2 Book Final 2

ADVANCED & COST
ACCOUNTING
According to
B.Com Part – II
new syllabus.
More than 350
Sameer Hussain practice
question with
the reference of
Developed by; www.a4accounting.net illustrations
and including
past papers.
ADVANCED & COST ACCOUNTING
B.COM PART – II
SAMEER HUSSAIN
According to new syllabus.
More than 350 practice questions

with the reference of illustrations
and including past papers.
Developed by:
www.a4accounting.net
Page i
All personal and company name / firm named in this book are intended to
be fictitious and accordingly any similarity to any living person or actual
company / firm is purely coincidental, except where indicated.
Page ii
DEDICATED TO:
All Students….
Page iii
Table of Contents
ADVANCED ACCOUNTING
Chapter # 1: Installment Sales ............................................................................................ 1
Chapter # 2: Branch Accounting ......................................................................................29
Chapter # 3: Analysis of Financial Statements ............................................................61
Chapter # 4: Cash Flow Statement ...................................................................................85
Chapter # 5: Accounting for Company – Final Accounts ....................................... 117
Chapter # 6: Accounting for Company – Amalgamation ....................................... 161
Chapter # 7: Accounting for Company – Absorption.............................................. 179
Chapter # 8: Accounting for Company – Reconstruction...................................... 197
COST ACCOUNTING
Chapter # 9: Accounting for Manufacturing Operation ........................................ 207
Chapter # 10: Job Order Costing ...................................................................................... 233
Chapter # 11: Standard Costing ....................................................................................... 257
Chapter # 12: Process Costing .......................................................................................... 275
PAST PAPERS ....................................................................................................................................... 301
Advanced & Cost Accounting 2011 (Regular) .......................................................................... 303
Advanced & Cost Accounting 2011 (External)......................................................................... 307
Page iv
Chapter # 1
Installment Sales
Advanced Accounting
Installment Sales
Chapter # 1
SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI:
 Accounting for installment sales under Perpetual Inventory System.

 Defaults and repossessions.
 Recognition of realized gross profit.
 Reporting of relevant accounts on Financial Statement.
WHAT THE EXAMINER USUALLY ASK?

 Computation of:
o Installment sales.
o Cost of installment sales.
o Unrealized gross profit (D.G.P.).
o Unrealized gross profit rate (D.G.P. %).
o Cash collection.
o Realized gross profit (R.G.P.).
o Gain or loss on repossession.
o Loss on default.
 General Journal entries under Perpetual Inventory System.
 Adjusting and closing entries under Perpetual Inventory System.
 Income Statement.
 Balance Sheet.
Page 2
Installment Sales
Chapter # 1
INSTALLMENT SALES
Goods purchase by buyer by paying a small amount of the total amount of goods at the time
of purchase of goods and agrees to pay the remaining amount in equal installments in equal
interval of time is known as installment. The first time payment is known as “down
payment”. In installment sales, the risk and rewards are transferred to the buyer.
COST OF INSTALLMENT SALES

The cost of merchandise sold on installment basis is called cost of installment sales. It is
obtained by adding net purchases in the merchandise inventory beginning and subtracting
merchandise inventory ending.
UNREALIZED GROSS PROFIT

Unrealized gross profit is referred to the total gross profit from the sale of merchandise on
installment basis which has not been collected. It is also known as “Deferred Gross Profit”.
REALIZED GROSS PROFIT

The profit on sale on merchandise on installment basis collected during the period out of
total unrealized gross profit is called realized gross profit. In other words, it is the profit
which has been collected during the period.
COMPUTATION OF COST OF INSTALLMENT SALES:

Merchandise inventory (beginning) XXX
Add: Net purchases during the period XXX
Merchandise available for sale XXX
Less: Merchandise inventory (ending) (XXX)
Cost of installment sales XXX
COMPUTATION OF UNREALIZED GROSS PROFIT (D.G.P.):

Unrealized gross profit (D.G.P.) = Installment sales – Cost of installment sales
COMPUTATION OF UNREALIZED GROSS PROFIT RATE (D.G.P. %):

Unrealized gross profit Rate (D.G.P. %) = Unrealized gross profit X 100
Installment sales
COMPUTATION OF CASH COLLECTION:

Cash collection (current year) = Installment sales – Installment accounts
receivable (ending)
OR
Cash collection (previous year) = Installment accounts receivable (beginning) –
Installment accounts receivable (ending) –
Installment accounts receivable cancelled
OR
Cash collection = Down payment + Installments received
COMPUTATION OF REALIZED GROSS PROFIT (R.G.P.):

Realized gross profit (R.G.P.) = Cash collection x Unrealized gross profit rate
Page 3
Installment Sales
Chapter # 1
COMPUTATION OF INSTALLMENT SALES / INSTALLMENT ACCOUNTS

RECEIVABLE (BEGINNING):
Installment sales/installment Unrealized gross profit
accounts receivable (beginning) = (D.G.P.)
Unrealized gross profit rate
(D.G.P.%)
COMPUTATION OF LOSS ON DEFAULT:

If the buyer is unable to pay the further installments and the seller is unable to repossess
his goods from the buyer, it is said to be default.
Installment accounts receivable cancelled XXX

Less: D.G.P. for go (Installment accounts receivable cancelled x D.G.P. %) (XXX)
Loss on default (XXX)
COMPUTATION OF GAIN OR LOSS ON REPOSSESSION:

If the buyer is unable to pay the further installments and the seller repossesses his goods
from the buyer, it is said to be repossession of merchandise.
Installment accounts receivable cancelled XXX

Less: D.G.P. for go (Installment accounts receivable cancelled x D.G.P. %) (XXX)
Book value XXX
Less: Merchandise repossessed at fair market value (XXX)
Gain/loss on repossession XXX/(XXX)
GENERAL ENTRIES UNDER PERPETUAL SYSTEM:

o Purchased Merchandise on Account:
Merchandise DR. (with amount of purchases)
Accounts payable CR. (with amount of payable)
------------------------------------------------------------------------------------------------------------
o Sold Merchandise on Installment Basis:

Installment accounts receivable DR. (amount receivable as installment)
Installment sales CR. (amount of installment sales)
------------------------------------------------------------------------------------------------------------
o Cash Collection on Installment Basis / Down Payment Received:

Cash DR. (with amount of cash collection)
Installment accounts receivable CR. (amount of cash collection)
------------------------------------------------------------------------------------------------------------
o Payment to Suppliers:
Accounts payable DR. (with amount of cash paid)
Cash CR. (with amount of cash paid)
------------------------------------------------------------------------------------------------------------
Page 4
Installment Sales
Chapter # 1
o Expense Paid During the Period:
Expenses DR. (with amount of expenses paid)
Cash CR. (with amount of cash paid)
ADJUSTING ENTRIES UNDER PERPETUAL SYSTEM:

o Recording Cost of Goods Sold:
Cost of installment sales DR. (amount of cost of installment sales)
Merchandise CR. (amount of cost of goods sold)
------------------------------------------------------------------------------------------------------------
o Recording Unrealized Gross Profit (D.G.P.):

Installment sales DR. (with amount of installment sales)
Unrealized gross profit (D.G.P.) CR. (amount of D.G.P.)
Cost of installment sales CR. (amount of cost of sales)
------------------------------------------------------------------------------------------------------------
o Recording Realized Gross Profit (R.G.P.):

Unrealized gross profit (D.G.P.) DR. (with amount of realized gross profit)
Realized gross profit (R.G.P.) CR. (with amount of R.G.P.)
------------------------------------------------------------------------------------------------------------
o Recording Loss on Default:

Unrealized gross profit (D.G.P.) DR. (with amount of D.G.P. on default)
Loss on default DR. (with amount of loss on default)
Installment accounts receivable CR. (installment A/R cancelled)
------------------------------------------------------------------------------------------------------------
o Recording Gain on Repossession:

Merchandise repossessed DR. (with repossessed value)
Gain on default CR. (amount of gain)
------------------------------------------------------------------------------------------------------------
o Recording Loss on Repossession:

Merchandise repossessed DR. (with repossessed value)
Loss on default DR. (with amount of loss on repossession)
------------------------------------------------------------------------------------------------------------
Page 5
Installment Sales
Chapter # 1
CLOSING ENTRIES UNDER PERPETUAL SYSTEM:

o Closing Expenses:
Expense and revenue summary DR.
Expenses CR.
Loss on repossession/default CR.
------------------------------------------------------------------------------------------------------------
o Closing Income:
Realized gross profit (R.G.P.) DR.
Interest income DR.
Gain on repossession DR.
Expense and revenue summary CR.
------------------------------------------------------------------------------------------------------------
Realized Gross Profit (RGP)
Cash Collection X Unrealized Gross Profit

Rate (DGP%)
Installment Installment
Unrealized
A/R (Beg) or Accounts Installment
- Gross Profit ÷
Installment Receivable Sales
(DGP)
sales (Ending)
Installment Sales - Cost of Installment Sales
Merchandise Inventory (Beginning)

+
Total Net Purchases
-
Merchandise Inventory (Ending)
ILLUSTRATION # 1:
Ali Company deals in radio and television sets. It sells those sets on installment basis. The
summary of transactions for the year ended 31 December 1995 is as follows:
1) Purchase on account Rs. 103,500
2) Installment sales Rs. 125,000
3) Cost of installment sales Rs. 100,000
4) Collection of installment accounts receivable Rs. 90,000
5) Payment to accounts payable Rs. 95,000
6) Selling expenses paid Rs. 1,200
7) General expenses paid Rs. 2,300
8) Repossessed merchandise at fair market value Rs. 3,000
9) Installment accounts receivable written off by repossession Rs. 10,500
REQUIRED
Give journal entries for the year ended 31st December 1995 including adjusting and closing
entries.
Page 6
Installment Sales
Chapter # 1
SOLUTION # 1:
Computation of Unrealized Gross Profit (DGP):
Unrealized gross profit = Installment sales – Cost of installment sales
Unrealized gross profit = 125,000 – 100,000
Unrealized gross profit = 25,000
Computation of Unrealized Gross Profit Rate (DGP%):

Unrealized gross profit rate = Unrealized gross profit x 100
Installment sales
Unrealized gross profit rate = 25,000 x 100
125,000
Unrealized gross profit rate = 20%
Computation of Realized Gross Profit (RGP):

Realized gross profit = Cash collection X DGP%
Realized gross profit = 90,000 x 20%
Realized gross profit = 18,000
Computation of Gain or Loss on Repossession:

Installment accounts receivable cancelled 10,500
Less: Unrealized gross profit (10,500 x 20%) (2,100)
Book value 8,400
Less: Merchandise repossessed at fair market value 3,000
Loss on repossession 5,400
ALI COMPANY
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Merchandise 103,500
Accounts payable 103,500
(To record the merchandise purchased on
account)
2 Installment accounts receivable 125,000
Installment sales 125,000
(To record the good sold on installment basis)
3 Cash 90,000
Installment accounts receivable 90,000
(To record the cash collected on installment
basis)
4 Accounts payable 95,000
Cash 95,000
(To record the payment to suppliers)
5 Selling expenses 1,200
Cash 1,200
(To record the selling expenses paid)
6 General expenses 2,300
Cash 2,300
(To record the general expenses paid)
Page 7
Installment Sales
Chapter # 1
ALI COMPANY
ADJUSTING ENTRIES
1 Cost of installment sales 100,000
Merchandise 100,000
(To record the cost of installment sales)
2 Installment sales 125,000
Cost of installment sales 100,000
Unrealized gross profit 25,000
(To adjust the unrealized gross profit)
3 Unrealized gross profit 18,000
Realized gross profit 18,000
(To adjust the realized gross profit)
4 Merchandise repossessed 3,000
(To adjust the repossession of merchandise)
ALI COMPANY
CLOSING ENTRIES
1 Expense and revenue summary 8,900
Selling expenses 1,200
General expenses 2,300
(To close the all expense accounts)
2 Realized gross profit 18,000
Expense and revenue summary 18,000
(To close the all income accounts)
Capital 9,100
(To close the expense and revenue summary
account)
ILLUSTRATION # 2:
The selected balances of ABC Installment Sales Co. are as follows:
2007 – Jan. 1 2007 – Dec. 31
Installment accounts receivable - 2005 90,000 -
Installment accounts receivable – 2006 285,000 135,000
Installment accounts receivable – 2007 - 337,500
Deferred gross profit – 2005 22,500 18,750
Installment sales - 450,000
Cost of installment sales - 306,000
Repossessed merchandise - 12,000
Installment accounts receivable – 2005 cancelled on
repossession - 15,000
Page 8
Installment Sales
Chapter # 1
REQUIRED
a) Gross profit realized during 2007.
b) General Journal entries including adjusting entries during 2007.
SOLUTION # 2:
Computation of Unrealized Gross Profit (DGP) (2007):
Unrealized gross profit = 144,000

Unrealized gross profit rate (2007) = Unrealized gross profit x 100
Installment sales
Unrealized gross profit rate (2007) = 144,000 x 100
450,000
Unrealized gross profit rate (2007)= 32%
Unrealized gross profit rate (2006) = Unrealized gross profit (Beg) x 100
Installment A/R (Beg)
285,000
90,000
Computation of Cash Collection:

Cash collection (2007) = Installment sales – Installment accounts receivable (ending)
Cash collection (2007) = 450,000 – 337,500
Cash collection (2007) = 112,500
Cash collection (2006) = Installment A/R (Beg) – Installment A/R (End)

Cash collection (2006) = 285,000 – 135,000
Cash collection (2005) = Installment A/R (Beg) – Installment A/R (End) –

Installment A/R cancelled
Cash collection (2005) = 90,000 – 0 – 15,000
Computation of Realized Gross Profit:

Realized gross profit (2007) = 112,500 x 32% 36,000
Total realized gross profit = 99,750
Page 9
Installment Sales
Chapter # 1
Installment accounts receivable cancelled 15,000
Less: Unrealized gross profit (15,000 x 25%) (3,750)
Book value 11,250
Less: Merchandise repossessed at fair market value (12,000)
Gain on repossession 750
ABC INSTALLMENT SALES CO.

GENERAL JOURNAL
1 Installment accounts receivable (2007) 450,000
2 Cash 337,500
Installment accounts receivable (2007) 112,500
basis)
ABC INSTALLMENT SALES CO.

ADJUSTING ENTRIES
Merchandise 306,000
Unrealized gross profit (2007) 144,000
3 Unrealized gross profit (2007) 36,000
4 Merchandise repossessed 12,000
Gain on repossession 750
ILLUSTRATION # 3:
The following are transactions for 2008 of XYZ Installment Sales Company which follows
the perpetual system and FIFO method for inventory valuation had 25 machines @ Rs.290
per machine in beginning inventory:
(a) Purchased 150 machines @ Rs.300/- per machine.
(b) Sold 125 machines @ Rs.500/- per machine.
(c) Received down payment @ Rs.100/- per machine.
(d) Received 497 installments @ Rs.50/- per installment.
Page 10
Installment Sales
Chapter # 1
(e) Repossesses one machine from a customer at a fair market value of Rs.200, who had
paid only down payment and one installment.
REQUIRED
Give General Journal entries including adjusting entry supported by proper computations.
Also determine ending inventory of merchandise.
SOLUTION # 3:
Computation of Merchandise Inventory Ending:
Merchandise inventory opening units 25
Add: Units purchases 150
Merchandise available for sale in units 175
Less: Units sold (125)
Merchandise inventory ending in units 50
Merchandise inventory ending = Units at end x Cost per unit
Merchandise inventory ending = 50 x 300
Merchandise inventory ending = Rs.15,000
Computation of Cost of Installment Sales:

Merchandise inventory opening (25 x 290) 7,250
Add: Purchases (150 x 300) 45,000
Merchandise available for sale 52,250
Less: Merchandise inventory ending (15,000)
Cost of installment sales Rs.37,250
Computation of Installment Sales:

Installment sales = Units sold x Selling price per unit
Installment sales = 125 x 500
Installment sales = Rs.62,500
Computation of Unrealized Gross Profit:

Unrealized gross profit = Rs.25,250

Unrealized gross profit rate = Unrealized gross profit x 100
Installment sales
Unrealized gross profit rate = 25,250 x 100
62,500
Unrealized gross profit rate = 40.4%

Down payment (125 x 100) 12,500
Add: Installment received (497 x 50) 24,850
Total cash collection Rs.37,350

Realized gross profit = 37,350 x 40.4%
Realized gross profit = Rs.15,089
Page 11
Installment Sales
Chapter # 1
Installment sales 500
Less: Down payment (100)
Installment accounts receivable 400
Less: Installment received (50)
Installment accounts receivable cancelled 350
Less: Unrealized gross profit (350 x 40.4%) (141)
Book value 209
Less: Merchandise repossessed at fair market value (200)
Loss on repossession Rs.9
XYZ INSTALLMENT SALES COMPANY

GENERAL JOURNAL
1 Merchandise (150 x 300) 45,000
(To record the goods purchased on account)
2 Installment accounts receivable 62,500
3 Cash 12,500
(To record the down payment received)
4 Cash 24,850
basis)
XYZ INSTALLMENT SALES COMPANY

ADJUSTING ENTRIES
Merchandise 37,250
3 Unrealized gross profit 15,089
4 Merchandise repossessed 200
Unrealized gross profit 141
Loss on repossession 9
Installment accounts receivable 350
Page 12
Installment Sales
Chapter # 1
INCOME STATEMENT
Sales XXX
Less: Cost of goods sold (XXX)
Gross profit XXX
Add: Realized gross profit (RGP) XXX
Total gross profit XXX
Less: Operating expenses (XXX)
Net profit XXX
BALANCE SHEET
Assets (Rupees) Equities (Rupees)
Current Assets: Liabilities:
Cash XXX Accounts payable XXX
Accounts receivable XXX Other liabilities XXX
Installment A/R (1st year) XXX Total liabilities XXX
Installment A/R (2nd year) XXX
Merchandise inventory XXX Owner’s Equity:
Other current assets XXX Capital XXX
Total current assets XXX Add: Net profit XXX
Add: D.G.P (1st year) XXX
Fixed Assets: Add: D.G.P (2nd year) XXX
Land XXX Total owner’s equity XXX
Other fixed assets XXX
Total fixed assets XXX
Total assets XXX Total equities XXX
ILLUSTRATION # 4: (FINANCIAL STATEMENTS)

The following trial balance has been prepared from the ledger of Imran & Co:
IMRAN & CO.
TRIAL BALANCE
AS ON DECEMBER 31, 2001
Debit (Rs.) Credit (Rs.)
Cash 33,750
Installment accounts receivable – 2001 123,750
Accounts receivable 60,750
Inventory January 1, 2001 117,000
Land and building 45,000
Deferred gross profit – 2000 81,000
Share capital 225,000
Retained earnings 16,250
Sales 418,750
Purchases 750,000
Shipment on installment sales 540,000
Operating expenses 416,250
Total 2,113,500 2,113,500
Page 13
Installment Sales
Chapter # 1
Other Information:
Inventory of merchandise on December 31, 2001 was Rs.123,750. The following account
balances were found in the post-closing trial balance prepared on January 1, 2001.
REQUIRED
(a) Prepare Income Statement and Balance Sheet for the year ended on Dec. 31, 2001.
(b) Pass the adjusting and closing entries.
SOLUTION # 4:
Computation of Unrealized Gross Profit:
Unrealized gross profit = Rs.180,000

Unrealized gross profit rate (2001) = Unrealized gross profit x 100
Installment sales
720,000
270,000

Cash collection (2001) = Installment sales – Installment accounts receivable (ending)
Cash collection (2001) = 720,000 – 123,750
Cash collection (2001) = Rs.596,250
Cash collection (2000) = Installment A/R (Beg) – Installment A/R (End)

Cash collection (2000) = 270,000 – 27,000
Cash collection (2000) = Rs.243,000

Total realized gross profit = Rs.221,963
Page 14
Installment Sales
Chapter # 1
Imran & Co.
Income Statement
For the Period Ended 31 December 2001
(Rupees) (Rupees)
Sales 418,750
Less: Cost of Goods Sold:
Merchandise inventory (beginning) 117,000
Add: Net purchases 750,000
Less: Shipment on installment sales (540,000)
Less: Merchandise inventory (ending) (123,750)
Cost of goods sold (203,250)
Gross profit 215,500
Add: Realized gross profit (R.G.P) 221,963
Total gross profit 437,463
Less: Operating expenses (416,250)
Net profit 21,213
Computation of Retained Earnings Ending Balance:

Retained earnings (unadjusted balance) 16,250
Add: Net profit for the period 21,213
Retained earnings adjusted balance Rs.37,463
Imran & Co.

Balance Sheet
As on 31 December 2001
Cash 33,750 Accounts payable 112,500
Accounts receivable 60,750 Total liabilities 112,500
Installment A/R (2001) 123,750
Installment A/R (2000) 27,000 Owner’s Equity:
Merchandise inventory 123,750 Share capital 225,000
Total current assets 369,000 Add: Retained earnings 37,463
Add: D.G.P (2001) 30,937
Fixed Assets: Add: D.G.P (2000) 8,100
Land and building 45,000 Total owner’s equity 301,500
Total fixed assets 45,000
Total assets 414,000 Total equities 414,000
Page 15
Installment Sales
Chapter # 1
Imran & Co.
Adjusting & Closing Entries
Merchandise 540,000
3 Unrealized gross profit (2001) 149,063
4 Expense and revenue summary 1,283,250
Purchases 750,000
(To close the various expense accounts)
5 Sales 418,750
Shipment on installment sales 540,000
Merchandise inventory (ending) 123,750
Expense and revenue summary 1,304,463
(To close the various income accounts)
(To record the transfer of net profit to retained
earnings account)
Page 16
Installment Sales
Chapter # 1
PRACTICE QUESTIONS
Question # 1:
Standard Company sells merchandise on installment basis and uses perpetual system. Its
transactions relating to sales for 1995 are as follows:
1. Installment sales Rs.1,200,000
2. Cost of installment sales 900,000
3. Collection of installments 750,000
REQUIRED
General Journal entries including adjusting entries.
Question # 2:
Merchandise sold on installment at a gross profit of 30% was repossessed at a market value
of Rs.60,000 and installment accounts receivable of Rs.75,000 were cancelled on
repossession.
REQUIRED
Give journal entries.
Question # 3:
Irfan and Company sells refrigerators at 20% above cost and keeps accounts for sales by the
installment method. In 2007, repossessions were made on unpaid installment contract
balances of Rs.90,000. Repossessed units had a total resale value of Rs.81,000. The company
records such repossessions at a value that will permit the normal margin on sales.
REQUIRED
Give the entry to summarize the repossessions for 2007.
Question # 4:
Rehan Co. Ltd. reports profits on installment basis. It uses perpetual inventory system, for
recording merchandise. The transactions for the year ended Dec. 31, 2007 are as under:
1. Purchased merchandise on account for Rs.540,000.
2. Sales on installment basis Rs.675,000.
3. Cost of installment sales Rs.375,000.
4. Collection of installment accounts receivable Rs.450,000.
5. Payment of accounts payable Rs.232,500.
6. Repossession of goods sold on installment basis:
Installment account receivable cancelled Rs.33,000.
Repossession of goods valued Rs.16,500.
7. Expenses incurred but not paid Rs.12,000.
REQUIRED
Give entries in General Journal to record the above transactions including adjusting and
closing entries.
Question # 5:
Irfan Limited sells merchandise on installment basis. Data relating to the inventory,
purchases and sales of equipment during the year 2010 are as follows:
Inventory of equipment January 1, 2010 Rs. 225,000
Purchases of equipment on account 750,000
Sales of equipment during the year 1,125,000
Cash collection from customers 375,000
Inventory of equipment December 31, 2010 300,000
Page 17
Installment Sales
Chapter # 1
REQUIRED
Give journal entries in the General Journal to record the above transactions including
adjusting and closing entries.
Question # 6:
The Kabir Company sells merchandise on installment basis. Data relating to the inventory,
Sales of equipment during the year 1,125,000
REQUIRED
Question # 7:
Nizam Sons use perpetual inventory system for recording merchandise. Summarized data
for the year 2004 are as under:
1. Sales made on installment basis 750,000.
2. Collecting from installment A/R 300,000.
3. Operating expenses paid 48,000.
4. Operating expense payable 4,500.
5. Cost of installment sales 600,000.
6. Installment accounts receivable cancelled 45,000.
7. Repossessed goods valued at 33,000.
REQUIRED
(a) Calculate gross profit rate.
(b) Find out loss/gain on repossession.
(c) Pass journal entries for recording the above transactions including adjusting and
closing entries.
Question # 8:
Umar & Sons Ltd. uses perpetual inventory system for recording merchandise and
installment method for recognizing profit. Their transactions for the year ended June 30,
2005 were as under:
1. Sales on installment basis Rs.675,000
3. Purchased merchandise on account for 750,000
5. Payment of accounts payable 300,000
6. Expenses paid 6,000
7. Installment accounts receivable cancelled 37,500
8. Repossessed merchandise was valued 24,000
REQUIRED
Record the above transactions in General Journal giving adjusting and closing entries.
Page 18
Installment Sales
Chapter # 1
Question # 9:
Mulla & Co. uses perpetual inventory system for recording merchandise and installment
method for recognizing profit. Their transactions for the year ended June 30, 1993 were as
under:
1. Purchased merchandise on account Rs.750,000
2. Purchased merchandise for cash 225,000
3. Sales on installment basis 900,000
5. Payment to creditors 375,000
6. Cost of merchandise sold on installment 675,000
7. Paid expenses 21,000
8. Repossession of merchandise sold on installment basis:
o Installment accounts receivable cancelled 60,000
o Value of repossessed goods 30,000
REQUIRED
Record the above transactions in General Journal giving adjusting and closing entries.
Question # 10:
Ahmad Installment Sales Company uses perpetual inventory system for recording
merchandise and installment method for recognizing profit. The following transactions
were incurred for the year ended June 30, 1992:
1. Installment sales Rs.450,000
2. Cash collection during the year 300,000
4. Office expenses paid 15,000
5. General expenses paid 7,500
REQUIRED
(a) Give the journal entries that would be made to record the above transactions along
with adjusting and closing entries for the year ended June 30, 1992.
(b) Prepare Income Statement and Balance Sheet on June 30, 1992.
Question # 11:
Jadid Homes sells bedroom furniture on installment basis. Following information pertains
to the accounting records for three years of operations:
2003 2004 2005
Installment sales 225,000 300,000 375,000
Cost of installment sales 150,000 225,000 300,000
Selling & administrative expenses 75,000 90,000 120,000
Collection from Customers:
Installment sales 2003 120,000 60,000 30,000
Installment sales 2004 --- 150,000 120,000
Installment sales 2005 --- --- 225,000
The firm uses installment method of recognizing revenue.
REQUIRED
(a) Compute the following for each year:
1. Deferred gross profit 2. Rate of deferred gross profit
3. Realized gross profit 4. Net profit or loss
(b) Record collection of cash and realize gross profit for each year separately in the
General Journal of Jadid Homes.
Page 19
Installment Sales
Chapter # 1
Question # 12:
Rashid Company sells all merchandise on installment basis. Following information obtained
from the accounting records for first three years of operations:
Year 1 Year 2 Year 3
Installment sales 270,000 360,000 300,000
Cost of installment sales 162,000 208,800 168,000
Operating expenses 75,000 82,500 81,000
Collection from Customers:
Installment sales of year 1 112,500 90,000 60,000
Installment sales of year 2 --- 150,000 120,000
Installment sales of year 3 --- --- 127,500
REQUIRED
(a) Determine the amount of net profit or net loss that would have been reported in
each of the three years if the installment method of recognizing revenue had been
employed.
(b) Record collection of cash and realize gross profit in each of the three years.
Question # 13:
Sarwar Associates sell merchandise on installment basis. The transactions for the year
ended Dec. 31, 2009 are as under, with merchandise inventory on Jan. 1, 2009 Rs.165,000.
1. Purchase of goods on Rs.1,125,000 of which Rs.337,500 was for cash.
2. Collection of installment accounts receivable were as under:
2007 Rs.105,000
2008 180,000
2009 450,000
3. Total sales on installment basis for the year Rs.975,000.
4. Accounts payables of Rs.600,000 were settled through bank.
5. Installment accounts receivable of 2007 were cancelled amounted to Rs.30,000 and
the repossessed merchandise was assigned a resale value of Rs.22,050.
6. Expenses totaled Rs.60,000 of which expenses amounting to Rs.37,500 were paid.
Ending inventory of merchandise was valued Rs.510,000.
Gross profit rate in 2007 was 30% and in 2008 25%.
REQUIRED
Record all above transactions including adjusting & closing entries under perpetual system.
Question # 14:
Umair & Company sells merchandise on installment basis. The transactions for the year
ended December 31, 2001 are as under:-
1. Merchandise inventory Jan. 1, 2001 225,000.
2. Purchased merchandise on account 600,000.
3. Purchased merchandise for cash 300,000.
4. Sold merchandise on installment basis 1,200,000.
5. Collection of installment accounts receivable of 2001 450,000.
6. Collection of installment accounts receivable of 1999 75,000
7. Collection of installment accounts receivable of 2000 150,000.
8. Payment made to creditors 375,000.
9. Installment accounts receivable of 1999 in the amount of Rs.12,000 was cancelled
because of default but the merchandise could not be repossessed.
10. Expenses paid 37,500.
11. Merchandise inventory Dec. 31, 2001 405,000.
Note: Gross profit rate 1999 – 42%, 2000 – 44%.
Page 20
Installment Sales
Chapter # 1
REQUIRED
Record the above transactions in the general journal and also give adjusting and closing
entries at December 31, 2001 assuming the company follows the perpetual inventory
system.
Question # 15:
A-One Co. follows the perpetual inventory system and FIFO method for inventory valuation
and closes its book twice in a year at June 30, and December 31.
Balances at January 1, 2001:
Installment accounts receivables – 1999 Rs.112,500
Installment accounts receivables – 2000 225,000
At June 30, 2001:
Installment sales made at 25% above cost during the 6 – month period Rs.675,000
An installment accounts receivable – 1999 cancelled 7,500
Repossessed merchandise was assigned a value of 3,750
REQUIRED
1. Compute gross profit rates of the installment sales originated in 1999 and 2000.
2. Prepare a statement showing collection of installment accounts receivables of 1999,
2000 and 2001 at June 30, 2001.
3. Give all necessary entries under installment method for recording transactions
concerning installment sales including an adjusting entry for recording realized
gross profit.
4. Record repossession without recognizing loss or gain.
Question # 16:
Alam Co. follows the perpetual inventory system and closes its books twice in a year at June
30, and Dec. 31.
Balance at January 1, 2003:
Installment A/Receivable – 2002 Rs.262,500
Deferred gross profit – 2002 Rs.112,500
At June 30, 2003:
Installment sales made at 40% gross profit during the 6 months period Rs.675,000
An installment A/Receivable – 2002 cancelled 7,500
Repossesses merchandise was assigned a value of 3,750
Installment A/Receivable – 2002 67,500
Installment A/Receivable – 2003 262,500
REQUIRED
(1) Compute gross profit rate of the installment sales originated in 2002.
(2) Show collection of installment A/Receivable of 2002 and 2003, at June 30, 2003.
(3) Give all necessary entries under installment method for recording transactions
concerning installment sales including an adjusting entry for recording realized
gross profit.
(4) Record repossession recognizing loss or gain.
Page 21
Installment Sales
Chapter # 1
Question # 17:
Ideal Sales Company sells goods on installment basis. Its balances on Dec. 31, 2001 were:
Installment accounts receivable Rs.210,000
Unrealized gross profit Rs.60,000
Summary of the transactions for the year 2002 is as follows:
(a) Installment sales Rs.735,000.
(b) Collection of installment of current year Rs.630,000.
(c) Collection of installment of 2001 Rs.84,000.
(d) Cancellation of installment contract 2001 Rs.31,500.
(e) Repossessed goods valued at Rs.20,250.
In both years the goods have been sold at 40% above cost.
REQUIRED
1. Entries to record the transactions for 2002.
2. Adjusting and closing entries for 2002.
3. Show how the relevant account will be reported in balance sheet on Dec. 31, 2002.
Question # 18:
The following balances are taken from the pre-closing trial balance of Hassan Co. as of Dec.
31, 2007:
1. Installment accounts receivable – 2006 Rs.120,000
2. Installment accounts receivable – 2007 180,000
3. Installment sales 300,000
5. Unrealized gross profit – 2006 120,000
REQUIRED
(1) Prepare all entries for the year ended Dec. 31, 2007 adjusting and closing as well,
assuming that rate of gross profit on installment sales of 2006 was 25%. Show all
computations.
(2) On Jan. 10, 2008 a customer defaulted on his payment. Give journal entries for
repossession with the help of the following information:
1. Original sale on installment Rs.3,000
2. Date of sale 12 Aug 2006
3. Collection up to date Rs.2,250
4. Estimated market value of repossessed merchandise Rs.900
Question # 19:
Al-Fazal Manufacturing Co. sells its finished products for cash, on credit and on installment.
Accidently, some water was spread on the accounting records of installment sales and some
of the pages were smeared. After drying, only the following portion is readable:
January 1, 1999
Installment accounts receivable 1998 Rs.120,000
Deferred gross profit 1998 Rs.48,000
December 31, 1999
(Before Adjustment)
During 1999, installment sales were made at 45% gross profit rate.
Page 22
Installment Sales
Chapter # 1
REQUIRED
1. Reconstruct in general journal form as many summary entries as possible for 1999
under installment method including adjusting and closing entries. Show necessary
supporting computations.
2. Give an entry to record repossession assuming that the repossessed merchandise
was recorded at its book value.
Question # 20:
The selected balances of Akbar Installment Sales Co. are as follows:
1997 – Jan. 1 1997 – Dec. 31
Installment accounts receivable – 1995 180,000 -
Installment accounts receivable – 1996 570,000 270,000
Installment accounts receivable – 1997 - 675,000
Installment sales - 900,000
Cost of installment sales - 612,000
Repossessed merchandise - 24,000
Installment accounts receivable – 1995 cancelled on
repossession - 30,000
REQUIRED
a) Gross profit percentage for each year.
b) Collection of installment accounts receivable of each year during 1997.
c) Gross profit realized during 1997.
d) General Journal entries made during 1997 on repossession.
e) General Journal entries to record the realized gross profit.
Question # 21:
The following are the selected assets and equities of Gulbahar Installment Co. on December
31, 2008:
Assets Equities
Cash 180,000 Accounts Payable 30,000
Merchandise Inventory 120,000 Deferred Gross Profit – 2007 60,000
Installment A/R 2007 300,000 Capital 510,000
Total Assets 600,000 Total Equities 600,000
Transactions During 2008 Are As Under:
Merchandise purchased on accounts 480,000
Collection from installment accounts receivable – 2007 150,000
Collection from installment accounts receivable – 2008 300,000
Payment of accounts payable 375,000
Installment accounts receivable – 2007 defaulted of 120,000
Merchandise repossessed at fair market value 30,000
Operating expenses paid 15,000
Merchandise inventory-ending (including repossessed merchandise) 180,000
Company uses perpetual inventory system (FIFO basis) for recording merchandise and
installment method for recognizing profits.
REQUIRED:
Give entries in General Journal to record the above data, including adjusting and closing
entries for the year 2008.
Page 23
Installment Sales
Chapter # 1
Question # 22:
Naseem & Company sells merchandise on installment basis. The summary of transactions
for the year ended December 31, 1985 and December 31, 1986 are as follows:
1985 1986
Installment sales 750,000 1,125,000
Collection in respect of 1985 installment sales 450,000 225,000
Collection in respect of 1986 installment sales - 675,000
Purchase on account 615,000 750,000
Selling & general expenses 112,500 255,000
Payment of accounts payable 375,000 750,000
Merchandise inventory ending 150,000 225,000
REQUIRED:
Give journal entries for the years ended December 31, 1985 and 1986 including adjusting
journal entries.
Question # 23:
The following are transactions for 1998 of Lahore Installment Sales Company which follows
the perpetual system and FIFO method for inventory valuation had 75 machines @ Rs.870
per machine in beginning inventory:
(a) Purchased 450 machines at the rate of Rs.900/- per machine.
(b) Sold 375 machines at the rate of Rs.1,500/- per machine.
(c) Received down payment at the rate of Rs.300/- per machine on 375 machines.
(d) Received 1,497 installments at the rate of Rs.150/- per installment.
(e) Repossesses one machine from a customer, who had paid only down payment and
one installment.
REQUIRED
General journal entries including adjusting entry supported by proper computations. Also
determine ending inventory of merchandise.
Question # 24:
Smart Home Company sells local vacuum cleaners on installment basis. The company uses
perpetual system and first in first out method for inventory valuation. The company has 150
vacuum cleaners of Rs.900 each in the beginning inventory. The company completed the
following transactions during the year:
(a) Purchased 450 vacuum cleaners at Rs.975 each.
(b) Sold 375 vacuum cleaners at Rs.1,500 each.
(c) Collected down payment at Rs.300 on each vacuum cleaner.
(d) The balance to be collected in 4 equal quarterly installments of Rs.300 each.
(e) All installments were collected in full except a customer who failed to pay the last
installment.
(f) The equipment was repossessed. The value of repossessed equipment was Rs.150.
REQUIRED
(a) General journal entries including adjusting.
(b) Cost of installment sales.
(c) Gain or loss on repossession and gross profit realized.
Page 24
Installment Sales
Chapter # 1
Question # 25:
The following transactions relate to Al-Abid Co. for 2006 which follows the perpetual
inventory system and FIFO method for valuation of inventory.
Opening inventory consist of 75 machines @ Rs.840 per machine. They completed the
following transactions:
(1) Purchased 525 machines @ Rs.900 per machine on account.
(2) Sold 375 machines @ Rs.1,500 each on installments.
(3) Received down payment @ Rs.300 per machine on all the sold machines.
(4) Received 1,496 installments @ Rs.150 per installment.
(5) Repossessed one machine from a customer who had paid only down payment
having market value of Rs.750.
REQUIRED
Journal entries including adjusting and closing entries. Show all computations.
Question # 26:
Mifta Installment Company purchased 15 computers from Alam & Bilal Traders @
Rs.50,400 each on credit. The company sold 7 computers on installment @ Rs.63,000 each
on September 1, 2008. The terms of installment sales were to pay 25% on each computer as
a down payment and the remaining amounts to be collected in 15 monthly installments
starting from October 1, 2008.
All installments collected on the first day of each month. Three of the computer holders
defaulted to pay the installments after the payment of 5th installment and company
repossessed the computers which have the fair market value of Rs.25,500 each computer.
Mifta Installment Company closes its accounting year on June 30 each year.
REQUIRED
Compute the following:
1. Amount of installment sales.
2. Amount of down payment received.
3. Monthly installment amount of each computer.
4. Unrealized (deferred) gross profit.
5. Rate of Unrealized (deferred) gross profit.
6. Total amount of installment accounts receivable cancelled.
7. Book value of repossessed merchandise.
8. Gain or loss on repossession.
9. Total amount collected during the period.
10. Amount of realized gross profit.
Question # 27:
On January 1, 1997 the X.Y. Co. sold a car for Rs.900,000 on installment basis. Rs.150,000
was received as down payment and balance amount in five quarterly installment including
interest. The rate of interest charge on the unpaid balance is 6% per annum. The cost of the
car was Rs.675,000. All payments were duly received. The accounting year ends on
December 31, each year.
REQUIRED
Give journal entries including adjusting and closing entries for the year 1997 only.
Page 25
Installment Sales
Chapter # 1
Question # 28:
On July 1, 1993, Shaheen Autos sold 10 Suzuki cars on installment basis at Rs.202,500 per
car, the cost being Rs.172,125 per car. The terms of sale were:
a) Rs.52,500 per car should be paid at the time of signing the agreement.
b) The balance should be paid in 20 quarterly of Rs.7,500 per car.
c) Interest at 8% should be paid on the unpaid balances, and be paid along with the
installment amount.
REQUIRED
Make necessary journal entries including adjusting and closing of entries in the books of
Shaheen Autos in respect of the above transactions for the year ended December 31, 1993
assuming that Shaheen Autos closes its books on December 31, every year. Shaheen Autos
follows installment method for recognizing profits.
Question # 29:
Hasnain & Brothers follows installment method for recognizing profits & closes its
accounting year on June 30, every year.
On September 12, 2010 Hasnain & Brothers purchased 30 computers from Tauseef
Computers for Rs.54,000 each on credit.
On October 1, 2010 Hasnain & Brothers sold 25 computers @ Rs.67,500 each. The
customers paid Rs.30,000 per computer as down payment of October 1, 2010 and agreed to
pay the balance in 8 equal quarterly installments (The first quarter started from October 1,
2010). The ownership would be transferred on the payment of the final installment. The
installments received on the last day of each quarter.
REQUIRED
Prepare journal entries including adjusting and closing to record the above transactions
only for the year ended June 30, 2011.
Question # 30:
City Cars deals with two brands of fuel economy local cars namely GL and XL. The selling
price of GL cars is Rs.675,000 each while the XL cars are sold for Rs.600,000. 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 on 10 monthly installments of equal amounts.
The business completed the following transactions during the year:
Purchased 10 units of GL cars 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:
(i) A customer failed to pay last three installments due on the XL cars he had purchased.
The vehicle was fortified and assigned a value of Rs.225,000. The car was taken by
the owner for his personal use.
(ii) A cheque amounting to Rs.108,000 received from a customer who bought a GL car
was dishonored.
City Cars incurred and paid the following expenses during the year:
Administrative expense 105,000
REQUIRED
(a) General Journal entries in City Cars’ book (adjusting and closing are not required).
(b) Cost of installment sales for each brand separately.
(c) Gross profit realized on each brand of cars.
(d) Net profit of City Cars for the year.
Page 26
Installment Sales
Chapter # 1
Question # 31:
Kamran Electric Company’s deals in the sales of generators on installment basis. The
company has two plans which are summarized below:
Explanation Plan “A” Plan “B”
Down payment for each 10% of the sales price Rs.10,500
generator
No. of installments 15 equal monthly 5 equal quarterly
installments installments
Rate of interest on unpaid Nil 6% per annum
balance
Installment amount due At the start of the each At the end of each month
month
Kamran Company had inventory of 30 generators 2500KV costing Rs.1,200,000.
Under Plan – A, company sold 6 generators to Sardar Industries on October 5, 2009 at a
profit of 35% on cost. Sardar Industries will start to pay installments from November, 2009.
Under Plan – B, company sold 5 generators to Shahani & Sons for Rs.75,000 each on June 28,
2009. Quarter starts from July 1, 2009.
REQUIRED
Prepare dated journal and adjusting entries, separately under each plan for 2009 only.
Question # 32:
The following trial balance has been prepared from the ledger of M/S. Rehman & Co. traders
dealing in installment sales. Taking the facts and figures from the trial balance you are
asked to:
(c) Find the gross profit percentage on installment sales in 1989, 1990 and 1991.
(d) Prepare Income Statement and Balance Sheet for the year ended on Dec. 31, 1991.
(e) Pass the adjusting and closing entries.
M/S. REHMAN & CO.
TRIAL BALANCE
AS ON DECEMBER 31, 1991
Cash Rs.67,500
Inventory December 31, 1990 234,000
Land and building 60,000
Furniture and fixture 30,000
Share capital 450,000
Profit and loss account balance 326,880
Sales 517,500
Installment sales 1,440,000
Purchases 1,497,150
Cost of installment sales 1,080,000
Shipment on installment sales 1,080,000
Total 4,237,650 4,237,650
Page 27
Installment Sales
Chapter # 1
Other Information:
Inventory of merchandise on December 31, 1991 was Rs.247,500. The following account
balances were found in the post-closing trial balance prepared on January 1, 1991.
Question # 33:
The Daniyal Electric Products Company manufactures table fans. It is a practice of the
company to sell 30% of its production on installment basis. The company recognizes profit
on sales on the basis of cash collected from customers. The following are the data for three
years:
Years Profit Installment Receivable Collection Installment Receivable on
on January 1, 2010 During 2010 December 31, 2010
2008 44% Rs.120,000 Rs.120,000 ---
2009 42% Rs.247,500 Rs.112,500 Rs.135,000
2010 40% Rs.225,000 Rs.450,000
REQUIRED
Prepare all journal entries for 2010 from the data above, including those required for the
recognition of gross profit at the end of year.
Question # 34:
Khan and Company reports profits on installment basis. It uses perpetual inventory system
for recording merchandise and installment method for recognizing profits. Transactions
during 2011 are summarized below:
a) Cost of installment sales Rs.400,000.
b) Installment accounts receivable (ending) – 2011 Rs.300,000.
c) Installment accounts receivable cancelled – 2010 Rs.40,000.
d) Merchandise repossessed at book value which is Rs.32,000.
e) Unrealized gross profit (beginning) – 2010 Rs.30,000.
f) Installment accounts receivable (ending) – 2010 Rs.20,000.
g) Unrealized gross profit percentage remains constant in both the years.
REQUIRED
a) Give the necessary General Journal entries including adjusting entries. Show
necessary computations.
b) Prepare partial balance sheet as on 31 December 2011 showing installment
accounts receivable and unrealized gross profit.
Page 28
Chapter # 2
Branch Accounting
Advanced Accounting
Branch Accounting
Chapter # 2
 Head office and branch accounting.

 Recording of reciprocal transactions.
 Billing of merchandise at cost and above cost.
 Reconciliation.
 Periodic adjustments.
 Closing process.
 Financial Statement.
 Computation of:
o Allowance for overvaluation rate.
o Allowance for overvaluation.
 General Journal entries in the books of head office.
 General Journal entries in the books of branches.
 Adjusting and closing entries in the books of head office.
 Adjusting and closing entries in the books of branches.
 Head office and branch account reconciliation statement.
 General Ledger of head office account and branch account.
 Income Statement of branch.
 Income Statement of head office.
 Consolidated Income Statement.
 Balance Sheet of branch.
 Balance Sheet of head office.
 Consolidated Balance Sheet.
Page 30
Branch Accounting
Chapter # 2
BRANCH ACCOUNTING
Branch accounting is an accounting system in which each department or Branch of a
business is established as a separate cost centre or budget centre. The net profit per Branch
may be added together to arrive at the profit for the whole business. Branch accounts may
be prepared to show the performance of both a main trading centre (i.e. the Head Office)
and subsidiary trading centre (i.e. Branches) but with all the accounting records being
maintained by Head Office. Alternatively, separate entity Branch accounts are prepared in
which Branches maintain their own records, which are later combined with Head Office
records to prepare accounts for the whole business.
ACCOUNTING SYSTEM FOR A BRANCH

There are two alternative systems:
1. The branch does not maintain a complete set of accounting records. The head
office serves only as an accounting and control center for the branches.
2. The branch maintains a complete set of accounting records consisting of journal
entries and ledger accounts. Financials statements are prepared by the branch
account and forwarded to the head office.
This chapter focuses on the second system that the branch maintains its own accounting
records.
RECIPROCAL LEDGER ACCOUNTS USED BY THE HEAD OFFICE AND BRANCH

 Head Office Ledger Account:
This account is used by the branch to account for all transactions with the home office. It is
credited for all cash, merchandise or other assets provided by the head office to the branch.
It is debited for all cash, merchandise, or other assets sent by the branch to the head office
or to other branches. This account represents the net investment by the head office in the
branch. At the end of a period, the balance of Income Summary account of a branch is closed
to the head office account.
 Branch Ledger Account:

This account is a reciprocal ledger account (to head office account) used by the head office
to account for any transactions with the branches. It is debited for cash, merchandise and
services provided to the branch by the head office and for the net income reported by the
branch. It is credited for cash, or other assets received from the branch, and for net losses
reported by the branch.
METHODS OF BILLING MERCHANDISE SHIPMENT TO BRANCH

Three alternative methods are available to head office in billing the merchandise shipped to
the branches:
1. Billed at head office cost.
2. Billed at a percentage above the head office cost.
3. Billed at the branch’s retail selling price.
ALLOWANCE FOR OVER VALUATION

Head Office sells merchandise to Branch more than selling price. This additional profit
which is earned by the Head Office from the shipment of merchandise to the Branch is
known as allowance for over valuation.
Page 31
Branch Accounting
Chapter # 2
COMPUTATION OF ALLOWANCE FOR OVERVALUATION PERCENTAGE:

Allowance for overvaluation percentage = Allowance for overvaluation X 100
Cost price
COMPUTATION OF ALLOWANCE FOR OVERVALUATION:

Billed price x Allowance for
Allowance for overvaluation =
overvaluation percentage (%)
Billed percentage (%)
 Billed price means cost price plus allowance for over valuation.
 Billed percentage (%) means cost percentage (100%) plus allowance for over
valuation percentage (%).
COMPUTATION OF REALIZED ALLOWANCE FOR OVERVALUATION:

Particulars Billed Cost Allowance for over
valuation
Merchandise inventory opening (Branch) XXX XXX XXX
Add: Merchandise sent to Branch XXX XXX XXX
Less: Merchandise returned by Branch (XXX) (XXX) (XXX)
Unadjusted allowance for overvaluation XXX XXX XXX
Less: Merchandise inventory ending (Branch) (XXX) (XXX) (XXX)
Adjusted allowance for overvaluation XXX XXX XXX
GENERAL ENTRIES:
Head Office Book Branch Book
1. Purchase merchandise on account by Head Office.
Purchases Debit
No entry
Accounts payable Credit
2. Head Office remitted (transferred) cash to Branch.

Branch Debit Cash Debit
Cash Credit Head Office Credit
3. Head Office sent goods to Branch at above cost.

Branch Debit Merchandise supplied Debit
Merchandise supplied Credit Head Office Credit
Allowance for over valuation Credit
4. Head Office transferred cash to Branch for the salaries expense of Branch.
Branch Debit Salaries expense Debit
5. Head Office paid the liability of Branch.

Branch Debit Accounts payable Debit
6. Head Office received the cash from the customers of Branch.

Cash Debit Head Office Debit
Branch Credit Accounts receivable Credit
Page 32
Branch Accounting
Chapter # 2
7. Branch purchase merchandise on account.

Purchases Debit
No entry
Accounts payable Credit
8. Merchandise sold for cash by Branch.

Cash Debit
No entry
Sales Credit
9. Branch sold merchandise on account.

Accounts receivable Debit
No entry
Sales Credit
10. Branch purchase furniture for cash.

Furniture Debit
No entry
Cash Credit
11. Branch paid the liability of Head Office.

Accounts payable Debit Head Office Debit
Branch Credit Cash Credit
12. Branch received the receivable of Head Office.

Branch Debit Cash Debit
Accounts receivable Credit Head Office Credit
13. Branch returned goods to Head Office at billed price.

Merchandise supplied returned Debit Head Office Debit
Allowance for over valuation Debit Merchandise supplied returned Credit
Branch Credit
14. Branch paid the rent expense of Head Office.

Rent expense Debit Head Office Debit
Branch Credit Cash Credit
15. Branch reported a net profit to Head Office.

Branch Debit Expense and revenue summary Debit
Profit and loss account Credit Head Office Credit
16. Branch reported a net loss to Head Office.

Profit and loss account Debit Head Office Debit
Branch Credit Expense and revenue summary Credit
17. Head Office adjusts the allowance for over valuation.

Allowance for over valuation Debit
No entry
Profit and loss account Credit
Page 33
Branch Accounting
Chapter # 2
ILLUSTRATION # 1:
Shah Shoes Company opened a branch at Hyderabad on 1 July 2004. The following
information of Hyderabad branch and head office for the year ended 30 June 2005:
a) Merchandise purchase on account by head office Rs.300,000.
b) Cash received by branch from head office Rs.30,000.
c) Goods received by branch from head office Rs.295,200 (costing Rs.246,000).
d) Head office paid the liability of branch Rs.30,000.
e) Head office received from the customers of branch Rs.50,000.
f) Goods purchased by branch for cash Rs.15,800 and on account Rs.35,000.
g) Sale by branch on cash Rs.64,000 and on account Rs.215,000.
h) Salaries expenses of branch paid by head office Rs.62,200.
i) Branch paid the liability of head office Rs.19,000.
j) Collection on account by branch from customers of head office Rs.182,100.
k) Cash sent to head office Rs.152,000 by branch.
l) Defective goods returned by branch to head office at billed price of Rs.6,000.
m) Branch paid the rent expense of the head office Rs.13,000.
n) Furniture sent to branch by head office Rs.10,000.
o) Branch reported a net profit of Rs.3,000 to the head office.
p) Merchandise inventory on 30 June 2005 at branch Rs.55,200 (billed price).
REQUIRED
Make entries in the books of head office as well as in branch.
SOLUTION # 1:
Shah Shoes Company
Head Office Book
General Journal
1 Purchases 300,000
(To record the goods purchased on account)
2 Hyderabad branch 30,000
Cash 30,000
(To record the cash remitted to branch)
Merchandise supplied 246,000
Allowance for overvaluation 49,200
(To record the goods supplied to branch)
Cash 30,000
(To record the branch’s liability paid)
5 Cash 50,000
Hyderabad branch 50,000
(To record the cash received from the customers
of branch)
6 No entry
7 No entry
Page 34
Branch Accounting
Chapter # 2
Shah Shoes Company
Head Office Book
General Journal
Cash 62,200
(To record the branch’s salaries paid)
(To record the liability paid by branch)
(To record the cash received by branch from the
customers of head office)
11 Cash 152,000
(To record the cash remitted by branch)
12 Merchandise supplied returned 5,000
Allowance for overvaluation 1,000
(To record the goods returned by branch)
13 Rent expense 13,000
(To record the rent expense paid by branch)
Furniture 10,000
(To record the furniture sent to branch)
Profit & loss account 3,000
(To record the net profit reported by branch)
16 Allowance for overvaluation 39,000
(To adjust the allowance for overvaluation
account)
Computation of Realized Allowance for Overvaluation:

Allowance for over
Particulars Billed Cost
valuation
Merchandise supplied to branch 295,200 246,000 49,200
Less: Merchandise returned by Branch (6,000) (5,000) (1,000)
Unadjusted allowance for overvaluation 289,200 241,000 48,200
Less: Merchandise inventory ending (Branch) (55,200) (46,000) (9,200)
Adjusted allowance for overvaluation 234,000 195,000 39,000
Computation of Allowance for Overvaluation Rate:

Cost price
Allowance for overvaluation percentage = 49,200 X 100
246,000
Allowance for overvaluation percentage = 20%
Page 35
Branch Accounting
Chapter # 2
Computation of Allowance for Overvaluation:

Allowance for overvaluation = 5,000 x 20%
120%
Allowance for overvaluation = Rs.1,000

120%
Shah Shoes Company

Hyderabad Branch Book
General Journal
1 No entry
2 Cash 30,000
Head office 30,000
(To record the cash received from head office)
3 Merchandise supplied 295,200
Head office 295,200
(To record the goods received from head office)
Head office 30,000
(To record the liability paid by head office)
5 Head office 50,000
(To record the cash collected from the customers
by head office)
6 Purchases 50,800
Cash 15,800
(To record the goods purchased on account and
for cash)
7 Cash 64,000
Sales 279,000
(To record the goods sold for cash and on credit)
8 Salaries expenses 62,200
Head office 62,200
(To record the salaries paid by head office)
Cash 19,000
(To record the payment of liability of head office)
Page 36
Branch Accounting
Chapter # 2
Shah Shoes Company
Hyderabad Branch Book
General Journal
10 Cash 182,100
Head office 182,100
(To record the cash collected from the customers
of head office)
Cash 152,000
(To record the cash remitted to head office)
Merchandise supplied return 6,000
(To record the goods returned to head office)
Cash 13,000
(To record the rent paid for head office)
14 Furniture 10,000
Head office 10,000
(To record the furniture received from head
office)
Head office 3,000
(To record the net profit reported to head office)
TRANSACTIONS BETWEEN BRANCHES

When it is necessary to transfer merchandise or assets from one branch to another branch,
Head Office Ledger account is used by the branches. The head office will transfer the
inventory (or assets) from investment in one branch to another branch. Any excess freight
costs incurred for the transfer between branches should be expensed.
ILLUSTRATION # 2: (INTER BRANCH TRANSACTIONS)

The Karachi Head Office of Umair Company consigned to Branch “A” goods costing
Rs.45,000 and freight paid Rs.3,750. Later on the Head Office directed the Branch “A” to
transfer the entire consignment to Branch “B”. The Branch “A” dully executed the directives
and paid additional freight Rs.750. If the goods had been sent to Branch “B” directly by the
Head Office, the freight charges would have been Rs.4,200.
REQUIRED
Give entries in General Journal of:
1. Head Office 2. Branch “A” 3. Branch “B”
Page 37
Branch Accounting
Chapter # 2
SOLUTION # 2:
Umair Company
Head Office Book
General Journal
1 Branch “A” 48,750
Cash 3,750
(To record the goods supplied to branch “A”)
2 Branch “B” 49,200
Inter branch freight charges 300
Branch “A” 49,500
(To record the inter branch freight charges)
Umair Company
Branch “A” Book
General Journal
Freight charges 3,750
Head office 48,750
(To record the goods received from head office)
Cash 750
(To record the goods supplied to Branch “B”
under the instruction of head office)
Umair Company
Branch “B” Book
General Journal
Head office 49,200
(To record the goods received from Branch “A”
under the instruction of head office)
FINANCIAL STATEMENTS
Separate financial statements for branches should be prepared so that management can
evaluate the performance of each branch. The branch’s financial statements may be revised
by the head office to include the allocated expenses incurred by the head office. Also, the
financial statements of branches should be revised to eliminate any intra-company profits
on merchandise shipments or interest charge on capital investments.
For investors, the head office and branches are a single business entity. Thus, combined
financial statements should be prepared for external users.
Page 38
Branch Accounting
Chapter # 2
INCOME STATEMENT IN BRANCH BOOK

Sales revenue XXX
Less: Sales return / sales discount (XXX)
Net sales XXX
Merchandise inventory opening XXX
Add: Net purchases XXX
Add: Merchandise received from Head Office XXX
Total merchandise during the period XXX
Less: Merchandise returned to Head Office (XXX)
Less: Merchandise inventory ending (XXX)
Cost of goods sold (XXX)
Gross profit/loss XXX/(XXX)
Net profit/loss XXX/(XXX)
INCOME STATEMENT IN HEAD OFFICE BOOK

Sales revenue XXX
Net sales XXX
Less: Merchandise send to Branch (XXX)
Total merchandise during the period XXX
Add: Merchandise returned by Branch XXX
Net profit/loss from Head Office XXX/(XXX)
Add: Branch Account:
Branch net profit/loss XXX/(XXX)
Realized allowance for over valuation XXX
Adjusted Branch account XXX/(XXX)
Adjusted net profit/loss XXX/(XXX)
Page 39
Branch Accounting
Chapter # 2
CONSOLIDATED INCOME STATEMENT

Sales revenue XXX
Net sales XXX
Net profit/loss XXX/(XXX)
BALANCE SHEET IN BRANCH BOOK

Assets Equities
Accounts receivable XXX Salaries payable XXX
Merchandise inventory XXX Total liabilities XXX
Total current assets XXX
Owner’s Equity:
Fixed Assets: Head Office XXX
Equipment XXX Add: Branch profit XXX
Less: All for depreciation (XXX) Total owner’s equity XXX
Total fixed assets XXX
BALANCE SHEET IN HEAD OFFICE BOOK

Assets Equities
Branch account XXX
Total current assets XXX Owner’s Equity:
Capital XXX
Fixed Assets: Add: Branch profit XXX
Equipment XXX Add: Head Office net profit XXX
Less: Allowance for (XXX) Add: Allowance for over XXX
depreciation valuation
Total fixed assets XXX Total owner’s equity XXX
Page 40
Branch Accounting
Chapter # 2
CONSOLIDATED BALANCE SHEET

Assets Equities
Total current assets XXX
Owner’s Equity:
Fixed Assets: Capital XXX
Equipment XXX Add: Branch profit XXX
Less: All for depreciation (XXX) Add: Head Office profit XXX
Total fixed assets XXX Total owner’s equity XXX

Following are the details of head office and branch on 31 December 2010:
Head Office Branch Office
Debit Credit Debit Credit
Merchandise inventory (opening) 7,500 --- 3,750 ---
Purchases 30,000 --- 11,250 ---
Goods sent to Branch --- 18,750 --- ---
Goods received from Head Office --- --- 22,500 ---
Allowance for overvaluation --- 4,125 --- ---
Sales --- 41,250 --- 33,750
Operating expenses 6,750 --- 2,250 ---
Additional Information on 31 December 2010:
1. Closing inventory: Head Office Rs.6,000 and Branch Rs.9,750 including Rs.750
purchases from outsiders.
REQUIRED
a) Prepare Branch Income Statement.
b) Prepare Head Office Income Statement.
c) Prepare Consolidated Income Statement.
SOLUTION # 3:
Branch Book
Income Statement
Sales 33,750
Merchandise inventory opening 3,750
Add: Merchandise received from Head Office 22,500
Gross profit 6,000
Net profit 3,750
Page 41
Branch Accounting
Chapter # 2
Head Office Book
Income Statement
Sales 41,250
Merchandise inventory opening 7,500
Less: Merchandise send to Branch (18,750)
Gross profit 28,500
Net profit from Head Office operation 21,750
Add: Branch Account:
Branch net profit 3,750
Realized allowance for over valuation 2,626
Adjusted Branch account 6,375
Adjusted net profit 28,125
Computation of Realized Allowance for Overvaluation:

