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MGT101 Solved Subjective Questions For Final Term Exam Preparation

MGT101 Solved Subjective Questions For Final Term Exam Preparation

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MGT101 Solved Subjective Question

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Question No: 49    ( Marks: 3 )

Mr. A, B & C entered into a partnership. At the beginning of the year their capital balances were Rs. 180,000, Rs. 140,000 and Rs. 80,000 respectively. Profit or loss is to be divided as:

• Mr. A: one-half
• Mr. B: one-third
• Mr. C: one-sixth

Required:

If profit is Rs. 390,000, calculate the share of profit for all the partners.

ANS:

Total profit 390,000
Share of A = 390,000 * 1/2 = 195,000
Share of b = 390,000 * 1/3 = 130,000
Share of C = 390,000 * 1/6 = 65000

Question No: 50    ( Marks: 3 )

Write down the components of Cash Flow Statement.

ANS:

Cash Flow statement has three components.
1. Cash related to operating activities of the business
3. Cash related to the financial activities of the business

Question No: 51    ( Marks: 5 )

What is bank overdraft? Mention an example for this. Why companies have to pay mark up on it. Under which head mark up paid on overdraft is shown in financial statement.

ANS:

Bank overdraft is the amount drawn over the balance exists in the account of business in the bank. This amount is the liability of the business and a kind of short term loan. As the bank has provided loan, so the bank charge interest (markup) on this amount as they have provided the short term loan to the business for markup incentive.
As we know that the markup on overdraft relates to the finance of the business. So, it is placed under the head of financial charges in the financial statements.

Question No: 52    ( Marks: 5 )

Write note on following terms.

• Net capital employed
• Share holder's equity
• Gain on sale of Fixed Assets
• Return on Investment

Question No: 53    ( Marks: 5 )

Indicate in which section of the Balance Sheet each of the following accounts is classified. Use the symbols CA for current assets, NCA for non current assets, CL for current liabilities, LTL for long term liabilities, and SHE for stockholders’ equity.

ANS:

 Accounts Section Prepaid rent CA Dividends payable CL Salaries payable CL Prepaid insurance CA Retained earnings CA Mortgage payable (due in 15 years) LTL Unearned service revenue CA Accounts receivable CA Land NCA Office supplies NCA

Question No: 54    ( Marks: 10 )

Write a note on legal documents required for the formation of company.

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LEGAL DOCUMENTS REQUIRED FOR FORMATION OF COMPANY:

MEMORENDUM OF ASSOCIATION: It contains the following information

1. Name of company.

2. Place of registered office

3. Objective

4. Amount of share capital with which company registers.

ARTICLES OF ASSOCIATION: It contains the following information

A document that contains all the policies and other matters necessary to run the business of the company. It is signed by all the members of the company.

Question No: 52    ( Marks: 10 )

Briefly explain the financial statements prepared by the organization. Why these are important for manufacturing concern?

ANSWER: The financial statements prepared by any organization are as follows:

1. Profit and loss account: It shows the performance of the business in a given period. It shows the profitability of business which shows the success or failure of the business.
2. Balance sheet: Balance sheet shows the position of business at a given point. It shows the resources available by the business and the resources invested by the owner and other loans.
3. Cash flow statements: Cash flow statements show the generation of cash and its usage over a given period.

IMPORTANCE OF FINANCIAL STATEMENTS FOR MANUFACTURING CONCERN:  These financial statements are important for manufacturing concern organization as they provide information related to financial affairs of the organization. The profitability and liquidity, the resources available to the company and the generation of cash and its usage over a given period which provides reasonable information to the management to take decisions.

Question No: 54    ( Marks: 10 )

Pass the rectifying entries to correct the following errors:

• Mr. “Ali” purchased goods of Rs. 1,500 on cash, but omitted to enter in the books of accounts.
• An amount of Rs. 5,000 received  from Mr. Amir, was credited to the account of Mr. Ameer.
• Goods returned worth Rs. 500 to Mr. “B” wrongly debited to sales Account.
• A purchase of goods from Mr. “B” of Rs. 400 has been wrongly debited to Furniture Account.
• Furniture purchased on cash Rs. 8,000 posted as purchases.

Rectification of Errors

Error 1.

