Insolvency Accounts

1. From the following figures, prepare a Statement of Accounts and Deficiency Account as at 31st December 1989. Assume that
  ·  Stock realizes Rs. 666;
  ·  Fixtures and Fittings Rs. 282;
  ·  Investment in shares the book value; and
  ·  Bad and Doubtful Debts Rs. 600.
On 1st January 1987, Arora commenced business with a capital of Rs. 6,360. His profits for the year 1987 and 1988 amounted to Rs. 5,544. He suffered a loss of Rs. 2,500 in the year 1989. His total drawings upto 31st December 1989 were Rs. 9,000.

Cash 230
Stock 1,000
Debtors-good 7,000
Debtors-doubtful 1,800
Debtors-bad 1,500
Fixtures and Fittings 564
Investment in shares 500
Unsecured Creditors (Including Rs. 1,000 of his wife) 13,000
Secured Creditors 2,500
Value of securities held by creditors 3,500
Preferential Creditors 190

2. Mr. Careless filed his necessary insolvency petition on 31st December 1989 and his position as on that date was as follows:
Creditors for goods
Bills payable
Creditors secured by lien on shares
Creditors secured by lien on stock
Liability on bills discounted (Estimated to rank Rs. 3,000)
Mortgage on mill
Creditors payable on full
Book debts-good
Doubtful (Estimated to produce Rs. 2,000)
Consignment-Considered goods
Shares (Estimated to realize Rs. 16,500)
Stock (Estimated to realize Rs. 40,000)
Cash at bank
Bills of exchange
Mill (Estimated to realize Rs. 11,000)
Machinery (Estimated to realize Rs. 12,000)
Fixtures (Estimated to realize Rs. 1,500)
Cottages (Estimated to realize Rs. 3,000)

On 1st January 6 years ago, he had a capital of Rs. 50,000. Profits made during the first four years totaled Rs. 45,000 and losses incurred during the last two years amounted to Rs. 25,000 after allowing Rs. 2,000 per year as interest on Capital. Withdrawals amounted to Rs. 77,200.

3. Mr.Reckless finds himself insolvent on 31st December 1989. His position was as follows:
Sundry Debtors: Good Rs. 5,000; Doubtful Rs. 30,000 (estimated to produce Rs. 25,000), Bad Rs. 15,000.

1,000 shares in Unsound Ltd. (estimated to produce Rs. 15,000)
Shares in Teak Co. Ltd. (estimated to realise Rs. 75,000)
Loss through betting
Creditors on open account
Creditors holding a 2nd charge on the shares of Teak Co. Ltd to the extent of Rs. 25,000
Creditors holding a 1st charge on the shares of Teak Co. Ltd.
Bills Payable
Creditors for rent, rates, taxes, etc. (of which Rs. 4,600 were preferential)
Furniture and Fixtures (estimated to realise Rs. 3,000)
Cash in hand and at bank
Stock in trade (estimated to realise Rs. 30,450)
Bills Receivable (estimated to realize Rs. 7,000)

Mr. Reckless started business with a capital of Rs. 70,000 on 1st January 1987 and the business resulted in a profit of Rs. 8,800 and Rs. 10,100 for the first two years respectively and in a loss of Rs. 5,000 for the 3rd year, after allowing Rs. 3,500 as interest on capital each year. Withdrawal for the whole period amounted to Rs. 30,000. Prepare a Statement of Affairs and a Deficiency Account.

4. Sri Rakesh Sharma finds himself insolvent on 1st January 1989. You are instructed to prepare his Statement of Affairs as at that date and Deficiency Account for the three years ended on that date. The information you are able to obtain as to his position is as follows:
Sundry debtors (good Rs. 10,000; doubtful Rs. 40,500 estimated to produce Rs. 20,000)

Shares in Malhotra Ltd. (Estimated to produce Rs. 91,000)
Creditors on open account
Creditors holding a first charge on investments
Creditors holding a second charge on investments to the extent of Rs. 30,000
Bills Receivable discounted (of which Rs. 3,500 is likely to be dishonoured)
Creditors for rents, taxes, etc. (of which Rs. 1,500 is preferential)
Furniture (estimated to realize Rs. 3,000)
Cash in hand
Stock in trade (estimated to realize Rs. 30,000)
Bills receivable (estimated to realize Rs. 7,000)
Loss on stock exchange

He started his business on 1st January 1986 with a capital of Rs. 50,000. In the first two years, there was a profit of Rs. 27,500 and in the third year there was a loss of Rs. 5,000. He has been allowed interest at 6% p.a. on his original capital for each of the three years. Withdrawals for the whole period amounted to Rs. 26,000. Out of his withdrawals, he had purchased jewellery for his wife at a price of Rs. 3,000. His wife offered this jewellery towards paying the debts of her husband. The jewellery is expected to realize Rs. 4,000.

