Detailed Question Analysis
Q1. A Not-for-Profit Organisation received subscriptions of ₹5,00,000 during the year 2023-24. This includes ₹25,000 for 2022-23 and ₹40,000 for 2024-25. Subscriptions outstanding for the year 2023-24 are ₹55,000. However, a member whose subscription of ₹5,000 was outstanding is now considered irrecoverable. What amount will be credited to the Income and Expenditure Account for the year 2023-24?
Correct Answer: Option B (₹4,85,000)
Explanation: Subscription for the year = Total Received - Received for Previous Year - Received for Next Year + Outstanding for Current Year = ₹5,00,000 - ₹25,000 - ₹40,000 + ₹50,000 (i.e., ₹55,000 - ₹5,000 irrecoverable). Irrecoverable subscriptions are not added to the income.
Q2. P, Q, and R are partners. P draws ₹10,000 on the 15th of every month, Q draws ₹20,000 on the last day of each quarter, and R withdraws ₹1,20,000 on October 1, 2023. The partnership deed is silent on the interest on drawings. The firm's accountant charged interest @ 6% p.a. What is the corrective action required?
Correct Answer: Option A (Credit P's, Q's, and R's Capital Accounts with the interest wrongly debited.)
Explanation: When the partnership deed is silent, no interest on drawings is to be charged. If it has been wrongly debited, the rectifying entry would be to credit the partners' capital accounts to reverse the charge.
Q3. X Ltd. forfeited 500 shares of ₹10 each (fully called-up), issued at a premium of ₹2 per share, for non-payment of final call of ₹3 per share. The shareholder had paid the application, allotment (including premium), and first call money. Out of these, 300 shares were reissued to Z as fully paid-up for ₹8 per share. What is the amount to be transferred to the Capital Reserve Account?
Correct Answer: Option B (₹1,500)
Explanation: Forfeited amount per share (excluding premium) = ₹10 (Called-up) - ₹3 (Unpaid) = ₹7. Forfeited amount on 300 reissued shares = 300 × ₹7 = ₹2,100. Loss on reissue = 300 × (₹10 - ₹8) = ₹600. Amount to Capital Reserve = ₹2,100 - ₹600 = ₹1,500.
Q4. A company's Current Ratio is 2.5:1 and its Quick Ratio is 1.6:1. If its current liabilities are ₹2,00,000, what would be the value of its closing inventory?
Correct Answer: Option A (₹1,80,000)
Explanation: Current Assets = Current Ratio × Current Liabilities = 2.5 × ₹2,00,000 = ₹5,00,000. Quick Assets = Quick Ratio × Current Liabilities = 1.6 × ₹2,00,000 = ₹3,20,000. Inventory = Current Assets - Quick Assets = ₹5,00,000 - ₹3,20,000 = ₹1,80,000.
Q5. On 1st April 2023, A and B commenced a business with capitals of ₹6,00,000 and ₹4,00,000 respectively. On 1st October 2023, they decided that their capitals should be ₹5,00,000 each. The necessary adjustments in capitals were made by introducing or withdrawing cash. Interest on capital is to be allowed @ 8% p.a. Calculate the interest on capital for partner A for the year ending 31st March 2024.
Correct Answer: Option B (₹44,000)
Explanation: For A: Interest on ₹6,00,000 for 6 months (Apr-Sep) + Interest on ₹5,00,000 for 6 months (Oct-Mar). (6,00,000 × 8/100 × 6/12) + (5,00,000 × 8/100 × 6/12) = ₹24,000 + ₹20,000 = ₹44,000.
Q6. A company issued 10,000, 9% Debentures of ₹100 each at a discount of 5%, redeemable at a premium of 10%. The total amount of 'Loss on Issue of Debentures' to be written off over the life of the debentures is:
Correct Answer: Option C (₹1,50,000)
Explanation: Loss on issue consists of two parts: Discount on Issue and Premium on Redemption. Discount = 5% of ₹10,00,000 = ₹50,000. Premium on Redemption = 10% of ₹10,00,000 = ₹1,00,000. Total Loss = ₹50,000 + ₹1,00,000 = ₹1,50,000.
Q7. Ram and Shyam are partners sharing profits in the ratio of 3:2. They admit Mohan for a 1/4th share in profits. Ram personally guarantees that Mohan's share of profit, after charging interest on capital @5% p.a. to all partners, will not be less than ₹1,00,000. The total profit of the firm before charging interest on capital was ₹4,20,000. Capitals of Ram, Shyam, and Mohan are ₹5,00,000, ₹4,00,000 and ₹3,00,000 respectively. What is the final deficiency to be borne by Ram?
Correct Answer: Option A (₹10,000)
Explanation: Total Interest on Capital = (5,00,000+4,00,000+3,00,000) * 5% = ₹60,000. Divisible Profit = ₹4,20,000 - ₹60,000 = ₹3,60,000. Mohan's share = 1/4 of ₹3,60,000 = ₹90,000. Deficiency = ₹1,00,000 - ₹90,000 = ₹10,000. This is borne entirely by Ram.
Q8. Which of the following transactions will result in 'No Flow of Cash' when preparing a Cash Flow Statement?
Correct Answer: Option C (Conversion of debentures into equity shares.)
Explanation: This is a non-cash transaction. It affects the capital structure but does not involve any inflow or outflow of cash or cash equivalents. It is disclosed in the notes to accounts.
Q9. At the time of dissolution of a partnership firm, an unrecorded asset with a book value of ₹Nil is taken over by a partner, Mr. X, for an agreed value of ₹25,000. Which account will be credited?
Correct Answer: Option B (Realisation Account)
Explanation: When an unrecorded asset is realized (either sold for cash or taken by a partner), the amount realized is a gain and is credited to the Realisation Account. The partner's capital account is debited.
Q10. A company's Balance Sheet shows 10% Debentures of ₹10,00,000 and a balance in Debenture Redemption Reserve (DRR) of ₹1,50,000. The company decides to redeem 30% of its debentures at the end of the year out of profits. What is the minimum additional amount that needs to be transferred to DRR before redemption, assuming the company is an unlisted public company (not an NBFC/HFC)?
Correct Answer: Option D (No further transfer is required.)
Explanation: For unlisted public companies, DRR must be created for 10% of the value of debentures outstanding. Total DRR required = 10% of ₹10,00,000 = ₹1,00,000. The company already has a balance of ₹1,50,000 in DRR, which is more than the requirement. No further transfer is needed.
Q11. A, B and C are partners with a profit-sharing ratio of 5:3:2. B retires from the firm. His share is acquired by A and C in the ratio of 2:3. The new profit-sharing ratio between A and C will be:
Correct Answer: Option B (31:19)
Explanation: B's share is 3/10. A acquires: 2/5 of 3/10 = 6/50. C acquires: 3/5 of 3/10 = 9/50. A's new share = 5/10 + 6/50 = 25/50 + 6/50 = 31/50. C's new share = 2/10 + 9/50 = 10/50 + 9/50 = 19/50. New Ratio = 31:19.
Q12. In a Common-Size Income Statement, if the percentage of 'Cost of Revenue from Operations' to 'Revenue from Operations' has increased from 60% to 70% over two years, it primarily indicates:
Correct Answer: Option C (A deterioration in gross profit margin.)
Explanation: Cost of Revenue from Operations is the primary component deducted from Revenue to arrive at Gross Profit. If its percentage increases, it means a larger portion of revenue is being consumed by costs, leading to a lower gross profit margin.
Q13. A firm has Total Assets of ₹20,00,000 and Total Debts of ₹12,00,000. The Current Liabilities are ₹4,00,000. The Debt-to-Equity Ratio is:
Correct Answer: Option B (1:1)
Explanation: Equity (Shareholders' Funds) = Total Assets - Total Debts = ₹20,00,000 - ₹12,00,000 = ₹8,00,000. Debt (Long-term Debt) = Total Debts - Current Liabilities = ₹12,00,000 - ₹4,00,000 = ₹8,00,000. Debt-to-Equity Ratio = Debt / Equity = ₹8,00,000 / ₹8,00,000 = 1:1.
Q14. A firm is dissolved. Realisation expenses of ₹10,000 were to be borne by the firm. A partner, Y, paid these expenses on behalf of the firm. The correct journal entry in the firm's books will be:
Correct Answer: Option C (Realisation A/c Dr. ₹10,000; To Y's Capital A/c ₹10,000)
Explanation: The expense belongs to the firm, so Realisation A/c must be debited. Since the partner (Y) paid it, instead of crediting Cash/Bank, the firm's liability towards the partner increases, so Y's Capital A/c is credited.
Q15. Which of the following is NOT a permissible use of the 'Securities Premium' account as per Section 52(2) of the Companies Act, 2013?
Correct Answer: Option C (To pay dividends to shareholders.)
Explanation: Dividends can only be paid out of profits (current or past). Securities Premium is a capital receipt and cannot be used for distributing dividends. The other three are permissible uses.
Q16. From the following, calculate Cash Flow from Investing Activities: - Purchase of Machinery: ₹5,00,000 - Sale of Land (Book Value ₹2,00,000) for ₹3,50,000 - Interest received on Debentures held as investment: ₹40,000 - Dividend received on shares of a subsidiary company: ₹60,000 - Purchase of 'Cash Equivalents': ₹1,00,000
Correct Answer: Option A (Net Cash Outflow of ₹50,000)
Explanation: Calculation: Sale of Land (+₹3,50,000) - Purchase of Machinery (-₹5,00,000) + Interest Received (+₹40,000) + Dividend Received (+₹60,000). Total = -₹50,000 (Net Outflow). Purchase of 'Cash Equivalents' is not a flow; it is just a change in the components of Cash & Cash Equivalents.
Q17. A and B are partners. The partnership deed provides for interest on capital at 10% p.a. but there was a loss of ₹50,000 for the year. Their capital balances are A - ₹4,00,000 and B - ₹3,00,000. What amount of interest on capital will be allowed to A and B?
Correct Answer: Option C (A: ₹NIL; B: ₹NIL)
Explanation: When the deed provides for interest on capital as a charge, it is paid even in case of loss. But if it is an appropriation (the default assumption unless 'charge' is specified), interest is allowed only out of profits. In case of loss, no interest on capital is provided.
Q18. ABC Ltd. has a Workmen Compensation Reserve of ₹90,000 in its Balance Sheet. At the time of reconstitution of the firm, a claim for workmen compensation is estimated at ₹60,000. The profit-sharing ratio of partners X, Y, and Z is 1:1:1. What will be the treatment for the reserve?
Correct Answer: Option C (₹30,000 will be credited to partners' capital accounts in a 1:1:1 ratio.)
Explanation: The total reserve is ₹90,000. A liability of ₹60,000 is created against it. The surplus reserve (₹90,000 - ₹60,000 = ₹30,000) belongs to the old partners and will be distributed among them in their old profit-sharing ratio.
Q19. A Ltd. invited applications for 1,00,000 shares of ₹10 each. Applications were received for 1,50,000 shares. A shareholder who was allotted 400 shares on a pro-rata basis failed to pay the allotment money of ₹4 per share (including ₹1 premium). How many shares did he apply for?
Correct Answer: Option B (600 shares)
Explanation: The ratio of allotment is Applied:Allotted = 1,50,000:1,00,000 = 3:2. If allotted shares are 2, applied shares are 3. If allotted shares are 400, applied shares = (400 / 2) × 3 = 600 shares.
Q20. Analysis of financial statements is significantly affected by 'window dressing'. This refers to:
Correct Answer: Option B (The manipulation of accounting data to present a more favourable picture of the company's financial position.)
Explanation: "Window dressing" is a limitation of financial analysis where management uses legal but unethical accounting tricks to make financial statements appear healthier than they actually are (e.g., delaying expense recognition, booking revenue early).