Easy2Siksha.com
GNDU Question Paper-2023
Bachelor of Commerce
(B.Com) 3
rd
Semester
CORPORATE ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section and the
Fifth question may be attempted from any of the Four sections. All questions carry equal
marks.
SECTION-A
1. A limited company issued a prospectus inviting applications for 2000 shares of Rs. 10
each at a premium of Rs. 2 per share payable as follows: On application Rs. 2; On
allotment Rs. 5 (including premium); On first call Rs. 3 and on Second call Rs. 2.
Applications were received for 3,000 shares and allotments were made pro rata to the
applicants for 2400 shares, the remaining applications being refused. Money overpaid on
applications employed on account of sums due on allotment. X to whom 40 shares were
allotted, failed to pay the allotment money and on his subsequent failure to pay the First
Call, his shares were forfeited. Y, the holder of 60 shares failed to pay the two calls, and
his shares were forfeited after the Second Call had been made.
Of the shares forfeited, 80 shares were sold to Z, credited as fully paid, for Rs. 9 per share,
the whole of X's shares being included. Show Journal and Cash Book entries and the
Balance sheet.
2. What is meant by redemption of debentures? Give accounting treatment of redemption
of debentures out of various sources of finance.
SECTION-B
3. The following is the Balance Sheet of Y Ltd. as on 31st March, 2021:
Easy2Siksha.com
Particulars Rs.
LIABILITIES
Share Capital:
2,50,000 Equity Shares of Rs. 10 each
Rs. 8 per share paid-up 20,00,000
1,00,000, 10% Preference Shares of
Rs. 10 each fully paid-up 10,00,000
Reserves and Surplus:
General Reserves 6,00,000
Statement of, Profit and Loss 8,00,000
Current Liabilities:
Creditors 4,00,000
Workmen's Profit sharing fund 3,00,000
Total 51,00,000
ASSETS
Fixed Assets:
Goodwill 8,00,000
Building 7,00,000
Plant and Machinery 13,00,000
Current Assets:
Stock 7,00,000
Sundry Debtors 9,00,000
Bank Balance 6,60,000
Miscellaneous Expenses:
Preliminary Expenses 40,000
Total 51,00,000
Easy2Siksha.com
X Ltd. decided to absorb the business of Y Ltd. at the respective book value of Assets and
Trade Liabilities except Building which was valued at Rs. 12,00,000 and Plant and
Machinery at Rs. 10,00,000.
The purchase consideration was payable as follows:
(1) Assumption of Trade Liabilities.
(2) Payment of liquidation expenses of Rs. 5,000 and workmen's profit sharing fund at 10%
Premium.
(3) Issue of equity shares of Rs. 10 each fully paid at Rs. 11 per share for every preference
share and every equity share of Y Ltd. and a payment of Rs. 4 per equity share in cash.
Calculate the purchase consideration. Show the necessary ledger accounts in the books of
Y Ltd. and opening journal entries of X Ltd.
4. What is meant by internal reconstruction? Give accounting treatment for alteration of
share capital.
SECTION-C
5. Following are the balances from the books of Everyman's Bank Limited as on March 31,
2016:
Current deposits - Rs. 2,27,50,000
Savings accounts - Rs. 82,60,000
Fixed and time deposits - Rs. 1,75,90,000
Sundry creditors - Rs. 2,28,000
Debts due to banks (secured) - Rs. 61,00,000
Bills receivable being bills for collection - Rs. 90,50,000
Customer's liability for acceptances - Rs. 75,84,000
Rebate on bills discounted - Rs. 7,000
Branch adjustments (credit) - Rs. 22,78,000
Reserve fund - Rs. 62,50,000
Capital (authorised, issued subscribed and paid up)
Easy2Siksha.com
100,000 shares of Rs. 50 each - Rs. 50,00,000
Interest and discount received - Rs. 29,00,000
Exchange and commissions received - Rs. 8,77,000
Profit and Loss Account: Balance as on 1-4-2015-Rs. 4,26,000
Cash in hand- Rs. 6,54,000
Cash at bank - Rs. 30,00,000
Bills for collection - Rs 90,50,000
Liabilities for customer acceptances Rs 75,84,000
Investments:
Government Securities - Rs. 1,70,00,000
Shares Rs. 79,50,000
Interest accrued on investments - Rs 4,37,000
Loan and cash credits Rs. 1,68,50,000
Bills purchased and discounted - Rs. 1,77,50,000
Furniture, Fixtures and Office Equipment - Rs. 2,50,000
Depreciation on assets - Rs. 2,50,000
Interest paid - Rs. 6,00,000
Exchange and commission paid - Rs. 50,000
Salaries-Rs. 12,00,000
Director's fees - Rs. 50,000
Stationery, postage - Rs. 2,00,000
Miscellaneous expenses - Rs. 1,50,000
Land and Building - Rs. 15,00,000
Money at call - Rs. 7,50,000
Non-banking assets - Rs. 25,000
Term loans - Rs. 40,00,000
Prepare the Profit and Loss Account for the year ending March 31, 2016 and Balance Sheet
at that date after taking note of the following:
Easy2Siksha.com
(1) Provision needed for taxation Rs. 5,00.000
(2) Current Account includes Rs. 42,50,000 debit balances being overdraft.
(3) One of the Accounts Rs. 50,000 is doubtful.
During the year; a property was acquired in satisfaction of a claim amounting to Rs. 25,000
and was sold for Rs. 18,000. The loss resulting therefrom remained unadjusted in the
books.
6. Define Non-performing assets. Discuss its classification. Explain legal
provisions regarding NPAs.
SECTION-D
7. Fast Pay Insurance Co. Ltd. has furnished the following information for preparation of
revenue account for fire insurance business for the year ended 31 December, 2016:
Claims admitted but not paid 42,376
Commission paid 50,000
Commission on reinsurance ceded 12,000
Share transfer fees 5,000
Expenses of Managements 78,000
Bad Debts 2,500
Claims Paid 15,000
Profit and Loss Account Appropriation 10,000
Premium received (less reinsurance) 5,52,000
Reserve for unexpired risk as on 1.1.2016 2,30,000
Additional reserves as on 1.1.2016 40,000
Claims outstanding as on 1.1.2016 27,000
Dividend on share capital 18,000
The following information has also been considered:
(i) Premium outstanding at the end of the year Rs. 40,000.
(ii) It is the policy of the company to maintain 50% of the premium towards reserves for
unexpired risks.
Easy2Siksha.com
(iii) Additional reserves at 10% of the premium to be maintained.
8. Prepare final accounts of life insurance company with imaginary figures.
Easy2Siksha.com
GNDU Answer Paper-2023
Bachelor of Commerce
(B.Com) 3
rd
Semester
CORPORATE ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section and the
Fifth question may be attempted from any of the Four sections. All questions carry equal
marks.
SECTION-A
1. A limited company issued a prospectus inviting applications for 2000 shares of Rs. 10
each at a premium of Rs. 2 per share payable as follows: On application Rs. 2; On
allotment Rs. 5 (including premium); On first call Rs. 3 and on Second call Rs. 2.
Applications were received for 3,000 shares and allotments were made pro rata to the
applicants for 2400 shares, the remaining applications being refused. Money overpaid on
applications employed on account of sums due on allotment. X to whom 40 shares were
allotted, failed to pay the allotment money and on his subsequent failure to pay the First
Call, his shares were forfeited. Y, the holder of 60 shares failed to pay the two calls, and
his shares were forfeited after the Second Call had been made.
Of the shares forfeited, 80 shares were sold to Z, credited as fully paid, for Rs. 9 per share,
the whole of X's shares being included. Show Journal and Cash Book entries and the
Balance sheet.
Ans: Start with a short story — imagine a small company, Greenfield Ltd., inviting
neighbours to buy tiny pieces (shares) of the business. The company wanted to issue 2,000
shares of ₹10 each with a premium of ₹2 (so total money per share = ₹12) and the payment
schedule was:
• On Application: ₹2
• On Allotment: ₹5 (this ₹5 includes the ₹2 premium)
• First Call: ₹3
• Second Call: ₹2
But more people wanted a piece than Greenfield expected — 3,000 applications arrived.
