financial accounting paa198 student manual

8/4/2019 Financial Accounting PAA198 Student Manual

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Financial Accounting

Author

Dr. Guruprasad Murthy

Himalaya Publishing House (Private) LimitedMumbai

Student Manual

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FINANCIAL ACCOUNTINGBYDR. GURUPRASAD MURTHY

STRUCTURE OF PROBLEMS AND SOLUTIONS (CD ROM)

2

Module

Nos.

Assignment

Nos.

Title / Topics CD ROM Pages

Module 1 Assignment 1 -

38

Problem and Solutions Equation

Method

03 52

List of AssignmentsAssignment 3.1 Rashid Enterprises 53 - 63

Assignment 3.2 Thomas Sons 64 - 69

Assignment 3.3 M/s. X Company Ltd. 70 89

Assignment 3.4 M/s. SPJ & Co. Ltd. 90 - 110

Assignment 3.5 M/s. Dalvi Co. Ltd. 111 - 130

Assignment 3.6 M/s. Ashutosh 131 141

Assignment 3.7 Abacus Airways Ltd. 142 159

Assignment3.8 M/s. PQR 160 - 169


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Module: 1 - Problems and Solutions

Assignment 1Match the following expressions in column 1 and 2

Column 1Column 2

Balance sheet

Owners Funds

AssetsFinancial Statement

Liabilities Uses of funds

Capital Borrowed funds

Answer to Assignment 1

Column 1 Column 2

Balance sheet Financial Statement

Assets Uses of funds

Liabilities Borrowed funds

Capital Owners' Funds

Assignment 2(pertains to transactions 1, 2 and 3)

Assets are _____________________ of funds; liabilities are __________________ of funds; capital is ______________________ of funds.

Answer to Assignment 2 (pertains to transactions 1, 2 and 3)

Assets are uses of funds; liabilities aresources of funds; capital issource of funds.

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Assignment 3 (pertains to transactions 4 and 5)Identify the attributes of Fixed Assets

Fixed assets are:

a)_______________________________________________________________________________

b)______________________________________________________________________________c)______________________________________________________________________________

d)______________________________________________________________________________

e)______________________________________________________________________________

f)______________________________________________________________________________

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Answer to Assignment 3 (pertains to transactions 4 and 5)Identify the attributes of Fixed Assets

Fixed assets are:

a) Long term uses of funds or long term assets owned by a business

b) Expenditure on capital account that is to say they are capital expenditures

c) Assets, which are acquired to derive benefits over a long period of time

d) Made up of tangible assets viz. Land, buildings, plant and machinery, furniture and fixtures and vehicles and intangible assets viz. goodwill, patents, copyrights andtrademarks

d) Made up of movable and immovable items

f) Assets of a permanent, durable and lasting nature and may be acquired through cash or on credit, depending on the specific transaction entered into.

Assignment 4(pertains to transactions 1 to 5)From the five transactions so far, what general observations can we make regarding any financial statements and what concepts emerge from the observations?

-_________________________________________________________________________

-_________________________________________________________________________

Answer to Assignment 4(pertains to transactions 1 to 5)

From the five transactions so far, what general observations can we make regarding any financial statements and what concepts emerge from the observations?

Observation Concept

Every item is measured in terms of money and money only Money measurement

Every transaction has a two fold effect:

1.Once on the asset side and once on the liability side (transaction 1,2,3 and 5)2.Increase and decrease on asset side (Transaction 4)

Dual aspect

Owners and business are separate entities. Entity concept

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Assignment 5 (pertains to transaction 6)5.1. Stocks are sold with a view to make a ________________ and convert into ______________ as soon as possible.

Two items have emerged so far under current assets, viz, stock or inventories (finished goods) and cash.5.2. In a trading business, stocks or inventories include finished goods. In a manufacturing business inventories include:

Answer to Assignment 5(pertains to transaction 6)5.1 Stocks are sold with a view to make aProfit andconvert into Cash as soon possible.5.2 In a trading business stocks include finished goods, in a manufacturing business inventories include:

Raw Materials Packing Materials

Work- in - Process Finished Goods

Consumables: Jigs, tools & fixtures; lubricants, oil & cotton waste

Assignment 6Given transactions 6 and 7, review your know-how on assets by filling the blanks below:

Fixed Assets Current Assets

a) uses of fund a) uses of funds

b) expenditure b) expenditure

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c) Produce -term benefits c) Produce - term benefits

d) Include d) Include

e) e)

f) f)

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Given transactions 6 and 7, review your know-how on assets by filling the blanks below:

Fixed Assets Current Assets

a. Long term uses of funds

b. Capital expenditure

c. Produce long term benefits

d. Include:

1. Land & Building2. Plant & Machinery

3. Furniture & Fixtures

4. Patents & Copyrights

5. Trademarks

e. Tangible & Intangible items; Movable & Immovable items; Animate & Inanimate items.

f.1) May be acquired on credit or against cash

2) May be owned or leased

a. Short term uses of funds, which should be converted into cash soon.

b. Revenue expenditures

c. Produce short term benefits

d. Include:

1.Cash2. Sundry Debtors or Accounts Receivables

3. Stock or Inventories

e. Represents the inputs required for the day to day running of business and

are known as working capital

f.

1.Gross working capital = current assets

2.Net working capital = current assets minus current liabilities

Assignment 7(based on transactions 9 and 10)7.1 Transaction 9 is a ______________________ sale unlike transaction 10, which is a _________________ sale.

The principle of recognizing sales as an income remains the same.

However, the detailed implications are driven by the nature of the transaction.

7.2 Prepare an Income statement for both the sales transactions (9 and 10) taken together.

Sales

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Cash sales

Credit sales

Total sales

Less: Cost of Goods sold

Gross Trading Profit

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Answer to Assignment 7(based on transactions 9 and 10)

7.Transaction 9 is a creditsale unlike transaction 10, which is a cash sale.

The principle of recognizing sales as an income remains the same. However, the detailed implications are driven by the nature of the transaction.

7.1 Prepare an Income statement for both the sales transactions (9 and 10) taken together.

Income statement for the period ending 10.01.2000

Sales

Cash sales 4000 bottles @ Rs. 20 per bottle

Credit sales 6000 bottle @ Rs. 20 per bottle

Total Sales

Rs.80,000

1,20,000

Rs.

2,00,000

Less: Cost of Goods sold or cost of sales (10000 bottles @ Rs. 10 per bottle) (1,00,000)

Gross Trading Profit 1,00,000

Assignment 8(Conceptual question)8.1 We have purchased 14,000 bottles in all so far:

Transaction 6 Purchases 10,000 bottles

Transaction 7 Purchases 5,000 bottles

Transaction 8 Purchase returns (1,000) bottles

Why? Please explain?

_____________________________________________________________________________________________________________________________________

10

However we have charged the income

statement with only 10,000 bottles?


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8.2 Differences between transactions 9 and 10.

Transaction 9 Transaction 10

1)

2)

3)

8.3. Profits = Liability. Provide conceptual justification.

8.4. If Profits = Liability, then Loss = Assets.

Again, provide conceptual justification for Loss = Asset

8.5. Distinguish between Profit and Loss

Profit Loss

1 1) 2)

2 3) 4)

3 5) 6)

4 7) 8)

5 9) 10)

8.6 State the attributes of Assets and Liabilities

Assets Liabilities

11) 12)

13) 14)

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15) 16)

17) 18)

19) 20)

Answer to Assignment 8 (Conceptual question)8.1

Purchased 14,000 bottles, charged only 10,000 bottles to the Income Statement. The profits are computed applying the 'matching concept', which matches relevant revenues withrelevant expenses.

Relevant revenues 10,000 bottles sold, therefore relevant expenses purchase cost of 10,000 bottles.Till such time as the remaining bottles are sold, they continue to remain as an inventory in the current assets section of the balance sheet.

8.2 Difference between transaction 9 and 10

Transaction 9 Transaction10

1) Credit sale Cash sale

2) Profits have increased by Rs. 0.6 lakhs but cash remains unaffected. This is a

book profit. However, debtors have emerged and equal Rs.1.2 lakhs.

Profits have increased by Rs. 0.4 lakhs. This is a book profit and cash

profit. However, cash in the business has increased by Rs. 0.8 lakhs.

3) Risk of bad debts i.e., Customer who will default or risk of doubtful debts

i.e., Customers who may not pay.

No risk of bad debts

8.3

Profits = Liability. Provide conceptual justification.

Entity concept distinguishes between the owner and the business as two distinct and separate entities. Capital contributed by owners was recorded on the liabilities side (transaction 1

and 2). It means that M/s Aryan Traders are obliged to the owner to the extent of the profit. Thus, at transactions 1 and 2, the business was obliged to the owners to the extent of Rs.12 lakhs (preference share capital Rs. 2 lakhs and equity share capital Rs. 10 lakhs). If the business was liquidated at that point of time, the said shareholders would receive their

respective contribution in that order. Now, at transaction 10, Aryan Traders have made a profit of Rs. 1 lakh. The obligations of the owners have increased by Rs. 1 lakh. Hence,

Profit = Liability based on the entity concept.

