PRINCIPLES OF ACCOUNTING b.com part I

PRINCIPLES OF ACCOUNTING b.com part I 2013 PRIVATE (SUPPLEMENTARY) Solved Paper Compiled & Solved by: Sameer Hussain

Instructions: (1) Attempt any FIVE questions. (2) All questions carry equal marks. (3) Use of calculator is allowed. Do not use abbreviations. (4) Answers without necessary computations will not be accepted. (5) All journal entries should be properly dated, intended and narrated. Q.No.1 WORKSHEET Unadjusted trial balance of Zulfiqar & Company on December 31, 2013 as under: Title of Accounts Debit Credit Cash 23,600 Accounts receivable 25,000 Office supplies 6,000 Furniture 40,000 Allowance for depreciation Furniture 5,000 Prepaid advertising 7,000 Merchandise inventory (1.1.2013) 10,000 Accounts payable 15,000 Allowance for bad debts 400 Commission income 8,000 Sales 120,000 Purchases 85,000 Salaries expenses 12,000 Insurance expense 10,000 Zulfiqar Capital 75,000 Zulfiqar Drawings 4,000 Total 223,000 223,000 Supplementary Data for Adjustments: (i) Merchandise inventory on December 31, 2013 was valued at Rs.15,000. (ii) Office supplies used during the year Rs.2,500. (iii) Salaries expense for the year amounted to Rs.15,000. (iv) Unearned commission amounted to Rs.1,000. (v) Bad debts is estimated to be 10% of accounts receivable. (vi) Depreciation is charged @ 15% by diminishing balance method. Prepare ten column worksheet. SOLUTION 1 ZULFIQAR & COMPANY TEN COLUMN WORK SHEET FOR THE PERIOD ENDED 31 DECEMBER 2013 Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 1

Particulars Cash Accounts receivable Office supplies Furniture Allowance for depreciation Prepaid advertising Merchandise inventory Accounts payable Allowance for bad debts Commission income Sales Purchases Salaries expenses Insurance expenses Zulfiqar Capital Zulfiqar Drawings Office supplies expense Salaries payable Unearned commission Bad debts expense Depreciation expense Merchandise inventory Net income Trial Balance DR. CR. 23,600 25,000 6,000 40,000 5,000 7,000 10,000 400 15,000 8,000 120,000 85,000 12,000 10,000 4,000 75,000 223,000 223,000 Adjustments DR. CR. 2,500 5,250 2,900 1,000 3,000 2,500 3,000 2,900 1,000 5,250 14,650 14,650 Adjusted Trial Bal. DR. CR. 23,600 25,000 3,500 40,000 10,250 7,000 10,000 15,000 2,500 7,000 120,000 85,000 15,000 10,000 4,000 75,000 2,500 3,000 2,900 1,000 5,250 233,750 233,750 Income Statement DR. CR. 10,000 7,000 120,000 85,000 15,000 10,000 2,500 2,900 5,250 15,000 130,650 142,000 11,350 142,000 142,000 Balance Sheet DR. CR. 23,600 25,000 3,500 40,000 10,250 7,000 15,000 2,500 4,000 75,000 3,000 1,000 15,000 118,100 106,750 118,100 11,350 118,100 Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 2

