Accounting Unit 1

Table of contents 1.

CHAPTER ACCOUNTING CONCEPTS

Page 02

2.

SUSPENSE ACCOUNT

07

3.

LABOUR REMUNERATION

11

4.

OVERHEAD& JOB COSTING

15

5.

STOCK VALUATION

27

6.

CONTROL A/C

31

7.

PARTNERSHIP

37

8.

INCOME AND EXPENDITURE

45

9.

SINGLE ENTRY

50

10.

RATIO ANALYSIS

58

11.

MANUFACTURING ACCOUNT

63

No.

2

Accounting concepts and conventions Brought to you by: Huzaifa Abdullah Tel: 01714098841

3

1. Huzaifa Abdullah prepared the following balance sheet as at 30th April 2009.

Huzaifa Abdullah balance sheet as at 30th April 2009. Details Fixed assets Premises Office fixtures Staff skill Current assets Stock Debtors Bank Less current liabilities Creditors

£ 180000 100 210000 210000 15000 19000 5900 39900 16000 234000

Financed by: Capital Net profit

160000 81000 241000 Drawings 7000 234000 Abdullah had not received any formal financial training before preparing the financial statements. The following information is available: I. The value of the premises was increased by £20000 to take into account of the increased market value in the year. This was considered as profit. II.

Office fixtures had a book value of £4000 on 1st may 2004. The usual depreciation rate of20% was not applied for the year ending 30th April 2005. For that year Abdullah had charged depreciation “writing down the assets” to its scrap value at the end of that year. The asset will be used in the business for several years.

III.

Huzaifa Abdullah valued the skill of the staff at £30000 and had placed this sum in the balance sheet and the profit loss account.

IV.

The closing stock was valued at resale value. The business uses 50%mark up on goods.

Required: a. Indentify for each of (I) to (IV) above, the accepted accounting concept or convention other than prudence which should have been complied with. (4) b. Calculate the revised net profit after applying the correct interpretation of the accepted accounting concept and conventions. c. Prepare a revised balance sheet as at 30th April 2005. d. Evaluate the role played in accounting by accepted accounting concepts and conventions. (2)

4

2. Huzaifa Abdullah prepared the following final accounts to the tax department. The officer completely rejected the accounts and advised him to prepare them afresh. Huzaifa Abdullah profit and loss account for the year ended 31st December 2000 Details £ Sales 750000 Costs of sales (230000) Gross profit 520000 Less, expenses (115000) Net profit before taxation 405000 Taxation (35000) Profit after taxation 370000 Huzaifa Abdullah Balance sheet as at 31st December 2000 Details £ £ £ Fixed assets (net book value) Leasehold land 200000 Computers 24000 Motor Vehicles 103000 327000 Current assets Stock 162000 Debtors 152000 Bank 24000 338000 Less, current liabilities Trade creditors 135000 Taxation due 35000 (170000) 168000 495000 Financed by: Capital 125000 Net profit 370000 495000 The officer in the tax department made the following observations: • Lease hold land had been revalued on 1st January 2000 at £20000 above its balance sheet value at 31st December 1999, but this had not been reflected in the balance sheet at 31st December 2000. At the revaluation date, all leases had 25 years before expiry. No amortisation had been provided in the profit loss account for the year ended 31 st December 2000. • £20000 worth of obsolete stock which was decided to be written off from the books had been included in the stock. • Expenses shown in the profit and loss accounts ignored an expense of £18000 which owed at the balance sheet in that date. • There has been no entry of provision for bad debts. It was decided to create a provision for bad debts to 5% of debtors. Required: a. Taking the above errors into consideration mention which concept you have referred to correct the errors. b. Prepare a corrected final account taking into consideration of all the errors listed above.

5 3. The directors of Akij LTD are concerned about the financial performance of the company for the year ended 31st December 2009. Extracts from the company’s profit and loss accounts and the balance sheet are as follows. Profit and loss account for the year ended 31st December 2009. Details £ Sales ( all credit) 600000 Cost of sales (purchases £500000) (540000) Gross profit 60000 Less expenses (40000) Operating profit 20000 Taxation (4000) Profit available for dividend 16000 Dividend (10000) Retained profit for the year 6000 Balance sheet as at 31st December 2009. Details Fixed assets Current assets Stock Trade debtors Current liabilities Trade creditors Taxation Dividend Overdraft

£

£

£ 320000

120000 60000 180000 90000 4000 10000 46000 (150000) 30000 350000

Financed by: Share capital Revenue reserves

300000 50000

350000 One of the directors suggested the following: i. The closing stock to be half the average stock of 2009. ii. Keep sales at the same level as 2009, but reduce purchases by 10% due to more competitive ordering techniques. iii. Decrease the closing creditors by one quarter. iv. Increase the closing creditors by one third v. Sell half of the fixed assets for cash by the end of 2010 (assume they realise the balance sheet value. Ignore depreciation) vi. Expenses will be reduced by 5% of 2009 levels. vii. Taxation will be 25% of the operating profit. viii. Proposed final dividend will be 10% of the profit available for dividend. Required: a. The profit and loss account and the balance sheet at the end of 2010 with as much detail as possible taking into consideration the suggestions. b. A summary of the movements on the bank balance during 2010. c. Evaluate whether the directors suggestion has had a positive impact on the business. Use relevant ratios to support your answer. (6)

6 4. a. explain why a business might maintain a provision for doubtful debts account b. The accounting concepts of accruals and materiality might conflict when preparing the accounts of a business. Explain the statement. (6) c. Evaluate the usefulness of accounting standard in the preparation of final accounts. (4)

5. a. Distinguish between accruals and realisation concepts in accounting (4) b. Evaluate the role of double entry accounting as an aid to communication in managing the business. (2) 6. A. Using relevant examples explain why a business should end of year adjustments for a. Capital and revenue expenditure b. Prepaid expenditure. 7. Huzaifa has produced draft accounts for the year ended 31st December 2008. The business showed a turnover in excess of $2 million. While discussing the draft accounts with his accountant he makes the following comments: i. “My trial balance failed to agree so I added that amount to sundry expenses. ii.

The business bought 15 computers on 1st January 2008 for $600 each. I decided to depreciate them over four years using straight line method. Although they are shown in the draft balance sheet at their depreciated amount. I now find that they were obsolete at 31st December 2008 and worth only a scrap value of $20 each.

iii.

“My wife has been a great asset with her excellent managerial skills. I have therefore included her on the balance sheet at a value of $30000. Increased the goodwill and decided to depreciate her by 2% on a straight line basis.

iv.

I like to solve business problems while relaxing on the Manhattan Beach. I have therefore included the cost of holiday $2700 in the travel expenses.

v.

I heard on 2nd January 2009 that stock previously valued in the draft accounts at $1500 was worthless. Even though it was after the year end, i decided to adjust the stock figure in the draft figure accounts.

Required: Bearing in mind the generally accepted accounting principles and standard give your opinion as the accountants likely response expresses above. Where appropriate calculate the effect on the company’s profit if any suggested by the accountant.

7

Suspense Account Brought to you by: Huzaifa Abdullah Tel: 01714098841

8 1. Kay extracted a trial balance from the books of her business as at 31st December 2002. The trial balance totals were £11942 debit and £12428 credit. Kay debited the difference of £486 to a suspense account so that she could prepare draft accounts. The draft profit and loss account showed a profit of £4200. Subsequently found the following errors: I. The debit side of the wages account had been overcast by £100. II. Discount received £45, had been posted to suppliers accounts but not to the discounts received accounts. III. A sale of goods on credit to Sam for £120 had not been entered in the books at all. IV. A cheque received from debtor, Keith £62 had been debit side of his account. V. The refund of an insurance premium, £30, had been debited in the cash book but no other entries had been made on this regard. VI. The purchase of some office equipment for £590 had been debited to office expenses. VII. Rent paid £400 had been credited to the rent receivable account. VIII. Goods returned to Slow Ltd, a supplier had been credited to Slow Ltd account and debited to the purchases returns account. The goods had originally cost £200. IX. A credit balance in the purchase ledger, £15 had been omitted from the list of balances extracted from the ledgers. The total of that list had been included in the trial balance as trade creditors. X. A purchase of office stationery £110 had been debited to telephones and postages account in error. Required: a) The journal entries to correct the errors. b) The suspense account showing the correcting entries. c) A revised profit figure. d) Explain three types of errors which do not affect the agreement of trial balance. (6)

2. Huzaifa Abdullah extracted a trial balance from his ledgers on 31st May 2003. His balances failed to agree and Abdullah opened a suspense account. Subsequently the following errors were discovered. I. A cheque received from Ali a debtor had been correctly entered in the cash book as £105, but had been credited to his account as £150. II. A modification to a machine at a cost of £750 had been debited into the machinery repairs account instead of machinery account. Assets are depreciated on the straight line method at 10% on cost. III. The total of sales day book for March 2003 was £10860 this had been posted to the sales account as £10680. IV. An invoice for the purchase of goods from BB on 5th January had been entirely omitted from the books. The invoice amounted to £300. V. A debt of £100 in the sales ledger had proved to be bad and had been written off in the sales ledger but the appropriate entry had not been made in the bad debts account. Required: a) The journal entries to correct the errors. b) The suspense account showing the correcting entries. c) A revised profit figure.

9 3. Denise trial balance at 31st March 1199 had difference of £4510, the total of the debit side being larger by that amount. Denise opened a suspense account until such time the errors could be found. Meanwhile she prepared final account which revealed a net loss of £2300 for the year. Subsequently Denise found the following errors: i. Major repair work to a damaged vehicle in the sum of £2780 had been debited in error to the motor car account at £2870. ii. An invoice for the sale on credit to NNO of goods selling price of £500 had been debited to NNO’s account but had not been entered in the sales day book. iii. The figure of stock at 1st April 1198 had been entered into the trial balance as £14000 instead of £10400. iv. A stock sheet totaling £1300 had been omitted from the closing stock calculation. v. A credit balance of £160 in the sales ledger had been extracted as a debit balance. Required: a) The journal entries to correct the errors. b) The suspense account showing the correcting entries. c) A revised profit figure. 4. Mrs. Sam prepared the following trial balance at 31st December 1196 for the business of her business of her husband. Details £ £ Capital 1st January 1196 53780 Purchases and sales 9000 18400 Return Inwards 100 Return Outwards 250 Depreciation for year written off 890 Wages 4300 Discount allowed 450 Discount received 270 Debtors and creditors 1250 2750 Premises 45000 Fixtures and fittings 8900 Bank Overdraft 1200 Cash 150 Carriage inwards 370 Stock 1st January 1196 2500 Carriage outwards 140 Sundry expenses 1420 Provision for doubtful debts 420 ______ 75770 75770 Although the trial balance agreed Mrs. Sam was sure that something was wrong but before she could find out she suffered from a heart attack and was rushed to hospital. a. You are asked to rewrite the trial balance correctly entering the difference (if any) in the suspense account balance. b. After checking the books the following errors are revealed: i. A page of purchase day book has been under cast by £3000. ii. A total in the sales book has been carried forward as £1000 instead of £1600. iii. The sale of some fixed asset for cash £300 has been credited to the sales account. iv. Return inward of £100 has been posted to the return outward account. c. Prepare journal entries to correct the above errors d. Write up the suspense account.

