1st Session - FUNDAMENTALS OF ACC. & MERCANTILE LAW

"Get reasons for the correct answer as well as the reasons for incorrect options as to why they are incorrect. Reasoning compiled by All India CA Rankers"


Q:1. What do you means by accommodation bills?

A. bills drawn to meet financial needs
B. bills drawn without any consideration
C. bills drawn although not to facilitate trade transaction
D.all of the above
See Answer

Choice "D" is correct as
We are asked the meaning of accommodation of bill.
OPTION A: is characteristic of accommodation of bill as bill is drawn to meet financial needs.
OPTION B: is characteristic of accommodation of bill as bill drawn without consideration.
OPTION C: is characteristic of accommodation of bill as this bill drawn for financial need and without any consideration so it does not facilitate trade transaction.
Hence all of above is correct answer.
Choice "A" is incorrect as
Through it is a characteristic of accommodation of bills and correct other options are also characteristic of accommodation of bill.
Choice "B" is incorrect as
OPTION A & OPTION C is also characteristic of accommodation of bill along with OPTION B.
Choice "C" is incorrect as
OPTION A, OPTION B & OPTION C are characteristic of accommodation of bill. Selecting one OPTION will be incorrect.

Q 2. Which document shows the financial position of a business house?

A. cash book
B. trial balance
C. profit and loss account
D. balance sheet
See Answer

Choice "D" is correct as
The balance sheet is a statement of assets and liabilities of the business at a particular point of time and helps in ascertaining the financial health of the business. The business house is anxious in knowing what it owes (liability) to the outsiders and what it owns (assets) on a certain date. To know this, the business house prepares a financial position statement popularly known as Balance Sheet. Thus, Option D is correct.
Choice "A" is incorrect as
As. Cash Book is a subsidiary book made for recording the cash transactions undertaken by an enterprise. It is a form of a ledger posting. Cash book has 2 columns - debit side for the receipts and credit side for the payments. The cash book needs to be balanced by way of either "By Balance c/d" [when receipts are more than payments] or "To Balance c/d [when payments are more than receipts]. Such balance of cash book is then taken to the balance sheet for completing the balance sheet. Thus, balance sheet shows the cash balance available with the enterprise thereby depiction the financial position of the enterprise.
Choice "B" is incorrect as
Trial Balance is a statement that shows separately the debit balances and credit balances. Such statement is prepared to establish arithmetical accuracy of the books. However, it does not depict financial position. Reason being, that it has all the accounts in it be it assets, liabilities, income & expenditure. Ascertaining the financial position means to know the assets & liabilities of an enterprise as on a particular date. Thus, since, trial balance has all the 4 things in it, it doesn't show the financial position. In fact, balance sheet and profit & loss a/c are prepared from the trial balance. The income & expense accounts are taken in the profit & loss a/c and the assets & liabilities are taken to the balance sheet.
Choice "C" is incorrect as
Profit & Loss is prepared to ascertain the financial performance of the enterprise and not the financial position. In fact, profits/ loss calculated from the profit & loss [by way of adding all incomes & reducing all expenses] is taken to the balance sheet to ascertain the net worth of the enterprise.

Q 3. A Bank Reconciliation Statement is a

A. Part of Cash Book
B. Part of Bank Account
C. Part of financial statements
D. None of the above
See Answer

Choice "D" is correct as
A Bank reconciliation is a stand alone statement prepared on particular date to recouncile the bank balance as per cash book with the bank balance as per pass book showing either causing difference. It's neither a part of cash book/ bank account not of financial statement.
Choice "A" is incorrect as
As BRS is a stand alone statement & is not part of cash book.
Choice "B" is incorrect as
BRS is a stand alone statement & is not part of bank account.
Choice "C" is incorrect as
As BRS is a stand alone statement & is not part of financial statement

Q 4. A businessman purchased goods for Rs. 25, 00,000 and sold 80% of such goods during the accounting year ended 31st March, 2011. The market value of the remaining goods was Rs. 4,00,000. He valued the closing stocks at cost. He violated the concept of

A. Money measurement
B. Conservatism
C. Cost
D. Periodicity
See Answer

Choice "B" is correct as
Conservatism states that the accountant should not anticipate income and should provide for all possible losses. When there are many alternative values of an asset, an accountant should choose the method which leads to the lesser value. Also as per AS-2, Valuation of Inventories, inventory is valued by following conservatism principle i.e., at lower of the cost or the market price and and if this principle accordingly results in the valuation of Inventories in one year at cost price and the market price in the other year, there is no inconsistency here. It is only an application of the principle. The cost price of closing stock is Rs.5,00,000.(25,00,000*20%=5,00,000) but market value is lower than cost value i.e Rs.4,00,000, hence goods should be valued at 4,00,000 i.e at market value.
Choice "A" is incorrect as
According to Money measurement concept, only those transactions, which can be measured in terms of money are recorded. Since money is the medium of exchange and the standard of economic value, this concept requires that those transactions alone that are capable of being measured in terms of money be only to be recorded in the books of accounts.
Choice "C" is incorrect as
According to Cost concept, the value of an asset is to be determined on the basis of historical cost, in other words, acquisition cost.
Choice "D" is incorrect as
According to Periodicity concept accounts should be prepared after every period & not at the end of the life of the entity. Usually this period is one calendar year. In India we follow from 1st April of a year to 31st March of the immediately following year. This is also called as definite accounting period.

Q 5. Debentures can be________________________
1. Mortgage debentures or simple debentures
2. Registered debentures or bearer debentures
3. Redeemable debentures or irredeemable debentures
4. Convertible debentures or non-convertible debentures

A. both 1 and 2
B. both 1 and 3
C. both 2 and 3
D. all of 1,2,3 and 4
See Answer

Choice "D" is correct as
Debenture can be of any of these type 1. If debenture is secured by mortgage of some asset than they are mortgage debenture else they are simple debenture. 2. if transfer of debenture need to be registered with company than they are registered debenture. And if transfer is done by mere transfer of debenture certificate, than they are bearrier debentures. 3. if debentures are to be payable after a period of time then they are redeemable debenture else they are irredeemable. 4. if debentures can be converted into equity share after a period of time than they are convertible debentures else they are non convertible debenture.
Choices "A", "B" & "C" are incorrect as
Debenture can be of any of these type.

Q 6. Opening balance of Capital Rs. 5,000, Net profit Rs. 2,770, Income tax Rs. 550, Drawings Rs. 650, Interest on capital Rs. 500, Interest on Drawings Rs. 120. Capital at end will be

A. Rs. 6950
B. Rs. 7650
C. Rs.6650
D. Rs.7050
See Answer

Choice "A" is correct as
We have to find capital at the end.
Relevant information :-
1. Opening Balance - Rs. 5,000
2. Net Profit - Rs. 2,770
3. Income tax - Rs. 550
4. Drawing - Rs. 650
5. Interest on drawing - Rs. 120
6. Interest on capital - Rs. 500
Relevant Calculation :-
Closing Capital = Opening Capital + Net Profit - Income tax - Drawing - interest on drawing + interest on capital = 5000 + 2770 - 550 - 650 - 120 + 500 = 6950
Choice "B" is incorrect as
Income tax is a drawing & will be deducted from opening capital.
Choice "C" is incorrect as
Interest on drawing is to be deducted from opening capital.
Choice "D" is incorrect as
Net profit will be added in opening cap.

Q7. Insurance claim received on account of machinery damaged completely by fire is

A. Capital receipt
B. Revenue receipt
C. Capital expenditures
D. Revenue expenditures
See Answer

Choice "A" is correct as
Capital receipt is a non recurring income and is not generated from the ordinary activities of an enterprise. Insurance claim received on account of machinery damaged completely by fire is capital receipt as it is obtained from destruction of machinery, which was earlier giving us benefit for more than a year.
Choice "B" is incorrect as
Receipts which are obtained in course of normal business activities are revenue receipts (e.g. receipts from sale of goods or services, etc).
Choice "C" is incorrect as
Capital expenditure is acquisition of any tangible or intangible fixed assets for enduring future benefits. Here no asset is acquired which may give benefit for more than a year, but the amount is received as compensation for the loss.
Choice "D" is incorrect as
Revenue expense is incurred to generate revenue for a particular accounting period and occurs in direct relation with the revenue or in relation with accounting periods, for example cost of goods sold, salaries, rent, etc.

Q. Opening stock of raw material of a manufacturing concern is Rs. 10,000, purchase during the year is Rs. 2,00,000, Wages Rs. 50,000, Carriage Rs. 5,000, Factory overheads Rs. 1,25,000 and closing stock of raw material is Rs. 15,000. The amount to be transferred is -

A. Rs. 3,75,000 to cost of goods manufactured account
B. Rs.2,50,000
C. Rs.3,70,000
D. None of these
See Answer

Choice "A" is correct as
Gross Profit is the difference between the selling price and the cost of the goods sold. Gross profit is usually ascertained by preparing a Trading account. The opening inventory, purchases, direct expenses, sales return are written on the debit side. Sales, closing inventory, purchases return are entered on the credit side. Hence on preparing Trading account we debit Opening stock Rs. 10,000+Purchases Rs.2,00,000 + wages Rs.50,000 + Carriage Rs.5,000+ factory overheads Rs.1,25,000( it is related to manufacturing process) =Rs.3,90,000 and we credit closing stock Rs.15,000, Hence amount Cost of goods consumed is Rs.3,75,000 ie. Rs.3,90,000 - Rs.15,000.
Choice "B" is incorrect as
The factory overhead is not included in cost of goods consumed, it should be considered as it is directly traceable to manufacturing process.
Choice "C" is incorrect as
Carriage of Rs.5,000 is not included in cost of goods consumed. The same should be included.
Choice "D" is incorrect as
It is an invalid option.

Q9. Journal and ledger records transactions in

A. A chronological order and analytical order respectively
B. An analytical order and chronological order respectively
C. A chronological order only
D. An analytical order only
See Answer

Choice "A" is correct as
In journal, the transactions are recorded chronologically (i.e. wrt their order of occurance) While in ledger, the transactions are classified wrt their respective subjects. For example, all transactions relating to cash are put together at one place i.e. Cash A/c and therefore, it provides an analytical record so on just a single look of the ledger of Cash i.e. Cash A/c, we are able to know how much cash balance we are having on a particular date which is quite difficult in case of journal.
Choice "B" is incorrect as
This is a reverse statement, as the journal contains a chronological record while the ledger contains analytical record. In journal, the transactions are recorded wrt their order of occurance) and this way, transactions of a similar nature may be recorded on different places if they occur on different dates. so we cannot analyze and derive the net effect of the transactions. While ledger, contains an analytical record as also explained in reasoning of "Option A".
Choice "C" is incorrect as
It is the journal that contains a chronological record while the main feature of ledger is that it provides an analytical record as also explained in the reasoning of "Option B". Journal is the book of first entry wherein the transactions are recorded as and when they take place while the ledger is the book of second entry and the core feature of ledger is that it provides an analytical record as also explained in the reasoning of "Option B".
Choice "D" is incorrect as
The journal contains a chronological record and not analytical record while the ledger is significant for keeping analytical record as also explained in reasoning of "Option A".

Q10. As per the SEBI guidelines, on issue of share, the application money should not be less than

A. 2.5% of the nominal value of share
B. 2.5% % of the issue price of share
C. 25.0% of the nominal value of share
D. 25.0% of the issue price of share
See Answer

Choice "D" is correct as
As per SEBI guideline the application money on shares cannot exceed 25% of ISSUE PRICE.
Choices "A", "B" & "C" are incorrect as
These are not in accordance with SEBI guidelines.

Q11. Goods purchased from A for Rs. 10,000 passed through the sales book. The errors will result in

A. Increase in gross profit
B. Decrease in gross profit
C. No effect on gross profit
D. Either A or B
See Answer

Choice "A" is correct as
Goods purchased from A Rs. 10,000 pass through the Sales goods, so the sales will increase by Rs. 10,000 obviously the gross profit will also increase.
Choice "B" is incorrect as
Sales amount is always on credit side of Trading account. So the gross profit will not decreases, it will increase only.
Choice "C" is incorrect as
If sales amount is more, obviously it affects the gross profit.
Choice "D" is incorrect as
It is only A not B. The gross profit will increase, never decrease.

Q12. X draws a bill on Y on 1/1/2011 for Rs 20,000 for 30 days what will be the maturity date of the bill:

A. 2.2.2011
B. 3.2.2011
C. 4.2.2011
D. 31.1.2011
See Answer

Choice "B" is correct as
To calculate - we have to find maturity data foe a bill.
Relevant Information:
1. Date of bill - 1.1.2011
2. Period of bill - 30 days
Relevant Working:
Date of bill 1.1.2011 +Days 30 31.1.2011 +grace 3 3.2.2011
Choice "A" is incorrect as
When bill get matured after specified days than we have to exclude that day on which bill is made .In this case date of bill is counted while counting 30 days .
Choice "C" is incorrect as
Because while counting days for bill of exchange, due date was taken next day of 31.3.2011 which is incorrect . last day is due date.
Choice "D" is incorrect as
Grace days are not considered.

