IGNOU FREE SOLVED ASSIGNMENT: ECO - 14 ACCOUNTANCY - II (2019 - 2020) | IGNOU B.COM SOLVED ASSIGNMENTS

IGNOU FREE SOLVED ASSIGNMENT (2019-20)
Elective Course in Commerce
ECO – 14: Accountancy - II
ASSIGNMENT- 2019-20

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course.

Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.

This assignment is valid for two admission cycles (July 2019 and January 2020). The validity is given below:

1)         Those who are enrolled in July 2019, it is valid up to June 2020.

2)         Those who are enrolled in January 2020, it is valid up to December 2020.

You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.

 IGNOU B.COM FREE SOLVED ASSIGNMENTS (2019-20)
Course Code: ECO - 14
Course Title: Accountancy - II
Assignment Code: ECO – 14/TMA/2019-20
Coverage: All Blocks
Maximum Marks: 100

Attempt all the questions.

1. What are the three systems of maintaining the accounts of a dependent branch and describe how is profit ascertained under each system? Explain how branch stock account helps in keeping effective control over the branch stock?                 (20)

Ans: Dependent Branch: The term ‘Dependent Branch’ means a branch which does not maintain its own set of books. All records have to be maintained by the head office. When the business policies and the administration of a branch are wholly controlled by the head office, its accounts also are maintained by it. In such a case, Branch accounts are written up at the head office out of reports and returns received from the branch.

The following are the main features of such branches:

a.       Such branches sell only those goods which are received from the head office and are not usually allowed to make purchases in the open market except with the express permission of the head office.

b.      Goods are supplied by the head office to such branches either at cost price or at invoice price.

c.       All expenses of the branch such as rent, salary of staff, advertisement etc., are paid by the head office.

d.      Petty expenses such as cartage, entertainment, freights etc. are paid by the branch manager out of petty cash book balance. Such book is maintained at the branch either as simple petty cash book or on imprest system.

e.      The amount received from cash sales or cash received from debtors is either remitted to the head office daily or deposited in the account of the head office in some local bank.

f.        The branch manager is normally expected to sell the goods for cash only but he may be authorized to sell goods on credit as well.

ACCOUNTING IN RESPECT OF DEPENDENT BRANCHES

In case of a dependent branch, the head office may keep accounts of the branch acc to any of the following systems

1)      Debtors System

2)      Stock and Debtors system

3)      Final Account system 

(1) Debtors System (Synthetic Method): This system is adopted in case of branches of small size. Under this system, a branch account is opened separately for each branch in the books of head office. This account is nominal account in nature. In order to determine the profit of any branch, a separate branch account is opened and it is debited with opening balance of assets, goods sent to branch less returns, cheque sent for expenses of the branch and credited with opening balance of liabilities, cheque received fro remittance and closing balance of branch assets. The difference between the two sides will be profit or loss of the branch.

When goods are sent by the head office to the branch at invoice price, i.e., cost plus some percentage of profit, the branch manager is required to sell the goods at invoice price only. In branch account, necessary adjustments regarding percentage of profit charged by the head office is required to be deducted from opening stock, goods sent to branch and closing stock.

(2) Stock and Debtors System: Profit and loss of a branch can be found out by preparing branch account but there is another method for the same purpose. This method is known as stock and debtors method. If it is desired to exercise a more detailed account control over the working of a branch, the accounts of the branch are maintained under which is described as the stock and debtors method. According to this system, instead of opening one branch account, separate accounts are opened for various transactions at branch. According to this system, a separate ledger for each branch will have to be maintained at head office for keeping accounts, such as branch stock, branch debtors, goods sent to branch, branch expenses and branch assets etc. branch cash or petty cash account may sometimes be required to be maintained if the branch is permitted to use the available cash for making certain payments. In addition to the above, branch adjustment account is prepared to find gross profit of the branch. In this account loading included in stocks,  goods sent and loss of stock are shown. After ascertaining gross profit, branch profit and loss account is prepared to find net profit of the branch. All the expense and losses relating to branch are shown in this account to find net profit of the branch.

(3) Final Accounts System: According to this system, the profit or loss made by the branch is determined by preparing branch trading and profit and loss account at cost price. It should be carefully noted that all expenses whether paid by the head office or by the branch are debited to the trading and profit and loss account prepared for the branch. The profit and loss disclosed by this account is exactly same as that of the branch account prepared according to debtors system and stock and debtors system. It should be further noted that the branch trading and profit and loss account is only a memorandum account not forming part of the full accounting system.

Branch stock account:

Branch stock account is similar to that of the branch trading account where opening stock, goods received from head office less return, and credited with cash sales plus credit sales less return from customers. The balance of this account represents gross profit or gross loss if branch stock account is maintained at cost and shortage or surplus of goods if branch stock account is maintained at invoice price. This account helps the head office to exercise better control over the branch stock. This account clearly brings into focus the shortage or surplus in stock at branch. The balance of this account, after posting all the relevant entries should be equal to the stock in hand available at branch, unless there is any surplus or shortage. The profit or the load included in such surplus or shortage should be transferred to branch adjustment account while the cost of such surplus or shortage should be adjusted to branch profit and loss account.

