B.COM – II – ADVANCED ACCOUNTINGB . C o m – II – Advanced Accounting – 2014 (Regular) Page 8 Q.No.4 COMPANY ACCOUNTING – ABSORPTION a) Differentiate between amalgamation

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.weebly.com

2014

Compiled and Solved by:

Sameer Hussain

B.COM – II – ADVANCED ACCOUNTING

REGULAR

Compiled & Solved by: Sameer Hussain www.a4accounting.weebly.com

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B . C o m – I I – A d v a n c e d A c c o u n t i n g – 2 0 1 4 ( R e g u l a r )

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ADVANCED ACCOUNTING – 2014

REGULAR Instructions: (1) Attempt any FIVE questions in all. (2) All questions carry equal marks.

(3) Answers without necessary computations will not be accepted.

Q.No.1 ACCOUNTING FOR INSTALLMENT SALES a) Differentiate between realized gross profit and unrealized gross profit. b) The Smith Co. recorded installment sales of Rs.600,000 in 2013. Cost of installment sales was Rs.420,000. The total collections on installment sales were Rs.360,000. The estimated value of the merchandise repossessed was Rs.110,000 and installment accounts receivable cancelled Rs.240,000. REQUIRED Calculate loss or gain and record repossession. c) The following data are available from the Western Corporation’s installment sales record:

Year Percentage Gross Profit

Installment Receivable on January 1, 2012

Cash Collection During 2012

Installment Receivable on December 31, 2012

2010 40% Rs.30,000 Rs.30,000 ---

2011 45% Rs.50,000 Rs.34,000 Rs.16,000

2012 50% Rs.200,000 Rs.60,000 Rs.140,000

REQUIRED Prepare all the journal entries for 2012 including adjusting entries. SOLUTION 1 (a) Unrealized Gross Profit: Unrealized gross profit is referred to the total gross profit from the sale of merchandise on installment basis which has not been collected. It is also known as “Deferred Gross Profit”. Realized Gross Profit: The profit on sale on merchandise on installment basis collected during the period out of total unrealized gross profit is called realized gross profit. In other words, it is the profit which has been collected during the period. SOLUTION 1 (b) Computation of Unrealized Gross Profit: Unrealized gross profit = Installment sales – Cost of installment sales Unrealized gross profit = 600,000 – 420,000 Unrealized gross profit = Rs.180,000 Computation of Unrealized Gross Profit Rate (DGP%): Unrealized gross profit rate = Unrealized gross profit x 100

Installment sales Unrealized gross profit rate = 180,000 x 100

600,000 Unrealized gross profit rate = 30%


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Computation of Realized Gross Profit: Realized gross profit = Cash collection X DGP% Realized gross profit = 360,000 x 30% Realized gross profit = Rs.108,000 Computation of Gain or Loss on Repossession: Installment accounts receivable cancelled 240,000 Less: Unrealized gross profit forego (240,000 x 30%) (72,000)

Book value 168,000 Less: Merchandise repossessed (110,000)

Loss on repossession Rs.58,000

SMITH CO.

GENERAL JOURNAL

Date Particulars P/R Debit Credit

1 Merchandise repossessed 110,000 Unrealized gross profit 72,000 Loss on repossession 58,000 Installment accounts receivable 240,000 (To record the merchandise repossessed on loss)

SOLUTION 1 (c) Computation of Realized Gross Profit: Realized gross profit = Cash collection X DGP% Realized gross profit (2010) = 30,000 x 40% 12,000 Realized gross profit (2011) = 34,000 x 45% 15,300 Realized gross profit (2012) = 60,000 x 50% 30,000

Total realized gross profit = Rs.57,300

Computation of Unrealized Gross Profit (DGP): Unrealized gross profit (2012) = Installment sales x DGP% Unrealized gross profit (2012) = 200,000 x 50% Unrealized gross profit (2012) = Rs.100,000 Computation of Cost of Installment Sales: Installment sales 200,000 Less: Unrealized gross profit (2012) (100,000)

Cost of installment sales Rs.100,000

WESTERN CORPORATION GENERAL JOURNAL


1 Installment accounts receivable (2012) 200,000 Installment sales 200,000 (To record the good sold on installment basis)

