INTRODUCTION TO FINANCIAL ACCOUNTING

Suggested Solution - Foundation Examinations – Spring 2010

A.1 (a) (i) Debit
(ii) Current Liabilities
(iii) more/higher/greater
(iv) purchases
(v) Total creditors/creditors
(vi) understated/reduced
(vii) Trade
(viii) Fixed assets
(ix) Assets
(x) Entity

(b) (i) Prudence

Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making
the estimates required under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated. However, the exercise of prudence does
not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate
understatement of assets or income, or the deliberate overstatement of liabilities or expenses,
because in that case, the financial statements would not give a true and fair view.

True and fair view

The application of appropriate accounting standards and the principal qualitative characteristics
i.e. understandability, relevance, reliability and comparability normally results in financial
statements giving a true and fair view.

(ii) The users of financial statements:

The users of financial statements include:
(i) Investors, (present and potential)
(ii) Employees
(iii) Lenders
(iv) Suppliers and other trade creditors
(v) Customers
(vi) Governments and their agencies
(vii) The public

A.2 Fixed Assets Account

Debit (Rs.) Credit (Rs.)
Balance b/d 100,000 Gain/Loss on asset disposal W-1 5,000
Gain/Loss on asset disposal W-2 400 Gain/Loss on asset disposal 2,000
Cash (New machine) 800
Inventory A/c (15,400/1.4) 11,000
Balance c/d 105,200
112,200 112,200

Accumulated Depreciation Account

Debit (Rs.) Credit (Rs.)
Gain/Loss on asset disposal (5,000 – Balance b/d 33,000
2,750) 2,250
Gain/Loss on asset disposal W-2 900 Depreciation Expense W-3 9,985
Balance c/d 39,835
42,985 42,985

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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Solution - Foundation Examinations – Spring 2010

Gain/Loss on asset disposal

Debit (Rs.) Credit (Rs.)
Fixed Assets Account W-2 400
Accumulated Depreciation Account 2,250
Accumulated Depreciation Account 900
Fixed Assets Account W-1 5,000 Cash (Sale proceeds) 1,500
Fixed Assets Account 2,000 P& L A/c – loss on disposal 1,950

1,950 1,950

W-1:
The depreciation on asset upto June 30, 2009 is 45% i.e. 10% each year, therefore its NBV represents 55%
of cost. Hence cost of asset = 2,750 ÷0.55 = Rs. 5,000

W-2:
Rupees
Cost of asset 2,000
Depreciation 2005 – 2008 – (40%) + six months of 2009 (900)
Written down value at the date of exchange 1,100
Cost of new machine less amount paid (1,200 – 800) 400
Loss on exchange/disposal of asset 700

W-3:Depreciation for the year

Depreciation on asset held throughout the year (100,000 – 5,000 – 2,000) *10% 9,300
Depreciation on asset sold (5,000 + 2,000) × 10% × 6/12 350
Depreciation on new asset obtained in exchange (1,200*10%*6/12) 60
Depreciation on new asset (transferred from inventory)11,000*10%*3/12 275
Total depreciation for the year 2009 9,985

A.3 (i) When goodwill is recorded in the books:

Debit (Rs.) Credit (Rs.)
Goodwill 1,890,000
X capital account 420,000
Y capital account 630,000
Z capital account 840,000

X capital account (Rs. 1,000,000 + 420,000) 1,420,000

Current assets (cash/bank) 1,420,000

Cash [(3,080,000*1 x 9/7) - 3,080,000+ goodwill 500,000] 1,380,000

A’s capital account 1,380,000

Goodwill *2360,000
Y capital account (3/7) 154,286
Z capital account (4/7) 205,714

Rupees
*1Net assets after departure of X (1,700+4,700-1,900-1,420) = 3,080,000

*2Total goodwill on A’s admission 500 x 9/2 = 2,250,000

Less: already recognized goodwill = 1,890,000
Further goodwill to be recorded 2,250,000-1,890,000 = 360,000
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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Solution - Foundation Examinations – Spring 2010

(ii) When goodwill is not recorded in the books:

Entry # 1:
Debit (Rs.) Credit (Rs.)
Goodwill 1,890,000
X capital account 420,000
Y capital account 630,000
Z capital account 840,000

Y’s capital account 810,000

Z’s capital account 1,080,000
Goodwill account 1,890,000

Debit (Rs.) Credit (Rs.)

