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Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 7th Lesson Retirement / Death of a Partner Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 7th Lesson Retirement / Death of a Partner

Very Short Answer Questions

Question 1.
What is meant by the retirement of a partner?
Answer:
A partner who opts to retire from an existing partnership firm is called ‘Retirement of a partner.

Question 2.
What do you understand by a Gaining ratio?
Answer:
The ratio in which the share of the retiring partner is taken over by other partners is called the ‘Gaining ratio’. To calculate the new profit sharing ratio, the share of profit of the retiring partner taken over by each continuing partner is added to his respective share of profit before the retirement of the outgoing partner.
Gaining ratio = New ratio – Old ratio

Question 3.
What are the adjustments required for the retirement or death of a partner?
Answer:
On the retirement or death of a partner, the existing partnership deed comes to an end and in its place, a new partnership deed needs to be framed whereby the remaining partners continue to do their business on changed terms and conditions. There is not much difference in accounting at the time of retirement or in the event of death. In both cases, we are required to determine the amount due to the retiring partner (in case of retirement) and to the legal representatives (in case of deceased partner) after making necessary adjustments in respect of goodwill, revaluation of assets and liabilities, and transfer of accumulated profits and losses. In addition to the above, the new profit-sharing ratio of the remaining partners and the gaining ratio is to be computed.

Question 4.
How is the account of the deceased partner settled?
Answer:
The deceased partner’s capital account is credited with the balance of capital at the beginning of the year, interest on capital, the share of profit on revaluation of assets and liabilities, the share of undistributed profits, the share of profit to the date of death, and his share of goodwill. The account is debited with drawings to the date of death, interest on drawings, and the balance is transferred to the executor’s account of the deceased partner.

Question 5.
Explain the modes of payment to the retiring partner.
Answer:
The outgoing partner’s account is settled as per the terms of the partnership deed i.e., in lumpsum immediately or in various installments with or without interest. In the absence of any agreement section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive either 6% interest till the date of payment or such share of profits that have been earned with his money (based on capital ratio). If the firm is not in a position to make payment immediately, the amount due is transferred to the retiring partner’s loan account.

Textual Exercises

Question 1.
Madhu, Nehra, and Tina are partners sharing profits in the ratio of 5 : 3 : 2. Calculate the new profit sharing ratio if
1. Madhu retires
2. Nehra retires
3. Tina retires
Solution:
1. New profit sharing ratio, if Madhu retires 3 : 2.
2. New profit sharing ratio, if Nehra retires 5 : 2.
3. New profit sharing ratio, if Tina retires 5 : 3.

Question 2.
Hari, Prasad, and Anwar are partners sharing profits in the ratio of 3 : 2 : 1. Hari retires and his share is taken up by Prasad and Anwar in the ratio of 3 : 2. Calculate the new profit sharing ratio.
Solution:
Old ratio of Hari, Prasad, Anwar = 3 : 2 : 1
Gaining ratio on the retirement of Hari = 3 : 2
New share of continuing partner = Old share + Acquired share from retiring partner
Prasad gets \(\frac{3}{5}\) of Hari share = \(\frac{3}{5} \times \frac{3}{6}=\frac{9}{30}\)
New share = \(\frac{2}{6}+\frac{9}{30}=\frac{10+9}{30}=\frac{19}{30}\)
Anwar gets \(\frac{2}{5}\) of Hari share = \(\frac{2}{5} \times \frac{3}{6}=\frac{6}{30}\)
New share = \(\frac{1}{6}+\frac{6}{30}=\frac{5+6}{30}=\frac{11}{30}\)
∴ New profit sharing ratio = 19 : 11.

Question 3.
Ranjana, Sadhna, and Kamana are partners sharing profits in the ratio 4 : 3 : 2. Ranjana retires, and Sadhna and Kamana decided to share future profits in the ratio of 5 : 3. Calculate the Gaining Ratio.
Solution:
Old profit sharing ratio = 4 : 3 : 2
New ratio = 5 : 3
Sadhna gaining ratio = New ratio – Old ratio
= \(\frac{5}{8}-\frac{3}{9}=\frac{45-24}{72}=\frac{21}{72}\)
Kamana gaining ratio = \(\frac{3}{8}-\frac{2}{9}=\frac{27-16}{72}=\frac{11}{72}\)
Gaining ratio = 21 : 11

Question 4.
Murali, Naveen, and Omprakash are partners sharing profits in the ratio of 3 : 4 : 1. Murali retires and surrenders 2/3rd of his share in favour of Naveen and the remaining share in favour of Omprakash. Calculate new profit sharing and the gaining ratio of the remaining partners.
Solution:
Naveen gets \(\frac{2}{3}\) of Murali share = \(\frac{2}{3} \times \frac{3}{8}=\frac{6}{24}\)
Omprakash gets \(\frac{1}{3}\) of Murali share = \(\frac{1}{3} \times \frac{3}{8}=\frac{3}{24}\)
Naveen new share = \(\frac{4}{8}+\frac{6}{24}=\frac{12+6}{24}=\frac{18}{24}\)
Omprakash new share = \(\frac{1}{8}+\frac{3}{24}=\frac{3+3}{24}=\frac{6}{24}\)
New gaining ratio = 18 : 6 = 3 : 1
Gaining ratio = New ratio – Old ratio
Naveen = \(\frac{3}{4}-\frac{4}{8}=\frac{6-4}{8}=\frac{2}{8}\)
Omprakash = \(\frac{1}{4}-\frac{1}{8}=\frac{2-1}{8}=\frac{1}{8}\)
Gaining ratio = 2 : 1

Question 5.
Vasu, Dasu, and Bosu are partners sharing profits in the ratio of 1 : 2 : 3. Dasu retires and at the time of retirement, goodwill is valued at ₹ 84,000. Vasu and Bosu decided to share future profits in the ratio of 2 : 1. Record the necessary journal entries.
Solution:
Journal Entry

Question 6.
Rama, Krishna, and Reddy are partners in a firm sharing profits and losses in the ratio of 2 : 2 : 1. On Rama’s retirement, the goodwill of the firm is valued at ₹ 46,000. Krishna and Reddy decided to share future profits equally. Record the necessary journal entry for the treatment of goodwill without opening a’ Goodwill Account’.
Solution:
Old ratio = 2 : 2 : 1
New ratio =1 : 1
Krishna gaining ratio = New ratio – Old ratio
= \(\frac{1}{2}-\frac{2}{5} \text { (or) } \frac{5}{10}-\frac{4}{10}=\frac{1}{10}\)
Reddy’s gaining ratio = \(\frac{1}{2}-\frac{1}{5}=\frac{5}{10}-\frac{2}{10}=\frac{3}{10}\) = 1 : 3
Journal Entry

Question 7.
Shanu, Nicee, and Jwalitha are partners sharing profits in the ratio of 1 : 3 : 5. Goodwill is appearing in the books at a value of ₹ 60,000. Nicee retires and goodwill is valued at ₹ 90,000. Shanu and Jwalitha decided to share future profits equally. Record necessary journal entries.
Solution:
Journal Entry

Question 8.
Asha, Deepa, and Lata are partners in the firm sharing profits in the ratio of 3 : 2 : 1. Deepa retires. After making all adjustments relating to revaluation, goodwill and accumulated profit, etc., the capital accounts of Asha and Lata showed a credit balance of ₹ 1,60,000 and ₹ 80,000 respectively. It was decided to adjust the capitals of Asha and Lata in their new profit-sharing ratio. They decided that the requirement of capital is ₹ 2,50,000. You are required to calculate the new capitals of the partners and record necessary journal entries for bringing in or withdrawing of the necessary amounts involved.
Solution:
New profit sharing ratio = 3 : 1
Total capital = 2,50,000
Asha capital = 2,50,000 × \(\frac{3}{4}\) = ₹ 1,87,500
Lata capital = 2,50,000 × \(\frac{3}{4}\) = ₹ 62,500

Question 9.
A, B and C are partners in a firm. B retires from the firm on 1st Jan 2015. On the date of his retirement ₹ 55,000 were due to him. It was decided that the payment will be done in 3 equal yearly installments together with interest @ 10% p.a. on the unpaid balance. Prepare necessary entries.
Solution:
B’s Loan a/c

Question 10.
The Balance Sheet of Mohit, Neeraj, and Sohan who are partners in firm sharing profits according to their capitals as on March 31, 2015, was as under:

On that date, Neeraj decided to retire from the firm and was paid for his share in the firm subject to the following:
1. Buildings to be appreciated by 20%.
2. Provision for Bad debts to be increased to 15% on Debtors.
3. Machinery to be depreciated by 20%.
Prepare necessary accounts and a new Balance Sheet after retirement.
Solution:

Question 11.
Siva, Rama, and Krishna were partners in firm sharing profits in the ratio of 2 : 2 : 1. Their Balance Sheet as on March 31, 2015, was as follows:

Rama retired on March 31, 2015, on the following terms:
(i) Goodwill of the firm was valued at ₹ 70,000 and was not to appear in the books.
(ii) Bad debts amounting to ₹ 2,000 were to be written off.
(iii) Patents were considered valueless.
Prepare Revaluation Account, Partner’s Capital Accounts, and the Balance Sheet.
Solution:

Question 12.
Radha, Krishna, and Satya were in partnership sharing profit and losses in the ratio of 4 : 2 : 1. On April 1, 2015, Krishna retires from the firm. On that date, their Balance Sheet was as follows:

The terms were:
(a) Goodwill of the firm was valued at ₹ 13,000.
(b) Expenses owing to be brought down to ₹ 3,750.
(c) Machinery and Loose Tools are to be valued at 10% less than their book value.
(d) Factory premises are to be revalued at ₹ 24,300.
Prepare:
1. Revaluation account
2. Partner’s capital accounts and
3. Balance sheet of the firm after the retirement of Krishna
Solution:

Question 13.
Suresh, Naresh, and Ramesh are partners sharing profits in the ratio of 3 : 2 : 1. Naresh retired from the firm due to his illness. On that date the Balance Sheet of the firm was as follows:
Books of Suresh, Naresh, and Ramesh Balance Sheet as on March 31, 2015.


Additional information:
(i) Premises have appreciated by 20%, stock depreciated by 10%, and provision for doubtful debts was to be made 5% on debtors.
(ii) Goodwill of the firm valued at ₹ 42,000.
(iii) ₹ 46,000 from Naresh’s capital account be transferred to his loan account and the balance be paid through the bank.
(iv) New profit sharing ratio of Suresh and Ramesh is decided to be 5 : 1.
Give the necessary ledger accounts and balance sheet of the firm after Naresh’s retirement.
Solution:

Question 14.
R, S, and T were carrying on business in partnership sharing profits in the ratio of 3 : 2 : 1 respectively. On March 31, 2015, the Balance Sheet of the firm stood as follows:

S retired on the above-mentioned date on the following terms:
(a) Buildings to be appreciated by ₹ 8,800.
(b) Provision for doubtful debts to be made @ 5% on debtors.
(c) Goodwill of the firm to be valued at ₹ 9,000.
(d) ₹ 5,000 to be paid to S immediately and the balance due to him is to be treated as a loan carrying interest @ 6% per annum.
Prepare the balance sheet of the reconstituted firm.
Solution:

Question 15.
The balance sheet of A, B, and C who were sharing the profits in proportion to their capitals stood on March 31, 2015.
Balance Sheet as on March 31, 2015

B retired on the date of the Balance Sheet and the following adjustments were to be made:
(a) Stock was depreciated by 10%.
(b) Factory building was appreciated by 12%.
(c) Provision for doubtful debts to be created upto 5%.
(d) Provision for legal charges to be made at Rs. 265.
(e) The goodwill of the firm is to be fixed at Rs. 10,000.
(f) The capital of the new firm is to be fixed at Rs. 30,000.
The continuing partners decide to keep their capitals in the new profit sharing ratio of 3 : 2. Work out the final balances in the capital accounts of the firm, and the amounts to be brought in and/or withdrawn by A and C to make their capitals proportionate to the new profit sharing ratio.
Solution:


Note: Capital of the new firm = ₹ 30,000
A’s capital should according to his share = \(\frac{3}{5}\) × 30,000 = ₹ 18,000
C’s capital = \(\frac{3}{5}\) × 30,000 = ₹ 12,000

Question 16.
N, S, and B are partners in firm sharing profits and losses in the ratio of 3 : 1 : 2. The Balance Sheet on April 1, 2015, was as follows:

B retires from the business and the partners agree to the following:
(a) Freehold premises and stock are to be appreciated by 20% and 15% respectively.
(b) Machinery and furniture are to be depreciated by 10% and 7% respectively.
(c) Bad debts reserve is to be increased to ₹ 1,500.
(d) Goodwill is valued at ₹ 21,000 on B’s retirement.
(e) The continuing partners have decided to adjust their capitals in their new profit-sharing ratio after the retirement of B. The capital requirement to continue the firm is ₹ 72,000. Surplus/deficit, if any, in their capital accounts will be adjusted.
Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.
Solution:


Note: Total capital of the firm = ₹ 72,000
The profit sharing ratio of N and S is 3 : 1
Capital of N = 72,000 × \(\frac{3}{4}\) = ₹ 54,000
Capital of S = 72,000 × \(\frac{1}{4}\) = ₹ 18,000

Question 17.
On December 31, 2014, the Balance Sheet of P, Q, and R showed as under:

The partnership deed provides that the profit be shared to the ratio of 2 : 1 : 1 and that in the event of the death of a partner, his executors are entitled to be paid out.
(a) The capital of his credit at the date of the last Balance Sheet.
(b) His proportion of reserves at the date of the last Balance Sheet.
(c) His proportion of profits to the date of death is based on the average profits of the last three completed years.
(d) By way of goodwill, his proportion of the total profits for the three preceding years.
The net profits for the last three years were:
2012 – 16,000; 2013 – 16,000; 2014 – 15,400.
R died on April 1, 2015. He had withdrawn ₹ 5,000 to the date of his death.
Prepare R’s Capital Account that of his executors.
Solution:
Working Notes:
(i) Share of profits (upto the date of death)

Average profits = \(\frac{47,400}{3}\) = ₹ 15,800
Share of profit upto 1st April 2015 = 15,800 × \(\frac{1}{4} \times \frac{3}{12}\) = ₹ 988

(ii) Goodwill:
Total profits = ₹ 47,400
Average profits = \(\frac{47,400}{3}\) = ₹ 15,800
R share of goodwill = 15,800 × \(\frac{1}{4}\) = ₹ 3,950

Question 18.
Following is the Balance Sheet of P, Q, and R as on March 31, 2014.

Q died on June 30, 2014. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:
(a) Amount standing to the credit of the Partner’s Capital account.
(b) Interest on capital at 5% per annum.
(c) Share of goodwill on the basis of twice the average of the past three year’s profit.
(d) Share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit.
Profits for the year ending on March 31, 2012, 2013, and 2014 were ₹ 12,000; ₹ 16,000, and ₹ 14,000 respectively. Profits were shared in the ratio of capital.
Pass the necessary journal entries and draw up Q’s capital account to be rendered to his executor.
Solution:
Working Notes:
(i) Interest on capital = 20,000 × \(\frac{5}{100} \times \frac{3}{12}\) = ₹ 250
(ii) Goodwill:
3 years profits = 12,000 + 16,000 + 14,000 = ₹ 42,000
Average profits = \(\frac{42,000}{3}\) = ₹ 14,000
Goodwill = 2 × 14,000 = ₹ 28,000
Share of goodwill = 28,000 × \(\frac{2}{7}\) = ₹ 8,000
Share of profit:
Profit of 2014 = 14,000 × \(\frac{2}{7} \times \frac{3}{12}\) = ₹ 1,000
Share in reserve = 16,000 × \(\frac{2}{7}\) = ₹ 4,571

Textual Examples

Question 1.
Naveen, Suresh, and Tarun are partners sharing profits and losses in the ratio of 5 : 3 : 2. Tarun retires from the firm, and his share was acquired by Naveen and Tarun in the ratio of 2 : 1. In such a case, calculate the new profit sharing ratio.
Solution:
The old ratio of Naveen, Suresh, and Tarun = 5 : 3 : 2
Gaining ratio of Naveen and Suresh after the retirement of Tarun = 2 : 1
New share of continuing partner = Old share + Acquired share from the outgoing partner
Share acquired by Naveen = \(\frac{2}{10} \times \frac{2}{3}=\frac{4}{30}\)
Naveen’s new share = \(\frac{5}{10}+\frac{4}{30}=\frac{15+4}{30}=\frac{19}{30}\)
Share acquired by Suresh = \(\frac{2}{10} \times \frac{1}{3}=\frac{2}{30}\)
Suresh’s new share = \(\frac{3}{10}+\frac{2}{30}=\frac{9+2}{30}=\frac{11}{30}\)
New ratio = \(\frac{19}{30}: \frac{11}{30}\)
Thus, the new profit sharing ratio of Naveen and Suresh will be = 19 : 11.

Question 2.
Anil, Dinesh, and Ganga are partners sharing profits in the ratio of 6 : 5 : 4. Dinesh retires. Anil and Ganga decide to share the profits of the new firm in the ratio of 3 : 2. Calculate the gaining ratio.
Solution:
The old ratio of all partners = 6 : 5 : 4
New ratio of continuing partners = 3 : 2
Gaining share of continuing partners = New share – Old share
Ami’s gaining share = \(\frac{3}{5}-\frac{6}{15}=\frac{9-6}{15}=\frac{3}{15}\)
Ganga’s gaining share = \(\frac{2}{5}-\frac{4}{15}=\frac{6-4}{15}=\frac{2}{15}\)
Gaining ratio = \(\frac{3}{15}: \frac{2}{15}\)
Thus, the gaining ratio of Anil and Ganga = 3 : 2

Question 3.
M, I, and G are partners sharing profits and losses in the ratio of 2 : 2 : 1 respectively. On March 31, 2015, their Balance Sheet was as under:


G retires on the above date. It was agreed that Machinery is valued at ₹ 1,40,000; Patents at ₹ 40,000; and Buildings at ₹ 1,25,000. Record the necessary journal entries and prepare the Revaluation Account.
Solution:

Question 4.
A, B, and Care partners in firm share profits in the ratio of 3 : 2 : 1. B retires. The goodwill of the firm is valued at ₹ 60,000 and the remaining partner A and C continue to share profits in the ratio of 3 : 1. Pass the journal entries under various alternatives:
(a) If goodwill is raised at full value and retained in books.
(b) If goodwill is raised at full value and written off immediately.
(c) If goodwill is raised to the extent of retiring partner’s share and written off immediately.
(d) If goodwill is not after in the firm’s books at all.
Solution:
(a) If goodwill is raised at full value and retained in books.

(b) If goodwill is raised at full value and written off immediately.

(c) If goodwill is raised to the extent of retiring partner’s share and written off immediately.

(d) If goodwill is not after in the firm’s book at all.

Working Notes:
Calculation of gaining ratio:
Old ratio of all partners = 3 : 2 : 1
New ratio of continuing ratio = 3 : 1
Gaining share of continuing partners = New share – Old share
A’s gaining share = \(\frac{3}{4}-\frac{3}{6}=\frac{9-6}{12}=\frac{3}{12}\)
C’s gaining share = \(\frac{1}{4}-\frac{1}{6}=\frac{3-2}{12}=\frac{1}{12}\)
Gaining ratio = \(\frac{3}{12}: \frac{1}{12}\)
Thus, the gaining ratio of A and C = 3 : 1

Question 5.
D, P, and R are partners sharing profits in the ratio of 5 : 3 : 2. Goodwill appears in the books at a value of ₹ 20,000. P retires from the business. Pass the necessary journal entries in the following cases:
(a) On the day of P’s retirement, goodwill is valued at ₹ 24,000 and
(b) At the time of retirement goodwill is valued ₹ 18,000.
Solution:
(a) On the day of P’s retirement, goodwill is valued at ₹ 24,000.

(b) At the time of retirement goodwill is valued ₹ 18,000.

Question 6.
John, Sundar, and Rao are partners in the firm sharing profits in the ratio of 2 : 1 : 1. John retired from the firm, and Sundar and Rao decided that the capital of the new firm will be fixed at ₹ 1,20,000. The capital accounts of Sundarand Rao show a credit balance of ₹ 82,000 and ₹ 41,000 respectively after making all the adjustments. Calculate the actual cash to be paid off or to be brought in by the continuing partners and pass the necessary journal entries.
Solution:
The new profit sharing ratio between Sundar and Rao = 2 : 1
Total capital of the firm = ₹ 1,20,000
New capital based on new ratio of Sundar = 1,20,000 × \(\frac{2}{3}\) = ₹ 80,000
Existing capital (after adjustments) = ₹ 82,000
Cash to be paid off = ₹ 2,000
New capital based on new ratio of Rao = 1,20,000 × \(\frac{1}{3}\) = ₹ 40,000
Existing capital (after adjustments) = ₹ 41,000
Cash to be paid off = ₹ 1,000
Journal entries in the books of Sundar and Rao

Question 7.
Geethika, Rishitha, and Pravalika are partners in a firm. Geethika retires from the firm. On her date of retirement, ₹ 50,000 becomes due to her.
Prepare necessary entries in the following cases:
1. When payment is made immediately;
2. When payment is not made immediately;
3. When they agree to pay 50% immediately.
Solution:
1. When payment is made immediately.

2. When payment is not made immediately.

3. When they agree to pay 50% immediately.

Question 8.
X, Y, and Z were partners in firm sharing profits in 3 : 2 : 1 ratio. On 31.3.2015, Z retires from the firm. On the date of Z’s retirement the balance sheet of the firm was as follows:

On Z’s retirement, it was agreed that;
(i) Premises will be appreciated by 5% and furniture will be appreciated by ₹ 2,000.
(ii) Stock will be depreciated by 10%.
(iii) Provision for bad debts was to be made at 10% on debtors.
(iv) Goodwill of the firm is valued at ₹ 48,000.
(v) Z’s amount will be paid by cheque.
Prepare Revaluation a/c, Partner’s capital a/cs and New Balance Sheet.
Solution:

Question 9.
Sai, Suresh, and Naresh were sharing profits in the ratio of 2 : 3 : 5. Balance sheet of Sai, Suresh, and Naresh has on March 31, 2015.

Suresh retires on the above date and the following adjustments are agreed upon his retirement.
1. Stock was valued at ₹ 1,80,000.
2. Furniture and fittings were valued at ₹ 90,000.
3. An amount of ₹ 12,000 was doubtful and a provision for the same was required.
4. Goodwill of the firm was valued at ₹ 2,00,000.
5. Suresh was paid ₹ 40,000 immediately on retirement and the balance was transferred to his loan account.
6. Sai and Naresh were to share future profits in the ratio of 3 : 2.
Prepare the Revaluation account, Capital account, and Balance Sheet of the Reconstituted firm.
Solution:

Question 10.
B, C, and D were partners in the firm sharing profits in the ratio of 5 : 4 : 1. the profit of the firm for the year ending on March 31, 2014, was ₹ 1,00,000. C dies on June 30, 2014. Calculate C’s share of profit and pass journal entry.
Solution:
Profit for the period from April 1 to June 30, 2014, shall be calculated as follows:
Total profit for the year ending on 31st March 2014 = ₹ 1,00,000
C’s share of profit = Preceding year’s profit × Proportionate period × Share of a deceased partner
= ₹ 1,00,000 × \(\frac{3}{12} \times \frac{4}{10}\)
= ₹ 10,000
The journal entry will be recorded as follows:

Question 11.
Anil, Bhanu, and Chandu were partners in firm sharing profits in the ratio of 5 : 3 : 2. On March 31, 2014, their Balance Sheet was as under:

Anil died on October 1, 2014. it was agreed between his executors and the remaining partners that:
(a) Goodwill to be valued at 2\(\frac{1}{2}\) years’ purchase of the average profits of the previous four years which were:
2010-11 – ₹ 13,000
2011-12 – ₹ 12,000
2012-13 – ₹ 20,000
2013-14 – ₹ 15,000
(b) Patents be valued at ₹ 8,000; Machinery at ₹ 28,000; and Building at ₹ 25,000.
(c) Profit for the year 2014-15 to be taken as having accrued at the same rate as that of the previous year.
(d) Interest on capital provided at 10% p.a.
(e) Half of the amount due to Anil is to be paid immediately.
Prepare Anil’s capital account and Anil’s executor’s account as on October 1, 2014.
Solution:

Working Notes:
1. Goodwill = Average Profit × 2\(\frac{1}{2}\) year’s purchase
Average profit for 4 years = ₹ 60,000 ÷ 4 = ₹ 15,000
Goodwill = 15,000 × \(\frac{5}{2}\) = ₹ 37,500
Anil’s share of goodwill = 37,500 × \(\frac{5}{10}\) = ₹ 18,750
This goodwill amount will adjust with 3 : 2 ratio between Bhanu and Chandu.

2. Profit from the date of last balance sheet to date of death (April 1, 2014, to October 1, 2014) = 6 months.
Profit for 6 months = ₹ 15,000 × \(\frac{6}{12}\) = ₹ 7,500
Anil’s share of profit = ₹ 7,500 × \(\frac{5}{10}\) = ₹ 3,750

3. Interest on Anil’s capital (April 1, 2014 to October 1, 2014) = ₹ 30,000 × \(\frac{10}{100} \times \frac{6}{12}\) = ₹ 1,500

Question 12.
You are given the Balance Sheet of Mohit, Sohan, and Rahul who are partners sharing profits in the ratio of 2 : 2 : 1, as on March 31, 2014.

Sohan died on June 15, 2014. According to the Deed, his legal representatives are entitled to:
(a) Balance in the capital account.
(b) Share of goodwill valued on the basis of thrice the average of the past 4 years’ profits.
(c) Share in profits up to the date of death on the basis of average profits for the past 4 years.
(d) Interest on capital account @ 12% p.a.
Profits for the year ending on March 31 of 2011, 2012, 2013 and 2014 were ₹ 15,000, ₹ 17,000, ₹ 19,000 and ₹ 13,000 respectively.
Mobit and Rahul continued as partners by taking over Sohan’s share equally. Work out the amount payable to Sohan’s legal representatives.
Solution:

Working Notes:
1. Goodwill = Average Profit × 3 year’s purchase
Average profit for 4 years = ₹ 64,000 ÷ 4 = ₹ 16,000
Goodwill = ₹ 16,000 × 3 = ₹ 48,000
Sohan’ share of goodwill = 48,000 × \(\frac{2}{5}\) = ₹ 19,200

2. Profit from the date of last balance sheet to date of death (April 1, 2014, to June 15, 2014) = 2\(\frac{1}{2}\) months.
Profit for 2\(\frac{1}{2}\) months = ₹ 16,000 × \(\frac{2.5}{12}\) = ₹ 3,333
Sohan’s share of profit = ₹ 3,333 × \(\frac{2}{5}\) = ₹ 1,333

3. Interest on Sohan’s capital (April 1, 2014) to June 15, 2014) = ₹ 25,000 × \(\frac{12}{100} \times \frac{2.5}{12}\) = ₹ 625

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 6th Lesson Admission of a Partner Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 6th Lesson Admission of a Partner

Very Short Answer Questions

Question 1.
What are the aspects that need adjustment at the time of admission of a new partner?
Answer:
When a new partner is admitted to the firm the agreement among the existing partners terminates and a new agreement will come into force.
The following adjustments must be made at the time of admission.

• New profit sharing ratio.
• Revaluation of assets and liabilities.
• Distribution of accumulated reserves, profits/losses.
• Treatment of goodwill.
• Adjustment of partners’ capitals.

Question 2.
Sacrificing Ratio
Answer:
The ratio in which the old partners agree to sacrifice their share of profit in favour of the incoming partner is called sacrificing ratio.
Sacrificing Ratio = Old share of Profit – New share of Profit.

Question 3.
Revaluation Account
Answer:
For the purpose of revaluation of assets and liabilities at the time of admission of a new partner, an account called a revaluation account is opened. It is a nominal account. The account is credited with all increases in the value of assets and decreases in the value of liabilities. Similarly, it is debited with a decrease in the value of assets and an increase in the value of liabilities. The balance of this account is again or lost on revaluation which is transferred to the old partners’ capital accounts in the old profit sharing ratio.

Question 4.
Goodwill
Answer:
Over a period of time, a well-established business develops the advantage of a good name and reputation which helps the business to earn more profits. The monetary value is called goodwill. It is regarded as an intangible asset. So, goodwill is the value of the reputation of a firm in respect of profits expected in the future over and above normal profits.

Question 5.
What are the methods of goodwill valuation?
Answer:
The important methods of valuation of Goodwill are:
1. Average profits method: Under this method, the goodwill is valued at an agreed number of years of the purchase of the average profits of the past few years.
Goodwill = Average profit × No. of years purchase

2. Super profit method: Super profit is the profit earned by the business in excess of the usual profit goodwill is valued by multiplying the super profit by the number of years purchased.

3. Capitalisation method: Under capitalisation method, the capitalized value of the business is determined by capitalizing the average profits by the normal rate of return. Out of the value so determined, the value of net assets/ capital employed is deducted, and the balance amount is the value of goodwill.

Textual Problems

Question 1.
M and N are partners sharing profit and losses in the 1 : 2 ratio. They have decided to admit ‘O’ by giving him 1/4th share in future profits. Calculate the New profit sharing ratio.
Solution:
If we assume the total share is 1
The new partners share is a \(\frac{1}{4}\)
Remaining share = 1 – \(\frac{1}{4}\) = \(\frac{3}{4}\)
Old Ratio = 1 : 2
New Share = Rest of the share × old ratio
M new share = \(\frac{3}{4} \times \frac{1}{3}=\frac{3}{12}\)
N new share = \(\frac{3}{4} \times \frac{2}{3}=\frac{6}{12}\)
O’s Share = \(\frac{1}{4}\) or \(\frac{3}{12}\)
New Share = 1 : 2 : 1

Question 2.
P & Q are partners sharing in the ratio of 2 : 3. They admit R for 1/4th share and he gets this share equally from P & Q. Calculate the new ratio.
Solution:
New partner R share \(\frac{1}{4}\)
He gets this equally from P and Q. That is \(\frac{1}{4} \times \frac{1}{2}=\frac{1}{8}\)
Old Ratio = 2 : 3
New Share = Old share – Sacrificing ratio
P = \(\frac{2}{5}-\frac{1}{8}=\frac{16}{40}-\frac{5}{40}=\frac{11}{40}\)
Q = \(\frac{3}{5}-\frac{1}{8}=\frac{24}{40}-\frac{5}{40}=\frac{19}{40}\)
R = \(\frac{1}{4}\) or \(\frac{10}{40}\)

Question 3.
X and Y share profits and losses in the Ratio of 4 : 3, they admit Z with 3/7th share; which he gets 2/7th from X and 1/7th from Y. What is the new profit sharing ratio?
Solution:
New partner Z’s share = \(\frac{3}{7}\) (This acquired \(\frac{2}{7}\) from X and \(\frac{1}{7}\) from Y)
Old ratio = 4 : 3
New share = Old share – Sacrificing ratio
X = \(\frac{4}{7}-\frac{2}{7}=\frac{2}{7}\)
Y = \(\frac{3}{7}-\frac{1}{7}=\frac{2}{7}\)
Z = \(\frac{3}{7}\)

Question 4.
A & B are partners sharing in the ratio of 3 : 2. C is admitted and he gets 3/20th from A and 1/20th from B. Calculate the new ratio.
Solution:
C’s share = \(\frac{4}{20}\) (Acquires \(\frac{3}{20}\) from A, \(\frac{1}{20}\) from B)
Old ratio = 3 : 2
New share = Old share – Sacrificing ratio
A = \(\frac{3}{5}-\frac{3}{20} \text { or } \frac{12}{20}-\frac{3}{20}=\frac{9}{20}\)
B = \(\frac{2}{5}-\frac{1}{20} \text { or } \frac{8}{20}-\frac{1}{20}=\frac{7}{20}\)
C = \(\frac{4}{20}\)
New ratio = 9 : 7 : 4

Question 5.
X & Y are partners who share profits in the ratio of 5 : 3. Z the new partner gets 1/5 of X’s share and 1/3rd of Y’s share. Calculate the new ratio.
Solution:
Z gets \(\frac{1}{5}\) share from X and \(\frac{1}{3}\) share from Y
Old ratio = 5 : 3
New ratio = Old ratio – Sacrificing ratio
X share = \(\frac{5}{8}-\frac{1}{5} \text { or } \frac{25}{40}-\frac{8}{40}=\frac{17}{40}\)
Y share = \(\frac{3}{8}-\frac{1}{3}=\frac{9}{24}-\frac{8}{24}=\frac{1}{24}\)
Z share = \(\frac{1}{5}+\frac{1}{3} \text { or } \frac{3}{15}+\frac{5}{15}=\frac{8}{15}\)

Question 6.
If Tarun and Nisha are partners sharing profits in the ratio of 5 : 3. What will be their sacrificing ratio if Rahul is admitted for 1/8 share of profit in the firm?
Solution:
Rahul share = \(\frac{1}{8}\)
Remaining share = 1 – \(\frac{1}{8}\) = \(\frac{7}{8}\)
New ratio:
Tarun = \(\frac{7}{8} \times \frac{5}{8}=\frac{35}{64}\)
Nisha = \(\frac{7}{8} \times \frac{3}{8}=\frac{21}{64}\)
Rahul \(\frac{1}{8}\) or \(\frac{8}{64}\)
Sacrificing ratio = Old ratio – New ratio
Tarun = \(\frac{5}{8}-\frac{35}{64} \text { or } \frac{40}{64}-\frac{35}{64}=\frac{5}{64}\)
Nisha = \(\frac{3}{8}-\frac{21}{64}=\frac{24}{64}-\frac{21}{24}=\frac{3}{24}\)
So Sacrificing ratio = 5 : 3

Question 7.
Amar and Bahadur are partners in firm sharing profits in the ratio of 5 : 2. They admitted Mary as a new partner for 1/4 share. The new profit sharing ratio of the partners will be 2 : 1 : 1. Calculate their sacrificing ratio.
Solution:
Old ratio = 5 : 2
New ratio = 2 : 1 : 1
Amar old ratio = \(\frac{5}{7}\)
Amar new ratio = \(\frac{2}{4}\)
Sacrificing ratio = old ratio – new ratio
Amar = \(\frac{5}{7}-\frac{2}{4}=\frac{20-14}{18}=\frac{6}{28}\)
Bahadur = \(\frac{2}{7}-\frac{1}{4}=\frac{8-7}{28}=\frac{1}{28}\)
∴ So sacrificing ratio = 6 : 1

Question 8.
Vijay and Sanjay are partners in the firm sharing profits and losses in the ratio of 1 : 2. They decide to admit Ajay into partnership with 1/4 share in profits. Ajay brings in ₹ 30,000 for capital and ₹ 15,000 for goodwill. Give necessary journal entries,
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
Solution:
(a) When the amount of goodwill is retained in the business.