8.4

If Profit = Liability, then Loss = Assets

Again, provide conceptual justification for Loss = Asset

Using the entity concept, profit increases the obligation of business to the owners. Loss decreases the obligation of business to the owners. In the event of liquidation, the owners can

get back their capital only after adjusting for the loss amongst other obligations of business. Hence, loss is an asset.

8.5

Distinguish between Profit and Loss

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Profit Loss

1 Profits refer to the excess of income over expenses Losses refer to the excess of expenses over income

2 Profit increases the net worth of the business Losses reduce the net worth of the business

3 Profits are recorded on the liability side of the balance sheet Losses are recorded on the asset side of the balance sheet

4 Profits signify the well being of the company Losses do not do so

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Profit is a liability.

Loss is an asset.

8.6 Attributes of assets and liabilities

Assets Liabilities

1 The economic resources owned by a company The economic resources owed by a company

2 Properties and possession of every description. Obligations of every description.

3 Short term and long term uses of funds. Short term and long term sources of funds.

4 Unexpired utility utility of fixed assets are spread over a long

period of time and utility of current assets expire within a short period,

usually a year.

Obligations, which have not matured - long-term obligations mature over a long

period of time and short-term obligations (current liabilities) mature within a short period of

time, usually a year.Capital contributed by the shareholders is permanent capital. Equity shareholders get

back their capital only on the company winding up business. Preference shareholders get

back their capital in accordance with the contract.

Assignment 9Test your thoughts on current assets:

9.1 Current assets include ______________, ___________________ and __________________.

9.2 Current assets are _________________ uses of funds.

9.3 Current assets are those, which are to be __________________ into ___________________________________________________.

9.4 Current assets represent __________________ capital of any business and are required for ________________________ operations of the business.

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Test your thoughts on current assets:

9.1 Current assets include cash, debtors or accounts receivables and stock or inventories.

9.2 Current assets areshort-term uses of funds.

9.3 Current assets are those, which are to be convertedinto cash as soon as possible.

9.4 Current assets represent workingcapital of any business and are required forday- to- day operations of the business.

Assignment 10Prepaid Insurance is:


Prepaid Insurance is:

Pre-paid Insurance is a current asset. Prepaid Insurance represents the right to receive benefits from the Insurance Company during the tenure of the policy. As and when 2001arrives, prepaid insurance will be treated as an expense.

Assignment 11OBSERVE from Transaction 12

Cash by Rs.0.5 lakh. Expenseby Rs.0.24 lakh only. Why has the expense not by the full amount of Rs.0.5 lakh. Explain with the help of an accountingprinciple.

Answer to Assignment 11OBSERVE from Transaction 12

Cash by Rs. 0.5 lakh. Expenses by Rs. 0.24 lakh only. Why has the expense not by the full amount of Rs. 0.5 lakh.

Explain with the help of an accounting principle.

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The accounting principle governing prepaid insurance is the 'accrual principle' and can be expressed as follows:

'An expense is not incurred merely because cash is paid'.Further, the matching concept which requires matching relevant expenses with the appropriate accounting period is also applicable

Rs. 0.24 lakh expensed in 2000.

Rs. 0.26 lakh to be expensed in 2001.

Pre-paid Insurance represents a payment in advance of the commencement of the next accounting period. To reiterate, such an advance payment is recognized as prepaid insurance,which is part of current assets section of the balance sheet.

Assignment 12In Transaction 12,

Cash by Rs._________; Expense by Rs._________ and Reserve by Rs._________.Accounting Principle


In Transaction 12,Cash by Rs. 0.5 lakh; Expenses by Rs. 0.24 lakh and Reserve by Rs. 0.24 lakh.

Accounting principle: Accrual concept & Matching concept.

Assignment 13From Transaction 14, cash increases. However, profits and reserves are unaffected. Explain why.(Hint: Accrual principle express in words)

______________________________________________________________________________________________

______________________________________________________________________________________________

Answer to Assignment 13From Transaction 14, cash increases alright. However, profits and therefore reserves are unaffected. Explain why.

(Hint: Accrual principle express in words)An income is not earned merely because cash is received.

Assignment 14Money is received today, goods/services to materialize at a future date.

Explain the accounting logic, which justifies parking the cash received as income received in advance or pre-received income.

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Answer to Assignment 14Money is received today, goods/services to materialize at a future date.

Explain the accounting logic, which justifies parking the cash received as income received in advance.Matching concept matching incomes relevant to the accounting period in question. The goods or services are to materialize to the customer at a future date. Hence,

postpone or defer the incomes to a future relevant period in which the matching relevant expenses emerge.

Assignment 1515.1 Conceptualize: Transaction 16

Money has not been paid. Expense has been recognized and booked. Profitsby the amount of Rs.1 lakh.Accounting Principle:

Between transaction 1 to transaction 10, we had prepared an Income Statement to compute the profit.

15.2.

Complete the Income Statement to reflect transactions for the period ending 20.01.2000 (Transactions 1 to 16).

Income Statement for the period ending 20.01.2000 (Transactions 1 to 16)

Sales

Cash sales

Credit Sales

Total Sales

Less: Cost of Goods SoldGross Trading Profit

Less: Non-trading expensesRent

Insurance

Answer to Assignment 15.1

Conceptualize:Money has not been paid. Expense has been recognized and booked. Profits to by the amount of Rs. 1 lakh.

Accounting Concept: Accrual Concept again: 'An expense is incurred whether cash is paid now or later'.

Matching principle too- match relevant revenues with relevant expenses.

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Assignment 16What concepts have been followed in constructing the Income Statement upto Transaction 16?

1.With respect to sales (Transaction 9)

2. With respect to insurance (Transaction 12)

3. With respect to income received in advance (Transaction 14)

4. With respect to rent expense (Transaction 16)

5. With respect to loss (Transaction 16)

6. Any other accounting concept/s followed.

______________________________________________________________________________________________________________________________________


What accounting concepts have been followed in constructing the Income Statement upto Transaction 16?

1) Sales (transaction 9): Income is earned whether cash is received now or later. (Accrual and matching concept)

2) Insurance (transaction 12): An expense is not incurred merely because cash is paid. (Accrual and matching concept)

3) Pre-received Income (transaction 14): an income is not earned merely because cash is received. (Accrual and matching concept)

4) Rent expenses (transaction 16): An expense is incurred whether cash is paid now or later.

5) Loss: Entity concept owners and business are two different and separate entities. Remember loss is an asset. (Entity concept)

6) Other Account concept/s: Money measurement and going concern.

Assignment 17List at least three reasons why depreciation is charged.

Answer to Assignment 17List the reasons why depreciation is charged.

1) To recognize the wear and tear of fixed assets due to use.

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2) To compute profit defined as 'revenue expense' where expenses include amongst other things depreciation.

3) To provide resources for replacement.

Assignment 18With the help of the above implication of depreciation in transaction 18, define:

18.1. Gross Fixed Assets in words and in figures.

18.2. Net Fixed Assets in words and in figures.


With the help of the above implication of depreciation in transaction 18, define:

18.1. Gross Fixed Assets in words and in figures.

Gross fixed assets represent the purchase price of fixed assets. In this case, the Gross Fixed assets are Rs. 12 lakh.

18.2. Net Fixed Assets in words and in figures.

Net fixed assets are gross fixed assets adjusted for accumulated depreciation.Gross Fixed assets Rs. 12 lakhs

Less: Accumulated Depreciation (Rs, 2.4 lakh)

Net Fixed Assets Rs. 9.6 lakhs

Learn more about depreciation:

Consider the expression current depreciation and accumulated depreciation.Current depreciation is the depreciation charged to the income statement of a particular accounting period.Accumulated depreciation is the sum of the current depreciation charged on a year on year basis.In the first year of the fixed assets life, current depreciation amount will always equal accumulated depreciation.

Assignment 19In the case on hand, if the same amount of depreciation is to be charged every year, that is for say the years ending 2001, 2002 & 2003, what will be the relevant

amounts for the following items against the respective dates:

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Rs. lakhs

Year Ending 31st December 2000 2001 2002 2003

Gross Fixed Assets 12 .0

Current Depreciation 2.4

Accumulated Depreciation 2.4

Net Fixed AssetsGross Fixed Assets as on 1st January NIL


In the case on hand, if the same amount of depreciation is to be charged every year, that is to say the years ending 2001, 2002 & 2003, what will be the relevant amountsfor the following items: Rs. Lakhs

Year Ending 31st December 2000 2001 2002 2003

Gross Fixed Assets 12.0 12.0 12.0 12.0

Current Depreciation 2.4 2.4 2.4 2.4

Accumulated Depreciation 2.4 4.8 7.2 9.6

Net Fixed Assets 9.6 7.2 4.8 2.4

Gross Fixed Assets as on 1st January NIL 12.0 12.0 12.0

Assignment 20One of the purposes of providing for depreciation is to generate resources for replacement. What is the accounting principle that emerges?