2 Cost of installment sales 100,000 Merchandise 100,000 (To record the cost of installment sales)


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3 Cash 124,000 Installment accounts receivable (2010) 30,000 Installment accounts receivable (2011) 34,000 Installment accounts receivable (2012) 60,000 (To record the cash collected on installment basis)

WESTERN CORPORATION

ADJUSTING ENTRIES


1 Installment sales 200,000 Cost of installment sales 100,000 Unrealized gross profit (2012) 100,000 (To adjust the unrealized gross profit)

2 Unrealized gross profit (2010) 12,000 Unrealized gross profit (2011) 15,300 Unrealized gross profit (2012) 30,000 Realized gross profit 57,300 (To adjust the realized gross profit)

Q.No.2 CASH FLOW STATEMENT a) Nishat Corporation acquired land by issuing 60,000 shares of Rs.10 each. Will this transaction be disclosed in cash flow statement? Reason. b) In year 2010, George Corporation made cash sales Rs.650,000; credit sales Rs.550,000; accounts receivable decreased by Rs.120,000. REQUIRED Compute: (1) Total sales. (2) Cash received from customers on account. (3) Total cash received. c) The following income statement and balance sheet for the past two years are available for Caravan Corporation:

CARAVAN CORPORATION INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2012 AND 2013

2012 2013

Sales Rs.500,000 Rs.350,000

Less: Cost of goods sold Rs.200,000 Rs.140,000

Gross profit Rs.300,000 Rs.210,000

Less: Operating expenses (including depreciation) Rs.260,000 Rs.243,000

Loss on sale of marketable securities --- Rs.1,000

Net income (loss) Rs.40,000 Rs.(34,000)


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CARAVAN CORPORATION BALANCE SHEET

DECEMBER 31, 2012 AND 2013

Assets: 2012 2013

Cash Rs.10,000 Rs.60,000

Marketable securities Rs.20,000 Rs.5,000

Accounts receivable Rs.40,000 Rs.23,000

Inventory Rs.120,000 Rs.122,000

Plant and equipment Rs.320,000 Rs.340,000

Accumulated depreciation Rs.(20,000) Rs.(55,000)

Total Rs.490,000 Rs.495,000

Equities: 2012 2013

Accounts payable Rs.50,000 Rs.73,000

Accrued expenses Rs.17,000 Rs.4,000

Notes payable Rs.245,000 Rs.263,000

Share capital Rs.120,000 Rs.135,000

Retained earnings Rs.58,000 Rs.20,000

Total Rs.490,000 Rs.495,000

Additional Information: (1) Company declared and paid Rs.4,000 cash dividend. (2) Marketable securities costing Rs.15,000 were sold for Rs.14,000 cash, resulting Rs.1,000 loss. (3) The company purchased plant assets for Rs.20,000, paying Rs.2,000 in cash and issuing a note

payable for the Rs.18,000 balance. REQUIRED Prepare a formal cash flow statement for 2013 showing operating, investing and financing activities. SOLUTION 2 (a) This transaction will not be disclosed in cash flow statement. Because cash flow statement is a statement showing the inflows and outflows of cash and cash equivalents for a business over a financial period. This transaction does not flow the cash and cash equivalents, neither inflow nor outflow of cash. SOLUTION 2 (b) Computation of Total Sales: Cash sales 650,000 Add: Credit sales 550,000

Total sales Rs.1,200,000

Computation of Cash Collected from Accounts Receivable: Credit sales 550,000 Add: Decrease in accounts receivable 120,000

Cash collected from accounts receivable Rs.670,000

Computation of Total Cash Collected: Cash sales 650,000 Add: Cash collected from accounts receivable 670,000

Total cash collection Rs.1,320,000


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SOLUTION 2 (c) CARAVAN CORPORATION CASH FLOW STATEMENT

FOR THE PERIOD ENDED 31 DECEMBER 2013 Cash Flow from Operating Activities: Net loss (34,000) Adjustments: Add: Depreciation expense 35,000 Add: Loss on sales of marketable securities 1,000

income before changes in working capital 2,000 Add: Decrease in accounts receivable 17,000 Less: Increase in merchandise inventory (2,000) Add: Increase in accounts payable 23,000 Less: Decrease in accrued expenses (13,000)