(b) When the amount of goodwill is fully withdrawn

(c) When 50% of the amount of goodwill is withdrawn

Question 9.
A and B are partners sharing profits and losses equally. They admit C into partnership and the new ratio is fixed as 4 : 3 : 2. C is unable to bring anything for goodwill but brings ₹ 25,000 as capital. Goodwill of the firm is valued at ₹ 18,000. Give the necessary journal entries assuming that the partners do not want goodwill to appear on the Balance Sheet.
Solution:

Question 10.
Rahul and Gandhi are partners sharing profit in the ratio of 4 : 5. On 1st April 2015, they admit Sonia as a new partner for 1/6 share in profits. On that date, the balance sheet of the firm shows a balance of ₹ 60,000 in general reserve and a debit balance of Profit and Loss A/c of ₹ 25,000.
Make the necessary journal entries.
Solution:

Question 11.
A & B are equal partners in a firm. They decide to admit C as a new partner for 1/5th share in profit. On the date of admission the balance sheet of the firm was as follows:

The terms of the agreement on C’s admission were as follows:
(a) Building will be valued at ₹ 65,000 and machinery at ₹ 20,000
(b) Creditors included ₹ 1,000 no longer payable.
Pass necessary Journal entries for revaluation of assets and liabilities.
Solution:

Question 12.
Kama and Balaram are partners sharing profit and losses in the ratio of 4 : 1. Their Balance Sheet was as follows:
Balance Sheet of Kama and Balaram as of December 31st, 2014

Nikhil is admitted as a partner and assets are revalued and liabilities reassessed as follows:
(i) Create a Provision for doubtful debt on debtors at ₹ 800
(ii) Building and investment are appreciated by 10%.
(iii) Machinery is deprecated at 5%
(iv) Creditors were overestimated by ₹ 500
Make journal entries and Prepare a revaluation account before the admission of Nikhil.
Solution:

Question 13.
Balance Sheet of A and B as on 31.03.2014

The other terms of the agreement on C’s admission were as follows:
(i) C will bring ₹ 12,000 for his share of capital.
(ii) Building will be valued at ₹ 1,85,000 and Machinery at ₹ 40,000
(iii) A provision of 6% will be created for debtors with bad debts.
Prepare Revaluation Account and Partners Capital Accounts.
Solution:

Question 14.
The following is the balance sheet of Ram and Shyam, who are sharing profit as 2/3 and 1/3 on 31st March 2014.

They agree to admit Mohan into partnership on the following terms:
(a) Mohan was to be given 1/3 share in the profit and to bring ₹ 7,500 as his capital and ₹ 3,000 as his share of goodwill.
(b) That the value of stock and plant & Machinery was to be reduced by 5%.
(c) That a reserve of 10% was to be created in respect of Sundry Debtors.
(d) The buildings were to be depreciated by 10%.
Pass Journal Entries and necessary Accounts.
Solution:

Question 15.
A and B are partners in a firm, sharing profits and losses in the ratio of 5 : 3, on 31st December 2014 their Balance sheet was as under:

On the above date they decided to admit C as a partner on the following terms:
(a) C will bring ₹ 90,000 as his capital and ₹ 24,000 for his share of goodwill for 1/4th share in the profit.
(b) Machinery is to be valued at ₹ 1,50,000, stock ₹ 1,00,000, and provision for bad debts of ₹ 10,000 is to be created.
Prepare Revaluation A/c, partners’ capital A/c and new Balance Sheet.
Solution:

Question 16.
Rashmi and Pooja are partners in a firm. They share profits and losses in the ratio of 2 : 1. They admit Santoshi into a partnership firm on the condition that she will bring ₹ 1,50,000 for capital and she will be given 1/3 share in future profits. At the time of admission on the Balance Sheet of Rashmi and Pooja was as under.

It was decided to:
(a) Revaluate stock at ₹ 45,000.
(b) Depreciate furniture by 10% and machinery by 5%.
(c) Make provision of ₹ 3,000 on sundry debtors for doubtful debts.
Prepare Revaluation Accounts, Partners Capital Accounts, and Balance Sheet of the new firm.
Solution:

Question 17.
Venu & Venkat are partners in a business sharing profits and losses equally. Their Balance Sheet on 31-3-2014 stood as under;

They decided to admit Naidu into the firm on 1st April 2014 on the following terms and conditions:
(a) Naidu has to pay ₹ 1,25,000/- for 1/4 share in future profits.
(b) Naidu has to pay ₹ 38,000/- for goodwill.
(c) Plant and Machinery to be depreciated by 10%.
(d) Buildings to be appreciated by 20%.
(e) 5% reserve for doubt full debts to be created on debtors.
Prepare necessary accounts in the books of the firm after admission of Naidu with the new Balance Sheet.
Solution:

Question 18.
Rao and Raju are carrying on business in a partnership, sharing profit & loss in the ratio of 2 : 3. Their Balance sheet as of 31-12-2014 was as under.

On that day they admitted Reddy into partnership and gave him 1/6th share in the future profits on the following terms.
(a) Reddy is to bring in ₹ 1,50,000 as his capital and ₹ 50,000 as goodwill, which sum is to remain in the business.
(b) Stock and furniture are to be reduced in value by 5%.
(c) Buildings are to be appreciated by ₹ 25,000.
(d) A provision of 5% to be created on sundry debtor for doubtful debts.
Write Journal entries to record the above arrangement and show the opening Balance sheet of the new firm.
Solution:

Question 19.
Bhanu and Prasad are partners sharing profit and losses in the ratio of 3 : 2 respectively. Their Balance Sheet as on March 31, 2015, was as under:

On that date they admit Deepak into a partnership for 1/3 share in future profit on the following terms:
(i) Furniture and stock are to be depreciated by 10%.
(ii) Building is appreciated by ₹ 20,000.
(iii) 5% provision is to be created on Debtors for doubtful debts.
(iv) Deepak is to bring in ₹ 50,000 as his capital and ₹ 30,000 as goodwill.
Make necessary Ledger Account and Balance Sheet of the new firm.
Solution:

Question 20.
The following is the Balance sheet of Arun and Tarun sharing profit and losses in the ratio of 2 : 1.

They agreed to admit Vanin into partnership on the following terms:
(i) Varun to pay ₹ 9,000 as Goodwill.
(ii) Varun brings ₹ 11,000 as Capital for 1/4 share of profit in the business.
(iii) Budding and furniture to be depreciated at 5%. Stock is reduced by ₹ 1,600 and Bad Debt Reserve ₹ 1,300 to be provided for.
Prepare necessary ledger accounts and balance sheets after admission.
Solution:

Question 21.
A and B are partners in the firm sharing profits in the ratio 2 : 1. C is admitted into the firm with 1/4 share in profits. He will bring in ₹ 30,000 as capital and the capitals of A and B are to be adjusted in the profit sharing ratio. The Balance Sheet of A and B as on March 31, 2014 (before C’s admission) was as under:

Other terms of the agreement are as under:
1. C will bring in ₹ 12,000 as his share of goodwill.
2. Building was valued at ₹ 45,000 and Machinery at ₹ 23,000
3. A provision for bad debts is to be created @ 6% on debtors.
4. The capital accounts of A and B are to adjust.
Record necessary journal entries, show necessary ledger accounts, and prepare a Balance Sheet after C’s admission.
Solution:
Calculation of New profit sharing ratio:
C’s share = \(\frac{1}{4}\)
Remaining share = 1 – \(\frac{1}{4}\) = \(\frac{3}{4}\)
Old ratio = \(\frac{2}{3}: \frac{1}{3}\)
New profit sharing ratio
A = \(\frac{2}{3} \times \frac{3}{4}=\frac{6}{12}\)
B = \(\frac{1}{3} \times \frac{3}{4}=\frac{3}{12}\)
C s share = \(\frac{1}{4} \text { or } \frac{3}{12}\)
A’s Capital = \(\frac{2}{4} \times \frac{4}{1} \times 30,000\) = 60,000
B’s Capital for \(\frac{1}{4}\) share = 30,000

Question 22.
Ashish and Pankaj are partners sharing profit in the ratio of 5 : 2, their Balance sheet on March 31, 2015, was as follows:

They admitted Gurudeep into partnership on the following terms on March 31, 2015.
(a) New profit sharing ratio is agreed upon as 3 : 2 : 1.
(b) He will bring in ₹ 1,00,000 as his shared capital and ₹ 30,000 as his share of goodwill.
(c) Machinery is appreciated by 10%
(d) Stock is valued at ₹ 87,000.
(e) Creditors are unrecorded to the extent of ₹ 6,000
(f) A provision for doubtful debts is to be created by 4% on debtors.
Prepare the Revaluation account, Capital Accounts, Bank account, and Balance Sheet of the new firm after the admission of Gurdeep.
Solution:

Question 23.
The Balance Sheet of Sarath and Sindhu as of 31.12.2014 who are sharing profits and losses in the ratio of 4 : 1 is as follows:

They have agreed to admit Sameer under the following conditions:
(a) Sameer has to bring the capital of ₹ 2,00,000 for his 1/5th share of profits.
(b) Furniture and stock have to be depreciated by 10% and a reserve of 5% have to be created on debtors for bad and doubtful debts.
(c) Land and Buildings have to be appreciated by 20%.
(d) Goodwill has to be raised by ₹ 80,000.
Prepare necessary ledger A/c and the balance sheet of the new firm.
Solution:

Question 24.
Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2014. A and B are sharing profits and losses in the ratio of 2 : 1.

C is admitted as a partner on the date of the balance sheet on the following terms:
(i) C will bring in ₹ 1,00,000 as his capital and ₹ 60,000 as his share of goodwill for 1/4 share in the profits.
(ii) Plant is to be appreciated to ₹ 1,20,000 and the value of buildings is to be appreciated by 10%.
(iii) Stock is found overvalued by ₹ 4,000.
(iv) A provision for bad and doubtful debts is to be created at 5% of debtors.
(v) Creditors were unrecorded to the extent of ₹ 1,000.
Pass the necessary journal entries, prepare the revaluation account and partners’ capital accounts, and show the Balance Sheet after the admission of C.
Solution:

Question 25.
Following is the Balance Sheet of Satyam and Murthi sharing profit as 3 : 2.

On admission of Tayaru for 1/6th share in the profit, it was decided that:
(i) Provision for doubtful debts to be increased by 1,500.
(ii) Value of land and buildings to be increased to 21,000.
(iii) Value of stock to be increased by 2,500.
(iv) The liability of the workmen’s compensation fund was determined to be 12,000.
(v) Tayaru brought in as her share of goodwill 10,000 in cash.
(vi) Tayaru was to bring further cash of 15,000 for her capital.
Prepare Revaluation AJc, Capital A/c, and the Balance Sheet of the new firm.
Solution:

Question 26.
Ramesh, Suresh, and Naresh are partners sharing profits and losses in the ratio of 1 : 2 : 3. On 31st March 2014, their Balance Sheet was as follows;

They admit Dinesh into partnership on the following terms:
(i) Furniture and Machinery to be depreciated by 5%.
(ii) Stock is evaluated at 48,000.
(iii) Outstanding rent amount to 1,880
(iv) Dinesh to bring 32,000 towards his capital for 1/6th share.
Prepare the Revaluation Account, Partners Capital Accounts, and Balance Sheet of the new firm.
Solution:

Question 27.
Ashish and Dattu were partners in the firm sharing profits in 3 : 2 ratio. On Jan 01, 2014, they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dattu as on Jan. 01, 2014, was as follows:

It was agreed that:
(i) The value of Land and Buildings be increased by ₹ 15,000.
(ii) The value of the plant be increased by ₹ 10,000.
(iii) Goodwill of the firm be valued at ₹ 20,000
(iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the new firm.
Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimal’s admission.
Solution:



Note: Vimal is given a share of \(\frac{1}{5}\).
The remaining share is 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
The total capitals of Ashish and Dattu after adjustments for \(\frac{4}{5}\) share = 1,60,000 (1,07,000 + 53,000)
The capital to be brought by Vimal for \(\frac{1}{5}\) share = \(\frac{1}{5} \times \frac{5}{4} \times 1,60,000\) = ₹ 40,000

Question 28.
The following was the Balance Sheet of Arun, Bhanu, and Charan sharing profits and losses in the ratio of 6 : 5 : 3 respectively.

They agreed to take Deepak into partnership and give him a share of 1/8 on the following terms:
(a) that Deepak should bring in ₹ 4,200 as goodwill and ₹ 7,000 as his Capital;
(b) that furniture be depreciated by 12%;
(c) that stock be depreciated by 10%;
(d) that a Reserve of 5% be created for doubtful debts;
(e) that the value of land and buildings having appreciated being brought upto ₹ 31,000;
(f) that after making the adjustments the capital accounts of the old partners be adjusted on the basis of the proportion of Deepak’s Capital to his share in the business, i.e., actual cash to be paid off, or brought in by the old partners as the case may be.
Prepare Necessary Accounts and the Opening Balance Sheet of the new firm.
Solution:
Old profit sharing ratio = \(\frac{6}{14}: \frac{5}{14}: \frac{3}{14}\)
Share given to Deepak = \(\frac{1}{8}\)
Remaining share = 1 – \(\frac{1}{8}\) = \(\frac{7}{8}\)
New profit sharing ratio
Arun = \(\frac{7}{8} \times \frac{6}{14}=\frac{42}{112}\)
Babu = \(\frac{7}{8} \times \frac{5}{14}=\frac{35}{112}\)
Charan = \(\frac{7}{8} \times \frac{3}{14}=\frac{21}{112}\)
Deepak = \(\frac{1}{8} \text { or } \frac{14}{112}\)
Total Ratio = 6 : 5 : 3 : 2
Arun capital = \(\frac{6}{16} \times \frac{16}{2} \times 7000\) = 21,000
Babu capital = \(\frac{5}{16} \times \frac{16}{2} \times 7000\) = 17,500
Charan capital = \(\frac{3}{16} \times \frac{16}{2} \times 7000\) = 10,500

Textual Examples

Case 1: If the new partner share is given along with the old ratio

Question 1.
Anil and Vishal are partners sharing profits in the ratio of 3 : 2. They admitted Sumit as a new partner for 1/5 share in the future profits of the firm. Calculate the new profit sharing ratio of Anil, Vishal, and Sumit.
Solution:
If we assume the total share is 1
The new partner sumit’s share = \(\frac{1}{5}\) share out of 1
Rest of the share = 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
Old Ratio = 3 : 2
New Share = Rest of the share × old share
Anil’s new share = \(\frac{4}{5} \times \frac{3}{5}=\frac{12}{25}\)
Vishal’s new share = \(\frac{4}{5} \times \frac{2}{5}=\frac{8}{25}\)
New Ratio = \(\frac{12}{25}: \frac{8}{25}: \frac{1}{5}\)
New profit sharing ratio of Anil, Vishal, and Sumit = 12 : 8 : 5

Case 2: If the new partner gets his share equally from the old partner

Question 2.
Akshay and Bharat are partners sharing profits in the ratio of 3 : 2. They admit Dinesh as a new partner for 1/5th share in the future profits of the firm which he gets equally from Akshay and Bharat. Calculate the new profit-sharing ratio of Akshay, Bharat, and Dinesh.
Solution:
New partner Dinesh’s share = \(\frac{1}{5}\)
This is shared equally between Akshay and Bharat,
i.e., 1/2 of the Dinesh share = \(\frac{1}{5} \times \frac{1}{2}\) = \(\frac{1}{10}\) from each partner.
Old Ratio = 3 : 2
New share = Old share – Sacrificing share
Akshay’s new share = \(\frac{3}{5}-\frac{1}{10}=\frac{5}{10}\)
Bharat’s new share = \(\frac{2}{5}-\frac{1}{10}=\frac{3}{10}\)
New Ratio = \(\frac{5}{10}: \frac{3}{10}: \frac{1}{5}\)
The new profit sharing ratio among Akshay, Bharat, and Dinesh will be 5 : 3 : 2

Case 3: If the profit share of a new partner takes a particular ratio from the old partner

Question 3.
Anusha and Nitu are partners sharing profits in the ratio of 3 : 2. They admitted Jyoti as a new partner for 3/10 shares, which she acquired 2/10 from Anusha and 1/10 from Nitu. Calculate the new profit-sharing ratio of Anusha, Nitu, and Jyoti.
Solution:
New partner Jyoti’s share = \(\frac{3}{10}\) (this acquired 2/10 from Anusha and 1/10 from Nitu)
Old Ratio = 3 : 2
New share = Old share – Sacrificing share
Anusha’s new share = \(\frac{3}{5}-\frac{2}{10}=\frac{4}{10}\)
Nitu’s new share = \(\frac{2}{5}-\frac{1}{10}=\frac{3}{10}\)
The new ratio = \(\frac{4}{10}: \frac{3}{10}: \frac{3}{10}\)
The new profit sharing ratio among Anusha, Nitu, and Jyoti will be 4 : 3 : 3.

Case 4: If the old partners sacrifice a particular proportion of their shares to a new partner

Question 4.
Ram and Shyam are partners in firm sharing profits in the ratio of 3 : 2. They admit Ganesh as a new partner. Ram surrenders 1/4 of his share and Shyam 1/3 of his share in favour of Ganesh. Calculate the new profit-sharing ratio of Ram, Shyam, and Ganesh.
Solution:
New partner Ganesh’s profit share = 1/4 of Ram’s share + 1/3 of Shyam’s share
= \(\frac{3}{5} \times \frac{1}{4}+\frac{2}{5} \times \frac{1}{3}\)
= \(\frac{3}{20}+\frac{2}{15}\)
= \(\frac{17}{60}\)
Old Ratio = 3 : 2
Ram’s new share = Old Share – Scarifying Share
= \(\frac{3}{5}-\frac{3}{20}\)
= \(\frac{9}{20}\)
Shyam’s new share = \(\frac{2}{5}-\frac{2}{15}\)
= \(\frac{4}{15}\)
New ratio = \(\frac{9}{20}: \frac{4}{15}: \frac{17}{60}\)
The new profit sharing ratio among Ram, Shyam, and Ganesh will be 27 : 16 : 17

Case 5: If the new partner share takes entire from one partner

Question 5.
Das and Sinha are partners in the firm sharing profits in 3 : 2 ratio. They admitted Pal as a new partner for 1/4 share in the profits, which he acquired wholly from Das. Determine the new profit-sharing ratio of the partners.
Solution:
New partner Pal’s share = \(\frac{1}{4}\)
Das’s new share = \(\frac{3}{5}-\frac{1}{4}=\frac{7}{20}\)
Sinha’s old and new share = \(\frac{2}{5}\)
New ratio = \(\frac{7}{20}: \frac{2}{5}: \frac{1}{4}\)
The new profit sharing ratio among Das, Sinha, and Pal will be 7 : 8 : 5

Question 6.
Rohit and Mohit are partners in firm sharing profits in the ratio of 5:3. They admit Sarma as a new partner for 1/7 share in the profit. The new profit sharing ratio will be 4 : 2 : 1. Calculate the sacrificing ratio of Rohit and Mohit.
Solution:
Rohit and Mohits’s old Ratio = 5 : 3
Rohit, Mohit, and Sarmas’ New Ratio = 4 : 2 : 1
Rohit’s old share = \(\frac{5}{8}\)
Rohit’s new share = \(\frac{4}{7}\)
Sacrifice share = Old Share of Profit – New Share of Profit
Rohit’s sacrifice share = \(\frac{5}{8}-\frac{4}{7}=\frac{3}{56}\)
Mohit’s old share = \(\frac{3}{8}\)
Mohit’s new share = \(\frac{2}{7}\)
Mohit’s sacrifice share = \(\frac{3}{8}-\frac{2}{7}=\frac{5}{56}\)
Sacrificing ratio = \(\frac{3}{56}: \frac{5}{56}\)
Sacrificing ratio of Rohit and Mohit will be 3 : 5
Note: The old partner’s sacrificing ratio is equal to the old ratio if the new partner’s share is given along with the old ratio (i.e. case – I).

Question 7.
R and S are partners, sharing profits in the ratio of 1 : 2. T admits for 1/5 share. State the sacrificing ratio.
Solution:
If we assume the total share is 1
The new partner T’s share = \(\frac{1}{5}\) share out of 1
Rest of the share = 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
Old Ratio = 1 : 2
New Share = Rest of the share × old share
R’s new share = \(\frac{4}{5} \times \frac{1}{3}=\frac{4}{15}\)
S’ s new share = \(\frac{4}{5} \times \frac{2}{3}=\frac{8}{15}\)
Sacrifice share = Old Share of Profit – New Share of Profit
R’s sacrificing share = \(\frac{1}{3}-\frac{4}{15}=\frac{1}{15}\)
S’s sacrificing share = \(\frac{2}{3}-\frac{8}{15}=\frac{2}{15}\)
Sacrificing Ratio = \(\frac{1}{15}: \frac{2}{15}\)
Sacrificing ratio of R and S = 1 : 2

Question 8.
Following is the Balance Sheet of Anusha and Pranusha sharing profit as 3 : 2.

On admission of Tanusha for 1/6th share in the profit, it was decided that
(i) Provision for doubtful debts to be created by ₹ 1,500.
(ii) Value of land and building to be increased to ₹ 21,000.
(iii) Value of stock to be increased to ₹ 13,500.
(iv) Tanusha was to bring further cash of ₹ 15,000 for her capital.
Prepare Revaluation A/c and Capital Accounts.
Solution:

Question 9.
Following is the Balance Sheet of A and B who share profits in the ratio of 3 : 2.
Balance Sheet of A and B as on April 1, 2015

On that date C is admitted into the partnership on the following terms:
1. C is to bring in ₹ 15,000 as capital for 1/6 share.
2. The value of a stock is reduced by 10% while plant and machinery are appreciated by 10%.
3. Furniture is revalued at ₹ 9,000.
4. A provision for doubtful debts is to be created on sundry debtors at 5%.
5. Investment worth ₹ 1,000 and electricity bills outstanding ₹ 200 (not mentioned in the balance sheet) are to be taken into account.
6. A creditor of ₹ 100 is not likely to claim his money and is to be written off.
Record journal entries and prepare the Revaluation Account, Partners’ Capital Account, and New Balance Sheet of the firm.
Solution:

Question 10.
Rajendra and Surendra are partners in a firm sharing profits in the ratio of 4 : 1. On April 1, 2015, they admit Narendra as a new partner. On that date, there was a balance of ₹ 20,000 in general reserve and a debit balance (loss) of ₹ 10,000 in the profit and loss account of the firm. Pass necessary journal entries regarding adjustment of accumulated profit or loss.
Solution:
Journals in the Books of Rajendra, Surendra and Narendra

Question 11.
A & B are partners in a firm, sharing Profits and Loss in the ratio of 5 : 3. On 31 Dec 2014 their Balance Sheet was as under;
Balance Sheet as of 31st Dec 2014

On the above date they decided to admit C as a new partner on the following terms;
(a) A, B, and C’s new profit sharing ratio will be 7 : 5 : 4
(b) C will bring ₹ 1,00,000 as his capital.
(c) Machine is to be valued at ₹ 1,50,000, Stock ₹ 1,00,000, and a provision for the doubtful debt of ₹ 10,000 is to be created.
Prepare Revaluation A/c, Partners’ Capital A/C, and new Balance Sheet of the firm.
Solution:

Question 12.
The profit for the five years of a firm are as follows – year 2009 ₹ 4,00,000; year 2010 ₹ 3,98,000; year 2011 ₹ 4,50,000; year 2012 ₹ 4,45,000 and year 2013 ₹ 5,00,000. Calculate goodwill of the firm on the basis of 4 years purchase of 5 years average profits.
Solution:

= \(\frac{21,93,000}{5}\)
= ₹ 4,38,600
Goodwill = Average Profit × No. of years’ purchase
= ₹ 4,38,600 × 4
= ₹ 17,54,400
2. Super Profit Method: Super Profit is the profit earned by the business that is in excess of the normal profit. Goodwill is determined by multiplying the super profit by the number of years’ purchase.
Normal Profit = Capital Employed × Normal Rate of Return /100.
Actual Profit = This is the profit earned by the firm during the year or it is also taken as the average of the last few years’ profit.
Super Profit = Actual Profit – Normal Profit.
Goodwill = Super Profit × No. of Years’ Purchase.

Question 13.
A firm earns a profit of ₹ 65,000 on a capital of ₹ 4,80,000 and the normal rate of return in a similar business is 10%. 3 years’ purchase value of super profit will be treated as goodwill.
Solution:
Normal Profit = Capital employed × Normal rate of return/100
= 4,80,000 × 10/100
= 48,000
Actual Profit = ₹ 65,000
Super Profit = Actual profit – Normal profit
= ₹ 65,000 – ₹ 48,000
= ₹ 17,000
Goodwill = Super Profit × No. of Years’ Purchase
= 17,000 × 3
= ₹ 51,000

Question 14.
A firm earned average profit during the last few years is ₹ 40,000 and the normal rate of return in a similar business is 10%. The total assets are ₹ 3,60,000 and outside liabilities are ₹ 50,000. Calculate the value of goodwill with the help of the Capitalisation of the Average profit method.
Solution:
Capital employed = Total assets – Outside liabilities
= ₹ 3,60,000 – ₹ 50,000
= ₹ 3,10,000
Capitalised value of average profit = Average Profit × 100 / Normal rate of profit
= ₹ 40,000 × 100 /10
= ₹ 4,00,000
Goodwill = Capitalised value – Capital employed
= ₹ 4,00,000 – ₹ 3,10,000
= ₹ 90,000

Question 15.
Sunil and Gavaskar are partners in the firm sharing profits and losses in the ratio of 5 : 3. Sachin is admitted to the firm for 1/5 share of profits. He is to bring in ₹ 20,000 as capital and ₹ 4,000 as bis share of goodwill. Give the necessary journal entries,
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is hilly withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
Solution:
(a) When the amount of goodwill is retained in the business.

(b) When the amount of goodwill is fully withdrawn.


(c) When 50% of the amount of goodwill is withdrawn.

Question 16.
Srikant and Ramana are partners in the firm sharing profits and losses in the ratio of 3 : 2. They decide to admit Venkat into a partnership firm with 1/3 share in the profits. Venkat brings in ₹ 30,000 as his capital. On the date of admission, the goodwill has been valued at ₹ 24,000. Record the necessary journal entries in the books of the firm.
Solution:

Question 17.
Dinesh and Ramesh are partners in the firm sharing profits and losses in the ratio of 3 : 2. They decided to admit Vasu as a partner with 1/5 share in the profits. Their Balance Sheet as on March 31, 2015, was as follows:

It was also decided that:
1. The fixed assets should be valued at ₹ 3,31,000.
2. A provision of 5% on sundry debtors to be made for doubtful debts.
3. The value of stock be reduced to ₹ 1,12,000.
4. Vasu brings ₹ 75,000 as capital and ₹ 15,000 as Goodwill.
Prepare the revised Balance sheet of the firm after admission of the partner.
Solution:

Question 18.
M and N were partners in the firm sharing profits in 5 : 3 ratios. They admitted O as a new partner for 1/3rd share in the profits. O was to contribute ₹ 20,000 as his capital. The Balance Sheet of M and N as of 1.4.2015 was as follows:

Other terms agreed upon were:
(i) Goodwill of the firm was valued at ₹ 12,000.
(ii) Land and buildings were to be valued at ₹ 35,000 and Plant and Machinery at ₹ 25,000.
(iii) The provision for doubtful debts was found to be in excess of ₹ 400.
(iv) A liability for ₹ 1,000 included in sundry creditors was not likely to arise.
Prepare the Revaluation Account, Partners’ Capital Accounts, and the Balance sheet of the new firm.
Solution:

Question 19.
A and B are partners in a firm who are sharing profits in the ratio of 2 : 1. C is admitted into the firm for 1/5 share in profits and he is to bring in cash of ₹ 40,000 amount as his capital. The capitals of other partners are to be adjusted according to the new partner. The capital of A and B after all adjustments are ₹ 1,00,000 and ₹ 70,000 respectively. Calculate the new capitals of A and B, and record the necessary journal entries.
Solution:
Calculation of new profit sharing ratio:
If we assume the total share is 1
The new partner C’s share = \(\frac{1}{5}\) share out of 1
Rest of the share = 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
A’s new share = \(\frac{4}{5} \times \frac{2}{3}=\frac{8}{15}\)
B’s new share = \(\frac{4}{5} \times \frac{1}{3}=\frac{4}{15}\)
New partner C’s capital for 1/5th share = 40,000
The total capital of the firm = 40,000 × \(\frac{5}{1}\) = ₹ 2,00,000
A’s new capital = 2,00,000 × \(\frac{8}{15}\) = ₹ 1,06,667
B’s new capital = 2,00,000 × \(\frac{4}{15}\) = ₹ 53,333
Hence, a will bring in ₹ 6,667 (₹ 1,06,667 – ₹ 1,00,000)
B will withdraw ₹ 16,667 (₹ 70,000 – ₹ 53,333)
The journal entries in this regard will be recorded as follows:

Question 20.
A and B share profits in the proportions of 3/5 and 2/5. Their Balance Sheet on Dec. 31, 2014, was as follows:

On that date C was admitted into partnership on the following terms:
(a) That C pays ₹ 10,000 as his capital and ₹ 5,000 as goodwill for his 1/6th share in profits.
(b) That stock and fixtures be reduced by 10% and 5% provision for doubtful debts be created on Sundry Debtors and Bills Receivables.
(c) That the value of land and buildings be appreciated by 20%.
Prepare necessary Accounts and the new Balance Sheet on the admission of C.
Solution:

Question 21.
On 31st March 2014, the Balance sheet of P and Q shared profits in 3 : 2 ratio was as follows:

On that date, R was admitted as a partner on the following conditions:
(a) R will get a 4/15th share of profits. R had to bring ₹ 60,000 as his capital.
(b) The assets would be revalued as under:
Sundry debtors at book value less 5% provision for bad debts. Stock at ₹ 40,000, plant and Machinery at ₹ 80,000.
Prepare Revaluation A/c, Partner’s Capital A/c, and the Balance Sheet of the new firm.
Solution:

Question 22.
Sanjay and Ramaswamy were partners in a firm sharing the profits in the ratio of 2 : 3. On 31-03-2015 they admitted Mehra as a new partner for 1/5th share in the profits. Their balance sheet was as follows:

On Mehra’s admission, it was agreed that:
1. Mehra will bring ₹ 4,00,000 as his capital and ₹ 16,000 for his share of goodwill, half of which was withdrawn by Sanjay and Ramaswamy.
2. A provision of 5% for bad and doubtful debts was to be created.
3. A provision was to be made for outstanding telephone bills of ₹ 3,000.
4. Land and Buildings are valued at ₹ 3,50,000.
After the above adjustments prepare the necessary accounts and the new balance sheet.
Solution:

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 5th Lesson Partnership Accounts Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 5th Lesson Partnership Accounts

Very Short Answer Questions

Question 1.
Define Partnership.
Answer:
Section 4 of the Indian Partnership Act, of 1932 defines partnership as “The relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”.

Question 2.
What are the features of a Partnership firm?
Answer:
The essential features of a partnership are

• There must be atleast two persons to form a partnership.
• The partnership is the result of an agreement.
• The agreement should be to carry on some business.
• The partnership may be carried on by all partners or any one of them acting for all.
• The partner should share the profits and losses of the business.
• The liability of partners is joint, several, and unlimited.

Question 3.
What is meant by a partnership deed?
Answer:
The document which contains the terms and conditions of the agreement is called the partnership deed.

Question 4.
Why it is important to have a partnership deed in writing?
Answer:
The partnership comes into existence as a result of an agreement. The agreement or partnership deed may be oral or written. A written agreement is safe to settle disputes between the partners that may arise in the future.

Question 5.
In the absence of a partnership deed, what are the rules applicable to a partnership firm?
Answer:
When there is no agreement among the partners, the following rules will be applicable as per section 13 of the partnership Act.

• Profits and Losses are shared equally by the partners.
• Interest on capital will not be allowed.
• No interest will be charged on the drawings of partners.
• No salary or commission will be allowed to any partner.
• If any partner has given a loan to the firm, he is entitled to get interest @ 6% per annum.

Question 6.
Why is the Profit and Loss Appropriation Account prepared? Explain.
Answer:
The profit and Loss Appropriation Account is merely an extension of the Profit and Loss Account. It shows how the profits are appropriated or distributed among the partners. All adjustments in respect of partners are made through this account. It starts with the profit/loss as per P & L a/c transferred to this account.

Question 7.
What do you understand by the fixed capital of the partners?
Answer:
Under the fixed capital method, the capitals of the partners shall remain fixed unless additional capital is introduced or a part of the capital is withdrawn as per agreement among the partners. Items like a share of profit/ loss, interest on capital, drawings, interest on drawings, etc., are recorded in a separate account called partner current account.

Question 8.
How do you understand by fluctuating capital of partners?
Answer:
Under the fluctuating capital method, only one account i.e., the capital account is maintained for each partner. All the adjustments such as share of profit/loss, interest on capital, drawings, interest on drawings, salary etc., are recorded directly in this account. This makes the balance in the capital account fluctuate from time to time which is why it is called as fluctuating capital method.

Question 9.
How will you deal with the following terms while preparing partnership accounts?
(i) Interest on Capital
(ii) Interest on Drawings
(iii) Interest on Loan
Answer:
(i) Interest on Capital: The interest on partner capital is not allowed unless it is specifically mentioned in the partnership deed. It should be calculated on a time basis after considering additional capital or withdrawal of capital.

(ii) Interest on Drawings: Interest on drawings is charged by the firm only when it is clearly mentioned in the partnership deed. It is calculated with reference to the period of time for which the money was withdrawn.

(iii) Interest on Loan: When the partner gives a loan to the firm, it should be credited to a separate loan account and calculated interest as per the interest rate in the agreement. In the absence of an agreement, the partnership Act provides that interest @ 6% p.a. shall be allowed on such loan irrespective of the profit.

Textual Exercise

Question 1.
Ram and Shyam started a partnership firm on 1st January 2014. Their capital contributions were ₹ 2,00,000 and ₹ 1,00,000 respectively. The partnership deed provided:
(i) Interest on capitals @10% p.a.
(ii) Ram to get a salary of ₹ 2,000 p.a. and Shyam ₹ 3,000 p.a.
(iii) Profits are to be shared in the ratio of 1 : 2.
The profits for the year ended 31st December 2014 before making the above appropriations were ₹ 2,16,000. Prepare Profit and Loss Appropriation Account.
Solution:

Question 2.
Lakshmi and Bhuvaneswari are partners with capitals of ₹ 15,00,000 and ₹ 10,00,000 respectively. They agree to share profits in the ratio of 3 : 2. Show how the following transactions will be recorded in the capital accounts of the partners in case the capitals are fixed. The books are closed on March 31, every year.
Solution:

Question 3.
On March 31, 2013, after the close of books of accounts, the capital accounts of Seenu, Prasad, and Sudarsan showed balances of ₹ 24,000, ₹ 18,000, and ₹ 12,000 respectively. After all adjustments profit for the year ended March 31, 2014, amounted to ₹ 36,000 and the partner’s drawings had been Seenu, ₹ 3,600; Prasad, ₹ 4,500 and Sudarsan, ₹ 2,700. The interest on capital @ 8% and the profit sharing ratio of Seenu, Prasad, and Sudarsan was 3 : 2 : 1. Prepare Partners’ Capital Accounts.
Solution:

Question 4.
Venu and Subbu are partners sharing profits in the ratio of 3 : 2, with capitals of ₹ 1,00,000 and ₹ 60,000 respectively. Interest on capital is agreed @ 10% p.a. Subbu is to be allowed an annual salary of ₹ 2,500. During the year 2014-15, the profits prior to the calculation of interest on capital but after charging Subbu’s salary amounted to ₹ 22,500.
Prepare the Profit and Loss Appropriation Account and the partners’ capital account for the year ending March 31, 2015.
Solution:

Question 5.
A and B are partners sharing profits in the ratio of 3 : 2, with capitals of ₹ 50,000 and ₹ 30,000 respectively. Interest on capital is agreed to be paid @ 6% p.a. Calculate interest on capital.
Solution:
Calculation of Interest on Capital:
A: 50,000 × \(\frac{6}{100}\) = ₹ 3,000
B: 30,000 × \(\frac{6}{100}\) = ₹ 1,800

Question 6.
P and Q are partners sharing profits and losses in the ratio of 3 : 2. On 1st April 2014 their capital balances was ₹ 50,000 and ₹ 40,000 respectively. On 1st July 2014, P brought ₹ 10,000 as his additional capital, whereas Q brought ₹ 20,000 as additional capital on 1st October 2014. Interest on capital was provided @ 10% p.a. Calculate the interest on capital of P and Q on 31st March 2015.
Solution:
Calculation of Interest on Capital:

Question 7.
Rama and Krishna are partners sharing profits and losses in the ratio of 5 : 1. Their capitals at the end of the financial year 2013-14 were ₹ 1,50,000 and ₹ 75,000. On October 1st, 2014 Rama and Krishna brought additional capitals of ₹ 16,000 and ₹ 14,000 respectively. On November 1st, 2014 Rama withdrew ₹ 6,000 and on December 1st, 2014 Krishna withdrew ₹ 9,000 from their capitals. Calculate interest on capital @ 15% p.a. for the year 2014-15.
Solution:
Calculation of Interest on Capital:

Question 8.
Priya and Mani are partners, sharing profits and losses in the ratio of 5 : 3. The balances in their capital accounts as on April 1, 2013, were; Priya, ₹ 6,00,000, and Mani, ₹ 8,00,000. Calculate interest on capital;
(a) when there is no agreement in respect of interest on capital, and
(b) when there is an agreement that the interest on capital will be allowed @ 7% p.a.
Solution:
(a) No interest on capital.
(b) Priya: 6,00,000 × \(\frac{7}{100}\) = ₹ 42,000
Mani: 8,00,000 × \(\frac{7}{100}\) = ₹ 56,000

Question 9.
Mohith is a partner, who withdrew ₹ 5,500 at the end of June 2014. The Partnership deed provides for charging the interest on drawings @ 12% p.a. Calculate interest on Mohith’s drawings for the year ending 31st December 2014.
Solution:
Mohit interest on drawings = 5,500 × \(\frac{12}{100} \times \frac{6}{12}\) = ₹ 330

Question 10.
Amar and Gul are partners in a firm. They share profits in the ratio of 3 : 2. As per their partnership agreement, interest on drawings is to be charged @10% p.a. Their drawings during 2014 were ₹ 24,000 and ₹ 16,000, respectively. Calculate interest in drawings.
(Hint: If the date of Drawings is not given in the question, interest on drawings will be charged an average period of 6 months.)
Solution:
Calculation of interest on drawings:
Amar: 24,000 × \(\frac{10}{100} \times \frac{6}{12}\) = ₹ 1,200
Gul’s: 16,000 × \(\frac{10}{100} \times \frac{6}{12}\) = ₹ 800
Note: In the absence of the date of withdrawal, it is assumed that withdrawals are made evenly throughout the year. Hence, interest is charged for the average period of the year i.e., 6 months.

