Financial Accounting Solved Question Papers November' 2012, Dibrugarh University B.Com 1st Sem

Financial Accounting Solved Question Papers November' 2012
Dibrugarh University B.Com 1st Sem
2012 (November) - Semester

1. (a) Fill up the blanks:

(i) Heavy advertising to launch a new product is a __. (Capital Expenditure / Revenue Expenditure / Deferred Revenue Expenditure)

(ii) Valuation of inventories is account for as per Accounting Standard 3.

(iii) If inventory at branch is shown at invoice price instead of cost price, then the account which is used for adjustment is Branch Adjustment Account.

(iv) Royalty Account is __. (Nominal Account / Real Account / Personal Account)

(v) An unrecorded liability when paid on dissolution is debited to __. (Realisation Account / Partner’s Capital Account / Revaluation Account)

(b) Write true or false

(i) Branch Stock Account is always prepared at cost price. False

(ii) Under Stock and Debtor System, Branch Stock Account is a Nominal Account. False

(iii) Under Stock and Debtor System, no entry is required for normal loss of stock. False

2. (a) Write on the provision of Accounting Standard 1.

(b) Write on the features of hire-purchase system.

Ans: Characteristics of Hire-Purchase System: The characteristics of hire-purchase system are as under

Hire-purchase is a system of credit sale.
The price under hire-purchase system is paid in installments.
The goods are delivered in the possession of the purchaser at the time of commencement of the agreement.
Hire vendor continues to be the owner of the goods till the payment of last installment.
The hire-purchaser has a right to use the goods as a bailer.
The hire-purchaser has a right to terminate the agreement at any time in the capacity of a hirer.
The hire-purchaser becomes the owner of the goods after the payment of all installments as per the agreement.
If there is a default in the payment of any installment, the hire vendor will take away the goods from the possession of the purchaser without refunding him any amount.

Ans: Minimum Rent is the amount below which landlord never accepts in any year from the person who has to pay royalty in case of mines. Minimum Rent is also known as Fixed Rent, Dead Rent, Flat Rent or Contract Rent. If in any year amount of royalty is less than the amount of minimum rent, the amount of minimum rent is payable by the person who has to pay the royalty, but if the amount of royalty is more than the amount of minimum rent, royalty will be paid.

Importance of Minimum Rent: Fixation of minimum rent is in the interest of landlord because it guarantees him the receipt of the minimum rent even in the case of low output or sales. In the absence of minimum rent clause, only the actual royalty will be paid to the landlord. Moreover, it also gives incentive to the lessee to enhance production or sales because he is bound to pay minimum rent.

(d) Mention the objectives of amalgamation of firms. Out of syllabus

3. (a) Karan and Jawahar are partners in a firm. The Trail Balance of the firm as on 31st March, 2011 was as following:

Trial Balance

Particulars	Amount	Particulars	Amount
Drawings: Karan Jawahar Land and Building Machinery Salaries and Wages Trade Expenses Sundry Debtors Discount Insurance Advertisement Cash at Bank Bills Receivable Closing Stock (31.03.2011) Furniture	2000 3500 40000 18000 3700 1900 24600 1000 1200 3000 2900 4000 36000 6500	Capital: Karan Jawahar Provision for Bad debt General Reserve Sundry Creditors Outstanding Wages Bank Loan (1.10.2010) Trading Account (Gross Profit)	35000 25000 800 4000 15000 500 8000 60000
	148300		148300

Prepare a profit and loss Account and a Profit and Loss Appropriation Account for the Year ended on 31st March, 2011 and also a balance sheet as on that date after taking into consideration the following adjustments:

(i) write off Rs. Bad Debt provide a 5% provision on the remaining Debtor for Doubtful Debts.

(ii)Interest on partner’s capital is to be allowed @ Rs.5% p.a.

(iii)Interest on Bank Loan id to be provide @ Rs. 10%

(iv)Depreciation is to be provided on Land and Buildings @ 10% p.a.; Machinery @ 12.50% p.a. and Furniture @5 p.a.

