B.COM I ACCOUNTING REGULAR/ PRIVATE. S.Hussain

Transcription

1 The workings under the heading of Additional Working are not required according to the requirement of the examiner. These are only for understanding the solutions. For more help, visit B.COM I ACCOUNTING REGULAR/ PRIVATE Compiled and Solved by: S.Hussain

2 ACCOUNTING 2000 REGULAR/PRIVATE Instructions: Attempt any five questions. Compiled & Solved by: S.Hussain Q.No.1 WORK SHEET GIVEN Presented given below is the unadjusted trial balance of Hassan Traders at December 31, 1999: Debit Credit Cash 1,250 Accounts receivable 11,000 Allowance for doubtful accounts 500 Merchandise inventory 12,000 Unexpired insurance 1,700 Plant assets 45,000 Allowance for depreciation Plant assets 15,000 15% Notes payable (due in 2003) 20,000 Capital Hassan 35,000 Drawings Hassan 2,000 Sales revenue 22,500 Cost of goods sold 12,300 Office supplies expense 2,500 Salaries expense 4,250 Data for Adjustments (a) Insurance expired during the year amounted to Rs.700. (b) Provide doubtful debts at 10% of accounts receivable. (c) Interest is paid annually on the notes payable at June 30, each year. (d) Office supplies used amounted to Rs.500. (e) Charge depreciation on plant assets at 20% on reducing balance method. (f) Salaries prepaid amounted to Rs.850. REQUIRED Prepare a Ten-Column Work Sheet in proper form and complete in all respects. SOLUTION 1 HASSAN TRADERS WORK SHEET FOR THE PERIOD ENDED 31 DECEMBER 1999 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 2

3 Particulars Cash Accounts receivable All for doubtful a/c. Merchandise inventory Unexpired insurance Plant assets All for depreciation (P) 15% Notes payable Capita Hassan Drawings Drawings Sales revenue Cost of goods sold Office supplies expense Salaries expense Insurance expense Bad debts expense Interest expense Interest payable Office supplies Depreciation expense Prepaid salaries Net loss Trial Balance DR. CR. 1,250 11, ,000 1,700 45,000 15,000 20,000 35,000 2,000 22,500 12,300 2,500 4,250 92,500 92,500 Adjustments DR. CR. 1, ,000 2, ,600 1,500 1,500 2,000 6, ,650 12,650 Adjusted Trial DR. CR. 1,250 11,000 12,000 1,100 1,000 45,000 21,000 20,000 35,000 2,000 22,500 12, , ,600 1,500 1,500 2,000 6, , ,100 Income Statement DR. CR. 22,500 12, , ,600 1,500 6,000 26,000 22,500 3,500 26,000 26,000 Balance Sheet DR. CR. 1,250 11,000 12,000 1,100 1,000 45,000 21,000 20,000 35,000 2,000 1,500 2, ,100 78,600 3,500 78,600 78,600 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 3

4 OR Q.No.1 ADJUSTING AND CLOSING JOURNAL ENTRIES GIVEN Before making any year end adjusting entries the total revenues of Aslam & Co. exceeded total expenses by Rs.60,000/-. However, the following adjustments are necessary: (a) Office supplies used Rs.350, recorded initially as asset. (b) Service rendered to clients but yet not billed Rs.2,700. (c) Interest accrued on notes payable Rs.1,350. (d) Depreciation Rs.50. (e) Accrued wages payable Rs.3,250. (f) Fee collected in advance which have not been earned Rs.4,300, recorded initially as liability. (g) The company is subject to income tax at 40% of income before income taxes (assume income before income tax is the same as taxable income). REQUIRED (i) Give the necessary adjusting and closing general entries for the above data. (ii) Prepare profit and loss summary accounts. (iii) Compute the net income after the above adjustments. SOLUTION 1 (i) ASLAM & CO. ADJUSTING ENTRIES FOR THE PERIOD ENDED 31 DECEMBER Office supplies expense 350 Office supplies 350 (To adjust the office supplies) 2 Service fee receivable 2,700 Service fee income 2,700 (To adjust the accrued service income) 3 Interest expense 1,350 Interest payable 1,350 (To adjust the accrued interest on notes payable) 4 Depreciation expense 50 Allowance for depreciation 50 (To adjust the depreciation expense for the period) 5 Wages expense 3,250 Wages payable 3,250 (To adjust the accrued wages expense) 6 Unearned fees 4,300 Fees income 4,300 (To adjust the unearned fees) 7 Income tax expense (62,000 x 40%) 24,800 Income tax payable 24,800 (To adjust the income tax expense) B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 4

