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ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD

(Department of Business Administration)
Course: Financial Accounting (5004)
Semester: Autumn 2019
Level: MSc Administrative Science
ASSIGNMENT No. 1
(Units: 1 – 4)

Q. 1 Alexandar Inc deals in the staete of the art telescope to individual and organizations
interested in studying the solar system. At December 31 last year, the company's inventory
amounted $150,000. During the first week of January this year, the company made only one
purchase and one sale.
These transactions were as follows: Jan 2: Sold one telescope costing $50,000to central state
university for cash $77,000. Jan 5: Purchased merchandise on account from lunar Optics,
$50,000. Terms, 4/10, n/3 0.
a) Prepare a journal report to record these transactions assuming that sky Probe uses the
perpetual inventory systems. Use separate entries to record the sales revenue and the cost of
goods sold for the sale on January 2.
Solution:
Date Account Details Debit $ Credit $

Cash 50,000
Jan 2 Sales 77,000
(To record one telescope
sold to for cash $77,000)

Jan 5 Cost of goods sold 50,000

Inventory 50,000
(To record one telescope
sold to)

b) Compute the balance of the inventory account on January 7.

Beginning Inventory = [Cost of Goods sold +Ending Inventory] – Amount of inventory purchased
= [77,000+ (investment purchased)] - 150,000
= [77,000+ (200,000)] - 150,000
= 277,000-150,000
= 127,000

c) Prepare journal entries to record the two transactions, assuming that Sky probe uses the
periodic inventory system.
Date Account Details Debit $ Credit $

Cash 77,000
Jan 2 Sales 77,000
(To record one telescope
sold to for cash $77,000)
Jan 2 No journal entry required
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Jan 5 Purchases 50,000

Accounts payable (Lunar 50,000

Optics)

d) Compute the cost of goods sold for the first week of January assuming use of a periodic
inventory system. Use your answer to part b as the ending inventory.
Cost of goods sold $ 50,000
e) Which inventory system do you believe that a company such as a Sky probe would probably
use? Explain your reasoning.
Inventory management is one of the really basic business skills. Retailers and wholesalers need to
know what product is available for sale, while restaurants need to know what ingredients they have
and even the office supplies you use in-house need monitoring. You can do this by counting your on-
hand inventory regularly, which is called a periodic inventory system, or by using software to track it
in real time. That's called a perpetual inventory system
Sky probe would probably use Periodic Inventory. Periodic inventory systems are the traditional
way to manage inventory, and they can be surprisingly accurate if they're done well. At a specified
interval – weekly, monthly, quarterly or even yearly – you'll physically count everything you have in
inventory, and then reconcile it against what your books say you should have. You'll know what you
had after the last count, referred to as your starting inventory for the period, and you know what
you've ordered and what you've sold since then. You'll also need to account for the stock that you've
ordered but not yet received as well as outgoing sales orders that you've shipped but still have
payments pending. Ideally, the inventory you show on your books will agree with what you
physically count, much like balancing your checkbook. In the real world, however, you can expect
discrepancies

Q. 2 Enchanted Forest, a large campground in South Carolina, adjusted its accounts monthly.
Most guest of the campground pay at the time they check out, and the amounts collected are
credited to camper Revenue. The following information is available as a source for preparing
the adjusting entries at December 31
. 1) Enchanted Forest invests some of its excess cash in certificates of deposit (CDs) with its
local bank. Accrued interest revenue on its CDs at December 31 is $400. None of the interest
has yet been received.
2) A six- month bank loan in the amount of $ 12,000 had been obtained on September 1.
Interest is to be computed at an annual rate of 8.5 percent and is payable when the loan
become due. 3
3) Depreciation on buildings owned by the campground is based on a 25-year life. The original
cost of the building was $600,000. The Accumulated Depreciation: Building account has a
credit balance of $310,000 at December 31, prior to the adjusting entry process. The straight
line method of depreciation is used.
4) Management signed an agreement to let Boy Scout troop 538 of Lewisburg, Pennsylvania
use the campground in June next year. The agreement specifies that the Boys Scouts will pay a
daily rate of $12 per campsite. With a clause providing a minimum total charge of $1,475
5) Salaries earned by campground employees that have not yet been paid amount to 1,250.
6) As of December 31 enchanted forest has earned $2,400 of revenue from current campers
who will not be billed until they check out.
7) Several lakefront campsites are currently being leased on a long-term basis by a group of
senior citizen. Six month rent of $5,400 was collected in advance and credited to unearned
camper revenue on October 1 of the current year.
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8) A bus to carry campers to and from town and the airport had been rented the first week of
December at a daily rate of $40 At December 31, no rented payment has been made, although
the campground has had use of the bus for 25 days.
9) Unrecorded Income taxes Expense accrued in December amounts to $8,400. This amount
will not be paid until January 15.
Solution
General Adjusted Entries
Dec 31 I nterest Receivable 400
Interest Revenue 400
To record accrued interest revenue on
CDs at December 31.