(v) 1/5th of the Advertisement is to be written off

Solution:

Profit and Loss Account

For the year ended on 31st March, 2011

Particulars	Amount	Particulars	Amount
To Depreciation on Land & Building To Depreciation on Machinery To Salaries & Wages To Trade Expenses To Write of bad debts To Discount To Insurance To Advertisement To Depreciation on furniture To Interest on Bank Loan To Net Profit	4,000 2,250 3,700 1,900 1,230 1,000 1,200 600 325 400 44,195	By Gross Profit By Provision for bad debts	60,000 800
	60,800		60,800

P/L Appropriation A/c

Particulars	Amount	Particulars	Amount
To Interest on Capital: Karan 35,000 x 5% = 1,750 Jawahar 25,000 x 5% = 1,250 To Share of Profit Karan 41,195 x 1/2 Jawahar 41,195 x 1/2	3,000 20,598 20,597	By Net Profit	44,195
	44,195		44,195

Partners Capital A/c

Particulars	Karan	Jawahar	Particulars	Karan	Jawahar
To Drawings To Balance c/d	2,000 55,348	3,500 43,347	By Balance b/d By Interest on Capital By Share of Profit	35,000 1,750 20,598	25,000 1,250 20,597
	57,348	46,847		57,348	46,847

Balance Sheet

As on 31st March, 2011

Liabilities	Amount	Assets	Amount
Capital Reserve Sundry Creditors Outstanding Wages Bank Loan 8,000 Add: Interest (8,000 x 10 x 6/12) 400 Capital: Karan 55,348 Jawahar 43,347	4,000 15,000 500 8,400 98,695	By Land & Building 40,000 Less: Depreciation @ 10% (4,000) Machinery 18,000 Less: Depreciation @ 12.5% (2,250) Sundry Debtors 24,600 Less: Write off 1,230 Advertisement Cash at Bank Bills Receivable Furniture 6,500 Less: Depreciation @ 5% (325) Closing Stock	36,000 15,750 23,370 2,400 2,900 4,000 6,175 36,000
	1,26,595		1,26,595

(b) Discuss the utility and significance of the financial statements to various parties in the business concern.

Ans: Users of Financial Statements

Users of accounting information may be categorised into (1) Internal Users; and (2) External Users.

(1) Internal Users:

(i) Owners: Owners contribute capital in the business and they are always exposed to risk. In view of risk involved, the owners are always interested in knowing the profitability and financial strength of the company.

(ii) Management: Managers has the responsibility to not only safeguard the owner’s investment but also to increase the value of business. Financial statements help the management to find out the overall as well as segment-wise efficiency of the business. It helps them in decision making as well as in controlling and self evaluation.

(iii) Employees and Workers: Employees and workers are entitled to bonus at the year end besides the salary and wages which is directly linked with the profits of the enterprise. Therefore, the employees and workers are interested in financial statements.

(2) External Users:

(i) Banks and Financial Institutions: Banks and Financial Institutions provide loans to the businesses. They watch the performance of the business to ensure the safety and recovery of the loan advanced.

(ii) Investors and Potential Investors: Investors uses financial statements to assess the earning capacity of the enterprise and ensure the safety of their investment.

(iii) Creditors: Creditors supply goods and services on credit. Before granting credit, Creditors satisfy themselves about the creditworthiness of the business. The financial statement helps them in making such assessment.

(iv) Government authorities: The government makes use of financial statements to compile national income accounts and other information. The information so available to it enables them to take policy decisions.

(v) Consumers: Customers have an interest in information about the continuance of an enterprise, especially whey they have a long-term with the enterprise. Sometime, prices of some products are fixed by the government, so it needs accounting information to fix fair prices so that consumers and producers are not exploited.

PURPOSES AND OBJECTIVES OF FINANCIAL STATEMENTS

Financial statements are very useful as they serve varied affected group having an economic interest in the activities in the business entity. Let us analyse the purpose served by financial statement:

a) The basic purpose of financial statement is communicated to their interested users, quantitative and objective information are useful in making economic decisions.

b) Secondly, financial statements are intended to meet the specialized needs of conscious creditors and investors.

c) Thirdly, financial statements are prepared to provide reliable information about the earning of a business enterprise and it ability to operate of profit in future. The users who are interested in this information are generally the investors, creditors, suppliers and employees.

d) Fourthly, financial statements are intended to provide the base for tax assessments.

e) Fifthly, financial statement are prepare in a way a provide information that is useful in predicting the future earning power of the enterprise.

f) Sixthly, financial statements are prepares to provide reliable information about the changes in economic resources.

g) Seventhly, financial statements are prepares to provide information about the changes in net resources of the organization that result from profit directed activities.

