B.Com II Advanced Accounting 2006 (Private)
B.Com II Advanced Accounting
Instruction: Attempt any FIVE questions.
Q.1. Accounting for Branch Operations
Auto Parts Company operates several sales and service outlets (branches) throughout Karachi. A decentralized accounting system is used by each branch. AT the end of November 2005 the following reciprocal accounts appears in the accounting records of the Hyderi Branch and the Head Office.
Branch Records: Head office (credit balance) Rs. 17,970,.
Head Office Records: Hyderi Branch (debit balance) Rs. 17,210.
The reason for the discrepancy in the amount shown in the two accounts is that the branch net income for November, Rs. 1,800 and a cash deposit made by the branch to the account of the head office, Rs. 1,040 have not been recorded by the head office.
Both the branch and the head office use a perpetual inventory system. During December 2006, the following transactions affected the two accounts.
December 6: Head office shipped auto parts to Hyderi branch, Rs. 7,250. Debit inventory account on branch books, credit inventory account on head office books.
December 12: Branch transferred Rs. 4,950 from its bank account to the bank account of the head office.
December 19: Branch returned shop supplies costing Rs. 610 to the head office. Shop supplies are recorded in the shop supplies account in both sets of accounts.
December 30: Head office notified branch that operating expenses Rs. 1,100 which had been recorded in the accounts of the head office in the operating expense account were chargeable to Hyderi Branch.
December 31: The Inventory summary account in the accounts of the branch a debit balance of Rs. 590 at the end of December.
Required:
i. Record the transactions listed above in the accounts of the Hyderi Branch.
ii. Record the two transactions relating to the month of November and all transactions for December in the accounts of the head office.
iii. Determine the balances in the Head Office account and the Hyderi Branch account at the end of December.
Q.2. Installment Sales
City Cars deals with two brands of fuel economy local cars namely GL and XL. The selling price of GL cars is Rs. 4,50,000 each while the XL cars sold for Rs. 4,00,000. The selling price includes a profit margin of 5 percent. A down payment of 20 percent is collected on each car. The balance is collected in 10 monthly installments of equal amount.
The business completed the following transactions during the year.
Purchased 10 units of GL and 15 units of XL cars on account from New Age Motors Company.
Sold 10 units of each type of cars.
The down payment and all installments were collected in full by cheque except the following.
1. A customer failed to pay last three installments due on the XL car he had purchased. The vehicle was forfeited and assigned a value of Rs. 1,50,000. The car was taken by the owner for his personal use.
2. A cheque amounting to Rs. 72,000 received from a customer who bought a GL car was dishonored.
City Cars incurred and paid the following expenses during the year.
Selling Expenses …………………………. 30,000
Administrative Expenses ………………… 70,000
Required:
i. General journal entries in City Car’s book (adjusting and closing are not required).
ii. Cost of installment sales for each brand separately.
iii. Gross profit realized on each brand of cars.
iv. Net profit of City Cars for the year.
Q.3. Cash Flow Analysis
Pakistan Digitech Company’s comparative balance sheets and income statement for the year 2006. Follows
Comparative Balance Sheet
ASSETS …………………………………………. 2006 ………….. 2005
Cash ………………………………………… 1,40,000 ……….. 1,00,000
Accounts Receivable ……………………… 2,10,000 ……….. 1,50,000
Inventory …………………………………… 5,00,000 ……….. 4,30,000
Prepaid Expenses ……………………………. 20,000 …………. 60,000
Plant and Equipment ……………………… 19,00,000 ………. 14,00,000
Less: Accumulated Depreciation ………… 6,50,000 ………… 5,40,000
Long-term investment ……………………. 7,00,000 ………… 9,00,000
TOTAL …………………………………….. 28,20,000 ………… 25,00,000
LIABILITIES and EQUITIES
Accounts Payable ……………………….. 2,60,000 ………….. 2,50,000
Accrued Liabilities ……………………….. 1,00,000 ………….. 1,20,000
Taxes Payable ……………………………. 4,90,000 ………….. 4,90,000
Debenture Payable ………………………. 5,00,000 ………….. 4,00,000
Ordinary Share Capital ………………….. 8,00,000 ………….. 7,00,000
Retained Earning ………………………… 6,70,000 …………… 5,40,000
TOTAL …………………………………… 28,20,000 …………. 25,00,000
Income Statement
For the year ended December 31, 2006
Sales ………………………………………………………… 23,00,000
Less: cost of goods sold …………………………………. 12,00,000
Gross Margin ……………………………………………….. 11,00,000
Less: Operating Expenses ………………………………… 7,00,000
Net Operating Income …………………………………….. 4,00,000
Gain on sale of long-term investment …………………….. 50,000
Income before Taxes ……………………………………… 4,50,000
Less: Income Taxes ………………………………………. 1,40,000
Net Income …………………………………………………..3,10,000
Additional Information
Dividends of Rs. 1,80,000 declared and paid during the year. The gain on sale of long-term investments was from the sale of investments for Rs. 2,50,000 in cash. The investment had an original cost of Rs. 2,00,000. There was no retirement or disposal of plant and equipment during the year.