5 ASLAM & CO. CLOSING ENTRIES FOR THE PERIOD ENDED 31 DECEMBER Expense and revenue summary 29,800 Office supplies expense 350 Interest expense 1,350 Wages expense 3,250 Depreciation expense 50 Income tax expense 24,800 (To close the various expenses accounts) 2 Profit and loss account 60,000 Service fees income 2,700 Fees income 4,300 Expense and revenue summary 67,000 (To close the income account) 3 Expense and revenue summary 37,200 Capital 37,200 (To close the expense and revenue summary account) SOLUTION 1 (ii) ASLAM & CO. GENERAL LEDGER Profit and Loss Account 1 Office supplies expense 350 Profit 60,000 3 Interest expense 1,350 2 Service fees income 2,700 4 Depreciation expense 50 6 Fees income 4,300 5 Wages expense 3,250 7 Income tax expense 24,800 Closing 37,200 67,000 67,000 SOLUTION 1 (iii) Computation of Net Income: Unadjusted net income 60,000 Add: Expenses: Office supplies expense 350 Interest expense 1,350 Depreciation expense 50 Wages expense 3,250 Income tax expense 24,800 Total expenses (29,800) 30,200 Add: Income: Service fees income 2,700 Fess income 4,300 Total income 7,000 Adjusted net income 37,200 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 5

6 Q.No.2 BANK RECONCILIATION STATEMENT GIVEN The following information pertains to Salim & Co. (i) The balance on May 31 bank statement is Rs.16,870 (Cr.). (ii) Withdrawals of cash Rs.90 from bank for personal use by Salim has not been recorded in cash book. (iii) Cheques issued by Salim that have not yet been paid by the bank total Rs.3,160. (iv) The cheque of Rs.28 to pay for freight was wrongly recorded on cash book as Rs.82. (v) A deposit of Rs.1,496 was made on 31 st which does not appear on bank statement. (vi) Issued a cheque for Rs.5,885 to pay for merchandise purchase. The bank statement showed payment of correct amount but it was erroneously recorded on cash book as Rs.8,585. (vii) A customer s cheque for Rs.58 was returned with the remarks N.S.F. (viii) Deposited a customer s cheque Rs.9,640 was shown on the bank statement as Rs.6,940. (ix) The bank collected for Salim Rs.1,760 including interest of Rs.160 on a note left for collection. (x) Cash in bank May 1 Balance 2,540 May 31 Withdrawals 28,400 May 31 Deposits 39,400 REQUIRED 1) A bank reconciliation statement and compute the adjusted balances of cash in bank & bank. 2) Give the necessary adjusting journal entries. 3) Compute bank balances as per cash book at May 31. SOLUTION 2 (1) SALIM & CO. BANK RECONCILIATION STATEMENT FOR THE MONTH OF MAY Particulars Cash Book Pass Book Balance on 31 May 13,540 16,870 Less: Drawings (ii) (90) 13,450 Less: Unpresented cheques (iii) (3,160) 13,710 Add: Freight Error (iv) 54 13,504 Add: Last day deposit (v) 1,496 15,206 Add: Purchases Error (vi) 2,700 16,204 Less: Dishonoured cheque (vii) (58) 16,146 Add: error by bank (viii) 2,700 17,906 Add: Notes receivable (ix) 1,600 17,746 Add: Interest income (ix) 160 Reconcile balance 17,906 17,906 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 6