A purchase of goods of Rs. 1,500 on cash was omitted by mistake

Rectification Entry on the date of discovery:

Debit:                          Purchase Account                              1,500

Credit:                                    Cash Account                                     1,500

Error 2

Debit:                          Mr. Ameer                                         5,000

Credit:                                    Mr. Amir                                            5,000

• Error 3 Goods returned worth Rs. 500 to Mr. “B” wrongly debited to sales Account.

Debit:                          Goods Return             Rs. 500

Credit:                                    Sales Account                         Rs. 500

Error 4 A purchase of goods from Mr. “B” of Rs. 400 has been wrongly debited to Furniture Account.

Debit:               Purchases                                Rs. 400

Credit                           Furniture Account                     Rs. 400

Error 5 Furniture purchased on cash Rs. 8,000 posted as purchases.

Debit               Furniture Account                  Rs. 8,000

Credit                          Purchase Post Account                      Rs. 8,000

Question No: 52    ( Marks: 10 )

Write down the at least ten distinguishing features of a limited company which differentiate it from Partnership business

The basic difference between a partnership and a limited company is the concept of limited liability.

1. If a partnership business runs into losses and is unable to pay it’s liabilities, its partners will have to pay the liabilities from their own wealth.
2. In case of limited company the shareholders don’t lose anything more than the amount of capital they have contributed in the company. It points that personal wealth is not at stake and their liability is limited to the amount of share capital they have contributed.
3. The concept of limited company is to mobilize the resources of a large number of people for a project, which they would not be able to afford independently and then get it managed by experts.
4. Listed Company have more than twenty partners, so problem of extra capital is reduced to minimum.
5. The liabilities of the members of a company is limited to the extent of capital invested by them in the company
6. There are certain tax benefits to the company, which a partnership firm can not enjoy
7. In Pakistan, affairs of limited companies are controlled by “Companies Ordinance” issued in 1984
8. The formation of a company and other matters related to companies are governed by “Securities and Exchange Commission of Pakistan (SECP)

Question No: 54    ( Marks: 10 )

The following discrepancies were noted on comparing Cash Book with Pass Book.

(1)               The following cheques were deposited into bank on 28th March but were not collected by the bank by 31st March, (i) Rs. 500, (ii) Rs. 300, (iii) Rs. 200.

(2)               The following cheques were issued but were not presented for the payment by 31st March. (i) Rs. 200, (ii) Rs. 450 (iii) Rs. 525 (iv) Rs. 375.

(3)               The bank credited a dividend of Rs. 2,000 on 31st march but intimation was received by the trader on 5th April, 2008.

(4)               The bank credited interest of Rs. 50 on 31st March but not debited in Cash Book.

(5)               The Bank charged (debited) a commission of Rs. 100 on 31st March.

(6)               A cheque of Rs. 500 was received from customer and was entered in the bank column of Cash Book on 25th March, but was paid into the bank on 1st April.

Required: Prepare a Bank Reconciliation Statement, if the Bank balance as per Cash Book (Dr.) was Rs. 15,000 on 31st March, 2008.

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Balance as per Cash book.                                           Dr                    15000

Less not collected Cheques. (500+300+200)                Cr                    1000

Dr                    14000

Add UN Presented Cheques (200+450+525+375)      Dr                    1550

Dr                    15550

Add dividend Credit by bank                                        Dr                    2000

Dr                    17550

Add interest credit by bank                                           Dr                    50

Dr                    17600

Less bank charges                                                        Cr                    100

Dr                    17500

Balance as per Bank Book                                           Cr                    17000

Question No: 52    ( Marks: 10 )

Income Statement of XYZ Ltd for the year ended on 30th June, 2007:

 Particulars Rs. Rs. Sales 500,000 Less: Cost of Goods Sold 250,000 Gross Profit 250,000 Less: Operating expenses Administrative expenses 110,000 Interest expenses 20,000 130,000 Net profit before Tax 120,000 Less: Taxes 36,000 Net profit after tax 84,000

Opening Stock for the year was Rs. 60,000.

