Free BCOC-137 Solved Assignment | Valid from 1st January 2025 to 31st December 2025 | CORPORATE ACCOUNTING | IGNOU

BCOC-137 Solved Assignment 2025

Section – A
Q.1 What is meant by issue of Bonus Shares? Discuss the guidelines issued by SEBI for issue of bonus shares.
Q.2 How does cash flow statement differ from funds flow statement? What are the uses of cash flow statement?
Q.3 What do you understand by Consolidated Financial Statement? Explain the advantages and disadvantages of preparing Consolidated Financial Statement.
Q.4 What journal entries are passed in the books of Transferor company in the case of amalgamation? Explain.
Q.5 Explain the primary and secondary functions of commercial banks.
Section – B
Q.6 Explain conditions for buy back of shares.
Q.7 From the following information, you are required to calculate the value of Goodwill by Capitalization Method:
  1. Capitalization of Actual Average Profit
  2. Capitalization of Super Profit
a. Actual Average Profit Rs. 60,000
b. Normal Rate of Return 10%
c. Actual Capital Employed Rs. 4,50,000
Differentiate between amalgamation and absorption. Q.8
Q.9 Explain the books of account generally kept by the Bank.
Q.10 What are the special features of Profit and Loss Account of a Company?
Section – C
Q.11 Asea Ltd. Issued 5,000 14% debentures of Rs. 100 each at a discount of 6% on January 1, 2016. The entries amount is payable on application. These debentures are redeemable at a premium of 5%. The interest on debentures is payable annually on December 31 each year and any loss on their issue is to be written off in three years. Give Journal entries for the above in the books of the Company.
Q.12 Write the short notes on the following :
a) Preliminary Expenses
b) Minority Interest
c) Disposal of Non-Banking Assets
d) Internal Reconstruction
e) Non- Performing Assets

Answer:

Section – A

Question:-1

What is meant by issue of Bonus Shares? Discuss the guidelines issued by SEBI for issue of bonus shares.

Answer:

Issue of Bonus Shares and SEBI Guidelines

Bonus shares represent additional shares distributed by a company to its existing shareholders at no extra cost, typically drawn from accumulated profits or free reserves. This mechanism increases the total number of shares outstanding without altering the company’s overall market value, as the share price adjusts proportionally. Issuing bonus shares serves multiple purposes: it enhances liquidity, rewards shareholders, and signals confidence in future profitability. However, to ensure transparency and protect investor interests, the Securities and Exchange Board of India (SEBI) has established stringent guidelines governing the process, particularly for listed companies. These regulations aim to streamline issuance, ensure fairness, and minimize market disruptions.

1. Conceptual Overview of Bonus Shares

Bonus shares are issued to capitalize a portion of a company’s free reserves, share premium, or other permissible reserves, effectively transferring these reserves to the company’s share capital. This process does not involve cash outflow, as shares are distributed free to shareholders in proportion to their existing holdings. For instance, a 1:1 bonus issue means one additional share is given for every share held. While this increases the number of shares, it does not impact shareholders’ ownership percentage or the company’s net worth, though it enhances the stock’s marketability by reducing its per-share price.

2. Core SEBI Guidelines for Bonus Share Issuance

SEBI’s guidelines ensure that bonus share issuance adheres to principles of fairness and efficiency. Companies must issue bonus shares only from free reserves built from genuine profits or share premium collected in cash, prohibiting the use of reserves created by revaluation of fixed assets. This ensures that only financially sound companies with authentic reserves can issue bonus shares. Additionally, bonus shares cannot be issued in lieu of dividends, preserving the distinction between capital distribution and income distribution. If a company has partly paid shares, these must be fully paid before a bonus issue, ensuring all shareholders are on equal footing.
Protection for Convertible Instrument Holders
Holders of fully or partly convertible debentures (FCDs/PCDs) are entitled to proportional benefits. Companies must reserve shares for these holders, to be allotted upon conversion, ensuring equitable treatment. This prevents dilution of their potential ownership.

3. Procedural and Timeline Requirements

SEBI mandates that companies obtain board approval for a bonus issue and implement it within 15 days, or within two months if shareholder approval is required. As of October 1, 2024, SEBI introduced a streamlined T+2 trading framework, where T is the record date—the cutoff date for determining eligible shareholders. Companies must apply for in-principle approval from the stock exchange within five working days of board approval and set a deemed allotment date (T+1 day). Bonus shares are credited directly to the existing International Securities Identification Number (ISIN) and made available for trading on T+2 day, reducing delays from the earlier 2-7 working days.

4. Capital and Compliance Obligations

If a bonus issue causes the subscribed and paid-up capital to exceed the authorized capital, companies must pass a resolution at a general body meeting to increase the authorized capital. The Articles of Association must permit capitalization of reserves; if not, they must be amended. Companies must also certify compliance with SEBI guidelines, verified by a statutory auditor or company secretary, ensuring transparency.

