ADVANCED & COST ACCOUNTING B.Com Part – II Sameer Hussain Developed by; www.a4accounting.net According to new syllabus. More than 350 practice question with the reference of illustrations and including past papers. ADVANCED & COST ACCOUNTING B.COM PART – II SAMEER HUSSAIN According to new syllabus. More than 350 practice questions with the reference of illustrations and including past papers. Developed by: www.a4accounting.net Page i All personal and company name / firm named in this book are intended to be fictitious and accordingly any similarity to any living person or actual company / firm is purely coincidental, except where indicated. Page ii DEDICATED TO: All Students…. Page iii Table of Contents ADVANCED ACCOUNTING Chapter # 1: Installment Sales ............................................................................................ 1 Chapter # 2: Branch Accounting ......................................................................................29 Chapter # 3: Analysis of Financial Statements ............................................................61 Chapter # 4: Cash Flow Statement ...................................................................................85 Chapter # 5: Accounting for Company – Final Accounts ....................................... 117 Chapter # 6: Accounting for Company – Amalgamation ....................................... 161 Chapter # 7: Accounting for Company – Absorption.............................................. 179 Chapter # 8: Accounting for Company – Reconstruction...................................... 197 COST ACCOUNTING Chapter # 9: Accounting for Manufacturing Operation ........................................ 207 Chapter # 10: Job Order Costing ...................................................................................... 233 Chapter # 11: Standard Costing ....................................................................................... 257 Chapter # 12: Process Costing .......................................................................................... 275 PAST PAPERS ....................................................................................................................................... 301 Advanced & Cost Accounting 2011 (Regular) .......................................................................... 303 Advanced & Cost Accounting 2011 (External)......................................................................... 307 Page iv Chapter # 1 Installment Sales Advanced Accounting www.a4accounting.net Installment Sales Chapter # 1 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Accounting for installment sales under Perpetual Inventory System. Defaults and repossessions. Recognition of realized gross profit. Reporting of relevant accounts on Financial Statement. WHAT THE EXAMINER USUALLY ASK? Computation of: o Installment sales. o Cost of installment sales. o Unrealized gross profit (D.G.P.). o Unrealized gross profit rate (D.G.P. %). o Cash collection. o Realized gross profit (R.G.P.). o Gain or loss on repossession. o Loss on default. General Journal entries under Perpetual Inventory System. Adjusting and closing entries under Perpetual Inventory System. Income Statement. Balance Sheet. www.a4accounting.net Page 2 Installment Sales Chapter # 1 INSTALLMENT SALES Goods purchase by buyer by paying a small amount of the total amount of goods at the time of purchase of goods and agrees to pay the remaining amount in equal installments in equal interval of time is known as installment. The first time payment is known as “down payment”. In installment sales, the risk and rewards are transferred to the buyer. COST OF INSTALLMENT SALES The cost of merchandise sold on installment basis is called cost of installment sales. It is obtained by adding net purchases in the merchandise inventory beginning and subtracting merchandise inventory ending. 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. COMPUTATION OF COST OF INSTALLMENT SALES: Merchandise inventory (beginning) Add: Net purchases during the period Merchandise available for sale Less: Merchandise inventory (ending) Cost of installment sales XXX XXX XXX (XXX) XXX COMPUTATION OF UNREALIZED GROSS PROFIT (D.G.P.): Unrealized gross profit (D.G.P.) = Installment sales – Cost of installment sales COMPUTATION OF UNREALIZED GROSS PROFIT RATE (D.G.P. %): Unrealized gross profit Rate (D.G.P. %) = Unrealized gross profit Installment sales X 100 COMPUTATION OF CASH COLLECTION: Cash collection (current year) = Cash collection (previous year) = Cash collection = Installment sales – Installment accounts receivable (ending) OR Installment accounts receivable (beginning) – Installment accounts receivable (ending) – Installment accounts receivable cancelled OR Down payment + Installments received COMPUTATION OF REALIZED GROSS PROFIT (R.G.P.): Realized gross profit (R.G.P.) = Cash collection x Unrealized gross profit rate Page 3 www.a4accounting.net Installment Sales Chapter # 1 COMPUTATION OF INSTALLMENT SALES / INSTALLMENT ACCOUNTS RECEIVABLE (BEGINNING): Installment sales/installment accounts receivable (beginning) = Unrealized gross profit (D.G.P.) Unrealized gross profit rate (D.G.P.%) COMPUTATION OF LOSS ON DEFAULT: If the buyer is unable to pay the further installments and the seller is unable to repossess his goods from the buyer, it is said to be default. Installment accounts receivable cancelled Less: D.G.P. for go (Installment accounts receivable cancelled x D.G.P. %) Loss on default XXX (XXX) (XXX) COMPUTATION OF GAIN OR LOSS ON REPOSSESSION: If the buyer is unable to pay the further installments and the seller repossesses his goods from the buyer, it is said to be repossession of merchandise. Installment accounts receivable cancelled Less: D.G.P. for go (Installment accounts receivable cancelled x D.G.P. %) Book value Less: Merchandise repossessed at fair market value Gain/loss on repossession XXX (XXX) XXX (XXX) XXX/(XXX) GENERAL ENTRIES UNDER PERPETUAL SYSTEM: o Purchased Merchandise on Account: Merchandise DR. (with amount of purchases) Accounts payable CR. (with amount of payable) -----------------------------------------------------------------------------------------------------------o Sold Merchandise on Installment Basis: Installment accounts receivable DR. (amount receivable as installment) Installment sales CR. (amount of installment sales) -----------------------------------------------------------------------------------------------------------o Cash Collection on Installment Basis / Down Payment Received: Cash DR. (with amount of cash collection) Installment accounts receivable CR. (amount of cash collection) -----------------------------------------------------------------------------------------------------------o Payment to Suppliers: Accounts payable DR. (with amount of cash paid) Cash CR. (with amount of cash paid) ------------------------------------------------------------------------------------------------------------ www.a4accounting.net Page 4 Installment Sales Chapter # 1 o Expense Paid During the Period: Expenses Cash DR. (with amount of expenses paid) CR. (with amount of cash paid) ADJUSTING ENTRIES UNDER PERPETUAL SYSTEM: o Recording Cost of Goods Sold: Cost of installment sales DR. (amount of cost of installment sales) Merchandise CR. (amount of cost of goods sold) -----------------------------------------------------------------------------------------------------------o Recording Unrealized Gross Profit (D.G.P.): Installment sales DR. (with amount of installment sales) Unrealized gross profit (D.G.P.) CR. (amount of D.G.P.) Cost of installment sales CR. (amount of cost of sales) -----------------------------------------------------------------------------------------------------------o Recording Realized Gross Profit (R.G.P.): Unrealized gross profit (D.G.P.) DR. (with amount of realized gross profit) Realized gross profit (R.G.P.) CR. (with amount of R.G.P.) -----------------------------------------------------------------------------------------------------------o Recording Loss on Default: Unrealized gross profit (D.G.P.) DR. (with amount of D.G.P. on default) Loss on default DR. (with amount of loss on default) Installment accounts receivable CR. (installment A/R cancelled) -----------------------------------------------------------------------------------------------------------o Recording Gain on Repossession: Merchandise repossessed DR. (with repossessed value) Unrealized gross profit (D.G.P.) DR. (with amount of D.G.P. on default) Gain on default CR. (amount of gain) Installment accounts receivable CR. (installment A/R cancelled) -----------------------------------------------------------------------------------------------------------o Recording Loss on Repossession: Merchandise repossessed DR. (with repossessed value) Unrealized gross profit (D.G.P.) DR. (with amount of D.G.P. on default) Loss on default DR. (with amount of loss on repossession) Installment accounts receivable CR. (installment A/R cancelled) ------------------------------------------------------------------------------------------------------------ Page 5 www.a4accounting.net Installment Sales Chapter # 1 CLOSING ENTRIES UNDER PERPETUAL SYSTEM: o Closing Expenses: Expense and revenue summary DR. Expenses CR. Loss on repossession/default CR. -----------------------------------------------------------------------------------------------------------o Closing Income: Realized gross profit (R.G.P.) DR. Interest income DR. Gain on repossession DR. Expense and revenue summary CR. -----------------------------------------------------------------------------------------------------------Realized Gross Profit (RGP) Cash Collection Installment A/R (Beg) or Installment sales - X Installment Accounts Receivable (Ending) Unrealized Gross Profit Rate (DGP%) Unrealized Gross Profit (DGP) Installment Sales - ÷ Installment Sales Cost of Installment Sales Merchandise Inventory (Beginning) + Total Net Purchases Merchandise Inventory (Ending) ILLUSTRATION # 1: Ali Company deals in radio and television sets. It sells those sets on installment basis. The summary of transactions for the year ended 31 December 1995 is as follows: 1) Purchase on account Rs. 103,500 2) Installment sales Rs. 125,000 3) Cost of installment sales Rs. 100,000 4) Collection of installment accounts receivable Rs. 90,000 5) Payment to accounts payable Rs. 95,000 6) Selling expenses paid Rs. 1,200 7) General expenses paid Rs. 2,300 8) Repossessed merchandise at fair market value Rs. 3,000 9) Installment accounts receivable written off by repossession Rs. 10,500 REQUIRED Give journal entries for the year ended 31st December 1995 including adjusting and closing entries. www.a4accounting.net Page 6 Installment Sales Chapter # 1 SOLUTION # 1: Computation of Unrealized Gross Profit (DGP): Unrealized gross profit = Installment sales – Cost of installment sales Unrealized gross profit = 125,000 – 100,000 Unrealized gross profit = 25,000 Computation of Unrealized Gross Profit Rate (DGP%): Unrealized gross profit rate = Unrealized gross profit Installment sales Unrealized gross profit rate = 25,000 125,000 Unrealized gross profit rate = 20% x 100 x 100 Computation of Realized Gross Profit (RGP): Realized gross profit = Cash collection X DGP% Realized gross profit = 90,000 x 20% Realized gross profit = 18,000 Computation of Gain or Loss on Repossession: Installment accounts receivable cancelled Less: Unrealized gross profit (10,500 x 20%) Book value Less: Merchandise repossessed at fair market value Loss on repossession Date 1 2 3 4 5 6 ALI COMPANY GENERAL JOURNAL Particulars Merchandise Accounts payable (To record the merchandise purchased on account) Installment accounts receivable Installment sales (To record the good sold on installment basis) Cash Installment accounts receivable (To record the cash collected on installment basis) Accounts payable Cash (To record the payment to suppliers) Selling expenses Cash (To record the selling expenses paid) General expenses Cash (To record the general expenses paid) Page 7 10,500 (2,100) 8,400 3,000 5,400 P/R Debit 103,500 Credit 103,500 125,000 125,000 90,000 95,000 90,000 95,000 1,200 1,200 2,300 2,300 www.a4accounting.net Installment Sales Chapter # 1 Date 1 2 3 4 Date 1 2 3 ALI COMPANY ADJUSTING ENTRIES Particulars Cost of installment sales Merchandise (To record the cost of installment sales) Installment sales Cost of installment sales Unrealized gross profit (To adjust the unrealized gross profit) Unrealized gross profit Realized gross profit (To adjust the realized gross profit) Merchandise repossessed Unrealized gross profit Loss on repossession Installment accounts receivable (To adjust the repossession of merchandise) ALI COMPANY CLOSING ENTRIES Particulars Expense and revenue summary Selling expenses General expenses Loss on repossession (To close the all expense accounts) Realized gross profit Expense and revenue summary (To close the all income accounts) Expense and revenue summary Capital (To close the expense and revenue summary account) P/R Debit 100,000 125,000 Credit 100,000 100,000 25,000 18,000 18,000 3,000 2,100 5,400 10,500 P/R Debit 8,900 18,000 9,100 Credit 1,200 2,300 5,400 18,000 9,100 ILLUSTRATION # 2: The selected balances of ABC Installment Sales Co. are as follows: 2007 – Jan. 1 Installment accounts receivable - 2005 90,000 Installment accounts receivable – 2006 285,000 Installment accounts receivable – 2007 Deferred gross profit – 2005 22,500 Deferred gross profit – 2006 85,500 Installment sales Cost of installment sales Repossessed merchandise Installment accounts receivable – 2005 cancelled on repossession - www.a4accounting.net Page 8 2007 – Dec. 31 135,000 337,500 18,750 85,500 450,000 306,000 12,000 15,000 Installment Sales Chapter # 1 REQUIRED a) Gross profit realized during 2007. b) General Journal entries including adjusting entries during 2007. SOLUTION # 2: Computation of Unrealized Gross Profit (DGP) (2007): Unrealized gross profit = Installment sales – Cost of installment sales Unrealized gross profit = 450,000 – 306,000 Unrealized gross profit = 144,000 Computation of Unrealized Gross Profit Rate (DGP%): Unrealized gross profit rate (2007) = Unrealized gross profit Installment sales Unrealized gross profit rate (2007) = 144,000 450,000 Unrealized gross profit rate (2007)= 32% Unrealized gross profit rate (2006) = Unrealized gross profit rate (2006) = Unrealized gross profit rate (2006)= Unrealized gross profit rate (2005) = Unrealized gross profit rate (2005) = Unrealized gross profit rate (2005)= x 100 x 100 Unrealized gross profit (Beg) Installment A/R (Beg) 85,500 285,000 30% x 100 Unrealized gross profit (Beg) Installment A/R (Beg) 22,500 90,000 25% x 100 x 100 x 100 Computation of Cash Collection: Cash collection (2007) = Installment sales – Installment accounts receivable (ending) Cash collection (2007) = 450,000 – 337,500 Cash collection (2007) = 112,500 Cash collection (2006) = Cash collection (2006) = Cash collection (2006) = Installment A/R (Beg) – Installment A/R (End) 285,000 – 135,000 150,000 Cash collection (2005) = Installment A/R (Beg) – Installment A/R (End) – Installment A/R cancelled 90,000 – 0 – 15,000 75,000 Cash collection (2005) = Cash collection (2005) = Computation of Realized Gross Profit: Realized gross profit = Cash collection X DGP% Realized gross profit (2007) = 112,500 x 32% Realized gross profit (2006) = 150,000 x 30% Realized gross profit (2005) = 75,000 x 25% Total realized gross profit = Page 9 36,000 45,000 18,750 99,750 www.a4accounting.net Installment Sales Chapter # 1 Computation of Gain or Loss on Repossession: Installment accounts receivable cancelled Less: Unrealized gross profit (15,000 x 25%) Book value Less: Merchandise repossessed at fair market value Gain on repossession Date 1 2 Date 1 2 3 4 ABC INSTALLMENT SALES CO. GENERAL JOURNAL Particulars P/R Installment accounts receivable (2007) Installment sales (To record the good sold on installment basis) Cash Installment accounts receivable (2007) Installment accounts receivable (2006) Installment accounts receivable (2005) (To record the cash collected on installment basis) ABC INSTALLMENT SALES CO. ADJUSTING ENTRIES Particulars P/R Cost of installment sales Merchandise (To record the cost of installment sales) Installment sales Cost of installment sales Unrealized gross profit (2007) (To adjust the unrealized gross profit) Unrealized gross profit (2007) Unrealized gross profit (2006) Unrealized gross profit (2005) Realized gross profit (To adjust the realized gross profit) Merchandise repossessed Unrealized gross profit (2005) Gain on repossession Installment accounts receivable (2005) (To adjust the repossession of merchandise) ILLUSTRATION # 3: 15,000 (3,750) 11,250 (12,000) 750 Debit 450,000 Credit 450,000 337,500 Debit 306,000 450,000 112,500 150,000 75,000 Credit 306,000 306,000 144,000 36,000 45,000 18,750 99,750 12,000 3,750 750 15,000 The following are transactions for 2008 of XYZ Installment Sales Company which follows the perpetual system and FIFO method for inventory valuation had 25 machines @ Rs.290 per machine in beginning inventory: (a) Purchased 150 machines @ Rs.300/- per machine. (b) Sold 125 machines @ Rs.500/- per machine. (c) Received down payment @ Rs.100/- per machine. (d) Received 497 installments @ Rs.50/- per installment. www.a4accounting.net Page 10 Installment Sales Chapter # 1 (e) Repossesses one machine from a customer at a fair market value of Rs.200, who had paid only down payment and one installment. REQUIRED Give General Journal entries including adjusting entry supported by proper computations. Also determine ending inventory of merchandise. SOLUTION # 3: Computation of Merchandise Inventory Ending: Merchandise inventory opening units 25 Add: Units purchases 150 Merchandise available for sale in units 175 Less: Units sold (125) Merchandise inventory ending in units 50 Merchandise inventory ending = Units at end x Cost per unit Merchandise inventory ending = 50 x 300 Merchandise inventory ending = Rs.15,000 Computation of Cost of Installment Sales: Merchandise inventory opening (25 x 290) Add: Purchases (150 x 300) Merchandise available for sale Less: Merchandise inventory ending Cost of installment sales 7,250 45,000 52,250 (15,000) Rs.37,250 Computation of Installment Sales: Installment sales = Units sold x Selling price per unit Installment sales = 125 x 500 Installment sales = Rs.62,500 Computation of Unrealized Gross Profit: Unrealized gross profit = Installment sales – Cost of installment sales Unrealized gross profit = 62,500 – 37,250 Unrealized gross profit = Rs.25,250 Computation of Unrealized Gross Profit Rate (DGP%): Unrealized gross profit rate = Unrealized gross profit Installment sales Unrealized gross profit rate = 25,250 62,500 Unrealized gross profit rate = 40.4% Computation of Cash Collection: Down payment (125 x 100) Add: Installment received (497 x 50) Total cash collection x 100 x 100 12,500 24,850 Rs.37,350 Computation of Realized Gross Profit: Realized gross profit = Cash collection X DGP% Realized gross profit = 37,350 x 40.4% Realized gross profit = Rs.15,089 Page 11 www.a4accounting.net Installment Sales Chapter # 1 Computation of Gain or Loss on Repossession: Installment sales Less: Down payment Installment accounts receivable Less: Installment received Installment accounts receivable cancelled Less: Unrealized gross profit (350 x 40.4%) Book value Less: Merchandise repossessed at fair market value Loss on repossession Date 1 2 3 4 Date 1 2 3 4 XYZ INSTALLMENT SALES COMPANY GENERAL JOURNAL Particulars P/R Merchandise (150 x 300) Accounts payable (To record the goods purchased on account) Installment accounts receivable Installment sales (To record the good sold on installment basis) Cash Installment accounts receivable (To record the down payment received) Cash Installment accounts receivable (To record the cash collected on installment basis) XYZ INSTALLMENT SALES COMPANY ADJUSTING ENTRIES Particulars P/R Cost of installment sales Merchandise (To record the cost of installment sales) Installment sales Cost of installment sales Unrealized gross profit (To adjust the unrealized gross profit) Unrealized gross profit Realized gross profit (To adjust the realized gross profit) Merchandise repossessed Unrealized gross profit Loss on repossession Installment accounts receivable (To adjust the repossession of merchandise) www.a4accounting.net Page 12 500 (100) 400 (50) 350 (141) 209 (200) Rs.9 Debit 45,000 Credit 45,000 62,500 62,500 12,500 24,850 Debit 37,250 62,500 15,089 12,500 24,850 Credit 37,250 37,250 25,250 15,089 200 141 9 350 Installment Sales Chapter # 1 INCOME STATEMENT Sales Less: Cost of goods sold Gross profit Add: Realized gross profit (RGP) Total gross profit Less: Operating expenses Net profit XXX (XXX) XXX XXX XXX (XXX) XXX BALANCE SHEET Assets Current Assets: Cash Accounts receivable Installment A/R (1st year) Installment A/R (2nd year) Merchandise inventory Other current assets Total current assets Fixed Assets: Land Other fixed assets Total fixed assets Total assets ILLUSTRATION # 4: (Rupees) XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Equities Liabilities: Accounts payable Other liabilities Total liabilities (Rupees) XXX XXX XXX Owner’s Equity: Capital Add: Net profit Add: D.G.P (1st year) Add: D.G.P (2nd year) Total owner’s equity XXX XXX XXX XXX XXX Total equities XXX (FINANCIAL STATEMENTS) The following trial balance has been prepared from the ledger of Imran & Co: IMRAN & CO. TRIAL BALANCE AS ON DECEMBER 31, 2001 Debit (Rs.) Cash 33,750 Installment accounts receivable – 2001 123,750 Installment accounts receivable – 2000 27,000 Accounts receivable 60,750 Inventory January 1, 2001 117,000 Land and building 45,000 Accounts payable Deferred gross profit – 2000 Share capital Retained earnings Sales Installment sales Purchases 750,000 Cost of installment sales 540,000 Shipment on installment sales Operating expenses 416,250 Total 2,113,500 Page 13 Credit (Rs.) 112,500 81,000 225,000 16,250 418,750 720,000 540,000 2,113,500 www.a4accounting.net Installment Sales Chapter # 1 Other Information: Inventory of merchandise on December 31, 2001 was Rs.123,750. The following account balances were found in the post-closing trial balance prepared on January 1, 2001. Installment accounts receivable – 2000 270,000 Deferred gross profit – 2000 81,000 REQUIRED (a) Prepare Income Statement and Balance Sheet for the year ended on Dec. 31, 2001. (b) Pass the adjusting and closing entries. SOLUTION # 4: Computation of Unrealized Gross Profit: Unrealized gross profit = Installment sales – Cost of installment sales Unrealized gross profit = 720,000 – 540,000 Unrealized gross profit = Rs.180,000 Computation of Unrealized Gross Profit Rate (DGP%): Unrealized gross profit rate (2001) = Unrealized gross profit Installment sales Unrealized gross profit rate (2001) = 180,000 720,000 Unrealized gross profit rate (2001)= 25% Unrealized gross profit rate (2000) = Unrealized gross profit rate (2000) = Unrealized gross profit rate (2000)= x 100 x 100 Unrealized gross profit (Beg) Installment A/R (Beg) 81,000 270,000 30% x 100 x 100 Computation of Cash Collection: Cash collection (2001) = Installment sales – Installment accounts receivable (ending) Cash collection (2001) = 720,000 – 123,750 Cash collection (2001) = Rs.596,250 Cash collection (2000) = Cash collection (2000) = Cash collection (2000) = Installment A/R (Beg) – Installment A/R (End) 270,000 – 27,000 Rs.243,000 Computation of Realized Gross Profit: Realized gross profit = Cash collection X DGP% Realized gross profit (2001) = 596,250 x 25% Realized gross profit (2000) = 243,000 x 30% Total realized gross profit = www.a4accounting.net Page 14 149,063 72,900 Rs.221,963 Installment Sales Chapter # 1 Imran & Co. Income Statement For the Period Ended 31 December 2001 Sales Less: Cost of Goods Sold: Merchandise inventory (beginning) Add: Net purchases Merchandise available for sale Less: Shipment on installment sales Less: Merchandise inventory (ending) Cost of goods sold Gross profit Add: Realized gross profit (R.G.P) Total gross profit Less: Operating expenses Net profit Fixed Assets: Land and building Total fixed assets Total assets (Rupees) 418,750 117,000 750,000 867,000 (540,000) (123,750) (203,250) 215,500 221,963 437,463 (416,250) 21,213 Computation of Retained Earnings Ending Balance: Retained earnings (unadjusted balance) Add: Net profit for the period Retained earnings adjusted balance Assets Current Assets: Cash Accounts receivable Installment A/R (2001) Installment A/R (2000) Merchandise inventory Total current assets (Rupees) 16,250 21,213 Rs.37,463 Imran & Co. Balance Sheet As on 31 December 2001 (Rupees) Equities Liabilities: 33,750 Accounts payable 60,750 Total liabilities 123,750 27,000 Owner’s Equity: 123,750 Share capital 369,000 Add: Retained earnings Add: D.G.P (2001) Add: D.G.P (2000) 45,000 Total owner’s equity 45,000 414,000 Total equities Page 15 (Rupees) 112,500 112,500 225,000 37,463 30,937 8,100 301,500 414,000 www.a4accounting.net Installment Sales Chapter # 1 Date 1 2 3 4 5 6 Imran & Co. Adjusting & Closing Entries Particulars P/R Cost of installment sales Merchandise (To record the cost of installment sales) Installment sales Cost of installment sales Unrealized gross profit (2001) (To adjust the unrealized gross profit) Unrealized gross profit (2001) Unrealized gross profit (2000) Realized gross profit (To adjust the realized gross profit) Expense and revenue summary Merchandise inventory (beginning) Purchases Operating expenses (To close the various expense accounts) Sales Shipment on installment sales Merchandise inventory (ending) Realized gross profit Expense and revenue summary (To close the various income accounts) Expense and revenue summary Retained earnings (To record the transfer of net profit to retained earnings account) www.a4accounting.net Page 16 Debit 540,000 720,000 149,063 72,900 1,283,250 418,750 540,000 123,750 221,963 Credit 540,000 540,000 180,000 221,963 117,000 750,000 416,250 1,304,463 21,213 21,213 Installment Sales Chapter # 1 PRACTICE QUESTIONS Question # 1: Standard Company sells merchandise on installment basis and uses perpetual system. Its transactions relating to sales for 1995 are as follows: 1. Installment sales Rs.1,200,000 2. Cost of installment sales 900,000 3. Collection of installments 750,000 REQUIRED General Journal entries including adjusting entries. Question # 2: Merchandise sold on installment at a gross profit of 30% was repossessed at a market value of Rs.60,000 and installment accounts receivable of Rs.75,000 were cancelled on repossession. REQUIRED Give journal entries. Question # 3: Irfan and Company sells refrigerators at 20% above cost and keeps accounts for sales by the installment method. In 2007, repossessions were made on unpaid installment contract balances of Rs.90,000. Repossessed units had a total resale value of Rs.81,000. The company records such repossessions at a value that will permit the normal margin on sales. REQUIRED Give the entry to summarize the repossessions for 2007. Question # 4: Rehan Co. Ltd. reports profits on installment basis. It uses perpetual inventory system, for recording merchandise. The transactions for the year ended Dec. 31, 2007 are as under: 1. Purchased merchandise on account for Rs.540,000. 2. Sales on installment basis Rs.675,000. 3. Cost of installment sales Rs.375,000. 4. Collection of installment accounts receivable Rs.450,000. 5. Payment of accounts payable Rs.232,500. 6. Repossession of goods sold on installment basis: Installment account receivable cancelled Rs.33,000. Repossession of goods valued Rs.16,500. 7. Expenses incurred but not paid Rs.12,000. REQUIRED Give entries in General Journal to record the above transactions including adjusting and closing entries. Question # 5: Irfan Limited sells merchandise on installment basis. Data relating to the inventory, purchases and sales of equipment during the year 2010 are as follows: Inventory of equipment January 1, 2010 Rs. 225,000 Purchases of equipment on account 750,000 Sales of equipment during the year 1,125,000 Cash collection from customers 375,000 Inventory of equipment December 31, 2010 300,000 Page 17 www.a4accounting.net Installment Sales Chapter # 1 REQUIRED Give journal entries in the General Journal to record the above transactions including adjusting and closing entries. Question # 6: The Kabir Company sells merchandise on installment basis. Data relating to the inventory, purchases and sales of equipment during the year 1996 are as follows: Inventory of equipment January 1, 1996 Rs. 150,000 Purchases of equipment on account 750,000 Sales of equipment during the year 1,125,000 Cash collection from customers 675,000 Inventory of equipment December 31, 1996 225,000 REQUIRED Give journal entries in the General Journal to record the above transactions including adjusting and closing entries. Question # 7: Nizam Sons use perpetual inventory system for recording merchandise. Summarized data for the year 2004 are as under: 1. Sales made on installment basis 750,000. 2. Collecting from installment A/R 300,000. 3. Operating expenses paid 48,000. 4. Operating expense payable 4,500. 5. Cost of installment sales 600,000. 6. Installment accounts receivable cancelled 45,000. 7. Repossessed goods valued at 33,000. REQUIRED (a) Calculate gross profit rate. (b) Find out loss/gain on repossession. (c) Pass journal entries for recording the above transactions including adjusting and closing entries. Question # 8: Umar & Sons Ltd. uses perpetual inventory system for recording merchandise and installment method for recognizing profit. Their transactions for the year ended June 30, 2005 were as under: 1. Sales on installment basis Rs.675,000 2. Cost of installment sales 472,500 3. Purchased merchandise on account for 750,000 4. Collection of installments 225,000 5. Payment of accounts payable 300,000 6. Expenses paid 6,000 7. Installment accounts receivable cancelled 37,500 8. Repossessed merchandise was valued 24,000 REQUIRED Record the above transactions in General Journal giving adjusting and closing entries. www.a4accounting.net Page 18 Installment Sales Chapter # 1 Question # 9: Mulla & Co. uses perpetual inventory system for recording merchandise and installment method for recognizing profit. Their transactions for the year ended June 30, 1993 were as under: 1. Purchased merchandise on account Rs.750,000 2. Purchased merchandise for cash 225,000 3. Sales on installment basis 900,000 4. Collection of installments 330,000 5. Payment to creditors 375,000 6. Cost of merchandise sold on installment 675,000 7. Paid expenses 21,000 8. Repossession of merchandise sold on installment basis: o Installment accounts receivable cancelled 60,000 o Value of repossessed goods 30,000 REQUIRED Record the above transactions in General Journal giving adjusting and closing entries. Question # 10: Ahmad Installment Sales Company uses perpetual inventory system for recording merchandise and installment method for recognizing profit. The following transactions were incurred for the year ended June 30, 1992: 1. Installment sales Rs.450,000 2. Cash collection during the year 300,000 3. Cost of installment sales 337,500 4. Office expenses paid 15,000 5. General expenses paid 7,500 REQUIRED (a) Give the journal entries that would be made to record the above transactions along with adjusting and closing entries for the year ended June 30, 1992. (b) Prepare Income Statement and Balance Sheet on June 30, 1992. Question # 11: Jadid Homes sells bedroom furniture on installment basis. Following information pertains to the accounting records for three years of operations: 2003 2004 2005 Installment sales 225,000 300,000 375,000 Cost of installment sales 150,000 225,000 300,000 Selling & administrative expenses 75,000 90,000 120,000 Collection from Customers: Installment sales 2003 120,000 60,000 30,000 Installment sales 2004 --150,000 120,000 Installment sales 2005 ----225,000 The firm uses installment method of recognizing revenue. REQUIRED (a) Compute the following for each year: 1. Deferred gross profit 2. Rate of deferred gross profit 3. Realized gross profit 4. Net profit or loss (b) Record collection of cash and realize gross profit for each year separately in the General Journal of Jadid Homes. Page 19 www.a4accounting.net Installment Sales Chapter # 1 Question # 12: Rashid Company sells all merchandise on installment basis. Following information obtained from the accounting records for first three years of operations: Year 1 Year 2 Year 3 Installment sales 270,000 360,000 300,000 Cost of installment sales 162,000 208,800 168,000 Operating expenses 75,000 82,500 81,000 Collection from Customers: Installment sales of year 1 112,500 90,000 60,000 Installment sales of year 2 --150,000 120,000 Installment sales of year 3 ----127,500 REQUIRED (a) Determine the amount of net profit or net loss that would have been reported in each of the three years if the installment method of recognizing revenue had been employed. (b) Record collection of cash and realize gross profit in each of the three years. Question # 13: Sarwar Associates sell merchandise on installment basis. The transactions for the year ended Dec. 31, 2009 are as under, with merchandise inventory on Jan. 1, 2009 Rs.165,000. 1. Purchase of goods on Rs.1,125,000 of which Rs.337,500 was for cash. 2. Collection of installment accounts receivable were as under: 2007 Rs.105,000 2008 180,000 2009 450,000 3. Total sales on installment basis for the year Rs.975,000. 4. Accounts payables of Rs.600,000 were settled through bank. 5. Installment accounts receivable of 2007 were cancelled amounted to Rs.30,000 and the repossessed merchandise was assigned a resale value of Rs.22,050. 6. Expenses totaled Rs.60,000 of which expenses amounting to Rs.37,500 were paid. Ending inventory of merchandise was valued Rs.510,000. Gross profit rate in 2007 was 30% and in 2008 25%. REQUIRED Record all above transactions including adjusting & closing entries under perpetual system. Question # 14: Umair & Company sells merchandise on installment basis. The transactions for the year ended December 31, 2001 are as under:1. Merchandise inventory Jan. 1, 2001 225,000. 2. Purchased merchandise on account 600,000. 3. Purchased merchandise for cash 300,000. 4. Sold merchandise on installment basis 1,200,000. 5. Collection of installment accounts receivable of 2001 450,000. 6. Collection of installment accounts receivable of 1999 75,000 7. Collection of installment accounts receivable of 2000 150,000. 8. Payment made to creditors 375,000. 9. Installment accounts receivable of 1999 in the amount of Rs.12,000 was cancelled because of default but the merchandise could not be repossessed. 10. Expenses paid 37,500. 11. Merchandise inventory Dec. 31, 2001 405,000. Note: Gross profit rate 1999 – 42%, 2000 – 44%. www.a4accounting.net Page 20 Installment Sales Chapter # 1 REQUIRED Record the above transactions in the general journal and also give adjusting and closing entries at December 31, 2001 assuming the company follows the perpetual inventory system. Question # 15: A-One Co. follows the perpetual inventory system and FIFO method for inventory valuation and closes its book twice in a year at June 30, and December 31. Balances at January 1, 2001: Installment accounts receivables – 1999 Rs.112,500 Deferred gross profit – 1999 37,500 Installment accounts receivables – 2000 225,000 Deferred gross profit – 2000 67,500 At June 30, 2001: Installment sales made at 25% above cost during the 6 – month period Rs.675,000 An installment accounts receivable – 1999 cancelled 7,500 Repossessed merchandise was assigned a value of 3,750 Installment accounts receivables – 1999 45,000 Installment accounts receivables – 2000 67,500 Installment accounts receivables – 2001 262,500 REQUIRED 1. Compute gross profit rates of the installment sales originated in 1999 and 2000. 2. Prepare a statement showing collection of installment accounts receivables of 1999, 2000 and 2001 at June 30, 2001. 3. Give all necessary entries under installment method for recording transactions concerning installment sales including an adjusting entry for recording realized gross profit. 4. Record repossession without recognizing loss or gain. Question # 16: Alam Co. follows the perpetual inventory system and closes its books twice in a year at June 30, and Dec. 31. Balance at January 1, 2003: Installment A/Receivable – 2002 Rs.262,500 Deferred gross profit – 2002 Rs.112,500 At June 30, 2003: Installment sales made at 40% gross profit during the 6 months period Rs.675,000 An installment A/Receivable – 2002 cancelled 7,500 Repossesses merchandise was assigned a value of 3,750 Installment A/Receivable – 2002 67,500 Installment A/Receivable – 2003 262,500 REQUIRED (1) Compute gross profit rate of the installment sales originated in 2002. (2) Show collection of installment A/Receivable of 2002 and 2003, at June 30, 2003. (3) Give all necessary entries under installment method for recording transactions concerning installment sales including an adjusting entry for recording realized gross profit. (4) Record repossession recognizing loss or gain. Page 21 www.a4accounting.net Installment Sales Chapter # 1 Question # 17: Ideal Sales Company sells goods on installment basis. Its balances on Dec. 31, 2001 were: Installment accounts receivable Rs.210,000 Unrealized gross profit Rs.60,000 Summary of the transactions for the year 2002 is as follows: (a) Installment sales Rs.735,000. (b) Collection of installment of current year Rs.630,000. (c) Collection of installment of 2001 Rs.84,000. (d) Cancellation of installment contract 2001 Rs.31,500. (e) Repossessed goods valued at Rs.20,250. In both years the goods have been sold at 40% above cost. REQUIRED 1. Entries to record the transactions for 2002. 2. Adjusting and closing entries for 2002. 3. Show how the relevant account will be reported in balance sheet on Dec. 31, 2002. Question # 18: The following balances are taken from the pre-closing trial balance of Hassan Co. as of Dec. 31, 2007: 1. Installment accounts receivable – 2006 Rs.120,000 2. Installment accounts receivable – 2007 180,000 3. Installment sales 300,000 4. Cost of installment sales 210,000 5. Unrealized gross profit – 2006 120,000 REQUIRED (1) Prepare all entries for the year ended Dec. 31, 2007 adjusting and closing as well, assuming that rate of gross profit on installment sales of 2006 was 25%. Show all computations. (2) On Jan. 10, 2008 a customer defaulted on his payment. Give journal entries for repossession with the help of the following information: 1. Original sale on installment Rs.3,000 2. Date of sale 12 Aug 2006 3. Collection up to date Rs.2,250 4. Estimated market value of repossessed merchandise Rs.900 Question # 19: Al-Fazal Manufacturing Co. sells its finished products for cash, on credit and on installment. Accidently, some water was spread on the accounting records of installment sales and some of the pages were smeared. After drying, only the following portion is readable: January 1, 1999 Installment accounts receivable 1998 Rs.120,000 Deferred gross profit 1998 Rs.48,000 December 31, 1999 (Before Adjustment) Installment accounts receivable 1998 Rs.30,000 Deferred gross profit 1998 Rs.45,000 Installment accounts receivable 1999 Rs.129,000 Deferred gross profit 1999 Rs.135,000 During 1999, installment sales were made at 45% gross profit rate. www.a4accounting.net Page 22 Installment Sales Chapter # 1 REQUIRED 1. Reconstruct in general journal form as many summary entries as possible for 1999 under installment method including adjusting and closing entries. Show necessary supporting computations. 2. Give an entry to record repossession assuming that the repossessed merchandise was recorded at its book value. Question # 20: The selected balances of Akbar Installment Sales Co. are as follows: 1997 – Jan. 1 1997 – Dec. 31 Installment accounts receivable – 1995 180,000 Installment accounts receivable – 1996 570,000 270,000 Installment accounts receivable – 1997 675,000 Deferred gross profit – 1995 45,000 37,500 Deferred gross profit – 1996 171,000 171,000 Installment sales 900,000 Cost of installment sales 612,000 Repossessed merchandise 24,000 Installment accounts receivable – 1995 cancelled on repossession 30,000 REQUIRED a) Gross profit percentage for each year. b) Collection of installment accounts receivable of each year during 1997. c) Gross profit realized during 1997. d) General Journal entries made during 1997 on repossession. e) General Journal entries to record the realized gross profit. Question # 21: The following are the selected assets and equities of Gulbahar Installment Co. on December 31, 2008: Assets Equities Cash 180,000 Accounts Payable 30,000 Merchandise Inventory 120,000 Deferred Gross Profit – 2007 60,000 Installment A/R 2007 300,000 Capital 510,000 Total Assets 600,000 Total Equities 600,000 Transactions During 2008 Are As Under: Merchandise purchased on accounts 480,000 Installment sales 600,000 Collection from installment accounts receivable – 2007 150,000 Collection from installment accounts receivable – 2008 300,000 Payment of accounts payable 375,000 Installment accounts receivable – 2007 defaulted of 120,000 Merchandise repossessed at fair market value 30,000 Operating expenses paid 15,000 Merchandise inventory-ending (including repossessed merchandise) 180,000 Company uses perpetual inventory system (FIFO basis) for recording merchandise and installment method for recognizing profits. REQUIRED: Give entries in General Journal to record the above data, including adjusting and closing entries for the year 2008. Page 23 www.a4accounting.net Installment Sales Chapter # 1 Question # 22: Naseem & Company sells merchandise on installment basis. The summary of transactions for the year ended December 31, 1985 and December 31, 1986 are as follows: 1985 1986 Installment sales 750,000 1,125,000 Collection in respect of 1985 installment sales 450,000 225,000 Collection in respect of 1986 installment sales 675,000 Purchase on account 615,000 750,000 Selling & general expenses 112,500 255,000 Payment of accounts payable 375,000 750,000 Merchandise inventory ending 150,000 225,000 REQUIRED: Give journal entries for the years ended December 31, 1985 and 1986 including adjusting journal entries. Question # 23: The following are transactions for 1998 of Lahore Installment Sales Company which follows the perpetual system and FIFO method for inventory valuation had 75 machines @ Rs.870 per machine in beginning inventory: (a) Purchased 450 machines at the rate of Rs.900/- per machine. (b) Sold 375 machines at the rate of Rs.1,500/- per machine. (c) Received down payment at the rate of Rs.300/- per machine on 375 machines. (d) Received 1,497 installments at the rate of Rs.150/- per installment. (e) Repossesses one machine from a customer, who had paid only down payment and one installment. REQUIRED General journal entries including adjusting entry supported by proper computations. Also determine ending inventory of merchandise. Question # 24: Smart Home Company sells local vacuum cleaners on installment basis. The company uses perpetual system and first in first out method for inventory valuation. The company has 150 vacuum cleaners of Rs.900 each in the beginning inventory. The company completed the following transactions during the year: (a) Purchased 450 vacuum cleaners at Rs.975 each. (b) Sold 375 vacuum cleaners at Rs.1,500 each. (c) Collected down payment at Rs.300 on each vacuum cleaner. (d) The balance to be collected in 4 equal quarterly installments of Rs.300 each. (e) All installments were collected in full except a customer who failed to pay the last installment. (f) The equipment was repossessed. The value of repossessed equipment was Rs.150. REQUIRED (a) General journal entries including adjusting. (b) Cost of installment sales. (c) Gain or loss on repossession and gross profit realized. www.a4accounting.net Page 24 Installment Sales Chapter # 1 Question # 25: The following transactions relate to Al-Abid Co. for 2006 which follows the perpetual inventory system and FIFO method for valuation of inventory. Opening inventory consist of 75 machines @ Rs.840 per machine. They completed the following transactions: (1) Purchased 525 machines @ Rs.900 per machine on account. (2) Sold 375 machines @ Rs.1,500 each on installments. (3) Received down payment @ Rs.300 per machine on all the sold machines. (4) Received 1,496 installments @ Rs.150 per installment. (5) Repossessed one machine from a customer who had paid only down payment having market value of Rs.750. REQUIRED Journal entries including adjusting and closing entries. Show all computations. Question # 26: Mifta Installment Company purchased 15 computers from Alam & Bilal Traders @ Rs.50,400 each on credit. The company sold 7 computers on installment @ Rs.63,000 each on September 1, 2008. The terms of installment sales were to pay 25% on each computer as a down payment and the remaining amounts to be collected in 15 monthly installments starting from October 1, 2008. All installments collected on the first day of each month. Three of the computer holders defaulted to pay the installments after the payment of 5th installment and company repossessed the computers which have the fair market value of Rs.25,500 each computer. Mifta Installment Company closes its accounting year on June 30 each year. REQUIRED Compute the following: 1. Amount of installment sales. 2. Amount of down payment received. 3. Monthly installment amount of each computer. 4. Unrealized (deferred) gross profit. 5. Rate of Unrealized (deferred) gross profit. 6. Total amount of installment accounts receivable cancelled. 7. Book value of repossessed merchandise. 8. Gain or loss on repossession. 9. Total amount collected during the period. 10. Amount of realized gross profit. Question # 27: On January 1, 1997 the X.Y. Co. sold a car for Rs.900,000 on installment basis. Rs.150,000 was received as down payment and balance amount in five quarterly installment including interest. The rate of interest charge on the unpaid balance is 6% per annum. The cost of the car was Rs.675,000. All payments were duly received. The accounting year ends on December 31, each year. REQUIRED Give journal entries including adjusting and closing entries for the year 1997 only. Page 25 www.a4accounting.net Installment Sales Chapter # 1 Question # 28: On July 1, 1993, Shaheen Autos sold 10 Suzuki cars on installment basis at Rs.202,500 per car, the cost being Rs.172,125 per car. The terms of sale were: a) Rs.52,500 per car should be paid at the time of signing the agreement. b) The balance should be paid in 20 quarterly of Rs.7,500 per car. c) Interest at 8% should be paid on the unpaid balances, and be paid along with the installment amount. REQUIRED Make necessary journal entries including adjusting and closing of entries in the books of Shaheen Autos in respect of the above transactions for the year ended December 31, 1993 assuming that Shaheen Autos closes its books on December 31, every year. Shaheen Autos follows installment method for recognizing profits. Question # 29: Hasnain & Brothers follows installment method for recognizing profits & closes its accounting year on June 30, every year. On September 12, 2010 Hasnain & Brothers purchased 30 computers from Tauseef Computers for Rs.54,000 each on credit. On October 1, 2010 Hasnain & Brothers sold 25 computers @ Rs.67,500 each. The customers paid Rs.30,000 per computer as down payment of October 1, 2010 and agreed to pay the balance in 8 equal quarterly installments (The first quarter started from October 1, 2010). The ownership would be transferred on the payment of the final installment. The installments received on the last day of each quarter. REQUIRED Prepare journal entries including adjusting and closing to record the above transactions only for the year ended June 30, 2011. Question # 30: City Cars deals with two brands of fuel economy local cars namely GL and XL. The selling price of GL cars is Rs.675,000 each while the XL cars are sold for Rs.600,000. 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.225,000. The car was taken by the owner for his personal use. (ii) A cheque amounting to Rs.108,000 received from a customer who bought a GL car was dishonored. City Cars incurred and paid the following expenses during the year: Selling expenses 45,000 Administrative expense 105,000 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. www.a4accounting.net Page 26 Installment Sales Chapter # 1 Question # 31: Kamran Electric Company’s deals in the sales of generators on installment basis. The company has two plans which are summarized below: Explanation Plan “A” Plan “B” Down payment for each 10% of the sales price Rs.10,500 generator No. of installments 15 equal monthly 5 equal quarterly installments installments Rate of interest on unpaid Nil 6% per annum balance Installment amount due At the start of the each At the end of each month month Kamran Company had inventory of 30 generators 2500KV costing Rs.1,200,000. Under Plan – A, company sold 6 generators to Sardar Industries on October 5, 2009 at a profit of 35% on cost. Sardar Industries will start to pay installments from November, 2009. Under Plan – B, company sold 5 generators to Shahani & Sons for Rs.75,000 each on June 28, 2009. Quarter starts from July 1, 2009. REQUIRED Prepare dated journal and adjusting entries, separately under each plan for 2009 only. Question # 32: The following trial balance has been prepared from the ledger of M/S. Rehman & Co. traders dealing in installment sales. Taking the facts and figures from the trial balance you are asked to: (c) Find the gross profit percentage on installment sales in 1989, 1990 and 1991. (d) Prepare Income Statement and Balance Sheet for the year ended on Dec. 31, 1991. (e) Pass the adjusting and closing entries. M/S. REHMAN & CO. TRIAL BALANCE AS ON DECEMBER 31, 1991 Cash Rs.67,500 Installment accounts receivable – 1991 247,500 Installment accounts receivable – 1990 54,000 Installment accounts receivable – 1989 13,500 Accounts receivable 121,500 Inventory December 31, 1990 234,000 Land and building 60,000 Furniture and fixture 30,000 Accounts payable 225,000 Deferred gross profit – 1990 162,000 Deferred gross profit – 1989 36,270 Share capital 450,000 Profit and loss account balance 326,880 Sales 517,500 Installment sales 1,440,000 Purchases 1,497,150 Cost of installment sales 1,080,000 Shipment on installment sales 1,080,000 Operating expenses 832,500 Total 4,237,650 4,237,650 Page 27 www.a4accounting.net Installment Sales Chapter # 1 Other Information: Inventory of merchandise on December 31, 1991 was Rs.247,500. The following account balances were found in the post-closing trial balance prepared on January 1, 1991. Installment accounts receivable – 1990 540,000 Installment accounts receivable – 1989 117,000 Deferred gross profit – 1990 162,000 Deferred gross profit – 1989 36,270 Question # 33: The Daniyal Electric Products Company manufactures table fans. It is a practice of the company to sell 30% of its production on installment basis. The company recognizes profit on sales on the basis of cash collected from customers. The following are the data for three years: Years Profit Installment Receivable Collection Installment Receivable on on January 1, 2010 During 2010 December 31, 2010 2008 44% Rs.120,000 Rs.120,000 --2009 42% Rs.247,500 Rs.112,500 Rs.135,000 2010 40% Rs.225,000 Rs.450,000 REQUIRED Prepare all journal entries for 2010 from the data above, including those required for the recognition of gross profit at the end of year. Question # 34: Khan and Company reports profits on installment basis. It uses perpetual inventory system for recording merchandise and installment method for recognizing profits. Transactions during 2011 are summarized below: a) Cost of installment sales Rs.400,000. b) Installment accounts receivable (ending) – 2011 Rs.300,000. c) Installment accounts receivable cancelled – 2010 Rs.40,000. d) Merchandise repossessed at book value which is Rs.32,000. e) Unrealized gross profit (beginning) – 2010 Rs.30,000. f) Installment accounts receivable (ending) – 2010 Rs.20,000. g) Unrealized gross profit percentage remains constant in both the years. REQUIRED a) Give the necessary General Journal entries including adjusting entries. Show necessary computations. b) Prepare partial balance sheet as on 31 December 2011 showing installment accounts receivable and unrealized gross profit. www.a4accounting.net Page 28 Chapter # 2 Branch Accounting Advanced Accounting www.a4accounting.net Branch Accounting Chapter # 2 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Head office and branch accounting. Recording of reciprocal transactions. Billing of merchandise at cost and above cost. Reconciliation. Periodic adjustments. Closing process. Financial Statement. WHAT THE EXAMINER USUALLY ASK? Computation of: o Allowance for overvaluation rate. o Allowance for overvaluation. General Journal entries in the books of head office. General Journal entries in the books of branches. Adjusting and closing entries in the books of head office. Adjusting and closing entries in the books of branches. Head office and branch account reconciliation statement. General Ledger of head office account and branch account. Income Statement of branch. Income Statement of head office. Consolidated Income Statement. Balance Sheet of branch. Balance Sheet of head office. Consolidated Balance Sheet. www.a4accounting.net Page 30 Branch Accounting Chapter # 2 BRANCH ACCOUNTING Branch accounting is an accounting system in which each department or Branch of a business is established as a separate cost centre or budget centre. The net profit per Branch may be added together to arrive at the profit for the whole business. Branch accounts may be prepared to show the performance of both a main trading centre (i.e. the Head Office) and subsidiary trading centre (i.e. Branches) but with all the accounting records being maintained by Head Office. Alternatively, separate entity Branch accounts are prepared in which Branches maintain their own records, which are later combined with Head Office records to prepare accounts for the whole business. ACCOUNTING SYSTEM FOR A BRANCH There are two alternative systems: 1. The branch does not maintain a complete set of accounting records. The head office serves only as an accounting and control center for the branches. 2. The branch maintains a complete set of accounting records consisting of journal entries and ledger accounts. Financials statements are prepared by the branch account and forwarded to the head office. This chapter focuses on the second system that the branch maintains its own accounting records. RECIPROCAL LEDGER ACCOUNTS USED BY THE HEAD OFFICE AND BRANCH Head Office Ledger Account: This account is used by the branch to account for all transactions with the home office. It is credited for all cash, merchandise or other assets provided by the head office to the branch. It is debited for all cash, merchandise, or other assets sent by the branch to the head office or to other branches. This account represents the net investment by the head office in the branch. At the end of a period, the balance of Income Summary account of a branch is closed to the head office account. Branch Ledger Account: This account is a reciprocal ledger account (to head office account) used by the head office to account for any transactions with the branches. It is debited for cash, merchandise and services provided to the branch by the head office and for the net income reported by the branch. It is credited for cash, or other assets received from the branch, and for net losses reported by the branch. METHODS OF BILLING MERCHANDISE SHIPMENT TO BRANCH Three alternative methods are available to head office in billing the merchandise shipped to the branches: 1. Billed at head office cost. 2. Billed at a percentage above the head office cost. 3. Billed at the branch’s retail selling price. ALLOWANCE FOR OVER VALUATION Head Office sells merchandise to Branch more than selling price. This additional profit which is earned by the Head Office from the shipment of merchandise to the Branch is known as allowance for over valuation. Page 31 www.a4accounting.net Branch Accounting Chapter # 2 COMPUTATION OF ALLOWANCE FOR OVERVALUATION PERCENTAGE: Allowance for overvaluation percentage = Allowance for overvaluation Cost price X 100 COMPUTATION OF ALLOWANCE FOR OVERVALUATION: Allowance for overvaluation = Billed price x Allowance for overvaluation percentage (%) Billed percentage (%) Billed price means cost price plus allowance for over valuation. Billed percentage (%) means cost percentage (100%) plus allowance for over valuation percentage (%). COMPUTATION OF REALIZED ALLOWANCE FOR OVERVALUATION: Particulars Merchandise inventory opening (Branch) Add: Merchandise sent to Branch Less: Merchandise returned by Branch Unadjusted allowance for overvaluation Less: Merchandise inventory ending (Branch) Adjusted allowance for overvaluation Billed Cost XXX XXX (XXX) XXX (XXX) XXX XXX XXX (XXX) XXX (XXX) XXX Allowance for over valuation XXX XXX (XXX) XXX (XXX) XXX GENERAL ENTRIES: Head Office Book Branch Book 1. Purchase merchandise on account by Head Office. Purchases Debit No entry Accounts payable Credit 2. Head Office remitted (transferred) cash to Branch. Branch Debit Cash Cash Credit Head Office 3. Head Office sent goods to Branch at above cost. Branch Debit Merchandise supplied Merchandise supplied Credit Head Office Allowance for over valuation Credit Debit Credit Debit Credit 4. Head Office transferred cash to Branch for the salaries expense of Branch. Branch Debit Salaries expense Debit Cash Credit Head Office Credit 5. Head Office paid the liability of Branch. Branch Debit Accounts payable Cash Credit Head Office Debit Credit 6. Head Office received the cash from the customers of Branch. Cash Debit Head Office Branch Credit Accounts receivable Debit Credit www.a4accounting.net Page 32 Branch Accounting Chapter # 2 7. Branch purchase merchandise on account. Purchases No entry Accounts payable Debit Credit 8. Merchandise sold for cash by Branch. Cash No entry Sales Debit Credit 9. Branch sold merchandise on account. Accounts receivable No entry Sales Debit Credit 10. Branch purchase furniture for cash. No entry Furniture Cash Debit Credit 11. Branch paid the liability of Head Office. Accounts payable Debit Head Office Branch Credit Cash Debit Credit 12. Branch received the receivable of Head Office. Branch Debit Cash Accounts receivable Credit Head Office Debit Credit 13. Branch returned goods to Head Office at billed price. Merchandise supplied returned Debit Head Office Allowance for over valuation Debit Merchandise supplied returned Branch Credit Debit Credit 14. Branch paid the rent expense of Head Office. Rent expense Debit Head Office Branch Credit Cash Debit Credit 15. Branch reported a net profit to Head Office. Branch Debit Expense and revenue summary Profit and loss account Credit Head Office Debit Credit 16. Branch reported a net loss to Head Office. Profit and loss account Debit Head Office Branch Credit Expense and revenue summary Debit Credit 17. Head Office adjusts the allowance for over valuation. Allowance for over valuation Debit No entry Profit and loss account Credit Page 33 www.a4accounting.net Branch Accounting Chapter # 2 ILLUSTRATION # 1: Shah Shoes Company opened a branch at Hyderabad on 1 July 2004. The following information of Hyderabad branch and head office for the year ended 30 June 2005: a) Merchandise purchase on account by head office Rs.300,000. b) Cash received by branch from head office Rs.30,000. c) Goods received by branch from head office Rs.295,200 (costing Rs.246,000). d) Head office paid the liability of branch Rs.30,000. e) Head office received from the customers of branch Rs.50,000. f) Goods purchased by branch for cash Rs.15,800 and on account Rs.35,000. g) Sale by branch on cash Rs.64,000 and on account Rs.215,000. h) Salaries expenses of branch paid by head office Rs.62,200. i) Branch paid the liability of head office Rs.19,000. j) Collection on account by branch from customers of head office Rs.182,100. k) Cash sent to head office Rs.152,000 by branch. l) Defective goods returned by branch to head office at billed price of Rs.6,000. m) Branch paid the rent expense of the head office Rs.13,000. n) Furniture sent to branch by head office Rs.10,000. o) Branch reported a net profit of Rs.3,000 to the head office. p) Merchandise inventory on 30 June 2005 at branch Rs.55,200 (billed price). REQUIRED Make entries in the books of head office as well as in branch. SOLUTION # 1: Date 1 Shah Shoes Company Head Office Book General Journal Particulars 6 Purchases Accounts payable (To record the goods purchased on account) Hyderabad branch Cash (To record the cash remitted to branch) Hyderabad branch Merchandise supplied Allowance for overvaluation (To record the goods supplied to branch) Hyderabad branch Cash (To record the branch’s liability paid) Cash Hyderabad branch (To record the cash received from the customers of branch) No entry 7 No entry 2 3 4 5 www.a4accounting.net Page 34 P/R Debit 300,000 30,000 Credit 300,000 30,000 295,200 246,000 49,200 30,000 50,000 30,000 50,000 Branch Accounting Chapter # 2 Date 8 9 10 11 12 13 14 15 16 Shah Shoes Company Head Office Book General Journal Particulars P/R Debit 62,200 Hyderabad branch Cash (To record the branch’s salaries paid) Accounts payable Hyderabad branch (To record the liability paid by branch) Hyderabad branch Accounts receivable (To record the cash received by branch from the customers of head office) Cash Hyderabad branch (To record the cash remitted by branch) Merchandise supplied returned Allowance for overvaluation Hyderabad branch (To record the goods returned by branch) Rent expense Hyderabad branch (To record the rent expense paid by branch) Hyderabad branch Furniture (To record the furniture sent to branch) Hyderabad branch Profit & loss account (To record the net profit reported by branch) Allowance for overvaluation Profit & loss account (To adjust the allowance for overvaluation account) Credit 62,200 19,000 19,000 182,100 182,100 152,000 5,000 1,000 13,000 10,000 152,000 6,000 13,000 10,000 3,000 3,000 39,000 39,000 Computation of Realized Allowance for Overvaluation: Particulars Billed Merchandise supplied to branch Less: Merchandise returned by Branch Unadjusted allowance for overvaluation Less: Merchandise inventory ending (Branch) Adjusted allowance for overvaluation Cost 295,200 246,000 (6,000) (5,000) 289,200 241,000 (55,200) (46,000) 234,000 195,000 Allowance for over valuation 49,200 (1,000) 48,200 (9,200) 39,000 Computation of Allowance for Overvaluation Rate: Allowance for overvaluation percentage = Allowance for overvaluation Cost price Allowance for overvaluation percentage = 49,200 246,000 Allowance for overvaluation percentage = 20% Page 35 X 100 X 100 www.a4accounting.net Branch Accounting Chapter # 2 Computation of Allowance for Overvaluation: Allowance for overvaluation = Allowance for overvaluation = Allowance for overvaluation = Billed price x Allowance for overvaluation percentage (%) Billed percentage (%) 5,000 x 20% 120% Rs.1,000 Allowance for overvaluation = 55,200 x 20% 120% Rs.9,200 Allowance for overvaluation = Shah Shoes Company Hyderabad Branch Book General Journal Particulars Date 1 No entry 2 Cash 3 4 5 6 7 8 9 Head office (To record the cash received from head office) Merchandise supplied Head office (To record the goods received from head office) Accounts payable Head office (To record the liability paid by head office) Head office Accounts receivable (To record the cash collected from the customers by head office) Purchases Cash Accounts payable (To record the goods purchased on account and for cash) Cash Accounts receivable Sales (To record the goods sold for cash and on credit) Salaries expenses Head office (To record the salaries paid by head office) Head office Cash (To record the payment of liability of head office) www.a4accounting.net Page 36 P/R Debit 30,000 Credit 30,000 295,200 295,200 30,000 50,000 30,000 50,000 50,800 15,800 35,000 64,000 215,000 62,200 19,000 279,000 62,200 19,000 Branch Accounting Chapter # 2 Date 10 11 12 13 14 15 Shah Shoes Company Hyderabad Branch Book General Journal Particulars P/R Debit 182,100 Cash Head office (To record the cash collected from the customers of head office) Head office Cash (To record the cash remitted to head office) Head office Merchandise supplied return (To record the goods returned to head office) Head office Cash (To record the rent paid for head office) Furniture Head office (To record the furniture received from head office) Expense and revenue summary Head office (To record the net profit reported to head office) 152,000 6,000 13,000 Credit 182,100 152,000 6,000 13,000 10,000 10,000 3,000 3,000 TRANSACTIONS BETWEEN BRANCHES When it is necessary to transfer merchandise or assets from one branch to another branch, Head Office Ledger account is used by the branches. The head office will transfer the inventory (or assets) from investment in one branch to another branch. Any excess freight costs incurred for the transfer between branches should be expensed. ILLUSTRATION # 2: (INTER BRANCH TRANSACTIONS) The Karachi Head Office of Umair Company consigned to Branch “A” goods costing Rs.45,000 and freight paid Rs.3,750. Later on the Head Office directed the Branch “A” to transfer the entire consignment to Branch “B”. The Branch “A” dully executed the directives and paid additional freight Rs.750. If the goods had been sent to Branch “B” directly by the Head Office, the freight charges would have been Rs.4,200. REQUIRED Give entries in General Journal of: 1. Head Office 2. Branch “A” 3. Branch “B” Page 37 www.a4accounting.net Branch Accounting Chapter # 2 SOLUTION # 2: Date 1 2 Date 1 2 Date 1 Umair Company Head Office Book General Journal Particulars P/R Branch “A” Cash Merchandise supplied (To record the goods supplied to branch “A”) Branch “B” Inter branch freight charges Branch “A” (To record the inter branch freight charges) Umair Company Branch “A” Book General Journal Particulars Merchandise supplied Freight charges Head office (To record the goods received from head office) Head office Freight charges Cash Merchandise supplied (To record the goods supplied to Branch “B” under the instruction of head office) Umair Company Branch “B” Book General Journal Particulars Merchandise supplied Freight charges Head office (To record the goods received from Branch “A” under the instruction of head office) FINANCIAL STATEMENTS Debit 48,750 49,200 300 P/R Debit 45,000 3,750 Credit 3,750 45,000 49,500 Credit 48,750 49,500 3,750 750 45,000 P/R Debit 45,000 4,200 Credit 49,200 Separate financial statements for branches should be prepared so that management can evaluate the performance of each branch. The branch’s financial statements may be revised by the head office to include the allocated expenses incurred by the head office. Also, the financial statements of branches should be revised to eliminate any intra-company profits on merchandise shipments or interest charge on capital investments. For investors, the head office and branches are a single business entity. Thus, combined financial statements should be prepared for external users. www.a4accounting.net Page 38 Branch Accounting Chapter # 2 INCOME STATEMENT IN BRANCH BOOK Sales revenue Less: Sales return / sales discount Net sales Less: Cost of Goods Sold: Merchandise inventory opening Add: Net purchases Add: Merchandise received from Head Office Total merchandise during the period Less: Merchandise returned to Head Office Merchandise available for sale Less: Merchandise inventory ending Cost of goods sold Gross profit/loss Less: Operating expenses Net profit/loss XXX (XXX) XXX XXX XXX XXX XXX (XXX) XXX (XXX) (XXX) XXX/(XXX) (XXX) XXX/(XXX) INCOME STATEMENT IN HEAD OFFICE BOOK Sales revenue Less: Sales return / sales discount Net sales Less: Cost of Goods Sold: Merchandise inventory opening Add: Net purchases Less: Merchandise send to Branch Total merchandise during the period Add: Merchandise returned by Branch Merchandise available for sale Less: Merchandise inventory ending Cost of goods sold Gross profit/loss Less: Operating expenses Net profit/loss from Head Office Add: Branch Account: Branch net profit/loss Realized allowance for over valuation Adjusted Branch account Adjusted net profit/loss XXX (XXX) XXX XXX XXX (XXX) XXX XXX XXX (XXX) (XXX) XXX/(XXX) (XXX) XXX/(XXX) XXX/(XXX) XXX XXX/(XXX) XXX/(XXX) Page 39 www.a4accounting.net Branch Accounting Chapter # 2 CONSOLIDATED INCOME STATEMENT Sales revenue Less: Sales return / sales discount Net sales Less: Cost of Goods Sold: Merchandise inventory opening Add: Net purchases Merchandise available for sale Less: Merchandise inventory ending Cost of goods sold Gross profit/loss Less: Operating expenses Net profit/loss XXX (XXX) XXX XXX XXX XXX (XXX) (XXX) XXX/(XXX) (XXX) XXX/(XXX) BALANCE SHEET IN BRANCH BOOK Assets Equities Current Assets: Cash Accounts receivable Merchandise inventory Total current assets Fixed Assets: Equipment Less: All for depreciation Total fixed assets Total assets XXX XXX XXX XXX XXX (XXX) XXX XXX Liabilities: Accounts payable Salaries payable Total liabilities XXX XXX XXX Owner’s Equity: Head Office Add: Branch profit Total owner’s equity XXX XXX XXX Total equities XXX BALANCE SHEET IN HEAD OFFICE BOOK Assets Current Assets: Cash Accounts receivable Merchandise inventory Branch account Total current assets Fixed Assets: Equipment Less: Allowance for depreciation Total fixed assets Total assets www.a4accounting.net Equities XXX XXX XXX XXX XXX XXX (XXX) XXX XXX Liabilities: Accounts payable Salaries payable Total liabilities Owner’s Equity: Capital Add: Branch profit Add: Head Office net profit Add: Allowance for over valuation Total owner’s equity Total equities Page 40 XXX XXX XXX XXX XXX XXX XXX XXX XXX Branch Accounting Chapter # 2 CONSOLIDATED BALANCE SHEET Assets Current Assets: Cash Accounts receivable Merchandise inventory Total current assets Fixed Assets: Equipment Less: All for depreciation Total fixed assets Total assets ILLUSTRATION # 3: Equities XXX XXX XXX XXX XXX (XXX) XXX XXX Liabilities: Accounts payable Salaries payable Total liabilities XXX XXX XXX Owner’s Equity: Capital Add: Branch profit Add: Head Office profit Total owner’s equity Total equities XXX XXX XXX XXX XXX (FINANCIAL STATEMENTS) Following are the details of head office and branch on 31 December 2010: Head Office Branch Office Debit Credit Debit Credit Merchandise inventory (opening) 7,500 --3,750 --Purchases 30,000 --11,250 --Goods sent to Branch --18,750 ----Goods received from Head Office ----22,500 --Allowance for overvaluation --4,125 ----Sales --41,250 --33,750 Operating expenses 6,750 --2,250 --Additional Information on 31 December 2010: 1. Closing inventory: Head Office Rs.6,000 and Branch Rs.9,750 including Rs.750 purchases from outsiders. REQUIRED a) Prepare Branch Income Statement. b) Prepare Head Office Income Statement. c) Prepare Consolidated Income Statement. SOLUTION # 3: Branch Book Income Statement For the Period Ended 31 December 2010 Sales Less: Cost of Goods Sold: Merchandise inventory opening Add: Net purchases Add: Merchandise received from Head Office Merchandise available for sale Less: Merchandise inventory ending Cost of goods sold Gross profit Less: Operating expenses Net profit Page 41 33,750 3,750 11,250 22,500 37,500 (9,750) (27,750) 6,000 (2,250) 3,750 www.a4accounting.net Branch Accounting Chapter # 2 Head Office Book Income Statement For the Period Ended 31 December 2010 Sales Less: Cost of Goods Sold: Merchandise inventory opening Add: Net purchases Less: Merchandise send to Branch Merchandise available for sale Less: Merchandise inventory ending Cost of goods sold Gross profit Less: Operating expenses Net profit from Head Office operation Add: Branch Account: Branch net profit Realized allowance for over valuation Adjusted Branch account Adjusted net profit 41,250 7,500 30,000 (18,750) 18,750 (6,000) (12,750) 28,500 (6,750) 21,750 3,750 2,626 6,375 28,125 Computation of Realized Allowance for Overvaluation: Particulars Merchandise inventory beginning Add: Merchandise supplied to branch Unadjusted allowance for overvaluation Less: Merchandise inventory ending (Branch) Adjusted allowance for overvaluation Billed Cost 3,750 22,500 26,250 (9,000) 17,250 3,375 18,750 22,125 (7,500) 14,625 Allowance for over valuation 375 3,750 4,125 (1,500) 2,625 Computation of Allowance for Overvaluation Rate: Allowance for overvaluation percentage = Allowance for overvaluation Cost price Allowance for overvaluation percentage = 3,750 18,750 Allowance for overvaluation percentage = 20% Computation of Allowance for Overvaluation: Allowance for overvaluation = Allowance for overvaluation = Allowance for overvaluation = www.a4accounting.net Billed price x Allowance for overvaluation percentage (%) Billed percentage (%) 9,000 x 20% 120% Rs.1,500 Page 42 X 100 X 100 Branch Accounting Chapter # 2 Consolidated Income Statement For the Period Ended 31 December 2010 Sales (41,250 + 33,750) Less: Cost of Goods Sold: Merchandise inventory opening (7,500 + 3,375) Add: Net purchases (30,000 + 11,250) Merchandise available for sale Less: Merchandise inventory ending (6,000 + 750 + 7,500) Cost of goods sold Gross profit Less: Operating expenses (6,750 + 2,250) Net profit Page 43 75,000 10,875 41,250 52,125 (14,250) (37,875) 37,125 (9,000) 28,125 www.a4accounting.net Branch Accounting Chapter # 2 PRACTICE QUESTIONS Question # 1: The following are selected transactions of Shalimar Branch working independently for the month of August 1998: 1. Received merchandise form Head Office at a billed price of Rs.300,000. 