Thus, financial statement satisfy the information requirements of a wide cross-section of the society representing corporate managers, executives, bankers, creditors, shareholders investors, labourers, consumers, and government institution.

4. (a) Manabendra purchased a motorcycle on hire-purchase system from M/s Sarmah. The sale are as follows:

Down Payment

1st Instalment

2nd Instalment

3rd Instalment

40000

43500

39000

34500

All the Instalments are payable at the end of the year and each instalment include equal amount of cash price in addition to interest. Prepare necessary Ledger Accounts in the book of to the buyer.

Solution:

Let, The part of cash price including each installment = X, Interest = Y

Now,

Ledger

In the books of Manabendra & Company

M/S Sarma & Co.

Dr. Cr.

Date	Particulars	Amount	Date	Particulars	Amount
1st Year	To Bank A/c To Bank A/c To Balance c/d	40,000 43,500 60,000	1st Year	By Machinery A/c By Interest A/c	1,30,000 13,500
		1,43,500			1,43,500
2nd Year	To Bank A/c To Balance c/d	39,000 30,000	2nd Year	By Balance b/d By Interest A/c	60,000 9,000
		69,000			69,000
3rd year	To Bank A/c	34,500	3rd year	By Balance b/d By Interest A/c	30,000 4,500
		34,500			34,500

(b) (i) Explain the feature of instalment purchase agreement.

Ans: Characteristics of Hire-Purchase System

Hire-purchase is a system of credit sale.
The price under hire-purchase system is paid in installments.
The goods are delivered in the possession of the purchaser at the time of commencement of the agreement.
Hire vendor continues to be the owner of the goods till the payment of last installment.
The hire-purchaser has a right to use the goods as a bailer.
The hire-purchaser has a right to terminate the agreement at any time in the capacity of a hirer.
The hire-purchaser becomes the owner of the goods after the payment of all installments as per the agreement.
If there is a default in the payment of any installment, the hire vendor will take away the goods from the possession of the purchaser without refunding him any amount.

(ii) Distinguish between hire purchase and credit sale.

Ans: Difference between Sale and Hire Purchase

Although hire purchase system could ultimately result in sale of goods, the sale in normal sense and sale under hire purchase system are not the same. The following are the differences between sale and hire purchase.

Sale	Hire Purchase
A ‘sale’ is governed by the sale of Goods Act, 1930.	Hire purchase is governed by the Hire Purchase Act, 1972.
In case of sale, the ownership of the goods is transferred to the buyer immediately.	In case of Hire purchase, the ownership of goods is transferred to buyer on payment of all installments.
In case of sale, the buyer makes payment in lump sum.	In case of hire purchase, the payment is made in installments.
The buyer pays only for the price of goods.	The hire purchaser pays for the price of goods and also some amount of interest.
On non-payment of the consideration the seller cannot take back the goods, but can only take legal action on buyer.	On non-payment of any installment, the seller can re-possess the goods.
Once a sale has taken place, neither the seller, nor the buyer can terminate the contract (unless it is for genuine reason like damage of goods etc.)	Either the buyer or the seller can terminate the contract at any point of time, until the payments of last installment.
When the buyer becomes insolvent, the seller has to undertake the risk of loss.	When the hire purchaser becomes insolvent, the seller can reposes the goods, and hence need not undertake the risk of loss.
A sale is subject to levy of sales tax at the time of contract of sale.	In this case, the sales tax will be leviable at the time of ownership (i.e. on payment of last installment).

5. (a) The following information relates to Guwahati Branch:

Particulars	Amount	Particulars	Amount
Stock on 1st January Branch Debtors On 1st January Goods sent to Branch Cash sent to Branch For: Rent Salaries Petty Cash	11,200 6,300 51,000 1,500 3,000 500	Sales at Branch: Cash Credit Cash Received from Debtors Stock on 31st December	25,000 39,000 41,200 13,600

You are required to prepare Branch Account for the year and also the Branch Debtors Account.