7 SOLUTION 2 (2) SALIM & CO. GENERAL JOURNAL FOR THE MONTH OF MAY 1 Drawings 90 Bank 90 (To record the cash withdrew by owner for personal use) 2 Bank 54 Freight 54 (To record the correction of error in freight) 3 Bank 2,700 Purchases 2,700 (To record the correction of error in purchases) 4 Accounts receivable 58 Bank 58 (To record the dishonoured cheque returned by bank) 5 Bank 1,600 Notes receivable 1,600 (To record the note collected by bank for company) 6 Bank 160 Interest income 160 (To record the interested credited by bank) SOLUTION 2 (3) Computation of Bank Balance as per Cash Book at 31 May: Bank opening balance per cash book 2,540 Add: deposits 39,400 41,940 Less: Withdrawals (28,400) Cash book balance (Bank column) 13,540 Q.No.3 INVENTORY VALUATION GIVEN Following data are obtained from the records of Karim & Sons. Units Sold Units Purchased Cost per Unit December 1 Inventory - 9 Rs.50 December 12 Credit purchase - 10 Rs.55 December 17 Sales December 21 Cash purchase - 10 Rs.60 December 28 Sales REQUIRED (i) Calculate the cost of inventory at December 31, and cost of goods sold under the periodic system and LIFO method. (ii) Calculate the cost of inventory at December 31, and cost of goods sold under the perpetual system and FIFO method. (iii) Give the necessary adjusting journal entries under both the system separately. B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 7

8 SOLUTION 3 (i) KARIM & SONS SCHEDULE OF UNITS PURCHASED, UNITS SOLD AND UNITS AT END FOR THE PERIOD DECEMBER Date Description Units 1 December Merchandise inventory Rs.50 each 9 Add: Units Purchased During the Period: 12 December Rs.55 each December Rs.60 each 10 Total units purchased during the period 20 Total units available for sale during the period 29 Less: Units Sold During the Period: 17 December Sold 8 28 December Sold 9 Total units sold during the period (17) Unsold units at end 12 Computation of Cost of Ending Inventory by LIFO Method (Periodic System): 9 Rs.50 each Rs.55 each Cost of ending inventory 615 Computation of Cost of Goods Sold by LIFO Method (Periodic System): 7 Rs.55 each Rs.60 each Cost of goods sold 985 SOLUTION 3 (ii) KARIM & SONS INVENTORY VALUATION PERPETUAL INVENTORY SYSTEM FIFO METHOD FOR THE PERIOD ENDED DECEMBER Date Purchases/Received Sales/Issued Balance Units Unit cost Total cost Units Unit cost Total cost Units Unit cost 1 Dec Dec Dec Dec Dec , Total cost B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 8

9 Computation of Cost of Ending Inventory: 2 Rs.55 each Rs.60 each Cost of ending inventory 710 Computation of Cost of Goods Sold: 8 Rs.50 each Rs.50 each 50 8 Rs.55 each Cost of goods sold 890 OR Merchandise inventory (opening) 450 Add: Net purchases during the period 1,150 Merchandise available for sale 1,600 Less: Merchandise inventory (ending) (710) Cost of goods sold 890 SOLUTION 3 (iii) KARIM & SONS GENERAL JOURNAL (LIFO METHOD PERIODIC SYSTEM) 1 Merchandise inventory 615 Expense and revenue summary 615 (To close the merchandise inventory) KARIM & SONS GENERAL JOURNAL (FIFO METHOD PERPETUAL SYSTEM) 1 Cost of goods sold 890 Merchandise inventory 890 (To adjust the cost of goods sold) Q.No.4 ACCOUNTING FOR RECEIVABLES GIVEN Ahmed Trading Co. estimates uncollectible accounts at 10% of year-end balance of accounts receivable in December 31, 1998 the A/R (Control) had a Dr. balance of Rs.75,000/= and the allowance for doubtful accounts showed a credit balance of Rs.2,500/- but a customer s account in a subsidiary ledger showed a credit balance of Rs.4,800/=. However, on January 5, 1999, the Co. sold merchandise at invoice price of Rs.200,000/= to the customer who had paid Rs.4,800/= in advance. Collected on receivable Rs.215,000/=, this is the cash received after discount deductions of Rs.4,400/=. During the year, total A/R written off Rs.15,000/= and the previously written off A/R recovered in the amount of Rs.6,500 at December 31, REQUIRED (i) Give entries in general journal to record the bad debts expense and advance from customer at December 31, (ii) Give entries in general journal to record all transactions completed during Including adjusting entry to record bad debts expense. (iii) Report relevant account balances on balance sheet as of December 31, B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 9

