FinancialAccounting(528)

FirstAssignment

1(a)

DescribeTheFinancialAccountingProcessindetail.

The Financial Accounting Process refers to the role of Financial AccountingProcess accounting which links decision makers with economic activitiesandwiththeresultsoftheirdecision.Theaccounting measure and describe the results of economic activities of business and that results facilitate businessmen in making economic decision such as measuring result and evaluating performanceofthebusiness.

1(b) Accountinghasoftenbeencalledthelanguageofbusiness. Inwhatrespectswouldyouagreewiththestatement?How mightitbearguedthatitisdeficient?

Thelanguageof business

Accounting is often called as the language of business becauseaffairsofabusinessorganizationaremadeunderstood toothersaswellastothosewhomanageitthroughaccounting information which has to be suitably recorded, classified, summarizedandpresented.Inordertomakethislanguageto conveythesamemeaningtoallpeople,itisnecessarythatit should be based on certain uniform scientifically laid down standards. These standards are termed as accounting principles.Accountingprinciplesmaybedefinedasthoserules of action which are adopted by the accountants universally while recording accounting transactions and measuring businessperformance. InmyviewthereisnowaytostressthatAccountingitselfis deficientbecauseitstartswithcorrectlyrecordinginbooksof accountingandendswithshowingtruepictureofperformance of the business in the form of financial statements such as Profit&LossAccountsandBalanceSheet. Inotherwaywecansaythatifaccountingisadoptedonthe basis of certain uniform scientifically laid down standards, it willbeprovedefficientandifitisadoptedinamannerthatis not based on prescribed standards, then it will be found deficient.

Accountingis deficient

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1(c) Giveatleast5examplesoftransactionthatwouldhavethe following effects on the elements in a firms accounting system:

(i)

Increasecash; decreasesome otherassets.

EXAMPLESOFTRANSACTION 1. On July 2, collected cash of Rs. 15,000/ from accounts receivable. 2. OnJuly3,soldmachineryoncashofRs.100,000toABC Company. 3. OnJuly4,soldlandofindustrialparkoncashatapriceof Rs.150,000. 4. On July 5, sold Suzuki Car on cash at a price of Rs. 125,000toMr.Rashid. 5. OnJuly6,officeequipmentsoldoncashatapriceofRs. 10,000/

(ii)

Decreasecash; increasesome otherassets.

1. OnJuly7,purchasedbuildingforofficeofRs.1,500,000. 2. On July 8, purchased machinery on cash of Rs. 100,000 fromABCCompany. 3. OnJuly9,purchasedlandforindustrialparkoncashata priceofRs.1,050,000. 4. OnJuly10,purchasedSuzukiPickuponcashatapriceof Rs.125,000. 5. OnJuly11,purchasedofficeequipmentoncashataprice ofRs.15,000/

(iii)

Increasein assets; increasea liability.

1. OnJuly12,purchasedbuildingforofficeofRs.1,500,000 fromABCcompanyonaccount. 2. OnJuly13,purchasedmachineryofRs.100,000fromABC Companyonaccount. 3. OnJuly14,purchasedonaccountlandforindustrialpark atapriceofRs.1,050,000fromMr.Khalid. 4. On July 15, purchased Suzuki Pick up on account at a priceofRs.125,000fromXYZCarDealer. 5. On July 16, purchased office equipment on account at a priceofRs.15,000/fromIBMComputers

(iv)

Increasean expense; decreasean

1. OnJuly1,paidRs.1,500,000.toemployeesassalaries. 2. OnJuly3,paidofficerentofRs.100,000toABCCompany.

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FirstAssignment

3. OnJuly4,paidElectricityBillofRs.10,000. 4. On July 5, Advertising expenses of Rs. 125,000 to ABC Advertisers. 5. OnJuly31,paidWaterBillofRs.200/.

(v)

Increasean assetother thancash.

