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# MGT101 GDB Fall 2019 Solution & Discussion

MGT101 GDB Fall 2019 Solution & Discussion

MGT101 Financial Accounting GDB Solution & Discussion Fall 2019

Topic to be tested:

Rectification of errors

Learning Objectives:

To understand type of error and effects of identified error on financial statements

GDB Question:

Mr. Hamid is running his small retail business under the name of Hamid Store. He has recently hired Mr. Imran as a junior accountant to maintain the books of accounts of his business. Mr. Imran has little knowledge in accounting. Recently, it has been observed that Mr. Imran wrongly treated installation charges of plant and machinery worth Rs. 500,000 as revenue expenditure under the heading of administration expenses. As a result, financial statements failed to reflect true and fair business affairs.

Required:

1. Identify the “type of error” committed by Mr. Imran.
2. What will be the effect of given error on asset side of a balance sheet? (Just mention whether the assets would be overstated, understated or remains unaffected)
3. What will be correct amount of fixed assets, if current assets and fixed assets before correcting this error were Rs. 160,000 and Rs. 940,000 respectively?
4. What will be correct amount of operating profit, if operating loss before correcting this error was Rs. 300,000?

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# Mgt101 GDB soultion 13-JAN.-2020

#MGT101 GDB IDEA SOL 2019-20

Error of Principle.
Assets understated
Corresct amount of Fix assets is 1440000/-
Operating Profit = (300000) + 500000 = 200000

MGT101 Financial Accounting GDB Solution & Discussion Fall 2019

Solution idea:

1- This is a principle error because Mr. Imran charge to wrong class.

2- Assets are understated because installation charges part of the machine cost. It will not include in any wrong entry. As assets are understated of  Rs 500,0000 so it will include in machine cost.

3- After correcting the errors the fixed asset will be

940000 + 500000 =1440000

It is the correct value of asset.

4- The correct operating profit is

500000 – 300000 = 200000

This is because the installation is the part of machine cost.

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# MGT101-Financial Accounting GDB Solution 2020

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