Conclusion

The issuance of bonus shares is a strategic tool for companies to reward shareholders and enhance market liquidity, governed by SEBI’s robust framework to ensure fairness and efficiency. By mandating the use of genuine reserves, protecting convertible instrument holders, and enforcing strict timelines, SEBI safeguards investor interests and promotes market stability. The T+2 trading framework further enhances efficiency, reducing volatility and ensuring timely access to bonus shares, thereby fostering investor confidence and a dynamic capital market ecosystem.

Question:-2

How does cash flow statement differ from funds flow statement? What are the uses of cash flow statement?

Answer:

Cash Flow Statement vs. Funds Flow Statement and Uses of Cash Flow Statement

Financial statements provide critical insights into a company’s performance, with the cash flow statement and funds flow statement serving distinct purposes in analyzing liquidity and resource allocation. While both track financial movements, their scope, methodology, and applications differ significantly. The cash flow statement, in particular, is a vital tool for stakeholders to assess a company’s cash management, operational efficiency, and financial health.

1. Conceptual Differences Between Cash Flow and Funds Flow Statements

The cash flow statement focuses exclusively on cash and cash equivalents, detailing inflows and outflows across three categories: operating, investing, and financing activities. It reveals how cash is generated and utilized, offering a precise view of liquidity. In contrast, the funds flow statement adopts a broader perspective, tracking changes in working capital, which includes cash, receivables, inventory, and current liabilities. This statement highlights the sources and uses of funds, emphasizing overall financial position rather than liquidity alone.
Basis of Preparation
The cash flow statement is prepared using the accrual basis, adjusted to reflect actual cash transactions, either through the direct method (tracking cash receipts and payments) or the indirect method (adjusting net income for non-cash items). The funds flow statement, however, is derived from changes in balance sheet items, focusing on the movement of working capital rather than cash-specific transactions. Consequently, the cash flow statement provides a granular view of cash dynamics, while the funds flow statement offers a macro-level analysis of resource allocation.

2. Structural and Temporal Distinctions

The cash flow statement is structured into operating activities (e.g., cash from sales), investing activities (e.g., purchase of assets), and financing activities (e.g., debt repayments or equity issuance). This categorization provides clarity on cash movement within a specific period. The funds flow statement, conversely, does not segregate activities in this manner but instead presents a summary of sources (e.g., funds from operations or asset sales) and applications (e.g., debt repayment or capital expenditure). Additionally, the cash flow statement is mandatory under accounting standards like Ind AS 7 for listed companies, while the funds flow statement is less commonly used in modern financial reporting.

3. Uses of the Cash Flow Statement

The cash flow statement is indispensable for assessing a company’s liquidity and solvency. It enables stakeholders to evaluate whether a company generates sufficient cash from operations to meet obligations, fund investments, and distribute dividends. By analyzing operating cash flows, management can gauge operational efficiency and identify areas for cost optimization. The statement also aids in forecasting future cash needs, crucial for budgeting and strategic planning.
Decision-Making and Investor Confidence
For investors, the cash flow statement reveals the sustainability of earnings, as high profits with poor cash flows may indicate underlying issues like delayed receivables. Creditors use it to assess a company’s ability to service debt, while management leverages it to make informed decisions on capital allocation, such as investments or dividend policies. It also highlights cash burn rates for startups, guiding funding strategies.

Conclusion

The cash flow statement, with its focus on cash movements, differs markedly from the funds flow statement’s broader working capital perspective, offering a more precise tool for liquidity analysis. Its structured breakdown into operating, investing, and financing activities provides stakeholders with actionable insights into financial health. By facilitating liquidity assessment, operational efficiency analysis, and strategic decision-making, the cash flow statement remains a cornerstone of financial reporting, empowering businesses and investors to navigate complex financial landscapes effectively.

Question:-3

What do you understand by Consolidated Financial Statement? Explain the advantages and disadvantages of preparing Consolidated Financial Statement.

Answer:

Consolidated Financial Statement: Understanding, Advantages, and Disadvantages

A consolidated financial statement presents the financial position and performance of a parent company and its subsidiaries as a single economic entity. This comprehensive report aggregates the assets, liabilities, equity, income, and expenses of the parent and its controlled entities, eliminating intercompany transactions to provide a unified view of the group’s financial health. Such statements are critical for stakeholders to assess the overall performance of a corporate group, particularly in complex organizations with multiple subsidiaries. However, preparing consolidated financial statements involves both significant advantages and inherent challenges.