Question 11.
Bose is a partner in a firm. He withdraws ₹ 3,000 at the start of each month for 12 months. The books of the firm close on March 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.
Solution:
When the amount is withdrawn at the beginning of every month:
Total drawings = 3,000 × 12 = ₹ 36,000
Interest on drawings = 36,000 × \(\frac{10}{100} \times \frac{6.5}{12}\) = ₹ 1,950

Question 12.
Vishnu and Thomas are partners in a firm. They share profits equally. Vishnu’s monthly drawings are ₹ 2,000. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Vishnu’s drawings for the year 2014, assuming that money is withdrawn:
(i) at the beginning of every month
(ii) in the middle of every month
(iii) at the end of every month.
Solution:
(i) When the amount is withdrawn at the beginning of every month:
Total drawings = 2,000 × 12 = ₹ 24,000
Interest on drawings = 24,000 × \(\frac{10}{100} \times \frac{6.5}{12}\) = ₹ 1,300

(ii) When the amount is withdrawn in the middle of every month:
Interest on drawings = 24,000 × \(\frac{10}{100} \times \frac{6}{12}\) = ₹ 1,200

(iii) When the amount is withdrawn at the end of every month:
Interest on drawings = 24,000 × \(\frac{10}{100} \times \frac{5.5}{12}\) = ₹ 1,100

Question 13.
A and B are partners sharing profits and losses in the ratio of 4 : 1. A withdraws ₹ 2,500 at the beginning of each month and B withdrew ₹ 1,500 at the end of each month for 12 months period. Interest on drawings was charged @ 8% p.a. Calculate the interest on drawings of A and B for the year ended 31st December 2014.
Solution:
A’s total drawings = 2,500 × 12 = ₹ 30,000
Interest on drawings = 30,000 × \(\frac{8}{100} \times \frac{6.5}{12}\) = ₹ 1,300
B’s total drawings = 1,500 × 12 = ₹ 18,000
Interest on drawings = 18,000 × \(\frac{8}{100} \times \frac{5.5}{12}\) = ₹ 660

Question 14.
Apama is a partner in a firm. She withdrew the following amounts during the year ended March 31, 2015.
May 01, 2014 – ₹ 12,000
July 31, 2014 – ₹ 6,000
September 30, 2014 – ₹ 9,000
November 30, 2014 – ₹ 12,000
January 01, 2015 – ₹ 8,000
March 31, 2015 – ₹ 7,000
Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.
Solution:
Statement showing the calculation of interest on drawings

Interest on drawings = Sum of products × \(\frac{\text { Rate }}{100} \times \frac{1}{12}\)
= 3,06,000 × \(\frac{9}{100} \times \frac{1}{12}\)
= ₹ 2,295

Question 15.
John, a partner in Kaveri Tours and Travels withdrew money for his personal use from his capital account during the year ending March 31, 2015. Calculate interest on drawings in each of the following alternative situations, if the rate of interest is 9 percent per annum.
(a) If they withdrew ₹ 3,000 at beginning of each month.
(b) If an amount of ₹ 3,000 per month was withdrawn by him at the end of each month.
(c) If the amounts withdrawn were:
₹ 12,000 on June 01, 2014
₹ 8,000 on August 31, 2014
₹ 3,000 on September 30, 2014
₹ 7,000 on November 30, 2014, and
₹ 6,000 on January 3, 2015.
Solution:
(a) When the amount is withdrawn at the beginning of every month:
Total drawings = 3,000 × 12 = ₹ 36,000
Interest on drawings = 36,000 × \(\frac{9}{100} \times \frac{6.5}{12}\) = ₹ 1,755
(b) When the amount is withdrawn at the end of each month:
Interest on drawings = 36,000 × \(\frac{9}{100} \times \frac{5.5}{12}\) = ₹ 1,485

Interest on drawings = Sum of product × rate × \(\frac{1}{12}\)
= 2,34,000 × \(\frac{9}{100} \times \frac{1}{12}\)
= ₹ 1,755

Textual Examples

Question 1.
A, B and C set up a partnership firm on January 1, 2014. They contributed ₹ 50,000, ₹ 40,000 and ₹ 30,000 respectively as their capitals and agreed to share profits and losses in the ratio of 3 : 2 : 1. A is to be paid a salary of ₹ 1,000 per month and a Commission for B of ₹ 5,000. It is also provided that interest be allowed on capital at 6% p.a. The drawings for the year were A – ₹ 6,000, B – ₹ 4,000, and C – ₹ 2,000. Interest on drawings was charged ₹ 270 on A’s drawings, ₹ 180 on B’s drawings, and ₹ 90 on C’s drawings. The net profit as per the Profit and Loss Account for the year ending December 31, 2014, was ₹ 35,660. Prepare the Profit and Loss Appropriation Account to show the distribution of profit among the partners.
Solution:

Question 2.
Vijay and Kumar are partners in a firm. The following information is provided as of 31st December 2014:

Solution:

Question 3.
X, Y, and Z entered into a partnership on 1st April 2013 to share profits & losses in the ratio of 4 : 3 : 3. Interest on Capital @ 5% p.a. The Capital contributions were: X – ₹ 3,00,000; Y – ₹ 2,00,000 and Z – ₹ 1,50,000 and drawings were: X – ₹ 10,000, Y – ₹ 8,000, and Z – ₹ 6,000 in this year. The profit for the year ended 31st March 2014 amounted to ₹ 1,60,000. Show the necessary Accounts.
Solution:

Question 4.
Amar and Kalesha commenced business as partners on April 1, 2013. Amar ₹ 40,000 and Kalesha ₹ 25,000 contributed as their capital. The partners decided to share their profits ¡n the ratio of 2 : 1. Amar was entitled to a salary of ₹ 6,000 p.a. Interest on capital was to be provided @ 6% p.a. The drawings of Amar and Kalesha for the year ending March 31, 2014, were ₹ 4,000 and ₹ 8,000 respectively. The profits of the firm after providing Amar’s salary and interest on capital were ₹ 12,000.
Draw up the Capital Accounts of the partners; (i) When capitals are fixed, and (ii) When capitals are fluctuating.
Solution:
(i) When capitals are fixed:

(ii) When capitals are fluctuating:

Question 5.
A and B are partners sharing profits in the ratio of 3 : 2 with capitals of ₹ 5,00,000 and ₹ 3,00,000 respectively. Interest on capital is agreed @ 6% p.a. B is be allowed an annual salary of ₹ 25,000. During the year 2014, the profit prior to the calculation of interest on capital but after charging B’s salary amounted to ₹ 1,25,000. A provision of 5% of the profits is to be made in respect of the Manager’s commission.
Prepare an account showing the allocation of profits and partner’s capital accounts.
Solution:

Question 6.
P, Q, and R entered into a partnership, bringing capital in ₹ 3,00,000, ₹ 2,00,000, and ₹ 1,00,000 respectively into the business. They decided to share profits and losses equally and agreed that interest on capital will be provided to the partners @ 10 percent per annum.
Solution:
The interest on capital:
For P = ₹ 30,000 (10% on 3,00,000)
For Q = ₹ 20,000 (10% on 2,00,000)
For R = ₹ 10,000 (10% on 1,00,000)

Question 7.
M and N who are partners in a firm and their capital accounts showed a balance of ₹ 4,00,000 and ₹ 2,50,000 respectively on April 1, 2014. M introduced additional capital of ₹ 1,00,000 on August 1, 2014, and N brought in further capital of ₹ 1,50,000 on October 1, 2014. Interest is to be allowed @ 6% p.a. on the capital.
Solution:
Interest on capital shall be worked as follows:
For M = \(\left[4,00,000 \times \frac{6}{1,000}\right]+\left[1,00,000 \times \frac{6}{1,000} \times \frac{8}{12}\right]\)
= 24,000 + 4,000
= ₹ 28,000
For N = \(\left[2,50,000 \times \frac{6}{1,000}\right]+\left[1,50,000 \times \frac{6}{1,000} \times \frac{6}{12}\right]\)
= 15,000 + 4,500
= ₹ 19,500

Question 8.
Lal and Pal are partners in a firm. Their capital accounts as on April 01, 2013, showed a balance of ₹ 4,00,000 and ₹ 6,00,000 respectively. On July 01, 2013, Lal introduced additional capital of ₹ 1,00,000 and Pal, ₹ 60,000. On October 01, 2013, Lal withdrew ₹ 50,000, and on January 01, 2014, Pal withdrew, ₹ 25,000 from their capitals. Interest is allowed @ 8% p.a. Calculate interest payable on capital to both partners during the financial year 2013-2014.
Solution:
Calculation of Interest on Capital:
For Lal = \(\left[4,00,000 \times \frac{8}{100}\right]+\left[1,00,000 \times \frac{8}{100} \times \frac{9}{12}\right]-\left[50,000 \times \frac{8}{100} \times \frac{6}{12}\right]\)
= 32,000 + 6,000 – 2,000
= ₹ 36,000
For Pal = \(\left[6,00,000 \times \frac{8}{100}\right]+\left[25,000 \times \frac{9}{12}\right]-\left[50,000 \times \frac{8}{100} \times \frac{3}{12}\right]\)
= 48,000 + 3,600 – 500
= ₹ 51,100

Question 9.
X and Y are Partners sharing Profit and Loss in the ratio of 2 : 3 with a capital of ₹ 20,000 and ₹ 10,000 respectively. Show distribution of Profit/Losses for the year ended 31st March 2015 by preparing P & L Appropriation a/c in each of the alternative cases.
Case 1: If the Partnership deed is silent as to the interest on capital and the profit for the year ended is ₹ 2,000.
Case 2: If the Partnership deed provides for the interest on capital @ 6% p.a. and the loss for the year is ₹ 1,500.
Case 3: If the Partnership deed provides for interest on capital @ 6% p.a. and trading profit is ₹ 2,100.
Solution:
Case 1:

Case 2:

Note: No interest on capital will be allowed if the firm has a net loss, even though they have an agreement.
Case 3:

Question 10.
Johnson is a partner who withdrew ₹ 20,000 on October 1, 2014. Interest on drawings is charged @ 10% per annum and the accounts were closed every year on December 31. Calculate interest on drawings.
Solution:
Interest on Drawings = 20,000 × \(\frac{10}{100} \times \frac{3}{12}\) = ₹ 500

Question 11.
Amount and rate of interest are given but the date of withdrawal is not specified:
Ahmed is a partner who withdraws ₹ 30,000 and interest on drawings is charged @ 15% per annum. Calculate interest on drawings:
Solution:
Interest on Drawings = 30,000 × \(\frac{15}{100} \times \frac{6}{12}\) = ₹ 2,250
Here, it is noted that in the absence of any particular date of withdrawal, it is assumed that withdrawals are made evenly throughout the year. Hence, interest is charged for the average of the period of the year, i.e., six months.

Question 12.
Shanu withdrew ₹ 10,000 per month from the firm for her personal use during the year 2014. Find out the interest on drawings, in different situations @ 8% p.a
Solution:
(a) When the amount is withdrawn at the beginning of every month:
Total drawings = 10,000 × 12 = ₹ 1,20,000
Interest on drawings = 1,20,000 × \(\frac{8}{100} \times \frac{6.5}{12}\) = ₹ 5,200
(b) When the amount is withdrawn at the end of every month:
Interest on drawings = 1,20,000 × \(\frac{8}{100} \times \frac{5.5}{12}\) = ₹ 4,400
(c) When money is withdrawn in the middle of every month/date of Drawings is not given:
Interest on drawings = 1,20,000 × \(\frac{8}{100} \times \frac{6}{12}\) = ₹ 4,800

Question 13.
Ratna and Manikyam are partners in a firm, sharing profits and losses equally. During the financial year 2014 – 2015, Ratna withdrew ₹ 50,000 quarterly. If interest is to be charged on drawings @ 10% per annum, calculate interest on drawings in different situations.
Solution:
(a) If the amount is withdrawn at the beginning of each quarter:
Total drawings = 50,000 × 4 = ₹ 2,00,000
Interest on drawings = 2,00,000 × \(\frac{10}{100} \times \frac{7.5}{12}\) = ₹ 12,500

(b) If the amount is withdrawn at the end of every quarter:
Interest on drawings = 2,00,000 × \(\frac{10}{100} \times \frac{4.5}{12}\) = ₹ 7,500
When different amounts are withdrawn on different dates:
The following are the two methods to calculate the amount of Interest on Drawings:

Question 14.
Vamshi and Krishna are partners in a firm. During the year ended 31st March 2015, Vamshi makes the drawings as under:

Partnership Deed provided that partners are to be charged interest on drawings @ 12% p.a. Calculate the interest on Vamshi’s drawings by using Simple Interest Method and Product Method.
Solution:
1. Simple Interest Method:

2. Product Method:

Interest on Drawings = Sum of Products × \(\frac{\text { Rate }}{100} \times \frac{1}{12}\)
= 70,000 × \(\frac{12}{100} \times \frac{1}{12}\)
= ₹ 700

Question 15.
Thanvika withdrew the following amounts for her personal use from her firm during the year ending March 31, 2014. Calculate interest on drawings with the product method, if the rate of interest to be charged is 7% per annum.
April 1, 2013, ₹ 16,000
June 30, 2013, ₹ 15,000
October 31, 2013, ₹ 10,000
December 31, 2013, ₹ 14,000, and
March 1, 2014, ₹ 11,000.
Solution:
Statement Showing Calculation of Interest on Drawings

Interest on Drawings = Sum of Products × \(\frac{\text { Rate }}{100} \times \frac{1}{12}\)
= 4,30,000 × \(\frac{7}{100} \times \frac{1}{12}\)
= ₹ 2,508 (approx.)

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 4th Lesson Not-for-Profit Organizations Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 4th Lesson Not-for-Profit Organizations

Short Answer Questions

Question 1.
State the meaning of Not-for-profit organisations. Give suitable examples.
Answer:
There are certain organizations like schools, colleges, libraries, athletic clubs, hospitals, charitable trusts, welfare societies, co-operative societies, clubs, etc. were established for providing service to its members or to the public. The main objective of this type of organisations is to do service rather than earn profits. This organization calls not-for-profit organisations.

Question 2.
Write the characteristics of not-for-profit organisations.
Answer:
The following are the characteristics of not-for-profit organisations:

• Working without profit motive: Not-for-Profit organisations are formed for providing services to a specific group or public at large such as education, recreation, health, and so on.
• Its sole aim is to provide service either free or cost or at nominal cost and not to earn profits.
• Organised bodies: These are organised as charitable trusts, and societies and subscribers to such organisations are called members.
• Source of income: The main source of income of such organisations is donations, legacies, grant-in-aid, subscriptions, income from investments, etc.
• Elected management: The organisation is managed by a managing committee or executive committee elected by members.
• No diffusion of surplus: The surplus generated in the form of income over expenditure is not distributed amongst the members. It is added to the capital fund.
• Reputation: Not-for-profit organisations earn their reputation by their contribution to the welfare of society.
• Accounting information: The account information provided by such organisations is meant for present and potential contributors and meets the statutory requirements.

Question 3.
Distinguish between profitable organisations and not-for-profitable organisations.
Answer:
Differences between profitable and not-for-profit organisations.

Question 4.
List out the accounts prepared by not-for-profit organisations.
Answer:
Not-for-profit organisations prepare the following accounts.

1. Receipts and Payment Account
2. Income and Expenditure Account
3. Balance Sheet

Question 5.
What are the final accounts prepared by not-for-profit organisations?
Answer:
Not-for-profit organisations prepare at the end of the financial period receipts and payments account, an Income and expenditure account, and a Balance Sheet in order to ascertain cash in hand or at the bank, surplus or deficit, and various assets and liabilities and capital funds respectively. So the final accounts in not-for-profit organisations consist of the following.

1. Receipts and Payments Account
2. Income and Expenditure Account
3. Balance Sheet

Question 6.
What do you mean by Receipts and Payment Accounts?
Answer:
The receipts and payments account is a mere summary of the cash book for a year. It is maintained and prepared by not-for-profit organisations in lieu of a cash book. Like cash books, receipts of cash are written on the debit side and payments on the credit side. All receipts and payments whether they are relating to the current, preceding, or succeeding period, or all the receipts and payments of capital and revenue nature and written in this account. The closing balance of this account shows the cash in hand/at the bank at the end of the accounting period.

Question 7.
What are the characteristics of receipts and payments accounts?
Answer:
Features of Receipts and Payment Account:

• It is a summary of the cash book.
• All the amounts of receipts and payments irrespective of the period are recorded.
• Irrespective of capital or revenue nature all the receipts and payments are recorded.
• Noncash items like depreciation and outstanding expenses are not shown in this account.
• It begins with an opening balance of cash in hand and cash at a bank or bank overdraft and closes with the year-end balance of cash in hand/cash at a bank or bank overdraft.

Question 8.
In what way do receipts and payment accounts differ from cash books?
Answer:
The distinction between receipts and payment account and cash book.

Question 9.
What is an income and expenditure account?
Answer:
The income and expenditure account is prepared in non-profit concerns in the lien of profit and loss account. The income and expenditure account is credited with all incomes, both realized and unrealized, and debit with all expenses, both paid and unpaid. There is no opening balance but the closing balance will show either surplus i.e. excess of income over expenditure or deficit i.e. excess of expenditure over income only revenue items are taken into consideration. It consists of income and expenditure relating to the current year and those incomes and expenditures relating to preceding and succeeding periods are excluded. This account is prepared on the accrual basis of accountancy and all adjustments relating to prepaid, outstanding expenses and incomes, provision for depreciation, or doubtful debts will be made.

Question 10.
Explain the basic features of the income and expenditure accounts.
Answer:
The following are the features of income and expenditure.

• It is a nominal account.
• It is similar to a profit and loss account.
• Expenditure and losses are recorded on the debit side and incomes are recorded on the credit side.
• Only revenue incomes and expenditures are recorded.
• Expenses and incomes relating to the current year are only taken into consideration.
• Adjustments for prepaid, and outstanding, provisions are made in this account.
• Differences between the two sides will show either surplus or deficit and it is transferred to the capital fund on the liabilities side of the balance sheet.

Question 11.
Differences between receipts and payments account and income and expenditure.
Answer:
Differences between Receipts and Payment Account and Income and Expenditure Account.

Question 12.
In what way income expenditure account differs from the profit and loss account?
Answer:

Question 13.
What do you mean by Revenue expenditure? Give examples.
Answer:
Any amount spent to earn revenue or profits is called revenue expenditure. These expenses are recurring in nature. Its useful life also would be less than one year.
e.g. salaries, rent, wages, insurance, etc.

Question 14.
What do mean by capital expenditure? Give examples.
Answer:
Capital expenditure is that expenditure that is generally incurred for the acquisition of assets and to increase the earning capacity of the business. The expenditure gives benefits for a number of years.
e.g. purchase of tangible and intangible assets like plant and machinery, furniture, buildings, patents, trademarks, goodwill, etc.

Question 15.
How do you prepare receipts and payment accounts?
Answer:
The following procedure is adopted for preparing receipts and payment accounts.

• Take the opening balances of cash in hand and cash at the bank and enter them on the debit side. In case of bank overdraft at the beginning of the year enter the same on the credit side of the account.
• Show all items of receipts on the debit side and payments on the credit side irrespective of nature, whether capital or revenue, and whether pertaining to past, current and future periods.
• Neither the receivable income nor payable income is considered.
• Find the difference between the debit side and the credit side of the account. If the total on the debit side is more, show the difference on the credit side and vice-versa and close the account.

Question 16.
Explain the procedure to convert receipts and payments account into income and expenditure accounts.
Answer:
Conversion of receipts and payment account into income and expenditure account.

1. Opening and closing balance of cash and bank given in receipts and payments accounts should be excluded.
2. Consider only revenue items of income and expenditure and exclude the items of capital receipts and payments.
3. Make all adjustments regarding outstanding, prepaid incomes and expenses, depreciation, and provision for bad debts.
4. Take only items for the current year and exclude all items from preceding and succeeding years.
5. Consider the following items not appearing in receipts and payments accounts and need to be taken for determination of surplus or deficit.
   • Depreciation on fixed assets.
   • Provision for doubtful debts.
   • Profit or Loss on the sale of fixed assets.

Question 17.
What is capital income? Give two examples.
Answer:
Any amount received as investment by owners or raised by way of loans and sale of fixed assets is known as capital receipts. These amounts lie in huge amounts. These are non-recurring in nature. All the items of capital receipts are to be shown on the liabilities side of the balance sheet.

Question 18.
What is revenue income? Give two examples.
Answer:
Any amount received in the normal course of the business is called revenue receipts, which are recurring in nature.
e.g. sales, interest, discounts, commission, rent received, etc.

Question 19.
Distinguish between capital income and revenue income.
Answer:
Any amount received as investment by owners or raised by way of loans and sale of fixed assets are capital receipts that are non-recurring in nature.
Any amount received in the normal course of the business is called revenue receipts, which are recurring in nature.

Question 20.
Distinguish between revenue expenditure and capital expenditure.
Answer:
Capital expenditure is that expenditure that is generally incurred in the acquisition of assets and to increase the earning capacity of the business. This expenditure gives benefits for a number of years. Any expenditure spent to earn revenue or profits is called revenue expenditure. It is useful for less than one year.

Question 21.
What is a subscription?
Answer:
Subscriptions are a major recurring source of income for non-profit entities that are paid by members periodically. Subscriptions relating to the current year are shown as income.

Question 22.
What is the capital fund?
Answer:
Excess of assets over liabilities is called capital or (General) fund and it is made up of a surplus of income over expenditure and certain items which are capitalized like life membership fees, donations, legacies, entrance fees, etc.

Question 23.
What is a legacy?
Answer:
It is the amount that a not-for-profit concern will receive as per the will of a deceased person. It should be capitalised being an item of non-recurring nature and should be shown on the liabilities side of the balance sheet.

Question 24.
What differs from revenue expenditure? Give examples.
Answer:
It is in the nature of revenue expenditure. But when the huge amount is paid, the benefit of which may be for more than one year, a portion will be debited to P & L A/c, and the balance is shown as an asset on the balance sheet.
e.g. for differed revenue expenditure is the huge amount spent on advertisement.

Question 25.
What is the Entrance fee?
Answer:
Entrance fees or admission fees are received from the members. When they were admitted into the concern. In the absence of specific instructions, this amount should be treated as revenue income.

Question 26.
What is meant by life membership?
Answer:
It is paid to a member once in a lifetime. So it should be capitalised and shown on the liabilities side of the balance sheet.

Question 27.
What are donations? Explain different types.
Answer:
Donations are the amounts that are given to the organisation as gifts by the public. These are two types.

• General donations: When they do lay down any specific conditions for their use, it is called general donations and treated as revenue and shown on the credit side of the income and expenditure account. If the amount is huge, then it should be capitalised.
• Specific donations: If the donation is for a specific purpose, then they are called a specific donation.
  e.g. Building Fund. This is shown on the liabilities side of the balance sheet.

Textual Exercises

Question 1.
From the following particulars, prepare Receipts and Payments A/c

Solution:

Question 2.
Prepare Receipts and Payments Accounts.

Solution:

Question 3.
From the following details prepare receipts and payments A/c

Solution:

Question 4.
From the following particulars Prepare Receipts and Payments A/c.

Solution:

Question 5.
Following is the receipts and payments A/c of Gandhi cultural club for the year ended 31-Dec-2014.


Subscriptions are receivable for the year 2014 ₹ 600.
Outstanding Salaries ₹ 400.
Half of the Donations are to be capitalized, with accrued interest of ₹ 60.
Prepaid Insurance ₹ 70.
Prepare income and Expenditure A/c for the year ended 31-Dec-2014.
Solution:
Income and expenditure account of Gandhi Cultural club for the year ended 31st Dec. 2014

Question 6.
Prepare income and expenditure A/c of Tirupathi Club from the following receipts and payments A/c, for the year ending 31-Dec-2014.


Adjustments:
(a) Rent paid included ₹ 200 for December 2013
(b) Salaries Payable ₹ 900.
(c) Subscriptions received included ₹ 600 for the year 2013.
(d) Subscriptions Due for the year 2014, ₹ 400.
(e) Cost of furniture sold ₹ 800.
Solution:
Income and expenditure account of Tirupathi club for the year ending 31st Dec. 2014.

Question 7.
From the following receipts and payments a/c of the Venkateswara Society for the year ended 31-Dec-2014. Prepare income and expenditure a/c for the year ended 31 -Dec-2014.


The entrance fees and donations are to be capitalized. Sports materials value ₹ 4,000 as of 31-Dec-2014.
Solution:
Income and expenditure of Venkateswara society for the year ending 31st December 2014.

Question 8.
Visakha Sports Association extracts the following receipts and payments A/c for the year ended 31-Dec-2014. From the particulars given, prepare income and expenditure a/c.

Adjustments:
(a) Subscriptions are outstanding on 31-Dec-2013, ₹ 450, and on 31-Dec-2014, ₹ 400. Subscriptions received include ₹ 100 on account of the year 2015.
(b) Sports equipments was valued on 31-Dec-2013, @ ₹ 550, and on 31-Dec-2014, @ ₹ 1090.
(c) Office expenses include ₹ 150, for the year 2013 whereas ₹ 200 is still payable on this account for 2014.
Solution:
Income and expenditure of Visakha sports association for the year ended 31st Dec. 2014

Question 9.
From the following, Prepare income and expenditure A/c of Tirupathi Sportsmen Club for the year ended 31-Dec-2010.

Adjustments:
Locker rent ₹ 420 pertaining to 2009 and ₹ 630 is still owing. Rent ₹ 9,100 Pertaining to 2009 and ₹ 9,100 is still due. Stationary expenses ₹ 2,184 relating to 2009 and ₹ 2,548 is still owing, Subscriptions receivable for the year 2010, ₹ 3,276.
Solution:
Income and expenditure a/c of Tirupathi sportsmen club for the year ended 31st Dec. 2010.

Question 10.
Sri Hari Sports Club’s, Ongole receipts and payments for the year ending 31-Dec-2014. Is given below.

Additional Information:
(a) Subscription receivable for 2013 were ₹ 1,000 and for 2014 ₹ 1,050. A subscription has already been received including ₹ 400 for the year 2015.
(b) Games equipment, in the beginning, was ₹ 1,000 and at the end ₹ 1,250.
(c) Provide depreciation @ 10% Grass cutting machine.
Prepare income and expenditure A/c for the year ending 31-Dec-2014. And opening, and closing the balance sheet.
Solution:
Balance sheet as on 1-1-2014

Income and expenditure A/c for the year ended 31-12-2014

Balance sheet as on 31-12-2014

Question 11.
From the following receipts and payments accounts of other information of Kadapa City Club, Prepare income and expenditure A/c as of 31-Dec-2014 and balance sheet as of that date.
Adjustments:
(a) Subscription received included ₹ 1,200 for the year 2013, and ₹ 2,400 for the year 2015.
(b) Subscriptions due for the year 2014 – ₹ 1,800
(c) Printing Charges payable for 2014 – ₹ 240
(d) Salaries payable for the year 2014 – ₹ 3,600

Solution:
Balance sheet as on 1-1-2014

Income and expenditure account for the year ended 31st December 2014.

Balance sheet as on 31.12.2014

Question 12.
From the following Receipts and payments a/c of Amaravathi Sports Club for the year ended 31st Dec-2008, prepare income and expenditure account.

Lockers rent ₹ 60, pertaining to 2007 and ₹ 90 is still owing. Rent ₹ 1,300 pertained to 2007 and ₹ 1,300 is still due. Stationery Expenses ₹ 312 relating to 2007 and ₹ 364 is still owing.
Subscriptions Receivable for 2008 is ₹ 468.
Solution:
Income and expenditure A/c of Amaravathi sports club for the year ended 31st December 2008

Note: Entrance fees are capitalized.

Question 13.
From the following Receipts and Payments of Nethajee Sports Club, prepare income and Expenditure A/c for the year ended on 31 -Mar-2012.

Additional Information:
(a) Subscriptions Include ₹ 1,000 Received for the last year.
(b) Rent Includes ₹ 600 paid for the last year.
From the above particulars Prepare Income and Expenditure A/c for the year ending 31-03-2012.
Solution:
Income and expenditure of Nethajee sports club for the year ended 31st March 2012

Question 14.
Visakha Town Club provided Receipts and Payments A/c for the year ended 31-Mar-2013. Prepare Income and Expenditure A/c.


Adjustments:
(a) Subscriptions Include ₹ 500 received for the last year.
(b) Rent Includes ₹ 300 paid for the last year.
(c) Book value of Furniture sold ₹ 1,000
Solution:
Income and expenditure A/c for the year ended 31.3.2013

Question 15.
From the following Receipts and Payments A/c of Guntur Sports Club for the year ending 31-Mar-2012, Prepare income and Expenditure A/c.

Additional Information:
(a) Outstanding Salaries ₹ 600
(b) Opening value of sports equipments ₹ 1,000, closing value ₹ 500
(c) Interest accrued on investments of ₹ 200
(d) Subscription receivable for the year 2012, ₹ 3,000
Solution:
Income and expenditure of Guntur sports club for the year ended 31st March 2012

Question 16.
From the following Receipts and Payments A/c of Sai Charitable Trust, Anantapur, Prepare Income and Expenditure A/c.

Additional Information:
(a) Subscriptions Receivable for the year 2011 – ₹ 2,500.
(b) Prepaid Rent ₹ 300.
(c) Outstanding Stationery Bill ₹ 150.
(d) Capitalize donations.
(e) Half of the Entrance fees are capitalized.
(f) Interest Receivable for the year 2011 – ₹ 200.
Solution:
Income and expenditure A/c of Sai Charitable Trust for the year ended Dec 31, 2011

Question 17.
Nellore Sports Club started on 01-01-2010. Their Receipts and Payments A/c for the year ended 31-Dec-2010.

Additional Information:
(a) Subscription is receivable for 2010 – ₹ 300.
(b) Salaries Unpaid – ₹ 170.
(c) Entrance fees are to be capitalized.
(d) Insurance includes 9 months’ premium for 2011.
Solution:
Income and expenditure of Nellore Sports Club for the year ended 31st Dec. 2010.

Question 18.
From the following Receipts and Payments A/c of Balaji Trust, prepare Income and Expenditure A/c for the year ending 31-December-2008.

Adjustments:
Subscriptions for the year 2008 still receivable were ₹ 700, interest due on Government Bonds ₹ 100, and rent outstanding ₹ 60.
Solution:
Income and expenditure account of Balaji trust for the year ended 31st, Dec. 2008

Textual Examples

Question 1.
From the following particulars, prepare Receipts and Payments Account.

Solution:

Question 2.
Prepare Receipts and Payments Account of Kurnool Sports Club for the year ended on 31-3-2015

Solution:
Receipts & Payments of Kurnool Sports Club for the year ending 31-3-2015

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 3rd Lesson Consignment Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 3rd Lesson Consignment

Essay Questions

Question 1.
What do you mean about consignment? Explain the differences between consignment and sale.
Answer:
Consignment means sending goods to another person. In the case of consignment, goods are sent by the owner of the goods to the agent for the purpose of sale. The ownership of the goods remains with the sender. The agent sells the goods on behalf of the sender according to his instructions. The sender of the goods is known as the consignor and the agent is called the consignee.
Differences between consignment and sale

Question 2.
What are account sales? Give a specimen copy of account sales.
Answer:
Account sales is a document or statement sent by the consignee to the consignor from time to time. Since the consignee sells the goods on behalf of the consignor, so he has to send a proper statement either on the sale of goods or at the end of a particular period.

In account sales, the consignee shows the details of the gross sale proceeds of the consignment. The various expenses, and charges incurred by him, and the commission due to him are deducted. Any advance payment to the consignor is deducted from the total amount due and the net amount payable is shown. The net amount payable is sent to the consignor by a bank draft or bill of exchange agreed.

Specimen of Account Sales
Account sales sent by Gwaliar Ltd to Sony Ltd regarding 200 T.V.s

Question 3.
What is meant by commission? Explain different types of commission.
Answer:
The consignee is remunerated by a commission which is usually calculated as an agreed percentage of the gross sale proceeds of the sale.
Commission payable to consignee can be divided into 3 types. They are:

• Ordinary commission
• Del credre commission
• Overriding commission

(a) Ordinary commission: Ordinary commission is the commission generally paid by the consignor to the consignee. It is calculated as a fixed percentage of gross sale proceeds. The such commission does not provide any security to the consignor from bad debts.

(b) Del credre commission: The consignee may sell some part of the goods on credit. When goods are sold on credit, there is always a risk of some amount as bad debt. In order to avoid the risk of bad debts, the consignor provides an additional commission known as Del credre commission to the consignee who guarantees the payment in case of credit sale. Del credre commission is paid at a predetermined percentage of gross sale proceeds. However, as regards payment of del credre commission there may be a separate agreement for its payment.

(c) Overriding commission: It is an extra commission allowed over the normal commission. This commission is generally offered when an agent is required to work hard either to introduce a new product in the market or to handle the work of supervising the performance of other agents in a particular area. It is the commission paid by the consignor to the consignee for executing sales on consignment at a price higher than the price fixed by the consignor. In other words, it is the surplus. the commission allowed to consignee, calculated on the surplus price realized by him.

Short Answer Questions

Question 1.
What do you mean by Consignment?
Answer:
The word consignment originated from the French word ‘consigner’ which means to hand over or transmit. To consign means ‘to send’; therefore, consignment means sending goods to another person. In the case of consignment, goods are sent by the owner of the goods to the agent for the purpose of sale. The ownership of the goods remains with the sender. The agent sells the goods on behalf of the sender, according to his instructions. The sender of the goods is known as the consignor and the agent is known as the consignee.

Question 2.
Briefly explain about Consignor and Consignee.
Answer:
Consignor: The person who sends the goods is known as a consignor. In other words, the consignor is the person who consigns the goods. He is the owner of the goods. He sends goods where in the physical delivery is delivered to the receiver without transfer of ownership.