1. OnJuly2,purchasedbuildingforofficeofRs.100,000from ABCcompany. 2. On July 3, purchased machinery of Rs. 10,000 from C Company. 3. OnJuly4,purchasedlandatapriceofRs.150,000from Mr.Khalid. 4. On July 5, purchased Toyota Pick up at a price of Rs. 125,000fromXYZCarDealer. 5. On July 6, purchased office equipment at a price of Rs. 150,000/fromIBMComputers

(vi)

Decreasean asset; decreasea liability

1. On August 2, paid remaining liability of Rs. 3,000/ on accountofpurchaseofbuildingfromABCcompany. 2. On August 3, paid remaining liability of Rs. 1,000 on accountofpurchaseofmachineryfromCCompany. 3. On August 4, paid remaining liability of Rs. 2,000 on accountofpurchaseoflandfromMr.Tariq. 4. On August 5, paid remaining liability of Rs. 23,000 on accountofpurchaseofToyotaPickupfromXYZCarDealer. 5. On August 6, paid remaining liability of Rs. 21,000 on account of purchase of office equipment from IBM Computers

2(a)

Differentiate between the Trial Balance, Chart of Accounts,BalanceSheet,andIncomeStatement.

Trial Balance

Inatrialbalanceseparatedebitandcreditcolumnsareusedto listthebalancesoftheindividualledgeraccounts..Thetotalof two columns proves the equality of the debit and credit balances. In Chart of Accounts a list of ledger titles and accounts numbersaremaintained.Thisisusedbyaparticularbusiness forrecordandreference.

ChartofAccounts

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Balance Sheet

A balance sheet is a financial statement which shows the financialpositionintheformofassets,liabilitiesandowners equityofabusinessentityataspecificdate.Itdoesnotshow thehowmuchabusinesscurrentlyisworth. Anincomestatementisafinancialstatementwhichindicates theprofitorlossofabusinessoveraperiodoftimethatmaybe ayear,sixmonthsorthreemonthsetc.

IncomeStatement

(b)

Describethenatureandpurposesofthegeneraljournal. What does journalizing means? give five examples of a compoundentryinthegeneraljournal.

A Journal in which information about each business transactionisinitiallyrecordedinanaccountingrecord. This Journalizing isalsocalledbookoforiginalentry. JournalizingmeansentryinJournalofallinformationabout a transaction in one place and also an explanation of the transactioninachronologicalorder.ExamplesofJournalizing inGeneralJournalwithcompoundentriesaregivenbelow: Transactions: 1. 2. 3. 4. 5. OnJanuary 1,1998 started business byintroducing amachine ofRs.50,000 andCashRs.10,000. OnApril1,1998giveawayacharityofRs.500andgoodsworthRs.1000/to EdhiWelfare. OnApril2,1998ReceivedRs.1000onaccountsreceivableandgivendiscountof Rs.100. OnApril3,1998paidRs.200,onaccountspayableandreceivedRs.20oncash discount. OnApril10,1998purchasedfurnitureofRs.10,000/andpaidcarriageofRs. 200/.

JOURNALIZING

(c) Debit

Definedebitandcredit.

Adebitisusedtorecordanincreaseinanassetoradecrease

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inaliabilityorinownersequity. Debitamountisenteredon thelefthandsideofledgeraccount. Acreditisusedtorecordadecreaseinanassetoranincrease Credit inaliabilityorinownersequity. creditamountisenteredon therighthandsideofledgeraccount. Nametheaccounts thatare: (i) Increasedby debits Decreasedby debits Assetse.g. Cash account, Land account, Machinery account, accounts receivable,Tools&Equipmentaccount,Buildingaccount. (ii) Liabilitiesandownersequitye.g. Notespayableaccount,accountspayable, Liabilitiesandownersequitye.g. Notespayableaccount,accountspayable, Assetse.g. Cash account, Land account, Machinery account, accounts receivable,Tools&Equipmentaccount,Buildingaccount. (v) Describethepurposeforwhichtheworksheetisprepared.Atwhatstageofthe accountingcycleaworksheetisusuallyprepared. WorkSheetispreparedforthepurposetoavoiderrorsinthe permanentrecordsofaccount.Itsimplifiesworktobedoneat theendoftheaccountingperiod.Itmaybepreparedfortesting Ledgeraccounts,adjustingentriesandfinancialaccounts. Stageof preparation Itispreparedforuseattheendoftheaccountingperiodasan aid to preparing financial statements and for planning purposes.

