B.COM 1 (PRIVATE) ADVANCE ACCOUNTING Compiled & Solved By: JAHANGEER KHAN 2015
Q.1: PREPERATION OF FINANCIAL STATMENTS: RAYAN Company Ltd. registered with a capital balance of Rs.10,00,000 divided into 100,000 ordinary shares. On December 31, 2015 following information is available. Cash 60,000 Reserve for Contingencies 20,000 Accounts Receivable 80,000 Inventory (Jan. 01) 60,000 Unexpired Insurance 12,000 Sales 450,000 Prepaid Advertisement 25,000 Sales Return 10,000 Furniture 150,000 Purchases 180,000 Land 500,000 Carriage in 20,000 Office Equipment 100,000 Accounts Payable 175,000 Salaries Expense 40,000 5% Bank Loan 60,000 Rent Expense 50,000 Purchases Return 10,000 Retained Earning 50,000 Income Tax 15,000 Allowance for Bad Debts 10,000 Allowance for Dep. (Equ.) 10,000 Allowance for Dep. (Fur.) 20,000 Share Capital? Data for Adjustment: 1. Prepaid Advertisement amounted to Rs.20,000. 2. Insurance was paid in advance for ONE year on October 01, 2015. 3. Salaries expense for the year Rs.30,000. 4. Accrued rent was Rs.5,000. 5. Bad Debts estimated @2.5% on net credit sales. 6. Income Tax for the year Rs.16,000. 7. Depreciation estimated @10% per annum on written down value of fixed assets. 8. Accrued Commission Income Rs.15,000. 9. Inventory on December 31, 2015 valued at Rs.30,000. 10. Reserve for contingencies Rs.10,000 and for plant extension Rs.30,000. REQUIRED: Prepare multiple step Income Statement and statement of retained earning. SOLUTION 1 : RAYAN COMPANY LTD. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2015 Sales 450,000 Less: Sales Return (10,000) Net Sales 440,000 Less: Cost of Goods Sold: Inventory (Opening) 60,000 Add: Net Purchases: Purchases 180,000 Carriage in 20,000 Gross Purchases 200,000 Less: Purchase Return (10,000) Net Purchases 190,000 Goods Available for Sale 250,000 Less: Inventory (Ending) (30,000) Cost of Goods Sold (220,000) Gross Profit 220,000 Less: Operating Expenses Advertisement Expense (25,000-20,000) 5,000 Insurance Expense (12,000 x 3/12) 3,000 pg. 1
Salaries Expense 30,000 Rent Expense 55,000 Bad Debts Expense (440,000 x 2.5%) 11,000 Depreciation Expense Furniture {(150,000-20,000)x10%} 13,000 Depreciation Expense Equipment (100,000 x 10%) 10,000 Total Operating Expenses (127,000) Operating Income 93,000 Add: Commission Income 15,000 Income Before Taxation 108,000 Less: Income Tax (16,000) Net Income 92,000 RAYAN COMPANY LTD. STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2015 Unadjusted Retained Earning 50,000 Add: Net Income 92,000 Total Retained Earning 142,000 Less: Reserves Reserve for Contingencies 10,000 Reserve for Plant Extension 30,000 Total Reserves (40,000) Adjusted Retained Earning 102,000 Q.2: CASH FLOW STATMENT: Shown below are comparative balance sheets for MOIN & Company Ltd. on December 31. ASSETS: 2015 2014 Cash Rs.68,000 Rs22,000 Accounts Receivable 88,000 76,000 Inventory 167,000 189,000 Land 80,000 100,000 Equipment 260,000 200,000 Accumulated Depreciation Equipment (66,000) (32,000) Total Rs.597,000 Rs.555,000 EQUATIES: Accounts Payable Rs.39,000 Rs.43,000 Bonds Payable 150,000 200,000 Ordinary Share Capital (Rs.10 each) 216,000 174,000 Retained Earnings 192,000 138,000 Rs.597,000 Rs.555,000 Cash dividend of Rs.39,000 were declared and paid. REQUIRED: Prepare a statement of cash flows showing Operating, Investing and financing Activities. SOLUTION 2: COMPUTATION FOR NET INCOME Retained Earnings (2015) 192,000 Less: Retained Earnings (2014) (138,000) 54,000 Add: cash Dividend 39,000 Net Income 93,000 pg. 2
