ACCOUNTANCY CLASS XII - HOTs

HIGHER ORDER THINKING SKILLS

Accounting for partnership firms –Fundamentals Including Admission of new Partner

1.      Give any two occasions when reconstitution of partnership firm takes place. Ans  Due to admission of a partner and due to retirement of a partner. 2.      State any one of the rights that a newly admitted partner acquires In the firm? Ans Sharing in the profits of the firm in future. 3.      What is sacrificing ratio? Ans  The ratio in which the old partners sacrifice their shares in favour of the new partner is called sacrificing ratio.  4.      Why are assets revalued at the time of admission of a partner? Ans  At the time of admission of a new partner, it is necessary to access the proper value of assets and liabilities of the firm shown in the balance sheet. 5.      Why is sacrificing ratio calculated? Ans : To distribute the premium of goodwill brought in by the new partner among the  old partner. 6.      What are accumulated losses? Ans  : These are the losses shown in the assets side of the balance sheet before admission of a new partner. 7.      What are accumulated profit  ? Ans   These are the profits shown in the liability side of the balance sheet before admission of a new partner. 8.      What is meant by reconstitution of a partnership firm? Ans. Whenever  there is a change in the existing agreement, it amounts to reconstitution of the partnership firm. 9.      What are the purpose of admission of a partner? Ans   (i) To procure additional capital (ii)  To acquire additional managerial  skill. 10.  What is meant by hidden goodwill? Ans.  Some times the value of goodwill is not given at  the time of admission of a new partner. In such a situation, goodwill is calculated on the basis of capitalization method or profit sharing ratio. This is called hidden goodwill.

Accounting for partnership Firms-Reconstitution and Dissolution

RETIREMENT AND DEATH OF A PARTNER 1 Unless otherwise  agreed, the retiring partners share of profits is acquired by remaining partners in which ratio ? Old ratio 2 What is the main difference between retirement and death of a partner? Retirement is planned and death is unexpected 3 Arun, Amrin and Abhay are partners in M/s ABC enterprises sharing profits and losses in the ratio 3:2:2. Abhay has desire to retire from the  business on 1st April, 2012 and desires that his son Ankur be admitted as partner The partnership is silent on the subject. Arun and Amrin agree to the change , sharing the profits and losses in the same ratio. Do you think the change will be as per law and why? Yes, the change will be as per   partnership deed is silent, the other partners have agreed to that. 4 When will be the balance in the  retiring partners’ capital account is transferred to his loan account? If the question does not specifically mention about the payment in cash. 5 Amount credited to a retiring partner in his capital account is Rs.2,01,000. He took over investment at Rs. 58,000. He also took over 20% of the debtors. The amount transferred to his loan account is Rs.1,23,000. What is the total value of debtors? Rs.20,000 * 100/20 = Rs. 1,00,000 6 Among whom and on what basis is profit of revaluation account distributed? All the partners  capital accounts and in their profit sharing ratio. 7 Why heirs of a retiring/deceased partner are entitled to share of goodwill of the firm? Goodwill earned collective effort of past performance and reputation. 8 At what rate is interest payable on the amount remaining unpaid to the executor of deceased partner? @6% p.a 9 Who receives the amount payable to the deceased partner? To his legal representative. 10 Explain the accounting treatment of goodwill at the time of retirement of a partner when the goodwill account does not exist in the old firm’s books. Continuing partners’ capital account                      Dr.              To outgoing partner’s capital account

DISSOLUTION OF A PARTNERSHIP FIRM 1 When a partnership is compulsorily dissolved ? When all the partners except one are insolvent or on happening of an event or business becomes unlawful. 2 In case of dissolution, which liabilities are to be paid first? External liabilities. 3 How deficiency of creditors is paid off? Paid off out of the contributions made by the partners. 4 To which account the balance of current account is transferred? Partners capital account . 5 Name the asset which is not transferred to the debit side of the realization account but can bring some cash ? Unrecorded asset 6 Dissolution expenses Rs.8000. Out of the said expenses Rs. 3000 was borne by the firm and the balance by a partner. What is the journal entry for the transaction ? Realisation account            Dr.3000 Partners capital account    Dr.5000        To bank account                                8000 7 For paying Realisation  the partner was paid  Rs. 10,000. Actual expenses were Rs. 5000. What is journal entry to be passed. Realisation account             Dr.               5000      To partner’s capital account.                               5000 8 What is the journal entry for paying the partner’s loan ?     Partner’s loan account       Dr.        To cash / bank account     9 Advertisement revenue expenditure account appeared in the asset side of the balance sheet. How will you treat the item at the time of dissolution of a partnership firm?     It will be written off to all the partners in their profit sharing ratio. 10 Unrecorded asset worth Rs. 5000 partly sold for cash of Rs.1000 and the balance taken over by a partner for Rs. 2000.   Pass journal entry.     Cash account                            Dr.             1000     Partner’s capital account        Dr.             2000                     To Realisation account                                    3000