1. Concept of Consolidated Financial Statements

Consolidated financial statements combine the financial data of a parent company and its subsidiaries, where the parent holds a controlling interest, typically more than 50% of voting rights. The process involves aggregating line items like revenues, expenses, and assets, while eliminating intercompany transactions, such as sales or loans between group entities, to avoid double-counting. These statements adhere to accounting standards like Ind AS 110 or IFRS 10, ensuring a true and fair view of the group’s financial position. They include a consolidated balance sheet, income statement, cash flow statement, and statement of changes in equity, reflecting the group’s operations as if it were a single entity.

2. Advantages of Consolidated Financial Statements

Holistic Financial Insight
Consolidated financial statements provide a comprehensive overview of the group’s financial performance, enabling stakeholders to assess the collective profitability, liquidity, and solvency. This unified perspective is crucial for investors and creditors evaluating the group’s ability to generate returns or meet obligations.
Improved Decision-Making
Management benefits from a clearer understanding of resource allocation and operational efficiency across subsidiaries. By identifying underperforming units or synergies, consolidated statements guide strategic decisions, such as divestitures or expansions.
Transparency for Stakeholders
These statements enhance transparency by presenting the group’s financial position without distortions from intercompany transactions. This fosters investor confidence and ensures compliance with regulatory requirements, particularly for listed companies.

3. Disadvantages of Consolidated Financial Statements

Complexity and Cost
Preparing consolidated financial statements is resource-intensive, requiring significant time, expertise, and costs. The process involves aligning different accounting policies, reconciling intercompany transactions, and adjusting for minority interests, which can be particularly challenging for groups with numerous subsidiaries or diverse operations.
Potential Misrepresentation
Consolidation may obscure the financial health of individual subsidiaries. A profitable parent company might mask losses in subsidiaries, misleading stakeholders about the group’s overall stability unless supplemented by separate financial statements.
Regulatory and Compliance Challenges
Differences in accounting standards across jurisdictions can complicate consolidation, especially for multinational groups. Ensuring compliance with local and international regulations adds further complexity, increasing the risk of errors or misstatements.

Conclusion

Consolidated financial statements are essential for presenting a unified view of a corporate group’s financial performance, offering stakeholders valuable insights into its overall health. They enhance transparency, support strategic decision-making, and meet regulatory requirements, making them indispensable for complex organizations. However, the process is costly, complex, and may obscure individual subsidiary performance, posing challenges for accurate interpretation. By balancing these advantages and disadvantages, companies can leverage consolidated financial statements to provide a clear, holistic picture while addressing the intricacies of preparation to ensure reliability and compliance.

Question:-4

What journal entries are passed in the books of Transferor company in the case of amalgamation? Explain.

Answer:

Journal Entries in the Books of the Transferor Company in Amalgamation

Amalgamation involves the merger of two or more companies, where the transferor company (the entity being merged or absorbed) transfers its assets, liabilities, and operations to the transferee company. In the books of the transferor company, specific journal entries are recorded to reflect the transfer of its financial position, the settlement with shareholders, and the closure of its accounts. These entries ensure accurate accounting of the amalgamation process, adhering to principles of financial reporting.

1. Recording the Transfer of Assets and Liabilities

When amalgamation occurs, the transferor company transfers all its assets and liabilities to the transferee company at agreed-upon values, which may be book values (in the case of amalgamation in the nature of merger) or fair values (in the case of amalgamation in the nature of purchase). A single journal entry captures this transfer:
Journal Entry:
Debit: Transferee Company Account (with the agreed consideration, e.g., purchase price or shares issued)
Credit: All Asset Accounts (e.g., fixed assets, current assets) at book or fair value
Credit: All Liability Accounts (e.g., creditors, loans) at book or agreed value
This entry reflects the transfer of the transferor’s entire balance sheet to the transferee company, recognizing the consideration receivable, which could be in the form of cash, shares, or other securities.

2. Recording the Receipt of Consideration

The transferee company provides consideration to the transferor company, typically in the form of shares, debentures, or cash. Upon receipt, the transferor records this consideration:
Journal Entry:
Debit: Shares in Transferee Company Account (or Cash/Bank, if cash is received)
Credit: Transferee Company Account
This entry accounts for the receipt of consideration, reducing the balance in the Transferee Company Account created in the first entry. If the consideration includes shares, they are recorded at their agreed value, often based on market or negotiated terms.

3. Distribution to Shareholders

The transferor company distributes the received consideration (e.g., shares or cash) to its shareholders, effectively settling their claims. This step involves liquidating the share capital and reserves:
Journal Entry:
Debit: Share Capital Account (at nominal value)
Debit: Reserves and Surplus Account (e.g., general reserve, profit and loss account)
Credit: Shareholders’ Account
Subsequently, the consideration is distributed to shareholders:
Debit: Shareholders’ Account
Credit: Shares in Transferee Company Account (or Cash/Bank)
These entries close out the equity accounts and allocate the consideration to shareholders, proportional to their holdings.

