Course: Advanced Accounting (444)

Semester: Autumn, 2020

ASSIGNMENT No. 2
Q.1 Prepare the Trading, Profit and Loss Account and Balance sheet from the following figures of
Usman Corporation for the period ended on 31st December, 2021. Closing stock is Rs. 55,000.
Rs. Rs. Rs.
Interim Dividend Sundry
Paid 3,750 Debtors 43,500 General Reserve 2,500
4 % Government
Purchases 92,500 Goodwill 12,500 Securities 0,000
Preliminary
Expenses 2,500 Cash in hand 4,125 Debenture Interest 4,500
Share Capital (fully
Freight 6,550 Cash at Bank 19,950 called) 230,000
Director's Fees 2,870 Wages 42,400 Bills Payable 19,000
General
Bad Debts 1,055 Expenses 8,450 Sales 207,500
6% Debentures 150,000 Salaries 7,250 Provision of Bad Debts 1,750
Stock Profit & Loss Account
Premises 150,000 (1.1.2020) 37,500 (Cr) 7,250
Plant &
Machinery 180,000 Fixtures 3,600 Sundry Creditors 25,000

Director fee 2870 Gross Profit 230000

General Expenses 8450 Purchases 92500
Salaries 7250
Bad Debt 1055
Less old provision (1750) 695
Plant & Machinery 180000
Freight 6550 Dividend 33315
Write off preminary 150000
355815 355815
Profit and loss Appropriation Account
Final Dividend (5%) 3562 Net Profit of the year 56680
Stock 55000 Balance b/d 11312
Interim Dividend 3750
Balance Transfer to B/S 5680
67992 67992

Current Liabilities Current assets

Interest on deb 4500 Closing stock 55000
Sundry creditiors 25000 Sundry debater 43500
Bill payable 19000 Less: Provision (1750) 41750
Final dividend 23000 Cash in Hand 4125

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 Course: Advanced Accounting (444)
Semester: Autumn, 2020
Provision for taxation 49325 Cash at Bank 19950
Interest on Govt
120825 120825

Q.2 From the following information, find out (a) Sales (b) Closing Stock, (c) Sundry Debtors and (d)
Sundry Creditors
Gross Profit Ratio 25 percent
Debtors Turnover Ratio 4 months
Stock Turnover Ratio 4 times
Creditors Turnover Ratio 6 months
Closing Stock Rs. 10,000 more than the opening Stock. Bills receivable amount to Rs. 65,000, and
Bills payable to Rs. 80,000. Cost of goods sold for the year is Rs. 1200,000.
(a) Sales
Sales = Cost of goods sold + Gross profit
Sales = 1200000 + 25%
Sales = 1500000
(b) Closing Stock
Cost of goods sold = Opening stock + Purchases - Closing stock
Closing stock = Opening stock + Purchases - Cost of goods sold
Closing stock = 65000 + 80000 – 1200000
Closing stock = -1055000
(c) Sundry Debtors
Debtors turnover ratio = 12 / 4 = 3 times
3 times = credit sales / (Bill receivable + sundry debtor)
(Bill receivable + sundry debtor) = credit sales / 3
65000 + sundry debtors = 80000 / 3
Sundry Debtors = 38333.33
(d) Sundry Creditors
Creditor turnover ratio = 12 / 6 = 2 times
Rs.4,000+ Sundry creditors= 80000 / 10000
Sundry Creditor = 4000-8 = 3992
Q.3 On 1st January 2021, the Green Company bought from Baker & Co. four wagons on hire-purchase basis.
The cash down price of the wagons was Rs. 5,000 each and the installments were Rs.1,100 each, the first
payment being payable on the signing of the contract and the other four at the end of each year. The rate
of interest charged by the seller was 5%. The Green Co., decided to charge depreciation at the rate of 10