2. Returned merchandise to Head Office at a billed price of Rs.15,000. 3. Purchased merchandise from the local market for Rs.150,000 on account. 4. Returned merchandise to the seller worth Rs.7,500. 5. Sold merchandise for Rs.52,500 on account. 6. Paid operating expenses Rs.30,000. 7. Received intimation from the Head Office that it had paid Branch operating expenses Rs.12,000. Other Data: (a) Accrued operating expenses Rs.9,000. (b) Prepaid operating expenses Rs.6,000. (c) Merchandise inventory beginning Rs.123,000 and ending Rs.117,000. REQUIRED Entries in Branch General Journal including adjusting and closing entries. Question # 2: Ismail & Company opened a Branch at Hyderabad. The transactions of Head Office and its Branches are as under:Head Office: 1. Purchase merchandise on account Rs.750,000. 2. Remitted cash to Branch Rs.375,000. 3. Shipped merchandise to Branch at a cost of Rs.450,000. 4. Paid salaries of the Branch Rs.112,500. 5. Paid the accounts payable of the Branch Rs.75,000. 6. Collected cash from Branch accounts receivable Rs.112,500. Branch: 1. Purchase merchandise on credit Rs.187,500. 2. Sold merchandise for cash Rs.225,000. 3. Sold merchandise on credit Rs.525,000. 4. Purchase furniture for cash Rs.187,500. 5. Paid the accounts payable of the Head Office Rs.112,500. 6. Paid the rent in advance Rs.150,000. REQUIRED Give the necessary journal entries in the books of Head Office and Branch respectively recording the reciprocal transactions in both the books. Question # 3: The Head Office of Zubair and Company carries all Branch plant assets in its own ledger. Give entries that would appear in the books of Head Office and Branch as a result of the following transactions: 1. The Head Office purchases Branch equipment for cash Rs.120,000. 2. The Branch pays Rs.9,000 for the installation of the equipment. 3. The Branch pays Rs.6,000 for the insurance of the equipment. 4. The Head Office records depreciation on the equipment Rs.6,000. www.a4accounting.net Page 44 Branch Accounting Chapter # 2 Question # 4: On January 1, 1993 Hafiz & Co. Karachi opened a Branch at Larkana, following is the information for the month of January 1993. 1. Shifted to the Branch goods billed at Rs.135,000. 2. During the month additional shipment was made at billed price of Rs.54,000. 3. During the month Branch returned merchandise of billed price of Rs.3,375. 4. At January 31, 1993 Branch inventory at billed price was Rs.45,000. 5. Branch reported a loss for January Rs.6,750. The Head Office has followed a practice of billing the Branch at 20% above cost of merchandise. REQUIRED Give the journal entries on the books of Head Office to record the above transactions and to record overvaluation adjustments. (Show necessary computations). Question # 5: On March 1, 2005 a company of Karachi opened a Branch at Lahore. The information for the month is as under: 1. Goods supplied to Branch at billed price for Rs.247,500. 2. During the month additional shipment was made at billed price of Rs.97,200. 3. Goods returned by Branch at billed price of Rs.6,075. 4. Merchandise valued at Branch on March 31, 2005 for Rs.81,000. 5. The Head Office had followed the practice of billing the Branch at 25% above cost. REQUIRED Give the journal entries in the books of Head Office to record the above transactions and to record overvaluation adjustment. Question # 6: On January 1, 2006, Bilal Co. of Karachi opened a Branch at Multan. Following is the information for the month of January 2006: 1. Sent merchandise to Branch at billed price of Rs.144,000. 2. During the month additional shipment was made at billed price of Rs.90,000. 3. Branch returned merchandise of billed price Rs.7,200 during January. 4. At the end of January the inventory (at billed price) held by Branch amounted to Rs.45,000. 5. Branch reported net profit of Rs.6,000 for the month. The Head Office followed the practice of billing the Branch at 20% above cost of merchandise. REQUIRED (1) Give journal entries in the books of Head Office including adjustment of overvaluation. (2) Give journal entries in the books of Multan Branch. Note: Where computation of overvaluation is required entries without computation will not be accepted. Page 45 www.a4accounting.net Branch Accounting Chapter # 2 Question # 7: Following are the transactions entered into by Zafar Co. Ltd. with its Branch at Hyderabad during the year ended June 30, 2007. The Head Office billed merchandise to Branch at 25% above cost. 1. Shipped to the Branch merchandise billed at Rs.105,000. 2. The Branch returned merchandise at billed price of Rs.2,250. 3. At June 30, the Branch inventory was valued at billed price of Rs.4,500. 4. The Branch reported a loss of Rs.6,750 for the year. REQUIRED (i) Give journal entries on the books of Head Office to record above transactions. (ii) Calculate and record the profit it from allowance for overvaluation. Question # 8: On 1st October 2004, Fahad Traders of Karachi opened a Branch at Islamabad by sending goods at a billed price of Rs.405,000. On 15th Nov. additional shipment was made at a billed price of Rs.162,000. On 20th Nov. the Branch returned goods worth Rs.12,000. On 31st Dec. 2004, the Branch reported a net loss of Rs.23,400 and goods unsold (inventory) at billed price of Rs.135,000. The Head Office invoices goods at 25% above cost. REQUIRED (1) Show over-valuation adjustment with necessary computation in Head Office books. (2) Record the above transactions (including incorporation of Branch profit/loss and overvaluation adjustment) in the Head Office journal. Question # 9: Pak Trading Co. with its Head Office in Karachi has a number of Branches operating independently almost in all the cities of Pakistan. Given below are the transactions and accounting data concerning Head Office & its Multan Branch for the month of November 2001. The Head Office bills merchandise to all its Branches at 25% above cost. 1. Multan Branch reported merchandise inventory at November 01 valued at Rs.18,750 (comprising exclusively of shipments from Head Office). 2. Multan Branch received merchandise shipment from Head Office at billed price of Rs.56,250. 3. Multan Branch returned merchandise against shipment in (2) at billed price of Rs.3,750. 4. Multan Branch received another shipment from Head Office at billed price of Rs.75,000. 5. A November 30, Multan Branch valued its inventory at Rs.28,125. The Branch is not authorized to make merchandise purchases from its local market. REQUIRED 1) Give entries in General Journal of Multan Branch to record transactions numbered 2, 3 and 4. 2) Give an adjusting entry in the General Journal of Head Office to record profit from allowance for over-valuation. 3) Set up a T-account for allowance for over-valuation in the ledger of Head Office, post relevant entries into it. Balance and rule off the account. 4) Show all the necessary computations on Head Office books. www.a4accounting.net Page 46 Branch Accounting Chapter # 2 Question # 10: On January 1, 2005 Printlake Co. opened a Branch at Quetta. Following is the information for the month of January 2005. The Head Office has followed the practice of billing the Branch at 25% above cost. 1. Goods supplied to Branch at billed price Rs.600,000. 2. During the month additional shipment was made at billed price of Rs.72,000. 3. Goods returned by Branch at billed price of Rs.60,000. 4. Cash remitted to Branch Rs.75,000. 5. Branch purchased locally Rs.120,000. 6. Sales by Branch Rs.750,000. 7. Branch incurred operating expenses Rs.90,000. 8. Merchandise valued at Branch on January 31, 2005 Rs.225,000 including 10% of local purchases. REQUIRED Give the journal entries in the books of Head Office and Branch office to record the above transactions and to record overvaluation and closing entries. Question # 11: Bashir Jan Muhammad & Co. of Karachi opened a Branch at Pindi. The Head Office and Branch selected transactions for the year ended December 31, 1990 were as under:1. The Head Office sent merchandise to Branch costing Rs.450,000 at a billed price of Rs.600,000. 2. The Head Office paid Branch salaries Rs.120,000. 3. The Branch sold goods for cash Rs.1,350,000. 4. The Branch paid Head Office accounts payable Rs.150,000. 5. The Head Office collected Branch accounts receivable Rs.225,000. 6. The Branch returned goods to Head Office at a billed price of Rs.75,000. 7. The Head Office paid Branch accounts payable Rs.90,000. 8. The Branch paid Branch shop rent Rs.180,000. 9. The Branch reported a net loss of Rs.45,000. 10. The Branch reported merchandise ending at billed price of Rs.60,000. REQUIRED Prepare entries in proper form in General Journals of: (a) Head Office including adjustment of allowance for overvaluation and closing of Branch expense and revenue summary account. (b) Branch. Question # 12: M/S. Nazeer Company Clifton, Karachi has a Branch in Lahore the goods are billed to the Branch at 20% above cost. All expenses of the Branch are paid by the Head Office. The following particulars are available with Branch on January 31, 2009: Opening Balances of January 1, 2009: Merchandise inventory at bill price 82,500 Goods received from Head Office at billed price 150,000 Expenses Paid by Head Office: Rent 4,500 Salary and other expenses 8,250 Page 47 www.a4accounting.net Branch Accounting Chapter # 2 Remittance to Head Office: Cash sales 19,875 Cash collected from customers 157,500 Goods returned to head office against the shipment 3,000 Merchandise inventory at billed price 97,500 REQUIRED (1) Prepare entries in the books of Head Office and Branch. (2) Prepare allowance for overvaluation account. (3) Find profit from allowance from overvaluation & prepare supporting adjusting entry. Question # 13: The following are the selected transactions of Head Office and its Branches: 1. Head Office sent merchandise to Branch A and Branch B, costing Rs.120,000 and Rs.150,000 respectively. 2. Branch A reported net income of Rs.15,000 and ending inventory of Rs.30,000. 3. Branch B reported net loss of Rs.7,500 and ending inventory of Rs.45,000. The Head Office bills merchandise at 20% above cost. REQUIRED (a) General Journal entries in Head Office books including entries for adjustments of allowance for overvaluation accounts and closing of Branch income summary accounts. (b) General Journal entries in the books of the Branches. Question # 14: Mehdi Corporation bills merchandise to its E-Branch at cost and maintains complete accounting records under perpetual inventory system. Equipment and other fixed assets used at Branch are carried in home office books. Transactions during December 2009, the first month of E-Branch operations are summarized below: 1. Cash Rs.15,000 was forwarded to E-Branch. 2. Merchandise costing Rs.900,000 was shipped by Head Office to E-Branch. 3. Equipment was acquired by E-Branch for Rs.22,500 cash. 4. Credit sales by Branch amounted to Rs.1,200,000 costing Rs.675,000. 5. Collection of accounts receivable by E-Branch Rs.930,000. 6. Payment of operating expenses by E-Branch totaled Rs.300,000. 7. Cash Rs.562,500 remitted by E-Branch to Head Office. 8. Operating expenses paid by Head Office and charged to E-Branch amounted to Rs.45,000. REQUIRED General Journal entries in the books of: (i) E-Branch and (ii) Head Office www.a4accounting.net Page 48 Branch Accounting Chapter # 2 Question # 15: A Karachi firm whose accounting year ends on 31st December has two Branches one at Hyderabad and the other at Multan. The Branches keep a complete set of books. On 31st December, 1996 the Hyderabad and the Multan Branches account in the Head Office books showed debit balance of Rs.456,750 and Rs.675,000 respectively before taking the following information into account. 1. Merchandise valued Rs.30,000 were transferred from Hyderabad to Multan Branch under the instruction from Head Office. 2. The Hyderabad Branch collected Rs.37,500 from a customer of Head Office. 3. The Multan Branch paid Rs.75,000 for certain goods purchased by the Head Office. 4. Rs.75,000 remitted by the Hyderabad Branch to the Head Office on 29th December, 1996 was received on 3rd January, 1997. 5. The Multan Branch received on behalf of the Head Office Rs.22,500 as dividend from a Multan Co. 6. For the year 1996, the Hyderabad Branch showed a net loss of Rs.18,750 and the Multan Branch a net profit of Rs.81,000. REQUIRED Pass journal entries to record these matters in the Head Office books and then write up the two Branches accounts therein. Question # 16: Next-door Grocers, Karachi (Head Office) deals in wholesale grocery. The company has two Branches, one at Islamabad and the other at Faisalabad. The Branches keep a complete set of books. On July 1, 2005 the Head Office books showed the following balances in the Branches accounts: Islamabad Branch -------------------------------------------------------- Rs.750,000 Faisalabad Branch ------------------------------------------------------- Rs.675,000 Some of the transactions between the Head Office and the two Branches for the year are listed below: Under the Head Office instructions, Islamabad Branch collected Rs.225,000 from the customers of Faisalabad Branch and remitted Rs.150,000 to Faisalabad Branch and Rs.75,000 to Head Office. Faisalabad Branch transferred merchandise valued Rs.150,000 to Islamabad Branch and paid Rs.15,000 cash for transporting the goods. Head Office paid Faisalabad Branch suppliers Rs.180,000 cash. Islamabad Branch paid Head Office suppliers Rs.120,000 cash. Islamabad Branch showed a net profit of Rs.300,000 and Faisalabad Branch showed a net loss of Rs.30,000. REQUIRED (a) Journal entries in the Head Office and the Branches books. (b) The two Branches accounts in the Head Office books. Page 49 www.a4accounting.net Branch Accounting Chapter # 2 Question # 17: 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.269,550. Head Office records: Hyderi Branch (debit balance) Rs.258,150. The reason for the discrepancy in the amount shown in the two accounts is that the Branch net income for November Rs.27,000 and a cash deposit made by the Branch to the account of the Head Office, Rs.15,600, 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.108,750. Debit inventory account on Branch books, credit inventory account on the Head Office books. December 12. Branch transferred Rs.74,250 from its bank account to the bank account of the Head Office. December 19. Branch returned shop supplies costing Rs.9,150 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.16,500 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.8,850 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. Question # 18: The following home office account with selected entries is taken from the Pindi Branch ledger: HOME OFFICE 1999 1999 March 5 Returns against Jan. 1 Balance 270,000 Goods shipments 13,500 Feb. 6 Goods shipments 90,000 Dec. 31 Net loss 18,600 June 8 Goods shipments 54,000 Dec. 10 Corrected overstated 7,500 bad debts for 1998 Pindi Branch reported inventories at billed price: at Jan. 1, 1999 Rs.36,000/= and at December 31, 1999 Rs.27,000/=. The home office bills merchandise to its Branches at 20% above cost. REQUIRED Give all reciprocal entries in the home office general journal including adjusting entry to record profit from allowance for overvaluation for 1999, and closing entry. Entries without supporting computations are not acceptable. www.a4accounting.net Page 50 Branch Accounting Chapter # 2 Question # 19: The Head Office account appears in the books of its Branch as shown below: Head Office 1990 1990 June 12 Remittance to H/O 22,500 June 1 Balance June 14 Merchandise returns 1,500 June 5 Merchandise shipments June 25 Payment of H/O June 20 Overstatement of accounts payable 7,500 depreciation of 1989 June 30 Payment of Head Office June 24 Collection of Head expense 4,500 Office accounts June 30 Payment of H/O note 6,000 REQUIRED Entries in General Journal of Head Office affecting Branch account. 75,000 21,000 1,800 6,000 Question # 20: On July 31, 1990 the balance of Branch account on the books of Head Office and the balance of Head Office account on the books of Branch are not agreed. On comparison the following items were detected: 1. The Branch returned merchandise of Rs.18,000 to the Head Office on July 20, but the merchandise was received by the Head Office after July 31, 1990. 2. The Head Office collected Branch accounts receivable of Rs.75,000 but forgot to intimate the Branch. 3. The Head Office paid Rs.21,000 for Branch expense but the item was not recorded by the Branch. 4. The Head Office paid Rs.11,790 for freight on merchandise but the Branch recorded the amount as Rs.10,170. REQUIRED Give adjusting entries on the books of Head Office and the Branch respectively for the above items. Question # 21: On June 30, 1995 the Branch account in the Head Office books of the Paramount (Pvt.) Ltd. shows a balance of Rs.151,200 and the Head Office account in the books of Branch shows a balance of Rs.175,230. The following items are responsible for the difference: 1. Merchandise billed at Rs.25,800 was supplied by the Head Office to the Branch on June 28. The merchandise was not received by the Branch till June 30. 2. The Branch collected a Head Office accounts receivable of Rs.60,000 but failed to inform the Head Office. 3. The Head Office recorded the profit of the Branch for the month of May Rs.20,250. This was an error, as the Branch reported a profit of Rs.22,950. 4. The Head Office has not charged Rs.12,870 in respect of merchandise returned by the Branch to the Head Office. The merchandise was in transit. REQUIRED a) Prepare a reconciliation statement. b) Pass necessary journal entries in the books of the Head Office and Branch. Page 51 www.a4accounting.net Branch Accounting Chapter # 2 Question # 22: Seiko (Pvt.) Ltd. sent merchandise worth Rs.90,000 to his Branch No. 1 Lahore and paid transporting cost Rs.2,700 for the same. On the request of Branch No. 2 Faisalabad, Seiko advised to Lahore Branch to transfer the same consignment of Rs.90,000 to Faisalabad Branch. Lahore Branch sent the same to Faisalabad and paid Rs.2,250 as transportation charges of the same. REQUIRED Journal entries in the books of: 1. Seiko (Pvt.) Ltd. Head Office 2. Lahore Branch 3. Faisalabad Branch It is noted that if the merchandise had been supplied from the Head Office to the Faisalabad the transporting charges would have been Rs.1,575. Question # 23: The Karachi Head Office of Al-Amin Company consigned to Lahore Branch goods costing Rs.90,000 and freight paid Rs.7,500. Later on the Head Office directed the Lahore Branch to transfer the entire consignment to Jhelum Branch. The Lahore Branch dully executed the directives and paid additional freight Rs.1,500. If the goods had been sent to Jhelum Branch directly by the Head Office, the freight charges would have been Rs.8,400. REQUIRED Give entries in General Journal of: 4. Head Office 5. Lahore Branch 6. Jhelum Branch Question # 24: Head Office in Karachi shipped merchandise to its Islamabad Branch costing Rs.30,000 billed at 25% above cost and Rs.3,750 transportation charges. Subsequently Head Office instructed Islamabad Branch to send this merchandise shipment to Multan Branch. Islamabad Branch compiled with instructions and paid transportation charges of Rs.750 for sending the shipment to Multan Branch. If the merchandise had been sent by the Head Office direct to Multan Branch, the normal transportation charge would have been Rs.3,000. REQUIRED Record the above transactions in the general journal of Head Office, Islamabad Branch and Multan Branch. Question # 25: Asad Ltd. sent merchandise costing Rs.90,000 which was billed at 20% above cost to its Lahore Branch and paid transportation cost of Rs.11,700. On request of the Faisalabad Branch, Asad Ltd. advised Lahore Branch to transfer the same shipment to Faisalabad Branch. Lahore Branch sent the same to Faisalabad Branch and paid transportation charges Rs.3,300. REQUIRED Pass journal entries in the books of: (1) Asad Ltd. (2) Lahore Branch. (3) Faisalabad Branch. Note: If the merchandise had been supplied directly by the Head Office (Asad Ltd.) to Faisalabad Branch the transportation charges would have been Rs.12,000. www.a4accounting.net Page 52 Branch Accounting Chapter # 2 Question # 26: Bilal Corporation at Karachi newly established its Branch at Sukkur. The Head Office supplies goods to the Branch at 125% of cost. Summarized data of the Branch’s transactions for the year 2003, are as under: 1. Goods received from Head Office at billed price Rs.720,000. 2. Local purchases on account Rs.180,000. 3. Credit sales to customers Rs.450,000 and sales for cash Rs.276,000. 4. Cash collected from customers Rs.375,000. 5. Paid to suppliers Rs.105,000. 6. Returned goods to Head Office Rs.9,000. 7. Remitted cash to Head Office Rs.270,000. 8. Branch expenses paid by Branch Rs.25,200 and by Head Office Rs.1,200. Data for Adjustment on 31-12-2003 (1) Accrued operating expenses Rs.900. (2) Ending inventory of merchandise: Rs.24,000 consisted of local purchases and Rs.22,500 consisted of shipment from Head Office. REQUIRED (a) Prepare journal entries (including adjusting and closing) in the Branch. (b) Journal entries in the Head Office books to incorporate Branch profit or loss and adjustment of overvaluation. (c) Show computation of overvaluation adjustment. Question # 27: The trial balance of Pindi Branch of Ashraf Corporation on December 31, 2001 is given below. The Head Office bills the Branch for merchandise at cost plus 25%. Title of Account Debit Credit Cash 75,000 Office supplies 12,000 Merchandise inventory January 1 240,000 Accounts receivable 225,000 Land 180,000 Office equipment 120,000 Allowance for depreciation – Office equipment 7,500 Accounts payable 105,000 Notes payable 45,000 Head Office 796,500 Sales 900,000 Sales returns & allowances 45,000 Purchases 75,000 Transportation – in 6,000 Purchases returns & allowances 9,000 Merchandise received from Head Office 750,000 Merchandise returned to Head Office 30,000 Selling expenses 75,000 General expenses 90,000 Total 1,893,000 1,893,000 Page 53 www.a4accounting.net Branch Accounting Chapter # 2 Additional Information on December 31, 2001 (a) Office supplies used Rs.7,500. (b) Prepaid selling expenses Rs.10,500. (c) Accrued general expenses Rs.12,000. (d) Depreciation on office equipment Rs.7,500. (e) Merchandise inventories: Received from Head Office at bill price Purchase from outsiders at cost 1.1.2001 Rs.180,000 60,000 Total 240,000 31.12.2001 Rs.225,000 57,000 282,000 REQUIRED (a) Prepare adjusting and closing entries in the books of Pindi Branch. (b) Prepare entries in the journal of Head Office to incorporate Pindi Branch profit or loss and to adjust the allowance for overvaluation account and also close out the Pindi Branch profit & loss account. Question # 28: On December 31, 1997 the end of monthly trial balance for W.S. Company Branch number A1 shows balances as listed below. The Head Office bills the Branch for merchandise at cost plus 20%. Cash 34,350 Notes payable 22,500 Merchandise 243,000 Head Office 450,000 Store equipment 120,000 Sales 427,500 Allowance for depreciation – Merchandise supplies from Store equipment 6,000 Head Office 236,250 Store supplies 9,000 Purchases 67,500 Accounts payable 75,600 Selling expenses 67,500 Lands 135,000 General expenses 69,000 The following data is available on December 31: (a) Physical store supplies inventory Rs.3,600. (b) Accrued selling expenses Rs.1,200. (c) Depreciation of equipment to be charged for December 1997 @ 1% per month. (d) Prepaid selling expenses Rs.3,750. Merchandise Inventories: December 1 December 31 Amount received from Head Office at billed price 180,000 207,000 Amount purchased from outsider at cost 63,000 58,500 Total 243,000 265,500 The Head Office notifies the Branch on December 31 that it has paid off the Branch note for Rs.22,500. REQUIRED (a) Prepare adjusting and closing entries in the books of Branch A – 1. (b) Give journal entries on the books of Head Office summarizing Branch operations for the month. www.a4accounting.net Page 54 Branch Accounting Chapter # 2 Question # 29: A new independent Branch has opened by M/S. Karimi & Co. at Hyderabad. The practice of the trader is that the goods are sent to Branch at 25% above cost. The summary of transaction (2 months) is narrated below. You are asked to: (a) Pass journal entries in the books of the Branch (including adjusting and closing). (b) Pass General Journal entries to record the Branch net income and adjustment of net income as reported by the Branch (in the books of Head Office). Summary of the Transactions: 1. Goods supplies to Branch invoiced at cost plus 25% Rs.600,000 and remitted cash Rs.75,000. 2. Purchase by the Branch, cash Rs.60,000 and on credit Rs.90,000. 3. Sales by the Branch, cash Rs.187,500 and on account Rs.525,000. 4. Equipment supplied by the Head Office Rs.45,000. 5. Cash collection from customers Rs.300,000. 6. Payment to creditors Rs.52,500. 7. Expenses paid by the Branch: a. Salaries expenses Rs.30,000. b. Rent & rates expenses Rs.6,000. c. Utilities expenses Rs.1,500. d. Advertising expenses Rs.3,750. e. Delivery expenses Rs.2,250. f. Salesman salary Rs.4,500 8. Expenses charged by the Head Office to the Branch office Rs.2,250. 9. Cash remitted to Head Office Rs.262,500. Adjustments: 1. Office salary accrued Rs.1,500. 2. Gas and electric charges accrued and not paid Rs.750. 3. Advertising expenses paid in advance Rs.1,125. 4. Depreciate equipment at 10%. 5. Merchandise inventory on December 31, 1994: Purchase from local market 22,500 Amount received from Head Office 187,500 210,000 Question # 30: Karachi Head Office has a Branch at Multan. Decentralized accounting is followed. The Head Office supplies goods to Branch at 20% above cost. Data relating to the Branch for 1991 are summarized below: a) Goods supplied to Branch, billed price Rs.360,000. b) Cash remitted to Branch Rs.45,000. c) Branch purchased goods from local market on account Rs.90,000. d) Operating expenses paid by Branch Rs.12,600. e) Head Office paid Branch operating expenses Rs.600. f) Cash remitted to Head Office Rs.135,000. g) Branch sold merchandise for cash Rs.438,000. Data for Adjustments on 31 – 12 – 1991: 1. Accrued operating expense Rs.1,800. 2. Prepaid operating expense Rs.1,350. 3. Ending inventory values at Rs.12,000 of purchase from local market and Rs.112,500 of goods supplied by Head Office. Page 55 www.a4accounting.net Branch Accounting Chapter # 2 REQUIRED 1. Journal entries including adjusting and closing entries in the books of the Branch. 2. Journal entries in the books of the Head Office to record Branch net income or loss, and for adjustment of overvaluation. (Show the necessary computations). Question # 31: The Nishat Corporation of Karachi sends merchandise to its Branch at Lahore at 140% of cost. The income statement data of the Branch is as follows: Merchandise inventory (Jan. 1, 2002) Rs.25,200. Shipment from Head Office Rs.294,000. Merchandise returned to Head Office Rs.16,800. Sales (including cash sales of Rs.150,000 remitted to Head Office) Rs.345,000. Salaries expenses (paid by Head Office) Rs.27,000. Rent expenses Rs.3,000. Merchandise inventory Dec. 31, 2002 Rs.33,600. REQUIRED (i) Branch income statement for the year ended Dec. 31, 2002. (ii) Give all reciprocal entries in the Head Office books including adjusting entry to record profit from overvaluation for 2002 & also pass the necessary closing entry. Question # 32: M/S. Nisar & Co. of Karachi have established a Branch at Hyderabad. The Branch balance sheet as on June 30, 1994 is as follows: Assets: Rupees Rupees Cash 243,000 Accounts receivable 1,098,000 Less: Allowance for bad debts (76,500) 1,021,500 Merchandise inventory 1,485,000 Prepaid expenses 31,500 Furniture 346,500 Less: Allowance for depreciation (243,000) 103,500 Total assets 2,884,500 Equities: Rupees Rupees Accounts payable 135,000 Accrued expenses 54,000 Head Office 2,695,500 Total equities 2,884,500 Branch transactions during July 1, 1993 – June 30, 1994 are as under:1. Expenses paid by Head Office and charged to Branch 72,000 2. Sales on account 3,240,000 3. Purchases on account 765,000 4. Expenses paid 1,116,000 5. Goods received from Head Office billing at cost 1,800,000 6. Cash remittance to Head Office 1,404,000 7. Collection of accounts 3,120,000 8. Bad debts written off 57,000 9. Payment on account 729,000 www.a4accounting.net Page 56 Branch Accounting Chapter # 2 Adjustments: Merchandise on hand 1,980,000 Prepaid expenses 40,500 Accrued expenses 72,000 Depreciation for the year 54,000 Allowance for bad debts to be kept at 72,000 REQUIRED a) Prepare necessary journal entries in the books of Branch for the year to record the above transactions including adjusting and closing entries. b) Prepare balance sheet and income statement of Branch as on June 30, 1994. Question # 33: Partial financial data from Pony Sales Co. with its Head Office at Karachi and its Bless Branch at Hyderabad for 1996 as follows: Head Office Bless Branch Sales 159,000 --Inventory merchandise Jan. 1 (at cost) 17,250 --Inventory merchandise Jan. 1 (at billed) --6,675 Purchases 123,000 --Shipment to Bless Branch (at cost) 31,500 --Shipment from Head Office (at billed price) --37,800 Inventory, December 31 (at cost) 21,375 --Inventory, December 31 (at billed price) --8,775 Operating expenses 57,300 --The Head Office bills the Branch for merchandise shipments as follows: In 1995, 25% above cost. In 1996, 20% above cost. REQUIRED Prepare Head Office income statement showing on it the Branch net loss of Rs.3,750 and the profit from overvaluation for 1996. Computations are necessary. Question # 34: Following are some of the items extracted from the books of Khursheed & Hassan Company Karachi and its Lahore Branch: Head Office Branch Cash 600,000 270,000 Inventory (opening) 225,000 300,000 Purchases 270,000 90,000 Sales revenue 481,500 450,000 Goods sent to Branch 90,000 --Goods received from Head Office --112,500 Salaries expense 30,000 15,000 Prepaid rent 18,000 12,000 Allowance for overvaluation 30,000 --On December 31, 2008 data for adjustment: Head Office: Inventory valued Rs.45,000, Prepaid salaries Rs.18,000 and prepaid rent Rs.12,000. Branch: Inventory with respect to Head Office Rs.22,500 and of local purchases Rs.18,000. Accrued salaries Rs.22,500 and rent expired during the period Rs.3,000. Page 57 www.a4accounting.net Branch Accounting Chapter # 2 REQUIRED 1. Allowance for overvaluation in opening inventory. 2. Rate of allowance for overvaluation. 3. Adjusting entry of allowance for overvaluation. 4. Prepare Consolidated Income Statement for the year ended December 31, 2008. Question # 35: The following are some of the selected balances taken out from the trial balance of Head Office and Branch on December 31, 1992: Head Office Branch Merchandise inventory (Opening) 43,500 37,500 Sales revenue 450,000 225,000 Purchases 450,000 --Purchase discount 7,500 --Goods sent to Branch 96,000 --Goods received from Head Office --120,000 Allowance for overvaluation 27,000 --Salaries expense 30,000 7,500 Miscellaneous general expense 7,500 1,500 Adjustment Data: Head Office Branch Merchandise inventory (Ending) 60,000 30,000 Accrued salaries --1,500 Prepaid salaries 3,000 --Depreciation on equipment 4,500 750 REQUIRED 1. Income Statement of Branch. 2. Consolidated Income Statement of Head Office and Branch. 3. Entries in the books of Head Office to incorporate Branch net income and adjustment of income resulting from overvaluation of merchandise. Question # 36: Hyderabad Branch of AK Farooqui Company submitted the following trial balance data of December 31, 2009 to its Head Office in Karachi: Debit: Balance at bank Rs.48,750; Cash in hand Rs.15,000; Accounts receivable Rs.112,500; Purchases Rs.150,000; Rent & rates Rs.60,000; Utilities expenses Rs.11,250; Salaries expenses Rs.41,250; Stock (January 1, 2009) Rs.93,750 (Total Rs.532,500) Credit: Accounts payable Rs.135,000; Sales Rs.337,500; Head Office Rs.60,000 (Total Rs.532,500) Additional Information: The salaries include a sum of Rs.18,750 paid to the Branch manager, who is further entitled to a commission at 7% on the net profit of the Branch before charging such commission, which is payable after a month. The ending stock of the Branch amounted to Rs.142,500 and utilities expenses payable Rs.6,000. REQUIRED From the above information prepare: (i) Income statement of Hyderabad Branch (ii) Balance sheet as of Hyderabad Branch www.a4accounting.net Page 58 Branch Accounting Chapter # 2 Question # 37: The trial balance of Head Office and Branch office as June 30, 1992 were as under: Head Office Branch Office Debit Credit Debit Credit Cash 129,000 --25,500 --Accounts receivable 30,000 --12,000 --Merchandise inventory (opening) 15,000 --7,500 --Equipment 18,000 --9,000 --Accounts payable --15,000 --13,500 Capital --167,250 ----Purchases 60,000 --22,500 --Goods sent to Branch --37,500 ----Goods received from Head Office ----45,000 --Allowance for overvaluation --8,250 ----Branch / Head Office 45,000 ----45,000 Sales --82,500 --67,500 Operating expenses 13,500 --4,500 --Additional Information on June 30, 1992: 1. Closing inventory: Head Office Rs.12,000 and Branch Rs.19,500 including Rs.1,500 purchases from outsiders. 2. Current year depreciation on equipment of Head Office Rs.3,750 and Branch Rs.2,250. REQUIRED a) Prepare Branch Income Statement. b) Prepare Head Office Income Statement. c) Prepare Consolidated Income Statement. d) Prepare Branch Balance Sheet. e) Prepare Head Office Balance Sheet. f) Prepare Consolidated Balance Sheet. Question # 38: The trial balance of head office and Pindi branch of Shah Ltd. as 30 June 2003 were as under: Head Office Pindi Branch Debit (Rs.) Credit (Rs.) Debit (Rs.) Credit (Rs.) Cash 86,000 --17,000 --Accounts receivable 30,000 --8,000 --Merchandise inventory 10,000 --7,000 --Equipment 20,000 --11,000 --Accounts payable --16,000 --18,000 Capital --? ----Purchases 53,000 --28,000 --Goods sent to branch --40,000 ----Goods received from head office ----50,000 --Purchase return and allowance --2,000 --1,000 Goods returned to head office ------5,000 Goods returned by branch ? ------Allowance for over valuation --12,000 ----Branch / Head office ? ----? Page 59 www.a4accounting.net Branch Accounting Chapter # 2 Sales --120,000 --90,000 Sales discount 3,000 --1,000 --Store supplies 20,000 --8,000 --Salaries expenses 18,000 --20,000 --General expenses 2,000 --9,000 --Prepaid rent 4,000 --5,000 --Total ? ? 164,000 ? Additional Information on 30 June 2003: Head Office Pindi Branch i. Store supplies on hand ----------------------- Rs.18,000 ------- Rs.5,000 ii. Depreciation on equipment ------------------ Rs.3,000 ------- Rs.1,000 iii. Commission receivable ------------------------ Rs.7,000 ------- Rs.2,000 iv. Salaries expenses for the year -------------- Rs.20,000 ----- Rs.18,000 v. Closing inventory at cost ---------------------- Rs.8,000 ----- Rs.12,000 (Including Rs.2,000 purchase from outside) REQUIRED a) Prepare income statement in the books of Pindi Branch at 30 June 2003. b) Prepare head office income statement showing branch profit or loss and allowance for over valuation on 30 June 2003. c) Prepare consolidated income statement for the period 30 June 2003. d) Prepare Pindi branch balance sheet as on 30 June 2003. e) Prepare head office balance sheet as on 30 June 2003. f) Prepare consolidated balance sheet as on 30 June 2003. www.a4accounting.net Page 60 Chapter # 3 Analysis of Financial Statement Advanced Accounting www.a4accounting.net Analysis of Financial Statements Chapter # 3 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Financial Statement analysis. Tools of analysis. Dollar/Rupees and percentage change. Trend percentage. Component percentage. Common size Financial Statements and ratios. Interpretation. WHAT THE EXAMINER USUALLY ASK? Computation of ratios and percentages. Trend percentages. Comments on ratios and percentages. www.a4accounting.net Page 62 Analysis of Financial Statements Chapter # 3 FINANCIAL STATEMENT ANALYSIS An analysis of the financial statements of a business to assess its performance and position. Ratios are normally calculated from the financial statements to assess the profitability, solvency, working capital management, liquidity, and capital structure of an organization. RATIO ANALYSIS The use of accounting ratios is to evaluate a company’s operating performance and financial stability. Such ratios as return on capital employed and gross profit percentage can be used to assess profitability. The liquidity ratios can be used to examine solvency and gearing ratios to examine the financial structure of the company. The analysis of ratios can indicate how well a company is run, the risks of financial insolvency, and the financial returns provided. Liquidity Ratio. Leverage Ratio. Activity Ratio. Investors/Shareholders Ratio. Profitability Ratio. LIQUIDITY RATIO Liquidity means the ability of the firm to pay its way. Liquidity ratios are the ratios that measure a company’s liquid position. LEVERAGE RATIO Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. ACTIVITY RATIO Activity ratios are the rate at which the company sells its stock and the efficiency with which it uses its assets. INVESTORS RATIO Information to enable decisions to be made on the extent of the risk and the earning potential of a business investment is investors’ ratio. PROFITABILITY RATIO Profitability ratio is a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Page 63 www.a4accounting.net Analysis of Financial Statements Chapter # 3 LIQUIDITY RATIO Working capital Current ratio Quick ratio LEVERAGE RATIO ACTIVITY RATIO Debt ratio Receivable turnover Equity ratio Inventory turnover Debt to equity Payable ratio turnover Total operating days INVESTORS RATIO Earnings per share Price earnings ratio Earning rate Dividend per share Dividend yield PROFITABILITY RATIO Net profit percentage Gross profit percentage Cost of goods sold percentage Operating expense percentage Rate of return on assets Assets turnover Rate of return on shareholders’ equity Book value per share WORKING CAPITAL Working capital is the capital that is used to finance the day-to-day operations of a company. Working capital is calculated as the difference between current assets and current liabilities. Working capital = Current assets – Current liabilities CURRENT RATIO Current ratio is the ratio of the current assets of a business to the current liabilities; it is used as a test of liquidity. Current ratio = Current assets Current liabilities QUICK RATIO Quick ratio is a ratio used for assessing the liquidity of a company; it is the ratio of the liquid assets (i.e. current assets less the inventory) to the current liabilities. It is also called acidtest ratio. Quick ratio = Quick assets Current liabilities QUICK ASSETS Quick assets are the assets held in cash or in something that can be readily turned into cash with minimal capital loss (e.g. deposits in a bank current account, accounts receivable, marketable investments). Quick assets = www.a4accounting.net Current assets – Inventory – Prepaid expenses Page 64 Analysis of Financial Statements Chapter # 3 DEBT RATIO A ratio used to examine the financial structure or gearing (leverage) of a business. The longterm debt, normally including preference shares, of a business is expressed as a percentage of its equity. A highly geared company is one in which the debt is higher than the equity, compared to the other companies in a similar industry. Debt ratio = EQUITY RATIO Equity ratio = Total liabilities Total assets Total shareholders’ equity Total assets x 100 DEBT TO EQUITY RATIO Debt to equity ratio = Total liabilities Total shareholders’ equity x 100 ACCOUNTS RECEIVABLE TURNOVER Receivable turnover of a company shows that in how many days a company collects its receivable. Accounts receivable turnover in times = Net credit sales Average accounts receivable Accounts receivable turnover in days = 365 Receivable turnover in times Average receivable = Accounts receivable (beg) + Accounts receivable (end) 2 INVENTORY TURNOVER A ratio that measures the number of times items of inventory are used annually. Inventory turnover in times = Cost of goods sold Average inventory Inventory turnover in days = 365 Inventory turnover in times Average inventory = Inventory (beg) + Inventory (end) 2 Page 65 www.a4accounting.net Analysis of Financial Statements Chapter # 3 ACCOUNTS PAYABLE TURNOVER Accounts payable turnover in times = Net credit purchases Average accounts payable Accounts payable turnover in days = 365 Payable turnover in times Accounts payable (beg) + Accounts payable (end) 2 Average payable = OPERATING CYCLE Operating cycle is the average time between acquiring inventory and receiving cash from its sale. Operating cycle = Inventory turnover in days + Receivable turnover in days Inventory turnover in days + Accounts receivable turnover in days 2 Average operating cycle = NET PROFIT PERCENTAGE Net profit margin is a ratio of financial performance calculated by expressing the net profit as percentage of sales revenue. Net profit percentage = Profit before Interest and Tax Net sales X 100 GROSS PROFIT PERCENTAGE Gross profit percentage is a ratio of financial performance calculated by expressing the gross profit as percentage of sales revenue. With retailing companies in particular, it is regarded as a prime measure of their trading success. Gross profit percentage = Gross profit Net sales X 100 COST OF GOODS SOLD PERCENTAGE Cost of goods sold percentage = Cost of goods sold Net sales OPERATING EXPENSES PERCENTAGE Operating expenses percentage = Operating expenses Net sales RATE OF RETURN ON ASSETS X 100 X 100 Rate of return on assets is an accounting ratio expressing the amount of profit for an accounting period as a percentage of the assets of a company. Rate of return on assets = www.a4accounting.net Net profit Total assets Page 66 X 100 Analysis of Financial Statements Chapter # 3 ASSETS TURNOVER Net sales Average assets Assets turnover = Average assets = X 100 Total assets (beg) + Total assets (end) 2 RATE OF RETURN ON SHAREHOLDERS’ EQUITY Net income Shareholders’ equity Rate of return on shareholders’ equity = X 100 EARNINGS PER SHARE (EPS) The profit attributable to each ordinary share in a company based on consolidated profit for the period, after deducting minority interest and preference shares dividends. This profit figure is divided by the weighted average number of shares in issue during the period. Net profit Average no. of shares Earnings per share = PRICE EARNINGS RATIO Price earnings ratio is a comparison of the current market price of a company share to the earning per share of the company. The price earnings ratio is one of the main indicators used by the fundamental analysts to decide whether the shares in a company are expensive or cheap, relative to the market. Market price per share Earnings per share Price earnings ratio = EARNINGS RATIO Earnings per share Market price per share Earnings ratio = BOOK VALUE PER SHARE Book value per share = NUMBER OF SHARES Number of shares = X 100 Shareholders’ equity Number of shares Share capital Par value of share DIVIDEND PER SHARE The total dividend declared by a company in a year divided by the total number of ordinary shares on which the divided is paid. Dividend per share = Cash dividend declared Number of ordinary shares Page 67 www.a4accounting.net Analysis of Financial Statements Chapter # 3 DIVIDEND YIELD A ratio computed by dividing the annual dividends paid per share of ordinary share by the market price per share at a specific date; indicates the rate of return to shareholders in terms of cash dividend distributions. Dividend per share Market price per share Dividend yield = SHARE CAPITAL Share capital = X 100 Shareholders’ equity – Retained earnings SHAREHOLDERS’ EQUITY Shareholders’ equity = Total assets – Total liabilities RETURN ON CAPITAL EMPLOYED (ROCE) Return on capital employed = Capital employed = Profit before interest and tax Capital employed X 100 Total assets – Total current liabilities ILLUSTRATION # 1: The following balances have been taken from the books of Furqan Company Ltd. on 31 December 2007: Fixed assets Rs. 200,000 Long term liabilities Rs. 100,000 Current assets Rs. 700,000 Current liabilities Rs. 400,000 Share capital (Rs.10) Rs. 300,000 Retained earnings Rs. 100,000 Sales (all on credit) Rs. 600,000 Cost of goods sold Rs. 350,000 Average inventory Rs. 20,000 Average receivable Rs. 40,000 Operating expenses Rs. 150,000 Market price per share Rs. 25 Quick assets Rs. 450,000 REQUIRED 1. Working capital 2. Debt ratio 3. Equity ratio 4. Current ratio 5. Inventory turnover 6. Receivable turnover 7. Rate of net income on sales 8. Earnings per share 9. Price earnings ratio 10. Total days of operating cycle 11. Quick ratio 12. Operating expenses rate 13. Rate of gross profit on sales 14. Cost of goods sold rate 15. Rate of return on assets 16. Assets turnover 17. Rate of return on shareholders’ equity 18. Book value per share www.a4accounting.net Page 68 Analysis of Financial Statements Chapter # 3 SOLUTION # 1: 1. Computation of Working Capital: Current assets Less: Current liabilities Working capital Rs. Rs. Rs. 700,000 (400,000) 300,000 2. Computation of Debt Ratio: Debt ratio = Total liabilities Total assets Debt ratio = 500,000 900,000 Debt ratio = 0.56 : 1 3. Computation of Equity Ratio: Equity ratio = Total shareholders’ equity Total assets Equity ratio = 400,000 900,000 Equity ratio = 0.44 : 1 4. Computation of Current Ratio: Current ratio = Total current assets Total current liabilities Current ratio = 700,000 400,000 Current ratio = 1.75 : 1 5. Computation of Inventory Turnover: Inventory turnover in times = Cost of goods sold Average inventory Inventory turnover in times = 350,000 20,000 Inventory turnover in times = 17.5 times Inventory turnover in days = 365 Inventory turnover in times Inventory turnover in days = 365 17.5 Inventory turnover in days = 21 days 6. Computation of Receivable Turnover: Receivable turnover in times = Net credit sales Average receivable Receivable turnover in times = 600,000 40,000 Receivable turnover in times = 15 times Receivable turnover in days = 365 Receivable turnover in times Receivable turnover in days = 365 15 Receivable turnover in days = 24 days Page 69 www.a4accounting.net Analysis of Financial Statements Chapter # 3 Computation of Net Income: Net sales Less: Cost of goods sold Gross profit Less: Operating expenses Net income Rs. Rs. Rs. Rs. Rs. 7. Computation of Rate of Net Income: Rate of net income on sales = Net income Net sales Rate of net income on sales = 100,000 600,000 Rate of net income on sales = 16.67% 600,000 (350,000) 250,000 (150,000) 100,000 X 100 X 100 8. Computation of Earnings Per Share: Earnings per share = Operating income Number of shares Earnings per share = 100,000 30,000 Earnings per share = Rs.3.33 Computation of Number of Shares: Number of shares = Share capital Par value of each share Number of shares = 300,000 10 Number of shares = 30,000 9. Computation of Price Earnings Ratio: Price earnings ratio = Market price per share Earnings per share Price earnings ratio = 25 3.33 Price earnings ratio = 7.51 10. Computation of Total Days of Operating Cycle: Total days of operating cycle = Inventory turnover in days + Receivable turnover in days Total days of operating cycle = 21 + 24 Total days of operating cycle = 45 days 11. Computation of Quick Ratio: Quick ratio = Total quick assets Total current liabilities Quick ratio = 450,000 400,000 Quick ratio = 1.125 : 1 www.a4accounting.net Page 70 Analysis of Financial Statements Chapter # 3 12. Computation of Operating Expense Rate: Operating expenses rate = Operating expenses Net sales Operating expenses rate = 150,000 600,000 Operating expenses rate = 25% 13. Computation of Gross Profit Rate: Gross profit rate = Gross profit Net sales Gross profit rate = 250,000 600,000 Gross profit rate = 41.67% 14. Computation of Cost of Goods Sold Rate: Cost of goods sold rate = Cost of goods sold Net sales Cost of goods sold rate = 350,000 600,000 Cost of goods sold rate = 58.33% 15. Computation of Rate of Return on Assets: Rate of return on assets = Net profit Total assets Rate of return on assets = 100,000 900,000 Rate of return on assets = 11.11% 16. Computation of Assets Turnover: Assets turnover = Net sales Average assets Assets turnover = 600,000 900,000 Assets turnover = 66.67% X 100 X 100 X 100 X 100 X 100 X 100 X 100 X 100 X 100 X 100 17. Computation of Rate of Return on Shareholders’ Equity: Rate of return on shareholders’ equity = Net income Shareholders’ equity Rate of return on shareholders’ equity = 100,000 400,000 Rate of return on shareholders’ equity = 25% X 100 X 100 18. Computation of Book Value Per Share: Book value per share = Total shareholders’ equity Number of shares Book value per share = 400,000 30,000 Book value per share = 13.33 Page 71 www.a4accounting.net Analysis of Financial Statements Chapter # 3 PRACTICE QUESTIONS Question # 1: Compute trend percentages for the following items taken from financial statements of Modern Fixtures over a five year period. Treat 1998 as the base year. State whether the trends are favourable or unfavourable. 2002 2001 2000 1999 1998 Sales 127,500 111,000 92,250 88,500 75,000 Cost of goods sold 87,750 69,900 60,750 54,000 45,000 Question # 2: The following items from the income statement of Makli Limited for the year ended December 31, 1998 have been expressed as a percentage of net sales: Net sales Rs.1,500,000 Beginning inventory 150,000 Net purchases 1,020,000 Ending inventory 120,000 Selling expenses 195,000 Administrative expenses 135,000 REQUIRED Calculate beginning inventory rate, net purchases rate and ending inventory rate, selling expenses rate and administrative expenses rate and cost of goods sold rate (all as percentage of net sales). Question # 3: Selected data taken from the balance sheet of Imam Co. at the end of fiscal year on December 31, 2010. Cash 150,000 Marketable securities 75,000 Accounts receivable 22,500 Inventories 375,000 Prepaid expense 300,000 Current liabilities 375,000 REQUIRED Compute: 1. Working capital 2. The current ratio 3. Acid test ratio Note: Write relevant formula in the computations. Question # 4: Zulfiqar Company’s ordinary shares capital account for 2010 and 2009 showed: Ordinary share Rs.10 par value Rs.45,000. The following data are provided relative to 2010 & 2009: 2010 2009 Dividends Rs.2,250 Rs.3,600 Market price per share Rs.20 Rs.22 Earnings per share Rs.2.13 Rs.2.67 REQUIRED Compute for year 2010 and 2009: (i) Dividend per share (ii) Dividend yield Note: Write relevant formula in the computations. Compare answer for the year 2010 with the year 2009. www.a4accounting.net Page 72 Analysis of Financial Statements Chapter # 3 Question # 5: The following balances have been taken from the books of Islamabad Co. Ltd. on Dec. 31, 98: Cash 90,000 Accounts payable 187,500 Marketable securities 60,000 Accrued expenses 37,500 Accounts receivable 120,000 Sales (on account) 900,000 Inventories 180,000 Cost of goods sold 540,000 REQUIRED (a) Working capital (b) Current ratio (c) Quick ratio (d) Accounts receivable turnover (e) Inventory turnover Question # 6: The following information has been taken from the record of Ashraf Company Ltd. at the end of the current year:Total assets Rs.675,000 Quick assets 120,000 Total liabilities 303,750 Current liabilities 150,000 Fixed assets 375,000 Retained earnings 71,250 Sales (including cash sales of Rs.150,000) 1,500,000 Gross profit on sales 30% Average inventory 105,000 Average receivable 135,000 Operating expenses 270,000 Market price of Rs.20 share is Rs.25. REQUIRED 1. Working capital 2. Debt ratio 3. Equity ratio 4. Current ratio 5. Inventory turnover 6. Receivable turnover 7. Rate of net income on sales 8. Earnings per share 9. Earnings ratio 10. Total days of operating cycle 11. Quick ratio 12. Operating expenses rate Question # 7: At the end of year the following information was obtained from the accounting records of Adnan Ltd. Sales (all on account) 600,000 Cost of goods sold 360,000 Average inventory 90,000 Average accounts receivable 60,000 Interest expense 4,500 Income taxes 6,000 Net income for the year 27,000 Average investment in assets 375,000 Average stockholder’s equity 300,000 REQUIRED On the basis of above information compute the following for the year: (1) Inventory turnover (2) Accounts receivable turnover (3) Total operating expenses (4) Gross profit percentage (5) Return on average stockholders’ equity (6) Return on average assets Page 73 www.a4accounting.net Analysis of Financial Statements Chapter # 3 Question # 8: Following are the selected balances taken from the books of Annie Ltd. at the end of 2004. Cost of goods sold 405,000 Accounts payable 150,000 Merchandise inventory (1.1.04) 90,000 Bills payable 375,000 Accounts receivable (1.1.04) 285,000 Marketable securities 106,500 Notes payable 22,500 Cash 81,000 Accounts receivable (31.12.04) 262,500 Credit sales (Net) 1,368,750 Merchandise inventory (31.12.04) 112,500 REQUIRED On the basis of above information, compute: (1) Current ratio (2) Acid test ratio (3) Inventory turnover (4) Accounts receivable turnover (5) Net profit percentage (6) Gross profit percentage (7) Average days to accounts receivable & inventory turnover Note: Computation without the use of relevant formula will not be accepted. Question # 9: Following are the selected data taken from books of Nissan Ltd. at the end of year 2003: Cost of goods sold Rs. 810,000 Accounts payable 300,000 Merchandise inventory (opening) 180,000 Bills payable 75,000 Accounts receivable (opening) 570,000 Marketable securities 213,000 Cash 162,000 Accounts receivable (ending) 525,000 Merchandise inventory (ending) 225,000 Credit sales (net) 2,737,500 Total operating expenses 900,000 REQUIRED On the basis of above information, find out: 1. Working capital 2. Inventory turnover 3. Current ratio 4. Accounts receivable turnover 5. Acid test ratio 6. Gross profit percentage 7. Net profit percentage 8. Operating expense rate Question # 10: Following are the selected data taken from the books of Masooma & Co. at the end of year 2004. Cash 33,600 Marketable securities 11,550 Inventory at start 44,400 Inventory at end 38,700 Prepaid expenses 28,800 Accounts receivable beginning 89,550 Accounts receivable ending 74,100 www.a4accounting.net Page 74 Analysis of Financial Statements Chapter # 3 Accounts payable Notes payable Purchases Sales Sales discount Operating expenses Non-operating expenses Total assets Total liabilities REQUIRED Compute the following: (a) Equity ratio (c) Rate of gross profit on sales (e) Rate of net income on sales (g) Return on equity 54,900 32,100 369,300 576,000 21,000 120,000 6,000 375,000 150,000 (b) Current ratio (d) Quick ratio (f) Return on assets (h) Total days of operating cycle. Question # 11: The following information has been taken from the balance sheet of Kashmir Carpets at the end of June 2004. Accounts payable Rs.150,000 Accounts receivable 120,000 Accrued liabilities 7,500 Cash 75,000 Income tax payable 10,500 Inventory 195,000 Marketable securities 300,000 Notes payable 102,000 Prepaid expenses 21,000 REQUIRED 1. Working capital 2. Current ratio 3. Acid test ratio Question # 12: The following data has been extracted from the financial statements of Green Grocers: 2004 2003 Net sales (70% credit sales) 3,072,000 3,502,500 Cost of goods sold 1,572,000 2,095,500 Average monthly inventory 304,500 285,000 Inventory end of the year 364,500 307,500 Accounts receivable 150% of average inventory. --75,000 REQUIRED Determine for each year: 1. Inventory turnover 2. Receivable turnover 3. No. of days sales in inventory 4. Days of operating cycle Page 75 www.a4accounting.net Analysis of Financial Statements Chapter # 3 Question # 13: The selected data given below are taken from the records of the Hasan Co. Ltd. at the end of the year 2007: Cash 450,000 Accounts receivable (beg) 62,250 Prepaid insurance 187,500 Accounts receivable (end) 652,500 Inventory (beginning) 272,250 Sales 382,500 Inventory (ending) 487,500 Operating expenses 784,500 Purchases 1,800,000 Accounts payable 337,500 Share capital (par value Rs.10) 3,750,000 Accrued expenses 487,500 Retained earnings 450,000 Total assets 9,750,000 REQUIRED Determine the following ratios on the basis of the above information: 1. Working capital 2. Acid test ratio 3. Current ratio 4. Operating expense rate 5. Rate of gross profit on sales 6. Equity ratio 7. Accounts receivable turnover rate 8. Inventory turnover rate Question # 14: The data shown below were taken from the financial records of Shahid Ltd. at the end of 1996:Accounts payable 750,000 Accrued liabilities 495,000 Cash 480,000 Inventories – Jan. 1, 1996 630,000 Inventories – Dec. 31, 1996 570,000 Marketable securities 150,000 Operating expenses 1,800,000 Prepaid expenses 375,000 Purchases (net) 5,400,000 A/c receivable – Jan. 1, 1996 915,000 A/c receivable – Jan. 31, 1996 915,000 Long term loan 2,250,000 Plant assets 6,000,000 Sales (all on credit) 9,060,000 Sales return and allowances 300,000 Retained earnings 1,995,000 Share capital (Rs.10 par) ? Market price per share Rs.18 REQUIRED On the basis of above information compute the following: 1. Current ratio 2. Quick ratio 3. Equity ratio 4. Debt ratio 5. Inventory turnover 6. Receivable turnover 7. Rate of net income on sales 8. Book value per share 9. Earnings per share 10. Price earnings ratio Question # 15: Parkland Ltd. balance sheet dated December 31, 1990 is given below: Assets Equities Cash 30,000 Bank overdraft Marketable securities 30,000 Notes payable Accounts receivable 120,000 Accounts payable Inventories 300,000 Long term loan Prepaid expenses 15,000 Share capital (Rs.10 par) Building 450,000 Retained earnings Other plant assets 180,000 Reserves Total assets 1,125,000 Total equities www.a4accounting.net Page 76 15,000 75,000 150,000 180,000 300,000 330,000 75,000 1,125,000 Analysis of Financial Statements Chapter # 3 Total sales during the year amounted to Rs.1,800,000. Gross profit for the year was Rs.660,000. Inventory and accounts receivable remained almost constant throughout the year. REQUIRED 1. Working capital 2. Current ratio 3. Acid test ratio 4. Equity ratio 5. Debt ratio 6. Receivable turnover 7. Inventory turnover 8. Book value per share Question # 16: The following items are taken from financial statement of Amman Company. All sales are made on account: Sales (on account) 2,700,000 Plant and equipment 3,600,000 Average shareholders’ equity 5,700,000 Long term liabilities 1,350,000 Average accounts receivable 562,500 Average merchandise inventory 382,500 Gross profit 787,500 REQUIRED Compute the following: 1. Accounts receivable turnover. 2. Merchandise inventory turnover. 3. Ratio of plant and equipment to long term liabilities. 4. Rate of return on shareholders’ equity. 5. Gross profit percentage. Question # 17: The following items have been taken from the financial record of Fazal & Company: Cash Rs.75,000; Accounts receivable on January 1, 2010 Rs.135,000; Office supplies Rs.13,500; Inventory on December 31, 2010 Rs.90,000; 5-year Bonds payable Rs.210,000; Operating expenses Rs.48,000; Bank overdraft Rs.202,500; Accounts receivable on December 31, 2010 Rs.180,000; Ordinary shares capital Rs.600,000 (par value Rs.10 each share); Cost of sales Rs.337,500 which is 75% of sales; Retained earnings Rs.85,500 (exclusive of current year income); Accrued expenses Rs.135,000; Prepaid expenses Rs.256,500; Inventory on January 1, 2010 was Rs.135,000; Plant and machinery Rs.292,500. REQUIRED Compute the following: (a) Current ratio (b) Inventory turnover days (c) Receivable turnover days (d) Equity ratio (e) Earnings per share (f) Book value per share Page 77 www.a4accounting.net Analysis of Financial Statements Chapter # 3 Question # 18: Presented below are data relating to financial statements of Al-Farid Limited at the end of first year of its operation: Balance Sheet As on December 31, 1988 Assets Equities Cash 9,000 Allowance for bad debts 4,500 Marketable securities 30,000 Allowance for depreciation 75,000 Accounts receivable 117,000 Accounts payable 102,000 Merchandise inventory 129,000 Outstanding expenses 22,500 Plant assets 525,000 Long term bonds payable 105,000 Share capital (Par Rs.10) 300,000 Retained earnings 201,000 Total assets 810,000 Total equities 810,000 Sales revenue 1,800,000 Cost of goods sold 1,152,000 Operating expenses 417,000 Note: a) Dividend paid during the year at 25% of paid-up capital. b) Market price per share is Rs.18. c) Credit sales for the year were Rs.1,687,500. REQUIRED Calculate the following: 1. Quick ratio 2. Current ratio 3. Equity ratio 4. Debt ratio 5. Accounts receivable turnover rate 6. Inventory turnover rate 7. Gross profit rate 8. Earnings per share 9. Price earnings ratio 10. Book value per share Question # 19: The data given below were taken from the financial statements of Hamza Corporation for years 2005 & 2006. 2005 2006 Current assets 330,000 396,000 Current liabilities 247,500 210,000 Cash sales 300,000 450,000 Credit sales 675,000 840,000 Cost of goods sold 675,000 750,000 Merchandise inventory 142,500 159,000 Quick assets 105,000 112,500 Accounts receivable 90,000 99,000 REQUIRED Compute the following for 2005 & 2006. 