B.COM II ADVANCED AND COST ACCOUNTING

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 2008 B.COM II ADVANCED AND COST ACCOUNTING PRIVATE Compiled and Solved by: S.Hussain

ADVANCED AND COST ACCOUNTING 2008 PRIVATE Instructions: Attempt any five questions, three from Section A and two from Section B. SECTION A (ADVANCED ACCOUNTING) Q.No.1 ACCOUNTING FOR COMPANIES FINANCIAL STATEMENTS GIVEN Star Co. Ltd. was registered with capital of Rs.800,000 divided into shares of Rs.10 each. The following are the account balances of the company as on June 30, 2007: Debit Balances: Cash Rs.11,000, Allowance for bad debts Rs.1,000, Marketable securities Rs.6,000, Accounts receivable Rs.22,000, Merchandise inventory Rs.10,000, Machine cost Rs.55,000, Purchases Rs.325,000, Sales returns & allowances Rs.30,000, Office salaries expense Rs.13,000, Sales salaries expense Rs.15,000, Advertising expense Rs.8,000, Office rent expense Rs.24,000, Auditors fees Rs.5,000, Directors fee Rs.14,000, Discount shares Rs.10,000. Credit Balances: Accounts payable Rs.6,000, Debentures payable Rs.5,000, Shares capital Rs.110,000, Sales Rs.400,000, Retained earnings? Data for Adjustment on June 30, 2007: 1) Merchandise inventory valued at Rs.58,000. 2) Estimated allowance for bad debts Rs.1,300. 3) Depreciation expense for the year Rs.9,000. 4) Prepaid rent Rs.4,000. 5) Declared cash dividend Rs.4,000 & stock dividend Rs.1,000. Prepare: (i) As Income Statement for the year ended June 30, 2007. (ii) Statement of Retained Earnings. (iii) A Balance Sheet as of June 30, 2007 in a classified form. SOLUTION 1 (i) STAR CO. LTD. INCOME STATEMENT FOR THE PERIOD ENDED 30 JUNE 2007 Sales 400,000 Less: Sales return and allowances (30,000) Net sales 370,000 Less: Cost of Goods Sold: Merchandise inventory (opening) 10,000 Add: Purchases 325,000 Merchandise available for sale 335,000 Less: Merchandise inventory (ending) (58,000) Cost of goods sold (277,000) Gross profit 93,000 Less: Operating Expenses: Office salaries expense 13,000 Sales salaries expense 15,000 B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 2

Advertising expense 8,000 Office rent expense (24,000 4,000) 20,000 Auditors fees 5,000 Directors fees 14,000 Bad debts expense 2,300 Depreciation expense 9,000 Total operating expenses (86,300) Net profit 6,700 SOLUTION 1 (ii) STAR CO. LTD. STATEMENT OF RETAINED EARNINGS FOR THE PERIOD ENDED 30 JUNE 2007 Retained earnings (opening balance) 28,000 Add: Net profit for the period 6,700 Total retained earning 34,700 Less: Reserves and Dividends: Cash dividend 4,000 Stock dividend 1,000 Total dividends (5,000) Retained earnings (ending balance) 29,700 SOLUTION 1 (iii) STAR CO. LTD. BALANCE SHEET AS ON 30 JUNE 2007 Equities Assets Shareholder s Equity: Fixed Assets: Authorized Capital: Machine 55,000 80,000 ordinary shares Less: All for depreciation (9,000) @ Rs.10/- each 800,000 Total fixed assets 46,000 Issued & Paid-up Capital: Current Assets: 11,000 ordinary shares Prepaid rent 4,000 @ Rs.10/- each 110,000 Merchandise inventory 58,000 Less: Share discount (10,000) Marketable securities 6,000 Add: Retained earnings 29,700 A/c. receivable 22,000 Total shareholder s equity 129,700 Less: All for b/d (1,300) 20,700 Cash 11,000 Liabilities: Total current assets 99,700 Long Term Liabilities: Debentures payable 5,000 Total long term liabilities 5,000 Current Liabilities: Accounts payable 6,000 Cash dividend payable 4,000 Stock dividend payable 1,000 Total current liabilities 11,000 Total liabilities 16,000 Total equities 145,700 Total assets 145,700 B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 3