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 Course: Advanced Accounting (444)
Semester: Autumn, 2020
per cent per annum on the diminishing balance method. Show the entries in the books of both the Green
Co., and Baker & Co
Particular Dr. Cr.
Cash down 5000
Price 5000
Installment 1100
Cash 1100
Interest 5250
Cash 5% 5250
Depreciation 4500
Per Annum 4500
Q.4
a) Differentiate between operating lease and capital lease.
A capital lease (or finance lease) is treated like an asset on a company’s balance sheet, while an operating lease
is an expense that remains off the balance sheet. Think of a capital lease as more like owning a piece of property
and think of an operating lease as more like renting a property. There are significant differences between a
capital lease vs operating lease, and this guide will help you understand the difference between the two types of
leases and their respective accounting treatment.
Capital leases are counted as debt. They depreciate over time and incur interest expense.
To be classified as a capital lease under U.S. GAAP, any one of four conditions must be met:
 A transfer of ownership of the asset at the end of the term
 An option to purchase the asset at a discounted price at the end of the term
 The term of the lease is greater than or equal to 75% of the useful life of the asset
 The present value of the lease payments is greater than or equal to 90% of the asset’s fair market value
Alternatively, if evaluated under IFRS, there is one more criterion that can be used to qualify a lease as a capital
lease:
 The assets under the lease are specialized so that only the lessee is able to utilize them without major
changes being made to the assets
Operating leases are used for short-term leasing of assets and are similar to renting, as they do not involve any
transfer of ownership. Periodic lease payments are treated as operating expenses and are expensed on
the income statement, impacting both the operating and net income. In contrast, capital leases are used to lease
longer-term assets and give the lessee ownership rights.
Capital and operating leases are subject to different accounting treatment for both the lessee and the lessor. For
the purpose of entry-level finance interviews, it is enough to understand the accounting treatment for the lessee
only.

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 Course: Advanced Accounting (444)
Semester: Autumn, 2020
Accounting for an operating lease is relatively straightforward. Lease payments are considered operating
expenses and are expensed on the income statement. The firm does not own the asset and, therefore, it does not
show up on the balance sheet and the firm does not assess any depreciation for the asset.
In contrast, a capital lease involves the transfer of ownership rights of the asset to the lessee. The lease is
considered a loan (debt financing), and interest payments are expensed on the income statement. The present
market value of the asset is included in the balance sheet under the assets side and depreciation is charged on
the income statement. On the other side, the loan amount, which is the net present value of all future payments,
is included under liabilities.
Advantages of a Capital Lease
There are many advantages to a capital lease, including the following:
 Lessee is allowed to claim depreciation on the asset, which reduces taxable income
 Interest expense also reduces taxable income
 Advantages of an Operating Lease
There are many advantages to an operating lease as well:
 Operating leases provide greater flexibility to companies as they can replace/update their equipment
more often
 No risk of obsolescence, as there is no transfer of ownership
 Accounting for an operating lease is simpler
 Lease payments are tax-deductible
b) Ali Ltd. leases an equipment on 1 st January, 2020 that has fair value of Rs. 12,000 from Zain
Corporation for four years. Interest rate implicit in the lease is 15%. Useful life of equipment is 4 years.
Annual rentals payable at the end of each year are amounting Rs. 4,203.18. The lessee depreciates the
asset using the straight line method.
Required:
i. Identify the type of lease.
A leasing agreement is essentially a hiring agreement, in which ownership of an asset may never pass to the
lessee. The lessor retains ownership of the asset but conveys the right to the use of the asset to the lessee for an
agreed period of time in return for the payment of specified rentals.
ii. Prepare amortization schedule.
Statement of comprehensive income for the year ending 31 December 2020
$ $
Loss on disposal – Deferred Nil
Operating lease rentals
Amount paid 12000
Plus: amortisation of deferred loss ($4m/20
years) 4203.18

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 Course: Advanced Accounting (444)
Semester: Autumn, 2020
Amount charged to the income statement 1603.18
iii. Prepare journal entries for the first two years in the books of lessor and lessee.
Value 12000
Leases 12000
Rentals 4203.18
Payable 4203.18
st
iv. Extracts of Balance Sheet as at 31 December, 2021 in the books of lessor and lessee.
Current Liabilities Current assets
Value 12000 At end
Lease 15% 13800 Lease 4203.18
Q.5 You are required to pass journal entries for the issue of following debentures:
a) 120 10% Rs. 1,000 Debentures are issued at 5% discount and are repayable at par.
b) Another 150 7% Rs. 1,000 Debentures are issued at 5% discount and repayable at 10%
premium.
c) Further 80 9% Rs. 1,000 Debentures are issued at 5% premium.
d) In addition, another 400 8% Rs. 100 Debentures are issued as collateral security against a loan
of Rs. 40,000.

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Course: Advanced Accounting (444)
Semester: Autumn, 2020