Accountancy: CUET Mock Test - 3 - CUET MCQ

Preference shares that allow holders the option to convert them into equity shares are known as Convertible Preference Shares. These shares offer flexibility to investors, enabling them to switch to equity if they foresee potential gains.

• Convertible Preference Shares provide an option for conversion to equity.
• They are attractive to investors seeking potential equity gains.
• This feature adds flexibility to investment strategies.

The correct answer is Rs 2,400.

Key Points Partner's Loans - If Partner's Loan in assets side of balance sheet of firm then Partner take loan from the firm. If Partner's Loan in Liabilities side of balance sheet of firm, then Partner gives loan from the firm. It is treated as a charge against profit.

As the above question is silent about Partnership Deed, Partner is entitled to Interest on loan only. No interest on Capital is allowed

Important PointsInterest on Loan- If any partner has advanced loan to the firm for the purpose of business, Partner shall be entitled to get an interest on the loan amount at the rate of 6 per cent per annum.

In above question, interest on Partner's loan = Partner's Loan x 6/100

=Rs.40,000 x 6/100

=Rs.2,400.

Additional InformationInterest on Capital: No partner is entitled to claim any interest on the amount of capital contributed by him in the firm as a matter of right. However, interest can be allowed when it is expressly agreed to by the partners. Thus, no interest on capital is payable if the partnership deed is silent on the issue.

The correct answer is Rs 330

Key Points

Interest on Drawing : Drawings are the funds taken out by the partners for personal purposes. It's the amount taken out against profit. It is the temporary withdrawal made, which the partners are required to return with interest.

The amount of interest paid by the partners on drawings is determined using the time period for which the money was withdrawn.

• It is attributed to the Profit and Loss Appropriation Account since it is a profit for the company.

• It is a partner expense, hence it is debited to the Partner's Capital Account.

• If it is stated in the Partnership Deed, the partners will be charged interest on the drawing.

Important Points

When equal amounts are withdrawn at the end of every month throughout the year:

Average Period= (no. of months left after first drawings + no. of months left after last drawing)

Average Period = (11+ 0)/2 = 5.5 months

Average Period = (11+0)/2

Interest on drawing = Total Drawings x Rate/ 100 x 5.5/12

Interest on drawing=12000 x 6/100 x 5.5/12 = 330

Hence, Interest on Drawing = 330

Additional Information

​Methods of calculating Interest on Drawing

Simple Method :

Interest on drawings is calculated separately on each amount of drawing from the date of drawing to the end of the accounting period under this technique. Formula of this method are as follows:

Interest on Drawing = Amount of Drawings x Rate of Interest /100 x Months / 12​

Product Method :

(a) When unequal amounts are withdrawn at unequal interval of time, this method is used.

First, the products are computed by multiplying each set of drawings by its duration. After then, the various products are added together, and interest is calculated on the entire amount of products for one month. The benefit of this system is that it eliminates the need for independent calculations each time. The formula of this method is as follows:

Interest on Drawing = Total of Products x Rate of interest /100 x 1/12

(b) When an equal amount are withdrawn at equal interval of time, then interest on drawing can be calculated by following formula:

Interest on drawing = Total amount of drawings x Rate/100 x Average Period /12

Average Period = (no. of months left after first drawing + no. of months left after last drawings)/2

The correct answer is Loss Rs. 4,000.

Key Points In this question, it is given that in agreement it is clearly mentioned that interest on capital will be paid even in case of loss, it means interest on capital will be treated as ''Charge against Profit".

Hence, for calculating interest on capital P&L A/c will be prepared which are as follows:

P&L A/C

Working Note:

Profit for the year is given in the question, i.e., 2,800

and, interest on capital is calculated according to the given rate i.e., 8%

but there is difference on credit side of Rs 10,000 i.e., loss, and it will be distributed according to the profit and loss sharing ratio which is given in the question i.e., 3 : 2

Hence, loss transferred to A's capital a/c = 10,000*3/5 = 6,000

Loss transferred to B's capital A/c = 10,000* 2/5 = 4,000.

the correct answer is Dr. Y's Capital A/c and Cr. X's Capital A/c with Rs.6,000.

