Accountancy: CUET Mock Test - 6 - CUET MCQ

The correct answer is Employee stock option scheme.

Key Points

Employees' Stock Option Plan

• Under this plan, the company provides employees with an option to take shares at a future date.
• ​It is a grant to an employee giving the right to buy a certain number of shares in the company's stock for a set price.
• These shares are purchased by employees at price below market price, or in other words, at discounted price.
• It motivates the employee to be committed to the company for the long term.
• The employees have to wait for a certain time period which is known as the vesting period to claim the benefits.

Additional Information

Stock Appreciation Right

• It refers to the right to be paid compensation equivalent to an increase in the company's common stock price over a base or the value of appreciation of the equity shares currently being traded on the public market.

Employee Stock Purchase Plan

• It allows an employee to purchase company stock at a discounted price.

Premium price options:

• A premium priced option plan is a great way to incentivise key employees.
• Under a premium priced option plan, a company issues the right to purchase shares
  • at a future point in time
  • at a specified exercise price
  • subject to vesting conditions

Key PointsGearing ratio

• it is the ratio between fixed income bearing funds and equity shareholders' funds.
• Gearing ratio are calculated to find out leverage in the company i.e. how much debt and how much equity is employed in the company and in which proportion.
• It is useful for risk assessment by the management of the company.
• Gearing ratio is related to equity and debt proportion of the firm.

Important Points

Gearing Ratio =

• Short term funds: These are the funds the repayment of which will be done within 1 year.
• Long term funds: These are the funds which will be repaid after 1 year or more.
• Shareholder's Fund: Shareholders' funds refer to the amount of equity in a company, which belongs to the shareholders. It is also called net worth.
• Bank overdraft is a short-term financing option for drawing money in excess of the bank balance.

The correct answer is ​A, B, C, D.

Key Points A common-size income statement expresses each line item as a percentage of net sales. Here's the breakdown of the ratios in the correct sequence:

• A. Gross profit margin: Gross profit margin is calculated by dividing gross profit by net sales and represents the percentage of revenue left after deducting the cost of goods sold. It is typically presented as one of the first ratios on a common-size income statement, hence it appears at the top.
• B. Operating profit margin: Operating profit margin is calculated by dividing operating profit by net sales. It indicates the profitability of the company's core operations before considering interest and taxes. It appears after the gross profit margin.
• C. Net profit margin: Net profit margin is calculated by dividing net income by net sales. It represents the percentage of revenue that remains as profit after accounting for all expenses, including taxes and interest. It appears after the operating profit margin.
• D. Earnings per share: Earnings per share (EPS) represents the portion of the company's profit allocated to each outstanding share of common stock. It is not a ratio that directly appears on a common-size income statement, as it relates to the number of shares outstanding rather than the percentage of revenue.

Therefore, the correct sequence is A (Gross profit margin), B (Operating profit margin), C (Net profit margin), and D (Earnings per share), making option B the correct answer.

The balance sheet provides a snapshot of a company's financial position, showing assets, liabilities, and equity at a specific moment.

Assets on the balance sheet are classified into current and non-current categories, based on how quickly they are expected to be converted into cash.

The balance sheet is key to evaluating the company's financial stability and liquidity, helping users understand its ability to meet obligations.

Revenue is reported in the Statement of Profit and Loss, not in the balance sheet, which focuses on assets, liabilities, and equity.

Financial statement analysis involves simplifying and interpreting data, not gathering raw data, which is typically handled by accountants.

Financial statement analysis is the method used to evaluate a firm's financial health by examining its financial statements.

A) Realisation Account: The Realisation Account is used during dissolution to record the realization of assets, payment of liabilities, and expenses. At the end, any remaining balance (assets minus liabilities) is transferred to partners’ capital accounts. Description (I) fits this role: "Account used to transfer the remaining assets and liabilities when the firm is dissolved."
B) Transfer of liabilities: In dissolution, liabilities are not "transferred" to another entity but are settled. However, in the context of the Realisation Account, liabilities are brought into the account by crediting them (as they are obligations). Description (II) states "Transferred to the credit of Realisation Account," which aligns with this accounting treatment.
C) Payment of creditors: Creditors are paid from the proceeds of asset sales during dissolution. If those proceeds are insufficient, partners may need to contribute from their capital accounts. Description (III) states: "Creditors are paid from the sale of assets and if necessary, the partners' capital accounts," which is an exact match.
D) Realisation Expenses: These are expenses incurred during dissolution (e.g., legal or administrative costs) and are debited to the Realisation Account as they reduce the net realizable amount. Description (IV) states: "Expenses incurred during the dissolution process, typically debited to the Realisation Account," which is a perfect fit.

A) Capital Account: This represents each partner’s contribution or stake in the firm. Matches (I) "Account representing the contribution of each partner to the firm."
B) Profit on Realisation: This is the gain when assets are sold above their book value during dissolution. Matches (II) "The gain resulting from the sale of assets in excess of their book value."
C) Dissolution Expenses: Costs like legal or administrative fees incurred during winding up. Matches (III) "Costs incurred for winding up the firm, including administrative and legal fees."
D) Partner’s Loan Account: This reflects a loan given by a partner to the firm, settled separately during dissolution. Matches (IV) "Amount a partner lends to the firm, which must be settled during dissolution."

