B.COM – II – ADVANCED ACCOUNTINGa4accounting.weebly.com/uploads/7/1/2/8/7128209/b.com_-_ii_-_2006...The investments had an original cost of Rs.200,000. There was retirement or

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2006

Compiled and Solved by:

S.Hussain

B.COM II ADVANCED ACCOUNTING

PRIVATE

http://www.a4accounting.net/

Compiled & Solved by: S.Hussain [email protected]

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 0 6 ( P r i v a t e )

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ADVANCED ACCOUNTING 2006

PRIVATE Instructions: Attempt any five questions.

Q.No.1 ACCOUNTING FOR BRANCH OPERATIONS GIVEN Auto Parts Company operates several sales and service outlets (branches) throughout Karachi. A decentralized accounting system is used by each branch. At the end of November 2006 the following reciprocal accounts appear in the accounting records of the Hyderi branch and the head office: Branch records: Head office (credit balance) Rs.17,970. Head office records: Hyderi branch (debit balance) Rs.17,210. The reason for the discrepancy in the amount shown in the two accounts is that the branch net income for November Rs.1,800 and a cash deposit made by the branch to the account of the head office, Rs.1,040, have not been recorded by the head office. Both the branch and the head office use a perpetual inventory system. During December 2006, the following transactions affected the two accounts. December 6. Head office shipped auto parts to Hyderi branch, Rs.7,250. Debit inventory account on branch books, credit inventory account on the head office books. December 12. Branch transferred Rs.4,950 from its bank account to the bank account of the head office. December 19. Branch returned shop supplies costing Rs.610 to the head office. Supplies are recorded in the shop supplies account in both sets of accounts. December 30. Head office notified branch that operating expenses Rs.1,100 which had been recorded in the accounts of the head office in the operating expense account were chargeable to Hyderi Branch. December 31. The income summary account in the accounts of the branch showed a debit balance of Rs.590 at the end of December. REQUIRED

(a) Record the transactions listed above in the accounts of the Hyderi branch. (b) Record the two transactions relating to the month of November and all transactions for

December in the accounts of the head office. (c) Determine the balance in the head office account and the Hyderi branch account at the end of

Dec. SOLUTION 1 (a)

AUTO PARTS COMPANY HYDERI BRANCH

GENERAL JOURNAL

Date Particulars P/R Debit Credit

6 Dec Merchandise inventory 7,250 2006 Head office 7,250 (To record the merchandise received form head office)

12 Dec Head office 4,950 2006 Bank 4,950 (To record the cash transferred to head office from

bank)

19 Dec Head office 610 2006 Shop supplies returned 610 (To record the shop supplies returned to head office)



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30 Dec Operating expense 1,100 2006 Head office 1,100 (To record the expenses charged by head office)

31 Dec Head office 590 2006 Income summary 590 (To record the net loss reported to head office)

SOLUTION 1 (b)

AUTO PARTS COMPANY HEAD OFFICE

GENERAL JOURNAL


1 Dec Hyderi branch 1,800 2006 Profit and loss account 1,800 (To record the net profit reported by branch for Nov.)

1 Dec Cash 1,040 2006 Hyderi branch 1,040 (To record the cash deposited by branch)

6 Dec Hyderi branch 7,250 2006 Merchandise inventory 7,250 (To record the merchandise supplied to branch)

12 Dec Bank 4,950 2006 Hyderi branch 4,950 (To record the cash transferred by bank into bank)

19 Dec Shop supplies returned 610 2006 Hyderi branch 610 (To record the shop supplies returned by branch)

30 Dec Hyderi branch 1,100 2006 Operating expenses 1,100 (To record the operating expenses paid of branch)

31 Dec Profit and loss account 590 Hyderi branch 590 (To record the net loss reported by branch for Dec.)

SOLUTION 1 (c)

HEAD OFFICE BOOK Branch Account

1 Dec Balance 17,210 1 Dec Cash 1,040 1 Dec Profit & loss account 1,800 12 Dec Bank 4,950 6 Dec Merchandise 7,250 19 Dec Shop supplies returned 610 30 Dec Operating expenses 1,100 31 Dec Profit & loss account 590 31 Dec c/d balance 20,170

