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Question-1

Name any two types of commonly used negotiable instruments.

Solution:
The two commonly used Negotiable Instruments are:
  Bills of Exchange; and
  Promissory Note.

Bill of exchange: According to the Negotiable Instruments Act 1881, a bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. Promissory Note: According to the Negotiable Instruments Act 1881, a promissory note is defined as an instrument in writing (not being a bank note or a currency note), containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument.

 

Question-2

Write two points of distinction between bills of exchange and promissory note.

Solution:
The main difference between a bills of exchange and a promissory note are:
  A bill is drawn by the creditor, but a promissory note is drawn by the debtor.
  A bill requires acceptance by the drawee or someone else on his behalf. But in case of a promissory note, it does not require any acceptance.

 

Question-3

State any four essential features of bill of exchange.

Solution:
The following are the features of a bill of exchange:

A bill of exchange must be in writing.
  It is an order to make payment.
  The order to make payment is unconditional.
  The maker of the bill of exchange must sign it.
  The payment to be made must be certain.
  The date on which payment is made must also be certain.
  The bill of exchange must be payable to a certain person.
  The amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time.
  It must be stamped as per the requirement of law.

 

Question-4

State the three parties involved in a bill of exchange.

Solution:
There are three parties to a bill of exchange:

(1) Drawer is the maker of the bill of exchange. A seller/creditor that is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor. The drawer after writing the bill of exchange has to sign it as maker of the bill of exchange.

(2) Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods upon whom the bill of exchange is drawn.

(3) Payee is the person to whom the payment is to be made. The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment. The payee may change in the following situations:

(a) In case the drawer has got the bill discounted, the person who has discounted the bill will become the payee;

(b) In case the bill is endorsed in favour of a creditor of the drawer, the creditor will become the payee.

Question-5

What is meant by maturity of a bill of exchange?

Solution:
The term maturity refers the date on which a bill of exchange or a promissory note becomes due for payment. In arriving at the maturity date three days, known as days of grace, must be added to the date on which the period of credit expires instrument is payable. Thus, if a bill dated March 05 is payable 30 days after date it, falls due on April 07, i.e. 33 days after March 05 If it were payable one month after date, the due date would be April 08, i.e. one month and 3 days after March 05.

Question-6

What is meant by dishonour of a bill of exchange?

Solution:
If the holder of the bill needs funds, he can approach the bank for encashment of the bill before the due date. The bank shall make the payment of the bill after deducting some interest (called discount in this case). This process of encashing the bill with the bank is called discounting the bill. The bank gets the amount from the drawee on the due date.

Question-7

Name the parties to a promissory note.

Solution:
There are two parties to a promissory note.

Maker or Drawer is the person who makes or draws the promissory note to pay a certain amount as specified in the promissory note. He is also called the promisor.
  Drawee or Payee is the person in whose favour the promissory note is drawn. He is called the promisee. Generally, the drawee is also the payee, unless, it is otherwise mentioned in the promissory note.

Question-8

What is meant by acceptance of a bill of exchange?

Solution:
The bill after is prepared is sent to the debtor. He writes the word ‘Accepted’ on the face of the bill and signs, thereby agreeing to pay the amount stated on the on the due date. This is known as ‘Acceptance’.

Question-9

What is Noting of a bill of exchange.

Solution:
A bill of exchange should be duly presented for payment on the date of its maturity. The drawee is absolved of his liability if the bill is not duly presented. Proper presentation of the bill means that it should be presented on the date of maturity to the acceptor during business working hours. To establish beyond doubt that the bill was dishonoured, despite its due presentation, it may preferably to be got noted by Notary Public. Noting authenticates the fact of dishonour. For providing this service, a fee is charged by the Notary Public which is called Noting Charges.

Question-10

What is meant by renewal of a bill of exchange?

Solution:
When the acceptor of the bill foresees that it may be difficult to meet the obligation of the bill on maturity due to temporary difficulties, he may approach the drawer with the request for extension for time for payment by canceling the old bill and drawing a fresh bill with new terms of payment. This is called renewal of the bill.

Question-11

Give the performa of a Bills Receivable Book.