Allowance for over
Particulars Billed Cost
valuation
Merchandise inventory beginning 3,750 3,375 375
Add: Merchandise supplied to branch 22,500 18,750 3,750
Unadjusted allowance for overvaluation 26,250 22,125 4,125
Less: Merchandise inventory ending (Branch) (9,000) (7,500) (1,500)
Adjusted allowance for overvaluation 17,250 14,625 2,625
Computation of Allowance for Overvaluation Rate:

Cost price
Allowance for overvaluation percentage = 3,750 X 100
18,750
Allowance for overvaluation percentage = 20%
Computation of Allowance for Overvaluation:

120%
Page 42
Branch Accounting
Chapter # 2
Consolidated Income Statement
Sales (41,250 + 33,750) 75,000
Merchandise inventory opening (7,500 + 3,375) 10,875
Add: Net purchases (30,000 + 11,250) 41,250
Less: Merchandise inventory ending (6,000 + 750 + 7,500) (14,250)
Gross profit 37,125
Less: Operating expenses (6,750 + 2,250) (9,000)
Net profit 28,125
Page 43
Branch Accounting
Chapter # 2
PRACTICE QUESTIONS
Question # 1:
The following are selected transactions of Shalimar Branch working independently for the
month of August 1998:
1. Received merchandise form Head Office at a billed price of Rs.300,000.
2. Returned merchandise to Head Office at a billed price of Rs.15,000.
3. Purchased merchandise from the local market for Rs.150,000 on account.
4. Returned merchandise to the seller worth Rs.7,500.
5. Sold merchandise for Rs.52,500 on account.
6. Paid operating expenses Rs.30,000.
7. Received intimation from the Head Office that it had paid Branch operating expenses
Rs.12,000.
Other Data:
(a) Accrued operating expenses Rs.9,000.
(b) Prepaid operating expenses Rs.6,000.
(c) Merchandise inventory beginning Rs.123,000 and ending Rs.117,000.
REQUIRED
Entries in Branch General Journal including adjusting and closing entries.
Question # 2:
Ismail & Company opened a Branch at Hyderabad. The transactions of Head Office and its
Branches are as under:-
Head Office:
1. Purchase merchandise on account Rs.750,000.
2. Remitted cash to Branch Rs.375,000.
3. Shipped merchandise to Branch at a cost of Rs.450,000.
4. Paid salaries of the Branch Rs.112,500.
5. Paid the accounts payable of the Branch Rs.75,000.
6. Collected cash from Branch accounts receivable Rs.112,500.
Branch:
1. Purchase merchandise on credit Rs.187,500.
2. Sold merchandise for cash Rs.225,000.
3. Sold merchandise on credit Rs.525,000.
4. Purchase furniture for cash Rs.187,500.
5. Paid the accounts payable of the Head Office Rs.112,500.
6. Paid the rent in advance Rs.150,000.
REQUIRED
Give the necessary journal entries in the books of Head Office and Branch respectively
recording the reciprocal transactions in both the books.
Question # 3:
The Head Office of Zubair and Company carries all Branch plant assets in its own ledger.
Give entries that would appear in the books of Head Office and Branch as a result of the
following transactions:
1. The Head Office purchases Branch equipment for cash Rs.120,000.
2. The Branch pays Rs.9,000 for the installation of the equipment.
3. The Branch pays Rs.6,000 for the insurance of the equipment.
4. The Head Office records depreciation on the equipment Rs.6,000.
Page 44
Branch Accounting
Chapter # 2
Question # 4:
On January 1, 1993 Hafiz & Co. Karachi opened a Branch at Larkana, following is the
information for the month of January 1993.
1. Shifted to the Branch goods billed at Rs.135,000.
2. During the month additional shipment was made at billed price of Rs.54,000.
3. During the month Branch returned merchandise of billed price of Rs.3,375.
4. At January 31, 1993 Branch inventory at billed price was Rs.45,000.
5. Branch reported a loss for January Rs.6,750.
The Head Office has followed a practice of billing the Branch at 20% above cost of
merchandise.
REQUIRED
Give the journal entries on the books of Head Office to record the above transactions and to
record overvaluation adjustments. (Show necessary computations).
Question # 5:
On March 1, 2005 a company of Karachi opened a Branch at Lahore. The information for the
month is as under:
1. Goods supplied to Branch at billed price for Rs.247,500.
3. Goods returned by Branch at billed price of Rs.6,075.
4. Merchandise valued at Branch on March 31, 2005 for Rs.81,000.
5. The Head Office had followed the practice of billing the Branch at 25% above cost.
REQUIRED
Give the journal entries in the books of Head Office to record the above transactions and to
record overvaluation adjustment.
Question # 6:
On January 1, 2006, Bilal Co. of Karachi opened a Branch at Multan. Following is the
information for the month of January 2006:
1. Sent merchandise to Branch at billed price of Rs.144,000.
3. Branch returned merchandise of billed price Rs.7,200 during January.
4. At the end of January the inventory (at billed price) held by Branch amounted to
Rs.45,000.
5. Branch reported net profit of Rs.6,000 for the month.
The Head Office followed the practice of billing the Branch at 20% above cost of
merchandise.
REQUIRED
(1) Give journal entries in the books of Head Office including adjustment of
overvaluation.
(2) Give journal entries in the books of Multan Branch.
Note: Where computation of overvaluation is required entries without computation will
not be accepted.
Page 45
Branch Accounting
Chapter # 2
Question # 7:
Following are the transactions entered into by Zafar Co. Ltd. with its Branch at Hyderabad
during the year ended June 30, 2007. The Head Office billed merchandise to Branch at 25%
above cost.
1. Shipped to the Branch merchandise billed at Rs.105,000.
2. The Branch returned merchandise at billed price of Rs.2,250.
3. At June 30, the Branch inventory was valued at billed price of Rs.4,500.
4. The Branch reported a loss of Rs.6,750 for the year.
REQUIRED
(i) Give journal entries on the books of Head Office to record above transactions.
(ii) Calculate and record the profit it from allowance for overvaluation.
Question # 8:
On 1st October 2004, Fahad Traders of Karachi opened a Branch at Islamabad by sending
goods at a billed price of Rs.405,000. On 15th Nov. additional shipment was made at a billed
price of Rs.162,000. On 20th Nov. the Branch returned goods worth Rs.12,000.
On 31st Dec. 2004, the Branch reported a net loss of Rs.23,400 and goods unsold (inventory)
at billed price of Rs.135,000. The Head Office invoices goods at 25% above cost.
REQUIRED
(1) Show over-valuation adjustment with necessary computation in Head Office books.
(2) Record the above transactions (including incorporation of Branch profit/loss and over-
valuation adjustment) in the Head Office journal.
Question # 9:
Pak Trading Co. with its Head Office in Karachi has a number of Branches operating
independently almost in all the cities of Pakistan. Given below are the transactions and
accounting data concerning Head Office & its Multan Branch for the month of November
2001. The Head Office bills merchandise to all its Branches at 25% above cost.
1. Multan Branch reported merchandise inventory at November 01 valued at Rs.18,750
(comprising exclusively of shipments from Head Office).
2. Multan Branch received merchandise shipment from Head Office at billed price of
Rs.56,250.
3. Multan Branch returned merchandise against shipment in (2) at billed price of
Rs.3,750.
4. Multan Branch received another shipment from Head Office at billed price of
Rs.75,000.
5. A November 30, Multan Branch valued its inventory at Rs.28,125. The Branch is not
authorized to make merchandise purchases from its local market.
REQUIRED
1) Give entries in General Journal of Multan Branch to record transactions numbered 2,
3 and 4.
2) Give an adjusting entry in the General Journal of Head Office to record profit from
allowance for over-valuation.
3) Set up a T-account for allowance for over-valuation in the ledger of Head Office, post
relevant entries into it. Balance and rule off the account.
4) Show all the necessary computations on Head Office books.
Page 46
Branch Accounting
Chapter # 2
Question # 10:
On January 1, 2005 Printlake Co. opened a Branch at Quetta. Following is the information
for the month of January 2005.
The Head Office has followed the practice of billing the Branch at 25% above cost.
1. Goods supplied to Branch at billed price Rs.600,000.
3. Goods returned by Branch at billed price of Rs.60,000.
4. Cash remitted to Branch Rs.75,000.
5. Branch purchased locally Rs.120,000.
6. Sales by Branch Rs.750,000.
7. Branch incurred operating expenses Rs.90,000.
8. Merchandise valued at Branch on January 31, 2005 Rs.225,000 including 10% of
local purchases.
REQUIRED
Give the journal entries in the books of Head Office and Branch office to record the above
transactions and to record overvaluation and closing entries.
Question # 11:
Bashir Jan Muhammad & Co. of Karachi opened a Branch at Pindi. The Head Office and
Branch selected transactions for the year ended December 31, 1990 were as under:-
1. The Head Office sent merchandise to Branch costing Rs.450,000 at a billed price of
Rs.600,000.
2. The Head Office paid Branch salaries Rs.120,000.
3. The Branch sold goods for cash Rs.1,350,000.
4. The Branch paid Head Office accounts payable Rs.150,000.
5. The Head Office collected Branch accounts receivable Rs.225,000.
6. The Branch returned goods to Head Office at a billed price of Rs.75,000.
7. The Head Office paid Branch accounts payable Rs.90,000.
8. The Branch paid Branch shop rent Rs.180,000.
9. The Branch reported a net loss of Rs.45,000.
10. The Branch reported merchandise ending at billed price of Rs.60,000.
REQUIRED
Prepare entries in proper form in General Journals of:
(a) Head Office including adjustment of allowance for overvaluation and closing of
Branch expense and revenue summary account.
(b) Branch.
Question # 12:
M/S. Nazeer Company Clifton, Karachi has a Branch in Lahore the goods are billed to the
Branch at 20% above cost. All expenses of the Branch are paid by the Head Office. The
following particulars are available with Branch on January 31, 2009:
Opening Balances of January 1, 2009:
Merchandise inventory at bill price 82,500
Goods received from Head Office at billed price 150,000
Expenses Paid by Head Office:
Rent 4,500
Salary and other expenses 8,250
Page 47
Branch Accounting
Chapter # 2
Remittance to Head Office:
Cash sales 19,875
Cash collected from customers 157,500
Goods returned to head office against the shipment 3,000
Merchandise inventory at billed price 97,500
REQUIRED
(1) Prepare entries in the books of Head Office and Branch.
(2) Prepare allowance for overvaluation account.
(3) Find profit from allowance from overvaluation & prepare supporting adjusting
entry.
Question # 13:
The following are the selected transactions of Head Office and its Branches: -
1. Head Office sent merchandise to Branch A and Branch B, costing Rs.120,000 and
Rs.150,000 respectively.
2. Branch A reported net income of Rs.15,000 and ending inventory of Rs.30,000.
3. Branch B reported net loss of Rs.7,500 and ending inventory of Rs.45,000.
The Head Office bills merchandise at 20% above cost.
REQUIRED
(a) General Journal entries in Head Office books including entries for adjustments of
allowance for overvaluation accounts and closing of Branch income summary
accounts.
(b) General Journal entries in the books of the Branches.
Question # 14:
Mehdi Corporation bills merchandise to its E-Branch at cost and maintains complete
accounting records under perpetual inventory system. Equipment and other fixed assets
used at Branch are carried in home office books. Transactions during December 2009, the
first month of E-Branch operations are summarized below:
1. Cash Rs.15,000 was forwarded to E-Branch.
2. Merchandise costing Rs.900,000 was shipped by Head Office to E-Branch.
3. Equipment was acquired by E-Branch for Rs.22,500 cash.
4. Credit sales by Branch amounted to Rs.1,200,000 costing Rs.675,000.
5. Collection of accounts receivable by E-Branch Rs.930,000.
6. Payment of operating expenses by E-Branch totaled Rs.300,000.
7. Cash Rs.562,500 remitted by E-Branch to Head Office.
8. Operating expenses paid by Head Office and charged to E-Branch amounted to
Rs.45,000.
REQUIRED
General Journal entries in the books of:
(i) E-Branch and
(ii) Head Office
Page 48
Branch Accounting
Chapter # 2
Question # 15:
A Karachi firm whose accounting year ends on 31st December has two Branches one at
Hyderabad and the other at Multan. The Branches keep a complete set of books. On 31st
December, 1996 the Hyderabad and the Multan Branches account in the Head Office books
showed debit balance of Rs.456,750 and Rs.675,000 respectively before taking the
following information into account.
1. Merchandise valued Rs.30,000 were transferred from Hyderabad to Multan Branch
under the instruction from Head Office.
2. The Hyderabad Branch collected Rs.37,500 from a customer of Head Office.
3. The Multan Branch paid Rs.75,000 for certain goods purchased by the Head Office.
4. Rs.75,000 remitted by the Hyderabad Branch to the Head Office on 29th December,
1996 was received on 3rd January, 1997.
5. The Multan Branch received on behalf of the Head Office Rs.22,500 as dividend from
a Multan Co.
6. For the year 1996, the Hyderabad Branch showed a net loss of Rs.18,750 and the
Multan Branch a net profit of Rs.81,000.
REQUIRED
Pass journal entries to record these matters in the Head Office books and then write up the
two Branches accounts therein.
Question # 16:
Next-door Grocers, Karachi (Head Office) deals in wholesale grocery. The company has two
Branches, one at Islamabad and the other at Faisalabad. The Branches keep a complete set
of books.
On July 1, 2005 the Head Office books showed the following balances in the Branches
accounts:
Islamabad Branch -------------------------------------------------------- Rs.750,000
Faisalabad Branch ------------------------------------------------------- Rs.675,000
Some of the transactions between the Head Office and the two Branches for the year are
listed below:
Under the Head Office instructions, Islamabad Branch collected Rs.225,000 from the
customers of Faisalabad Branch and remitted Rs.150,000 to Faisalabad Branch and
Rs.75,000 to Head Office.
Faisalabad Branch transferred merchandise valued Rs.150,000 to Islamabad Branch and
paid Rs.15,000 cash for transporting the goods.
Head Office paid Faisalabad Branch suppliers Rs.180,000 cash.
Islamabad Branch paid Head Office suppliers Rs.120,000 cash.
Islamabad Branch showed a net profit of Rs.300,000 and Faisalabad Branch showed a net
loss of Rs.30,000.
REQUIRED
(a) Journal entries in the Head Office and the Branches books.
(b) The two Branches accounts in the Head Office books.
Page 49
Branch Accounting
Chapter # 2
Question # 17:
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
2006 the following reciprocal accounts appear in the accounting records of the Hyderi
Branch and the Head Office:
Branch records: Head Office (credit balance) Rs.269,550.
Head Office records: Hyderi Branch (debit balance) Rs.258,150.
The reason for the discrepancy in the amount shown in the two accounts is that the Branch
net income for November Rs.27,000 and a cash deposit made by the Branch to the account
of the Head Office, Rs.15,600, 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.108,750. Debit inventory
account on Branch books, credit inventory account on the Head Office books.
December 12. Branch transferred Rs.74,250 from its bank account to the bank account of
the Head Office.
December 19. Branch returned shop supplies costing Rs.9,150 to the Head Office. Supplies
are recorded in the shop supplies account in both sets of accounts.
December 30. Head Office notified Branch that operating expenses Rs.16,500 which had
been recorded in the accounts of the Head Office in the operating expense
account were chargeable to Hyderi Branch.
December 31. The income summary account in the accounts of the Branch showed a debit
balance of Rs.8,850 at the end of December.
REQUIRED
(a) Record the transactions listed above in the accounts of the Hyderi Branch.
(b) Record the two transactions relating to the month of November and all transactions
for December in the accounts of the Head Office.
(c) Determine the balance in the Head Office account and the Hyderi Branch account at
the end of Dec.
Question # 18:
The following home office account with selected entries is taken from the Pindi Branch
ledger:
HOME OFFICE
1999 1999
March 5 Returns against Jan. 1 Balance 270,000
Goods shipments 13,500 Feb. 6 Goods shipments 90,000
Dec. 31 Net loss 18,600 June 8 Goods shipments 54,000
Dec. 10 Corrected overstated 7,500
bad debts for 1998
Pindi Branch reported inventories at billed price: at Jan. 1, 1999 Rs.36,000/= and at
December 31, 1999 Rs.27,000/=. The home office bills merchandise to its Branches at 20%
above cost.
REQUIRED
Give all reciprocal entries in the home office general journal including adjusting entry to
record profit from allowance for overvaluation for 1999, and closing entry. Entries without
supporting computations are not acceptable.
Page 50
Branch Accounting
Chapter # 2
Question # 19:
The Head Office account appears in the books of its Branch as shown below:
Head Office
1990 1990
June 12 Remittance to H/O 22,500 June 1 Balance 75,000
June 14 Merchandise returns 1,500 June 5 Merchandise
shipments 21,000
June 25 Payment of H/O June 20 Overstatement of
accounts payable 7,500 depreciation of 1989 1,800
June 30 Payment of Head Office June 24 Collection of Head
expense 4,500 Office accounts 6,000
June 30 Payment of H/O note 6,000
REQUIRED
Entries in General Journal of Head Office affecting Branch account.
Question # 20:
On July 31, 1990 the balance of Branch account on the books of Head Office and the balance
of Head Office account on the books of Branch are not agreed. On comparison the following
items were detected:
1. The Branch returned merchandise of Rs.18,000 to the Head Office on July 20, but the
merchandise was received by the Head Office after July 31, 1990.
2. The Head Office collected Branch accounts receivable of Rs.75,000 but forgot to
intimate the Branch.
3. The Head Office paid Rs.21,000 for Branch expense but the item was not recorded by
the Branch.
4. The Head Office paid Rs.11,790 for freight on merchandise but the Branch recorded
the amount as Rs.10,170.
REQUIRED
Give adjusting entries on the books of Head Office and the Branch respectively for the above
items.
Question # 21:
On June 30, 1995 the Branch account in the Head Office books of the Paramount (Pvt.) Ltd.
shows a balance of Rs.151,200 and the Head Office account in the books of Branch shows a
balance of Rs.175,230. The following items are responsible for the difference:
1. Merchandise billed at Rs.25,800 was supplied by the Head Office to the Branch on
June 28. The merchandise was not received by the Branch till June 30.
2. The Branch collected a Head Office accounts receivable of Rs.60,000 but failed to
inform the Head Office.
3. The Head Office recorded the profit of the Branch for the month of May Rs.20,250.
This was an error, as the Branch reported a profit of Rs.22,950.
4. The Head Office has not charged Rs.12,870 in respect of merchandise returned by
the Branch to the Head Office. The merchandise was in transit.
REQUIRED
a) Prepare a reconciliation statement.
b) Pass necessary journal entries in the books of the Head Office and Branch.
Page 51
Branch Accounting
Chapter # 2
Question # 22:
Seiko (Pvt.) Ltd. sent merchandise worth Rs.90,000 to his Branch No. 1 Lahore and paid
transporting cost Rs.2,700 for the same. On the request of Branch No. 2 Faisalabad, Seiko
advised to Lahore Branch to transfer the same consignment of Rs.90,000 to Faisalabad
Branch. Lahore Branch sent the same to Faisalabad and paid Rs.2,250 as transportation
charges of the same.
REQUIRED
Journal entries in the books of:
1. Seiko (Pvt.) Ltd. Head Office 2. Lahore Branch 3. Faisalabad Branch
It is noted that if the merchandise had been supplied from the Head Office to the Faisalabad
the transporting charges would have been Rs.1,575.
Question # 23:
The Karachi Head Office of Al-Amin Company consigned to Lahore Branch goods costing
Rs.90,000 and freight paid Rs.7,500. Later on the Head Office directed the Lahore Branch to
transfer the entire consignment to Jhelum Branch. The Lahore Branch dully executed the
directives and paid additional freight Rs.1,500. If the goods had been sent to Jhelum Branch
directly by the Head Office, the freight charges would have been Rs.8,400.
REQUIRED
Give entries in General Journal of:
4. Head Office 5. Lahore Branch 6. Jhelum Branch
Question # 24:
Head Office in Karachi shipped merchandise to its Islamabad Branch costing Rs.30,000
billed at 25% above cost and Rs.3,750 transportation charges. Subsequently Head Office
instructed Islamabad Branch to send this merchandise shipment to Multan Branch.
Islamabad Branch compiled with instructions and paid transportation charges of Rs.750 for
sending the shipment to Multan Branch. If the merchandise had been sent by the Head
Office direct to Multan Branch, the normal transportation charge would have been Rs.3,000.
REQUIRED
Record the above transactions in the general journal of Head Office, Islamabad Branch and
Multan Branch.
Question # 25:
Asad Ltd. sent merchandise costing Rs.90,000 which was billed at 20% above cost to its
Lahore Branch and paid transportation cost of Rs.11,700.
On request of the Faisalabad Branch, Asad Ltd. advised Lahore Branch to transfer the same
shipment to Faisalabad Branch. Lahore Branch sent the same to Faisalabad Branch and paid
transportation charges Rs.3,300.
REQUIRED
Pass journal entries in the books of:
(1) Asad Ltd.
(2) Lahore Branch.
(3) Faisalabad Branch.
Note: If the merchandise had been supplied directly by the Head Office (Asad Ltd.) to
Faisalabad Branch the transportation charges would have been Rs.12,000.
Page 52
Branch Accounting
Chapter # 2
Question # 26:
Bilal Corporation at Karachi newly established its Branch at Sukkur. The Head Office
supplies goods to the Branch at 125% of cost. Summarized data of the Branch’s transactions
for the year 2003, are as under:
1. Goods received from Head Office at billed price Rs.720,000.
2. Local purchases on account Rs.180,000.
3. Credit sales to customers Rs.450,000 and sales for cash Rs.276,000.
4. Cash collected from customers Rs.375,000.
5. Paid to suppliers Rs.105,000.
6. Returned goods to Head Office Rs.9,000.
7. Remitted cash to Head Office Rs.270,000.
8. Branch expenses paid by Branch Rs.25,200 and by Head Office Rs.1,200.
Data for Adjustment on 31-12-2003
(1) Accrued operating expenses Rs.900.
(2) Ending inventory of merchandise: Rs.24,000 consisted of local purchases and
Rs.22,500 consisted of shipment from Head Office.
REQUIRED
(a) Prepare journal entries (including adjusting and closing) in the Branch.
(b) Journal entries in the Head Office books to incorporate Branch profit or loss and
adjustment of overvaluation.
(c) Show computation of overvaluation adjustment.
Question # 27:
The trial balance of Pindi Branch of Ashraf Corporation on December 31, 2001 is given
below. The Head Office bills the Branch for merchandise at cost plus 25%.
Title of Account Debit Credit
Cash 75,000
Office supplies 12,000
Merchandise inventory January 1 240,000
Land 180,000
Office equipment 120,000
Allowance for depreciation – Office equipment 7,500
Notes payable 45,000
Head Office 796,500
Sales 900,000
Sales returns & allowances 45,000
Purchases 75,000
Transportation – in 6,000
Purchases returns & allowances 9,000
Merchandise received from Head Office 750,000
Merchandise returned to Head Office 30,000
Total 1,893,000 1,893,000
Page 53
Branch Accounting
Chapter # 2
Additional Information on December 31, 2001
(a) Office supplies used Rs.7,500.
(b) Prepaid selling expenses Rs.10,500.
(c) Accrued general expenses Rs.12,000.
(d) Depreciation on office equipment Rs.7,500.
(e) Merchandise inventories: 1.1.2001 31.12.2001
Received from Head Office at bill price Rs.180,000 Rs.225,000
Purchase from outsiders at cost 60,000 57,000
Total 240,000 282,000
REQUIRED
(a) Prepare adjusting and closing entries in the books of Pindi Branch.
(b) Prepare entries in the journal of Head Office to incorporate Pindi Branch profit or
loss and to adjust the allowance for overvaluation account and also close out the
Pindi Branch profit & loss account.
Question # 28:
On December 31, 1997 the end of monthly trial balance for W.S. Company Branch number
A1 shows balances as listed below. The Head Office bills the Branch for merchandise at cost
plus 20%.
Cash 34,350 Notes payable 22,500
Merchandise 243,000 Head Office 450,000
Store equipment 120,000 Sales 427,500
Allowance for depreciation – Merchandise supplies from
Store equipment 6,000 Head Office 236,250
Store supplies 9,000 Purchases 67,500
Accounts payable 75,600 Selling expenses 67,500
Lands 135,000 General expenses 69,000
The following data is available on December 31:
(a) Physical store supplies inventory Rs.3,600.
(b) Accrued selling expenses Rs.1,200.
(c) Depreciation of equipment to be charged for December 1997 @ 1% per month.
(d) Prepaid selling expenses Rs.3,750.
Merchandise Inventories: December 1 December 31
Amount received from Head Office at billed price 180,000 207,000
Amount purchased from outsider at cost 63,000 58,500
Total 243,000 265,500
The Head Office notifies the Branch on December 31 that it has paid off the Branch note for
Rs.22,500.
REQUIRED
(a) Prepare adjusting and closing entries in the books of Branch A – 1.
(b) Give journal entries on the books of Head Office summarizing Branch operations for
the month.
Page 54
Branch Accounting
Chapter # 2
Question # 29:
A new independent Branch has opened by M/S. Karimi & Co. at Hyderabad. The practice of
the trader is that the goods are sent to Branch at 25% above cost. The summary of
transaction (2 months) is narrated below. You are asked to:
(a) Pass journal entries in the books of the Branch (including adjusting and closing).
(b) Pass General Journal entries to record the Branch net income and adjustment of net
income as reported by the Branch (in the books of Head Office).
Summary of the Transactions:
1. Goods supplies to Branch invoiced at cost plus 25% Rs.600,000 and remitted cash
Rs.75,000.
2. Purchase by the Branch, cash Rs.60,000 and on credit Rs.90,000.
3. Sales by the Branch, cash Rs.187,500 and on account Rs.525,000.
4. Equipment supplied by the Head Office Rs.45,000.
5. Cash collection from customers Rs.300,000.
6. Payment to creditors Rs.52,500.
7. Expenses paid by the Branch:
a. Salaries expenses Rs.30,000.
b. Rent & rates expenses Rs.6,000.
c. Utilities expenses Rs.1,500.
d. Advertising expenses Rs.3,750.
e. Delivery expenses Rs.2,250.
f. Salesman salary Rs.4,500
8. Expenses charged by the Head Office to the Branch office Rs.2,250.
9. Cash remitted to Head Office Rs.262,500.
Adjustments:
1. Office salary accrued Rs.1,500.
2. Gas and electric charges accrued and not paid Rs.750.
3. Advertising expenses paid in advance Rs.1,125.
4. Depreciate equipment at 10%.
5. Merchandise inventory on December 31, 1994:
Purchase from local market 22,500
Amount received from Head Office 187,500
210,000
Question # 30:
Karachi Head Office has a Branch at Multan. Decentralized accounting is followed. The Head
Office supplies goods to Branch at 20% above cost. Data relating to the Branch for 1991 are
summarized below:
a) Goods supplied to Branch, billed price Rs.360,000.
b) Cash remitted to Branch Rs.45,000.
c) Branch purchased goods from local market on account Rs.90,000.
d) Operating expenses paid by Branch Rs.12,600.
e) Head Office paid Branch operating expenses Rs.600.
f) Cash remitted to Head Office Rs.135,000.
g) Branch sold merchandise for cash Rs.438,000.
Data for Adjustments on 31 – 12 – 1991:
1. Accrued operating expense Rs.1,800.
2. Prepaid operating expense Rs.1,350.
3. Ending inventory values at Rs.12,000 of purchase from local market and Rs.112,500
of goods supplied by Head Office.
Page 55
Branch Accounting
Chapter # 2
REQUIRED
1. Journal entries including adjusting and closing entries in the books of the Branch.
2. Journal entries in the books of the Head Office to record Branch net income or loss,
and for adjustment of overvaluation. (Show the necessary computations).
Question # 31:
The Nishat Corporation of Karachi sends merchandise to its Branch at Lahore at 140% of
cost. The income statement data of the Branch is as follows:
Merchandise inventory (Jan. 1, 2002) Rs.25,200.
Shipment from Head Office Rs.294,000.
Merchandise returned to Head Office Rs.16,800.
Sales (including cash sales of Rs.150,000 remitted to Head Office) Rs.345,000.
Salaries expenses (paid by Head Office) Rs.27,000.
Rent expenses Rs.3,000.
Merchandise inventory Dec. 31, 2002 Rs.33,600.
REQUIRED
(i) Branch income statement for the year ended Dec. 31, 2002.
(ii) Give all reciprocal entries in the Head Office books including adjusting entry to record
profit from overvaluation for 2002 & also pass the necessary closing entry.
Question # 32:
M/S. Nisar & Co. of Karachi have established a Branch at Hyderabad. The Branch balance
sheet as on June 30, 1994 is as follows:
Assets: Rupees Rupees
Cash 243,000
Accounts receivable 1,098,000
Less: Allowance for bad debts (76,500) 1,021,500
Merchandise inventory 1,485,000
Prepaid expenses 31,500
Furniture 346,500
Less: Allowance for depreciation (243,000) 103,500
Total assets 2,884,500
Equities: Rupees Rupees
Accrued expenses 54,000
Head Office 2,695,500
Total equities 2,884,500
Branch transactions during July 1, 1993 – June 30, 1994 are as under:-
1. Expenses paid by Head Office and charged to Branch 72,000
2. Sales on account 3,240,000
3. Purchases on account 765,000
4. Expenses paid 1,116,000
5. Goods received from Head Office billing at cost 1,800,000
6. Cash remittance to Head Office 1,404,000
7. Collection of accounts 3,120,000
8. Bad debts written off 57,000
9. Payment on account 729,000
Page 56
Branch Accounting
Chapter # 2
Adjustments:
Merchandise on hand 1,980,000
Accrued expenses 72,000
Depreciation for the year 54,000
Allowance for bad debts to be kept at 72,000
REQUIRED
a) Prepare necessary journal entries in the books of Branch for the year to record the
above transactions including adjusting and closing entries.
b) Prepare balance sheet and income statement of Branch as on June 30, 1994.
Question # 33:
Partial financial data from Pony Sales Co. with its Head Office at Karachi and its Bless
Branch at Hyderabad for 1996 as follows:
Head Office Bless Branch
Sales 159,000 ---
Inventory merchandise Jan. 1 (at cost) 17,250 ---
Inventory merchandise Jan. 1 (at billed) --- 6,675
Purchases 123,000 ---
Shipment to Bless Branch (at cost) 31,500 ---
Shipment from Head Office (at billed price) --- 37,800
Inventory, December 31 (at cost) 21,375 ---
Inventory, December 31 (at billed price) --- 8,775
Operating expenses 57,300 ---
The Head Office bills the Branch for merchandise shipments as follows:
 In 1995, 25% above cost.
 In 1996, 20% above cost.
REQUIRED
Prepare Head Office income statement showing on it the Branch net loss of Rs.3,750 and the
profit from overvaluation for 1996. Computations are necessary.
Question # 34:
Following are some of the items extracted from the books of Khursheed & Hassan Company
Karachi and its Lahore Branch:
Head Office Branch
Cash 600,000 270,000
Inventory (opening) 225,000 300,000
Purchases 270,000 90,000
Sales revenue 481,500 450,000
Goods sent to Branch 90,000 ---
Goods received from Head Office --- 112,500
Salaries expense 30,000 15,000
Prepaid rent 18,000 12,000
Allowance for overvaluation 30,000 ---
On December 31, 2008 data for adjustment:
Head Office: Inventory valued Rs.45,000, Prepaid salaries Rs.18,000 and prepaid rent
Rs.12,000.
Branch: Inventory with respect to Head Office Rs.22,500 and of local purchases
Rs.18,000. Accrued salaries Rs.22,500 and rent expired during the period
Rs.3,000.
Page 57
Branch Accounting
Chapter # 2
REQUIRED
1. Allowance for overvaluation in opening inventory.
2. Rate of allowance for overvaluation.
3. Adjusting entry of allowance for overvaluation.
4. Prepare Consolidated Income Statement for the year ended December 31, 2008.
Question # 35:
The following are some of the selected balances taken out from the trial balance of Head
Office and Branch on December 31, 1992:
Head Office Branch
Merchandise inventory (Opening) 43,500 37,500
Sales revenue 450,000 225,000
Purchases 450,000 ---
Purchase discount 7,500 ---
Goods sent to Branch 96,000 ---
Goods received from Head Office --- 120,000
Allowance for overvaluation 27,000 ---
Salaries expense 30,000 7,500
Miscellaneous general expense 7,500 1,500
Adjustment Data:
Head Office Branch
Merchandise inventory (Ending) 60,000 30,000
Accrued salaries --- 1,500
Prepaid salaries 3,000 ---
Depreciation on equipment 4,500 750
REQUIRED
1. Income Statement of Branch.
2. Consolidated Income Statement of Head Office and Branch.
3. Entries in the books of Head Office to incorporate Branch net income and
adjustment of income resulting from overvaluation of merchandise.
Question # 36:
Hyderabad Branch of AK Farooqui Company submitted the following trial balance data of
December 31, 2009 to its Head Office in Karachi:
Debit:
Balance at bank Rs.48,750; Cash in hand Rs.15,000; Accounts receivable Rs.112,500;
Purchases Rs.150,000; Rent & rates Rs.60,000; Utilities expenses Rs.11,250; Salaries
expenses Rs.41,250; Stock (January 1, 2009) Rs.93,750 (Total Rs.532,500)
Credit:
Accounts payable Rs.135,000; Sales Rs.337,500; Head Office Rs.60,000 (Total Rs.532,500)
Additional Information:
The salaries include a sum of Rs.18,750 paid to the Branch manager, who is further entitled
to a commission at 7% on the net profit of the Branch before charging such commission,
which is payable after a month. The ending stock of the Branch amounted to Rs.142,500 and
utilities expenses payable Rs.6,000.
REQUIRED
From the above information prepare:
(i) Income statement of Hyderabad Branch (ii) Balance sheet as of Hyderabad Branch
Page 58
Branch Accounting
Chapter # 2
Question # 37:
The trial balance of Head Office and Branch office as June 30, 1992 were as under:
Head Office Branch Office
Debit Credit Debit Credit
Cash 129,000 --- 25,500 ---
Accounts receivable 30,000 --- 12,000 ---
Merchandise inventory (opening) 15,000 --- 7,500 ---
Equipment 18,000 --- 9,000 ---
Accounts payable --- 15,000 --- 13,500
Capital --- 167,250 --- ---
Purchases 60,000 --- 22,500 ---
Goods sent to Branch --- 37,500 --- ---
Goods received from Head Office --- --- 45,000 ---
Allowance for overvaluation --- 8,250 --- ---
Branch / Head Office 45,000 --- --- 45,000
Sales --- 82,500 --- 67,500
Operating expenses 13,500 --- 4,500 ---
Additional Information on June 30, 1992:
1. Closing inventory: Head Office Rs.12,000 and Branch Rs.19,500 including Rs.1,500
purchases from outsiders.
2. Current year depreciation on equipment of Head Office Rs.3,750 and Branch
Rs.2,250.
REQUIRED
a) Prepare Branch Income Statement.
b) Prepare Head Office Income Statement.
c) Prepare Consolidated Income Statement.
d) Prepare Branch Balance Sheet.
e) Prepare Head Office Balance Sheet.
f) Prepare Consolidated Balance Sheet.
Question # 38:
The trial balance of head office and Pindi branch of Shah Ltd. as 30 June 2003 were as
under:
Head Office Pindi Branch
Debit (Rs.) Credit (Rs.) Debit (Rs.) Credit (Rs.)
Cash 86,000 --- 17,000 ---
Accounts receivable 30,000 --- 8,000 ---
Merchandise inventory 10,000 --- 7,000 ---
Equipment 20,000 --- 11,000 ---
Accounts payable --- 16,000 --- 18,000
Capital --- ? --- ---
Purchases 53,000 --- 28,000 ---
Goods sent to branch --- 40,000 --- ---
Goods received from head office --- --- 50,000 ---
Purchase return and allowance --- 2,000 --- 1,000
Goods returned to head office --- --- --- 5,000
Goods returned by branch ? --- --- ---
Allowance for over valuation --- 12,000 --- ---
Branch / Head office ? --- --- ?
Page 59
Branch Accounting
Chapter # 2
Sales --- 120,000 --- 90,000
Sales discount 3,000 --- 1,000 ---
Store supplies 20,000 --- 8,000 ---
Salaries expenses 18,000 --- 20,000 ---
General expenses 2,000 --- 9,000 ---
Prepaid rent 4,000 --- 5,000 ---
Total ? ? 164,000 ?
Additional Information on 30 June 2003: Head Office Pindi Branch
i. Store supplies on hand ----------------------- Rs.18,000 ------- Rs.5,000
ii. Depreciation on equipment ------------------ Rs.3,000 ------- Rs.1,000
iii. Commission receivable ------------------------ Rs.7,000 ------- Rs.2,000
iv. Salaries expenses for the year -------------- Rs.20,000 ----- Rs.18,000
v. Closing inventory at cost ---------------------- Rs.8,000 ----- Rs.12,000
(Including Rs.2,000 purchase
from outside)
REQUIRED
a) Prepare income statement in the books of Pindi Branch at 30 June 2003.
b) Prepare head office income statement showing branch profit or loss and allowance
for over valuation on 30 June 2003.
c) Prepare consolidated income statement for the period 30 June 2003.
d) Prepare Pindi branch balance sheet as on 30 June 2003.
e) Prepare head office balance sheet as on 30 June 2003.
f) Prepare consolidated balance sheet as on 30 June 2003.
Page 60
Chapter # 3
Analysis of Financial Statement
Advanced Accounting
Analysis of Financial Statements
Chapter # 3
 Financial Statement analysis.

 Tools of analysis.
 Dollar/Rupees and percentage change.
 Trend percentage.
 Component percentage.
 Common size Financial Statements and ratios.
 Interpretation.
 Computation of ratios and percentages.

 Trend percentages.
 Comments on ratios and percentages.
Page 62
Chapter # 3
FINANCIAL STATEMENT ANALYSIS

An analysis of the financial statements of a business to assess its performance and position.
Ratios are normally calculated from the financial statements to assess the profitability,
solvency, working capital management, liquidity, and capital structure of an organization.
RATIO ANALYSIS
The use of accounting ratios is to evaluate a company’s operating performance and financial
stability. Such ratios as return on capital employed and gross profit percentage can be used
to assess profitability. The liquidity ratios can be used to examine solvency and gearing
ratios to examine the financial structure of the company. The analysis of ratios can indicate
how well a company is run, the risks of financial insolvency, and the financial returns
provided.
 Liquidity Ratio.
 Leverage Ratio.
 Activity Ratio.
 Investors/Shareholders Ratio.
 Profitability Ratio.
LIQUIDITY RATIO
Liquidity means the ability of the firm to pay its way. Liquidity ratios are the ratios that
measure a company’s liquid position.
LEVERAGE RATIO
Any ratio used to calculate the financial leverage of a company to get an idea of the
company's methods of financing or to measure its ability to meet financial obligations.
There are several different ratios, but the main factors looked at include debt, equity, assets
and interest expenses.
ACTIVITY RATIO
Activity ratios are the rate at which the company sells its stock and the efficiency with
which it uses its assets.
INVESTORS RATIO
Information to enable decisions to be made on the extent of the risk and the earning
potential of a business investment is investors’ ratio.
PROFITABILITY RATIO
Profitability ratio is a class of financial metrics that are used to assess a business's ability to
generate earnings as compared to its expenses and other relevant costs incurred during a
specific period of time. For most of these ratios, having a higher value relative to a
competitor's ratio or the same ratio from a previous period is indicative that the company is
doing well.
Page 63
Chapter # 3
LIQUIDITY LEVERAGE ACTIVITY INVESTORS PROFITABILITY

RATIO RATIO RATIO RATIO RATIO
Working Debt ratio Receivable Earnings per Net profit
capital turnover share percentage
Current ratio Equity ratio Inventory Price earnings Gross profit
turnover ratio percentage
Quick ratio Debt to equity Payable Earning rate Cost of goods sold
ratio turnover percentage
Total operating Dividend per Operating expense
days share percentage
Dividend yield Rate of return on
assets
Assets turnover
Rate of return on
shareholders’ equity
Book value per share
WORKING CAPITAL
Working capital is the capital that is used to finance the day-to-day operations of a
company. Working capital is calculated as the difference between current assets and
current liabilities.
Working capital = Current assets – Current liabilities
CURRENT RATIO
Current ratio is the ratio of the current assets of a business to the current liabilities; it is
used as a test of liquidity.
Current assets
Current ratio =
Current liabilities
QUICK RATIO
Quick ratio is a ratio used for assessing the liquidity of a company; it is the ratio of the liquid
assets (i.e. current assets less the inventory) to the current liabilities. It is also called acid-
test ratio.
Quick assets
Quick ratio =
Current liabilities
QUICK ASSETS
Quick assets are the assets held in cash or in something that can be readily turned into cash
with minimal capital loss (e.g. deposits in a bank current account, accounts receivable,
marketable investments).
Quick assets = Current assets – Inventory – Prepaid expenses
Page 64
Chapter # 3
DEBT RATIO
A ratio used to examine the financial structure or gearing (leverage) of a business. The long-
term debt, normally including preference shares, of a business is expressed as a percentage
of its equity. A highly geared company is one in which the debt is higher than the equity,
compared to the other companies in a similar industry.
Total liabilities
Debt ratio =
Total assets
EQUITY RATIO
Total shareholders’ equity x 100
Equity ratio =
Total assets
DEBT TO EQUITY RATIO

Total liabilities x 100
Debt to equity ratio =
Total shareholders’ equity
ACCOUNTS RECEIVABLE TURNOVER

Receivable turnover of a company shows that in how many days a company collects its
receivable.
Net credit sales

Accounts receivable turnover in times =
Average accounts receivable
365
Accounts receivable turnover in days =
Receivable turnover in times
Accounts receivable (beg) + Accounts receivable (end)

Average receivable =
2
INVENTORY TURNOVER
A ratio that measures the number of times items of inventory are used annually.
Cost of goods sold

Inventory turnover in times =
Average inventory
365
Inventory turnover in days =
Inventory turnover in times
Inventory (beg) + Inventory (end)

Average inventory =
2
Page 65
Chapter # 3
ACCOUNTS PAYABLE TURNOVER

Net credit purchases
Accounts payable turnover in times =
Average accounts payable
365
Accounts payable turnover in days =
Payable turnover in times
Accounts payable (beg) + Accounts payable (end)

Average payable =
2
OPERATING CYCLE
Operating cycle is the average time between acquiring inventory and receiving cash from its
sale.
Operating cycle = Inventory turnover in days + Receivable turnover in days
Inventory turnover in days + Accounts receivable

Average operating cycle = turnover in days
2
NET PROFIT PERCENTAGE

Net profit margin is a ratio of financial performance calculated by expressing the net profit
as percentage of sales revenue.
Profit before Interest and Tax X 100

Net profit percentage =
Net sales
GROSS PROFIT PERCENTAGE

Gross profit percentage is a ratio of financial performance calculated by expressing the
gross profit as percentage of sales revenue. With retailing companies in particular, it is
regarded as a prime measure of their trading success.
Gross profit X 100

Gross profit percentage =
Net sales
COST OF GOODS SOLD PERCENTAGE

Cost of goods sold X 100
Cost of goods sold percentage =
Net sales
OPERATING EXPENSES PERCENTAGE

Operating expenses X 100
Operating expenses percentage =
Net sales
RATE OF RETURN ON ASSETS

Rate of return on assets is an accounting ratio expressing the amount of profit for an
accounting period as a percentage of the assets of a company.
Net profit X 100

Rate of return on assets =
Total assets
Page 66
Chapter # 3
ASSETS TURNOVER
Net sales X 100
Assets turnover =
Average assets
Total assets (beg) + Total assets (end)

Average assets =
2
RATE OF RETURN ON SHAREHOLDERS’ EQUITY

Net income X 100
Rate of return on shareholders’ equity =
Shareholders’ equity
EARNINGS PER SHARE (EPS)

The profit attributable to each ordinary share in a company based on consolidated profit for
the period, after deducting minority interest and preference shares dividends. This profit
figure is divided by the weighted average number of shares in issue during the period.
Net profit
Earnings per share =
Average no. of shares
PRICE EARNINGS RATIO

Price earnings ratio is a comparison of the current market price of a company share to the
earning per share of the company. The price earnings ratio is one of the main indicators
used by the fundamental analysts to decide whether the shares in a company are expensive
or cheap, relative to the market.
Market price per share

Price earnings ratio =
Earnings per share
EARNINGS RATIO
Earnings per share X 100
Earnings ratio =
BOOK VALUE PER SHARE

Book value per share =
Number of shares
NUMBER OF SHARES
Share capital
Number of shares =
Par value of share
DIVIDEND PER SHARE

The total dividend declared by a company in a year divided by the total number of ordinary
shares on which the divided is paid.
Cash dividend declared

Dividend per share =
Number of ordinary shares
Page 67
Chapter # 3
DIVIDEND YIELD
A ratio computed by dividing the annual dividends paid per share of ordinary share by the
market price per share at a specific date; indicates the rate of return to shareholders in
terms of cash dividend distributions.
Dividend per share X 100

Dividend yield =
SHARE CAPITAL
Share capital = Shareholders’ equity – Retained earnings
SHAREHOLDERS’ EQUITY
Shareholders’ equity = Total assets – Total liabilities
RETURN ON CAPITAL EMPLOYED (ROCE)

Profit before interest and tax X 100
Return on capital employed =
Capital employed
Capital employed = Total assets – Total current liabilities
ILLUSTRATION # 1:
The following balances have been taken from the books of Furqan Company Ltd. on 31
December 2007:
Fixed assets Rs. 200,000 Long term liabilities Rs. 100,000
Current assets Rs. 700,000 Current liabilities Rs. 400,000
Share capital (Rs.10) Rs. 300,000 Retained earnings Rs. 100,000
Sales (all on credit) Rs. 600,000 Cost of goods sold Rs. 350,000
Average inventory Rs. 20,000 Average receivable Rs. 40,000
Operating expenses Rs. 150,000 Market price per share Rs. 25
Quick assets Rs. 450,000
REQUIRED
1. Working capital 2. Debt ratio
3. Equity ratio 4. Current ratio
5. Inventory turnover 6. Receivable turnover
7. Rate of net income on sales 8. Earnings per share
9. Price earnings ratio 10. Total days of operating cycle
11. Quick ratio 12. Operating expenses rate
13. Rate of gross profit on sales 14. Cost of goods sold rate
15. Rate of return on assets 16. Assets turnover
17. Rate of return on shareholders’ equity 18. Book value per share
Page 68
Chapter # 3
SOLUTION # 1:
1. Computation of Working Capital:
Current assets Rs. 700,000
Less: Current liabilities Rs. (400,000)
Working capital Rs. 300,000
2. Computation of Debt Ratio:

Debt ratio = Total liabilities
Total assets
Debt ratio = 500,000
900,000
Debt ratio = 0.56 : 1
3. Computation of Equity Ratio:

Equity ratio = Total shareholders’ equity
Total assets
Equity ratio = 400,000
900,000
Equity ratio = 0.44 : 1
4. Computation of Current Ratio:

Current ratio = Total current assets
Total current liabilities
Current ratio = 700,000
400,000
Current ratio = 1.75 : 1
5. Computation of Inventory Turnover:

Inventory turnover in times = Cost of goods sold
Average inventory
Inventory turnover in times = 350,000
20,000
Inventory turnover in times = 17.5 times
Inventory turnover in days = 365
Inventory turnover in times
Inventory turnover in days = 365
17.5
Inventory turnover in days = 21 days
6. Computation of Receivable Turnover:

Receivable turnover in times = Net credit sales
Average receivable
Receivable turnover in times = 600,000
40,000
Receivable turnover in times = 15 times
Receivable turnover in days = 365
Receivable turnover in times
Receivable turnover in days = 365
15
Receivable turnover in days = 24 days
Page 69
Chapter # 3
Computation of Net Income:
Net sales Rs. 600,000
Less: Cost of goods sold Rs. (350,000)
Gross profit Rs. 250,000
Less: Operating expenses Rs. (150,000)
Net income Rs. 100,000
7. Computation of Rate of Net Income:

Rate of net income on sales = Net income X 100
Net sales
Rate of net income on sales = 100,000 X 100
600,000
Rate of net income on sales = 16.67%
8. Computation of Earnings Per Share:

Earnings per share = Operating income
Number of shares
Earnings per share = 100,000
30,000
Earnings per share = Rs.3.33
Computation of Number of Shares:

Number of shares = Share capital
Par value of each share
Number of shares = 300,000
10
9. Computation of Price Earnings Ratio:

Price earnings ratio = Market price per share
Earnings per share
Price earnings ratio = 25
3.33
Price earnings ratio = 7.51
10. Computation of Total Days of Operating Cycle:

Total days of operating cycle = Inventory turnover in days + Receivable turnover in days
Total days of operating cycle = 21 + 24
Total days of operating cycle = 45 days
11. Computation of Quick Ratio:

Quick ratio = Total quick assets
Total current liabilities
Quick ratio = 450,000
400,000
Quick ratio = 1.125 : 1
Page 70
Chapter # 3
12. Computation of Operating Expense Rate:
Operating expenses rate = Operating expenses X 100
Net sales
Operating expenses rate = 150,000 X 100
600,000
Operating expenses rate = 25%
13. Computation of Gross Profit Rate:

Gross profit rate = Gross profit X 100
Net sales
Gross profit rate = 250,000 X 100
600,000
Gross profit rate = 41.67%
14. Computation of Cost of Goods Sold Rate:

Cost of goods sold rate = Cost of goods sold X 100
Net sales
Cost of goods sold rate = 350,000 X 100
600,000
Cost of goods sold rate = 58.33%
15. Computation of Rate of Return on Assets:

Rate of return on assets = Net profit X 100
Total assets
Rate of return on assets = 100,000 X 100
900,000
Rate of return on assets = 11.11%
16. Computation of Assets Turnover:

Assets turnover = Net sales X 100
Average assets
Assets turnover = 600,000 X 100
900,000
Assets turnover = 66.67%
17. Computation of Rate of Return on Shareholders’ Equity:

Rate of return on shareholders’ equity = Net income X 100
Rate of return on shareholders’ equity = 100,000 X 100
400,000
Rate of return on shareholders’ equity = 25%
18. Computation of Book Value Per Share:

Book value per share = Total shareholders’ equity
Number of shares
Book value per share = 400,000
30,000
Book value per share = 13.33
Page 71
Chapter # 3
PRACTICE QUESTIONS
Question # 1:
Compute trend percentages for the following items taken from financial statements of
Modern Fixtures over a five year period. Treat 1998 as the base year. State whether the
trends are favourable or unfavourable.
2002 2001 2000 1999 1998
Sales 127,500 111,000 92,250 88,500 75,000
Cost of goods sold 87,750 69,900 60,750 54,000 45,000
Question # 2:
The following items from the income statement of Makli Limited for the year ended
December 31, 1998 have been expressed as a percentage of net sales:
Net sales Rs.1,500,000
Beginning inventory 150,000
Net purchases 1,020,000
Ending inventory 120,000
Administrative expenses 135,000
REQUIRED
Calculate beginning inventory rate, net purchases rate and ending inventory rate, selling
expenses rate and administrative expenses rate and cost of goods sold rate (all as
percentage of net sales).
Question # 3:
Selected data taken from the balance sheet of Imam Co. at the end of fiscal year on
December 31, 2010.
Cash 150,000
Marketable securities 75,000
Inventories 375,000
Prepaid expense 300,000
Current liabilities 375,000
REQUIRED
Compute:
1. Working capital 2. The current ratio 3. Acid test ratio
Note: Write relevant formula in the computations.
Question # 4:
Zulfiqar Company’s ordinary shares capital account for 2010 and 2009 showed:
Ordinary share Rs.10 par value Rs.45,000.
The following data are provided relative to 2010 & 2009:
2010 2009
Dividends Rs.2,250 Rs.3,600
Market price per share Rs.20 Rs.22
Earnings per share Rs.2.13 Rs.2.67
REQUIRED
Compute for year 2010 and 2009:
(i) Dividend per share (ii) Dividend yield
Note: Write relevant formula in the computations. Compare answer for the year 2010 with
the year 2009.
Page 72
Chapter # 3
Question # 5:
The following balances have been taken from the books of Islamabad Co. Ltd. on Dec. 31, 98:
Marketable securities 60,000 Accrued expenses 37,500
Accounts receivable 120,000 Sales (on account) 900,000
Inventories 180,000 Cost of goods sold 540,000
REQUIRED
(a) Working capital (b) Current ratio
(c) Quick ratio (d) Accounts receivable turnover
(e) Inventory turnover
Question # 6:
The following information has been taken from the record of Ashraf Company Ltd. at the
end of the current year:-
Total assets Rs.675,000
Quick assets 120,000
Total liabilities 303,750
Current liabilities 150,000
Fixed assets 375,000
Sales (including cash sales of Rs.150,000) 1,500,000
Gross profit on sales 30%
Average inventory 105,000
Average receivable 135,000
Market price of Rs.20 share is Rs.25.
REQUIRED
1. Working capital 2. Debt ratio
3. Equity ratio 4. Current ratio
7. Rate of net income on sales 8. Earnings per share
9. Earnings ratio 10. Total days of operating cycle
11. Quick ratio 12. Operating expenses rate
Question # 7:
At the end of year the following information was obtained from the accounting records of
Adnan Ltd.
Sales (all on account) 600,000
Cost of goods sold 360,000
Average inventory 90,000
Average accounts receivable 60,000
Interest expense 4,500
Income taxes 6,000
Net income for the year 27,000
Average investment in assets 375,000
Average stockholder’s equity 300,000
REQUIRED
On the basis of above information compute the following for the year:
(1) Inventory turnover (2) Accounts receivable turnover
(3) Total operating expenses (4) Gross profit percentage
(5) Return on average stockholders’ equity (6) Return on average assets
Page 73
Chapter # 3
Question # 8:
Following are the selected balances taken from the books of Annie Ltd. at the end of 2004.
Merchandise inventory (1.1.04) 90,000
Bills payable 375,000
Accounts receivable (1.1.04) 285,000
Cash 81,000
Accounts receivable (31.12.04) 262,500
Credit sales (Net) 1,368,750
Merchandise inventory (31.12.04) 112,500
REQUIRED
On the basis of above information, compute:
(1) Current ratio (2) Acid test ratio
(3) Inventory turnover (4) Accounts receivable turnover
(5) Net profit percentage (6) Gross profit percentage
(7) Average days to accounts receivable & inventory turnover
Note: Computation without the use of relevant formula will not be accepted.
Question # 9:
Following are the selected data taken from books of Nissan Ltd. at the end of year 2003:
Cost of goods sold Rs. 810,000
Merchandise inventory (opening) 180,000
Accounts receivable (opening) 570,000
Cash 162,000
Accounts receivable (ending) 525,000
Merchandise inventory (ending) 225,000
Credit sales (net) 2,737,500
Total operating expenses 900,000
REQUIRED
On the basis of above information, find out:
1. Working capital 2. Inventory turnover
3. Current ratio 4. Accounts receivable turnover
5. Acid test ratio 6. Gross profit percentage
7. Net profit percentage 8. Operating expense rate
Question # 10:
Following are the selected data taken from the books of Masooma & Co. at the end of year
2004.
Cash 33,600
Inventory at start 44,400
Inventory at end 38,700
Accounts receivable beginning 89,550
Accounts receivable ending 74,100
Page 74
Chapter # 3
Purchases 369,300
Sales 576,000
Sales discount 21,000
Non-operating expenses 6,000
Total assets 375,000
Total liabilities 150,000
REQUIRED
(a) Equity ratio (b) Current ratio
(c) Rate of gross profit on sales (d) Quick ratio
(e) Rate of net income on sales (f) Return on assets
(g) Return on equity (h) Total days of operating cycle.
Question # 11:
The following information has been taken from the balance sheet of Kashmir Carpets at the
end of June 2004.
Accounts payable Rs.150,000
Accrued liabilities 7,500
Cash 75,000
Income tax payable 10,500
Inventory 195,000
REQUIRED
1. Working capital 2. Current ratio 3. Acid test ratio
Question # 12:
The following data has been extracted from the financial statements of Green Grocers:
2004 2003
Net sales (70% credit sales) 3,072,000 3,502,500
Cost of goods sold 1,572,000 2,095,500
Average monthly inventory 304,500 285,000
Inventory end of the year 364,500 307,500
Accounts receivable 150% of average inventory. --- 75,000
REQUIRED
Determine for each year:
3. No. of days sales in inventory 4. Days of operating cycle
Page 75
Chapter # 3
Question # 13:
The selected data given below are taken from the records of the Hasan Co. Ltd. at the end of
the year 2007:
Cash 450,000 Accounts receivable (beg) 62,250
Prepaid insurance 187,500 Accounts receivable (end) 652,500
Inventory (beginning) 272,250 Sales 382,500
Inventory (ending) 487,500 Operating expenses 784,500
Purchases 1,800,000 Accounts payable 337,500
Share capital (par value Rs.10) 3,750,000 Accrued expenses 487,500
Retained earnings 450,000 Total assets 9,750,000
REQUIRED
Determine the following ratios on the basis of the above information:
1. Working capital 2. Acid test ratio
3. Current ratio 4. Operating expense rate
5. Rate of gross profit on sales 6. Equity ratio
7. Accounts receivable turnover rate 8. Inventory turnover rate
Question # 14:
The data shown below were taken from the financial records of Shahid Ltd. at the end of
1996:-
Accounts payable 750,000 Accrued liabilities 495,000
Cash 480,000 Inventories – Jan. 1, 1996 630,000
Inventories – Dec. 31, 1996 570,000 Marketable securities 150,000
Operating expenses 1,800,000 Prepaid expenses 375,000
Purchases (net) 5,400,000 A/c receivable – Jan. 1, 1996 915,000
A/c receivable – Jan. 31, 1996 915,000 Long term loan 2,250,000
Plant assets 6,000,000 Sales (all on credit) 9,060,000
Sales return and allowances 300,000 Retained earnings 1,995,000
Share capital (Rs.10 par) ? Market price per share Rs.18
REQUIRED
On the basis of above information compute the following:
1. Current ratio 2. Quick ratio
3. Equity ratio 4. Debt ratio
7. Rate of net income on sales 8. Book value per share
9. Earnings per share 10. Price earnings ratio
Question # 15:
Parkland Ltd. balance sheet dated December 31, 1990 is given below:
Assets Equities
Cash 30,000 Bank overdraft 15,000
Marketable securities 30,000 Notes payable 75,000
Accounts receivable 120,000 Accounts payable 150,000
Inventories 300,000 Long term loan 180,000
Prepaid expenses 15,000 Share capital (Rs.10 par) 300,000
Building 450,000 Retained earnings 330,000
Other plant assets 180,000 Reserves 75,000
Total assets 1,125,000 Total equities 1,125,000
Page 76
Chapter # 3
Total sales during the year amounted to Rs.1,800,000.
Gross profit for the year was Rs.660,000.
Inventory and accounts receivable remained almost constant throughout the year.
REQUIRED
1. Working capital 2. Current ratio
3. Acid test ratio 4. Equity ratio
5. Debt ratio 6. Receivable turnover
7. Inventory turnover 8. Book value per share
Question # 16:
The following items are taken from financial statement of Amman Company. All sales are
made on account:
Sales (on account) 2,700,000
Plant and equipment 3,600,000
Average shareholders’ equity 5,700,000
Long term liabilities 1,350,000
Average accounts receivable 562,500
Average merchandise inventory 382,500
REQUIRED
1. Accounts receivable turnover.
2. Merchandise inventory turnover.
3. Ratio of plant and equipment to long term liabilities.
4. Rate of return on shareholders’ equity.
5. Gross profit percentage.
Question # 17:
The following items have been taken from the financial record of Fazal & Company:
Cash Rs.75,000; Accounts receivable on January 1, 2010 Rs.135,000; Office supplies
Rs.13,500; Inventory on December 31, 2010 Rs.90,000; 5-year Bonds payable Rs.210,000;
Operating expenses Rs.48,000; Bank overdraft Rs.202,500; Accounts receivable on
December 31, 2010 Rs.180,000; Ordinary shares capital Rs.600,000 (par value Rs.10 each
share); Cost of sales Rs.337,500 which is 75% of sales; Retained earnings Rs.85,500
(exclusive of current year income); Accrued expenses Rs.135,000; Prepaid expenses
Rs.256,500; Inventory on January 1, 2010 was Rs.135,000; Plant and machinery Rs.292,500.
REQUIRED
(a) Current ratio (b) Inventory turnover days
(c) Receivable turnover days (d) Equity ratio
(e) Earnings per share (f) Book value per share
Page 77
Chapter # 3
Question # 18:
Presented below are data relating to financial statements of Al-Farid Limited at the end of
first year of its operation:
Balance Sheet
As on December 31, 1988
Assets Equities
Cash 9,000 Allowance for bad debts 4,500
Marketable securities 30,000 Allowance for depreciation 75,000
Merchandise inventory 129,000 Outstanding expenses 22,500
Plant assets 525,000 Long term bonds payable 105,000
Share capital (Par Rs.10) 300,000
Sales revenue 1,800,000
Cost of goods sold 1,152,000
Note:
a) Dividend paid during the year at 25% of paid-up capital.
b) Market price per share is Rs.18.
c) Credit sales for the year were Rs.1,687,500.
REQUIRED
Calculate the following:
1. Quick ratio 2. Current ratio
3. Equity ratio 4. Debt ratio
5. Accounts receivable turnover rate 6. Inventory turnover rate
7. Gross profit rate 8. Earnings per share
9. Price earnings ratio 10. Book value per share
Question # 19:
The data given below were taken from the financial statements of Hamza Corporation for
years 2005 & 2006.
2005 2006
Current assets 330,000 396,000
Current liabilities 247,500 210,000
Cash sales 300,000 450,000
Credit sales 675,000 840,000
Cost of goods sold 675,000 750,000
Merchandise inventory 142,500 159,000
Quick assets 105,000 112,500
Accounts receivable 90,000 99,000
REQUIRED
Compute the following for 2005 & 2006.
1. Amount of working capital 2. Current ratio
3. Days of inventory turnover 4. Quick ratio
5. Days of receivable turnover 6. Rate of gross profit on sales
7. Days of operating cycle in 2006 only
Page 78
Chapter # 3
Question # 20:
The following data have been obtained from the financial statements of Mujahid & Co. for
the year ended December 31, 2006 and 2007:
2007 2006
Cash 43,125 30,000
Prepaid expenses 7,800 11,250
Accounts payable 21,000 24,000
Notes payable 45,000 52,500
Accrued expenses 10,500 13,050
Net sales 307,500 360,000
REQUIRED
Compute the following for 2006 and 2007:
(1) Amount of working capital (2) Current ratio
(3) Acid test ratio (4) Inventory turnover
(5) Receivable turnover (6) Gross profit rate
Question # 21:
Following comparative data has been taken from the records of Nuzhat & Company:
NUZHAT & COMPANY
COMPARATIVE INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2007 AND 2008
2008 2007
Net sales 1,800,000 1,275,000
Cost of sales (1,035,000) (765,000)
Gross profit 510,000 340,000
Operating Expenses:
Selling expense (180,000) (142,500)
General & administrative expenses (240,000) (195,000)
Income before interest & taxes (IBIT) 345,000 172,500
Financial charges (48,000) (36,000)
Income before tax 297,000 136,500
Income tax (44,550) (20,475)
Net income 252,450 116,025
Assets:
Non – Current Assets:
Property, plant and equipment 573,450 255,000
Intangible assets 225,000 180,000
Current Assets:
Inventories 105,000 105,000
Accrued financial income 105,000 90,000
Accounts receivables 285,000 165,000
Marketable securities 270,000 255,000
Cash and bank 180,000 297,000
Page 79
Chapter # 3
Authorized Capital:
50,000 ordinary shares @ Rs.10 750,000 750,000
Share Capital:
Ordinary share capital @ Rs.10 675,000 615,000
Retained earnings 552,450 300,000
Long Term Liabilities:
Bonds payable 202,500 187,500
Deferred income 30,000 ---
Current Liabilities:
Current maturity of deferred income 6,000 ---
REQUIRED
Compute the following ratios:
1. Current ratio for 2007 and 2008 2. Quick ratio for 2007 and 2008
3. Earnings per share for 2007 and 2008 4. Book value per share for 2007 and 2008
5. Inventory turnover for 2007 and 2008 6. Receivable turnover for 2007 and 2008
7. Return on assets for 2007 and 2008
Question # 22:
Selected data from the financial statements of R. Company and M. Company are as follows:
R. Company M. Company
Total assets 600,000 450,000
Total liabilities 150,000 75,000
Sales (all on credit) 1,500,000 1,200,000
Average inventory 210,000 225,000
Average receivable 187,500 150,000
Gross profit as a percentage of sales 30% 25%
Net income as a percentage of sales 6% 5%
REQUIRED
Computation of the following for each company:-
1. Net income.
2. Net income as a percentage of shareholders’ equity.
3. Accounts receivable turnover and the average number of days required to collect the
receivable.
4. Inventory turnover and the average number of days required to turnover the
inventory.
Question # 23:
1. Find current liabilities when current ratio is 4:1 and current assets Rs.120,000.
2. Find current assets when current ratio is 3:1 and current liabilities Rs.60,000.
3. Find quick assets when quick ratio is 3:1 and current liabilities Rs.90,000.
4. Find total liabilities when debt ratio is 1:3 and total assets Rs.900,000.
5. Find out total capital when equity ratio is 5:8 and the total assets Rs.1,200,000.
6. Find cost of goods sold when inventory turnover is 20 times and average inventory
Rs.90,000.
7. Find net credit sales when accounts receivable turnover is ten times and average
accounts receivable Rs.120,000.
8. Find net sales when gross profit ratio is 1:3 and gross profit Rs.75,000.
Page 80
Chapter # 3
Question # 24:
The following items are taken from the financial statements of Imam Company Ltd. for the
year ended December 31, 1999:
Cash Rs.162,000
Accounts receivable (net) 450,750
Merchandise inventory 339,000
Accrued interest on notes receivable 6,750
10% notes receivable (current) 24,750
Advances from customers 2,250
Ordinary shares capital 600,000
Premium on ordinary shares 180,000
Sales (including cash sales of Rs.20,500/=) 1,680,750
Net income 375,000
Cash dividend declared 180,000
Other information is as under:
i) Shareholders’ equity (opening) was Rs.1,140,000/=.
ii) Market price per share is Rs.42/=.
iii) Merchandise inventory (opening) was Rs.135,000/=.
iv) Accounts receivable (opening) was Rs.153,750/=.
REQUIRED
1. Operating expenses rate 2. Current ratio
3. Quick ratio 4. Dividend yield
5. Earnings per share 6. Price earnings ratio
7. Rate of return on ordinary shares 8. Accounts receivable turnover ratio
9. Inventory turnover ratio 10. Gross profit ratio
Question # 25:
Key figures taken from the Income Statement of Blue Spring Company for two succession
years are shown below:
Year 5 (Rs.) Year 4 (Rs.)
Sales 320,000 240,000
Selling expenses 40,000 35,000
General and administrative expenses 16,000 17,800
REQUIRED
a) The net income increased from Rs._______ in year 4 to Rs._______ in year 5.
b) The net income as percentage (%) of sales was ______% in year 4 and decreased to
______% of sales in year 5.
c) The gross profit on sales decreased from _____% in year 4 by _____% in year 5.
Page 81
Chapter # 3
Question # 26:
Pakistan Digitech Company’s comparative balance sheets and income statement for the year
2006 are as follows:
PAKISTAN DIGITECH COMPANY
COMPARATIVE BALANCE SHEET
Assets: 2006 2005
Cash 210,000 150,000
Inventory 750,000 645,000
Plant & equipment 1,350,000 1,050,000
Less: Accumulated depreciation 525,000 240,000
Long-term investment 1,050,000 1,350,000
Total 4,230,000 3,750,000
Liabilities & Equities: 2006 2005
Accrued liabilities 150,000 180,000
Taxes payable 735,000 735,000
Debentures payable 750,000 600,000
Ordinary share capital 1,200,000 1,050,000
Retained earnings 1,005,000 810,000
Total 4,230,000 3,750,000

