Chapter 15. Double Account System – Corporate Accounting

15

Double Account System

LEARNING OBJECTIVES

After studying this chapter you should be able to understand:

  1. The meaning of double account system.

  2. The salient features of double account system.

  3. The differences between single account system and double account system.

  4. The advantages and limitations of double account system.

  5. The usage of double account system in public utility concerns such as water, gas, electricity.

  6. The meaning and accounting treatment of: (i) Replacement of assets (ii) Tariffs and dividend control reserve (iii) Clear profits (iv) Reasonable returns and (v) Capital base.

  7. The preparation of final accounts under double account system: (i) Revenue A/c (ii) Net revenue A/c (iii) Receipt and expenditure on capital A/c and (iv) general balance sheet.

  8. Some important formats relating to electric supply companies as envisaged in Indian electricity rules.

  9. The key terms associated with “Double Account System”.

“Double account system”, a different system of presenting accounts of public utility entities, owes its origin to England. This system is mainly vogue in organizations engaged in public utilities like electricity, water, gas and the like. These organizations enjoy a unique monopolistic right in their business activities. Mostly, they are formed under special Acts of Parliament. Every activity of such enterprise is specifically directed by the related provisions of the Act including the format preparation and presentation of accounts. All important aspects of this system of accounting are discussed in detail in the forthcoming pages.

15.1 DOUBLE ACCOUNT SYSTEM

Meaning: A system of presenting annual financial statements in two parts, viz. (i) Statement of receipts and expenditure on capital account and (2) General balance sheet, is referred to as “double account system”.

The salient features of double account system are as follows:

  1. Generally, this system is used by public utility entities incorporated under special Acts of parliament.
  2. This is not a system of recording transactions or maintaining accounts, but is a system of presenting annual financial statements.
  3. The balance sheet is split into two parts:
    1. Statement of receipts and expenditure on capital account
    2. General balance sheet
  4. The prime objective of this system is to show how much amount of fixed capital is raised from the public and how it has been spent on the acquisition of fixed assets. Its aim is not to reveal the financial position on a particular date
  5. Profit and loss account is rechristened “revenue account”, in which incomes and expenses of a public utility concern are disclosed.
  6. Profit and loss appropriation account is renamed net revenue account, in which appropriation of profits is shown
  7. Under this system, fixed assets are shown at cost in the capital account. Fixed assets are not shown at depreciated value.
  8. Depreciation is not shown as a deduction from fixed assets. Depreciation on fixed assets is credited to revenue account and credited to depreciation reserve or fund which appears on the liability side of the general balance sheet.
  9. Interest on debentures and other loans is shown on the debit side of net revenue A/c as an appropriation. Interest received is shown on the credit side of net revenue account.
  10. Loans and debentures are treated as capital and shown in the capital account.
  11. Discount and premium on issue of shares and debentures are permanently retained as capital items.
  12. General reserves, sinking fund, depreciation fund, investment fluctuation fund, balance of net revenue A/c, capital reserve are shown on the liability side of the general balance sheet.
  13. Renewals are provided out of current revenue.
  14. The capital account shows the total expenditure to date on assets. It is immaterial whether such assets exist or not on the date of the account.
  15. The published are to be accompanied by a huge number of statistical returns and statements—a cumbersome procedure.

15.1.1 Double Account System vs. Double Entry System

One should not confuse double account system with double entry system. Double entry system is a system of recording transactions and maintaining books of account. But double account system is a system of preparing and presenting final accounts of public utility undertakings. Even though the prime objective of double account system is different, the accounting is based entirely on the principles of doubly entry bookkeeping only.

15.1.2 Double Account System vs. Single Account System

The single account system refers to the normal and established procedure of preparing final accounts on a particular date. But double account system differs from single account system in many ways, which are presented in the following tabular column:

 

Differences Between Doubles Account System and Single Account System
Basis of Difference Single Account System Double Account System

1. Prime object

The prime object is to show the financial position of an entity on a specified date

The prime purpose is to show how capital is raised and utilized

2. Presentation of account

Under this system, a single balance sheet is prepared

The balance sheet is split into two parts: (i) Capital A/c & (ii) General balance sheet

3. Ascertainment of profit

Profit is ascertained by preparing “profit and loss account”

Profit is ascertained by preparing “a revenue account”

4. Appropriation of profits

Appropriation of profits is carried out through “profit and loss appropriation account”

“A net revenue account” is prepared for disclosing appropriation of profits

5. Treatment of fixed assts

Fixed assets are shown after deducting depreciation in the balance sheet

Fixed assets are shown at their original cost without deducting depreciation in the capital account

6. Dealing with depreciation

Depreciation is charged to fixed assets. That means, it is deducted from fixed assets

Depreciation is charged to revenue A/c and credited to depreciation fund A/c, which is shown in the general balance sheet

7. Treatment of interest

Interest paid/payable and interest received/accrued are shown in profit and loss account

They are all shown in net revenue account

8. Discount on issue of shares and debentures

Discount on issue of shares and debentures is shown in the balance sheet under the head: “Miscellaneous Expenses & Losses”

They are subtracted from the share or debentures Capital in the “capital account”

9. Disposal of old assets

When an old fixed asset is replaced by a new fixed assets, the old fixed asset is “written off” wholly in the books of accounts

Even after the replacement, the original cost of old assets continues to appear in the books of account under this system

10. Applicability or usage

Generally, this system is used by non-public utility concerns

Mostly, this system is used in public utility concerns

15.1.3 Advantages of Double Account System

The following are the advantages of double account system:

  1. Easy to understand: This system is easily understood even by persons who do not possess special knowledge of accounting as the capital account is in the form of “cash book”.
  2. Ready disclosure of source and use of funds: This system readily discloses the sources of capital and how it is utilized in acquisition of fixed assets. Further, the capital account discloses the cash balance left. One can easily understand whether the organization is over-capitalized or undercapitalized.
  3. Enhancement of cash resources: Under this system, creation of depreciation fund is compulsory which in turn is invested in securities. This facilitates the replacement of fixed assets without draining resources of the concerns. Hence, it enhances the cash resources of the organizations.
  4. Enrichment of operating activities: The income statement is split into revenue A/c and net revenue A/c. The revenue A/c is concerned purely with the operating activities of the concerns. All other activities are taken to net revenue A/c. Hence, the net operating results of the concerns will be enriched.
  5. Prescribed forms: The undertakings which adopt double account system have to adopt prescribed forms for the preparation and presentation of accounts. This enables the state to ensure efficient service as reasonable cost to the public.
  6. Statistical returns: The publications of accounts in the prescribed, standardized forms enable the concerns to compile varied statistical returns reflecting the services rendered to the public.

15.1.4 Disadvantages of Double Account System

The following are the disadvantages of double account system:

  1. Not a true and fair view: The general balance sheet does not show a true and fair view of the financial position of the company, as the assets are shown at the cost price in the capital account. Depreciation is credited to depreciation fund which is shown on the liabilities side of the balance sheet.
  2. Shown profit or loss is not correct: The repairs and renewals are charged to the revenue account of the same period in which they are incurred. This may result in little expenditure in some years and huge for some other years. Due to this, profit and loss arrived at is not a correct figure.
  3. Replacement of an asset: The amount to be charged to revenue on replacement of an asset may not be ascertained precisely. This practice may mar the result.
  4. Interest paid/received: This item, i.e., the interest paid or received, is not shown in the revenue account. As a result, the revenue A/c may not reflect a true view of its financial position.
  5. Not a correct accounting principle: Some of the assets of short duration are taken to the capital A/c. Further, they are shown as cost price even after they reflect a true view of its financial position.
15.2 FINAL ACCOUNTS

Under double account system, the final accounts of public utility undertakings are prepared under the following heads:

  1. Revenue account
  2. Net revenue account
  3. Capital account (Receipts and expenditure on capital A/c)
  4. General balance sheet

15.2.1 Revenue Account

This is similar to profit and loss account of handing enterprises. All items of expenditure are shown on the debit side of this account and all items of income are shown on the credit side of this account. It is to be again noted that depreciation is debited to this account only. The following is the specimen of revenue account:

 

Revenue A/c for the Year Ended

15.2.2 Net Revenue Account

This is like the ordinary profit and loss appropriation account of trading entities.

