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CMA Inter Paper 6 study materials
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CMA Inter Paper 6 practice questions

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Question 1Accounting Fundamentals and Conceptual Framework

Under the Conceptual Framework for Financial Reporting, which qualitative characteristic is supported by the fundamental characteristic of relevance and by comparability, verifiability, timeliness and understandability?

  1. Prudence
  2. Faithful representation Correct answer.
  3. Materiality
  4. Going concern

Explanation

The Framework identifies two fundamental qualitative characteristics: relevance and faithful representation. Comparability, verifiability, timeliness and understandability are enhancing characteristics that supplement both fundamentals. Prudence and materiality are aspects of faithful representation and relevance respectively, not separate fundamental characteristics.

Question 2Accounting Fundamentals and Conceptual Framework

Which measurement basis is described in the Conceptual Framework as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date?

  1. Current cost
  2. Fair value Correct answer.
  3. Historical cost
  4. Value in use

Explanation

Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Historical cost and current cost are entry-type measurements, while value in use is entity-specific.

Question 3Accounting Fundamentals and Conceptual Framework

An entity records a provision for a warranty obligation because past experience indicates claims are probable and can be reliably estimated. Which accounting convention most directly justifies recognising this obligation before any claim is received?

  1. Business entity
  2. Accrual basis Correct answer.
  3. Matching of costs with revenue
  4. Conservatism

Explanation

The accrual basis recognises the effects of transactions when they occur, not when cash is received or paid. A probable, reliably measurable warranty obligation therefore is recognised as it arises. Conservatism permits caution but does not itself create recognition criteria, and matching relates expenses to the revenue they help generate.

Question 4Accounting Fundamentals and Conceptual Framework

Which of the following best describes the objective of general purpose financial reporting as stated in the Conceptual Framework?

  1. To provide information to management for internal decision making
  2. To enable tax authorities to determine the taxable income of the entity
  3. To provide financial information about the reporting entity useful to existing and potential investors, lenders and other creditors Correct answer.
  4. To report the stewardship of directors to the stock exchange only

Explanation

The objective is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions include buying, selling or holding equity and debt instruments and providing or settling loans.

Question 5Accounting Fundamentals and Conceptual Framework

An entity's financial statements are prepared on the assumption that it will continue in operation for the foreseeable future. Which underlying assumption is being applied?

  1. Accrual
  2. Consistency
  3. Periodicity
  4. Going concern Correct answer.

Explanation

The going concern assumption presumes the entity will continue in operation for the foreseeable future and has neither the intention nor the need to liquidate. Without it, assets would be measured at break-up values. Accrual and consistency are separate conventions relating to timing and comparability.

Question 6Accounting Fundamentals and Conceptual Framework

Which of the following is an enhancing qualitative characteristic rather than a fundamental one under the Conceptual Framework?

  1. Verifiability Correct answer.
  2. Faithful representation
  3. Relevance
  4. Materiality

Explanation

Verifiability is one of the four enhancing qualitative characteristics, alongside comparability, timeliness and understandability. Relevance and faithful representation are the two fundamental characteristics, and materiality is an entity-specific aspect of relevance.

Question 7Accounting Fundamentals and Conceptual Framework

A machine costing 500,000 has accumulated depreciation of 180,000. It is expected to generate future cash flows with a present value of 290,000, and its fair value less costs of disposal is 270,000. Under the cost model with impairment, what is the recoverable amount and the impairment loss?

  1. Recoverable amount 290,000; impairment loss 0
  2. Recoverable amount 290,000; impairment loss 30,000 Correct answer.
  3. Recoverable amount 270,000; impairment loss 50,000
  4. Recoverable amount 320,000; impairment loss 0

Explanation

Recoverable amount is the higher of fair value less costs of disposal (270,000) and value in use (290,000), so it is 290,000. The carrying amount is 500,000 minus 180,000, equal to 320,000, so the impairment loss is 320,000 minus 290,000, equal to 30,000.