27,360 27,360

1 Jan b/d balance 20,170



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HYDERI BRANCH BOOK Head Office Account

12 Dec Bank 4,950 1 Dec Balance 17,970 19 Dec Shop supplies returned 610 6 Dec Merchandise 7,250 31 Dec Income summary 590 30 Dec Operating expenses 1,100 31 Dec c/d balance 20,170

26,320 26,320

1 Jan b/d balance 20,170

Q.No.2 INSTALLMENT SALES GIVEN City Cars deals with two brands of fuel economy local cars namely GL and XL. The selling price of GL cars is Rs.450,000 each while the XL cars are sold for Rs.400,000. The selling price includes a profit margin of 5 percent. A down payment of 20 percent is collected on each car. The balance is collected on 10 monthly installments of equal amounts. The business completed the following transactions during the year: Purchased 10 units of GL cars and 15 units of XL cars on account from New Age Motors Company. Sold 10 units of each type of cars. The down payment and all installments were collected in full by cheque except the following:

(i) A customer failed to pay last three installments due on the XL cars he had purchased. The vehicle was fortified and assigned a value of Rs.150,000. The car was taken by the owner for his personal use.

(ii) A cheque amounting to Rs.72,000 received from a customer who bought a GL car was dishonored.

City Cars incurred and paid the following expenses during the year: Selling expenses 30,000 Administrative expense 70,000 REQUIRED

(a) General Journal entries in City Cars book (adjusting and closing are not required). (b) Cost of installment sales for each brand separately. (c) Gross profit realized on each brand of cars. (d) Net profit of City Cars for the year.

SOLUTION 2 (a)

CITY CARS GENERAL JOURNAL


1 Merchandise (GL) 4,275,000 Accounts payable (New Age Motors Company) 4,275,000 (To record the GL cars purchased on account)

2 Merchandise (XL) 5,700,000 Accounts payable (New Age Motors Company) 5,700,000 (To record the XL cars purchased on account)

3 Installment accounts receivable (GL) 4,500,000 Installment sales 4,500,000 (To record the GL cars sold on installments basis)

4 Installment accounts receivable (XL) 4,000,000 Installment sales 4,000,000 (To record the XL cars sold on installments basis)



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5 Bank 900,000 Installment accounts receivable (GL) 900,000 (To record the down payment collected on GL cars)

6 Bank 800,000 Installment accounts receivable (XL) 800,000 (To record the down payment collected on XL cars)

7 Bank 3,600,000 Installment accounts receivable (GL) 3,600,000 (To record the cash collected on installment basis of GL)

8 Bank 3,104,000 Installment accounts receivable (XL) 3,104,000 (To record the cash collected on installment basis of XL)

9 Installment accounts receivable (GL) 72,000 Bank 72,000 (To record the dishonoured cheque)

10 Selling expenses 30,000 Administrative expenses 70,000 Cash 100,000 (To record the selling and administrative expenses paid)

11 Drawings 150,000 Unrealized gross profit 4,800 Gain on repossession 58,800 Installment accounts receivable (XL) 96,000 (To record the merchandise repossessed)

Computation of Purchases: GL Cars: Total purchases = Selling price per car of GL x 95/100 x Units purchased of GL Total purchases = 450,000 x 95/100 x 10 Total purchases = 4,275,000 XL Cars: Total purchases = Selling price per car of XL x 95/100 x Units purchased of XL Total purchases = 400,000 x 95/100 x 15 Total purchases = 5,700,000 Computation of Installment Sales: GL Cars XL Cars Selling price per car 450,000 400,000 Units sold 10 10

Installment sales 4,500,000 4,000,000

Computation of Cash Collection: GL Cars: Down payment (4,500,000 x 20%) 900,000 Add: Remaining Installments (4,500,000 900,000) 3,600,000