1. Amount of working capital 2. Current ratio 3. Days of inventory turnover 4. Quick ratio 5. Days of receivable turnover 6. Rate of gross profit on sales 7. Days of operating cycle in 2006 only www.a4accounting.net Page 78 Analysis of Financial Statements Chapter # 3 Question # 20: The following data have been obtained from the financial statements of Mujahid & Co. for the year ended December 31, 2006 and 2007: 2007 2006 Cash 43,125 30,000 Accounts receivable 58,500 69,000 Merchandise inventory 34,500 22,500 Prepaid expenses 7,800 11,250 Accounts payable 21,000 24,000 Notes payable 45,000 52,500 Accrued expenses 10,500 13,050 Net sales 307,500 360,000 Cost of goods sold 165,000 187,500 REQUIRED Compute the following for 2006 and 2007: (1) Amount of working capital (2) Current ratio (3) Acid test ratio (4) Inventory turnover (5) Receivable turnover (6) Gross profit rate Question # 21: Following comparative data has been taken from the records of Nuzhat & Company: NUZHAT & COMPANY COMPARATIVE INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 AND 2008 2008 2007 Net sales 1,800,000 1,275,000 Cost of sales (1,035,000) (765,000) Gross profit 510,000 340,000 Operating Expenses: Selling expense (180,000) (142,500) General & administrative expenses (240,000) (195,000) Income before interest & taxes (IBIT) 345,000 172,500 Financial charges (48,000) (36,000) Income before tax 297,000 136,500 Income tax (44,550) (20,475) Net income 252,450 116,025 Assets: Non – Current Assets: Property, plant and equipment 573,450 255,000 Intangible assets 225,000 180,000 Current Assets: Inventories 105,000 105,000 Prepaid expenses 135,000 45,000 Accrued financial income 105,000 90,000 Accounts receivables 285,000 165,000 Marketable securities 270,000 255,000 Cash and bank 180,000 297,000 Page 79 www.a4accounting.net Analysis of Financial Statements Chapter # 3 Authorized Capital: 50,000 ordinary shares @ Rs.10 Share Capital: Ordinary share capital @ Rs.10 Retained earnings Long Term Liabilities: Bonds payable Deferred income Current Liabilities: Accounts payable Accrued expenses Current maturity of deferred income REQUIRED Compute the following ratios: 1. Current ratio for 2007 and 2008 3. Earnings per share for 2007 and 2008 5. Inventory turnover for 2007 and 2008 7. Return on assets for 2007 and 2008 750,000 750,000 675,000 552,450 615,000 300,000 202,500 30,000 187,500 --- 300,000 112,500 6,000 184,500 105,000 --- 2. Quick ratio for 2007 and 2008 4. Book value per share for 2007 and 2008 6. Receivable turnover for 2007 and 2008 Question # 22: Selected data from the financial statements of R. Company and M. Company are as follows: R. Company M. Company Total assets 600,000 450,000 Total liabilities 150,000 75,000 Sales (all on credit) 1,500,000 1,200,000 Average inventory 210,000 225,000 Average receivable 187,500 150,000 Gross profit as a percentage of sales 30% 25% Net income as a percentage of sales 6% 5% REQUIRED Computation of the following for each company:1. Net income. 2. Net income as a percentage of shareholders’ equity. 3. Accounts receivable turnover and the average number of days required to collect the receivable. 4. Inventory turnover and the average number of days required to turnover the inventory. Question # 23: 1. Find current liabilities when current ratio is 4:1 and current assets Rs.120,000. 2. Find current assets when current ratio is 3:1 and current liabilities Rs.60,000. 3. Find quick assets when quick ratio is 3:1 and current liabilities Rs.90,000. 4. Find total liabilities when debt ratio is 1:3 and total assets Rs.900,000. 5. Find out total capital when equity ratio is 5:8 and the total assets Rs.1,200,000. 6. Find cost of goods sold when inventory turnover is 20 times and average inventory Rs.90,000. 7. Find net credit sales when accounts receivable turnover is ten times and average accounts receivable Rs.120,000. 8. Find net sales when gross profit ratio is 1:3 and gross profit Rs.75,000. www.a4accounting.net Page 80 Analysis of Financial Statements Chapter # 3 Question # 24: The following items are taken from the financial statements of Imam Company Ltd. for the year ended December 31, 1999: Cash Rs.162,000 Accounts receivable (net) 450,750 Merchandise inventory 339,000 Accrued interest on notes receivable 6,750 Accounts payable 162,000 10% notes receivable (current) 24,750 Advances from customers 2,250 Ordinary shares capital 600,000 Premium on ordinary shares 180,000 Retained earnings 420,000 Sales (including cash sales of Rs.20,500/=) 1,680,750 Gross profit 780,750 Net income 375,000 Cash dividend declared 180,000 Operating expenses 600,000 Other information is as under: i) Shareholders’ equity (opening) was Rs.1,140,000/=. ii) Market price per share is Rs.42/=. iii) Merchandise inventory (opening) was Rs.135,000/=. iv) Accounts receivable (opening) was Rs.153,750/=. REQUIRED 1. Operating expenses rate 2. Current ratio 3. Quick ratio 4. Dividend yield 5. Earnings per share 6. Price earnings ratio 7. Rate of return on ordinary shares 8. Accounts receivable turnover ratio 9. Inventory turnover ratio 10. Gross profit ratio Question # 25: Key figures taken from the Income Statement of Blue Spring Company for two succession years are shown below: Year 5 (Rs.) Year 4 (Rs.) Sales 320,000 240,000 Cost of goods sold 240,000 168,000 Selling expenses 40,000 35,000 General and administrative expenses 16,000 17,800 REQUIRED a) The net income increased from Rs._______ in year 4 to Rs._______ in year 5. b) The net income as percentage (%) of sales was ______% in year 4 and decreased to ______% of sales in year 5. c) The gross profit on sales decreased from _____% in year 4 by _____% in year 5. Page 81 www.a4accounting.net Analysis of Financial Statements Chapter # 3 Question # 26: Pakistan Digitech Company’s comparative balance sheets and income statement for the year 2006 are as follows: PAKISTAN DIGITECH COMPANY COMPARATIVE BALANCE SHEET Assets: 2006 2005 Cash 210,000 150,000 Accounts receivable 315,000 225,000 Inventory 750,000 645,000 Prepaid expenses 30,000 90,000 Plant & equipment 1,350,000 1,050,000 Less: Accumulated depreciation 525,000 240,000 Long-term investment 1,050,000 1,350,000 Total 4,230,000 3,750,000 Liabilities & Equities: 2006 2005 Accounts payable 390,000 375,000 Accrued liabilities 150,000 180,000 Taxes payable 735,000 735,000 Debentures payable 750,000 600,000 Ordinary share capital 1,200,000 1,050,000 Retained earnings 1,005,000 810,000 Total 4,230,000 3,750,000 PAKISTAN DIGITECH COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2006 Sales 3,450,000 Less: Cost of goods sold 1,800,000 Gross margin 1,650,000 Less: Operating expenses 1,050,000 Net operating profit 600,000 Gain on sale of long-term investment 75,000 Income before taxes 675,000 Less: Income taxes 210,000 Net income 465,000 Additional Information: Dividends of Rs.270,000 declared and paid during the year. The gain on sale of long-term investments was from the sale of investments for Rs.375,000 in cash. The investments had an original cost of Rs.300,000. There was no retirement or disposal of plant and equipment during the year. REQUIRED Compute the following ratios for the year 05 and 06. 1. Current ratio 2. Acid test ratio 3. Inventory turnover 4. Return on total assets 5. Return on shareholder’s equity 6. Debt-to-equity ratio 7. Accounts receivable turnover www.a4accounting.net Page 82 Analysis of Financial Statements Chapter # 3 Question # 27: Comparative balance sheets at the end of 2004 and 2005 of Oasis Limited appear below: OASIS LIMITED COMPARATIVE BALANCE SHEETS Assets 31.12.04 31.12.05 Cash and bank balance 75,000 67,500 Marketable securities 60,000 37,500 Accounts receivable 480,000 495,000 Merchandise inventory 360,000 352,500 Plant & equipment (Net) 900,000 960,000 1,875,000 1,912,500 Liabilities & Shareholder’s Equity Accounts payable 225,000 240,000 Accrued expenses 90,000 67,500 Mortgage loan (long term) --105,000 Debentures payable (due 2010) 750,000 525,000 Ordinary share capital 240,000 240,000 Retained earnings 570,000 735,000 1,875,000 1,912,500 Additional Information: Net income for the year amounted to Rs.375,000. Cash dividends of Rs.210,000 were declared and paid. Depreciation of plant and equipment for the year was Rs.90,000. Marketable securities costing Rs.22,500 were sold Rs.52,500 cash. REQUIRED Compute the following ratios for the year 2004 and 2005: 1. Current ratio 2. Quick ratio 3. Working capital 4. Stock turnover 5. Accounts receivable turnover 6. Return on capital employed Note: Sales were Rs.1,200,000 and Rs.1,275,000 for the year 2004 and 2005 respectively and profit on cost of goods sold is 25%. Question # 28: Current Assets: Cash Accounts receivable (net) Inventory Total current assets Plant Assets: Equipment Less: Accum. depreciation Total assets HO HO CORPORATION Balance Sheet As on December 31, 1992 (In thousands of rupees) Liabilities: ? Current liabilities ? Long term debt 8% interest ? ? Total liabilities Stockholders’ Equity: 2,700 Capital stock Rs.10 par (450) 2,250 Retained earnings Total shareholders’ equity ? Total equities Page 83 ? ? ? 1,500 300 1,800 ? www.a4accounting.net Analysis of Financial Statements Chapter # 3 HO HO CORPORATION Income Statement For the period ended December 31, 1992 (In thousands of rupees) Net sales ? Cost of goods sold ? Gross profit on sales (25% on net sales) ? Operating expenses ? Operating income (10% of net sales) ? Interest expense 126 Income before income tax ? Income tax – 40% of income before income tax ? Net income Rs. 270 Additional Information: 1. The equity ratio 40%, the debt ratio was 60%. 2. The only interest expense was on the long term debt. 3. The beginning inventory was Rs.750,000; the inventory turnover was 4.8 times. 4. The current ratio was 2 to 1. The quick ratio was 1.07 to 1. 5. The beginning balance in accounts receivable was Rs.420,000. The accounts receivable turnover for the year was 12.8 times. All sales were made on account. REQUIRED a) Complete the financial statements by use of available information. b) Give all computations of amounts appearing in the balance sheet and income statement. www.a4accounting.net Page 84 Chapter # 4 Cash Flow Statement Advanced Accounting www.a4accounting.net Cash Flow Statement Chapter # 4 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Fund Flow Analysis. Cash Flow Statement (Indirect method). WHAT THE EXAMINER USUALLY ASK? Net income on accrual basis. Statement of changes in working capital. Statement of sources and application of fund or Fund Statement. Statement of net cash generated. Cash flow statement. www.a4accounting.net Page 86 Cash Flow Statement Chapter # 4 WORKING CAPITAL Working capital is the capital that is used to finance the day-to-day operations of a company. Working capital is calculated as the difference between current assets and current liabilities. Changes in working capital is the difference of net current assets (total current assets – total current liabilities) of the current and previous year. STATEMENT OF NET INCOME BEFORE INTEREST & TAX ON ACCRUAL BASIS Retained earnings (current year) Less: Retained earnings (previous year) Retained earnings for the period Add: Dividend and Reserves: Cash dividend paid Reserves Total dividends and reserves Profit for the period after tax Add: Income tax expenses Profit before tax Add: Finance cost Profit before interest and tax ILLUSTRATION # 1: XXX (XXX) XXX XXX XXX XXX XXX XXX XXX XXX XXX (NET INCOME ON ACCRUAL BASIS) Following are the data taken from the accounting records of ABC Co. Ltd. On 31 December 2006 and 2007: Accounts Title 31.12.2007 (Rs.) 31.12.2006 (Rs.) Cash dividend payable 70,000 53,000 General reserves 100,000 85,000 Retained earnings 600,000 350,000 REQUIRED Calculate net income on accrual basis. SOLUTION # 1: ABC Co. Ltd. Statement of Net Income on Accrual Basis For the Period Ended 31 December 2007 Retained earnings (2007) 600,000 Less: Retained earnings (2006) (350,000) Retained earnings for the period 250,000 Add: Dividend and Reserves: Cash dividend declared 17,000 General reserves 15,000 Total dividends and reserves 32,000 Net income on accrual basis 282,000 Page 87 www.a4accounting.net Cash Flow Statement Chapter # 4 STATEMENT OF CHANGES IN WORKING CAPITAL Particular Current Assets: Cash Accounts receivable Merchandise inventory Total current assets Less: Current Liabilities: Accounts payable Increase / decrease in working capital ILLUSTRATION # 2: Current Year Previous Year Changes in Working Capital XXX XXX XXX XXX XXX XXX XXX XXX XXX/(XXX) XXX/(XXX) XXX/(XXX) XXX/(XXX) (XXX) XXX (XXX) XXX (XXX)/XXX XXX/(XXX) (CHANGES IN WORKING CAPITAL) Following are the data taken from the accounting records of ABC Co. Ltd. On 31 December 2008 and 2009: Accounts Title (Rupees) 31 December 2009 31 December 2008 Cash 40,000 25,000 Accounts receivable 370,000 323,000 Merchandise inventory 220,000 248,000 Accounts payable 180,000 157,000 Accrued expenses 63,000 71,000 REQUIRED Prepare a statement of changes in working capital on 31 December 2009 SOLUTION # 2: ABC Co. Ltd. Statement of Changes in Working Capital For the Period Ended 31 December 2009 Particular Current Assets: Cash Accounts receivable Merchandise inventory Total current assets Less: Current Liabilities: Accounts payable Accrued expenses Total current liabilities Increase in working capital www.a4accounting.net 2009 2008 Rupees 40,000 370,000 220,000 630,000 Rupees 25,000 323,000 248,000 596,000 Changes in Working Capital Rupees 15,000 47,000 (28,000) 34,000 (180,000) (63,000) (243,000) 387,000 (157,000) (71,000) (228,000) 368,000 (23,000) 8,000 (15,000) 19,000 Page 88 Cash Flow Statement Chapter # 4 FUND A separate pool of monetary and other resources used to support designated activities is called fund. FUND FLOW STATEMENT A statement describing how a business has raised and used its funds for a specified period is called fund flow statement or statement of sources and application of fund. Sources of funds are typically trading profits, issues of shares or debentures, sales of fixed assets and borrowings. Applications of funds are typically trading losses, purchases of fixed assets, dividends paid, and repayments of borrowings. Any balancing figure represents the increase or decrease in working capital. FORMAT OF FUND FLOW STATEMENT Name of Company Fund Flow Statement For the Period Ended ______ Sources of Fund: Net income/net loss Add: Expenses not Required Fund: Depreciation expense Amortization of intangible fixed assets Loss on sale of fixed assets Gain on sale of fixed assets Total expenses not required fund Fund received from business operation Add: Sale of fixed assets Add: Issue of long-term liability/bonds/debentures Add: Issue of shares* Total sources of fund Less: Applications of Fund: Purchases of fixed assets Purchases of long-term investments Payments of long-term liabilities/debentures Cash dividend paid Total applications of fund Increase/decrease in working capital XXX/(XXX) XXX XXX XXX (XXX) XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX (XXX) XXX/(XXX) *Issue of shares includes shares capital plus shares premium. ILLUSTRATION # 3: (FUND STATEMENT) XYZ Ltd. balance sheet as on December 31, 2001 & 2002 are given below: Assets 31 December 2002 31 December 2001 Cash 200,000 50,000 Accounts receivable 340,000 230,000 Merchandise inventory 210,000 240,000 Equipment 310,000 280,000 Total assets 1,060,000 800,000 Page 89 www.a4accounting.net Cash Flow Statement Chapter # 4 Equities 31 December 2002 31 December 2001 Accounts payable 270,000 250,000 Debentures payable 240,000 120,000 Allowance for depreciation – Equipment 40,000 30,000 Ordinary share capital 400,000 300,000 Retained earnings 110,000 100,000 Total equities 1,060,000 800,000 Cash dividend of Rs.150,000 was declared and paid during 2002. Net income for the year 31 December 2002 Rs.160,000. REQUIRED Prepare a statement of sources and application of fund on 31 December 2002. SOLUTION # 3: XYZ Ltd. Statement of Sources and Application of Funds For the Period Ended 31 December 2002 Sources of Fund: Net income on accrual basis Add: Expenses not Required Fund: Depreciation expense (40,000 – 30,000) Total expenses not required fund Fund received from business operation Add: Issue of debentures (240,000 – 120,000) Add: Issue of shares capital (400,000 – 300,000) Total sources of fund Less: Applications of Fund: Purchases of equipment (310,000 – 280,000) Cash dividend paid Total applications of fund Increase in working capital Rupees Rupees 160,000 10,000 10,000 170,000 120,000 100,000 390,000 30,000 150,000 (180,000) 210,000 CASH FLOW The movement of cash into and out of a business is called cash flow. The cash receipts of a business are known as cash inflows. The cash inflows arise from transactions such as sales of merchandise, receipts from debtors for credit sales and sales of fixed assets. The cash payments made by a business is known as cash outflows which arise from transactions such as purchase of materials, directs labour costs, overheads, and payments of taxes and dividends. CASH FLOW STATEMENT – IAS 7 Cash flow statement is a statement showing the inflows and outflows of cash and cash equivalents for a business over a financial period. The inflows and outflows are classified under the headings of operating activities, taxation, capital expenditure, and financial investments, acquisitions and disposals, equity dividends paid, management of financing. Cash flow statement consists of three parts: Cash flow from operating activities. Cash flow from investing activities. Cash flow from financing activities. www.a4accounting.net Page 90 Cash Flow Statement Chapter # 4 CASH FLOW FROM OPERATING ACTIVITIES Cash flow from operating activities is the section of the statement of cash flow that reports the cash transactions affecting the determination of net income. The amount is computed by adding back of net income the items on the income statement that did not result in an outflow of cash and subtracting the items on the income statement that did not provide an inflow of cash. Cash flow operating activities includes: Current assets. o Except marketable securities. Current liabilities. Revenue and expenses (includes interest expense, revenue, and dividends received). The figures below are the adjustments necessary to convert the profit figure to the cash flow for the period: Depreciation: Added back to profit because it is a non – cash expense. Added back because it is not part of cash generated Interest Expense: from operations (the interest actually paid is deducted later). Increase in Accounts Receivable: Decrease in Inventory: Decrease in Accounts Receivable: Increase in Inventory: Deducted because this is part of the profit not yet realized into cash but tied up in receivables. Added on because the decrease in inventories liberates extra cash. Added on because the cash has been collected from customers. Deducted because the decrease in inventories shows outflow of cash. Decrease in Accounts Payable: Deducted because the reduction in payables must reduce cash. Increase in Accounts Payable: Added on because this is part of the expense not yet paid into cash but tied up in payables. Dividends Paid: These are the amounts actually paid in the year. Income Tax Paid: These are the amounts actually paid in the year. Page 91 www.a4accounting.net Cash Flow Statement Chapter # 4 CASH FLOW FROM INVESTING ACTIVITIES Cash flow from investing activities is the section of the cash flow statement that reports cash flows from transactions affecting investments in fixed assets. Cash flow from investing activities may include: Interest received. Dividend received. Sale of fixed assets. Purchase of fixed assets. Purchase of marketable securities. Sale of marketable securities. CASH FLOW FROM FINANCING ACTIVITIES Cash flow from financing activities is the section of the cash flow statement that reports cash flows from transactions affecting the equity and debts of the business. Cash flow from financing activities may include: Issues of shares. Issue of debentures/loans. Repayment of debentures/loans. Dividend paid.* *Dividend paid can be taken either in operating activities or in financing activities. CASH Cash means cash on hand (including overdrafts) and on demand deposits. CASH EQUIVALENTS Cash equivalents are highly liquid investments that are capable of being converted into known amounts of cash without notice. Cash equivalents may include marketable securities. Cash equivalents are most important element of a cash flow statement. INTERPRETATION USING THE CASH FLOW STATEMENT The cash flow statement reveals: Whether the overall activities reveal a positive cash flow. Whether the operating activities yield a positive cash flow. The manner in which capital expenditure has been financed (for example, whether it has come from internally-generated resources, borrowings, issue of shares or from cash balance). Cash flow statements allow users to evaluate: How the enterprise generates and uses cash and cash equivalents. Changes in net assets, financial structure (including liquidity and solvency) and the ability of the enterprise to adapt to changing circumstances. The ability of the enterprise to generate cash. Forecasts of future cash flows. The accuracy of past assessments of future cash flows. www.a4accounting.net Page 92 Cash Flow Statement Chapter # 4 FORMAT OF CASH FLOW STATEMENT Name of Company Cash Flow Statement For the Period Ended ______ Cash Flow from Operating Activities: Profit before tax XXX Adjustments: Add: Depreciation expense XXX Add: Amortization of intangible fixed assets XXX Add: Loss on sale of fixed assets XXX Less: Gain on sale of fixed assets (XXX) Investment Income: Less: Dividend income (XXX) Less: Interest income (XXX) Profit before changes in working capital XXX Add/Less: Decrease/Increase in inventory XXX/(XXX) Add/Less: Decrease/Increase in accounts receivable XXX/(XXX) Add/Less: Increase/Decrease in accounts payable XXX/(XXX) Cash generated from operation XXX Less: Finance cost paid (a) (XXX) Less: Income tax paid (b) (XXX) Net cash flow from operating activities Cash Flow from Investing Activities: Purchases of fixed assets (XXX) Purchases of long-term investments (XXX) Sale of fixed assets XXX Sale of long-term investments XXX Interest income received (c) XXX Dividend income received (c) XXX Net cash flow from investing activities Cash Flow from Financing Activities: Issue of shares XXX Issue of loans/debentures XXX Repayment of loans/debentures (XXX) Dividend paid (XXX) Net cash flow from financing activities Net increase/decrease in cash and cash equivalents Add: Opening cash and cash equivalents balance Closing cash and cash equivalents balance Page 93 XXX/(XXX) XXX/(XXX) XXX/(XXX) XXX/(XXX) XXX/(XXX) XXX/(XXX) www.a4accounting.net Cash Flow Statement Chapter # 4 (a) Computation of Finance Cost Paid Interest expense Add: Interest payable (Beginning) Less: Interest payable (Ending) Interest expense paid (b) Computation of Income Tax Paid Income tax expense Add: Income tax payable (Beginning) Less: Income tax payable (Ending) Income tax paid (c) XXX XXX XXX (XXX) XXX/(XXX) XXX XXX XXX (XXX) XXX/(XXX) Computation of Interest Income and Dividend Income Received Dividend and interest income Add: Dividend and interest receivable (Beginning) Less: Dividend and interest receivable (Ending) Dividend and Income Received ILLUSTRATION # 4: XXX XXX XXX (XXX) XXX/(XXX) (CASH FLOW STATEMENT) XYZ Ltd. balance sheet as on December 31, 2001 & 2002 are given below: Assets 31 December 2002 31 December 2001 Cash 200,000 50,000 Accounts receivable 340,000 230,000 Merchandise inventory 210,000 240,000 Equipment 310,000 280,000 Total assets 1,060,000 800,000 Equities 31 December 2002 31 December 2001 Accounts payable 270,000 250,000 Debentures payable 240,000 120,000 Allowance for depreciation – Equipment 40,000 30,000 Ordinary share capital 400,000 300,000 Retained earnings 110,000 100,000 Total equities 1,060,000 800,000 Cash dividend of Rs.150,000 was declared and paid during 2002. Net income for the year 31 December 2002 Rs.160,000. REQUIRED Prepare Cash Flow Statement on 31 December 2002. www.a4accounting.net Page 94 Cash Flow Statement Chapter # 4 SOLUTION # 4: XYZ Ltd. Cash Flow Statement For the Period Ended 31 December 2002 Cash Flow from Operating Activities: Rs. Profit before tax 160,000 Adjustments: Add: Depreciation expense (40,000 – 30,000) 10,000 Profit before changes in working capital 170,000 Add: Decrease in inventory (240,000 – 210,000) 30,000 Less: Increase in accounts receivable (340,000 – 230,000) (110,000) Add: Increase in accounts payable (270,000 – 250,000) 20,000 Net cash flow from operating activities Cash Flow from Investing Activities: Purchases of equipment (30,000) Net cash flow from investing activities Cash Flow from Financing Activities: Issue of shares (400,000 – 300,000) 100,000 Issue of debentures (240,000 – 120,000) 120,000 Dividend paid (150,000) Net cash flow from financing activities Net increase/decrease in cash and cash equivalents Add: Opening cash and cash equivalents balance Closing cash and cash equivalents balance Rs. 110,000 (30,000) 70,000 150,000) 50,000 200,000 CASH GENERATED FROM OPERATION There are two methods of calculating cash generation from operation: Direct method. Indirect method. CASH GENERATED FROM OPERATION – DIRECT METHOD Cash sales Add: cash received from customers XXX XXX XXX (XXX) (XXX) (XXX) XXX/(XXX) Less: Cash purchases Less: Cash paid to suppliers Less: Expenses paid Cash generated from operation Page 95 www.a4accounting.net Cash Flow Statement Chapter # 4 CASH GENERATED FROM OPERATION – INDIRECT METHOD Profit before tax Adjustments: Add: Depreciation expense Add: Amortization of intangible fixed assets Add: Loss on sale of fixed assets Less: Gain on sale of fixed assets Investment Income: Less: Dividend income Less: Interest income Profit before changes in working capital Add/Less: Decrease/Increase in inventory Add/Less: Decrease/Increase in accounts receivable Add/Less: Increase/Decrease in accounts payable Cash generated from operation XXX XXX XXX XXX (XXX) (XXX) (XXX) XXX XXX/(XXX) XXX/(XXX) XXX/(XXX) XXX CASH FLOW STATEMENT Cash Flow From Operating Activities •Current Assets (Except Marketable Securities) •Current Liabilities •Revenue & Expenses (Includes Interest Expense, Revenue, & Dividends Received) Cash Flow From Investing Activities •Interest Received •Issue of Shares •Dividends Received •Issue of Debentures / Bonds / Long Term Liabilities •Purchase of Fixed Assets •Sale of Fixed Assets •Purchase of Marketable Securities •Sale of Marketable Securities www.a4accounting.net Cash Flow From Financing Activities Page 96 •Repayment of Debentures / Bonds / Long Term Liabilities •Payment of Cash Dividend Cash Flow Statement Chapter # 4 PRACTICE QUESTIONS Question # 1: Muzammil Ltd. balance sheet as on December 31, 2005 & 2006 are given below: Assets 31.12.2006 (Rs.) 31.12.2005 (Rs.) Cash 525,000 555,000 Accounts receivable 1,050,000 1,020,000 Merchandise inventory 525,000 360,000 Plant 2,400,000 1,500,000 Total assets 4,500,000 3,435,000 Equities 31.12.2006 (Rs.) 31.12.2005 (Rs.) Accounts payable 630,000 600,000 Bonds payable 450,000 --Allowance for depreciation 420,000 300,000 Ordinary share capital 2,025,000 1,500,000 Retained earnings 975,000 1,035,000 Total equities 4,500,000 3,435,000 Cash dividend of Rs.150,000 and stock dividend of Rs.300,000 were declared during 2006. REQUIRED (1) Compute net income or loss for 2006. (2) A statement showing changes in working capital. (3) Fund Flow Statement. (4) Cash flow statement showing cash flows from operating, investing and financing activities. Question # 2: The following are the comparative balance sheets of Nadeem Ltd. Debit Balances 31.12.2008 (Rs.) 31.12.2009 (Rs.) Cash 135,000 189,000 Accounts receivables (Net) 225,000 372,000 Merchandise inventory 342,000 276,000 Machinery 765,000 585,000 Land 360,000 585,000 Patents 180,000 153,000 Total 2,007,000 2,160,000 Credit Balances Accounts payable 270,000 217,500 Unpaid expenses 216,000 286,500 Debentures payable 360,000 180,000 Ordinary share capital 720,000 900,000 Share premium 180,000 225,000 Retained earnings 261,000 351,000 Total 2,007,000 2,160,000 At the end of 2009, declared cash dividend Rs.135,000 and stock dividend Rs.225,000. REQUIRED (a) A statement showing changes in working capital. (b) Fund Flow Statement. (c) Cash Flow Statement. Page 97 www.a4accounting.net Cash Flow Statement Chapter # 4 Question # 3: The comparative balance sheets of Aamna Ltd. for the two years are produced below: Debit Balances (in Rs.) Dec. 31, 2003 Dec. 31, 2002 Cash 131,250 157,500 Merchandise inventory 243,750 262,500 Prepaid rent 60,000 67,500 Accounts receivable 262,500 240,000 Plant assets 660,000 622,500 Total Rs. 1,357,500 1,350,000 Credit Balances (in Rs.) Ordinary share capital 907,500 855,000 Accounts payable 135,000 150,000 Salaries payable 22,500 22,500 Unearned rent 22,500 15,000 Debentures payable 90,000 150,000 Retained earnings 180,000 157,500 Total Rs. 1,357,500 1,350,000 Additional Data: (1) Net income for the year 2003, Rs.135,000. (2) Cash dividend declared Rs.112,500 REQUIRED (a) Working capital for both the year. (b) Statement showing changes in working capital. (c) Statement of sources and application of fund. (d) Cash Flow Statement. Question # 4: The comparative balance sheets of Sumera Ltd. are reproduced below: Debit Balances (in Rs.) 2004 Cash 262,500 Prepaid insurance 120,000 Accounts receivable 525,000 Merchandise inventory 487,500 Plant & machinery 1,320,000 Total Rs. 2,715,000 Credit Balances (in Rs.) Paid up capital 1,800,000 Accounts payable 270,000 Salaries payable 90,000 Bonds payable 180,000 Retained earnings 375,000 Total Rs. 2,715,000 Additional Data: (1) Net income for the year 2004, Rs.180,000. (2) Declared cash dividend Rs.135,000. REQUIRED (1) Statement showing changes in working capital. (2) Determine cash flow from operating activities. www.a4accounting.net Page 98 2003 315,000 135,000 480,000 525,000 1,245,000 2,700,000 1,695,000 300,000 75,000 300,000 330,000 2,700,000 Cash Flow Statement Chapter # 4 Question # 5: The comparative balance sheet of Uzair Corporation at December 31, 1999 and 1998 is as follows: Debit Balances (in Rs.) Dec. 31, 1999 Dec. 31, 1998 Cash 315,000 225,000 Accounts receivable 630,000 375,000 Inventories 450,000 570,000 Machinery 975,000 1,275,000 Land 975,000 600,000 Patents 255,000 300,000 3,600,000 3,345,000 Credit Balances (in Rs.) Accounts payable 360,000 450,000 Accrued expenses 480,000 360,000 Bonds payable 300,000 600,000 Ordinary share capital 1,500,000 1,200,000 Share premium 375,000 300,000 Retained earnings 585,000 435,000 3,600,000 3,345,000 The corporation declared a cash dividend of Rs.225,000 and share dividend of Rs.375,000 during 1999. REQUIRED 1) Determine working capital for both the years. 2) Statement of sources and uses of fund. 3) Prepare a cash flow statement for the year ended December 31, 1999. Question # 6: Net income reported on the income statement for the year 2010 was Rs.1,306,500. Depreciation recorded on equipment and building amounted to Rs.483,750 for the year. Balance of the current assets and current liabilities accounts at the beginning and end of the year are as follows: End of the Year (Rs.) Beginning of the Year (Rs.) Cash 916,875 880,875 Accounts receivable 1,312,500 1,200,000 Inventories 1,650,000 1,425,000 Prepaid expenses 103,500 114,750 Accounts payable 1,158,000 1,090,500 Salaries payable 56,250 93,750 REQUIRED Prepare the cash flows from operating activities section of the statement of cash flows. Page 99 www.a4accounting.net Cash Flow Statement Chapter # 4 Question # 7: The comparative balance sheet of Uzair & Company for the two years ate shown below: Debit Balances (in Rs.) Dec. 31, 2004 Dec. 31, 2003 Cash 84,000 37,500 Accounts receivable 180,000 112,500 Inventories 97,500 60,000 Marketable securities 45,000 58,200 Supplies 3,000 1,800 Building 300,000 210,000 Goodwill 30,000 37,500 Total Rs. 739,500 517,500 Credit Balances (in Rs.) Accumulated depreciation (Building) 72,000 52,500 Accounts payable 93,000 67,500 Long term loan payable 75,000 --Share capital 375,000 300,000 Retained earnings 124,500 97,500 Total Rs. 739,500 517,500 During the year 2004 the company declared cash dividend of Rs.30,000 and stock dividend Rs.52,500. REQUIRED (1) Compute working capital for both the year. (2) Fund Flow Statement. (3) Cash Flow Statement. Question # 8: The balances of the accounts of Multan Cement Co. Limited at end of 1998 and 1999 are as follows: (In Rs.) December 31, 1998 December 31, 1997 Cash 90,000 150,000 Accounts receivable 225,000 262,500 Merchandise inventory 487,500 375,000 Land 112,500 --Plant & equipment 1,200,000 937,500 Patents 135,000 150,000 (In Rs.) 2,250,000 1,875,000 Accumulated depreciation 390,000 300,000 Accounts payable 232,500 112,500 Dividend payable 15,000 --Bonds payable 37,500 --Capital stock 1,500,000 1,312,500 Retained earnings 75,000 150,000 2,250,000 1,875,000 Cash dividends of Rs.15,000 were declared, but not paid. REQUIRED a) Statement of changes in working capital. b) Fund flow statement. c) Cash Flow Statement. www.a4accounting.net Page 100 Cash Flow Statement Chapter # 4 Question # 9: The accounting staff of Nasr & Company has presents the following information: 31.12.08 (Rs.) 31.12.07 (Rs.) Cash 63,000 75,300 Accounts receivables 75,000 93,000 Office supplies 37,500 24,000 Accrued income 63,000 30,000 Plant & equipment 450,000 390,000 Accumulated depreciation (Plant & equipment) (57,000) (39,000) Land & building 300,000 394,500 Investment in bonds 555,000 510,000 Accounts payables 27,000 Accrued utilities 36,000 Long term loans 255,000 Share capital 825,000 Retained earnings 343,500 During the year 2008 the company declared cash dividend Rs.48,000. REQUIRED (a) Compute the net income from operation. (b) Statement of Changes in Working Capital. (c) Fund Flow Statement. (d) Cash generated from operation. (e) Prepare Cash Flow Statement. 34,500 30,000 363,300 750,000 300,000 Question # 10: The comparative balance sheet of Shaheen Ltd. as of December 31, 1995 and 1996 are as under: Assets (in Rs.) Dec.31.1995 Dec.31.1996 Cash 45,000 54,000 Accounts receivable 120,000 127,500 Merchandise inventory 90,000 84,000 Equipment 75,000 90,000 330,000 355,500 Equities (in Rs.) Accounts payable 34,500 30,000 Allowance for bad debts 6,000 4,500 Allowance for depreciation 7,500 15,000 Bonds payable 75,000 60,000 Share capital 150,000 180,000 Retained earnings 57,000 66,000 330,000 355,500 Cash dividend declared and paid during the year ended December 31, 1996 amounted to Rs.45,000. REQUIRED (a) Compute the amount of cash generated by operational activities of the company. (b) Prepare cash flow statement for the year ended December 31, 1996. (c) Prepare statement of sources and application of funds. Page 101 www.a4accounting.net Cash Flow Statement Chapter # 4 Question # 11: The following is the comparative list of balances taken from the balance sheets of Evergreen Ltd. as of December 31, 1993 and December 31, 1992. Debit Balances: 1993 (in Rs.) 1992 (in Rs.) Cash 103,500 145,500 Accounts receivable 124,500 190,500 Merchandise inventory 540,000 600,000 Machinery 1,200,000 900,000 Total 1,968,000 1,836,000 Credit Balances: 1993 (in Rs.) 1992 (in Rs.) Allowance for bad debts 5,250 18,000 Allowance for depreciation – Machinery 360,750 240,000 Accounts payable 240,000 312,000 Bonds payable --300,000 Common stock 1,200,000 840,000 Retained earnings 162,000 126,000 Total 1,968,000 1,836,000 For the year 1993 net income of the company was Rs.336,000 and it had declared cash dividend of Rs.300,000 during the year. REQUIRED (a) Prepare a statement of changes in working capital. (b) Compute the amount of cash generated by the operational activities of the company. (c) Prepare cash flow statement for the year ended December 31, 1993. Question # 12: The balance sheet of Decent Products Ltd. for the years ended August 31, 1994 and 1995 are as follows: Debit Balances: 1994 (in Rs.) 1995 (in Rs.) Bank balance 222,000 390,000 Accounts receivable 547,500 601,500 Inventories 331,500 420,000 Furniture 51,000 37,500 Machinery 534,000 874,500 Building 876,000 1,777,500 Credit Balances: Accrued liabilities 502,500 576,000 Income tax payable 147,000 165,000 5% Debentures --420,000 Retained earnings 292,500 475,500 General reserve 90,000 135,000 Ordinary share capital 1,200,000 1,875,000 Share premium 330,000 454,500 Depreciation written off during the year 1995 was for machinery Rs.192,000 and furniture Rs.7,500. REQUIRED (a) Prepare schedule of changes in working capital. (b) Prepare statement of sources and application of funds. (c) Prepare cash flow statement. www.a4accounting.net Page 102 Cash Flow Statement Chapter # 4 Question # 13: The comparative balance sheet data of Shah Ltd. as of June 30, 1991 and 1992, followed by income statement data for the year ended June 30, 1992 is as under: Assets June 30, 1991 (Rs.) June 30, 1992 (Rs.) Cash 75,000 84,000 Accounts receivable 105,000 112,500 Merchandise inventory 120,000 114,000 Equipment 30,000 45,000 Total 330,000 355,500 Equities Accounts payable 22,500 18,000 Allowance for bad debts 7,500 6,000 Allowance for depreciation 9,000 12,000 9% Bonds payable 90,000 75,000 Share capital 180,000 217,500 Retained earnings 21,000 27,000 Total 330,000 355,500 Income Statement Data June 30, 1992 Net sales Rs. 180,000 Cost of goods sold Rs. 112,500 Gross margin Rs. 67,500 Operating expenses (including depreciation expense Rs.3,000) Rs. 31,500 Net income Rs. 36,000 REQUIRED (a) Prepare a statement showing changes in working capital during the year ended June 30, 1992. (b) Compute the amount of cash generated by the operational activities of the company. (c) Prepare cash flow statement for the year ended June 30, 1992. Question # 14: The following data have been taken from the Income Statement and Balance Sheet of Alvi Corporation: Dec.31, 1996 (Rs.) Jan. 1, 1996 (Rs.) Net income 1,200,000 Depreciation expense 360,000 Amortization of intangible assets 120,000 Balance Sheets: Accounts receivable 1,005,000 1,140,000 Inventory 1,509,000 1,725,000 Prepaid expenses 66,000 30,000 Accounts payable 1,137,000 1,230,000 Accrued expenses 540,000 465,000 REQUIRED (a) Partial statement of cash flows for the year ended December 31, 1996 showing the computation of net cash flow from operating activities. (b) During the current year a company made cash sales of Rs.750,000 and credit sales of Rs.1,470,000. During the year accounts receivable decreased by Rs.96,000. Page 103 www.a4accounting.net Cash Flow Statement Chapter # 4 Question # 15: The following data are taken from the income statement and balance sheets of Shahdadpur Ltd. Dec. 31, 1999 (Rs.) Dec. 31, 1998 (Rs.) Net income 600,000 Depreciation expense 180,000 Amortization of intangible assets 60,000 Gain on sale of plant assets 120,000 Loss on sale of investments 52,500 Balance Sheets: Cash 160,500 67,500 Accounts receivable 502,500 570,000 Inventory 754,500 862,500 Prepaid expenses 33,000 15,000 Accounts payable 568,500 615,000 Accrued expenses 270,000 232,500 REQUIRED (a) Prepare a statement showing net cash flow from operating activities. (b) Prepare a schedule showing changes in working capital during 1999. Question # 16: The selected data below are taken from income statement and balance sheets of Dilsoz Company: Income Statement 1992 (in Rs.) 1991 (in Rs.) Net loss 37,500 Depreciation expense 60,000 Amortization of intangible assets 13,500 Un-insured fire damage to building 30,000 Gain on sale of plant assets 9,000 Amortization of premium of bonds payable 7,500 Loss on sale of investments 36,000 Amortization of discount on issue of shares 22,500 Balance Sheets: Accounts receivable 570,000 555,000 Inventory 862,500 856,500 Prepaid expenses 33,000 34,500 Accounts payable (to merchandise suppliers) 615,000 577,500 Accrued expenses 270,000 243,000 Unearned commission 37,500 48,000 REQUIRED (1) Statement of changes in working capital. (2) Net cash generated by operating activities. www.a4accounting.net Page 104 Cash Flow Statement Chapter # 4 Question # 17: A comparative balance sheet data of Sun Rise Ltd. for 1995 and 1996 show the following changes. Increases in assets are shown in debit column and their decreases in credit column. Increases in equities are shown in credit column and decreases in debit column. Debit (in Rs.) Credit (in Rs.) Cash 21,000 --Other current assets 285,000 --Plant assets 540,000 --Allowance for depreciation – Plant --75,000 Current liabilities --138,000 Long term bonds payable 60,000 --Share capital par --600,000 Retained earnings --93,000 Near the end of 1996 the company declared and paid a cash dividend of Rs.225,000. REQUIRED (a) Compute the net income on accrual basis for the year 1996. (b) Prepare fund flow statement for the year 1996 using working capital concept under section 234 of the Companies Ordinance 1984. (c) Prepare cash flow statement for 1996. Question # 18: A comparative balance sheet data of Commerce Enterprises Ltd. for 1988 and 1987 show the following changes. Increases in assets are shown in debit column and their decreases in credit column. Increases in equities are shown in credit column and decreases in debit column. Debit (in Rs.) Credit (in Rs.) Cash 10,500 --Other current assets 292,500 --Plant assets 270,000 --Allowance for depreciation – Plant --37,500 Current liabilities --69,000 Long term bonds payable 30,000 --Share capital par --300,000 Retained earnings --46,500 Near the end of 1988, the company declared and paid a cash dividend of Rs.112,500. REQUIRED (a) Compute the net income on accrual basis for the year 1988. (b) Prepare fund flow statement for the year 1988 using working capital concept. (c) Compute the amount of cash generated by the operational activities of the company. (d) Prepare cash flow statement for 1988. Page 105 www.a4accounting.net Cash Flow Statement Chapter # 4 Question # 19: On December 31, 2006 and 2007 balance sheet of Nizam Ltd. shows the following: Assets 2007 (in Rs.) 2006 (in Rs.) Cash 105,000 72,000 Accounts receivable 127,500 142,500 Merchandise inventory 487,500 498,000 Equipment 451,500 360,000 Equities Accumulated depreciation – Equipment 91,500 72,000 Accounts payable 252,000 291,000 Mortgage payable 90,000 150,000 Share capital – Rs.10 per share 450,000 375,000 Share premium 37,500 --Retained earnings 250,500 184,500 Additional Information: (1) A fully depreciated equipment that costs of Rs.12,000 was discarded and related accounts were closed. (2) Cash dividend of Rs.60,000 were declared and paid. REQUIRED Prepare a Cash Flow Statement showing Operating, Investing and Financing Activities. Question # 20: The accounting records of Kashif Ltd. showed the following balances at the end of year 2001 and 2002: Debit Balances (in million rupees) 2002 2001 Cash 16.80 15.00 Accounts receivable 22.50 21.00 Merchandise inventory 19.80 20.25 Equipment 9.00 6.00 Patents 3.00 3.75 Total 71.10 66.00 Credit Balance (in million rupees) 2002 2001 Accounts payable 3.60 4.50 Allowance for bad debts 1.20 1.50 Accumulated depreciation (Equipment) 2.40 1.80 Bonds payable 15.00 18.00 Share capital (Paid up) 43.50 36.00 Retained earnings 5.40 4.20 Total 71.10 66.00 Additional Data: (i) Fully depreciated equipment that cost Rs.1,500,000 was discarded and the related accounts closed. (ii) Cash dividends of Rs.6,000,000 were declared and paid. REQUIRED (a) Compute the amount of cash generated by the operational activities of the company. (b) Prepare cash flow statement for the year ended December 31, 2002. (c) Assuming net purchases for the year 2002 to be Rs.26,250,000 compute the amount of cash payments to supplier. www.a4accounting.net Page 106 Cash Flow Statement Chapter # 4 Question # 21: The comparative balance sheet of Faisal Corporation at June 30, 2001 and 2002 are as follows: Debit Balance 30.6.2002 (in Rs.) 30.6.2001 (in Rs.) Cash 135,000 75,000 Accounts receivable 435,000 525,000 Merchandise inventories 750,000 862,500 Prepaid expenses 105,000 60,000 Machinery 1,500,000 1,350,000 Land 750,000 900,000 Goodwill 225,000 300,000 3,900,000 4,072,500 Credit Balance Accounts payable Accrued expenses Accumulated depreciation – Machinery 10% Bonds payable Share capital Retained earnings 30.6.2002 (in Rs.) 420,000 390,000 450,000 600,000 1,500,000 540,000 3,900,000 30.6.2001 (in Rs.) 525,000 300,000 330,000 750,000 1,500,000 667,500 4,072,500 The following additional data are given: (a) Land costing Rs.150,000 was sold for Rs.300,000. (b) Machinery costing Rs.300,000 was sold for Rs.135,000. At the time of sale the book value of machinery was Rs.180,000. (c) Cash dividend Rs.300,000 was paid during the year. REQUIRED (a) Compute the working capital provided by operating activities. (b) Compute net cash flow from operating activities. (c) Prepare a statement of sources and application of fund for the year ended June 30, 2002. (d) Assuming net sales for the year 2002 to be Rs.3,750,000, calculate the cash collection from customers during 2002. Question # 22: Comparative balance sheets at the end of 2004 and 2005 of Oasis Limited appear below: OASIS LIMITED COMPARATIVE BALANCE SHEETS Assets 31.12.04 (in Rs.) 31.12.05 (in Rs.) Cash and bank balance 75,000 67,500 Marketable securities 60,000 37,500 Accounts receivable 480,000 495,000 Merchandise inventory 360,000 352,500 Plant & equipment (Net) 900,000 960,000 1,875,000 1,912,500 Page 107 www.a4accounting.net Cash Flow Statement Chapter # 4 Liabilities & Shareholder’s Equity Accounts payable Accrued expenses Mortgage loan (long term) Debentures payable (due 2010) Ordinary share capital Retained earnings 225,000 90,000 --750,000 240,000 570,000 1,875,000 240,000 67,500 105,000 525,000 240,000 735,000 1,912,500 Additional Information: Net income for the year amounted to Rs.375,000. Cash dividends of Rs.210,000 were declared and paid. Depreciation of plant and equipment for the year was Rs.90,000. Marketable securities costing Rs.22,500 were sold Rs.52,500 cash. REQUIRED Prepare a Cash Flow Statement using indirect method for the year ended December 31, 2006 showing the following clearly: (a) Cash Flow from Operating Activities. (b) Cash Flow from Investing Activities. (c) Cash Flow from Financing Activities. Question # 23: The accounting records of Waqar Ltd. showed the following balance at the end of year 1995 and 1996: 1996 (in Rs.) 1995 (in Rs.) Cash 139,500 180,000 Accounts receivable 247,500 157,500 Merchandise inventory 427,500 675,000 Equipment 1,822,500 1,012,500 Land 360,000 157,500 Total 2,997,000 2,182,500 Allowance for depreciation – Equipment 360,000 270,000 Accounts payable 196,500 82,500 Accrued liabilities 22,500 135,000 Long term bonds payable 450,000 360,000 Premium on bonds payable 6,000 7,500 Capital stock Rs.10 par 900,000 675,000 Premium on capital stock 360,000 225,000 Retained earnings 702,000 427,500 Total 2,997,000 2,182,500 Additional Information: (a) Cash dividend of Rs.112,500 were declared and paid during 1996. (b) Equipment costing Rs.112,500 was sold at Rs.60,000 and at the time of sale book value of equipment was Rs.75,000. REQUIRED (1) Prepare cash flow statement. (2) Prepare fund flow statement. www.a4accounting.net Page 108 Cash Flow Statement Chapter # 4 Question # 24: The following are balance sheet data of Anarkali Company Ltd. Debit Balances 1997 – Dec. 31 (Rs.) 1996 – Dec. 31 (Rs.) Cash 18,000 6,000 Accounts receivable 60,000 75,000 Merchandise inventory 142,500 195,000 Prepaid expenses 10,500 4,500 Land 97,500 112,500 Building 300,000 187,500 Equipment 27,000 15,000 Retained earnings 15,000 --670,500 595,500 Credit Balances 1997 – Dec. 31 (Rs.) 1996 – Dec. 31 (Rs.) Allowance for bad debts 6,000 7,500 Allowance for depreciation – Building 45,000 40,500 Allowance for depreciation – Equipment 4,500 7,500 Accounts payable 75,000 94,500 Accrued expenses 15,000 10,500 Long term loans 150,000 120,000 Share capital (Rs.10 par) 375,000 300,000 Retained earnings --15,000 670,500 595,500 Additional Data: During the year land costing Rs.15,000 was sold at a gain of Rs.7,500 for cash, and the old equipment costing Rs.15,000 was sold for Rs.3,000 on credit. REQUIRED (a) Fund Flow Statement using working capital concept. (b) Cash generated from operations. (c) Cash Flow Statement. Question # 25: The comparative balance sheet of Abdullah Foods Ltd for June 30, 2004 and 2003 is as follows: Assets (in Rs.) June 30, 2004 June 30, 2003 Cash 140,100 86,700 Accounts receivable (Net) 187,500 185,250 Inventories 219,750 163,350 Investment --97,500 Land 217,500 --Equipment 551,400 417,900 Accumulated depreciation (166,350) (131,100) Liabilities & Shareholder’s Equity (in Rs.) June 30, 2004 June 30, 2003 Accounts payable 123,600 111,000 Accrued expenses 10,050 9,000 Dividend payable 27,600 23,550 Ordinary share capital Rs.10 150,000 105,000 Ordinary share premium 480,000 300,000 Retained earnings 358,650 271,050 Page 109 www.a4accounting.net Cash Flow Statement Chapter # 4 The following additional information has been taken from the records of Abdullah Foods Ltd. (a) Equipment and land were acquired for cash. (b) The investments were sold for Rs.142,500 cash. (c) The ordinary shares were issued for cash. (d) Net income Rs.198,000. (e) Cash dividend declared Rs.110,400. REQUIRED Prepare a Statement of Cash Flow for the year ended June 30, 2004. Question # 26: Pakistan Digitech Company’s comparative balance sheets and income statement for the year 2006 follows: PAKISTAN DIGITECH COMPANY COMPARATIVE BALANCE SHEET Assets: 2006 (in Rs.) 2005 (in Rs.) Cash 210,000 150,000 Accounts receivable 315,000 225,000 Inventory 750,000 645,000 Prepaid expenses 30,000 90,000 Plant & equipment 1,850,000 1,400,000 Less: Accumulated depreciation 575,000 310,000 Long-term investment 500,000 930,000 Total 4,230,000 3,750,000 Liabilities & Equities: Accounts payable 390,000 375,000 Accrued liabilities 150,000 180,000 Taxes payable 735,000 735,000 Debentures payable 750,000 600,000 Ordinary share capital 1,200,000 1,050,000 Retained earnings 1,005,000 810,000 Total 4,230,000 3,750,000 PAKISTAN DIGITECH COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2006 Sales Rs. 3,450,000 Less: Cost of goods sold Rs. 1,800,000 Gross margin Rs. 1,650,000 Less: Operating expenses Rs. 1,050,000 Net operating profit Rs. 600,000 Gain on sale of long-term investment Rs. 75,000 Income before taxes Rs. 675,000 Less: Income taxes Rs. 210,000 Net income Rs. 465,000 Additional Information: Dividends of Rs.270,000 declared and paid during the year. The gain on sale of long-term investments was from the sale of investments for Rs.375,000 in cash. The investments had an original cost of Rs.430,000. There was no retirement or disposal of plant and equipment during the year. www.a4accounting.net Page 110 Cash Flow Statement Chapter # 4 REQUIRED Prepare a Cash Flow Statement using indirect method showing clearly: (a) Cash flow from operating activities. (b) Cash flow from investing activities. (c) Cash flow from financing activities. Question # 27: The following trial balances have been taken from the books of Farooqui Ltd. Karachi: 2010 (in Rs.) 2009 (in Rs.) Cash 225,000 315,000 Accounts receivable 360,000 300,000 Marketable securities 240,000 180,000 Inventories 525,000 540,000 Prepaid expenses 45,000 30,000 Land & building 1,500,000 1,500,000 Machinery & equipment 1,050,000 780,000 Discount on issue of bonds 15,000 30,000 Total 3,960,000 3,675,000 Allowance for bad debts 18,000 16,500 Allowance for depreciation (Building) 180,000 172,500 Allowance for depreciation (Machine) 165,000 135,000 Accounts payable 240,000 225,000 Accrued expenses 75,000 60,000 Bonds payable 675,000 975,000 Capital stock 1,237,500 637,500 Retained earnings 769,500 553,500 Reserve for plant extension 600,000 900,000 Total 3,960,000 3,675,000 Additional Information: (1) Sold an old equipment costing Rs.30,000 having a book value of Rs.22,500 at Rs.15,000 on credit. (2) Cash dividend of Rs.225,000 was declared and paid. (3) Stock dividend of Rs.150,000 was declared and issued required number of shares of Rs.10 par. REQUIRED Prepare Cash Flow Statement showing Operating, Investing and Financing Activities. Question # 28: The comparative financial data of Brothers Limited for the last two years are: Assets (in Rs.) 31.12.2005 31.12.2006 Cash 30,000 30,000 Accounts receivable 75,000 240,000 Merchandise inventory 150,000 112,500 Land and buildings 120,000 180,000 Plant and machinery 750,000 1,200,000 Total assets 1,125,000 1,762,500 Page 111 www.a4accounting.net Cash Flow Statement Chapter # 4 Liabilities and Capital (in Rs.) 31.12.2005 31.12.2006 Accounts payable 79,500 285,000 Bills payable 60,000 75,000 Outstanding expenses 10,500 7,500 Share capital 750,000 1,050,000 Retained earnings 150,000 240,000 General reserve 75,000 105,000 Total liabilities and capital 1,125,000 1,762,500 Additional Information: (i) 10% Depreciation has been charged on plant and machinery during the year 2006. (ii) A piece of machinery was sold for Rs.12,000 during the year 2006. It had cost Rs.18,000; depreciation of Rs.10,500 had been provided on it. REQUIRED (a) Prepare a schedule of changes in working capital. (b) Statement showing the sources and application of fund for the year 2006. (c) Statement of cash flow. Question # 29: The comparative balance sheet of M/s. Rehmat Ali (Pvt.) Ltd. as at June 30, 1993 and 1994 are as follows: Assets (in thousand rupees) June 30, 1994 June 30, 1993 Cash at bank 13,050 21,300 Accounts receivable 16,200 24,900 Merchandise inventory 74,325 78,000 Prepaid expenses 2,100 2,220 Plant assets 162,000 127,500 Accumulated depreciation – Plant (48,000) (70,500) Equities (in thousand rupees) June 30, 1994 June 30, 1993 Accounts payable 35,175 16,710 Long term loan --37,500 Share capital (Ordinary share of Rs.10 each) 157,500 105,000 Discount of shares (10,500) --Retained earnings 37,500 24,210 Other Information Taken from Ledger: 1) Net income for the year Rs.227,400. 2) Depreciation expense for the year Rs.75,000. 3) Cash dividend declared during the year Rs.94,500. 4) The loan was due in 1994, but as per agreement can be paid earlier without penalty. 5) Additional cost to building amounted to Rs.645,000. 6) Fully depreciated equipment costing Rs.300,000 was discarded with no salvage value. 7) During the year 52,500 shares were issued for cash at Rs.8/= each. REQUIRED (a) Prepare schedule to find changes in working capital. (b) Prepare a statement of sources and application of fund. (c) Prepare cash flow statement. www.a4accounting.net Page 112 Cash Flow Statement Chapter # 4 Question # 30: Below are the Statements of Financial Position for Zita as at 31 Dec. 2009 and 31 December, 2008 and the Statement of Comprehensive Income for the year ended 31 December, 2009. Assets 2009 (in Rs.) 2008 (in Rs.) Non – Current Assets: Intangible assets 2,122,500 1,225,500 Tangible assets 1,248,000 1,021,500 Total non – current assets 3,370,500 2,247,000 Current Assets: Inventory 928,500 1,051,500 Receivables 786,000 738,000 Investments 594,000 187,500 Cash 25,500 121,500 Total current assets 2,334,000 2,098,500 Total assets 5,704,500 4,345,500 Equities & Liabilities Equities: Ordinary shares (Rs.10) 750,000 450,000 Share premium 468,000 426,000 General reserve 225,000 60,000 Retained earnings 2,418,000 1,815,000 Total equities 3,861,000 2,751,000 Non – Current Liabilities: 5% Debentures payable 439,500 207,000 Current Liabilities: Interest payable 150,000 45,000 Dividend payable 121,500 210,000 Tax payable 357,000 339,000 Accounts payable 775,500 793,500 Total current liabilities 1,404,000 1,387,500 Total equities and liabilities 5,704,500 4,345,500 Statement of Comprehensive Income Revenue 2,641,500 Cost of sales (1,392,000) Operating profit 1,249,500 Interest charge (165,000) Profit before tax 1,084,500 Income tax expense (360,000) Profit for the year 724,500 Additional Information: 1) Intangible non-current assets represent deferred development expenditure. Amortization in 2009 amounted to Rs.64,500. 2) Tangible non-current asset additions totaling Rs.300,000 were made. Proceeds from the sale of tangible non-current assets were Rs.154,500, on which Zita suffered a loss of Rs.9,000. 3) Investments include treasury bills of Rs.48,000 acquired during 2009. Zita sees these as cash equivalents. REQUIRED Prepare a Statement of Cash Flows for Zita for the year ended 31 December, 2009 in accordance with IAS 7 (revised). Page 113 www.a4accounting.net Cash Flow Statement Chapter # 4 Question # 31: Smithson Ltd. Balance Sheet As on 30 June 2000 2000 (in Rs.) Assets Current Assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Fixed Assets: Land Building Accumulated depreciation (B) Equipment Accumulated depreciation (E) Goodwill (net of amortization) Total fixed assets Total assets Equities & Liabilities Current Liabilities: Accounts payable Dividend payable Salaries payable Total current liabilities Long Term Liabilities: Mortgage payable Shareholders’ Equity: Ordinary shares capital Retained earnings Total shareholders’ equity Total equities and liabilities 30,000 (10,000) 12,000 (7,100) 1999 (in Rs.) 9,490 8,550 6,100 310 24,450 1,400 9,000 4,320 180 14,900 10,000 8,000 20,000 4,900 4,000 38,900 63,350 30,000 (9,000) 16,000 (8,500) 4,850 1,500 400 6,750 8,000 10,000 23,500 15,650 45,940 63,350 39,150 55,900 Smithson Ltd. Income Statement For the Year Ended 30 June 2000 www.a4accounting.net 7,500 4,500 41,000 55,900 6,120 3,000 290 9,410 29,000 16,940 Sales revenue (net) Cost of goods sold Gross profit Operating Expenses: Amortization of goodwill Depreciation expense Insurance expense Miscellaneous expenses Repairs and maintenance expense Salaries expense Telephone expense Utilities expense Total operating expenses Operating income 21,000 108,000 (46,410) 61,590 500 2,500 840 960 1,370 21,630 1,850 750 (30,400) 31,190 Page 114 Cash Flow Statement Chapter # 4 Interest expense (800) Loss on sale of equipment (300) Income before income taxes 30,090 Income tax expense (16,800) Net income 13,290 Additional Information: 1) Equipment with a cost of Rs.4,000 and accumulated depreciation of Rs.2,900 was sold. 2) Dividends of Rs.12,000 were declared. REQUIRED Prepare a cash flow statement, using the indirect method. Question # 32: Assets Current Assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Fixed Assets: Land Building Accumulated depreciation (B) Equipment Accumulated depreciation (E) Patents Total fixed assets Total assets Equities & Liabilities Current Liabilities: Accounts payable Unearned revenue Dividends payable Income taxes payable Total current liabilities Long Term Liabilities: Bonds payable Shareholders’ Equity: Ordinary shares capital Retained earnings Total shareholders’ equity Total equities and liabilities West-Man Industries Ltd. Balance Sheet As at 31 December 1998 1998 (in Rs.) 700,000 (216,000) 160,000 (48,000) 145,500 220,000 110,000 3,000 478,500 70,000 205,000 130,000 2,000 407,000 170,000 170,000 484,000 112,000 50,000 816,000 1,294,500 600,000 (192,000) 280,000 (64,000) 408,000 216,000 --794,000 1,201,000 52,000 4,500 10,000 25,000 91,500 48,000 8,000 20,000 20,000 96,000 500,000 400,000 330,000 373,000 500,000 205,000 703,000 1,294,500 Page 115 1997 (in Rs.) 705,000 1,201,000 www.a4accounting.net Cash Flow Statement Chapter # 4 West-Man Industries Ltd. Income Statement For the Year Ended 31 December 1998 Sales revenue 2,000,000 Cost of goods sold (1,100,000) Gross profit 900,000 Operating Expenses: Depreciation expense 40,000 Supplies expense 5,000 Other expenses 22,000 Salaries expense 400,000 Total operating expenses (467,000) Operating income 433,000 Interest expense (20,000) Loss on sale of equipment (45,000) Income before income taxes 368,000 Income tax expense (140,000) Net income 228,000 Additional Data: (a) Building renovation costing Rs.100,000 were completed & paid for during the year. (b) Equipment that initially cost Rs.120,000 and accumulated depreciation of Rs.32,000 was sold. (c) Dividends of Rs.60,000 were declared during the year. (d) Ordinary shares were repurchased on the stock market for Rs.170,000 cash, an amount equal to their book value. REQUIRED Prepare the statement of cash flow for 1998. www.a4accounting.net Page 116 Chapter # 5 Accounting for Company – Final Accounts Advanced Accounting www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Accounting for companies. Issuance of shares and bonds. Appropriation of retained earnings. Declaration and payment of dividends. Financial Statements in accordance with International Accounting Standards. WHAT THE EXAMINER USUALLY ASK? General Journal entries for issuance of shares. General Journal entries for issuance of debentures/bonds. Appropriation of retained earnings. Income Statement. Statement of Retained Earnings. Balance Sheet. www.a4accounting.net Page 118 Accounting for Company – Final Accounts Chapter # 5 COMPANY A corporate enterprise that has a legal identity separate from that of its members; it operates as one single unit, in the success of which all the members participate. A company may have limited liability (limited company), so that the liability of the members of the company’s debt is limited. An unlimited company is one in which the liability of the members is not limited in any way. A company may be registered as a public limited company or a private company. The shares of a private company may not be offered to the public for sale. SHARE CAPITAL Share capital is the part of the finance of a company received from its members or shareholders in exchange for shares. AUTHORIZED SHARE CAPITAL The maximum amount of shares capital that may be issued by a company, as detailed in the company’s memorandum of association is called authorized capital or registered capital. The authorized share capital must be disclosed on the face of the balance sheet or alternatively in the notes to the accounts. ISSUED SHARE CAPITAL The amount of the authorized share capital of a company for which shareholders have subscribed is called issued share capital. CALLED – UP SHARE CAPITAL Called – up capital is the part of the issued share capital of a company payment for which has either been received (paid up share capital) or requested but not yet received. Some shares are paid for in part at the time of issue, with subsequent requests for the outstanding payment. When all requests have been paid, the called-up share capital will equal the paidup share capital. PAID – UP SHARE CAPITAL The part of the issued share capital of a company that shareholders have paid into the company for their fully paid or partly paid shares is called paid – up share capital. SHARE PREMIUM Share premium is the amount payable for shares in a company and issued by the company itself in excess of their nominal value. Share premium received by a company must be credited to a share premium account, which cannot be used for paying dividends to the shareholders. SHARE DISCOUNT A share issued at a price below its par value. The discount is the difference between the par value and the issue price. PRELIMINARY EXPENSES Expenses incurred for the registration and documentation in the setting up of a company is called preliminary expenses. It is treated as current asset in the balance sheet. Page 119 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 ARTICLES OF ASSOCIATION Article of association is the document that governs the running of a company. It sets out voting rights of shareholders, conduct of shareholders’ and directors’ meetings, power of management, etc. MEMORANDUM OF ASSOCIATION Memorandum of association is an official document setting out the detail of a company’s existence. It must be signed by the first subscribers and must contain the following information: The name of company. The address of the registered office. The objects of the company. A statement that the company is a public company. A statement of limited liability. Amount of the guarantee. The amount of authorized share capital and its division. GENERAL JOURNAL ENTRIES ISSUE OF SHARES AT PAR Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the cash received from general public at par) ----------------------------------------------------------------------------------------------------------------Ordinary shares application DR. (with the amount of shares issued) Ordinary shares capital CR. (with the amount of shares issued) (To record the shares issued to general public at par) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 1: (ISSUED AT PAR) Paramount Co. Ltd. has an authorized capital of Rs.250,000 divided into 25,000 ordinary shares of Rs.10 each. The company invites application for 3,000 ordinary shares at par from public along with money. The last day, the banker of the company has informed that only 3,000 ordinary shares applications were received. The management of the company then decided to issue the same to the public. REQUIRED Prepare necessary journal entries. SOLUTION # 1: Paramount Co. Ltd. General Journal Particulars Date 1 Bank (3,000 x 10) Ordinary shares applications (To record the shares applications received at par) 2 Ordinary shares application Ordinary shares capital (3,000 x 10) (To record the shares issued to the public at par) www.a4accounting.net Page 120 P/R Debit 30,000 30,000 Credit 30,000 30,000 Accounting for Company – Final Accounts Chapter # 5 ILLUSTRATION # 2: (ISSUED AT PAR) Diamond Co. Ltd. is offering 35,000 ordinary shares of Rs.10 each to the public along with money. The banker of the company reported that they have received 55,000 ordinary shares application at par upto the last day. The company has decided to issue 35,000 ordinary shares and instructed to the banker that excess amount refund to whom shares were not allotted. REQUIRED Prepare necessary journal entries. SOLUTION # 2: Diamond Co. Ltd. General Journal Date Particulars 1 Bank (55,000 x 10) Ordinary shares applications (To record the shares applications received at par) 2 Ordinary shares application Ordinary shares capital (35,000 x 10) (To record the shares issued to the public at par) 3 Ordinary shares application Bank (20,000 x 10) (To record the refund of excess money to the public at par) P/R Debit 550,000 Credit 550,000 350,000 200,000 350,000 200,000 ISSUE OF SHARES AT PREMIUM Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the cash received from general public at premium) ----------------------------------------------------------------------------------------------------------------Ordinary shares application DR. (amount of shares issued at par plus premium) Ordinary shares capital CR. (with the amount of shares issued at par) Ordinary shares premium CR. (with the premium amount) (To record the shares issued to the public at premium) ----------------------------------------------------------------------------------------------------------------Ordinary shares application DR. (with the amount refund to public) Bank CR. (with the amount refund to public) (To record the refund of excess money to public) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 3: (ISSUED AT PREMIUM) Regal Ltd. has registered capital of Rs.3,000,000 divided into 150,000 ordinary shares of Rs.20 each. The company invites applications for 28,000 ordinary shares of Rs.20 each at Rs.26 each along with money. The banker has reported that they have received 28,000 ordinary shares applications at premium. The company decided to issue the same number of shares to the public. REQUIRED Prepare necessary journal entries. Page 121 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 SOLUTION # 3: Regal Ltd. General Journal Date Particulars 1 Bank (28,000 x 26) Ordinary shares applications (To record the shares applications received at premium) 2 Ordinary shares application Ordinary shares capital (28,000 x 20) Ordinary shares premium (28,000 x 6) (To record the shares issued to the public at premium) ILLUSTRATION # 4: P/R Debit 728,000 Credit 728,000 728,000 560,000 168,000 (ISSUED AT PREMIUM) Unilever Ltd. invites shares applications from 1 April to 10 April for 26,000 ordinary shares of Rs.10 each with the premium of Rs.2 each. On 10 April, the banker of the company informed to the company that they have received total 42,000 shares application along with money. On 18 April the board has decided to issue 26,000 ordinary shares at premium after balloting and instructed to banker that they must refund the amount to whom they have not issued shares. REQUIRED Prepare necessary journal entries. SOLUTION # 4: Unilever Ltd. General Journal Date Particulars 10 Bank (42,000 x 12) April Ordinary shares applications (To record the shares applications received at premium) 18 Ordinary shares application April Ordinary shares capital (26,000 x 10) Ordinary shares premium (26,000 x 2) (To record the shares issued to the public at premium) 18 Ordinary shares application April Bank (16,000 x 12) (To record the refund of excess money to the public at premium) www.a4accounting.net Page 122 P/R Debit 504,000 Credit 504,000 312,000 260,000 52,000 192,000 192,000 Accounting for Company – Final Accounts Chapter # 5 ISSUE OF SHARES AT DISCOUNT Bank DR. (with amount received) Ordinary shares application CR. (with amount received) (To record the amount received from public at discount) ----------------------------------------------------------------------------------------------------------------Ordinary shares application DR. (with the amount of shares issued at discount) Ordinary shares discount DR. (with the amount of discount) Ordinary shares capital CR. (with the amount of shares issued at par) (To record the shares issued to public at discount) ----------------------------------------------------------------------------------------------------------------Bank DR. (with the amount of shares issued at discount) Ordinary shares discount DR. (with the amount of discount) Ordinary shares capital CR. (with the amount of shares issued at par) (To record the shares issued to underwriter as per agreement) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 5: (ISSUED AT DISCOUNT) Pepsi Co. Ltd. has an authorized capital of Rs.2,500,000 divided into 100,000 ordinary shares of Rs.25 each. The company invites applications for 35,000 ordinary shares of Rs.25 each at Rs.20 each for the public with the agreement by underwriter. On the last day, the banker has reported that they have received 26,000 ordinary shares applications from public. The management then decided to issue the 26,000 ordinary shares to the public and remaining shares will be taken up by the underwriter as per agreement. REQUIRED Prepare necessary journal entries. SOLUTION # 5: Date 1 2 3 Pepsi Co. Ltd. General Journal Particulars Bank (26,000 x 20) Ordinary shares applications (To record the shares applications received at discount) Ordinary shares application Ordinary shares discount (26,000 x 5) Ordinary shares capital (26,000 x 25) (To record the shares issued to the public at discount) Bank (9,000 x 20) Ordinary shares discount (9,000 x 5) Ordinary shares capital (9,000 x 25) (To record the shares issued to the underwriter at discount as per agreement) Page 123 P/R Debit 520,000 520,000 130,000 180,000 45,000 Credit 520,000 650,000 225,000 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 DEBENTURES Debentures are the most common form of long-term loan taken by a company. It is usually a loan repayable at a fixed date, although some debentures are irredeemable securities. Most debentures also pay a fixed rate of interest, and this interest must be paid before a dividend is paid to shareholders. ISSUE OF DEBENTURES AT PAR & PAYBACK AT PAR Bank DR. (with the amount received) Debentures payable CR. (with nominal value) (To record the debentures issued at par and payback at par) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 6: (ISSUED AT PAR & PAYBACK AT PAR) The company has issued 15,000 7% debentures of Rs.100 each at par and agreed to payback after 3 years at par. REQUIRED Prepare necessary journal entries. SOLUTION # 6: Date 1 General Journal Particulars Bank (15,000 x 100) 7% Debentures payable (15,000 x 100) (To record the issue of 7% debentures at par and payback at par after 3 years) P/R Debit 1,500,000 Credit 1,500,000 ISSUE OF DEBENTURES AT PREMIUM & PAYBACK AT PAR Bank DR. (with amount received) Debentures payable CR. (with par value) Premium on debenture CR. (with amount received in premium) (To record the debentures issued at premium and payback at par) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 7: (ISSUED AT PREMIUM & PAYBACK AT PAR) The company has issued 23,000 10% debentures of Rs.100 each at Rs.105 and agreed to payback after 5 years at Rs.100 each. REQUIRED Prepare necessary journal entries. SOLUTION # 7: Date 1 General Journal Particulars Bank (23,000 x 105) 10% Debentures payable (23,000 x 100) Premium on debentures (23,000 x 5) (To record the issue of 10% debentures at premium and payback at par after 5 years) www.a4accounting.net Page 124 P/R Debit 2,415,000 Credit 2,300,000 115,000 Accounting for Company – Final Accounts Chapter # 5 ISSUE OF DEBENTURES AT DISCOUNT & PAYBACK AT PAR Bank DR. (with amount received) Discount on debenture DR. (with discount amount) Debentures payable CR (with par value) (To record the debentures issued at discount and payback at par) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 8: (ISSUED AT DISCOUNT & PAYBACK AT PAR) The company has issued 30,000 8% debentures of Rs.100 each at Rs.95 and redeemable after 5 years at Rs.100 each. REQUIRED Prepare necessary journal entries. SOLUTION # 8: General Journal Date 1 Particulars Bank (30,000 x 95) Discount on debentures (30,000 x 5) 8% Debentures payable (30,000 x 100) (To record the issue of 8% debentures at discount and payback at par after 5 years) P/R Debit 2,850,000 150,000 Credit 3,000,000 ISSUE OF DEBENTURES AT PAR & PAYBACK AT PREMIUM Bank DR. (with amount received) Loss on redemption DR. (with amount of loss at the time of payback) Debentures payable CR. (with par value) Premium on redemption CR. (the amount will be paid as premium) (To record the debentures issued at par and payback at premium) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 9: (ISSUED AT PAR & PAYBACK AT PREMIUM) The company has issued 26,000 6% debentures of Rs.100 each at par and redeemable after 6 years at Rs.106 each. REQUIRED Prepare necessary journal entries. SOLUTION # 9: Date 1 General Journal Particulars Bank (26,000 x 100) Loss on redemption (26,000 x 6) 6% Debentures payable (26,000 x 100) Premium on redemption (26,000 x 6) (To record the issue of 6% debentures at par and payback at premium after 6 years) Page 125 P/R Debit 2,600,000 156,000 Credit 2,600,000 156,000 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 ISSUE OF DEBENTURES AT DISCOUNT & PAYBACK AT PREMIUM Bank DR. (with amount received) Loss on redemption DR. (with amount of loss at the time of payback) Discount on debenture DR. (with the discount amount) Debentures payable CR. (with par value) Premium on redemption CR. (the amount will be paid as premium) (To record the debentures issued at discount and payback at premium) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 10: (ISSUED AT DISCOUNT & PAYBACK AT PREMIUM) The company has issued 35,000 9% debentures of Rs.100 each at Rs.93 and redeemable after 8 years at Rs.106 each. REQUIRED Prepare necessary journal entries. SOLUTION # 10: Date 1 General Journal Particulars P/R Bank (35,000 x 93) Loss on redemption (35,000 x 6) Discount on debentures (35,000 x 7) 9% Debentures payable (35,000 x 100) Premium on redemption (35,000 x 6) (To record the issue of 9% debentures at discount and payback at premium after 8 years) Debit 3,255,000 210,000 245,000 Credit 3,500,000 210,000 RETAINED EARNINGS Retained earnings are accumulated earnings that have not been distributed to shareholders but rather reinvested in the business. A company's retained earnings are disclosed at or near the bottom of the shareholders equity section of the balance sheet. Accountants may prepare a separate "statement of retained earnings" that shows the change in retained earnings during the accounting period; however, the statement of retained earnings is often combined with the income statement. RESERVES AND FUNDS 1. 