Alternative to Entry # 1

Y’s capital account 180,000

Z’s capital account 240,000
X capital account 420,000

Entry # 2:
X capital account 1,420,000
Current assets (cash/bank) 1,420,000

Entry # 3:
Cash (3,080,000 x 9/7) - 3,080,000+ goodwill 500,000 1,380,000
A’s capital account 1,380,000

Entry # 4:
Goodwill 2,250,000
Y capital account 964,286
Z capital account 1,285,714

Y’s capital account 750,000

Z’s capital account 1,000,000
A’s capital account 500,000
Goodwill account 2,250,000

OR

A’s capital account 500,000

Y’s capital account 214,286
Z’s capital account 285,714

A.4 Bank Reconciliation Statement

As at 31st December 2009

Balance overdrawn as per bank statement (806,436)

(Increase)/decrease in over draft
Cheques drawn not presented (377,784 – 5,000) (372,784)
Cheque issued wrongly credited in bank statement (13,200 + 13,200) (26,400)
Collection received not banked 250,600
Bill not credited 196,500

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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Solution - Foundation Examinations – Spring 2010
Adjusted balance per bank / cash book (overdraft) to be carried to balance sheet (758,520)

Cash Book corrections - (Increase)/decrease in overdraft:

Bank mark-up wrongly entered in cash book (118,686)
1st time-barred cheque reversed (5,000)
Discount allowed wrongly entered in cash column 10,500
Error in recording of cheque (125,000 – 12,500) 112,500
Subscription to magazines now entered 3,144
Cheque received wrongly entered in bank book (7,500+7,500) (15,000) (12,542)
Bank balance as per cash book (overdraft) (before above adjustments/corrections) (771,062)

A.5 Debtors Control Account

Rs.‘000’ Rs.‘000’
Balance b/d 2,600 Cash received from debtors 31,650
Credit sales 35,900 Discount allowed 350
Bank – refund to customer 120 Returns 980
Cheque dishonored 200 Bad debts written off 430
Credit balances c/d 75 Creditors Control Account-contra 1,660
Balance c/d 3,825
38,895 38,895

Creditors Control Account

Rs.‘000’ Rs.‘000’
Bank – payment to suppliers 23,350 Balance b/d 4,100
Discount received 250 Purchases 27,700
Purchases returns 550 Purchases – not recorded 350
Debtors Control Account-contra 1,660 Cheque received against return of goods 180
Balance c/d 6,520
32,330 32,330

A.6 Branch Stock Account

Dr. (Rs.) Cr. (Rs.)
Balance b/d 18,000 Goods Sent to Branch A/c 8,000
Goods Sent to Branch A/c 240,000 Branch Debtor A/c 200,000
Branch Debtor A/c 1,050 Branch Cash A/c 27,000
Branch adjustment A/c Goods sent to branch A/c
Surplus on net credit sales (goods lost by fire - balancing figure) 8,263
[200,000 – 1,050] × 2.4/102.4 4663
Balance c/d: Physical stock 10,450
Goods in transit 10,000
263,713 263,713

Branch Debtor Account

Dr. (Rs.) Cr. (Rs.)
Balance b/d 7,000 Branch Stock A/c 1,050
Branch Stock A/c 200,000 Good Sent to Branch A/c 3,000
Branch Cash A/c (balancing figure) 200,000
Balance c/d 2,950
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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Solution - Foundation Examinations – Spring 2010
207,000 207,000

Goods Sent to Branch Account

Dr. (Rs.) Cr. (Rs.)
Branch Stock A/c 8,000 Branch Stock A/c 240,000
Branch Adjustment A/c 48,000 Branch Adjustment A/c 1,600
Cash A/c 7,200 Branch Adjustment A/c 656
Branch Debtor A/c 3,000 Branch Adjustment A/c 1,440
Branch stock A/c 8,263 Branch adjustment A/c
(loading on goods lost by fire – 8,263 × 25÷125) 1,653
Purchases A/c (Bal) 170,886
245,349 245,349