Consignee: The person who receives the goods sent by the consignor is known as the consignee. In other words, the consignee is the person who acts as an agent of the consignor. He receives the goods on behalf of the consignor, stores them, incurs expenses, and sells the goods as per the specifications of the consignor for a consideration called ‘commission’.

Question 3.
What is a Proforma Invoice?
Answer:
Along with the goods, a statement is usually forwarded by the consignor to the consignee, giving a description of the goods consigned, the weight, quantity, price, and other relevant details. The statement is known as a proforma invoice. It resembles a sales invoice in appearance, but its purpose is quite different. It is intended as an evidence record of the consignment and the minimum price at which the consignee is expected to sell the goods sent to him.

Question 4.
What is Account Sales?
Answer:
Account sales is a document sent by the consignee to the consignor showing the details of the gross sale proceeds, the various expenses incurred by him, the commission amount due, any advance payment to the consignor which is deducted from the total amount due, and the net amount payable is shown.

Question 5.
What is Commission?
Answer:
The consignee is remunerated by a commission which is usually calculated as an agreed percentage of the gross proceeds of sale and such commission does not provide any security to the consigner from bad debts.

Question 6.
What is the Del Credre commission?
Answer:
The consignee may sell some part of the goods on credit. When goods are sold on credit, there is always a risk of some amount of bad debt. In order to avoid the risk of bad debts, the consignor provides an additional commission known as the Del-Credre commission to the consignee who guarantees the payment in case of credit sale. Del credre commission is paid at a predetermined percentage of gross sale proceeds.

Question 7.
What is Overriding Commission?
Answer:
It is an extra commission allowed over the normal commission. This commission is generally offered when an agent is required to work hard either to introduce a new product or to supervise the work of other agents in a particular area.

Question 8.
Briefly explain recurring expenses and nonrecurring expenses.
Answer:
All the expenses incurred to bring the goods to the godown of the consignee are treated as nonrecurring or direct expenses. Examples of non-recurring expenses which may be incurred by the consignor or consignee are freight, carriage or cartage insurance, packing, dock dues, loading and unloading charges, customs duty, octroi, etc. All the expenses incurred by the consignee after the goods reach the godown are treated as recurring or indirect expenses.
e.g: Go down rent, godown insurance, salary to salesmen, advertisement selling expenses, commission, bank charges, etc.

Question 9.
Explain the procedure for valuation of unsold stock in consignment.
Answer:
At the end of the accounting period, the unsold goods left with the consignee should be valued properly. Otherwise, true profit cannot be ascertained. Unsold stock is valued at either market price or cost price whichever is less. The cost price of the goods for this purpose does not mean only the cost at which the consignor purchased goods. But the proportion of non-recurring or direct expenses incurred by the consignor as well as the consignee should be added to the cost price.

Question 10.
Explain the term normal loss.
Answer:
In the case of some goods, even after taking all the precautions, some loss of quantity is bound to take place. Therefore, the loss which is unavoidable, natural, and due to the inherent nature of goods is called normal loss. For example, if coal is consigned a small portion of coal is bound to lose while loading and unloading. Similarly, in the case of oil and petroleum products, a portion may last due to evaporation and leakage when they are stored.

Question 11.
Accounting treatment for normal loss.
Answer:
Normal loss is unavoidable. Therefore, it forms part of the cost of consignment. Since this loss is usual, no journal entry is required to be passed but the normal loss is to be considered for calculating the cost of unsold stock left with the consignee, normal loss is spread over the remaining stock. Therefore, for calculating the value of the unsold stock, the following formula can be applied.

Textual Exercises

Question 1.
On 1st January 2009, Sudha of Srinagar consigned goods valued at ₹ 20,000 to Indira of Warangal. Sudha paid cartage and other expenses ₹ 1,500. On 1st April 2009, Indira sent on account sales with the following information.
(a) 1/2 of the goods sold for ₹ 15,000
(b) Indira incurred expenses of ₹ 750
(c) Indira is entitled to receive commission @ 5% on sales.
A bank draft was enclosed for the balance due. Prepare necessary Ledger accounts in the books of Sudha.
Solution:

Question 2.
On 1st January 2012, Gopi of Hyderabad consigned goods valued at ₹ 30,000 to Sudheer of Madras. Gopi paid cartage and other expenses ₹ 2,000 on 1st April 2012. Sudheer sent the account sales with the following information:
(a) 50% of the goods sold for ₹ 22,000
(b) Sudheer incurred expenses amounting to ₹ 1,200
(c) Sudheer is entitled to receive a commission @ 5% on sales.
A bank draft was enclosed for the balance due. Prepare the necessary ledger accounts in the books of Gopi.
Solution:

Question 3.
Sai and Co., of Chennai, consigned 100 Radios to Deepthi and Co. of Hyderabad. The cost of each Ratio was ₹ 500. Sai and Co. paid insurance ₹ 500; Freight ₹ 800. Account sales were received from Deepthi and Co., showing the sale of 80 Radios at ₹ 600 each. The following expenses were deducted by them.
Carriage – ₹ 20
Selling expenses – ₹ 130
Commission = ₹ 2,400
Sai and Co. received a bank draft for the balance due. Prepare important Ledger accounts in the books of Deepthi and Co.
Solution:

Question 4.
Raj of Bandar sends 200 T V. sets each costing ₹ 15,000 to Rani of Guntur to be sold on a consignment basis. He incurred the following expenses.
Freight ₹ 2,000; Loading and unloading charges ₹ 2,000 and Insurance ₹ 5,000.
Rani sold 185 TVs for ₹ 30,00,000 and paid ₹ 10,000 as shop rent which is to be borne by Raj as per terms and conditions of consignment.
The consignee is entitled to a commission of ₹ 200 per T V. sold. Assuming that Rani settled the account by sending a bank draft to Raj.
Prepare the necessary Ledger Accounts in the books of Raj.
Solution:

Question 5.
Vishnu of Vijayawada consigned goods valued at ₹ 50,000 to Shiva of Secundrabad. Vishnu paid transport charges ₹ 4,000 and drew a bill of two months on Shiva for ₹ 30,000 as advance. The bill was discounted with bankers for ₹ 29,500. Shiva sent the account sales of the consignment stating that the entire stock was sold for ₹ 72,000; Cartage ₹ 2,000; Commission ₹ 3,000 and a Bank Draft for the balance.
Prepare necessary accounts in the books of Vishnu.
Solution:

Question 6.
Laxmi of Vijayawada consigned goods worth ₹ 20,000 to his agent Saraswathi of Kodad on consignment Laxmi spent ₹ 1,000 on transport, ₹ 500 on insurance: Saraswathi sent ₹ 5,000 as advance. After two months, Laxmi received the account sales as follows:
(a) Half of the goods were sold for ₹ 24,000
(b) Selling expenses were ₹ 1,200
(c) 10% commission on sales
Give ledger accounts in the books of Laxmi.
Solution:

Question 7.
On 1st January 2009, Sudha of Srinagar consigned goods valued at ₹ 20,000 to Indira of Warangal. Sudha paid cartage and other expenses ₹ 1500. On 1st April 2009, Indira sent account sales with the following information:
(a) 50% of the goods sold for ₹ 15,000
(b) Indira incurred expenses amounting to ₹ 750
(c) Indira is entitled to receive commission @ 5% on sales.
A bank draft was enclosed for the balance due. Prepare the necessary ledger accounts in the books of Sudha.
Answer:

Question 8.
Robert consigned goods to Rahim valued at ₹ 5,000 to be sold on a 5% commission basis. Robert has paid ₹ 500 freight and ₹ 550 towards insurance.
Robert received account sales and a draft for the balance from Rahim showing the following particulars.
Gross Sales – ₹ 7500
Selling Expenses – ₹ 450
Commission – ₹ 375
Pass necessary entries journal in the and prepare ledger accounts in the books of both parties.
Solution:

Question 9.
Krishna of Mumbai and Gopal of Chennai is in the consignment business. Gopal sent goods to Krishna for ₹ 10,000. Gopal paid freight ₹ 500. Insurance ₹ 1,500 Krishna met sales expenses ₹ 900, Krishna sold the entire stock for ₹ 20,000 and he is entitled to a commission of 5% on sales.
Write the necessary entries in the books of Gopal and Krishna.
Solution:
In the books of Gopal Journal Entries

In the book of Krishna Journal Entries

Question 10.
Manikanta of Vijayawada Consigned goods of value of ₹ 20,000 to Ayyappa of Ahmedabad. Manikanta paid forwarding charges of ₹ 1,000 and drew a bill of two months on Ayyappa for ₹ 10,000. The bill was discounted with bankers for ₹ 9,500. Ayyappa sent received the account sales of the consignment stating that the entire stock was sold for ₹ 28,000 agents commission ₹ 2,000 and a bank draft for the balance.
Prepare necessary accounts.
Solution:

Question 11.
Mrs. Murali sent 50 Bicycles on consignment to Mr. Deepthi invoiced at ₹ 800 each on Jan 1st, 2009. She has paid the following expenses:
₹ 1,350 – freight, ₹ 600 – Insurance, ₹ 1,500 – other expenses.
On 5th January, she received a bill from Deepthi for ₹ 40,000. On Feb 20th Deepthi sent an account sales showing that the bicycles have realized ₹ 1,000 each. He incurred expenditures on carriage ₹ 500, warehousing ₹ 460, and ₹ 300 miscellaneous expenses. He charged a commission of 10% on sales. Prepare the books of the consignor and consignee.
Solution:

Question 12.
M/s. Robert & Co. of Bangalore consigned 100 cases @ 50 each to Mahathi & Co., of Calcutta. M/s. Robert & Co. spent ₹ 700 on Carriage and paid insurance ₹ 250.
In due course account sales were received with the following details:

Pass necessary entries in the books of both parties.
Solution:
In the books of Robert & Co. Journal Entries

In the books of Mahathi & Co. Journal Entries

Question 13.
A & Co., of Hyderabad, consigned 100 Video Games to B & Co., of Delhi to be sold on consignment @ ₹ 500 each. He paid transport ₹ 2,000 and warehouse charges ₹ 3,000. B & Co. sent account sales stating that

Prepare necessary ledger accounts of both books.
Solution:

Question 14.
X of Chirala consigned 200 bales of Tobacco @ 250 per bale to V of Vijayawada. X paid cartage of freight etc., ₹ 1,250. X drew a bill on V for 3 months for ₹ 30,000. V sold the entire consignment and rendered account sales showing that the goods realized ₹ 60,000 out of which he deducted his charges amounting to ₹ 400 and commission at 5% on sales. Make entries in the journal and show necessary ledger accounts in the books of both parties.
Solution:

Question 15.
Amar consigned 100 bales of cloth to Akbar at ₹ 5,000 per bale. Amar incurred the following expenses:
Packing and Forwarding Charges – ₹ 500
Insurance in Transit – ₹ 2,000
Akbar received the consignment and sold 80 bales at ₹ 8,000 per bale.
They incurred the following expenses:
Freight and Cartage – ₹ 3,000
Insurance of godown – ₹ 400
Salesmen’s Salary – ₹ 1,600
Ascertain the value of the consignment.
Solution:

Question 16.
On January 15, 2009, Dharani of Hyderabad sent 400 Bicycles to be sold on consignment to Dheeraj of Warangal. The Bicycles were invoiced at ₹ 1,000 per piece carriage and other expenses amounted to ₹ 6,000.
Dharani received the following account sales.
On 15th March 100 Bicycles were sold at ₹ 1,450 per piece on which 5% commission was charged and ₹ 3,750 were deducted as expenses.
10th April – 150 Bicycles were sold at ₹ 1,400 per piece on which 5% commission was charged and ₹ 2,900 were deducted as expenses incurred after 15 March.
Prepare consignment Accounts and Accounts in the books of Dharani.
Pass the necessary journal entries in the books of Bhagavan and Lakshman.
Solution:

Textual Examples

Question 1.
When the consignee sold total goods.
Sri Manikanta of Guntur consigned goods of the value of ₹ 1,00,000 to their agent Sri Rama of Hyderabad. Sri Manikanta paid loading and insurance in transit ₹ 5,000. On receiving the consignment Sri Rama sent ₹ 50,000 worth of Bank draft as advance.
Sri Rama sent account sales which show the following particulars.
Gross Sales – ₹ 2,00,000
Godown Rent – ₹ 1,000
Advertisements – ₹ 2,000
Commission 10% on sales
Sri Rama attached a bank draft for the balance due to Sri Manikanta your required to pass journal entries and prepare necessary ledger accounts in the books of Sri Manikanta and Sri Rama.
Solution:

Question 2.
Bhaskar of Rajahmundry consign 500 radio sets each at ₹ 600 to Prasad to Tenali on consignment Bhaskar paid ₹ 12,000 as freight and insurance in transit Bhaskar drawn a bill on Prasad for 3 months for ₹ 1,00,000. Prasad sends account sales which show the following particulars.
(1) Gross sale proceeds are ₹ 4,50,000.
(2) Unloading and godown rent ₹ 10,000.
(3) Commission 5% on Gross sales.
Prasad sends a bank draft for the balance due to Bhaskar.
You are required to prepare necessary ledger accounts in the books of the consignor and consignee.
Solution:

Question 3.
Kishore of Guntur sends 200 bicycles costing ₹ 1,20,000 to Pavan of Vijayawada on consignment. Kishore spends ₹ 6,000 on freight and insurance in transit. Pavan spent unloading charges ₹ 1,200 godown rent ₹ 800, consignee sold 180 bicycles at ₹ 2,00,000. Calculate the value of the closing stock.
Solution:

Note: Godown rent paid by the consignee is a recurring expense. Hence godown rent is not included in the valuation of closing stock.

Question 4.
X Send 500 radios costing ₹ 1,000 each to Y on consignment. X spends ₹ 50,000 on expenses. Y spent ₹ 12,000 as an advertisement. Consignee sold 400 radios each at ₹ 1,200. Calculate the value of the closing stock.
Solution:

Question 5.
Murali and Co of Warangal consign 500 radio sets to Han and Co of Hyderabad. The cost of each radio is ₹ 500. Murali and Co paid insurance ₹ 10,000 and freights ₹ 15,000. Account sales were received from Hari and Co showing the following particulars.
1. 400 radio sets sold each at ₹ 600.
2. Advertisement expenses ₹ 20,000.
3. Commission 10% on sales.
Hari and Co send a bank draft for the balance due to the consignor.
Show journal entries and ledger accounts in the books of both parties.
Solution:

Question 6.
A dealer is apple consign 1,000 tonnes of apples at a cost of ₹ 10,000 and paid ₹ 2,000 towards freight and insurance. The consignee received 950 tonnes of apples. Consignee sold 500 tonnes of apples. 50 tonnes of apples were treated as an unavoidable loss. Calculate the value of the unsold stock.
Solution:
Cost of 1,000 tonnes of apples = ₹ 10,000
Add: Consignor expenses = ₹ 2,000
Total = ₹ 12,000
Total quantity of goods less normal loss in quantity = 1,000 – 50 = 950 tonnes
Stock of unsold goods = 950 – 500 = 450 tonnes

Value of unsold stock = 12000 × \(\frac{450}{950}\)
= ₹ 5,684.21
= ₹ 5684

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 2nd Lesson Depreciation Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 2nd Lesson Depreciation

Essay Questions

Question 1.
Define depreciation. What are the main causes of depreciation?
Answer:
Spicer and Pegler define depreciation as follows ‘Depreciation is the measure of exhaustion of the effective life of an asset from any cause during a given period. Depreciation means a decline in the value of fixed assets due to use, the passage of time, obsolescence, or any other cause.
Causes of depreciation: The main causes of depreciation include the following:

• Wear and tear: When fixed assets are put to use in business operations for earning revenue, the value of such assets may decrease. Such a decrease in the value of assets is said to be due to wear and tear.
• Physical forces: When the assets are exposed to the forces of nature like weather, winds, rains, etc. The value of such assets may decrease even if they are not being put to use.
• Expiration of legal rights: When the use of the assets like patents, copyrights, leases, etc., is governed by a time-bound agreement, the value of such assets may decrease with the passage of time.
• Obsolescence: Obsolescence implies an existing asset becoming out of date on account of the availability of a better type of asset due to technological changes or improvements in production methods.
• Accidents: A decline in the usefulness of the asset may be caused by accidents due to fire, earthquakes, floods, etc. Accidental loss is permanent.
• Depletion: Assets of wasting character such as mines, quarries, oil wells, etc., get depleted with the extraction of raw materials them.

Question 2.
Define depreciation. Explain the need of providing depreciation.
Answer:
“Depreciation is the diminution in the intrinsic value of the asset due to use and or the lapse of time”.
So, depreciation is a permanent, continuous, and gradual decrease in the book value of an asset due to various causes.
Need for Depreciation:

• To ascertain true profit or loss: The true profit or loss can be ascertained only when the depreciation is debited to the profit and loss account along with other revenue expenses like salaries, postage, etc. Which are incurred for the purpose of earning revenue.
• To disclose true and fair financial position: If reasonable depreciation is not deducted from the value of assets, the balance sheet will not reflect the true and fair financial position of business concerns. Hence depreciation should be provided every year to present a true and fair financial position.
• To have funds for the replacement of assets: A portion of profits is set aside in the form of depreciation every year. The amount accumulates and is available for replacement of the asset at the end of its life or when it is discarded.
• To ascertain the true cost of production: For ascertaining the cost of production, it is necessary to charge depreciation as an item of cost of production. If the depreciation is not charged, the cost records would not present the true cost of production.
• To fulfill legal requirements: In the case of joint stock companies, it is compulsory to provide depreciation on fixed assets. Without providing depreciation dividends cannot be declared.

Question 3.
Explain the meaning, merits, and demerits of the Straight Line Method.
Answer:
The straight-line method is the simplest and one of the most widely used methods of providing depreciation. This method is called as Fixed Instalment Method or Equal Instalment Method or Original Cost Method. Under this method, depreciation is calculated at a fixed percentage of the original value of the asset every year. Thus the amount of annual depreciation is uniform throughout the year.
The annual depreciation amount and rate of depreciation is calculated as follows.

Merits of straight-line method:

• It is veiy easy to understand.
• It is very simple to calculate depreciation.
• Assets can be depreciated up to net scrap value or zero value.
• This method is suitable for those assets whose estimated life can be estimated accurately.
• Depreciation will remain the same throughout the life of the asset.

Demerits of straight-line method:

• In this method, the depreciation amount will remain the same throughout the life of the asset.
• But in reality depreciation and repairs will be less in the earlier years and gradually increase in the later part of the life of the asset.
• It becomes difficult to ascertain the amount of depreciation if additions are made during the year.
• This method is not recognized by the income tax authorities.
• No provision is made for interest on the amount invested in the asset.
• It is very difficult to estimate the life of the asset.

Question 4.
Explain the meaning, merits, and demerits of the Reducing Balance Method.
Answer:
This method is known as Diminishing Balance Method or Written Down Value Method. Under this method, depreciation is charged at a fixed percentage on the book value of the asset. Since the book value keeps on reducing by the annual charge of depreciation, it is known as the reducing balance method.
The amount of depreciation decreases year after year. Depreciation is calculated on the diminishing value of the asset. Under this method, the amount of depreciation is larger in the earlier years than in the later years.
Merits:

• The total charge i.e., depreciation and repairs remain uniform year after year. In the earlier years, the amount of depreciation is more and the amount of repairs is less, whereas in later years, the depreciation amount is less and the amount of repairs is more.
• This method is logical in the sense that as an asset grows older, the amount of depreciation also goes on decreasing.
• Income Tax Act, 1961 accept this method for tax purpose.
• This method can be used where obsolescence is high.
• This method is suitable for those assets which have a longer life.

Demerits:

• It is difficult to calculate depreciation.
• The book value of the asset doesn’t become zero.
• It doesn’t take into account the interest on the amount invested in the asset.
• It doesn’t provide for the replacement of assets on the expiry of its life.

Question 5.
What are the differences between the Straight Line Method and the Reducing balance method?
Answer:

Short Answer Questions

Question 1.
What is depreciation?
Answer:
Depreciation is the gradual reduction or loss in the value of fixed assets like building plants, furniture, etc. If a company purchases a plant for ₹ 1,00,000 with an estimated life of 10 years, the plant will lose a value of ₹ 10,000 every year. This reduction loss is called depreciation.

Question 2.
What are the causes of depreciation?
Answer:
The main causes of depreciation are:

• Wear and tear
• Physical forces
• Expiration of legal rights
• Obsolescence
• Accidents
• Depletion

Question 3.
What is obsolescence?
Answer:
Obsolescence implies an existing asset becoming out of date on account of the availability of a better type of asset due to technological changes or improvements in production methods.

Question 4.
What is depletion?
Answer:
Assets of wasting in nature such as mines, quarries, etc., get depleted with the extraction of raw materials them.

Question 5.
Write different methods of providing depreciation.
Answer:
The following are the different methods of providing depreciation.

• Straight line method
• Reducing balance method
• Annuity method
• Depreciation fund method
• Insurance policy method
• Revaluation method
• Depletion method
• Machine hour rate method

Question 6.
What is the Straight Line Method?
Answer:
The straight-line method is the simple and widely used method of providing depreciation. Under this method, depreciation is calculated at a fixed percentage of the original cost of the asset every year.

Question 7.
What is the Reducing Balance Method?
Answer:
This method is also known as the written down value method. Under this method, depreciation is charged at a fixed percentage on the book value of the asset. Since the book value keeps on reducing by the annual charge of depreciation, it is known as the reducing balance method.

Textual Exercises

Question 1.
Praveen traders purchased a machine for ₹ 80,000. The life of the machine is estimated at 10 years and the residual value is ₹ 10,000. Calculate the annual amount of depreciation according to the Straight Line Method.
Solution:

Question 2.
A machine is purchased for ₹ 40,000. It is estimated that the useful life of the machine is 9 years and the residual value is ₹ 4,000. You are required to find out the annual amount of depreciation and the rate of depreciation under the Straight Line Method.
Solution:

Question 3.
A truck is purchased for ₹ 50,000. It is estimated that the useful life of the truck is 10 years and the residual value is ₹ 5,000. Calculate the annual amount of depreciation and the rate of depreciation under the Straight Line method.
Solution:

Question 4.
On 1st April 2010, Anand traders purchased a machine for ₹ 2,60,000 and spent ₹ 40,000 on its installation. It is estimated that working life is 10 years and after 10 years its scrap value will be ₹ 20,000. Books are closed on 31st March every year.
Write necessary journal entries and prepare machine accounts for the first three years in the books of Anand traders according to the Straight Line Method.
Solution:
Original cost = Purchase price + Installation expenses
= 2,60,000 + 40,000
= ₹ 3,00,000

Question 5.
On 1st July 2011, Neeharika & Co purchased a printing machine for ₹ 2,16,000 and spent ₹ 24,000 on its installation. It was estimated that the effective useful life of the printing machine will be 12 years and its scrap value will be ₹ 24,000. The books are closed on 31st December every year.
Prepare printing machine account and depreciation account for the first three years according to the Straight Line Method.
Solution:

Question 6.
Madan & Company purchased machinery on 1st January 2011 for ₹ 80,000 and spent ₹ 4,000 for its installation. The estimated life of the machinery is 10 years with a scrap value of ₹ 4,000. Books are closed on 31st December every year.
Calculate the amount of annual depreciation under the Straight Line Method and prepare the machinery account for the first three years.
Solution:



Note: 2 and 3 entries are to be passed for another three years.

Question 7.
On 1st January 2011, Raghavendra traders purchased Furniture for ₹ 60,000. Depreciation is to be calculated at the rate of 10% p.a. on Straight Line method. The books are closed on 31st December every year. Write necessary journal entries and prepare Furniture Account for the first four years.
Solution:

Question 8.
On 1st October 2011 Jagannadham & Sons purchased a machine for ₹ 90,000 and spent ₹ 10,000 for its installation. The books are closed on 31st March every year. The firm writes off depreciation at the rate of 10% on the original cost every year.
Prepare Machine Account and Depreciation Account for the first three years.
Solution:

Question 9.
Venugopal traders limited purchased machinery on 1st July 2010 for ₹ 50,000 and spent ₹ 2,000 on its installation. Depreciation is to be provided at @10% p.a. under the Straight Line Method. Books of account are closed on 31st December every year.
Show the machinery account for the first three years.
Solution:

Question 10.
On 1st January 2011 Suma purchased Furniture for ₹ 80,000. Depreciation is to be provided annually at 10% under the Straight Line Method. On 31st December 2013 furniture was sold for ₹ 40,000.
Show the Furniture Account assuming that the books are closed on 31st December every year.
Solution:

Question 11.
Suneetha traders purchased a second-hand machine for ₹ 72,000 on 1st January 2011 and spent ₹ 8,000 on repairs and installed the same. Depreciation is written off at 10% p.a.on the Straight Line Method. On 30th June 2013, the machine was sold for ₹ 50,000.
Prepare machinery accounts assuming that the accounts are closed on 31st December every year.
Solution:

Question 12.
Ranadheer & Co purchased a machine for ₹ 60,000 on 1st January 2011. Depreciation is calculated at @10% on the Straight Line Method. On 1st April 2013, the company sold the machine for ₹ 36,000.
Prepare machine accounts assuming that the accounts are closed on 31st December every year.
Solution:

Question 13.
On 1st January 2011, Siva traders purchased a second-hand machine for ₹ 40,000 and spent ₹ 5,000 on repairs and installed the same. It is estimated that the working life of the machine is 10 years and the scrap value is ₹ 2,500. On 31st December 2013, the machine was sold for ₹ 25,000. Prepare machine account assuming that the books are closed on 31st December every year according to the Straight Line Method.
Solution:

Question 14.
Manoj & Company purchased a second-hand machine for ₹ 18,000 on 1st April 2011 and spent ₹ 2,000 on repairs and installed the same. Depreciation is written off at 10% p.a. on the Straight Line Method. On 30th June 2013, it was sold for ₹ 13,000.
Prepare machine accounts assuming that the accounts are closed on 31st December every year.
Solution:

Question 15.
Ramesh & Co purchased machinery on 1st January 2011 for ₹ 3,00,000. On 1st September 2011, another machine was purchased for ₹ 4,20,000. Depreciation is provided on machinery at 10% p.a. on the Straight Line Method. Books are closed on 31st December every year.
Prepare machinery account for three years.
Solution:

Question 16.
Andhra sugars Ltd. purchased a plant for ₹ 1,00,000 on 1st January 2011. On 1st July of the same year, an additional plant was purchased for ₹ 50,000. On 1st October 2013, the plant purchased on 1st January 2011 has become obsolete and was sold for ₹ 60,000. On the same date, a fresh plant was purchased for ₹ 1,25,000. Depreciation is provided at 10% p.a. on the Straight Line Method.
Prepare plant account for the years assuming that the accounts are closed on 31st December every year.
Solution:

Question 17.
On 1st July 2010 Ganga & Co purchased a secondhand machine for ₹ 40,000 and spent ₹ 6,000 on repairs. On 1st January 2011, a new machine was purchased for ₹ 24,000. On 30th June 2012 the machine purchased on 1st January 2011 was sold for ₹ 16,000 and another machine was installed at a cost of ₹ 30,000. The company writes off depreciation @ 10% p.a. on the original cost every year on 31st March.
Show the machinery account for three years.
Solution:

Question 18.
Rama transport company purchased 6 trucks at ₹ 5,00,000 each on 1st January 2011. The company writes off the depreciation of @10% p.a. on the original cost. The books of account are closed on 31st December every year. On 1st July 2013, one of the trucks is involved in an accident and completely destroyed. A sum of ₹ 2,50,000 is received from the insurance company in full settlement. Prepare Trucks Account for the first three years.
Solution:

Reducing Balance Method

Question 19.
Kushal textile mills purchased machinery on 1st April 2011 for ₹ 4,00,000 and spent ₹ 20,000 for its installation. Depreciation is provided at @ 10% p.a. on the Reducing Balance Method. Books are closed on 31st March every year.
Write necessary journal entries and prepare Machinery Account and Depreciation Account for the first three years.
Solution:

Question 20.
On 1st July 2010, Pradeep & Co purchased machinery for ₹ 50,000. Depreciation is written off at the rate of 10% p.a. under the Reducing Balance Method. Show the Machinery Account for 3 years assuming that the books are closed on 31st December every year.
Solution:

Question 21.
On 1st January 2012, Siva & Co purchased second-hand machinery for ₹ 34,000 and spent ₹ 6,000 on its repairs and installed the same. On 31st December 2014, the machinery was sold for ₹ 26,000. The books are closed on 31st December every year. Depreciation is provided @ 10% p.a. on the Reducing Balance Method. Show the Machinery Account.
Solution:

Question 22.
On 1st January 2011, Geetha traders purchased a printing machine for ₹ 3,00,000. On 1st July 2013, the printing machine was sold for ₹ 1,30,000. Depreciation is provided @ 10% p.a. on the Reducing Balance Method. The books are closed on 31st December every year.
Prepare Printing Machine Account.
Solution:

Question 23.
Sravanthi enterprises purchased a machine for ₹ 40,000 on 1st July 2011 and spent ₹ 5,000 on its installation. Another Machine for ₹ 35,000 was purchased on 1st January 2013. Depreciation is charged @ 20% p.a. on the Reducing Balance Method. Books are closed on 31st March every year. Prepare Machinery Account for three years.
Solution:

Question 24.
On 1st January 2012, Swathi & Co purchased the plant for ₹ 3,00,000. On 1st October 2012, another plant was purchased for ₹ 1,00,000. Depreciation is charged @10% p.a. on the Reducing Balance Method. On 1st October 2013, the first plant was Sold for ₹ 2,20,000.
Prepare plant account for three years assuming that the accounts are closed on 31st December every year.
Solution:

Textual Examples

Illustrations of Straight Line Method

Question 1.
An Asset is purchased for ₹ 40,000. The useful life of the asset is 10 years and the residual value is ₹ 4,000. Find out the annual depreciation and the rate of depreciation under the straight-line method.
Solution:

Question 2.
Radha & Company purchased machinery for ₹ 45,000 on 1st Jan 2010. The estimated life of the machinery is 8 years and the residual value at the end of its life period is ₹ 5,000. The books are closed on 31st December every year.
Write journal entries and show the Machinery Account and Depreciation Account for 3 years on the Straight Line Method.
Solution:

Question 3.
Vasavi & Co purchased machinery for ₹ 80,000 on 1st January 2011. Depreciation is provided annually at 10% on the original cost every year. Die books are closed on 31st December every year.
Prepare Machinery Account for the first 3 years.
Solution:

Question 4.
Narayana and Bros purchased a plant for ₹ 2,00,000 on 1st January 2010 and spent ₹ 50,000 for its installation. The salvage value of the plant after its useful life of 10 years is estimated to be ₹ 20,000. The Books are closed on 31st December every year.
Prepare Plant account and Depreciation Account for the first 3 years using the Straight Line Method.
Solution:
The original cost of Plant = Purchase price + Installation expenses
= 2,00,000 + 50,000
= ₹ 2,50,000

Question 5.
Rama Rao and his sons purchased a machine for ₹ 1,40,000 on 1st July 2011 and spent ₹ 10,000 for its installation. The firm writes off depreciation at the rate of 10% on the original cost every year. The books are closed on December 31st every year.
Prepare Machine Account and Depreciation Account for the three years.
Solution:
1. Original cost of Machine = Purchase price + Installation expenses
= 1,40,000 + 10,000
= ₹ 1,50,000
2. Annual depreciation = 1,50,000 × \(\frac{10}{100}\) = ₹ 15,000
3. Depreciation for the year 2011 = the Asset is used only 6 months from 01-07-2011.
Depreciation shall be provided only for 6 months i.e. ₹ 7,500

Question 6.
On 1st January 2010, Sahithi & Co purchased a second-hand machine for ₹ 80,000 and spent ₹ 4,000 on carriage inwards, ₹ 40,000 as repair charges, and ₹ 2,000 on installation expenses. It is estimated that the machine will have a scrap value of ₹ 5,000 at end of its useful life which is 10 years. On 31st December 2012, the machine was sold for ₹ 50,000. The books are closed on 31st December every year.
Prepare Machine Account.
Solution:

Question 7.
Nagaraju & Co purchased a second-hand machine on 1st January 2011, for ₹ 45,000 and spent ₹ 5,000 on repairs and installed the same. Depreciation is provided at the rate of 10% p.a. under the Straight Line Method. On 1st July 2014, the machine was sold for ₹ 30,000. The books are closed on 31st December every year.
Prepare the Machine Account.
Solution:

Question 8.
Bhavani traders purchased a machine for ₹ 50,000 on 01-01-2010. Another machine was bought on 01-01-2011 for ₹ 60,000 and used from 1st July 2011 onwards. The depreciation is provided at 10% per annum under the Straight Line Method. The books are closed on 31st December every year.
Prepare the machinery account for 3 years.
Solution:

Working Notes:
1. Annual depreciation is calculated as under.
1st Machine = 50,000 × \(\frac{10}{100}\) = ₹ 5,000
2nd Machine = 60,000 × \(\frac{10}{100}\) = ₹ 6,000
2. The Second machine was purchased on 1st January 2011, but started working from 1st July 2011. Hence the depreciation is calculated for 6 months only, i.e. from the date of use to the closing date of the year 2011.
Depreciation on 2nd machine for 6 months = 60,000 × \(\frac{6}{12}\) = ₹ 3,000

Question 9.
On 1st July 2011, Anupama Traders purchased a machine for ₹ 80,000. On 1st April 2012, the firm purchased another machine for ₹ 40,000. on 31st March 2014, the machine which was purchased on 1st April 2012 was sold for ₹ 29,000. The firm writes off 10% depreciation on the original cost. The books are closed on 31st March every year.
Show the machinery account for three years.
Solution:

Question 10.
On 1st April 2011 Rajesh transport company purchased 4 trucks at ₹ 6,00,000 each. The company writes off depreciation @ 10% per annum on the original cost. On 1st July 2013, one of the trucks is involved in an accident and completely destroyed. Insurance company paid ₹ 3,00,000 in full settlement of the claim. The books are closed on 31st December every year.
Prepare trucks to account for three years.
Solution:

Difference between Straight Line Method and Reducing Balance Method

Question 11.
Nagarjuna & Co purchased plant and machinery for ₹ 70,000 on 1st January 2011 and spent ₹ 10,000. for installation expenses. Depreciation is to be provided at 10% on the Reducing Balance Method. Books are closed on 31st December every year.
Write the necessary journal entries and prepare the Plant and Machinery Account and Depreciation Account for three years.
Solution:
Journal Entries in the Books of Nagarjuna & Co

Question 12.
Sujatha enterprises purchased machinery on 1st April 2011 for ₹ 4,00,000. Depreciation is calculated @ 10% per annum on the Reducing Balance Method. Books are closed on 31st December every year.
Prepare Machinery Account for the first three years.
Solution:

Question 13.
Kiran enterprises purchased a printing machine for ₹ 80,000 on 1st July 2011 and spent ₹ 10,000 on its transport and installation expenses. Another machine for ₹ 70,000 was purchased on 1st January 2013. Depreciation is charged at the rate of 20% on the Reducing Balance Method. Books are closed on 31st March every year.
Prepare printing Machine Account for three years.
Solution:

Question 14.
On 1st July 2010, Venkatesh & Co purchased a machine for ₹ 40,000. On 30th June 2013, the machine was disposed of for ₹ 26,000. The books are closed on 31st December every year. Depreciation is to be calculated @ 10% per annum on the Reducing Balance Method.
Show the Machine Account.
Solution:

Question 15.
On 1st January 2011, Bhargava traders purchased machinery for ₹ 40,000. On 1st July of the same year, the firm purchased additional machinery for ₹ 20,000. On 1st July 2013, the machinery purchased on 1st January 2011 has become obsolete, it was sold for ₹ 32,000. The books are closed on 31st December every year.
Prepare Machinery Account for three years providing depreciation @ 10% p.a. on Reducing Balance Method.
Solution:

Question 16.
On 1st January 2010, Manjula & Co purchased a plant for ₹ 30,000. The company purchased another plant on 1st January 2011 for ₹ 28,000 and spent ₹ 2,000 on installation expenses. The books are closed on 31st December every year.
Show the plant account for the first three years providing depreciation at 10% on the first plant and 15% on the second plant on the Reducing Balance Method.
Solution:

Andhra Pradesh BIEAP AP Inter 2nd Year Accountancy Study Material 1st Lesson Bills of Exchange Textbook Questions and Answers.