Computation of Retained Earnings: Total debits 549,000 Less: Total credits (521,000) Retained earnings Opening balance 28,000 Q.No.2 AMALGAMATION GIVEN Hafeez Co. Ltd and Rasheed Co. Ltd. decided to amalgamate their business and a new company Hameed Co. Ltd. was formed to take over all assets and liabilities of the two companies. Hameed Co. Ltd. issued 100,000 shares of Rs.10 each at Rs.26 to Hafeez Co. Ltd. and 98,000 shares of Rs.10 each at Rs.26 to Rasheed Co. Ltd. At the time of amalgamation following were the balance sheets of two companies: Hafeez Co. Ltd. Balance Sheet as on Dec. 31, 2007 Assets Equities Cash 110,000 Accounts payable 280,000 Accounts receivable 400,000 Share Capital: Merchandise inventory 600,000 190,000 shares of Rs.10 1,900,000 Building 1,300,000 General reserves 300,000 Furniture 70,000 2,480,000 2,480,000 Rasheed Co. Ltd. Balance Sheet as on Dec. 31, 2007 Assets Equities Cash 200,000 Accounts payable 200,000 Accounts receivable 350,000 Share Capital: Merchandise inventory 600,000 185,000 shares of Rs.10 1,850,000 Building 900,000 General reserves 100,000 Furniture 100,000 2,150,000 2,150,000 (i) Compute purchase consideration for each of the amalgamating company. (ii) Give all necessary entries in the General Journal of Hameed Co. Ltd. (iii) Prepare a balance sheet of Hameed Co. Ltd. after amalgamation. SOLUTION 2 (i) Computation of Purchase Consideration: Hafeez Co. Ltd. 100,000 ordinary shares @ Rs.26 each 2,600,000 Purchase consideration 2,600,000 Rasheed Co. Ltd. 98,000 ordinary shares @ Rs.26 each 2,548,000 Purchase consideration 2,548,000 B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 4

SOLUTION 2 (ii) HAMEED CO. LTD. GENERAL JOURNAL 1 Cash 110,000 Accounts receivable 400,000 Merchandise inventory 600,000 Building 1,300,000 Furniture 70,000 Goodwill 400,000 Accounts payable 280,000 Payable to Hafeez Co. Ltd. 2,600,000 (To record the all assets and liabilities of Hafeez Co. Ltd. were taken over by Hameed Co. Ltd.) 2 Payable to Hafeez Co. Ltd. 2,600,000 Ordinary shares capital (100,000 x 10) 1,000,000 Ordinary shares premium (100,000 x 16) 1,600,000 (To record the share issued at premium to Hafeez Co. Ltd. against purchase consideration) 3 Cash 200,000 Accounts receivable 350,000 Merchandise inventory 600,000 Building 900,000 Furniture 100,000 Goodwill 598,000 Accounts payable 200,000 Payable to Rasheed Co. Ltd. 2,548,000 (To record the all assets and liabilities of Rasheed Co. Ltd. were taken over by Hameed Co. Ltd.) 4 Payable to Rasheed Co. Ltd. 2,548,000 Ordinary shares capital (98,000 x 10) 980,000 Ordinary shares premium (98,000 x 16) 1,568,000 (To record the share issued at premium to Rasheed Co. Ltd. against purchase consideration) SOLUTION 2 (iii) HAMEED CO. LTD. BALANCE SHEET AS ON 31 DECEMBER 2007 Equities Assets Issued & Paid-up Capital: Fixed Assets: 198,000 ordinary shares Goodwill 998,000 @ Rs.10/- each 1,980,000 Building 2,200,000 Add: Share premium 3,168,000 Furniture 170,000 Total shareholder s equity 5,148,000 Total fixed assets 3,368,000 Liabilities: Current Assets: Accounts payable 480,000 Merchandise inventory 1,200,000 Total liabilities 480,000 Accounts receivable 750,000 B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 5