Solution:
The bills receivable book has been designed as a summary of information regarding a duly accepted bill received by a drawer. All the details of the bill-date, acceptor’s name, amount, term, place of payment, etc. are entered in the bills receivable book for presentation and further reference. The performa of a bills receivable book is as follows:

Bills Receivable Book

No. of Bill Date Received Date of bill From Whom Received Drawer Acceptor Where Payable Term Due Date Ledger Folio Amount Cash Book Folio Remarks
                         

Question-12

Give the performa of a Bills Payable Book.

Solution:
The bills payable book is maintained like a bills receivable book. It is meant to record all the details, relating to the bills accepted by a person or a party, which are retained for being use in the future, in case of need.The proforma of a bills payable book is given

Bills Payable Book

No. of Bill Date of Bill To whom given Drawer Payee Where payable Term Due date Ledger Folio Amount Paid Date Cash Book Folio Remarks
                         

Question-13

What is retirement of a bill of exchange?

Solution:
Sometimes the acceptor is prepared to (retire) pay the Bill before the date of maturity. In such a case the drawer may allow him a concession called Rebate or Discount at certain rate calculated on the unexpired period of maturity of the bill. The amount so deducted is known as discount and this discount is a gain to the acceptor and a loss to the drawer. The whole process is known as Discounting of Bill.

Question-14

Give the proforma of a Bills of Exchange.

Solution:
The following is the proforma of a bills of exchange:
 

Mamta                                                                                       NewDelhi

Rs.10,000                                                                           April 01,2006

Three months after date pay to me or my order, the sum of Rupees Ten Thousand only, for value received.

Stamp

 

Accepted

(signed)                                                                                (Signed)

Jyoti                                                                                        Mamta

1.4.2006                                                                        196, Karol Bagh

73-B, Mahipalpur                                                                 New Delhi

New Delhi 110 037

                                                                                                 To

                                                                                               Jyoti

                                                                                     73-B, Mahipalpur

New Delhi 110 037

In the above mentioned bill of exchange, Mamta is the drawer and Jyoti is the drawee. Since Jyoti has accepted the bill, she is the acceptor. Suppose in place of Jyoti the bill is accepted by Ashok then Ashok will become the acceptor.

Question-15

On March 15, 2006 Ramesh sold goods for Rs. 8,000 to Deepak on credit. Deepak accepted a bill of exchange drawn upon him by Ramesh payable after three months. On April, 15 Ramesh endorsed the bill in favour of his creditor Poonam in full settlement of her debt of Rs. 8,250. On May 15, Poonam discounted the bill with her bank @ 12% p.a. On the due date Deepak met the bill. Record the necessary journal entries in the books of Ramesh, Deepak, and Poonam.

Solution:

Books of Ramesh- Journal

Date Particulars L.F. Debit Amount Rs. Credit Amount Rs.
2006 Deepak A/c Dr.   8,000  
Mar.15 To Sales A/c (Sold goods to Deepak on credit)     8,000
Mar 15 Bills Receivable A/c Dr. To Deepak A/c (Received Deepak’s acceptance for three months)   8,000



8,000

Apr 15 Poonam’s A/c Dr. 8,250 To Bills Receivable A/c 8,000 To Discount Received A/c 250 (Bill endorsed in favour of Poonam in full settlement of her debt of Rs. 8,250)   8,250


8,000

250

Books of Deepak-Journal

Date Particulars L.F. Debit Amount Rs. Credit Amount Rs.
2006 Purchases A/c Dr.   8,000  
Mar.05 To Ramesh A/c (Sold goods to Deepak on credit)     8,000
Mar 05 Ramesh’s A/c Dr. To Bills Payable A/c (Accepted Ramesh’s draft payable after three months)   8,000

8,000
Jun 18 Bills Payable A/c Dr. 8,000 To Bank A/c 8,000 (Met the acceptance in favour of Ramesh on maturity)   8,000
8,000