Total installment accounts receivable 4,500,000 Less: Dishonoured cheque (72,000)

Cash collection 4,428,000



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XL Cars: Down payment (4,000,000 x 20%) 800,000 Add: Remaining Installments (4,000,000 800,000) 3,200,000

Total installment accounts receivable 4,000,000 Less: Installment accounts receivable cancelled (320,000/10 x 3) (96,000)

Cash collection 3,904,000

SOLUTION 2 (b) Computation of Cost of Installment Sales: GL Cars: Cost of installment sales = Selling price per car of GL x 95/100 x Units sold of GL Cost of installment sales = 450,000 x 95/100 x 10 Cost of installment sales = 4,275,000 XL Cars: Cost of installment sales = Selling price per car of XL x 95/100 x Units sold of XL Cost of installment sales = 400,000 x 95/100 x 10 Cost of installment sales = 3,800,000 SOLUTION 2 (c) Computation of Realized Gross Profit: Realized gross profit = Cash collection X DGP% Realized gross profit (GL) = 4,428,000 x 5% 221,400 Realized gross profit (XL) = 3,904,000 x 5% 195,200

Total realized gross profit = 416,600

Computation of Gain or Loss on Repossession: Installment accounts receivable cancelled (XL) 96,000 Less: Unrealized gross profit (96,000 x 5%) (4,800)

Book value 91,200 Less: Merchandise repossessed at fair market value (150,000)

Gain on repossession 58,800

SOLUTION 2 (d)

CITY CARS INCOME STATEMENT

Realized gross profit 416,600 Less: Operating Expenses: Selling expenses 30,000 Administrative expenses 70,000

Total operating expenses (100,000)

Profit from operation 316,600 Add: Gain on repossession 58,800

Net income 375,400



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Q.No.3 CASH FLOW ANALYSIS GIVEN Pakistan Digitech Companys comparative balance sheets and income statement for the year 2006 follows:

PAKISTAN DIGITECH COMPANY COMPARATIVE BALANCE SHEET

Assets: 2006 2005 Cash 140,000 100,000 Accounts receivable 210,000 150,000 Inventory 500,000 430,000 Prepaid expenses 20,000 60,000 Plant & equipment 1,900,000 1,400,000 Less: Accumulated depreciation 650,000 540,000 Long-term investment 700,000 900,000

Total 2,820,000 2,500,000

Liabilities & Equities: Accounts payable 260,000 250,000 Accrued liabilities 100,000 120,000 Taxes payable 490,000 490,000 Debentures payable 500,000 400,000 Ordinary share capital 800,000 700,000 Retained earnings 670,000 540,000

Total 2,820,000 2,500,000

PAKISTAN DIGITECH COMPANY INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2006 Sales 2,300,000 Less: Cost of goods sold 1,200,000

Gross margin 1,100,000 Less: Operating expenses 700,000

Net operating profit 400,000 Gain on sale of long-term investment 50,000

Income before taxes 450,000 Less: Income taxes 140,000

Net income 310,000

Additional Information: Dividends of Rs.180,000 declared and paid during the year. The gain on sale of long-term investments was from the sale of investments for Rs.250,000 in cash. The investments had an original cost of Rs.200,000. There was retirement or disposal of plant and equipment during the year. REQUIRED Prepare a Cash Flow Statement using indirect method showing clearly:

(i) Cash flow from operating activities. (ii) Cash flow from investing activities. (iii) Cash flow from financing activities.



