FUNDAMENTALS OF ACCOUNTING - CHAPTER 7

Solution Books of Khosla Joint Venture Account with David Rs. Rs. To Bank - Remittance 1,50,000 By Bank - Sales 2,40,000 To Bank - Insurance 1,000 By Vehicles A/c - Car Purchase 50,000 To Bank - Garage Rent 2,000 To Bank - Brokerage 2,000 To Bank - Sundry 400 To Profit & Loss A/c - Share of Profit 29,800 To Bank - Final Settlement 1,04,800 2,90,000 2,90,000 Memorandum Joint Venture Account Rs. Rs. To David - cost of cars 1,60,000 By Khosla - Sales 2,40,000 To David - Reconditioning 60,000 By Khosla - car taken 50,000 To David - Transport charges 5,000 To Khosla - Expenses * 5,400* To Net Profit - David 29,800 - Khosla 29,800 59,600 2,90,000 2,90,000 * Expenses incurred by Khosla - Insurance 1,000 - Garage Rent 2,000 - Brokerage 2,000 - Sundry Expenses 400 5,400 Illustration 10 A of Delhi and B of Bangalore entered into a joint venture for purchase and sale of one lot of mopeds. The cost of each moped was Rs. 3,600 and the fixed retail selling price; Rs. 4,500. The following were the recorded transactions: FUNDAMENTALS OF ACCOUNTING 7.51 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES 2009 Jan 1 A purchased 100 mopeds paying Rs. 72,000 in cash on account. A raised a loan from X Bank for Rs. 50,000 at 18% p.a., interest repayable with interest on 1.3.2009. A forwarded 80 mopeds to B incurring Rs. 2,880 as forwarding and insurance charges. Jan. 7 B received the consignment and paid Rs. 720 as clearing charges. A sold 5 mopeds for cash. B sold 20 mopeds for cash. B raised a loan of Rs. 1,50,000 from Y Bank, repayable with interest at 18% p.a on 1.3.2009. B telegraphically transferred Rs. 1,50,000 to A incurring charges of Rs. 50. A paid balance due for the mopeds. Feb. 26 A sold the balance mopeds for cash. B sold balance mopeds for cash. A paid selling expenses Rs. 5,000. B paid selling expenses Rs. 20,000. Mar. 1 Accounts settled between the venturer and loans repaid, profit being appropriated equally. You are required to show Memorandum Joint Venture A/c. Solution Memorandum Joint Venture Account for the period Jan. 1 to March 1, 2009 Rs. Rs. To A : By Sales : Cost of Mopeds 3,60,000 B (80 × 4,500) 3,60,000 Forwarding & Insurance 2,880 A (20 × 4,500) 90,000 Interest (2 months) 1,500 Selling Expenses 5,000 To B : Clearing Charges 720 Interest (1 month) 2,250 Sundry Expenses (Telegraphic transfer charges) 50 Selling Expenses 20,000 To Net Profit to A 28,800 B 28,800 57,600 4,50,000 4,50,000 7.52 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Illustration 11 With the data given in Illustration 10, prepare (1) Joint Venture with B A/c in A's books; and (2) Joint Venture with A A/c in B's books. You have to assume that each venturer recorded only such transactions as concluded by him. Solution In the books of A Joint Venture with B Account Rs. Rs. To Bank A/c - (part payment of cost) 72,000 By Bank A/c 22,500 (sales proceeds) To Bank A/c - (forwarding charges) 2,880 By Bank A/c - (remittance 1,50,000 from B) To Bank A/c - (balance cost of 2,88,000 By Bank A/c 67,500 purchases) (sales proceeds) To Bank A/c - (selling exp.) 5,000 By Bank A/c - (cash received To Interest A/c 1,500 in settlement) 1,58,180 To Profit & Loss A/c - (share of profit) 28,800 3,98,180 3,98,180 Books of B Joint Venture with A Account Dr. Cr. Rs. Rs. To Bank A/c - (clearing charges) 720 By Bank A/c - (Sales proceeds of 20 mopeds) 90,000 To Bank A/c - (remittance 1,50,000 By Bank A/c - (sales proceeds including charges) of 60 mopeds) 2,70,000 To Bank A/c - (selling exp.) 20,000 To Bank A/c - (interest) 2,250 To Sundry Expenses 50 To P & L A/c (share of profit) 28,800 To Bank A/c - (paid in settlement) 1,58,180 3,60,000 3,60,000 FUNDAMENTALS OF ACCOUNTING 7.53 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES Illustration 12 K and A of Nagpur entered into a joint venture to trade in silk goods in the ratio 2:1. On June 1, 2009, K bought goods worth Rs. 7,200 and handed over half of the goods to A. On July 1, 2009, K bought another lot of goods costing Rs. 2,400 and paid Rs. 180 as expenses. On September 1, A purchased goods for Rs. 4,500 and on the same day he sent to K a part of these goods costing Rs. 1,800 and paid Rs. 240 towards expenses. On the same day K remitted Rs. 1,800 to A. The goods were invariably sold by the venturers at a uniform price of 33.33% above cost price excluding expenses. Each of the venturers collected cash proceeds on sales excepting an amount of Rs. 250 owing to K by a customer and this was written off as a loss relating to the venture. In addition, goods costing Rs. 600 in possession of A were destroyed by fire and an amount of Rs. 500 was realised by him as compensation from the Insurance Company. On December 20, unsold goods costing Rs. 1,500 (at cost) were lying with K. Of these, goods costing Rs. 600 were taken by K for personal use and the balance was purchased by him at an agreed value of Rs. 1,000. A disposed of all the goods with him on December 31, excepting some damaged goods costing Rs. 300 which were written off as unsaleable. Prepare a Memorandum Joint Venture Account to find the amount of profit or loss. Solution Memorandum Joint Venture Account Dr. Cr. Date Particulars Rs. Date Particulars Rs. ToK: By K: Cost of goods Sales (W.N.1) 8,400 (Rs. 7,200 + Rs. 2,400) 9,600 Stock taken over 1,600 Expenses 180 By A: Bad Debts 250 Sales (W.N.2) 7,200 To A: Insurance claim 500 Cost of goods 4,500 Expenses 240 To Net Profit: K - 2/3rd 1,953 A - 1/3rd 977 17,700 17,700 7.54 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Working Notes: 1. Calculation of sales affected by K Rs. Goods purchased in first lot Rs. 7,200 Less: Send to A Rs. 3,600 3,600 Goods purchased in another lot 2,400 Goods received from A 1,800 7,800 Less: Unsold goods: Taken for personal use 600 Purchase by K (1500-600) 900 1,500 Cost of goods sold 6,300 Add: Profit @ 33.33% on cost 2,100 Sales price of goods sold 8,400 2. Calculation of sales affected by A Rs. Goods received by K 3,600 Goods purchased 4,500 Less: Goods sent to K 1,800 2,700 6,300 Less: Goods destroyed by fire 600 Damaged goods 300 Cost of goods sold 5,400 Add: Profit @ 33.33% on costs 1,800 Sales price of goods sold 7,200 FUNDAMENTALS OF ACCOUNTING 7.55 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES SELF EXAMINATION QUESTIONS Choose the most appropriate answer from the given options 1. M and N enter into a Joint venture where M supplies goods worth Rs. 6,000 and spends Rs 100 on various expenses. N sells the entire lot for Rs. 7,500 meeting selling expenses amounting to Rs 200. Profit sharing ratio is equal. N remits to M the amount due. The amount of remittance will be: (a) Rs. 6,700 (b) Rs. 7,300 (c) Rs. 6,400 (d)Rs. 6,100 2. A purchased goods costing Rs. 42,500. B sold goods costing Rs. 40,000 at Rs. 50,000. Balance goods were taken over by A at same gross profit percentage as in case of sale. The amount of goods taken over will be: (a). Rs. 3,125 (b). Rs. 2,500 (c). Rs. 3,000 (d)None 3. Which of the following statement is true? (a) Only one venturer bears the risk (b) Only one venturer can sell the goods (c) Only one venturer can purchase the goods (d) In joint venture, provisions of partnership act applies 4. Which of the following statement is true: (a) In case of separate sets of books method of Joint Venture, co-venturer’s contribution of goods is debited in Joint Bank A/c (b) Co-venturer’s contribution in cash is debited in Venturer’s personal account (c) Discount on discounting of B/R is debited to Venturer’s personal account (d) Contract money received is credited to Joint Venture Account. 5. For opening Joint Bank account, in case of separate sets of books: (a) Venture A/c will be debited and Venturers A/c will be credited (b) Joint Bank A/c is debited and Venturers Capital A/c is credited (c) Joint Venture A/c is debited and Joint Bank A/c will be credited (d) Joint Bank A/c will be debited and Joint Venture A/c will be credited 6. For purchase of plant from Joint Bank Account, in case separate sets of books are maintained, the correct journal entry will be: (a) Plant A/c will be debited and Joint Bank A/c will be credited (b) Joint Venture A/c will be debited and Joint Bank A/c will be credited (c) Plant A/c will be debited and Venturers Capital A/c will be credited (d) Joint Venture A/c will be debited and Plant A/c will be credited 7.56 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 7. For material supplied from own stock by any of the venturer, the correct journal entry will be: (In case of separate sets of books) (a) Joint Venture A/c will be debited and Venturers Capital A/c will be credited (b) Joint Venture A/c will be debited and Joint Bank A/c will be credited (c) Joint Venture A/c will be debited and Material A/c will be credited (d) Joint Bank A/c will be debited and Joint Venture A/c will be credited 8. A and B enter into a joint venture to underwrite the shares of K Ltd. K Ltd make an equity issue of 1,00,000 equity shares of Rs 10 each. 80% of the issue was subscribed by the public. The profit sharing ratio between A and B is 3:2. The balance shares not subscribed by the public, purchased by A and B in profit sharing ratio. How many shares to be purchased by A. (a) 80,000 shares (b) 72,000 shares (c) 12,000 shares (d) 8,000 shares 9. A and B enter into a joint venture to underwrite shares of K Ltd. K Ltd make an equity issue of 2,00,000 equity shares. 80% of the shares underwritten by the venturer. 