2. 3. 4. 5. 6. 7. RESERVE It is created out of retained earnings. Reserve is a voluntary provision made out of net income. Reserve is part of owner’s equity. It is shown on the credit side of the balance sheet under owner’s equity. It represents a portion of profits or liability. Reserve has normally credit balance. It is part of retained earnings. www.a4accounting.net Page 126 1. 2. 3. 4. 5. FUND It is created out of cash. A provision is a change expense and revenue. Fund is an asset. It is shown on the debit side of the balance sheet among assets. It represents on assets. 6. Fund has normally debit balance. 7. It is not part of retained earnings. Accounting for Company – Final Accounts Chapter # 5 CAPITAL RESERVE Capital reserves are the reserves that may not be distributed according to Company Act 1985. They include share capital, share premium, capital redemption reserve, certain unrealized profits, or any other reserves that the company may not distribute according to some other act or its own article of association. SECRET RESERVE Funds held in the reserve but not disclosed in the balance sheet. They arise when an asset is deliberately either undisclosed or undervalued. VALUATION RESERVE Allowance, created by a charge against earnings, to provide for changes in the value of a company's assets. Examples include accumulated depreciation and allowance for bad debts. SURPLUS RESERVE Amount appropriated out of earned surplus (retained earnings) for future planned or unforeseen expenditure. LIABILITY RESERVE Liability reserve is used to reflect a known liability. RESERVES No. Purpose Entry to Create Reporting on Balance Sheet Nature of Reserve: Contra Assets or Valuation Reserve 1. To decrease Bad debts expense Deduction in accounts (Dr.) accounts receivable to their Allowance for bad receivable realizable value debts (Cr.) 2. To accumulate Depreciation expense Deduction in expired cost of (Dr.) related fixed fixed assets Allowance for asset depreciation (Cr.) Nature of Reserve: Estimated Liability 3. To recognize Income tax expense Shown as a estimated liability (Dr.) current liability Reserve for income tax (Cr.) Page 127 Entry to Write Off Allowance for bad debts (Dr.) Accounts receivable (Cr.) Allowance for depreciation (Dr.) Fixed asset (Cr.) Reserve for income tax (Dr.) Bank (Cr.) www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Nature of Reserve: Appropriation of Retained Earnings 4. To restrict Retained earnings Shown as a part distributable (Dr.) of retained profit for building Reserve for building earnings extension extension (Cr.) 5. To restrict Retained earnings Shown as a part distributable (Dr.) of retained profit for plant Reserve for plant earnings expansion expansion (Cr.) 6 To restrict Retained earnings Shown as a part distributable (Dr.) of retained profit for Reserve for earnings debenture debenture redemption redemption (Cr.) 7 To restrict Retained earnings Shown as a part distributable (Dr.) of retained profit for Reserve for earnings contingencies contingencies (Cr.) Reserve for building extension (Dr.) Retained earnings (Cr.) Reserve for plant expansion (Dr.) Retained earnings (Cr.) Reserve for debenture redemption (Dr.) Retained earnings (Cr.) Reserve for contingencies (Dr.) Retained earnings (Cr.) FUNDS No. Purpose Entry to Create Nature of Reserve: Petty Cash 1. To set aside cash Petty cash fund (Dr.) for petty expenses Bank (Cr.) Nature of Reserve: Sinking 2. To set aside cash Sinking fund (Dr.) for sinking fund Bank (Cr.) ILLUSTRATION # 11: Reporting on Balance Sheet Entry to Write Off Shown as a part of cash All expenses (Dr.) Petty cash fund (Cr.) Shown as a part of cash Bonds payable (Dr.) Sinking fund (Cr.) (RETAINED EARNINGS) The retained earnings account on ABC Company Ltd. showed a credit balance of Rs.400,000 on December 31, 2010. The expense and revenue summary for the year ending on that date showed a net income of Rs.150,000 which is transferred to retained earnings account. The company decided on December 31, 2010 as under: (a) To declare a cash dividend of Rs.50,000 and stock dividend of Rs.40,000. (b) To appropriate Rs.40,000 for reserve for plant expansion. (c) To appropriate Rs.27,000 for reserve for contingencies. (d) To establish reserve for building extension for Rs.80,000. (e) Cash dividend paid through bank. (f) 4,000 shares issued in settlement of stock dividend. REQUIRED Give entries in General Journal to give effect to the above decisions. www.a4accounting.net Page 128 Accounting for Company – Final Accounts Chapter # 5 SOLUTION # 11: Date 1 2 3 4 5 6 7 8 ABC Company Ltd. General Journal Particulars Expense and revenue summary Retained earnings (To record the transfer of net income to the retained earnings account) Retained earnings Cash dividend payable (To record the declaration of cash dividend) Retained earnings Stock dividend payable (To record the declaration of stock dividend) Retained earnings Reserve for plant expansion (To record the reserve for plant expansion) Retained earnings Reserve for contingencies (To record the reserve for contingencies) Retained earnings Reserve for building extension (To record the reserve for building extension) Cash dividend payable Bank (To record the payment of cash dividend) Stock dividend payable Ordinary shares capital (4,000 x 10) (To record the issue of shares in settlement of stock dividend at par) P/R Debit 150,000 Credit 150,000 50,000 50,000 40,000 40,000 40,000 27,000 80,000 40,000 27,000 80,000 50,000 50,000 40,000 40,000 FINANCIAL STATEMENTS Financial statement is a written report which quantitatively describes the financial health of a company. Financial statements are usually compiled on a quarterly and annually basis. Financial statements include: Income Statement. Balance Sheet. Cash Flow Statement. Statement of Changes in Equity. Notes to the Financial Statements. Page 129 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 INCOME STATEMENT Income statement shows the financial performance of the business. It shows the result of operations for a period. It consists of revenue and expenses. When total revenues exceed the total expenses, the resulting amount is net profit. When expenses exceed revenues, the resulting amount is net loss. Name of Company Income Statement For the Period Ended______ Sales Less: Sales discount Less: Sales returns and allowances Net sales Less: Cost of Goods Sold: Merchandise inventory (beg) Add: Net Purchases: Purchases Add: Transportation in Delivered purchases Less: Purchase discount Less: Purchase returns & allowances Net purchases Merchandise available for sale Less: Merchandise inventory (end) Cost of goods sold Gross profit Less: Operating Expenses: Office salaries expense Advertising expenses Directors’ fee expenses Auditor’s fee expenses Insurance expense Bad debts expense Depreciation expense Total operating expenses Profit/loss from operation Add: Other Income: Commission income Income before income tax Less: Income tax expense Net profit/Loss www.a4accounting.net XXX XXX XXX (XXX) XXX XXX XXX XXX XXX (XXX) (XXX) XXX XXX (XXX) (XXX) XXX XXX XXX XXX XXX XXX XXX XXX (XXX) XXX/(XXX) XXX XXX (XXX) XXX/(XXX) Page 130 Accounting for Company – Final Accounts Chapter # 5 BALANCE SHEET Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities and owner’s equity on a given date. It is a quantitative summary of company’s financial condition at a specific point in time, including assets, liabilities and net worth. The first part of balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and owner’s equity). Name of Company Balance Sheet As on _________ Equities Shareholder’s Equity: Authorized Capital: XXX ordinary shares @ Rs.xx each XXX Issued & Paid-up Capital: XXX ordinary shares @ Rs.xx each Add: Shares premium Less: Shares discount XXX XXX (XXX) XXX XXX XXX XXX Add: Retained earnings Add: Reserves Total shareholder’s equity Liabilities: Long-Term Liabilities: Debentures payable Premium on redemption Total long-term liabilities Current Liabilities: Accounts payable Cash dividend payable Stock dividend payable Accrued expenses Unearned income Total current liabilities Total equities Assets Fixed Assets: Goodwill Plant & equipment Less: All for depreciation Preliminary expenses Total fixed assets Current Assets: Office supplies Prepaid Merchandise inventory Accounts receivable Cash/Bank Total current assets XXX XXX (XXX) XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Total assets Page 131 XXX www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 STATEMENT OF RETAINED EARNINGS Name of Company Statement of Retained Earnings For the Period Ended ______ Retained earnings (opening balance) XXX Add: Net income for the period XXX Total retained earning XXX Less: Reserves: Reserve for contingencies XXX Reserve for plant expansion XXX Reserve for debenture redemption XXX Total reserves (XXX) XXX Less: Dividends: Cash dividend XXX Stock dividend XXX Total dividends (XXX) Retained earnings (ending balance) XXX ILLUSTRATION # 12: (FINANCIAL STATEMENTS) The pre-closing trial balance of XYZ Ltd. was prepared on 31 March 2009 showed as follows:Debit Balances (in Rs.) Credit Balances (in Rs.) Cash 76,000 Accounts payable 167,000 Accounts receivable 50,000 All. for depreciation – Equipment 18,000 Merchandise inventory 51,000 Allowance for bad debts 3,000 Purchases 200,000 Paid-up capital 220,000 Equipment 312,000 Sales 300,000 Insurance expense 2,000 Retained earnings 18,000 Salary expense 11,000 Director’s fee 17,000 Auditor’s fee 7,000 726,000 726,000 Supplementary data for adjustment on June 30, 1993:(a) Depreciation expense on equipment is estimated for the year at Rs.5,000. (b) The allowance for bad debts is to be increased by Rs.1,000. (c) Appropriate Rs.20,000 for contingencies. (d) Merchandise inventory valued on 31 March 2009 was Rs.40,000. REQUIRED (a) Prepare Income Statement for the year ended 31 March 2009 and also Statement of Retained Earnings. (b) Prepare Balance Sheet as of 31 March 2009. www.a4accounting.net Page 132 Accounting for Company – Final Accounts Chapter # 5 SOLUTION # 12: XYZ Ltd. Income Statement For the Period Ended 31 March 2009 Sales Less: Cost of Goods Sold: Merchandise inventory (beginning) Add: Purchases Merchandise available for sale Less: Merchandise inventory (ending) Cost of goods sold Gross profit Less: Operating Expenses: Insurance expense Salary expense Directors’ fee expenses Auditor’s fee expenses Bad debts expense Depreciation expense Total operating expenses Net profit 300,000 51,000 200,000 251,000 (40,000) (211,000) 89,000 2,000 11,000 17,000 7,000 1,000 5,000 (43,000) 46,000 XYZ Ltd. Statement of Retained Earnings For the Period Ended 31 March 2009 Retained earnings (opening balance) 18,000 Add: Net income for the period 46,000 Total retained earning 64,000 Less: Reserves: Reserve for contingencies (20,000) Retained earnings (ending balance) 44,000 XYZ Ltd. Balance Sheet As on 31 March 2009 Equities Shareholder’s Equity: Issued & Paid-up Capital: 22,000 ordinary shares @ Rs.10 each Add: Retained earnings Add: Reserve for contingencies Total shareholder’s equity Liabilities: Accounts payable Total liabilities Total equities 167,000 Assets Fixed Assets: Equipment 312,000 Less: Allowance for depreciation (23,000) 220,000 Total fixed assets 289,000 44,000 20,000 Current Assets: 284,000 Merchandise inventory 40,000 Accounts rec. 50,000 Less: All for b/d(4,000) 46,000 Cash 76,000 167,000 Total current assets 162,000 451,000 Total assets 451,000 Page 133 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 PRACTICE QUESTIONS Question # 1: M/S. Salman Ltd. has the registered capital of Rs.1,500,000 divided into ordinary shares of Rs.50 each. 22,500 shares of Rs.50 each were offered to the public at Rs.55 per share. REQUIRED (a) Give Journal entries in proper form in the book of the company under each of the following assumptions separately: (i) Applications were received for 30,000 shares. The company allotted the shares offered and refunded the amount received in excess. (ii) Applications were received for 21,000 shares. The company finalized the allotment of these shares. (b) Prepare share capital and bank accounts under each of the above assumptions separately. Question # 2: Shahid Mujib & Company Ltd. offered to the public 105,000 ordinary shares of Rs.10 each at Rs.15 (Rs.5 being premium per share) on January 1, 1998. The company’s bankers received applications for 135,000 ordinary shares up to January 15, 1998. On January 31, 1998 the company finalized the allotment of shares and directed to bank to refund the excess money received on account of over-subscription. REQUIRED (a) Give necessary journal entries in proper form on the books of Shahid Mujib & Company Ltd. of the above transactions (Give narration below each entry). (b) Set up “T” accounts of cash in bank, ordinary share capital and share premium. (c) Prepare initial balance sheet of the company. Question # 3: Zain Company Ltd. was incorporated with an authorized capital of Rs.1,500,000 divided into 150,000 ordinary shares of Rs.10 each. 75,000 shares were issued to the public at par, payable in full with application. The company’s banker reported that applications were received for 67,500 shares. The remaining shares which were not taken up by the public were taken up by the underwriters under the agreement. The directors finalized the allotment of shares. The preliminary expenses amounted to Rs.22,500. The company acquired a delivery truck and in payment issued 7,500 ordinary shares of Rs.10 each. The market price of the shares was Rs.12 per share. REQUIRED (a) Give entries in the General Journal of the company for the above transactions. (b) Prepare initial balance sheet of the company. Question # 4: The following are transactions, completed by Abdul Sattar and Company: (a) Received applications for 75,000 ordinary shares of Rs.10 each @ Rs.12 per share. (b) Allotted 60,000 ordinary shares of Rs.10 each at a premium of Rs.2 per share. (c) Refunded application money on 15,000 ordinary shares @ Rs.12 per share. (d) Paid preliminary expenses Rs.30,000. (e) Allotted 7,500 ordinary shares of Rs.10 each against land costing Rs.90,000. (f) Allotted 7,500 ordinary shares of Rs.10 each to the promoters of the company. REQUIRED Prepare General Journal entries for the above transactions. www.a4accounting.net Page 134 Accounting for Company – Final Accounts Chapter # 5 Question # 5: Mahfooz & Co. Ltd. was registered with capital of Rs.7,500,000 divided into ordinary shares of Rs.10 each. The company offered to the public 22,500 shares payable in full on application. The bank informs that 30,000 shares application were received. The company allotted the offered shares and refunded the amount received in excess. During the year the company completed the following transactions: (a) Issued 7,500 shares at Rs.18 each for cash. (b) Issued 10,500 shares to the promoters as par. (c) Purchased computers for Rs.60,000 and issued 4,500 shares. (d) Purchased a piece of land and issued 75,000 shares at Rs.15. REQUIRED Give entries in General Journal for Mahfooz & Co. Ltd. Question # 6: Mehmood Ltd. was registered with the authorized capital of Rs.3,000,000 divided into 300,000 ordinary shares of Rs.10 each. The company offered to the public 255,000 shares for subscription at par. The applications for 225,000 shares were received. The underwriters, under the agreement, subscribed for the remaining 30,000 shares. The company paid 2% underwriting commission. The company also completed the following transactions: (a) Issued 6,300 shares at par to the promoters in consideration for their services for the promotion of the company. (b) Purchased equipment for Rs.120,000 and issued 11,400 shares of Rs.10 each. (c) Purchased office building for Rs.195,000 and issued 18,000 shares of Rs.10 each as purchase consideration. REQUIRED Record the above transactions in the General Journal of the company. Question # 7: Yusufzai & Company Limited was registered with the capital of Rs.15,000,000 divided into ordinary shares of Rs.10 each. The company offered to the public 45,000 shares payable in full on application. The bank informs that 60,000 share applications were received. The company allotted the offered shares and refunded the amount received in excess. During the year, the company completed the following transactions: (a) Issued 15,000 shares at Rs.16 each for cash. (b) Issued 21,000 shares to the promoters at par. (c) Purchased computers for Rs.120,000 and issued the suitable number of shares. The market value of shares was Rs.12.50 each. (d) Purchased a piece of land and issued 150,000 shares at Rs.15 each. REQUIRED Give entries in the general journal for Yusufzai & Co. Ltd. Question # 8: Waheed Company Limited issued ordinary shares of Rs.10 each during 1995: (a) 15,000 shares for purchase of machine (market price of shares was Rs.12). (b) 6,000 shares at par to promoters for services rendered. (c) Offered 135,000 shares to the public at a premium of Rs.2. Application money received for 180,000 shares. The company allotted the shares and refunded the excess money. (d) Issued 7,500 shares at par for the redemption of 20% debentures payable. Page 135 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 (e) The company acquired the following assets from a firm: Merchandise Rs.30,000; Equipment Rs.180,000 and Furniture Rs.90,000. Purchase consideration was paid by issuing 37,500 shares of Rs.10 each as fully paid up. REQUIRED Record the above transactions in the General Journal of the company. Question # 9: On January 1, 1996, Jansher Company Ltd. was registered with an authorized capital of Rs.1,800,000 divided into 9,000 10% preference shares of Rs.100 each and 90,000 ordinary shares of Rs.10 each. On January 15, 1996, the company offered 6,000 10% preference shares and 75,000 ordinary shares, payable in full with application. On January 25, 1996, the company’s banker reported that Rs.750,000 on 7,500 10% preference shares and Rs.600,000 on 60,000 ordinary shares were received with applications. The remaining ordinary shares which were not taken up by the public were taken up by the underwriters under the agreement. On January 31, 1996, the directors of the company finalized the allotment of 6,000 10% preference shares and 60,000 ordinary shares to the public and 15,000 ordinary shares to the underwriters and directed the banker to refund the excess of application money. On February 10, 1996, the company allotted 6,000 ordinary shares of Rs.10 each in consideration of purchase price of machinery. The shares were issued at market price of Rs.12.50 each. REQUIRED (i) Give dated entries in the General Journal of the Company for the above transactions. (ii) Prepare initial balance sheet of the company on February 29, 1996. Question # 10: Chuhan & Co. Ltd. was registered with a capital of Rs.30,000,000 ordinary shares of Rs.10 each. It was incorporated by acquiring the running business of Yasir, a sole trader. The balance sheet of the business of Yasir as of January 01, 2005 was as under: ASSETS EQUITIES Cash Rs. 60,000 Accounts payable Rs. 60,000 Accounts receivable 180,000 Notes payable 60,000 Merchandise inventory 240,000 Allowance for bad debts 12,000 Office supplies 12,000 Accumulated depreciation 360,000 Furniture 600,000 Yasir Capital 600,000 1,092,000 1,092,000 Chuhan & Co. Ltd. took over the business assets other than cash and assumed the liabilities. In exchange, the company issued 45,000 shares of Rs.10 each at Rs.15 per share. The company also made an additional issue of 15,000 shares of Rs.10 each at Rs.15 per share to the public, which were subscribed and paid for. REQUIRED (i) Give the necessary entries in the General Journal of Chuhan & Company. (ii) Prepare initial balance sheet. www.a4accounting.net Page 136 Accounting for Company – Final Accounts Chapter # 5 Question # 11: Eastern Company Ltd. was incorporated with a capital of Rs.3,000,000 divided into 300,000 ordinary shares of Rs.10 each. The company took over the running business of Danish Brothers. The balance sheet items of the business of Danish Brothers as of the date of purchase were as under:Cash Rs. 30,000 Accounts receivable Rs. 84,000 Merchandise inventory Rs. 120,000 Office supplies Rs. 6,000 Machinery Rs. 300,000 Allowance for depreciation – Machine Rs. 180,000 Accounts payable Rs. 60,000 The company took over the business assets other than cash and assumed the liabilities. In exchange, the company issued 22,500 ordinary shares of Rs.10 each as fully paid-up. The company also made an additional issue of 45,000 shares of Rs.10 each at Rs.12 per share to the public. REQUIRED (a) Give entries in the General Journal of Eastern Company Ltd. (b) Prepare initial Balance Sheet of the company. Question # 12: Al-Mansoor Co. Limited made the following transactions. The par value of share is Rs.50 and of debenture Rs.100. (a) The company issued 30,000 shares at Rs.60 each for cash. (b) The company issued 15,000 shares at Rs.45 each for cash. (c) The company issued 7,500 shares for purchase of a piece of land with market value of Rs.450,000. (d) The company issued 3,000 shares at par to the promoters of the company. (e) The company issued 3,000, 10% debentures at Rs.100 each repayable after 5 years at Rs.110 each. (f) The company issued 2,000, 10% debentures at Rs.90 each repayable after 10 years at Rs.110 each. REQUIRED Give necessary entries in proper form to record the above transactions. Give explanation below each entry. Question # 13: Mehran Company Ltd. made the following transactions. The par value of the share is Rs.10/and of the debenture is Rs.100/-. (a) The company issued 10,000 shares at Rs.13/- each for cash. (b) The company issued 15,000 shares for purchase of building which had a market value of Rs.225,000/-. (c) The company issued 1,000 shares to the promoters of the company. (d) The company issues 1,500 10% debentures at Rs.100/- each repayable after 5 years at Rs.110/- each. (e) The company issued 4,000 10% debentures of Rs.90/- each repayable after 10 years at Rs.110/- each. REQUIRED Give necessary general journal entries to record the above transactions. Give explanation below each entry. Page 137 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Question # 14: Mehran Company Ltd. completed the following transactions: (a) Issued 25,000 shares of Rs.10 at premium of Rs.2 each for cash. (b) Purchased building worth Rs.900,000 and issued 91,500 shares of Rs,10 each. (c) Debentures of Rs.120,000 were settled by issue of sufficient number of shares of Rs.10 each. (d) Purchased four computers of Rs.90,000 each by issuing sufficient number of shares of Rs.10 each. The market price of each share is Rs.12. (e) The company issued 3,000 10% debentures of Rs.100 each at Rs.96 each payable at Rs.103 after 5 years. REQUIRED Prepare journal entries in the book of company to record the above transactions. Question # 15: Aamna Ltd. was registered with the authorized capital of Rs.12,000,000 divided into the shares of Rs.10 each. The company made the following transactions: (a) Offered 750,000 shares to public at par. The bank informed that Rs.6,750,000 were received. The directors made the final allotment. (b) Issued 15,000 shares for the purchase of equipments at Rs.13 each. (c) Issued 375,000 shares for the purchase of machinery costing Rs.3,375,000. (d) Paid Rs.140,000 for preliminary expenses. (e) Issued 3,000 8% debentures of Rs.100 each at Rs.95 for cash. (f) Issued 1,500 10% debentures of Rs.100 each at Rs.105 each. REQUIRED (a) Record the above transactions in General Journal. (b) What is the amount of company’s paid up capital? Question # 16: Zulfiqar Ltd. registered with a capital of Rs.3,000,000 which is divided into 300,000 ordinary shares @ Rs.10 each. During the year 2009 following transactions were completed. (1) Issued 18,000 ordinary shares in full settlement of bonds payable of Rs.195,000. (2) Issued 4,500 ordinary shares to the promoters for services rendered by them. (3) Issued 12,000 5% 5 years debentures of Rs.100 at Rs.98 each. (4) Purchased building for Rs.450,000 and issued ordinary shares which have a market value of Rs.12.50 each. REQUIRED Prepare entries in General Journal (Show computation). Question # 17: The following transactions were completed by Amjad Co. Ltd. (the par value of share is Rs.10/- each). (a) Company offered to public 150,000 ordinary shares at Rs.15. The company received application for 210,000 shares at Rs.15/- per share. Company allotted the shares offered and refunded the amount received in excess. (b) The company purchased machinery for Rs.390,000/- and in consideration issued to vendor, its own 33,000 ordinary shares of Rs.10/- each. (c) The company issued 24,000 debentures of Rs.100/- each, redeemable after five years at Rs.110/- each. All debentures were subscribed. (d) Paid for preliminary expenses Rs.75,000/-. REQUIRED Prepare entries in General Journal (Show computation). www.a4accounting.net Page 138 Accounting for Company – Final Accounts Chapter # 5 Question # 18: Umer Company Ltd. issued the following shares and debentures having par value of Rs.10/and Rs.100/- each. (a) The company received applications for 800,000 ordinary shares of Rs.10/- each. Allotment letters were issued for 600,000 shares and the excess subscription amount was refunded. (b) The promoters paid Rs.80,000 for printing of Memorandum of Association of the company. (c) A computer was acquired by issuing 8,000 ordinary shares of Rs.10/- each fully paid up. The market price per share was Rs.18/-. (d) Issued 12,000 14% 5 years debentures of Rs.100/- each at par redeemable after 5 years at Rs.105. REQUIRED Give entries in the General Journal of the company. Question # 19: Mind Corporation completed the following transaction for the month of January 1998. Jan. 1 Purchased land for Rs.500,000 and in consideration issued shares of Rs.10 each. The market price of the share was Rs.12.50. Jan. 5 Purchased machinery and issued 62,500 shares of Rs.10 each. The market price of share was Rs.12.00. Jan. 10 The Corporation allotted 100,000 shares of Rs.10 each to the promoters in consideration of services rendered. Jan. 20 The Corporation issued 45,000 share of Rs.10 each in full settlement of bonds payable Rs.500,000. Jan. 25 Issued 5,000 debentures of Rs.100 each redeemable after five years at Rs.105. Jan. 30 Issued 10,000 debentures of Rs.100 each at Rs.95 redeemable after five years. Jan. 31 Paid preliminary expenses Rs.50,000. REQUIRED Give dated entries in the General Journal with narration to record the above transactions. Question # 20: Nishat Co. Ltd. made the following issuance of shares and debentures: (a) The company issued 180,000 ordinary shares of Rs.10 each at Rs.12 per share to public; applications were received for 210,000 shares. 180,000 shares were allotted and the excess money was refunded. (b) Land was acquired by issuing 120,000 ordinary shares of Rs.10 each. The market price per share was Rs.15. (c) The promoters of the company were allotted 18,000 ordinary shares of Rs.10 each in consideration of their services rendered. (d) Mortgage payable of Rs.180,000 was settled by the issue of ordinary shares of Rs.10 each. The market value of the share was Rs.15. (e) Received Rs.285,000 against the issue of 3,000 10% debentures each redeemable at par after 5 years. REQUIRED Record the above transactions in the General Journal of the company. Page 139 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Question # 21: The following transactions were completed by Al-Murtuza Company Limited:(a) Issued 75,000 ordinary shares of Rs.10 each at Rs.12.50 per share to the public payable in full on application. The company received applications for 120,000 shares. The company allotted the shares offered and refunded the amount received in excess. (b) The company issued to the public 75,000 ordinary shares of Rs.10 each payable in full on application. The entire issue was guaranteed by the underwriters. The company received applications for 60,000 shares. As per agreement the underwriters subscribed the balance of the issuance. (c) The company purchased machinery at a price of Rs.675,000 and consideration issued to the vendors its own 64,500 ordinary shares of Rs.10 each. (d) The company issued 15,000 debenture bonds of Rs.100 each redeemable at Rs.105 per debenture after five years. All the debentures were subscribed. (e) The company issued 15,000 debenture bonds of Rs.10 each at Rs.95 per debenture. The debentures are redeemable at par after five years. All the debentures were subscribed. REQUIRED Give entries in the General Journal of the company to record the above transactions. Question # 22: The Pakistan State Oil Ltd. Issued 3,000,000 ordinary shares of Rs.10/- each at Rs.9/- per share to general public on November 1, 2001 to argument its cash reserves. The bankers Habib Bank Ltd. reported on 5th November 2001 that the public offering was undersubscribed by 600,000 ordinary shares. On November 20, the board of directors finalized the allotment of 2,400,000 shares to the public and the remaining 600,000 undersubscribed shares were allotted to the under-writers as per agreement. In addition to above, the PSO Ltd. made the following transactions:November 25. Acquired land and building Rs.3,150,000/- and issued 300,000 ordinary shares of Rs.10/- each at Rs.10.50/- per share to vendors in consideration of the assets taken over. December 28. The company issued 7,500, 8% debentures at Rs.100/- each repayable after 5 years at Rs.108 each. December 29. The company issued 10,500, 11% debentures at Rs.90/- each repayable after 10 years at Rs.111/- each. REQUIRED Record general journal entries in standard form. Question # 23: The following transactions were completed by Al-Mustafa Company Limited:(a) Offered 200,000 ordinary shares of Rs.10 each at Rs.12 per share to the public in full on application. The company received applications for 240,000 shares. The company allotted the shares offered and refunded excess amount received. (b) The company offered to the public 80,000 ordinary shares of Rs.10 each payable in full on application. The entire issue was under-written. The company received applications for 60,000 shares. These shares were allotted to the public and as per agreement under-writers subscribed the balance of the issue. (c) The company purchased a piece of land and in consideration issued 90,000 ordinary shares of Rs.10 each to the vendors. The value of land was determined to be Rs.1,000,000. (d) The company allotted 20,000 ordinary shares to promoters for services rendered. www.a4accounting.net Page 140 Accounting for Company – Final Accounts Chapter # 5 (e) The company issued 40,000 mortgage debentures of Rs.100 each, redeemable @ Rs.105 each after five years. All the debentures were duly subscribed. (f) The company issued 20,000 ordinary debentures of Rs.100 each at Rs.90 per debenture. The debentures are redeemable @ Rs.105 each after 10 years. All the debentures were duly subscribed. REQUIRED Give entries in the General Journal of the company to record the above transactions. Question # 24: Dewan Company Ltd. was incorporated on January 3, 1996, with an authorized capital of Rs.7,500,000 divided into 750,000 ordinary shares of Rs.10 each. The following information is available to you:Date: 10-1-96: The formation expense of Rs.75,000 were paid by the promoters. 15-1-96: The following shares were issued and fully subscribed at par: 45,000 shares to (NIT) 30,000 shares to the company employees 75,000 shares to the general public 16-1-96: The Company entered into an agreement with M/s. Zulfi Industries to take over its assets and liabilities on the following values: Equipment Rs.225,000; Building Rs.330,000; Furniture and fixture Rs.60,000; Accounts payable Rs.15,000. In exchange 45,000 ordinary shares of Rs.10 each were issued and fully subscribed. 31-12-96: The Company paid cash Rs.161,583 in exchange of 5 years, 12% bonds liability worth Rs.150,000. 31-12-96: Under writer’s commission of Rs.21,750 is outstanding against the company. REQUIRED (a) Prepare dated general entries from the above transactions in the book of Dewan Company Ltd. (b) Prepare a balance sheet of M/s. Dewan Company Ltd. as on December 31, 1995. Question # 25: The retained earnings account on Jawedan Company showed a credit balance of Rs.495,000 on March 31, 2001. The expense and revenue summary for the year ending on that date showed a net income of Rs.435,000 which is transferred to retained earnings account. The company decided on March 31, 2001 as under: (a) To declare a cash dividend of Rs.150,000. (b) To appropriate Rs.60,000 for reserve for sinking fund. (c) To appropriate Rs.45,000 for reserve for contingencies. (d) To establish reserve for building extension for Rs.90,000. REQUIRED Give entries in General Journal to give effect to the above decisions. Page 141 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Question # 26: The following balances appeared in the ledger of Shahid and Co. Ltd. on December 31, 1989:75,000 7% preference shares of Rs.20 each Rs.1,500,000 150,000 ordinary shares of Rs.10 each Rs.1,500,000 Retained earnings un-appropriated Rs.750,000 At this date the company decided as under:(a) To declare cash dividend at 15% on ordinary shares. (b) To declare normal dividend on preference shares for which ordinary shares at par were issued. (c) To appropriate Rs.60,000 for contingencies. (d) To appropriate Rs.90,000 for debenture redemption. (e) To appropriate Rs.45,000 for plant expansion. The company was informed by its bankers that cash dividend was collected on 96,000 ordinary shares and stock dividend was collected on 66,000 preference shares by December 31, 1989. REQUIRED (a) Give entries in General Journal in proper form on the books of Shahid and Co. Ltd. to give effect to the above decision. (b) Prepare a partial Balance Sheet of the above company as of December 31, 1989 after giving effect to the above decisions. Question # 27: The data were extracted from the balance sheet of Al-Mehran Company Limited on December 31, 1990:Authorized Capital: 600,000 ordinary shares of Rs.10 each Rs.6,000,000 Issued and Paid-up Capital: 300,000 ordinary shares of Rs.10 each Rs.3,000,000 Retained earnings Rs.450,000 On December 31, 1991, the income summary of the company sowed net income of Rs.900,000. At this date the company decided as under:(a) To declare cash dividend of 15%. (b) To appropriate Rs.300,000 for plant expansion. (c) To appropriate Rs.150,000 for contingencies. (d) To appropriate Rs.150,000 for debenture redemption. REQUIRED (a) Give the entry in the General Journal of the company to transfer the net income to retained earnings account. (b) Give entries in the General Journal to give effect to the above decision of the company. (c) Prepare partial balance sheet of the company as of December 31, 1991. www.a4accounting.net Page 142 Accounting for Company – Final Accounts Chapter # 5 Question # 28: Shuja & Co. Ltd. issued ordinary shares (Rs.10/- par) during 1992, as noted below:(a) 40,000 shares of Rs.14/- each for cash. (b) 16,000 shares of Rs.9/- each for cash. (c) 20,000 shares for the purchase of machine (market price of share being Rs.13/each). (d) 16,000 shares at par to the promoters, for services rendered. (e) 12,000 shares for purchase of equipment having list price of Rs.128,000. (f) 24,000 shares at par as stock dividend. REQUIRED Give entries in General Journal of the company to record the above transactions. (Show computations, where necessary). Question # 29: Mehran & Co. Ltd. completed the following transactions during the accounting year 1994. (The par value of shares is Rs.10/- each). (a) Offered 450,000 shares to the public for cash, but received applications along with cash for 600,000 shares. The company allotted the shares offered and refunded the excess money. (b) Acquired equipment at a fair market value of Rs.1,000,000 and issued 80,000 shares of Rs.10 each at Rs.12.50 per share to the vendors. (c) Acquired land at a cost of Rs.1,000,000 and issued 110,000 shares of Rs.10/- each to the vendors. (d) Decided to capitalize Rs.500,000 against retained earnings having a balance of Rs.1,500,000 and issued 40,000 shares of Rs.10/- each. REQUIRED (a) Give entries in the General Journal of the company to record the above transactions. (b) Prepare partial balance sheet of the company. Question # 30: The following are the selected balances of Star Company Ltd.:Reserve for income tax Rs. 54,000 Retained earnings Rs. 630,000 Reserve for plant extension Rs. 67,500 Reserve for legal charges Rs. 90,000 REQUIRED With reference to the above data record the following in the General Journal:(a) Reserve for contingencies is created with Rs.90,000. (b) Income tax liability is paid. (c) Reserve for plant extension is disposed of completely. (d) Reserve for legal charges is raised by Rs.45,000. (e) Reserve for depreciation on machine is created with Rs.31,500. Page 143 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Question # 31: Zafar & Company Limited made the following issuance. The par value of the company’s share is Rs.10:(a) Issued 52,500 shares at par for cash. (b) Issued 63,000 shares at Rs.12 each for cash. (c) Issued 31,500 shares at Rs.9 each for cash. (d) Issued 42,000 shares for the purchase of furniture worth Rs.455,000. (e) Issued 38,500 shares for the purchase of equipment worth Rs.350,000. (f) Issued 10,500 shares at par value to the promoters of the company for services rendered by them (g) Issued 24,500 shares at par in payment of stock dividend. REQUIRED Record the above transactions in the General Journal of the company. Question # 32: The shareholders equity of Habeeb Limited on January 1, 2004, appears as follows: Ordinary share capital: 90,000 shares of Rs.10 par value Rs.900,000 Ordinary shares premium Rs.450,000 Unappropriated retained earnings Rs.876,000 During the year 2004, the following transactions occurred: July 16: The board of directors of the company appropriated Rs.240,000 of retained earnings for the plant expansion. Dec. 12: Declared a stock dividend of Rs.1.50 per share. Dec. 31: Closed the net income of Rs.300,000 from income summary account to retained earnings. REQUIRED (a) Prepare journal entries to record the above transactions. (b) Prepare retained earnings statement for the year 2004. (c) The stock dividend was issued on January 10, 2005. The market value of ordinary shares is Rs.15 per share. Make necessary journal entries. Question # 33: Consider the following cases separately wherein the par value of shares and debentures are Rs.10 and Rs.100 respectively. Cases: (a) Issued 25,000 shares at Rs.12 per share for cash. (b) Issued 17,500 shares to the promoters at par. (c) Issued 12,500 8% debentures at Rs.90 each repayable after 10 years at Rs.110 each. (d) Declares sock dividend Rs.100,000. (e) Purchased equipment and issued 8,750 shares of Rs.10 each. The market value of the shares is Rs.15. (f) Purchases furniture for Rs.112,500 and issued 10,000 shares of Rs.10 each. (g) Issued 8,000 shares against stock dividend. The market price is Rs.12.50 per shares. REQUIRED Give entries in General Journal (standard form) to record the above transactions with brief narrations. www.a4accounting.net Page 144 Accounting for Company – Final Accounts Chapter # 5 Question # 34: The income statement of Sana Mariam Ltd. for the year ended 31st March, 2008, showed the net income of Rs.2,750,000. The board of directors decided: (i) To declare Rs.550,000 cash dividend and Rs.825,000 stock dividend. (Number of issued shares 82,500 of Rs.10 each against the stock dividend). (ii) To appropriate reserve for contingencies Rs.550,000 and plant extension Rs.1,650,000. REQUIRED (a) Pass journal entry for the transfer of net income to retained earnings having credit balance of Rs.2,200,000. (b) Journalize the directors’ decision No. 1 and 2 above. (c) Prepare the statement of retained earnings on 31.3.2008. Question # 35: Consider the following cases of Shehzad Shoukat & Co. separately wherein the par values of shares and debentures are Rs.10 and Rs.100 respectively. (a) Offered 30,000 shares to the public at par. Applications were received for 36,000 shares. The directors made the final allotment and instructed the bank to refund the excess money. (b) Issued 3,000, 17% debentures at Rs.95 repayable after 5 years at Rs.105. (c) Purchased an open plot for office building for Rs.2,475,000 and issued a sufficient number of shares at Rs.15 each. (d) Decided to capitalize Rs.600,000 against retained earnings and then issued shares at premium of Rs.6. (e) Issued 9,500 shares at par for the purchase of three computers @ Rs.30,000 each. REQUIRED Give General Journal entries to record the above transactions. Question # 36: The following balances appearing in the books of Anum Company Ltd. on December 31, 2009: Authorized Capital: 750,000 ordinary shares @ Rs.10 each Rs.7,500,000 Issued and Paid-up Capital: 675,000 ordinary shares @ Rs.10 each Rs.6,750,000 Retained earnings Rs.382,500 On December 31, 2009 the income summary of the company showed a credit balance of Rs.975,000. At this date the company decided as under: (1) To declare cash dividend of Rs.0.50 per ordinary share and 10% stock dividend. (2) To appropriate Rs.60,000 for contingencies. REQUIRED (a) Give the entry in the General Journal of the company to transfer the net income to retained earnings account. (b) Give entries in the General Journal to give the effect to the above decisions of the company. Page 145 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Question # 37: The following balances appeared in the ledger of Aqeel Company Ltd. on December 31st, 2010: 1,000,000 Ordinary shares of Rs.10/- each Rs.10,000,000/Retained earnings un-appropriated Rs.2,800,000/On this date, the company decided as under: (a) To declare cash dividend at 15% on ordinary shares. (b) To declare stock dividend at 10% on ordinary shares. (c) To appropriate Rs.140,000/- for contingencies. (d) The company was informed by its banker that cash dividend was collected by 800,000 ordinary shareholders on December 31st, 2010. REQUIRED Give entries in General Journal in proper form on the books of Aqeel Company Ltd. to give effect to the above decisions. Question # 38: Few transactions were posted in Retained Earnings account of Man & Co. Retained Earnings Dec. 31, 2010 Rs. Jan. 1. 2010 Balance ii) Cash dividend 1,200,000 i) Expense & revenue summary iii) Reserve for building 480,000 expansion iv) Reserve for sinking fund 180,000 v) Reserve for contingencies 240,000 Balance (Cr.) 3,600,000 5,700,000 REQUIRED Prepare journal entries from above ledger. Rs.4,500,000 1,200,000 5,700,000 Question # 39: The expense and income summary of Sarfaraz Co. Ltd. for the year ended on 31st December, 1996 showed a credit balance of Rs.2,820,000 which is transferred to the retained earnings account. The directors decided:(1) To pay a cash dividend of 15% (on 150,000 shares of Rs.50/= each). (2) Rs.150,000 to be transferred to general reserve. (3) To appropriate Rs.375,000 and Rs.255,000 for plant expansion and building extension respectively. REQUIRED Pass journal entries for the above appropriation as well as net income’s transfer to retained earnings. www.a4accounting.net Page 146 Accounting for Company – Final Accounts Chapter # 5 Question # 40: (1) 67,500 shares of Rs.10 each were issued and subscribed at Rs.9 per share. (2) The company allotted shares of Rs.10 each in consideration of stock dividend payable Rs.117,000. The market value of the share was Rs.13. (3) Directors of the company allotted shares to the promoters in consideration of their services values Rs.67,500, the market value of shares Rs.15. (4) Issued 60,000 shares of Rs.10 each for the purchase of a machine costing Rs.540,000. (5) Declared cash dividend Rs.225,000. (6) The bank reported the amount of dividend paid Rs.195,000 and unclaimed dividend Rs.30,000. REQUIRED Give entries to record the above transactions giving necessary explanation. Question # 41: Karim Company Ltd. completed the following transactions: (1) The company issued 105,000 shares of Rs.10 each at Rs.12 but received applications for 120,000 shares. The company finalized the allotment and refunded the excess amount. (2) The company purchased a running business and acquired the following assets and liabilities: Merchandise inventory Rs.22,500; Office equipment Rs.75,000; Machinery Rs.60,000; Accounts payable Rs.7,500. Purchase consideration of the above business was paid by issue of 13,500 shares of Rs.10 each fully paid-up. (3) Purchased a machine worth Rs.300,000 and in consideration issued shares of Rs.10 each. Each share had a market value of Rs.12.50. (4) Purchased office equipment and in consideration issued 15,000 shares of Rs.10 each. The market value of the share was Rs.13. (5) Issued 3,000 10% debentures of Rs.100 each at Rs.95 redeemable after five years at Rs.105. (6) The company declared stock dividend Rs.75,000 and issued 6,750 shares of Rs.10 each. REQUIRED Give journal entries in proper form of the above transactions on the books of Karim Co. Ltd. Question # 42: The following transactions relate to Bhutto Limited. (a) Received applications for 150,000 ordinary shares of Rs.10 each. Issued allotment letters for 120,000 shares and refunded the excess application money. (b) Issued 9,000 ordinary shares of Rs.10 each at a market price of Rs.12 per share for acquiring land. (c) Issued ordinary shares of Rs.10 each at a premium of Rs.2 per share, in settlement of bonds payable Rs.90,000. (d) Declared cash dividend of Rs.45,000 and stock dividend of Rs.75,000. (e) Appropriate Rs.225,000 for contingencies. (f) Issued ordinary shares of Rs.10 each in payment of stock dividend of Rs.75,000. (g) Issued dividend warrants in payment of cash dividend of Rs.45,000. (h) Unclaimed dividend of Rs.7,500 as per bank statement. REQUIRED Give general journal entries for the above transactions. Page 147 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Question # 43: Al-Azam Ltd. entered into the following transactions: (1) Issued 75,000 ordinary shares of Rs.10 par at Rs.12 each for cash. (2) Issued 15,000 ordinary shares of Rs.10 in acquisition of machinery costing Rs.180,000. (3) Declared cash dividend Rs.225,000 and stock dividend Rs.300,000. Retained earnings account is having sufficient balance. (4) Bank reported that the cash dividend in the amount of Rs.45,000 was unclaimed. (5) Issued 26,250 ordinary shares of Rs.10 in settlement of stock dividend. (6) Issued to directors 22,500 shares of Rs.10 each in recognition of their services rendered to the company. (7) Issued 1,500 debentures of Rs.100 each at Rs.110 payable after 5 years at Rs.120. REQUIRED Give the necessary journal entries to record the above transactions in proper form. Question # 44: The shares issue transactions of Safeer Co. Ltd. for the year ended on 30th Sept. 2003. (a) The company issued for cash 600,000 shares of Rs.10 each at Rs.13 each. (b) The promoters were allotted 15,000 shares of Rs.10 each for services. (c) The company bought equipment costing Rs.150,000. Rs.10 shares were issued in exchange. The market value per share was Rs.12.50. (d) For land purchased worth Rs.1,125,000, 120,000 shares of Rs.10 each were issued. (e) Declared dividend 25% on the shares issued above. (f) Paid the dividend through bank. REQUIRED (i) Journalize the above transactions. (ii) Prepare initial balance sheet of the company. Question # 45: The following transactions related to Salman Co. Ltd.: 1. The company offered 75,000 shares of Rs.10 each at Rs.15. The company received application for 97,500 shares. The company finalized the allotment and the excess money was refunded. 2. The company declared stock dividend of Rs.150,000. The company issued 13,500 shares of Rs.10 each in settlement of stock dividend. 3. The company purchased land worth Rs.750,000 and issued 67,500 shares of Rs.10 each to vendor. 4. The company purchased machine and in consideration thereof issued 24,000 shares of Rs.10 each. The market price of the share was Rs.12.50. 5. The company issued 3,000 debentures of Rs.100 each at par, repayable after five years at 5% redemption premium. 6. The company issued 4,000 debentures of Rs.100 each at Rs.95 repayable after five years at Rs.105. REQUIRED Record the above transactions in the General Journal of the company. www.a4accounting.net Page 148 Accounting for Company – Final Accounts Chapter # 5 Question # 46: The following transactions relate to Khan & Co. Ltd. (a) The company received application for 300,000 ordinary shares of Rs.10 each. Allotment letters were issued for 225,000 shares and the excess subscription amount was refunded. (b) The promoters paid Rs.30,000 for printing of Memorandum of Association of the company. (c) A computer was acquired by issuing 6,000 ordinary shares of Rs.10 each fully paid up. The market price per share was Rs.18. (d) Declared a cash dividend of Rs.300,000 and stock dividend of Rs.450,000. (e) Created reserve for debenture redemption in the amount of Rs.22,500. (f) Issued 7,500 debentures of Rs.100 each at Rs.90 redeemable after 7 years. (g) The bank reported that the amount of dividend paid was Rs.225,000 and the unclaimed dividend was Rs.75,000. (h) The company issued 4,500 12% 5 years debentures of Rs.100 at par redeemable after 5 years at Rs.105. REQUIRED Give journal entries for the above transactions. Question # 47: Siddique Company Ltd. is registered with an authorized capital of Rs.2,000,000 divided into 200,000 ordinary shares of Rs.10 each. The company issued its shares as under: (a) The company offered to the public 100,000 shares at par. Applications for 80,000 shares were received. As per agreement the underwriters subscribed for the balance of their shares. The directors finalized the allotment of 80,000 shares to the public and 20,000 shares to the underwriters. The company paid 2% underwriting commission on shares subscribed to them. (b) The company purchased a machine costing Rs.144,000 and issued sufficient shares. The shares had a market value of Rs.8/= each. (c) The company allotted necessary shares in consideration of stock dividend Rs.100,000. The shares had a market value of Rs.12.50. (d) The company issued 2,000 shares in exchange for services rendered to the company. The stock holders agreed that these services were worth Rs.30,000. REQUIRED Record the above transactions in the General Journal of the company. Question # 48: The shareholders’ equity section of balance sheet of Wasim Ltd. as on June 30, 2000 was as under:Authorized capital (1,000,000 shares of Rs.10 par) Rs. 10,000,000 Paid up capital 360,000 shares of Rs.10 par Rs. 3,600,000 Premium on shares Rs. 720,000 Retained earnings Rs. 2,080,000 Reserve for building extension Rs. 600,000 During the quarter ended September 30, the company performed the following transactions in addition to normal business: (a) The company received application along with application money for 320,000 shares in response to the issue of 400,000 shares of Rs.10 par at Rs.15/= to the public. The board of directors finalized the allotment by allotting 320,000 shares to the public and 80,000 shares to the underwriters. Page 149 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 (b) Closed the reserve for building extension account as the purpose is over. (c) A computer costing Rs.360,000 was acquired by allotting 28,000 shares of Rs.10/= par. (d) Purchased a fax machine for Rs.30,000 by allotting shares at the price of Rs.12.50 per share as quoted at the stock exchange. (e) Issued 20,000 – 10% 5 year bonds of Rs.100 par for cash to be redeemed at Rs.110 at maturity. (f) Created a reserve for redemption of bonds by Rs.160,000. (g) Declared interim stock dividend of Rs.600,000 and cash dividend of Rs.800,000. (h) Allotted shares of Rs.10 par at a premium of Rs.5 per share in settlement of the stock dividend. REQUIRED (i) Record the above transactions in General Journal. (ii) Prepare a partial Balance Sheet reporting the above facts. Question # 49: Selected data as of December 31, 1992 relating to Moon Ltd. follow:Share capital (ordinary shares of Rs.10/- each par value) General reserves 10% Debentures payable Accounts payable Retained earnings Machinery Advances to suppliers Accounts receivable Cash at bank Merchandise inventory REQUIRED Prepare classified balance sheet as of December 31, 1992. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. 