10 SOLUTION 4 (i) Computation of Bad Debts Expense: Accounts receivable 75,000 Add: Advance from customer 4,800 Total accounts receivable 79,800 Rate of bad debts 10% Allowance for bad debts adjusted balance 7,980 Less: Allowance for bad debts unadjusted balance (2,500) Bad debts expense for the period 5,480 AHMED TRADING CO. GENERAL JOURNAL FOR THE PERIOD ENDED 31 DECEMBER Dec Accounts receivable 4, Advance from customer 4,800 (To record the advance received from customer) 31 Dec Bad debts expense 5, Allowance for bad debts 5,480 (To record the bad debts expense for the period) 31 Dec Expense and revenue summary 5, Bad debts expense 5,480 (To close the band debts expense account) SOLUTION 4 (ii) AHMED TRADING CO. GENERAL JOURNAL FOR THE PERIOD Jan Accounts receivable 195, Advance from customer 4,800 Sales 200,000 (To record the goods sold on account) Cash 215,000 Sales discount 4,400 Accounts receivable 219,400 (To record the cash collected from customers after discount) Allowance for bad debts 15,000 Accounts receivable 15,000 (To record the write off customer s account) Accounts receivable 6,500 Allowance for bad debts 6,500 (To record the recovery of written off account) Cash 6,500 Accounts receivable 6,500 (To record the cash collected from customers) B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 10

11 31 Dec Bad debts expense 4, Allowance for bad debts 4,580 (To record the bad debts expense for the period) 31 Dec Expense and revenue summary 4, Bad debts expense 4,580 (To close the band debts expense account) Computation of Bad Debts Expense: Accounts receivable 40,600 Rate of bad debts 10% Allowance for bad debts adjusted balance 4,060 Add: Write off customer s account 15,000 19,060 Less: Recovery of previously written off accounts receivable (65,00) 12,560 Less: Allowance for bad debts unadjusted balance (7,980) Bad debts expense for the period 4,580 Accounts Receivable 1 Jan 98 Balance 75, Dec 98 c/d balance Dec 98 Advance from customer 4,800 79,800 79,800 1 Jan 99 b/d balance 79,800 Cash/Discount 219,400 5 Jan 99 Sales 195,200 Allowance for bad debts 15,000 Allowance for bad debts 6,500 Cash 6, Dec 99 c/d balance 40, , ,500 1 Jan 00 b/d balance 40,600 Allowance for Doubtful Accounts 31 Dec 98 c/d balance 7,980 1 Jan 98 Balance 2, Dec 98 Bad debts expense 5,480 7,980 7,980 Accounts receivable 15,000 1 Jan 99 b/d balance 7, Dec 99 c/d balance 4,060 Accounts receivable 6, Dec 99 Bad debts expense 4,580 19,060 19,060 1 Jan 00 b/d balance 4,060 SOLUTION 4 (iii) AHMED TRADING CO. BALANCE SHEET AS ON 31 DECEMBER 2003 Assets Equities Accounts receivable 40,600 Less: Allowance for bad debts (4,060) 36,540 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 11

12 Q.No.5 ACCOUNTING FOR DEPRECIATION (a) GIVEN XY Company acquired a computer on July 1, 1998 at a cost of Rs.50,000/=, its operating life was estimated as 5 years with salvage value of Rs.5,000/=. The company s accounting year ends on December 31. REQUIRED Calculate the depreciation cost & depreciation charge on the computer for the years ended December 1, 998 and 1999 under each of the following methods separately: (i) Straight Line Method. (ii) Reducing Balance Method. (iii) Sum of the years digit method. (b) GIVEN Equipment which cost Rs.6,000/= had an estimated useful life of 6 years and estimated salvage value of Rs.600/= Straight Line depreciation was used. REQUIRED Prepare the journal entries to record the disposal of the equipment under each of the following assumptions: (i) The equipment was sold for Rs.4,000/= cash after 2 years use. (ii) After three years use the equipment was sold for Rs.3,500/= cash. (iii) After 4 years use the equipment was traded in on a similar equipment with a fair market value of Rs.8,000/= the trade in allowance was Rs.3,100. SOLUTION 5 (a) Computation of Depreciation Expense by Straight Line Method: Annual depreciation = Cost Scrap value Estimated life in years Annual depreciation = 50,000 5,000 5 Annual depreciation = 9,000 Depreciation expense for the period 31 December 1998 = 9,000 x 6/12 = 4,500 Depreciation expense for the period 31 December 1999 = 9,000 Computation of Depreciation Expense by Diminishing Balance Method: Annual depreciation = Cost/Book value x Rate (%) Book value = Cost Allowance for depreciation Rate (%) = 100 / Life in years Rate (%) = 100/5 Rate (%) = 20% Year Cost/Book Value Rate Depreciation Expense Book Value ,000 20% 10,000 x 6/12 = 5,000 50,000 5,000 = 45, ,000 20% 9,000 45,000 9,000 = 36,000 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 12

13 Computation of Depreciation Expense by Sum of the Year s Digit Method: Annual depreciation = Cost Salvage value (Depreciable cost) x Yearly fraction Fraction = n (n + 1) 2 Fraction = 5 (5 +1) 2 Fraction = 15 Year Depreciable Cost Yearly Fraction Compiled & Solved by: S.Hussain Depreciation Expense ,000 5,000 = 45,000 5/15 15,000 x 6/12 7, ,000 5/15 15,000 x 6/12 = 7,500 45,000 4/15 12,000 x 6/12 = 6,000 13,500 SOLUTION 5 (b) Computation of Depreciation Expense by Straight Line Method: Annual depreciation = Cost Scrap value Estimated life in years Annual depreciation = 6, Annual depreciation = 900 Depreciation expense for the 1 st year = 900 Depreciation expense for the 2 nd year = 900 Depreciation expense for the 3 rd year = 900 Depreciation expense for the 4 th year = 900 Case 1: Computation of Gain or Loss on Sale: Cost of equipment 6,000 Less: allowance for depreciation upto date (1,800) Book value 4,200 Less: Sold for (4,000) Loss on sale 200 M/S. GENERAL JOURNAL 1 Cash 4,000 Accumulated depreciation Equipment 1,800 Loss on sale 200 Equipment 6,000 (To record the sale of equipment on loss) Case 2: Computation of Gain or Loss on Sale: Cost of equipment 6,000 Less: allowance for depreciation upto date (2,700) Book value 3,300 Less: Sold for (3,500) Gain on sale 200 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 13

14 M/S. GENERAL JOURNAL 1 Cash 3,500 Accumulated depreciation Equipment 2,700 Gain on sale 200 Equipment 6,000 (To record the sale of equipment on gain) Case 3: Computation of Gain or Loss on Exchange: Cost of equipment (old) 6,000 Less: allowance for depreciation upto date (3,600) Book value 2,400 Less: Trade in allowance (3,100) Gain on exchange 700 Computation of Cash Payment: Cost of equipment (new) 8,000 Less: Trade in allowance (3,100) Cash payment 4,900 M/S. GENERAL JOURNAL 1 Equipment (New) 8,000 Accumulated depreciation Equipment 3,600 Cash 4,900 Gain on exchange 700 Equipment (Old) 6,000 (To record the exchange of equipment on gain) Q.No.6 VOUCHER SYSTEM GIVEN M&N Co. uses the voucher system. Selected transactions for November are presented below:- (i) Issued a non-interest bearing note for Rs.7,500/= in settlement of voucher payable for Rs.7,000. (ii) Issued a 12% 60 days note in settlement of an outstanding voucher for Rs.8,000/=. (iii) Issued cheques for Rs.2,500/= to establish petty cash fund. (iv) Purchased merchandise from Tahir Traders for Rs.8,500/= on terms 3/10, n/30. (v) Purchased a computer for Rs.18,000/=, paying Rs.8,000/= and signing a note for the balance. (vi) Issued a debit memo to Tahir Traders for Rs.500/= for return of defective merchandise. (vii) Issued a cheque for Rs.2,500/= to increase the petty cash fund to replenish the fund for postage expense Rs.1,200/=, entertainment expense Rs.900/= and miscellaneous expense Rs.400/=. (viii) Issued a 10%, 30 days note for Rs.3,000/= and paid Rs.3,500/= in settlement of a voucher payable for Rs.6,000/=. REQUIRED Using general journal forms show how the above transactions would be recorded in voucher register, cheque register and general journal. B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 14

15 SOLUTION 6 M&N CO. GENERAL JOURNAL (VOUCHER REGISTER) 1 No Entry 2 No Entry 3 Petty cash fund 2,500 Voucher payable 2,500 (To record the voucher issued for petty cash fund) 4 Purchases 8,500 Voucher payable 8,500 (To record the voucher issued for purchase of goods) 5 Equipment 18,000 Voucher payable 10,000 Voucher payable 8,000 (To record the voucher issued for purchase of computer) 6 Voucher payable 8,500 Purchase returns and allowances 500 Voucher payable 8,000 (To record the issue of voucher for purchase return) 7 Postage expense 1,200 Entertainment expense 900 Miscellaneous expense 400 Voucher payable 2,500 (To record the issue of voucher for petty cash expenses) 8 Voucher payable 6,000 Interest expense 500 Voucher payable 3,000 Voucher payable 3,500 (To record the issue of voucher in settlement of previous voucher payable) M&N CO. GENERAL JOURNAL (CHEQUE REGISTER) 1 No Entry 2 No Entry 3 Voucher payable 2,500 Bank 2,500 (To record the cheque issued for petty cash fund) B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 15

16 4 No Entry 5 Voucher payable 8,000 Bank 8,000 (To record the cheque issued for purchase of goods) 6 No Entry 7 Voucher payable 2,500 Bank 2,500 (To record the cheque issued for petty cash expenses) 8 Voucher payable 3,500 Bank 3,500 (To record the cheque issued for payment of voucher) M&N CO. GENERAL JOURNAL 1 Voucher payable 7,000 Interest expense 500 Notes payable 7,500 (To record the promissory note issued in settlement of voucher payable) 2 Voucher payable 8,000 12% Notes payable 8,000 (To record the promissory note issued in settlement of voucher payable) 3 No Entry 4 No Entry 5 Voucher payable 10,000 Notes payable 10,000 (To record the promissory note issued in settlement of voucher payable) 6 No Entry 7 No Entry 8 Voucher payable 3,000 10% Notes payable 3,000 (To record the promissory note issued in settlement of voucher payable) B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 16

17 Q.No.7 ACCOUNTING CONCEPTS AND PRINCIPLES (a) GIVEN Indicate in each case whether or not the item has been handled in accordance with Generally Accepted Accounting Principles. If so, indicate which of the basic concept/principle has been followed. If not, indicate which concept/principle has been violated and why? Explain in one or two sentences. (i) Included on the balance sheet of the Swift Shop is the personal automobile of Mateen the owner. (ii) Each year the Sheraz Co. values its investment in Land at the current market price. (iii) Feroz Company makes furniture. The cost of particular chair is Rs.35. However, when the inventory figure is counted for the balance sheet the amount used for this chair is Rs.68, which is normal selling price. (iv) Samad Co. owns office equipment that was purchased seven years ago. It is still carried in the firm accounting records at the original cost. No depreciation has ever been taken on the equipment. (b) State the effects on income statement and balance sheet if a revenue expenditure was wrongly treated as capital expenditure. (c) Define GAAP and enumerate atleast four of these. SOLUTION 7 (a) (i) This transaction violated the concept of business entity which indicates that owner is separate from the business entity and no personal assets can be shown in the business balance sheet. (ii) This transaction violated the going concern principle which states that assets of the company should be valued at its costs rather than its market price. (iii) This transaction violated the principle of conservatism which states that inventory must be reported at cost, but not at its selling price. (iv) This transaction violated the matching principle which states that expenses should be offset against revenue. SOLUTION 7 (b) Net profit will increases in the income statement. Assets section of the balance sheet will also increase and owner s equity will also increase. SOLUTION 7 (c) Generally Accepted Accounting Principles (GAAP): In the USA, the rules, accounting standards, and accounting concepts followed by accountants in measuring, recording, and reporting transactions. There is also a requirement to state whether financial statements conform with GAAP. In the UK the term is more loosely used but is normally taken to mean accounting standards and the requirements of company legislation and the stock exchange. GAAP are the common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. Some of the principles are: Conservatism. Consistency. Disclosure principle. Going concern principle. B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 17

18 Q.No.8 ACCOUNTING FOR COMPANIES GIVEN The shareholders equity section of balance sheet of Wasim Ltd. as on June 30, 2000 was as under:- Authorized capital (200,000 shares of Rs.10 par) 2,000,000 Paid up capital 90,000 shares of Rs.10 par 900,000 Premium on shares 180,000 Retained earnings 520,000 Reserve for building extension 150,000 During the quarter ended September 30, the company performed the following transactions in addition to normal business: (i) The company received application alongwith application money for 80,000 shares in response to the issue of 100,000 shares of Rs.10 par at Rs.15/= to the public. The board of directors finalized the allotment by allotting 80,000 shares to the public and 20,000 shares to the underwriters. (ii) Closed the reserve for building extension account as the purpose is over. (iii) A computer costing Rs.90,000 was acquired by allotting 7,000 shares of Rs.10/= par. (iv) Purchased a fax machine for Rs.75,000 by allotting shares at the price of Rs per share as quoted at the stock exchange. (v) Issued 5,000 10% 5 year bonds of Rs.100 par for cash to be redeemed at Rs.110 at maturity. (vi) Created a reserve for redemption of bonds by Rs.40,000. (vii) Declared interim stock dividend of Rs.150,000 and cash dividend of Rs.200,000. (viii) Allotted shares of Rs.10 par at a premium of Rs.5 per share in settlement of the stock dividend. REQUIRED (i) Record the above transactions in General Journal. (ii) Prepare a partial Balance Sheet reporting the above facts. SOLUTION 8 (i) WASIM LTD. GENERAL JOURNAL 1 Bank (80,000 x 15) 1,200,000 Ordinary shares application 1,200,000 (To record the ordinary shares applications received at premium) 2 Ordinary shares application 1,200,000 Ordinary shares capital (80,000 x 10) 800,000 Ordinary shares premium (80,000 x 5) 400,000 (To record the ordinary shares issued at premium) 3 Bank (20,000 x 15) 300,000 Ordinary shares capital (20,000 x 10) 200,000 Ordinary shares premium (20,000 x 5) 100,000 (To record the ordinary shares issued at premium to the underwriter as per agreement) 4 Reserve for building extension 150,000 Retained earnings 150,000 (To record the closing of reserve for building extension) 5 Computer 90,000 Ordinary shares capital (7,000 x 10) 70,000 Ordinary shares premium 20,000 (To record the shares issued for purchase of computer) B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 18

19 6 Fax machine 75,000 Ordinary shares capital (6,000 x 10) 60,000 Ordinary shares premium (6,000 x 2.5) 15,000 (To record the purchase of fax machine by issuing shares at premium) 7 Bank (5,000 x 100) 500,000 Loss on redemption (5,000 x 10) 50,000 10% Debentures payable (5,000 x 100) 500,000 Premium on redemption (5,000 x 10) 50,000 (To record the issue of 10% debentures at par and payback at premium after 5 years) 8 Retained earnings 40,000 Reserve for redemption of bonds 40,000 (To record the reserve for redemption of bonds) 9 Retained earnings 350,000 Stock dividend payable 150,000 Cash dividend payable 200,000 (To record the cash and stock dividend declared) 10 Stock dividend payable 150,000 Ordinary shares capital (10,000 x 10) 100,000 Ordinary shares premium (10,000 x 5) 50,000 (To record the ordinary shares issued at premium in settlement of stock dividend) SOLUTION 8 (ii) Statement of Retained Earnings: Retained earnings (opening balance) 520,000 Less: Loss on bonds redemption (50,000) Add: Disposal of reserve for plant extension 150, ,000 Less: Reserves: Reserve for redemption of bonds 40,000 Total reserves (40,000) 580,000 Less: Dividends: Cash dividend 200,000 Stock dividend 150,000 Total dividends (350,000) Retained earnings (ending balance) 230,000 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 19

20 WASIM LTD. BALANCE SHEET AS ON 30 JUNE 2000 EQUITIES Authorized Capital: 200,000 ordinary Rs.10 each 2,000,000 ASSETS Shareholders Equity: 213,000 ordinary Rs.10 each 2,130,000 Share premium 765,000 Retained earnings 230,000 Reserve for bonds redemption 40,000 Total shareholders equity 3,165,000 Liabilities: Long-Term Liabilities: 10% Bonds payable 500,000 Premium on redemption 50,000 Total long term liabilities 550,000 Current Liabilities: Cash dividend payable 200,000 Total liabilities 750,000 Total equities 3,915,000 B. C o m I A c c o u n t i n g ( R e g u l a r / P r i v a t e ) Page 20