Top 8 Problems on Insolvency Accounts | Accounting

Are you looking for problems and solutions on insolvency accounts? You are at the right place! In this article we have compiled top eight problems on insolvency accounts with its relevant solutions.

Contents:

  1. Accounting Problems on the Calculation of Different Forms of Creditors
  2. Preparation of Statement of Affairs and a Deficiency Account
  3. Preparation of Statement of Affairs and Deficiency Account
  4. Accounting Problem on Partnership
  5. Preparation of Statement of Affairs and Deficiency Account
  6. Preparation of Statement of Affairs and Deficiency Account of a Individual Who is Declared as Insolvent
  7. Preparation of Statement of Affairs and Deficiency Account of a Individual Who is Declared as Insolvent
  8. Preparation of a Deficiency Account and Statement of Affairs


Problems on Insolvency Accounts

1. Accounting Problems on the Calculation of Different Forms of Creditors:

Mr. X of Calcutta, finding himself unable to meet his creditors, has to prepare a Statement of Affairs for which the following particulars are available:

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Leasehold Property Rs. 1,00,000, estimated to realise Rs. 90,000; Plant and Machinery Rs. 40,000, estimated to realise Rs. 30,000; Stock-in-trade Rs. 20,000, estimated to realise Rs. 14,000; Book Debts; Good Rs. 60,000, Doubtful Rs. 5,000, estimated to realise 50%; Bad Debts Rs. 14,000.

Bills in hand Rs. 3,750.

Life Policy for Rs. 25,000 whose surrender value is Rs. 5,000 held by insurance company against a Loan of Rs. 2,000.

Household furniture Rs. 3,600; Household Debt Rs. 2,900; Bills Discounted Rs. 6,000; Rs. 2,000 likely to be dishonoured. Loan on Mortgage of Leasehold Rs. 50,000.

Cash in hand Rs. 100.

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Bank Overdraft secured by personal guarantee of X’s brother and second mortgage on Leasehold, Rs. 50,000.

Unsecured Creditors Rs. 1,50,000; Loan from N. Rs. 2,500 secured by a second charge on life policy. Ground Rent on leasehold for three months accrued Rs. 250.

He could not pay his office clerk’s (two in number) salaries for six months, Rs. 1,500, and also rates and taxes amounting to Rs. 1,500.

Prepare a Statement of Affairs.

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Solution:

Before preparing the Statement of Affairs of Mr. X., we are to calculate the different forms of creditors:


2. Preparation of Statement of Affairs and a Deficiency Account:

From the following Trial Balance of Mr. X who commenced business on January 1 1990, you are asked to prepare a Statement of affairs and a Deficiency Account:

Missing Information:

Sometimes the full information relating to the Deficiency Account is not available. In that case, students are advised to prepare a trial balance on the basis of book value figures and not on the basis of estimated realisable value and calculate the difference between the totals of the two sides which, in other words, should be considered as the value of missing information.


3. Preparation of Statement of Affairs and Deficiency Account:

From the following information prepare a Statement of Affairs and Deficiency Account of Mr. Ashis Sadhukhan who was declared insolvent under the Provincial Towns Insolvency Act:

His capital was Rs. 7,000 and his drawings were Rs. 7,000.

His assets consisted of:

(i) Book Debts Rs. 10,000 of which Rs. 8,000 was considered good and the balance estimated to produce Rs. 1,000.

(ii) Stock (book value Rs. 15,000) estimated to produce Rs. 9,000.

(iii) Machinery (book value Rs. 16,000, cost Price Rs. 18,000) estimated to produce Rs. 11,000.

(iv) Freehold house (private property) valued at Rs. 12,000 the debt of which was lodged with the bank as security for an overdraft on business account Rs. 8,000.

(v) His life policy (surrender value Rs. 6,000) was given as a part security for a private loan of Rs. 10,000. His unsecured creditors amounted to Rs. 40,300 and he owed Rs. 500 to his clerk being salary for two months just preceding the date of his insolvency.

Solution:

From the above problem, it becomes necessary to prepare a trial balance in order to calculate the missing information relating to profit and losses of the business i.e., for preparing Deficiency Account. It should be remembered that at the time of preparing trial balance, private assets (i.e. Freehold House, Life Policy etc.) and private liabilities (i.e. loan) are not to be considered at all.

Moreover, book values of assets are to be taken into consideration and not the cost price.

Notes:

It has been pointed out above that while preparing Trial balance private assets and private liabilities are not to be considered at all. But the same are to be taken into consideration while ascertaining insolvency losses. Private assets either increase capital of the proprietor or increase assets in the Statement of Affairs. In the present case, however, as private assets have been given as security, as such, liabilities have been reduced and that is why the same is not shown as an asset.


4. Accounting Problem on Partnership:

On 31st August 1998, an order of adjudication as insolvent was made against X and Y who carry on partnership business.

The balances in the firm’s book as on that date included the following:

During the 13th months to 31st August 1998 X drew Rs. 40,000 and Y Rs. 30,000. Private assets of X and Y amounted to Rs. 4,000 and Rs. 3,000, respectively. Book Values of these assets were Rs. 7,000 and Rs. 5,000, respectively. Y had private liabilities of Rs. 12,000.

