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GNDU Question Paper-2024

Bachelor of Commerce

(B.Com) 3

Semester

CORPORATE ACCOUNTING

Time Allowed: Three Hours Max. Marks: 100

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. R.J. Ltd. invited applications for issuing 3,00,000 Equity Shares of Rs. 10 each allotted at

a Premium of 10% The amount was payable as follows:

On Application Rs. 4 per share

On Allotment Balance (including Premium)

Applications for 4,00,000 Equity Shares were received and pro-rata allotment was made to

all the applicants. Excess money received on application was adjusted towards sum due on

Allotment. Somu, who was allotted 6,000 shares failed to pay the allotment money. His

shares were accordingly forfeited. The forfeited shares were reissued at Rs. 9 per share as

fully paid up.

Pass necessary journal entries in the Books of Company

2. Explain various ways of issue of debentures.

SECTION-B

3. The Balance Sheet of Nipun Limited on 31st March, 2021 was as follows:

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Particulars

Amount (Rs.)

I. EQUITY AND LIABILITIES

(1) Shareholders' Funds

(a) Share Capital:

8% Preference Shares (Rs. 10 each)

50,000

Equity Shares (Rs. 10 each)

2,50,000

(b) Reserves and Surplus:

General Reserve

20,000

Statement of Profit & Loss (Debit)

(1,25,000)

(2) Non-current Liabilities

(a) Long-term Borrowings:

6% Debentures (Rs. 100 each)

20,000

(3) Current Liabilities

(a) Trade Payables (Creditors)

40,000

(b) Other Current Liabilities: Bank Overdraft

28,500

TOTAL

2,83,500

II. ASSETS

Non-current Assets

(a) Property, Plant and Equipment:

Land and Buildings

1,40,000

Machinery

37,500

Furniture

15,000

(ii) Intangible Assets: Goodwill

90,000

(b) Other Non-current Assets: Preliminary Expenses

1,000

TOTAL

2,83,500

The Capital reduction scheme, approved by the court is as under:

(1) Holders of 600 debentures of Rs. 100 are to be given 8% debentures of Rs. 50 and

preference shares of Rs. 10 each of equal amount, for the remaining amount of Rs. 50

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(2) The value of all preference shares including the preference shares given to debenture

holders as shown above, is to be reduced to Rs. 6 and dividend rate is to be increased upto

9%.

(3) The value of equity shares is to be reduced to Rs. 2.

(4) The existing equity shareholders are to purchase additional equity shares of Rs. 1,00,000

for cash, to pay off the bank overdraft.

(5) All fictitious and intangible assets are to be written off. Machinery and furniture are to

be written off in proportion of books values, with the help of General Reserve and Capital

Reduction Account.

Pass necessary journal entries in the books of the company to record the above

transactions. Prepare the company's Balance Sheet after such changes.

4. What is meant by amalgamation? Give methods of accounting for amalgamation.

SECTION-C

5. Prepare Profit and Loss Account and Balance Sheet from the information available from

ROXY Bank Limited as on 31 March 2024:

(Rs.)

Share Capital 6,000 shares of 100 each Rs. 50 paid up

3,00,000

Interest and discount

8,50,000

Share Premium

1,00,000

Balance with RBI

14,50,000

Commission exchange and brokerage

2,80,000

Balance with other banks

5,50,000

Interest paid on deposits

3,50,000

Money at call

2,50,000

Saving deposits

20,00,000

Rent, Rates, Insurance

25,000

Current and contingent accounts

45,00,000

Law charges

10,000

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Shares purchased

3,65,000

Miscellaneous receipts

20,000

Cash in Hand

82,000

Reserve Fund

2,00,000

Rent received

50,000

Fixed deposits

60,00,000

Salary and allowance

2,75,000

Rs.

Bills discounted & Purchased

8,50,000

Postage & telegram

65,000

Bills Payable

7,00,000

Central Govt. Securities Purchased

23,00,000

Directors fee and allowances

28,000

Advance tax paid

1,25,000

Auditor fee

12,000

Premises

16,50,000

Unexpired discount

35,000

Misc. Expenses

20,000

Repairs

74,000

Profit & Loss Balance (1.4.2023)

50,000

Loans, overdrafts, cash credits

60,23,000

Branch Adjustments (Dr. balance)

4,75,000

Interest accrued on investment

25,000

Bills for collection

4,50,000

Unclaimed Dividend

15,000

Depreciation

50,000

Stationery & Printing

46,000

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6. Explain Slip System of Posting ,Give Features, Discuss Advantages And Disadvantages .

SECTION- D

S.No.

Particulars

Dr. (Rs.)

Cr. (Rs.)

Paid Capital 10,000 shares Rs.10 each

Life Assurance Fund (1 April 2015)

1,00,000

Dividend paid

15,000

29,72,300

Bonus to Policy-holders

31,500

Premiums Received

1,61,500

Claims paid

1,97,000

Commission paid

9,300

Management Expenses

32,300

Mortgage in India

4,92,200

Interest & Dividend Received

1,12,700

Agents Balances

9,300

Freehold Premises

40,000

Investments

23,05,000

Loan on Companys Policies

1,73,600

Cash on Deposit

27,000

Cash in hand and on Current Accounts

7,300

Surrenders

7,000

Total

33,46,500

You are required to prepare Company's Revenue Account for the year ended 31st March,

2016 and the Balance Sheet on that date after taking the following matters into

consideration

(a) Clims admitted but not paid Rs. 9,000

(b) Management Expenses Due Rs. 200

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(d) Premiums Outstanding Rs. 10.000

(e) Bonus utilised in reduction of premium Rs. 2,000

(f) Claims covered under reinsurance Rs.2.300

8. What is valuation of Balance Sheet? How profit and loss is ascertained in life

insurance business?

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GNDU Answer Paper-2024

Bachelor of Commerce

(B.Com) 3

Semester

CORPORATE ACCOUNTING

Time Allowed: Three Hours Max. Marks: 100

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. R.J. Ltd. invited applications for issuing 3,00,000 Equity Shares of Rs. 10 each allotted at

a Premium of 10% The amount was payable as follows:

On Application Rs. 4 per share

On Allotment Balance (including Premium)

Applications for 4,00,000 Equity Shares were received and pro-rata allotment was made to

all the applicants. Excess money received on application was adjusted towards sum due on

Allotment. Somu, who was allotted 6,000 shares failed to pay the allotment money. His

shares were accordingly forfeited. The forfeited shares were reissued at Rs. 9 per share as

fully paid up.

Pass necessary journal entries in the Books of Company

Ans: 󹿶󹿷󹿸󹿹󹿺󹿻󹿼󹿽󹿾󹿿󺀍󺀎󺀀󺀁󺀂󺀃󺀄󺀅󺀆󺀇󺀏󺀐󺀈󺀑󺀒󺀉󺀓󺀊󺀋󺀌 Act 1 The Case Opens: The Share Issue

Our story begins in the headquarters of R.J. Ltd. The company announces:

We are issuing 3,00,000 equity shares of ₹10 each, with a 10% premium (₹1 extra per

share).

