4. Accounting For Some Special Transactions
UNIT 1 & 2 : HIRE PURCHASE AND INSTALMENT PAYMENT SYSTEM AND ACCOUNTING FOR LEASES
Question 1
Krishna Agencies started business on 1st April, 1994. During the year ended 31st March, 1995, they sold under-mentioned durables under two schemes — Cash Price Scheme (CPS) and Hire-Purchase Scheme (HPS).
Under the CPS they priced the goods at cost plus 25% and collected it on delivery.
Under the HPS the buyers were required to sign a Hire-purchase Agreement undertaking to pay for the value of the goods including finance charges in 30 instalments, the value being calculated at Cash Price plus 50%.
The following are the details available at the end of 31st March, 1995 with regard to the products :
Product
Nos. purchased
Nos. sold under CPS
Nos. sold under HPS
Cost per unit
Rs.
No. of instalments due during the year
No. of instalments received during the year
TV sets
90
20
60
16,000
1,080
1,000
Washing Machines
70
20
40
12,000
840
800
The following were the expenses during the year :
Rs.
Rent 1,20,000
Salaries 1,44,000
Commission to Salesmen 12,000
Office Expenses 1,20,000
From the above information, you are required to prepare :
(a) Hire-purchase Trading Account, and
(b) Trading and Profit & Loss Account. (20 marks) (Intermediate–May 1995)
Answer
In the books of Krishna Agencies
Hire-Purchase Trading Account
for the year ended 31st March, 1995
Rs.
Rs.
Rs.
Rs.
To Goods sold on H.P. A/c:
By Bank A/c cash received
TVs
(60×Rs. 30,000)
18,00,000
TVs
(1,000×Rs. 1,000)
10,00,000
Washing Machines
(40 × Rs. 22,500)
9,00,000
27,00,000
Washing Machines
(800 ×Rs. 750)
6,00,000
16,00,000
87.5
187.5
To H.P. Stock Reserve
Rs. 9,90,000×
4,62,000
By Instalment Due A/c:
TVs
(80×Rs.1,000)
80,000
To Profit & Loss A/c
(H.P. profit transferred)
7,98,000
Washing Machines
(40×Rs. 750)
30,000
1,10,000
87.5
187.5
By Goods sold on HP
A/c: (Cancellation of
loading)
Rs. 27,00,000 ×
By H.P. Stock (W.N 2)
12,60,000
9,90,000
39,60,000
39,60,000
Trading and Profit & Loss Account
for the year ended 31st March, 1995
Rs.
Rs.
Rs.
Rs.
To Purchases:
By Sales:
TVs
(90×Rs. 16,000)
14,40,000
TVs
(20×Rs. 20,000)
4,00,000
Washing Machines
(70 × Rs. 12,000)
8,40,000
22,80,000
Washing Machines
(20 ×Rs. 15,000)
3,00,000
7,00,000
To Gross profit c/d
1,40,000
By Goods sold on H.P.
A/c
(27,00,000–12,60,000)
By Shop Stock (W. N 3)
14,40,000
2,80,000
24,20,000
24,20,000
To Salaries
1,44,000
By Gross profit b/d
1,40,000
To Rent
To Commission
1,20,000
12,000
By H.P. Trading a/c
(H.P. Profit)
7,98,000
To Office expenses
1,20,000
To Net Profit
5,42,000
9,38,000
9,38,000
Working Notes:
(1) Calculation of per unit cash price, H.P. price and Instalment Amount :
Product
Cost
Rs.
Cash Price
Rs.
(Cost × 1.25)
H.P. price
Rs.
(Cash Price×1.50)
Instalment
Amount (Rs.)
(H.P. price/No.
of instalments)
TV sets
16,000
20,000
30,000
1,000
Washing
Machines
12,000
15,000
22,500
750
(2) Calculation of H.P. Stock as on 31st March, 1995 :
Product
Total No. of
Instalments
(Nos.)
Instalments
Due in 1994-95
(Nos.)
Instalments
not due in 1994-95
(Nos.)
Amount
Rs.
TV sets
1800
1080
720
7,20,000
Washing Machines
1,200
840
360
2,70,000
9,90,000
(3) Calculation of Shop Stock as on 31st March, 1995 :
Product
Purchased
(Nos.)