Q13. A machine was purchased for Rs. 10, 00,000 on 01.01.2008 and on 31.12.2008 its net realizable value was Rs. 10, 50,000. Do you prefer to count this profit? If you count, which of the following concepts will be violated

A. realisation
B. conservatism
C. accrual
D. matching
See Answer

Choice "B" is correct as
Conservatism states that the accountant should not anticipate income and should provide for all possible losses. When there are many alternative values of an asset, an accountant should choose the method which leads to the lesser value. It is not prudent to count unrealised gain but it is desirable to guard against all possible losses. So, if machinery purchased for Rs. 10, 00,000 and shown at net realizable value of Rs. 10, 50,000, then accordingly conservatism principle is not followed that assets should be shown at historical cost.
Choice "A" is incorrect as
According to realizable value, assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Choice "C" is incorrect as
Under accrual concept, the effects of transactions and other events are recognized on mercantile basis i.e., when they occur (and not as cash or a cash equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
Choice "D" is incorrect as
According to Matching concept, all expenses matched with the revenue of that period should only be taken into consideration and in the financial statements of the organization if any revenue is recognized then expenses related to earn that revenue should also be recognized.

Q14. If del-credere commission is for bad debt, consignee will debit the bad debt amount to:

A. Commission Earned A/C
B. Consignor's A/C
C. Trade receivables (Customer A/C)
D. General Trading A/C
See Answer

Choice "A" is correct as
Consignee gets the additional commission for bearing the loss on account bad debts, the bad debts amount he debits to commission account only.
Choice "B" is incorrect as
The Consignor pays additional commission for bearing the bad debts losses to consignee. So the Consignee is Suppose to bear bad debts losses and can't debit the same losses to the consignor's account.
Choice "C" is incorrect as
When the consignee gets the Del credere commission, he has to pay full amount of credit sales to the consignor, but if there is a loss of bad debts, he has to transfer to his commission account. The consignee may does his separate business along with this consignment business. He can't treat consignment receivables as his own business receivables or customers.
Choice "D" is incorrect as
The bad debts losses of the consignment activity the consignee can't debit/credit any loss on income to General Trading Account. The Del credere Commission is paid by the consignor to consignee to bear the loss of the bad debts, obviously it will be debited to the commission account. The balance of the commission account will be transferred to the profit & loss account. If the losses of bad debts are higher than the commission earned by the consignment business, then it will be transferred to profit & loss account and not to General Trading Account.

Q15. Credit balance in bank passbook represent

A. Asset
B. Liability
C. Provision
D. Fictitious asset
See Answer

Choice "A" is correct as
Credit balance in pass book represents, debit balance in bank A/c of cash book that is an asset. What is debit for the account holder is a credit for the bank as bank holds the account as a liability towards the account holder and thus shows credit balance as it has to return the same to the account holder.
Choice "B" is incorrect as
It is a liability for the bank and not for the account holder.
Choice "C" is incorrect as
Provision is created for a liability whose amount cannot be ascertained completely. Since, it is not a liability only, there is no question of it being a provision.
Choice "D" is incorrect as
A fictitious asset is an asset which is not real. However, the credit balance in pass book is very much a true asset.

Q16. A, B and C entered into partnership on 1st April, 2009 to share profits and losses in the ratio of 4:3:3. A, however, personally guaranteed that C's share of profit after charging interest on capital @ 5% p.a. would not be less than Rs. 40,000 in any year. Capitals were as follows. A Rs. 300,000, B Rs. 200,000, C Rs. 150,000. Profit for the year ended on 31st March 2010 amounted to Rs. 160,000. Sacrifice made by A for C will be ________

A. Rs. 1,750
B. Rs. 1,000
C. Zero
D. None of these
See Answer

Choice "A" is correct as
We have to find how much profit A will have to sacrifice for C for personal guarantee given by him. In this case any deficiency of profit of C will be borne by A only.
Relevant Information:
1) A, B & C share profit & loss in the ratio of 4:3:3
2) A guarantee C that his share of profit after interest @ 5% p.a will not be less than 40,000
3) A, B & C have capital of 3,00,000, 2,00,000 & 1,50,000
4) Profit of firm 1,60,000
Relevant Working:
Net profit 1,60,000 less: interest on capital A (3,00,000*5%) - 15,000 B (2,00,000*5%) - 10,000 C (1,50,000*5%) - 7,500 32,500 1,27,500 Deficiency of C = 40,000 - 38,250 = 1,750C's share = 1,27,500 * 3 /10 = 38,250 So, A will make sacrifice of 1,750 for C
Choice "B" is incorrect as
Only A will bear deficiency not A & B both, as A personaly gave guarantee to C.
Choice "C" is incorrect as
Interest on capital at 5% will be deducted from profit before dividing it.
Choice "D" is incorrect as
Option A is correct.

Q17. A, B and C are equal partners. D is admitted to the firm for one-fourth share. D brings Rs. 20,000 capital and Rs. 5,000 being half of the premium for goodwill. The value of goodwill of the firm is:

A. 20,000
B. 40000
C. 10,000
D. 5,000
See Answer

Choice "B" is correct as
We have to find the value of goodwill of the firm
Relevant Information:
1) D bring Rs. 5,000 as half of the goodwill premium
2) He is admitted for 1/4 share
Relevant Working:
D's share of goodwill premium= 5,000*2 = 10,000
Total Goodwill = D's goodwill premium/his share of profit
= 10/1/4 = 40,000
Choice "A" is incorrect as
Since, 5000 is half of the premium he bought. So, 10,000 is his share in premium
Choice "C" is incorrect as
its share of D in goodwill for 1/4 share not the amount of goodwill
Choice "D" is incorrect as
its premium of goodwill. he is bring not the amount of goodwill

Q18. This is not a contingent liability:


A. uncalled liability on partly paid shares
B. arrears of dividend on cumulative preference share
C. guarantee for loan
D. unclaimed dividend
See Answer

Choice "D" is correct as
Contingent liability is a potential obligation that may be incurred depending on the outcomes of a future event. Dividend once declared becomes liability to company irrespective of whether it was claimed or not.
Choice "A" is incorrect as
Uncalled liability is still yet to be called in future. it will depend on decision to make call. So it is a contingent liability.
Choice "B" is incorrect as
Arrears of dividend on cumulative preference share accrue until it gets paid. So its payment depends on profit earned and therefore it is a contingent liability.
Choice "C" is incorrect as
Guarantee for loan means assurance given to bank that in case of nonpayment of loan the person or company will pay it off. It is a contingent liability which depends on default by lender.

Q19. R Ltd. Company purchase machinery on 1-4-2006 for Rs. 1,00,000. The depreciation on this machinery is charged @10% per annum on SLM. On 1-10-2008 machinery is sold for Rs. 89,000, the profit or loss on sale of such machinery is

A. Profit of Rs. 12,000
B. Loss of Rs. 12,000
C. Profit of Rs. 14,000
D. Loss of Rs. 6,000
See Answer

Choice "C" is correct as
We are required to calculate the profit or loss on sale of the machinery.
Relevant Information:
Purchase cost 100000
Date of purchase 4/1/2006
Rate of Depreciation 10%
Method Straight Line Method
Date of sale 10/1/2008 Sale price 89000
Formula to be used
Depreciation under Straight Line Method = Rate of Depreciation * Original Cost
Relevant Calculation:
Purchase cost100000
Date of purchase4/1/2006
Date of sale 10/1/2008
Tenure of asset usage 2.50 years
Rate of Depreciation10%
Method Straight Line Method
Depreciation Charged for the asset for one year = 100000 * 10% =10000
Depreciation Charged for the asset for 2.5 years = 10000 * 2.5 =25,000
Book value of the asset on the date of sale = 100000 - 25000 =75,000
Sale price= 89000 Therefore, profit or (loss) = Sale price - book value of the asset
=89000 - 75000 =14,000 When sale price is more than the cost it results in profit
Choice "A" is incorrect as
In this calculation, profit or (loss) is calculated by the formula = book value - sale price. This is incorrect. When sale price is more than the cost it results in profit.
Choice "B" is incorrect as
The value arrived is by deducting the original cost of the asset from the sale price, i.e.., 89000 - 100000 = Loss 11000. This is incorrect, as the depreciation charged on the asset has to be deducted from the cost of the asset to arrive at the book value of the asset which has to then be deducted from the sale price of the asset.
Choice "D" is incorrect as
The value arrived at is by deducting the sale price from the original cost of the asset, i.e.., 100000 - 89000 = Profit 11000. This is incorrect in 2 ways:
1. The depreciation charged on the asset has to be deducted from the cost of the asset to arrive at the book value of the asset which has to then be deducted from the sale price of the asset.
2. The excess or deficit of sale price over the book value is profit or loss respectively and not vice versa.

Q20. Whenever errors are noticed in the accounting records, they should be rectified


A. At the time of preparation of the trail balance
B. Without waiting the accounting year to end
After preparation of final accounts
In the next accounting year
See Answer

Choice "B" is correct as
When the errors are noticed in the accounting records, they should be rectified without waiting the accounting year to end. Because these types of errors are detected before the year ends, it is easy to rectify in the same accounting year.
Choice "A" is incorrect as
As the errors are noticed in the accounting records, they should be rectified before the preparation of the trial balance.
Choice "C" is incorrect as
Preparation of final accounts is the last stage of the year. The errors are noticed before the preparation of trial balance so it can be rectified before the preparation of trial balance, after which the financial accounts are made.
Choice "D" is incorrect as
The same has been noticed and should be rectified in the same accounting year without waiting for the next year. The error pertains to the current year and should be rectified in the same year.

Q21. Accounting standards


A. Harmonize accounting policies
B. Eliminate the non-comparability of financial statement
C. Improve the reliability of financial statement
D. All of the above
See Answer

Choice "D" is correct as
The accounting standards are centered around harmonization of accounting policies and practices followed by different business entities so that the diverse accounting practices adopted for various aspects of accounting can be standardized. They eliminate the non-comparability of financial statements and thereby improving the reliability of financial statements; and provide a set of standard accounting policies, valuation norms and disclosure requirements. They reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises.
Choices "A", "B" & "C" are incorrect as
All these options are individually correct and thus none of them can be selected individually.

Q22. On March 31, 2011 after sale of goods worth Rs. 2,000, he is left with the closing stock of Rs. 10,000.This is
A. An event.
B. A transaction.
C. Both transaction as well as an event.
D. Neither a transaction nor as event.
See Answer

Choice "A" is correct as
Meaning of event - A happening, as a consequence of transaction(s), a result.
Meaning of transaction - A business, performance of an act, an agreement
In the current example -
1. There is a sale of goods for Rs. 2,000 - this is nature of an act and is thus a TRANSACTION.
2. Post sale of goods, there is a closing stock of Rs. 10,000 - this is a consequence of transaction (transaction of sale of goods) and is thus an EVENT. Based on above, the correct answer is "A" - an event.
Choice "B" is incorrect as
As transaction in this example is - sale of goods for Rs. 2,000 (an act).
Choice "C" is incorrect as
As closing stock of Rs. 10,000 is only an event and not a transaction. So, this option is ruled out.
Choice "D" is incorrect as
As it a transaction and not an event, thus, it is not that it is neither a transaction nor an event. Thus, this option is also ruled out.

Q23. Amit Ltd. purchased a machine on 01.01.2008 for Rs. 1,20,000. Installation expenses were Rs. 10,000. Residual value after 5 years Rs. 5,000. On 01.07.2008, expenses for repairs were incurred to the extent of Rs. 2,000. Depreciation is provided @10% p.a. under written down value method. Deprecation for the 4th year =__________.
A. Rs. 25,000
B. Rs. 8,748
C. Rs. 9,631
D. Rs. 9,477
See Answer

Choice "D" is correct as
We need to compute the amount of depreciation for the 4th year under Written down value method. The installation charges shall form part of the total cost to be considered for the depreciation purposes. However, Repairs shall not be taken into consideration as the same is a recurring cost in the nature of maintenance. Recurring cost are not taken into account for computation of Depreciation. Residual value is also not considered under Written Down Value Method unlike under Straight Line Method of Depreciation.
Relevant Data
Original Cost 120,000
Installation Cost 10,000
Rate of Depreciation10%
Method of Depreciation Written Down Value Method
Year under Consideration4
Formula to be used
Depreciation under WDV Method = (WDV at the beginning of the year * Rate of depreciation)
Relevant Calculation
Particulars Amount
Original Cost 120,000
Installation Cost 10,000
Total Cost 130,000
WDV at the beginning of year 1 130,000
Depreciation for year 1 (130,000* 10%) 13,000
WDV at the beginning of year 2 117,000
Depreciation for year 2 (117,000*10%) 11,700
WDV at the beginning of year 3 105,300
Depreciation for year 3 (105,300* 10%) 10,530
WDV at the beginning of year 4 94,770
Depreciation for year 4 (94,770* 10%) 9,477
Choice "A" is incorrect as
The value arrived at is after taking into consideration the Residual Value of the asset after 5 years. Under Written Down Value method, Residual Value is not to be deducted from the value of the asset.
Choice "B" is incorrect as
The cost of the asset taken is only the purchase cost. Installation cost is not taken into account which is incorrect. The cost of acquisition of the asset shall include installation charges and depreciation shall be charged on such costs as well."
Choice "C" is incorrect as
The amount spent on repairs of the asset during the year is added to the cost of the asset. The same should not be considered as it is the maintenance cost and is of recurring nature. Such expenditures are revenue transactions and depreciation cannot be charged on such expenses.

