A.

(a)

Merits of company form of organisation: (1) (2) (3) (4) (1) (2) (3) (i)

Demerits of company form of organisation:

A company has perpetual existence unaffected by incoming / outgoing members. Companies can raise large amount of capital. The liability of the shareholders is restricted to the amount contributed by them. The ownership of the shares in a company is easily transferable.

INTRODUCTION TO FINANCIAL ACCOUNTING Suggested Answers Foundation Examinations Spring 2011

(b)

(ii) True and fair view A true and fair view of financial statements normally results from the application of (i) principal qualitative characteristics and (ii) appropriate accounting standards.

Going concern: Going concern means that the entity will continue in operation for the foreseeable future and that it has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

A joint stock public company has to fulfil a number of legal formalities which makes its actual management rather difficult and costly. Separation between ownership and control can sometime lead to problems. For example, if an unprincipled team comes in possession of management, it may create serious problems for the company. The size and the procedural handicaps in case of large companies can sometimes result in delay in important decisions.

(c)

(iii) Substance over form It means that the transactions are accounted for and presented in the financial statements in accordance with their substance and economic reality and not merely their legal form.

Disclosure of inventories The financial statements shall disclose: (i) the accounting policies adopted in measuring inventories, including the cost formula used; (ii) the total carrying amount of inventories along with classifications appropriate to the entity; (iii) the carrying amount of inventories carried at fair value less costs to sell; (iv) the amount of inventories recognised as an expense during the period; (v) the amount of any write-down of inventories recognised as an expense in the period; (vi) the reversal of any write-down that was recognised in the previous period. (vii) the circumstances or events that led to the reversal of the write-down of inventories; and (viii) the carrying amount of inventories pledged as security for liabilities.

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A.2

INTRODUCTION TO FINANCIAL ACCOUNTING Suggested Answers Foundation Examinations Spring 2011

Balance b/d - Cash in hand - Trade debtors - Stock - Furniture and fittings Branch Account for the year ended 31-12-2010 10,000 395,000 1,200,000 500,000 Dr. Stock Reserve Goods sent to branch A/c (Returns to H.O) Goods sent to branch A/c (Loading on net goods sent to branch (14,100,000 x 1/6) Bank A/c (Remittance to H.O) Balance c/d - Trade debtors - Stock - Furniture and fittings Goods sent to branch A/c Branch cash A/c Branch debtors A/c Balance c/d

Goods sent to branch A/c Bank A/c (payment for furniture) Balance c/d - Stock reserve (1,560,000 x 1/6) - Outstanding expenses Profit and loss A/c (Net profit) Balance b/d Goods sent to branch A/c Branch debtors A/c returns customers Surplus on net credit sales 12/132 x (3,498,000 132,000) Balance b/d Branch stock A/c

14,200,000 100,000

2,105,000

Branch Stock Memorandum Account by Dr. 1,200,000 14,200,000 132,000

260,000 10,000 1,537,000 18,212,000

12,682,000

2,350,000

200,000 100,000

Cr.

Branch Debtors Memorandum Account Dr. 395,000 3,498,000

306,000 15,838,000

Cr. 100,000 10,680,000 3,498,000 1,560,000

804,000 1,560,000 516,000 18,212,000

15,838,000

Balance b/d Bank Balance b/d Branch stock A/c Branch debtors A/c

Branch Furniture and Fittings Memorandum Account Dr. 500,000 100,000 600,000

3,893,000

Branch cash a/c Branch discount A/c Branch stock A/c (Returns) Branch Bad debts A/c Balance c/d Depreciation A/c (80,000 + 4,000) Balance c/d Branch expenses A/c Branch A/c (Remitts. to H.O)(Bal.)

Cr. 2,842,000 70,000 132,000 45,000 804,000 3,893,000 Cr. 84,000 516,000 600,000

Branch Cash Memorandum Account Dr. 10,000 10,680,000 2,842,000 13,532,000

Cr. 850,000 12,682,000

13,532,000

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A.3

INTRODUCTION TO FINANCIAL ACCOUNTING Suggested Answers Foundation Examinations Spring 2011

Dr. Purchases: Cash A/c Add: owed to supplier Gross profit c/d Trading and Profit and Loss Account For the year ended 31 December 2010 37,496 1,900 39,396 7,400 46,796 2,600 1,350 502 100 424 Sales: Cash A/c Add: owed by customer Closing Stock Gross profit b/d

Computation of sales: Receipts from sales deposited in bank (41,850 960 200 480) Receipts from sale used to pay expenses: Salaries Drawings (12 100,000) Sundry expenses (12 20,000) Total sales Liabilities Capital (invested on 1.1.2010) Additional Capital (960+ 480) Add: Net Profit Less: Drawings Creditors

Staff salaries Rent, rates & taxes (1,750 - 400) Sundry Exp. (230+272) Lighting and Heating Repairs (460 36) Dep. on: Truck @ 25% for 6 months on Rs. 1,200 Motor Van @ 25% for 4 months on Rs. 240 Furniture and Fixtures @ 15% of Rs. 600 Deep freezers @15% for 6 months on Rs. 800 Loss on sale of van (24020200) Net profit

44,250 150

Rs. in 000

44,400 2,396 46,796 7,400

Cr.