It is to be noted here that interests on loans and debentures are shown on the debit side of net revenue A/c. This is the main difference between P&L appropriation A/c and net revenue A/c. This is due to the reason that loans and debentures are headed as a part of the capital of the public utility undertakings and shown in the capital accounts along with the fixed assets. The specimen of net revenue account is as follows:

 

Net Revenue Account
for the Year Ended…

15.2.3 Capital Account (Receipts and Expenditure on Capital A/c)

The prime object of preparing this account is to show how much capital is raised and how the same has been utilized. This consists of three columns on either side. This is also known as receipts and expenditure on capital account.

Capital expenditure is shown on the left-hand side and capital receipts on the right. The first column (on either side) is meant for recording transaction up to the time of commencement of the accounting period (previous years.) The second column indicates the items pertaining to the current accounting period.

The third column indicates the total of first two columns on either side of this account. It is to be noted here that preliminary expenses on forming the undertakings are to be taken as capital expenditure. Premium received on issue of shares and debentures is a capital receipt.

Regarding discount on issue of shares and debentures, they are to be deducted from the proceeds of respective issues and the net amount is to be shown here.

The balance of the capital account is carried down and shown as a separate item in the general balance sheet. But in case of electric supply companies, the total capital receipts and the total expenditure are shown in the general balance sheet instead of only the balance. The specimen of capital account is as follows

 

Capital Account
Or
Receipts and Expenditure on Capital A/c for the Year Ended …

15.2.4 General Balance Sheet

The following are shown in the general balance sheet:

  1. The balance of the capital account
  2. Current assets and
  3. Current liabilities

On the left-hand side of the general balance sheet, various funds, such as depreciation fund, sinking fund, investment fluctuation fund and so on, and current liabilities are recorded.

On the right-hand side, the current and floating assets and other all other debit balances are recorded.

In case of electricity supply companies, total of the expenditure as per capital account is shown on the assets side and the total of receipts is shown on the liabilities side of the general balance sheet. The proforma for general balance sheet is as follows:

 

General Balance Sheet of…… Ltd. as on……

15.2.4.1 Legal Provisions Relating to Electricity Companies

Electric supply industry in India is regulated by certain laws. The Indian Electricity Act, 1910 was the first one to govern electric supply industry. Then, in independent India, the Electricity (Supply) Act 1948 was enacted. It paved the way for establishing State Electricity Board. In 1998, Electricity Regulatory Commissions Act was enacted. In 2003, the Electricity Act was enacted which has replaced all the prior acts governing electric supply industry. This Act gave special emphasis to “annual statement of account”. The legal provisions, the rules of the Central Electricity Regulatory Commission, stipulate strict accounting procedure to be followed, and the prescribed forms in which the accounts are to be published. Accordingly, all such forms are statutory under the (Repealed) Indian Electricity Act of 1910.

15.2.4.1.1 Repairs and Renewals

  • Under double account system, repairs and renewals are to be charged to the revenue account. It should be recorded in the same year in which they are incurred.
  • Despite the benefit derived by the use of the assets may remain almost same, the charge to revenue with respect to repairs and renewals may vary in different years.
  • To explain in simpler terms, the profits in the first few years will be high as the charge for repairs and renewals will be very low. But in due course, the assets will become older—the charge for repairs and renewals will increase whereas the benefit or profit will get reduced in later years.
  • To level this burden or inequality, the following accounting procedure is followed:
  • Repairs & renewals reserve or fund is created.
  • The amount to be spent on repairs is determined in advance, based on the life of the asset, and charged to revenue account, i.e., debited every year.
  • The actual amount spent on repairs will be debited to the “repairs & renewals reserve A/c”.
  • The balance in “repairs & renewals reserve A/c” is to be taken to the general balance sheet. This is explained by way of an illustration as follows:

Illustration 15.1

Model: Repairs & renewals

The following particulars are available from the books of Modern Electricity Company:

 

Balance of Repairs and Renewals Reserve

 

Account as on 1 April 2009

2,10,000

Actual Repairs Incurred During the Year Ended

 

31 March 2010

90,000

31 March 2011

60,000

The Company transfers annually a sum of 80,000 to the “repairs and renewals” reserve account Draw up the account for the years the years 2009–10 and 2010–11.

  1. Provide depreciation on: building 21/2%, machinery 71/2%, mains 5%; transformers, etc. 10%; Meters 15%
  2. A call of 5 per share was payable on 30 June 2010 and arrears are subject to interest at 5% per annum

You are required to prepare (a) revenue A/c; (b) capital A/c for the year ended 31 December 2010 and (c) the balance sheet as on that date.

Solution

 

Revenue Account
for the Year Ended 31 December 2010
Repairs & Renewals Reserve A/c

Illustration 15.2

Model: Replacement of assets

The Tiruchirapalli Municipal Corporation replaces part of its existing water mains with larger mains at a cost of 50,00,000 the original cost of laying the old mains was 10,00,000 and the present cost of laying those mains would be four times the original cost. 1,00,000 was realized by the sale of old materials and old materials of 3,00,000 were used in the replacement and included in the cost given above.

Give the journal entries to record the above and show the allocation of expenses between revenue and capital along with replacement account.

Solution

STAGE I: BASIC CALCULATIONS

 

1. Calculation of Total Cost of New Work:

Total Cost of New Mains - Given

= 50,00,000

(Including Old Material Cost)

 

2. Calculation of Amount to Be Charged to Revenue Ac:

Step 1: Estimated Present Cost of Replacement

= 40,00,000

( 10,00,000 × 4 Times)

 

Step 2: Less:

 

(i) Sale of Old Materials: 1,00,000

 

(ii) Old Material Used in New Work}: 3,00,000

4,00,00

Step 3: Amount to be Charged to Revenue A/c :

36,00,000

3. Calculation of Amount to Be Charged to Capital A/c:

 

Step 1: Total Cost of New Work (Given)

= 50,00,000

Step 2: Λεσσ: Estimated Present Cost of Replacement ((2)—Step 1)

= 40,00,000

Step 3: Amount to Be Charged to Capital A/c

= 10,00,000

4. Calculation of Actual Cost Spent on Replacement:

 

 

Step 1: Total Cost of Actual Cash Spent on Replacement:

 

Total Cost of New Work

= 50,00,000

Step 2: Less: Old Materials Used in New Project

= 3,00,000

Step 3: Actual Cost Spent on Replacement

= 47,00,000

STAGE II: Recording Journal:

 

Journal Entries

STAGE III: Preparation of Replacement A/c:

 

Replacement A/c

Illustration 15.3

Model: Replacement of asset and preparation of new works A/c

A public utility undertaking rebuilt and re-equipped part of their works at a cost of 30,00,000. The part of the old works cost 16,00,000. 1,00,000 is realized by the sale of old materials and old materials valued 5,000 are used in the reconstruction and included in the cost of 30,00,000 mentioned above.

The cost of labour and materials now is 25% higher than when the old works were constructed.

Give journal entries and prepare the necessary ledger accounts.

Solution

STAGE II: Passing of Journal Entries:

 

Journal Entries

STAGE III: Preparation of Ledger Accounts:

 

(i) New Works A/c
(ii) Replacement A/c

Illustration 15.4

Model: Estimated cost of replacement adjustments

An electricity company in Himachal Pradesh decides to replace one of its old plants with a modern one with a larger capacity. The plant was installed in 1948 at the cost to the company of 90,00,000, the components of materials, labour and overhead being in the ratio of 4:3:3.

It is ascertained that the cost of materials and labour have gone up by 50% and 80%, respectively. The proportion of overheads to total costs is expected to remain the same as before.

The cost of the new plant as per improved design is 2,00,00,000 and in addition, materials recovered from the old plant was of the value of 10,00,000, have been used in the construction of the new plant. The old plant was scrapped and sold for 20,00,000.

The accounts of the company are maintained under double account system. Indicate how much would be capitalized and the amount that would be changed to revenue. Show journal entries and prepare necessary ledger accounts.

