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The workings under the heading of “Additional Working”

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2014
B.COM – II – ADVANCED
ACCOUNTING
REGULAR

Compiled and Solved by:

Sameer Hussain
Compiled & Solved by: Sameer Hussain
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a4accounting@hotmail.com

ADVANCED ACCOUNTING – 2014


REGULAR
Instructions: (1) Attempt any FIVE questions in all. (2) All questions carry equal marks.
(3) Answers without necessary computations will not be accepted.

Q.No.1 ACCOUNTING FOR INSTALLMENT SALES


a) Differentiate between realized gross profit and unrealized gross profit.

b) The Smith Co. recorded installment sales of Rs.600,000 in 2013. Cost of installment sales was
Rs.420,000. The total collections on installment sales were Rs.360,000. The estimated value of the
merchandise repossessed was Rs.110,000 and installment accounts receivable cancelled Rs.240,000.
REQUIRED
Calculate loss or gain and record repossession.

c) The following data are available from the Western Corporation’s installment sales record:
Year Percentage Installment Receivable on Cash Collection Installment Receivable on
Gross Profit January 1, 2012 During 2012 December 31, 2012
2010 40% Rs.30,000 Rs.30,000 ---
2011 45% Rs.50,000 Rs.34,000 Rs.16,000
2012 50% Rs.200,000 Rs.60,000 Rs.140,000
REQUIRED
Prepare all the journal entries for 2012 including adjusting entries.

SOLUTION 1 (a)
Unrealized Gross Profit:
Unrealized gross profit is referred to the total gross profit from the sale of merchandise on installment
basis which has not been collected. It is also known as “Deferred Gross Profit”.

Realized Gross Profit:


The profit on sale on merchandise on installment basis collected during the period out of total
unrealized gross profit is called realized gross profit. In other words, it is the profit which has been
collected during the period.

SOLUTION 1 (b)
Computation of Unrealized Gross Profit:
Unrealized gross profit = Installment sales – Cost of installment sales
Unrealized gross profit = 600,000 – 420,000
Unrealized gross profit = Rs.180,000

Computation of Unrealized Gross Profit Rate (DGP%):


Unrealized gross profit rate = Unrealized gross profit x 100
Installment sales
Unrealized gross profit rate = 180,000 x 100
600,000
Unrealized gross profit rate = 30%

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Computation of Realized Gross Profit:
Realized gross profit = Cash collection X DGP%
Realized gross profit = 360,000 x 30%
Realized gross profit = Rs.108,000

Computation of Gain or Loss on Repossession:


Installment accounts receivable cancelled 240,000
Less: Unrealized gross profit forego (240,000 x 30%) (72,000)
Book value 168,000
Less: Merchandise repossessed (110,000)
Loss on repossession Rs.58,000

SMITH CO.
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Merchandise repossessed 110,000
Unrealized gross profit 72,000
Loss on repossession 58,000
Installment accounts receivable 240,000
(To record the merchandise repossessed on loss)

SOLUTION 1 (c)
Computation of Realized Gross Profit:
Realized gross profit = Cash collection X DGP%
Realized gross profit (2010) = 30,000 x 40% 12,000
Realized gross profit (2011) = 34,000 x 45% 15,300
Realized gross profit (2012) = 60,000 x 50% 30,000
Total realized gross profit = Rs.57,300

Computation of Unrealized Gross Profit (DGP):


Unrealized gross profit (2012) = Installment sales x DGP%
Unrealized gross profit (2012) = 200,000 x 50%
Unrealized gross profit (2012) = Rs.100,000

Computation of Cost of Installment Sales:


Installment sales 200,000
Less: Unrealized gross profit (2012) (100,000)
Cost of installment sales Rs.100,000
WESTERN CORPORATION
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Installment accounts receivable (2012) 200,000
Installment sales 200,000
(To record the good sold on installment basis)
2 Cost of installment sales 100,000
Merchandise 100,000
(To record the cost of installment sales)

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Date Particulars P/R Debit Credit
3 Cash 124,000
Installment accounts receivable (2010) 30,000
Installment accounts receivable (2011) 34,000
Installment accounts receivable (2012) 60,000
(To record the cash collected on installment basis)