2. Jalani Distributors sold three light commercial vans to Jain Enterprises on January 1, 2017 on hire purchase system. The price of each van was Rs. 90, 000 payment of which was to be made as follows:

1)         Rs. 30, 000 as down payment for each van

2)         Remaining amount in 3 equal installment along with interest @15%

Jain Enterprises were charging depreciation @ 20% each year on written down value method. After payment of the first installment as on December 31, 2017, they could not pay further installments. It was agreed between the parties for repossession of two van adjusting their values against the amount due. For the purpose of repossession, depreciation @ 30% p.a. was charged. Repossessed goods were repaired at a cost Rs. 2,000 and were then sold for Rs. 92,000. Calculate the value of repossessed stock and show the necessary accounts in the books of both the parties. (20)

Ledger A/c

In the Books of Jain Enterprises

Jalani Distributers

Ledger A/c

In the Books of Jalani Distributers

Jain Enterprises

Calculation of repossession values loss as repossession (2 vans)

Repossession value = 88,200

Loss on repossession = 1,15,200 – 88,200 = 27,000

3. (a) Explain how is goodwill treated when the incoming partner does not bring his share of goodwill in cash?               10

Ans: At the time of admission of a partner, he must brought capital and his share of goodwill in cash. If the new partner does not bring his share of goodwill in cash, the new partner’s capital accounts is debited for his share of goodwill and the sacrificing partner’s capital account are credited in their sacrificing ratio. The goodwill can be treated in the books of account I any of the following manners:

a) When only capital is brought in by new partner:

Cash/Bank account                                                           Dr

To New partner’s capital account

(Being the capital brought in cash by new partner)

b) When premium for goodwill is not brought in by new partner:

New partner’s capital account                                                           Dr

To Sacrificing partner’s capital account

(Being the new partner’s share of goodwill adjusted amongst the sacrificing partners in sacrificing ratio)

c) If goodwill already appears in balance sheet of the old firm, then it is to be written of in every case

Old partner’s capital account                                            Dr

To Goodwill account

The following illustration will explain the above point

Illustration: The new partner is unable to bring cash for goodwill). A and B who share profits in proportion of 3 and 2 had capitals of Rs. 2,00,000 and Rs. 1,50,000 respectively. They agree to admit C into partnership as from 1^st April, 2019, on the following terms in return for one third share in future profits:

1)         That C should bring in Rs. 2,00,000 as capital.

2)         That as C is unable to bring his share of goodwill in cash, the goodwill of the firm be valued at Rs. 1,50,000. Record necessary Journal entries in the books of the firm

JOURNAL

Working Note: Since the new profit sharing ratio is not given here, A and B will sacrifices their profit in favour of C in their old profit sharing ratio, i.e., 3 : 2. Therefore, the sacrificing ratio will be 3 : 2.

Total goodwill = Rs. 1,50,000

C’s share in profit = 1/3

C’s share of goodwill = 1,50,000*1/3 = 50,000

(b) How will you work out the new capital of each partner if the capital is to be adjusted in the new profit sharing ratio? Give Examples.                                10

Ans: Adjustment of Capital: Sometimes, on the admission of new partner it is decided that either the new partner will contribute as capital an amount in proportion to his share of profit or that the capitals of other partners will be adjusted to make them proportionate to their respective shares of profit.  Suppose, A, and B share profits in the ratio of 3 : 2, then, if the capitals are to be in the same proportion, and if say A’s capital is Rs. 30,000 then B’s capital should be Rs. 20,000. Adjustment of capital of partners can be done in the following ways:

1)      Adjustment of capitals on the basis of incoming partner’s capital, or

2)      Calculating capital on incoming partner on the basis of old partner’s capitals.

1. Adjustment of Old Partners. Capital Accounts on the Basis of Incoming Partner’s Capital

If the amount to be brought in by the new partner is fixed and it is decided that the capitals of the partners will be in the profit-sharing ratio, the capital brought in by the new partner shall be the basis to determine capitals of existing partners. On this basis, the entire capital of the firm is determined by multiplying the capital of new partner by the inverse of his share. The capital of each partner is ascertained by dividing the amount according to their profit-sharing ratio. Suppose, A and B are partners sharing profits and losses in the ratio of 3 : 2. They admit C as partner with 1/6^th share of profits on the condition that he contributes Rs. 30,000 as capital. The total capital of the firm should be obviously six times this figure, i.e., Rs. 1,80,000. A’s share of profit will be 5/6^th x 3/5^th or 3/6^th. B’s share of profit will be 5/6^th x 2/5^th or 2/6^th. Therefore, A’s capital will be Rs. 1,80,000 x 3/6^th or Rs. 90,000; B’s capital will be Rs. 60,000.