4. Closing the Books of the Transferor Company

If any difference arises between the consideration received and the net assets transferred (assets minus liabilities), it is adjusted in the reserves or recognized as a gain or loss. For instance, in an amalgamation in the nature of purchase, a difference may be recorded as goodwill or capital reserve in the transferee’s books, but in the transferor’s books, it adjusts the reserves:
Journal Entry (if applicable):
Debit: Reserves and Surplus (if consideration exceeds net assets)
Credit: Profit and Loss Account (or vice versa for a shortfall)
Finally, all remaining accounts are closed, and the transferor company ceases to exist as a separate entity.

Conclusion

The journal entries in the transferor company’s books during amalgamation systematically record the transfer of assets and liabilities, receipt of consideration, distribution to shareholders, and closure of accounts. These entries ensure a clear and accurate reflection of the transferor’s dissolution, aligning with accounting principles. By meticulously accounting for each step, the process maintains transparency and facilitates a smooth transition of financial obligations to the transferee company, ensuring stakeholder interests are addressed.

Question:-5

Explain the primary and secondary functions of commercial banks.

Answer:

Primary and Secondary Functions of Commercial Banks

Commercial banks serve as the backbone of the financial system, facilitating economic activities through a range of functions that support individuals, businesses, and the broader economy. Their operations are categorized into primary and secondary functions, each playing a critical role in ensuring financial stability and fostering economic growth. Understanding these functions highlights the pivotal role banks play in modern economies.

1. Primary Functions of Commercial Banks

The primary functions of commercial banks revolve around their core activities of mobilizing savings and providing credit, which directly influence economic transactions.
Accepting Deposits
Commercial banks accept various types of deposits, such as savings, current, and fixed deposits, from individuals and organizations. Savings accounts encourage small-scale savings with moderate interest, while current accounts cater to businesses needing frequent transactions without interest. Fixed deposits offer higher interest rates for funds locked in for a specified period, providing banks with stable resources for lending.
Advancing Loans
Banks extend credit through loans, overdrafts, and cash credits to meet the financial needs of individuals, businesses, and industries. These loans, offered at competitive interest rates, support personal needs (e.g., home or car loans), business expansions, and working capital requirements. By channeling funds from depositors to borrowers, banks facilitate economic activity and earn interest income.
Credit Creation
Through the process of credit creation, banks generate money in the economy by lending a portion of their deposits while maintaining a reserve ratio. When a loan is granted, it creates a deposit in the borrower’s account, effectively increasing the money supply. This function amplifies economic activity but requires prudent management to avoid liquidity risks.

2. Secondary Functions of Commercial Banks

Secondary functions encompass a wide range of ancillary services that enhance customer convenience and contribute to economic efficiency.
Agency Functions
Banks act as agents for customers by facilitating payments, such as collecting cheques, dividends, or utility bills, and executing standing instructions. They also provide services like tax payments, insurance premium collections, and fund transfers, streamlining financial transactions for clients.
Utility Functions
Banks offer utility services that add value beyond traditional banking. These include issuing letters of credit and guarantees, facilitating international trade through foreign exchange services, and providing safe deposit lockers for secure storage of valuables. Additionally, banks offer digital services like internet banking, mobile apps, and debit/credit cards, enhancing accessibility and convenience.
Investment and Advisory Services
Banks engage in underwriting securities, investing in government bonds, and offering wealth management services. They provide financial advisory services to businesses for mergers, acquisitions, or capital structuring, leveraging their expertise to guide clients in complex financial decisions.

3. Economic and Social Impact

The primary functions ensure liquidity and credit availability, driving economic growth by supporting consumption and investment. Secondary functions enhance financial inclusion, promote convenience, and foster trust in the banking system. Together, these functions enable banks to act as intermediaries, channeling funds efficiently and supporting economic stability.

Conclusion

Commercial banks are integral to economic ecosystems, with their primary functions of accepting deposits, advancing loans, and creating credit forming the foundation of financial intermediation. Their secondary functions, including agency, utility, and advisory services, broaden their role, enhancing customer experience and economic efficiency. By balancing these functions, banks not only meet the financial needs of individuals and businesses but also contribute significantly to economic development and societal well-being.

Section – B

Question:-6

Explain conditions for buy back of shares.

Answer:

Conditions for Buy-Back of Shares

A buy-back of shares is a corporate action where a company repurchases its own shares from shareholders, reducing the total number of shares outstanding. This process enhances shareholder value, improves financial ratios, and optimizes capital structure. However, it is subject to stringent conditions to ensure fairness, transparency, and compliance with regulatory frameworks, particularly under the Companies Act, 2013, and SEBI (Buy-Back of Securities) Regulations, 2018, in India.
A company must be authorized by its Articles of Association to undertake a buy-back. If not, the articles must be amended. The buy-back must comply with Section 68 of the Companies Act, 2013, which permits companies to use free reserves, securities premium, or proceeds from fresh share issuance (excluding the same class of shares) for the buy-back. The aggregate value of shares repurchased cannot exceed 25% of the company’s paid-up share capital and free reserves in a financial year. For buy-backs exceeding 10% of this limit, shareholder approval via a special resolution is mandatory, while smaller buy-backs (up to 10%) require only board approval.