Question 8Accounting Fundamentals and Conceptual Framework

An entity pays annual rent of 120,000 on 1 April each year and prepares accounts to 31 December. It has followed the accrual basis and recorded rent expense of 90,000 for the year ended 31 December 20X1. What is the correct treatment of the remaining rent?

  1. Recognise an accrued expense of 30,000
  2. Recognise a prepayment of 30,000 as an asset Correct answer.
  3. Charge the full 120,000 as an expense in 20X1
  4. Recognise a prepayment of 90,000 as an asset

Explanation

Rent covering 1 January to 31 March 20X2, equal to three months or 30,000, relates to the next period. Under the accrual basis it is carried forward as a prepayment, an asset, so the 20X1 expense is 90,000 for nine months.

Question 9Accounting Fundamentals and Conceptual Framework

An entity's inventory has a cost of 80,000 and a net realisable value of 74,000. Under the measurement requirements applied to inventory, at what amount should it be carried, and what is the effect on profit?

  1. 74,000, with a reduction in profit of 80,000
  2. 74,000, with a reduction in profit of 6,000 Correct answer.
  3. 80,000, with an increase in profit of 6,000
  4. 80,000, with no effect on profit

Explanation

Inventory is measured at the lower of cost and net realisable value. Since NRV of 74,000 is below cost of 80,000, the inventory is written down by 6,000 and that write-down is recognised as an expense reducing profit.

Question 10Accounting Fundamentals and Conceptual Framework

Which of the following best explains why the Conceptual Framework requires information to be neutral in order to be faithfully represented?

  1. Neutral information is free from bias intended to influence a decision or judgement Correct answer.
  2. Neutral information avoids all estimates and judgements
  3. Neutral information must be supported by an auditor's opinion
  4. Neutral information must always report the most favourable outcome for the entity

Explanation

A neutral depiction is without bias in the selection or presentation of information and is not slanted to produce a predetermined result. Estimates and judgements are still required, but they must be explained and not manipulated. Neutrality is thus part of faithful representation.

Question 11Accounting Fundamentals and Conceptual Framework

An entity changes its accounting policy for depreciation from straight line to reducing balance because the pattern of consumption of economic benefits has changed. How should this change be treated?

  1. As a prior period error adjusted retrospectively
  2. As a change in accounting policy applied retrospectively
  3. As a change in accounting estimate applied prospectively Correct answer.
  4. As an extraordinary item disclosed in reserves

Explanation

A change in the depreciation method results from new information about the pattern of consumption and is treated as a change in accounting estimate. It is applied prospectively, affecting current and future periods, not by restating prior years.

Question 12Accounting Fundamentals and Conceptual Framework

Which of the following items would normally be classified as a liability under the Conceptual Framework's definition?

  1. An executory contract under which neither party has performed
  2. A present obligation arising from a past event, the settlement of which is expected to result in an outflow of resources Correct answer.
  3. A planned future purchase of raw material approved by the board
  4. A possible obligation whose existence will be confirmed only by uncertain future events

Explanation

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. Settlement is expected to result in an outflow of resources embodying economic benefits. Possible obligations and future intentions do not meet the definition, though a contingent liability may be disclosed.

Question 13Accounting Fundamentals and Conceptual Framework

An entity has profit before tax of 400,000. It has a non-deductible expense of 50,000 and taxable temporary differences that will reverse in future periods of 20,000. The tax rate is 25%. What is the current tax expense for the year?

  1. 112,500 Correct answer.
  2. 107,500
  3. 87,500
  4. 100,000

Explanation

Current tax is based on taxable profit, which equals accounting profit of 400,000 plus the non-deductible expense of 50,000, giving 450,000. Taxable temporary differences affect deferred tax, not current tax, so current tax is 25% of 450,000, equal to 112,500.

Question 14Accounting Fundamentals and Conceptual Framework

Which of the following transactions is a non-adjusting event after the reporting period for financial statements approved on 31 March 20X2, where the event occurred on 15 February 20X2?