MOIN COMPANY LTD. CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2015 Cash Flow from Operating Activities: Net Income 93,000 Depreciation Expense (Equipment) 34,000 Increase in Accounts Receivable (12,000) Decrease in Inventory 22,000 Increase in Accounts Payable (4,000) Net Cash Flow from Operating Activities 133,000 Cash Flow from Investing Activities: Sale Land 20,000 Purchase of Equipment (60,000) Net Cash Flow from Investing Activities (40,000) Cash Flow from Financing Activities: Payment of Bonds (50,000) Issuance of Shares 42,000 Cash Dividend (39,000) Net Cash Flow from Investing Activities (47,000) Increase in Cash and Cash during the year 46,000 Add: Cash Balance (2014) 22,000 Cash Balance (2015) 68,000 Q.3: FINANCIAL STATMENT ANALYSIS: Take the data from question No. 2. REQUIRED: Computation for both years: (1) Quick ratio (2) Current ratio (3) Debt ratio (4) Equity ratio (5) Book value per share SOLUTION 3: 1. COMPUTATIONS FOR QUICK RATIO PARTICULAR 2014 2015 QUICK ASSETS Cash 22,000 68,000 Accounts Receivable 76,000 88,000 Total Quick Assets 98,000 156,000 CURRENT LIABILITIES: Accounts Payable 43,000 39,000 Total Current Liabilities 43,000 39,000 pg. 3
2. COMPUTATION FOR CURRENT RATIO: PARTICULAR 2014 2015 CURRENT ASSETS: Total Quick Assets 98,000 156,000 Inventory 189,000 167,000 Total Current Assets 287,000 323,000 3. COMPUTATION FOR DEBT RATIO: PARTICULAR 2014 2015 TOTAL ASSETS Total Current Assets 287,000 323,000 Land 100,000 80,000 Equipment (Net Book Value) 168,000 194,000 Total Assets 555,000 597,000 TOTAL LIABILITIES: Accounts Payable 43,000 39,000 Bonds Payable 200,000 150,000 Total Liabilities 243,000 189,000 4. COMPUTATION FOR EQUITY RATIO: PARTICULAR 2014 2015 SHAREHOLDERS EQUITY: Ordinary Share Capital 174,000 216,000 Retained Earnings 138,000 192,000 Total Shareholders Equity 312,000 408,000 pg. 4
5. COMPUTATION FOR BOOK VALUE PER SHARE: Q.4: INSTALLMENT SALES: On October 31, 2015, KAMRAN Construction Company sold property costing Rs.600,000 for Rs.750,000 on installment basis. Received Rs.200,000 as down payment and balance is receivable in 20 equal monthly installments. First two installments received during November and December 2015 including interest amounted Rs.30,250 and Rs.30,113 respectively. REQUIRED: Give entries in General Journal including adjusting and closing. SOLUTION 4: COMPUTATIONS 1. UNREALIZED GROSS PROFIT RATE: Installment Sales 750,000 Less: Cost of Installment Sales (600,000) Unrealized gross Profit 150,000 pg. 5
2. CASH COLLECTION Installment Sales 750,000 Less: Down Payment 200,000 Remaining Balance 550,000 Down Payment 200,000 Add: Installments Collected (27,500) 55,000 Cash Collection 255,000 3. REALIZED GROSS PROFIT: KAMRAN CONSTRUCTION COMPANY Date Particulars P/R Debit Credit 31-10-2015 Installment Accounts Receivable 750,000 Installment Sales 750,000 (To record installment sales) 31-10-2015 Cash 200,000 Installment Accounts Receivable 200,000 (To record collection of down payment) 31-10-2015 Cost of Installment Sales 600,000 Merchandise Inventory 600,000 (To record cost of installment sales) 30-11-2015 Cash 30,250 Installment Accounts Receivable 27,500 Interest Income (30,250-27500) 2,750 (To record collection of first installment ) 31-12-2015 Cash 30,113 Installment Accounts Receivable 27,500 Interest Income (30,113-27,500) 2,613 (To record collection of second installment ) 31-12-2015 Installment Sales 750,000 Cost of installment Sales 600,000 Unrealized Gross Profit 150,000 (To record unrealized gross profit) 31-12-2015 Unrealized gross Profit 51,000 Realized Gross Profit 51,000 (To record realized gross profit) 120,000 pg. 6
Date Particulars P/R Debit Credit 31-12-2015 Realized Gross Profit 51,000 Interest Income 5,363 Income summary 56,363 (to close revenue accounts into income summary) 31-12-2015 Income Summary 56,363 Retained earnings 56,363 (To close income summary into retained earnings) Q.5: COMPANY RECONSTRUCTION: Following is the balance sheet of BUKHTIAR & Company Ltd. as on December 31, 2015 EQUATIES ASSETS Authorized Capital: Non current Assets: 60,000 Ord. Shares of Rs.10 each Rs.600,0000 Machinery 90,000 Paid up Capital: Equipment 50,000 45,000 Ord. Shares of Rs.10 each Rs.450,000 Patents 70,000 Accounts Payable 21,000 Preliminary Expenses 8,000 Accrued Expenses 25,000 