If the capital of a partner after making adjustment as to goodwill, reserves and revaluation, etc;, is less than what it should be according to the agreement, he should bring in additional capital. If there is an excess, the excess capital should be credited to the partner’s current account by debit to his capital account, unless the excess amount is to be paid off immediately. It should be noted that if the capitals are to be in the same proportion as the share of profits, the capitals should be treated as fixed. Current accounts should be opened for entries in respect of drawings, interest, shares of profits, etc. In short the adjustment of capital can be done in the following ways:

1)      Determine total capital of the new firm as Capital of incoming partner Reciprocal of incoming partner’s share.

2)      Determine new capitals of each partner. Total capital is divided in their new profit sharing ratio.

3)      Adjust the old partners’ capital to goodwill, profit/loss on revaluation, reserves, etc.

4)      Determine the surplus or deficiency. Surplus be paid or transferred to his current account and deficiency to be made up.

2. Calculating the Capital of Incoming Partner on the Basis of Capitals of the Old Partners.

If a new partner is to bring in proportionate capital, the amount is determined on the basis of the total of capitals (after all adjustments have been made) of the other partners and the total of their shares of profits. Suppose C is admitted with 1/5^th share of profit into a firm having already A and B as partners. The total of the share of profits of A and B will be 4/5^th, i.e., 1 – 1/5^th. C’s capital should be 1/4^th (since 1/5 is 1/4 of 4/5) of the total of capital of A and B. If A’s capital is Rs. 20,000 and B’s Rs. 16,000, C should bring in Rs. 9,000. We may also say that C’s capital should be 1/5^th of the total capital including his own. After C brings in his capital, the total will be Rs. 45,000; Rs. 9,000 is 1/5^th of that. If the new partner is given 1/4^th share of profits, he should contribute as capital 1/4^th of the total capital, including his own, or 1/3^rd of the combined capitals of the other partners. Suppose, the combined capital of others is Rs. 75,000, then C should bring in Rs. 25,000. In short the adjustment of capital can be done in the following ways:

We may understand the method more explicitly as follows:

1)      Determine the total adjusted capital of old partners, i.e., after effecting adjustments as to goodwill, reserves and revaluation account, etc.

2)      Determine the total capital of the new firm as follows: Total Adjusted Capital of old partners  Reciprocal of total share of old partners.

3)      Determine the capital of incoming partner as follows: Total Capital (as per 2 above)  Share of incoming partner.

4. XYZ Ltd. issued 1, 50,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share payable Rs. 3 on application,   Rs. 5 on allotment (including premium) and balance in two calls of equals amount. Applications were received for Rs. 2, 00,000 shares and pro rata allotment was made to all the applicants. The excess application money was adjusted towards allotment. Mahesh, who was allotted 400 shares failed to pay 1st and 2nd call and his shares were forfeited after the second call. Pass the necessary journal entries in the books of XYZ Ltd. and also show the Balance sheet.  (20)

Journal Entries

In the Books of XYZ Ltd.

Balance Sheet of XYZ Ltd

5. “Return on investment is considered to be the master ratio which reflects the overall performance of the firm” Elucidate.                              (20)

Ans: Return on Capital Employed Ratio establishes the relationship of profit (profit means profit before interest and tax) with capital employed. The net result of operations of a business is either profit or loss. The sources, i.e., funds used by the business to earn this (profit or loss) are proprietors’ (shareholders’) funds and loans. The overall performance of the enterprise can be judged by this ratio when compared with the previous periods to judge improvement in performance.

Computation: This ratio is computed by dividing the net profit before interest, tax and dividends by capital employed. In the form of formula, this ratio may be expressed as:

Example: Following is the Balance Sheet of X Ltd. as on 31^st March, 2019:

Find out the Return on Capital Employed.

Solution:

Return on Capital Employed or Return on Investment judges the overall performance of the enterprise. It measures how efficiently the sources entrusted to the business are used. The return on capital employed is a fair measure of the profitability of any concern with the result that the performance of different industries may be compared. This ratio also helps in judging performance efficiency of different departments or units within the enterprise. An enterprise should have a satisfactory ratio. To judge whether the ratio is satisfactory or not, it should be compared with its own past ratios or with the ratio of similar enterprise in the industry or with the industry average.

Generally, any positive ROI is considered a good return. This means that the total cost of the investment was recouped in addition to some profits left over. A negative return on investment means that the revenues weren’t even enough to cover the total costs. That being said, higher return rates are always better than lower return rates.

One thing to remember is that it does not take into consideration the time value of money. For a simple purchase and sale of stock, this fact doesn’t matter all that much, but it does for calculation of a fixed asset like a building or house that appreciates over many years. This is why the original simplistic earnings portion of the formula is usually altered with a present value calculation.