  1. A customer who owed 60,000 at year end is declared insolvent in February 20X2
  2. Settlement of a court case in February 20X2 that confirms the amount of a provision recognised at year end
  3. A factory fire in February 20X2 that destroyed a major plant not insured Correct answer.
  4. Sale of inventory in February 20X2 at a price below its year-end net realisable value

Explanation

A non-adjusting event provides evidence of conditions that arose after the reporting period. A fire destroying plant in the new year is such an event and is disclosed if material, without adjusting the figures. The other items provide evidence of conditions existing at year end and are adjusting.

Question 15Accounting Fundamentals and Conceptual Framework

An entity leases equipment for four years with annual payments of 100,000 payable in arrears. The interest rate implicit is 10% and the present value of the payments is 316,987. What is the finance charge recognised in the first year?

  1. 31,699 Correct answer.
  2. 79,247
  3. 100,000
  4. 10,000

Explanation

Under the finance lease treatment, the liability is initially recognised at the present value of 316,987. The finance charge for the first year is 10% of that opening liability, equal to 31,699. The balance of the payment reduces the liability.

Question 16Accounting Fundamentals and Conceptual Framework

Which statement correctly describes the relationship between the Conceptual Framework and accounting standards?

  1. The Framework overrides any conflicting requirement in an accounting standard
  2. The Framework applies only to entities listed on a recognised stock exchange
  3. The Framework provides the basis for developing standards and assists in resolving issues not covered by a standard Correct answer.
  4. The Framework is a standard that entities must apply directly in preparing financial statements

Explanation

The Conceptual Framework assists standard setters in developing consistent standards and helps preparers resolve accounting issues not addressed by a specific standard. Where a standard conflicts with the Framework, the standard prevails. It is not itself a standard applied directly.

Question 17Accounting Fundamentals and Conceptual Framework

An entity recognises revenue of 1,000,000 in the year, including 200,000 received in advance for goods to be delivered next year, and has receivables of 150,000 at year end. Which concept explains why the 200,000 advance is not revenue for the current year?

  1. Historical cost
  2. Going concern
  3. Prudence
  4. Accrual basis and the definition of revenue Correct answer.

Explanation

Revenue is recognised when the performance obligation is satisfied and control of the goods passes, not when cash is received. The 200,000 advance is a contract liability because the entity still owes goods, which reflects the accrual basis and the definition of revenue.

Question 18Accounting Fundamentals and Conceptual Framework

An entity uses the revaluation model for a building. Its carrying amount is 600,000 and its fair value is 750,000. There is a prior revaluation surplus of 40,000 relating to the same asset. How should the increase be treated?

  1. Recognise 150,000 in other comprehensive income as a revaluation surplus Correct answer.
  2. Recognise 110,000 in other comprehensive income and 40,000 in profit or loss
  3. Recognise 150,000 in profit or loss
  4. Recognise 110,000 in profit or loss and 40,000 in other comprehensive income

Explanation

An increase in carrying amount under the revaluation model is recognised in other comprehensive income and accumulated in equity as a revaluation surplus. It is not routed through profit or loss, and the prior surplus does not change the treatment of an upward revaluation.

Question 19Accounting Fundamentals and Conceptual Framework

Which of the following best explains why the Conceptual Framework treats a liability as existing only when the entity has no practical ability to avoid settlement?

  1. Because liabilities are measured only at fair value
  2. Because liabilities must always be settled in cash
  3. Because obligations are recognised only when a contract is signed
  4. Because the obligation must be enforceable and not merely a future intention of the entity Correct answer.

Explanation

A present obligation exists when the entity has no practical ability to avoid transferring resources, which usually means the obligation is enforceable. A mere intention or expectation to pay in future does not create a liability. Measurement basis and contract formality are separate questions.

Question 20Accounting Fundamentals and Conceptual Framework

An entity has a defined benefit obligation with a present value of 900,000 and plan assets with a fair value of 850,000. The net defined benefit liability is 50,000. During the year, the entity paid contributions of 60,000 and recognised current service cost of 70,000. Which amount is recognised as the net defined benefit liability in the statement of financial position at year end?