Key PointsWhen there is change in partnership between the partners then treatment of goodwill and reserve can be made in two methods:

When partners decides to write off goodwill and reserves completely from balance sheet-Amount of goodwill and reserves will be distributed between among partners in old ratio.

When partners decides to retain goodwill and reserves completely in balance sheet, adjusted amount of goodwill and reserves will be distributed between among partners in sacrifice ratio/gain ratio to partner’s capital account.

Important Points

Adjustment of entry for Goodwill:

Working Note:

Calculation of Sacrifice ratio-

Sacrifice ratio= Old ratio - New ratio

X's share= 3/5 -1/2 = (6-5)/10=1/10 (here sacrifice, will be credited)

Y's Share= 2/5-1/2= (4-5)/10=-1/10 (here gaining, will be debited)

Goodwill of the firm = Rs.60,000

X's share of sacrifice =Rs 60,000 x 1/10 =Rs.6,000.

The correct answer is In profit sharing ratio

Key Points

• When a partner of a firm becomes insolvent, and the firm incurs losses as a result, the losses are typically borne by the remaining partners in their profit sharing ratio.
• The profit sharing ratio determines how profits and losses are distributed among the partners in the partnership agreement.
• The profit sharing ratio may or may not be equal to the capital ratio or the ratio in which partners contributed to the capital of the firm.
• It is common for partnerships to have different profit sharing ratios based on the agreement between the partners, reflecting their respective contributions to the firm's business, efforts, or any other criteria.
• So, when a partner becomes insolvent, the loss is distributed among the remaining partners in proportion to their profit sharing ratios as defined in the partnership agreement.
• The partner's capital contribution or the equal ratio is not necessarily considered when allocating the loss.

The correct answer is (B) and (D) only.

Key Points

• (A) Fixed Assets + Current Assets - Long term liabilities
  • This statement is incorrect.
  • While it combines elements of the balance sheet, it does not accurately reflect the concept of Net Capital Employed, which typically accounts for all capital investments, not just fixed and current assets adjusted by long-term liabilities.
• (B) Non-current Assets + Current Assets - Current liabilities
  • This statement is correct.
  • Net Capital Employed is often calculated to represent the total capital used in the business, which is more accurately reflected by this formula. It considers both non-current and current assets financed by equity and long-term debt, minus current liabilities, giving a clearer picture of the capital employed in the business.
• (C) Fixed Assets + Current Assets - Equity
  • This statement is incorrect.
  • This formula subtracts equity directly from assets, which does not accurately calculate Net Capital Employed. Equity is part of how capital employed is financed, not a deduction from assets to arrive at net capital employed.
• (D) Equity + Debt
  • This statement is correct.
  • This is another accurate representation of Net Capital Employed. It sums up equity and debt, showcasing the total sources of funds employed in the business. It aligns with the concept that Net Capital Employed is essentially the total capital used within a business, coming from these two primary sources.
• (E) Current Assets - Current liabilities
  • This statement is incorrect.
  • While this formula calculates working capital, it does not provide a comprehensive view of Net Capital Employed, as it only considers current assets and liabilities without factoring in non-current assets or long-term financing sources.

Hence, the correct statements that accurately reflect the calculation of Net Capital Employed are (B) Non-current Assets + Current Assets - Current liabilities and (D) Equity + Debt.

The correct answer is Purchase of land by taking loan.

Key Points

• Purchase of land by taking loan:
  • This transaction involves a cash flow, where the company takes a loan (hence, receives cash or its equivalent) and uses it to purchase land.
  • It is a direct financial transaction with an inflow and outflow of cash, marking it as a cash transaction.
  • The nature of this transaction directly impacts the cash position of the company, making it relevant for cash flow statements and financial analysis.

Additional Information

• Purchase of machinery by issue of preference shares:
  • This transaction involves acquiring machinery in exchange for issuing preference shares, which does not involve a direct cash flow.
  • It is a non-cash transaction as it involves an exchange of non-cash assets (machinery) for equity (preference shares), without the immediate inflow or outflow of cash.
• Redemption of Debentures by issuing equity shares:
  • Here, debentures are redeemed or paid off through the issuance of equity shares, again not involving cash as part of the transaction.
  • This is considered a non-cash financing activity since it involves the exchange of financial instruments without affecting the company's cash position.
• Issue of Debentures as collateral security:
  • This transaction involves issuing debentures as security for a loan or another obligation, which does not constitute a cash transaction.
  • It is a financing activity that impacts the company's financial structure but does not directly involve cash inflows or outflows at the time of the transaction.