Q24. Opening Stock Rs. 10,000, Purchases Rs. 1,10,000, Closing Stock Rs. 20,000. Find out total sales if profit margin is 30% on cost of sales:


A. Rs. 1,42,857
B. Rs. 1,30,000
C. Rs. 1,56,000
D. Rs. 1,17,000
See Answer

Choice "B" is correct as
(a) To Calculate - Total Sales
(b) Relevant Data- Opening stock - 10,000
Purchase - 1,10,000
Closing Stock - 20,000
Profit Margin - 30% on cost of sales
(c) Relevant Calculation-
Cost of Sales = Opening stock + Purchase - Closing stock
= 10,000 + 1,10,000 - 20,000
= 1,00,000
Total Sales = Cost of sales + Margin
= 1,00,000 + (1,00,000*3) = 1,00,000 + 30,000
= 1,30,000
Choice "A" is incorrect as
In arriving at this value, profit margin of 30% is applied on sales which is incorrect
Choice "C" is incorrect as
In this calculation, closing stock has been added and opening stock has been reduced in calculating cost of sales which should have been the other way round.
Choice "D" is incorrect as
In this calculation, in the calculation of cost of sales - closing stock has been reduced but opening stock has not been added which gives a cost of sale of - 90,000. Opening stock shall be added in cost of sales calculation. Thus, this option is incorrect.

Q25. Accounting policy for inventories of Xeta Enterprises state that inventories are valued at the lower of cost determined on weighted average basis or not realizable value. Which accounting principle in followed in adopting the above policy


A. Materiality
B. Prudence
C. Substance over form
D. All of the above
See Answer

Choice "B" is correct as
As per prudence concept, the preparers of financial statements have to contend with the uncertainties that inevitably surround many events and circumstances, such as the collectability of receivables, the probable useful life of plant and machinery, and valuation of inventory. Such uncertainties are recognized by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. Inventory is valued by following conservatism principle i.e. at lower of the cost or the market price but the revised AS 2 permits the use of only FIFO or weighted average cost formula for determining the cost of inventories where the specific identification of cost of inventories is not possible. Hence Xeta Enterprises has followed prudence concept in valuation of inventories.
Choice "A" is incorrect as
According to materiality principle, all the items having significant economic effect on the business of the enterprise should be disclosed in the financial statements and any insignificant item which will only increase the work of the accountant but will not be relevant to the users need not be disclosed in the financial statements.
Choice "C" is incorrect as
If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. For example, where rights and beneficial interest in an immovable property are transferred but the documentations and legal formalities are pending, the recording of acquisition/disposal (by the transferee and transferor respectively) would in substance represent the transaction entered into.
Choice "D" is incorrect as
Option B is only correct.

Q26. During the year 2005-06, T Ltd. issued 20,000, 12% Preference shares of Rs. 10 each at a premium of 5%,which are redeemable after 4 years at par. During the year 2010-11, as the company did not have sufficient cash resources to redeem the preference shares, it issued 10,000, 14% debentures of Rs. 10 each at a premium of 10%. At the time of redemption of 12% preference share, the amount to be transferred to capital redemption reserve=?


A. 2,10,000
B. 1,00,000
C. 2,00,000
D. None of these
See Answer

Choice "C" is correct as
Preference shares can be redeemed out of divisible profits (divisible profit is a profit that can be distributed as dividend and it includes general reserve, P & L A/c balance.) or net proceeds of fresh equity issued. On redemption, an amount equal to nominal value of preference shares to be redeemed less by net proceeds of equity issued, is to be transferred to capital redemption reserve.
In thus question, nominal value of preference shares to be redeemed =20,000*10 =2,00,000 fresh equity issued = 0, and thus, amount to be transferred to capital redemption reserve (Cr)= Rs. 2,00,000.
Choice "A" is incorrect as
Only the nominal value of preference shares to be reedmed after deducting net proceeds of equity is transferred to CRR and premium on redemption is not taken into consideration for transferring purpose.
Choice "B" is incorrect as
Preference shares can be redeemed out of net proceeds of fresh equity shares not by debentures.
Choice "D" is incorrect as
It is an invalid option.

Q27. R's Trial Balances contains the following information-Discount received: Rs.1,000; Prov. for discount on Creditors: Rs. 1,600; It is desired to maintain a provision for discount on creditors at Rs. 1,100. The amount to be credited to P&L Account is- s


A. Rs.1,500
B. Rs.1,000
C. Rs.1,100
D. Rs.500
See Answer

Choice "D" is correct as
In Nominal account we debit all expenses and losses and credit all incomes and gains. Discount received of Rs.1,000 is an income hence credited to P&L account. Also earlier provision on Creditors was Rs. 1,600 and it is to be kept at Rs. 1,100, i.e. provision is reduced by Rs.500 is to be debited in P& L a/c .So ,the net amount to be credited to P&L Account is Rs.1,000-Rs.500 = Rs.500.
Choice "A" is incorrect as
The provision on creditors is reduced by Rs.500 is to be debited in P& L a/c and discount received is to be credited, but here both amounts are credited.
Choice "B" is incorrect as
The closing balance of provision on creditors is shown in P&L A/c , which is incorrect. The difference between opening and closing balance of provision is provided in P&L a/c. Also the effect of discount received on creditors is not given.
Choice "C" is incorrect as
The effect of discount received on creditors is not given and also the provision on creditors that needs to be reduced by Rs.500 should be debited in P& L A/c. In this calculation, it has been credited which is incorrect.

Q28. Reserve Capital means


A. Part of subscribed uncalled capital
B. Accumulated profit
C. Part of Capital Reserve
D. Part of Capital Redemption Reserve
See Answer

Choice "A" is correct as
Reserve capital is the capital which is uncalled and is available for drawing in case of need.
Choice "B" is incorrect as
It is uncalled capital not accumulated profit.
Choice "C" is incorrect as
Capital reserve and reserve capital are different.
Choice "D" is incorrect as
Redemption reserve is reserve made out of profit for redemption of securities and it is not reserve capital

Q29. Interest Payable on debentures is


A. An appropriation of profit of the company.
B. A charge against profits of the company.
C. Transferred to Sinking Fund A/c
D. Treated as Miscellaneous Expenditure to be shown in Balance Sheet.

See Answer

Choice "B" is correct as
Interest on debenture is charge against profit not appropriation of profit. Interest is paid irrespective of company's earning.
Choice "A" is incorrect as
Debenture is a debt instrument. Therefore interest paid on debenture will be a charge against profit not appropriation of profit. Dividend paid on share is appropriation of profit.
Choice "C" is incorrect as
Interest paid on debenture is different from transfer to sinking fund. Transfer to Sinking Fund means transferring profit to a fund as to repay the debt. Generally the amount of this fund is invested in some specified investments. Whereas Interest on Debenture is charge paid to debenture holders for the debentures they subscribed for the tenure of debenture.
Choice "D" is incorrect as
Interest payable on debentures is expense of that year and therefore is debited to P&L A/c.

Q30. Bobby sold goods worth Rs. 25,000 to Mr. Bonny. Bonny immediately accepted a bill on 1.11.01,payable after 2 months. Bobby discounted this bill @ 18% p.a. on 15.11.01. On the due date, Bonny became insolvent and 50 paisa 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. 25000
C. Rs. 24250
D. Rs. 12125
See Answer

Choice "A" is correct as
We are required to find out bad debts to be recorded in books of bobby.
Relevant data:-
1) amount of bill- 25000
2) bobby become insolvent and can pay only 50 paise in rupee.
Relevant working:-
Bad debts= amount of bill- money recovered
= 25000-25000*0.50 = 25000-12500= 12500
Choice "B" is incorrect as
It amount of bill We have to deduct amount recovered to get bad debts.
Choice "C" is incorrect as
It is net proceeds Bobby will get on discounting bill. we are required find the amount of bad debts.
Choice "D" is incorrect as
Net proceed amount as amount recoverable from bonny. on due data entire amount is recoverable.

Q31. Opening balance of Capital Rs. 5,000, Net profit Rs. 2,770, Income tax Rs. 550, Drawings Rs. 650, Interest on capital Rs. 500, Interest on Drawings Rs. 120. Capital at end will be


A. Rs. 6950
B. Rs. 7500
C. Rs. 7190
D. Rs. 1410
See Answer

Choice "A" is correct as
as We have to find capital at the end.
Relevant data:-
1. Opening Balance - Rs. 5,000
2. Net Profit - Rs. 2,770
3. Income tax - Rs. 550
4. Drawing - Rs. 650
5. Interest on drawing - Rs. 120
6. Interest on capital - Rs. 500
Relevant working:-
Closing Capital = Opening Capital + Net Profit - Income tax - Drawing - interest on drawing + interest on cap
= 5000 + 2770 - 550 - 650 - 120 + 500 = 6950
Choice "B" is incorrect as
income tax is drawing & will be deducted from opening cap.
Choice "C" is incorrect as
interest on drawing is to be deducted from opening cap.
Choice "D" is incorrect as
net profit will be added in opening cap.

Q32. Sales for the year ended 31st March, 2011 amounted to Rs. 10, 00,000. Sales included goods sold to Mr. A for Rs. 50,000 at a profit of 20% on cost. Such goods are still lying in the godown at the buyer's risk. Therefore such goods should be treated as part of,


A. Sales
B. Closing stock
C. Goods in transit
D. Sales return.
See Answer

Choice "A" is correct as
The property in the goods is transferred from the seller to the buyer when the latter acquires the proprietary rights over the goods and the obligations linked thereto. 'Property in Goods' which means the ownership of goods, is different from ' possession of goods' which means the physical custody or control of the goods, here though the goods are with the seller, but he is holding it at the risk of Mr. A so such goods will be counted as sale, as ownership is transferred to buyer.
Choice "B" is incorrect as
The property in the goods is transferred from the seller to the buyer, so it cannot be counted in closing stock.
Choice "C" is incorrect as
The goods are lying in the godown of the seller, it isn't in transit.
Choice "D" is incorrect as
Sales return means merchandise that was returned to the seller by a customer due to Excess quantity shipped, Defective goods, Goods shipped too late, Product specification etc. This account is a contra sales account.

Q33. Find out the goodwill of firm using capitalization method from the following information: Total Capital Employed in the firm Rs. 8,00,000; Reasonable Rate of Return 15%; Profits for the year Rs. 12,00,000.


A. 80,00,000
B. 4,00,000
C. 72,00,000
D. None of these
See Answer

Choice "C" is correct as
We have to find the goodwill by capitalization basis.
Relevant data:-
1) Capital employed - 8,00,000
2) Profit of the year - 12,00,000
3) Reasonable rate of return - 15%
Relevant working:-
Normal value of business= Profit of the year/Reasonable rate of return
= 12,00,000/15% = 80,00,000
Goodwill = Normal value of business - Capital employed
= 80,00,000 - 8,00,000 = 72,00,000
Choice "A" is incorrect as
It is normal value of business where as Goodwill = Normal value of business - Capital employed.
Choice "B" is incorrect as
Goodwill is not equal to profit earned deducted by capital employed. It is capital employed deducted from normal value of business.
Choice "D" is incorrect as
It is an invalid option.

Q34. X and Y are partners sharing profits in the ratio 5:3. They admitted Z for 1/5th share of profits, for which he paid Rs. 1, 20,000 against capital and Rs. 60,000 against goodwill. Find the capital balances for each partner taking Z's capital as base capital.


A. X- 4,50,000 Y-2,70,000 Z-1,80,000
B. X- 2,40,000, Y-2,40,000, Z-1,20,000
C. X- 3,00,000; Y- 1,80,000 and Z- 1,20,000
D. X-1,20,000, Y-1,20,000, Z-1,20,000
See Answer

Choice "C" is correct as
We have to find the capital balance of each partner. Here we have to use new partner i.e Z capital as base to calculate the balance of capital. For this, we will find out new profit sharing ratio.
Relevant data:-
1) Z will bring capital of 1,20,000 for 1/5th share.
2) Old ratio between X and Y is 5:3
Relevant working:-
New profit sharing ratio,
Z's share= 1/5
Remaining share of X and Y = 1-1/5
= 4/5
Share of X, = 4/5 * 5/8
= 5/10
Share of Y, = 4/5 * 3/8
= 3/10
New profit sharing ratio is = 5/10 : 3/10 : 1/5
= 5:3:2
New Capital Balance:- Taking Z's capital as base,
Capital of firm = 1,20,000 * 5 = 6,00,000
X's capital, = 5/10 * 6,00,000
= 1,80,000
Y's capital, = 3/10 * 6,00,000
= 1,20,000

Choice "A" is incorrect as
It takes goodwill brought by Z as his capital. Goodwill is brought by new partner to give the old partners to compensate for his profit share in firm. So, it will not be added into capital.
Choice "B" is incorrect as
The remaining share of firm will be shared in old ratio. As nothing is mentioned how they all sacrificing their share, it is assumed that they will sacrifice in old ratio.
Choice "D" is incorrect as
New profit sharing is 5:3:2 not equal.

Q35. Amount utilized out of profits to the redeemable preference shares can be utilized only for -


A. Issue of fully paid bonus shares to the members of the company.
B. Redemption of debentures.
C. Writing off discount allowed on issue of shares or debentures.
D. Writing off the cost of issuing shares or debentures.
See Answer

Choice "A" is correct as
Amount utilized out of profit to redeem Preference Shares i.e. CRR can be utilized only to pay fully paid up bonus share to members of company.
Choice "B" is incorrect as
Debentures cannot be redeemed from CRR A/c.
Choice "C" is incorrect as
Discount allowed on issue of share or debentures cannot be written off from CRR.
Choice "D" is incorrect as
CRR can be utilized to write off cost of issue of share or debentures.

