Page 40 - MA-12

2.6 Double Entry Book Keeping (Section A)—ISC XII

On scrutiny of the accounts, following matters are revealed:
(i) On 1st December, 2017 major repair was carried out in respect of the Plant incurring
` 60,000 which enhanced the capacity of the machine and it was charged to revenue.
Depreciation on Machinery is charged @ 10% p.a. on reducing balance method.
(ii) Closing stock as at 31st March, 2017 was overvalued by ` 24,000.
(iii) To cover management cost, an annual charge of ` 48,000 should be made for the
purpose of goodwill valuation.
(iv) On 1st October, 2016, a machine having book value of ` 20,000 was sold for 22,000
but the proceeds were wrongly credited to Profit and Loss Account. No effect has
been given to rectify the same. Depreciation is charged on machine @ 10% p.a. on
reducing balance method.
(v) Following is the Balance Sheet as on 31st March, 2019:

Liabilities ` Assets `
Creditors 50,000 Cash 20,000
Capital 3,00,000 Debtors 80,000
Plant and Machinery 1,60,000
Stock 40,000
Bills Receivable 50,000
3,50,000 3,50,000

(vi) Normal Rate of Return in similar business is 10%.
Solution: CALCULATION OF ADJUSTED PROFIT

Particulars 31st March, 31st March, 31st March, 31st March,
2016 (`) 2017 (`) 2018 (`) 2019 (`)
Given Profits 2,02,000 2,48,000 2,00,000 2,80,000
Less: Annual Management Cost (48,000) (48,000) (48,000) (48,000)
Add: Capital Expenditure on Plant ... ... 60,000 ...
1,54,000 2,00,000 2,12,000 2,32,000
Less: Unprovided Depreciation on Plant ... ... (2,000) (5,800)
1,54,000 2,00,000 2,10,000 2,26,200
Less: Overvaluation of Closing Stock ... (24,000) ... ...
Less: Overvaluation of Opening Stock ... ... 24,000 ...

1,54,000 1,76,000 2,34,000 2,26,200
Less: Proceeds from Sale of Plant
wrongly credited ... (22,000) ... ...
1,54,000 1,54,000 2,34,000 2,26,200
Add: Depreciation Wrongly Credited
to Profit and Loss ... 1,000 1,900 1,710
Adjusted Profits 1,54,000 1,55,000 2,35,900 2,27,910