Current Assets: Inventory 78,000 Account Receivable 80,000 Cash 100,000 Profit & Loss Account 20,000 496,000 496,000 The following Resolutions were passed and confirmed: 1. Rs.10 shares be reduced to the same number of fully paid shares of Rs.8 each. 2. The sum thus rendered available be applied as follows: a) The balance of profit & Loss account and Preliminary Expenses to be written off entirely. b) The Inventory to be reduced to Rs.30,000. c) Patent to be reduced by Rs.5,000. d) The balance to be utilized in writing down Machinery. REQUIRED: Give Journal Entries and prepare revised Balance Sheet. SOLUTION 5 : BUKHTIAR & COMPANY LTD. 1. Ordinary Share Capital (45,000 x 10) 450,000 Capital Reduction 90,000 Ordinary Share Capital (45,000 x 8) 360,000 (to record reduced per share value of Rs.10 ordinary shares to Rs.5 each) 2. Capital Reduction 90,000 Profit & Loss 20,000 Preliminary Expense 8,000 Inventory 48,000 Patent 5,000 Machinery 9,000 (To record write off various assets) pg. 7
BUKHTIAR & COMPANY LTD. REVISED BALANCE SHEET AS ON DECEMBER 31, 2015 EQUATIES ASSETS Authorized Capital: Fixed Assets: 75,000 Ordinary Shares of Rs.8 each 600,000 Machinery 81,000 Equipment 50,000 Issued & Paid up Capital: Patents 65,000 45,000 Ordinary Shares of Rs.8 each 360,000 Total Fixed Assets 196,000 Total issued & Paid up Capital 360,000 Current Assets: Liabilities: Cash 100,000 Accounts Payable 21,000 Account Receivable 80,000 Accrued Expense 25,000 Inventory 30,000 Total Liabilities 46,000 Total Current Assets 210,000 Total Equities 406,000 Total Assets 406,000 Q.6: BRANCH RECIPROCAL ENTRIES: On July 5, 2014 SHAHANI Traders establish a branch at Hyderabad. The following are the transactions of the Head Office completed during the year ended june 30, 2015. 1. Cash remitted to branch Rs.44,000. 2. Merchandise shipment to branch costing Rs.1,00,000 which was billed at 25% above cost. 3. Purchased merchandise on account Rs.58,000 and on cash Rs.135,000. 4. Purchased furniture for cash Rs.19,000 and sent to branch. 5. Sales on account Rs.82,000 and for cash Rs.86,000. 6. Administrative and General expenses paid Rs.18,000. 7. Cash received from customers Rs.47,000. 8. Cash paid to creditors Rs.23,500. 9. Paid branch salaries Rs.10,500. Beginning and ending Inventories were Rs.70,000 and Rs.50,000 respectively. REQUIRED: (a) Give entries in General journal of Head office and Branch. (b) Prepare adjusting journal entry for allowance for overvaluation. Assuming that the Branch reported ending inventory Rs.60,000. SOLUTION 6 (a): SHAHANI TRADERS HEAD OFFICE BOOK 1. Hyderabad Branch 44,000 Cash 44,000 (To record cash remitted to Hyderabad branch) 2. Hyderabad Branch 125,000 Allowance for Overvaluation(100,000x25%) 25,000 Goods Sent to Branch 100,000 (To record goods sent to Hyderabad brance) pg. 8
3. Purchases 193,000 Cash 135,000 Accounts Payable 58,000 (To record purchase of merchandise for cash and on credit) 4. Hyderabad Branch 19,000 Cash 19,000 (To record purchase of furniture and sent to branch) 5. Cash 86,000 Accounts Receivable 82,000 Sales 168,000 (To record sale of merchandise for cash and on credit) 6. Administrative and general Expenses 18,000 Cash 18,000 (To record payment of administrative and general expenses) 7. Cash 47,000 Accounts Receivable 47,000 (To record cash collection from customers) 8. Accounts Payable 23,500 Cash 23,500 (To record cash paid to creditors) 9. Hyderabad Branch 10,500 Cash 10,500 (To record payment of Hyderabad branch salaries) SHAHANI TRADERS HEYDERABAD BRANCH 1. Cash 44,000 Head Office 44,000 (To record cash received from head office) 2. Goods from Head Office 125,000 Head Office 125,000 (To record goods received from head office) 3. Furniture 19,000 Head Office 19,000 (To record furniture sent by head office) 4. Salaries Expense 10,500 Head Office 10,500 (To record salaries paid by head office) pg. 9