Balance Sheet of XYZ Ltd on 30th June, 2007:

 Assets Rs. Fixed Assets 400,000 Stock 60,000 Debtors 230,000 Bills Receivable 40,000 Cash at bank 150,000 Prepaid expenses 20,000 Total 900,000 Liabilities Share capital 200,000 Reserves and surplus 250,000 10% Debentures 200,000 Creditors 180,000 Bills payable 70,000 Total 900,000

Calculate following ratios from the financial statement of XYZ Ltd.

1. Current Ratio
2. Acid Test Ratio
3. Stock turn over Ratio
4. Debt equity Ratio
5. Gross profit Ratio

Solution:

1: Current Ratio:

Total Assets/Total Liabilities

= 900000/900000

= 1

2: Acid Test Ratio

Total Assets-Stock/Total Liabilities

= 900000-60000/900000

= 840000/900000

= 0.933333

3: Stock turn over Ratio

(Average Stock / Cost of goods sold) x 365

Average Stock = opening stock + Closing Stock/2

= 60000+60000/2

= 60000

= (Average Stock / Cost of goods sold) x 365

= (60000/250000) x 365

= 0.24 x 365

= 87.4

4: Debt equity Ratio

Long term Liabilities / Equity

= 200000/200000

= 1

5: Gross profit Ratio

(Gross Profit / Sales) x 100

= 250000/500000 x 100

= 0.5 x 100

= 50

Question No: 51    ( Marks: 5 )

10 % Debentures of Rs. 80,000 are shown in trial balance. How it will be shown in financial statements? Also mention why a company issues debentures.

10% Debentures of Rs. 80000 is shown the Owners Equity pr liability Side of Balance sheet.

Debentures are issued under the common seal of the company and debentures are an instrument for obtaining the loan from the general public. Company also paid mark up on debentures which generally equal to the market rate.

Question No: 56    ( Marks: 5 )

Write down the five advantages of Limited Company.

1. 1.      It is a legal entity created by law and hence has its own recognition, good will and brand equity etc.
2. 2.      It is a wide form of business and hence a formal approach for various partners/investors to come and work for the same objectives in an organized form.
3. 3.      Liability limited to company assets only. Investors/partners do not personally liable for any loss or in state of bankrupty.
4. 4.      Being a legal entity, easy to get loans or gather funds from public (for public limited companies only) or financial institutes.
5. 5.       Being a legal entity, it can enjoy more opportunities for mega projects and trade/operations opportunities in international markets on its on behalf.

Question No: 57    ( Marks: 5 )

ABC Company purchased goods of Rs.150,000 on credit from which goods of Rs.20,000 were defected and returned. Company received 2% discount at the time of payment from the supplier.

Required:

What will be the amount of discount received by the company?

Also show the journal entries

Solution:

(A)

Discount Received= (150,000-20,000) x (2/100) = 2600

(B)

Particulars                       Dr.                  Cr.

Entry for Purchase

Goods                           150,000

A/P                                                        150,000

Entry for Return

A/P                                  20,000

Goods                                                      20,000

While making Payment (@ 2% discount = 2600)

A/P                                 130,000

Discount income                                       2,600

Cash                                                     127,400

Question No: 59    ( Marks: 10 )

The unadjusted and adjusted trial balances for Tinker Corporation on December 31, 2007, are shown below:

 Tinker Corporation Trial Balances December 31, 2007 Unadjusted Adjusted Debit Rs. Credit Rs. Debit Rs. Credit Rs. Cash 35,200 35,200 Accounts receivable 29,120 29,120 Unexpired insurance 1,200 600 Prepaid rent 5,400 5,400 Office supplies 680 380 Equipment 60,000 60,000 Accumulated depreciation: equipment 49,000 50,000 Accounts payable 900 900 Notes payable 5,000 5,000 Interest payable 200 200 Salaries payable - 2,100 Income taxes payable 1,570 1,570 Unearned revenue 6,800 3,800 Capital stock 25,000 25,000 Retained earnings 30,000 30,000 Fees earned 91,530 94,530 Advertising expense 1,500 1,500 Insurance expense 6,600 7,200 Rent expense 19,800 19,800 Office supplies expense 1,200 1,500 Repairs expense 4,800 4,800 Depreciation expense: equipment 11,000 12,000 Salaries expense 26,300 28,400 Interest expense 200 200 Income taxes expense 7,000 7,000 210,000 210,000 213,100 213,100

Journalize the five adjusting entries that the company made on December 31, 2007.

