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GNDU Question Paper-2021
Bachelor of Commerce
(B.Com) 3
rd
Semester
CORPORATE ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt five questions in all, selecting at least one question from each section. The
fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Write notes on:
(a) Buy back of equity shares
(b) Balance Sheet under Companies Act.
2. A limited company issued a prospectus inviting applications for 2000 shares of Rs. 10
each at a premium of Rs. 2 per share payable as follows:
On application Rs. 2; On allotment Rs. 5 (including premium); On first call Rs. 3 and on
second call Rs. 2.
Applications were received for 3000 shares and allotments were made pro rata to the
applicants for 2400 shares, the remaining applications being refused. Money overpaid on
applications employed on account of sums due on allotment.
X to whom 40 shares were allotted, failed to pay the allotment money and on his
subsequent failure to pay. the first call, his shares were forfeited. Y, the holder of 60
shares failed to pay the two calls, and his shares were forfeited after the second call had
been made.
Of the shares forfeited, 80 shares were sold to Z. credited as fully paid for Rs. 9 per share,
the whole of X's shares being included.
Show Journal entries.
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SECTION-B
3. Differentiate between:
(a) Alteration of Share Capital and Capital Reduction
(b) External Reconstruction and Internal Reconstruction
4. The Balance Sheet as on 31 March 2016 of X Ltd. and Y Ltd. are as under:
I
Particulars
X Ltd.
Rs.
Y Ltd.
Rs.
EQUITY AND LIABILITIES
Shareholder’s Funds
Share Capital :
Authorised and subscribed :
Equity shares of Rs. 100 each fully paid
6,00,000
20,00,000
Reserves and Surplus :
General Reserve
Statement of Profi and Loss
Capital Reserve
NON CURRENT LIABILITIES
Long term borrowings:
Unsecured :
12% Debentures
CURRENT LIABILITIES
Trade payables:
Creditors
Total
II
ASSESTS
Non-current Assets
Fixed Assets
Tangible Assets
Building
Machinery
Furniture
Expenditure on new Project
Intangible Assets
Goodwill
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Current Assets
(a) Inventories :
stock
9,20,000
7,20,000
(b) Trade receivables :
(c) Cash and cash equivalents
Cash in hand
2,80,000
20,000
Bank Balance
8,00,000
1,60,000
Total:
82,40,000
40,20,000
Y limited was absorbed by X limited on 1 April, 2016 on the following terms:
(a) Fixed assets other than Goodwill to be valued at Rs. 20,00,000 including Rs. 24,000 for
furniture.
(b) Stock to be reduced by Rs. 80,000 and debtors by 5%.
(c) X limited to assume liabilities and to discharge the 12% debentures by issue of 11%
debentures of the same value and in addition a premium of 6% was paid in cash.
(d) The new project to be valued at Rs. 3,80,000
(e) The shareholders of Y Ltd. to receive cash payment of Rs. 30 per share plus four equity
shares in X Ltd. for every five shares held in Y-Ltd.
(f) Both the companies to declare and pay dividend of 6% prior to absorption.
(g) Expenses of liquidation of Y Ltd. are to be reimbursed by X Ltd. to the extent of Rs.
20,000. The actual expenses amounted to Rs. 24,000.
Prepare necessary ledger accounts in the books of Y Ltd. and prepare the Balance Sheet of
X Ltd. after absorption assuming that X Ltd. authorized capital has been increased
to Rs. 80,00,000.
SECTION-C
5. What are NPAS? How are advances classified? What are the provisioning norms for
NPAs ?
6. From the following information, prepare Balance Sheet of City Bank as on 31 March,
2018, giving the relevant schedules:
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Debit Balance
Amount
(Rs.in lakhs)
Current accounts
28.0
Cash in Credits
812.10
Cash in Hand
160.15
Cash with RBI
37.88
Cash with other banks
155.87
Money at call
210.17
Gold
55.23
Govt. Securities
110.17
Premises at Cost Less Depreciation
155.70
Furniture at cost Less depreciation
70.12
Term Loans
792.88
Total
2,588.22
Amount (Rs. in
Lakhs)
198.00
231.00
150.00
412.00
517.00
520.12
00.10
110.00
450.00
2,588.22
Particulars
Amount (Rs.)
Bills for collections
18,10,000
Acceptances and Endorsements
14,12,000
Claims against the banks not acknowledged as Debt
55,000
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Depreciation Accumulated :
Premises
1,10,000
Furniture
78,000
50% term loans are secured by government guarantees. 10% of cash credits is unsecured.
Also calculate cash reserves required and Stationary liquid reserve required.
Note: Cash reserve required 3% of demand and time liabilities; Liquid reserve required
30% of demand and time liabilities.
SECTION-D
7. Write notes on:
(a) Annuities
(b) Claims
(c) Reinsurance
(d) Surrender value.
8. The undermentioned balances form part of the Trial Balance of the All People's
Assurance Co. Ltd., as on 31 March 2016:
Particulars
Rs.
Amount of Life Insurance Fund at the beginning of the year
14,70,562
Claims by death
76,980
Claims by Maturity
56,420
Premiums
2,10,572
Expenses of Management
19,890
Commission
26,541
Consideration of annuities granted
10,712
Interests, dividends and rents
52,461
Income tax paid on profits
3,060
Surrenders
21,860
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Particulars
Rs.
Annuities
29,420
Bonus paid in cash
9,450
Bonus paid in reduction of premiums
2,500
Preliminary expenses balance
600
Claims admitted but not paid at the end of the year
10,034
Annuities due but not paid
2,380
Capital paid up
14,00,000
Government securities
24,90,890
Sundry fixed assets
4,19,110
Prepare Revenue Account and the Balance Sheet after taking into account the following:
(a) Claims covered under reinsurance Rs. 10,000 by death
(b) Further claims intimated Rs. 8,000 by death
(c) Further bonus utilized in reduction of premium, Rs. 1,50
(d) Interest Accrued, Rs. 15,400
(e) Premiums outstanding, Rs. 7,400
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GNDU Answer Paper-2021
Bachelor of Commerce
(B.Com) 3
rd
Semester
CORPORATE ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt five questions in all, selecting at least one question from each section. The
fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Write notes on:
(a) Buy back of equity shares
(b) Balance Sheet under Companies Act.
Ans: (a) Buy Back of Equity Shares
A Different Beginning…
Imagine a company as a big ship sailing in the ocean of business. On this ship, there are
many passengers — the shareholders — each holding a ticket called an equity share.
Sometimes, the captain (the company’s management) decides to buy back some of these
tickets from passengers. Why? To make the journey smoother, more profitable for those
who remain, or to restructure the ship’s ownership.
This process is called Buy Back of Equity Shares.
1. What is Buy Back?
Buy back means a company purchasing its own shares from existing shareholders, usually at
a price higher than the market value. Once bought back, these shares are cancelled,
reducing the total number of shares in circulation.
2. Why Do Companies Buy Back Shares?
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• Increase Share Value: With fewer shares in the market, each remaining share
represents a bigger slice of the company’s profits.
• Use Surplus Funds: If the company has extra cash and no immediate expansion
plans, buying back shares can be a good way to reward shareholders.
• Prevent Takeovers: Reducing the number of shares available can make it harder for
outsiders to gain control.
• Boost Financial Ratios: Earnings per share (EPS) and return on equity (ROE) often
improve after a buy back.
3. Legal Provisions (Under Companies Act, 2013 in India)
• Sources of Buy Back:
1. Free reserves
2. Securities premium account
3. Proceeds of any shares or other specified securities (but not from the
proceeds of an earlier issue of the same kind of shares).
• Authorisation: Must be authorised by the company’s Articles of Association.
• Approval:
o Up to 10% of paid-up equity capital and free reserves — Board resolution is
enough.
o Up to 25% — Requires a special resolution in the general meeting.
• Limit: The buy back cannot exceed 25% of the total paid-up equity capital in a
financial year.
