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Table of contents

No. CHAPTER Page


1. ACCOUNTING CONCEPTS 02

2. SUSPENSE ACCOUNT 07

3. LABOUR REMUNERATION 11

4. OVERHEAD& JOB COSTING 15

5. STOCK VALUATION 27

6. CONTROL A/C 31

7. PARTNERSHIP 37

8. INCOME AND EXPENDITURE 45

9. SINGLE ENTRY 50

10. RATIO ANALYSIS 58

11. MANUFACTURING ACCOUNT 63


2

Accounting concepts
and conventions

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Huzaifa Abdullah Tel: 01714098841
3

1. Huzaifa Abdullah prepared the following balance sheet as at 30th April 2009.
Huzaifa Abdullah balance sheet as at 30th April 2009.

Details £
Fixed assets
Premises 180000
Office fixtures 100
Staff skill 210000
210000
Current assets
Stock 15000
Debtors 19000
Bank 5900
39900
Less current liabilities
Creditors 16000
234000

Financed by:
Capital 160000
Net profit 81000
241000
Drawings 7000
234000
Abdullah had not received any formal financial training before preparing the financial
statements. The following information is available:
I. The value of the premises was increased by £20000 to take into account of the
increased market value in the year. This was considered as profit.
II. Office fixtures had a book value of £4000 on 1st may 2004. The usual depreciation rate
of20% was not applied for the year ending 30th April 2005. For that year Abdullah had
charged depreciation “writing down the assets” to its scrap value at the end of that
year. The asset will be used in the business for several years.
III. Huzaifa Abdullah valued the skill of the staff at £30000 and had placed this sum in the
balance sheet and the profit loss account.
IV. The closing stock was valued at resale value. The business uses 50%mark up on goods.

Required:
a. Indentify for each of (I) to (IV) above, the accepted accounting concept or convention
other than prudence which should have been complied with. (4)
b. Calculate the revised net profit after applying the correct interpretation of the
accepted accounting concept and conventions.
c. Prepare a revised balance sheet as at 30th April 2005.
d. Evaluate the role played in accounting by accepted accounting concepts and
conventions. (2)
4

2. Huzaifa Abdullah prepared the following final accounts to the tax department. The officer
completely rejected the accounts and advised him to prepare them afresh.

Huzaifa Abdullah profit and loss account for the year ended 31st December 2000
Details £
Sales 750000
Costs of sales (230000)
Gross profit 520000
Less, expenses (115000)
Net profit before taxation 405000
Taxation (35000)
Profit after taxation 370000

Huzaifa Abdullah Balance sheet as at 31st December 2000


Details £ £ £
Fixed assets (net book value)
Leasehold land 200000
Computers 24000
Motor Vehicles 103000
327000
Current assets
Stock 162000
Debtors 152000
Bank 24000
338000
Less, current liabilities
Trade creditors 135000
Taxation due 35000
(170000)
168000
495000
Financed by:
Capital 125000
Net profit 370000
495000

The officer in the tax department made the following observations:


• Lease hold land had been revalued on 1st January 2000 at £20000 above its balance sheet
value at 31st December 1999, but this had not been reflected in the balance sheet at 31st
December 2000. At the revaluation date, all leases had 25 years before expiry. No
amortisation had been provided in the profit loss account for the year ended 31 st December
2000.
• £20000 worth of obsolete stock which was decided to be written off from the books had
been included in the stock.
• Expenses shown in the profit and loss accounts ignored an expense of £18000 which owed
at the balance sheet in that date.
• There has been no entry of provision for bad debts. It was decided to create a provision for
bad debts to 5% of debtors.
Required:
a. Taking the above errors into consideration mention which concept you have referred to
correct the errors.
b. Prepare a corrected final account taking into consideration of all the errors listed above.
5

3. The directors of Akij LTD are concerned about the financial performance of the company for the
year ended 31st December 2009. Extracts from the company’s profit and loss accounts and the
balance sheet are as follows.

Profit and loss account for the year ended 31st December 2009.
Details £
Sales ( all credit) 600000
Cost of sales (purchases £500000) (540000)
Gross profit 60000
Less expenses (40000)
Operating profit 20000
Taxation (4000)
Profit available for dividend 16000
Dividend (10000)
Retained profit for the year 6000

Balance sheet as at 31st December 2009.


Details £ £ £
Fixed assets 320000
Current assets
Stock 120000
Trade debtors 60000
180000
Current liabilities
Trade creditors 90000
Taxation 4000
Dividend 10000
Overdraft 46000
(150000)
30000
350000
Financed by:
Share capital 300000
Revenue reserves 50000
350000
One of the directors suggested the following:
i. The closing stock to be half the average stock of 2009.
ii. Keep sales at the same level as 2009, but reduce purchases by 10% due to more
competitive ordering techniques.
iii. Decrease the closing creditors by one quarter.
iv. Increase the closing creditors by one third
v. Sell half of the fixed assets for cash by the end of 2010 (assume they realise the
balance sheet value. Ignore depreciation)
vi. Expenses will be reduced by 5% of 2009 levels.
vii. Taxation will be 25% of the operating profit.
viii. Proposed final dividend will be 10% of the profit available for dividend.

Required:
a. The profit and loss account and the balance sheet at the end of 2010 with as much detail
as possible taking into consideration the suggestions.
b. A summary of the movements on the bank balance during 2010.
c. Evaluate whether the directors suggestion has had a positive impact on the business. Use
relevant ratios to support your answer. (6)
6

4.
a. explain why a business might maintain a provision for doubtful debts account
b. The accounting concepts of accruals and materiality might conflict when preparing the
accounts of a business. Explain the statement. (6)
c. Evaluate the usefulness of accounting standard in the preparation of final accounts. (4)

5.
a. Distinguish between accruals and realisation concepts in accounting (4)
b. Evaluate the role of double entry accounting as an aid to communication in managing the
business. (2)

6. A. Using relevant examples explain why a business should end of year adjustments for
a. Capital and revenue expenditure
b. Prepaid expenditure.

7. Huzaifa has produced draft accounts for the year ended 31st December 2008. The business
showed a turnover in excess of $2 million. While discussing the draft accounts with his
accountant he makes the following comments:
i. “My trial balance failed to agree so I added that amount to sundry expenses.
ii. The business bought 15 computers on 1st January 2008 for $600 each. I decided to
depreciate them over four years using straight line method. Although they are shown in
the draft balance sheet at their depreciated amount. I now find that they were obsolete
at 31st December 2008 and worth only a scrap value of $20 each.
iii. “My wife has been a great asset with her excellent managerial skills. I have therefore
included her on the balance sheet at a value of $30000. Increased the goodwill and
decided to depreciate her by 2% on a straight line basis.
iv. I like to solve business problems while relaxing on the Manhattan Beach. I have
therefore included the cost of holiday $2700 in the travel expenses.
v. I heard on 2nd January 2009 that stock previously valued in the draft accounts at $1500
was worthless. Even though it was after the year end, i decided to adjust the stock
figure in the draft figure accounts.

Required:
Bearing in mind the generally accepted accounting principles and standard give your
opinion as the accountants likely response expresses above. Where appropriate
calculate the effect on the company’s profit if any suggested by the accountant.
7

Suspense Account

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Huzaifa Abdullah Tel: 01714098841
8

1. Kay extracted a trial balance from the books of her business as at 31st December 2002. The trial
balance totals were £11942 debit and £12428 credit.
Kay debited the difference of £486 to a suspense account so that she could prepare draft accounts.
The draft profit and loss account showed a profit of £4200.
Subsequently found the following errors:
I. The debit side of the wages account had been overcast by £100.
II. Discount received £45, had been posted to suppliers accounts but not to the discounts received
accounts.
III. A sale of goods on credit to Sam for £120 had not been entered in the books at all.
IV. A cheque received from debtor, Keith £62 had been debit side of his account.
V. The refund of an insurance premium, £30, had been debited in the cash book but no other entries
had been made on this regard.
VI. The purchase of some office equipment for £590 had been debited to office expenses.
VII. Rent paid £400 had been credited to the rent receivable account.
VIII. Goods returned to Slow Ltd, a supplier had been credited to Slow Ltd account and debited to the
purchases returns account. The goods had originally cost £200.
IX. A credit balance in the purchase ledger, £15 had been omitted from the list of balances extracted
from the ledgers. The total of that list had been included in the trial balance as trade creditors.
X. A purchase of office stationery £110 had been debited to telephones and postages account in
error.
Required:
a) The journal entries to correct the errors.
b) The suspense account showing the correcting entries.
c) A revised profit figure.
d) Explain three types of errors which do not affect the agreement of trial balance. (6)

2. Huzaifa Abdullah extracted a trial balance from his ledgers on 31st May 2003. His balances failed
to agree and Abdullah opened a suspense account.
Subsequently the following errors were discovered.
I. A cheque received from Ali a debtor had been correctly entered in the cash book as £105,
but had been credited to his account as £150.
II. A modification to a machine at a cost of £750 had been debited into the machinery
repairs account instead of machinery account. Assets are depreciated on the straight line
method at 10% on cost.
III. The total of sales day book for March 2003 was £10860 this had been posted to the sales
account as £10680.
IV. An invoice for the purchase of goods from BB on 5th January had been entirely omitted
from the books. The invoice amounted to £300.
V. A debt of £100 in the sales ledger had proved to be bad and had been written off in the
sales ledger but the appropriate entry had not been made in the bad debts account.
Required:
a) The journal entries to correct the errors.
b) The suspense account showing the correcting entries.
c) A revised profit figure.
9

3. Denise trial balance at 31st March 1199 had difference of £4510, the total of the debit side being
larger by that amount.
Denise opened a suspense account until such time the errors could be found. Meanwhile she
prepared final account which revealed a net loss of £2300 for the year. Subsequently Denise
found the following errors:
i. Major repair work to a damaged vehicle in the sum of £2780 had been debited in error to
the motor car account at £2870.
ii. An invoice for the sale on credit to NNO of goods selling price of £500 had been debited
to NNO’s account but had not been entered in the sales day book.
iii. The figure of stock at 1st April 1198 had been entered into the trial balance as £14000
instead of £10400.
iv. A stock sheet totaling £1300 had been omitted from the closing stock calculation.
v. A credit balance of £160 in the sales ledger had been extracted as a debit balance.
Required:
a) The journal entries to correct the errors.
b) The suspense account showing the correcting entries.
c) A revised profit figure.