10 5. At the end of the financial year Mr. Kassali prepared a trial balance which failed to match. The difference was entered in the suspense account. The trial balance was used to prepare final account which recorded a profit of £23800. The following errors were later discovered: i. A purchase of goods for resale costing £340 had been recorded in the office fixtures account. ii. Rent received £2500 had been correctly entered into the bank account but debited to the rent receivable account, iii. A cheque sent to a creditor for £850 was correctly entered in the cash book but was entered in the creditors account as £580. iv. Depreciation on motor van had been charged for the year at £900. Motor vehicle cost £15000; the depreciation policy is to charge depreciation at the rate of 20% on cost. v. A payment of £80 wages by cheque had been debited to the wages account as £18 and credited to the bank account as £180. Required a. Prepare journal entries to correct the above errors b. Write up the suspense account c. Calculate the revised net profit after correction of all errors. d. Distinguish between errors of commission and errors of principle. (2) e. Evaluate the role of suspense account in correcting errors contained within the books of double entry. (2)

6. The following trial balance was prepared by an inexperienced accountant for the business of JKK traders on 30th April 2009. The trial balance only contains errors of drafting and errors of double entry. The following errors in the double entry were discovered: i. Goods purchased on credit valued at £200 were returned on 28th April 2009 but no entries had been made. ii. New fixtures cost £1500 had been posted to the purchase account in error. iii. Goods sold to a customer for £8000 had been debited to both the sales account and the customer’s account. iv. Telephone charges of £60 had been paid by cheque and correctly recorded in the tele Details £ £ pho Sales 96450 ne Purchase 42000 char Stock 5700 ges Purchase returns 800 acco Salaries and trade expenses 45200 unt Telephone charges 1540 but Capital 15000 no Bank overdraft 1600 othe Fixtures (at cost) 40000 r Fixtures provision for depreciation 1800 entri Debtors 12920 es Creditors 15050 had Provision for bad and doubtful debts 600 been made. Required a) Prepare journal entries to correct the above errors b) Write up the suspense account c) Calculate the revised trial balance after correction of all errors. d) Trial balance is a checking device. Identify another checking device used in accounting and evaluate its benefits.

11

LABOUR REMUNERATION Brought to you by: Huzaifa Abdullah Tel: 01714098841

12 1. The following information relates to three employees; John, Alice and Clara. Workers John

Alice

Clara

Actual hours worked

37

41

35

Hourly pay rate £

3.20

2.75

4.10

Output ( units) : product X420

50

-

174

Product Y 420

93

70

-

Product Z 420

99

75

225

The standard time for the products is: ! Product X420: 5 minutes ! Product Y 420: 10 minutes ! Product Y 420: 12 minutes ! For piece rate purposes each minute is valued at £0.05. Required: a. Guaranteed hourly rates only (basic pay) b. Piece work with earnings guaranteed at 90% of basic pay c. Premium bonus where the employee received half of the time saved in additional pay. 2. The following information relates to three employees; Osama, Kareem and Saimon. Workers Osama

Kareem

Saimon

Actual hours worked

60

50

45

Hourly pay rate £

5.20

4.75

6.5

Output ( units) : Premium

150

-

174

Regular

100

170

-

Special

199

175

225

The standard time for the products is: ! Premium : 15 minutes ! Regular: 10 minutes ! Special: 12 minutes ! Piece work wages are: £ 20, £ 15, £ 12 for premium, regular and special respectively. Required: a. Guaranteed hourly rates only (basic pay) b. Piece work with earnings guaranteed at 80% of basic pay c. Premium bonus where the employee received 75% of the time saved in additional pay.

13 3. Alex produces tables. He has hired to employees. In recent times he had to hire different workers as workers were leaving as soon as they had gained expertise in their jobs. In other words Alex was training workers for his competitors. He is concerned by this high labour turn over and wants to resolve this situation. He is considering two methods piece rate system and Hourly pay system. The following information is available: Employees Akkas 360

Units produced

Jabbar 420

Time allowed for each table

10

10

Time taken hours

28

54

Rate/hour (£)

9

9

Rate/unit

4

4

a. Using the information from above calculate the remuneration for each employees on Piece rate and on an hourly rate. Which remuneration scheme should Alex use: i. In point of view of the workers ii. In point of view of the Business. (2) b. A friend of Alex suggested introducing bonus scheme. He decided to pay the employees 50% of their time saved. Evaluate all the three proposals i.e. merits and demerits and help Alex decide on which method should he use. (6)

4. Xyz manufacturing limited has a premium bonus scheme based on time saved. Employees receive a bonus equivalent to half the time saved on a job. Three workers are given a similar job to do. Hourly rate is fixed to £15.The standard time is 6 hours. Worker A completes it in 3 hours, while Worker B takes 4 and Worker C takes the whole 6 hours to complete. a. Calculate the earnings for each of the workers for that job. b. Evaluate the remuneration method. c. Assuming that Worker A and Worker C would be working at the same speed throughout a 35 hour week. Who would earn most? And why?

14 5. Three employees are given the same type of job to perform; the standard time is 7 hours. Under the company’s payment scheme employees are paid an hourly rate of £35 and a bonus on 40% time saved. Mariam performs the job in 4 hours, while Saimon takes 6 while Khaled takes 7. a. Calculate the wages earned by each worker showing clearly the bonus and the basic pay. b. Mariam is unhappy: she has worked the quickest and yet the scheme is penalising her. Explain with valid reasons wether she is justified in being angry? (5) c. What safeguards must a company build into its bonus scheme to ensure that they are not abused? (4)

6. In accounting differentiate between time rate methods and piece rate methods (6)

7. A company is considering paying the workers of research and development on the piece rate system. To what extent do you agree or disagree with this proposal. What payment scheme would you suggest? (8)

8. i. It is some times said of premium bonus schemes that it is the savings in the overheads which provides the funds out of which the bonus is paid. How can this be so? (5) iii.

What incentives do employers have on premium bonus schemes? (4)

15

Overhead& Job Costing

Brought to you by: Huzaifa Abdullah Tel: 01714098841

16

expenditure

allocation

direct expenses

apportion

allocateable indirect expenses

Bases of apportionment Overhead Buildings: rent, rates, maintenance, depreciation, insurance Heating and lighting Plant, machinery depreciation Cost of storekeeping (warehousing) Costs of canteen, personnel department, administration

Basis of apportionment Floor area Space occupied, or floor area On cost or book value of plant Number of store requisitions On number of employees.

non allocateable indirect expenses

17 1. Dhaka industry limited is a manufacturing company with four departments: machining, assembly, painting and packing. The following data relates to the four departments: Machining Assembly Painting Packing Floor area (meters)

2000

1500

1000

500

Plant cost (£000)

90

30

20

10

Plant replacement cost (£000)

120

50

30

20

Number of store requisitions

300

200

250

50

Direct Labour Hours

150

130

60

55

Machine Hours

175

115

55

70

During the year ended 31st December 2020 Dhaka Industry Limited incurred the following expenditures: Machining Assembly Painting Packing £

£

£

£

Production material

130000

24000

34000

17000

Direct Labour

36000

12000

15000

12000

Indirect Labour

4100

5000

4700

3400

Other expenses included: £ Factory rent

15000

Repairs and maintenance

7500

Factory depreciation

3000

Factory insurance

1000

Heating

2500

Plant depreciation

9000

Plant insurance

1320

Store keeping costs

6400

Required: a. Explain the difference between allocation and apportionment. (3) b. Using appropriate bases of apportionment, prepare a table showing apportionment and allocation of Dhaka industry limited overheads to the four departments. c. Calculate the overhead recovery rates using the appropriate basis.

18 2. Mojo Drinks is a manufacturing company with four departments: machining, assembly, painting and packing. The following data relates to the four departments: Machining Assembly Painting Packing Floor area (meters)

12000

10000

5000

1500

Plant cost (£000)

190

40

30

5

Plant replacement cost (£000)

110

60

40

10

Direct Labour Hours

200

120

50

75

Machine Hours

175

115

55

70

During the year ended 31st December 2020 Mojo Drinks incurred the following expenditures: Machining Assembly Painting Packing £

£

£

£

Production material

250000

230000

43000

27000

Direct Labour

38000

17000

16000

15000

Indirect Labour

4100

5000

4700

3400

Other overheads included: £ Factory rent

25000

Repairs and maintenance

5500

Factory depreciation

3500

Factory insurance

1200

Heating

500

Plant depreciation

19000

Plant insurance

10000

Required: a. Using appropriate bases of apportionment, prepare a table showing apportionment and allocation of Mojo Drinks overheads to the four departments. b. Calculate the overhead recovery rates using the appropriate basis.

19 3. Dandy clothing company manufactures clothing for women and children. There are three processes involved in the manufacture spinning, weaving and packaging. The following data is available for the three departments: spinning

weaving

packaging

Dyeing

Floor area (meters)

1700

1500

900

600

Plant cost (£000)

85

25

10

15

Plant replacement cost (£000)

20

40

5

6

Number of store requisitions

300

200

250

50

Direct Labour Hours

200

120

50

75

Machine Hours

175

115

55

70

Overhead expenses were: £ Factory rent

16000

Repairs and maintenance

17500

Factory depreciation

2000

Factory insurance

5000

Heating

2600

Plant depreciation

5000

Plant insurance

1200

Store keeping costs

4600

Other expenses were: spinning

weaving

packaging

Dyeing

£

£

£

£

Production material

250000

230000

43000

27000

Direct Labour

38000

17000

16000

15000

Indirect Labour

4100

5000

4700

3400

Required: a. Using appropriate bases of apportionment, prepare a table showing apportionment and allocation of Dandy clothing company overheads to the four departments. b. Calculate the overhead recovery rates using the appropriate basis.

