ch5 exercise solution

8/14/2019 Ch5 Exercise Solution

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Suggested Solutions to Exercise in Financial Accounting for Management by Ramachandran & Kakani

Authored by Ram Kumar Kakani, Copyright with Tata McGraw Hill Education Private Limited, 2011

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CHAPTER 5Accounting Records

SELF ASSESMENT QUESTIONS

1. Typically, all the transactions that occur are written as and when they occurred as per thedocuments, vouchers, or papers relating to them. These documents/vouchers are then filed

properly in the order of their occurrence. On the basis of these records, the accounts aremaintained by way of the journal.

The primary record for a transaction is the journal. A journal is a chronological record of alltransactions, showing the debit and credit of the accounts as affected by the transactions. Thejournal also contains a narrative description of the transaction, so as to explain the same.

The ledger is a book of final entry in which a record of the debits and credits to the variousaccounts are kept. Usually, a ledger is a group of accounts. The ledger will contain at least as

many separate accounts as there are items on the balance sheet and income statement. Thenumber of accounts is governed by the managements need for information statutory

requirements, if any, and the cost (of course, in relation to the benefits to be derived from it) ofkeeping it. For practical convenience, the ledger is also usually classified into groups of

accounts. (See Section 5.7 to 5.9 for details)

2. All nominal accounts relating to expenses and gains or incomes must be closed at the end of theyear. In order to close them, they are transferred either to trading account or profit and loss

account. Journal entry required for transferring them to trading account or profit and loss

account is called a closing entry. (See pages 285-286 for details)

3.No, an organisation can not prepare its financial statements without preparing a worksheet.In a business organisation with a large number of transactions at the end of an accounting

period, the balances of both debit and credit accounts of all the ledger accounts are first

transferred to a worksheet, which is called, the original trial balance or unadjusted trialbalance. Adjustments are then worked out, giving rise to an Adjusted trial balance. Finally,

based on the type of the account, the balances of the individual accounts are then taken to either

of the two final financial statements that is the balance sheet or the profit & loss account. (Seesection 5.12 for details)

4. An accountthat is kept within a subsidiary ledger, which in turn summarizes into the generalledger are called subsidiary accounts. (Refer Section 5.8 for details)

5. Three columnar cash book with cash, bank and discount columns.6. When transactions appear on both the sides in both cash and bank columns at the same time,

they are called Contra entries. For Example, when a firm receives a cheque from a party, it is

generally deposited in the bank on the same day.Sometimes, this cheque is not deposited in the bank on the same day. Rather, it is deposited in

the bank afterwards. When it is deposited in the bank after this date, a contra entry is madefirst on the credit side in the cash column and then again on the debit side in the bank column.


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7. In almost all businesses, it is found necessary to keep small sums of ready money with thecashier or petty cashier for the purpose of meeting small expenses such as postage, telegrams,

stationary and office sundries etc. The sum of money so kept in hand generally termed as pettycash and book in which the petty cash expenditures are recorded is termed as petty cash book.

8. Special Purpose Subsidiary books are kept in those business firms which have large number oftransactions of different types. Separate books are kept for recording separate type of

transactions. Cash transactions receipts and/or payments are recorded in cash book or journals

only. Similarly, credit purchases of goods are recorded in purchases journal. Returns of goodsto suppliers or creditors on account of defect in goods, etc. are recorded in separate journal

known as purchases return journal. (Refer Section 5.8 for details)

9. Cash discount may be defined as an allowance made by the person who receives cash to thepayer for prompt payment. Cash discount is always allowed or received when payment is made.

Trade discount, on the other hand, is an allowance made by the wholesale dealers to retailersoff the catalogue or invoice price. This allowance is made between purchasers and sellers

engaged in the same class of trade.

Cash Discount Trade Discount

1. It is recorded in account books. 1. It is not shown separately.2. It is generally allowed by retailers to

customers.

2. It is granted by one trader to anothertrader.

3. The purpose of providing cashdiscount is prompt payment by the

debtor to the creditor.

3. The purpose of allowing trade discountis to enable the retailers to sell the

goods at list price.

10. Trial balance can be defined as a list of all balances standing on the ledger accounts of a firm atany given time.

The following are the important objects or purposes of preparing a trial balance:I. If the two sides of the trial balance are equal, it is proved that the books are at least

arithmetically correct.