Solution

STAGE I: BASIC CALCULATIONS:

 

1. Calculation of Total Cost of New Plant:

(i) Cost of New Plant (Given)

2,00,00,000

(ii) Add: Value of Material of Old Plant Used in Construction of New Plant

10,00,000

(iii) Total Cost of New Plant

2,10,00,000

 

2. Components Wise Distribution of Old Plant in 4:3:3 Ratio:

 

 

(i) Materials:


=


36,00,000

(ii) Labour:


=


27,00,000

(iii) Overheads:


=


27,00,000

 

=

90,00,000

3. Determination of Percentage of Overheads:

  1. Percentage of Overheads to Total Cost
  2. Percentage of Overheads to Combined Cost of Materials and Labour:

4. Calculation of Current Cost of Replacement:

 

  (i) Materials (50% Increase on 36,00,000)

=

54,00,000

( 36,00,000 + 50% of 36,00,000)}

 

 

  (ii) Labour (80% increase over 27,00,000)

=

48,60,000

( 27,00,000 + 80% of 27,00,000)}

 

 

  (iii) Overheads (42.8571% of Combined Cost of = Material and Labour ( 54,00,000 + 48,660,000)

=

42,25,710

  (iv) Estimated Cost of Replacement

=

1,44,85,710

5. Calculation of Amount of Replacement to be Capitalized:

 

(i) Total Actual Cost of New plant

2,10,00,000

(ii) Less: Estimated Present Cost of Replacement

1,44,85,710

(Ref: 4 (iv) above)

 

(iii) Amount to be Capitalized

65,14,290

7. Calculation of Actual Amount of Cash Spent on Replacement:

 

  (i) Total Cost of New Plant

2,10,00,000

  (ii) Less: Value of Old Materials Used in the Construction of New Plant}:

10,00,000

  (iii) Actual Amount of Cash Spent on Replacement

2,00,00,000

STAGE II: Making Journal Entries

 

Journal Entries

STAGE III: Preparation of Ledger Accounts:

 

(i) Plant A/c
(ii) Replacement A/c

Illustration 15.5

Model: Partial replacement of asset

An electricity company laid down a main at the cost of 30,00,000. Some years later, the company laid down an auxiliary main for one-third of the length of the old main at a cost of 12,00,000. It also replaced the rest of the length of old main at a cost of 36,00,000. The costs of materials and labour have gone up by 20%. Sale of old materials realized 1,00,000. Old materials valued at 1,00,00 were used in the renewal and old materials valued at 1,50,000 were used in the auxiliary main.

Give the journal entries for recording the above transactions and show the capital expenditure and revenue expenditure.

Solution

STAGE I: BASIC CALCULATIONS:

 

1. Calculation of Total Actual Costs:

 

  (i) Total Actual Cost of Auxiliary Main

=

12,00,000

  (ii) Total Actual Cost of Replacement

=

36,00,000

2. Calculation of Estimated Present Cost of Replacement:

 

 

  (i) Cost of (1 − 1/3 = 2/3) of Original Main

=

20,00,000

( 30,00,000 × 2/3)

 

 

  (ii) Add: Increase in Material and Labour Costs

=

4,00,000

( 20,00,000 × 20%)

 

 

  (iii) Estimated Present Cost of Replacement

=

24,00,000

3. Calculation of Amount to Be Charged to Capital A/c:

 

 

  (i) Auxiliary Main

=

12,00,000

  (ii) Replacement:

 

 

   (a) Total Actual Cost of Replacement

=

36,00,000

   (b) Less: Estimated Present Cost of Replacement (Ref: 2 above)

=

24,00,000

  (iii) Amount to Be Capitalized

=

12,00,000

5. Calculation of Actual Amount of Cash Spent on Auxiliary Main:

=

(i) Total Actual Cost

=

12,00,000

(ii) Less: Old Materials Used

=

1,50,000

(iii) Actual Amount Spent on Auxiliary Main

=

10,50,000

6. Calculation of Actual Amount of Cash Spent on Replacement:

 

 

(i) Total Actual Cost

=

36,00,00

(ii) Less: Old Materials Used

=

1,00,000

(iii) Actual Amount Spent on Replacement

=

35,00,000

STAGE II: Making Journal Entries:

 

Journal Entries

STAGE III: Preparation of Ledger Accounts:

 

Replacement A/c

Illustration 15.6

Model: Partial replacement of assets with special adjustment on estimation of present cost

A power supply company has built a power station and the connecting lines during 2007. The following further particulars are furnished:

  1. In the year 2007, the company incurred an amount of 9,00,000 towards purchase of machinery items and 1,00,000 towards labour expenses. The company also used stores worth 2,00,000 from its existing stock which was in the warehouse.
  2. Extension and replacement was carried out to the power station in 2010 as a cost of 5,00,000 out of which material worth 10,000 was used from the existing stock for replacement purposes. The extent of replacement was estimated as 20% of original cost.
  3. The cost of materials and wages in 2010 have gone up by 25%.
  4. The old materials discarded in the process of extension and replacement were of the value of 50,000.
  5. Out of the above, material valued as 30,000 was used for extension purposes and the balance not being used was sold for 20,000.

You are required to show the journal entries in respect of the above transaction for the year 2010. Workings should form part of your answer.

Solution

STAGE I: BASIC CALCULATIONS:

STAGE II:

 

Journal Entries
Replacement A/c

Illustration 15.7

Model: Replacement A/c—Preparation

Electric Supply Ltd. rebuilt and re-equipped one of their mains at a cash cost of 80,00,000. The old mains, thus, superseded cost for 30,00,000. The capacity of the new main is double that of old main.

1,40,000 was realized from sale of old materials. Four old motors valued as 4,00,000 salvaged from the old main were used in the reconstruction. The cost of labour and material now is, respectively, 30% and 25% higher than when the old main was built. The proportion of labour to material in the main then and now is 2:3.

Show the journal entries for recording the above transactions if the accounts are mentioned under double account system.

 

[C.A. (Inter). Modified]

Solution

Important Calculations:

 

1. Calculation of Current Cost of Replacement:

 

 

(i) Cost of Existing Main:

 

Labour: Materials = 2:3

=

12,00,000

Labour =


=


18,00,000

Material


=


30,00,000

(ii) Add: Increase in Cost:

 

 

Labour 30% of 12,00,000

=

3,60,000

Material 25% of 18,00,000

=

4,50,000

(iii) Total Estimated Current Cost for Replacement

=

38,10,000

2. Calculation of Amount to Be Capitalized:

 

 

(i) Cost of Re-building New Main (Given)

=

80,00,000

(ii) Less: Estimated Cost of Replacement (Ref: 1 above)

=

38,10,000

 

=

41,90,000

3. Amount to be Charged to Revenue A/c (Net Current Cost of Replacement A/c to be Transferred to Revenue A/c) Is To Be Determined by Preparing Replacement A/c as follows:

 

Replacement A/c
Electric Supply Ltd
Journal Entries

15.2.4.2 Reasonable Return

The law seeks to prevent an electricity conern from earning very huge profit. For this, “reasonable return” is defined as consisting of:

  1. An yield at the standard rate, which is the Reserve Bank Rate (generally given in the problem) plus 2% on the capital base (defined later)
  2. Income derived from investments except investments made against “Contingencies Reserve”
  3. An amount equal to 1/2% on the loans advanced by the electricity board
  4. An account equal to 1/2% on the balance of development reserve
  5. An amount equal to 1/2% on debentures.

15.2.4.2.1 Capital Base

Capital base means:

  1. The original cost of fixed assets available for use minus the contribution made by the consumers for construction of service lines and also amounts written off
  2. The cost of intangible assets
  3. The original cost of works in progress
  4. The amount of investments made compulsorily against contingencies reserve
  5. The monthly average of stores, materials, supplies and cash and bank balances held as the end of the each month

Less:

  1. Amounts written off relating to depreciation of fixed assets and intangible assets
  2. Loans advanced by the Board
  3. Debentures
  4. Security deposits of consumers held in cash
  5. The amount standing to the credit of tariff and dividends control Reserve
  6. The amount set apart for the development reserve

15.2.4.2.2 Clear Profit

The difference between the total income and total expenditure PLUS specific appropriations is referred to as “clear profit”.

Specific appropriations: The following is a list of specific appropriations, to arrive at clear profit: Taxes on income and profits, previous losses, installments relating to intangible assets, expenses on issue of capital contribution to contingencies reserve, development reserve, arrears of depreciation and appropriations permitted by the Government.

15.2.4.3.3 Disposal of Surplus

When the clear profit exceeds the reasonable return, the surplus should be disposed in the following manner:

  1. One-third of the surplus, not exceeding 5% of the reasonable return—that means, one-third of surplus or 5% of reasonable return, whichever is lower, is at the disposal of the concerns
  2. Of the balance, one-half will be transferred to “tariffs and dividends control reserve”
  3. The balance will be distributed among consumers by way to reduction of rates.

Note:

An electricity undertaking should so adjust rates that the amount of clear profit in any year will not exceed the reasonable return by more than 20% of the reasonable return.

When clear profit is less than the reasonable return, “tariffs and dividends control” should be utilized.

[Disposal of surplus can be best understood with the help of the forthcoming illustrations.]

