Tag: reserve and fund

Questions Related to reserve and fund

Reserve created for maintaining a stable rate of dividend is termed as dividend equalisation fund.

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. True

  2. False

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Correct Option: A
Explanation:

This Statement is true. 

Dividend Equalization reserve is a distributable reserve which is specifically set up to  ensure that dividends remain stable for despite being changes in earnings.Stability in dividend helps in maintaining trust among shareholders. So in the year of higher profit companies transfer some part of profit to this fund and in year of less profit dividend is paid out of this profit. 

Reserves are created to meet future expenses or losses the amount of which is not certain.

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. True

  2. False

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Correct Option: B
Explanation:

Option B is the correct one.
Reserve accounting. A reserve is profits that have been appropriated for a particular purpose. Reserves are sometimes set up to purchase fixed assets, pay an expected legal settlement, pay bonuses, pay off debt, pay for repairs and maintenance, and so forth.The board of directors is authorized to create a reserve.

X sends out 500 bags to Y costing Rs 400 each at an invoice price of Rs 450 each. Consignor's expenses Rs 4,000, consignee's expenses, freight Rs 1000, selling Rs 2,000. 400 bags was sold.
The amount of Consignment Stock Reserve will be

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. Rs 5000

  2. Nil

  3. Rs 10,000

  4. Rs 10,200

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Correct Option: A

In purchase method, the excess of net asset of the transferor company acquired by the transferee company over the purchase consideration should be recognized as ________.

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. P & L

  2. Goodwill

  3. General reserve

  4. Capital reserve

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Correct Option: D
Explanation:

For the purpose of accounting for amalgamation, we are essentially guided by AS-14 'Accounting for Amalgamations'. Para (3)g of AS 14 deines the term purchase consideration as "the aggregate of the shares and other securities issued and the payments made in the form of cash or other assets by the transferee companyto the sharegolders of the transferor company." in simple words it is the price apyable by the transferee company to the transferor companyfor taking overt the buiness of the transferor company.

There are two methods of accounting for amalgamation:
1. Pooling of interest method
2. Purchase method
Purchase method - In this method the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or the purchase consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation.
No reserves, other than statutory reserves, of the transferor company should 
be incorporatedb in the financial statements of the transferee company.
Any excess of the amount of purchase consideration over the value of net assets of the transferor company acquired by the transferee company should be recognised as goodwill in the financial statement of the transferee comapany. Any short fall should be shown as a capital reserve.

Banks are required to transfer _________of their profits to statutory reserve.

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. 20%

  2. 25%

  3. 10%

  4. None of these

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Correct Option: B
Explanation:

Under Section 17, every banking company incorporated in India is required to transfer at least 25% of its current profit to its reserve fund. It is known as statutory reserve. Only those banks get exemptions from this legal condition whose reserve along with share premium if any become equal to paid up capital.

While preparing the books of the transferee company in purchase method, the difference between purchase consideration and share capital of the transferor company should be adjusted in _______.

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. Share capital

  2. Reserves

  3. Assets

  4. Liabilities

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Correct Option: B
Explanation:

For the purpose of accounting for amalgamation, we are essentially guided by AS-14 'Accounting for Amalgamations'. Para (3)g of AS 14 defines the term purchase consideration as "the aggregate of the shares and other securities issued and the payments made in the form of cash or other assets by the transferee company to the shareholders of the transferor company." in simple words it is the price payable by the transferee company to the transferor company for taking over the business of the transferor company.


Any excess of the amount of purchase consideration over the value of net assets of the transferor company acquired by the transferee company should be recognised as goodwill in the financial statement of the transferee comapany. Any short fall should be shown as a capital reserve.

Which of the following is statutory reserve?

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. Development Allowance Reserve

  2. Capital Reserve

  3. Workmen's Compensation Fund

  4. CRR

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Correct Option: A
Explanation:
A statutory reserve is an amount of money set aside by a financial institution, such as bank or insurance firm, in order to meet unmatured obligations.
Followig are the examples of statutory reserves:
Development Rebate Reserve, Investment Allowance Reserve, Export Profit Reserve, etc.

When investment in own debentures is cancelled the profit on cancellation is credited to ___________________.

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. Sinking fund account

  2. Debenture Redemption reserve account

  3. Capital reserve account

  4. Any of the above

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Correct Option: B
Explanation:

When investment in own debenture is cancelled the profit on cancellation is credited to - Debenture Redumption Reserve Account.Because working capital of tge company is adversely affected, it is desirable that the amount equal to the nominal value of the debenture cancelled should be transferred to the debenture redemption reserve a/c out of the profit of the company.

  This will help in maintaing the working capital of the company by noy paying as dividend as part of the profit set aside.

What journal entry is passed for transfer to capital redemption reserve account?

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. General Reserve                                         Dr.

    Capital Redemption Reserve Account       Cr.

  2. Profit & Loss Account                                Dr.
    Capital Redemption Reserve Account       Cr.
  3. Dividend Equalization fund accoint           Dr.
    Capital Redemption Reserve Account       Cr.

  4. All of the above

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Correct Option: D
Explanation:

Section 69 : Companies Act 2013

1. Where a company purchase its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transfrred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.
2. The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
Journal entry passed for transfer to capital redemption reserve account is:
  General reserves A/c                        Dr.
  Profit & Loss A/c                                Dr.
  Dividend Equalization Fund A/c       Dr.
                     To Capital Redemption Reserve A/c

In the case of marine insurance reserve for unexpired risk is _______.

book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

  1. 50%

  2. 100%

  3. 40%

  4. None of these

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Correct Option: B
Explanation:

There is an unexpired liability under various policies which may occur during the remaining term of the policy beyond the year and therefore, a provision for unexpired risks is made at normally 50% in case of Fire Insurance and 100% of in case of Marine Insurance.