20 4. Saimon Engineering manufactures computer tables. They have four departments within the business: machining, finishing, administration and maintenance each of which is an independent cost centre. The following overhead costs were budgeted for the year ended 31st December 2000. machining finishing administration maintenance £ £ £ £ Indirect labour 15000 25900 4000 3000 Unallocated costs were £ Machinery Insurance 5900 Heat and Light 5000 Cleaning 6000 Depreciation 12500 Supervisory costs 75000 Power 35600 Rent 3000 Rates 6000 Telephone 1000 Miscellaneous expenses 1200 The following information is available: Floor area (meters) Plant cost (£000) Book value of assets (£000) Number of store requisitions Direct Labour Hours Machine Hours Number of employees

machining 1700 85 150 300 200 2000 40

finishing 1500 25 90 200 120 1200 20

administration 900 10 50 250 50 11 10

maintenance 600 15 30 50 75 5 2

You are also informed that: ⇒ Machining and finishing are productive departments. ⇒ The machining department spends 75% of staff hours in the machining department and 25% in the finishing department. It is estimated that 40% of administration relates to the machining department and the 60% to the finishing department. ⇒ The machining department is “machine intensive” and the finishing department is “labour intensive”. ⇒ The factory works 40 hours per week and 50 weeks per year. ⇒ For the year 2000 actual overheads and hours worked were: Machining Finishing Overhead expenditure £100000 £90000 Machining Hours 2650 1640 Direct Labour hours 250 100 Required: a. Prepare an overhead cost statement showing the allocation and apportionment of overheads to the four cost centres for the year 2000. b. Reallocate the cost of service departments to the production departments using the elimination method. c. Calculate& comment on the under or over recovery of overheads for the departments.(5) d. Explain the terms “machine intensive” and “labour intensive”.(4)

21 5. Rajdhani clothing company manufactures clothing for children. There are three processes involved in the manufacture spinning, weaving and packaging. There are two service departments: canteen and maintenance. Canteen is used by all the employees including those of maintenance. The following data is available for the three departments: spinning weaving

packaging

Dyeing

Canteen

maintenance

Floor area (meters)

1700

1500

900

600

50

200

Plant cost (£000)

85

25

10

15

25

45

Plant replacement

20

40

5

6

25

55

Direct Labour Hours

200

120

50

75

-

-

Machine Hours

175

115

55

70

-

-

No of employees

45

35

15

25

5

15

cost (£000)

Budgeted Overhead expenses for the year 2020 were: £ Factory rent

16000

Repairs and maintenance

17500

Factory depreciation

2000

Factory insurance

5000

Heating

2600

Plant depreciation

5000

Plant insurance

1200

Store keeping costs

4600

Required: a. Using appropriate bases of apportionment, prepare a table showing apportionment and allocation of Rajdhani clothing company overheads to the four departments. b. Calculate the overhead recovery rates using the appropriate basis. c. Re allocate the cost of service departments to the production departments using the elimination method. The actual overheads for the year ended 31st December 2020 were: spinning

weaving

packaging

Dyeing

Direct Labour Hours

250

95

55

60

Machine Hours

155

100

65

55

Actual overheads

32000

23000

12000

34000

d.

Calculate the over or under absorption. Comment on the effect on net profit. (5)

22 6. KIWI Industries LTD produces plastic bottles. They have four departments within the business: machining, finishing, administration and maintenance each of which is an independent cost centre. The following overhead costs were budgeted for the year ended 31st December 2000. machining finishing administration maintenance £ £ £ £ Indirect labour 15000 25900 4000 3000 Unallocated costs were £ Machinery Insurance 6900 Heat and Light 7000 Cleaning 8000 Depreciation 10500 Supervisory costs 70000 Power 35000 Rent 6000 Rates 5000 Telephone 4000 Miscellaneous expenses 3200 The following information is available: Floor area (meters) Plant cost (£000) Book value of assets (£000) Number of store requisitions Direct Labour Hours Machine Hours Number of employees

machining 1700 85 150 300 200 2000 40

finishing 1500 25 90 200 120 1200 20

administration 900 10 50 250 50 11 10

maintenance 600 15 30 50 75 5 2

You are also informed that: ⇒ Machining and finishing are productive departments. ⇒ The machining department spends 75% of staff hours in the machining department and 25% in the finishing department. It is estimated that 40% of administration relates to the machining department and the 60% to the finishing department. ⇒ The factory works 40 hours per week and 50 weeks per year. ⇒ For the year 2000 actual overheads and hours worked were: Machining Finishing Overhead expenditure £120000 £85000 Machining Hours 2650 1640 Direct Labour hours 250 100 Required: a. Prepare an overhead cost statement showing the allocation and apportionment of overheads to the four cost centres for the year 2000. b. Reallocate the cost of service departments to the production departments using the continuous allotment method. c. Calculate& comment on the under or over recovery of overheads for the departments.(5) d. Explain why some overheads can be allocated while some need to be apportioned? (3)

23 7. Chittagong industry limited is a manufacturing company with four production departments: machining, assembly, painting and packing. Service departments include administration and Maintenance. The following data relates to the departments:

Floor area (meters) Plant cost (£000) Plant replacement cost (£000) Number of store requisitions Direct Labour Hours Machine Hours Number of employees

Machining 2000

Assembly 1500

Painting 1000

Packing 500

administration Maintenance 200 250

90

30

20

10

10

30

120

50

30

20

20

45

300

200

250

50

-

40

150

130

60

55

95

80

175 40

115 20

55 10

70 15

45 5

30 10

Packing 15% 15%

administration Maintenance 5% 5% -

Use of service departments by other departments Machining Assembly Painting administration 45% 15% 20% Maintenance 30% 20% 30% Budgeted expenses included

£ Factory rent 15000 Repairs and maintenance 7500 Factory depreciation 3000 Factory insurance 1000 Heating 25000 Plant depreciation 15000 Plant insurance 1320 For the year 2000 actual overheads and hours worked were: Machining Assembly Overhead expenditure £50000 £67000 Machining Hours 200 95 Direct Labour hours 140 135

Painting £24000 67 55

Packing £12000 78 85

Required: a) Prepare an overhead cost statement showing the allocation and apportionment of overheads to the four cost centres for the year 2000. b) Reallocate the cost of service departments to the production departments using the continuous allotment method. c) Calculate& comment on the under or over recovery of overheads for the departments.(5) d) Explain why some overheads can be allocated while some need to be apportioned? (3)

24 8. A business has three production departments and two service departments. Details of their total overhead costs after allocation and apportionment are as follows: Machining Assembly Painting Canteen Administration Total overheads

£95000

£35000

£15000

£52000

£80000

Hourly wage rate

£20

£15

£12

Administration

40%

30%

20%

10%

-

Canteen

40%

20%

30%

-

10

Budgeted hours

12000

8000

6000

Actual overhead cost

£145000

£75000

£40000

Actual hours worked

10000

7000

60000

Use of service departments:

Required: a) Reallocate the cost of service departments to the production departments using the continuous allotment method. b) Calculate& comment on the under or over recovery of overheads for the departments.(5) The business usually deals in made to order goods and manufactures goods for its customers. The firm received an order named as Order420. The following cost would be associated with the order: Raw materials

£5000

Other miscellaneous expenses

£450

Machine hours required

20

Labour hours required

13

It is the company’s policy to maintain a margin of 40%. c) Calculate the price the firm should quote for Order420. The actual expenses involved with the Order420 were Raw materials

£4500

Other miscellaneous expenses

£400

Machine hours required

15

Labour hours required

8

d) Calculate the actual profit or loss from Order 420. e) The directors are concerned that the orders are decreasing and the customers are moving away to rivals. He believes that the overhead absorption rate is not being accurate. Comment on the statement (4) f) What suggestions would you give to improve the situation?

25 9. Osama Bin Laden manufactures products made to customers special requirements and uses a system of job costing. The business has two production departments and two service departments. All these years of business he has always calculated “single overhead” recovery rate but now realises that he had been doing a mistake and now wants to charge individual overhead recovery rate for each production department. Cost centre of the business have been budgeted as follows: Production Machining Finishing £ £ Allocated costs: Indirect cost 1100 3500 Indirect wages Unallocated costs: Supervision Rent and rates Insurance

Service Stores Admin £ £ 1500 11000

1500 20000

Stores 50 5 1 £12

Admin 100 15 2

£ 30000 12000 6000

The following information is available: Floor area (meters) Plant cost (£000) Number of store requisitions Direct Labour Hours Machine Hours Number of employees Hourly wage rate

Machining 200 25 700 8000 5 £20

Finishing 250 15 400 7100 4 £15

Required: a. Define the term “single overhead rate”? Outline the disadvantages and suggest an improved method. (4) b. Define over and under absorption of overhead.(4) c. Apportion the unallocated costs between the departments using an appropriate basis. d. Reallocate the cost of service department in to the production department using the most appropriate basis. e. Osama Bin Laden has been approached by a customer for a special order and was requested by the customer to quote a price for the JOB420 The following information is available: Raw materials cost £520 Labour: 20 hours of machining and 16 hours of finishing Overheads: 20 hours and 16 hours finishing. All jobs require a profit margin of 50% A special tool would be needed for this job only and would be of no use later. The cost of tool would be £300 but can be sold after the completion of the job for £250. i. Prepare the quotation for JOB420 ii. JOB420 was completed with following costs: Raw materials cost £450 Labour: 20 hours of machining and 10 hours of finishing Calculate for JOB420: Under or over recovery of overheads, Actual profit and profit margin.

26 10. Abdullah Traders have three production departments and two service departments. Details of their total overhead costs after allocation and apportionment are as follows: Machining Assembly Painting Canteen Administration Total overheads

£115000

£55000

£45000

£55000

£90000

Hourly wage rate

£30

£35

£32

Administration

30%

30%

30%

10%

-

Canteen

25%

35%

30%

-

10%

Budgeted hours

13000

7000

5000

Actual overhead cost

£145000

£75000

£40000

Actual hours worked

10000

7000

60000

Use of service departments:

Required: a. Reallocate the cost of service departments to the production departments using the continuous allotment method. b. Calculate& comment on the under or over recovery of overheads for the departments.(5) The business usually deals in made to order goods and manufactures goods for its customers. The firm received an order named as Order420. The following cost would be associated with the order: Raw materials

£5000

Other miscellaneous expenses

£450

Machine hours required

25

Labour hours required

14

It is the company’s policy to maintain a margin of 20%. c. Calculate the price the firm should quote for Order420. The actual expenses involved with the Order420 were Raw materials

£5500

Other miscellaneous expenses

£400

Machine hours required

26

Labour hours required

15

d. Calculate the actual profit or loss from Order 420.