1,60,000 shares are subscribed by the public. How many shares are to be subscribed by the venturer? (a) Nil (b) 32,000 shares (c) 36,000 shares (d)40,000 shares 10. A and B purchased a piece of land for Rs. 20,000 and sold it for Rs. 60,000 in 2009. Originally A had contributed Rs. 12,000 and B Rs. 8,000. What will be the profit on venture? (a) Rs. 40,000 (b) Rs. 20,000 (c) Rs. 60,000 (d)Nil 11.. A and B enter into a joint venture sharing profit and losses in the ratio 2:1. A purchased goods costing Rs. 2,00,000. B sold the goods for Rs. 2,50,000. A is entitled to get 1% commission on purchase and B is entitled to get 5% commission on sales. The profit on venture will be: (a) Rs. 35,500 (b) Rs. 36,000 (c) Rs. 34,000 (d)Rs.38,000 12. P and Q enter into a Joint Venture sharing profits and losses in the ratio 3:2. P purchased goods costing Rs. 2,00,000. Other expenses of P Rs. 10,000. Q sold the goods for 180,000. Remaining goods were taken over by Q at Rs. 20,000. The amount of final remittance to be paid by Q to P will be: (a) Rs. 2,15,000 (b) Rs. 2,04,000 (c) Rs. 2,10,000 (d)None 13. C and D entered into a Joint Venture to construct a bridge. They did not open separate set of books. They shared profits and losses as 3:2. C contributed Rs. 1,50,000 for purchase of materials. D paid wages amounting to Rs. 80,000. Other expenses were paid as: C – Rs. 5,000 D – Rs. 15,000 C purchased one machine for Rs. 20,000. The machine was taken over by C for Rs. 10,000. Total contract value of Rs. 3,00,000 was received by D. What will be the profit on venture? (a) Rs. 30,000 (b) Rs. 40,000 (c) Rs. 20,000 (d)Rs. 15,000 14. R and M entered into a joint venture to purchase and sell new year gifts. They agreed to share the profit and losses equally. R purchased goods worth Rs. 1,00,000 and spent FUNDAMENTALS OF ACCOUNTING 7.57 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES Rs. 10,000 in sending the goods to M. He also paid Rs. 5,000 for insurance. M spent Rs. 10,000 as selling expenses and sold goods for Rs. 2,00,000. Remaining goods were taken over by him at Rs. 5000. What will be the amount to be remitted by M to R as final settlement? (a) Rs.1,55,000 (b) Rs.1,50,000 (c) Rs.11,5000 (d)Rs.80,000 15. R and M entered into a joint venture to purchase and sell new year gifts. They agreed to share the profit and losses equally. R purchased goods worth Rs. 100,000 and spent Rs. 10,000 in sending the goods to M. He also paid Rs. 5,000 for insurance. M spent Rs. 10,000 as selling expenses and sold goods for Rs. 2,00,000. Remaining goods were taken over by him at Rs. 5,000. Find out profit on venture? (a) Rs.70,000 (b) Rs.75,000 (c) Rs.80,000 (d)Rs.85,000 16. A and B enter into a joint venture sharing profit and losses in the ratio 3:2. A will purchase goods and B will affect the sale. A purchase goods costing Rs 200,000. B sold it for Rs. 3,00,000. The venture is terminated after 3 months. A is entitled to get 10% interest on capital invested irrespective of utilization period.. The amount of interest received by A will be (a) Rs. 20,000 (b) Rs. 10,000 (c) Rs. 15,000 (d)Rs. 25,000 17. A bought goods of the value of Rs. 10,000 and consigned them to B to be sold by them on a joint venture, profits being divided equally. A draws a bill on B for an amount equivalent to 80% of cost on consignment. The amount of bill will be: (a) Rs.10,000 (b) Rs.8,000 (c) Rs.6,000 (d)Rs.9,000 18. A bought goods of the value of Rs. 10,000 and consigned them to B to be sold by them on a joint venture, profits being divided equally, A paid Rs. 1,000 for freight and insurance. A draws a bill on B for Rs. 10,000. A got it discounted at Rs. 9,500. B sold the goods for Rs. 15,000. Commission payable to B, Rs. 500. Find out the profit on venture? (a) Rs.3,000 (b) Rs.3,500 (c) Rs.4,000 (d)Rs.3,200 19. A bought goods of the value of Rs. 10,000 and consigned them to B to be sold by them on a joint venture, profits being divided equally, A paid Rs. 1,000 for freight and insurance. A draws a bill on B for Rs. 10,000. A got it discounted at Rs. 9,500. B sold the goods for Rs. 15,000. Commission payable to B, Rs. 500. The amount to be remitted by B to A will be: (a) Rs.12,500 (b) Rs.3,000 (c) Rs.14,500 (d)Rs.13,500 20. If any stock is taken over by the venturer, it will be treated as an: (a) Income of the joint venture, hence credited to Joint Venture Account (b) Expenses of Joint Venture, hence debited to Joint Venture Account (c) To be ignored as Joint Venture Transaction (d) It will be treated in the personal book of the venturer and not in the books of Joint Venture. 21. Advise which of the statement is true: (a) The Joint Venture can be formed by a single person only. 7.58 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India (b) A legal deed should be drafted before forming Joint Venture. (c) The profit to be shared between the venturer in agreed ratio (d) Joint Venture follows going concern concept. 22. A and B were partners in a joint venture sharing profits and losses in the proportion of 3/5th and 2/5th respectively. A supplies goods to the value of Rs. 80,000 and incurs expenses amounting Rs. 6,000. B supplies goods to the value of Rs. 14,000 and his expenses amount to Rs. 2,000. B sells goods on behalf of the joint venture and realizes Rs. 1,50,000. B entitled to a commission of 5% on sales. B settles his account by bank draft. Find out A’s share of profit on venture? (a) Rs. 24,300 (b) Rs. 25,000 (c) Rs. 26,000 (d) Rs. 20,300 23. A and B were partners in a joint venture sharing profits and losses in the proportion of 3/5th and 2/5th respectively. A supplies goods to the value of Rs. 60,000 and incurs expenses amounting Rs. 6,000. B supplies goods to the value of Rs. 16,000 and his expenses amount to Rs. 3,000. B sells goods on behalf of the joint venture and realizes Rs. 1,20,000. B entitled to a commission of 5% on sales. B settles his account by bank draft. How much amount, B will pay to A as final settlement? (a) Rs.83,400 (b) Rs.93,200 (c) Rs.80,000 (d)Rs.66,000 24. A and V enter into a joint venture to sell a consignment of biscuits sharing profits and losses equally. A provides biscuits from stock Rs. 10,000. He pays expenses amounting to Rs. 1,000. V incurs further expenses on carriage Rs. 1,000. He receives cash for sales Rs. 15,000. He also takes over goods to the value of Rs. 2,000. What will be the amount to be remitted by V to A? (a) Rs.13,500 (b) Rs.15,000 (c) Rs.11,000 (d)Rs.10,000 25. A and V enter into a joint venture to sell a consignment of biscuits sharing profits and losses equally. A provides biscuits from stock Rs. 10,000. He pays expenses amounting to Rs. 1,000. V incurs further expenses on carriage Rs. 1,000. He receives cash for sales Rs. 15,000. He also takes over goods to the value of Rs. 2,000. Find out profit on venture? (a) Rs.3,000 (b) Rs.5,000 (c) Rs.6,000 (d)Rs.3,500 26. A purchased 1000 kg of rice costing Rs 200 each. Paid carriage Rs. 2,000 and insurance Rs. 3,000. 4/5th of the boxes were sold by B at Rs 250 per boxes. Remaining stock were taken over by B at cost. The amount of stock taken over will be: (a) Rs. 40,000 (b) Rs.41,000 (c) Rs.50,000 (d) Rs.50,200 27. Goods costing Rs. 10,000 destroyed by an accident, insurance claim nil. (a) Rs 10000 will be credited to Joint Venture Account. (b) No Entry will be made in the books of Joint Venture (c) Rs 10000 will be debited in Joint Venture Account as Loss (d) Rs 8000 will be credited in Joint Venture Account FUNDAMENTALS OF ACCOUNTING 7.59 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES 28. A and B were partners in a joint venture sharing profits and losses in the proportion of 3/5th and 2/5th respectively. A supplies goods to the value of Rs. 60,000 and incurs expenses amounting Rs. 6,000. B supplies goods to the value of Rs. 14,000 and his expenses amount to Rs. 1,000. B sells goods on behalf of the joint venture and realizes Rs. 1,00,000. B entitled to a commission of 5% on sales. B settles his account by bank draft. Find out the profit on venture? (a) Rs. 14,400 (b) Rs.14,000 (c) Rs.13,000 (d)Rs.13,200 29. A purchased goods costing Rs. 1,00,000. B sold the goods for Rs 1,50,000. Profit sharing ratio between A and B equal. If same sets of books is maintained, what will be the final remittance? (a) B will remit Rs 1,25,000 to A (b) B will remit Rs 1,50,000 to A (c) A will remit Rs 1,00,000 to B (d) B will remit Rs 25,000 to A 30. A purchased goods costing Rs. 2,00,000, B sold 4/5th of the goods for Rs. 2,50,000. Balance goods were taken over by B at cost less 20%. If same sets of books is maintained, find out profit on venture? (a) Rs. 82,000 (b) Rs. 90,000 (c) Rs. 50,000 (d)None of these 31. A purchased goods costing Rs. 2,00,000. B sold the goods for Rs. 2,80,000. Unused material costing Rs. 10,000 taken over by A at Rs. 8,000. A is entitled to get 1% commission on purchase. B is entitled to get 2% commission on sales. Profit sharing ratio equal. A’s share of profit on venture will be: (a) Rs. 40,000 (b) Rs. 40,400 (c) Rs. 40,600 (d)Rs. 40,200 32. A and B enter into joint venture sharing profit and loss equally. A purchased 100 kg of rice @ Rs 20/kg. Brokerage paid Rs 200, carriage paid Rs 300. B sold 90 kg of rice @ Rs 22/ kg. Balance rice were taken over by B at cost. The value of rice taken over to be recorded in joint venture will be: (a) Rs. 200 (b) Rs. 250 (c) Rs. 230 (d)Rs. 220 33. A and B enter into a joint venture sharing profit and losses equally. A purchased 5,000 kg of rice @ Rs 50/kg. B purchased 1,000 kg of wheat @ Rs 60/kg. A sold 1,000 kg of wheat @ Rs 70/kg and B sold 5,000 kg of rice @Rs 60/kg. The profit on venture when same sets of books is maintained will be: (a) Rs. 1,10,000 (b) Rs.1,00,000 (c) Rs.1,20,000 (d)Rs.60,000 34. A and B enter into a joint venture sharing profits and losses equally. A purchased 5000 kg of rice @ Rs. 50/kg. B purchased 1,000 kg of wheat @ Rs. 60/kg. A sold 1,000 kg of wheat @ Rs. 70/kg and B sold 5,000 kg of rice @ Rs. 60/kg. What will be the final remittance? (a) B will remit Rs. 2,10,000 to A (b) A will remit Rs. 2,10,000 to B (c) A will remit Rs. 2,00,000 to B (d) B will remit Rs. 1,80,000 to A 7.60 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 35. A and B enter into a Joint Venture by opening a joint bank account contributing Rs. 10,00,000. The profit sharing ratio between A and B is 3:2. How much amount to be contributed by A? (a) Rs.6,00,000 (b) Rs.4,00,000 (c) Rs.3,00,000 (d)Rs.5,00,000 36. A, B and C are co-venturer. The relative Profit sharing ratio between A and B is 3:2 and between B and C is also 3:2. Find out the profit sharing ratio between A, B and C. (a) 3:2:2 (b) 9:6:4 (c) 4:3:2 (d)3:2:1 37. A and B entered into a joint venture. They opened a joint bank account by contributing Rs. 2,00,000 each. The expenses incurred on venture is exactly equal to Rs. 2,00,000. Once the work is completed, contract money received by cheque Rs. 4,00,000 and in shares Rs. 50,000. The shares are sold for Rs. 40,000. What will be the profit on venture? (a) Rs.2,50,000 (b) Rs.2,40,000 (c) Rs. 4,40,000 (d)Rs. 4,50,000 38. If a venturer draws a bill on his co-venturer and if the drawer discounts the bill with same sets of books maintained, the discounting charges will be borne by: (a) The drawer of the bill (b) The drawee of the bill (c) The discounting charges will be recorded in memorandum joint venture account (d) The discounting charges will be borne by bank 39. Which of the following statement is not true? (a) Joint venture is a going concern (b) Joint venture is terminable in nature (c) Joint venture does not follow accrual basis of accounting (d) The co-venturer shares the profit in agreed ratio 40. A and B were partners in a joint venture sharing profits and losses in the proportion of 4/5th and 1/5th respectively. A supplies goods to the value of Rs. 50,000 and incurs expenses amounting to Rs. 5,400. B supplies goods to the value of Rs. 14,000 and his expense amount to Rs. 800. B sells goods on behalf of the joint venture and realizes Rs. 92,000. B is entitled to a commission of 5 percent on sales. B settles his account by bank draft. What will be the final remittance? (a) B will remit Rs.69,160 to A (b) A will remit Rs.69,160 to B (c) A will remit Rs.69,000 to B (d) B will remit Rs.69,000 to A 41. A and B were partners in a joint venture sharing profits and losses in the proportion of 4/5th and 1/5th respectively. A supplies goods to the value of