The directors decided to allot 2,400 shares pro rata (they allotted more than original
Easy2Siksha.com
invitation; that’s allowed sometimes). The surplus applications (for 600 shares) were
refused; instead of refunding the money, the company used the extra application money to
meet allotment money (the question explicitly says the money overpaid on applications was
employed on allotment).
Two investors caused trouble later:
• X was allotted 40 shares, paid only application money and then refused to pay
allotment and later the First Call. Eventually X’s 40 shares were forfeited.
• Y held 60 shares, paid upto allotment but refused to pay both calls (First and
Second). After Second Call had been made, Y’s 60 shares were forfeited.
Out of the 100 forfeited shares (40 of X + 60 of Y), 80 shares (including all 40 of X’s shares)
were sold to Z as fully paid at ₹9 per share (i.e., Z pays ₹720 for the 80 shares). The
remaining forfeited 20 shares remained forfeited.
Below I explain the accounting in a simple, step-by-step manner and then show the journal
entries, the cash book totals and the final balance sheet. Numbers are kept consistent and
reconciled so you can follow the whole flow.
1) Compute the money flows (quick map)
• Applications received: 3,000 × ₹2 = ₹6,000 (Bank)
• Allotment due (gross): 2,400 × ₹5 = ₹12,000 (this includes premium)
• Securities premium on allotment: 2,400 × ₹2 = ₹4,800
• Allotment capital portion: 2,400 × ₹3 = ₹7,200
• First call due: 2,400 × ₹3 = ₹7,200
• Second call due: 2,400 × ₹2 = ₹4,800
• Total contract amount per allotted share = ₹12 → total for 2,400 = ₹28,800 (2,400 ×
12)
Because directors used overpaid application money for allotment, items are adjusted as
shown in journal entries below.
Defaulters’ specifics:
• X (40 shares): paid only application ₹2 × 40 = ₹80; did not pay allotment or first call;
forfeited before second call.
• Y (60 shares): paid application + allotment = (₹2 + ₹5) × 60 = ₹420; did not pay either
call; forfeited after second call.
Forfeited amounts collected from these two = ₹80 (X) + ₹420 (Y) = ₹500 (This goes into
Share Forfeiture account). Of these forfeited shares, 80 were reissued to Z at ₹9 each, giving
cash ₹720. To make the reissued shares fully paid, some of the forfeiture reserve is
transferred to Share Capital.
Easy2Siksha.com
Finally, the company’s cash position and reserves reconcile perfectly — you’ll see the
Balance Sheet at the end.
2) Journal Entries (narrative → accounting)
(Amounts in ₹)
1. On receipt of applications (3,000 @ ₹2)
Bank A/c Dr. 6,000
To Share Application A/c 6,000
2. On allotment — transfer application money to capital and use oversubscription on
account of allotment
Share Application A/c Dr. 6,000
To Share Capital A/c 4,800 (2,400 shares × ₹2 application credited to capital)
To Share Allotment A/c 1,200 (oversubscription money applied to allotment)
3. Allotment due (2,400 × ₹5) — record allotment called (includes premium)
Share Allotment A/c Dr. 12,000
To Share Capital A/c 7,200 (2,400 × ₹3 — capital portion)
To Securities Premium A/c 4,800 (2,400 × ₹2 — premium)
4. Allotment received (BUT X fails to pay allotment — shortfall included in Calls in
Arrears)
Bank A/c Dr. 10,600
Calls in Arrears A/c Dr. 200 (amount not received on allotment from defaulters)
To Share Allotment A/c 10,800
Explanation: Net Share Allotment balance after step (2) was ₹12,000 – ₹1,200 =
₹10,800 to collect in cash; out of that ₹200 was unpaid (X’s allotment), so cash
actually received = ₹10,600.
5. First Call made (2,400 × ₹3)
Share First Call A/c Dr. 7,200
To Share Capital A/c 7,200
6. First Call received (X and Y default on first call — combined unpaid first call ₹300)
Bank A/c Dr. 6,900
Calls in Arrears A/c Dr. 300
To Share First Call A/c 7,200
7. Second Call made (2,400 × ₹2)
Share Second Call A/c Dr. 4,800
To Share Capital A/c 4,800
8. Second Call received (Y defaults on second call — unpaid ₹120)
Bank A/c Dr. 4,680
Calls in Arrears A/c Dr. 120
To Share Second Call A/c 4,800
9. Forfeiture of X’s 40 shares & Y’s 60 shares (100 shares total):
(Called up amounts on forfeited shares: X = 40 × ₹10 = ₹400 ; Y = 60 × ₹12 = ₹720 ;
Easy2Siksha.com
total = ₹1,120)
Share Capital A/c Dr. 1,120
To Calls in Arrears A/c 620 (the unpaid calls on those shares that were already in
calls-in-arrears)
To Share Forfeiture A/c 500 (amounts actually paid by X & Y on those shares: ₹80 +
₹420)
Check: 1120 = 620 (unpaid) + 500 (paid) — so the entry balances.
10. Re-issue 80 forfeited shares to Z as fully paid at ₹9 per share (80 × ₹9 = ₹720)
Bank A/c Dr. 720
Share Forfeiture A/c Dr. 80 (transfer of forfeiture reserve to make shares fully paid)
To Share Capital A/c 800 (80 × ₹10 nominal)
Explanation: Nominal capital created on re-issue = ₹800. Cash collected from Z =
₹720; the shortfall ₹80 is met by reducing the Share Forfeiture reserve.
3) Cash Book summary (receipts column / simplified)
Receipts into Bank (₹):
• From applications (3,000 × ₹2) = 6,000
• From allotment receipts (net) = 10,600
• From first call receipts = 6,900
• From second call receipts = 4,680
• From re-issue to Z = 720
Total Bank Receipts = ₹28,900
(You can check this equals the sum of equity items in the balance sheet — that ensures
everything balances.)
4) Closing balances and the Balance Sheet
Important ledger balances after all entries:
• Share Capital (after all calls, forfeiture and re-issue) = ₹23,680
(This is the net Share Capital shown on books after debiting for forfeiture ₹1,120 and
crediting re-issue ₹800: 24,000 − 1,120 + 800 = 23,680.)
• Securities Premium (credit) = ₹4,800
• Share Forfeiture (remaining balance after using ₹80 on re-issue) = ₹420 (₹500 initial
forfeiture less ₹80 used)
• Bank (Cash) = ₹28,900
Easy2Siksha.com
Now the Balance Sheet (extract, equity & assets only — as there are no other liabilities in
this problem):
Balance Sheet (extract)
As at date
Liabilities / Equity
• Share Capital (Called up) .................................. ₹23,680
• Securities Premium (Reserves) .............................. ₹4,800
• Share Forfeiture (Capital Reserve) ........................ ₹420
Total Equity & Liabilities ................................ ₹28,900
Assets
• Bank (Cash at Bank) ........................................ ₹28,900
Total Assets .............................................. ₹28,900
Everything balances — assets equal equity plus reserves.
2. What is meant by redemption of debentures? Give accounting treatment of redemption
of debentures out of various sources of finance.
Ans: Long ago, in a small business town, there lived a company called Shining Stars Ltd. Like
every ambitious company, it wanted to grow, expand its factories, and launch new products.
But here comes the classic problem: they needed money.
Now, they had two options:
1. Ask the shareholders to invest more.
2. Borrow money from the public by issuing debentures (which are like long-term loans
taken from many people).
The company thought: “Why trouble our shareholders again? Let’s borrow from the public
and promise to pay them back with interest after some years.” And so, they issued
debentures.
Time passed… the company grew, earned good profits, and finally the day arrived when the
promise had to be fulfilled. They had to redeem their debentures.
What is Redemption of Debentures?
Let’s pause our story for a moment and understand:
Easy2Siksha.com
Redemption of debentures simply means paying back the money borrowed from
debenture holders on the maturity date or earlier, as per the terms of issue.
In other words, if debenture holders are like lenders, redemption is the act of returning their
money. This can happen in one lump sum or in installments. Sometimes it’s at face value,
sometimes at a small premium.
So, Shining Stars Ltd. is now ready to return money to all those who trusted them and
bought their debentures.
Sources of Redemption – Where Does the Money Come From?
The next big question is: “From where will the company arrange the money to repay the
debenture holders?”