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Date             Particular                                                Dr.                       Cr.

Dec 31         Insurance expense                                  600

to   Unexpired insurance                                                     600

Dec 31         Office Supplies Expense                         300

to   Office Supplies                                                              300

Dec 31         Depreciation Expense-Equip.                1000

to   Accumulated depreciation-Equip.                                1000

Dec 31         Salaries Expense                                    2100

to   Salaries Payable                                                         2100

Dec 31         Unearned revenue                                  3000

to   Fee Earned                                                                  3000

Question No: 55    ( Marks: 3 )

Give four reasons, why capital might change.

1. 1.      The entrance or exit of some (new) partner
2. 2.      Withdraw by partner(s)
3. 3.      Additional Investment by the partner(s)
4. 4.      Profit/Loss

Question No: 55    ( Marks: 3 )

Mr. Hassan is a partner in a partnership firm. His capital on July 1, 2001 was Rs. 400,000. He invested further capital of Rs. 150,000 on March 01, 2002. Markup rate is @6%p.a. The financial year of such a business  is from 1st July to 30th June.

Required: You are required to calculate his markup on Capital at the end of 30th June 2002.

a) Capital invested on july 1 2001 = 400,000

Markup rate on 400,000 = 6% of 40,000 = 24,000

b) Further capital introduced / invested = 150000 on March 1, 2002

Markup rate = 6% of 150000 = 9000 x 4/12 = 3000

Total mark up rate = a + b = 24000 + 3000 = 27000

Question No: 57    ( Marks: 5 )

X and Y were partners in a business sharing profits in the ratio of 3:1. Their capital were Rs.30,000 and Rs.10,000 respectively. They earned a net profit of Rs. 160,000. Mr. Y was entitled to a salary of Rs.200 p.m. Prepare Profit Distribution Account of X & Y Partnership.

X AND Y ARE SHARED WITH  the ratio 3:1

X capital = 30000

Y capital = 10000

Net profit = 160,000

Mr. Y salary is = 200 p.m entitled

Total investment = X + Y capital = 30000 +10000 = 40000

X profit distribution = 30,000/40000 x 160000 = 120,000

Y profit distrubtion = 10,000/40000 x 160000 x 40000 = 40000

Question No: 52    ( Marks: 10 )

Briefly explain the financial statements prepared by the organization. Why these are important for manufacturing concern?

ANSWER: The financial statements prepared by any organization are as follows:

1. Profit and loss account: It shows the performance of the business in a given period. It shows the profitability of business which shows the success or failure of the business.
2. Balance sheet: Balance sheet shows the position of business at a given point. It shows the resources available by the business and the resources invested by the owner and other loans.
3. Cash flow statements: Cash flow statements show the generation of cash and its usage over a given period.

IMPORTANCE OF FINANCIAL STATEMENTS FOR MANUFACTURING CONCERN:  These financial statements are important for manufacturing concern organization as they provide information related to financial affairs of the organization. The profitability and liquidity, the resources available to the company and the generation of cash and its usage over a given period which provides reasonable information to the management to take decisions.

Question No: 53    ( Marks: 10 )

The comparative financial statement data for XYZ Company is given below:

 December 31 Assets: 2007 2006 Rs. Rs. Cash 4,000 7,000 Accounts receivable 36,000 29,000 Inventory 75,000 61,000 Plant and equipment 210,000 180,000 Accumulated depreciation (40,000) (30,000) Total Assets 285,000 247,000 Liabilities & Stockholder’s equity: Accounts payable 45,000 39,000 Common stock 90,000 70,000 Retain earnings 150,000 138,000 Total liabilities & Stockholder’s equity 285,000 247,000

For 2007, the company reported net income as follows:

XYZ Company

Income Statement

For the year ended 31st December, 2007

Rs.

Sales                                                                                        500,000

Less: Cost of goods sold                                                            300,000

Gross margin                                                                            200,000

Less Operating expenses                                                          180,000

Net Income                                                                               20,000

Required:

Prepare a Statement of Cash Flows if dividend of Rs. 8,000 was declared and paid during the year 2007. There were no sales of plant and equipment during the year.