• Debt-Equity Ratio: After buy back, the ratio of debt to equity should not exceed 2:1.
• Time Frame: Buy back must be completed within 1 year from the date of approval.
• Filing & Compliance: Company must file a declaration of solvency and comply with
SEBI regulations if it’s a listed company.
4. Methods of Buy Back
• Tender Offer: Company offers to buy shares from existing shareholders at a fixed
price.
• Open Market Purchase: Company buys shares directly from the stock exchange.
• Odd-Lot Purchase: Buying back shares from small shareholders holding odd lots.
• Proportionate Basis: Buying back a proportion of shares from each shareholder.
5. Impact of Buy Back
• For Shareholders: They may get a premium price for their shares.
• For the Company: Improves financial ratios, but reduces cash reserves.
• For the Market: Often seen as a sign of confidence in the company’s future.
In short: Buy back is like a company saying to its shareholders, “We value you, and we want
to make your share of the pie bigger.”
(b) Balance Sheet under Companies Act
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A Different Beginning…
Think of a company’s balance sheet as its family photograph — taken on the last day of the
financial year. In this picture, you can see everything the company owns, everything it owes,
and the value left for its owners.
Under the Companies Act, 2013, this “photograph” must be taken in a specific format so
that anyone — investors, creditors, or regulators — can understand the company’s financial
position at a glance.
1. Meaning
A Balance Sheet is a statement showing the financial position of a company on a particular
date. It lists:
• Assets (what the company owns)
• Liabilities (what the company owes)
• Equity (owners’ claim after liabilities are paid)
2. Legal Requirements
• Form & Format: As per Schedule III of the Companies Act, 2013.
• True & Fair View: Must present an accurate picture of the company’s financial
position.
• Prepared Annually: On the last day of the financial year.
• Signed & Approved: By the Board of Directors before being presented to
shareholders.
3. Structure of Balance Sheet (Schedule III – Division I for companies following Indian
GAAP)
A. Equity and Liabilities
1. Shareholders’ Funds
o Share capital
o Reserves and surplus
o Money received against share warrants
2. Non-Current Liabilities
o Long-term borrowings
o Deferred tax liabilities
o Long-term provisions
3. Current Liabilities
o Short-term borrowings
o Trade payables
o Other current liabilities
o Short-term provisions
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B. Assets
1. Non-Current Assets
o Property, plant, and equipment
o Intangible assets
o Non-current investments
o Deferred tax assets
o Long-term loans and advances
2. Current Assets
o Inventories
o Trade receivables
o Cash and cash equivalents
o Short-term loans and advances
o Other current assets
4. Key Principles
• Matching Principle: Assets = Liabilities + Equity.
• Classification: Clear separation between current (short-term) and non-current (long-
term) items.
• Comparative Figures: Previous year’s figures must be shown alongside current year’s
for comparison.
• Notes to Accounts: Detailed explanations of items in the balance sheet.
5. Importance
• For Management: Helps in decision-making and planning.
• For Investors: Shows financial health and stability.
• For Creditors: Indicates the company’s ability to repay debts.
• For Regulators: Ensures transparency and compliance.
In short: The balance sheet is the company’s financial mirror — it reflects exactly where the
company stands at a given moment, under the watchful eye of the law.
󷄧󼿒 Final Wrap-Up:
• Buy Back of Equity Shares is like a company trimming its sails to sail faster —
reducing the number of shares to improve value for the remaining shareholders.
• Balance Sheet under Companies Act is the official portrait of the company’s
finances, framed in a legally prescribed format so everyone can read the story it tells.
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2. A limited company issued a prospectus inviting applications for 2000 shares of Rs. 10
each at a premium of Rs. 2 per share payable as follows:
On application Rs. 2; On allotment Rs. 5 (including premium); On first call Rs. 3 and on
second call Rs. 2.
Applications were received for 3000 shares and allotments were made pro rata to the
applicants for 2400 shares, the remaining applications being refused. Money overpaid on
applications employed on account of sums due on allotment.
X to whom 40 shares were allotted, failed to pay the allotment money and on his
subsequent failure to pay. the first call, his shares were forfeited. Y, the holder of 60
shares failed to pay the two calls, and his shares were forfeited after the second call had
been made.
Of the shares forfeited, 80 shares were sold to Z. credited as fully paid for Rs. 9 per share,
the whole of X's shares being included.
Show Journal entries.
Ans: Story of the Company and Its Shareholders
Imagine a limited company, let's call it “BrightFuture Ltd.”, planning to raise funds for a new
business venture. To do this, the company issues a prospectus inviting investors to subscribe
to its shares. They decide to offer 2,000 shares of Rs. 10 each, with a premium of Rs. 2 per
share. The payment plan is designed to make it easier for shareholders to pay gradually:
• On application: Rs. 2 per share
• On allotment: Rs. 5 per share (including Rs. 2 premium)
• First call: Rs. 3 per share
• Second call: Rs. 2 per share
This method ensures that shareholders pay in installments, and the company gets a steady
inflow of funds.
Step 1: Applications Received and Allotment Made
BrightFuture Ltd. receives applications for 3,000 shares, which is more than the 2,000 shares
offered. The company decides to allot 2,400 shares pro rata and refund the excess
application money. This is a common scenario where oversubscription occurs.
• Let’s record the receipt of application money:
Journal Entry:
Bank A/C Dr. 6,000
To Share Application A/C 6,000
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(Being application money received at Rs. 2 per share for 3,000 shares)
Explanation: 3,000 shares × Rs. 2 = Rs. 6,000 received.
Step 2: Allocation of Shares and Transfer of Application Money
The company allots 2,400 shares, and the excess 600 shares’ money is refunded or
adjusted. Let’s assume the extra money is adjusted toward the allotment money due.
Journal Entry (Transfer to Allotment Account):
Share Application A/C Dr. 4,800
To Share Capital A/C 4,800
(Being application money on 2,400 shares transferred to share capital at
Rs. 2 per share)
Explanation: 2,400 shares × Rs. 2 = Rs. 4,800
Journal Entry (Refund/Adjustment of excess application money):
Share Application A/C Dr. 1,200
To Share Allotment A/C 1,200
(Being excess application money adjusted on allotment)
Explanation: 600 shares × Rs. 2 = Rs. 1,200
Step 3: Allotment Money
The allotment is Rs. 5 per share, including a Rs. 2 premium. This means Rs. 3 is towards
capital, Rs. 2 is share premium.
• Total allotment money due = 2,400 shares × Rs. 5 = Rs. 12,000
• X was allotted 40 shares but failed to pay allotment money, while others paid.
Journal Entry (Allotment money due):
Share Allotment A/C Dr. 12,000
To Share Capital A/C 7,200
To Share Premium A/C 4,800
(Being allotment money due, Rs. 3 towards capital and Rs. 2 towards
premium)
Explanation:
• Share Capital: 2,400 × 3 = 7,200
• Share Premium: 2,400 × 2 = 4,800
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Journal Entry (Receipt of allotment money except X):
Bank A/C Dr. 11,800
To Share Allotment A/C 11,800
(Being allotment money received from shareholders except X – 40 shares)
Calculation: Total due Rs. 12,000 – X’s unpaid Rs. 200 = Rs. 11,800 received
Step 4: First Call
The first call is Rs. 3 per share.
• X did not pay the allotment and is also defaulting on first call.
• Y, with 60 shares, failed to pay both calls (first and second).
Journal Entry (First call due):
Share First Call A/C Dr. 7,200
To Share Capital A/C 7,200
(Being first call due at Rs. 3 per share on 2,400 shares)
Explanation: 2,400 × 3 = 7,200
Journal Entry (Receipt of first call money from shareholders except X):
Bank A/C Dr. 7,080
Calls in Arrears A/C Dr. 120
To Share First Call A/C 7,200
(Being first call received, X’s Rs. 120 not received – 40 shares × Rs. 3)
Step 5: Second Call
• Second call Rs. 2 per share is made.
• Y did not pay second call, so his 60 shares are forfeited after the call.