 

DISPOSAL OF PROFITS

Illustration 15.8

Model: Disposal of profits

An electric company earned a profit of 10,00,000 during the year ended 31 March 2011 after debentures interest @ 6% on 3,00,000. With the help of the figures given below, show the disposal of profits:

 

 

Original Cost of Fixed Assets

1,00,00,000

Formation and Other Expenses

4,00,000

Monthly Average of Current Assets (Net)

30,00,000

Reserve Fund (Represented by 4% Govt. Securities)

12,00,000

Contingencies Reserve Fund Investments

2,00,000

Loan from Electricity Board

12,00,000

Total Depreciation Written Off to Date

18,00,000

Tariff and Dividend Control Reserve

1,00,000

Security Deposits Received from Customers

2,00,000

Assume Bank Rate to be 6%

 

Solution

STAGE I: CALCULATION OF CAPITAL BASE:

STAGE II: Calculation of Reasonable Return:

 

(i) 6% + 2%:8% on Capital Base

8,00,000

Add:

 

(ii) on Loan from Electricity Board


6,000

(iii) on Debentures:


1,500

(iv) Income from Reserve Fund Investment:( 12,00,000 × 4/100)

48,000

(v) Reasonable Return

8,55,000

STAGE III: Calculation of Surplus:

 

(i) Clear Profit (As Given)

10,00,000

(ii) Less: Reasonable Return (Ref Stage II above)

8,55,000

(iii) Surplus

1,45,000

STAGE IV: Calculation of Disposal of Surplus:

 

(i) One-third of the Company Limited to 5% of Reasonable Return (5% of 8,55,000) or (1/3 of 1,45,000) ( 42,750) or (48,333.33) Least is 42,750

42,750

(ii) Half of the Balance to Be Credited to Tariff & Dividends Control Reserve ( 1,45,000 − 42,750) × =

51,125

(iii) Balance Credited to Consumer Benefit Reserve ( 1,45,000 − 42,750 − 51,125)

51,125

Total

1,45,000

STAGE V:

 

Journal Entry

Illustration 15.9

Model: Disposal of surplus—Amount refundable to customers

The following balances relate to an electric company and pertain to its accounts for the year ended 31 December 2010:

 

 

Share Capital

60,00,000

Reserve Fund (Invested) in 5% Govt. Securities at Par)

30,00,000

Contingencies Reserve (Invested in 6% Govt. Loan)

10,00,000

Loan from Stare Electricity Board……….

15,00,000

11% Debentures

5,00,000

Development Reserve

5,00,000

Fixed Assets

1,00,00,000

Depreciation Reserve on Fixed Assets

40,00,000

Consumer’s Deposits

40,00,000

Amount Contributed by Consumers Towards Cost of Fixed Assets

1,00,000

Tariffs and Dividends Control Reserve

2,50,000

Monthly Average of Current Assets

10,00,000

Intangible Assets:

2,00,000

The Company earned a profit of 5,00,000. Show how the profits of the company will be dealt with under the provision of the Electricity Act, assuming that the bank rate during the year was 8%.

 

[C.A. (Inter). Modified]

Solution

STAGE I: CALCULATION OF CAPITAL BASE:

 

 

 

(i) Fixed Assets

 

1,00,00,000

 

 

Add: (ii) Intangible Assets

2,00,000

 

(iii) Monthly Average of Current Assets

10,00,000

 

(iv) Investments Against Contingent Reserve

10,00,000

22,00,000

 

 

1,22,00,000

Less: (v) Depreciation Reserve

40,00,000

 

(vi) Loan from Electricity Board

15,00,000

 

(vii) 11% Debentures

5,00,000

 

(viii) Development Reserve

5,00,000

 

(ix) Consumer Deposits

40,00,000

 

(x) Amount Contributed by Customers

1,00,000

 

(xi) Tariffs & Dividend Control Reserve

2,00,000

1,08,00,000

(xii) Capital Base:

 

14,00,000

STAGE II: Calculation of Reasonable Returns:

 

(i) Return on Capital Base @ 10% (Bank Rate 8% + 2%) on 14,00,000

1,40,000

(ii) Return on Reserve Fund Investment ( 30,00,000 × 5%)= 1,50,000:

1,50,000

(iii) on Electricity Board Loan of 15,00,000 = 7,500:


7,500

(iv) on Debentures


2,500

(v) on Development Reserve


2,500

(vi) Reasonable Return :

3,02,500

STAGE III: Calculation of Surplus:

 

(i) Clear Profit (Given)

5,00,000

(ii) Less: Reasonable Return

3,02,500

Surplus

1,97,500

STAGE IV: Calculation of Amount Refundable to Customers:

 

 

(i) Surplus

1,97,500

(ii) Less: 20% of Reasonable Returns:(20/100 × 3.02,500)

60,500

(iii) Amount Refundable to Customers:

1,37,000

STAGE V: Calculation of Disposal of Balance Surplus:

STAGE VI: Calculation of Total Amount as the Disposal of the Company

 

(i) Reasonable Return

3,02,500

(ii) Add: Share in Surplus (Ref: Stage V (i))

15,125

(iii) Total Amount as the Disposal of the Company:

3,17,625

Illustration 15.10

Model: Composition of clear profit

From the following details of an electric supply company, maintaining accounts under double account system, calculate the following:

(a) capital base; (b) reasonable return; (c) clear profit and (d) amounts available for dividends and contribution to tariff and dividend control reserve and consumer’s rebate reserve.

 

 

Sale of Energy

14,60,000

Meter Rents

60,000

Transfer Fees

1,500

Cost of Generation

8,80,000

Distribution and Selling Expenses

80,000

Rent, Rates & Taxes

30,000

Audit Fees

2,400

Intangibles Written Off

9,000

Management Expenses

26,000

Depreciation

96,000

Interest on Loan of State Electricity Board

5,000

Contingency Reserve Investment Income

5,000

Interest on Security Deposit

1,000

Interest from Bank

800

Contribution to Provident Fund

70,000

No tax is payable for the year.

 

Original cost of fixed assets: 48,00,000; contributions by consumers for acquisition of such fixed assets: 2,40,000; cost of intangibles: 1,60,000; contingency reserve investments: 1,20,000; stores: opening 1,00,000 and closing 1,40,000; cash and bank balances: opening 1,20,000 and closing 80,000.

Depreciation up to the beginning of the year: 8,70,000; intangibles written off up to the beginning of the year; 70,000; security deposit of customers held in cash: 30,000; Tariffs and dividend control reserve at the beginning of the year: 1,80,000; Development reserve as the beginning of the year: 2,60,000; amount carried forward for distribution to consumers: 40,000; loan from state electricity board: 1,20,000. There is no addition to plant and machinery. Transfer to contingency reserve was 14,000and assume RBI rate as 8%.

Solution

STAGE I: Calculation of Capital Base:

 

 

(i) Original Cost of Fixed Assets

 

48,00,000

Add:

 

 

(i) Cost of Intangibles

1,60,000

 

(ii) Investments out of Contingency Reserve

1,20,000

 

(iii) Average Cash & Bank

 

 

Balance: [( 1,20,000 + 80,000) ÷ 2]

1,00,000

 

(iv) Average Stores:

1,20,000

5,00,000

[( 1,00,000 + 1,40,000) ÷ 2]

 

53,00,000

Less:

 

 

(i) Provision for Depreciation ( 8,70,000 + 96,000)

9,66,000

 

(ii) Intangibles Written Off ( 70,000 + 9,000)

79,000

 

(iii) Loan from State Electricity Board

1,20,000

 

(iv) Tariffs and Dividend Control Reserve Balance

1,80,000

 

(v) Security Deposit of Customers

30,000

 

(vi) Development Reserve

2,60,000

 

(vii) Balance of Consumer Benefit Reserve

40,000

 

(viii) Contribution by Customers for Acquisition of Fixed Assets

2,40,000

19,15,000

(ix) Capital Base

 

33,85,000

STAGE II: Calculation of Reasonable Return:

 

8% Return on Capital Base

 

33,85,000 × 8/100

2,70,800

(RBI Rate 6% + 2% = 8%)

 

 

Add:

(i) Bank Interest

800

(ii) on Loan from Board (1,20,000 × 1/200)


600

(iii) on Development Reserve (2,60,000 × 1/200)


1,300

Reasonable Return =

2,73,500

STAGE III: Calculation of Clear Profits:

 

(i) Incomes:

 

