/c 2,50,000
(Being final call received for 89,000 shares and
calls in advance for 10,000 shares adjusted)

CA Mayank Sharma | +91- 83051-34143

 15

Interest on Calls in Advance A/c Dr. 750

To Shareholders A/c 750
(Being interest made due on calls in advance
of ` 25,000 at the rate of 12% p.a.)
Shareholders A/c Dr. 750
To Bank A/c 750
(Being payment of interest made to
shareholder)
Shareholders A/c Dr. 41.67
To Interest on Calls in Arrears A/c 41.67
(Being interest on calls in arrears made due
at the rate of 10%)
Bank A/c Dr. 2,541.67
To Calls in Arrears A/c 2,500
To Shareholders A/c 41.67
(Being money received from shareholder for
calls in arrears and interest thereupon)

ILLUSTRATION 10
A Ltd forfeited 30,000 equity shares of ` 10 fully called-up, held by Mr. X for non-payment of
final call @ ` 4 each. However, he paid application money @ ` 2 per share and allotment money @
` 4 per share. These shares were originally issued at par. Give Journal Entry for the forfeiture.

SOLUTION
In the books of A Ltd.
Journal

Date Particulars ` `

CA Mayank Sharma | +91- 83051-34143

 16

Equity Share Capital A/c (30,000 x ` 10) Dr. 3,00,000

To Equity Share Final Call A/c (30,000 x ` 4) To 1,20,000

Forfeited Shares A/c (30,000 x ` 6) 1,80,000

(Being the forfeiture of 30,000 equity shares of ` 10 each

fully called-up for non-payment of final call money @ `
4 each as per Board’s Resolution No…. dated….)

ILLUSTRATION 11
X Ltd forfeited 20,000 equity shares of ` 10 each, ` 8 called-up, for non-payment of first call money
@ ` 2 each. Application money @ ` 2 per share and allotment money @ ` 4 per share have already
been received by the company. Give Journal Entry for the forfeiture (assume that all money due is
transferred to Calls-in-Arrears Account).

SOLUTION
In the books of X Ltd
Journal

Date Particulars ` `

Equity Share Capital A/c (20,000 x ` 8) Dr. 1,60,000

To Calls-in-Arrears A/c (20,000 x ` 2) To 40,000

Forfeited Shares A/c (20,000 x ` 6) 1,20,000

(Being the forfeiture of 20,000 equity shares of

` 10each, ` 8 called-up for non-payment of first call
money @ ` 2 each as per Board’s Resolution
No……dated….. )

ILLUSTRATION 12
X Ltd. forfeited 5,000 equity shares of `100 each fully called-up which were issued at a premium of
20%. Amount payable on shares were: on application ` 20; on allotment ` 50 (including premium);
on First and Final call ` 50. Only application money was paid by the shareholders in respect of these
shares. Pass Journal Entries for the forfeiture.

SOLUTION
In the books of X Ltd.
Journal

CA Mayank Sharma | +91- 83051-34143

 17

Date Particulars ` `

Equity Share Capital A/c (5,000 x ` 100) Dr. 5,00,000

Securities Premium A/c (See Note) Dr. 1,00,000

To Equity Share Allotment A/c (5,000 x ` 50) 2,50,000

To Equity Share First and Final Call A/c (5000 x ` 50) To 2,50,000

Forfeited Shares A/c (5000 x ` 20) 1,00,000

(Being the forfeiture of 5,000 equity shares of ` 100 each

fully called-up, issued at a premium of 20%, for non-
payment of allotment and call money as per Board’s
Resolution No…..dated….)

ILLUSTRATION 13

Mr. Shami has applied for 1,000 shares of Company XYZ Ltd. paying application money @ ` 2
per share but has been allotted only 600 shares. The shares have a face value of ` 10 and a premium
of ` 2 per share, which are payable as: on Allotment- ` 5 (including premium) and on final call ` 5.
Now in case Mr. Shami doesn't pay allotment money and final call and his shares are forfeited,
then following entry will be passed on forfeiture:

SOLUTION

Share Capital A/c (600 x ` 10) Dr. 6,000

Securities Premium A/c (600 x ` 2) Dr. 1,200

To Share Forfeiture A/c 2,000
To Share Allotment A/c 2,200
To Share Final Call A/c (600 x 5) 3,000
(Being 600 shares forfeited due to non-payment of allotment
money and call money as per Board Resolution no..... dated ......)

Note:

Total Amount Received on application (1,000 x 2) 2,000

Less: Amount used for application money (600 x 2) (1,200)
Excess money received on application 800
Amount due on Allotment (600 x 5) 3,000
For premium (600 x 2) 1,200

CA Mayank Sharma | +91- 83051-34143

 18

For Capital A/c (600 x 3) 1,800

Thus amount not received on allotment (3,000 - 800) 2,200

For Premium A/c For Capital A/c

Amount not received on allotment (2,200) ` 1,200 ` 1,000

ILLUSTRATION 14
Mr. Long who was the holder of 2,000 preference shares of ` 100 each, on which ` 75 per share has
been called up could not pay his dues on Allotment and First call each at ` 25 per share. The
Directors forfeited the above shares and reissued 1500 of such shares to Mr. Short at ` 65 per
share paid-up as ` 75 per share.
Give Journal Entries to record the above forfeiture and re-issue in the books of the company.

SOLUTION

Particulars ` `

Preference Share Capital A/c (2,000 x ` 75) Dr. 1,50,000

To Preference Share Allotment A/c 50,000

To Preference Share First Call A/c 50,000

To Forfeited Share A/c 50,000

(Being the forfeiture of 2,000 preference shares ` 75 each

being called up for non-payment of allotment and first call
money as per Board’s Resolution No.... dated........ )
Bank A/c (1,500 x ` 65) Dr. 97,500

Forfeited Shares A/c (1,500 x ` 10) Dr. 15,000

To Preference Share Capital A/c 1,12,500

(Being re-issue of 1500 shares at ` 65 per share paid-up as

` 75 as per Board’s Resolution No…..dated….)
Forfeited Shares A/c Dr. 22,500
To Capital Reserve A/c (Note 1) 22,500
(Being profit on re-issue transferred to Capital/Reserve)

Working Note:

CA Mayank Sharma | +91- 83051-34143

 19

Calculation of amount to be transferred to Capital Reserve

Forfeited amount per share = ` 50,000/2000 = ` 25

Loss on re-issue = ` 75 – ` 65 = ` 10
Surplus per share re-issued ` 15
Transferred to capital Reserve ` 15 x 1500 = ` 22,500

ILLUSTRATION 15
Beautiful Co. Ltd issued 30,000 equity shares of ` 10 each payable as ` 3 per share on
application, ` 5 per share (including ` 2 as premium) on allotment and ` 4 per share on call. All the
shares were subscribed. Money due on all shares was fully received except from Ram, holding 500
shares, who failed to pay the Allotment and Call money and Shyam, holding 1,000 shares, who
failed to pay the Call Money. All those 1,500 shares were forfeited. Of the shares forfeited, 1,250
shares (including whole of Ram’s shares) were subsequently re-issued to Jadu as fully paid up at a
discount of ` 2 per share.
Pass the necessary entries in the Journal of the company to record the forfeiture and re-issue of
the share. Also prepare the Balance Sheet of the company.

SOLUTION
In the books of Beautiful Co. Ltd.
Journal

Date Particulars ` `
Equity Share Capital A/c (1,500 x ` 10) Dr. 15,000

Securities Premium A/c (500 x ` 2) Dr. 1,000

To Equity Share Allotment A/c (500 x ` 5) 2,500

To Equity Share Call A/c (1,500 x ` 4) 6,000

To Forfeited Shares A/c 7,500

(Being forfeiture of 1,500 equity shares for non payment

of allotment and call money on 500 shares and for non-
payment of call money on 1,000 shares as per Board’s
Resolution No…..dated ….)
Bank A/c Dr. 10,000
Forfeited Shares A/c Dr. 2,500
To Equity Share Capital A/c 12,500

(Being re-issue of 1250 shares @ ` 8 each as per

Board’s Resolution No…..dated….)

CA Mayank Sharma | +91- 83051-34143

 20

Forfeited Shares A/c Dr. 3,500

To Capital Reserve A/c 3,500
(Being profit on re-issue transferred to Capital Reserve)

Balance Sheet of Beautiful Limited as at……

Particulars Notes No. `

EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1 2,99,000
Reserves and Surplus 2 62,500
Total 3,61,500
ASSETS
Current assets
Cash and cash equivalents (bank) 3,61,500
Total 3,61,500

Notes to accounts

` `
1. Share Capital
Equity share capital
Issued share capital
30,000 Equity shares of ` 10 each 3,00,000
Subscribed, called up and paid up share capital
29,750 Equity shares of ` 10 each 2,97,500
Add: Forfeited shares 1,500 2,99,000
2. Reserves and Surplus
Securities Premium 59,000
Capital Reserve 3,500 62,500

Working Note :
(1) Calculation of Amount to be Transferred to Capital Reserve

Amount forfeited per share of Ram ` 3 Amount forfeited per share of `6

Shyam
Less: Loss on re-issue per share (` 2) Less: Loss on re-issue per share (` 2)
Surplus `1 `4

CA Mayank Sharma | +91- 83051-34143

 21

Transferred to Capital Reserve: Surplus

Ram share (500 x ` 1) ` 500
Shyam’s Share (750 x ` 4)
Total ` 3,000
` 3,500

(2) Balance of Security Premium

Total Premium amount receivable on allotment = 60,000

Less: Amount reversed on forfeiture = (1,000)

Balance remaining = 59,000

ILLUSTRATION 16
A holds 2,000 shares of ` 10 each on which he has paid ` 2 as application money. B holds
4,000 shares of ` 10 each on which he has paid ` 2 per share as application money and ` 3
per share as allotment money. C holds 3,000 shares of ` 10 each and has paid ` 2 on
application, ` 3 on allotment and ` 3 for the first call. They all fail to pay their arrears on the second
and final call and the directors, therefore, forfeited their shares. The shares are re- issued
subsequently for ` 12 per share fully paid-up. Journalise the transactions relating to the forfeiture
and re-issue.

SOLUTION
Journal

Date Particulars ` `
Share Capital A/c (9,000 x ` 10) Dr. 90,000
To Share Allotment A/c (2,000 x ` 3) 6,000

To Share First Call A/c (6,000 x ` 3) 18,000

To Share Final Call A/c (9,000 x ` 2) 18,000

To Forfeited Shares A/c 48,000

(Being forfeiture of 9,000 shares of ` 10 each for non- payment

of allotment, first and final call money as per Board’s
Resolution No…..dated….)
Bank A/c (9,000 x ` 12) Dr. 1,08,000
To Share Capital A/c 90,000

CA Mayank Sharma | +91- 83051-34143

 22

To Securities Premium A/c 18,000

(Being the re-issue of 9,000 shares of ` 10 each @ ` 12 as

per Board’s Resolution No…..dated…)
Forfeited Shares A/c Dr. 48,000
To Capital Reserve A/c 48,000
(Being profit on re-issue transferred to Capital
Reserve).

Working Note:
Shareholders Money Received Money Not Received On
Application Allotment First Call Final Call Allotment First Call Final Call
A 2,000 - - - 2,000 2,000 2,000
B 4,000 4,000 - - - 4,000 4,000
C 3,000 3,000 3,000 - - - 3,000
TOTAL 9,000 7,000 3,000 - 2,000 6,000 9,000
Money `2 `3 `3 `2 `3 `3 `2
Receivable ` 18,000 `21,000 ` 9,000 - ` 6,000 ` 18,000 ` 18,000

ILLUSTRATION 17
X Limited invited applications for issuing 75,000 equity shares of ` 10 each at a premium of ` 5 per
share. The total amount was payable as follows:

- ` 9 per share (including premium) on application and allotment

- Balance on the First and Final Call

Applications for 3,00,000 equity shares were received. Applications for 2,00,000 equity shares
were rejected and money refunded. Shares were allotted on pro-rata basis to the remaining
applicants. The first and final call was made. The amount was duly received except on 1,500 shares
applied by Mr. Raj. His shares were forfeited. The forfeited shares were re-issued at a discount of `
4/- per share.

Pass necessary journal entries· for the above transactions in the books of X Limited.

SOLUTION
Journal

Dr. Cr.
` `
1 Bank Account Dr. 27,00,000

CA Mayank Sharma | +91- 83051-34143

 23

To Share Application & Allotment A/c 27,00,000

(Being Application money on 3,00,000 shares at ` 9 per
share received.)
2 Share Application & Allotment A/c Dr. 27,00,000
To Share Capital A/c (75,000 x ` 4) 3,00,000
To Securities premium A/c (75,000 x ` 5) 3,75,000
To Bank A/c (2,00,000 x ` 9) 18,00,000
To Share First & Final Call A/c 2,25,000
(Being application money transferred)
3 Share First & Final Call A/c (75,000 x6) Dr. 4,50,000
To Share Capital Account 4,50,000
(Amount First & Final Call A/c due from members as per
Directors, resolution no...... dated ....... )
Bank Account A/c Dr. 2,21,625
4 Calls in arrear A/c Dr. 3,375
To Share First & Final Call Account 2,25,000
(Being Receipt of the amounts due on first call.)
5 Equity share capital A/c Dr. 11,250
To Share forfeiture A/c 7,875
To Calls in arrear A/c 3,375
(Being 1,125 shares forfeited for non payment of final
call.)
6 Bank Account A/c (1,125 x ` 6) Dr. 6,750
Share forfeiture A/c (1,125 x ` 4) 4,500
To Share Capital Account (1,125 x ` 10) 11,250
(Being forfeited shares reissued at ` 4 discount)
7 Share forfeiture A/c 3,375
To Capital reserve A/c 3,375
(Being share forfeiture transferred to capital reserve*)

CA Mayank Sharma | +91- 83051-34143

 24

Working notes:
1.

Shares Shares Money Money Money Excess Share Amount Money

Received on Transferred Transferred Application First and received
Applie Allotted Refunded
Application to Share to Security Money Final Call from
d
@ ` 9/- Capital@ Premium @ Share
` 4/- ` 6/- First
@` 5/-
and
Final Call
after
adjusting
excess
appl.
money

2,00000 - 18,00,000 - - - - - 18,00,000

1,00,000 75,000 9,00,000 3,00,000 3,75,000 2,25,000 4,50,000 2,25,000* -

3,00,000 75,000 27,00,000 3,00,000 3,75,000 2,25,000 4,50,000 4,46,625* 18,00,000

*4,50,000 less 2,25,000

** ` 4,50,000 less ` 3,375.

2. Number of shares allotted to Mr. Raj = 1,500 x 75,000 / 1,00,000 = 1,125 shares

3. Calculation of calls in arrear

Application money received from Raj (1,500 x9) 13,500

Less: actual application money 1,125 x9 10,125
Excess Application & Allotment Money Adjusted 3,375
with first and final call
Final call due from Raj 6,750
Less: Adjusted with final call (3,375)
Calls in arrear 3,375

CA Mayank Sharma | +91- 83051-34143

 25

ISSUE OF SHARES FOR CONSIDERATION OTHER

THAN CASH
ILLUSTRATION 18
X Co. Ltd. was incorporated with an authorized share capital of 90,000 equity shares of ` 10
each. The company purchased land and buildings from Y Co. Ltd for ` 4,00,000 payable in fully paid-
up shares of the company. The balance of the shares were issued to the public, which were fully
subscribed and paid for.
You are required to pass Journal Entries and to prepare the Balance Sheet.

SOLUTION
Journal

Date Particulars ` `
Land and Buildings A/c Dr. 4,00,000
To Y Co. Ltd A/c 4,00,000
(Being the land and buildings purchased from Y Co. Ltd
as per agreement dated…).
Y. Co. Ltd A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being 40,000 shares of ` 10 each issued to Y Co. Ltd. on
purchase of land and building)
Bank A/c Dr. 5,00,000
To Equity Share Application and Allotment A/c 5,00,000
(Being the issue of 50,000 shares of ` 10 each as per
Board’s Resolution No…..dated…)
Equity Share Application and Allotment A/c Dr 5,00,000
To Equity Share Capital A/c 5,00,000
(Being shares allotted for application money
received.)

Balance Sheet of X Company Limited as at….

Particulars Notes No. `

EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1 9,00,000

CA Mayank Sharma | +91- 83051-34143

 26

Total 9,00,000

ASSETS
1. Non-current assets
a Fixed assets
i. Plant Property and Equipment 2 4,00,000
2. Current assets
Cash and cash equivalents 3 5,00,000

Total 9,00,000

Notes to accounts

1. Share Capital
Equity share capital
Authorised share capital

90,000 Equity shares of ` 10 each 9,00,000

Issued share capital

90,000 Equity shares of ` 10 each 9,00,000

Subscribed Share Capital

90,000 Equity Shares of ` 10 each 9,00,000

Called up and Paid up Capital

90,000 Equity Shares of ` 10 each 9,00,000

(Out of the above 40,000 shares have been allotted as fully paid up
pursuant to contract(s) without payment being received in cash)
2. Plant Property and Equipment
Land and Building 4,00,000
3. Cash and cash equivalents
Balances with banks 5,00,000

Theory Questions
1. Write short notes on:
(i) Utilization of securities premium account

CA Mayank Sharma | +91- 83051-34143

 27

(ii) Re-issue of forfeited shares

2. Distinguish between:

(i) Calls-in-Arrears and Calls-in-advance

(ii) Issue of shares for cash and Issue of Shares for Consideration other than Cash
3. Can a company issue shares at discount?

Practical Questions
1. X Ltd. invited applications for 10 lakhs shares of ` 100 each payable as follows :

`
On Application 20
On Allotment (on 1st May, 2022) 30
On First Call (on 1st Oct., 2022) 30
On Final Call (on 1st Feb., 2023) 20

All the shares were applied for and allotted. A shareholder holding 20,000 shares paid
the whole of the amount due along with allotment. Journalise the transactions, assuming all
sums due were received. Interest was paid to the shareholder concerned on 1st February,
2023.

2. A limited Company, with an authorized capital of ` 20,00,000 divided into shares of

` 100 each, issued for subscription 10,000 shares payable at ` 25 per share on
application, ` 30 per share on allotment, ` 20 per share on first call three months after
allotment and the balance as and when required.
The subscription list closed on January 31, 2022 when application money on 10,000
shares was duly received and allotment was made on March 1, 2022. All amounts due were
received within one month of the date they were called.
The allotment amount was received in full but, when the first call was made, one shareholder
failed to pay the amount on 1,000 shares held by him and another shareholder with 500
shares paid the entire amount on his shares.
Give journal entries in the books of the Company to record these share capital transactions.
3. A Ltd. forfeits 100 shares of Rs.10 each fully called upon. The shareholder failed to pay
the first call money of Rs. 4 per share and the second and final Call Money of Rs. 4 per share.
Give journal entry to show the effect of this transaction.

4. B Ltd. issued 20,000 equity shares of ` 100 each at a premium of ` 20 per share payable as

CA Mayank Sharma | +91- 83051-34143

 28

follows: on application ` 50; on allotment ` 50 (including premium); on final call ` 20.

Applications were received for 24,000 shares. Letters of regret were issued to applicants
for 4,000 shares and shares were allotted to all the other applicants. Mr. A, the holder of 150
shares, failed to pay the allotment and call money, the shares were forfeited. Show the
Journal Entries and Cash Book in the books of B Ltd.

CA Mayank Sharma | +91- 83051-34143

 29

ANSWERS/ HINTS
Theoretical Questions
1. (ii) A forfeited share is merely a share available to the company for sale and remains
vested in the company for that purpose only. Reissue of forfeited shares is not
allotment of shares but only a sale. The share, after forfeiture, in the hands of the
company is subject to an obligation to dispose it off. In practice, forfeited shares are
disposed off by auction. These shares can be re- issued at any price so long as the total
amount received (from the original allottee and the second purchaser) for those shares is
not less than the amount in arrears on those shares.
2. (i)Calls-in-Arrears: Sometimes shareholders fail to pay the amount due on allotment
or calls. The total unpaid amount on one or more instalments is known as
Calls-in-Arrears or Unpaid Calls. Such amount represents the uncollected amount
of capital from the shareholders; hence, it is shown by way of deduction from
‘called-up capital’ to arrive at paid-up value of the share capital. Calls-in-advance:
Some shareholders may sometimes pay a part, or whole, of the amount not yet
called up, such amount is known as Calls-in-advance.
(ii) The shares can be issued by a company either for cash or for consideration other
than cash. Public limited companies, generally, issue their shares for cash and use
such cash to buy the various types of assets needed in the business. Sometimes,
however, a company may issue shares in a direct exchange for land, buildings or
other assets.

3. According to Section 53 of the Companies Act, 2013, a Company cannot issue

shares at a discount except in the case of issue of sweat equity shares (issued to
employees and directors). Thus any issue of shares at discount shall be void.

Practical Question
1. Journal of X Ltd.

2022 ` in ` in
lakhs lakhs
May 1 Bank A/c Dr. 200
To Share Application A/c 200
(Receipt of applications for 10 lakh shares along
with application money of ` 20 per share.)
May 1 Share Application A/c Dr. 200

CA Mayank Sharma | +91- 83051-34143

 30

Share Allotment A/c Dr. 300

To Share Capital A/c 500

(The allotment of 10 lakh shares: payable on
application ` 20 share and ` 30 on allotment as per
Directors’ resolution no... dated...)
May 1 Bank A/c Dr. 310
To Shares Allotment A/c 300
To Calls in Advance A/c 10

[Receipt of money due on allotment @ ` 30, also

the two calls (` 30 and ` 20) on 20,000 shares.]
Oct. 1 Share First Call A/c Dr. 300
To Share Capital A/c 300

(The amount due on 10 lakh shares @ ` 30 on first

call, as per Directors, resolution no... dated...)
Bank A/c Dr. 294
Calls in Advance A/c Dr. 6
To Share First Call A/c 300
(Receipt of the first call on 9.80 lakh shares, the
balance having been previously received and now
debited to call in advance account.)
2023
Feb. 1 Share Final Call A/c Dr. 200
To Share Capital A/c 200
(The amount due on Final Call on 10 lakh shares @
` 20 per share, as per Directors’ resolution no...
dated...)
Feb. 1 Bank A/c Dr. 196
Calls in Advance A/c Dr. 4
To Share Final Call A/c 200
(Receipt of the moneys due on final call on 9.80 lakhs
shares, the balance having been previously received.)