4. Mrs. Sam prepared the following trial balance at 31st December 1196 for the business of her
business of her husband.
Details £ £
Capital 1st January 1196 53780
Purchases and sales 9000 18400
Return Inwards 100
Return Outwards 250
Depreciation for year written off 890
Wages 4300
Discount allowed 450
Discount received 270
Debtors and creditors 1250 2750
Premises 45000
Fixtures and fittings 8900
Bank Overdraft 1200
Cash 150
Carriage inwards 370
Stock 1st January 1196 2500
Carriage outwards 140
Sundry expenses 1420
Provision for doubtful debts 420 ______
75770 75770

Although the trial balance agreed Mrs. Sam was sure that something was wrong but before
she could find out she suffered from a heart attack and was rushed to hospital.
a. You are asked to rewrite the trial balance correctly entering the difference (if any) in
the suspense account balance.
b. After checking the books the following errors are revealed:
i. A page of purchase day book has been under cast by £3000.
ii. A total in the sales book has been carried forward as £1000 instead of £1600.
iii. The sale of some fixed asset for cash £300 has been credited to the sales account.
iv. Return inward of £100 has been posted to the return outward account.
c. Prepare journal entries to correct the above errors
d. Write up the suspense account.
10

5. At the end of the financial year Mr. Kassali prepared a trial balance which failed to match. The
difference was entered in the suspense account. The trial balance was used to prepare final
account which recorded a profit of £23800. The following errors were later discovered:
i. A purchase of goods for resale costing £340 had been recorded in the office fixtures
account.
ii. Rent received £2500 had been correctly entered into the bank account but debited to the
rent receivable account,
iii. A cheque sent to a creditor for £850 was correctly entered in the cash book but was
entered in the creditors account as £580.
iv. Depreciation on motor van had been charged for the year at £900. Motor vehicle cost
£15000; the depreciation policy is to charge depreciation at the rate of 20% on cost.
v. A payment of £80 wages by cheque had been debited to the wages account as £18 and
credited to the bank account as £180.
Required
a. Prepare journal entries to correct the above errors
b. Write up the suspense account
c. Calculate the revised net profit after correction of all errors.
d. Distinguish between errors of commission and errors of principle. (2)
e. Evaluate the role of suspense account in correcting errors contained within the books of
double entry. (2)

6. The following trial balance was prepared by an inexperienced accountant for the business of JKK
traders on 30th April 2009. The trial balance only contains errors of drafting and errors of double
entry.

The following errors in the double entry were discovered:


i. Goods purchased on credit valued at £200 were returned on 28th April 2009 but no entries
had been made.
ii. New fixtures cost £1500 had been posted to the purchase account in error.
iii. Goods sold to a customer for £8000 had been debited to both the sales account and the
customer’s account.
iv. Telephone charges of £60 had been paid by cheque and correctly recorded in the
tele
Details £ £ pho
Sales 96450 ne
Purchase 42000 char
Stock 5700 ges
Purchase returns 800 acco
Salaries and trade expenses 45200 unt
Telephone charges 1540 but
Capital 15000 no
Bank overdraft 1600 othe
Fixtures (at cost) 40000 r
Fixtures provision for depreciation 1800 entri
Debtors 12920 es
Creditors 15050 had
Provision for bad and doubtful debts 600 been
made.
Required
a) Prepare journal entries to correct the above errors
b) Write up the suspense account
c) Calculate the revised trial balance after correction of all errors.
d) Trial balance is a checking device. Identify another checking device used in
accounting and evaluate its benefits.
11

LABOUR REMUNERATION

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Huzaifa Abdullah Tel: 01714098841
12

1. The following information relates to three employees; John, Alice and Clara.
Workers
John Alice Clara
Actual hours worked 37 41 35
Hourly pay rate £ 3.20 2.75 4.10
Output ( units) : product X420 50 - 174
Product Y 420 93 70 -
Product Z 420 99 75 225
The standard time for the products is:
! Product X420: 5 minutes
! Product Y 420: 10 minutes
! Product Y 420: 12 minutes
! For piece rate purposes each minute is valued at £0.05.
Required:
a. Guaranteed hourly rates only (basic pay)
b. Piece work with earnings guaranteed at 90% of basic pay
c. Premium bonus where the employee received half of the time saved in additional pay.

2. The following information relates to three employees; Osama, Kareem and Saimon.
Workers
Osama Kareem Saimon
Actual hours worked 60 50 45
Hourly pay rate £ 5.20 4.75 6.5
Output ( units) : Premium 150 - 174
Regular 100 170 -
Special 199 175 225
The standard time for the products is:
! Premium : 15 minutes
! Regular: 10 minutes
! Special: 12 minutes
! Piece work wages are: £ 20, £ 15, £ 12 for premium, regular and special respectively.
Required:
a. Guaranteed hourly rates only (basic pay)
b. Piece work with earnings guaranteed at 80% of basic pay
c. Premium bonus where the employee received 75% of the time saved in additional pay.
13

3. Alex produces tables. He has hired to employees. In recent times he had to hire different
workers as workers were leaving as soon as they had gained expertise in their jobs. In other
words Alex was training workers for his competitors. He is concerned by this high labour turn
over and wants to resolve this situation. He is considering two methods piece rate system and
Hourly pay system. The following information is available:

Employees
Jabbar Akkas
Units produced 420 360

Time allowed for each table 10 10

Time taken hours 28 54

Rate/hour (£) 9 9

Rate/unit 4 4

a. Using the information from above calculate the remuneration for each employees on Piece
rate and on an hourly rate. Which remuneration scheme should Alex use:
i. In point of view of the workers
ii. In point of view of the Business. (2)
b. A friend of Alex suggested introducing bonus scheme. He decided to pay the employees 50%
of their time saved.
Evaluate all the three proposals i.e. merits and demerits and help Alex decide on which
method should he use. (6)

4. Xyz manufacturing limited has a premium bonus scheme based on time saved. Employees
receive a bonus equivalent to half the time saved on a job. Three workers are given a similar
job to do. Hourly rate is fixed to £15.The standard time is 6 hours. Worker A completes it in 3
hours, while Worker B takes 4 and Worker C takes the whole 6 hours to complete.

a. Calculate the earnings for each of the workers for that job.

b. Evaluate the remuneration method.

c. Assuming that Worker A and Worker C would be working at the same speed throughout a
35 hour week. Who would earn most? And why?
14

5. Three employees are given the same type of job to perform; the standard time is 7 hours.
Under the company’s payment scheme employees are paid an hourly rate of £35 and a bonus
on 40% time saved.

Mariam performs the job in 4 hours, while Saimon takes 6 while Khaled takes 7.

a. Calculate the wages earned by each worker showing clearly the bonus and the basic pay.

b. Mariam is unhappy: she has worked the quickest and yet the scheme is penalising her.
Explain with valid reasons wether she is justified in being angry? (5)

c. What safeguards must a company build into its bonus scheme to ensure that they are not
abused? (4)

6. In accounting differentiate between time rate methods and piece rate methods (6)

7. A company is considering paying the workers of research and development on the piece rate
system.

To what extent do you agree or disagree with this proposal. What payment scheme would you
suggest? (8)

8. i. It is some times said of premium bonus schemes that it is the savings in the overheads which
provides the funds out of which the bonus is paid. How can this be so? (5)

iii. What incentives do employers have on premium bonus schemes? (4)


15

Overhead& Job Costing

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16

expenditure

allocation apportion

allocateable non allocateable


direct expenses indirect expenses indirect expenses

Bases of apportionment

Overhead Basis of apportionment


Buildings: rent, rates, maintenance, Floor area
depreciation, insurance
Heating and lighting Space occupied, or floor area
Plant, machinery depreciation On cost or book value of plant
Cost of storekeeping (warehousing) Number of store requisitions
Costs of canteen, personnel department, On number of employees.
administration
17

1. Dhaka industry limited is a manufacturing company with four departments: machining,


assembly, painting and packing. The following data relates to the four departments:
Machining Assembly Painting Packing
Floor area (meters) 2000 1500 1000 500
Plant cost (£000) 90 30 20 10
Plant replacement cost (£000) 120 50 30 20
Number of store requisitions 300 200 250 50
Direct Labour Hours 150 130 60 55
Machine Hours 175 115 55 70

During the year ended 31st December 2020 Dhaka Industry Limited incurred the following
expenditures:
Machining Assembly Painting Packing
£ £ £ £
Production material 130000 24000 34000 17000
Direct Labour 36000 12000 15000 12000
Indirect Labour 4100 5000 4700 3400
Other expenses included:
£
Factory rent 15000
Repairs and maintenance 7500
Factory depreciation 3000
Factory insurance 1000
Heating 2500
Plant depreciation 9000
Plant insurance 1320
Store keeping costs 6400

Required:
a. Explain the difference between allocation and apportionment. (3)
b. Using appropriate bases of apportionment, prepare a table showing apportionment
and allocation of Dhaka industry limited overheads to the four departments.
c. Calculate the overhead recovery rates using the appropriate basis.
18

2. Mojo Drinks is a manufacturing company with four departments: machining, assembly, painting
and packing. The following data relates to the four departments:
Machining Assembly Painting Packing
Floor area (meters) 12000 10000 5000 1500
Plant cost (£000) 190 40 30 5
Plant replacement cost (£000) 110 60 40 10
Direct Labour Hours 200 120 50 75
Machine Hours 175 115 55 70

During the year ended 31st December 2020 Mojo Drinks incurred the following expenditures:
Machining Assembly Painting Packing
£ £ £ £
Production material 250000 230000 43000 27000
Direct Labour 38000 17000 16000 15000
Indirect Labour 4100 5000 4700 3400
Other overheads included:
£
Factory rent 25000
Repairs and maintenance 5500
Factory depreciation 3500
Factory insurance 1200
Heating 500
Plant depreciation 19000
Plant insurance 10000

Required:
a. Using appropriate bases of apportionment, prepare a table showing apportionment
and allocation of Mojo Drinks overheads to the four departments.
b. Calculate the overhead recovery rates using the appropriate basis.
19

3. Dandy clothing company manufactures clothing for women and children. There are three
processes involved in the manufacture spinning, weaving and packaging.
The following data is available for the three departments:

spinning weaving packaging Dyeing


Floor area (meters) 1700 1500 900 600
Plant cost (£000) 85 25 10 15
Plant replacement cost (£000) 20 40 5 6
Number of store requisitions 300 200 250 50
Direct Labour Hours 200 120 50 75
Machine Hours 175 115 55 70

Overhead expenses were:


£
Factory rent 16000
Repairs and maintenance 17500
Factory depreciation 2000
Factory insurance 5000
Heating 2600
Plant depreciation 5000
Plant insurance 1200
Store keeping costs 4600

Other expenses were:


spinning weaving packaging Dyeing
£ £ £ £
Production material 250000 230000 43000 27000
Direct Labour 38000 17000 16000 15000
Indirect Labour 4100 5000 4700 3400

Required:
a. Using appropriate bases of apportionment, prepare a table showing apportionment
and allocation of Dandy clothing company overheads to the four departments.
b. Calculate the overhead recovery rates using the appropriate basis.
20

4. Saimon Engineering manufactures computer tables. They have four departments within the
business: machining, finishing, administration and maintenance each of which is an
independent cost centre.

