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ADVANCED ACCOUNTING – b.Com part – II

2014 – Regular & Private (SUPPLEMENTARY) –

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Compiled & Solved by: Sameer Hussain

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Compiled & Solved by: Sameer Hussain www.a4accounting.weebly.com

www.facebook.com/a4accounting.net www.twitter.com/a4accounting2

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Advanced Accounting – B.Com Part – II – 2014 Regular & Private (Supplementary) Solution 1

Instructions: (1) Attempt any FIVE questions. (2) All questions carry equal marks. (3) Use of calculator is allowed. Do not use abbreviations. (4) Answers without necessary computations will not be accepted. (5) All journal entries should be properly dated, intended and narrated. Q.No.1 INSTALLMENT SALES The following information is extracted from the books of EZ – Company for the year ended December 31, 2014: Inventory (1-1-2014) 7 machines costing Rs.12,250. During the year purchased 80 machines for Rs.2,000 each on credit. Inventory (31-12-2014) 12 machines. The company follows FIFO and makes all sales on installment basis, at 60% above cost. Received 25% as down payment and the balance was to be received in 15 monthly installments. All installments were collected smoothly during the year. REQUIRED Find the amount of:

(a) Cost of installment sales. (b) Installment sales. (c) Deferred gross profit rate. (d) Total collection during 2014. (e) Realized gross profit during 2014.

Note: All sales were made on January 1, 2014 and installments were collected at the last date of each month, starting from January 2014. SOLUTION 1 (a) Computation of Cost of Installment Sales: Merchandise inventory beginning 12,250 Add: Purchases (80 x 2,000) 160,000

Merchandise available for sales 172,250 Less: Merchandise inventory ending (12 x 2,000) (24,000)

Cost of installment sales Rs.148,250

SOLUTION 1 (b) Computation of Installment Sales: Installment sales = Cost of installment sales x 160% Installment sales = 148,250 x 160% Installment sales = Rs.237,200 SOLUTION 1 (c) Computation of Unrealized Gross Profit: Unrealized gross profit = Installment sales – Cost of installment sales Unrealized gross profit = 237,200 – 148,250 Unrealized gross profit = Rs.88,950



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Computation of Unrealized Gross Profit Rate (DGP%): Unrealized gross profit rate = Unrealized gross profit x 100

Installment sales Unrealized gross profit rate = 88,950 x 100

237,200 Unrealized gross profit rate = 37.5% SOLUTION 1 (d) Computation of Total Cash Collection: Down payment (237,200 x 25%) 59,300 Add: Installments received {(237,200 – 59,300)/15 x 12} 142,320

Total cash collection Rs.201,620

SOLUTION 1 (e) Computation of Realized Gross Profit: Realized gross profit = Cash collection X DGP% Realized gross profit = 201,620 x 37.5% Realized gross profit = Rs.75,607.5

Q.No.2 BRANCH ACCOUNTING On May 1, 2015, AK Traders of Karachi established a branch at Hyderabad and decided to make all shipments at 25% above cost. The following selected transactions are taken from their records for May 2015:

1. Sent goods to branch at billed price of Rs.300,000 and cash Rs.50,000. 2. During the month, three additional shipments were made at billed price of Rs.200,000;

Rs.150,000 and Rs.250,000 respectively. 3. During the month, the branch returned goods at billed price of Rs.20,000 and reported a net

loss for the month Rs.9,000 as well as ending inventory valued Rs.70,000. The branch was not authorized to purchase goods from local market. REQUIRED Record the above transactions and allowance for overvaluation adjustment in head office book for May, 2015. (Computations are necessarily to be shown). SOLUTION 2 Computation of Allowance for Overvaluation:

Particulars Billed Cost Allowance for over valuation

Merchandise supplied (300,000 x 25/125) 300,000 240,000 60,000 Add: Merchandise supplied (200,000 x 25/125) 200,000 160,000 40,000 Add: Merchandise supplied (150,000 x 25/125) 150,000 120,000 30,000 Add: Merchandise supplied (250,000 x 25/125) 250,000 200,000 50,000 Less: Merchandise returned (20,000 x 25/125) (20,000) (16,000) (4,000)