Cash 310,000 Total current assets 2,260,000 Total equities 5,628,000 Total assets 5,628,000 Q.No.3 ACCOUNTING FOR INSTALLMENT SALES GIVEN Rehan Co. Ltd. reports profits on installment basis. It uses perpetual inventory system, for recording merchandise. The transactions for the year ended Dec. 31, 2007 are as under: (i) Purchased merchandise on account for Rs.360,000. (ii) Sales on installment basis Rs.450,000. (iii) Cost of installment sales Rs.250,000. (iv) Collection of installment accounts receivable Rs.300,000. (v) Payment of accounts payable Rs.155,000. (vi) Repossession of goods sold on installment basis: Installment account cancelled Rs.22,000. Repossession of goods valued Rs.11,000. (vii) Expenses incurred but not paid Rs.8,000. Give entries in General Journal to record the above transactions including adjusting and closing entries. SOLUTION 3 Computation of Unrealized Gross Profit: Unrealized gross profit = Installment sales Cost of installment sales Unrealized gross profit = 450,000 250,000 Unrealized gross profit = 200,000 Computation of Unrealized Gross Profit Rate (DGP%): Unrealized gross profit rate = Unrealized gross profit x 100 Installment sales Unrealized gross profit rate = 200,000 x 100 450,000 Unrealized gross profit rate = 44.44% Computation of Realized Gross Profit: Realized gross profit = Cash collection X DGP% Realized gross profit = 300,000 x 44.44% Realized gross profit = 133,320 Computation of Gain or Loss on Repossession: Installment accounts receivable cancelled 22,000 Less: Unrealized gross profit (22,000 x 44.44%) (9,777) Book value 12,223 Less: Merchandise repossessed at fair market value (11,000) Loss on repossession 1,223 B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 6

REHAN CO. LTD. GENERAL JOURNAL 1 Merchandise 360,000 Accounts payable 360,000 (To record the merchandise purchased on account) 2 Installment accounts receivable 450,000 Installment sales 450,000 (To record the good sold on installment basis) 3 Cash 300,000 Installment accounts receivable 300,000 (To record the cash collected on installment basis) 4 Accounts payable 155,000 Cash 155,000 (To record the payment to suppliers) 5 Expenses 8,000 Expenses payable 8,000 (To record the expenses incurred but not paid) REHAN CO. LTD. ADJUSTING ENTRIES 1 Cost of installment sales 250,000 Merchandise 250,000 (To record the cost of installment sales) 2 Installment sales 450,000 Cost of installment sales 250,000 Unrealized gross profit 200,000 (To adjust the unrealized gross profit) 3 Unrealized gross profit 133,320 Realized gross profit 133,320 (To adjust the realized gross profit) 4 Merchandise repossessed 11,000 Unrealized gross profit 9,777 Loss on repossession 1,223 Installment accounts receivable 22,000 (To adjust the repossession of merchandise) REHAN CO. LTD. CLOSING ENTRIES 1 Expense and revenue summary 9,223 Expenses 8,000 Loss on repossession 1,223 (To close the all expense accounts) 2 Realized gross profit 133,320 Expense and revenue summary 133,320 (To close the all income accounts) 3 Expense and revenue summary 124,097 Capital 124,097 (To close the expense and revenue summary account) B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 7