Rs. 50,000 and incurs expenses amounting to Rs. 5,400. B supplies goods to the value of Rs. 14,000 and his expense amount to Rs 800. B sells goods on behalf of the joint venture and realizes Rs. 92,000. B is entitled FUNDAMENTALS OF ACCOUNTING 7.61 Copyright -The Institute of Chartered Accountants of India JOINT VENTURES to a commission of 5 percent on sales. B settles his account by bank draft. What will be the profit on venture? (a) Rs.17,200 (b) Rs.17,000 (c) Rs.18,000 (d)Rs.18,200 42. In a Joint venture A contributes Rs. 5,000 and B contributes Rs. 10,000. Goods are purchased for Rs. 11,200. Expenses amount to Rs. 800. Sales amount to Rs. 14,000 the remaining goods were taken by B at an agree price of Rs. 400. A and B share profit and losses in the ratio of 1:2 respectively. As a final settlement, how much A will receive? (a) Rs. 5,800 (b) Rs. 6,000 (c) Rs. 5,000 (d)Rs. 10,800 43. Which of the following statement is true? (a) There is no difference between Joint Venture and Partnership (b) Consignment and Joint Venture is same (c) There is no separate act for Joint Venture (d) In case of Joint Venture, the number of third party is one only. 44. A and B enter into a joint venture sharing profits and losses in the ratio 2:3. Goods purchased by A for Rs. 45,000. Expenses incurred by A Rs. 13,500 and by B Rs. 5,200. B sold the goods for Rs. 85,000. Remaining stock taken over by B at Rs. 7,200. What will be the final remittance to be made by B to A: (a) Rs.69,900 (b) Rs.11,400 (c) Rs.17,100 (d)Rs.7,200 45. If separate sets of books is maintained and suppliers grant discount at the time of making the payment for purchase of goods, such discount received will be treated as: (a) Income of Joint Venture, hence credited to Joint Venture A/c (b) Will be credited to Joint Bank A/c (c) Will be credited to Co-venturer’s Capital A/c (d) Will be ignored from the books 46. If unsold goods costing Rs 20,000 is taken over by Venturer at Rs. 15,000, the Joint Venture A/c will be credited by: (a) Rs.20,000 (b) Rs.15,000 (c) Rs.5,000 (d)Nil 47. A and B enter into a venture sharing profits and losses in the ratio 2:3. Goods purchased by A for Rs. 45,000. Expenses incurred by A, Rs. 13,500 and by B Rs. 5,200. B sold the goods for Rs. 85,000. Remaining stock taken over by B at Rs. 7,200. The profit on venture will be: (a) Rs. 28,500 (b) Rs. 21,300 (c) Rs. 35,700 (d)Rs. 9,800 48. State which of the statement is true? (a) Memorandum Joint Venture Account is prepared to find out profit on venture (b) Memorandum Joint Venture Account is prepared to find out amount due from co-venturer 7.62 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India (c) Memorandum Joint Venture Account is prepared when separate sets of books is maintained (d) In Memorandum Joint Venture Account only one venturer’s transaction is recorded 49. A and B enter into a joint venture for purchase and sale of Type-writer. A purchased Typewriter costing Rs. 1,00,000. Repairing expenses Rs. 10,000, printing expenses Rs. 10,000. B sold it at 20% margin on selling price. The sales value will be: (a) Rs. 1,25,000 (b) Rs. 1,50,000 (c) Rs. 1,00,000 (d)Rs. 1,40,000 50. Which of the following statement is true? (a) When separate set of books is maintained, expenses paid by venturer will be credited to joint bank account. (b) When separate set of books is maintained, expenses paid by venturer will be credited to venturer’s capital account. (c) When separate set of books is maintained, expenses paid by venturer will be credited to Joint venture account. (d) When separate set of books is maintained, expenses paid by venturer will be credited to Outstanding Expenses Account. ANSWERS 1. (a) 2. (a) 3. (d) 4. (d) 5. (b) 6. (b) 7. (a) 8. (c) 9. (b) 10. (a) 11. (a) 12. (b) 13. (b) 14. (a) 15. (c) 16. (a) 17. (b) 18. (a) 19. (b) 20. (a) 21. (c) 22. (a) 23. (a) 24. (a) 25. (b) 26. (b) 27. (b) 28. (b) 29. (a) 30. (a) 31. (d) 32. (b) 33. (d) 34. (a) 35. (a) 36. (b) 37. (b) 38. (c) 39. (a) 40. (a) 41. (a) 42. (a) 43. (c) 44. (a) 45. (a) 46. (b) 47. (a) 48. (a) 49. (b) 50. (b) FUNDAMENTALS OF ACCOUNTING 7.63 Copyright -The Institute of Chartered Accountants of India CHAPTER - 7 ACCOUNTING FOR SPECIAL TRANSACTIONS Unit 3 Bills of Exchange and Promissory Notes Copyright -The Institute of Chartered Accountants of India Learning Objectives After studying this unit, you will be able to : (cid:2) Understand the meaning of Bills of Exchange and Promissory Notes and also try to grasp their underlying features. (cid:2) Grasp the accounting treatments relating to issue, acceptance, discounting, maturity and endorsement of bills and notes in the books of drawer and drawee. (cid:2) Learn the technique of accounting relating to accommodation bills. (cid:2) Learn the special treatment needed in case of insolvency as well as early retirement of bill. 1. BILLS OF EXCHANGE Often when goods are sold on credit, the seller would like that the purchaser should give a definite promise in writing to pay the amount of the goods on a certain date. Commercial practice has developed to treat these written promises into valuable instruments of credit so much so that when a written promise is made in proper form and is properly stamped, it is supposed that the buyer has discharged his debt and that the seller has received payment. This is because written promises are often accepted by banks and money is advanced against them. Otherwise also they can be passed on from person to person. The written promise is either in the form of a Bill of Exchange or in the form of a promissory note. 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 a certain person or to the bearer of the instrument". When such an order is accepted in writing on the face of the order itself, it becomes a valid bill of exchange. Suppose A order B to pay Rs. 500 three months after date and B accepts this order by signing his name, then it will be a bill of exchange. The following is a specimen of a properly drawn bill of exchange. Rs. 1,000 Delhi June, 2006 Three months after date pay to M/s. Mohanlal & Sons or order the sum of Rs. One thousand for value received. G. Nanda To Gulab Singh & Co. Sardar Bazaar. This is known as draft. This will be sent to M/s. Mohanlal & Sons or order as accepted by them who will write across the order as under : Accepted Gulab Singh Partner After acceptance it becomes a proper bill of exchange. FUNDAMENTALS OF ACCOUNTING 7.65 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES The following points should be noted: 1. A Bill of Exchange must be in writing. 2. It must be dated. 3. It must contain an order to pay a certain sum of money. 4. The money must be payable to a definite person or to his order to the bearer. 5. The draft must be accepted for payment by the party to whom the order is made. The party which makes the order is known as the drawer. the party which accepts the order is known as the acceptor and the party to whom the amount has to be paid is known as the payee. The drawer and the payee can be the same. A Bill of Exchange can be passed on to another person by endorsement. Endorsement on a bill of exchange is made exactly as it is done in the case of a cheque. The primary liability on a bill of exchange is that of the acceptor. If he does not pay, a holder can recover the amount from any of the previous endorsers or the drawee. The meaning of the term Payee, Drawee and Drawer can be explained with the help of following example : Sohan sold goods worth Rs. 1,00,000 to Mohan for which the former drew a bill to be paid 3 months after date and sent it to later for acceptance. After acceptance, this bill becomes a bill of exchange. In the mean time, Sohan bought goods worth Rs. 1,00,000 from Ram Lal & Sons and directed Mohan to pay the amount to Ram Lal & Sons. Specimen of a Bill of Exchange Payee Rs. 1,00,000/- only Delhi, June 25, 2009 Three months after pay to M/s. Ram Lal & Sons or order the sum of Rs. One lakh only, for value received. Stamp To, Mohan Accepted Sd/- 23, Rajasthali Apartments, (Mohan) (Sohan) Pitampura, Delhi-110 034. Drawee Drawer 7.66 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India A foreign bill of exchange is generally drawn up in triplicate. Each copy is sent by separate post so that at least one copy reaches the intented party. Of course payment will be made only on one of the copies and when such payment is made the other copies become useless. A foreign bill of exchange drawn like the following : Rs. 5,000 New Delhi July, 2009 Ninety days after date of this First Bill of Exchange (Second and Thrid of the same tenure and date being unpaid) pay to the order of M/s. Ghosh Sons, London the sum of Rs. Five thousand only, value received. To Wallis Sons, M/s. Black White Birmingham, UK. Section 12 of the Negotiable Instruments Act provides that all instruments which are not inland instrument are foreign. The following are examples of foreign bills. 1. A bill drawn in India on a person resident outside India and made payable outside India. 2. A bill drawn outside India on a person resident outside India. 3. A bill drawn outside India and made payable in India. 4. A bill drawn outside India and made payable outside India. 2. PROMISSORY NOTES 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 order of a certain person. Under Section 31(2) of the Reserve Bank of India Act a promissory note cannot be made payable to bearer. A promissory note has the following characteristics. 1. It must be in writing. 2. It must contain a clear promise to pay. Mere acknowledgement of a debt is not a promissory note. 3. The promise to pay must be unconditional "I promise to pay Rs. 500 as soon as I can” is not an unconditional promise. 4. The promiser or maker must sign the promissory note. 5. The maker must be a certain person. 6. The payee (the person to whom the payment is promised) must also be certain. 7. The sum payable must be certain. "I promise to pay Rs. 500 plus all fine" is not certain. 8. Payment must be in legal currency of the country. 9. It should not be made payable to the bearer. 10. It should be properly stamped. FUNDAMENTALS OF ACCOUNTING 7.67 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES Specimen of promissory note : Specimen of a Promissory Note Rs. 1,00,000/- only Mohan 84, Sector-1, Noida. June 20, 2006. Three months after date I promise to pay Sohan or his order the sum of Rs. One lakh only, for value received To, Sohan Stamp D-14, Pitampura, Delhi-110 034. (Mohan) Payee Maker 3. RECORD OF BILLS OF EXCHANGE AND PROMISSORY NOTES 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. We shall first deal with the entries in the books of the party which receives promissory notes or bills. (When we talk of bills, we include promissory notes also). (1) On receipt of Bill : Bills Receivable Account ...... Dr. To Drawee/Maker of the note Example 1 : A accepts a Bill of exchange drawn on him by B. In the books of B the entry will be : Bills Receivable Account Dr. To A (2) A sends to B the acceptance of D. In this case also, the entry in the books of B will be : Bills Receivable Account ..... Dr. To A Example 2 : The person who receives the bill has three options. These are : (i) He can hold the bill till maturity. (Naturally in this case no further entry is passed until the date of maturity arrives). 