The following overhead costs were budgeted for the year ended 31st December 2000.
machining finishing administration maintenance
£ £ £ £
Indirect labour 15000 25900 4000 3000

Unallocated costs were


£
Machinery Insurance 5900
Heat and Light 5000
Cleaning 6000
Depreciation 12500
Supervisory costs 75000
Power 35600
Rent 3000
Rates 6000
Telephone 1000
Miscellaneous expenses 1200
The following information is available:
machining finishing administration maintenance
Floor area (meters) 1700 1500 900 600
Plant cost (£000) 85 25 10 15
Book value of assets (£000) 150 90 50 30
Number of store requisitions 300 200 250 50
Direct Labour Hours 200 120 50 75
Machine Hours 2000 1200 11 5
Number of employees 40 20 10 2

You are also informed that:


⇒ Machining and finishing are productive departments.
⇒ The machining department spends 75% of staff hours in the machining department and 25% in
the finishing department. It is estimated that 40% of administration relates to the machining
department and the 60% to the finishing department.
⇒ The machining department is “machine intensive” and the finishing department is “labour
intensive”.
⇒ The factory works 40 hours per week and 50 weeks per year.
⇒ For the year 2000 actual overheads and hours worked were:
Machining Finishing
Overhead expenditure £100000 £90000
Machining Hours 2650 1640
Direct Labour hours 250 100

Required:
a. Prepare an overhead cost statement showing the allocation and apportionment of
overheads to the four cost centres for the year 2000.
b. Reallocate the cost of service departments to the production departments using the
elimination method.
c. Calculate& comment on the under or over recovery of overheads for the departments.(5)
d. Explain the terms “machine intensive” and “labour intensive”.(4)
21

5. Rajdhani clothing company manufactures clothing for children. There are three processes
involved in the manufacture spinning, weaving and packaging. There are two service
departments: canteen and maintenance. Canteen is used by all the employees including those
of maintenance.
The following data is available for the three departments:

spinning weaving packaging Dyeing Canteen maintenance


Floor area (meters) 1700 1500 900 600 50 200
Plant cost (£000) 85 25 10 15 25 45
Plant replacement 20 40 5 6 25 55
cost (£000)
Direct Labour Hours 200 120 50 75 - -
Machine Hours 175 115 55 70 - -
No of employees 45 35 15 25 5 15

Budgeted Overhead expenses for the year 2020 were:


£
Factory rent 16000
Repairs and maintenance 17500
Factory depreciation 2000
Factory insurance 5000
Heating 2600
Plant depreciation 5000
Plant insurance 1200
Store keeping costs 4600

Required:
a. Using appropriate bases of apportionment, prepare a table showing apportionment
and allocation of Rajdhani clothing company overheads to the four departments.
b. Calculate the overhead recovery rates using the appropriate basis.
c. Re allocate the cost of service departments to the production departments using the
elimination method.

The actual overheads for the year ended 31st December 2020 were:

spinning weaving packaging Dyeing


Direct Labour Hours 250 95 55 60
Machine Hours 155 100 65 55
Actual overheads 32000 23000 12000 34000
d. Calculate the over or under absorption. Comment on the effect on net profit. (5)
22

6. KIWI Industries LTD produces plastic bottles. They have four departments within the business:
machining, finishing, administration and maintenance each of which is an independent cost
centre.

The following overhead costs were budgeted for the year ended 31st December 2000.
machining finishing administration maintenance
£ £ £ £
Indirect labour 15000 25900 4000 3000

Unallocated costs were


£
Machinery Insurance 6900
Heat and Light 7000
Cleaning 8000
Depreciation 10500
Supervisory costs 70000
Power 35000
Rent 6000
Rates 5000
Telephone 4000
Miscellaneous expenses 3200
The following information is available:
machining finishing administration maintenance
Floor area (meters) 1700 1500 900 600
Plant cost (£000) 85 25 10 15
Book value of assets (£000) 150 90 50 30
Number of store requisitions 300 200 250 50
Direct Labour Hours 200 120 50 75
Machine Hours 2000 1200 11 5
Number of employees 40 20 10 2

You are also informed that:


⇒ Machining and finishing are productive departments.
⇒ The machining department spends 75% of staff hours in the machining department and 25%
in the finishing department. It is estimated that 40% of administration relates to the
machining department and the 60% to the finishing department.
⇒ The factory works 40 hours per week and 50 weeks per year.
⇒ For the year 2000 actual overheads and hours worked were:
Machining Finishing
Overhead expenditure £120000 £85000
Machining Hours 2650 1640
Direct Labour hours 250 100

Required:
a. Prepare an overhead cost statement showing the allocation and apportionment of
overheads to the four cost centres for the year 2000.
b. Reallocate the cost of service departments to the production departments using the
continuous allotment method.
c. Calculate& comment on the under or over recovery of overheads for the
departments.(5)
d. Explain why some overheads can be allocated while some need to be apportioned? (3)
23

7. Chittagong industry limited is a manufacturing company with four production departments:


machining, assembly, painting and packing. Service departments include administration and
Maintenance. The following data relates to the departments:

Machining Assembly Painting Packing administration Maintenance


Floor area 2000 1500 1000 500 200 250
(meters)
Plant cost 90 30 20 10 10 30
(£000)
Plant 120 50 30 20 20 45
replacement
cost (£000)
Number of 300 200 250 50 - 40
store
requisitions
Direct Labour 150 130 60 55 95 80
Hours
Machine Hours 175 115 55 70 45 30
Number of 40 20 10 15 5 10
employees

Use of service departments by other departments


Machining Assembly Painting Packing administration Maintenance
administration 45% 15% 20% 15% - 5%
Maintenance 30% 20% 30% 15% 5% -

Budgeted expenses included

£
Factory rent 15000
Repairs and maintenance 7500
Factory depreciation 3000
Factory insurance 1000
Heating 25000
Plant depreciation 15000
Plant insurance 1320
For the year 2000 actual overheads and hours worked were:
Machining Assembly Painting Packing
Overhead expenditure £50000 £67000 £24000 £12000
Machining Hours 200 95 67 78
Direct Labour hours 140 135 55 85

Required:
a) Prepare an overhead cost statement showing the allocation and apportionment
of overheads to the four cost centres for the year 2000.
b) Reallocate the cost of service departments to the production departments using
the continuous allotment method.
c) Calculate& comment on the under or over recovery of overheads for the
departments.(5)
d) Explain why some overheads can be allocated while some need to be
apportioned? (3)
24

8. A business has three production departments and two service departments. Details of their
total overhead costs after allocation and apportionment are as follows:
Machining Assembly Painting Canteen Administration
Total overheads £95000 £35000 £15000 £52000 £80000
Hourly wage rate £20 £15 £12
Use of service departments:
Administration 40% 30% 20% 10% -
Canteen 40% 20% 30% - 10

Budgeted hours 12000 8000 6000


Actual overhead cost £145000 £75000 £40000
Actual hours worked 10000 7000 60000
Required:
a) Reallocate the cost of service departments to the production departments using the
continuous allotment method.
b) Calculate& comment on the under or over recovery of overheads for the departments.(5)
The business usually deals in made to order goods and manufactures goods for its customers.
The firm received an order named as Order420. The following cost would be associated with the
order:
Raw materials £5000
Other miscellaneous expenses £450
Machine hours required 20
Labour hours required 13
It is the company’s policy to maintain a margin of 40%.
c) Calculate the price the firm should quote for Order420.
The actual expenses involved with the Order420 were
Raw materials £4500
Other miscellaneous expenses £400
Machine hours required 15
Labour hours required 8
d) Calculate the actual profit or loss from Order 420.
e) The directors are concerned that the orders are decreasing and the customers are moving
away to rivals. He believes that the overhead absorption rate is not being accurate.
Comment on the statement (4)
f) What suggestions would you give to improve the situation?
25

9. Osama Bin Laden manufactures products made to customers special requirements and uses a
system of job costing. The business has two production departments and two service
departments. All these years of business he has always calculated “single overhead” recovery
rate but now realises that he had been doing a mistake and now wants to charge individual
overhead recovery rate for each production department.

Cost centre of the business have been budgeted as follows:


Production Service
Machining Finishing Stores Admin
£ £ £ £
Allocated costs:
Indirect cost 1100 3500 1500 1500
Indirect wages - - 11000 20000

Unallocated costs: £
Supervision 30000
Rent and rates 12000
Insurance 6000

The following information is available:


Machining Finishing Stores Admin
Floor area (meters) 200 250 50 100
Plant cost (£000) 25 15 5 15
Number of store requisitions 700 400 - -
Direct Labour Hours - 7100 - -
Machine Hours 8000 - - -
Number of employees 5 4 1 2
Hourly wage rate £20 £15 £12

Required:
a. Define the term “single overhead rate”? Outline the disadvantages and suggest an
improved method. (4)
b. Define over and under absorption of overhead.(4)
c. Apportion the unallocated costs between the departments using an appropriate basis.
d. Reallocate the cost of service department in to the production department using the most
appropriate basis.

e. Osama Bin Laden has been approached by a customer for a special order and was
requested by the customer to quote a price for the JOB420

The following information is available:


Raw materials cost £520
Labour: 20 hours of machining and 16 hours of finishing
Overheads: 20 hours and 16 hours finishing.
All jobs require a profit margin of 50%
A special tool would be needed for this job only and would be of no use later. The cost of tool would
be £300 but can be sold after the completion of the job for £250.
i. Prepare the quotation for JOB420
ii. JOB420 was completed with following costs:
Raw materials cost £450
Labour: 20 hours of machining and 10 hours of finishing
Calculate for JOB420: Under or over recovery of overheads, Actual profit and profit margin.
26

10. Abdullah Traders have three production departments and two service departments. Details
of their total overhead costs after allocation and apportionment are as follows:
Machining Assembly Painting Canteen Administration
Total overheads £115000 £55000 £45000 £55000 £90000
Hourly wage rate £30 £35 £32
Use of service departments:
Administration 30% 30% 30% 10% -
Canteen 25% 35% 30% - 10%

Budgeted hours 13000 7000 5000


Actual overhead cost £145000 £75000 £40000
Actual hours worked 10000 7000 60000
Required:
a. Reallocate the cost of service departments to the production departments using
the continuous allotment method.
b. Calculate& comment on the under or over recovery of overheads for the
departments.(5)
The business usually deals in made to order goods and manufactures goods for its customers.
The firm received an order named as Order420. The following cost would be associated with the
order:
Raw materials £5000
Other miscellaneous expenses £450
Machine hours required 25
Labour hours required 14
It is the company’s policy to maintain a margin of 20%.
c. Calculate the price the firm should quote for Order420.
The actual expenses involved with the Order420 were
Raw materials £5500
Other miscellaneous expenses £400
Machine hours required 26
Labour hours required 15
d. Calculate the actual profit or loss from Order 420.
27

Stock valuation

Brought to you by:


Huzaifa Abdullah Tel: 01714098841
28

1. On 1st January 2007 Quddus Ali started a business which traded “Pan”. He bought a machine
which costed him £5000. He planned to use it for 5 years with no residual value.