Sale of Energy

14,60,000

Meter Rent

60,000

Transfer Fees

1,500

Interest on Contingency Reserve Investment

5,000

Bank Interest

800

 

15,27,300

 

(i) Less: Expenses:

 

Cost of Generation

8,80,000

 

Distribution & Selling Expenses

80,000

 

Rent, Rates and Taxes

30,000

 

Interest on Loan from Board

5,000

 

Interest on Security Deposit

1,000

 

Audit Fees

2,400

 

Management Expenses

26,000

 

Depreciation for the Year

96,000

 

Contribution to Provident Fund

70,000

11,90,400

 

 

3,36,900

 

(ii) Less: Special Appropriations:

 

 

Intangible Written Off During the Year

9,000

 

Contribution to Contingency Reserve

14,000

23,000

CLEAR PROFIT-

 

3,13,900

STAGE IV: Calculation of Surplus:

 

(i) Clear Profit

3,13,900

(ii) Less: Reasonable Return

2,73,500

(iii) SURPLUS

40,400

STAGE V: Calculation of Disposal of Surplus

 

 

(i) Available to the Company for Its Disposal:

 

13,466 or 13,675 Whichever Is Less

13,466

(ii) Amount to Be Credited to Tariffs and Dividend Control Reserve: (40,000 − 13,466) ×

13,467

(iii) Amount to Be Credited to Consumer Benefit service: (40,000 − 13,466) ×

40,400

STAGE VI: Calculation of Amount Refundable to Customers:

As the Surplus 40,000 Does Not Exceed 20% of

Reasonable Return, i.e. 54,700, Nothing Is Refundable to Customers.

STAGE VII: Calculation of Total Amount as the Disposable of the Company:

 

Reasonable Return

2,73,500

Add: Share in Surplus

 

(Ref: Step V (i))

13,466

Total Amount as the Disposable of the company

2,86,966

Illustration 15.11

Model: Preparation of revenue A/c; net revenue A/c; capital A/c and general balance sheet

From the following balances as on 31 December 2010, appearing in the ledger of Electric Light and Power Co. Ltd, you are required to prepare: (a) revenue account; (b) net revenue account; (c) capital account and (d) general balance sheet.

[B.Com Modified]

Solution

 

(a) Revenue A/c
for the Year Ended 31 December 2010
(b) Net Revenue A/c
for the Year Ended 31 December 2010
(c) Receipts & Expenditure on Capital Account
for the Year Ended 31 December 2010
(d) General Balance Sheet
as on 31 December 2010

Illustration 15.12

Model: Preparation of final accounts

The following is the trial balance of the Electric Lighting Co Ltd. for the year ended 31 December 2010: Prepare its final accounts for the year ended 31 December 2010.

Solution

 

Receipts and Expenditure on Capital A/c
for the Year Ended 31 December 2010

 

General Balance Sheet
as on 31 December 2010

Illustration 15.13

Model: Double account system—Water supply company’s final A/c

From the following trial balance extracted from the books of water supply company, prepare its final accounts under the double account system for the year ended 31 December 2010:

 

Trial Balance of Water Supply Company
as on 31 December 2010

Adjustments:

 

1. Outstanding Expenses:

 

Taxes & Rates

40,000

Salaries

60,000

2. Reserve Fund Should Be Raised to

2,00,000

Solution

Important Note: While preparing balance sheet of companies other than electricity companies, only capital account balance is to be shown. Total receipts and payments on capital A/c should not be shown.

 

(i) Revenue Account of Water Supply Company
for the Year Ending 31 December 2010
(ii) Net Revenue Account
for the Year Ending 31 December 2010
Receipts & Expenditure on Capital A/c
for the Year Ended 31 December 2010
General Balance Sheet
as on 31 December 2010

Summary

Double account system of accounting adopts the procedure of preparing two accounts—(i) capital A/c and (2) general balance sheet—for presenting annual financial statements. This system is adopted by public utility concerns.

Salient features: (i) Splitting of balance sheet into two parts (ii) Revenue A/c and net revenue A/c in place of P&L A/c and P&L appropriation A/c (iii) Fixed assets shown at original cost (iv) Depreciation is provided by creating reserves (v) Loans and debentures are as capital items (vi) Provision of renewals out of current revenue and (vii) Continuation of fixed assets in books even after they are reduced to scrap value.

Difference between single account and double account system: Refer the text.

Advantages of double account system: (i) Easy interpretation (ii) Enhancement of cash resources (iii) Prescribed formats (iv) enriches operating activities and (v) Helps in preparation of statistical returns

Disadvantages: (i) Assets even shown as cost price without providing depreciation (ii) Adoption of huge formats with annexure (iii) Uneven allocation of repairs and renewals and (iv) Amount charged to revenue is arbitrary.

Final account under double account system: This comprises (i) Revenue A/c (ii) Net revenue A/c (iii) Capital A/c and (iv) The general balance sheet. Their formats and preparation are discussed in detail through illustrations—Refer the text.

Key Terms

Double Account System: A system of presenting annual financial by splitting the balance sheet into two parts: capital account and the general balance sheet.

Revenue Account: The account prepared in the place of profit and loss A/c.

Net Revenue Account: The account prepared instead of P&L appropriation A/c.

QUESTION BANK

Objective Type Questions

I: State whether the following statement are true or false

  1. Double account system and double entry system are one and the same.
  2. Profit and loss account is renamed as revenue account, under double account system.
  3. Under double account system, depreciation is shown as a deduction from fixed assets.
  4. Fixed assets are shown at their original cost.
  5. epreciation is provided by creating reserves.
  6. Loans and debentures are shown in Revenue A/c.
  7. Interest on loans and debentures is debited to net revenue A/c.
  8. Discount and premium on issue of shares and debentures are treated at capital items.
  9. Renewals are provided out of capital reserves.
  10. Principles of double entry are not followed in double account system.
  11. Under double account system, the main purpose of preparing financial statements is to depict the financial position of public utility undertakings on a particular date.
  12. Fixed assets are always shown as original cost in the books, even if they become absolute.
  13. The depreciation fund and the corresponding investments are shown only in capital accounts.
  14. Creation of depreciation fund is obligatory.
  15. The public utility concerns can use any format in the preparation and presentation of their final accounts.
  16. Revenue account is concerned purely with the operating activities of the public utility concerns.
  17. Repairs and renewals are charged to revenue account of the same period in which they are incurred.
  18. Depreciation is debited to respective assets account.
  19. Interest on loans and debentures is shown straightaway in the general balance sheet.
  20. In case of electricity supply companies, the balance of the capital account is carried down and shown as a separate item in the general balance sheet.

Answers:

  1. False
  2. True
  3. False
  4. True
  5. True
  6. False
  7. True
  8. True
  9. False
  10. False
  11. False
  12. True
  13. False
  14. False
  15. False
  16. True
  17. True
  18. False
  19. False
  20. False

II: Fill in the blanks with apt word(s)

  1. Under double account system, the balance sheet is split into __________ and __________.
  2. Under double account system, P&L A/c is named as __________.
  3. Under double account system, P&L appropriation A/c is called ________.
  4. Public utility undertakings present financial statements by adopting _________ system.
  5. Under double account system, capital A/c is named as _________ and ________ on capital A/c.
  6. Under double account system, fixed assets are shown at _________ .
  7. Depreciation is provided by __________ .
  8. Loans and debentures are treated as _________ .
  9. Interest on loans and debentures is treated as __________.
  10. Discount and premium on issue of shares and debentures are treated as _________ .
  11. Renewals are provided for out of _________ .
  12. Balance of net revenue A/c is shown in the _________ side of the general balance sheet.
  13. The capital A/c is in the form of _________ .
  14. Revenue A/c is purely concerned with __________ activities of the concerns.
  15. Depreciation is debited to _________ and credited to __________.
  16. Preliminary expenses on formation of concerns are treated as __________.
  17. The actual repairs are debited to the __________ A/c and not to the __________ A/c.
  18. Assets continue to appear in the books as __________ and not as _________ even if they are absolute.
  19. __________ is not at all affected by cost of material reused.
  20. Formats for preparation of various accounts relating to electricity companies are statutory forms under the __________ Act, 1910.