7.68 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India (ii) The bill can be endorsed in favour of another party. In this case the entry will be to debit the party which now receives the bill and to credit the Bills Receivable Account. A ...... Dr. To Bills Receivable Account (iii) The Bill of Exchange can be discounted with bank. The bank will deduct a small sum of money as discount and pay rest of the money. Bank Account Dr. (with the amount actually received) Discount Account Dr. (with the amount of loss or discount) To Bills Receivable Account Example 3 : On the date of maturity there will be two possibilities. The first is that the bill will be paid, that is to say, met or honoured. The entries for this will depend upon what was done to the bill during the period of maturity. If the bill was kept, the cash will be received by the party which originally received the bill. In his books, therefore, the entry will be : Cash Account ... Dr. To Bills Receivable Account But if he has already endorsed the bill in favour of his creditor or if the bill has been discounted with the bank he will not get the amount; it will be the creditor or the bank wich will receive the money. Therefore, in these two cases, no entry will be made in the books of the party which originally received the bill. The second possibility is that the bill will be dishonoured, that is to say, the bill will not be paid. If the bill is dishonoured, the bill becomes useless and the party from whom the bill was received will be liable to pay the amount (and also the expenses incurred by the party). Therefore, the following entires will be made : 1. If the bill was kept till maturity then : Drawee / Maker of the note .... Dr. To Bills Receivable Account 2. If the bill was endorsed in favour of a creditor, the entry is : Drawee / Maker of the note .... Dr. To Creditors 3. If the bill was discounted with the bank : Drawee / Maker of the note .... Dr. To Bank A/c Thus it will be seen that in case of dishonour, the party which gave the bill has to be debited (because he has become liable to pay the amount). The credit entry is in Bills Receivable Account (if it was retained) or the Creditor or the bank (if it was endorsed/discounted in their favour). FUNDAMENTALS OF ACCOUNTING 7.69 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES 4. TERM OF A BILL The term of bill of exchange may be of any duration. Usually the term does not exceed 90 days from the date of the bill. When a bill is drawn after sight, the term of the bill begins to run from the date of ‘sighting’, i.e., when the bill is accepted. When a bill is drawn ‘after date’, the term of the bill begins to run from the date of drawing the bill. 5. DUE DATE OF A BILL The date on which the term of the bill expires is called as ‘Due Date of the bill’. 6. DAYS OF GRACE Every instrument payable otherwise than on demand is entitled to three days of grace. 7. DATE OF MATURITY OF BILL The date which comes after adding three days to the due date of a bill, is called the date of maturity. 8. BILL AT SIGHT Bill at Sight means the instruments in which no time for payment is mentioned. A cheque is always payable on demand. A promissory note or bill of exchange is payable on demand- (a) when no time for payment is specified, or (b) when it is expressed to be payable on demand, or at sight or on presentment. Notes: (i) ‘At sight’ and ‘presentment’ means on demand. (ii) An instrument payable on demand may be presented for payment at anytime. (iii) Days of grace is not to added to calculate maturity for such types of bill. 9. BILL AFTER DATE Bill after date means the instrument in which time for payment is mentioned. A promissory note or bill of exchange is a time instrument when it is expressed to be payable- (a) after a specified period. (b) on a specific day (c) after sight (d) on the happening of event which is certain to happen 7.70 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Notes: (i) The expression ‘after sight’ means- (a)in a promissory note, after presentment for sight (b)in a bill of exchange, after acceptance or noting for non-acceptance or protest for non-acceptance. (ii) A cheque cannot be a time instrument because the cheque is always payable on demand. 10. HOW TO CALCULATE DUE DATE OF A BILL The due date of each bill is calculated as follows: Case Due Date (a) When the bill is made payable on a (a) That specific date will be the due date. specific date. (b) When the bill is made payable at a (b) That date on which the term of the bill shall stated number of months(s) after date. expire will be the due date. Note: The term shall expire on that day of the month which corresponds with the day on which the bill is dated. If the month in which the period terminates has no corresponding day, the period shall be deemed to expire on the last day of such a month. (c) When the bill is made payable at a (c) That date which comes after adding stated stated number of days after date. number of days to the date of bill, shall be the due date. Note: The date of Bill is excluded. (d)When the due date is a public holiday. (d) The preceding business day will be the due date. (e) When the due date is an emergency/ (e) The next following day will be the due date. unforeseen holiday. Note: The term of a Bill after sight commences from the date of acceptance of the bill whereas the term of a Bill after date of drawing a bill commences from the date of drawing of bill. 11.HOW TO CALCULATE DATE OF MATURITY IN CASE OF TIME BILLS In case of time or tenor bills, three days (called days of grace) are added to the due date to arrive at the date of maturity. FUNDAMENTALS OF ACCOUNTING 7.71 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES 12. NOTING CHARGES It is necessary that the fact of dishonour and the causes of dishonour should be established. If the acceptor can prove that the bill was not properly presented to him for payment, he may escape liability. Therefore, if there is dishonour, or fear of dishonour, the bill will be given to a public official known as "Notary Public". These officials present the bill for payment and if the money is received, they will hand over the money to the original party. But if the bill is dishonoured they will note the fact of dishonuour, with the reasons and give the bill back to their client. For this service they charge a small fee. This fee is known as noting charges. The amount of noting charges is recoverable from the party which is responsible for dishounour. Suppose X received from Y a bill for Rs. 1,000. On Maturity the bill is dishonoured and Rs. 10 is paid as noting charges. The entry in this case will be Rs. Rs. Y Dr. 1,010 To Bills Receivable Account 1,000 To Bank A/c 10 Suppose X had endorsed this bill in favour of Z. In that case entry for dishonoured bill would have been Y Dr. 1,010 To Z 1,010 This is because Z will claim Rs. 1,010 from X and X has the right of recovering Rs. 1,010 from Y. Similarly, if the bill has been discounted with a bank, entry will be : Y Dr. 1,010 To Bank A/c 1,010 13. RENEWAL OF BILL Sometimes the acceptor is unable to pay the amount and he himself moves that he should be given extension of time. In such a case a new bill will be drawn and the old bill will be cancelled. If this happens entries should be passed for cancellation of the old bill. This is done exactly as already explained for dishonuour. When the new bill is received entries for the receipt of the bill will be repeated. Illustration 1 Mohan sold goods to Gupta on 1st September, 2009 for Rs. 1,600. Gupta immediately accepted a three months bill. On due date Gupta requested that the bill be renewed for a fresh period of two months. Mohan agrees provided interest at 9% was paid immediately in cash. To this Gupta was agreeable. The second bill was met on due date. Give Journal entries in the books of Mohan. 7.72 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Solution Books of Mohan Journal Dr. Cr. 2009 Rs. Rs. Sept. 1 Gupta Dr. 1,600 To Sales Account 1,600 (Sales of goods to Gupta as per Invoice No...) Bills Receivable Account Dr. 1,600 To Gupta 1,600 (3 months acceptance received from Gupta for the amount due from him) Dec. 4 Gupta Dr. 1,600 To Bills Receivable Account 1,600 (Gupta's acceptance cancelled because of renewal) Gupta Dr. 24 To interest 24 (Interest @ 9% on Rs. 1,600 due from Gupta for 2 months because of renewal) Bills Receivable Account Dr. 1,600 Cash Account Dr. 24 To Gupta 1,624 [New acceptance for 2 months for Rs. 1,600 and Cash (for interest) received from Gupta] 2010 Feb. 7 Cash Account Dr. 1,600 To Bills Receivable Account 1,600 (Cash received against Gupta's second acceptance) Illustration 2 On 1st July, 2009, G drew a bill for Rs. 80,000 for 3 months on H for mutual accommodation. H accepted the bill of exchange. G had purchased goods worth Rs. 81,000 from J on the same date. G endorsed H's acceptance to J in full settlement. On 1st September, 2009 J purchased goods worth Rs. 90,000 from H. J endorsed the bill of exchange received from G to H and paid FUNDAMENTALS OF ACCOUNTING 7.73 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES Rs. 9,000 in full settlement of the amount due to H. On 1st October, 2009 H purchased goods worth Rs. 1,00,000 from G. H paid the amount due to G by cheque. Give the necessary Journal Entries in the books of H. Solution In the books of H Journal Entries Date Particulars Dr. Cr. Rs. Rs. 1.7.09 G's account Dr. 80,000 To Bills payable account 80,000 (Acceptance of bill drawn by G) 1.9.09 J's account Dr. 90,000 To Sales account 90,000 (Sales made to J) 1.9.09 Bills receivable account Dr. 80,000 Bank account Dr. 9,000 Discount account Dr. 1,000 To J's account 90,000 (Acceptance received from J's endorsement of bill received from G for Rs. 80,000 and Rs. 9,000 received in full settlement of the amount due) 1.9.09 Bills payable account Dr. 80,000 To Bills receivable account 80,000 (Own acceptance received from J's endorsement, cancelled) 1.10.09 Purchase account Dr. 1,00,000 To G's account 1,00,000 (Purchases made from G) G's account Dr. 20,000 To Bank account 20,000 (Amount paid to G after adjusting Rs. 80,000 for accommodation extended to him) 7.74 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Illustration 3 On 1st January, 2006, A sells goods for Rs. 