Starting balance:

Net income                                                                               20,000

Depreciation                                                                             38,000

Operating profit before working capital changes:                         58,000

Working capital changes:

Less: accounts receivable                                                             (7,000)

Cash generated from operations                                                  61,000

Cash flow from investing activities

Cash flow from financing activities:

Common Stock                                                                              20,000

Net decrease in cash                                                                       3,000

Net cash flow                                                                                 78,000

Question No: 41    ( Marks: 10 )

Calculate depreciation of the asset for five years by using written down value method. Also show accumulated depreciation.

 Cost of the asset Rs. 1,20,000 Depreciation Rate 10% Expected Life 5 years

 YR Written down value method RS Accumulated depreciation 1 cost 120,000 Depreciation @ 10%... 10%*120,000 12,000 12,000 WDV… 120,000-12,000 108,000 2 Dep @ 10%... 10%*108000 10,800 22800 WDV= 108,000-10,800 97,200 3 Dep @ 10%... 10%*97,200 9,720 32520 WDV= 97,200-9,720 87,480 4 Dep @ 10%...10%*87,480 8,748 41,268 WDV=87,480-8,748 78,732 5 Dep @ 10%...10%*78,732 7873.2 49,141.2 WDV=78,732-7873.2 70858.8

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Question No: 51    ( Marks: 5 )

Following information is extracted from the books of Abrar Ltd as on December 31st, 2007.

 Particulars Rs Carriage inwards 8,000 Legal charges 6,500 Financial charges 223,500 Tax payable 30,000 Advances from customer 10,000 General reserve 40,000 Accumulated profit brought forward(credit balance ) 95,000 Long term loans 1,00,000

The authorized capital is Rs. 50, 00,000 divided into 500,000 shares of Rs. 10 each. Issued and paid up capital 2, 500,000.

You are required to prepare calculate Share holders equity

Share holder equity will have Authorized capital, Paid up capital, General Reserves & Accumulated profit brought forward

Authorized capital = Rs. 50,00,000 divided into 500,000 shares of Rs. 10 each

Issued and paid up capital 2,500,000

General Reserve 40,000

Accumulated profit brought forward (Credit balance) 95,000

Question No: 52    ( Marks: 10 )

Write down the at least ten distinguishing features of a limited company which differentiate it from sole proprietor business

The basic difference between a partnership and a limited company is the concept of limited liability.

1. If a partnership business runs into losses and is unable to pay it’s liabilities, its partners will have to pay the liabilities from their own wealth.
2. In case of limited company the shareholders don’t lose anything more than the amount of capital they have contributed in the company. It points that personal wealth is not at stake and their liability is limited to the amount of share capital they have contributed.
3. The concept of limited company is to mobilize the resources of a large number of people for a project, which they would not be able to afford independently and then get it managed by experts.
4. Listed Company have more than twenty partners, so problem of extra capital is reduced to minimum.
5. The liabilities of the members of a company is limited to the extent of capital invested by them in the company
6. There are certain tax benefits to the company, which a partnership firm can not enjoy
7. In Pakistan, affairs of limited companies are controlled by “Companies Ordinance” issued in 1984
8. The formation of a company and other matters related to companies are governed by “Securities and Exchange Commission of Pakistan (SECP)

Question No: 53    ( Marks: 10 )

What is the difference between public and private company?

The main difference between public and private company is that in public limited companies there is no restriction on number of persons to be its members. There is one restriction. That there should be a minimum of three members to form a public limited company. Public limited company can offer its shares to general public.

While in private company two to fifty persons can form a company. Minimum two members are elected to form a board of directors. This board is given the responsibility to run day to day business of the company. Private limited company cannot offer its share to general public.

Question No: 56    ( Marks: 5 )

What do you mean by “Bad Debts” and “Doubtful Debts”? Distinguish between these.

when we are going to sell the products on credit so our business take risk that there are some customer in market that they will never pay for stock sold to them.So,such situation in which  the amount which is due to the debetor are call bad debts

This is a loss sustained loss for business due to risk. It is recorded in Profit and Loss Account in the period in which it is happen.

Doubtful Debts

A doubtful debt is a debt, which the business considers may not be paid

Question:

From the following information calculate cost of goods sold.