Solution:

In the books of Head office

Guwahati Branch A/c

Particulars	Amount	Particulars	Amount
To Opening Balance Stock Debtors To Goods Sent to Branch To Bank Exp. Rent Salaries Petty Cash To General P/L a/c (Profit for the year)	11,200 6,300 51,000 1,500 3,000 500 10,400	By Remittance Cash sales Collection for Debtors By Closing Balance Stock Debtors	25,000 41,200 13,600 4,100
	83,900		83,900

Branch Debtors A/c

Particulars	Amount	Particulars	Amount
To Opening balance To Branch Stock A/c (Credit sale)	6,300 39,000	By Branch Cash A/c (Collection from debtors) By Closing balance	41,200 4,100
	45,300		45,300

(b) Briefly explain the treatment of the following items in Branch Account:

(i) Cash in transit

(ii) Goods in transit

(iii) Interbranch transaction

(iv) Cash paid by Branch on behalf of Head Office

Ans: Treatment of some Specific Transactions in case of Independent Branch

(i) Cash in transit: If the cash sent by branch to H.O. or the cash sent by H.O. to branch has not been received by the other party upto the end of the year, it is known as cash in transit. There is a difference in the balances of two accounts on account of this transaction also. To reconcile the two balances, the following journal entry is passed in H.O. books at the end of the year:

Cash in Transit a/c Dr.

To Branch a/c

(Cash in transit taken into books)

At the beginning of the next year, reverse entry will be passed.

(ii) Goods in transit: When goods are dispatched by the head office to branch and the branch does not receive it even upto the end of the year, it is known as goods in transit. In the same way when goods are returned by branch to head office and the head office does not receive it upto the end of the year it is also known as goods in transit.

It is quite understandable that a difference should arise in the balances of two accounts due to these transactions. Therefore, to reconcile, the following journal entry will be passed in head office books in both the circumstances:

Goods in Transit a/c Dr.

To Branch a/c

(Goods in transit taken into books)

In the Balance Sheet of Head office both the above items will be shown as an asset.

(iv) Inter-Branch Transactions: Where there are number of branches, inter-branch transactions are likely to take place, e.g., cash or goods sent by one branch to another or expenses incurred by one branch on behalf of another. Such transactions are usually adjusted assuming that they were entered into under the instructions from the H.O. Suppose Kolkata branch transfers some goods to Mumbai branch under the directions of the H.O. The entries will be as follows:

1.	In the books of Kolkata Branch: Head Office A/c Dr To Goods Supplied to Branch A/c	XXX	XXX
2.	In the books of Mumbai Branch: Goods received from Branches A/c Dr To Head Office A/c	XXX	XXX
3.	In the books of Head Office: Mumbai Branch A/c Dr To Kolkata Branch a/c	XXX	XXX

Note: Inter-branch transactions without the knowledge of head office may be passed as between the branches only in the usual manner.

6. (a) Raju took a lease of mine for a period of 20 years. Royalty is payable Rs. 1 per ton subject to a minimum rent Rs.12000 per annum The short working are recoupable during the first three years of the lease. The output was followings:

2008 = Nil

2009 = 4000 tons

2010 = 20000 tons

2011 = 40000 tons

Give the following Entries in the books of Raju.

Solution:

ANALYSIS OF ROYALTIES PAYABLE:

Year	Output	Royalty @ Rs. 1	M/R	Shortworking	Surplus	Recoupment	Written off	Payment
2008 2009 2010 2011	- 4,000 20,000 40,000	- 4,000 20,000 40,000	12,000 12,000 12,000 12,000	12,000 8,000 - -	- - 8,000 28,000	- - 8,000 -	- - 12,000 -	12,000 12,000 12,000 40,000