Q.No.2 ADJUSTING AND CLOSING ENTRIES From the data given in question # 1, prepare the adjusting and closing entries. SOLUTION 2 ZULFIQAR & COMPANY ADJUSTING ENTRIES FOR THE PERIOD ENDED 31 DECEMBER 2013 1 Merchandise inventory 15,000 Expense and revenue summary 15,000 (To close the ending inventory) 2 Office supplies expense 2,500 Office supplies 2,500 (To adjust the office supplies) 3 Salaries expense 3,000 Salaries payable 3,000 (To adjust the unpaid salaries) 4 Commission income 1,000 Unearned commission 1,000 (To adjust the commission income) 5 Bad debts expense 2,900 Allowance for bad debts 2,900 (To adjust the bad debts expense) 6 Depreciation expenses 5,250 Allowance for depreciation 5,250 (To adjust the depreciation expense) ZULFIQAR & COMPANY CLOSING ENTRIES FOR THE PERIOD ENDED 31 DECEMBER 2013 1 Expense and revenue summary 130,650 Merchandise inventory 10,000 Purchases 85,000 Salaries expenses 15,000 Insurance expenses 10,000 Office supplies expenses 2,500 Bad debts expenses 2,900 Depreciation expenses 5,250 (To close the various expense accounts) 2 Sales 120,000 Commission income 7,000 Merchandise inventory 15,000 Expense and revenue summary 142,000 (To close the various income accounts) Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 3

3 Expense and revenue summary 11,350 Zulfiqar Capital 11,350 (To close the expense and revenue summary account) 4 Zulfiqar Capital 4,000 Zulfiqar Drawings 4,000 (To close the drawings account) Q.No.3 VALUATION OF ACCOUNTS RECEIVABLE On January 1, 2013, Asghar Company showed the accounts receivable account balance of Rs.400,000 and the allowance for bad debts showed a credit balance of Rs.20,000. During the year 2013 transactions relating to accounts receivable were as under: (a) Total sales Rs.900,000 including cash sales of Rs.100,000. (b) Sales return and allowance Rs.30,000. (c) Sales discount Rs.20,000. (d) Customer s account written off during the year Rs.10,000. (e) Cash collected from credit customers Rs.500,000. (f) A customer s account is showing a credit balance of Rs.5,000. (g) A previously written off account of Rs.12,000 was subsequently recovered to the extent of Rs.8,000. (h) Promissory note received from customers to apply on account Rs.25,000. As per company s policy, allowance for bad debts on December 31, 2013 shall be equal to 5% of accounts receivable year-end balance. (a) Record the above transactions in the General Journal including the year-end adjusting entry. (b) Prepare allowance for bad debts account. (c) Prepare a partial balance sheet as on December 31, 2013. SOLUTION 3 (a) ASGHAR COMPANY (a) Accounts receivable 800,000 Cash 100,000 Sales 900,000 (To record the goods sold for cash and on credit) (b) Sales return and allowance 30,000 Accounts receivable 30,000 (To record the goods return by customers) (c) Sales discount 20,000 Accounts receivable 20,000 (To record the discount allowed to customers) (d) Allowance for bad debts 10,000 Accounts receivable 10,000 (To record the write off customer s account) Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 4

(e) Cash 500,000 Accounts receivable 500,000 (To record the cash collected from customers) (f) Accounts receivable 5,000 Advance from customers 5,000 (To record the advanced received from customer) (g) Accounts receivable 8,000 Allowance for bad debts 8,000 (To record the recovery of previous account) (g) Cash 8,000 Accounts receivable 8,000 (To record the cash recovered from customer) (h) Notes receivable 25,000 Accounts receivable 25,000 (To record the note apply on accounts receivable) (i) Bad debts expense 13,000 Allowance for bad debts 13,000 (To record the bad debts expense for the period) ASGHAR COMPANY GENERAL LEDGER Accounts Receivable Jan. 1, Balance 400,000 (b) Sales return 30,000 (a) Sales 800,000 (c) Sales discount 20,000 (f) Advance from customer 5,000 (d) Allowance for bad debts 10,000 (g) Allowance for bad debts 8,000 (e) Cash 500,000 (g) Cash 8,000 (h) Notes receivable 25,000 Dec. 31 c/d balance 620,000 1,213,000 1,213,000 Jan. 1 b/d balance 620,000 Computation of Bad Debts Expense: Accounts receivable (ending balance) 620,000 Rate of uncollectible 5% Allowance for bad debts closing balance 31,000 Add: Written off customers accounts 10,000 Less: Recover of previously written off account (8,000) Less: Allowance for bad debts opening balance (20,000) Bad debts expense for the period 13,000 Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 5