AP Inter 2nd Year Accountancy Study Material 1st Lesson Bills of Exchange

Essay Questions

Question 1.
Define a bill of exchange. Explain the main features of a bill of exchange.
Answer:
Sec. 5 of the Negotiable Instruments Act, of 1881 defines a bill of exchange as follows:
“A bill of exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”.
Features of a bill of exchange: The following are the features of a bill of exchange.

• A bill of exchange must be in writing.
• It must contain an order and not a request to make payment.
• The order of payment must be unconditional.
• The amount of the bill of exchange must be certain.
• The date of the bill of exchange should be clearly mentioned.
• It must be signed by the maker or drawer of the bill.
• It must be accepted by the drawee by signing on it.
• The amount is payable either to a certain person or to his order or to the bearer of the bill.
• The amount of the bill of exchange is payable either on demand or on the expiry of a certain period.
• It must be properly stamped as per legal requirements.

Question 2.
What are the advantages of a bill of exchange?
Answer:
A bill of exchange as an instrument or credit is used frequently in business because of the following advantages.

• It helps in the purchase and sale of goods on a credit basis.
• It is a legally valid document in the eyes of law. It assures an easier recovery to the drawer if the drawee fails to make payments.
• It acts as a source of finance since it can be discounted from the file bank before the due date.
• It is a written and signed acknowledgment of debt.
• It can be easily transferred from one person to another person by endorsement.
• By drawing accommodation bills on one another traders can raise money.

Question 3.
What are the different types of bills of exchange?
Answer:
Bills of exchange can be classified as follows:

• Time bill: When the payment of a bill of exchange is to be made after a particular period of time. The bill is termed a time bill. In such a case, the date of maturity is always calculated by adding three days of grace.
• Demand bill: In the case of a demand bill, payment is to be made on demand. Neither the acceptance of the drawee is necessary nor any days of grace allowed.
• Trade bill: When a bill of exchange has been drawn and accepted for a genuine trade transaction, it is termed a trade bill.
  Ex: A sold goods to B on credit and draws a bill of exchange on B who accepted it. It is a trade bill.
• Accommodation bill: Accommodation bills refer to those bills which are drawn, accepted endorsed without any consideration. These bills are drawn and accepted to meet the financial needs of drawer/drawee/both for a temporary period by getting bills disconnected at the bank.
• Inland bill: A bill is termed as an Inland bill if it is drawn in India on a person residing in India whether payable in or outside India.
  Or
  It is drawn in India on a person residing outside India but payable in India.
• Foreign bill: A bill that is not an inland bill is a foreign bill. A foreign bill is generally drawn up in triplicate and each copy is sent by separate post so that atleast one copy reaches the concerned party at the earliest. Of course, the drawer of the acceptor will sign on a single set. It becomes the actual bill and the payment will be made on the such bill.

Question 4.
Explain the differences between a bill of exchange and a promissory note.
Answer:
The differences between bill of exchange and promissory note are as follows:

Question 5.
Explain the differences between a bill of exchange and a cheque.
Answer:
A cheque is a bill of exchange drawn on a specified banker and payable on demand (sec 6 of N.I Act, 1881). A cheque is similar to a bill of exchange with two additional conditions. They are:

• It is always drawn by a specified banker.
• It is always payable on demand.

Differences between Bill of exchange and Cheque

Short Answer Questions

Question 1.
What is a bill of exchange?
Answer:
When goods are sold on credit, the buyer promises the seller that he will pay the number of goods purchased after a certain period. The buyer has to give a promise in writing. The bill of exchange contains an unconditional order to pay a certain amount on an agreed date.

Question 2.
State the three parties involved in a bill of exchange.
Answer:
There are three parties to a bill of exchange.

• Drawer: The drawer is the person who writes the bill of exchange or the person who granted credit.
• Drawee: Drawee is the person on whom the bill of exchange is drawn or to whom the credit is granted.
• Payee: Payee is the person who receives the amount of the bill on maturity. Usually, the drawer and payee are the same people. But when the bill is discounted with a bank by the drawer then the payee is the banker. Similarly, when the bill is endorsed by the drawer to a third party then the payee is the endorsee.

Question 3.
What is a Promissory Note?
Answer:
A promissory note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

Question 4.
What is the due date of a bill?
Answer:
A bill payable on demand or at sight, presentment becomes due as soon as the bill is presented. A bill payable a certain period after the date or after sight becomes nominally due after the expiry of such period. The date which becomes after adding 3 days of grace to be nominally due date of a bill is called the date of maturity.

Question 5.
What are the days of Grace?
Answer:
For making the payment of the bill, the drawee is allowed three extra days after the normal due date. Such three days are known as ‘Days of Grace. If the due date is a public holiday previous day is the due date. If the due date is a sudden holiday, the next day is the due date.

Question 6.
What do you mean by Noting Charges?
Answer:
To obtain proof of dishonour, the bill is re-sent to the drawee through a legally authorized person called a notary public. Notary public charges a small fee for providing this service known as noting charges. Noting charges are paid to the notary public first by the holder of the bill but are ultimately recovered from the drawee because he is the responsible person for the dishonour.

Question 7.
What is meant by acceptance of a bill of exchange?
Answer:
The drawee has to accept the bill prepared by the drawer. Unless the drawee gives his acceptance by writing the word ‘accepted’ and also putting his signature along with the date, the bill does not become a legal document. Before the acceptance, the bill is called ‘Draft’. After acceptance, the bill is returned to the drawer. This is called acceptance of a bill of exchange.

Question 8.
What is meant by discounting a bill?
Answer:
When the bill is encashed from the bank before its due date, it is known as discounting of the bill. Bank deducts a small sum of money as a discount from the amount of the bill and disburses the balance amount to the drawer of the bill.

Question 9.
What is the retirement of the bill of exchange?
Answer:
When the drawee makes the payment of the bill before its due date it is called ‘retirement of the bill’. In such a case, the holder of the bill usually allows a certain amount as a rebate to the drawee.

Question 10.
What do you mean by the renewal of the bill of exchange?
Answer:
Sometimes the drawee of a bill finds himself unable to meet the bill on the due date. To avoid dishonouring of the bill, he may request the holder of the bill to cancel the original bill and draw a new bill in place of the old one. If the holder agrees, the old bill is cancelled and a new bill with new terms is drawn on the drawee and also accepted by him. This is called ‘Renewal of a bill’.

Question 11.
What is meant by ‘Dishonour of a Bill’?
Answer:
When the drawee or acceptor of the bill fails to make payment of the bill on the date of maturity it is called ‘Dishonour of the bill’.

Textual Exercises

A. Bills of Exchange Honoured

Question 1.
On 1st July 2014, Madhu sold goods to Pavan for ₹ 5,000 on credit and drew a bill of exchange for 3 months for the same amount. Pavan accepted the bill and returned it to Madhu. Pavan met his acceptance on maturity.
Pass the necessary Journal entries in the books of Madhu and Pavan.
Solution:
Journal entries in the books of Madhu


Journal entries in the books of Pavan

Question 2.
On 1st March 2013, Radhika sold goods to Harika worth ₹ 9,000 and drew a bill for 2 months for the same amount. Harika accepted the bill and returned it to Radhika. The bill is honoured on the date of maturity.
Pass the necessary Journal entries in the books of Radhika and Harika.
Solution:
Journal entries in the books of Radhika

Journal entries in the books of Harika

Question 3.
On 25th March 2014, Vinod drew a bill for 3 months on Prakash for ₹ 3,000. Prakash accepted the bill and handed it over the bill to Vinod. The bill is honoured on the date of maturity.
Show the journal entries in the books of Vinod and Prakash.
Solution:
Journal entries in the books of Vinod

Journal entries in the books of Prakash

Question 4.
On 1st January 2014, Rajendra sold goods to Narendra worth ₹ 4,000 and drew a bill on Narendra payable after three months. After securing Narendra’s acceptance, Rajendra discounted the bill with his bank at 12% p.a. on 1st February 2014. On the due date, the bill is honoured.
Pass necessary journal entries in the books of Rajendra and Narendra.
Solution:
Journal entries in the books of Rajendra

Journal entries in the books of Narendra

Question 5.
Amar sold goods for ₹ 10,000 to Sundar OD credit on 1st July 2014. Amar drew a bill of exchange on Sundar for the same amount for three months. Sundar accepted the bill and returned it to Amar. Amar discounted the bill with his bank at 10% per annum on the same day. Sundar met bis acceptance on maturity.
Pass necessary journal entries in the books of Amar and Sundar.
Solution:
Journal entries in the books of Amar

Journal entries in the books of Sundar

Question 6.
Sandhya sold goods for ₹ 14,000 to Rajeswari on 1st March 2014 and drew upon her a bill of exchange payable after 2 months. Rajeswari accepted the bill and handed over the same to Sandhya. Sandhya immediately discounted the bill with her bank @ 12% p.a. On the due date, Rajeswari met her acceptance.
Pass the necessary journal entries in the books of Sandhya and Rajeswari.
Solution:
Journal entries in the books of Sandhya

Journal entries in the books of Rajeswari

Question 7.
Satyam sold goods to Sivam worth ₹ 9,000 on 1st June 2013 and drew a bill for 2 months for the same amount. Sivam accepted the bill and returned it to Satyam. Satyam endorsed the bill to his creditor Sundaram on 1st July 2013. The bill was honoured on the due date.
Pass necessary journal entries in the books of Satyam, Sivam, and Sundaram.
Solution:
Journal entries in the books of Satyam

Journal entries in the books of Sivam

Journal entries in the books of Sundaram

Question 8.
On 1st July 2014, Ajay purchased goods worth ₹ 8,000 from Kiran and accepted the bill which was drawn by Kiran payable after three months for the same amount. Kiran sent the bill to his bank for collection. The bill was honoured on the date of maturity.
Pass necessary journal entries in the books of Kiran and Ajay.
Solution:
Journal entries in the books of Kiran

Journal entries in the books of Ajay

Question 9.
Jayaram sold goods for ₹ 20,000 to Sivaram on 15th March 2014 and drew upon him a bill of exchange payable after two months. Sivaram accepted the bill and returned the same to Jayaram. On the due date, the bill was honoured.
Pass the necessary journal entries in the books of Jayaram and Sivaram in the following circumstances.
I. When the bill was retained by Jayaram till the date of its maturity.
II. When Jayaram immediately discounted the bill @ 6% p.a. with his bank.
III. When the bill was endorsed immediately by Jayaram in favour of his creditor Seetharam.
IV. When the bill was sent by Jayaram to his bank for collection on 25th April 2014.
Solution:
Journal entries in the books of Jayaram


Journal entries in the books of Sivaram

B. Dishonour of bills of exchange

Question 10.
Kotireddy purchased goods worth ₹ 12,000 from Rajareddy on 25th March 2014 and accepted a bill of exchange drawn upon him by Rajareddy payable after two months. On the date of maturity, Kotireddy dishonoured the bill. Rajareddy paid ₹ 80 as noting charges.
Pass the necessary journal entries in the books of Rajareddy and Kotireddy.
Solution:
Journal entries in the books of Kotireddy

Journal entries in the books of Rajareddy

Question 11.
Parvathi sold goods worth ₹ 14,000 to Suneetha on 1st January 2014. Suneetha paid ₹ 4,000 immediately and for the balance, she accepted a bill of exchange drawn upon her by Parvathi payable after 3 months. Parvathi discounted the bill immediately with her bank @ 10% p.a. On the due date, Suneetha dishonoured the bill and the bank paid ₹ 30 as noting charges.
Pass the necessary journal entries in the books of Parvathi and Suneetha.
Solution:
Journal entries in the books of Parvathi

Journal entries in the books of Suneetha

Question 12.
On 1st January 2014, Hari accepted 3 months bill for ₹ 12,000 drawn on him by Raju. Raju discounted the bill with his bank @ 9% p.a. on the Same day. On the due date, Hari dishonoured his acceptance.
Pass the necessary journal entries in the books of Raju and Hari.
Solution:
Journal entries in the books of Raju

Journal entries in the books of Hari

Question 13.
On 25th April 2013, Bhagavan sold goods for ₹ 13,000 to Lakshman and drew upon him a bill of exchange for 3 months for the same amount Lakshman accepted the bill and sent the same to Bhagavan. Bhagavan endorsed the bill in favour of his creditor Raman. On the due date, the bill was dishonoured and Raman paid ₹ 90 as Noting charges.
Pass the necessary journal entries in the books of Bhagavan and Lakshman.
Solution:
Journal entries in the books of Bhagavan

Journal entries in the books of Lakshman

Question 14.
Manga purchased goods for ₹ 20,000 from Gangs on 1st February 2013 and accepted a bill of exchange drawn by Gangs for the same amount payable after 2 months. On 20th February 2013 Gangs sent the bill to her bank for collection. On the due date, Manga dishonoured the bill and the bank paid ₹ 100 as noting charges.
Pass the necessary journal entries in the books of Gangs and Manga.
Solution:
Journal entries in the books of Ganga

Journal entries in the books of Manga

Question 15.
Mohan sold goods for ₹ 15,000 to Vinod on 1st January 2014 and drew upon him a bill of exchange for the same amount to payable after two months. Vinod accepted the bill and handed it over the bill to Mohan. On the due date, the bill was dishonoured.
Pass the necessary journal entries in the books of Mohan and Vinod in the following cases.
I. When Mohan retained the bill till the due date and paid ₹ 150 as noting charges.
II. When Mohan discounted the bill @ 12% p.a. on 4th February 2014 and the bank paid ₹ 150 as noting charges.
III. When Mohan endorsed the bill immediately in favour of his creditor Amar and paid ₹ 150 as noting charges.
IV. When Mohan sent the bill to his bank for collection on 25th January 2014 and bank paid ₹ 150 as noting charges.
Solution:
Journal entries in the books of Mohan


Journal entries in the books of Vinod

C. Renewal of a bill

Question 16.
On 1st July 2013, Kalyan sold goods to Kapil for ₹ 24,000 and drew upon him a bill for the same amount payable after 3 months. Kapil accepted the bill and returned it to Kalyan. On the due date, Kapil expressed his inability to honour the bill and offered to pay ₹ 12,000 in cash and to accept a new bill for the balance amount including interest at 10% p.a. for 2 months. Kalyan agreed to this proposal. On the due date, the new bill was honoured.
Pass the necessary journal entries in the books of Kalyan and Kapil.
Solution:
Journal entries in the books of Kalyan

Journal entries in the books of Kapil

Question 17.
Anasuya sold goods worth ₹ 6,000 to the Padma on 1st March 2013 and drew upon her a bill for the same amount payable after three months. The Padma accepted the bill and sent it back to Anasuya. On the due date, Padma expressed her inability to honour the bill and requested Anasuya to cancel the original bill and draw a new bill for three months. Anasuya agreed the proposal provided interest at 12% was paid immediately in cash. The Padma paid such interest in cash and accepted a new bill. The new bill was dishonoured on the due date.
Pass the necessary journal entries in the books of Anasuya and Padma.
Solution:
Journal entries in the books of Anasuya


Journal entries in the books of Padma

Question 18.
On 1st May 2014 Akhil sold goods to Nikhil for ₹ 6,000 on credit and drew a bill on him for three months for the same amount. Nikhil accepted the bill and returned it to Akhil. On 4th August 2014, Nikhil requested Akhil to draw a new bill for the amount due. Akhil agreed to draw a new bill for 2 months but he charged interest @ 12% p.a. This bill was honoured on its maturity.
Pass necessary journal entries in the books of Akhil and Nikhil.
Solution:
Journal entries in the books of Akhil

Journal entries in the books of Nikhil

D. Retiring of a bill under rebate

Question 19.
On 1st January 2013, Nagababu sold goods for ₹ 10,000 to Damodhar and drew upon him a bill of exchange payable after two months. Damodhar accepted the bill and handed over the same to Nagababu. One month before the maturity of the bill Damodhar approached Nagababu to accept the payment against the bill under a rebate of 9% p.a. Nagababu agreed to the request Damodhar. Damodhar retired the bill under the agreed rate of rebate.
Pass the necessary journal entries in the books of Nagababu and Damodhar.
Solution:
Journal entries in the books of Nagababu

Journal entries in the books of Damodhar

Question 20.
On 1st June 2014, Meghana sold goods for ₹ 13,000 to Kaveri and drew upon her a bill of exchange payable after 3 months. Kaveri accepted the bill and returned it to Meghana. One month before the maturity of the bill Kaveri approached Meghana to accept the payment against the bill under a rebate of 12% p.a. Meghana agreed to the request of Kaveri to retire the bill under the agreed rate of rebate.
Pass the necessary journal entries in the books of Meghana and Kaveri.
Solution:
Journal entries in the books of Meghana

Journal entries in the books of Kaveri

E. Insolvency of Drawee

Question 21.
Jayababu purchased goods for ₹ 25,000 from Tatababu on 1st February 2014 and accepted a bill of exchange drawn by Tatababu for the same amount The bill was payable after 2 months. Before the due date of the bill, Jayababu became insolvent and nothing could be recovered from his estate.
Write necessary journal entries in the books of Tatababu and Jayababu.
Solution:
Journal entries in the books of Tatababu

Journal entries in the books of Jayababu

Question 22.
Anil sold goods worth ₹ 17,000 to Sunil on 1st March 2014 and drew upon him a bill for three months for the same amount Sunil accepted the bill and handed over it to Anil. On the same day, Anil discounted the bill @ 12% p.a. with his bank. Before the due date of the bill, Sunil became insolvent and only 50 paise in a rupee could be recovered from his estate.
Pass necessary journal entries in the books of Anil and Sunil.
Solution:
Journal entries in the books of Anil

Journal entries in the books of Sunil

Textual Examples

Question 1.
On 1st March 2014, Ravi sold goods for ₹ 10,000 to Vikas on credit and drew a bill for 3 months for the same amount Vikas accepted the bill and returned it to Ravi. This bill is honoured on the date of maturity.
Pass the necessary journal entries in the books of Ravi and Vikas.
Solution:
Journal entries in the books of Ravi (Drawer)

Journal entries in the books of Vikas (Drawee)

Question 2.
On 1st January 2013, Sankar sold goods worth ₹ 20,000 to Bhaskar on credit and drew a bill for 3 months for the same amount. Bhaskar accepted the bill and returned it to Sankar. On the same day, Sankar discounted the bill with his bank at 10% per annum. On the due date, the bill is honoured.
Pass the necessary journal entries in the books of Sankar and Bhaskar.
Solution:
Journal entries in the books of Sankar (Drawer)

Journal entries in the books of Bhaskar (Drawee)

Question 3.
On 1st March 2014, Sumathi purchased goods for ₹ 8,000 from Lakshmi and accepted a bill for the same amount drawn by Lakshmi payable after 3 months. Lakshmi discounted the bill with her bank on 1st April 2014 at 12% per annum. Sumathi met her acceptance on the due date.
Pass the necessary journal entries in the books of Lakshmi and Sumathi.
Solution:
Journal entries in the books of Lakshmi (Drawer)

Journal entries in the books of Sumathi (Drawee)

Question 4.
On 1st January 2014, Venkatesh sold goods worth ₹ 5,000 to Nagarjuna and drew a bill on Nagarjuna for 3 months for the same amount Nagaijuna accepted the bill and returned it to Venkatesh. On 1st February 2014, Venkatesh endorsed the bill in favour of his creditor Prabhakar in the settlement of his debt. The bill was honoured on the due date.
Pass the necessary journal entries in the books of Venkatesh, Nagarjuna, and Prabhakar.
Solution:
Journal entries in the books of Venkatesh (Drawer)

Journal entries in the books of Nagarjuna (Drawee)

Journal entries in the books of Prabhakar (Endorsee)

Question 5.
On 1st July 2014, Parasuram sold goods to Rama Krishna for ₹ 7,000 and drew a bill on him for the same amount for two months. Rama Krishna accepted the bill and returned the same to Parasuram. Immediately after its acceptance, Parasuram sent the bill to his bank for collection. On the due date, bill is honoured.
Pass necessary journal entries in the books of Parasuram and Rama Krishna.
Solution:
Journal entries in the books of Parasuram (Drawer)


Journal entries in the books of Rama Krishna (Drawee)

Question 6.
Ashok sold goods to Rajesh on 1st April 2014 for ₹ 10,000 on credit and drew upon him a bill for the same amount payable after 3 months. Rajesh accepted the bill and returned it to Ashok. On the date of maturity, a bill was presented to Rajesh for payment and he honoured it.
Pass the journal entries in the books of Ashok and Rajesh when
Case I: Bill is retained by Ashok till the date of maturity.
Case II: Bill is discounted by Ashok with his bank on the same date @ 12% p.a.
Case III: Bill is endorsed in favour of Santosh on 4th May 2014.
Case IV: Bill is sent to the bank for collection on 1st June 2014.
Also, record the journal entries in the books of Santosh.
Solution:
Journal entries in the books of Ashok (Drawer)

Journal entries in the books of Rajesh (Drawee)

Journal entries in the books of Santosh (Endorsee)

Question 7.
On 15th March 2014, Suresh sold goods for ₹ 3,000 to Naresh on credit. Naresh accepted the bill of exchange drawn upon him by Suresh payable after 2 months. On the due date, the bill was dishonoured and Suresh paid ₹ 40 as noting charges.
Pass the journal entries in the books of Suresh and Naresh.
Solution:
Journal entries in the books of Suresh (Drawer)


Journal entries in the books of Naresh (Drawee)

Question 8.
Narayana purchased goods for ₹ 15,000 from Ravindra on 1st March 2013. Ravindra drew upon Narayana a bill of exchange for the same amount payable after two months. The bill was immediately discounted by Ravindra with his bank @ 6% p.a. On the due date, the bill was dishonoured and Bank paid ₹ 100 as noting charges.
Pass the necessary journal entries in the books of Ravindra and Narayana.
Solution:
Journal entries in the books of Ravindra (Drawer)


Journal entries in the books of Narayana (Drawee)

Question 9.
On 1st January 2013, Leela purchased goods for ₹ 15,000 from Neela. She immediately made a payment of ₹ 5,000 by cash and for the balance accepted the bill of exchange for 3 months drawn upon her by Neela. On 25th January 2013, Neela purchased goods worth ₹ 10,000 from Bala and endorsed the above bill to Bala. On the due date, the bill was dishonoured and Bala paid ₹ 50 as noting charges.
Pass the necessary journal entries in the books of Neela, Leela, and Bala.
Solution:
Journal entries in the books of Neela (Drawer)

Journal entries in the books of Leela (Drawee)


Journal entries in the books of Bala (Endorsee)

Question 10.
On 1st June 2014 Jaya sold goods to Surya for ₹ 8,000 on credit and drew a bill on Surya for the above amount payable after 3 months. Immediately after its acceptance, Jaya sent the bill to her bank for collection. On the due date, the bill was dishonoured and the noting charges amounted to ₹ 70.
Pass the necessary journal entries in the books of Jaya and Surya.
Solution:
Journal entries in the books of Jaya (Drawer)


Journal entries in the books of Surya (Drawee)

Question 11.
Siva sold goods to Pradeep on 1st May 2014 for ₹ 6,000 on credit and drew upon him a bill for the same amount payable after 2 months. Pradeep accepted the bill and returned it to Siva. On the date of maturity, Pradeep failed to make payment of the bill.
Pass the necessary journal entries in the books of Siva and Pradeep in the following cases:
Case I: When Siva retained the bill till the due date and paid noting charges of ₹ 100.
Case II: When Siva discounted the bill with his bank on 4th June 2014 @ 12% p.a. and the bank paid noting charges of ₹ 100.
Case III: When Siva endorsed the bill in favour of his creditor Rahul on 1st June 2014 and Rahul paid noting charges of ₹ 100.
Case IV: When Siva sent the bill to his bank for collection on 1st June 2014 and bank paid noting charges of ₹ 100.
Solution:
Journal entries in the books of Siva (Drawer)

Case I: When the bill is retained by Siva till the date of maturity

Case II: When the bill is discounted by Siva with his bank

Case III: When the bill is endorsed in favour of Rahul

Case IV: When the bill is sent to the bank for collection

Journal entries in the books of Pradeep (Drawee)

Question 12.
On 1st September 2014, Hari purchased goods for ₹ 12,000 from Sekhar and accepted a bill for the same amount drawn by Sekhar payable after 3 months. On the date of maturity, Hari offered to pay ₹ 6,000 and requested Sekhar to draw a new bill for 3 months for the balance amount including interest at 12% p.a. Sekhar agreed to this proposal.
Pass the necessary journal entries in the books of Sekhar and Hari.
Solution:
Journal entries in the books of Sekhar (Drawer)


Journal entries in the books of Hari (Drawee)

Question 13.
Viswanath sold goods to Srinivas on 1st April 2014 for ₹ 4,000 and drew a bill for 3 months on Srinivas for the same amount Srinivas accepted the bill and returned it to Viswanath. On the due date, Srinivas requested Viswanadh to draw a new bill for the period of 3 months. Srinivas agreed to pay interest in cash @ 9% p.a. immediately. Viswanath agreed to this proposal. The new bill was honoured on the due date.
Pass the necessary journal entries in the books of Viswanath and Srinivas.
Solution:
Journal entries in the books of Viswanath (Drawer)

Journal entries in the books of Srinivas (Drawee)

Question 14.
On 1st March 2013 Jagannadham sold goods to Chidambaram for ₹ 24,000 and drew upon him a bill for the same amount payable after 3 months. On the due date, Chidambaram requested Jagannadham to renew the bill for a further period of 3 months at 9% interest per annum. Jagannadham agreed to this proposal. Chidambaram accepted a new bill drawn by Jagannadham for the amount of the old bill including interest payable after 3 months. On the due date, a new bill was dishonoured.
Pass the necessary journal entries in the books of Jagannadham and Chidambaram.
Solution:
Journal entries in the books of Jagannadham (Drawer)


Journal entries in the books of Chidambaram (Drawee)

Question 15.
On 1st March 2013, Prudhvi sold goods to Akbar for ₹ 6,000 and drew upon him a bill for the same amount payable after 3 months. Akbar accepted the bill and returned it to Prudhvi. On 4th April 2013, Akbar retired the bill under a rebate of 12% p.a.
Pass the necessary journal entries in the books of Prudhvi and Akbar
Solution:
Journal entries in the books of Prudhvi (Drawer)

Journal entries in the books of Akbar (Drawee)

Question 16.
On 1st January 2014 Revathi drew a bill for ₹ 4,000 on Savithri payable after 3 months. Savithri accepted the bill and returned it to Revathi. On 4th February 2014, Savithri retired the bill under a rebate of 9% p.a.
Pass the necessary journal entries in the books of Revathi and Savithri.
Solution:
Journal entries in the books of Revathi (Drawer)

Journal entries in the books of Savithri (Drawee)

Question 17.
Damayanthi sold goods worth ₹ 9,000 to Jayanthi on 1st June 2014 and drew a bill for 2 months for the same amount Jayanthi accepted the bill and returned it to Damayanthi. Before the due date of the bill, Jayanthi became insolvent and nothing could be recovered from her estate.
Pass the necessary journal entries in the books of Damayanthi and Jayanthi.
Solution:
Journal entries in the books of Damayanthi (Drawer)

Journal entries in the books of Jayanthi (Drawee)

Question 18.
Kumar sold goods worth ₹ 7,000 to Murali on 1st January 2014 and drew upon him a bill for 3 months for the same amount Murali accepted the bill and returned it to Kumar. On the due date, murali requested Kumar to draw a new bill for the amount due. Kumar agreed to draw a new bill for 2 months but he charged interest @ 12% p.a. Murali accepted the new bill which was drawn by Kumar. Before the due date of the bill, Murali became insolvent and only 50 paise in a rupee could be recovered from his estate.
Pass the necessary journal entries in the books of Kumar and Murali.
Solution:
Journal entries in the books of Kumar (Drawer)

Journal entries in the books of Murali (Drawee)

Andhra Pradesh BIEAP AP Inter 2nd Year Economics Study Material 10th Lesson Economic Statistics Textbook Questions and Answers.

AP Inter 2nd Year Economics Study Material 10th Lesson Economic Statistics

Essay Questions

Question 1.
What are the uses of dispersion?
Answer:
According to A.L.Bowley “Dispersion is the measure of the variation of the items”.
According to Brooks and Dick “Dispersion or spread is the degree of the scatter or variation of the variable about a central value”.
Uses of Dispersion :

1. To use other statistical methods: After getting the value of dispersion we can proceed to other techniques such as locating co-relation or lines of regression (Regression Analysis).
2. To compare variability: We are in the general habit of comparison, may it be income, weight, or temperature. To achieve the required degree of result one tries to improve to achieve the required result.
3. To test the reliability of the average: If the total of differences between the central value and the given value is smaller, the uniformity is less i.e., it means that this sum should be minimum for the reliability of the average.
4. To establish trends in time series: In time series we remove, cyclical, seasonal, or random fluctuations, which we from after studying central values.
5. To control the undesired variability: According to Spurr and Bonini “In industrial production, the efficient operation requires control of quantity variation, the causes of which are sought through inspection and quality control programmes”.

Thus it is clear from the above definition that we have to find the cause for variation when we compare the degree of variability between two series.

Question 2.
What is meant by dispersion ? Explain the various measures of dispersion.
Answer:
The measurement of the scatteredness of the mass of figures in a series about an average is called a measure of variation or dispersion. According to A.LBowley “Disper-sion is the measure of the variation of the items”.

According to Brooks and Dick “Dispersion or spread is the scatter or variation of the variable about a central value.
Methods of studying variation :

1. The range
2. The interquartile range and the quartile deviation
3. The mean deviation or average deviation
4. The standard deviation and
5. The Lorenz curve

1) Range : It is the simplest of the values of dispersion. It is merely the difference between the largest and smallest term- symbolically,
R = L – S

2) Inter – quartile range or quartile deviation: In range we used to calculate L – S terms. But in this case we leave the 1^st 25% and last 25% terms to avoid the undue importance of extreme values.
Q.D = \(\frac{\mathrm{Q}_3-\mathrm{Q}_1}{2}\)

3) Mean deviation : It is the average difference between the items in a series from the mean or median or mode.
M.D. = \(\frac{\Sigma f|D|}{N}\)

4) Standard deviation : It is also called Root – Mean Square deviation, as it is the square root of the mean of the squared deviations from the actual mean.
S.D = \(\sqrt{\Sigma \frac{(x-\bar{x})^2}{N}}\)
σ = \(\sqrt{\frac{\sum \mathrm{x}^2}{\mathrm{~N}}}\)

5) Lorenz curve : It is graphic method to study dispersion. It helps in studying the variability in different components of distribution.

Question 3.
Calculate the quartile deviation for frequency distribution.

Solution:

Q₁ = L + \(\frac{\frac{\mathrm{n}}{4}-\mathrm{CF}}{\mathrm{f}}\) × i
Where Q₁ = Size of \(\left(\frac{\mathrm{n}}{4}\right)^{\mathrm{th}}\) value = \(\left(\frac{\mathrm{10}}{4}\right)^{\mathrm{th}}\) = 10^th item
L = Lower limit = 10
C.F = 5 (value of C.F for the class preceeding the quartile class)
i = 10 (frequency of the quartile class)
Q₁ = 10 + \(\frac{10-5}{8}\) × 10 = 16.25
Similarly Q₃ = L + \(\frac{3\left(\frac{n}{4}\right)-\text { C.F }}{f}\) × i
Where Q₃ =\(\frac{3(n)}{4}=\frac{3(40)}{4}=\frac{120}{4}\) = (30)^th item
C.F = 29, f = 7, i = 20, L = 40
L = 40
Q₃ = 40 + \(\frac{30-29}{7}\) × 20 = 42.87
Q₃ = 42.87
Q.D. = \(\frac{\mathrm{Q}_3-\mathrm{Q}_1}{2}\)
Q.D. = \(\frac{42.87-16.25}{2}\) = 13.31
∴ Q.D. = 13.31

Question 4.
Calculate the Karl Pearson’s coefficient of correlation.

Solution:

Short Answer Questions

Question 1.
Define relation between M.D, S.D and Q.D.
Answer:
Measures of dispersion can be classified into five types.

1. The range
2. The inter quartile range and the quartile deviation
3. The mean deviation or average deviation
4. The standard deviation
5. The Lorenz curve

The range and quartile deviations are positional measures because they depend on the values at a particular position in the distribution.

The average deviation and the standard deviation are called calculation measures of deviation because all of the values are employed in their calculation while the last method is a graphic method.

Question 2.
Calculate the standard deviation of the following values 5, 10, 25, 30, 50. [A.P. Mar. 17]
Solution:

Question 3.
Define Lorenz Curve. When is it used ?
Answer:
This curve was given by Dr. Max.O.Lorenz, a popular Economic statistician. He studied the distribution of wealth and income with its help. It is graphic method to study dispersion. It helps in studying the variability in different components of the distribution. The base of Lorenz curve is that we take cumulative percentage along X & Y axis. Joining these points we get the Lorenz curve.

Lorenz curve uses the information expressed in a cumulative manner to indicate the degree of variability.
For example: The monthly incomes of employees of a company given below.

Solution:

Question 4.
What is correlation ? State its importance.
Answer:
Correlation is an analysis of the co-variation between two or more variables.

1. The correlation is a statistical device which help to analyzing the co-variation between two or more variables.
2. If the value of a variable is given, we can know the value of another variable.
3. With the help of correlation we can predict about the future.
4. It helps us in knowing the important variables on which other depend.
5. In the field of commerce and industry, the technique of correlation coefficient helps to make estimates like sales, price or costs.

Question 5.
How many types of index numbers ?
Answer:
The first index was constructed in 1764 to compose the Italian price index in 1750 with the price level in 1500. Index numbers are devices for measuring difference in the magnitude of groups of related variabilities.
There are four types of index numbers. They are :

1. Price index number
   a) Wholesale price index number
   b) Retail price index number
2. Quantity index number
3. Cost living index number
4. Special purpose index number

Very Short Answer Questions

Question 1.
Range. [A.P. Mar. 17, 16]
Answer:
Range is the simplest method of studying dispersion. It is defined as the difference between the value of the smallest item and the value of the largest item included in the distribution.
Range = L – S
Where L = Largest item; S = Smallest item.

Question 2.
Mean deviation.
Answer:
Mean deviation also called as average deviation. It is the average difference between the items in a series from the mean or median or mode. In this mean deviation we ignored ± signs.
M.D. = \(\frac{\Sigma \mathrm{f}|\mathrm{D}|}{\mathrm{N}}\)

Question 3.
Correlation. [A.P. Mar 17]
Answer:
Correlation is an analysis of the co-variation between two or more variables. There are two types of correlation.

1. Karl Pearson’s method
2. Spearman’s Rank method
   Karl Pearson’s correlation (r) = \(\frac{\Sigma x y}{\sqrt{\Sigma x^2 \times \Sigma y^2}}\)
   Spearman’s correlation (rk) = \(\frac{6 \Sigma D^2}{N\left(N^2-1\right)}\)
   (Or) 1 – \(\frac{6 \Sigma D^2}{N^3-\mathrm{N}}\)

Question 4.
Rank correlation.
Answer:
In 1904, Prof. Charter Edward Spearman had devised a method of rank correlation. It is based on the ranking of different items in the variable. This method is useful where actual item values are not given simply their ranks in the series are known.