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SOLUTION 3 PAKISTAN DIGITECH COMPANY

CASH FLOW STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2006

Cash Flow from Operating Activities: Profit before tax 450,000 Adjustments: Add: Depreciation expense 110,000 Less: Gain on sale of long-term investment (50,000)

Profit before changes in working capital 510,000 Less: Increase in accounts receivable (60,000) Less: Increase in merchandise inventory (70,000) Add: Decrease in prepaid expenses 40,000 Add: Increase in accounts payable 10,000 Less: Decrease in accrued liabilities (20,000)

Cash generated from operation 410,000 Less: Income tax paid (140,000)

Net cash flow from operating activities 270,000 Cash Flow from Investing Activities: Purchases of plant and equipment (500,000) Sale of long-term investments 250,000

Net cash flow from investing activities (250,000) Cash Flow from Financing Activities: Issue of shares 100,000 Issue of debentures payables 100,000 Cash dividend paid (180,000)

Net cash flow from financing activities 20,000

Net increase in cash and cash equivalents 40,000 Add: Opening cash and cash equivalents balance 100,000

Closing cash and cash equivalents balance 140,000

Q.No.4 FINANCIAL STATEMENT ANALYSIS GIVEN Take into account the financial statements of Pakistan Digitech Company (given in Q3). REQUIRED

(a) Compute the following ratios for the year 05 and 06. (i) Current ratio (ii) Acid test ratio (iii) Inventory turnover (iv) Return on total assets (v) Return on shareholders equity (vi) Debt-to-equity ratio (vii) Accounts receivable turnover

(b) Comment on the results of your computation. SOLUTION 4 (a) Computation of Current Liabilities: 2006 2005 Accounts payable 260,000 250,000 Accrued liabilities 100,000 120,000 Taxes payable 490,000 490,000

Total current liabilities 850,000 860,000



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Computation of Current Assets: 2006 2005 Cash 140,000 100,000 Accounts receivable 210,000 150,000

Total quick assets 350,000 250,000 Merchandise inventory 500,000 430,000 Prepaid expenses 20,000 60,000

Total current assets 870,000 740,000

(i) Current Ratio:

2006 2005

Current ratio = Total current assets

Total current liabilities Current ratio = 870,000 740,000

850,000 860,000 Current ratio = 1.02 : 1 0.86 : 1

(ii) Acid Test Ratio:

2006 2005

Acid test ratio = Total quick assets

Total current liabilities Acid test ratio = 350,000 250,000

850,000 860,000 Acid test ratio = 0.41 : 1 0.29 : 1

(iii) Inventory Turnover:

2006 2005

Inventory turnover in times = Cost of goods sold

Average inventory Inventory turnover in times = 1,200,000 Not possible

(500,000+430,000)/2 Inventory turnover in times = 2.58 times

2006 2005

Inventory turnover in days = 365

Inventory turnover times Inventory turnover in days = 365 Not possible

2.58 Inventory turnover in days = 142 days

(iv) Return on Total Assets:

2006 2005

Return on total assets = Net income X 100

Total assets Return on capital employed = 310,000 X 100 Not possible

2,820,000 Return on total assets = 11%



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(v) Return on Shareholders Equity:

2006 2005

Return on shareholders equity = Net income X 100

Shareholders equity

Return on shareholders equity = 310,000 X 100 Not possible

1,470,000 Return on shareholders equity = 21.09%

(vi) Debt-to-Equity Ratio:

2006 2005

Debt-to-equity ratio = Total liabilities X 100

Shareholders equity Debt-to-equity ratio = 1,350,000 X 100 1,260,000 X 100

1,470,000 1,240,000 Debt-to-equity ratio = 91.84% 101.61%

(vii) Accounts Receivable Turnover:

2006 2005

Receivable turnover in times = Net credit sales

Average receivable Receivable turnover in times = 2,300,000 Not possible

(210,000+150,000)/2 Receivable turnover in times = 12.78 times

2006 2005

Receivable turnover in days = 365

Receivable turnover times Receivable turnover in days = 365 Not possible

12.78 Receivable turnover in days = 29 days

Computation of Total Liabilities: 2006 2005 Total current liabilities 850,000 860,000 Debentures payable 500,000 400,000

Total liabilities 1,350,000 1,260,000

Computation of Total Shareholders Equity: 2006 2005 Ordinary share capital 800,000 700,000 Retained earnings 670,000 540,000

Total shareholders equity 1,470,000 1,240,000



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SOLUTION 4 (b) Comments: The companys liquidity position is not good because current ratio is just 1.02: 1 which is unfavourable (1.5 is usually considered as a safe minimum) and acid test ratio is also not good (0.41: 1). In case of liquidity company cannot meet its debts. Return on total assets is low (11%) but return on shareholders equity is average (21.09%). Debt-to-equity ratio of the company is very high (91.84%) which shows the gearing of the company.