Q.No.4 HEAD OFFICE AND BRANCH ACCOUNTING GIVEN Following are the transactions entered into by Zafar Co. Ltd. with its branch at Hyderabad during the year ended June 30, 2007. The head office billed merchandise to branch at 25% above cost. (i) Shipped to the branch merchandise billed at Rs.70,000. (ii) The branch returned merchandise at billed price of Rs.1,500. (iii) At June 30, the branch inventory was valued at billed price of Rs.3,000. (iv) The branch reported a loss of Rs.4,500 for the year. (i) Give journal entries on the books of head office to record above transactions. (ii) Calculate and record the profit it from allowance for overvaluation. SOLUTION 4 (i) ZAFAR CO. LTD. HEAD OFFICE GENERAL JOURNAL 1 Hyderabad branch 70,000 Merchandise sent 56,000 Allowance for overvaluation 14,000 (To record the merchandise sent to Hyderabad Branch) 2 Merchandise returned 1,200 Allowance for overvaluation 300 Hyderabad branch 1,500 (To record the branch returned the merchandise) 3 Profit and loss account 4,500 Hyderabad branch 4,500 (To record the net loss reported by branch) SOLUTION 4 (ii) Computation of Realized Allowance for Overvaluation: Particulars Billed Cost Allowance for over valuation Merchandise sent to branch (70,000 x 25/125) 70,000 56,000 14,000 Less: Merchandise returned by branch (1,500 x 25/125) (1,500) (1,200) (300) Unadjusted allowance for overvaluation 68,500 54,800 13,700 Less: Merchandise inventory ending (3,000 x 25/125) (3,000) (2,400) (600) Adjusted allowance for overvaluation 65,500 52,400 13,100 ZAFAR CO. LTD. HEAD OFFICE GENERAL JOURNAL 1 Allowance for overvaluation 13,100 Profit and loss account 13,100 (To adjust the allowance for overvaluation) B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 8

Q.No.5 FINANCIAL STATEMENT ANALYSIS GIVEN The selected data given below are taken from the records of the Hasan Co. Ltd. at the end of the year 2007: Cash 30,000 Accounts receivable (beg) 4,150 Prepaid insurance 12,500 Accounts receivable (end) 43,500 Inventory (beginning) 18,150 Sales 255,000 Inventory (ending) 32,500 Operating expenses 52,300 Purchases 120,000 Accounts payable 22,500 Share capital (par value Rs.10) 250,000 Accrued expenses 32,500 Retained earnings 30,000 Total assets 650,000 Determine the following ratios on the basis of the above information: (i) Working capital (ii) Acid test ratio (iii) Current ratio (iv) Operating expense ratio (v) Rate of gross profit on sales (vi) Equity ratio (vii) Accounts receivable turnover rate (viii) Inventory turnover rate SOLUTION 5 (i) Working Capital: Current Assets: Cash 30,000 Accounts receivable (end) 43,500 Total quick assets 73,500 Merchandise inventory (end) 32,500 Prepaid insurance 12,500 Total current assets: 118,500 Less: Total Current Liabilities: Accounts payable 22,500 Accrued expenses 32,500 Total current liabilities 55,000 Working capital 63,500 (ii) Acid Test Ratio: Acid test ratio = Total quick assets Total current liabilities Acid test ratio = 73,500 55,000 Acid test ratio = 1.34 : 1 (iii) Current Ratio: Current ratio = Total current assets Total current liabilities Current ratio = 118,500 55,000 Current ratio = 2.15 : 1 B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 9

(iv) Operating Expense Ratio: Operating expense ratio = Operating expenses Net sales Operating expense ratio = 52,300 255,000 Operating expense ratio = 0.21 : 1 (v) Rate of Gross Profit on Sale: Rate of gross profit on sale = Gross profit X 100 Net sales Rate of gross profit on sale = 149,350 X 100 255,000 Rate of gross profit on sale = 58.57% Computation of Gross Profit: Sales 255,000 Less: Cost of Goods Sold: Merchandise inventory (beginning) 18,150 Add: Purchases 120,000 Merchandise available for sale 138,150 Less: Merchandise inventory (ending) (32,500) Cost of goods sold (105,650) Gross profit 149,350 (vi) Equity Ratio: Equity ratio = Total shareholders equity Total assets Equity ratio = 280,000 650,000 Equity ratio = 0.43 : 1 Computation of Total Shareholders Equity: Share capital 250,000 Add: Retained earnings 30,000 Total shareholders equity 280,000 (vii) Accounts Receivable Turnover Rate: Receivable turnover in times = Net credit sales Average receivable Receivable turnover in times = 255,000 (4,150 + 43,500) / 2 Receivable turnover in times = 255,000 23,825 Receivable turnover in times = 10.70 times Receivable turnover in days = 365 Receivable turnover in times Receivable turnover in days = 365 10.70 Receivable turnover in days = 34 days B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 10

