Chapter financial-statements-of-a-company: Financial Statements of a Company Application Questions | accountancy Class 12 CBSE

Chapter financial-statements-of-a-company: Financial Statements of a Company Application Questions | accountancy Class 12 CBSE | ByteNotes.in

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

A company has a General Reserve of Rs. 5,00,000 and a debit balance in the Statement of Profit and Loss of Rs. 3,00,000. How will 'Reserves and Surplus' appear in the balance sheet?

The debit balance in the Statement of Profit and Loss (Rs. 3,00,000) is deducted from the General Reserve (Rs. 5,00,000) since it represents accumulated losses that must be adjusted against existing reserves as per Schedule III.
The net Reserves and Surplus is Rs. 2,00,000 (Rs. 5,00,000 minus Rs. 3,00,000), and this positive figure is shown under 'Reserves and Surplus' within Shareholders' Funds on the equity and liabilities side of the balance sheet.
In the Notes to Accounts, the working is presented clearly: General Reserve Rs. 5,00,000 less Statement of Profit and Loss (Dr. Balance) Rs. 3,00,000 equals Rs. 2,00,000 — this detail must be disclosed as per mandatory disclosure requirements.

ByteNotes

Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 2

Applied Concept

Arushi Ltd. issued 5,000, 10% debentures of Rs. 100 each at par but redeemable at a premium of 5%. Explain how the premium on redemption should be treated and where it appears in the balance sheet.

The premium on redemption of debentures (5% × Rs. 5,00,000 = Rs. 25,000) represents a future liability that the company will have to pay at the time of redemption; since it is not yet payable, it is shown as 'Other Long-term Liabilities' under Non-current Liabilities.
The corresponding debit is the loss on issue (premium on redemption), which reduces the Reserves and Surplus — it is shown as a negative balance in Statement of Profit and Loss (Rs. 25,000 debit) under Reserves and Surplus, making it (Rs. 25,000) negative.
The 5,000 debentures of Rs. 100 each (Rs. 5,00,000 total) are shown under 'Long-term Borrowings' as non-current liabilities; cash received (Rs. 5,00,000) appears under Cash and Cash Equivalents in current assets.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 3

Applied Concept

A bank manager is reviewing the loan application of Bright Futures Ltd. With reference to the uses of financial statements, explain what information the bank will seek from the company's financial statements.

The bank will assess the company's solvency and liquidity by examining current assets versus current liabilities from the balance sheet, evaluating whether the company can repay short-term obligations and meet day-to-day operational needs.
The bank will also examine profitability from the Statement of Profit and Loss — consistent profits indicate ability to service interest and repay principal; revenue from operations, net profit margin, and finance costs already borne will be key indicators.
The bank will review non-current assets as security/collateral and long-term borrowings already outstanding to assess the debt burden; the financial statements form the primary basis for credit granting decisions by financial institutions.

ByteNotes

Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 4

Applied Concept

Dinkar Ltd. received applications for 36,000 shares out of 40,000 offered, with all calls duly received except 500 shares on which the final call of Rs. 20 was not received. The company forfeited 200 shares on which the final call was not received. How will share capital be presented in the balance sheet?

Subscribed and fully paid capital: 35,500 equity shares of Rs. 100 each = Rs. 35,50,000. Subscribed but not fully paid capital: 300 shares × Rs. 100 = Rs. 30,000 less calls-in-arrears (300 × Rs. 20 = Rs. 6,000) = Rs. 24,000.
Share Forfeiture Account: 200 forfeited shares × Rs. 80 (paid up before forfeiture) = Rs. 16,000 is added to subscribed but not fully paid, giving total subscribed but not fully paid plus forfeiture = Rs. 40,000.
Total share capital in the balance sheet = Rs. 35,50,000 + Rs. 40,000 = Rs. 35,90,000, shown under Shareholders' Funds as 'Share Capital' with detailed working provided in Notes to Accounts.

ByteNotes

Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 5

Applied Concept

A company's accounts show 'Preliminary Expenses Rs. 40,000' and 'Securities Premium Rs. 20,000'. How will these two items be treated and presented in the balance sheet?

Preliminary expenses are required to be written off completely in the year in which such expenses are incurred; they should first be written off against the Securities Premium account and the balance, if any, from the Statement of Profit and Loss.
Since Securities Premium is Rs. 20,000 and Preliminary Expenses are Rs. 40,000, the entire Rs. 20,000 of Securities Premium is used to write off preliminary expenses; the remaining Rs. 20,000 of preliminary expenses is written off against the Statement of Profit and Loss.
In the balance sheet, the net Reserves and Surplus shows Securities Premium as nil (Rs. 20,000 – Rs. 20,000 = 0) and the Statement of Profit and Loss is reduced by Rs. 20,000; the remaining Rs. 20,000 preliminary expenses does not appear as an asset.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

With reference to the realisation postulate, explain how a company selling goods worth Rs. 10,00,000 on credit (to be received over 3 years) should record its revenue in the Statement of Profit and Loss.

As per the realisation postulate, revenue is included in the sales of the year in which the sale was undertaken, regardless of when the sale price will actually be received by the company.
Therefore, the entire Rs. 10,00,000 will be shown as 'Revenue from Operations' in the Statement of Profit and Loss for the year in which the sale was made, even though cash will be received over three years.
This postulate ensures that income is matched with the period in which economic activity (the sale) occurred, maintaining consistency and comparability of the income statement across periods, even though it may overstate cash position.