Net cash flow from operating activities 27,000 Cash Flow from Investing Activities: Purchase of plant and equipment (2,000) Sale of marketable securities 14,000

Net cash flow from investing activities 12,000 Cash Flow from Financing Activities: Issue of shares capital 15,000 Cash dividend paid (4,000)

Net cash flow from financing activities 11,000

Net increase in cash and cash equivalents 50,000 Add: Opening cash and cash equivalents balance 10,000

Closing cash and cash equivalents balance Rs.60,000

Q.No.3 FINANCIAL STATEMENT ANALYSIS The following is information for William Corporation at the end of 2013:

Cash Rs.225,000

Marketable securities Rs.120,000

Notes receivable Rs.180,000

Accounts receivable Rs.300,000

Allowance for doubtful accounts Rs.15,000

Inventory Rs.240,000

Prepaid expenses Rs.30,000

Notes payable within one year Rs.90,000

Accounts payable Rs.247,500

Accrued liabilities Rs.22,500

The following transactions are completed early in 2014: 1. Sold inventory costing Rs.36,000 for Rs.30,000. 2. Declared a cash dividend Rs.120,000. 3. Paid accounts payable Rs.60,000. 4. Purchased goods on account Rs.45,000. 5. Issued additional shares of Rs.450,000. 6. Wrote off uncollectible accounts Rs.9,000. 7. Acquired plant and equipment for cash Rs.240,000.


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REQUIRED (a) Compute current ratio, acid – test ratio and working capital at the end of 2013. (b) Indicate the effects (increase, decrease, no change) of the above transactions on:

(i) Current ratio. (ii) Acid test ratio. SOLUTION 3 (a)

1. Computation of Total Current Assets: Cash 225,000 Marketable securities 120,000 Notes receivable 180,000 Accounts receivable (Net) 285,000

Total quick assets 810,000 Merchandise inventory 240,000 Prepaid expenses 30,000

Total current assets 1,080,000 Less: Total Current Liabilities: Notes payable 90,000 Accounts payable 247,500 Accrued liabilities 22,500

Total current liabilities (360,000)

Working capital Rs.720,000

2. Computation of Current Ratio:

Current ratio = Total current assets

Total current liabilities Current ratio = 1,080,000

360,000 Current ratio = 3 : 1

3. Computation of Acid Test Ratio: Acid test ratio = Total quick assets

Total current liabilities Acid test ratio = 810,000

360,000 Acid test ratio = 2.25 : 1 SOLUTION 3 (b) No. Transaction Current Ratio Acid Test Ratio

1. Sold inventory costing Rs.36,000 for Rs.30,000. Decrease Decrease

2. Declared a cash dividend Rs.120,000. Decrease Decrease

3. Paid accounts payable Rs.60,000. Increase Increase

4. Purchased goods on account Rs.45,000. Decrease Decrease

5. Issued additional shares of Rs.450,000. Increase Increase

6. Wrote off uncollectible accounts Rs.9,000. No change No change

7. Acquired plant and equipment for cash Rs.240,000. Decrease Decrease


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Q.No.4 COMPANY ACCOUNTING – ABSORPTION a) Differentiate between amalgamation and absorption. b) The balance sheet of M/S. Black Corporation Ltd. as on December 31, 2013 is as under:

ASSETS EQUITIES

Preliminary expenses Rs.20,000 Share capital (Rs.10 par) Rs.300,000

Building Rs.225,000 General reserve Rs.60,000

Merchandise inventory Rs.75,000 Retained earnings Rs.30,000

Accounts receivable Rs.75,000 Long term loans Rs.75,000

Cash Rs.107,500 Allowance for depreciation Rs.15,000

Allowance for bad debts Rs.7,500

Accounts payable Rs.15,000

Total Rs.502,500 Total Rs.502,500

Black Corporation was absorbed by White Corporation Ltd. on the following terms: 1. White Corporation takes over all the assets and liabilities of Black Corporation at book value.

(Except cash and long term loans). 2. 5 new shares were issued against every 4 shares of Black Corporation @ Rs.10 each. 3. Liquidation expenses paid by White Corporation Rs.15,000.

REQUIRED (1) Calculate purchase consideration. (2) Record entries in the books of: (i) Black Corporation. (ii) White Corporation.