27

Stock valuation

Brought to you by: Huzaifa Abdullah Tel: 01714098841

28 1. On 1st January 2007 Quddus Ali started a business which traded “Pan”. He bought a machine which costed him £5000. He planned to use it for 5 years with no residual value. Date 2nd January 5th February 6th February 27th February 5th June 7th July 9th August 11th September 12th October 30th November 1st December

Purchases £ 50 50.5 49 45 56 60 55 55.5 49.5 40 60

Quantity 600 500 700 100 1000 600 400 600 500 1000 10

Date 12th January 8th February 12th March 13th April 12th June 21st July 19th August 19th September 24th October 1st December 21st December

Issues £ 85 85 85 85 85 85 85 85 85 85 85

Quantity 200 600 100 100 1200 450 500 550 600 900 90

Other expenses included: Wages and salaries £500, Rent and rates £250, advertisement £50, telephone £55, packaging materials £12. Required: a. Draw up a statement measuring the value of stock after each issue in FIFO, LIFO & AVCO. b. Prepare the trading, profit and Loss account in all three stock valuation methods. c. Which of the three methods would you recommend and why? (6) 2. On 1st January 2007 Cristiano Ronald started a business which traded vegetables. He bought a machine which was used to pack goods. It costed him £50000. He planned to use it for 15 years and the ma Purchases Date £ Quantity Date Quantity 2nd January 40 600 12th January 200 5th February 45 500 8th February 600 6th February 49 700 12th March 100 27th February 51 100 13th April 100 5th June 51.5 1000 12th June 1200 7th July 49 600 21st July 450 9th August 51 400 19th August 500 11th September 55 600 19th September 550 12th October 45.5 500 24th October 600 30th November 56 1000 1st December 900 1st December 60 10 21st December 90 Additional information: Selling price was determined by adding 75% to the cost of sales. Other expenses included: Rent $5000, wages and salaries $500, telephone $120, discount allowed $90. 100 units were damaged by torrential rain on 8th July. Required: Draw up a statement measuring the value of stock after each issue in FIFO, LIFO & AVCO. Prepare the trading, profit and Loss account in all three stock valuation methods.

29 3. On 1st January 2007 Akksas Ali started a business which traded “lungi”. Purchases Date £ Quantity nd 12 600 2 January 23 500 5th February 13 700 6th February th 12.5 100 27 February 14 1000 5th June 16 600 7th July th 12 400 9 August 17 600 11th September 19 500 12th October 17 1000 30th November 10 100 1st December Selling price was £23/unit. At the end of the year 500 units were in stock. Other expenses included: Salaries £450, Rent and rates £250, telephone £55, packaging materials £12. Required: a. Draw up a statement measuring the value of stock in FIFO, LIFO & AVCO. b. Prepare the trading, profit and Loss account in all three stock valuation methods. 4. On 1st January 2007 Osama Bin Laden started a business. Purchases Date £ Quantity 12 1600 2nd January 23 5100 5th February th 13 1700 6 February 12.5 1300 27th February 14 1200 5th June th 16 400 7 July 12 600 9th August 17 600 11th September 19 300 12th October 17 900 30th November 1st December 10 100 • At the end of the year 1000 units were in stock. • Selling price was fixed to £ 30/ unit. Other expenses included: ⇒ Salaries £450, Rent and rates £250, telephone £55, packaging materials £12. ⇒ 100 units were damaged by a storm on 8th July. Required: a. Draw up a statement measuring the value of stock in FIFO, LIFO & AVCO. b. Prepare the trading, profit and Loss account in all three stock valuation methods.

30 5. Tom and Jerry Ltd is wholesale business which sells its goods all over the country and deals mainly with one particular type of good. It has a huge warehouse and buys the goods in huge quantities and then sells them to different retailers and sometimes even other wholesalers. On the 13th of June there was a burglary in their ware house and some goods were stolen. Tom and Jerry ltd had an insurance policy in order but the insurance company asked for detailed damaged which had occurred. They hired you to estimate the damage. The following information is available. Purchases Date £ 2nd January 50 5th February 50.5 6th February 49 27th February 45 5th June 56 7th July 60 9th August 55 11th September 55.5 12th October 49.5 30th November 40 1st December 60

Quantity 6000 5800 7700 8100 5100 800 8800 3300 6500 1700 1000

Date 12th January 8th February 12th March 13th April 12th June 21st July 19th August 19th September 24th October 1st December 21st December

Issues £ 85 85 85 85 85 85 85 85 85 85 85

Quantity 2500 5600 3100 4100 4200 2000 6500 2550 1600 1900 900

A physical count revealed that there were 20000 units in stock. Required: a. Calculate the stock stolen in FIFO and LIFO. b. Suggest which value Tom and Jerry ltd should use for claiming compensation. (2) c. The management is unsure of using which stock valuation method. Evaluate the methods and help them decide on a stock valuation method. (6) 6. Shalimar PLC. is wholesale business which sells its goods all over the country and deals mainly with one good. On the 13th of July there was a storm in their ware house and some goods were damaged. Shalimar PLC. They hired you to estimate the damage. The following information is available. Purchases Date Date £ Quantity 12th January 2nd January 50 6000 8th February 5th February 50.5 5800 12th March 6th February 49 7700 13th April 27th February 45 8100 12th June 5th June 56 5100 21st July 7th July 60 800 19th August 9th August 55 8800 A physical count revealed that there were 14000 units in stock.

Issues £ 85 85 85 85 85 85 85

Quantity 2500 5600 3100 4100 4200 2000 6500

Required: a. Calculate the stock stolen in FIFO and LIFO. b. The management is unsure of using which stock valuation method. Evaluate the methods and help them decide on a stock valuation method. (6)

31

CONTROL A/C Brought to you by: Huzaifa Abdullah Tel: 01714098841

32

Sales ledger control account Debit Total of the sales ledger Credit sales Refunds to customers Dishonoured cheques Interest charged to customers Bad debts recovered Total of any sales ledger credit balances

Credit Total of sales ledger credit balances brought forward Sales returns Cash received from debtors Cassh discounts allowed Bad debts written off Cash received * Contra ** Total of sales ledger debit balances

*Cash received in respect of bad debts previously written off. ** Balances if purchases had been made from the customer or debtor.

Purchase ledger control account Debit Credit Total of purchase ledger balance Total of purchase ledger credit balance Return outwards Total credit purchases Cash paid to suppliers Refunds from suppliers Cash discounts received Interest charged by suppliers Contra * Total of purchase ledger credit balances Total of debit balance * Balances if purchases had been made from the customer or debtor. Key Points to remember: 1. Control accounts help to identify any discrepancies and errors in the ledgers. 2. If there is a trade discount deduct the trade and then enter the net price. Mention the original price and the discount. Common Errors 1. Items posted to the wrong sides of control account. 2. Contra entries posted in one account only. 3. Bad debts recovered not entered in the both sides of the control account.

33

1. Junaid Jamshed was preparing the control account for his firm when he suddenly fell sick and was rushed to hospital. The following information is available. Details Total debtors balances at 31st December 2000

£ 22000

Cash sales for the year

142000

Credit sales

86000

Credit sales returns

420

Cash received from debtors

87210

Discount allowed to debtors

1415

Bad debts written off

250

Dishonoured cheque

220

Goods bought on credit from a customer

140

Additional information: The issuer of the dishonoured had assured that payment would be settled soon. It was decided to settle the account of the creditor. Required: a. From the above information prepare sales ledger control account for Junaid Jamshed. b. List the advantages and disadvantages for control account. (5)

2. Saeed Anwar was preparing the control account for his firm. He had no formal training in accounting and so is in a fix. The following information is available. Details Total creditors balances at 31st December 2000

£ 21000

Cash purchases for the year

42000

Credit purchases

186000

Credit purchase returns

140

Cash paid to creditors

97210

Discount received from creditors

1500

Goods bought on credit by a creditor

340

Additional information: It was decided to settle the account of the creditor. Required: From the above information prepare purchase ledger control account for Saeed Anwar.

34 3. The following information is extracted from the books of Haji Company for the month of July 2020. £ Sales ledger balances at 1st July 2020 Debit Credit

5000 76

Purchase ledger balances at 1st July 2020 Debit Credit

124 3600

Sales for July 2020 Cash Credit

2400 21790

Purchase for July 2020 Cash Credit

1020 14500

Goods returned by credit customers Goods returned to suppliers bought on credit

1760 440

Cash received from debtors

20450

Cash paid to creditors

11120

Discount allowed

580

Discount received

276

Bad debts written off

424

Cash received from previously written off bad debt Dishonoured cheques Interest debited to accounts of overdue of debtors Balances in sales ledger ( to be offset in the purchase ledger)

70 826 36 1200

Provision for bad and doubtful debts (CR)

200

Sales ledger credit balance 31st July 2020

150

Purchase ledger debit balances at 31st July 2020

80

Required: Prepare sales ledger and purchase ledger control account for the month of July 2020 for Haji Company.

35

4. John is a groceries trader buying and selling on credit. He wishes to produce a control account to check whether his accountant is involved in any discrepancy. The following information is available for the six months ending 30th June 2021.

Trade creditors at 1st Jan 2021 Trade debtors at 1st January 2021 Sales on credit Cheques Paid Returns Inwards Purchases for cash Bad debts written off Provision for bad and doubtful debts Purchase on credit Cheques received Return Outwards Discount received Dishonoured cheques

£ 25310 36400 68650 33200 900 3200 2100 1600 29470 63000 950 850 1450

The following errors have been discovered in the books of John: ⇒ A credit purchase of goods for resale, costing £1200, had been recorded in the office stationery account. ⇒ A credit note for returned to John worth £2800 had not been entered into the accounts. ⇒ A cheque for £475 rent receivable had been debited to bank account as £75. ⇒ Discount received of £20 had been incorrectly claimed by John. ⇒ Invoices for credit sales of £4000 had not been entered into the accounts. John just came to know that one of the invoices was for a business which had gone bankrupt and there was no chance of payment.

Required: a. Prepare journal entries recording the correction of errors. (narratives are not required) b. Prepare sales ledger and purchase ledger control accounts incorporating all the adjustments required. c. Evaluate the uses of control account to a business (4)

36 5. The following balances appeared in the books of Toto Company ltd for the year ended 30th June 2000. £ Creditor balances 1st July 1999

36846

Debtor Balances 1st July 1999

328

Discount received

1975

Purchases

276220

Payment to creditors

258972

Purchase returns

3116

Cash refunded from creditors Bills payable

262 1118

th

Debtors balances at 30 June 2000

419

Contra: sales ledger

784

The control account creditor balance failed to agree with the balances extracted from the purchase ledger. After thorough examination the following errors were revealed: ⇒ A credit balance of £176 on the account of creditor had been omitted from the list of creditor balances. ⇒ Discount received of £28 had been correctly entered in the cash book and the discount received account but was not entered in the creditors account in the ledger. ⇒ The purchase day book was under cast by £200. ⇒ An item in the purchase day book had been posted to the creditors account as £168. ⇒ Discount received of £137 had been posted to the debit side of the discount received account. ⇒ Goods returned to supplier valued at £82 had been correctly entered in the creditors account but entered in the purchase returns account as £182.