Question 5.
Index number. [A.P. Mar. 18]
Answer:
Index numbers are devices for measuring difference in the magnitude of groups related variabilities. There are four types of index numbers.

1. Price index number
2. Quantity index number
3. Cost living index number
4. Special purpose index number

Question 6.
Laspeyre’s price index formula.
Answer:
P₀₁ = \(\frac{\Sigma \mathrm{P}_1 \mathrm{Q}_0}{\Sigma \mathrm{P}_0 \mathrm{Q}_0}\) × 100

Question 7.
Paasche’s price index formula. [A.P. Mar 16]
Answer:
P₀₁ = \(\frac{\Sigma \mathrm{P}_1 \mathrm{Q}_1}{\Sigma \mathrm{P}_0 \mathrm{Q}_1}\) × 100

Question 8.
Fisher’s price index formula.
Answer:
P₀₁ = \(\sqrt{\mathrm{L} \times \mathrm{P}}\)
= \(\sqrt{\frac{\Sigma \mathrm{P}_1 \mathrm{Q}_0}{\Sigma \mathrm{P}_0 \mathrm{Q}_0} \times \frac{\Sigma \mathrm{P}_1 \mathrm{Q}_1}{\Sigma \mathrm{P}_0 \mathrm{Q}_0}}\) × 100

Andhra Pradesh BIEAP AP Inter 2nd Year Economics Study Material 9th Lesson Economy of Andhra Pradesh Textbook Questions and Answers.

AP Inter 2nd Year Economics Study Material 9th Lesson Economy of Andhra Pradesh

Essay Questions

Question 1.
Write an essay on the economy of Andhra Pradesh.
Answer:
Andhra Pradesh is one of the largest states in India in terms of area and population. It is the eighth largest state in terms of geographical area, accounting for 4.96% of the area of the country. The state has a total geographical area of 160.21 lakh hectares. In terms of population, it is the 10^th largest state with 4.96 crores i.e., 4.10% of the country’s population.

State Gross Domestic Product (SGDP): The SGDP may also be called as state income. SGDP is defined as the total value of the finished goods and services produced within the boundaries of the state during a year.
The three sectors in A.P Economy are as follows.

1. Primary sector: Agriculture, Animal husbandry, Forests etc.
2. Industrial sector : Industries, Electricity, Irrigation.
3. Tertiary sector: Trade, Hotels, Transport, Communication etc.

The SGDP A.P an increase trend from 2005 – 06 ₹ 1,41,977 crore to 2013 – 2014 it was ₹ 2,50,282 crores. The growth rate of SGDP of A.P 6.08% in 2013 – 14.

Per capita income : The per capita income gives a better idea of the standard of the people. A.P per capita income was ₹ 85,797 in 2013-14.

Agriculture: Agriculture and allied actives remained the main source of livelihood of the state population. During 2013-14 food crops are grown in 54.92 lakh hectors.

Industry: The industrial development in A.P in going on the same lines of the industrial development of India. The industrial sector contribution in GSDP undergoes slight changes. It shares decreased from 23.7 during 2007-08 to 20.7% by 2013-14.

Tertiary Sector: The share of tertiary sector in the SGDP has shown a tremendous increase from ₹ 64,411 crore to ₹ 1,40,054 crore in 2013-14.

Question 2.
What is SGDP ? Explain the trends in SGDP of Andhra Pradesh.
Answer:
The State Gross Domestic Product may also be called as the State Income.

The State Gross Domestic Product is defined as the total value of the final/finished goods and services produced within the geographical boundaries of the state during a year.

The directorate of economics and statistics estimates the SGDP in Andhra Pradesh. The directorate makes use of the product and income methods for estimation of SGDP”. The three sectors in Andhra Pradesh Economy are as follows :

1. Primary Sector : Agriculture, Animal husbandly, Forests, Mines and Quarries.
2. Industrial Sector : Industries, Electricity/Gas, Irrigation, Construction.
3. Tertiary Sector : Trade, Hostels, Transport, Communication, Real Estate, General Administration, Social Services.

The railway, insurance, banking and communication services are called supra regional sectors. The income generated in these sectors are estimated by the Central Statistical Organisation (CSO) and the centre allots the share to the states proportionately.

Andhra Pradesh makes use of the product method for estimating the SGDP in Agriculture sector, Forests, Animal husbandry, Industries, Mines and Quarries and the Income Method in Irrigation, Transport, Power Supply of Gas, Insurance, Banking and Communication sectors.

Trends of SGDP in Andhra Pradesh: The following table explains the trends in SGDP of Andhra Pradesh.
GSDP of A.P at Constant (2004 – 05) prices

GSDP of AP in about 4.36% of Indian G.D.P. It is notical that the growth rates of both A.P and India are not showing a steady trend but are fluctuating.

Question 3.
Explain the trends in population and percapita income growth in Andhra Pradesh.
Answer:
With 13 districts, A.P occupies tenth place among all states of India with 4.96 crores of population according to 2011 census, The population of A.P is 4.96 crores and that of India is 121.06 crores. So the percentage of A.P population is 4 in the total Indian population. The decadal growth rate of population of A.P is always lower than the Indian growth rate. By 2011 the population growth rate of A.P(9.21) is almost half of the national average 17.69.

The density of population in Andhra Pradesh has gone up. During 2011, the density of population per sq. km is 304 persons for the state, as against 382 persons for the country. Among the districts, the Krishna district having high density with 518 persons followed by West godavari district 470 persons per sq.km. The lowest density area is Y.S.R Kadapa with 188 persons.

The fertility rate in A.P is also showing downward trend in the recent decade.

The percapita income gives a better idea of the standard of living of people. The following table reveals the changes in percapita income of Andhra Pradesh from 2004-05 to 2013-14.

From the table, it is clear that the percapita income of A.P. was ₹ 25,959 in 2004 – 05 and has gone up to ₹ 85,797 at 2013 – 14.

Question 4.
Importance of Agriculture in Andhra Pradesh Economy.
Answer:
Andhra Pradesh is considered as the Annapurna, i.e., granary of South India. Agriculture and its allied activities remained the main source of livelihood for a sizable chunk of the state population in general and its labour force in particular. Ensuring food security and providing gainfaul employment to the labour force, has been the essential premise of the policy makers. Raising form incomes through crop diversification and encouraging alternative methods of forming perhaps help to improve the standards of the farmers in the state.

With regard to foodgrain production in India, Uttar Pradesh stands in the 1^st place, Punjab in the second and A.P in the third. The table provides information on the food grain production in Andhra Pradesh.
Area under Food & Non Food Crops in the State

From the above table we can come to the conclusion that food crops are dominating with around 65% of are put for their production and the trend is continuing over the year. During 2013 – 14 food crops are grown in 54.92 lakh hectares which is 67.57% of total area in that year.

According to 2013 – 14 provisional estimates, 11,698 thousand tonnes of food grains are produced in which 10,618 thousand tonnes are cereals and millets and 1,080 thousand tonnes pulses. 2,242 thousand tonnes of oil also produced from various parts of the state.

Question 5.
Importance of Industry in Andhra Pradesh Economy.
Answer:
The role of industrial sector in any economy decides its pace of development. The state of Andhra Pradesh is endowed with wide varieties of natural resources, longest coastline in South India. Infrastructure, communication system, experts in technical field and wide market opportunities.

The contribution of this sector was only 29,124 cr. in the base year ie., 2004 – 05 increased to 51,838 crores in 2013 – 14 continuously except for 2008 – 09. Infact it share decreased from 23.7 during 2007 – 08 to 20.7 percent by 2013 -14.

The share of industrial sector in providing employment opportunities to the labour force remained same in both state and the nation over the years. The share of this sector is increasing very sluggishly.

The value of industrial exports from the state is continuously increasing. It is ₹ 1,29,001 crore in 2012 – ’13. In the total silk units of the country, A.P’s sick units are 10.2 percent and state stood in fourth place. There are 44 State Level Public Enterprises (SLPEs) functioning in the combined state with the capital of ₹ 69,125 crore. Among them, APCPDCL, A.P. GENCO, APSPDCL, Housing Board etc., are top level SLPEs. Andhra Pradesh Industrial Infrastructure Corporation (APIIC) is the nodal agency for special economic zones in the state, A.P. is the first state in the country to announce an exclusive SEZ policy. As on March 2014, there were 32 number of SEZs in the state in which 10 were IT related, 6 multiproduct, 4 pharmaceuticals, 2 biotech and 10 sector specific SEZs. Recently, State Finalized Visakapatnam SEZ in an area of 3,500 acres.

Question 6.
Importance of tertiary sector in Andhra Pradesh economy.
Answer:
A service sector is the fastest growing sector in Andhra Pradesh as it is in total India. It is expanding as of agriculture is losing, the industrial sector being constant.

Service sector is the major contributor to the state GSDP with 48.54 percent in 2004- OS and increase further to 55.96 by 2013-14. ₹ 64.411 crore were contributed by the service during 2004 – 05 which increases enormously to 1,40,054 crore in 2013 – 14. This means only service sector alone is contributing more than half of the states GSDP. Same trend is also noticed in India where service sector is the single largest contributor to the GDP with more than 50 percent contribution. IT sector is the faster growing sector.

Service sector is the second largest among the three sectors with provides nearly 1/4^th of the employment opportunities in the state. It is providing livelihood to nearly 25 percent of labour force, which is, on par with the national average (25.4 percent).

Question 7.
Explain the Irrigation facilities in Andhra Pradesh.
Answer:
Irrigation : Andhra Pradesh is blessed with many major rivers. The most important being Godavari, Krishna, Thungabhadra, Penna and Vamsadhara. The State, share of dependable flows from all the rivers and streams is estimated at 2.746 TMC, and only 1.753 TMC has been utilized so far. Apart from rivers the state consists of many artificial lakes and reservoirs for irrigation and drinking water.

Irrigation development as well as management is of utmost importance in the State. Andhra Pradesh is rightly called “A River State” as it is blessed with major river systems like the Godavari, Krishna, Thungabhadra, Vamsadhara and other rivulets. Presently, 54 major, medium and other projects are being considered under Jalayagnam, with a hope to irrigate 52 lakh acres.

Polavaram project is a multi – purpose irrigation project witch has been accorded ’National Project Status’ by Central Government. This dam across the Godavari river is under construction located in West and East Godavari District in Andhra Pradesh and its reservoir spreads in parts of Chhattisgarh and Orissa States also. The project is expected to enabling irrigation of23,20,000 in Krishna, West Godavari, East Godavari, Visakhapatnam, Vizianagaram and Srikakulam districts of Andhra Pradesh.

The Pattiseema Project is crucial as it will lift 80 tmft of surplus Godavari water from Pattiseema to Krishna Basin and divert it through Srisailam to the parched Rayalaseema till Polavaram project is completed. Government also announced that Pattiseema project would not go aganist the interest of farmers of twin Godavari districts, but would meet drinking and irrigation water need of Rayalaseema.

Government of Andhra Pradesh is also encouraging drip irrigation system, in the State. It is supplying drip irrigation equipment on subsidized rates to the farmer. A.R ranks 1^st in Micro irrigation system in the country and so far covers 5.63 lakh hectors.

Question 8.
Explain about the transport facilities in Andhra Pradesh.
Answer:
The transport facilities available in Andhra Pradesh can be classified into four categories.
They are :

1. Railways
2. Roadways
3. Airways
4. Waterways.

1) Railways : They have played a significant role in boosting the economy of the State alongside developing the industrial and the tourism sectors. Andhra Pradesh mainly served by three major railway zones viz., South Central Railway, Southern Railway and East Coast Railway. State has total 444 railway stations and having 3,355 km of rail network. State Government proposals are with Ministry of Railways to set a new Railway Zone in newly formed Andhra Pradesh.

One of the highest broad gauge tracks in the world is in Eastern Ghats route that runs from Visakhapatnam to Anantagiri. Vijayawada railway station is the highest grosser in the SCR zone and one of biggest railway junctions in India.

2) Roadways : Roads are one of the basic modes of transportation system and also an important priority sector of infrastructure. Systematic development of road is one of the important pre-requisites for development and acceleration of growth in the economy. Among the different modes of domestic transportation systems, road transport carries more than 80 percent of the goods and passenger traffic.

Andhra Pradesh has an extensive road network of 1,46,954 km with 42,511 km of State Highways, 3,144 km of National Highways and 101,484 km of District Roads. Andhra Pradesh Road Development Corporation (APRDC), established 1998 is responsible for Maintenance and Management of roads.

National highways and State highways connect to every village and town within the State, as well as to major cities of neighbouring States. National Highway 5, with a highway network of around 1,000 km runs from Srikakulam district to Nellore district.

The Andhra Pradesh State Road Transport Corporation (APSRTQ operates public bus services in the state owned by the State Government. Pandit Nehru Bus Station in Vijayawada is the largest bus terminus in the State.

3) Civil Aviation (or) Airways : Government has entered into Memorandum of understanding with Airports Authority of India (AAI) For up – gradation / modernization of non – metro airports at Vijayawada, Tirupati, Kadapa and Rajahmundry airports. The Airport Authority of India (AAI) has proposed to upgrade the Tirupati airport to International standards. AAI proposed Master plan for development of Rajahmundry airport.

4) Seaports (or) Waterways : Andhra Pradesh has the second longest coastline of 972 km after Gujarat in India. Ports provide development and growth of maritime activities such as international trade of exports and imports, ship repairs, tourism, fishing and water sports.

Ports are a gateway to trade and commerce. Visakhapatnam, the largest port in the State is also one of the largest ports in terms of handling cargo in the country.

Question 9.
Role of Information Technology (I.T) in the economic development of Andhra Pradesh. .
Answer:
The combined State of A.P had taken a leadership position in E-Govemance and IT. However, the new state of A.P formed on 2^nd June 2014, accounts for only 2 percent of the IT export Turnover of the combined State and about 1.8 percent of employment Significant, consistent and planned efforts have to be made if these figures have to attain respectability over the next 5 years.

A.P is called as Hi-tech Capital and Cilican Valley of India. But after bifurcation, Government announced that Vizag city having all potential to be developed as IT center. IT parks would be developed in all district headquarters across the State in a phased manner said minister for IT, P. Raghunatha Reddy. Following important points can be drawn from AP’s IT sector.

• Vizag may be the IT Capital of the State.
• Every district headquarter will have IT park.
• IT sector contributes 38.22 percent of total exports from A.P (United Andhra)
• IT sector provides employment opportunities to around 3 lakh employees by 2013.
• This sector export value was nearly 36 thousand crore by 2013.
• Out of 3 IT professionals working in USA, one is from India and out of 3 Indians, one is represented from A.P.
• State having highest number of IT Special Economic Zones (SEZs) in India – 10 out of 56.
• IT export expected to go up from current level of ₹ 36,000 crore to about ₹ 150,000 crore by 2017.
• Direct employment from existing 3 lakh to 7 lakh.
• State Government is looking forward to integrate IT and BT. It says Information Technology and Biotechnology need to come together to streamline manufacturing processes.

Latest IT policy of A.P – 2014 : To face the challenges in IT sector development after the bifurcation of the State, the Government of Andhra Pradesh has developed a blueprint “Re-imagining Andhra Pradesh – role of E-Govemance, Electronics and IT “for development of ICT Industry in the State.

Government shall endeavor to establish state-of-the-art infrastructure of international standards suiting to the requirements of the IT/ITESC Industry. Visakhapatnam will be developed as a Mega IT Hub, through an initial effort of developing an IT township with a built – up space of 5 million square feet. A signature tower of 1 million square feet shall form the nucleus of the Mega IT Hub. IT Hubs shall also be developed at Vijayawada, Kakinada, Tirupati and Anantapur. Fiscal and non – fiscal incentives are announced in the policy to attract investment in the field.

Question 10.
Briefly give an account of the Welfare schemes of Andhra Pradesh.
Answer:
The foremost objective of any welfare state is to sustain and improve the living standards of people. Although since a long time, agriculture and industry have been recognized as prime drivers of economic growth; social sector development is gaining ground especially in the context of human development. The concept of human development invariably highlights the importance of bringing improvement in the social infrastructure like education, health care, nutrition, water supply, housing, social security etc. Further, public investment on these social overheads ensures social justice and equality in the society.! Government of A.P has been implementing various welfare programmes schemes. Some of the important welfare programmes. The following table shows section wise – welfare programmes by A.P Government.

Section-wise Welfare Programmes Implemented by Government of Andhra Pradesh

Short Answer Questions

Question 1.
State Gross Domestic Product (SGDP).
Answer:
The State Gross Domestic Product may also be called as the State Income. The State gross domestic product is defined as the total value of the final/finished goods and services produced within the geographical boundaries of the State during a year.
The three sectors in A.P economy are as follows.

1. Primary sector : Agriculture, Animal husbandary, Forests etc.
2. Industrial sector : Industries, Gas, Irrigation, Construction.
3. Tertiary sector : Trade, Hotels, Transport, Communication, General Administration Social Services.

Andhra Pradesh makes use of the product method for estimating the SGDP in Agriculture sector, industrial sector, service sector. The GSDP in 2004 – 05 was 1,34,767 crores and it has incrosed to ₹ 2,50,282 crores in 2013 – 14. The annual growth in 2005 – 06 was 5.35 percent and it decreased to 2.14% in 2008 – 09 and picked up again and reached 7.29% in 2011-12.

Question 2.
State percapitaincome.
Answer:
The percapita income gives better idea of the standard of living of the people. This can be taken as an indicator of improving living standards in A.P economy. The following table reveals changes in percapita income A.P from 2004 – 05 to 2013 – 14.

Percapita Income of A.P and All India at Current Prices

The state PCI is always higher than the national average. For 2013-14 the gap between State and National percapita incomes is ₹ 11,417. Among the districts Viaskhapatnam with a percapita income ₹ 1,13,860 stands tall, while Srikakulam remains at the bottom with almost half of the PCI Visakhapatnam.

Question 3.
Occupational distribution of labour in A.P. [A.P. Mar- 18]
Answer:
Occupational distribution pattern in any country decides the level of economic growth. Any economy can be divided into

1. Agriculture sector
2. Industrial sector
3. Service sector

Dividing the total population according to their occupation or work is known as occupational distribution of population or labour.

According to the statistical abstract of A.P 2014, prepared on the basis of the 2011 census, the total number of workers is A.P is 2,30,80,964. Among them, the total number of workers in industry sector in A.P is 33,40,133 which is 14.47% of total work force. Total number of workers related to primary sector is 1,43,92,736. i.e., 62.36% and 34.77% of total work force based on service sector.

The number of people depending on agriculture sector is still very high. Tertiary sector is in the second place and providing livelihood to the larger percent of population after agriculture sector. In A.P secondary sector’s contribution is steady and constant.

Question 4.
Environmental protection activities in the state. [A.P. Mar. 17]
Answer:
Andhra Pradesh having good environmental conditions. Its coastline is second in India and first in South Indian states. To protect this rich environment, steps have been taken by the State Government.
1) Environmental Protection Programmes : State is implementing programmes like Community Forest Management (CFM), National Afforestation Programme (NAP) etc.

2) Chettu – Neeru Programme : The State Government launched ‘neeru – chettu’ a programme aimed at conserving water and saving trees, in all districts in 2015.

3) Non – Conventional Energy : A.P Department of Energy decided to make the State as a largest “Green Energy Corridor”, by increasing the production of renewable energy through solar.

4) Vanamahotsava : Forest Department celebrated 64th Vanamahotsava in 2013 with view of ‘Two million tree plantation”.

5) Wildlife conservation: To protect the rich bio-diversity of Flora, Fauna and ecosystem Govt, declared 66 protected areas which include 13 wildlife sanctuaries and 3 National Parks. Biodiversity conservation society of A.P has been constituted to take care of the conservation measures of wild life sanctuaries. The Seshachalam Biosphere Reserve has been notified and made functional.

Question 5.
Importance of Tourism in A.P. [A.P. Mar. 18, 16]
Answer:
Andhra Paradesh Tourism Development corporation is state government agency which promotes tourism in A.P. The state government is making efforts to bring the world to A.P and take A.P to the world. A new tourism policy was announced in 2010 and steps are initializing to make Andhra Pradesh as a tourist – friendly destination. The important types of tourism in A.P are as follows.

1. Pilgrim Tourism
2. Health Tourism
3. Buddhist Tourism
4. Beach Tourism
5. Farm Tourism
6. ECO Tourism
7. Leisure Tourism

The tourist spots in A.P are attracting both domestic and foreign tourists.
The state is also famous for pilgrim tourism. All these attractions are increasing the inflow of foreign and domestic tourists in A.P.
Tourism is now becoming a revenue source for the state’s treasury along with IT sector.

Question 6.
Population characteristics of Andhra Pradesh. A.P. Mar. 16]
Answer:
The demographic characteristics of newly formed State of Andhra Pradesh with 13 districts (Coastal Andhra & Rayalaseema). The population of 4.96 crore which accounts for 4.1% of the country’s population makes it the 10^th most popular state in the Country of this male are 2,48,30,513. A female population is 2,47,46,950 in 2011 census. Sex ratio for every 1000 male is 997 and female is 943 in 2011. Where the rural population is 349.67 in 2011, in total population the density of population goes up 304 per sq.km in 2011 census. The fertility rate in A.P is also showing a downward trend in the recent years. The literacy rate is 67.35 in 2011 for A.P in which male literacy is 74.77 and that of female is 59.96. State has 5.64% less literates when compare to the Nation.

Question 7.
Welfare schemes related to different sections in Andhra Pradesh.
Answer:
The foremost objective of any welfare state is to sustain and improve the living standards of people. Government of A:P has been implementing various welfare progra-mmes/schemes some of the important programmes implemented by the government of Andhra Pradesh.

Welfare programmes of women and child they are Janani Suraksh Yojana, Child Health Care services, Kishore Sakti Yojana, Widow Pension Scheme, Pavala Vaddi Scheme, Abhaya Hastham Ready to eat etc. some of the youth welfare programmes are TRYSEM, DWACRA, Rajeev Udyoga Sree etc., some of minorities programmes are Urdu Academy, Micro credit to SHGS, Post Metrict Scholarships, Reimbursement of tution fee etc.

Very Short Answer Questions

Question 1.
SGDP [A.P. Mar. 18]
Answer:
The state gross domestic product is defined as the total value of the final goods and services produced with in the geographical boundaries of the state during a year.

Question 2.
Density of population in A.P.
Answer:
The density of population determines the magnitude of the burden that State is being called upon to carry and to determine the future potential of growth.
Density of population = Total population in the area/total area in square k.m
In A.P the density of population is 304 per square km in 2011 census.

Question 3.
Literacy rate in A.P.
Answer:
Literacy is the reading and writing skill of the people. The literacy rate is 67.35 in 2011 for A.P. in which male literacy is 74.77 and that of female is 59.96. State has 5.64% less literates when compare to the Nation, West godavari stood in 1^st place. Vizianagaram having lowest literacy rate.

Question 4.
Project Tiger. [A.P. Mar. 18, 16]
Answer:
This programme is being implemented with the objective of increase the number of our National animal tiger. The Nagarjuna Sagar, Srisailam Tiger Reserve Spreads over the districts of Kurnool, Prakasam, Guntur which is the home to over 50 tigers and able to support even more.

Question 5.
Sarva Siksha Abhiyan.
Answer:
This was introduced during 2001 – 2002 with an aim to provide universal elementary education for all children in the 6 to 14 age group by 2014 SSA has how been renamed as ‘Rajiv Vidya Mission’ in A.P.

Question 6.
Any Welfare Programme.
Answer:
Government of A.P has been implemention various welfare programmes/schemes. Some of the welfare programmes are Pavala Vaddi scheme, Abhaya Hastam Ready to eat, Metric Scholarships, Micro credit to self help groups etc.

Question 7.
Eco – Tourism [A.P. Mar. 17]
Answer:
Andhra Pradesh vision – 2020 envisaged East Godavari tourism as a growth engine. It is one of the important type of tourism in A.P. Maredumilli, Nelapattu (Nellore) Mamandur, Talakona (Chittoor), Balapalli (Kadapa), Ethipothala (Guntur), Kambala Konda (Visakhapatnam) are the famous eco – tourism centres in A.P

Question 8.
Civil aviation in A.P
Answer:
Government has entered into memorandum of understanding with Airports Authority of India (AAI) for up – gradation / modernization of non metro airports at Vijayawada, Tirupati, Kadapa and Rajahmundary. AAI has proposed to upgrade the Tirupati airport International standards.

Question 9.
Roadways in A.P
Answer:
Roads are one of the basic modes of the transportation system and also an important priority sector of infrastructure. Road transport carries more than 80% of the goods and passenger traffic. A.P has extensive road network of 1,46,954 km with 42,511 km of State Highways 3,144 k.m of National Highway and 1,01,484 km of District Roads.

Question 10.
Sea – ports in A.P [A.P. Mar. 17, 16]
Answer:
Ports are a gateway to trade and commerce. A.P has the second longest coastline of 972 km after Gujarat in India. Ports provide development and growth of maritime activities. Visakha is the largest port in the State and also one of the largest port in terms of handling cargo in Country.

Andhra Pradesh BIEAP AP Inter 2nd Year Economics Study Material 8th Lesson Environment and Sustainable Economic Development Textbook Questions and Answers.

AP Inter 2nd Year Economics Study Material 8th Lesson Environment and Sustainable Economic Development

Essay Questions

Question 1.
Define environment and explain the components of environment
Answer:
The word Environment is derived from the French word environner which means to surround or encircle. Everything which surround us may collectively be termed as the environment, we are surrounded by both living and non living things. The living things are called as biotic part (Physical environment) and non-living things as abiotic part (Biological environment) of the environment.

Components of Environment : According to National Environmental Policy Act (NEPA) of USA, 1969, the term “Environment” includes physical, social, cultural, economic and aesthetic dimensions. According to Rau & Wooten, environment can be viewed in four dimensions.

1) Physical Environment: It covers the physical, chemical and biological elements such as land, climate, vegetation, wild life surrounding land uses and physical character of the area, infrastructure, air and noise pollution levels.

2) Social Environment: It includes a large number of factors such as population and its density, community, composition, religious, education, community facilities like schools, parks, hospitals, recreational and cultural facilities. Some social factors will overlap the economic factors.

3) Economic Environment: All economic factors like employment, unemployment levels and sources of income, availability of factors of production, demand patterns, poverty level etc., are come under this category.

4) Aesthetic Environment : This category comprises historical archeological or architecture of objects or sites, scenic areas, views and landscapes. People derive pleasure by seeing such objects.

As the environment consists of all these different components, it is considered to be completely interdisciplinary discipline. We need the knowledge of Physics, Botany, Zoology, Geology, Geography, Agriculture, Chemistry, Economic Education, Demography, Ecology, Sociology, Philosophy, Political Science, Biotechnology, Biochemistry and Genetics to understand what an environment is.

Question 2.
Describe the relationship between environment and the economy.
Answer:
Relationship between environment and economy: The functions of the environment explain the importance of environment. It acts as the supplier of raw materials to the economy and absorbs the wastes discharged by the economy.

In economic terms, the resources supplied by the environment can be called as environmental goods. These goods are public goods. They can be used by many individuals at the same time without any competition from other individuals.

However, in modem days, the reckless and exploitative behaviour of the economic activity is setting a limit to the efficiency of environment to supply to the resources. Economist warned the world about the consequences of overuse of environmental resources. He said that earth is a spaceship with a limited amount of life support resources. He warned the mankind to minimize the consumption rather than to maximize it.

In the other words, there should be a balance between inputs and outputs. When we receive the inputs to produce goods and services, it must be equal to the consumption and the discharge of wastes. The quality of wastes and emission must be less, so that the environment can absorb them. Material balance model.provides and excellent.answer for the relationship that must exist between environment and the economy.
R = F + W₁
The household sector consumes all the ‘F units of produced goods and services. While doing so, it also produces W2 units of wastes.
So in the consumption sector F = W₂
Hence, in the consumption economy R = F = (W₁ + W₂)
Therefore R = (W₁ + W₂)
These equations show that the entire mass of inputs (raw materials) equal the entire mass of output (wastes). This entire amount of wastes is returned to the environment. Thus, the materials taken from the environment are again returned the environment in equal amounts. Hence, R = W₁ + W₂.
This equality shows the accounting identing of the material balance. Assuming this two sector model, material balance can be explained by the diagram.

Note: F = W and R = W₁ + W₂; F = Final goods and services; W = Wastes; R = Raw material the production sector uses R (Raw materials) units of raw materials from the environrhent to product F unit of final products./While producing the final products, it also produces W₁ amount of wastes. So in the production sector.
R = F + W₁
The household sector consumes all the ‘F units of produced goods and services. While doing so it also produces W₂ units of wastes.
So in the consumption sector F = W₂
Hence, in the economy R = F = (W₁ + W₂)
Therefore R = (W₁ + W₂)
These equations show that the entire mass of inputs (raw materials) equals the entire mass of output (wastes). This entire amount of wastes is returned to the environment. Thus, the materials taken from the environment are again returned to the environment in equal amounts. Hence, R = W₁ + W₂. This equality shows the accounting identity of the material balance.

It can be concluded that this material balance model depends upon the first two laws of thermodynamics. The first law explains that the energy can be changed from one form to another. But it can neither be created nor destroyed. The second law is the law of entropy. Economic activities of production and consumption are dependent on these two laws. Similarly generation and assimilation of wastes are also dependent on the two laws.

Question 3.
What is air pollution ? Explain the causes and consequences for air pollution.
Answer:
“The excessive concentration of contaminated substance in the air which adversely affects the well being of the individuals, living organs and property of all forms” is called as air pollution.

Causes for air pollution : It is estimated that 2 billion tonnes of air pollutants are released every year. Besides natural sources, a number of man-made sources are causing air pollution. Burning of fire woods for domestic purposes, burning of fossil fuels, industrialization, agricultural activities, vehicular emissions, nuclear tests, deforestation, mining power generation, refrigeration industries, etc., are the sources of air pollution.

Effects of Air Pollution :

1. Air pollution adversely affects people, plants, animals, aquatic life and materials.
2. It leads to health disorders in human beings.
3. Damages the leaves of the plants and trees; interferes with photosynthesis and plant growth.
4. Air pollution discolours the historical monuments; breakdown the exterior paint on cars and houses and deteriorates the quality of natural beauty sites. Ex : Taj Mahal in 1998, when the white marble of the famous monument began to turn yellow.
5. Air pollution affects the stratosphere and climatic conditions.
6. Global warming, acid rains, depletion of ozone layer, changes in the distribution of solar energy, rising temperatures, occurrence of droughts, changes in the natural plants, crops, insects, livestock
7. Increased ultraviolet radiation are the effects of air pollution.

Question 4.
Briefly discuss the sources, effects of water pollution ?
Answer:
Water is blue gold like air, water is very essential for the existence of all the living organisms. It accounts tor about 70 percent of the weight of the human body. About 80 percent of the earths surface is covered by water.

Water pollution is defined as “the addition of some substance or factor which degrades the quality of water, so that it becomes unit for use”.
We have two sources of water surface and ground water.

Water that is found in streams, tanks, rivers and artificial reservoirs is called surface water. Water that per colates into the ground is called as ground water.

Sources of Water Pollution: The major pollutants that pollute water are :

1. Domestic wastes and Sewage
2. Surface run-off
3. Silt
4. Industrial effluents
5. Hot effluents.
6. Fertilizers and Pesticides
7. Accidental Oil spills
8. Compounds of toxic metals
9. Mining wastes
10. Untreated waste water and garbage etc.,

Effects of Water Pollution: Water pollution generates the following effects.

1. Transmits the water – borne diseases.
2. Deteriorates the quality of drinking water.
3. Affects the productivity of irrigated agricultural lands.
4. Sea food becomes contaminated.
5. Depletes oxygen in water. Brings undesirable changes in temperature and breeding of fish.
6. Makes water unfit even for swimming
7. Produces offensive odours in water.
8. Water-related diseases cause a heavy economic burden, particularly for poor people.
9. Leads to loss of human days due to illness.
10. Children suffer from intestinal diseases.

Question 5.
Define noise pollution and explain how it affects the quality of environment?
Answer:
Sound is different from ‘Noise’, though these words are used similarly. Not all sounds are noise. A deep, loud and unpleasant sound is called noise. It is undesirable and unwanted. To be precise, anything between 50 to 90 dB is considered as noise. The human ear can safely responds to pressures upto 120 dB. As per the Environment (protection) (Second Amendment) Rules, 1997, the permitted noise levels is 125 dB.

“Any noise generated above 125 dB and produces harmful effects in effects in environment and causes health hazards to human being” is called as noise pollution.

Noise becomes a pollutant when it exceeds certain limits. Noise pollution remains in the environment only for hazards to human being is called as noise pollution limited time. It is not so dangerous as air and water pollutions. They are

1. Indoor sources
2. Outdoor sources.

Sources of Noise Pollution : There are two board categories of sources for noise pollution. They are 1. Indoor sources 2. Outdoor sources.

1) Indoor Sources: Sounds generated by the use of home appliances, libraries, living rooms, business offices, sounds generated by alarm clocks, breathing, conversation, computer rooms etc., are the sources of indoor noise pollution.

2) Outdoor Sources: Noise generated by transport vehicles, loud speakers, industries, marriages, aeroplanes, cinema theatres, firing of crackers, heavy road traffic, festivals etc., are the outdoor noise pollutants.

Effects of Noise Pollution: Noise pollution affects the quality of environment as well as life on earth. Noise pollution leads to the following effects.

1. Pollutes the essence of music and speech.
2. Affects communications.
3. Leads of temporary or permanent hearing loss.
4. Affects the functioning of various systems of human body. Hypertension, sleeplessness, digestive disorders, peptic hinders, blood pressure changes are some of the ill effects of noise pollution.
5. Disturbs the brain waves of the people at sleep.
6. Causes irregular or faster pulse beats and increases in blood cholesterol levels.
7. Causes increased heart-beat rate of the foetus.
8. Causes irrepairable damage, to unborn babies.
9. Ears, the first organ that develop of the unborn babies, are badly affected.

Question 6.
What are the economic implications of environmental degradation ?
Answer:
Environmental degradation is slightly different from pollution. Environmental degradation is decrease in the quality of environment, whereas, the pollution is the contamination of the nature (air, soil, water) with harmful substances. Environmental changes may be driven by many factors including economic growth, population growth, urbanization, intensification of agriculture, rising energy use and transportation etc. The basic factors for environmental degradation are discussed below.

1) Social factors: Social factors, which are responsible for environmental degradation are briefly discussed below.

a) Population : Population is an important source of development yet it is a major source of environmental degradation when it exceeds the threshold limits of the support systems.

b) Poverty : Poverty is said to be both the cause and effect of environmental degradation. The circular link between both concepts is an extremely complex phenomenon. Inequality may faster unsustainability because, the poor, who rely on natural resources more than the rich, deplete natural resources faster as they have no real prospects of gaining access to other types of resources.

c) Urbanisation : Lack of opportunities for gainful employment in villages and the ecological stresses is leading to an ever-increasing movement of poor families to town, Mega cities are emerging and urban slums are expanding. Such rapid and unplanned expansion of cities has resulted in degradation of urban environment.

2) Economic factors : Environmental degradation is the result of market failure. In this context, environmental degradation is a particular case of consumption or production of externalities reflected by divergence between private social costs.

3) Institution factors: The Ministry of Environment and Forest of the government of India is responsible for protection, conservation and development of environment. Environment Act, 1986 is the key legislation governing environment management. Wild life Act 1972, the forest conservation Act 1980 etc.

Question 7.
What are the various factors resulting in environmental pollution ?
Answer:
Pollutions are classified into different ways. They are classified according to their form, exsistence and natural disposal.
According to their natural disposal, the pollutants are classified into three groups.
1) Degradable pollutants: The pollutants are can be rapidly broken down by natural processes are called degradable pollutants. Ex : discorded vegetables, domestic sewage etc. These pollutants are called as Biodegradable pollutants.