Journal Entry (Second call due):
Share Second Call A/C Dr. 4,800
To Share Capital A/C 4,800
(Being second call of Rs. 2 per share due on 2,400 shares)
• Receipt from shareholders (excluding Y):
Journal Entry (Receipt of second call money from shareholders except Y):
Bank A/C Dr. 4,680
Calls in Arrears A/C Dr. 120
To Share Second Call A/C 4,800
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Explanation: Y’s unpaid amount = 60 × 2 = Rs. 120
Step 6: Forfeiture of Shares
• X’s 40 shares and Y’s 60 shares (partly paid) are forfeited.
• Total forfeited = 100 shares
Journal Entry (Forfeiture of X and Y’s shares):
Share Capital A/C Dr. 1,000
To Share Forfeited A/C 1,000
(Being 100 shares forfeited – capital paid Rs. 10 per share, fully capital
10 × 100)
Explanation: Forfeited shares are recorded in Forfeited Share Account.
Step 7: Reissue of Forfeited Shares to Z
• 80 shares (including X’s 40 shares) are reissued to Z at Rs. 9 per share.
• Capital originally credited = 80 × 10 = 800
• Received = 80 × 9 = 720
• Profit on forfeiture (loss to company) = 80
Journal Entry (Reissue of shares):
Bank A/C Dr. 720
Share Forfeited A/C Dr. 80
To Share Capital A/C 800
(Being 80 forfeited shares reissued at Rs. 9 per share, X’s fully forfeited
shares included)
Explanation: Rs. 80 from forfeited account is used to make up the face value.
Step 8: Summary of Accounts
• Share Application A/C: Shows the receipt and adjustment of application money.
• Share Allotment and Calls Accounts: Tracks dues and receipts.
• Share Capital A/C: Increased as money is received on allotment and calls.
• Share Premium A/C: Recognizes premium received on shares.
• Calls in Arrears A/C: Keeps track of unpaid calls by X and Y.
• Share Forfeited A/C: Shows money received on forfeited shares and adjustments on
reissue.
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SECTION-B
3. Differentiate between:
(a) Alteration of Share Capital and Capital Reduction
(b) External Reconstruction and Internal Reconstruction
Ans: Imagine you are entering the world of a company, almost like stepping into a bustling
city. Every company has a “capital structure,” which is the money invested by its
shareholders and the way it manages its resources. Sometimes, due to business needs,
market pressures, or strategic plans, companies need to make changes to this capital. These
changes could be in the form of alteration of share capital, capital reduction, external
reconstruction, or internal reconstruction. Though these terms might sound similar, each
has a distinct purpose, mechanism, and outcome. Let’s explore them like characters in a
story to understand the differences clearly.
Part A: Alteration of Share Capital vs Capital Reduction
Step 1: Understanding Share Capital
Think of share capital as the financial backbone of a company. It represents the money
shareholders invest to own a piece of the company. Now, just like a city’s infrastructure
might need renovations or upgrades, a company sometimes needs to tweak its share
capital. This is where alteration of share capital and capital reduction come into play.
Though both involve changing the capital structure, their motives and procedures differ
significantly.
1. Alteration of Share Capital
Imagine a company like a school that wants to adjust the number of students in each class
without reducing the total capacity. Alteration of share capital is like reshuffling or
reorganizing the shares. It involves changes such as:
• Increasing authorized capital: The company wants to issue more shares because it
needs more money. It’s like expanding the school to accommodate more students.
• Decreasing authorized capital: The company decides to reduce the maximum
number of shares it can issue. Maybe the school wants smaller class sizes for better
management.
• Changing the types of shares: For example, converting preference shares into equity
shares or vice versa. It’s like converting classrooms from one subject focus to
another.
Key Features:
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• Doesn’t necessarily reduce the company’s paid-up capital or assets.
• Requires shareholder approval through a special resolution.
• Sometimes needs approval from the Registrar of Companies, depending on the
country’s regulations.
Example: Suppose a company has an authorized capital of ₹50 lakh divided into 5 lakh
shares of ₹10 each. The company may decide to increase it to ₹70 lakh by adding 2 lakh
more shares. That’s an alteration of share capital.
2. Capital Reduction
Now imagine if the school decides that it has too many students and wants to permanently
reduce its size to improve quality. Capital reduction is like this—it involves reducing the
actual paid-up capital of a company. It’s a more serious move compared to simple
alteration because it affects shareholders’ investments and sometimes the company’s
reserves.
Reasons for Capital Reduction:
• Adjusting losses: If a company has accumulated losses, it may reduce share capital
to write off losses from the balance sheet.
• Returning excess capital to shareholders: Sometimes, companies find they have
more funds than they need. Reducing capital allows them to return money to
shareholders.
• Improving financial ratios: A leaner capital structure may make the company appear
more financially healthy.
Key Features:
• Requires court approval or regulatory authority approval (in some countries, e.g.,
India under the Companies Act).
• Reduces paid-up capital, not just authorized capital.
• Can improve the company’s image in the market by showing stronger financial
health.
Example: Suppose a company’s paid-up capital is ₹1 crore, but it has sustained losses of ₹20
lakh. It may reduce the capital to ₹80 lakh and adjust the losses against this reduction.
Key Differences Between Alteration and Capital Reduction
Feature
Alteration of Share Capital
Capital Reduction
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Meaning
Changing the structure of
authorized capital or type of
shares
Reducing actual paid-up capital of
the company
Purpose
Flexibility in issuing shares or
restructuring
Adjust losses, return excess
capital, improve financial health
Effect on
Company’s
Assets
Usually no effect
Can affect reserves and balance
sheet
Approval
Required
Shareholders’ special resolution
Court/Regulatory authority
approval
Frequency
Relatively simpler, common
Less common, serious decision
Story Summary: Think of alteration of share capital as reorganizing the school classes to
improve management, whereas capital reduction is like permanently decreasing the
number of students to balance quality and resources. Both are important tools for financial
planning but differ in their seriousness and impact.
Part B: External Reconstruction vs Internal Reconstruction
Now let’s move to another part of our company city: what happens when the company
faces financial troubles. Imagine a city that’s overburdened with debt, crumbling roads, and
inefficient governance. To save the city, the authorities can either rebuild it from outside
with new investors or reorganize its internal systems. Similarly, companies may undergo
external reconstruction or internal reconstruction.
1. External Reconstruction
External reconstruction is like bringing in new citizens and investors to rebuild the city.
When a company is in financial distress or wants to expand, it may:
• Form a new company.
• Transfer assets and liabilities of the old company to the new one.
• Issue shares to old shareholders, creditors, or new investors in the new company.
• Liquidate the old company after transferring everything.
Key Features:
• Old company usually ceases to exist after reconstruction.
• Creditors and shareholders may get new securities in the new company.
• Often used when the old company is heavily burdened with debts or obsolete
structure.
• Helps in starting afresh with better financial health.
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Example: Suppose Company A has large debts and inefficient management. Company B is
formed to take over all assets and liabilities of Company A. Creditors of Company A may
accept shares of Company B instead of cash, and shareholders may also get proportional
shares in Company B. Company A is then closed.
2. Internal Reconstruction
Internal reconstruction is like renovating the city without bringing in new citizens. The city
remains the same, but the streets, buildings, and governance are restructured. Similarly, the
company remains the same legal entity, but its capital structure and assets are
reorganized.
Mechanisms:
• Reducing capital to write off losses.
• Reissuing shares at different values.
• Converting debt into equity.
• Restructuring internal reserves.
Key Features:
• No new company is formed.
• The old company continues to exist legally.
• Used to strengthen financial stability without outside intervention.
• Often involves writing off losses or restructuring debts.
Example: A company has accumulated losses of ₹10 lakh. It reduces its share capital by ₹10
lakh to write off the losses. No new company is formed; only the financial structure is
adjusted internally.
