Unit 2 Accounting and Auditing PYQ’s 9 Sep 2026 Shift 2

The Correct answer is: D and E Only

Key Points

• Statement A: Objective of Vouching:
  • This statement is correct.
  • Vouching is the act of examining documentary evidence (vouchers) to ascertain the accuracy and authenticity of entries in the books of account.
  • It ensures that every transaction is supported by valid evidence, is properly authorized, and is recorded in the correct period.
• Statement B: Backbone of Auditing:
  • This statement is correct.
  • Vouching is famously described as the backbone of auditing because the success of an audit depends largely on how efficiently the auditor verifies the transactions at the source level.
• Statement C: Verification of Assets:
  • This statement is correct.
  • Verification involves proving the truth about the existence, ownership, possession, and valuation of assets as shown in the Balance Sheet.
• Statement D: Intangible Assets:
  • This statement is incorrect.
  • Intangible assets are assets that do not have physical existence (e.g., Goodwill, Patents, Trademarks). Assets that have physical existence are called Tangible Assets.
• Statement E: Objective of Vouching vs. Verification:
  • This statement is incorrect.
  • Ensuring that assets are free from any charge or mortgage (liens) is a primary objective of Verification, not vouching. Vouching is concerned with the transactions (revenue/expenditure), while verification is concerned with the items in the Balance Sheet.

Additional Information

• Difference between Vouching and Verification:
  • Vouching is the examination of the Profit and Loss Account items (income and expenses) through documentary evidence.
  • Verification is the examination of Balance Sheet items (Assets and Liabilities) to confirm their existence, ownership, and valuation.
  • Valuation is a part of verification where the auditor ensures that the assets are recorded at their correct monetary value according to accounting principles.

The correct answer is: Rs.6,00,000.

The Margin of Safety is a key financial metric in cost-volume-profit analysis that represents the difference between actual sales and the break-even sales. It indicates the amount by which sales can drop before the company begins to incur a loss.

Key Points

• Given Data:
  • Sales = Rs.8,00,000
  • Contribution = Rs.2,00,000
  • Net Profit = Rs.1,50,000
• Formula:
  • The Profit-Volume (P/V) Ratio is calculated as:
  • The Margin of Safety (Value) is calculated as:
• Step-by-Step Calculation:
  • Step 1: Calculate P/V Ratio
     (or 0.25)
  • Step 2: Calculate Margin of Safety
    
    
  • Step 3: Final Computation
    
• Conclusion:
  • The Margin of Safety for ABC Limited is Rs.6,00,000.

Additional Information

• Margin of Safety Ratio:
  • It can also be expressed as a percentage: . In this case, .
• Break-Even Point (BEP):
  • The Break-Even Sales can be found by subtracting the Margin of Safety from Total Sales: . At this level, the company neither makes a profit nor a loss.
• Significance:
  • A high Margin of Safety indicates a low risk of reaching the break-even point and incurring losses, providing a substantial cushion for the business against market fluctuations.

The correct answer is: 4 times

The Inventory Turnover Ratio is an efficiency ratio that measures how many times a company has sold and replaced its inventory during a specific period. It helps in understanding the liquidity of the inventory and the effectiveness of inventory management.

Key Points

• Given Data:
  • Revenue from Operations (Sales) = Rs. 4,00,000
  • Opening Inventory = Rs. 50,000
  • Closing Inventory = Rs. 1,10,000
  • Gross Profit Ratio = 20% on Sales
• Formula:
  • 
  • 
  • 
• Step-by-Step Calculation:
  • Step 1: Calculate Gross Profit
    
  • Step 2: Calculate Cost of Revenue from Operations (COGS)
    
  • Step 3: Calculate Average Inventory
    
  • Step 4: Calculate Inventory Turnover Ratio
    
• Conclusion:
  • The final calculated inventory turnover ratio is 4 times.

Additional Information

• Significance of the Ratio:
  • A high ratio generally indicates efficient inventory management, implying that goods are sold quickly and capital is not tied up in stock.
  • A low ratio may indicate overstocking, obsolescence, or deficiencies in the product line or marketing effort.
• Inventory Holding Period:
  • This is a related metric calculated as . In this case, it would be  days, meaning inventory stays in the warehouse for approximately 91 days before being sold.

The correct answer is: A-IV, B-III, C-II, D-I.