Books of Poonam- Journal

Date Particulars L.F. Debit Amount Rs. Credit Amount Rs.
2006 Mar.15         Mar 15       Bills Receivable A/c Dr. Discount Allowed A/c Dr. To Ramesh’s A/c (Ramesh endorsed Deepak’s acceptance in our favour for discharge his dept of Rs. 8,250 in full settlement) Bank A/c Dr. Discount Allowed A/c Dr. To Bills Receivable A/c (Biils receivable encashed on maturity)   8,000 250         7,920 80  

8,250        

8,000
 

 

Question-16

On Jan. 15, 2006 Sachin sold goods Rs.30, 000 to Narain and drew upon the later a bill for the same amount payable after 3 months. The bill was accepted by Narain. The bill was discounted by Sachin from his bank for Rs.29, 250 on Jan. 31, 2006. On maturity the bill was dishonored. He further agreed to pay Rs.10, 500 in cash including Rs. 500 interest and accept a new bill for two months for the remaining Rs.20, 000. The new bill was creditor Kapil for settling a debt of Rs. 20,800. The new bill was endorsed by sachin in favour of his creditor Kapil for settling a debt of Rs. 20,800. The new bill was duly met by Narain on maturity.

 

Record the necessary journal entries in the books of Sachin and Narain.

 


Solution:

Books of Sachin-Journal

Date Particulars L.F. Debit Amount Rs. Credit Amount Rs.
2006 Narain A/c Dr.   30,000  
Jan.15

To Sales A/c

(Sold goods to Narain)

    30,000
Jan 15

Bill’s Receivable A/c Dr.

To Narain’s A/c

(Received Bunty’s acceptance)

  30,000

30,000
Jan 31

Bank A/c Dr.

Discount A/c

To Bill receivable A/c

(Narains’ acceptance discounted with bank)

  29,250

    750



30,000
Apr.19

Narain’s A/c Dr.

To Bank A/c

To Interest A/c

(Narain’s acceptance cancelled)

  30,500

30,000     500
Apr.19

Bank A/c Dr.

Bills Receivavble A/c Dr.

To Narain A/c

(Received cash from Narain and a new acceptance for the balace)

  10,500

20,00030,500
Apr.19

Kapil A/c Dr.

To Bill Receivable A/c

To Discount Receivable A/c (Narain’s acceptance endorsed in favour of

kapil and he allowed discount)

  20,800
20,000     800

Books of Narain-Journal

Date

Particulars

L.F. Debit Amount Rs. Credit Amount Rs.
2006 Purchases A/c Dr.   30,000  
Jan.15

To Sachin A/c

(Purchased goods from sachin)

    30,000
Jan 15

Sachin A/c Dr.

To Bills Payable A/c

(Accepted Sachin’s draft)

  30,000

30,000
Jan 19

Bill Payable A/c Dr.

Interest A/c Dr.

To Sachin A/c

(Cancelled old bill & Sachin charged interest)

  30,000 500

 




30,500
Apr.19

Sachin’s A/c Dr.

To Bank A/c

To Bill Payable A/c

(Paid Sachin and accepted a new draft for the balance)

  30,500

10,50020,000
Apr.22

Bills Receivavble A/c Dr.

To Bank A/c

(Met new acceptance on Maturity)

  20,000

20,000

 

Question-17

Ashok sold goods Rs.14, 000 to Bishan on October 30, 2005 and drew three bills for Rs.2, 000, Rs.4, 000 & Rs.8, 000 payable after two, three, and four months respectively. The first bill was kept by Ashok with him till maturity. He endorsed the second bill in favour of his creditor Chetan. The third bill was discounted on December 03, 2005 at 12% p.a. The first and second bills were duly met on maturity but the third bill was dishonored and the bank paid Rs.50 as noting charges. On March 03, 2006 Bishan paid Rs.4, 000 and noting charges in cash and accepted a new bill at two months after date for the balance plus interest Rs.100. The new bill was met on maturity by Bishan.

You are required to give the journal entries in the books of both Ashok and Bishan and prepare Bishan’s account in Ashok’s books and Ashok’s account in Bishan’s books.


Solution:

 

Books of Ashok- Journal

Date

Particulars

L.F.

Debit Amount Rs.

Credit Amount Rs.

