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Question 3 (a) An Engineering goods company provides ‘after sales warranty’ for 2 years to its customers. Based on the past experience, the company has been following policy for making provision for warranties on the Invoice amount on the remaining balance warranty period: Invoice less than 1 year : 2.5% provision Invoice more than 1 year : 4.5% provision The Company has raised Invoices as under: Invoice Date ` 20th February, 2021 42,000 17th July, 2022 25,000 27th January, 2022 47,000 1st March, 2023 1,10,000 24th August, 2023 34,000 20th March, 2024 75,000 You are required to: (i) Calculate the provision to be make for warranty under AS 29 as at 31st March, 2023 and 31st March, 2024: (ii) Also compute the amount to be debited to Profit and Loss Account for the year ended 31st March, 2024. (7 Marks) (b) Given below are the extracts of the Balance Sheet of BGH Limited: Particulars 31st March, 2024 (`) 31st March, 2023 (`) Share Capital 5,00,000 4,00,000 Profit & Loss Account 1,10,000 60,000 10% Debentures (issued at the end of the year) 1,00,000 - Bank Loan 2,50,000 2,00,000 Trade Payable 60,000 75,000 Dividend Payable - 50,000 Interest Payable on Bank Loan (Current Year) 25,000 20,000 Goodwill 1,20,000 1,50,000 Trade Receivables 65,000 95,000 Inventory 55,000 30,000 You are required to prepare for the year ended 31st March,2024: Cash Flow from Operating Activities; Cash Flow from Financing Activities. (7 Marks)

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Detailed Solution & Explanation

(a) Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’ As at 31st March 2023 = ` 25,000 x 2.5% + ` 47,000 x 2.5% + ` 1,10,000 x 4.5% = ` 625 + ` 1,175+ ` 4,950 = ` 6,750 As at 31st March 2024 = ` 1,10,000x 2.5% + ` 34,000 x 4.5% +` 75,000 x 4.5% = ` 2,750 + ` 1,530+ ` 3,375 = ` 7,655 Amount debited to Statement of Profit and Loss for year ended 31st March 2024 ` Balance of provision required as on 31.03.2024 7,655 Less: Opening Balance as on 1.4.2023 (6,750) Amount debited to Statement of Profit and loss 905 Note: No provision will be made on 31st March 2024 in respect of sales amounting ` 42,000,25,000 and 47,000 made on as the warranty period ADVANCED ACCOUNTING (b) Cash Flow from Operating Activities for the Year Ended 31 March 2024 Particulars ` Cash Flow from Operating Activities Retained earnings (1,10,000-60,000) 50,000 Adjustments for non-cash items Goodwill Amortisation 30,000 Interest expenses 25,000 1,05,000 Changes in Working Capital Decrease in Trade Receivables 30,000 Increase in Inventory (25,000) Decrease in Trade Payables (15,000) Cash Flow from Operating Activities 95,000 Cash Flow from Financing Activities for the Year Ended 31 March 2024 Increase in Share Capital 1,00,000 Increase in Bank Loan 50,000 Issue of 10% Debentures 1,00,000 Dividend Paid (50,000) Interest Paid (20,000) Cash Flow from Financing Activities 1,80,000

Key Concepts to Understand

Profit and Loss Account

The second part of the final accounts that records all indirect incomes and indirect expenses to determine the Net Profit or Net Loss for the accounting period. It starts with Gross Profit from the Trading Account.

Balance Sheet

A statement showing the financial position of a business at a particular date, listing all assets on one side and all liabilities and capital on the other side. It is not an account but a statement.

Goodwill

An intangible asset representing the good reputation, brand name, customer loyalty, and earning capacity of a business over and above its net tangible assets. It arises in accounting during partnership changes or business acquisitions.

Debentures

Long-term debt instruments issued by a company to the public for raising loan capital, carrying a fixed rate of interest (coupon rate) payable regardless of profit. Debenture holders are creditors, not owners, of the company.

More Questions from Advanced Accounting

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If the ratio of two numbers is 7:11\displaystyle 7:11. If 7\displaystyle 7 is added to each number then the new ratio will be 2:3\displaystyle 2:3 then the numbers are.

If x:y=z:7=4:11\displaystyle x:y=z:7=4:11 then x+y+zz\displaystyle \frac{x+y+z}{z} is

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If A:B=3:7\displaystyle A:B=3:7, then 3a+2b:4a+5b=?\displaystyle 3a+2b:4a+5b=?

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