Unadjusted allowance for overvaluation 880,000 704,000 176,000 Less: Inventory ending (70,000 x 25/125) (70,000) (56,000) (14,000)

Adjusted allowance for overvaluation 810,000 648,000 162,000



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AK TRADERS HEAD OFFICE BOOK GENERAL JOURNAL

FOR THE MONTH OF MAY 2015

Date Particulars P/R Debit Credit

1 Hyderabad branch 350,000 Merchandise supplied 240,000 Allowance for overvaluation 60,000 Cash 50,000 (To record the merchandise supplied to branch and

cash remitted to branch)

2 Hyderabad branch 200,000 Merchandise supplied 160,000 Allowance for overvaluation 40,000 (To record the merchandise supplied to branch)



5 Merchandise supplied return 16,000 Allowance for overvaluation 4,000 Hyderabad branch 20,000 (To record the goods returned by branch)

6 Profit and loss account 9,000 Hyderabad branch 9,000 (To record the net loss reported by branch)

7 Allowance for over valuation 162,000 Profit and loss account 162,000 (To adjust the allowance for overvaluation)

Q.No.3 CASH FLOW STATEMENT Comparative balance sheets of Leo Co. Ltd. are given below:

Assets December 31,2013

December 31,2014

Equities December 31,2013

December 31,2014

Cash Rs.100,000 Rs.112,000 Accounts payable Rs.30,000 Rs.24,000

Accounts receivable 140,000 150,000 Allowance for bad debts 10,000 8,000

Inventory 160,000 152,000 Allow. for depreciation 12,000 16,000

Equipment 40,000 60,000 10% Bonds payable 120,000 100,000

Share capital (Rs.10 par) 240,000 290,000

Retained earnings 28,000 36,000

440,000 474,000 440,000 474,000

Cash dividend declared and paid during the year ended December 31, 2014, Rs.40,000.



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REQUIRED Prepare a cash flow statement, showing cash flows from: (a) operating activities (b) investing activities (c) financing activities. SOLUTION 3 Computation of Net Income: Retained earnings (2014) 36,000 Less: Retained earnings (2013) (28,000)

Net increase in retained earnings 8,000 Add: Cash divided 40,000

Net income Rs.48,000

LEO CO. LTD.

CASH FLOW STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2014

Cash Flow from Operating Activities: Net income 48,000 Adjustments: Add: depreciation expense 4,000

Income before changes in working capital 52,000 Less: Decrease in allowance for bad debts (2,000) Less: Increase in accounts receivable (10,000) Add: Decrease in merchandise inventory 8,000 Less: Decrease in accounts payable (6,000)

Net cash flow from operating activities 42,000 Cash Flow from Investing Activities: Purchase of equipment (20,000)

Net cash flow from investing activities (20,000) Cash Flow from Financing Activities: Payment of bonds payable (20,000) Issue of share capital 50,000 Cash dividend paid (40,000)

Net cash flow from financing activities (10,000)

Net increase in cash and cash equivalents 12,000 Add: Opening cash and cash equivalents balance 100,000

Closing cash and cash equivalents balance Rs.112,000

Q.No.4 COMPANY ACCOUNTING – AMALGAMATION Balance sheets of A Ltd. and B Ltd. as on December 31, 2014 are as follows:

Assets A Ltd. B Ltd. Equities A Ltd. B Ltd.