750,000 375,000 150,000 75,000 150,000 750,000 240,000 135,000 75,000 300,000 Question # 50: The following is the adjusted trial balance of National Co. Ltd. as on December 31, 1990: Debit Balance (in Rs.) Credit Balance (in Rs.) Cash 225,000 Allowance for bad debts 30,000 Accounts receivable 1,200,000 Allowance for depreciation 90,000 Merchandise inventory 1,050,000 Accounts payable 75,000 Furniture 900,000 Ordinary debenture 300,000 Preliminary expenses 300,000 Share capital 1,500,000 Cost of goods sold 1,800,000 Retained earnings 795,000 Salaries expense 180,000 General reserve 150,000 Auditor’s fee expense 150,000 Sales revenue 3,000,000 Rent expense 75,000 Depreciation expense 45,000 Bad debts expense 15,000 5,940,000 5,940,000 REQUIRED (a) Income Statement for the year ended December 31, 1990. (b) Balance Sheet as of December 31, 1990. www.a4accounting.net Page 150 Accounting for Company – Final Accounts Chapter # 5 Question # 51: Raja Ltd. has an authorized capital of Rs.600,000 divided into 60,000 ordinary shares of Rs.10 each of which 45,000 shares were issued and fully paid up. The pre-closing trial balance prepared on June 30, 1993 showed as follows:Debit Balances (in Rs.) Credit Balances (in Rs.) Cash on hand 9,000 A/c payable 166,500 Cash in bank 31,500 All. for depreciation – Machine 36,000 A/c receivable 99,000 Allowance for bad debts 6,750 Merchandise inventory 101,250 Paid-up capital 450,000 Purchases 391,500 Sales revenue 600,000 Machine – cost 622,500 Retained earnings 38,250 Insurance expense 4,500 Salary expense 18,000 Director’s fee 15,750 Auditor’s fee 4,500 1,297,500 1,297,500 Supplementary data for adjustment on June 30, 1993:(a) Depreciation expense on machine is estimated for the year at Rs.9,000. (b) The allowance for bad debts is to be increased by Rs.1,125. (c) Appropriate Rs.27,000 for contingencies. (d) Merchandise inventory valued on June 30, 1993 was Rs.157,500. REQUIRED (a) Prepare Income Statement for the year ended June 30, 1993 and also Statement of Retained Earnings. (b) Prepare balance Sheet as of June 30, 1993 in classified form. Question # 52: Following is the pre-closing trial balance of Al-Rauf Co. Ltd.as on December 31, 1997: Debit Balances: Cash Rs.52,500; Note receivable Rs.45,000; Accounts receivable Rs.82,500; Merchandise inventory (January 1, 1997) Rs.90,000; Office supplies Rs.22,500; Furniture Rs.75,750; Purchases Rs.525,000; Salaries expense Rs.127,500; Rent expense Rs.37,500; Interest expense Rs.3,000 (Total Rs.1,061,250). Credit Balances: Allowance for depreciation (Furniture) Rs.12,000; Notes payable Rs.45,000; Accounts payable Rs.34,500; Share capital Rs.150,000; Retained earnings Rs.52,500; Sales Rs.765,000; Interest income Rs.2,250. (Total Rs.1,061,250). Supplementary Data for Adjustment (a) Merchandise inventory (Dec. 31, 1997) Rs.157,500. (b) Depreciation on furniture for the year Rs.3,750. (c) Accrued salary Rs.4,950. (d) Rent prepaid Rs.15,000. (e) Accrued interest receivable Rs.525. REQUIRED Taking into account the data for adjustments, prepare (a) Income Statement and (b) Balance Sheet in classified form for the year ended December 31, 1997. Page 151 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Question # 53: Mardan Company Ltd. was registered with an authorized capital of Rs.3,000,000 divided into 150,000 ordinary shares of Rs.10 each and 1,500 9% preference shares of Rs.100 each. The following balances of accounts were extracted from the books of the Co. on Dec. 31, 95:Debit Balances:Cash on hand Rs.150,000; Cash at bank Rs.450,000; Merchandise inventory (1.1.1995) Rs.30,000; Prepaid insurance Rs.9,000; Accounts receivable Rs.112,500; Machine – cost Rs.450,000; Purchases Rs.375,000; Transportation on purchases Rs.18,000; Salaries expense Rs.30,000; Advertising expense Rs.15,000; Auditor’s fee expense Rs.7,500; Director’s fee expense Rs.3,000. (Total Rs.1,650,000). Credit Balances:Accounts payable Rs.72,000; Allowance for depreciation Machine Rs.75,000; Allowance for bad debts Rs,3,000; Mortgage notes payable Rs.105,000; Sales revenue Rs.480,000; Retained earnings Rs.15,000; Share capital - paid-up preference shares Rs.712,500; ordinary shares Rs.187,500. (Total Rs.1,650,000). Supplementary data for adjustments on December 31, 1995: (a) Merchandise inventory was valued on December 31, 1995 at Rs.48,000. (b) Insurance expired Rs.6,000. (c) Accrued salaries Rs.7,500. (d) Allowance for depreciation on machinery for the year was estimated at Rs.7,500. (e) Allowance for bad debts to be increased by Rs.1,500. (f) The company decided to appropriate Rs.7,500 for reserve for contingencies and to appropriate Rs.12,000 for reserve for plant expansion. REQUIRED (a) Prepare INCOME STATEMENT for the year ended December 31, 1995 in classified report form and also STATEMENT OF RETAINED EARNINGS on the same date. (b) Prepare BALANCE SHEET as of December 31, 1995 in classified form. Question # 54: Pak and Company Limited is registered with an authorized capital of Rs.6,000,000 divided into ordinary shares of Rs.10 each. The company’s book showed the following balances on December 31, 1998, the end of the accounting year before the closing process:Debit Balances:Cash in bank Rs.32,000; Accounts receivable Rs.104,000; Merchandise inventory (1.1.1998) Rs.20,800; Machinery cost Rs.2,240,000; Purchases Rs.720,000; Transportation – in Rs.72,000; Salaries expense Rs.88,000; Rent expense Rs.69,600; Auditor’s fee expense Rs.8,000; Director’s fee expense Rs.10,000 (Total Rs.3,364,400). Credit Balances:Accounts payable Rs.92,000; Allowance for depreciation machinery Rs.272,000; Allowance for bad debts Rs.8,000; 10% Bonds payable Rs.557,600; Paid-up capital Rs.1,520,000; Sales revenue Rs.720,000; Retained earnings Rs.194,800 (Total Rs.3,364,400). Data for adjustment on December 31, 1998: (a) Rent payable Rs.2,400. (b) Merchandise inventory was valued on December 31, 1998 at Rs.340,000. (c) Provide allowance for depreciation on machinery for the year Rs.60,000. (d) Raise the allowance for bad debts to Rs.10,000. (e) Appropriate Rs.32,000 for plant extension and Rs.72,000 for contingencies. REQUIRED (a) Prepare Income Statement for the year ended December 31, 1998 and also a Statement of Retained Earnings. (b) Prepare Balance Sheet as of December 31, 1998 in classified form. www.a4accounting.net Page 152 Accounting for Company – Final Accounts Chapter # 5 Question # 55: Al-Rehman Company Limited had a registered capital of Rs.3,000,000 divided into 300,000 ordinary shares of Rs.10 each. The following balances were extracted from the books of the company on December 31, 1996. Debit Balances Cash in bank Rs. 30,000 Accounts receivable Rs. 82,500 Merchandise inventory Rs. 16,875 Machinery – Cost Rs. 1,875,000 Purchases Rs. 562,500 Transportation – in Rs. 67,500 Salaries expense Rs. 56,250 Rent expense Rs. 61,500 Auditors fee expense Rs. 11,250 Total Rs. 2,763,375 Credit Balances Accounts payable Rs. 67,500 Allowance for depreciation – Machinery Rs. 225,000 Allowance for bad debts Rs. 6,750 Sales revenue Rs. 562,500 Mortgage payable Rs. 450,000 Paid-up capital Rs. 1,125,000 Retained earnings Rs. 326,625 Total Rs. 2,763,375 Data for adjustments on December 31, 1996: (a) Provide depreciation on machinery for the year Rs.75,000. (b) Prepaid salaries Rs.1,125. (c) Salaries payable Rs.750, (d) Merchandise inventory on December 31, 1996 Rs.270,000. (e) Appropriate Rs.30,000 for building extension and Rs.67,500 for contingencies. REQUIRED (a) Prepare Income Statement for the year ended December 31, 1996. (b) Prepare Statement of Retained Earnings for the year ended December 31, 1996. (c) Prepare Balance Sheet as of December 31, 1996. Question # 56: Wahid Company Limited is registered with a capital of Rs.3,000,000 divided into ordinary shares of Rs.20/= each. The company’s book showed the following balances on December 31, 1999:Debit Balances:Cash in bank Rs.12,000; Accounts receivable Rs.39,000; Merchandise inventory (1.1.99) Rs.7,800; Prepaid rent Rs.600; Machinery – cost Rs.840,000; Purchases Rs.270,000; Transportation – in Rs.27,000; Salaries expense Rs.33,000; Rent expense Rs.25,500; Auditors fee expense Rs.6,750 (Total Rs.1,261,650). Credit Balances:Accounts payable Rs.42,000; Allowance for depreciation – Machinery Rs.102,000; Allowance for bad debts Rs.3,000; Accrued rent Rs.1,500; Mortgage notes payable Rs.200,100; Paid-up capital Rs.570,000; Sales revenue Rs.270,000; Retained earnings Rs.73,050 (Total Rs.1,261,650). Page 153 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Data for adjustment on December 31, 1999: (a) Prepaid rent Rs.150. (b) Rent payable Rs.150. (c) Merchandise inventory was valued on December 31, 1999 Rs.132,000. (d) Depreciation expense for the year Rs.24,000. (e) Allowance for bad debts Rs.3,750. (f) Appropriate Rs.12,000 for plant extension and Rs.27,000 for contingencies. REQUIRED (a) Prepare Income Statement for the year ended December 31, 1999 and also Statement of Retained Earnings. (b) Prepare Balance Sheet as of December 31, 1999. Question # 57: Zeeshan Company Limited is registered with an authorized capital of Rs.1,500,000 divided into ordinary shares of Rs.100 each. The pre-closing trial balance of the company on December 31, 2000 is as follows: Debit Balances: Machinery Rs.300,000; Building Rs.450,000; Office equipment Rs.90,000; Cash at bank Rs.120,000; Accounts receivable Rs.135,000; Merchandise inventory (1.1.2000) Rs.127,500; Purchases Rs.157,500; Salaries expense Rs.37,500; Transportation in Rs.7,500; Rent expense Rs.66,000; Insurance expense Rs.37,500; Advertising expense Rs.22,500; Directors fee Rs.22,500; Auditors’ fee Rs.22,500; Sales returns Rs.22,500 (Total Rs.1,618,500). Credit Balances: Accounts payable Rs.36,000; Purchase returns Rs.15,000; Accumulated depreciation on machinery Rs.37,500; Accumulated depreciation on building Rs.45,000; Accumulated depreciation on office equipment Rs.15,000; Allowance for bad debts Rs.7,500; Sales Rs.547,500; Share capital Rs.900,000; Retained earnings Rs.15,000 (Total Rs.1,618,500). Data for Adjustments: (a) Merchandise inventory (31.12.2000) Rs.142,500. (b) Accrued salaries Rs.3,750. (c) Unpaid rent Rs,9,000. (d) Un-expired insurance Rs.7,500. (e) Allowance for depreciation on machinery Rs.30,000; building Rs.22,500; office equipment Rs.7,500. (f) Allowance for bad debts increased by Rs.2,250. REQUIRED (i) Prepare classified income statement for the year ended on December 31, 2000. (ii) Prepare classified balance sheet as on December 31, 2000. Question # 58: Pak. Company Ltd. was registered with an authorized capital of Rs.7,500,000 divided into 750,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on June 30, 2002: Title of Accounts Debit (in Rs.) Credit (in Rs.) Cash in bank 94,500 Accounts receivable 150,000 Allowance for bad debts 4,500 Office supplies 18,000 Merchandise inventory 1.7.01 225,000 Prepaid insurance 12,000 Machinery – cost 1,800,000 www.a4accounting.net Page 154 Accounting for Company – Final Accounts Chapter # 5 Allowance for depreciation – Machinery Preliminary expenses Accounts payable 10% Bonds payable Paid up capital Retained earnings Sales revenue Interest revenue Sales return & allowance Purchases Transportation – in Purchases returns & allowances Salaries expenses Rent expenses Income tax expenses Advertising expenses 180,000 9,000 30,000 600,000 60,000 75,000 54,000 15,000 7,500 3,150,000 45,000 300,000 1,200,000 315,000 1,050,000 10,500 45,000 3,150,000 Data for Adjustments on June 30, 2002: (a) Rent expenses for the year amounted to Rs.45,000. (b) Merchandise inventory was valued on June 30, 2002 at Rs.240,000. (c) Provide allowances for depreciation on machinery for the year Rs.120,000. (d) Allowance for bad debts Rs.7,500 for the year. (e) Appropriate Rs.75,000 for plant extension and Rs.60,000 for contingencies. (f) Declared cash dividend @ 10% on capital. REQUIRED (a) Prepare a classified income statement for the year ended June 30, 2002 and also a statement of retained earnings. (b) Prepare a balance sheet as of June 30, 2002 in classified form. Question # 59: Mehran Company was registered with an authorized capital of Rs.9,000,000 divided into 900,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on December 31, 2002, the end of the accounting year before the closing process: Debit Balance: Cash Rs.60,000; Accounts receivable Rs.97,500; Merchandise inventory (1.1.2002) Rs.37,500; Machinery – cost Rs.2,250,000; Purchase Rs.720,000; Transportation in Rs.30,000; Salaries expense Rs.87,000; Unexpired insurance Rs.12,000; Rent expense Rs.72,000; Auditor’s fee expense Rs.30,000; Director’s fee expense Rs.27,000. Credit Balance: Accounts payable Rs.67,500; Accumulated depreciation – Machinery Rs.210,000; Allowance for bad debts Rs.12,000; 10% Bonds payable Rs.420,000; Paid up capital Rs.1,500,000; Sales revenue Rs.1,125,000; Retained earnings Rs.88,500. Data for Adjustments on December 31, 2002: (a) Merchandise inventory at December 31, 2002 was valued at Rs.270,000. (b) Allowance for bad debts to be increased by Rs.3,000. (c) Insurance expired Rs.4,500. (d) Machinery is depreciated by 20% Diminishing Balance Method. (e) Salaries prepaid Rs.12,000. (f) Rent payable Rs.18,000. (g) Provide Rs.30,000 for income tax. Page 155 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 (h) Appropriate Rs.15,000 for contingencies. REQUIRED (a) Prepare Income Statement for the year ended December 31, 2002 and statement of retained earnings on the same date. (b) Prepare balance sheet as of December 31, 2002 in classified form. Question # 60: Urooj Ltd. was registered with an authorized capital of Rs.6,300,000 divided into Rs.10 shares. The company’s books showed the following balances as on 30th June 2004. Debit Balance: (in Rs.) Plant assets: 6,750,000; Cash: 180,000; Accounts receivable: 292,500; Merchandise inventory (1st July, 2003): 112,500; Sales return: 12,600; Purchases: 2,241,000; Transportation in: 36,000; Salaries expenses: 261,000; Prepaid advertising: 36,000; Director’s fee: 387,000 (Total Rs.10,308,600). Credit Balance: (in Rs.) Sales revenue: 3,375,000; Commission income: 36,000; Accumulated depreciation: 630,000; Retained earnings: 661,500; Paid up capital: 4,500,000; 10% debentures payable: 900,000; Accounts payable: 202,500; Purchases return: 3,600 (Total Rs.10,308,600). Data for Adjustment on 30th June, 2004: (a) Merchandise inventory valued Rs.81,000. (b) Advertising expired Rs.27,000. (c) Director’s fee payable Rs.54,000. (d) Prepaid salaries Rs.45,000. (e) Provide depreciation on plant assets at 5%. (f) Commission earned but not received Rs.9,000. (g) The board of directors decided: 1. To declare cash dividend 5% on paid up capital. 2. To appropriate for plant expansion Rs.112,500 & for contingency Rs.90,000. REQUIRED (a) Income statement. (b) Statement of retained earnings. (c) Balance sheet in classified form. Question # 61: Hammad Hamid Ltd. was registered with an authorized capital of Rs.112,000,000 divided into 11,200,000 ordinary shares of Rs.10 each. The company books showed the following balances on June 30, 2005. Debit Balance (in million rupees) Credit Balance (in million rupees) Cash 1.760 Paid up capital 8.000 Accounts receivable 2.000 Retained earnings 0.800 Merchandise inventory 0.672 Accounts payable 0.800 Office supplies 0.608 6% Debentures payable 1.600 Unexpired insurance 0.640 Accumulated dep. (Plant assets) 0.800 Plant assets 7.200 Accumulated dep. (Vehicles) 1.200 Vehicles 3.200 Purchases return & allowance 0.480 Purchases 3.280 Commission income 1.440 Transportation in 0.560 Sales revenue 6.400 Sales return & allowance 0.400 Salaries expenses 1.200 21.520 21.520 www.a4accounting.net Page 156 Accounting for Company – Final Accounts Chapter # 5 Data for Adjustment on June 30, 2005: (a) Office supplies used Rs.384,000. (b) Insurance expired Rs.528,000. (c) 20% Depreciation for the year on written down value on vehicles. (d) Depreciation estimated on plant assets Rs.800,000. (e) Salaries for the period Rs.1,280,000. (f) Prepaid salaries Rs.80,000. (g) Merchandise inventory Rs.512,000 on 30.6.2005. (h) Provision for estimated bad debts Rs.80,000. (i) Appropriate Rs.640,000 for plant extension and Rs.400,000 for general reserves and declare cash dividend @ 10% on paid up capital. REQUIRED (a) Income statement. (b) Statement of retained earnings. (c) Balance sheet. Question # 62: Good Luck Ltd. has an issued capital of Rs.70,000,000 divided into ordinary shares of Rs.10 each. The authorized capital is 14,000,000 ordinary shares of Rs.10 each. Following is the company’s trial balance as on December 31, 2004: In Thousand Rupees: Debit Credit Sales --14,000 Purchases 5,600 --Debenture interest 35 --Director’s remuneration 630 --Selling and distribution expenses 1,820 --General expenses 2,002 --Ordinary share capital --70,000 Share premium --700 5% Debentures --700 Plant & machinery cost 65,800 --Motor van at cost 9,800 --Accumulated depreciation - Plant & machine --1,960 Accumulated depreciation - Motor van --1,120 General reserve --1,260 Retained earnings Jan. 1, 04 --1,680 Accounts payable --840 Accounts receivable 2,660 --Bank balance 2,863 --Inventory January 1, 2004 700 --Interim dividend 350 --92,260 92,260 Additional Information – December 31, 2004: (a) Merchandise inventory valued at Rs.1,120,000. (b) Dividend proposed on ordinary shares at 3%. (c) Audit fees for the year estimated at Rs.70,000. (d) Provision for depreciation on plant and machinery and motor van is estimated at 10% and 20% per annum respectively. (e) The directors have recommended transferring Rs.700,000 to general reserve. Page 157 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 REQUIRED (a) Income statement for the year ended December 31, 2004. (b) Statement of retained earnings. (c) Balance sheet as on December 31, 2004 in a classified form. Question # 63: Star Co. Ltd. was registered with capital of Rs.24,000,000 divided into shares of Rs.10 each. The following are the account balances of the company as on June 30, 2007: Debit Balances: Cash Rs.330,000, Allowance for bad debts Rs.30,000, Marketable securities Rs.180,000, Accounts receivable Rs.660,000, Merchandise inventory Rs.300,000, Machine cost Rs.1,650,000, Purchases Rs.9,750,000, Sales returns & allowances Rs.900,000, Office salaries expense Rs.390,000, Sales salaries expense Rs.455,000, Advertising expense Rs.240,000, Office rent expense Rs.720,000, Auditors fees Rs.150,000, Directors fee Rs.420,000, Discount shares Rs.300,000. Credit Balances: Accounts payable Rs.180,000, Debentures payable Rs.150,000, Shares capital Rs.3,300,000, Sales Rs.12,000,000, Retained earnings ? Data for Adjustment on June 30, 2007: 1) Merchandise inventory valued at Rs.1,740,000. 2) Estimated allowance for bad debts Rs.39,000. 3) Depreciation expense for the year Rs.270,000. 4) Prepaid rent Rs.120,000. 5) Declared cash dividend Rs.120,000 & stock dividend Rs.30,000. REQUIRED Prepare: (a) As Income Statement for the year ended June 30, 2007. (b) Statement of Retained Earnings. (c) A Balance Sheet as of June 30, 2007 in a classified form. Question # 64: Mehran Company Ltd. is registered with authorized capital of Rs.1,900,000 divided into ordinary shares of Rs.100 each. The following balances have been taken from the preclosing trial balance of the company prepared on December 31, 1994, the close of the accounting year:Debit Balances: Cash Rs.49,400; Accounts receivable Rs.38,000; Merchandise inventory (1.1.94) Rs.13,300; Prepaid rent Rs.2,850; Machine – cost Rs.912,000; Purchases Rs.313,500; Salaries expense Rs.34,200; Rent expense Rs.36,860. Credit Balances: Accounts payable Rs.76,000; Allowance for depreciation on machine Rs.110,200; Allowance for doubtful debts Rs.1,900; Accrued salaries Rs.1,520; Sales revenue Rs.275,500; Share capital paid up Rs.760,000; Retained earnings Rs.174,990. Supplementary Data for Adjustment on 31.12.94 (a) Merchandise inventory was valued at Rs.133,000 on December 31, 1994. (b) Prepaid rent amounted to Rs.3,800. (c) Accrued salaries amounted to Rs.4,750. (d) Depreciation on machine for the year was estimated at Rs.34,200. (e) Doubtful debts were estimated at Rs.2,280. (f) Provide Rs.19,000 for income tax. (g) Appropriate Rs.28,500 for reserve for plant extension. www.a4accounting.net Page 158 Accounting for Company – Final Accounts Chapter # 5 REQUIRED (a) Prepare INCOME STATEMENT in report form for the year ended December 31, 1994 and a STATEMENT OF RETAINED EARNINGS on the same date. (b) Prepare a BALANCE SHEET in report form as of December 31, 1994. Question # 65: Sana Ltd. was registered with a capital 800,000 shares of Rs.10/= per. The unarranged trial balance at 31st December 2004 was as under: Account Titles Debit (Rs.) Credit (Rs.) Cash 192,000 Accounts receivable 248,000 Accounts payable 232,000 Merchandise inventory 200,000 Purchases 2,400,000 Paid up capital 2,880,000 Transportation in 32,000 Salaries expenses 192,000 Sales 2,928,000 Building 2,880,000 Auditors fee 112,000 Furniture 80,000 Retained earnings 360,000 Fire insurance premium 16,000 Utility expenses 48,000 6,400,000 6,400,000 Data for Adjustment on 31-12-04 1. Merchandise inventory valued at Rs.224,000. 2. Salaries unpaid amounted to Rs.16,000. 3. Accrued utility expenses Rs.8,000. 4. One-fifth of insurance premium is unexpired. 5. Provide depreciation on furniture 20% and on building at 2%. 6. As per board of directors approval: (a) Reserve for income tax @ 10% of net income. (b) Reserve for contingencies Rs.128,000. (c) Interim dividend declared @ 10% of paid up capital. REQUIRED (a) Income statement. (b) Retained earnings statement. (c) Balance sheet. Question # 66: The following is the trial balance of Multi Tech Limited as at December 31, 2006: Debit (Rs.) Credit (Rs.) Paid up share capital 1,400,000 Share premium 700,000 Retained earnings January 1, 2006 980,000 10% Debentures payable 2010 840,000 Plant and assets 5,460,000 Accumulated depreciation 644,000 Merchandise inventory 1,232,000 Page 159 www.a4accounting.net Accounting for Company – Final Accounts Chapter # 5 Accounts receivable Accounts payable Purchases and sales Administrative salaries Sales salaries Director’s remuneration Advertising expenses Carriage outwards Utility expenses Bank overdraft 588,000 5,110,000 700,000 98,000 224,000 392,000 140,000 420,000 504,000 9,156,000 140,000 14,364,000 14,364,000 Additional Information: The paid-up share capital consists of 140,000 shares of Rs.10 each. Merchandise inventory at December 31, 2006 was Rs.700,000. Estimated tax on profit of the company for the year is Rs.210,000. The directors have proposed final dividend of 10% 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. Question # 67: DECENT COMPANY LIMITED INCOME STATEMENT FOR THE YEAR ENDED JUNE 30, 2007 Net sales Cost of goods sold Gross profit (30% of net sales) Operating expenses Operating income (10% of net sales) Interest expense Income before income tax Income tax – 25% of income before income tax Net income REQUIRED Complete the income statement using only the information available. www.a4accounting.net Page 160 Rs._______? Rs._______? Rs._______? Rs._______? Rs._______? Rs.360,000 Rs._______? Rs.450,000 Rs.1,350,000 Chapter # 6 Accounting for Company – Amalgamation Advanced Accounting www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Accounting for companies. Amalgamation. WHAT THE EXAMINER USUALLY ASK? Computation of purchase consideration and number of shares. General Journal entries in the books of old companies. General Journal entries in the books of new company. Initial Balance Sheet of new company. www.a4accounting.net Page 162 Accounting for Company – Amalgamation Chapter # 6 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”. PURCHASE CONSIDERATION Purchase consideration is the amount paid by the new company to both old companies. The purchase consideration can be made in two different ways: Purchase consideration by net asset method. Purchase consideration by lump sum method. a) PURCHASE CONSIDERATION BY NET ASSET METHOD In this method the purchase consideration is calculated according to the value of net asset (total assets – total liabilities). It means that the amount paid to the old companies is equal to their book value (if liquidation expenses are not paid separately by new company) and no goodwill or capital reserve arises. COMPUTATION OF PURCHASE CONSIDERATION: “A” Co. XXX (XXX) XXX XXX XXX Total assets Less: Total liabilities Net assets Add: Liquidation expense Purchase consideration “B” Co. XXX (XXX) XXX XXX XXX b) PURCHASE CONSIDERATION BY LUMP SUM METHOD In this method the new company paid the amount of consideration without calculating the net assets value. In this method there is a chance of goodwill or capital reserve. COMPUTATION OF PURCHASE CONSIDERATION: Company – A: XXX no. of shares @ Rs.XX each. Rs.XXX Company – B: XXX no. of shares @ Rs.XX each. Rs.XXX GENERAL ENTRIES IN THE BOOKS OF OLD COMPANY 1- Entry to record the purchase consideration: Receivable from purchasing company Debit Realization Credit --------------------------------------------------------------------------------------------------------------2- Entry to record the purchase consideration received: Shares – in Debit Debentures – in Debit Cash Debit Receivable from purchasing company Credit --------------------------------------------------------------------------------------------------------------- Page 163 www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 3- Entry to record the transfer of assets: Realization Debit Assets (all) Credit --------------------------------------------------------------------------------------------------------------4- Entry to record the transfer of liabilities: Liabilities Debit Realization Credit --------------------------------------------------------------------------------------------------------------5- Entry to close the shareholder’s equity account: Share capital Debit Retained earning Debit Share premium Debit Payable to shareholders Credit --------------------------------------------------------------------------------------------------------------6- Entry to record the payment to shareholders: Payable to shareholders Debit Shares – in Credit Debentures – in Credit Cash Credit ----------------------------------------------------------------------------------------------------------------- GENERAL ENTRIES IN THE BOOKS OF NEW COMPANY 1- Entry to record the purchase of assets and liabilities from A company: Assets Debit Liabilities Credit Payable to old company (A) Credit ---------------------------------------------------------------------------------------------------------------2- Entry to record the payment of purchase consideration to A company: Payable to old company (A) Debit Debentures – in Credit Cash Credit Shares – in Credit ---------------------------------------------------------------------------------------------------------------3- Entry to record the purchase of assets and liabilities from B Company: Assets Debit Liabilities Credit Payable to old company (B) Credit ---------------------------------------------------------------------------------------------------------------4- Entry to record the payment of purchase consideration to B Company: Payable to old company (B) Debit Debentures – in Credit Cash Credit Shares – in Credit www.a4accounting.net Page 164 Accounting for Company – Amalgamation Chapter # 6 ILLUSTRATION # 1: (NET ASSET METHOD) ABC Co. Ltd. and XYZ Co. Ltd. have agreed to amalgamate. A new company A2Z Co. Ltd. has been formed to take over the both companies. After negotiations the financial position of both companies is shown in the following balance sheet as on December 31, 2009. ABC Co. Ltd. (Rs.) XYZ Co. Ltd. (Rs.) Total assets 500,000 470,000 Total liabilities 140,000 170,000 Share capital 360,000 300,000 REQUIRED (a) Compute purchase consideration. (b) General Journal entries in the books of ABC Co. Ltd. and XYZ Co. Ltd. (c) General Journal entries in the books of A2Z Co. Ltd. (d) Initial balance sheet of A2Z Co. Ltd. on 31 December 2009. SOLUTION # 1: Computation of Purchase Consideration: Total assets Less: Total liabilities Purchase consideration ABC Co. Ltd. (Rs.) 500,000 140,000 360,000 XYZ Co. Ltd. (Rs.) 470,000 170,000 300,000 360,000/10 36,000 300,000/10 30,000 Number of shares = Number of shares = Date 1 2 3 4 5 6 ABC Co. Ltd. General Journal Particulars Receivable from A2Z Co. Ltd. Realization (To record the purchase consideration) Shares – in Receivable from A2Z Co. Ltd. (To record the shares received for purchase consideration from A2Z Co. Ltd.) Realization Assets (To record the transfer of assets to A2Z Co. Ltd.) Liabilities Realization (To record the transfer of liabilities to A2Z Co. Ltd.) Share capital Payable to shareholders (To record the closing of shareholders’ equity) Payable to shareholders Shares – in (To record the shares issued to the shareholders) Page 165 P/R Debit 360,000 Credit 360,000 360,000 360,000 500,000 500,000 140,000 140,000 360,000 360,000 360,000 360,000 www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 Date 1 2 3 4 5 6 Date 1 2 3 4 XYZ Co. Ltd. General Journal Particulars Receivable from A2Z Co. Ltd. Realization (To record the purchase consideration) Shares – in Receivable from A2Z Co. Ltd. (To record the shares received for purchase consideration from A2Z Co. Ltd.) Realization Assets (To record the transfer of assets to A2Z Co. Ltd.) Liabilities Realization (To record the transfer of liabilities to A2Z Co. Ltd.) Share capital Payable to shareholders (To record the closing of shareholders’ equity) Payable to shareholders Shares – in (To record the shares issued to the shareholders) A2Z Co. Ltd. General Journal Particulars Assets Liabilities Payable to ABC Co. Ltd. (To record the purchase of assets and liabilities from ABC Co. Ltd.) Payable to ABC Co. Ltd. Ordinary share capital (36,000 x 10) (To record the shares issued to the ABC Co. Ltd.) Assets Liabilities Payable to XYZ Co. Ltd. (To record the purchase of assets and liabilities from XYZ Co. Ltd.) Payable to XYZ Co. Ltd. Ordinary share capital (30,000 x 10) (To record the shares issued to the XYZ Co. Ltd.) www.a4accounting.net Page 166 P/R Debit 300,000 300,000 Credit 300,000 300,000 470,000 470,000 170,000 170,000 300,000 300,000 300,000 300,000 P/R Debit 500,000 Credit 140,000 360,000 360,000 360,000 470,000 170,000 300,000 300,000 300,000 Accounting for Company – Amalgamation Chapter # 6 A2Z Co. Ltd. Balance Sheet As on 31 December 2009 Equities Shareholder’s Equity: Issued & Paid-up Capital: 66,000 ordinary shares @ Rs.10 each Total shareholder’s equity 660,000 660,000 Liabilities Total equities 310,000 970,000 Total assets ILLUSTRATION # 2: Assets Assets 970,000 970,000 (LUMP SUM METHOD) On January 1, 2010 balance sheet of A Ltd. and B Ltd. appeared as follows: A Ltd. (in Rs.) B Ltd. (in Rs.) Cash 40,000 90,000 Assets 300,000 400,000 Liabilities 40,000 40,000 Shares capital (Rs.10 each) 300,000 450,000 The two companies amalgamate on January 1, 2010 to form C Ltd. on the following conditions: (a) Authorized capital of C Ltd. is to be 120,000 ordinary shares of Rs.10 each. (b) All assets and liabilities of A Ltd. are taken at book value and shareholders are issued 33,000 shares (fully paid up) in C Ltd. (c) All the assets and liabilities of B Ltd. are taken at book value and the shareholders are issued 40,000 shares (fully paid up) in C Ltd. (d) Liquidation expenses paid by the C Ltd. Rs.12,000 to each liquidating company. REQUIRED (a) Give journal entries in the books of both liquidating companies. (b) Give journal entries in the books of C Ltd. (c) Balance sheet of C Ltd. on January 1, 2010. SOLUTION # 2: Computation of Purchase Consideration: A Ltd. 33,000 ordinary shares @ Rs.10 each Add: Liquidation expense (Cash) Purchase consideration Rupees 330,000 12,000 342,000 B Ltd. 40,000 ordinary shares @ Rs.10 each Add: Liquidation expense (Cash) Purchase consideration Rupees 400,000 12,000 412,000 Page 167 www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 Date 1 2 3 4 5 6 7 8 3 5 7 Date 1 2 A Ltd. General Journal Particulars Receivable from C Ltd. Realization (To record the purchase consideration) Shares – in Cash Receivable from C Ltd. (To record the shares and cash received for purchase consideration from C Ltd.) Realization Assets Cash (To record the transfer of assets to C Ltd.) Liabilities Realization (To record the transfer of liabilities to C Ltd.) Realization Cash (To record the liquidation expense paid) Share capital Payable to shareholders (To record the closing of shareholders’ equity) Realization Payable to shareholders (To record the closing of realization account) Payable to shareholders Shares – in (To record the shares issued to the shareholders) Assets Cash Payable to shareholders Realization 340,000 1 12,000 4 30,000 382,000 B Ltd. General Journal Particulars Receivable from C Ltd. Realization (To record the purchase consideration) Shares – in Cash Receivable from C Ltd. (To record the shares and cash received for purchase consideration from C Ltd.) www.a4accounting.net Page 168 P/R Debit 342,000 Credit 342,000 330,000 12,000 342,000 340,000 300,000 40,000 40,000 40,000 12,000 300,000 30,000 12,000 300,000 30,000 330,000 330,000 Receivable from C Ltd. Liabilities 342,000 40,000 382,000 P/R Debit 412,000 400,000 12,000 Credit 412,000 412,000 Accounting for Company – Amalgamation Chapter # 6 Date 3 4 5 6 7 8 3 5 Date 1 2 3 B Ltd. General Journal Particulars P/R Debit Realization 490,000 Assets Cash (To record the transfer of assets to C Ltd.) Liabilities 40,000 Realization (To record the transfer of liabilities to C Ltd.) Realization 12,000 Cash (To record the liquidation expense paid) Share capital 450,000 Payable to shareholders (To record the closing of shareholders’ equity) Payable to shareholders 50,000 Realization (To record the closing of realization account) Payable to shareholders 400,000 Shares – in (To record the shares issued to the shareholders) Realization Assets 490,000 1 Receivable from C Ltd. Cash 12,000 4 Liabilities 7 Payable to shareholders 502,000 C Ltd. General Journal Particulars Assets Cash Goodwill Liabilities Payable to A Ltd. (To record the purchase of assets and liabilities from A Ltd.) Payable to A Ltd. Ordinary share capital (33,000 x 10) Cash (To record the shares & cash paid to the A Ltd.) Assets Cash Liabilities Capital reserve Payable to B Ltd. (To record the purchase of assets and liabilities from B Ltd.) Page 169 P/R Debit 300,000 40,000 42,000 Credit 400,000 90,000 40,000 12,000 450,000 50,000 400,000 412,000 40,000 50,000 502,000 Credit 40,000 342,000 342,000 330,000 400,000 90,000 40,000 38,000 412,000 www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 Date 4 C Ltd. General Journal Particulars Payable to B Ltd. Ordinary share capital (40,000 x 10) Cash (To record the shares & cash paid to B Ltd.) P/R Debit 412,000 Credit 400,000 12,000 C Ltd. Balance Sheet As on 1January 2010 Equities Shareholder’s Equity: Authorized Capital: 120,000 ordinary shares @ Rs.10 each Issued & Paid-up Capital: 73,000 ordinary shares @ Rs.10 each Capital reserve Total shareholder’s equity Liabilities Total equities www.a4accounting.net Assets 1,200,000 Goodwill Assets Cash 42,000 700,000 106,000 730,000 38,000 768,000 80,000 848,000 Total assets Page 170 848,000 Accounting for Company – Amalgamation Chapter # 6 PRACTICE QUESTIONS Question # 1: The Moon Light Co. Ltd. and the Star Light Co. Ltd. have agreed to amalgamate. A new company Sun Light Co. Ltd. has been formed to take over the both companies. After negotiations the financial position of both companies is shown in the following balance sheet as on October 31, 1995. Moon Light Co. Ltd. Balance Sheet As on October 31, 1995 Assets (in Rs.) Equities (in Rs.) Cash and bank balances 72,000 Accounts payable 160,000 Accounts receivable 240,000 Issued and Paid – Up Capital: Merchandise inventory 248,000 160,000 Ordinary shares Land and building 784,000 @ Rs.10 fully paid 1,600,000 Machinery and plant 320,000 Retained earnings 144,000 Patents 240,000 1,904,000 1,904,000 Star Light Co. Ltd. Balance Sheet As on October 31, 1995 Assets (in Rs.) Cash Accounts receivable Merchandise inventory Land and building Machinery and plant Goodwill 80,000 40,000 40,000 464,000 448,000 96,000 1,168,000 Equities (in Rs.) Accounts payable General reserve Issued and Paid – Up Capital: 81,600 Ordinary shares @ Rs.10 fully paid Retained earnings 176,000 80,000 816,000 96,000 1,168,000 REQUIRED Compute: What amount payable is arrived at each, and prepare the journal entries in the books of Moon Light Co. Ltd., Star Light Co. Ltd., and Sun Light Co. Ltd. Also prepare amalgamated balance sheet of the new company. Question # 2: A Ltd. and B Ltd. decide to amalgamate C Ltd. take over the assets and liabilities of the two companies. C Ltd. issues ordinary shares of Rs.10 each to the value of net assets to each of the old companies. The balance sheets of A Ltd. and B Ltd. on the date of amalgamation were: Assets A Ltd. (in Rs.) B Ltd. (in Rs.) Plant assets 252,000 280,000 Patents 49,000 --Merchandise inventory 210,000 112,000 Accounts receivable 70,000 84,000 Cash 21,000 70,000 Profit and loss 14,000 --Total assets 616,000 546,000 Page 171 www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 Liabilities and Capital A Ltd. (in Rs.) Ordinary share capital 504,000 Accounts payable 112,000 General reserve --Profit and loss --Total liabilities and capital 616,000 REQUIRED (a) Compute purchase consideration to A Ltd. and B Ltd. (b) General Journal entries in the books of A Ltd. and B Ltd. (c) Entries in the General Journal of C Ltd. B Ltd. (in Rs.) 266,000 70,000 126,000 84,000 546,000 Question # 3: Two companies A and B carrying on similar business decided to amalgamate and a new company called AB Company Ltd. being formed to take over the assets and liabilities of each. The followings are the respective balance sheets, showing the values of assets as agreed in the contract and it is provided that fully paid up Rs.100 shares will be issued by the new company to the value of the net assets of each of the old companies: Assets A. Co. Ltd. (in Rs.) B. Co. Ltd. (in Rs.) Cash 23,100 73,500 Accounts receivable --73,500 Merchandise inventory 157,500 94,500 Retained earnings 42,000 --Building 199,500 157,500 Machinery 189,000 210,000 Total assets 611,100 609,000 Liabilities and Capital A. Co. Ltd. (in Rs.) B. Co. Ltd. (in Rs.) Accounts payable 86,100 63,000 Share capital 525,000 420,000 Reserve fund --105,000 Retained earnings --21,000 Total liabilities and capital 611,100 609,000 REQUIRED (a) Compute purchase consideration for each liquidating Co. (b) State what shares the liquidator of each company will receive in the new company. (c) Give entries in the books of both liquidating company. (d) Give entries in the books of new company. Question # 4: The balance sheets of the two private companies are given below: M/S. Nisar Ahmed (Pvt.) Ltd. Balance Sheet As on June 30, 1994 Equities (in Rs.) Assets (in Rs.) Share Capital: Machinery and equipment 5,400 Shares of Rs.150 each 810,000 Land and building Accounts payable 90,000 Merchandise inventory Cash at bank Profit & loss account Total equities 900,000 Total assets www.a4accounting.net Page 172 270,000 360,000 144,000 72,000 54,000 900,000 Accounting for Company – Amalgamation Chapter # 6 M/S. Qurban Ali (Pvt.) Ltd. Balance Sheet As on June 30, 1994 Equities (in Rs.) Assets (in Rs.) Share Capital: Land and building 450,000 4,500 Shares of Rs.150 each 675,000 Machinery and equipment 252,000 Accounts payable 72,000 Merchandise inventory 90,000 Reserve (General) 54,000 Accounts receivable 27,000 Profit & loss account 45,000 Cash at bank 27,000 Total equities 846,000 Total assets 846,000 On July 1, 1994, both the companies are of the opinion that the companies should be amalgamated to avoid future competition as they are doing the same business. Hence, they agreed to enter into a contract to amalgamate their business. The new business will be carried on under the name and style of M/S. Nisar and Qurban (Pvt.) Ltd. under the term that fully paid shares of Rs.100 each should be issued by the new company of the net assets. REQUIRED (a) State the number of shares the liquidator of each Co. will receive from the new Co. (b) Give entries in the books of both liquidating companies. (c) Pass necessary journal entries at the time of amalgamation in the book of newly formed company. (d) Prepare the opening balance sheet of the new company as on July 1, 1994. Question # 5: On January 1, 1999 balance sheet data of Khairpur Ltd. & Noori Abad Ltd. are as follows: (in Rupees) Khairpur Ltd. Noori Abad Ltd. Cash 11,200 65,600 Accounts receivable 166,400 155,200 Merchandise inventory 136,000 160,000 Land 96,000 72,000 Building 200,000 224,000 Goodwill 32,000 --Retained earnings 16,000 641,600 692,800 Allowance for bad debts 6,400 4,800 Allowance for depreciation 40,000 48,000 Accounts payable 75,200 80,000 Share capital 480,000 560,000 Reserve for contingencies 8,000 --Retained earnings 32,000 641,600 692,800 Both the companies have agreed to amalgamate on January 1, 1999. For this purpose a new company, Sindh Co. Limited has been formed with an authorized capital of Rs.1,600,000 divided into ordinary shares of Rs.10/- each. The new company issued shares equal to the value of their net assets in payment of purchase consideration to each of the old company and also paid Rs.24,000 to each liquidating Co. for their liquidating expenses and paid preliminary expenses Rs.4,000. REQUIRED (a) Amount of purchase consideration of each company and the number of shares to be issued. (b) Entries in general journal of both liquidating companies. Page 173 www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 (c) Entries in general journal of Sindh Company Limited. (d) Initial balance sheet of Sindh Company Limited. Question # 6: Balance sheets of Blue Limited and Bright Limited as on January 1, 2006 are given below: Assets (in Rupees) Blue Limited Bright Limited Cash and bank balance 12,000 60,000 Accounts receivable 160,000 126,000 Merchandise inventory 96,000 114,000 Land & building 960,000 360,000 Goodwill 132,000 --1,320,000 660,000 Liabilities & Equity Accounts payable 48,000 60,000 Ordinary share capital (Rs.10 ordinary shares fully paid) 1,200,000 480,000 General reserves --72,000 Retained earnings 72,000 48,000 1,320,000 660,000 On January 1, 2006 both companies agreed to amalgamate and form Indigo Limited with an authorized capital of Rs.12,000,000 divided into ordinary shares of Rs.10 each. Indigo Limited issued shares equal to the value of their net assets in payment of purchase consideration of Blue Limited and Bright Limited. The new company also paid Rs.30,000 to each liquidating company for their liquidation expenses. REQUIRED (a) Amount of purchase consideration for each liquidating company and the number of shares to be issued. (b) Entries in General Journal of both liquidating companies. (c) Entries in General Journal of Indigo Limited. (d) Initial balance sheet of Indigo Limited as on January 1, 2006. Question # 7: The respective balance sheets of Fiza Ltd. and Aimen Ltd. stood on 31, Dec. 2004 as under: Assets (in Rs.) Fiza Ltd. Aimen Ltd. Building (Net) 880,000 1,540,000 Plant & machinery (Net) 715,000 880,000 Goodwill --110,000 Merchandise inventory 110,000 275,000 Accounts receivable 66,000 330,000 Cash 44,000 165,000 Retained earnings 55,000 --Total: 1,870,000 3,300,000 Equities (in Rs.) Fiza Ltd. Aimen Ltd. Share capital (in Rs.10 shares) 1,650,000 2,750,000 Accounts payable 220,000 330,000 Retained earnings --220,000 Total: 1,870,000 3,300,000 On 1st January 2005, both the companies agreed to amalgamate. A new company Nadeem Ltd. was formed with an authorized capital of Rs.5,500,000 (divided into 550,000 shares of Rs.10 each) to take over assets and liabilities of the both the concerns at book values with the exception of buildings which were taken at 20% more than their book values. www.a4accounting.net Page 174 Accounting for Company – Amalgamation Chapter # 6 REQUIRED (1) Compute the amount payable to each company and number of shares to be issued to the shareholders of the liquidating companies. (2) Journal entries in the books of both liquidating companies. (3) Journal entries in the books of Nadeem Ltd. (4) Prepare initial balance sheet of Nadeem Ltd. Question # 8: On January 1, 2005 balance sheet of Karim Ltd. and Rahim Ltd. appeared as follows: Assets Karim Ltd. (in Rs.) Rahim Ltd. (in Rs.) Cash 48,000 24,000 Accounts receivable 36,000 72,000 Merchandise 84,000 36,000 Prepaid insurance 12,000 --Plant assets 180,000 216,000 Equities Accounts payable 60,000 36,000 Accumulated depreciation 60,000 72,000 Shares capital (Rs.10 each) 240,000 240,000 The two companies amalgamate on January 1, 2005 to form Bright Star Ltd. on the following conditions: (a) Authorized capital of Bright Star Ltd. is to be 120,000 ordinary shares of Rs.10 each. (b) All assets and liabilities of Karim Ltd. are taken at book value and shareholders are issued 36,000 shares (fully paid up) in Bright Star Ltd. (c) All the assets and liabilities of Rahim Ltd. are taken at book value and the shareholders are issued 28,800 shares (fully paid up) in Bright Star Ltd. (d) Preliminary expenses paid by the new company Rs.12,000. REQUIRED (a) Give journal entries in the books of both liquidating companies. (b) Give journal entries in the books of Bright Star Ltd. (c) Balance sheet of Bright Star Ltd. on January 1, 2005. Question # 9: On January 1, 1996 Balance Sheet data of Aiman Co. and Fahim Co. appeared as follows: Assets Aiman Co. (in Rs.) Fahim Co, (in Rs.) Cash 34,000 17,000 Accounts receivable 25,500 51,000 Merchandise 59,500 25,500 Prepaid insurance 8,500 --Plant assets 127,500 153,000 Equities Accounts payable 42,500 51,000 Accumulated depreciation (Plant assets) 42,500 25,500 Shares capital (Rs.10 par) 170,000 170,000 The two companies amalgamate on January 1, 1996 to form Aiman Fahim Company on the following conditions: (a) Authorized capital of Aiman Fahim Co. is to be 85,000 ordinary shares of Rs.10 each. (b) All the assets and liabilities of Aiman Co. are taken over at book values and its shareholders are issued 25,500 shares (fully paid up) in Aiman Fahim Co. (c) All the assets and liabilities of Fahim Co. are taken over at book values and its shareholders are issued 20,400 shares (fully paid up) in Aiman Fahim Co. Page 175 www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 (d) The new company makes a public issue of 22,100 shares of Rs.10 each at Rs.13 per share; the issue is fully subscribed and paid for in full. REQUIRED (a) General Journal entries in the books of both liquidating companies. (b) General Journal entries in the books of Aiman Fahim Company. (Preliminary expenses paid by the company Rs.8,500). (c) Balance sheet of Aiman Fahim Company on January 1, 1996. Question # 10: Shan Ltd. and Adnan Ltd. decided to amalgamate their business and a new company S and A Co. is formed to take over all assets and liabilities of the two concerns. The new Co. S and A Ltd. issued 209,000 shares of Rs.10 each at Rs.20 to Shan Ltd. and 171,000 shares of Rs.10 each at Rs.20 to Adnan Ltd. The following are the balance sheets: Shan Limited Balance Sheet December 31, 2000 Cash Rs.228,000 Accounts payable Rs.342,000 Accounts receivable 760,000 General reserves 570,000 Merchandise inventory 1,140,000 Share capital Machines 2,280,000 361,000 shares of Rs.10 each 3,610,000 Furniture 114,000 4,522,000 4,522,000 Cash Accounts receivable Merchandise inventory Machines Office equipment Adnan Limited Balance Sheet December 31, 2000 Rs.475,000 Accounts payable 570,000 General reserves 1,330,000 Share capital 1,520,000 351,500 shares of Rs.10 each 190,000 4,085,000 Rs.380,000 190,000 3,515,000 4,085,000 REQUIRED (a) Give entries in General Journal form in the books of Shan Ltd. and Adnan Ltd. (b) Give entries in General Journal form in the books of S and A Co. (c) Prepare amalgamated balance sheet in the books of S and A Co. (d) Compute purchase consideration for each liquidating Co. Question # 11: Zulfi Ltd. and Lutfi Ltd. decided amalgamate their businesses and a new company ZL Ltd. is formed to take over all the assets and liabilities of the two concerns. The new company ZL Ltd. issues 120,000 shares of Rs.10 each at Rs.20 to Zulfi Ltd. and 96,000 shares of Rs.10 each at Rs.20 to Lutfi Ltd. The following are the balance sheets of the two companies: Zulfi Ltd. Balance sheet as at December 31, 2004 Cash 120,000 Accounts payable 456,000 Accounts receivable 420,000 General reserve 120,000 Merchandise inventory 780,000 Share capital Machinery 1,464,000 228,000 shares of Rs.10 each 2,280,000 Furniture 72,000 2,856,000 2,856,000 www.a4accounting.net Page 176 Accounting for Company – Amalgamation Chapter # 6 Cash Accounts receivable Merchandise inventory Machinery Office equipment Lutfi Ltd. Balance sheet as at December 31, 2004 240,000 Accounts payable 420,000 General reserve 840,000 Share capital 960,000 222,000 shares of Rs.10 each 120,000 2,580,000 216,000 144,000 2,220,000 2,580,000 REQUIRED (a) Compute purchase consideration for each liquidating Co. (b) Give general journal entries in the books of Zulfi Ltd. and Lutfi Ltd. (c) Give general journal entries in the books of ZL Ltd. (d) Prepare amalgamated balance sheet of ZL Ltd. Question # 12: Hafeez Co. Ltd and Rasheed Co. Ltd. decided to amalgamate their business and a new company Hameed Co. Ltd. was formed to take over all assets and liabilities of the two companies. Hameed Co. Ltd. issued 140,000 shares of Rs.10 each at Rs.26 to Hafeez Co. Ltd. and 137,200 shares of Rs.10 each at Rs.26 to Rasheed Co. Ltd. At the time of amalgamation following were the balance sheets of two companies: Hafeez Co. Ltd. Balance Sheet as on Dec. 31, 2007 Assets (Rs.) Equities (Rs.) Cash 154,000 Accounts payable 392,000 Accounts receivable 560,000 Share Capital: Merchandise inventory 840,000 266,000 shares of Rs.10 2,660,000 Building 1,820,000 General reserves 420,000 Furniture 98,000 3,472,000 3,472,000 Rasheed Co. Ltd. Balance Sheet as on Dec. 31, 2007 Assets (in Rs.) Equities (in Rs.) Cash 280,000 Accounts payable 280,000 Accounts receivable 490,000 Share Capital: Merchandise inventory 840,000 259,000 shares of Rs.10 2,590,000 Building 1,260,000 General reserves 140,000 Furniture 140,000 3,010,000 3,010,000 REQUIRED (a) Compute purchase consideration for each of the amalgamating company. (b) Give all necessary entries in the General Journal of liquidating companies. (c) Give all necessary entries in the General Journal of Hameed Co. Ltd. (d) Prepare a balance sheet of Hameed Co. Ltd. after amalgamation. Page 177 www.a4accounting.net Accounting for Company – Amalgamation Chapter # 6 Question # 13: The following are the assets and equities of Faqeer Ltd. and Ameer Ltd. on June 30, 1993: Faqeer Ltd. (Rs.) Ameer Ltd. (Rs.) Current assets 96,000 640,000 Non – current assets 1,056,000 1,344,000 Investments --128,000 Accounts payable 480,000 320,000 5% Debentures payable --160,000 General reserves 64,000 96,000 Paid up capital (Rs.20 each) 768,000 1,280,000 Retained earnings (Dr.) 160,000 (Cr.) 256,000 The above companies enter into a contact to amalgamate a new company being formed under the name of Rising Star Ltd. The Rising Star Ltd. issued 96,000 shares of Rs.10 each to Faqeer Ltd. and 160,000 shares of Rs.10 each to Ameer Ltd. The new company also issued 8% debentures to the debenture holders of Ameer Ltd. at a premium of 5%. All the assets and liabilities of the companies were taken over at book values. REQUIRED (a) Give journal entries in the books of Faqeer Ltd. and Ameer Ltd. (b) Give journal entries in the books of Rising Star Ltd. Question # 14: On January 1, 1987, balance sheet of data of A Co. and B Co. appeared as follows: Assets A Co. (in Rs.) B Co. (in Rs.) Cash 130,000 52,000 Accounts receivable 260,000 130,000 Merchandise inventory 195,000 234,000 Prepaid insurance 52,000 --Plant assets 650,000 1,040,000 Equities A Co. (in Rs.) B Co. (in Rs.) Allowance for depreciation – Plant 182,000 195,000 10% Bonds payable --260,000 Ordinary share capital (Rs.10 each) 650,000 650,000 Retained earnings 455,000 351,000 The two companies amalgamate on January 1, 1987 to form AB Co. on the following conditions: 1. Authorized capital of AB Co. to be 650,000 ordinary shares of Rs.10 each. 2. All the assets of A Co. (except cash and prepaid insurance) are taken over at book values and its shareholders are issued 104,000 shares (fully paid up) in AB Co. 3. Of the assets of B Co. cash, accounts receivable and merchandise are taken over at book values and plant assets are taken over at Rs.780,000. The bondholders are issued 27,300 shares and a suitable number of shares were issued to the shareholders of B Co. REQUIRED (a) General Journal entries in the books of the two liquidating companies. (b) General Journal entries in the books of AB Co. (Preliminary expenses paid by the company Rs.39,000). (c) Prepare a balance sheet of AB Co. after amalgamation. www.a4accounting.net Page 178 Chapter # 7 Accounting for Company – Absorption Advanced Accounting www.a4accounting.net Accounting for Company – Absorption Chapter # 7 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Accounting for companies. Absorption. WHAT THE EXAMINER USUALLY ASK? Computation of purchase consideration and number of shares. General Journal entries in the books of absorbed company. General Journal entries in the books of absorbing company. Balance Sheet of absorbing company after absorption. www.a4accounting.net Page 180 Accounting for Company – Absorption Chapter # 7 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 absorbing company (A). PURCHASE CONSIDERATION Purchase consideration is the amount paid by the new company to both old companies. The purchase consideration can be made in two different ways: Purchase consideration by net asset method. Purchase consideration by lump sum method. a) PURCHASE CONSIDERATION BY NET ASSET METHOD In this method the purchase consideration is calculated according to the value of net asset (total assets – total liabilities). It means that the amount paid to the old companies is equal to their book value (if liquidation expenses are not paid separately by acquiring company) and no goodwill or capital reserve arises. COMPUTATION OF PURCHASE CONSIDERATION: “B” Co. XXX (XXX) XXX XXX XXX Total assets Less: Total liabilities Net assets Add: Liquidation expense Purchase consideration b) PURCHASE CONSIDERATION BY LUMP SUM METHOD In this method the acquiring company paid the amount of consideration without calculating the net assets value. In this method there is a chance of goodwill or capital reserve. COMPUTATION OF PURCHASE CONSIDERATION: Company – B: XXX no. of shares @ Rs.XX each. Rs.XXX Page 181 www.a4accounting.net Accounting for Company – Absorption Chapter # 7 GENERAL ENTRIES IN THE BOOKS OF OLD COMPANY 1- Entry to record the purchase consideration: Receivable from purchasing company Debit Realization Credit --------------------------------------------------------------------------------------------------------------2- Entry to record the purchase consideration received: Shares – in Debit Debentures – in Debit Cash Debit Receivable from purchasing company Credit --------------------------------------------------------------------------------------------------------------3- Entry to record the transfer of assets: Realization Debit Assets (all) Credit --------------------------------------------------------------------------------------------------------------4- Entry to record the transfer of liabilities: Liabilities Debit Realization Credit --------------------------------------------------------------------------------------------------------------5- Entry to close the shareholder’s equity account: Share capital Debit Retained earning Debit Share premium Debit Payable to shareholders Credit --------------------------------------------------------------------------------------------------------------6- Entry to record the payment to shareholders: Payable to shareholders Debit Shares – in Credit Debentures – in Credit Cash Credit ----------------------------------------------------------------------------------------------------------------- GENERAL ENTRIES IN THE BOOKS OF NEW COMPANY 1- Entry to record the purchase of assets and liabilities from B Company: Assets Debit Liabilities Credit Payable to old company (B) Credit ---------------------------------------------------------------------------------------------------------------2- Entry to record the payment of purchase consideration to B Company: Payable to old company (B) Debit Debentures – in Credit Cash Credit Shares – in Credit ---------------------------------------------------------------------------------------------------------------- www.a4accounting.net Page 182 Accounting for Company – Absorption Chapter # 7 ILLUSTRATION # 1: (NET ASSET METHOD) On January 1, 2001 balance sheet of Bilal Ltd. appeared as follows: Cash 10,000 Accounts payable Accounts receivable 20,000 Bonds payable Merchandise inventory 30,000 Share capital Rs.10 Equipment 40,000 Retained earnings 100,000 Bilal Ltd. is absorbed on January 1, 2001 by ML Ltd. on the following terms: (a) All the assets and liabilities were taken over at book values except cash. (b) Shareholders will get shares equal to net assets. REQUIRED (1) Compute purchase consideration. (2) Journal entries in the books of Bilal Ltd. (3) Journal entries in the books of ML Ltd. 10,000 20,000 40,000 30,000 100,000 SOLUTION # 1: Computation of Purchase Consideration: Assets: Accounts receivable Merchandise inventory Equipment Total assets Less: Liabilities: Accounts payable Bonds payable Total liabilities Purchase consideration Bilal Ltd. (Rs.) 20,000 30,000 40,000 90,000 10,000 20,000 (30,000) 60,000 Number of shares = Number of shares = Date 1 2 3 4 60,000/10 6,000 Bilal Ltd. General Journal Particulars Receivable from ML Ltd. Realization (To record the purchase consideration) Shares – in Receivable from ML Ltd. (To record the shares received for purchase consideration from ML Ltd.) Realization Accounts receivable Merchandise inventory Equipment (To record the transfer of assets to ML Ltd.) Accounts payable Bonds payable Realization (To record the transfer of liabilities to ML Ltd.) Page 183 P/R Debit 60,000 Credit 60,000 60,000 70,000 90,000 20,000 30,000 40,000 10,000 20,000 30,000 www.a4accounting.net Accounting for Company – Absorption Chapter # 7 Date 5 6 Date 1 2 Bilal Ltd. General Journal Particulars P/R Share capital Retained earnings Payable to shareholders (To record the closing of shareholders’ equity) Payable to shareholders Shares – in Cash (To record the shares issued and cash paid to the shareholders) ML Ltd. General Journal Particulars Accounts receivable Merchandise inventory Equipment Accounts payable Bonds payable Payable to Bilal Ltd. (To record the purchase of assets and liabilities from Bilal Ltd.) Payable to Bilal Ltd. Ordinary share capital (6,000 x 10) (To record the shares issued to the Bilal Ltd.) ILLUSTRATION # 2: Debit 40,000 30,000 Credit 70,000 70,000 60,000 10,000 P/R Debit 20,000 30,000 40,000 Credit 10,000 20,000 60,000 60,000 60,000 (LUMP SUM METHOD) On January 1, 2007 balance sheet of AB Ltd. appeared as follows: Cash 100,000 Accounts payable 140,000 Accounts receivable 230,000 Bonds payable 300,000 Merchandise inventory 310,000 Share capital Rs.10 500,000 Equipment 400,000 Retained earnings 100,000 1,040,000 1,040,000 AB Ltd. is absorbed on January 1, 2007 by YZ Ltd. on the following terms: (a) All the assets and liabilities were taken over at book values. (b) Four new shares of Rs.10 each for every five shares held were issued to the shareholders of the AB Ltd. (c) Bondholders will get 32,000 shares of Rs.10 each in YZ Ltd. (d) Liquidation expenses paid by YZ Ltd. amounted to Rs.60,000. REQUIRED (1) Compute purchase consideration. (2) Journal entries in the books of AB Ltd. (3) Journal entries in the books of YZ Ltd. www.a4accounting.net Page 184 Accounting for Company – Absorption Chapter # 7 SOLUTION # 2: Computation of Purchase Consideration: To Shareholders: 50,000 x 4/5 = 40,000 Ordinary shares @ Rs.10 each To Bondholders: 32,000 Ordinary shares @ Rs.10 each Liquidation Expense: Cash Purchase consideration Date 1 2 3 4 5 6 7 8 9 AB Ltd. General Journal Particulars Receivable from YZ Ltd. Realization (To record the purchase consideration) Shares – in Cash Receivable from YZ Ltd. (To record the shares and cash received for purchase consideration from YZ Ltd.) Realization Cash Accounts receivable Merchandise inventory Equipment (To record the transfer of assets to YZ Ltd.) Accounts payable Realization (To record the transfer of liabilities to YZ Ltd.) Bonds payable Realization Shares – in (To record the shares issued to the bondholders) Realization Cash (To record the payment of liquidation expense) Shares capital Retained earnings Payable to shareholders (To record the closing of shareholders’ equity) Payable to shareholders Realization (To record the closing of realization account) Payable to shareholders Shares – in (To record the shares issued to shareholders) Page 185 (Rupees) 400,000 320,000 60,000 780,000 P/R Debit 780,000 720,000 60,000 1,040,000 Credit 780,000 780,000 100,000 230,000 310,000 400,000 140,000 140,000 300,000 20,000 320,000 60,000 60,000 500,000 100,000 200,000 600,000 200,000 400,000 400,000 www.a4accounting.net Accounting for Company – Absorption Chapter # 7 3 5 6 Date 1 2 Assets Shares – in Cash Realization 1,040,000 1 20,000 4 60,000 8 1,120,000 Receivable from YZ Ltd. Accounts payable Payable to shareholders YZ Ltd. General Journal Particulars Cash Accounts receivable Merchandise inventory Equipment Capital reserve Accounts payable Payable to AB Ltd. (To record the purchase of assets and liabilities from AB Ltd.) Payable to AB Ltd. Ordinary share capital (72,000 x 10) Cash (To record the shares issued and cash paid to the AB Ltd.) www.a4accounting.net Page 186 P/R Debit 100,000 230,000 310,000 400,000 780,000 140,000 200,000 1,120,000 Credit 120,000 140,000 780,000 780,000 720,000 60,000 Accounting for Company – Absorption Chapter # 7 PRACTICE QUESTIONS Question # 1: On January 1, 2007 balance sheet of Zeeshan Ltd. appeared as follows: Cash 77,000 All for depreciation – Building Accounts receivable 77,000 Accounts payable Merchandise inventory 55,000 Bonds payable Equipment 55,000 Share capital Rs.10 Building 660,000 Retained earnings 924,000 Zeeshan Ltd. is absorbed on January 1, 2007 by Furqan Ltd. on the following terms: (a) All the assets and liabilities were taken over at book values except cash. (b) Shareholders will get 66,000 shares of Rs.10 each in Furqan Ltd. (c) Liquidation expenses paid by Zeeshan Ltd. amounted to Rs.22,000. REQUIRED (1) Compute purchase consideration. (2) Journal entries in the books of Zeeshan Ltd. (3) Journal entries in the books of Furqan Ltd. 110,000 110,000 55,000 605,000 44,000 924,000 Question # 2: Following balances appear in the balance sheet of United Company Ltd. as on June 30, 1996: Assets (in Rs.) Equities (in Rs.) Accounts receivable 110,000 Allowance for bad debts 11,000 Inventories 275,000 Allowance for depreciation 99,000 Land 440,000 Accounts payable 110,000 Building 880,000 Share capital 1,650,000 Retained earnings 165,000 Total assets 1,870,000 Total equities 1,870,000 The company was absorbed by Decent Company Ltd. on the following terms: (a) All assets and liabilities to be taken over at book values. (b) Purchase consideration to be paid as follows: Cash Rs.330,000. Shares of Rs.10 each Rs.1,100,000. REQUIRED Give journal entries in the books of: a) United Company Ltd. b) Decent Company Ltd. Question # 3: The equities section of Saigals Ltd. on 31 December 1990 was as under: Authorized capital (Rs.10) Rs.1,800,000 Paid – up capital (Rs.10) 1,200,000 Share premium 60,000 Retained earnings 540,000 Reserves 120,000 Bonds payable 180,000 Accounts payable 60,000 The company was absorbed by Tariq Saeed Ltd. on the following terms: (a) Tariq Saeed Ltd. to take over all the assets and to assume the accounts payable at book value. (b) The shareholders to receive 180,000 shares of Rs.10 each and a cash payment of Rs.210,000. Page 187 www.a4accounting.net Accounting for Company – Absorption Chapter # 7 (c) Bondholders to receive 18,000 shares of Rs.10 each in Tariq Saeed Ltd. (d) Tariq Saeed Ltd. to pay liquidation expenses of Rs14,400 to Saigals Ltd. in cash. REQUIRED Give journal entries in proper form in the books of: a) Saigals Ltd. b) Tariq Saeed Ltd. Question # 4: The following balances appear in the balance sheet of Malir Company Limited as on November 30, 2000. Cash Rs.195,000 Accounts receivable 715,000 Office equipment 325,000 Retained earnings 260,000 -----------------Allowance for bad debts Rs.26,000 Allowance for depreciation 39,000 Accounts payable 130,000 Share capital 1,300,000 Malir Company Ltd. was absorbed by Karachi Company Ltd. on the following terms: 1) All assets (except cash) to be taken over at book values. 2) Purchase consideration to be paid in cash Rs.260,000 and shares Rs.650,000. 3) Malir Company Ltd. paid Rs.123,500 in full settlement of accounts payable, and Rs.19,500 as liquidation expenses. 4) Shares and remaining cash were distributed amongst the shareholders of Malir Company Ltd. REQUIRED Prepare entries in general journal of: (a) Malir Company Ltd. (b) Karachi Company Ltd. Question # 5: Following balances appear in the balance sheet of Al-Furqan Ltd. as on December 31, 1992: Debit Balances (Rupees) Credit Balances (Rupees) Cash 14,000 Ordinary share capital Accounts receivable 56,000 35,000 shares @ Rs.10 each 350,000 Merchandise inventory 70,000 Ordinary share premium 70,000 Land 112,000 Reserve for contingencies 28,000 Building 1,008,000 Retained earnings 140,000 8% Debentures payable 280,000 Accounts payable 56,000 All for depreciation–Building 336,000 Total assets 1,260,000 Total equities 1,260,000 Al-Furqan Ltd. was absorbed by Mehran Ltd. on the following terms: (a) All the assets and liabilities (with the exception of cash and bonds payable) were taken over by Mehran Ltd. (b) Purchase consideration was agreed at Rs.980,000 which was paid by Mehran Ltd. as under: Cash Rs.420,000 and 56,000 ordinary shares of Rs.10 each Rs.560,000. (c) Bondholders were paid by Al-Furqan Ltd. (d) Al-Furqan Ltd. paid the liquidation expenses of Rs.14,000. www.a4accounting.net Page 188 Accounting for Company – Absorption Chapter # 7 (e) Al-Furqan Ltd. distributed the shares of Mehran Ltd. and the remaining cash amongst its shareholders. REQUIRED (1) Entries in General Journal of Al-Furqan Ltd. for the above transactions. (2) Prepare cash account. (3) Entries in General Journal of Mehran Ltd. Question # 6: The balance sheet data of Saim Waqar Ltd. was as under: Authorized capital Rs.1,875,000 Paid up capital Rs.750,000 Share premium 93,750 Retained earnings 187,500 Reserves 93,750 Bonds payable 187,500 Accounts payable 112,500 Preliminary expenses 187,500 Saim Waqar Ltd. was absorbed by Owais Ltd. on the following terms: (a) All the assets and accounts payable were taken over by absorbing company at book value. (b) Saim Waqar Ltd. received 75,000 shares of Rs.10 each and cash payment of Rs.112,500 from absorbing company. (c) Bond holders received 20,625 shares of Rs.10 each from the absorbing company. (d) Owais Ltd. paid the liquidation expenses of Rs.18,750 to Saim Waqar Ltd. REQUIRED (1) Compute the purchase consideration. (2) Give necessary journal entries to give effect to the above decision on the books of: a) Saim Waqar Ltd. b) Owais Ltd. Question # 7: Following balance sheet relates to business of Bilquis & Co. Equities (Rupees) Assets (Rupees) Authorized Capital: Non – Current Assets: 64,000 ordinary shares Plant & Property 320,000 @ Rs.10 Each 640,000 Paid up Capital: Current Assets: 38,400 ordinary shares 384,000 Inventory 48,000 Bonds payable 544,000 Office supplies 96,000 Accounts receivable 192,000 Current Liabilities: Cash 368,000 Accounts payable 96,000 Total equities 1,024,000 Total assets 1,024,000 Bilquis & Company was absorbed by Umer & Company under the following terms & conditions: (1) Umer & Co. took over all business assets (except cash) and assumed accounts payable at book values. (2) In consideration Umer & Co. issued 65,600 shares of Rs.10 each to the shareholders of Bilquis & Co. (3) The bonds holders of Bilquis & Co. were issued 38,720 shares of Rs.10 in Umer & Co. (4) The liquidation expenses were paid by Bilquis & Co. Rs.25,600 cash. REQUIRED (a) Record entries in the books of Bilquis & Co. (b) Record entries in the books of Umer & Co. Page 189 www.a4accounting.net Accounting for Company – Absorption Chapter # 7 (c) Prepare an initial balance sheet of Umer & Co. as on July 1, 2010. Umer & Co. was registered with a capital of Rs.1,280,000 which is divided into 128,000 ordinary shares of Rs.10 par. Question # 8: The balance sheet data of Karim Ltd. was as under: Authorized capital Rs.1,700,000; Paid-up capital Rs.680,000; Share premium Rs.85,000; Retained earnings (credit balance) Rs.170,000; Reserves Rs.85,000; Bonds payable Rs.170,000; Accounts payable Rs.102,000; Preliminary expenses Rs.170,000. Karim Ltd. was absorbed by Rahim Ltd. on the following terms: a) All the assets and accounts payable were taken over by the absorbing company at book values. b) Karim Ltd. received 68,000 shares of Rs.10 each and cash payment of Rs.102,000 from the absorbing company. c) Bondholders received 18,700 shares of Rs.10 each from the absorbing company. d) Rahim Ltd. paid the liquidation expenses of Rs.17,000 to Karim Ltd. in cash. REQUIRED (1) Compute the purchase consideration. (2) Give necessary journal entries to give effect to the above decision on the books of: a) Karim Ltd. b) Rahim Ltd. Question # 9: The balance sheet of Kamran Company Ltd. as on 31 December 1986 was as under: Credit Balances (Rupees) Debit Balances (Rupees) 36,000 shares of Rs.10 each 360,000 Preliminary expenses 72,000 General reserve 72,000 Building 270,000 Profit & loss account 36,000 Merchandise inventory 90,000 Allowance for depreciation 18,000 Accounts receivable 90,000 Allowance for bad debts 9,000 Cash 81,000 Long term loan 90,000 Accounts payable 18,000 603,000 603,000 The company was absorbed by Adnan Co. Ltd. on the following terms: (a) All the assets and liabilities (with the exception of cash and long term loan) were taken over by absorbing company at book values. (b) Kamran Co. Ltd. received 36,000 shares of Rs.10 each and cash payment of Rs.90,000 from the absorbing company. (c) Kamran Co. Ltd. paid the liquidation expenses amounting to Rs.18,000 and long term loan at book values. REQUIRED (1) Compute the purchase consideration. (2) Give necessary journal entries to give effect to the above decision on the books of: a) Kamran Co. Ltd. b) Adnan Co. Ltd. Question # 10: The following balances appear in the balance sheet of Imran Ltd. as on 31 December 1985: Debit Balances: (Rs.) Land 142,500 Building 475,000 Accounts receivable 57,000 www.a4accounting.net Page 190 Accounting for Company – Absorption Chapter # 7 Merchandise inventory Credit Balances: Ordinary share capital (28,500 shares of Rs.10 each) Bonds payable Accounts payable Allowance for depreciation – Building Retained earnings 38,000 712,500 (Rs.) 285,000 95,000 28,500 142,500 161,500 712,500 Imran Ltd. was absorbed by Hani Ltd. on the following terms: (a) All the assets and accounts payable to be taken over by the Hani Ltd. at book values. (b) Shareholders of Imran Ltd. to receive 47,500 shares of Rs.10 each and a cash payment of Rs.47,500 from Hani Ltd. (c) Bondholders of Imran Ltd. to receive 11,400 shares of Rs.10 each in Hani Ltd. REQUIRED: (1) Entries in General Journal of Imran Ltd. (2) Entries in General Journal of Hani Ltd. Question # 11: Following are the asset and equity account balance of Ashraf Co. Ltd. as on June 30, 1999. Dr. Balances (Rupees) Cr. Balances (Rupees) Cash 55,000 Allow. for depreciation – Plant 55,000 Merchandise inventory 82,500 Accounts payable 38,500 Accounts receivable 33,000 Accrued expenses 16,500 Plant assets 220,000 Share capital (Rs.10 par) 297,000 Preliminary expenses 5,500 Retained earnings 11,000 The above company was absorbed by ‘Sajid Company Ltd.’ on July 1, 1999 on the following terms: a) All the assets and liabilities (with the exception of cash, accounts receivable and accrued expenses) were taken over by the absorbing company at book values. Accounts receivable were later on collected by Ashraf Company Ltd. in the amount of Rs.22,000 in full settlement, and paid Rs.11,000 in full settlement of the accrued expenses. b) Two new shares of Rs.10 at Rs.12 each for every three shares are issued to the shareholders of Ashraf Co. Ltd. REQUIRED 1) Entries in the books of Ashraf Co. Ltd. relating to transfer of business and final settlement of accounts. 2) Entries in the books of Sajid Co. Ltd. relating to record the absorption of Ashraf Co. Ltd. and issuance of shares to vendors. Question # 12: The following balances relate to the business of Ashar Company Ltd. as on June 30, 2009: Cash Rs.420,000; Other assets Rs.378,000 and accounts payable Rs.36,000 which is 1/3 of long term liabilities, Ordinary share capital (par value Rs.10 per share) Rs.600,000, Retained earnings Rs.54,000. Ashar Company was absorbed by Absar Company Limited under the following terms and conditions: Page 191 www.a4accounting.net Accounting for Company – Absorption Chapter # 7 (a) Absar Company Ltd. to take over all the business assets except cash and to assume accounts payable at book value. (b) The shareholders of Ashar Company Ltd. to receive 5 shares in Absar Company Ltd. against 4 shares of Rs.10 per share. (c) Long term liabilities of Ashar Company Ltd. settled by issuing 11,400 ordinary shares in Absar Company Ltd. of Rs.10. (d) Absar Company Ltd. to pay liquidation expenses of Rs.21,600 cash to Ashar Company Ltd. REQUIRED (a) Compute the amount of purchase consideration. (b) Prepare journal entries in the books of liquidating company. Question # 13: The balance sheet of Bilal Company Ltd. on June 30, 2002 was as under:Assets Cash Merchandise inventory Accounts receivable Land Plant assets Retained earnings Equities Accounts payable Allowance for depreciation – Plant 5% Debentures payable Share capital (57,200 shares @ Rs.10 each) (Rupees) 19,500 71,500 97,500 130,000 390,000 130,000 838,500 (Rupees) 58,500 78,000 130,000 572,000 838,500 The above company is absorbed by Owais Company Ltd. on the following terms:(1) All assets and liabilities to be taken at book value. (2) Four new shares of Rs.10 each for every five shares held were issued to the shareholders of the old company. (3) The debenture holders of the old company are issued new 10% debentures at a premium of 5%. (4) The realization expenses of old company Rs.3,900 to be paid by the new company. REQUIRED (a) Compute the amount of purchase consideration. (b) Entries in the books of Bilal Company Ltd. (c) Entries in the books of Owais Company Ltd. Question # 14: The following balances appeared in the balance sheet of Yousuf Ltd. as on June. 30, 2003 Assets Rupees Equities Rupees Cash 28,000 Accounts payable 28,000 Accounts receivable 84,000 Bonds payable 140,000 Merchandise inventory 224,000 Share capital (Rs.10/= each) 840,000 Land and building 336,000 General reserves 224,000 Plant and machinery 560,000 Retained earnings 168,000 Goodwill 168,000 Total 1,400,000 Total 1,400,000 www.a4accounting.net Page 192 Accounting for Company – Absorption Chapter # 7 The above company is absorbed by Ghani Ltd. on the following terms: (1) All the assets (with exception of cash) to be taken over at book values. (2) Accounts payable to be paid by Yousuf Ltd. (3) Purchase consideration was as follows: (a) A cash payment of Rs.4 for every share of Yousuf Ltd. (b) The issue of one share of Rs.10/= each (market value Rs.12.50) in Ghani Ltd. for every share in Yousuf Ltd. (c) The issue of 1,540 bonds of Rs.100/= each in Ghani Ltd. to enable Yousuf Ltd. to discharge its bonds at a premium of 10%. REQUIRED (i) Compute the purchase consideration. (ii) Give the necessary journal entries in the books of both the companies. Question # 15: Following is the balance sheet of Maheen Ltd. as on June 30, 2004: Assets Rupees Liabilities & Equities Rupees Cash 300,000 Share capital Accounts receivable 450,000 525,000 shares of Rs.10 each 5,250,000 Merchandise inventory 525,000 5% Debentures payable 750,000 Plant machinery 2,775,000 Accounts payable 477,000 Building 2,325,000 Accumulated Depreciation: Furniture 1,087,500 Machinery 285,000 Building 240,000 Furniture 108,750 Retained earnings 351,750 Total Rs. 7,462,500 Total Rs. 7,462,500 On that date the company was absorbed by Afzal Ltd. on these terms: 1. All assets (except cash) and accounts payable were taken over at book value. 