150 20 90 60

320 20 2,084 7,400

Rs. in 000 40,210 2,600 1,200 240 44,250

7,400

Balance Sheet as at 31st December 2010 Rupees 3,960 1,440 2,084 7,484 3,196 4,288 1,900

Computation of drawings

6,188

Truck Less: Depreciation Fixture & Fittings Less: Depreciation Deep freezers Less: Depreciation Closing Stock Debtors Advance rent Cash Bank

Assets

Cash retained from sales proceeds Bank withdrawals Repairs (bungalow)

Rs. in 000 1,200 1,960 36 3,196

Rupees 1,200 150 1,050 600 90 510 800 60 740 2,396 150 400 10 932 6,188

Rs. in 000

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A.4

INTRODUCTION TO FINANCIAL ACCOUNTING Suggested Answers Foundation Examinations Spring 2011

Net income Depreciation (170,000 + 60,000) Items for separate consideration: Gain on sale of land Gain on sale of long term investment Loss on sale of equipment (Increase) / decrease in current assets: Accounts receivable Inventory Prepaid insurance Office supplies Cash flow for the year ended 31 December 2010

Rs.

(Decrease) / Increase in current liabilities: Decrease in accounts payable Increase in wages payable Net (increase) / decrease in working capital Cash generated from operations Cash invested Proceeds from sale of: Land (2,500,000 1,810,000 + 64,000) Equipment (75,000 15,000) Long term investments (100,000 + 32,000) Fixed capital expenditure building (2,800,000 2,300,000) Long term investments (220,000 +100,000-170,000) Payment of long term loan (1,160,000 985,000) Drawings Net increase in cash Cash - opening Cash - closing
A.5 (a)

(176,000) (224,000) 12,000 (7,000) (395,000) (105,000) 16,000 754,000 60,000 132,000

(64,000) (32,000) 15,000

Rs. 950,000 230,000

(484,000) 615,000 100,000

equipments (1,200,000+105,000*1,150,000)

*Book value 75,000 + accumulated depreciation 30,000 = Cost Rs. 105,000

Balance b/d 350,410 Discount (disallowed) (vii) 800 AB & Company (viii) 1,800 Sales ledger control account Rupees Dr. Sales return account (under-casting) (ii) Write off of Shahids balance (iii) Purchase ledger control account (transfer) (v) Goods returned by Babar not recorded (vi) Posting errors 60% of 18,000 (x) Balance c/d

946,000 (500,000) (155,000) (150,000) (175,000) (568,000) 113,000 32,000 145,000

Rupees

353,010

1,700 10,800 322,810 353,010

Cr. 12,000 2,100 3,600

Page 4 of 5

INTRODUCTION TO FINANCIAL ACCOUNTING Suggested Answers Foundation Examinations Spring 2011

(b) Reconciliation of subsidiary sales ledger balance with sales ledger control account Net balance as per sales ledger Add: Debit balance written as credit balance (2,600 + 2,600) (iv) Omission of entry for discounts disallowed in the sales ledger (vii) Corrected balance in sales ledger/sales ledger control account Rs. 1,200 990 Rs. 319,000 5,200 800 325,000 2,190 322,810 Net Profit -

A.6

Less: Omission of credit balance (i) Cash received from Shah and Company wrongly debited (540+450)(ix) Statement for Ascertaining correct gross and net profit

Profit as given Add / (Less) (a) (i) (ii)

Gross Profit

Cost of Goods distributed as free samples Outstanding expenses Salaries Transportation-in

1,050,000 25,000 10,000 2,083

650,000 10,000 -

(iii) (b) (c) (d) (e) (f) (g)

Goods taken by owner for personal use Goods used for office repair (2,500*100/120)

Sale of old furniture items posted as sale

(10,000) (3,000) (3,000) (30,000) (60,300) (50,000) (2,000) 953,783 24,500 500

(20,000) (10,000) (2,000) (3,000) (30,000) (60,300) (50,000) (2,000) 507,700 24,500 500

Sale on return basis [18,000 - (18,000 100/120)] Payment to creditor wrongly debited to purchases Purchase discount Over-casting of sales day book

Error in Carrying forward of purchases (67,000 6,700)

Corrected figures

Goods wrongly included in closing stock (60,000 100 / 120) insurance claim short received (60,000 80% 50,000)

(THE END)

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