(viii) Inventory Turnover Rate: Inventory turnover in times = Cost of goods sold Average inventory Inventory turnover in times = 105,650 (18,150 + 32,500) / 2 Inventory turnover in times = 105,650 25,325 Inventory turnover in times = 4.17 times Inventory turnover in days = 365 Inventory turnover in times Inventory turnover in days = 365 4.17 Inventory turnover in days = 88 days SECTION B (COST ACCOUNTING) Q.No.6 ACCOUNTING FOR MANUFACTURING CONCERN GIVEN Moon Co. has provided following for the year ended December 31, 2007: Sales 655,000 Advertising expense 65,000 Direct labour cost incurred 148,000 Direct material purchased 225,000 Building rent: 60% allocated to manufacturing and 30% to administrative & selling functions 95,000 Utilities factory 50,000 Maintenance factory 32,000 Selling and administrative salaries 95,000 FOH applied at the rate of 90% of direct labour inventories Jan. 1, 2007 Dec. 31, 2007 Raw material 21,000 10,000 Work in process 28,000 42,000 Finished goods 42,000 45,000 (i) Prepare a Statement of Cost of Goods Manufactured for the year ended Dec. 31, 2007. (ii) Prepare an Income Statement. SOLUTION 6 (i) MOON CO. STATEMENT OF COST OF GOODS MANUFACTURED FOR THE PERIOD ENDED 31 DECEMBER 2007 Direct Materials: Raw materials (opening) 21,000 Add: Purchases of raw materials 225,000 Raw materials available for use 246,000 Less: Raw materials (ending) (10,000) Raw materials used 236,000 Add: Direct labour 148,000 Prime cost 384,000 Add: Factory Overheads: Building rent (95,000 x 60%) 57,000 B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 11

Utilities factory 50,000 Maintenance factory 32,000 Total factory overheads 139,000 Total manufacturing cost 523,000 Add: Work in process (opening) 28,000 Total work in process during the period 551,000 Less: Work in process (ending) (42,000) Cost of goods manufactured 509,000 SOLUTION 6 (ii) MOON CO. INCOME STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2007 Sales 655,000 Less: Cost of Goods Sold: Finished goods (opening) 42,000 Add: Cost of goods manufactured 509,000 Merchandise available for sale 551,000 Less: Finished goods (ending) (45,000) Cost of goods sold (506,000) Gross profit 149,000 Less: Operating Expenses: Advertising expense 65,000 Building rent (95,000 x 30%) 28,500 Selling and administrative salaries 95,000 Total operating expenses (188,500) Net loss (39,500) Q.No.7 JOB ORDER COSTING GIVEN Skyline Co. uses Job Order Cost System. The manufacturing operations for the year ended December 31, 2007 were as follows: (i) Purchased raw materials on account Rs.72,000. (ii) Materials issued to factory of Rs.64,500 of which Rs.4,500 was indirect materials. (iii) Direct labour cost incurred Rs.58,000 and Rs.4,800 indirect labours. (iv) Factory overhead application rate was 80% on direct labour cost. (v) Factory overhead cost incurred on account Rs.35,000. (vi) Cost of jobs completed Rs.150,000. (vii) Cost of jobs Rs.130,000. (viii) Sales on account Rs.170,000. Record all the above transactions in the General Journal & give an entry to close the factory overhead account. B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 12