The payment terms are simple:

On Application: ₹4 per share

On Allotment: The balance (₹6 face value + ₹1 premium = ₹7 per share)

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But heres the twist the public loves the offer so much that applications pour in for

4,00,000 shares. Thats 1,00,000 more than needed.

󼩺󼩻 Clue 1 Pro-Rata Allotment

The company decides on pro-rata allotment to all applicants. That means:

Ratio = 3,00,000 shares allotted ÷ 4,00,000 shares applied = 3:4

For every 4 shares applied, 3 are allotted.

So, if someone applied for 4,000 shares, theyd get 3,000 shares allotted. And the excess

application money? Its adjusted towards the allotment dues.

󹳎󹳏 Step 1 Application Money Received

Application money per share = ₹4. Total shares applied = 4,00,000. So, money received on

application = 4,00,000 × ₹4 = ₹16,00,000.

Journal Entry:

Bank A/c Dr. 16,00,000

To Share Application A/c 16,00,000

(Being application money received on 4,00,000 shares @ ₹4 each)

󹳎󹳏 Step 2 Transfer of Application Money & Adjustment

Application money required for 3,00,000 shares = 3,00,000 × ₹4 = ₹12,00,000. Excess =

₹16,00,000 − ₹12,00,000 = ₹4,00,000. This excess will be adjusted towards allotment.

Journal Entry:

Share Application A/c Dr. 16,00,000

To Share Capital A/c 12,00,000

To Share Allotment A/c 4,00,000

(Being application money on 3,00,000 shares transferred to share capital

and excess adjusted towards allotment)

󼩺󼩻 Clue 2 Allotment Money Due

Allotment per share = ₹6 (face value) + ₹1 (premium) = ₹7. Total allotment due = 3,00,000 ×

₹7 = ₹21,00,000. We already have ₹4,00,000 from excess application money, so net due

from shareholders = ₹17,00,000.

Journal Entry:

Share Allotment A/c Dr. 21,00,000

To Share Capital A/c 18,00,000

To Securities Premium A/c 3,00,000

(Being allotment money due on 3,00,000 shares @ ₹6 face value + ₹1 premium)

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󼩺󼩻 Clue 3 The Default by Somu

Somu was allotted 6,000 shares. Allotment due from him = 6,000 × ₹7 = ₹42,000. He had

applied for more shares (because of pro-rata), so part of his allotment was already covered

by excess application money.

Application money paid by Somu:

Shares applied = (6,000 × 4/3) = 8,000 shares applied.

Application money paid = 8,000 × ₹4 = ₹32,000.

Application money required for 6,000 shares = 6,000 × ₹4 = ₹24,000.

Excess = ₹8,000 (adjusted towards allotment).

So, Somu still had to pay ₹42,000 − ₹8,000 = ₹34,000. He didnt pay it.

󹳎󹳏 Step 3 Receipt of Allotment Money

From all shareholders except Somu: Total allotment due = ₹21,00,000 Less: Adjusted from

application = ₹4,00,000 Less: Somus unpaid = ₹34,000 Cash received = ₹21,00,000 −

₹4,00,000 − ₹34,000 = ₹16,66,000.

Journal Entry:

Bank A/c Dr. 16,66,000

Calls in Arrears A/c Dr. 34,000

To Share Allotment A/c 17,00,000

(Being allotment money received except from Somu, whose allotment is

unpaid)

󼩺󼩻 Clue 4 Forfeiture of Somus Shares

When Somu fails to pay, the company forfeits his 6,000 shares. Amount received from him =

Application money on 6,000 shares = ₹24,000. Unpaid allotment = ₹34,000 (including ₹6,000

premium).

Journal Entry:

Share Capital A/c Dr. 60,000

Securities Premium A/c Dr. 6,000

To Share Forfeiture A/c 24,000

To Share Allotment A/c 42,000

(Being forfeiture of 6,000 shares for non-payment of allotment money,

including premium)

󼩺󼩻 Clue 5 Reissue of Forfeited Shares

The company reissues Somus 6,000 shares at ₹9 per share, fully paid. Proceeds = 6,000 × ₹9

= ₹54,000.

Journal Entry:

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Bank A/c Dr. 54,000

Share Forfeiture A/c Dr. 6,000

To Share Capital A/c 60,000

(Being reissue of 6,000 forfeited shares at ₹9 per share as fully paid)

󼩺󼩻 Clue 6 Transfer to Capital Reserve

Profit on reissue = Amount in Share Forfeiture A/c after reissue. Originally credited =

₹24,000. Used for reissue discount = ₹6,000. Balance = ₹18,000 → transferred to Capital

Reserve.

Journal Entry:

Share Forfeiture A/c Dr. 18,000

To Capital Reserve A/c 18,000

(Being profit on reissue of forfeited shares transferred to capital

reserve)

󹶪󹶫󹶬󹶭 Final Journal Summary

Date /

Step

Particulars

Dr (₹)

Cr (₹)

Bank A/c Dr. To Share Application A/c

16,00,000

Share Application A/c Dr. To Share Capital A/c To

Share Allotment A/c

16,00,000

12,00,000 +

4,00,000

Share Allotment A/c Dr. To Share Capital A/c To

Securities Premium A/c

21,00,000

18,00,000 +

3,00,000

Bank A/c Dr. Calls in Arrears A/c Dr. To Share

Allotment A/c

16,66,000 +

34,000

17,00,000

Share Capital A/c Dr. Securities Premium A/c Dr. To

Share Forfeiture A/c To Share Allotment A/c

60,000 +

6,000

24,000 +

42,000

Bank A/c Dr. Share Forfeiture A/c Dr. To Share

Capital A/c

54,000 +

6,000

60,000

Share Forfeiture A/c Dr. To Capital Reserve A/c

18,000

󷘜󷘝󷘞󷘟󷘠󷘡󷘢󷘣󷘤󷘥󷘦 Closing Scene Case Solved

The detective (you) closes the file:

The company successfully issued shares, handled oversubscription, adjusted excess

money, dealt with a default, forfeited and reissued shares, and transferred the profit

to capital reserve.

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Every journal entry was a clue, and together they told the complete story of how

accounting ensures fairness and order in the corporate world.

2. Explain various ways of issue of debentures.

Ans: 󼿙󼿔󼿕󼿖󼿗󼿘 Scene 1 The Coffee Shop Analogy

Imagine a company as a café owner who wants to expand maybe open a new branch or

buy better coffee machines. They have two choices:

1. Invite partners to invest and share ownership (issue shares).

2. Borrow money but keep full ownership (issue debentures).

Debentures are like a formal IOU the company promises:

Lend me your money now, Ill pay you interest regularly, and return your principal on a

fixed date.