5. The capital in the business of Govinda on 31st December 1988 was Rs. 700. During the year 1989, he sustained a trading loss of Rs. 780, and his drawings out of the business were Rs. 700. Owing to the depreciation of stocks and his unsatisfactory financial position, he was compelled to file his petition, and a receiving order was made against him on 31st December 1989. His assets consisted of:
a) Book debts Rs. 1,000 of which Rs. 800 was considered good and the remainder estimated to produce Rs. 100.
b) Stock (Cost Rs. 1,500) estimated to produce Rs. 900.
c) Machinery (cost Rs. 1,600) estimated to produce Rs. 1,100.
d) House property valued at Rs. 1,200, the deeds of which were lodged with the bank as security for an overdraft on business account of Rs. 800.
e) His life policy (surrender value Rs. 600) given as security for a private loan of Rs. 1,000
His unsecured creditors amounted to Rs. 4,030 and he owed Rs. 50 to his clerk, being the salary for the two months ended 30th November 1989. Prepare his Statement of Affairs and Deficiency Account.

6. Prepare a Statement of Affairs and Deficiency Account of Mr. Insolvent who filed his petition on 31st December 1989. The books show that he owed Rs. 40,100 of which creditors amounting to Rs. 6,500 held stock of the estimated value of Rs. 7,200. Others amounting to Rs. 29,000 held stock of the estimated value of Rs. 15,300 and a mortgage on the property at Calcutta at Rs. 13,000, the landlord being a preferential creditor for Rs. 100.
Bills had been discounted amounting to Rs. 3,500, in respect of which it was estimated that the firm would be liable for Rs. 500. The assets consisted of the following:
Book Debts: Good Rs. 1,500, Doubtful Rs. 600 estimated to produce Rs. 400 and Bad Debts Rs. 700.
Furniture and Fittings Rs. 300, estimated to produce Rs. 150. Cash Rs. 50, Bills receivable Rs. 350 and Stock Rs. 1,600, estimated to produce Rs. 1200.
The firm commenced business on 1st January 1985 with a capital of Rs. 25,000. After charging Rs. 1,000 a year for interest on capital and Rs. 1,300 a year for salary (which were credited to capital account and not withdrawn), he had the profit in the first year of Rs. 2,700, but in the following four years losses were Rs. 2,000, Rs. 3,700, Rs. 4,000 and Rs. 6,500 respectively. He drew out of cash at the rate of Rs. 1,200 a year. The property at Calcutta cost Rs. 22,000 and stock mortgaged was subject to a discount of 25%.

7. Mr. Pauper filed a petition in bankruptcy on 30th June 1990. His books showed the following balances:

Fixtures and Fittings (estimated to produce Rs. 80)
Stock in trade (estimated to produce Rs. 1,200)
Sundry Creditors: Loan from Mrs. Pauper
Trade Creditors
Bills Payable
Bank overdraft
Sundry Debtors: Good
Doubtful (estimated at 50%)

Liability on bills discounted Rs. 500, expected to rank Rs. 100. His household furniture, etc was valued at Rs. 250. He owned a house valued at Rs. 750, having a mortgage on it of Rs. 600 at 4%. Interest was paid up to the preceding 31st December1989. The amount due to Mrs. Pauper was out of money given to her by Mr. Pauper.
Preferential Creditors amounted to Rs. 35 (included in Sundry Creditors) and Rs.15 for Rates on the house.
Prepare a Statement of Affairs and Deficiency Account.

8. On 31st December 1989, Mr.Bankrupt's assets liabilities as per books amounted to Rs. 60,000 and Rs. 45,000 respectively. He estimated his deficiency to be Rs. 20,000. He found subsequently that the following had not been taken into account:
a) Interest on his capital of Rs. 30,000 at 6% p.a. for one year.
b) Liability on bills discounted amounting in all to Rs. 10,000, out of which Rs. 3,000 were expected to be dishonoured.
c) Salaries Rs. 1,400, wages Rs. 500 and rent to landlord for three months Rs. 150 have to be paid.
Prepare Mr.Bankrupt's Statement of Affair and Deficiency Account.