2. Financial and Operational Conditions

The debt-equity ratio post-buy-back must not exceed 2:1, ensuring the company maintains financial stability. The shares to be bought back must be fully paid-up, preventing partial claims. The buy-back must be completed within one year from the date of board or shareholder approval, ensuring timely execution. Additionally, a cooling-off period prohibits further buy-backs for one year after the closure of a previous buy-back, preventing market manipulation.

3. Procedural and Compliance Obligations

For listed companies, SEBI regulations mandate a public announcement and filing with stock exchanges, detailing the buy-back method (e.g., tender offer or open market purchase). A letter of offer must be sent to shareholders, and an escrow account must be maintained to secure funds. The company must also ensure that the buy-back does not lead to delisting unless explicitly intended. Post-buy-back, the repurchased shares must be extinguished within seven days to avoid misuse.

Conclusion

The buy-back of shares is a strategic tool for capital management, governed by strict conditions to protect stakeholders. By adhering to legal, financial, and procedural requirements, companies ensure transparency and maintain investor confidence while optimizing their financial structure.

Question:-7

From the following information, you are required to calculate the value of Goodwill by Capitalization Method:

1) Capitalization of Actual Average Profit

2) Capitalization of Super Profit

a. Actual Average Profit Rs. 60,000

b. Normal Rate of Return 10%

c. Actual Capital Employed Rs. 4,50,000

Answer:

Calculation of Goodwill by Capitalization Method

1. Capitalization of Actual Average Profit

Goodwill = Capitalized Value of Average ProfitActual Capital Employed
  • Capitalized Value of Average Profit
    Capitalized Value = Actual Average Profit Normal Rate of Return × 100 Capitalized Value = Actual Average Profit Normal Rate of Return × 100 “Capitalized Value”=(“Actual Average Profit”)/(“Normal Rate of Return”)xx100\text{Capitalized Value} = \frac{\text{Actual Average Profit}}{\text{Normal Rate of Return}} \times 100Capitalized Value=Actual Average ProfitNormal Rate of Return×100
    = 60 , 000 10 × 100 = 6 , 00 , 000 = 60 , 000 10 × 100 = 6 , 00 , 000 =(60,000)/(10)xx100=6,00,000= \frac{60,000}{10} \times 100 = 6,00,000=60,00010×100=6,00,000
  • Goodwill
    Goodwill = Capitalized Value Actual Capital Employed Goodwill = Capitalized Value Actual Capital Employed “Goodwill”=”Capitalized Value”-“Actual Capital Employed”\text{Goodwill} = \text{Capitalized Value} – \text{Actual Capital Employed}Goodwill=Capitalized ValueActual Capital Employed
    = 6 , 00 , 000 4 , 50 , 000 = 1 , 50 , 000 = 6 , 00 , 000 4 , 50 , 000 = 1 , 50 , 000 =6,00,000-4,50,000=****₹1,50,000****= 6,00,000 – 4,50,000 = **₹1,50,000**=6,00,0004,50,000=1,50,000

2. Capitalization of Super Profit

Goodwill = Super Profit × (100 / Normal Rate of Return)
  • Normal Profit (Expected Profit at NRR)
    Normal Profit = Capital Employed × NRR 100 Normal Profit = Capital Employed × NRR 100 “Normal Profit”=”Capital Employed”xx(“NRR”)/(100)\text{Normal Profit} = \text{Capital Employed} \times \frac{\text{NRR}}{100}Normal Profit=Capital Employed×NRR100
    = 4 , 50 , 000 × 10 100 =₹ 45 , 000 = 4 , 50 , 000 × 10 100 =₹ 45 , 000 =4,50,000 xx(10)/(100)=₹45,000= 4,50,000 \times \frac{10}{100} = ₹45,000=4,50,000×10100=₹45,000
  • Super Profit
    Super Profit = Actual Avg. Profit Normal Profit Super Profit = Actual Avg. Profit Normal Profit “Super Profit”=”Actual Avg. Profit”-“Normal Profit”\text{Super Profit} = \text{Actual Avg. Profit} – \text{Normal Profit}Super Profit=Actual Avg. ProfitNormal Profit
    = 60 , 000 45 , 000 =₹ 15 , 000 = 60 , 000 45 , 000 =₹ 15 , 000 =60,000-45,000=₹15,000= 60,000 – 45,000 = ₹15,000=60,00045,000=₹15,000
  • Goodwill
    Goodwill = Super Profit × ( 100 NRR ) Goodwill = Super Profit × 100 NRR “Goodwill”=”Super Profit”xx((100)/(“NRR”))\text{Goodwill} = \text{Super Profit} \times \left( \frac{100}{\text{NRR}} \right)Goodwill=Super Profit×(100NRR)
    = 15 , 000 × ( 100 10 ) = 1 , 50 , 000 = 15 , 000 × 100 10 = 1 , 50 , 000 =15,000 xx((100)/(10))=****₹1,50,000****= 15,000 \times \left( \frac{100}{10} \right) = **₹1,50,000**=15,000×(10010)=1,50,000

Final Result

Both methods yield the same goodwill value:
Goodwill = ₹1,50,000
This indicates consistency in valuation, confirming that the business’s earning capacity justifies the goodwill amount.