Answers:

  1. capital A/c; general balance sheet
  2. revenue A/c
  3. net revenue A/c
  4. double account
  5. receipts and expenditure
  6. original cost
  7. creating reserve
  8. capital items
  9. appropriation of profit
  10. capital items
  11. current revenue
  12. liability
  13. cash book
  14. operating
  15. revenue; depreciation fund A/c
  16. capital expenditure
  17. reserve; revenue
  18. original cost; reduced value
  19. Capitalization
  20. Indian Electricity

III: Multiple choice questions—Choose the correct answer

  1. The name of the account showing profit/loss under double account system is
    1. revenue A/c
    2. net revenue A/c
    3. income & expenditure A/c
    4. receipts & payments A/c
  2. Under double account system, the P&L appropriation A/c is otherwise named as
    1. revenue A/c
    2. net revenue A/c
    3. income & expenditure A/c
    4. receipts & payments A/c
  3. Under double accounts system, when an asset is replaced
    1. the original cost reduced by the amount of depreciation is written off to revenue
    2. the current cost of replacement is written off to revenue
    3. the original cost of the asset is written off to revenue
    4. the lower of (b) and (c)
  4. When an asset is replaced, any amount realized on sale of old materials is credited to
    1. net revenue A/c
    2. revenue A/c
    3. replacement A/c
    4. respective asset A/c
  5. Under double account system, shares forfeited account is shown in
    1. credit side of capital A/c
    2. credit side of net revenue A/c
    3. credit side of revenue A/c
    4. assets side of the general balance sheet
  6. Original cost of an asset: 3,00,000; present cost of replacement: 5,00,000; amount spent on replacement: 5,75,000. The amount charged to revenue is
    1. 3,00,000
    2. 5,00,000
    3. 5,50,000
    4. 2,50,000
  7. Original cost of an asset: 2,50,000; present cost of replacement: 3,50,000; amount spent on its replacement: 4,00,000. The amount to be capitalized is
    1. 3,50,000
    2. 2,50,000
    3. 50,000
    4. 1,00,000
  8. Cost of license is to be shown in
    1. revenue A/c
    2. net revenue A/c
    3. the general balance sheet
    4. capital A/c
  9. Preliminary expenses is to be shown in
    1. capital A/c
    2. revenue A/c
    3. net revenue A/c
    4. the general balance sheet
  10. The essential feature of double account system is
    1. principles of double entry system
    2. capital receipts and capital expenditure shown in separate accounts
    3. showing assets as original cost, charging depreciation to depreciation reserve account
    4. all of these

Answers:

 

1. (a)

2. (b)

3. (d)

4. (c)

5. (a)

6. (b)

7. (c)

8. (d)

9. (a)

10. (d)

 

 

Short Answer Questions

  1. What do you mean by “double account system”?
  2. State any four salient features of double account system.
  3. Mention any four differences between double account system and single account system.
  4. State any two advantages of double account system.
  5. What are the limitations of double account system (any two)?
  6. Name the constituents of final accounts prepared under double account system.
  7. What do you mean by revenue A/c?
  8. How will you treat depreciation on fixed assets?
  9. What is meant by net revenue A/c?
  10. What is the main purpose of preparing capital A/c under double account system?
  11. How would you treat the balance of the capital account?
  12. What is means by general balance sheet?
  13. How will you treat repairs and renewals under double account system?
  14. What is the accounting treatment for replacement of assets when there is no improvement or additions to them?
  15. How will you determine the amount to be charged to the revenue A/c in replacement of asset?
  16. How will you ascertain the amount to be capitalized in replacement of asset?
  17. How will you compute reasonable return?
  18. What is meant by “clear profits”?
  19. Explain the provision relating to “disposal of surplus”?
  20. What is “capital base”?

Essay Type Questions

 

  1. Explain the term: double account system. Enumerate the main features of this system.
  2. Distinguish between double account system and single account system.
  3. Discuss the advantages and limitations of double account system.
  4. Enumerate the salient features of revenue A/c. Draw a format of revenue A/c. How it is prepared?
  5. How will you prepare the net revenue A/c?
  6. Draw the format of receipts and expenditure on capital account? Is there any difference in treatment of balance with respect to electricity companies and non-electricity public utility concerns? Substantiate your answer.
  7. How does the general balance sheet differ from that of balance sheet of trading concerns?
  8. Explain the accounting treatment for replacement of assets.
  9. Explain the special provision relating to reasonable returns and disposal of surplus of an electric supply company.
  10. Define “capital base. How will you treat this? Explain with an example.
  11. Explain the procedure involved in calculation of clear profit.
  12. What treatment would you recommend in double account system for the following:
    1. Depreciation
    2. Replacement of an asset, including additions & alterations
    3. Tariffs and dividend control reserve
    4. Loans & debentures and interest there on
    5. Discount and premium on issue of shares & debentures

Exercises

 

Part I—For Undergraduate Level

[Model: Replacement of assets and Allocation between revenue and capital]

 

1. A water supply company had to replace a quarter of its mains and lay auxiliary mains for the remaining length. The total cost of old mains is 25,00,000. The cost of auxiliary mains is 22,50,000 and that of the new mains has gone up by 30%. Amount spent on replacement is 8,75,000. Journalize.

[Ans: Amount to be capitalized: 62,500; & 22,50,000]

 

2. An electric supply company laid down a main at a cost of 25,00,000. Some years later, the company laid down an auxiliary main for one-fifth of the length of the old main at a cost of 7,50,000 and also replaced the rest of the length of the old main at a cost of 30,00,000, the cost of labour and materials having gone up by 15%. Sale of old materials realized 40,000. Old materials valued as 50,000 were used in renewal and those valued as 25,000 were used in construction of the auxiliary main.

You are required to give the journal entries for recording the above transactions. Also show how you would apportion the above expenditure between capital and revenue.

[Ans: Amount to be charged to revenue: 21,85,000; Amount to be capitalized 15,25,000]

 

3. An old water works was replaced by a new one at a cost of 48,00,000. The old waterworks cost only 12,81,000, materials forming of three-sevenths of the expenditure have now doubled and labour cost had risen by 250%. Old materials worth 66,000 were sold. Pass journal entries showing the allocation between capital and revenue.

[Ans: Current replacement cost: 29,28,000; Amount to be charged to revenue: 28,62,000; Amount to be capitalized: 18,72,000]

 

4. The coastal gas company rebuilt its works with double the capacity at a cost of 32,00,000. The cost of the part of old works was 14,00,000. In working the new works, old materials of 60,000 were reused and material worth 1,00,000 was sold away. The cost of labour and materials are 50% higher now than when the old works were built. You are required to make necessary calculations and give journal entries.

[Ans: Current replacement cost: 21,00,000; Amount to be charged to revenue: 19,40,000; Amount to be capitalized 11,00,000]

 

5. A water supply concern had to replace a quarter of the mains and lay an auxiliary main for the remaining length in order the augment supplies of water to a locality. The total cost of the original main was 24,00,000. The auxiliary main cost 27,00,000 and the new main cost 10,50,000. It is estimated that the cost of laying a main has gone up by 30% and part of the old main realized 90,000.

[Ans: Amount to be charged to revenue 6,90,000; Amount to be capitalized: 29,70,000]

[Model: Replacement of asset]

 

6. The Kolkata Corporation decides to replace water mains with a modern one with a larger capacity. The cost of installation in 1980 was 96 lakh, The components of materials, labour and overheads being in the ratio of 5:3:2. It is ascertained that the costs of materials and labour have gone up by 40% and 80%, respectively. The proportion of overheads to total cost is expected to remain the same as before.

The cost of the new mains as per improved design is 240 lakh and in addition, material recovered from the old mains of the value of 9,60,000 has been used in the construction of new mains. The old man was scrapped and sold for 30 lakh.

You are asked to make the allocation between capital and revenue and pass necessary journal entries under double accounts system.

[Ans: Amount to be charged to revenue 1,09,20,000; Amount to be capitalized 1,00,80,000]

 

7. A railway station was built in 1980 at a cost of 18,00,000. It was replaced in 2010 by a new railway station at a cost of 96,00,000. Since 1980, prices of materials have a risen to 250% and the labour rates have trebled. The proportion of materials and labour in the old station was 2:3. Old materials valued at 1,50,000 are used in the construction of new station and included in the cost of 96,00,000. 2,52,000 is realized by the sale of old materials.

Give journal entries for recording the above transactions.