2) Slowly Degradable pollutants : Some pollutants remain in the environment for many years in unchanged condition pollution results when their discharge exceeds the capacity of the environmental degrade them. These pollutants are actually waste products. Ex : DDT, Plastic etc.

3) Non – Degradable pollutants: The pollutants which can not be degraded by natural processes are called as nondegradable pollutants once they enter into the environment, it is difficult to eradicate them. They continue to accumulate in the environment. For Ex : Nuclear waste.

Short Answer Questions

Question 1.
Explain various concepts of Environment.
Answer:
Environment around us consists of living and non living things with their inter dependency and mutual interaction. A study of all these aspects is called as ecology. To understand environment and its nature, a primary information of its basic concepts is needed. Eco-system biodiversity, greenhouse effects, global warming, climate change, acid rains, ozone depletion are some of the basic concepts of environment.

A) Eco-System: The British Ecologist AG.Tansley coined the term Ecosystem in 1935. An ecosystem is a region with a specific and recognizable land, scape (form) such as forest, grassland, desert, or coastal area. The living community of plants and animals in any area together with the non-living components of the Environment constitute as ecosystem.

B) Biodiversity : The word biodiversity was coined by Walter Rosen in 1986. Living organisms are different in their size, colour, shape and structure. The genes, environment and ecosystem decide this variety and complexity in the living organisms. The variety and variability among living organisms is called as biodiversity.

C) Greenhouse effect: It is a phenomenon in which the atmosphere of a planet traps radiation emitted by the sun, caused by gases such as carbon dioxide, water vapour and methane that allow incoming sunlight to pass through but retain heat radiated back from the planet’s surface. It is a process by which thermal radiation from a planetary surface is absorbed by atmospheric greenhouse gases and is re-radiated in all directions.

Greenhouse effect may leads to many serious environmental issues such as radiation, climate change, mansoon, directions and its efficiency and so on.

D) Global Warming : Global warming is the increase of Earth’s average surface temperature due to the effect of greenhouse gases, such as carbon dioxide emissions from burning fossil fuels or from deforestation. Which trap heat that would otherwise escape from Earth.

E) Acid Rain : Acid rain is a broad term referring to a mixture of wet and dries deposition (deposited material) from the atmosphere containing higher than normal amounts of nitric and sulfuric acids. These acid rains are the result from both natural sources such as volcanoes and decaying vegetation and man-made sources, primarily emissions of sulfur dioxide (SO₂) and nitrogen oxides (NO_x) resulting from fossil fuel combustion.

F) Ozone Depletion : Reduction in the amount of Ozone (O₃) in the stratosphere is called ozone depletion. It happens due to high levels of chlorine and bromine compounds in that layer.
As ozone depletes more ultraviolet (UV) radiation comes to earth and causes damages to all living organisms. UV radiation seems responsible for skin cancer and other skin complications.

Question 2.
Causes for soil or land pollution.
Answer:
Soil pollution is defined as “Unfavourable alteration of soil quality by disturbing the natural composition which decreased soil productivity.
Causes for Soil Pollution :

1. Soil pollution or land degradation is primarily caused by soil erosion, in which the fertile upper surface of the land erode and land become barren. It happens due to deforestation, extensive cultivation, mining activities etc.
2. Desertification is spreading due to over grazing, extensive use of poor soils, alkalization and salination of soil.
3. Soil is also degrading because of excessive use of chemical fertilizers and pesticides leads to acidification which changes chemical properties and destroy plants and agricultural sector on the whole.
4. Filling of wastages and other disposals into the land also causes land degradation.

Question 3.
Types of natural resources with suitable examples. [A.P. Mar. 16]
Answer:
Natural resources are classified on the basis of their quantity, mutability and re¬usability. However, it would be convenient to classify the natural resources in the following general categories.

Natural Resources
1) Renewable Resources : The natural resources which cam be used permanently without depletion are called renewable resources. They are not exhaustible. They have the capacity to regenerate themselves, within a short period. Ex: Solar; wind, tidal etc.

2) Non-Renewable Resources : The natural resources which will exhaust by use are called as non-renewable resources. They cannot be regenerated. Once we exhaust these resources, they will not be available for use. Ex : Gold, silver, copper etc.

Question 4.
What is pollution ? Explain the types of pollution.
Answer:
Pollutant is a physical agent which is found more than the normal levels, changes the physical, chemical or biological characteristics of the resources that environment is supplying.
Types of Pollution : Pollution can be classified into various types among which air, water, soil, noise pollutions are important forms.

Air Pollution: The excessive concentration of contaminated substance in the air which adversely affects the well being of the individuals, living organs and property of all forms is called as air pollution.

Water Pollution : It is defined as the addition of some substance or factor present in water which degrades its quality. So that it becomes health hazard or unfit for use”.

Soil Pollution : Unfavourable alteration of soil quality by disturbing the natural composition which decreases soil productivity.

Noise Pollution : Any noise generated above 125 dl. B and produces harmful effects in environment and causes health hazards to human being is called noise pollution.

Question 5.
What do you mean by ”Sustainability” ? Explain the Components of Sustainability.
Answer:
Sustainability can also be defined as achievement of constant real consumption through time keeping the capital intact. A flow of consumption without reducing the capital is called sustainability.

There are three basic components of sustainable developments namely economic, social and environmental components. These three components are interdependent.

Economic Component: Economic components of sustainability require that societies pursue growth path that generate, optimum flow of income while maintaining the basic stock of man-made capital, human capital and natural capital.

Social Components : Social components of sustainability are built on the twin principles of justice and equity. For development path to be sustained, wealth, resources and oppo’rtunities should be equally shared. All citizens should have access to minimum standards of security, human rights and social benefits such as food, health, education and opportunities of self-development.

Environmental Components : Environment components of sustainability require sustainable resource use, efficient sink function and maintainance of natural capital. The environment should be able to perform its three functions efficiently and uninterrupted so that ecological stability and resilience are not affected.

Question 6.
Explain the effects of pollution on human health.
Answer:
Enviommental degradation has adverse effects on human health; which may lead to raise the labour absenteesism. Ill health causes to decrease the efficiency of labour which intum leads to low productivity.

i) Air Pollution: Air pollutants like carbon monoxide, nitrogen oxides, hydrocarbons, particulate matter etc., attack human health through respiratory system. Diseases like bronchitis, lung cancer, eye irritation and skin irritation etc., are caused by air pollution.

ii) Water Pollution : Water is significant vehicle in transmission of diseases, various, disease – producing organisms such as viruses, bacteria and protozoa are transmitted through water. These organisms cause dysentery, typhoid, cholera and infectious hepatitis.

iii) Sound Pollution: Sound pollution affects human health in many ways. Loud noise causes disturbances in sleep and lead to different side effects. It leads to damage of hearing, interference with work tasks and speech, diversion of concentration, hypertension, tachycardia (fast heart beat) and irritation.

Question 7.
Measures for the conservation of forests. [A.P. Mar. 18, 17]
Answer:
Forests are the carbon sinks and treasures of scenic beauty. The following are some protective measures such important forests.

1. Forest land should not be alloted to poor for house sites.
2. Specific areas must be developed under social forestry programmes.
3. Waste land must be brought under plantations.
4. Forest must be protected from fires particularly in summer.
5. Measures must be taken to refill the depleted forest area.
6. Establishment of Joint Forest Management Communities is necessary.
7. Cattle grazing and illegal cutting of trees should not be allowed.
8. Local communities must be involved in the conservation of forests.

Question 8.
Need for environmental preservation.
Answer:
1) Moral persuasion, which is an appeal to reduce pollution in the broader interests of the society and making people involved in the environmental protection activities.

2) Methods of recycling should be made compulsory in which production units are restricted to maintain certain level of environmental quality or to install a specific treatment of pollutants.

3) Fiscal controlling techniques should be implemented such as
a) Levying of an affluent charge or pollution charge and revenue so collected should be redirected for the purpose of environmental protection.
b) Giving subsidies on pollution control equipment and encouragement of eco-friendly techniques of manufacturing.
c) Refundable deposit, which is collected from the polluters and refunded after his activities cease.
d) Pollution permits should be fixed and to see each production unit is functioning with in the limits.
e) Industrial permits should be linked with the maintenance of plantation in proportion to its production activity.

4) Government investment programmes such as waste treatment plants, slum clearance and management of wild like refugees, reforestration and afforestation are some policy instruments available to control pollution and preserve environmental equity.

5) As the children are the future citizens, awareness on environment and its protection should be introduced as a part of their curriculum. An effort is made by the government in this direction and now environmental education is mandatory part in education system from school level and onwards.

6) So far, government of India enacted some of the following acts for environmental protection.
a. The Wild life Protection Act, 1972.
b. The Water (prevention and control of pollution) Act, 1974 amended in 1978 and 1988.
c. The Air (Prevention and Control of Pollution) Act, 1981.
d. The Air (Prevention and Control of Pollution) Rules, 1982.
e. The Forest (conservation) Act, 1980 amended in 1988.
f. The Environment (protection) Act, 1986.

Very Short Answer Questions

Question 1.
Environment.
Answer:
The word environment is derived from French word environner which means to surround or encircle. Everything which surrounds us is collectively called as environment.

Question 2.
Ecosystem. [A.P. Mar. 16]
Answer:
The British ecologist A.G.Tansley coined the term Ecosystem in 1935. Eco system is the combination of natural and physical environment in a given geographical arc. It is two types. 1. Natural eco-system 2. Artificial eco-system.

Question 3.
Greenhouse effect. [A.P. Mar. 17]
Answer:
It is a phenomenon in which the atmosphere of a planet traps radiation emitted by the sun caused by gases such as CO₂, water vapor and methane, that allow incoming sunlight to pass through but retain heat radiated back from the planet’s surface. It leads radiation climate changes etc.

Question 4.
Air Pollution.
Answer:
The excessive concentration of contaminated substance in the air which adversely affect the well being of the individuals, living organs and properly of all forms is called air pollution.

Question 5.
Water Pollution. [A.P. Mar. 18, 17]
Answer:
It is defined as “the addition of some substance or factor which degrades the quality of water, so that it becomes unfit for use”. The major pollutants that pollute water are, domestic wastes and sewage, slit etc.

Question 6.
Ozone Layer. [A.P. Mar 18, 17, 16]
Answer:
The Ozone layer is present in the stratosphere which is immediately above the troposphere at a height of 12 k.m from the earth. It is 40 k.m thick layer. Ozone absorbs the dangerous ultra violet rays from the sun and protects life on earth from death.

Question 7.
Global Warming.
Answer:
Global warming is the increase of Earth’s average surface temperature due to the effects of green house gases such as carbon dioxide emissions from burning fossil fuels or from deforestation, which trap heat that would otherwise escape from earth.

Question 8.
Sustainable Development [A.P. Mar. 18, 16]
Answer:
The process of development which sustains the human well being in future also.

Question 9.
Cost – benefit analysis of environment.
Answer:
Evaluation and comparison of capital and environmental costs of a project to estimate its relative merits and demerits. Every economic activity consists of both benefits as well as costs.

Question 10.
Reasons for Deforestation.
Answer:
Forests are deforestation due to various causes such as population growth, poverty and unemployment, fire wood, overgrazing, construction of danis, roads etc.

Question 11.
Biodiversity. [A.P. Mar. 18, 17]
Answer:
The word biodiversity was coined by Waiter Rosen in 1986. The variety and variability among living organisms is called as biodiversity or totality of genes species and ecosystems in a region.

Question 12.
What is “Noise”?
Answer:
A deep, loud and unpleasant sound which is undesirable and unwanted.

Question 13.
What is Land Degradation? .
Answer:
Land is a valuable resource wedepend for food, habitations and for all the basic necessities on land. The land is said to be degraded. Deforestation cultivation industrialisation, wind erosion, soil acidity are important sources for land degradation.

Question 14.
Environmental Externalities.
Answer:
An externality is a consequence of an economic activity that is experienced by unrelated third parties. It is either positive or negative. Whenever economic activity is held environmental externalities should be considered.

Question 15.
Swachh BharatAbhiyan. [A.P. Mar. 16]
Answer:
Mahatma Gandhi communicated a quintessential message to the ration through his efforts, to educate people around him about cleanliness. He wished to see a ‘Clean India’. To work seriously towards this vision of Gandhiji, R M. Shri Narendra Modi – External website that opens Swachh Bharat in October 2, 2014. This mission seeks to achieve the goal.

Andhra Pradesh BIEAP AP Inter 2nd Year Economics Study Material 7th Lesson Planning and Economic Reforms Textbook Questions and Answers.

AP Inter 2nd Year Economics Study Material 7th Lesson Planning and Economic Reforms

Essay Questions

Question 1.
Define planning and what are the objectives of planning.
Answer:
There is no single opinion among economists with regard to the meaning of planning. From the economic growth point of view, planning stands for the actions taken during a particular period to achieve a targeted growth rate, economic planning implies deliberate control and direction of the economy by a central authority for the purpose of achieving definite targets and objectives within a specified period of time.

Thus planning means the efforts taken to reach the already set goals during a particular time period or directing the economic activities in a systematic way to get the set goals.

General objectives of planning :

1. To increase the annual growth rate.
2. Thereby, increasing the per capita income and standard of living of the people in the country.
3. Speedy industrial development.
4. Self-sufficiency with respect to the production of food grains.
5. Removal of regional imbalances.
6. Eradication of poverty by removing disparities in income and wealth.
7. To increase the employment opportunities.
8. To bring steady growth through price stabilisation.

Question 2.
Explain the objectives of Twelth five year plan. [A.P. Mar. 17, 18]
Answer:
The Government on 4^th October approved the 12^th five year plan (2012 – 2017) to achieve annual average economic growth rate of 8.2 per cent, down from 9 per cent envisaged earlier, in view of fragile global recovery. According to officials the projected average rate gross capital formation in the 12^th plan is 37 per cent of GDP. The projected gross domestic savings rate is 34.2 per cent of GDP.

Main objectives :
The main objectives of twelth five year plan with its central aim faster, sustainable and more inclusive growth are discussed under the following heads.
a) Economic Growth :

• Real GDP Growth Rate of 8.0 per cent.
• The per capita income should grow at 6.5 per cent per annum.
• Agriculture growth rate of 4.0 per cent.
• 10 percent annual growth rate of manufacturing or industrial sector.
• Industrial sector growth rate of 7.6 percent.
• Service sector growth rate of 9.0 per cent.
• Every state must have a higher average growth rate in the Twelth plan than that achieved in the Eleventh plan.

b) Poverty and Employment:

• Head – Count ratio of consumption poverty to be reduced by 10 percentage points over the proceeding estimates by the end of twelth five year plan.
• Generate 50 million new work opportunities in the non-farm sector and provide skill certification to equivalent numbers during the twelth five year plan.

c) Education :

• Increase in literacy to 85 percent by 2017.
• Mean years of schoohng to increase to seven years by the end of twelth five year plan.
• Enhance access to higher education by creating two million additional seats for each age cohort aligned to the skill needs of the economy (RUSA).
• Eliminate gender and social gap in school enrollment (that is, between girls and boys, and between SCs, STs, Muslims and the rest of population) by the end of the twelth five year plan.

d) Health :

• Reduced IMR to 25 and MMR to 1 per 1000 live births, and improve child sex ratio (0-6 years) to 950 by the end of the twelth five year plan.
• The outlay on health would include increased spending in related areas of drinking water and sanitation.
• Reduce Total Fertility Rate to 2.1 by the end of Twelth five year plan.
• Reduce under nutrition among children aged 0-3 yrs to half of the NFHS – 3 levels by the end of the plan.

e) Infrastructure, Including Rural Infrastructure :

• Increase investment in infrastructure as a percentage of GDP to 9 percent.
• Increase the Gross Irrigated Area from 90 million hectare to 103 million hectare.
• Provide electricity to all villages and reduce AT & G losses to 20 percent by the end of twelth five year plan.
• Connect all villages with all weather roads by the end of twelth five year plan.
• Upgrade national and state highways to the minimum two – lane standard by the end of twelth five year plan.
• Complete Eastern and Western Dedicated Freight Corridors by the end of twelth five year plan.
• Increase rural tele – density to 70 percent.
• Ensure 50 percent of rural population has access to 55 LPCD piped drinking water supply and 50 percent of gram panchayats achieve the Nirmal Gram Status by the end of plan.

f) Environment and Sustainability:

• Increase in forest and tree cover to 33 percent.
• Increase green cover (as measured by satellite imagery) by 1 million hectare eveiy year during the twelth five year plan.
• Add 30,000 MW of renewable energy capacity in the plan.
• Reduce emission intensity of GDP in line with the target of 20 percent to 25 percent reduction by 2020 over 2005 levels.
• Cleaning of all major polluted rivers.

g) Service Delivery:

• Provide access to banking services to 90 percent Indian households by the end of the plan.
• Major subsidies and welfare related beneficiary payments to be shifted to a direct cash transfer by the end of the twelth plan, using the Aadhar platform with linked bank accounts.

Question 3.
Briefly review the achievements and failures of Eleven five year plans. [A.P. Mar. 18]
Answer:
Achievements :

1. India attained self – sufficiency with regard to the food grain production increased from 50.8 million tonnes into 264 million tonnes.
2. The growth rate in the national income increased from 3.6 percent in First plan to 8.3 percent by the end of 11 plan.
3. The percapita income increased from ₹ 1.32 lakhs crores in the first plan to ₹ 47.67 lakh crores by the end of 11^th plan. A considerable progress in progress in the production of various industries like steel, aluminium etc.
4. Large scale development took place in infrastructural facilities like transportation irrigation tele communication etc.
5. India attained commandable progress in science, technology and research.
6. To control the increasing population, the family planning programme came into force for the first time in the sixth plan.
7. The industrial growth increased from 32 million tones to 583 million tones by the end of 11^th plan.

Failures of the plans: The Indian economy has made significant progress over more than fifty years of planning era. Still there are many weakness which point out towards the failures of Indian plans in many ways.

1. Despite more than sixty years of planned economic development. Still there exist the problems of poverty and unemployment.
2. Inspite of the several measures taken under land reforms. Still there exist inequalities with regard ownership of land. There is need for redistribution of land among the landless. So it can be said that the land reforms are not implemented properly.
3. The plans are hot able to control the volume of black money and corruption.
4. We are still have to go along way to reach the target of health to all.
5. Plans are not been able to reduce the economic concentration of income and wealth in the few plans.
6. Plans failed to achieved balanced regional development.

Question 4.
Explain the causes of regional imbalance in India. [A.P. Mar 16]
Answer:
Regional imbalances stand in the way of a nation’s integrity, economic growth and development. Before taking the measures to rectify regional imbalances, it is imperative to know the causes of regional imbalances. They are :
a) Geographical reasons : Physical geography controls economic growth in developing countries than the developed countries. For Ex: Himachal Pradesh, Hill districts of UP, Northern Kashmir etc., remained backward mainly because of in accessibility.

b) Climate condition : Climate too plays an important role in the economic development of many regions in India, regions with adverse climatic conditions reflected in low agricultural output and absence of large – scale industries.

c) British rule: Historically, the existence of backward regions started from the British rule in India. The British helped the development of only those regions which are. endowed with conductive facilities to drain Indian wealth to their country like Calcutta, Bombay etc.

d) Concentration of Industries: New investment, in the private sector has a tendency to concentrate in already well developed areas, thus reaping the benefits of external economics. Since, well developed area offers private investors certain basic advantages viz., skilled labour, infrastructure, transport etc.

e) Scarcity of Natural Resources : Certain regions are endowed with natural resources, whereas some regions are not. Those regions with great natural resource endowment are developed faster.

f) Lack of Infrastructural Facilities: Those regions where there are no proper roads, electricity, telecommunication, drinking water, education, medical, technical, training facility, credit facilities etc., they tend to remain underdeveloped.

Question 5.
Explain the measures taken for balanced regional development
Answer:
As the problem of regional imbalance is multidimensional and peculiar one, it is very difficult to bring balanced regional development. Though steps have been launched since second five year plan in this direction, still a lot is required to do. However, following things can be done to attain a balance between different regions.

• Transfer of funds from the central pool to backward states.
• Starting of industries by the Government in the backward regions, as private sector having bias towards developed regions.
• Providing infrastructural facilities like electricity, telecommunications, transport etc., in backward regions.
• Encouragement to industrial decentralization through regional planning and micro level planning.
• Formation of Industrial estates in backward areas.
• Special policies to the regions where frequent floods and drought occur.
• Central assistance to develop hill and tribal areas.
• Encouragement to small scale industries.
• Provision of subsidies, tax concessions, tax holidays etc.

Question 6.
Explain the role of International Trade in Economic Development.
Answer:
The role of international trade in economic development is significant. In modem days all countries irrespective of their financial status are depending in participating in international trade. Economists found a positive association between country’s participation in international trade and its level of economic growth.

a) Increases output: Due to international trade when a country specializes in the production of few goods and division of labour, it exports the commodities which it produces cheaper in exchange for what others can produce at lower cost. It gains from trade through increased output, national income which is useful to break vicious circle of poverty and promotes development.

b) Expand mairket: Developing countries are hampered by the small size of domestic markets which fail to absorb sufficient volume of output. This leads to low inducement to investment. International trade widens the market arid increases the inducement to invest.

c) Increases Employment : Due to international market opportunities, under – developed countries started exploiting unutilized resources which will reduce unemployment and under employment. As people’s income rises, domestic savings and investments increase. Human resources will be utilized optimally.

d) Increases Internal and External Economies : Expansion of productive activities and expanded market opportunities leads to a number of internal and external economies, and hence to reduction of cost of production. There are the direct gains from international trade.

e) Indirect Benefits : By enlarging the size of the market and the scope of specialization, international trade makes a greater use of machinery, encourages inventions and innovation and raises labour productivity.

f) Import of capital goods against export of staple commodities : International trade helps to exchange domestic goods having low growth potential for the foreign goods with high growth potential.

g) Important Educative Effect : International trade helps in importation of ideas, skills and technical know – how from the developed countries and stimulates technical progress in UDCs. So underdeveloped countries have to change their poor educational, technical, productive systems so as to raise their competitiveness.

h) Basis for importation of foreign capital: Developing countries are capital scarce economies. This condition restricts the economy in all fields to move ahead. If a country actively participates in international trade, the unused capital resources of rich countries will flow and utilized effectively in capital poor countries. Foreign capital not only helps in increasing employment, output and income but also smoothen the adverse balance of payments and inflationary pressures.

Question 7.
Define Globalization and what are the essential conditions of globalization in India.
Answer:
Globalization is the process of integrating or synchronizing domestic economy with the world economy or in simple words it is the process of opening up of domestic economy doors to the rest of the world.

Essential conditions for Globalization : There are some essential conditions to be satisfied on the domestic economy as well as the firm for successful globalization of the business. They are
a) Business Freedom : There should not be unnecessary government restrictions which come in the way of globalization. Like import restrictions, restrictions on sourcing finance, foreign investment etc. So, Liberalization is the pre condition for globalization.

b) Infrastructure facilities : The extent to which an enterprise and develop globally from home country base depends on the infrastructural facilities like water, transport, electricity, finance etc.

c) Government support : Although unnecessary government interference is a hindrance to globalization. Government support can encourage globalization. Government support may take the form of policy and procedural reforms, development of common facilities like infrastructural facilities.

d) Resources : Resources often decide the ability of a firm to globalize. Resourceful companies may find it easier to thrust ahead in the global market. Resources include finance, technology, R and D capabilities, managerial expertise etc.

e) Competitiveness : The competitive advantage of the company is an important determinant of success in global business. A firm may derive competitive advantage from any of the factors such as low costs and price, product quality, product differentiations, technological superiority etc.

f) Orientation : A global orientation on the part of the business firms and suitable globalization strategies are essential for globalization.

Question 8.
Explain the impact of globalization on Indian Economy.
Answer:
Globalization is the process of integrating or synchronizing domestic economy with the world economy or in simple words it is the process of opening up of domestic economy doors to the rest of the world.
Impact of Globalisation on Indian Economy :
a) India’s share in the world exports raised from 0.53 percent in 1991 to 1.7 percent by 2013.
b) Foreign currency reserves which were as low as one billion U.S dollars, grow up to 333 billion U.S dollars by the end of February 2015.
c) Exports now finance more than 65 percent of imports.
d) Control over country’s current account deficit is observed.
e) The growing rate of external debt decreased drastically when compared to prereform period. .
f) International confidence in India has been restored.
g) Indian consumers are now enjoying wide variety of quality goods at lower prices.
h) Employment situation worsened in the era of globalization. The growth rate of employment actually declined from 2 percent to 0.98 percent after globalization.
i) The pressure of MNCs, IMF and World Bank force governments to take decisions regarding reforms actually leading to the closure of small and medium enterprises.
j) Globalization also widened the income inequalities among the people and even among regions too.

Short Answer Questions

Question 1.
Types of planning.
Answer:
Economic planning is the main characteristic feature of socialistic and mixed economic systems, which fallow planned development strategy.
Types of planning:
a) Perspective plan : A perspective plan is a macro plan formulated for a period of 15 to 20 years, keeping in view the long term needs and long term objectives.

b) Five year plans: Five year plans are designed for a period of five years. A five year plan is an integral part of perspective plan. After the completion of five years, the achieved targets will be reviewed.

c) Annual plans : Annual plan is part of a five year plan. The targets of five year plans are divided into annual targets and detailed plans will be prepared year – wise.

d) Rolling plans : This concept was introduced by Gunnar Myrdal. This kind of plan does not have a fixed period of time. It has only duration and moves forward, the completed year will be deleted and next year will be added.

Question 2.
Planning commission.
Answer:
After independence on 1^st March, 1950, the planning commission was setup by the Government of India. Planning Commission works independently and as an advisor to the central government. The Prime Minister of the country acts as the chairman and there will be an active deputy chairman and other members in the commission. Montek Singh Ahluwalia was its last Deputy Chairman. The cabinet minister of key portfolios also the ex-officio members. Experts in various fields like economics, industry, science and technology etc., will be appointed as full time members. From 1^st January 2015, planning commission replaced by NITI Ayog.

Question 3.
Explain the objectives of planning commission. [A.P. Mar 17]
Answer:
Preparing plans for the most effective and balanced utilization of the country’s man power, physical and capital resources is the obligation of planning commission.
Objectives and functions:

1. To make an assessment of the material, capital and human resources of the country and to examine whether they are sufficient to meet the nation’s requirement.
2. To.define the stages, on the basis of priority in which the plan should be carried out and propose the allocation of resources for the due completion of each stage.
3. To indicate the factors that tend to retard economic development and find feasible ways to overcome these factors.
4. To determine the conditions for the successful execution of the’ plan.
5. To determine the nature of the machinery required for securing the successful implementation of each stage of the plan in all its aspects.
6. To appraise from time to time the progress achieved in the execution of each stage of the plan and to recommend alternative policy measures when they are needed.

Question 4.
Explain atleast three failures of plans.
Answer:
The Indian economy has made significant progress over more than sixty five years of planning era. Still there are many weaknesses which point out towards the failures of Indian plans in many ways. Some of the failures are presented as under.

a) Despite more than sixty years of planned economic development, still there exist the problems of poverty and unemployment. In 2012 the Indian government stated 21.9 percent of its population is below its official poverty limit. (About 300 million people), like wise the from 1983 till 2011 unemployment rates in India averaged 9 percent reaching an all time low of 3.8 percent in December 2011. The NSS data reveals the number of unemployed to be of the order of 26.58 million during 1999 – 2000 and 28.1 million during 2009-10.

b) Inspite of the several measures taken under land reforms, still there exist inequalities regarding land, income and wealth. Distribution of surplus lands not completed.

c) One of the objectives of Indian Five Years Plans was to establish an egalitarian society. This could not be achieved so far.

d) The plans are not able to control the volume of black money and corruption. In Feb 2012 Central Bureau of Investigation (CBI) said that Indian have $ 500 billion illegal money (Black money) based on a statement made to India’s Supreme Court in July 2011.

e) We still have to go a long way to reach the target of Health to All.

Question 5.
Causes of Regional Imbalances in India. [A.P. Mar. 18, 17]
Answer:
Regional imbalances stand in the way of Nation’s Integrity, economic growth and development.

a) Geographical Reasons : Physical geography controls economic growth in developing countries than the developed countries. For example, Himachal Pradesh, Hill district of UP, Northern Kashmir etc., remained backward mainly because of inaccessibility.

b) Climatic Conditions : Climate too plays an important role in the economic development of many region in India, region with achierse climatic conditions reflected in low agricultural output and absence of large – scale industries.

c) British Rule : Historically the existence of backward regions started from the British rule in India. The British helped the developed of only those regions which are endowed with conducive facilities to drain Indian wealth to their country like Calcutta, Bombay etc.

d) Concentration of Industries: New investment, in the private sector has attendance to concentrate in already well developed areas, thus reaping the benefits of external economic. Since, well developed area offers private investors certain basic advantages viz., skilled labour, infrastructure, transport etc.

e) Scarcity of Natural Resources : Certain regions are endowed with natural resources, where as same regions are not. Those regions with great natural resources endowment are developed faster.

f) Lack of Infrastructural Facilities: Those regions where there are no proper roads, electricity, telecommunication, drinking water, education, medical, technical training facility etc., tend to remain underdeveloped.

Question 6.
Enumerate 3 points in justification of privatization.
Answer:
1) Improvement in efficiency and performance : The Private sector introduces the profit oriented decision making process in the working of enterprise leading to improved efficiency and performance.

2) Fixing Responsibility is Easier : While personnel in the public enterprises cannot be held responsible for any lapse, the areas of responsibility in the private sector is clearly defined. This makes it possible to take people to task in the private sector units for blunders committed by them, whereas in the public sector units, it is easy to pass the buck.

3) Private units are subject to capital market discipline : Private sector firms are subject to capital market discipline and scrutiny by financial experts. In fact, the ability to raise funds in the capital market is critically dependent on performance, but not so in the case of public enterprises.

Question 7.
Rule of International Trade.
Answer:
The international trade plays avery vital role for the development of economic of the developing countries.
1) Due to international trade when a country specializes in the production of few goods and divisions of labour, it exports the commodities which it produces cheaper in exchange for what others can produce at lower cost.

2) Developing countries are hampered by the small size of domestic markets which fail to absorb sufficient volume of output. This leads to low inducement to investment. International trade widens the market and increases the inducement to invest.

3) Due to international market opportunities, under developed countries started exploiting unutilized resources which will reduce unemployment and under employment.

4) Expansion of productive activities and expanded market opportunities leads to a number of internal and external economics, and hence to reduction of cost of production.

5) By enlarging the size of the market and the scope of specialization, international trade makes a greater, use of machinery, encouraging inventions and innovation and raises labour productivity.

6) International trade helps to exchange domestic goods having low growth potential for the foreign goods with high growth potential.

7) International trade helps in importation of ideas, skills and technical know-how from the developed countries and stimulates technical progress in UDCs.

8) Developing countries are capital scarce economics. If a country actively participates in international trade, the unused capital resources of rich countries will fallow and utilized effectively in capital poor countries.

Question 8.
Objectives of GATT.
Answer:

1.  It had no legal status.
2. It was not created by the governments and legislatures.
3. It was not an agency of the United Nations Organization.
4. It has a set of rules and producers relating to multilateral agreements of selective nature. There were separate agreements on on members.
5. The GATT disputes settlements system was dilatory and not binding on the parties to the disputes
6. The GATT was a forum where the member countries meet once in a decade to discuss and solve world trade problems.
7. The GATT rules applied to trade in goods.
8. It has a small secretariat managed by a Director General.

Question 9.
Objectives of W.T.O
Answer:
a) It aims at raising standard of living, ensuring full employment and large and steady growth, expanding the production and trade in goods and services among the global countries.

b) To allow for the optimal use of the world’s resources in accordance with the objectives of sustainable development. This also considers environmental protection with economic growth.

c) To ensure the developing and least developed countries secure a share in the growth in international trade.

d) To convince the member countries for reciprocal and mutually advantageous arrangements through reduction of tariffs and other trade harries.

e) To develop an integrated, more viable and durable multilateral trading system.

Question 10.
Differences between GATT and WTO.
Answer:
GATT

1. It had no legal status.
2. It was not created by the government and legislatures.
3. It was not an agency of the united nations organization.
4. It has a set of rules and procedures relating to multilateral agreements of selective nature. There were.separate agreements on separate issues which were not binding on members. Any member could stay out of an agreement. Only could be penalized on default.
5. The GAIT disputes settlement system was dilatory and not binding on the parties to the disputes.
6. The GATT was a forum where the member countries met once in a decade to discuss and solve world trade problems.
7. The GAIT rules applied to trade in goods.
8. It has a small secretariat managed by a Director General.

WTO

1. It has legal status.
2. It has been created by international treaty ratified by the governments and legislatures of the member states.
3. It has co-operative relationship with the UNO. The agreements which form part of the WTO are permanent and binding on all members.
4. Action can be taken against any defaulting member by all the member states.
5. The WTO dispute settlement mechanism is automatic, faster and binding on the parties.
6. Its properly established rule based World Trade Organisation where decisions on agreements are time bound.
7. The WTO covers not only trade in goods and services but also trade related aspects of intellectual property rights and number of other agreements.
8. It has a large secretariat and a huge organizational set-up.

Question 11.
Functions of W.T.O [A.P. Mar. 18, 16]
Answer:
a) WT.O facilitates the implementation, administration and operation of world trade agreements.
b) It provides the forum for trade negotiations among its member countries.
c) It shall handle trade disputes.
d) It shall monitor national trade policies of member countries.
e) It shall provide technical assistance and training to developing countries.
f) It maintains harmonious and co-operative relationship with IMF and IBRD and its affiliated agencies.

Very Short Answer Questions

Question 1.
Define plan.
Answer:
Plan may be defined as an outline or broad statement of schemes Or programmes designed or evolved to relaise certain pre-determined economic objectives.
(Or)
The efforts taken to reach the already set gains during a particular time period.

Question 2.
What is Rolling plan ?
Answer:
Rolling Plan : This concept was introduced by Yunnar Myrdal. This kind of plan does not have a fixed period of time. It has only duration and moves forward, the completed year will be deleted and next year will be added.

Question 3.
Concept of plan holiday.
Answer:
The gap that occurred in the planning process. There was official gap was 1966 – 69. A unofficial gap occurred in 1990 – 92 due to economic and political instability in the country.

Question 4.
Define perspective plan.
Answer:
A perspective plan is a macro plan formulated for a period of 15 to 20 years. Keeping in view the long term needs and long term objectives.

Question 5.
What is an Annual plan ? Give an example.
Answer:
Annual plan is a part of five year plan. The targets of five year plans are divided into annual targets and detailed plans will be prepared year – wise.
For example : There was a plan holiday for three years from 1966 – 69 at that time annual plans are implemented by postponing the commencement of 4^th plan.

Question 6.
Backward states in India.
Answer:
We can classify the states in India into two categories on the basis of percapita income. Poverty and Human development index. They are 1. Developed states 2. Developing states Backward states are Orissa, Bihar, Utter Pradesh, Madhya Pradesh and Assam.

Question 7.
Define Regional imbalance.
Answer:
The co-existence of relatively developed and economically depressed states and even regions with each country or state is known as regional imbalance. It may be natural or mammal.

Question 8.
Balanced regional development.
Answer:
It implies the extension of the economic progress to the backward area and widespread diffusion of industry. It does not mean equal development of the different regions in the country. The objective is to raise the standard of living of the people into backward regions.

Question 9.
What is Liberalisation ?
Answer:
It refers to relaxation of previous government restrictions usually in areas of social and economic policies. Thus, when government liberalised trade it means it has removed the tariff, subsidies and other under employment restrictions on the flow of goods and services between the countries.

Question 10.
Explain the concept of privatization.
Answer:
It is the general process of involving the private sector in the ownership or operation of a state owned enterprises. Privatisation is a process the government transfers the producing activity from the public sector to the private sector.