Q36. Purpose of an accounting system includes all the following except,


A. Interpret and record the effect of business transaction.
B. Classify the effect of transactions to facilitate the preparation of report.
C. Summarize and communicate information to decision makers.
D. Dictate the specific types of business enterprise transactions that the enterprises may engage in.
See Answer

Choice "D" is correct as
An accounting system is adopted by an enterprise basically for 2 functions -
1. Generating financial information - which includes recording, classifying, summarising, analyzing, interpreting and communicating financial information
2. Using such financial information
The mentioned financial information is the information that arises from the business enterprise transactions an enterprise undertakes. Thus, it can be inferred from above that accounting system does not include the types of business transactions that the enterprise may engage. The system only records such transactions. It is up to the management of the enterprise to decide on the course of transactions that the enterprise may engage in.
Choices "A", "B" and "C" are incorrect as
Accounting system is adopted by the enterprise to interpret, record and classify the effect of business transactions. Also, the system enables to summarize and communicate the information generated through such recording to decision makers.

Q37. Which of the following statement is/are false?
i. The term 'depreciation', 'depletion' and 'amortization' convey the same meaning.
ii. Provision for depreciation A/c is debited when provision for depreciation A/c is created.
iii. The main purpose of charging the profit and loss A/c with the amount of depreciation is to spread the cost of an asset over its useful life for the purpose of income determination.


A. Only (i) above
B. only (ii) above
C. Only (iii) above
D. All (i) (ii) & (iii) above
See Answer

Choice "B" is correct as
Depreciation is a debit entry. Any provision created for a debit entry is to be shown on the liabilities side of the Balance Sheet. Accordingly, Provision for Depreciation account is credited when such provision is made.
Choice "A" is incorrect as
Depreciation, Depletion and Amortization do not convey the same meaning. Depreciation is normal wear and tear to an asset. Depletion is used in case of asset like Mines and ores where there is only a certain quantity of material, which once used takes ample time to be replenished. Amortization is reduction in the value of intangible assets for example, Goodwill.
Choice "C" is incorrect as
The main purpose of charging Depreciation to the profit and loss account is to match the cost of productive asset to the revenues earned in a particular financial year. Since the asset has a direct link to revenues, the asset cost is allocated to the various years. However, it is not a direct purpose of spreading the asset's cost over the useful life.
Choice "D" is incorrect as
Point (i) and (iii) are incorrect as stated above.

Q38. A proprietor, Mr. A has reported a profit of Rs. 1,25,000 at the end of the financial year after taking into consideration the following amount: 1) The cost of an asset of Rs.25, 000 has been taken as an expense.2)Mr. A is anticipating profit of Rs. 10,000 on the future sale of a car shown as an asset in his books. 3) Salary of Rs. 7,000 payable in the financial year has not been into account. 4) Mr. A purchased an asset for Rs. 75,000 but its fair value on the date of purchase was Rs85,000. Mr. A recorded the value of asset in the value of asset in his books by Rs. 85,000. On the basis of the above facts answer the following questions from the given choices: Which measurement base should be followed in the statement (ii)?


A. Conservatism,
B. Materiality,
C. Historical cost,
D. Accrual
See Answer

Choice "A" is correct as
Conservatism states that the accountant should not anticipate income and should provide for all possible losses. When there are many alternative values of an asset, an accountant should choose the method which leads to the lesser value. The Realisation Concept also states that no change should be counted unless it has materialised. The Conservatism Concept puts a further brake on it. It is not prudent to count unrealised gain but it is desirable to guard against all possible losses. Hence Mr. A should not take into account the unrealised profit on the future sale of a car shown as an asset in his books.
Choice "B" is incorrect as
According to materiality principle, all the items having significant economic effect on the business of the enterprise should be disclosed in the financial statements and any insignificant item which will only increase the work of the accountant but will not be relevant to the users need should not be disclosed in the financial statements.
Choice "C" is incorrect as
Historical cost means acquisition price. According to this base, assets are recorded at an amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation.
Choice "D" is incorrect as
Under accrual concept, the effects of transactions and other events are recognised on mercantile basis i.e., when they occur (and not as cash or a cash equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

Q39. L's acceptance of Rs. 20,000 given to A is renewed upon cash payment of Rs. 5,000 and the fresh bill of Rs. 15,100. Journal entry of renewal in the book of A will be


A. B/R a/c Dr. 15,100
Cash a/c Dr. 5,000
To L a/c 20,000 to interest a/c 100
B. B/R a/c Dr. 15100
Cash a/c Dr. 5000
To L's a/c 20100
C. A's a/c Dr. 20000
Interest a/c Dr. 100
To cash a/c 5000
To B/P a/c 1500
D. None of above
See Answer

Choice "A" is correct as
We have to pass journal entry of renewal in the bank of A. it is case of renewal of Bill


Relevant data and calculation:- 1) old bill- 20000
2) renewed bill- 15100
3) cash payment- 5000
Renewal of bill is done when drawee is not able to meet his liability and he request for fresh bill with extended time. Drawer charge interest on drawee on amount unpaid for extra period granted. Such interest is income to drawer.
B/R a/c Dr. - 15100
fresh bill of 1500 is made
Cash a/c Dr. - 5000
Cash is received from L.
L a/c Cr. - 15000
L was debited while cancelling the bill, so he became our debtor of 15000Rs.
interest A/c. Cr. 100.
It is the income for drawer, so it is credited.
Choice "B" is incorrect as
It's incorrect because it is made liable on cancelling of B/R by Rs. 20000. interest is considered and recorded at the time renewal.
Choice "C" is incorrect as
This is the entry that be passed in books of L. we are required to find out the entry in books of A.
Choice "B" is incorrect as
It is an invalid option.

Q40. Which of the following can be utilized for redemption of preference shares?


A. The proceeds of fresh issue of equity shares
B. The proceeds of issue of debentures
C. The proceeds of issue of fixed deposit
D. All of the above
See Answer

Choice "A" is correct as
Preference shares can be redeemed out of divisible profit or net proceeds of fresh issue of equity share.
Choice "B" is incorrect as
Only net proceeds of firm equity share issued can be used for redemption of preference share. Net proceeds of debentures cannot be used for redemption of preference share.
Choice "C" is incorrect as
Only net proceeds of fresh equity share issued can be used for redemption of preference shares.
Choice "D" is incorrect as
Only Choice A is correct, hence this option is invalid.

Q41. X of Kolkata sends out goods costing Rs 80,000 to Y of Mumbai so as show 20% profit on invoices value 3/5th of the goods received by consignee is sold at 5% above invoice price The amount of sales value will be:


A. 63,000
B. 60,480
C. 1,05,000
D. 60,000
See Answer

Choice "A" is correct as
We are required to calculate the sales value of the goods received on consignment.
To arrive at the sales value, the mark-up over the invoice value is to be determined and added to the invoice value.
Invoice value is also required to be determined
Relevant Data
Cost price of the goods = Rs.80000...............(1)
Mark up before consignment = 20% on invoice price
Mark up for sales = 5% above invoice value
Relevant Calculation
Cost price of the goods consigned = Rs. 80000
Mark up before consignment = 20% on invoice price
Let invoice price be 'x'
Mark up before consignment = 20% of x = 0.2x
Cost price = Invoice price - Mark-up added
= x - 0.2x
= 0.8 x
By (1) and (2)
Cost price = 80000 = 0.8 x
Therefore, x or Invoice value = Rs. 1,00,000
(OR)
Cost price of the goods consigned = 80000
Mark up before consignment = 20% on invoice price, i.e., 1/5th on invoice price
= 1/5th on invoice price equals 1/4th on cost price
Mark up before consignment = Rs. 20,000
Therefore, Invoice price = Rs. 1,00,000
Proportion of goods sold = 3/5
Invoice value of goods sold = Rs.60,000
Mark-up for sales = 5% above invoice value
= Rs. 3,000
Sale price of goods sold = Rs. 63,000
Choice "B" is incorrect as
Here, the invoice value is calculated by adding 20% markup on cost. The mark up 20% on invoice value means, profit is 1/5th of invoice price and therefore, 1/4th on cost price. Thus, to take 20% on cost price at mark-up is incorrect.
Choice "C" is incorrect as
Here, the proportion of goods sold is ignored and sales value for all the goods consigned is determined. We are required to calculate the sales value of the goods sold. Therefore, proportion of goods sold, 3/5th in our case, is to be taken into consideration.
Choice "D" is incorrect as
The amount here is only invoice value of the goods sold. Determination of sales value of the goods sold is required. The mark-up above invoice price is to be added to arrive at the sales price.

Q42. Under sale on return or approval basis, when transaction are few, the seller while sending the goods, treats them as


A. An ordinary sale but no entry is passed in the books
B. An ordinary sale and entry for normal sale is passed in the books
C. Approval sale and no entry is passed
D. None of these
See Answer

Choice "B" is correct as
When the transactions are few or goods are sent casually, the seller on sending the goods, treats them as an ordinary sale and entry is passed as sales in books of accounts. 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.
Choice "A" is incorrect as
Without passing any entry for such transaction of sale on return basis, a business will not have proper control on inventory.
Choice "C" is incorrect as
When in a business, the goods are sent out on sale frequently, on approval or return basis, an immediate sale obviously does not take place. Even for approval sales, an entry is to be passed in books of account, i.e. debiting Customers account and crediting Sale on return basis account.
Choice "D" is incorrect as
It is an invalid option as Option B is correct.

Q43. What will be the treatment of pre-paid expenses if adjustment of it is appearing outside the Trial Balance?


A. Prepaid Expenses account will be debited and respective expenses A/c will be credited
B. Expenses A/c will be debited and prepaid Expenses account will be credited.
C. Profit n Loss account Dr. To Expenses ac Cr.
D. None of these
See Answer

Choice "A" is correct as
At the end of the year prepaid expenses are brought into the books by debiting prepaid expenses account and crediting the expenses concerned. The effect of this is also to transfer the debit in respect of prepaid expenses to the year in which the benefit from such expenses will accrue. The journal entry to be passed will be: Prepaid Expenses account will be debited and respective expenses A/c will be credited.
Choice "B" is incorrect as
This entry is passed at the beginning of the year, to take into account such part of expenditure though incurred in previous year but relate to current year's expense.
Choice "C" is incorrect as
This entry is passed when nominal accounts balance is transferred to profit and loss account as it amounts to current year's expenditure of an enterprise.
Choice "D" is incorrect as
It is an invalid option as Option A is correct.

Q44. For charging depreciation, on which of the following assets, the depletion method is adopted?


A. Plant & Machinery
B. Land & building
C. Goodwill
D. Wasting assets like mines and quarries
See Answer

Choice "D" is correct as
Wasting assets like mines and quarries have only a certain quantity of material, which once used takes ample time to be replenished. Therefore, depletion method is adopted. Under this method, the depreciation is calculated by dividing the cost of the asset by the estimated quantity of product likely to be available. Annual depreciation will be the quantity extracted multiplied by the rate per unit.
Choice "A" is incorrect as
In case of Plant & Machinery, the reduction in value is caused due to the wear and tear of the asset and hence depreciation method is adopted.
Choice "B" is incorrect as
Land & Building have an infinite useful life. The asset cannot be depreciated. Such assets can only be revalued. Therefore, Revaluation method is adopted.
Choice "C" is incorrect as
Goodwill is an intangible asset. Amortization method is adopted for intangible assets.

Q45. Mohan purchased goods for Rs. 15,00,000 and sold 4/5th of the goods amounting Rs. 18,00,000 and met expenses amounting Rs. 2,50,000 during the year 2011. He counted net profit as Rs.3,50,000. Which of the accounting concept was followed by him?


A. Entity
B. Periodicity
C. Matching
D. Conservatism
See Answer

Choice "D" is correct as
Under Matching concept, all expenses matched with the revenue of that period should only be taken into consideration. In the financial statements of the organization if any revenue is recognized then expenses related to earn that revenue should also be recognized. This concept is based on accrual concept as it considers the occurrence of expenses and income and do not concentrate on actual inflow or outflow of cash. This leads to adjustment of certain items like prepaid and outstanding expenses, unearned or accrued incomes. Hence the profit of Rs.3,50,000 is derived; (15,00,000*3 /4 = Rs.12,00,000, which is sold for 18,00,00, thereby earning profit of 6,00,00 but expenses should be matched with revenue earned from that transaction, so 2,50,000 is to be deducted, leaving a profit of Rs.3,50,000.
Choice "A" is incorrect as
Entity concept states that business enterprise is a separate identity apart from its owner. Accountants should treat a business as distinct from its owner. Business transactions are recorded in the business books of accounts and owner's transactions in his personal books of accounts.
Choice "B" is incorrect as
According to Periodicity concept accounts should be prepared after every period & not at the end of the life of the entity. Usually this period is one calendar year. In India we follow from 1st April of a year to 31st March of the immediately following year. This is also called as definite accounting period.
Choice "D" is incorrect as
Conservatism states that the accountant should not anticipate income and should provide for all possible losses. When there are many alternative values of an asset, an accountant should choose the method which leads to the lesser value.