DEC 31 Interest Expense 85

To Interest Parable
To record accrued interest ex pence in 85
December $12.000 x 8.5% x 1/12.
Dec 31 Depreciation Expense: Building 2.00
Accumulated Depreciation: Building 2.00
To record December depreciation expense
$600.000 + 25 Years x 1/12.
Dec 31

No adjusting: entry required. Revenue is

recognized
When it is earned. Earned. Entertain into a
contract does not
Constitute the earning of revenue.

Dec 31 1,250
Salaries Expense 1,250
Salaries Payable
To record accrued salaries expenses in
December.

Dec 31 Camper Revenue Receivable 2400

Camper Revenue 2400
To record camper revenue earned in December.
Dec 31 Unearned Camper Revenue 900
Camper Revenue
To record revenue earned from camper that 900
paid in advance $5...400 + 6
months.
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Dec 31 Bus Rental Expense 1.00

Accounts Payable 1000
To record accrued bus rental expense in 1000
$40 per day x 25 days.

Dec 31 Income Taxes Expense 8400

Income Taxes Payable
To record income taxes accrued in December.
8400

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Q. 3 Ken Hensley Enterprise Inc is a small recording studio in st.Iouis.Rock bands use the
studio to mix the mix-quality demo recordings distributed to talent agents. New clients are
required to pay in advance for studio services. Bands with established credit are billed for
studio services at the end of each month. Adjusting entries are performed on am monthly basis.
An unadjusted trial balance dated December31, 2005, follows (Bear in mind that adjusting
entries already have been made for the first eleven months of 2005, but not for December.
KEN HENSLEY ENTERPRISES, INC
Unadjusted Trail Balance
December 31, 2005
Cash $43,170
Account receivable 81,400
Studio supplies 7,600
Unexpired insurance 500
Prepaid studio rent 4,000
Recording equipment 90,000
Accumulated depreciation: recording equipment $52,500
Notes payable 16,000
Interest payable 840
Income Tax Payable 3,200
Unearned studio revenue 9,600
Capital stock 80,000
Retained earnings 38000
Studio revenue earned 107,000
Salaries expenses 18000
Supplies expenses 1200
Insurance expense 2,680
Depreciation expense: recording equipment 16,500
Studio rent expense 21,000
Interest expense 840
Utilities expense 2,350
Income taxes expense 17,900
$307,149 $307,140
Other data:
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1) Records show that $4,400 in studio revenue had not yet been billed or recorded as of
December 31.
2) Studio supplies on hand at December 31 amount to $6,900.
3) On August 1, 2005 the studio purchased a six month insurance policy for
$1,500.The entire premium as initially debited to unexpired insurance.
4) The studio is located in a rented building. On November 1, 2005 the studio paid $6,000 rent
in advance for November, December and January. The entire amount was debited to prepaid
studio rent.
5) The useful life of the studios recording equipment is estimated to be a five years ( or 60
months) The straight-line method of depreciation is used.
6) On May 1, 2005, the studio borrowed $ 16,000 by signing a 12-month, 9 percent note
payable to first federal Bank of St.Louis. The entire $16,000 plus 12 months interest is due in
full on April 30, 2006.
7) Records show that $3,600 of cash receipts originally recorded as unearned studio Revenue
had been earned as of December 31.
8) Salaries earned by recording to technicians that remain unpaid at December 31 amount to
$ 540.
9) The studios accountant estimated that income taxes expense for the entire year ended
December 31, 2005, is $19,600, (Note that $17,900 of this amount has already been recorded.
You are required to prepare Income Statement and Balance Sheet.
Answer:- (instead of 2002 it will be 2005 in answer)
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d)
The studio was profitable in 2005 as evidenced by the $29,400 net income reported in its income
statement. This figure is 25.6% of total revenue, which is promising. The studio also appears to be
solvent at the end of 2005. Tis balance sheet reports $130,650 in cash and accounts receivable to
cover $22,400 in liabilities coming due in the near future. Stated differently, the studio has $5.83 in
cash and accounts receivable for every dollar it has in obligations coming due ($130,650 + $22,400 =
$5.83).