SOLUTION 4 (a)

Amalgamation: The combination of two or more companies in which the old companies merge to form a new company is called amalgamation. For example Company “A” and Company “B” amalgamate to form a Company “C”. All the assets and liabilities of both old companies (A and B) are transferred to new company (C). In that sense the company “C” is acquiring the company “A” and company “B”.

Absorption: The combination of two or more companies in which one company acquires the other company and the other company absorbs in the acquiring company is called absorption. For example Company “A” acquires the Company “B”. So that after the acquiring the name of Company “B” will not exist but the name of Company “A” will exist. All the assets and liabilities of old company (B) are transferred to purchasing company (A).

SOLUTION 4 (b) Computation of Purchase Consideration: 30,000 x 5/4 = 37,500 Ordinary shares @ Rs.10 each 375,000 Liquidation expense (cash) 15,000

Purchase consideration Rs.390,000


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BLACK CORPORATION LTD. GENERAL JOURNAL


1 Realization 375,000 Building 225,000 Merchandise inventory 75,000 Accounts receivable 75,000 (To record the transfer of assets to White Corporation)

2 Allowance for depreciation 15,000 Allowance for bad debts 7,500 Accounts payable 15,000 Realization 37,500 (To record the transfer of liabilities to White Corporation)

3 Receivable from White Corporation Ltd. 390,000 Realization 390,000 (To record the purchase consideration)

4 Shares – in 375,000 Cash 15,000 Receivable from White Corporation Ltd. 390,000 (To record the cash and shares received from White

Corporation against purchase consideration)

5 Long term loans 75,000 Cash 75,000 (To record the payment of long term loan)

6 Realization 15,000 Cash 15,000 (To record the payment of liquidation expense)

7 Ordinary share capital 300,000 General reserve 60,000 Retained earnings 30,000 Preliminary expenses 20,000 Payable to shareholders 370,000 (To record the closing of shareholders’ equity)

8 Realization 37,500 Payable to shareholders 37,500 (To record the closing of realization account)

9 Payable to shareholders 407,500 Cash 32,500 Shares – in 375,000 (To record the cash & shares issued to the shareholders)

Realization

1 Assets 375,000 2 Liabilities 37,500 6 Liquidation expense 15,000 3 Receivable from White Corporation 390,000 8 Payable to shareholders 37,500

427,500 427,500


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WHITE CORPORATION LTD. GENERAL JOURNAL


1 Building 210,000 Merchandise inventory 75,000 Accounts receivable 75,000 Goodwill 52,500 Allowance for bad debts 7,500 Accounts payable 15,000 Payable to Black Corporation Ltd. 390,000 (To record the assets and liabilities taken over from Black

Corporation Ltd.)

2 Payable to Black Corporation Ltd. 390,000 Ordinary shares capital (37,500 x 10) 375,000 Cash 15,000 (To record the cash shares issued to Black Corporation)

Q.No.5 BRANCH ACCOUNTING – RECIPROCAL TRANSACTIONS The following account is found in the books of Ford Corporation:

FAISALABAD BRANCH

2013 2013 Jan. 1 Balance Rs.67,500 Jan. 19 Remittance from branch Rs.3,000 Jan. 10 Payment of branch note Rs.2,500 Jan. 25 Goods return by branch Rs.2,500 Jan. 15 Payment for branch furniture Rs.10,000 Jan. 29 Collection of branch account Rs.1,500 Jan. 20 Shipment of goods to branch Rs.25,000 Jan. 31 Net loss of branch Rs.890 Jan. 30 Expenses charges to branch Rs.1,500 REQUIRED

(i) Prepare entries in the General Journal of branch. (ii) Prepare T – account of head office in the ledger of branch.