WESTERN CORPORATION
ADJUSTING ENTRIES
Date Particulars P/R Debit Credit
1 Installment sales 200,000
Cost of installment sales 100,000
Unrealized gross profit (2012) 100,000
(To adjust the unrealized gross profit)
2 Unrealized gross profit (2010) 12,000
Unrealized gross profit (2011) 15,300
Unrealized gross profit (2012) 30,000
Realized gross profit 57,300
(To adjust the realized gross profit)

Q.No.2 CASH FLOW STATEMENT


a) Nishat Corporation acquired land by issuing 60,000 shares of Rs.10 each. Will this transaction be
disclosed in cash flow statement? Reason.

b) In year 2010, George Corporation made cash sales Rs.650,000; credit sales Rs.550,000; accounts
receivable decreased by Rs.120,000.
REQUIRED
Compute:
(1) Total sales. (2) Cash received from customers on account. (3) Total cash received.

c) The following income statement and balance sheet for the past two years are available for
Caravan Corporation:
CARAVAN CORPORATION
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2012 AND 2013
2012 2013
Sales Rs.500,000 Rs.350,000
Less: Cost of goods sold Rs.200,000 Rs.140,000
Gross profit Rs.300,000 Rs.210,000
Less: Operating expenses (including depreciation) Rs.260,000 Rs.243,000
Loss on sale of marketable securities --- Rs.1,000
Net income (loss) Rs.40,000 Rs.(34,000)

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CARAVAN CORPORATION
BALANCE SHEET
DECEMBER 31, 2012 AND 2013
Assets: 2012 2013
Cash Rs.10,000 Rs.60,000
Marketable securities Rs.20,000 Rs.5,000
Accounts receivable Rs.40,000 Rs.23,000
Inventory Rs.120,000 Rs.122,000
Plant and equipment Rs.320,000 Rs.340,000
Accumulated depreciation Rs.(20,000) Rs.(55,000)
Total Rs.490,000 Rs.495,000

Equities: 2012 2013


Accounts payable Rs.50,000 Rs.73,000
Accrued expenses Rs.17,000 Rs.4,000
Notes payable Rs.245,000 Rs.263,000
Share capital Rs.120,000 Rs.135,000
Retained earnings Rs.58,000 Rs.20,000
Total Rs.490,000 Rs.495,000
Additional Information:
(1) Company declared and paid Rs.4,000 cash dividend.
(2) Marketable securities costing Rs.15,000 were sold for Rs.14,000 cash, resulting Rs.1,000 loss.
(3) The company purchased plant assets for Rs.20,000, paying Rs.2,000 in cash and issuing a note
payable for the Rs.18,000 balance.
REQUIRED
Prepare a formal cash flow statement for 2013 showing operating, investing and financing activities.

SOLUTION 2 (a)
This transaction will not be disclosed in cash flow statement. Because cash flow statement is a
statement showing the inflows and outflows of cash and cash equivalents for a business over a financial
period. This transaction does not flow the cash and cash equivalents, neither inflow nor outflow of cash.

SOLUTION 2 (b)
Computation of Total Sales:
Cash sales 650,000
Add: Credit sales 550,000
Total sales Rs.1,200,000

Computation of Cash Collected from Accounts Receivable:


Credit sales 550,000
Add: Decrease in accounts receivable 120,000
Cash collected from accounts receivable Rs.670,000

Computation of Total Cash Collected:


Cash sales 650,000
Add: Cash collected from accounts receivable 670,000
Total cash collection Rs.1,320,000

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SOLUTION 2 (c)
CARAVAN CORPORATION
CASH FLOW STATEMENT
FOR THE PERIOD ENDED 31 DECEMBER 2013
Cash Flow from Operating Activities:
Net loss (34,000)
Adjustments:
Add: Depreciation expense 35,000
Add: Loss on sales of marketable securities 1,000
income before changes in working capital 2,000
Add: Decrease in accounts receivable 17,000
Less: Increase in merchandise inventory (2,000)
Add: Increase in accounts payable 23,000
Less: Decrease in accrued expenses (13,000)