e)
Monthly rent expense for the last two months of 2005 was $2,000 ($6,000 + 3 months). The $21,000
rent expense shown in the studio’s trial balance includes a $2,000 rent expense for November, which
means that total rent expense for January through October was $19,000 (521,000 - $2,000). The
monthly rent expense in these months must have been $1,900 ($19,000 + 10 months). Thus, it
appears that the studio’s monthly rent increased by $100 (from $1,900 to $2,000) in November and
December. ,

Q. 4 Bank Reconciliation Statement can be beneficial for the management to make the records
updated. Comment.
Businesses maintain a cash book to record various transactions. Also as a record to cross-check bank
statement. The process of comparing both the records is Reconciliation. It checks the errors and
states them in BRS (Bank Reconciliation Statement). In addition, reconciliation takes place every
month to maintain the balance between the two records. Moreover, reconciliation brings out the
potential difference that profits a firm when ruled out. There are many things that come up in a
firm’s cash record which needs mending. 
Overview
Bank Reconciliation Statement is as necessary as a bank statement for a cash account. It records
necessary changes mandatory to declare the bank statement and cash book records error-free and
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hence, required. Moreover, some random errors like noting wrong entries to the data, etc. might not
be replaced.

Reconciliation records all the needful changes and helps in the smooth functioning of a firm. BRS is
a statement which is prepared to reconcile the difference between cash balance and bank statement
balance.
What is Reconciliation Mandatory for?
It isn’t mandatory to prepare a BRS until and unless you want to be double sure.  Also, there is no
fixed date to reconcile both statements.
Two different firms prepare a cash record and bank statement. A firm records transactions in the cash
book.  A bank issues a bank statement every month.
However, a third party prepares the Bank Reconciliation statement. It compiles the errors they both
make.
Steps in Preparation of Bank Reconciliation Statement
Check for Uncleared Dues
Step 1: First of all, compare the opening balances of both the bank column of the cash book as well
as the bank statement. The two can be different in terms of uncleared dues like un-presented or un-
credited cheques from the previous month.
Compare Debit and Credit Sides
Step 2: Start by comparing the credit side of the bank statement to the debit side of the bank
statement. Also, compare the credit side of the cash book to the debit side of the cash book. The two
must be equal in both documents. Tick the columns if you can’t find any error.
Check for Missed Entries
Step 3: Analyse entries in the bank column of the cash book as well as in checkbook. Look for
records that have been missed to be posted in the bank column of the cash book. Make a separate list
of all such items and list them in cash book.
Correct them
Step 4:  Correct the errors present in the cash book, if any.
Revise the Entries
Step 5: Calculate the balance after revising the updated cash book’s bank column.
Step 6: Prepare Bank Reconciliation Statement accordingly. Make sure to add the updated version of
records.
Add Un-presented Cheques and Deduct Un-credited Cheques
Step 7: Banks are not aware of Un-presented cheques because the beneficiary doesn’t get the cheque.
It is the case when the business firm forgets to deliver the signed cheque to the issued name.
This situation leads to the addition of the cheque amount in the bank statement.
On the other hand, cheques which beneficiary has not yet collected are called un-credited cheques.
These must be deducted.
Make Final Changes
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Step 8: Make all the final adjustments and check for bank errors in the bank statement and the firm’s
errors in the cash book. During heavy transaction days, firms or banks may make mistakes in noting
entries.
The process removes those errors. Although it consists of fine work, reconciliation becomes a
helping hand at hard times (large transaction days).
Left-Hand Side Equal to the Right-Hand Side
Step 9: The results from both the documents i.e. bank statement and cash book must match with each
other.
Why do we Need to Prepare Bank Reconciliation Statement?
A bounced cheque leads to a fall in one’s reputation in the eyes of the bank. This may lead to future
misunderstandings for a firm’s relationship with Banks.
Moreover, it may also lead to delays in monetary help responses from bank side. Therefore,
reconciliation helps to tackle these mistakes and maintain a healthy official relationship. BRS offers
several other advantages to a business firm:
Detects Errors
A bank reconciliation statement helps to locate errors. After locating errors, firms can easily remove
them.
Tracking Interest and Fees
The bank might add interest payments or deduct service fees from the account without prior notice.
The additions or deletions are visible directly in the bank statement. A bank reconciliation statement
helps in managing these changes.
Detecting Fraud
Suppose, an employee handles the bank account for the firm. Apparently, the transaction history is
clearly visible to the manager of the business by reading the reconciliation statement. Hence, no
chances of fraud are entertained.