Purchases Issues
Date £ Quantity Date £ Quantity
2nd January 50 600 12th January 85 200
5th February 50.5 500 8th February 85 600
6th February 49 700 12th March 85 100
27th February 45 100 13th April 85 100
5th June 56 1000 12th June 85 1200
7th July 60 600 21st July 85 450
9th August 55 400 19th August 85 500
11th September 55.5 600 19th September 85 550
12th October 49.5 500 24th October 85 600
30th November 40 1000 1st December 85 900
1st December 60 10 21st December 85 90

Other expenses included:


Wages and salaries £500, Rent and rates £250, advertisement £50, telephone £55, packaging
materials £12.
Required:
a. Draw up a statement measuring the value of stock after each issue in
FIFO, LIFO & AVCO.
b. Prepare the trading, profit and Loss account in all three stock valuation methods.
c. Which of the three methods would you recommend and why? (6)
2. On 1st January 2007 Cristiano Ronald started a business which traded vegetables. He bought a
machine which was used to pack goods. It costed him £50000. He planned to use it for 15 years
and the ma

Purchases
Date £ Quantity Date Quantity
2nd January 40 600 12th January 200
5th February 45 500 8th February 600
6th February 49 700 12th March 100
27th February 51 100 13th April 100
5th June 51.5 1000 12th June 1200
7th July 49 600 21st July 450
9th August 51 400 19th August 500
11th September 55 600 19th September 550
12th October 45.5 500 24th October 600
30th November 56 1000 1st December 900
1st December 60 10 21st December 90
Additional information:
Selling price was determined by adding 75% to the cost of sales.
Other expenses included:
Rent $5000, wages and salaries $500, telephone $120, discount allowed $90.
100 units were damaged by torrential rain on 8th July.
Required:
Draw up a statement measuring the value of stock after each issue in FIFO, LIFO & AVCO.
Prepare the trading, profit and Loss account in all three stock valuation methods.
29

3. On 1st January 2007 Akksas Ali started a business which traded “lungi”.

Purchases
Date £ Quantity
nd
2 January 12 600
5th February 23 500
6th February 13 700
th
27 February 12.5 100
5th June 14 1000
7th July 16 600
th
9 August 12 400
11th September 17 600
12th October 19 500
30th November 17 1000
1st December 10 100
Selling price was £23/unit. At the end of the year 500 units were in stock.
Other expenses included:
Salaries £450, Rent and rates £250, telephone £55, packaging materials £12.

Required:
a. Draw up a statement measuring the value of stock in FIFO, LIFO & AVCO.
b. Prepare the trading, profit and Loss account in all three stock valuation methods.

4. On 1st January 2007 Osama Bin Laden started a business.

Purchases
Date £ Quantity
2nd January 12 1600
5th February 23 5100
th
6 February 13 1700
27th February 12.5 1300
5th June 14 1200
th
7 July 16 400
9th August 12 600
11th September 17 600
12th October 19 300
30th November 17 900
1st December 10 100
• At the end of the year 1000 units were in stock.
• Selling price was fixed to £ 30/ unit.
Other expenses included:
⇒ Salaries £450, Rent and rates £250, telephone £55, packaging materials £12.
⇒ 100 units were damaged by a storm on 8th July.
Required:
a. Draw up a statement measuring the value of stock in FIFO, LIFO & AVCO.
b. Prepare the trading, profit and Loss account in all three stock valuation methods.
30

5. Tom and Jerry Ltd is wholesale business which sells its goods all over the country and deals
mainly with one particular type of good. It has a huge warehouse and buys the goods in huge
quantities and then sells them to different retailers and sometimes even other wholesalers.
On the 13th of June there was a burglary in their ware house and some goods were stolen. Tom
and Jerry ltd had an insurance policy in order but the insurance company asked for detailed
damaged which had occurred. They hired you to estimate the damage. The following
information is available.

Purchases Issues
Date £ Quantity Date £ Quantity
2nd January 50 6000 12th January 85 2500
5th February 50.5 5800 8th February 85 5600
6th February 49 7700 12th March 85 3100
27th February 45 8100 13th April 85 4100
5th June 56 5100 12th June 85 4200
7th July 60 800 21st July 85 2000
9th August 55 8800 19th August 85 6500
11th September 55.5 3300 19th September 85 2550
12th October 49.5 6500 24th October 85 1600
30th November 40 1700 1st December 85 1900
1st December 60 1000 21st December 85 900

A physical count revealed that there were 20000 units in stock.

Required:
a. Calculate the stock stolen in FIFO and LIFO.
b. Suggest which value Tom and Jerry ltd should use for claiming compensation. (2)
c. The management is unsure of using which stock valuation method. Evaluate the methods
and help them decide on a stock valuation method. (6)
6. Shalimar PLC. is wholesale business which sells its goods all over the country and deals mainly
with one good. On the 13th of July there was a storm in their ware house and some goods were
damaged. Shalimar PLC. They hired you to estimate the damage. The following information is
available.

Purchases Issues
Date £ Quantity Date £ Quantity
2nd January 50 6000 12th January 85 2500
5th February 50.5 5800 8th February 85 5600
6th February 49 7700 12th March 85 3100
27th February 45 8100 13th April 85 4100
5th June 56 5100 12th June 85 4200
7th July 60 800 21st July 85 2000
9th August 55 8800 19th August 85 6500
A physical count revealed that there were 14000 units in stock.
Required:
a. Calculate the stock stolen in FIFO and LIFO.
b. The management is unsure of using which stock valuation method. Evaluate the methods
and help them decide on a stock valuation method. (6)
31

CONTROL A/C
Brought to you by:
Huzaifa Abdullah Tel: 01714098841
32

Sales ledger control account


Debit Credit
Total of the sales ledger Total of sales ledger credit balances brought forward
Credit sales Sales returns
Refunds to customers Cash received from debtors
Dishonoured cheques Cassh discounts allowed
Interest charged to customers Bad debts written off
Bad debts recovered Cash received *
Contra **
Total of any sales ledger credit balances Total of sales ledger debit balances

*Cash received in respect of bad debts previously written off.


** Balances if purchases had been made from the customer or debtor.

Purchase ledger control account

Debit Credit
Total of purchase ledger balance Total of purchase ledger credit balance
Return outwards Total credit purchases
Cash paid to suppliers Refunds from suppliers
Cash discounts received Interest charged by suppliers
Contra *
Total of purchase ledger credit balances Total of debit balance
* Balances if purchases had been made from the customer or debtor.

Key Points to remember:

1. Control accounts help to identify any discrepancies and errors in the ledgers.
2. If there is a trade discount deduct the trade and then enter the net price. Mention the original
price and the discount.
Common Errors
1. Items posted to the wrong sides of control account.
2. Contra entries posted in one account only.
3. Bad debts recovered not entered in the both sides of the control account.
33

1. Junaid Jamshed was preparing the control account for his firm when he suddenly fell sick
and was rushed to hospital. The following information is available.

Details £
Total debtors balances at 31st December 2000 22000
Cash sales for the year 142000
Credit sales 86000
Credit sales returns 420
Cash received from debtors 87210
Discount allowed to debtors 1415
Bad debts written off 250
Dishonoured cheque 220
Goods bought on credit from a customer 140
Additional information:
The issuer of the dishonoured had assured that payment would be settled soon.
It was decided to settle the account of the creditor.
Required:
a. From the above information prepare sales ledger control account for Junaid
Jamshed.
b. List the advantages and disadvantages for control account. (5)

2. Saeed Anwar was preparing the control account for his firm. He had no formal training in
accounting and so is in a fix. The following information is available.

Details £
Total creditors balances at 31st December 2000 21000
Cash purchases for the year 42000
Credit purchases 186000
Credit purchase returns 140
Cash paid to creditors 97210
Discount received from creditors 1500
Goods bought on credit by a creditor 340
Additional information:
It was decided to settle the account of the creditor.
Required:
From the above information prepare purchase ledger control account for Saeed
Anwar.
34

3. The following information is extracted from the books of Haji Company for the month of July
2020.

£
Sales ledger balances at 1st July 2020 -
Debit 5000
Credit 76

Purchase ledger balances at 1st July 2020


Debit 124
Credit 3600

Sales for July 2020


Cash 2400
Credit 21790

Purchase for July 2020


Cash 1020
Credit 14500

Goods returned by credit customers 1760


Goods returned to suppliers bought on credit 440
Cash received from debtors 20450
Cash paid to creditors 11120
Discount allowed 580
Discount received 276
Bad debts written off 424
Cash received from previously written off bad debt 70
Dishonoured cheques 826
Interest debited to accounts of overdue of debtors 36
Balances in sales ledger ( to be offset in the purchase ledger) 1200
Provision for bad and doubtful debts (CR) 200

Sales ledger credit balance 31st July 2020 150

Purchase ledger debit balances at 31st July 2020 80

Required:
Prepare sales ledger and purchase ledger control account for the month of July 2020 for Haji
Company.
35

4. John is a groceries trader buying and selling on credit. He wishes to produce a


control account to check whether his accountant is involved in any discrepancy.
The following information is available for the six months ending 30th June 2021.

£
Trade creditors at 1st Jan 2021 25310
Trade debtors at 1st January 2021 36400
Sales on credit 68650
Cheques Paid 33200
Returns Inwards 900
Purchases for cash 3200
Bad debts written off 2100
Provision for bad and doubtful debts 1600
Purchase on credit 29470
Cheques received 63000
Return Outwards 950
Discount received 850
Dishonoured cheques 1450

The following errors have been discovered in the books of John:

⇒ A credit purchase of goods for resale, costing £1200, had been recorded in the office stationery
account.
⇒ A credit note for returned to John worth £2800 had not been entered into the accounts.
⇒ A cheque for £475 rent receivable had been debited to bank account as £75.
⇒ Discount received of £20 had been incorrectly claimed by John.
⇒ Invoices for credit sales of £4000 had not been entered into the accounts. John just came to
know that one of the invoices was for a business which had gone bankrupt and there was no
chance of payment.
Required:
a. Prepare journal entries recording the correction of errors. (narratives are not required)
b. Prepare sales ledger and purchase ledger control accounts incorporating all the
adjustments required.
c. Evaluate the uses of control account to a business (4)
36

5. The following balances appeared in the books of Toto Company ltd for the year ended 30th
June 2000.
£
Creditor balances 1st July 1999 36846
Debtor Balances 1st July 1999 328
Discount received 1975
Purchases 276220
Payment to creditors 258972
Purchase returns 3116
Cash refunded from creditors 262
Bills payable 1118
th
Debtors balances at 30 June 2000 419
Contra: sales ledger 784

The control account creditor balance failed to agree with the balances extracted from the
purchase ledger. After thorough examination the following errors were revealed:
⇒ A credit balance of £176 on the account of creditor had been omitted from the list of creditor
balances.
⇒ Discount received of £28 had been correctly entered in the cash book and the discount
received account but was not entered in the creditors account in the ledger.
⇒ The purchase day book was under cast by £200.
⇒ An item in the purchase day book had been posted to the creditors account as £168.
⇒ Discount received of £137 had been posted to the debit side of the discount received
account.
⇒ Goods returned to supplier valued at £82 had been correctly entered in the creditors account
but entered in the purchase returns account as £182.