II. Error in casting the books of subsidiary records is immediately known.III. Error in posting from the books of subsidiary records to ledger is found out.IV. Error in balancing the ledger accounts is found out.V. Schedules of debtors and creditors are verified to be correct.

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The main reasons for disagreement of a trial balance may be enumerated as under:1) Balance of personal accounts placed on wrong sides in trial balance.2) Bank overdraft being put on wrong side.3) Cash balance or bank balance may be omitted to be recorded in trial balance.4) Error in bringing forward proper or correct balances from the previous years books.5) Errors in additions of items in accounts and carry forwards of total to next page.6) Omission of any balance from the nominal accounts, e.g. salary, rent etc. in the trial

balance.

7) Omission of any balance in the schedule or list of sundry debtors and creditors.


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8) Omission of any monthly totals of the Purchases Book, Sales Book, Returns Book, BillsBook to be posted in the ledger.

9) Posting of entries to wrong sides of accounts.10) Wrong posting of the totals of discount columns from the cash book to the trial

balance. (See Section 5.14 & 5.15 for details)

12. When all the accounts of a concern are balanced off they are put in a list, debit balances on one

side and credit balances on the other side. The list so prepared is called trial balance. The total

of the debit side of trial balance must be equal to that of its credit side. This is based on theprinciple that in double entry system, for every debit there must be a corresponding credit.

The preparation of a trial balance is an essential part of the process because if totals of both

the sides are the same then it is generally proved that books are at least arithmetically correct.

It must be remembered that equalizing the two sides of a trial balance is not the sole and

conclusive proof of the complete correctness of books.

13. This is an account that is maintained till the trial balance is not matched. A suspense account isopened and the amounts relating to all the errors that affect the trial balance, are transferred to this

account. As and when the errors are located, a corrective entry is passed in the respective account,

with a corresponding entry to the suspense account. A suspense account is not required for the errorsthat do not affect the trial balance, because the errors in such cases occur in two accounts. When all

the errors are located and rectified, the balance in the suspense account becomes nil.

If there are no errors in the books, the suspense account would simply vanish or balance out to give a

zero balance in the end. However, if errors go undetected, the suspense account appears in thebalance sheet either on the asset side (for debit balance) or on the liabilities side (for credit balance).

(See Section 5.17 for details)

MULTIPLE CHOICE QUESTIONS

1. (c) and (f)2. (b)3. (b)

4. (b)

5. (b)6. (c)

7. (a), (b) & (c)

8. (d)

9. (b)10. (b)

11. (a)

12. (d)13. (a) & (b)

14. (b)

15. (c)16. (d)

17. (a)


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18. (c)

19. (a)

EXERCISE

1. Trial Balance Exercise

Accounts Debits (in Rs.) Credits (in Rs.)

Cash 7,500

Salaries Payable 900

Taxes Payable 3,000

Accounts Receivable 16,500

Inventory 21,000

Capital Stock 60,000

Long-term Debt 34,000Land 6,000

Buildings (net) 60,000

Other Assets 2,000

Accounts Payable 7,000

Dividends Payable 2,500

Retained Earnings -17,400

Totals 84,500 84,500

2.

Match The Following

Column A Column B

Acquire assets by incurring debt Debit Asset and Credit Liability

Distributions to Owners Debit Owner(s) Equity and Credit Asset

Investments by Owners Debit Asset and Credit Owner(s) Equity

Use assets to acquire other assets Debit Asset and Credit Asset

Use assets to extinguish debts Debit Liability and Credit Asset

3. Mark True (T) or False (F)1. T2. T3. T4. F5. F6. T7. F8. T9. T10.T


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11.T12.T13.T14.T

4. Uday Consultancy Limited (UCL)Uday Consultancy Limited (UCL)

Income Statement for the period ending March 31 (all figures in $)

Software Sales 200,000ExpensesSalary Expenses 40,000Social Welfare Expenses (including Donations) 200

Courier Expenses 450

Telephone Expenses 500Employee Welfare Expenses 80,000

Sales and Marketing Expenses 4,600

Rent Expenses 11,200Repairs and Maintenance Expenses 820

Travel Expenses 37,000

Net Income 25,230Less: Withdrawal 13,500

Profit transferred to Balance Sheet (i.e., Retained Earnings) 11,730

Uday Consultancy Limited (UCL)Balance Sheet as at March 31 (all figures in $)Assets Amount Liabilities and Owners Equity AmounCurrent Assets Current Liabilities

