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Preparation of

Financial Statements – Examples

IPCC Paper 1: Financial Accounting Chapter 2

CA. Pankajj Goel1

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Illustration 1

PCC June 2009 Marks XX2

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Problem Statement

The Managing Director of A Ltd. is entitled to 5% of the annual

net profits, as his remuneration, subject to a minimum of 

Rs.25,000 per month.The net profits, for this purpose, are to

be taken without charging income-tax and his remuneration

itself. During the year, A Ltd. made net profit of Rs.43,00,000

before charging MD’s remuneration, but after charging

provision for taxation of Rs.17,20,000.

Compute remuneration payable to the Managing Director.

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Solution

Calculation of remuneration of the ManagingDirector(All Figures in Lakhs)

Net profit as per books 43.00

 Add: Provision for taxation 17.20

 Annual profit for the purpose of managerial remuneration

60.20 Managing Director’s Remuneration @ 5% of above

=3.01

Minimum remuneration to be paid to the Managing

Director  = Rs.25,000 per month ́ 12 =3.00

Hence, in this case, remuneration to be paid to theManaging Director of A Ltd. = Rs.3,01,000. 4

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Illustration 2

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Problem Statement

XYZ Limited made a net profit of Rs. 25,000 lakh

after adjusting the following items.

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Particulars Rs/Lakh

(a) Provision for taxation

(b) Capital profit on sale of part of the Undertaking

(c) Depreciation as per books

(d) Managerial remuneration

(e) Provision for d iminution in the value of investments

(f) Profit on sale of investments

(g) Provision for wealth tax

10,000

200

600

55

15

30

20

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Problem Statement 2

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Particulars    Rs/Lakh

(h) Directors’ fees

(i) Profit on sale of assets U /S 349 (j) Loss on sale of assets U / S 

349

(k) Prior period adjustments (credit)

(l) Provision for  bad debts

(m) Ex‐gratia payment to an employee

15

40

35

15

100

5

You are given the following additional information:(1) Depreciation as per S.350 Rs.500 lakhs

(2) Bad debts actually wri tten of f Rs.60 lakhs

You are required to calculate net profi ts U /S 198 and 309 (5) of the Companies Act 1956

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Solution

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Particulars Rs/Lakh Rs/Lakh

Net profit after Prov. for Taxation 

Add, Provision for taxation 

Directors’ fees

Depreciation as per books

Managerial remuneration

Provision for diminution in the value of investments

Provision for bad debts

Provision for

 wealth

 tax

Ex‐gratia payment to an employee

Total

Less Depreciation as per Sec. 350

Profit 

on 

sale 

of 

investmentsPrior period adjustments (credit)

Capital profit on sale of part of the Undertaking

Bad debt written off

Net Profit as per section 198 and 309 5) Of the Act

10,000

15

600

55

15

10020

5

500

30

15

200

60

25,000

10,810

35,810(805)

35,005

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Illustration 3

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Problem Statement

From the following particulars of Prakash Limited, you

are required to calculate the managerialremuneration in the following situations.

(i) There is only one whole time director.

(ii) There are two whole time directors,

(iii) There are two whole time directors, a part time

director and Manager 

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Problem Statement 2

1. Net profit before provision for income-tax and

managerial remuneration, but after depreciationand provision for repairs- 8,70,410

2. Depreciation provided in the books- 3,10,000

3. Provision for repairs of machinery during the year-

25,000

4. Depreciation allowable under Schedule XIV-

2,60,000

5.  Actual expenditure incurred on repairs during theyear- 15,000

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Solution:

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Sections 198 and 309 of  the Companies Act, 1956 prescribe the maximum percentage  of  profit

that can be paid as managerial remuneration. For this purpose, profit is to be calculated in the

manner as specified in Section 349.

Calculation of net profit u/s 349 of the Companies Act, 1956

Rs. Rs.

Net Profit before provision for income‐tax 

and Managerial remuneration, but after 

depreciation and provision for repairs

Add back: Depreciation provided in the 

books

Provision for repairs of machinery

Less Depreciation allowable under 

Schedule XIV Actual expenditure incurred 

on repairs

Profit under section 349

8,70,410

3,10,000

25,0003,35,000

2,60,000

15,000

12,05,410

2,75,000

9,30,410

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Working Notes

Calculation of managerial remuneration

(i)There is only one whole time director 

Managerial remuneration= 5 % of Rs. 9,30,410

= Rs. 46,520.50

(ii) There are two whole time directors

Managerial remuneration=10% of Rs. 9,30,410

=Rs. 93,041

(iii)There are two whole time directors, a parttime

director and a manager Managerial remuneration =11% of Rs. 9,30,410

=Rs. 1,02,345.10 13

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THANK YOU