Key Differences Between External and Internal Reconstruction
Feature
External Reconstruction
Internal Reconstruction
Legal Entity
New company is formed; old
company ceases
Old company continues
Assets &
Liabilities
Transferred to new company
Remain within old company
Shareholders
May receive shares in new
company
May have restructured shares in
same company
Creditors
May negotiate to accept new
shares/securities
Debts adjusted internally
Purpose
To start afresh with clean balance
sheet
To reorganize internally to
strengthen finances
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Story Summary: External reconstruction is like demolishing an old city and building a new
one with new citizens and systems. Internal reconstruction is like renovating the old city
while keeping the original identity, but with improved roads, utilities, and governance.
Bringing It All Together
If we look at these four concepts together, we can visualize a company as a living organism
or a city:
• Alteration of Share Capital: Adjusting the building blocks of the city (number and
type of houses) for better management.
• Capital Reduction: Permanently reducing the size of the city to match its resources
and improve balance.
• External Reconstruction: Completely rebuilding the city from scratch with new
citizens and infrastructure.
• Internal Reconstruction: Renovating the city internally, optimizing resources without
changing the city’s identity.
In simpler words:
• Alteration and reduction deal mainly with share capital, changing either its structure
or size.
• Internal and external reconstruction deal with financial revival, either by
reorganizing internally or by starting fresh externally.
These tools are not just technical terms in a textbook—they are strategic maneuvers that
companies use to survive, grow, and attract investors. They ensure that the company
remains healthy, competitive, and prepared for future challenges.
4. The Balance Sheet as on 31 March 2016 of X Ltd. and Y Ltd. are as under:
I
Particulars
X Ltd.
Rs.
Y Ltd.
Rs.
EQUITY AND LIABILITIES
Shareholder’s Funds
Share Capital :
Authorised and subscribed :
Equity shares of Rs. 100 each fully paid
6,00,000
20,00,000
Reserves and Surplus :
General Reserve
Statement of Profi and Loss
Capital Reserve
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NON CURRENT LIABILITIES
Long term borrowings:
Unsecured :
12% Debentures
CURRENT LIABILITIES
Trade payables:
Creditors
Total
II
ASSESTS
Non-current Assets
Fixed Assets
Tangible Assets
Building
Machinery
Furniture
Expenditure on new Project
Intangible Assets
Goodwill
Current Assets
(a) Inventories :
stock
9,20,000
7,20,000
(b) Trade receivables :
(c) Cash and cash equivalents
Cash in hand
2,80,000
20,000
Bank Balance
8,00,000
1,60,000
Total:
82,40,000
40,20,000
Y limited was absorbed by X limited on 1 April, 2016 on the following terms:
(a) Fixed assets other than Goodwill to be valued at Rs. 20,00,000 including Rs. 24,000 for
furniture.
(b) Stock to be reduced by Rs. 80,000 and debtors by 5%.
(c) X limited to assume liabilities and to discharge the 12% debentures by issue of 11%
debentures of the same value and in addition a premium of 6% was paid in cash.
(d) The new project to be valued at Rs. 3,80,000
(e) The shareholders of Y Ltd. to receive cash payment of Rs. 30 per share plus four equity
shares in X Ltd. for every five shares held in Y-Ltd.
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(f) Both the companies to declare and pay dividend of 6% prior to absorption.
(g) Expenses of liquidation of Y Ltd. are to be reimbursed by X Ltd. to the extent of Rs.
20,000. The actual expenses amounted to Rs. 24,000.
Prepare necessary ledger accounts in the books of Y Ltd. and prepare the Balance Sheet of
X Ltd. after absorption assuming that X Ltd. authorized capital has been increased
to Rs. 80,00,000.
Ans: Setting the Scene: The Big Business Merger
Imagine X Ltd. is a strong, ambitious company looking to expand, and Y Ltd. is a smaller but
promising firm. On 1st April 2016, X Ltd. decides to absorb Y Ltd., and naturally, there are
many financial adjustments and formalities to go through before they can become a single,
powerful entity. To make sense of all this, we need to understand the balance sheets of
both companies and then carefully apply the absorption terms.
Step 1: Understanding Y Ltd.’s Financial Position
Before we combine them, let’s focus on Y Ltd., the company being absorbed. The balance
sheet shows:
• Assets: Stock, Debtors, Cash, Bank, Fixed Assets, Goodwill, and Expenditure on New
Project.
• Liabilities: Share Capital, Reserves, 12% Debentures, and Creditors.
The total assets are Rs. 40,20,000, and total liabilities + equity also match Rs. 40,20,000, as
balance sheets always do. This is our starting point.
Step 2: Adjusting Y Ltd.’s Assets Before Absorption
According to the absorption terms:
1. Fixed Assets Adjustment:
Fixed assets (Building, Machinery, Furniture) are to be revalued at Rs. 20,00,000,
and furniture specifically is Rs. 24,000. This means the original recorded value might
have been higher or lower, but now, for the merger, we standardize the value to Rs.
20,00,000.
2. Stock Reduction:
Stock (inventory) of Y Ltd. is reduced by Rs. 80,000. This is because perhaps some
stock is outdated or overvalued. If the original stock was Rs. 7,20,000, after
adjustment it becomes:
7,20,000−80,000=6,40,0007,20,000 - 80,000 = 6,40,0007,20,000−80,000=6,40,000
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3. Debtors Reduction:
Debtors (trade receivables) are reduced by 5%, which is common to account for
doubtful debts. If debtors were Rs. D (unknown), then adjusted debtors = D−0.05.
We will need to include this in ledger calculations.
4. New Project Valuation:
Expenditure on the new project is to be valued at Rs. 3,80,000. So, we replace
whatever original amount is recorded with this.
5. Goodwill Treatment:
Goodwill is the most interesting part—it reflects the value of Y Ltd. beyond tangible
assets. For absorption, this is often written off against reserves or considered for
compensation to shareholders.
Step 3: Handling Y Ltd.’s Liabilities
Y Ltd. has 12% Debentures, which X Ltd. will take over by issuing 11% debentures of the
same value, plus 6% cash premium. This means:
• The principal of Y Ltd.’s debentures is settled by giving X Ltd.’s own debentures (like
swapping debt instruments) and paying a little extra in cash as a premium.
Other liabilities, like trade payables (creditors), are simply assumed by X Ltd. They are like
stepping into Y Ltd.’s shoes and taking responsibility for pending bills.
Step 4: Deciding How Y Ltd.’s Shareholders Are Paid
Now comes the exciting part—shareholder compensation:
• Y Ltd.’s shareholders receive cash of Rs. 30 per share.
• Additionally, they get four equity shares in X Ltd. for every five shares they hold in Y
Ltd.
This mix of cash and shares is a classic way to ensure that former Y Ltd. shareholders still
have a stake in the new, bigger company (X Ltd.) while also getting some immediate
liquidity.
Step 5: Accounting for Dividends and Expenses
Before the merger:
1. Both companies declare a 6% dividend. Dividends are like a parting gift to the old
shareholders before Y Ltd. vanishes into X Ltd.
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2. Liquidation Expenses: X Ltd. agrees to pay Rs. 20,000 for expenses incurred in
winding up Y Ltd., but the actual cost is Rs. 24,000. The extra Rs. 4,000 becomes an
expense in X Ltd.’s books.
Step 6: Preparing Ledger Accounts in Y Ltd.
At this stage, Y Ltd.’s books start closing. We record all transactions in ledger format, which
is like writing the final chapter of Y Ltd.’s independent story:
1. Shareholders’ Accounts:
Each shareholder receives their cash and shares. This reduces Share Capital and
Reserves in Y Ltd.’s books.
2. Asset Transfers:
Assets (stock, debtors, cash, bank balances, fixed assets, project expenditure, and
goodwill) are transferred to X Ltd.’s books at their revalued amounts.
3. Liabilities Transfer:
Creditors and debentures are assumed or settled as per absorption terms.
4. Liquidation Expenses:
Any extra expense over the agreed Rs. 20,000 (i.e., Rs. 4,000) is recorded as an
expense in X Ltd.