Cash & Bank Balance 158,130 Accounts Payable 40,0Accounts Receivable 80,000 Provision for Employee Welfare 60,0

Supplies 60,000 Other Accrued Payables 1,4

Current Assets 298,130 Current Liabilities 101,4Long Term Assets Long Term Liabilities

Computer and Software 70,000 Loan from Sam 120,0

Long Term Assets 70,000 Long Term Liabilities 120,0

Owner(s) EquityShare Capital 135,0

Retained Earnings 11,7

Total Shareholder Funds 146,7

Total Assets 368,130 Total Liabilities & Owners Equity 368,1


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Note: We can further improve our presentation by making assumptions (and having adjustment entries) related

(a) closing stock of supplies

(b) depreciation for computer/software

(c) other accrued items (including revenues)

5. Rachna Manufacturers Limited(c) Above Rs 40,001

6. Transaction/Event Table:

Transaction / Event CA FA OA CL LTL CC+RR CR Rev. Exp. Div.Example 1: Ram invests capital inRam Software Limited

Dr Cr

Example 2: A customer wasoffered a cup of tea

Cr Dr

Q 1: Retirement of an employee

from Pankhuri Textiles Limited(resulting in complete severance of

ties with the company). Pankhuri

Textiles will record

Cr Dr

Explanation: The provision made for retirement benefits and salaries accrued would be adjusted along

with payment of cash, bank balances, & employee advances

Q2: Convertibility of Rs. 100

Debentures to 1 Equity Shares of

Rs. 10 Par Value

Dr Cr Cr

Explanation: This conveys that a long-term liability is being converted into share capital plus share

premium

Q3: Convertibility of Rs. 100 Par

Value Preference Shares to 50Equity Shares of Rs 2 par value

each

Dr & Cr

Explanation: One type of share capital is being converted to another type of share capital

Q4: As part of restructuring of a

bankrupt company its par valueof share is reduced from Rs. 10 to

Rs. 1

Cr Dr

Explanation: Losses carried forward (and not adjusted) an asset side item would be adjusted with

the firms capital reduction exercise.

p.s. A famous accounting saying goes losses are of the firm whereas profits are of the shareholders.

Q5: As a reward to shareholders,

Hindustan Unilever Limited issuesbonus debentures to its

shareholders in the ratio of 1:1 i.e.,

Cr Dr


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Transaction / Event CA FA OA CL LTL CC+RR CR Rev. Exp. Div.1 bonus debentures of Rs 100 par

value is issued for every one share

of the company with par value of

Rs 1.Explanation: Reduction in revenue reserves of HUL. At the same time increases in the firms long-termliabilities.

Q6: A company follows a % ofsales method for provisioning of

its estimated collection losses. The

company comes to known that acustomer has expired. The said

customer used to always purchase

on a 30-days credit from the

company. The company will

Cr Dr

Explanation: The accounts receivable account of the customer would be written off along with theprovision for bad debts.

Q7: A person goes and cancels his

railway reservation ticket (2841

Coromandal Express from Howrahto Rajahmundry) of Rs. 500. The

ticket counter fellow punches a

few keys (in the computer) andpays him Rs. 460. The accounts of

railways will have:

Cr Dr Cr

Explanation: Unearned revenue goes down (a current liability item). Cancellation charges arise as an

income. The money returned is cash going down.Q8: Railway wagons lying empty

at a customers site results in

demurrage charges. Indian railwaysends a notice to Steel Authority

for delay in returning its empty

wagons.

Dr Cr

Explanation: For railways this leads to income by way of demurrage charges and a simultaneous

increase in accounts receivable. In fact, it is a big source of revenue for Shipping Yards and IndianRailways

Q9: Disposal of a old fixed asset

by a company at a loss (thecompany does not used block

depreciation)

Dr Cr Dr Dr

Explanation: The cash comes in along with adjustments of a loss item (expense), write off of the

fixed asset and the accumulated depreciation related to the item.

Q10: Planned massive capital

repair of a blast furnace

Cr Dr

Explanation: Any repair that increases the life and / or capacity of a fixed asset has to be capitalized as


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Transaction / Event CA FA OA CL LTL CC+RR CR Rev. Exp. Div.part of the value of the fixed asset..