2005 Bishan’s A/c Dr.   14,000  
Oct. 30 To Sales A/c (sold goods to Bishan on credit)     14,000
Oct. 30

Bills Receivable A/c Dr.

To Bishan’s A/c

(Received three acceptances from Bishan. First for Rs. 2,000 payable after two months, second for Rs. 4,000 payable after three months

and the third for Rs. 8,000 payable after four months)

  14,000

14,000
Oct.30

Chetan’s A/c Dr.
To Bills receivable A/c

(Endorsed second bills in favour of creditor Chetan)

  4,000
4,000
Apr.03

Bank A/c Dr.

Discount A/c

To Bill receivable A/c

(Third bill discounted at 12% p.a.)

  7,760

240





8000
Apr.02

Bank A/c Dr.

Bills receivable A/c

(Bishan met his first acceptance on due date)

  2,000

2,000
Mar 03

Bishan A/c Dr.

To Bank A/c

(Bishan dishonoured his third acceptance and bank paid Rs.50 as noting charges)

  8,050

8,050
Mar 03

Cash A/c Dr.

To Bishan’s A/c

(Cash received from Bishan)

  4,050  

4,050

Mar 03

Bishan’s A/c Dr.

To Interest A/c

(Interest charged from Bishan for the extended period)

  100

100
Mar 03

Bills Receivable A/c Dr.

To Bishan’s A/c

(Received new acceptance from Bishan for two months)

  4,100

4,100
May12

Bank A/c Dr.

To bills Receivable A/c

(Bishan met his new acceptance on maturity)

  4,100

4,100

 

Bishan’s Account

Dr.

Cr.

Date

Particulars

J.F.

Amount Rs.

Date

Particulars

J.F.

Amount Rs.

2005

Oct 30

2006

Mar 03

Mar 09



Sales

Bank

Interest

 

 

14,000

 

8,050

  100


______

22,150

2005

Oct30 2006
Mar 03

Mar 03



Bills Receivables

Cash

Bills Receivable

 



14,000

4,050

4,100

______

22,150

 

 

Books of Bishan- Journal

Date

Particulars

L.F.

Debit Amount Rs.

Credit Amount Rs.

2005

Jan 30

 

 

 

Jan 30

 

 

 

 

 


2006

Jan 02

 

 

 



Feb.02

 

 

 

 



Mar 03

 

 

 

 

Mar 09

 

 

 

 

 


Mar 09

 

 

 

 

Mar 09

 

 

 

 

Mar 12

 

Purchases A/c Dr.

To Ashok’s A/c

(Purchases goods on credit from Ashok)


Ashok’s A/c Dr.

To Bills Payable A/c

(Accepted three drafts of Ashok, the first for Rs. 2,000 payable after 2 months, second for Rs. 4,000 Payable after 3 months and the third for Rs. 8,000 Payable after 4 months)



Bills Payable A/c Dr.

To Bank A/c

(Met first acceptance for Rs. 2,000 in favour of Ashok.)



Bill Payabale A/c Dr.

To Bank A/c

(Met second acceptance for Rs. 4,000 in favour of Ashok on maturity)


Bill Payable A/c Dr.

Noting charges A/c Dr.

To Ashok A/c

(Third acceptance in favour of Ashok dishonoured and noting charges Rs. 50)

Ashok’s A/c Dr.

To Cash A/c

(Paid to Ashok Rs. 4,000 plus noting charges)


Interest A/c Dr.

To Ashok’s A/c

(Interest allowed to Ashok)

 

Ashok’s A/c Dr.

To Bills Payable A/c

(New draft of Ashok for two months accepted)

 

Bills Payable A/c Dr.

To Bank A/c

(Met new acceptance for Rs. 4,100 in favour of Ashok on maturity)

 

14,000

 

 

 

 

14,000

 

 

 

 

 

 



2,000

 

 

 


4,000

 

 

 

 

 


8,050

50

 

 

 



4,050

 

 

 




100

 

 

 


4,100

 

 

 

 

4,100

 

 

 

 

14,000

 

 

 

 

14,000

 

 

 

 

 

 

 

2,000

 

 

 


4000

 

 

 

 

 

 


8,050

 

 

 

 

4,050

 

 

 




100

 

 

 

4,100

 

 

 

 


4,100

 

Ashok’s Account

Dr.

