Unit 1: Question & Answer - Bill Of Exchange and Promissory Notes | Principles and Practice of Accounting - CA Foundation PDF Download

SUMMARY

A Bill of Exchange is defined as an “instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument”.

A promissory note is an instrument in writing, not being a bank note or currency note containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the orderof a certain person. Under Section 31(2) of the Reserve Bank of India Act a promissory note cannot bemade payable to bearer.
A party which receives a Promissory Note or receives an accepted Bill of Exchange will treat it as a new asset under the name of Bills receivable. A party which issues a Promissory Note or accepts a Bill of Exchange will treat it as new liability under the heading of Bills Payable.

Multiple Choice Questions
Ques 1: On 1.1.2017, A draws a bill on B for ₹1,20,000 for 3 months’ maturity date of the bill will be:

(a) 1.4.2017
(b) 3.4.2017
(c) 4.4.2017
Ans: c

Ques 2: On 16.6.2016 P draws a bill on Q for ₹1,25,000 for 30 days. 19th July is a public holiday, maturity date of the bill will be:

(a) 19th July
(b) 18th July
(c) 17th July
Ans: b

Ques 3: PQ draws a bill on XY for ₹130,000 on 1.1.2017. X accepts the same on 4.1.2017 for period of 3 months after date. What will be the maturity date of the bill:

(a) 4.4.2017
(b) 3.4.2017
(c) 7.4.2017
Ans: a

Ques 4: A draws a bill on B. A endorsed the bill to C. The payee of the bill will be

(a) A
(b) B
(c) C
Ans: c

Ques 5: A bill of ₹120,000 was discounted by Saras with the banker for ₹1,18,800. At maturity, the bill returned dishonoured, noting charges ₹ 200. How much amount will the bank deduct from Saras’s bank balance at the time of such dishonour?

(a) ₹1,20,000
(b) ₹1,18,800
(c) ₹1,20,200
Ans: c

Ques 6: X draws a bill on Y for ₹300,000 on 1.1.2016 for 3 months after sight, date of acceptance is 6.1.2016. Maturity date of the bill will be:

(a) 8.4.2016
(b) 9.4.2016
(c) 10.4.2016
Ans: b

Ques 7: X sold goods to Y for ₹5,00,000. Y paid cash ₹4,30,000. X will grant 2% discount on balance, and Y request X to draw a bill for balance, the amount of bill will be:

(a) ₹ 98,000
(b) ₹ 68,000
(c) ₹ 68,600
Ans: c

Ques 8:On 1.1.2017, X draws a bill on Y for ₹ 5,00,000 for 3 months. X got the bill discounted 4.1.2017 at 12%rate. The amount of discount on bill will be:

(a) ₹ 15,000
(b) ₹16,000
(c) ₹18,000
Ans: a

Ques 9: Mr. Jay draws a bill on Mr. John for ₹3,00,000 on 1.1.2017 for 3 months. On 4.2.2017, John got the bill discounted at 12% rate. The amount of discount will be:

(a)  ₹9,000
(b) ₹ 6,000
 (c) ₹3,000
Ans: b

Ques 10: XZ draws a bill on YZ for  ₹2,00,000 for 3 months on 1.1.2017. The bill is discounted with banker at a charge of ₹1,000. At maturity the bill return dishonoured. In the books of XZ, for dishonour, the bank account will be credited by:

(a) ₹199,000
(b) ₹ 200,000
(c) ₹ 201,000
Ans: b

Ques 11: On 1.1.2017, XA draws a bill on YB for ₹ 1,00,000. At maturity YB request XA to renew the bill for 2 month at 12% p.a. interest. Amount of interest will be:

(a) ₹ 2,000 (b) ₹ 1,500 (c) ₹ 1,800
Ans: a

Ques 12: A bill of exchange is drawn by a

(a) Creditor
(b) Debtor
(c) Debenture holder
Ans: a

Ques 13: At the time of drawing a bill, the drawer credits

(a) Bills Receivables A/c

(b) Bills Payable A/c

(c) Debtor’s A/c
Ans: c

Ques 14: A promissory note is made by a

(a) Seller
(b) Purchaser
(c) Endorsee
Ans: b

Ques 15: A bill of exchange contains

(a) An unconditional order

(b) A promise

(c) A request to deliver the goods
Ans: a

Ques 16: A promissory note contains

(a) An unconditional order

(b) A promise

(c) A request to deliver the goods
Ans: b

Ques 17: The rebate on the bill shows that

(a) It has been endorsed

(b) It has been paid after the date of maturity

(c) It has been paid before the date of maturity
Ans: c

Ques 18: Notary Public may charge his fee from the

(a) Holder of bill of exchange

(b) Drawer

(c) None
Ans: a

Theory Questions
Ques 1: Write short notes on:
(a) Accommodation bill.
(b) Renewal of bill.
(c) Noting charges.
Ans: (a) Bills of Exchange are usually drawn to facilitate trade transmission, that is, bills are meant to finance actual purchase and sale of goods. But the mechanism of bill can be utilised to raise finance also.
When bills are used for such a purpose, they are known as accommodation bills.
(b) When the acceptor of a bill finds himself in financial straits to honour the bill on the due date, then he may request the drawer to cancel the original bill and draw on him a fresh bill for another period. And if the drawer agrees, a new bill in place of the original bill may be accepted by the drawee for another period. This is called the renewal of bill.
(c) The charges paid to Notary public for notify the dishonour are noting charges. Refer para 1.12 for details.

Ques 2: What is bill of exchange? How does it differ from Promissory Note?
Ans: A bill of exchange has been defined as “an instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of certain person or to the bearer of the instrument”. When such an order is accepted by the drawee, it becomes a valid bill of exchange. A promissory note is an instrument in writing (not being a bank note or a government currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

A promissory note needs no acceptance, as the debtor himself writes the document promising to pay the stated amount. Like bills of exchange, promissory notes are also negotiable instruments, and can be transferred by endorsement. In case of bill of exchange, the drawer and the payee may be the same person but in case of a promissory note, the maker and the payee cannot be the same person.

Practical Questions
Ques 1: On 1st January, 2016, A sells goods for `10,000 to B and draws a bill at three months for the amount.B accepts it and returns it to A. On 1st March, 2016, B retires his acceptance under rebate of 12% per annum. Record these transactions in the journals of B.
Ans:

Working Note :

Calculation of rebate:

10,000 x 12/100 x 1/12 = ₹100

 Ques 2: A draws upon B three Bills of Exchange of  ₹3,000, ₹ 2,000 and ₹ 1,000 respectively. A week later his first bill was mutually cancelled, B agreeing to pay 50% of the amount in cash immediately and for the balance plus interest ₹100, he accepted a fresh Bill drawn by A. This new bill was endorsed to C whodiscounted the same with his bankers for ₹1,500. The second bill was discounted by A at 5%. This bill on maturity was returned dishonoured (nothing charge being ₹30). The third bill was retained till maturity when it was duly met. Give the necessary journal entries recording the above transactions in the books of A.
Ans:

Note: It is assumed that the bill for ₹1,600 has not yet fallen due for payment

 Ques 3: Journalize the following in the books of Don:

(i) Bob informs Don that Ray’s acceptance for ₹ 3,000 has been dishonoured and noting charges are ₹40. Bob accepts ₹1,000 cash and the balance as bill at three months at interest of 10%.Don accepts from Ray his acceptance at two months plus interest @ 12% p.a.

(ii) James owes Don ₹ 3,200; he sends Don’s own acceptance in favour of Ralph for ₹ 3,160; in full settlement.

(iii) Don meets his acceptance in favour of Singh for ₹ 4,500 by endorsing John’s acceptance for ₹4,450 in full settlement.

(iv) Ray’s acceptance in favour of Don retired one month before due date, interest is taken at the rate of 6% p.a.