Net cash flow from operating activities 27,000


Cash Flow from Investing Activities:
Purchase of plant and equipment (2,000)
Sale of marketable securities 14,000
Net cash flow from investing activities 12,000
Cash Flow from Financing Activities:
Issue of shares capital 15,000
Cash dividend paid (4,000)
Net cash flow from financing activities 11,000
Net increase in cash and cash equivalents 50,000
Add: Opening cash and cash equivalents balance 10,000
Closing cash and cash equivalents balance Rs.60,000

Q.No.3 FINANCIAL STATEMENT ANALYSIS


The following is information for William Corporation at the end of 2013:
Cash Rs.225,000
Marketable securities Rs.120,000
Notes receivable Rs.180,000
Accounts receivable Rs.300,000
Allowance for doubtful accounts Rs.15,000
Inventory Rs.240,000
Prepaid expenses Rs.30,000
Notes payable within one year Rs.90,000
Accounts payable Rs.247,500
Accrued liabilities Rs.22,500
The following transactions are completed early in 2014:
1. Sold inventory costing Rs.36,000 for Rs.30,000.
2. Declared a cash dividend Rs.120,000.
3. Paid accounts payable Rs.60,000.
4. Purchased goods on account Rs.45,000.
5. Issued additional shares of Rs.450,000.
6. Wrote off uncollectible accounts Rs.9,000.
7. Acquired plant and equipment for cash Rs.240,000.
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REQUIRED
(a) Compute current ratio, acid – test ratio and working capital at the end of 2013.
(b) Indicate the effects (increase, decrease, no change) of the above transactions on:
(i) Current ratio. (ii) Acid test ratio.

SOLUTION 3 (a)
1. Computation of Total Current Assets:
Cash 225,000
Marketable securities 120,000
Notes receivable 180,000
Accounts receivable (Net) 285,000
Total quick assets 810,000
Merchandise inventory 240,000
Prepaid expenses 30,000
Total current assets 1,080,000
Less: Total Current Liabilities:
Notes payable 90,000
Accounts payable 247,500
Accrued liabilities 22,500
Total current liabilities (360,000)
Working capital Rs.720,000

2. Computation of Current Ratio:


Current ratio = Total current assets
Total current liabilities
Current ratio = 1,080,000
360,000
Current ratio = 3:1

3. Computation of Acid Test Ratio:


Acid test ratio = Total quick assets
Total current liabilities
Acid test ratio = 810,000
360,000
Acid test ratio = 2.25 : 1

SOLUTION 3 (b)
No. Transaction Current Ratio Acid Test Ratio
1. Sold inventory costing Rs.36,000 for Rs.30,000. Decrease Decrease
2. Declared a cash dividend Rs.120,000. Decrease Decrease
3. Paid accounts payable Rs.60,000. Increase Increase
4. Purchased goods on account Rs.45,000. Decrease Decrease
5. Issued additional shares of Rs.450,000. Increase Increase
6. Wrote off uncollectible accounts Rs.9,000. No change No change
7. Acquired plant and equipment for cash Rs.240,000. Decrease Decrease

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Q.No.4 COMPANY ACCOUNTING – ABSORPTION
a) Differentiate between amalgamation and absorption.

b) The balance sheet of M/S. Black Corporation Ltd. as on December 31, 2013 is as under:
ASSETS EQUITIES
Preliminary expenses Rs.20,000 Share capital (Rs.10 par) Rs.300,000
Building Rs.225,000 General reserve Rs.60,000
Merchandise inventory Rs.75,000 Retained earnings Rs.30,000
Accounts receivable Rs.75,000 Long term loans Rs.75,000
Cash Rs.107,500 Allowance for depreciation Rs.15,000
Allowance for bad debts Rs.7,500
Accounts payable Rs.15,000
Total Rs.502,500 Total Rs.502,500
Black Corporation was absorbed by White Corporation Ltd. on the following terms:
1. White Corporation takes over all the assets and liabilities of Black Corporation at book value.
(Except cash and long term loans).
2. 5 new shares were issued against every 4 shares of Black Corporation @ Rs.10 each.
3. Liquidation expenses paid by White Corporation Rs.15,000.
REQUIRED
(1) Calculate purchase consideration.
(2) Record entries in the books of: (i) Black Corporation. (ii) White Corporation.