Cash Rs.90,000 Rs.64,000 Current liabilities Rs.108,000 Rs.72,000

Other current assets 900,000 720,000 General reserves 36,000 9,000

Plant assets 1,620,000 1,440,000 Share capital (Rs.10 par) 2,500,000 2,170,000

Goodwill 52,000 36,000 Retained earnings 18,000 9,000

2,662,000 2,260,000 2,662,000 2,260,000



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On January 1, 2015, both the companies agreed to amalgamate, establishing a new company XY Co. Ltd. The amalgamating company took over all assets and liabilities of liquidating companies and issued sufficient number of shares of Rs.10 each to each liquidating company. XY Co. Ltd. paid Rs.30,000 as preliminary expenses. REQUIRED

(a) Number of shares issued to each liquidating company by XY Company Ltd. (b) Entries in the General Journal of XY Company Ltd. (c) Initial balance sheet of XY Company Ltd.

SOLUTION 4 (a) Computation of Purchase Consideration:

A Ltd. B Ltd. Cash 90,000 64,000 Other current assets 900,000 720,000 Plant assets 1,620,000 1,440,000 Goodwill 52,000 36,000

Total assets 2,662,000 2,260,000 Less: Liabilities: Current liabilities (108,000) (72,000)

Purchase consideration Rs.2,554,000 Rs.2,188,000

Computation of Number of Shares:

A Ltd. B Ltd. Purchase consideration 2,554,000 2,188,000 Par value per share 10 10

Number of shares 255,400 218,800

SOLUTION 4 (b)

XY COMPANY LTD. GENERAL JOURNAL


1 Cash 90,000 Other current assets 900,000 Plant assets 1,620,000 Goodwill 52,000 Current liabilities 108,000 Payable to A Ltd. 2,554,000 (To record the assets and liabilities taken over from

A Ltd.)

2 Payable to A Ltd. 2,554,000 Ordinary shares capital (255,400 x 10) 2,554,000 (To record the shares issued against purchase

consideration)



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3 Cash 64,000 Other current assets 720,000 Plant assets 1,440,000 Goodwill 36,000 Current liabilities 72,000 Payable to B Ltd. 2,188,000 (To record the assets and liabilities taken over from

B Ltd.)

4 Payable to B Ltd. 2,188,000 Ordinary shares capital (218,800 x 10) 2,188,000 (To record the shares issued against purchase

consideration)

5 Preliminary expenses 30,000 Cash 30,000 (To record the payment of preliminary expenses)

SOLUTION 4 (c)

XY COMPANY LTD? BALANCE SHEET

AS ON JANUARY 1, 2015

Equities Assets

Shareholder’s Equity: Fixed Assets: Issued & Paid-up Capital: Goodwill 88,000 474,200 Ordinary shares @ Rs.10 each 4,742,000 Preliminary expenses 30,000

Total shareholder’s equity 4,742,000 Plant assets 3,060,000

Total fixed assets 3,178,000 Liabilities: Current liabilities 180,000 Current Assets:

Total liabilities 180,000 Other current assets 1,620,000 Cash 124,000

Total current assets 1,744,000

Total equities 4,922,000 Total assets 4,9220,000

Q.No.5 ISSUANCE OF SHARES AND DEBENTURES Record the following independent transactions in general journal assuming that the par value of each share is Rs.10 and of debenture Rs.100 each.

1) Received cash Rs.300,000 against issuance of 24,000 ordinary shares. 2) Issued 15,000 shares to the promoters against their services. 3) Issued 64,000 shares at Rs.12.50 each in settlement of stock dividend. 4) Purchased equipment costing Rs.900,000 and issued sufficient shares at Rs.9 each in full

settlement. 5) Issued 10,000, 8% debentures at Rs.98 each redeemable after 10 years at 5% premium.



