XII ACCOUNTING REGULAR / PRIVATE. S.Hussain

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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 XII ACCOUNTING REGULAR / PRIVATE Compiled and Solved by: S.Hussain

2 ACCOUNTING 2005 REGULAR / PRIVATE NOTE: Attempt any four questions. Q.No.1 SINGLE ENTRY (a) What do you understand by Single Entry? State its main features. (b) Mr. Adnan maintains his books on single entry system and uses only the cashbook. A summary of his receipts and cash payments for the year ending Dec. 31, 2004 is as follows: Receipts Payments Capital 20,000 Salaries expenses 6,000 Commission income 8,000 Rent 2,000 Loan 2,000 Furniture 5,000 Drawings 3,000 Additional Information on Dec. 31, 2004: (i) Accrued salary Rs.2,000. (ii) Prepaid rent Rs.500. (iii) Accrued commission income Rs.5,000. (iv) Depreciation expense on furniture Rs.1,000. (i) Statement of profit or loss for the year ended Dec. 31, (ii) Statement of Affairs as of Dec. 31, SOLUTION 1 (a) SINGLE ENTRY Single entry system is an incomplete form of recording financial transactions. It is the system, which does not record two aspects or accounts of all the financial transactions. It is the system, which has no fixed set of rules to record the financial transactions of the business. Single entry system records only one aspect of transaction. Thus, single entry system is not a proper system of recording financial transactions, which fails to present complete information required by the management. Single entry system mainly maintains cash book and personal accounts of debtors and creditors. Single entry system ignores nominal account and real account except cash account. Hence, it is incomplete form of double entry system, which fails to disclose true profit or loss and financial position of a business organization. Features Of Single Entry System The following are the main features of single entry system: 1. No Fixed Rules Single entry system is not guided by fixed set of accounting rules for determining the amount of profit and preparing the financial statements. 2. Incomplete System Single entry system is an incomplete system of accounting, which does not record all the aspects of financial transactions of the business. 3. Cash Book Single entry system maintains cash book for recording cash receipts and payments of the business organization during a given period of time. 4. Personal Account Single entry system maintains personal accounts of all the debtors and creditors for determining the amount of credit sales and credit purchases during a given period of time. X I 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 5. Variations In Application Single entry system has no fixed set of principles for recording financial transactions and preparing different financial statements. Hence, it has variations in its application from one business to another. SOLUTION 1 (b) MR. ADNAN STATEMENT OF PROFIT AND LOSS FOR THE PERIOD ENDED 31 DECEMBER 2004 Commission income (8,000 5,000) 13,000 Less: Operating Expenses: Salaries expense (6, ,000) 8,000 Rent expense (2, ) 1,500 Depreciation expense 1,000 Total operating expenses (10,500) Net profit 2,500 MR. ADNAN STATEMENT OF AFFAIRS AS ON 31 DECEMBER 2004 ASSETS EQUITIES Current Assets: Liabilities: Cash 14,000 Loan 2,000 Prepaid rent 500 Salaries payable 2,000 Commission receivable 5,000 Total liabilities 4,000 Total current assets 19,500 Owner s Equity: Fixed Assets: Capital 20,000 Furniture 5,000 Add: Net profit 2,500 Less: All for depreciation (1,000) 22,500 Total fixed assets 4,000 Less: Drawings (3,000) Total owner s equity 19,500 Total assets 23,500 Total equities 23,500 Computation of Cash: Capital 20,000 Commission income 8,000 Loan 2,000 Total cash receipts 30,000 Less: Total Cash Payments: Salaries expenses 6,000 Rent 2,000 Furniture 5,000 Drawings 3,000 Total cash payments (16,000) Cash balance 14,000 X I 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 Additional Working: MR. ADNAN ADJUSTING ENTRIES FOR THE PERIOD ENDED 31 DECEMBER Salaries expense 2,000 Salaries payable 2,000 (To adjust the unpaid salaries) 2 Prepaid rent 500 Rent expense 500 (To adjust the rent expense) 3 Commission receivable 5,000 Commission income 5,000 (To adjust the accrued commission income) 4 Depreciation expense 1,000 Allowance for depreciation Furniture 1,000 (To adjust the depreciation expense) Q.No.2 PARTNERSHIP DISTRIBUTION OF PROFIT OR LOSS ACCOUNT GIVEN Partners A and B have beginning capitals of Rs.80,000 and Rs.120,000 respectively. Profit and loss sharing is as follows: Interest at 20% on beginning capitals, salaries to A and B of Rs.20,000 and Rs.10,000 respectively and remainder amount is shared in the ratio of 2:3. (i) Choose from the given options how much of Rs.60,000 net income would be distributed to A? a. Rs.36,000 b. Rs.32,000 c. Rs.31,000 d. Rs.28,000 (ii) Make entries in the general journal for distribution of net income to each partner. SOLUTION 2 INCOME DISTRIBUTION SUMMARY FOR THE PERIOD ENDED A B Total Capital balances 80, , ,000 Net profit 60,000 20% interest on opening capital balances 16,000 24,000 40,000 Salaries 20,000 10,000 30,000 Distribution of remaining loss in the ratio 2:3 (4,000) (6,000) (10,000) Total 32,000 28,000 60,000 Option b is correct answer. A will receive Rs.32, Expense and revenue summary 60,000 A current account 32,000 B current account 28,000 (To record the distribution of net profit) X I 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 Q.No.3(a) PARTNERSHIP ADMISSION OF A NEW PARTNER GIVEN X and Y are partners who share profit and loss equally. They admit Z as a new partner. Z contributes Rs.240,000 for one third interest in the new partnership. (i) Record entry to admit Z sharing as Rs.40,000 bonus each to X and Y. (ii) What is the total capital of the new partnership? Q.No.3(b) PARTNERSHIP RETIREMENT OF A NEW PARTNER GIVEN A, B and C are partners sharing profits and losses in the ratio of 5:3:2 respectively. Their capital balances are A Rs.260,000; B Rs.160,000 and C Rs.260,000. A retires from the firm on March 31 and is paid Rs.280,000 from partnership firm. (i) Record journal entries to retire A from the firm. (ii) Give reason that might cause A to receive a bonus. SOLUTION 3 (a) 1 Cash 240,000 X Capital 40,000 Y Capital 40,000 Z Capital 160,000 (To record the admission of Z) Computation of Total Capital: For 1/3 interest, Z capital 160,000 Therefore total capital of firm (160,000 x 3/1) 480,000 SOLUTION 3 (b) Computation: Capital of A 260,000 Less: Amount paid to A (280,000) Bonus to A 20,000 1 A Capital 260,000 B Capital (20,000 x 3/5) 12,000 C Capital (20,000 x 2/5) 8,000 Cash 280,000 (To record the retirement of A) Total capital of A was Rs.260,000 and the amount paid to A was Rs.280,000. Rs.20,000 was paid in excess to A. Therefore the excess amount received by A is bonus which was given to him by B and C by reducing their capitals. X I 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.4(a) PARTNERSHIP DISSOLUTION OF PARTNERSHIP GIVEN Anis, Qamer and Mehdi are equal partners in a business with capital balances of Rs.231,200; Rs.177,200 and Rs.191,600 respectively. The current year of operation did not go well and the partners finally decided to dissolve the partnership. On December 31, after the assets were converted to cash and all the creditors were paid, only Rs.60,000 cash remained in the firm. (i) Compute capital balances of partners after the realization of assets and payments of liabilities. (ii) Make journal entry to record the cash receipt from the deficient partner and also the entry for the final disbursement of cash to partners. Q.No.4(b) PARTNERSHIP DISSOLUTION OF PARTNERSHIP GIVEN In the process of dissolution of