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Practice Exercise:
Prepare Trial Balance & Financial statements for the exercises given in Page no. 28 & 29 by using
ledger drawn by you for that exercise.
1. Given below are the ledger balances of a management consultancy firm:
Capital Rs.4,00,000, Computer Rs. 25,000, Air conditioner and furniture Rs. 1,00,000, Fixed Deposits
Rs.2,00,000, Salaries Rs.8,00,000, Fees received Rs. 12,00,000, Travelling expenses Rs.1,50,000,
Rent and office expenses Rs.2,40,000, Cash balances Rs. 1,80,000. Bank overdraft Rs. 95,000.
The total of trial balance will be
(a) Rs. 16,00,000. (b) Rs. 16,95,000. (c) Rs. 14,50,000. (d) Rs. 15,00,000.
..
Bank Reconciliation Statement:
Format of Bank Reconciliation:-
Particulars Dr. Amt. Cr. Amt.
Balance as Per Ledger (bank A/c)/Cash Book(with bank col.) XX
Cheques issued but not presented for payment XX
Cheques deposited but not cleared or collected by bank XX
Cheques deposited but dishonoured, not in books XX
Bank charges/Interest charged by bank not in books XX
Interest income not in books XX
Direct deposit of money by customer not in books
( e.g. rent, payment by customer etc. is possible due to CBS)
XX
Total XXX XXX
Balance As per Bank statement XX
Total
XXX XXX
Notes:-
Not in Books means customer knows these adjustments only when he obtain the information through
passbook/bank statement/now a days by net banking. And hence no reverse effect has been given in
bank reconciliation. One has to give the norma effect as if accounting in normal manner.
In case of overdraft account or CC accounts, bank reconciliation will be prepared in the same manner
as above but only the op. balance has to be written in credit side of it. Rest all will be the same.
Particulars Dr. Amt. Cr. Amt.
Balance as Per Ledger (bank A/c)/Cash Book(with bank
col.)
XX
Some Practice problems:
Illustration 1 : On 31
st
December, 2009 the balance of bank as per bank a/c showed Rs. 10,000. The
balance as per BANK STATEMENT was Rs. 12,200. On the Scrutiny of accounts it was found that
the cheques worth Rs. 3,000 issued to the customer on 25
th
December were not encashed unit 2
nd
January. Cheques worth Rs. 1,000 deposited with bank on 29
th
December were not credited unit 4
th
January. Interest of Rs. 300 on Government securities was credited in the BANK STATEMENT but
was not entered in the bank a/c.. The bank debited Rs. 100 towards bank charges. Prepare the
reconciliation statement.
Bank Reconciliation Statement as on 31
st
December, 2009
Rs. P. Rs. P.
Bank Balance as per ledger book 10,000.00
Debit: Cheques issued but not presented for payment 3,000.00
Interest on Government securities credited in the
bank statement but not adjusted in the ledger book. 300.00 3,300.00
_________ ________
13,300.00
.
BOND Valuation
Yield to Maturity (YTM)
In the previous section on bond valuation, we used equation 13.1 to show that the value of a bond is
the discounted present value of the expected future cash flows of the bond. We solved the equation to
determine a value, given an assumed required rate. If we instead solve the equation for the required
rate, given the price of the bond, we would get a yield measure, which is knows as the YTM or yield to
maturity of a bond. That is, given a pre-specified set of cash flows and a price, the YTM of a bond is
that rate which equates the discounted value of the future cash flows to the present price of the bond.
It is the internal rate of return of the valuation equation.
For example, if we find that an 11.99% 2009 bond is being issued at a price of Rs. 108, (for the sake
of simplicity we will begin with the valuation on a cash flow date), we can state that,
This equation only states the well known bond valuation principle that the value of a bond will have to
be equal to the discounted value of the expected future cash flows, which are the 18 semi-annual
coupons of Rs. 5.995 each and the redemption of the principal of Rs. 100, at the end of the 9th year.
That value of r which solves this equation is the YTM of the bond. The value of r that solves the above
equation can be found to be 5.29%, which is the semi-annual rate. The YTM of the bond is 10.58%.
Yield to maturity represents the yield on the bond, provided the bond is held to maturity and the
intermittent coupons are re-invested at the same YTM rate. In other words, when we compute YTM as
the rate that discounts all the cash flows from the bond, at the same YTM rate, what we are assuming
in effect is that each of these cash flows can be re-invested at the YTM rate for the period until
maturity.
Exercise:- 1 Consider a Rs 1000 par value bond, carrying an interest rate of 15 percent (Payable
annually) and maturing after 5 years. The present market price of this bond is Rs 850. The re-
investment rate applicable to the future cash flows of this bond is 16 percent. The future value of the
benefits receivable from this bond, works out to 2032. The realized yield to maturity is the value of r *
in the following equation.
Present market price (1+ r*) 5 = Future value
850 (1+ r*) 5 = 2032
(1+ r*) 5 = 2032/850 = 2.391
r* = 0.19 for 19 percent
.
Question set 1:
1. Which method of depreciation is approved as per the income tax rules?
a) Sinking fund method b) Written Down Value Method c) Annuity Method d) None of the above
2. Capital A/c is a _______ A/c.
a) Personal b) Real c) Nominal d) None
3. Cash A/c is a ________ A/c.
a) Personal b) Real c) Nominal d) None
4. Which is not only a subsidiary book, but also a principal book?
a) Cash book b) Sales book c) Purchase book d) Bills receivable book
5. The principle Debit the receiver and credit the giver is related to_____
a) Personal a/c b) Real a/c c) Nominal a/c d) None
.Around 250 such multiple objective questions including case studies with answers.