CA Mayank Sharma | +91- 83051-34143

 31

Feb. 1 Interest on calls in Advance A/c Dr. 0.66

To Shareholder A/c 0.66

(Being interest on call in advance made due)

Feb 1 Shareholder A/c Dr. 0.66

To Bank A/c 0.66
(Being interest paid)

Working Note:

The interest on calls in advance paid @ 12% on : `

` 6,00,000 (first call) from 1st May to 1st Oct., 2022–5 months 30,000
` 4,00,000 (final call) from 1st May to 1st Feb., 2023–9 months 36,000
Total Interest Amount Due 66,000

2. Journal Entries in the Books of the Company

Date Particulars L.F. Debit Credit

2022 Amount Amount

(`) (`)
Jan. 31 Bank A/c Dr. 2,50,000
To Equity Share Application 2,50,000
A/c
(Money received on applications for
10,000 shares @ ` 25 per share)

March 1 Equity Share Application A/c Dr. 2,50,000

To Equity Share Capital A/c 2,50,000
(Transfer of application money on 10,000
shares to share capital)

March 1 Equity Share Allotment A/c Dr. 3,00,000

To Equity Share Capital A/c 3,00,000
(Amount due on the allotment of 10,000
shares @ ` 30 per share)

CA Mayank Sharma | +91- 83051-34143

 32

April 1 Bank A/c Dr. 3,00,000

To Equity Share Allotment A/c 3,00,000
(Allotment money received)
June 1 Equity Share First Call A/c Dr. 2,00,000
To Equity Share Capital A/c 2,00,000
(First call money due on 10,000 shares @
` 20 per share)
July 1 Bank A/c Dr. 1,92,500
Calls-in-Arrears A/c Dr. 20,000
To Equity Share First Call A/c 2,00,000
To Calls-in-Advance A/c 12,500
(First call money received on 9000 shares
and calls-in-advance on 500 shares @
` 25 per share)

3. In the Books of A Ltd.

Journal Entries

Date Particulars ` `

Equity Share Capital A/c (100X10) Dr. 1,000

To Share First Call A/c (100X4) 400
To Second and Final Call A/c (100X4) 400
To Share Forfeiture A/c (100X2) 200
(Being share forfeiture of 100 shares as per Board’s
Resolution No…..dated…)

4. In the Books of B Ltd.

Cash Book (Bank column only)

Date Particulars ` Date Particulars `

To Equity Share By Equity Share
Application A/c 12,00,000 Application A/c 2,00,000
(Being application (Being excess money
money received on refunded on 4,000 shares @
24,000 shares @ ` 50 each as per Board’s
` 50 each) Resolution No…dated….)

CA Mayank Sharma | +91- 83051-34143

 33

To Equity Share 9,92,500 By Balance c/d 23,89,500

Allotment A/c
(Being allotment
money received on
19,850 shares @
` 50 each)
To Equity Share 3,97,000
Final Call A/c
(Being final call
money received on
19,850 shares @
` 20 each)
25,89,500 25,89,500

Journal Entries

Date Particulars ` `
Equity Share Application A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(Being application money on 20,000 shares @` 50 each
transferred to Equity Share Capital Account as per
Board’s Resolution No…..dated…)
Equity Share Allotment A/c Dr. 10,00,000
To Equity Share Capital A/c 6,00,000
To Securities Premium A/c 4,00,000
(Being allotment money @ ` 50 per share including
premium of ` 20 per share being made due as per
Board’s Resolution No……dated….)
Equity Share Capital A/c (150 x ` 100) Dr. 15,000

Securities Premium A/c (150 x ` 20) Dr. 3,000

To Equity Share Allotment A/c 7,500

To Equity Share Final Call A/c 3,000

To Forfeited Shares A/c 7,500

(Being forfeiture of 150 shares for non-payment

of allotment money and final call money as per
Board’s Resolution No….dated…)

CA Mayank Sharma | +91- 83051-34143

 34

Equity Share Final Call A/c (19,850 x ` 20) Dr. 3,97,000

To Equity Share Capital A/c 3,97,000

(Being final call money received for ` 20 per share

being made as per Board’s resolution No…. dated ……)
Note: Here, securities premium on forfeited shares has not been realised, so Securities
Premium Account will be debited at the time of forfeiture of these shares.
Also, alternatively Calls in arrears A/c could have been used in which case following entries
would have been passed in place of the entry (given above) for forfeiture:

On non- receipt of allotment money:

Calls in Arrears A/c Dr. 7,500
To Equity Share Allotment A/c 7,500
(Being allotment money on 150 shares @ ` 50 not received
transferred to calls in arrears.)
On non - receipt of Call money:
Calls in Arrears A/c Dr. 3,000
To Equity Share Final Call A/c 3,000
(Being final call on 150 shares @ ` 20 not received transferred to
calls in arrears)
On Forfeiture:
Share Capital A/c (150 x ` 100) 15,000
Securities Premium A/c (150 x ` 20) 3,000
To Calls in Arrears A/c 10,500
To Share Forfeiture A/c 7,500
(Being forfeiture of 150 shares for non-payment of allotment money
and final call money as per Board’s Resolution No….dated…)

CA Mayank Sharma | +91- 83051-34143

 35

ACCOUNTING FOR BONUS ISSUE AND

RIGHT ISSUE
ILLUSTRATION 1
Following items appear in the trial balance of Bharat Ltd. (a listed company) as on 31st March, 2022:

Example 1
Alpha Company announced bonus issue to its shareholders in the ratio of 2:3 ie. 2 shares for
every 3 shares held. Shareholder X has 6,000 shares before announcement of bonus issue. How
much shares would he have after bonus issue?

Solution
Company announced bonus issue in ratio of 2:3

Shareholder X will be entitled to have 4,000 bonus shares (6,000 shares / 3 x 2) Total

number of shares X has after bonus issue 10,000 (6,000 + 4,000)

`
40,000 Equity shares of ` 10 each 4,00,000
Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
General Reserve 1,05,000
Surplus i.e. credit balance of Profit and Loss Account 50,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 4 shares held and for this purpose, it decided that there should be the minimum reduction
in free reserves. Pass necessary journal entries.
SOLUTION
Journal Entries in the books of Bharat Ltd.

Dr. Cr.
` `
Capital Redemption Reserve A/c Dr. 55,000
Securities Premium A/c Dr. 30,000
General Reserve A/c (b.f.) Dr. 15,000
To Bonus to Shareholders A/c 1,00,000
(Bonus issue of one share for every four shares held, by
utilising various reserves as per Board’s resolution
dated…….)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital A/c 1,00,000

CA Mayank Sharma | +91- 83051-34143

 36

(Capitalisation of profit)

CA Mayank Sharma | +91- 83051-34143

 37

Working Note-
Number of Bonus shares to be issued- (40,000 shares / 4) X 1 = 10,000 shares Value

of Bonus shares- 10,000 shares of ` 10 each = ` 1,00,000

ILLUSTRATION 2

Pass Journal Entries in the following circumstances:

(i) A Limited company with subscribed capital of ` 5,00,000 consisting of 50,000 Equity shares
of ` 10 each; called up capital ` 7.50 per share. A bonus of ` 1,25,000 declared out of
General Reserve to be applied in making the existing shares fully paid up.

(ii) A Limited company having fully paid up capital of ` 50,00,000 consisting of Equity shares of
` 10 each, had General Reserve of ` 9,00,000. It was resolved to capitalize ` 5,00,000 out of
General Reserve by issuing 50,000 fully paid bonus shares of ` 10 each, each shareholder to
get one such share for every ten shares held by him in the company.
SOLUTION
Journal Entries

` `
(i) General Reserve A/c Dr. 1,25,000
To Bonus to shareholders A/c 1,25,000
(For making provision of bonus issue)
Share Final Call A/c 1,25,000
To Equity share capital A/c 1,25,000
(For final calls of ` 2.5 per share on 50,000 equity
shares due as per Board’s Resolution dated….)
Bonus to shareholders A/c Dr. 1,25,000
To Share Final Call A/c 1,25,000
(For bonus money applied for call)
(ii) General Reserve A/c Dr. 5,00,000
To Bonus to shareholders A/c 5,00,000
(For making provision of bonus issue)
Bonus to shareholders A/c Dr. 5,00,000
To Equity share capital A/c 5,00,000
(For issue of 50,000 bonus shares at ` 10)

CA Mayank Sharma | +91- 83051-34143

 38

ILLUSTRATION 3
Following notes pertain to the Balance Sheet of Solid Ltd. as at 31st March, 2022:

`
Authorised capital :
10,000 12% Preference shares of ` 10 each 1,00,000
1,00,000 Equity shares of ` 10 each 10,00,000
11,00,000
Issued and Subscribed capital:
8,000 12% Preference shares of ` 10 each fully paid 80,000
90,000 Equity shares of ` 10 each, ` 8 paid up 7,20,000
Reserves and Surplus :
General reserve 1,60,000
Revaluation reserve 35,000
Securities premium (collected in cash) 20,000
Profit and Loss Account 2,05,000
Secured Loan:
12% Debentures @ ` 100 each 5,00,000

On 1st April, 2022 the Company has made final call @ ` 2 each on 90,000 equity shares. The
call money was received by 20th April, 2022. Thereafter the company decided to capitalise its
reserves by way of bonus at the rate of one share for every four shares held. Show necessary entries
in the books of the company and prepare the extract of the Balance Sheet immediately after bonus
issue assuming that the company has passed necessary resolution at its general body meeting
for increasing the authorised capital.

SOLUTION
Journal Entries in books of Solid Ltd.
Dr. Cr.
2022 ` `
April 1 Equity Share Final Call A/c Dr. 1,80,000
To Equity Share Capital A/c 1,80,000
(Final call of ` 2 per share on 90,000 equity
shares due as per Board’s Resolution dated... )

CA Mayank Sharma | +91- 83051-34143

 39

April 20 Bank A/c Dr. 1,80,000

To Equity Share Final Call A/c 1,80,000
(Final Call money on 90,000 equity shares
received)
Securities Premium A/c Dr. 20,000
General Reserve A/c Dr. 1,60,000
Profit and Loss A/c (b.f.) Dr. 45,000
To Bonus to Shareholders A/c 2,25,000
(Bonus issue @ one share for every four shares
held by utilising various reserves as per Board’s
Resolution dated...)
April 20 Bonus to Shareholders A/c Dr. 2,25,000
To Equity Share Capital A/c 2,25,000
(Capitalization of profit)

Balance Sheet (Extract) as at 30th April, 2022 (after bonus issue)

Particulars Notes Amount (`)

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 12,05,000
b Reserves and Surplus 2 1,95,000
2 Non-current liabilities
a Long-term borrowings 3 5,00,000
Total 19,00,000

Notes to Accounts

1 Share Capital
Authorised share capital
10,000 12% Preference shares of ` 10 each 1,00,000
1,12,500 Equity shares of ` 10 each 11,25,000
Issued, subscribed and fully paid share capital
8,000 12% Preference shares of ` 10 each 80,000
1,12,500 Equity shares of ` 10 each, fully paid
(Out of above, 22,500 equity shares
@ ` 10 each were issued by way of bonus) (A) 11,25,000
Total 12,05,000

CA Mayank Sharma | +91- 83051-34143

 40

2 Reserves and Surplus

Revaluation Reserve 35,000
Securities Premium 20,000
Less: Utilised for bonus issue (20,000) Nil
General reserve 1,60,000
Less: Utilised for bonus issue (1,60,000) Nil
Profit & Loss Account 2,05,000
Less: Utilised for bonus issue (45,000) 1,60,000
Total 1,95,000
3 Long-term borrowings
Secured
12% Debentures @ ` 100 each 5,00,000

The authorised capital has been increased by sufficient number of shares. (11,25,000 –
10,00,000)

Working Note-
Number of Bonus shares to be issued (90,000 shares / 4 ) X 1 = 22,500 shares

Note: It has to be ensured that the authorized capital after bonus issue should not be less than the
issued share capital (including bonus issue) in all the practical problems. The authorized capital
may either be increased by the amount of bonus issue or the value of additional shares [value of
bonus shares issued less unused authorized capital (excess of authorized capital in comparison to
the issued shares before bonus issue)].

ILLUSTRATION 4
Following notes pertain to the Balance Sheet of Preet Ltd. as at 31st March, 2022

`
Share capital:
Authorised capital:
15,000 12% Preference shares of ` 10 each 1,50,000
1,50,000 Equity shares of ` 10 each 15,00,000
16,50,000
Issued and Subscribed capital:
12,000 12% Preference shares of ` 10 each fully paid 1,20,000
1,35,000 Equity shares of ` 10 each, ` 8 paid up 10,80,000

CA Mayank Sharma | +91- 83051-34143

 41

Reserves and surplus:

General Reserve 1,80,000
Capital Redemption Reserve 60,000
Securities premium (collected in cash) 37,500
Profit and Loss Account 3,00,000

On 1st April, 2022, the Company has made final call @ ` 2 each on 1,35,000 equity shares. The call
money was received by 20th April, 2022. Thereafter, the company decided to capitalise its reserves
by way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet as on 30th April, 2022 after bonus issue.
SOLUTION
Journal Entries in the books of Preet Ltd.

` `
1-4-2022 Equity share final call A/c Dr. 2,70,000
To Equity share capital A/c 2,70,000
(For final calls of ` 2 per share on 1,35,000 equity
shares due as per Board’s Resolution dated….)

20-4-2022 Bank A/c Dr. 2,70,000

To Equity share final call A/c 2,70,000
(For final call money on 1,35,000 equity shares
received)
Securities Premium A/c Dr. 37,500
Capital Redemption Reserve A/c Dr. 60,000
General Reserve A/c Dr. 1,80,000
Profit and Loss A/c (b.f.) Dr. 60,000
To Bonus to shareholders A/c 3,37,500
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 3,37,500
To Equity share capital A/c 3,37,500
(For issue of bonus shares)

CA Mayank Sharma | +91- 83051-34143

 42

Extract of Balance Sheet as at 30th April, 2022 (after bonus issue)

Particulars Notes Amount (`)

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 18,07,500
b Reserves and Surplus 2 2,40,000
Total 20,47,500

Notes to Accounts

`
1. Share Capital
Authorised Capital
15,000 12% Preference shares of `10 each 1,50,000
1,68,750 Equity shares of `10 each (refer working note 16,87,500
below)
Issued and subscribed capital
12,000 12% Preference shares of `10 each, fully paid 1,20,000
1,68,750 Equity shares of `10 each, fully paid 16,87,500
(Out of above, 33,750 equity shares @ `10 each were issued
by way of bonus)
Total 18,07,500
2. Reserves and surplus
Securities Premium 37,500
Less: Utilised for bonus issue (37,500) NIL
Capital Redemption Reserve 60,000
Less: Utilised for bonus issue (60,000) NIL
General Reserve 1,80,000
Less: Utilised for bonus issue (1,80,000) NIL
Profit and Loss Account Less: 3,00,000
Utilised for bonus issue (60,000) 2,40,000

CA Mayank Sharma | +91- 83051-34143

 40

Working Notes:
1. Number of Bonus shares to be issued-`
(1,35,000 shares / 4) X 1 = 33,750 shares
2. The authorised capital should be increased as per details given below:
Existing issued Equity share capital 13,50,000
Add: Issue of bonus shares to equity shareholders 3,37,500
16,87,500

ILLUSTRATION 5

A company offers new shares of ` 100 each at 25% premium to existing shareholders on one for four
bases. The cum-right market price of a share is ` 150. Calculate the value of a right. What should
be the ex-right market price of a share?
SOLUTION

Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares Issue Price) /
(Existing Number of shares + No. of right shares)

= (` 150 X 4 Shares + ` 125 X 1 Share) / (4 + 1) Shares

= ` 725 / 5 shares = ` 145 per share.

Value of right = Cum-right value of the share – Ex-right value of the share

= ` 150 – ` 145 = ` 5 per share.

Hence, any one desirous of having a confirmed allotment of one share from the company at
` 125 will have to pay ` 20 (4 shares X ` 5) to an existing shareholder holding 4 shares and willing to
renounce his right of buying one share in favour of that person.

CA Mayank Sharma | +91- 83051-34143

 Practical Questions
1. Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2022:

Particulars Amount
,500 Equity Shares of ` 100 each 4,50,000
Securities Premium (collected in cash) 40,000
Capital Redemption Reserve 70,000
General Reserve 1,05,000
Profit and Loss Account (Cr. Balance) 65,000

The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 3 shares held. Company decided that there should be the minimum reduction in
free reserves. Pass necessary Journal Entries in the books Saral Ltd.

2. The following notes pertain to Brite Ltd.'s Balance Sheet as at 31st March, 2022:

Notes ` in Lakhs
(1) Share Capital
Authorised :
20 crore shares of ` 10 each 20,000
Issued and Subscribed :
10 crore Equity Shares of ` 10 each 10,000
2 crore 11% Cumulative Preference Shares of ` 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of ` 10 each, ` 8 per share called and paid up 8,000
2 crore 11% Cumulative Preference Shares of ` 10 each,
fully called and paid up 2,000

Total 10,000

(2) Reserves and Surplus :

Capital Redemption Reserve 1,485

Securities Premium (collected in cash) 2,000

General Reserve 1,040

Surplus i.e. credit balance of Profit & Loss Account 273

Total 4,798

On 2nd April 2022, the company made the final call on equity shares @ ` 2 per share.
The entire money was received in the month of April, 2022.

CA Mayank Sharma | +91- 83051-34143

 On 1st June 2022, the company decided to issue to equity shareholders bonus shares at the
rate of 2 shares for every 5 shares held . Pass journal entries for all the above mentioned
transactions. Also prepare the notes on Share Capital and Reserves and Surplus relevant
to the Balance Sheet of the company immediately after the issue of bonus shares.

3. Following notes pertain to the Balance Sheet of Manoj Ltd. as at 31st March, 2022

Authorised capital: `
30,000 12% Preference shares of ` 10 each 3,00,000
3,00,000 Equity shares of ` 10 each 30,00,000
33,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000

On 1st April, 2022, the Company has made final call @ ` 2 each on 2,70,000 equity
shares. The call money was received by 20th April, 2022. Thereafter, the company decided to
capitalise its reserves by way of bonus at the rate of one share for every four shares held.

Show necessary journal entries in the books of the company and prepare the extract of
the balance sheet as on 30th April, 2022 after bonus issue.

4. A company has decided to increase its existing share capital by making rights issue to its
existing shareholders. The company is offering one new share for every two shares held
by the shareholder. The market value of the share is ` 240 and the company is offering one
share of ` 120 each. Calculate the value of a right. What should be the ex-right market price
of a share?

5. A Ltd company having share capital of 25,000 equity shares of `10 each decides to issue rights
share at the ratio of 1 for every 4 shares held at par value. Assuming all the share holders
accepted the rights issue and all money was duly received, pass journal entries in the
books of the company.

6. Following notes pertain to the Balance Sheet of Mars Company Limited as at 31st
March 2022:

`
Authorised capital:

CA Mayank Sharma | +91- 83051-34143

 50,000 12% Preference shares of ` 10 each 5,00,000
5,00,000 Equity shares of ` 10 each 50,00,000
55,00,000
Issued and Subscribed capital:
50,000 12% Preference shares of ` 10 each fully paid 5,00,000
4,00,000 Equity shares of ` 10 each, ` 8 paid up 32,00,000
Reserves and surplus:
General Reserve 1,60,000
Capital Redemption Reserve 2,40,000
Securities premium (collected in cash) 2,75,000
Revaluation Reserve 1,00,000
Profit and Loss Account 16,00,000

On 1st April, 2022, the Company has made final call @ ` 2 each on 4,00,000 equity shares.
The call money was received by 25th April, 2022. Thereafter, on 1st May 2022 the company
decided to capitalise its reserves by way of bonus at the rate of one share for every four shares
held, it decided that there should be minimum reduction in free reserves.

On 1st June 2022, the Company issued Rights shares at the rate of two shares for every
five shares held on that date at issue price of ` 12 per share. All the rights shares were accepted
by the existing shareholders and the money was duly received by 20th June 2022.

Show necessary journal entries in the books of the company for bonus issue and rights issue.

ANSWERS/ HINTS
Practical Questions
1. Journal Entries in the books of Saral Ltd.