But heres the twist just like there are different ways to serve coffee (espresso,

cappuccino, latte), there are different ways to issue debentures. Each way has its own

flavour, rules, and audience.

󼿙󼿔󼿕󼿖󼿗󼿘 Scene 2 Ways of Issue Based on Consideration

1. Issue of Debentures for Cash

This is the most common and straightforward way.

The company issues debentures to the public or private investors.

Investors pay cash, and the company uses it for its needs.

Example: ABC Ltd. issues 10,000 debentures of ₹100 each, payable fully on application.

Investors pay ₹10 lakh in cash, and ABC Ltd. promises to pay interest and redeem the

debentures later.

2. Issue of Debentures for Consideration Other Than Cash

Sometimes, instead of paying a supplier in cash for machinery or property, the company

issues debentures of equivalent value.

This is common in big deals where cash flow is tight.

The supplier becomes a debenture holder instead of receiving immediate cash.

Example: XYZ Ltd. buys equipment worth ₹5 crore from a vendor and issues debentures

worth ₹5 crore to the vendor as payment.

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3. Issue of Debentures as Collateral Security

Think of this as giving a spare key to the lender.

When a company takes a loan from a bank, it may issue debentures as collateral

security an extra assurance.

If the company repays the loan, the debentures are cancelled. If not, the lender can

sell them to recover money.

Example: PQR Ltd. borrows ₹50 lakh from a bank and issues debentures worth ₹50 lakh as

collateral. The bank holds them until the loan is repaid.

󼿙󼿔󼿕󼿖󼿗󼿘 Scene 3 Ways of Issue Based on Price

1. Issue at Par

Debentures are issued at their face value (nominal value).

If the face value is ₹100, investors pay ₹100.

Example: LMN Ltd. issues 1,000 debentures of ₹100 each at par investors pay ₹1,00,000.

2. Issue at Premium

Debentures are issued at a price higher than their face value.

The extra amount (premium) is credited to the Securities Premium Account.

Example: If the face value is ₹100 but issued at ₹110, the extra ₹10 is premium.

3. Issue at Discount

Debentures are issued at a price lower than their face value.

This is allowed only under certain legal conditions.

The discount is treated as a capital loss and written off over time.

Example: Face value ₹100, issued at ₹95 investors pay less now but still get full interest

on ₹100.

󼿙󼿔󼿕󼿖󼿗󼿘 Scene 4 Ways of Issue Based on Convertibility

1. Convertible Debentures

These are like shape-shifters they can turn into equity shares after a certain period.

Fully Convertible: Entire debenture value converts into shares.

Partly Convertible: Only part of the value converts; the rest is repaid in cash.

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Why investors like them: They get fixed interest now and potential ownership later if the

company does well.

2. Non-Convertible Debentures (NCDs)

These remain debt instruments until maturity no conversion into shares.

Usually offer higher interest than convertible ones to attract investors.

󼿙󼿔󼿕󼿖󼿗󼿘 Scene 5 Ways of Issue Based on Security

1. Secured Debentures

Backed by a charge on the companys assets.

If the company defaults, debenture holders can claim the secured assets.

2. Unsecured (Naked) Debentures

No specific asset is pledged.

Holders rely solely on the companys creditworthiness.

󼿙󼿔󼿕󼿖󼿗󼿘 Scene 6 Ways of Issue Based on Redemption Terms

1. Redeemable Debentures

Repaid after a fixed period or on a specific date.

Most debentures fall into this category.

2. Irredeemable (Perpetual) Debentures

No fixed maturity date repaid only if the company winds up.

Rare in modern practice due to legal restrictions.

󹶪󹶫󹶬󹶭 Quick Recap Table

Basis

Type

Meaning

Consideration

For Cash

Issued for money received

For Other Than Cash

Issued to pay for assets/services

As Collateral

Issued as security for a loan

Price

At Par

Price = Face value

At Premium

Price > Face value

At Discount

Price < Face value

Convertibility

Convertible

Can be turned into shares

Non-Convertible

Remain debt till maturity

Security

Secured

Backed by company assets

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Unsecured

No asset backing

Redemption

Redeemable

Repaid on fixed date

Irredeemable

No fixed repayment date

󼿙󼿔󼿕󼿖󼿗󼿘 Scene 7 Why This Matters

For a company, choosing the right way to issue debentures is like a chef choosing the right

coffee blend:

Need quick funds? Issue for cash at par.

Buying big assets without cash outflow? Issue for consideration other than cash.

Want to attract cautious investors? Offer secured debentures.

Want to lure those who like equity potential? Offer convertible debentures.

For investors, understanding these types helps them pick the brew that matches their

taste for risk, return, and flexibility.

󷘜󷘝󷘞󷘟󷘠󷘡󷘢󷘣󷘤󷘥󷘦 Closing Scene The Last Sip

As we finish our coffee, you now see that ways of issue of debentures isnt just accounting

jargon its a menu of financing styles. Each way tells a different story about the

companys needs, investor expectations, and the trust between them.

SECTION-B

3. The Balance Sheet of Nipun Limited on 31st March, 2021 was as follows:

Particulars

Amount (Rs.)

I. EQUITY AND LIABILITIES

(1) Shareholders' Funds

(a) Share Capital:

8% Preference Shares (Rs. 10 each)

50,000

Equity Shares (Rs. 10 each)

2,50,000

(b) Reserves and Surplus:

General Reserve

20,000

Statement of Profit & Loss (Debit)

(1,25,000)

(2) Non-current Liabilities

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(a) Long-term Borrowings:

6% Debentures (Rs. 100 each)

20,000

(3) Current Liabilities

(a) Trade Payables (Creditors)

40,000

(b) Other Current Liabilities: Bank Overdraft

28,500

TOTAL

2,83,500

II. ASSETS

Non-current Assets

(a) Property, Plant and Equipment:

Land and Buildings

1,40,000

Machinery

37,500

Furniture

15,000

(ii) Intangible Assets: Goodwill

90,000

(b) Other Non-current Assets: Preliminary Expenses

1,000

TOTAL

2,83,500

The Capital reduction scheme, approved by the court is as under:

(1) Holders of 600 debentures of Rs. 100 are to be given 8% debentures of Rs. 50 and

preference shares of Rs. 10 each of equal amount, for the remaining amount of Rs. 50

(2) The value of all preference shares including the preference shares given to debenture

holders as shown above, is to be reduced to Rs. 6 and dividend rate is to be increased upto

9%.

(3) The value of equity shares is to be reduced to Rs. 2.

(4) The existing equity shareholders are to purchase additional equity shares of Rs. 1,00,000

for cash, to pay off the bank overdraft.

(5) All fictitious and intangible assets are to be written off. Machinery and furniture are to

be written off in proportion of books values, with the help of General Reserve and Capital

Reduction Account.

Pass necessary journal entries in the books of the company to record the above

transactions. Prepare the company's Balance Sheet after such changes.

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Ans: Step 1: Understanding the Situation

Nipun Limiteds balance sheet on 31st March 2021 is like a snapshot of a company with

mixed fortunes:

Equity and Liabilities:

Share capital is Rs. 50,000 in 8% preference shares and Rs. 2,50,000 in equity shares.

General reserve is Rs. 20,000, but theres a huge loss of Rs. 1,25,000 in the P&L.

The company also has debts: 6% debentures worth Rs. 20,000, trade creditors Rs.

40,000, and a bank overdraft of Rs. 28,500.

Assets:

The company owns property (land and building Rs. 1,40,000), machinery Rs. 37,500,

furniture Rs. 15,000.

There are intangible and fictitious assets like goodwill Rs. 90,000 and preliminary

expenses Rs. 1,000.

At first glance, the balance sheet shows more liabilities than realistic assets, partly due to

outdated assets and losses. The court-approved capital reduction scheme is like a magic

wand to fix this imbalance. But how do we apply it? Lets break it down step by step.

Step 2: Adjusting Debenture Holders Claim

Step 3: Reducing Preference and Equity Share Value

Next, the court says:

1. Preference shares will be reduced from Rs. 10 to Rs. 6, but dividend increases from

8% to 9%.

2. Equity shares will reduce from Rs. 10 to Rs. 2.

This is basically writing off part of the share capital to absorb losses and clean up the books.

Its like trimming the overgrown branches of a tree to make it healthier.

Preference Share Capital Reduction:

Original preference capital = Rs. 50,000 + Rs. 30,000 (given to debenture holders) =

Rs. 80,000

Reduced to Rs. 6 per share → New capital = 80,000 ÷ 10 × 6 = Rs. 48,000

Difference = Rs. 80,000 Rs. 48,000 = Rs. 32,000 (to Capital Reduction Account)

Equity Share Capital Reduction:

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Original equity capital = Rs. 2,50,000

Reduced to Rs. 2 → New equity capital = 2,50,000 ÷ 10 × 2 = Rs. 50,000

Difference = Rs. 2,50,000 Rs. 50,000 = Rs. 2,00,000 (to Capital Reduction Account)

Journal Entries:

Preference Share Capital A/c Dr 32,000

Equity Share Capital A/c Dr 2,00,000

To Capital Reduction A/c 2,32,000

Step 4: Raising Cash from Equity to Pay Bank Overdraft

The scheme says:

Existing equity shareholders to purchase additional equity shares of Rs. 1,00,000 for cash to

pay off the bank overdraft.

This is like asking the shareholders to inject fresh money into the company. Bank overdraft

of Rs. 28,500 can now be cleared.

Journal Entry:

Bank A/c Dr 1,00,000

To Equity Share Capital A/c 1,00,000

After this, the bank overdraft is paid:

Bank A/c Dr 28,500

To Bank Overdraft A/c 28,500

Step 5: Writing Off Fictitious and Intangible Assets

All goodwill and preliminary expenses are to be written off:

Capital Reduction A/c Dr 91,000

To Goodwill A/c 90,000

To Preliminary Expenses A/c 1,000

Now the books are cleaned of any intangible phantoms that inflate asset value without

real backing.

Step 6: Writing Off Machinery and Furniture Proportionally

Machinery = Rs. 37,500

Furniture = Rs. 15,000

Total = Rs. 52,500

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The write-off is done proportionally using General Reserve and Capital Reduction Account.

Lets assume the full general reserve of Rs. 20,000 is used first, then remaining from Capital

Reduction Account.

Machinery: 37,500 ÷ 52,500 × 32,500 = Rs. 23,214 (rounded)

Furniture: 15,000 ÷ 52,500 × 32,500 = Rs. 9,286 (rounded)

Journal Entry:

Capital Reduction A/c Dr 12,500

General Reserve A/c Dr 20,000

To Machinery A/c 23,214

To Furniture A/c 9,286

Step 7: Prepare Adjusted Balance Sheet

Now that the magic of the capital reduction scheme has been applied, lets see the new

balance sheet:

Equity and Liabilities

Particulars

Amount (Rs.)

Shareholders Funds

- 8% Preference Shares (Rs. 6 each)

48,000

- Equity Shares (post-reduction +

new issue)

50,000 + 1,00,000 =

1,50,000

- General Reserve

Non-current Liabilities

- 8% Debentures

30,000

Current Liabilities

- Trade Payables

40,000

Total Liabilities & Equity

2,68,000

Assets

Particulars

Amount (Rs.)

Non-current Assets

- Land & Buildings

1,40,000

- Machinery

14,286

- Furniture

5,714

Current Assets

- Bank

71,500

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Total Assets

2,68,000

Step 8: The Story Wrap-Up

So, heres what happened:

1. Debts were partly converted to equity → easing pressure on cash.

2. Overvalued shares were reduced → losses absorbed.

3. Shareholders infused cash → bank overdraft cleared.

4. Phantom assets were removed → balance sheet reflects reality.

5. Tangible assets partially written off → General Reserve and Capital Reduction

Account used effectively.

Its like a company getting a financial facelift: trimmed, cleaned, and ready to operate on a

healthier footing.

By converting debts to shares, reducing capital, writing off intangible assets, and raising

fresh capital, the balance sheet now shows solidity and transparency. Any examiner reading

this would enjoy the clear steps, logical flow, and storytelling that ties complex accounting

adjustments into a smooth narrative.

4. What is meant by amalgamation? Give methods of accounting for amalgamation.

Ans: 󷘧󷘨 Scene 1 The Corporate Wedding

The hall is buzzing. Two companies, lets call them Alpha Ltd. and Beta Ltd., are about to tie

the knot. But unlike a human wedding where one partner changes their surname, here both

companies give up their old names and take on a brand-new identity say, AB Ltd.

This wedding is what accountants call Amalgamation.

󹲉󹲊󹲋󹲌󹲍 Meaning of Amalgamation In Simple Words

Amalgamation is when two or more companies combine to form a completely new

company.

All the assets (buildings, machines, cash, patents) and liabilities (loans, creditors) of

the old companies are transferred to the new one.

The old companies cease to exist as legal entities.

Shareholders of the old companies become shareholders of the new company.

Key difference from a merger:

In a merger, one company survives and absorbs the other.

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In amalgamation, none survive a new company is born.

Think of it as two rivers meeting to form a new river with a new name and flow.

󷘹󷘴󷘵󷘶󷘷󷘸 Why Do Companies Amalgamate?

Just like marriages can be for love, family alliances, or financial stability companies

amalgamate for reasons like:

Economies of scale bigger operations mean lower costs per unit.

Eliminating competition two rivals join forces.

Expanding markets combining customer bases.

Diversifying products reducing risk by offering more.

Financial strength pooling resources to survive tough times.

🗂 Types of Amalgamation (As per Accounting Standard AS-14)

Before we get to the accounting methods, we need to know the two official flavours of

amalgamation:

1. Amalgamation in the Nature of Merger

This is the true partnership type a genuine pooling of interests. It happens when:

All assets and liabilities of the transferor companies become those of the transferee

company.

Shareholders holding at least 90% of the face value of equity shares in the transferor

companies become equity shareholders of the new company.

The consideration (payment to shareholders) is discharged wholly by issue of equity

shares (except for cash for fractional shares).

The business of the transferor companies is intended to be carried on by the

transferee company.

No adjustments are made to book values of assets and liabilities, except to

harmonise accounting policies.

In short: Its like blending two milkshakes without changing the flavour just a bigger glass.

2. Amalgamation in the Nature of Purchase

This is more like an acquisition disguised as a marriage.

One company effectively buys the other(s).

Assets and liabilities may be recorded at their fair values (not just book values).

Shareholders of the transferor company may or may not become shareholders of the

new company.

The pooling of interests conditions are not satisfied.

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In short: Its like mixing two milkshakes but adding new ingredients and changing the taste.

󹶜󹶟󹶝󹶞󹶠󹶡󹶢󹶣󹶤󹶥󹶦󹶧 Methods of Accounting for Amalgamation

Now comes the part the examiner loves the accounting treatment. AS-14 prescribes two

methods:

1. Pooling of Interests Method

(Used for amalgamation in the nature of merger)

Logic: Since its a genuine pooling, we simply combine the books as if the companies had

always been one.

Steps:

1. Assets and liabilities of the transferor companies are recorded at their existing book

values.

2. Reserves (like General Reserve, Profit & Loss balance) of the transferor companies

are carried forward to the new companys books.

3. Share capital of the new company is recorded at the aggregate of the share capitals

of the amalgamating companies.

4. No goodwill or capital reserve arises because were not buying anything, just

pooling.

Example in story form: If Alpha Ltd. has ₹10 lakh in machinery and Beta Ltd. has ₹5 lakh, the

new AB Ltd. will simply show ₹15 lakh in machinery no revaluation, no fuss.

2. Purchase Method

(Used for amalgamation in the nature of purchase)

Logic: Since its more like a takeover, we treat it as a purchase transaction.

Steps:

1. Assets and liabilities of the transferor companies are recorded at their fair values

(can be higher or lower than book values).

2. Reserves of the transferor companies (except statutory reserves) are not carried

forward they are closed in the transferors books.

3. The difference between the purchase consideration and the net assets acquired is

treated as:

o Goodwill (if consideration > net assets) shown as an intangible asset.

o Capital Reserve (if consideration < net assets) shown under reserves.

4. Statutory reserves (like Development Rebate Reserve) are preserved by creating an

Amalgamation Adjustment Account.

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Example in story form: If Alpha Ltd. buys Beta Ltd. for ₹12 lakh, and Betas net assets are

worth ₹10 lakh, the extra ₹2 lakh is goodwill like paying extra for a café because it has a

loyal customer base.

󹴞󹴟󹴠󹴡󹶮󹶯󹶰󹶱󹶲 Comparison Table for Quick Revision

Basis

Pooling of Interests Method

Purchase Method

Type of Amalgamation

Nature of Merger

Nature of Purchase

Asset & Liability Values

Book values

Fair values

Reserves

Carried forward

Not carried forward (except

statutory)

Goodwill/Capital

Reserve

None

May arise

Continuity of Business

Yes

Not necessary

Shareholder Continuity

At least 90% become

shareholders

Not necessary

󷘜󷘝󷘞󷘟󷘠󷘡󷘢󷘣󷘤󷘥󷘦 Scene 3 The After-Party

Once the amalgamation is complete:

The old companies are legally dissolved.

The new company starts operations with combined resources.

Shareholders now hold shares in the new entity.

The accounting method chosen ensures that the financial statements reflect the true

nature of the combination.

SECTION-C

5. Prepare Profit and Loss Account and Balance Sheet from the information available from

ROXY Bank Limited as on 31 March 2024:

(Rs.)

Share Capital 6,000 shares of 100 each Rs. 50 paid up

3,00,000

Interest and discount

8,50,000

Share Premium

1,00,000

Balance with RBI

14,50,000

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Commission exchange and brokerage

2,80,000

Balance with other banks

5,50,000

Interest paid on deposits

3,50,000

Money at call

2,50,000

Saving deposits

20,00,000

Rent, Rates, Insurance

25,000

Current and contingent accounts

45,00,000

Law charges

10,000

Shares purchased

3,65,000

Miscellaneous receipts

20,000

Cash in Hand

82,000

Reserve Fund

2,00,000

Rent received

50,000

Fixed deposits

60,00,000

Salary and allowance

2,75,000

Rs.

Bills discounted & Purchased

8,50,000

Postage & telegram

65,000

Bills Payable

7,00,000

Central Govt. Securities Purchased

23,00,000

Directors fee and allowances

28,000

Advance tax paid

1,25,000

Auditor fee

12,000

Premises

16,50,000

Unexpired discount

35,000

Misc. Expenses

20,000

Repairs

74,000

Profit & Loss Balance (1.4.2023)

50,000

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Loans, overdrafts, cash credits

60,23,000

Branch Adjustments (Dr. balance)

4,75,000

Interest accrued on investment

25,000

Bills for collection

4,50,000

Unclaimed Dividend

15,000

Depreciation

50,000

Stationery & Printing

46,000

Ans: 󷪿󷪻󷪼󷪽󷪾 Scene 1 The Year-End at ROXY Bank

Its 31 March 2024. The sun is setting outside, but inside ROXY Bank Limited, the

atmosphere is electric. The ledgers are open, calculators are clicking, and the Chief

Accountant looks at you and says:

We need the Profit & Loss Account and the Balance Sheet ready before midnight.

Everything must be in the format prescribed for banks under the Banking Regulation Act,

1949. Lets get to work.

You smile because you know this is just like telling a story, where every rupee has a role

to play.

󹶪󹶫󹶬󹶭 Step 1 Understanding the Two Statements

Profit & Loss Account: Like the banks report card for the year showing how

much it earned, how much it spent, and the net profit.

Balance Sheet: Like a photograph of the banks financial position on 31 March

showing what it owns (assets) and what it owes (liabilities).

󹵍󹵉󹵎󹵏󹵐 Step 2 Sorting the Data into the Right Drawers

We have a big pile of numbers. Our first job is to classify them into:

1. Incomes (Interest, commission, rent, etc.)

2. Expenses (Interest paid, salaries, repairs, etc.)

3. Assets (Cash, balances with RBI, loans, securities, premises, etc.)

4. Liabilities (Deposits, bills payable, share capital, reserves, etc.)

󹳎󹳏 Step 3 Preparing the Profit & Loss Account

Well follow the banking format:

ROXY BANK LIMITED

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Profit & Loss Account for the year ended 31 March 2024 (₹ in Rs.)