SOLUTION 5 (i)

FORD CORPORATION GENERAL JOURNAL


Jan. 10 Notes payable 2,500 Head office 2,500 (To record the notes paid by head office)

Jan. 15 Furniture 10,000 Head office 10,000 (To record the payment for furniture by head office)

Jan. 19 Head office 3,000 Cash 3,000 (To record the cash remitted to head office)

Jan. 20 Merchandise supplied 25,000 Head office 25,000 (To record the goods received from head office)


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Jan. 25 Head office 2,500 Merchandise supplied return 2,500 (To record the goods returned to head office)

Jan. 29 Head office 1,500 Accounts receivable 1,500 (To record the cash collected from customer by head

office)

Jan. 30 Expenses 1,500 Head office 1,500 (To record the expenses paid by head office)

Jan. 31 Head office 890 Expense and revenue summary 890 (To record the net loss reported to head office)

SOLUTION 5 (ii)

FORD CORPORATION GENERAL LEDGER

HEAD OFFICE

Jan. 19 Cash 3,000 Jan. 1 Balance 67,500 Jan. 25 Merchandise supplied return 2,500 Jan. 10 Notes payable 2,500 Jan. 29 Accounts receivable 1,500 Jan. 15 Furniture 10,000 Jan. 31 Expense and revenue summary 890 Jan. 20 Merchandise supplies 25,000 Jan. 31 Balance c/d 98,610 Jan. 30 Expenses 1,500

106,500 106,500

Feb. 1 Balance b/d 98,610

Q.No.6 BRANCH ACCOUNTING – ALLOWANCE FOR OVERVALUATION AND INTER BRANCH

TRANSACTION a) The Marsh Corporation bills its Islamabad branch at 35% above cost. On December 31, 2013, its branch reported the following inventory balances:

Particulars Received from Head Office Purchased from Outsiders

Merchandise inventory beginning Rs.16,200 Rs.4,000

Shipment from head office Rs.20,250 Rs.12,000

Merchandise inventory ending Rs.18,900 Rs.5,000

REQUIRED (i) Calculate allowance for overvaluation before adjustment. (ii) Prepare entry to record the adjustment of allowance for overvaluation account.

b) Beta Corporation sent merchandise costing Rs.30,000 at billed price Rs.40,000 to Lahore branch. Freight charges were Rs.2,500. Head office instructed the Lahore branch to send same merchandise to Multan branch. Lahore branch sent merchandise to Multan branch with payment of additional freight charges of Rs.1,000. If head office had directly sent merchandise to Multan branch freight charges would have been Rs.2,500. REQUIRED Record entries in General Journal of: (i) Head office. (ii) Lahore branch. (iii) Multan branch.


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SOLUTION 6 (a) Computation of Allowance for Overvaluation:

Particulars Billed Cost Allowance for over valuation

Merchandise inventory opening (16,200 x 35/135)) 16,200 12,000 4,200 Add: Merchandise supplied (20,250 x 35/135) 20,250 15,000 5,250

Unadjusted allowance for overvaluation 36,450 27,000 9,450 Less: Merchandise inventory ending (18,900 x 35/135) (18,900) (14,000) (4,900)

Adjusted allowance for overvaluation 17,550 13,000 4,550

MARSH CORPORATION

HEAD OFFICE BOOK GENERAL JOURNAL

FOR THE PERIOD ENDED DECEMBER 31, 2013


Dec. 31 Allowance for overvaluation 4,550 2013 Profit and loss account 4,550 (To adjust the allowance for overvaluation)

SOLUTION 6 (b)

BETA CORPORATION HEAD OFFICE

GENERAL JOURNAL


1 Lahore Branch 42,500 Merchandise supplied 30,000 Allowance for overvaluation 10,000 Cash 2,500 (To record the merchandise sent to Lahore Branch and

paid transportation)

2 Multan Branch 42,500 Inter branch freight expenses 1,000 Lahore Branch 43,500 (To record the inter branch freight charges)

BETA CORPORATION

LAHORE BRANCH GENERAL JOURNAL


1 Merchandise supplied 40,000 Freight charges 2,500 Head office 42,500 (To record the merchandise received from head office

and transportation paid by head office)


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2 Head office 43,500 Merchandise supplied 40,000 Freight expense 2,500 Cash 1,000 (To record the merchandise supplied to Multan Brach and

paid transportation)

BETA CORPORATION

MULTAN BRANCH GENERAL JOURNAL


1 Merchandise supplied 40,000 Freight charges 2,500 Head office 42,500 (To record the merchandise received from Lahore Branch

and transportation paid)

Q.No.7 COMPANY ACCOUNTING – ISSUANCE OF SHARES AND DEBENTURES Haroon Textile Mills Ltd. offered 95,000 shares of Rs.10 each. The company received applications for 90,000 shares. The underwriting commission is 1% paid in cash. During the year company completed the following transactions:

1. Issued 4,000 shares at Rs.12 each for office equipment purchased worth Rs.48,000. 2. Issued 35,000 ordinary shares to promoters. The market value of shares was Rs.15 each. 3. Decided to capitalize Rs.20,000 against retained earnings and issued 1,600 shares of Rs.10 each. 4. 9% Debentures payable of Rs.70,000 was settled by the issue of shares of Rs.10 each. 5. Issued 5,500, 8% debentures of Rs.100 each at Rs.90. 6. Issued 70,000 debentures at Rs.95 each and repayable after 9 years at Rs.120. 7. Paid stock dividend by issued 5,500 shares at Rs.15 each.

REQUIRED Prepare journal entries in the books of Haroon Textile Ltd. SOLUTION 7

HAROON TEXTILE MILLS LTD. GENERAL JOURNAL


1 Bank (90,000 x 10) 900,000 Ordinary shares application 900,000 (To record the shares application received at par)

2 Ordinary shares application 900,000 Ordinary shares capital (90,000 x 10) 900,000 (To record the shares issued to public at par)

3 Bank (5,000 x 10) 50,000 Ordinary shares capital (5,000 x 10) 50,000 (To record the shares issued to underwriters at par)

4 Commission expense (50,000 x 1%) 500 Bank 500 (To record the commission paid to underwriters)


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5 Office equipment 48,000 Ordinary shares capital (4,000 x 10) 40,000 Ordinary shares premium (4,000 x 2) 8,000 (To record the issue of shares for purchase of equipment)

6 Preliminary expenses (35,000 x 15) 525,000 Ordinary shares capital (35,000 x 10) 350,000 Ordinary shares premium (35,000 x 5) 175,000 (To record the issue of shares to promoters)

7 Retained earnings 20,000 Ordinary shares capital (1,600 x 10) 16,000 Ordinary shares premium (1,600 x 2.50) 4,000 (To record the issue of shares against retained earnings)

8 9% Debentures payable 70,000 Ordinary shares capital (7,000 x 10) 70,000 (To record the issue of shares for debentures payable)

9 Bank (5,500 x 90) 495,000 Discount on debentures (5,500 x 10) 55,000 8% Debentures payable (5,500 x 100) 550,000 (To record the issue of 8% debentures at discount and

payback at par)

10 Bank (70,000 x 95) 6,650,000 Discount on debentures (70,000 x 5) 350,000 Loss on redemption (70,000 x 20) 1,400,000 Debentures payable (70,000 x 100) 7,000,000 Premium on redemption (70,000 x 20) 1,400,000 (To record the issue of debentures at discount and

payback at premium after 9 years)

11 Retained earnings (5,500 x 15) 82,500 Stock dividend payable 82,500 (To record the declaration of stock dividend)

12 Stock dividend payable 82,500 Ordinary shares capital (5,500 x 10) 55,000 Ordinary shares premium (5,500 x 5) 27,500 (To record the issue of shares in settlement of stock

dividend)

Q.No.8 PREPARATION OF FINANCIAL STATEMENTS Moon Ltd. has an authorized capital of Rs.4,000,000 divided into 40,000 shares of Rs.100 each. Following is the pre – closing trial balance on December 31, 2013:

MOON LTD. PRE – CLOSING TRIAL BALANCE (DECEMBER 31, 2013)

DEBIT BALANCES CREDIT BALANCES

Cash Rs.17,000 Share capital Rs.800,000

Accounts receivable Rs.30,000 Allowance for bad debts Rs.1,500

Inventory Rs.140,000 Accounts payable Rs.25,000

Machinery Rs.400,000 Retained earnings Rs.200,000

Building Rs.700,000 Sales Rs.500,000


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Purchases Rs.300,000 Commission income Rs.3,500

Carriage – in Rs.2,000 10% Bonds payable Rs.100,000

Salaries expense Rs.18,000

Director’s fees Rs.10,000

Rent expenses Rs.8,000

Office supplies Rs.2,000

Prepaid insurance Rs.3,000

Total Rs.1,630,000 Total Rs.1,630,000

Additional Information: 1. Depreciation for the year of machinery at 10% and building at 15%. 2. Insurance expired Rs.1,000. 3. Rent expense for the year was Rs.6,000. 4. Allowance for bad debts is to be maintained at 4% of accounts receivable. 5. Accrued interest on bonds for three months. 6. Merchandise ending valued Rs.70,000. 7. The company decided to declare cash dividend of Rs.15,000 and appropriate a sum of Rs.40,000

for building extension. REQUIRED

(i) Prepare an income statement for the year ended December 31, 2013. (ii) Prepare balance sheet on December 31, 2013.