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, 2006, B retires his acceptance under rebate of 12% per annum. Record these transactions in the journals of A. Solution Journal Entries in the books of A Date Particulars Dr. Cr. 2006 Rs. Rs. Jan. 1 B's account Dr. 10,000 To Sales account 10,000 (Being the goods sold to B on credit) Bills receivable account Dr. 10,000 To B's account 10,000 (Being the acceptance of bill received) March 1 Bank account Dr. 9,900 Rebate on bills account Dr. 100 To Bills receivable account 10,000 (Being retirement of bill by B one month before maturity, the rebate being given to him at 12% p.a.) Illustration 4 On 1st January, 2006, A sells goods for Rs. 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, 2006, B retires his acceptance under rebate of 12% per annum. Record these transactions in the journals of B. Solution Journal Entries in the books of B Date Particulars Debit Credit 2006 Rs. Rs. Jan. 1 Purchases account Dr. 10,000 To A's account 10,000 (Being the goods purchased from A on credit) A's account Dr. 10,000 To Bills payable account 10,000 (Being the acceptance of bill given to A) March 1 Bills payable account Dr. 10,000 To Bank account 9,900 To Rebate on bills account 100 (Being the bill discharged under rebate @ 12% p.a.) Working Note : Calculation of rebate: 10,000 x 12/100 x 1/12 = Rs. 100 FUNDAMENTALS OF ACCOUNTING 7.75 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES Illustration 5 A draws upon B three Bills of Exchange of Rs. 3,000, Rs. 2,000 and Rs. 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 Rs. 100, he accepted a fresh Bill drawn by A. This new bill was endorsed to C who discounted the same with his bankers for Rs. 1,500. The second bill was discounted by A at 5%. This bill on maturity was returned dishonoured (nothing charge being Rs. 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. Solution Journal of A Dr. Cr. Rs. Rs. Bills Receivable A/c Dr. 6,000 To B 6,000 (Three bills for Rs. 3,000, Rs. 2,000 and Rs. 1,000 drawn on B and duly accepted by him received) B Dr. 1,500 To Bills Receivable A/c 3,000 (Bills received from B cancelled for renewal) Cash Account Dr. 1,500 Bills Receivable Account Dr. 1,600 To B 3,000 To Interest Account 100 (Amount received on cancellation of the first bill, 50% along with a new bill for 50% of the amount plus interest Rs. 100) C Dr. 1,600 To Bills Receivable A/c 1,600 (A's acceptance endorsed in favour of C) Bank A/c Dr. 1,900 Discount A/c Dr. 100 To Bills Receivable A/c 2,000 (Second Bill for Rs. 2,000 discounted with the bank @ 5%) B Dr. 2,030 To Bank A/c 2,030 (Second Bill for Rs. 2,000 discounted with the Bank dishonoured, noting charges Rs. 30 paid by the Bank) Bank A/c Dr. 1,000 To Bills Receivable A/c 1,000 (Amount received on maturity of the third bill) Note : It is assumed that the bill for Rs. 1,600 has not yet fallen due for payment. 7.76 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Illustration 6 Journalise the following transactions in K. Katrak's books. (i) Katrak's acceptance to Basu for Rs. 2,500 discharged by a cash payment of Rs. 1,000 and a new bill for the balance plus Rs. 50 for interest. (ii) G. Gupta's acceptance for Rs. 4,000 which was endorsed by Katrak to M. Mehta was dishonoured. Mehta paid Rs. 20 noting charges. Bill withdrawn against cheque. (iii) D. Dalal retires a bill for Rs. 2,000 drawn on him by Katrak for Rs. 10 discount. (iv) Katrak's acceptance to P. Patel for Rs. 5,000 discharged by P. Mody's acceptance to Katrak for a similar amount. Solution Books of K. Katrak Journal Entries Dr. Cr. Rs. Rs. (i) Bills Payable Account Dr. 2,500 Interest Account Dr. 50 To Cash A/c 1,000 To Bills Payable Account 1,550 (Bills Payable to Basu discharged by cash payment of Rs. 1,000 and a new bill for Rs. 1,550 including Rs. 50 as interest) (ii) (a) G. Gupta Dr. 4,020 To M. Mehta 4,020 (G. Gupta's acceptance for Rs. 4,000 endorsed to M. Mehta dishonoured, Rs. 20 paid by M. Mehta as noting charges) (b) M. Mehta Dr. 4,020 To Bank Account 4,020 (Payment to M. Mehta on withdrawal of bill earlier received from Mr. G. Gupta) (iii) Bank Account Dr. 1,990 Discount Account Dr. 10 To Bills Receivable Account 2,000 (Payment received from D. Dalal against his acceptance for Rs. 2,000. Allowed him a discount of Rs. 10) (iv) Bills Payable Account Dr. 5,000 To Bills Receivable Account 5,000 (Bills Receivable from M. Mody endorsed to P. Patel in settlement of bills payable issued to him earlier) FUNDAMENTALS OF ACCOUNTING 7.77 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES Illustration 7 Journalise the folllowing in the books of Don : (i) Bob informs Don that Ray's acceptance for Rs. 3,000 has been dishonoured and noting charges are Rs. 40. Bob accepts Rs. 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 Rs. 3,200; he sends Don's own acceptance in favour of Ralph for Rs. 3,160; in full settlement. (iii) Don meets his acceptance in favour of Singh for Rs. 4,500 by endorsing John's acceptance for Rs. 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. Solution Books of Don Dr. Cr. Rs. Rs. (i) (a) Ray Dr. 3,040 To Bob 3,040 (Ray's acceptance endorsed to Bob dishonoured on due date nothing charges paid by Bob Rs. 40) (b) Bob Dr. 3,040 Interest Dr. 51 To Cash 1,000 To Bills Payable A/c 2,091 (Amount payable to Bob Rs. 3,040 settled by cash payment Rs. 1,000 and issue of new bill for Rs. 2,091 including interest Rs. 51 for three months on Rs. 2,040 @ 10% p.a.) (ii) Bills Receivable A/c Dr. 3,100.80 To Ray 3,040.00 To Interest 60.80 (Bill received from Ray for Rs. 3,040 due against earlier acceptance dishonoured plus Rs. 60.80 interest for two months @ 12% p.a.) (iii) Bills Payable A/c Dr. 3,160 Discount A/c Dr. 40 To James 3,200 (Cancellation of bills payable to Ralph for Rs. 3,160 in settlement of Rs. 3,200 due from James) 7.78 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India (iv) Bills payable A/c Dr. 4,500 To Bills Receivable A/c 4,450 To Discount A/c 50 (Settlement of acceptance issued to Mr. Singh by endorsement of John's Acceptance for Rs. 4,450) (v) Bank A/c Dr. 3085.30 Discount A/c Dr. 15.50 Total Bills Receivable A/c 3,100.80 (Amount received fro Ray in settlement of Bills Payable, retired one month before due date) 14. ACCOMMODATION BILLS 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. Suppose Bhalla needs, finance for three months. In that case he may persuade his friend Kohli to accept his draft. The bill of exchange may then be taken by Bhalla to his bank and get it discounted there. Thus, Bhalla will be able to make use of funds. When the three months period expires, Bhalla will send the requisite amount to Kohli and Kohli will meet the bill. Thus, Bhalla is able to raise money for his use. If both Bhalla and Kohli need money, the same devise can be used. Either Bhalla accepts a bill of exchange or Kohli does. In either case, the bill will be discounted with the bank and the proceeds divided between the two parties according to mutual agreement. The discounting charges must also be borne by the two parties in the same ratio in which the proceeds are divided. On the due date the acceptor will receive from the other party his share. The bill will then be met. When bills are used for such a purpose, they are known as accommodation bills. Entries are passed in the books of two parties exactly in the way already pointed out for ordinary bills. The only additional entry to be passed is for sending the remittance to the other party and also debiting the other party with the shared amount of discount. 15. INSOLVENCY Insolvency of a person means that he is unable to pay his liabilities. This means that bills accepted by him will be dishonoured. Therefore when it is known that a person has become insolvent, entry for dishonour of his acceptance must be passed. Later on, something may be received from his estate. When and if an amount is received, cash account will be debited and the personal account of the debtor will be credited. The remaining amount will be irrecoverable and, threfore, should be written off as bad debt. The student should be careful to calculate the amount actually received from an insolvent's estate and amount to be written off only after preparing his account. In the books of drawee of the bill, the amount not ultimately paid by him due to insolvency, should be credited to deficiency account. FUNDAMENTALS OF ACCOUNTING 7.79 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES Illustration 8 R owed Rs. 1,000 to S. On 1st October, 2005, R accepted a bill drawn by S for the amount at 3 months. S got the bill discounted with his bank for Rs. 900 on 3rd October, 2005. Before the due date, R approached S for renewal of the bill. S agreed on the conditions that Rs. 500 be paid immediately together with interest on the remaining amount at 12% per annum for 3 months and for the balance, R should accept a new bill at three months. These arrangements were carried out. But afterwards, R became insolvent and 40% of the amount could be recovered from his estate. Pass journal entries (with narration) in the books of S. Solution In the books of S Journal Entries Particulars L.F. Dr. Cr. Rs. Rs. Bills Receivable A/c Dr. 1,000 To R 1,000 (Being a 3 month's bill drawn on R for the amount due) Bank A/c Dr. 900 Discount A/c Dr. 100 To Bills Receivable A/c 1,000 (Being the bill discounted) R Dr 1,000 To Bank A/c 1,000 (Being the bill cancelled up due to R's inability to pay it) R Dr. 15 To Interest A/c 15 (Being the interest due on Rs. 500 @ 12% for 3 months) Bank A/c Dr. 515 To R 515 (Being the receipt of a portion of the amount due on the bill together with interest) Bills Receivable A/c Dr. 500 To R 500 (Being the new bill drawn for the balance) R Dr. 500 To Bills Receivable A/c 500 (Being the dishonour of the bill due to R's insolvency) Bank A/c Dr. 200 Bad Debts A/c Dr. 300 To R 500 (Being the receipt of 40% of the amount due on the bill from R's estate) 7.80 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Illustration 9 On 1st July, 2005 G drew a bill for Rs. 80,000 for 3 months on H for mutual accommodation. H accepted the bill of exchange. G had purchased goods worth Rs. 81,000 from J on the same date. G endorsed H's acceptance to J in full settlement. On 1st September, 2005 J purchased goods worth Rs. 90,000 from H. J endorsed the bill of exchange received from G to H and paid Rs. 9,000 in full settlement of the amount due to H. On 1st October, 2005 H purchased goods worth Rs. 1,00,000 from G. H paid the amount due to G by cheque. Give the necessary Journal Entries in the books of H. Solution In the books of H Journal Entries Date Particulars Dr. Cr. Rs. Rs. 1.7.05 G's account Dr. 80,000 To Bills payable account 80,000 (Acceptance of bill drawn by G) 1.9.05 J's account Dr. 90,000 To Sales account 90,000 (Sales made to J) 1.9.05 Bills receivable account Dr. 80,000 Bank account Dr. 9,000 Discount account Dr. 1,000 To J's account 90,000 (Acceptance received from J's endorsement of bill received from G for Rs. 80,000 and Rs. 9,000 received in full settlement of the amount due) 1.9.05 Bills payable account Dr. 80,000 To Bills receivable account 80,000 (Own acceptance received from J's endorsement, cancelled) 1.10.05 Purchase account Dr. 1,00,000 To G's account 1,00,000 (Purchases made from G) G's account Dr. 20,000 To Bank account 20,000 (Amount paid to G after adjusting Rs. 80,000 for accommodation extended to him) FUNDAMENTALS OF ACCOUNTING 7.81 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES Illustration 10 For the mutual accommodation of 'X' and 'Y' on 1st April, 2006, 'X' drew a four months' bill on 'Y' for Rs. 4,000. 