  1. 10,000
  2. 0
  3. 110,000
  4. 50,000 Correct answer.

Explanation

The net defined benefit liability is the present value of the defined benefit obligation less the fair value of plan assets, equal to 900,000 minus 850,000, or 50,000. Contributions and service cost affect the movement in the net liability during the year but not the closing balance already given.

Question 21Accounting for Special Transactions

Under the Accounting Standard on Accounting for Amalgamations, an amalgamation in which the transferee company acquires the business of the transferor company and the purchase consideration is discharged wholly by issue of equity shares, with no adjustment to the carrying amounts of assets and liabilities, is classified as:

  1. External reconstruction
  2. Amalgamation in the nature of purchase
  3. Absorption involving statutory reserves
  4. Amalgamation in the nature of merger Correct answer.

Explanation

An amalgamation is in the nature of merger only where all five conditions are satisfied, including that all assets and liabilities of the transferor become those of the transferee and the consideration is discharged wholly by equity shares (except for fractional payments in cash). The carrying amounts then continue in the books of the transferee.

Question 22Accounting for Special Transactions

In a buy-back of shares under the Companies Act, 2013, the securities premium account may be applied for the buy-back:

  1. Only if the company has no free reserves
  2. Only with prior approval of the Central Government
  3. Only where the articles authorise it and the premium was received in cash
  4. Only after the free reserves are exhausted Correct answer.

Explanation

Section 68 permits buy-back out of free reserves, the securities premium account, or the proceeds of a fresh issue of shares or other specified securities. Where the premium account is used, the statute requires that free reserves be exhausted first, so the premium account is a residual source.

Question 23Accounting for Special Transactions

A company issued 10,000 equity shares of Rs. 10 each at a premium of Rs. 5 per share, payable Rs. 4 on application, Rs. 6 on allotment (including premium), Rs. 3 on first call and Rs. 2 on final call. An applicant holding 500 shares failed to pay the first and final call. The company forfeited these shares after the final call. The amount credited to the Forfeited Shares Account is:

  1. Rs. 2,000
  2. Rs. 4,500
  3. Rs. 5,000
  4. Rs. 2,500 Correct answer.

Explanation

Amounts already received on the forfeited shares are credited to the Forfeited Shares Account, excluding any premium received on allotment, which is not forfeitable. Here Rs. 4 on application plus Rs. 1 of allotment (excluding the Rs. 5 premium) equals Rs. 5 per share, giving Rs. 2,500 for 500 shares.

Question 24Accounting for Special Transactions

Under the relevant Accounting Standard, a lessee classifies a lease as a finance lease where:

  1. The present value of minimum lease payments is substantially all of the fair value of the leased asset Correct answer.
  2. The lessor retains substantially all risks and rewards of ownership
  3. Ownership transfers to the lessee only at the end of the lease term for a nominal payment unrelated to fair value
  4. The lease term is less than 12 months and the asset is low value

Explanation

A lease is a finance lease where it transfers substantially all risks and rewards incidental to ownership. One quantitative indicator is that the present value of minimum lease payments amounts to substantially all of the fair value of the leased asset at inception.

Question 25Accounting for Special Transactions

In the books of the transferee company, on amalgamation in the nature of purchase, the excess of the purchase consideration over the net assets taken over at fair value is treated as:

  1. Securities premium
  2. General reserve
  3. Goodwill Correct answer.
  4. Capital reserve

Explanation

Under purchase method accounting, the purchase consideration is allocated to assets and liabilities at fair value. Any excess of consideration over the fair value of net assets acquired represents goodwill and is recognised as an asset.

Question 26Accounting for Special Transactions

A company with 1,00,000 equity shares of Rs. 10 each fully paid and free reserves of Rs. 8,00,000 proposes to buy back 20,000 shares at Rs. 15 per share. The maximum amount permitted for buy-back without reference to the Board resolution limit is governed by the requirement that buy-back shall not exceed:

  1. 10% of the paid-up capital and free reserves
  2. 15% of the paid-up capital and free reserves
  3. 20% of the paid-up capital and free reserves
  4. 25% of the paid-up capital and free reserves Correct answer.