Cr.

Date

Particulars

J.F.

Amount Rs.

Date

particulars

J.F.

Amount Rs.

2005

Oct 30

2006

Mar 03

Mar 09



Bills Payable



Cash

Bills patable

 

 

14,000

 


4,050

4,100



______

22,150

2005

Oct30 2006

Mar 03



Mar 09

 

Purchases


Bills Payable

Noting Charges

Bills Receivable

 



14,000


8,000

    50

4,100

______

22,150

 

Question-18

Aashirwad draws on Aakarshak a Bill of Exchange for 3 months for Rs.10, 000 which Aakarshak accepts on January 01, 2006. Aashirwad endorses the bill in favour of Aakarti.

Before maturity Aakarshak approaches Aashirwad with the request that the bill be renewed for a further period of 3 months at 18 per cent per annum interest. Aashirwad pays the sum to Prateek on the due date and agrees to the proposal of Aakarshak. Record the journal entries in the books of Aashirwad, assuming that the second bill is duly met.


Solution:

 

 

Books of Ashirwad - Journal

Date

Particulars

L.F.

Debit Amount

Credit Amount

2006 Bills Receivable A/c Dr.   10,000  
Jan 01

To Aakarshak’s A/c

(The Bill of exchange received from Aakarshak)

    10,000
Jan 01

Aakarati’s A/c Dr.

To Bills payable A/c

(The bill of exchange received from Aakarshak, endorsed to Aakarati)

  10,000

10,000
Apr.04

Aakarshak’s A/c Dr.

To Aakarati’s A/c

(Cancellation of the bill of exchange received from Aakarshak now with Aakarati)

 

10,000




10,000
Apr.04

Aakarati’s A/c Dr.
To Bank A/c

(Payment of the amount due to Aakarati)

 
10,000



10,000
Apr.04

Aakarshak’s A/c Dr.

To Interest A/c

(Interest due from Aakarshak on Rs.10,000 for 3 months at 18% p.a.)

 

450




450
Apr.04

Bills Receivable A/c Dr.

To Aakarshak’s A/c

(The new bill received from Aakarshak for the amountdue for him)

 



10,450





10,450
July07

Bank A/c Dr.

To Bills Receivable A/c

(The amount received from Aakarshak in respect of the renewed bill)

 

 

10,450





 

10,450

 

Question-19

Ankit owes Nikita a sum of Rs.6, 000. On April 01, 2006 Ankit gives a promissory note for the amount for 3 months to Nikita who gets it discounted with her bankers for Rs.5, 760. On the due date the bill is dishonored, the bank paid Rs.15 as noting charges. Ankit then pays Rs.2, 000 in cash and accepts a bill of exchange drawn on him for the balance together with Rs.100 as interest. This bill of exchange is for 2 months and on the due date the bill is again dishonored, Nikita paid Rs.15 as noting charges.

Draft the journal entries to be recorded in Nikita’s books.


Solution:

 

Books of Nikita- Journal

Date

Particulars

L.F.

Debit Amount Rs.

Credit Amount Rs.

2005 Bills Receivable A/c Dr.   6,000  
Apr 01

To Ankit’s A/c

(Ankit’s promissory note received in settlement of his account)

    6,000
Jan 01

Bank A/c Dr.

Discount A/c Dr.

To Bills Payable A/c

(Ankit’s Promissory note discounted for Rs.5,760)

  5,760
  
   240

 

 

6,000
July 04

Ankit A/c Dr.

To Bank A/c 6,015

(The promissory note dishonoured by Ankit the amount of the bill and the noting charges

recoverable from Ankit and payable to bank)

  6,015

6,015
July 04

July 04 Cash A/c Dr. 2,000

To Ankit’s A/c 2,000

(The amount received from Ankit)

  2,000

2,000
Jul 04

Ankit’s A/c Dr. 100

To Interest A/c 100

(Interest due from Ankit for the second bill)

 

100





100
Jul 04

Bills Receivable A/c Dr.