PAPER 3 - LEGAL & REGULATORY ASPECTS OF BANKINGONLY SOME PORTION
OF MATERIAL TAKEN TO SHOW WHAT TYPE OF MATERIAL WE HAVE MADE.
LOAN PRODUCTS
History of loan & borrowings:-
Being India as agro economy, prior to 1960, the agriculturist were dependable for loans and borrowing
on moneylenders, shop keepers , jamindars or their relatives and friends. Further, the option for
industries, traders were also limited at that time. Private banks present were also acted like
moneylenders. However, in ancient India, these money lenders have started banking on benches
where they lend money and exchange valuables. After the nationalization and reforms of banking in
1960, bank credit have gone up significantly year after year. Now, the situation has changed and
banking credit is the first option.
..
Non Fund Base Working Capital Loans :-
The fund base credit facilites are following types -
i) Bank Guarantees
ii) Letter of Credit
i) Bank Guarantees :-
Bank guarantees are issued as a guarantee-bond whereby bank undertake to make the payment of a
specified sum to the beneficiary in the event of the applicants failure to honour his commitment.
The guarantees issued by the bank can be broadly classified into three categories -
a) Financial guarantee
b) Performance guarantee
c) Deferred Payment guarantee, and,
d) Bid Bond guarantee
A Contract of Guarantee is a Tripartite Agreement which contemplates the Principal Debtor, the
Creditor or Beneficiary and the Surety.
A Bank Guarantee is a contract between the issuing Bank and the beneficiary in whose favour the
Guarantee has been furnished. Though the Bank Guarantee may have been issued by the Banker at
the instance of his client, as far as the Bank Guarantee is concerned, it is a contract between the
Banker and the Beneficiary in whose favour the Bank Guarantee has been issued. The party at whose
instance the Guarantee has been furnished is, in a way, a stranger to the said contract of Bank
Guarantee. The person in whose favour the Bank Guarantee has been issued has a right to ask the
Bank to fulfil its obligation in terms of the Bank Guarantee.
If the terms of the Bank Guarantee entitle a party to ask for the payment of money from the Bank then
this right cannot be interfered with merely for the reason that there exists a dispute between the party
and the client at whose instance the Bank Guarantee has been issued. A Bank Guarantee is a
commercial document and may be invoked in a commercial manner.
Precautions to be taken while issuing the bank guarantee document from the point of view of
law of contract:-
In a bank guarantee , the amount has to be specifically stated both in figures and words. The liability
of a bank under a bank guarantee depends on two important criteria, viz, the amount guaranteed and
the period of the guarantee. These two factors have to be specifically stated in a bank guarantee to
avoid future disputes.
1.If the amount and period are not specifically mentioned in a bank guarantee then , the liability of a
bank could be unlimited either in the amount guaranteed or the period during guarantee.
2.Banks always specify the period for which their guarantee subsists and an additional period during
which a claim has to be made upon the bank to make payment. A) The period during which a bank
guarantee subsists is called validity period. B) On the expiry of validity period.
Essential Features of a Contract of Guarantee
1. A contract of guarantee may be either oral or written [Section 126]. Bankers invariably like to have
a written contract of guarantee to avoid uncertainty in future and to bind the surety by his words.
2. Sometimes a contract of guarantee is implied also from the special circumstances. For example,
the endorser of a bill of exchange is liable to pay the amount of the bill to the payee in the case the
acceptor of the bill defaults to fulfil his promise.
3. A guarantee may be either 1) a specific guarantee, or 2) a continuing guarantee. A specific
guarantee is given in respect of a single transaction or promise undertaken by the principal debtor. It
comes to an end when the specific promise or transaction is fulfilled or undertaken.
Example. ABC bank sanctions a loan of Rs.1000 to B. C stands as surety for the repayment of the
same. This is a specific guarantee. As soon as B repays the loan to the Bank, Cs liability as surety is
over. If subsequently B takes another loan from the same Bank, C will not be deemed as surety for
the same.
A guarantee which extends to a series of promises or transactions is called a continuing guarantee
(Section 129). The surety specifies the amount up to which and the period within which he shall
remain liable as a surety.
Example: A enters into a cash credit arrangement with OBC for a credit limit of Rs.10,000. C stands
as surety for A up to this amount for a period of one year ending 31
st
December 2007. Under this
arrangement A will be permitted to undertake any number of transactions with the bank subject to the
limit that the maximum amount outstanding in his account at any time should not exceed Rs.10,000. C
will remain liable as surety for the actual amount of debt taken by A but within the limit of Rs. 10,000
and that too within a period of one year up to 31.12.2007.
In case of a continuing guarantee the surety remains liable during the specified period of guarantee.
But he can at any time revoke the continuing guarantee as to future transactions, by giving notice to
the creditor. (Section 130).
Some decisions of Supreme court in recent past:
Decision in 2012:-
The Supreme court gave the ruling on an appeal by one Ganga Kishun, who had stood as a guarantor
to a bank loan, raised by one Mr. Prasad, who had died without clearing it. Ganga Kishun had come
to the apex court against the Banks decision to recover the loan arrears from him after the death of
principal debtor Mr. Prasad.
Mr. Ganga Kishun argued that the creditor must first exhaust all remedies against the principal debtor
before recovering the debts from the surety holders.
The Supreme court has given the following decision:
There can be no dispute to the settled legal proposition that in view of the provisions of Section 128 of
the Indian Contract Act, 1872, the liability of the guarantor / surety is co-extensive with that of the
debtor.
Therefore, the creditor has a right to obtain a decree against the surety and the principal debtor.
The surety has no right to restrain execution of the decree against him until the creditor has
exhausted his remedy against the principal debtor. And hence Mr. Ganga Kishun has to pay the
amount as stated in decree.
.
.Around 250 such multiple objective questions including case studies with answers.