2. Debentures were to be redeemed by Maheen Ltd. 3. The purchase consideration was satisfied by allotment of four shares of Rs.10 each in Afzal Ltd. (at market value Rs.12.50) for every five shares in Maheen Ltd. and the balance paid in cash. 4. Maheen Ltd. paid off the debentures with redemption premium @ Rs.10. Also paid Rs.7,500 for liquidation expenses. REQUIRED (a) Compute the amount of purchase consideration. (b) Entries in the general journal of Maheen Ltd. for absorption. Question # 16: The balance sheet of Multan Milk Products as on December 1, 2006 was as under: Assets (Rupees) Cash 64,000 Merchandise inventory 48,000 Accounts receivable 128,000 Land & building 480,000 Machinery & equipment 800,000 Allowance for depreciation (Machinery & equipment) (160,000) 1,360,000 Page 193 www.a4accounting.net Accounting for Company – Absorption Chapter # 7 Liabilities and Equity (Rupees) Accounts payable 6% Debentures payable Share capital (112,000 ordinary shares of Rs.10) Retained earnings 64,000 80,000 1,120,000 96,000 1,360,000 Fresh Milk Limited, a giant in dairy products, absorbed the Multan Milk Products on the following terms: All assets and liabilities were taken over at book value. Fresh Milk Limited issued one share of Rs.10 for every two shares held by Multan Milk Products shareholders. The balance was settled in cash. The debenture holders were issued new 10% debentures at par. Multan Milk Products paid its realization expenses amounting to Rs.16,000. REQUIRED (a) Compute the purchase consideration. (b) Give necessary general Journal entries to record the absorption in the books of both companies. Question # 17: The equity section of the balance sheet of Khalid Co. Ltd. as of 31 December 1996 was as under: Authorized, Issued and Paid – Up Capital: (Rs.) 13,600 shares of Rs.100 each 1,360,000 Retained earnings 425,000 6% Bonds payable 510,000 Accounts payable 225,000 It was decided that the Khalid Co. Ltd. absorbed by Karim Company on the following terms: a) All the assets and accounts payable were taken over by the absorbing company at book values. b) The absorbing company issued five shares of Rs.100 each for four shares held in the absorbed company. c) Bondholders received 5,270 shares of Rs.100 each from the absorbing company. d) Karim Company paid the liquidation expenses of Rs.17,000 to Khalid Co. Ltd. in cash. REQUIRED: (1) Compute the purchase consideration. (2) Entries in General Journal of the absorbed company. (3) Entries in General Journal of the absorbing company. Question # 18: The following balances appear in the balance sheet of Kamal Limited as on 30 June 1990: Debit Balances: Rupees Land 72,000 Building 648,000 Preliminary expenses 18,000 Accounts receivable 36,000 Merchandise inventory 27,000 Cash 9,000 Credit Balances: Rupees Ordinary share capital (22,500 shares of Rs.10 each) 225,000 Ordinary share premium 45,000 www.a4accounting.net Page 194 Accounting for Company – Absorption Chapter # 7 Reserve for contingencies 18,000 Retained earnings 90,000 Bonds payable (1,800 bonds of Rs.100 each) 180,000 Accounts payable 34,200 Allowance for depreciation – Building 216,000 Allowance for bad debts 1,800 Kamal Ltd. was absorbed by Zafar Ltd. on the following terms: (a) All the assets and liabilities (with the exception of cash and bonds payable) were taken over by Zafar Ltd. (b) Purchase consideration was agreed at Rs.630,000 which was paid by Zafar Ltd. as under: Cash Rs.270,000 36,000 Ordinary shares of Rs.10 each of Zafar Ltd. Rs.360,000 (c) Bondholders were paid by Kamal Ltd. (d) Kamal Ltd. paid the liquidation expenses of Rs.9,000. (e) Kamal Ltd. distributed the shares of Zafar Ltd. and the remaining cash amongst its shareholders. REQUIRED: (1) Entries in General Journal of Kamal Ltd. for the above transactions. (2) Prepare cash account. (3) Entries in General Journal of Zafar Ltd. Question # 19: Following are balance sheet data of Mughallias Ltd. and Babar Ltd. on December 31, 1997: Debit Balances: (Rupees) Mughallias Ltd. Babar Ltd. Cash 190,000 19,000 Accounts receivable 142,500 98,800 Merchandise inventory 95,000 85,500 Land 152,000 104,500 Building 304,000 266,000 Goodwill 85,500 Preliminary expenses 28,500 Credit Balances: (Rupees) Mughallias Ltd. Babar Ltd. Allowance for bad debts 9,500 3,800 Allowance for depreciation 114,000 76,000 Accounts payable 66,500 47,500 12% Bonds payable 114,000 Ordinary share capital (Rs.10 par) 570,000 380,000 Ordinary share premium 38,000 Reserves 57,000 Retained earnings 38,000 57,000 Babar Ltd is absorbed by Mughallias Ltd. on January 1, 1998 on the following terms: a) Current assets (except cash) and liabilities to be taken over at book values, and land and building to be taken over at Rs.142,500 and Rs.228,000 respectively. b) Purchase consideration of Rs.570,000 to be paid in cash Rs.95,000 and by issue of ordinary shares of Rs.10 each at a premium of Rs.2.50 per share. REQUIRED (1) Entries in General Journal of the absorbed company. (2) Entries in General Journal of the absorbing company. (3) Classified balance sheet after absorbing (authorized capital is one million rupees). Page 195 www.a4accounting.net Accounting for Company – Absorption Chapter # 7 Question # 20: The following are the assets and equities of Mushkbar Company Ltd. as on June 30, 1993: Assets (Rupees) Equities (Rupees) Cash 44,000 Allowance for depreciation 275,000 Accounts receivable 176,000 Accounts payable 165,000 Merchandise inventory 275,000 Ordinary share capital 1,177,000 Plant assets 1,045,000 (Rs.10 each) Retained earnings 77,000 Total assets 1,617,000 Total equities 1,617,000 The above company is absorbed by Ashkbar Company Ltd. on July 1, 1993 which already holds 38,500 ordinary shares of Mushkbar Company Ltd. and which were acquired by it for Rs.330,000. (a) All assets and liabilities to be taken at book values. (b) Ashkbar Company Ltd. to issue to the vendors, namely outside shareholders, two ordinary shares of Rs.10 each in Ashkbar Ltd. for every three ordinary shares in Mushkbar Company Ltd. The market price of Ashkbar Company Ltd. is Rs.15 each. REQUIRED (1) Entries in the books of Mushkbar Company Ltd. relating to transfer of business and final settlement of accounts. (2) Entries in the books of Ashkbar Company Ltd. relating to record the absorption of Mushkbar Company Ltd. and issuance of shares to vendors. Question # 21: Sagheer Ltd balance sheet data as on 30 June 1988 is as follows: Assets (Rupees) Equities (Rupees) Cash 6,000 Allowance for depreciation 36,000 Accounts receivable 18,000 Accounts payable 21,600 Merchandise inventory 24,000 Ordinary share capital 120,000 Plant assets 120,000 (Rs.10 each) Retained earnings 9,600 Total assets 177,600 Total equities 177,600 The above company is absorbed by Al-Kabeer Ltd. which already holds 4,800 ordinary shares of Sagheer Ltd. and which were acquired by it for Rs.43,200. (a) All assets and liabilities to be taken at book values. (b) Al-Kabeer Ltd. to issue to the vendors, namely outside shareholders, two ordinary shares of Rs.10 each in Al-Kabeer Ltd. for every three ordinary shares in Sagheer Ltd. REQUIRED (1) Entries in the books of Sagheer Ltd. relating to transfer of business and final settlement of accounts. (2) Entries in the books of Al-Kabeer Ltd. relating to record the absorption of Sagheer Ltd. and issuance of shares to vendors. www.a4accounting.net Page 196 Chapter # 8 Accounting for Company – Reconstruction Advanced Accounting www.a4accounting.net Accounting for Company – Reconstruction Chapter # 8 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Accounting for companies. Reconstruction. WHAT THE EXAMINER USUALLY ASK? General Journal entries in the books of company. Revised Balance Sheet of company after capital reduction. www.a4accounting.net Page 198 Accounting for Company – Reconstruction Chapter # 8 REDUCTION OF CAPITAL A reduction in the issued share capital of a company is called capital reduction. The Companies Act states that, subject to confirmation by the court, a company may, if authorized by its article of association, pass a special resolution to reduce its issued share capital. It may: a) Cancel any paid-up capital that is lost or no longer represented by available assets. b) Extinguish or reduce the liability on any of its shares in respect of share capital not paid up. c) Pay off any paid-up share capital that is in excess of its warrants. SOME POSSIBLE GENERAL ENTRIES 1- Reduction in the par value of paid – up ordinary shares: Ordinary share capital Debit (with paid-up capital amount) Ordinary share capital Credit (with new par value) Capital reduction Credit (difference amount) --------------------------------------------------------------------------------------------------------------2- Write off retained earnings account (loss): Capital reduction Debit (accumulated loss amount) Retained earnings Credit (retained earning amount) --------------------------------------------------------------------------------------------------------------3- Write off preliminary expenses account: Capital reduction Debit (preliminary expense) Preliminary expenses Credit (preliminary expense) --------------------------------------------------------------------------------------------------------------4- Reduction in the values of current assets and fixed assets: Capital reduction Debit (total assets amount) Current assets Credit (current assets) Fixed assets Credit (fixed assets) --------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 1: The balance sheet of ABC Ltd. as on December 31, 2003 is as follows: Assets Rupees Equities Rupees Bank 30,000 Accounts payable 40,000 Accounts receivable 110,000 Allow for depreciation Plant 30,000 Merchandise inventory 25,000 Authorized Capital: Preliminary expense 12,000 Paid up capital 600,000 Goodwill 20,000 Share premium 30,000 Retained earnings 143,000 Plant assets 360,000 700,000 700,000 The following scheme of reconstruction was agreed upon & implemented on June 1, 2003: (a) Ordinary share of Rs.10 each be reduced to an equal number of fully paid shares of Rs.5 each. (b) Share premium was utilized. (c) The amount thus available is utilized to write off preliminary expenses, profit & loss and goodwill completely. Page 199 www.a4accounting.net Accounting for Company – Reconstruction Chapter # 8 (d) Accounts receivable are estimated to realize Rs.100,000, inventory is valued at Rs.20,000 and plant assets are assigned a book value of Rs.190,000. REQUIRED (1) Entries in the General Journal to give effect to the above scheme. (2) Revised balance sheet of ABC Ltd. SOLUTION # 1: Date 1 2 3 4 ABC Ltd. General Journal Particulars Ordinary shares capital (60,000 x 10) Ordinary shares capital (60,000 x 5) Capital reduction (To record the capital reduction) Share premium Capital reduction (To record the write off share premium) Capital reduction Preliminary expense Goodwill Retained earnings (To record the write off preliminary expenses, profit & loss and goodwill) Capital reduction Allowance for bad debts Merchandise inventory Allowance for depreciation (To record the reduction in the values of assets) P/R Debit 600,000 Credit 300,000 300,000 30,000 175,000 30,000 12,000 20,000 143,000 155,000 10,000 5,000 140,000 ABC Ltd. Balance Sheet As on 1 June 2003 Equities Shareholder’s Equity: Issued & Paid-up Capital: 60,000 ordinary shares @ Rs.5 each Total shareholder’s equity Liabilities: Accounts payable Total liabilities Total equities www.a4accounting.net 40,000 Assets Fixed Assets: Plant assets 360,000 Less: Allow for depreciation (170,000) 300,000 Total fixed assets 190,000 300,000 Current Assets: Inventory 20,000 Accounts receivable 110,000 40,000 Less: All for bad debts (10,000) Bank 30,000 Total current assets 150,000 340,000 Total assets 340,000 Page 200 Accounting for Company – Reconstruction Chapter # 8 PRACTICE QUESTIONS Question # 1: The balance sheet of Zeeshan Ltd. as on Dec. 31, 2002 is as follows: Assets Rupees Equities Rupees Cash in hand 16,500 Accounts payable 82,500 Accounts receivable 275,000 Allow for depreciation Plant 165,000 Merchandise inventory 55,000 Authorized Capital: Investment 110,000 275,000 ordinary shares of Preliminary expense 27,500 Rs.10 each 2,750,000 Goodwill 38,500 Paid up capital 1,100,000 Profit & loss 165,000 Share premium 55,000 Plant assets 715,000 1,402,500 1,402,500 The following scheme of reconstruction was agreed upon & implemented on July 31, 2003: (a) Ordinary share of Rs.10 each be reduced to an equal number of fully paid shares of Rs.5 each. (b) Share premium was utilized. (c) Investment was sold for Rs.99,000. (d) The amount thus available is utilized to write off preliminary expenses, profit & loss and goodwill completely. (e) Accounts receivable are estimated to realize Rs.220,000, inventory is valued at Rs.44,000 and plant assets are assigned a book value of Rs.330,000. REQUIRED (1) Entries in the General Journal to give effect to the above scheme. (2) Revised balance sheet of Zeeshan Ltd. Question # 2: Following is the trial balance of Metropolitan Trading Company Limited as on December 31, 2006: Assets (Rupees) Equities & Liabilities (Rupees) Land and building 480,000 Authorized Capital: Machinery & equipment 360,000 120,000 ord. shares of Rs.10 1,200,000 Furniture & fixture 24,000 Paid up Capital: Merchandise inventory 120,000 120,000 shares of Rs.10 1,200,000 Accounts receivable 132,000 Accounts payable 36,000 Retained earnings 120,000 Outstanding expense 30,000 Bank 30,000 1,266,000 1,266,000 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 180,000 ordinary shares of Rs.10 each. The new company purchases the business of the existing company for a sum of Rs.1,080,000 by issuing 96,000 shares of Rs.10 each and paying Rs.120,000 cash. The reconstruction expenses amounting to Rs.30,000 is to be meet by the existing the company. Page 201 www.a4accounting.net Accounting for Company – Reconstruction Chapter # 8 REQUIRED (a) General Journal entries to record the reconstruction transactions. (b) Realization account and shareholders account in the books of Metropolitan Trading Company Limited. Question # 3: The following are the balance sheet accounts of Rasheed Co. Ltd. as on 30th June 2007: Debit (Rupees) Credit (Rupees) Cash 27,300 Accounts payable 52,000 Accounts receivable 94,900 Bank overdraft 67,600 Merchandise inventory 79,300 Share Capital: Plant & machinery 109,200 32,500 Ordinary shares of Rs.10 325,000 Preliminary expenses 2,600 Retained earnings (Deficit) 110,500 Patents 20,800 444,600 444,600 The company proved unsuccessful and resolutions were passed to carry out the following schemes of reconstruction by reduction of capital: (1) That the ordinary shares be reduced to an equal number of fully paid shares of Rs.5 each. (2) That the amount so available be utilized for wiping out losses and reduction of assets as follows: Preliminary expenses and retained earnings account (Dr. Balance) to be written off entirely. The plant & machinery be reduced by Rs.10,400. The merchandise inventory is written down by Rs.7,800. Make provision for bad debts Rs.10,400. The patents to be completely written off. REQUIRED (i) Make necessary journal entries in the books of the company to implement the above scheme of reconstruction. (ii) Prepare the balance sheet (revised). Question # 4: The balance sheet of Al-Raza Ltd as on June 30, 2009 is as follows: Credit Balances: Authorized capital: 140,000 ordinary shares of Rs.20 Paid up Capital: 63,000 ordinary shares of Rs.20 each 7% Bond payable Accounts payable Allowance for depreciation – Plant assets Debit Balances: Plant assets Accounts receivable (Net) Merchandise inventory Cash Preliminary expenses Profit / Loss www.a4accounting.net Page 202 Rs. 2,800,000 Rs. Rs. Rs. Rs. Rs. 1,260,000 280,000 105,000 210,000 1,855,000 Rs. Rs. Rs. Rs. Rs. Rs. Rs. 840,000 336,000 364,000 28,000 63,000 224,000 1,855,000 Accounting for Company – Reconstruction Chapter # 8 The following scheme of reconstruction was agreed and implemented on the same date: 1. The amount of authorized capital to remain unchanged but the par value of each share is now to be Rs.10 as per Companies Ordinance 1984. 2. The shareholders were issued 70,000 shares at Rs.10 each against their holdings. 3. Bonds payable were settled by issuing 29,400 shares at par. 4. Preliminary expenses and profit or loss accounts were completely written off, merchandise was valued at Rs.378,000, accounts receivable were estimated to realize to the extent of 90%. The balance of reduced capital’s amount was utilized to reduce the value of plant assets. REQUIRED (a) Entries in the books of Al-Raza Ltd. to give effects of the above scheme. (b) Revised balance sheet as on June 30, 2009. Question # 5: The following balances appeared on 31 December 1996 in the General Ledger of Aslam Ltd. Balance Sheet Credit (Rupees) Debit (Rupees) 450,000 Ordinary shares Building 3,000,000 @ Rs.10 each 4,500,000 Plant & machinery 1,200,000 Long term bonds payable 525,000 Goodwill 300,000 Accounts payable 525,000 Merchandise inventory 450,000 Allowance for depreciation: Accounts receivable 375,000 Building 450,000 Preliminary expenses 225,000 Plant & machinery 225,000 Profit & loss 675,000 Total 6,225,000 Total 6,225,000 The following terms were settled under duly approved scheme of capital reduction: (a) The ordinary shares to be reduced to Rs.5 each. (b) The long terms bonds payable were settled by issuing 120,000 shares of Rs.5 each. (c) To write off profit & loss (Dr.) balance, preliminary expenses and goodwill. (d) To value the building and plant & machinery be reduced to Rs.1,950,000 and Rs.750,000 respectively. REQUIRED Give journal entries to record the above transactions and prepare balance sheet (revised). Question # 6: The balance sheet of Al-Khair Ltd. as on 31 December 1995 is as follows: Credit (Rupees) Debit (Rupees) Authorized capital par Rs.25 1,600,000 Plant assets 1,280,000 Paid-up capital par Rs.25 1,280,000 Goodwill 48,000 Bonds payable (Long term) 288,000 Preliminary expenses 16,000 Accounts payable 112,000 Accounts receivable 144,000 Allow for depreciation – Plant 96,000 Merchandise inventory 192,000 Cash in hand 8,000 Profit & loss 120,000 Total 1,808,000 Total 1,808,000 The following schemes of reconstruction was agreed upon and implemented under Section 283 of Companies Ordinance 1984: (a) The amount of authorized capital to remain unchanged at Rs.1,600,000 but the par value of each ordinary share is now to be Rs.10 in compliance with the Companies Ordinance 1984. Page 203 www.a4accounting.net Accounting for Company – Reconstruction Chapter # 8 (b) The shareholders surrender their 51,200 ordinary shares of Rs.25 and in exchange they were issued 75,200 ordinary shares of Rs.10 par. (c) 32,000 ordinary shares of Rs.10 par were issued to bondholders for redeeming their bonds. (d) Goodwill, preliminary expenses, and balance to profit & loss were completely written off. (e) Accounts receivable were expected to realize Rs.136,000. Merchandise was valued at Rs.160,000 and the plant assets were valued at Rs.880,000. REQUIRED (1) Give General Journal entries to incorporate the above scheme. (2) Prepare revised balance sheet. Question # 7: The balance sheet data of Al-Abid Ltd. as on 31 December 1988 is as follows: Credit (Rupees) Debit (Rupees) Authorized capital par Rs.25 1,700,000 Plant assets 1,360,000 Paid-up capital par Rs.25 1,275,000 Goodwill 85,000 Long term bonds payable 340,000 Preliminary expenses 17,000 Sundry creditors 119,000 Stock – in – trade 204,000 Allow for depreciation – Plant 136,000 Cash in hand 8,500 Profit & loss 69,500 Sundry debtors 126,000 Total 1,870,000 Total 1,870,000 The following schemes of internal reconstruction is agreed and implemented: (a) The amount of authorized capital to remain unchanged at Rs.1,700,000 but the par value of each ordinary share is now to be Rs.10. (b) Holders of two shares receive three ordinary shares of Rs.10 each fully paid. (c) Bondholders are fully redeemed by the issue of 37,400 new ordinary shares of Rs.10 each to the bondholders. (d) Goodwill, preliminary expenses, and balance of profit & loss are completely written off. (e) Sundry debtors are estimated to realize Rs.144,500, stock – in – trade is valued Rs.170,000 and plant assets are assigned a book value of Rs.935,000. REQUIRED (1) Entries in the General Journal to give effect to the above scheme. (2) Revised balance sheet of Al-Abid Ltd. Question # 8: The following is the balance sheet of Salman Co. Ltd. as 31 December 1986: Credit (Rupees) Debit (Rupees) Authorized Capital: Patents 72,000 Ordinary shares Building @ Rs.10 each 720,000 Machinery Issued and Paid – Up Capital: Accounts receivable 57,600 Ordinary shares Merchandise inventory @ Rs.10 each 576,000 Cash All. for depreciation - Building 18,000 Profit & loss All. for dep. – Machinery 9,000 Preliminary expenses Accounts payable 45,000 Total 648,000 Total www.a4accounting.net Page 204 216,000 180,000 108,000 14,400 28,800 7,200 72,000 21,600 648,000 Accounting for Company – Reconstruction Chapter # 8 The company implemented duly authorized the scheme for reduction of share capital. The scheme provides that shareholders will receive one new ordinary share each of Rs.8 paid – up for every two ordinary shares held. The scheme further provides that the capital reduction be utilized as follows: (a) To write off entirely the debit balance of profit and loss and preliminary expenses. (b) To reduce the value of building and machinery to Rs.108,000 and Rs.72,000 respectively. (c) The balance available is utilized to write off further the patents. (d) The authorized share of capital was increases to Rs.720,000 comprising of 90,000 ordinary shares each of Rs.8 each. REQUIRED (1) Give the necessary journal entries in the General Journal. (2) Draw up the balance sheet of the giving effect to the above scheme. Question # 9: Sharif Company Ltd. Faisalabad obtained permission from court to do as under: (1) To reduce 380,000 ordinary shares of Rs.10 each to 190,000 ordinary shares of Rs.10 each fully paid-up. (2) To write off preliminary expenses Rs.323,000; goodwill Rs.285,000 and loss Rs.950,000. (3) To write off plant assets of Rs.2,318,000 to the extent of remaining balance of capital reduction. The company issued suitable number of ordinary shares to pay its long term liabilities. REQUIRED (a) Prepare balance sheet before the scheme of reduction, assuming that the company had no assets and equities other than mentioned above. (b) Prepare entries in General Journal of Sharif Company. (c) Prepare revised balance sheet. Question # 10: The following is the balance sheet of Azam Company Ltd. as on 30 June 1992: Credit (Rupees) Debit (Rupees) Authorized Capital: Copyright & patents 862,400 13,750 10% Preference shares Freehold premises 231,000 @ Rs.100 each 1,375,000 Machinery 55,000 132,000 Ordinary shares Accounts receivable 88,000 @ Rs.10 each 1,320,000 Merchandise inventory 44,000 2,695,000 Cash in hand 27,500 Issued and Paid – Up Capital: Discount on shares 17,600 8,800 10% Preference shares Preliminary expenses 11,000 @ Rs.100 each 880,000 Profit & loss 258,500 66,000 Ordinary shares @ Rs.10 each 660,000 Accounts payable 44,000 Bank overdraft 11,000 Total 1,595,000 Total 1,595,000 The company suffered huge losses and was not getting on well. On 1 July 1992, the company scheme of internal reconstruction was agreed upon and implemented: (a) The preference shares of Rs.100 each are reduced to an equal number of fully paid shares of Rs.50 each. Page 205 www.a4accounting.net Accounting for Company – Reconstruction Chapter # 8 (b) The ordinary shares of Rs.10 each are reduced to an equal number of fully paid shares of Rs.3 each. (c) The amount thus available be utilized to write off Rs.37,400 off freehold premises, Rs.13,200 off merchandise inventory, 20% off machinery and the balance available (after writing off discount on shares, preliminary expenses, and profit & loss completely) off copyrights and patents. (d) The authorized capital increased to 27,500 10% preference shares of Rs.50 each and 440,000 ordinary shares of Rs.3 each. REQUIRED (1) Entries in General Journal of Azam Company Ltd. to give effect to the above scheme. (2) Revised balance sheet of Azam Company Ltd. on 1 July 1992. Question # 11: The following is the balance sheet of A.B Company Ltd. as on December 31, 1997: Liabilities & Equities (Rupees) Assets (Rupees) Accounts payable 104,400 Cash 1,200 Interest on debentures payable 15,600 Accounts receivable 144,000 Bank loan 24,000 Inventory 256,800 5% Debentures payable 156,000 Patents 138,000 7 – ½% Preference shares Machinery 684,000 @ Rs.100 each 600,000 Building 480,000 9,600 ord. shares of Rs.100 each 960,000 Profit and loss 156,000 1,860,000 1,550,000 The company was authorized to issue 6,000 7 – ½% preference shares of Rs.100 each and 12,000 ordinary shares of Rs.100 each. During the past years the company sustained huge losses and, therefore, a scheme of reconstruction is prepared and approved by the shares holders. A summary of the scheme is as follows: 1) The preference shareholders forego the shares of dividend of Rs.90,000. 2) The 7 – ½% preference shares are to be converted into 5% preference shares. 3) Every ordinary shareholder should surrender 50% of his holdings to the company. 4) The debenture holders have agreed to forego the outstanding interest and to accept 1,200 ordinary shares of Rs.100 each in exchange for debentures and balance of Rs.36,000 to be paid in cash. 5) The surrendered ordinary shares are to be utilized as under: a) To write off deficit. b) To bring down the value of patents to Rs.90,000. c) Inventory is valued at Rs.180,000. d) To write off Rs.12,000 from accounts receivable. e) The balance of the surrendered shares is to be utilized in writing off the machinery. 6) The remaining 1,200 ordinary shares are issued against cash. The cash so received is utilized in paying bank loan and the balance of debentures. REQUIRED 1) Entries in the General Journal of A.B. Company Ltd. to give effect to the above scheme. 2) Revised balance sheet of A.B. Company Ltd. on January 1, 1998. www.a4accounting.net Page 206 Chapter # 9 Accounting for Manufacturing Operation Cost Accounting www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Accounting for manufacturing concern. Cost accounting concepts. Classification of cost. Statement of cost of goods manufactured. Income Statement. Closing entries. WHAT THE EXAMINER USUALLY ASK? Computation of: o Prime cost. o Conversion cost. o Manufacturing cost. o Raw material used. o Net purchases of raw materials. o Opening inventory of raw material. o Ending inventory of raw material. o Opening inventory of goods in process. o Ending inventory of goods in process. o Opening inventory of finished goods. o Ending inventory of finished goods. o Per unit cost. o Factory overhead rate. Statement of Cost of Goods Manufactured. Income Statement. Closing entries. www.a4accounting.net Page 208 Accounting for Manufacturing Operation Chapter # 9 COST ACCOUNTING Cost accounting is the techniques used in collecting, processing, and presenting financial and quantitative data within an organization to ascertain the cost of the cost centres, the cost units, and the various operations. Cost accounting is now regarded as a division of management accounting, which also incorporates the techniques of planning, decision making, and control. Cost accounting is used to help management how much it cost to run a business. ROLE OF COST ACCOUNTING Cost accounting is the area of accounting that record, measures and report information about how much things cost within the organization. Cost accounting is used by manufacturing, merchandising, and servicing companies, governments, universities and non-profit organizations and profit organizations. The role of cost management plays in helping an organization to maintain a competitive advantage by creating more value at lower cost by efficiently managing an organization’s value chain of activities, processes, and functions. The information from the cost reports should be interpreted and presented in a way that will be useful for management. Budget is the key for planning and controlling. The budget contains cost accounting data. Management will not be able to set an optimal price for a product or service cannot be decide without knowing the cost of what is to be sold. IMPORTANCE OF COST ACCOUNTING Managers rely on cost accounting to provide an idea of the cost of processes, departments, operations or product which is the foundation of their budget, allowing them to analyze fluctuation and the way funds are used socially for profit. Cost accounting is used in management accounting, where managers justify the ability to cut costs for a company in order to increase that company’s profit. Cost accounting creates a financial value out of the production of a product, measuring currency that is nominal into units that are measured by convention. By making recorded historic costs a bit further, cost accounting allocates a company’s fixed costs over a specific time period to what items are actually produced during that period of time, creating a total cost of product production. Products that were not sold during that period of time produced a “full cost” of those products, recording them in a complex inventory system that uses accounting methods of its own that are in compliance with the GAAP standards. Managers are then enabling to focus on each period’s results as it relates to the “standard cost” of any product. Any distortions in cost that were caused by calculating that the overhead of a product is versus what a unit cost is for companies that specialize in only one specific product are very minor in industries that mass produce that product with a low fixed cost. Understanding why costs vary compared to what was actually planned helps a manager to save company money by taking actions that are appropriate to correct that variation in the future. Variance analysis is a very important part of cost accounting because it breaks down each variance into many different components of standard cost and actual cost. Some of these components are material cost variation, volume variation and labour cost variation. Page 209 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 OBJECTIVES OF COST ACCOUNTING These are the following important objectives of cost accounting: Ascertainment of Cost: The primary objective of the cost accounting is to ascertain cost of each product, service, job, operation or service rendered. Ascertainment of Profitability: Cost accounting determines the profitability of each product, process, job, operation or service rendered. The statement of profit or losses and balance sheet also submitted to the management periodically. Classification of Cost: Cost accounting classifies cost into different elements such as materials, labours, and expenses. It has further been divided as direct cost and indirect cost for cost control and recording. Control of Cost: Cost accounting aims at controlling cost by setting standards and compared with the actual, the derivation or variation between two is identified and necessary steps are taken to control them. Fixation of Selling Prices: Cost accounting guides management in regard to fixation of selling prices of the product. It is also helpful for preparing tender and quotations. SCOPES OF COST ACCOUNTING Determination and Analysis of Cost: Cost accounting records cost and income information for each department, process, job, sales territory and lies order to ascertain cost and evaluate the operating efficiency of each division of the business enterprise. Control of Cost: In age of competition, the objective of business is to maintain; in costs at the lowest point with efficient operating conditions. It requires examination of each individual item of cost in the light of the service and benefits obtained so the maximum utilization of the money expended on – it may be recovered. This requires planning and use of standard for each item of cost for locating deviations, if any, and taking remedial measures. Proper Matching of Cost With Revenue: It prepares monthly or quarterly statements to reflect the cost and income data identified with the sale of that period. Aids to Management: Cost accounting enables a business not only to ascertain what various jobs, products and services have cost to the business but also what they should have cost. It locates losses and wastages for taking corrective measures and to avoid them in future. www.a4accounting.net Page 210 Accounting for Manufacturing Operation Chapter # 9 DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING Financial Accounting (1) The main purpose of financial accounting is to record financial transactions, finding out profit or loss and financial position. (2) Financial accounting presents financial information at the end of the accounting period. (3) Financial accounting is kept compulsory in such a way as to meet the requirement of the Companies Act and Income Tax Act. (4) Financial accounting records transactions in a subjective manner. It means according to the nature of expense. (5) Financial accounting is used for internal and external users. Cost Accounting (1) The main purpose of cost accounting is to analyze, ascertainment and control of cost. (2) Cost accounting presents cost information at frequent intervals. (3) Cost accounting generally kept voluntarily meeting the requirements of the management. (4) Cost accounting records transactions in an objective manner. It means the purpose for which the cost is incurred. (5) Cost accounting is used only for internal users. COST CLASSIFICATION The process of grouping expenditure according to common characteristics is called cost classification. Cost can be classified into the following categories: COST CLASSIFICATION BY ELEMENT: Material: The production supplies of an organization that features as revenue expenditure purchased from a third party. Material may be classified as direct materials or indirect materials. Materials are not necessarily raw materials, but can include components and sub-assemblies used in the finished product. Labour: Expenditure on wages paid to those operators who are both directly and indirectly concerned with the production of the product, service, or cost unit. Overheads: An indirect cost of an organization is called overhead. Overheads are usually classified as manufacturing overheads, administration overheads, selling overheads, distribution overheads, and research and development cost. COST CLASSIFICATION BY NATURE: Direct Cost: Product costs that can be directly traced to a product or cost unit is called direct cost. They are usually made up of direct materials cost, direct labour costs, and direct expenses. a) Direct Material: Materials that are directly incorporated in the final product or cost unit of an organization is called direct materials. For example, in the production of furniture, direct material would include wood, glue, and paint. Page 211 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 b) Direct Labour: Worker directly concerned with the production of a product, service, or a cost unit is called direct labour such as machine operators, assembly and finishing operators, etc. c) Direct Expenses: Expenditure that would not be incurred unless a particular cost unit was produced (excluding costs of direct materials and direct labours) is called direct expenses. Direct expenses are included in the direct cost of an item. Indirect Cost: Expenses that cannot be traced directly to a product or cost unit and are therefore overheads are called indirect cost. a) Indirect Materials: Those materials that do not feature in the final product but are necessary to carry out the production is known as indirect materials such as machine oil, cleaning materials, and consumable materials. b) Indirect Labour: Personnel not directly engaged in the production of a product or cost unit manufactured by an organization is called indirect labour. Examples of indirect labour include maintenance personnel, cleaning staff, and senior supervisors. c) Indirect Expenses: Expenses that cannot be traced directly to a product or cost unit and are therefore overheads are called indirect expenses or indirect cost. COST CLASSIFICATION BY FUNCTION: Production Cost: The total cost of all costs incurred in producing a product or cost unit is called production cost. Production costs include: a) Direct materials. b) Direct labour. c) Direct expenses. d) Production overheads. Non – Production Cost: The indirect costs of an organization that are not classified as manufacturing cost is called non-production cost. They include administrative cost, selling cost, and distribution cost. a) Administrative Cost: That part of general cost of an organization that is incurred in carrying out its administrative activities. It includes general office salaries, stationary, telephone, etc. www.a4accounting.net Page 212 Accounting for Manufacturing Operation Chapter # 9 b) Selling Cost: The expenses incurred by an organization in carrying out its selling activities. These would include salaries of sales personnel, advertising costs, sales commission, etc. c) Distribution Cost: The cost classification that includes the costs incurred in delivering a product to the customers. Examples include postage, transport, packaging and insurance. COST CLASSIFICATION BY BEHAVIOUR: Variable Cost: An item of expenditure that, in total, varies directly with the level of activity achieved. For example, direct materials cost will tends to double if output doubles, a characteristics being that is incurred as a constant rate per unit. Fixed Cost: An item of expenditure that remains unchanged, in total, irrespective of changes in the levels of production or sales. Examples are business rates, rent, etc. Semi – Variable Cost: An item of expenditure that contains both a fixed cost element and a variable cost element is called semi-variable cost. Consequently, when activity is zero, the fixed cost will still continue to be incurred. For example, the telephone bill, in which line rent is fixed while the unit cost is variable. Stepped Cost: Stepped cost is an item of expenditure that increases in total as activity rises but in a stepped, rather than a linear function. For example the cost of one supervisor may be required for a particular range of activity, although above this level the cost of an additional supervisor would be incurred. WORK – IN – PROCESS Work in process is the balance of partly finished work remaining in a manufacturing operation at a particular time. It is valued using either FIFO cost, LIFO cost or the average cost method. FINISHED GOODS Products that have completed the manufacturing process and are available for distribution to customers is called finished goods. RAW MATERIALS Direct materials used in a production process, which are at low level of completion compared to the final product or cost unit. Examples include steel plate, wood, and chemicals. Page 213 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 PRIME COST Prime cost = CONVERSION COST Conversion cost = MANUFACTURING COST Manufacturing cost = Direct material + Direct labour Direct labour + Factory overhead Direct material + Direct labour + Factory overhead COST OF GOODS MANUFACTURED Cost of goods manufactured = Manufacturing cost + Work in process (beg) – Work in process (end) RAW MATERIAL USED Raw material used = Raw material (beginning) + Net purchases of raw material – Raw material (ending) NET PURCHASES OF RAW MATERIAL Net purchases of raw material = COST OF GOODS SOLD Cost of goods sold = Purchases of raw material + Transportation in – Purchase discount – Purchase return & allowance Finished goods (beginning) + Cost of goods manufactured – Finished goods (ending) PER UNIT COST Per unit cost = Cost of goods manufactured Number of units manufactured FACTORY OVERHEAD RATE (%) Factory overhead rate (%) = Factory overhead Direct labour X 100 SOME ITEMS OF FACTORY OVERHEAD Indirect labour cost. Indirect material cost. Factory maintenance and repair cost. Water, gas. Heat, light and power. Factory development cost. Factory supplies charges. www.a4accounting.net Page 214 Factory supervisor salary. Factory foremen salary. Factory plant, machinery and building depreciation. Factory insurance charges. Factory taxes charges. Factory miscellaneous expenses. Factory general expenses. Accounting for Manufacturing Operation Chapter # 9 COST OF GOODS MANUFACTURED The total production cost of the finished goods transferred from the production facility of an organization during an accounting period. It is made up of the total expenditure for the period on direct materials, direct labours, direct expenses, and manufacturing overheads adjusted by the opening and closing stocks of raw materials and the work in process at the beginning and end of the period. STATEMENT OF COST OF GOODS MANUFACTURED Name of Business Statement of Cost of Goods Manufactured For the Period Ended __________________ Raw Material Used: Raw materials (opening) Add: Net Purchases of Raw Materials: Purchases of raw materials Add: Transportation-in Delivered purchases of raw materials Less: Purchase discount Less: Purchase return and allowances Net purchases of raw materials Raw materials available for use Less: Raw materials (ending) Raw materials used Add: Direct labour Prime cost Add: Factory Overheads: Indirect materials Indirect labours Factory maintenance and repair cost Heat, light and power Water, gas Factory supervisor salary Factory foreman salary Depreciation – factory Factory insurance expense Factory rent Other overheads Total factory overheads Manufacturing cost Add: Work – in – process (opening) Total work – in – process during the period Less: Work – in – process (ending) Cost of goods manufactured Page 215 XXX XXX XXX XXX (XXX) (XXX) XXX XXX (XXX) XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX (XXX) XXX www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 INCOME STATEMENT Name of Business Income Statement For the Period Ended _______ Sales Less: Sales discount Less: Sales returns and allowances Net sales Less: Cost of Goods Sold: Finished goods (opening) Add: Cost of goods manufactured Merchandise available for sale Less: Finished goods (ending) Cost of goods sold Gross profit Less: Operating Expenses: Administrative expenses Selling expenses Distribution expenses Total operating expenses Net profit/Loss ILLUSTRATION # 1: XXX XXX XXX (XXX) XXX XXX XXX XXX (XXX) (XXX) XXX XXX XXX XXX (XXX) XXX/(XXX) (COST OF GOODS MANUFACTURED STATEMENT & INCOME STATEMENT) ABC Company manufactures leather bags. The information on the cost 31 December 1989 is as under: Raw material (beginning) Rs.40,000 Raw material (ending) Rs.60,000 Raw material purchased Rs.200,000 Direct labour used Rs.170,000 Factory overhead Rs.130,000 Goods in process (beginning) Rs.100,000 Goods in process (ending) Rs.70,000 Finished goods (beginning) Rs.20,000 Finished goods (ending) Rs.30,000 Sales Rs.600,000 Operating expenses Rs.40,000 REQUIRED (a) Prepare a statement of cost of goods manufactured. (b) Prepare income statement. www.a4accounting.net Page 216 Accounting for Manufacturing Operation Chapter # 9 SOLUTION # 1: ABC Company Statement of Cost of Goods Manufactured For the Period Ended 31 December 1989 Raw Material Used: Raw materials (opening) Add: Net purchases of raw materials Raw materials available for use Less: Raw materials (ending) Raw materials used Add: Direct labour Prime cost Add: Factory overheads Manufacturing cost Add: Goods – in – process (opening) Total goods – in – process during the period Less: Goods – in – process (ending) Cost of goods manufactured 40,000 200,000 240,000 (60,000) 180,000 170,000 350,000 130,000 480,000 100,000 580,000 (70,000) 510,000 ABC Company Income Statement For the Period Ended 31 December 1989 Sales Less: Cost of Goods Sold: Finished goods (opening) Add: Cost of goods manufactured Merchandise available for sale Less: Finished goods (ending) Cost of goods sold Gross profit Less: Operating expenses Net profit ILLUSTRATION # 2: 600,000 20,000 510,000 530,000 (30,000) (500,000) 100,000 (40,000) 60,000 (UNIT COST AND MISSING INVENTORIES) The following data relate to a manufacturing company for the year 1999: Raw material purchased Rs.300,000 Raw material used Rs.360,000 Direct labour cost Rs.250,000 Factory overhead Rs.270,000 During the year 180,000 units were manufactured and 190,000 units were sold. Selected information concerning inventories during the year is as follows: (in Rupees) Dec. 31st Jan. 1st Raw materials ? 80,000 Work in process 50,000 70,000 Finished goods (25,000 units beginning) ? 100,000 REQUIRED (a) Cost of goods manufactured. (b) Average unit cost. (c) Cost of goods sold assuming FIFO method (d) Ending inventories of: (i) Material (ii) Finished goods Page 217 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 SOLUTION # 2: M/S. ________________ Statement of Cost of Goods Manufactured For the Period Ended 31 December 1999 Raw material used Add: Direct labour Prime cost Add: Factory overheads Total manufacturing cost Add: Work – in – process (opening) Total work – in – process during the period Less: Work – in – process (ending) Cost of goods manufactured Computation of Unit Cost: Average unit cost = Average unit cost = Average unit cost = 360,000 250,000 610,000 270,000 880,000 70,000 950,000 (50,000) 900,000 Cost of goods manufactured Number of units manufactured 900,000 180,000 Rs.5 Computation of Raw Material Ending Inventory: Raw material opening inventory Add: Purchase of raw material Raw material available for use Less: Raw material used Raw material ending inventory 80,000 300,000 380,000 (360,000) 20,000 Computation of Finished Goods Ending Units: Finished goods opening units Add: Units manufactured Units available for sale Less: Units sold Finished goods ending units 25,000 180,000 205,000 (190,000) 15,000 Computation of Cost Finished Goods Ending Inventory: Finished goods ending inventory = Finished goods ending in units x Average unit cost Finished goods ending inventory = 15,000 x 5 Finished goods ending inventory = Rs.75,000 M/S. ________________ Cost of Goods Sold For the Period Ended 31 December 1999 Finished goods beginning inventory Add: Cost of goods manufactured Good available for sale Less: Finished goods ending inventory Cost of goods sold www.a4accounting.net Page 218 100,000 900,000 1,000,000 (75,000) 925,000 Accounting for Manufacturing Operation Chapter # 9 PRACTICE QUESTIONS Question # 1: A manufacturer presents the following details about the various expenses for the month of June 2006. Purchase Rs.88,000 Opening stock of raw material 5,500 Carriage – in 3,300 Import duty 7,700 Closing stock of raw material 16,500 Factory rent 3,300 Bad debts 550 Printing and stationary 770 Carriage – out 1,870 Indirect material 880 Power 4,400 Depreciation – Office furniture 220 Repair of plant and machinery 1,430 Salesman’s expenses 550 Advertising expenses 5,500 Direct wages 50,600 General manager’s salary 19,800 Factory manager’s salary 14,300 Depreciation plant and machinery 1,540 Audit fees 1,430 Research and development cost 3,300 Legal expenses 880 REQUIRED Classify the above expenses under the various elements of costs, showing separately the total expenditure. Question # 2: A manufacturer presents the following details about the various expenses for the month of June 2006. Stock of materials, 30 June 1995 Rs.188,400 Stock of materials, 1 July 1994 144,000 Materials purchased during the year 555,000 Carriage outward 12,900 Carriage inward 21,432 Salaries – Factory 19,500 Salaries – Office 37,800 Discount expense 8,700 Bad debts written off 19,536 Repairs of plant, machinery and tools 13,356 Rent and insurance – Factory 25,500 Rent and insurance – Office 6,000 Sales 1,383,300 Travelling expenses 6,300 Traveler’s salaries and commission 23,100 Productive wages 378,000 Page 219 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 Depreciation of machinery and tools Depreciation of office furniture Director’s fees Gas and water – Factory Gas and water – Office Manager’s salary (3/4th factory, 1/4th office) General expenses REQUIRED Prepare a statement giving the following information: (a) Materials consumed (b) Prime cost (d) Factory overhead percentage on wages (f) Administrative overhead and percentage on factory cost (g) Total cost 19,500 900 18,000 3,600 1,200 30,000 10,200 (c) Factory overhead (e) Factory cost (h) Net profit Question # 3: Charmi Bag Company manufactures leather bags. The information on the cost for the first quarter of 1989 is as under: June 1989. Rs. Raw material consumed 780,000 Direct labour used 520,000 Factory overhead applied 416,000 Goods in process (beginning) 91,000 Goods in process (ending) 52,000 REQUIRED Prepare a statement of cost of goods manufactured. Question # 4: The following information is collected from the books of Saleem Manufacturing Company for the month of January 1986: Raw material inventory January 1 Rs.126,000 Raw material inventory January 31 133,000 Raw material returned to suppliers 21,000 Work in process inventory January 1 182,000 Work in process inventory January 31 378,000 Raw material purchased 700,000 Direct raw material used 672,000 Direct labour used 756,000 Factory overhead cost incurred 308,000 Cost of goods manufactured 1,540,000 Finished goods inventory January 1 182,000 Finished goods inventory January 31 112,000 Sales 2,100,000 Gross profit on sales 490,000 REQUIRED Prepare a statement of cost of goods manufactured and income statement. www.a4accounting.net Page 220 Accounting for Manufacturing Operation Chapter # 9 Question # 5: The following data have been taken from the books of Saleem Manufacturing Company Ltd. for the year 1997 – 98: Inventories 1 July 1997 (Rs.) 30 June 1998 (Rs.) Raw materials 24,000 27,000 Goods – in – process 36,000 33,000 Finished goods 18,000 39,000 Data for the year: Rs. Sales 720,000 Purchases of raw materials 165,000 Purchase discount 3,000 Direct labour 135,000 Factory overhead 147,000 Operating expenses 105,000 REQUIRED (a) Statement of cost of goods manufactured (b) Income statement (c) Closing entries Question # 6: The books of Jan Manufacturing Company included the following data for the year ended 31 December 1990: In Rupees: 1 January 1990 31 December 1990 Raw materials 48,000 64,000 Goods – in – process 80,000 120,000 Finished goods 112,000 144,000 Purchases of raw materials 344,000 Purchase discount 16,000 Freight inward 24,000 Heat, light and power 48,000 Factory machine repairs 8,000 Factory insurance 6,400 Indirect labour 16,000 Indirect materials 16,000 Direct labour 144,000 Sales 896,000 Sales return & allowances 32,000 Selling and administrative expenses 140,800 REQUIRED Prepare in proper form: (a) Statement of cost of goods manufactured (b) Income statement Question # 7: The records of Mirza Manufacturing Company provided the following data for May 2005: Sales Rs.825,000; Marketing expenses 10% of sales; Administrative expenses 5% of sales; Purchases Rs.375,000; Factory overhead 2/3 of direct labour; Direct labour Rs.156,000. Inventories Beginning (Rs.) Ending (Rs.) Finished goods 153,000 170,000 Work in process 136,000 178,500 Materials 119,000 144,500 Page 221 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 REQUIRED (i) Cost of goods manufactured statement. (ii) Income statement. Question # 8: Moon Co. has provided following for the year ended December 31, 2007: Sales Rs.1,179,000 Advertising expense 117,000 Direct labour cost incurred 266,400 Direct material purchased 405,000 Building rent: 60% allocated to manufacturing and 40% to administrative & 171,000 selling functions Utilities – factory 90,000 Maintenance – factory 57,600 Selling and administrative salaries 171,000 Factory overhead applied at the rate of 90% of direct labour Inventories Jan. 1, 2007 (Rs.) Dec. 31, 2007 (Rs.) Raw material 37,800 18,000 Work in process 50,400 75,600 Finished goods 75,600 81,000 REQUIRED (i) Prepare a Statement of Cost of Goods Manufactured for the year ended December 31, 2007. (ii) Prepare an Income Statement. Question # 9: Following information was taken from the accounting record of Al-Rehman Industries: In Rupees: 1.1.2009 31.12.2009 Finished goods 47,500 55,100 Work in process 76,000 34,200 Material 3,800 57,000 During the year the following transactions were performed: Material purchases 665,000 Direct labour cost 228,000 Indirect factory labour cost 114,000 Depreciation – Factory building 38,000 Depreciation – Salesroom & office (share equally) 28,500 Utilities (60% to factory, 20% to office & 20% to salesroom) 95,000 Other indirect manufacturing cost 76,000 Sales person’s salaries 76,000 Office salaries 45,600 Sales on account 1,387,000 REQUIRED (a) Statement of Cost of Goods Manufactured. (b) Income Statement. www.a4accounting.net Page 222 Accounting for Manufacturing Operation Chapter # 9 Question # 10: The following data relates to the operations of Hassan Manufacturing Company for the year ended 31 December 1996: Inventories at 1 January 1996: Rupees: Raw materials 28,600 Goods in process 48,400 Finished goods 66,000 Rupees: Purchase of raw materials 214,500 Purchase return and allowances 8,800 Sales 449,460 Sales return and allowances 3,960 Purchase discount 2,200 Sales discount 3,300 Freight – in 4,400 Machine repairs 7,700 Heat, light 16,500 Factory insurance 6,600 Indirect labour 9,900 Factory supplies 11,000 Administrative expenses 22,000 Direct labour 63,800 Data for adjustment on 31 December 1996: Rupees: (1) Inventories on 31 December 1996: Raw materials 41,800 Goods in process 29,700 Finished goods 90,200 (2) Make allowance for depreciation on: Factory building 4,400 Factory machinery 2,200 Office building 5,500 (3) Insurance premium on factory was paid on 1 July 1996 for one year. (4) Productive wages (direct labour) payable 2,200 (5) Factory supplies on hand 2,200 (6) Amortization on patents 1,100 REQUIRED (a) A Statement of Cost of Goods Manufactured for the year ended 31 December 1996. (b) Income Statement for the year ended 31 December 1996. Question # 11: Kamran Company produces various types of fertilizers. No beginning units in process of finished were on hand on 1 January 1996. 36,000 finished units were on hand on 31 December 1996 and 114,000 units were sold during the year. There were no units in work in process inventory on 31 December 1996. The materials put into production cost Rs.360,000 (75% were direct materials). There was no beginning or ending materials inventory. Labour costs were Rs.420,000 (40% was for indirect labour). Factory overhead costs, other than direct materials and direct labours were the following: Heat, light and power Rs.138,000 Depreciation 93,600 Factory taxes 78,000 Repairs and maintenance 50,400 Page 223 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 Selling expenses were Rs.96,000, general and administrative expenses were Rs.60,000. REQUIRED Compute: (a) Cost of goods manufactured (b) Total cost (c) Unit cost (d) Prime cost (e) Conversion cost Question # 12: The accounting records of Alladin Manufacturing Company include the following information relating to the year ended 31 December 1996: 31 December 1 January 1996 1996 (Rs.) (Rs.) Material inventory 78,000 61,750 Goods – in – process inventory 24,375 26,000 Finished goods inventory (January 1: – 6,500 units) ? 123,500 Raw material purchases 185,250 Direct labour cost 126,750 Factory overhead cost 287,950 The company manufactured a single product during 1996, 29,250 units were manufactured and 26,000 units were sold. REQUIRED (a) Prepare a statement of cost of finished goods manufactured for 1996. (b) Compute the cost of producing a single unit during 1996. (c) Compute the cost of inventory of finished goods at 31 December 1996 assuming that the FIFO method of inventory costing is used. (d) Compute the cost of goods sold during 1996, assuming that the FIFO inventory costing is used. Question # 13: The following extract of costing information relates to commodity ‘A’ manufactured by Ribbi Engineering Company for the half year ended 31st December 2008: Purchase of raw material Rs.350,000 Sales (all on account) 420,000 Factory overhead (20% of direct labour) 35,000 Carriage on purchases 4,200 Stock (July 1, 2008) Raw material 39,200 Finished goods (1,680 units) 4,200 Work in process 63,000 Stock (December 31, 2008) Raw material 23,800 Finished goods (1,400 units) ? Work in process 128,100 Selling and distribution overheads are Rs.3 per unit sold. During the period 41,720 units were produced. REQUIRED (1) Compute cost of material used. (2) Calculates the amount of direct labour used. (3) Prepare Statement of Cost of Goods manufactured. (4) Prepare Statement of Cost of Goods Sold. www.a4accounting.net Page 224 Accounting for Manufacturing Operation Chapter # 9 Question # 14: The following data relate to a manufacturing company for the year 2003: Purchase of direct material Rs.660,000 Direct material used Rs.675,000 Direct labour paid during the year Rs.487,500 Direct labour assigned to production Rs.525,000 Manufacturing overhear Rs.600,000 During the year 183,000 units were manufactured and 187,500 units were sold. Selected information concerning inventories during the year is as follows: (in Rupees) Dec. 31st Jan. 1st Materials ? 75,000 Work in process 105,000 135,000 Finished goods (22,500 units beginning) ? 202,500 REQUIRED (a) Cost of goods manufactured. (b) Average unit cost. (c) Cost of goods sold assuming FIFO method (d) Ending inventories of: (i) Material (ii) Finished goods Question # 15: The following data relate to Waseem Co. for the year 2007: 1. Purchase of direct material Rs. 140,800 2. Direct material used 144,000 3. Direct labour paid 104,000 4. Direct labour assigned to production 112,000 5. Factory overhead cost incurred 128,000 During the year 39,040 units were manufactured and 40,000 units were sold. Selected information concerning inventories during the year is as follows: In Rupees: Jan. 1, 2007 Dec. 31, 2007 Material 16,000 ? Work in process 28,800 22,400 Finished goods 4,800 units 43,200 ? REQUIRED (1) Cost of goods manufactured during 2007. (2) Average unit cost produced during 2007. (3) Cost of goods sold assuming FIFO basis. (4) Cost of ending inventories of: (i) Materials (ii) Finished goods. Question # 16: Record of Nasir and Mazkoor Corporation show the following information: Sales (85 TV sets) Rs. 1,700,000 Material purchased Rs. 510,000 Direct labour Rs. ? Factory overhead (2/3 of direct labour) Rs. 340,000 Selling expense 5% of sales General expense 10% of sales Inventories January 1, 2003: Material Rs. 85,000 Finished goods (85 TV sets) Rs. 7,000 Page 225 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 Inventories December 31, 2003: No unfinished work on hand Finished goods (30 TV sets) Rs. ? Material Rs. 119,000 REQUIRED (1) The number of units manufactured. (2) An income statement for the period ended Dec. 31, 2003. (3) Unit cost of TV manufactured. (4) Finished goods ending inventory using FIFO flow of cost. (5) Gross profit per unit. Question # 17: Microsoft Company produces a single product. The following information has been taken from the company’s records for the year 1999: Units: Production in units 54,000 Sales in units ? Ending finished goods in units ? Sales (Rs.25/- per unit) Rs.1,170,000 Costs: Rupees: Advertising 162,000 Direct labour 288,000 Raw materials purchased 144,000 Building rent (production uses 80% of the space, administration & sales offices uses the rest) 90,000 Utilities, factory 63,000 Maintenance, factory 45,000 Depreciation on factory equipment is estimated at Rs.0.10 per unit produce ? Selling and administrative salaries 180,000 Other factory overhead costs 19,800 Other selling and administrative expenses 36,000 Inventories (in Rupees): Jan. 1, 1999 Dec. 31, 1999 Raw material 36,000 18,000 Work in process 54,000 72,000 Finished goods --? The finished goods inventory is being carried at average unit production cost for the year. REQUIRED (1) Prepare statement of cost of goods manufactured for the year. (2) Compute the following: a) The number of units in finished goods inventory at December 31. b) The cost of the units in finished goods inventory at December 31. (3) Prepare an income statement for the year. Question # 18: The following information is taken from the financial statements of M/S. Adnan & Brothers Ltd. at the end of the year 06. Goods in process inventory ……………………………………… Rs.1,140,000 Cost of raw materials used ……………………………………… Rs.5,928,000 Cost of goods manufactured ……………………………………… Rs.14,143,600 Factory overhead, 75% of direct labour ……………………………………… Rs.3,420,000 REQUIRED Compute the cost of goods in process inventory at January 1, 2006. www.a4accounting.net Page 226 Accounting for Manufacturing Operation Chapter # 9 Question # 19: The following information is taken from the financial statements of Jagir & Co. at the end of the year 1993. Rupees Goods in process inventory ending …………………………………… 330,000 Cost of raw materials used …………………………………… 1,716,000 Cost of goods manufactured …………………………………… 4,092,000 Factory overhead, 75% of direct labour …………………………………… 990,000 REQUIRED Compute the cost of goods in process inventory at January 1, 1993. Question # 20: The following data relates to the operation of Salman Manufacturing Company for the year ended December 31, 2005. Sales Rs.7,303,200 Machinery repair expenses 90,000 Sales return & allowances 96,000 Factory insurance 84,000 Purchase of raw material 3,786,000 Bad debts expense 18,000 Purchases return & allowances 156,000 Factory rent & taxes 242,400 Sales discount 31,200 Selling & administrative expenses 420,000 Purchases discount 30,000 Direct labour 1,080,000 Freight in 60,000 Factory supplies expenses 15,600 Import duty 360,000 Office supplies expense 6,000 Foreman’s salary 360,000 Indirect labour 180,000 Inventories 1.1.2005 (Rs.) 31.12.2005 (Rs.) Raw material 360,000 816,000 Goods in process 480,000 ? Finished goods 840,000 672,000 Factory manager estimated work in process as follows: Raw material 240,000 Direct labour 360,000 The company assigns factory overhead on the basis of direct labour cost. REQUIRED (a) Determine factory overhead rate. (b) Compute the cost of work in process on December 31, 2005. (c) Prepare statement of cost of goods manufactured & income statement for 2005. Page 227 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 Question # 21: The following balances have been taken from the general ledger of Fano Manufacturing Company: Raw material inventory (1 December 1991) Rs.44,135 Raw material purchase 246,480 Raw material returns 11,440 Carriage inwards 20,410 Direct labour 330,720 Indirect labour 77,025 Depreciation (Machinery) 40,105 Heat, light and power 33,020 Factory rent & taxes 40,885 Factory repairs expense 25,155 Foreman’s salary 31,850 Raw materials inventory (31 December 1991) 74,750 Work in process inventory (1 December 1991) 69,420 The foreman estimates that Rs.41,340 of raw materials and Rs.32,240 of direct labour are to be allocated to the unfinished goods in process on 31 December 1991. REQUIRED (a) Determine the factory overhead rate based on direct labour cost. (b) Compute the cost of 31 December 1991 inventory of goods in process. (c) Prepare statement of cost of goods manufactured for 31 December 1991. Question # 22: The following information was taken from the books and records of the Standard Manufacturing Company for the year ended December 31, 2005. Units Costs (Rs.) Sales during the year 112,000 ? Opening inventory of finished goods 25,200 203,000 Closing Inventory: Work in process 1,400 ? Finished goods 28,000 ? Manufacturing Costs: Direct material 420,000 Direct labour 280,000 Factory overhead 224,000 The foreman has submitted the following costs for the closing work in process. Inventory: Material cost 37,800 Direct labour cost 14,000 The company’s past experience showed that factory overhead cost tends to fluctuate closely in production to direct labour cost. REQUIRED (1) Determine the number of units manufactured during the year. (2) Compute the estimated cost of work in process. (3) Determine cost of each unit. (4) Determine the ending inventory of finished goods and the cost of sales. www.a4accounting.net Page 228 Accounting for Manufacturing Operation Chapter # 9 Question # 23: From the following data compute the net cost of raw materials purchased during the year: Factory overhead is 30% of cost of goods manufactured. Direct labour is 20% of sales and 40% of cost of goods manufactured. Ending raw materials inventory is Rs.60,000 more than beginning raw materials inventory. Sales totaled Rs.1,500,000 for the year. Question # 24: From the following data compute the net cost of raw materials purchased during the year: Factory overhead is 30% of cost of goods manufactured. Direct labour is 20% of sales and 40% of cost of goods manufactured. Ending raw materials inventory is Rs.12,8000 more than beginning raw materials inventory. Sales totaled Rs.3,200,000 for the year. Question # 25: The following data appeared in the books of Al-Imran Industries as on 30 June 1993: Sales Rs. 690,200 Raw material inventory, 1 January 1993 Rs. 34,000 Raw material purchased Rs. 442,000 Raw material returned to suppliers Rs. 17,000 Goods in process inventory, 1 January 1993 Rs. 17,000 Direct labour Rs. 187,000 Cost of goods manufactured Rs. 646,000 Gross profit on sales Rs. 102,000 Raw materials consumed Rs. 403,750 Indirect manufacturing cost Rs. 102,000 Transportation – in Rs. 5,100 Finished goods inventory, 1 January 1993 Rs. 76,500 REQUIRED (a) Determine the closing inventories of: (1) Raw material (2) Goods in process (3) Finished goods (b) Prepare entries to close manufacturing accounts at the end of June 1993. Question # 26: The following data appeared in the books of Ali Industries Ltd. as of 31 March 1992: Sales Rs. 365,400 Raw material inventory, 1 January 1993 Rs. 18,000 Raw material purchased Rs. 234,000 Raw material returned to suppliers Rs. 9,000 Goods in process inventory, 1 January 1993 Rs. 9,000 Direct labour Rs. 81,000 Cost of goods manufactured Rs. 333,900 Gross profit on sales Rs. 45,000 Raw materials consumed Rs. 213,750 Indirect manufacturing cost Rs. 52,650 Transportation – in Rs. 2,250 Finished goods inventory, 1 January 1993 Rs. 40,500 REQUIRED (a) Determine the closing inventories of: (1) Raw material (2) Goods in process (3) Finished goods (b) Prepare entries to close manufacturing accounts at the end of month, include an entry to close the manufacturing account to the income summary account. Page 229 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 Question # 27: Maroof Manufacturing Company showed beginning and ending inventories balances for 1992: Inventory Account 31 December 1992 1 January 1992 (Rs.) (Rs.) Raw material 57,000 49,400 Goods in process 17,100 22,800 Finished goods 66,500 74,100 The amounts debited and credited during the year to the accounts used in recording manufacturing costs are summarized below: Accounts (in Rupees) Debit Entries Credit Entries Raw material 380,000 ? Direct labour 114,000 129,299 Manufacturing overhead 161,500 161,500 Goods in process inventory ? ? Finished goods inventory ? ? REQUIRED (a) Compute the amounts for 1992: (1) Direct material purchased. (2) Direct materials used. (3) Direct labour payroll paid during the year. (4) Direct labour cost assigned to units manufactured. (5) The year-end liability for direct wages payable. (6) The overhead application rate, assuming that overhead costs are applied to units manufactured in proportion to direct labour cost. (7) Total manufacturing cost debited to goods in process inventory. (b) Prepare statement of cost of goods sold for 1992. Question # 28: From the following information determine (a) Prime cost (b) Conversion cost (c) Cost of goods sold (d) Cost of goods manufactured for the month of November, 2002. Product A (Units) Product B (Units) Units produced during November 20,000 units 16,000 units Finished goods beginning inventory 2,000 units 1,800 units Finished goods ending inventory 4,000 units 200 units Unit cost applicable to inventories and production: Direct material Rs.4 per unit Rs.3 per unit Direct labour Rs.10 per unit Rs.20 per unit Factory overhead Rs.7 per unit Rs.14 per unit Actual factory overhead was Rs.364,800, under or over applied factory overhead is to be adjusted in cost of goods sold. www.a4accounting.net Page 230 Accounting for Manufacturing Operation Chapter # 9 Question # 29: The Aslam and Asghar Corporation had the following data: Inventories Jan. 1, 2003 Dec. 31, 2003 Material Rs. 80 Rs. 160 Finished goods Rs. 400 Rs. 120 Work in process – material Rs. 40 Rs. 120 Work in process – labour Rs. 160 Rs. 120 Work in process – factory overhead Rs. 240 Rs. 120 During January, the company purchased materials for Rs.1,600, direct labour cost incurred was Rs.800 of which Rs.600 was paid. Factory overhead applicable to production was 150% of the direct material cost. REQUIRED T account showing the flow of the cost of goods manufactured and sold, using three accounts of work in process. (Note: Statement of cost of goods manufactured is not required). Question # 30: From the following partial information completes the income statement: Sales ? Less: Cost of Goods Sold: Opening inventory finished goods 66,000 Add: Cost of goods manufactured ? Less: Finished goods inventory, ending ? Cost of goods sold ? Gross profit (41.25% of sales) ? Operating expenses ? Net income 26 2/3% of sales 704,000 The Other Information is as under: Raw material used Rs.583,000, Direct labour Rs.495,000, Factory overhead 50% of prime cost. The work-in-process was opening Rs.132,000, closing Rs.121,000. REQUIRED Determine the missing figures and complete the income statement, show computation. Question # 31: The following information has been taken from the accounting records of Latif Manufacturing Company: Inventories (Jan. 1, 2004) Raw material Rs.32,760. Goods-in-process Rs.19,440. Finished goods Rs.28,920. Inventories (Mar. 31, 2004) Items Raw Material (Rs.) Goods-in-Process (Rs.) Finished Goods (Rs.) Material 34,860 7,740 26,100 Labour 2,520 16,200 Overhead ? 