Required:
I. Show the purchase ledger control account before incorporating the relevant errors.
II. Prepare a revised control account incorporating the errors. (Clearly showing the
errors). HINT: A STATEMENT FOR CORRECTION OF ERRORS MIGHT BE HELPFUL.
III. Prepare a statement reconciling the corrected balance with the totals as shown by
the list of errors were found.
37

Partnership

Brought to you by:


Huzaifa Abdullah Tel: 01714098841
38

1.1 Treatment of goodwill on change in Partnership.


Accounting Entries Account to be debited Account to be credited
1. If goodwill is to Good will Capital a/c of the partners in the
remain in the books old firm (in old firm ratio)
2. If good will is not to be a. Goodwill Capital a/c of the partners in the
retained in the books. old firm (in old firm ratio)
b. Capital a/c of partners in new Goodwill (to close goodwill
firms (in new firm ratio) account again.)

1.2 Revaluation account


Accounting Entries Account to be debited Account to be credited
1. Increases in value of Asset Revaluation
assets
2. Decreases in values of Revaluation Asset
assets
3. Provision for Provision for depreciation Revaluation
depreciation on revalued
assets
4. Profit on revaluation Revaluation Capital (in proportion of the
profit sharing ratio before the
revaluation.)
5. Loss on revaluation Capital (in proportion of the Revaluation
profit sharing ratio before the
revaluation.)
1.3 realisation account
Accounting Entries Account to be debited Account to be credited
1. Assets at net book Realisation Assets
value
2. Proceeds of sale of Bank/cash Realisation
assets
3. Assets taken over Capital account of the partner Realisation account
by partners ( at
valuation)
4. Cost of dissolutions Realisation Bank/cash
5. Payment of Creditors Bank/cash
creditors
6. Discount received Creditors Realisation
7. Cash received from Bank/cash Debtors
debtors
8. Bad debts & Realisation Debtors
discount allowed
9. Credit balance of Realisation a/c Partners capital (in profit
realisation a/c sharing ratio)
10. Debit balance of Partners capital (in profit Realisation a/c
realisation a/c sharing ratio)
11. Repayments of Partners loan a/c Bank/cash
partners loan
39

Instruction for students:


⇒ Use the papers provided with the question paper.
⇒ Try to finish the whole Assignment with in one sitting.
⇒ Please try not to refer to any notes or formats when solving this question paper.
⇒ Make maximum effort to finish with in the time designated by the teacher.
⇒ This Assignment contains ( ) questions.

1. Harry potter and Ronald Weasly are partners in a firm and share profits equally. Their
capitals are: Potter £50000, Weasly £45000. On 1st January 2007 they decided to admit
Hermoine Granger into the business as a partner. They will be sharing the profits in the ratio
1:2:1 for Harry potter, Ronald Weasly & Hermoine Granger respectively. Goodwill is to be
valued at £ 25000 and is not to be retained in the books. Granger has paid £15000 into the
business bank account as capital.
Required:
Show the entries in the partner’s capital accounts to adjust for Goodwill.

2. Huzaifa and Khubaib are partners in a firm and share profits in the ratio 1:2. Their capitals
are: Huzaifa £45000, Khubaib £54000. On 1st January 2007 they decided to admit Zubair
Zamir into the business as a partner. They will be sharing the profits in the ratio 2:1:2 for
Harry potter, Huzaifa, Khubaib and Zubair respectively. Goodwill is to be valued at £125000
and is not to be retained in the books. Zubair Zamir has paid £15000 into the business bank
account as capital.
Required:
Show the entries in the partner’s capital accounts to adjust for Goodwill.

PLEASE TURN OVER………………………………………


40

3. Inzimam and Yousuf are partners in firm selling cricket gears like pads, gloves etc. they are
good friends and were sharing profits and losses equally. After the end of 31st December
2007 their balance sheet was as follows:
Details £ £
Fixed Assets
Free hold premises 100000
Motor cars 40000
Office furniture’s 6000
146000
Current Assets
Prepaid expenses 20000
Debtors 48000
Balance at Bank 12000
80000
Less: Current Liabilities
Creditors (8000)
Working capital 72000
218000
Capital accounts
Inzimam 100000
Yousuf 100000
200000
Current accounts
Inzimam 12000
Yousuf 6000
18000
Capital employed 218000
After several years of business both the partners felt they had other assignments and were
not being able to attend the business properly and the business was suffering because of
that. They decided to admit Shoaib Akhter as their partner on 1 st January 2008. He
introduced £45000 as capital and brought some fixtures into the business which was
valued at £20000 on the same day. It was agreed that the following assets will be revalued:
Free hold premises £ 13000
Motor cars of the old firms £ 35000
Office furniture and equipment £ 2000
Provision for bad debts 5% of debtors ?

The new profit sharing ratio would be Inzimam, Yousuf and Shoaib Akhter as 3:2:1
respectively.
Goodwill was valued at £ 65000 but it was decided not retain it in the books of the
partnership.

Required:
a) Show the entries in the partner’s capital accounts to adjust for Goodwill
b) Show the opening balance sheet for Inzimam, Yousuf and Shoaib Akhter as
at 1st January 2008.
41

4. Shahrukh Khan & Salman Khan are partners in a firm selling Bollywood DVD’s. They were
sharing profits and losses equally. After the end of 31st December 2007 their balance sheet
was as follows:
Details £ £
Fixed Assets
Office equipment 20000
Lease hold premises 150000
Air conditioners 25000
Motor cars 15000
Machinery 12000
222000
Current Assets
Stock 25000
Debtors 48000
Balance at Bank 12000
85000
Less: Current Liabilities: Creditors (13000)
72000
Working capital 294000
Capital accounts
Shahrukh Khan 150000
Salman Khan 126000
276000
Current accounts
Shahrukh Khan 12000
Salman Khan 6000
18000
Capital employed 294000
After several years of business both the partners felt they had other assignments and were
not being able to attend the business properly and the business was suffering because of
that. They decided to admit Saif Ali Khan as their partner on 1st January 2008. He introduced
£45000 as capital and brought a car into the business which was valued at £100000 on the
same day. It was agreed that the following assets will be revalued:
Office equipment 15000
Lease hold premises 200000
Air conditioners 5000
Motor cars 5000
Machinery 20000
Stock 15000

The new profit sharing ratio would be Shahrukh Khan, Salman Khan and Saif Ali Khan as
4:3:2 respectively.
Goodwill was valued at £ 105000 but it was decided not retain it in the books of the
partnership.

Required:
a. Partners capital accounts to adjust for Goodwill
b. Balance sheet as at 1st January 2008.
42

5. David, Victoria and Alex are in partnership, sharing profit and losses in the ratio 2:2:1.
Interest is charged on drawings at 5% p.a. interest on capital is at 6% p.a. On 31 st December
2007 the balance sheet of the business was as follows:
Details £ £
Fixed Assets : Free hold land and buildings 180000
Motor cars 60000
Office equipments 15000
Machinery 35000
290000
Current assets: stock 34000
Debtors 41000
75000
Current liabilities: creditors (45000)
Bank (10000)
20000
310000
Financed by:
David 140000
Victoria 100000
Alex 70000
310000

The accountant who checked the financial statements commented that the capital account balances
have not the following into consideration:
i. Interest has not been charged on the drawings. The drawings were:
1st January 1st July
£ £
David 6000 9000
Victoria 15000
Alex 10000 5000

ii. Interest on capital had not been credited. Partner’s capital for the purpose of “interest
calculation” were:
David £70000
Victoria £50000
Alex £30000
Alex decided to concentrate more on his football coaching school and retire from the business. The
following decisions regarding the business were made:
o He will receive £18755 payable by cheque immediately.
o The freehold land and buildings will be revalued at £ 250000
o Goodwill is to be valued at £10000. The goodwill will not be retained in the business.
o Alex will take a partnership car at the net book value of £9000.
o The balance of Alex’s capital will be left in the business as loan.

Required:
a. Partner’s capital accounts both before and after the retirement of Alex
taking into consideration the adjustments and changes respectively.
b. Balance sheet as at 1st January 2008.
c. What might be the reasons for calculating interest on capital from different
figures? (4)
43

6. Rezwan, Kalim and Saima are in partnership, sharing profit and losses in the ratio 2:2:1.
Interest is charged on drawings at 15% p.a. interest on capital is at 7% p.a. On 31st
December 2005 the balance sheet of the business was as follows:
Details £ £ Details £ £
Fixed Assets : buildings 180000 Current
liabilities:
creditors 45000
Motor cars 60000
Bank 10000
equipments 15000
Machinery 35000
290000
Current assets: stock 34000 Financed by:
Debtors 41000 Rezwan 140000
Kalim 100000
Saima 70000
365000 365000

The accountant who checked the financial statements commented that the capital account balances
have not the following into consideration:
iii. Interest has not been charged on the drawings. The drawings were:
1st January 1st July
£ £
Rezwan 6000 9000
Kalim 15000
Saima 10000 5000

iv. Interest on capital had not been credited. Partner’s capital for the purpose of “interest
calculation” were: Rezwan £70000, Kalim £50000, Saima £30000
Saima decided to concentrate more on her modelling career and retire from the business. The following
decisions regarding the business were made:
o He will receive £10000 payable by cheque immediately.
o The following assets will be revalued: £
Free hold land and buildings 270000
Motor cars 55000
Office equipments 10000
Machinery 25000
stock 30000
Debtors 25000

o Goodwill is to be valued at £90000. The goodwill will be retained in the business.


o Saima will take a partnership car at the net book value of £9000.
o The balance of Saima’s capital will be paid through the business bank account.
o Rezwan will introduce £100000 as a loan to the business.

Required:
a. Partner’s capital accounts both before and after the retirement of Saima
taking into consideration the adjustments and changes respectively.
b. Balance sheet as at 1st January 2006.
44

7. Akkas ali, Jabbar Ali and Quddus Ali were partners in a business for many years. They have
been in this trade for a long time and now want to pursue other interests. They used to
share profit and loss in the ratio 3:2:1. They have decided to dissolve the partnership on
31st December 2005. The balance sheet on that date is as follows:
Details £ £ Details £ £
Fixed Assets : Current liabilities:
Machinery 12000 Creditors 2700
Motor vehicles 3000 Financed by:
Office machinery 600 capital
Current Assets Akkas ali 20000
Stock 21000 Jabbar Ali 10000
Debtors 6400 Quddus Ali 2000
Bank 3800 32000
Current accounts
Akkas ali 4000
Jabbar Ali 5000
Quddus Ali (1900)
7100
Loan from Akkas ali 5000
46800 46800
Jabbar Ali was allowed to keep his car which was valued at £4000. The remaining assets
realized the following amounts on 1st January 2006.