To Ankit’s A/c

(Ankit’s acceptance for 2 months in settlement of amount due)

 

4,115



 

4,115

Sep 07

Ankit’s A/c Dr.

To Bills Receivable A/c

(The dishonour by Ankit of his acceptance)

 

4,115

 

 

4,115

Sept.07

Ankit’s A/c Dr.

To Cash A/c

(Payment of noting charges, recoverable from Ankit)

  15
 

 

15

 

Question-20

Ashu and Mudit were in need of funds. On October 01, 2005 Ashu drew upon a bill for Rs. 9,000 for 2 months. Mudit accepted the bill and returned to Ashu. Ashu got it discounted at 5% from Bank same day. Half of the amount was remitted to Mudit. On the due date Ashu sent the required sum to Mudit, who met the bill. Journalise the transactions in the books of Ashu and Mudit.

Solution:

Books of Ashu-Journal

 

Date

Particulars

L.F.

Debit Amount Rs.

Credit Amount Rs.

2005

Oct 01

 

 


Oct 03

 

 

 

 


Oct 03

 

 

 

 


Oct. 01

Raj’s A/c Dr.

To Bills Payable A/c

(Mutual accommodation bill receipts from Mudit)

Bank A/c Dr.

Discount A/c Dr.

To Bill Receivable A/c

(Bill discounted from bank)

Mudit’s A/c Dr.

To Cash A/c

To Discount A/c

(Half the proceeds remitted to Mudit)

Mudit’s A/c Dr.

To Cash A/c

(Half amount of the bill sent to Mudit to enable him to meet it)

 

9,000

 

 

 

 


8,925

75

 

 

 

4,500

 

 

 

 

 

4,500

 

 

9,000

 

 

 

 

 

 

9,000

 

 

 

4,462.50

37.50

 

 

 

 

4,500

 

Books of Mudit-Journal

Date

Particulars

L.F.

Debit Amount

Credit Amount

2005

Oct 01

 

 


Oct 01

 

 

 




Dec 04

 

 

 

 

Dec 05

Ashu’s A/c Dr.

To Bills Payable A/c

(Mutual Accommodation bill accepted)

Cash A/c Dr.

Discount A/c Dr.

To Ashu’s A/c

(half amount of Discounted Bill received from Ashu)

Cash A/c Dr. 4,500

To Auhu’s A/c 4,500

(Amount retained by Ashu now received from him)


Bill Payable A/c Dr.

To Bank A/c

(Acceptance honoured)

 

9,000

 

 

 

 


4,462.50

37.50

 

 


4,500

 

 

 

 

9,000

 

 

9,000

 

 

 

 

 



4,500

 

 

4,500

 

 

 

 


9,000

 

 

Question-21

Rohan and Rohit were both in need to temporary accommodation. On November 01, 2005, Rohan accepted Rohit draft for Rs. 5,000 for 3 months and Rohit accepted Rohan draft for Rs. 4,000 for 3 months. The both bills were discounted at the respected banks for Rs 4,800 and Rs. 3,850. Before maturity of the bill Rohit sent Rs. 1,000 to Rohan for difference in accommodation bill. Rohan and Rohit met his acceptance on the due date. Dec. 04 Cash A/c Dr Records the transaction in the journal of Rohan and Rohit.

Solution:

Books of Rohan’s- Journal

Date

Particulars

L.F.

Debit Amount Rs.

Credit Amount Rs.

2005 Rohit’s A/c Dr.   5,000  
Nov 01

To Bills Payable A/c

(Rohan accepted bill accommodation)

    5,000
Nov 01

Bill Receivable A/c Dr. 4,000

To Rohit’s A/c 4,000

(Accommodated bill received)

  4,000



4,000
Nov 01

Bank A/c Dr. 3,850

Discount A/c Dr. 150

To Bill Receivable A/c 4,000

(Bill discounted by bank)

 



3,850

150





 


4,000

Feb 04

Cash A/c Dr.

To Rohit’s A/c

(Cash received for meet the bill)

 

 

1,000



 


1,000

Feb. 04

Bill Payable A/c Dr.

To Bank A/c

(Bill met on maturity)

 
 


5,000


 

 

5,000

 





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