Q.No.5 SINGLE ENTRY & INCOMPLETE RECORDS (NOT INCLUDED IN THE NEW COURSE) Q.No.6 COMPANY ACCOUNTING FINANCIAL STATEMENT GIVEN The following is the trial balance of Multi Tech Limited as at December 31, 2006: Paid up share capital 1,000,000 Share premium 500,000 Nat income January 1, 2006 700,000 10% Debentures payable 2010 600,000 Plant and assets 3,900,000 Accumulated depreciation 460,000 Merchandise inventory 880,000 Accounts receivable 420,000 Accounts payable 360,000 Purchases and sales 3,650,000 6,540,000 Administrative salaries 500,000 Sales salaries 70,000 Directors remuneration 160,000 Advertising expenses 280,000 Carriage outwards 100,000 Utility expenses 300,000 Bank overdraft 100,000

10,260,000 10,260,000

Additional Information: The paid-up share capital consists of 100,000 shares of Rs.10 each. Merchandise inventory at December 31, 2006 was Rs.500,000. Estimated tax on profit of the company for the year is Rs.150,000. The directors have proposed final dividend of 10 percent on the ordinary share capital. Depreciation is provided at 10 percent per annum on plant and assets. Allowance for bad debts is to be maintained at 5 percent of the accounts receivable. REQUIRED

(a) Income statement for the year ended Dec. 31, 2006. (b) Statement of retained earnings. (c) Balance sheet as at December 31, 2006.



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SOLUTION 6 (a) MULTI TECH LIMITED INCOME STATEMENT

FOR THE PERIOD ENDED 31 DECEMBER 2006 Sales 6,540,000 Less: Cost of Goods Sold: Merchandise inventory (beg) 880,000 Add: Net purchases 3,650,000

Merchandise available for sale 4,530,000 Less: Merchandise inventory (end) (500,000)

Cost of goods sold (4,030,000)

Gross profit 2,510,000 Less: Operating Expenses: Administrative salaries 500,000 Sales salaries 70,000 Directors remuneration 160,000 Advertising expenses 280,000 Carriage outwards 100,000 Utility expenses 300,000 Depreciation expenses (3,900,000 x 10%) 390,000 Bad debts expense (420,000 x 5%) 21,000

Total operating expenses (1,821,000)

Income before income tax 689,000 Less: Income tax expense (150,000)

Net profit 539,000

SOLUTION 6 (b)

MULTI TECH LIMITED STATEMENT OF RETAINED EARNINGS

FOR THE PERIOD ENDED 31 DECEMBER 2006 Retained earnings (opening balance) 700,000 Add: Net income for the period 539,000

Total retained earning 1,239,000 Less: Dividends and Reserves: Dividend (1,000,000 x 10%) (100,000)

Retained earnings (ending balance) 1,139,000

SOLUTION 6 (c)

MULTI TECH LIMITED BALANCE SHEET

AS ON 31 DECEMBER 2006

Equities Assets Shareholders Equity: Fixed Assets: Issued & Paid-up Capital: Plant and assets 3,900,000 100,000 ordinary shares Less: All for dep. (850,000)

@ Rs.10/- each 1,000,000 Total fixed assets 3,050,000 Share premium 500,000 Retained earnings 1,139,000 Current Assets:

Total shareholders equity 2,639,000 Merchandise inv. 500,000



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A/c rec. 420,000 Liabilities: - All for b/d (21,000) 399,000

Long Term Liabilities: Total current assets 899,000 10% Debentures payable 600,000 Current Liabilities: Accounts payable 360,000 Bank overdraft 100,000 Income tax payable 150,000 Dividend payable 100,000