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SOLUTION 5 M/S. __________

GENERAL JOURNAL


1 Cash 300,000 Ordinary share capital (24,000 x 10) 240,000 Ordinary share premium 60,000 (To record the issue of shares at premium)

2 Preliminary expenses 150,000 Ordinary share capital (15,000 x 10) 150,000 (To record the issue of shares to promoters)

3 Stock dividend to be distributed (64,000 x 12.50) 800,000 Ordinary share capital (64,000 x 10) 640,000 Ordinary share premium (64,000 x 2.50) 160,000 (To record the issue of shares against stock dividend)

4 Equipment 900,000 Ordinary share discount (100,000 x 1) 100,000 Ordinary share capital (100,000 x 10) 1,000,000 (To record the issue of shares for the purchase of

equipment)

5 Cash (10,000 x 98) 980,000 Discount on debentures (10,000 x 2) 20,000 Loss on redemption (10,000 x 5) 50,000 8% Debentures payable (10,000 x 100) 1,000,000 Premium on redemption (10,000 x 5) 50,000 (To record the issue of debentures at discount and

payback at premium)

Q.No.6 FINANCIAL STATEMENTS Pearl Ltd. has an authorized capital of Rs.3,000,000 divided into shares of Rs.10 each. Following is the trial balance of the company as on December 31, 2014:

Cash Rs.42,500 Paid up capital Rs.2,000,000

Accounts receivable 75,000 Allowance for bad debts 3,750

Inventory (1-1-2014) 350,000 Accounts payable 62,500

Machinery 1,000,000 Retained earnings 500,000

Building 1,750,000 Sales 1,250,000

Purchases 750,000 Commission income 8,750

Carriage – in 5,000 10% Bonds payable 250,000

Salaries expenses 45,000

Directors’ fee 25,000

Rent expenses 20,000

Office supplies 5,000

Prepaid insurance 7,500

Rs.4,075,000 Rs.4,075,000



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Additional Information (December 31, 2014): (i) Depreciation on fixed assets is charged @ 5%. (ii) Prepaid insurance was zero. (iii) Rent expense for the year was Rs.15,000. (iv) Bad debts to be maintained @ 6% of accounts receivable. (v) Bonds were issued on November 1, 2014. (vi) Merchandise inventory values at Rs.275,000. (vii) Declare cash dividend @ Rs.1.75 per share and reserved Rs.80,000 for plant extension.

REQUIRED Prepare: (a) Income statement and statement of retained earnings. (b) Balance sheet. SOLUTION 6 (a)

PEARL LTD. INCOME STATEMENT

FOR THE PERIOD ENDED DECEMBER 31, 2014 Sales revenue 1,250,000 Less: Cost of Goods Sold: Merchandise inventory beginning 350,000 Add: Net Purchases: Purchases 750,000 Add: Carriage in 5,000

Net purchases 755,000

Merchandise available for sale 1,105,000 Less: Merchandise inventory ending (275,000)

Cost of goods sold (830,000)

Gross profit 420,000 Less: Operating Expenses: Salaries expense 45,000 Rent expense (20,000 – 5,000) 15,000 Directors’ fee 25,000 Insurance expense 7,500 Depreciation expense – Machinery (1,000,000 x 5%) 50,000 Depreciation expense – Building (1,750,000 x 5%) 87,500 Bad debts expense {(75,000 x 6%) – 3,750} 750 Interest expense (250,000 x 10% x 2/12) 4,167

Total operating expenses (234,917)

Profit from operation 185,083 Add: Other Income: Commission on income 8,750

Net income Rs.193,833



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PEARL LTD. STATEMENT OF RETAINED EARNINGS

FOR THE PERIOD ENDED DECEMBER 31, 2014 Retained earnings (opening balance) 500,000 Add: Net income for the period 193,833

Total retained earning 693,833 Less: Dividends and Reserves: Reserve for plant extension 80,000 Cash dividend (200,000 x 1.75) 350,000

Total dividend and reserves (430,000)

Retained earnings (ending balance) Rs.263,833

SOLUTION 6 (b)

PEARL LTD. BALANCE SHEET

AS ON DECEMBER 31, 2014

Equities Assets

Shareholder’s Equity: Fixed Assets: Authorized Capital: Machinery 1,000,000 300,000 ordinary shares @ Rs.10 each 3,000,000 Less: All for dep. (50,000) 950,000

Building 1,750,000 Issued & Paid-up Capital: Less: All for dep. (87,500) 1,662,500