Question 11.
Define Globalisation. [A.P. Mar. 18]
Answer:
It is the process of integrating various economies of the world without creating any hindrance in the free flow of goods and services, technology, capital even labour or human capital.

Question 12.
Concepts of TRIPS.
Answer:
Trips refer to the legal ownership by a person or business of an invention attached to a particular product.

Question 13.
What do you mean by TRIMS ?
Answer:
Trade related investment measures refer to certain condition or restrictions imposed by a Governments is respect of foreign investment in the country. TRIMS were widely employed by developing countries. The agreement or trade. Related investment measures calls for introducing national treatment of foreign investment.

Question 14.
The clause of MFN. [A.P. Mar. 16]
Answer:
Any concession given to any nation was automatically extended to all the member countries of the GATT. MFN means Most Favoured Nation.

Question 15.
Define Disinvestment.
Answer:
The sale of the public sector equity to the private sector is called disinvestment.

Question 16.
GATT.
Answer:
The general agreement on Tariffs and trade it came into force on 1^st January 1948. As the name itself suggests, General Agreement was concerned only with tariffs and trade restrictions and regulated international trade matters. Geneva is the head quarter of GATT.

Question 17.
W.T.O. [A.P. Mar. 17]
Answer:
The WTO Agreement came into force from January 1, 1995. WTO is a new international organisation setup as a permanent body and is designed to play the role of a watch dog in the spheres of trade in goods, trade in services, foreign investment, intellectual property rights etc.

Question 18.
Uruguay Round.
Answer:
There were 8 rounds of negotiations between participating countries. In GATT in 1947. The 1^st six rounds were related to curtailing tariff rates. Seventh-round included non-tariff obstacles. 8^th round is different from previous round. Because it included a number of new objects for consideration, this 8^th round known as “Uruguay Round’.

Question 19.
F.D.I.
Answer:
Investment in a foreign country where the investor remains control over the investment. FDI means foreign direct investment.

Andhra Pradesh BIEAP AP Inter 2nd Year Economics Study Material 5th Lesson Industrial Sector Textbook Questions and Answers.

AP Inter 2nd Year Economics Study Material 5th Lesson Industrial Sector

Essay Questions

Question 1.
Explain the importance of Industrial Sector in India.
Answer:
Industrialisation is a pre-requisite for any country, in a particular underdeveloped country like India. The major sectors like Agriculture and tertiary sectors depend upon the available production of equipment and machinery at reasonable prices by the industrial sector.

1) Raising Income: The first important role is that industrial development provides a secure basis for rapid growth of income. In industrially developed countries, for example the percapita income is very high where, as for the industrially backward countries is very low. Percapita income in 2012 in Germany was $ 44,010, Japan $ 47,870, U.K. $ 38,250, USA $ 50,120 and India only at $ 1530 per annum.

2) Changing the structure of the Economy: Secondly, in order to develop the economy underdeveloped countries need structural change through industrialization. The benefits of industrialization will ‘trickle down’ to the other sectors of the economy in the form of development of agricultural and service sectors leading to the rise in employment, output and income. In India sectoral contribution to gross domestic product is 13.9 percent from Agriculture, 26.2 percent from Industry and 59.9 percent from Service sector during the year 2013-14. (provisional)

3) Meeting High – Income Demands: Demands of the people are usually for industrial products alone. After having met the needs of food, income of the people is spent mostly on manufactured goods. To meet these demands and increase the economy’s output,’ underdeveloped countries need industialization.

4) Overcoming Deterioration in the terms of India : India need industrialization to free themselves from the adverse effects of fluctuations in the prices of primary products and deterioration in their terms of trade. Such countries mainly export primary products and import manufactured goods. For economic development such countries must shake off dependence on primary products. They should adopt import substituting and export oriented industrialization strategy.

5) Absorption of Surplus labour in Industries: The next advantage is underdeveloped countries like India are characterised by surplus labour and rapidly growing population. To absorb all the surplus labour it is essential to industrialise the country rapidly. It is the establishment of industries alone that can generate employment opportunities on an accelerated rate.

6) Bringing Technological Progress: Another advantage is research and development is associated with the process of industrialization. This results in bringing about an industrial civilization (or) environment for rapid progress which is necessary for any healthy economy.

7) Strengthening the Economy: Finally industrialization of the country can provide the necessary elements for strengthening the economy.

Question 2.
Briefly review the 1948 Industrial Policy Resolution of India.
Answer:
After independence, Government of India issued the first important industrial policy statement on April 6, 1948. This resolution laid the foundation of mixed economy in India. Objectives:

1. Establishment of a society where equal opportunities and justice to all.
2. Increase in the standards of living of people.
3. Removal of inequalities in income and wealth. In order to reach the objectives • mentioned above, the resolution divided the industries into four broad categories.
   1. Industries – where state (Government) had a monopoly.
   2. Mixed sector – Industries in the private sector and Government controls them.
   3. Those industries under the control of Government are the key industries. They are established by the Government. The existing private undertakings were allowed to continue for 10 years. After which Government will think of their Nationalisation.
   4. All over industries which are not included in the above were left open to the private sector. However, the state will have its control over these units. The important features noticed in the 1948 industrial policy resolution are :
      a) Industries are classified into four categories.
      b) The resolution accepted the importance of both private and public sectors in the speedy industrial development of Indian economy.
      c) The 1948 resolution also accepted the importance of small and cottage industries.
      d) The resolution also recognized the role of foreign capital and importance of regularization of its use.
      e) The resolution also mentioned about the Nationlisation of private undertakings in case of unsatisfactory progress.

Question 3.
Discuss the 1956 industrial policy resolution of India.
Answer:
1956 Industrial Policy Resolution: Agriculture sector achieved the desired progress during the first five year plan. Therefore, Government of India shifted the stress to the development of industry in the second five year plan. In the light of the socio-economic changes that took place during the 1^st plan and all this necessitated a fresh statement of Industrial policy. As a result the second industrial policy resolutions were adopted in April 30, 1956.

Objectives : Following are the objectives of the 1956 industrial policy resolutions.

1. Acclerating the rate of growth by speeding up the industrialisation process.
2. Mutual co-operation between the public and private sectors.
3. To develop heavy industries and machine making industries by expanding the public sector.
4. Establishment of the socialistic pattern of society.
5. To prevent private monopolies and the concentration of wealth and income.
6. Reducing the regional imbalances.
7. Encouragement to cottage and small scale industries.
8. To build up a large and growing co-operative sector.

1956 Industrial policy resolutions gave importance to the establishment of socialistic pattern of society in India with an expanded public sector. In a nut-shall, we can say that this policy modernized the concept of mixed economy.

Important Provisions : The important provisions of the 1956 Industrial Policy Resolutions are :
1) New classification of Industries: The resolutions laid down three categories which bear a close resemblance of the 1948 resolutions.
a) Category A has 17 Industries : Arms of ammunition atomic energy iron and steel, heavy machinery for mining, machine tool manufacturers, heavy electrical, coal, mineral oils, aircrafts, air transports, railways, ship building, telephone, telegraph, wireless equipment, generation and distribution of electricity.

b) Category B includes : 12 Indusries mining industries, aluminium and other non ferrous metals not mentioned in category “A” chemical industry, antibiotics and other essential drugs fertilizers synthetic rubbur, chemicals, road and sea transport, carbonization of coal.

c) Category C includes : Industries which consisted of the rest. These industries and their future development would in general be left to the initiative and enterprise of the private sector.

2) Public and private sectors : This resolution also laid down the importance on the mutual co-operation between the public and private sectors.
The private sector was allowed to operate freely or its help could be obtained if the Government cleaned fit. However, the private sector was to remain subject to various regulations and controls of Government.

3) Cottage and Small scale Industries : The 1956 resolutions recognized the importance of small – scale and cottage industries as the 1948 resolutions.

4) Removing regional disparities ’: It also called for the reduction in regional imbalances and .income inequalities.

5) Role of labour : To provide the technical and training facilities for efficient management that helps for speedy industrialisation.
This resolutions also recognized the importance of industrial peace for the economic growth of the economy.

Question 4.
Critically evaluate the 1991 New Industrial’Policy Resolution of India. [A.P. Mar. 16]
Answer:
Industrial policy statement 1991 brought rapid structural changes in the economy of India. Most of the State owned units were running with huge losses. Government was not interested to run the state owned units. So as part of economic reforms generally known as liberalization, privatization, globalization and a new industrial policy became inevitable.

Objectives :
a) To build on the going already made in the industrial sector.
b) To correct the distortions or weakness that may creep in the pattern of industrial growth.
c) To maintain a sustained growth in productivity and gainful employment and
d) To attain technological dynamism and international competitiveness.
Main features: In order to explore and exploit the industrial potential of the country the following decisions.

a) Delicensing:
i) Industrial licensing will be abolished for all projects except for these which are important for security, strategic, social and envirorimental reasons and items of elite’s consumption. License is not necessary for the items produced in small scale sector. License is required to establish the following industries viz, coal, petroleum, motor cars, alcoholic drugs, cigars, industrial explosives, hazardous chemicals.

ii) Reservation for the public sector: Establishment of key and strategic industries reserved for public sector are arms and ammunition, defense equipment, atomic energy, mineral oils, railway transport.

iii) Automatic clearance of capital goods: The Government permits imports of capital goods like machinery, without any conditions if the foreign exchange needed for the imports is met from foreign equity capital.

iv) Location policy : In locations other than cities of more than one million population, there will be no requirement of obtaining industrial approvals from the Central Government except for industries specified in Annexure II originally. In cities with a population of more than 1 million, industry other than those of a non-polluting in nature, were required to be located outside 25 kilometers of the periphery.

v) Abolition of convertibility clause : The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects. This has provided them an option of converting part of their loans into equity, if felt, necessary by their management.

b) Foreign investment policy : According to the new industrial policy approval will be given for direct foreign investment up to 51 percent foreign equity in high priority industries. FDI is prohibited only in the following sectors in 1991 industrial resolution.

They are :

1. Retail trading
2. Atomic energy
3. Lottery business
4. Gambling and betting

c) Foreign technology agreement: Automatic approval for technology agreements in high priority industries should be given. No permission will be necessary for hiring of foreign technicians and foreign testing of indigenously developed technologies.

d) Public sector policy : Public sector will not be barred from entering areas are not specifically reserved for it. Board for Industrial and Financial Reconstruction (BIFR) is constituted to undertake the revival of rick public units and to protect the interest of workers affected by rehabilitation.

e) MRTP ACT: The conditions in the Monopoly Restrictive Grade Practices (MRTP) Act that monoploies should get prior approval of the Government for expansion, for establishment of new undertakings merger, amalgamation, take over and appointment of directors will be removed. The Act will concentrate more on controlling unfair or restrictive trade practices.

Question 5.
Write about National Manufacturing Policy of India.
Answer:
After a long gap there was a major industrial policy initiated by the UPA Government in 2011. India’s manufacturing sector is only about 13% of that of China’s. Government of India brings back industrial policy into focus in the form of National Manufacturing Policy (NMP) on November 4, 2011.

National Manufacturing Polity : This policy envisages simplification of business requlations without diluting their purpose. Recognizing the importance of Small and Medium Enterprises (SMEs) in the country’s economy. These interventions relate primarily to technological up gradation, adoption of environment, friendly technology and equity investments. This policy has been given high priority in the policy through fiscal incentives for private sector and Government schemes. It also provided for on – lands which are degraded and uncultivable.

Objectives:

1. Increase manufacturing sector growth 12 – 14% over the medium term.
2. Increase the share of manufacturing in gross domestic product from the present level of about 16.0% to 25% by 2022.
3. Create 1000 million additional jobs in the manufacturing sector by 2012.
4. Create appropriate skills among the rural migrant and urban pour for their easy absorption.
5. Increase domestic value addition and technological depth in manufacturing.
6. Enchance global competitiveness of Indian manufacturing.

In India 60% of its population in the working age group. The manufacturing sector will have to create gainful employment opportunities for at least half this number.

Features:

1. The State Government would be responsible for the selection of suitable land having an area of 50Q0 hectares in size.
2. A Special Purpose Vehicle (SPV) will be constituted to discharge the affairs of NIMZs
3. The State Government would facilitate the provision of water, power connectivity and other infrastructure and utilities linkages.
4. The Central Government will bear the cost of master planning.

Question 6.
Explain the disinvestment policy of India.
Answer:
The Government of India in July 1991 initiated the disinvestment progress in India. “In order to raise resources and encourage wide public participation, a part of the Government share holding in the public sector would be offered to mutual funds, financial institutions, general public and employees”. This is a process for disinvestment in the public enterprises.

Salient features of the disinvestment policy are :

1. Citizens have every right to own part of the shares of public sector undertakings.
2. Public sector undertakings are the wealth of the Nation and this wealth should rest in the hands of the people.
3. While pursuing disinvestment, Government has to retain majority shareholding; i.e, at least 51 percent and management control of the public sector undertakings.

Development regarding Disinvestment:
On 5th November 2009, Government approved the following action plan for disinvestment in profit making Government companies.
i) Already listed profitable Central Public Sector Enterprises (CPSEs) (not meeting mandatory shareholding of 10 percent are to.be made compliant by offer for sale by Government (or) by the CPSEs through issue of fresh shares or a combination of both.

ii) Unlisted Central Public Sector Enterprises (CPSEs) with no accumulated losses and having earned net profit in three preceding consecuive years are to be listed.

iii) Follow on public offers would be considered taking into consideration the needs for capital investment of CPSE, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding.

iv) In all cases of disinvestment, the Government would retain at least 51 percent equity and the managment control.

v) All cases of disinvestment are to be decided on a case by case basis.

Major disinvestment receipts, since 2004 – 05 have come from sale of equity shares of National of Thermal Power Corporation Limited. (NTPC) ? 2684.07 crore, Maruti Udyog Limited (MUL) (Not a CPSU) ₹ 2277.62 crore, Power Grid Corporation of India (PGCI) ₹ 994.82 crore, Oil India limited ₹ 2247.05 crore NMDC limited ₹ 9930.40 crore, Coal India limited ₹ 15,199 crore and Power Finance Corporation (PFQ) ₹ 1144.55 crore upto 30-1-15, the Government of India got ₹ 1,79,625.25 crores through disinvestment process that should be utilized to provide social infrastructure and to undertake other development activities in the country.

Question 7.
Explain the role of foreign Direct Investment in economic development of India.
Answer:
Foreign direct investment is a major source of non financial resources for the economic development of India. Foreign companies invest in India to take advantage of cheaper wages, special investment privileges like tax exemptions etc. The Government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defense, PSU oil refineries, telecom, power exchange, stock exchange, Auto mobile industries etc.

According to a recent report by global credit rating agency Moody’s, FDI inflows have increased significantly in India in the current fiscal. Net FDI inflow to take of US $ 14.1 billion in the 1^st five months of 2014 – 15. Total FDI inflows into India in the period April 2000 – November 2014 touched US $ 350,963 millions.

Government initiatives towards (FDIs): India’s cabinet has cleared a proposal which allows 100% FDI in railway, infrastructure, excluding operations. The Government has notified easier FDI rules for construction sector, where 100% overseas investment is permitted, which will allow overeas investors to exist a project even before its completion.

With the objective of encouraging foreign firms to transfer state of the art technology in defence production, the Government increase the FDI cap for the sector to 74% from 49% at present. The Union Cabinet has cleared a bill to raise the foreign investement ceiling in private insurance companies from 26% to 49%.

The RBI has allowed a number of foreign investors to invest on repatriation basis, in non – convertible preference shares or debentures which are issued by Indian companies. The RBI has established a frame work for investments, which allows foreign port folio investors to take part in open offers, buyback of securities and disinvestment of shares by Central or State Governments.

India will require around US $ 1 trillion in 12^th Five Year Plan to fund infrastructure growth covering sectors such as highways, ports and airways. This requires support in terms of FDI. During the year 2013 FDI was dumped into the automobiles, computer software, hardware, power and telecommunications.

Question 8.
Critically examinethe role of Special Economic Zones in Indian economic development.
Anwer:
The Government of India announced Special Economic Zones policy in April 2000. This policy aims at rapid economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the-Central and State level, with the minimum possible regulations. In India, while passing the SEZ Act in May 2005 and came into effect from February 2006, the following objectives were laid down.

1. Generation of additional economic activity.
2. Promotion of exports of goods and services.
3. Promotion of investment from domestic and foreign sources.
4. Creation of employment opportunities; and
5. Development of infrastructure facilities.

Special Economic Zones in India : Upto 2013 number of formal approval Special Economic zones were 577. Number of SEZ notified and functioning are 389 and 170 respectively. The total units approved are 3589 and these units provide employment to 10,74,904 persons (as on March 31,2013). The Special Economic Zones exports are ₹ 4,76,159 crore during the year 2012 – 13. As per the provision of the SEZ Act 2005, 100% Foregin Direct Investment is allowed.

Government Incentives to Special Economic Zones: Government of India offers the following fiscal and incentive packages to Special Economic Zones.

1. Exemption from custom duties, central excise duties, service tax, central sales tax and securities transactions tax to both the developers and the units.
2. Tax holidays for 15 years i.e, 100 percent tax exemption for 5 years, 50 percent for the next 5 years and 50 percent of the ploughed back export profits for the next 5 years
3. 100 percent income tax exemption for 10 years in a block period of 15 years for SEZ devleopers.
4. Provision of standard factories at low rents with extended lease period.
5. Provision of infrastructure and utilities.
6. Single window clearance and simplified procedures.

Advantages of Special Economic Zones : Special Economic Zones are expected to give a big push to exports, employment and investment. In fact, the Government of India has been systematically projecting SEZs as “Carriers of Economic Properity”. The advantages of SEZs are as follows.

1. Boost economic growth at an extremely fast rate.
2. Usher in affluence in rural areas.
3. Provide large number of jobs in manufacturing and other services.
4. Attract global manufacturing and technological skills. ‘
5. Bring in private and public sector investment from both home and abroad.
6. Made Indian firms more competitive and
7. Help to slow down rural – urban migration.

To conclude, it may be stated that the standing committee report on SEZ in June 2007 is a path breaking document which indicates the direction in which the country must move if it wants to pursue industrialization with a human face.

Question 9.
Mention the various causes for Industrial backwardness in India.
Answer:
India could not achieve the desired growth rate in the industrial sector even though it is rich in natural resources and has huge working population. Even after completion of eleven Five Year Plans, there is wide gap between targets fixed targets achieved. Rakesh Mohan opines that there is a gap of 20 percent on an average between the targets fixed and targets realized in each plan annually. The reasons for this are as follows.
Reasons for Industrial Backwardness in India

1) Under – utilisation of productive capacities: Many of the industrial units failed to utilize the existing productive capacities fully. There are many reasons for this. Among them is raw material scarcity, low technical know-how etc. For example during 2005 – 2006, out of 203 public sector enterprises, the capacity utilization was below 50 percent by nearly 67 percent of the units.

2) Performance of public sector units: Prior to liberalization, there was a phenomenal growth of the public sector. Many of the public sector units were under losses. The number of loss making units decreased from 105 in 1999 – 00 to only 63 in 2011. However, the losses increased from ₹ 10,302 crores in 1999 – 00 to ₹ 27,602 crores in 2011-12.

3) Political factorsIn many situations, political factors influence decision about location of projects not considering feasibility. This approach leads to a considerable wastage of capital resources.

4) Infrastructural constraints: One of the major constraints in industrial development is poor quality and high cost of infrastructure particularly power and transport network. All such infrastructural constraints not only showed adverse effect on industrial growth but also reduced the competitiveness of Indian industries that were, fast emerging in the new global economic environment.

5) Gaps between targets and achievements : In the earlier period of planning achievements were below the targets. Rakesh Mohan has observed. “The average industrial growth rate achieved over thirty – five to forty years has been about 6.2 percent rate to the average of about 8 percent projected”.

6) Emergency challenges : As a founder member of the World Trade Orginization, India has withdrawn all quantitative restrictions on imports. This resulted into the closure of a nuclear of industrial units. Thus, the industrial sector facing so many problems.

Question 10.
What are the merits and demerits of small scale enterprises in Indian economy. [A.P. Mar. 18, 17]
Answer:
The small scale and cottage industries play apvital role in the Indian economy. As ancillary industries, they are contributing to the growth of the agriculture and industrial sectors in a developing country like India.

The recommendations of Abid Hussian Committee, the Government raised the investment limit on plant and machinery for small units and ancillaries to 3 crores and that for tiny units to ₹ 25 lakhs.
Merits:

1. Expansion of small scale industrial sector and its share in industrial production: The rapid growth of small scale units from 2006 – 07 onwards contributing much to India’s gross domestic product.
2. Employment opportunities : The small industries are labour intensive they could generate employment opportunities to the tune of 191.4 lakh persons in 1994 – 95, 249.3 lakh persons in 2001 – 02 and it increased to 1012.6 lakh persons in 2011 – 12.
3. Capital formation: The spreading of industry over the country side would encourage the habits of thrift and investment in the rural areas.
4. Low capital: The small scale units are best suited to the developing countries like India, which are labour intensive and capital scarce economics. It does not require much capital for the establishment Of these units.
5. Skill formation : A small scale enterprise does not require any sophisticate skill. But it provide, industrial experience for large number of small scale managers.
6. Low import intensity: Low import intensity in the capital structure of small scale .enterprises reduces the need for foreign capital.
7. Decentralized industrial development : Development of small scale industries will bring about decentralization of industries. It will promote the object of balanced regional development.
8. Equitable distribution : The profits earned by small scale enterprises distributed among large number of enterpreneurs leads to decentralization of income and wealth.
9. Exports : The contribution of small scale enterprises to earn foreign exchange is very high. The share of exports from the small scale sector represents about 31.1% of total exports in 2006 – 07.

Demerits:

1. Inefficent human factor: Most of the rural people are illiterates and lack technical know-how in the areas of production, finance, accounting and marketing management.
2. Lack of credit facilities : The small industrialists are generally poor and there are no facilities of cheap credit either. Thus, they are caught up in the vicious circle of debt trap.
3. Problem of raw materials : The quantity, quality and regularity of the supply of raw materials are all highly unsatisfactory. According to an estimate, about 40 percent of such units have become sick owing to non – availability of raw materials regularly.
4. Absence of organized marketing: Since marketing is not properly organized, the helpless artisans are completly at the mercy of middlemen. The small scale units cannot afford to spend lavishly on advertisement to promote their sales.
5. Lack of machinery and equipment: Small scale untis are facing inadequate modem machines and equipment. This leads to low productivity in small scale units.
6. Power shortage : In recent years power shortage and frequent power cuts played havoc with small scale industries. More hours of power cut are there in rural areas which affect the growth of small scale units.
7. Lack of technological up – gradation : It is found that the levels of productivity and technology used by the small scale sector are not globally competitive. Without technological upgradation these units may not serve in a globally integrated economy.
8. Heavy taxation : Cottage and small scale industries have also to bear a heavy burden of taxation both on raw materials and also on finished goods.

Question 11.
Briefly explain the Indian industrial growth rate during the Five Year Plans.
Answer:
The industrial pattern in India has undergone a marked change as a result of Five Year Pains, especially since the beginning of the Second Five Year Plan (1956 – 61). The number of bigger industrial establishments has multiplied and the proportion of producer goods in the composition of manufacturers has registered a striking is increase. Heavy and basic industries have come to occupy an important place in the industrial structure of India.

I. First Plan (1951 – 56): Owing to the small size of the First Plan, insufficiency of funds and greater urgency or agricultural development, the First Plan did not make any big provision for industrial development. The overall industrial production increased by 39 percent i.e about 8 percent per year.

II. Second Plan (1956 – 61) : The actual investment in the public sector on organized industry was ₹870 crores in the second plan. In comprised 27 percent in the Second Five Year Plan’s total outlay.

III. Third Plan (1961 – 66) : The overall financial outlay in industrial sector during the Thrid Plan was ₹ 3,000 crores, out of which the outlay in the public sector was about 1,700 crores and the private sector was ₹ 1,300 crores. An overall target of 7 per cent increase in industrial production was envisaged in the plan.

IV. Fourth Plan (1969 – 74): During the Fourth Plan on the actual out lay organized industry was ₹ 2,700 crores in the public sector. The private sector investment was around ₹ 2,250 crores. The actual performance during the Fourth Plan in the industrial sector was very disappointing. Its average annual growth rate was hardly 5 per cent as against the plan target of 8 per cent.

V. Fifth Plan (1974 – 79) : The Fifth Plan assigned a very important place to the development of industries with a view to achieving self – reliance and social justice. The public sector outlay on industrial development was around ₹ 9,700 crores. The average rate of industrial growth during the plan was targeted at 8.1 per cent per annum.

VI. Sixth Plan (1980 – 85): The public sector outlay of ₹ 23,000 crores was envisaged during the Sixth Plan period, during the sixth plan reveals that a growth rate of 5.45 percent as against 7 percent was achieved.

VII. Seventh Plan (1985 – 90) : The total investment in the industrial sector was ₹ 22,460 crores or 12.5 percent of the total plan outlay. The Seventh Plan achieved the targeted industrial growth rate of 8.5 per cent. It has been made possible because of adequate infrastructure and liberalization policy of the Government.

VIII. Eighth Plan (1992 – 97) : The Eighth Plan was formulated under a new environment when a number of reforms in industrial, fiscal, trade and foreign investment policies were introduced in the economy.

IX. Ninth Plan (1997 – 2002) : Ninth Plan allocated ₹ 69,972 crores for industry at 1996 – 97 prices. Ninth plan targeted a growth rate of 8% for industry. But it achieved only 5%.

X. Tenth Plan (2002 – 07): In the Tenth Plan public sector outlay was ₹ 44,695 crores at 2001 – 02 prices. Industrial performance in the Tenth plan period improved to 8.9% from very low level of growth rate of 4.3% in ninth plan.

XII. Eleventh Plan (2007 – 12): The total outlay in the Eleventh Plan is estimated at ₹ 36,44,718 crores. During this plan, the targeted growth rate is 10 – 11%. The target rate of growth achived more or less in case of industry.

XII. Twelfth Plan (2012 – 2017) : Twelfth Plan envisages an investment of 50 lakh crores in 5 years. The private sector is expected to provide 25 lakh crores. To achieve industrial growth rate to the tune of 9.5% it would require much faster growth in the manufacturing as well as in electricity, gas and water supply sectors.

Question 12.
Discuss major sources of Industrial Finance in India.
Answer:
Industry needs capital expenditure for the purchase of land, construction of building, installation of machinery etc. Besides this, funds are also required for the purchase of raw materials, for stores, for marketing and for meeting day – to – day requirements of the industry.

The following are the main sources from which the Indian Industry draws finance:
a) Shares
b) Debentures
c) Public deposits
d) Commercial banks
e) Industrial financial institutions

Rapid industrialization needs adequate medium and long term loans. Industrilalization requires lot of funds to start up new units and to modernize existing units. Some of the industrial financial institutions are:
a) Industrial Finance Corporation of India (IFCI)
b) State Financial Corporations (SFC’s)
c) Industrial Credit and Investment Corporation of India (ICICI).
d) The Industrial Development Bank of India (IDBI)
e) Small Industries Devlopment Bank of India (SIDBI)
f) Industrial Investment Bank of India (IIB1)
g) Venture Capital Funds (VCF)
h) UC and GIC.

Short Answer Questions

Question 1.
Industrial Finance Corporation of India.
Answer:
The Government of India set up the Industrial Finance Corporation of India in July 1948 under a special Act. The corporation was authorized to issue bonds and debentures in the open market, accept deposits from the public and also borrow from the R.B.I.

Functions:

1. It guaranteed loans raised by the industrial concerns in the capital market.
2. It granted loans and advances to industrial concerns and subscribed to the debentures floated by them.
3. If under wrote the issues of stocks, shares, bonds and debentures of industrial concerns. The loans sanctioned by IFCI increased from ₹ 210 crores in 1980 – 81 to ₹ 1,860 crores in 2000 – 01.

Question 2.
Industrial credit and Investment corporation of India.
Answer:
It played a role in consolidation in various sectors of the Indian Industry, by financing, mergers and acquisitions. The ICICI, groups financing and banking operations both wholesale and retail.

Functions :

1. Guaranteed loans from other private Government source.
2. Provided financial services such as deffered credit, leasing credit, installment sale, asset, credit and venture capital.
3. It offered long term and medium – term loans, both indian currency arid foreign currency loan.
4. Participated in equity capital and in debentures and under wrote new issues of shares and debentures.

Question 3.
Industrial Estates.
Answer:
Industrial estates are very useful in the development of small scale industries. An industrial estates refers to an area in which a number of small industries are concentrated. As a number of manufacturing units are located with in the same area, they can have common advantages like good site, electricity, water, communication etc. The production costs of the industrial units decrease as they get all facilities at one place for lesser cost.

Advantages:

1. It providing and opportunity both rural and semi-urban areas to develop industrially.
2. Giving scope to use the available local resources.
3. More scope for regional development.
4. It makes possible for small industrial units to realise the benefits of economics of scale.
5. They can become the best ancillary units, when they are situated nearby the large scale industries.
6. The small scale industrial units can make their production profitable by using the available facilities at one place for a lower cost.

Question 4.
Special Economic zones.
Answer:
Special Economic Zones policy was announced by Government of India in April 2000. This policy aims at rapid economic growth by quality infrastructure complemented by an attractive fiscal package, both at the Central and State level. In India, while passing the SEZ Act in May 2005. It came into effect from February 2006.

Objectives:

1. Development of infrastructure facilities.
2. Generation of additional economic activity.
3. Promotion of exports of goods and services.
4. Promotion of investment from domestic and foreign sources.
5. Creation of employment opportunities etc.

Question 5.
Explain the need of Foreign Direct Investment in India.
Answer:
Foreign Direct Investment is a major source of non – debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of cheaperwages, special investment privileges like tax exemption.

1. Encouraging foreign firms to transfer state – of – the art technology in defence production.
2. For a country where foreign investments are being made, it also achieving technical know-how and generation of employment.
3. The continuous inflow of FDI in India, which is allowed across several industries.

Question 6.
National Investment Fund.
Answer:
The Government of India constituted the National Investment Rind (NIF) on 3^rd November, 2005. The amount received in the form of Disinvestment will go into the National Investment Rind. The fund was to be maintained outside the consolidated fund of India. The NIF was initialized with the disinvestment proceeds of two CPSE. 1. Power Grid Corporation of India Limited (PGCIL) and Rural Electrification Corporation (REQ amounting to ₹ 1814.45.
Features:

1. The corpus of the National Investment Rind will be of a permanent nature.
2. The proceeds from disinvestment of CPSEs will be channelized into the national investment fund, which is to be maintained outside the consolidated fund of India.
3. The Rind will be professionally managed to provide sustainable returns to the Government.
4. 75% of annual income of the fund will be used to finance selected social sector schemes, which promote education, health and employment. Ex: Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY) etc.

Question 7.
Objectives of National Manufacturing Policy. [A.P. Mar. 18]
Answer:
Government of India brings back industrial policy into focus in the form of National manufacturing policy on November 4^th 2011.

Objects:

1. Increase manufacturing sector growth to 12-14% over the medium term.
2. Create 100 million additional jobs in the manufacturing sector by 2012.
3. Increase the share of. manufacturing in gross domestic product from 16% to 25% by 2022.
4. Create appropriate skills among the rural and urban migrant.
5. Increase domestic value addition and technological depth in manufacturing.
6. Enhance global competitiveness of Indian manufacturing.

Question 8.
National Investment and Manufacturing Zones.
Answer:

1. The State Government would be responsible for the selection of suitable land having an area of 5000 hectares in size.
2. NIMZ’s will be utilised for location of manufacturing units at least 30% of total area proposed.
3. The State Government would facilitate the provision of water power, connectivity and other infrastructure.
4. The Central Government will provide financial support in the form of viability gap finding not exceeding J20% of project costs.
5. The Central Government will bear the cost of master planning and will improve physicial infrastructures like rail, road, airports and telecommunications.

Question 9.
Write briefly about MSMEs.
Answer:
On October 2, 2006, “Micro, Small and Medium Enterprise Development Act” came into force’ MSMEs sector in India constitutes enterprises with investment in plant and machinery less than 10 crore in manufacturing and less than 5 crore in case of service sector. In India MSMEs play a vital role in the industrial economy of the country. The major advantage of the sector is its employment potential of low capital cost.

Question 10.
The Industrial Investment Bank of India. [A.P. Mar. 16]
Answer:
To provide financial, technical and managerial assistance to sick units, Industrial Reconstruction Corporation of India was set up in 1971. The Government of India converted I the IRCI into Industrial Reconstruction Bank of India (IRBI) on March 20,1985. IRBI was reconstituted into full-fledged new financial institution called Industrial Investment Bank ; of India (TIBI) in March 1997.

The financial assistance sanctioned by IIBI in 2003 – 04 was ₹ 2,412 crore while assistance disbursed was ₹ 2,252 crore. As the IIBI was suffering operating losses and also poor financial position. IIBI is in the process of voluntary winding up.

Very Short Answer Questions

Question 1.
SIDBI. [A.P. Mar. 18]
Answer:
Small Industries Development Bank of India with a view to ensure largest flow of financial and non financial assistance to the small scale and cottage industries. The SIDBI Act was passed by the parliment in 1989 and the bank commenced its operation from April 2^nd 1990.

Question 2.
IDBI.
Answer:
The Industrial Development Bank of India. The IDBI was set up 1^st 1964. The IDBI was initially set up as a wholly owned subsidiary of the R.B.I. In February 16, 1976 the IDBI was made an autonomous’ institution and its ownership passed on from the RBI to the Government of India.

Question 3.
State Finance Corporations.
Answer:
The SFC was set up to offer financial assistance to only large and medium sized undertakings. Therefore the need for separate level development banks which could cater to financial needs of small and medium sized industrial concerns was rightly felt. The 1^st SFC setup in punjab in 1953. At present there are 18 SFCs in the country.

Question 4.
Disinvestment.
Answer:
The Government of India in July 1991 initiated the disinvestment process in India. The new industrial policy provides that in order to raise resources and encourage wide public participation, apart of the government share, holding in the public sector would be offered to mutual funds financial institutions, general public and employees.

Question 5.
MRTPAct.
Answer:
Monoploy Restrictive Trade Pratices Act. The Act will concentrate more on controlling unfair or restrictive trade practices.

Question 6.
Special Economic Zones. [A.P. Mar. 17]
Answer:
The Government of India announced Special Economic Zones policy in April 2000. This policy objective is at rapid economic growth supported by quality infrastructure complemented by an attractive fiscal package both at central and state level with minimum possible regulations. This act came into effect from February 2006.

Question 7.
Foreign Direct Investment.
Answer:
Foreign Direct Investment is a major source of non – debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of cheaper wages, special investment privilages like tax exemptions etc.

Question 8.
Industrial Estates.
Answer:
It was established in the year 1955 by small scale industries board for the development of small scale industries. An industrial estate is a group of small scale units constructed on an economic scale in suitable sizes with facilities of water transport, electricity, banks and is provided with special arrangements for technical guidance and common service facilities.

Question 9.
MSMEs.
Answer:
Micro, Small and Medium Enterprises. MSME sector in India constitutes enterprises with investment in plant and machinery less than 10 crore in manufacturing and less than 5 crore in case of service sector. The labour intensity of the MSME sector is much higher than that of the large enterprises.

Question 10.
ICICI.
Answer:
Industrial Credit and Investment Corporation India.
It was set up in January 1955 and it commenced business in March of the same year. It was second all India development financial institution to be established in the country. It was a private sector development financial institution.

Question 11.
IFCI.
Answer:
Industrial Finance Corporation of India. It was set yp in July 1948, under a special Act. It was set up to provide medium and long term credit to industry to start new industries, expansion of old industries and for modernisation.

Question 12.
Globalization.
Answer:
It is the process of integrating various economies of the world without creating and hindrances the free flow of goods and services, technology, capital even labour or human capital.