Required: I. Show the purchase ledger control account before incorporating the relevant errors. II. Prepare a revised control account incorporating the errors. (Clearly showing the errors). HINT: A STATEMENT FOR CORRECTION OF ERRORS MIGHT BE HELPFUL. III. Prepare a statement reconciling the corrected balance with the totals as shown by the list of errors were found.

37

Partnership Brought to you by: Huzaifa Abdullah Tel: 01714098841

38

1.1 Treatment of goodwill on change in Partnership. Accounting Entries 1. If goodwill is to remain in the books 2. If good will is not to be retained in the books.

Account to be debited Good will a. Goodwill b. Capital a/c of partners in new firms (in new firm ratio)

Account to be credited Capital a/c of the partners in the old firm (in old firm ratio) Capital a/c of the partners in the old firm (in old firm ratio) Goodwill (to close goodwill account again.)

1.2 Revaluation account Accounting Entries 1. Increases in value of assets 2. Decreases in values of assets 3. Provision for depreciation on revalued assets 4. Profit on revaluation

5. Loss on revaluation

Accounting Entries 1. Assets at net book value 2. Proceeds of sale of assets 3. Assets taken over by partners ( at valuation) 4. Cost of dissolutions 5. Payment of creditors 6. Discount received 7. Cash received from debtors 8. Bad debts & discount allowed 9. Credit balance of realisation a/c 10. Debit balance of realisation a/c 11. Repayments of partners loan

Account to be debited Asset

Account to be credited Revaluation

Revaluation

Asset

Provision for depreciation

Revaluation

Revaluation

Capital (in proportion of the

Capital (in proportion of the profit sharing ratio before the revaluation.) 1.3 realisation account

Revaluation

profit sharing ratio before the revaluation.)

Account to be debited Realisation

Account to be credited Assets

Bank/cash

Realisation

Capital account of the partner

Realisation account

Realisation Creditors

Bank/cash Bank/cash

Creditors Bank/cash

Realisation Debtors

Realisation

Debtors

Realisation a/c

Partners capital (in profit

Partners capital (in profit

Realisation a/c

Partners loan a/c

Bank/cash

sharing ratio)

sharing ratio)

39

Instruction for students: ⇒ Use the papers provided with the question paper. ⇒ Try to finish the whole Assignment with in one sitting. ⇒ Please try not to refer to any notes or formats when solving this question paper. ⇒ Make maximum effort to finish with in the time designated by the teacher. ⇒ This Assignment contains (

1.

) questions.

Harry potter and Ronald Weasly are partners in a firm and share profits equally. Their capitals are: Potter £50000, Weasly £45000. On 1st January 2007 they decided to admit Hermoine Granger into the business as a partner. They will be sharing the profits in the ratio 1:2:1 for Harry potter, Ronald Weasly & Hermoine Granger respectively. Goodwill is to be valued at £ 25000 and is not to be retained in the books. Granger has paid £15000 into the business bank account as capital. Required: Show the entries in the partner’s capital accounts to adjust for Goodwill.

2. Huzaifa and Khubaib are partners in a firm and share profits in the ratio 1:2. Their capitals are: Huzaifa £45000, Khubaib £54000. On 1st January 2007 they decided to admit Zubair Zamir into the business as a partner. They will be sharing the profits in the ratio 2:1:2 for Harry potter, Huzaifa, Khubaib and Zubair respectively. Goodwill is to be valued at £125000 and is not to be retained in the books. Zubair Zamir has paid £15000 into the business bank account as capital. Required: Show the entries in the partner’s capital accounts to adjust for Goodwill.

PLEASE TURN OVER………………………………………

40 3. Inzimam and Yousuf are partners in firm selling cricket gears like pads, gloves etc. they are good friends and were sharing profits and losses equally. After the end of 31st December 2007 their balance sheet was as follows: Details £ £ Fixed Assets Free hold premises 100000 Motor cars 40000 Office furniture’s 6000 146000 Current Assets Prepaid expenses 20000 Debtors 48000 Balance at Bank 12000 80000 Less: Current Liabilities Creditors (8000) Working capital 72000 218000 Capital accounts Inzimam 100000 Yousuf 100000 200000 Current accounts Inzimam 12000 Yousuf 6000 18000 Capital employed 218000 After several years of business both the partners felt they had other assignments and were not being able to attend the business properly and the business was suffering because of that. They decided to admit Shoaib Akhter as their partner on 1 st January 2008. He introduced £45000 as capital and brought some fixtures into the business which was valued at £20000 on the same day. It was agreed that the following assets will be revalued: Free hold premises £ 13000 Motor cars of the old firms £ 35000 Office furniture and equipment £ 2000 Provision for bad debts 5% of debtors ? The new profit sharing ratio would be Inzimam, Yousuf and Shoaib Akhter as 3:2:1 respectively. Goodwill was valued at £ 65000 but it was decided not retain it in the books of the partnership.

Required: a) Show the entries in the partner’s capital accounts to adjust for Goodwill b) Show the opening balance sheet for Inzimam, Yousuf and Shoaib Akhter as at 1st January 2008.

41 4. Shahrukh Khan & Salman Khan are partners in a firm selling Bollywood DVD’s. They were sharing profits and losses equally. After the end of 31st December 2007 their balance sheet was as follows: Details £ £ Fixed Assets Office equipment 20000 Lease hold premises 150000 Air conditioners 25000 Motor cars 15000 Machinery 12000 222000 Current Assets Stock 25000 Debtors 48000 Balance at Bank 12000 85000 Less: Current Liabilities: Creditors (13000) 72000 Working capital 294000 Capital accounts Shahrukh Khan 150000 Salman Khan 126000 276000 Current accounts Shahrukh Khan 12000 Salman Khan 6000 18000 Capital employed 294000 After several years of business both the partners felt they had other assignments and were not being able to attend the business properly and the business was suffering because of that. They decided to admit Saif Ali Khan as their partner on 1st January 2008. He introduced £45000 as capital and brought a car into the business which was valued at £100000 on the same day. It was agreed that the following assets will be revalued: Office equipment 15000 Lease hold premises 200000 Air conditioners 5000 Motor cars 5000 Machinery 20000 Stock 15000 The new profit sharing ratio would be Shahrukh Khan, Salman Khan and Saif Ali Khan as 4:3:2 respectively. Goodwill was valued at £ 105000 but it was decided not retain it in the books of the partnership.

Required: a. Partners capital accounts to adjust for Goodwill b. Balance sheet as at 1st January 2008.

42

5. David, Victoria and Alex are in partnership, sharing profit and losses in the ratio 2:2:1. Interest is charged on drawings at 5% p.a. interest on capital is at 6% p.a. On 31 st December 2007 the balance sheet of the business was as follows: Details £ £ 180000 Fixed Assets : Free hold land and buildings Motor cars 60000 Office equipments 15000 Machinery 35000 290000 34000 Current assets: stock Debtors 41000 75000 (45000) Current liabilities: creditors Bank (10000) 20000 310000 Financed by: David 140000 Victoria 100000 Alex 70000 310000 The accountant who checked the financial statements commented that the capital account balances have not the following into consideration: i. Interest has not been charged on the drawings. The drawings were: 1st July 1st January £ £ David 6000 9000 Victoria 15000 Alex 10000 5000 ii.

Interest on capital had not been credited. Partner’s capital for the purpose of “interest calculation” were: David £70000 Victoria £50000 Alex £30000 Alex decided to concentrate more on his football coaching school and retire from the business. The following decisions regarding the business were made: o He will receive £18755 payable by cheque immediately. o The freehold land and buildings will be revalued at £ 250000 o Goodwill is to be valued at £10000. The goodwill will not be retained in the business. o Alex will take a partnership car at the net book value of £9000. o The balance of Alex’s capital will be left in the business as loan.

Required: a. Partner’s capital accounts both before and after the retirement of Alex taking into consideration the adjustments and changes respectively. b. Balance sheet as at 1st January 2008. c. What might be the reasons for calculating interest on capital from different figures? (4)

43 6. Rezwan, Kalim and Saima are in partnership, sharing profit and losses in the ratio 2:2:1. Interest is charged on drawings at 15% p.a. interest on capital is at 7% p.a. On 31st December 2005 the balance sheet of the business was as follows: Details £ £ Details £ £ 180000 Current Fixed Assets : buildings liabilities: creditors 45000 Motor cars 60000 Bank 10000 equipments 15000 Machinery 35000 290000 34000 Financed by: Current assets: stock Rezwan 140000 Debtors 41000 Kalim 100000 Saima 70000 365000 365000 The accountant who checked the financial statements commented that the capital account balances have not the following into consideration: iii. Interest has not been charged on the drawings. The drawings were: 1st July 1st January £ £ Rezwan 6000 9000 Kalim 15000 Saima 10000 5000 iv.

Interest on capital had not been credited. Partner’s capital for the purpose of “interest calculation” were: Rezwan £70000, Kalim £50000, Saima £30000 Saima decided to concentrate more on her modelling career and retire from the business. The following decisions regarding the business were made: o He will receive £10000 payable by cheque immediately. o The following assets will be revalued: £ Free hold land and buildings 270000 Motor cars 55000 Office equipments 10000 Machinery 25000 stock 30000 Debtors 25000 o o o o

Goodwill is to be valued at £90000. The goodwill will be retained in the business. Saima will take a partnership car at the net book value of £9000. The balance of Saima’s capital will be paid through the business bank account. Rezwan will introduce £100000 as a loan to the business.

Required: a. Partner’s capital accounts both before and after the retirement of Saima taking into consideration the adjustments and changes respectively. b. Balance sheet as at 1st January 2006.

44 7. Akkas ali, Jabbar Ali and Quddus Ali were partners in a business for many years. They have been in this trade for a long time and now want to pursue other interests. They used to share profit and loss in the ratio 3:2:1. They have decided to dissolve the partnership on 31st December 2005. The balance sheet on that date is as follows: Details £ £ Details £ £ Current liabilities:

Fixed Assets : Machinery

12000

Creditors

Motor vehicles

3000

Financed by:

Office machinery

600

capital

Current Assets

2700

Akkas ali

20000

Stock

21000

Jabbar Ali

10000

Debtors

6400

Quddus Ali

2000

Bank

3800

32000 Current accounts Akkas ali

4000

Jabbar Ali

5000

Quddus Ali

(1900) 7100

Loan from Akkas ali 46800

5000 46800

Jabbar Ali was allowed to keep his car which was valued at £4000. The remaining assets realized the following amounts on 1st January 2006. Machinery Motor vehicles Office machinery Stock Debtors

£ 10000 5000 1000 25000 6200

Additional information ⇒ All creditors were paid and discounts received was £ 74 ⇒ The dissolution expenses were £800

Required: i. ii. iii. iv.