200,000 ordinary shares @ Rs.10 each 2,000,000 Total fixed assets 2,612,500 Retained earnings 263,833 Reserve for plant extension 80,000 Current Assets:

Total shareholder’s equity 2,343,833 Office supplies 5,000 Prepaid rent 5,000 Liabilities: Inventory 275,000 Long Term Liabilities: A/c. receivable 75,000 10% Bonds payable 250,000 Less:All for b/d (4,500) 70,500 Cash 42,500

Current Liabilities: Total current assets 398,000 Accounts payable 62,500 Interest payable 4,167 Cash dividend payable 350,000

Total liabilities 666,667

Total equities 3,010,500 Total assets 3,010,500

Additional Working:

PEARL LTD. ADJUSTING ENTRIES

FOR THE PERIOD ENDED DECEMBER 31, 2014


1 Depreciation expense 137,500 Allowance for depreciation – Machinery 50,000 Allowance for depreciation – Building 87,500 (To adjust the depreciation for the period)



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2 Insurance expense 7,500 Prepaid insurance 7,500 (To adjust the prepaid insurance)

3 Prepaid rent 5,000 Rent expense 5,000 (To adjust the rent expense)

4 Bad debts expense 750 Allowance for bad debts 750 (To adjust the bad debts expense)

5 Interest expense 4,167 Interest payable 4,167 (To adjust the unpaid interest on bonds)

6 Merchandise inventory 275,000 Expense and revenue summary 275,000 (To close the ending inventory)

7 Retained earnings 430,000 Cash dividend payable 350,000 Reserve for plant extension 80,000 (To adjust the cash dividend and reserve for plant

extension)

Q.No.7 FINANCIAL STATEMENTS ANALYSIS Compute from the following data on December 31, 2014:

(a) Working capital (b) Current ratio (c) Acid test ratio (d) Equity ratio (e) Debt ratio (f) Receivable turnover in times and in days (g) Inventory turnover in times and days (h) Book value per share

Cash Rs.20,000 Bank overdraft Rs.10,000

Marketable securities 20,000 Notes payable (short term) 50,000

Accounts receivable 80,000 Accounts payable 100,000

Inventory 200,000 Long term loan 120,000

Prepaid expenses 10,000 Share capital (Rs.10 par) 200,000

Building 300,000 Retained earnings 220,000

Other plant assets 120,000 Reserves 50,000

Rs.750,000 Rs.750,000

Other information: (a) Net credit sales for the year were Rs.1,200,000 and gross profit was Rs.440,000. (b) Inventory and accounts receivable remained almost constant throughout the year.



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SOLUTION 7 Computation of Total Assets: Cash 20,000 Marketable securities 20,000 Accounts receivable 80,000

Total quick assets 120,000 Merchandise inventory 200,000 Prepaid expenses 10,000

Total current assets 330,000 Building 300,000 Other plant assets 120,000

Total assets Rs.750,000

Computation of Total Liabilities: Bank overdraft 10,000 Notes payable (short term) 50,000 Accounts payable 100,000

Total current liabilities 160,000 Long term loan 120,000

Total liabilities Rs.280,000

Computation of Total Shareholders’ Equity: Share capital 200,000 Retained earnings 220,000 Reserves 50,000

Total shareholders’ equity Rs.470,000

Computation of Cost of Goods Sold: Sales 1,200,000 Less: Gross profit (440,000)

Cost of goods sold Rs.760,000

(i) Working Capital:

Total current assets 330,000 Less: Total current liabilities (160,000)

Working capital Rs.170,000

(ii) Current Ratio:

Current ratio = Total current assets

Total current liabilities Current ratio = 330,000

160,000 Current ratio = 2.06 : 1



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(iii) Acid Test Ratio: Acid test ratio = Total quick assets

Total current liabilities Acid test ratio = 120,000

160,000 Acid test ratio = 0.75:1

(iv) Equity Ratio:

Equity ratio = Total shareholders’ equity

Total assets Equity ratio = 470,000

750,000 Equity ratio = 0.63:1

(v) Debt Ratio:

Debt ratio = Total liabilities

Total assets Debt ratio = 280,000

750,000 Debt ratio = 0.37:1

(vi) Accounts Receivable Turnover:

Receivable turnover in times = Net credit sales

Average receivable Receivable turnover in times = 1,200,000

80,000 Receivable turnover in times = 15 times Receivable turnover in days = 365

Receivable turnover in times Receivable turnover in days = 365

15 Receivable turnover in days = 25 days

(vii) Inventory Turnover:

Inventory turnover in times = Cost of goods sold

Average inventory Inventory turnover in times = 760,000

200,000 Inventory turnover in times = 3.8 times Inventory turnover in days = 365

Inventory turnover in times Inventory turnover in days = 365

3.8 Inventory turnover in days = 96 days



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Q.No.8 BRANCH ACCOUNTING The following trial balance relate to Karachi Company (head office) and its Hyderabad branch on June 30, 2015:

Karachi Company (Head Office)

Hyderabad Branch

Cash Rs.20,000 Rs.10,000

Merchandise – July 1, 2014 40,000 15,000

Branch / Head office 50,000 50,000

Shipment to branch / from head office 100,000 120,000

Purchases 200,000 10,000

Allowance for overvaluation 21,000 ---

Operating expenses 9,000 5,000

Sales 198,000 110,000

Capital 80,000 ---

Head office and branch merchandise inventories were valued on June 30, 2015 at Rs.16,000 and Rs.38,000 respectively. REQUIRED

(a) Closing entries in the books of branch. (b) Closing and adjusting entries in the books of the head office.

SOLUTION 8 (a)

KARACHI COMPANY HYDERABAD BRANCH BOOK

CLOSING ENTRIES FOR THE PERIOD ENDED JUNE 30, 3015


1 Expense and revenue summary 150,000 Merchandise inventory 15,000 Shipment from head office 120,000 Purchases 10,000 Operating expenses 5,000 (To close the various expense accounts)

2 Sales 110,000 Merchandise inventory 38,000 Expense and revenue summary 148,000 (To close the various income accounts)

3 Head office 2,000 Expense and revenue summary 2,000 (To close the expense and revenue summary

account)



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SOLUTION 8 (b) Computation of Allowance for Overvaluation Rate:

Allowance for overvaluation rate = Allowance for overvaluation

X 100 Cost price

Allowance for overvaluation rate = 20,000

X 100 100,000

Allowance for overvaluation rate = 20% Computation of Allowance for Overvaluation:

Particulars Billed Cost Allowance for over valuation

Merchandise inventory beginning 15,000 14,000 1,000 Add: Merchandise supplied 120,000 100,000 20,000

Unadjusted allowance for overvaluation 135,000 114,000 21,000 Less: Inventory ending (38,000 x 20/120) (38,000) (31,667) (6,333)

Adjusted allowance for overvaluation 97,000 82,333 14,667

KARACHI COMPANY HEAD OFFICE BOOK CLOSING ENTRIES

FOR THE PERIOD ENDED JUNE 30, 3015


1 Expense and revenue summary 249,000 Merchandise inventory 40,000 Purchases 200,000 Operating expenses 9,000 (To close the various expense accounts)

2 Sales 198,000 Merchandise inventory 16,000 Shipment to branch 100,000 Expense and revenue summary 314,000 (To close the various income accounts)

3 Expense and revenue summary 65,000 Profit and loss account 65,000 (To close the expense and revenue summary

account)

4 Profit and loss account 2,000 Hyderabad branch 2,000 (To adjust the branch net loss)

5 Allowance for overvaluation 14,667 Profit and loss account 14,667 (To adjust the allowance for overvaluation)

6 Profit and loss account 77,667 Capital 77,667 (To close the profit and loss account)

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