SOLUTION 8 (i)

MOON LTD. INCOME STATEMENT

FOR THE PERIOD ENDED DECEMBER 31, 2013 Sales 500,000 Less: Cost of Goods Sold: Merchandise inventory beginning 140,000 Add: Net Purchases: Purchases 300,000 Add: Carriage – in 2,000

Net purchases 302,000

Merchandise available for sale 442,000 Less: Merchandise inventory ending (70,000)

Cost of goods sold (372,000)

Gross profit 128,000 Less: Operating Expenses: Salaries expense 18,000 Director’s fees 10,000 Rent expense (8,000 – 2,000) 6,000 Insurance expense 1,000 Depreciation expense –Machinery (400,000 x 10%) 40,000 Depreciation expense –Building (700,000 x 15%) 105,000 Interest expense (100,000 x 10% x 3/12) 2,500

Total operating expenses (182,500)

Loss from operation (54,500) Add: Other Income: Commission income 3,500

Net loss (51,000)


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MOON LTD. STATEMENT OF RETAINED EARNINGS

FOR THE PERIOD ENDED 30 JUNE 2013 Retained earnings (opening balance) 200,000 Less: Net loss for the period (51,000)

Total retained earning 149,000 Less: Dividends and Reserves: Reserve for building extension 40,000 Less: Allowance for bad debts (300) Cash dividend 15,000

Total dividend and reserves (54,700)

Retained earnings (ending balance) 94,300

SOLUTION 8 (b)

MOON LTD. BALANCE SHEET

AS ON 30 JUNE 2013

Equities Assets

Shareholder’s Equity: Fixed Assets: Authorized Capital: Machinery 400,000 400,000 ordinary shares @Rs.100 each 4,000,000 Less: All for dep. (40,000) 360,000

Building 700,000 Issued & Paid-up Capital: Less: All for dep. (105,000) 595,000

80,000 ordinary shares @ Rs.100 each 800,000 Total fixed assets 955,000 Retained earnings 94,300 Reserve for building extension 40,000 Current Assets:

Total shareholder’s equity 934,300 prepaid rent 2,000 Prepaid insurance 2,000 Liabilities: Office supplies 2,000 Long Term Liabilities: Merchandise inventory 70,000 10% Bonds payable 100,000 A/c. receivable 30,000 Less: All for b/d (1,200) 28,800 Current Liabilities: Cash 17,000

Accounts payable 25,000 Total current assets 121,800 Interest payable 2,500 Cash dividend payable 15,000

Total liabilities 142,500

Total equities 1,076,800 Total assets 1,076,800

Additional Working:

MOON LTD. ADJUSTING ENTRIES

FOR THE PERIOD ENDED DECEMBER 31, 2013


1 Depreciation expense 145,000 Allowance for depreciation – Machinery 40,000 Allowance for depreciation – Building 105,000 (To adjust the depreciation expenses for the period)


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2 Insurance expense 1,000 Prepaid insurance 1,000 (To adjust the prepaid insurance)

3 Prepaid rent 2,000 Rent expense 2,000 (To adjust the rent expense)

4 Allowance for bad debts 300 Retained earnings 300 (To adjust the bad debts expense for the period)

5 Interest expense 2,500 Interest payable 2,500 (To adjust the unpaid interest on bonds payable)

6 Merchandise inventory 70,000 Expense and revenue summary 70,000 (To close the ending inventory)

7 Retained earnings 55,000 Cash dividend payable 15,000 Reserve for building extension 40,000 (To record the declaration of cash dividend and reserve

for building extension)

Documents

B.COM – II – ADVANCED ACCOUNTINGB . C o m – II – Advanced Accounting – 2014 (Regular) Page 8 Q.No.4 COMPANY ACCOUNTING – ABSORPTION a) Differentiate between amalgamation