Journal entries to record the dissolution Realisation account. The firm’s capital account in columnar format. The firm’s bank account.

45

Income and Expenditure Brought to you by: Huzaifa Abdullah Tel: 01714098841

46 1.

Gallery tone is club for painters. The members can sell their painting through exhibitions organised by the club. The financial year ends on 31st December. The following information is available 1st January 2008 £

31st December 2008 £

Picture frames

1000

1000

Equipments

1600

1840

Stock of Paintings at cost

2200

3120

Debtors from paintings sales

200

110

Subscription in arrears

100

80

Subscriptions in advance

40

55

Cash at bank

416

?

Rent advance

100

70

Electricity owing

60

80

Printing expenses

15

40

Receipts and payments for the year £

£

Subscription

1100

Purchase of paintings

3000

Sale of painting

5140

Purchase of equipment

400

Rent

900

Electricity

230

Printing

60

Raffle prizes

100

Staff expenses

35

Refreshments

240

Sale of raffle tickets 300 Refreshments

440

Equipment is to be depreciated 10% on reducing balance method.

Required: a. Prepare income and expenditure account for the year ended 31st December 2008 b. Balance sheet as at 31st December 2008.

47 2. Rajasthan royals cricket franchise‘s financial year ends on 30th April 2007. The assets and liabilities of the franchise were: 1st may 2006

30th April 2007

£

£

Cricket equipment

2500

2800

Subscription in arrears

200

110

Subscriptions in advance

130

110

Creditors for bar

350

430

Bar stock

800

600

Rent owing

150

100

Electricity owing

105

140

Bank balance

723

1300

Receipts and payments for the year ended are as follows. £ Subscription (including £ 60

£

2100

Affiliation fee

100

Bar takings

4100

Purchase of new gloves

800

Annual dinner

2400

Bar stocks

2050

Sale of raffle tickets

180

Barmen wages

750

Catering dinner/dance

1440

Raffle prizes

60

Rent of hall

1500

Printing and postage

200

Electricity

581

Staff expenses

122

Repairs to bats

300

Hire of bands

300

arrears from the previous year )

Required: a. Prepare income and expenditure account for the year ended 30th April 2007 b. Balance sheet as at 30th April 2007.

48 3. Daigon Valley club performs a number of concerts and plays in the theatre they own in Pivet Street. In addition the club frequently arranges talent show which means their premises are rented out throughout the year. The club’s membership is composed of individuals and corporate houses. Several corporate houses provide additional funds to sponsor the events. The treasurer of the club has prepared the following receipts and payments account: Rent charged Sponsorship Subscription: Individual Business Programme advertising Ticket sales from shows

£ 3900 12500 4000 1700 320 52800

Balance b/d Light and heat Insurance Club advertising Copy right costs Care takers wages Printing & stationery Postages and telephone General expenses Shows cost Repairs & maintenance Costume hire Balance c/d

______ 75300 The following additional information is available:

£ 880 3960 1820 1560 1504 8016 1575 610 6772 27800 6318 3725 10760 _______ 75300

The theatre was purchased on 1st January 1998 for £85000 and is being depreciated at a rate of 4% p.a. on cost. The club also owns a variety of fixtures £16000 and upon which depreciation of £6200 has been made till 31st December 2007. The rate of depreciation is fixed at 10% p.a. The cash balance of the club always remains at £100 but this year it was decided to increase it to £150. The additional £50 was taken from the rent charged before the money being banked. Individual members pay £20 p.a. while corporate houses pay £100 p.a. as subscription. At 31st December 2007 four individual members were in arrears but three corporate houses had paid in advance. On 31st December 2008 seven individual members had not paid for the year but six had paid for the year 2009. The individuals who had not paid in December 2007 had subsequently paid up. At 31st December 2007 the following amounts had been outstanding: Printing £320, repairs £170 whilst insurance had been prepaid by £120. At 31st December 2008 a telephone bill of £85, and one for electricity of £510 was unpaid but copyright expenses of £125 had been prepaid.

Required: A. Calculate the accumulated fund for the Daigon Valley club for the year ended 31st December 2007 B. Prepare an income and expenditure account for the Daigon Valley club for the year ended 31st December 2008. C. Prepare balance sheet as at 31st December 2008.

49 4. The accountant of the Abahani sports club presented the following receipts and payment account. Details

£

Details

£

Balance b/d

3600

Refund of subscription for 1999

90

Staff wages

44550

Subscriptions : For 1999

2700

Printing and advertising

3375

For 2000

37800

Repairs to equipment

2250

Competition fees

4725

Competition prizes

2700

Sale of equipment

3150

Dance expenses

2025

Sale of dance tickets

3690

Equipment purchased

16200

Sundry expenses

3690

The assets and liabilities at the start and end of the financial year 2000 were: Other information: Equipment with a net book value of £9000 on 1st January 2000 was sold during the year. The equipment has been owned and depreciated exactly for four years prior to sale. It has been depreciated on straight line method with an estimated life of five years and no residual value. Required: a. Prepare and Income and expenditure account for the year ended 31st December 2000. b. Balance sheet as at 31st December 2000. c. It has been proposed that a life membership should be introduced by the club. State how the payments for life membership should be treated in the income and expenditure account. (5)

50

Incomplete records Brought to you by: Huzaifa Abdullah Tel: 01714098841

51 1. Harry Potter started a business in 1st January 2008. He named his firm as Muggle Store and sold Magical wands for both children and other people who have magical fantasies. He had savings of £6500 which he decided to take into the business as the starting capital. He also brought a car which he had won in Hogwarts as a prize into the business. This was valued at £4100. Muggle store borrowed £5300 from Gringotts a financial institution at an interest rate of 16% p.a. All the cash which means the capital and the loan was lodged into the business bank account. Potter has received no formal training in accounting and has failed to keep proper records. He has maintained details of movements of cash and bank. He thinks having a bank balance means that the business is making profit. He was recently warned by the ministry of magic for not keeping proper accounts. So he hired you as his accountant and has decided to pay you £355. Details of transaction in cash and through bank are listed below: Transaction Lease payments of premises Wages to staff Redecoration of premises General operating expenses Purchases of goods for resale Lighting and heating Fixtures and fittings Interest payment on loan Accountancy fees Car expenses

Cash £ 3200 320 95

155

Bank £ 4800 7050 1235 1375 105950 965 4895 424 355 1050

Assets and liabilities for the year ended 31st December 2008 are as follows: Cash 125 Bank 8150 3150 Car Fixtures and fittings 4200 Stocks 14500 Creditors for purchases 10950 Additional information: i. The lease agreement states that the cost of leasing would be £960 for every four months payable in advance. ii. All sales are for cash and are banked after meeting some cash expenditures. iii. Harry Potter took £100/week from the cash till for personal use. He also took three wands to give it to his wife Ginny. The combined cost would be £335. iv. Harry potter also paid his personal insurance premium from the business account and had entered as general expenses. v. Ginny Potter has always used the car for her personal. It is estimated that 20% cost of the car has been for private purposes.

Required: a. Prepare a cash and bank account to determine the sales b. Prepare a trading, profit and loss account for the year ended 31st December 2008 c. Prepare a balance sheet as at 31st December 2008. d. Why do you think Potter was warned by the ministry of Magic. (5)

52 3. Saimon is engaged in selling specialist cricket equipments for several years. He has never maintained proper accounts. A complete analysis if his accounts revealed the following information. Complete bank account for the year ended 31st December 2008 is as follows: Details Balance b/d Cash banked

£ 2800 86900

Details £ Purchase of goods 66200 New shop fittings 3000 Rent and rates 4600 Light and heat 3900 New van 4000 Van running expenses 1400 Wages to shop assistants 9070 Advertising 840 Insurance 560 Sundry expenses 2800 st Details of Saimon’s Assets and liabilities for the year ended 31 December 2008 are as follows:

Debtors Creditors Insurance prepaid Advertising unpaid Stocks Van net book value Shop fittings at cost Depreciation on shop fittings Bank balance

1st January 600 2400 80 140 16800 2400 1500 450 2800

31st December 850 3300 120 120 23700 ? ? ? ?

Additional information: •

Saimon had banked all the receipts with the exception of drawings £200/ week.

•

Closing debtors included an amount of £100 who had been declared bankrupt and there was no chance of money being recovered from him.

•

The van owned at 1st January 2008 was part exchanged for £2000.

•

Depreciation policy is to charge full year depreciation on the year of purchase but none on the year of sale. Depreciation rates are 25% straight line method for vans and 30% reducing balance method on shop fittings.

Required:

!

Prepare trading, profit and loss accounts for the year ended 31st December 2008.

!

Prepare a balance sheet for that date.

53 4. Mariam traders deal selling two types of goods. Mobile phones and cameras. Recently there was a fire in their office and some of their documents were destroyed. They were extremely worried about the business profitability. They hired an experienced accountant and provided her with the following data: Bank statement taken out on 31st December 2008 Details Cash banked Camera Mobile phones Insurance compensation Commission from suppliers Camera Mobile phones Proceeds from sale of delivery van

£ 1000000 700000 40000 5000 3090 670

Details Rent

£ 7000

Rate Insurance premium Delivery van Petrol for delivery van Fixtures and fittings Payment for suppliers of mobile phones Payments for suppliers of Cameras Seagull hotel cox’sbazar Advertising Electricity Association fee Salaries to staff Redecoration of premises Packaging materials Commission to staff Loan repayment Compensation to employee for sacking Telephone Sundry expenses Repairs to premises Loan interest

600 8000 9000 700 7000 87000 56000 560 900 5000 120 12000 890 90 900 10000 900 450 890 45000 5000

Additional information: ! All sales receipts are banked after making cash expenditures. ! Mariam the proprietor takes £50 per week as drawings. ! The bill to seagull hotel was her holiday and she used the business bank account to pay the hotel bill. ! The business’s policy is to charge 25% depreciation by reducing balance method on all assets owned. ! Depreciation is charged on proportion of the year for which the assets had been owned. This policy is applicable for both purchase and sale of assets. ! A delivery van which costed £8000 was sold on 1st May 2008. It was bought on 1st January 2005. ! The new van was purchased on 1st July 2008. While fixtures and fittings were bought on 1st February. ! Mobile phone supplier provided Mariam with a discount of £500. ! Some defected cameras worth £900 were returned to the suppliers. ! It has been estimated that £500 debtors of Mobile phones will not be paying as they have gone bankrupt. ! No cash account is maintained.