(iii)

Increasedby credits

(iv)

Decreasedby credits

Purposeof WorkSheet

3(a) Whataccounttitlesarelikelytoappearintheaccounting systemofamerchandisingcompanythatdonotappearin thesystememployedbyaserviceenterprises? Theaccounttitlesasareappearedintheaccountingsystemof

Accounttitles

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a merchandising company have some separate titles in comparisonwithaservicerenderedorganization.Asthebasic purpose ofmerchandising companiesistoearntheirrevenue bysellinggoods. Therefore,thefollowingmainaccounttitles areused: Inventory/merchandisingaccount Costofgoodssoldaccount Purchasesofmerchandisingaccount Every merchandising company, in addition to the main subsidiaryledgersalsomaintainsgeneralsubsidiaryledgersfor eachcreditor/debtorandforonetypeofproduct.

(b)

Explainthedifferentbetweentradediscountandcash discount.Whatarethechaindiscountandpurchase discount?

Trade Discount

Trade Discount is a rebate or allowance from the schedule price granted by the seller to the buyer. This discount is usuallygrantedwhensellingtoafellowtrader,orthebuyeris anoldcustomerorsalesaremadeinbulk,etc. Whereas the Cash Discount is a deduction or allowance

CashDiscount

allowed by a creditor to a debtor. If a person pays his debt beforetheduedateofpaymenttherecipientmaygranthiman allowancefordoingso. ThetermChainDiscountsisakindofcashdiscountinwhich discountsareofferedinachaintoencouragepromptpayment assoonaspossible. Forexampleasalemadewithtermsof2/20,1/30,n/60.This chain of discounts provide debtor an opportunity of two discountsi.e.,(1)ifhepayspaymentwithin20dayshewillget 2%discountand(2)ifhepayspaymentwithin30dayshewill get1%discount.

Chain Discount

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FirstAssignment

This isalso one ofthe kinds of cash discount. This term is usedbybuyersforcashdiscount.

(c)

Periodic inventoryprocedure issaid toaffordlittle control overinventory.Explainwhy?

Periodic Inventory System

Periodicinventoryprocedureisadoptedasanalternativetothe perpetual inventory system. This procedure eliminates the need for recording the cost of goods sold as sales occurs. However,theamountsofinventoryandthecostofgoodssold arenotknownuntilacompletephysicalinventoryistakenat yearsend.ForthisreasonsaPeriodicInventorySystemiswell suitedtothepreparationofonlyannuallyfinalstatements.But asitisarguedthatthePeriodicInventorySystemhasafforded little control over inventory that will be for the reasons as explained above as well as the Periodic inventory system has the lack of inventory subsidiary ledger which provide useful information to management for making decisions regarding developmentofthemarketingstrategiesandsalepurchaseof merchandises.

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FirstAssignment

4(a) Thecreditmanagerofacompanyhasestablishedapolicyof seekingtocompletelyeliminatealllossesfromuncollectible accounts receivable. Is this a desirable objective for a company?Explain. Inmyviewitmaybeadesirableobjectiveofanycompanybutit Eliminationofall lossesfrom uncollectible accounts receivable isnotpossibleofoperationofthistypeofpolicyinorganized business. Because in any modern business, credit sale is almost indispensable and it is common experience of traders thatsomeofthedebtorsfailtopaytheirdebtsinfull.Afterall theseuncollectibleaccountsreceivablearewrittenoff. A policy can be established to minimize the numbers of uncollectible accounts receivable. In this way business concernsallowdiscounttodebtorsatthetimeofpaymentby fixingcertainpercentage.