9. A merchant became insolvent on 1st January 1989. On that date, his total assets were Rs. 3,750 and his liabilities Rs. 3,250 and the estimated deficiency of Rs. 1,000 before taking the following items into consideration:
(a) Interest on capital Rs. 75 for one year at 5% p.a.
(b) Liability on bills discounted Rs. 150 on bills discounted by him Rs. 400.
(c) Outstanding expenses for wages, etc. to be treated as preferential Rs. 120.
(d) Loan from a friend Rs. 250 and a loan from his wife Rs. 100.
Prepare a Deficiency Account on the basis of data given above.

10. Prepare a Statement of Affairs and Deficiency Account of Ramesh on 10th October 1987. Cash in hand Rs. 85; Book Debts: Good Rs. 1,000; Bad and Doubtful Rs. 3,472 (estimated to produce Rs. 2,869); Reserve for Bad and Doubtful Debts Rs. 1,000; unfinished contract in hand (estimated to produce Rs. 3,000 over and above the cost of completing it); plant, tool, etc. cost Rs. 188 (estimated to realize Rs. 500); Office furniture (estimated to realize Rs. 25); Stock in trade valued at Rs. 1,900; Investment valued at Rs. 6,200 of which deposited with bankers as security for loan Rs. 5,460; land of Rs. 1,470 subject to the advances made by the company amounting to Rs. 1,420; unsecured creditors on trade account Rs. 4,140; unsecured creditors for cash advanced Rs. 4,308; salary of manager Rs. 1,000. Mohan for two months' wages due to him as a clerk, Rs. 30; Sohan's six months salary due to him as a clerk at Rs. 15 per month. Rent o/s Rs. 45; Bankers for loan partly secured Rs. 10,134 (estimated value of securities held by Bank Rs. 7,460 viz., investments Rs. 5,460 and lease Rs. 2,000); capital account on 1st January as shown by the books Rs. 189; loss on trading from 1st January to 10th October, Rs. 374; Loss on sale of investments made on the 30th June, Rs. 200; drawings Rs. 750. Estimating the cost of winding up Rs. 4,005.50 state the amount of dividend which could be expected to be paid to the unsecured creditors.

11. Mr. Ramesh had on 31st March 1988, assets of Rs. 66,000 including a machinery valued in the books at Rs. 6,000 and estimated to realise 70% of the book value and liabilities Rs. 40,000 of which Rs. 3,000 were fully secured against the machinery. He filed his petition in insolvency and estimated his deficiency to be Rs. 20,000 before taking into account the following outstanding liabilities: Wages Rs. 1,000; Rent Rs. 800; Salaries Rs. 2,000; Taxes Rs. 200. Prepare his revised Statement of Affairs and Deficiency Account from the above particulars.

12. A & B sharing profits and losses equally commenced business in partnership on 1st January 1981, with equal capitals, the capital amounts not being known. However, they are in a position to say that their capitals invariably increased by 10% of the balance as on first day of each year. On 31st December 1984, a petition in bankruptcy was filed when the estimated deficiency was 50% of the original capitals. The creditors of the firm on 31st December 1984 amounted to Rs. 46,000 and the assets Rs. 1,04,564. Prepare Statement of Affairs and Deficiency Account of the firm.

13. Mr. N.O. Money had on 31st March 1984 assets (as shown by his books) Rs. 27,000 including machinery valued in the books at Rs. 2,000 and estimated to realize only 45% of the book value, and liabilities Rs. 20,400 of which Rs. 800 were fully secured against the machinery. He filed his petition in bankruptcy and estimated his deficiency to be Rs. 14,400 before taking into account the following outstanding liabilities:
Wages Rs. 600
Salaries Rs. 1,300
Rent Rs. 500
Prepare his statement of Affairs and Deficiency Account from the above particulars.