SOLUTION 3 (b) ASGHAR COMPANY GENERAL LEDGER Allowance for Bad Debts (d) Accounts receivable 10,000 Jan. 1 Balance 20,000 Dec. 31 c/d balance 31,000 (g) Accounts receivable 8,000 Dec. 31 Bad debts expense 13,000 41,000 41,000 Jan. 1 b/d balance 31,000 SOLUTION 3 (c) ASGHAR COMPANY BALANCE SHEET AS ON 31 DECEMBER 2013 Assets Equities Accounts receivable 620,000 Advance from customer 5,000 Less: Allowance for bad debts (31,000) 589,000 Notes receivable 25,000 Q.No.4 INVENTORY VALUATION (a) Merchandise inventory on March 1, 2014 Rs.20,000; Purchase during the month of March Rs.100,000; Freight in Rs.4,000; Purchase returns Rs.3,000; Purchase discount Rs.2,000; Sales Rs.155,000; Gross profit 40% on sales. Compute the cost of ending inventory on March 31 st 2014 by gross profit method. (b) Zubair & Co. made the following purchases and sales during the year 2013: January 1, 2013 Merchandise inventory 1,000 units @ Rs.10.00 each January 21, 2013 Purchases 1,600 units @ Rs.10.50 each March 13, 2013 Sales 400 units @ Rs.15.00 each April 10, 2013 Purchases 600 units @ Rs.11.00 each May 15, 2013 Sales 1,000 units @ Rs.17.00 each November 15, 2013 Purchases 700 units @ Rs.12.00 each December 18, 2013 Sales 500 units @ Rs.20.00 each Find the cost of ending inventory by: (a) FIFO (Periodic). (b) Weighted average (Periodic). (c) LIFO (Perpetual). Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 6

SOLUTION 4 (a) Computation of Cost of Ending Inventory by Gross Profit Method: Merchandise inventory (beginning) 20,000 Add: Net Purchases: Purchases 100,000 Add: Freight-in 4,000 Delivered purchases 104,000 Less: Purchase return and allowance (3,000) Less: Purchase discount (2,000) Net purchases 99,000 Merchandise available for sale 119,000 Less: Cost of Goods Sold: Sales 155,000 Less: Gross profit (155,000 x 40%) (62,000) Cost of goods sold (93,000) Cost of ending inventory 26,000 SOLUTION 4 (b) ZUBAIR & CO. SCHEDULE OF UNITS PURCHASED, UNITS SOLD AND UNITS AT END FOR THE PERIOD 2013 Date Particulars Units Unit Cost Total Cost (Rs.) January 1 Merchandise inventory 1,000 Rs.10.00 Rs.10,000 January 21 Purchases 1,600 Rs.10.50 Rs.16,800 April 10 Purchases 600 Rs.11.00 Rs.6,600 November 15 Purchases 700 Rs.12.00 Rs.8,400 Units available for sale 3,900 Rs.41,800 Less: Units Sold: Total units sold (400+1,000+500) (1,900) Ending inventory in units 2,000 Computation of Cost of Ending Inventory by FIFO Method Periodic Inventory System: Date Particulars Units Unit Cost Total Cost (Rs.) January 21 Purchases 700 Rs.10.50 Rs.7,350 April 10 Purchases 600 Rs.11.00 Rs.6,600 November 15 Purchases 700 Rs.12.00 Rs.8,400 Cost of ending inventory 2,000 Rs.22,350 Computation of Cost of Ending Inventory by Weighted Average Method Periodic Inventory System: Average unit cost = Cost of merchandise available for sale Units available for sale Average unit cost = 41,800 3,900 Average unit cost = Rs.10.72 per unit Cost of ending inventory = Units at end x Average unit cost Cost of ending inventory = 2,000 x 10.72 Cost of ending inventory = Rs.21,435 Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 7