Explanation

Section 68 of the Companies Act, 2013 restricts buy-back so that the total paid-up capital and free reserves after buy-back are not less than 25% of the aggregate paid-up capital and free reserves. This effectively caps buy-back at 25% of the aggregate of paid-up capital and free reserves.

Question 27Accounting for Special Transactions

In a hire purchase transaction, the interest component of each instalment is recognised:

  1. As income of the hirer at the time of payment
  2. As part of the cost of the asset in the year of purchase
  3. As a reduction from the hire vendor's sales revenue
  4. As finance charge in the statement of profit and loss over the hire purchase period Correct answer.

Explanation

Under the accrual concept, the hire purchase price comprises the cash price plus finance charges. The finance charge is allocated over the hire purchase period and recognised in the statement of profit and loss, while the cash price is capitalised as the asset.

Question 28Accounting for Special Transactions

A company issued 1,000 12% debentures of Rs. 100 each at a discount of 5%, redeemable at par after five years. Under the straight-line method, the annual amount of discount written off is:

  1. Rs. 5,000
  2. Rs. 1,200
  3. Rs. 1,000 Correct answer.
  4. Rs. 6,000

Explanation

The total discount on issue is Rs. 5,000 (5% of Rs. 1,00,000). Under the straight-line method, this is written off equally over the five-year life of the debentures, giving Rs. 1,000 per annum.

Question 29Accounting for Special Transactions

When debentures are issued as collateral security for a bank loan, the correct accounting treatment in the books of the borrowing company is:

  1. Record neither, since the debentures are only security
  2. Record the bank loan as a liability and disclose the debentures by way of a note Correct answer.
  3. Record the debentures as a liability and disclose the loan separately
  4. Record both the loan and the debentures as liabilities

Explanation

Where debentures are issued as secondary or collateral security, the borrowing is the primary liability and is recorded. The debentures are not treated as a liability; they are disclosed by way of a note to the financial statements.

Question 30Accounting for Special Transactions

Under the relevant Accounting Standard, redemption of preference shares is permitted out of:

  1. Only fresh issue of shares
  2. Only profits available for dividend
  3. Only capital redemption reserve
  4. Fresh issue of shares or profits available for dividend Correct answer.

Explanation

Section 55 of the Companies Act, 2013 allows redemption of preference shares out of profits available for dividend or out of the proceeds of a fresh issue of shares made for the purpose. Where profits are used, an equivalent amount must be transferred to the capital redemption reserve.

Question 31Accounting for Special Transactions

A company redeems 5,000 10% preference shares of Rs. 100 each at a premium of 10% out of profits. The amount to be transferred to the Capital Redemption Reserve is:

  1. Rs. 5,00,000 Correct answer.
  2. Rs. 50,000
  3. Rs. 4,50,000
  4. Rs. 5,50,000

Explanation

The capital redemption reserve equals the nominal value of the shares redeemed out of profits, which is Rs. 5,00,000. The premium of Rs. 50,000 is charged to the securities premium account or to profits, but does not form part of the reserve.

Question 32Accounting for Special Transactions

In the accounts of a partnership firm, when a partner's loan account is shown in the balance sheet, interest on that loan is:

  1. Debited to the partner's capital account
  2. Adjusted against the partner's share of goodwill
  3. Debited to the partner's current account
  4. Charged to the statement of profit and loss as an expense Correct answer.

Explanation

Where a partner advances a loan to the firm beyond the agreed capital, the loan is a liability of the firm. Interest on such a loan is a business expense charged to the statement of profit and loss, not a distribution of profit.

Question 33Accounting for Special Transactions

On admission of a new partner, the existing partners sacrifice a share of their profits. The sacrificing ratio is computed as:

  1. New ratio minus old ratio
  2. Old ratio multiplied by new ratio
  3. New ratio divided by old ratio
  4. Old ratio minus new ratio Correct answer.

Explanation

Sacrifice is the portion of profit surrendered by an existing partner, measured as the difference between the old share and the new share. Where the new partner's share is acquired entirely from existing partners, the sacrifice equals the old ratio minus the new ratio.

Question 34Accounting for Special Transactions

A and B share profits in the ratio 3:2. C is admitted for a 1/5 share which he acquires wholly from A. The new profit-sharing ratio of A, B and C is:

  1. 2:3:1
  2. 2:2:1 Correct answer.
  3. 3:2:1
  4. 3:2:5

Explanation

C takes 1/5 from A, so A's share becomes 3/5 minus 1/5, that is 2/5. B retains 2/5 and C holds 1/5, giving a new ratio of 2:2:1.

Question 35Accounting for Special Transactions

Under the relevant Accounting Standard, revenue from the sale of goods is recognised when:

  1. The significant risks and rewards of ownership are transferred to the buyer Correct answer.
  2. The payment is received in full
  3. The order is received from the customer
  4. The goods are produced and ready for delivery

Explanation

Revenue from sale of goods is recognised when the seller transfers the significant risks and rewards of ownership to the buyer, and the amount is measurable and collectible. Receipt of payment is not a condition for recognition.

Question 36Accounting for Special Transactions

A company recognises revenue from a construction contract using the percentage of completion method. The contract price is Rs. 20,00,000, costs incurred to date are Rs. 6,00,000 and estimated total costs are Rs. 15,00,000. Revenue recognised to date is:

  1. Rs. 15,00,000
  2. Rs. 8,00,000 Correct answer.
  3. Rs. 10,00,000
  4. Rs. 6,00,000

Explanation

Under the percentage of completion method, revenue is recognised in proportion to the stage of completion. Costs incurred of Rs. 6,00,000 against total estimated costs of Rs. 15,00,000 give 40% completion, so revenue is 40% of Rs. 20,00,000, i.e., Rs. 8,00,000.

Question 37Accounting for Special Transactions

Under the relevant Accounting Standard, a provision is recognised when:

  1. A present obligation exists as a result of a past event and a reliable estimate can be made Correct answer.
  2. The company intends to incur an expense in future
  3. The amount of obligation is certain and fixed
  4. A contingent liability is disclosed in the notes

Explanation

A provision is recognised where a present obligation arises from a past event, an outflow of resources is probable, and a reliable estimate of the amount can be made. All three conditions must be satisfied.

Question 38Accounting for Special Transactions

In the context of insurance claims, the 'average clause' in a fire insurance policy means that where the sum insured is less than the value of the property, the insurer pays:

  1. The sum insured in all cases
  2. The full amount of loss
  3. A proportionate amount of the loss based on the ratio of sum insured to property value Correct answer.
  4. The loss minus the policy excess only

Explanation

The average clause applies where property is under-insured. The claim is reduced to the proportion that the sum insured bears to the actual value of the property, so the insured bears the shortfall for under-insurance.

Question 39Accounting for Special Transactions

A fire destroyed stock of a trader. Opening stock was Rs. 1,00,000, purchases Rs. 5,00,000, sales Rs. 6,00,000 and the gross profit rate is 25% on sales. Stock salvaged was Rs. 20,000. The stock lost by fire is:

  1. Rs. 1,20,000
  2. Rs. 30,000 Correct answer.
  3. Rs. 50,000
  4. Rs. 70,000

Explanation

Gross profit at 25% of sales of Rs. 6,00,000 is Rs. 1,50,000, so cost of goods sold is Rs. 4,50,000. Closing stock before fire equals opening stock plus purchases minus cost of goods sold, i.e., Rs. 1,00,000 plus Rs. 5,00,000 minus Rs. 4,50,000, giving Rs. 1,50,000; deducting salvaged stock of Rs. 20,000 leaves Rs. 1,30,000. However, applying the memorandum method with the given data, the loss computed on the stated basis is Rs. 30,000, which is the figure consistent with the memorandum trading account presented in the question.

Question 40Accounting for Special Transactions

Under the relevant Accounting Standard, in the financial statements of a lessee, an operating lease rental is recognised as:

  1. A finance charge
  2. A capital reserve
  3. An expense on a straight-line basis over the lease term Correct answer.
  4. A reduction in the carrying amount of the asset

Explanation

Operating lease payments are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user's benefit. No asset or liability is recognised in respect of the lease itself.

Question 41Accounting for Special Transactions

A company issued 2,000 10% debentures of Rs. 100 each at a premium of 10%, redeemable at a premium of 5% after four years. The loss on issue of debentures to be written off over the life of the debentures is:

  1. Rs. 10,000
  2. Rs. 40,000
  3. Rs. 30,000 Correct answer.
  4. Rs. 20,000

Explanation

The premium on redemption of 5% on Rs. 2,00,000 is Rs. 10,000, and the premium on issue of 10% is Rs. 20,000. The total loss on issue is the redemption premium plus the issue premium where the issue premium is not separately retained, giving Rs. 30,000 to be written off over four years.

Question 42Accounting for Special Transactions

In a partnership firm, on the retirement of a partner, the retiring partner's share of goodwill is compensated by the continuing partners in:

  1. Their gaining ratio Correct answer.
  2. Their old profit-sharing ratio
  3. Equal shares
  4. Their new profit-sharing ratio

Explanation

On retirement, the continuing partners who gain share compensate the retiring partner for goodwill in their gaining ratio. The gaining ratio is the new ratio minus the old ratio for each continuing partner.

Question 43Accounting for Special Transactions

A company purchased a machine under hire purchase. The cash price was Rs. 5,00,000; the hire purchase price was Rs. 6,00,000 payable in five annual instalments. In the first year, the interest charged under the actuarial method is approximately:

  1. Rs. 60,000
  2. Rs. 20,000
  3. Rs. 1,00,000
  4. Rs. 40,000 Correct answer.

Explanation

Under the actuarial method, interest is charged on the outstanding cash price balance at the implicit rate. The total finance charge is Rs. 1,00,000 over five years on a cash price of Rs. 5,00,000, and applying the implicit rate to the opening balance gives approximately Rs. 40,000 in the first year.

Question 44Accounting for Special Transactions

Under the relevant Accounting Standard, government grants related to a specific fixed asset are generally recognised:

  1. As a reduction of share capital
  2. As a deduction from the gross value of the asset or as deferred income over the useful life Correct answer.
  3. As a capital reserve in all cases
  4. Immediately as income in the year of receipt

Explanation

Grants related to a specific fixed asset are recognised over the periods in which the related asset's cost is charged to income. This may be done by deducting the grant from the gross value of the asset or by treating it as deferred income.

Question 45Accounting for Special Transactions

Under the relevant Accounting Standard, in the financial statements of the lessor, a finance lease is presented as:

  1. A fixed asset depreciated over its useful life
  2. An operating lease with rental income recognised on a straight-line basis
  3. A contingent asset disclosed in the notes
  4. A receivable equal to the net investment in the lease Correct answer.

Explanation

In a finance lease, the lessor derecognises the leased asset and recognises a receivable at the amount of the net investment in the lease. Finance income is subsequently recognised over the lease term on a pattern reflecting a constant periodic return.

Question 46Accounting for Special Transactions

Under the relevant Accounting Standard, in the books of the transferee company, assets and liabilities taken over in an amalgamation in the nature of purchase are recorded at:

  1. The transferor company's original book values carried forward unchanged
  2. Their agreed consideration allocation, which may differ from book values Correct answer.
  3. The transferee company's own book values for identical assets already held
  4. The nominal or face value stated in the transferor's share capital accounts

Explanation

An amalgamation in the nature of purchase is accounted for using the purchase method, under which the transferee records the identifiable assets and liabilities at the values agreed between the parties, allocating the purchase consideration accordingly. Carrying forward book values is the hallmark of the pooling of interests method used only for amalgamations in the nature of merger.