Journal Entries

Date	Particulars	L/f	Amt. (Dr.)	Amt. (Cr.)
31st Dec, 2008	Shortworking A/c Dr. To Landlord A/c (Being the royalties & Shortworking due to landlord.)		12,000	12,000
31st Dec, 2008	Landlord A/c Dr. To Bank A/c (Being the royalties paid to landlord)		12,000	12,000
31st Dec, 2009	Royalties A/c Dr. Shortworking A/c Dr. To Landlord A/c (Being the royalties & Shortworking due to landlord)		4,000 8,000	12,000
31st Dec, 2009	Landlord A/c Dr. To Bank A/c (Being the royalties paid to landlord)		12,000	12,000
31st Dec, 2009	Production A/c Dr. To Royalties A/c (Being the royalties transferred to production A/c)		4,000	4,000
31st Dec, 2010	Royalties A/c Dr. To Shortworking A/c To Landlord A/c (Being the royalties due & Shortworking recouped)		20,000	8,000 12,000
31st Dec, 2010	Landlord A/c Dr. To Bank A/c (Being the royalties paid to landlord)		12,000	12,000
31st Dec, 2010	Production A/c Dr. To Royalties A/c (Being the royalties transferred to production A/c)		20,000	20,000
31st Dec, 2010	Profit & Loss A/c Dr. To Shortworking A/c (Being the Shortworking written off)		12,000	12,000
31st Dec, 2011	Royalties A/c Dr. To Landlord A/c (Being the royalties due to landlord)		40,000	40,000
31st Dec, 2011	Bank A/c Dr. To Landlord A/c (Being the royalties paid to landlord)		40,000	40,000
31st Dec, 2011	Production A/c Dr. To Royalties A/c (Being the royalties transferred to Production A/c)		40,000	40,000

(b) (i) What is Royalty and Surface Rent?

Ans: Royalty is an amount payable for utilizing the benefit of certain rights vested with some other person. For example a landlord possesses right over the mine in his land, the author of book possesses right over his book. When the rights are leased the owner receives a consideration for the same which is called royalty.

Royalty is a periodical sum based on the output payable by the lessee to the lessor for having utilized the rights of the lessor. The person who makes the payment to the owner of asset is known as lessee and the owner of the asset is known as lessor. Royalty is a business expense and closed and transferred to profit and loss account.

According to William Pickles, “Royalty is the remuneration payable to a person in respect of the use of an asset, whether hired or purchased from such person, calculated by reference to and varying with quantities produced or sold as a result of such asset.”

Surface Rent: The rent, paid to the landlord for the use of land or surface on the yearly or half yearly basis is known as Ground Rent or Surface Rent. Ground rent or surface rent in the rent payable by the lessee in addition to minimum rent.

(ii) Distinguish between rent and royalty.

Ans: Difference between Royalties and Rent: In the common usage, the term royalty is used to mean rent. But there is some difference between royalty and rent. The following are the major difference between royalty and rent:

S.N.	Royalty	Rent
Type of Assets	Royalty is the consideration payable for the use of special right for both tangible and intangible assets.	But rent is the consideration payable for the use of only tangible assets.
Basis of Calculation	Royalty is paid either on the basis of output or sale.	Rent is paid on the basis of period.
Variability	Royalty varies on the basis of output or sales.	Rent is fixed.
Minimum Rent	Royalty agreement normally contains a clause to pay a minimum rent.	But in rent, there is no concept of minimum rent.
Parties	Parties are known as lessor and lessee.	Parties are known as tenant and landlord.

7 (a) P,Q and R are partners sharing profits and losses equally. On 31st March, 2011 their Balance Sheet stood as followings :

Liabilities	Amount	Assets	Amount
Bills Payable Creditors Loan from Q General Reserve P’s Current Account Q’s Current Account P’s Capital Account Q’s Capital Account R’s Capital Account	16000 119000 25000 30000 15000 15000 20000 100000 100000	Cash at Bank Debtors Stock Furniture Machinery R’s Current Account	15000 125000 290000 40000 120000 30000
	620000		620000

The firm was dissolve on the above mentioned date. P agreed to pay creditors at par . Q took over the remaining assets were sold for Rs 553000. Bills Payable were retained for a discount of 100 received for a payment before the due date of maturity. Expenses of discount amounted to Rs. 12000. Prepare important Ledger Accounts and Cash Book.

(b) Briefly explain the causes of dissolution of a partnership firm. Discuss the Garner vs. Murray decision and its applicability in dissolution of the partnership firm.

Financial Accounting Solved Question Papers November' 2012, Dibrugarh University B.Com 1st Sem