Q46. A and B were partners in a joint venture sharing profit 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 expenses 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 per cent 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. B will remit Rs 64,000 to B
D. None of these
See Answer

Choice "A" is correct as
It is evident from the following A/c.


Choice "B" is incorrect as
The amount is to be remitted by B to A and not vice versa and as far as Option C is concerned
Choice "C" is incorrect as
if the profit is mistakenly distributed equally i.e. 8,600 each then the amount of remittance due to A accrues to 64,000.
Choice "D" is incorrect as
Option A is correct, thus it is an invalid option.

Q47. If a sale return of Rs. 1,500 has been wrongly posted to the credit of the purchase return account, but has been correctly entered in the debtors account, the total of the-


A. Trial balance would show the debit side to be Rs. 3,000 more than the credit
B. Trial balance would show the credit side to be Rs. 3,000 more than the debit
C. The debit side of the trial balance will be Rs. 1,500 more than the credit side
D. The credit side of the trial balance will be Rs. 1,500 more than the debit side
See Answer

Choice "B" is correct as
The correct entry:
Sales Return A/c Dr.      1,500
To Debtors A/c      1,500
Purchase return account is wrongly credited by Rs. 1,500.
So the total of debit side of trial balance is less by 1,500
and the credit side is more by Rs. 1,500, so the total credit side to be more by Rs. 3,000 (1,500 + 1,500)
Choice "A" is incorrect as
In case of sales returns it must be debited, instead it was credited to purchase return so the credit side of the trial balance will be more by Rs. 3,000 not the debit side.
Choice "C" is incorrect as
This will not happen because the purchase return account is credited, so the total of credit side will be more.
Choice "D" is incorrect as
Because sales return A/c is not debited by Rs. 1,500 and wrongly purchase return account is credited will sum up and will be Rs. 3,000. So the credit side of trial balance will be more by Rs. 3,000, instead of Rs. 1,500.

Q48. B Ltd. invited applications for 5,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows: On application Rs 5(including premium); On allotment Rs 4;On first and final call-- Rs 3; Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr.C to whom 60 shares were allotted, failed to pay allotment money and call money. Mr. D the holder of 100 shares, failed to pay call money. All these shares were forfeited after proper notice. On forfeited, the amount credited to share allotment account=


A. Rs. 240
B. Rs. 60
C. Rs 180
D. Rs. 580
See Answer

Choice "C" is correct as
We have to find how much share allotment will be credited on forfeited of share. We will focus on details of Mr. C only as Mr. D has paid allotment money. Mr. D received to pay call money.
Relevant Information:
1) B Ltd. invited applications for 5,000 shares of Rs. 10 each at a premium of Rs. 2
2) Allotment was made on pro-rata basis of 6000 share.
3) On application Rs 5 (including premium), on allotment Rs. 4 & first & final call - 3 was payable.
4) Mr. C whom 60 shares were allotted failed to pay allotment money & call money
Relevant Working
Share applied Share allotted
Total 6000 5000
C ? 60
By cross multiplication, C applied for share = 6000 * 60 / 5000 = 72
Amount of allotment for C's share = 60 * 4 = 240
Amount in excess paid during application = 12 * 5 = 60
Share allotment unpaid by Mr. C = 240 - 60 = Rs. 180
Hence, share allotment credited by Rs. 180 on forfeited of account
Choice "A" is incorrect as
It is the total amount for allotment for Mr. C. Mr. C has been allotted share on pro-rata basis. So, he has paid excess on application i.e for 12 shares application money which will be adjusted against allotment money. Therefore, allotment money due will be less than total allotment money on his share.
Choice "B" is incorrect as
It is amount received in excess by C on application which will be adjusted against allotment money for C. We have been asked allotment money due.
Choice "D" is incorrect as
Mr. D was unable to pay call money. So, it means he have paid allotment money.

Q49. Consider the following information pertaining to G & Sons as on March 31, 2011: Opening Inventory Rs. 15,00,000, Purchases during the year 2010-11: Rs. 45,00,000, Sales during the year 2010-11: Rs.50,00,000 As per physical inventory taken on March 31, 2011 the closing inventory was Rs. 20,90,000. Gross profit on sales has remained constant at 25%. The management of the firm feels that some inventory might have been taken away by a new employee. The estimated cost of missing inventory on the close of the financial year and the cost of goods sold during the year respectively are


A. Rs. 37,50,000; Rs. 1,60,000
B. Rs. 0; Rs.39,10,000
C. Rs. 1,60,000; Rs.37,50,000
D. None of these
See Answer

Choice "C" is correct as
a) Relevant Data:Opening inventory = 15,00,000
Purchase = 45,00,000
Inventory as per physical verification = 20,90,000
Sales = 50,00,000
Gross profit (constant) = 25%

Relevant Working
i) Opening inventory Rs. 15,00,000
Add: purchase Rs. 45,00,000
Total Rs. 60,00,000
Cost of goods sold = 60,00,000 - n ........ (1)
ii) Sales Rs. 50,00,000
gross profit % = 25%
Value of gross profit (Sales * 25%) Rs. 12,50,000
Cost of goods sold (Sales - gross) = Rs. 37,50,000 ......(2)
iii) Equating 1 & 2
37,50,000 = 60,00,000 - n
n = 60,00,000 - 37,50,000
n = 22,50,000 = Value of closing stock
iv) Estimated cost of missing inventory
= Value of stock as per (iii) - actual value of inventory as per physical verification
= 22,50,000 - 20,90,000
= 1,60,000

Choice "A" is incorrect as
Rs. 37,50,000 is the value of cost of goods sold and Rs. 1,60,000 is the value of missing inventory. The question asks - Value of missing inventory and cost of goods sold respectively. In this answer, since, the question asks values respectively - RS. 37,50,000 becomes value of missing inventory & Rs. 1,60,000 as cost of goods sold. Thus, this option is incorrect.
Choice "B" is incorrect as
In this calculation, estimated cost is taken at Zero and cost of goods sold of Rs. 39,10,000 is calculated based on inventory of RS. 20,90,000 as closing inventory
Choice "D" is incorrect as
Since, option D is correct, this option becomes invalid.

Q50. R Ltd. Forfeited 300 shares of Rs. 10 each fully called up held P for non payment of allotment money of Rs. 3 per share and final call money of RS. 4 per share. Out of these shares 250 were reissued to Q for a total payment of Rs. 2,000. Amount transferred to capital reserve account will be -


A. Rs. 250
B. Rs. 400
C. Rs. 750
D. None of these
See Answer

Choice "A" is correct as
We have to find the amount of forfeiture that will be transferred to capital reserve, when the shares are forfeited.
Relevant Information:
1) R Ltd. Forfeited 300 share of Rs. 10 each called up from Mr. P. He did not pay allotment money at Rs. 3 per share and Final Call money at Rs. 4 per share.
2) 250 share were raised to Q for a total payment of Rs. 2,000
Relevant Working
When shares are forfeited,
Share Capital A/c Dr. [300 * 10] 3,000
To Call in arrears [(3+4) * 300) 2,100
To Share forfeiture [(10-7) * 300) 900
When Share are reissued,
Bank A/c Dr. 2,000
Share forfeiture A/c Dr. 500
To Share Capital A/c 2,500
Shares Amount of Forfeiture A/c
300 900
250 ?
Amount of Forfeiture for 250 share,
= 250 * 900 / 300
= 750
Share forfeiture to be transferred to Capital reserve,
=Amount of Forfeiture for 250 share - forfeiture used
= 750 - 500
= 250
Choice "B" is incorrect as
we are only reissuing only 250 shares. So, amount of forfeiture A/c in respect of 250 shares after using it in reissue will be transferred to capital reserve.
Choice "C" is incorrect as
we will further deduct amount of forfeiture used up in reissue of share Rs. 500 (2500 - 2000) from 750.
Choice "D" is incorrect as
Since, option A is correct, this option is invalid.

Q51.D Ltd. issued 2,00,000 shares of Rs. 100 each at a premium of Rs. 20 per share payable as follows: On application Rs 20; On allotment Rs 50(including premium);On first call Rs 30; On second and final call Rs 20;shares. Money excess received on application of 2,40,000 shares was employed on account of sum due on allotment as part of share capital. E, to whom 4,000 shares were allotment, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited and F, the holder of 6,000 shares failed to pay the two calls and his shares were forfeited after the second call. Of the forfeited shares, 8,000 shares were reissued to G at a discount of 10%, the whole of E's forfeited shares being reissued. Total amount paid by F=_______________.

A. Rs. 3,00,000
B. Rs. 5,16,000
C. Rs. 4,20,000
D. Rs. 96,000
See Answer

Choice "C" is correct as
We have to find total amount paid by F.
Relevant Information:
1) D Ltd. issue share of Rs. 100 each at a premium of Rs. 20 per share payable as follows:
Application - Rs. 20
Allotment - Rs. 50 (Including Premium)
1st Call - Rs. 30
Final Call - Rs. 20
2) F holder of 6000 shares failed to pay both call money.
Relevant Calculation:
F failed to pay call money on 6000 Shares. So, he have paid application & allotment money.
Hence, Amount Paid by F = = 6,000 * (20+50) = 4,20,000
Choice "A" is incorrect as
We have been asked amount paid by F not the amount of share forfeiture. While crediting share forfeiture we ignore security premium once paid.
Choice "B" is incorrect as
We have been asked amount paid by F not by both E & F.
Choice "D" is incorrect as
We have been asked amount paid by F not by E.

Q52. Balance as per cash is Rs 50,000. Cheques issued but not presented for payment Rs 20,000 and cheques sent for collection but not collected Rs 10,500. The bank had wrongly debited the account of firm Rs. 20. Balance as per pass book will be-

A. Rs. 40,500
B. B. Rs 59,480
C. Rs. 59,520
D. Rs. 59,500
See Answer

Choice "B" is correct as
We have to find balance as per pass book.
Relevant Data:
Balance as per Cash Book Rs. 50,000
Cheque issued but not presented for payment Rs. 20,000
Cheque sent for collection but not collected Rs. 10,500
Bank had wrongly debited Rs. 20
Relevant Calculation:
Bank Reconciliation statement
Balance as per cash book 50,000
add: Cheques issued but not presented 20,000
less:
cheques sent for collection but not collected - 10,500
Wrong debited amount - 20 (10520)
Balance as per cash book 59,480
Choice "A" is incorrect as
Cheques issued but not presented will be added not subtracted as cheque issued is deducted from cash book & since it is not presented so it mean it has not been deducted from bank A/c. Cheque deposited but not cleared will be deducted as it has been added in cash book but in pass book no amount is reflected as it has not been cleared yet.
Choice "C" is incorrect as
Wrongly debit in book means wrongly deducted from pass book. So we will deduct it from cash book balance instead of adding it. In this calculation, bank charges of Rs. 20 has been added instead of reducing it.
Choice "D" is incorrect as
In this calculation, no adjustment has been given for the bank charges which is incorrect.

Q53. Hindustan Ltd. has furnished the following details: (1)01.03.2009 Opening stock 100 units @ Rs.1.75. (2)05.03.2009 Purchased 150 units @ Rs.1.50. (3)12.03.2009 Purchased 300 units @ Rs.1.60. (4)08.03.2009 Issued 200 units. (5)18.03.2009 Issued 250 units. Using the information given in the problem, the value of closing stock as per weighted average method:

A. Rs. 160
B. Rs. 167.5
C. Rs. 720
D. Rs. 705
See Answer


Total cost of units =
Total units = 550 (100+150+300)
Total cost = 880 (175+225+480)
Cost per units (Weighted average cost per unit)
= 880/550
= 1.60
Then, Value of closing stock
= 1.60 * 100
= 160
Thus, issue will be made at 1.60 per unit and closing stock will also be valued at 1.60 per unit.
(In Weighted average method, total units are calculated and its cost is calculated and then, it is divided by the total units to calculate weighted average cost per unit)
Choice "B" is incorrect as
This is the value of closing stock based on LIFO method.
Choice "C" is incorrect as
This is the value of the issues made and not the closing stock.
Choice "D" is incorrect as
This is the value of the purchase made and not the closing stock

Q54.A purchased goods costing Rs 1, 00,000 B sold the goods for Rs 1, 50,000 Profit sharing ratio between A & B equal If same sets of books are 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
See Answer

Choice "A" is correct as
The initial investment for purchase of goods is made by A and the goods are sold and proceeds received by B. the profit in the venture accrues to 1,50,000-1,00,000=50,000 to A & B equally i.e. 25,000 each. Thus, B will remit 1,00,000 + 25,000 = 1,25,000 to A.
Choice "B" is incorrect as
25,000 is B's share of profit , thus, B will remit the sale proceed less his share of profit i.e. 1,50,000-25,000=1,25,000 to A.
Choice "C" is incorrect as
The proceeds are to be remitted by B and not by A.
Choice "D" is incorrect as
B will not only remit the profit share but also the amount of goods purchased by A i.e. 25,000 +1,00,000 =1,25,000

Q55. Consider the following data pertaining to R Ltd for the month of June 2011: Opening stock 30,000, Closing stock 40,000, Purchases 5,60,000, Returns outward 15,000, Returns inward 20,000, Carriage inward 5,000. If the gross profit is 20% of net sales, the gross sales for the month of June 2011 is