X, Y, Z partnership, non-cash assets were sold for Rs.50,000 and the related gain or loss on realization resulted in debits to capital accounts of partners X, Y and Z for Rs.12,000; Rs.9,000 and Rs.9,000 respectively. (i) Determine the gain or loss on the realization of assets. (ii) Determine the partners profit and loss as per capital ratio. (iii) Compute the book value of the non-cash assets sold. SOLUTION 4 (a) LIQUIDATION SUMMARY FOR THE PERIOD ENDED 31 DECEMBER Anis Qamer Mehdi Capital Capital Capital Balances 231, , ,600 Distribution of loss on realization (540,000 x 1:1:1) (180,000) (180,000) (180,000) Balances 51,200 (2,800) 11,600 Total capital = 231, , ,600 = 600,000 Loss on realization = Total capital Available cash Loss on realization = 600,000 60,000 = 540,000 FOR THE PERIOD ENDED 31 DECEMBER 1 Cash 2,800 Qamer Capital 2,800 (To record the capital deficiency met by Qamer) 2 Anis Capital 51,200 Mehdi Capital 11,600 Cash 62,800 (To record the distribution of remaining cash) X I 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 4 (b) Computation of Gain or Loss on Realization: X capital account debited (Loss) 12,000 Y capital account debited (Loss) 9,000 Z capital account debited (Loss) 9,000 Loss on realization 30,000 Computation of Partners Ratio as per Capital: X Ratio Y Ratio Z Ratio Total Loss distribution 12,000 9,000 9,000 30,000 Ratio (divided by 3,000) Computation of Book Value of Non-Cash Assets: Cash sale of non-cash assets 50,000 Add: Loss on sale of assets 30,000 Book value of non-cash assets 80,000 Q.No.5 ISSUE OF SHARES GIVEN Mehmood Ltd. was registered with the authorized capital of Rs.2,000,000 divided into 200,000 ordinary shares of Rs.10 each. The company offered to the public 170,000 shares for subscription at par. The applications for 150,000 shares were received. The underwriters, under the agreement, subscribed for the remaining 20,000 shares. The company paid 2% underwriting commission. The company also completed the following transactions: (i) Issued 4,200 shares at par to the promoters in consideration for their services for the promotion of the company. (ii) Purchased equipment for Rs.80,000 and issued 7,600 shares of Rs.10 each. (iii) Purchased office building for Rs.130,000 and issued 12,000 shares of Rs.10 each as purchase consideration. Record the above transactions in the General Journal of the company. SOLUTION 5 MEHMOOD LTD. 1 Bank (150,000 x 10) 1,500,000 Ordinary shares application 1,500,000 (To record the shares application received at par) 2 Ordinary shares application 1,500,000 Ordinary share capital (150,000 x 10) 1,500,000 (To record the shares issued to public at par) 3 Bank (20,000 x 10) 200,000 Ordinary share capital (20,000 x 10) 200,000 (To record the shares issued to underwriter at par) 4 Commission expense 4,000 Bank (200,000 x 2%) 4,000 (To record the commission paid to underwriter) X I 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 5 Preliminary expenses 42,000 Ordinary shares capital (4,200 x 10) 42,000 (To record the shares issued to promoters at par) 6 Equipment 80,000 Ordinary share capital (7,600 x 10) 76,000 Ordinary share premium 4,000 (To record the purchase of equipment by issuing shares at premium)) 7 Office building 130,000 Ordinary share capital (12,000 x 10) 120,000 Ordinary share premium 10,000 (To record the purchase of office building by issuing shares at premium) Q.No.6 APPROPRIATION OF RETAINED EARNINGS GIVEN The shareholders equity of Habeeb Limited on January 1, 2004, appears as follows: Ordinary share capital: 60,000 shares of Rs.10 par value Rs.600,000 Ordinary shares premium Rs.300,000 Unappropriated retained earnings Rs.584,000 During the year 2004, the following transactions occurred: July 16: The board of directors of the company appropriated Rs.160,000 of retained earnings for the plant expansion. Dec. 12: Declared a