Accounting for share capital

Q1. Give any two points of difference between reserve capital &capital reserve. Ans.  1. Reserve capital is a part of capital whereas capital reserve is a part of capital profits.          2. Reserve capital is called on at the time of winding up whereas capital reserve arises on sale of     fixed assets & investments & reissue of forfeited shares etc. Q2. What do you mean by minimum subscription? Ans. Minimum amount that must  have been collected on the share applications which have been issued to public. Acc to SEBI guidelines it must be 90% of the face value of shares issued. Q3. State the nature of share application a/c. Ans. Nominal account. Q4. What should be the minimum time gap between two consecutive share calls? Ans. Two months . Q5. How is “calls in arrears” shown in the balance sheet of the company? Ans. Under the main heading shareholders funds, sub heading share capital  less from subscribed capital. Q6. What alternatives are available other than rejecting the applications in case of over subscription? Ans. a) Pro-rata allotment          b) rejecting few applications & allotting remaining proportionately. Q7. Can a company declare dividend out of securities premium reserve? Justify your answer. Ans. No, because securities premium reserve is to per utilized as per provisions of sec. 77 A & 78. Q8. Can a new company issue shares at discount? Give reason in support of your answer. Ans. No, because at least one year must have completed from the commencement of the business. Q9. State when the shares can be issued at a discount of more than 10%? Ans. Yes, with the prior permission of the central govt. Q10. Give the amount which is credited to share forfeiture a/c at the time of share forfeiture. Ans. Amount actually received on the shares being forfeited. Q11. How is the balance amount left in the share forfeiture a/c after their re-issue dealt with in the books of accounts? Ans. Transferred to capital reserve

Accounting for Debentures

Q1. What is the nature of interest on debentures? Ans: It is nominal in nature. Q2. What is the provision of the companies (Amendment) Act regarding creation of Debenture Redemption Reserve? Ans: Transfer sufficient amount to DRR account before commencement of redemption Q3. In which method of redemption companies are not required to create Debenture Redemption Reserve? Ans: Conversion method Q4. Under which head is the debenture redemption reserve shown in the balance sheet? Ans: Reserves and Surplus Q5. Enumerate the methods of redemption of non-convertible debentures? Ans: a)Lump-sum payment b)drawing in lots  c) Purchase in the open market Q6. Why would an investor prefer to invest in debentures of a company rather than its shares? Ans: Steady income and security. Q7. Why would an investor prefer to invest partly in shares and partly in the debentures of a company? Ans: Capital appreciation in shares and Steady income and security. Q8. What is meant by bearer debentures? Ans: Debentures which are freely transferable. Q9.what is meant by debentures issued as collateral security? Ans: Debentures issued as additional security. Q10. Give the meaning of  convertible debentures? Ans: Debentures which can be converted into share or other rate of debentures.

Analysis of financial statements

Q1. How can the financial strength of a business enterprise be judged? Ans. Balance sheet Q2. How the earning Capacity of a business is assessed by Financial Statement Analysis? Ans. By looking at the analysis report. Q3. How does subjectivity become a limitation of Financial Statement Analysis? Ans. Only numerical terms can be assessed. Q4. Explain how Financial Statements Analysis ignores qualitative elements? Ans. It shows only quantitative information. Q5. What do you mean by window dressing? Ans. To show the unfair and manipulated data. Q6. Give two areas of interest for management while analyzing the financial statements.  Ans. Decision making and corrective action. Q7. What are contingent liabilities?     Ans. Uncertain claims payable in future. Q8. Why creditors are interested in financial statement analysis?   Ans. Ensure about the repayment. Q9. State the formulae of collecting capital employed. Ans.= share capital + retained earnings. Q10. How subjectivity does become a limitation of Financial Statement Analysis? Ans. Only numerical terms can be assessed. Q11. Explain how Financial Statements Analysis ignores qualitative elements? Ans. It shows only quantitative information. Q12. X Ltd. Has a Debt-Equity Ratio at 3:1. According to the management it should be maintained at 1:1. State the method to do so? Ans. By repaying the debts. Q13. Assuming that the Debt-Equity Ratio is 1:2, state giving reason, whether the ratio will             improve, decline or will have no change in case equity shares are issued for cash. Ans. Decrease the ratio. Q14. How window dressing affect analysis of financial statements? Ans. It gives false information to interested parties. Q15. With which ratios we can check company’s efficiency or activity? Ans. Turnover ratios. Q16. If debt equity ratio is low what does it indicate? Ans. It indicates dependence on borrowing. Q17. Give the assets side approach to calculate the capital employed. Ans. = fixed assets + working capital. Q18. How can liquidity be judged through stock turnover ratio? Ans. By length of operating cycle. Q19. How quick ratio is better than the current ratio to judge the short term financial position of a concern? Ans.quick assets is more faithful parameter to assess the short-term financial position. Q20. If there is high creditor’s turnover ratio what does it indicate? Ans. Longer the period of repayment to the creditors.

Cash Flow Statement

1)      What is meant by ‘Cash’ as per AS-3? Ans: Cash compromises Cash in hand and demand deposits with bank. 2)      Give one example of an activity which is an operating activity for every enterprise. Ans: Salary paid to staff. 3)      Give one example of an activity which is an Investing Activity for every organization. Ans: Purchase of Goodwill. 4)      Give one example of an activity which is a financing activity for every organization. Ans: Payment of dividend. 5)      Do you think Issue of Bonus Shares will appear in the Cash Flow Statement? Ans: Issue of Bonus Shares will not appear in the Cash Flow Statement since it is a capitalization of profit. 6)      What are the two methods which can be employed to calculate Net Cash Flow from Operating Activities? Ans: Direct and Indirect Method. 7)      State with reason whether cash deposited in bank will result in inflow, outflow or no flow of cash. Ans: Cash deposited into bank does not result in cash flow. It is a movement between two components of cash and cash equivalents. 8)      State how cash flow statements are historical in nature. Ans: Cash Flow Statement is historical in nature because it is prepared from Profit & Loss A/c and Balance Sheet, which are based on past transactions. 9)      Dividend paid by a finance company is classified under which kind of activity while preparing cash flow statement? Ans: It is classified under financing activities. 10)Declaration of final dividend would result in inflow, outflow, or no flow of cash. Give yours answers with reason. Ans: No flow of cash, as dividend is declared only not yet paid.