 Stock opening balance Rs.56,950 Purchases 175,750 Stock closing balance 65,020 Carriage inward 5,200 Sales 245,500

Solution:

Opening stock  :                                             Rs.56,950

Less Stock closing balance:                                (65020)

Cost of goods sold                =                       Rs 172,880

Question No: 55    ( Marks: 3 )

If the capitals of the partners are fixed, Pass Journal Entries for the following:

v      Excess drawn amount is returned by partner

v      Profit distribution among partner

Partner’s Current A/c Dr.

Cash/Bank A/c Cr.

Cash/Bank Dr.

Partner’s Current A/c Cr.

Profit & Loss A/c Dr.

Partner’s Current A/c Cr.

Question No: 56    ( Marks: 5 )

ABC Company purchased goods of Rs.150,000 on credit from which goods of Rs.20,000 were defected and returned. Company received 2% discount at the time of payment from the supplier.

Required:

• What will be the amount of discount received by the company?
•  Also show the journal entries

Purchases A/c 150,000

Creditor A/c                 150,000

Goods are being purchased

Creditor A/c                 20,000

Purchases A/c  20,000

Goods returned to supplier

Creditor A/c                 130,000

Cash/Bank A/c             127400

Question No: 49    ( Marks: 3 )

What do you know about the Profit and loss appropriation account in case of partnership?

The profit account does not included the salary of partner nor the markup on capital or interest on drawing, this all we do after calculating the net income in profit and loss appropriation account  to get to the distributable income/profit among the partners as per the profit/loss sharing ratio.

Question No: 50    ( Marks: 3 )

Assume that a company repays Rs. 300,000 loan taken from its bank and then later, in the same year company borrows Rs. 500,000. How will these items be treated on the current year’s Statement of Cash Flows?

Answer :  In the section of Financing Activities

300,000 will appear as (300,000) showing outflow/repayment of loan

500,000 will appear as 500,000 showing inflow of cash borrowed.

Question No: 51    ( Marks: 5 )

What types of changes are made when a new partner joins partnership? Mention those situations in which partnership comes to an end.

In case of admission of any new partner all the assets and liabilities is revalued as well as the good will of the partnership company. The new ratio get sets for profit/loss sharing among the partner.

Usually In Case of death or retirement of partner from partnership, partnership comes to an end or in a state of dissolution.

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Question No: 52    ( Marks: 5 )

Define cash flow from operating activities with some examples.

Extract from Cash Flow Statement.

Net profit                                                                                          100,000

Add  Back : Non Cash Transaction

Depreciation Exp                                                                          5000

Gain on Currency Exchange                                           10,000

Gain on Sale of Disposal of Asset                                                2,000

Cash from Opening Activities before working

Capital Change                                                                         117,000

Less: Increase in Assets                                                                     -10,000

Less: Decrease in Liabilities                                                      -3000

Cash Generated from Operating Activities                            115,000

Question No: 53    ( Marks: 5 )

Given the following data:

Purchases Rs.26,000, Returns outwards Rs.1,470, Returns inwards Rs.2,100, Carriage outwards Rs.1,230, Carriage inwards Rs.890, Opening stock Rs.4,500, and closing stock Rs.6,130.

What would be the value of the cost of goods sold?

Solution:

 Cost of Good Sold Amount Opening Stock 4,500 Add: Purchases 26,000 Less: Return Outward -1,470 Add: Carriage Inward 890 Goods available for Sale 29,920 Less: Closing Stock -6,130 Cost of Good Sold 23,790

Question No: 49    ( Marks: 3 )

Briefly write down the steps for the formation of a Private Ltd Company.

1. Selection of the type of company.

2. Selection of name for the proposed company.

3. Apply for the Directors Identification Number (DIN) and Digital Signatures.

4. Drafting of Memorandum and Articles of Association.

5. Stamping, digitally signing and e-filing of various documents with the Registrar.

6. Payment of Fees.

7. Obtaining Certificate of Incorporation.

8. Preparation and filing of Prospectus/Statement in lieu of Prospectus and e-Form 19/20 (in case of public companies) for obtaining the certificate of commencement of business.