2022 Dr. Cr.

Capital Redemption Reserve A/c Dr. 70,000
Securities Premium A/c Dr. 40,000
General Reserve A/c (b.f.) Dr. 40,000
To Bonus to Shareholders A/c 1,50,000
(Bonus issue of one shares for every three
shares held, by utilising various reserves as per
Board’s resolution dated…….)
Bonus to Shareholders A/c Dr. 1,50,000

CA Mayank Sharma | +91- 83051-34143

 To Equity Share Capital A/c 1,50,000
(Capitalisation of profit)

Working Note- Number of bonus shares to be issued- 4500 / 3 X1= 1500 shares

2. Journal Entries in the books of Brite Ltd.

2022 Dr. Cr.

` in lakhs ` in lakhs
April 2 Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000
(Final call of ` 2 per share on 10 crore
equity shares made due)
Bank A/c Dr. 2,000
To Equity Share Final Call A/c 2,000
(Final call money on 10 crore equity
shares received)
June 1 Capital Redemption Reserve A/c Dr. 1,485
Securities Premium A/c Dr. 2,000
General Reserve A/c (b.f.) Dr. 515
To Bonus to Shareholders A/c 4,000
(Bonus issue of two shares for every five
shares held, by utilising various reserves
as per Board’s resolution dated…….)
Bonus to Shareholders A/c Dr. 4,000
To Equity Share Capital A/c 4,000
(Capitalisation of profit)

Notes to Accounts

` in lakhs
1. Share Capital
Authorised share capital:
20 crore shares of ` 10 each 20,000
Issued, subscribed and fully paid up share capital:
14 crore Equity shares of ` 10 each, fully paid up 14,000
(Out of the above, 4 crore equity shares @ ` 10 each
were issued by way of bonus)
2 crore, 11% Cumulative Preference share capital of ` 10
each, fully paid up 2,000

CA Mayank Sharma | +91- 83051-34143

 16,000
2. Reserves and Surplus:
Capital Redemption reserve 1,485
Less: Utilised for bonus issue (1,485) -
Securities Premium 2,000
Less: Utilised for bonus issue (2,000) -
General Reserve 1,040
Less: Utilised for bonus issue (515) 525
Surplus (Profit and Loss Account) 273
Total 798

3. Journal Entries in the books of Manoj Ltd.

` `
1-4-2022 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ` 2 per share on 2,70,000
equity shares due as per Board’s Resolution
dated….)
20-4-2022 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity
shares received)
Securities Premium A/c Dr. 75,000
Capital redemption Reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of
one share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)

Extract of Balance Sheet as at 30th April, 2022 (after bonus issue)

CA Mayank Sharma | +91- 83051-34143

 Authorised Capital
30,000 12% Preference shares of `10 each 3,00,000
3,37,500 Equity shares of `10 each (refer W.N.) 33,75,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of `10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ `10 each were
issued by way of bonus shares)
Reserves and surplus
Capital Redemption Reserve 1,20,000
Less: Utilised for bonus issue (1,20,000) NIL
Securities premium 75,000
Less: Utilised for bonus issue (75,000) NIL
General Reserve 3,60,000
Less: Utilised for bonus issue (3,60,000) NIL
Profit and Loss Account 6,00,000
Less: Utilised for bonus issue (1,20,000) 4,80,000

Working Note:
1. Number of bonus shares to be issued- 2,70,000/4 X1= 67,500 shares

2. The authorised capital should be increased as per details given below: `

Existing issued Equity share capital 27,00,000

Add: Issue of bonus shares to equity shareholders 6,75,000 33,75,000

4. Ex-right value of the shares = (Cum-right value of the
existing
shares + Rights shares x Issue Price) / (Existing
Number of shares + No. of right shares)
= (` 240 x 2 Shares + ` 120 x 1 Share) / (2 + 1)
Shares
= ` 600 / 3 shares = ` 200 per share

Value of right = Cum-right value of the share – Ex-right value of the share
= ` 240 – ` 200 = ` 40 per share.

Hence, any one desirous of having a confirmed allotment of one share from the company at ` 120 will
have to pay ` 80 (2 shares x ` 40) to an existing shareholder holding 2 shares and willing to renounce his
right of buying one share in favour of that person.

CA Mayank Sharma | +91- 83051-34143

 Journal Entry in the books of A Ltd.

` `
Bank A/c Dr. 62,500
To Equity share capital A/c 62,500
(For rights share issued at par value in the ratio of 1:4
equity shares due as per Board’s Resolution dated….)

Working Note:
Number of Rights shares to be issued- 25,000/4x1= 6,250 shares

5. Journal Entries in the books of Mars Ltd.

2022 Dr. Cr.

` `
April 1 Equity Share Final Call A/c Dr. 8,00,000
To Equity Share Capital A/c 8,00,000
(Final call of ` 2 per share on 4,00,000
equity shares made due)
April 25 Bank A/c Dr. 8,00,000
To Equity Share Final Call A/c 8,00,000
(Final call money on equity shares
received)
May 1 Capital Redemption Reserve A/c Dr. 2,40,000
Securities Premium A/c Dr. 2,75,000
General Reserve A/c Dr. 1,60,000
Profit and Loss A/c (b.f.) Dr. 3,25,000
To Bonus to Shareholders A/c 10,00,000
(Bonus issue of one shares for every four
shares held, by utilising various reserves
as per Board’s resolution dated…….)
Bonus to Shareholders A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(Capitalisation of profit)

CA Mayank Sharma | +91- 83051-34143

 June 20 Bank A/c Dr. 24,00,000
To Securities Premium A/c 4,00,000
To Equity Share Capital A/c 20,00,000
(Being Rights issue of 2 shares for every 5
shares held as per board resolution dated
………..)

REDEMPTION OF PREFERENCE SHARES

ILLUSTRATION 1

Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of ` 100 each, fully paid up.
The company decided to redeem these preference shares at par by the issue of sufficient number of equity
shares of ` 10 each fully paid up at par. You are required to pass necessary Journal Entries including
cash transactions in the books of the company.
SOLUTION

In the books of Hinduja Company Ltd.

Journal Entries

Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000
(Being the issue of 50,000 Equity Shares of `10
each at par for the purpose of redemption of
preference shares, as per Board Resolution No.
……..dated ......... )
8% Redeemable Preference Share Capital A/c Dr. 5,00,000
To Preference Shareholders A/c 5,00,000
(Being the amount payable on redemption of
preference shares transferred to Preference
Shareholders Account)
Preference Shareholders A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Being the amount paid on redemption of
preference shares)

ILLUSTRATION 2

C Ltd. had 10,000, 10% Redeemable Preference Shares of ` 100 each, fully paid up. The company

CA Mayank Sharma | +91- 83051-34143

 decided to redeem these preference shares at par, by issue of sufficient number of equity shares of
` 10 each at a premium of ` 2 per share as fully paid up. You are required to pass necessary
Journal Entries including cash transactions in the books of the company.

SOLUTION

In the books of C Ltd.

Journal Entries

Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 12,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium A/c 2,00,000
(Being the issue of 1,00,000 Equity Shares of `10 each
at a premium of `2 per share as per Board’s Resolution
No….. dated )
10% Redeemable Preference Share Capital A/c Dr. 10,00,000
To Preference Shareholders A/c 10,00,000
(Being the amount payable on redemption of
preference shares transferred to Preference
Shareholders A/c)
Preference Shareholders A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Being the amount paid on redemption of
preference shares)

Note: Amount required for redemption is ` 10,00,000. Therefore, face value of equity shares to be
issued for this purpose must be equal to ` 10,00,000. Premium received on new issue cannot be used to
finance the redemption.

ILLUSTRATION 3
G India Ltd. had 9,000 10% redeemable Preference Shares of ` 10 each, fully paid up. The company
decided to redeem these preference shares at par by the issue of sufficient number of equity shares
of ` 9 each fully paid up.
You are required to pass necessary Journal Entries including cash transactions in the books of the
company.

CA Mayank Sharma | +91- 83051-34143

 SOLUTION
In the books of G India Limited Journal

Date Particulars Dr. Cr. (`)

(`)
Bank A/c Dr. 90,000
To Equity Share Capital A/c 90,000
(Being the issue of 10,000 Equity Shares of `9 each at par,
as per Board’s Resolution No…….Dated…..)
10% Redeemable Preference Shares Capital A/c Dr. 90,000
To Preference Shareholders A/c 90,000
(Being the amount payable on redemption of preference
shares transferred to Preference Shareholders A/c)
Preference Shareholders A/c Dr. 90,000
To Bank A/c 90,000
(Being the amount paid on redemption of preference
shares)

ILLUSTRATION 4

The Board of Directors of a Company decided to issue minimum number of equity shares of ` 9 to
redeem ` 5,00,000 preference shares. The maximum amount of divisible profits available for redemption
is ` 3,00,000. Calculate the number of shares to be issued by the company to ensure that the provisions
of Section 55 are not violated. Also determine the number of shares if the company decides to issue
shares in multiples of 50 only.

SOLUTION

Nominal value of preference shares ` 5,00,000 Maximum

possible redemption out of profits ` 3,00,000

Minimum proceeds of fresh issue ` 5,00,000 – 3,00,000 = ` 2,00,000 Proceed of one

share =`9
2,00,000
Minimum number of shares = = 22,222.22 shares
9
As fractional shares are not permitted, the minimum number of shares to be issued is 22,223 shares.

If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50 is
22,250. Hence, minimum number of shares to be issued in such a case is 22,250 shares.

CA Mayank Sharma | +91- 83051-34143

 ILLUSTRATION 5
X Ltd. gives you the following information as at 31st March, 2023:

Particulars `
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 2,90,000
b Reserves and Surplus 48,000
2. Current liabilities
Trade Payables 56,500
ASSETS
1. Property, Plant and Equipment 3,45,000
2. Non-current investments 18,500
3. Current Assets
Cash and cash equivalents (bank) 31,000

The share capital of the company consists of ` 50 each equity shares of ` 2,25,000 and ` 100 each
Preference shares of ` 65,000(issued on 1.4.2021). Reserves and Surplus comprises Profit and Loss
Account only.
In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided:

(a) to sell all the investments for ` 15,000.

(b) to finance part of redemption from company funds, subject to, leaving a bank balance of
` 12,000.
(c) to issue minimum equity share of ` 50 each share to raise the balance of funds required. You are

required to pass the necessary Journal Entries to record the above transactions.

SOLUTION

Journal

Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 37,500
To Share Application A/c 37,500
(For application money received on 750 shares @
` 50 per share)
Share Application A/c Dr. 37,500
To Equity Share Capital A/c 37,500
(For disposition of application money received)

CA Mayank Sharma | +91- 83051-34143

 Preference Share Capital A/c Dr.
65,000
Premium on Redemption of
Preference Shares A/c Dr.
6,500
To Preference Shareholders A/c
71,500
(For amount payable on redemption of preference shares)
Bank A/c Dr.
15,000
Profit and Loss A/c (loss on sale) A/c Dr.
3,500
To Investment A/c
18,500
(For sale of investments at a loss of ` 3,500)
Profit and Loss A/c Dr.
27,500
To Capital Redemption Reserve A/c
27,500
(For transfer to CRR out of divisible profits an amount
equivalent to excess of nominal value of preference shares
over proceeds (face value of equity shares) i.e., ` 65,000 -
` 37,500)
Preference Shareholders A/c Dr.
71,500
To Bank A/c
71,500
(For payment of preference shareholders)
Profit and Loss A/c Dr.
6,500
To Premium on Redemption of Preference Shares
6,500
A/c
(For writing off premium on redemption out of profits)

Working Note:
Calculation of Number of Shares: `
Amount payable on redemption (` 65,000 + 10% of ` 65,000) 71,500
Less: Sale price of investment (15,000)
56,500
Less: Available bank balance (31,000 - 12,000) (19,000)
Funds from fresh issue 37,500
No. of shares = 37,500/50=750 shares

ILLUSTRATION 6
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 2022.

Share capital: 40,000 Equity shares of ` 10 each fully paid – ` 4,00,000; 1,000 10% Redeemable
preference shares of ` 100 each fully paid – ` 1,00,000.

Reserve & Surplus: Capital reserve – ` 50,000; Securities premium – ` 50,000; General reserve –

CA Mayank Sharma | +91- 83051-34143

 ` 75,000; Profit and Loss Account – ` 35,000
On 1st January 2023, the Board of Directors decided to redeem the preference shares at par by
utilisation of reserve.
You are required to pass necessary Journal Entries including cash transactions in the books of the
company.

SOLUTION
In the books of ABC Limited Journal
Entries

Date Particulars Dr. (`) Cr. (`)

2023
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,00,000
To Preference Shareholders A/c 1,00,000
(Being the amount payable on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being the amount paid on redemption of
preference shares)
General Reserve A/c Dr. 75,000
Profit & Loss A/c Dr. 25,000
To Capital Redemption Reserve A/c 1,00,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)

Note: Securities premium and capital reserve (not being distributable profits) cannot be utilised
for transfer to Capital Redemption Reserve.

ILLUSTRATION 7
C Limited had 3,000, 12% Redeemable Preference Shares of ` 100 each, fully paid up. The company had
to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:

(i) 25,000 Equity Shares of ` 10 each at par,

(ii) 1,000 14% Debentures of ` 100 each.

CA Mayank Sharma | +91- 83051-34143

 The issue was fully subscribed and all amounts were received in full. The payment was duly made.
The company had sufficient profits. Show Journal Entries in the books of the company.

SOLUTION
In the books of C Limited Journal
Entries

Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 2,50,000
To Equity Share Capital A/c 2,50,000
(Being the issue of 25,000 equity shares of ` 10 each
at par as per Board’s resolution No……dated…..)

Bank A/c Dr. 1,00,000

To 14% Debenture A/c 1,00,000
(Being the issue of 1,000 Debentures of
` 100 each as per Board’s Resolution
No…..dated……)
Profit & Loss A/c Dr. 50,000
To Capital Redemption Reserve A/c 50,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)

12% Redeemable Preference Share Capital A/c Dr. 3,00,000

Premium on Redemption of Preference Shares A/c Dr. 30,000
To Preference Shareholders A/c 3,30,000
(Being the amount payable on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 3,30,000
To Bank A/c 3,30,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 30,000
To Premium on Redemption of 30,000
Preference Shares A/c
(Being the adjustment of premium on redemption
against Profits & Loss Account)
Working Note:

CA Mayank Sharma | +91- 83051-34143

 Amount to be transferred to Capital Redemption Reserve Account

Face value of shares to be redeemed 3,00,000

Less: Proceeds from new issue (2,50,000)
Total Balance 50,000

ILLUSTRATION 8
The capital structure of a company consists of 20,000 Equity Shares of ` 10 each fully paid up and
1,000 8% Redeemable Preference Shares of ` 100 each fully paid up (issued on 1.4.2021).

Undistributed reserve and surplus stood as: General Reserve ` 80,000; Profit and Loss Account
` 20,000; Investment Allowance Reserve out of which ` 5,000, (not free for distribution as dividend) `
10,000; Securities Premium ` 2,000, Cash at bank amounted to ` 98,000. Preference shares are to be
redeemed at a Premium of 10% and for the purpose of redemption, the directors are empowered to
make fresh issue of Equity Shares at par after utilising the undistributed reserve and surplus, subject
to the conditions that a sum of ` 20,000 shall be retained in general reserve and which should not be
utilised.
Pass Journal Entries to give effect to the above arrangements.

SOLUTION
In the books of ……….
Journal Entries

Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of
` 10 each at a premium of Re. 1 per share as per Board’s
Resolution No…..dated…….)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c
75,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)
8% Redeemable Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference Shares A/c Dr. 10,000

CA Mayank Sharma | +91- 83051-34143

 To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of Preference Shares A/c 10,000
(Being the premium payable on redemption is adjusted
against Profit & Loss Account)

Working Note:
No of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed ` 1,00,000

Less: Profit available for distribution as dividend:

General Reserve : `(80,000-20,000) ` 60,000 Profit and

Loss (20,000 – 10,000 set aside for

adjusting premium payable on redemption of preference

shares) `10,000

Investment Allowance Reserve: (` 10,000-5,000) ` 5,000 (` 75,000)

` 25,000

Therefore, No. of shares to be issued = ` 25,000/`10 = 2,500 shares.

ILLUSTRATION 9
The Balance Sheet of XYZ Ltd. as at 31st March, 2021 inter alia includes the following
information:

`
50,000, 8% Preference Shares of `100 each, `70 paid up 35,00,000

1,00,000 Equity Shares of `100 each fully paid up 1,00,00,000

Securities Premium 5,00,000

Capital Redemption Reserve 20,00,000
General Reserve 50,00,000

CA Mayank Sharma | +91- 83051-34143

 Bank 15,00,000

Under the terms of their issue, the preference shares are redeemable on 31st March, 2022 at 5%
premium. In order to finance the redemption, the company makes a rights issue of 50,000 equity shares
of ` 100 each at ` 110 per share, ` 20 being payable on application, ` 35 (including premium) on
allotment and the balance on 1st January, 2023. The issue was fully subscribed and allotment
made on 1st March, 2022. The money due on allotment were duly received by 31st March, 2022.
The preference shares were redeemed after fulfilling the necessary conditions of Section 55 of the
Companies Act, 2013.

You are asked to pass the necessary Journal Entries. (Ignore date column)

SOLUTION

Journal Entries

` `
8% Preference Share Final Call A/c Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
(For final call made on preference shares @ ` 30 each to
make them fully paid up)
Bank A/c Dr. 15,00,000
To 8% Preference Share Final Call A/c 15,00,000
(For receipt of final call money on preference shares)
Bank A/c Dr. 10,00,000
To Equity Share Application A/c 10,00,000
(For receipt of application money on 50,000 equity shares @
` 20 per share)
Equity Share Application A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(For capitalisation of application money received)
Equity Share Allotment A/c Dr. 17,50,000
To Equity Share Capital A/c 12,50,000
To Securities Premium A/c 5,00,000
(For allotment money due on 50,000 equity shares @ ` 35
per share including a premium of ` 10 per share)
Bank A/c Dr. 17,50,000
To Equity Share Allotment A/c 17,50,000
(For receipt of allotment money on equity shares)

CA Mayank Sharma | +91- 83051-34143

 General Reserve A/c Dr. 27,50,000
To Capital Redemption Reserve A/c 27,50,000
(For transfer of CRR the amount not covered by the
proceeds of fresh issue of equity shares i.e., 50,00,000 -
10,00,000 - 12,50,000)
8% Preference Share Capital A/c Dr. 50,00,000
Premium on Redemption of Preference Shares A/c Dr. 2,50,000
To Preference Shareholders A/c 52,50,000
(For amount payable to preference shareholders on
redemption at 5% premium)
Preference Shareholders A/c Dr. 52,50,000
To Bank A/c 52,50,000
(For amount paid to preference shareholders)
General Reserve A/c Dr. 2,50,000
To Premium on Redemption A/c 2,50,000
(For writing off premium on redemption of preference
shares)

Note: On the redemption of redeemable preference shares out of accumulated divisible profits, it will
be necessary to transfer to the Capital Redemption Reserve Account an amount equal to the amount repaid
on the redemption of preference shares on account of face value less proceeds of a fresh issue of shares
made for the purpose of redemption.

ILLUSTRATION 10

With the help of the details in Illustration 9 above and further assuming that the Preference Shareholders
holding 2,000 shares fail to make the payment for the Final Call made under Section 55, you are
asked to pass the necessary Journal Entries and show the relevant extracts from the balance sheet as on
31st March, 2022 with the corresponding figures as on 31st December, 2021 assuming that the shares
in default are forfeited after giving proper notices. (Ignore date column)
SOLUTION

Journal Entries

` `
8% Preference Share Final Call A/c Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
(For final call made on preference shares @
` 30 each to make them fully paid up)
Bank A/c (48,000 x ` 30) Dr. 14,40,000

CA Mayank Sharma | +91- 83051-34143

 Calls in arrears A/c (2,000x ` 30) 60,000

To 8% Preference Share Final Call A/c 15,00,000

(For receipt of final call money on preference shares)

Preference Share Capital A/c (2000 X ` 100) To Dr. 2,00,000
Calls in Arrears A/c (2000 X ` 30) 60,000
To Shares Forefeited A/c (2000 X ` 70) 1,40,000
(For Shares Forefeited after shareholders fail to pay
the Final Call)
Bank A/c Dr. 10,00,000
To Equity Share Application A/c 10,00,000
(For receipt of application money on 50,000 equity
shares @ ` 20 per share)
Equity Share Application A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(For capitalisation of application money received)
Equity Share Allotment A/c Dr. 17,50,000
To Equity Share Capital A/c 12,50,000
To Securities Premium A/c 5,00,000
(For allotment money due on 50,000 equity shares @ `
35 per share including a premium of ` 10 per share)
Bank A/c Dr. 17,50,000
To Equity Share Allotment A/c 17,50,000
(For receipt of allotment money on equity shares)
General Reserve A/c Dr. 25,50,000
To Capital Redemption Reserve A/c 25,50,000
(For transfer of CRR the amount not covered by the
proceeds of fresh issue of equity shares i.e., 48,00,000 –
10,00,000 – 12,50,000)
8% Preference Share Capital A/c Dr. 48,00,000
Premium on Redemption of Preference Shares A/c Dr. 2,40,000
To Preference Shareholders A/c 50,40,000
(For amount payable to preference shareholders on
redemption at 5% premium)
Preference Shareholders A/c Dr. 50,40,000
To Bank A/c 50,40,000
(For amount paid to preference shareholders)

CA Mayank Sharma | +91- 83051-34143

 General Reserve A/c Dr. 2,40,000
To Premium on Redemption A/c 2,40,000
(For writing off premium on redemption of
preference shares)
Shares Forfeited A/c Dr. 1,40,000
To Capital Reserve A/c 1,40,000
(For transferring balance to Capital Reserve A/c after
redemption of preference shares)

Note: Amount received (excluding premium) on fresh issue of shares till the date of redemption
should be considered for calculation of proceeds of fresh issue of shares. Thus, proceeds of fresh issue of
shares ` 22,50,000 (`10,00,000 application money plus ` 12,50,000 received on allotment towards share
capital) will be considered.

Practical Questions
1. The books of B Ltd. showed the following balance on 31st December, 2023:

30,000 Equity Shares of ` 10 each fully paid; 18,000 12% Redeemable Preference Shares of `10
each fully paid; 4,000 10% Redeemable Preference Shares of ` 10 each, ` 8 paid up (all shares
issued on 1st April, 2022).

Undistributed Reserve and Surplus stood as: Profit and Loss Account ` 80,000; General Reserve `
1,20,000; Securities Premium Account ` 15,000 and Capital Reserve ` 21,000.

For redemption, 3,000 equity shares of ` 10 each are issued at 10% premium. At the same
time, Preference shares are redeemed on 1st January, 2024 at a premium of ` 2
per share. The whereabouts of the holders of 100 shares of ` 10 each fully paid are not known.