You are required to prepare:

1. Individual partner’s Statement of Affairs and Deficiency Accounts.

2. The firms Statement of Affairs and the Deficiency Account.

Before preparing the Deficiency Account, we are to prepare the following Trial Balance in order to find out the profit or loss of the firm:

 


5. Preparation of Statement of Affairs and Deficiency Account:

The assets of Mr. Z on 30th June 1990, as shown by his books of accounts, were Rs. 1,68,000 and his liabilities Rs. 1,32,000. He filed an Insolvency petition in the court and estimated his deficiency to be Rs. 90,000.

After making the above estimate he found that the following items were not passed through his books of account:

(a) Interest at 6% p.a. on his capital from 1st January 1990.

(b) A contingent liability of Rs. 7,500 for bills discounted by him for Rs. 15,000.

(c) Amount due as wages — Rs. 900; as salaries — Rs. 2,100; as Rent — Rs. 900; as Rates & Taxes— Rs. 600.

Prepare Mr. Z’s Statement of Affairs and his Deficiency Account.


6. Preparation of Statement of Affairs and Deficiency Account of a Individual Who is Declared as Insolvent:

From the following information prepare a Statement of Affairs and a Deficiency Account of Mr. X who is declared insolvent on 31st December 1999. Total creditors Rs. 62,000 including preferential creditors Rs. 1,000. Secured creditors holding a first charge on Building Rs. 15,000 and another secured creditor holding a second charge on Building Rs. 14,000. Building (Book value Rs. 32,000); estimated to realise Rs. 25,000; Debtors Rs. 18,000 (Bad Debt estimated Rs. 2,000). Machinery estimated to realise (60% of book value) Rs. 12,000. Stock (Book Value Rs. 6,000) estimated to realise Rs. 4,000. Bank Balance Rs. 1,000.

He commenced his business on 1.1.1995 with an initial Capital of Rs. 20,000. His drawings were Rs. 200 more than those of the previous year. His drawings were Rs. 1,800 in the year 1999.

The profit of business in first four years was Rs. 4,200. But in the last year business incurred a loss of Rs. 5,200. He paid Rs. 4,000 to his creditor friend on 8.12.1999 by fraudulent preference. He gifted Rs. 1,000 to his daughter on the occasion of her marriage on 9.12.1999. A discounted bill of Rs. 1,200 was dishonoured on 31.12.1999.

Amount of Drawings to be calculated as under:

1999 Rs. 1,800; 1998 Rs. 1,600; 1997 Rs. 1,400; 1996 Rs. 1,200; 1995 Rs. 1,000.

Notes:

1. Gift made to daughter amounting to Rs. 1,000 is treated as Drawings.

2. Rs. 4,000 paid to creditor friend by fraudulent preference is absolutely void and, as such, the same has been added back to creditors as also increased by debtors for the like amount.


7. Preparation of Statement of Affairs and Deficiency Account of a Individual Who is Declared as Insolvent:

Mr. Bad is insolvent. He supplies to you the following information as on March 31,1990:

Mr. Bad commenced business six years ago with a capital of Rs. 43,750. He drew Rs. 8,750 each year for private purposes, but did not maintain proper books of accounts. Mrs. Bad gave up her jewellery valued at Rs. 7,000 to the receiver.

Prepare the Statement of Affairs and Deficiency Account of Mr. Bad.

3. It has been assumed that Mrs. Bad had given loan from her ‘Stridhan’ and, as such, the same has been included in unsecured creditors.


8. Preparation of a Deficiency Account and Statement of Affairs:

On 31st December 1994 Sarbasanta files his petition in bankruptcy on which date the receiving order was made. You are instructed by the official receiver in bankruptcy to assist the debtor in the preparation of a Deficiency Account and Statement of Affairs.

Your investigations disclosed the following:

Liabilities:

His liabilities amount to Rs. 3,50,000 of which Rs. 74,000 was fully secured, Rs. 38,000 partly secured; Liabilities for rent, wages etc. were Rs. 4,500 claimed to be preferential. There was also a contingent liability of bills under discount of Rs. 27,400 of which Rs. 2,000 was expected to rank.

He has household furniture of the estimated value of Rs. 2,500, and life policies of the surrender value of Rs. 6,000. The two latter items were not in his books of accounts.

Out of liabilities for rent etc. Rs. 2,000 was admitted as preferential.

On 1.1.1992 his capital was Rs. 1,30,000.

During the three intervening years, trading results, interest on Capitals and drawings were:

Out of drawings Mrs. Sarbasantas purchased ornaments for Rs. 5,000 which she offers to Mr. Sarbasanta for paying loans. These are estimated to fetch Rs. 6,000, Rs. 30,000 loss in 1993 (included in Rs. 75,000 above) was due to speculations.

Solution:

In order to find out trading loss for 1994 the following trial balances as well as the capital accounts are to be prepared:

Before preparing the Statement of Affairs and Deficiency Account, we are to calculate the amount of unsecured creditors:

Unsecured Creditors:

Note:

1. It has been assumed that the ornaments were purchased not out of ‘Stridhan’.


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