ZUBAIR & CO. INVENTORY CARD LIFO METHOD FOR THE PERIOD 2013 Date Purchases/Received Sales/Issued Balance Units Unit cost Total cost Units Unit cost Total cost Units Unit cost Total cost Jan. 1 1,000 10.00 10,000 Jan. 21 1,600 10.50 16,800 1,000 10.00 10,000 1,600 10.50 16,800 Mar. 13 400 10.50 4,200 1,000 10.00 10,000 1,200 10.50 12,600 Apr. 10 600 11.00 6,600 1,000 10.00 10,000 1,200 10.50 12,600 600 11.00 6,600 May. 15 600 11.00 6,600 1,000 10.00 10,000 400 10.50 4,200 800 10.50 8,400 Nov. 15 700 12.00 8,400 1,000 10.00 10,000 800 10.50 8,400 700 12.00 8,400 Dec. 18 500 12.00 6,000 1,000 10.00 10,000 800 10.50 8,400 200 12.00 2,400 2,900 31,800 1,900 21,000 2,000 20,800 Computation of Cost of Ending Inventory: 1,000 Units @ Rs.10.00 each 10,000 800 Units @ Rs.10.50 each 8,400 200 Units @ Rs.12.00 each 2,400 2,000 Cost of ending inventory Rs.20,800 Q.No.5 BANK RECONCILIATION A study of cash record of Noor Traders for the month of December 2013 revealed the following information: (a) Cash book balance (Dr.) on December 31, 2013 Rs.5,150. (b) Bank statement balance (Dr.) overdraft on December 31, 2013 Rs.4,780. (c) Service charges levied by bank Rs.150. (d) A cheque of Rs.9,500 deposited into bank was wrongly entered into bank statement as Rs.5,900. (e) Cheques outstanding Rs.5,820. (f) Deposit of Rs.12,000 on December 31, 2013 not shown on bank statement. (g) Bank statement showed a direct deposit of Rs.1,500 by a customer nit recorded in cash book. (h) Accompanying the bank statement was a customer s cheque for Rs.1,200 returned unpaid by bank due to NSF. (i) A cheque of Rs.1,300 issued in settlement of an accounts payable was erroneously entered into cash book as Rs.1,000. (a) Prepare bank reconciliation statement on December 31, 2013. Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 8

(b) Prepare adjusting entries in General Journal. SOLUTION 5 (a) NOOR TRADERS BANK RECONCILIATION STATEMENT FOR THE MONTH ENDED DECEMBER 31, 2013 Particulars Cash Book Pass Book Unadjusted balance on December 31, 2013 5,150 (4,780) Less: Service charges (c) (150) Add: Error by bank (d) 3,600 Less: Outstanding cheque (e) (5,820) Add: Uncleared cheque (f) 12,000 Add: Direct deposit by customer Receivable (g) 1,500 Less: Dishonoured cheque Receivable (h) (1,200) Less: Accounts payable Error (i) (300) Adjusted balance 5,000 5,000 SOLUTION 5 (b) NOOR TRADERS FOR THE MONTH OF DECEMBER 2013 1 Bank 1,500 Accounts receivable 1,500 (To record the addition in bank account) 2 Service charges 150 Accounts receivable 1,200 Accounts payable 300 Bank 1,650 (To record the deduction from bank account) Q.No.6 DEPRECIATION (a) On May 1, 2010 Haider Company purchased a machine costing Rs.450,000. The estimated useful life of machine is 7 years with a salvage value of Rs.50,000. The company follows sum of the year s digits method for charging depreciation. The company accounting year ends on December 31 st. On April 1, 2013, the machine was sold for cash. Supported by proper computations, record the sale of machine under both cases separately: Case (1): Machine is sold for cash Rs.215,000. Case (2): Machine is sold for cash Rs.160,000. (b) An equipment costing Rs.100,000 is traded with a new equipment having a price of Rs.140,000. The trade in allowance for the old equipment is agreed at Rs.30,000 and the balance is paid in cash. The allowance for depreciation on old equipment amounted to Rs.80,000. Give entries to record the exchange of equipment. Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 9