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2006
Sales 3,450,000
Less: Cost of goods sold 1,800,000
Gross margin 1,650,000
Less: Operating expenses 1,050,000
Net operating profit 600,000
Gain on sale of long-term investment 75,000
Income before taxes 675,000
Less: Income taxes 210,000
Net income 465,000
Dividends of Rs.270,000 declared and paid during the year. The gain on sale of long-term
investments was from the sale of investments for Rs.375,000 in cash. The investments had
an original cost of Rs.300,000. There was no retirement or disposal of plant and equipment
during the year.
REQUIRED
Compute the following ratios for the year 05 and 06.
1. Current ratio 2. Acid test ratio
3. Inventory turnover 4. Return on total assets
5. Return on shareholder’s equity 6. Debt-to-equity ratio
7. Accounts receivable turnover
Page 82
Chapter # 3
Question # 27:
Comparative balance sheets at the end of 2004 and 2005 of Oasis Limited appear below:
OASIS LIMITED
COMPARATIVE BALANCE SHEETS
Assets 31.12.04 31.12.05
Cash and bank balance 75,000 67,500
Plant & equipment (Net) 900,000 960,000
1,875,000 1,912,500
Liabilities & Shareholder’s Equity
Mortgage loan (long term) --- 105,000
Debentures payable (due 2010) 750,000 525,000
Ordinary share capital 240,000 240,000
1,875,000 1,912,500
Net income for the year amounted to Rs.375,000.
Cash dividends of Rs.210,000 were declared and paid.
Depreciation of plant and equipment for the year was Rs.90,000.
Marketable securities costing Rs.22,500 were sold Rs.52,500 cash.
REQUIRED
Compute the following ratios for the year 2004 and 2005:
1. Current ratio 2. Quick ratio
3. Working capital 4. Stock turnover
5. Accounts receivable turnover 6. Return on capital employed
Note: Sales were Rs.1,200,000 and Rs.1,275,000 for the year 2004 and 2005 respectively
and profit on cost of goods sold is 25%.
Question # 28:
HO HO CORPORATION
Balance Sheet
As on December 31, 1992
(In thousands of rupees)
Cash ? Current liabilities ?
Accounts receivable (net) ? Long term debt 8% interest ?
Inventory ?
Total current assets ? Total liabilities ?
Plant Assets: Stockholders’ Equity:
Equipment 2,700 Capital stock Rs.10 par 1,500
Less: Accum. depreciation (450) 2,250 Retained earnings 300
Total shareholders’ equity 1,800
Total assets ? Total equities ?
Page 83
Chapter # 3
HO HO CORPORATION
Income Statement
For the period ended December 31, 1992
(In thousands of rupees)
Net sales ?
Cost of goods sold ?
Gross profit on sales (25% on net sales) ?
Operating expenses ?
Operating income (10% of net sales) ?
Interest expense 126
Income before income tax ?
Income tax – 40% of income before income tax ?
Net income Rs. 270
1. The equity ratio 40%, the debt ratio was 60%.
2. The only interest expense was on the long term debt.
3. The beginning inventory was Rs.750,000; the inventory turnover was 4.8 times.
4. The current ratio was 2 to 1. The quick ratio was 1.07 to 1.
5. The beginning balance in accounts receivable was Rs.420,000. The accounts
receivable turnover for the year was 12.8 times. All sales were made on account.
REQUIRED
a) Complete the financial statements by use of available information.
b) Give all computations of amounts appearing in the balance sheet and income
statement.
Page 84
Chapter # 4
Cash Flow Statement
Advanced Accounting
Cash Flow Statement
Chapter # 4
 Fund Flow Analysis.

 Cash Flow Statement (Indirect method).

 Net income on accrual basis.
 Statement of changes in working capital.
 Statement of sources and application of fund or Fund Statement.
 Statement of net cash generated.
 Cash flow statement.
Page 86
Cash Flow Statement
Chapter # 4
WORKING CAPITAL
Working capital is the capital that is used to finance the day-to-day operations of a
company. Working capital is calculated as the difference between current assets and
current liabilities. Changes in working capital is the difference of net current assets (total
current assets – total current liabilities) of the current and previous year.
STATEMENT OF NET INCOME BEFORE INTEREST & TAX ON ACCRUAL BASIS

Retained earnings (current year) XXX
Less: Retained earnings (previous year) (XXX)
Retained earnings for the period XXX
Add: Dividend and Reserves:
Cash dividend paid XXX
Reserves XXX
Total dividends and reserves XXX
Profit for the period after tax XXX
Add: Income tax expenses XXX
Profit before tax XXX
Add: Finance cost XXX
Profit before interest and tax XXX
ILLUSTRATION # 1: (NET INCOME ON ACCRUAL BASIS)

Following are the data taken from the accounting records of ABC Co. Ltd. On 31 December
2006 and 2007:
Accounts Title 31.12.2007 (Rs.) 31.12.2006 (Rs.)
Cash dividend payable 70,000 53,000
General reserves 100,000 85,000
REQUIRED
Calculate net income on accrual basis.
SOLUTION # 1:
ABC Co. Ltd.
Statement of Net Income on Accrual Basis
Retained earnings (2007) 600,000
Less: Retained earnings (2006) (350,000)
Retained earnings for the period 250,000
Add: Dividend and Reserves:
Cash dividend declared 17,000
General reserves 15,000
Total dividends and reserves 32,000
Net income on accrual basis 282,000
Page 87
Cash Flow Statement
Chapter # 4
STATEMENT OF CHANGES IN WORKING CAPITAL

Current Previous Changes in
Particular
Year Year Working Capital
Current Assets:
Cash XXX XXX XXX/(XXX)
Accounts receivable XXX XXX XXX/(XXX)
Merchandise inventory XXX XXX XXX/(XXX)
Total current assets XXX XXX XXX/(XXX)
Less: Current Liabilities:
Accounts payable (XXX) (XXX) (XXX)/XXX
Increase / decrease in working capital XXX XXX XXX/(XXX)
ILLUSTRATION # 2: (CHANGES IN WORKING CAPITAL)

Following are the data taken from the accounting records of ABC Co. Ltd. On 31 December
2008 and 2009:
Accounts Title (Rupees) 31 December 2009 31 December 2008
Cash 40,000 25,000
REQUIRED
Prepare a statement of changes in working capital on 31 December 2009
SOLUTION # 2:
ABC Co. Ltd.
Statement of Changes in Working Capital
Changes in
Particular 2009 2008
Working Capital
Current Assets: Rupees Rupees Rupees
Cash 40,000 25,000 15,000
Accounts receivable 370,000 323,000 47,000
Merchandise inventory 220,000 248,000 (28,000)
Total current assets 630,000 596,000 34,000
Less: Current Liabilities:
Accounts payable (180,000) (157,000) (23,000)
Accrued expenses (63,000) (71,000) 8,000
Total current liabilities (243,000) (228,000) (15,000)
Increase in working capital 387,000 368,000 19,000
Page 88
Cash Flow Statement
Chapter # 4
FUND
A separate pool of monetary and other resources used to support designated activities is
called fund.
FUND FLOW STATEMENT

A statement describing how a business has raised and used its funds for a specified period
is called fund flow statement or statement of sources and application of fund. Sources of
funds are typically trading profits, issues of shares or debentures, sales of fixed assets and
borrowings. Applications of funds are typically trading losses, purchases of fixed assets,
dividends paid, and repayments of borrowings. Any balancing figure represents the
increase or decrease in working capital.
FORMAT OF FUND FLOW STATEMENT

Name of Company
Fund Flow Statement
For the Period Ended ______
Sources of Fund:
Net income/net loss XXX/(XXX)
Add: Expenses not Required Fund:
Depreciation expense XXX
Amortization of intangible fixed assets XXX
Loss on sale of fixed assets XXX
Gain on sale of fixed assets (XXX)
Total expenses not required fund XXX
Fund received from business operation XXX
Add: Sale of fixed assets XXX
Add: Issue of long-term liability/bonds/debentures XXX
Add: Issue of shares* XXX
Total sources of fund XXX
Less: Applications of Fund:
Purchases of fixed assets XXX
Purchases of long-term investments XXX
Payments of long-term liabilities/debentures XXX
Cash dividend paid XXX
Total applications of fund (XXX)
Increase/decrease in working capital XXX/(XXX)
*Issue of shares includes shares capital plus shares premium.
ILLUSTRATION # 3: (FUND STATEMENT)

XYZ Ltd. balance sheet as on December 31, 2001 & 2002 are given below:
Assets 31 December 2002 31 December 2001
Cash 200,000 50,000
Equipment 310,000 280,000
Total assets 1,060,000 800,000
Page 89
Cash Flow Statement
Chapter # 4
Equities 31 December 2002 31 December 2001
Allowance for depreciation – Equipment 40,000 30,000
Total equities 1,060,000 800,000
Cash dividend of Rs.150,000 was declared and paid during 2002. Net income for the year 31
December 2002 Rs.160,000.
REQUIRED
Prepare a statement of sources and application of fund on 31 December 2002.
SOLUTION # 3:
XYZ Ltd.
Statement of Sources and Application of Funds
Sources of Fund: Rupees Rupees
Net income on accrual basis 160,000
Add: Expenses not Required Fund:
Depreciation expense (40,000 – 30,000) 10,000
Total expenses not required fund 10,000
Fund received from business operation 170,000
Add: Issue of debentures (240,000 – 120,000) 120,000
Add: Issue of shares capital (400,000 – 300,000) 100,000
Total sources of fund 390,000
Less: Applications of Fund:
Purchases of equipment (310,000 – 280,000) 30,000
Cash dividend paid 150,000
Total applications of fund (180,000)
Increase in working capital 210,000
CASH FLOW
The movement of cash into and out of a business is called cash flow. The cash receipts of a
business are known as cash inflows. The cash inflows arise from transactions such as sales
of merchandise, receipts from debtors for credit sales and sales of fixed assets. The cash
payments made by a business is known as cash outflows which arise from transactions such
as purchase of materials, directs labour costs, overheads, and payments of taxes and
dividends.
CASH FLOW STATEMENT – IAS 7

Cash flow statement is a statement showing the inflows and outflows of cash and cash
equivalents for a business over a financial period. The inflows and outflows are classified
under the headings of operating activities, taxation, capital expenditure, and financial
investments, acquisitions and disposals, equity dividends paid, management of financing.
Cash flow statement consists of three parts:
 Cash flow from operating activities.
 Cash flow from investing activities.
 Cash flow from financing activities.
Page 90
Cash Flow Statement
Chapter # 4
CASH FLOW FROM OPERATING ACTIVITIES

Cash flow from operating activities is the section of the statement of cash flow that reports
the cash transactions affecting the determination of net income. The amount is computed by
adding back of net income the items on the income statement that did not result in an
outflow of cash and subtracting the items on the income statement that did not provide an
inflow of cash. Cash flow operating activities includes:
 Current assets.
o Except marketable securities.
 Current liabilities.
 Revenue and expenses (includes interest expense, revenue, and dividends received).
The figures below are the adjustments necessary to convert the profit figure to the cash
flow for the period:
Depreciation: Added back to profit because it is a non – cash expense.
Added back because it is not part of cash generated

Interest Expense: from operations (the interest actually paid is deducted
later).
Deducted because this is part of the profit not yet

Increase in Accounts Receivable:
realized into cash but tied up in receivables.
Added on because the decrease in inventories liberates

Decrease in Inventory:
extra cash.
Added on because the cash has been collected from

Decrease in Accounts Receivable:
customers.
Deducted because the decrease in inventories shows

Increase in Inventory:
outflow of cash.
Deducted because the reduction in payables must

Decrease in Accounts Payable:
reduce cash.
Added on because this is part of the expense not yet

Increase in Accounts Payable:
paid into cash but tied up in payables.
Dividends Paid: These are the amounts actually paid in the year.
Income Tax Paid: These are the amounts actually paid in the year.
Page 91
Cash Flow Statement
Chapter # 4
CASH FLOW FROM INVESTING ACTIVITIES

Cash flow from investing activities is the section of the cash flow statement that reports
cash flows from transactions affecting investments in fixed assets. Cash flow from investing
activities may include:
 Interest received.
 Dividend received.
 Sale of fixed assets.
 Purchase of fixed assets.
 Purchase of marketable securities.
 Sale of marketable securities.
CASH FLOW FROM FINANCING ACTIVITIES

Cash flow from financing activities is the section of the cash flow statement that reports
cash flows from transactions affecting the equity and debts of the business. Cash flow from
financing activities may include:
 Issues of shares.
 Issue of debentures/loans.
 Repayment of debentures/loans.
 Dividend paid.*
*Dividend paid can be taken either in operating activities or in financing activities.
CASH
Cash means cash on hand (including overdrafts) and on demand deposits.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments that are capable of being converted into
known amounts of cash without notice. Cash equivalents may include marketable securities.
Cash equivalents are most important element of a cash flow statement.
INTERPRETATION USING THE CASH FLOW STATEMENT

The cash flow statement reveals:
 Whether the overall activities reveal a positive cash flow.
 Whether the operating activities yield a positive cash flow.
 The manner in which capital expenditure has been financed (for example, whether it
has come from internally-generated resources, borrowings, issue of shares or from
cash balance).
Cash flow statements allow users to evaluate:

 How the enterprise generates and uses cash and cash equivalents.
 Changes in net assets, financial structure (including liquidity and solvency) and the
ability of the enterprise to adapt to changing circumstances.
 The ability of the enterprise to generate cash.
 Forecasts of future cash flows.
 The accuracy of past assessments of future cash flows.
Page 92
Cash Flow Statement
Chapter # 4
FORMAT OF CASH FLOW STATEMENT

Name of Company
Cash Flow Statement
Cash Flow from Operating Activities:
Adjustments:
Add: Depreciation expense XXX
Add: Amortization of intangible fixed assets XXX
Add: Loss on sale of fixed assets XXX
Less: Gain on sale of fixed assets (XXX)
Investment Income:
Less: Dividend income (XXX)
Less: Interest income (XXX)
Profit before changes in working capital XXX
Add/Less: Decrease/Increase in inventory XXX/(XXX)
Add/Less: Decrease/Increase in accounts receivable XXX/(XXX)
Add/Less: Increase/Decrease in accounts payable XXX/(XXX)
Cash generated from operation XXX
Less: Finance cost paid (a) (XXX)
Less: Income tax paid (b) (XXX)
Net cash flow from operating activities XXX/(XXX)
Cash Flow from Investing Activities:
Purchases of fixed assets (XXX)
Purchases of long-term investments (XXX)
Sale of fixed assets XXX
Sale of long-term investments XXX
Interest income received (c) XXX
Dividend income received (c) XXX
Net cash flow from investing activities XXX/(XXX)
Cash Flow from Financing Activities:
Issue of shares XXX
Issue of loans/debentures XXX
Repayment of loans/debentures (XXX)
Dividend paid (XXX)
Net cash flow from financing activities XXX/(XXX)
Net increase/decrease in cash and cash equivalents XXX/(XXX)
Add: Opening cash and cash equivalents balance XXX/(XXX)
Closing cash and cash equivalents balance XXX/(XXX)
Page 93
Cash Flow Statement
Chapter # 4
(a) Computation of Finance Cost Paid

Interest expense XXX
Add: Interest payable (Beginning) XXX
XXX
Less: Interest payable (Ending) (XXX)
Interest expense paid XXX/(XXX)
(b) Computation of Income Tax Paid

Income tax expense XXX
Add: Income tax payable (Beginning) XXX
XXX
Less: Income tax payable (Ending) (XXX)
Income tax paid XXX/(XXX)
(c) Computation of Interest Income and Dividend Income Received

Dividend and interest income XXX
Add: Dividend and interest receivable (Beginning) XXX
XXX
Less: Dividend and interest receivable (Ending) (XXX)
Dividend and Income Received XXX/(XXX)
ILLUSTRATION # 4: (CASH FLOW STATEMENT)

XYZ Ltd. balance sheet as on December 31, 2001 & 2002 are given below:
Assets 31 December 2002 31 December 2001
Cash 200,000 50,000
Equipment 310,000 280,000
Total assets 1,060,000 800,000
Equities 31 December 2002 31 December 2001
Total equities 1,060,000 800,000
Cash dividend of Rs.150,000 was declared and paid during 2002. Net income for the year 31
December 2002 Rs.160,000.
REQUIRED
Prepare Cash Flow Statement on 31 December 2002.
Page 94
Cash Flow Statement
Chapter # 4
SOLUTION # 4:
XYZ Ltd.
Cash Flow Statement
Cash Flow from Operating Activities: Rs. Rs.
Profit before tax 160,000
Adjustments:
Add: Depreciation expense (40,000 – 30,000) 10,000
Profit before changes in working capital 170,000
Add: Decrease in inventory (240,000 – 210,000) 30,000
Less: Increase in accounts receivable (340,000 – 230,000) (110,000)
Add: Increase in accounts payable (270,000 – 250,000) 20,000
Net cash flow from operating activities 110,000
Cash Flow from Investing Activities:
Purchases of equipment (30,000)
Net cash flow from investing activities (30,000)
Cash Flow from Financing Activities:
Issue of shares (400,000 – 300,000) 100,000
Issue of debentures (240,000 – 120,000) 120,000
Dividend paid (150,000)
Net cash flow from financing activities 70,000
Net increase/decrease in cash and cash equivalents 150,000)
Add: Opening cash and cash equivalents balance 50,000
Closing cash and cash equivalents balance 200,000
CASH GENERATED FROM OPERATION

There are two methods of calculating cash generation from operation:
 Direct method.
 Indirect method.
CASH GENERATED FROM OPERATION – DIRECT METHOD

Cash sales XXX
Add: cash received from customers XXX
XXX
Less: Cash purchases (XXX)
Less: Cash paid to suppliers (XXX)
Less: Expenses paid (XXX)
Cash generated from operation XXX/(XXX)
Page 95
Cash Flow Statement
Chapter # 4
CASH GENERATED FROM OPERATION – INDIRECT METHOD

Adjustments:
Add: Depreciation expense XXX
Add: Amortization of intangible fixed assets XXX
Add: Loss on sale of fixed assets XXX
Less: Gain on sale of fixed assets (XXX)
Investment Income:
Less: Dividend income (XXX)
Less: Interest income (XXX)
Profit before changes in working capital XXX
Add/Less: Decrease/Increase in inventory XXX/(XXX)
Add/Less: Decrease/Increase in accounts receivable XXX/(XXX)
Add/Less: Increase/Decrease in accounts payable XXX/(XXX)
Cash generated from operation XXX
CASH FLOW STATEMENT
Cash Flow From Cash Flow From Cash Flow From

Operating Activities Investing Activities Financing Activities
•Current Assets (Except •Interest Received •Issue of Shares

Marketable Securities)
•Dividends Received •Issue of Debentures /
•Current Liabilities Bonds / Long Term
•Purchase of Fixed Liabilities
•Revenue & Expenses Assets
(Includes Interest •Repayment of
Expense, Revenue, & •Sale of Fixed Assets Debentures / Bonds /
Dividends Received) Long Term Liabilities
•Purchase of
Marketable Securities •Payment of Cash
Dividend
•Sale of Marketable
Securities
Page 96
Cash Flow Statement
Chapter # 4
PRACTICE QUESTIONS
Question # 1:
Muzammil Ltd. balance sheet as on December 31, 2005 & 2006 are given below:
Assets 31.12.2006 (Rs.) 31.12.2005 (Rs.)
Cash 525,000 555,000
Accounts receivable 1,050,000 1,020,000
Plant 2,400,000 1,500,000
Total assets 4,500,000 3,435,000
Equities 31.12.2006 (Rs.) 31.12.2005 (Rs.)
Bonds payable 450,000 ---
Allowance for depreciation 420,000 300,000
Retained earnings 975,000 1,035,000
Total equities 4,500,000 3,435,000
Cash dividend of Rs.150,000 and stock dividend of Rs.300,000 were declared during 2006.
REQUIRED
(1) Compute net income or loss for 2006.
(2) A statement showing changes in working capital.
(3) Fund Flow Statement.
(4) Cash flow statement showing cash flows from operating, investing and financing
activities.
Question # 2:
The following are the comparative balance sheets of Nadeem Ltd.
Debit Balances 31.12.2008 (Rs.) 31.12.2009 (Rs.)
Cash 135,000 189,000
Accounts receivables (Net) 225,000 372,000
Machinery 765,000 585,000
Land 360,000 585,000
Patents 180,000 153,000
Total 2,007,000 2,160,000
Credit Balances
Unpaid expenses 216,000 286,500
Share premium 180,000 225,000
Total 2,007,000 2,160,000
At the end of 2009, declared cash dividend Rs.135,000 and stock dividend Rs.225,000.
REQUIRED
(a) A statement showing changes in working capital.
(b) Fund Flow Statement.
(c) Cash Flow Statement.
Page 97
Cash Flow Statement
Chapter # 4
Question # 3:
The comparative balance sheets of Aamna Ltd. for the two years are produced below:
Debit Balances (in Rs.) Dec. 31, 2003 Dec. 31, 2002
Cash 131,250 157,500
Plant assets 660,000 622,500
Total Rs. 1,357,500 1,350,000
Credit Balances (in Rs.)
Salaries payable 22,500 22,500
Unearned rent 22,500 15,000
Total Rs. 1,357,500 1,350,000
Additional Data:
(1) Net income for the year 2003, Rs.135,000.
(2) Cash dividend declared Rs.112,500
REQUIRED
(a) Working capital for both the year.
(b) Statement showing changes in working capital.
(c) Statement of sources and application of fund.
(d) Cash Flow Statement.
Question # 4:
The comparative balance sheets of Sumera Ltd. are reproduced below:
Debit Balances (in Rs.) 2004 2003
Cash 262,500 315,000
Prepaid insurance 120,000 135,000
Plant & machinery 1,320,000 1,245,000
Total Rs. 2,715,000 2,700,000
Paid up capital 1,800,000 1,695,000
Total Rs. 2,715,000 2,700,000
Additional Data:
(1) Net income for the year 2004, Rs.180,000.
(2) Declared cash dividend Rs.135,000.
REQUIRED
(1) Statement showing changes in working capital.
(2) Determine cash flow from operating activities.
Page 98
Cash Flow Statement
Chapter # 4
Question # 5:
The comparative balance sheet of Uzair Corporation at December 31, 1999 and 1998 is as
follows:
Debit Balances (in Rs.)
Dec. 31, 1999 Dec. 31, 1998
Cash 315,000 225,000
Machinery 975,000 1,275,000
Land 975,000 600,000
Patents 255,000 300,000
3,600,000 3,345,000
3,600,000 3,345,000
The corporation declared a cash dividend of Rs.225,000 and share dividend of Rs.375,000
during 1999.
REQUIRED
1) Determine working capital for both the years.
2) Statement of sources and uses of fund.
3) Prepare a cash flow statement for the year ended December 31, 1999.
Question # 6:
Net income reported on the income statement for the year 2010 was Rs.1,306,500.
Depreciation recorded on equipment and building amounted to Rs.483,750 for the year.
Balance of the current assets and current liabilities accounts at the beginning and end of the
year are as follows:
End of the Year (Rs.) Beginning of the Year (Rs.)
Cash 916,875 880,875
Inventories 1,650,000 1,425,000
Accounts payable 1,158,000 1,090,500
REQUIRED
Prepare the cash flows from operating activities section of the statement of cash flows.
Page 99
Cash Flow Statement
Chapter # 4
Question # 7:
The comparative balance sheet of Uzair & Company for the two years ate shown below:
Cash 84,000 37,500
Supplies 3,000 1,800
Building 300,000 210,000
Goodwill 30,000 37,500
Total Rs. 739,500 517,500
Accumulated depreciation (Building) 72,000 52,500
Long term loan payable 75,000 ---
Share capital 375,000 300,000
Total Rs. 739,500 517,500
During the year 2004 the company declared cash dividend of Rs.30,000 and stock dividend
Rs.52,500.
REQUIRED
(1) Compute working capital for both the year.
(2) Fund Flow Statement.
(3) Cash Flow Statement.
Question # 8:
The balances of the accounts of Multan Cement Co. Limited at end of 1998 and 1999 are as
follows:
(In Rs.) December 31, 1998 December 31, 1997
Cash 90,000 150,000
Land 112,500 ---
Plant & equipment 1,200,000 937,500
Patents 135,000 150,000
(In Rs.) 2,250,000 1,875,000
Accumulated depreciation 390,000 300,000
Dividend payable 15,000 ---
Bonds payable 37,500 ---
Capital stock 1,500,000 1,312,500
2,250,000 1,875,000
Cash dividends of Rs.15,000 were declared, but not paid.
REQUIRED
a) Statement of changes in working capital.
b) Fund flow statement.
c) Cash Flow Statement.
Page 100
Cash Flow Statement
Chapter # 4
Question # 9:
The accounting staff of Nasr & Company has presents the following information:
31.12.08 (Rs.) 31.12.07 (Rs.)
Cash 63,000 75,300
Accounts receivables 75,000 93,000
Office supplies 37,500 24,000
Accrued income 63,000 30,000
Plant & equipment 450,000 390,000
Accumulated depreciation (Plant & equipment) (57,000) (39,000)
Land & building 300,000 394,500
Investment in bonds 555,000 510,000
Accounts payables 27,000 34,500

Accrued utilities 36,000 30,000
Long term loans 255,000 363,300
During the year 2008 the company declared cash dividend Rs.48,000.
REQUIRED
(a) Compute the net income from operation.
(b) Statement of Changes in Working Capital.
(c) Fund Flow Statement.
(d) Cash generated from operation.
(e) Prepare Cash Flow Statement.
Question # 10:
The comparative balance sheet of Shaheen Ltd. as of December 31, 1995 and 1996 are as
under:
Assets (in Rs.) Dec.31.1995 Dec.31.1996
Cash 45,000 54,000
Equipment 75,000 90,000
330,000 355,500
Equities (in Rs.)
Allowance for bad debts 6,000 4,500
330,000 355,500
Cash dividend declared and paid during the year ended December 31, 1996 amounted to
Rs.45,000.
REQUIRED
(a) Compute the amount of cash generated by operational activities of the company.
(b) Prepare cash flow statement for the year ended December 31, 1996.
(c) Prepare statement of sources and application of funds.
Page 101
Cash Flow Statement
Chapter # 4
Question # 11:
The following is the comparative list of balances taken from the balance sheets of Evergreen
Ltd. as of December 31, 1993 and December 31, 1992.
Debit Balances: 1993 (in Rs.) 1992 (in Rs.)
Cash 103,500 145,500
Machinery 1,200,000 900,000
Total 1,968,000 1,836,000
Credit Balances: 1993 (in Rs.) 1992 (in Rs.)
Allowance for depreciation – Machinery 360,750 240,000
Bonds payable --- 300,000
Common stock 1,200,000 840,000
Total 1,968,000 1,836,000
For the year 1993 net income of the company was Rs.336,000 and it had declared cash
dividend of Rs.300,000 during the year.
REQUIRED
(a) Prepare a statement of changes in working capital.
(b) Compute the amount of cash generated by the operational activities of the company.
(c) Prepare cash flow statement for the year ended December 31, 1993.
Question # 12:
The balance sheet of Decent Products Ltd. for the years ended August 31, 1994 and 1995
are as follows:
Debit Balances: 1994 (in Rs.) 1995 (in Rs.)
Bank balance 222,000 390,000
Furniture 51,000 37,500
Machinery 534,000 874,500
Building 876,000 1,777,500
Credit Balances:
Income tax payable 147,000 165,000
5% Debentures --- 420,000
General reserve 90,000 135,000
Depreciation written off during the year 1995 was for machinery Rs.192,000 and furniture
Rs.7,500.
REQUIRED
(a) Prepare schedule of changes in working capital.
(b) Prepare statement of sources and application of funds.
(c) Prepare cash flow statement.
Page 102
Cash Flow Statement
Chapter # 4
Question # 13:
The comparative balance sheet data of Shah Ltd. as of June 30, 1991 and 1992, followed by
income statement data for the year ended June 30, 1992 is as under:
Assets June 30, 1991 (Rs.) June 30, 1992 (Rs.)
Cash 75,000 84,000
Equipment 30,000 45,000
Total 330,000 355,500
Equities
9% Bonds payable 90,000 75,000
Total 330,000 355,500
Income Statement Data June 30, 1992

Net sales Rs. 180,000
Gross margin Rs. 67,500
Operating expenses (including depreciation expense Rs.3,000) Rs. 31,500
REQUIRED
(a) Prepare a statement showing changes in working capital during the year ended June 30,
1992.
(b) Compute the amount of cash generated by the operational activities of the company.
(c) Prepare cash flow statement for the year ended June 30, 1992.
Question # 14:
The following data have been taken from the Income Statement and Balance Sheet of Alvi
Corporation:
Dec.31, 1996 (Rs.) Jan. 1, 1996 (Rs.)
Net income 1,200,000
Depreciation expense 360,000
Amortization of intangible assets 120,000
Balance Sheets:
Inventory 1,509,000 1,725,000
Accounts payable 1,137,000 1,230,000
REQUIRED
(a) Partial statement of cash flows for the year ended December 31, 1996 showing the
computation of net cash flow from operating activities.
(b) During the current year a company made cash sales of Rs.750,000 and credit sales of
Rs.1,470,000. During the year accounts receivable decreased by Rs.96,000.
Page 103
Cash Flow Statement
Chapter # 4
Question # 15:
The following data are taken from the income statement and balance sheets of Shahdadpur
Ltd.
Dec. 31, 1999 (Rs.) Dec. 31, 1998 (Rs.)
Net income 600,000
Gain on sale of plant assets 120,000
Loss on sale of investments 52,500
Balance Sheets:
Cash 160,500 67,500
Inventory 754,500 862,500
REQUIRED
(a) Prepare a statement showing net cash flow from operating activities.
(b) Prepare a schedule showing changes in working capital during 1999.
Question # 16:
The selected data below are taken from income statement and balance sheets of Dilsoz
Company:
Income Statement 1992 (in Rs.) 1991 (in Rs.)
Net loss 37,500
Un-insured fire damage to building 30,000
Gain on sale of plant assets 9,000
Amortization of premium of bonds payable 7,500
Loss on sale of investments 36,000
Amortization of discount on issue of shares 22,500
Balance Sheets:
Inventory 862,500 856,500
Accounts payable (to merchandise suppliers) 615,000 577,500
Unearned commission 37,500 48,000
REQUIRED
(1) Statement of changes in working capital.
(2) Net cash generated by operating activities.
Page 104
Cash Flow Statement
Chapter # 4
Question # 17:
A comparative balance sheet data of Sun Rise Ltd. for 1995 and 1996 show the following
changes. Increases in assets are shown in debit column and their decreases in credit
column. Increases in equities are shown in credit column and decreases in debit column.
Debit (in Rs.) Credit (in Rs.)
Cash 21,000 ---
Other current assets 285,000 ---
Plant assets 540,000 ---
Allowance for depreciation – Plant --- 75,000
Current liabilities --- 138,000
Long term bonds payable 60,000 ---
Share capital par --- 600,000
Retained earnings --- 93,000
Near the end of 1996 the company declared and paid a cash dividend of Rs.225,000.
REQUIRED
(a) Compute the net income on accrual basis for the year 1996.
(b) Prepare fund flow statement for the year 1996 using working capital concept under
section 234 of the Companies Ordinance 1984.
(c) Prepare cash flow statement for 1996.
Question # 18:
A comparative balance sheet data of Commerce Enterprises Ltd. for 1988 and 1987 show
the following changes. Increases in assets are shown in debit column and their decreases in
credit column. Increases in equities are shown in credit column and decreases in debit
column.
Debit (in Rs.) Credit (in Rs.)
Cash 10,500 ---
Other current assets 292,500 ---
Plant assets 270,000 ---
Allowance for depreciation – Plant --- 37,500
Current liabilities --- 69,000
Long term bonds payable 30,000 ---
Share capital par --- 300,000
Near the end of 1988, the company declared and paid a cash dividend of Rs.112,500.
REQUIRED
(a) Compute the net income on accrual basis for the year 1988.
(b) Prepare fund flow statement for the year 1988 using working capital concept.
(c) Compute the amount of cash generated by the operational activities of the company.
(d) Prepare cash flow statement for 1988.
Page 105
Cash Flow Statement
Chapter # 4
Question # 19:
On December 31, 2006 and 2007 balance sheet of Nizam Ltd. shows the following:
Assets 2007 (in Rs.) 2006 (in Rs.)
Cash 105,000 72,000
Equipment 451,500 360,000
Equities
Accumulated depreciation – Equipment 91,500 72,000
Mortgage payable 90,000 150,000
Share capital – Rs.10 per share 450,000 375,000
Share premium 37,500 ---
(1) A fully depreciated equipment that costs of Rs.12,000 was discarded and related
accounts were closed.
(2) Cash dividend of Rs.60,000 were declared and paid.
REQUIRED
Prepare a Cash Flow Statement showing Operating, Investing and Financing Activities.
Question # 20:
The accounting records of Kashif Ltd. showed the following balances at the end of year 2001
and 2002:
Debit Balances (in million rupees) 2002 2001
Cash 16.80 15.00
Accounts receivable 22.50 21.00
Merchandise inventory 19.80 20.25
Equipment 9.00 6.00
Patents 3.00 3.75
Total 71.10 66.00
Credit Balance (in million rupees) 2002 2001
Accounts payable 3.60 4.50
Allowance for bad debts 1.20 1.50
Accumulated depreciation (Equipment) 2.40 1.80
Bonds payable 15.00 18.00
Share capital (Paid up) 43.50 36.00
Retained earnings 5.40 4.20
Total 71.10 66.00
Additional Data:
(i) Fully depreciated equipment that cost Rs.1,500,000 was discarded and the related
accounts closed.
(ii) Cash dividends of Rs.6,000,000 were declared and paid.
REQUIRED
(a) Compute the amount of cash generated by the operational activities of the company.
(b) Prepare cash flow statement for the year ended December 31, 2002.
(c) Assuming net purchases for the year 2002 to be Rs.26,250,000 compute the amount of
cash payments to supplier.
Page 106
Cash Flow Statement
Chapter # 4
Question # 21:
The comparative balance sheet of Faisal Corporation at June 30, 2001 and 2002 are as
follows:
Debit Balance 30.6.2002 (in Rs.) 30.6.2001 (in Rs.)
Cash 135,000 75,000
Merchandise inventories 750,000 862,500
Machinery 1,500,000 1,350,000
Land 750,000 900,000
Goodwill 225,000 300,000
3,900,000 4,072,500
Credit Balance 30.6.2002 (in Rs.) 30.6.2001 (in Rs.)

Accumulated depreciation – Machinery 450,000 330,000
10% Bonds payable 600,000 750,000
Share capital 1,500,000 1,500,000
3,900,000 4,072,500
The following additional data are given:
(a) Land costing Rs.150,000 was sold for Rs.300,000.
(b) Machinery costing Rs.300,000 was sold for Rs.135,000. At the time of sale the book
value of machinery was Rs.180,000.
(c) Cash dividend Rs.300,000 was paid during the year.
REQUIRED
(a) Compute the working capital provided by operating activities.
(b) Compute net cash flow from operating activities.
(c) Prepare a statement of sources and application of fund for the year ended June 30, 2002.
(d) Assuming net sales for the year 2002 to be Rs.3,750,000, calculate the cash collection
from customers during 2002.
Question # 22:
Comparative balance sheets at the end of 2004 and 2005 of Oasis Limited appear below:
OASIS LIMITED
COMPARATIVE BALANCE SHEETS
Assets 31.12.04 (in Rs.) 31.12.05 (in Rs.)
Plant & equipment (Net) 900,000 960,000
1,875,000 1,912,500
Page 107
Cash Flow Statement
Chapter # 4
Liabilities & Shareholder’s Equity
Mortgage loan (long term) --- 105,000
Debentures payable (due 2010) 750,000 525,000
1,875,000 1,912,500
Net income for the year amounted to Rs.375,000.
Cash dividends of Rs.210,000 were declared and paid.
Depreciation of plant and equipment for the year was Rs.90,000.
Marketable securities costing Rs.22,500 were sold Rs.52,500 cash.
REQUIRED
Prepare a Cash Flow Statement using indirect method for the year ended December 31,
2006 showing the following clearly:
(a) Cash Flow from Operating Activities.
(b) Cash Flow from Investing Activities.
(c) Cash Flow from Financing Activities.
Question # 23:
The accounting records of Waqar Ltd. showed the following balance at the end of year 1995
and 1996:
1996 (in Rs.) 1995 (in Rs.)
Cash 139,500 180,000
Equipment 1,822,500 1,012,500
Land 360,000 157,500
Total 2,997,000 2,182,500
Long term bonds payable 450,000 360,000
Premium on bonds payable 6,000 7,500
Capital stock Rs.10 par 900,000 675,000
Premium on capital stock 360,000 225,000
Total 2,997,000 2,182,500
(a) Cash dividend of Rs.112,500 were declared and paid during 1996.
(b) Equipment costing Rs.112,500 was sold at Rs.60,000 and at the time of sale book
value of equipment was Rs.75,000.
REQUIRED
(1) Prepare cash flow statement.
(2) Prepare fund flow statement.
Page 108
Cash Flow Statement
Chapter # 4
Question # 24:
The following are balance sheet data of Anarkali Company Ltd.
Debit Balances 1997 – Dec. 31 (Rs.) 1996 – Dec. 31 (Rs.)
Cash 18,000 6,000
Land 97,500 112,500
Building 300,000 187,500
Equipment 27,000 15,000
Retained earnings 15,000 ---
670,500 595,500
Credit Balances 1997 – Dec. 31 (Rs.) 1996 – Dec. 31 (Rs.)
Allowance for depreciation – Building 45,000 40,500
Long term loans 150,000 120,000
Share capital (Rs.10 par) 375,000 300,000
670,500 595,500
Additional Data:
During the year land costing Rs.15,000 was sold at a gain of Rs.7,500 for cash, and the old
equipment costing Rs.15,000 was sold for Rs.3,000 on credit.
REQUIRED
(a) Fund Flow Statement using working capital concept.
(b) Cash generated from operations.
(c) Cash Flow Statement.
Question # 25:
The comparative balance sheet of Abdullah Foods Ltd for June 30, 2004 and 2003 is as
follows:
Assets (in Rs.) June 30, 2004 June 30, 2003
Cash 140,100 86,700
Accounts receivable (Net) 187,500 185,250
Investment --- 97,500
Land 217,500 ---
Equipment 551,400 417,900
Accumulated depreciation (166,350) (131,100)
Liabilities & Shareholder’s Equity (in Rs.) June 30, 2004 June 30, 2003
Dividend payable 27,600 23,550
Ordinary share capital Rs.10 150,000 105,000
Ordinary share premium 480,000 300,000
Page 109
Cash Flow Statement
Chapter # 4
The following additional information has been taken from the records of Abdullah Foods
Ltd.
(a) Equipment and land were acquired for cash.
(b) The investments were sold for Rs.142,500 cash.
(c) The ordinary shares were issued for cash.
(d) Net income Rs.198,000.
(e) Cash dividend declared Rs.110,400.
REQUIRED
Prepare a Statement of Cash Flow for the year ended June 30, 2004.
Question # 26:
Pakistan Digitech Company’s comparative balance sheets and income statement for the year
2006 follows:
COMPARATIVE BALANCE SHEET
Assets: 2006 (in Rs.) 2005 (in Rs.)
Cash 210,000 150,000
Inventory 750,000 645,000
Plant & equipment 1,850,000 1,400,000
Less: Accumulated depreciation 575,000 310,000
Long-term investment 500,000 930,000
Total 4,230,000 3,750,000
Liabilities & Equities:
Taxes payable 735,000 735,000
Retained earnings 1,005,000 810,000
Total 4,230,000 3,750,000
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2006
Sales Rs. 3,450,000
Less: Cost of goods sold Rs. 1,800,000
Gross margin Rs. 1,650,000
Less: Operating expenses Rs. 1,050,000
Net operating profit Rs. 600,000
Gain on sale of long-term investment Rs. 75,000
Income before taxes Rs. 675,000
Less: Income taxes Rs. 210,000
Dividends of Rs.270,000 declared and paid during the year. The gain on sale of long-term
investments was from the sale of investments for Rs.375,000 in cash. The investments had
an original cost of Rs.430,000. There was no retirement or disposal of plant and equipment
during the year.
Page 110
Cash Flow Statement
Chapter # 4
REQUIRED
Prepare a Cash Flow Statement using indirect method showing clearly:
(a) Cash flow from operating activities.
(b) Cash flow from investing activities.
(c) Cash flow from financing activities.
Question # 27:
The following trial balances have been taken from the books of Farooqui Ltd. Karachi:
2010 (in Rs.) 2009 (in Rs.)
Cash 225,000 315,000
Land & building 1,500,000 1,500,000
Machinery & equipment 1,050,000 780,000
Discount on issue of bonds 15,000 30,000
Total 3,960,000 3,675,000
Allowance for depreciation (Building) 180,000 172,500
Allowance for depreciation (Machine) 165,000 135,000
Capital stock 1,237,500 637,500
Reserve for plant extension 600,000 900,000
Total 3,960,000 3,675,000
(1) Sold an old equipment costing Rs.30,000 having a book value of Rs.22,500 at Rs.15,000
on credit.
(2) Cash dividend of Rs.225,000 was declared and paid.
(3) Stock dividend of Rs.150,000 was declared and issued required number of shares of
Rs.10 par.
REQUIRED
Prepare Cash Flow Statement showing Operating, Investing and Financing Activities.
Question # 28:
The comparative financial data of Brothers Limited for the last two years are:
Assets (in Rs.) 31.12.2005 31.12.2006
Cash 30,000 30,000
Land and buildings 120,000 180,000
Plant and machinery 750,000 1,200,000
Total assets 1,125,000 1,762,500
Page 111
Cash Flow Statement
Chapter # 4
Liabilities and Capital (in Rs.) 31.12.2005 31.12.2006
Bills payable 60,000 75,000
Outstanding expenses 10,500 7,500
Share capital 750,000 1,050,000
Total liabilities and capital 1,125,000 1,762,500
(i) 10% Depreciation has been charged on plant and machinery during the year 2006.
(ii) A piece of machinery was sold for Rs.12,000 during the year 2006. It had cost Rs.18,000;
depreciation of Rs.10,500 had been provided on it.
REQUIRED
(a) Prepare a schedule of changes in working capital.
(b) Statement showing the sources and application of fund for the year 2006.
(c) Statement of cash flow.
Question # 29:
The comparative balance sheet of M/s. Rehmat Ali (Pvt.) Ltd. as at June 30, 1993 and 1994
are as follows:
Assets (in thousand rupees) June 30, 1994 June 30, 1993
Cash at bank 13,050 21,300
Plant assets 162,000 127,500
Accumulated depreciation – Plant (48,000) (70,500)
Equities (in thousand rupees) June 30, 1994 June 30, 1993
Long term loan --- 37,500
Share capital (Ordinary share of Rs.10 each) 157,500 105,000
Discount of shares (10,500) ---
Other Information Taken from Ledger:
1) Net income for the year Rs.227,400.
2) Depreciation expense for the year Rs.75,000.
3) Cash dividend declared during the year Rs.94,500.
4) The loan was due in 1994, but as per agreement can be paid earlier without penalty.
5) Additional cost to building amounted to Rs.645,000.
6) Fully depreciated equipment costing Rs.300,000 was discarded with no salvage value.
7) During the year 52,500 shares were issued for cash at Rs.8/= each.
REQUIRED
(a) Prepare schedule to find changes in working capital.
(b) Prepare a statement of sources and application of fund.
(c) Prepare cash flow statement.
Page 112
Cash Flow Statement
Chapter # 4
Question # 30:
Below are the Statements of Financial Position for Zita as at 31 Dec. 2009 and 31 December,
2008 and the Statement of Comprehensive Income for the year ended 31 December, 2009.
Non – Current Assets:
Intangible assets 2,122,500 1,225,500
Tangible assets 1,248,000 1,021,500
Total non – current assets 3,370,500 2,247,000
Current Assets:
Inventory 928,500 1,051,500
Receivables 786,000 738,000
Investments 594,000 187,500
Cash 25,500 121,500
Total current assets 2,334,000 2,098,500
Total assets 5,704,500 4,345,500
Equities & Liabilities
Equities:
Ordinary shares (Rs.10) 750,000 450,000
Retained earnings 2,418,000 1,815,000
Total equities 3,861,000 2,751,000
Non – Current Liabilities:
5% Debentures payable 439,500 207,000
Interest payable 150,000 45,000
Tax payable 357,000 339,000
Total current liabilities 1,404,000 1,387,500
Total equities and liabilities 5,704,500 4,345,500
Statement of Comprehensive Income
Revenue 2,641,500
Cost of sales (1,392,000)
Operating profit 1,249,500
Interest charge (165,000)
Profit before tax 1,084,500
Income tax expense (360,000)
Profit for the year 724,500
1) Intangible non-current assets represent deferred development expenditure.
Amortization in 2009 amounted to Rs.64,500.
2) Tangible non-current asset additions totaling Rs.300,000 were made. Proceeds from
the sale of tangible non-current assets were Rs.154,500, on which Zita suffered a
loss of Rs.9,000.
3) Investments include treasury bills of Rs.48,000 acquired during 2009. Zita sees
these as cash equivalents.
REQUIRED
Prepare a Statement of Cash Flows for Zita for the year ended 31 December, 2009 in
accordance with IAS 7 (revised).
Page 113
Cash Flow Statement
Chapter # 4
Question # 31:
Smithson Ltd.
Balance Sheet
As on 30 June 2000
Current Assets:
Cash 9,490 1,400
Inventory 6,100 4,320
Prepaid expenses 310 180
Total current assets 24,450 14,900
Fixed Assets:
Land 10,000 8,000
Building 30,000 30,000
Accumulated depreciation (B) (10,000) 20,000 (9,000) 21,000
Equipment 12,000 16,000
Accumulated depreciation (E) (7,100) 4,900 (8,500) 7,500
Goodwill (net of amortization) 4,000 4,500
Total fixed assets 38,900 41,000
Total assets 63,350 55,900
Salaries payable 290 400
Total current liabilities 9,410 6,750
Mortgage payable 8,000 10,000
Shareholders’ Equity:
Ordinary shares capital 29,000 23,500
Total shareholders’ equity 45,940 39,150
Total equities and liabilities 63,350 55,900
Smithson Ltd.
Income Statement
For the Year Ended 30 June 2000
Sales revenue (net) 108,000
Gross profit 61,590
Operating Expenses:
Amortization of goodwill 500
Insurance expense 840
Miscellaneous expenses 960
Repairs and maintenance expense 1,370
Salaries expense 21,630
Telephone expense 1,850
Utilities expense 750
Total operating expenses (30,400)
Operating income 31,190
Page 114
Cash Flow Statement
Chapter # 4
Interest expense (800)
Loss on sale of equipment (300)
Income before income taxes 30,090
Net income 13,290
1) Equipment with a cost of Rs.4,000 and accumulated depreciation of Rs.2,900 was
sold.
2) Dividends of Rs.12,000 were declared.
REQUIRED
Prepare a cash flow statement, using the indirect method.
Question # 32:
West-Man Industries Ltd.
Balance Sheet
As at 31 December 1998
Current Assets:
Cash 145,500 70,000
Inventory 110,000 130,000
Total current assets 478,500 407,000
Fixed Assets:
Land 170,000 170,000
Building 700,000 600,000
Accumulated depreciation (B) (216,000) 484,000 (192,000) 408,000
Equipment 160,000 280,000
Accumulated depreciation (E) (48,000) 112,000 (64,000) 216,000
Patents 50,000 ---
Total fixed assets 816,000 794,000
Total assets 1,294,500 1,201,000
Unearned revenue 4,500 8,000
Dividends payable 10,000 20,000
Income taxes payable 25,000 20,000
Total current liabilities 91,500 96,000
Shareholders’ Equity:
Ordinary shares capital 330,000 500,000
Total shareholders’ equity 703,000 705,000
Total equities and liabilities 1,294,500 1,201,000
Page 115
Cash Flow Statement
Chapter # 4
West-Man Industries Ltd.
Income Statement
For the Year Ended 31 December 1998
Cost of goods sold (1,100,000)
Operating Expenses:
Supplies expense 5,000
Other expenses 22,000
Salaries expense 400,000
Operating income 433,000
Interest expense (20,000)
Loss on sale of equipment (45,000)
Income before income taxes 368,000
Net income 228,000
Additional Data:
(a) Building renovation costing Rs.100,000 were completed & paid for during the year.
(b) Equipment that initially cost Rs.120,000 and accumulated depreciation of Rs.32,000
was sold.
(c) Dividends of Rs.60,000 were declared during the year.
(d) Ordinary shares were repurchased on the stock market for Rs.170,000 cash, an
amount equal to their book value.
REQUIRED
Prepare the statement of cash flow for 1998.
Page 116
Chapter # 5
Accounting for Company –
Final Accounts
Advanced Accounting
Accounting for Company – Final Accounts
Chapter # 5
 Accounting for companies.

 Issuance of shares and bonds.
 Appropriation of retained earnings.
 Declaration and payment of dividends.
 Financial Statements in accordance with International Accounting Standards.
 General Journal entries for issuance of shares.