Sold
(Nos.)
Balance
(Nos.)
Amount
Rs.
TV sets
90
80
10
1,60,000
Washing Machines
70
60
10
1,20,000
2,80,000
Question 2
ABC Associates entered into a financial lease agreement on 1.4.1995 with Flexible Leasing Ltd. for lease of a car. The price of the car was Rs. 2,00,000 and the quarterly lease rentals were agreed at Rs. 90 per thousand payable at the beginning of every quarter. ABC Associates kept up their payments but by 25.3.1996 they approached and obtained the consent of the leasing company for treating the arrangement as one of Hire-purchase from the beginning on the following terms :
Period: 3 years
Quarterly hire : Rs. 30,000 payable at the beginning of the quarter.
It was agreed that the lease rentals paid will be treated as hire monies and that the balance due upto 31.3.1996 will be settled by ABC Associates on that date with interest at 18% p.a. on various instalments due during the year. The rate of depreciation on the car is 25%.
Show the following accounts in the books of ABC Associates for the year 1995-96:
Flexible Leasing Ltd.’s A/c and Interest Suspense A/c.
Calculations are to be rounded off to the nearest rupee (15 Marks)(Intermediate–May 1996)
Answer
Books of ABC Associates
Flexible Leasing Limited Account
Dr.
Rs.
Cr.
Rs.
1996
1996
March 25
To Lease rental
A/c
72,000
March 25
By Car on Hire
Purchase A/c
2,00,000
March 31
To Bank
53,400
March 25
By Interest
Suspense A/c
1,60,000
March 31
To Balance c/d
2,40,000
By Interest A/c
5,400
3,65,400
3,65,400
Interest Suspense Account
Dr.
Rs.
Cr.
Rs.
1996
1996
March 25
To Flexible
Leasing Ltd. A/c
1,60,000
March, 31
By Interest on Hire
purchase A/c
72,727
March, 31
By Balance c/d
87,273
1,60,000
1,60,000
Working Notes :
(i) Calculation of balance payable on 31st March, 1996 and the Amount of Interest
Calculation of Difference Payable on 31.3.1996 and Interest
Date
Quarterly Hire
Charges
(Rs.)
Quarterly Lease
Rentals Paid
(Rs.)
Difference
Payable
(Rs.)
Interest
From
(18% p.a.)
To
Amount of Interest
(Rs.)
1.4.95
30,000
18,000
12,000
1.4.95
31.3.96
2,160
1.7.95
30,000
18,000
12,000
1.7.95
31.3.96
1,620
1.10.95
30,000
18,000
12,000
1.10.95
31.3.96
1,080
1.1.96
30,000
18,000
12,000
1.1.96
31.3.96
540
72,000
48,000
5,400
Amount payable on 31st March, 1996 :
Rs.
Balance due 48,000
Interest due 5,400
53,400
(1) Ascertainment of Total Amount of Interest on Hire Purchase
Rs.
Hire Purchase Price of the car
(Rs. 30,000 × 12 installments) 3,60,000
Less : Cash Price 2,00,000
Total Amount of Interest 1,60,000
(2) Calculation of Interest on Hire Purchase Attributable to the year 1995-1996.
Date
Interest Calculation
Interest
Rs.
1.4.95
--
--
1.7.95
8,000
28,000
Bad debts on repossessed computers
5,000
Question 9
Easy buy Corporation sells goods on hire-purchase basis. The hire-purchase price is cost plus 60%.
It furnishes you the following information:
Rs.
Hire Purchase stock on 1.4.2007
2,40,000
Installments due on 1.4.2007
45,000
Goods sold on hire purchase from 1.4.2007 to 31.3.2008
9,60,000
Cash collected from HP debtors during 1.4.2007 to 31.3.2008
3,00,000
Stock with customers at hire-purchase price on 31.3.2008
6,40,000
You are required to prepare Hire Purchase Trading Account for the year ended 31st March, 2008 (8 Marks) (PE II- Nov. 2008)
Answer
Hire Purchase Trading Account
For the year ended 31.3.2008
Rs.
