Question

Madhav accepted a bill of Rs. 40,000 drawn by Kashinath at 3 months. Kashinath got the bill discounted with his bank for Rs. 39,000. Before the due date, Madhav approached Kashinath for renewal of the bill. It was agreed to pay Rs 30,000 immediately together with interest on the remaining amount at 10% p. a. for 3 months and for the balance Madhav accepted a new bill for 3 months. These arrangements were carried through. But afterwards Madhav became insolvent. Only 35% of the amount could be recovered from his estate.

1. Pass necessary Journal Entries in the books of 'Madhav'.

2. Prepare Madhav's A/c in the books of 'Kashinath'.

Answer 1

 

In the books of Madhav Journal
Date	Particulars		L.F.	Debit Amount (Rs)	Credit Amount (Rs)
	Kashinath	Dr.		40,000
	To Bills Payable A/c				40,000
	(Acceptance given)
	Bills Payable A/c	Dr.		40,000
	To Kashinath				40,000
	(Bill cancelled)
	Interest A/c	Dr.		250
	To Kashinath				250
	(Interest due)
	Kashinath	Dr.		30,250
	To Cash A/c				30,250
	(Cash paid)
	Kashinath	Dr.		10,000
	To Bills Payable A/c				10,000
	(Bill issued)
	Bills Payable A/c	Dr.		10,000
	To Kashinath				10,000
	(Bill dishonoured)
	Kashinath	Dr.		10,000
	To Cash A/c				3,500
	To Deficiency A/c				6,500
	(Final compensation paid)

 

Madhav’s Account
Dr.			Cr.
Date	Particulars	Amount (Rs)	Date	Particulars	Amount (Rs)
	Balance b/d	40,000		Bills Receivable	40,000
	Bank	40,000		Cash	30,250
	Interest	250		Bills Receivable (New)	10,000
	Bills Receivable (New)	10,000		Cash	3,500
				Bad Debts	6,500
		90,250			90,250

Working Notes:

WN1 Calculation of Interest

\[\text{Amount of Interest} = 10, 000 \times\frac{10}{100}\times\frac{3}{12}= Rs 250\]

WN2 Calculation of Final Compensation

\[\text{Amount of Final Compensation} = 10, 000 \times\frac{35}{100} = Rs 3, 500\]