SOLUTION 4 (a)
 Amalgamation:
The combination of two or more companies in which the old companies merge to form a new
company is called amalgamation. For example Company “A” and Company “B” amalgamate to
form a Company “C”. All the assets and liabilities of both old companies (A and B) are
transferred to new company (C). In that sense the company “C” is acquiring the company “A”
and company “B”.
 Absorption:
The combination of two or more companies in which one company acquires the other company
and the other company absorbs in the acquiring company is called absorption. For example
Company “A” acquires the Company “B”. So that after the acquiring the name of Company “B”
will not exist but the name of Company “A” will exist. All the assets and liabilities of old
company (B) are transferred to purchasing company (A).

SOLUTION 4 (b)
Computation of Purchase Consideration:
30,000 x 5/4 = 37,500 Ordinary shares @ Rs.10 each 375,000
Liquidation expense (cash) 15,000
Purchase consideration Rs.390,000

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BLACK CORPORATION LTD.
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Realization 375,000
Building 225,000
Merchandise inventory 75,000
Accounts receivable 75,000
(To record the transfer of assets to White Corporation)
2 Allowance for depreciation 15,000
Allowance for bad debts 7,500
Accounts payable 15,000
Realization 37,500
(To record the transfer of liabilities to White Corporation)
3 Receivable from White Corporation Ltd. 390,000
Realization 390,000
(To record the purchase consideration)
4 Shares – in 375,000
Cash 15,000
Receivable from White Corporation Ltd. 390,000
(To record the cash and shares received from White
Corporation against purchase consideration)
5 Long term loans 75,000
Cash 75,000
(To record the payment of long term loan)
6 Realization 15,000
Cash 15,000
(To record the payment of liquidation expense)
7 Ordinary share capital 300,000
General reserve 60,000
Retained earnings 30,000
Preliminary expenses 20,000
Payable to shareholders 370,000
(To record the closing of shareholders’ equity)
8 Realization 37,500
Payable to shareholders 37,500
(To record the closing of realization account)
9 Payable to shareholders 407,500
Cash 32,500
Shares – in 375,000
(To record the cash & shares issued to the shareholders)

Realization
1 Assets 375,000 2 Liabilities 37,500
6 Liquidation expense 15,000 3 Receivable from White Corporation 390,000
8 Payable to shareholders 37,500
427,500 427,500

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WHITE CORPORATION LTD.
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Building 210,000
Merchandise inventory 75,000
Accounts receivable 75,000
Goodwill 52,500
Allowance for bad debts 7,500
Accounts payable 15,000
Payable to Black Corporation Ltd. 390,000
(To record the assets and liabilities taken over from Black
Corporation Ltd.)
2 Payable to Black Corporation Ltd. 390,000
Ordinary shares capital (37,500 x 10) 375,000
Cash 15,000
(To record the cash shares issued to Black Corporation)

Q.No.5 BRANCH ACCOUNTING – RECIPROCAL TRANSACTIONS


The following account is found in the books of Ford Corporation:
FAISALABAD BRANCH
2013 2013
Jan. 1 Balance Rs.67,500 Jan. 19 Remittance from branch Rs.3,000
Jan. 10 Payment of branch note Rs.2,500 Jan. 25 Goods return by branch Rs.2,500
Jan. 15 Payment for branch furniture Rs.10,000 Jan. 29 Collection of branch account Rs.1,500
Jan. 20 Shipment of goods to branch Rs.25,000 Jan. 31 Net loss of branch Rs.890
Jan. 30 Expenses charges to branch Rs.1,500
REQUIRED
(i) Prepare entries in the General Journal of branch.
(ii) Prepare T – account of head office in the ledger of branch.