SOLUTION 6 (a) Computation of Depreciation Expense by Sum of the Year s Digit Method: Annual depreciation = (Depreciable cost x Yearly fraction Depreciable cost = Cost Salvage value Depreciable cost = 450,000 50,000 Depreciable cost = Rs.400,000 Fraction = n (n + 1) 2 Fraction = 7 (7 +1) 2 Fraction = 28 Year Depreciable Cost Yearly Fraction Depreciation Expense Accumulated Depreciation Book Value 2010 400,000 7/28 100,000 x 8/12 = 66,667 66,667 383,333 2011 400,000 7/28 100,000 x 4/12 = 33,333 400,000 6/28 85,714 x 8/12 = 57,143 157,143 292,857 90,476 2012 400,000 6/28 85,714 x 4/12 = 28,571 400,000 5/28 71,429 x 8/12 = 47,619 233,333 216,667 76,190 2013 400,000 5/28 71,429 x 4/12 = 23,810 257,143 192,857 Case (1): Computation of Gain or Loss on Sales: Cost of machine 450,000 Less: Allowance for depreciation upto date (257,143) Book value 192,857 Less: Sold for (215,000) Gain on sale Rs.22,143 HAIDER COMPANY April 1 Cash 215,000 2013 Accumulated depreciation Machine 257,143 Gain on sale 22,143 Machine 450,000 (To record the sale of machine) Case (2): Computation of Gain or Loss on Sales: Cost of machine 450,000 Less: Allowance for depreciation upto date (257,143) Book value 192,857 Less: Sold for (160,000) Loss on sale Rs.32,857 Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 10

HAIDER COMPANY April 1 Cash 160,000 2013 Accumulated depreciation Machine 257,143 Loss on sale 32,857 Machine 450,000 (To record the sale of machine) SOLUTION 6 (b) Computation of Gain or Loss on Exchange: Cost of old equipment 100,000 Less: Allowance for depreciation upto date (80,000) Book value 20,000 Less: Trade in allowance (30,000) Gain on exchange Rs.10,000 Computation of Cash Payment: Cost of new equipment 140,000 Less: Trade in allowance (30,000) Cash payment Rs.110,000 M/S. 1 Equipment (new) 140,000 Accumulated depreciation Equipment 80,000 Gain on exchange 10,000 Cash 110,000 Equipment (old) 100,000 (To record the exchange of equipment) Q.No.7 PARTNERSHIP ADMISSION Saqib and Danish are partners with capital balances of Rs.120,000 and Rs.60,000 sharing profit and loss in their capital ratio. They agreed to admit Adnan as a new partner. Prepare necessary journal entries to record Adnan admission under each of the following cases separately: Case (1): Adnan invests sufficient cash for 1/3 interest in the total capital of the firm. Case (2): Adnan invests Rs.60,000 for 1/5 interest in the total capital of the firm (Record bonus). Case (3): Adnan invests Rs.70,000 for 1/4 interest in the firm. Adnan capital will be credited with the entire amount of his investment. Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 11