 General Journal entries for issuance of debentures/bonds.
 Appropriation of retained earnings.
 Statement of Retained Earnings.
 Balance Sheet.
Page 118
Chapter # 5
COMPANY
A corporate enterprise that has a legal identity separate from that of its members; it
operates as one single unit, in the success of which all the members participate. A company
may have limited liability (limited company), so that the liability of the members of the
company’s debt is limited. An unlimited company is one in which the liability of the
members is not limited in any way. A company may be registered as a public limited
company or a private company. The shares of a private company may not be offered to the
public for sale.
SHARE CAPITAL
Share capital is the part of the finance of a company received from its members or
shareholders in exchange for shares.
AUTHORIZED SHARE CAPITAL

The maximum amount of shares capital that may be issued by a company, as detailed in the
company’s memorandum of association is called authorized capital or registered capital.
The authorized share capital must be disclosed on the face of the balance sheet or
alternatively in the notes to the accounts.
ISSUED SHARE CAPITAL

The amount of the authorized share capital of a company for which shareholders have
subscribed is called issued share capital.
CALLED – UP SHARE CAPITAL

Called – up capital is the part of the issued share capital of a company payment for which
has either been received (paid up share capital) or requested but not yet received. Some
shares are paid for in part at the time of issue, with subsequent requests for the outstanding
payment. When all requests have been paid, the called-up share capital will equal the paid-
up share capital.
PAID – UP SHARE CAPITAL

The part of the issued share capital of a company that shareholders have paid into the
company for their fully paid or partly paid shares is called paid – up share capital.
SHARE PREMIUM
Share premium is the amount payable for shares in a company and issued by the company
itself in excess of their nominal value. Share premium received by a company must be
credited to a share premium account, which cannot be used for paying dividends to the
shareholders.
SHARE DISCOUNT
A share issued at a price below its par value. The discount is the difference between the par
value and the issue price.
PRELIMINARY EXPENSES
Expenses incurred for the registration and documentation in the setting up of a company is
called preliminary expenses. It is treated as current asset in the balance sheet.
Page 119
Chapter # 5
ARTICLES OF ASSOCIATION
Article of association is the document that governs the running of a company. It sets out
voting rights of shareholders, conduct of shareholders’ and directors’ meetings, power of
management, etc.
MEMORANDUM OF ASSOCIATION
Memorandum of association is an official document setting out the detail of a company’s
existence. It must be signed by the first subscribers and must contain the following
information:
 The name of company.
 The address of the registered office.
 The objects of the company.
 A statement that the company is a public company.
 A statement of limited liability.
 Amount of the guarantee.
 The amount of authorized share capital and its division.
GENERAL JOURNAL ENTRIES
ISSUE OF SHARES AT PAR

Bank DR. (with amount received)
Ordinary shares application CR. (with amount received)
(To record the cash received from general public at par)
-----------------------------------------------------------------------------------------------------------------
Ordinary shares application DR. (with the amount of shares issued)
Ordinary shares capital CR. (with the amount of shares issued)
(To record the shares issued to general public at par)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 1: (ISSUED AT PAR)

Paramount Co. Ltd. has an authorized capital of Rs.250,000 divided into 25,000 ordinary
shares of Rs.10 each. The company invites application for 3,000 ordinary shares at par from
public along with money. The last day, the banker of the company has informed that only
3,000 ordinary shares applications were received. The management of the company then
decided to issue the same to the public.
REQUIRED
Prepare necessary journal entries.
SOLUTION # 1:
Paramount Co. Ltd.
General Journal
1 Bank (3,000 x 10) 30,000
Ordinary shares applications 30,000
(To record the shares applications received at par)
2 Ordinary shares application 30,000
Ordinary shares capital (3,000 x 10) 30,000
(To record the shares issued to the public at par)
Page 120
Chapter # 5
ILLUSTRATION # 2: (ISSUED AT PAR)

Diamond Co. Ltd. is offering 35,000 ordinary shares of Rs.10 each to the public along with
money. The banker of the company reported that they have received 55,000 ordinary
shares application at par upto the last day. The company has decided to issue 35,000
ordinary shares and instructed to the banker that excess amount refund to whom shares
were not allotted.
REQUIRED
SOLUTION # 2:
Diamond Co. Ltd.
General Journal
1 Bank (55,000 x 10) 550,000
(To record the shares applications received at par)
(To record the shares issued to the public at par)
Bank (20,000 x 10) 200,000
(To record the refund of excess money to the
public at par)
ISSUE OF SHARES AT PREMIUM

(To record the cash received from general public at premium)
-----------------------------------------------------------------------------------------------------------------
Ordinary shares application DR. (amount of shares issued at par plus premium)
Ordinary shares capital CR. (with the amount of shares issued at par)
Ordinary shares premium CR. (with the premium amount)
(To record the shares issued to the public at premium)
-----------------------------------------------------------------------------------------------------------------
Ordinary shares application DR. (with the amount refund to public)

Bank CR. (with the amount refund to public)
(To record the refund of excess money to public)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 3: (ISSUED AT PREMIUM)

Regal Ltd. has registered capital of Rs.3,000,000 divided into 150,000 ordinary shares of
Rs.20 each. The company invites applications for 28,000 ordinary shares of Rs.20 each at
Rs.26 each along with money. The banker has reported that they have received 28,000
ordinary shares applications at premium. The company decided to issue the same number
of shares to the public.
REQUIRED
Page 121
Chapter # 5
SOLUTION # 3:
Regal Ltd.
General Journal
1 Bank (28,000 x 26) 728,000
(To record the shares applications received at
premium)
Ordinary shares premium (28,000 x 6) 168,000
(To record the shares issued to the public at
premium)
ILLUSTRATION # 4: (ISSUED AT PREMIUM)

Unilever Ltd. invites shares applications from 1 April to 10 April for 26,000 ordinary shares
of Rs.10 each with the premium of Rs.2 each. On 10 April, the banker of the company
informed to the company that they have received total 42,000 shares application along with
money. On 18 April the board has decided to issue 26,000 ordinary shares at premium after
balloting and instructed to banker that they must refund the amount to whom they have not
issued shares.
REQUIRED
SOLUTION # 4:
Unilever Ltd.
General Journal
10 Bank (42,000 x 12) 504,000
April Ordinary shares applications 504,000
premium)
April Ordinary shares capital (26,000 x 10) 260,000
Ordinary shares premium (26,000 x 2) 52,000
premium)
April Bank (16,000 x 12) 192,000
(To record the refund of excess money to the
public at premium)
Page 122
Chapter # 5
ISSUE OF SHARES AT DISCOUNT

(To record the amount received from public at discount)
-----------------------------------------------------------------------------------------------------------------
Ordinary shares application DR. (with the amount of shares issued at discount)
Ordinary shares discount DR. (with the amount of discount)
(To record the shares issued to public at discount)
-----------------------------------------------------------------------------------------------------------------
Bank DR. (with the amount of shares issued at discount)

Ordinary shares discount DR. (with the amount of discount)
(To record the shares issued to underwriter as per agreement)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 5: (ISSUED AT DISCOUNT)

Pepsi Co. Ltd. has an authorized capital of Rs.2,500,000 divided into 100,000 ordinary
shares of Rs.25 each. The company invites applications for 35,000 ordinary shares of Rs.25
each at Rs.20 each for the public with the agreement by underwriter. On the last day, the
banker has reported that they have received 26,000 ordinary shares applications from
public. The management then decided to issue the 26,000 ordinary shares to the public and
remaining shares will be taken up by the underwriter as per agreement.
REQUIRED
SOLUTION # 5:
Pepsi Co. Ltd.
General Journal
1 Bank (26,000 x 20) 520,000
discount)
Ordinary shares discount (26,000 x 5) 130,000
discount)
3 Bank (9,000 x 20) 180,000
Ordinary shares discount (9,000 x 5) 45,000
(To record the shares issued to the underwriter at
discount as per agreement)
Page 123
Chapter # 5
DEBENTURES
Debentures are the most common form of long-term loan taken by a company. It is usually a
loan repayable at a fixed date, although some debentures are irredeemable securities. Most
debentures also pay a fixed rate of interest, and this interest must be paid before a dividend
is paid to shareholders.
ISSUE OF DEBENTURES AT PAR & PAYBACK AT PAR

Bank DR. (with the amount received)
Debentures payable CR. (with nominal value)
(To record the debentures issued at par and payback at par)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 6: (ISSUED AT PAR & PAYBACK AT PAR)

The company has issued 15,000 7% debentures of Rs.100 each at par and agreed to
payback after 3 years at par.
REQUIRED
SOLUTION # 6:
General Journal
1 Bank (15,000 x 100) 1,500,000
7% Debentures payable (15,000 x 100) 1,500,000
(To record the issue of 7% debentures at par and
payback at par after 3 years)
ISSUE OF DEBENTURES AT PREMIUM & PAYBACK AT PAR

Debentures payable CR. (with par value)
Premium on debenture CR. (with amount received in premium)
(To record the debentures issued at premium and payback at par)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 7: (ISSUED AT PREMIUM & PAYBACK AT PAR)

The company has issued 23,000 10% debentures of Rs.100 each at Rs.105 and agreed to
payback after 5 years at Rs.100 each.
REQUIRED
SOLUTION # 7:
General Journal
1 Bank (23,000 x 105) 2,415,000
Premium on debentures (23,000 x 5) 115,000
(To record the issue of 10% debentures at
premium and payback at par after 5 years)
Page 124
Chapter # 5
ISSUE OF DEBENTURES AT DISCOUNT & PAYBACK AT PAR

Discount on debenture DR. (with discount amount)
Debentures payable CR (with par value)
(To record the debentures issued at discount and payback at par)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 8: (ISSUED AT DISCOUNT & PAYBACK AT PAR)

The company has issued 30,000 8% debentures of Rs.100 each at Rs.95 and redeemable
after 5 years at Rs.100 each.
REQUIRED
SOLUTION # 8:
General Journal
1 Bank (30,000 x 95) 2,850,000
Discount on debentures (30,000 x 5) 150,000
(To record the issue of 8% debentures at discount
and payback at par after 5 years)
ISSUE OF DEBENTURES AT PAR & PAYBACK AT PREMIUM

Loss on redemption DR. (with amount of loss at the time of payback)
Premium on redemption CR. (the amount will be paid as premium)
(To record the debentures issued at par and payback at premium)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 9: (ISSUED AT PAR & PAYBACK AT PREMIUM)

The company has issued 26,000 6% debentures of Rs.100 each at par and redeemable after
6 years at Rs.106 each.
REQUIRED
SOLUTION # 9:
General Journal
1 Bank (26,000 x 100) 2,600,000
Loss on redemption (26,000 x 6) 156,000
Premium on redemption (26,000 x 6) 156,000
(To record the issue of 6% debentures at par and
payback at premium after 6 years)
Page 125
Chapter # 5
ISSUE OF DEBENTURES AT DISCOUNT & PAYBACK AT PREMIUM

Loss on redemption DR. (with amount of loss at the time of payback)
Discount on debenture DR. (with the discount amount)
Premium on redemption CR. (the amount will be paid as premium)
(To record the debentures issued at discount and payback at premium)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 10: (ISSUED AT DISCOUNT & PAYBACK AT PREMIUM)

The company has issued 35,000 9% debentures of Rs.100 each at Rs.93 and redeemable
after 8 years at Rs.106 each.
REQUIRED
SOLUTION # 10:
General Journal
1 Bank (35,000 x 93) 3,255,000
Loss on redemption (35,000 x 6) 210,000
Discount on debentures (35,000 x 7) 245,000
Premium on redemption (35,000 x 6) 210,000
(To record the issue of 9% debentures at discount
and payback at premium after 8 years)
RETAINED EARNINGS
Retained earnings are accumulated earnings that have not been distributed to shareholders
but rather reinvested in the business. A company's retained earnings are disclosed at or
near the bottom of the shareholders equity section of the balance sheet. Accountants may
prepare a separate "statement of retained earnings" that shows the change in retained
earnings during the accounting period; however, the statement of retained earnings is often
combined with the income statement.
RESERVES AND FUNDS

RESERVE FUND
1. It is created out of retained earnings. 1. It is created out of cash.
2. Reserve is a voluntary provision 2. A provision is a change expense and
made out of net income. revenue.
3. Reserve is part of owner’s equity. 3. Fund is an asset.
4. It is shown on the credit side of the 4. It is shown on the debit side of the
balance sheet under owner’s equity. balance sheet among assets.
5. It represents a portion of profits or 5. It represents on assets.
liability.
6. Reserve has normally credit balance. 6. Fund has normally debit balance.
7. It is part of retained earnings. 7. It is not part of retained earnings.
Page 126
Chapter # 5
CAPITAL RESERVE
Capital reserves are the reserves that may not be distributed according to Company Act
1985. They include share capital, share premium, capital redemption reserve, certain
unrealized profits, or any other reserves that the company may not distribute according to
some other act or its own article of association.
SECRET RESERVE
Funds held in the reserve but not disclosed in the balance sheet. They arise when an asset is
deliberately either undisclosed or undervalued.
VALUATION RESERVE
Allowance, created by a charge against earnings, to provide for changes in the value of a
company's assets. Examples include accumulated depreciation and allowance for bad debts.
SURPLUS RESERVE
Amount appropriated out of earned surplus (retained earnings) for future planned or
unforeseen expenditure.
LIABILITY RESERVE
Liability reserve is used to reflect a known liability.
RESERVES
No. Purpose Entry to Create Reporting on Entry to Write Off
Balance Sheet
Nature of Reserve: Contra Assets or Valuation Reserve
1. To decrease Bad debts expense Deduction in Allowance for bad
accounts (Dr.) accounts debts (Dr.)
receivable to their Allowance for bad receivable Accounts receivable
realizable value debts (Cr.) (Cr.)
2. To accumulate Depreciation expense Deduction in Allowance for
expired cost of (Dr.) related fixed depreciation (Dr.)
fixed assets Allowance for asset Fixed asset (Cr.)
depreciation (Cr.)
Nature of Reserve: Estimated Liability
3. To recognize Income tax expense Shown as a Reserve for income
estimated liability (Dr.) current liability tax (Dr.)
Reserve for income Bank (Cr.)
tax (Cr.)
Page 127
Chapter # 5
Nature of Reserve: Appropriation of Retained Earnings
4. To restrict Retained earnings Shown as a part Reserve for building
distributable (Dr.) of retained extension (Dr.)
profit for building Reserve for building earnings Retained earnings
extension extension (Cr.) (Cr.)
5. To restrict Retained earnings Shown as a part Reserve for plant
distributable (Dr.) of retained expansion (Dr.)
profit for plant Reserve for plant earnings Retained earnings
expansion expansion (Cr.) (Cr.)
6 To restrict Retained earnings Shown as a part Reserve for
distributable (Dr.) of retained debenture
profit for Reserve for earnings redemption (Dr.)
debenture debenture Retained earnings
redemption redemption (Cr.) (Cr.)
7 To restrict Retained earnings Shown as a part Reserve for
distributable (Dr.) of retained contingencies (Dr.)
profit for Reserve for earnings Retained earnings
contingencies contingencies (Cr.) (Cr.)
FUNDS
No. Purpose Entry to Create Reporting on Entry to Write Off
Balance Sheet
Nature of Reserve: Petty Cash
1. To set aside cash Petty cash fund (Dr.) Shown as a part All expenses (Dr.)
for petty expenses Bank (Cr.) of cash Petty cash fund (Cr.)
Nature of Reserve: Sinking
2. To set aside cash Sinking fund (Dr.) Shown as a part Bonds payable (Dr.)
for sinking fund Bank (Cr.) of cash Sinking fund (Cr.)
ILLUSTRATION # 11: (RETAINED EARNINGS)

The retained earnings account on ABC Company Ltd. showed a credit balance of Rs.400,000
on December 31, 2010. The expense and revenue summary for the year ending on that date
showed a net income of Rs.150,000 which is transferred to retained earnings account. The
company decided on December 31, 2010 as under:
(a) To declare a cash dividend of Rs.50,000 and stock dividend of Rs.40,000.
(b) To appropriate Rs.40,000 for reserve for plant expansion.
(c) To appropriate Rs.27,000 for reserve for contingencies.
(d) To establish reserve for building extension for Rs.80,000.
(e) Cash dividend paid through bank.
(f) 4,000 shares issued in settlement of stock dividend.
REQUIRED
Give entries in General Journal to give effect to the above decisions.
Page 128
Chapter # 5
SOLUTION # 11:
ABC Company Ltd.
General Journal
(To record the transfer of net income to the
retained earnings account)
2 Retained earnings 50,000
Cash dividend payable 50,000
(To record the declaration of cash dividend)
Stock dividend payable 40,000
(To record the declaration of stock dividend)
Reserve for plant expansion 40,000
(To record the reserve for plant expansion)
Reserve for contingencies 27,000
(To record the reserve for contingencies)
Reserve for building extension 80,000
(To record the reserve for building extension)
7 Cash dividend payable 50,000
Bank 50,000
(To record the payment of cash dividend)
8 Stock dividend payable 40,000
(To record the issue of shares in settlement of
stock dividend at par)
FINANCIAL STATEMENTS
Financial statement is a written report which quantitatively describes the financial health of
a company. Financial statements are usually compiled on a quarterly and annually basis.
Financial statements include:
 Balance Sheet.
 Cash Flow Statement.
 Statement of Changes in Equity.
 Notes to the Financial Statements.
Page 129
Chapter # 5
INCOME STATEMENT
Income statement shows the financial performance of the business. It shows the result of
operations for a period. It consists of revenue and expenses. When total revenues exceed
the total expenses, the resulting amount is net profit. When expenses exceed revenues, the
resulting amount is net loss.
Name of Company
Income Statement
For the Period Ended______
Sales XXX
Less: Sales discount XXX
Less: Sales returns and allowances XXX (XXX)
Net sales XXX
Merchandise inventory (beg) XXX
Add: Net Purchases:
Purchases XXX
Add: Transportation in XXX
Delivered purchases XXX
Less: Purchase discount (XXX)
Less: Purchase returns & allowances (XXX)
Net purchases XXX
Less: Merchandise inventory (end) (XXX)
Gross profit XXX
Less: Operating Expenses:
Office salaries expense XXX
Advertising expenses XXX
Directors’ fee expenses XXX
Auditor’s fee expenses XXX
Insurance expense XXX
Bad debts expense XXX
Depreciation expense XXX
Total operating expenses (XXX)
Profit/loss from operation XXX/(XXX)
Add: Other Income:
Commission income XXX
Income before income tax XXX
Less: Income tax expense (XXX)
Net profit/Loss XXX/(XXX)
Page 130
Chapter # 5
BALANCE SHEET
Balance sheet shows the financial position of business. It is listing of firm’s assets, liabilities
and owner’s equity on a given date. It is a quantitative summary of company’s financial
condition at a specific point in time, including assets, liabilities and net worth. The first part
of balance sheet shows all the productive assets a company owns, and the second part
shows all the financing methods (such as liabilities and owner’s equity).
Name of Company
Balance Sheet
As on _________
Equities Assets
Shareholder’s Equity: Fixed Assets:
Authorized Capital: Goodwill XXX
XXX ordinary shares Plant & equipment XXX
@ Rs.xx each XXX Less: All for depreciation (XXX) XXX
Preliminary expenses XXX
Issued & Paid-up Capital: Total fixed assets XXX
XXX ordinary shares
@ Rs.xx each XXX Current Assets:
Add: Shares premium XXX Office supplies XXX
Less: Shares discount (XXX) Prepaid XXX
XXX Merchandise inventory XXX
Add: Retained earnings XXX Accounts receivable XXX
Add: Reserves XXX Cash/Bank XXX
Total shareholder’s equity XXX Total current assets XXX
Liabilities:
Long-Term Liabilities:
Debentures payable XXX
Premium on redemption XXX
Total long-term liabilities XXX
Accounts payable XXX
Cash dividend payable XXX
Stock dividend payable XXX
Accrued expenses XXX
Unearned income XXX
Total current liabilities XXX
Total equities XXX Total assets XXX
Page 131
Chapter # 5
STATEMENT OF RETAINED EARNINGS

Name of Company
Statement of Retained Earnings
Retained earnings (opening balance) XXX
Add: Net income for the period XXX
Total retained earning XXX
Less: Reserves:
Reserve for contingencies XXX
Reserve for plant expansion XXX
Reserve for debenture redemption XXX
Total reserves (XXX)
XXX
Less: Dividends:
Cash dividend XXX
Stock dividend XXX
Total dividends (XXX)
Retained earnings (ending balance) XXX

The pre-closing trial balance of XYZ Ltd. was prepared on 31 March 2009 showed as
follows:-
Debit Balances (in Rs.) Credit Balances (in Rs.)
Accounts receivable 50,000 All. for depreciation – Equipment 18,000
Merchandise inventory 51,000 Allowance for bad debts 3,000
Purchases 200,000 Paid-up capital 220,000
Equipment 312,000 Sales 300,000
Insurance expense 2,000 Retained earnings 18,000
Salary expense 11,000
Director’s fee 17,000
Auditor’s fee 7,000
726,000 726,000
Supplementary data for adjustment on June 30, 1993:-
(a) Depreciation expense on equipment is estimated for the year at Rs.5,000.
(b) The allowance for bad debts is to be increased by Rs.1,000.
(c) Appropriate Rs.20,000 for contingencies.
(d) Merchandise inventory valued on 31 March 2009 was Rs.40,000.
REQUIRED
(a) Prepare Income Statement for the year ended 31 March 2009 and also Statement of
Retained Earnings.
(b) Prepare Balance Sheet as of 31 March 2009.
Page 132
Chapter # 5
SOLUTION # 12:
XYZ Ltd.
Income Statement
For the Period Ended 31 March 2009
Sales 300,000
Add: Purchases 200,000
Less: Merchandise inventory (ending) (40,000)
Gross profit 89,000
Insurance expense 2,000
Directors’ fee expenses 17,000
Auditor’s fee expenses 7,000
Bad debts expense 1,000
Net profit 46,000
XYZ Ltd.
Statement of Retained Earnings
For the Period Ended 31 March 2009
Retained earnings (opening balance) 18,000
Add: Net income for the period 46,000
Total retained earning 64,000
Less: Reserves:
Reserve for contingencies (20,000)
Retained earnings (ending balance) 44,000
XYZ Ltd.
Balance Sheet
As on 31 March 2009
Equities Assets
Issued & Paid-up Capital: Equipment 312,000
22,000 ordinary shares Less: Allowance for depreciation (23,000)
@ Rs.10 each 220,000 Total fixed assets 289,000
Add: Retained earnings 44,000
Add: Reserve for contingencies 20,000 Current Assets:
Total shareholder’s equity 284,000 Merchandise inventory 40,000
Accounts rec. 50,000
Liabilities: Less: All for b/d(4,000) 46,000
Accounts payable 167,000 Cash 76,000
Total liabilities 167,000 Total current assets 162,000
Total equities 451,000 Total assets 451,000
Page 133
Chapter # 5
PRACTICE QUESTIONS
Question # 1:
M/S. Salman Ltd. has the registered capital of Rs.1,500,000 divided into ordinary shares of
Rs.50 each. 22,500 shares of Rs.50 each were offered to the public at Rs.55 per share.
REQUIRED
(a) Give Journal entries in proper form in the book of the company under each of the
following assumptions separately:
(i) Applications were received for 30,000 shares. The company allotted the
shares offered and refunded the amount received in excess.
(ii) Applications were received for 21,000 shares. The company finalized the
allotment of these shares.
(b) Prepare share capital and bank accounts under each of the above assumptions
separately.
Question # 2:
Shahid Mujib & Company Ltd. offered to the public 105,000 ordinary shares of Rs.10 each at
Rs.15 (Rs.5 being premium per share) on January 1, 1998. The company’s bankers received
applications for 135,000 ordinary shares up to January 15, 1998.
On January 31, 1998 the company finalized the allotment of shares and directed to bank to
refund the excess money received on account of over-subscription.
REQUIRED
(a) Give necessary journal entries in proper form on the books of Shahid Mujib &
Company Ltd. of the above transactions (Give narration below each entry).
(b) Set up “T” accounts of cash in bank, ordinary share capital and share premium.
(c) Prepare initial balance sheet of the company.
Question # 3:
Zain Company Ltd. was incorporated with an authorized capital of Rs.1,500,000 divided into
150,000 ordinary shares of Rs.10 each. 75,000 shares were issued to the public at par,
payable in full with application. The company’s banker reported that applications were
received for 67,500 shares. The remaining shares which were not taken up by the public
were taken up by the underwriters under the agreement. The directors finalized the
allotment of shares.
The preliminary expenses amounted to Rs.22,500. The company acquired a delivery truck
and in payment issued 7,500 ordinary shares of Rs.10 each. The market price of the shares
was Rs.12 per share.
REQUIRED
(a) Give entries in the General Journal of the company for the above transactions.
(b) Prepare initial balance sheet of the company.
Question # 4:
The following are transactions, completed by Abdul Sattar and Company:
(a) Received applications for 75,000 ordinary shares of Rs.10 each @ Rs.12 per share.
(b) Allotted 60,000 ordinary shares of Rs.10 each at a premium of Rs.2 per share.
(c) Refunded application money on 15,000 ordinary shares @ Rs.12 per share.
(d) Paid preliminary expenses Rs.30,000.
(e) Allotted 7,500 ordinary shares of Rs.10 each against land costing Rs.90,000.
(f) Allotted 7,500 ordinary shares of Rs.10 each to the promoters of the company.
REQUIRED
Prepare General Journal entries for the above transactions.
Page 134
Chapter # 5
Question # 5:
Mahfooz & Co. Ltd. was registered with capital of Rs.7,500,000 divided into ordinary shares
of Rs.10 each. The company offered to the public 22,500 shares payable in full on
application. The bank informs that 30,000 shares application were received. The company
allotted the offered shares and refunded the amount received in excess. During the year the
company completed the following transactions:
(a) Issued 7,500 shares at Rs.18 each for cash.
(b) Issued 10,500 shares to the promoters as par.
(c) Purchased computers for Rs.60,000 and issued 4,500 shares.
(d) Purchased a piece of land and issued 75,000 shares at Rs.15.
REQUIRED
Give entries in General Journal for Mahfooz & Co. Ltd.
Question # 6:
Mehmood Ltd. was registered with the authorized capital of Rs.3,000,000 divided into
300,000 ordinary shares of Rs.10 each. The company offered to the public 255,000 shares
for subscription at par. The applications for 225,000 shares were received. The
underwriters, under the agreement, subscribed for the remaining 30,000 shares. The
company paid 2% underwriting commission. The company also completed the following
transactions:
(a) Issued 6,300 shares at par to the promoters in consideration for their services for
the promotion of the company.
(b) Purchased equipment for Rs.120,000 and issued 11,400 shares of Rs.10 each.
(c) Purchased office building for Rs.195,000 and issued 18,000 shares of Rs.10 each as
purchase consideration.
REQUIRED
Record the above transactions in the General Journal of the company.
Question # 7:
Yusufzai & Company Limited was registered with the capital of Rs.15,000,000 divided into
ordinary shares of Rs.10 each. The company offered to the public 45,000 shares payable in
full on application. The bank informs that 60,000 share applications were received. The
company allotted the offered shares and refunded the amount received in excess.
During the year, the company completed the following transactions:
(a) Issued 15,000 shares at Rs.16 each for cash.
(b) Issued 21,000 shares to the promoters at par.
(c) Purchased computers for Rs.120,000 and issued the suitable number of shares. The
market value of shares was Rs.12.50 each.
(d) Purchased a piece of land and issued 150,000 shares at Rs.15 each.
REQUIRED
Give entries in the general journal for Yusufzai & Co. Ltd.
Question # 8:
Waheed Company Limited issued ordinary shares of Rs.10 each during 1995:
(a) 15,000 shares for purchase of machine (market price of shares was Rs.12).
(b) 6,000 shares at par to promoters for services rendered.
(c) Offered 135,000 shares to the public at a premium of Rs.2. Application money
received for 180,000 shares. The company allotted the shares and refunded the
excess money.
(d) Issued 7,500 shares at par for the redemption of 20% debentures payable.
Page 135
Chapter # 5
(e) The company acquired the following assets from a firm:
Merchandise Rs.30,000; Equipment Rs.180,000 and Furniture Rs.90,000.
Purchase consideration was paid by issuing 37,500 shares of Rs.10 each as fully paid
up.
REQUIRED
Question # 9:
On January 1, 1996, Jansher Company Ltd. was registered with an authorized capital of
Rs.1,800,000 divided into 9,000 10% preference shares of Rs.100 each and 90,000 ordinary
shares of Rs.10 each.
On January 15, 1996, the company offered 6,000 10% preference shares and 75,000
ordinary shares, payable in full with application.
On January 25, 1996, the company’s banker reported that Rs.750,000 on 7,500 10%
preference shares and Rs.600,000 on 60,000 ordinary shares were received with
applications. The remaining ordinary shares which were not taken up by the public were
taken up by the underwriters under the agreement.
On January 31, 1996, the directors of the company finalized the allotment of 6,000 10%
preference shares and 60,000 ordinary shares to the public and 15,000 ordinary shares to
the underwriters and directed the banker to refund the excess of application money.
On February 10, 1996, the company allotted 6,000 ordinary shares of Rs.10 each in
consideration of purchase price of machinery. The shares were issued at market price of
Rs.12.50 each.
REQUIRED
(i) Give dated entries in the General Journal of the Company for the above transactions.
(ii) Prepare initial balance sheet of the company on February 29, 1996.
Question # 10:
Chuhan & Co. Ltd. was registered with a capital of Rs.30,000,000 ordinary shares of Rs.10
each. It was incorporated by acquiring the running business of Yasir, a sole trader. The
balance sheet of the business of Yasir as of January 01, 2005 was as under:
ASSETS EQUITIES
Cash Rs. 60,000 Accounts payable Rs. 60,000
Accounts receivable 180,000 Notes payable 60,000
Merchandise inventory 240,000 Allowance for bad debts 12,000
Office supplies 12,000 Accumulated depreciation 360,000
Furniture 600,000 Yasir Capital 600,000
1,092,000 1,092,000
Chuhan & Co. Ltd. took over the business assets other than cash and assumed the liabilities.
In exchange, the company issued 45,000 shares of Rs.10 each at Rs.15 per share. The
company also made an additional issue of 15,000 shares of Rs.10 each at Rs.15 per share to
the public, which were subscribed and paid for.
REQUIRED
(i) Give the necessary entries in the General Journal of Chuhan & Company.
(ii) Prepare initial balance sheet.
Page 136
Chapter # 5
Question # 11:
Eastern Company Ltd. was incorporated with a capital of Rs.3,000,000 divided into 300,000
ordinary shares of Rs.10 each. The company took over the running business of Danish
Brothers. The balance sheet items of the business of Danish Brothers as of the date of
purchase were as under:-
Cash Rs. 30,000
Accounts receivable Rs. 84,000
Merchandise inventory Rs. 120,000
Office supplies Rs. 6,000
Machinery Rs. 300,000
Allowance for depreciation – Machine Rs. 180,000
Accounts payable Rs. 60,000
The company took over the business assets other than cash and assumed the liabilities. In
exchange, the company issued 22,500 ordinary shares of Rs.10 each as fully paid-up. The
company also made an additional issue of 45,000 shares of Rs.10 each at Rs.12 per share to
the public.
REQUIRED
(a) Give entries in the General Journal of Eastern Company Ltd.
(b) Prepare initial Balance Sheet of the company.
Question # 12:
Al-Mansoor Co. Limited made the following transactions.
The par value of share is Rs.50 and of debenture Rs.100.
(a) The company issued 30,000 shares at Rs.60 each for cash.
(b) The company issued 15,000 shares at Rs.45 each for cash.
(c) The company issued 7,500 shares for purchase of a piece of land with market value
of Rs.450,000.
(d) The company issued 3,000 shares at par to the promoters of the company.
(e) The company issued 3,000, 10% debentures at Rs.100 each repayable after 5 years
at Rs.110 each.
(f) The company issued 2,000, 10% debentures at Rs.90 each repayable after 10 years
at Rs.110 each.
REQUIRED
Give necessary entries in proper form to record the above transactions. Give explanation
below each entry.
Question # 13:
Mehran Company Ltd. made the following transactions. The par value of the share is Rs.10/-
and of the debenture is Rs.100/-.
(a) The company issued 10,000 shares at Rs.13/- each for cash.
(b) The company issued 15,000 shares for purchase of building which had a market
value of Rs.225,000/-.
(c) The company issued 1,000 shares to the promoters of the company.
(d) The company issues 1,500 10% debentures at Rs.100/- each repayable after 5 years
at Rs.110/- each.
(e) The company issued 4,000 10% debentures of Rs.90/- each repayable after 10 years
at Rs.110/- each.
REQUIRED
Give necessary general journal entries to record the above transactions. Give explanation
below each entry.
Page 137
Chapter # 5
Question # 14:
Mehran Company Ltd. completed the following transactions:
(a) Issued 25,000 shares of Rs.10 at premium of Rs.2 each for cash.
(b) Purchased building worth Rs.900,000 and issued 91,500 shares of Rs,10 each.
(c) Debentures of Rs.120,000 were settled by issue of sufficient number of shares of
Rs.10 each.
(d) Purchased four computers of Rs.90,000 each by issuing sufficient number of shares
of Rs.10 each. The market price of each share is Rs.12.
(e) The company issued 3,000 10% debentures of Rs.100 each at Rs.96 each payable at
Rs.103 after 5 years.
REQUIRED
Prepare journal entries in the book of company to record the above transactions.
Question # 15:
Aamna Ltd. was registered with the authorized capital of Rs.12,000,000 divided into the
shares of Rs.10 each. The company made the following transactions:
(a) Offered 750,000 shares to public at par. The bank informed that Rs.6,750,000 were
received. The directors made the final allotment.
(b) Issued 15,000 shares for the purchase of equipments at Rs.13 each.
(c) Issued 375,000 shares for the purchase of machinery costing Rs.3,375,000.
(d) Paid Rs.140,000 for preliminary expenses.
(e) Issued 3,000 8% debentures of Rs.100 each at Rs.95 for cash.
(f) Issued 1,500 10% debentures of Rs.100 each at Rs.105 each.
REQUIRED
(a) Record the above transactions in General Journal.
(b) What is the amount of company’s paid up capital?
Question # 16:
Zulfiqar Ltd. registered with a capital of Rs.3,000,000 which is divided into 300,000
ordinary shares @ Rs.10 each. During the year 2009 following transactions were completed.
(1) Issued 18,000 ordinary shares in full settlement of bonds payable of Rs.195,000.
(2) Issued 4,500 ordinary shares to the promoters for services rendered by them.
(3) Issued 12,000 5% 5 years debentures of Rs.100 at Rs.98 each.
(4) Purchased building for Rs.450,000 and issued ordinary shares which have a market
value of Rs.12.50 each.
REQUIRED
Prepare entries in General Journal (Show computation).
Question # 17:
The following transactions were completed by Amjad Co. Ltd. (the par value of share is
Rs.10/- each).
(a) Company offered to public 150,000 ordinary shares at Rs.15. The company received
application for 210,000 shares at Rs.15/- per share. Company allotted the shares
offered and refunded the amount received in excess.
(b) The company purchased machinery for Rs.390,000/- and in consideration issued to
vendor, its own 33,000 ordinary shares of Rs.10/- each.
(c) The company issued 24,000 debentures of Rs.100/- each, redeemable after five
years at Rs.110/- each. All debentures were subscribed.
(d) Paid for preliminary expenses Rs.75,000/-.
REQUIRED
Prepare entries in General Journal (Show computation).
Page 138
Chapter # 5
Question # 18:
Umer Company Ltd. issued the following shares and debentures having par value of Rs.10/-
and Rs.100/- each.
(a) The company received applications for 800,000 ordinary shares of Rs.10/- each.
Allotment letters were issued for 600,000 shares and the excess subscription
amount was refunded.
(b) The promoters paid Rs.80,000 for printing of Memorandum of Association of the
company.
(c) A computer was acquired by issuing 8,000 ordinary shares of Rs.10/- each fully paid
up. The market price per share was Rs.18/-.
(d) Issued 12,000 14% 5 years debentures of Rs.100/- each at par redeemable after 5
years at Rs.105.
REQUIRED
Give entries in the General Journal of the company.
Question # 19:
Mind Corporation completed the following transaction for the month of January 1998.
Jan. 1 Purchased land for Rs.500,000 and in consideration issued shares of Rs.10 each. The
market price of the share was Rs.12.50.
Jan. 5 Purchased machinery and issued 62,500 shares of Rs.10 each. The market price of
share was Rs.12.00.
Jan. 10 The Corporation allotted 100,000 shares of Rs.10 each to the promoters in
consideration of services rendered.
Jan. 20 The Corporation issued 45,000 share of Rs.10 each in full settlement of bonds
payable Rs.500,000.
Jan. 25 Issued 5,000 debentures of Rs.100 each redeemable after five years at Rs.105.
Jan. 30 Issued 10,000 debentures of Rs.100 each at Rs.95 redeemable after five years.
Jan. 31 Paid preliminary expenses Rs.50,000.
REQUIRED
Give dated entries in the General Journal with narration to record the above transactions.
Question # 20:
Nishat Co. Ltd. made the following issuance of shares and debentures:
(a) The company issued 180,000 ordinary shares of Rs.10 each at Rs.12 per share to
public; applications were received for 210,000 shares. 180,000 shares were allotted
and the excess money was refunded.
(b) Land was acquired by issuing 120,000 ordinary shares of Rs.10 each. The market
price per share was Rs.15.
(c) The promoters of the company were allotted 18,000 ordinary shares of Rs.10 each in
consideration of their services rendered.
(d) Mortgage payable of Rs.180,000 was settled by the issue of ordinary shares of Rs.10
each. The market value of the share was Rs.15.
(e) Received Rs.285,000 against the issue of 3,000 10% debentures each redeemable at
par after 5 years.
REQUIRED
Page 139
Chapter # 5
Question # 21:
The following transactions were completed by Al-Murtuza Company Limited:-
(a) Issued 75,000 ordinary shares of Rs.10 each at Rs.12.50 per share to the public
payable in full on application. The company received applications for 120,000
shares. The company allotted the shares offered and refunded the amount received
in excess.
(b) The company issued to the public 75,000 ordinary shares of Rs.10 each payable in
full on application. The entire issue was guaranteed by the underwriters. The
company received applications for 60,000 shares. As per agreement the
underwriters subscribed the balance of the issuance.
(c) The company purchased machinery at a price of Rs.675,000 and consideration
issued to the vendors its own 64,500 ordinary shares of Rs.10 each.
(d) The company issued 15,000 debenture bonds of Rs.100 each redeemable at Rs.105
per debenture after five years. All the debentures were subscribed.
(e) The company issued 15,000 debenture bonds of Rs.10 each at Rs.95 per debenture.
The debentures are redeemable at par after five years. All the debentures were
subscribed.
REQUIRED
Give entries in the General Journal of the company to record the above transactions.
Question # 22:
The Pakistan State Oil Ltd. Issued 3,000,000 ordinary shares of Rs.10/- each at Rs.9/- per
share to general public on November 1, 2001 to argument its cash reserves. The bankers
Habib Bank Ltd. reported on 5th November 2001 that the public offering was under-
subscribed by 600,000 ordinary shares. On November 20, the board of directors finalized
the allotment of 2,400,000 shares to the public and the remaining 600,000 under-
subscribed shares were allotted to the under-writers as per agreement.
In addition to above, the PSO Ltd. made the following transactions:-
November 25. Acquired land and building Rs.3,150,000/- and issued 300,000 ordinary
shares of Rs.10/- each at Rs.10.50/- per share to vendors in consideration of
the assets taken over.
December 28. The company issued 7,500, 8% debentures at Rs.100/- each repayable after 5
years at Rs.108 each.
December 29. The company issued 10,500, 11% debentures at Rs.90/- each repayable after
10 years at Rs.111/- each.
REQUIRED
Record general journal entries in standard form.
Question # 23:
The following transactions were completed by Al-Mustafa Company Limited:-
(a) Offered 200,000 ordinary shares of Rs.10 each at Rs.12 per share to the public in full
on application. The company received applications for 240,000 shares. The company
allotted the shares offered and refunded excess amount received.
(b) The company offered to the public 80,000 ordinary shares of Rs.10 each payable in
full on application. The entire issue was under-written. The company received
applications for 60,000 shares. These shares were allotted to the public and as per
agreement under-writers subscribed the balance of the issue.
(c) The company purchased a piece of land and in consideration issued 90,000 ordinary
shares of Rs.10 each to the vendors. The value of land was determined to be
Rs.1,000,000.
(d) The company allotted 20,000 ordinary shares to promoters for services rendered.
Page 140
Chapter # 5
(e) The company issued 40,000 mortgage debentures of Rs.100 each, redeemable @
Rs.105 each after five years. All the debentures were duly subscribed.
(f) The company issued 20,000 ordinary debentures of Rs.100 each at Rs.90 per
debenture. The debentures are redeemable @ Rs.105 each after 10 years. All the
debentures were duly subscribed.
REQUIRED
Give entries in the General Journal of the company to record the above transactions.
Question # 24:
Dewan Company Ltd. was incorporated on January 3, 1996, with an authorized capital of
Rs.7,500,000 divided into 750,000 ordinary shares of Rs.10 each. The following information
is available to you:-
Date:
10-1-96: The formation expense of Rs.75,000 were paid by the promoters.
15-1-96: The following shares were issued and fully subscribed at par:
45,000 shares to (NIT)
30,000 shares to the company employees
75,000 shares to the general public
16-1-96: The Company entered into an agreement with M/s. Zulfi Industries to take
over its assets and liabilities on the following values:
Equipment Rs.225,000; Building Rs.330,000; Furniture and fixture
Rs.60,000; Accounts payable Rs.15,000.
In exchange 45,000 ordinary shares of Rs.10 each were issued and fully
subscribed.
31-12-96: The Company paid cash Rs.161,583 in exchange of 5 years, 12% bonds
liability worth Rs.150,000.
31-12-96: Under writer’s commission of Rs.21,750 is outstanding against the company.
REQUIRED
(a) Prepare dated general entries from the above transactions in the book of Dewan
Company Ltd.
(b) Prepare a balance sheet of M/s. Dewan Company Ltd. as on December 31, 1995.
Question # 25:
The retained earnings account on Jawedan Company showed a credit balance of Rs.495,000
on March 31, 2001. The expense and revenue summary for the year ending on that date
showed a net income of Rs.435,000 which is transferred to retained earnings account. The
company decided on March 31, 2001 as under:
(a) To declare a cash dividend of Rs.150,000.
(b) To appropriate Rs.60,000 for reserve for sinking fund.
(c) To appropriate Rs.45,000 for reserve for contingencies.
(d) To establish reserve for building extension for Rs.90,000.
REQUIRED
Give entries in General Journal to give effect to the above decisions.
Page 141
Chapter # 5
Question # 26:
The following balances appeared in the ledger of Shahid and Co. Ltd. on December 31,
1989:-
75,000 7% preference shares of Rs.20 each Rs.1,500,000
150,000 ordinary shares of Rs.10 each Rs.1,500,000
Retained earnings un-appropriated Rs.750,000
At this date the company decided as under:-
(a) To declare cash dividend at 15% on ordinary shares.
(b) To declare normal dividend on preference shares for which ordinary shares at par
were issued.
(c) To appropriate Rs.60,000 for contingencies.
(d) To appropriate Rs.90,000 for debenture redemption.
(e) To appropriate Rs.45,000 for plant expansion.
The company was informed by its bankers that cash dividend was collected on 96,000
ordinary shares and stock dividend was collected on 66,000 preference shares by December
31, 1989.
REQUIRED
(a) Give entries in General Journal in proper form on the books of Shahid and Co. Ltd. to
give effect to the above decision.
(b) Prepare a partial Balance Sheet of the above company as of December 31, 1989 after
giving effect to the above decisions.
Question # 27:
The data were extracted from the balance sheet of Al-Mehran Company Limited on
December 31, 1990:-
Authorized Capital:
Issued and Paid-up Capital:
Retained earnings Rs.450,000
On December 31, 1991, the income summary of the company sowed net income of
Rs.900,000.
At this date the company decided as under:-
(a) To declare cash dividend of 15%.
(b) To appropriate Rs.300,000 for plant expansion.
(c) To appropriate Rs.150,000 for contingencies.
(d) To appropriate Rs.150,000 for debenture redemption.
REQUIRED
(a) Give the entry in the General Journal of the company to transfer the net income to
retained earnings account.
(b) Give entries in the General Journal to give effect to the above decision of the
company.
(c) Prepare partial balance sheet of the company as of December 31, 1991.
Page 142
Chapter # 5
Question # 28:
Shuja & Co. Ltd. issued ordinary shares (Rs.10/- par) during 1992, as noted below:-
(a) 40,000 shares of Rs.14/- each for cash.
(b) 16,000 shares of Rs.9/- each for cash.
(c) 20,000 shares for the purchase of machine (market price of share being Rs.13/-
each).
(d) 16,000 shares at par to the promoters, for services rendered.
(e) 12,000 shares for purchase of equipment having list price of Rs.128,000.
(f) 24,000 shares at par as stock dividend.
REQUIRED
Give entries in General Journal of the company to record the above transactions. (Show
computations, where necessary).
Question # 29:
Mehran & Co. Ltd. completed the following transactions during the accounting year 1994.
(The par value of shares is Rs.10/- each).
(a) Offered 450,000 shares to the public for cash, but received applications along with
cash for 600,000 shares. The company allotted the shares offered and refunded the
excess money.
(b) Acquired equipment at a fair market value of Rs.1,000,000 and issued 80,000 shares
of Rs.10 each at Rs.12.50 per share to the vendors.
(c) Acquired land at a cost of Rs.1,000,000 and issued 110,000 shares of Rs.10/- each to
the vendors.
(d) Decided to capitalize Rs.500,000 against retained earnings having a balance of
Rs.1,500,000 and issued 40,000 shares of Rs.10/- each.
REQUIRED
(a) Give entries in the General Journal of the company to record the above transactions.
(b) Prepare partial balance sheet of the company.
Question # 30:
The following are the selected balances of Star Company Ltd.:-
Reserve for income tax Rs. 54,000
Retained earnings Rs. 630,000
Reserve for plant extension Rs. 67,500
Reserve for legal charges Rs. 90,000
REQUIRED
With reference to the above data record the following in the General Journal:-
(a) Reserve for contingencies is created with Rs.90,000.
(b) Income tax liability is paid.
(c) Reserve for plant extension is disposed of completely.
(d) Reserve for legal charges is raised by Rs.45,000.
(e) Reserve for depreciation on machine is created with Rs.31,500.
Page 143
Chapter # 5
Question # 31:
Zafar & Company Limited made the following issuance. The par value of the company’s
share is Rs.10:-
(a) Issued 52,500 shares at par for cash.
(b) Issued 63,000 shares at Rs.12 each for cash.
(c) Issued 31,500 shares at Rs.9 each for cash.
(d) Issued 42,000 shares for the purchase of furniture worth Rs.455,000.
(e) Issued 38,500 shares for the purchase of equipment worth Rs.350,000.
(f) Issued 10,500 shares at par value to the promoters of the company for services
rendered by them
(g) Issued 24,500 shares at par in payment of stock dividend.
REQUIRED
Question # 32:
The shareholders equity of Habeeb Limited on January 1, 2004, appears as follows:
Ordinary share capital:
90,000 shares of Rs.10 par value Rs.900,000
Ordinary shares premium Rs.450,000
Unappropriated retained earnings Rs.876,000
During the year 2004, the following transactions occurred:
July 16: The board of directors of the company appropriated Rs.240,000 of retained
earnings for the plant expansion.
Dec. 12: Declared a stock dividend of Rs.1.50 per share.
Dec. 31: Closed the net income of Rs.300,000 from income summary account to
retained earnings.
REQUIRED
(a) Prepare journal entries to record the above transactions.
(b) Prepare retained earnings statement for the year 2004.
(c) The stock dividend was issued on January 10, 2005. The market value of ordinary
shares is Rs.15 per share. Make necessary journal entries.
Question # 33:
Consider the following cases separately wherein the par value of shares and debentures are
Rs.10 and Rs.100 respectively.
Cases:
(a) Issued 25,000 shares at Rs.12 per share for cash.
(b) Issued 17,500 shares to the promoters at par.
(c) Issued 12,500 8% debentures at Rs.90 each repayable after 10 years at Rs.110 each.
(d) Declares sock dividend Rs.100,000.
(e) Purchased equipment and issued 8,750 shares of Rs.10 each. The market value of
the shares is Rs.15.
(f) Purchases furniture for Rs.112,500 and issued 10,000 shares of Rs.10 each.
(g) Issued 8,000 shares against stock dividend. The market price is Rs.12.50 per shares.
REQUIRED
Give entries in General Journal (standard form) to record the above transactions with brief
narrations.
Page 144
Chapter # 5
Question # 34:
The income statement of Sana Mariam Ltd. for the year ended 31st March, 2008, showed the
net income of Rs.2,750,000. The board of directors decided:
(i) To declare Rs.550,000 cash dividend and Rs.825,000 stock dividend. (Number of
issued shares 82,500 of Rs.10 each against the stock dividend).
(ii) To appropriate reserve for contingencies Rs.550,000 and plant extension
Rs.1,650,000.
REQUIRED
(a) Pass journal entry for the transfer of net income to retained earnings having credit
balance of Rs.2,200,000.
(b) Journalize the directors’ decision No. 1 and 2 above.
(c) Prepare the statement of retained earnings on 31.3.2008.
Question # 35:
Consider the following cases of Shehzad Shoukat & Co. separately wherein the par values of
shares and debentures are Rs.10 and Rs.100 respectively.
(a) Offered 30,000 shares to the public at par. Applications were received for 36,000
shares. The directors made the final allotment and instructed the bank to refund the
excess money.
(b) Issued 3,000, 17% debentures at Rs.95 repayable after 5 years at Rs.105.
(c) Purchased an open plot for office building for Rs.2,475,000 and issued a sufficient
number of shares at Rs.15 each.
(d) Decided to capitalize Rs.600,000 against retained earnings and then issued shares at
premium of Rs.6.
(e) Issued 9,500 shares at par for the purchase of three computers @ Rs.30,000 each.
REQUIRED
Give General Journal entries to record the above transactions.
Question # 36:
The following balances appearing in the books of Anum Company Ltd. on December 31,
2009:
Authorized Capital:
750,000 ordinary shares @ Rs.10 each Rs.7,500,000
Issued and Paid-up Capital:
675,000 ordinary shares @ Rs.10 each Rs.6,750,000
Retained earnings Rs.382,500
On December 31, 2009 the income summary of the company showed a credit balance of
Rs.975,000. At this date the company decided as under:
(1) To declare cash dividend of Rs.0.50 per ordinary share and 10% stock dividend.
(2) To appropriate Rs.60,000 for contingencies.
REQUIRED
(a) Give the entry in the General Journal of the company to transfer the net income to
retained earnings account.
(b) Give entries in the General Journal to give the effect to the above decisions of the
company.
Page 145
Chapter # 5
Question # 37:
The following balances appeared in the ledger of Aqeel Company Ltd. on December 31st,
2010:
1,000,000 Ordinary shares of Rs.10/- each Rs.10,000,000/-
Retained earnings un-appropriated Rs.2,800,000/-
On this date, the company decided as under:
(a) To declare cash dividend at 15% on ordinary shares.
(b) To declare stock dividend at 10% on ordinary shares.
(c) To appropriate Rs.140,000/- for contingencies.
(d) The company was informed by its banker that cash dividend was collected by
800,000 ordinary shareholders on December 31st, 2010.
REQUIRED
Give entries in General Journal in proper form on the books of Aqeel Company Ltd. to give
effect to the above decisions.
Question # 38:
Few transactions were posted in Retained Earnings account of Man & Co.
Retained Earnings
Dec. 31, 2010 Rs. Jan. 1. 2010 Balance Rs.4,500,000
ii) Cash dividend 1,200,000 i) Expense & revenue 1,200,000
summary
iii) Reserve for building 480,000
expansion
iv) Reserve for sinking fund 180,000
v) Reserve for contingencies 240,000
Balance (Cr.) 3,600,000
5,700,000 5,700,000
REQUIRED
Prepare journal entries from above ledger.
Question # 39:
The expense and income summary of Sarfaraz Co. Ltd. for the year ended on 31st December,
1996 showed a credit balance of Rs.2,820,000 which is transferred to the retained earnings
account. The directors decided:-
(1) To pay a cash dividend of 15% (on 150,000 shares of Rs.50/= each).
(2) Rs.150,000 to be transferred to general reserve.
(3) To appropriate Rs.375,000 and Rs.255,000 for plant expansion and building
extension respectively.
REQUIRED
Pass journal entries for the above appropriation as well as net income’s transfer to retained
earnings.
Page 146
Chapter # 5
Question # 40:
(1) 67,500 shares of Rs.10 each were issued and subscribed at Rs.9 per share.
(2) The company allotted shares of Rs.10 each in consideration of stock dividend
payable Rs.117,000. The market value of the share was Rs.13.
(3) Directors of the company allotted shares to the promoters in consideration of their
services values Rs.67,500, the market value of shares Rs.15.
(4) Issued 60,000 shares of Rs.10 each for the purchase of a machine costing
Rs.540,000.
(5) Declared cash dividend Rs.225,000.
(6) The bank reported the amount of dividend paid Rs.195,000 and unclaimed dividend
Rs.30,000.
REQUIRED
Give entries to record the above transactions giving necessary explanation.
Question # 41:
Karim Company Ltd. completed the following transactions:
(1) The company issued 105,000 shares of Rs.10 each at Rs.12 but received applications
for 120,000 shares. The company finalized the allotment and refunded the excess
amount.
(2) The company purchased a running business and acquired the following assets and
liabilities:
Merchandise inventory Rs.22,500; Office equipment Rs.75,000; Machinery
Rs.60,000; Accounts payable Rs.7,500. Purchase consideration of the above business
was paid by issue of 13,500 shares of Rs.10 each fully paid-up.
(3) Purchased a machine worth Rs.300,000 and in consideration issued shares of Rs.10
each. Each share had a market value of Rs.12.50.
(4) Purchased office equipment and in consideration issued 15,000 shares of Rs.10 each.
The market value of the share was Rs.13.
(5) Issued 3,000 10% debentures of Rs.100 each at Rs.95 redeemable after five years at
Rs.105.
(6) The company declared stock dividend Rs.75,000 and issued 6,750 shares of Rs.10
each.
REQUIRED
Give journal entries in proper form of the above transactions on the books of Karim Co. Ltd.
Question # 42:
The following transactions relate to Bhutto Limited.
(a) Received applications for 150,000 ordinary shares of Rs.10 each. Issued allotment
letters for 120,000 shares and refunded the excess application money.
(b) Issued 9,000 ordinary shares of Rs.10 each at a market price of Rs.12 per share for
acquiring land.
(c) Issued ordinary shares of Rs.10 each at a premium of Rs.2 per share, in settlement of
bonds payable Rs.90,000.
(d) Declared cash dividend of Rs.45,000 and stock dividend of Rs.75,000.
(e) Appropriate Rs.225,000 for contingencies.
(f) Issued ordinary shares of Rs.10 each in payment of stock dividend of Rs.75,000.
(g) Issued dividend warrants in payment of cash dividend of Rs.45,000.
(h) Unclaimed dividend of Rs.7,500 as per bank statement.
REQUIRED
Give general journal entries for the above transactions.
Page 147
Chapter # 5
Question # 43:
Al-Azam Ltd. entered into the following transactions:
(1) Issued 75,000 ordinary shares of Rs.10 par at Rs.12 each for cash.
(2) Issued 15,000 ordinary shares of Rs.10 in acquisition of machinery costing
Rs.180,000.
(3) Declared cash dividend Rs.225,000 and stock dividend Rs.300,000. Retained
earnings account is having sufficient balance.
(4) Bank reported that the cash dividend in the amount of Rs.45,000 was unclaimed.
(5) Issued 26,250 ordinary shares of Rs.10 in settlement of stock dividend.
(6) Issued to directors 22,500 shares of Rs.10 each in recognition of their services
rendered to the company.
(7) Issued 1,500 debentures of Rs.100 each at Rs.110 payable after 5 years at Rs.120.
REQUIRED
Give the necessary journal entries to record the above transactions in proper form.
Question # 44:
The shares issue transactions of Safeer Co. Ltd. for the year ended on 30th Sept. 2003.
(a) The company issued for cash 600,000 shares of Rs.10 each at Rs.13 each.
(b) The promoters were allotted 15,000 shares of Rs.10 each for services.
(c) The company bought equipment costing Rs.150,000. Rs.10 shares were issued in
exchange. The market value per share was Rs.12.50.
(d) For land purchased worth Rs.1,125,000, 120,000 shares of Rs.10 each were issued.
(e) Declared dividend 25% on the shares issued above.
(f) Paid the dividend through bank.
REQUIRED
(i) Journalize the above transactions.
(ii) Prepare initial balance sheet of the company.
Question # 45:
The following transactions related to Salman Co. Ltd.:
1. The company offered 75,000 shares of Rs.10 each at Rs.15. The company received
application for 97,500 shares. The company finalized the allotment and the excess
money was refunded.
2. The company declared stock dividend of Rs.150,000. The company issued 13,500
shares of Rs.10 each in settlement of stock dividend.
3. The company purchased land worth Rs.750,000 and issued 67,500 shares of Rs.10
each to vendor.
4. The company purchased machine and in consideration thereof issued 24,000 shares
of Rs.10 each. The market price of the share was Rs.12.50.
5. The company issued 3,000 debentures of Rs.100 each at par, repayable after five
years at 5% redemption premium.
6. The company issued 4,000 debentures of Rs.100 each at Rs.95 repayable after five
years at Rs.105.
REQUIRED
Page 148
Chapter # 5
Question # 46:
The following transactions relate to Khan & Co. Ltd.
(a) The company received application for 300,000 ordinary shares of Rs.10 each.
Allotment letters were issued for 225,000 shares and the excess subscription
amount was refunded.
(b) The promoters paid Rs.30,000 for printing of Memorandum of Association of the
company.
(c) A computer was acquired by issuing 6,000 ordinary shares of Rs.10 each fully paid
up. The market price per share was Rs.18.
(d) Declared a cash dividend of Rs.300,000 and stock dividend of Rs.450,000.
(e) Created reserve for debenture redemption in the amount of Rs.22,500.
(f) Issued 7,500 debentures of Rs.100 each at Rs.90 redeemable after 7 years.
(g) The bank reported that the amount of dividend paid was Rs.225,000 and the
unclaimed dividend was Rs.75,000.
(h) The company issued 4,500 12% 5 years debentures of Rs.100 at par redeemable
after 5 years at Rs.105.
REQUIRED
Give journal entries for the above transactions.
Question # 47:
Siddique Company Ltd. is registered with an authorized capital of Rs.2,000,000 divided into
200,000 ordinary shares of Rs.10 each. The company issued its shares as under:
(a) The company offered to the public 100,000 shares at par. Applications for 80,000
shares were received. As per agreement the underwriters subscribed for the balance
of their shares. The directors finalized the allotment of 80,000 shares to the public
and 20,000 shares to the underwriters. The company paid 2% underwriting
commission on shares subscribed to them.
(b) The company purchased a machine costing Rs.144,000 and issued sufficient shares.
The shares had a market value of Rs.8/= each.
(c) The company allotted necessary shares in consideration of stock dividend
Rs.100,000. The shares had a market value of Rs.12.50.
(d) The company issued 2,000 shares in exchange for services rendered to the company.
The stock holders agreed that these services were worth Rs.30,000.
REQUIRED
Question # 48:
The shareholders’ equity section of balance sheet of Wasim Ltd. as on June 30, 2000 was as
under:-
Authorized capital (1,000,000 shares of Rs.10 par) Rs. 10,000,000
Paid up capital 360,000 shares of Rs.10 par Rs. 3,600,000
Premium on shares Rs. 720,000
Retained earnings Rs. 2,080,000
Reserve for building extension Rs. 600,000
During the quarter ended September 30, the company performed the following transactions
in addition to normal business:
(a) The company received application along with application money for 320,000 shares
in response to the issue of 400,000 shares of Rs.10 par at Rs.15/= to the public. The
board of directors finalized the allotment by allotting 320,000 shares to the public
and 80,000 shares to the underwriters.
Page 149
Chapter # 5
(b) Closed the reserve for building extension account as the purpose is over.
(c) A computer costing Rs.360,000 was acquired by allotting 28,000 shares of Rs.10/=
par.
(d) Purchased a fax machine for Rs.30,000 by allotting shares at the price of Rs.12.50
per share as quoted at the stock exchange.
(e) Issued 20,000 – 10% 5 year bonds of Rs.100 par for cash to be redeemed at Rs.110
at maturity.
(f) Created a reserve for redemption of bonds by Rs.160,000.
(g) Declared interim stock dividend of Rs.600,000 and cash dividend of Rs.800,000.
(h) Allotted shares of Rs.10 par at a premium of Rs.5 per share in settlement of the stock
dividend.
REQUIRED
(i) Record the above transactions in General Journal.
(ii) Prepare a partial Balance Sheet reporting the above facts.
Question # 49:
Selected data as of December 31, 1992 relating to Moon Ltd. follow:-
Share capital (ordinary shares of Rs.10/- each par value) Rs. 750,000
General reserves Rs. 375,000
10% Debentures payable Rs. 150,000
Machinery Rs. 750,000
Advances to suppliers Rs. 240,000
Cash at bank Rs. 75,000
REQUIRED
Prepare classified balance sheet as of December 31, 1992.
Question # 50:
The following is the adjusted trial balance of National Co. Ltd. as on December 31, 1990:
Debit Balance (in Rs.) Credit Balance (in Rs.)
Cash 225,000 Allowance for bad debts 30,000
Accounts receivable 1,200,000 Allowance for depreciation 90,000
Merchandise inventory 1,050,000 Accounts payable 75,000
Furniture 900,000 Ordinary debenture 300,000
Preliminary expenses 300,000 Share capital 1,500,000
Cost of goods sold 1,800,000 Retained earnings 795,000
Salaries expense 180,000 General reserve 150,000
Auditor’s fee expense 150,000 Sales revenue 3,000,000
Rent expense 75,000
5,940,000 5,940,000
REQUIRED
(a) Income Statement for the year ended December 31, 1990.
(b) Balance Sheet as of December 31, 1990.
Page 150
Chapter # 5
Question # 51:
Raja Ltd. has an authorized capital of Rs.600,000 divided into 60,000 ordinary shares of
Rs.10 each of which 45,000 shares were issued and fully paid up. The pre-closing trial
balance prepared on June 30, 1993 showed as follows:-
Debit Balances (in Rs.) Credit Balances (in Rs.)
Cash on hand 9,000 A/c payable 166,500
Cash in bank 31,500 All. for depreciation – Machine 36,000
A/c receivable 99,000 Allowance for bad debts 6,750
Merchandise inventory 101,250 Paid-up capital 450,000
Purchases 391,500 Sales revenue 600,000
Machine – cost 622,500 Retained earnings 38,250
Insurance expense 4,500
Director’s fee 15,750
Auditor’s fee 4,500
1,297,500 1,297,500
Supplementary data for adjustment on June 30, 1993:-
(a) Depreciation expense on machine is estimated for the year at Rs.9,000.
(b) The allowance for bad debts is to be increased by Rs.1,125.
(c) Appropriate Rs.27,000 for contingencies.
(d) Merchandise inventory valued on June 30, 1993 was Rs.157,500.
REQUIRED
(a) Prepare Income Statement for the year ended June 30, 1993 and also Statement of
Retained Earnings.
(b) Prepare balance Sheet as of June 30, 1993 in classified form.
Question # 52:
Following is the pre-closing trial balance of Al-Rauf Co. Ltd.as on December 31, 1997:
Debit Balances:
Cash Rs.52,500; Note receivable Rs.45,000; Accounts receivable Rs.82,500; Merchandise
inventory (January 1, 1997) Rs.90,000; Office supplies Rs.22,500; Furniture Rs.75,750;
Purchases Rs.525,000; Salaries expense Rs.127,500; Rent expense Rs.37,500; Interest
expense Rs.3,000 (Total Rs.1,061,250).
Credit Balances:
Allowance for depreciation (Furniture) Rs.12,000; Notes payable Rs.45,000; Accounts
payable Rs.34,500; Share capital Rs.150,000; Retained earnings Rs.52,500; Sales
Rs.765,000; Interest income Rs.2,250. (Total Rs.1,061,250).
Supplementary Data for Adjustment
(a) Merchandise inventory (Dec. 31, 1997) Rs.157,500.
(b) Depreciation on furniture for the year Rs.3,750.
(c) Accrued salary Rs.4,950.
(d) Rent prepaid Rs.15,000.
(e) Accrued interest receivable Rs.525.
REQUIRED
Taking into account the data for adjustments, prepare (a) Income Statement and (b)
Balance Sheet in classified form for the year ended December 31, 1997.
Page 151
Chapter # 5
Question # 53:
Mardan Company Ltd. was registered with an authorized capital of Rs.3,000,000 divided
into 150,000 ordinary shares of Rs.10 each and 1,500 9% preference shares of Rs.100 each.
The following balances of accounts were extracted from the books of the Co. on Dec. 31, 95:-
Debit Balances:-
Cash on hand Rs.150,000; Cash at bank Rs.450,000; Merchandise inventory (1.1.1995)
Rs.30,000; Prepaid insurance Rs.9,000; Accounts receivable Rs.112,500; Machine – cost
Rs.450,000; Purchases Rs.375,000; Transportation on purchases Rs.18,000; Salaries
expense Rs.30,000; Advertising expense Rs.15,000; Auditor’s fee expense Rs.7,500;
Director’s fee expense Rs.3,000. (Total Rs.1,650,000).
Credit Balances:-
Accounts payable Rs.72,000; Allowance for depreciation Machine Rs.75,000; Allowance for
bad debts Rs,3,000; Mortgage notes payable Rs.105,000; Sales revenue Rs.480,000;
Retained earnings Rs.15,000; Share capital - paid-up preference shares Rs.712,500;
ordinary shares Rs.187,500. (Total Rs.1,650,000).
Supplementary data for adjustments on December 31, 1995:
(a) Merchandise inventory was valued on December 31, 1995 at Rs.48,000.
(b) Insurance expired Rs.6,000.
(c) Accrued salaries Rs.7,500.
(d) Allowance for depreciation on machinery for the year was estimated at Rs.7,500.
(e) Allowance for bad debts to be increased by Rs.1,500.
(f) The company decided to appropriate Rs.7,500 for reserve for contingencies and to
appropriate Rs.12,000 for reserve for plant expansion.
REQUIRED
(a) Prepare INCOME STATEMENT for the year ended December 31, 1995 in classified
report form and also STATEMENT OF RETAINED EARNINGS on the same date.
(b) Prepare BALANCE SHEET as of December 31, 1995 in classified form.
Question # 54:
Pak and Company Limited is registered with an authorized capital of Rs.6,000,000 divided
into ordinary shares of Rs.10 each. The company’s book showed the following balances on
December 31, 1998, the end of the accounting year before the closing process:-
Debit Balances:-
Cash in bank Rs.32,000; Accounts receivable Rs.104,000; Merchandise inventory (1.1.1998)
Rs.20,800; Machinery cost Rs.2,240,000; Purchases Rs.720,000; Transportation – in
Rs.72,000; Salaries expense Rs.88,000; Rent expense Rs.69,600; Auditor’s fee expense
Rs.8,000; Director’s fee expense Rs.10,000 (Total Rs.3,364,400).
Credit Balances:-
Accounts payable Rs.92,000; Allowance for depreciation machinery Rs.272,000; Allowance
for bad debts Rs.8,000; 10% Bonds payable Rs.557,600; Paid-up capital Rs.1,520,000; Sales
revenue Rs.720,000; Retained earnings Rs.194,800 (Total Rs.3,364,400).
Data for adjustment on December 31, 1998:
(a) Rent payable Rs.2,400.
(b) Merchandise inventory was valued on December 31, 1998 at Rs.340,000.
(c) Provide allowance for depreciation on machinery for the year Rs.60,000.
(d) Raise the allowance for bad debts to Rs.10,000.
(e) Appropriate Rs.32,000 for plant extension and Rs.72,000 for contingencies.
REQUIRED
(a) Prepare Income Statement for the year ended December 31, 1998 and also a
Statement of Retained Earnings.
(b) Prepare Balance Sheet as of December 31, 1998 in classified form.
Page 152
Chapter # 5
Question # 55:
Al-Rehman Company Limited had a registered capital of Rs.3,000,000 divided into 300,000
ordinary shares of Rs.10 each. The following balances were extracted from the books of the
company on December 31, 1996.
Debit Balances
Cash in bank Rs. 30,000
Machinery – Cost Rs. 1,875,000
Purchases Rs. 562,500
Transportation – in Rs. 67,500
Salaries expense Rs. 56,250
Rent expense Rs. 61,500
Auditors fee expense Rs. 11,250
Total Rs. 2,763,375
Credit Balances
Allowance for depreciation – Machinery Rs. 225,000
Allowance for bad debts Rs. 6,750
Sales revenue Rs. 562,500
Mortgage payable Rs. 450,000
Paid-up capital Rs. 1,125,000
Total Rs. 2,763,375
Data for adjustments on December 31, 1996:
(a) Provide depreciation on machinery for the year Rs.75,000.
(b) Prepaid salaries Rs.1,125.
(c) Salaries payable Rs.750,
(d) Merchandise inventory on December 31, 1996 Rs.270,000.
(e) Appropriate Rs.30,000 for building extension and Rs.67,500 for contingencies.
REQUIRED
(a) Prepare Income Statement for the year ended December 31, 1996.
(b) Prepare Statement of Retained Earnings for the year ended December 31, 1996.
(c) Prepare Balance Sheet as of December 31, 1996.
Question # 56:
Wahid Company Limited is registered with a capital of Rs.3,000,000 divided into ordinary
shares of Rs.20/= each. The company’s book showed the following balances on December
31, 1999:-
Debit Balances:-
Cash in bank Rs.12,000; Accounts receivable Rs.39,000; Merchandise inventory (1.1.99)
Rs.7,800; Prepaid rent Rs.600; Machinery – cost Rs.840,000; Purchases Rs.270,000;
Transportation – in Rs.27,000; Salaries expense Rs.33,000; Rent expense Rs.25,500;
Auditors fee expense Rs.6,750 (Total Rs.1,261,650).
Credit Balances:-
Accounts payable Rs.42,000; Allowance for depreciation – Machinery Rs.102,000;
Allowance for bad debts Rs.3,000; Accrued rent Rs.1,500; Mortgage notes payable
Rs.200,100; Paid-up capital Rs.570,000; Sales revenue Rs.270,000; Retained earnings
Rs.73,050 (Total Rs.1,261,650).
Page 153
Chapter # 5
Data for adjustment on December 31, 1999:
(a) Prepaid rent Rs.150.
(b) Rent payable Rs.150.
(c) Merchandise inventory was valued on December 31, 1999 Rs.132,000.
(d) Depreciation expense for the year Rs.24,000.
(e) Allowance for bad debts Rs.3,750.
(f) Appropriate Rs.12,000 for plant extension and Rs.27,000 for contingencies.
REQUIRED
(a) Prepare Income Statement for the year ended December 31, 1999 and also
(b) Prepare Balance Sheet as of December 31, 1999.
Question # 57:
Zeeshan Company Limited is registered with an authorized capital of Rs.1,500,000 divided
into ordinary shares of Rs.100 each. The pre-closing trial balance of the company on
December 31, 2000 is as follows:
Debit Balances:
Machinery Rs.300,000; Building Rs.450,000; Office equipment Rs.90,000; Cash at bank
Rs.120,000; Accounts receivable Rs.135,000; Merchandise inventory (1.1.2000) Rs.127,500;
Purchases Rs.157,500; Salaries expense Rs.37,500; Transportation in Rs.7,500; Rent
expense Rs.66,000; Insurance expense Rs.37,500; Advertising expense Rs.22,500; Directors
fee Rs.22,500; Auditors’ fee Rs.22,500; Sales returns Rs.22,500 (Total Rs.1,618,500).
Credit Balances:
Accounts payable Rs.36,000; Purchase returns Rs.15,000; Accumulated depreciation on
machinery Rs.37,500; Accumulated depreciation on building Rs.45,000; Accumulated
depreciation on office equipment Rs.15,000; Allowance for bad debts Rs.7,500; Sales
Rs.547,500; Share capital Rs.900,000; Retained earnings Rs.15,000 (Total Rs.1,618,500).
Data for Adjustments:
(a) Merchandise inventory (31.12.2000) Rs.142,500.
(b) Accrued salaries Rs.3,750.
(c) Unpaid rent Rs,9,000.
(d) Un-expired insurance Rs.7,500.
(e) Allowance for depreciation on machinery Rs.30,000; building Rs.22,500; office
equipment Rs.7,500.
(f) Allowance for bad debts increased by Rs.2,250.
REQUIRED
(i) Prepare classified income statement for the year ended on December 31, 2000.
(ii) Prepare classified balance sheet as on December 31, 2000.
Question # 58:
Pak. Company Ltd. was registered with an authorized capital of Rs.7,500,000 divided into
750,000 ordinary shares of Rs.10 each. The company’s books showed the following
balances on June 30, 2002:
Title of Accounts Debit (in Rs.) Credit (in Rs.)
Cash in bank 94,500
Allowance for bad debts 4,500
Merchandise inventory 1.7.01 225,000
Prepaid insurance 12,000
Machinery – cost 1,800,000
Page 154
Chapter # 5
Allowance for depreciation – Machinery 180,000
Preliminary expenses 9,000
10% Bonds payable 300,000
Paid up capital 1,200,000
Interest revenue 10,500
Sales return & allowance 30,000
Purchases 600,000
Purchases returns & allowances 45,000
Salaries expenses 75,000
Rent expenses 54,000
Income tax expenses 15,000
Advertising expenses 7,500
3,150,000 3,150,000
Data for Adjustments on June 30, 2002:
(a) Rent expenses for the year amounted to Rs.45,000.
(b) Merchandise inventory was valued on June 30, 2002 at Rs.240,000.
(c) Provide allowances for depreciation on machinery for the year Rs.120,000.
(d) Allowance for bad debts Rs.7,500 for the year.
(f) Declared cash dividend @ 10% on capital.
REQUIRED
(a) Prepare a classified income statement for the year ended June 30, 2002 and also a
statement of retained earnings.
(b) Prepare a balance sheet as of June 30, 2002 in classified form.
Question # 59:
Mehran Company was registered with an authorized capital of Rs.9,000,000 divided into
balances on December 31, 2002, the end of the accounting year before the closing process:
Debit Balance:
Cash Rs.60,000; Accounts receivable Rs.97,500; Merchandise inventory (1.1.2002)
Rs.37,500; Machinery – cost Rs.2,250,000; Purchase Rs.720,000; Transportation in
Rs.30,000; Salaries expense Rs.87,000; Unexpired insurance Rs.12,000; Rent expense
Rs.72,000; Auditor’s fee expense Rs.30,000; Director’s fee expense Rs.27,000.
Credit Balance:
Accounts payable Rs.67,500; Accumulated depreciation – Machinery Rs.210,000; Allowance
for bad debts Rs.12,000; 10% Bonds payable Rs.420,000; Paid up capital Rs.1,500,000; Sales
revenue Rs.1,125,000; Retained earnings Rs.88,500.
Data for Adjustments on December 31, 2002:
(a) Merchandise inventory at December 31, 2002 was valued at Rs.270,000.
(b) Allowance for bad debts to be increased by Rs.3,000.
(c) Insurance expired Rs.4,500.
(d) Machinery is depreciated by 20% Diminishing Balance Method.
(e) Salaries prepaid Rs.12,000.
(f) Rent payable Rs.18,000.
(g) Provide Rs.30,000 for income tax.
Page 155
Chapter # 5
(h) Appropriate Rs.15,000 for contingencies.
REQUIRED
(a) Prepare Income Statement for the year ended December 31, 2002 and statement of
retained earnings on the same date.
(b) Prepare balance sheet as of December 31, 2002 in classified form.
Question # 60:
Urooj Ltd. was registered with an authorized capital of Rs.6,300,000 divided into Rs.10
shares. The company’s books showed the following balances as on 30th June 2004.
Debit Balance: (in Rs.)
Plant assets: 6,750,000; Cash: 180,000; Accounts receivable: 292,500; Merchandise
inventory (1st July, 2003): 112,500; Sales return: 12,600; Purchases: 2,241,000;
Transportation in: 36,000; Salaries expenses: 261,000; Prepaid advertising: 36,000;
Director’s fee: 387,000 (Total Rs.10,308,600).
Credit Balance: (in Rs.)
Sales revenue: 3,375,000; Commission income: 36,000; Accumulated depreciation: 630,000;
Retained earnings: 661,500; Paid up capital: 4,500,000; 10% debentures payable: 900,000;
Accounts payable: 202,500; Purchases return: 3,600 (Total Rs.10,308,600).
Data for Adjustment on 30th June, 2004:
(a) Merchandise inventory valued Rs.81,000.
(b) Advertising expired Rs.27,000.
(c) Director’s fee payable Rs.54,000.
(d) Prepaid salaries Rs.45,000.
(e) Provide depreciation on plant assets at 5%.
(f) Commission earned but not received Rs.9,000.
(g) The board of directors decided:
1. To declare cash dividend 5% on paid up capital.
2. To appropriate for plant expansion Rs.112,500 & for contingency Rs.90,000.
REQUIRED
(a) Income statement.
(b) Statement of retained earnings.
(c) Balance sheet in classified form.
Question # 61:
Hammad Hamid Ltd. was registered with an authorized capital of Rs.112,000,000 divided
into 11,200,000 ordinary shares of Rs.10 each. The company books showed the following
balances on June 30, 2005.
Debit Balance (in million rupees) Credit Balance (in million rupees)
Cash 1.760 Paid up capital 8.000
Accounts receivable 2.000 Retained earnings 0.800
Merchandise inventory 0.672 Accounts payable 0.800
Office supplies 0.608 6% Debentures payable 1.600
Unexpired insurance 0.640 Accumulated dep. (Plant assets) 0.800
Plant assets 7.200 Accumulated dep. (Vehicles) 1.200
Vehicles 3.200 Purchases return & allowance 0.480
Purchases 3.280 Commission income 1.440
Transportation in 0.560 Sales revenue 6.400
Sales return & allowance 0.400
Salaries expenses 1.200
21.520 21.520
Page 156
Chapter # 5
Data for Adjustment on June 30, 2005:
(a) Office supplies used Rs.384,000.
(b) Insurance expired Rs.528,000.
(c) 20% Depreciation for the year on written down value on vehicles.
(d) Depreciation estimated on plant assets Rs.800,000.
(e) Salaries for the period Rs.1,280,000.
(f) Prepaid salaries Rs.80,000.
(g) Merchandise inventory Rs.512,000 on 30.6.2005.
(h) Provision for estimated bad debts Rs.80,000.
(i) Appropriate Rs.640,000 for plant extension and Rs.400,000 for general reserves and
declare cash dividend @ 10% on paid up capital.
REQUIRED
(c) Balance sheet.
Question # 62:
Good Luck Ltd. has an issued capital of Rs.70,000,000 divided into ordinary shares of Rs.10
each. The authorized capital is 14,000,000 ordinary shares of Rs.10 each. Following is the
company’s trial balance as on December 31, 2004:
In Thousand Rupees: Debit Credit
Sales --- 14,000
Purchases 5,600 ---
Debenture interest 35 ---
Director’s remuneration 630 ---
Selling and distribution expenses 1,820 ---
General expenses 2,002 ---
Ordinary share capital --- 70,000
Share premium --- 700
5% Debentures --- 700
Plant & machinery cost 65,800 ---
Motor van at cost 9,800 ---
Accumulated depreciation - Plant & machine --- 1,960
Accumulated depreciation - Motor van --- 1,120
General reserve --- 1,260
Retained earnings Jan. 1, 04 --- 1,680
Accounts payable --- 840
Accounts receivable 2,660 ---
Bank balance 2,863 ---
Inventory January 1, 2004 700 ---
Interim dividend 350 ---
92,260 92,260
Additional Information – December 31, 2004:
(a) Merchandise inventory valued at Rs.1,120,000.
(b) Dividend proposed on ordinary shares at 3%.
(c) Audit fees for the year estimated at Rs.70,000.
(d) Provision for depreciation on plant and machinery and motor van is estimated at
10% and 20% per annum respectively.
(e) The directors have recommended transferring Rs.700,000 to general reserve.
Page 157
Chapter # 5
REQUIRED
(a) Income statement for the year ended December 31, 2004.
(c) Balance sheet as on December 31, 2004 in a classified form.
Question # 63:
Star Co. Ltd. was registered with capital of Rs.24,000,000 divided into shares of Rs.10 each.
The following are the account balances of the company as on June 30, 2007:
Debit Balances:
Cash Rs.330,000, Allowance for bad debts Rs.30,000, Marketable securities Rs.180,000,
Accounts receivable Rs.660,000, Merchandise inventory Rs.300,000, Machine cost
Rs.1,650,000, Purchases Rs.9,750,000, Sales returns & allowances Rs.900,000, Office
salaries expense Rs.390,000, Sales salaries expense Rs.455,000, Advertising expense
Rs.240,000, Office rent expense Rs.720,000, Auditors fees Rs.150,000, Directors fee
Rs.420,000, Discount shares Rs.300,000.
Credit Balances:
Accounts payable Rs.180,000, Debentures payable Rs.150,000, Shares capital Rs.3,300,000,
Sales Rs.12,000,000, Retained earnings ?
Data for Adjustment on June 30, 2007:
1) Merchandise inventory valued at Rs.1,740,000.
2) Estimated allowance for bad debts Rs.39,000.
3) Depreciation expense for the year Rs.270,000.
4) Prepaid rent Rs.120,000.
5) Declared cash dividend Rs.120,000 & stock dividend Rs.30,000.
REQUIRED
Prepare:
(a) As Income Statement for the year ended June 30, 2007.
(b) Statement of Retained Earnings.
(c) A Balance Sheet as of June 30, 2007 in a classified form.
Question # 64:
Mehran Company Ltd. is registered with authorized capital of Rs.1,900,000 divided into
ordinary shares of Rs.100 each. The following balances have been taken from the pre-
closing trial balance of the company prepared on December 31, 1994, the close of the
accounting year:-
Debit Balances:
Cash Rs.49,400; Accounts receivable Rs.38,000; Merchandise inventory (1.1.94) Rs.13,300;
Prepaid rent Rs.2,850; Machine – cost Rs.912,000; Purchases Rs.313,500; Salaries expense
Rs.34,200; Rent expense Rs.36,860.
Credit Balances:
Accounts payable Rs.76,000; Allowance for depreciation on machine Rs.110,200; Allowance
for doubtful debts Rs.1,900; Accrued salaries Rs.1,520; Sales revenue Rs.275,500; Share
capital paid up Rs.760,000; Retained earnings Rs.174,990.
Supplementary Data for Adjustment on 31.12.94
(a) Merchandise inventory was valued at Rs.133,000 on December 31, 1994.
(b) Prepaid rent amounted to Rs.3,800.
(c) Accrued salaries amounted to Rs.4,750.
(d) Depreciation on machine for the year was estimated at Rs.34,200.
(e) Doubtful debts were estimated at Rs.2,280.
(f) Provide Rs.19,000 for income tax.
(g) Appropriate Rs.28,500 for reserve for plant extension.
Page 158
Chapter # 5
REQUIRED
(a) Prepare INCOME STATEMENT in report form for the year ended December 31, 1994
and a STATEMENT OF RETAINED EARNINGS on the same date.
(b) Prepare a BALANCE SHEET in report form as of December 31, 1994.
Question # 65:
Sana Ltd. was registered with a capital 800,000 shares of Rs.10/= per. The unarranged trial
balance at 31st December 2004 was as under:
Account Titles Debit (Rs.) Credit (Rs.)
Cash 192,000
Purchases 2,400,000
Paid up capital 2,880,000
Transportation in 32,000
Sales 2,928,000
Building 2,880,000
Auditors fee 112,000
Furniture 80,000
Fire insurance premium 16,000
Utility expenses 48,000
6,400,000 6,400,000
Data for Adjustment on 31-12-04
1. Merchandise inventory valued at Rs.224,000.
2. Salaries unpaid amounted to Rs.16,000.
3. Accrued utility expenses Rs.8,000.
4. One-fifth of insurance premium is unexpired.
5. Provide depreciation on furniture 20% and on building at 2%.
6. As per board of directors approval:
(a) Reserve for income tax @ 10% of net income.
(b) Reserve for contingencies Rs.128,000.
(c) Interim dividend declared @ 10% of paid up capital.
REQUIRED
(b) Retained earnings statement.
(c) Balance sheet.
Question # 66:
The following is the trial balance of Multi Tech Limited as at December 31, 2006:
Debit (Rs.) Credit (Rs.)
Paid up share capital 1,400,000
Share premium 700,000
Retained earnings January 1, 2006 980,000
10% Debentures payable 2010 840,000
Plant and assets 5,460,000
Accumulated depreciation 644,000
Merchandise inventory 1,232,000
Page 159
Chapter # 5
Purchases and sales 5,110,000 9,156,000
Administrative salaries 700,000
Sales salaries 98,000
Director’s remuneration 224,000
Carriage outwards 140,000
Utility expenses 420,000
Bank overdraft 140,000
14,364,000 14,364,000
 The paid-up share capital consists of 140,000 shares of Rs.10 each.
 Merchandise inventory at December 31, 2006 was Rs.700,000.
 Estimated tax on profit of the company for the year is Rs.210,000.
 The directors have proposed final dividend of 10% 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
(a) Income statement for the year ended Dec. 31, 2006.
(c) Balance sheet as at December 31, 2006.
Question # 67:
DECENT COMPANY LIMITED
INCOME STATEMENT
FOR THE YEAR ENDED JUNE 30, 2007
Net sales Rs._______?
Cost of goods sold Rs._______?
Gross profit (30% of net sales) Rs._______?
Operating expenses Rs._______?
Operating income (10% of net sales) Rs._______?
Interest expense Rs.360,000
Income before income tax Rs._______?
Income tax – 25% of income before income tax Rs.450,000
Net income Rs.1,350,000
REQUIRED
Complete the income statement using only the information available.
Page 160
Chapter # 6
Amalgamation
Advanced Accounting
Accounting for Company – Amalgamation
Chapter # 6