Think of it like when you borrow money from a friend. When the time comes to return it,
you may use:
• your savings,
• money from your salary,
• selling something you own,
• or even taking a new loan.
Companies do the same thing. They can redeem debentures using different sources. Let’s
explore them one by one, but in a lively way.
1. Redemption Out of Capital
This is the simplest way. Imagine the company takes money directly out of its pocket
(capital) and pays the debenture holders.
Accounting treatment:
• Debenture A/c (Dr.) → To Debenture Holders A/c
• Debenture Holders A/c (Dr.) → To Bank A/c
But there’s one catch. If the company pays directly out of its capital, its financial position
becomes weaker (because money goes out, but no new capital comes in). To protect
shareholders and creditors, law generally does not allow reckless redemption out of capital.
2. Redemption Out of Profits (Through Debenture Redemption Reserve – DRR)
Easy2Siksha.com
Now suppose Shining Stars Ltd. earned good profits every year. Instead of spending it all,
they carefully kept a portion aside in a special box called Debenture Redemption Reserve
(DRR).
When the time for redemption comes, they open the box, take the saved money, and pay
back the debenture holders.
Accounting treatment involves two steps:
1. Transfer profits to DRR:
o Profit & Loss Appropriation A/c (Dr.) → To DRR A/c
2. Redeem debentures using DRR funds:
o Debenture A/c (Dr.) → To Debenture Holders A/c
o Debenture Holders A/c (Dr.) → To Bank A/c
o And then transfer DRR to General Reserve once redemption is done.
This method ensures the company doesn’t suddenly get burdened at the last moment. It’s
like how we save bit by bit to repay a big loan in the future.
3. Redemption by Fresh Issue of Shares or Debentures
Imagine Shining Stars Ltd. didn’t have enough profits or savings. But they were clever. They
thought: “Why not borrow again to pay off the old loan?”
So, they issued new shares or even new debentures and collected money from new
investors. This fresh fund was then used to repay the old debenture holders.
Accounting treatment:
• Bank A/c (Dr.) → To Share Capital / Debentures A/c (new issue)
• Debentures A/c (Dr.) → To Debenture Holders A/c
• Debenture Holders A/c (Dr.) → To Bank A/c
It’s like taking a new loan to close an old one. Not always ideal, but sometimes necessary.
4. Redemption by Conversion
Now comes the smartest trick. Instead of paying cash, the company says:
“Dear debenture holders, instead of taking money back, would you like to become
shareholders of our company?”
Some agree happily because they see a bright future. So their debentures are simply
converted into shares or new debentures. No actual cash goes out.
Easy2Siksha.com
Accounting treatment:
• Debentures A/c (Dr.) → To Share Capital A/c / New Debentures A/c
This way, the company saves cash and still fulfills its promise.
5. Redemption by Sinking Fund or Insurance Policy
Some companies are extra cautious. They don’t just save profits in a DRR, but also invest
them every year in a sinking fund or take an insurance policy. At maturity, the accumulated
fund or policy amount is used to pay off debenture holders.
It’s like keeping money in a fixed deposit every year and breaking it only when repayment
day arrives.
Why So Many Methods?
Because every company’s financial situation is different. Some may have huge profits, some
may have very little savings, some may prefer fresh issue, and some may go for conversion.
The law provides flexibility so that no company feels trapped.
Linking Back to the Story
So, in the end, Shining Stars Ltd. looked at its financial position and chose the best method.
They redeemed their debentures, kept their promise, and maintained their goodwill. The
debenture holders walked away happily with their money or shares.
And the moral of the story?
Redemption of debentures is not just an accounting formality. It’s about trust. A
company borrows from the public, enjoys growth, and then shows its credibility by fulfilling
the repayment responsibly.
SECTION-B
3. The following is the Balance Sheet of Y Ltd. as on 31st March, 2021:
Particulars Rs.
Easy2Siksha.com
LIABILITIES
Share Capital:
2,50,000 Equity Shares of Rs. 10 each
Rs. 8 per share paid-up 20,00,000
1,00,000, 10% Preference Shares of
Rs. 10 each fully paid-up 10,00,000
Reserves and Surplus:
General Reserves 6,00,000
Statement of, Profit and Loss 8,00,000
Current Liabilities:
Creditors 4,00,000
Workmen's Profit sharing fund 3,00,000
Total 51,00,000
ASSETS
Fixed Assets:
Goodwill 8,00,000
Building 7,00,000
Plant and Machinery 13,00,000
Current Assets:
Stock 7,00,000
Sundry Debtors 9,00,000
Bank Balance 6,60,000
Miscellaneous Expenses:
Preliminary Expenses 40,000
Total 51,00,000
Easy2Siksha.com
X Ltd. decided to absorb the business of Y Ltd. at the respective book value of Assets and
Trade Liabilities except Building which was valued at Rs. 12,00,000 and Plant and
Machinery at Rs. 10,00,000.
The purchase consideration was payable as follows:
(1) Assumption of Trade Liabilities.
(2) Payment of liquidation expenses of Rs. 5,000 and workmen's profit sharing fund at 10%
Premium.
(3) Issue of equity shares of Rs. 10 each fully paid at Rs. 11 per share for every preference
share and every equity share of Y Ltd. and a payment of Rs. 4 per equity share in cash.
Calculate the purchase consideration. Show the necessary ledger accounts in the books of
Y Ltd. and opening journal entries of X Ltd.
Ans: 1) Compute the purchase consideration (step-by-step)
Facts summary (numbers given):
• Equity shares of Y: 2,50,000 shares of ₹10 each; paid up ₹8 per share → Equity
capital shown = ₹20,00,000.
• Preference shares: 1,00,000 of ₹10 each fully paid → Preference capital =
₹10,00,000.
• Reserves & Surplus: General Reserve ₹6,00,000; Profit & Loss ₹8,00,000.
• Current liabilities (trade): Creditors ₹4,00,000.
• Workmen’s Profit Sharing Fund (WPS) ₹3,00,000.
• Liquidation expenses to be paid by purchaser: ₹5,000.
• X Ltd. will absorb assets at book values except: Building at ₹12,00,000 (instead of
book ₹7,00,000) and Plant & Machinery at ₹10,00,000 (instead of book ₹13,00,000).
• Offer of X Ltd.: For every share of Y (both equity and preference), issue 1 equity
share of X of ₹10 each fully paid, at issue price ₹11 (i.e., ₹1 premium). In addition,
Y’s equity shareholders get ₹4 cash per equity share.
Step A — Count the number of X shares to be issued
• For each Y equity share: 1 X share → 2,50,000 X shares
• For each Y preference share: 1 X share → 1,00,000 X shares
Total X shares to be issued = 3,50,000 shares.
Issue price = ₹11 per share → Value of shares issued = 3,50,000 × 11 = ₹38,50,000.
(At par: share capital recorded at ₹10 × 3,50,000 = ₹35,00,000; share premium becomes ₹1
× 3,50,000 = ₹3,50,000.)
Easy2Siksha.com
Step B — Cash payment to equity shareholders
Equity shareholders (2,50,000 shares) are also paid ₹4 per share in cash:
Cash = 2,50,000 × 4 = ₹10,00,000.
Step C — Purchaser assumes trade liabilities and pays specified sums
• Assumption of trade liabilities (creditors): ₹4,00,000 (this is treated as part of
consideration because purchaser relieves vendor of this liability).
• Workmen’s profit sharing fund: purchaser pays it at 10% premium → WPS
outstanding ₹3,00,000 → paid = 3,00,000 × 110% = ₹3,30,000.
• Liquidation expenses paid by purchaser = ₹5,000.
Step D — Total purchase consideration (sum of all the above)
• Shares issued (value) = ₹38,50,000
• Cash to equity shareholders = ₹10,00,000
• Assumption of trade liabilities (creditors) = ₹4,00,000
• Payment of WPS (with 10% premium) = ₹3,30,000
• Liquidation expenses = ₹5,000
Total = 38,50,000 + 10,00,000 + 4,00,000 + 3,30,000 + 5,000 = ₹55,85,000.
So the purchase consideration = ₹55,85,000.
2) Prepare the main ledger in the books of Y Ltd. (Realisation approach) — story form
When Y’s business is being handed to X, Y’s books are closed via a Realisation Account (to
show what went out and what came in), then capital accounts are settled. I’ll present the
key journal transfers and then summarise the Realisation A/c as a T-account so you can see
the flow.