14. 'A' filed his petitions in bankruptcy on 30th June 1987 and you are instructed to prepare Statement of Affairs and Deficiency Account from the following information: Stock in trade at cost, Rs. 36,000, of which Rs. 3,000 worth is in the hands of a creditor for Rs. 5,000 who is entitled to exercise a lien; Book Debts: Good Rs. 48,750, Doubtful Rs. 600 (estimated to realise Rs. 200), Bad Rs. 750, Cash in hand, Rs. 50; Bills receivable, Rs. 5,500 (held by bankers against overdraft of Rs. 20,000 the balance of which is secured by a second charge on debtors, freehold property, and by the guarantee of his brother); Fixtures and Fittings Rs. 1,150; Customers bills under discount Rs. 7,500, of which Rs. 1,000 is ascertained to be bad, Rs. 500 is doubtful. Freehold Property Rs. 15,000 subject to a first mortgage of Rs. 10,000. The unsecured creditors amount to Rs. 1,49,000 in addition to claims for Rates, Taxes and Wages amounting to Rs. 1,200. The Stock in Trade is estimated to be worth 75% of its face value and the Freehold Property is valued at Rs. 11,000. Subject to the modifications above stated, the assets are worth their book values.
The debtor started his business on 1st January 1985, with a capital of Rs. 25,000, since then he has withdrawn Rs. 15,000 p.a. in equal monthly installments. His profits for the year ended 31st December 1985 were Rs. 10,500 and 1986, Rs. 2,100 since that date he has not made up his books.

15. 'A' receiving order has been made against 'B' dated 15th September1987. The particulars of his assets and liabilities are as under:

Unsecured creditors
Motor cycle used in business (estimated)
Creditors fully secured (holding life insurance policies valued at Rs. 12,315)
Creditors partly secured (the Security held is a second mortgage on assets pledged to fully secured creditors, the surplus available from the latter being estimated at Rs. 1,020)
Preferential creditors
Cash in hand
Life insurance policies, not charged (surrender value estimated)
Stocks and shares (estimated)
Book Debts Rs. 76 (of which Rs. 39 are good) estimated

The debtor has conveyed business furniture to his wife by deed of gift dated 3rd March 1987. The value of this item is estimated at Rs. 300. The Deficiency Account starts from 30th June 1986 on which date the excess of liabilities over assets was Rs. 3,936. The causes of failure are unsuccessful trading, stock exchange speculation and excessive interest on money borrowed. Prepare the Statement of Affairs and Deficiency Account inserting in the latter such items of gains and losses as are usual or suggested by the particulars then.

16. Following were the assets and liabilities of Raman of Madras on 31st March 1987 when he was declared insolvent: Assets: Furniture Rs. 1,000; Stock Rs. 30,000; Debtors Rs. 9,000. Liabilities: Creditors Rs. 28,000; Government tax Rs. 7,000; Wages of 5 labourers Rs. 600; Salary of 3 clerks Rs. 1000; Reserve for Bad and Doubtful Debts Rs. 100; 2 months rent payable to landlord Rs. 200; Capital Rs. 3,100.
His private liabilities were Rs. 7,000 and private assets Rs. 8,500. Following were included in these private assets: (a) Wearing apparel for himself and his family member, cooking vessels, and his furniture Rs. 1,000; (b) Property for which he is reputed owner Rs. 500; (c) Property held under trusts for others Rs. 4,000.
He started his business on 1st April 1984 with a capital of Rs. 10,000. During the whole period he withdrew Rs. 6,900 for his personal use. His profits for the first and second year respectively were Rs. 5,000 and Rs. 3,000. His loss in the 3rd year was Rs. 8,000. Following amounts were realised from his assets: Furniture Rs. 800; Stock Rs. 10,000; Debtors Rs. 3,000.
Prepare Statement of Affairs and Deficiency Account of Raman and find out the rate of dividend payable to his creditors.

17. Prepare Statement of Affairs and Deficiency Account of Ramesh of Mumbai against whom an order of adjudication was passed on 31st December 1987. Following figures were obtained from his books at the date of insolvency:

Trade creditors
Liabilities on bills receivable discounted (estimated to rank Rs. 2,500)
Due to landlord in respect of rent for 2 months (Rs. 200 per month)
Stock in trade (Estimated to realise Rs. 20,000)
Bills payable
Machinery (estimated to realise Rs. 25,000)
Bank overdraft
Furniture (estimate to realise Rs. 2,000)
Rates and taxes due
Mortgage (holding the security worth Rs. 40000)
Wages and salaries being preferential debt
Partly secured creditors (Security being a second charge on the assets held by fully secured creditors to the extent of Rs. 500)
Book debt (a) Good
(b) Doubtful (estimated to produce Rs. 200)
(c) Bad

The insolvent commenced business 2 years ago on 1st January 1986, with a capital of Rs. 34,000. Drawings in the 2 years amounted to Rs. 1,100. In the year 1986, there was a net profit of Rs. 300, and a net loss of Rs. 500 was incurred on 1987. Interest on capital was allowed to the tune of Rs. 500 p.a. Further information available is that an amount of Rs. 500 due to Mohan, has been included in trade creditors while his debit balance of Rs. 300 is included in debtors, and debit balance of Rs. 500 receivable from Sohan is included in debtors and his credit balance of Rs. 100 is included in creditors.