(b)

For what purpose might a company issue a mortgage note payable?

MortgageNote Payable

Notepayableisanunconditionalpromiseagainsttheloantoa bank.Thisisissuedwheneverbankloanisobtained. Mortgagenotepayableisissuedwhenaborrowerwantstotake loanofheavyamountand/orlongtermbasisforpurchaseof realestateorcostlyequipmentetc.Suchtypeofnoteprovides security by way of charge on the companys asset(s) to the bankagainsttheloansrepayment.

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(c)

On June 1, 1997 the Shafiq Company received a Rs. 12,000/120days,8%notefromSaleemCompanydated June 1, 1997. On August 15, 1997 the note was discountedattheBank.Therateofdiscountwas12%.

(v)

Theproperentrytorecordthereceiptofproceedsatthedateofdiscount. 5 OnJanuary2,1997,TirmiziCompanypurchasedamachine forRs.57,000cash,themachinehasanestimatedusefullife ofsixyearsandanestimatedsalvagevalueofRs.1,900.The double declining balance method of depreciation is being used.

Required

i.

ComputethebookvalueonthemachineasonJuly 1,1997.

DepreciationSchedule:DoubleDecliningBalanceMethod Year Computation Depreciation Expenses Accumulated Depreciation BookValue Rs.57000 7/1997 Rs.57000X33.33%X 1/2 Rs.9499 Rs.9499 Rs.47501

ii.

AssumethemachineisdisposedofonJuly2000.Preparethejournalentries torecordthedispositionofthemachineundereachofthefollowingunrelated assumptions:

DepreciationSchedule:DoubleDecliningBalanceMethod Year Computation Depreciation Expenses Accumulated Depreciation BookValue Rs.57000 7/1997 7/1998 7/1999 7/2000 Rs.57000X33.33%X 1/2 Rs.47501X33.33% Rs.31669X33.33% Rs.21114X33.33% Rs.15832 Rs.10555 Rs.7037 Rs.25331 Rs.35886 Rs.42923 Rs.31669 Rs.21114 Rs.14077 Rs.9499 Rs.9499 Rs.47501

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FinancialAccounting(528) (a) ThemachineissoldforRs.9,500cash. GeneralJournal Date 2000 July AccountTitlesandExplanation 1 Cash LossonDisposalofMachine AccumulatedDepreciation:Machine Machine Saleofmachineatapricebelowbookvalue LP

FirstAssignment

Page ______ Debit 9500 4577 42923 Credit

57000

(b)

ThemachineissoldforRs.14,250cash. GeneralJournal Page ______ LP Debit 14250 42923 Credit

Date 2000 July

AccountTitlesandExplanation 1 Cash AccumulatedDepreciation:Machine GainonDisposalofMachine Machine Saleofmachineatapriceabovebookvalue

173 57000

(c)

ThemachineandRs.57,000cashareexchangedforanewmachinethathasa cashpriceofRs.61,750. GeneralJournal Page ______ LP Debit 61750 42923 9327 Credit

Date 2000 July

AccountTitlesandExplanation 1 Machine(New) AccumulatedDepreciation:Machine(Old) LossonDisposalofMachine(Old) Machine(Old) Cash Saleofmachine(old)inexchangeofnew machineandcash

57000 57000

(d)

Themachineiscompletelydestroyedbyfire.CashofRs.7,600isexpectedto bereceivedfrominsurancecompany. GeneralJournal Page ______ LP Debit 7600 6477 42923 Credit

Date 2000 July

AccountTitlesandExplanation 1 AccountsreceivablefromInsuranceCo. Lossonfire AccumulatedDepreciation:Machine Machine

57000 Page#10

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FirstAssignment

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FirstAssignment

The Murtaza Company acquired a machine on September 26,1995atatotalcostofRs.90,200. Themachinewas estimatedtohavelifeof10yearsandasalvagevalueofRs. 2,200/. It was also estimated that the machine would produce one million units of product during its life. The machineproduced99,000unitin1995and137,500units in1996.