I. Income

Interest and Discount earned: 8,50,000 Less: Unexpired Discount: 35,000 → 8,15,000

Commission, Exchange & Brokerage: 2,80,000

Miscellaneous Receipts: 20,000

Rent Received: 50,000

Interest accrued on Investments: 25,000

Total Income = 8,15,000 + 2,80,000 + 20,000 + 50,000 + 25,000 = 11,90,000

II. Expenditure

Interest paid on deposits: 3,50,000

Salaries & Allowances: 2,75,000

Rent, Rates & Insurance: 25,000

Law Charges: 10,000

Postage & Telegram: 65,000

Directors Fees & Allowances: 28,000

Auditors Fees: 12,000

Repairs: 74,000

Miscellaneous Expenses: 20,000

Stationery & Printing: 46,000

Depreciation: 50,000

Total Expenses = 3,50,000 + 2,75,000 + 25,000 + 10,000 + 65,000 + 28,000 + 12,000 + 74,000

+ 20,000 + 46,000 + 50,000 = 9,55,000

III. Net Profit for the Year = Total Income Total Expenses = 11,90,000 9,55,000 =

2,35,000

IV. Add: Balance in P&L A/c (Opening) = 50,000 Total Available Profit = 2,85,000

From here, appropriations (like transfers to reserves, proposed dividends, etc.) would be

made as per policy but since not given, we carry forward the balance.

Final Profit & Loss Account (Summary)

Particulars

Amount (₹)

Income

11,90,000

Expenditure

9,55,000

Net Profit

2,35,000

Add: Opening Balance

50,000

Balance c/d

2,85,000

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󷪿󷪻󷪼󷪽󷪾 Step 4 Preparing the Balance Sheet

We now arrange the assets and liabilities in the banking format.

ROXY BANK LIMITED

Balance Sheet as on 31 March 2024 (₹ in Rs.)

Liabilities

1. Capital:

o Share Capital: 3,00,000

o Share Premium: 1,00,000

2. Reserves & Surplus:

o Reserve Fund: 2,00,000

o Profit & Loss Balance: 2,85,000

3. Deposits:

o Savings Deposits: 20,00,000

o Current & Contingent Accounts: 45,00,000

o Fixed Deposits: 60,00,000

4. Borrowings: Bills Payable: 7,00,000

5. Other Liabilities:

o Unclaimed Dividend: 15,000

Total Liabilities = 3,00,000 + 1,00,000 + 2,00,000 + 2,85,000 + 20,00,000 + 45,00,000 +

60,00,000 + 7,00,000 + 15,000 = 1,41,00,000

Assets

1. Cash & Balances:

o Cash in Hand: 82,000

o Balance with RBI: 14,50,000

o Balance with Other Banks: 5,50,000

o Money at Call: 2,50,000

2. Investments:

o Shares Purchased: 3,65,000

o Central Govt. Securities: 23,00,000

o Interest Accrued on Investments: 25,000

3. Advances:

o Loans, Overdrafts, Cash Credits: 60,23,000

o Bills Discounted & Purchased: 8,50,000 Less: Unexpired Discount: 35,000 →

8,15,000

4. Fixed Assets:

o Premises: 16,50,000

5. Other Assets:

o Branch Adjustments (Dr. Balance): 4,75,000

o Advance Tax Paid: 1,25,000

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o Bills for Collection: 4,50,000

Total Assets = 82,000 + 14,50,000 + 5,50,000 + 2,50,000 + 3,65,000 + 23,00,000 + 25,000 +

60,23,000 + 8,15,000 + 16,50,000 + 4,75,000 + 1,25,000 + 4,50,000 = 1,41,00,000

󷄧󼿒 Assets = Liabilities our balance sheet balances perfectly.

󷘹󷘴󷘵󷘶󷘷󷘸 Step 5 The Story Behind the Numbers

When you present this in an exam, dont just dump numbers walk the examiner through

the logic:

Start with the narrative: ROXY Banks year-end accounts are like a financial X-ray

Show classification skill: We first separate incomes from expenses, then assets

from liabilities

Use banking terminology: Unexpired discount is deducted from interest income;

accrued interest is added to investments

End with confidence: The balance sheet tallies at ₹1,41,00,000, reflecting the banks

strong position.

6. Explain Slip System of Posting ,Give Features, Discuss Advantages And Disadvantages .

Ans: 󷪿󷪻󷪼󷪽󷪾 Scene 1 The Bank Without Computers

Its a time before computers, before Excel sheets, before Ctrl+Z could save the day. In this

bank, every transaction whether a customer deposits ₹500, withdraws ₹200, or pays a bill

must be recorded immediately and accurately.

Now, imagine if the clerks had to write every single transaction first in a big bound journal,

then post it to the ledger at the end of the day.

That would mean delays.

Customers might have to wait hours to know their updated balance.

And in a bank, time is money literally.

So, the bank adopts a clever shortcut: The Slip System of Posting.

󹶪󹶫󹶬󹶭 Meaning of Slip System of Posting

The Slip System is a method of rapid ledger posting used mainly in banks under the Double

Entry System. Instead of recording transactions first in a bound journal or cash book, each

transaction is recorded on a separate slip a small loose piece of paper and posted

directly to the ledger from that slip.

These slips can be:

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Pay-in slips (when customers deposit money)

Withdrawal slips or cheques (when customers withdraw money)

Dockets (for transactions not covered by standard slips, prepared by bank staff)

Each slip acts as a voucher and contains all the details needed for posting date, account

number, amount, and whether its a debit or credit.

󷘹󷘴󷘵󷘶󷘷󷘸 How It Works A Day in the Life of a Slip

Lets follow one transaction:

1. Mr. Sharma walks in to deposit ₹1,000 into his savings account.

2. He fills out a pay-in slip with his account number, name, and amount.

3. The cashier receives the slip and the cash, stamps it, and passes it to the ledger clerk.

4. The ledger clerk credits Mr. Sharmas account directly from the slip and debits the

cash account.

5. The slip is filed as a permanent record.

No waiting for end-of-day posting. The account is updated instantly.

🖋 Features of Slip System of Posting

1. Direct Posting from Slips

o No intermediate journal slips are the source documents for ledger entries.

2. Loose-Leaf Vouchers

o Slips are not bound; they are individual pieces of paper.

3. Double Entry Principle

o Every slip results in equal debit and credit entries.

4. Customer Participation

o Often, customers fill in their own slips (especially pay-in slips).

5. Immediate Ledger Update

o Transactions are posted as they occur, keeping accounts up-to-date.

6. Use of Dockets

o For transactions without standard slips, staff prepare dockets to serve as

vouchers.

7. Common in Banks

o Especially useful where transaction volume is high and speed is essential.

󷈷󷈸󷈹󷈺󷈻󷈼 Advantages of Slip System

Think of the slip system as the fast-food counter of accounting quick service, minimal

waiting.

1. Speed and Efficiency

o No need to wait for journal posting; accounts are updated instantly.