Q. 5 Elaborate various steps involved in development of Accounting Information System

The system that collects and processes transaction-data and disseminates financial information to
interested parties is known as the accounting system or accounting information system.
This system includes every step of the accounting cycle.
It also includes documentary evidence of transactions.
Therefore, the transaction with documentary evidence, journal, ledger, trial
balance, worksheet, financial statements determining results, etc. are included in the accounting
information system.
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Recording of a business transaction, ledger preparation, trial balance preparation, analyzing the
process of financial Statements are similar in all business organizations. The speed and efficiency of
the system depend on accounting information systems in practice.
For example, a student decides to go home after attending an accounting class. His roads to his home
are two-one is side road and the other is a superhighway.
Now it is up to the student which road he will take to go home. But his intention is one i.e. to reach
home.
He can go home driving a car using either of the roads. But it is expected that he will drive the car to
go home by the super highway because this road is very much speedy.
It is also true in case of an accounting information system. If a particular accounting system is
comparatively speedy and efficient, it can be used for the accounting process.
In this stage identification of various accounting systems and their characteristics will be discussed.
Processing transactions through a general journal and general ledger manually is one type of
accounting system.
Another accounting system is to add a special journal and subsidiary ledger to the above-mentioned
system.
Accounts keeping through machine i.e. computer can be done more speedily and efficiently in
comparison to manual operating of accounting activities.
Developing an Accounting System
An ideal accounting system does not come into force automatically. It is to be very much carefully
planned, designed, arranged, managed and modified.
In developing an ideal accounting system the following four steps are necessary;
 Analysis.
 Design.
 Implementation.
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 Follow-up.

Analysis
At first, it is to be ascertained what information is necessary for internal and external users. An
information analyst is to identify sources of the necessary information for collecting data and prepare
reports and preserve them properly.
Strength and weakness of an existing information system are to be identified for its analysis.
Design
For formulating a new accounting system designing of forms and documents, sorting of the method
and working process, preparing a statement of work, collecting techniques of control, preparing
reports and selecting equipment are necessary.
Slight changes are required for redesigning existing accounting information system.
Implementation
For the implementation of a new or modified accounting information system, necessary documentary
evidence of information, the process of methods and installation of necessary equipment, etc. are to
be activated.
Employees concerned are to be given training and they are to be monitored closely.
Follow-up
After the implementation of the accounting information system and making it workable, its weakness
and breakdown are to be monitored very closely and its effectiveness and design are to be compared
with organizational objectives.
If needed changes are to be brought in its implementation process of design. The above-mentioned
steps represent the life cycle of an accounting information system. This suggests that some
accounting information systems are always unchangeable.
But the expansion of knowledge, experience and technology and occurrence of organizational
changes might create and change the accounting information system.
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