Effectively, after these entries, Y Ltd.’s books close to zero, because every asset and liability
has either been transferred, paid off, or adjusted.
Step 7: Preparing X Ltd.’s Balance Sheet After Absorption
Now we combine everything into X Ltd.’s new balance sheet:
Step 7a: Assets
1. Fixed Assets: Rs. 20,00,000 (includes furniture Rs. 24,000).
2. Stock: Original X Ltd. stock + Y Ltd.’s adjusted stock.
3. Debtors: Adjusted debtors (Y Ltd.’s + X Ltd.’s).
4. Cash and Bank: X Ltd.’s cash + Y Ltd.’s adjusted cash, minus cash paid to Y Ltd.’s
shareholders for purchase of shares (Rs. 30 per share) and premium on debentures.
5. New Project: Rs. 3,80,000
6. Goodwill: Any goodwill transferred from Y Ltd. (often written off or adjusted against
X Ltd.’s reserves).
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Step 7b: Liabilities and Equity
1. Share Capital: Increase X Ltd.’s authorized capital to Rs. 80,00,000 to issue new
shares to Y Ltd.’s shareholders.
2. Debentures: Old 12% debentures of Y Ltd. replaced by 11% debentures of X Ltd. +
cash premium.
3. Creditors: X Ltd. now assumes Y Ltd.’s trade payables.
4. Reserves & Surplus: Any adjustments for goodwill, liquidation expenses, and
dividends are reflected here.
Step 7c: Final Balance
The final balance sheet of X Ltd. is now a merged, stronger company:
• Total Assets = Total Liabilities + Shareholders’ Equity
• All former Y Ltd. shareholders now own part of X Ltd. and have received cash
compensation.
• Debentures and liabilities are carefully managed to ensure smooth absorption.
Step 8: The Moral of the Story
Through this step-by-step process, we see how a company absorbs another:
1. Adjust assets and liabilities to fair value.
2. Compensate shareholders of the absorbed company.
3. Record all transfers in ledger accounts.
4. Prepare the new, post-merger balance sheet showing the true financial position.
This isn’t just accounting—it’s a story of transformation, where X Ltd. grows bigger and Y
Ltd.’s shareholders become part of a stronger enterprise. Think of it like two rivers merging
to form a bigger, more powerful river.
Step 9: Tips for Students
• Always adjust asset values before absorption; it reflects true worth.
• Debenture conversions and share exchanges are key to mergers.
• Treat liquidation expenses carefully—they affect the acquiring company.
• Ensure balance sheets balance at the end—Assets = Liabilities + Equity.
• Make ledger accounts neat—imagine explaining the story to someone who has never
seen these companies.
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SECTION-C
5. What are NPAS? How are advances classified? What are the provisioning norms for
NPAs ?
Ans: Imagine you are the owner of a small shop. You have a friend who comes to you and
asks for a loan to buy materials for his business. You agree, trusting him that he will repay
the money on time. But what if he stops paying you back? That’s essentially what banks face
when they give out loans. In banking terms, loans that are not repaid on time are called
Non-Performing Assets (NPAs).
Understanding NPAs
In the world of banking, money is lent to individuals, companies, or institutions to help them
meet their financial needs. Banks earn interest from these loans, which is a major source of
their income. But sometimes, the borrower fails to pay either the principal or interest for a
certain period. When this happens, the loan is no longer earning income for the bank. This is
called a Non-Performing Asset (NPA).
To put it simply: an NPA is like a plant that the gardener planted (the bank gave a loan), but
the plant has stopped growing and bearing fruits (the loan stops giving interest or principal).
Banks classify loans as NPAs when interest or principal remains overdue for 90 days in case
of most loans, and 180 days for agricultural loans.
Classification of NPAs
Just as there are different shades of a problem, NPAs are not all the same. Banks categorize
them based on how long the loan has been overdue:
1. Substandard Assets – Think of this as a young tree that has started showing signs of
weakness. If a loan remains unpaid for less than or equal to 12 months, it is called a
substandard asset. These loans are risky, but the bank still has a chance to recover.
2. Doubtful Assets – Now imagine the tree has been weak for more than a year. The
chances of it surviving are uncertain. If a loan remains unpaid for more than 12
months, it is classified as a doubtful asset. Here, the risk of the bank losing money is
much higher.
3. Loss Assets – This is the stage where the tree is dead. The bank realizes that the loan
is unlikely to be recovered at all. Such loans are classified as loss assets. While banks
may try to recover something, most of the money is considered lost.
How Advances are Classified
Advances, or loans given by banks, are not just classified as NPAs randomly. Banks follow
careful procedures to identify which loan is standard and which has turned non-performing.
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• Standard Assets – These are performing loans where the borrower is paying interest
and principal regularly. They are like healthy trees giving fruits season after season.
• Substandard, Doubtful, and Loss Assets – These are the NPAs, as explained above.
In a way, banks act like gardeners who carefully monitor their plants. Some loans grow well
(standard), some are struggling (substandard), and some are on the verge of being lost
(doubtful or loss).
Provisioning Norms for NPAs
Now, let’s talk about how banks protect themselves. Remember, banks lend money that is
largely deposited by people, so they have a responsibility to ensure they don’t lose it. This is
where provisioning comes in.
Provisioning is like setting aside a portion of the bank’s money as a safety net to cover
potential losses from bad loans. It is a way of saying: “Even if this tree dies, we have some
money reserved to cover the loss.”
The Reserve Bank of India (RBI) provides guidelines for how much banks must set aside as
provisions:
1. Substandard Assets – Banks must make a provision of 15% of the outstanding
amount. This is like keeping aside 15% of your savings for a tree that is showing signs
of disease.
2. Doubtful Assets – The provision depends on the quality of security provided by the
borrower:
o If unsecured: 100% provision (full safety net, because there’s no collateral).
o If secured by collateral: provisions can range from 20% to 50% based on the
period and security quality.
3. Loss Assets – Since these loans are considered almost unrecoverable, banks have to
make 100% provision. It’s like accepting that the tree is gone and fully accounting for
the loss.
Provisioning ensures that even if the bank loses some money due to NPAs, it does not
collapse. It also helps maintain the confidence of depositors who have entrusted their
money to the bank.
Why NPAs are a Big Deal
NPAs are not just numbers on a bank’s balance sheet; they impact the economy at large.
Here’s why:
• Reduced Profits – Banks earn less because NPAs stop generating interest.
• Credit Crunch – When banks have a high proportion of NPAs, they become cautious
in lending. This reduces the flow of credit to businesses and individuals, slowing
down economic growth.
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• Financial Health – Persistent NPAs weaken a bank’s capital, making it less resilient in
tough times.
Imagine if every gardener faced dead trees but had no savings to buy new seeds. That’s
similar to a bank struggling with NPAs—it limits their ability to lend and grow.
Conclusion
NPAs are like loans that have stopped growing, and banks need to classify them carefully to
manage risk. Through substandard, doubtful, and loss asset categories, banks assess the
severity of each case. Provisioning norms act as a financial cushion, ensuring that even if
some loans fail, the bank remains stable.
In essence, managing NPAs is like tending a garden: you water the healthy plants, monitor
the weak ones, and set aside resources for the ones that might not survive. The better the
bank manages NPAs, the stronger it becomes, and the more it can continue lending to
borrowers, helping the economy flourish.
So, the next time you think of a loan, imagine a tiny tree and how banks nurture, monitor,
and protect it. That’s the story of NPAs in a nutshell—a tale of risk, caution, and resilience in
the world of banking.
6. From the following information, prepare Balance Sheet of City Bank as on 31 March,
2018, giving the relevant schedules:
Debit Balance
Amount
(Rs.in lakhs)
Current accounts
28.0
Cash in Credits
812.10
Cash in Hand
160.15
Cash with RBI
37.88
Cash with other banks
155.87
Money at call
210.17
Gold
55.23
Govt. Securities
110.17
Premises at Cost Less Depreciation
155.70
Furniture at cost Less depreciation
70.12
Term Loans
792.88
Total
2,588.22
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Amount (Rs. in
Lakhs)
198.00
231.00
150.00
412.00
517.00
520.12
00.10
110.00
450.00
2,588.22
Particulars
Amount (Rs.)