SOLUTION 5 (i)
FORD CORPORATION
GENERAL JOURNAL
Date Particulars P/R Debit Credit
Jan. 10 Notes payable 2,500
Head office 2,500
(To record the notes paid by head office)
Jan. 15 Furniture 10,000
Head office 10,000
(To record the payment for furniture by head office)
Jan. 19 Head office 3,000
Cash 3,000
(To record the cash remitted to head office)
Jan. 20 Merchandise supplied 25,000
Head office 25,000
(To record the goods received from head office)

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Date Particulars P/R Debit Credit
Jan. 25 Head office 2,500
Merchandise supplied return 2,500
(To record the goods returned to head office)
Jan. 29 Head office 1,500
Accounts receivable 1,500
(To record the cash collected from customer by head
office)
Jan. 30 Expenses 1,500
Head office 1,500
(To record the expenses paid by head office)
Jan. 31 Head office 890
Expense and revenue summary 890
(To record the net loss reported to head office)

SOLUTION 5 (ii)
FORD CORPORATION
GENERAL LEDGER
HEAD OFFICE
Jan. 19 Cash 3,000 Jan. 1 Balance 67,500
Jan. 25 Merchandise supplied return 2,500 Jan. 10 Notes payable 2,500
Jan. 29 Accounts receivable 1,500 Jan. 15 Furniture 10,000
Jan. 31 Expense and revenue summary 890 Jan. 20 Merchandise supplies 25,000
Jan. 31 Balance c/d 98,610 Jan. 30 Expenses 1,500
106,500 106,500
Feb. 1 Balance b/d 98,610

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


TRANSACTION
a) The Marsh Corporation bills its Islamabad branch at 35% above cost. On December 31, 2013, its
branch reported the following inventory balances:
Particulars Received from Head Office Purchased from Outsiders
Merchandise inventory beginning Rs.16,200 Rs.4,000
Shipment from head office Rs.20,250 Rs.12,000
Merchandise inventory ending Rs.18,900 Rs.5,000
REQUIRED
(i) Calculate allowance for overvaluation before adjustment.
(ii) Prepare entry to record the adjustment of allowance for overvaluation account.

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

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SOLUTION 6 (a)
Computation of Allowance for Overvaluation:
Allowance for
Particulars Billed Cost
over valuation
Merchandise inventory opening (16,200 x 35/135)) 16,200 12,000 4,200
Add: Merchandise supplied (20,250 x 35/135) 20,250 15,000 5,250
Unadjusted allowance for overvaluation 36,450 27,000 9,450
Less: Merchandise inventory ending (18,900 x 35/135) (18,900) (14,000) (4,900)
Adjusted allowance for overvaluation 17,550 13,000 4,550

MARSH CORPORATION
HEAD OFFICE BOOK
GENERAL JOURNAL
FOR THE PERIOD ENDED DECEMBER 31, 2013
Date Particulars P/R Debit Credit
Dec. 31 Allowance for overvaluation 4,550
2013 Profit and loss account 4,550
(To adjust the allowance for overvaluation)

SOLUTION 6 (b)
BETA CORPORATION
HEAD OFFICE
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Lahore Branch 42,500
Merchandise supplied 30,000
Allowance for overvaluation 10,000
Cash 2,500
(To record the merchandise sent to Lahore Branch and
paid transportation)
2 Multan Branch 42,500
Inter branch freight expenses 1,000
Lahore Branch 43,500
(To record the inter branch freight charges)

BETA CORPORATION
LAHORE BRANCH
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Merchandise supplied 40,000
Freight charges 2,500
Head office 42,500
(To record the merchandise received from head office
and transportation paid by head office)

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Date Particulars P/R Debit Credit
2 Head office 43,500
Merchandise supplied 40,000
Freight expense 2,500
Cash 1,000
(To record the merchandise supplied to Multan Brach and
paid transportation)

BETA CORPORATION
MULTAN BRANCH
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Merchandise supplied 40,000
Freight charges 2,500
Head office 42,500
(To record the merchandise received from Lahore Branch
and transportation paid)

Q.No.7 COMPANY ACCOUNTING – ISSUANCE OF SHARES AND DEBENTURES


Haroon Textile Mills Ltd. offered 95,000 shares of Rs.10 each. The company received applications for
90,000 shares. The underwriting commission is 1% paid in cash. During the year company completed the
following transactions:
1. Issued 4,000 shares at Rs.12 each for office equipment purchased worth Rs.48,000.
2. Issued 35,000 ordinary shares to promoters. The market value of shares was Rs.15 each.
3. Decided to capitalize Rs.20,000 against retained earnings and issued 1,600 shares of Rs.10 each.
4. 9% Debentures payable of Rs.70,000 was settled by the issue of shares of Rs.10 each.
5. Issued 5,500, 8% debentures of Rs.100 each at Rs.90.
6. Issued 70,000 debentures at Rs.95 each and repayable after 9 years at Rs.120.
7. Paid stock dividend by issued 5,500 shares at Rs.15 each.
REQUIRED
Prepare journal entries in the books of Haroon Textile Ltd.