Key Points

Additional Information

• Amalgamation: This occurs when two or more companies (e.g., Company X and Company Y) go into liquidation to form a brand-new entity (Company Z). The assets and liabilities of the liquidating companies are transferred to the new company.
• Absorption: In this process, an existing company (the purchasing company) takes over the business of another existing company (the vendor company). The vendor company is liquidated, but no new company is formed.
• External Reconstruction: This involves the liquidation of one existing company which is suffering from losses or financial distress, and the formation of a new company to take over its business. It is essentially a ‘fresh start’ for the same business under a new legal entity.
• Internal Reconstruction: Unlike the other three, this does not involve the liquidation of the company. It is an arrangement where the capital structure is modified (such as reduction of share capital or variation of shareholders’ rights) to write off accumulated losses and overvalued assets.

The correct answer is ‘Business entity concept’

Key Points

• Business Entity Concept:
  • This concept, also known as the Separate Entity Concept, states that a business is a distinct legal and economic unit, separate from its owners, partners, or shareholders.
  • Under this principle, the capital invested by the owner is treated as a liability of the business because the business owes this amount back to the owner.
  • It ensures that personal transactions of the owners are not mixed with business transactions, allowing for a true and fair view of the financial performance of the enterprise.
  • This concept is the foundation for the Accounting Equation: Assets = Liabilities + Capital.

Additional Information

• Cost Concept:
  • Also known as the Historical Cost Principle, it requires that all assets be recorded in the books of accounts at their purchase price (cost of acquisition) rather than their current market value.
• Matching Concept:
  • This principle dictates that expenses incurred during a particular period should be matched against the revenues earned during that same period to determine the accurate profit or loss.
• Accounting Period Concept:
  • Since a business is assumed to continue indefinitely (Going Concern), this concept requires the life of the business to be divided into smaller, equal time intervals (usually 12 months) called accounting periods for reporting financial performance.

The Correct answer is: C, D and E Only

Key Points

• Statement A and B (Priority of Dividend):
  • These statements are incorrect.
  • According to the Companies Act, preference shares carry a preferential right to receive dividends before any dividend is paid to equity shareholders.
  • Therefore, dividend on preference shares is paid before equity shares, making both Statement A and Statement B false.
• Statement C (Issue of Prospectus):
  • This statement is correct.
  • A prospectus is a formal legal document required by the Securities and Exchange Board of India (SEBI) and the Companies Act for any public company that intends to offer its securities (shares or debentures) to the general public.
  • It contains essential information about the company’s financial health, business model, and the purpose of the fundraise to help investors make informed decisions.
• Statement D (Installments on Shares):
  • This statement is correct.
  • When shares are not paid for in a single lump sum, the payment is divided into stages: Application Money, Allotment Money, and subsequent installments known as Calls (e.g., First Call, Second Call, and Final Call).
  • A ‘call’ is a demand made by the company on its shareholders to pay the whole or part of the balance remaining unpaid on each share.
• Statement E (Issue of Shares at Premium):
  • This statement is correct.
  • When a company issues shares at a price higher than their Face Value (Nominal Value), it is called an ‘Issue of Shares at Premium’.
  • In this case: . This Rs.5 is the Securities Premium.

Additional Information

• Equity vs. Preference Shares:
  • Preference Shares: Have a fixed rate of dividend and priority in repayment of capital during liquidation.
  • Equity Shares: Represent ownership; dividends are not fixed and are paid only out of residual profits after meeting all other obligations.
• Securities Premium Account:
  • The premium amount collected (Rs.5 in this example) must be credited to a separate account called the Securities Premium Account.
  • Under Section 52 of the Companies Act, 2013, this fund can only be used for specific purposes like issuing fully paid bonus shares, writing off preliminary expenses, or providing for the premium payable on redemption of preference shares.

The correct answer is: Rs.350 Adverse

Material Usage Variance (MUV) is a sub-variance of the direct material cost variance that measures the difference between the standard quantity of materials allowed for the actual output and the actual quantity of materials consumed, valued at the standard price.

Key Points

• Given Data:
  • Standard Quantity (SQ) per tonne = 30 units
  • Actual Output = 80 tonnes
  • Standard Rate (SR) = Rs.3.50 per unit
  • Opening Stock = 0 units
  • Purchases = 3,000 units
  • Closing Stock = 500 units
• Formula:
  • 
  • Where,
  • And,
• Step-by-Step Calculation:
  • Calculation of Standard Quantity (SQ):
    
  • Calculation of Actual Quantity (AQ) consumed:
    
  • Calculation of Material Usage Variance:
    
    
• Conclusion:
  • Since the actual quantity consumed (2,500 units) is greater than the standard quantity allowed (2,400 units), the variance is Adverse.
  • The final value is Rs.350 Adverse.

Additional Information

• Material Price Variance (MPV):
  • It is the difference between the standard price and the actual price paid for the material, multiplied by the actual quantity. In this case, the actual price per unit is .
• Significance of Adverse Variance:
  • An Adverse (A) variance indicates inefficiency, such as excessive wastage, theft, or poor quality of materials requiring higher consumption than standard.

The correct answer is ‘new profit sharing ratio of B & C =19 : 11’

When a partner retires, their share of profit is distributed among the remaining partners in a specific ratio. The New Profit Sharing Ratio is determined by adding the acquired share from the retiring partner to the existing old share of the continuing partners.

Key Points

• Old Profit Sharing Ratio:
  • The partners A, B, and C share profits in the ratio of 3 : 2 : 1.
  • 
  • 
  • 
• Retirement and Gaining Ratio:
  • Partner A retires from the firm.
  • A’s share () is taken up by B and C in the ratio of 3 : 2.
• Calculation of Gained Share:
  • 
  • 
• Calculation of New Profit Sharing Ratio:
  • 
  • 
  • 
• Final Ratio:
  • The new profit sharing ratio between B and C is , which simplifies to 19 : 11.

Additional Information

• Gaining Ratio: It is the ratio in which the continuing partners acquire the outgoing partner’s share. In this case, the gaining ratio is explicitly given as 3 : 2.
• Accounting Treatment: Upon retirement, the gaining ratio is primarily used to compensate the retiring partner for their share of Goodwill, which is debited to the continuing partners’ capital accounts and credited to the retiring partner’s capital account.

The correct answer is: Rs.900

When shares are forfeited due to non-payment of calls, the amount already paid by the shareholders is transferred to the Share Forfeiture Account. Upon reissuing these shares, any discount allowed on the reissue is debited to this account. The remaining balance in the Share Forfeiture Account, specifically pertaining to the reissued shares, is then transferred to the Capital Reserve Account as it represents a capital gain for the company.

Key Points

• Analysis of Forfeiture:
  • Total shares forfeited = 400 shares.
  • Amount paid per share = Rs.6.
  • Total amount in Share Forfeiture Account = .
• Calculation for Reissued Shares:
  • Number of shares reissued = 300 shares.
  • Forfeited amount proportional to reissued shares = .
• Discount on Reissue:
  • Reissue price = Rs.7 per share (Fully paid-up, i.e., Rs.10).
  • Discount allowed on reissue = .
  • Total discount on 300 shares = .
• Transfer to Capital Reserve:
  • Formula: .
  • Calculation: .

Additional Information

• Capital Reserve: It is a reserve created out of capital profits. Since the profit on the reissue of forfeited shares is not earned through regular business operations, it is treated as a capital profit and cannot be used for distributing dividends.
• Balance in Forfeiture Account: The balance remaining in the Share Forfeiture account regarding the 100 shares () that were not reissued () will continue to be shown in the Balance Sheet under the head ‘Share Capital’ until those shares are reissued or the account is closed.

The correct answer is ‘Net realisable value method’

Key Points

• Purchase Consideration: In the context of amalgamation, purchase consideration refers to the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.
• Net Realisable Value Method: This is NOT a recognized method for calculating purchase consideration under Accounting Standard 14 (AS-14). Net Realisable Value (NRV) is typically an inventory valuation principle (cost or NRV, whichever is lower) or used in the liquidation context, but it is not a standard method to determine the price paid for a business acquisition.
• Standard Methods: The accounting treatment for amalgamation recognizes specific methods such as the Lumpsum method, Net Assets method, Net Payment method, and Intrinsic Value method.

Additional Information

• Net Payment Method:
  • Under this method, the purchase consideration is calculated by adding up all the payments made by the purchasing company to the shareholders (Equity and Preference) of the vendor company.
  • Payments may be in the form of cash, shares, or debentures. Payments made to debenture holders or creditors are excluded from this calculation.
• Net Assets Method:
  • The consideration is equal to the agreed value of the assets taken over by the transferee company minus the agreed value of the liabilities assumed.
  • .
• Lumpsum Method:
  • This is the simplest form where the purchasing company agrees to pay a fixed, predetermined amount to the vendor company for the entire business. No specific calculation based on assets or payments is required.
• Intrinsic Value Method:
  • The consideration is calculated based on the intrinsic value of shares of both companies. The ratio of exchange is determined by dividing the intrinsic value of the transferor company’s share by the intrinsic value of the transferee company’s share.