£
Machinery 10000
Motor vehicles 5000
Office machinery 1000
Stock 25000
Debtors 6200

Additional information
⇒ All creditors were paid and discounts received was £ 74
⇒ The dissolution expenses were £800

Required:

i. Journal entries to record the dissolution


ii. Realisation account.
iii. The firm’s capital account in columnar format.
iv. The firm’s bank account.
45

Income and Expenditure

Brought to you by:


Huzaifa Abdullah Tel: 01714098841
46

1. Gallery tone is club for painters. The members can sell their painting through exhibitions
organised by the club. The financial year ends on 31st December.
The following information is available
1st January 2008 £ 31st December 2008 £
Picture frames 1000 1000
Equipments 1600 1840
Stock of Paintings at cost 2200 3120
Debtors from paintings sales 200 110
Subscription in arrears 100 80
Subscriptions in advance 40 55
Cash at bank 416 ?
Rent advance 100 70
Electricity owing 60 80
Printing expenses 15 40

Receipts and payments for the year


£ £
Subscription 1100 Purchase of paintings 3000
Sale of painting 5140 Purchase of equipment 400
Sale of raffle tickets Rent 900
300
Refreshments 440 Electricity 230
Printing 60
Raffle prizes 100
Staff expenses 35
Refreshments 240

Equipment is to be depreciated 10% on reducing balance method.


Required:
a. Prepare income and expenditure account for the year ended 31st December
2008
b. Balance sheet as at 31st December 2008.
47

2. Rajasthan royals cricket franchise‘s financial year ends on 30th April 2007.
The assets and liabilities of the franchise were:
1st may 2006 30th April 2007
£ £
Cricket equipment 2500 2800
Subscription in arrears 200 110
Subscriptions in advance 130 110
Creditors for bar 350 430
Bar stock 800 600
Rent owing 150 100
Electricity owing 105 140
Bank balance 723 1300
Receipts and payments for the year ended are as follows.

£ £
Subscription (including £ 60 2100 Affiliation fee 100
arrears from the previous year )
Bar takings 4100 Purchase of new gloves 800
Annual dinner 2400 Bar stocks 2050
Sale of raffle tickets 180 Barmen wages 750
Catering dinner/dance 1440
Raffle prizes 60
Rent of hall 1500
Printing and postage 200
Electricity 581
Staff expenses 122
Repairs to bats 300
Hire of bands 300
Required:
a. Prepare income and expenditure account for the year ended 30th April 2007
b. Balance sheet as at 30th April 2007.
48

3. Daigon Valley club performs a number of concerts and plays in the theatre they own in
Pivet Street. In addition the club frequently arranges talent show which means their
premises are rented out throughout the year.
The club’s membership is composed of individuals and corporate houses. Several
corporate houses provide additional funds to sponsor the events. The treasurer of the
club has prepared the following receipts and payments account:

£ £
Rent charged 3900 Balance b/d 880
Sponsorship 12500 Light and heat 3960
Subscription: Insurance 1820
Individual 4000 Club advertising 1560
Business 1700 Copy right costs 1504
Programme advertising 320 Care takers wages 8016
Ticket sales from shows 52800 Printing & stationery 1575
Postages and telephone 610
General expenses 6772
Shows cost 27800
Repairs & maintenance 6318
Costume hire 3725
Balance c/d 10760
______ _______
75300 75300
The following additional information is available:

The theatre was purchased on 1st January 1998 for £85000 and is being depreciated at a
rate of 4% p.a. on cost. The club also owns a variety of fixtures £16000 and upon which
depreciation of £6200 has been made till 31st December 2007. The rate of depreciation is
fixed at 10% p.a.
The cash balance of the club always remains at £100 but this year it was decided to
increase it to £150. The additional £50 was taken from the rent charged before the money
being banked.
Individual members pay £20 p.a. while corporate houses pay £100 p.a. as subscription.
At 31st December 2007 four individual members were in arrears but three corporate houses
had paid in advance. On 31st December 2008 seven individual members had not paid for the
year but six had paid for the year 2009. The individuals who had not paid in December
2007 had subsequently paid up.
At 31st December 2007 the following amounts had been outstanding:
Printing £320, repairs £170 whilst insurance had been prepaid by £120.
At 31st December 2008 a telephone bill of £85, and one for electricity of £510 was unpaid
but copyright expenses of £125 had been prepaid.

Required:
A. Calculate the accumulated fund for the Daigon Valley club for the year ended
31st December 2007
B. Prepare an income and expenditure account for the Daigon Valley club for the
year ended 31st December 2008.
C. Prepare balance sheet as at 31st December 2008.
49

4. The accountant of the Abahani sports club presented the following receipts and payment
account.

Details £ Details £
Balance b/d 3600 Refund of subscription for 1999 90
Subscriptions : Staff wages 44550
For 1999 2700 Printing and advertising 3375
For 2000 37800 Repairs to equipment 2250
Competition fees 4725 Competition prizes 2700
Sale of equipment 3150 Dance expenses 2025
Sale of dance tickets 3690 Equipment purchased 16200
Sundry expenses 3690

The assets and liabilities at the start and end of the financial year 2000 were:

Other information:
Equipment with a net book value of £9000 on 1st January 2000 was sold during the year.
The equipment has been owned and depreciated exactly for four years prior to sale. It has
been depreciated on straight line method with an estimated life of five years and no
residual value.

Required:
a. Prepare and Income and expenditure account for the year ended 31st December 2000.
b. Balance sheet as at 31st December 2000.
c. It has been proposed that a life membership should be introduced by the club. State
how the payments for life membership should be treated in the income and expenditure
account. (5)
50

Incomplete records

Brought to you by:


Huzaifa Abdullah Tel: 01714098841
51

1. Harry Potter started a business in 1st January 2008. He named his firm as Muggle Store and
sold Magical wands for both children and other people who have magical fantasies. He had
savings of £6500 which he decided to take into the business as the starting capital. He also
brought a car which he had won in Hogwarts as a prize into the business. This was valued at
£4100. Muggle store borrowed £5300 from Gringotts a financial institution at an interest rate of
16% p.a. All the cash which means the capital and the loan was lodged into the business bank
account. Potter has received no formal training in accounting and has failed to keep proper
records. He has maintained details of movements of cash and bank. He thinks having a bank
balance means that the business is making profit. He was recently warned by the ministry of
magic for not keeping proper accounts. So he hired you as his accountant and has decided to
pay you £355. Details of transaction in cash and through bank are listed below:

Transaction Cash £ Bank £


Lease payments of premises 4800
Wages to staff 3200 7050
Redecoration of premises 1235
General operating expenses 320 1375
Purchases of goods for resale 105950
Lighting and heating 95 965
Fixtures and fittings 4895
Interest payment on loan 424
Accountancy fees 355
Car expenses 155 1050

Assets and liabilities for the year ended 31st December 2008 are as follows:
Cash 125
Bank 8150
Car 3150
Fixtures and fittings 4200
Stocks 14500
Creditors for purchases 10950

Additional information:
i. The lease agreement states that the cost of leasing would be £960 for every four months
payable in advance.
ii. All sales are for cash and are banked after meeting some cash expenditures.
iii. Harry Potter took £100/week from the cash till for personal use. He also took three wands
to give it to his wife Ginny. The combined cost would be £335.
iv. Harry potter also paid his personal insurance premium from the business account and had
entered as general expenses.
v. Ginny Potter has always used the car for her personal. It is estimated that 20% cost of the
car has been for private purposes.
Required:
a. Prepare a cash and bank account to determine the sales
b. Prepare a trading, profit and loss account for the year ended 31st December 2008
c. Prepare a balance sheet as at 31st December 2008.
d. Why do you think Potter was warned by the ministry of Magic. (5)
52

3. Saimon is engaged in selling specialist cricket equipments for several years. He has never
maintained proper accounts. A complete analysis if his accounts revealed the following
information. Complete bank account for the year ended 31st December 2008 is as follows:
Details £ Details £
Balance b/d 2800 Purchase of goods 66200
Cash banked 86900 New shop fittings 3000
Rent and rates 4600
Light and heat 3900
New van 4000
Van running expenses 1400
Wages to shop assistants 9070
Advertising 840
Insurance 560
Sundry expenses 2800
st
Details of Saimon’s Assets and liabilities for the year ended 31 December 2008 are as follows:

1st January 31st December


Debtors 600 850
Creditors 2400 3300
Insurance prepaid 80 120
Advertising unpaid 140 120
Stocks 16800 23700
Van net book value 2400 ?
Shop fittings at cost 1500 ?
Depreciation on shop fittings 450 ?
Bank balance 2800 ?

Additional information:
• Saimon had banked all the receipts with the exception of drawings £200/ week.
• Closing debtors included an amount of £100 who had been declared bankrupt and
there was no chance of money being recovered from him.
• The van owned at 1st January 2008 was part exchanged for £2000.
• Depreciation policy is to charge full year depreciation on the year of purchase but
none on the year of sale. Depreciation rates are 25% straight line method for vans and
30% reducing balance method on shop fittings.
Required:
! Prepare trading, profit and loss accounts for the year ended 31st December 2008.
! Prepare a balance sheet for that date.
53

4. Mariam traders deal selling two types of goods. Mobile phones and cameras. Recently there was
a fire in their office and some of their documents were destroyed. They were extremely worried
about the business profitability. They hired an experienced accountant and provided her with
the following data:
Bank statement taken out on 31st December 2008
Details £ Details £
Cash banked Rent 7000
Camera 1000000
Mobile phones 700000
Insurance compensation 40000 Rate 600
Commission from suppliers Insurance premium 8000
Camera 5000 Delivery van 9000
Mobile phones 3090 Petrol for delivery van 700
Proceeds from sale of delivery van 670 Fixtures and fittings 7000
Payment for suppliers of mobile 87000
phones
Payments for suppliers of 56000
Cameras
Seagull hotel cox’sbazar 560
Advertising 900
Electricity 5000
Association fee 120
Salaries to staff 12000
Redecoration of premises 890
Packaging materials 90
Commission to staff 900
Loan repayment 10000
Compensation to employee for 900
sacking
Telephone 450
Sundry expenses 890
Repairs to premises 45000
Loan interest 5000

Additional information:
! All sales receipts are banked after making cash expenditures.
! Mariam the proprietor takes £50 per week as drawings.
! The bill to seagull hotel was her holiday and she used the business bank account to pay the
hotel bill.
! The business’s policy is to charge 25% depreciation by reducing balance method on all assets
owned.
! Depreciation is charged on proportion of the year for which the assets had been owned. This
policy is applicable for both purchase and sale of assets.
! A delivery van which costed £8000 was sold on 1st May 2008. It was bought on 1st January 2005.
! The new van was purchased on 1st July 2008. While fixtures and fittings were bought on 1st
February.
! Mobile phone supplier provided Mariam with a discount of £500.
! Some defected cameras worth £900 were returned to the suppliers.
! It has been estimated that £500 debtors of Mobile phones will not be paying as they have gone
bankrupt.
! No cash account is maintained.
54

! All the common expenses should be divided as camera department 45% while mobile phone
department 55%

