Introduction to Accounting Suggested Answers Certificate in Accounting and Finance Spring 2016

Transcription

1 Ans.1 User Groups and information that would be of interest to them: (i) (ii) (iii) (iv) (v) (vi) (vii) Investors require information to assess the ability of an entity to earn profits and to pay dividends. Principally, they need to decide whether to buy, hold or sell shares. Employees and their representative groups (e.g. trade unions), require information to assess the ability of an entity to provide remuneration, retirement benefits and employment opportunities. Lenders are interested in information that enable them to determine whether their loans and interest entitlements will be paid when due. Suppliers require information which will enable them to assess whether the entity has the ability to pay amounts owed when they fall due. Customers are interested in assessing the continuance of an entity where they have a longterm involvement with them and/or are dependent on them for supplies. Government and their agencies require information for a variety of purposes. These include resource allocation decisions (e.g. government grants), to assess taxable capacity and for regional and national planning purposes. Public is interested in variety of ways which include employment potential, Corporate Social Responsibility (CSR) activities and for environment assessment purposes. Page 1 of 8

2 Ans.2 (a) Lotus Pharma Purchase day book Suppliers 1-Jan-2016 Shan Trader 8.50 Rahat Store Quality Medicos Subsidiary purchase ledger accounts Shan Trader Particulars Particulars 24-Jan Bank Jan Purchases Jan Balance c/f Rahat Store Particulars Particulars 20-Jan Purchase return Jan Purchases Jan Account receivable Jan Bank Quality Medicos Particulars Particulars 28-Jan Bank (15 98%) Jan Purchases Jan Discount received (15 2%) Particulars Trade payables control account Particulars 20-Jan Purchase return-rahat Jan Purchases Jan Bank-Shan Traders Jan Bank-Quality Medicos Jan Discount received Jan Trade account rec. - Rahat Jan Bank-Rahat Jan Balance c/f Page 2 of 8

3 Ans.3 Quality Products (a) Valuation of closing inventory Closing inventory at lower of cost or NRV, using - Weighted average cost Received Issues Balance Qty. Rate Rs. Qty. Rate Rs. Qty. Rate Rs. 1-Jan-16 Balance 10, ,480,000 6-Jan-16 Purchases 15, ,250,000 25, ,730, Jan-16 Sales (18,000) (2,685,600) 7, ,044, Jan-16 Purchases 13, ,080,000 20, ,124, Jan-16 Purchase return (1,000) (150,000) 19, ,974, Jan-16 Sales (12,000) (1,878,600) 7, ,095, Jan-16 Drawings (2,000) (313,080) 5, , Jan-16 Purchases 10, ,400,000 15, ,182, Jan-16 Shortages (800) (116,408) 14, ,066,312 QTY Cost per unit NRV per unit Closing inventory at lower of cost or NRV (Rs.) Good units (14,200-1,200) 13, ,891,630 Damaged units 1, ,000 14,200 2,035,630 Closing inventory at lower of cost or NRV, using - FIFO QTY Cost per unit NVR per unit Closing inventory at lower of cost or NRV (Rs.) Good units 10, ,400,000 Good units 3, ,000 Damaged units 1, ,000 14,200 2,024,000 14,200 2,048,000 Page 3 of 8

4 Ans.4 (a) Galaxy Enterprises Corrected bank book balance Rupees Dr./(Cr.) Balance as per bank book 856, Reversal of cheque issued and time barred 250, Reversal of a cheque issued with an incorrect name 455,000 1XX Reversal of a cheque deposited into the bank and dishonored (140,000) (iv) Reversal of a post-dated cheque of 1 March 2016 mistakenly presented and (v) credited by the bank in Dec (135,000) Correction of a customer's cheque of Rs. 54,000 mistakenly recorded as Rs. 45,000 9,000 (vi) Bank debit advices of January 2016 received in February Bank charges (8,500) - Annual subscription (120,000) Corrected bank book balance 1,166,500 Correction Journal entries for the month of January 2016 Description Debit Credit Rupees Jan-2016 Bank 250,000 Account payable 250,000 (Reversal of time barred cheque # 111) 31-Jan-2016 Bank 455,000 Account payable 455,000 (Reversal of cheque # 666 issued with an incorrect name) 31-Jan-2016 Account receivable 140,000 Bank 140,000 (Reversal of dishonored cheque # 1XX) 31-Jan-2016 Account receivable 135,000 Bank 135,000 (Reversal of post-dated cheque of 1 March 2016 mistakenly presented to the bank in Dec. 2015) 31-Jan-2016 Bank 9,000 Account receivable 9,000 (Correction of a customer's cheque of Rs. 54,000 mistakenly recorded as Rs. 45,000) 31-Jan-2016 Bank charges 8,500 Subscription charges 120,000 Bank 128,500 (To record bank charges and annual subscriptions paid) Bank reconciliation statement for the month of January 2016 Rupees (Dr.)/Cr. Bank balance as per bank statement 1,182,500 Less: Cheques issued but not presented for payments: 444 (79,000) 777 (500,000) Various (1,350,000) Add: Cheques deposited into the bank but not yet cleared: 2XX 70,000 3XX 63,000 Various 1,780,000 Corrected bank book balance 1,166,500 Page 4 of 8