SOLUTION 7
HAROON TEXTILE MILLS LTD.
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Bank (90,000 x 10) 900,000
Ordinary shares application 900,000
(To record the shares application received at par)
2 Ordinary shares application 900,000
Ordinary shares capital (90,000 x 10) 900,000
(To record the shares issued to public at par)
3 Bank (5,000 x 10) 50,000
Ordinary shares capital (5,000 x 10) 50,000
(To record the shares issued to underwriters at par)
4 Commission expense (50,000 x 1%) 500
Bank 500
(To record the commission paid to underwriters)

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Date Particulars P/R Debit Credit
5 Office equipment 48,000
Ordinary shares capital (4,000 x 10) 40,000
Ordinary shares premium (4,000 x 2) 8,000
(To record the issue of shares for purchase of equipment)
6 Preliminary expenses (35,000 x 15) 525,000
Ordinary shares capital (35,000 x 10) 350,000
Ordinary shares premium (35,000 x 5) 175,000
(To record the issue of shares to promoters)
7 Retained earnings 20,000
Ordinary shares capital (1,600 x 10) 16,000
Ordinary shares premium (1,600 x 2.50) 4,000
(To record the issue of shares against retained earnings)
8 9% Debentures payable 70,000
Ordinary shares capital (7,000 x 10) 70,000
(To record the issue of shares for debentures payable)
9 Bank (5,500 x 90) 495,000
Discount on debentures (5,500 x 10) 55,000
8% Debentures payable (5,500 x 100) 550,000
(To record the issue of 8% debentures at discount and
payback at par)
10 Bank (70,000 x 95) 6,650,000
Discount on debentures (70,000 x 5) 350,000
Loss on redemption (70,000 x 20) 1,400,000
Debentures payable (70,000 x 100) 7,000,000
Premium on redemption (70,000 x 20) 1,400,000
(To record the issue of debentures at discount and
payback at premium after 9 years)
11 Retained earnings (5,500 x 15) 82,500
Stock dividend payable 82,500
(To record the declaration of stock dividend)
12 Stock dividend payable 82,500
Ordinary shares capital (5,500 x 10) 55,000
Ordinary shares premium (5,500 x 5) 27,500
(To record the issue of shares in settlement of stock
dividend)

Q.No.8 PREPARATION OF FINANCIAL STATEMENTS


Moon Ltd. has an authorized capital of Rs.4,000,000 divided into 40,000 shares of Rs.100 each.
Following is the pre – closing trial balance on December 31, 2013:
MOON LTD.
PRE – CLOSING TRIAL BALANCE (DECEMBER 31, 2013)
DEBIT BALANCES CREDIT BALANCES
Cash Rs.17,000 Share capital Rs.800,000
Accounts receivable Rs.30,000 Allowance for bad debts Rs.1,500
Inventory Rs.140,000 Accounts payable Rs.25,000
Machinery Rs.400,000 Retained earnings Rs.200,000
Building Rs.700,000 Sales Rs.500,000

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Purchases Rs.300,000 Commission income Rs.3,500
Carriage – in Rs.2,000 10% Bonds payable Rs.100,000
Salaries expense Rs.18,000
Director’s fees Rs.10,000
Rent expenses Rs.8,000
Office supplies Rs.2,000
Prepaid insurance Rs.3,000
Total Rs.1,630,000 Total Rs.1,630,000
Additional Information:
1. Depreciation for the year of machinery at 10% and building at 15%.
2. Insurance expired Rs.1,000.
3. Rent expense for the year was Rs.6,000.
4. Allowance for bad debts is to be maintained at 4% of accounts receivable.
5. Accrued interest on bonds for three months.
6. Merchandise ending valued Rs.70,000.
7. The company decided to declare cash dividend of Rs.15,000 and appropriate a sum of Rs.40,000
for building extension.
REQUIRED
(i) Prepare an income statement for the year ended December 31, 2013.
(ii) Prepare balance sheet on December 31, 2013.