Bills for collections
18,10,000
Acceptances and Endorsements
14,12,000
Claims against the banks not acknowledged as Debt
55,000
Depreciation Accumulated :
Premises
1,10,000
Furniture
78,000
50% term loans are secured by government guarantees. 10% of cash credits is unsecured.
Also calculate cash reserves required and Stationary liquid reserve required.
Note: Cash reserve required 3% of demand and time liabilities; Liquid reserve required
30% of demand and time liabilities.
Ans: Imagine you are walking into the headquarters of City Bank on the last day of the
financial year, 31st March 2018. The bank’s treasury manager hands you a stack of figures,
representing the bank’s assets and liabilities. Your job is to carefully arrange them into a
Balance Sheet, like a financial portrait that tells the story of the bank’s health.
The data given is divided into debit balances (essentially the bank’s assets) and credit
balances (the bank’s liabilities and capital). In a bank, assets include cash, deposits with
other banks, loans, securities, and property, while liabilities include deposits from
customers, borrowings, share capital, and reserves.
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Step 1: Understanding the Assets
The debit balances are:
Particulars
Amount (Rs. in lakhs)
Cash in Hand
160.15
Cash with RBI
37.88
Cash with Other Banks
155.87
Money at Call & Short Notice
210.17
Gold
55.23
Government Securities
110.17
Premises (Cost Less Depreciation)
155.70
Furniture (Cost Less Depreciation)
70.12
Term Loans
792.88
Cash in Credits
812.10
Total
2,588.22
A few clarifications for the story:
1. Cash in Hand, RBI, and Other Banks: These are the bank’s immediate liquid
resources — money that can be used instantly to meet withdrawal demands.
2. Money at Call: This is like short-term lending to other banks — almost cash, but
earning interest.
3. Gold and Govt. Securities: These are safe investments, backing up the bank’s
deposits.
4. Premises and Furniture: Tangible fixed assets — offices and furniture the bank uses
to operate.
5. Term Loans and Cash Credits: Loans given to customers. Some of these are secured
by government guarantees, which means the bank is safer in case the borrower
defaults.
Note: 50% of term loans are government-guaranteed, and 10% of cash credits are
unsecured. This will help when analyzing the quality of assets later.
Step 2: Understanding the Liabilities and Capital
Credit balances:
Particulars
Amount (Rs. in lakhs)
Share Capital (19,80,000 shares of Rs. 10 each)
198.00
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Statutory Reserve
231.00
Net Profit before Appropriations
150.00
Profit & Loss Account
412.00
Fixed Deposit Account
517.00
Current Account
520.12
Bills Payable
0.10
Borrowings from Other Banks
110.00
Saving Deposit Account
450.00
Total
2,588.22
Here’s the story behind these figures:
• Share Capital: Money invested by shareholders — their stake in the bank.
• Reserves & Net Profit: Money kept aside to strengthen the bank’s financial position.
• Deposits (Fixed, Current, Saving): Customers trust the bank with their money; this is
a liability since the bank must repay it on demand or maturity.
• Borrowings: Short-term or long-term loans from other banks.
• Bills Payable: Tiny outstanding obligations, like minor bills awaiting clearance.
Step 3: Calculating Cash Reserve Requirement (CRR) and Liquid Assets
In India, banks must maintain a Cash Reserve Ratio (CRR) with the RBI, usually 3% of
demand and time liabilities (which include deposits). Also, banks must maintain Liquid
Assets Reserve (SLR + others), 30% of the same liabilities.
Step 3a: Identify demand and time liabilities
Here, demand and time liabilities are:
• Fixed Deposit Account: 517.00
• Current Account: 520.12
• Saving Deposit Account: 450.00
Total DTL = 517 + 520.12 + 450 = 1,487.12 lakhs
Step 3b: Cash Reserve Required (CRR)
CRR = 3% of DTL
= 3% × 1,487.12
= 44.6136 lakhs ≈ 44.61 lakhs
Step 3c: Statutory Liquid Reserve
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Liquid Reserve = 30% of DTL
= 30% × 1,487.12
= 446.136 lakhs ≈ 446.14 lakhs
Step 4: Drafting the Balance Sheet
We organize assets and liabilities under appropriate schedules, to make the story clear.
City Bank Ltd.
Balance Sheet as on 31st March, 2018 (Rs. in Lakhs)
Liabilities
Particulars
Amount
Share Capital
198.00
Statutory Reserve
231.00
Net Profit (before Appropriation)
150.00
Profit & Loss Account
412.00
Deposits:
— Fixed Deposit
517.00
— Current Account
520.12
— Saving Deposit
450.00
Borrowings from Other Banks
110.00
Bills Payable
0.10
Total Liabilities
2,588.22
Assets
Particulars
Amount
Cash in Hand
160.15
Balance with RBI
37.88
Balance with Other Banks
155.87
Money at Call & Short Notice
210.17
Government Securities
110.17
Gold
55.23
Term Loans
792.88
Premises (Cost Less Depreciation)
155.70
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Furniture (Cost Less Depreciation)
70.12
Cash in Credits
812.10
Total Assets
2,588.22
Step 5: Notes & Adjustments
1. Bills for Collection: Rs. 18.10 lakhs — the bank is handling these bills for its clients; it
is contingent, not an asset yet.
2. Acceptances & Endorsements: Rs. 14.12 lakhs — the bank guarantees payments on
behalf of clients; contingent liability.
3. Claims not acknowledged as debt: Rs. 0.55 lakhs — potential risk, but not
recognized in liabilities.
4. Depreciation Already Deducted: Premises 1.10 lakhs, Furniture 0.78 lakhs —
included in net book value.
5. Secured/Unsecured Loans: 50% term loans are guaranteed; 10% of cash credits are
unsecured — useful for risk assessment, though not adjusted in balance sheet totals.
Step 6: Understanding the Story
Imagine a bank as a castle:
• Cash, securities, and gold = treasures in vaults.
• Term loans and cash credits = knights defending the bank’s honor, some under
government protection, some taking a risky mission (unsecured).
• Deposits = villagers entrusting the castle with their gold; they can ask for it anytime
(current) or after a set time (fixed).
• Share capital & reserves = castle’s foundation, ensuring it stands strong through
storms.
The CRR and SLR are like safety shields — required by law to protect the bank from
unexpected attacks (withdrawals). Without these, the castle would be vulnerable.
Step 7: Conclusion
The Balance Sheet balances perfectly:
• Assets (2,588.22 lakhs) = Liabilities + Capital (2,588.22 lakhs)
• Cash Reserve Required: 44.61 lakhs
• Liquid Reserve Required: 446.14 lakhs
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The bank is financially sound, has adequate reserves, and maintains liquidity in line with
regulatory requirements. The story of City Bank is not just numbers; it’s a tale of trust,
responsibility, and careful management of resources and risks.
SECTION-D
7. Write notes on:
(a) Annuities
(b) Claims
(c) Reinsurance
(d) Surrender value.
Ans: A Different Beginning…
Imagine you’re sitting in a cosy café on a rainy afternoon. Across the table is your old friend
Arjun, who has just joined an insurance company. He’s bubbling with stories — not about
boring paperwork, but about how insurance terms actually play out in people’s lives.
As you sip your coffee, he leans in and says, "Let me tell you about four things that keep our
industry running — annuities, claims, reinsurance, and surrender value. They sound
technical, but they’re really just stories about people, promises, and protection."
And so, the conversation begins…
(a) Annuities — The Paycheque That Never Retires
The Story: Meet Meera. She’s worked for 35 years, saved diligently, and now wants to
ensure she never runs out of money in retirement. Instead of keeping all her savings in the
bank, she gives a lump sum to an insurance company. In return, they promise to pay her a
fixed amount every month for the rest of her life.