'Y' returned the bill after acceptance of the same date. 'X' discounts the bill from his bankers @ 6% per annum and remit 50% of the proceed to 'Y'. On due date 'X' is unable to send the amount due and therefore 'Y' draws a bill for Rs. 7,000, which is duly accepted by 'X'. 'Y' discounts the bill for Rs. 6,600 and sends Rs. 1,300 to 'X'. Before the bill is due for payment 'X' becomes insolvent. Later 25 paise in a rupee received from his estate. Record Journal entries in the books of 'X'. Solution In the books of X Journal Entries Date Particulars Debit Credit 2006 Rs. Rs. April 1 Bills receivable account Dr. 4,000 To Y's account 4,000 (Acceptance received from Y for mutual accommodation) April 1 Bank account Dr. 3,920 Discount account Dr. 80 To Bills receivable account 4,000 (Bill discounted for Rs. 3,920) Y's account Dr. 2,000 To Cash account 1,960 To Discount account 40 (Half of proceeds remitted to Y) Aug. 4 Y's account Dr. 7,000 To Bills payable account 7,000 (Acceptance given to Y, being unable to remit the due amount) Bank account Dr. 1300 Discount account Dr. 200 (2,000+1,300) 40× 660 To Y's account 1500 (Amount received from Y and discount amount credited to him) Bills payable account Dr. 7,000 To Y's account 7,000 (Acceptance to Y dishonoured because of insolvency) Y account Dr. 3,500 To Bank account 875 To Deficiency account 2,625 (Amount paid @ 25 paise in a rupee and balance credited to deficiency account as being unable to pay) 7.82 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Illustration 11 Anil draws a bill for Rs. 9,000 on Sanjay on 5th April, 2005 for 3 months, which Sanjay returns it to Anil after accepting the same. Anil gets it discounted with the bank for Rs. 8,820 on 8th April, 2005 and remits one-third amount to Sanjay. On the due date Anil fails to remit the amount due to Sanjay, but he accepts a bill for Rs. 12,600 for three months, which Sanjay discounts it for Rs. 12,330 and remits Rs. 2,220 to Anil. Before the maturity of the renewed bill Anil becomes insolvent and only 50% was realized from his estate on 15th October, 2005. Pass necessary Journal entries for the above transactions in the books of Anil. Solution In the books of Anil Journal Entries Date Particulars Debit Credit Amount Amount 2005 Rs. Rs. April 5 Bills receivable account Dr. 9,000 To Sanjay's account 9,000 (Being acceptance received from Sanjay for mutual accommodation) April 5 Bank account Dr. 8,820 Discount account Dr. 180 To Bills receivable account 9,000 (Being bill discounted with bank) April 5 Sanjay's account Dr. 3,000 To Bank account 2,940 To Discount account 60 (Being one-third proceeds of the bill sent to Sanjay) July 8 Sanjay's account Dr. 12,600 To Bills payable account 12,600 (Being Acceptance given) July 8 Bank account Dr. 2,220 Discount account Dr. 180 To Sanjay's account 2,400 (Being proceeds of second bill received from Sanjay) Oct.11 Bills payable account Dr. 12,600 To Sanjay's account 12,600 (Being bill dishonoured due to insolvency) Oct.15 Sanjay's account (6,000+2,400) Dr. 8,400 To Bank account 4,200 To Deficiency account 4,200 (Being insolvent, only 50% amount paid to Sanjay) FUNDAMENTALS OF ACCOUNTING 7.83 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES Illustration 12 Bose and Mitra were in need of funds. On 1st May, 2005 Bose accepted Mitra's draft for Rs. 6,000 at 3 months. After 3 days, Mitra got it discounted at 6% and remitted 1/3 of the proceeds to Bose. On the due date Mitra was not able to sent the amount instead he accepted to Bose's bill for Rs. 4,500 at two months. Bose got it discounted for Rs. 4,420 on 7th August, 2005. Out of this Rs. 280 were sent to Mitra. Early in October Mitra became insolvent. His estate paid 40%. Give Journal entries in the books of Bose. Solution In the books of Bose Journal Entries Dr. Cr. 2005 Rs. Rs. May 1 Mitra Dr. 6,000 To Bills Payable Account 6,000 (Mitra's draft for Rs. 6,000 accepted for mutal accommodation) May 4 Bank Account Dr. 1,970 Discount Account Dr. 30 To Mitra 2,000 (One third of the proceeds of bill after discount received from Mitra) Aug. 4 Bills Receivable Account Dr. 4,500 To Mitra 4,500 (Acceptance received from Mitra to cover the amount due from him) Bank Account Dr. 4,420 Discount Account Dr. 80 To Bills Receivable Account 4,500 (Mitra's acceptance discounted for Rs. 4,420) Bills Payable Account Dr. 6,000 To Bank Account 6,000 (Own acceptance due on this date met) Mitra Dr. 357.47 To Bank Account 280.00 To Discount Account* 77.47 (Amount remitted to Mitra after discounting the bill) Oct. 7 Mitra Dr. 4,500 To Bank Account 4,500 (Mitra's acceptance dishonoured because of his insolvency) Bank Account Dr. 1742.99 Bad Debts Account Dr. 2614.48 To Mitra 4357.47 (Amount received and debts written off in respect of amount due for Mitra) 7.84 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Illustration 13 Mr. David draws two bills of exchange on 1.1.2005 for Rs. 6,000 and Rs. 10,000. The bills of exchange for Rs. 6,000 is for two months while the bill of exchange for Rs. 10,000 is for three months. These bills are accepted by Mr. Thomas. On 4.3.2005, Mr. Thomas requests Mr. David to renew the first bill with interest at 18% p.a. for a period of two months. Mr. David agrees to this proposal. On 20.3.3005, Mr. Thomas retires the acceptance for Rs. 10,000, the interest rebate i.e. discount being Rs. 100. Before the due date of the renewed bill, Mr. Thomas becomes insolvent and only 50 paise in a rupee could be recovered from his estate. You are to give the journal entries in the books of Mr. David. Solution Journal Entries in the books of Mr. David 2005 Dr.(Rs.) Cr.(Rs.) Jan. 1 Bills receivable (No. 1) A/c Dr. 6,000 Bills receivable (No. 2) A/c Dr. 10,000 To Mr. Thomas's A/c 16,000 (Being drawing of bills receivable No. 1 due for maturity on 4.3.2005 and bills receivable No. 2 due for maturity on 4.4.2005) March 4 Mr. Thomas's A/c Dr. 6,000 To Bills receivable (No.1) A/c 6,000 (Being the reversal entry for bill No.1 on agreed renewal) March 4 Bills receivable (No. 3) A/c Dr. 6,180 To Interest A/c 180 To Mr. Thomas's A/c 6,000 (Being the drawing of bill of exchange no. 3 due for maturity on 7.5.2005 together with interest at 18% p.a. in lieu of the original acceptance of Mr. Thomas) March 20 Bank A/c Dr. 9,900 Discount A/c Dr. 100 To Bills receivable (No. 2) A/c 10,000 (Being the amount received on retirement of bills No.2 before the due date) FUNDAMENTALS OF ACCOUNTING 7.85 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES May 7 Mr. Thomas's A/c Dr. 6,180 To Bills receivable (No. 3) A/c 6,180 (Being the amount due from Mr. Thomas on dishonour of his acceptance on presentation on the due date) May 7 Bank A/c Dr. 3,090 To Mr. Thomas's A/c 3,090 (Being the amount received from official assignee of Mr. Thomas at 50 paise per rupee against dishonoured bill) May 7 Bad debts A/c Dr. 3,090 To Mr. Thomas's A/c 3,090 (Being the balance 50% debt in Mr. Thomas's Account arising out of dishonoured bill written as bad) 16. BILLS OF COLLECTION When a person received a bill of exchange he may decide to retain the bill till the date of maturity. But in order to ensure safety, he may send it to bank with instructions that the bill should be retained till maturity and should be realised on that date. This does not mean discounting because the bank will not credit the client until the amount is actually realised. If the bill is sent to the bank with such instructions it is known as "Bill sent for collection". It is better to make a record of this also in books by passing following entry: Bills for Collection Account Dr. To Bills Receivable Account When the amount is realised the entry will be Bank Account Dr. To Bills for Collection Account When the amount is not honoured, the entry will be Party (from whom the bill was received) Dr. To Bills for collections A/c 7.86 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 17. RETIREMENT OF BILLS OF EXCHANGE We have seen that renewal of a bill of exchange is made when a person does not have sufficient fund to pay for the bill of exchange on the due date and he requires a further period of credit. Many a time instances do arise when the acceptor has spare funds much before the maturity date of the bill of exchange accepted by him. In such circumstances he approaches the payee of the bill of exchange and asks him whether the payee is prepared to accept cash before the maturity date. In such cases the acceptor gets a certain rebate or interest or discount for premature payment. The interest becomes the income of the acceptor and expense of the payee. It is a consideration of premature payment. Illustration 14 On 1st January, 2006, Vilas draws a bill of exchange for Rs. 10,000 due for payment after 3 months on Eknath. Eknath accepts to this bill of exchange. On 4th March, 2006. Eknath retires the bill of exchange at a discount of 12% p.a. You are asked to show the journal entries in the books of Vilas. Solution Journal entries in the books of Eknath Date Particulars L.F. Debit Credit Rs. Rs. Jan. 1 Vilas A/c Dr. 10,000 To Bills Payable A/c 10,000 (Being the bill draws by him accepted) Mar. 4 Bills Payable A/c Dr. 10,000 To Bank A/c 9,900 To Interest A/c (Discount A/c) 100 (Being retirement of acceptance 1 month before maturity, interest allowed at 12% p.a.) Illustration 15 On 1st January, 2006, Vilas draws a Bill of Exchange for Rs. 10,000 due for payment after 3 months on Eknath. Eknath accepts to this bill of exchange. On 4th March, 2006. Eknath retires the bill of exchange at a discount of 12% p.a. You are asked to show the journal entries in the books of Eknath. FUNDAMENTALS OF ACCOUNTING 7.87 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES Solution Journal entries in the books of Vilas Date Particulars Debit Credit 2006 Rs. Rs. Jan. 1 Bills Receivable A/c Dr. 10,000 To Eknath A/c 10,000 (Being bill of exchange no . . . drawn on Eknath due for payment on 4th April 2001) Mar. 4 Bank A/c Dr. 9,900 Interest A/c (Discount) A/c Dr. 100 To Bills Receivable A/c 10,000 (Being retirement of bill of exchange no. due for maturity on 4th April, 2001 by Eknath 1 month before maturity, the rebate being given to him at 12% p.a.) 18. BILLS RECEIVABLE AND BILLS PAYABLE BOOKS Bills receivable and bills payable books are journals (Day Books) to record in a chronological order the details of bills receivable and bills payable. When large number of bill transactions take place in an organisation, it is convenient to maintain these books. Wherein any bill transaction takes place, the same is entered in the Day Books in the first instance. Postings to individual debtors or creditors accounts are made from the Day Books. Also totals of bills received or accepted are posted periodically to Bills Receivable Account and Bills Payable Account respectively. Bills receivable book and bills payable book are very useful for following up the status of outstanding bills. When there are large number of bills and these bills fall due on different dates, some of these bills may not be honoured on maturity due to some reason or the other. It is possible from these Day Books to trace the details of the outstanding bills and to identify the reasons for not honouring the bills. Given below are forms of Day Books for both bills receivable and bills payable: 7.88 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Bills Receivable Book (Folio No . . .) Date of Voucher Party Acceptor Date of Due Place of Amt. LF. Mode of receipt No. from Bill Date Payment Rs. Disposal whom Received Bills Payable Book (Folio No . . .) Date of Drawer Payee Date of Due Place of Amount L.F. Mode of Acceptance Bill Date Payment Rs. Disposal SELF EXAMINATION QUESTIONS Choose the most appropriate answer from the given options: 1. On 1.1.05, X draws a bill on Y for Rs 20,000 for 3 months maturity date of the bill will be: (a) 1.4.05 (b) 3.4.05 (c) 4.4.05 (d) 4.5.05 2. On 15.8.05, X draws a bill on Y for 3 months for Rs. 20,000. 