Q11: A company is fully insuredby Life Insurance Corporation

(LIC) of India (as part of its groupinsurance scheme for all staff).After one month there were no

claims made by the company with

LIC. This would result in LIC

having

Dr Cr

Explanation: Unearned revenue would get decreased with a simultaneous recognition of revenue.

Q12. Massive earthquake happens

at a factory (say, RelianceRefinery). Unfortunately, this

results in complete destruction of

the site. The secured lender willmake the following

Cr Dr

Explanation: Losses / expensing of the firm along due to with write off of the loans & advance given to

Reliance (in the case of a financial institution, this is a current item and hence we would treat it as a

current asset).Note: CA Current Assets; CC Contributed Capital; CL Current Liabilities & Provisions; CR Capital

Reserves; Div. Dividends; Exp. Expenses; FA Fixed Assets; LTL Long-term Liabilities; OA Other

Assets; RR Revenue Reserves; and Rev. Revenues.


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REVIEW QUESTIONS

Please refer the Ch5_Exercise_Solution_XL for working and complete solution of these 8 reviewquestions. The sheets in the excel file have been named as follows:

1. Debjit Rose Trading Company2. Ram Traders3. Priyamvada4. Peddamma5. Khilona6. Coconut Business7. Zareen Technologies8. Money Lender9. Bade Miya and Chote Miya

Value of House 250,000,000.00

Funding Bades Share Chotes Share TotalLoan 180,000,000.00 20,000,000.00 200,000,000.00Personal Saving 25,000,000.00 25,000,000.00 50,000,000.00

205,000,000.00 45,000,000.00 250,000,000.00Ownership Ratio 0.82 0.18

EMI paid by Bade Miya for theyear

Bades Share Chotes Share1,968,000.00 432,000.00 2,400,000.00

Interest 1,558,000.00 342,000.00 1,900,000.00Principal 410,000.00 90,000.00 500,000.00Rent Received by Chote Miya Bades Share Chotes Share

Rent 984,000.00 216,000.00 1,200,000.00

Based on the above table the net settlement would be:

Bade's A/cBade's Share of Rent receivable from Chote 984,000.00

Chote's Share of EMI receivable from Chote 432,000.00

Total Receivable from Chote 1,416,000.00


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In the books of Bade Miya

House A/c 20,50,00,000

To Housing Loan A/c 20,50,00,000

Chote A/c 4,32,000

Housing Loan A/c 4,10,000Housing Loan Interest A/c 15,58,000

To Bank A/c 24,00,000

Chote A/c 9,84,000To Rent Income A/c 9,84,000

In the books of Chote Miya

House A/c 4,50,00,000

To Housing Loan A/c 4,50,00,000

Housing Loan A/c 90,000

Housing Loan Interest A/c 3,42,000

To Bade Miya A/c 4,32,000

Bank A/c 12,00,000

To Bade Miya A/c 9,84,000

To Rent Income A/c 2,16,000

10.Kanni Badshah Filters LimitedDr. Trading Account Cr.

Particulars Amount Particulars Amount

Opening Stock

WagesPurchases

Gross Profit

50,000

30,0001,00,000

90,000

2,70,000

Sales

Closing Stock

1,70,000

1,00,000

2,70,000


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Dr.

Profit and Loss Account for the year ending....Cr.

Particulars Amount Particulars Amount

To InterestTo Bad DebtsTo Repairs

To Depreciation

To Rates & Taxes

To SalariesTo Office expenses

To Net Profit

2,0005,0003,000

10,000

8,000

20,00025,000

23,000

96,000

By Gross ProfitBy Rent

90,0006,000

96,000

Dr.Balance Sheet as on.... Cr.

Liabilities Amount Assets Amount

Capital 2,50,000

Add:Net Profit 23,000

2,73,000

Less: Drawings 20,000

Sundry Creditors

Bills Payable

2,53,000

70,000

40,000

3,63,000

Sundry Debtors

Land & BuildingCash in Hand

Cash at Bank

Bills ReceivableFurniture & Fixture

Plant &Machinery

Closing Stock

15,000

1,00,00016,000

40,000

20,00015,000

57,000

1,00,000

3,63,000

1. (c) Above Rs. 80,0012. (b) Between Rs. 10,001 and Rs. 40,0003. (b) Between Rs. 1,00,001 and Rs. 2,80,000

ch5 exercise solution

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