Rs.
To
Hire purchase stock (Opening)
2,40,000
By
Hire purchase stock reserve (Opening)
90,000
To
Instalments due (Opening)
45,000
By
Bank (Collections)
3,00,000
To
Goods sold on hire purchase
9,60,000
By
Goods sold on hire purchase (Loading)
3,60,000
To
Hire purchase stock reserve (Closing)
2,40,000
By
Hire purchase stock (Closing)
6,40,000
To
Profit and loss A/c
2,10,000
By
Instalments due (Closing)
3,05,000
16,95,000
16,95,000
Working Notes:
Memorandum Hire Purchase Stock A/c
Rs.
Rs.
To Balance b/d
2,40,000
By Hire Purchase debtors A/c
(Balancing Figure)
5,60,000
To Goods sold on hire purchase
9,60,000
By balance c/d
6,40,000
12,00,000
12,00,000
Memorandum Hire Purchase Debtors A/c
Rs.
Rs.
To Balance b/d
45,000
By Cash/Bank A/c
3,00,000
To Hire purchase stock A/c
5,60,000
By balance c/d (Balancing Figure)
3,05,000
6,05,000
6,05,000
* Hire purchase price of a computer = Rs. 5,000 + (Rs. 2,500 x 8) = Rs. 25,000.
UNIT 3 : INVESTMENT ACCOUNTS
Question 1
On 1.4.96, Sundar had 25,000 equity shares of ‘X’ Ltd.at a book value of Rs. 15 per share (Face value Rs.10). On 20.6.96, he purchased another 5,000 shares of the company at Rs. 16 per share. The directors of ‘X’Ltd. announced a bonus and rights issue. No dividend was payable on these issues. The tems of the issue are as follows:
Bonus basis 1:6 (Date 16.8.96).
Rights basis 3:7 (Date 31.8.96) Price Rs. 15 per share.
Due date for payment 30.9.96.
Shareholders can transfer their rights in full or in part. Accordingly Sundar sold 33.33% of his entitlement to Sekhar for a consideration of Rs. 2 per share.
Dividends: Dividends for the year ended 31.3.96 at the rate of 20% were declared by X Ltd. and received by Sundar on 31.10.96. Dividends for shares acquired by him on 20.6.96 are to be adjusted against the cost of purchase.
On 15.11.96, Sundar sold 25,000 equity shares at a premium of Rs. 5 per share.
You are required to prepare in the books of Sundar.
(1) Investment Account
(2) Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.96 and shares are valued at average cost. (15 Marks), (Intermediate–May 1997)
Answer
Books of Sundar
Investment Account
Equity Shares in X Ltd.
No. Amount No. Amount
Rs. Rs.
1.4.96 To Bal b/d 25,000 3,75,000 30.9.96 By Bank (Sale
20.6.96 To Bank 5,000 80,000 of Rights) 10,000
16.8.96 To Bonus 5,000 — 31.10.96 By Bank 10,000
(dividend on
30.9.96 To Bank 10,000 1,50,000 shares acquired
(Rights Shares) on 20/6/96)
15.11.96 By Bank
(Sale of shares) 25,000 3,75,000
15.11.96 To Profit 50,000 31.12.96 By Bal. c/d 20,000 2,60,000
transferred 45,000 6,55,000 45,000 6,55,000
Profit & Loss A/c
To Balance c/d 1,00,000 By Profit transferred 50,000
By Dividend 50,000
1,00,000 1,00,000
Working Notes:
(1) Bonus Shares =
Question 2
On 1.4.2002, Mr. Krishna Murty purchased 1,000 equity shares of Rs. 100 each in TELCO Ltd. @ Rs. 120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per Rs. 100 as cost of shares transfer stamps. On 31.1.2003 Bonus was declared in the ratio of 1 : 2. Before and after the record date of bonus shares, the shares were quoted at Rs. 175 per share and Rs. 90 per share respectively. On 31.3.2003 Mr. Krishna Murty sold bonus shares to a Broker, who charged 2% brokerage.