Question:-8

Differentiate between amalgamation and absorption.

Answer:

Differentiation Between Amalgamation and Absorption

Amalgamation and absorption are corporate restructuring processes where companies combine or merge, but they differ in their structure, outcomes, and operational implications. Both processes aim to enhance efficiency, expand market presence, or achieve economies of scale, yet they involve distinct mechanisms and consequences for the entities involved.

1. Conceptual Overview

Amalgamation occurs when two or more companies merge to form a new entity, with all original companies ceasing to exist as separate legal entities. The assets, liabilities, and operations of the merging companies are transferred to a newly created company, which issues shares to the shareholders of the transferor companies. For example, if Company A and Company B amalgamate, they form a new entity, Company C, which assumes their combined operations.
Absorption, in contrast, involves one company (the transferee) taking over another (the transferor), with the transferor company being dissolved and its operations integrated into the existing transferee company. The absorbing company retains its identity and legal existence, while the absorbed company ceases to exist. For instance, if Company X absorbs Company Y, Company Y is dissolved, and its assets and liabilities are merged into Company X.

2. Key Differences

Entity Status
In amalgamation, all original companies lose their individual identities to form a new entity, whereas in absorption, the transferee company continues its operations under its existing name and structure, absorbing the transferor’s business.
Shareholder Impact
Amalgamation results in shareholders of all merging companies receiving shares in the new entity, proportionate to the agreed terms. In absorption, shareholders of the absorbed company typically receive shares or other consideration from the absorbing company, which continues to operate.
Accounting Treatment
Amalgamation may be accounted for as a merger (pooling of interests) or purchase, depending on the terms, with assets and liabilities combined at book or fair values. Absorption is generally treated as a purchase, with the absorbed company’s assets and liabilities recorded at fair value in the transferee’s books.

Conclusion

Amalgamation creates a new entity through the merger of multiple companies, while absorption involves one company subsuming another, retaining its identity. Both processes streamline operations but differ in legal, operational, and accounting outcomes, impacting stakeholders and corporate structures uniquely.

Question:-9

Explain the books of account generally kept by the Bank.

Answer:

Books of Account Generally Kept by Banks

Banks, as financial intermediaries, maintain a comprehensive set of books of account to record their diverse transactions, ensure regulatory compliance, and provide accurate financial reporting. These books are tailored to capture the unique nature of banking operations, including deposits, loans, investments, and ancillary services. They are maintained in accordance with statutory requirements and accounting standards, ensuring transparency and accountability.

1. Principal Books of Account

Banks maintain several key ledgers to record their core operations. The General Ledger serves as the primary book, consolidating all financial transactions, including assets, liabilities, income, and expenses. It provides a summarized view of the bank’s financial position. Subsidiary ledgers include the Deposit Ledger, which tracks customer deposits (savings, current, and fixed deposits) with details of account balances and interest accruals. The Loan Ledger records details of loans advanced, including principal, interest, and repayment schedules. The Investment Ledger captures transactions related to government securities, bonds, and other investments, tracking purchases, sales, and interest income. Additionally, the Cash Book records daily cash transactions, including receipts and payments at counters and ATMs, ensuring accurate cash flow tracking.

2. Specialized Registers and Records

Beyond principal ledgers, banks maintain specialized registers to manage specific activities. The Bills Register tracks bills of exchange and promissory notes, recording discounts and collections. The Foreign Exchange Register documents transactions in foreign currencies, including remittances and trade financing. The Fixed Assets Register details the bank’s tangible assets, such as buildings and equipment, with depreciation schedules. The Customer Transaction Register logs individual customer transactions, ensuring accurate account updates. Banks also maintain a Suspense Account for temporary entries pending clarification and a Clearing Register for transactions processed through clearing houses.

3. Statutory and Compliance Records

Banks are required to maintain records mandated by regulatory bodies, such as the Reserve Bank of India. These include the Profit and Loss Account and Balance Sheet, prepared annually to reflect financial performance and position. The Statutory Reserve Ledger tracks reserves mandated under banking regulations. Additionally, banks keep detailed records of non-performing assets, provisions, and compliance with capital adequacy norms.