The correct answer is 30000.

Key Points

• To find out the number of debentures issued, we need to calculate the effective amount received by the vendor after accounting for the discount.
• Since the debentures are issued at a 4% discount, it means for every ₹100 face value of debenture, the company only pays ₹96 (100 - 4% of 100).
• The total purchase consideration is ₹28,80,000. To satisfy this amount entirely through the issuance of debentures at a 4% discount, we divide the total consideration by the amount received per debenture.
• Thus, the calculation is ₹28,80,000 divided by ₹96 (₹100 - ₹4), which equals 30,000.
• Therefore, AB & Co. issued 30,000 debentures to the vendor to fully settle the purchase consideration of ₹28,80,000.

Additional Information

• Issuing debentures at a discount is a common practice to make them more attractive to investors or, in this case, to a vendor as a form of payment. The discount effectively acts as an interest cost of financing for the company.
• Debentures are a type of long-term debt instrument that companies use to raise capital. They are a popular choice for corporate financing due to their fixed interest rates and repayment schedules.

The correct answer is ₹5,00,000.

Key Points

• Capitalisation of Super Profits method is used to calculate the value of goodwill. This method considers the excess profits a firm earns over the expected normal profits.
• First, calculate the normal profits by applying the normal rate of return on the average capital employed. For this case, it is 20% of ₹9,00,000, which equals ₹1,80,000.
• The super profits are then determined by subtracting the normal profits from the average profits. Here, the super profits are ₹2,80,000 (average profits) - ₹1,80,000 (normal profits) = ₹1,00,000.
• To find the value of goodwill, we capitalise the super profits using the normal rate of return. This is done by dividing the super profits by the normal rate of return and multiplying by 100. Thus, the value of goodwill is ₹1,00,000 / 20% = ₹5,00,000.
• This method assumes that the ability to generate super profits will continue into the future, and it provides a valuation based on the present value of these expected excess earnings.

Additional Information

• The normal rate of return is an expected rate of return that investors want from an investment considering its risk level. It is used as a benchmark to evaluate the performance of a business.
• Goodwill represents the value of a company's brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology. It is an intangible asset that arises when a business is acquired for more than the fair value of its net identifiable assets.

The correct answer is ₹4,92,000.

Key Points

• To calculate the total value of the furniture, we start with the fact that Shaniya took 25% of the furniture as part of her retirement settlement.
• Since 25% of the furniture's value equated to a part of Shaniya's capital adjustments, it implies that the remaining balance of her capital (after other adjustments) was compensated through other means.
• The value assigned to the furniture for Shaniya's 25% share must be calculated back to 100% to find the total value of the furniture.
• If 25% of the furniture equals a portion of Shaniya's capital adjustment, we can set up an equation where 25% of the total value of the furniture is part of the equation leading to her final capital adjustment.
• To find the total value, we consider that the sum of money transferred to her loan account, the accepted bill of exchange, and the value of her share in the furniture equals her final capital adjustment amount.
• Given that Shaniya's capital, after adjustments, was ₹4,50,000, and knowing she accepted a bill of exchange for ₹52,000 and had ₹2,75,000 transferred to her loan account, we can deduce the value attributed to the furniture from the total settlement.
• Thus, solving through the provided financial adjustments and considering the 25% share, we find that the total value of the furniture was ₹4,92,000.

Additional Information

• This calculation is crucial in understanding how assets are valued and divided in partnership retirements or dissolutions, reflecting the importance of accurate valuations in financial settlements.
• The process showcases the intricacies involved in partnership settlements, where each partner's share in various assets and liabilities is carefully calculated to ensure a fair distribution.

A) Capital Contribution: The new partner’s investment into the firm.
B) Profit Sharing Ratio: Revised ratio post-admission for profit distribution.
C) Revaluation of Assets: Adjustments to asset/liability values during reconstitution. 
D) Sacrificing Partner: Old partner who sacrifices profit share.