A bonus issue of equity share was made at par, two shares being issued for every five held
on that date out of the Capital Redemption Reserve Account. However, equity shares, issued
for redemption are not eligible for bonus.
Show the necessary Journal Entries to record the transactions. (Ignore date column)

ANSWERS/ HINTS
Practical Questions
1. In the books of B Limited

CA Mayank Sharma | +91- 83051-34143

 Journal Entries

Particulars Dr. (`) Cr. (`)

12% Redeemable Preference Share Capital A/c Dr. 1,80,000
Premium on Redemption of Preference Shares A/c Dr. 36,000
To Preference Shareholders A/c 2,16,000
(Being the amount payable on redemption of 18,000
12% Redeemable Preference Shares transferred to
Shareholders Account)
Preference Shareholders A/c Dr. 2,14,800
To Bank A/c 2,14,800
(Being the amount paid on redemption of 17,900
preference shares)
Bank A/c Dr. 33,000
To Equity Shares Capital A/c 30,000
To Securities Premium A/c 3,000
(Being the issue of 3,000 Equity Shares of
` 10 each at a premium of 10% as per Board’s Resolution
No……. Dated……)
General Reserve A/c Dr. 1,20,000
Profit & Loss A/c Dr. 30,000
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital Redemption
Reserve A/c as per the requirement of the Act.)
Capital Redemption Reserve A/c Dr. 1,20,000
To Bonus to Shareholders A/c 1,20,000
(Being the amount appropriated for issue of bonus share
in the ratio of 5:2 as per shareholders Resolution No.…..
dated…)
Bonus to Shareholders A/c Dr. 1,20,000
To Equity Share Capital A/c 1,20,000
(Being the utilisation of bonus dividend for issue of
12,000 equity shares of ` 10 each fully paid)
Profit & Loss A/c Dr. 36,000

CA Mayank Sharma | +91- 83051-34143

 To Premium on Redemption of Preference Shares 36,000
A/c
(Being premium on redemption of preference shares
adjusted against to Profit & Loss Account)

Working Note:
(1) Partly paid-up preference shares cannot be redeemed.

(2) Amount to be Transferred to Capital Redemption Reserve Account Face

value of share to be redeemed ` 1,80,000 Less:

Proceeds from fresh issue (excluding premium) (` 30,000)

` 1,50,000

(3) No bonus shares on 3,000 equity shares issued for redemption.

Note: Bonus shares does not result in receipt of cash, and hence the increase in share capital on
account of bonus issue cannot be considered in determination of amount to be transferred to
Capital Redemption Reserve.

CA Mayank Sharma | +91- 83051-34143

 Chapter:02
Accounting for DEBENTURES

ILLUSTRATION 1
Amol Ltd. issued 40,00,000, 9% debentures of ` 50 each, payable on
application as per term mentioned in the prospectus and redeemable
at par any time after 3 years from the date of issue. Record
necessary entries for issue of debentures in the books of Amol Ltd.

SOLUTION
Books of Amol Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount (`) Amount (`)
Bank A/c Dr. 20,00,00,000
To Debenture Application A/c 20,00,00,000
(Debenture application money
received)
Debenture Application A/c Dr. 20,00,00,000
To 9% Debentures A/c 20,00,00,000
(Application money transferred to
9% debentures account consequent
upon Allotment)

ILLUSTRATION 2 Atul Ltd. issued 1,00,00,000, 8% debenture of `100

each at a discount of 10% redeemable at par at the end of 10th
year. Money was payable as follows :
` 30 on application
` 60 on allotment
Record necessary journal entries regarding issue of debenture.

SOLUTION
Books of Atul Ltd.

CA Mayank Sharma | +91- 83051-34143

 Journal

Date Particulars L.F Debit Credit

.
(`) (`)
Bank A/c Dr. 30,00,00,000

To Debenture Application A/c 30,00,00,000

(Debenture application money received)

Debenture Application Dr. 30,00,00,000

A/c To 8% 30,00,00,000
Debentures A/c
(Application money transferred to 8%
debentures account consequent upon
allotment)
Debenture allotment A/c Dr. 60,00,00,000

Discount on issue of debentures Dr. 10,00,00,000

A/c To 8% Debentures A/c 70,00,00,000

(Amount due on allotment)

Bank A/c Dr. 60,00,00,000

To Debenture Allotment A/c

60,00,00,000
(Money received upon
consequent
allotment)

ILLUSTRATION 3
Koinal Chemicals Ltd. issued 15,00,000, 10% debenture of ` 50 each at
premium of 10%, payable as ` 20 on application and balance on allotment.
Debentures are redeemable at par after 6 years. All the money due on
allotment was called up and received. Record necessary entries when
premium money is included in application money.

SOLUTION
Books of Koinal Chemicals Ltd.
Journal
When premium money is received along with application money:

CA Mayank Sharma | +91- 83051-34143

 Date Particulars Debit Credit
Amount (`) Amount (`)
Bank A/c Dr. 3,00,00,000
To Debenture Application A/c 3,00,00,000
(Debenture application
money received)
Debentures Application Dr. 3,00,00,000
A/c To 10% 2,25,00,000
Debentures A/c To 75,00,000
Securities Premium A/c
(Application money transferred to
10% debentures account and
securities premium
account
consequent upon allotment)
Debenture Allotment A/c Dr. 5,25,00,000
To 10% Debentures 5,25,00,000
A/c
(Call made consequent
upon allotment)
Bank A/c Dr. 5,25,00,000
To Debenture Allotment A/c 5,25,00,000
(Call made consequent
upon allotment money
received)

ILLUSTRATION 4
Modern Equipments Ltd. issued 4,00,000, 12% debentures of ` 100 payable

as follows : On application ` 30

On allotment ` 70
The debenture were fully subscribed and all the money was duly
received. As per the terms of issue, debentures are redeemable at `110
per debenture. Record necessary entries regarding issue of debentures.

SOLUTION
Books of Modern Equipments Ltd.
Journal

CA Mayank Sharma | +91- 83051-34143

 Date Particulars Debi Credi
t t
Amoun Amoun
t t
(` (`
Lakhs) Lakhs)
Bank A/c Dr. 120
To Debentures application A/c 120
(Debenture application money received)
Debentures Application Dr. 120
A/c To 12% 120
Debentures A/c
(Application money transferred to
12% debentures account
consequent to allotment)
Debentures Allotment A/c Dr. 280
Loss on issue of Debentures Dr. 40
A/c To 12% Debentures 280
A/c 40
To Debenture redemption premium
A/c
(Call made on allotment of debentures at
par and entry for debentures redeemable at
premium)
Bank A/c Dr. 280
To Debentures allotment A/c 280
(Call made consequent upon allotment
money received)

ILLUSTRATION 5
Agrotech Ltd. issued 150 lakh 9% debentures of ` 100 each at a discount of
6%, redeemable at a premium of 5% after 3 years payable as: ` 50 on
application and ` 44 on allotment. Record necessary journal entries for
issue of debentures.

SOLUTION

Books of Agrotech Ltd.

CA Mayank Sharma | +91- 83051-34143

 Journal

Date Particulars L.F. Debit Credit

Amount Amount
(` (`
Lakhs) Lakhs)
Bank A/c Dr. 7,500
To Debenture Application A/c 7,500
(Debentures application money received)

Debenture Application A/c Dr. 7,500

To 9% Debentures A/c 7,500
(Application money transferred to 9%
debentures account)
Debenture Allotment A/c Dr. 6,600

Discount on issue of debentures Dr 900

Loss on issue of debenture A/c Dr. 750

To 9% Debentures A/c 7,500
To Debenture redemption premium A/c 750
(Call made consequent upon allotment of
debentures issued at discount and redeemable
at premium)
Bank A/c Dr. 6,600
To Debenture Allotment A/c (Allotment 6,600
amount received)

Working Notes:
Amount of discount on issue = 150 Lakhs X ₹100 X 6% =
₹900 lakhs Loss on issue of debentures = 150 Lakhs X ₹100 X 5% =
₹750 Lakhs
Alternatively, the discount on issue of debentures can be combined with loss on
issue of debentures A/c as both discount and premium on redemption represent
loss to the company. In that case, the journal

Books of Agrotech Ltd.

CA Mayank Sharma | +91- 83051-34143

 Journal
Date Particulars Debit Credit
Amount Amount
(` (`
Lakhs) Lakhs)
Bank A/c Dr. 7,500
To Debenture Application A/c 7,500
(Debentures application money received)

Debenture Application A/c Dr. 7,500

To 9% Debentures A/c 7,500
(Application money transferred to 9%
debentures account)
Debenture Allotment A/c Dr. 6,600
Loss on issue of debenture A/c Dr. 1,650
To 9% Debentures A/c 7,500
To Debenture redemption premium A/c 7,50
(Call made consequent upon allotment of
debentures issued at discount and redeemable at
premium)
Bank A/c Dr. 6,600
To Debenture Allotment A/c (Allotment 6,600
amount received)

Working Notes :
Loss on issue of debentures =

(Amount of discount on issue + Premium payable on redemption) x No. of Debentures

= (6% of `100 + 5% of `100) x 150 lakh

= (` 6 + ` 5) x 150 lakh

= ` 1,650 lakh

ILLUSTRATION 6
Simmons Ltd. issued 1,00,000, 12% Debentures of `100 each at par
payable in full on application by 1st April, Application were received for
1,10,000 Debentures. Debentures were allotted on 7th April. Excess
money refunded on the same date.

CA Mayank Sharma | +91- 83051-34143

 You are required to pass necessary Journal Entries (including cash
transactions) in the books of the company.

SOLUTION
In the books of Simmons Limited

Date Particulars ` 000 ` 000

April 1 Bank A/c Dr. 11,000
To Debentures Application A/c 11,000
(Being money received on 1,10,000 debentures)
April 7 Debentures Application A/c Dr. 1,000
To Bank A/c 1,000
(Being money on 10,000 debentures refunded as
per Board’s Resolution No…..dated…)
April 7 Debentures Application A/c Dr. 10,000
To Debentures A/c 10,000
(Being the allotment of 1,00,000 debentures of ` 100
each at par, as per Board’s Resolution
No….dated…)

ILUSTRATION 7

X Ltd. issued 1,00,000 12% Debentures of `100 each at a discount of 10%

payable in full on application by 31st May, 2022. Applications were received
for 1,20,000 debentures. Debentures were allotted on 9th June, 2022.
Excess money was refunded on the same date. Pass necessary Journal
Entries. Also show necessary ledger accounts.

SOLUTION
In the books of X
Limited Journal
Entries

Date
2022 Particulars ` '000 ` '000
May 31 Bank A/c Dr. 10,800
To Debentures Application A/c 10,800
(Being money received for 1,20,000 debentures @ `
90 each)
June 9 Debentures Application A/c Dr. 1,800

CA Mayank Sharma | +91- 83051-34143

 To Bank A/c 1,800
(Being excess money on 20,000 debentures @ ` 90
refunded as per Board’s Resolution No….dated….)
June 9 Debentures Application A/c Dr. 9,000
Discount on Issue of Debentures A/c Dr. 1,000
To 12% Debentures A/c 10,000
(Being the allotment of 1,00,000 debentures of ` 100 each
at a discount of ` 10 per debenture as per Board’s
Resolution No…..dated…)

Bank Account

Date Particulars ` Date Particulars `

31.5.2022 To 12% 10,800 9.6.2022 By 12% Debentures 1,800
Debentures Application A/c
Application A/c 9.6.2022 By Balance c/d 9,000
10,800 10,800

12% Debentures Account

Date Particulars ` Date Particulars `

30.6.2022 To Balance 10,000 9.6.202 By 12% 9,000
c/d 2 Debentures
Application A/c
9.6.202 By Discount on Issue of 1,000
2 Debentures A/c
10,000 10,000

Debentures Application Account

Date Particulars ` Date Particulars `

9.6.2022 To Bank A/c 1,800 31.5.2022 By Bank A/c 10,800
9.6.2022 To 12% Debentures A/c 9,000
10,800 10,800

Discount on Issue of Debentures Account

Date Particulars ` Date Particulars `

9.6.2022 To12% Debentures 1,000 30.6.2022 By Balance c/d 1,000
A/c 1,000 1,000

CA Mayank Sharma | +91- 83051-34143

 ILLUSTRATION 8
X Ltd. obtains a loan from IDBI of `1,00,00,000, giving as collateral
security of
`1,50,00,000 (of ` 10 each), 14%, First Mortgage Debentures.

SOLUTION
In the Notes to Accounts of Balance Sheet of X Ltd., it is shown as follows:

Notes to Accounts of X Limited as at…(includes)

Long Term Borrowings`

Secured Loan

IDBI Loan 1,00,00,000

(Collaterally secured by issue of ` 1,50,00,000 14% First Mortgage Debentures)

Method 2
Under this method, the following entry is made to record the issue of such

debentures: Debentures Suspense Account Dr.

To % Debentures Account

(Being the issue of…debentures collaterally as

per Board’s Resolution No…..dated……)

The Debentures Suspense Account will appear on the assets side of the Balance
Sheet under Other Non- Current Assets and Debentures on the liabilities side of the
Balance Sheet. When the loan is repaid, the entry is reversed in order to cancel it.

ILLUSTRATION 9
Taking the same information of the illustration 8, the entry on issue
will be as follows :

In the Books of X Ltd.

Journal
Date Particulars ` `
Debentures Suspense A/c Dr. 1,50,00,000
To 14% First Mortgage Debentures A/c 1,50,00,000
(Being the issue of ` 15,00,000 debentures @
`10 collaterally as per Board’s Resolution
No…dated…)
Balance Sheet of X Limited as at….(Extracts)

CA Mayank Sharma | +91- 83051-34143

 Particulars Notes `
No.
EQUITY AND LIABILITIES
1. Non-Current Liabilities
Long Term Borrowings 1 1,00,00,000
Total 1,00,00,000
ASSETS
2. Non-current Assets
Other non-current asset
3. Current Assets
Cash and cash equivalent 1,00,00,000
Total 1,00,00,000
Notes to accounts `

`
1. Long Term Borrowings 1,00,00,00
Secured Loan 0
IDBI Loan
1,50,00,00
14% First Mortgage Debentures 0
Debenture Suspense Account 1,50,00,00
0
(issue of ` 15,00,000 14% First
Debentures as collateral security as per
contra)

ILLUSTRATION 10
X Company Limited issued 10,000 14% Debentures of the
nominal value of
`50,00,000 as follows:

(a) To sundry persons for cash at 90% of nominal value of `

25,00,000.
(b) To a vendor for purchase of fixed assets worth
`10,00,000 – ` 12,50,000 nominal value.
(c) To the banker as collateral security for a loan of ` 10,00,000
– ` 12,50,000 nominal Value. Pass Necessary Journal Entry

SOLUTION
In the books of X Company Ltd.

CA Mayank Sharma | +91- 83051-34143

 Journal Entries
Date Particulars ` `

(a) Bank A/c Dr. 22,50,000

To Debentures Application A/c 22,50,000

(Being the application money received on

5,000 debentures @ ` 450 each)
Debentures Application A/c Dr. 22,50,000

Discount on issue of Debentures A/c Dr. 2,50,000

To 14% Debentures A/c 25,00,000

(Being the issue of 5,000 14% Debentures @ 90%

as per Board’s Resolution No….dated….)

(b) Fixed Assets A/c Dr. 10,00,000

To Vendor A/c 10,00,000

(Being the purchase of fixed assets from vendor)

Vendor A/c Dr. 10,00,000

Discount on Issue of Debentures A/c Dr. 2,50,000

To 14% Debentures A/c 12,50,000

(Being the issue of debentures of ` 12,50,000 to

vendor to satisfy his claim)
(c) Bank A/c Dr. 10,00,000

To Bank Loan A/c (See Note) 10,00,000

(Being a loan of ` 10,00,000 taken from bank by
issuing debentures of ` 12,50,000 as collateral
security)
Note : No entry is made in the books of account of the company at the time of
making issue of such debentures. In the Balance Sheet due to the fact that the
debentures being issued as collateral security and outstanding are shown under the
respective liability.

ILLUSTRATION 11
HDC Ltd issues 1,00,000, 12% Debentures of ` 100 each at ` 94 on 1st
January, 2022. Under the terms of issue, the debentures are redeemable
at the end of 5 years from the date of the issue. Calculate the amount

CA Mayank Sharma | +91- 83051-34143

 of discount to be written- off in each of the 5 years.

SOLUTION
Total amount of discount comes to ` 6,00,000 (`6 X 1,00,000). The amount of discount to be
written-off in each year is calculated as under :

Year end Debentures Ratio in Amount of discount

outstanding which to be written-
discount to off
be written-
off
1st ` 1,00,00,000 1/5 1/5th of ` 6,00,000 = `
1,20,000
2nd ` 1,00,00,000 1/5 1/5th of ` 6,00,000 = `
1,20,000
3rd ` 1,00,00,000 1/5 1/5th of ` 6,00,000 = `
1,20,000
4th ` 1,00,00,000 1/5 1/5th of ` 6,00,000 = `
1,20,000

5th ` 1,00,00,000 1/5 1/5th of ` 6,00,000= ` 1,20,000

ILLUSTRATION 12
HDC Ltd. issues 2,00,000, 12% Debentures of `10 each at `9.40 on 1st
January, 2022. Under the terms of issue, 1/5th of the debentures are
annually redeemable by drawings, the first redemption occurring on 31st
December, 2022. Calculate the amount of discount to be written- off
from 2022 to 2026.

SOLUTION
Calculation of amount of discount to be written-off
At the Debentures Ratio of Amount of discount
Year Outstandin benefit to be written-
end g before Derived off
redemption
2022 ` 20,00,000 5 5/15th of ` 1,20,000 = ` 40,000
2023 ` 16,00,000 4 4/15th of ` 1,20,000 = ` 32,000
2024 ` 12,00,000 3 3/15th of ` 1,20,000 = ` 24,000
2025 ` 8,00,000 2 2/15th of ` 1,20,000 = ` 16,000
2026 ` 4,00,000 1 1/15th of ` 1,20,000 = ` 8,000
TOTAL 15 ` 1,20,000

CA Mayank Sharma | +91- 83051-34143

 ILLUSTRATION 13
A company issued 12% debentures of the face value of `10,00,000 at 10%
discount on 1-1-2022. Debenture interest after deducting tax at source @
10% was payable on 30th June and 31st of December every year. All the
debentures were to be redeemed after the expiry of five year period at 5%
premium.
Pass journal entries for the accounting year 2022.

SOLUTION
Journal Entries
(`) (`)
1-1-2022 Bank A/c Dr. 9,00,000
Discount/Loss on Issue of Debentures A/c Dr. 1,50,000
To 12% Debentures A/c 10,00,000
To Premium on Redemption of Debentures 50,000
A/c
(For issue of debentures at discount
redeemable at premium)
30-6-2022 Debenture Interest A/c Dr. 60,000
To Debenture holders A/c 54,000

To Tax Deducted at Source 6,000

A/c (For interest payable)

Debenture holders A/c Dr. 54,000
Tax Deducted at Source Dr. 6,000
A/c To Bank A/c 60,000
(For payment of interest and TDS)
31-12-2022 Debenture Interest A/c Dr. 60,000
To Debenture holders A/c 54,000

To Tax Deducted at Source 6,000

A/c (For interest payable)

Debenture holders A/c Dr. 54,000
Tax Deducted at Source Dr. 6,000
A/c To Bank A/c 60,000
(For payment of interest and tax)

CA Mayank Sharma | +91- 83051-34143

 Profit and Loss A/c Dr. 1,20,000
To Debenture Interest A/c 1,20,000
(For transfer of debenture interest to profit
and loss account at the end of the year)
Profit and Loss A/c Dr. 30,000
To Discount/Loss on issue of debenture A/c 30,000
(For proportionate debenture discount and
premium on redemption written off, i.e.,
1,50,000 x 1/5)

CA Mayank Sharma | +91- 83051-34143

 Practical questions
1. Country Crafts Ltd. issued 1,00,000, 8% debentures of ` 100 each at
premium of 5% payable fully on application and redeemable at
premium of ` 10 Pass necessary journal entries at the time of issue.

2. Koinal Chemicals Ltd. issued 20,00,000, 10% debentures of ` 50 each

at premium of 10%, payable as ` 20 on application and balance on
allotment. Debentures are redeemable at par after 6 years. All the
money due on allotment was called up and received. Record
necessary entries when premium money is included in allotment
money.

3. Kapil Ltd. issued 50,000, 12% Debentures of ` 100 each at a premium

of 10% payable in full on application by 1st March, 2022. The issue was
fully subscribed and debentures were allotted on 9th March, 2022.

Pass necessary Journal Entries (including cash transactions).

4. On 1st April 2022 Sheru Ltd. issued 1,00,000 12% debentures of ` 100
each at a discount of 5%, redeemable on 31st March, 2027. Issue was
oversubscribed by 20,000 debentures, who were refunded their
money. Interest is paid annually on 31st March. You are required to
prepare:

(i) Journal Entries at the time of issue of debentures.

(ii) Discount on issue of Debenture Account
(iii) Interest account and Debenture holder Account assuming
TDS is deducted @ 10%.

5. A Limited issued 14% Debentures of the nominal value of ` 10

each as follows:

(a) To sundry persons 1,00,000 Debentures for cash at 10%

discount.

(b) To a vendor for purchase of Inventory worth ` 1,00,000,

8,000 debentures at 25% premium.

(c) To the banker as collateral security for a loan of ` 1,00,000 – `

1,50,000 nominal value.

Pass necessary Journal

Entries.

CA Mayank Sharma | +91- 83051-34143

 11.178

ANSWERS/HINTS
Practical Questions
1. Journal Entries in the Books of Country Crafts Ltd.

Debi Credit

Date Particulars t Amount

Amoun (`'000)
t
(`'000)
(a) Bank A/c Dr. 10,500
To Debenture Application A/c 10,500
(Debenture application money received)

(b) Debenture Application A/c Dr. 10,500

Loss on Issue of Debenture Dr. 1,000
A/c 500

To Securities Premium 10,000

A/c To 8% Debentures 1,000

A/c

To Premium on Redemption A/c

(Debenture application
money transferred to
debenture account)

CA Mayank Sharma | +91- 83051-34143

 11.179

2. Journal Entries in the Books of Koinal Chemicals Ltd.

Particulars Debit Credit

Amount Amount
(` (`
lakhs) lakhs)
Bank A/c Dr. 400
To Debenture Application A/c 400
(Debenture application money received)
Debentures Application A/c Dr. 400
To 10% Debentures A/c 400
(Debenture application money
transferred to 10% debenture account
consequent
upon allotment)
Debenture allotment A/c Dr. 700
To 10% Debentures 600
A/c To Securities 100
Premium A/c
(Call made on allotment of debenture including
premium)
Bank A/c Dr. 700
To Debenture Allotment A/c 700
(Money received consequent upon allotment)

CA Mayank Sharma | +91- 83051-34143

 11.180

3. Journal Entries in the books of Kapil Limited

Date Particulars ` `
2022
March 1 Bank A/c Dr. 55,00,000
To Debentures Application A/c 55,00,000
(Being the money received on
50,000 debentures @ ` 110 each
including premium of
` 10 each)
March 9 Debentures Application A/c Dr. 55,00,000

To 12% Debentures A/c 50,00,000

To Securities Premium A/c 5,00,000

(Being the allotment of 50,000 debentures

of
` 100 each, premium @ ` 10 each transferred
to Securities Premium Account as per
Board’s Resolution No….dated….)

4. (i) Journal in the Books of Sheru Ltd.

Date Particulars LF (` 00) (` 00)

2022
Apr 1 Bank A/c 1,14,000
To Debenture Application A/c 1,14,000
(Being debenture application money
received for 1,20,000 debentures)
Debenture Application A/c Dr. 1,14,000
Discount on Issue of Debenture A/c Dr. 5,000

CA Mayank Sharma | +91- 83051-34143

 11.181

To 12% 1,00,000
Debenture A/c To 19,000
Bank A/c
(Being application money transferred to
debenture account and excess refunded)

(ii) Discount on Issue of Debenture A/c

Date Particulars `'00 Date Particulars `'00

1.4.2 To 12% Debentures 5,000 31.3.2 By Profit & Loss A/c 1,000
2 A/c 3
31.3.2 By Balance c/d 4,00
3 0
5,000 5,000
1.4.2 To Balance b/d 4,000 31.3.2 By Profit & Loss A/c 1,000
3 4
31.3.2 By Balance c/d 3,00
4 0
4,000 4,000
1.4.2 To Balance b/d 3,000 31.3.2 By Profit & Loss A/c 1,000
4 5
31.3.2 By Balance c/d 2,00
5 0
3,000 3,000
1.4.2 To Balance b/d 2,000 31.3.2 By Profit & Loss A/c 1,000
5 6
31.3.2 By Balance c/d 1,00
6 0
2,000 2,000
1.4.2 To Balance b/d 1,000 31.3.2 By Profit & Loss A/c 1,000
6 7
1,000 1,000

(ii) Interest A/c

Date Particulars `'00 Date Particulars `'00

31.3.23 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000

A/c 3 A/c
12,000 12,000

CA Mayank Sharma | +91- 83051-34143

 11.182

31.3.24 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000

A/c 4 A/c
12,000 12,000
31.3.25 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000
A/c 5 A/c
12,000 12,000
31.3.26 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000
A/c 6 A/c
12,000 12,000
31.3.27 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000
A/c 7 A/c
12,000 12,000

Debentureholder A/c

Date Particulars `'00 Date Particulars `'00

31.3.23 To Bank A/c 10,800 31.3.23 By Interest 12,000
A/c
31.3.23 To TDS A/c 1,200
12,000 12,000
31.3.24 To Bank A/c 10,800 31.3.24 By Interest 12,000
A/c
31.3.24 To TDS A/c 1,200
12,000 12,000
31.3.25 To Bank A/c 10,800 31.3.25 By Interest 12,000
A/c
31.3.25 To TDS A/c 1,200
12,000 12,000
31.3.26 To Bank A/c 10,800 31.3.26 By Interest 12,000
A/c
31.3.26 To TDS A/c 1,200
12,000 12,000
31.3.27 To Bank A/c 10,800 31.3.27 By Interest 12,000
A/c
31.3.27 To TDS A/c 1,200
12,000 12,000

CA Mayank Sharma | +91- 83051-34143

 11.183

5. In the books of A Ltd.

Journal Entries

Date Particulars ` `
(a) Bank A/c Dr. 9,00,000
To Debentures Application A/c 9,00,000
(Being the application money received on
100,000 debentures @ ` 9 each)
Debentures Application A/c Dr. 9,00,00
0
Discount on issue of Debentures A/c Dr.
1,00,00
To 14% Debentures A/c 0
(Being the issue of 100,000 14% Debentures 10,00,000
@ 90% as per Board’s Resolution
No….dated….)

(b) Inventories A/c Dr. 1,00,000

To Vendor A/c 1,00,000
(Being the purchase of inventories from vendor)

Vendor A/c Dr. 1,00,000

To 14% Debentures 80,000
A/c To Securities 20,000
Premium
(Being the issue of 8,000 debentures of to
vendor to satisfy his claim at premium of
25%)
(c) Bank A/c Dr. 1,00,000

CA Mayank Sharma | +91- 83051-34143

 11.184

To Bank Loan A/c (See Note) 1,00,000

(Being a loan of `1,00,000 taken from bank by

issuing debentures of ` 1,50,000 as collateral
security)
Note : No entry is made in the books of account of the company at the time of making
issue of such debentures. In the Balance Sheet due to the fact that the debentures being
issued as collateral security and outstanding are shown under the respective liability

CA Mayank Sharma | +91- 83051-34143

 11.185

REDEMPTION OF DEBENTURES
ILLUSTRATION 1
The following balances appeared in the books of a company (unlisted company other than AIFI,
Banking company, NBFC and HFC) as on December 31, 2021: 6% Mortgage 10,000 debentures
of ` 100 each; Debenture Redemption Reserve (for redemption of debentures) ` 50,000; Investments
in deposits with a scheduled bank, free from any charge or lien ` 1,50,000 at interest 4% p.a.
receivable on 31st December every year. Bank balance with the company is ` 9,00,000.

The Interest on debentures had been paid up to December 31, 2021.

On February 28, 2022, the investments were realised at par and the debentures were paid off at 101,
together with accrued interest.
Write up the concerned ledger accounts (excluding bank transactions). Ignore taxation.

SOLUTION
6% Mortgage Debentures Account

2022 ` 2022 `
Feb. 28 To Debenture- 10,00,000 Jan. 1 By Balance b/d 10,00,000
holders A/c

Premium on Redemption of Debentures Account

2022 ` 2022 `
Feb. 28 To Debenture- 10,000 Feb. 28 By Profit and 10,000
holders A/c loss A/c

Debentures Redemption Reserve Investment Account

2022 ` 2022 `
Jan. 1 To Balance b/d 1,50,000 Feb. 28 By Bank 1,50,000

Debenture Interest Account

2022 ` 2022 `
Feb. 28 To Bank (10,000 x 100 10,000 Feb. 28 By Profit & Loss 10,000
x 6% x 2/12) A/c

CA Mayank Sharma | +91- 83051-34143

 11.186

Bank A/c

2022 ` 2022 `
Jan 01 To Balance b/d 9,00,000 Feb. 28 By Debenture-holders 10,10,000
(10,000 x 101)
Feb 28 To Interest on 1,000
Debentures
Redemption
Investments
(1,50,000 x 4% x
2/12)
To Debentures By Debenture Interest A/c 10,000
Redemption
Reserve By Balance c/d 31,000
investment A/c 1,50,000
10,51,000 10,51,000

Debenture Redemption Reserve Account

2022 ` 2022 `
Feb 28 To General 1,00,000 Jan.1 By Balance b/d 50,000
Reserve-note
Jan.1 By Profit & Loss (b/f) 50,000
1,00,000 1,00,000

Note
Amount to be transferred to DRR before the redemption = ` 1,00,000 [i.e. 10% of
(10,000 X 100)].

ILLUSTRATION 2
The following balances appeared in the books of Paradise Ltd (unlisted company other than
AIFI, Banking company, NBFC and HFC) as on 1-4-2021:

(i) 12 % Debentures ` 7,50,000

(ii) Balance of DRR ` 25,000
(iii) DRR Investment 1,12,500 represented by 10% ` 1,125 Secured Bonds of the Government
of India of ` 100 each.
Annual contribution to the DRR was made on 31st March every year. On 31-3-2022, balance at
bank was ` 7,50,000 before receipt of interest. The investment were realised at par for
redemption of debentures at a premium of 10% on the above date.
You are required to prepare the following accounts for the year ended 31st March, 2022:

CA Mayank Sharma | +91- 83051-34143

 11.187
(1) Debentures Account
(2) DRR Account
(3) DRR Investment Account
(4) Bank Account
(5) Debenture Holders Account.

SOLUTION
1. 12% Debentures Account

Date Particulars ` Date Particulars `

31st March, 2022 To Debenture 7,50,000 1st April, 2021 By Balance b/d 7,50,000
holders A/c
7,50,000 7,50,000

2. DRR Account

Date Particulars ` Date Particulars `

1 April, 2021
st
By Balance b/d 25,000
31st March, To General reserve 75,000 1st April, 2021 By Profit and loss A/c 50,000
2022 A/c (Refer Note) (Refer Note)
75,000 75,000

3. 10% Secured Bonds of Govt. (DRR Investment) A/c

` `
1 April, 2021
st
To Balance b/d 1,12,500 31 March, 2022
st
By Bank A/c 1,12,500
1,12,500 1,12,500

4. Bank A/c

` `
31st March, To Balance b/d 7,50,000 31st March, By Debenture 8,25,000
2022 To Interest on DRR 11,250 2022 holders A/c
Investment (1,12,500 x 10%)
To DRR Investment A/c 1,12,500 By Balance c/d 48,750
8,73,750 8,73,750

5. Debenture holders A/c

` `

CA Mayank Sharma | +91- 83051-34143

 11.188

31st March, To Bank A/c 8,25,000 31st March, By 12% Debentures 7,50,000
2022 2022 By Premium on redemption of
debentures (7,50,000 X 10%) 75,000

8,25,000 8,25,000

Note –
Calculation of DRR before redemption = 10% of ` 7,50,000 = 75,000 Available
balance = ` 25,000
DRR required = 75,000 – 25,000 = ` 50,000.

ILLUSTRATION 3
XYZ Ltd. has issued 1,000, 12% convertible debentures `100 each redeemable after a period of five
years. According to the terms & conditions of the issue, these debentures were redeemable at a
premium of 5%. The debenture holders also had the option at the time of redemption to convert
20% of their holdings into equity shares of ` 10 each at a price of ` 20 per share and balance in cash.
Debenture holders amounting ` 20,000 opted to get their debentures converted into equity shares
as per terms of the issue. You are required to calculate the number of shares issued and cash paid
for redemption of ` 20,000 debenture holders.

SOLUTION

Number of
debentures
Debenture holders opted for conversion (20,000 /100) 200
Option for conversion 20%
Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5% [40 x (100+5)] ` 4,200
Equity shares of ` 10 each issued on conversion
[` 4,200/ ` 20] 210 shares

Calculation of cash to be paid : `

Number of debentures 200
Less: number of debentures to be converted into equity shares (40)
160

Redemption value of 160 debentures (160 × ` 105) ie. ` 16,800.

CA Mayank Sharma | +91- 83051-34143

 11.189

ILLUSTRATION 4
The Balance Sheet of BEE Co. Ltd. (unlisted company other than AIFI, Banking company, NBFC
and HFC) as at 31st March, 2021 is as under:

Particulars Note No `

I. Equity and liabilities

(1) Shareholder's Funds

(a) Share Capital 1 2,00,000

(b) Reserves and Surplus 2 1,20,000

(2) Non-current liabilities

(a) Long term borrowings 3 1,20,000

(3) Current Liabilities

(a) Trade payables 1,15,000

Total 5,55,000

II. Assets

(1) Non-current assets

(a) Property, Plant and Equipment 4 1,15,000

(2) Current assets

(a) Inventories 1,35,000

(b) Trade receivables 75,000

(c) Cash and bank balances 5 2,30,000

Total 5,55,000

Notes to Accounts

`
1. Share Capital
Authorised share capital
30,000 shares of ` 10 each fully paid 3,00,000

Issued and subscribed share capital

20,000 shares of ` 10 each fully paid 2,00,000

CA Mayank Sharma | +91- 83051-34143

 11.190

2. Reserve and Surplus

Profit & Loss Account 1,20,000
3. Long term borrowings
12% Debentures 1,20,000
4. Property, Plant and Equipment
Freehold property 1,15,000
5. Cash and bank balances
Cash at bank 2,00,000
Cash in hand 30,000 2,30,000

At the Annual General Meeting, it was resolved:

(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for every four
shares (held prior to the bonus distribution). This option was taken up by all the shareholders.
(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%. The DRR Investments realised at par as
per existing Book value.
Give the necessary journal entries for these transactions.

SOLUTION
Journal of BEE Co. Ltd.

Dr. Cr.
` `
Bank A/c Dr. 75,000
To Equity Shareholders A/c 75,000
(Application money received on 5,000 shares @ ` 15 per
share to be issued as rights shares in the ratio of 1:4)
Equity Share Shareholders A/c Dr. 75,000
To Equity Share Capital A/c 50,000
To Securities Premium A/c 25,000
(Share application money on 5,000 shares @ ` 10 per share
transferred to Share Capital Account, and ` 5 per share to
Securities Premium Account vide Board’s Resolution
dated…)

CA Mayank Sharma | +91- 83051-34143

 11.191

Securities Premium A/c Dr.

Profit & Loss A/c Dr. 25,000

To Bonus to Shareholders A/c 25,000

50,000
(Amount transferred for issue of bonus shares to existing
shareholders in the ratio of 1:5 vide General Body’s
resolution dated...)
Bonus to Shareholders A/c Dr.
To Equity Share Capital A/c 50,000
50,000
(Issue of bonus shares in the ratio of 1 for 5 vide Board’s
resolution dated ..... )
Profit and Loss A/c Dr.
To Debenture Redemption Reserve 12,000
12,000
(for DRR created 10% x 1,20,000)
Debenture Redemption Reserve Investment A/c Dr.
To Bank A/c 18,000
18,000
(for DRR Investment created 15% x 1,20,000)
12% Debentures A/c Dr.
Premium Payable on Redemption A/c @ 3% Dr. 1,20,000
To Debenture holders A/c 3,600
1,23,600
(Amount payable to debentures holders)
Profit and loss A/c Dr.
To Premium Payable on Redemption A/c 3,600*
3,600
(Premium payable on redemption of debentures charged
to Profit & Loss A/c)
Debenture Redemption Reserve A/c Dr.
To General Reserve 12,000
12,000
(for DRR transferred to general reserve)
Bank A/c Dr.
18,000
To Debenture Redemption Reserve Investment 18,000
(for DRR Investment realised)
Debenture holders A/c Dr. 1,23,600
To Bank A/c 1,23,600
(Amount paid to debenture holders on redemption)
* In the absence of details of the term of debentures (redemption period), the entire
redemption premium was charged to profit & loss A/c of the year.

CA Mayank Sharma | +91- 83051-34143

 11.192

Practical Questions
1. A company had issued 20,000, 13% debentures of ` 100 each on 1st April, 2021. The
debentures are due for redemption on 1st July, 2022. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to
the debenture holders to convert 20% of their holding into equity shares (Nominal value
` 10) at a price of ` 15 per share. Debenture holders holding 2,500 debentures did not
exercise the option. Calculate the number of equity shares to be allotted to the debenture
holders exercising the option to the maximum.

2. Libra Limited (a listed company) recently made a public issue in respect of which the
following information is available:

(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price-
` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6
months from the date of closing of issue.
(c) Date of closure of subscription lists- 1.5.2021, date of allotment- 1.6.2021, rate
of interest on debenture- 15% payable from the date of allotment, value of equity
share for the purpose of conversion- ` 60 (Face Value ` 10).
(d) No. of debentures applied for- 2,00,000.
(e) Interest payable on debentures half-yearly on 30th September and 31st March.

Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2022 (including cash and bank entries).
3. Case Ltd. (unlisted company other than AIFI, Banking company, NBFC and HFC) provides
the following information as at 31st March, 2022:

Particulars `

CA Mayank Sharma | +91- 83051-34143

 11.193

Shareholder's Funds
(a) Share Capital
Authorized share capital:
45,000 equity shares of ` 10 each fully paid 4,50,000
Issued and subscribed share capital:
30,000 equity shares of ` 10 each fully paid 3,00,000

(b) Reserves and Surplus

Profit & Loss Account 1,62,000

Debenture Redemption Reserve 18,000

Non-current liabilities
(a) Long term borrowings
12% Debentures 1,80,000
Current Liabilities
(a) Trade payables 1,72,500
Non-current assets
(a) Property, Plant and Equipment (Freehold property) 1,72,500
(b) Non-current Investment: DRR Investment 27,000
Current assets
(a) Inventories 2,02,500
(b) Trade receivables 1,12,500
(c) Cash and bank balances:
Cash at bank 2,73,000
Cash in hand 45,000

At the Annual General Meeting on 1.4.2022, it was resolved:

(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for every
four shares (held prior to the bonus distribution). This option was taken up by all
the shareholders.
(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%. The DRR Investments realised at
par as per existing Book value.
Give the necessary journal entries for these transactions.

CA Mayank Sharma | +91- 83051-34143

 11.194

ANSWERS/ HINTS
1. Calculation of number of equity shares to be allotted

Number of debentures
Total number of debentures 20,000
Less: Debenture holders not opted for conversion (2,500)
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500
Redemption value of 3,500 debentures at a premium of
5% [3,500 x (100+5)] ` 3,67,500
Equity shares of ` 10 each issued on conversion
[` 3,67,500/ ` 15] 24,500 shares

2. Journal Entries in the books of Libra Ltd.

Journal Entries

Date Particulars Amount ` Amount `

Dr. Cr.

1.5.2021 Bank A/c Dr. 2,00,00,000

To Debenture Application A/c 2,00,00,000
(Application money received on 2,00,000
debentures @ ` 100 each)
1.6.2021 Debenture Application A/c Dr. 2,00,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 2,00,000 debentures to
applicants
1.6.2021 Debenture Redemption Investment A/ 12,00,000
To Bank A/c Dr.
(2,00,000 X 100 x 15% X 40%) 12,00,000
(Being Investments made for redemption
purpose)

CA Mayank Sharma | +91- 83051-34143

 11.195

30.9.2021 Debenture Interest A/c Dr. 10,00,000

To Bank A/c 10,00,000
(Interest paid on debentures for 4 months
@ 15% on ` 2,00,00,000)
31.10.2021 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value of
` 10)
31.3.2022 Debenture Interest A/c Dr. 7,50,000
To Bank A/c 7,50,000
(Interest paid on debentures for the
half year) (Refer working note)

Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2022 On
` 80,00,000 for 6 months @ 15% = ` 6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000

`7,50,000
3. Journal Entries in the Books of Case Ltd.

Dr.` Cr.`
Bank A/c Dr. 1,12,500
To Equity Shareholders A/c 1,12,500
(Application money received on 7,500 shares @ ` 15 per
share to be issued as rights shares in the ratio of 1:4)
Equity Shareholders A/c Dr. 1,12,500
To Equity Share Capital A/c 75,000
To Securities Premium A/c 37,500
(Share application money on 7,500 shares @ ` 10 per share
transferred to Share Capital Account, and ` 5 per share to
Securities Premium Account vide Board’s Resolution
dated…)
Securities Premium A/c Dr. 37,500

CA Mayank Sharma | +91- 83051-34143

 11.196

Profit & Loss A/c Dr. 37,500

To Bonus to Shareholders A/c 75,000
(Amount transferred for issue of bonus shares to existing
shareholders in the ratio of 1:5 vide General Body’s
resolution dated...)
Bonus to Shareholders A/c Dr. 75,000
To Equity Share Capital A/c 75,000
(Issue of bonus shares in the ratio of 1 for 5 vide Board’s
resolution dated ..... )
12% Debentures A/c Dr. 1,80,000
Premium Payable on Redemption A/c (@ 3%) Dr. 5,400
To Debenture holders A/c 1,85,400
(Amount payable to debentures holders)
Profit and loss A/c Dr. 5,400*
To Premium Payable on Redemption A/c 5,400
(Premium payable on redemption of debentures
charged to Profit & Loss A/c)
Debenture Redemption Reserve A/c Dr. 18,000
To General Reserve 18,000
(For DRR transferred to general reserve)
Bank A/c Dr. 27,000
To Debenture Redemption Reserve Investment 27,000
(for DRR Investment realised)
Debenture holders A/c Dr. 1,85,400
To Bank A/c 1,85,400
(Amount paid to debenture holders on redemption)
* In the absence of details of the term of debentures (redemption period), the entire redemption
premium was charged to profit & loss A/c of the year.

CA Mayank Sharma | +91- 83051-34143

 11.197

Chapter:03
Underwriting
Question 1
(a) New Ltd. issued 1,00,000 shares which were underwritten as under :

Number of shares Applications for Marked

underwritten firm underwriting applications

Underwriter A 60,000 8,000 10,000

Underwriter B 25,000 3,000 20,000

Underwriter C 15,000 10,000 5,000

Total subscriptions excluding firm underwriting (including market applications) were 50,000 shares.
Prepare a statement calculating net underwriter liability. Consider firm underwriting shares are treated
as unmarked applications.

Answer
Calculation of unmarked applications
Shares
Total Subscriptions 50,000

Less: Marked Applications 35,000

15,000

Firm Underwriting 21,000

36,000

Statement of Underwriters Liability

Particulars A B C Total
Gross Liability 60,000 25,000 15,000 1,00,000

Less: Marked Applications 10,000 20,000 5,000 35,000

Balance 50,000 5,000 10,000 65,000

Less: Unmarked applications 21,600 9,000 5,400 36,000

(Distributed in ratio of gross liability)

CA Mayank Sharma | +91- 83051-34143

 11.198

Balance 28,400 -4,000 4,600 29,000

Credit of B’s Subscription in 60:15 ratio -3200 4000 -800 -

Net Liability 25,200 - 3,800 29,000

Add: Firm Underwriting 8,000 3,000 10,000 21,000

Total Liability 33,200 3,000 13,800 50,000

Question 2

(a) XYZ Ltd. incorporated on 1st April, 2023 issued a prospectus inviting applications for
5,00,000 equity shares of ₹ 10 each. The whole issue was fully underwritten by K, B, D,
and M as follows :
K-2,00,000 Shares, B-

1,50,000 Shares, D-

1,00,000 Shares,

M-50,000 Shares
The applications were received for 4,50,000 shares of which marked applications
were as follows :
K-2,20,000 Shares,
B-90,000 Shares,

D-1,10,000 Shares,

M-10,000 shares.

Calculate the liability of individual underwriters

Answer

CA Mayank Sharma | +91- 83051-34143

 11.199

Statement showing underwriters liability

Particular K B D M
Gross Liability: 200000 150000 100000 50000
Less : Unmarked application allocated in (8000) (6000) (4000) (2000)
the ratio of [Link] (450000 - 430000)
192000 144000 96000 48000

Less : Marked application 220000 90000 110000 10000

-28000 54000 -14000 38000

Less: On surplus of K & D allocated to

+28000 -31500 +14000 -10500
B & M in the ratio of 3:1
Net Liability NIL 22500 NIL 27500

Alternate Answer 3(a)

Statement showing underwriters liability

Particular K B D M
Gross Liability: 200000 150000 100000 50000
Less : Marked application (220000) (90000) (110000) (10000)

(20000) 60000 (10000) 40000

Less: On surplus of K & D allocated to 20000 (22500) 10000 (7500)

B & M in the ratio of 3:1

Less: Unmarked application allocated - (15000) - (5000)

to B & M in the ratio of 3:1 (450000 -
430000)

Net Liability NIL 22500 NIL 27500

CA Mayank Sharma | +91- 83051-34143

 11.200

Chapter:04
Ration Analysis
Question 1
(a) Alpha Ltd. has provided you the following information as on 31st March, 2024 :

Particulars Amt. in `
Opening Inventory 2,28,750/-

Purchases 9,66,750/-

Closing Inventory 2,95,500/-

Sales 15,60,000/-

Sales Returns 60,000/-

Calculate lnventory Turnover Ratio and Gross Profit Ratio.

Answer 1 (a)
Amount in `

A Opening Inventory 2,28,750

B Purchases 9,66,750

C Closing Inventory 2,95,500

D Cost of Goods Sold (A+B-C) 9,00,000

E Average Inventory(A+C)/2 2,62,125

F Inventory Turnover Ratio (times) 3.43

= Cost of Goods Sold/Average Inventory (D/E)
G Sales 15,60,000
Less: Sales Return 60,000
Net Sales 15,00,000
H Gross Profit (Net Sales – Cost of Goods Sold) 6,00,000
(G -D)

CA Mayank Sharma | +91- 83051-34143

 11.201

I Gross Profit Ratio ( Gross Profit/Net Sales) 40.00%

(H/G)

Question 02

Prabhuji is a first-generation entrepreneur engaged in the bakery business. Prabhuji is the proprietor of B
& Sons – a Mumbai based concern manufacturing bakery products, confectioneries and sweets.
The products are manufactured and sold in wholesale to retailers under a brand name ‘‘Bread &
More’’. Products were essentially sold to retailers who would then sell the final customer. Since the year
2020 – the next generation of Prabhuji’s family started participating in the business. The new generation
is technologically aware and suggested direct sales to customers through omni channel (online sales).
The bakery brand was only known locally. However, due to sales online and due to the good quality of
the products – the bakery product’s started gaining traction nationally. Demand for the products
increased. As a result, there was a need to increase manufacturing capacity. The new members in
the business suggested borrowing or setting up a Special Purpose Vehicle for the new manufacturing
unit. Private Equity players can then invest in the Special Purpose Vehicle. Prabhuji is a conservative
businessman. While not being average to expansion – Prabhuji suggests minimizing the need for
external finance while relying more on internal accruals.

Following are some financial details :

Particulars Amount (`)

Inventory at 1st April 2022 1,00,000

Inventory at 31st March, 2023 2,00,000

Revenues 25,00,000

Credit Sales 80% of sales

Purchases 9,50,000

Wages 7,00,000

Carriage inwards 1,50,000

Receivables 1st April, 2022 2,50,000

Receivables 31st March, 2023 3,00,000

Total assets 24,00,000

Admin. Expenses 2,50,000

Depreciation 2,00,000

CA Mayank Sharma | +91- 83051-34143

 11.202

Finance charges 50,000

Total debt 4,00,000

Total equity 20,00,000

Tax 30%

Jimsha is a financial expert and consultant and is a school friend of Prabhuji. One of the key
questions was on improvement in cash flows. Jimsha made a suggestion regarding study of working
capital management. A number of firms ignore funds blocked in working capital. Prabhuji was also
concerned about the return on funds invested in business as capital. Jimsha advised Prabhuji to use Du
Pont Analysis to check whether funds are used efficiently.

Prabhuji mentions the increase in demand and possible need to increase capacity. There are
various options available to meet the demand.

⚫ Outsource the production to third party.

⚫ Expand the production capacity by incurring certain capital expenditure.
There are concerns around manufacturing quality if production is outsourced. The cost of the
additional capacity is likely to be substantial. A capex of ` 5,00,000 financed 80% by debt raiseed at 10%
and remaining through new equity is required. Financial projections are given below:
Information for 2023-24 Current New
Revenues 25,00,000 Increase by 30%

Total assets 24,00,000 26,00,000

Admin. Expenses 2,50,000 2,75,000

Depreciation 2,00,000 3,00,000

Financial charges 50,000 50,000 + Interest on new debt

Total equity 20,00,000 New Equity amount

Tatal debt 4,00,000

Tax 30% 30%

Gross profit ratio remains same as provious year.

On the basis of above information, answer the following questions :
(a) Calculate inventory turnover, average collection period and interpret the ratios.

(b) Calculate Return on Equity by using Du Pont Analysis. Comment on how can Return on Equity be
improved.

(c) Prepare the estimate of Profit & Loss A/c for 2023-24. What will be the Owner’s capital as on

CA Mayank Sharma | +91- 83051-34143

 11.203

31st March, 2024 ?

Answer (a)
Cost of Goods Sold
Inventory Turnover Ratio =
Average Inventory

Cost of Goods Sold = Opening Inventory + Purchases+ Wages+ Carriage Inwards – Closing Inventory Cost

of Goods Sold = ` 1,00,000 + ` 9,50,000 + ` 7,00,000 + ` 1,50,000 - ` 2,00,000

= ` 17,00,000

Average Inventory = (Opening Inventory + Closing Inventory)/2

Cost of Goods Sold ` 17,00,000
Inventory Turnover Ratio = = = 11.33 times
Average Inventory ` 1,50,000

Credits Sales (80% of ` 25,00,000)

Receivables Turnover Ratio = =
Receivables Turnover (`2,50,000 + `3,00,000)/2

Receivables Turnover Ratio = ` 20,00,000 7.273 times

` 2,75,000

365 = 365/7.273 = 50.19

Average Collection Period =
Receivables Turnover days

Interpretation of Ratios
Inventory turnover ratio Inventory turnover ratio of 11.33 has room for improvement. Inventory days
of 11.33 times (365/11.33) are 32 days. The organization should aim to reduce inventory
days with better planning of raw material utilization and demand estimation of
finished products.
Average Collection It takes approximately 50 days to collect on credit sales. Receivable days
Period is 50.19 days are on the higher side. Planning should be done to improve upon
collection. Factoring as a strategy could also be used to sell receivables.

Answer (b)
Return on Equity = Net Profit Margin x Asset Turnover Ratio x Financial Leverage
Net Profit

CA Mayank Sharma | +91- 83051-34143

 11.204

Revenues
(i) Net Profit Margin =

(Sales – Cost of Goods Sold – operating expenses) -30% tax

=
Revenues

((` 25,00,000- ` 17,00,000- ` 2,50,000-` 2,00,000-` 50,000) -30% tax

=
`25,00,000

= ` 2,10,000/` 25,00,000 = 8.40% (A)

Sales `25,00,000
(ii) Net Profit Margin = = = 1.042 (B)
Total Assets ` 24,00,000

Total Assets
(iii) Financial Leverage =
Total Equity

` 24,00,000
= 1.20 (C)
` 20,00,000

Return on Equity = (A) x (B) x (C) = 8.40 x 1.04 x 1.20 = 10.50%

The return on equity is calculated using Du Pont Analysis. An improvement can be made in RoE:
⚫ By improving the utilization of assets. The asset turnover ratio is on the lower side. Operations need
to be studied for efficiency. An increase in Assets turnover will improve expected returns on equity.

⚫ A small amount of debt increase on the balance sheet could help the firm. Increase in
financial leverage is likely to lead to an increase in Return on Equity. However, it should be noted
that borrowing costs need to be lower than expected Return on Capital Employed to benefit
equity shareholder returns.

⚫ Passing on some of the costs to customers through minor price increases and making the
organization more efficient may lead to better margins and in turn better Return on equity.

Answer (c)
Estimated Profit & Loss A/c for financial year 2023-24 for “B & Sons”
Estimated P&L Amount in ` Amount in ` Comments
FY 2022-23 FY 2023-24
Revenues 25,00,000 32,50,000 New Revenues increase by 30%

CA Mayank Sharma | +91- 83051-34143

 11.205

Gross Profit 8,00,000 10,40,000 Gross Profit Margin 32%

Admin expenses 2,50,000 2,75,000 Given

Depreciation 2,00,000 3,00,000 Given

Earnings before Interest and 3,50,000 4,65,000

Tax (EBIT)
Finance Charges 50,000 90,000 Additional Debt is 4,00,000/-
@10 % interest

Earnings before Tax (EBT) 3,00,000 3,75,000

Tax 90,000 1,12,500 Tax rate @30%

Profit after Tax (PAT) 2,10,000 2,62,500

Owner’s Capital as on March 31, 2024

Particulars Amount in `
Equity Amount as on 1st April 2023 20,00,000
Profit of FY 2023-24 2,62,500
Additional Equity raised (` 5,00,000 - 80% debt) 1,00,000
23,62,500

Question 03
(a) Following information is provided for X Ltd :
Balance Sheet of X Ltd. (As on 31st March, 2023)
I. Equity and Liability Amoun Amoun

t (` in t (` in

lakh) lakh)

1. Shareholders’ Funds
(a) Share Capital

Equity Capital

Divided in shares of face value 10/- Preference

XX
Capital
Divided in shares of face value 1,000/- XX XX
(b) Reserves and Surplus

CA Mayank Sharma | +91- 83051-34143

 11.206

General Reserve 7,800

P & L A/c 15,000 22,800

2. Non-Current Liabilities
(a) Long-term Borrowings XX
3. Current Liabilities

Short-term Borrowings 5,000

Trade Payables 3,000

Short-term Provisions 500

Outstanding Expenses 100 8,600

II. Assets
1. Non-Current Assets

(a) Property, Plant and Equipment and Intengible Assets

(i) Property, Plant and Equipment 30,000

(ii) Intangible Assets 1,000

(iii) Capital Work in Progress 2,500 33,500

2. Non-Current Assets XX

3. Current Assets

(a) Inventories XX

(b) Trade Receivables 5,000

(c) Cash and Cash Equivalents 300 XX

Complete the above balance sheet. Other relevant information is given below :
(i) The investments are in fixed income securities and have an interest rate of 8%. The
payout of interest is ` 100 lakh. (ignore tax or TDS).
(ii) Inventory turnover ratio is 5. The Cost of Goods sold is ` 15,000 lakh.
Opening and Closing inventory figures are same.
(iii) Issued equity share capital of ` 10 each is twice of preference share capital.

CA Mayank Sharma | +91- 83051-34143

 11.207
(v) Long-term borrowings have an interest payout of ` 1,000 lakh and rate of interest is 10%.

Answer:

(a)
(i) Calculation of Non-Current Investments
Long term investments = `100/8% = ` 1250 Lakh

Cost of Goods Sold

(ii) Inventory Turnover Ratio =
Average Inventory

Inventory = `15,000 lakh/5 = `3,000 lakh

Current Assets = ` 3,000 lakh + ` 5,000 lakh (Given) + `300 lakh (Given)
= ` 8,300 Lakh
Balance Sheet Total = Non-Current Assets + Non-Current Investments + Current Assets
= ` 33,500 Lakh + ` 1,250 Lakh + ` 8,300 Lakh
= ` 43,050 Lakh

(iii) Shareholders fund

Balance Sheet Total ` 43,050 Lakh
Less: Long term borrowings (1000/10%) ` 10,000 Lakh
Less: Current Liabilities ` 8,600 Lakh
Less: Reserves ` 22,800 Lakh
`41,400 Lakh
Shareholders’ Funds ` 1,650 Lakh
Total of equity
shares issued
and preference
shares

(iv) Division of share capital in 2:1

Equity Share Capital ` 1,100 Lakh
Preference Share Capital ` 550 Lakh

` 1,650 Lakh

CA Mayank Sharma | +91- 83051-34143

 11.208

(v) Balance Sheet of X Ltd.

(As on 31st March 2023)
I. Equity and Liabilities Amount Amount
(in ` lakh) (in ` lakh)
1. Shareholders’ Funds

a. Share Capital

Equity Capital: Divided in shares of face value ` 10/- 1,100

Preference Capital: Divided in shares of face value ` 550

1,000/-
Total issued capital 1,650

b. Reserves and Surplus

General Reserve 7,800

P&L A/c 15,000 22,800

Shareholders’ funds 24,450

2. Non-Current Liabilities

a. Long term Borrowings 10,000 10,000

3. Current Liabilities

Short Term Borrowings 5,000

Trade Payables 3,000

Short Term Provisions 500

Outstanding Expenses 100 8,600

43,050

II. Assets

Non-Current Assets -

a. Property, Plant and Equipment and Intangible Assets

i. Property, Plant and Equipment 30,000

ii. Intangible Assets 1,000

iii. Capital Work in Progress 2,500 33,500

CA Mayank Sharma | +91- 83051-34143

 11.209

2. Non-Current Investments 1,250

1. Current Assets

a. Inventories 3,000

b. Trade Receivables 5,000

c. Cash and Cash Equivalents 300 8,300

43,050

CA Mayank Sharma | +91- 83051-34143

 11.210

Question 04
(a) Calculate net profit margin from the following given information :

Particulars Amount (`)

Revenue from operations 17,00,000

Cost of Revenue from operations 10,00,000

Selling Expenses 2,00,000

Administrative Expenses 1,00,000

Depreciation 2,00,000

Interest expenses 50,000

Other Income 45,000

Tax Rate 30%

Answer
Particulars Amount in `
Sales 17,00,000

Cost of Sales -10,00,000

Gross Profit 7,00,000 41.18%

Selling Expenses -2,00,000

Admin Expenses -1,00,000

EBITDA 4,00,000 23.53%

Depreciation -2,00,000

EBIT 2,00,000

Interest -50,000

Other income 45,000

EBT 1,95,000
Tax -58,500 Tax rate 30%

Net Profit 1,36,500 7.82%

Net Profit ` 1,36,500
Net profit Margin = = = 7.82%
Total Revenue ` 17,45,000

CA Mayank Sharma | +91- 83051-34143

 11.211

Question 5

(a) Following Summarized Statement of Profit/Loss and Balance Sheet are provided by
ABC Ltd. :
Summarized Profit/Loss account of ABC Ltd.

(For the year ended 31st March, 2023)

Particulars Amount (in crore ₹)

Sales 144
Add : Other Income 15
Less : Cost of Sales 110.02
Gross Margin (excluding other incomes) 33.98
Operating Expenses :
Administration : 14.36
Selling and Distribution : 5.36
Profit Before interest and Tax (EBIT) 29.26
Interest 4.01
Profit Before Tax (EBT) 25.25
Provision for Taxes 9.47
Profit after Tax (EAT) 15.78

Balance Sheets of ABC Ltd. (As on 31st March, 2023)

Particulars Amount (in crore ₹)

Fixed Assets (Net) 37.50
Current Assets :
Inventory 16.64
Accounts Receivable 15.43
Cash and Bank 1.75
Less : Current Liabilities 11.25
Net Current Assets 22.57
Total Assets 60.07
Liabilities and Owners’ Equity :
Share Capital 27.00
Reserves and Surplus 6.36
Long-term Debt 26.71
Total 60.07

CA Mayank Sharma | +91- 83051-34143

 11.212
You are required to calculate the following ratios :
(i) Current Ratio
(ii) Liquid Ratio
(iii) Gross Profit Margin Ratio
(iv) Net Profit Margin Ratio
(v) Return on Equity.

Answer

Ratios

(i) Current Ratio = Current Assets / Current (16.64+15.43+1.75)/11.25

Liabilities
= 3.006 times (3.01 times)
Or 3.01:1
(ii) Liquidity Ratio = Liquid Assets*/Current (15.43+ 1.75)/11.25
Liabilities
= 1.527 times (1.53 times)
* Current Assets excluding Inventory
Or 1.53:1
(iii) Gross Profit Margin = Gross Profit/Net 33.98 /144* 100
Sales * 100
= 23.60%
(iv) Net Profit Margin = Net Profit after Tax / 15.78/144* 100
Net Sales * 100
= 10.96%
(v) Return on Equity = Earning for Equity 15.78/33.36* 100
/Average Equity *100
= 47.30%
(In place of Average Equity, Closing Equity
33.36 = (27 + 6.36)
may be used)

CA Mayank Sharma | +91- 83051-34143

 11.213

Chapter:05
Forecasting
Question 1
Komal is a third-generation businesswomen in the dairy business “Bharat Ghee & Co.”. The business is run
under the brand “Pure Ghee”. The company prepares milk-based products and is known for good
quality in the market. The sales are made through self-owned stores, other retailers at locations
where self-owned stores are not present and online.

The business is run by Komal’s family on a strategic and operational basis. However, now the business is
growing at a rapid pace. There is a need to get in professional management to run the business. “Bharat
Ghee & Co.” hires a new CEO - Garima, who has three decades of experience in the dairy industry.
Komal will now be Executive Chairman and provide a guiding role in the business. The first task that
Garima has on hand is to identify issues that are hindering business growth.

Komal asks Garima to list major concerns that the business is facing :

⚫ Lower margins where sales are made through other retailers and online. Online platforms are
charging a big commission for making sales.

⚫ High chance of spoilage due to perishable nature of the raw material. Due to perishable
nature of material - inventories are kept at a negligible level.

⚫ Capacity increase may be necessitated in the near future for which capital will have to be
raised.

Garima requests the Accounts Head - Naina for key financial metrics of “Bharat Ghee & Co”.
Naina provides the following details to Garima :

Key Financials of Bharat Ghee & Co :

Credit Revenue (`) 80,00,00,000/-

Cash Revenue 20% of total sales

Gross Profit ratio 30%

Indirect expenses (`) 10,00,00,000/-

Tax rate 25%

Interest on debt 12%

Interest amount (?) 12,00,00,000/-

CA Mayank Sharma | +91- 83051-34143

 11.214

Debt to equity ratio 2:1

Garima does some quick calculations to derive Return on Equity and Return on Capital
Employed. Komal indicates willingness to contribute fresh equity in the business and payoff the
loans. However, Garima is not in favour of repayment of loans.

Garima has made a business plan to change the strategy to decrease dependence from third
party vendors. The new plan recommends creation of infrastructure to enable sales at
locations which are serviced by channel partners. A new strategic business unit is to be created
for implementation of the business plan.

The following infrastructure facilities need to be created :

Items (`)
Cold chain warehousing facility 15,00,00,000

New trucks 5,00,00,000

Office premises 3,00,00,000

Furniture and computers 1,00,00,000

⚫ The aforementioned infrastructure will be set up using debt and equity in the ratio of 2 : 1. The new
debt will be raised at a rate of 14%.

⚫ The average depreciation will be 30%.

⚫ The above investment and raising of debt will be done on October 1. The organization follows
an April to March financial year.

⚫ The average receivables at the end of the financial year from the new business will be `
10,80,00,000/-. The receivables turnover days will be 45 days. Assume 180 days to calculate
receivables turnover ratio.

⚫ The gross profit margin will be 20%.

⚫ Indirect expenses other than depreciation will be ` 2,00,00,000/-.
⚫ lncome tax rate is 25%.
Komal asks for the projected P&L before approving the required investment amount :
(a) Calculate current Net Profit Margin, Return on Equity and Return on Capital Employed.

(b) lf debt is paid off using fresh equity, what will be new Net Profit Margin and Return on Equity ?
Assume debt is repaid on first day of financial year. Comment on change in return on equity.

(c) Prepare the projected Profit & Loss Account of the new business unit.