A. Rs. 6,75,000
B. Rs. 6,68,750
C. Rs. 6,68,000
D. Rs. 6,95,000
See Answer

Choice "D" is correct as
(a) Relevant Data:-
Opening stock Rs. 30,000
Return O\w Rs. 15,000
Closing Stock Rs. 40,000
Return I/w Rs. 20,000
Purchase Rs. 5,60,000
Carriage I/w Rs. 5000
Gross profit 20% of net sales
(b) To calculate:- gross sales
(c) Calculation -
i) To calculate cost of goods sold=
Opening 30,000
Add: Purchase 5,60,000
less: Return O/w (15,000)
Add: Carriage 5000
less: Closing Stock (40,000)
Net cost 5,40,000
ii) Profit = 20% on sales.
so, profit = 25% on cost
If profit = 20% on sales
= 1/5 th on sales
for eg. Sales = n
so, cost = sales - profit
cost = n - n/5
cost = 4n/5
Thus, % of profit on cost = n/5 / 4n/5
= n * 5 / 5 * 4n
= 1/4 = 25%
Thus, we can say that calculating profit on cost
= (1 / 1 - 1/5) - 1
= (1 / 5 - 1/5) - 1
= 5/4 - 1 = 1/4th on cost value
Cost = 5,40,000
Profit = 5,40,000/4
= 1,35,000
iii) Sales = profit + cost
= 1,35,000 + 5,40,000
= 6,75,000
iv) Gross sales = net sales + Return Inward
= 6,75,000 + 20,000
= 6,95,000
Choice "A" is incorrect as
The above value is net sales. We need to calculate gross sales for which returns inward need to be added.
Choice "B" is incorrect as
For calculating the above value, cost has been taken as = 5,40,000 - 5,000 = 5,35,000 ( that is including carriage inward). However, carriage inward cannot be removed in our cost calculation. It will form part of the cost of goods sold being a direct expense. Also this value does not include return inwards.
Choice "C" is incorrect as
In above calculation, gross sales = net + return. Thus net sales = 6,68,000 - 20,000 = 6,48,000. In this profit% of 20% is applied directly on cost of goods sold = 5,40,000 which gives profit = 1,08,000. Profit % of 20% is on net sales and not on cost and then it cannot be applied directly on cost. Profit % on cost would be 25%.

Q56. He, She and Me are partners in a firm sharing profits and losses in the ratio of 5:3:2. Hey took joint life policy of Rs. 50,000, Rs. 1, 00,000 and Rs. 1, 50,000 for He, She and Me, respectively. The share of she in policy will be

A. Rs. 1,00,000
B. Rs. 90,000
C. Rs. 30,000
D. Rs. 60,000
See Answer

Choice "B" is correct as
We have to find the share of she in policy
Relevant Data:-
1) He, She and Me are partners in a firm sharing profits and losses in the ratio of 5:3:2
2) They took joint life policy of Rs. 50,000, Rs. 1, 00,000 and Rs. 1, 50,000 for He, She and Me, respectively
Relevant Workings:- Here, Individual policy is taken for each partner separately. In case of one death, the policy taken on him will became payable. On each policy each partner will have right according to their profit & loss share. So, she will have share in total policy.
Total amount of policy = 3,00,000
She's share = 3/10
So, she share in policy = 3,00,000*3/10
Choice "A" is incorrect as
It is amount of the policy taken on she. in case of death of she, firm will get 1,00,000 which will be shared amongst partners in profit sharing ratio. Same treatment will be given to the policy of He & Me. So, she's share will be 3/10 of total policy amount of all partners
Choice "C" is incorrect as
It is only she's share in the policy taken on she's life. She will have share in policy of He & Me as well.
Choice "D" is incorrect as
She's share is 3/10 in total policy amount of all partners not 2/10

Q57.Sales for the year ended 31st March, 2011 amounted to Rs. 10, 00,000. Sales included goods sold to Mr. A for Rs. 50,000 at a profit of 20% on cost. Such goods are still lying in the godown at the buyer's risk. Therefore such goods should be treated as part of,

A. Sales
B. Closing stock
C. Goods in transit
D. Sales return.
See Answer

Choice "A" is correct as
The property in the goods is transferred from the seller to the buyer when the latter acquires the proprietary rights over the goods and the obligations linked thereto. 'Property in Goods' which means the ownership of goods, is different from ' possession of goods' which means the physical custody or control of the goods, here though the goods are with the seller, but he is holding it at the risk of Mr.A so such goods will be counted as sale, as ownership is transferred to buyer.
Choice "B" is incorrect as
The property in the goods is transferred from the seller to the buyer, so it cannot be counted in closing stock.
Choice "C" is incorrect as
The goods are lying in the godown of the seller, it isn't in transit.
Choice "D" is incorrect as
Sales return means merchandise that was returned to the seller by a customer due to Excess quantity shipped, Defective goods, Goods shipped too late, Product specification etc. This account is a contra sales account.

Q58. R Ltd. Company purchase machinery on 1-4-2006 for Rs. 1,00,000. The depreciation on this machinery is charged @10% per annum on SLM. On 1-10-2008 machinery is sold for Rs. 89,000, the profit or loss on sale of such machinery is-

A. Profit of Rs. 12,000
B. Loss of Rs. 12,000
C. Profit of Rs. 14,000
D. Loss of Rs. 6,000
See Answer

Choice "C" is correct as
We are required to calculate the profit or loss on sale of the machinery.
Relevant Data
Purchase cost 100000
Date of purchase 4/1/2006
Rate of Depreciation 10%
Method Straight Line Method
Date of sale 10/1/2008
Sale price 89000
Formula to be used
Depreciation under Straight Line Method = Rate of Depreciation * Original Cost
Relevant Calculation
Purchase cost100000
Date of purchase4/1/2006
Date of sale 10/1/2008
Tenure of asset usage 2.50 years
Rate of Depreciation10%
Method Straight Line Method
Depreciation Charged for the asset for one year = 100000 * 10% =10000
Depreciation Charged for the asset for 2.5 years = 10000 * 2.5 =25,000
Book value of the asset on the date of sale = 100000 - 25000 =75,000
Sale price= 89000
Therefore, profit or (loss) = Sale price - book value of the asset
=89000 - 75000
=14,000
When sale price is more than the cost it results in profit
Choice "A" is incorrect as
Profit or (loss) is calculated by the formula = Book value - sale price. This is incorrect. When sale price is more than the cost it results in profit.
Choice "B" is incorrect as
The value arrived is by deducting the original cost of the asset from the sale price, i.e.., 89000 - 100000 = Loss 11000. This is incorrect, as the depreciation charged on the asset has to be deducted from the cost of the asset to arrive at the book value of the asset which has to then be deducted from the sale price of the asset.
Choice "D" is incorrect as
The value arrived at is by deducting the sale price from the original cost of the asset, i.e.., 100000 - 89000 = Profit 11000. This is incorrect in 2 ways:
1. The depreciation charged on the asset has to be deducted from the cost of the asset to arrive at the book value of the asset which has to then be deducted from the sale price of the asset.
2. The excess or deficit of sale price over the book value is profit or loss respectively and not vice versa.

Q59. A sent same goods costing Rs, 3,500 at a profit of 25% on sale to B on sale or return basis. B returned goods costing Rs. 800. At the end of the accounting period i.e. on 31st December, 2011, the remaining goods were neither returned nor were approved by him. The stock on approval will be shown in the balance sheet at

A. Rs.3590
B. Rs.2700
C. Rs.3500
D. Rs.800
See Answer

Choice "B" is correct as
When the goods were returned by B to A, A must have passed a reverse entry to cancel the previous transaction of Rs.800. At the year-end December 2011, if goods are still lying with the customer, here B, 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 Inventories for Balance Sheet purpose. Hence the amount to be shown under head of stock with customer account will be Rs.3500- Rs.800 =Rs.2700, shown at cost price.
Choice "A" is incorrect as
Here the cost price of goods is already given, which is to be reduced from goods return but here the balance goods are shown at sale price, i.e. if the profit margin on sale is 25% i.e. on cost it is 33.33%, and calculation done is Rs.2700+33.33% =Rs.3590.
Choice "C" is incorrect as
Rs.3500 is the cost price of goods only, goods return is to be reduced from this amount.
Choice "D" is incorrect as
Rs.800 is the amount of goods returned and not the balance lying with customer.

Q60. S Ltd. follows perpetual inventory system. On March 31 of the every year, the company undertakes physical stock verification. On March 31, 2011, the value of stock as per the records differed from the value as per the physical stock. On scrutiny, the following difference were noticed: (i) Goods purchased for Rs. 10,000 were received and included in the physical stock but no entry was made in the books.(ii)Goods costing Rs. 30,000 were sold and entered in the books but the stock is yet to be delivered.(iii)Goods worth Rs. 5,000 are returned to the suppliers but is omitted to be recorded. If the inventory is valued in the books at Rs. 1,50,000, the value of the physical inventory is

A. Rs. 1,95,000
B. Rs. 1,89,000
C. Rs. 1,75,000
D. Rs. 1,25,000
See Answer

Choice "B" is correct as
a) To calculate - Value of the physical inventory
b) Relevant Data and calculation -Valuation of the physical inventory


Choice "A" is incorrect as
In this calculation, Rs. 5000 of goods which are returned to suppliers but omitted to be recorded is added rather than reduced.
Choice "C" is incorrect as
In this calculation, Rs. 10,000 - Value of goods purchased included in stock, but no entry made in amounts is reduced rather than added
Choice "D" is incorrect as
In this calculation, Rs. 30,000 - value of goods sold and entered in books but stock is yet to be delivered is reduced rather than added

Q61. A telegraphed to B - 'Will you sell us your X- land? Telegraph lowest cash price. B replied by telegram - 'Lowest cash price for X-land, Rs. 10 Lakh's'. A immediately sent another telegram stating - 'We agree to buy your X- land for Rs. 10 Lakh's asked by you. B refused to sell, state the correct position out of the following:

A. B was wrong since he made no proposal by quoting the lowest price
B. B was right since he made no proposal
C. A can sue B for breach of contract
D. A can sue as B had made a proposal
See Answer

Choice "B" is correct as
Reply of B for As telegram as - 'Lowest cash price for X-land, Rs. 10 Lakhs is not done with the view to obtain the assent of A, it is an invitation of offer. Thus As reply that we agree to buy your X- land for Rs. 10 Lakhs is offer. So B may refuse to accept the offer to not sell his land as he made no proposal. A mere statement of the minimum selling price is an invitation to offer and not an offer to sell. This was held in the case of Harvey vs facie.
Choices "A", "C" & "D" are incorrect as
Option B is only correct.

Q62.Collateral agreement to an illegal agreement is:

A. Void
B. Valid
C. Lawful
D. Enforceable
See Answer

Choice "A" is correct as
all illegal agreements are void and contracts collateral with illegal contracts are also tainted with illegality, thus, even they are void.
Choices "B", "C" & "D" are incorrect as
only option A is correct.

Q63. Which of the following is Void Contract?

A. Agreement the meaning of which is certain
B. Agreement with unlawful consideration
C. Agreement with minor
D. Agreement with inadequate consideration, if inadequacy is not supported by free consent
See Answer

Choice "B" is correct as
Agreement with unlawful consideration is void as per section 23. as the limits to contractual freedom are set out in Section 23 of the Act. An agreement, the object or consideration of which is unlawful is void. "Consideration or object in unlawful if it is forbidden by law; or it would; if permitted defeat the provisions of any or law or is fraudulent; or involves injury to the person or property of another, or is immoral; or opposed to public policy."
Choices "A", "C" and "D" are incorrect as
Agreement with a minor is void ab initio as a minor is not competent to enter into a contract. Agreement the meaning of which is certain and Agreement with inadequate consideration, if inadequacy is not supported by free consent are valid contracts as consideration need not be adequate but must be real.

Q64. Which one of the following statement is about doctrine of privity is correct?

A. Only a party to the contract can sue
B. Stranger to a contract cannot sue
C. A contract is enforceable by a stranger
D. Both "A" & "B"
See Answer

Choice "D" is correct as
Though under the Indian Contract Act, 1872 the consideration for an agreement may proceed from a third party, the third party cannot sue on agreement. Only a person who is party to a contract can sue on it. Thus, the concept of stranger to consideration is a valid and is different from stranger to a contract which means contract by the person who is not a party to the contract. The rule, that stranger to a contract cannot sue is known as a "doctrine of privity of contract", is however, subject to certain exceptions. In other words, even a stranger to a contract may enforce a claim in the certain cases which are prescribed as exceptions.
Choices "A", "B" and "C" are incorrect as
Both the option A and B are correct.

Q65. Which of the following statement is not true

A. Consideration must be real & not illusory
B. Consideration may be inadequate
C. Past consideration is no consideration
D. Consideration should not consist of a legal obligation
See Answer

Choice "C" is correct as
Consideration may be past, present or future.
Choice "A" is incorrect as
Consideration must be real and must also be competent. It must be something to which the law attaches some value.
Choice "B" is incorrect as
Consideration need not be adequate, but should be real.
Choice "D" is incorrect as
The performance of an act by a person who is legally bound to perform the same cannot be consideration for a contract. Hence, a promise to pay money to a witness is void, for it is without consideration.