Required

Computetheamountofdepreciationtoberecordedin1995and 1996undereachofthefollowing:

a.

Straightlinemethod CostResidualvalue Yearsofusefullife = = Rs.902002200 10 8800peryear DepreciationSchedule:StraightlineMethod Year Computation Depreciation Expenses Rs.2200 Rs.8800 Accumulated Depreciation Rs.2200 Rs.11000 BookValue Rs.90200 Rs.88000 Rs.79200

1995 1996 b.

Rs.88000X1/10X1/4 Rs.88000X1/10

Unitofproduction

DepreciationSchedule:TheUnitofOutputMethod Year Computation Depreciation Expenses Rs.8712 Rs.12100 Accumulated Depreciation Rs.8712 Rs.20812 BookValue Rs.90200 Rs.81488 Rs.69388

1995 1996 c.

Rs.99000X0.088 Rs.137500X0.088

Sumoftheyearsdigitmethod

DepreciationSchedule:Sumoftheyearsdigitmethod Year Computation Depreciation Accumulate Expenses d BookValue

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FirstAssignment Depreciation Rs.90200

1995 1996 d. Doubledecliningbalancemethod.

Rs.4000 Rs.15600

Rs.4000 Rs.19600

Rs.86200 Rs.70600

DepreciationSchedule:DoubleDecliningBalanceMethod Year Computation Depreciation Expenses Accumulated Depreciation BookValue Rs.90200 1995 1996 Rs.90200X20%X1/4 Rs.85690X20% Rs.4510 Rs.17138 Rs.4510 Rs.21648 Rs.85690 Rs.68552

ThetrialbalanceofAfzalCompanyonDecember31ofthe current year includes among other items, the following accountbalances:

(InRupees) Debits Credits Officesuppliesinhand Prepaidrent Buildings AccumulatedDepreciation:Building Salariesexpenses Unearneddeliveryfees AdditionalData: 1. PartofthesuppliesrepresentedbyRs.6,000balanceoftheoffice supplied in hand account have been consumed. An inventory countofthesuppliesactuallyinhandatDecember31totalRs. 2,400/ OnMay1ofthecurrentyear, arental payment ofRs.25,200 wasmadefor12monthsofrent;itwasdebitedtoprepaidrent. The annual depreciation for the building is based on the cost showninthebuildingaccountlessanestimatedsalvagevalueof Rs.10,000. Theestimatedusefullivesofthebuildingsare40 yearseach. ThesalariesexpensesofRs.124,000donotincludeRs.6,000of unpaidsalariesearnedsincethelastpayday. 6000 25200 200000 124000

33250 4000

2. 3.

4.

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5. 6. Required: (a)

One fourth of the unearned delivery fees have been earned by December31. DeliveryservicesofRs.600wereperformedforacustomerbuta billhasnotyetbeensent.

PreparetheadjustingjournalentriesforDecember31,assuming adjustingentriesarepreparedonlyattheyearend. GeneralJournal Page ______ LP Debit 3600 Credit 3600

Date AccountTitlesandExplanation 1998 Dec. 31 SuppliesExpenses Officesupplies BeingthesuppliesinhandonDec.31 31 RentExpenses PrepaidRent EstimateofrentexpensesatDec.31 31 DepreciationExpenses:Building Accumulateddepreciation:Building Annualdepreciationofbuilding 31 SalariesExpenses SalariesPayable Toaccruesalariesunpaidasthemonthend 31 UnearnedDeliveryFees DeliveryFeesearned PortionofdeliveryfeesearnedatDec.31 31 Accountsreceivable ServicesRevenue Torecognizerevenuefromservicerendered fromacustomerduringDec.

16800

16800

4750

4750

6000

6000

1000

1000

600

600

(b)

Based on the adjusted balance shown in the accumulated Depreciation BuildingAccount,howmanyyearshastheAfzalCompanyaroundthebuilding.

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