Required: Prepare a cash flow statement using indirect method showing clearly.
i. Cash flow operating activities
ii. Cash flow from investing activities
iii. Cash flow from financing activities
Q.4. Financial Statement Analysis
Take into account the financial statements of Pakistan Digitech Company (Give in Question No. 3).
Required:
i. Compute the following ratios for the year 05 and 06.
a. Current ratio
b. Acid test ratio
c. Inventory turnover
d. Return on total assets
e. Return on shareholder’s equity
f. Debt to equity ratio
g. Accounts receivable turnover
ii. Comments on the results of your computation.
Q.5. Single Entry and Incomplete Records
NOTE: Not Included in the New Course
Q.6. Company Account – Financial Statement
The following is the trial balance of MULTI TECH LIMITED as at December 31, 2006.
Paid-up share capital ………………………………………… 10,00,000
Share premium ………………………………………………… 5,00,000
Net Income January 01, 2006 ……………………………….. 7,00,000
10% Debentures payable 2010 ……………………………… 6,00,000
Plants and Assets ………………………. 39,00,000
Accumulated Depreciation …………………………………… 4,60,000
Merchandise Inventory ………………… 8,80,000
Accounts Receivable …………………… 4,20,000
Accounts Payable ……………………………………………. 3,60,000
Purchases and Sales …………………. 36,50,000 ……….. 65,40,000
Administrative Salaries ……………….. 5,00,000
Sales Salaries ………………………….. 70,000
Director’s Remuneration ……………… 1,60,000
Advertising Expenses …………………. 2,80,000
Carriage Outwards ……………………. 1,00,000
Utility Expenses ……………………….. 3,00,000
Bank Overdraft ………………………………………………. 1,00,000
……………………………………….. 1,02,60,000 ……….. 1,02,60,000
Additional Information
The paid-up share capital consists of 1,00,000 shares of Rs. 10 each.
Merchandise inventory at December 31, 2006 was Rs. 5,00,000.
Estimated tax on the profit of the company for the year is Rs. 1,50,000. The directors have proposed final dividend of 10 percent on the ordinary share capital.
Depreciation is provided at 10 percent per annum on plant and assets. Allowance for bad debts is to be maintained at 5 percent of the accounts receivable.
Required:
i. Income statement for the year ended Dec 31, 2006.
ii. Statement of retained earning.
iii. Balance sheet as at December 31, 2006.
Q.7. Company Account Reconstruction
Following is the balance sheet of Metropolitan Trading Company Limited as on December 31, 2006.
Assets …………………………………….. Equities and Liabilites
Land and Building ……… 4,00,000 | Authorities Capital
Machinery & Equip. ……. 3,00,000 |1,00,000 Ord Share of 10 10,00,000
Furniture & Fixture ……… 20,000 | Paid Up Capital
Merchandise Inven. …… 1,00,000 | 1,00,000 Shares of 10 .. 10,00,000
Accounts Receivable ….. 1,10,000| Accounts Payable ……… 30,000
Net Loss ……………….. 1,00,000 | Outstanding Expense ….. 25,000
Bank ……………………… 25,000
………………………… 10,55,000 …………………………….. 10,55,000
The company has suffered losses for last few years. In a joint meeting of creditors and shares holders, it was decided to reconstruct the company and change the name of the company to Karachi Trading Company Limited.
The scheme of reconstruction agreed upon and implemented with effect from January 01, 2007 are as follows.
The new company will takeover all assets and liabilities if the existing company.
The authorized share capital of the new company will consist of 1,50,000 ordinary shares of Rs. 10 each.
The new company purchases the business of the existing company for a sum of Rs. 9,00,000 by issuing 80,000 shares of Rs. 10 each and paying Rs. 1,00,000 cash.
The reconstruction expenses amounting to Rs. 25,000 is to be met by the existing the company.
Required:
i. General journal entries to record the reconstruction transactions.
ii. Realization account and shareholders account in the books of Metropolitan Trading Company Limited.
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