Answer to Assignment 20Going Concern Concept: Enterprise has an indefinite life and enjoys perpetual succession. Shareholders may come and shareholders may go, but enterprise will go on forever or atleast in the foreseeable future.

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Assignment 21Accounting Principle followed with respect to accrued commission income is:

Answer to Assignment 21Accounting Principle followed with respect to accrued commission income is:Accrual Principle. 'an income is earned whether cash is received now or later'

Matching Principle to-match relevant revenues with relevant expense.

Assignment 22Given the following four dimensions of accrual concept, identify the transactions which fit into the relevant slots.

Accrual Concept Transactions

An expense is incurred whether cash is paid now or later 1.

An expense is not incurred merely because cash is paid 2.

An income is earned whether cash is received now or later 3.

An income is not earned merely because cash is received 4.

Answer to Assignment 22Given the following four dimensions of accrual concept, identify the transactions which fit into the relevant slots.

Accrual concept Transactions

An expense is incurred whether cash is paid now or later Transaction 16

An expense is not incurred merely because cash is paid Transaction 12

An income is earned whether cash is received now or later Transactions 9 & 19

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Accrual concept Transactions

An income is not earned merely because cash is received Transaction 14

Assignment 23Revise the list of Current Assets and Current Liabilities by presenting as exhaustive a list as possible

Current Assets Current Liabilities

1. 7.

2. 8.

3. 9.

4. 10.

5. 11.

6. 12.

Answer to Assignment 23Revised list of current assets and current liabilities

Current assets Current liabilities

Cash Bank or other short term loans

Sundry debtors or accounts receivables Sundry creditors or accounts payable

Stock (finished goods) Income received in advance or pre-received income.

Prepaid insurance Outstanding expenses

Accrued commission Provision for income tax

Advance income tax Provision for dividends.

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Assignment 24State whether the following statements are true or false .Give reasons.

True False

24.1 When sales increase, profits need not go up.

24.2 When sales increase, cash necessarily increases.

24.3 When expenses increase, cash necessarily decreases by the same amount.

24.4 When cash is paid towards an item of expense, profits necessarily decrease by the same amount.

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Answer to Assignment 24Say whether the following statements are true or false. Give reasons.

True False

24.1When sales increase, profits need not go up.

May be true May be false

24.2 When sales increase, cash necessarily increases.


24.3 When expenses increase, cash necessarily decreases by the same amount.


24.4 When cash is paid towards an item of expense, profits necessarily decrease by the same

amount. May be true May be false

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When sales increases, profits need go up - may be true,may be false

Profits = Revenue Expense, provided the revenue is > than expense. However, if revenue is < thanexpense, a loss is incurred. Therefore when sales increases, profits may or may not necessarily increase.

When sales increases, cash necessarily increases maybe true, may be false

If sales have been made against cash, an increase in sales is necessarily followed by a cash increase

(transactions 10, 17, and 24). If sales are made on credit, an increase in sales will not be necessarily

followed by a cash increase. (Transaction 9) pending the arrival of cash, the sales amount is parked as

accounts receivables or sundry debtors.

When expenses increase, cash necessarily decreases-may be true, may be false

If cash is paid towards an expense for the current period in question, as and when an expense increases,cash necessarily decreases.

If cash is to be paid at a future date for any expense incurred, during the current accounting period,increase in expense will not cause cash decrease. Pending the payment of cash, the amount of the expenseincurred is parked as outstanding expenses in the current liabilities section.

Accrual principle an expense is incurred whether cash is paid now or later.

Matching concept expenses relevant for an accounting period has to be charged to that period regardlessof the cash payment.

When cash is paid towards an expense, profitsnecessarily decrease may be true, may be false

If cash is paid towards an expense for the current period in question, as and when cash is paid, profits willdecrease. However, if cash is paid for expenses of the future period along with the current period, the

amount relevant for the current period has to be separated from the amount pertaining to the future

period. While the profits will decrease to the extent of current period's cash expenses, the amount

pertaining to future period/s will not impact profits. Accrual principle an expense is not incurred merely because cash is paid. Matching concept expense pertaining to future periods need not be charged in the current period. Such

payments are known as prepayments and are recorded as prepaid expenses (current assets section).

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Assignment 25What is the accounting principle governing transaction 20?

Answer to Assignment 25What is the accounting principle governing transaction 20?

Accrual principle an expense is incurred whether cash is paid now or later.

Matching principle to match relevant revenues with relevant expenses.

Assignment 26State whether the following items are assets or liabilities.

Item Assets Liabilities

Outstanding expenses

Prepaid expenses

Accrued income

Pre-received income

Answer to Assignment 26State whether the following items are assets or liabilities.

Item Assets/Liabilities

Outstanding expenses Current liabilities

Prepaid expenses Current assets Accrued income Current assets

Pre-received income Current liabilities

Assignment 27

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The process of parking a revenue item like advertising as a miscellaneous asset is known as capitalising. Other revenue items, which may be capitalised, include:

_________________________________; _________________________________; _________________________________

Advertising expenditures is incurred in huge amounts running into millions of rupees. The benefits of these expenditures are spread over more than one accounting

period. Hence, they are capitalized and spread over more than one accounting period.

Answer to Assignment 27The process of parking a revenue item like advertising as a miscellaneous asset is known as 'capitalizing'. Other revenue items, which may be capitalized, include:

Training and Development Repairs Preliminary Expenses.

Advertising and the above mentioned expenditures incurred in huge amounts running into millions of rupees. The benefits of these expenditures are spread over more than one

accounting period.

Assignment 28

Identify the accounting concept governing the spread of advertising expenditure over two accounting periods.


Identify the account concept governing the spread of advertising expenditure over two accounting periods.Matching concept The expenditure brings benefits spread over two accounting periods. Matching relevant incomes with relevant expenses is necessary to

present a true and fair picture of financial position of business.

Assignment 29 Distinguish between capital expenditures and revenue expenditures.

Particulars Capital expenditure Revenue expenditure

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Distinguish between Capital Expenditure and Revenue Expenditures

Comparability: Both involve an outlay of funds, which results in either an outflow of cash or the creation of obligation with third parties as a result of a credit transaction.

Distinction:

Capital Expenditure Revenue Expenditure

a) Result in the acquisition of fixed assets of a permanent, durable

and lasting nature.

Result in the acquisition of current assets of a non-permanent

nature

b) Non-recurring, non-routine and non-reversible. Recurring, routine and reversible.

c) Benefit are spread over a period of time i .e ., they extend into

futurity.

Benefits usually expire within a year.

d) Not fully chargeable, to the profit and loss account butexpenditure is spread over the benefit producing periods of the

future.

Fully chargeable, to the profit and loss account, unless decidedotherwise which represents an exception to the general rule.

e) Expenditure into cash through sales of fixed assets.

Objective is to use the fixed assets over a long period of time.

Assets into cash at the earliest opportunity.

f) Capital assets appear on the assets side of the balance sheet. Revenue expenditures charged to profit and loss account. Only

deferred portions of revenue expenditures appear on the assetsside of the balance sheet usually as miscellaneous assets.

Assignment 30Explain the meaning of Deferred Revenue Expenditures.


Explain the meaning of Deferred Revenue Expenditures

Item that has been initially recorded as an asset and is expected to generate revenues over time or through the normal operations of the business is known as deferred revenueexpenditure. Example: outlays on advertising, or training and development.

Assignment 31Sometimes a customer could be a bad debt for other reasons too:

1) _________________________________________________________________________________________________________

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2)_________________________________________________________________________________________________________


Sometimes a customer could be a bad debt for other reasons too:

Malafide intentions intent to deceive Indiscriminate credit policy which has not vetted the customer credentials and credit worthiness.

Assignment 32The accounting concept guiding the charge of bad debts and provision for doubtful debts is:

Answer to Assignment 32The accounting concept guiding the charge of bad debts and provision for doubtful debts is:

Principle of conservatism or prudence.Anticipated profits ignore

Anticipated losses provide for immediately.

N.B. The accountants world over adopt an approach motivated by abundant caution.

Assignment 33Identify the accounting concepts explored so far:

Answer to Assignment 33Money measurement Entity concept Dual aspect Going concern Conservatism

Accrual conceptual Matching concept Accrual conceptual Matching concept.

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Assignment 34Prepare an Income Statement for the period ending 31.12.2000. (Transactions 1 to 25).