5 Ans.5 (a) Accrual basis of accounting: Under accrual basis of accounting: Revenue is recognised when it is earned, irrespective of the date of receipt. Expense is recognised in the period in which it is incurred irrespective of the date of payment. Main advantage of accrual basis of accounting: The accrual basis of accounting gives a better measurement of profitability than does the cash basis. Because accrual basis matches revenues with expenses that an entity incurred to earned it. Zamil Traders Adjusting entries for the month of January 2016 Description Debit Credit Jan-2016 Prepaid rent 1.1 Rent expense 1.1 (Rent for the period Feb-Dec debited to prepayment account) 31-Jan-2016 Advance to suppliers/goods in transit 20 40% 8.00 Purchases 8.00 (Purchases adjusted for the goods not yet received) 31-Jan-2016 Sales 3.00 Advance from customers 3.00 (Sales adjusted for the goods not yet delivered) 31-Jan-2016 Discount expense ( ) Sales 0.10 (Correction of sales recorded net of payment discount) 31-Jan-2016 Salaries and wages expense Salaries and wages payable 0.48 (Salaries and wages for the month of January 2016 paid in February 2016) 31-Jan-2016 Utility expenses 0.30 Utility bills payable 0.30 (Utility bills for the month of January 2016 received and paid in February 2016) Page 5 of 8

6 Ans.6 Sky-link Traders (a) Suggested adjustments to ensure that financial statements present a true and fair view: (i) (ii) (iii) (iv) Trade receivables: ST should recognise an allowance for doubtful debts at 4% on year end balance of trade account receivables. Stock-in-trade: As there is no reason for change of the cost formula, ST should determine cost of closing stock-in-trade under weighted average cost formula as it is being followed for last many years. Fixed assets: According to the matching concept, depreciation is to be charged on a fixed asset over its economic life. However, in view of materiality concept, ST may charge off assets costing less than Rs. 5,000 in the year of purchase as this would not render the financial statements misleading. Therefore, no adjustment is required. Other income: As services are to be performed in 2016 therefore, under the matching concept expenses have not yet been incurred, other income should be reversed and a liability should be recognised in respect of the amount received in advance. Concept/principle relevant to each suggested adjustment: (i) (ii) (iii) (iv) Prudence/Matching Prudence involves allowing for some caution in preparing financial statements, by making reasonable and sensible allowance in order to avoid overstating assets or income and to avoid understating liabilities and expenses. Consistency The content of the financial statements must be presented consistently from one period to another. The presentation can be changed only if necessary to improve the quality of information presented in terms of its usefulness to the users or if a new rule requires a change. Materiality Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial statements about a specific reporting entity. Accrual/matching Other income should be recognised in the period when it arises which might not be the same as the period when the cash is received. Income and expenses incurred to earn that income must be reported in the same financial period. Page 6 of 8

7 Ans.7 (a) Moon Trading Statement of comprehensive income for the year ended 31 December 2015 Sales revenue , Cost of sales: Opening inventory (410.00) Purchases 2, (2,135.40) Closing inventory ( ) (2,019.00) Gross profit Selling and administration expenses: (W.1) (536.42) Financial charges 8+(160 10% 3 12) (14.25) Operating profit Other income [1.8 - ( )] + ( ) Net profit before tax W.1: Selling and administration expenses: As per trial balance: Add: Dep. on items in office use % Less: Decrease in bad debt expense (BS) 6.03-(6+3.5) (3.47) Less: Office supplies in hand (0.15) Statement of financial position as at 31 December 2015 Assets: Non-current assets Fixed assets Accumulated depreciation (W.1) (45.04) Current assets Trade debtors Provision for doubtful debts % (6.03) Closing inventory P&L Prepayments, advances and other receivables Cash and bank balances Equity and current liabilities Capital: Opening balance Profit for the year P&L Drawings (0.32) Long-term bank loan Current liabilities: Current maturity of long-term bank loan Trade creditors Accruals & other payables 25+(160 10% 3 12)+[1.8-( )] Page 7 of 8

8 Ans.8 (a) Karachi Chemicals Ledger accounts Realisation Account Description Description Fixed assets Trade creditors and other payables Stock in trade Gamma capital account - Car 0.50 Trade debtors and other receivables ABS - Fixed assets ABS - Creditors ABS - Stock in trade ABS - Claim payable ABS - Trade debtors ABS - Prov. for realisation exp 0.50 ABS - Goodwill Capital account: Alpha ( ) Beta ( ) Gamma ( ) Partners' capital accounts: Alpha Beta Gamma - (Debit)/Credit Balance Realisation account - car taken over by Gamma at agreed value (0.50) Realisation account - gain Cash and bank - - (15.00) Cash brought by Alpha and Beta in their profit sharing ratio to pay Gamma [(37-15) 4 7], [(37-15) 3 7] (22.00) ABS - balances transferred to the new firm (62.57) (46.93) ABS Enterprises Journal entries Particulars Debit Credit 1-Jan-2016 Fixed assets Stock in trade Trade debtors (60+40) Goodwill Trade creditors and other payables Provision for realisation expenses Provision for bad debts Capital - Alpha Capital - Beta Capital - Sigma 100+(50-8) ( ) (Assets taken over and liabilities assumed by the new firm) 1-Jan-2016 Capital - Alpha Capital - Beta Capital - Sigma Goodwill (Goodwill charged to the partners' capital accounts in their profit sharing ratio) 1-Jan-2016 Cash and bank (balancing) Capital - Alpha ( )-( ) Capital - Beta ( )-( ) Capital - Sigma ( )-( ) (Cash brought by the partners to cover deficit) (THE END) Page 8 of 8