[Ans: Amount to be charged to revenue: 46,38,000; Amount to be capitalized: 45,60,000]

[Model: Disposal of profit]

8. From the following information and details relating to the year ended 31 March 2011 and bearing in mind the provision of the Electricity (supply) Act, 1948, indicate the disposal of profits of an Electric Corporation Ltd:

 

 

Net Profit Before Charging Debentures Interest

17,50,050

Fixed Assets

2,10,00,000

Depreciation Written Off on

49,00,000

Fixed Assets

 

Loan from Electricity Board

60,00,000

6% Investments of the Reserve Fund

45,00,000

(FV 45,00,000)

 

6% Investments of the Contingencies Reserve

38,00,000

Tariffs and Dividends Control Reserve

4,20,000

Security Deposits of Customers

2,42,000

Customer’s Contribution to Main Lines

70,000

Preliminary Expenses

 

Average of Current Assets— Excluding Customers’

13,85,000

Balance of 3,10,000 Development Reserve

2,20,000

10% Debenture Interest Paid in the Year

3,75,000

The RBI rate on the relevant date was 8%.

 

 

[Ans: Capital base: 1,03,63,000;

Reasonable Return: 13,56,150;

Surplus: 18,900;

Amount as the disposal of the company: 6,300;

Amount credited to tariffs & dividend control reserve: 6,300;

Amount to consumer benefit reserve: 6,300]

 

9. Best Electricity Supply Ltd earned a profit of 2,11,250 during the year ended 31 March 2011 after debentures interest @ 71/2%on 62,500. With the help of the figures given below, show the disposal of profits:

 

 

Original Cost of Fixed Assets

25,00,000

Formation & Other Expenses

1,25,000

Monthly Average of Current Assets

6,25,000

Reserve Fund (Represented by 4% Govt. Securities)

2,50,000

Contingencies Reserve Fund Investments

62,500

Loan from Electricity Board

3,75,000

Total Depreciation Written Off To Date

5,00,000

Tariff and Dividend Control Reserve

12,500

Security Deposits Received from Customers

50,000

Assume bank rate to be 6%

 

 

[Ans: Capital base: 23,12,500; Reasonable return: 1,97,187.50; Surplus: 14,062.50;

Tariff and dividends control reserve: 4,687.50; Consumer benefit reserve: 4,687.50]

 

10. The following balances release to an Electric Company and pertain to its are the accounts for the year ended 31 December 2010:

 

 

Share Capital

50,00,000

Reserve Fund (Invested in 5% Govt. Securities)

30,00,000

Contingencies Reserve (Invested in 6% State Government Loan)

10,00,000

Loan from State Electricity Board

15,00,000

11% Debentures

4,00,000

Development Reserve

5,00,000

Fixed Assets

1,00,00,000

Depreciation Reserve on Fixed Assets

40,00,000

Consumer’s Depositse

37,50,000

Amount Contributed by Consumers Towards Cost of Fixed Assets

1,00,000

Intangible Assets

2,50,000

Tariffs and Dividends Control Reserve

3,00,000

Current Assets (Monthly Average)

10,00,000

 

The company earned a profit of 4,50,000. Show how the profits of the company will be dealt with under the provisions of the Electricity Act, assuming that the bank rate during the year was 8%. All workings should form part of your answer.

[Ans: Capital base; 17,00,000; Reasonable return: 3,32,000; Surplus: 1,18,000; To tariffs & dividend: 29,900; Consumer’s benefit reserve: 29,900]

[Model: Final accounts]

 

11. The following are the balances on 31 March 2011 in the books of Shimla Power and Light Company Ltd:

Particulars

Lands on 31 March 2010

3,60,00

Lands Expended During 2010–11

12,000

Machinery on 31 March 2010

14,40,000

Machinery Expended During 2010–11

12,000

Mains Including Cost of Laying

4,80,000

Mains Expended During 2010–11

1,22,400

 

Equity Shares

13,17,600

Debentures

4,80,000

Sundry Creditors

2,400

Depreciation Fund A/c

 

6,00,000

Sundry Debtors for Current supplied

96,000

Other Debtors

1,200

Cash

12,000

Cost of Generation of Electricity

84,000

Cost of Distribution of Electricity

12,000

Rent, Rates & Taxes

12,000

Management Expenses

28,800

Depreciation

48,000

 

Sale of Current

3,12,000

Rent of Meters

12,000

Interest on Debentures

24,000

Interim Dividend

48,000

Net Revenue A/c Balance on 31 March 2010

68,400

 

27,92,400

27,92,400

From the above trial balance, prepare revenue A/c; net revenue A/c; capital A/c and general balance sheet.

[Ans: Revenue A/c: 1,29,200; Net revenue A/c:
1,35,600; (Balance) (Balance)

Receipts total: 17,97,600; General balance
sheet total – 25,35,600]

 

12. From the following as at 31 March 2011, prepare revenue A/c; net revenue A/c; capital A/c and general balance sheet of an electric supply company:

[Ans: Revenue A/c (Balance): 39,800; Net revenue A/c (Balance): 38,900; Capital A/c: 1,57,200; General balance sheet total: 6,33,900]

 

13. From the following particulars, draw up (i) balance Sheet as on 31 December 2010 on the basis of the single account system and (ii) the capital A/c and the general balance sheet on the same date under the double account system:

Authorized capital is 1,500 shares of 10 each, of which issued and paid up capital is 13,500; 6% Debentures: 1,500; Trade creditors: 800; Trade debtors: 1,900; Cash at bank 1,750; Stock-in-trade: 1,200; P&L A/c: 800; Land: 1,850; Machineries: 8,000;

Shafting: 2,500; Buildings: 650; Depreciation fund (Machinery): 1,250.

[Ans: (i) Balance sheet total: 16,600; (ii) Capital A/c balance: 2,000; General balance sheet total: 17,850]

The following are the balance as at 31December 2010 in the books of the Utopian Railway Co Ltd. Make out the receipts and expenditure on capital A/c for 2010 and the general balance sheet as at 3 December 2010:

 

 

Traffic Accounts Due from Other Railways

65,950

Expenditure on Lines Open for Traffic

1,44,000

Expenditure on Working Stock

48,000

Expenditure on Motor Books

24,000

Expenditure on Docks, Harbors & Wharves

22,500

Subscription to Other Companies

15,000

Preference Shares Paid up as at 31 December 2010

1,27,500

Ordinary Shares Paid up as at 1 January 2010

1,20,000

Ordinary Shares Issued as at 1 January 2010

30,000

Premium on Shares as at 1 January 2010

8,250

Premium on Shares Received in 2010

3,300

Debentures

49,500

Net Revenue A/c, Balance as Credit

430

Renewals Reserve A/c

3,750

Sundry Creditors

1,875

Cash at Bank

2,055

Cash on Deposit in Bank

6,750

Investments

4,350

Spares Stock

3,750

Sundry Debtors

8,250

 

[Ans: Capital A/c balance: 85,050; General balance total 91,105

 

15. From the following particulars for the year ending 31 December 2010, prepare under the double account system, the receipts and expenditure on capital A/c and general balance sheet of an electric supply company:

  Debit
Balances
Credit
Balances

Capital:
Authorized: 5,00,000 Equity Shares of 10 Each
50,00,000

 

 

Issued, Subscribed & Paid up:
3,00,000 Equity Shares of 10 Each
( 8 per Share Paid up)

24,00,000

6% Debentures

7,00,000

Depreciation Fund

2,50,000

Buildings

6,00,000

Freehold Lands

4,50,000

Plants and Machinery

11,67,500

Mains

2,30,000

Sundry Machine Parts

25,000

Meters

20,000

Instruments and Appliances

32,000

Stock and General Stores

1,88,000

Office Furniture

15,000

Fuel

22,500

Sundry Machine Room Materials

 

 

(Lubricants, Cotton, Waste)

5,000

Sundry Debtors

1,75,000

Sundry Creditors

85,000

Investments

4,50,000

Cash in Hand and Cash as Bank

3,95,000

Balance Transferred from Net

3,40,000

Revenue A/c

 

 

 

37,75,000

37,75,000

[Ans: Balance Capital A/c 3,72,500; General balance total: 37,75,000]

Exercises

 

Part B—For Advanced Level

 

16. The following balances appeared in the books of Mauna Power Ltd. as on 31 March 2011:

Particulars Dr
Cr

Equity Shares

12,00,000

Debentures

4,00,000

Land on 31 March 2010

3,00,000

Land Purchased During the Year

1,20,000

Mains Including Cost of Laying to 31 March 2010

3,20,000

Mains Expended During the Year

1,52,000

Machinery on 31 March 2010

11,00,000

Machinery Purchased During the Year

1,32,000

Sundry Creditors

 

2,000

Depreciation Fund Account

 

5,00,000

Sundry Debtors for Current supplied

80,000

Other Book Debts

1,000

Stores on Hand

12,000

Cash in Hand

8,000

Cost of Generation of Electricity

60,000

Cost of Distribution

18,000

Sale of Current

3,00,000

Meter Rent

10,000

Rent, Rates and Taxes

24,000

Establishment Expenses

42,000

Interest on Debentures

20,000

Interim Dividend

40,000

Depreciation

40,000

Net Revenue A/c Balance on 31 March 2010

57,000

 

24,69,000

24,69,000

From the above balances prepare capital A/c; revenue A/c; net revenue A/c and general balance sheet.