18. How will you treat the following in the Statement of Affairs and Deficiency Account?
(a) Rs. 20,000 loan from wife has been included in unsecured creditors of Rs. 50,000. Wife has paid this loan out of a Stridhan.
(b)16 months before declaration of insolvency, insolvents private house of Rs. 30,000 was transferred to his wife without consideration.
(c) Private assets of Rs. 25,000 of the insolvent include Rs. 3,000 'Stridhan' of his wife and his private liabilities are Rs. 15,000.
(d) The insolvent has transferred his private cottage of Rs. 18,000 to his daughter in consideration of her marriage.

19. Classify the following items for the various lists of liabilities side of statement of affairs of an insolvent according to Presidency Town's Insolvency Act and Provincial Insolvency Act.
(a) Loan from 'A' secured by machinery Rs. 40,000, the estimated value of machine is Rs. 30,000 (Book Value Rs. 60,000).
(b) Loan from 'B' secured by first mortgage on leasehold property Rs. 32,000, the estimated value of property is Rs. 40,000;
(c) Loan from 'C' secured charge on the above property Rs. 6,000.
(d) Private liabilities Rs. 10,000;
(e) Loan from wife Rs. 5,000 (Rs. 3,000) out of her Stridhan;
(f) Bills discounted Rs. 6,000 out of which a sum of Rs. 1,500 is doubtful and Rs. 1,000 is bad,
(g) Rs. 2,500 due to 'C' for losses in a speculation business;
(h) Bank overdraft Rs. 5,000 secured by personal guarantee of a friend of insolvent for the full amount;
(i) Trade creditors Rs. 70,000 and bills payable Rs. 10,000;
(j) Rent due to landlord for 3 months Rs. 1,200;
(k) Clerks at Rs. 250 per month for 4 months and 2 peons at Rs. 125 per month for 5 months,
(l) Rates and taxes Rs. 2,500;
(m) Liability for an incomplete contract Rs. 6,000 not expected to rank for payment.

20. From the following information, prepare a Statement of Affairs and a Deficiency Account of Mr. Unlucky who is declared insolvent on 31st December 1977.
Total creditors of 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 debts estimated at 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 1/1/73 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 1977.
The profit of business in first four years were Rs. 4,200 but in the last year, business incurred a loss of Rs. 5,200. He paid Rs. 4,000 to his creditor's friend on 8/12/77 by fraudulent preference. He gifted Rs. 1,000 to her daughter on occasion of her marriage on 9/12/77. A discounted bill of Rs. 1,200 was dishonoured on 31/12/77.

21. Shri Jaganth filed a petition in bankruptcy on 31st March 1974 when his balance sheet was:

Sundry creditors
Cash on hand
Bank overdraft
Land and buildings
Bills payable
Plant and machinery
Income tax payable
Sundry debtors
Bills receivable
Shri Jagnath's drawings A/c

From the following information, prepare the Statement of Affairs and Deficiency account;
(a) Bank overdraft has a first charge on land and buildings and sundry creditors have second charge upto Rs. 7,000.
(b) Sundry creditors include Rs. 6,000 due to his wife, which amount belongs to her father.
(c) Shri Jagnath gave furniture of Rs. 2,000 as a gift to his brother on 1/1/74. He recorded the said transaction in his books of accounts as under:
Drawings A/c                Dr.    Rs. 2,000
     To Furniture A/c                                  Rs. 2,000
(d) A decree has been passed for Rs. 1,800 against him for which no liability has been created in his books.
(e) Assets (including furniture) are estimated to realise at 50% of the book value.
(f) Shri Jagnath's capital commencement of business was Rs. 15,000, his trade losses were Rs. 6,000, loss in speculation was Rs. 10,000, and his withdrawals were Rs. 20,000 resulting in his net debit balance of the drawings A/c Rs. 21,000 as shown in the balance sheet.