Branch adjustment (Profit loading) Account

Dr. (Rs.) Cr. (Rs.)
Goods Sent to Branch A/c Stock Reserve A/c
(loading on goods returned (loading on opening stock) 3,600
to HO by Branch) 8,000×25/125 1,600 Goods Sent to Branch A/c
Goods Sent to Branch A/c (loading on goods sent to stock) 48,000
(loading on goods returned Branch Stock A/c
by credit customers to HO Excess of selling price over invoice
(3000 x 28/128) 656 price of goods on credit
Goods Sent to Branch A/c (200,000 – 1,050) × 2.4/102.4 4,663
(loading on goods returned
by cash customers to HO -
7,200 × 25/125) 1,440
Branch Stock A/c
(loading on stock lost) 1,653
Stock Reserve A/c
(20,450 × 25 / 125) 4,090
(loading on closing stock)
Including stock in transit)
Gross Profit c/d 46,824
56,263 56,263

A.7 Statement of Cash Flow for the year ended December 31, 2009
Profit before tax (see working) 1,630,000
Add: Non-cash items
Depreciation on fixed assets
(2,950,000 – 2,450,000)+200,000+(960,000 – 160,000) 1,500,000
Profit on sale of investment (70,000)
Profit on sale of fixed assets (90,000)
2,970,000
Add: Cash in flows
Proceeds from sale of investment 320,000
Proceeds from sale of fixed assets 250,000
Capital introduced 1,000,000 1,570,000
4,540,000
Less: Cash outflows
Income tax payment 180,000
Withdrawal by owner against profits 1,200,000
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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Solution - Foundation Examinations – Spring 2010
Addition to fixed assets
(9,750,000 + 200,000 + 960,000 – 9,600,000) 1,310,000
Additions to investment (2,600,000+250,000 – 2,500,000) 350,000 3,040,000
1,500,000
(Increase)/decrease in working capital
Increase in creditors 400,000
Increase in current assets 80% of (4,750,000 – 2,850,000) (1,520,000) (1,120,000)
Net increase in cash 380,000
Opening balance of cash 570,000
Closing balance of cash 950,000

Closing balance 1,100,000

Drawings 1,200,000
2,300,000
Less: opening balance 900,000
Net profit for the year 1,400,000
Add: provision for tax (200,000 +180,000 – 150,000) 230,000
Profit before tax 1,630,000

A.8 Adnan
Trading and Profit and Loss Account
For the year ended December 31, 2009
Rs. Rs.
Opening stock Sales:
15,700
Purchases (130,800+1,423,800 –
116,100) 1,438,500 Cash 348,115
Credit 1,426,700
*
Gross profit 348,115 Closing stock 27,500
1,802,315 1,802,315
Wages 106,800 Gross profit 348,115
Rent (3,500×9) + (4,500×3) 45,000

Electricity & telephone (33,0000+8,800) 41,800

Depreciation
(285,000×0.1)+(75,000×0.1×6/12) 32,250

Net profit 122,265

348,115 348,115

Computation of sales
Cost of sales (15,700 + 1,438,500 – 27,500) 1,426,700
Cash sales (1,426,700 × 20% 1.22) 348,115
*
Credit sales (1,426,700 × 80%) 1,426,700

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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Solution - Foundation Examinations – Spring 2010

Adnan
Balance Sheet
As at 31.12.2008 and 2009

31.12.09 31.12.08 31.12.09 31.12.08

Liabilities Assets
Rs. Rs. Rs. Rs.
(see note) (see note)
Capital Account (Bal. Figure) 396,150 593,200 Fixed assets 327,750* 285,000
Sundry creditors 130,800 116,100 Stock 27,500 15,700
Outstanding expenses: Debtors 80,900 48,700
Rent 4,500 3,500 Bank 103,400 349,100
Electricity & Telephone 8,800 - Cash 700 14,300
540,250 712,800 540,250 712,800
*(285,000 + 75,000 – 32,250)

Cash shortage Rs.

Opening Capital on December 31, 2008 593,200
Profit for the year 122,265
Less: Drawings (122,600)
Capital on December 31, 2009 396,150
Cash shortage (196,715)

Note: Balance sheet for 2008 is not a part of the requirement, but has been prepared only for computing
opening balance of capital.
(THE END)

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