 

[I.C.W.A. Modified]

[Ans: Revenue A/c (Balance): 1,26,000; Net revenue A/c (Balance): 1,23,000; Capital A/c (Balance): 5,24,000; General balance sheet (Total): 22,25,000]

 

17. The following balances were extracted from the books of an electric supply company, as on 31 March 2011. Prepare revenue, net revenue and appropriation accounts and the balance sheet in the form prescribed under the Electricity Act.

[I.C.W.A. Modified]

[Ans: Revenue A/c: 86,800; Net revenue A/c: 86,800; General balance sheet total: 15,27,884; Hint: Difference in trial balance: 31,230]

 

18. Bright Electricity Ltd earned a profit of 13,47,500 for the year ended 31 March 2011 after debenture interest as 14% on 2,50,000. Calculate the reasonable return after taking into consideration the following facts also:

 

 

Fixed Assets (Original Cost)

1,00,00,000

Formation and Other Expenses

5,00,000

Monthly Average of Current Assets (Net)

25,00,000

Reserve Fund (Represented by 8% Govt. Securities)

10,00,000

Contingencies Reserve Investments

2,50,000

Loan from Electricity Board

15,00,000

Total Depreciation on Fixed Assets, Written Off To Date

20,00,000

Tariffs and Dividends Control Reserve

50,000

Security Deposits Received from Customers

2,00,000

Assume the Bank Rate to be 10%

 

 

[C.S. (Inter). Modified]

[Ans: Capital base: 92,50,000; Reasonable return: 11,98,750]

 

19. An electricity supply company rebuilt and re- equipped a power station and the connecting lines during the year ended 31 March 2011. For this purpose, it purchased materials for 21,70,000 and used stores costing 9,80,000 from its existing stock. The cost of labour came to 10,44,000. The estimated supervisory overheads attributed to this project were 26,000. The power station was ejected during the year ended 31 March 1990 at a cost of 10,00,000. The index of costs in the line stood at 385 in the year ended 31 March 2011, taking the year ended 31 March 1990 as the base year. Discarded materials from the old power station fetched 24,000.

Show journal entries to record the above-mentioned transactions relating to the replacement of the power station. Show all your working notes.

 

[C.S. (Inter). Modified]

[Ans: 3,70,000 to be capitalized]

 

20. The following are the balances of Modern Electric Co. Ltd. as on 31 March 2011:

Stock on hand on 31 March 2011:

Coal 6,92,940

Other Materials 10,700

Depreciation is to be provided as follows:

15% of value of plant & 10% of value of

buildings on 1 April 2010. Prepare revenue A/c, capital A/c, net revenue A/c and general balance

sheet under double account system.

 

[C.A. (Final). Modified]

[Ans: Profit: 31,18,060; Capital A/c (Total): 1,88,74,060; General balance sheet total: 2,23,80,880]

[Model: Disposal of profit]

 

21. Gopal Electricity Co. Ltd. earned a profit of 67,94,000 after paying 2,40,000 @ 6% as debenture interest for the year ended 31 March 2011. The following further information is supplied:

 

 

Fixed Assets

14,20,00,000

Depreciation Written Off

4,00,00,000

Loan from Electricity Board

3,20,00,000

Reserve Fund Investment at Par (4%)

80,00,000

Contingency Reserve Investment at Par (4%)

60,00,000

Tariffs and Dividend Control Reserve

8,00,000

Security Deposits of Customers

12,00,000

Customer’s Contribution to Assets

4,00,000

Preliminary Expenses

3,20,000

Monthly Average of Current Assets Including

 

Amount Due from Customers 20,00,000

60,80,000

Development Reserve

20,00,000

Show the disposal of the profits.

 

 

[C.A. (Final). Modified]

[Ans: Capital base: 7,40,000; Reasonable return: 86,50,000; Surplus: NIL]

 

22. The following balances have been extracted from the books of an electricity company at the end of March 2011:

 

 

Share Capital

40,00,000

Fixed Assets

1,00,00,000

Depreciation Reserve on Fixed Assets

12,00,000

Reserve Fund (Invested in 8% Government Securities at Par)

24,00,000

Contingency Reserve (Invested in 7% State Government Loan)

4,80,000

Consumer’s Deposit

16,00,000

Amount Contributed by
Consumers

 

Towards Cost of Fixed Costs

80,000

Tariffs & Dividends Control
Reserve

4,00,000

Development Reserve

3,20,000

12% Debentures

8,00,000

Loan from State Electricity Board

10,00,000

Intangible Assets

3,20,000

Current Assets (Monthly Average)

6,00,000

 

 

The company earned a profit of 11,20,000 (after tax) in 2010–11. Show how the profits are to be dealt with by the company assuming the bank rate was 10%.

All workings should form part of your answer.

 

[I.C.W.A. Modified]

[Ans: Capital base: 60,00,000; Reasonable return: 9,22,600; Surplus: 1,97,400; Amount refundable to customers: 12,880; Amount credited to tariffs and dividends control reserve: 69,195; Amount credited to consumer benefit reserve: 69,195]

 

23. Saharanpur Electricity Co. Ltd. earned a profit of 8,70,000 during the year ended 31 March 2011, after charging interest on debentures amounting to 22,500 @ 71/2%. You are required to show the disposal of profit assuming bank rate as 6% with the help of the following data:

 

 

      

Fixed Assets as Cost

1,25,00,000

Preliminary Expenses

2,50,000

Monthly Average of Current

18,00,000

Assets including Amount

 

Due to Customers 3,00,000

 

Reserve Fund (Represented by 6% Government Securities)

20,00,000

Total Depreciation Written Off

38,50,00

Contingencies Reserve

5,00,000

Investments

 

Loan from Electricity Board

25,00,000

Tariff & Dividend Control
Reserve

1,00,000

Security Deposits Received
from Customers

2,50,000

Development Reserve

2,50,000

[I.C.W.A. (Final) Modified]

[Ans: Capital base: 75,00,000; Reasonable returns: 7,35,250; Surplus: 1,34,750; Amount at the disposal of the company: 36,762.50; Amount transferred to tariffs and dividend control reserve and consumer benefit reserve: Each 48,993.75]

[Model: Final accounts]

 

24. The following were extracted from the books of urban Electric Supply Co. Ltd as on 31 December 2010. Prepare revenue, net revenue accounts and balance sheet in the form prescribed under the Electricity Act:

[C.A. (Final). Modified]

[Ans: Revenue A/c: 2,17,000; Net revenue: A/c 2,17,000; General balance total: 38,19,710; Difference in trial balance: 78,075]

[Model: Final accounts]

 

25. The following balances appeared in the books of Eastern Electric Supply Corporation Ltd as on 31 December 2010:

Particulars Debit
Balances
Credit
Balances

Equity Shares

12,00,000

Debentures

   4,00,000

Land on 31 March 2010

3,00,000

Land Purchased During the Year

1,20,000

Mains Including Cost of Laying to 31 December

3,20,000

Mains Expended During the Year

1,52,000

Machinery on 31 December 2010

11,00,000

Machinery Purchased During the Year

1,32,000

 

Sundry Creditors

2,000

Depreciation Fund Account

5,00,000

Sundry Debtors for Current supplied

80,000

Other Book Debts

1,000

Stores on Hand

12,000

Cash in Hand

8,000

Cost of Generation of Electricity

60,000

Cost of Distribution Electricity

18,000

Sale of Current

3,00,000

Meter Rent

10,000

Rent, Rates and Taxes

24,000

Establishment Expenses

42,000

Interest on Debentures

20,000

Interim Dividend

40,000

Depreciation

40,000

Net Revenue A/c Balance on 31

57,000

December 2010

 

 

 

24,69,000

24,69,000

From the above balances, prepare revenue A/c; net revenue A/c; capital A/c and general balance sheet.

[I.C.W.A. (Final). Modified]

[Ans: Revenue A/c: 1,26,000; Net revenue A/c: 1,23,000; Capital A/c: 5,24,000; Balance sheet total: 22,25,000]