(A) Transfer assets to Realisation A/c (at book / agreed values)
(We follow the instruction “respective book value of assets except Building and P&M” — so
for Building and P&M use the agreed values.)
Journal (in Y Ltd.) — transferring assets to Realisation:
Realisation A/c Dr. ₹51,00,000
Easy2Siksha.com
To Goodwill A/c ₹8,00,000
To Building A/c ₹7,00,000
To Plant & Machinery A/c ₹13,00,000
To Stock A/c ₹7,00,000
To Sundry Debtors A/c ₹9,00,000
To Bank A/c ₹6,60,000
To Preliminary Expenses A/c ₹40,000
(Being assets transferred to Realisation at book value.)
Note: Although X values Building & P&M differently, the vendor (Y) first closes asset ledgers
at book values into Realisation. The valuation effect will appear because the purchaser’s
valuation determines the consideration — already reflected in what X pays.
(B) Transfer liabilities to Realisation (to remove them from books)
Creditors A/c Dr. ₹4,00,000
Workmen's Profit Sharing Fund A/c Dr. ₹3,00,000
To Realisation A/c ₹7,00,000
(Being trade liabilities transferred to Realisation.)
(C) Transfer Reserves & Surplus to Realisation (they are company’s funds)
Reserves & P&L are closed to Realisation so they are available for distribution/settlement.
General Reserve A/c Dr. ₹6,00,000
Profit & Loss A/c Dr. ₹8,00,000
To Realisation A/c ₹14,00,000
(Being reserves transferred to Realisation.)
(D) Record the consideration received/realised on sale (the buyer’s obligations)
Y’s Realisation A/c must show what consideration has been given in exchange for the assets
and relief of liabilities.
The consideration consists of:
• Value of X shares issued to Y’s shareholders = ₹38,50,000
• Cash paid to equity shareholders = ₹10,00,000
• Assumption of creditors = ₹4,00,000
• Payment of WPS at 10% premium = ₹3,30,000
• Liquidation expenses = ₹5,000
So, in Y’s books we credit Realisation A/c with the total consideration (this represents
consideration in favour of Y):
Realisation A/c Dr. — (no entry here)
To X Ltd. (or “Purchaser A/c”) ₹55,85,000
(Being purchase consideration credited to Realisation.)
Easy2Siksha.com
Practically, because the purchaser issues shares directly to shareholders and pays cash to
them, the vendor company will record the fact that the purchaser has given consideration
amounting to ₹55,85,000. For bookkeeping closure, Realisation A/c is credited with
₹55,85,000.
(E) Summarise Realisation A/c (T-account style)
Realisation A/c
Dr (₹) — Assets transferred
Cr (₹) — Liabilities / Consideration
Goodwill — 8,00,000
Creditors assumed — 4,00,000
Building — 7,00,000
WPS — 3,00,000
Plant & Machinery —13,00,000
General Reserve — 6,00,000
Stock — 7,00,000
Profit & Loss — 8,00,000
Sundry Debtors — 9,00,000
Purchase consideration — 55,85,000
Bank — 6,60,000
Preliminary Expenses — 40,000
Total Dr = 51,00,000
Total Cr = 76,85,000
Balance (Cr side) = 76,85,000 − 51,00,000 = ₹25,85,000 (Cr)
But wait — this T-account above includes reserves as credits and purchase consideration as
credit. To find the profit on realisation we must consider that reserves already belong to
shareholders — they were shown on the liabilities side; in practice the net assets (assets −
liabilities) were ₹44,00,000 and the buyer’s consideration was ₹55,85,000 → profit on
realisation = ₹55,85,000 − ₹44,00,000 = ₹11,85,000.
Why the bigger figure in the earlier T-account? Because the T-account credited both
reserves (₹14,00,000) and the purchase consideration (₹55,85,000). Reserves are part of
shareholders’ funds and must appear in the closure process; when you isolate profit on
realisation the correct figure which eventually goes to capital accounts is ₹11,85,000. (If you
prefer: Assets 51,00,000 − Liabilities 7,00,000 = Net book value 44,00,000; Consideration
55,85,000 ⇒ Profit 11,85,000.)
(F) Transfer profit on realisation to capital accounts
Easy2Siksha.com
Profit on Realisation = ₹11,85,000. This profit is transferred to shareholders’ capital
accounts in the agreed proportion — normally in proportion to their capital balances (unless
otherwise stated). Capitals are:
• Equity capital = ₹20,00,000
• Preference capital = ₹10,00,000
Ratio = 2 : 1
So allocation of ₹11,85,000:
• To Equity shareholders = 2/3 × 11,85,000 = ₹7,90,000
• To Preference shareholders = 1/3 × 11,85,000 = ₹3,95,000
Journal in Y Ltd.:
Realisation A/c Dr. ₹11,85,000
To Equity Capital A/c ₹7,90,000
To Preference Capital A/c ₹3,95,000
(Being profit on realisation transferred to capital accounts in 2:1 ratio.)
Then Y’s capital accounts would be closed by paying / issuing the agreed consideration to
shareholders. For example, Equity Capital holders have ₹20,00,000 on the liability side; they
receive shares of X worth ₹27,50,000 (2,50,000 × ₹11) and ₹10,00,000 cash — those
payments extinguish the capital and record any excess/deficit as appropriate. Preference
holders similarly get shares of X worth ₹11,00,000 which extinguishes their ₹10,00,000
preference capital plus their share of realisation profit.
(Exact clearing entries in Y would show Debits to Capital accounts and Credits to
Bank/Realisation/Purchaser A/cs as payments are made. The net effect is that all capital
accounts are closed and company is wound up.)
3) Opening journal entries in the books of X Ltd. (on takeover date)
X must record assets acquired at the agreed values, assume liabilities, pay cash and issue
shares. Purchaser also recognizes any goodwill arising because the purchase consideration
(₹55,85,000) exceeds fair value of identifiable net assets (assets ₹53,00,000) — the excess
is additional goodwill of ₹2,85,000 (55,85,000 − 53,00,000).
Assets acquired at agreed values total = ₹53,00,000 (Goodwill 8,00,000 + Building
12,00,000 + P&M 10,00,000 + Stock 7,00,000 + Debtors 9,00,000 + Bank 6,60,000 +
Preliminary Expenses 40,000 = ₹53,00,000).
So the opening entry in X to record the acquisition and consideration:
Goodwill A/c Dr. 8,00,000
Building A/c Dr. 12,00,000
Plant & Machinery A/c Dr. 10,00,000
Easy2Siksha.com
Stock A/c Dr. 7,00,000
Sundry Debtors A/c Dr. 9,00,000
Bank A/c Dr. 6,60,000
Preliminary Expenses A/c Dr. 40,000
Goodwill (on acquisition — excess) Dr. 2,85,000 ← (Purchase consideration − Net assets)
To Creditors A/c 4,00,000
To Workmen's PS Fund A/c 3,30,000
To Bank A/c 10,05,000 (₹10,00,000 cash to equity + ₹5,000 liquidn)
To Equity Share Capital A/c 35,00,000 (3,50,000 shares of ₹10 each)
To Securities Premium A/c 3,50,000 (3,50,000 × ₹1)
(Being assets acquired and liabilities assumed and consideration recorded; Goodwill of ₹2,85,000 recognized.)
Check: Total Debits = 53,00,000 + 2,85,000 = 55,85,000; Total Credits = 4,00,000 + 3,30,000
+ 10,05,000 + 35,00,000 + 3,50,000 = 55,85,000 — the journal balances.
Notes about this entry:
• Equity Share Capital A/c is credited at par value (₹10 × 3,50,000 = ₹35,00,000).
• Securities Premium A/c credited by ₹3,50,000 (₹1 premium × 3,50,000 shares).
• Cash outflow by X to equity shareholders is ₹10,00,000; liquidation expenses paid
₹5,000 — total cash paid ₹10,05,000 recorded via Bank.
4. What is meant by internal reconstruction? Give accounting treatment for alteration of
share capital.
Ans: Internal Reconstruction – A Story of Revival
Imagine there is a company called “Bright Future Ltd.”. When the company started,
everyone was very excited. The directors dreamed of huge profits, the shareholders
expected handsome dividends, and creditors hoped their money was safe. But life is never
as smooth as we plan. After some years, due to poor management decisions, market
competition, and financial struggles, the company started sinking.
Losses began to pile up on the balance sheet, the company’s goodwill fell, and the
shareholders were unhappy. Creditors began to doubt whether they would get their money
back. The company was still alive but weak, almost like a person who is ill and cannot work
at full strength.
Now, the company faced two choices:
1. Close down completely (which is known as liquidation), or
2. Recover and rebuild from within without shutting the doors.
Like any fighter who doesn’t want to give up, “Bright Future Ltd.” chose the second option.
It decided to reorganize itself internally.
And this process of healing and reshaping the company’s financial structure without
liquidating is called Internal Reconstruction.
Easy2Siksha.com
What is Internal Reconstruction?
In simple words, internal reconstruction means restructuring the capital of a company and
re-arranging its financial affairs so that it can wipe out accumulated losses, revalue its
assets and liabilities, and start afresh without closing down its business.
It is like giving the same company a fresh chance to grow by cleaning its balance sheet.
Unlike external reconstruction (where a new company is formed), in internal reconstruction
the same company continues—only its finances are reorganized.
Think of it like a cricket team where some players are underperforming. Instead of dissolving
the whole team, the coach reshuffles positions, gives some players new roles, and motivates
everyone to perform better. The team remains the same but is restructured for a better
future.
Objectives of Internal Reconstruction
The main goals are:
1. To wipe out past accumulated losses.
2. To present a healthy balance sheet.
3. To revalue assets and liabilities at their real worth.
4. To restore the confidence of investors, creditors, and the market.
5. To provide the company with a second chance for growth.
Methods of Internal Reconstruction
Internal reconstruction can happen in several ways. The most important one (and the one
you asked about) is Alteration of Share Capital.
Before we dive into the accounting treatment, let’s first understand what alteration means
in a simple manner.
Alteration of Share Capital – A Fresh Haircut for the Company
Think about when you go for a haircut. You’re still the same person, but your look becomes
fresh and clean. Alteration of share capital is something similar—it’s a financial haircut for
the company.
Easy2Siksha.com
The company does not close down, but it makes some changes to its share capital structure.
This helps the company reduce its burden and look fresh again in the eyes of investors.
Different Types of Alteration of Share Capital
1. Subdivision of Shares
o A company may divide its shares into smaller units.
o For example, a share of ₹100 may be split into 10 shares of ₹10 each.
o This is done to make shares affordable for more investors.
2. Consolidation of Shares
o The opposite of subdivision. Smaller shares are combined into bigger ones.
o For example, 10 shares of ₹10 each may be consolidated into 1 share of ₹100.
o This reduces the number of shares but increases their face value.
3. Conversion of Shares into Stock and Vice Versa
o Shares can be converted into stock, which is a more flexible form of capital.
Later, stock can also be reconverted into shares.
4. Reduction of Share Capital
o This is the most important method in internal reconstruction.
o If the company has accumulated heavy losses, it reduces the face value of its
shares.
o Example: A ₹100 share may be reduced to ₹60. This means shareholders
sacrifice a part of their capital so that the company’s balance sheet looks
healthy.
Think of it like this: shareholders agree to take a haircut in the value of their shares
so that the company can cut its losses and breathe again.
Accounting Treatment of Alteration of Share Capital
Now comes the main part: how do we record all these changes in the books of accounts?
Let’s go step by step with examples.
1. Subdivision of Shares
• Suppose Bright Future Ltd. has 1,000 shares of ₹100 each. It decides to split them
into shares of ₹10 each.
• After subdivision, the company will have 10,000 shares of ₹10 each.
Accounting Entry:
No journal entry is passed because only the face value is split. It is just a memorandum
change in the balance sheet.
Easy2Siksha.com
2. Consolidation of Shares
• Suppose the company has 10,000 shares of ₹10 each. It consolidates them into 1,000
shares of ₹100 each.
• Again, no journal entry is needed.
3. Reduction of Share Capital (Most Important)
This is where entries are passed. Suppose Bright Future Ltd. has 10,000 equity shares of
₹100 each = ₹10,00,000. But the company has accumulated losses of ₹4,00,000.
To clean the balance sheet, it reduces the face value of each share from ₹100 to ₹60.
So now, share capital becomes:
10,000 × ₹60 = ₹6,00,000.
The balance of ₹4,00,000 is used to write off accumulated losses.
Journal Entry:
Equity Share Capital A/c Dr. 4,00,000
To Capital Reduction A/c 4,00,000
Then, losses are written off:
Capital Reduction A/c Dr. 4,00,000
To Profit & Loss A/c 4,00,000
Now, the balance sheet looks neat, and the company can move forward.
Why is Capital Reduction Important?
Because without reducing capital, the company would keep carrying forward losses year
after year. This discourages investors and prevents the company from declaring dividends.
By altering its share capital, it gets a clean slate.
Final Balance Sheet – A Fresh Start
After internal reconstruction through alteration of share capital, the company’s balance
sheet looks healthier. Losses are wiped off, assets may be revalued, and liabilities are
rearranged. The same company continues, but with new hope and new energy.
Easy2Siksha.com
Conclusion (A Life Lesson Too)
So, internal reconstruction is nothing but a company’s way of starting fresh without dying.
It is a lesson not only in accounting but also in life. Just like companies, we too sometimes
make mistakes and face losses. Instead of giving up, we can reconstruct ourselves
internally—by cutting down on bad habits, reorganizing our priorities, and valuing ourselves
correctly.
In accounting terms, alteration of share capital is the key method of internal
reconstruction. Whether through subdivision, consolidation, or reduction, the aim is the
same—to wipe out the baggage of the past and begin anew.
And that’s why internal reconstruction is often called the “second life” of a company.
SECTION-C
5. Following are the balances from the books of Everyman's Bank Limited as on March 31,
2016:
Current deposits - Rs. 2,27,50,000
Savings accounts - Rs. 82,60,000
Fixed and time deposits - Rs. 1,75,90,000
Sundry creditors - Rs. 2,28,000
Debts due to banks (secured) - Rs. 61,00,000
Bills receivable being bills for collection - Rs. 90,50,000
Customer's liability for acceptances - Rs. 75,84,000
Rebate on bills discounted - Rs. 7,000
Branch adjustments (credit) - Rs. 22,78,000
Reserve fund - Rs. 62,50,000
Capital (authorised, issued subscribed and paid up)
100,000 shares of Rs. 50 each - Rs. 50,00,000
Interest and discount received - Rs. 29,00,000
Exchange and commissions received - Rs. 8,77,000
Profit and Loss Account: Balance as on 1-4-2015-Rs. 4,26,000
Easy2Siksha.com
Cash in hand- Rs. 6,54,000
Cash at bank - Rs. 30,00,000
Bills for collection - Rs 90,50,000
Liabilities for customer acceptances Rs 75,84,000
Investments:
Government Securities - Rs. 1,70,00,000
Shares Rs. 79,50,000
Interest accrued on investments - Rs 4,37,000
Loan and cash credits Rs. 1,68,50,000
Bills purchased and discounted - Rs. 1,77,50,000
Furniture, Fixtures and Office Equipment - Rs. 2,50,000
Depreciation on assets - Rs. 2,50,000
Interest paid - Rs. 6,00,000
Exchange and commission paid - Rs. 50,000
Salaries-Rs. 12,00,000
Director's fees - Rs. 50,000
Stationery, postage - Rs. 2,00,000
Miscellaneous expenses - Rs. 1,50,000
Land and Building - Rs. 15,00,000
Money at call - Rs. 7,50,000
Non-banking assets - Rs. 25,000
Term loans - Rs. 40,00,000
Prepare the Profit and Loss Account for the year ending March 31, 2016 and Balance Sheet
at that date after taking note of the following:
(1) Provision needed for taxation Rs. 5,00.000
(2) Current Account includes Rs. 42,50,000 debit balances being overdraft.
(3) One of the Accounts Rs. 50,000 is doubtful.
Easy2Siksha.com
During the year; a property was acquired in satisfaction of a claim amounting to Rs. 25,000
and was sold for Rs. 18,000. The loss resulting therefrom remained unadjusted in the
books.
Ans: A New Beginning – The Story of Everyman’s Bank Limited
Imagine it is 31st March 2016. The financial year has just ended, and Everyman’s Bank
Limited is sitting down to prepare its accounts. Think of the Bank as a character—a
hardworking institution that has been busy the whole year collecting deposits, lending
money, investing in securities, paying staff, and even handling customer acceptances and
bills. Now, it’s the time of truth: “What did we earn? What do we own? What do we owe?”
That’s what the Profit and Loss Account (P&L) and Balance Sheet reveal.
So, let’s walk through the story step by step.
Step 1: Understanding the Mission – What is P&L and Balance Sheet?
• The Profit and Loss Account is like a scorecard of the year—it tells us how much
income we earned and what expenses we incurred, and finally, whether we ended
the year with profit or loss.
• The Balance Sheet is like a photograph of the bank on 31st March—it shows what
the bank owns (assets) and what it owes (liabilities and capital).
So, first we prepare the P&L (because profit/loss affects reserves), and then we prepare the
Balance Sheet.
Step 2: Building the Profit and Loss Account
Let’s look at the bank’s income and expenses like we’re listing earnings and household costs.
Incomes (What the bank earned):
1. Interest and Discount received = Rs. 29,00,000
2. Exchange and Commission received = Rs. 8,77,000
Total Incomes = Rs. 37,77,000
Expenses (What the bank spent):
1. Interest paid = Rs. 6,00,000
2. Exchange & Commission paid = Rs. 50,000
3. Salaries = Rs. 12,00,000
4. Director’s fees = Rs. 50,000
Easy2Siksha.com
5. Stationery & Postage = Rs. 2,00,000
6. Miscellaneous = Rs. 1,50,000
Total Operating Expenses = Rs. 22,50,000
Now, income – expenses = Rs. 37,77,000 – Rs. 22,50,000 = Rs. 15,27,000 (Operating Profit)
Step 3: Adjustments (the small twists in the story)
But the story isn’t that simple. The bank has a few hidden adjustments:
1. Rebate on Bills Discounted = Rs. 7,000 (This is like income received in advance, so it
reduces our profit).
2. Provision for taxation = Rs. 5,00,000 (We must keep aside this much for government
taxes).
3. Doubtful debt = Rs. 50,000 (One loan may not come back, so we provide for it).
4. Loss on sale of property = Rs. 7,000 (Property worth Rs. 25,000 was acquired, but
sold for Rs. 18,000).
So, from Rs. 15,27,000, we subtract:
• Rebate = 7,000
• Tax = 5,00,000
• Doubtful debt = 50,000
• Property loss = 7,000
Total deductions = Rs. 5,64,000
Net Profit = Rs. 15,27,000 – Rs. 5,64,000 = Rs. 9,63,000
Step 4: Adding Past Reserves
There was already a balance in Profit & Loss A/c (1-4-2015) = Rs. 4,26,000.
So, Final Profit available for distribution = Rs. 9,63,000 + Rs. 4,26,000 = Rs. 13,89,000
Profit and Loss Account (for year ending 31st March, 2016)
Dr.
Cr.
To Interest Paid – Rs. 6,00,000
By Interest & Discount Received – Rs. 29,00,000
Easy2Siksha.com
To Commission & Exchange Paid – Rs.
50,000
By Commission & Exchange Received – Rs.
8,77,000
To Salaries – Rs. 12,00,000
To Directors’ Fees – Rs. 50,000
To Stationery & Postage – Rs. 2,00,000
To Miscellaneous Expenses – Rs. 1,50,000
To Rebate on Bills Discounted – Rs. 7,000
To Provision for Tax – Rs. 5,00,000
To Provision for Doubtful Debt – Rs. 50,000
To Loss on Sale of Property – Rs. 7,000
To Balance c/d (Net Profit) – Rs. 9,63,000
Total = Rs. 37,77,000
Total = Rs. 37,77,000
Balance b/d (last year profit) = Rs. 4,26,000
Final balance available = Rs. 13,89,000
Step 5: Preparing the Balance Sheet
Now, let’s make the Balance Sheet. Think of it as two columns—Liabilities (what bank owes
or owns as obligation) and Assets (what bank owns or controls).
Liabilities
1. Capital = Rs. 50,00,000
2. Reserve Fund = Rs. 62,50,000
3. Profit & Loss Balance = Rs. 13,89,000
4. Current Deposits = Rs. 2,27,50,000 (but remember, Rs. 42,50,000 are overdrafts, so
actually they are assets. Net = Rs. 1,85,00,000).
5. Savings Deposits = Rs. 82,60,000
6. Fixed Deposits = Rs. 1,75,90,000
7. Sundry Creditors = Rs. 2,28,000
8. Debts due to Banks = Rs. 61,00,000
9. Branch Adjustments (Credit) = Rs. 22,78,000
10. Liability for Acceptances = Rs. 75,84,000
Total Liabilities = Rs. 6,49,79,000
Easy2Siksha.com
Assets
1. Cash in Hand = Rs. 6,54,000
2. Cash at Bank = Rs. 30,00,000
3. Money at Call = Rs. 7,50,000
4. Investments:
o Govt. Securities = Rs. 1,70,00,000
o Shares = Rs. 79,50,000
o Accrued Interest = Rs. 4,37,000
Total Investments = Rs. 2,53,87,000
5. Loans & Advances:
o Loans & Cash Credit = Rs. 1,68,50,000
o Term Loans = Rs. 40,00,000
o Bills Purchased & Discounted = Rs. 1,77,50,000
o Less: Provision for Doubtful = (50,000)
Total = Rs. 3,85,50,000
6. Bills for Collection = Rs. 90,50,000
7. Customer’s Liability for Acceptances = Rs. 75,84,000
8. Land & Building = Rs. 15,00,000
9. Furniture & Fixtures = Rs. 2,50,000 – 2,50,000 (depreciated) = Nil
10. Non-banking Asset = Rs. 25,000
Total Assets = Rs. 6,49,79,000
Perfectly matches!
Step 6: Wrap-Up – The Happy Ending
So, in the story of Everyman’s Bank Limited, the bank managed to earn a net profit of Rs.
9.63 lakhs for the year. When added to last year’s profit, it carried forward Rs. 13.89 lakhs.
Its Balance Sheet shows a strong financial position with investments and loans forming the
bulk of assets, and customer deposits being the main liability.
This whole exercise shows how every small adjustment—like doubtful debts, rebate, or even
a tiny loss on property—can change the final result. Just like in life, even small twists can
make a big difference in a story.
6. Define Non-performing assets. Discuss its classification. Explain legal
provisions regarding NPAs.
Ans: Imagine a farmer named Mohan. He takes a loan from the local bank to buy seeds,
fertilisers, and a tractor. The bank expects him to repay the loan in monthly instalments,
along with interest — just like a shopkeeper expects payment for goods sold.
Easy2Siksha.com
For the first few months, Mohan pays on time. But then, a drought hits. His crops fail, his
income dries up, and he stops paying. The bank waits, sends reminders, and even visits his
farm — but the payments don’t come.
From the bank’s point of view, Mohan’s loan has now stopped generating income. It’s no
longer an “asset” that earns interest — it has become a Non-Performing Asset.
Definition of NPA
In banking terms, an NPA is a loan or advance where:
• Interest and/or principal payments are overdue for more than 90 days in the case
of a term loan.
• In an overdraft or cash credit account, the account remains “out of order” for more
than 90 days.
• In bill purchase/discounting, the bill remains overdue for more than 90 days.
• For agricultural loans, the instalment of principal or interest remains overdue for
two crop seasons (short duration crops) or one crop season (long duration crops).
In simple words:
An NPA is like a fruit tree that has stopped bearing fruit — it’s still there, but it’s not giving
any returns.
Why NPAs Matter
For a bank, loans are assets because they generate income through interest. When too
many loans turn into NPAs:
• The bank’s income falls.
• It has less money to lend to others.
• It must set aside extra funds (“provisions”) to cover possible losses.
• Investor confidence drops, and the economy can slow down.
Classification of NPAs
The Reserve Bank of India (RBI) has a clear system for classifying NPAs based on how long
they’ve been non-performing and the chances of recovery.
1. Sub-Standard Assets
• Assets that have remained NPAs for up to 12 months.
• Risk of loss is there, but recovery is still possible with effort.
Story lens: Like a patient with an illness that’s serious but treatable if given the right
medicine.
Easy2Siksha.com
2. Doubtful Assets
• Assets that have remained NPAs for more than 12 months.
• The longer they stay unpaid, the lower the chances of recovery.
• Banks must make higher provisions for these.
Story lens: Like a patient whose illness has worsened because treatment was delayed —
recovery is uncertain.
3. Loss Assets
• Assets identified by the bank, auditors, or RBI as uncollectible.
• They have little or no value left, though some scraps may be recovered.
• Must be written off from the books, with 100% provisioning.
Story lens: Like a tree that’s completely dried up — you can’t expect fruit anymore, but you
might use the wood for fire.
Special Mention Accounts (SMA) — The Early Warning System
Before a loan becomes an NPA, it may be classified as an SMA:
• SMA-0: Overdue up to 30 days.
• SMA-1: Overdue 31–60 days.
• SMA-2: Overdue 61–90 days.
This helps banks take early action before the account slips into NPA status.
Legal Provisions Regarding NPAs
India has several legal tools to help banks manage and recover NPAs.
1. RBI Prudential Norms
• RBI issues guidelines on asset classification, income recognition, and provisioning.
• Banks must:
o Classify assets correctly.
o Stop recognising interest income on NPAs unless actually received.
o Make minimum provisions based on the NPA category (e.g., 10% for
sub-standard, 20–50% for doubtful, 100% for loss assets).
2. SARFAESI Act, 2002
• Full name: Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act.
• Allows banks to:
o Take possession of secured assets (like property given as collateral).
Easy2Siksha.com
o Sell them to recover dues.
o Do this without going to court, which speeds up recovery.
3. Debt Recovery Tribunals (DRTs)
• Special tribunals set up to handle cases of loan defaults quickly.
• Banks and financial institutions can approach DRTs for recovery of debts above a
certain threshold.
4. Insolvency and Bankruptcy Code (IBC), 2016
• Provides a time-bound process for resolving insolvency of companies and individuals.
• Creditors can initiate insolvency proceedings if a borrower defaults.
• If resolution fails, assets are liquidated to repay creditors.
5. Lok Adalats
• Informal forums for settling disputes through compromise.
• Useful for small loans where legal costs would be too high.
6. Asset Reconstruction Companies (ARCs)
• Specialised companies that buy NPAs from banks at a discount.
• They then try to recover the money themselves, freeing the bank’s books.
Why Legal Provisions Are Important
Without these laws and mechanisms:
• Banks would be stuck with bad loans for years.
• Recovery would be slow and costly.
• Public confidence in the banking system would suffer.
These provisions act like a toolkit — each tool suited for a different kind of NPA problem.
Quick Recap Table
Category
Time Overdue
Provisioning Requirement
Sub-Standard
≤ 12 months
10% of outstanding
Doubtful
> 12 months
20–50% depending on period
Loss Asset
Identified as uncollectible
100%
Closing the Story
Back to Mohan, our farmer. If his loan remains unpaid for more than 90 days, it becomes an
NPA. If he manages to pay within a few months, it’s a sub-standard asset that recovers. If
not, it may slip into doubtful or even loss category.
Easy2Siksha.com
For the bank, the key is to act early — using the legal tools available — to either help Mohan
get back on track or recover the dues before it’s too late.
Because in banking, just like in farming, early care can save the crop — but delay can mean
losing the harvest entirely.
SECTION-D
7. Fast Pay Insurance Co. Ltd. has furnished the following information for preparation of
revenue account for fire insurance business for the year ended 31 December, 2016:
Claims admitted but not paid 42,376
Commission paid 50,000
Commission on reinsurance ceded 12,000
Share transfer fees 5,000
Expenses of Managements 78,000
Bad Debts 2,500
Claims Paid 15,000
Profit and Loss Account Appropriation 10,000
Premium received (less reinsurance) 5,52,000
Reserve for unexpired risk as on 1.1.2016 2,30,000
Additional reserves as on 1.1.2016 40,000
Claims outstanding as on 1.1.2016 27,000
Dividend on share capital 18,000
The following information has also been considered:
(i) Premium outstanding at the end of the year Rs. 40,000.
(ii) It is the policy of the company to maintain 50% of the premium towards reserves for
unexpired risks.
(iii) Additional reserves at 10% of the premium to be maintained.
Ans: Imagine you’re the head clerk in an old-fashioned insurance office — the kind with a
brass bell on the counter and shelves full of neat files. It’s the last working day of 2016 and
you’re closing the book for the Fire Insurance revenue account. Your job is to take the year’s
flows of premiums and claims, tidy up opening and closing reserves, and report the
Easy2Siksha.com
underwriting result for the examiner (who, luckily for you, likes a neat story as much as neat
arithmetic). I’ll walk you through the entire process step by step, explaining why each item
appears where it does, and then present the final Fire Insurance Revenue Account and the
underwriting profit that gets sent across to the Profit & Loss account.
Step 1 — Gather the story’s characters (the numbers)
From the facts given we have the following cast:
• Premium received (net of reinsurance): ₹5,52,000
• Premium outstanding at year end: ₹40,000 (this is premium earned/written during
the year but not yet collected)
• Reserve for unexpired risks (opening, 1-1-2016): ₹2,30,000
• Additional reserves (opening): ₹40,000
• It is company policy to keep:
• Unexpired risk reserve = 50% of premium (we’ll apply this to the premium base),
and
• Additional reserve = 10% of premium.
• Claims paid during the year: ₹15,000
• Claims outstanding at opening (1-1-2016): ₹27,000
• Claims admitted but not paid (i.e., outstanding at 31-12-2016): ₹42,376
• Commission paid: ₹50,000
• Commission on reinsurance ceded: ₹12,000
• Expenses of management: ₹78,000
• Share transfer fees: ₹5,000
• Bad debts: ₹2,500
• Other items given but not part of underwriting account: Profit & Loss appropriation
₹10,000 and Dividend on share capital ₹18,000 — these are appropriation items
(after underwriting/profit), so they will appear in the appropriation section of the
Profit & Loss account, not in the Fire Insurance Revenue Account.
Step 2 — Prepare the premium base
First we establish the premium written (net):
• Premium received (net) = ₹5,52,000
• Add: Premium outstanding at year end = ₹40,000
Premium written (net) = ₹5,52,000 + ₹40,000 = ₹5,92,000
This ₹5,92,000 is the natural base to apply the company’s reserves policy (50% and 10%).
Step 3 — Compute closing reserves required
According to company policy:
Easy2Siksha.com
• Reserve for unexpired risks required (closing) = 50% of premium written = 50% ×
₹5,92,000 = ₹2,96,000
• Additional reserve required (closing) = 10% of premium written = 10% × ₹5,92,000 =
₹59,200
Compare these with opening balances:
• Opening unexpired risk reserve = ₹2,30,000 → increase required = ₹2,96,000 −
₹2,30,000 = ₹66,000
• Opening additional reserve = ₹40,000 → increase required = ₹59,200 − ₹40,000 =
₹19,200
You will see the practical effect of these increases when we prepare the account: the closing
reserves are shown on the debit side (i.e., amounts set aside from underwriting) and the
opening reserves are shown on the credit side (a relief to the current year’s premium).
Step 4 — Compute claims incurred in the year (the simple but important twist)
Claims are not just the cash paid during the year. The correct approach is:
Claims incurred = Claims paid during year + Closing claims outstanding − Opening claims
outstanding
So:
• Claims paid = ₹15,000
• Closing claims outstanding = ₹42,376
• Opening claims outstanding = ₹27,000
Claims incurred = 15,000 + 42,376 − 27,000 = ₹30,376
This number reflects the cost of claims that belong to the current year’s underwriting,
whether they were paid or simply admitted and left outstanding.
Step 5 — Collect all other underwriting outgoings
These are straightforward operating outgoings that come from running the insurance
business:
• Commission paid = ₹50,000
• Commission on reinsurance ceded = ₹12,000
• Expenses of management = ₹78,000
• Share transfer fees = ₹5,000
• Bad debts = ₹2,500
These are treated as underwriting outgoings in the Revenue Account.