Show the Investment Account in the books of Mr. Krishna Murty, who held the shares as Current assets and closing value of investments shall be made at Cost or Market value whichever is lower. (10 marks) (PE-II – Nov. 2003)
Answer
In the books of Mr. Krishna Investment Account
for the year ended 31st March, 2003
(Scrip: Equity Shares of TELCO Ltd.)
Dr. Cr.
Date
Particulars
Nominal Value
(Rs.)
Cost
(Rs.)
Date
Particulars Nominal Value
(Rs.)
Cost
(Rs.)
1.4.2002
To
Bank A/c
1,00,000
1,23,000
31.3.2003
By
Bank A/c
50,000
44,100
31.1.2003
To
Bonus shares
50,000
-
31.3.2003
By
Balance c/d
1,00,000
82,000
31.3.2003
To
Profit & loss A/c
-
3,100
1,50,000
1,26,100
1,50,000
1,26,100
Working Notes:
(i) Cost of equity shares purchased on 1.4.2002 = 1,000 ´ Rs. 120 + 2% of Rs. 1,20,000 + ½% of Rs. 1,20,000 = Rs. 1,23,000
(ii) Sale proceeds of equity shares sold on 31st March, 2003 = 500 ´ Rs. 90 – 2% of Rs. 45,000 = Rs. 44,100.
(iii) Profit on sale of bonus shares on 31st March, 2003
= Sales proceeds – Average cost
Sales proceeds = Rs. 44,100
Average cost = Rs. (1,23,000 ´ 50,000)/1,50,000
= Rs. 41,000
Profit = Rs. 44,100 – Rs. 41,000 = Rs. 3,100.
(iv) Valuation of equity shares on 31st March, 2003
Cost = (Rs. 1,23,000 × 1,00,000)/1,50,000 = Rs. 82,000)
Market Value = 1,000 shares × Rs. 90 = Rs. 90,000
Closing balance has been valued at Rs. 82,000 being lower than the market value.
UNIT 4 : CONTRACT ACCOUNTS
Question 1
Completed Contract Method.
(5 marks) (Intermediate–Nov. 1995)
Answer
It is a revenue recognition method for long term construction contracts under which revenue is recognized only when the contract is completed or substantially completed; i.e., when only minor work is expected to complete the contract other than warranty obligations. Costs and progress payments received are accumulated during the course of contract but revenue is not recognized until the contract activity is substantially completed.
However, it is necessary to create provision for anticipated losses for the unfinished contract work although revenue is recognized only when the contract is substantially completed.
The principal advantage of this method is that it is based on results as determined when the contract is completed or substantially completed rather than on estimates which may require subsequent adjustments as a result of unforeseen cost and possible losses. If this method is followed, the risk of recognizing profit which is not really earned is greatly minimised.
The disadvantage is that periodic reported income does not reflect the level of activity on contracts during the period.
Question 2
Describe with reference to Accounting Standard 7 on Accounting for construction contracts, the methods which may be used for recognizing revenue on construction contracts.
(4 marks) (Intermediate–Nov. 2001)
Answer
As per Accounting Standard 7 on Accounting for Construction Contracts, two methods of accounting commonly followed by contractors for recognizing revenue on construction contracts are the percentage of completion method and the completed contract method.
Under the percentage of completion method, revenue is recognized as the contract activity progresses based on the stage of completion reached. The costs incurred in reaching the stage of completion are matched with this revenue, resulting in the reporting of results which can be attributed to the proportion of work completed. Although (as per the principle of ‘prudence’) revenue is recognized only when realized, under this method, the revenue is recognized as the activity progresses even though in certain circumstances it may not be realized.
Under the completed contract method, revenue is recognized only when the contract is completed or substantially completed; that is, when only minor work is expected other than warranty obligation. Costs and progress payments received are accumulated during the course of the contract but revenue is not recognized until the contract activity is substantially completed.
Under both methods, provision is made for losses for the stage of completion reached on the contract. In addition, provision is usually made for losses on the remainder of the contract.
It may be necessary for accounting purposes to combine contracts made with a single customer or to combine contracts made with several customers if the contracts are negotiated as a package or if the contracts are for a single project. Conversely, if a contract covers number of projects and if the costs and revenues of such individual projects can be identified within the terms of the overall contract, each such project may be treated as equivalent to a separate contract.