Conclusion

The books of account maintained by banks, including general and subsidiary ledgers, specialized registers, and statutory records, ensure meticulous tracking of financial activities. These records support operational efficiency, regulatory compliance, and transparent reporting, enabling banks to manage risks and serve stakeholders effectively.

Question:-10

What are the special features of Profit and Loss Account of a Company?

Answer:

Special Features of a Company’s Profit and Loss Account

The Profit and Loss (P&L) Account of a company is a critical financial statement that summarizes revenues, expenses, and profits over a specific period, reflecting its operational and financial performance. Unlike other financial statements, the P&L account has distinct features tailored to corporate entities, ensuring compliance with accounting standards and providing stakeholders with insights into profitability.

1. Structure and Presentation

The P&L account is structured to present a clear flow of financial performance, typically divided into revenue, expenses, and profit sections. It begins with Revenue from Operations, capturing income from core business activities, such as sales or services. Other income, like interest or dividends, is separately reported to distinguish non-operational earnings. Expenses are categorized into direct costs (e.g., cost of goods sold), operating expenses (e.g., salaries, rent), and finance costs (e.g., interest on loans). The statement culminates in Net Profit or Loss, calculated after accounting for taxes and exceptional items, providing a comprehensive view of profitability.

2. Compliance with Accounting Standards

The P&L account adheres to accounting standards, such as Ind AS 1 or IFRS, ensuring uniformity and transparency. Companies must present the statement in a prescribed format, often as per Schedule III of the Companies Act, 2013, in India. This mandates specific disclosures, such as depreciation, employee benefits, and tax expenses, ensuring comparability across periods and entities. Exceptional or extraordinary items, like gains or losses from asset sales, are separately disclosed to avoid distorting operational performance.

3. Focus on Profit Appropriation

A unique feature is the Appropriation Section, which details how net profit is distributed. This includes transfers to reserves (e.g., general reserve, statutory reserve), dividend declarations, and retained earnings carried forward to the balance sheet. This section highlights the company’s policy on profit retention versus shareholder distribution, crucial for assessing financial strategy.

4. Analytical Insights and Ratios

The P&L account facilitates the calculation of key financial ratios, such as gross profit margin, operating margin, and net profit margin, enabling stakeholders to evaluate efficiency and profitability. It also reflects trends in revenue growth and cost management, aiding strategic decision-making.

Conclusion

The P&L account of a company is distinguished by its structured presentation, adherence to accounting standards, focus on profit appropriation, and utility in financial analysis. These features ensure it serves as a vital tool for assessing a company’s operational success and guiding stakeholder decisions.

Section – C

Question:-11

Asea Ltd. Issued 5,000 14% debentures of Rs. 100 each at a discount of 6% on January 1, 2016. The entries amount is payable on application. These debentures are redeemable at a premium of 5%. The interest on debentures is payable annually on December 31 each year and any loss on their issue is to be written off in three years. Give Journal entries for the above in the books of the Company.

Answer:

Journal Entries for Issue and Redemption of Debentures by Asea Ltd.

Asea Ltd. issued 5,000 14% debentures of Rs. 100 each at a 6% discount on January 1, 2016, with the entire amount payable on application. The debentures are redeemable at a 5% premium, with interest payable annually on December 31. The loss on issue is to be written off over three years. Below are the journal entries in the books of Asea Ltd., reflecting these transactions and adhering to accounting principles.

1. Issue of Debentures (January 1, 2016)

The debentures are issued at a 6% discount, so the issue price per debenture is Rs. 100 × (1 – 0.06) = Rs. 94. Total proceeds for 5,000 debentures = 5,000 × Rs. 94 = Rs. 4,70,000. The nominal value is 5,000 × Rs. 100 = Rs. 5,00,000. The loss on issue includes the discount (Rs. 30,000) and the premium on redemption (5,000 × Rs. 5 = Rs. 25,000), totaling Rs. 55,000.
Journal Entry:
Debit: Bank A/c Rs. 4,70,000
Debit: Loss on Issue of Debentures A/c Rs. 55,000
Credit: 14% Debentures A/c Rs. 5,00,000
Credit: Premium on Redemption of Debentures A/c Rs. 25,000
(To record issue of 5,000 debentures at 6% discount, redeemable at 5% premium)

2. Payment of Interest (December 31, 2016)

Annual interest = 5,000 × Rs. 100 × 14% = Rs. 70,000.
Journal Entry:
Debit: Debenture Interest A/c Rs. 70,000
Credit: Bank A/c Rs. 70,000
(To record payment of 14% interest on debentures)

3. Transfer of Interest to Profit and Loss Account (December 31, 2016)

The interest expense is transferred to the Profit and Loss Account.
Journal Entry:
Debit: Profit and Loss A/c Rs. 70,000
Credit: Debenture Interest A/c Rs. 70,000
(To transfer debenture interest to Profit and Loss Account)