9. Obtaining Certificate of Commencement of business (in case of public limited companies).

Question No: 51    ( Marks: 5 )

What is the Purpose of Control Accounts?

A business needs to have accounts created for individual creditors and debtors in its general ledger. Creditors are people/entity to whom company owes money and debtors are entities/people who owe money to the business.  But when a business grows then the number of creditors and debtors also grows. We know that trial balance can give us the mathematical accuracy of accounts and if there is any difference in trial balance we can know it from the general ledger by actually checking each and every transaction for the year. But it is a very time consuming job to check each and every transaction if the business of the company is huge because it will have many many transaction to check. So in this control accounts are maintained in general one for total creditors and one for total debtors. Debtor’s account is called debtor’s control account and creditor’s account is called creditor’s control account.  These accounts will not get hit by individual purchase, purchase returns, payments to creditor in case of creditor’s control account and by sales, sales return, receipts in case of debtor’s control account. Periodically this summarized data will be posted from individual ledgers which will be created for each type of transaction e.g a sales subsidiary ledger, purchase subsidiary ledger etc which will contain actual details of transactions with invoice number and periodically the amounts will be summarized from these subsidiary ledgers and posted to the control accounts at a single time. This way the transactions in general ledger will decrease and will become easy to manage and can be easily checked against creditor’s or debtor’s details in total creditor’s ledger and total debtor’s ledger for accuracy.

Question No: 52    ( Marks: 10 )

What is the effect of given adjustments on Trading & Profit & Loss account and Balance Sheet?

1. Accrued Expenses or Outstanding Expenses
2. Prepaid Expenses or Unexpired Expenses
3. Accrued Revenue or Revenue Receivable
5. Depreciation of Asset

1. Accrued Expenses or Outstanding Expenses

Trading and profit and loss account effect

These expenses will be shown in profit and loss account under administrative expenses and will and be deducted from gross profit. They will be used to calculate net profit

Balance sheet effect

These expenses will be shown as expense payable or accrued expenses in balance sheet as current liabilities and will be shown under current liabilities section of liabilities as they have to be paid by business..

1. Prepaid Expenses or Unexpired Expenses

Trading and profit and loss account effect

These will be deducted from relevant expense account to get the actual expenses for the period and that actual amount of expense will be deducted from gross profit to arrive at net profit. This amount of prepaid expenses will not be included in profit and loss account as an expense itself but its effect will be on current expenses for the period for which profit and loss is being calculated.

Balance sheet effect

These prepaid expenses will be show and current assets in balance sheet and will be shown under the section of current assets in balance sheet.

1. Accrued Revenue or Revenue Receivable

Trading and profit and loss account effect

These will be added to sales in trading account in profit and loss statement and will be treated as a revenue in the calculation of gross profit by subtracting cost of goods sold from net sales. This will affect gross profit in trading account.

Balance sheet effect

In balance sheet this revenue will be shown under current assets as receivables from debtors and will be shown under the section of current assets of the business.

Trading and profit and loss account effect

This will not be added to the sales as sales is recognized when the actual services have been provided or when goods have been shipped irrespective of whether payment has been received or not. So this will not affect profit and loss account as it is still not recognized as sales/revenue.

Balance sheet effect

This is a liability for the company because the company has to give goods or services to the buyer for the advance payment done by the buyer and will be shown as a liability in the balance sheet under the current liability section of balance sheet. Also the same amount will be shown in the bank or cash as current asset to offset the liability because the cash or cheque has been received for goods not given or services not rendered yet.

1. Depreciation of Asset

Trading and profit and loss account effect

The depreciation of asset is an operating expense for the business and will affect profit and loss account. It will be added to the administrative expense and will be appear in the administrative expense section of profit and loss account and will be deducted from gross profits to arrive at net profits along with other expenses.

Balance sheet effect

In balance sheet it will appear as deduction from the fixed asset as the fixed assets in balance sheet will be shown at written down value. So this will be added to previous balance of accumulated depreciation and will be deducted from the total cost of the fixed assets and will appear in the assets section under the heading of fixed asset. It might appear in notes as sometimes in balance sheet summarized figure of fixed asset at WDV will be shown. In any case it is deducted from fixed asset in balance sheet and affects the total assets side

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