ByteNotes

Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 7

Applied Concept

Jumbo Ltd. issued 10,000, 12% debentures of Rs. 100 each at a discount of 20%, redeemable after 5 years. Show how the debentures and related discount will appear in the balance sheet immediately after issue.

Cash received = 10,000 × Rs. 80 = Rs. 8,00,000 (shown under Cash and Cash Equivalents as current asset); Long-term Borrowings = 10,000 × Rs. 100 = Rs. 10,00,000 (face value, shown under non-current liabilities).
The discount on issue of debentures of Rs. 2,00,000 (Rs. 10,00,000 – Rs. 8,00,000) is treated as a borrowing cost; it should be written off in the same year in which the debentures are issued, as per the chapter's important points.
If written off in the year of issue, the discount reduces the Statement of Profit and Loss by Rs. 2,00,000; if not yet written off, it temporarily appears under 'Other Current Assets' until the write-off occurs in the current financial year.

ByteNotes

Application Question

Easy difficulty • Concept in a practical situation

Easy

Question 8

Applied Concept

A company has the following items: Bank Balance Rs. 60,000, Cash in Hand Rs. 38,000, Loose Tools Rs. 20,000. Identify the correct head and sub-head for each item in the balance sheet.

Bank Balance (Rs. 60,000) and Cash in Hand (Rs. 38,000) are both shown under 'Current Assets' as 'Cash and Cash Equivalents' on the face of the balance sheet; their combined total (Rs. 98,000) may be shown as one figure with a breakdown in Notes to Accounts.
Loose Tools (Rs. 20,000) are shown under 'Current Assets' as 'Inventories' in the balance sheet; loose tools are items of small value used in manufacturing or operations and are classified as inventory, always treated as current assets.
All three items therefore fall under the major head 'Assets' and sub-head 'Current Assets'; their details must be disclosed in Notes to Accounts with specific line items for each component.

ByteNotes

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 9

Applied Concept

A prospective investor is evaluating two companies in the same industry. With reference to the uses and limitations of financial statements, advise the investor on how to use and interpret these statements.

The investor should use the balance sheets of both companies to assess their financial position — comparing shareholders' funds, borrowing levels, asset quality, and liquidity position to determine which company is in a stronger financial position.
The investor should analyse the Statements of Profit and Loss to evaluate earning capacity, revenue trends, expense structures, and profitability — helping predict, compare, and evaluate potential future returns on investment.
However, the investor must remain aware of limitations: both statements reflect historical cost, not current values; they may contain bias from personal judgements; they do not capture qualitative factors like management quality, labour relations, or brand strength — so financial statements should be used alongside other information sources for a complete picture.

ByteNotes

Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 10

Applied Concept

Brinda Ltd. has 25,000, 10% debentures of Rs. 100 each, a bank loan of Rs. 10,00,000 repayable after 5 years, and interest on debentures yet to be paid. Show how these items appear in the balance sheet.

25,000, 10% debentures of Rs. 100 each = Rs. 25,00,000 and bank loan of Rs. 10,00,000 repayable after 5 years are both classified as 'Long-term Borrowings' under Non-current Liabilities, since both are repayable after more than 12 months.
Interest on debentures yet to be paid = 10% × Rs. 25,00,000 = Rs. 2,50,000 (assuming one full year); this accrued but unpaid interest is classified as 'Other Current Liabilities' under Current Liabilities, since it is due and payable in the current period.
Total Long-term Borrowings = Rs. 35,00,000 shown under Non-current Liabilities; Accrued Interest = Rs. 2,50,000 shown separately under Other Current Liabilities with appropriate notes to accounts disclosing nature of each item.

ByteNotes

Premium Access

Unlock all Application Questions

You are viewing 10 free application questions from this chapter. Upgrade to Premium to unlock the remaining 12 questions.

Upgrade to Premium12 questions locked

Chapter sections

Chapter financial-statements-of-a-company: Financial Statements of a Company | Application Questions

A company has a General Reserve of Rs. 5,00,000 and a debit balance in the Statement of Profit and Loss of Rs. 3,00,000. How will 'Reserves and Surplus' appear in the balance sheet?

Arushi Ltd. issued 5,000, 10% debentures of Rs. 100 each at par but redeemable at a premium of 5%. Explain how the premium on redemption should be treated and where it appears in the balance sheet.

A bank manager is reviewing the loan application of Bright Futures Ltd. With reference to the uses of financial statements, explain what information the bank will seek from the company's financial statements.

A company's accounts show 'Preliminary Expenses Rs. 40,000' and 'Securities Premium Rs. 20,000'. How will these two items be treated and presented in the balance sheet?

With reference to the realisation postulate, explain how a company selling goods worth Rs. 10,00,000 on credit (to be received over 3 years) should record its revenue in the Statement of Profit and Loss.

Jumbo Ltd. issued 10,000, 12% debentures of Rs. 100 each at a discount of 20%, redeemable after 5 years. Show how the debentures and related discount will appear in the balance sheet immediately after issue.

A company has the following items: Bank Balance Rs. 60,000, Cash in Hand Rs. 38,000, Loose Tools Rs. 20,000. Identify the correct head and sub-head for each item in the balance sheet.

A prospective investor is evaluating two companies in the same industry. With reference to the uses and limitations of financial statements, advise the investor on how to use and interpret these statements.

Brinda Ltd. has 25,000, 10% debentures of Rs. 100 each, a bank loan of Rs. 10,00,000 repayable after 5 years, and interest on debentures yet to be paid. Show how these items appear in the balance sheet.

Unlock all Application Questions