54 !

All the common expenses should be divided as camera department 45% while mobile phone department 55%

Following is the list of assets and liabilities for the year ending 31st December 2008. 31st December 1st January Rent accrued 200 450 Rate prepaid 120 390 Insurance premium advance 345 Delivery vans at cost 45000 46000 Fixtures and fittings 23000 30000 suppliers of mobile phones due 7000 15000 suppliers of Cameras due 15000 9000 Advertising due 700 80 Electricity due 2300 6000 Association fee prepaid 70 Salaries to staff due 5000 7000 Loan 10000 Telephone prepaid 500 120 Sundry expenses prepaid 560 1200 Bank balance 23000 ? Loan interest 5000 debtors of mobile phones 7000 9000 debtors of Cameras 8900 7800 Stock: Camera 56000 76000 Mobile phones 76000 90000

REQUIRED: ! Prepare trading, profit and loss accounts in a columnar format for the year ended 31st December 2008. !

Calculate the following and comment on the performance for the year ended 31 st December 2008. I. II. III. IV. V. VI.

Current ratio. Liquid acid test ratio Rate of stock turn over Return on capital employed Asset turnover Margin

VII.

Net profit as a percentage of sales (2.5x7)

55 5. Md. Zubair is an owner of a business which sells two types of goods. Premium and regular. Though he keeps complete records for his business and has hired an accountant to handle them. Recently the accountant was bitten by a dog and has been severely injured and could not work at all. Even though he did study accounting in his school days but he was completely lost when he looked at the accounts. He has hired you to help him out from the mess. The following information is available for the year ended 31st December 2008. £ Stocks at 1st January Raw materials Premium 5000 Regular 4900 Finished goods Premium 7800 Regular 6700 Payments received from customers during the year Premium Regular

450000 650000

Factory wages paid during the year Direct Indirect

210000 32500

Rent and rates paid during the year Factory Office

56000 52600

Heating and lighting paid during the year Factory Office

5100 7400

Office salaries paid during the year Sales men

12200

Payments made to suppliers Premium Regular

98000 95000

Stocks at 31st December Raw materials Premium Regular Finished goods Premium Regular Wages and salaries accrued at 31st December Factory Direct Indirect Sales men

17000 18000 2000

Wages and salaries advance at 1st January Factory Direct Indirect

2000 -

9000 7000 5000 8000

56 Rent and rates due at 1st January Factory Office Discount allowed to regular customers. Eid bonus to all the employees of Zubair’s factory 30% employees are in the office and the rest are in the factory Compensation to an employee for being injured while production this cost would be shared by both the departments equally. Fixed assets Motor vans at cost bought on 1st January 2004 (used equally by factory & office) leasehold premises ( to be used for 21 years with no residual value) initiated in 2004 Fixtures and fittings at cost bought on 1 st May 2008 Machinery net book value Office equipments net book value

1000 300 120 3000 1200

500000 1000000 75000 120000 56000

Additional information: •

All the receipts have been banked after meeting some cash expenditures.

•

Zubair has taken £500/week as drawings. This was taken from the cash till. Other operating expenses are £ 10000 which was paid through the business bank account.

•

Zubair’s wife fell ill and her medical bill was paid from the business. The money was paid from sales and the remainder was banked immediately.

•

The business used to sell goods on cash basis prior to this financial period. To increase their “market competitiveness” they have started to sell on credit.

•

After the end of the year Zubair estimates that he has £50000 debtors for Premium while £90000 for regular. He is not totally confident of receiving them all.

•

The invoices show that Zubair owes £23000 to suppliers of materials of Premium while £33000 to suppliers of regular.

•

The business depreciation policy states that Motor van, fixtures and fittings should be depreciated by 20% on cost. While machinery & office equipments should be depreciated by 12% on reducing balance method.

•

Heating and lighting, Rent and rates, depreciation and indirect wages would be shared in the ratio 2:3 between premium and regular respectively.

REQUIRERD: a) Prepare manufacturing account in columnar format for the year ended 31st December 2008. b) Prepare trading, profit and loss accounts in columnar format for the year ended 31st December 2008.

57 6. Quddus ali recently won a lottery of £50000 from the lottery and was able to fulfill a longstanding desire to open a boutique. On 1st January 2000 she opened a business bank account with the full amount of the lottery.. At 31st December 2000 he received a summon from the local authorities. Only then he realized that he needed to calculate his profits and submit it. At 31st December 2000 the following is the summary of Quddud Alis bank transactions: Details

£

Details

£

Lottery

50000

Rent

6750

Cash banked

269000

Fixtures/ equipments

21670

Business rates

2400

Electricity

4670

Telephone

690

Purchases

265770

Holiday in Goa

340

All the takings were banked after the following cash expenses were paid and personal drawings were taken. These were: •

Wages £410/week (50 weeks)

•

Sundry expenses £15/week

•

Cash purchases £2980 for the year.

•

Quddus Ali always maintains a cash balance of £250.

Additional information: o

Selling prices were fixed by adding 80% to the cost of sales.

o

Business rates of £1000 had been paid on 5th October 2000 to cover for the period of 31st May 2001.

o

It was decided to depreciate the equipments by 15%.

o

Creditors for purchases were £6250.

o

Trade debtors amounted to £38000 at the year end and a provision for bad and doubtful debts should be created at 5% of debtors.

o

Closing stock was valued at £15000.

o

The rent agreement states rent is due of about £9000.

Required:

!

Prepare trading, profit and loss accounts for the year ended 31st December 2008.

!

Prepare a balance sheet for that date.

58

Ratio Analysis Brought to you by: Huzaifa Abdullah Tel: 01714098841

59 1. Agora superstores have three departments. Food items, children ware and women wares. The company is doing extremely well and generating huge revenues. The following information is available: sales

gross profit

net profit 9.8

4.3

5.8 3 1

food item

3.5

2

1.8

1

children wear -1

0.8

0.8

women's wear

company as a whole

Calculate the following for the departments and the company as a whole: a) Mark up b) Margin c) Net profit as a percentage of sales

return on capital employed in % 13

10

closing stock

18 14.3

9.5

4.4 0.5 food item

children wear -5

women's wear

company as a whole

d) Comment on the return on capital employed by the business e) Some quarters of the management team is criticizing the high stock Women wear departments Manager of keeping very high levels of stock. What would you suggest? Support your answer with valid reasons.

60

2. Following is the data of three firms.

sales

roce in %

dividends in %

netprofit

20

18 12

10

12 8

6 3

5

10

10 5

7 4

3

0 Akij limited

Grameen phone

Nokia

dandy fabrics

a. Mrs Saima is a wealthy widow. She has inherited a lot of money from her recently deceased husband. Though she is a graduate but is dismayed looking at the profit comparison of three firms. This data was provided to her by her manager. Her manager asked her to invest in Dandy dying but she was suspicious of his intentions. Do you agree or disagree with the managers recommendations. b. What information do you think is needed to make the choice of investment a more accurate one? c. Identify the draw backs of ratio analysis 3. Karim is in business a general store owner where he sells daily groceries on credit to both retailers and final consumers. The following balances were available as at 31st December 2009 Fixed assets 15000 Stock in trade 35000 Net profit 12000 Debtors 50000 Sales 600000 Creditors 50000 Bank 10000 Purchases 240000 a. From the above balances calculate the following: I. Current ratio II. Liquid acid test ratio III. Debtors’ collection period IV. Creditors’ payment period V. Return on capital employed b. Comment on the liquidity of the business c. After seeing the results of the previous question one of his friends commented that Karim was paying his creditors late. Evaluate this claim.

61 4. The following information for the financial performance of Quddus Ali plc is as follows:

Sales Material Wages Factory overheads Cost of sales Gross profit Operating expenses Net profit

Fixed assets Premises Plant and machinery Motor vehicles Current assets Stock Debtors Cash at bank and at hand Current liabilities Creditors Bank

Capital and reserves Ordinary shares of 25p each General reserve Retained earnings Long term liabilities 5%debenture

$’000 2006 1600 720 460 90

800 330 250 (1270) 330 (260) 70

(1380) 400 (315) 85

Balance sheets $’000 2006 90 110 20 220

$’000 2007 90 236 25 351

150 200 40 390

180 260 2 442

147 -

153 30 243 463

259 610

300 120 43

300 180 30

463

100 610

Opening at the start of 2006 was $132000 Only 20% of sales are for cash the rest is on credit. Dividend for 2006 was 10% while 12% for 2007 Market price for the share was $1 in 2006 while $2 in 2007

a. 1) 2) 3) 4) 5) 6) 7) 8) 9)

$’000 2007 1780

From the above balances calculate for both the years the following: Current ratio Liquid acid test ratio Rate of stock turn over Debtors’ collection period Creditors’ payment period Return on capital employed Earnings per share Gearing Dividend cover

62 10) 11) 12) 13) 14)

Dividend yield Asset turnover Mark up Margin Net profit as a percentage of sales

b. Taking six appropriate ratios from your own calculation (done in part a) analyse the performance of the company with special attention to expenses and utilisation of resources. c. One of the board members of the Quddus Ali plc was furious with the finance manager for taking the debenture as he feared that debenture holder might force the company into liquidation. The manager was struggling to put up a meaningful answer to the director. Based on your learning state the reasons how a high gearing can be beneficial for firms.

63

MANUFACTURING ACCOUNT

PREPARED BY: HUZAIFA ABDULLAH

64

1. Akij cigarettes ltd is producing two brands of cigarettes. Akij regular and Akij Lights. The materials used in both the cigarettes are the same but the processing is different and helps the company to cater to the different needs of the smokers. Regular cigarette is more for chain smokers while Akij lights is for the younger and occasional smokers. For the year ended 31st December 2007. The following information is available. The primary concern for the management of the company was that the workers were not willing to stay in the organisation for longer periods, thus they were leaving very quickly and new labourer were needed to fill up that gap. This prompted some heavy expenses in advertising for workers in the national newspapers. This costed the firm around $5000. Information relating to production and selling: Wages to labourers Each labourer is paid $0.10/cigarette. Irrespective of lights or regular. All floor level workers are given an annual bonus of $200 There are 500 floor level workers. Every 50 floor level workers work under a supervisor. Each supervisor is paid $6000 per annum. All the supervisors are controlled by a production manager who is in charge of the production department. He is paid an annual salary of $8000. Materials Regular consumes about $.50 worth of tobacco, while lights takes around $0.35 worth of tobacco and some other materials worth $0.40. Filter and other packaging materials cost $0.60 which is the same for both the products. Additional information: The premises where akij factories is situated is valued at $600000. A machine has been bought in the year 2004 for $400,000 from England. It had been decided to depreciate it by 12% p.a. on reducing balance method. Office equipment costed Akij $50000 when it was bought in 2005. It was decided to depreciate by 20% on straight line method. Motor vans each costing $100000 were bought in 2005 and was decided to depreciate them by 20% on straight line method. There were four motor vans. These vans are used to distribute cigarettes to retailers. Akij has hired some land for storing tobacco as it needs to import it from abroad. The rent is fixed to $3000/month. Three quality controllers are hired. Their job is to inspect the quality of the products. Each are paid 15% of the wage bill of the floor workers combined.