 Amalgamation.

 Computation of purchase consideration and number of shares.
 General Journal entries in the books of old companies.
 General Journal entries in the books of new company.
 Initial Balance Sheet of new company.
Page 162
Chapter # 6
AMALGAMATION
The combination of two or more companies in which the old companies merge to form a
new company is called amalgamation. For example Company “A” and Company “B”
amalgamate to form a Company “C”. All the assets and liabilities of both old companies (A
and B) are transferred to new company (C). In that sense the company “C” is acquiring the
company “A” and company “B”.
PURCHASE CONSIDERATION
Purchase consideration is the amount paid by the new company to both old companies. The
purchase consideration can be made in two different ways:
 Purchase consideration by net asset method.
 Purchase consideration by lump sum method.
a) PURCHASE CONSIDERATION BY NET ASSET METHOD

In this method the purchase consideration is calculated according to the value of net asset
(total assets – total liabilities). It means that the amount paid to the old companies is equal
to their book value (if liquidation expenses are not paid separately by new company) and
no goodwill or capital reserve arises.
COMPUTATION OF PURCHASE CONSIDERATION:

“A” Co. “B” Co.
Total assets XXX XXX
Less: Total liabilities (XXX) (XXX)
Net assets XXX XXX
Add: Liquidation expense XXX XXX
Purchase consideration XXX XXX
b) PURCHASE CONSIDERATION BY LUMP SUM METHOD

In this method the new company paid the amount of consideration without calculating the
net assets value. In this method there is a chance of goodwill or capital reserve.

Company – A:
XXX no. of shares @ Rs.XX each. Rs.XXX
Company – B:
GENERAL ENTRIES IN THE BOOKS OF OLD COMPANY

1- Entry to record the purchase consideration:
Receivable from purchasing company Debit
Realization Credit
---------------------------------------------------------------------------------------------------------------
2- Entry to record the purchase consideration received:

Shares – in Debit
Debentures – in Debit
Cash Debit
Receivable from purchasing company Credit
---------------------------------------------------------------------------------------------------------------
Page 163
Chapter # 6
3- Entry to record the transfer of assets:

Realization Debit
Assets (all) Credit
---------------------------------------------------------------------------------------------------------------
4- Entry to record the transfer of liabilities:

Liabilities Debit
Realization Credit
---------------------------------------------------------------------------------------------------------------
5- Entry to close the shareholder’s equity account:

Share capital Debit
Retained earning Debit
Share premium Debit
Payable to shareholders Credit
---------------------------------------------------------------------------------------------------------------
6- Entry to record the payment to shareholders:

Payable to shareholders Debit
Shares – in Credit
Debentures – in Credit
Cash Credit
-----------------------------------------------------------------------------------------------------------------
GENERAL ENTRIES IN THE BOOKS OF NEW COMPANY

1- Entry to record the purchase of assets and liabilities from A company:
Assets Debit
Liabilities Credit
Payable to old company (A) Credit
----------------------------------------------------------------------------------------------------------------
2- Entry to record the payment of purchase consideration to A company:

Payable to old company (A) Debit
Cash Credit
----------------------------------------------------------------------------------------------------------------
3- Entry to record the purchase of assets and liabilities from B Company:

Assets Debit
Liabilities Credit
Payable to old company (B) Credit
----------------------------------------------------------------------------------------------------------------
4- Entry to record the payment of purchase consideration to B Company:

Payable to old company (B) Debit
Cash Credit
Page 164
Chapter # 6
ILLUSTRATION # 1: (NET ASSET METHOD)

ABC Co. Ltd. and XYZ Co. Ltd. have agreed to amalgamate. A new company A2Z Co. Ltd. has
been formed to take over the both companies. After negotiations the financial position of
both companies is shown in the following balance sheet as on December 31, 2009.
ABC Co. Ltd. (Rs.) XYZ Co. Ltd. (Rs.)
Total assets 500,000 470,000
Total liabilities 140,000 170,000
REQUIRED
(a) Compute purchase consideration.
(b) General Journal entries in the books of ABC Co. Ltd. and XYZ Co. Ltd.
(c) General Journal entries in the books of A2Z Co. Ltd.
(d) Initial balance sheet of A2Z Co. Ltd. on 31 December 2009.
SOLUTION # 1:
Computation of Purchase Consideration:
ABC Co. Ltd. (Rs.) XYZ Co. Ltd. (Rs.)
Total assets 500,000 470,000
Less: Total liabilities 140,000 170,000
Purchase consideration 360,000 300,000
Number of shares = 360,000/10 300,000/10

Number of shares = 36,000 30,000
ABC Co. Ltd.

General Journal
1 Receivable from A2Z Co. Ltd. 360,000
Realization 360,000
(To record the purchase consideration)
2 Shares – in 360,000
Receivable from A2Z Co. Ltd. 360,000
(To record the shares received for purchase
consideration from A2Z Co. Ltd.)
3 Realization 500,000
Assets 500,000
(To record the transfer of assets to A2Z Co. Ltd.)
4 Liabilities 140,000
Realization 140,000
(To record the transfer of liabilities to A2Z Co.
Ltd.)
5 Share capital 360,000
Payable to shareholders 360,000
(To record the closing of shareholders’ equity)
6 Payable to shareholders 360,000
Shares – in 360,000
(To record the shares issued to the
shareholders)
Page 165
Chapter # 6
XYZ Co. Ltd.
General Journal
1 Receivable from A2Z Co. Ltd. 300,000
Realization 300,000
2 Shares – in 300,000
Receivable from A2Z Co. Ltd. 300,000
consideration from A2Z Co. Ltd.)
Assets 470,000
(To record the transfer of assets to A2Z Co. Ltd.)
Realization 170,000
(To record the transfer of liabilities to A2Z Co.
Ltd.)
shareholders)
A2Z Co. Ltd.

General Journal
1 Assets 500,000
Liabilities 140,000
Payable to ABC Co. Ltd. 360,000
(To record the purchase of assets and liabilities
from ABC Co. Ltd.)
2 Payable to ABC Co. Ltd. 360,000
Ordinary share capital (36,000 x 10) 360,000
(To record the shares issued to the ABC Co. Ltd.)
3 Assets 470,000
Liabilities 170,000
Payable to XYZ Co. Ltd. 300,000
from XYZ Co. Ltd.)
4 Payable to XYZ Co. Ltd. 300,000
(To record the shares issued to the XYZ Co. Ltd.)
Page 166
Chapter # 6
A2Z Co. Ltd.
Balance Sheet
As on 31 December 2009
Equities Assets
Shareholder’s Equity: Assets 970,000
Issued & Paid-up Capital:
66,000 ordinary shares
@ Rs.10 each 660,000
Total shareholder’s equity 660,000
Liabilities 310,000
ILLUSTRATION # 2: (LUMP SUM METHOD)

On January 1, 2010 balance sheet of A Ltd. and B Ltd. appeared as follows:
A Ltd. (in Rs.) B Ltd. (in Rs.)
Cash 40,000 90,000
Assets 300,000 400,000
Liabilities 40,000 40,000
Shares capital (Rs.10 each) 300,000 450,000
The two companies amalgamate on January 1, 2010 to form C Ltd. on the following
conditions:
(a) Authorized capital of C Ltd. is to be 120,000 ordinary shares of Rs.10 each.
(b) All assets and liabilities of A Ltd. are taken at book value and shareholders are issued
33,000 shares (fully paid up) in C Ltd.
(c) All the assets and liabilities of B Ltd. are taken at book value and the shareholders
are issued 40,000 shares (fully paid up) in C Ltd.
(d) Liquidation expenses paid by the C Ltd. Rs.12,000 to each liquidating company.
REQUIRED
(a) Give journal entries in the books of both liquidating companies.
(b) Give journal entries in the books of C Ltd.
(c) Balance sheet of C Ltd. on January 1, 2010.
SOLUTION # 2:
A Ltd. Rupees
33,000 ordinary shares @ Rs.10 each 330,000
Add: Liquidation expense (Cash) 12,000
Purchase consideration 342,000
B Ltd. Rupees
40,000 ordinary shares @ Rs.10 each 400,000
Add: Liquidation expense (Cash) 12,000
Page 167
Chapter # 6
A Ltd.
General Journal
1 Receivable from C Ltd. 342,000
Realization 342,000
2 Shares – in 330,000
Cash 12,000
Receivable from C Ltd. 342,000
(To record the shares and cash received for
purchase consideration from C Ltd.)
Assets 300,000
Cash 40,000
(To record the transfer of assets to C Ltd.)
Realization 40,000
(To record the transfer of liabilities to C Ltd.)
Cash 12,000
(To record the liquidation expense paid)
(To record the closing of realization account)
shareholders)
Realization
3 Assets 340,000 1 Receivable from C Ltd. 342,000
5 Cash 12,000 4 Liabilities 40,000
382,000 382,000
B Ltd.
General Journal
1 Receivable from C Ltd. 412,000
Realization 412,000
2 Shares – in 400,000
Cash 12,000
Receivable from C Ltd. 412,000
purchase consideration from C Ltd.)
Page 168
Chapter # 6
B Ltd.
General Journal
Assets 400,000
Cash 90,000
(To record the transfer of assets to C Ltd.)
Realization 40,000
(To record the transfer of liabilities to C Ltd.)
Cash 12,000
(To record the liquidation expense paid)
Realization 50,000
shareholders)
Realization
3 Assets 490,000 1 Receivable from C Ltd. 412,000
5 Cash 12,000 4 Liabilities 40,000
502,000 502,000
C Ltd.
General Journal
1 Assets 300,000
Cash 40,000
Goodwill 42,000
Liabilities 40,000
Payable to A Ltd. 342,000
from A Ltd.)
2 Payable to A Ltd. 342,000
Cash
(To record the shares & cash paid to the A Ltd.)
3 Assets 400,000
Cash 90,000
Liabilities 40,000
Capital reserve 38,000
Payable to B Ltd. 412,000
from B Ltd.)
Page 169
Chapter # 6
C Ltd.
General Journal
4 Payable to B Ltd. 412,000
Cash 12,000
(To record the shares & cash paid to B Ltd.)
C Ltd.
Balance Sheet
As on 1January 2010
Equities Assets
Shareholder’s Equity: Goodwill 42,000
Authorized Capital: Assets 700,000
120,000 ordinary shares Cash 106,000
@ Rs.10 each 1,200,000
Issued & Paid-up Capital:
73,000 ordinary shares
@ Rs.10 each 730,000
Liabilities 80,000
Page 170
Chapter # 6
PRACTICE QUESTIONS
Question # 1:
The Moon Light Co. Ltd. and the Star Light Co. Ltd. have agreed to amalgamate. A new
company Sun Light Co. Ltd. has been formed to take over the both companies. After
negotiations the financial position of both companies is shown in the following balance
sheet as on October 31, 1995.
Moon Light Co. Ltd.
Balance Sheet
As on October 31, 1995
Assets (in Rs.) Equities (in Rs.)
Cash and bank balances 72,000 Accounts payable 160,000
Accounts receivable 240,000 Issued and Paid – Up Capital:
Merchandise inventory 248,000 160,000 Ordinary shares
Land and building 784,000 @ Rs.10 fully paid 1,600,000
Machinery and plant 320,000 Retained earnings 144,000
Patents 240,000
1,904,000 1,904,000
Star Light Co. Ltd.

Balance Sheet
As on October 31, 1995
Accounts receivable 40,000 General reserve 80,000
Merchandise inventory 40,000 Issued and Paid – Up Capital:
Land and building 464,000 81,600 Ordinary shares
Machinery and plant 448,000 @ Rs.10 fully paid 816,000
Goodwill 96,000 Retained earnings 96,000
1,168,000 1,168,000
REQUIRED
Compute: What amount payable is arrived at each, and prepare the journal entries in the
books of Moon Light Co. Ltd., Star Light Co. Ltd., and Sun Light Co. Ltd. Also prepare
amalgamated balance sheet of the new company.
Question # 2:
A Ltd. and B Ltd. decide to amalgamate C Ltd. take over the assets and liabilities of the two
companies. C Ltd. issues ordinary shares of Rs.10 each to the value of net assets to each of
the old companies. The balance sheets of A Ltd. and B Ltd. on the date of amalgamation
were:
Assets A Ltd. (in Rs.) B Ltd. (in Rs.)
Plant assets 252,000 280,000
Patents 49,000 ---
Cash 21,000 70,000
Profit and loss 14,000 ---
Total assets 616,000 546,000
Page 171
Chapter # 6
Liabilities and Capital A Ltd. (in Rs.) B Ltd. (in Rs.)
General reserve --- 126,000
Profit and loss --- 84,000
Total liabilities and capital 616,000 546,000
REQUIRED
(a) Compute purchase consideration to A Ltd. and B Ltd.
(b) General Journal entries in the books of A Ltd. and B Ltd.
(c) Entries in the General Journal of C Ltd.
Question # 3:
Two companies A and B carrying on similar business decided to amalgamate and a new
company called AB Company Ltd. being formed to take over the assets and liabilities of
each. The followings are the respective balance sheets, showing the values of assets as
agreed in the contract and it is provided that fully paid up Rs.100 shares will be issued by
the new company to the value of the net assets of each of the old companies:
Assets A. Co. Ltd. (in Rs.) B. Co. Ltd. (in Rs.)
Cash 23,100 73,500
Accounts receivable --- 73,500
Building 199,500 157,500
Machinery 189,000 210,000
Total assets 611,100 609,000
Liabilities and Capital A. Co. Ltd. (in Rs.) B. Co. Ltd. (in Rs.)
Reserve fund --- 105,000
Total liabilities and capital 611,100 609,000
REQUIRED
(a) Compute purchase consideration for each liquidating Co.
(b) State what shares the liquidator of each company will receive in the new company.
(c) Give entries in the books of both liquidating company.
(d) Give entries in the books of new company.
Question # 4:
The balance sheets of the two private companies are given below:
M/S. Nisar Ahmed (Pvt.) Ltd.
Balance Sheet
As on June 30, 1994
Equities (in Rs.) Assets (in Rs.)
Share Capital: Machinery and equipment 270,000
5,400 Shares of Rs.150 each 810,000 Land and building 360,000
Accounts payable 90,000 Merchandise inventory 144,000
Cash at bank 72,000
Page 172
Chapter # 6
M/S. Qurban Ali (Pvt.) Ltd.
Balance Sheet
As on June 30, 1994
Equities (in Rs.) Assets (in Rs.)
Share Capital: Land and building 450,000
4,500 Shares of Rs.150 each 675,000 Machinery and equipment 252,000
Reserve (General) 54,000 Accounts receivable 27,000
Profit & loss account 45,000 Cash at bank 27,000
On July 1, 1994, both the companies are of the opinion that the companies should be
amalgamated to avoid future competition as they are doing the same business. Hence, they
agreed to enter into a contract to amalgamate their business. The new business will be
carried on under the name and style of M/S. Nisar and Qurban (Pvt.) Ltd. under the term
that fully paid shares of Rs.100 each should be issued by the new company of the net assets.
REQUIRED
(a) State the number of shares the liquidator of each Co. will receive from the new Co.
(b) Give entries in the books of both liquidating companies.
(c) Pass necessary journal entries at the time of amalgamation in the book of newly
formed company.
(d) Prepare the opening balance sheet of the new company as on July 1, 1994.
Question # 5:
On January 1, 1999 balance sheet data of Khairpur Ltd. & Noori Abad Ltd. are as follows:
(in Rupees) Khairpur Ltd. Noori Abad Ltd.
Cash 11,200 65,600
Land 96,000 72,000
Building 200,000 224,000
Goodwill 32,000 ---
641,600 692,800
Reserve for contingencies 8,000 ---
641,600 692,800
Both the companies have agreed to amalgamate on January 1, 1999. For this purpose a new
company, Sindh Co. Limited has been formed with an authorized capital of Rs.1,600,000
divided into ordinary shares of Rs.10/- each. The new company issued shares equal to the
value of their net assets in payment of purchase consideration to each of the old company
and also paid Rs.24,000 to each liquidating Co. for their liquidating expenses and paid
preliminary expenses Rs.4,000.
REQUIRED
(a) Amount of purchase consideration of each company and the number of shares to be
issued.
(b) Entries in general journal of both liquidating companies.
Page 173
Chapter # 6
(c) Entries in general journal of Sindh Company Limited.
(d) Initial balance sheet of Sindh Company Limited.
Question # 6:
Balance sheets of Blue Limited and Bright Limited as on January 1, 2006 are given below:
Assets (in Rupees) Blue Limited Bright Limited
Land & building 960,000 360,000
Goodwill 132,000 ---
1,320,000 660,000
Liabilities & Equity
Ordinary share capital (Rs.10 ordinary shares fully paid) 1,200,000 480,000
General reserves --- 72,000
1,320,000 660,000
On January 1, 2006 both companies agreed to amalgamate and form Indigo Limited with an
authorized capital of Rs.12,000,000 divided into ordinary shares of Rs.10 each.
Indigo Limited issued shares equal to the value of their net assets in payment of purchase
consideration of Blue Limited and Bright Limited. The new company also paid Rs.30,000 to
each liquidating company for their liquidation expenses.
REQUIRED
(a) Amount of purchase consideration for each liquidating company and the number of
shares to be issued.
(b) Entries in General Journal of both liquidating companies.
(c) Entries in General Journal of Indigo Limited.
(d) Initial balance sheet of Indigo Limited as on January 1, 2006.
Question # 7:
The respective balance sheets of Fiza Ltd. and Aimen Ltd. stood on 31, Dec. 2004 as under:
Assets (in Rs.) Fiza Ltd. Aimen Ltd.
Building (Net) 880,000 1,540,000
Plant & machinery (Net) 715,000 880,000
Goodwill --- 110,000
Cash 44,000 165,000
Total: 1,870,000 3,300,000
Equities (in Rs.) Fiza Ltd. Aimen Ltd.
Share capital (in Rs.10 shares) 1,650,000 2,750,000
Total: 1,870,000 3,300,000
On 1st January 2005, both the companies agreed to amalgamate. A new company Nadeem
Ltd. was formed with an authorized capital of Rs.5,500,000 (divided into 550,000 shares of
Rs.10 each) to take over assets and liabilities of the both the concerns at book values with
the exception of buildings which were taken at 20% more than their book values.
Page 174
Chapter # 6
REQUIRED
(1) Compute the amount payable to each company and number of shares to be issued to
the shareholders of the liquidating companies.
(2) Journal entries in the books of both liquidating companies.
(3) Journal entries in the books of Nadeem Ltd.
(4) Prepare initial balance sheet of Nadeem Ltd.
Question # 8:
On January 1, 2005 balance sheet of Karim Ltd. and Rahim Ltd. appeared as follows:
Assets Karim Ltd. (in Rs.) Rahim Ltd. (in Rs.)
Cash 48,000 24,000
Merchandise 84,000 36,000
Prepaid insurance 12,000 ---
Plant assets 180,000 216,000
Equities
Accumulated depreciation 60,000 72,000
Shares capital (Rs.10 each) 240,000 240,000
The two companies amalgamate on January 1, 2005 to form Bright Star Ltd. on the
following conditions:
(a) Authorized capital of Bright Star Ltd. is to be 120,000 ordinary shares of Rs.10 each.
(b) All assets and liabilities of Karim Ltd. are taken at book value and shareholders are
issued 36,000 shares (fully paid up) in Bright Star Ltd.
(c) All the assets and liabilities of Rahim Ltd. are taken at book value and the
shareholders are issued 28,800 shares (fully paid up) in Bright Star Ltd.
(d) Preliminary expenses paid by the new company Rs.12,000.
REQUIRED
(a) Give journal entries in the books of both liquidating companies.
(b) Give journal entries in the books of Bright Star Ltd.
(c) Balance sheet of Bright Star Ltd. on January 1, 2005.
Question # 9:
On January 1, 1996 Balance Sheet data of Aiman Co. and Fahim Co. appeared as follows:
Assets Aiman Co. (in Rs.) Fahim Co, (in Rs.)
Cash 34,000 17,000
Merchandise 59,500 25,500
Plant assets 127,500 153,000
Equities
Accumulated depreciation (Plant assets) 42,500 25,500
Shares capital (Rs.10 par) 170,000 170,000
The two companies amalgamate on January 1, 1996 to form Aiman Fahim Company on the
following conditions:
(a) Authorized capital of Aiman Fahim Co. is to be 85,000 ordinary shares of Rs.10 each.
(b) All the assets and liabilities of Aiman Co. are taken over at book values and its
shareholders are issued 25,500 shares (fully paid up) in Aiman Fahim Co.
(c) All the assets and liabilities of Fahim Co. are taken over at book values and its
shareholders are issued 20,400 shares (fully paid up) in Aiman Fahim Co.
Page 175
Chapter # 6
(d) The new company makes a public issue of 22,100 shares of Rs.10 each at Rs.13 per
share; the issue is fully subscribed and paid for in full.
REQUIRED
(a) General Journal entries in the books of both liquidating companies.
(b) General Journal entries in the books of Aiman Fahim Company. (Preliminary
expenses paid by the company Rs.8,500).
(c) Balance sheet of Aiman Fahim Company on January 1, 1996.
Question # 10:
Shan Ltd. and Adnan Ltd. decided to amalgamate their business and a new company S and A
Co. is formed to take over all assets and liabilities of the two concerns. The new Co. S and A
Ltd. issued 209,000 shares of Rs.10 each at Rs.20 to Shan Ltd. and 171,000 shares of Rs.10
each at Rs.20 to Adnan Ltd. The following are the balance sheets:
Shan Limited
Balance Sheet December 31, 2000
Cash Rs.228,000 Accounts payable Rs.342,000
Accounts receivable 760,000 General reserves 570,000
Merchandise inventory 1,140,000 Share capital
Machines 2,280,000 361,000 shares of Rs.10 each 3,610,000
Furniture 114,000
4,522,000 4,522,000
Adnan Limited
Balance Sheet December 31, 2000
Accounts receivable 570,000 General reserves 190,000
Merchandise inventory 1,330,000 Share capital
Machines 1,520,000 351,500 shares of Rs.10 each 3,515,000
4,085,000 4,085,000
REQUIRED
(a) Give entries in General Journal form in the books of Shan Ltd. and Adnan Ltd.
(b) Give entries in General Journal form in the books of S and A Co.
(c) Prepare amalgamated balance sheet in the books of S and A Co.
(d) Compute purchase consideration for each liquidating Co.
Question # 11:
Zulfi Ltd. and Lutfi Ltd. decided amalgamate their businesses and a new company ZL Ltd. is
formed to take over all the assets and liabilities of the two concerns.
The new company ZL Ltd. issues 120,000 shares of Rs.10 each at Rs.20 to Zulfi Ltd. and
96,000 shares of Rs.10 each at Rs.20 to Lutfi Ltd. The following are the balance sheets of the
two companies:
Zulfi Ltd.
Balance sheet as at December 31, 2004
Merchandise inventory 780,000 Share capital
Machinery 1,464,000 228,000 shares of Rs.10 each 2,280,000
Furniture 72,000
2,856,000 2,856,000
Page 176
Chapter # 6
Lutfi Ltd.
Balance sheet as at December 31, 2004
Merchandise inventory 840,000 Share capital
Machinery 960,000 222,000 shares of Rs.10 each 2,220,000
2,580,000 2,580,000
REQUIRED
(a) Compute purchase consideration for each liquidating Co.
(b) Give general journal entries in the books of Zulfi Ltd. and Lutfi Ltd.
(c) Give general journal entries in the books of ZL Ltd.
(d) Prepare amalgamated balance sheet of ZL Ltd.
Question # 12:
Hafeez Co. Ltd and Rasheed Co. Ltd. decided to amalgamate their business and a new
company Hameed Co. Ltd. was formed to take over all assets and liabilities of the two
companies. Hameed Co. Ltd. issued 140,000 shares of Rs.10 each at Rs.26 to Hafeez Co. Ltd.
and 137,200 shares of Rs.10 each at Rs.26 to Rasheed Co. Ltd. At the time of amalgamation
following were the balance sheets of two companies:
Hafeez Co. Ltd.
Balance Sheet as on Dec. 31, 2007
Assets (Rs.) Equities (Rs.)
Accounts receivable 560,000 Share Capital:
Merchandise inventory 840,000 266,000 shares of Rs.10 2,660,000
Building 1,820,000 General reserves 420,000
Furniture 98,000
3,472,000 3,472,000
Rasheed Co. Ltd.

Balance Sheet as on Dec. 31, 2007
Accounts receivable 490,000 Share Capital:
Building 1,260,000 General reserves 140,000
Furniture 140,000
3,010,000 3,010,000
REQUIRED
(a) Compute purchase consideration for each of the amalgamating company.
(b) Give all necessary entries in the General Journal of liquidating companies.
(c) Give all necessary entries in the General Journal of Hameed Co. Ltd.
(d) Prepare a balance sheet of Hameed Co. Ltd. after amalgamation.
Page 177
Chapter # 6
Question # 13:
The following are the assets and equities of Faqeer Ltd. and Ameer Ltd. on June 30, 1993:
Faqeer Ltd. (Rs.) Ameer Ltd. (Rs.)
Current assets 96,000 640,000
Non – current assets 1,056,000 1,344,000
Investments --- 128,000
5% Debentures payable --- 160,000
General reserves 64,000 96,000
Paid up capital (Rs.20 each) 768,000 1,280,000
Retained earnings (Dr.) 160,000 (Cr.) 256,000
The above companies enter into a contact to amalgamate a new company being formed
under the name of Rising Star Ltd.
The Rising Star Ltd. issued 96,000 shares of Rs.10 each to Faqeer Ltd. and 160,000 shares of
Rs.10 each to Ameer Ltd. The new company also issued 8% debentures to the debenture
holders of Ameer Ltd. at a premium of 5%. All the assets and liabilities of the companies
were taken over at book values.
REQUIRED
(a) Give journal entries in the books of Faqeer Ltd. and Ameer Ltd.
(b) Give journal entries in the books of Rising Star Ltd.
Question # 14:
On January 1, 1987, balance sheet of data of A Co. and B Co. appeared as follows:
Assets A Co. (in Rs.) B Co. (in Rs.)
Cash 130,000 52,000
Plant assets 650,000 1,040,000
Equities A Co. (in Rs.) B Co. (in Rs.)
Allowance for depreciation – Plant 182,000 195,000
10% Bonds payable --- 260,000
Ordinary share capital (Rs.10 each) 650,000 650,000
The two companies amalgamate on January 1, 1987 to form AB Co. on the following
conditions:
1. Authorized capital of AB Co. to be 650,000 ordinary shares of Rs.10 each.
2. All the assets of A Co. (except cash and prepaid insurance) are taken over at book
values and its shareholders are issued 104,000 shares (fully paid up) in AB Co.
3. Of the assets of B Co. cash, accounts receivable and merchandise are taken over at
book values and plant assets are taken over at Rs.780,000. The bondholders are
issued 27,300 shares and a suitable number of shares were issued to the
shareholders of B Co.
REQUIRED
(a) General Journal entries in the books of the two liquidating companies.
(b) General Journal entries in the books of AB Co. (Preliminary expenses paid by the
company Rs.39,000).
(c) Prepare a balance sheet of AB Co. after amalgamation.
Page 178
Chapter # 7
Absorption
Advanced Accounting
Accounting for Company – Absorption
Chapter # 7

 Absorption.

 Computation of purchase consideration and number of shares.
 General Journal entries in the books of absorbed company.
 General Journal entries in the books of absorbing company.
 Balance Sheet of absorbing company after absorption.
Page 180
Chapter # 7
ABSORPTION
The combination of two or more companies in which one company acquires the other
company and the other company absorbs in the acquiring company is called absorption. For
example Company “A” acquires the Company “B”. So that after the acquiring the name of
Company “B” will not exist but the name of Company “A” will exist. All the assets and
liabilities of old company (B) are transferred to absorbing company (A).
PURCHASE CONSIDERATION
Purchase consideration is the amount paid by the new company to both old companies. The
purchase consideration can be made in two different ways:
 Purchase consideration by net asset method.
 Purchase consideration by lump sum method.
a) PURCHASE CONSIDERATION BY NET ASSET METHOD

In this method the purchase consideration is calculated according to the value of net asset
(total assets – total liabilities). It means that the amount paid to the old companies is equal
to their book value (if liquidation expenses are not paid separately by acquiring company)
and no goodwill or capital reserve arises.

“B” Co.
Total assets XXX
Less: Total liabilities (XXX)
Net assets XXX
Add: Liquidation expense XXX
Purchase consideration XXX
b) PURCHASE CONSIDERATION BY LUMP SUM METHOD

In this method the acquiring company paid the amount of consideration without calculating
the net assets value. In this method there is a chance of goodwill or capital reserve.

Company – B:
Page 181
Chapter # 7
GENERAL ENTRIES IN THE BOOKS OF OLD COMPANY

1- Entry to record the purchase consideration:
Receivable from purchasing company Debit
Realization Credit
---------------------------------------------------------------------------------------------------------------
2- Entry to record the purchase consideration received:

Shares – in Debit
Debentures – in Debit
Cash Debit
Receivable from purchasing company Credit
---------------------------------------------------------------------------------------------------------------
3- Entry to record the transfer of assets:

Realization Debit
Assets (all) Credit
---------------------------------------------------------------------------------------------------------------
4- Entry to record the transfer of liabilities:

Liabilities Debit
Realization Credit
---------------------------------------------------------------------------------------------------------------
5- Entry to close the shareholder’s equity account:

Share capital Debit
Retained earning Debit
Share premium Debit
Payable to shareholders Credit
---------------------------------------------------------------------------------------------------------------
6- Entry to record the payment to shareholders:

Payable to shareholders Debit
Cash Credit
-----------------------------------------------------------------------------------------------------------------
GENERAL ENTRIES IN THE BOOKS OF NEW COMPANY

1- Entry to record the purchase of assets and liabilities from B Company:
Assets Debit
Liabilities Credit
Payable to old company (B) Credit
----------------------------------------------------------------------------------------------------------------
2- Entry to record the payment of purchase consideration to B Company:

Payable to old company (B) Debit
Cash Credit
----------------------------------------------------------------------------------------------------------------
Page 182
Chapter # 7
ILLUSTRATION # 1: (NET ASSET METHOD)

On January 1, 2001 balance sheet of Bilal Ltd. appeared as follows:
Accounts receivable 20,000 Bonds payable 20,000
Merchandise inventory 30,000 Share capital Rs.10 40,000
Equipment 40,000 Retained earnings 30,000
100,000 100,000
Bilal Ltd. is absorbed on January 1, 2001 by ML Ltd. on the following terms:
(a) All the assets and liabilities were taken over at book values except cash.
(b) Shareholders will get shares equal to net assets.
REQUIRED
(1) Compute purchase consideration.
(2) Journal entries in the books of Bilal Ltd.
(3) Journal entries in the books of ML Ltd.
SOLUTION # 1:
Assets: Bilal Ltd. (Rs.)
Equipment 40,000
Total assets 90,000
Less: Liabilities:
Bonds payable 20,000
Total liabilities (30,000)
Number of shares = 60,000/10

Bilal Ltd.
General Journal
1 Receivable from ML Ltd. 60,000
Realization 60,000
2 Shares – in 60,000
Receivable from ML Ltd. 70,000
consideration from ML Ltd.)
Equipment 40,000
(To record the transfer of assets to ML Ltd.)
Realization 30,000
(To record the transfer of liabilities to ML Ltd.)
Page 183
Chapter # 7
Bilal Ltd.
General Journal
Cash 10,000
(To record the shares issued and cash paid to the
shareholders)
ML Ltd.
General Journal
1 Accounts receivable 20,000
Equipment 40,000
Payable to Bilal Ltd. 60,000
from Bilal Ltd.)
2 Payable to Bilal Ltd. 60,000
(To record the shares issued to the Bilal Ltd.)
ILLUSTRATION # 2: (LUMP SUM METHOD)