(5+5+5=15 marks)

CA Mayank Sharma | +91- 83051-34143

 11.215

Answer No. 1(a)

Calculation of Net Profit Margin, Return on Capital Employed
and Return on Equity
Amount in `

Cash Sales 20% of total sales 20,00,00,000

Credit Sales 80% of total sales 80,00,00,000

Total Sales 1,00,00,00,000

Gross Profit 30% of total sales 30,00,00,000

Less: Indirect Expenses 10,00,00,000

Profit Before Interest and Tax (PBIT) 20,00,00,000

Less: Interest on Debt @12% 12,00,00,000

Profit Before Tax (PBT) 8,00,00,000

Less: Tax @25% 2,00,00,000

Profit after Tax (PAT) 6,00,00,000

Debt (A) Interest/ Interest rate 1,00,00,00,000

Equity (B) 50,00,00,000

Total Capital Employed (A+B) 1,50,00,00,000

Net Profit Margin Profit after Tax 6%

Total Sales

Return on Equity Profit after Tax 12.00%

Total Equity

Return on capital employed (PBIT) 13.33%

Total Capital Employed

CA Mayank Sharma | +91- 83051-34143

 11.216

Answer 1(b)
Impact on Return on equity if debt is repaid(Amount in `)
Cash Sales 20,00,00,000

Credit Sales 80,00,00,000

Total Sales 1,00,00,00,000

Gross Profit 30,00,00,000

Less: Indirect Expenses 10,00,00,000

Profit Before Interest and Tax (PBIT) 20,00,00,000

Less: Interest Nil

Profit Before Tax (PBT) 20,00,00,000

Tax@25% 5,00,00,000

Profit after Tax (PAT) 15,00,00,000

Total Equity 1,50,00,00,000

15.00%
Net Profit Margin =

10.00%
Return on Equity =

Comment on change in return on equity

The return on equity has declined from 12% to 10% on repayment of debt. Since there is no interest
expense as debt is now not available in the balance sheet, the decline in return on equity ratio has
occurred.

Answer 1(c)
Projected P&L A/c of the New Business Unit
Amount in `

Turnover (WN-i) 43,20,00,000

Gross Profit (20% of the Turnover) 8,64,00,000

Less: Depreciation (WN-ii) 3,60,00,000

CA Mayank Sharma | +91- 83051-34143

 11.217

Less: Other Indirect Expenses 2,00,00,000

Profit before interest and taxes 3,04,00,000

Less: Interest 1,12,00,000

Profit before taxes 1,92,00,000

Income tax 48,00,000

Profit after tax 1,44,00,000

Working Notes (WN):

i. Turnover

Average receivables ` 10,80,00,000

Receivable days 45

Receivable turnover 180/45 4

Turnover ` 43,20,00,000

ii. Calculation of capital investment and depreciation

(Amount in `)

Cold chain warehousing facility 15,00,00,000

New trucks 5,00,00,000

Office premises 3,00,00,000

Furniture and computers 1,00,00,000

Total 24,00,00,000

Depreciation 30%

Months of usage 6

Depreciation 3,60,00,000

iii. Capital structure and interest amount

(Amount in `)

Debt 16,00,00,000

CA Mayank Sharma | +91- 83051-34143

 11.218

Equity 8,00,00,000

Interest 14%

Interest amount (for six months) 1,12,00,000

Question 2

Central Textiles Ltd. has provided you its historical revenue and cost data :

Particulars Amount (Crore)

Revenues 1,000

Variable Cost 70% of sales 700

Fixed Cost 115

Depreciation 101

Income Tax 25%

Central Textiles Ltd. management is attempting to project profitability for next year under different
scenarios. The historical data will be the base case scenario. The details regarding optimistic scenario
and worst-case scenario are given below :

Particulars Optimistic Scenario Worst-Case Scenario

Revenue change 40% increase 20% decrease

Variable cost 65% of sales 71 % of sales

Fixed cost 113/- crore 120/- crore

Depreciation Same as base case Same as base case

Prepare Profitability projection with the given data.

Answer
Profit projections for Central Textiles Ltd.
Amount in Crore
Base Case Optimistic Worst -
Scenario Case
Scenario
Revenues (A) 1,000 1,400 800

CA Mayank Sharma | +91- 83051-34143

 11.219

Less: Variable Cost (B) 700 910 568

Contribution (A-B) 300 490 232

Less: Fixed Cost 115 113 120

Less: Depreciation 101 101 101

Profit before Tax 84 276 11

Income Tax 25% 21 69 2.75

Profit after Tax 63 207 8.25

Question 03
The Capital structure of Sangam Ltd. is given below :
Particulars `
(Crore)
Share Capital (divided in shares of 10/- each) 5,000

Secured Loans 4,000

Unsecured Loans 2,500

In the next year the company is undertaking an expansion project of ` 1,500/- crore.
The project is to be financed in the ratio of 40% infusion of fresh owner capital and 60% secured
debt capital. No old debt is repaid during the year.
The equity capital will be raised at ` 15/- per share. The average interest rate of the debt (old + new) will be
13%.
The income tax rate is 25%.
Prepare a statement showing forecast cash flow from financing activities.

Answer

Cash flow from Financing Activities

Particulars Amount in ` Amount in `
Crore Crore
Share Capital raised 400

Share Premium 200 600

New Secured Debt raised 900

CA Mayank Sharma | +91- 83051-34143

 11.220

Debt interest -962

Cash inflow from financing activities 538

Working Note
Breakup of Capital
Total Finance required ` 1500 crore
for expansion project
Equity Capital 40% ` 600 crore
Debt Capital 60% ` 900 crore

Secured Loans 4000

Unsecured Loans 2500

Amount raised from secured debt capital for new project 900

Total debt capital 7400

Interest Cost @13% 962

Question 4
(b) Y Ltd. recently reported the following income Statement:

(₹ in Crore)

Sales 600
Operating Cost 470

EBIT 130

Interest 40

EBT 90

Taxes @ 40% 36

EAT (Net Income) 54

Dividend 21.6

Retained Earnings 32.4

This year company is forecasting 25% increase in sales and it expects that its year end operating cost
will be around 70% of sales. It is expected that tax rate, interest and dividend pay-out ratio will be
constant. You are required to compute projected Net Income and expected growth rate in dividend.

CA Mayank Sharma | +91- 83051-34143

 11.221
Answer
(b) The Summary Balance Sheet of ABC Ltd. as on 31st March, 2023 read as under :

Liabilities Amount Assets Amount

(₹) (₹)
Share Capital : Freehold property 1,15,000
Authorized share Capital : Stock 1,35,000
40,000 Equity Shares of Trade receivables 75,000
₹ 10 each 4,00,000 Cash 30,000
Issued and Subscribed : Balance at Bank 2,00,000
20,000 Equity
Shares of ₹ 10 each fully 2,00,000
paid.
Securities Premium 30,000
Statement of Profit and Loss 90,000
12% Debentures 1,20,000
Trade payables 1,15,000
5,55,000 5,55,000
The Annual General Meeting of ABC Ltd., it was resolved that:
(i) To issue one bonus share for every four shares held.

(ii) To repay the debentures at a premium of 3%.

Record the above transactions in the books of ABC Ltd. to meet the above resolutions.

CA Mayank Sharma | +91- 83051-34143

 11.222

Chapter:06
Consolidation
Question 01
Balance Sheet of S Ltd. is given below
Particulars Amount (`)

Liabilities

Share Capital of 10/- each fully paid 6,00,000

General Reserve 1,50,000

Profit and Loss Account 1,05,000

Creditors 1,80,000

10,35,000

Assets

Fixed Assets 3,00,000

Current Assets 7,35,000

10,35,000

Other information :
Holding company H Ltd. has bought 48,000 shares in its subsidiary S Ltd.
Consideration for purchase of shares in S Ltd. ` 9,00,000/-
General Reserve of S Ltd. on date of acquisition ` 1,20,000/-
Profit and Loss Account on date of acquisition ` 24,000/-
Calculate :
Minority lnterest and Goodwill.
How will goodwill be treated in consolidated books of accounts ?

Answer
H Ltd
Minority Interest `

Share Capital 1,20,000

Capital Profit 28,800

(Pre acquisition Capital Reserve + Pre acquisition P&L A/c) x Minority shareholding
Revenue Profit 22,200
(General Reserve for the year + P&L A/c addition for the year) x minority shareholding

CA Mayank Sharma | +91- 83051-34143

 11.223

1,71,000

Consideration ` 9,00,000

Less: Face value of shares acquired ` 4,80,000

Less: General Reserve (`1,20,000 x4/5) ` 96,000

Less: P&L Account (`24,000 x 4/5) ` 19,200

Goodwill 3,04,800

Goodwill will be shown on the Asset side of Consolidated Balance Sheet of H Ltd.

CA Mayank Sharma | +91- 83051-34143

 11.224
Question 02
What are requirements for consolidation of a subsidiary which is LLP or partnership ?
Answer:
Requirements for consolidation of a subsidiary which is LLP or partnership
As per Companies (Accounts) Rules, 2014 under the heading “Manner of Consolidation of Accounts”
it is provided that the consolidation of financial statements of a company shall be done in accordance
with provisions of Schedule III to the Companies Act, 2013 and the applicable Accounting Standards.
It is noted that relevant Indian Accounting Standards i.e Ind AS110, Consolidated Financial Statements
provides that where an entity has control over one or more other entities, the controlling entity is required
to consolidate all the controlled entities. Since, the word “entity” includes a company as well as any
other form of entity, therefore LLPs and partnership firms are required to be consolidated.
Similarly, under AS 21, as per the definition of subsidiary an enterprise controlled by the parent is
required to be consolidated. The term “enterprise” includes a company and any enterprise other than
a company. Therefore, under AS also, LLPs and partnership firms are required to be consolidated.

CA Mayank Sharma | +91- 83051-34143

 11.225
Question 03
The summarized balance sheet of H Ltd. and S Ltd. as on 31 March, 2023 are given below :
Equity and Liabilities H Ltd. (`) S Ltd. (`)
Share Capital :

Shares of Rs. 10 each 1,00,00,000 20,00,000

Reserves 16,00,000 6,00,000

Profit & Loss A/c 12,00,000 8,00,000

Total 1,28,00,000 34,00,000

Assets

Sundry Assets 1,00,00,000 34,00,000

Equity in S Ltd. 1,60,000 shares 28,00,000

1,28,00,000 34,00,000
S Ltd. had reserves of ` 6,00,000 when H Ltd. acquired shares in S Ltd. but P & L balance was fully earned
after the purchase of shares by H Ltd.
S Ltd. decided to issue bonus shares out of the post-acquisition profits in the ratio of 1 share
for every 5 shares held.
Calculate cost of control before issue of bonus shares and after issue of bonus shares.
What will be the journal entry passed in the books of S Ltd. and H Ltd. on issue of bonus shares by S Ltd ?

Answer
Step Calculation of cost of control before issue of bonus shares Amount `

1 Amount of consideration paid by H Ltd. for acquisition of shares in S Ltd. 28,00,000

2 Less: Face Value of shares acquired 16,00,000

3 Less: H Ltd.’s share in capital profits 600,000 x (8/10) 4,80,000

4 Cost of control/Goodwill 7,20,000

Step Calculation of cost of control after issue of bonus shares Amount `

1. Amount of consideration paid by H Ltd. for acquisition of shares in S Ltd. 28,00,000

2. Less: Face Value of Shares acquired 16,00,000

CA Mayank Sharma | +91- 83051-34143

 11.226

3. Less: H Ltd.’s share in capital profits

6,00,000 x (8/10) 4,80,000

7,20,000

4. H Ltd.’s share in bonus

(20,00,000 x 8/10 x 1/5) 3,20,000

5. Cost of Control/Goodwill 4,00,000

Journal Entries

Amount in `
Books of S Ltd. P & L A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being issue of bonus shares in the ratio of 1 share for
every 5 shares held)

Books of H Ltd. No entry is passed

CA Mayank Sharma | +91- 83051-34143

 11.227
Question 4
On 31st March, 2023, H Ltd. has 20,000 shares out of 25,000 equity shares issued by S Ltd. H Ltd.
acquired these shares in S Ltd. in the following manner :

Date of Acquisition % of Shares Acquired

01st April, 2022 25%
01st October, 2022 37.5%
01st January, 2023 37.5%

On 31st March, 2022, the balance sheet of S Ltd. exhibited equity share capital of ₹ 2,50,000 (in ₹ 10
shares) and reserves and surplus of ₹ 1,25,000. During the year 2022- 23, net profit earned by the
company was ₹ 50,000, that was distributed evenly throughout the year. Amount of Reserves and
Surplus on 31st March, 2023 stood at
₹1,75,000.
Ascertain the share of parent company in profits of S Ltd. on the dates of acquisition of these shares.

Answer
Calculation of share of H Ltd. in profits of S Ltd. on the dates of acquisition of shares.
On 01.04.2022
Reserves and Surplus: Rs. 1,25,000
Shares acquired by H Ltd. on 01.04.22 = 20000 * 25/100 = 5,000 shares Proportionate holding of
H Ltd. in S Ltd. =5000/25000 * 100 =20%
Share of H Ltd. in profit on 01.04.22= 1,25,000 * 20/100 = 25,000
On 01.10.2022
Reserves and Surplus on 01.04.22:= Rs. 1,25,000
Profit earned during 2022-23: Rs. 50,000
Proportionate profit up to [Link] (6 months) = 50,000 *6/l2 = Rs. 25,000
= Rs. 1,50,000

Profit for distribution

Shares freshly acquired by H Ltd.: 20,000 * 37.5/100 = 7500 shares
Proportion of freshly acquired share in S Ltd. = 7,500/25,000*= 30%
100
Total share acquired by H Ltd. in S Ltd = 20%+30% = 50%
Share of H Ltd. in profit on 1/10/2022= 150000*50% = Rs. 75000
On 01.01.2023
Reserves and Surplus on 01.04.2022 = Rs. 1,25,000
Profit earned during 2022-23 = Rs. 50,000
Proportionate profit up to 01.01.23 (9 months) = 50,000 *9/12 Rs. 37,500
Rs. 1,62,500

CA Mayank Sharma | +91- 83051-34143

 11.228
Profit for distribution
Shares freshly acquired by H Ltd.: 20,000 * 37.5/100 = 7500 shares
Proportion of freshly acquired share in S Ltd. = 7,500 /= 30%
25,000*100
Total Share of H Ltd. in S Ltd. on 1/1/23= 50%+30% = 80%
Share of H Ltd. in profits on 1/1/23 = 162500*80% = 130000

CA Mayank Sharma | +91- 83051-34143

 11.229
Question 5
From the following details, calculate value of Goodwill/Capital Reserve and Minority Interest that will
reflect in consolidated Balance Sheet on 31st March, 2023 :
Liabilities [Link].(₹) [Link].(₹) Assets [Link].(₹) [Link].(₹)

Share Capital (₹ Sundry Assets 20,00,000 10,00,000

100 shares) 10,00,000 4,00,000
Profit and Loss 6,00,000 4,00,000 3000 shares in
S Ltd. (01.04.22) 7,00,000 —
General Reserve 2,00,000 ........
Liabilities 9,00,000 2,00,000
Total 27,00,000 10,00,000 Total 27,00,000 10,00,000

Balance Sheet of S Ltd. on 31st March, 2022 exhibited profit of ` 1,00,000 and general reserve of ₹
60,000.
Answer

(i) Calculation of Goodwill:

Cost of Investment in shares: Rs. 7,00,000
Less: Value of H Ltd.’s equity on date of acquisition: (Rs. 4,20,000)
Value of Goodwill Rs. 2,80,000
Calculation of Value of H Ltd.’s equity on date of
acquisition:
Proportionate holding of H Ltd. in S Ltd. = 3000/4000 * 100= 75%
Face Value of shares = 3000 * 100 = 3,00,000
Share in pre-acquisition profit = 1,00,000* 75/100 = 75,000
Share in pre-acquisition reserves = 60,000* 75/100 = 45,000
Rs. 4,20,000

Calculation of Minority Interest

Nominal Value of Equity Shares held by Minority Shareholders = 1000*100 = 100000
Add : Share in pre-acquisition profits and reserves (100000+60000) * 25/ 100 = 40000
Add : Share in post-acquisition profits (400000-160000) * 25 / 100 = 60000
Total= Rs. 200000

CA Mayank Sharma | +91- 83051-34143

 11.230

Chapter:07
Cash Flow Statement
Illustration 1

Intelligent Ltd., a non-financial company has the following entries in its Bank
Account. It has sought your advice on the treatment of the same for preparing Cash
Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:

(1) to suppliers
(2) to employees
(3) to its subsidiaries companies

(ii) Investment made in subsidiary Smart Ltd. and dividend received

(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made

(v) TDS on interest earned on advance given to suppliers

(vi) Insurance claim received against loss of
fixed asset by fire

Discuss in the context of AS 3 Cash Flow Statement.

Solution
(i) Loans and advances given and interest earned

(1) to suppliers Operating Cash flow

(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow

(iii) Dividend paid for the year

Financing Cash Outflow

(iv) TDS on interest income earned on investments made

Investing Cash Outflow

(v) TDS on interest earned on advance given to suppliers

CA Mayank Sharma | +91- 83051-34143

 11.231
Operating Cash Outflow

(vi) Insurance claim received of amount loss of fixed asset by fire

Extraordinary item to be shown under a separate heading as
‘Cash inflow from investing activities’.

Illustration 2
Following are extracts of the Balance Sheets of Ajay Ltd.:

Particulars Notes 31.3.20 31.3.20

X1 X2
` `
Equity and Liabilities
Shareholder’s funds
(a) Share capital 1 5,00,000 5,00,000
(b) Reserve & surplus 2 50,000 90,000
Non-current liabilities
(a) Long-term borrowings 3 5,00,000 7,50,000
Current liabilities
(a) Other current liabilities 4 --- 5,000

Assets
Non-current assets
(a) Intangible assets 5 2,05,000 1,80,000

Notes to accounts

31.3.20X 31.3.20X
1 2

` `
1 Share Capital

50,000 Equity Shares of `10 each 5,00,000 5,00,000

2 Reserve & surplus

Profit & Loss A/c 50,000 90,000

3 Long-term borrowings

10% Debentures 5,00,000 7,50,000

CA Mayank Sharma | +91- 83051-34143

 11.232

4 Other current liabilities

Unpaid interest --- 5,000

5 Intangible assets
Goodwill 2,05,000 1,80,000
You are required to show the related items in Cash Flow Statement.

Solution
An Extract of Cash Flow Statement for the year ending 31.3.20X2
`
Cash flows from operating activities:

Closing balance as per Profit & Loss A/c 90,000

Less: Opening balance as per Profit & Loss Alc (50,000)

Add: Goodwill amortisation 25,000

Add: Interest on Debentures (Refer Note 1) 75,000

Net Cash from Operating Activities 1,40,000

Note 1 : Interest has been computed on the closing balance of debentures as on 31.3.20X2 assuming
that all the additions/ deletions were made, if any, at the beginning of the year.

Cash flows from financing activities:

Proceeds from debentures (Refer Working Note) 2,50,000

Interest paid on Debentures [less unpaid] (70,000)

Net Cash from Financing Activities 1,80,000

Working Note:

10% Debentures Account

Particulars ` Particular `
To Balance c/d 7,50,00 By Balance b/d 5,00,000

CA Mayank Sharma | +91- 83051-34143

 11.233

0 By Bank A/c (Bal. fig.) 2,50,000

7,50,000 7,50,000

Illustration 3
From the following information, calculate cash flow from operating activities:
Summary of Cash Account
for the year ended March 31, 20X1

Particulars ` Particulars `
To Balance b/d 1,00,000 By Cash Purchases 1,20,000

To Cash sales 1,40,000 By Trade payables 1,57,000

To Trade receivables 1,75,000 By Office & 75,000

Selling Expenses

To Trade Commission 50,000 By Income Tax 30,000

To Sale of Investment 30,000 By Investment 25,000

To Loan from Bank 1,00,000 By Repayment of Loan 75,000

To Interest & Dividend 1,000 By Interest on loan 10,000

By Balance c/d 1,04,000

5,96,000 5,96,000

Solution
Cash Flow Statement of ……
for the year ended March 31, 20X1(Direct Method)
Particulars ` `
Operating Activities:

Cash received from sale of goods 1,40,000

Cash received from Trade receivables 1,75,000

Trade Commission received 50,000 3,65,000

Less: Payment for Cash Purchases 1,20,000

Payment to Trade payables 1,57,000

CA Mayank Sharma | +91- 83051-34143

 11.234

Office and Selling Expenses 75,000

Payment for Income Tax 30,000 (3,82,000)

Net Cash Flow used in Operating Activities (17,000)

Illustration 4
The following summary cash account has been extracted from the company’s
accounting records:

Summary Cash Account

(` ’000)
Balance at 1.3.20X1 35

Receipts from customers 2,783

Issue of shares 300

Sale of fixed assets 128

3,24
6
Payments to suppliers 2,047
Payments for property, plant & equipment 230

Payments for overheads 115

Wages and salaries 69

Taxation 243
Dividends 80
Repayments of bank loan 250 (3,03
4)
Balance at 31.3.20X2 21
2

Prepare Cash Flow Statement of this company Hills Ltd. for the year ended 31st
March, 20X2 in accordance with AS-3 (Revised).

The company does not have any cash equivalents.

Solution
Hills Ltd.
Cash Flow Statement for the year ended 31st March, 20X2 (Using
direct method)
(` ’000)

CA Mayank Sharma | +91- 83051-34143

 11.235

Cash flows from operating activities

Cash receipts from customers 2,783

Cash payments to suppliers (2,047)

Cash paid to employees (69)

Other cash payments (for overheads) (115)

Cash generated from operations 552

Income taxes paid (243)

Net cash from operating activities 309

Cash flows from investing activities

Payments for purchase of fixed assets (230)

Proceeds from sale of fixed assets 128

Net cash used in investing activities (102)

Cash flows from financing activities

(30)
Proceeds from issuance of share capital 300

Bank loan repaid (250)

Dividend paid (80)

Net cash used in financing activities

Net increase in cash and cash equivalents 177

Cash and cash equivalents at beginning of period 35

Cash and cash equivalents at end of period 212

Illustration 5
Prepare cash flow statement of M/s MNT Ltd. for the year ended 31st March, 20X1
with the help of the following information:
(1) Company sold goods for cash only.
(2) Gross Profit Ratio was 30% for the year, gross profit amounts to ` 3,82,500.
(3) Opening inventory was lesser than closing inventory by ` 35,000.

CA Mayank Sharma | +91- 83051-34143

 11.236

(4) Wages paid during the year ` 4,92,500.