stock dividend of Rs.1.50 per share. Dec. 31: Closed the net of Rs.200,000 from income summary account to retained earnings. (i) Prepare journal entries to record the above transactions. (ii) Prepare retained earnings statement for the year (iii) The stock dividend was issued on January 10, The market value of ordinary shares is Rs.15 per share. Make necessary journal entries. SOLUTION 6 (i) HABEEB LIMITED 16 July Retained earnings 160, Reserve for plant extension 160,000 (To record the reserve for plant extension) 12 Dec Retained earnings 90, Stock dividend payable (60,000 x 1.50) 90,000 (To record the declaration of stock dividend) 31 Dec Expense and revenue summary 200, Retained earnings 200,000 (To record the transfer of net income to retained earnings account) X I 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 SOLUTION 6 (ii) HABEEB LIMITED STATEMENT OF RETAINED EARNINGS FOR THE PERIOD ENDED 31 DECEMBER 2004 Unappropriated retained earnings 584,000 Add: Net income for the period 200,000 Total retained earning 784,000 Less: Reserves: Reserve for plant expansion (160,000) (624,000 Less: Stock dividend (90,000) Retained earnings (ending balance) 534,000 SOLUTION 6 (iii) HABEEB LIMITED 1 Jan Stock dividend payable 90, Ordinary shares capital (6,000 x 10) 60,000 Ordinary shares premium (6,000 x 5) 30,000 (To record the shares issued at premium for the settlement of stock dividend) Q.No.7 DEPRECIATION (a) GIVEN Assume that an asset costs Rs.20,000 and has an estimated life of five years. The estimated salvage value at the end of the life of the asset is Rs.2,000. The company uses Diminishing Balance Method at the rate of 40%. (i) Compute the depreciation for five years. (ii) Make adjusting entries to record the depreciation for 4 th and 5 th years. (b) Distinguish between Revenue Expenditure and Capital Expenditure and state how the difference should be recorded. SOLUTION 7 (a) Computation of Depreciation Expense by Diminishing Balance Method: Annual depreciation = Cost/Book value x Rate (%) Book value = Cost Allowance for depreciation Year Cost/Book Value Rate Depreciation Expense Book Value 1 st Year 20,000 40% 8,000 20,000 8,000 = 12,000 2 nd Year 12,000 40% 4,800 12,000 4,800 = 7,200 3 rd Year 7,200 40% 2,880 7,200 2,880 = 4,320 4 th Year 4,320 40% 1,728 4,320 1,728 = 2,592 5 th Year 2,592 40% 1,037 2,592 1,037 = 1,555 X I 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 M/S. 4 th Depreciation expense 1,728 Year Allowance for depreciation 1,728 (To record the depreciation expense) 4 th Expense and revenue summary 1,728 Year Depreciation expense 1,728 (To close the depreciation expense) 5 th Depreciation expense 1,037 Year Allowance for depreciation 1,037 (To record the depreciation expense) 5 th Expense and revenue summary 1,037 Year Depreciation expense 1,037 (To close the depreciation expense) SOLUTION 7 (b) Difference between Capital Expenditure and Revenue Expenditure: BASIS OF DIFFERENCE CAPITAL EXPENDITURE REVENUE EXPENDITURE 1. Purpose It is incurred for the purchase of fixed assets. It is incurred for the maintenance of fixed assets. 2. Earning Capacity It increases the earning capacity of the business. It does not increase the earning capacity of the business. 3. Periodicity of Its benefits are spread over a Its benefit is only for one accounting Benefit 4. Placement in Financial Statements number of years. It is an item of balance sheet and is shown as an asset. period. It is an item of trading and profit and loss account and is shown on the debit side of either of the two. 5. Recording Asset (Debit) Expense (Debit) Cash/A/c payable (Credit) Cash/A/c payable (Credit) X I 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

XII ACCOUNTING REGULAR / PRIVATE. S.Hussain

XII ACCOUNTING REGULAR / PRIVATE. S.Hussain 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 www.a4accounting.net