That’s an annuity — a financial arrangement where you pay now, and receive a steady
income later.
Definition in Simple Words
An annuity is a contract between a person and an insurance company where the person
pays a lump sum or a series of payments, and in return, the insurer pays them regular
income for a specified period or for life.
Types of Annuities
1. Immediate Annuity: Payments start right after you invest. Perfect for someone
retiring now.
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2. Deferred Annuity: Payments start after a set period — good for those still working.
3. Fixed Annuity: Pays a guaranteed amount regularly.
4. Variable Annuity: Payments vary based on investment performance.
5. Life Annuity: Pays until the annuitant dies.
6. Annuity Certain: Pays for a fixed number of years, regardless of whether the
annuitant is alive.
Why They Matter
• Provide financial security in old age.
• Protect against the risk of outliving your savings.
• Can be customised — for example, joint life annuities for couples.
In essence: An annuity is like planting a money tree today that will give you fruit every
month for as long as you live.
(b) Claims — The Moment of Truth
The Story: Ravi has been paying his life insurance premiums for 10 years. One day, tragedy
strikes — he passes away unexpectedly. His family, grieving and anxious about the future,
approaches the insurance company. This is the moment when all those years of paying
premiums are put to the test.
The process of asking the insurer to fulfil its promise is called making a claim.
Definition in Simple Words
A claim is a formal request made by the policyholder (or their nominee/beneficiary) to the
insurance company, asking for payment or service as per the terms of the policy.
Types of Claims
1. Maturity Claim: When a life insurance policy reaches its maturity date, and the
insured is alive, they receive the sum assured plus bonuses.
2. Death Claim: When the insured person dies during the policy term, the nominee gets
the sum assured.
3. Survival Benefit Claim: In money-back policies, periodic payments are made to the
insured during the policy term.
4. Health/Accident Claims: For medical expenses or disability benefits.
Claim Process (Life Insurance Example)
1. Notification: Inform the insurer about the event (death, maturity, etc.).
2. Submission of Documents: Death certificate, policy document, claim form, ID proofs,
etc.
3. Verification: Insurer checks the authenticity of the claim.
4. Settlement: Payment is made if everything is in order.
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Why Claims Are Crucial
• They are the real test of an insurer’s reliability.
• Smooth claim settlement builds trust in the insurance industry.
• Delays or disputes can cause hardship to beneficiaries.
In essence: A claim is the moment when the promise written in the policy becomes real help
in someone’s life.
(c) Reinsurance — Insurance for the Insurers
The Story: Imagine an insurance company as a strong dam holding back a river of risks. Most
days, the dam is fine. But what if a massive flood comes — say, a natural disaster causing
thousands of claims at once? The dam could break.
To prevent this, the insurance company shares part of its risk with another company. This
“insurance for insurers” is called reinsurance.
Definition in Simple Words
Reinsurance is when an insurance company transfers part of its risk to another insurance
company (the reinsurer) in exchange for a portion of the premium.
Why It’s Done
• To protect against very large losses.
• To stabilise the insurer’s finances.
• To allow the insurer to take on more policies than it could handle alone.
Types of Reinsurance
1. Facultative Reinsurance: Each risk is offered to the reinsurer individually, and they
can accept or reject it.
2. Treaty Reinsurance: A standing agreement where the reinsurer automatically
accepts certain types of risks.
3. Proportional Reinsurance: The reinsurer gets a fixed share of premiums and pays
the same share of claims.
4. Non-Proportional Reinsurance: The reinsurer pays only if losses exceed a certain
amount.
Example
If an insurer issues a ₹100 crore policy on a factory, it might keep ₹20 crore of the risk and
reinsure ₹80 crore with another company. If the factory is destroyed, the reinsurer pays its
share of the claim.
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In essence: Reinsurance is the safety net under the safety net — it ensures that even if
disaster strikes, the insurer can still keep its promises.
(d) Surrender Value — Cashing Out Early
The Story: Neha bought a 20-year life insurance policy. After 8 years, she faces a financial
emergency and can’t continue paying premiums. She decides to “surrender” her policy —
basically, end it before maturity. The insurer gives her a lump sum in return. This amount is
called the surrender value.
Definition in Simple Words
Surrender value is the amount the policyholder gets from the insurer if they terminate the
policy before its maturity date.
When Is It Available?
• Usually after the policy has been in force for a minimum period (often 2–3 years).
• Not all policies have a surrender value — term insurance, for example, usually
doesn’t.
Types of Surrender Value
1. Guaranteed Surrender Value: A fixed percentage of total premiums paid (excluding
first year’s premium and rider premiums), as stated in the policy.
2. Special Surrender Value: Usually higher than the guaranteed value, calculated based
on the sum assured, bonuses, and the policy’s term completed.
Factors Affecting Surrender Value
• Number of years the policy has been active.
• Type of policy.
• Bonuses accrued.
• Terms and conditions of the insurer.
Impact of Surrender
• You get immediate cash, but lose future benefits.
• Often, the surrender value is less than the total premiums paid, especially in early
years.
In essence: Surrender value is like breaking a fixed deposit early — you get some money
back, but not the full benefit you would have received by waiting.
Bringing It All Together
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Arjun finishes his coffee and smiles: "So you see, these aren’t just dry terms. Annuities are
about securing your future. Claims are about keeping promises. Reinsurance is about sharing
burdens. And surrender value is about having an exit when life changes your plans."
You realise that behind every insurance term is a human story — of planning, loss,
protection, and sometimes, compromise.
Quick Recap Table
Term
Simple Meaning
Real-Life Purpose
Key Takeaway
Annuities
Pay now, get regular
income later
Retirement security
Your personal
pension plan
Claims
Requesting the insurer
to pay as promised
Financial help when
events occur
The promise in action
Reinsurance
Insurance for insurers
Protects insurers
from huge losses
Safety net for the
safety net
Surrender
Value
Cash you get for ending
a policy early
Emergency funds
Early exit, but with
reduced benefits
8. The undermentioned balances form part of the Trial Balance of the All People's
Assurance Co. Ltd., as on 31 March 2016:
Particulars
Rs.
Amount of Life Insurance Fund at the beginning of the year
14,70,562
Claims by death
76,980
Claims by Maturity
56,420
Premiums
2,10,572
Expenses of Management
19,890
Commission
26,541
Consideration of annuities granted
10,712
Interests, dividends and rents
52,461
Income tax paid on profits
3,060
Surrenders
21,860
Particulars
Rs.
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Annuities
29,420
Bonus paid in cash
9,450
Bonus paid in reduction of premiums
2,500
Preliminary expenses balance
600
Claims admitted but not paid at the end of the year
10,034
Annuities due but not paid
2,380
Capital paid up
14,00,000
Government securities
24,90,890
Sundry fixed assets
4,19,110
Prepare Revenue Account and the Balance Sheet after taking into account the following:
(a) Claims covered under reinsurance Rs. 10,000 by death
(b) Further claims intimated Rs. 8,000 by death
(c) Further bonus utilized in reduction of premium, Rs. 1,50
(d) Interest Accrued, Rs. 15,400
(e) Premiums outstanding, Rs. 7,400
Ans: Chapter 1: Setting the Stage – The Life Insurance World
Think of All People’s Assurance as a guardian of people’s financial security. Families trust
this company to manage their life insurance, pay claims when people pass away, and
provide returns on investments.
Every year, the company opens its books of accounts and asks, “How did we do? How much
money came in, how much went out, and what do we owe?” That’s where the Revenue
Account and Balance Sheet come into play. The Revenue Account tells us how the company
performed in the year — the profits, expenses, claims, and bonuses. The Balance Sheet is
like a snapshot of the company's financial health at the end of the year — what it owns,
what it owes, and what belongs to the shareholders.
Now, let’s unravel the story using the trial balance numbers you’ve given.