4. Writing Off Loss on Issue (December 31, 2016)

The loss on issue (Rs. 55,000) is to be written off over three years, so the annual write-off = Rs. 55,000 ÷ 3 = Rs. 18,333.33 (rounded to Rs. 18,333 for simplicity).
Journal Entry:
Debit: Profit and Loss A/c Rs. 18,333
Credit: Loss on Issue of Debentures A/c Rs. 18,333
(To write off one-third of the loss on issue of debentures)

Conclusion

The journal entries for Asea Ltd. accurately capture the issuance of 5,000 14% debentures at a 6% discount, the annual interest payment, and the write-off of the loss on issue over three years. These entries ensure proper accounting for the financial obligations, including the premium on redemption and interest expenses, maintaining compliance with financial reporting standards. The same interest and write-off entries would repeat for 2017 and 2018, with the final redemption entry recorded when the debentures are redeemed.

Question:-12

Write the short notes on the following:

a) Preliminary Expenses

b) Minority Interest

c) Disposal of Non-Banking Assets

d) Internal Reconstruction

e) Non-Performing Assets

Answer:

Short Notes on Financial Concepts

a) Preliminary Expenses

Preliminary expenses are costs incurred during the formation or incorporation of a company, such as legal fees, registration charges, stamp duties, and expenses for drafting the memorandum and articles of association. These are one-time expenses essential for establishing the legal and operational framework of the company. In accounting, preliminary expenses are treated as intangible assets and recorded under the head of "Miscellaneous Expenditure" on the balance sheet. They are typically written off over a period (e.g., 3–5 years) through the Profit and Loss Account, as they do not generate future economic benefits directly. The write-off is debited to the Profit and Loss Account and credited to the Preliminary Expenses Account, ensuring gradual amortization. Proper accounting of these expenses ensures compliance with financial reporting standards and reflects the company’s initial setup costs transparently.

b) Minority Interest

Minority interest refers to the portion of a subsidiary’s equity that is not owned by the parent company, typically arising in consolidated financial statements when the parent holds less than 100% of the subsidiary’s shares. It represents the claim of minority shareholders on the subsidiary’s net assets and profits. In the consolidated balance sheet, minority interest is shown as a separate component under equity, calculated as the proportionate share of the subsidiary’s net assets attributable to non-controlling shareholders. In the consolidated Profit and Loss Account, the minority’s share of the subsidiary’s profit or loss is deducted to arrive at the parent’s profit. This ensures fair presentation of the group’s financial position, acknowledging the rights of minority shareholders while consolidating the subsidiary’s financials with the parent’s.

c) Disposal of Non-Banking Assets

Non-banking assets (NBAs) are properties or assets acquired by banks, typically through loan default settlements, such as foreclosed properties or assets taken over in lieu of debt repayment. Banks are not permitted to hold NBAs indefinitely, as their primary function is banking, not asset management. Disposal of NBAs involves selling these assets through auctions, negotiations, or other means to recover dues. The sale proceeds are credited to the Non-Banking Assets Account, and any profit or loss (difference between sale proceeds and carrying value) is transferred to the Profit and Loss Account. Regulatory guidelines, such as those by the Reserve Bank of India, mandate disposal within a specified period (e.g., seven years) to ensure liquidity and prevent banks from engaging in non-core activities, thereby maintaining financial stability.

d) Internal Reconstruction

Internal reconstruction is a financial restructuring process undertaken by a company to reorganize its capital structure without liquidating or merging with another entity. It aims to eliminate accumulated losses, reduce overcapitalization, or realign assets and liabilities. Common methods include reducing share capital, writing off losses against reserves, or revaluing assets to reflect their fair value. Journal entries involve debiting the Share Capital Account and crediting the Capital Reduction Account to absorb losses or adjust liabilities. For example, a company may reduce the face value of shares (e.g., from Rs. 10 to Rs. 5) to offset losses. Internal reconstruction requires shareholder and court approval, ensuring transparency and protection of stakeholder interests. This process strengthens the company’s financial position, enhancing its ability to attract investment and continue operations.

e) Non-Performing Assets

Non-performing assets (NPAs) are loans or advances held by banks or financial institutions where the borrower has failed to make interest or principal payments for a specified period, typically 90 days or more. NPAs are classified as substandard, doubtful, or loss assets based on the duration of default and recoverability. They adversely affect a bank’s profitability, as they cease to generate interest income, requiring provisions to cover potential losses. Banks must maintain a Provision for NPAs Account, debiting the Profit and Loss Account to create reserves. NPAs are managed through recovery mechanisms like restructuring, legal action, or asset sales. Regulatory oversight ensures banks monitor and report NPAs, maintaining adequate capital reserves to mitigate risks, thereby safeguarding financial stability and depositor confidence.

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