Amount Amount

Sales (transaction 9)




Less: sales discount (transaction 24)

Net Sales

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34.1 (contd)

Less: Trading cost of goods sold (schedule 1)

Gross trading profit

Less: Non-trading expenses (as per schedule 3)

Operating loss

Add: Income other than sales

Commission income (transaction 13)

Accrued commission (transaction 19)

Advance received from customer (transaction 14)

Less: Amount relevant for next year (transaction 14)

Profit before income tax

Less: Provision for income tax (transaction 25)

Profit After income tax

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Schedule 1 showing Trading cost of goods sold for the period ending 31.12.2000(Rs. Lakhs)

Particulars Amount Amount

Opening Stock

Add: Purchases (transaction 6)

Purchases (transaction 7)

Purchases (transaction 23)

Less: Purchase return (transaction 8)

Less: Purchase discount (transaction 23)

Purchase cost of goods available for sale

Less: Closing stock (as per schedule 2)

Trading cost of goods sold

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Schedule 3 showing non-trading expenses for the year ending 31.12.2000

Particulars Amount

(in Rs. lakhs)

Amount

(in Rs. lakhs)

Rent (transaction 11)

Add: Outstanding rent (transaction 16)

Insurance (transaction 12)

Less: Prepaid (transaction 12)

Depreciation

Plant and machinery (transaction 18)

Furniture and fixtures (transaction 18)

Interest on ICICI loan (transaction 20)

Bad debts (transaction 22)

Provision for doubtful debts @ 10% (transaction 22)

Advertising expenses (transaction 21)

Less: Deferred portion (transaction 21)

Total

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Particulars Units Cost price Amount

Purchase

Purchase

Purchases

Purchase return

Total

Sale

Sales

Sales

Sale

Closing stock


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Answer to Assignment 34:

Prepare an income statement for the period ending 31.12.2000 (Transactions 1 to 25)

M/s Aryan Traders Limited

Income and order statement for the period ending 31.12.2000 (Rs. Lakhs)

Amount Amount

Sales (transaction 9) 1.2




Less: Sales discount (transaction 24) (0.2) 4.8

Less: Trading cost of goods sold (Schedule 1) (2.2)

Gross trading profit 2.6

Less: non-trading expenses (as per schedule 3) (5.17)

Operating loss (2.57)

Add: Income other than sales

Commission income (transaction 13) 0.25

Accrued commission (transaction 19) 5.0. 5.25

Advance received from customer (transaction 14) 1.0

Less: Amount relevant for next year (transaction 14) (1.0)

Profit before income tax 2.68

Less: Provision for income tax (transaction 25) (0.8)Profit after income tax 1.88

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Schedule 1 showing trading cost of goods sold for the period ending 31.12.2000

(Rs. Lakhs)

Particulars Amount Amount

Opening stock nil

Add: purchases (transaction 6) 1.0

Purchases (transaction 7) 0.5

Purchases (transaction 23) 1.0

Less: Purchase returns (transaction 8) (0.1)

2.4

Less: purchase discount (transaction 23) (0.1)

Purchase cost of goods available for sale 2.3 2.3

Less: Closing stock (as per schedule 2) (0.1)

Trading cost of goods sold 2.2

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Schedule 2 showing closing stock as on 31.12.2000

Particulars Units Cost price Amount (Rs. Lakhs)

Purchase (Tr. 6) 10,000 10 1.0

Purchase (Tr. 7) 5,000 10 0.5

Purchase (Tr. 23) 10,000 0.9

Purchase returns (Tr. 8) (1,000) 10 (0.1)Total 24,000 2.3

Sales (Tr. 9) (6,000) 10 (0.6)

Sales (Tr. 10) (4,000) 10 (0.4)

Sales (Tr. 17) (3,000) 10 (0.3)

Sales (Tr. 24) (10,000) (1.8)

Closing stock 1,000 10 0.1

Closing Stock (in units) = Opening Stock + Purchases purchase returns Sales

= Nil + [10000 + 5000 + 1000] [1000] [6000 +4000 + 3000 + 10000]= 0 + 16000 1000 14000 = 1000 UNITS

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Schedule 3 showing non-trading expenses for the year ending 31.12.2000

Particulars Amount (Rs. Lakhs) Amount (Rs. Lakhs)

Rent (transaction 11) 0.5

Add: Outstanding rent (transaction 16) 1.0 1.5

Insurance (transaction 12) 0.5

Less: Prepaid (transaction 12) (0.26) 0.24Current depreciation:

Plant and machinery (transaction 18) 2.0

Furniture and fixtures (transaction 18) 0.4 2.4

Interest on ICICI loan (transaction 20) 0.48

Bad debts (transaction 22) 0.2

Provision for doubtful debts @ 10 % (transaction 22) 0.1

Advertising expenses (transaction 21) 0.5

Less: Deferred portion (transaction 21) (0.25) 0.25

TOTAL 5.17

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Assignment 35Using common sense approach, list all the cash inflows and the cash outflows. Ascertain the closing cash position of M/s Aryan Traders Ltd., as on 31.12.2000.

Transaction Cash Flows

Plus

Cash Flows

Minus

1 Owner brings in equity share capital Rs.10 lakhs

2 Owner brings in preference share capital Rs. 2 lakhs

3 M/S Aryan Traders Co. Ltd., borrowed on a long term basis

from ICICI Rs. 4 lakhs @ 12 % p.a

4 Purchased land, buildings, plant and machinery for cash

Rs. 10 lakhs.

5 Purchased furniture and fixtures Rs. 2 lakhs on credit from

M/s Z

6 Purchased stock of 10,000 bottles of tablets @ Rs. 10 per bottle

on credit (M/s P)

7 Purchased 5,000 bottles of tablets @ Rs. 10 per bottle for cash

8 Returns to M/s P 1,000 bottles @ Rs. 10 per bottle

9 Sold for credit 6,000 bottles @ Rs. 20 per bottle

10 Sold for cash 4,000 bottles @ Rs. 20 per bottle

11 Rent expenses incurred and paid Rs. 50,000

12 Paid insurance for two years Rs. 50, 000 (Rs. 26,000 relates to

1990)

13 Commission Income received in cash Rs. 25, 000

14 Advances received from customers Rs. 1 Lakh

15 Tax paid in advance Rs. 25,000

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16 Rent expenses incurred but not paid for Rs. 1 lakh

17 Sold 3,000 bottles for cash Rs. 1 lakh

18 Depreciation on fixed assets @ 20 %

19 Commission income earned Rs.5 lakhs

20 Interest expenses incurred @ 12% on ICICI loan

21 Advertising expenditure incurred Rs. 0.5 lakhs. Rs. 0.25 lakhs

has to be deferred.

22 One customer Mr. X will not be able to pay (Rs. 20,000) and

Management want a provision for doubtful debt @ 10%

23 Purchased 10,000 bottles for Rs1 lakh and earned a cash

discount of 10%

24 Sold 10,000 bottles for Rs. 2 lakhs and recd. Rs. 1.8 lakhs in full

satisfaction

25 Provision for income tax @ 30 %

TOTAL

EXCESS OF CASH INFLOWS OVER CASH OUTFLOWS (as

on 31.12.00)

GRAND TOTAL


Using common sense approach, list all the cash inflows and the cash outflows. Ascertain the closing cash position of M/s Aryan Traders Ltd., as on 31.12.2000

TransactionCash Flows Plus Cash Flows Minus

1 Owner brings in equity share capital Rs. 10 lakhs 10

2 Owner brings in preference share capital Rs. 2

lakhs

2

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3 M/s Aryan traders Co. Ltd., borrowed on a long

term basis from ICICI Rs. 4 lakhs @ 12% p.a

4

4 Purchased land, building, plant & machinery forcash Rs.10 lakhs

10

5 Purchased furniture & fixtures Rs.2 lakh on credit

from M/s Z

nil nil

6 Purchase stock of 10,000 bottles of tablets @Rs.10 per bottle on credit (M/s P)

nil nil

7 Purchased 5,000 bottles of tablets @ Rs.10 per

bottle for cash.

0.5

8 Returns to M/s P 1,000 bottles @ Rs.10 per bottle nil nil

9 Sold for credit 6,000 @ Rs. 20 per bottle nil nil

10 Sold for cash 4,000 bottles @ Rs. 20 per bottle 0.8 nil

11 Rent expenses incurred and paid Rs. 50,000 nil 0.5

12 Paid insurance for two years Rs. 50,000 (Rs.26,000 relates to 1990)

nil 0.5

13 Commission income received in cash Rs.25,000 0.25 nil

14 Advances received from customers Rs. 1 lakh 1 nil

15 Tax paid in advance Rs.25,000 nil 0.25

16 Rent expenses incurred but not paid for Rs. 1 lakh nil nil

17 Sold 3,000 bottles for cash Rs. 1 lakh 1 nil

18 Depreciation on fixed assets @ 20% nil nil

19 Commission income earned Rs. 5 lakh nil nil

20 Interest expenses incurred @ 12% on ICICI loan nil nil

21 Advertising expenditure incurred Rs. 0.5 lakh.

Rs. 0.25 lakh has to be deferred

nil nil

22 One customer Mr. X will not be able to pay

(Rs.20,000) and management wants a provision

nil nil

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for doubtful debt @ 10%

23 Purchased 10,000 bottles for Rs. 1 lakh and

earned a cash discount of 10%

nil 0.9

24 Sold 10,000 bottles for Rs. 2 lakhs and recorded

Rs. 1.8 lakhs in full satisfaction

1.8 nil

25 Provision for income tax @ 30% nil nil

TOTAL 20.85 12.65

EXCESS OF CASH INFLOWS OVER CASH

OUTFLOWS (as on 31.12.2000)

8.20

GRAND TOTAL 20.85 20.85

N.B.