12,960 Totals 34,860 ? 55,260 Page 231 www.a4accounting.net Accounting for Manufacturing Operation Chapter # 9 Data for the three months ended on March 31, 2004: Cost of goods manufactured ......................................Rs.487,728. Factory overhead............................................................Rs.107,040. The company also paid transportation costs on materials purchased of Rs.16,620, it received credit of Rs.9,780 for materials returned to suppliers. REQUIRED On the basis of the above information and the missing data, which can be derived from it, prepare a statement of cost of goods manufactured for the three months ended on March 31st 2004. Question # 32: Aslam started business with a name of PM Industries on April 1 and produced by the end of the month of June 60,000 units of its single product. The product requires three basic raw materials. A, B and C, which were purchased during the first three months at the following prices and quantities: Particulars Purchases Price Quantities Purchased Quantity on Hand June 30 (Rs.) (Units) (Units) Material ‘A’ 0.35 per unit 52,500 6,000 Material ‘B’ 0.30 per unit 15,000 9,000 Material ‘C’ 0.60 per unit 12,000 7,500 Factory wages and other salaries paid and outstanding were: Particulars Paid (Rs.) Direct labour 27,000 Indirect labour 3,400 Supervision 4,500 Marketing & administrative salaries 12,300 Outstanding (Rs.) 1,125 300 --2,700 Other overhead consisted of: Particulars Factory Overhead (Rs.) Marketing & Administrative Expenses (Rs.) Supplies 1,050 1,200 Repairs 675 600 Maintenance 750 525 Depreciation 1,305 465 Utilities 420 420 Insurance --3,690 There were no ending inventories of work in process. However finished goods inventories contained 2,250 units. The company was sold 57,750 units at an average sale price of Rs.2.25 per unit. REQUIRED (i) Prepare Statement of Cost of Goods Manufactured & Statement of Cost of Goods Sold. (ii) Prepare an Income Statement for the period ended June 30, 2010. (Show all your computations). www.a4accounting.net Page 232 Chapter # 10 Job Order Costing Cost Accounting www.a4accounting.net Job Order Costing Chapter # 10 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Job order costing under Perpetual Inventory System. WHAT THE EXAMINER USUALLY ASK? Computation of: o Opening inventory of raw material. o Ending inventory of raw material. o Opening inventory of goods in process. o Ending inventory of goods in process. o Opening inventory of finished goods. o Ending inventory of finished goods. o Factory overhead rate. General Journal entries. General Ledger of goods in process. General Ledger of raw material. General Ledger of finished goods. www.a4accounting.net Page 234 Job Order Costing Chapter # 10 JOB ORDER COSTING A costing process to assess the individual costs of performing each job is called job order costing. This is important in organization that produce a range of different products and also in service organizations. Job is an identifiable discrete piece of work carried out by an organization. POSSIBLE GENERAL ENTRIES Purchase of Raw Materials on Account: Raw materials DR. (with materials amount) Accounts payable CR. (with payable amount) ---------------------------------------------------------------------------------------------------------------- Raw Materials Returned to Supplier: Accounts payable DR. (with return amount) Raw materials CR. (with return amount) ---------------------------------------------------------------------------------------------------------------- Raw Materials Issued to Factory for Production: Work in process DR. (with material issued for production) Raw materials CR. (with material amount issued) ---------------------------------------------------------------------------------------------------------------- Indirect Material Issued to Factory: Factory overhead DR. (with indirect material amount) Raw materials CR. (with indirect materials amount) ---------------------------------------------------------------------------------------------------------------- Direct Labour Used: Work in process (Labour) DR. (with direct labour amount) Accrued payroll CR. (with direct labour amount) ---------------------------------------------------------------------------------------------------------------- Indirect Labour Used: Factory overhead DR. (with indirect labour amount) Accrued payroll CR. (with indirect labour amount) ---------------------------------------------------------------------------------------------------------------- Direct and Indirect Labour Paid: Accrued payroll DR. (with cash payment) Cash CR. (with cash amount) ---------------------------------------------------------------------------------------------------------------- Actual Factory Overhead Incurred: Factory overhead DR. (with actual factory overhead amount) Accounts payable CR. (with actual factory overhead) ----------------------------------------------------------------------------------------------------------------- Page 235 www.a4accounting.net Job Order Costing Chapter # 10 Factory Overhead Applied: Work in process DR. (with applied factory overhead amount) Factory overhead applied CR. (with applied factory overhead) ---------------------------------------------------------------------------------------------------------------- Goods Completed and Transferred to Finished Goods: Finished goods DR. (with finished goods amount) Work in process CR. (with finished goods amount) ---------------------------------------------------------------------------------------------------------------- Cost of Finished Goods Sold: Cost of goods sold DR. (with cost of goods sold amount) Finished goods CR. (with cost of goods sold amount) ---------------------------------------------------------------------------------------------------------------- Goods Sold on Account: Accounts receivable DR. (with receivable amount) Sales CR. (with sales amount) ---------------------------------------------------------------------------------------------------------------- Closing of Under Applied Factory Overhead: Cost of goods sold DR. (with under applied factory overhead) Under applied factory overhead CR. (with under applied FOH) ----------------------------------------------------------------------------------------------------------------OR Closing of Over Applied Factory Overhead: Over applied factory overhead DR. (with over applied factory overhead) Cost of goods sold CR. (with over applied FOH) ----------------------------------------------------------------------------------------------------------------- ILLUSTRATION # 1: Dell Company uses Job Order Cost System. The manufacturing operations for the year ended December 31, 1983 were as follows: (1) Purchased raw materials on account Rs.140,000. (2) Materials issued to factory of Rs.120,000 of which Rs.20,000 was indirect materials. (3) Direct labour cost incurred Rs.90,000 and Rs.10,000 indirect labours. (4) Factory overhead application rate was 90% on direct labour cost. (5) Factory overhead cost incurred on account Rs.80,000. (6) Cost of jobs completed Rs.250,000. (7) Cost of goods sold Rs.180,000 (8) Sales on account Rs.230,000. REQUIRED Record all the above transactions in the General Journal & give an entry to close the factory overhead account. www.a4accounting.net Page 236 Job Order Costing Chapter # 10 SOLUTION # 1: Date 1 2 3 4 5 6 7 8 9 2 3 5 Dell Company General Journal Particulars P/R Raw materials Accounts payable (To record the purchase of raw material on account) Work in process Factory overhead Raw material (To record the raw material issued) Work in process Factory overhead Accrued payroll (To record the direct and indirect labour used) Work in process (90,000 x 90%) Factory overhead applied (To record the applied factory overhead) Factory overhead Accounts payable (To record the factory overhead costs incurred) Finished goods Work in process (To record the goods completed and transferred to finished goods) Cost of goods sold Finished goods (To record the cost of goods sold) Accounts receivable Sales (To record the goods sold on account) Cost of goods sold Under – applied factory overhead (To adjust the under-applied factory overhead) Raw material Accrued payroll Accounts payable Factory Overhead 20,000 4 10,000 9 80,000 110,000 Page 237 Debit 140,000 100,000 20,000 90,000 10,000 Credit 140,000 120,000 100,000 81,000 81,000 80,000 250,000 80,000 250,000 180,000 180,000 230,000 29,000 Work in process Cost of goods sold 230,000 29,000 81,000 29,000 110,000 www.a4accounting.net Job Order Costing Chapter # 10 ILLUSTRATION # 2: (INVENTORIES BALANCES) Moiz Manufacturing Company uses job order cost system. The ledger accounts show the following inventories: Inventories: 31 December (Rs.) 1 January (Rs.) Raw materials 40,000 26,000 Work in process 62,000 50,000 Finished goods 60,000 25,000 The manufacturing operations for the month of January 2003 are summarized as follows: (a) Materials purchased on account Rs.100,000. (b) Material returned to suppliers Rs.8,000. (c) Materials issued to jobs for Rs.78,000. (d) Labour used Rs.59,000 of which Rs.50,000 was used directly. (e) Depreciation on machinery Rs.12,000. (f) Factory overhead cost incurred Rs.42,000. (g) The factory overhead rate is applied 120% of direct labour cost. (h) The jobs were completed and shipped to customers at a billed price of Rs.190,000. REQUIRED Give the necessary journal entries and prepare T – accounts for raw materials, work in process, and finished goods and complete in all respect. SOLUTION # 2: Date 1 2 3 4 5 6 7 Moiz Company General Journal Particulars P/R Raw materials Accounts payable (To record the purchase of raw material on account) Accounts payable Raw material returned (To record the material returned to the suppliers) Work in process Raw material (To record the raw material issued) Work in process Factory overhead Accrued payroll (To record the direct and indirect labour used) Factory overhead Allowance for depreciation (To record the factory machine depreciation) Factory overhead Accounts payable (To record the factory overhead costs incurred) Work in process (50,000 x 120%) Factory overhead applied (To record the applied factory overhead) www.a4accounting.net Page 238 Debit 100,000 Credit 100,000 8,000 8,000 78,000 78,000 50,000 9,000 59,000 12,000 12,000 42,000 60,000 42,000 60,000 Job Order Costing Chapter # 10 Moiz Company General Journal Date 8 9 10 11 1 Particulars Finished goods Work in process (To record the goods completed and transferred to finished goods) Cost of goods sold Finished goods (To record the cost of goods sold) Accounts receivable Sales (To record the goods sold on account) Cost of goods sold Under – applied factory overhead (To adjust the under-applied factory overhead) Balance Accounts payable Raw Material 26,000 2 100,000 3 P/R Debit 176,000 3 4 7 8 4 5 6 Work in Process 50,000 8 78,000 50,000 60,000 238,000 Balance Work in process Finished Goods 25,000 9 176,000 201,000 Accrued payroll All for depreciation Accounts payable Factory Overhead 9,000 7 12,000 9 42,000 63,000 Page 239 176,000 141,000 141,000 190,000 190,000 3,000 3,000 Accounts payable Work in process Balance c/d 8,000 78,000 40,000 126,000 Finished goods Balance c/d 176,000 62,000 126,000 Balance Raw material Accrued payroll Factory overhead Credit 238,000 Cost of goods sold Balance c/d 141,000 60,000 201,000 Work in process Cost of goods sold 60,000 3,000 63,000 www.a4accounting.net Job Order Costing Chapter # 10 ILLUSTRATION # 3: (WORK – IN – PROCESS ACCOUNT) The following information appears in the work in process inventory account:Work in Process Inventory Balance January 1 60,000 Finished goods 280,000 Direct material 110,000 Balance March 31, 70,000 Direct labour 80,000 Factory overhead 100,000 350,000 350,000 Factory overhead is applied as a percentage of direct labour cost, direct labour charged to work in process at March 31, is estimated to be Rs.20,000. Finished goods sold on credit Rs.340,000. REQUIRED a) Factory overhead percentage on direct labour cost. b) Factory overhead applied and direct materials used on goods still in process at March 31. c) General Journal entries to record: i) Manufacturing costs charged to production during March. ii) Transfer of production to finished goods warehouse during March. iii) Cost of goods sold iv) Credit sales. SOLUTION # 3: Computation of Factory Overhead Rate: Factory overhead rate = Factory overhead Direct labour Factory overhead rate = 100,000 80,000 Factory overhead rate = 125% X 100 X 100 Computation of Factory Overhead (Work in Process Ending Inventory): Factory overhead = Direct labour x Factory overhead rate Factory overhead = 20,000 x 125% Factory overhead = Rs.25,000 Computation of Raw Material (Work in Process Ending Inventory): Work in process ending inventory 70,000 Less: Direct labour (ending work in process) (20,000) Less: Factory overhead (ending work in process) (25,000) Raw material (ending work in process) Rs.25,000 Date 1 M/S. _______ General Journal Particulars Work in process Raw material Accrued payroll Factory overhead applied (To record the manufacturing cost) www.a4accounting.net Page 240 P/R Debit 290,000 Credit 110,000 80,000 100,000 Job Order Costing Chapter # 10 Date 2 3 4 M/S. _______ General Journal Particulars P/R Finished goods Work in process (To record the goods completed and transferred to finished goods) Cost of goods sold Finished goods (To record the cost of goods sold) Accounts receivable Sales (To record the goods sold on account) ILLUSTRATION # 4: Debit 280,000 Credit 280,000 280,000 280,000 340,000 340,000 (DIFFERENT JOBS) The following transactions relate to the Crescent Company for the month of May, 2008. (1) Materials purchased on account Rs.400,000. (2) Materials and labour used on jobs were s under: Jobs Direct Materials (Rs.) Direct Labours (Rs.) Job No. M1 27,000 33,000 Job No. M2 12,000 15,000 Job No. M3 41,000 45,000 Indirect materials Rs.10,000. Indirect labour Rs.13,000. (3) Other factory overhead cost incurred Rs.60,000. (4) Factory overhead is applied at 100% of direct labour. (5) Jobs No. M1 and M2 were completed and customers were billed with Rs.130,000 and Rs.68,000 respectively. REQUIRED Prepare the necessary entries to record the above transactions. SOLUTION # 4: Date 1 2 3 Crescent Company General Journal Particulars Raw material Accounts payable (To record the purchase of raw materials) Work in process (Job No. M1) Work in process (Job No. M2) Work in process (Job No. M3) Factory overhead Raw material (To record the raw material issued to factory) Work in process (Job No. M1) Work in process (Job No. M2) Work in process (Job No. M3) Factory overhead Accrued payroll (To record the direct and indirect labour used) Page 241 P/R Debit 400,000 Credit 400,000 27,000 12,000 41,000 10,000 90,000 33,000 15,000 45,000 13,000 106,000 www.a4accounting.net Job Order Costing Chapter # 10 Date 4 5 6 7 8 9 Crescent Company General Journal Particulars Factory overhead Accounts payable (To record the factory overhead cost incurred) Work in process (Job No. M1) Work in process (Job No. M2) Work in process (Job No. M3) Factory overhead applied (To record the applied factory overhead cost) Finished goods (Job No. M1) Finished goods (Job No. M2) Work in process (To record the goods completed and transferred to finished goods) Cost of goods sold Finished goods (To record the cost of goods sold) Accounts receivable (Job No. M1) Accounts receivable (Job No. M2) Sales (To record the goods sold on account) Over applied factory overhead Cost of goods sold (To adjust the factory overhead) Computation of Jobs Started and Completed: Job No. M1 Jobs Started: Direct material 27,000 Direct labour 33,000 Factory overhead 33,000 Total 93,000 Jobs Completed: 93,000 Jobs in Process: 2 3 4 9 Raw material Accrued payroll Accounts payable Cost of goods sold www.a4accounting.net Job No. M2 12,000 15,000 15,000 42,000 42,000 Factory Overhead 10,000 5 13,000 60,000 10,000 93,000 Page 242 P/R Debit 60,000 33,000 15,000 45,000 93,000 42,000 135,000 Credit 60,000 93,000 135,000 135,000 130,000 68,000 198,000 10,000 10,000 Job No. M3 41,000 45,000 45,000 131,000 --131,000 Work in process Total 80,000 93,000 93,000 266,000 135,000 131,000 93,000 93,000 Job Order Costing Chapter # 10 PRACTICE QUESTIONS Question # 1: The following information relates to a manufacturing company: 1. Purchase of direct material on account Rs.192,500. 2. Direct material used Rs.176,000. 3. Direct labour used Rs.110,000. 4. Direct labour paid Rs.104,500. 5. Factory overhead incurred on account Rs.84,700. 6. Factory overhead is applied at 80% of direct labour. 7. Jobs with total cost of Rs.330,000 were completed. 8. Units costing Rs.308,000 were sold on account for Rs.374,000. REQUIRED Give journal entries for the above transactions. Question # 2: Skyline Co. uses Job Order Cost System. The manufacturing operations for the year ended December 31, 2007 were as follows: (1) Purchased raw materials on account Rs.86,400. (2) Materials issued to factory of Rs.77,400 of which Rs.5,400 was indirect materials. (3) Direct labour cost incurred Rs.69,600 and Rs.5,760 indirect labours. (4) Factory overhead application rate was 80% on direct labour cost. (5) Factory overhead cost incurred on account Rs.42,000. (6) Cost of jobs completed Rs.180,000. (7) Cost of jobs Rs.156,000. (8) Sales on account Rs.204,000. REQUIRED Record all the above transactions in the General Journal & give an entry to close the factory overhead account. Question # 3: Meer and Company uses job order cost system. The following data summarize the operations relating to production for June 2005: (a) Materials purchased on account Rs.135,200. (b) Materials requisitioned Rs.128,700 of which Rs.3,900 was for general factory use. (c) Factory labour used Rs.109,200 of which Rs.14,300 was factory overhead. (d) Other costs for factory overhead were incurred on account Rs.22,100. (e) Prepaid insurance expired for factory overhead was Rs.1,300. (f) Depreciation of factory equipment was Rs.11,700. (g) Factory overhead cost applied to jobs Rs.52,000. (h) Jobs completed Rs.273,000. (i) Cost of goods sold Rs.256,100. REQUIRED Entries in general journal to record the summarized operations. Page 243 www.a4accounting.net Job Order Costing Chapter # 10 Question # 4: The following information relates to Sakina Industries for the month of December 2009. 1. Purchase materials on account Rs.126,000. 2. Issued materials of Rs.112,000 which included indirect materials of Rs.14,000. 3. Labour costs accrued: Direct Rs.63,000 and indirect Rs.21,000. 4. Indirect manufacturing costs other than indirect material and indirect labour incurred on account Rs.26,600. 5. Factory overhead costs applied @ 90% of direct labour cost. 6. Goods costing Rs.168,000 were completed (finished). 7. 80% of the completed goods were sold at 20% above cost. REQUIRED Prepare journal entries for the above information. Question # 5: The Moon Company Ltd. uses job order cost system. The transactions for the month of July 1990 are given below: (a) Purchased materials on account for Rs.142,500. (b) Defective materials worth Rs.7,500 were returned to the supplier. (c) Materials issued to factory, direct materials Rs.120,000 and indirect materials Rs.4,500. (d) Labour used Rs.135,000 of which Rs.108,000 is direct labour. (e) Factory overhead cost incurred on account of Rs.24,000. (f) Depreciation on machinery was Rs.7,500. (g) Factory overhead rate is applied at 60% of direct labour cost. (h) Cost of goods completed and transferred to finished goods store Rs.225,000. (i) Sold finished goods costing Rs.180,000 on account at 30% above cost. (j) Balance of factory overhead account was closed into cost of goods sold account. REQUIRED (1) Give entries in General Journal to record the above transactions. (2) Prepare factory overhead account and goods in process account. Question # 6: Mustafa Jatoi Manufacturing Company uses job order cost system. Manufacturing operations for January – December 1990 were as under: (a) Purchased materials on account Rs.1,200,000 (b) Defective materials were returned 32,000 (c) Direct materials were issued to jobs 1,000,000 (d) Indirect materials were issued to factory 32,000 (e) Direct labour cost incurred was 1,152,000 (f) Indirect labour cost incurred was 120,000 (g) The applied factory overhead cost amounted to 768,000 (h) Factory overhead cost on account was 624,000 (i) Factory depreciation cost was estimated at 64,000 (j) The jobs were completed for 2,336,000 (k) Finished goods costing were sold 1,920,000 (l) The finished goods were sold on account for 2,880,000 REQUIRED Prepare entries in the General Journal. www.a4accounting.net Page 244 Job Order Costing Chapter # 10 Question # 7: Danish Corporation produces special product as to customer specifications and uses the job order cost system. The following data relates to its operations of December 2006. (1) Purchased raw material on account Rs.102,000. (2) Raw material issued to factory Rs.73,100 of which Rs.6,800 was used indirectly. (3) Factory labour used direct Rs.110,500 and indirect Rs.9,350. (4) Factory overhead cost incurred on account Rs.74,800. (5) Factory overhead applied at 100% of direct labour cost. (6) Jobs were completed to the extent of 80%. (7) Goods sold on account Rs.340,000. (8) Finished goods inventory on December 31, 2006 is Rs.31,280. REQUIRED Record the above transactions in journal also close over or under applied factory overhead at the end of month. Question # 8: Ahsan Corporation produces special product as to customer specifications and uses the job order cost system. The following data relates to its operations for the month of December 1996: (1) Purchased raw material on account Rs.75,600. (2) Raw material issued to factory Rs.59,400 of which Rs.5,400 was used indirectly. (3) Labour used: Direct Rs.90,000 and indirect Rs.9,000. (4) Factory overhead cost incurred on account Rs.72,000. (5) Factory overhead applied at 100% of direct labour cost. (6) Jobs were completed to the extent of 90%. (7) Goods sold on account Rs.306,000. (8) Finished goods ending inventory valued at Rs.18,000. REQUIRED Record the above transactions in journal also close the factory overhead account. Question # 9: Raza Corporation produces special products to customer’s specifications and uses job order cost system. The following transactions relates to its operations for the month of December 2003: (1) Purchase of raw material on account Rs.95,000. (2) Material issued to production Rs.125,400 out of which Rs.11,400 was used indirectly. (3) Labour used direct Rs.190,000 indirect Rs.19,000. (4) Factory overhead cost incurred Rs.152,000. (5) Factory overhead applied 100% of direct labour cost. (6) Jobs were completed to the extent of 95%. (7) Goods sold on account Rs.327,750, including G.S.T. @ 15%. (8) Finished goods inventory valued at Rs.28,500. REQUIRED Pass necessary journal entries and close the factory overhead account. Page 245 www.a4accounting.net Job Order Costing Chapter # 10 Question # 10: Sunshine Co. uses a job order cost accounting system. The following information was provided for the month of March: a) Purchases of direct materials during the month amounted to Rs.119,400/= on account. b) Materials requisitions issued by the production department during the month total to Rs.112,400/=. c) Time cards of direct workers show 4,000 hours worked on various jobs during the month, for total direct labour cost of Rs.60,000/=. d) Direct workers were paid Rs.52,600/= in March. e) Actual overhead costs for the month amounted to Rs.69,800/=. f) Overhead is applied to jobs at a rate of Rs.18/= per direct labour hour. g) Jobs with total accumulated cost of Rs.232,000/= were completed during the month. h) On March 31, finished goods inventory was valued at Rs.44,000/=. i) During March finished goods were sold for Rs.256,000/= on account. REQUIRED Prepare general journal entries for each of the above transactions (including cost of goods sold and closing of factory overhead account). Question # 11: Hakeem & Company reported the following inventories on 1st November, 2001. Raw material inventory Rs.49,500 Goods in process inventory 66,000 Finished goods inventory 40,700 The company uses the job order cost accounting system. The following transactions took place during November:a) Material purchased on account Rs.165,000. b) Material returned to supplier Rs.6,600. c) Raw material account showed a debit balance of Rs.37,900 on 30th November 2001. d) Direct labour assigned to production Rs.99,000 and indirect labour Rs.16,500 of which Rs.100,000 paid in cash. e) Sundry manufacturing expenses incurred Rs.121,000. f) Paid to accounts payable Rs.61,600. g) Collected from accounts receivable Rs.99,000. h) Factory overhead applied at the rate of 110% of direct labour cost. i) Goods in process inventory November 30, Rs.71,500. j) Finished goods inventory November 30, Rs.60,500. k) Finished goods are sold on account @ 30% above cost. REQUIRED Prepare General Journal entries for each of the above transactions (including entries for cost of goods manufactured, cost of goods sold and closing factory overhead account). www.a4accounting.net Page 246 Job Order Costing Chapter # 10 Question # 12: The Shalimar Manufacturing Company uses job order cost system. The ledger accounts show the following inventories at the beginning and ending of August 1992: Inventories: 1 August (Rs.) 31 August (Rs.) Goods in process 24,000 60,000 Raw material 36,000 66,000 Finished goods (1,000 units opening) 60,000 144,000 The manufacturing operations for the month of August 1992 are summarized below: (a) Purchased material costing Rs.240,000 on account. (b) Issued Rs.180,000 worth direct material and Rs.35,000 worth indirect material for production. (c) The payroll for the month amounted to Rs.120,000 for direct labour and Rs.10,800 for indirect labour. (d) Factory overhead cost incurred on account Rs.55,200. (e) The applied factory overhead is at 80% of direct labour cost. (f) Goods completed during the month (6,000 units) Rs.360,000. (g) Sold finished goods on account (4,800 units) at Rs.300,000. Use first in first out method in crediting finished goods account. REQUIRED (1) Give necessary journal entries for all the above transactions. (2) Prepare T – accounts for raw material, goods in process, and finished goods and complete in all respects. Question # 13: Ansar Manufacturing Company uses job order cost system. The ledger accounts show the following inventories: Inventories: 31 January (Rs.) 1 January (Rs.) Raw materials 19,500 13,000 Work in process 31,850 26,000 Finished goods 26,000 13,000 The manufacturing operations for the month of January 1986 are summarized as follows: (a) Materials purchased on account Rs.52,000. (b) Material returned to suppliers Rs.2,600. (c) Materials issued to jobs for Rs.42,900. (d) Labour used Rs.26,000 of which Rs.19,500 was used directly. (e) Depreciation on machinery Rs.2,600. (f) Factory overhead cost incurred Rs.19,500. (g) The factory overhead rate is applied 110% of direct labour cost. (h) The jobs were completed and shipped to customers at a billed price of Rs.104,000. REQUIRED Give the necessary journal entries and prepare T – accounts for raw materials, work in process, and finished goods and complete in all respect. Page 247 www.a4accounting.net Job Order Costing Chapter # 10 Question # 14: The Sindh Manufacturing Company uses job order cost system. The transactions for the month of March 1996 are given below: (1) Purchased raw material costing Rs.133,000 on account. (2) The raw material account shows a debit balance of Rs.21,000 on 31 March 1996. (3) Direct labour cost incurred Rs.168,000. (4) Factory overhead rate is applied 90% of direct labour cost. (5) The completed jobs were shipped to customers at a billed price Rs.490,000. Note: Raw material Rs.14,000 and direct labour cost Rs.9,800 are included in the goods in process on 31 March 1996 (Factory overhead is applied on the basis of direct labour cost). REQUIRED (a) Prepare General Journal entries and setup work in process account. (b) Compute the cost of goods in process inventory 31 March 1996. Question # 15: The following data relate to Khurram Farooqui manufacturing Company for the month of December 1991: (1) Purchased raw material on account Rs.97,500. (2) The raw material account shows a debit balance of Rs.30,000 on 31 December 1991. (3) Direct labour cost Rs.150,000. (4) Factory overhead incurred and applied Rs.120,000. (5) The completed jobs were shipped to customers at a billed price Rs.450,000. Note: Raw material Rs.8,850 and direct labour cost Rs.6,750 are included in the goods in process on 31 December 1991 (Factory overhead is applied on the basis of direct labour cost). REQUIRED (a) Record the above transactions in the General Journal. (b) Compute the cost of goods in process inventory 31 December 1991. (c) Prepare a condensed Income Statement for 31 December 1991. Question # 16: The following data relate to Dada Bhai Manufacturing Company for its operations for April 2004: 1. Purchase of raw material on account for Rs.52,000. 2. Raw material account shows a debit balance of Rs.16,000 on April 30, 2004. 3. Direct labour cost incurred Rs.80,000. 4. Factory overhead incurred Rs.64,000. 5. The jobs were completed and shipped to customers at a billed price of Rs.240,000. 6. The factory overhead is applied on the basis of direct labour cost. 7. Goods in process on April 30, 2004 were as: Raw material ............................ Rs.4,720. Direct labour cost ................... Rs.3,600. REQUIRED 1. Give necessary journal entries for the above transactions. 2. Compute the cost of goods in process on April 30, 2004. 3. Prepare a condensed income statement. www.a4accounting.net Page 248 Job Order Costing Chapter # 10 Question # 17: The following data relate to Irfan Manufacturing Company for its operation for the year ended December 31, 2005. Raw material purchased on account Rs.340,000. Raw Material Issued to Factory: Rupees: Direct 238,000 Indirect 34,000 Labour Used: Rupees: Direct labour for production 408,000 For general use 40,800 Other factory overhead incurred on account Rs.306,000. 90% of the factory overhead has been applied on the work-in-process account on the basis of direct labour cost. Goods valued Rs.877,200 were transferred from factory to go-down as complete. Finished goods costing Rs.112,200 were in the ending inventory and the rest were sold at 20% above cost. REQUIRED (i) Give General Journal entries to record the above transactions and setup work-inprocess, finished goods and factory overhead account. (ii) To close the factory overhead accounts. Question # 18: The following information appears in the work in process inventory account:Work in Process Inventory Balance October 1, Rs.129,600 Transfer to finished goods Direct material 216,000 Inventory account 540,000 Direct labour 162,000 Balance October 31, 162,000 Factory overhead 194,400 702,000 702,000 Factory overhead is applied as a percentage of direct labour cost, direct labour charged to goods in process at October 31, is estimated to be Rs.54,000. 75% of the goods finished during October are sold for cash Rs.486,000 and the remaining 25% of finished goods are sold on credit Rs.171,000. REQUIRED a) Factory overhead percentage on direct labour cost. b) Factory overhead applied and direct materials used on goods still in process at October 31. c) General journal entries to record: (1) Manufacturing costs charged to production during October. (2) Transfer of production to finished goods warehouse during October. (3) Cash sales. (4) Credit sales. Page 249 www.a4accounting.net Job Order Costing Chapter # 10 Question # 19: Master Sons uses job order cost system. Factory overhead charged to individual jobs through the use of predetermined overhead rate-based on direct labour cost. The following appears in the company’s goods in process account for the month of January 2006. Debit to Account: Rs. Balance January 01, 2006 195,700 Raw material 285,000 Direct labour 171,000 Factory overhead 222,300 874,000 Credit to Account: Rs. Transferred to finished goods account 646,000 Balance January 31, 2006 228,000 REQUIRED (1) Determine the overhead application rate used by the company. (2) Assuming that the direct labour charged to the job still in process at January 31, amounts to Rs.57,000. Compute the amount of factory overhead and amount of raw material which have been charged to these jobs as of January 31, 2006. (3) Prepare General Journal entries to record: (a) The manufacturing cost (Material, labour & overhead). (b) The transfer of production completed during January 31, to the finished goods inventory accounts. (c) The credit sales of total finished goods completed at 30% above cost. Question # 20: Sheikh Sons uses job order cost accounting system. Factory overhead is charged to individual jobs through the use of predetermined overhead rate-based on direct labour cost. The following information appears in the company’s goods in process account for the month of June: Debits to Account: Rs. Balance 1 June 24,900 Raw material 36,000 Direct labour 27,000 Factory overhead (applied to jobs as a percentage of direct labour cost) 35,100 123,000 Credits to Account: Transferred to finished goods inventory 96,000 Balance 30 June 27,000 REQUIRED (1) Compute the predetermine overhead application rate used by the company. (2) Assuming that the direct labour charged to the job still in process at June 30, amounts to Rs.7,200. Compute the amount of factory overhead and amount of raw material which have been charged to these jobs as of June 30. (3) Prepare General Journal entries to summarize: (a) The manufacturing cost (Material, labour & overhead) charged to production during June. (b) The transfer of production completed during June to the finished goods inventory accounts. www.a4accounting.net Page 250 Job Order Costing Chapter # 10 (c) The cash sales of 90% of the merchandise completed during June, at a total sales price of Rs.139,500. Show the related cost of goods sold in a separate journal entry. Question # 21: Margoob Company uses job order cost accounting system. The following information appears in the goods in process controlling account for the month of June 1993 and company uses FIFO method: Goods in Process Debits to Accounts (Rupees) Credits to Accounts (Rupees) Balance 1 June 1993 88,000 Transfer to finished goods Direct materials 220,000 Inventory account ? Direct labour 132,000 Balance 30 June, 1993 94,000 Manufacturing overhead 154,000 incurred on account 594,000 594,000 Over-applied factory overhead Rs.4,400 and used factory overhead rate based on direct labour cost. 90% completed units sold on account for Rs.550,000. REQUIRED a) Assuming that the direct labour charged to the job still in process at June 30, 1993 amounts to Rs.23,100. Compute the amount of manufacturing overhead applied and the amount of direct material which have been charged to these jobs as of June 30. b) Pass the journal entries relating: i) Manufacturing costs. ii) Completed goods transferred to finished goods inventory. iii) Cost of goods sold. iv) Credit sales. v) Factory overhead incurred. vi) Close over-applied factory overhead to cost of goods sold. c) Prepare revised goods in process account. Question # 22: The following transactions relate to the Decent Corporation for the month of June, 2002. (1) Materials purchased on account .............................................Rs.204,000. (2) Materials and labour used on jobs were s under: Direct Materials (Rs.) Direct Labours (Rs.) Job No. 1 13,680 16,800 Job No. 2 6,000 8,400 Job No. 3 20,640 22,080 Indirect materials Rs.4,560. Indirect labour Rs.6,600. (3) Other factory overhead cost incurred ........................................ Rs.8,220. (4) Depreciation on machinery ............................................................ Rs.3,600. (5) Factory overhead is applied at 80% of direct labour. (6) Jobs No. 1 and 2 were completed and customers were billed with Rs.60,000 and Rs.31,200 respectively. REQUIRED Prepare the necessary entries to record the above transactions. Page 251 www.a4accounting.net Job Order Costing Chapter # 10 Question # 23: The following data relates to M/S. Al-Mansoor Co. for the month of September 1995, who maintains job order cost system. (1) Materials purchased on account Rs.156,000. (2) Materials requisitioned and factory labour used: Job No. Material (Rs.) Factory Labour (Rs.) Job No. 501 16,900 24,700 Job No. 502 11,700 20,176 Job No. 503 29,120 18,304 Job No. 504 22,880 27,040 Job No. 505 18,200 9,360 Job No. 506 9,100 4,680 For general factory use 4,940 9,620 (3) Factory overhead cost incurred on account Rs.89,440. (4) Depreciation of machinery Rs.13,520. (5) The factory overhead rate is 110% of direct labour cost. (6) Jobs completed: No. 501, 503, 504 and 506. (7) Jobs No. 501, 503 and 504 were shipped and customers were billed for Rs.109,200, Rs.110,500 and Rs.130,000 respectively. REQUIRED (a) Pass necessary journal entries to record the information summarized above. (b) Prepare accounts in ledger of the company for the accounts work – in – process and finished goods. Question # 24: Arsalan Manufacturing Company uses a job order cost system. The following data summarizes the operations to production for April 1993: (1) Raw materials purchased on cash Rs.560,000. (2) Raw materials purchased on account Rs.280,000. (3) Raw materials requisitioned and direct labour used: Job No. Raw Material (Rs.) Direct Labour (Rs.) Job No. 11 91,000 133,000 Job No. 12 75,600 108,640 Job No. 13 156,800 98,560 Job No. 14 123,200 145,600 Job No. 15 98,000 50,400 Job No. 16 49,000 25,200 For general factory use 26,600 51,800 (4) Factory overhead cost incurred on account Rs.478,800. (5) Depreciation of machinery Rs.72,800. (6) The factory overhead rate is 110% of direct labour cost. (7) Jobs completed: No. 11, 13, 14 and 16 and transferred to finished goods warehouse. (8) Jobs No. 11, 13 and 14 were sold on account at a cost of Rs.588,000, Rs.630,000 and Rs.700,000 respectively. REQUIRED (a) Entries in General Journal to record the foregoing operations. (b) Setup T – accounts of raw material, work in process, and finished goods. (c) Bring down the end of the month balances. www.a4accounting.net Page 252 Job Order Costing Chapter # 10 Question # 25: The Millat Company uses job order costing. The following data were obtained from the company’s records as of June 30: Job No. Direct Material (Rs.) Direct Labour Hours Job No. 1001 244,500 34,500 Job No. 1002 354,000 70,500 Job No. 1003 367,500 63,000 Job No. 1004 231,000 37,500 Job No. 1005 273,000 48,000 Job No. 1006 205,500 29,700 Direct labour is charged to job at an average cost of Rs.6 per direct labour hour. Factory overhead is charged to jobs on the basis of Rs.3 per direct labour hour. Actual overhead totaled Rs.870,000. During June, Job No. 1001, 1002, 1003, 1004, and 1005 were completed. Jobs No. 1001 and 1002 were shipped out and customers were billed for Rs.720,000 and Rs.1,230,000 respectively. REQUIRED Give journal entries to summarize the transactions for June and to close the factory overhead account. Question # 26: The A.M. Company uses job order costing. At the beginning of June, two jobs were in process: Job 101 Job 102 Material Rs. 56,000 Rs. 75,200 Direct labour Rs. 160,000 Rs. 80,000 Applied factory overhead Rs. 128,000 Rs. 64,000 There was no inventory of finished goods on June 1, during June job 103, 104, 105, 106, 107 and 108 were started. Material requisitions for June totaled Rs.480,000 direct labour cost Rs.720,000. Factory overhead is applied 80% of direct labour cost. The only job still in process at the end of June 30 is No. 108 with cost of Rs.64,000 for material and Rs.112,000 for the direct labour. Job 107, the only finished job on hand at the end of June, has total cost of Rs.137,600. REQUIRED (1) Calculate work in process inventory on June 30 (Job no. 108). (2) General Journal entries to record: (a) Cost of goods manufactured. (b) Cost of goods sold. (c) Closing of over or under applied factory overhead. Page 253 www.a4accounting.net Job Order Costing Chapter # 10 Question # 27: Mushtaq Company uses a pre-determined rate in applying factory overhead to individual production orders. Overhead is applied in Department – A on the basis of machine hours and in Department – B on the basis of direct labour hours. At the beginning of the year 1997 management made the following budget estimates: Department – A Department – B Direct labour Rs.467,500 Rs.1,632,000 Factory overhead Rs.918,000 Rs.1,020,000 Machine hours 612,000 Hours 7,650 Hours Direct labour hours 212,500 Hours 850,000 Hours Production No. 490 was started in the middle of January and completed two weeks later. The cost records for the job show the following information: Department – A Department – B Job No. 490 – 4,080 units of product Cost of raw material used on job Rs.3,910 Rs.12,920 Direct labour cost Rs.4,250 Rs.10,030 Machine hours 10,710 Hours 850 Hours Labour hours 2,040 Hours 3,230 Hours REQUIRED (1) Determine the overhead rate that should be used in applying overhead costs to Job No. 490. (2) What is the total cost of Job No. 490 and the unit cost of the product manufactured on this production cost? Question # 28: On March 1, 2009 Azfar Engineering Works had two jobs in process as follows: Job No. 18 Job No. 19 Direct material Rs.90,000 Rs.32,400 Direct labour Rs.64,800 Rs.21,600 Direct labour hours 18,000 Hours 14,400 Hours Direct machine hours 5,400 Hours 4,500 Hours Applied factory overhead Rs.3 per direct machine hour Rs.5 per direct labour hour During March Job No. 20, 21, 22 and 23 were started. Direct materials of Rs.67,500 and direct labour of 3,240 hours at an average rate of Rs.15 per hour used during the month. Pre-determined factory overhead applied rate is Rs.10 per direct labour hour on all jobs starting in March. Job No. 23 was the only incomplete job at the end of March. Direct material of Rs.27,000 and direct labour of Rs.16,200 were charged to job. At the end of month job No. 22 was the only finished job on hand. It had accumulated total cost of Rs.49,050. There was no beginning inventory in finished goods. Jobs completed were sold on account at a profit of 20% on cost. REQUIRED (i) Prepare following T – account: (a) Work in process (b) Finished goods (c) Cost of goods sold (ii) Prepare journal entries to record: (a) Cost incurred on jobs started in the month of March (b) Cost of goods manufactured (c) Sales (d) Cost of sales www.a4accounting.net Page 254 Job Order Costing Chapter # 10 Question # 29: The following information has been taken from the job order cost system, used by Jahangeer Sons: Job No. Balance July 1 (Rs.) Production Cost in July (Rs.) 21 266,000 --22 205,200 --23 57,000 315,400 24 95,000 247,000 25 --380,000 26 --229,900 27 --152,000 During July Job No. 23, 24 and 25 were completed, and Job No. 21, 22 and 23 were sold on account at 25% above cost. REQUIRED (a) Compute: (1) Cost of finished goods inventory – beginning. (2) Cost of goods in process inventory – beginning. (3) Cost of finished goods inventory – ending. (4) Cost of goods in process inventory – ending. (5) Cost of goods manufactured. (6) Cost of goods sold. (7) Sales revenue. (b) General Journal entries for (5), (6) and (7) above. Question # 30: Ashar Engineering Works produces robotic arms according to customers’ specification. At November 1, 2009 the jobs were in process: Job No. Material Cost (Rs.) Labour Cost (Rs.) Factory Overhead (Rs.) 201 A 8,000 4,000 20% of direct labour 215 B 16,000 8,000 15% of direct labour 230 C 16,600 4,400 1/4 of direct labour Additional costs to complete the products during November: Material Rs.40,000 allocated as follows: Job No. 201 A 40% Job No. 215 B 25% Job No. 230 C 35% Labour charges Rs.8,000 per job and factory overhead apply to all the jobs at 20% of direct labour. Units selling price: Job No. 201 A Rs.4.40 Job No. 215 B Rs.5.00 Job No. 230 C Rs.3.60 All jobs were completed and sold during November. REQUIRED Prepare journal entry to record transfer of the jobs to the finished goods account. Page 255 www.a4accounting.net Job Order Costing Chapter # 10 Question # 31: On January 1, 2010 Mansoor Company has a debit balance of Rs.55,000 in material account. During a month of January following transactions were completed: (1) Purchased material from Zulfiqar Company Rs.132,000 which included 30% cash purchases. (2) Material issued to: Job No. Direct (Rs.) Indirect (Rs.) X 55,000 5,500 Y 44,000 4,400 Z 66,000 6,600 (3) Labours hours used: Job No. Direct Indirect X 220 Hours 22 Hours Y 540 Hours 54 Hours Z 880 Hours 88 Hours (4) Labour rate is Rs.8 per direct labour hour. (5) Factory overhead applied at the rate of 80% of direct labour cost. (6) Job No. X and Z were completed and transferred to finished goods. (7) 30% of finished goods were sold on account to Naeem Traders at a profit of 25%. REQUIRED Prepare journal entries in the books of Mansoor Industries, showing computations. www.a4accounting.net Page 256 Chapter # 11 Standard Costing Cost Accounting www.a4accounting.net Standard Costing Chapter # 11 SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI: Standard costing. Computing and recording: o Materials quantity and price variances. o Labour time (efficiency) and wage variances. o Factory overhead (one way) variance. WHAT THE EXAMINER USUALLY ASK? Computation of: o Material price variance. o Material quantity variance. o Overall material variance. o Labour rate variance. o Labour efficiency variance. o Overall labour variance. o Factory overhead variance. General Journal entries to record the standard cost, actual cost and variances. Closing entries to close variances. www.a4accounting.net Page 258 Standard Costing Chapter # 11 STANDARD COSTING A system of cost ascertainment and control in which predetermined standard costs and income for products and operations are set and periodically compared with actual costs incurred and income generated in order to establish any variances. VARIANCE In standard costing and budgetary control, the difference between the standard or budgeted levels of cost or income for any activity and the actual costs incurred or income achieved. If the actual performance is better than standard then a favourable variance results, while if actual performance is worse than standard there is an adverse or unfavourable variance. MATERIAL PRICE VARIANCE In a standard costing system, a variance arising as a part of the direct materials total cost variance is known as materials price variance. It is the difference between the standard price of the materials and the actual price of the materials purchased. Material Price Variance = (Standard Material Price – Actual Material Price) x Actual Material Quantity MATERIAL QUANTITY VARIANCE In standard costing systems, part of the direct materials usage variance; it is the difference between the total standard quantity of material allowed for a process in standard proportions and the actual materials used, also in standard proportions, valued at standard prices. Material Quantity Variance = (Standard Material Quantity – Actual Material Quantity) x Standard Material Price TOTAL MATERIAL VARIANCE It is the difference between the total standard cost of the materials and the total actual cost of the materials. Total Material Variance = Total Standard Cost – Total Actual Cost OR Total Material Variance = Material Price Variance + Material Quantity Variance LABOUR RATE VARIANCE It compares the actual rate paid to direct labour for an activity with the standard rate of pay allowed for that activity for the actual hours worked. Labour Rate Variance = (Standard Labour Rate – Actual Labour Rate) x Actual Hours Worked Page 259 www.a4accounting.net Standard Costing Chapter # 11 LABOUR EFFICIENCY VARIANCE It compares the actual labour time taken to carry out an activity with the standard time allowed and values the difference at the standard direct labour rate per hour. Labour Efficiency Variance = (Standard Labour Hours – Actual Labour Hours) x Standard Labour Rate TOTAL LABOUR VARIANCE It is the difference between the total standard cost of the labour and the total actual cost of the labour. Total Labour Variance = Total Standard Cost – Total Actual Cost OR Total Labour Variance = Labour Price Variance + Labour Efficiency Variance OVERHEAD VARIANCE The total variance that arises in respect of fixed and variable overheads; it represents the difference between the standard overhead recovered for the actual units produced and the actual overhead incurred for a period. Overhead Variance = Total Standard Cost – Total Actual Cost (There are many overhead variances but are not relevant according to the examination point of view but still showing their formulas). Fixed Overhead Capacity Variance = Budgeted Expenditure – (Actual Hours x Fixed Overhead Absorption Rate per Hour) Fixed Overhead Efficiency Variance = (Standard Hours for Actual Production x Fixed Overhead Absorption Rate per Hour) – (Actual Hours x Fixed Overhead Absorption Rate per Hour) Fixed Overhead Expenditure Variance = Actual Expenditure – Budgeted Expenditure Fixed Overhead Volume Variance = Budgeted Expenditure – (Actual Units x Fixed Overhead Absorption Rate per Unit) OR Budgeted Expenditure – (Standard Hours for Actual Production x Fixed Overhead Absorption Rate per Standard Hour) Fixed Overhead Volume Variance = Variable Overhead Expenditure Variance = (Standard Rate – Actual Rate) x Actual Hours Variable Overhead Efficiency Variance = (Standard Hours – Actual Hours) x Standard Rate www.a4accounting.net Page 260 Standard Costing Chapter # 11 GENERAL ENTRIES Material: Work in process (standard quantity x standard rate) DR. (standard cost) Material price variance DR. (unfavourable) Material quantity variance CR. (favourable) Raw materials (actual quantity x actual rate) CR. (actual cost) -------------------------------------------------------------------------------------------------------------- Labour: Work in process (standard hours x standard rate) DR. (standard cost) Labour price variance DR. (unfavourable) Labour efficiency variance CR. (favourable) Accrued payroll (actual hours x actual rate) CR. (actual cost) ---------------------------------------------------------------------------------------------------------------- Overhead: Work in process DR. (with total standard cost) Overhead variance DR. (unfavourable variance) Factory overhead CR. (total actual cost) ---------------------------------------------------------------------------------------------------------------- Closing Unfavourable Material Price Variance: Cost of goods sold DR. (with material price variance) Material price variance CR. (material price variance) ---------------------------------------------------------------------------------------------------------------- Closing Favourable Material Quantity Variance: Material quantity variance DR. (with material quantity variance) Cost of goods sold CR. (material qty. variance) ---------------------------------------------------------------------------------------------------------------- Closing Unfavourable Labour Rate Variance: Cost of goods sold DR. (with labour rate variance) Labour rate variance CR. (with labour rate variance) ---------------------------------------------------------------------------------------------------------------- Closing Favourable Labour Efficiency/Hour Variance: Labour efficiency variance DR. (with labour efficiency variance) Cost of goods sold CR. (labour efficiency variance) ---------------------------------------------------------------------------------------------------------------- Closing Unfavourable Factory Overhead Variance: Cost of goods sold DR. (with factory overhead variance) Factory overhead variance CR. (factory overhead variance) ----------------------------------------------------------------------------------------------------------------- Page 261 www.a4accounting.net Standard Costing Chapter # 11 ILLUSTRATION # 1: (VARIANCE) The standard cost and the actual cost data of KA Manufacturing Company were as under: Standard Actual Materials 15,000 units at Rs.6.00 per unit 16,000 units at Rs.5.70 per unit Labour 5,000 hours at Rs.8.00 per hour 4,800 hours at Rs.8.50 per hour Factory Overhead Rs.69,000 Rs.62,000 REQUIRED (a) Determine: (1) Material price variance and material quantity variance. (2) Labour rate variance and labour time variance. (3) Overhead variance. (b) Record the above transactions in the General Journal. (c) Prepare General Journal entries closing the variance accounts. SOLUTION # 1: Computation of Material Price Variance: Material price variance = (Standard price – Actual price) x Actual quantity Material price variance = (6.00 – 5.70) x 16,000 Material price variance = 4,800 (Favourable) Computation of Material Quantity Variance: Material quantity variance = (Standard quantity – Actual quantity) x Standard price Material quantity variance = (15,000 – 16,000) x 6.00 Material quantity variance = (6,000) (Unfavourable) Computation of Labour Rate Variance: Labour rate variance = (Standard price – Actual price) x Actual hours Labour rate variance = (8.00 – 8.50) x 4,800 Labour rate variance = (2,400) (Unfavourable) Computation of Labour Time Variance: Labour time variance = (Standard hours – Actual hours) x Standard price Labour time variance = (5,000 – 4,800) x 8.00 Labour time variance = 1,600 (Favourable) Computation of Factory Overhead Variance: Factory overhead variance = Standard cost – Actual cost Factory overhead variance = 69,000 – 62,000 Factory overhead variance = 7,000 (Favourable) Date 1 KA Manufacturing Company General Journal Particulars P/R Work in process (15,000 x 6.00) Material quantity variance Material price variance Raw material (16,000 x 5.70) (To record the material price and quantity variance) www.a4accounting.net Page 262 Debit 90,000 6,000 Credit 4,800 91,200 Standard Costing Chapter # 11 Date 2 3 Date 1 KA Manufacturing Company General Journal Particulars P/R Work in process (50,000 x 8.00) Labour rate variance Labour efficiency variance Accrued payroll (4,800 x 8.50) (To record the labour rate and efficiency variance) Work in process Factory overhead variance Factory overhead (To record the factory overhead variance) KA Manufacturing Company Closing Entries Particulars P/R Material price variance Labour efficiency variance Factory overhead variance Cost of goods sold Material quantity variance Labour rate variance (To close the all variances) ILLUSTRATION # 2: Debit 40,000 2,400 69,000 Debit 4,800 1,600 7,000 Credit 1,600 40,800 7,000 62,000 Credit 5,000 6,000 2,400 (STANDARD COST) The actual costs and variance for direct materials, direct labour and factory overhead for the month of September are given below:Actual Cost Unfavourable Favourable (Rs.) Variance (Rs.) Variance (Rs.) Direct material 150,000 Quantity variance 10,000 Price variance 9,000 Direct labour 200,000 Hours variance 13,000 Rate variance 17,000 Factory overhead 210,000 Overhead variance 25,000 REQUIRED (a) Compute the standard costs of direct material, direct labour and factory overhead. (b) Give the entries in General Journal to record the actual and standard costs and their variances. Page 263 www.a4accounting.net Standard Costing Chapter # 11 SOLUTION # 2: Computation of Direct Material Standard Cost: Direct materials standard cost = Material actual cost + Favourable variance – Unfavourable variance Direct materials standard cost = 150,000 + 10,000 – 9,000 Direct materials standard cost = Rs.151,000 Computation of Direct Labour Standard Cost: Direct labour standard cost = Labour actual cost + Favourable variance – Unfavourable variance Direct labour standard cost = 200,000 + 17,000 – 13,000 Direct labour standard cost = Rs.204,000 Computation of Factory Overhead Standard Cost: Factory overhead standard cost = Factory overhead actual cost + Favourable variance – Unfavourable variance Factory overhead standard cost = 210,000 – 25,000 Factory overhead standard cost = Rs.185,000 Date 1 2 3 M/S. _____________ General Journal For the Month of September Particulars P/R Work in process Material price variance Material quantity variance Raw material (To record the material price and quantity variance) Work in process Labour hours variance Labour rate variance Accrued payroll (To record the labour rate and efficiency variance) Work in process Factory overhead variance Factory overhead (To record the factory overhead variance) www.a4accounting.net Page 264 Debit 151,000 9,000 Credit 10,000 150,000 204,000 13,000 17,000 200,000 185,000 25,000 210,000 Standard Costing Chapter # 11 ILLUSTRATION # 3: (ACTUAL COST) The standard cost and variances of direct materials, direct labour and factory overhead for the month of August are given below: Variances Standard Cost (Rs.) Unfavourable (Rs.) Favourable (Rs.) Direct materials 300,000 Price variance 7,000 Quantity variance 5,000 Direct labour Rate variance Usage variance 260,000 3,000 13,000 Factory overhead 290,000 Factory overhead variance 10,000 REQUIRED Determine the actual cost incurred during the month of August for direct materials, direct labour and factory overhead. SOLUTION # 3: Computation of Actual Cost of Direct Materials: Actual cost of direct material = Material standard cost + Unfavourable variance – Favourable variance Actual cost of direct material = 300,000 + 7,000 – 5,000 Actual cost of direct material = Rs.302,000 Computation of Actual Cost of Direct Labour: Actual cost of direct labour = Labour standard cost + Unfavourable variance – Favourable variance Actual cost of direct labour = 260,000 + 13,000 – 3,000 Actual cost of direct labour = Rs.270,000 Computation of Actual Cost of Factory Overhead: Actual cost of factory overhead = Standard factory overhead cost + Unfavourable variance – Favourable variance Actual cost of factory overhead = 290,000 – 10,000 Actual cost of factory overhead = Rs.280,000 Page 265 www.a4accounting.net Standard Costing Chapter # 11 PRACTICE QUESTIONS Question # 1: The standard and actual cost data of Thatta Silk Mills Limited are as follows: Standard Actual Direct material: 22,000 units at Rs.4.00/21,560 units at Rs.3.50/Direct labour: 11,000 hours at Rs.6.00/13,200 hours at Rs.6.50/REQUIRED a) Compute: i) Material price variance and material quantity variance. ii) Labour rate variance and labour time variance. iii) Overhead variance. b) General Journal entries to record the above information and to close the variance accounts. Question # 2: The standard and actual data of Asif Co. are as follows: Standard Actual Direct material 36,000 units @ Rs.4.00 per unit 34,800 units @ Rs.4.50 per unit Direct labour 14,400 hours @ Rs.10.00 per hour 15,600 hours @ Rs.10.60 per hour REQUIRED (1) Material price variance (2) Material quantity variance (3) Labour rate variance (4) Labour time variance (5) Pass journal entries for recording of variances with actual and standard costs. Question # 3: The standard and actual cost data of Arif Co. are as follows: Standard Actual Direct material 26,000 units @ Rs.4.00 per unit 25,480 units @ Rs.3.50 per unit Direct labour 13,000 hours @ Rs.10.00 per hour 14,300 hours @ Rs.10.50 per hour REQUIRED (1) Material price variance (2) Material quantity variance (3) Labour rate variance (4) Labour time variance (5) Journal entries for recording of variances with actual and standard cost. Question # 4: The standard and actual cost data of Ahmed Limited is as follows: Standard Direct material 14,000 units @ Rs.4.00 per unit Direct labour 7,000 hours @ Rs.6.00 per hour Actual Direct material 13,720 units @ Rs.3.50 per unit Direct labour 8,400 hours @ Rs.6.50 per hour REQUIRED (a) Material price variance and material quantity variance. (b) Labour rate variance and labour time variance. (c) General Journal entries to record the above information and to close the variance accounts. www.a4accounting.net Page 266 Standard Costing Chapter # 11 Question # 5: Standard and actual costs for direct materials and direct labour are given as under: Standard Cost Direct materials 12,000 units at Rs.5.00 per unit Direct labour 10,500 hours at Rs.6.00 per hour Actual Cost Direct materials 12,750 units @ Rs.4.50 per unit Direct labour 9,750 hours @ Rs.6.25 per hour REQUIRED (a) Material price variance and material quantity variance. (b) Labour rate variance and labour time variance. (c) General Journal entries to record the above information and to close the variance accounts. Question # 6: The standard costs and actual costs of direct materials and direct labours in the production of 32,000 units of product “R” by Rashid Manufacturing Company during October 1994 are summarized below: Material Standard 64,000 units @ Rs.3.00 per unit Actual 65,920 units @ Rs.3.12 per unit Labour Standard 51,200 hours @ Rs.4.00 per hour Actual 50,560 hours @ Rs.4.20 per hour REQUIRED (a) Compute the material price variance and material quantity variance and overall material variance. (b) Compute the labour wage variance, labour efficiency variance and overall labour variance. (c) General Journal entries. Question # 7: The standard cost and the actual cost data of Kamal Azfar Manufacturing Company were as under: Standard Actual Materials 34,000 units at Rs.3.00 per unit 34,850 units at Rs.2.80 per unit Labour 51,000 hours at Rs.4.00 per hour 50,660 hours at Rs.4.20 per hour Factory Overhead Rs.165,000 Rs.105,000 REQUIRED (a) Determine: (1) Material price variance and material quantity variance. (2) Labour rate variance and labour time variance. (3) Overhead variance. (b) Record the above transactions in the General Journal. (c) Prepare General Journal entries closing the variance accounts. Page 267 www.a4accounting.net Standard Costing Chapter # 11 Question # 8: The standard and actual cost data of Mustafa Ltd. are as follows: Standard Actual Direct materials 9,000 Kg. @ Rs.10.00 10,800 Kg. @ Rs.12.00 Direct labour 3,600 hours @ Rs.5.50 3,240 hours @ Rs.6.00 Factory overhead Rs.90,000 Rs.90,000 REQUIRED (a) Calculate: (1) Material price variance and material quantity variance. (2) Labour rate variance and labour time variance. (3) Overhead variance. (b) Give journal entries to record the above information and to close the variance account. Question # 9: The standard and actual costs data of Auranzeb Ltd. are as follows: Standard Actual Direct materials 19,000 units @ Rs.4.00/= 18,620 units @ Rs.3.50/= Direct labour 9,500 hours @ Rs.6.00/= 11,400 hours @ Rs.6.50/= Factory overhead 50% of direct labour Rs.28,000 REQUIRED (a) Calculate: (1) Material price variance and material quantity variance. (2) Labour rate variance and labour time variance. (3) Overhead variance. (b) Give journal entries to record the above information and to close the variance account. Question # 10: The following data relate to Salman Manufacturing Ltd. Standard Actual Materials 16,000 units @ Rs.6.20/= per unit 14,400 units @ Rs.6.30/= per unit Labour 8,000 hours @ Rs.11.50/= per hour 10,000 hours @ Rs.11.10/= per hour Overhead 80% of direct labour Rs.85,000 REQUIRED (a) Calculate: (1) Material price variance and material quantity variance. (2) Labour rate variance and labour time variance. (3) Overhead variance. (b) Give journal entries to record the above information and to close the variance account. www.a4accounting.net Page 268 Standard Costing Chapter # 11 Question # 11: Rashid Product Co. uses standard costs system. The cost data for various elements of cost for manufacturing of 8,800 units is following: Standard Actual Direct material 5,500 units @ Rs.8.00 5,280 units @ Rs.9.00 Direct labour 2,200 hours @ Rs.11.00 2,530 hours @ Rs.12.00 Factory overhead 90% of direct labour Rs.24,700 REQUIRED Calculate:i) Material quantity variance & material price variance. ii) Labour time variance & labour rate variance. iii) Factory overhead variance. Question # 12: Aftab Sports Company uses standard costs system. The cost data for various elements of cost for manufacture of 17,760 footballs is as following: Standard Actual Direct material 6,000 units @ Rs.70 per unit 5,760 units @ Rs.75 per unit Direct labour 2,400 hours @ Rs.100 per hour 2,760 hours @ Rs.110 per hour Factory overhead 80% of direct labour Rs.240,000 All costs are charged to work in process at standard and separate variances accounts are established. There is no beginning or ending inventory of work in process. REQUIRED (a) Calculate: i) Material quantity variance & material price variance. ii) Labour time variance & labour rate variance. iii) Factory overhead variance. (b) Give journal entries to record the above information and also give entries to close the variances accounts. (c) Compare the actual cost of one football with its standard cost. Question # 13: Sachal Products uses standard cost system. Following data extracted from their records: Standard Raw material Costing Rs.130,000 (for 26,000 bags) of one KG each Direct labour 26,000 hours @ Rs.7.00 per hour Factory overhead 120% of direct labour cost Actual Raw material 26,650 bags of one KG @ 5.10 each KG Direct labour 25,610 hours @ Rs.7.50 per hour Factory overhead Rs.228,000 REQUIRED (a) Calculate: (1) Material price variance (2) Material quantity variance (3) Labour rate variance (4) Labour efficiency variance (5) Factory overhead variance (6) Overall variance (b) Record entries of the above variances and one entry to close all variances. Page 269 www.a4accounting.net Standard Costing Chapter # 11 Question # 14: Irfan Co. provided following standard and actual cost data for the month of June, 2007: Standards Materials 7,000 Kgs @ Rs.1.50 Labour 7,000 hours @ Rs.3.50 Factory overheads Rs.2.70 per labour hour Actual Materials 6,860 Kgs @ Rs.1.80 Labour 7,140 hours @ Rs.3.60 Factory overheads Rs.20,720 REQUIRED (1) Compute material price variance, material quantity variance, labour rate variance, labour efficiency variance and overhead variance. (2) General Journal entries for the above. (3) General Journal entries to close the variance accounts. Question # 15: Riaz process standard and actual cost data for the single product they manufacture, for the month of September 1992 are as follows: Standards Materials 7,500 Kgs @ Rs.1.60 per Kg Labour 7,500 hours @ Rs.3.60 per hour Factory overheads Rs.2.80 per labour hour Actual Materials 7,350 Kgs @ Rs.1.90 per Kg Labour 7,650 hours @ Rs.3.70 per hour Factory overheads Rs.22,350 REQUIRED (1) Compute material price variance, material quantity variance, labour rate variance, labour efficiency variance and overhead variance. (2) General Journal entries for the above. (3) General Journal entries to close the variance accounts. Question # 16: Top Products Co. uses standard cost system. Following data are taken from its cost accounting records: Standard Actual Raw material Rate per unit Rs.6.00 Rate per unit Rs.6.20 Total cost Rs.86,400/= Quantity 14,720 units Direct labour Wage per hour Rs.11.00 Wage per hour Rs.10.50 Total labour hours 16,000 Total labour cost Rs.174,400/= Factory overhead 80% of direct labour cost Total cost Rs.144,000/= REQUIRED a) Calculate: (1) Material price variance. (2) Material quantity variance. (3) Labour wage variance. (4) Labour efficiency variance. (5) Factory overhead variance. b) Give entries in general journal to record actual and standard costs of direct materials, direct labour and factory overhead and their variance. www.a4accounting.net Page 270 Standard Costing Chapter # 11 Question # 17: Following information has been extracted from the cost records of Mahrukh Pharma Company: Standard Cost: Material Labour Factory Overhead 17,000 units at the rate of 22,100 hours at the rate of Rs.2.50 per direct labour Rs.7 per unit Rs.9 per hour hour Actual Cost: Material Labour Factory Overhead 20,400 units at the rate of 21,250 hours at the rate of 1/5 of direct labour hour at Rs.6 per unit Rs.8 per hour the rate of Rs.6 REQUIRED (a) Compute Material Price and Quantity Variance. (b) Compute Labour Rate and Time Variance. (c) Factory Overhead Variance. Question # 18: Following information relate to business of Zaitoon Co. The actual direct material 90,000 units @ Rs.6. The direct material price variance Rs.5,760 adverse (unfavourable). The direct material quantity variance Rs.7,380 favourable. REQUIRED Compute the amount of standard cost and prepare necessary journal entry. Question # 19: Standard Cost (Rs.) Favourable (Rs.) 9,500 - Variances Unfavourable (Rs.) 15,200 Factory overhead cost 152,000 Controllable variance Volume variance REQUIRED i) Determine actual factory overhead cost. ii) Record factory overhead cost and its variance in general journal. Question # 20: The following are actual costs and variances for direct materials and direct labour for the month of April 1996:Actual Cost Unfavourable Favourable (Rs.) Variance (Rs.) Variance (Rs.) Direct material 180,000 Price variance 14,000 Quantity variance 10,000 Direct labour 320,000 Rate variance 9,000 Efficiency variance 21,000 REQUIRED 1) Standard cost of direct material and direct labour. 