Following is the list of assets and liabilities for the year ending 31st December 2008.
1st January 31st December
Rent accrued 200 450
Rate prepaid 120 390
Insurance premium advance - 345
Delivery vans at cost 45000 46000
Fixtures and fittings 23000 30000
suppliers of mobile phones due 7000 15000
suppliers of Cameras due 15000 9000
Advertising due 700 80
Electricity due 2300 6000
Association fee prepaid 70 -
Salaries to staff due 5000 7000
Loan 10000 -
Telephone prepaid 500 120
Sundry expenses prepaid 560 1200
Bank balance 23000 ?
Loan interest 5000 -
debtors of mobile phones 7000 9000
debtors of Cameras 8900 7800
Stock:
Camera 56000 76000
Mobile phones 76000 90000

REQUIRED:
! Prepare trading, profit and loss accounts in a columnar format for the year ended 31st
December 2008.
! Calculate the following and comment on the performance for the year ended 31 st December
2008.
I. Current ratio.
II. Liquid acid test ratio
III. Rate of stock turn over
IV. Return on capital employed
V. Asset turnover
VI. Margin
VII. Net profit as a percentage of sales
(2.5x7)
55

5. Md. Zubair is an owner of a business which sells two types of goods. Premium and regular.
Though he keeps complete records for his business and has hired an accountant to handle them.
Recently the accountant was bitten by a dog and has been severely injured and could not work at all.
Even though he did study accounting in his school days but he was completely lost when he looked at
the accounts. He has hired you to help him out from the mess. The following information is available for
the year ended 31st December 2008.
Stocks at 1st January £
Raw materials
Premium 5000
Regular 4900
Finished goods
Premium 7800
Regular 6700

Payments received from customers during the year


Premium 450000
Regular 650000

Factory wages paid during the year


Direct 210000
Indirect 32500

Rent and rates paid during the year


Factory 56000
Office 52600

Heating and lighting paid during the year


Factory 5100
Office 7400

Office salaries paid during the year


Sales men 12200

Payments made to suppliers


Premium 98000
Regular 95000

Stocks at 31st December


Raw materials
Premium 9000
Regular 7000
Finished goods
Premium 5000
Regular 8000
Wages and salaries accrued at 31st December
Factory
Direct 17000
Indirect 18000
Sales men 2000

Wages and salaries advance at 1st January


Factory
Direct 2000
Indirect -
56

Rent and rates due at 1st January


Factory 1000
Office 300

Discount allowed to regular customers. 120


Eid bonus to all the employees of Zubair’s factory 3000
30% employees are in the office and the rest are in the factory
Compensation to an employee for being injured while production this cost would 1200
be shared by both the departments equally.

Fixed assets
Motor vans at cost bought on 1st January 2004 (used equally by factory & office) 500000
leasehold premises ( to be used for 21 years with no residual value) initiated in 2004 1000000
Fixtures and fittings at cost bought on 1 st May 2008 75000
Machinery net book value 120000
Office equipments net book value 56000
Additional information:
• All the receipts have been banked after meeting some cash expenditures.
• Zubair has taken £500/week as drawings. This was taken from the cash till. Other operating
expenses are £ 10000 which was paid through the business bank account.
• Zubair’s wife fell ill and her medical bill was paid from the business. The money was paid from
sales and the remainder was banked immediately.
• The business used to sell goods on cash basis prior to this financial period. To increase their
“market competitiveness” they have started to sell on credit.
• After the end of the year Zubair estimates that he has £50000 debtors for Premium while
£90000 for regular. He is not totally confident of receiving them all.
• The invoices show that Zubair owes £23000 to suppliers of materials of Premium while £33000
to suppliers of regular.
• The business depreciation policy states that Motor van, fixtures and fittings should be
depreciated by 20% on cost. While machinery & office equipments should be depreciated by
12% on reducing balance method.
• Heating and lighting, Rent and rates, depreciation and indirect wages would be shared in the
ratio 2:3 between premium and regular respectively.
REQUIRERD:
a) Prepare manufacturing account in columnar format for the year ended 31st December 2008.
b) Prepare trading, profit and loss accounts in columnar format for the year ended 31st December
2008.
57

6. Quddus ali recently won a lottery of £50000 from the lottery and was able to fulfill a
longstanding desire to open a boutique. On 1st January 2000 she opened a business bank
account with the full amount of the lottery.. At 31st December 2000 he received a summon
from the local authorities. Only then he realized that he needed to calculate his profits and
submit it.
At 31st December 2000 the following is the summary of Quddud Alis bank transactions:
Details £ Details £
Lottery 50000 Rent 6750
Cash banked 269000 Fixtures/ equipments 21670
Business rates 2400
Electricity 4670
Telephone 690
Purchases 265770
Holiday in Goa 340
All the takings were banked after the following cash expenses were paid and personal drawings were
taken. These were:
• Wages £410/week (50 weeks)
• Sundry expenses £15/week
• Cash purchases £2980 for the year.
• Quddus Ali always maintains a cash balance of £250.
Additional information:
o Selling prices were fixed by adding 80% to the cost of sales.
o Business rates of £1000 had been paid on 5th October 2000 to cover for the period of
31st May 2001.
o It was decided to depreciate the equipments by 15%.
o Creditors for purchases were £6250.
o Trade debtors amounted to £38000 at the year end and a provision for bad and
doubtful debts should be created at 5% of debtors.
o Closing stock was valued at £15000.
o The rent agreement states rent is due of about £9000.
Required:
! Prepare trading, profit and loss accounts for the year ended 31st December 2008.
! Prepare a balance sheet for that date.
58

Ratio Analysis

Brought to you by:


Huzaifa Abdullah Tel: 01714098841
59

1. Agora superstores have three departments. Food items, children ware and women wares.
The company is doing extremely well and generating huge revenues.
The following information is available:

sales gross profit net profit


9.8

5.8
4.3
3 3.5
2 1.8
1 1 0.8 0.8

food item children wear


-1 women's wear company as a whole

Calculate the following for the departments and the company as a whole:
a) Mark up
b) Margin
c) Net profit as a percentage of sales

return on capital employed in % closing stock


18
13 14.3
10 9.5
4.4
0.5

food item children wear women's wear company as a whole


-5

d) Comment on the return on capital employed by the business


e) Some quarters of the management team is criticizing the high stock Women wear
departments Manager of keeping very high levels of stock.
What would you suggest? Support your answer with valid reasons.
60

2. Following is the data of three firms.

sales roce in % dividends in % netprofit


20
18

12 12
10 10 10
8 7
6 5 5
3 3 4
0

Akij limited Grameen phone Nokia dandy fabrics

a. Mrs Saima is a wealthy widow. She has inherited a lot of money from her recently deceased
husband. Though she is a graduate but is dismayed looking at the profit comparison of three
firms. This data was provided to her by her manager.
Her manager asked her to invest in Dandy dying but she was suspicious of his intentions.
Do you agree or disagree with the managers recommendations.
b. What information do you think is needed to make the choice of investment a more accurate
one?
c. Identify the draw backs of ratio analysis

3. Karim is in business a general store owner where he sells daily groceries on credit to both
retailers and final consumers.
The following balances were available as at 31st December 2009
Fixed assets 15000
Stock in trade 35000
Net profit 12000
Debtors 50000
Sales 600000
Creditors 50000
Bank 10000
Purchases 240000

a. From the above balances calculate the following:


I. Current ratio
II. Liquid acid test ratio
III. Debtors’ collection period
IV. Creditors’ payment period
V. Return on capital employed
b. Comment on the liquidity of the business
c. After seeing the results of the previous question one of his friends commented that Karim
was paying his creditors late. Evaluate this claim.
61

4. The following information for the financial performance of Quddus Ali plc is as follows:

$’000 2006 $’000 2007


Sales 1600 1780
Material 720 800
Wages 460 330
Factory overheads 90 250
Cost of sales (1270) (1380)
Gross profit 330 400
Operating expenses (260) (315)
Net profit 70 85

Balance sheets
Fixed assets $’000 2006 $’000 2007
Premises 90 90
Plant and machinery 110 236
Motor vehicles 20 25
220 351
Current assets
Stock 150 180
Debtors 200 260
Cash at bank and at hand 40 2
390 442
Current liabilities
Creditors 147 153
Bank - 30
243 259
463 610
Capital and reserves
Ordinary shares of 25p each 300 300
General reserve 120 180
Retained earnings 43 30
Long term liabilities
5%debenture - 100
463 610
Opening at the start of 2006 was $132000
Only 20% of sales are for cash the rest is on credit.
Dividend for 2006 was 10% while 12% for 2007
Market price for the share was $1 in 2006 while $2 in 2007

a. From the above balances calculate for both the years the following:
1) Current ratio
2) Liquid acid test ratio
3) Rate of stock turn over
4) Debtors’ collection period
5) Creditors’ payment period
6) Return on capital employed
7) Earnings per share
8) Gearing
9) Dividend cover
62

10) Dividend yield


11) Asset turnover
12) Mark up
13) Margin
14) Net profit as a percentage of sales

b. Taking six appropriate ratios from your own calculation (done in part a) analyse the
performance of the company with special attention to expenses and utilisation of resources.
c. One of the board members of the Quddus Ali plc was furious with the finance manager for
taking the debenture as he feared that debenture holder might force the company into
liquidation.
The manager was struggling to put up a meaningful answer to the director. Based on your
learning state the reasons how a high gearing can be beneficial for firms.
63

MANUFACTURING ACCOUNT

PREPARED BY: HUZAIFA ABDULLAH


64

1. Akij cigarettes ltd is producing two brands of cigarettes. Akij regular and Akij
Lights.
The materials used in both the cigarettes are the same but the processing is different
and helps the company to cater to the different needs of the smokers. Regular cigarette
is more for chain smokers while Akij lights is for the younger and occasional smokers.
For the year ended 31st December 2007. The following information is available.
The primary concern for the management of the company was that the workers were not
willing to stay in the organisation for longer periods, thus they were leaving very quickly
and new labourer were needed to fill up that gap. This prompted some heavy expenses
in advertising for workers in the national newspapers. This costed the firm around $5000.
Information relating to production and selling:
Wages to labourers
Each labourer is paid $0.10/cigarette. Irrespective of lights or regular.
All floor level workers are given an annual bonus of $200
There are 500 floor level workers.
Every 50 floor level workers work under a supervisor. Each supervisor is paid $6000 per
annum.
All the supervisors are controlled by a production manager who is in charge of the
production department. He is paid an annual salary of $8000.
Materials
Regular consumes about $.50 worth of tobacco, while lights takes around $0.35 worth of
tobacco and some other materials worth $0.40.
Filter and other packaging materials cost $0.60 which is the same for both the products.
Additional information:
The premises where akij factories is situated is valued at $600000.
A machine has been bought in the year 2004 for $400,000 from England. It had been
decided to depreciate it by 12% p.a. on reducing balance method.
Office equipment costed Akij $50000 when it was bought in 2005. It was decided to
depreciate by 20% on straight line method.
Motor vans each costing $100000 were bought in 2005 and was decided to depreciate
them by 20% on straight line method. There were four motor vans. These vans are used
to distribute cigarettes to retailers.
Akij has hired some land for storing tobacco as it needs to import it from abroad. The rent
is fixed to $3000/month.
Three quality controllers are hired. Their job is to inspect the quality of the products.
Each are paid 15% of the wage bill of the floor workers combined.
65