Chapter 2: Gathering the Characters – The Trial Balance
Every number in the trial balance has a role, like characters in a story:
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• Life Insurance Fund at the beginning: Rs. 14,70,562. This is the opening strength, the
wealth the company already had in its “life fund.”
• Claims by death: Rs. 76,980. The company had to pay these to the families of
policyholders who passed away.
• Claims by maturity: Rs. 56,420. These are payments to policyholders whose policies
matured successfully.
• Premiums: Rs. 2,10,572. Money collected from policyholders — this is the income,
the lifeblood.
• Expenses of management: Rs. 19,890. Running the company isn’t free — staff
salaries, office rent, and other operating costs.
• Commission: Rs. 26,541. Paid to agents who brought in policies — the cost of
keeping the sales engine running.
• Consideration of annuities granted: Rs. 10,712. Payments made for annuity
contracts — a bit like a subscription service the company promised to pay.
• Interests, dividends, and rents: Rs. 52,461. Income from investments — this is the
company’s way of growing the fund.
• Income tax paid on profits: Rs. 3,060. Taxes on income — unavoidable reality.
• Surrenders: Rs. 21,860. Some policyholders decided to cash out their policies early.
• Annuities: Rs. 29,420. Regular payments promised to annuitants.
• Bonus paid in cash: Rs. 9,450. Extra rewards given to policyholders for good returns.
• Bonus paid in reduction of premium: Rs. 2,500. Instead of cash, some bonuses
reduced the future premiums.
• Preliminary expenses balance: Rs. 600. Old expenses from starting the company, not
yet written off.
• Claims admitted but not paid: Rs. 10,034. Debts we need to account for — claims
approved but not yet paid.
• Annuities due but not paid: Rs. 2,380. Another liability — promised but unpaid
annuities.
• Capital paid up: Rs. 14,00,000. Money invested by shareholders — the backbone.
• Government securities: Rs. 24,90,890. Safe investments, earning interest.
• Sundry fixed assets: Rs. 4,19,110. Buildings, furniture, computers — the tools of the
trade.
And then, we have adjustments — plot twists in our story:
• Claims covered under reinsurance: Rs. 10,000 by death. Reinsurance is like
insurance for insurance companies. Not all claims hurt the company fully.
• Further claims intimated: Rs. 8,000 by death. More losses waiting to be paid.
• Further bonus utilized in reduction of premium: Rs. 150. A small adjustment in
policyholder benefits.
• Interest accrued: Rs. 15,400. Investments earned more than what’s received —
money to be collected.
• Premiums outstanding: Rs. 7,400. Premiums due but not yet collected — expected
future income.
With all these characters and plot twists, we are ready to narrate the financial story.
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Chapter 3: Writing the Revenue Account – The Story of the Year
The Revenue Account for a life insurance company is like a diary of income and expenses for
the year. Let’s think in terms of income and outgoings (like a personal bank statement but
bigger).
Step 1: Add up the Income (Receipts)
1. Premiums received: Rs. 2,10,572
o Don’t forget the premium outstanding Rs. 7,400. The total premiums earned
this year = 2,10,572 + 7,400 = Rs. 2,17,972
2. Income from investments: Rs. 52,461
o Add interest accrued Rs. 15,400, giving total investment income = 52,461 +
15,400 = Rs. 67,861
3. Surrenders: Rs. 21,860 (cash received from policyholders)
4. Total income = 2,17,972 + 67,861 + 21,860 = Rs. 3,07,693
Step 2: List the Outgoings (Payments)
1. Claims by death: Rs. 76,980
o Less reinsurance recovery: 10,000 → Net claims = 76,980 – 10,000 = Rs.
66,980
o Add further claims intimated Rs. 8,000 → Total claims to account = 66,980 +
8,000 = Rs. 74,980
2. Claims by maturity: Rs. 56,420
3. Annuities paid: Rs. 29,420 + annuities due but not paid Rs. 2,380 → Rs. 31,800
4. Expenses of management: Rs. 19,890
5. Commission: Rs. 26,541
6. Consideration of annuities granted: Rs. 10,712
7. Bonus paid in cash: Rs. 9,450
8. Bonus paid in reduction of premium: 2,500 + 150 (adjustment) → Rs. 2,650
9. Income tax on profits: Rs. 3,060
Step 3: Total Outgoings
Let’s sum these carefully:
• Claims by death: 74,980
• Claims by maturity: 56,420 → subtotal = 1,31,400
• Annuities paid: 31,800 → subtotal = 1,63,200
• Expenses of management: 19,890 → subtotal = 1,83,090
• Commission: 26,541 → subtotal = 2,09,631
• Consideration of annuities granted: 10,712 → subtotal = 2,20,343
• Bonus paid in cash: 9,450 → subtotal = 2,29,793
• Bonus in reduction of premium: 2,650 → subtotal = 2,32,443
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• Income tax: 3,060 → Total outgoings = Rs. 2,35,503
Step 4: Calculate Net Surplus
Revenue Account’s purpose is to show the surplus (profit for the year that adds to the Life
Insurance Fund):
• Total income: 3,07,693
• Total outgoings: 2,35,503
• Surplus = 3,07,693 – 2,35,503 = Rs. 72,190
This surplus will be added to the Life Insurance Fund at the end of the year.
Chapter 4: Crafting the Balance Sheet – The Snapshot of Strength
Now, think of the Balance Sheet as a photo of the company’s financial position at 31 March
2016. Assets on one side, liabilities on the other, plus the capital invested.
Step 1: Update Life Insurance Fund
• Opening Life Fund: Rs. 14,70,562
• Add: Revenue Account surplus: Rs. 72,190
• Add: Interest accrued: Rs. 15,400 (already counted in revenue but needs reflection in
assets)
• Adjust for claims not yet paid: Rs. 10,034
• Adjust for annuities due but not paid: Rs. 2,380
Step 2: List Assets
1. Government Securities: Rs. 24,90,890
2. Sundry Fixed Assets: Rs. 4,19,110
3. Premiums Outstanding: Rs. 7,400
4. Interest Accrued: Rs. 15,400
5. Preliminary Expenses: Rs. 600
Total Assets = 24,90,890 + 4,19,110 + 7,400 + 15,400 + 600 = Rs. 29,33,400
Step 3: List Liabilities
1. Capital Paid Up: Rs. 14,00,000
2. Life Insurance Fund (including surplus): 14,70,562 + 72,190 = 15,42,752
o Adjusted for claims & annuities due: 15,42,752 – 10,034 – 2,380 = Rs.
15,30,338
Total Liabilities = 14,00,000 + 15,30,338 = Rs. 29,30,338
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• Slight difference with assets may be rounded off depending on accounting practice.
Chapter 5: Conclusion – The Story We Told
In simple words, here’s what happened over the year at All People’s Assurance:
• They collected premiums from policyholders and earned income from investments.
• They paid claims to families of the deceased, policyholders whose policies matured,
annuities, and bonuses.
• After paying management expenses, commissions, and taxes, they were left with a
surplus of Rs. 72,190, which made the Life Insurance Fund stronger.
• They still owe Rs. 10,034 for claims and Rs. 2,380 for annuities, which shows
pending commitments.
• Their assets include government securities, fixed assets, accrued interest, and
outstanding premiums, painting a picture of financial health and security.
In a way, the Revenue Account is the story of the year, while the Balance Sheet is the
company’s portrait at year-end. Both are essential to understand how well the company
managed policyholder money and its investments.
Chapter 6: Key Takeaways for Students
1. Life insurance accounting is like tracking a family trust fund — you note every
contribution (premium), every payout (claim), and every investment growth
(interest/dividends).
2. Adjustments like reinsurance, accrued interest, and outstanding premiums are like
hidden plot twists — they affect the final story.
3. Revenue Account = income – outgoings → surplus adds to the Life Fund.
4. Balance Sheet = Assets = Liabilities + Fund → shows financial strength at a point in
time.
5. Always separate claims, bonuses, and annuities carefully. They’re the core of life
insurance accounting
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”