SOLUTION 7 SKYLINE CO. GENERAL JOURNAL FOR THE PERIOD DECEMBER 2007 1 Raw materials 72,000 Accounts payable 72,000 (To record the purchase of raw material on account) 2 Work in process 60,000 Factory overhead 4,500 Raw material 64,500 (To record the raw material issued) 3 Work in process 58,000 Factory overhead 4,800 Accrued payroll 62,800 (To record the direct and indirect labour used) 4 Work in process (58,000 x 80%) 46,400 Factory overhead applied 46,400 (To record the applied factory overhead) 5 Factory overhead 35,000 Accounts payable 35,000 (To record the factory overhead costs incurred) 6 Finished goods 150,000 Work in process 150,000 (To record the goods completed and transferred to finished goods) 7 Cost of goods sold 130,000 Finished goods 130,000 (To record the cost of goods sold) 8 Accounts receivable 170,000 Sales 170,000 (To record the goods sold on account) 9 Over-applied factory overhead 2,100 Cost of goods sold 2,100 (To adjust the over-applied factory overhead) Factory Overhead 2 Raw material 4,500 4 Work in process 46,400 3 Accrued payroll 4,800 5 Accounts payable 35,000 9 Cost of goods sold 2,100 46,400 46,400 B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 13

Q.No.8 STANDARD COSTING GIVEN Irfan Co. provided following standard and actual cost data for the month of June, 2007: Standards Materials 500 Kgs @ Rs.1.50 Labour 500 hours @ Rs.3.50 Factory overheads Rs.2.70 per labour hour Actual Materials 490 Kgs @ Rs.1.80 Labour 510 hours @ Rs.3.60 Factory overheads Rs.1,480 (i) Compute material price variance, material quantity variance, labour rate variance, labour efficiency variance and overhead variance. (ii) General Journal entries for the above. (iii) General Journal entries to close the variance accounts. SOLUTION 8 (i) Computation of Material Price Variance: Material price variance = (Standard price Actual price) x Actual quantity Material price variance = (1.50 1.80) x 490 Material price variance = (147) (Unfavourable) Computation of Material Quantity Variance: Material quantity variance = (Standard quantity Actual quantity) x Standard price Material quantity variance = (500 490) x 1.50 Material quantity variance = 15 (Favourable) Computation of Labour Rate Variance: Labour rate variance = (Standard price Actual price) x Actual hours Labour rate variance = (3.50 3.60) x 510 Labour rate variance = (51) (Unfavourable) Computation of Labour Efficiency Variance: Labour efficiency variance = (Standard hours Actual hours) x Standard price Labour efficiency variance = (500 510) x 3.50 Labour efficiency variance = (35) (Unfavourable) Computation of Factory Overhead Variance: Factory overhead variance = Standard cost Actual cost Factory overhead variance = (500 x 2.70) 1,480 Factory overhead variance = 1,350 1,480 Factory overhead variance = (130) (Unfavourable) B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 14

SOLUTION 8 (ii) IRFAN CO. GENERAL JOURNAL 1 Work in process (500 x 1.50) 750 Material price variance 147 Material quantity variance 15 Raw material (490 x 1.80) 882 (To record the material price and quantity variance) 2 Work in process (500 x 3.50) 1,750 Labour rate variance 51 Labour efficiency variance 35 Accrued payroll (510 x 3.60) 1,836 (To record the labour rate and efficiency variance) 3 Work in process (500 x 2.70) 1,350 Factory overhead variance 130 Factory overhead 1,480 (To record the factory overhead variance) SOLUTION 8 (iii) IRFAN CO. CLOSING ENTRIES 1 Material quantity variance 15 Cost of goods sold 348 Material price variance 147 Labour efficiency variance 35 Labour rate variance 51 Factory overhead variance 130 (To close the all variances) B. C o m II A d v a n c e d & C o s t A c c o u n t i n g 2 0 0 8 ( P r i v a t e ) Page 15