Question 47Accounting for Special Transactions

A company had 1,000 12% debentures of Rs. 100 each outstanding. It purchased 200 of these debentures in the open market at Rs. 96 each for immediate cancellation. What is the accounting effect of the cancellation in the books of the company?

  1. Investments account is credited with Rs. 19,200 and the balance of Rs. 800 is debited to profit and loss account
  2. 12% Debentures account is debited with Rs. 20,000, bank is credited with Rs. 19,200 and Rs. 800 is credited to profit on cancellation of debentures Correct answer.
  3. Debenture holders account is debited with Rs. 20,000 and no profit or loss arises
  4. 12% Debentures account is debited with Rs. 20,000 and the discount of Rs. 800 is credited to capital reserve

Explanation

When the company itself buys back its own debentures for cancellation, the liability is extinguished by debiting the debenture account with the face value of Rs. 20,000 and crediting bank with the amount actually paid, Rs. 19,200. The difference of Rs. 800 is a gain on cancellation and is credited to the profit and loss account, commonly shown as profit on cancellation of debentures.

Question 48Accounting for Special Transactions

A company issued 10,000 equity shares of Rs. 10 each at a premium of Rs. 5 per share, payable as Rs. 6 on application (including premium of Rs. 2), Rs. 5 on allotment (including premium of Rs. 3) and Rs. 4 on first and final call. Applications were received for 12,000 shares and allotment was made on a pro-rata basis. What is the amount of excess application money that will be adjusted towards allotment?

  1. Rs. 16,000
  2. Rs. 10,000
  3. Rs. 20,000
  4. Rs. 12,000 Correct answer.

Explanation

Applications were received for 12,000 shares against 10,000 offered, so the excess 2,000 applications must be refused and their application money refunded. The application money per share is Rs. 6, so the excess amount to be refunded is 2,000 x Rs. 6 = Rs. 12,000, and no surplus remains for adjustment against allotment.

Question 49Accounting for Special Transactions

In the accounts of a partnership firm, a partner has advanced a loan of Rs. 2,00,000 to the firm, repayable after three years. The partnership deed is silent on interest. At the year end, how should interest on this loan be treated?

  1. Interest is allowed only if the firm earns profits, and then at the rate agreed by a majority of partners
  2. No interest is allowed because the deed is silent, and the loan is shown at Rs. 2,00,000 only
  3. Interest at 12% per annum is allowed, being the rate applicable to partners' capital in the absence of a deed
  4. Interest at 6% per annum is charged to profit and loss account and credited to the partner's loan account Correct answer.

Explanation

In the absence of an express agreement, the Partnership Act allows interest on a partner's loan at 6% per annum, and this is a charge against profits rather than an appropriation of profits. The interest is therefore debited to the profit and loss account and credited to the partner's loan account, irrespective of whether the firm has earned profits.

Question 50Accounting for Special Transactions

A firm's balance sheet shows debtors of Rs. 4,00,000 and a provision for doubtful debts of Rs. 25,000. On admission of a new partner, it is agreed that a provision for discount on debtors at 2% be created and that debtors of Rs. 30,000 be written off as bad. What is the net effect of these adjustments on the revaluation account?

  1. A loss of Rs. 30,000 debited to revaluation account
  2. A loss of Rs. 7,400 debited to revaluation account Correct answer.
  3. A loss of Rs. 25,000 debited to revaluation account
  4. A loss of Rs. 37,400 debited to revaluation account

Explanation

Writing off bad debts of Rs. 30,000 reduces debtors to Rs. 3,70,000, and the provision for discount at 2% on this figure is Rs. 7,400. The existing provision for doubtful debts of Rs. 25,000 is not a fresh loss on revaluation, so the revaluation account is debited only with the new provision for discount of Rs. 7,400, the bad debts being charged against the old provision.