65 Heating and lighting costs for the year is $5000 Cleaning expenses $1000 Electricity $50000 Insurance(for the whole premises) $20000 Sundry expenses $400 Bank charges $150 Ware house workers $5000 Ware house repairs $500 Premises repairs $300 Motor van repairs $500 Machinery parts replaced $1200 Security guards expenses $500 General manager (head of all operations) $50000 p.a. Selling and distribution expenses Salary for each sales staff is fixed as $5000 p.a. there are 20 sales staff in the company. They are also paid 1% of sales if sales exceed more than 120000 units. Combined of regular and light. Policy regarding defected products Workers are not paid any wages for the defected cigarette irrespective of the fact that it was their mistake or the machine was at fault. Selling price was determined as $5 for regular and $7 for lights. Value of closing stock 1st January

31st December

Regular cigarettes

4000

200000

Lights

12000

40000

Tobacco

$56000

$90000

Allthe common expenses are apportioned in the ratio 3:1 Based on the above information please prepare Manufacturing account in columnar format Trading profit loss account columnar format The general manager wants to introduce bonus for work to reduce labour turn over. Evaluate the proposal. (5)

66 2. Quddus doors ltd is producing two brands of doors. Quddus regular and Quddus Special. The materials used in both the doors are the same but the processing is different and helps the company to cater to the different needs of the consumers. For the year ended 31st December 2007. The following information is available. Information relating to production and selling: Wages to labourers Each labourer is paid $10/door. Irrespective of special or regular. All floor level workers are given an annual bonus of $200 There are 50 floor level workers. 10 floor level workers work under a supervisor. The supervisors are paid $2000 per annum. Materials Regular consumes about $20 worth of Wood, while special takes around $32 worth of Wood and some other special materials worth $0.40. other packaging materials cost $3.60 which is the same for both the products. Additional information: The premises where Quddus factories is situated is valued at $1000000. A machine has been bought in the year 2004 for $400,000 from Taiwan. It had been decided to depreciate it by 16% p.a. on reducing balance method. Sales Office equipment costed Quddus $50000 when it was bought in 2005. It was decided to depreciate by 20% on straight line method. Motor vans each costing $100000 were bought in 2005 and was decided to depreciate them by 20% on straight line method. There were four motor vans. Motor vans are used 40% for delivery and the rest for bringing wood from the suppliers. One motor van was sold on 1st January 2007. At a price of $40000 Quddus has hired some land for storing Wood as it needs to import it from abroad. The rent is fixed to $2000/month. Four quality inspectors are hired. Their job is to inspect the quality of the products. Each are paid $1/door. They also assist in the factory administration. Heating and lighting costs for the year is $2000 Cleaning expenses $1500 Electricity $90000 Insurance(for the whole premises) $10000 Sundry expenses $4800 Bank charges $1500 Ware house repairs $500

67 Premises repairs $300 Motor van repairs $500 Machinery parts replaced $1200 Security guards expenses $500 Accountant fees $5000 Tax 12% of profit Director’s remuneration $5000 Salary for Quddus for managing the business $5000 Selling and distribution expenses Salary for each sales staff is fixed as $1000 p.a. there are 20 sales staff in the company. They are also paid 1% of sales if sales exceed more than 120000 units. Combined of regular and light. Policy regarding defected products Workers are paid halve the wages due for the defected door irrespective of the fact that it was their mistake or the machine was at fault. During the year ended 31st December 2007 3000000 regular and 1000000 special were produced. 2% of regular and 5% of special were found defective and were thrown away in order to save the reputation of the company. Selling price was determined as $55 for regular and $85 for special. Value of closing stock 1st January

31st December

Regular doors

4000

200000

Special doors

10000

40000

Wood

$65000

$95000

All the common expenses are apportioned in the ratio 3:1 Based on the above information please prepare Manufacturing account in columnar format showing for both per unit and as a whole. Trading profit loss account columnar format

68

3. Pocha shaban has the following extract from the trial balance for the year ended 31st January 2008. $ Stocks at 1st January Raw materials

12000

Work in progress

14200

Finished goods

22000

Purchases Raw materials

144000

Indirect materials

1000

Factory wages Direct

210000

Indirect

32500

Rent and rates Factory

20000

Office

12600

Heating and lighting Factory

7100

Office

3400

Carriage inwards

1360

Carriage outwards

4725

Office salaries Sales men

8800

Other

12000

Debenture interest

500 cr

Sales

200000

Rent receivable

2000

Stocks at 31st December Raw materials

10100

Work in progress

15900

Finished goods

16000

Rent and rates paid in advance at 31st December Factory

3000

Office

800

69 Wages and salaries accrued at 31st December Factory Direct

12000

Indirect

1800

Sales men

2000

Other

700

Depreciation for the year Machinery

12000

Office equipment

1000

Delivery van used for both distributing and bringing raw materials

4000

Ratio stands to 1:3 Wages and salaries accrued at 1st January Factory Direct

2000

Indirect

900

Sales men

1000

Other

200

Rent and rates paid in due at 1st January Factory

1000

Office

300

Sales of scrap material

400

Raw materials damaged

300

Goods returned by customers

1200

Discount allowed

120

Eid bonus to all the employees of Pocha shaban

3000

30% employees are in the office and the rest are in the factory Compensation to an employee for being injured while production Units produced 12000 Based on the above information please prepare Manufacturing account Trading profit loss account Comment on the pricing by comparing the cost and profit/unit. (5)

1200

70 4. A maths teacher designed some math exercises for ordinary level students. He decided to produce 4000 copies of the exercises. He hired a local typist who would be responsible for typing and editing of the books. A fixed fee of $500 was paid to him. The printing press asked for $ 2 for printing and a further $.5 for binding and packaging. Cost of paper combined rose to $1000. This was fully used by the press in producing the desired number of books. The teacher made some expenses for travelling to the press and the typist to see the work this resulted in travelling expenses of $45. Carriage for bringing the paper to the printing press costed $56. A worker was hired to store the completed books in the teacher’s room. He was paid $25. Some books were damaged due to rain in the teacher’s room. 25 books were destroyed. The teacher had taken a loan from one of his colleague to finance the production of the books. He took a loan of $5000 at an interest rate of 5% and 4% of the net profit. After the completion of the books an author of a math book claimed that the exercises were part of his copyright and demanded royalty on the books produced. The teacher agreed to pay the author $0.10 for every books produced as he feared legal actions. The biggest concern for the teacher was to sell the huge number of books he had in his stock. One of his students offered to take up the responsibility of selling the books for a fixed fee of $500 and $0.5/book if he could sell more than 2500 books. The teacher quickly agreed with this proposal. After the end of first year books in stock were 500. After the end of first year books in stock were 500. Selling price is determined by adding 150% to the cost of sales. Despite the arrangement with the student the teacher thought that still had a lot of books in his stock as the student was not be able to sell the desired amount of books. He contacted a local book shop and tried to sell him the books. After seeing the books the book seller agreed to buy the books but asked for some changes. The changes are: The book seller wanted a 10% discount on the current selling price and will buy 4500 copies He wanted to have his own name written on the covers for which would cost additional $0.50/book. The book seller suggested some editing which could save the teacher from paying the royalty. He will incur the cost of editing. The books should be delivered to the book seller’s warehouse which would result in additional rise in expenditure of $400. Sell only to the bookseller. The teacher estimates that he would again produce the same amount of books for the next year. And the cost structure will not change except for the book seller requests.

71 Though he is happy with the profit he is wondering whether to accept the proposal of the bookseller. Required: a) Manufacturing account for the year ended 31st December 2008 b) Trading profit/loss account for the year ended 31st December c) Based on the calculation suggest wether the teacher should accept the proposal of the book seller. d) Identify the nonfinancial factors involved if the teacher sold only to the book seller.

72 5. Saima Bulbs are famous for their products all over the electrical industry. Their main product has been the energy saving lamp they have been producing and selling all over Bangladesh. Their business policy suggests that if orders are over 500 pieces this qualifies for a 12% discount, delivery service to any part of the city and sometimes even credit facilities. While orders of below 500 pieces are not given that importance and no facilities are provided to them. Following information is available. Stocks at 1st January Raw materials

100000

Work in progress

13400

Finished goods

500000

Purchases Raw materials

1454000

Indirect materials

134000

Factory wages paid Direct

210000

Indirect

32500

Rent and rates paid Factory

56000

Office

52600

Heating and lighting paid Factory

5100

Office

7400

Carriage inwards

2360

Carriage outwards

4425

Office salaries paid Sales men

12200

Other

12600

Debenture interest

500 cr

Sales Orders Below 500 pieces

50000

Orders of Over 500 pieces

400000

Rent receivable

2000

Stocks at 31st December Raw materials

10100

Work in progress

15900

Finished goods

16000

73 Rent and rates paid in advance at 31st December Factory

3000

Office

800

Wages and salaries accrued at 31st December Factory Direct

12000

Indirect

1800

Sales men

2000

Other

700

Depreciation for the year Machinery

12000

Office equipment

1000

Delivery van used for both distributing and bringing raw materials

4000

Ratio stands to 2:3 Wages and salaries accrued at 1st January Factory Direct

2000

Indirect

900

Sales men

1000

Other

200

Rent and rates paid in due at 1st January Factory

1000

Office

300

Sales of scrap material

400

Raw materials damaged

300

Goods returned by customers

1200

Discount allowed

120

Eid bonus to all the employees of Saima Bulbs

3000

30% employees are in the office and the rest are in the factory Compensation to an employee for being injured while production

1200

Selling price for orders below 500 pieces is $87 Selling price for orders over 500 pieces is ? a. Prepare manufacturing account b. Prepare trading accounts in columnar format for below and over 500 pieces. c. Prepare profit loss accounts combined

74 The management is having some complaints from some customers of lack of preferential treatment and some have moved away to other competitors. The management is extremely worried as orders of below 500 have fallen steadily and they are suggesting the following measures: •

Charge the same price to all the customers.

•

Provide delivery services which the company estimates could cost around $5000 in the year.

•

Provide credit to credit worthy customers which would increase the bad debts expense to $13000 a year.

d. Evaluate the above measures and help the management of Saima Bulbs to rectify the situation.

75