A) Goodwill Adjustment: Compensation paid by the new partner to old partners for goodwill.
B) Incoming Partner's Capital: The amount the new partner invests.
C) Profit Sharing Agreement: Defines profit/loss allocation.
D) Old Partner's Capital: Capital balance of existing partners before adjustments.

A) Premium for Goodwill: Amount paid by the new partner to old partners for their share of goodwill.
B) New Partner's Capital: The contribution made by the new partner for ownership.
C) Profit Sharing Ratio: Post-admission profit distribution ratio. 
D) Revaluation of Assets: Adjusting asset values to current worth during admission.

A) Goodwill Treatment: When a partner retires, their share of goodwill is credited to their capital account as compensation for their contribution to the firm’s goodwill. This matches (I) "Credited to Retiring Partner's Capital A/c."
B) Revaluation Account: This account is prepared to adjust the book values of assets and liabilities to their fair market values at the time of retirement, with gains or losses shared among partners. Matches (II) "Adjusts Assets and Liabilities to Fair Value."
C) Gaining Ratio: The gaining ratio is the proportion in which remaining partners increase their profit shares
after the retiring partner’s exit, calculated as the difference between their new and old ratios. Matches (III) "New Ratio - Old Ratio."
D) Executor’s Account: If a partner dies (contextually similar to retirement in some cases), the final amount due is transferred to the executor’s account for settlement with legal heirs. In retirement, this can apply if death is assumed; otherwise, it’s a settlement account. Matches (IV) "Balance transferred to Legal Heirs."

A) New Profit Sharing Ratio: After retirement, the remaining partners agree on a new ratio to share profits, replacing the old ratio. Matches (II) "Remaining partners’ new agreed ratio."
B) Balance in Retiring Partner’s Capital A/c: The final balance (after adjustments like goodwill, revaluation) is settled either by cash payment or transferred to a loan account if not paid immediately. Matches (I) "Paid in cash or transferred to Loan A/c."
C) Adjustment for Loss on Revaluation: Any loss from revaluing assets/liabilities is debited to the partners’ capital accounts in their old profit-sharing ratio. Matches (III) "Debited to Partners’ Capital Accounts."
D) Capital Brought in by Continuing Partners: To maintain the firm’s capital structure or settle the retiring partner, remaining partners may contribute additional capital. Matches (IV) "To Maintain Agreed Capital Structure."

Financial statements are primarily prepared to assist management and other external stakeholders in making informed decisions about the business’s performance and financial position.

The Statement of Profit and Loss is one of the key financial statements used to determine a company’s profitability during a specified period.

Financial statements provide vital information to various stakeholders, including investors, creditors, and government, for decision-making.

Financial statements are the final output of the accounting process, which involves recording, summarizing, and reporting financial transactions.

The Statement of Profit and Loss and Balance Sheet are essential financial statements that summarize the company’s financial performance and position.

Financial statements are primarily based on the historical cost principle, meaning transactions are recorded at their original cost rather than current market value.

Personal judgments are essential for estimating provisions like depreciation and doubtful debts, as these often depend on the accountant’s professional discretion.

Accounting conventions help standardize the preparation of financial statements, making them more understandable and comparable across companies.

Hedging is a financial strategy used to reduce risk, not an accounting convention like conservatism or realization.

The going concern assumption presumes that a company will continue operating in the future, which justifies recording assets at historical cost.

When the purchase consideration exceeds the net worth of a company being acquired, the difference is accounted for as goodwill.

• The Goodwill Account is debited because this excess amount represents the value of intangible assets such as reputation or brand strength.
• This entry reflects the additional value the acquirer believes the acquired company will bring beyond its tangible assets.
• Goodwill is an important aspect in accounting for mergers and acquisitions.

Applicants of 40,000 shares allotted 20,000 shares Ratio 40,000 : 20,000 = 2:1

f the company fails to repay the application money within the said 60 days period, it shall be liable to repay that money with interest @ 15% p.a. from the expiry of the 60th day.

Applied shares = 1,200 x 80,000 / 60,000
= 1,600