Heating and lighting costs for the year is $5000


Cleaning expenses $1000
Electricity $50000
Insurance(for the whole premises) $20000
Sundry expenses $400
Bank charges $150
Ware house workers $5000
Ware house repairs $500
Premises repairs $300
Motor van repairs $500
Machinery parts replaced $1200
Security guards expenses $500
General manager (head of all operations) $50000 p.a.
Selling and distribution expenses
Salary for each sales staff is fixed as $5000 p.a. there are 20 sales staff in the company.
They are also paid 1% of sales if sales exceed more than 120000 units. Combined of
regular and light.
Policy regarding defected products
Workers are not paid any wages for the defected cigarette irrespective of the fact that it
was their mistake or the machine was at fault.
Selling price was determined as $5 for regular and $7 for lights.
Value of closing stock
1st January 31st December
Regular cigarettes 4000 200000
Lights 12000 40000
Tobacco $56000 $90000
Allthe common expenses are apportioned in the ratio 3:1
Based on the above information please prepare
Manufacturing account in columnar format
Trading profit loss account columnar format
The general manager wants to introduce bonus for work to reduce labour turn over.
Evaluate the proposal. (5)
66

2. Quddus doors ltd is producing two brands of doors. Quddus regular and Quddus
Special.
The materials used in both the doors are the same but the processing is different and
helps the company to cater to the different needs of the consumers. For the year ended
31st December 2007. The following information is available.
Information relating to production and selling:
Wages to labourers
Each labourer is paid $10/door. Irrespective of special or regular.
All floor level workers are given an annual bonus of $200
There are 50 floor level workers.
10 floor level workers work under a supervisor. The supervisors are paid $2000 per
annum.
Materials
Regular consumes about $20 worth of Wood, while special takes around $32 worth of
Wood and some other special materials worth $0.40.
other packaging materials cost $3.60 which is the same for both the products.
Additional information:
The premises where Quddus factories is situated is valued at $1000000.
A machine has been bought in the year 2004 for $400,000 from Taiwan. It had been
decided to depreciate it by 16% p.a. on reducing balance method.
Sales Office equipment costed Quddus $50000 when it was bought in 2005. It was
decided to depreciate by 20% on straight line method.
Motor vans each costing $100000 were bought in 2005 and was decided to depreciate
them by 20% on straight line method. There were four motor vans. Motor vans are used
40% for delivery and the rest for bringing wood from the suppliers.
One motor van was sold on 1st January 2007. At a price of $40000
Quddus has hired some land for storing Wood as it needs to import it from abroad. The
rent is fixed to $2000/month.
Four quality inspectors are hired. Their job is to inspect the quality of the products. Each
are paid $1/door. They also assist in the factory administration.
Heating and lighting costs for the year is $2000
Cleaning expenses $1500
Electricity $90000
Insurance(for the whole premises) $10000
Sundry expenses $4800
Bank charges $1500
Ware house repairs $500
67

Premises repairs $300


Motor van repairs $500
Machinery parts replaced $1200
Security guards expenses $500
Accountant fees $5000
Tax 12% of profit
Director’s remuneration $5000
Salary for Quddus for managing the business $5000
Selling and distribution expenses
Salary for each sales staff is fixed as $1000 p.a. there are 20 sales staff in the company.
They are also paid 1% of sales if sales exceed more than 120000 units. Combined of
regular and light.
Policy regarding defected products
Workers are paid halve the wages due for the defected door irrespective of the fact that it
was their mistake or the machine was at fault.
During the year ended 31st December 2007 3000000 regular and 1000000 special were
produced. 2% of regular and 5% of special were found defective and were thrown away
in order to save the reputation of the company. Selling price was determined as $55 for
regular and $85 for special.
Value of closing stock
1st January 31st December
Regular doors 4000 200000
Special doors 10000 40000
Wood $65000 $95000
All the common expenses are apportioned in the ratio 3:1
Based on the above information please prepare
Manufacturing account in columnar format showing for both per unit and as a whole.
Trading profit loss account columnar format
68

3. Pocha shaban has the following extract from the trial balance for the year ended
31st January 2008.
$
Stocks at 1st January
Raw materials 12000
Work in progress 14200
Finished goods 22000
Purchases
Raw materials 144000
Indirect materials 1000
Factory wages
Direct 210000
Indirect 32500
Rent and rates
Factory 20000
Office 12600
Heating and lighting
Factory 7100
Office 3400
Carriage inwards 1360
Carriage outwards 4725
Office salaries
Sales men 8800
Other 12000
Debenture interest 500 cr
Sales 200000
Rent receivable 2000
Stocks at 31st December
Raw materials 10100
Work in progress 15900
Finished goods 16000
Rent and rates paid in advance at 31st December
Factory 3000
Office 800
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Wages and salaries accrued at 31st December


Factory
Direct 12000
Indirect 1800
Sales men 2000
Other 700

Depreciation for the year


Machinery 12000
Office equipment 1000
Delivery van used for both distributing and bringing raw materials 4000
Ratio stands to 1:3
Wages and salaries accrued at 1st January
Factory
Direct 2000
Indirect 900
Sales men 1000
Other 200
Rent and rates paid in due at 1st January
Factory 1000
Office 300

Sales of scrap material 400


Raw materials damaged 300
Goods returned by customers 1200
Discount allowed 120
Eid bonus to all the employees of Pocha shaban 3000
30% employees are in the office and the rest are in the factory
Compensation to an employee for being injured while production 1200
Units produced 12000
Based on the above information please prepare
Manufacturing account
Trading profit loss account
Comment on the pricing by comparing the cost and profit/unit. (5)
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4. A maths teacher designed some math exercises for ordinary level students. He decided
to produce 4000 copies of the exercises.
He hired a local typist who would be responsible for typing and editing of the books. A fixed fee
of $500 was paid to him. The printing press asked for $ 2 for printing and a further $.5 for
binding and packaging.
Cost of paper combined rose to $1000. This was fully used by the press in producing the
desired number of books.
The teacher made some expenses for travelling to the press and the typist to see the work this
resulted in travelling expenses of $45.
Carriage for bringing the paper to the printing press costed $56. A worker was hired to store the
completed books in the teacher’s room. He was paid $25. Some books were damaged due to
rain in the teacher’s room. 25 books were destroyed.
The teacher had taken a loan from one of his colleague to finance the production of the books.
He took a loan of $5000 at an interest rate of 5% and 4% of the net profit.
After the completion of the books an author of a math book claimed that the exercises were part
of his copyright and demanded royalty on the books produced. The teacher agreed to pay the
author $0.10 for every books produced as he feared legal actions.
The biggest concern for the teacher was to sell the huge number of books he had in his stock.
One of his students offered to take up the responsibility of selling the books for a fixed fee of
$500 and $0.5/book if he could sell more than 2500 books.
The teacher quickly agreed with this proposal. After the end of first year books in stock were
500.
After the end of first year books in stock were 500.
Selling price is determined by adding 150% to the cost of sales.
Despite the arrangement with the student the teacher thought that still had a lot of books in his
stock as the student was not be able to sell the desired amount of books.
He contacted a local book shop and tried to sell him the books. After seeing the books the book
seller agreed to buy the books but asked for some changes. The changes are:
The book seller wanted a 10% discount on the current selling price and will buy 4500 copies
He wanted to have his own name written on the covers for which would cost additional
$0.50/book.
The book seller suggested some editing which could save the teacher from paying the royalty.
He will incur the cost of editing.
The books should be delivered to the book seller’s warehouse which would result in additional
rise in expenditure of $400.
Sell only to the bookseller.
The teacher estimates that he would again produce the same amount of books for the next
year. And the cost structure will not change except for the book seller requests.
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Though he is happy with the profit he is wondering whether to accept the proposal of the
bookseller.

Required:
a) Manufacturing account for the year ended 31st December 2008
b) Trading profit/loss account for the year ended 31st December
c) Based on the calculation suggest wether the teacher should accept the proposal of the
book seller.
d) Identify the nonfinancial factors involved if the teacher sold only to the book seller.
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5. Saima Bulbs are famous for their products all over the electrical industry. Their main
product has been the energy saving lamp they have been producing and selling all over
Bangladesh. Their business policy suggests that if orders are over 500 pieces this
qualifies for a 12% discount, delivery service to any part of the city and sometimes even
credit facilities. While orders of below 500 pieces are not given that importance and no
facilities are provided to them. Following information is available.
Stocks at 1st January
Raw materials 100000
Work in progress 13400
Finished goods 500000
Purchases
Raw materials 1454000
Indirect materials 134000
Factory wages paid
Direct 210000
Indirect 32500
Rent and rates paid
Factory 56000
Office 52600
Heating and lighting paid
Factory 5100
Office 7400
Carriage inwards 2360
Carriage outwards 4425
Office salaries paid
Sales men 12200
Other 12600
Debenture interest 500 cr
Sales
Orders Below 500 pieces 50000
Orders of Over 500 pieces 400000
Rent receivable 2000
Stocks at 31st December
Raw materials 10100
Work in progress 15900
Finished goods 16000
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Rent and rates paid in advance at 31st December


Factory 3000
Office 800
Wages and salaries accrued at 31st December
Factory
Direct 12000
Indirect 1800
Sales men 2000
Other 700
Depreciation for the year
Machinery 12000
Office equipment 1000
Delivery van used for both distributing and bringing raw materials 4000
Ratio stands to 2:3
Wages and salaries accrued at 1st January
Factory
Direct 2000
Indirect 900
Sales men 1000
Other 200
Rent and rates paid in due at 1st January
Factory 1000
Office 300

Sales of scrap material 400


Raw materials damaged 300
Goods returned by customers 1200
Discount allowed 120
Eid bonus to all the employees of Saima Bulbs 3000
30% employees are in the office and the rest are in the factory
Compensation to an employee for being injured while production 1200
Selling price for orders below 500 pieces is $87
Selling price for orders over 500 pieces is ?

a. Prepare manufacturing account


b. Prepare trading accounts in columnar format for below and over 500 pieces.
c. Prepare profit loss accounts combined
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The management is having some complaints from some customers of lack of preferential
treatment and some have moved away to other competitors. The management is extremely
worried as orders of below 500 have fallen steadily and they are suggesting the following
measures:
• Charge the same price to all the customers.
• Provide delivery services which the company estimates could cost around $5000 in the
year.
• Provide credit to credit worthy customers which would increase the bad debts expense
to $13000 a year.
d. Evaluate the above measures and help the management of Saima Bulbs to rectify the
situation.
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