18th Nov was a sudden holiday, maturity date of the bill will be: (a) 17th Nov (b) 18th Nov (c) 19th Nov (d) 15th Nov 3. On 16.6.05 X draws a bill on Y for Rs 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 (d) 16th July 4. X draws a bill on Y for Rs 30,000 on 1.1.05. X accepts the same on 4.1.05 for period of 3 months after date. What will be the maturity date of the bill: (a) 4.4.05 (b) 3.4.05 (c) 7.4.05 (d) 8.4.05 5. X draws a bill on Y. X endorsed the bill to Z. The payee of the bill will be (a) X (b) Y (c) Z (d) None 6. A bill of Rs. 12,000 was discounted by A with the banker for Rs. 11,880. At maturity, the bill returned dishonoured, noting charges Rs 20. How much amount will the bank deduct from A’s bank balance at the time of such dishonour? (a) Rs. 12,000 (b) Rs. 11,880 (c) Rs. 12,020 (d) Rs. 11,900 FUNDAMENTALS OF ACCOUNTING 7.89 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES 7. X draws a bill on Y for Rs 20,000 on 1.1.05 for 3 months after sight, date of acceptance is 6.1.05. Maturity date of the bill will be: (a) 8.1.05 (b) 9.1.05 (c) 10.1.05 (d) 11.1.05 8. X sold goods to Y for Rs 1,00,000. Y paid cash Rs 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) Rs. 98,000 (b) Rs. 68,000 (c) Rs. 68,600 (d) Rs. 70,000 9. On 1.1.05, X draws a bill on Y for Rs 50,000 for 3 months. X got the bill discounted 4.1.05 at 12% rate. The amount of discount on bill will be: (a) Rs. 1,500 (b) Rs. 1,600 (c) Rs. 1,800 (d) Rs. 1,450 10. Mr. A draws a bill on Mr. Y for Rs 30,000 on 1.1.06 for 3 months. On 4.2.06. X got the bill discounted at 12% rate. The amount of discount will be: (a) Rs. 900 (b) Rs. 600 (c) Rs. 300 (d) Rs. 650 11. X draws a bill on Y for Rs 20,000 for 3 months on 1.1.05. The bill is discounted with banker at a charge of Rs 100. At maturity the bill return dishonoured. In the books of X, for dishonour, the bank account will be credited by: (a) Rs. 19,900 (b) Rs. 20,000 (c) Rs. 20,100 (d) Rs. 19,800 12. On 1.1.05, X draws a bill on Y for Rs 10,000. At maturity Y request X to renew the bill for 2 month at 12% p.a. interest. Amount of interest will be: (a) Rs. 200 (b) Rs. 150 (c) Rs. 180 (d) Rs. 190 13. On 1.1.05, X draws a bill on Y for Rs 15,000 for 3 months. At maturity Y request X to accept Rs 5,000 in cash and for balance to draw a fresh bill for 2 months together with 12% p.a. interest, amount of interest will be: (a) Rs. 200 (b) Rs. 300 (c) Rs. 240 (d) Rs. 380 14. On 1.8.05, X draws a bill on Y “for 30 days after sight”. The date of acceptance is 8.8.05. The maturity date of the bill will be: (a) 8.9.05 (b) 10.9.05 (c) 11.9.05 (d) 9.9.05 15. On 1.6.05, X draws a bill on Y for Rs. 25,000. At maturity Y request X to accept Rs. 5,000 in cash and noting charges incurred Rs. 100 and for the balance X draw a bill on Y for 2 months at 12% p.a. Interest amount will be: (a) Rs. 410 (b) Rs. 420 (c) Rs. 440 (d) Rs. 400 16. On 1.1.05, X draws a bill on Y for Rs. 50,000. At maturity, the bill returned dishonoured as Y become insolvent and 40 paise per rupee is recovered from his estate. The amount recovered is: (a) Rs. 20,000 (b) Nil (c) Rs. 30,000 (d) 40 paise 7.90 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 17. X draws a bill on Y for Rs 3,000. X endorsed to Z. Y will pay the amount of the bill to: (a) X (b) Z (c) To himself (d) None 18. On 1.1.05, X draws a bill on Y for 3 months for Rs 10,000. On 4.3.05, Y pay the bill to X at 12% discount, the amount of discount will be: (a) 100 (b) 200 (c) 300 (d) 50 19. Ram draws on Aslam a bill for Rs 60,000 on 1.4.09 for 2 months. Aslam accepts the bill and sends it to Ram who gets it discounted for Rs 58,800. Ram immediately remits Rs 19,600 to Aslam. On due date, Ram being unable to remit the amount due and accepts a bill for Rs 84,000 for 2 months which is discounted by Aslam for Rs 82,200. Aslam sends Rs 14,800 to Ram out of the same. How much discount will be borne by Ram at the time of 14,800 remittance. (a) Rs. 1,200 (b) Rs. 1,800 (c) Rs. 1,100 (d) Rs. 800 20. Mr. Bobby sold goods worth Rs 25,000 to Mr Bonny. Bonny immediately accepted a bill on 1.11.09, payable after 2 months. Bobby discounted this bill @ 18% p.a. on 15.11.09. On the due date Bonny failed to discharge the bill. Later on Bonny became insolvent and 50 paise is recovered from Bonny’s estate. How much amount of bad debt will be recorded in the books of Bobby: (a) Rs. 12,500 (b) Rs. 9,437 (c) Rs. 11,687 (d) Rs. 13,650 21. The purpose of accommodation bill is: (a) To finance actual purchase or sale of goods (b) To facilitate trade transmission (c) When both parties are in need of funds (d) None of the above 22. M sold goods worth of Rs 50,000 to N. On 1.10.05, N immediately accepted a three month bill. On due date, N requested that the bill be renewed for a fresh period of 3 months. N agrees to pay interest @ 18% p.a. in cash. How much interest to be paid in cash by N? (a) Rs. 2,250 (b) Rs. 1,800 (c) Rs. 2,000 (d) Rs. 1,100 23. On 1.1.05, X draws a bill on Y for Rs 30,000. At maturity Y request X to draw a fresh bill for 2 months together with 12% pa. interest. Noting charges Rs 100. The amount of interest will be: (a) Rs. 600 (b) Rs. 602 (c) Rs. 500 (d) Rs. 550 24. On 18.2.05 A draw a bill on B for Rs. 10,000. B accepted the bill on 21.2.05. The bill is drawn for 30 days after sight. The maturity date of the bill will be: (a) 24.3.05 (b) 22.3.05 (c) 26.3.05 (d) 21.3.05 25. X sold goods to Y for Rs 3,00,000. ½ of the amount will be received in cash and balance in B/R. For what amount X should draw the bill on Y. (a) Rs. 1,50,000 (b) Rs. 3,00,000 (c) Rs. 1,00,000 (d) Rs. 1,20,000 FUNDAMENTALS OF ACCOUNTING 7.91 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES 26. A draws a bill on B for Rs 50,000 for 3 months. At maturity, the bill returned dishonoured, noting charges Rs 500. 40 paise in a rupee is recovered from B’s estate. The amount of deficiency to be recorded on insolvency in the books of B will be: (a) Rs.20,200 (b) Rs.30,300 (c) Rs.19,800 (d) Rs.19,000 27. A sold goods to B for Rs 20,000. A will grant 5% discount to B. B requested A to draw a bill. The amount of the bill will be: (a) Rs. 20,000 (b) Rs. 19,000 (c) Rs. 19,200 (d) Nil 28. Fees paid in cash to Notary Public is charged by: (a) Drawer (b) Drawee (c) Holder of the bill of exchange (d) None 29. A draws a bill on B for Rs 50,000. A endorsed it to C in full settlement of Rs 50,500. Noting charges of Rs 200 as the bill returned dishonoured. A want to pay the amount to C at 2 % discount. The amount to be paid by A to C will be: (a) Rs. 49,000 (b) Rs. 49,490 (c) Rs. 49,686 (d) Rs. 50,500 30. A draws a bill on B for Rs 1,00,000. A endorsed the bill to C. The bill return dishonoured. Noting charges Rs 1,000. B request A to accept the amount at 2% discount by a single cheque. The cheque amount will be: (a) Rs. 98,000 (b) Rs. 98,980 (c) Rs. 99,000 (d) Rs. 99,980 31. S draws 2 bills of exchange on 1.1.06 for Rs 3,000 and Rs 5,000 respectively. The bill of exchange for Rs 3,000 is for 2 months, while the bill of exchange for Rs 5,000 is for 3 months. These bills are accepted by K. On 4.3.06 K requests S to renew the first bill with interest at 18% p.a. for a period of 2 months. S agrees to this proposal. On 20.3.06 K retires the acceptance for Rs 5,000 the interest rebate i.e., discount being Rs 50. Before the due date of the renewed bill K becomes insolvent and only 60 paise in a rupee can be recovered from his estate. How much bad debt will be recorded in the books of S: (a) Rs. 1,236 (b) Rs. 1,854 (c) Rs. 3,090 (d) Rs. 3,000 32. The promissory note should be signed by: (a) Drawer (b) Drawee (c) Payee (d) Promiser 33. Kuntal draws a bill on Shyam for Rs 3,000. Kuntal endorsed it to Ram. Ram endorsed it to Rahim. The payee of the bill will be: (a) Kuntal (b) Ram (c) Shyam (d) Rahim 34. A bill is drawn on 29th Jan’ 06 for one month after date. The date of acceptance is 2nd Feb’06. The maturity date of the bill will be: (a) 28th February (b) 1st March (c) 2nd March (d) 3rd March 35. Mr. Rex accepted a bill drawn by Mr. Rabin. Mr. Rabin endorsed the bill to Mr Shekar. On the due date, the bill is dishonored as Mr Rex became insolvent. To record the dishonor of the bill in the books of Mr. Rabin, which of the following accounts should be credited? 