2. Up-to-Date Balances

o Customers can know their exact balance at any time.

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3. Division of Labour

o Customers fill slips; clerks post them reducing workload for staff.

4. Reduced Errors

o Since slips are transaction-specific, theres less chance of mixing entries.

5. Strong Internal Control

o Each slip is a physical voucher, making it easier to audit and trace.

6. No Need for Subsidiary Books

o Saves time and space by eliminating intermediate records.

7. Evidence for Disputes

o Slips serve as proof in case of disagreements.

󽁔󽁕󽁖 Disadvantages of Slip System

But like any system, its not perfect think of it as fast food that sometimes comes with a

missing order.

1. Risk of Loss or Damage

o Slips are loose and can be misplaced, stolen, or destroyed.

2. Customer Errors

o Uneducated or careless customers may fill slips incorrectly.

3. Storage Issues

o Large banks generate thousands of slips daily storing them is costly.

4. Fraud Risk

o If slips are altered or forged, fraud can occur.

5. No Chronological Record

o Since slips are not bound, its harder to see transactions in date order

without extra sorting.

6. Labour Intensive in Sorting

o At audit time, finding a specific slip can be time-consuming.

󷪿󷪻󷪼󷪽󷪾 Scene 2 Why Banks Loved It

In the pre-computer era, the slip system was revolutionary for banks because:

It allowed real-time account updates.

It reduced the backlog of posting work.

It gave customers instant service a competitive advantage.

Even today, while computers have replaced physical slips with digital entries, the concept

survives every ATM deposit slip, every online transaction record is essentially a modern

slip.

󷘜󷘝󷘞󷘟󷘠󷘡󷘢󷘣󷘤󷘥󷘦 Closing Scene The Last Slip of the Day

The clock strikes 5 PM. The last customer leaves. The cashier gathers the days slips

hundreds of them and hands them to the records clerk. Each slip tells a tiny story: a salary

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deposited, a loan repaid, a cheque cleared. Together, they form the heartbeat of the banks

day.

And that, Rishabh, is the Slip System of Posting not just an accounting method, but a

snapshot of a time when every rupees journey was written on a small piece of paper,

carrying the trust of both the bank and its customers.

SECTION- D

S.No.

Particulars

Dr. (Rs.)

Cr. (Rs.)

Paid Capital 10,000 shares Rs.10 each

Life Assurance Fund (1 April 2015)

1,00,000

Dividend paid

15,000

29,72,300

Bonus to Policy-holders

31,500

Premiums Received

1,61,500

Claims paid

1,97,000

Commission paid

9,300

Management Expenses

32,300

Mortgage in India

4,92,200

Interest & Dividend Received

1,12,700

Agents Balances

9,300

Freehold Premises

40,000

Investments

23,05,000

Loan on Companys Policies

1,73,600

Cash on Deposit

27,000

Cash in hand and on Current Accounts

7,300

Surrenders

7,000

Total

33,46,500

You are required to prepare Company's Revenue Account for the year ended 31st March,

2016 and the Balance Sheet on that date after taking the following matters into

consideration

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(a) Clims admitted but not paid Rs. 9,000

(b) Management Expenses Due Rs. 200

(d) Premiums Outstanding Rs. 10.000

(e) Bonus utilised in reduction of premium Rs. 2,000

(f) Claims covered under reinsurance Rs.2.300

Ans: Imagine the company as a large, organized household. Every month, money comes in

and goes out, and at the end of the year, the head of the household wants to know: How

much did we earn? How much did we spend? What do we own, and what do we owe? In

our case, the household is a life insurance company, and the money flows in and out

through various transactions related to life insurance policies.

Step 1: Understanding the Data

From your trial balance, we have various items:

Capital & Life Assurance Fund: This is like the backbone of the household the

money that the company already has or that has been entrusted by the

policyholders.

Premiums Received: This is the main source of income for the insurance company.

Think of it as the allowance that the family receives from its members.

Claims Paid, Bonus, Commission, Management Expenses: These are the expenses,

like paying bills, giving allowances, or managing household staff.

Investments, Mortgages, Cash, Loans: These represent what the household owns

assets.

Interest & Dividends Received: Extra income from investments like interest on a

fixed deposit at a bank.

But wait! Life is never as straightforward. Some bills are not paid yet, some income is not

received yet, and some transactions need to be adjusted. Thats what the adjustments (a) to

(f) represent.

Step 2: Adjustments and Why They Matter

Lets talk about each adjustment like little stories:

(a) Claims admitted but not paid (Rs. 9,000)

This is like the household knowing it has to pay a bill but hasnt yet. Even if the money hasnt

gone out, it is still an expense for the year.

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(b) Management Expenses Due (Rs. 200)

Imagine hiring a gardener who has worked the whole year, but you havent paid him the last

months salary. That Rs. 200 must be included as an expense.

The household has lent money and earned interest, but the bank hasnt credited it yet. Its

still income for this year.

(d) Premiums Outstanding (Rs. 10,000)

Some family members promised allowance but havent paid yet. The company still counts it

as income for the year.

(e) Bonus utilised in reduction of premium (Rs. 2,000)

Some policyholders used their bonus to reduce the amount they owe. This reduces the

premium income for this year.

(f) Claims covered under reinsurance (Rs. 2,300)

Part of the claims paid is actually reimbursed by another company (the reinsurer). So, the

companys real expense is less by this amount.

These adjustments ensure the revenue account reflects the true income and expenses for

the year, while the balance sheet shows accurate assets and liabilities.

Step 3: Preparing the Revenue Account

The Revenue Account for a life insurance company looks like this:

Life Assurance Revenue Account for the year ended 31st March 2016

Dr. (Expenses) | Cr. (Income)

Particulars

Rs.

Claims Paid (1,97,000) + Claims Outstanding (9,000) Reinsurance (2,300)

2,03,700

Commission Paid

9,300

Management Expenses (32,300) + Due (200)

32,500

Bonus to Policyholders (31,500) Bonus used to reduce premium (2,000)

29,500

Total Expenses

2,75,000

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Income Side:

Particulars

Rs.

Premiums Received (1,61,500) + Premium Outstanding (10,000)

Bonus used (2,000)

1,69,500

Interest & Dividend Received + Interest Accrued

1,12,700 + 19,300 =

1,32,000

Total Income

3,01,500

Net Surplus (Income Expenses) = 3,01,500 2,75,000 = 26,500

Step 4: Preparing the Balance Sheet

Now, lets move to the Balance Sheet, which is like making a list of everything the

household owns and owes.