Excess of cash inflows over cash outflows represents the cash position as on 31.12.2000 and will appear as a liquid asset in the current asset section, on the asset side of thebalance sheet as on 31.12.2000.

The closing balance as on 31.12.2000 is the opening balance as on 01.01.2001.

Assignment 36With the help of the financial statements of M/s Aryan Traders for the period ending 31st December 2000, fill in the following blanks in words and in rupees:

1. Gross Fixed assets as on 31.12.2000 = ____________________________________________________________and equals Rs._______.

2. Net Fixed assets as on 31.12.2000 = ____________________________________________________________and equals Rs._______.

3. Accumulated Depreciation as on 31.12.2000 = ____________________________________________________________and equals Rs._______.

4. Current Assets as on 31.12.2000 = ____________________________________________________________and equals Rs._______. Current assets are also known as Gross working capital.

5. The items of Current Assets as on 31.12.2000 include:

Rs.

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Rs. Rs. Rs. Rs.

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6. Current Liabilities as on 31.12.2000 = ____________________________________________________________and equals Rs._______.

7. The items of Current Liabilities as on 31.12.2000 include:

Rs.

Rs. Rs. Rs. Rs.

8. Net Working Capital as on 31.12.2000 = ____________________________________________________________and equals Rs._______.

9. Quick Assets as on 31.12.2000 = ____________________________________________________________

and equals Rs._______. [Quick assets = current assets stock]

10. Long Term Liabilities as on 31.12.2000 = ___________________________________________________and equals Rs._______.

11. Owners funds or Net worth as on 31.12.2000 = ____________________________________________________________and equals Rs.

12. Total Assets as on 31.12.2000 = ____________________________________________________________

and equals Rs._______.

13. Total sources as on 31.12.2000 =


With the help of the financial statement of M/s Aryan Traders for the period ending 31st December 2000, fill in the following blanks in words and in rupees:

1. Gross fixed assets as on 31.12.2000 = Purchase price of fixed assets and equals Rs. 12 lakhs.

2. Net fixed assets as on 31.12.2000 = Gross fixed assets minus accumulated depreciation and equalsRs. 12 lakhs Rs. 2.4 lakhs i.e., Rs.9.6 lakhs.

3. Accumulated depreciation as on31.12.2000 = sum of the current depreciation charged year after year and equalsRs. 2.4 lakhs. In the first year of the life of a fixed asset current depreciation and accumulated depreciation will be equal.

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4. Current assets as on 31.12.2000 = Gross working capital and equals Rs. 14.96 lakhs.

5.The items of current assets as on 31.12.2000 include: (Rs. Lakhs)

Stock 0.1

Debtors 0.9

Cash 8.2

Prepaid insurance 0.26

Advance tax 0.25

Accrued income 5.0

TOTAL 14.71

6) Current liabilities as on 31. 12. 2000 = short term sources and equals Rs. 4.68 lakhs

7) The items of current liabilities as on 31. 12. 2000 include: (Rs.lakhs)

Accounts payable (M/s P) 0.9

Accounts payable (advertising) 0.5

Income received in advance 1.0

Outstanding expenses 1.0

Interest expenses 0.48

Provision for income tax 0.8

TOTAL 4.68

8) Net working capital as on 31. 12. 2000 = Current assets minus current liabilities and equals Rs.14.71 lakhs Rs. 4.68 lakhs i.e., Rs. 10.03 lakhs.

9) Quick assets as on 31. 12 2000 = those assets which are to be converted into cash very soon and is defined as current assets minus stock and equals Rs. 14.71 lakhs Rs. 0.1

lakhs i.e., Rs. 14.61 lakhs.

10) Long term liabilities as on 31. 12. 2000 = long term source and equals Rs. 6 lakhs.

11) Owned funds or net worth as on 31.12.2000 = owned sources of funds and equals Rs. 13.88 lakhs.

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12) Total assets as on 31.12.2000 = Total uses of funds and equals Rs. 24.56 lakhs.

13) Total sources as on 31.12 .2000 = current liabilities (Rs. 4.68) lakhs + Long term Liabilities (Rs. 6.00) lakhs + Owned funds (Rs. 13.88) lakhs = Rs.24.56 lakhs.

Assignment 37Present the balance sheet of M/s Aryan Traders Ltd., after all the 25 transactions as on 31.12.2000 in the two formats shown below.

Assignment 37 (format 1) Balance Sheet proforma -Horizontal Format

Liabilities & Capital Amount Amount Assets Amount Amount

Equity share capital Gross Fixed assets

Preference share capital Less: Accumulated depreciation

Reserves

Owners Funds NET FIXED ASSETS

Long Term liabilities

Total Current Liabilities as per

schedule 2

Total current assets as per schedule 1

Miscellaneous Assets

Deferred advertising expenditure

Total Liabilities and Capital Total Assets

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BALANCE SHEET PRO FORMA (contd)

Schedule 1

Current Assets Amount Amount

TOTAL

Schedule 2

Current Liabilities Amount Amount

TOTAL

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Assignment 37 (Format 2)Balance sheet pro forma - Vertical Format

ASSETS:

Gross Fixed Assets

Less: Accumulated Depreciation

Net fixed assets (A)

Current assets (B)

Less: Current Liabilities (C)

Net Assets (A+B-C)

Balance sheet pro forma -Vertical Format (contd.)

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FINANCED BY

Long term Liabilities (D)

Owners funds

Equity share capital

Preference share capital

Reserves

Total owners fund (E)

Total financing (D+E)

N.B

(1) Total financing is also known as capital employed.

(2) Net Assets (A+B-C) should be equal to total financing (D+E).

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Answer to Assignment 37(Horizontal Format)M/S Aryan Traders Limited

Balance sheet as on 31.12.2000

Liabilities & capital Amount Amount Assets Amount Amount

Equity share capital 10 Gross fixed Assets 12

Preference Share capital 2 Less: Accumulated depreciation (2.4)

Reserves 1.88 NET FIXED ASSTES 9.6

Owner's fund 13.88

Long term liabilities 6.00

Total current liabilities as per schedule 2 4.68 Total current assets as per schedule 1 14.71

Miscellaneous Assets: Deferred advertising expenditure 0.25

Total liabilities and capital 24.56 Total assets 24.56

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Answer to Assignment 37.2

M/s Aryan Traders Ltd. (Vertical Format)


Amount (Rs. lakhs)

Assets

Fixed assets 12

Less: Accumulated Depreciation (2.4)

Net Fixed assets (A) 9.6

Current assets (B)

Stock 0.1

Debtors 1.2

Less: bad debts (0.2)Provision for doubtful

debt (0.1)

Net debtors 0.9

cash 8.2

Prepaid Insurance 0.26

Advance income tax 0.25

Accrued income 5.00 14.71

Miscellaneous assets

Deferred advertising expenditure(C) 0.25 0.25

Current liabilities (D)

Accounts payable 0.9

Account payable (advertising) 0.5

Income received in advance 1.0

Outstanding Expenses 1.0

Interest expenses 0.48

Provision for income tax 0.8 (4.68)

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M/s Aryan Traders Ltd. (Vertical Format)


Amount (Rs. lakhs)

Assets

Net Assets (A+B+C-D) 19.88

Financed by

Long term Liabilities (E) 6 6

Owners' funds

Equity share capital 10

Preference share capital 2

Reserves 1.88

Total owners' fund (F) 13.88

Total financing (E+F) 19.88

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Assignment 38Given the list of concepts below and the 25 transaction of M/s Aryan Traders Ltd., match the concepts with relevant transactions.

Concept Transaction No.

Money measurement

Entity concept

Going concern

Accrual concept

Matching concept

Conservatism conceptAnswer to Assignment 38Given the list of concepts below and the transaction of M/s Aryan Traders Ltd., match the concepts with relevant transactions.

Concept Transaction no.

Money measurement All transaction

Entity concept All transactions

Going concern All Transactions

Accrual Concept 9,12,14,16,19,20

Matching concept 9,12,14,16,18,19,20

Conservatism concept 22

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Assignment 1 Rashid Enterprises

In the space provided below, for each action for Rashid Enterprises (REL), present the accounting equation, which reflects the transaction(s). At the

end of action 12, draw up a balance sheet, profit and loss account and cash flow statement adopting the layouts given in the text.

Rashid commences business with Rs. 40,000 and a further Rs.10,000 cash from his cousin. The money received from his cousin is an interest free loan.

REL buys the plant and equipment for Rs.5,000 by cash, factory and warehouse for Rs.25,000 by cash, and raw materials for Rs.8,000 (half by cash,

half by credit).

Before the equipment is commissioned, it requires a post installation lubrication costing Rs.200. REL pays for this in cash. 50 % of the raw materials

are then processed into finished goods through the equipment and the labour cost is Rs.400.

REL pays his creditors in full and sells half of the finished goods (recorded at cost Rs.2, 200) for Rs.4, 000 credit

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Action 1

Action 2

Action 3

Action 4


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REL buys second-hand equipment for Rs. 3,000 on credit and other assets for Rs.200 cash.

REL sells the remainder of the finished goods (recorded at cost of Rs.2,200) for Rs.3,900, and receives payment of Rs.3,900 from his debtors.

The equipment breaks down and requires Rs.100 for repairs, which REL pays in cash. REL buys further raw materials for Rs.6,000 cash and processes

the remainder of his first batch of raw materials (which had cost Rs.4,000) at a cost for labour of Rs.300.

On Id, REL buys his wife a present costing Rs.100 and his secretary a gift costing Rs.1, 200. He pays for both items using his credit card.

REL sells his second batch of finished goods (which are recorded at a cost of Rs.4,300) for Rs. 6,000, receiving half of the money in cash and giving

credit for the other half. REL pays off his creditors.

REL pays Rs.400 cash for advertising and Rs.200 cash for audit fees; REL also has all of his raw materials (cost Rs.6,000) processed, his labour force

incurring Rs.1,000 wages in doing so.

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Action 5

Action 6

Action 7

Action 8

Action 9

Action 10


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REL auditors advise that he should write off the debt of Rs.100 which has been outstanding since Action 4; in their opinion this debt is now

irrecoverable. They also recommend that REL provide for depreciation on plant and equipment at a rate of 10 percent and on motor vehicles at 25 percent.

REL considers that one-fifth of his factory and warehouse space is excessive for his needs; he sells that part for Rs.7,000 in cash. He withdraws

Rs.2,000 in cash for personal needs.

Income Tax @ 30%.

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Action 11

Action 12

Action 13


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Solution to Assignment no. 1

RASHID ENTERPRISES

The Equation following each Action [Action 1 to 13]

Assets = Capital + Liabilities

Cash Rs. 50,000 = Owner's equity (OE) Rs. 40,000 + Long-term loan (LTL) Rs. 10,000.


Plant and equipment Rs. 5,000 OE Rs. 40,000 LTL Rs. 10,000

Factory and warehouse Rs.25,000 Creditors Rs. 4,000Raw material inventory Rs. 8,000

Cash Rs. 16,000



Factory and warehouse Rs.25,000 Creditors Rs. 4,000

Raw material inventory Rs. 4,000

Finished Goods inventory Rs. 4,400Cash Rs. 15,400

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Action 1

Action 2

Action 3


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Factory and warehouse Rs. 25,000 Creditors Nil


Finished Goods Inventory Rs. 2,200

Debtors Rs. 4,000

Cash Rs. 11,400

Note that the post-installation lubrication has been 'capitalized'. We can gather from the action that the equipment would not work without this

lubrication and so we can add this cost to the original purchase price. Any further maintenance on this equipment would be expensed', i.e., written off

against owner's equity.



Factory and warehouse Rs. 25,000 Creditors Rs. 3,000

Motor vehicle Rs. 3,000Raw material inventory Rs. 4,000

Finished goods inventory Rs. 2,200

Debtors Rs. 4,000Cash Rs. 11,200

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Action 4

Action 5


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Plant and equipment Rs. 5,400 OE Rs 43,500 LTL Rs.10,000


Motor vehicle Rs. 3,000


Finished goods inventory Nil

Debtors Rs. 100

Cash Rs. 19,000


Plant and equipment Rs.5,400 OE Rs. 43,400 LTL Rs. 10,000


Motor vehicle Rs. 3,000Raw material inventory Rs. 6,000


Debtors Rs. 100

Cash Rs. 12,600

No change from Action 7. This action represents personal expenditure and does not affect Rashids business records.

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Action 6

Action 7

Action 8


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Plant and equipment Rs. 5,400 OE Rs 45,100 LTL Rs. 10,000

Factory and warehouse s. 25,000 Creditors Nil



Finished goods inventory Nil

Debtors Rs. 3,100

Cash Rs. 12,600


Plant and equipment Rs.5,400 OE Rs. 44,500 LTL Rs. 10,000



Raw material inventory Nil

Finished goods inventory Rs. 7,000Debtors Rs. 3,100

Cash Rs. 11,000

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Action 9

Action 10


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Plant and equipment Rs. 4,860 OE Rs. 43,110 LTL Rs. 10,000Factory and warehouse Rs. 25,000 Creditors Nil


Raw material inventory Nil


Debtors Rs. 3,100

Cash Rs. 11,000





Raw material inventory NilFinished goods inventory Rs. 7,000

Debtors Rs. 3,000

Cash Rs. 16,000




Motor Vehicle Rs. 2,250 Provision for tax Rs.1,533Raw material inventory Nil


Debtors Rs. 3,000

Cash Rs. 16,000

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Action 11

Action 12

Action 13


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Profit and Loss Account for the period

Rs. Rs.

Sales 13,900

Less : Cost of sales : Raw Materials 8,000Labour 700

Depreciation on plant and equipment 540 9,240

Gross Manufacturing Profit 4,660

Other Expenses: Motor repairs 100

Advertising 400

Depreciation on motor vehicles 750

Bad debt 100

Audit 200 1,550

Operating Profit 3,110

Profit from sales of factory 2,000Profit before tax 5,110

Less: Provision for Income Tax @ 30% 1,533

Profit after Tax 3,577

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Balance Sheet as at the end of Action 13

Rs. Rs. Rs.

Fixed Assets

Factory and warehouse 20,000

Plant and equipment 4,860

Motor vehicles 2,250 27,110

Current Assets

Finished goods 7,000

Debtors 3,000

Cash 16,000 26,000

Less: Current Liabilities (Provision for Income tax) (1,533) 24,467

Net assets of the company 51,577

Represented by:

Capital introduced 40,000

Profit after tax 3,57743,577

Less: Drawings 2,000

Owners equity 41,577

Long-term loan 10,000 51,577

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Cash Flow Statement for the period to action 13

Rs. Rs.

Sources of cash

Profit from operations 3,110

Adjustment for non-cash items depreciation 1,290 4,400

Capital introduction 40,000

Long-term loan 10,000 50,000Sale of factory and warehouse 7,000

61,400

Uses of cash

Purchase of assets: Factory & warehouse 25,000

Plant & equipment 5,400

Motor vehicles 3,000 33,400

Increase in inventories Finished goods 7,000

Increase in debtors 3,000 10,000

Drawings 2,000

45,400Closing balance of cash 16,000

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Assignment 2 Thomas Sons

Thomas Sons opened their business for trading on 1 Jan. 2003 with Rs.25,000 cash. The first six months of trading resulted in the following

transactions:

Paid six months rent of Rs.2, 000 for the premises.

Purchased equipment for Rs.10, 000 and an estate car for Rs.6, 000.

Acquired Rs.8000 of manufacturing materials on credit, half of which was paid in June.

Paid Rs.2000 in manufacturing wages in converting 75 per cent of the materials into finished goods.

Sold 60 per cent of the finished products for Rs. 12,000 cash.

.Paid Rs. 600 for office staff wages and 300 for petrol.

Further information

The equipment is estimated to have a useful life of five years, whilst the estate car requires to be depreciated over three years.

Required:

1. Prepare the accounting equations after each of the above actions; include depreciation too along with action (6).

2. Prepare a profit and loss account for the six months to 30 June and a balance sheet as at that date after taking into account an income tax rate

of 30% (Consider income tax adjustment as Action7).

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Action 1

Action 2

Action 3

Action 4

Action 5

Action 6


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Solution to Assignment no. 2Thomas Sons

The initial accounting equation is:

Assets (cash) Rs.25,000 = Owners Funds Rs.25,000. Thereafter, the accounting equation changes after each economic action as shown below:

(a) Payment of rent reduces both cash and owners funds, since it is a charged to profit and loss account as an expense.

Rs.

Assets = Liability + Capital

Cash = Rs. 23,000 OF = Rs. 23,000

(b) The equipment and car are acquisition of fixed assets, with no immediate effect on owners equity, but a decrease in cash.

Rs.


Cash = Rs.7,000 OF = Rs. 23,000Equipment = Rs.10,000

Vehicle = Rs. 6,000

(c) This increases the assets by introducing raw material inventory (Rs.8,000), financed by creditors-liabilities, half of which (Rs. 4,000) was paid by

the end of June, depleting the cash amount. Rs.


Cash = Rs. 3,000 Creditors = Rs. 4,000 OF = Rs 23,000

Equipment = Rs.10,000Vehicle = Rs.6,000

Raw material inventories = Rs.8,000

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(d) f f i ( 2 000) i d dd l h i i f b f l f h fi i h d d


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(d) Payment of manufacturing wages (Rs. 2,000) is expected to add value to the inventories, for recovery by future sale of the finished goods.

Rs.


Cash = Rs. 1,000 Creditors = Rs. 4,000 OF = Rs. 23,000Equipment = Rs. 10,000

Vehicle = Rs. 6,000

Raw material inventories = Rs. 2,000

Finished goods inventories=Rs.8,000

(RM = 6,000 + Wages = 2,000)

(e) There are no two separate effects on the accounting equation from this business transaction. Sales impact owners equity, less the costs incurred in

generating the sales. The amount of cash rises, but a debtor is created to reflect the balance outstanding of unpaid sales.

Rs.


Cash = Rs. 8,500 (1,000+7,500) Creditors = Rs. 4,000 OF = Rs. 30,200

Equipment = Rs. 10,000 (23,000 + 7,200)

Vehicle = Rs. 6,000


Finished goods inventories = Rs.3,200 (8,000 4,800)

Debtors = Rs. 4,500 (12,000

7,500)

(f) Both payments are administrative expenses, comprising part of the operating the business in the six months. Therefore, their effect is to reduce both

cash and owners equity.

Rs.


Cash = Rs. 8,500 Creditors = Rs. 4,000 OF= Rs. 27,300Equipment =Rs. 9,000 (10,000

1,000)Vehicle = Rs. 5,000 (6,000 1,000)


Finished goods inventories = Rs.

3,200

Debtors =Rs. 4,500

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Depreciation on equipment and vehicles is treated differently; the former being an element in the manufacturing process and the latter a

selling/administrative expense. Even with the different lifetime for each assets type, the annual depreciation for each is Rs.2,000; reducing to

Rs.1,000 each for the six months.

(g) Provision for income tax.

Assets = Liability + CapitalCash = Rs. 8,500 Creditors = Rs. 4,000 OF= Rs. 26,610

Equipment = Rs. 9,000 (10,000 1,000) Provision of income tax

Vehicle = Rs. 5,000 (6,000 1,000) = Rs. 690

Raw material inventories =Rs. 2,000

Finished goods inventories = Rs. 3,200

Debtors = Rs. 4,500

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P fit d l t f th i th d d 30th J 2003


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Profit and loss account for the six months ended 30th June 2003.

Rs. Rs.

Sales 12,000Less: Cost of sales 3,600

Materials 1,200Labour 1,000 5,800

Gross manufacturing profit 6,200

Less: Selling and administrative costs

Rent 2,000Office wages 600

Petrol 300Depreciation vehicle 1,000 3,900

Profit before tax 2,300

Less: Provision for income tax @ 30% (690)1610

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B l h t t 30th J 2003


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Balance sheet as at 30th June 2003.

Assets Rs. Rs. Rs.

Fixed assetsEquipment at cost 10,000

Less: Depreciation 1,000 9,000Vehicle at cost 6,000

Less: Depreciation 1,000 5,000 14,000

Current assetsStocks 5,200

Debtors 4,500Cash 7,600 17,300

Less: Current liabilities

Creditors 4,000

Provision for income tax 69012,610

26,610

Represented by

Capital introduced 25,000Reserves and surplus 1,610

26,610

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A i t 3 M/ X C Ltd


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Assignment 3 M/s X Co. Ltd.

M/s X Co. Ltd., has the following transactions for the period ending 31.03.2002.

Rs. in lakhs

Date Particulars Amount

1.1.2002 Equity Share Capital contributed by shareholders 50

1.1.2002 Preference Share Capital contributed by shareholders 10

1.1.2002 Procured loan from ICICI @ 10% per annum 20

1.2.2002 Purchased fixed assets 40

1.2.2002 Purchased I.T. equipment in cash 5

1.2.2002 Purchases 6

1.2.2002 Purchase returns 1

15.3.2002 Sales 10

15.4.2002 Sales returns 2

16.5.2002 Sales of Rs.10 lakhs received cash after providing discount of 2%

17.6.2002 Received cash from customers Rs. 5.9 lakhs in full satisfaction of Rs. 6 lakhs

20.6.2002 Payment to suppliers Rs. 2.8 lakhs in full satisfaction of Rs. 3 lakhs

28.12.2002 Rent Income received in cash 6

30.12.2002 Commission Income received in cash 5

31.12.2002 Rent expenses paid 1

71


72/170

Insurance expenses paid 2.5

31.12.2002 Advertising expenditure 3

Part 1

Journalize the above transactionsPost them into the ledgerPrepare a trial balance as on 31.12.2002

Part 2

You are provided with the following information on 31.12.2002

21) Closing stock is valued at Rs.1.5 lakhs. The market price as on 31.3.2002 is Rs.1.25 lakhs.

22) Outstanding rent expenses Rs.0.5 lakhs

23) Insurance is prepaid to the extent of Rs.0.75 lakhs

24) Commission Income accrued Rs.4 lakhs25) Rent income is pre-received to the extent of Rs.3 lakhs

26) Advertising expenditure is to be spread over 3 years

27) Depreciation is to be provided @ 10% of the fixed assets and 25% of the I.T. equipment

28) Bad debts Rs. 50,000

29) Provision for doubtful debts @ 10%

30) Provision for Income tax @ 30%

31) Provision for dividends @ 20% of profits

32) Residual reserves (if any) to be transferred to Staff Welfare Reserve and General Reserve on a fifty-fifty basis.

Required:

Prepare the relevant financial statements viz. Income and other statements and Balance sheet for the year 2002.

72

Solution to Assignment no 3


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Solution to Assignment no 3Part 1 Journal Entries

In the books of M/s X Company Ltd.

(Rs. in lakhs)

Date Particulars Amount

(Debit)

Amount

(Credit)

1. 1. 2002 Cash A/c Dr

To Equity share capital A/c

50

50

1. 1.2002 Cash A/c Dr

To Preference share capital

10

10

31. 1. 2002 Cash A/c Dr

To ICICI loan A/c

20

20

1. 2. 2002 Fixed assets A/c Dr

To Fixed assets loans A/c

40

40

1. 2. 2002 IT equipment A/c Dr

To Cash A/c

5

5

1. 2. 2002 Purchases A/c Dr

To Sundry Creditors A/c

6

6

1. 2. 2002 Sundry Creditors A/c Dr

To Purchase Return A/c

1

1

15. 3. 2002 Sundry Debtors A/c Dr 10

73


74/170

To Sales A/c 10

15. 4. 2002 Sales returns A/c Dr

To Sundry Debtors A/c

2

2

16. 5. 2002 Cash A/c Dr

Sales Discount A/c Dr

To Sales A/c

9.8

0.2

10

17. 6. 2002 Cash A/c Dr

Sales Discount A/c Dr

To Sundry Debtors A/c

5.9

0.1

6

20. 6. 2002 Sundry Creditors A/c Dr

To Cash A/c

To Purchase discount A/c

3

2.8

0.2

28. 12. 2002 Cash A/c Dr

To Rent Income

6

6

30. 12. 2002 Cash A/c Dr

To Commission Income

5

5

31. 12. 2002 Rent Expense A/c Dr

Insurance Expense A/c Dr

To Cash A/c

1

2.5

3.5

74

31 12 2002 Ad i i A/ 3


75/170

31. 12. 2002 Advertising A/c Dr

To Sundry Creditors (Advertising) A/c

3

3

In the books of M/s X Co. Ltd.,

Ledger Accounts

Dr Cash/ bank A/c Cr

Date Particulars Amount Date Particulars Amount

1. 1. 2002 To equity share

capital

50 1. 2. 2002 5

1. 1. 2002 To preference

share capital

10 20. 6. 2002 By payment to

creditors

2.8

31. 1. 2002 To ICICI loan 20 31. 12. 2002 By rent expense 1

16. 5. 2002 To cash sales 9.8 31. 12. 2002 By insurance

expense

2.5

17. 6. 2002 To receipt from

debtors

5.9 31. 12. 2002 By balance c/d 95.4

28. 12. 2002 To rent income 6

30. 12. 2002 To commission

income

5

106.7 106.7

75

By ITEquipment


76/170

Dr Equity Share Capital A/c Cr


31. 12. 2002 To balance c/d 50 1. 1. 2002 By cash 50

50 50

Dr Preference Share Capital A/c CrDate Particulars Amount Date Particulars Amount


10 10

Dr ICICI Loan A/c Cr



20 20

Dr Fixed Assets A/c Cr


1. 2. 2002 To fixed assets

loan A/c

40 31. 1. 2002 By cash 45

1. 2. 2002 To Cash (ITequipment) 5

45 45

76

Dr Fixed Assets Loan A/c Cr


77/170

Dr Fixed Assets Loan A/c Cr


31. 12. 2002 To balance c/d 40 1. 2. 2002 By fixed assets A/c 40

40 40

Dr Purchase A/c Cr


1. 2. 2002 To creditors 6 31. 12. 2002 By balance c/d 6

6 6

Dr SundryCreditors A/c Cr


1. 2. 2002 To purchase return A/c 1 1. 2. 2002 By purchases A/c 6

20. 6. 2002 To cash A/c 2.8

20. 6. 2002 To purchase discount

A/c

0.2

31. 12. 2002 To balance c/d 2

6 6

77

Dr Purchase Return A/c Cr


78/170


31. 12. 2002 To balance c/d 1 1. 2. 2002 By sundry creditors 1

1 1

Dr Sundry Debtors A/c Cr


15. 3. 2002 To sales 10 15. 4. 2002 By sales return a/c 2

16. 5. 2002 By cash a/c 5.9

17. 6. 2002 By sales discount 0.1

31. 12. 2002 By balance c/d 2

10 10

Dr Sales A/c Cr


31. 12. 2002 To balance c/d 20 15. 3. 2002 10 2

16. 5. 2002 By cash a/c 9.8

16. 5. 2002 By sales discount 0.2

20 20

78


79/170

Dr Sales Return A/c Cr


15. 4. 200

2

To sundry debtors

a/c

2 31. 12. 2002 By balance c/d 2

2 2

Dr Sales Discount A/c Cr


16. 5. 200

2

To sales a/c 0.2 31. 12. 2002 By balance c/d 0.3

17. 6. 200

2

To sundry debtors

a/c

0.1

0.3 0.3 2

Dr Purchase Discount A/c Cr


15. 4. 2002 To balance c/d 0.2 20. 6. 2002 By sundry creditors

a/c

0.2

0.2 0.2

79

Dr Rent Expense A/c Cr


80/170

p


31. 12. 2002 To cash a/c 1 31. 12. 2002 By balance c/d 1

1 1

Dr Insurance Expense A/c Cr


31. 12. 2002 To cash a/c 2.5 31. 12. 2002 By balance c/d 2.5

2.5 2.5

Dr Commission Income A/c Cr

Date Particulars Amount Date Amount

30. 12. 2002 To balance c/d 5 30. 12. 2002 By cash a/c 5

5 5

Dr Rent Income A/c Cr

Date Particulars Amount Particulars Amount

28. 12. 2002 To balance c/d 6 28. 12. 2002 By cash/ bank 6

6 6

80


81/170

Dr Advertisement Expenditure A/c Cr


31. 12. 2002 To Advertising(Accounts

Payable) A/c

3 31. 12. 2002 3

3 3

Dr Advertising Accounts Payable A/c Cr


31. 12. 2002 To balance c/d 3 31. 12. 2002 By Advertising

(accounts payable)

A/c

3

3 3

81

By Balance c/d

M/s X Co. Ltd.


82/170

Trial balance as on 31 December 2001

(Amount in Rs. lakh)

Particulars Debit Credit

Equity share capital 50

Preference share capital 10

ICICI loan @10% 20

Fixed assets 45

Purchases 6

Purchase returns 1

Sales 20

Sales return 2

Sales discount 0.3

Purchase discount 0.2

Rent expenses 1

Insurance expenses 2.5

Commission income 5

Rent income 6

Advertising expenditure 3

82

Fixed assets (loan) 40


83/170

Fixed assets (loan) 40

Advertising (accounts payable) 3

Cash 95.4

Sundry Debtors 2

Sundry Creditors 2

Total 157.2 157.2

83

M/s X Co. Ltd.


84/170

Income Statement for the year ended 31 December 2001 (Rs. in lakhs)

Particulars Schedule Amount

Net sales 1 17.7

Less: Trading Cost of Goods Sold 2 (3.55)

Gross Trading Profit 14.15

Less: Non Trading expenses 3 (10.15)

Operating profit 4.00

Add: income other than sales 4 12.00

Profit before interest and tax (P.B.I.T) 16.00

Less: interest @ 10% on ICICI loan 2.00

Profit before tax (P.B.T) 14.00

Less: provision for tax @30% 4.20

Profit after tax (P.A.T) 9.80

84


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Schedule showing appropriationsRs. lakh

Balance as per income statement (P.A.T) 9.80

Add: balance from earlier years nil

Available for appropriations 9.80

Less: provision for dividends @ 20% (rounded off) 2.00

Balance 7.80

Less: Transfer to Staff Welfare Reserves 3.90

Less: Transfer to General Reserves 3.90

85

M/s X Co. Ltd

B l h t 31 D b 2001


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Balance sheet as on 31 December 2001

Rs. lakh

LiabilitiesRs. Assets Rs.

Owners funds Net fixed assets39.75

Equity share capital 50 Current assets (per

schedule 5)

102.75

Preference share. capital 10 Miscellaneous assets (to

the extent not written off )

Deferred Advertising

2.00

Reserves/ surplus 7.80 67.80

Long term liabilities

ICICI loan 20

Fixed assets (vendors) 40 60

Current liabilities (per

schedule 6)16.70

144.50 144.50

86

Schedule 1 (showing net sales) Rs. lakh


87/170

Sales 20.00

Less: sales return 2.00

18.00

Less: sales discount 0.30

Net sales 17.70

Schedule 2 (showing trading cost of goods sold)

Rs. lakh

Opening stock Nil

Purchases 6.00

Less: purchase returns (1.00)

5.00

Less: purchase discount (0.20)

4.80

Less: closing stock ( lower of cost or market value) 1.25

Cost of goods sold (COGS) 3.55

87

Schedule 3 (showing non-trading expenses)

R l kh


88/170

Rs lakh

Rent1.00

Add: Outstanding rent 0.50

1.50

Insurance 2.50

Less: Prepaid Insurance 0.75

1.75

Depreciation (schedule 3 A) 5.25

Bad debts 0.50

Add: provision for doubtful debts (10% of 1.5) 0.15 0.65

Advertising expenditure (1/3 to be charged) / and balance to be deferred 1

Total 10.15

Schedule 3 A (depreciation)Rs. lakh

Particulars

(gross block)

Amount Current

depreciation

Accumulated

depreciation

Net fixed assets

Fixed assets @

10%

40.00 4.00 4.00 36.00

I.T equipment 5.00 1.25 1.25 3.75

88

@ 25%


89/170

@

Total 45.00 5.25 5.25 39.75

Schedule 4 (showing income other than sales)

Rs. lakh

Rent income 6.00

Less: Pre-received rent income (3.00) 3.00

Commission Income 5.00

Add: Accrued Commission Income 4.00 9.00

Total 12.00

Schedule 5: Showing details of current assets

Rs. lakh

Cash 95.40

Debtors 1.35

Stock 1.25

Pre-paid insurance 0.75

Commission accrued 4.00Total current assets

102.75

Schedule 6: Showing details of current liabilities

Rs. lakh

89

Creditors 2.00


90/170

Pre-received rent 3.00

Outstanding rent 0.50

Outstanding interest 2.00

Advertisement expenses (accounts payable) 3.00

Provision for tax 4.20

Proposed dividend 2.00

Total current liabilities 16.70

90

Assignment 4 M/s SPJ & Co. Ltd


91/170

M/s SPJ & Co. Ltd., has the following transactions for the year-ended 31.12.2001

(Amount in Rs. lakhs)

1.1.2001 Equity Share Capital contributed by shareholders 80

1.1.2001 Preference Share Capital contributed by shareholders 20

1.1.2001 Procured loan from IDBI @ 10 % p.a. 40

15.2.2001 Purchased fixed assets on account 30

17.2.2001 Purchased I.T. equipment in cash 10

22.2.2001 Purchases on account 6

27.2.2001 Purchase returns 1

17.3.2001 Sales on account 10

16.4.2001 Sales returns 2

18.5.2001 Sales of Rs. 10 lakhs - Received cash

after providing discount of 10 %

11.6.2001 Received cash from customers Rs. 5 lakhs in full

satisfaction of Rs. 6 lakhs

20.6.2001 Payments to suppliers Rs. 2 lakhs in full

satisfaction of Rs. 3 lakhs

25.12.2001 Rent income received in cash 8

91

31.12.2001 Rent expenses paid 2

Insurance expense paid 4


92/170

Insurance expense paid 4

31122001 Commission income

received in cash 7

31.12.2001 Advertising expenditure accrued 4

On the basis of data given above:

5. Journalize the transactions

6. Post the transactions into the Ledger

7. Prepare a Trial balance as on 31.12 2001.

You may use the following assumptions for solving the given problem:

Ignore pro rata rates for the purpose of depreciation and interest computations;

In transaction dated 11.6.2001, the difference be treated as discount allowed;

In transaction dated 20.6.2001, the difference be treated as discount received

ADJUSTMENTS

It is now 31.12.2001

You are provided with the following information:

1. Closing Stock is valued at Rs. 2 lakhs. The market price as on 31.12 2001 is Rs.20 lakhs.

2. Bad Debts Rs. 0.5 lakh.

3. Advertising Expenditure is to be spread over 4 years.4. Outstanding Rent Expenses Rs. 25 lakhs.

5. Commission Income Accrued Rs. 0.95 lakh.

6. Insurance is prepaid to the tune of Rs.1 lakh.

92

7. Provision for Doubtful Debts @ 10 %


93/170

8. Depreciation is to be provided @ 10 % of the fixed assets and 25 % of I.T Equipment

9. Rent income is pre-received to the extent of Rs 4 lakhs

10. Provision for I. Tax @ 30 % (ignore surcharge)

11. Provision for Dividends @ 20 % of profits

12. Residual Reserves (if any) to be transferred to Staff Welfare Reserve and General Reserve on a 40:60 basis.

Required:

1. Prepare the relevant financial statement: Income and other statements and Balance sheet for the year 2001.

Solution to Assignment no. 4 M/s SPJ

Journal entries

Date Particulars L/F Debit

(Rs.)

Credit

(Rs.)

1.1.2001 Cash/ Bank A/c

To Equity share capital A/c

(being amoun

financial accounting paa198 student manual

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