IGNOU| ACCOUNTANCY - II (ECO - 14)| SOLVED PAPER – (DEC - 2022)| (BDP)| ENGLISH MEDIUM
BACHELOR'S DEGREE PROGRAMME
(BDP)
Term-End Examination
December - 2022
(Elective Course: Commerce)
ECO-14
ACCOUNTANCY-II
Time: 2 Hours
Maximum Marks: 50
Note: Attempt four questions in all. Question No. 1
is compulsory.
1. Write short notes on the following: 5, 5, 4
(i)
Preliminary expenses and their accounting treatment
Ans:- Preliminary
expenses is the cost that is incurred by the promoter of the organization or
company while forming the institution or business for the first time.
The term
"Preliminary cost" refers to the types of fees that are imposed for
not allowing progress in areas and which are often financial in nature.
Ultimately, these costs are paid before the company even starts. Since they are
compensated before business operations, these costs are also known as related
costs.
Preliminary
expenses are those expenses which are incurred before the start of a business.
They are treated as hypothetical assets and amortized over several years.
Preliminary
expenses include:-
(i) Cost of incorporation
(ii) Legal and
license fees
(iii)
appointing a lawyer
(iv) Stamp
duty
(v)
Distribution expenses
(vi) Painting
the new factory
(vii)
Manufacturing of new machine
Preliminary
expenses are treated as deferred revenue expenditure. They are shown under the
heading "Other Assets" on the assets side of the balance sheet.
Some
examples of Preliminary expenses include:-
(i) Buying a
new machine for ₹ 60,000
(ii) Spending
₹ 800 on its transportation
(iii) To pay ₹
1,500 as salary for its establishment
(iv) To spend
₹ 10,000 on painting the new factory.
(v) To pay ₹
5,000 for manufacturing a new machine.
Preliminary
cost of treatment:-
Preliminary
expenses treatment is no longer included in the list of deferred costs and is
not reflected in pricing over time. Because this will not fully represent the
actual additional resources of the year, the remaining deficit may be retained
as expenditure for each year.
Depending on
the company's foundation and Preliminary investment, it can be financed or
changed by adopting an effective strategy. Preliminary expenses are those
associated with building a business.
(ii) Methods
of Valuation of Goodwill
Ans:- Various
methods are used in valuing goodwill. However, valuation methods are based on
an individual company's situation and different business practices.
The top
three processes of valuation of goodwill are mentioned below.
(A) Average
Profit Method: This method is divided into two subdivisions.
(i) Simple
Average: In this process goodwill valuation is done by calculating the
average profit based on the number of years, it is called year's purchases. It
can be calculated using the formula. Goodwill = Average Profit x Number of
years of purchase.
(ii) Weighted
Average: Here, the profit of the previous year is calculated by a specific
number of weights. It is used to obtain the value of goods, which is divided by
the total number of weights to determine the average weight gain. This
technique is used when there is a change in profit and the current year's
profit is given more importance. It is evaluated using the formula. Goodwill =
Weighted Average Profit x Number of Years of Purchase, where Weighted Average
Profit = Sum of Profit multiplied by Weight / Sum of Weight
(B) Super
Profit Method: It is the surplus of expected future maintainable profits
over normal profits. There are two methods among these methods.
(i) Purchase
method based on number of years: Goodwill is established by valuing
super-profits on the basis of a specific number of purchase years. This can be
estimated by applying the formula given below. Super Profit = Actual or Average
Profit – Normal Profit
(ii) Annuity
Method: Here, the average premium is taken as the annuity value over a
certain number of years. The discounted amount of super profit calculates the
present value of an annuity at a given interest rate. Here is the formula used.
Goodwill =
Super Profit x Discounting Factor
(C)
Capitalization Method: Under this method goodwill can be valued in two
ways.
(i) Average
Profit Method: In this process, goodwill is measured by deducting the
original capital applied from the capitalized amount of average profit based on
average return rate. The formula used is mentioned below.
Average
Return on Capital = Average Return x (100/Average Rate of Return)
(ii) Super
Profit Method: Here, super profit is capitalized, and goodwill is
calculated. The formula applied is. Goodwill = Super Profit x (100/Normal Rate
of Return)
(iii) Issue of
Debenture as Collateral Security
Ans:- Debentures
issued as collateral security are secondary or parallel security to the
original loan taken by the company. The lender can realize the collateral
security if the borrower fails to repay the principal loan. In this article, we
will learn more about debentures issued as collateral security and accounting
treatment.
Collateral
means secondary. Thus, collateral security refers to the collateral or
secondary security for the loan. If the borrower fails to pay the principal
loan amount on the due date, the lender can sell the collateral security to
realize the loan amount.
Typically, the
borrower puts up a particular asset or group of assets as collateral security.
When he fails to repay the loan, these assets are sold and the loan is paid off
from the sale proceeds.
However,
sometimes a company may issue its own debentures as collateral security for a
loan. When he repays the loan on the due date, the lender immediately releases
the original security and these debentures.
If the company
is unable to repay the principal amount and interest on the loan on the due
date, the lender becomes the holder of these debentures.
Thus, he can
exercise all the rights of the debenture holder. However, the holder of these
debentures is entitled to interest on the loan but not on the debentures.
2. Why are the accounts of branches maintained? What journal
entries are made in the books of Head Office to incorporate the Trial Balance
of an Independent Branch? 4, 8
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