Q66. A minor may be

A. admitted to benefits of partnership
B. a partner to firm
C. representative of firm
D. entitled to carry on business of firm
See Answer

Choice "A" is correct as
As per Section 30 of the Indian Partnership Act 1932, with the consent of all the partners for the time being, a minor may be admitted to the benefits of partnership
Choice "B" is incorrect as
A partnership is founded on a contract and minor cannot be bound by a contract.
Choice "C" is incorrect as
A minor cannot be a partner to a firm. He can be admitted only for the benefits of partnership. Since, he cannot be a partner to the firm, there is no question of him acting as a representative tothe firm.
Choice "D" is incorrect as
The acts done require contracts which a minor is incapable of making.

Q67. Which of the following statement is true?

A. Even if a proposal is not accepted properly it becomes a valid contract
B. The agreements which are against the public policy can be enforced if the parties are willing to contract
C. A contract can consist of an offer or an acceptance only
D. Two or more persons are said to consent when they agree upon the same thing in the same sense
See Answer

Choice "D" is correct as
The term 'consent' means parties to a contract must agree upon the same thing in the same sense. i.e. there should be consensus ad-idem.
Choice "A" is incorrect as
Only if a proposal is accepted properly and all the essential elements of a valid contract are present, it becomes a valid contract.
Choice "B" is incorrect as
The agreements which are against the public policy are void and hence, cannot be enforced if the parties are willing to contract.
Choice "C" is incorrect as
A contract must consist of both an offer and an acceptance.

Q68. Contract induced by misrepresentation is voidable at the option of aggrieved party, it means that such a party

A. must rescind (i.e., cancel) the contract.
B. must cancel the contract the old contract and make fresh one new terms
C. must enforce the contract and claim damages.
D. may put an end to the contract if he so chooses.
See Answer

Choice "D" is correct as
A contract induced by misrepresentation is voidable at the option of aggrieved party, it means that such a party may either choose to rescind the contract or he may insist that the contract should be performed and that he should be put in the same position in which he would have been, if the representation made had been true.
Choice "A" is incorrect as
There is no necessity to rescind (i.e., cancel) the contract, he may chose otherwise as well.
Choice "B" is incorrect as
There is no compulsion to cancel the contract the old contract and make fresh one new terms. The option given is to either cancel the contract or continue with the old one.
Choice "C" is incorrect as
There is no compulsion to enforce the contract. Further, damages are allowed only in case of fraud and not for misrepresentation.

Q69. Which of the following is a wagering agreement:

A. A crossword competition the prizes of which depend upon the correspondence of the competitors solution with a previously prepaid solution.
B. Picture puzzles
C. A contract of insurance
D. A crossword competition involving a good measure of skill for its successful solution
See Answer

Choice "A" is correct as
A crossword competition the prizes of which depend upon the correspondence of the competitors solution with a previously prepaid solution by a newspaper editor is a type of lottery, it is a wagering agreement and thus void.
Choice "B" is incorrect as
Prize competitions which are game of skill like picture puzzles, athletic competition in which winner is rewarded prize money was held not to be a wagering agreement.
Choice "C" is incorrect as
Section 31 of the Act defines contingent contract as 'a contract to do or not to do something, if some event collateral to such contract, does or does not happen'. Contracts of insurance are of this class.
Choice "D" is incorrect as
According to Prize Competition Act,1955 prize competition in games of skill are not wagers, provided the prize money does not exceed Rs.1000.

Q70. Which one of the following is a void agreement?

A. An agreement without consideration
B. An agreement in restraint of marriage
C. An agreement in restraint of trade
D. All of the above
See Answer

Choice "D" is correct as
Void contract is a contract without any legal effect and cannot be enforced in a Court of Law. Under Section 25 of Indian Contracts Act 1872, an agreement made without consideration is void also a contract may only be enforceable only when there is an adequate consideration, however it is subject to few exceptions. Section 26 of Indian Contracts Act 1872 deals with agreement in restraint of marriage - Every agreement in restraint of marriage of any person other than a minor, is void. So if a person, being a major, agrees for good consideration not to marry, the promise is not binding. Section 27 of Indian Contract Act,1872 deals with Agreement in restraint of trade - An agreement by which any person is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. But this rule is subject to the few exceptions.
Choices "A", "B" and "C" are incorrect as
All the options are correct so none of the option can be selected in individually.

Q71. A wagering agreement is an agreement between two person under which money or money's worth is payable by one person to another person on the:

A. happening of a future certain event
B. non-happening of a future uncertain event
C. happening or non-happening of a future uncertain events
D. none of these
See Answer

Choice "C" is correct as
In wagering agreement there are two parties, one wins, the other loses and involves payment of a sum of money upon the determination of happening or non-happening of a future uncertain event in which neither of them has legitimate interest. Agreements by way of wager are void.
Choice "A" is incorrect as
Under wagering agreements it depends on the happening or non-happening of the future uncertain (not certain) event.
Choice "B" is incorrect as
Under wagering agreements it depends on the happening (also) or non-happening of the future uncertain event.
Choice "D" is incorrect as
Option C is correct.

Q72. Which of the following is correct:

A. A wagering agreement is void
B. A contingent contract is valid
C. A wagering agreement is void while a contingent contract is valid
D. None of the above
See Answer

Choice "C" is correct as
In wagering agreement there are two parties, one wins, the other loses and involves payment of a sum of money upon the determination of an uncertain event in which neither of them has legitimate interest. Agreements by way of wager are void. Section 31 of the Act defines contingent contract as "a contract to do or not to do something, if some event collateral to such contract, does or does not happen". Contracts of insurance are of this class, hence valid.
Choice "A" is incorrect as
A wagering agreement is void but a contingent contract is valid.
Choice "B" is incorrect as
A wagering agreement is void while a contingent contract is valid
Choice "D" is incorrect as
Option C is correct.

Q73.When the performance of a contract becomes impossible, the purpose which the parties had in mind is frustrated. If the purpose becomes impossible because of supervening event, the promissor is excused from the performance of the contract. This is known as:

A. The doctrine of frustration
B. Initial impossibility
C. Subsequent impossibility
D. None of these
See Answer

Choice "A" is correct as
The doctrine of frustration states "An agreement to do an act impossible in itself is void. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. To discharge a contract, the impossibility may exist from the very start. In that case, it would be impossibility ab initio. Alternatively, it may supervene. Supervening impossibility may take place owing to:
(a) an unforeseen change in law,
(b) the destruction of the subject-matter essential to that performance;
(c) the non-existence or non-occurrence of particular state of things, which was naturally contempleted for performing the contract, as a result of some personal incapacity like dangerous malady;
(d) the declaration of a war.
Choices "B", "C" and "D" are incorrect as
The doctrine of frustration covers both initial impossibility and subsequent impossibility.

Q74. Acceptance of consideration lesser than that agreed is known as________

A. Recession
B. Novation
C. Remission
D. Alteration
See Answer

Choice "C" is correct as
Acceptance of lesser performance or abandonment of rights by a party may take place in case of remission of contract.
Choice "A" is incorrect as
Mutual cancellation of contract is called rescission.
Choice "B" is incorrect as
Substitution of a new contract for the existing one is called novation.
Choice "D" is incorrect as
Change in one or more terms of contract is called alteration.

Q75. In which of the following cases a contract is discharged on the ground of frustration or subsequent impossibility?

A. Outbreak of war
B. Unforeseen Change of law or government policy
C. Both of these
D. None of these
See Answer

Choice "C" is correct as
Supervening impossibility may take place owing to:
(a) an unforeseen change in law,
(b) the destruction of the subject matter essential to that performance;
(c) the non-existence or non-occurrence of particular state of things, which was naturally contemplated for performing the contract,
(d) as a result of some personal incapacity like dangerous malady;
(e) the declaration of a war. Thus, in both the cases a contract is discharged on the ground of frustration or subsequent impossibility.
Choices "A", "B" and "D" are incorrect as
Option C is correct.

Q76. Which of the following do not constitute ground for dissolution by Court?

A. Insanity of the partner
B. Business carried on at a loss.
C. Willful misconduct of partner.
D. Expulsion of a partner.
See Answer

Choice "D" is correct as
A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith, of powers conferred by contract between the partners. However, where there is no such powers conferred in the contract, the only remedy, when a partner misconduct in the business of the firm, is to seek judicial dissolution.
Choices "A", "B" and "C" are incorrect as
Court may, at the suit of the party, dissolve a firm on any of the following ground:
(a) Insanity/unsound mind
(b) Permanent incapacity
(c) Misconduct
(d) Persistent breach of agreement
(e) Transfer of interest
(f) Continuous losses
(g) Just and equitable grounds.

Q77.Which of the following persons can perform the contract?

A. Promisor alone.
B. Legal representatives of promisor.
C. Agent of the promisor.
D. All of these.
See Answer

Choice "D" is correct as
the promise under a contract may be performed, as the circumstances may permit, by the promisor himself, or by his agent or his legal representative. Promise can also be performed by third persons or by joint promisors.
Choices "A", "B" and "C" are incorrect as
all other options are equally correct.

Q78. A and B agreed to buy 100 bags of rice and share the same between them equally. In this case there is no Partnership.

A. True, as there is no business between them.
B. False, as single transaction results in Partnership.
C. None of these
D. Can't say
See Answer

Choice "A" is correct as
Partnership is the relation between two or more persons who have agreed to share the profits of a legal business carried on by all or any one of them acting for all. Here the intention of the parties is not to do business, but they have come together for their mutual help and gain as they have decided to divide the purchased 100 bags of rice equally between them. (may be for self consumption or other reasons)
Choice "B" is incorrect as
Particular partnership means when a person may become a partner with another person in particular or specific business enterprise for a particular venture or undertakings, such as, construction of road, laying a railway line, etc. are particular partnership. It will come to an end on completion of task for which it was made. But firstly since no business is conducted between the parties, hence it cannot be called Partnership.
Choice "C" is incorrect as
Option A is correct.
Choice "D" is incorrect as
Option A is correct.

Q79. A partner can retire on:

A. Reaching the age of superannuation
B. On the balance in the capital account reaching a certain amount
C. In accordance with the partnership Deed
D. On the condition of his nominee becoming a partner
See Answer

Choice "C" is correct as
Every partner has the right to retire with the consent of all the other partners and in the case of a partnership being at will, by giving notice to that effect to all the other partners and in accordance with the partnership Deed .The liability of a retired partner to the third parties continues until a public notice of his retirement has been given.
Choice "A" is incorrect as
Particular partnership means when a person may become a partner with another person in particular or specific business enterprise for a particular venture or undertakings, such as, construction of road, laying a railway line, etc. are particular partnership. It will come to an end on completion of task for which it was made. But firstly since no business is conducted between the parties, hence it cannot be called Partnership.
Choice "B" is incorrect as
On the balance in the capital account reaching a certain amount. It is not mentioned in the Partnership act that when capital is reducing of the firm then one should retire.
Choice "D" is incorrect as
Any partner shall be entitled to nominate or appoint by notice in writing to the other partners and subject to any previous nomination or appointment by notice as aforesaid, by will or Codicil, any person to be a partner in his place in the partnership business on the death of the partner making such nomination or appointment.

Q80. Unless there is a contract to the contrary, the effect insolvency of a partner is that:-

A. The firm is dissolved
B. The firm is not automatically dissolved
C. The firm is also deemed insolvent
D. The firm is reconstituted.
See Answer

Choice "A" is correct as
Unless there is a contract to the contrary, the effect of insolvency of a partner is that the firm is dissolved.
Choices "B", "C" and "D" are incorrect as
Only where there is a earlier contract between the partners or where the other partners decide to continue, when only one or the partners retires or becomes incapacitated from acting as a partner due to death, insolvency or insanity, the partnership, i.e. the relationship between such a partner and other is dissolved. This is referred to as dissolution of partnership. The firm is not automatically dissolved here.

Q81. Which of these is a valid partnership

A. Partnership between two Joint Hindu Families
B. Partnership between two firms
C. Partnership between a firm and a Joint Stock Company
D. One major and one minor person
See Answer

Choice "C" is correct as
A company is a separate legal entity distinct from its members (Salomon v. Salomon), hence it is regarded as a legal person in eyes of law thereby there can be partnership between a firm and a Joint Stock Company.
Choice "A" is incorrect as
Under the joint family system, the members share houses, properties, business, income, wealth, food and their value systems and principles. Therefore, in India, a joint Hindu family is given a separate legal entity status called Hindu Undivided Family (HUF) and this status is shared and enjoyed by all members of the family. It is created not to earn profit but to manage the family properties and assets.
Choice "B" is incorrect as
A partnership firm is not a legal entity i.e., it has no legal personality distinct from the personalities of its constituent members. Partnership is thus that invisibility which binds the partners together and firm is the visible form of those partners who are thus bound together. Hence firm is not regarded as a person in legal sense of the term so two Partnership firms cannot enter into an agreement to form a Partnership firm between them.
Choice "D" is incorrect as
A minor cannot be bound by a contract because a minor's contract is void and not merely voidable, hence he cannot become a partner, he can only be admitted to the benefits of partnership under Section 30 of the Act (he can be validly given a share in the partnership profits).Any partner shall be entitled to nominate or appoint by notice in writing to the other partners and subject to any previous nomination or appointment by notice as aforesaid, by will or Codicil, any person to be a partner in his place in the partnership business on the death of the partner making such nomination or appointment

Q82.A partner has implied authority to open a bank account, on behalf of the firm, in his own name

A. true, as it is necessary for conducting the business affairs of the firm
B. false, as it has been excluded from the scope of implied authority under Section 19(2)
C. depends on the partnership agreement
D. None of these
See Answer

Choice "B" is correct as
Under Acts beyond implied authority (Section 19) it is clearly mentioned that a partner cannot open a bank account on behalf of the firm in his own name.
Choices "A", "C" and "D" are incorrect as
Only option B is correct.