7.92 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India (a) Mr. Rex’s account (b) Bills Receivable account (c) Mr Shekar’s account (d) Bills payable account 36. Which of the following statements is true? (a) A bill cannot be endorsed more than two times (b) A bill is drawn by purchaser (c) A bill contains an unconditional promise to pay (d) Noting charges are borne by the drawee in the event of dishonour of bill. 37. For mutual accommodation of A and B, B accepted a bill drawn on him by A for 2 months for Rs. 6,000. The said bill is discounted at 12% pa. and remitted 1/3rd of the proceeds to B. The amount remitted by A to B will be: (a) Rs. 2,000 (b) Rs. 1,960 (c) Rs. 1,920 (d) Rs. 1,900 38. Lara draws an accommodation bill on Sachin. The proceeds are to be borne between Sachin and Lara in the ratio of 3:1. The amount of bill Rs 6000, discounting charges Rs 120.Discount borne by Sachin will be: (a) Rs. 90 (b) Rs. 120 (c) Rs. 100 (d) None 39. A draws a bill on B for Rs. 4,500 for mutual accommodation in the ratio 2:1. A got it discounted at 4230 and remitted 1/3rd of the proceeds to B. At the time of maturity, how much amount A should remit to B such that B can pay off the bill? (a) Rs. 3,000 (b) Rs. 2,880 (c) Rs. 2,920 (d) Rs. 3,010 40. Suman drew a bill on Sonu for Rs. 4,500 for mutual accommodation in the ratio 2:1. Sonu accepted the bill and returned to Suman. Suman discounted the bill for Rs. 4,230 and remitted 1/3rd proceeds to Sonu. Before the due date, not having funds to meet the bill, Sonu drew a bill on Suman for Rs. 6,300 on the same terms as to mutual accommodation. The second bill was discounted for Rs. 6,120. The first bill was honored on the due date and a net amount of Rs. 1,080 was remitted to Suman by Sonu. The proportionate discount charge on both the bills is to be borne by Suman is: (a) Rs. 180 (b) Rs. 150 (c) Rs. 300 (d) Rs. 120 41. Which of the following instrument is not a negotiable instrument: (a) Bearer cheque (b) Promissory note (c) Bill of exchange (d) Crossed cheque 42. On 1.1.06 Vikas draws a bill of exchange for Rs 10,000 due for payment after 3 months on Ekta. Ekta accepts to this bill of exchange. On 4.3.06, Ekta retires the bill of exchange at a discount of 12% p.a. Which of the discount is correct for premature payment in the books of Ekta? (a) Rs. 120 (b) Rs. 100 (c) Rs. 140 (d) Rs. 160 43. Neelam sold goods to Dhiman for Rs 4,000 on 1.5.06. On the same day, she drew on Dhiman a bill for the amount for 3 months, which Dhiman duly accepted. Neelam got the bill discounted with her bank before the due date, Dhiman became insolvent. Later, his FUNDAMENTALS OF ACCOUNTING 7.93 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES estate could pay only 40% of the amount due. What will be the amount of deficiency in the books of Dhiman. (a) Rs. 3,200 (b) Rs. 2,200 (c) Rs. 2,400 (d) Rs. 2,000 44. Which of the following is not a foreign bill: (a) A bill drawn in India, on a person resident outside India and made payable outside India. (b) A bill drawn outside India, on a person resident outside India (c) A bill drawn outside India, made payable in India (d) A bill drawn on a person resident in India made payable in India 45. A drew a bill on B for Rs 50,000 for 3 months. Proceeds are to be shared equally. A got the bill discounted at 12% p.a. and remits required proceeds to B. The amount of such remittance will be: (a) Rs. 24,250 (b) Rs. 25,000 (c) Rs. 16,167 (d) Rs. 32,333 46. From the following information, find out who can draw the bill if Mr A sold goods to B: (a) A will draw a bill on B (b) B will draw a bill on A (c) None of these (d) Third party will draw a bill on A 47. When the bill are to be produced to notary public: (a) At the time of drawing the bill (b) At the time of acceptance of the bill (c) At the time of dishonour of the bill (d) At the time of “bill for collection” 48. Which of the following statement is false: (a) B/R is a negotiable instrument (b) B/R must be accepted by drawee. (c) There can be three parties in respect of bills of exchange – drawer, drawee & payee (d) Oral bill of exchange is also valid. 49. Under which circumstances drawer and payee is same person: (a) When drawer discounted the bill with banker (b) When drawer endorse the bill to the third party (c) When drawer held the bill till maturity (d) When drawee rejects to accept the bill 50. Which of the following statement is true: (a) Noting charge is an expense to be borne by drawer (b) Noting charge is an expense to be borne by drawee (c) Noting charge is an expense to be borne by payee (d) Noting charge is an expense to be borne by bank 7.94 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India 51. Which of the following statement is true: (a) Creditors can draw a bill on Debtors (b) Debtors can draw a bill on Creditors. (c) Bank will draw a bill on customer at the time of overdraft. (d) One can draw the bill on another under any circumstances. 52. Indian currency is a (a) Bill of exchange (b) Promissory Note (c) Hyundi (d) Cheque 53. Gouri sold goods to Gupta on 1.6.06 for Rs 1600. Gupta immediately accepted a three months bill. On due date Gupta requested that the bill be renewed for a fresh period of two months. Gouri agrees provided interest at 9% was paid immediately in cash. What will be the amount of interest in the books of Gouri? (a) Rs. 20 (b) Rs. 25 (c) Rs. 24 (d) Rs. 28 54. X draws a bill on Y on 1.1.05 for Rs 20,000 for 30 days. What will be the maturity date of the bill: (a) 2.2.05 (b) 3.2.05 (c) 1.2.05 (d) 31.1.05 55. Ram’s acceptance to Din for Rs 8,000 renewed at 3 months on the condition that Rs 4,000 be paid in cash immediately and the remaining amount will carry interest @ 12% p.a. The amount of interest will be: (a) Rs. 120 (b) Rs. 80 (c) Rs. 90 (d) Rs. 160 56. A draws a bill on B for Rs 30,000. A wants to endorse it to C in settlement of Rs 35,000 at 2% discount with the help of B’s acceptance and balance in cash. How much cash A will pay to B? (a) Rs. 4,300 (b) Rs. 4,000 (c) Rs. 4,100 (d) Rs. 5,000 57. Ram gets Ghosh’s acceptance for Rs 12,000 discounted at 2 months at 12% p.a. The amount of discount will be: (a) Rs. 240 (b) Rs. 120 (c) Rs. 360 (d) Nil 58. If the due date is a public holiday, what will be the due date of the bill: (a) Following day (b) Preceding day (c) The same day only (d) One month later FUNDAMENTALS OF ACCOUNTING 7.95 Copyright -The Institute of Chartered Accountants of India BILLS OF EXCHANGE AND PROMISSORY NOTES ANSWERS 1. (c) 2. (c) 3. (b) 4. (a) 5. (c) 6. (c) 7. (b) 8. (c) 9. (a) 10. (b) 11. (b) 12. (a) 13. (a) 14. (b) 15. (d) 16. (a) 17. (b) 18. (a) 19. (a) 20. (a) 21. (c) 22. (a) 23. (b) 24. (c) 25. (a) 26. (b) 27. (b) 28. (c) 29. (c) 30. (b) 31. (a) 32. (d) 33. (d) 34. (d) 35. (c) 36. (d) 37. (b) 38. (a) 39. (a) 40. (c) 41. (d) 42. (b) 43. (c) 44. (d) 45. (a) 46. (a) 47. (c) 48. (d) 49. (c) 50. (b) 51. (a) 52. (b) 53. (c) 54. (b) 55. (a) 56. (a) 57. (a) 58. (b) 7.96 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India CHAPTER - 7 ACCOUNTING FOR SPECIAL TRANSACTIONS Unit 4 Sale of Goods on Approval or Return Basis Copyright -The Institute of Chartered Accountants of India SALE OF GOODS ON APPROVAL OR RETURN BASIS Learning Objectives After studying this unit, you will be able to : (cid:2) Understand the nature of goods sent on approval or return basis. (cid:2) Learn the accounting treatment of sales on approval or return basis under different situations. 1. INTRODUCTION With a view of pushing up the sales or for introducing a new product in the market, goods are sometimes sent to the customers on sale or approval basis. Here, goods sent on 'approval' or 'on sale or return' basis mean the delivery of the goods to the customers with the option to retain or return them within a specified period. Generally, these transactions take place between a manufacturer (or a wholesaler) and a retailer. The goods are transferred from the wholesaler to the retailer, under a sale or return basis, it implies a change in the possession of goods only and not a transfer of the ownership of goods. The ownership is passed only when the retailer gives his approval or if the goods are not returned within that specified period. The retailer (customer) does not incur any liability when the goods are merely sent to him. As per the definition given under the Sale of Goods Act, 1893, in respect of such goods, the sale will take place or the property in the goods pass to the buyer: (i) When he signifies his approval or acceptance to the seller; (ii) When he does some act adopting the transaction; (iii) If he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, on the expiry of the specified time (if a time has been fixed) or on the expiry of a reasonable time (if no time has been fixed). 2. ACCOUNTING RECORDS Accounting entries depend on the fact whether the business sends goods on sale or approval basis (i) casually; (ii) frequently; and (iii) numerously. An overview of the accounting treatment for the goods sent on sale or approval basis can be depicted with the help of the chart given below : 7.98 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India Sale of Goods on Approval or Return Basis Accounting treatment when the business sends goods Casually Frequently Numerously Transaction is Sales or Return treated as Journal is prepared Ordinary Sale with four main columns Sales or Return Sales or Day Book Return Ledger Treated as Memorandum Books Goods sent on Goods Goods Balance Approval Returned Approved 2.1 WHEN THE BUSINESS SENDS GOODS CASUALLY ON SALES OR RETURN When the transactions are few, the seller on sending the goods, treats them as an ordinary sale. If the goods are accepted or not returned or the business receives no intimation within the specified time limit, no extra entry is required to be passed because the transaction for sale or return becomes entry after the expiry of the specified period. If the goods are returned within a specified time limit, a reverse entry is passed to cancel the previous transaction. If, at the year-end, goods are still lying with the customers and the specified time limit is yet to expire, the entry for sales made earlier is cancelled and the value of the goods lying with the customers must be reduced from the selling price to the cost price, and treated as an ordinary stock for Balance Sheet purposes. Journal Entries: 1. When goods are sent on approval or on sale or return basis Sundry Debtors Account Dr. [Invoice price] To Sales Account 2. When goods are rejected or returned within the specified time Sales/Return Inwards Account Dr. [Invoice price] To Customers/Sundry Debtors Account FUNDAMENTALS OF ACCOUNTING 7.99 Copyright -The Institute of Chartered Accountants of India SALE OF GOODS ON APPROVAL OR RETURN BASIS 3 When goods are accepted at invoice price [No entry] 4 When goods are accepted at a higher price than invoice price Sundry Debtors Account Dr. To Sales Account [Difference in price] 5 When goods are accepted at a lower price than the invoice price Sales Account Dr. To Sundry Debtors Account [Difference in price] 6 (i) At the year-end, when goods are lying with customers and the specified time limit is yet to expire Sales Account Dr. [Invoice price] To Sundry Debtors Account (ii) These goods should be considered as stock with customers and in addition to the above, the following adjustment entry is to be passed Stock with Customers on Sale or Return Account Dr. To Trading Account [Cost price or market price whichever is less] No entry is to be passed for goods returned by the customers on a subsequent date. Illustration 1 CE sends goods to his customers on Sale or Return. The following transactions took place during 2009: 2009 Sept. 15 Sent goods to customers on sale or return basis at cost plus 33 1/3 % Rs.1,00,000 Oct. 20 Goods returned by customers 40,000 Nov. 25 Received letters of approval from customers 40,000 Dec .31 Goods with customers awaiting approval 20,000 CE records sale or return transactions as ordinary sales. You are required to pass the necessary Journal Entries in the books of CE assuming that accounting year closes on 31st December, 2009. 7.100 COMMON PROFICIENCY TEST Copyright -The Institute of Chartered Accountants of India