(5) Office and selling expenses paid during the year ` 75,000.
(6) Dividend paid during the year ` 30,000.
(7) Bank loan repaid during the year ` 2,15,000 (included interest ` 15,000).
(8) Trade payables on 31st March, 20X0 exceed the balance on
31st March, 20X1 by ` 25,000.
(9) Amount paid to trade payables during the year ` 4,60,000.
(10) Tax paid during the year amounts to ` 65,000 (Provision for
taxation as on 31.03.20X1` 45,000).
(11) Investments of ` 7,00,000 sold during the year at a profit of ` 20,000.
(12) Depreciation on fixed assets amounts to ` 85,000.
(13) Plant and machinery purchased on 15th November, 20X0 for ` 2,50,000.
(14) Cash and Cash Equivalents on 31st March, 20X0` 2,00,000.

Cash and Cash Equivalents on 31st March, 20X1` 6,07,500.

Solution
M/s MNT Ltd.
Cash Flow Statement for the year ended 31st March, 20X1 (Using direct method)

Particulars ` `
Cash flows from Operating Activities

Cash sales (` 3,82,500/.30) 12,75,000

Less: Cash payments for trade payables (4,60,000)

Wages Paid (4,92,500)

Office and selling expenses (75,000) (10,27,500)

Cash generated from operations before taxes 2,47,500

Income tax paid (65,000)

Net cash generated from operating activities (A) 1,82,500

Cash flows from investing activities

Sale of investments (7,00,000 + 20,000) 7,20,000

Payments for purchase of Plant & machinery (2,50,000)

CA Mayank Sharma | +91- 83051-34143

 11.237

Net cash used in investing activities (B) 4,70,000

Cash flows from financing activities

Bank loan repayment (including interest) (2,15,000)

Dividend paid (30,000)

Net cash used in financing activities (C) (2,45,000)

Net increase in cash (A+B+C) 4,07,500

Cash and cash equivalents at beginning of the

period 2,00,000

Cash and cash equivalents at end of the period 6,07,500

Illustration 6
Ryan Ltd provides you the following information at the year-end, March 31, 20X1:

` `
Sales 6,98,000

Cost of Goods Sold (5,20,000)

1,78,000
Operating Expenses

(including Depreciation Expense of ` 37,000) (1,47,000)

31,000
Other Income / (Expenses):

Interest Expense paid (23,000)

Interest Income received 6,000

Gain on Sale of Investments 12,000

Loss on Sale of Plant (3,000)

(8,000)

23,000
Income tax (7,000)

16,000

Information available:

CA Mayank Sharma | +91- 83051-34143

 11.238

31st March 31st March

20X1 20X0

` `
Plant 7,15,000 5,05,000

Less: Accumulated Depreciation (1,03,000) (68,000)

6,12,000 4,37,000
Investments (Long term) 1,15,000 1,27,000
Inventory 1,44,000 1,10,000
Trade receivables 47,000 55,000
Cash 46,000 15,000
Prepaid expenses 1,000 5,000
Share Capital 4,65,000 3,15,000
Reserves and surplus 1,40,000 1,32,000
Bonds 2,95,000 2,45,000
Trade payables 50,000 43,000
Outstanding liabilities 12,000 9,000
Income taxes payable 3,000 5,000

Analysis of selected accounts and transactions during 20X0-X1

1. Purchased investments for ` 78,000.

2. Sold investments for ` 1,02,000. These investments cost ` 90,000.

3. Purchased plant assets for ` 1,20,000.

4. Sold plant assets that cost `10,000 with accumulated

depreciation of ` 2,000 for ` 5,000.

5. Issued ` 1,00,000 of bonds at face value in an exchange for

plant assets on 31st March, 20X1.

6. Repaid ` 50,000 of bonds at face value at maturity.

7. Issued 15,000 shares of ` 10 each.

8. Paid cash dividends ` 8,000.

Prepare Cash Flow Statement as per AS-3 (Revised), using indirect method

CA Mayank Sharma | +91- 83051-34143

 11.239

Solution
Ryan Ltd.
Cash Flow Statement
for the year ending 31st March, 20X1
` `
Cash flows from operating activities
Net profit before taxation 23,000

Adjustments for:
Depreciation 37,000
Gain on sale of investments (12,000)

Loss on sale of plant assets 3,000

Interest expense 23,000
Interest income (6,000)

Operating profit before working capital changes 68,000

Decrease in trade receivables 8,000
Increase in inventory (34,000)
Decrease in prepaid expenses 4,000
Increase in trade payables 7,000
Increase in outstanding liabilities 3,000

Cash generated from operations 56,000

Income taxes paid* (9,000)

Net cash generated from operating activities 47,00

0
Cash flows from investing activities
Purchase of plant (1,20,000)

Sale of plant 5,000

Purchase of investments (78,000)

Sale of investments 1,02,000

Interest received 6,000

Net cash used in investing activities (85,000)

Cash flows from financing activities

CA Mayank Sharma | +91- 83051-34143

 11.240

Proceeds from issuance of share capital 1,50,000

Repayment of bonds (50,000)

Interest paid (23,000)

Dividends paid (8,000)

Net cash from financing activities 69,000

Net increase in cash and cash equivalents 31,000

Cash and cash equivalents at the beginning of 15,000

the period

Cash and cash equivalents at the end of the 46,000

period

Note: Significant non-cash adjustments: Issued ₹ 1,00,000 of bonds at face value for
acquisition of plant on 31st March, 20X1.

*Working Note:

`
Income taxes paid:

Income tax expense for the year 7,000

Add: Income tax liability at the beginning of the year 5,000

12,000

Less: Income tax liability at the end of the year (3,000)

9,000

CA Mayank Sharma | +91- 83051-34143

 11.241

Illustration 7
The balance sheets of Sun Ltd. as at 31st March 20X1 and 20X0 were as:
Particulars Notes 20 20
X1 X0

` `
Equity and Liabilities

1 Shareholder’s funds

(a) Share capital 1 60,000 50,000

(b) Reserve & surplus 2 5,000 4,000

2 Current liabilities

(a) Trade Payables 4,000 2,500

(b) Other current liabilities 3 - 1,000

(c) Short term provision (provision for tax) 1,500 1,000

Total 70,500 58,500

Asse
ts
1 Non-current assets

(a) Property, Plant & Equipment 4 39,500 29,000

2 Current assets

(a) Current investments 2,000 1,000

(b) Inventories 17,000 14,000

(c) Trade receivables 8,000 6,000

(d) Cash & cash equivalents 5 4,000 8,500

70,500 58,500

Notes to Accounts

CA Mayank Sharma | +91- 83051-34143

 11.242

20 20X0
X1
`
`
1 Share Capital

Equity Shares of `10 each 60,000 50,000

2 Reserve & surplus

Profit and Loss Account 5,000 4,000

3 Other current liabilities

Dividend Payable - 1,000

4 Property, plant and equipment (at WDV)

Building 10,000 10,000

Fixtures 17,000 11,000

Vehicles 12,500 8,000

Total 39,500 29,000

5 Cash and cash equivalents

Cash and Bank 4,000 8,500

The profit and loss statement for the year ended 31st March, 20X1 disclosed
Particulars `
Profit before tax 4,500

Tax expense: Current tax (1,500)

Profit for the year 3,000

Declared dividend (2,000)

Retained Profit 1,000

Further information is available:

Fixtures Vehicle
s
` `
Depreciation for the year 1,000 2,500

Disposals:

CA Mayank Sharma | +91- 83051-34143

 11.243

Proceeds on disposal of vehicles — 1,700

Written down value — (1,000)

Profit on disposal 700

Prepare a Cash Flow Statement for the year ended 31st March, 20X1

Solution
Sun Ltd.
Cash Flow Statement
for the year ended 31st March, 20X1

` `
Cash flows from operating activities

Net Profit before taxation 4,500

Adjustments for:
Depreciation 3,500
Profit on sale of vehicles (1,700 – 1,000) (700)

Operating profit before working capital changes 7,300

Increase in Trade receivables (2,000)
Increase in inventories (3,000)
Increase in Trade payables 1,500

Cash generated from operations 3,800

Income taxes paid (W.N.1) (1,000)

Net cash generated from operating activities 2,80

0
Cash flows from investing activities

Sale of vehicles 1,70

Purchase of current investments 0
(1,000
)
Purchase of vehicles (W.N.3) (8,000)

Purchase of fixtures (W.N.3) (7,000)

Net cash used in investing activities (14,300)

CA Mayank Sharma | +91- 83051-34143

 11.244

Cash flows from financing activities

Issue of shares for cash 10,000

Dividends paid (W.N.2) (3,000)

Net cash generated from financing activities 7,000

Net decrease in cash and cash equivalents (4,500)

Cash and cash equivalents at beginning of period

(See Note) 8,500

Cash and cash equivalents at end of period

(See Note) 4,000

Note to the Cash Flow Statement

Cash and Cash Equivalents

31.3.20X1 31.3.20X
0
Bank and Cash 4,000 8,500

Cash and cash equivalents 4,000 8,500

Working Notes:
`
1. Income taxes paid
Income tax expense for the year 1,500
Add: Income tax liability at the beginning of the year 1,000
2,500
Less: Income tax liability at the end of the year (1,500)
1,000
2. Dividend paid
Declared dividend for the year 2,000
Add: Amount payable at the beginning of the year 1,000
3,000
Less: Amount payable at the end of the year -
3,000
3. Property, plant and equipment acquisitions
Fixture Vehicles
s

CA Mayank Sharma | +91- 83051-34143

 11.245

` `
W.D.V. at 31.3.20X1 17,000 12,500
Add back:
Depreciation for the year 1,000 2,500
Disposals — 1,000
18,000 16,000
Less: W.D.V. at 31.12.20X0 (11,00 (8,000)
0
)
Acquisitions during 20X0-20X1 7,000 8,000

Note: Current investments may not be readily convertible to a known amount of cash and
may not be subject to an insignificant risk of changes in value as per the requirements of
AS 3 and hence those have been considered as investing activities.

CA Mayank Sharma | +91- 83051-34143

 11.246

Illustration 8
Ms. Jyoti of Star Oils Limited has collected the following information for the
preparation of cash flow statement for the year ended 31st March, 20X1:

(` in lakhs)
Net Profit 25,000
Dividend paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
Depreciation charged to the Statement of Profit and Loss 20,000
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765
Interest income received on investments 2,506
Interest expenses of the year 10,000
Interest paid during the year 10,520
Increase in Working Capital (excluding Cash & Bank Balance) 56,081
Purchase of Fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction work in progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from short-term borrowings 20,575
Opening cash and bank balance 5,003
Closing cash and bank balance 6,988

Prepare the Cash Flow Statement for the year ended 31 March 20X1 in accordance
with AS 3. (Make necessary assumptions)
Solution
Star Oils Limited Cash Flow
Statement
for the year ended 31st March, 20X1

CA Mayank Sharma | +91- 83051-34143

 11.247

(` in lakhs)
Cash flows from operating activities
Net profit before taxation (25,000 + 5,000) 30,000
Adjustments for :
Depreciation 20,000
Loss on sale of assets (Net) 40
Profit on sale of investments (100)
Interest income on investments (2,506)
Interest expenses 10,000
Operating profit before working capital changes 57,434
Changes in working capital (Excluding cash and bank (56,081)
balance)
Cash generated from operations 1,353
Income taxes paid (4,248)
Net cash used in operating activities (2,895)
Cash flows from investing activities
Sale of assets (W.N.1) 145
Sale of investments (27,765 + 100) 27,865
Receipt of grant for capital projects 12
Interest income on investments 2,506
Purchase of fixed assets (14,560)
Investment in joint venture (3,850)
Expenditure on construction work-in progress (34,740)
Net cash used in investing activities (22,622)
Cash flows from financing activities

Proceeds from calls in arrear 2

Proceeds from long-term borrowings 25,980

Proceed from short-term borrowings 20,575

Interest paid (10,520)

Dividend (including dividend tax) paid (8,535 27,502

CA Mayank Sharma | +91- 83051-34143

 11.248

Net increase in cash and cash equivalents ) 1,985

Cash and cash equivalents at the beginning of 5,003
the period

Cash and cash equivalents at the end of the period 6,988

Working note:
[Link] value of the assets sold 185

Less : Loss on sale of assets (40)

Proceeds on sale 145

Illustration 9
From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement
for the year ended 31st March, 20X1 in accordance with AS 3 (Revised) using the
direct method. The company does not have any cash equivalents.
Summary Cash Account for the year ended 31 3.20X1
`’000 `’000
Balance on 1.4.20X0 50 Payment to Suppliers 2,000

Issue of Equity Shares 300 Purchase of Fixed Asset 200

Receipts from Customers 2,800 Overhead expense 200

Sale of Fixed Assets 100 Wages and Salaries 100

Taxation 250
Dividend 50

Repayment of Bank Loan 300

Balance on 31.3.20X1 150

3,25 3,250
0
Solution
X Ltd.
Cash Flow Statement for the year ended 31st March, 20X1 (Using direct method)

CA Mayank Sharma | +91- 83051-34143

 11.249

` ’000 ` ’000
Cash flows from operating activities
Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash generated from operating activities 250
Cash flows from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at the beginning of the year 50
Cash at the end of the year 150

Illustration 10
Given below are the relevant extracts of the Balance Sheet and the Statement of
Profit and Loss of ABC Ltd. along with additional information:

Extract of Balance sheet

Particulars Notes 31.3.20X1 31.3.20X0

(` in (` in lakhs)
lakhs)
Equity and Liabilities
1 Current liabilities
(a) Trade Payables 250 230
(b) 1 200 180

CA Mayank Sharma | +91- 83051-34143

 11.250

(c) Short term Provisions 2 70 50

Other current
1 liabilities
Assets
Current
assets
Inventories
(a) 200 180
Trade Receivables
(b) 400 250
Other current
(c) 3 195 180
assets

Statement of Profit and Loss of ABC Ltd. for the year ended
31st March, 20X1
Particulars Notes ` in lakhs
I Revenue from operations 4,150
II Other income 4 100
III Total income (I + II) 4,250
Expenses:
Purchases of Stock-in-Trade 2,400
Change in inventories of finished goods (20)
Employee benefits expense 800
Depreciation expense 100
Finance cost 5 60
Other expenses 200
IV Total expenses 3,540
V Profit before tax (III – IV) 710
V Tax expense:
I Current tax 200
VII Profit for the year from 510
continuing operations

Appropriations
Balance of Profit and Loss account brought forward 50

Transfer to general reserve 200

Dividend paid 330

CA Mayank Sharma | +91- 83051-34143

 11.251
Notes to Accounts:
20X1 20X0
(` in lakhs) (` in lakhs)
1 Short term Provisions:
Provision for Tax 200 180
2 Other current liabilities:
Outstanding wages 50 40
Outstanding expenses 20 10
Total 70 50
3 Other current assets:
Advance tax 195 180
4 Other income:
Interest and dividend 100
5 Finance cost:
Interest 60
Compute cash flow from operating activities using both direct and indirect method

Solution
Cash Flows from Operating Activities
` in lakhs ` in
lakhs
Using Direct Method
Cash Receipts:

Cash sales and collection from Trade

receivables

Sales + Opening Trade receivables – Closing 4,150 + 250 400 4,00

Trade receivables (A) 0

Cash payments:

Cash purchases & payment to Trade payables

Purchases + Opening Trade payables – 2,400 + 230 250 2,380

Closing Trade payables

Wages and salaries paid 800 + 40 50 790

Cash expenses 200 + 10 – 20 190

CA Mayank Sharma | +91- 83051-34143

 11.252

Taxes paid – Advance tax 195

(B) 3,555

Cash flow from operating activities (A – B) 445

Using Indirect Method

Profit before tax 710

Add: Non-cash items : Depreciation 100

Add: Interest : Financing cash inflow 60

Less: Interest and Dividend : Investment cash (100)

outflow

Less: Tax paid (195)

Working capital adjustments

Trade receivables 250 400 (150)

Inventories 180 200 (20)

Trade payables 250 230 20

Outstanding wages 50 40 10

Outstanding expenses 20 10 10 (13

0)
Cash flow from operating activities
445

Illustration 11
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.20X1
from the following information:

(1) Sales for the year amounted to ` 135 crores out of which 60% was cash sales.

(2) Purchases for the year amounted to ` 55 crores out of which

credit purchase was 80%.

(3) Administrative and selling expenses amounted to ` 18 crores and

salary paid amounted to ` 22 crores.

(4) The Company redeemed debentures of ` 20 crores at a premium

of 10%. Debenture holders were issued equity shares of ` 15
crores towards redemption and the balance was paid in cash.
Debenture interest paid during the year was ` 1.5 crores.

CA Mayank Sharma | +91- 83051-34143

 11.253

(5) Dividend paid during the year amounted to ` 11.7 crores.

(6) Investment costing ` 12 crores were sold at a profit of ` 2.4 crores.

(7) ` 8 crores was paid towards income tax during the year.
(8) A new plant costing ` 21 crores was purchased in part exchange of an old
plant. The book value of the old plant was ` 12 crores but the vendor took
over the old plant at a value of ` 10 crores only. The balance was paid in
cash to the vendor.
(9) The following balances are also provided:

` in ` in
crores crores
1.4.20X 31.3.20X
0 1
Debtors 45 50

Creditors 21 23

Bank 6 18.2

Solution
Gamma Ltd.
Cash Flow Statement for the year ended 31st March, 20X1 (Using
direct method)
Particulars ` in crores ` in crores
Cash flows from operating activities
Cash sales (60% of 135) 81
Cash receipts from Debtors 49
[45+ (135x40%) - 50]
Cash purchases (20% of 55) (11)
Cash payments to suppliers (42)
[21+ (55x80%) – 23]
Cash paid to employees (22)
Cash payments for overheads (Adm. and selling) (18)
Cash generated from operations 37
Income tax paid (8)

CA Mayank Sharma | +91- 83051-34143

 11.254

Net cash generated from operating activities 29

Cash flows from investing activities
Sale of investments (12+ 2.40) 14.4
Payments for purchase of fixed assets (21 – 10) (11)
Net cash generated from investing activities 3.4

Cash flows from financing activities

(20.2)
Redemption of debentures (22-15) (7)

Interest paid (1.5)

Dividend paid (11.7)

Net cash used in financing activities

Net increase in cash 12.2

Cash at beginning of the period 6.0

Cash at end of the period 18.2

Significant non-cash items:

(a) Debenture-holders received equity shares of ₹ 15 crores on redemption of the debentures.
(b) Plant having book value of ₹ 12 crores was given in exchange of an asset costing ₹ 21 crores. The
said plant was transferred at a value of ₹ 10 crores only, and ₹ 11 crores was paid for the balance
dues towards the plant

Illustration 12
From the following information of Mr. Zen, prepare a Cash flow statement as per
AS-3 for the year ended 31.3.20X1:
Ledger balances of Mr. Zen as of 20X0 and 20X1
As on 1.4.20X0 As on 1.4.20X1
` `
Zen’s Capital A/c 10,00,000 12,24,000
Trade payables 3,20,000 3,52,000
Mrs. Zen’s loan 2,00,000 --
Loan from Bank 3,20,000 4,00,000

CA Mayank Sharma | +91- 83051-34143

 11.255

Land 6,00,000 8,80,000

Plant and Machinery (net block) 6,40,000 4,40,000
Inventories 2,80,000 2,00,000
Trade receivables 2,40,000 4,00,000
Cash 80,000 56,000

Additional information: A machine costing ` 80,000 (accumulated depreciation there on `24,000)

was sold for ` 40,000. The provision for depreciation on 1.4.20X0 was ` 2,00,000 and 31.3.20X1
was ` 3,20,000. The net profit for the year ended on 31.3.20X1 was
` 3,60,000.

Solution

Cash Flow Statement of Mr. Zen as per AS 3 for the year

ended 31.3.20X1
`

(i) Cash flow from operating activities

Net Profit (given) 3,60,000

Adjustments for

Depreciation on Plant & Machinery (W.N.2) 1,44,000

Loss on Sale of Machinery (W.N.1) 16,000 1,60,000

Operating Profit before working 5,20,000

capital changes

Decrease in inventories 80,000

Increase in trade receivables (1,60,000)

Increase in trade payables 32,000 (48,000)

Net cash generated from operating activities 4,72,000

(ii) Cash flow from investing activities

Sale of Machinery (W.N.1) 40,000

Purchase of Land (8,80,000 – 6,00,000) (2,80,000)

Net cash used in investing activities (2,40,000)

(iii) Cash flow from financing activities

CA Mayank Sharma | +91- 83051-34143

 11.256

Repayment of Mrs. Zen’s Loan (2,00,000)

Drawings (W.N.3) (1,36,000)

Loan from Bank 80,000
Net cash used in financing activities (2,56,000
)
Net decrease in cash (24,000)

Opening balance as on 1.4.20X0 80,000

Cash balance as on 31.3.20X1 56,000

Working Notes:
1. Plant & Machinery A/c
` `
To Balance b/d 8,40,000 By Cash – Sales 40,000

(6,40,000 + 2,00,000) By Provision for 24,000

Depreciation A/c
By Profit & Loss A/c 16,000
– Loss on Sale
(80,000 – 64,000)

By Balance c/d
(4,40,000+3,20,000) 7,60,000

8,40,000 8,40,000

2. Provision for depreciation on Plant and Machinery A/c

` `
To Plant and 24,000 By Balance b/d 2,00,000
Machinery A/c

To Balance c/d 3,20,000 By Profit & Loss A/c 1,44,000

(Bal. fig.)
3,44,000 3,44,000

3. To find out Mr. Zen’s drawings:

`
Opening Capital 10,00,000

CA Mayank Sharma | +91- 83051-34143

 11.257

Add: Net Profit 3,60,000

13,60,000
Less: Closing Capital (12,24,000)
Drawings 1,36,000

CA Mayank Sharma | +91- 83051-34143