Q83. Which of the following is not disability of an unregistered firm?

A. It cannot file a suit against third parties.
B. Its partners cannot file a suit against a firm.
C. It cannot claim a set-off exceeding Rs.100.
D. It cannot be sued by a third party.
See Answer

Choice "D" is correct as
Non-registration of a firm does not, however effect the following rights:
- The right of third parties to sue the firm or any partner.
- The right of partners to sue for the dissolution of the firm or for the settlement of the accounts of a dissolved firm, or for realization of the property of a dissolved firm.
- The power of an Official Assignees, Receiver of Court to release the property of the insolvent partner and to bring an action.
- The right to sue or claim a set-off if the value of suit does not exceed 100 in value.
Choices "A", "B" and "C" are incorrect as
Following are the disabilities of non registration:
(i) No suit in a civil court by firm or other co-partners against third party.
(ii) No relief to partners for set-off of claim if the suit be valued for more than 100.
(iii) Aggrieved partner cannot bring legal action against other partner or the firm.

Q84. Duty to indemnify the firm for losses caused by partner's fraud is an absolute duty and

A. cannot be excluded by an agreement to the contrary
B. can only be excluded by an agreement to contrary
C. makes the guilty partner liable for imprisonment
D. None
See Answer

Choice "A" is correct as
Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm and it cannot be excluded by an agreement to the contrary.
Choices "B", "C" and "D" are incorrect as
Only option A is correct.

Q85. Active partner has the right to:

A. Take part in the business of the firm
B. Actively participates in co-curricular activities
C. Does not share the profits
D. Makes a show of authority
See Answer

Choice "A" is correct as
Active partner is a person (i) Who has become a partner by agreement, and (ii) Who actively participates in the conduct of the partnership. He has right to take part in the business of the firm, He acts as an agent of other partners for all acts done in the ordinary course of business. In the event of his retirement, he must give a public notice in order to absolve himself of liabilities for acts of other partners done after his retirement. Every partner has the right to take part in the business of the firm. This is because partnership business is a business of the partners and their management powers are generally coextensive.
Choices "B", "C" and "D" are incorrect as
Only option A is correct

Q86. A notice in writing by one partner must be given to all the partners of the firm in case of:

A. Dissolution on the happening of contingencies
B. Dissolution of partnership at will
C. Dissolution by court
D. Compulsory dissolution
See Answer

Choice "B" is correct as
Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.
Choice "A" is incorrect as
Firm is automatically dissolved on the happening of contingencies. No notice by any other to other partners is required.
Choice "C" is incorrect as
Court issues notice in case of dissolution by court.
Choice "D" is incorrect as
A firm is compulsorily dissolved by adjudication of all the partners or of all the partners but one as insolvent, or by happening of any event which makes it unlawful for the business of the firm to be carried on. It also does not notice by any other to other partners.

Q87. A & B are partners in a partnership firm A introduced C, a former partner, as his partner to D. C remained silent at that moment. But later on informed D that he is actually a former partner of the firm. C had also issued public notice in the year of his retirement from the partnership firm. D a trader supplied 500 refrigerators to the firm on credit. The credit period expired and D did not get the price of hi supplies. D filed a suit against A&C for the recovery of price. In light of the above circumstances answer which of the following is correct:

A. C is liable for the price to D
B. C is liable for the price to D, irrespective of the fact, whether C remained silent or not
C. C is not liable for the price to D
D. none of the above
See Answer

Choice "C" is correct as
C had rightly given a public notice at the time of his retirement and moreover, C also clarified his position as a former partner to D. Thus, C cannot be called a partner by holding out or estoppel thus, C is not liable for the price to D.
Choices "A", "B" and "D" are incorrect as
Only option C is correct.

Q88. Breach of a condition gives a right to

A. Repudiate a contract
B. Claim damages only
C. Repudiate the contract and claim damages
D. None of the above
See Answer

Choice "C" is correct as
In the event of breach of contract, besides claiming damages as a remedy for the breach of contract, the following remedies are also available:
- Rescission of contract
- Suit upon Quantum Meruit
- Suit for specific performance
- Suit for injunction.

Choices "A", "B" and "D" are incorrect as
Only option C is correct.

Q89. The doctrine of caveat emptor implies

A. Let the buyer beware.
B. Let the seller beware.
C. Let the seller take care of buyer's interest
D. both "B" and "C"
See Answer

Choice "A" is correct as
In case of sale of goods, the doctrine Caveat Emptor means let the buyer beware. When sellers display their goods in the open market, it is for the buyers to make a proper selection or choice of the goods. If the goods turn out to be defective he cannot hold the seller liable. The seller is in no way responsible for the bad selection of the buyer. The seller is not bound to disclose the defects in the goods which he is selling. It is the duty of the buyer to satisfy himself before buying the goods that the goods will serve the purpose for which they are being bought.
Choices "B", "C" and "D" are incorrect as
Only option A is correct.

Q90. In case of every agreement to sell there is an implied condition that the seller

A. has a right to sell the goods
B. has the goods in his possession
C. will have the right to sell the goods
D. will acquire the goods in future
See Answer

Choice "C" is correct as
Per condition as to title, in the case of every agreement to sell, there is an implied condition that the seller will have the right to sell the goods at the time when the property is to pass.
Choice "A" is incorrect as
Per condition as to title, in case of every sale there is an implied condition that the seller has the right to sell the goods.
Choices "B" & "D" are incorrect as
It is a common sense, that the seller will either acquire the goods or already has the goods in his possession, it is not implied by any condition.

Q91. A warranty is a stipulation which is

A. essential to the main purpose of contract of sale
B. essential for buyer's specific purpose
C. collateral to main purpose of contract of sale
D. none of these
See Answer

Choice "C" is correct as
Warranty is a stipulation collateral to main purpose of contract of sale.
Choice "A" is incorrect as
Condition is a stipulation essential to the main purpose of contract of sale.
Choice "B" is incorrect as
The implied condition that goods shall be fit to buyer's specific purpose, is applicable only where the buyer tells his purpose to the seller and relies upon seller's skill and judgement.
Choice "D" is incorrect as
Only option C is correct.

Q92. Under which circumstances, the right of stoppage can be exercised by an unpaid seller

A. the buyer has become insolvent.
B. the goods are in transit.
C. the seller must be unpaid.
D. all of the above.
See Answer

Choice "D" is correct as
When the unpaid seller has parted with the goods to a carrier and the buyer has become insolvent, he can exercise right of asking the carrier to return the goods back, ie. right of stoppage of vehicle or not to deliver the goods to the buyer. However, the right of stoppage in transit is exercised only when the following conditions are fulfilled:
(a) The seller must be unpaid.
(b) He must have parted with the possession of goods.
(c) The goods are in transit.
(d) The buyer has become insolvent.
(e) The right is subject to provisions of the Act.

Example: B at Delhi, orders goods of A, at Mumbai. A consigns and forwards the goods to B. On arrival at Delhi, they are taken to B's warehouse and left there. B refuses to take these goods and stop payment. The goods are in transit and the unpaid seller can take them back.
Choices "A", "B" and "C" are incorrect as
All options are correct so none of them can be selected individually.

Q93. In which of the following cases, sellers right of stoppage in transit is lost

A. Buyers act of taking delivery from carrier.
B. Carriers acknowledgement to the buyer.
C. Carriers wrongful refusal to deliver goods to the buyer.
D. All of these.
See Answer

Choice "D" is correct as
The right to stoppage in transit is lost under the following cases:
(i) If the buyer or his agent obtains possession of the goods.
(ii) If after arrival of the goods at the appointed destination, the carrier or the bailee acknowledges to the buyer that he holds the goods on buyers behalf.
(iii) When the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent.
(iv) When part delivery of the goods has been made to the buyer or his agent, the remainder of the goods may be stopped in transit subject to the intention of the parties regarding the part delivery of goods.

Choices "A", "B" and "C" are incorrect as
All options are correct so none of them can be selected individually.

Q94. If a agrees to deliver 100kg of sugar to B in exchange of 15 mts of cloth, then it is

A. Contract of sale.
B. Agreement to sell.
C. Exchange.
D. Barter.
See Answer

Choice "D" is correct as
Barter is exchange of one good/goods in return for other good/goods. Here, sugar is exchanged for cloth and so it is a barter transaction.
Choice "A" is incorrect as
In case of contract for sale, price in money (not in kind) is paid.
Choice "B" is incorrect as
In case of agreement to sell, price in money (not in kind) is promised.
Choice "C" is incorrect as
Exchange is an act of giving one thing and receiving another (especially of the same kind) in return. It also includes the changing of money to its equivalent in the currency of another country.

Q95. When buyer repudiates the contract before the date of delivery the seller may ____________.

A. Sue for damages
B. Sue for price
C. Rescind the contract
D. None of the above
See Answer

Choice "A" is correct as
When a contract is broken by one party, the other party may treat the contract as rescinded. In such a case he is absolved of all his obligations under the contract and is entitled to compensation for any damages that he might have suffered. Thus, the seller may claim for the difference in price or any other expenses he may have incurred in respect of the above contract.
Choice "B" is incorrect as
The buyer has repudiated the contract and not accepted the good mentioned therein, the seller cannot sue for price but may only sue for damages.
Choice "C" is incorrect as
The above contract automatically stands rescinded upon the buyer's repudiation of contract.
Choice "D" is incorrect as
Option A is correct.

Q96. Under the Sale of Goods Act, 1930, in a contract of sale the essential element is:

A. Exchange of goods
B. Price
C. Promise to produce goods
D. None of the above
See Answer

Choice "B" is correct as
The following elements must co-exist so as to constitute a contract of sale of goods under the Sale of Goods Act, 1930.
(i) There must be at least two parties, the seller and the buyer.
(ii) The subject matter of the contract must necessarily be goods covering only movable property. It may be either existing goods, owned or possessed by the seller or future goods.
(iii) A price in money (not in kind) should be paid or promised.
(iv) A transfer of property in goods from seller to the buyer must take place. The contract of sale is made by an offer to buy or sell goods for a price by one party and the acceptance of such offer by other.
(v) A contract of sale must be absolute or conditional [Section 4(2)].
(vi) All other essential elements of a valid contract must be present in the contract of sale.
Choices "A", "C" and "D" are incorrect as
Mere exchange of goods does not amount to contract for sale. There should be transfer of property in goods. Further, a promise to produce goods does not make a contract for sale.

Q97. A document of title of goods:

A. Bill of lading
B. Dock warrant
C. Railway receipt
D. All of the above
See Answer

Choice "D" is correct as
"Document of title to goods" includes bill of lading, dock-warrant, warehouse keeper's certificate, wharfingers' certificate, railway receipt, multimodal transport document, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented.
Choices "A", "B" and "C" are incorrect as
all other options are equally correct.

Q98. A agreed to sell and delivered a horse to B for trial for eight days. It was agreed that the sale would be completed if the horse was found suitable for B's purpose the horse died on the third day without any fault or either party here the contract of sale is

A. void
B. not void
C. voidable
D. none of these
See Answer

Choice "A" is correct as
The horse forms the subject matter of sale. Since, it was being used by B, thus it became specific good. Further as the trial period was not over, the contract for sale is not incomplete. Thus, upon destruction of the subject-matter of a contract being specific goods, the contract is void.
Choices "B", "C" and "D" are incorrect as
Only option A is correct.

Q99. A contract of sale in which consent of the buyer is obtained by fraud or misrepresentation is ________

A. void
B. voidable
C. valid
D. unlawful
See Answer

Choice "B" is correct as
A contract is voidable when it is obtained without free consent. Thus, even a contract of sale in which consent of the buyer is obtained by fraud or misrepresentation i.e., without free consent is voidable at the option of the aggrieved party.
Choices "A", "C" and "D" are incorrect as
An illegal contract or a contract which does not contain all the essential elements of a valid contract is void. A voidable contract also becomes void when the aggrieved party rescinds the contract.

Q100. The unpaid seller can exercise the right of stoppage in transit where the middleman i.e., carrier holds the goods as an

A. agent of seller
B. agent of buyer
C. independent person i.e., in his own name
D. both (A) and (B)
See Answer

Choice "C" is correct as
When the unpaid seller has parted with the goods to a carrier and the buyer has become insolvent, he can exercise right of asking the carrier to return the goods back, or not to deliver the goods to the buyer until the whole of price of goods is paid or tendered by the buyer. The carrier must hold the goods in the capacity of an independent person and not in the capacity of an agent for the seller or buyer. The carrier should stop the goods in transit when the seller sends a notice to the carrier regarding the same.
Choice "A" is incorrect as
If the carrier holds the goods as an agent for the seller, there is no question of exercising the right of stoppage in transit because the seller can exercise his right of lien.
Choice "B" is incorrect as
If the carrier holds the goods as an agent for the buyer, the seller cannot exercise the right of stoppage in transit because the delivery to the carrier amounts to delivery to buyer.
Choice "D" is incorrect as
Only option C is correct.