2) Entries in General Journal to record the above information and to close the variance account. Page 271 www.a4accounting.net Standard Costing Chapter # 11 Question # 21: The actual costs and variance for direct materials, direct labour and factory overhead for the month of October are given below:Actual Cost Unfavourable Favourable (Rs.) Variance (Rs.) Variance (Rs.) Direct material 78,100 Quantity variance 5,500 Price variance 4,400 Direct labour 101,200 Hours variance 6,600 Rate variance 8,800 Factory overhead 104,500 Overhead variance 11,000 REQUIRED (a) Compute the standard costs of direct material, direct labour and factory overhead. (b) Give the entries in General Journal to record the actual and standard costs and their variances. Question # 22: The following are standard costs and variances for direct materials and direct labour for the month of September 1996: Variances Standard Cost (Rs.) Unfavourable (Rs.) Favourable (Rs.) Direct materials 216,000 Price variance 10,800 Quantity variance 6,480 Direct labour Rate variance Efficiency variance 432,000 - 12,960 4,320 - REQUIRED 1) Actual cost of direct material and direct labour. 2) Entries in General Journal to record the above information and to close the variance account. www.a4accounting.net Page 272 Standard Costing Chapter # 11 Question # 23: The standard cost and variances of direct materials, direct labour and factory overhead for the month of November are given below: Variances Standard Cost (Rs.) Unfavourable (Rs.) Favourable (Rs.) Direct materials 78,000 Price variance 3,900 Quantity variance 2,340 Direct labour Rate variance Usage variance 156,000 1,560 7,020 Factory overhead 234,000 Controllable variance 3,120 Volume variance 4,680 REQUIRED Determine the actual cost incurred during the month of November for direct materials, direct labour and factory overhead. Question # 24: The standard costs and variances for July 2005 are as follows: Standard Cost (Rs.) Variances Unfavourable (Rs.) Favourable (Rs.) Direct materials 1,260,000 Price variance 67,200 Quantity variance Direct labour 2,520,000 Rate variance Efficiency variance 75,600 Factory overhead 3,780,000 Spending variance Volume variance REQUIRED (a) Actual costs for: (1) Direct materials (2) Direct labour (b) Entries in general journal: (i) To record the above information. (ii) To close the variance accounts. Page 273 42,000 25,200 50,400 33,600 (3) Factory overhead www.a4accounting.net Standard Costing Chapter # 11 Question # 25: A manufacturer uses a standard cost system. The per unit cost of production, assuming a normal volume of 1,500 units per month is as follows: Unit Cost (Rs.) Direct material 15kg @ Rs.13 per kg 190 Direct labour 5 hours @ Rs.8 per hour 40 Factory Overhead Applied: Fixed cost (22,500 ÷ 1,500) 15 Variable cost 7 252 During the month the products were produced at the following actual cost. Unit Cost (Rs.) Direct material 16.5kg @ Rs.12 per kg 198.00 Direct labour 9 hours @ Rs.7.80 per hour 70.20 Factory overhead Rs.27,720 for 1,200 units 23.10 291.30 REQUIRED (a) Compute: Material price & quantity, labour rate & efficiency and factory overhead controllable and volume variances. (b) Prepare journal entries to record variances. Question # 26: The standards price for materials in manufacturing items Y is one pound at Rs.40. During the current month 5,000 units of item Y were produced and 5,100 pounds of materials costing Rs.214,200 were used. Analyze the variance between actual cost and standard in such a way as to show how much of it was attributable to price change and how much the excess quantity of materials used. Indicated whether the variances are favourable or unfavourable. www.a4accounting.net Page 274 Chapter # 12 Process Costing Cost Accounting www.a4accounting.net Process Costing Chapter # 12 Syllabus ACCORDING TO UNIVERSITY OF KARACHI: Process costing. Procedure of process costing (FIFO method) cost by department. Product flow. Cost of production report. WHAT THE EXAMINER USUALLY ASK? Computation of: o Equivalent production units. o Unit cost and total per unit cost. o Cost of units completed and transferred out. o Cost of work in process ending inventory. Cost of production report. General entries. www.a4accounting.net Page 276 Process Costing Chapter # 12 PROCESS COSTING A costing system sometimes applied to production carried out by a series of chemical or operational stages or processes. Its characteristics are that costs are accumulated for the whole production process and that average unit costs of production are computed at each stage. Special rules are applied in process costing to the valuation of work in process, normal loss and abnormal losses. EQUIVALENT UNITS Unfinished units of production that remain in a process at the end of a period as work in process are called equivalent units. Degree of completion are assigned to each cost classification, which, when applied to the number of units in work in process, give an equivalent number of completed units. The equivalent units have an impact on the valuation of opening and closing work in process. EQUIVALENT PRODUCTION UNITS Particulars Units completed & transferred to next department/finished goods Add: Work in process (ending): (WIP ending units x % of completion) Direct material Direct labour Factory overhead Work in process during the period Less: Work in process (beginning) (WIP opening units x % of completion) Direct material Direct labour Factory overhead Equivalent production in units Material Equivalent Units XXX Labour Equivalent Units XXX XXX Overhead Equivalent Units XXX XXX XXX XXX XXX XXX (XXX) (XXX) XXX XXX (XXX) XXX PER UNIT COST AND TOTAL PER UNIT COST Particular Cost from preceding department Direct material Direct labour Factory overhead Total per unit cost Cost XXX XXX XXX XXX XXX Page 277 Equivalent Units Per Unit Cost XXX XXX XXX XXX XXX XXX XXX XXX www.a4accounting.net Process Costing Chapter # 12 STATEMENT OF UNITS COMPLETED AND TRANSFERRED TO NEXT DEPARTMENT / FINISHED GOODS Cost of Work in Process Opening Inventory: Cost b/d from last month Add: Cost Applied During This Month From Work in Process Beginning: (WIP opening units x % of completion x unit cost of element) Direct material XXX Direct labour XXX Factory overhead XXX Total cost applied during this month from work in process beginning Total cost of work in process beginning inventory Add: Remaining Units Completed During This Month: (Units completed – WIP opening units) x Unit cost Total cost of remaining units completed Total cost of units completed and transferred to next department/finished goods XXX XXX XXX XXX XXX STATEMENT OF COST OF WORK IN PROCESS ENDING INVENTORY Cost from preceding department Add: Cost Incurred by This Department: (WIP ending units x % of completion) x unit cost of element Direct material Direct labour Factory overhead Cost of work in process ending inventory COST OF PRODUCTION REPORT XXX XXX XXX XXX XXX Cost of production report is a report prepared periodically by a processing department, summarizing: The units for which the department is accountable and the disposition of those units. The costs incurred by the department and the allocation of those costs between completed and incomplete production. www.a4accounting.net Page 278 Process Costing Chapter # 12 Format of Cost of Production Report: Name of Business Cost of Production Report For the Period Ended ______ Particulars Department # 1 Quantity Schedule: Units started XXX Units received from preceding department Units completed and transferred out XXX Units still in process XXX XXX Cost Charged to the Department: Total Cost Unit Cost Cost from Preceding Department: Transferred in during the month Cost Added by Department: Material Labour Factory overhead Total cost added Total cost to be accounted for XXX XXX XXX XXX XXX Cost Accounted for as Follows: Cost of units completed and transferred out Cost of Work in Process Ending Inventory: Cost from preceding department Material Labour Factory overhead Total cost of work in process ending inventory Total cost accounted for ILLUSTRATION # 1: XX XX XX XX XX Department # 2 XXX XXX XXX XXX Total Cost Unit Cost XXX XX XXX XXX XXX XXX XXX XX XX XX XX XX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX (SINGLE PROCESS DATA) The following are the production data for Department A for the first month of operation: Direct material used Rs.200,000 Direct labour Rs.195,500 Factory overhead Rs.212,500 During the month 10,000 units were placed in production; 7,000 units were completed and the remaining units are 100% completed as to material and 50% completed as to direct labour and overhead. REQUIRED Compute the following: (a) Equivalent units of production. (b) Unit cost. (c) Total cost of units completed. (d) Total cost of units in process at the end of the month. Page 279 www.a4accounting.net Process Costing Chapter # 12 SOLUTION # 1: M/S. _____________ Equivalent Production Units (Department – A) For the Month Ended _______ Material Particulars Equivalent Units Units completed & transferred to next 7,000 department. Add: Work in process (ending): (WIP ending units x % of completion) Direct material (3,000 x 100%) 3,000 Direct labour (3,000 x 50%) Factory overhead (3,000 x 50%) Equivalent production in units 10,000 Particular Direct material Direct labour Factory overhead Total per unit cost Labour Equivalent Units 7,000 1,500 8,500 M/S. _____________ Unit Cost (Department – A) For the Month Ended _______ Cost (Rs.) Equivalent Units 200,000 10,000 195,500 8,500 212,500 8,500 608,000 M/S. _____________ Statement of Cost of Units Completed (Department – A) For the Month Ended _______ Units Completed During This Month: Units completed x Unit cost Total cost of units completed (7,000 x 68) Total cost of units completed and transferred to next department M/S. _____________ Statement of Cost of Work in Process Ending (Department – A) For the Month Ended _______ Cost Incurred by This Department: (WIP ending units x % of completion) x unit cost of element (Rs.) Direct material (3,000 x 100%) x 20 60,000 Direct labour (3,000 x 50%) x 23 34,500 Factory overhead (3,000 x 50%) x 25 37,500 Cost of work in process ending inventory 132,000 www.a4accounting.net Page 280 Overhead Equivalent Units 7,000 1,500 8,500 Per Unit Cost (Rs.) 20 23 25 68 (Rs.) 476,000 476,000 Process Costing Chapter # 12 ILLUSTRATION # 2: (SINGLE PROCESS WITH BEGINNING INVENTORY) The following information is taken from the books of Pak Steel Mills for department I for the month of March 2001. Cost of units in process on March 1, 2001 Rs.40,000 Cost of material placed in production Rs.177,600 Direct labour Rs.112,500 Factory overhead Rs.135,000 The data extracted from the production report relating to above process are as follows: Units in process on March 1, 2001 (80% complete as to material & 50% as to conversion cost) 4,000 units Units placed in production during March, 2001 22,000 units Units in hand on March 31, 2001 (90% complete as to material & 75% complete as to conversion cost) 6,000 units REQUIRED (a) Equivalent production units. (b) Per unit cost. (c) Total cost of units in process on 31 March 2001. (d) Total cost of units transferred out to department II. (e) Give necessary General Journal entry to record the transfer of units from department I to department II. SOLUTION # 2: Computation of Number of Units Completed: Work in process beginning inventory in units Add: Units placed in production Total work in process during the period Less: Work in process ending inventory in units Number of units completed Pak Steel Mills Equivalent Production Units (Department I) For the Period March 2001 Particulars Material Equivalent Units Units completed & transferred to next 20,000 department Add: Work in process (ending): (WIP ending units x % of completion) Direct material (6,000 x 90%) 5,400 Direct labour (6,000 x 75%) Factory overhead (6,000 x 75%) Work in process during the period 25,400 Less: Work in process (opening): Direct material (4,000 x 80%) (3,200) Direct labour (4,000 x 50%) Factory overhead (4,000 x 50%) Equivalent production in units 22,200 Page 281 4,000 22,000 26,000 (6,000) 20,000 Labour Equivalent Units 20,000 4,500 24,500 (2,000) 22,500 Overhead Equivalent Units 20,000 4,500 24,500 (2,000) 22,500 www.a4accounting.net Process Costing Chapter # 12 Particular Direct material Direct labour Factory overhead Total per unit cost Pak Steel Mills Per Unit Cost (Department I) For the Period March 2001 Cost Equivalent Units 177,600 22,200 112,500 22,500 135,000 22,500 425,100 Per Unit Cost 8.00 5.00 6.00 19.00 Pak Steel Mills Statement of Work in Process Ending Inventory (Department I) For the Period March 2001 (WIP ending units x % of completion) x unit cost of element Direct material (6,000 x 90% x 8) 43,200 Direct labour (6,000 x 75% x 5) 22,500 Factory overhead (6,000 x 75% x 6) 27,000 Cost of work in process ending inventory 92,700 Pak Steel Mills Statement of Units Completed & Transferred to Next Department (Department I) For the Period March 2001 Cost of Work in Process Opening Inventory: Cost b/d from last month 40,000 Add: Cost Applied During This Month From Work in Process Beginning: (WIP opening units x % of completion x unit cost of element) Direct material (4,000 x 20% x 8) 6,400 Direct labour (4,000 x 50% x 5) 10,000 Factory overhead (4,000 x 50% x 6) 12,000 Total cost applied during this month from work in process beginning 28,400 Total cost of work in process beginning inventory 68,400 Add: Remaining Units Completed During This Month: (Units completed – WIP opening units) x Unit cost Total cost of remaining units completed (16,000 x 19) 304,000 Total cost of units completed and transferred to next department 372,400 Date 1 Pak Steel Mills General Journal For the Period March 2001 Particulars P/R Work in process – Department II Work in process – Department I (To record the units completed and transferred to next department) www.a4accounting.net Page 282 Debit 372,400 Credit 372,400 Process Costing Chapter # 12 ILLUSTRATION # 3: (COST OF PRODUCTION REPORT) ABC Company’s department “B” costs for January, 2003 were as follows: Cost from department “A” Rs. 5,000 Cost added in department “B” Material Rs. 20,000 Labour 25,200 Factory overhead 33,600 The quality schedule shows 10,000 units received during the month from department “A”, 6,000 units were transferred to finished goods; and 4,000 units in process at the end of January were 100% complete as to material and 60% complete as to conversion cost. REQUIRED Prepare cost of production report. SOLUTION # 3: ABC Company Cost of Production Report For the Period January 2003 Particulars Quantity Schedule: Units received from department – A Units completed and transferred out Units still in process Department – B 10,000 6,000 4,000 Cost Charged to the Department - B: Cost from Department - A: Transferred in during the month (5,000 / 10,000) Cost Added by Department – B: Material (20,000 / 10,000) Labour (25,200 / 8,400) Factory overhead (33,600 / 8,400) Total cost added Total cost to be accounted for Cost Accounted for as Follows: Cost of units completed and transferred out (6,000 x 9.50) Cost of Work in Process Ending Inventory: Cost from department – A(4,000 x 0.5) Material (4,000 x 100% x 2.00) Labour (4,000 x 60% x 3.00) Factory overhead (4,000 x 60% x 4.00) Total cost of work in process ending inventory Total cost accounted for Page 283 Total Cost 10,000 Unit Cost 5,000 0.50 20,000 25,200 33,600 78,800 83,800 2.00 3.00 4.00 9.00 9.50 57,000 2,000 8,000 7,200 9,600 26,800 83,800 www.a4accounting.net Process Costing Chapter # 12 ABC Company Equivalent Production Unit (Department – B) For the Period January 2003 Particulars Material Labour Equivalent Equivalent Units Units Units completed & transferred out 6,000 6,000 Add: Work in process (ending): (WIP ending units x % of completion) Direct material (4,000 x 100%) 4,000 Direct labour (4,000 x 60%) 2,400 Factory overhead (4,000 x 60%) Equivalent production in units 10,000 8,400 ILLUSTRATION # 4: (MULTIPLE DEPARTMENTS DATA) Overhead Equivalent Units 6,000 2,400 8,400 The following information relates to the goods in process No. 3 of Mustafa Manufacturing for the month of November 2004: Goods in process inventory beginning (40,000 units 100% complete as to Rs.774,000 material and 75% complete as to conversion cost) Cost of 140,000 units transferred in from process No. 2 during November Rs.1,400,000 Manufacturing cost added in process No. 3, during November: Direct material Rs.560,000 Direct labour Rs.250,000 Factory overhead Rs.750,000 Rs.3,734,000 On November 30, 50,000 units are still in process No. 3 which is 100% complete as to material and 50% complete as to conversion cost. REQUIRED (a) Compute: (1) Equivalent units of production. (2) Cost per unit. (3) Cost of units transferred out of finished goods using FIFO. (4) Cost of units in process on November 30, 2004. (b) General Journal entries to record: (1) Transfer of 140,000 units from process No. 2 to process No. 3. (2) Manufacturing cost added in process No. 3 during November. (3) Transfer of 130,000 units from process No. 3 to finished goods warehouse. www.a4accounting.net Page 284 Process Costing Chapter # 12 SOLUTION # 4: Mustafa Manufacturing Equivalent Production Units (Process No. 3) For the Period Ended November 2004 Particulars Material Labour Equivalent Equivalent Units Units Units completed & transferred to finished 130,000 130,000 goods Add: Work in process (ending): (WIP ending units x % of completion) Direct material (50,000 x 100%) 50,000 Direct labour (50,000 x 50%) 25,000 Factory overhead (50,000 x 50%) Work in process during the period 180,000 155,000 Less: Work in process (opening): Direct material (40,000 x 100%) (40,000) Direct labour (40,000 x 75%) (30,000) Factory overhead (40,000 x 75%) Equivalent production in units 140,000 125,000 Particular Cost from process No. 2 Direct material Direct labour Factory overhead Total per unit cost Mustafa Manufacturing Per Unit Cost (Process No. 3) For the Period Ended November 2004 Cost Equivalent Units 1,400,000 140,000 560,000 140,000 250,000 125,000 750,000 125,000 2,960,000 Overhead Equivalent Units 130,000 25,000 155,000 (30,000) 125,000 Per Unit Cost 10 4 2 6 22 Mustafa Manufacturing Statement of Units Completed and Transferred to Finished Goods Process No. 3 For the Period Ended November 2004 Cost of Work in Process Opening Inventory: Cost b/d from last month 774,000 Add: Cost Applied During This Month From Work in Process Beginning: (WIP opening units x % of completion x unit cost of element) Direct labour (40,000 x 25% x 2) 20,000 Factory overhead (40,000 x 25% x 6) 60,000 Total cost applied during this month from work in process beginning 80,000 Total cost of work in process beginning inventory 854,000 Add: Remaining Units Completed During This Month: (Units completed – WIP opening units) x Unit cost Total cost of remaining units completed (90,000 x 22) 1,980,000 Total cost of units completed and transferred to finished goods 2,834,000 Page 285 www.a4accounting.net Process Costing Chapter # 12 Mustafa Manufacturing Statement of Work in Process Ending Inventory (Process No. 3) For the Period Ended November 2004 (WIP ending units x % of completion) x unit cost of element Cost from process No. 2 (50,000 x 10) 500,000 Direct material (50,000 x 100% x 4) 200,000 Direct labour (50,000 x 50% x 2) 50,000 Factory overhead (50,000 x 50% x 6) 150,000 Cost of work in process ending inventory 900,000 Date 1 2 3 Mustafa Manufacturing General Journal Particulars Work in process (Process 3) Work in process (Process 2) (To record the goods completed and transferred to next process) Work in process (Process 3) Raw material Accrued payroll Factory overhead (To record the manufacturing cost of process 3) Finished goods Work in process (Process 3) (To record the goods completed and transferred to finished goods) www.a4accounting.net Page 286 P/R Debit 1,400,000 Credit 1,400,000 1,560,000 560,000 250,000 750,000 2,834,000 2,834,000 Process Costing Chapter # 12 PRACTICE QUESTIONS Question # 1: The following are the production data for Department A for the first month of operation: Direct material used Rs.169,950 Direct labour Rs.62,920 Factory overhead Rs.314,600 During the month 8,250 units were placed in production; 7,700 units were completed and the remaining units are 100% completed as to material and 30% completed as to direct labour and overhead. REQUIRED Compute the following: (a) Equivalent units of production. (b) Unit cost of material used, labour, and factory overhead. (c) Total cost of units completed. (d) Total cost of units in process at the end of the month. Question # 2: Given below are the production data for department No. 1 for the first month of operation: Inputs to Department: Material 1,200 units Rs.120,000 Direct labour Rs.228,000 Factory overhead Rs.171,000 During the first month 960 units were completed and the remaining 240 units were 100% completed as to material and 75% completed as to conversion cost. REQUIRED Compute the following: (a) Equivalent units of production. (b) Unit cost of material used, labour, and factory overhead. (c) Total cost of 960 units completed. (d) Total cost of 240 units in process at the end of the month. Question # 3: Mansoor Industries Limited uses a process cost system of three processes, the following data relates to its process – 01: Beginning inventory Rs.208,000 Raw material used Rs.325,000 Direct labour cost used Rs.478,400 Factory overhead cost applied Rs.358,800 The data extracted from a quality schedule relating to the above process are as follows: Units Units in process beginning 169,000 (100% complete as to material, 70% as to conversion cost) Units placed in production 617,500 Units completed 520,000 Units still in process at the end 90% complete as to material and 50% complete as to conversion cost. REQUIRED Compute the equivalent production units, the unit cost, the total cost of unit completed and the total cost of units in process at end. Page 287 www.a4accounting.net Process Costing Chapter # 12 Question # 4: The following information was taken from the records of Faisal Manufacturing Co. for the month of January 2006. Cost of units in process on January 1, 2006 Rs.42,000 Cost of raw material used Rs.113,960 Direct labour cost incurred Rs.90,720 Factory overhead cost incurred Rs.60,480 The data extracted from the production report relating to above process is as follows: Units in process at end of January 2006 4,200 units (60% complete as to material and 80% complete as to conversion cost) Units placed in production during the month 18,200 units Units in process on January 1, 2006 7,000 units (40% complete as to material and 60% complete as to conversion cost) REQUIRED (a) Equivalent production during the month. (b) Unit cost. (c) Cost of units completed. (d) Cost of ending inventory of goods in process. (e) Journal entries to record cost allocated to production and cost of goods completed during the month. (f) Cost of production report. Question # 5: The information relate to a production operated by Raza Corporation during the month of October 2003: Beginning inventory in process Rs.136,200 Raw material used Rs.223,200 Direct labour used Rs.270,000 Applied factory overhead (90% of direct labour cost) Rs.243,000 Production report for October 2003: Units in process October 1st (100% complete as to material 50% complete as to conversion cost) 18,000 units Units put into process during October 96,000 units Units completed and transferred to next department 84,000 units Units in process October 31 (90% complete as to material 50% complete as to conversion cost) 30,000 units REQUIRED (a) Determine: (1) Equivalent production in units. (2) Cost of one unit. (3) Cost of units transferred to next department. Use FIFO. (4) The value of units in process on October 31, 2003. (b) Give journal entries to record the cost allocated to production and the cost of units completed during October 2003. (c) Cost of production report. www.a4accounting.net Page 288 Process Costing Chapter # 12 Question # 6: Information relating to goods in process in Frame Department of Sohrab Cycle Manufacturing Co. during the month of September 1993 is as under: Beginning inventory in process Rs.72,640 Raw material used Rs.119,040 Direct labour used Rs.114,000 Applied factory overhead (90% of direct labour cost) Rs.129,600 Production Report for September 1993: Units in process September 1st (100% complete as to material 50% complete as to conversion cost) 9,600 units Units put into process during September 51,200 units Units completed and transferred to painting department 44,800 units Units in process September 30 (90% complete as to material 50% complete as to conversion cost) 16,000 units REQUIRED (a) Determine: (1) Equivalent production in units. (2) Cost of one unit. (3) Cost of units transferred to painting department. (4) The value of units in process on September 30, 1993. (b) Give journal entries to record the cost allocated to production and the cost of units completed during September 1993. (c) Cost of production report. Question # 7: Information relating to goods in process in Cap Department of Eagle Pen Manufacturing Company during the month of August 1992 is as under: Beginning inventory Rs.25,500 Material cost Rs.127,500 Labour cost Rs.91,290 Overhead cost Rs.60,860 Production Report for August 1992: Units in process August 1st (80% complete as to material, 70% complete as to labour and overhead) 8,500 units Units put into process during August 34,000 units Units completed and transferred to holder department 27,200 units Units in process August 31 (75% complete as to material, 60% complete as to labour and overhead) 15,300 units REQUIRED (a) Determine: (1) Equivalent production in units. (2) Cost of one unit. (3) Cost of units transferred to holder department. (4) The amount of goods in process on August 31. (b) Give journal entries to record the cost allocated to production and the cost of units completed during August 1992. (c) Cost of production report. Page 289 www.a4accounting.net Process Costing Chapter # 12 Question # 8: The following information pertains to the goods in process in the lock assembly department during the month of December 1985: Beginning inventory of goods in process Rs.39,600 Materials used Rs.142,200 Direct labour Rs.279,000 Applied factory overhead (80% of direct labour cost) Rs.223,200 Rs.684,000 Production Report for December: Units in process December 1 (100% complete as to material and 75% complete as to labour and factory overhead) 5,400 units Units put into process during December 72,000 units Units completed and transferred to painting department 68,400 units Units in process December 31, (90% complete as to material and 60% complete as to labour and factory overhead) 9,000 units REQUIRED (a) Determine: (1) Equivalent production in units. (2) Unit cost for December. (3) Total cost of units completed. (4) Cost of units in process on 31 December 1985. (b) Entry in General Journal to record the transfer of production from the lock assembly department to the painting department. (c) Cost of production report. Question # 9: Shafique & Company has one department and uses a process cost system. The following data related to its process: Units in process November 1, Units 1,900 (40% complete as to material and 60% complete as to conversion costs) Cost of units in process November, 1 Rs.24,130 Units placed in production during November Units 7,600 Cost of material placed in production Rs.130,530 Direct labour cost incurred Rs.53,200 Factory overhead applied Rs.95,760 Units in process November 30 (75% complete as to material and 80% complete as to conversion costs) Units 2,850 REQUIRED (a) Equivalent production units. (b) Unit cost for November. (c) Total cost of units completed. (d) Cost of units in process on November 30. (e) Cost of production report. www.a4accounting.net Page 290 Process Costing Chapter # 12 Question # 10: The information below relates to a production operated by Noora Corporation during the month of October 1993: Units in process October 1, 1993 Units 6,000 (90% completed as to material and 70% completed as to conversion costs) Cost of units in process October 1, 1993 Rs.25,400 Units placed in production during October 1993 Units 40,000 Cost of material placed in production Rs.195,000 Direct labour cost incurred Rs.115,800 Factory overhead incurred on account Rs.140,000 Units in process October 31, 1993 (85% complete as to material and 60% complete as to conversion costs) Units 8,000 REQUIRED (a) Compute equivalent full units completed of materials and conversion costs. (b) Compute unit cost of material, labour and factory overhead. (c) Determine cost of transferred units of finished goods inventory (use FIFO method). (d) Determine cost of ending inventory of goods in process. (e) Prepare journal entries to record the cost allocated to production, the cost of goods completed during October 1993. (f) Cost of production report. Question # 11: Iyra Pharma Company processes a product through three distinct stages. The product of one process is being passed on to the next process and so on to the finished product intact. Details of the cost incurred in process No. 1 is given below for the month of November 2009. Cost of units in process on November 1, 2009 Rs.198,000 Cost of material placed in production Rs.132,000 Direct labour used (125% of factory overhead) Rs.220,000 Factory overhead applied Rs.? The data extracted from the production report relating to above processes are as follows: Units in process on November 1, 2009 16,500 units (60% completed as to material & 80% as to conversion cost) Units placed in production 44,000 units Units in process on November 30, 2009 11,000 units (40% completed as to material & 50% as to conversion cost) REQUIRED (a) Equivalent production units. (b) Per unit cost. (c) Total cost of units completed and transferred to next process (Process No. 2). (d) Total cost of units in process on November 30, 2009. (e) Cost of production report. Page 291 www.a4accounting.net Process Costing Chapter # 12 Question # 12: The following information is taken from the books of Pak Steel Mills for department I for the month of March 2001. Cost of units in process on March 1, 2001 Rs.48,000 Cost of material placed in production Rs.213,120 Direct labour Rs.? Factory overhead (120% of direct labour cost) Rs.162,000 The data extracted from the production report relating to above process are as follows: Units in process on March 1, 2001 (80% complete as to material & 50% as to conversion cost) 4,800 units Units placed in production during March, 2001 26,400 units Units in hand on March 31, 2001 (90% complete as to material & 75% complete as to conversion cost) 7,200 units REQUIRED (a) Compute: (1) Equivalent production units. (2) Per unit cost. (3) Total cost of units in process on March 31, 2001. (4) Total cost of units transferred out to department II. (b) Give necessary General Journal entry to record the transfer of units from department I to department II. (c) Cost of production report. Question # 13: Rahat and Co. have the following data, during the month of June 2003: Units started in production 6,500 Units Units finished 3,900 Units Units still in process: (60% as to material and 40% as to conversion) 1,950 Units Balance is lost in process (Normal loss) Material cost Rs. 15,210 Direct labour cost Rs. 18,720 Factory overhead cost Rs. 23,400 REQUIRED Calculate the cost of finished goods. Question # 14: Atique Company’s department “B” costs for January, 2003 were as follows: Cost from department “A” Rs. 70,000 Cost added in department “B” Material Rs. 280,000 Labour Rs. 352,800 Factory overhead Rs. 470,400 The quality schedule shows 140,000 units received during the month from department “A”, 84,000 units were transferred to finished goods; & 56,000 units in process at the end of January were 100% complete as to material and 60% complete as to conversion cost. REQUIRED Prepare cost of production report. www.a4accounting.net Page 292 Process Costing Chapter # 12 Question # 15: Babar Manufacturing Company uses a process cost system. The costs of department 2 for the month of May, 2010 were as follows: Cost from the proceeding department Rs.300,000 Cost added by the department: Material cost Rs.324,300 Labour cost Rs.131,100 Factory overhead cost Rs.96,600 The following information was obtained from the department’s quantity schedule: Units received 75,000 units Units completed and transferred out 60,000 units Units still in process (60% completed as to material & conversion cost) 15,000 units REQUIRED Prepare a Cost of Production Report of department 2 for May, 2010 using FIFO Method. Question # 16: Kamran Manufacturing uses process cost system. The costs of process 2 for the month of May were as under: Cost from preceding process Rs. 90,000 Cost Added by the Process: Material Rs. 98,172 Labour Rs. 34,992 Factory overhead Rs. 18,468 Following information was obtained from the department quantity schedule: Units received 11,250 Units transferred 9,000 Units still in process 2,250 The degree of completion of work in process was 50% of the units were 40% complete, 20% of the units were 30% complete and the balance of the units was 20% complete. REQUIRED (a) Prepare cost of production report for department 2 for May 2006. (b) General Journal entries to record: (1) Transfer of 11,250 units from preceding department to process 2. (2) Manufacturing cost added in process 2 during May 2006. (3) Transfer of 9,000 units from process 2 to finished goods warehouse. (c) Cost of production report. Page 293 www.a4accounting.net Process Costing Chapter # 12 Question # 17: The following information pertains to the goods in process No. 3 for the month of December 2007. The company applies FIFO method for inventory valuation: Goods in process inventory December 1, 2007, 68,000 units 75% complete, cost of Rs.657,900. Cost 238,000 units transferred in from process No. 2, during December Rs.1,428,000. Cost added in process No. 3 during December, direct material Rs.467,500, direct labour Rs.140,250 and factory overhead Rs.233,750. On December 31, 85,000 units are still in process No. 3 which is 75% complete as to materials and 20% complete as to conversion cost. REQUIRED Compute: (a) Number of units completed. (b) Equivalent units in production. (c) Cost per unit. (d) Cost of units completed and transferred to finished goods warehouse. (e) Cost of production report. Question # 18: The following information pertains to the goods in process No. 3 for the month of November, 1999: Goods in process inventory November 1, (72,000 units 100% complete as to materials and 75% complete as to conversion costs) Rs.696,600 Cost of 252,000 units transferred in from process No. 2 during Nov. Rs.1,260,000 Manufacturing cost added in process No. 3 during November: Direct material Rs.504,000 Direct labour Rs.225,000 Factory overhead Rs.675,000 On November 30, 90,000 units are still in process No. 3 which is 100% complete as to materials and 50% complete as to conversion cost. REQUIRED (a) Compute: (1) Equivalent units of production. (2) Cost per unit. (3) Cost of units transferred to finished goods warehouse. (4) Cost of units in process on November 30. (b) General Journal entries to record: (1) Transfer of 252,000 units from process No. 2 to process No. 3. (2) Manufacturing cost added in process No. 3 during November. (3) Transfer of 234,000 units from process No. 3 to finished goods warehouse. (c) Cost of production report. www.a4accounting.net Page 294 Process Costing Chapter # 12 Question # 19: The following information relates to the goods in process No. 3 of Mustafa Manufacturing for the month of November 2004: Goods in process inventory November 1 (76,000 units 100% complete as Rs.1,470,600 to material and 75% complete as to conversion cost) Cost of 266,000 units transferred in from process No. 2 during November Rs.2,660,000 Manufacturing cost added in process No. 3, during November Direct material Rs.1,064,000 Direct labour Rs.475,000 Factory overhead Rs.1,425,000 Rs.7,094,600 On November 30, 95,000 units are still in process No. 3 which is 100% complete as to material and 50% complete as to conversion cost. REQUIRED (a) Compute: (1) Equivalent units of production. (2) Cost per unit. (3) Cost of units transferred out of finished goods using FIFO. (4) Cost of units in process on November 30, 2004. (b) General Journal entries to record: (1) Transfer of 266,000 units from process No. 2 to process No. 3. (2) Manufacturing cost added in process No. 3 during November. (3) Transfer of 247,000 units from process No. 3 to finished goods warehouse. (c) Cost of production report. Question # 20: The following information pertains to the goods in the process No. 3 for November 2005: Cost of goods in process inventory, November 1, (6,400 units 100% complete as to materials, and 75% complete as to conversion cost) Rs.779,200 Cost of 22,400 units transferred in from process No. 2 Rs.1,120,000 Manufacturing Costs Added in Process No. 3: Direct materials Rs.448,000 Direct labour Rs.200,000 Factory overhead Rs.600,000 On November 30, 8,000 units are still in process No. 3, which are 100% complete as to materials and 50% complete as to conversion cost. REQUIRED (a) Compute: (1) Equivalent units of production. (2) Cost per unit. (3) Cost of units transferred to finished goods. (4) Cost of units in process on November 30. (b) General journal entries to record: (1) Transfer of 22,400 units from process No. 2 to process No. 3. (2) Manufacturing costs added in process No. 3. (3) Transfer of 20,800 units from process No. 3 to finished goods. (c) Cost of production report. Page 295 www.a4accounting.net Process Costing Chapter # 12 Question # 21: Given below is November’s unit and cost data for a manufacturing firm that uses FIFO costing: Department 2 Beginning units in process (55% complete as to direct materials, 15% 162,000 units complete as to conversion cost) Work – in – process beginning inventory Rs.567,000 Units transferred in during the period 504,000 units Cost transferred in this period Rs.705,600 Cost Added During This Period: Direct materials Rs.975,240 Direct labour Rs.811,512 Factory overhead Rs.584,766 Units transferred out to finished goods inventory godown 516,000 units Ending units in process (25% complete as to direct material, 70% 150,000 units complete as to conversion cost) REQUIRED (a) Calculate the equivalent units for direct materials and conversion costs. (b) Prepare cost of production report. Question # 22: The following information pertains to the goods in process in the fourth process during the month of July 1990: Beginning of goods in process inventory (1.7.1990) Rs.535,700 Cost of units transferred in from the third process during July Rs.385,000 Manufacturing cost incurred in July: Raw materials used Rs.154,000 Direct labour Rs.308,000 Factory overhead Rs.231,000 Rs.1,613,700 Production Report of Fourth Process for July 1990: Units in process July 1, 1990 (100% complete as to material and 75% complete as to labour and factory overhead) 44,000 units Units transferred in from the third process during July 77,000 units Units completed and transferred to finished goods store 99,000 units Units in process July 31, 1990 (100% complete as to material and 50% complete as to labour and factory overhead) 22,000 units REQUIRED (a) Determine: (1) Equivalent production in units. (2) Unit cost for July 1990. (3) Total cost of units completed. (4) Cost of units in process on 31 July 1990. (b) Entries in General journal to record: (1) Transfer of 77,000 units from the third process in the fourth process. (2) Transfer of 99,000 completed units from the fourth process to the finished goods store. (c) Cost of production report. www.a4accounting.net Page 296 Process Costing Chapter # 12 Question # 23: The production and cost data of Alamgir Company for process No. 3 for the period ended 31 December 1988 is as under: Units Cost (Rs.) Beginning goods in process (20% completed) 13,000 54,600 Material received from process No. 2 104,000 1,040,000 Direct labour 226,200 Factory overhead 904,800 117,000 2,225,600 Completed and transferred to finished goods store 97,500 ? Ending goods in process (60% completed) 19,500 ? REQUIRED Supported by computation determine the missing cost data (use FIFO basis). Question # 24: A manufacturing concern produced a product in three processes, the information of which is as under: Process I Process II Process III Transferred to next process 2/3 60% --Transferred to warehouse for sale 1/3 40% 100% In each process 4% of the total weight put in is lost and 6% is scrap, which from Process I realized Rs.3 per Lb. from Process II Rs.5 per Lb. and from Process III Rs.6 per Lb. The following particular rates are applied: Raw Material Used: Process I 19,600 Lbs. at Rs.10/= per Lb. Process II 2,240 Lbs. at Rs.16/= per Lb. Process III 17,640 Lbs. at Rs.7/= per Lb. Manufacturing Wages and Expenses: Process I Rs.72,128 Process II Rs.43,960 Process III Rs.40,530 REQUIRED Prepare process accounts showing the cost per Lb. Question # 25: Nasr Medicine Inc. uses two processing departments (department X and department Y) to manufacture its products. The cost accounting department obtained the following information for the month of September, 2009: Department X Department Y Beginning units in process ----Units started in process 60,000 Units --Units received from other department --52,500 Units Ending units in process 7,500 Units 7,500 Units Cost Added by Departments: Rupees: Rupees: Direct material 47,250 --Direct labour 36,270 23,520 Factory overhead applied 32,550 20,160 Page 297 www.a4accounting.net Process Costing Chapter # 12 Work in Process Ending: Material 100% --Conversion cost 1/5 2/3 REQUIRED (a) Determine the equivalent units of production for each department and unit cost of product at each department. (b) Pass the entries in the General Journal for goods completed and transferred to finished goods. Question # 26: Shahjahan Company processes its goods successively in process – A and process – B and then transfers to finished goods godown. Its records show the following information for the month of June 1998: Process – A Process – B Cost of goods in process (1 June) Rs.24,000 --Raw material used Rs.100,800 Rs.54,400 Direct labour used Rs.86,400 Rs.108,800 Factory overhead applied on the basis of direct labour 50% 100% Production Reports for June: Units in process – 1 June (1/3 complete) 4,800 units --Units completed and transferred out 16,000 units 12,800 units Units in process – 30 June (1/4 complete) --3,200 units REQUIRED (a) Equivalent full units of production in process – A and process – B. (b) Unit cost in process – A and process – B. (c) Cost of units transferred out of process – A and process – B. Question # 27: One of the primary products of Tariq Ltd. is Photorex, a product which is processed in Department – A and Department – B and then transferred to the company’s sales warehouse. The flow of product through the departments during the month of December 1996 is shown below: Department – A Goods in Process Input 51,000 units To Department – B 42,500 units From Department – A Department – B Goods in Process 42,500 units To sales warehouse 35,700 units Departmental manufacturing costs applicable to Photorex production for the month of December 1996 were as follows: www.a4accounting.net Page 298 Process Costing Chapter # 12 Department – A (Rs.) Department – B (Rs.) Raw materials 38,080 15,912 Direct labour 33,320 23,868 Factory overhead 23,800 47,736 Unfinished goods in each department at the end of December 1996 were on the average 60% complete with respect to both raw material and processing cost. REQUIRED (a) Determine the equivalent full units of production in each department during December 1996. (b) Compute unit production cost in each department during December 1996. (c) Prepare journal entries to record transfer to product out of Department – A and Department – B during December 1996. Question # 28: One of the primary products of Omark Company is Omacron, a product which is processed successfully in Department – F and Department – G and then transferred to the company’s sales warehouse. The flow of product through the departments during the month of August 1993 is shown below: Department – F Goods in Process Input 36,000 units To Department – G 28,800 units From Department – F Department – G Goods in Process 28,800 units To sales warehouse 25,200 units Departmental manufacturing costs applicable to Omacron production for the month of August 1993 were as follows: Department – F (Rs.) Department – G (Rs.) Raw materials 32,400 27,000 Direct labour 16,200 13,500 Factory overhead 8,100 6,750 Unfinished goods in each department at the end of August 1996 were on the average 50% complete both with respect to raw materials and processing cost. REQUIRED (a) Determine the present status of the 36,000 units put into production in Department – F during August. (b) Determine the equivalent completed units of production in Department – F and Department – G. (c) Compute unit production costs in each department during August. (d) Prepare the necessary journal entries to record. Page 299 www.a4accounting.net Process Costing Chapter # 12 Question # 29: The following given information have been obtained from the cost accounts of a factory producing a commodity in the manufacture of which 3 processes are involved with the facts that: (a) The operation in each separate process is completed daily. (b) The value of which units are to be charged to process – B and C is the cost per unit of process – A thus B respectively. Process A (Rs.) B (Rs.) C (Rs.) Direct wages 192,000 360,000 877,500 Raw material used 720,000 ----Machine expenses 108,000 90,000 108,000 Manufacturing overhead 60,000 67,500 72,000 Units Units Units Production (Gross) 1,110,000 ----Wastage 30,000 45,000 15,000 Inventory 1 January 1994 --120,000 495,000 Inventory 31 December 1994 --30,000 165,000 REQUIRED Prepare process cost accounts showing the cost of the output and the cost per unit at each stage of manufacture. www.a4accounting.net Page 300 Past Papers Advanced & Cost Accounting www.a4accounting.net Past Papers Advanced & Cost Accounting PAST PAPERS: Advanced and Cost Accounting 2011 (Regular). Advanced and Cost Accounting 2011 (External). www.a4accounting.net Page 302 Past Papers Advanced & Cost Accounting – 2011 (Regular) B.COM PART – II (REGULAR) ANNUAL EXAMINATION – 2011 PAPER – IV: ADVANCED AND COST ACCOUNTING (N.S.) Time Allowed: Three Hours Max. Marks: 100 Instructions: (1) Attempt any FIVE questions in all, THREE questions from Section – A and TWO from Section – B. (2) All questions carry equal marks. (3) Answers without necessary computations will not be accepted. Question # 1: Section – A (Advanced Accounting) 60 Marks Accounting for Company – Financial Statements: X, Y Company Ltd. was registered with an authorized capital of Rs.8,000,000 divided into 800,000 ordinary shares of Rs.10 each. The company’s books showed the following balances on June 30, 2011: Title of Accounts Debit Credit Cash in bank 94,500 Accounts receivable 150,000 Allowance for bad debts 4,500 Office supplies 18,000 Merchandise inventory 1-7-10 225,000 Prepaid insurance 12,000 Machinery – Cost 1,500,000 Allowance for depreciation – Machinery 150,000 Preliminary expenses 10,000 Accounts payable 40,000 10% Bonds payable 200,000 Paid up capital 800,000 Retained earnings 310,000 Sales revenue 800,000 Commission on income 706,000 Sales return & allowance 20,000 Purchases 900,000 Transportation – in 40,000 Purchase returns & allowances 40,000 Salaries expenses 40,000 Rent expenses 26,000 Income tax expenses 10,000 Advertising expenses 5,000 3,050,500 3,050,500 Data for Adjustments on June 30, 2011: (a) Rent expense for the year amounted to Rs.30,000. (b) Merchandise inventory was valued on June 30, 2011 at Rs.260,000. (c) Provide allowances for depreciation on machinery for the year Rs.135,000. (d) Allowance for bad debts Rs.5,000 for the year. (e) Appropriate Rs.50,000 for plant extension and Rs.40,000 for contingencies. (f) Declared cash dividend @10% on capital. REQUIRED (1) Prepare a classified Income Statement for the year ended June 30, 2011 and also a Statement of Retained Earnings. (2) Prepare a Balance Sheet as of June 30, 2011 in classified form. Page 303 www.a4accounting.net Past Papers Advanced & Cost Accounting – 2011 (Regular) Question # 2: Company Accounting – Absorption: Question # 3: Analysis of Financial Statements: Question # 4: Accounting for Installment Sales: The following are the assets and equity account balance of AB. Co. Ltd., as on June 30, 2011: Dr. Balances Cr. Balances Cash 50,000 Allowance for depreciation Plant 50,000 Merchandise inventory 105,000 Accounts payable 50,000 Plant assets 200,000 Share capital (Rs.10 par) 270,000 Preliminary expenses 5,000 Retained earnings 10,000 The above company was absorbed by MY Company Ltd., on July 1, 2011 on the following terms: (a) All the assets and liabilities (with the exception of cash) were taken over by the absorbing company at book values. (b) Two new shares of Rs.10 at Rs.12 each for every three shares are issued to shareholders of AB. Co. Ltd. REQUIRED (1) Entries in the books of AB. Co. Ltd. relating to transfer of business and final settlement of accounts. (2) Entries in the books of MY Co. Ltd. relating to record the absorption of AB. Co. Ltd. and issuance of shares to vendors. Following are the selected data taken from books of Rafiq Co. Ltd. at the end of year 2010: Cost of goods sold Rs. 540,000 Accounts payable 200,000 Merchandise inventory (Opening) 120,000 Bills payable 50,000 Accounts receivable (Opening) 380,000 Marketable securities 142,000 Cash 108,000 Accounts receivable (Ending) 350,000 Merchandise inventory (Ending) 150,000 Credit sales (Net) 1,825,000 Total operating expenses 600,000 REQUIRED On the basis of above information, find out: (1) Working capital (2) Inventory turnover (3) Current ratio (4) Accounts receivable turnover (5) Acid test ratio (6) Gross profit percentage (7) Net profit percentage (8) Operating expenses rate Irfan Limited sells merchandise on installment basis. Data relating to the inventory, purchases and sales of equipment during the year 2010 are as follows: Inventory of equipment January 1, 2010 Rs. 150,000 Purchases of equipment on account 500,000 Sales of equipment during the year 750,000 Cash collection from customers 250,000 Inventory of equipment December 31, 2010 200,000 www.a4accounting.net Page 304 Past Papers Advanced & Cost Accounting – 2011 (Regular) REQUIRED Give journal entries in the General Journal to record the above transactions including adjusting and closing entries. Question # 5: Accounting for Branches: Question # 6: Section – B (Cost Accounting) 40 Marks Accounting for Manufacturing Operation A Karachi firm whose accounting year end on 31st December has two Branches one at Hyderabad and the other at Multan. The Branches keep a complete set of books. On 31st December, 2010 the Hyderabad and the Multan Branches account in the Head Office books showed debit balance of Rs.30,450 and Rs.45,000 respectively before taking the following information into account. 1. Merchandise valued Rs.2,000 were transferred from Hyderabad to Multan Branch under the instruction from Head Office. 2. The Hyderabad Branch collected Rs.2,500 from a customer of Head Office. 3. The Multan Branch paid Rs.5,000 for certain goods purchased by the Head Office. 4. Rs.5,000 remitted by the Hyderabad Branch to the Head Office. 5. The Multan Branch received on behalf of the Head Office Rs.1,500 as dividend from a Multan Co. 6. For the year 2010, the Hyderabad Branch showed a net loss of Rs.1,250 and the Multan Branch a net profit of Rs.5,400. REQUIRED Pass journal entries to record these matters in the Head Office books and then write up the two Branches accounts therein. The accounting records of Asim Corporation contain the following information: Inventories July 1, 2011: Raw material Rs.132,000 Goods in process Rs.97,200 Finished goods Rs.144,600 Inventories at July 31, 2011: Items Raw Material Goods-in-Process Finished Goods Material Rs.144,000 Rs.38,700 Rs.130,500 Labour Rs.24,000 90,000 Overhead ? 72,000 Totals 144,000 ? 292,500 Data for the three months ended on July 31, 2011: Cost of goods manufactured Rs.2,430,000, Factory overhead 80% of direct labour Rs.535,200. The company also paid transportation costs of Rs.90,000 on materials purchased. It received credit of Rs.48,900 for material returned to suppliers. REQUIRED Prepare a statement of cost of goods manufactured for the month ended July 31, 2011. Some information needed for this statement is not listed above but can be computed from the data given. Page 305 www.a4accounting.net Past Papers Advanced & Cost Accounting – 2011 (Regular) Question # 7: Cost Accounting – Process Costing Question # 8: Standard Costs The following information pertains to the goods in process No. 4 for the month of November, 2010: Goods in process inventory November 1, (25,000 units 75% complete as to materials and 50% complete as to conversion costs) Rs.450,000 Cost of 150,000 units transferred in from process No. 3 during November 700,000 Manufacturing cost added in process No. 4 during November: Direct material 280,000 Direct labour 125,000 Factory overhead 375,000 On 30 November 50,000 units are still in process No. 4 which are 75% complete as to materials and 50% complete as to conversion cost. REQUIRED Prepare cost of production report for process No. 4 and pass General Journal entries. Usman Company uses standard cost system. Following data are taken from its cost accounting records: Standard Actual Raw material Rate per unit Rs.9 Rate per unit Rs.9.2 Total cost Rs.54,000/= Quantity 9,200 units. Direct labour Wage per hour Rs.12. Wage per hour Rs.10.50. Total labour hours 10,000 Total labour cost Rs.110,250/= Factory overhead 80% of direct labour cost Total cost Rs.90,000/= REQUIRED a) Calculate: (1) Material price variance. (2) Material quantity variance. (3) Labour wage variance. (4) Labour efficiency variance. (5) Factory overhead variance. b) Give entries in General Journal to record actual and standard costs of direct materials, direct labour and FOH and their variance. ================== YMS ================== www.a4accounting.net Page 306 Past Papers Advanced & Cost Accounting – 2011 (External) B.COM PART – II (EXTERNAL) ANNUAL EXAMINATION – 2011 PAPER – IV: ADVANCED AND COST ACCOUNTING (N.S.) Time Allowed: Three Hours Max. Marks: 100 Instructions: (1) Attempt any FIVE questions in all, THREE questions from Section – A and TWO from Section – B. (2) All questions carry equal marks. (3) Answers without necessary computations will not be accepted. Question # 1: Section – A (Advanced Accounting) 60 Marks Accounting for Company – Amalgamation: (a) Differentiate between Amalgamation & Absorption of Co’s. (b) Sun Ltd. and Moon Ltd. decided to amalgamate their business and a new company Stars Ltd. is formed to take over all assets and liabilities of the two concerns. The new Co. Stars Ltd. issued 110,000 shares of Rs.10 each at Rs.20 to Sun Ltd. and 90,000 shares of Rs.10 each at Rs.20 to Moon Ltd. The following are the Balance Sheets: SUN LIMITED (Balance Sheet December 31, 2010) Cash Rs.120,000 Accounts payable Rs.180,000 A/c receivable 400,000 General reserve 300,000 Mds. inventory 600,000 Share capital (190,000 shares of Rs.10 each) 1,900,000 Machines 1,200,000 Furniture 60,000 2,380,000 2,380,000 Cash A/c receivable Mds. inventory Machines Office equipment MOON LIMITED (Balance Sheet December 31, 2010) Rs.250,000 Accounts payable 300,000 General reserve 700,000 Share capital (185,000 shares of Rs.10 each) 800,000 100,000 2,150,000 Rs.200,000 100,000 1,850,000 2,150,000 REQUIRED (1) Give entries in General Journal form in the books of Stars Ltd. (2) Prepare amalgamated Balance Sheet in the books of Stars Ltd. Question # 2: Accounting for Branches: The following balances were taken from the books of Usman Motorcycles (Pvt) Ltd. Karachi as of Dec. 31, 2009: Cash Rs.150,000 Accounts payable Rs.40,000 Accounts receivable 80,000 Sales tax payable 10,000 Merchandise inventory 250,000 Share capital 400,000 Furniture 70,000 Retained earnings 100,000 550,000 550,000 January 01, 2010 a branch was established in Lahore at which time the head office sent cash of Rs.50,000 and merchandise costing Rs.80,000 which were billed at 20% above cost. Additional transactions for the month ended January 31, 2010 were as follows: Page 307 www.a4accounting.net Past Papers Advanced & Cost Accounting – 2011 (External) Head Office Branch Purchase on account (including 16% sales tax) Rs.580,000 Rs.30,000 Sales on account (including 16% sales tax) 928,000 46,400 Accounts receivable collected 400,000 20,000 Accounts payable paid 200,000 15,000 Operating expenses paid 95,000 10,000 Furniture bought for cash and sent to branch 25,000 Cash remitted to head office 20,000 Sales tax paid 10,000 Closing inventories on Jan. 31, 2010 were Rs.180,000 and Rs.90,000 (at billed price) at the head office and branch respectively. Depreciation was taken at 10% per annum on fixed assets. REQUIRED Head office journal entries for the month of Jan. 2010 including adjusting and closing entries. Question # 3: Cash Flow Statement: Question # 4: Accounting for Installment Sales: The comparative balance sheets of Zubair Ltd. for the two years are produced below: Debit Balances (in Rs.) Dec. 31, 11 Dec. 31, 10 Cash 87,500 105,000 Merchandise inventory 162,500 175,000 Prepaid rent 40,000 45,000 Accounts receivable 175,000 160,000 Plant assets 440,000 415,000 Total Rs. 905,000 900,000 Credit Balances (in Rs.) Dec. 31, 11 Dec. 31, 10 Ordinary share capital 605,000 570,000 Accounts payable 90,000 100,000 Debentures payable 90,000 125,000 Retained earnings 120,000 105,000 Total Rs. 905,000 900,000 Additional Data: (1) Net income for the year 2011, Rs.90,000 (2) Cash dividend declared Rs.75,000 REQUIRED (a) Working capital for both the year. (b) Prepare Cash Flow Statement. The Daniyal Electric Products Company manufactures table fans. It is a practice of the company to sell 30% of its production on installment basis. The company recognizes profit on sales on the basis of cash collected from customers. The following are the data for three years: Years Profit Installment Receivable Collection Installment Receivable on on January 1, 2010 During 2010 December 31, 2010 2008 44% Rs.80,000 Rs.80,000 --2009 42% 165,000 75,000 Rs.90,000 2010 40% 150,000 300,000 REQUIRED Prepare all journal entries for 2010 from the data above, including those required for the recognition of gross profit at the end of year. www.a4accounting.net Page 308 Past Papers Advanced & Cost Accounting – 2011 (External) Question # 5: Analysis of Financial Statements: Question # 6: Section – B (Cost Accounting) 40 Marks Accounting for Manufacturing Operation A condensed Balance Sheet of Amjad Ltd., prepared at the year ended Dec. 31, 2010 appeared as follows: ASSETS EQUITIES Cash Rs.95,000 Notes payable (due in 6 months) Rs.40,000 Accounts receivable 155,000 Accounts payable 110,000 Inventory 270,000 Long term liabilities 360,000 Prepaid expenses 60,000 Capital stock, Rs.50/- par 300,000 Plant & equipment – Net 570,000 Retained earnings 430,000 Other fixed assets 90,000 Total Assets 1,240,000 Total Equities 1,240,000 During the year the company earned a gross profit of Rs.1,116,000 on credit sales of Rs.2,950,000. Accounts receivable, inventory and plant assets remained almost constant in amount throughout the year. REQUIRED Compute the following: (a) Current ratio? (b) Quick ratio? (c) Working capital? (d) Debt ratio? (e) Accounts receivable turnover? (f) Inventory turnover? (g) Book – value per share? The following data relate to a manufacturing company for the year 2010: Purchase of direct material Rs.440,000 Direct material used Rs.450,000 Direct labour paid during the year Rs.325,000 Direct labour assigned to production Rs.350,000 Manufacturing overhead Rs.400,000 During the year 122,000 units were manufactured and 125,000 units were sold. Selected information concerning inventories during the year is as follows: Jan. 1 Dec. 31 Materials Rs.50,000 Rs. ? Work in process Rs.90,000 Rs.70,000 Finished goods (15,000 units beginning) Rs.135,000 Rs. ? REQUIRED (a) Cost of goods manufactured. (b) Average unit cost. (c) Cost of goods sold assuming FIFO method. (d) Ending inventories of: (i) Materials (ii) Finished goods. Page 309 www.a4accounting.net Past Papers Advanced & Cost Accounting – 2011 (External) Question # 7: Job Order Costing: Question # 8: Standard Costs The Hamza Printers (Pvt.) Ltd. uses job order cost system. The transactions for the month of September, 2011 are given below: (a) Material purchased on account Rs.5,800,000 including 16% sales tax. (b) Material requisition for production Rs.3,500,000 and supplies Rs.500,000. (c) Material return to supplier Rs.116,000 including 16% sales tax. (d) Accrued payroll Rs.825,000 including payroll for indirect labour Rs.125,000. (e) Paid factory electricity bills Rs.425,000 including sales tax Rs.57,600 and income tax Rs.7,400. (f) Paid factory gas bill Rs.16,240 including sales tax Rs.2,240. (g) Other manufacturing expenses incurred Rs.150,000. (h) FOH applied at the rate of 175% of direct labour cost. (i) Goods in process inventory on September 30, Rs.542,500. (j) Finished goods inventory on September 30, Rs.882,500. (k) Sales on account Rs.6,032,000 including 16% sales tax. REQUIRED Prepare General Journal entries for each of the above transactions including entries for cost of goods sold and closing factory overhead account. The following are actual costs and variances for direct materials and direct labour for the month of April 2011:Variances Actual Cost Unfavourable Favourable Direct material 90,000 Price variance 7,000 Quantity variance 5,000 Direct labour 160,000 Rate variance 4,500 Efficiency variance 10,500 REQUIRED 1) Standard cost of direct material and direct labour. 2) Entries in General Journal to record the above information and to close the various variance accounts. ================== YMS ================== www.a4accounting.net Page 310