SOLUTION 8 (i)
MOON LTD.
INCOME STATEMENT
FOR THE PERIOD ENDED DECEMBER 31, 2013
Sales 500,000
Less: Cost of Goods Sold:
Merchandise inventory beginning 140,000
Add: Net Purchases:
Purchases 300,000
Add: Carriage – in 2,000
Net purchases 302,000
Merchandise available for sale 442,000
Less: Merchandise inventory ending (70,000)
Cost of goods sold (372,000)
Gross profit 128,000
Less: Operating Expenses:
Salaries expense 18,000
Director’s fees 10,000
Rent expense (8,000 – 2,000) 6,000
Insurance expense 1,000
Depreciation expense –Machinery (400,000 x 10%) 40,000
Depreciation expense –Building (700,000 x 15%) 105,000
Interest expense (100,000 x 10% x 3/12) 2,500
Total operating expenses (182,500)
Loss from operation (54,500)
Add: Other Income:
Commission income 3,500
Net loss (51,000)

B.Com – II – Advanced Accounting – 2014 (Regular) Page 15


Compiled & Solved by: Sameer Hussain
www.a4accounting.weebly.com
a4accounting@hotmail.com
MOON LTD.
STATEMENT OF RETAINED EARNINGS
FOR THE PERIOD ENDED 30 JUNE 2013
Retained earnings (opening balance) 200,000
Less: Net loss for the period (51,000)
Total retained earning 149,000
Less: Dividends and Reserves:
Reserve for building extension 40,000
Less: Allowance for bad debts (300)
Cash dividend 15,000
Total dividend and reserves (54,700)
Retained earnings (ending balance) 94,300

SOLUTION 8 (b)
MOON LTD.
BALANCE SHEET
AS ON 30 JUNE 2013
Equities Assets
Shareholder’s Equity: Fixed Assets:
Authorized Capital: Machinery 400,000
400,000 ordinary shares @Rs.100 each 4,000,000 Less: All for dep. (40,000) 360,000
Building 700,000
Issued & Paid-up Capital: Less: All for dep. (105,000) 595,000
80,000 ordinary shares @ Rs.100 each 800,000 Total fixed assets 955,000
Retained earnings 94,300
Reserve for building extension 40,000 Current Assets:
Total shareholder’s equity 934,300 prepaid rent 2,000
Prepaid insurance 2,000
Liabilities: Office supplies 2,000
Long Term Liabilities: Merchandise inventory 70,000
10% Bonds payable 100,000 A/c. receivable 30,000
Less: All for b/d (1,200) 28,800
Current Liabilities: Cash 17,000
Accounts payable 25,000 Total current assets 121,800
Interest payable 2,500
Cash dividend payable 15,000
Total liabilities 142,500
Total equities 1,076,800 Total assets 1,076,800

Additional Working:
MOON LTD.
ADJUSTING ENTRIES
FOR THE PERIOD ENDED DECEMBER 31, 2013
Date Particulars P/R Debit Credit
1 Depreciation expense 145,000
Allowance for depreciation – Machinery 40,000
Allowance for depreciation – Building 105,000
(To adjust the depreciation expenses for the period)

B.Com – II – Advanced Accounting – 2014 (Regular) Page 16


Compiled & Solved by: Sameer Hussain
www.a4accounting.weebly.com
a4accounting@hotmail.com
Date Particulars P/R Debit Credit
2 Insurance expense 1,000
Prepaid insurance 1,000
(To adjust the prepaid insurance)
3 Prepaid rent 2,000
Rent expense 2,000
(To adjust the rent expense)
4 Allowance for bad debts 300
Retained earnings 300
(To adjust the bad debts expense for the period)
5 Interest expense 2,500
Interest payable 2,500
(To adjust the unpaid interest on bonds payable)
6 Merchandise inventory 70,000
Expense and revenue summary 70,000
(To close the ending inventory)
7 Retained earnings 55,000
Cash dividend payable 15,000
Reserve for building extension 40,000
(To record the declaration of cash dividend and reserve
for building extension)

B.Com – II – Advanced Accounting – 2014 (Regular) Page 17

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