SOLUTION 6 (b): COMPUTATION OF ALLOWANCE FOR OVERVALUATION Allowance for Particulars overvaluation Overvaluation in Shipments (100,000 x 25%) 25,000 Less: Overvaluation in ending inventory (60,000 x 25/125) (12,000) Adjusted Allowance for overvaluation 13,000 SHAHANI TRADERS HEAD OFFICE BOOK 1. Allowance for Overvaluation 13,000 Income Summary 13,000 (To adjust allowance for overvaluation account) Q.7: HEAD OFFICE INCOME STATMENT: Take the data from question No. 6. REQUIRED: Prepare Income Statement of Head Office showing on it Branch Profit/Loss. SOLUTION 7: SHAHANI TRADERS HEAD OFFICE BOOK INCOME STATEMENT FOR THE PERIOD ENDED JUNE 30, 2015 Sales 168,000 Less: Cost of Goods Sold: Inventory (Opening) 70,000 Add: Purchases 193,000 263,000 Less: Goods sent to Branch (100,000) Goods Available for Sale 163,000 Less: Inventory (Ending) (50,000) Cost of Goods Sold (113,000) Gross Profit 55,000 Advertisement and General Expense (18,000) Operating Income 37,000 Add: Income from Branch Allowance for Overvaluation 13,000 Total Income from Branch 13,000 Net Income 50,000 Q.8: COMPANY ABSORPTION: Following is the Balance Sheet of MOON Company Ltd. on December 31, 2015. ASSETS EQUATIES Cash Rs.15,000 Accounts Payable Rs.100,000 Cash at bank 30,000 Share Capital (100,000 x Rs.10) 10,00,000 pg. 10
Accounts Receivable 150,000 Retained Earnings 90,000 Merchandise Inventory 155,000 Land & Building 490,000 Machinery & Plant 200,000 Patents 150,000 Rs.11,90,000 On balance Sheet data the MOON Company Ltd. was absorbed by STAR Company Ltd. under the following terms. 1. All the assets (Except cash) and Accounts Payable were taken over by the Absorbing Co. at book value. 2. Star Company Ltd. issued three shares of Rs.10 each for every five shares in the Moon Company Ltd. at Rs.13 per shares. Cash of Rs.175,000 was also the part of purchase consideration. 3. Liquidation expenses of Moon Company Ltd. were Rs.35,000 of which Rs.20,000 were paid by Absorbing Company. REQUIRED: (a) Compute the amount of purchase consideration.. (b) Give the necessary Journal Entries in the books of Absorbing and Absorbed Companies. SOLUTION 8 (a): COMPUTATION FOR PURCHASE CONSIDERATION Shares in Star Ltd. (100,000 3/5 x13) 780,000 Cash Payment 175,000 Liquidation Expenses 20,000 Purchase Consideration 975,00 SOLUTION 8 (b): MOON COMPANY LTD. 1. Realization 1,175,000 Cash at Bank 30,000 Accounts Receivable 150,000 Merchandise Inventory 155,000 Land and building 490,000 Machinery and Plant 200,000 Patents 150,000 (To record assets taken over by Star Company Ltd.) 2. Accounts Payable 100,000 Realization 100,000 (To record liabilities taken over by Star Company Ltd.) 3. Receivable from Star Company Ltd. 975,000 Realization 975,000 (To record purchase consideration) 4. Shares in Star Company Ltd. 780,000 Cash 195,000 Receivable from Star Company Ltd. 975,000 (To record received shares and cash from Star Company Ltd.) pg. 11
5. Realization 35,000 Cash 35,000 (To record payment of liquidation expenses) 6. Share Capital 1,000,000 Retained Earnings 90,000 Realization 135,000 Shareholders 955,000 (To close various accounts into shareholders account) 7. Shareholders 955,000 Shares in Star Company Ltd. 780,000 Cash 175,000 (To record final settlement of shareholders account) Realization 1. 1,175,000 2. 100,000 5. 35,000 3. 975,000 6. 135,000 1,210,000 1,210,000 Cash Balance 15,000 5. 35,000 4. 195,000 7. 175,000 210,000 210,000 STAR COMPANY LTD. 1. Cash at Bank 30,000 Accounts Receivable 150,000 Merchandise Inventory 155,000 Land and building 490,000 Machinery and Plant 200,000 Patents 150,000 Capital Reserve 100,000 Accounts Payable 100,000 Payable to Moon Company ltd. 975,000 (To record assets and liabilities taken over from Moon Company Ltd.) 2. Payable to Moon Company ltd. 975,000 Share Capital (100,000 x 3/5 x 10) 600,000 Share Premium (100,000 x 3/5 x 3) 180,000 Cash 195,000 (To record issued shares to Moon Company Ltd. and balance is paid by cash) pg. 12