Easy2Siksha.com
The Fire Insurance Revenue Account (for the year ended 31-12-2016)
Credits (Income side)
• Premiums (net) received during the year: ₹5,52,000
• Add: Premium outstanding at year end: ₹40,000
• Add: Reserve for unexpired risks (opening): ₹2,30,000
• Add: Additional reserve (opening): ₹40,000
Total Credits = ₹5,52,000 + ₹40,000 + ₹2,30,000 + ₹40,000 = ₹8,62,000
Debits (Outgoings)
• Claims incurred during the year: ₹30,376
• Commission paid: ₹50,000
• Commission on reinsurance ceded: ₹12,000
• Expenses of management: ₹78,000
• Share transfer fees: ₹5,000
• Bad debts: ₹2,500
• Reserve for unexpired risks (closing): ₹2,96,000
• Additional reserve (closing): ₹59,200
Total Debits = ₹30,376 + 50,000 + 12,000 + 78,000 + 5,000 + 2,500 + 2,96,000 +
59,200 = ₹5,33,076
Underwriting result (Credit side − Debit side)
Underwriting profit transferred to Profit & Loss Account = ₹8,62,000 − ₹5,33,076 =
₹3,28,924
Final commentary — what the numbers tell us (in plain language)
Think of the underwriting account like a single season’s harvest for a farmer. You start the
season with some grain already stored (opening reserves). You gather the new crop
(premiums written) and you must set aside seed for next season (closing reserves). You pay
for the workers and tools (management expenses, commissions), and you repair damage
done by pests (claims). After putting seed in the store and paying all costs, what remains is
your harvest for the year — the underwriting profit.
Here the company wrote ₹5,92,000 of premium (including outstanding), and by rule had to
set aside half of that as reserve for unexpired risks and add a further 10% as “additional”
reserve. That is a conservative policy — together they tie up 60% of premiums as reserves
for future periods. Even after these sizable reserves and after paying claims and running
expenses, the books show a healthy underwriting profit of ₹3,28,924 for the year. This
profit is the direct result of collecting premiums that cover current claims and operating
costs and still leave a surplus.
Two important bookkeeping clarifications so everything is crystal clear:
Easy2Siksha.com
1. Why opening reserves are added on the credit side and closing reserves shown on
the debit side: Opening reserves are funds set aside earlier for unexpired policies at
the start of the year; they reduce the premium that was “not yet earned” last year
and therefore are brought in on the income side. Closing reserves are amounts you
must set aside at year end — a charge against this year’s underwriting — so they
appear as a debit.
2. Why dividends and P&L appropriation are not in this account: The Fire Insurance
Revenue Account shows the underwriting result — the profit (or loss) generated
purely from underwriting operations. Distribution decisions like dividends or
appropriation of profit belong to the Profit & Loss Appropriation section after the
profit has been finally determined, so they are shown elsewhere.
8. Prepare final accounts of life insurance company with imaginary figures.
Ans: A Different Start – The Story of “SecureLife Insurance Ltd.”
Imagine there’s a company called SecureLife Insurance Ltd. This company doesn’t make
chocolates like Cadbury or mobile phones like Samsung. Instead, it sells something invisible
yet powerful—protection and financial security for families.
People pay money in the form of premiums, and in return, the company promises to pay
them (or their families) a big lump sum in case something happens. That’s the basic idea of
life insurance.
Now, just like any other business, SecureLife Insurance also has to prepare its final accounts
at the end of the year. These final accounts are not only for shareholders but also for
government regulators, auditors, and policyholders, so everything must be crystal clear.
The Three Parts of Final Accounts
Before we jump into numbers, let’s quickly recall what final accounts of a life insurance
company usually include:
1. Revenue Account (also called Revenue Account of Life Insurance Business):
This is like the “Profit & Loss Account” of normal businesses. It shows incomes
(mainly premiums, investment income) and expenses (claims, commission,
management expenses).
2. Profit & Loss Account (Net Profit Account):
If the company earns a surplus in the revenue account, it is transferred here. This
account shows whether the company made overall profit or not.
3. Balance Sheet:
Just like any other company, this shows the financial position—assets and
liabilities—on the last day of the year.
Easy2Siksha.com
Now, let’s bring this alive with imaginary figures for SecureLife Insurance Ltd.
1. Revenue Account of SecureLife Insurance Ltd.
(For the year ending 31st March, 2025)
Incomes:
• Premiums collected from policyholders: ₹8,00,00,000
• Interest, dividend & rent on investments: ₹1,20,00,000
• Profit on sale of investments: ₹30,00,000
Expenses:
• Claims paid: ₹4,50,00,000
• Bonus to policyholders: ₹70,00,000
• Commission to agents: ₹50,00,000
• Management expenses (salaries, office rent, etc.): ₹40,00,000
Balance (Surplus transferred to P&L A/c): ₹2,40,00,000
Story explanation:
Think of this account as a household diary. On one side, we write all the income—premiums
are like your monthly salary, and investment income is like the interest you earn on your
savings. On the other side, we write expenses—claims are like the monthly household bills,
commissions are like paying fees for services, and management expenses are like your
everyday running costs. Finally, if income is more than expenses, the difference is called the
surplus.
2. Profit & Loss Account
(For the year ending 31st March, 2025)
• Surplus from Revenue A/c: ₹2,40,00,000
• Add: Miscellaneous income: ₹10,00,000
• Total: ₹2,50,00,000
Less:
• Provision for taxation: ₹60,00,000
• Reserve for future policyholders’ bonus: ₹70,00,000
• Balance carried to Balance Sheet: ₹1,20,00,000
Easy2Siksha.com
Story explanation:
Here, SecureLife takes the leftover money from the revenue account and decides what to do
with it. Just like after receiving your monthly salary, you keep some money aside for taxes,
some for future savings, and whatever is left becomes your free cash.
3. Balance Sheet of SecureLife Insurance Ltd.
(As on 31st March, 2025)
Liabilities:
• Share Capital: ₹5,00,00,000
• Life Assurance Fund: ₹20,00,00,000
• Reserve for bonus to policyholders: ₹70,00,000
• Outstanding claims: ₹1,00,00,000
• Creditors & other liabilities: ₹50,00,000
• Profit & Loss A/c balance: ₹1,20,00,000
Total Liabilities: ₹28,40,00,000
Assets:
• Investments: ₹22,00,00,000
• Loans: ₹2,00,00,000
• Fixed Assets (building, office furniture): ₹1,00,00,000
• Cash & Bank balances: ₹2,50,00,000
• Outstanding premiums (amount receivable): ₹40,00,000
• Other assets: ₹50,00,000
Total Assets: ₹28,40,00,000
Story explanation:
The balance sheet is like taking a photograph of the company’s financial health on the last
day of the year. On the left side (liabilities), we show where the money came from (capital,
funds, reserves, etc.). On the right side (assets), we show where the money is being used
(investments, loans, buildings, etc.). Both sides must always be equal—just like balancing a
see-saw.
Why is This Important?
Life insurance companies handle public money. Every premium a person pays is someone’s
hard-earned savings. That’s why regulators like IRDAI (Insurance Regulatory and
Development Authority of India) strictly monitor these accounts.
Easy2Siksha.com
If these accounts are wrongly prepared, it could harm not just the company but thousands
of families who trust them. That’s why the final accounts are always presented with
transparency.
Making it Simple – Think of a School Annual Day
Imagine your school’s annual day function. At the end of the year:
• The principal shows how much fee was collected (like premiums).
• How much was spent on electricity, salaries, books (like management expenses).
• How much was spent on student prizes (like claims & bonuses).
• If money is still left, some is saved for future (reserves), some is spent on taxes, and
the rest is carried forward.
This is exactly how a life insurance company works, only with bigger numbers and stricter
rules.
Conclusion
So, the final accounts of a life insurance company are nothing but a neatly arranged story of
money—where it came from, where it was spent, and what remains at the end.
• The Revenue Account tells us how efficiently the company managed its insurance
operations.
• The Profit & Loss Account tells us how much real profit remains after taxes and
reserves.
• The Balance Sheet shows us the true financial picture of the company on the closing
date.
By presenting figures like our imaginary SecureLife Insurance Ltd., we can understand that
accounting is not just about debit and credit—it is about telling a financial story that
anyone, even without an accounting background, can follow.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
