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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
2. Cash related to Investment made by 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.

www.vustudents.ning.com

 

ANSWER:

 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.

www.vustudents.ning.com

 

Answer:

 

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

Less Cheque received                                                   Cr                    500

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.

 

Answer:

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.

 

Solution: www.vustudents.ning.com

 

 

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.

 

ANSWER:

 

Starting balance:

    Net income                                                                               20,000

Add: adjustment for non cash items                                                            

    Depreciation                                                                             38,000

Operating profit before working capital changes:                         58,000

 

Working capital changes:

Add: cash                                                                                      3,000

Less: accounts receivable                                                             (7,000)

Add: accounts payable                                                                   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

ANSWER

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

 

 

www.vustudents.ning.com

 

 

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

                                                                                

Additional information

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.

Ans: Bad Debts

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                        

Add bpurchase:                                                 175,750

Add  Carriage inward :                                         5,200

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      Drawings made by partner

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

            Discount Received A/c 2600

            Cash/Bank A/c             127400

Payment is being made to creditor and 2% discount is received.

 

 

Question No: 49    ( Marks: 3 )

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

 

Answer:

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.

 

Answer:

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.

 

Answer:

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         

Add: Decrease in Assets                                                                        5,000

Add: Increase in Liabilities                                                         6000

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
  4. Unearned Revenue or Revenue Received in Advance
  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.

 

 

  1. Unearned Revenue or Revenue Received in Advance

 

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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