SOLUTION 7 Case (1): Computation of Sufficient Cash: For 2/3 interest, old partners capital (120,000 + 60,000) 180,000 Therefore total capital of firm (180,000 x 3/2) 270,000 For 1/3 interest, Adnan s Capital (270,000 x 1/3) Rs.90,000 PARTNERSHIP 1 Cash 90,000 Adnan s Capital 90,000 (To record the admission of Adnan) Case (2): Computation: (Bonus Method): Old partners capital (120,000 + 60,000) 180,000 Add: Adnan s investment 60,000 Total capital of firm 240,000 For 1/5 interest Adnan s capital (240,000 x 1/5) 48,000 Less: Adnan s investment (60,000) Bonus to old partners Rs.12,000 PARTNERSHIP 1 Cash 60,000 Saqib s Capital (12,000 x 2/3) 8,000 Danish s Capital (12,000 x 1/3) 4,000 Adnan s Capital 48,000 (To record the admission of Adnan) Case (3): Computation: (Goodwill to Old Partners): For 1/4 interest, Adnan s investment 70,000 Therefore total capital of firm (70,000 x 4) 280,000 For 3/4 interest, old partners capital (280,000 x 3/4 210,000 Less: Old partners capital before admission of Adnan (180,000) Goodwill to old partners Rs.30,000 PARTNERSHIP 1 Cash 90,000 Adnan s Capital 90,000 (To record the admission of Adnan) Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 12

2 Goodwill 30,000 Saqib s Capital (30,000 x 2/3) 20,000 Danish s Capital (30,000 x 1/3) 10,000 (To record the distribution of goodwill) Q.No.8 (a) ACCOUNTING CONCEPTS / PRINCIPLES AND CORRECTION OF ERRORS Define the following accounting concepts / principles: (a) Conservatism (b) Going concern (c) Consistency (d) Materiality (e) Historical cost (b) The following errors were made during 2012 and were discovered before closing the books of accounts: (i) Rs.20,000 paid for the extension of the building was debited to building repair account. (ii) Sales returns of Rs.5,000 was charged to purchases. (iii) Accrued interest income of Rs.10,000 was overlooked. (iv) Payment of rent expenses of Rs.5,000 was wrongly recorded as receipt of rent income. (v) Sale of equipment for Rs.5,000 was credited to sales account, book value of the equipment was Rs.6,000. Record correcting entries in General Journal on December 31, 2012. SOLUTION 8 (a) (i) Conservatism: If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to break a tie. It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective. The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an account that is lower than the original cost, but will not write inventory up to an amount higher than the original cost. (ii) Going Concern: One of four fundamental accounting concepts. It is the assumption that an enterprise will continue in operation for the foreseeable future, i.e. that there is no intention and necessity to liquidate or significantly curtail the scale of the enterprise s operation. The implication of this principle is that assets are shown at cost, or at cost less depreciation, and not at their break-up values; it also assumes that liabilities applicable only on liquidation are not shown. The going concern value of a business is higher than the value that would be achieved by disposing of its individual assets, since it is assumed that the business has a continuing potential to earn profits. This assumption will underline the preparation of financial statements. If an auditor thinks that a business may not be a going concern, the auditors report should be qualified. Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 13

(iii) Consistency: The concept requires the consistency of treatment of like items within each accounting period and from one period to the next; it also requires that accounting policies are consistently applied. Rather, an entity is required to implement those principles that are judged most appropriate to its circumstances for the purpose of giving a true and fair view. Comparability is held to be a more important characteristic of financial statements than consistency. (iv) Materiality: The characteristic of accounting information that focuses on how important the information is to making decisions. If the amount of the error or the amount left out of the report is big enough to affect the decision-making process, then that item is considered material. (v) Historical Cost: A way of valuing assets that is measured by the amount of cash it takes to buy the asset and get it into use. Delivery costs, installation costs, sales tax, and calibration costs for technical equipment are included. SOLUTION 8 (b) M/S. CORRECTING ENTRIES 1 Building 20,000 Building repairs 20,000 (To correct the extension of building) 2 Sales returns and allowances 5,000 Purchases 5,000 (To correct the sales returns) 3 Interest receivable 10,000 Interest income 10,000 (To correct the unrecorded accrued interest income) 4 Rent expense 5,000 Rent income 5,000 Cash 10,000 (To correct the payment of rent expense) 5 Sales 5,000 Loss on sale of equipment 1,000 Equipment 6,000 (To correct the sale of equipment) Principles of Accounting B.Com Part I 2013 Private (Supplementary) Solution 14