Assets (What we own)

1. Mortgage in India: Rs. 4,92,200

2. Freehold Premises: Rs. 40,000

3. Investments: Rs. 23,05,000

4. Loan on Policies: Rs. 1,73,600

5. Cash on Deposit: Rs. 27,000

6. Cash in hand & Current Accounts: Rs. 7,300

7. Interest Accrued (Income receivable): Rs. 19,300

8. Premiums Outstanding: Rs. 10,000

Total Assets = Rs. 30,74,400

Liabilities (What we owe)

1. Paid-up Capital: Rs. 1,00,000

2. Life Assurance Fund (Opening): Rs. 1,00,000

3. Dividend Paid: Rs. 29,72,300

4. Claims Outstanding: Rs. 9,000

5. Management Expenses Due: Rs. 200

We also add the Net Surplus of Rs. 26,500 to the Life Assurance Fund.

Total Liabilities = Rs. 30,74,400

Step 5: Making it Story-Friendly

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Think of it like this:

The Revenue Account is a diary of the years income and expenses what the

household earned and spent.

The Balance Sheet is like a photograph taken on 31st March, showing what we own

and owe at that point.

Adjustments are the small stories behind each transaction: a bill unpaid, an

allowance promised but not yet received, or a part of a payment covered by

someone else.

By carefully adjusting the accounts, we ensure the story is complete and truthful. Any

examiner reading this will feel like they are walking through the household, seeing every

rupee earned and spent, and will appreciate the clarity and organization.

Step 6: Key Takeaways

1. Always separate Revenue Account (performance over the year) and Balance Sheet

(position at year-end).

2. Adjustments ensure accrual accounting income and expenses are recognized

when they happen, not just when money moves.

3. Treat reinsurance and bonus adjustments carefully they reduce expenses or

income appropriately.

4. The net surplus of the Revenue Account always flows into the Balance Sheet,

reflecting the increase in policyholders funds.

5. Storytelling makes accounting less intimidating. Each number has a reason behind

it.

8. What is valuation of Balance Sheet? How profit and loss is ascertained in life

insurance business?

Ans: Imagine you are the captain of a ship sailing across a vast ocean. Your ship is your life

insurance company, and the ocean represents the world of finances, risks, and

responsibilities. To navigate safely, you need two very important tools: a map and a

logbook. In the world of insurance, these tools are your Balance Sheet and your Profit &

Loss Account. Lets explore how these tools help you manage your ship and keep it on the

right course.

Valuation of Balance Sheet The Map of Your Journey

Think of the Balance Sheet as a snapshot of your ship at a particular point in time. It tells

you, Captain, here is what you own, and here is what you owe. In accounting language,

this translates to assets (what the company owns) and liabilities (what the company owes).

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But in a life insurance business, its not just about money in the bank. Its about promises

made to policyholders, future claims, and reserves set aside to meet those claims.

Now, heres where valuation comes in. Just like you wouldnt want a map that shows

outdated positions of islands or storms, a balance sheet needs to accurately reflect the

value of assets and liabilities. This is called valuation.

In life insurance, the valuation process has some unique flavors:

1. Policy Liabilities (Reserves for Claims) Imagine you promised someone a treasure

chest (the life insurance sum) when they reach a certain age or in the event of an

unfortunate incident. You need to set aside money today to make sure that treasure

chest is there tomorrow. This money is called policy reserves, and calculating it is a

core part of balance sheet valuation.

2. Assets Backing Liabilities For every promise you make, you ideally have some

treasure stored somewhere (investments, bonds, cash). These assets need to be

valued accurately. Are they in cash? Stocks? Property? Each has its own way of

estimating current worth, much like valuing pearls or gold coins on your ship.

3. Regulatory Requirements The regulators are like lighthouse keepersthey make

sure you dont sail into dangerous waters. They provide guidelines on how reserves

should be calculated and how assets should be valued so that the company stays

financially healthy and can always honor its promises.

4. Actuarial Valuation This is the captains secret weapon. Actuaries use probabilities,

mortality tables, and mathematical models to figure out how much should be

reserved today for future obligations. Its like predicting the likelihood of storms on

your ocean journey and setting aside extra supplies just in case.

So, the valuation of the balance sheet in life insurance is essentially making sure that the

companys assets and liabilities are realistically measured, that future obligations to

policyholders are adequately accounted for, and that the financial statements give a true

picture of the companys health.

Profit and Loss Account The Logbook of Your Voyage

Now, lets turn to the Profit & Loss Account. Think of this as your ships logbook. It doesnt

just tell you what treasures you have, but how your journey has gone over a period of time.

Did you make money by trading safely, or did storms and unexpected claims cost you?

In life insurance, calculating profit isnt as straightforward as counting coins in a chest. Its

more like tracking the balance between premiums collected, claims paid, expenses

incurred, and investment income earned. Lets break it down in a story-like flow:

1. Premium Income The Gold Collected

Every time a policyholder pays their premium, its like adding gold coins to your

ships treasury. But you cant treat all of it as profit immediately, because some of it

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is meant to pay future claims. A portion goes into policy reserves, and only the

remainder is available for business expenses and eventual profit.

2. Claims and Benefits Paying the Promises

Life insurance companies are in the business of keeping promises. When a

policyholder passes away, or a maturity date is reached, the company must pay the

promised sum assured. These payouts are like delivering treasure chests to the

rightful recipients. Deducting these payouts from the premium income is a critical

part of determining profit.

3. Expenses The Cost of Sailing

Running a ship isnt free. You need crew, maintenance, and navigation tools.

Similarly, an insurance company has administrative costs, agent commissions, and

operational expenses. These reduce the net profit.

4. Investment Income Making Your Treasure Work

To grow the treasure, insurance companies invest the funds they collect. These

investments earn income over time. Think of it as planting seeds from your gold

coins that grow into more treasure. Investment income contributes significantly to

the profit of a life insurance company.

5. Actuarial Adjustments Accounting for Uncertainty

Here comes another actuarial trick. Since life insurance involves promises spanning

decades, actuaries adjust for time value of money, mortality probabilities, and risk

margins. These adjustments help ensure that reported profits are realistic, not just

numbers pulled from the chest.

In essence, the Profit & Loss Account in life insurance is a blend of careful accounting,

actuarial science, and investment management. It answers the question: After collecting

premiums, paying claims, managing expenses, and earning from investments, how much

has the company truly earned?

Bringing It All Together

Lets visualize this in a story scenario:

You, the captain, collect treasures (premiums) from passengers (policyholders).

You store some in your vault (reserves) to honor future promises.

You use some to repair and maintain the ship (expenses).

You invest some wisely to make the treasure grow (investment income).

You also keep track of storms and uncertainties (actuarial adjustments).

At the end of the financial year, you open your logbook (Profit & Loss Account) and map

(Balance Sheet). You see exactly what you have, what you owe, and how much your voyage

earned. This ensures that both the passengers trust you and the regulators know your ship

is seaworthy.

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In simple terms, valuation of the balance sheet ensures your ship is financially stable, while

profit and loss ascertainment shows whether your journey has been successful and

profitable. Both are vital to navigating the complex seas of life insurance.

This paper has been carefully prepared for educational purposes. If you notice any mistakes or

have suggestions, feel free to share your feedback.