Total liabilities 1,310,000

Total equities 3,949,000 Total assets 3,949,000

Q.No.7 COMPANY ACCOUNTING RECONSTRUCTION GIVEN Following is the trial balance of Metropolitan Trading Company Limited as on December 31, 2006:

Assets Equities & Liabilities Land and building 400,000 Authorized Capital: Machinery & equipment 300,000 100,000 ordinary shares of Rs.10 1,000,000

Furniture & fixture 20,000 Paid up Capital: Merchandise inventory 100,000 100,000 shares of Rs.10 1,000,000 Accounts receivable 110,000 Accounts payable 30,000 Net loss 100,000 Outstanding expense 25,000 Bank 25,000

1,055,000 1,055,000

The company has suffered losses for last few years. In a joint meeting of creditors and shareholders, it was decided to reconstruct the company and change the name of the company to Karachi Trading Company Limited. The scheme of reconstruction agreed upon and implemented with effect from January 1, 2007 are as follows: The new company will take over all assets and liabilities of the existing company. The authorized capital of the new company will consist of 150,000 ordinary shares of Rs.10 each. The new company purchases the business of the existing company for a sum of Rs.900,000 by issuing 80,000 shares of Rs.10 each and paying Rs.100,000 cash. The reconstruction expenses amounting to Rs.25,000 is to be meet by the existing the company. REQUIRED

(a) General Journal entries to record the reconstruction transactions. (b) Realization account and shareholders account in the books of Metropolitan Trading Company

Limited. SOLUTION 7 (a) Computation of Purchase Consideration: 80,000 ordinary shares @ Rs.10 each 800,000 Cash 100,000

Purchase consideration 900,000



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METROPOLITAN TRADING COMPANY LIMITED GENERAL JOURNAL


1 Receivable from Karachi Trading Company Limited 900,000 Realization 900,000 (To record the purchase consideration)

2 Shares in 800,000 Cash 100,000 Receivable from Karachi Trading Company Limited 900,000 (To record the shares and cash received from Karachi

Trading Company Limited)

3 Realization 955,000 Land and building 400,000 Machinery and equipment 300,000 Furniture and fixture 20,000 Merchandise inventory 100,000 Accounts receivable 110,000 Bank 25,000 (To record the closing of all assets accounts)

4 Accounts payable 30,000 Outstanding expenses 25,000 Realization 55,000 (To record the closing of liabilities account)

5 Realization 25,000 Cash 25,000 (To record the payment of reconstruction expense)

6 Ordinary shares capital 1,000,000 Net loss 100,000 Payable to shareholders 900,000 (To record the closing of shareholders equity)

7 Payable to shareholders 25,000 Realization 25,000 (To record the closing of realization account)

8 Payable to shareholders 875,000 Cash 75,000 Shares in 800,000 (To record the cash & shares issued to the shareholders)



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KARACHI TRADING COMPANY LIMITED GENERAL JOURNAL


1 Land and building 400,000 Machinery & equipment 300,000 Furniture & fixture 20,000 Merchandise inventory 100,000 Accounts receivable 110,000 Bank 25,000 Accounts payable 30,000 Outstanding expenses 25,000 Payable to Metropolitan Trading Company Limited 900,000 (To record the assets and liabilities taken over from

Metropolitan Trading Company Limited)

2 Payable to Metropolitan Trading Company Limited 900,000 Ordinary shares capital (80,000 x 10) 800,000 Cash 100,000 (To record the shares and cash issued to the Metropolitan

Trading Company Limited)

SOLUTION 7 (b)

Realization

3 All assets 955,000 1 Receivable 900,000 5 Cash 25,000 4 Liabilities 55,000 7 Payable to shareholders 25,000

980,000 980,000

Shareholders Equity

7 Realization 25,000 Balance 900,000 8 Cash/Share in 875,000

900,000 900,000

Documents

B.COM – II – ADVANCED ACCOUNTINGa4accounting.weebly.com/uploads/7/1/2/8/7128209/b.com_-_ii_-_2006...The investments had an original cost of Rs.200,000. There was retirement or