A) Transfer of Assets: During dissolution, all assets are transferred to the Realisation Account at their book value. Matches (II) "All assets are transferred at their book value to the Realisation Account."
B) Payment to Partners: After settling liabilities, the remaining balance is distributed to partners. Matches (I) "After liabilities are settled, the remaining balance is paid to the partners."
C) Settlement of Unrecorded Liabilities: These are liabilities not in the books, paid from available funds during dissolution. Matches (III) "Liabilities not previously recorded are paid from available funds."
D) Transfer of Profits or Losses: Profits or losses from realisation are transferred to partners’ capital accounts. Matches (IV) "Profits or losses from the dissolution process are transferred to the partners' capital accounts."

Because it is not related to the admission or retirement of the partners. Goodwill is calculated only during these events.

Key points to consider:

• The profit from the contract will not affect the profit sharing of the partners.
• Goodwill is assessed at the time of partner admission or retirement.
• Thus, this profit is excluded from the calculation of goodwill.

As per the partnership act, if the partnership deed is silent about the things mentioned above so in that case the partners are not entitled for any salary or interest on capital , but as per the provision even if the partnership deed is silent the partner is entitled for an interest @6% on loan or any advance given by him to the firm.

Interest on capital will be paid to the partners if provided for in the agreement but only from profits. Interest on capital is an appropriation and not a charge against profit hence, is provided only to the extent of profits. 

When a firm maintains fixed capital accounts for partners, the capital introduced by partners remains unchanged in the Partners' Capital Account.

All other periodic adjustments like:

• Salary to partners
• Interest on capital
• Interest on drawings
• Drawings
• Share of profits/losses

are recorded in a separate account called the Partners’ Current Account.

This helps in keeping the capital account fixed, while fluctuations in a partner's equity due to these items are tracked in the current account.

A new partner can be admitted in the partnership firm only with the consent of all the existing partners. A new partner cannot be admitted if all existing partners are not ready to admit him as a partner.

Goodwill existing in the old balance sheet of a partnership firm before admitting a new partner will be written off by the old partners in their old profit sharing ratio. A new partner cannot be debited for the same.

Calculation of sacrificing ratio of partners:
Old Ratio = 2:1
New Ratio = 3:1:1
Sacrificing Ratio = A : 2/3 – 3/5 = 1/15
B : 1/3 – 1/5 = 2/15

REPORT ERROR

Retiring or outgoing partner:

A retiring partner is liable for obligations incurred before their retirement. This means:

• The partner remains responsible for any debts or liabilities that arose while they were still part of the firm.
• They are not liable for any new obligations that occur after their retirement.
• If the retiring partner consented to any obligations, they may also be liable for those.

In summary, a retiring partner's liability is limited to obligations incurred prior to their exit from the firm.

To determine the amount transferred to B's loan account upon retirement, follow these steps:

• Calculate B's share of goodwill:

  Goodwill is valued at Rs. 30,000. B's share (2/5) is:

  Rs. 30,000 × (2/5) = Rs. 12,000.

• Determine profit on revaluation:

  The profit on revaluation is Rs. 7,050. B's share (2/5) is:

  Rs. 7,050 × (2/5) = Rs. 2,820.

• Calculate total amount due to B:

  Combine B's share of goodwill and profit on revaluation:

  Rs. 12,000 + Rs. 2,820 = Rs. 14,820.

• Include B's capital balance:

  B's capital balance is Rs. 50,000.

• Account for reserves:

  Balance in reserve is Rs. 15,000. B's share (2/5) is:

  Rs. 15,000 × (2/5) = Rs. 6,000.

• Calculate total amount transferred to B's loan account:

  Add B's capital balance, share of goodwill, profit on revaluation, and share of reserves:

  Rs. 50,000 + Rs. 12,000 + Rs. 2,820 + Rs. 6,000 = Rs. 70,820.

Final Amount: Rs. 70,820 will be transferred to B's loan account.

At the time of retirement of a partner, the firm receives a payment from the insurance company related to the Joint Life Policy taken out for all partners. The correct option is:

• The firm receives the Surrender Value from the insurance company.
• This value represents the amount payable upon the retirement of a partner.
• It is important to note that the Surrender Value is different from the policy amount.

Joint Life Policy is a type of insurance taken by a firm on the lives of:

• All the partners jointly.
• All the partners severely.
• On the life of all the partners and employees of the firm.
• ‘a’ and ‘b’.

The correct answer is D.

Schedule VI to the Companies Act, 1956 deals with the form of Balance Sheet and Profit and Loss Account and classified disclosure to be made therein and it applies uniformly to all the companies registered under the Companies Act, 1956, for the preparation of financial statements of an accounting year.