On January 1, 2007 balance sheet of AB Ltd. appeared as follows:
Merchandise inventory 310,000 Share capital Rs.10 500,000
Equipment 400,000 Retained earnings 100,000
1,040,000 1,040,000
AB Ltd. is absorbed on January 1, 2007 by YZ Ltd. on the following terms:
(a) All the assets and liabilities were taken over at book values.
(b) Four new shares of Rs.10 each for every five shares held were issued to the
shareholders of the AB Ltd.
(c) Bondholders will get 32,000 shares of Rs.10 each in YZ Ltd.
(d) Liquidation expenses paid by YZ Ltd. amounted to Rs.60,000.
REQUIRED
(2) Journal entries in the books of AB Ltd.
(3) Journal entries in the books of YZ Ltd.
Page 184
Chapter # 7
SOLUTION # 2:
To Shareholders: (Rupees)
50,000 x 4/5 = 40,000 Ordinary shares @ Rs.10 each 400,000
To Bondholders:
32,000 Ordinary shares @ Rs.10 each 320,000
Liquidation Expense:
Cash 60,000
AB Ltd.
General Journal
1 Receivable from YZ Ltd. 780,000
Realization 780,000
2 Shares – in 720,000
Cash 60,000
Receivable from YZ Ltd. 780,000
purchase consideration from YZ Ltd.)
3 Realization 1,040,000
Cash 100,000
Equipment 400,000
(To record the transfer of assets to YZ Ltd.)
Realization 140,000
(To record the transfer of liabilities to YZ Ltd.)
5 Bonds payable 300,000
Realization 20,000
(To record the shares issued to the bondholders)
Cash 60,000
(To record the payment of liquidation expense)
7 Shares capital 500,000
Realization 200,000
(To record the shares issued to shareholders)
Page 185
Chapter # 7
Realization
3 Assets 1,040,000 1 Receivable from YZ Ltd. 780,000
5 Shares – in 20,000 4 Accounts payable 140,000
6 Cash 60,000 8 Payable to shareholders 200,000
1,120,000 1,120,000
YZ Ltd.
General Journal
1 Cash 100,000
Equipment 400,000
Payable to AB Ltd. 780,000
from AB Ltd.)
2 Payable to AB Ltd. 780,000
Cash 60,000
(To record the shares issued and cash paid to the
AB Ltd.)
Page 186
Chapter # 7
PRACTICE QUESTIONS
Question # 1:
On January 1, 2007 balance sheet of Zeeshan Ltd. appeared as follows:
Cash 77,000 All for depreciation – Building 110,000
Merchandise inventory 55,000 Bonds payable 55,000
Equipment 55,000 Share capital Rs.10 605,000
Building 660,000 Retained earnings 44,000
924,000 924,000
Zeeshan Ltd. is absorbed on January 1, 2007 by Furqan Ltd. on the following terms:
(a) All the assets and liabilities were taken over at book values except cash.
(b) Shareholders will get 66,000 shares of Rs.10 each in Furqan Ltd.
(c) Liquidation expenses paid by Zeeshan Ltd. amounted to Rs.22,000.
REQUIRED
(2) Journal entries in the books of Zeeshan Ltd.
(3) Journal entries in the books of Furqan Ltd.
Question # 2:
Following balances appear in the balance sheet of United Company Ltd. as on June 30, 1996:
Accounts receivable 110,000 Allowance for bad debts 11,000
Inventories 275,000 Allowance for depreciation 99,000
Land 440,000 Accounts payable 110,000
Building 880,000 Share capital 1,650,000
The company was absorbed by Decent Company Ltd. on the following terms:
(a) All assets and liabilities to be taken over at book values.
(b) Purchase consideration to be paid as follows:
Cash Rs.330,000.
Shares of Rs.10 each Rs.1,100,000.
REQUIRED
Give journal entries in the books of:
a) United Company Ltd. b) Decent Company Ltd.
Question # 3:
The equities section of Saigals Ltd. on 31 December 1990 was as under:
Authorized capital (Rs.10) Rs.1,800,000
Paid – up capital (Rs.10) 1,200,000
Share premium 60,000
Reserves 120,000
The company was absorbed by Tariq Saeed Ltd. on the following terms:
(a) Tariq Saeed Ltd. to take over all the assets and to assume the accounts payable at
book value.
(b) The shareholders to receive 180,000 shares of Rs.10 each and a cash payment of
Rs.210,000.
Page 187
Chapter # 7
(c) Bondholders to receive 18,000 shares of Rs.10 each in Tariq Saeed Ltd.
(d) Tariq Saeed Ltd. to pay liquidation expenses of Rs14,400 to Saigals Ltd. in cash.
REQUIRED
Give journal entries in proper form in the books of:
a) Saigals Ltd. b) Tariq Saeed Ltd.
Question # 4:
The following balances appear in the balance sheet of Malir Company Limited as on
November 30, 2000.
Cash Rs.195,000
------------------
Allowance for bad debts Rs.26,000
Allowance for depreciation 39,000
Share capital 1,300,000
Malir Company Ltd. was absorbed by Karachi Company Ltd. on the following terms:
1) All assets (except cash) to be taken over at book values.
2) Purchase consideration to be paid in cash Rs.260,000 and shares Rs.650,000.
3) Malir Company Ltd. paid Rs.123,500 in full settlement of accounts payable, and
Rs.19,500 as liquidation expenses.
4) Shares and remaining cash were distributed amongst the shareholders of Malir
Company Ltd.
REQUIRED
Prepare entries in general journal of:
(a) Malir Company Ltd. (b) Karachi Company Ltd.
Question # 5:
Following balances appear in the balance sheet of Al-Furqan Ltd. as on December 31, 1992:
Debit Balances (Rupees) Credit Balances (Rupees)
Cash 14,000 Ordinary share capital
Accounts receivable 56,000 35,000 shares @ Rs.10 each 350,000
Merchandise inventory 70,000 Ordinary share premium 70,000
Land 112,000 Reserve for contingencies 28,000
Building 1,008,000 Retained earnings 140,000
8% Debentures payable 280,000
All for depreciation–Building 336,000
Al-Furqan Ltd. was absorbed by Mehran Ltd. on the following terms:
(a) All the assets and liabilities (with the exception of cash and bonds payable) were
taken over by Mehran Ltd.
(b) Purchase consideration was agreed at Rs.980,000 which was paid by Mehran Ltd. as
under:
Cash Rs.420,000 and 56,000 ordinary shares of Rs.10 each Rs.560,000.
(c) Bondholders were paid by Al-Furqan Ltd.
(d) Al-Furqan Ltd. paid the liquidation expenses of Rs.14,000.
Page 188
Chapter # 7
(e) Al-Furqan Ltd. distributed the shares of Mehran Ltd. and the remaining cash
amongst its shareholders.
REQUIRED
(1) Entries in General Journal of Al-Furqan Ltd. for the above transactions.
(2) Prepare cash account.
(3) Entries in General Journal of Mehran Ltd.
Question # 6:
The balance sheet data of Saim Waqar Ltd. was as under:
Authorized capital Rs.1,875,000 Paid up capital Rs.750,000
Share premium 93,750 Retained earnings 187,500
Reserves 93,750 Bonds payable 187,500
Accounts payable 112,500 Preliminary expenses 187,500
Saim Waqar Ltd. was absorbed by Owais Ltd. on the following terms:
(a) All the assets and accounts payable were taken over by absorbing company at book
value.
(b) Saim Waqar Ltd. received 75,000 shares of Rs.10 each and cash payment of
Rs.112,500 from absorbing company.
(c) Bond holders received 20,625 shares of Rs.10 each from the absorbing company.
(d) Owais Ltd. paid the liquidation expenses of Rs.18,750 to Saim Waqar Ltd.
REQUIRED
(1) Compute the purchase consideration.
(2) Give necessary journal entries to give effect to the above decision on the books of:
a) Saim Waqar Ltd. b) Owais Ltd.
Question # 7:
Following balance sheet relates to business of Bilquis & Co.
Equities (Rupees) Assets (Rupees)
Authorized Capital: Non – Current Assets:
64,000 ordinary shares Plant & Property 320,000
@ Rs.10 Each 640,000
Paid up Capital: Current Assets:
38,400 ordinary shares 384,000 Inventory 48,000
Bonds payable 544,000 Office supplies 96,000
Current Liabilities: Cash 368,000
Total equities 1,024,000 Total assets 1,024,000
Bilquis & Company was absorbed by Umer & Company under the following terms &
conditions:
(1) Umer & Co. took over all business assets (except cash) and assumed accounts payable at
book values.
(2) In consideration Umer & Co. issued 65,600 shares of Rs.10 each to the shareholders of
Bilquis & Co.
(3) The bonds holders of Bilquis & Co. were issued 38,720 shares of Rs.10 in Umer & Co.
(4) The liquidation expenses were paid by Bilquis & Co. Rs.25,600 cash.
REQUIRED
(a) Record entries in the books of Bilquis & Co.
(b) Record entries in the books of Umer & Co.
Page 189
Chapter # 7
(c) Prepare an initial balance sheet of Umer & Co. as on July 1, 2010. Umer & Co. was
registered with a capital of Rs.1,280,000 which is divided into 128,000 ordinary
shares of Rs.10 par.
Question # 8:
The balance sheet data of Karim Ltd. was as under:
Authorized capital Rs.1,700,000; Paid-up capital Rs.680,000; Share premium Rs.85,000;
Retained earnings (credit balance) Rs.170,000; Reserves Rs.85,000; Bonds payable
Rs.170,000; Accounts payable Rs.102,000; Preliminary expenses Rs.170,000.
Karim Ltd. was absorbed by Rahim Ltd. on the following terms:
a) All the assets and accounts payable were taken over by the absorbing company at
book values.
b) Karim Ltd. received 68,000 shares of Rs.10 each and cash payment of Rs.102,000
from the absorbing company.
c) Bondholders received 18,700 shares of Rs.10 each from the absorbing company.
d) Rahim Ltd. paid the liquidation expenses of Rs.17,000 to Karim Ltd. in cash.
REQUIRED
a) Karim Ltd. b) Rahim Ltd.
Question # 9:
The balance sheet of Kamran Company Ltd. as on 31 December 1986 was as under:
Credit Balances (Rupees) Debit Balances (Rupees)
36,000 shares of Rs.10 each 360,000 Preliminary expenses 72,000
General reserve 72,000 Building 270,000
Profit & loss account 36,000 Merchandise inventory 90,000
Allowance for depreciation 18,000 Accounts receivable 90,000
Allowance for bad debts 9,000 Cash 81,000
Long term loan 90,000
603,000 603,000
The company was absorbed by Adnan Co. Ltd. on the following terms:
(a) All the assets and liabilities (with the exception of cash and long term loan) were
taken over by absorbing company at book values.
(b) Kamran Co. Ltd. received 36,000 shares of Rs.10 each and cash payment of
Rs.90,000 from the absorbing company.
(c) Kamran Co. Ltd. paid the liquidation expenses amounting to Rs.18,000 and long term
loan at book values.
REQUIRED
a) Kamran Co. Ltd. b) Adnan Co. Ltd.
Question # 10:
The following balances appear in the balance sheet of Imran Ltd. as on 31 December 1985:
Debit Balances: (Rs.)
Land 142,500
Building 475,000
Page 190
Chapter # 7
712,500
Credit Balances: (Rs.)
Ordinary share capital (28,500 shares of Rs.10 each) 285,000
Allowance for depreciation – Building 142,500
712,500
Imran Ltd. was absorbed by Hani Ltd. on the following terms:
(a) All the assets and accounts payable to be taken over by the Hani Ltd. at book values.
(b) Shareholders of Imran Ltd. to receive 47,500 shares of Rs.10 each and a cash
payment of Rs.47,500 from Hani Ltd.
(c) Bondholders of Imran Ltd. to receive 11,400 shares of Rs.10 each in Hani Ltd.
REQUIRED:
(1) Entries in General Journal of Imran Ltd.
(2) Entries in General Journal of Hani Ltd.
Question # 11:
Following are the asset and equity account balance of Ashraf Co. Ltd. as on June 30, 1999.
Dr. Balances (Rupees) Cr. Balances (Rupees)
Cash 55,000 Allow. for depreciation – Plant 55,000
Merchandise inventory 82,500 Accounts payable 38,500
Accounts receivable 33,000 Accrued expenses 16,500
Plant assets 220,000 Share capital (Rs.10 par) 297,000
The above company was absorbed by ‘Sajid Company Ltd.’ on July 1, 1999 on the following
terms:
a) All the assets and liabilities (with the exception of cash, accounts receivable and
accrued expenses) were taken over by the absorbing company at book values.
Accounts receivable were later on collected by Ashraf Company Ltd. in the amount
of Rs.22,000 in full settlement, and paid Rs.11,000 in full settlement of the accrued
expenses.
b) Two new shares of Rs.10 at Rs.12 each for every three shares are issued to the
shareholders of Ashraf Co. Ltd.
REQUIRED
1) Entries in the books of Ashraf Co. Ltd. relating to transfer of business and final
settlement of accounts.
2) Entries in the books of Sajid Co. Ltd. relating to record the absorption of Ashraf Co.
Ltd. and issuance of shares to vendors.
Question # 12:
The following balances relate to the business of Ashar Company Ltd. as on June 30, 2009:
Cash Rs.420,000; Other assets Rs.378,000 and accounts payable Rs.36,000 which is 1/3 of
long term liabilities, Ordinary share capital (par value Rs.10 per share) Rs.600,000,
Retained earnings Rs.54,000.
Ashar Company was absorbed by Absar Company Limited under the following terms and
conditions:
Page 191
Chapter # 7
(a) Absar Company Ltd. to take over all the business assets except cash and to assume
accounts payable at book value.
(b) The shareholders of Ashar Company Ltd. to receive 5 shares in Absar Company Ltd.
against 4 shares of Rs.10 per share.
(c) Long term liabilities of Ashar Company Ltd. settled by issuing 11,400 ordinary
shares in Absar Company Ltd. of Rs.10.
(d) Absar Company Ltd. to pay liquidation expenses of Rs.21,600 cash to Ashar
Company Ltd.
REQUIRED
(a) Compute the amount of purchase consideration.
(b) Prepare journal entries in the books of liquidating company.
Question # 13:
The balance sheet of Bilal Company Ltd. on June 30, 2002 was as under:-
Assets (Rupees)
Cash 19,500
Land 130,000
Plant assets 390,000
838,500
Equities (Rupees)
Allowance for depreciation – Plant 78,000
Share capital (57,200 shares @ Rs.10 each) 572,000
838,500
The above company is absorbed by Owais Company Ltd. on the following terms:-
(1) All assets and liabilities to be taken at book value.
(2) Four new shares of Rs.10 each for every five shares held were issued to the
shareholders of the old company.
(3) The debenture holders of the old company are issued new 10% debentures at a
premium of 5%.
(4) The realization expenses of old company Rs.3,900 to be paid by the new company.
REQUIRED
(b) Entries in the books of Bilal Company Ltd.
(c) Entries in the books of Owais Company Ltd.
Question # 14:
The following balances appeared in the balance sheet of Yousuf Ltd. as on June. 30, 2003
Assets Rupees Equities Rupees
Merchandise inventory 224,000 Share capital (Rs.10/= each) 840,000
Land and building 336,000 General reserves 224,000
Plant and machinery 560,000 Retained earnings 168,000
Goodwill 168,000
Total 1,400,000 Total 1,400,000
Page 192
Chapter # 7
The above company is absorbed by Ghani Ltd. on the following terms:
(1) All the assets (with exception of cash) to be taken over at book values.
(2) Accounts payable to be paid by Yousuf Ltd.
(3) Purchase consideration was as follows:
(a) A cash payment of Rs.4 for every share of Yousuf Ltd.
(b) The issue of one share of Rs.10/= each (market value Rs.12.50) in Ghani Ltd.
for every share in Yousuf Ltd.
(c) The issue of 1,540 bonds of Rs.100/= each in Ghani Ltd. to enable Yousuf Ltd.
to discharge its bonds at a premium of 10%.
REQUIRED
(i) Compute the purchase consideration.
(ii) Give the necessary journal entries in the books of both the companies.
Question # 15:
Following is the balance sheet of Maheen Ltd. as on June 30, 2004:
Assets Rupees Liabilities & Equities Rupees
Cash 300,000 Share capital
Accounts receivable 450,000 525,000 shares of Rs.10 each 5,250,000
Merchandise inventory 525,000 5% Debentures payable 750,000
Plant machinery 2,775,000 Accounts payable 477,000
Building 2,325,000 Accumulated Depreciation:
Furniture 1,087,500 Machinery 285,000
Building 240,000
Furniture 108,750
Total Rs. 7,462,500 Total Rs. 7,462,500
On that date the company was absorbed by Afzal Ltd. on these terms:
1. All assets (except cash) and accounts payable were taken over at book value.
2. Debentures were to be redeemed by Maheen Ltd.
3. The purchase consideration was satisfied by allotment of four shares of Rs.10 each
in Afzal Ltd. (at market value Rs.12.50) for every five shares in Maheen Ltd. and the
balance paid in cash.
4. Maheen Ltd. paid off the debentures with redemption premium @ Rs.10. Also paid
Rs.7,500 for liquidation expenses.
REQUIRED
(b) Entries in the general journal of Maheen Ltd. for absorption.
Question # 16:
The balance sheet of Multan Milk Products as on December 1, 2006 was as under:
Assets (Rupees)
Cash 64,000
Land & building 480,000
Machinery & equipment 800,000
Allowance for depreciation (Machinery & equipment) (160,000)
1,360,000
Page 193
Chapter # 7
Liabilities and Equity (Rupees)
Share capital (112,000 ordinary shares of Rs.10) 1,120,000
1,360,000
Fresh Milk Limited, a giant in dairy products, absorbed the Multan Milk Products on the
following terms:
 All assets and liabilities were taken over at book value.
 Fresh Milk Limited issued one share of Rs.10 for every two shares held by Multan
Milk Products shareholders. The balance was settled in cash. The debenture holders
were issued new 10% debentures at par.
 Multan Milk Products paid its realization expenses amounting to Rs.16,000.
REQUIRED
(a) Compute the purchase consideration.
(b) Give necessary general Journal entries to record the absorption in the books of both
companies.
Question # 17:
The equity section of the balance sheet of Khalid Co. Ltd. as of 31 December 1996 was as
under:
Authorized, Issued and Paid – Up Capital: (Rs.)
13,600 shares of Rs.100 each 1,360,000
It was decided that the Khalid Co. Ltd. absorbed by Karim Company on the following terms:
a) All the assets and accounts payable were taken over by the absorbing company at
book values.
b) The absorbing company issued five shares of Rs.100 each for four shares held in the
absorbed company.
c) Bondholders received 5,270 shares of Rs.100 each from the absorbing company.
d) Karim Company paid the liquidation expenses of Rs.17,000 to Khalid Co. Ltd. in cash.
REQUIRED:
(2) Entries in General Journal of the absorbed company.
(3) Entries in General Journal of the absorbing company.
Question # 18:
The following balances appear in the balance sheet of Kamal Limited as on 30 June 1990:
Debit Balances: Rupees
Land 72,000
Building 648,000
Cash 9,000
Credit Balances: Rupees
Ordinary share capital (22,500 shares of Rs.10 each) 225,000
Ordinary share premium 45,000
Page 194
Chapter # 7
Reserve for contingencies 18,000
Bonds payable (1,800 bonds of Rs.100 each) 180,000
Allowance for depreciation – Building 216,000
Kamal Ltd. was absorbed by Zafar Ltd. on the following terms:
(a) All the assets and liabilities (with the exception of cash and bonds payable) were
taken over by Zafar Ltd.
(b) Purchase consideration was agreed at Rs.630,000 which was paid by Zafar Ltd. as
under:
Cash Rs.270,000
36,000 Ordinary shares of Rs.10 each of Zafar Ltd. Rs.360,000
(c) Bondholders were paid by Kamal Ltd.
(d) Kamal Ltd. paid the liquidation expenses of Rs.9,000.
(e) Kamal Ltd. distributed the shares of Zafar Ltd. and the remaining cash amongst its
shareholders.
REQUIRED:
(1) Entries in General Journal of Kamal Ltd. for the above transactions.
(2) Prepare cash account.
(3) Entries in General Journal of Zafar Ltd.
Question # 19:
Following are balance sheet data of Mughallias Ltd. and Babar Ltd. on December 31, 1997:
Debit Balances: (Rupees) Mughallias Ltd. Babar Ltd.
Cash 190,000 19,000
Land 152,000 104,500
Building 304,000 266,000
Goodwill 85,500 -
Preliminary expenses - 28,500
Credit Balances: (Rupees) Mughallias Ltd. Babar Ltd.
12% Bonds payable 114,000 -
Ordinary share capital (Rs.10 par) 570,000 380,000
Ordinary share premium - 38,000
Reserves 57,000 -
Babar Ltd is absorbed by Mughallias Ltd. on January 1, 1998 on the following terms:
a) Current assets (except cash) and liabilities to be taken over at book values, and land
and building to be taken over at Rs.142,500 and Rs.228,000 respectively.
b) Purchase consideration of Rs.570,000 to be paid in cash Rs.95,000 and by issue of
ordinary shares of Rs.10 each at a premium of Rs.2.50 per share.
REQUIRED
(1) Entries in General Journal of the absorbed company.
(2) Entries in General Journal of the absorbing company.
(3) Classified balance sheet after absorbing (authorized capital is one million rupees).
Page 195
Chapter # 7
Question # 20:
The following are the assets and equities of Mushkbar Company Ltd. as on June 30, 1993:
Cash 44,000 Allowance for depreciation 275,000
Merchandise inventory 275,000 Ordinary share capital 1,177,000
Plant assets 1,045,000 (Rs.10 each)
The above company is absorbed by Ashkbar Company Ltd. on July 1, 1993 which already
holds 38,500 ordinary shares of Mushkbar Company Ltd. and which were acquired by it for
Rs.330,000.
(a) All assets and liabilities to be taken at book values.
(b) Ashkbar Company Ltd. to issue to the vendors, namely outside shareholders, two
ordinary shares of Rs.10 each in Ashkbar Ltd. for every three ordinary shares in
Mushkbar Company Ltd. The market price of Ashkbar Company Ltd. is Rs.15 each.
REQUIRED
(1) Entries in the books of Mushkbar Company Ltd. relating to transfer of business and
final settlement of accounts.
(2) Entries in the books of Ashkbar Company Ltd. relating to record the absorption of
Mushkbar Company Ltd. and issuance of shares to vendors.
Question # 21:
Sagheer Ltd balance sheet data as on 30 June 1988 is as follows:
Cash 6,000 Allowance for depreciation 36,000
Merchandise inventory 24,000 Ordinary share capital 120,000
Plant assets 120,000 (Rs.10 each)
The above company is absorbed by Al-Kabeer Ltd. which already holds 4,800 ordinary
shares of Sagheer Ltd. and which were acquired by it for Rs.43,200.
(a) All assets and liabilities to be taken at book values.
(b) Al-Kabeer Ltd. to issue to the vendors, namely outside shareholders, two ordinary
shares of Rs.10 each in Al-Kabeer Ltd. for every three ordinary shares in Sagheer
Ltd.
REQUIRED
(1) Entries in the books of Sagheer Ltd. relating to transfer of business and final
(2) Entries in the books of Al-Kabeer Ltd. relating to record the absorption of Sagheer
Ltd. and issuance of shares to vendors.
Page 196
Chapter # 8
Reconstruction
Advanced Accounting
Accounting for Company – Reconstruction
Chapter # 8

 Reconstruction.

 General Journal entries in the books of company.
 Revised Balance Sheet of company after capital reduction.
Page 198
Chapter # 8
REDUCTION OF CAPITAL
A reduction in the issued share capital of a company is called capital reduction. The
Companies Act states that, subject to confirmation by the court, a company may, if
authorized by its article of association, pass a special resolution to reduce its issued share
capital. It may:
a) Cancel any paid-up capital that is lost or no longer represented by available assets.
b) Extinguish or reduce the liability on any of its shares in respect of share capital not
paid up.
c) Pay off any paid-up share capital that is in excess of its warrants.
SOME POSSIBLE GENERAL ENTRIES

1- Reduction in the par value of paid – up ordinary shares:
Ordinary share capital Debit (with paid-up capital amount)
Ordinary share capital Credit (with new par value)
Capital reduction Credit (difference amount)
---------------------------------------------------------------------------------------------------------------
2- Write off retained earnings account (loss):

Capital reduction Debit (accumulated loss amount)
Retained earnings Credit (retained earning amount)
---------------------------------------------------------------------------------------------------------------
3- Write off preliminary expenses account:

Capital reduction Debit (preliminary expense)
Preliminary expenses Credit (preliminary expense)
---------------------------------------------------------------------------------------------------------------
4- Reduction in the values of current assets and fixed assets:

Capital reduction Debit (total assets amount)
Current assets Credit (current assets)
Fixed assets Credit (fixed assets)
---------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 1:
The balance sheet of ABC Ltd. as on December 31, 2003 is as follows:
Bank 30,000 Accounts payable 40,000
Accounts receivable 110,000 Allow for depreciation Plant 30,000
Merchandise inventory 25,000 Authorized Capital:
Preliminary expense 12,000 Paid up capital 600,000
Goodwill 20,000 Share premium 30,000
700,000 700,000
The following scheme of reconstruction was agreed upon & implemented on June 1, 2003:
(a) Ordinary share of Rs.10 each be reduced to an equal number of fully paid shares of
Rs.5 each.
(b) Share premium was utilized.
(c) The amount thus available is utilized to write off preliminary expenses, profit & loss
and goodwill completely.
Page 199
Chapter # 8
(d) Accounts receivable are estimated to realize Rs.100,000, inventory is valued at
Rs.20,000 and plant assets are assigned a book value of Rs.190,000.
REQUIRED
(1) Entries in the General Journal to give effect to the above scheme.
(2) Revised balance sheet of ABC Ltd.
SOLUTION # 1:
ABC Ltd.
General Journal
1 Ordinary shares capital (60,000 x 10) 600,000
Capital reduction 300,000
(To record the capital reduction)
2 Share premium 30,000
Capital reduction 30,000
(To record the write off share premium)
3 Capital reduction 175,000
Preliminary expense 12,000
Goodwill 20,000
(To record the write off preliminary expenses,
profit & loss and goodwill)
4 Capital reduction 155,000
(To record the reduction in the values of assets)
ABC Ltd.
Balance Sheet
As on 1 June 2003
Equities Assets
Issued & Paid-up Capital: Plant assets 360,000
60,000 ordinary shares Less: Allow for depreciation (170,000)
@ Rs.5 each 300,000 Total fixed assets 190,000
Current Assets:
Liabilities: Inventory 20,000
Accounts payable 40,000 Accounts receivable 110,000
Total liabilities 40,000 Less: All for bad debts (10,000)
Bank 30,000
Total current assets 150,000
Page 200
Chapter # 8
PRACTICE QUESTIONS
Question # 1:
The balance sheet of Zeeshan Ltd. as on Dec. 31, 2002 is as follows:
Cash in hand 16,500 Accounts payable 82,500
Accounts receivable 275,000 Allow for depreciation Plant 165,000
Merchandise inventory 55,000 Authorized Capital:
Investment 110,000 275,000 ordinary shares of
Preliminary expense 27,500 Rs.10 each 2,750,000
Goodwill 38,500 Paid up capital 1,100,000
Profit & loss 165,000 Share premium 55,000
1,402,500 1,402,500
The following scheme of reconstruction was agreed upon & implemented on July 31, 2003:
(a) Ordinary share of Rs.10 each be reduced to an equal number of fully paid shares of
Rs.5 each.
(b) Share premium was utilized.
(c) Investment was sold for Rs.99,000.
(d) The amount thus available is utilized to write off preliminary expenses, profit & loss
and goodwill completely.
(e) Accounts receivable are estimated to realize Rs.220,000, inventory is valued at
REQUIRED
(2) Revised balance sheet of Zeeshan Ltd.
Question # 2:
Following is the trial balance of Metropolitan Trading Company Limited as on December 31,
2006:
Assets (Rupees) Equities & Liabilities (Rupees)
Land and building 480,000 Authorized Capital:
Machinery & equipment 360,000 120,000 ord. shares of Rs.10 1,200,000
Furniture & fixture 24,000 Paid up Capital:
Retained earnings 120,000 Outstanding expense 30,000
Bank 30,000
1,266,000 1,266,000
The company has suffered losses for last few years. In a joint meeting of creditors and
shareholders, 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 1,
2007 are as follows:
The new company will take over all assets and liabilities of the existing company.
The authorized capital of the new company will consist of 180,000 ordinary shares of Rs.10
each.
The new company purchases the business of the existing company for a sum of
Rs.1,080,000 by issuing 96,000 shares of Rs.10 each and paying Rs.120,000 cash.
The reconstruction expenses amounting to Rs.30,000 is to be meet by the existing the
company.
Page 201
Chapter # 8
REQUIRED
(a) General Journal entries to record the reconstruction transactions.
(b) Realization account and shareholders account in the books of Metropolitan Trading
Company Limited.
Question # 3:
The following are the balance sheet accounts of Rasheed Co. Ltd. as on 30th June 2007:
Debit (Rupees) Credit (Rupees)
Accounts receivable 94,900 Bank overdraft 67,600
Merchandise inventory 79,300 Share Capital:
Plant & machinery 109,200 32,500 Ordinary shares of Rs.10 325,000
Retained earnings (Deficit) 110,500
Patents 20,800
444,600 444,600
The company proved unsuccessful and resolutions were passed to carry out the following
schemes of reconstruction by reduction of capital:
(1) That the ordinary shares be reduced to an equal number of fully paid shares of Rs.5
each.
(2) That the amount so available be utilized for wiping out losses and reduction of
assets as follows:
Preliminary expenses and retained earnings account (Dr. Balance) to be written off entirely.
The plant & machinery be reduced by Rs.10,400. The merchandise inventory is written
down by Rs.7,800. Make provision for bad debts Rs.10,400. The patents to be completely
written off.
REQUIRED
(i) Make necessary journal entries in the books of the company to implement the above
scheme of reconstruction.
(ii) Prepare the balance sheet (revised).
Question # 4:
The balance sheet of Al-Raza Ltd as on June 30, 2009 is as follows:
Credit Balances:
Authorized capital: 140,000 ordinary shares of Rs.20 Rs. 2,800,000
Paid up Capital:
63,000 ordinary shares of Rs.20 each Rs. 1,260,000
7% Bond payable Rs. 280,000
Allowance for depreciation – Plant assets Rs. 210,000
Rs. 1,855,000
Debit Balances:
Plant assets Rs. 840,000
Accounts receivable (Net) Rs. 336,000
Cash Rs. 28,000
Preliminary expenses Rs. 63,000
Profit / Loss Rs. 224,000
Rs. 1,855,000
Page 202
Chapter # 8
The following scheme of reconstruction was agreed and implemented on the same date:
1. The amount of authorized capital to remain unchanged but the par value of each
share is now to be Rs.10 as per Companies Ordinance 1984.
2. The shareholders were issued 70,000 shares at Rs.10 each against their holdings.
3. Bonds payable were settled by issuing 29,400 shares at par.
4. Preliminary expenses and profit or loss accounts were completely written off,
merchandise was valued at Rs.378,000, accounts receivable were estimated to
realize to the extent of 90%. The balance of reduced capital’s amount was utilized to
reduce the value of plant assets.
REQUIRED
(a) Entries in the books of Al-Raza Ltd. to give effects of the above scheme.
(b) Revised balance sheet as on June 30, 2009.
Question # 5:
The following balances appeared on 31 December 1996 in the General Ledger of Aslam Ltd.
Balance Sheet
Credit (Rupees) Debit (Rupees)
450,000 Ordinary shares Building 3,000,000
@ Rs.10 each 4,500,000 Plant & machinery 1,200,000
Long term bonds payable 525,000 Goodwill 300,000
Allowance for depreciation: Accounts receivable 375,000
Building 450,000 Preliminary expenses 225,000
Plant & machinery 225,000 Profit & loss 675,000
Total 6,225,000 Total 6,225,000
The following terms were settled under duly approved scheme of capital reduction:
(a) The ordinary shares to be reduced to Rs.5 each.
(b) The long terms bonds payable were settled by issuing 120,000 shares of Rs.5 each.
(c) To write off profit & loss (Dr.) balance, preliminary expenses and goodwill.
(d) To value the building and plant & machinery be reduced to Rs.1,950,000 and
REQUIRED
Give journal entries to record the above transactions and prepare balance sheet (revised).
Question # 6:
The balance sheet of Al-Khair Ltd. as on 31 December 1995 is as follows:
Authorized capital par Rs.25 1,600,000 Plant assets 1,280,000
Paid-up capital par Rs.25 1,280,000 Goodwill 48,000
Bonds payable (Long term) 288,000 Preliminary expenses 16,000
Accounts payable 112,000 Accounts receivable 144,000
Allow for depreciation – Plant 96,000 Merchandise inventory 192,000
Cash in hand 8,000
Profit & loss 120,000
Total 1,808,000 Total 1,808,000
The following schemes of reconstruction was agreed upon and implemented under Section
283 of Companies Ordinance 1984:
(a) The amount of authorized capital to remain unchanged at Rs.1,600,000 but the par
value of each ordinary share is now to be Rs.10 in compliance with the Companies
Ordinance 1984.
Page 203
Chapter # 8
(b) The shareholders surrender their 51,200 ordinary shares of Rs.25 and in exchange
they were issued 75,200 ordinary shares of Rs.10 par.
(c) 32,000 ordinary shares of Rs.10 par were issued to bondholders for redeeming their
bonds.
(d) Goodwill, preliminary expenses, and balance to profit & loss were completely
written off.
(e) Accounts receivable were expected to realize Rs.136,000. Merchandise was valued
at Rs.160,000 and the plant assets were valued at Rs.880,000.
REQUIRED
(1) Give General Journal entries to incorporate the above scheme.
(2) Prepare revised balance sheet.
Question # 7:
The balance sheet data of Al-Abid Ltd. as on 31 December 1988 is as follows:
Authorized capital par Rs.25 1,700,000 Plant assets 1,360,000
Paid-up capital par Rs.25 1,275,000 Goodwill 85,000
Long term bonds payable 340,000 Preliminary expenses 17,000
Sundry creditors 119,000 Stock – in – trade 204,000
Allow for depreciation – Plant 136,000 Cash in hand 8,500
Profit & loss 69,500
Sundry debtors 126,000
Total 1,870,000 Total 1,870,000
The following schemes of internal reconstruction is agreed and implemented:
(a) The amount of authorized capital to remain unchanged at Rs.1,700,000 but the par
value of each ordinary share is now to be Rs.10.
(b) Holders of two shares receive three ordinary shares of Rs.10 each fully paid.
(c) Bondholders are fully redeemed by the issue of 37,400 new ordinary shares of Rs.10
each to the bondholders.
(d) Goodwill, preliminary expenses, and balance of profit & loss are completely written
off.
(e) Sundry debtors are estimated to realize Rs.144,500, stock – in – trade is valued
REQUIRED
(2) Revised balance sheet of Al-Abid Ltd.
Question # 8:
The following is the balance sheet of Salman Co. Ltd. as 31 December 1986:
Authorized Capital: Patents 216,000
72,000 Ordinary shares Building 180,000
@ Rs.10 each 720,000 Machinery 108,000
Issued and Paid – Up Capital: Accounts receivable 14,400
57,600 Ordinary shares Merchandise inventory 28,800
@ Rs.10 each 576,000 Cash 7,200
All. for depreciation - Building 18,000 Profit & loss 72,000
All. for dep. – Machinery 9,000 Preliminary expenses 21,600
Total 648,000 Total 648,000
Page 204
Chapter # 8
The company implemented duly authorized the scheme for reduction of share capital. The
scheme provides that shareholders will receive one new ordinary share each of Rs.8 paid –
up for every two ordinary shares held. The scheme further provides that the capital
reduction be utilized as follows:
(a) To write off entirely the debit balance of profit and loss and preliminary expenses.
(b) To reduce the value of building and machinery to Rs.108,000 and Rs.72,000
respectively.
(c) The balance available is utilized to write off further the patents.
(d) The authorized share of capital was increases to Rs.720,000 comprising of 90,000
ordinary shares each of Rs.8 each.
REQUIRED
(1) Give the necessary journal entries in the General Journal.
(2) Draw up the balance sheet of the giving effect to the above scheme.
Question # 9:
Sharif Company Ltd. Faisalabad obtained permission from court to do as under:
(1) To reduce 380,000 ordinary shares of Rs.10 each to 190,000 ordinary shares of
Rs.10 each fully paid-up.
(2) To write off preliminary expenses Rs.323,000; goodwill Rs.285,000 and loss
Rs.950,000.
(3) To write off plant assets of Rs.2,318,000 to the extent of remaining balance of capital
reduction.
The company issued suitable number of ordinary shares to pay its long term liabilities.
REQUIRED
(a) Prepare balance sheet before the scheme of reduction, assuming that the company
had no assets and equities other than mentioned above.
(b) Prepare entries in General Journal of Sharif Company.
(c) Prepare revised balance sheet.
Question # 10:
The following is the balance sheet of Azam Company Ltd. as on 30 June 1992:
Authorized Capital: Copyright & patents 862,400
13,750 10% Preference shares Freehold premises 231,000
@ Rs.100 each 1,375,000 Machinery 55,000
132,000 Ordinary shares Accounts receivable 88,000
@ Rs.10 each 1,320,000 Merchandise inventory 44,000
2,695,000 Cash in hand 27,500
Issued and Paid – Up Capital: Discount on shares 17,600
8,800 10% Preference shares Preliminary expenses 11,000
@ Rs.100 each 880,000 Profit & loss 258,500
66,000 Ordinary shares
@ Rs.10 each 660,000
Bank overdraft 11,000
Total 1,595,000 Total 1,595,000
The company suffered huge losses and was not getting on well. On 1 July 1992, the company
scheme of internal reconstruction was agreed upon and implemented:
(a) The preference shares of Rs.100 each are reduced to an equal number of fully paid
Page 205
Chapter # 8
(b) The ordinary shares of Rs.10 each are reduced to an equal number of fully paid
(c) The amount thus available be utilized to write off Rs.37,400 off freehold premises,
Rs.13,200 off merchandise inventory, 20% off machinery and the balance available
(after writing off discount on shares, preliminary expenses, and profit & loss
completely) off copyrights and patents.
(d) The authorized capital increased to 27,500 10% preference shares of Rs.50 each and
440,000 ordinary shares of Rs.3 each.
REQUIRED
(1) Entries in General Journal of Azam Company Ltd. to give effect to the above scheme.
(2) Revised balance sheet of Azam Company Ltd. on 1 July 1992.
Question # 11:
The following is the balance sheet of A.B Company Ltd. as on December 31, 1997:
Liabilities & Equities (Rupees) Assets (Rupees)
Accounts payable 104,400 Cash 1,200
Interest on debentures payable 15,600 Accounts receivable 144,000
Bank loan 24,000 Inventory 256,800
5% Debentures payable 156,000 Patents 138,000
7 – ½% Preference shares Machinery 684,000
@ Rs.100 each 600,000 Building 480,000
9,600 ord. shares of Rs.100 each 960,000 Profit and loss 156,000
1,860,000 1,550,000
The company was authorized to issue 6,000 7 – ½% preference shares of Rs.100 each and
12,000 ordinary shares of Rs.100 each. During the past years the company sustained huge
losses and, therefore, a scheme of reconstruction is prepared and approved by the shares
holders. A summary of the scheme is as follows:
1) The preference shareholders forego the shares of dividend of Rs.90,000.
2) The 7 – ½% preference shares are to be converted into 5% preference shares.
3) Every ordinary shareholder should surrender 50% of his holdings to the company.
4) The debenture holders have agreed to forego the outstanding interest and to accept
1,200 ordinary shares of Rs.100 each in exchange for debentures and balance of
Rs.36,000 to be paid in cash.
5) The surrendered ordinary shares are to be utilized as under:
a) To write off deficit.
b) To bring down the value of patents to Rs.90,000.
c) Inventory is valued at Rs.180,000.
d) To write off Rs.12,000 from accounts receivable.
e) The balance of the surrendered shares is to be utilized in writing off the
machinery.
6) The remaining 1,200 ordinary shares are issued against cash. The cash so received is
utilized in paying bank loan and the balance of debentures.
REQUIRED
1) Entries in the General Journal of A.B. Company Ltd. to give effect to the above
scheme.
2) Revised balance sheet of A.B. Company Ltd. on January 1, 1998.
Page 206
Chapter # 9
Accounting for
Manufacturing Operation
Cost Accounting
Accounting for Manufacturing Operation
Chapter # 9
 Accounting for manufacturing concern.

 Cost accounting concepts.
 Classification of cost.
 Statement of cost of goods manufactured.
 Closing entries.
 Computation of:
o Prime cost.
o Conversion cost.
o Manufacturing cost.
o Raw material used.
o Net purchases of raw materials.
o Opening inventory of raw material.
o Ending inventory of raw material.
o Opening inventory of goods in process.
o Ending inventory of goods in process.
o Opening inventory of finished goods.
o Ending inventory of finished goods.
o Per unit cost.
o Factory overhead rate.
 Statement of Cost of Goods Manufactured.
 Closing entries.
Page 208
Chapter # 9
COST ACCOUNTING
Cost accounting is the techniques used in collecting, processing, and presenting financial
and quantitative data within an organization to ascertain the cost of the cost centres, the
cost units, and the various operations. Cost accounting is now regarded as a division of
management accounting, which also incorporates the techniques of planning, decision
making, and control. Cost accounting is used to help management how much it cost to run a
business.
ROLE OF COST ACCOUNTING

Cost accounting is the area of accounting that record, measures and report information
about how much things cost within the organization. Cost accounting is used by
manufacturing, merchandising, and servicing companies, governments, universities and
non-profit organizations and profit organizations. The role of cost management plays in
helping an organization to maintain a competitive advantage by creating more value at
lower cost by efficiently managing an organization’s value chain of activities, processes, and
functions.
The information from the cost reports should be interpreted and presented in a way that
will be useful for management. Budget is the key for planning and controlling. The budget
contains cost accounting data. Management will not be able to set an optimal price for a
product or service cannot be decide without knowing the cost of what is to be sold.
IMPORTANCE OF COST ACCOUNTING

Managers rely on cost accounting to provide an idea of the cost of processes, departments,
operations or product which is the foundation of their budget, allowing them to analyze
fluctuation and the way funds are used socially for profit. Cost accounting is used in
management accounting, where managers justify the ability to cut costs for a company in
order to increase that company’s profit.
Cost accounting creates a financial value out of the production of a product, measuring
currency that is nominal into units that are measured by convention. By making recorded
historic costs a bit further, cost accounting allocates a company’s fixed costs over a specific
time period to what items are actually produced during that period of time, creating a total
cost of product production. Products that were not sold during that period of time produced
a “full cost” of those products, recording them in a complex inventory system that uses
accounting methods of its own that are in compliance with the GAAP standards. Managers
are then enabling to focus on each period’s results as it relates to the “standard cost” of any
product.
Any distortions in cost that were caused by calculating that the overhead of a product is
versus what a unit cost is for companies that specialize in only one specific product are very
minor in industries that mass produce that product with a low fixed cost. Understanding
why costs vary compared to what was actually planned helps a manager to save company
money by taking actions that are appropriate to correct that variation in the future.
Variance analysis is a very important part of cost accounting because it breaks down each
variance into many different components of standard cost and actual cost. Some of these
components are material cost variation, volume variation and labour cost variation.
Page 209
Chapter # 9
OBJECTIVES OF COST ACCOUNTING

These are the following important objectives of cost accounting:
 Ascertainment of Cost:
The primary objective of the cost accounting is to ascertain cost of each product,
service, job, operation or service rendered.
 Ascertainment of Profitability:
Cost accounting determines the profitability of each product, process, job, operation
or service rendered. The statement of profit or losses and balance sheet also
submitted to the management periodically.
 Classification of Cost:
Cost accounting classifies cost into different elements such as materials, labours, and
expenses. It has further been divided as direct cost and indirect cost for cost control
and recording.
 Control of Cost:
Cost accounting aims at controlling cost by setting standards and compared with the
actual, the derivation or variation between two is identified and necessary steps are
taken to control them.
 Fixation of Selling Prices:

Cost accounting guides management in regard to fixation of selling prices of the
product. It is also helpful for preparing tender and quotations.
SCOPES OF COST ACCOUNTING

 Determination and Analysis of Cost:
Cost accounting records cost and income information for each department, process,
job, sales territory and lies order to ascertain cost and evaluate the operating
efficiency of each division of the business enterprise.
 Control of Cost:
In age of competition, the objective of business is to maintain; in costs at the lowest
point with efficient operating conditions. It requires examination of each individual
item of cost in the light of the service and benefits obtained so the maximum
utilization of the money expended on – it may be recovered. This requires planning
and use of standard for each item of cost for locating deviations, if any, and taking
remedial measures.
 Proper Matching of Cost With Revenue:

It prepares monthly or quarterly statements to reflect the cost and income data
identified with the sale of that period.
 Aids to Management:
Cost accounting enables a business not only to ascertain what various jobs, products
and services have cost to the business but also what they should have cost. It locates
losses and wastages for taking corrective measures and to avoid them in future.
Page 210
Chapter # 9
DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

Financial Accounting Cost Accounting
(1) The main purpose of financial (1) The main purpose of cost accounting
accounting is to record financial is to analyze, ascertainment and
transactions, finding out profit or control of cost.
loss and financial position.
(2) Financial accounting presents (2) Cost accounting presents cost
financial information at the end of information at frequent intervals.
the accounting period.
(3) Financial accounting is kept (3) Cost accounting generally kept
compulsory in such a way as to meet voluntarily meeting the
the requirement of the Companies requirements of the management.
Act and Income Tax Act.
(4) Financial accounting records (4) Cost accounting records transactions
transactions in a subjective manner. in an objective manner. It means the
It means according to the nature of purpose for which the cost is
expense. incurred.
(5) Financial accounting is used for (5) Cost accounting is used only for
internal and external users. internal users.
COST CLASSIFICATION
The process of grouping expenditure according to common characteristics is called cost
classification. Cost can be classified into the following categories:
COST CLASSIFICATION BY ELEMENT:

 Material:
The production supplies of an organization that features as revenue expenditure
purchased from a third party. Material may be classified as direct materials or
indirect materials. Materials are not necessarily raw materials, but can include
components and sub-assemblies used in the finished product.
 Labour:
Expenditure on wages paid to those operators who are both directly and indirectly
concerned with the production of the product, service, or cost unit.
 Overheads:
An indirect cost of an organization is called overhead. Overheads are usually
classified as manufacturing overheads, administration overheads, selling overheads,
distribution overheads, and research and development cost.
COST CLASSIFICATION BY NATURE:

 Direct Cost:
Product costs that can be directly traced to a product or cost unit is called direct
cost. They are usually made up of direct materials cost, direct labour costs, and
direct expenses.
a) Direct Material:
Materials that are directly incorporated in the final product or cost unit of an
organization is called direct materials. For example, in the production of
furniture, direct material would include wood, glue, and paint.
Page 211
Chapter # 9
b) Direct Labour:
Worker directly concerned with the production of a product, service, or a
cost unit is called direct labour such as machine operators, assembly and
finishing operators, etc.
c) Direct Expenses:
Expenditure that would not be incurred unless a particular cost unit was
produced (excluding costs of direct materials and direct labours) is called
direct expenses. Direct expenses are included in the direct cost of an item.
 Indirect Cost:
Expenses that cannot be traced directly to a product or cost unit and are therefore
overheads are called indirect cost.
a) Indirect Materials:
Those materials that do not feature in the final product but are necessary to
carry out the production is known as indirect materials such as machine oil,
cleaning materials, and consumable materials.
b) Indirect Labour:
Personnel not directly engaged in the production of a product or cost unit
manufactured by an organization is called indirect labour. Examples of
indirect labour include maintenance personnel, cleaning staff, and senior
supervisors.
c) Indirect Expenses:
Expenses that cannot be traced directly to a product or cost unit and are
therefore overheads are called indirect expenses or indirect cost.
COST CLASSIFICATION BY FUNCTION:

 Production Cost:
The total cost of all costs incurred in producing a product or cost unit is called
production cost. Production costs include:
a) Direct materials.
b) Direct labour.
c) Direct expenses.
d) Production overheads.
 Non – Production Cost:

The indirect costs of an organization that are not classified as manufacturing cost is
called non-production cost. They include administrative cost, selling cost, and
distribution cost.
a) Administrative Cost:
That part of general cost of an organization that is incurred in carrying out its
administrative activities. It includes general office salaries, stationary,
telephone, etc.
Page 212
Chapter # 9
b) Selling Cost:
The expenses incurred by an organization in carrying out its selling activities.
These would include salaries of sales personnel, advertising costs, sales
commission, etc.
c) Distribution Cost:
The cost classification that includes the costs incurred in delivering a product
to the customers. Examples include postage, transport, packaging and
insurance.
COST CLASSIFICATION BY BEHAVIOUR:

 Variable Cost:
An item of expenditure that, in total, varies directly with the level of activity
achieved. For example, direct materials cost will tends to double if output doubles, a
characteristics being that is incurred as a constant rate per unit.
 Fixed Cost:
An item of expenditure that remains unchanged, in total, irrespective of changes in
the levels of production or sales. Examples are business rates, rent, etc.
 Semi – Variable Cost:

An item of expenditure that contains both a fixed cost element and a variable cost
element is called semi-variable cost. Consequently, when activity is zero, the fixed
cost will still continue to be incurred. For example, the telephone bill, in which line
rent is fixed while the unit cost is variable.
 Stepped Cost:
Stepped cost is an item of expenditure that increases in total as activity rises but in a
stepped, rather than a linear function. For example the cost of one supervisor may
be required for a particular range of activity, although above this level the cost of an
additional supervisor would be incurred.
WORK – IN – PROCESS
Work in process is the balance of partly finished work remaining in a manufacturing
operation at a particular time. It is valued using either FIFO cost, LIFO cost or the average
cost method.
FINISHED GOODS
Products that have completed the manufacturing process and are available for distribution
to customers is called finished goods.
RAW MATERIALS
Direct materials used in a production process, which are at low level of completion
compared to the final product or cost unit. Examples include steel plate, wood, and
chemicals.
Page 213
Chapter # 9
PRIME COST
Prime cost = Direct material + Direct labour
CONVERSION COST
Conversion cost = Direct labour + Factory overhead
MANUFACTURING COST
Manufacturing cost = Direct material + Direct labour + Factory overhead
COST OF GOODS MANUFACTURED

Cost of goods manufactured = Manufacturing cost + Work in process (beg) –
Work in process (end)
RAW MATERIAL USED

Raw material used = Raw material (beginning) + Net purchases of raw
material – Raw material (ending)
NET PURCHASES OF RAW MATERIAL

Net purchases of raw material = Purchases of raw material + Transportation in –
Purchase discount – Purchase return & allowance
COST OF GOODS SOLD

Cost of goods sold = Finished goods (beginning) + Cost of goods
manufactured – Finished goods (ending)
PER UNIT COST

Per unit cost = Cost of goods manufactured
Number of units manufactured
FACTORY OVERHEAD RATE (%)

Factory overhead rate (%) = Factory overhead X 100
Direct labour
SOME ITEMS OF FACTORY OVERHEAD

 Indirect labour cost.  Factory supervisor salary.
 Indirect material cost.  Factory foremen salary.
 Factory maintenance and repair cost.  Factory plant, machinery and
building depreciation.
 Water, gas.  Factory insurance charges.
 Heat, light and power.  Factory taxes charges.
 Factory development cost.  Factory miscellaneous expenses.
 Factory supplies charges.  Factory general expenses.
Page 214
Chapter # 9
COST OF GOODS MANUFACTURED

The total production cost of the finished goods transferred from the production facility of an
organization during an accounting period. It is made up of the total expenditure for the
period on direct materials, direct labours, direct expenses, and manufacturing overheads
adjusted by the opening and closing stocks of raw materials and the work in process at the
beginning and end of the period.
STATEMENT OF COST OF GOODS MANUFACTURED

Name of Business
Statement of Cost of Goods Manufactured
For the Period Ended __________________
Raw Material Used:
Raw materials (opening) XXX
Add: Net Purchases of Raw Materials:
Purchases of raw materials XXX
Add: Transportation-in XXX
Delivered purchases of raw materials XXX
Less: Purchase discount (XXX)
Less: Purchase return and allowances (XXX)
Net purchases of raw materials XXX
Raw materials available for use XXX
Less: Raw materials (ending) (XXX)
Raw materials used XXX
Add: Direct labour XXX
Prime cost XXX
Add: Factory Overheads:
Indirect materials XXX
Indirect labours XXX
Factory maintenance and repair cost XXX
Heat, light and power XXX
Water, gas XXX
Factory supervisor salary XXX
Factory foreman salary XXX
Depreciation – factory XXX
Factory insurance expense XXX
Factory rent XXX
Other overheads XXX
Total factory overheads XXX
Manufacturing cost XXX
Add: Work – in – process (opening) XXX
Total work – in – process during the period XXX
Less: Work – in – process (ending) (XXX)
Cost of goods manufactured XXX
Page 215
Chapter # 9
INCOME STATEMENT
Name of Business
Income Statement
For the Period Ended _______
Sales XXX
Less: Sales discount XXX
Less: Sales returns and allowances XXX (XXX)
Net sales XXX
Finished goods (opening) XXX
Add: Cost of goods manufactured XXX
Less: Finished goods (ending) (XXX)
Gross profit XXX
Administrative expenses XXX
Selling expenses XXX
Distribution expenses XXX
Total operating expenses (XXX)
Net profit/Loss XXX/(XXX)
ILLUSTRATION # 1: (COST OF GOODS MANUFACTURED STATEMENT &

INCOME STATEMENT)
ABC Company manufactures leather bags. The information on the cost 31 December 1989 is
as under:
Raw material (beginning) Rs.40,000
Raw material (ending) Rs.60,000
Raw material purchased Rs.200,000
Direct labour used Rs.170,000
Factory overhead Rs.130,000
Goods in process (beginning) Rs.100,000
Goods in process (ending) Rs.70,000
Finished goods (beginning) Rs.20,000
Finished goods (ending) Rs.30,000
Sales Rs.600,000
Operating expenses Rs.40,000
REQUIRED
(a) Prepare a statement of cost of goods manufactured.
(b) Prepare income statement.
Page 216
Chapter # 9
SOLUTION # 1:
ABC Company
Raw Material Used:
Raw materials (opening) 40,000
Add: Net purchases of raw materials 200,000
Raw materials available for use 240,000
Less: Raw materials (ending) (60,000)
Raw materials used 180,000
Add: Direct labour 170,000
Prime cost 350,000
Add: Factory overheads 130,000
Manufacturing cost 480,000
Add: Goods – in – process (opening) 100,000
Total goods – in – process during the period 580,000
Less: Goods – in – process (ending) (70,000)
Cost of goods manufactured 510,000
ABC Company
Income Statement
Sales 600,000
Finished goods (opening) 20,000
Add: Cost of goods manufactured 510,000
Less: Finished goods (ending) (30,000)
Net profit 60,000
ILLUSTRATION # 2: (UNIT COST AND MISSING INVENTORIES)

The following data relate to a manufacturing company for the year 1999:
Raw material purchased Rs.300,000
Raw material used Rs.360,000
Direct labour cost Rs.250,000
During the year 180,000 units were manufactured and 190,000 units were sold. Selected
information concerning inventories during the year is as follows:
(in Rupees) Dec. 31st Jan. 1st
Raw materials ? 80,000
Work in process 50,000 70,000
Finished goods (25,000 units beginning) ? 100,000
REQUIRED
(a) Cost of goods manufactured. (b) Average unit cost.
(c) Cost of goods sold assuming FIFO method
(d) Ending inventories of:
(i) Material (ii) Finished goods
Page 217
Chapter # 9
SOLUTION # 2:
M/S. ________________
Raw material used 360,000
Add: Direct labour 250,000
Prime cost 610,000
Add: Factory overheads 270,000
Total manufacturing cost 880,000
Add: Work – in – process (opening) 70,000
Total work – in – process during the period 950,000
Less: Work – in – process (ending) (50,000)
Cost of goods manufactured 900,000
Computation of Unit Cost:

Average unit cost = Cost of goods manufactured
Number of units manufactured
Average unit cost = 900,000
180,000
Average unit cost = Rs.5
Computation of Raw Material Ending Inventory:

Raw material opening inventory 80,000
Add: Purchase of raw material 300,000
Raw material available for use 380,000
Less: Raw material used (360,000)
Raw material ending inventory 20,000
Computation of Finished Goods Ending Units:

Finished goods opening units 25,000
Add: Units manufactured 180,000
Units available for sale 205,000
Less: Units sold (190,000)
Finished goods ending units 15,000
Computation of Cost Finished Goods Ending Inventory:

Finished goods ending inventory = Finished goods ending in units x Average unit cost
Finished goods ending inventory = 15,000 x 5
Finished goods ending inventory = Rs.75,000
M/S. ________________
Cost of Goods Sold
Finished goods beginning inventory 100,000
Add: Cost of goods manufactured 900,000
Good available for sale 1,000,000
Less: Finished goods ending inventory (75,000)
Page 218
Chapter # 9
PRACTICE QUESTIONS
Question # 1:
A manufacturer presents the following details about the various expenses for the month of
June 2006.
Purchase Rs.88,000
Opening stock of raw material 5,500
Carriage – in 3,300
Import duty 7,700
Closing stock of raw material 16,500
Factory rent 3,300
Bad debts 550
Printing and stationary 770
Carriage – out 1,870
Indirect material 880
Power 4,400
Depreciation – Office furniture 220
Repair of plant and machinery 1,430
Salesman’s expenses 550
Direct wages 50,600
General manager’s salary 19,800
Factory manager’s salary 14,300
Depreciation plant and machinery 1,540
Audit fees 1,430
Research and development cost 3,300
Legal expenses 880
REQUIRED
Classify the above expenses under the various elements of costs, showing separately the
total expenditure.
Question # 2:
A manufacturer presents the following details about the various expenses for the month of
June 2006.
Stock of materials, 30 June 1995 Rs.188,400
Stock of materials, 1 July 1994 144,000
Materials purchased during the year 555,000
Carriage outward 12,900
Carriage inward 21,432
Salaries – Factory 19,500
Salaries – Office 37,800
Discount expense 8,700
Bad debts written off 19,536
Repairs of plant, machinery and tools 13,356
Rent and insurance – Factory 25,500
Rent and insurance – Office 6,000
Sales 1,383,300
Travelling expenses 6,300
Traveler’s salaries and commission 23,100
Productive wages 378,000
Page 219
Chapter # 9
Depreciation of machinery and tools 19,500
Depreciation of office furniture 900
Director’s fees 18,000
Gas and water – Factory 3,600
Gas and water – Office 1,200
Manager’s salary (3/4th factory, 1/4th office) 30,000
REQUIRED
Prepare a statement giving the following information:
(a) Materials consumed (b) Prime cost (c) Factory overhead
(d) Factory overhead percentage on wages (e) Factory cost
(f) Administrative overhead and percentage on factory cost
(g) Total cost (h) Net profit
Question # 3:
Charmi Bag Company manufactures leather bags. The information on the cost for the first
quarter of 1989 is as under:
June 1989. Rs.
Raw material consumed 780,000
Direct labour used 520,000
Factory overhead applied 416,000
Goods in process (beginning) 91,000
Goods in process (ending) 52,000
REQUIRED
Prepare a statement of cost of goods manufactured.
Question # 4:
The following information is collected from the books of Saleem Manufacturing Company
for the month of January 1986:
Raw material inventory January 1 Rs.126,000
Raw material inventory January 31 133,000
Raw material returned to suppliers 21,000
Work in process inventory January 1 182,000
Work in process inventory January 31 378,000
Raw material purchased 700,000
Direct raw material used 672,000
Direct labour used 756,000
Factory overhead cost incurred 308,000
Cost of goods manufactured 1,540,000
Finished goods inventory January 1 182,000
Finished goods inventory January 31 112,000
Sales 2,100,000
Gross profit on sales 490,000
REQUIRED
Prepare a statement of cost of goods manufactured and income statement.
Page 220
Chapter # 9
Question # 5:
The following data have been taken from the books of Saleem Manufacturing Company Ltd.
for the year 1997 – 98:
Inventories 1 July 1997 (Rs.) 30 June 1998 (Rs.)
Raw materials 24,000 27,000
Goods – in – process 36,000 33,000
Finished goods 18,000 39,000
Data for the year: Rs.
Sales 720,000
Purchases of raw materials 165,000
Purchase discount 3,000
Direct labour 135,000
Factory overhead 147,000
REQUIRED
(a) Statement of cost of goods manufactured
(b) Income statement (c) Closing entries
Question # 6:
The books of Jan Manufacturing Company included the following data for the year ended 31
December 1990:
In Rupees: 1 January 1990 31 December 1990
Goods – in – process 80,000 120,000
Purchases of raw materials 344,000
Freight inward 24,000
Heat, light and power 48,000
Factory machine repairs 8,000
Factory insurance 6,400
Indirect labour 16,000
Indirect materials 16,000
Sales 896,000
Sales return & allowances 32,000
Selling and administrative expenses 140,800
REQUIRED
Prepare in proper form:
(a) Statement of cost of goods manufactured
(b) Income statement
Question # 7:
The records of Mirza Manufacturing Company provided the following data for May 2005:
Sales Rs.825,000; Marketing expenses 10% of sales; Administrative expenses 5% of sales;
Purchases Rs.375,000; Factory overhead 2/3 of direct labour; Direct labour Rs.156,000.
Inventories Beginning (Rs.) Ending (Rs.)
Materials 119,000 144,500
Page 221
Chapter # 9
REQUIRED
(i) Cost of goods manufactured statement.
(ii) Income statement.
Question # 8:
Moon Co. has provided following for the year ended December 31, 2007:
Sales Rs.1,179,000
Advertising expense 117,000
Direct labour cost incurred 266,400
Direct material purchased 405,000
Building rent: 60% allocated to manufacturing and 40% to administrative & 171,000
selling functions
Utilities – factory 90,000
Maintenance – factory 57,600
Selling and administrative salaries 171,000
Factory overhead applied at the rate of 90% of direct labour
Inventories Jan. 1, 2007 (Rs.) Dec. 31, 2007 (Rs.)
Raw material 37,800 18,000
REQUIRED
(i) Prepare a Statement of Cost of Goods Manufactured for the year ended December
31, 2007.
(ii) Prepare an Income Statement.
Question # 9:
Following information was taken from the accounting record of Al-Rehman Industries:
In Rupees: 1.1.2009 31.12.2009
Material 3,800 57,000
During the year the following transactions were performed:
Material purchases 665,000
Direct labour cost 228,000
Indirect factory labour cost 114,000
Depreciation – Factory building 38,000
Depreciation – Salesroom & office (share equally) 28,500
Utilities (60% to factory, 20% to office & 20% to salesroom) 95,000
Other indirect manufacturing cost 76,000
Sales person’s salaries 76,000
Office salaries 45,600
Sales on account 1,387,000
REQUIRED
(a) Statement of Cost of Goods Manufactured.
(b) Income Statement.
Page 222
Chapter # 9
Question # 10:
The following data relates to the operations of Hassan Manufacturing Company for the year
ended 31 December 1996:
Inventories at 1 January 1996: Rupees:
Raw materials 28,600
Goods in process 48,400
Finished goods 66,000
Rupees:
Purchase of raw materials 214,500
Purchase return and allowances 8,800
Sales 449,460
Sales return and allowances 3,960
Freight – in 4,400
Machine repairs 7,700
Heat, light 16,500
Factory supplies 11,000
Administrative expenses 22,000
Data for adjustment on 31 December 1996: Rupees:
(1) Inventories on 31 December 1996:
Raw materials 41,800
Goods in process 29,700
(2) Make allowance for depreciation on:
Factory building 4,400
Factory machinery 2,200
Office building 5,500
(3) Insurance premium on factory was paid on 1 July 1996 for one year.
(4) Productive wages (direct labour) payable 2,200
(5) Factory supplies on hand 2,200
(6) Amortization on patents 1,100
REQUIRED
(a) A Statement of Cost of Goods Manufactured for the year ended 31 December 1996.
(b) Income Statement for the year ended 31 December 1996.
Question # 11:
Kamran Company produces various types of fertilizers. No beginning units in process of
finished were on hand on 1 January 1996. 36,000 finished units were on hand on 31
December 1996 and 114,000 units were sold during the year. There were no units in work
in process inventory on 31 December 1996. The materials put into production cost
Rs.360,000 (75% were direct materials). There was no beginning or ending materials
inventory. Labour costs were Rs.420,000 (40% was for indirect labour). Factory overhead
costs, other than direct materials and direct labours were the following:
Heat, light and power Rs.138,000
Depreciation 93,600
Factory taxes 78,000
Repairs and maintenance 50,400
Page 223
Chapter # 9
Selling expenses were Rs.96,000, general and administrative expenses were Rs.60,000.
REQUIRED
Compute:
(a) Cost of goods manufactured (b) Total cost (c) Unit cost
(d) Prime cost (e) Conversion cost
Question # 12:
The accounting records of Alladin Manufacturing Company include the following
information relating to the year ended 31 December 1996:
31 December 1 January 1996
1996 (Rs.) (Rs.)
Material inventory 78,000 61,750
Goods – in – process inventory 24,375 26,000
Finished goods inventory (January 1: – 6,500 units) ? 123,500
Raw material purchases 185,250
Factory overhead cost 287,950
The company manufactured a single product during 1996, 29,250 units were manufactured
and 26,000 units were sold.
REQUIRED
(a) Prepare a statement of cost of finished goods manufactured for 1996.
(b) Compute the cost of producing a single unit during 1996.
(c) Compute the cost of inventory of finished goods at 31 December 1996 assuming that
the FIFO method of inventory costing is used.
(d) Compute the cost of goods sold during 1996, assuming that the FIFO inventory
costing is used.
Question # 13:
The following extract of costing information relates to commodity ‘A’ manufactured by
Ribbi Engineering Company for the half year ended 31st December 2008:
Purchase of raw material Rs.350,000
Sales (all on account) 420,000
Factory overhead (20% of direct labour) 35,000
Carriage on purchases 4,200
Stock (July 1, 2008)
Raw material 39,200
Finished goods (1,680 units) 4,200
Work in process 63,000
Stock (December 31, 2008)
Raw material 23,800
Finished goods (1,400 units) ?
Selling and distribution overheads are Rs.3 per unit sold. During the period 41,720 units
were produced.
REQUIRED
(1) Compute cost of material used.
(2) Calculates the amount of direct labour used.
(3) Prepare Statement of Cost of Goods manufactured.
(4) Prepare Statement of Cost of Goods Sold.
Page 224
Chapter # 9
Question # 14:
Purchase of direct material Rs.660,000
Direct material used Rs.675,000
Direct labour paid during the year Rs.487,500
Direct labour assigned to production Rs.525,000
Manufacturing overhear Rs.600,000
(in Rupees) Dec. 31st Jan. 1st
Materials ? 75,000
Finished goods (22,500 units beginning) ? 202,500
REQUIRED
(a) Cost of goods manufactured. (b) Average unit cost.
(c) Cost of goods sold assuming FIFO method
(i) Material (ii) Finished goods
Question # 15:
The following data relate to Waseem Co. for the year 2007:
1. Purchase of direct material Rs. 140,800
2. Direct material used 144,000
3. Direct labour paid 104,000
4. Direct labour assigned to production 112,000
5. Factory overhead cost incurred 128,000
In Rupees: Jan. 1, 2007 Dec. 31, 2007
Material 16,000 ?
Finished goods 4,800 units 43,200 ?
REQUIRED
(1) Cost of goods manufactured during 2007.
(2) Average unit cost produced during 2007.
(3) Cost of goods sold assuming FIFO basis.
(4) Cost of ending inventories of:
(i) Materials (ii) Finished goods.
Question # 16:
Record of Nasir and Mazkoor Corporation show the following information:
Sales (85 TV sets) Rs. 1,700,000
Material purchased Rs. 510,000
Direct labour Rs. ?
Factory overhead (2/3 of direct labour) Rs. 340,000
Selling expense 5% of sales
General expense 10% of sales
Inventories January 1, 2003:
Material Rs. 85,000
Finished goods (85 TV sets) Rs. 7,000
Page 225
Chapter # 9
Inventories December 31, 2003:
No unfinished work on hand
Finished goods (30 TV sets) Rs. ?
Material Rs. 119,000
REQUIRED
(1) The number of units manufactured.
(2) An income statement for the period ended Dec. 31, 2003.
(3) Unit cost of TV manufactured.
(4) Finished goods ending inventory using FIFO flow of cost.
(5) Gross profit per unit.
Question # 17:
Microsoft Company produces a single product. The following information has been taken
from the company’s records for the year 1999: Units:
Production in units 54,000
Sales in units ?
Ending finished goods in units ?
Sales (Rs.25/- per unit) Rs.1,170,000
Costs: Rupees:
Advertising 162,000
Raw materials purchased 144,000
Building rent (production uses 80% of the space,
administration & sales offices uses the rest) 90,000
Utilities, factory 63,000
Maintenance, factory 45,000
Depreciation on factory equipment is estimated at Rs.0.10 per unit produce ?
Selling and administrative salaries 180,000
Other factory overhead costs 19,800
Other selling and administrative expenses 36,000
Inventories (in Rupees): Jan. 1, 1999 Dec. 31, 1999
Finished goods --- ?
The finished goods inventory is being carried at average unit production cost for the year.
REQUIRED
(1) Prepare statement of cost of goods manufactured for the year.
(2) Compute the following:
a) The number of units in finished goods inventory at December 31.
b) The cost of the units in finished goods inventory at December 31.
(3) Prepare an income statement for the year.
Question # 18:
The following information is taken from the financial statements of M/S. Adnan & Brothers
Ltd. at the end of the year 06.
Goods in process inventory ……………………………………… Rs.1,140,000
Cost of raw materials used ……………………………………… Rs.5,928,000
Cost of goods manufactured ……………………………………… Rs.14,143,600
Factory overhead, 75% of direct labour ……………………………………… Rs.3,420,000
REQUIRED
Compute the cost of goods in process inventory at January 1, 2006.
Page 226
Chapter # 9
Question # 19:
The following information is taken from the financial statements of Jagir & Co. at the end of
the year 1993. Rupees
Goods in process inventory ending …………………………………… 330,000
Cost of raw materials used …………………………………… 1,716,000
Cost of goods manufactured …………………………………… 4,092,000
Factory overhead, 75% of direct labour …………………………………… 990,000
REQUIRED
Compute the cost of goods in process inventory at January 1, 1993.
Question # 20:
The following data relates to the operation of Salman Manufacturing Company for the year
ended December 31, 2005.
Sales Rs.7,303,200
Machinery repair expenses 90,000
Sales return & allowances 96,000
Purchase of raw material 3,786,000
Purchases return & allowances 156,000
Factory rent & taxes 242,400
Selling & administrative expenses 420,000
Purchases discount 30,000
Direct labour 1,080,000
Freight in 60,000
Factory supplies expenses 15,600
Import duty 360,000
Office supplies expense 6,000
Foreman’s salary 360,000
Inventories 1.1.2005 (Rs.) 31.12.2005 (Rs.)
Raw material 360,000 816,000
Goods in process 480,000 ?
Factory manager estimated work in process as follows:
Raw material 240,000
The company assigns factory overhead on the basis of direct labour cost.
REQUIRED
(a) Determine factory overhead rate.
(b) Compute the cost of work in process on December 31, 2005.
(c) Prepare statement of cost of goods manufactured & income statement for 2005.
Page 227
Chapter # 9
Question # 21:
The following balances have been taken from the general ledger of Fano Manufacturing
Company:
Raw material inventory (1 December 1991) Rs.44,135
Raw material purchase 246,480
Raw material returns 11,440
Carriage inwards 20,410
Depreciation (Machinery) 40,105
Heat, light and power 33,020
Factory rent & taxes 40,885
Factory repairs expense 25,155
Foreman’s salary 31,850
Raw materials inventory (31 December 1991) 74,750
Work in process inventory (1 December 1991) 69,420
The foreman estimates that Rs.41,340 of raw materials and Rs.32,240 of direct labour are to
be allocated to the unfinished goods in process on 31 December 1991.
REQUIRED
(a) Determine the factory overhead rate based on direct labour cost.
(b) Compute the cost of 31 December 1991 inventory of goods in process.
(c) Prepare statement of cost of goods manufactured for 31 December 1991.
Question # 22:
The following information was taken from the books and records of the Standard
Manufacturing Company for the year ended December 31, 2005.
Units Costs (Rs.)
Sales during the year 112,000 ?
Opening inventory of finished goods 25,200 203,000
Closing Inventory:
Work in process 1,400 ?
Finished goods 28,000 ?
Manufacturing Costs:
Direct material 420,000
The foreman has submitted the following costs for the closing work in process.
Inventory:
Material cost 37,800
The company’s past experience showed that factory overhead cost tends to fluctuate closely
in production to direct labour cost.
REQUIRED
(1) Determine the number of units manufactured during the year.
(2) Compute the estimated cost of work in process.
(3) Determine cost of each unit.
(4) Determine the ending inventory of finished goods and the cost of sales.
Page 228
Chapter # 9
Question # 23:
From the following data compute the net cost of raw materials purchased during the year:
Factory overhead is 30% of cost of goods manufactured. Direct labour is 20% of sales and
40% of cost of goods manufactured. Ending raw materials inventory is Rs.60,000 more than
beginning raw materials inventory. Sales totaled Rs.1,500,000 for the year.
Question # 24:
From the following data compute the net cost of raw materials purchased during the year:
Factory overhead is 30% of cost of goods manufactured. Direct labour is 20% of sales and
40% of cost of goods manufactured. Ending raw materials inventory is Rs.12,8000 more
than beginning raw materials inventory. Sales totaled Rs.3,200,000 for the year.
Question # 25:
The following data appeared in the books of Al-Imran Industries as on 30 June 1993:
Sales Rs. 690,200
Raw material inventory, 1 January 1993 Rs. 34,000
Raw material purchased Rs. 442,000
Raw material returned to suppliers Rs. 17,000
Goods in process inventory, 1 January 1993 Rs. 17,000
Direct labour Rs. 187,000
Cost of goods manufactured Rs. 646,000
Gross profit on sales Rs. 102,000
Raw materials consumed Rs. 403,750
Indirect manufacturing cost Rs. 102,000
Finished goods inventory, 1 January 1993 Rs. 76,500
REQUIRED
(a) Determine the closing inventories of:
(1) Raw material (2) Goods in process (3) Finished goods
(b) Prepare entries to close manufacturing accounts at the end of June 1993.
Question # 26:
The following data appeared in the books of Ali Industries Ltd. as of 31 March 1992:
Sales Rs. 365,400
Raw material inventory, 1 January 1993 Rs. 18,000
Raw material purchased Rs. 234,000
Raw material returned to suppliers Rs. 9,000
Goods in process inventory, 1 January 1993 Rs. 9,000
Direct labour Rs. 81,000
Cost of goods manufactured Rs. 333,900
Gross profit on sales Rs. 45,000
Raw materials consumed Rs. 213,750
Indirect manufacturing cost Rs. 52,650
Finished goods inventory, 1 January 1993 Rs. 40,500
REQUIRED
(a) Determine the closing inventories of:
(1) Raw material (2) Goods in process (3) Finished goods
(b) Prepare entries to close manufacturing accounts at the end of month, include an
entry to close the manufacturing account to the income summary account.
Page 229
Chapter # 9
Question # 27:
Maroof Manufacturing Company showed beginning and ending inventories balances for
1992:
Inventory Account 31 December 1992 1 January 1992
(Rs.) (Rs.)
Goods in process 17,100 22,800
The amounts debited and credited during the year to the accounts used in recording
manufacturing costs are summarized below:
Accounts (in Rupees) Debit Entries Credit Entries
Raw material 380,000 ?
Direct labour 114,000 129,299
Manufacturing overhead 161,500 161,500
Goods in process inventory ? ?
Finished goods inventory ? ?
REQUIRED
(a) Compute the amounts for 1992:
(1) Direct material purchased.
(2) Direct materials used.
(3) Direct labour payroll paid during the year.
(4) Direct labour cost assigned to units manufactured.
(5) The year-end liability for direct wages payable.
(6) The overhead application rate, assuming that overhead costs are applied to
units manufactured in proportion to direct labour cost.
(7) Total manufacturing cost debited to goods in process inventory.
(b) Prepare statement of cost of goods sold for 1992.
Question # 28:
From the following information determine (a) Prime cost (b) Conversion cost (c) Cost of
goods sold (d) Cost of goods manufactured for the month of November, 2002.
Product A (Units) Product B (Units)
Units produced during November 20,000 units 16,000 units
Finished goods beginning inventory 2,000 units 1,800 units
Finished goods ending inventory 4,000 units 200 units
Unit cost applicable to inventories and production:
Direct material Rs.4 per unit Rs.3 per unit
Direct labour Rs.10 per unit Rs.20 per unit
Factory overhead Rs.7 per unit Rs.14 per unit
Actual factory overhead was Rs.364,800, under or over applied factory overhead is to be
adjusted in cost of goods sold.
Page 230
Chapter # 9
Question # 29:
The Aslam and Asghar Corporation had the following data:
Inventories Jan. 1, 2003 Dec. 31, 2003
Material Rs. 80 Rs. 160
Finished goods Rs. 400 Rs. 120
Work in process – material Rs. 40 Rs. 120
Work in process – labour Rs. 160 Rs. 120
Work in process – factory overhead Rs. 240 Rs. 120
During January, the company purchased materials for Rs.1,600, direct labour cost incurred
was Rs.800 of which Rs.600 was paid. Factory overhead applicable to production was 150%
of the direct material cost.
REQUIRED
T account showing the flow of the cost of goods manufactured and sold, using three
accounts of work in process.
(Note: Statement of cost of goods manufactured is not required).
Question # 30:
From the following partial information completes the income statement:
Sales ?
Opening inventory finished goods 66,000
Add: Cost of goods manufactured ?
Less: Finished goods inventory, ending ?
Cost of goods sold ?
Gross profit (41.25% of sales) ?
Operating expenses ?
Net income 26 2/3% of sales 704,000
The Other Information is as under:
Raw material used Rs.583,000, Direct labour Rs.495,000, Factory overhead 50% of prime
cost. The work-in-process was opening Rs.132,000, closing Rs.121,000.
REQUIRED
Determine the missing figures and complete the income statement, show computation.
Question # 31:
The following information has been taken from the accounting records of Latif
Manufacturing Company:
Inventories (Jan. 1, 2004) Raw material Rs.32,760.
Goods-in-process Rs.19,440.
Finished goods Rs.28,920.
Inventories (Mar. 31, 2004)
Items Raw Material (Rs.) Goods-in-Process (Rs.) Finished Goods (Rs.)
Material 34,860 7,740 26,100
Labour 2,520 16,200
Overhead ? 12,960
Totals 34,860 ? 55,260
Page 231
Chapter # 9
Data for the three months ended on March 31, 2004:
Cost of goods manufactured ......................................Rs.487,728.
Factory overhead............................................................Rs.107,040.
The company also paid transportation costs on materials purchased of Rs.16,620, it
received credit of Rs.9,780 for materials returned to suppliers.
REQUIRED
On the basis of the above information and the missing data, which can be derived from it,
prepare a statement of cost of goods manufactured for the three months ended on March
31st 2004.
Question # 32:
Aslam started business with a name of PM Industries on April 1 and produced by the end of
the month of June 60,000 units of its single product. The product requires three basic raw
materials. A, B and C, which were purchased during the first three months at the following
prices and quantities:
Particulars Purchases Price Quantities Purchased Quantity on Hand June 30
(Rs.) (Units) (Units)
Material ‘A’ 0.35 per unit 52,500 6,000
Material ‘B’ 0.30 per unit 15,000 9,000
Material ‘C’ 0.60 per unit 12,000 7,500
Factory wages and other salaries paid and outstanding were:

Particulars Paid (Rs.) Outstanding (Rs.)
Indirect labour 3,400 300
Supervision 4,500 ---
Marketing & administrative salaries 12,300 2,700
Other overhead consisted of:

Particulars Factory Overhead (Rs.) Marketing & Administrative Expenses (Rs.)
Supplies 1,050 1,200
Repairs 675 600
Maintenance 750 525
Depreciation 1,305 465
Utilities 420 420
Insurance --- 3,690
There were no ending inventories of work in process. However finished goods inventories
contained 2,250 units. The company was sold 57,750 units at an average sale price of
Rs.2.25 per unit.
REQUIRED
(i) Prepare Statement of Cost of Goods Manufactured & Statement of Cost of Goods Sold.
(ii) Prepare an Income Statement for the period ended June 30, 2010.
(Show all your computations).
Page 232
Chapter # 10
Job Order Costing
Cost Accounting
Job Order Costing
Chapter # 10
 Job order costing under Perpetual Inventory System.
 Computation of:
o Opening inventory of raw material.
o Ending inventory of raw material.
o Opening inventory of goods in process.
o Ending inventory of goods in process.
o Opening inventory of finished goods.
o Ending inventory of finished goods.
o Factory overhead rate.
 General Journal entries.
 General Ledger of goods in process.
 General Ledger of raw material.
 General Ledger of finished goods.
Page 234
Job Order Costing
Chapter # 10
JOB ORDER COSTING

A costing process to assess the individual costs of performing each job is called job order
costing. This is important in organization that produce a range of different products and
also in service organizations. Job is an identifiable discrete piece of work carried out by an
organization.
POSSIBLE GENERAL ENTRIES

 Purchase of Raw Materials on Account:
Raw materials DR. (with materials amount)
Accounts payable CR. (with payable amount)
-----------------------------------------------------------------------------------------------------------------
 Raw Materials Returned to Supplier:

Accounts payable DR. (with return amount)
Raw materials CR. (with return amount)
-----------------------------------------------------------------------------------------------------------------
 Raw Materials Issued to Factory for Production:

Work in process DR. (with material issued for production)
Raw materials CR. (with material amount issued)
-----------------------------------------------------------------------------------------------------------------
 Indirect Material Issued to Factory:

Factory overhead DR. (with indirect material amount)
Raw materials CR. (with indirect materials amount)
-----------------------------------------------------------------------------------------------------------------
 Direct Labour Used:

Work in process (Labour) DR. (with direct labour amount)
Accrued payroll CR. (with direct labour amount)
-----------------------------------------------------------------------------------------------------------------
 Indirect Labour Used:

Factory overhead DR. (with indirect labour amount)
Accrued payroll CR. (with indirect labour amount)
-----------------------------------------------------------------------------------------------------------------
 Direct and Indirect Labour Paid:

Accrued payroll DR. (with cash payment)
Cash CR. (with cash amount)
-----------------------------------------------------------------------------------------------------------------
 Actual Factory Overhead Incurred:

Factory overhead DR. (with actual factory overhead amount)
Accounts payable CR. (with actual factory overhead)
-----------------------------------------------------------------------------------------------------------------
Page 235
Job Order Costing
Chapter # 10
 Factory Overhead Applied:

Work in process DR. (with applied factory overhead amount)
Factory overhead applied CR. (with applied factory overhead)
-----------------------------------------------------------------------------------------------------------------
 Goods Completed and Transferred to Finished Goods:

Finished goods DR. (with finished goods amount)
Work in process CR. (with finished goods amount)
-----------------------------------------------------------------------------------------------------------------
 Cost of Finished Goods Sold:

Cost of goods sold DR. (with cost of goods sold amount)
Finished goods CR. (with cost of goods sold amount)
-----------------------------------------------------------------------------------------------------------------
 Goods Sold on Account:

Accounts receivable DR. (with receivable amount)
Sales CR. (with sales amount)
-----------------------------------------------------------------------------------------------------------------
 Closing of Under Applied Factory Overhead:

Cost of goods sold DR. (with under applied factory overhead)
Under applied factory overhead CR. (with under applied FOH)
-----------------------------------------------------------------------------------------------------------------
OR
 Closing of Over Applied Factory Overhead:

Over applied factory overhead DR. (with over applied factory overhead)
Cost of goods sold CR. (with over applied FOH)
-----------------------------------------------------------------------------------------------------------------
ILLUSTRATION # 1:
Dell Company uses Job Order Cost System. The manufacturing operations for the year
ended December 31, 1983 were as follows:
(1) Purchased raw materials on account Rs.140,000.
(2) Materials issued to factory of Rs.120,000 of which Rs.20,000 was indirect materials.
(3) Direct labour cost incurred Rs.90,000 and Rs.10,000 indirect labours.
(4) Factory overhead application rate was 90% on direct labour cost.
(5) Factory overhead cost incurred on account Rs.80,000.
(6) Cost of jobs completed Rs.250,000.
(7) Cost of goods sold Rs.180,000
(8) Sales on account Rs.230,000.
REQUIRED
Record all the above transactions in the General Journal & give an entry to close the factory
overhead account.
Page 236
Job Order Costing
Chapter # 10
SOLUTION # 1:
Dell Company
General Journal
1 Raw materials 140,000
(To record the purchase of raw material on
account)
2 Work in process 100,000
(To record the raw material issued)
Accrued payroll 100,000
(To record the direct and indirect labour used)
4 Work in process (90,000 x 90%) 81,000
(To record the applied factory overhead)
5 Factory overhead 80,000
(To record the factory overhead costs incurred)
6 Finished goods 250,000
(To record the goods completed and transferred
to finished goods)
7 Cost of goods sold 180,000
(To record the cost of goods sold)
Sales 230,000
(To record the goods sold on account)
Under – applied factory overhead 29,000
(To adjust the under-applied factory overhead)
Factory Overhead
2 Raw material 20,000 4 Work in process 81,000
3 Accrued payroll 10,000 9 Cost of goods sold 29,000
110,000 110,000
Page 237
Job Order Costing
Chapter # 10
ILLUSTRATION # 2: (INVENTORIES BALANCES)

Moiz Manufacturing Company uses job order cost system. The ledger accounts show the
following inventories:
Inventories: 31 December (Rs.) 1 January (Rs.)
The manufacturing operations for the month of January 2003 are summarized as follows:
(a) Materials purchased on account Rs.100,000.
(b) Material returned to suppliers Rs.8,000.
(c) Materials issued to jobs for Rs.78,000.
(d) Labour used Rs.59,000 of which Rs.50,000 was used directly.
(e) Depreciation on machinery Rs.12,000.
(f) Factory overhead cost incurred Rs.42,000.
(g) The factory overhead rate is applied 120% of direct labour cost.
(h) The jobs were completed and shipped to customers at a billed price of Rs.190,000.
REQUIRED
Give the necessary journal entries and prepare T – accounts for raw materials, work in
process, and finished goods and complete in all respect.
SOLUTION # 2:
Moiz Company
General Journal
1 Raw materials 100,000
(To record the purchase of raw material on
account)
Raw material returned 8,000
(To record the material returned to the suppliers)
Raw material 78,000
(To record the raw material issued)
(To record the factory machine depreciation)
(To record the factory overhead costs incurred)
7 Work in process (50,000 x 120%) 60,000
(To record the applied factory overhead)
Page 238
Job Order Costing
Chapter # 10
Moiz Company
General Journal
to finished goods)
Sales 190,000
Under – applied factory overhead 3,000
(To adjust the under-applied factory overhead)
Raw Material
Balance 26,000 2 Accounts payable 8,000
1 Accounts payable 100,000 3 Work in process 78,000
Balance c/d 40,000
126,000 126,000
Work in Process
Balance 50,000 8 Finished goods 176,000
3 Raw material 78,000 Balance c/d 62,000
4 Accrued payroll 50,000
238,000 238,000
Finished Goods
Balance 25,000 9 Cost of goods sold 141,000
8 Work in process 176,000 Balance c/d 60,000
201,000 201,000
Factory Overhead
4 Accrued payroll 9,000 7 Work in process 60,000
5 All for depreciation 12,000 9 Cost of goods sold 3,000
63,000 63,000
Page 239
Job Order Costing
Chapter # 10
ILLUSTRATION # 3: (WORK – IN – PROCESS ACCOUNT)

The following information appears in the work in process inventory account:-
Work in Process Inventory
Balance January 1 60,000 Finished goods 280,000
Direct material 110,000 Balance March 31, 70,000
350,000 350,000
Factory overhead is applied as a percentage of direct labour cost, direct labour charged to
work in process at March 31, is estimated to be Rs.20,000. Finished goods sold on credit
Rs.340,000.
REQUIRED
a) Factory overhead percentage on direct labour cost.
b) Factory overhead applied and direct materials used on goods still in process at
March 31.
c) General Journal entries to record:
i) Manufacturing costs charged to production during March.
ii) Transfer of production to finished goods warehouse during March.
iii) Cost of goods sold
iv) Credit sales.
SOLUTION # 3:
Computation of Factory Overhead Rate:
Factory overhead rate = Factory overhead X 100
Direct labour
Factory overhead rate = 100,000 X 100
80,000
Factory overhead rate = 125%
Computation of Factory Overhead (Work in Process Ending Inventory):

Factory overhead = Direct labour x Factory overhead rate
Factory overhead = 20,000 x 125%
Factory overhead = Rs.25,000
Computation of Raw Material (Work in Process Ending Inventory):

Work in process ending inventory 70,000
Less: Direct labour (ending work in process) (20,000)
Less: Factory overhead (ending work in process) (25,000)
Raw material (ending work in process) Rs.25,000
M/S. _______
General Journal
(To record the manufacturing cost)
Page 240
Job Order Costing
Chapter # 10
M/S. _______
General Journal
to finished goods)
Sales 340,000
ILLUSTRATION # 4: (DIFFERENT JOBS)

The following transactions relate to the Crescent Company for the month of May, 2008.
(1) Materials purchased on account Rs.400,000.
(2) Materials and labour used on jobs were s under:
Jobs Direct Materials (Rs.) Direct Labours (Rs.)
Job No. M1 27,000 33,000
Job No. M2 12,000 15,000
Job No. M3 41,000 45,000
Indirect materials Rs.10,000.
Indirect labour Rs.13,000.
(3) Other factory overhead cost incurred Rs.60,000.
(4) Factory overhead is applied at 100% of direct labour.
(5) Jobs No. M1 and M2 were completed and customers were billed with Rs.130,000 and
REQUIRED
Prepare the necessary entries to record the above transactions.
SOLUTION # 4:
Crescent Company
General Journal
1 Raw material 400,000
(To record the purchase of raw materials)
2 Work in process (Job No. M1) 27,000
Work in process (Job No. M2) 12,000
Raw material 90,000
(To record the raw material issued to factory)
Page 241
Job Order Costing
Chapter # 10
Crescent Company
General Journal
(To record the factory overhead cost incurred)
(To record the applied factory overhead cost)
6 Finished goods (Job No. M1) 93,000
Finished goods (Job No. M2) 42,000
to finished goods)
8 Accounts receivable (Job No. M1) 130,000
Accounts receivable (Job No. M2) 68,000
Sales 198,000
9 Over applied factory overhead 10,000
(To adjust the factory overhead)
Computation of Jobs Started and Completed:

Job No. M1 Job No. M2 Job No. M3 Total
Jobs Started:
Direct material 27,000 12,000 41,000 80,000
Direct labour 33,000 15,000 45,000 93,000
Factory overhead 33,000 15,000 45,000 93,000
Total 93,000 42,000 131,000 266,000
Jobs Completed: 93,000 42,000 --- 135,000
Jobs in Process: 131,000 131,000
Factory Overhead
2 Raw material 10,000 5 Work in process 93,000
3 Accrued payroll 13,000
93,000 93,000
Page 242
Job Order Costing
Chapter # 10
PRACTICE QUESTIONS
Question # 1:
The following information relates to a manufacturing company:
1. Purchase of direct material on account Rs.192,500.
2. Direct material used Rs.176,000.
3. Direct labour used Rs.110,000.
4. Direct labour paid Rs.104,500.
5. Factory overhead incurred on account Rs.84,700.
6. Factory overhead is applied at 80% of direct labour.
7. Jobs with total cost of Rs.330,000 were completed.
8. Units costing Rs.308,000 were sold on account for Rs.374,000.
REQUIRED
Give journal entries for the above transactions.
Question # 2:
Skyline Co. uses Job Order Cost System. The manufacturing operations for the year ended
December 31, 2007 were as follows:
(1) Purchased raw materials on account Rs.86,400.
(2) Materials issued to factory of Rs.77,400 of which Rs.5,400 was indirect materials.
(3) Direct labour cost incurred Rs.69,600 and Rs.5,760 indirect labours.
(4) Factory overhead application rate was 80% on direct labour cost.
(6) Cost of jobs completed Rs.180,000.
(7) Cost of jobs Rs.156,000.
(8) Sales on account Rs.204,000.
REQUIRED
Record all the above transactions in the General Journal & give an entry to close the factory
overhead account.
Question # 3:
Meer and Company uses job order cost system. The following data summarize the
operations relating to production for June 2005:
(b) Materials requisitioned Rs.128,700 of which Rs.3,900 was for general factory use.
(c) Factory labour used Rs.109,200 of which Rs.14,300 was factory overhead.
(d) Other costs for factory overhead were incurred on account Rs.22,100.
(e) Prepaid insurance expired for factory overhead was Rs.1,300.
(f) Depreciation of factory equipment was Rs.11,700.
(g) Factory overhead cost applied to jobs Rs.52,000.
(h) Jobs completed Rs.273,000.
(i) Cost of goods sold Rs.256,100.
REQUIRED
Entries in general journal to record the summarized operations.
Page 243
Job Order Costing
Chapter # 10
Question # 4:
The following information relates to Sakina Industries for the month of December 2009.
1. Purchase materials on account Rs.126,000.
2. Issued materials of Rs.112,000 which included indirect materials of Rs.14,000.
3. Labour costs accrued: Direct Rs.63,000 and indirect Rs.21,000.
4. Indirect manufacturing costs other than indirect material and indirect labour
incurred on account Rs.26,600.
5. Factory overhead costs applied @ 90% of direct labour cost.
6. Goods costing Rs.168,000 were completed (finished).
7. 80% of the completed goods were sold at 20% above cost.
REQUIRED
Prepare journal entries for the above information.
Question # 5:
The Moon Company Ltd. uses job order cost system. The transactions for the month of July
1990 are given below:
(a) Purchased materials on account for Rs.142,500.
(b) Defective materials worth Rs.7,500 were returned to the supplier.
(c) Materials issued to factory, direct materials Rs.120,000 and indirect materials
Rs.4,500.
(d) Labour used Rs.135,000 of which Rs.108,000 is direct labour.
(e) Factory overhead cost incurred on account of Rs.24,000.
(f) Depreciation on machinery was Rs.7,500.
(g) Factory overhead rate is applied at 60% of direct labour cost.
(h) Cost of goods completed and transferred to finished goods store Rs.225,000.
(i) Sold finished goods costing Rs.180,000 on account at 30% above cost.
(j) Balance of factory overhead account was closed into cost of goods sold account.
REQUIRED
(1) Give entries in General Journal to record the above transactions.
(2) Prepare factory overhead account and goods in process account.
Question # 6:
Mustafa Jatoi Manufacturing Company uses job order cost system. Manufacturing
operations for January – December 1990 were as under:
(a) Purchased materials on account Rs.1,200,000
(b) Defective materials were returned 32,000
(c) Direct materials were issued to jobs 1,000,000
(d) Indirect materials were issued to factory 32,000
(e) Direct labour cost incurred was 1,152,000
(f) Indirect labour cost incurred was 120,000
(g) The applied factory overhead cost amounted to 768,000
(h) Factory overhead cost on account was 624,000
(i) Factory depreciation cost was estimated at 64,000
(j) The jobs were completed for 2,336,000
(k) Finished goods costing were sold 1,920,000
(l) The finished goods were sold on account for 2,880,000
REQUIRED
Prepare entries in the General Journal.
Page 244
Job Order Costing
Chapter # 10
Question # 7:
Danish Corporation produces special product as to customer specifications and uses the job
order cost system. The following data relates to its operations of December 2006.
(1) Purchased raw material on account Rs.102,000.
(2) Raw material issued to factory Rs.73,100 of which Rs.6,800 was used indirectly.
(3) Factory labour used direct Rs.110,500 and indirect Rs.9,350.
(5) Factory overhead applied at 100% of direct labour cost.
(6) Jobs were completed to the extent of 80%.
(7) Goods sold on account Rs.340,000.
(8) Finished goods inventory on December 31, 2006 is Rs.31,280.
REQUIRED
Record the above transactions in journal also close over or under applied factory overhead
at the end of month.
Question # 8:
Ahsan Corporation produces special product as to customer specifications and uses the job
order cost system. The following data relates to its operations for the month of December
1996:
(2) Raw material issued to factory Rs.59,400 of which Rs.5,400 was used indirectly.
(3) Labour used: Direct Rs.90,000 and indirect Rs.9,000.
(5) Factory overhead applied at 100% of direct labour cost.
(7) Goods sold on account Rs.306,000.
(8) Finished goods ending inventory valued at Rs.18,000.
REQUIRED
Record the above transactions in journal also close the factory overhead account.
Question # 9:
Raza Corporation produces special products to customer’s specifications and uses job order
cost system. The following transactions relates to its operations for the month of December
2003:
(1) Purchase of raw material on account Rs.95,000.
(2) Material issued to production Rs.125,400 out of which Rs.11,400 was used
indirectly.
(3) Labour used direct Rs.190,000 indirect Rs.19,000.
(4) Factory overhead cost incurred Rs.152,000.
(5) Factory overhead applied 100% of direct labour cost.
(7) Goods sold on account Rs.327,750, including G.S.T. @ 15%.
(8) Finished goods inventory valued at Rs.28,500.
REQUIRED
Pass necessary journal entries and close the factory overhead account.
Page 245
Job Order Costing
Chapter # 10
Question # 10:
Sunshine Co. uses a job order cost accounting system. The following information was
provided for the month of March:
a) Purchases of direct materials during the month amounted to Rs.119,400/= on
account.
b) Materials requisitions issued by the production department during the month total
to Rs.112,400/=.
c) Time cards of direct workers show 4,000 hours worked on various jobs during the
month, for total direct labour cost of Rs.60,000/=.
d) Direct workers were paid Rs.52,600/= in March.
e) Actual overhead costs for the month amounted to Rs.69,800/=.
f) Overhead is applied to jobs at a rate of Rs.18/= per direct labour hour.
g) Jobs with total accumulated cost of Rs.232,000/= were completed during the month.
h) On March 31, finished goods inventory was valued at Rs.44,000/=.
i) During March finished goods were sold for Rs.256,000/= on account.
REQUIRED
Prepare general journal entries for each of the above transactions (including cost of goods
sold and closing of factory overhead account).
Question # 11:
Hakeem & Company reported the following inventories on 1st November, 2001.
Raw material inventory Rs.49,500
Goods in process inventory 66,000
Finished goods inventory 40,700
The company uses the job order cost accounting system. The following transactions took
place during November:-
a) Material purchased on account Rs.165,000.
b) Material returned to supplier Rs.6,600.
c) Raw material account showed a debit balance of Rs.37,900 on 30th November 2001.
d) Direct labour assigned to production Rs.99,000 and indirect labour Rs.16,500 of
which Rs.100,000 paid in cash.
e) Sundry manufacturing expenses incurred Rs.121,000.
f) Paid to accounts payable Rs.61,600.
g) Collected from accounts receivable Rs.99,000.
h) Factory overhead applied at the rate of 110% of direct labour cost.
i) Goods in process inventory November 30, Rs.71,500.
j) Finished goods inventory November 30, Rs.60,500.
k) Finished goods are sold on account @ 30% above cost.
REQUIRED
Prepare General Journal entries for each of the above transactions (including entries for
cost of goods manufactured, cost of goods sold and closing factory overhead account).
Page 246
Job Order Costing
Chapter # 10
Question # 12:
The Shalimar Manufacturing Company uses job order cost system. The ledger accounts
show the following inventories at the beginning and ending of August 1992:
Inventories: 1 August (Rs.) 31 August (Rs.)
Goods in process 24,000 60,000
Finished goods (1,000 units opening) 60,000 144,000
The manufacturing operations for the month of August 1992 are summarized below:
(a) Purchased material costing Rs.240,000 on account.
(b) Issued Rs.180,000 worth direct material and Rs.35,000 worth indirect material for
production.
(c) The payroll for the month amounted to Rs.120,000 for direct labour and Rs.10,800
for indirect labour.
(d) Factory overhead cost incurred on account Rs.55,200.
(e) The applied factory overhead is at 80% of direct labour cost.
(f) Goods completed during the month (6,000 units) Rs.360,000.
(g) Sold finished goods on account (4,800 units) at Rs.300,000. Use first in first out
method in crediting finished goods account.
REQUIRED
(1) Give necessary journal entries for all the above transactions.
(2) Prepare T – accounts for raw material, goods in process, and finished goods and
complete in all respects.
Question # 13:
Ansar Manufacturing Company uses job order cost system. The ledger accounts show the
following inventories:
Inventories: 31 January (Rs.) 1 January (Rs.)
The manufacturing operations for the month of January 1986 are summarized as follows:
(b) Material returned to suppliers Rs.2,600.
(c) Materials issued to jobs for Rs.42,900.
(d) Labour used Rs.26,000 of which Rs.19,500 was used directly.
(e) Depreciation on machinery Rs.2,600.
(f) Factory overhead cost incurred Rs.19,500.
(g) The factory overhead rate is applied 110% of direct labour cost.
(h) The jobs were completed and shipped to customers at a billed price of Rs.104,000.
REQUIRED
Give the necessary journal entries and prepare T – accounts for raw materials, work in
process, and finished goods and complete in all respect.
Page 247
Job Order Costing
Chapter # 10
Question # 14:
The Sindh Manufacturing Company uses job order cost system. The transactions for the
month of March 1996 are given below:
(1) Purchased raw material costing Rs.133,000 on account.
(2) The raw material account shows a debit balance of Rs.21,000 on 31 March 1996.
(3) Direct labour cost incurred Rs.168,000.
(4) Factory overhead rate is applied 90% of direct labour cost.
(5) The completed jobs were shipped to customers at a billed price Rs.490,000.
Note: Raw material Rs.14,000 and direct labour cost Rs.9,800 are included in the goods in
process on 31 March 1996 (Factory overhead is applied on the basis of direct labour
cost).
REQUIRED
(a) Prepare General Journal entries and setup work in process account.
(b) Compute the cost of goods in process inventory 31 March 1996.
Question # 15:
The following data relate to Khurram Farooqui manufacturing Company for the month of
December 1991:
(2) The raw material account shows a debit balance of Rs.30,000 on 31 December 1991.
(3) Direct labour cost Rs.150,000.
(4) Factory overhead incurred and applied Rs.120,000.
(5) The completed jobs were shipped to customers at a billed price Rs.450,000.
Note: Raw material Rs.8,850 and direct labour cost Rs.6,750 are included in the goods in
process on 31 December 1991 (Factory overhead is applied on the basis of direct
labour cost).
REQUIRED
(a) Record the above transactions in the General Journal.
(b) Compute the cost of goods in process inventory 31 December 1991.
(c) Prepare a condensed Income Statement for 31 December 1991.
Question # 16:
The following data relate to Dada Bhai Manufacturing Company for its operations for April
2004:
1. Purchase of raw material on account for Rs.52,000.
2. Raw material account shows a debit balance of Rs.16,000 on April 30, 2004.
3. Direct labour cost incurred Rs.80,000.
4. Factory overhead incurred Rs.64,000.
5. The jobs were completed and shipped to customers at a billed price of Rs.240,000.
6. The factory overhead is applied on the basis of direct labour cost.
7. Goods in process on April 30, 2004 were as:
Raw material ............................ Rs.4,720.
Direct labour cost ................... Rs.3,600.
REQUIRED
1. Give necessary journal entries for the above transactions.
2. Compute the cost of goods in process on April 30, 2004.
3. Prepare a condensed income statement.
Page 248
Job Order Costing
Chapter # 10
Question # 17:
The following data relate to Irfan Manufacturing Company for its operation for the year
ended December 31, 2005.
Raw material purchased on account Rs.340,000.
Raw Material Issued to Factory: Rupees:
Direct 238,000
Indirect 34,000
Labour Used: Rupees:
Direct labour for production 408,000
For general use 40,800
Other factory overhead incurred on account Rs.306,000.
90% of the factory overhead has been applied on the work-in-process account on the basis
of direct labour cost.
Goods valued Rs.877,200 were transferred from factory to go-down as complete. Finished
goods costing Rs.112,200 were in the ending inventory and the rest were sold at 20% above
cost.
REQUIRED
(i) Give General Journal entries to record the above transactions and setup work-in-
process, finished goods and factory overhead account.
(ii) To close the factory overhead accounts.
Question # 18:
The following information appears in the work in process inventory account:-
Work in Process Inventory
Balance October 1, Rs.129,600 Transfer to finished goods
Direct material 216,000 Inventory account 540,000
Direct labour 162,000 Balance October 31, 162,000
702,000 702,000
Factory overhead is applied as a percentage of direct labour cost, direct labour charged to
goods in process at October 31, is estimated to be Rs.54,000. 75% of the goods finished
during October are sold for cash Rs.486,000 and the remaining 25% of finished goods are
sold on credit Rs.171,000.
REQUIRED
a) Factory overhead percentage on direct labour cost.
b) Factory overhead applied and direct materials used on goods still in process at
October 31.
c) General journal entries to record:
(1) Manufacturing costs charged to production during October.
(2) Transfer of production to finished goods warehouse during October.
(3) Cash sales.
(4) Credit sales.
Page 249
Job Order Costing
Chapter # 10
Question # 19:
Master Sons uses job order cost system. Factory overhead charged to individual jobs
through the use of predetermined overhead rate-based on direct labour cost.
The following appears in the company’s goods in process account for the month of January
2006.
Debit to Account: Rs.
Balance January 01, 2006 195,700
874,000
Credit to Account: Rs.
Transferred to finished goods account 646,000
Balance January 31, 2006 228,000
REQUIRED
(1) Determine the overhead application rate used by the company.
(2) Assuming that the direct labour charged to the job still in process at January 31,
amounts to Rs.57,000. Compute the amount of factory overhead and amount of raw
material which have been charged to these jobs as of January 31, 2006.
(3) Prepare General Journal entries to record:
(a) The manufacturing cost (Material, labour & overhead).
(b) The transfer of production completed during January 31, to the finished
goods inventory accounts.
(c) The credit sales of total finished goods completed at 30% above cost.
Question # 20:
Sheikh Sons uses job order cost accounting system. Factory overhead is charged to
individual jobs through the use of predetermined overhead rate-based on direct labour cost.
The following information appears in the company’s goods in process account for the
month of June:
Debits to Account: Rs.
Balance 1 June 24,900
Raw material 36,000
Factory overhead (applied to jobs as a percentage of direct labour cost) 35,100
123,000
Credits to Account:
Transferred to finished goods inventory 96,000
Balance 30 June 27,000
REQUIRED
(1) Compute the predetermine overhead application rate used by the company.
(2) Assuming that the direct labour charged to the job still in process at June 30,
amounts to Rs.7,200. Compute the amount of factory overhead and amount of raw
material which have been charged to these jobs as of June 30.
(3) Prepare General Journal entries to summarize:
(a) The manufacturing cost (Material, labour & overhead) charged to production
during June.
(b) The transfer of production completed during June to the finished goods
inventory accounts.
Page 250
Job Order Costing
Chapter # 10
(c) The cash sales of 90% of the merchandise completed during June, at a total
sales price of Rs.139,500. Show the related cost of goods sold in a separate
journal entry.
Question # 21:
Margoob Company uses job order cost accounting system. The following information
appears in the goods in process controlling account for the month of June 1993 and
company uses FIFO method:
Goods in Process
Debits to Accounts (Rupees) Credits to Accounts (Rupees)
Balance 1 June 1993 88,000 Transfer to finished goods
Direct materials 220,000 Inventory account ?
Direct labour 132,000 Balance 30 June, 1993 94,000
Manufacturing overhead 154,000
incurred on account
594,000 594,000
Over-applied factory overhead Rs.4,400 and used factory overhead rate based on direct
labour cost. 90% completed units sold on account for Rs.550,000.
REQUIRED
a) Assuming that the direct labour charged to the job still in process at June 30, 1993
amounts to Rs.23,100. Compute the amount of manufacturing overhead applied and
the amount of direct material which have been charged to these jobs as of June 30.
b) Pass the journal entries relating:
i) Manufacturing costs.
ii) Completed goods transferred to finished goods inventory.
iii) Cost of goods sold.
iv) Credit sales.
v) Factory overhead incurred.
vi) Close over-applied factory overhead to cost of goods sold.
c) Prepare revised goods in process account.
Question # 22:
The following transactions relate to the Decent Corporation for the month of June, 2002.
(1) Materials purchased on account .............................................Rs.204,000.
(2) Materials and labour used on jobs were s under:
Direct Materials (Rs.) Direct Labours (Rs.)
Job No. 1 13,680 16,800
Job No. 2 6,000 8,400
Job No. 3 20,640 22,080
Indirect materials Rs.4,560.
Indirect labour Rs.6,600.
(3) Other factory overhead cost incurred ........................................ Rs.8,220.
(4) Depreciation on machinery ............................................................ Rs.3,600.
(5) Factory overhead is applied at 80% of direct labour.
(6) Jobs No. 1 and 2 were completed and customers were billed with Rs.60,000 and
REQUIRED
Prepare the necessary entries to record the above transactions.
Page 251
Job Order Costing
Chapter # 10
Question # 23:
The following data relates to M/S. Al-Mansoor Co. for the month of September 1995, who
maintains job order cost system.
(1) Materials purchased on account Rs.156,000.
(2) Materials requisitioned and factory labour used:
Job No. Material (Rs.) Factory Labour (Rs.)
Job No. 501 16,900 24,700
Job No. 502 11,700 20,176
Job No. 503 29,120 18,304
Job No. 504 22,880 27,040
Job No. 505 18,200 9,360
Job No. 506 9,100 4,680
For general factory use 4,940 9,620
(4) Depreciation of machinery Rs.13,520.
(5) The factory overhead rate is 110% of direct labour cost.
(6) Jobs completed: No. 501, 503, 504 and 506.
(7) Jobs No. 501, 503 and 504 were shipped and customers were billed for Rs.109,200,
Rs.110,500 and Rs.130,000 respectively.
REQUIRED
(a) Pass necessary journal entries to record the information summarized above.
(b) Prepare accounts in ledger of the company for the accounts work – in – process and
finished goods.
Question # 24:
Arsalan Manufacturing Company uses a job order cost system. The following data
summarizes the operations to production for April 1993:
(1) Raw materials purchased on cash Rs.560,000.
(2) Raw materials purchased on account Rs.280,000.
(3) Raw materials requisitioned and direct labour used:
Job No. Raw Material (Rs.) Direct Labour (Rs.)
Job No. 11 91,000 133,000
Job No. 12 75,600 108,640
Job No. 13 156,800 98,560
Job No. 14 123,200 145,600
Job No. 15 98,000 50,400
Job No. 16 49,000 25,200
For general factory use 26,600 51,800
(5) Depreciation of machinery Rs.72,800.
(6) The factory overhead rate is 110% of direct labour cost.
(7) Jobs completed: No. 11, 13, 14 and 16 and transferred to finished goods warehouse.
(8) Jobs No. 11, 13 and 14 were sold on account at a cost of Rs.588,000, Rs.630,000 and
REQUIRED
(a) Entries in General Journal to record the foregoing operations.
(b) Setup T – accounts of raw material, work in process, and finished goods.
(c) Bring down the end of the month balances.
Page 252
Job Order Costing
Chapter # 10
Question # 25:
The Millat Company uses job order costing. The following data were obtained from the
company’s records as of June 30:
Job No. Direct Material (Rs.) Direct Labour Hours
Job No. 1001 244,500 34,500
Job No. 1002 354,000 70,500
Job No. 1003 367,500 63,000
Job No. 1004 231,000 37,500
Job No. 1005 273,000 48,000
Job No. 1006 205,500 29,700
Direct labour is charged to job at an average cost of Rs.6 per direct labour hour. Factory
overhead is charged to jobs on the basis of Rs.3 per direct labour hour. Actual overhead
totaled Rs.870,000. During June, Job No. 1001, 1002, 1003, 1004, and 1005 were completed.
Jobs No. 1001 and 1002 were shipped out and customers were billed for Rs.720,000 and
Rs.1,230,000 respectively.
REQUIRED
Give journal entries to summarize the transactions for June and to close the factory
overhead account.
Question # 26:
The A.M. Company uses job order costing. At the beginning of June, two jobs were in
process:
Job 101 Job 102
Material Rs. 56,000 Rs. 75,200
Direct labour Rs. 160,000 Rs. 80,000
Applied factory overhead Rs. 128,000 Rs. 64,000
There was no inventory of finished goods on June 1, during June job 103, 104, 105, 106, 107
and 108 were started.
Material requisitions for June totaled Rs.480,000 direct labour cost Rs.720,000.
Factory overhead is applied 80% of direct labour cost.
The only job still in process at the end of June 30 is No. 108 with cost of Rs.64,000 for
material and Rs.112,000 for the direct labour.
Job 107, the only finished job on hand at the end of June, has total cost of Rs.137,600.
REQUIRED
(1) Calculate work in process inventory on June 30 (Job no. 108).
(2) General Journal entries to record:
(a) Cost of goods manufactured.
(b) Cost of goods sold.
(c) Closing of over or under applied factory overhead.
Page 253
Job Order Costing
Chapter # 10
Question # 27:
Mushtaq Company uses a pre-determined rate in applying factory overhead to individual
production orders. Overhead is applied in Department – A on the basis of machine hours
and in Department – B on the basis of direct labour hours. At the beginning of the year 1997
management made the following budget estimates:
Department – A Department – B
Direct labour Rs.467,500 Rs.1,632,000
Factory overhead Rs.918,000 Rs.1,020,000
Machine hours 612,000 Hours 7,650 Hours
Direct labour hours 212,500 Hours 850,000 Hours
Production No. 490 was started in the middle of January and completed two weeks later.
The cost records for the job show the following information:
Department – A Department – B
Job No. 490 – 4,080 units of product
Cost of raw material used on job Rs.3,910 Rs.12,920
Direct labour cost Rs.4,250 Rs.10,030
Machine hours 10,710 Hours 850 Hours
Labour hours 2,040 Hours 3,230 Hours
REQUIRED
(1) Determine the overhead rate that should be used in applying overhead costs to Job
No. 490.
(2) What is the total cost of Job No. 490 and the unit cost of the product manufactured
on this production cost?
Question # 28:
On March 1, 2009 Azfar Engineering Works had two jobs in process as follows:
Job No. 18 Job No. 19
Direct material Rs.90,000 Rs.32,400
Direct labour Rs.64,800 Rs.21,600
Direct labour hours 18,000 Hours 14,400 Hours
Direct machine hours 5,400 Hours 4,500 Hours
Applied factory overhead Rs.3 per direct machine hour Rs.5 per direct labour hour
During March Job No. 20, 21, 22 and 23 were started. Direct materials of Rs.67,500 and
direct labour of 3,240 hours at an average rate of Rs.15 per hour used during the month.
Pre-determined factory overhead applied rate is Rs.10 per direct labour hour on all jobs
starting in March.
Job No. 23 was the only incomplete job at the end of March. Direct material of Rs.27,000 and
direct labour of Rs.16,200 were charged to job. At the end of month job No. 22 was the only
finished job on hand. It had accumulated total cost of Rs.49,050.
There was no beginning inventory in finished goods. Jobs completed were sold on account
at a profit of 20% on cost.
REQUIRED
(i) Prepare following T – account:
(a) Work in process (b) Finished goods
(c) Cost of goods sold
(ii) Prepare journal entries to record:
(a) Cost incurred on jobs started in the month of March
(b) Cost of goods manufactured (c) Sales (d) Cost of sales
Page 254
Job Order Costing
Chapter # 10
Question # 29:
The following information has been taken from the job order cost system, used by
Jahangeer Sons:
Job No. Balance July 1 (Rs.) Production Cost in July (Rs.)
21 266,000 ---
22 205,200 ---
23 57,000 315,400
24 95,000 247,000
25 --- 380,000
26 --- 229,900
27 --- 152,000
During July Job No. 23, 24 and 25 were completed, and Job No. 21, 22 and 23 were sold on
account at 25% above cost.
REQUIRED
(a) Compute:
(1) Cost of finished goods inventory – beginning.
(2) Cost of goods in process inventory – beginning.
(3) Cost of finished goods inventory – ending.
(4) Cost of goods in process inventory – ending.
(5) Cost of goods manufactured.
(6) Cost of goods sold.
(7) Sales revenue.
(b) General Journal entries for (5), (6) and (7) above.
Question # 30:
Ashar Engineering Works produces robotic arms according to customers’ specification. At
November 1, 2009 the jobs were in process:
Job No. Material Cost (Rs.) Labour Cost (Rs.) Factory Overhead (Rs.)
201 A 8,000 4,000 20% of direct labour
215 B 16,000 8,000 15% of direct labour
230 C 16,600 4,400 1/4 of direct labour
Additional costs to complete the products during November:
Material Rs.40,000 allocated as follows:
Job No. 201 A 40% Job No. 215 B 25% Job No. 230 C 35%
Labour charges Rs.8,000 per job and factory overhead apply to all the jobs at 20% of direct
labour.
Units selling price:
Job No. 201 A Rs.4.40 Job No. 215 B Rs.5.00 Job No. 230 C Rs.3.60
All jobs were completed and sold during November.
REQUIRED
Prepare journal entry to record transfer of the jobs to the finished goods account.
Page 255
Job Order Costing
Chapter # 10
Question # 31:
On January 1, 2010 Mansoor Company has a debit balance of Rs.55,000 in material account.
During a month of January following transactions were completed:
(1) Purchased material from Zulfiqar Company Rs.132,000 which included 30% cash
purchases.
(2) Material issued to:
Job No. Direct (Rs.) Indirect (Rs.)
X 55,000 5,500
Y 44,000 4,400
Z 66,000 6,600
(3) Labours hours used:
Job No. Direct Indirect
X 220 Hours 22 Hours
Y 540 Hours 54 Hours
Z 880 Hours 88 Hours
(4) Labour rate is Rs.8 per direct labour hour.
(5) Factory overhead applied at the rate of 80% of direct labour cost.
(6) Job No. X and Z were completed and transferred to finished goods.
(7) 30% of finished goods were sold on account to Naeem Traders at a profit of 25%.
REQUIRED
Prepare journal entries in the books of Mansoor Industries, showing computations.
Page 256
Chapter # 11
Standard Costing
Cost Accounting
Standard Costing
Chapter # 11
 Standard costing.
 Computing and recording:
o Materials quantity and price variances.
o Labour time (efficiency) and wage variances.
o Factory overhead (one way) variance.
 Computation of:
o Material price variance.
o Material quantity variance.
o Overall material variance.
o Labour rate variance.
o Labour efficiency variance.
o Overall labour variance.
o Factory overhead variance.
 General Journal entries to record the standard cost, actual cost and variances.
 Closing entries to close variances.
Page 258
Standard Costing
Chapter # 11
STANDARD COSTING
A system of cost ascertainment and control in which predetermined standard costs and
income for products and operations are set and periodically compared with actual costs
incurred and income generated in order to establish any variances.
VARIANCE
In standard costing and budgetary control, the difference between the standard or budgeted
levels of cost or income for any activity and the actual costs incurred or income achieved. If
the actual performance is better than standard then a favourable variance results, while if
actual performance is worse than standard there is an adverse or unfavourable variance.
MATERIAL PRICE VARIANCE

In a standard costing system, a variance arising as a part of the direct materials total cost
variance is known as materials price variance. It is the difference between the standard
price of the materials and the actual price of the materials purchased.
Material Price Variance = (Standard Material Price – Actual Material Price) x Actual
Material Quantity
MATERIAL QUANTITY VARIANCE

In standard costing systems, part of the direct materials usage variance; it is the difference
between the total standard quantity of material allowed for a process in standard
proportions and the actual materials used, also in standard proportions, valued at standard
prices.
Material Quantity Variance = (Standard Material Quantity – Actual Material

Quantity) x Standard Material Price
TOTAL MATERIAL VARIANCE

It is the difference between the total standard cost of the materials and the total actual cost
of the materials.
Total Material Variance = Total Standard Cost – Total Actual Cost
OR
Total Material Variance = Material Price Variance + Material Quantity Variance
LABOUR RATE VARIANCE

It compares the actual rate paid to direct labour for an activity with the standard rate of pay
allowed for that activity for the actual hours worked.
Labour Rate Variance = (Standard Labour Rate – Actual Labour Rate) x

Actual Hours Worked
Page 259
Standard Costing
Chapter # 11
LABOUR EFFICIENCY VARIANCE

It compares the actual labour time taken to carry out an activity with the standard time
allowed and values the difference at the standard direct labour rate per hour.
Labour Efficiency Variance = (Standard Labour Hours – Actual Labour Hours) x

Standard Labour Rate
TOTAL LABOUR VARIANCE

It is the difference between the total standard cost of the labour and the total actual cost of
the labour.
Total Labour Variance = Total Standard Cost – Total Actual Cost
OR
Total Labour Variance = Labour Price Variance + Labour Efficiency Variance
OVERHEAD VARIANCE
The total variance that arises in respect of fixed and variable overheads; it represents the
difference between the standard overhead recovered for the actual units produced and the
actual overhead incurred for a period.
Overhead Variance = Total Standard Cost – Total Actual Cost
(There are many overhead variances but are not relevant according to the examination
point of view but still showing their formulas).
Fixed Overhead Capacity Variance = Budgeted Expenditure – (Actual Hours x

Fixed Overhead Absorption Rate per Hour)
Fixed Overhead Efficiency Variance = (Standard Hours for Actual Production x

Fixed Overhead Absorption Rate per Hour) –
(Actual Hours x Fixed Overhead Absorption
Rate per Hour)
Fixed Overhead Expenditure Variance = Actual Expenditure – Budgeted Expenditure
Fixed Overhead Volume Variance = Budgeted Expenditure – (Actual Units x

Fixed Overhead Absorption Rate per Unit)
OR
Fixed Overhead Volume Variance = Budgeted Expenditure – (Standard Hours for
Actual Production x Fixed Overhead
Absorption Rate per Standard Hour)
Variable Overhead Expenditure Variance = (Standard Rate – Actual Rate) x Actual

Hours
Variable Overhead Efficiency Variance = (Standard Hours – Actual Hours) x

Standard Rate
Page 260
Standard Costing
Chapter # 11
GENERAL ENTRIES
 Material:
Work in process (standard quantity x standard rate) DR. (standard cost)
Material price variance DR. (unfavourable)
Material quantity variance CR. (favourable)
Raw materials (actual quantity x actual rate) CR. (actual cost)
---------------------------------------------------------------------------------------------------------------
 Labour:
Work in process (standard hours x standard rate) DR. (standard cost)
Labour price variance DR. (unfavourable)
Labour efficiency variance CR. (favourable)
Accrued payroll (actual hours x actual rate) CR. (actual cost)
-----------------------------------------------------------------------------------------------------------------
 Overhead:
Work in process DR. (with total standard cost)
Overhead variance DR. (unfavourable variance)
Factory overhead CR. (total actual cost)
-----------------------------------------------------------------------------------------------------------------
 Closing Unfavourable Material Price Variance:

Cost of goods sold DR. (with material price variance)
Material price variance CR. (material price variance)
-----------------------------------------------------------------------------------------------------------------
 Closing Favourable Material Quantity Variance:

Material quantity variance DR. (with material quantity variance)
Cost of goods sold CR. (material qty. variance)
-----------------------------------------------------------------------------------------------------------------
 Closing Unfavourable Labour Rate Variance:

Cost of goods sold DR. (with labour rate variance)
Labour rate variance CR. (with labour rate variance)
-----------------------------------------------------------------------------------------------------------------
 Closing Favourable Labour Efficiency/Hour Variance:

Labour efficiency variance DR. (with labour efficiency variance)
Cost of goods sold CR. (labour efficiency variance)
-----------------------------------------------------------------------------------------------------------------
 Closing Unfavourable Factory Overhead Variance:

Cost of goods sold DR. (with factory overhead variance)
Factory overhead variance CR. (factory overhead variance)
-----------------------------------------------------------------------------------------------------------------
Page 261
Standard Costing
Chapter # 11
ILLUSTRATION # 1: (VARIANCE)
The standard cost and the actual cost data of KA Manufacturing Company were as under:
Standard Actual
Materials 15,000 units at Rs.6.00 per unit 16,000 units at Rs.5.70 per unit
Labour 5,000 hours at Rs.8.00 per hour 4,800 hours at Rs.8.50 per hour
Factory Overhead Rs.69,000 Rs.62,000
REQUIRED
(a) Determine:
(1) Material price variance and material quantity variance.
(2) Labour rate variance and labour time variance.
(3) Overhead variance.
(b) Record the above transactions in the General Journal.
(c) Prepare General Journal entries closing the variance accounts.
SOLUTION # 1:
Computation of Material Price Variance:
Material price variance = (Standard price – Actual price) x Actual quantity
Material price variance = (6.00 – 5.70) x 16,000
Material price variance = 4,800 (Favourable)
Computation of Material Quantity Variance:

Material quantity variance = (Standard quantity – Actual quantity) x Standard price
Material quantity variance = (15,000 – 16,000) x 6.00
Material quantity variance = (6,000) (Unfavourable)
Computation of Labour Rate Variance:

Labour rate variance = (Standard price – Actual price) x Actual hours
Labour rate variance = (8.00 – 8.50) x 4,800
Labour rate variance = (2,400) (Unfavourable)
Computation of Labour Time Variance:

Labour time variance = (Standard hours – Actual hours) x Standard price
Labour time variance = (5,000 – 4,800) x 8.00
Labour time variance = 1,600 (Favourable)
Computation of Factory Overhead Variance:

Factory overhead variance = Standard cost – Actual cost
Factory overhead variance = 69,000 – 62,000
Factory overhead variance = 7,000 (Favourable)
KA Manufacturing Company
General Journal
1 Work in process (15,000 x 6.00) 90,000
Material quantity variance 6,000
Material price variance 4,800
Raw material (16,000 x 5.70) 91,200
(To record the material price and quantity
variance)
Page 262
Standard Costing
Chapter # 11
General Journal
2 Work in process (50,000 x 8.00) 40,000
Labour rate variance 2,400
Labour efficiency variance 1,600
Accrued payroll (4,800 x 8.50) 40,800
(To record the labour rate and efficiency
variance)
Factory overhead variance 7,000
(To record the factory overhead variance)
Closing Entries
1 Material price variance 4,800
Labour efficiency variance 1,600
(To close the all variances)
ILLUSTRATION # 2: (STANDARD COST)

The actual costs and variance for direct materials, direct labour and factory overhead for
the month of September are given below:-
Actual Cost Unfavourable Favourable
(Rs.) Variance (Rs.) Variance (Rs.)
Quantity variance 10,000
Price variance 9,000
Hours variance 13,000
Rate variance 17,000
Overhead variance 25,000
REQUIRED
(a) Compute the standard costs of direct material, direct labour and factory overhead.
(b) Give the entries in General Journal to record the actual and standard costs and their
variances.
Page 263
Standard Costing
Chapter # 11
SOLUTION # 2:
Computation of Direct Material Standard Cost:
Direct materials standard cost = Material actual cost + Favourable variance –
Unfavourable variance
Direct materials standard cost = 150,000 + 10,000 – 9,000
Direct materials standard cost = Rs.151,000
Computation of Direct Labour Standard Cost:

Direct labour standard cost = Labour actual cost + Favourable variance –
Direct labour standard cost = 200,000 + 17,000 – 13,000
Direct labour standard cost = Rs.204,000
Computation of Factory Overhead Standard Cost:

Factory overhead standard cost = Factory overhead actual cost + Favourable variance –
Factory overhead standard cost = 210,000 – 25,000
Factory overhead standard cost = Rs.185,000
M/S. _____________
General Journal
For the Month of September
Material price variance 9,000
(To record the material price and quantity
variance)
Labour hours variance 13,000
(To record the labour rate and efficiency
variance)
(To record the factory overhead variance)
Page 264
Standard Costing
Chapter # 11
ILLUSTRATION # 3: (ACTUAL COST)

The standard cost and variances of direct materials, direct labour and factory overhead for
the month of August are given below:
Standard Cost Variances
(Rs.) Unfavourable (Rs.) Favourable (Rs.)
Direct materials 300,000

Rate variance 3,000
Usage variance 13,000

REQUIRED
Determine the actual cost incurred during the month of August for direct materials, direct
labour and factory overhead.
SOLUTION # 3:
Computation of Actual Cost of Direct Materials:
Actual cost of direct material = Material standard cost + Unfavourable variance
– Favourable variance
Actual cost of direct material = 300,000 + 7,000 – 5,000
Actual cost of direct material = Rs.302,000
Computation of Actual Cost of Direct Labour:

Actual cost of direct labour = Labour standard cost + Unfavourable variance –
Favourable variance
Actual cost of direct labour = 260,000 + 13,000 – 3,000
Actual cost of direct labour = Rs.270,000
Computation of Actual Cost of Factory Overhead:

Actual cost of factory overhead = Standard factory overhead cost + Unfavourable
variance – Favourable variance
Actual cost of factory overhead = 290,000 – 10,000
Actual cost of factory overhead = Rs.280,000
Page 265
Standard Costing
Chapter # 11
PRACTICE QUESTIONS
Question # 1:
The standard and actual cost data of Thatta Silk Mills Limited are as follows:
Standard Actual
Direct material: 22,000 units at Rs.4.00/- 21,560 units at Rs.3.50/-
Direct labour: 11,000 hours at Rs.6.00/- 13,200 hours at Rs.6.50/-
REQUIRED
a) Compute:
i) Material price variance and material quantity variance.
ii) Labour rate variance and labour time variance.
iii) Overhead variance.
b) General Journal entries to record the above information and to close the variance
accounts.
Question # 2:
The standard and actual data of Asif Co. are as follows:
Standard Actual
Direct material 36,000 units @ Rs.4.00 per unit 34,800 units @ Rs.4.50 per unit
Direct labour 14,400 hours @ Rs.10.00 per hour 15,600 hours @ Rs.10.60 per hour
REQUIRED
(1) Material price variance (2) Material quantity variance
(3) Labour rate variance (4) Labour time variance
(5) Pass journal entries for recording of variances with actual and standard costs.
Question # 3:
The standard and actual cost data of Arif Co. are as follows:
Standard Actual
Direct material 26,000 units @ Rs.4.00 per unit 25,480 units @ Rs.3.50 per unit
Direct labour 13,000 hours @ Rs.10.00 per hour 14,300 hours @ Rs.10.50 per hour
REQUIRED
(3) Labour rate variance (4) Labour time variance
(5) Journal entries for recording of variances with actual and standard cost.
Question # 4:
The standard and actual cost data of Ahmed Limited is as follows:
Standard
Direct material 14,000 units @ Rs.4.00 per unit
Direct labour 7,000 hours @ Rs.6.00 per hour
Actual
Direct material 13,720 units @ Rs.3.50 per unit
REQUIRED
(a) Material price variance and material quantity variance.
(b) Labour rate variance and labour time variance.
(c) General Journal entries to record the above information and to close the variance
accounts.
Page 266
Standard Costing
Chapter # 11
Question # 5:
Standard and actual costs for direct materials and direct labour are given as under:
Standard Cost
Direct materials 12,000 units at Rs.5.00 per unit
Direct labour 10,500 hours at Rs.6.00 per hour
Actual Cost
Direct materials 12,750 units @ Rs.4.50 per unit
REQUIRED
(a) Material price variance and material quantity variance.
(b) Labour rate variance and labour time variance.
(c) General Journal entries to record the above information and to close the variance
accounts.
Question # 6:
The standard costs and actual costs of direct materials and direct labours in the production
of 32,000 units of product “R” by Rashid Manufacturing Company during October 1994 are
summarized below:
Material
Standard 64,000 units @ Rs.3.00 per unit
Actual 65,920 units @ Rs.3.12 per unit
Labour
Standard 51,200 hours @ Rs.4.00 per hour
Actual 50,560 hours @ Rs.4.20 per hour
REQUIRED
(a) Compute the material price variance and material quantity variance and overall
material variance.
(b) Compute the labour wage variance, labour efficiency variance and overall labour
variance.
(c) General Journal entries.
Question # 7:
The standard cost and the actual cost data of Kamal Azfar Manufacturing Company were as
under:
Standard Actual
Materials 34,000 units at Rs.3.00 per unit 34,850 units at Rs.2.80 per unit
Labour 51,000 hours at Rs.4.00 per hour 50,660 hours at Rs.4.20 per hour
Factory Overhead Rs.165,000 Rs.105,000
REQUIRED
(a) Determine:
(b) Record the above transactions in the General Journal.
(c) Prepare General Journal entries closing the variance accounts.
Page 267
Standard Costing
Chapter # 11
Question # 8:
The standard and actual cost data of Mustafa Ltd. are as follows:
Standard Actual
Direct materials 9,000 Kg. @ Rs.10.00 10,800 Kg. @ Rs.12.00
Direct labour 3,600 hours @ Rs.5.50 3,240 hours @ Rs.6.00
Factory overhead Rs.90,000 Rs.90,000
REQUIRED
(a) Calculate:
(b) Give journal entries to record the above information and to close the variance
account.
Question # 9:
The standard and actual costs data of Auranzeb Ltd. are as follows:
Standard Actual
Direct materials 19,000 units @ Rs.4.00/= 18,620 units @ Rs.3.50/=
Direct labour 9,500 hours @ Rs.6.00/= 11,400 hours @ Rs.6.50/=
Factory overhead 50% of direct labour Rs.28,000
REQUIRED
(a) Calculate:
account.
Question # 10:
The following data relate to Salman Manufacturing Ltd.
Standard Actual
Materials 16,000 units @ Rs.6.20/= per unit 14,400 units @ Rs.6.30/= per unit
Labour 8,000 hours @ Rs.11.50/= per hour 10,000 hours @ Rs.11.10/= per hour
Overhead 80% of direct labour Rs.85,000
REQUIRED
(a) Calculate:
account.
Page 268
Standard Costing
Chapter # 11
Question # 11:
Rashid Product Co. uses standard costs system. The cost data for various elements of cost
for manufacturing of 8,800 units is following:
Standard Actual
Direct material 5,500 units @ Rs.8.00 5,280 units @ Rs.9.00
Direct labour 2,200 hours @ Rs.11.00 2,530 hours @ Rs.12.00
REQUIRED
Calculate:-
i) Material quantity variance & material price variance.
ii) Labour time variance & labour rate variance.
iii) Factory overhead variance.
Question # 12:
Aftab Sports Company uses standard costs system. The cost data for various elements of
cost for manufacture of 17,760 footballs is as following:
Standard Actual
Direct material 6,000 units @ Rs.70 per unit 5,760 units @ Rs.75 per unit
Direct labour 2,400 hours @ Rs.100 per hour 2,760 hours @ Rs.110 per hour
All costs are charged to work in process at standard and separate variances accounts are
established.
There is no beginning or ending inventory of work in process.
REQUIRED
(a) Calculate:
i) Material quantity variance & material price variance.
ii) Labour time variance & labour rate variance.
iii) Factory overhead variance.
(b) Give journal entries to record the above information and also give entries to close
the variances accounts.
(c) Compare the actual cost of one football with its standard cost.
Question # 13:
Sachal Products uses standard cost system. Following data extracted from their records:
Standard
Raw material Costing Rs.130,000 (for 26,000 bags) of one KG each
Factory overhead 120% of direct labour cost
Actual
Raw material 26,650 bags of one KG @ 5.10 each KG
REQUIRED
(a) Calculate:
(3) Labour rate variance (4) Labour efficiency variance
(5) Factory overhead variance (6) Overall variance
(b) Record entries of the above variances and one entry to close all variances.
Page 269
Standard Costing
Chapter # 11
Question # 14:
Irfan Co. provided following standard and actual cost data for the month of June, 2007:
Standards
Materials 7,000 Kgs @ Rs.1.50
Labour 7,000 hours @ Rs.3.50
Factory overheads Rs.2.70 per labour hour
Actual
Materials 6,860 Kgs @ Rs.1.80
Labour 7,140 hours @ Rs.3.60
Factory overheads Rs.20,720
REQUIRED
(1) Compute material price variance, material quantity variance, labour rate variance,
labour efficiency variance and overhead variance.
(2) General Journal entries for the above.
(3) General Journal entries to close the variance accounts.
Question # 15:
Riaz process standard and actual cost data for the single product they manufacture, for the
month of September 1992 are as follows:
Standards
Materials 7,500 Kgs @ Rs.1.60 per Kg
Labour 7,500 hours @ Rs.3.60 per hour
Factory overheads Rs.2.80 per labour hour
Actual
Materials 7,350 Kgs @ Rs.1.90 per Kg
Labour 7,650 hours @ Rs.3.70 per hour
Factory overheads Rs.22,350
REQUIRED
(1) Compute material price variance, material quantity variance, labour rate variance,
labour efficiency variance and overhead variance.
(2) General Journal entries for the above.
(3) General Journal entries to close the variance accounts.
Question # 16:
Top Products Co. uses standard cost system. Following data are taken from its cost
accounting records:
Standard Actual
Raw material Rate per unit Rs.6.00 Rate per unit Rs.6.20
Total cost Rs.86,400/= Quantity 14,720 units
Direct labour Wage per hour Rs.11.00 Wage per hour Rs.10.50
Total labour hours 16,000 Total labour cost Rs.174,400/=
Factory overhead 80% of direct labour cost Total cost Rs.144,000/=
REQUIRED
a) Calculate:
(1) Material price variance. (2) Material quantity variance.
(3) Labour wage variance. (4) Labour efficiency variance.
(5) Factory overhead variance.
b) Give entries in general journal to record actual and standard costs of direct
materials, direct labour and factory overhead and their variance.
Page 270
Standard Costing
Chapter # 11
Question # 17:
Following information has been extracted from the cost records of Mahrukh Pharma
Company:
Standard Cost:
Material Labour Factory Overhead
17,000 units at the rate of 22,100 hours at the rate of Rs.2.50 per direct labour
Rs.7 per unit Rs.9 per hour hour
Actual Cost:
Material Labour Factory Overhead
20,400 units at the rate of 21,250 hours at the rate of 1/5 of direct labour hour at
Rs.6 per unit Rs.8 per hour the rate of Rs.6
REQUIRED
(a) Compute Material Price and Quantity Variance.
(b) Compute Labour Rate and Time Variance.
(c) Factory Overhead Variance.
Question # 18:
Following information relate to business of Zaitoon Co.
 The actual direct material 90,000 units @ Rs.6.
 The direct material price variance Rs.5,760 adverse (unfavourable).
 The direct material quantity variance Rs.7,380 favourable.
REQUIRED
Compute the amount of standard cost and prepare necessary journal entry.
Question # 19:
Variances
Standard Cost (Rs.)
Favourable (Rs.) Unfavourable (Rs.)
Factory overhead cost 152,000 - -
Controllable variance - 9,500 -
Volume variance - - 15,200
REQUIRED
i) Determine actual factory overhead cost.
ii) Record factory overhead cost and its variance in general journal.
Question # 20:
The following are actual costs and variances for direct materials and direct labour for the
month of April 1996:-
Rate variance 9,000
Efficiency variance 21,000
REQUIRED
1) Standard cost of direct material and direct labour.
2) Entries in General Journal to record the above information and to close the variance
account.
Page 271
Standard Costing
Chapter # 11
Question # 21:
The actual costs and variance for direct materials, direct labour and factory overhead for
the month of October are given below:-
Hours variance 6,600
Rate variance 8,800
Overhead variance 11,000
REQUIRED
(a) Compute the standard costs of direct material, direct labour and factory overhead.
(b) Give the entries in General Journal to record the actual and standard costs and their
variances.
Question # 22:
The following are standard costs and variances for direct materials and direct labour for the
month of September 1996:
Variances
Standard Cost (Rs.)
Unfavourable (Rs.) Favourable (Rs.)
Direct materials 216,000 - -
Price variance - 10,800 -
Quantity variance - - 6,480
Direct labour 432,000 - -

Rate variance - - 4,320
Efficiency variance - 12,960 -
REQUIRED
1) Actual cost of direct material and direct labour.
2) Entries in General Journal to record the above information and to close the variance
account.
Page 272
Standard Costing
Chapter # 11
Question # 23:
The standard cost and variances of direct materials, direct labour and factory overhead for
the month of November are given below:
Variances
Standard Cost (Rs.)
Direct materials 78,000

Rate variance 1,560
Usage variance 7,020

Controllable variance 3,120
Volume variance 4,680
REQUIRED
Determine the actual cost incurred during the month of November for direct materials,
direct labour and factory overhead.
Question # 24:
The standard costs and variances for July 2005 are as follows:
Variances
Standard Cost (Rs.)
Direct materials 1,260,000
Direct labour 2,520,000
Rate variance 25,200
Factory overhead 3,780,000
Spending variance 50,400
Volume variance 33,600
REQUIRED
(a) Actual costs for:
(1) Direct materials (2) Direct labour (3) Factory overhead
(b) Entries in general journal:
(i) To record the above information.
(ii) To close the variance accounts.
Page 273
Standard Costing
Chapter # 11
Question # 25:
A manufacturer uses a standard cost system. The per unit cost of production, assuming a
normal volume of 1,500 units per month is as follows:
Unit Cost (Rs.)
Direct material 15kg @ Rs.13 per kg 190
Direct labour 5 hours @ Rs.8 per hour 40
Factory Overhead Applied:
Fixed cost (22,500 ÷ 1,500) 15
Variable cost 7
252
During the month the products were produced at the following actual cost.
Unit Cost (Rs.)
Direct material 16.5kg @ Rs.12 per kg 198.00
Direct labour 9 hours @ Rs.7.80 per hour 70.20
Factory overhead Rs.27,720 for 1,200 units 23.10
291.30
REQUIRED
(a) Compute: Material price & quantity, labour rate & efficiency and factory overhead
controllable and volume variances.
(b) Prepare journal entries to record variances.
Question # 26:
The standards price for materials in manufacturing items Y is one pound at Rs.40. During
the current month 5,000 units of item Y were produced and 5,100 pounds of materials
costing Rs.214,200 were used. Analyze the variance between actual cost and standard in
such a way as to show how much of it was attributable to price change and how much the
excess quantity of materials used. Indicated whether the variances are favourable or
unfavourable.
Page 274
Chapter # 12
Process Costing
Cost Accounting
Process Costing
Chapter # 12
Syllabus ACCORDING TO UNIVERSITY OF KARACHI:
 Process costing.
 Procedure of process costing (FIFO method) cost by department.
 Product flow.
 Cost of production report.

 Computation of:
o Equivalent production units.
o Unit cost and total per unit cost.
o Cost of units completed and transferred out.
o Cost of work in process ending inventory.
 Cost of production report.
 General entries.
Page 276
Process Costing
Chapter # 12
PROCESS COSTING
A costing system sometimes applied to production carried out by a series of chemical or
operational stages or processes. Its characteristics are that costs are accumulated for the
whole production process and that average unit costs of production are computed at each
stage. Special rules are applied in process costing to the valuation of work in process,
normal loss and abnormal losses.
EQUIVALENT UNITS
Unfinished units of production that remain in a process at the end of a period as work in
process are called equivalent units. Degree of completion are assigned to each cost
classification, which, when applied to the number of units in work in process, give an
equivalent number of completed units. The equivalent units have an impact on the
valuation of opening and closing work in process.
EQUIVALENT PRODUCTION UNITS

Material Labour Overhead
Particulars Equivalent Equivalent Equivalent
Units Units Units
Units completed & transferred to next XXX XXX XXX
department/finished goods
Add: Work in process (ending):
(WIP ending units x % of completion)
Direct material XXX
Direct labour XXX
Factory overhead XXX
Work in process during the period XXX XXX XXX
Less: Work in process (beginning)
(WIP opening units x % of completion)
Direct material (XXX)
Direct labour (XXX)
Factory overhead (XXX)
Equivalent production in units XXX XXX XXX
PER UNIT COST AND TOTAL PER UNIT COST

Equivalent
Particular Cost Per Unit Cost
Units
Cost from preceding department XXX XXX
Direct material XXX XXX XXX
Direct labour XXX XXX XXX
Factory overhead XXX XXX XXX
Total per unit cost XXX XXX
Page 277
Process Costing
Chapter # 12
STATEMENT OF UNITS COMPLETED AND TRANSFERRED TO NEXT

DEPARTMENT / FINISHED GOODS
Cost of Work in Process Opening Inventory:
Cost b/d from last month XXX
Add: Cost Applied During This Month From Work in Process Beginning:
(WIP opening units x % of completion x unit cost of element)
Direct material XXX
Direct labour XXX
Total cost applied during this month from work in process beginning XXX
Total cost of work in process beginning inventory XXX
Add: Remaining Units Completed During This Month:
(Units completed – WIP opening units) x Unit cost
Total cost of remaining units completed XXX
Total cost of units completed and transferred to next department/finished goods XXX
STATEMENT OF COST OF WORK IN PROCESS ENDING INVENTORY

Cost from preceding department XXX
Add: Cost Incurred by This Department:
(WIP ending units x % of completion) x unit cost of element
Direct material XXX
Direct labour XXX
Cost of work in process ending inventory XXX
COST OF PRODUCTION REPORT

Cost of production report is a report prepared periodically by a processing department,
summarizing:
 The units for which the department is accountable and the disposition of those units.
 The costs incurred by the department and the allocation of those costs between
completed and incomplete production.
Page 278
Process Costing
Chapter # 12
Format of Cost of Production Report:

Name of Business
Cost of Production Report
Particulars Department # 1 Department # 2
Quantity Schedule:
Units started XXX
Units received from preceding department XXX
Units completed and transferred out XXX XXX
Units still in process XXX XXX
XXX XXX
Cost Charged to the Department: Total Unit Total Unit

Cost Cost Cost Cost
Cost from Preceding Department:
Transferred in during the month XXX XX
Cost Added by Department:

Material XXX XX XXX XX
Labour XXX XX XXX XX
Factory overhead XXX XX XXX XX
Total cost added XXX XX XXX XX
Total cost to be accounted for XXX XX XXX XX
Cost Accounted for as Follows:

Cost of units completed and transferred out XXX XXX
Cost of Work in Process Ending Inventory:
Cost from preceding department XXX XXX
Material XXX XXX
Labour XXX XXX
Factory overhead XXX XXX
Total cost of work in process ending inventory XXX XXX
Total cost accounted for XXX XXX
ILLUSTRATION # 1: (SINGLE PROCESS DATA)

The following are the production data for Department A for the first month of operation:
Direct labour Rs.195,500
During the month 10,000 units were placed in production; 7,000 units were completed and
the remaining units are 100% completed as to material and 50% completed as to direct
labour and overhead.
REQUIRED
(a) Equivalent units of production.
(b) Unit cost.
(c) Total cost of units completed.
(d) Total cost of units in process at the end of the month.
Page 279
Process Costing
Chapter # 12
SOLUTION # 1:
M/S. _____________
Equivalent Production Units
(Department – A)
For the Month Ended _______
Material Labour Overhead
Particulars Equivalent Equivalent Equivalent
Units Units Units
Units completed & transferred to next 7,000 7,000 7,000
department.
Direct material (3,000 x 100%) 3,000
Direct labour (3,000 x 50%) 1,500
Factory overhead (3,000 x 50%) 1,500
Equivalent production in units 10,000 8,500 8,500
M/S. _____________
Unit Cost
(Department – A)
Particular Cost (Rs.) Equivalent Units Per Unit Cost (Rs.)
Direct material 200,000 10,000 20
Direct labour 195,500 8,500 23
Factory overhead 212,500 8,500 25
Total per unit cost 608,000 68
M/S. _____________
Statement of Cost of Units Completed
(Department – A)
Units Completed During This Month: (Rs.)
Units completed x Unit cost
Total cost of units completed (7,000 x 68) 476,000
Total cost of units completed and transferred to next department 476,000
M/S. _____________
Statement of Cost of Work in Process Ending
(Department – A)
Cost Incurred by This Department:
(WIP ending units x % of completion) x unit cost of element (Rs.)
Direct material (3,000 x 100%) x 20 60,000
Direct labour (3,000 x 50%) x 23 34,500
Factory overhead (3,000 x 50%) x 25 37,500
Cost of work in process ending inventory 132,000
Page 280
Process Costing
Chapter # 12
ILLUSTRATION # 2: (SINGLE PROCESS WITH BEGINNING INVENTORY)

The following information is taken from the books of Pak Steel Mills for department I for the
month of March 2001.
Cost of units in process on March 1, 2001 Rs.40,000
Cost of material placed in production Rs.177,600
The data extracted from the production report relating to above process are as follows:
Units in process on March 1, 2001
(80% complete as to material & 50% as to conversion cost) 4,000 units
Units placed in production during March, 2001 22,000 units
Units in hand on March 31, 2001
(90% complete as to material & 75% complete as to conversion cost) 6,000 units
REQUIRED
(a) Equivalent production units.
(b) Per unit cost.
(c) Total cost of units in process on 31 March 2001.
(d) Total cost of units transferred out to department II.
(e) Give necessary General Journal entry to record the transfer of units from
department I to department II.
SOLUTION # 2:
Computation of Number of Units Completed:
Work in process beginning inventory in units 4,000
Add: Units placed in production 22,000
Total work in process during the period 26,000
Less: Work in process ending inventory in units (6,000)
Number of units completed 20,000
Pak Steel Mills

Equivalent Production Units
(Department I)
For the Period March 2001
Particulars Material Labour Overhead
Equivalent Equivalent Equivalent
Units Units Units
Units completed & transferred to next 20,000 20,000 20,000
department
Direct labour (6,000 x 75%) 4,500
Work in process during the period 25,400 24,500 24,500
Less: Work in process (opening):
Direct material (4,000 x 80%) (3,200)
Direct labour (4,000 x 50%) (2,000)
Factory overhead (4,000 x 50%) (2,000)
Page 281
Process Costing
Chapter # 12
Pak Steel Mills
Per Unit Cost
(Department I)
Particular Cost Equivalent Units Per Unit Cost
Direct material 177,600 22,200 8.00
Direct labour 112,500 22,500 5.00
Factory overhead 135,000 22,500 6.00
Total per unit cost 425,100 19.00
Pak Steel Mills

Statement of Work in Process Ending Inventory
(Department I)
Direct material (6,000 x 90% x 8) 43,200
Direct labour (6,000 x 75% x 5) 22,500
Factory overhead (6,000 x 75% x 6) 27,000
Pak Steel Mills

Statement of Units Completed & Transferred to Next Department
(Department I)
Cost b/d from last month 40,000
Direct labour (4,000 x 50% x 5) 10,000
Total cost applied during this month from work in process beginning 28,400
Total cost of work in process beginning inventory 68,400
Total cost of remaining units completed (16,000 x 19) 304,000
Total cost of units completed and transferred to next department 372,400
Pak Steel Mills

General Journal
1 Work in process – Department II 372,400
Work in process – Department I 372,400
(To record the units completed and transferred to
next department)
Page 282
Process Costing
Chapter # 12
ILLUSTRATION # 3: (COST OF PRODUCTION REPORT)

ABC Company’s department “B” costs for January, 2003 were as follows:
Cost from department “A” Rs. 5,000
Cost added in department “B”
Material Rs. 20,000
Labour 25,200
The quality schedule shows 10,000 units received during the month from department “A”,
6,000 units were transferred to finished goods; and 4,000 units in process at the end of
January were 100% complete as to material and 60% complete as to conversion cost.
REQUIRED
Prepare cost of production report.
SOLUTION # 3:
ABC Company
Cost of Production Report
For the Period January 2003
Particulars Department – B
Quantity Schedule:
Units received from department – A 10,000
Units completed and transferred out 6,000
Units still in process 4,000
10,000
Cost Charged to the Department - B: Total Cost Unit Cost
Cost from Department - A:
Transferred in during the month (5,000 / 10,000) 5,000 0.50
Cost Added by Department – B:

Material (20,000 / 10,000) 20,000 2.00
Labour (25,200 / 8,400) 25,200 3.00
Factory overhead (33,600 / 8,400) 33,600 4.00
Total cost added 78,800 9.00
Total cost to be accounted for 83,800 9.50
Cost Accounted for as Follows:

Cost of units completed and transferred out (6,000 x 9.50) 57,000
Cost of Work in Process Ending Inventory:
Cost from department – A(4,000 x 0.5) 2,000
Material (4,000 x 100% x 2.00) 8,000
Labour (4,000 x 60% x 3.00) 7,200
Factory overhead (4,000 x 60% x 4.00) 9,600
Total cost of work in process ending inventory 26,800
Total cost accounted for 83,800
Page 283
Process Costing
Chapter # 12
ABC Company
Equivalent Production Unit
(Department – B)
For the Period January 2003
Equivalent Equivalent Units Equivalent Units
Units
Units completed & transferred out 6,000 6,000 6,000
(WIP ending units x % of
completion)
Direct labour (4,000 x 60%) 2,400
ILLUSTRATION # 4: (MULTIPLE DEPARTMENTS DATA)

The following information relates to the goods in process No. 3 of Mustafa Manufacturing
for the month of November 2004:
Goods in process inventory beginning (40,000 units 100% complete as to Rs.774,000
material and 75% complete as to conversion cost)
Cost of 140,000 units transferred in from process No. 2 during November Rs.1,400,000
Manufacturing cost added in process No. 3, during November:
Direct material Rs.560,000
Rs.3,734,000
On November 30, 50,000 units are still in process No. 3 which is 100% complete as to
material and 50% complete as to conversion cost.
REQUIRED
(a) Compute:
(1) Equivalent units of production.
(2) Cost per unit.
(3) Cost of units transferred out of finished goods using FIFO.
(4) Cost of units in process on November 30, 2004.
(b) General Journal entries to record:
(1) Transfer of 140,000 units from process No. 2 to process No. 3.
(2) Manufacturing cost added in process No. 3 during November.
(3) Transfer of 130,000 units from process No. 3 to finished goods warehouse.
Page 284
Process Costing
Chapter # 12
SOLUTION # 4:
Mustafa Manufacturing
Equivalent Production Units (Process No. 3)
For the Period Ended November 2004
Equivalent Equivalent Equivalent
Units Units Units
Units completed & transferred to finished 130,000 130,000 130,000
goods
Direct labour (50,000 x 50%) 25,000
Work in process during the period 180,000 155,000 155,000
Less: Work in process (opening):
Direct material (40,000 x 100%) (40,000)
Direct labour (40,000 x 75%) (30,000)
Factory overhead (40,000 x 75%) (30,000)
Per Unit Cost (Process No. 3)
Particular Cost Equivalent Units Per Unit Cost
Cost from process No. 2 1,400,000 140,000 10
Direct material 560,000 140,000 4
Direct labour 250,000 125,000 2
Factory overhead 750,000 125,000 6
Total per unit cost 2,960,000 22
Statement of Units Completed and Transferred to Finished Goods
Process No. 3
Cost b/d from last month 774,000
Direct labour (40,000 x 25% x 2) 20,000
Total cost applied during this month from work in process beginning 80,000
Total cost of work in process beginning inventory 854,000
Total cost of remaining units completed (90,000 x 22) 1,980,000
Total cost of units completed and transferred to finished goods 2,834,000
Page 285
Process Costing
Chapter # 12
Statement of Work in Process Ending Inventory
(Process No. 3)
Cost from process No. 2 (50,000 x 10) 500,000
Direct labour (50,000 x 50% x 2) 50,000
General Journal
1 Work in process (Process 3) 1,400,000
Work in process (Process 2) 1,400,000
to next process)
2 Work in process (Process 3) 1,560,000
(To record the manufacturing cost of process 3)
3 Finished goods 2,834,000
Work in process (Process 3) 2,834,000
to finished goods)
Page 286
Process Costing
Chapter # 12
PRACTICE QUESTIONS
Question # 1:
The following are the production data for Department A for the first month of operation:
During the month 8,250 units were placed in production; 7,700 units were completed and
the remaining units are 100% completed as to material and 30% completed as to direct
labour and overhead.
REQUIRED
(b) Unit cost of material used, labour, and factory overhead.
(d) Total cost of units in process at the end of the month.
Question # 2:
Given below are the production data for department No. 1 for the first month of operation:
Inputs to Department:
Material 1,200 units Rs.120,000
During the first month 960 units were completed and the remaining 240 units were 100%
completed as to material and 75% completed as to conversion cost.
REQUIRED
(b) Unit cost of material used, labour, and factory overhead.
(c) Total cost of 960 units completed.
(d) Total cost of 240 units in process at the end of the month.
Question # 3:
Mansoor Industries Limited uses a process cost system of three processes, the following
data relates to its process – 01:
Beginning inventory Rs.208,000
Direct labour cost used Rs.478,400
Factory overhead cost applied Rs.358,800
The data extracted from a quality schedule relating to the above process are as follows:
Units
Units in process beginning 169,000
(100% complete as to material, 70% as to conversion cost)
Units placed in production 617,500
Units completed 520,000
Units still in process at the end 90% complete as to material and 50% complete as to
conversion cost.
REQUIRED
Compute the equivalent production units, the unit cost, the total cost of unit completed and
the total cost of units in process at end.
Page 287
Process Costing
Chapter # 12
Question # 4:
The following information was taken from the records of Faisal Manufacturing Co. for the
month of January 2006.
Cost of units in process on January 1, 2006 Rs.42,000
Cost of raw material used Rs.113,960
Direct labour cost incurred Rs.90,720
Factory overhead cost incurred Rs.60,480
The data extracted from the production report relating to above process is as follows:
Units in process at end of January 2006 4,200 units
(60% complete as to material and 80% complete as to conversion cost)
Units placed in production during the month 18,200 units
Units in process on January 1, 2006 7,000 units
(40% complete as to material and 60% complete as to conversion cost)
REQUIRED
(a) Equivalent production during the month. (b) Unit cost.
(c) Cost of units completed.
(d) Cost of ending inventory of goods in process.
(e) Journal entries to record cost allocated to production and cost of goods completed
during the month.
(f) Cost of production report.
Question # 5:
The information relate to a production operated by Raza Corporation during the month of
October 2003:
Beginning inventory in process Rs.136,200
Applied factory overhead (90% of direct labour cost) Rs.243,000
Production report for October 2003:
Units in process October 1st
(100% complete as to material 50% complete as to conversion cost) 18,000 units
Units put into process during October 96,000 units
Units completed and transferred to next department 84,000 units
Units in process October 31
REQUIRED
(a) Determine:
(1) Equivalent production in units.
(2) Cost of one unit.
(3) Cost of units transferred to next department. Use FIFO.
(4) The value of units in process on October 31, 2003.
(b) Give journal entries to record the cost allocated to production and the cost of units
completed during October 2003.
(c) Cost of production report.
Page 288
Process Costing
Chapter # 12
Question # 6:
Information relating to goods in process in Frame Department of Sohrab Cycle
Manufacturing Co. during the month of September 1993 is as under:
Beginning inventory in process Rs.72,640
Production Report for September 1993:
Units in process September 1st
Units put into process during September 51,200 units
Units completed and transferred to painting department 44,800 units
Units in process September 30
REQUIRED
(a) Determine:
(3) Cost of units transferred to painting department.
(4) The value of units in process on September 30, 1993.
completed during September 1993.
Question # 7:
Information relating to goods in process in Cap Department of Eagle Pen Manufacturing
Company during the month of August 1992 is as under:
Beginning inventory Rs.25,500
Material cost Rs.127,500
Labour cost Rs.91,290
Overhead cost Rs.60,860
Production Report for August 1992:
Units in process August 1st (80% complete as to material,
70% complete as to labour and overhead) 8,500 units
Units put into process during August 34,000 units
Units completed and transferred to holder department 27,200 units
Units in process August 31 (75% complete as to material,
60% complete as to labour and overhead) 15,300 units
REQUIRED
(a) Determine:
(3) Cost of units transferred to holder department.
(4) The amount of goods in process on August 31.
completed during August 1992.
Page 289
Process Costing
Chapter # 12
Question # 8:
The following information pertains to the goods in process in the lock assembly department
during the month of December 1985:
Beginning inventory of goods in process Rs.39,600
Materials used Rs.142,200
Rs.684,000
Production Report for December:
Units in process December 1 (100% complete as to material and 75%
complete as to labour and factory overhead) 5,400 units
Units put into process during December 72,000 units
Units completed and transferred to painting department 68,400 units
Units in process December 31, (90% complete as to material and 60%
REQUIRED
(a) Determine:
(2) Unit cost for December.
(3) Total cost of units completed.
(4) Cost of units in process on 31 December 1985.
(b) Entry in General Journal to record the transfer of production from the lock assembly
department to the painting department.
Question # 9:
Shafique & Company has one department and uses a process cost system. The following
data related to its process:
Units in process November 1, Units 1,900
(40% complete as to material and 60% complete as to conversion costs)
Cost of units in process November, 1 Rs.24,130
Units placed in production during November Units 7,600
Factory overhead applied Rs.95,760
Units in process November 30 (75% complete as to material and
80% complete as to conversion costs) Units 2,850
REQUIRED
(b) Unit cost for November.
(d) Cost of units in process on November 30.
(e) Cost of production report.
Page 290
Process Costing
Chapter # 12
Question # 10:
The information below relates to a production operated by Noora Corporation during the
month of October 1993:
Units in process October 1, 1993 Units 6,000
(90% completed as to material and 70% completed as to conversion costs)
Cost of units in process October 1, 1993 Rs.25,400
Units placed in production during October 1993 Units 40,000
Factory overhead incurred on account Rs.140,000
Units in process October 31, 1993 (85% complete as to material and
60% complete as to conversion costs) Units 8,000
REQUIRED
(a) Compute equivalent full units completed of materials and conversion costs.
(b) Compute unit cost of material, labour and factory overhead.
(c) Determine cost of transferred units of finished goods inventory (use FIFO method).
(d) Determine cost of ending inventory of goods in process.
(e) Prepare journal entries to record the cost allocated to production, the cost of goods
completed during October 1993.
(f) Cost of production report.
Question # 11:
Iyra Pharma Company processes a product through three distinct stages. The product of
one process is being passed on to the next process and so on to the finished product intact.
Details of the cost incurred in process No. 1 is given below for the month of November
2009.
Cost of units in process on November 1, 2009 Rs.198,000
Direct labour used (125% of factory overhead) Rs.220,000
Factory overhead applied Rs.?
The data extracted from the production report relating to above processes are as follows:
Units in process on November 1, 2009 16,500 units
(60% completed as to material & 80% as to conversion cost)
Units placed in production 44,000 units
Units in process on November 30, 2009 11,000 units
(40% completed as to material & 50% as to conversion cost)
REQUIRED
(b) Per unit cost.
(c) Total cost of units completed and transferred to next process (Process No. 2).
(d) Total cost of units in process on November 30, 2009.
Page 291
Process Costing
Chapter # 12
Question # 12:
The following information is taken from the books of Pak Steel Mills for department I for the
month of March 2001.
Cost of units in process on March 1, 2001 Rs.48,000
Direct labour Rs.?
Factory overhead (120% of direct labour cost) Rs.162,000
The data extracted from the production report relating to above process are as follows:
Units in process on March 1, 2001
(80% complete as to material & 50% as to conversion cost) 4,800 units
Units placed in production during March, 2001 26,400 units
Units in hand on March 31, 2001
(90% complete as to material & 75% complete as to conversion cost) 7,200 units
REQUIRED
(a) Compute:
(1) Equivalent production units.
(2) Per unit cost.
(3) Total cost of units in process on March 31, 2001.
(4) Total cost of units transferred out to department II.
(b) Give necessary General Journal entry to record the transfer of units from
department I to department II.
Question # 13:
Rahat and Co. have the following data, during the month of June 2003:
Units started in production 6,500 Units
Units finished 3,900 Units
Units still in process:
(60% as to material and 40% as to conversion) 1,950 Units
Balance is lost in process (Normal loss)
Material cost Rs. 15,210
Direct labour cost Rs. 18,720
Factory overhead cost Rs. 23,400
REQUIRED
Calculate the cost of finished goods.
Question # 14:
Atique Company’s department “B” costs for January, 2003 were as follows:
Cost from department “A” Rs. 70,000
Cost added in department “B”
Material Rs. 280,000
Labour Rs. 352,800
Factory overhead Rs. 470,400
The quality schedule shows 140,000 units received during the month from department “A”,
84,000 units were transferred to finished goods; & 56,000 units in process at the end of
January were 100% complete as to material and 60% complete as to conversion cost.
REQUIRED
Prepare cost of production report.
Page 292
Process Costing
Chapter # 12
Question # 15:
Babar Manufacturing Company uses a process cost system. The costs of department 2 for
the month of May, 2010 were as follows:
Cost from the proceeding department Rs.300,000
Cost added by the department:
Material cost Rs.324,300
Labour cost Rs.131,100
Factory overhead cost Rs.96,600
The following information was obtained from the department’s quantity schedule:
Units received 75,000 units
Units completed and transferred out 60,000 units
Units still in process (60% completed as to material & conversion cost) 15,000 units
REQUIRED
Prepare a Cost of Production Report of department 2 for May, 2010 using FIFO Method.
Question # 16:
Kamran Manufacturing uses process cost system. The costs of process 2 for the month of
May were as under:
Cost from preceding process Rs. 90,000
Cost Added by the Process:
Material Rs. 98,172
Labour Rs. 34,992
Factory overhead Rs. 18,468
Following information was obtained from the department quantity schedule:
Units received 11,250
Units transferred 9,000
Units still in process 2,250
The degree of completion of work in process was 50% of the units were 40% complete,
20% of the units were 30% complete and the balance of the units was 20% complete.
REQUIRED
(a) Prepare cost of production report for department 2 for May 2006.
(1) Transfer of 11,250 units from preceding department to process 2.
(2) Manufacturing cost added in process 2 during May 2006.
(3) Transfer of 9,000 units from process 2 to finished goods warehouse.
Page 293
Process Costing
Chapter # 12
Question # 17:
The following information pertains to the goods in process No. 3 for the month of December
2007. The company applies FIFO method for inventory valuation:
Goods in process inventory December 1, 2007, 68,000 units 75% complete, cost of
Rs.657,900.
Cost 238,000 units transferred in from process No. 2, during December Rs.1,428,000.
Cost added in process No. 3 during December, direct material Rs.467,500, direct labour
Rs.140,250 and factory overhead Rs.233,750.
On December 31, 85,000 units are still in process No. 3 which is 75% complete as to
materials and 20% complete as to conversion cost.
REQUIRED
Compute:
(a) Number of units completed.
(b) Equivalent units in production.
(c) Cost per unit.
(d) Cost of units completed and transferred to finished goods warehouse.
Question # 18:
The following information pertains to the goods in process No. 3 for the month of
November, 1999:
Goods in process inventory November 1, (72,000 units 100% complete
as to materials and 75% complete as to conversion costs) Rs.696,600
Cost of 252,000 units transferred in from process No. 2 during Nov. Rs.1,260,000
Manufacturing cost added in process No. 3 during November:
Direct material Rs.504,000
REQUIRED
(a) Compute:
(2) Cost per unit.
(3) Cost of units transferred to finished goods warehouse.
(4) Cost of units in process on November 30.
Page 294
Process Costing
Chapter # 12
Question # 19:
The following information relates to the goods in process No. 3 of Mustafa Manufacturing
for the month of November 2004:
Goods in process inventory November 1 (76,000 units 100% complete as Rs.1,470,600
to material and 75% complete as to conversion cost)
Cost of 266,000 units transferred in from process No. 2 during November Rs.2,660,000
Manufacturing cost added in process No. 3, during November
Direct material Rs.1,064,000
Factory overhead Rs.1,425,000
Rs.7,094,600
material and 50% complete as to conversion cost.
REQUIRED
(a) Compute:
(2) Cost per unit.
(3) Cost of units transferred out of finished goods using FIFO.
(4) Cost of units in process on November 30, 2004.
Question # 20:
The following information pertains to the goods in the process No. 3 for November 2005:
Cost of goods in process inventory, November 1, (6,400 units 100% complete as to
materials, and 75% complete as to conversion cost) Rs.779,200
Cost of 22,400 units transferred in from process No. 2 Rs.1,120,000
Manufacturing Costs Added in Process No. 3:
Direct materials Rs.448,000
On November 30, 8,000 units are still in process No. 3, which are 100% complete as to
REQUIRED
(a) Compute:
(2) Cost per unit.
(3) Cost of units transferred to finished goods.
(4) Cost of units in process on November 30.
(b) General journal entries to record:
(2) Manufacturing costs added in process No. 3.
(3) Transfer of 20,800 units from process No. 3 to finished goods.
Page 295
Process Costing
Chapter # 12
Question # 21:
Given below is November’s unit and cost data for a manufacturing firm that uses FIFO
costing:
Department 2
Beginning units in process (55% complete as to direct materials, 15% 162,000 units
complete as to conversion cost)
Work – in – process beginning inventory Rs.567,000
Units transferred in during the period 504,000 units
Cost transferred in this period Rs.705,600
Cost Added During This Period:
Direct materials Rs.975,240
Units transferred out to finished goods inventory godown 516,000 units
Ending units in process (25% complete as to direct material, 70% 150,000 units
complete as to conversion cost)
REQUIRED
(a) Calculate the equivalent units for direct materials and conversion costs.
(b) Prepare cost of production report.
Question # 22:
The following information pertains to the goods in process in the fourth process during the
month of July 1990:
Beginning of goods in process inventory (1.7.1990) Rs.535,700
Cost of units transferred in from the third process during July Rs.385,000
Manufacturing cost incurred in July:
Raw materials used Rs.154,000
Rs.1,613,700
Production Report of Fourth Process for July 1990:
Units in process July 1, 1990 (100% complete as to material and 75%
Units transferred in from the third process during July 77,000 units
Units completed and transferred to finished goods store 99,000 units
Units in process July 31, 1990 (100% complete as to material and 50%
REQUIRED
(a) Determine:
(2) Unit cost for July 1990.
(3) Total cost of units completed.
(4) Cost of units in process on 31 July 1990.
(b) Entries in General journal to record:
(1) Transfer of 77,000 units from the third process in the fourth process.
(2) Transfer of 99,000 completed units from the fourth process to the finished
goods store.
Page 296
Process Costing
Chapter # 12
Question # 23:
The production and cost data of Alamgir Company for process No. 3 for the period ended 31
December 1988 is as under:
Units Cost (Rs.)
Beginning goods in process (20% completed) 13,000 54,600
Material received from process No. 2 104,000 1,040,000
117,000 2,225,600
Completed and transferred to finished goods store 97,500 ?
Ending goods in process (60% completed) 19,500 ?
REQUIRED
Supported by computation determine the missing cost data (use FIFO basis).
Question # 24:
A manufacturing concern produced a product in three processes, the information of which
is as under:
Process I Process II Process III
Transferred to next process 2/3 60% ---
Transferred to warehouse for sale 1/3 40% 100%
In each process 4% of the total weight put in is lost and 6% is scrap, which from Process I
realized Rs.3 per Lb. from Process II Rs.5 per Lb. and from Process III Rs.6 per Lb.
The following particular rates are applied:
Raw Material Used:
Process I 19,600 Lbs. at Rs.10/= per Lb.
Process II 2,240 Lbs. at Rs.16/= per Lb.
Process III 17,640 Lbs. at Rs.7/= per Lb.
Manufacturing Wages and Expenses:
Process I Rs.72,128
Process II Rs.43,960
Process III Rs.40,530
REQUIRED
Prepare process accounts showing the cost per Lb.
Question # 25:
Nasr Medicine Inc. uses two processing departments (department X and department Y) to
manufacture its products. The cost accounting department obtained the following
information for the month of September, 2009:
Department X Department Y
Beginning units in process --- ---
Units started in process 60,000 Units ---
Units received from other department --- 52,500 Units
Ending units in process 7,500 Units 7,500 Units
Cost Added by Departments: Rupees: Rupees:
Direct material 47,250 ---
Factory overhead applied 32,550 20,160
Page 297
Process Costing
Chapter # 12
Work in Process Ending:
Material 100% ---
Conversion cost 1/5 2/3
REQUIRED
(a) Determine the equivalent units of production for each department and unit cost of
product at each department.
(b) Pass the entries in the General Journal for goods completed and transferred to
finished goods.
Question # 26:
Shahjahan Company processes its goods successively in process – A and process – B and
then transfers to finished goods godown. Its records show the following information for the
month of June 1998:
Process – A Process – B
Cost of goods in process (1 June) Rs.24,000 ---
Raw material used Rs.100,800 Rs.54,400
Direct labour used Rs.86,400 Rs.108,800
Factory overhead applied on the basis of direct labour 50% 100%
Production Reports for June:
Units in process – 1 June (1/3 complete) 4,800 units ---
Units completed and transferred out 16,000 units 12,800 units
Units in process – 30 June (1/4 complete) --- 3,200 units
REQUIRED
(a) Equivalent full units of production in process – A and process – B.
(b) Unit cost in process – A and process – B.
(c) Cost of units transferred out of process – A and process – B.
Question # 27:
One of the primary products of Tariq Ltd. is Photorex, a product which is processed in
Department – A and Department – B and then transferred to the company’s sales
warehouse. The flow of product through the departments during the month of December
1996 is shown below:
Department – A
Goods in Process
Input 51,000 units To Department – B 42,500 units
Department – B
Goods in Process
From Department – A 42,500 units To sales warehouse 35,700 units
Departmental manufacturing costs applicable to Photorex production for the month of

December 1996 were as follows:
Page 298
Process Costing
Chapter # 12
Department – A (Rs.) Department – B (Rs.)
Factory overhead 23,800 47,736
Unfinished goods in each department at the end of December 1996 were on the average
60% complete with respect to both raw material and processing cost.
REQUIRED
(a) Determine the equivalent full units of production in each department during
December 1996.
(b) Compute unit production cost in each department during December 1996.
(c) Prepare journal entries to record transfer to product out of Department – A and
Department – B during December 1996.
Question # 28:
One of the primary products of Omark Company is Omacron, a product which is processed
successfully in Department – F and Department – G and then transferred to the company’s
sales warehouse. The flow of product through the departments during the month of August
1993 is shown below:
Department – F
Goods in Process
Input 36,000 units To Department – G 28,800 units
Department – G
Goods in Process
From Department – F 28,800 units To sales warehouse 25,200 units
Departmental manufacturing costs applicable to Omacron production for the month of

August 1993 were as follows:
Department – F (Rs.) Department – G (Rs.)
Factory overhead 8,100 6,750
Unfinished goods in each department at the end of August 1996 were on the average 50%
complete both with respect to raw materials and processing cost.
REQUIRED
(a) Determine the present status of the 36,000 units put into production in Department
– F during August.
(b) Determine the equivalent completed units of production in Department – F and
Department – G.
(c) Compute unit production costs in each department during August.
(d) Prepare the necessary journal entries to record.
Page 299
Process Costing
Chapter # 12
Question # 29:
The following given information have been obtained from the cost accounts of a factory
producing a commodity in the manufacture of which 3 processes are involved with the facts
that:
(a) The operation in each separate process is completed daily.
(b) The value of which units are to be charged to process – B and C is the cost per unit of
process – A thus B respectively.
Process A (Rs.) B (Rs.) C (Rs.)
Direct wages 192,000 360,000 877,500
Raw material used 720,000 --- ---
Machine expenses 108,000 90,000 108,000
Manufacturing overhead 60,000 67,500 72,000
Units Units Units
Production (Gross) 1,110,000 --- ---
Wastage 30,000 45,000 15,000
Inventory 1 January 1994 --- 120,000 495,000
Inventory 31 December 1994 --- 30,000 165,000
REQUIRED
Prepare process cost accounts showing the cost of the output and the cost per unit at each
stage of manufacture.
Page 300
Past Papers
Advanced & Cost Accounting
Past Papers
Advanced & Cost Accounting
PAST PAPERS:
 Advanced and Cost Accounting 2011 (Regular).

 Advanced and Cost Accounting 2011 (External).
Page 302
Past Papers
Advanced & Cost Accounting – 2011 (Regular)
B.COM PART – II (REGULAR) ANNUAL EXAMINATION – 2011

PAPER – IV: ADVANCED AND COST ACCOUNTING (N.S.)
Time Allowed: Three Hours Max. Marks: 100
Instructions: (1) Attempt any FIVE questions in all, THREE questions from
Section – A and TWO from Section – B.
(2) All questions carry equal marks.
(3) Answers without necessary computations will not be accepted.
Section – A (Advanced Accounting) 60 Marks

Question # 1: Accounting for Company – Financial Statements:
X, Y Company Ltd. was registered with an authorized capital of Rs.8,000,000 divided into
balances on June 30, 2011:
Title of Accounts Debit Credit
Cash in bank 94,500
Merchandise inventory 1-7-10 225,000
Prepaid insurance 12,000
Machinery – Cost 1,500,000
Allowance for depreciation – Machinery 150,000
Paid up capital 800,000
Sales revenue 800,000
Commission on income 706,000
Sales return & allowance 20,000
Purchases 900,000
Purchase returns & allowances 40,000
Rent expenses 26,000
Income tax expenses 10,000
3,050,500 3,050,500
Data for Adjustments on June 30, 2011:
(a) Rent expense for the year amounted to Rs.30,000.
(b) Merchandise inventory was valued on June 30, 2011 at Rs.260,000.
(c) Provide allowances for depreciation on machinery for the year Rs.135,000.
(d) Allowance for bad debts Rs.5,000 for the year.
(f) Declared cash dividend @10% on capital.
REQUIRED
(1) Prepare a classified Income Statement for the year ended June 30, 2011 and also a
(2) Prepare a Balance Sheet as of June 30, 2011 in classified form.
Page 303
Past Papers
Question # 2: Company Accounting – Absorption:

The following are the assets and equity account balance of AB. Co. Ltd., as on June 30, 2011:
Dr. Balances Cr. Balances
Cash 50,000 Allowance for depreciation Plant 50,000
Merchandise inventory 105,000 Accounts payable 50,000
Plant assets 200,000 Share capital (Rs.10 par) 270,000
The above company was absorbed by MY Company Ltd., on July 1, 2011 on the following
terms:
(a) All the assets and liabilities (with the exception of cash) were taken over by the
absorbing company at book values.
(b) Two new shares of Rs.10 at Rs.12 each for every three shares are issued to
shareholders of AB. Co. Ltd.
REQUIRED
(1) Entries in the books of AB. Co. Ltd. relating to transfer of business and final
(2) Entries in the books of MY Co. Ltd. relating to record the absorption of AB. Co. Ltd.
and issuance of shares to vendors.
Question # 3: Analysis of Financial Statements:

Following are the selected data taken from books of Rafiq Co. Ltd. at the end of year 2010:
Merchandise inventory (Opening) 120,000
Accounts receivable (Opening) 380,000
Cash 108,000
Accounts receivable (Ending) 350,000
Merchandise inventory (Ending) 150,000
Credit sales (Net) 1,825,000
Total operating expenses 600,000
REQUIRED
On the basis of above information, find out:
(1) Working capital (2) Inventory turnover
(3) Current ratio (4) Accounts receivable turnover
(5) Acid test ratio (6) Gross profit percentage
(7) Net profit percentage (8) Operating expenses rate
Question # 4: Accounting for Installment Sales:

Irfan Limited sells merchandise on installment basis. Data relating to the inventory,
Sales of equipment during the year 750,000
Page 304
Past Papers
REQUIRED
Question # 5: Accounting for Branches:

A Karachi firm whose accounting year end on 31st December has two Branches one at
Hyderabad and the other at Multan. The Branches keep a complete set of books. On 31st
December, 2010 the Hyderabad and the Multan Branches account in the Head Office books
showed debit balance of Rs.30,450 and Rs.45,000 respectively before taking the following
information into account.
1. Merchandise valued Rs.2,000 were transferred from Hyderabad to Multan Branch
under the instruction from Head Office.
2. The Hyderabad Branch collected Rs.2,500 from a customer of Head Office.
3. The Multan Branch paid Rs.5,000 for certain goods purchased by the Head Office.
4. Rs.5,000 remitted by the Hyderabad Branch to the Head Office.
5. The Multan Branch received on behalf of the Head Office Rs.1,500 as dividend from a
Multan Co.
6. For the year 2010, the Hyderabad Branch showed a net loss of Rs.1,250 and the
Multan Branch a net profit of Rs.5,400.
REQUIRED
Pass journal entries to record these matters in the Head Office books and then write up the
two Branches accounts therein.
Section – B (Cost Accounting) 40 Marks

Question # 6: Accounting for Manufacturing Operation
The accounting records of Asim Corporation contain the following information:
Inventories July 1, 2011:
Raw material Rs.132,000 Goods in process Rs.97,200 Finished goods Rs.144,600
Inventories at July 31, 2011:
Items Raw Material Goods-in-Process Finished Goods
Material Rs.144,000 Rs.38,700 Rs.130,500
Labour Rs.24,000 90,000
Overhead ? 72,000
Totals 144,000 ? 292,500
Data for the three months ended on July 31, 2011:
Cost of goods manufactured Rs.2,430,000, Factory overhead 80% of direct labour
Rs.535,200. The company also paid transportation costs of Rs.90,000 on materials
purchased. It received credit of Rs.48,900 for material returned to suppliers.
REQUIRED
Prepare a statement of cost of goods manufactured for the month ended July 31, 2011.
Some information needed for this statement is not listed above but can be computed from
the data given.
Page 305
Past Papers
Question # 7: Cost Accounting – Process Costing

The following information pertains to the goods in process No. 4 for the month of
November, 2010:
Goods in process inventory November 1, (25,000 units 75% complete as to
materials and 50% complete as to conversion costs) Rs.450,000
Cost of 150,000 units transferred in from process No. 3 during November 700,000
Manufacturing cost added in process No. 4 during November:
On 30 November 50,000 units are still in process No. 4 which are 75% complete as to
REQUIRED
Prepare cost of production report for process No. 4 and pass General Journal entries.
Question # 8: Standard Costs

Usman Company uses standard cost system. Following data are taken from its cost
accounting records:
Standard Actual
Raw material Rate per unit Rs.9 Rate per unit Rs.9.2
Total cost Rs.54,000/= Quantity 9,200 units.
Direct labour Wage per hour Rs.12. Wage per hour Rs.10.50.
Total labour hours 10,000 Total labour cost Rs.110,250/=
Factory overhead 80% of direct labour cost Total cost Rs.90,000/=
REQUIRED
a) Calculate:
(1) Material price variance. (2) Material quantity variance.
(3) Labour wage variance. (4) Labour efficiency variance.
(5) Factory overhead variance.
b) Give entries in General Journal to record actual and standard costs of direct
materials, direct labour and FOH and their variance.
================== YMS ==================
Page 306
Past Papers
Advanced & Cost Accounting – 2011 (External)
B.COM PART – II (EXTERNAL) ANNUAL EXAMINATION – 2011

PAPER – IV: ADVANCED AND COST ACCOUNTING (N.S.)
Time Allowed: Three Hours Max. Marks: 100
Instructions: (1) Attempt any FIVE questions in all, THREE questions from
Section – A and TWO from Section – B.
(2) All questions carry equal marks.
(3) Answers without necessary computations will not be accepted.
Section – A (Advanced Accounting) 60 Marks

Question # 1: Accounting for Company – Amalgamation:
(a) Differentiate between Amalgamation & Absorption of Co’s.
(b) Sun Ltd. and Moon Ltd. decided to amalgamate their business and a new company
Stars Ltd. is formed to take over all assets and liabilities of the two concerns. The
new Co. Stars Ltd. issued 110,000 shares of Rs.10 each at Rs.20 to Sun Ltd. and
90,000 shares of Rs.10 each at Rs.20 to Moon Ltd. The following are the Balance
Sheets:
SUN LIMITED
(Balance Sheet December 31, 2010)
A/c receivable 400,000 General reserve 300,000
Mds. inventory 600,000 Share capital (190,000 shares of Rs.10 each) 1,900,000
Machines 1,200,000
Furniture 60,000
2,380,000 2,380,000
MOON LIMITED
(Balance Sheet December 31, 2010)
A/c receivable 300,000 General reserve 100,000
Mds. inventory 700,000 Share capital (185,000 shares of Rs.10 each) 1,850,000
Machines 800,000
2,150,000 2,150,000
REQUIRED
(1) Give entries in General Journal form in the books of Stars Ltd.
(2) Prepare amalgamated Balance Sheet in the books of Stars Ltd.
Question # 2: Accounting for Branches:

The following balances were taken from the books of Usman Motorcycles (Pvt) Ltd. Karachi
as of Dec. 31, 2009:
Accounts receivable 80,000 Sales tax payable 10,000
Merchandise inventory 250,000 Share capital 400,000
Furniture 70,000 Retained earnings 100,000
550,000 550,000
January 01, 2010 a branch was established in Lahore at which time the head office sent cash
of Rs.50,000 and merchandise costing Rs.80,000 which were billed at 20% above cost.
Additional transactions for the month ended January 31, 2010 were as follows:
Page 307
Past Papers
Head Office Branch
Purchase on account (including 16% sales tax) Rs.580,000 Rs.30,000
Sales on account (including 16% sales tax) 928,000 46,400
Accounts receivable collected 400,000 20,000
Accounts payable paid 200,000 15,000
Operating expenses paid 95,000 10,000
Furniture bought for cash and sent to branch 25,000
Cash remitted to head office 20,000
Sales tax paid 10,000
Closing inventories on Jan. 31, 2010 were Rs.180,000 and Rs.90,000 (at billed price) at the
head office and branch respectively. Depreciation was taken at 10% per annum on fixed
assets.
REQUIRED
Head office journal entries for the month of Jan. 2010 including adjusting and closing
entries.
Question # 3: Cash Flow Statement:

The comparative balance sheets of Zubair Ltd. for the two years are produced below:
Cash 87,500 105,000
Plant assets 440,000 415,000
Total Rs. 905,000 900,000
Credit Balances (in Rs.) Dec. 31, 11 Dec. 31, 10
Total Rs. 905,000 900,000
Additional Data:
(1) Net income for the year 2011, Rs.90,000 (2) Cash dividend declared Rs.75,000
REQUIRED
(a) Working capital for both the year. (b) Prepare Cash Flow Statement.
Question # 4: Accounting for Installment Sales:

The Daniyal Electric Products Company manufactures table fans. It is a practice of the
company to sell 30% of its production on installment basis. The company recognizes profit
on sales on the basis of cash collected from customers. The following are the data for three
years:
Years Profit Installment Receivable Collection Installment Receivable on
on January 1, 2010 During 2010 December 31, 2010
2008 44% Rs.80,000 Rs.80,000 ---
2009 42% 165,000 75,000 Rs.90,000
2010 40% 150,000 300,000
REQUIRED
Prepare all journal entries for 2010 from the data above, including those required for the
recognition of gross profit at the end of year.
Page 308
Past Papers
Question # 5: Analysis of Financial Statements:

A condensed Balance Sheet of Amjad Ltd., prepared at the year ended Dec. 31, 2010
appeared as follows:
ASSETS EQUITIES
Cash Rs.95,000 Notes payable (due in 6 months) Rs.40,000
Inventory 270,000 Long term liabilities 360,000
Prepaid expenses 60,000 Capital stock, Rs.50/- par 300,000
Plant & equipment – Net 570,000 Retained earnings 430,000
Other fixed assets 90,000
Total Assets 1,240,000 Total Equities 1,240,000
During the year the company earned a gross profit of Rs.1,116,000 on credit sales of
Rs.2,950,000. Accounts receivable, inventory and plant assets remained almost constant in
amount throughout the year.
REQUIRED
(a) Current ratio? (b) Quick ratio?
(c) Working capital? (d) Debt ratio?
(e) Accounts receivable turnover? (f) Inventory turnover?
(g) Book – value per share?
Section – B (Cost Accounting) 40 Marks

Question # 6: Accounting for Manufacturing Operation
Purchase of direct material Rs.440,000
Direct labour paid during the year Rs.325,000
Direct labour assigned to production Rs.350,000
Manufacturing overhead Rs.400,000
Jan. 1 Dec. 31
Materials Rs.50,000 Rs. ?
Work in process Rs.90,000 Rs.70,000
Finished goods (15,000 units beginning) Rs.135,000 Rs. ?
REQUIRED
(a) Cost of goods manufactured.
(b) Average unit cost.
(c) Cost of goods sold assuming FIFO method.
(i) Materials (ii) Finished goods.
Page 309
Past Papers
Question # 7: Job Order Costing:

The Hamza Printers (Pvt.) Ltd. uses job order cost system. The transactions for the month of
September, 2011 are given below:
(a) Material purchased on account Rs.5,800,000 including 16% sales tax.
(b) Material requisition for production Rs.3,500,000 and supplies Rs.500,000.
(c) Material return to supplier Rs.116,000 including 16% sales tax.
(d) Accrued payroll Rs.825,000 including payroll for indirect labour Rs.125,000.
(e) Paid factory electricity bills Rs.425,000 including sales tax Rs.57,600 and income tax
Rs.7,400.
(f) Paid factory gas bill Rs.16,240 including sales tax Rs.2,240.
(g) Other manufacturing expenses incurred Rs.150,000.
(h) FOH applied at the rate of 175% of direct labour cost.
(i) Goods in process inventory on September 30, Rs.542,500.
(j) Finished goods inventory on September 30, Rs.882,500.
(k) Sales on account Rs.6,032,000 including 16% sales tax.
REQUIRED
Prepare General Journal entries for each of the above transactions including entries for cost
of goods sold and closing factory overhead account.
Question # 8: Standard Costs

The following are actual costs and variances for direct materials and direct labour for the
month of April 2011:-
Actual Cost Variances
Unfavourable Favourable
Rate variance 4,500
REQUIRED
1) Standard cost of direct material and direct labour.
2) Entries in General Journal to record the above information and to close the various
variance accounts.
================== YMS ==================
Page 310

2 Book Final 2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2 Book Final 2

Uploaded by

Copyright:

Available Formats

ADVANCED & COST

According to new syllabus.

More than 350 practice questions

Chapter # 1: Installment Sales ............................................................................................ 1

Chapter # 2: Branch Accounting ......................................................................................29

Chapter # 3: Analysis of Financial Statements ............................................................61

Chapter # 4: Cash Flow Statement ...................................................................................85

Chapter # 5: Accounting for Company – Final Accounts ....................................... 117

Chapter # 6: Accounting for Company – Amalgamation ....................................... 161

Chapter # 7: Accounting for Company – Absorption.............................................. 179

Chapter # 8: Accounting for Company – Reconstruction...................................... 197

Chapter # 9: Accounting for Manufacturing Operation ........................................ 207

Chapter # 10: Job Order Costing ...................................................................................... 233

Chapter # 11: Standard Costing ....................................................................................... 257

Chapter # 12: Process Costing .......................................................................................... 275

PAST PAPERS ....................................................................................................................................... 301

Advanced & Cost Accounting 2011 (Regular) .......................................................................... 303

Advanced & Cost Accounting 2011 (External)......................................................................... 307

SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI:

 Accounting for installment sales under Perpetual Inventory System.

WHAT THE EXAMINER USUALLY ASK?

COST OF INSTALLMENT SALES

UNREALIZED GROSS PROFIT

REALIZED GROSS PROFIT

COMPUTATION OF COST OF INSTALLMENT SALES:

COMPUTATION OF UNREALIZED GROSS PROFIT (D.G.P.):

COMPUTATION OF UNREALIZED GROSS PROFIT RATE (D.G.P. %):

COMPUTATION OF CASH COLLECTION:

COMPUTATION OF REALIZED GROSS PROFIT (R.G.P.):

COMPUTATION OF INSTALLMENT SALES / INSTALLMENT ACCOUNTS

COMPUTATION OF LOSS ON DEFAULT:

Installment accounts receivable cancelled XXX

COMPUTATION OF GAIN OR LOSS ON REPOSSESSION:

Installment accounts receivable cancelled XXX

GENERAL ENTRIES UNDER PERPETUAL SYSTEM:

o Sold Merchandise on Installment Basis:

o Cash Collection on Installment Basis / Down Payment Received:

ADJUSTING ENTRIES UNDER PERPETUAL SYSTEM:

o Recording Unrealized Gross Profit (D.G.P.):

o Recording Realized Gross Profit (R.G.P.):

o Recording Loss on Default:

o Recording Gain on Repossession:

o Recording Loss on Repossession:

CLOSING ENTRIES UNDER PERPETUAL SYSTEM:

Realized Gross Profit (RGP)

Cash Collection X Unrealized Gross Profit

Installment Sales - Cost of Installment Sales

Merchandise Inventory (Beginning)

Computation of Unrealized Gross Profit Rate (DGP%):

Computation of Realized Gross Profit (RGP):

Computation of Gain or Loss on Repossession:

Computation of Unrealized Gross Profit Rate (DGP%):

Computation of Cash Collection:

Cash collection (2006) = Installment A/R (Beg) – Installment A/R (End)

Cash collection (2005) = Installment A/R (Beg) – Installment A/R (End) –

Computation of Realized Gross Profit:

ABC INSTALLMENT SALES CO.

ABC INSTALLMENT SALES CO.

Computation of Cost of Installment Sales:

Computation of Installment Sales:

Computation of Unrealized Gross Profit:

Computation of Unrealized Gross Profit Rate (DGP%):

Computation of Cash Collection: