SECTION “A” (MULTIPLE CHOICE QUESTIONS)

1. Choose the correct answer for each from the given options

(i) The term retained earning means:
* capital
* reserve
* accumulated revenue
* net profit

(ii) The amount of share capital, with which a company registered, is called:
* issued capital
* paid up capital
* authorized capital
* called up capital

(iii) Under the diminishing balance method, amount of annual depreciation:
* gradually increases
* gradually decreases
* remains constant
* does not change

(iv) This is shown in the shareholder equity section of balance sheet:
* unclaimed dividend
* cash dividend payable
* share premium
* preliminary expenses

(v) This is not included in the cost of machine:
* installation charges
* insurance in transit
* freight
* income tax

(vi) Goodwill is shown in:
* Quick assets
* fixed assets
* total assets
* none of these

(vii) Cost of machine: Rs.150,000; scrap value: Rs.20,000; rate of depreciation: 20%. The depreciation of machine under diminishing balance method is:
* Rs.20,000
* RS.30,000
* Rs.40,000
* Rs.50,000

(viii) In case of liquidation of a firm, assets are:
* donated
* distributed
* sold
* revaluated

(ix) In the absence of any agreements regarding the distribution of profit/loss, it will be distributed among the partners:
* according to a average capital
* according to beginning capital
* according to capital at the end
* equally

(x) All fixed assets are depreciated except:
* building
* office equipments
* vehicles
* Land

(xi) Excess of expenses over income in a non profit concern is:
* income
* surplus
* bank balance
* deficit

(xii) Trade Mark is annually depreciated at the rate of:
* 18%
* 40%
* 10%
*  none of these

(xiii) When partnership is dissolved, this is the final task.
* payment to partners
* payment of liabilities
* payment of expenses
* none of these

(xiv) The term Debentures means:
* long term loan
* short term loan
* asset
* capital

(xv) This is intangible asset:
* patent
* furniture
* cash
* land

(xvi) This item is an income in non-profit concerns:
* asset
* liability
* capital
* subscription

(xvii) For the formation of partnership, the minimum number of individuals required is:
* two
* five
* ten
* forty

(xviii) The distribution of profit of a company in the form of cash, is called:
* cash dividend
* stock dividend
* property dividend
*  none of these

(xix) The excess, on issue of shares price over the par value, is called:
* discount
* premium
* retain earning
* none of these

(xx) Unclaimed dividend is/are:
* income
* Liabilities
* assets
* capital

SECTION ‘B’ (SHORT – ANSWER QUESTIONS)

2. Single Entry:

Mr. Akram maintains his books on single entry. The following information was available from his books.
                                      March 1, 2011          December 31, 2011
Cash in hand                       ?                             Rs.37,500
Cash at bank                   Rs. 30,000                 Rs.120,000 
Account Receivable       Rs.135,000               Rs.172,500   
Merchandise Inventory  Rs.150,000               Rs.245,000  
Office equipments          Rs. 300,000               Rs.300,000    
Account payable             Rs. 54,000                 Rs.75,000 
Bank Loan                       Rs. 70,000                      —-
Mr. Akram’s capital        Rs. 500,000                    ?

Additional information at December 31st , 2011:
(i) During the year, Mr. Akram withdrew Rs.3,000 p.m. for personal use and RS.30,000 for business use.
(ii) Depreciation expense on office equipment was estimated at Rs.30,000.
REQUIRED:
(i) Compute cash on March 1,2011 & capital of Dec,31, 2011
(ii) Prepare statement of affairs as on December 31, 2011. (If net income is Rs.300,000)

SOLUTION:

3. Accounting for Non-Profit Concern:
The following are the receipts and payments of accounts of Rahim Welfare Trust for 2011

Additional data at December 31st \ 2011:
(i) Accrued subscription fees Rs.8,400.
(ii) Prepaid salaries Rs.5,600
(iii) Accrued utilities expenses Rs.2,800.
(iv) Depreciation on furniture Rs.2,800.

REQUIRED: Prepare income and expenditure account for the year ended December 31, 2011.

SOLUTION:

4. Partnership Admission:
Rafiq and Karim are ‘partners with capital of Rs.200,000 and 800,000 respectively. They share profit and loss in the ratio of their capitals. They decide to admit Jalil as a partner.

REQUIRED: Record the admission of Jalil under each of the following assumptions separately:
(i) Jalil purchased 1/4 interest of Karim for cash Rs.80,000 . and Land Rs.300,000.
(ii) Jalil invests sufficient cash & gets 1/5 interest in the firm.

SOLUTION:

5. Partnership-Formation:
Naeem, Amjad and Khalid formed partnership contributing equal amounts of capitals shown below:
Naeem: Cash Rs.150,000 and Building worth Rs.750,000.
Amjad: Cash Rs.500,000 and merchandise inventory for the balance.
Khalid: Office· equipment worth Rs.800,000 and the balance in cash.

REQUIRED:
(i) Present entries in,the ‘General Journal of the firm.
(ii) Prepare Balance sheet in classified form on the formation of the partnership firm.

SOLUTION:

6. Partnership·Liquidation:
Ashraf, Arif and Inam were partners sharing profits and losses in the ratio 3:2:5 respectively. They liquidate their business on December 31, 2011. On that date, their Balance sheet showed as follows.Other Assets were sold for Rs.80,000. Accounts payable are paid in full. Partners are solvent except Inam who does not contribute any amount to meet the deficiency. All available cash is distributed among the partners.

REQUIRED: Make the necessary General Journal entries to give effect to the above transactions.

SOLUTION:

7. Corporations-Purchase of Running Business:
Naveed Company ltd. was incorporated with an authorized capital of Rs.50,00,000,divided into 500,000 . ordinary shares of Rs.10 each. The company took over the running business of M.M. Brothers, with the following assets and liabilities.

Cash                                  Rs.40,000
Account Receivable         Rs.200,000
Merchandise Inventory    Rs.360,000
Machinery                         Rs.500,000
Account Payable              Rs.400,000
The company issued to the vendor, 104000 ordinary shares of Rs.10 each fully paid, as purchase consideration.

REQUIRED:
(i) Give entries in the General journal of Naveed Company Ltd. to record the above transactions.
(ii) Prepare initial Balance sheet of the company.

SOLUTION:

COMPUTATION OF GAIN OR LOSS ON
PURCHASE OF BUSINESS

Cash                                                    40,000
Accounts Receivable                           2,00,000
Merchandise Inventory                        3,60,000
Machinery                                            8,00,000
Total Assets                                    14,00,000
Less: Accounts Payable                       4,00,000 
Net worth of Assets                             10,00,000
Less: Total Payment (10400 x 10)       10,40,000
Loss on Purchase of Business                  40,000  

8. Corporations-Disposal of Net Income:
On June 30, 2011, the Retained Earning account in the Books of Indus Company Ltd. showed a credit balance of Rs.300,000. The expense and revenue summary of the company for the year ending on that date shows net income of Rs.550,000, which is transferred to retained earnings account.
The Company’s directors decided as follows:
(i) Declared a cash dividend of Rs.250,000.
(ii) Established a reserve for building extension in the amount of Rs.100,000.
(iii) Appropriate of Rs.50,000 for revenue for debentures, redemption.
(iv) Established a reserve for contingencies in the amount of Rs.45,000.
REQUIRED: Prepare Retained Earning Account.

SOLUTION:

SECTION “C” (DETAILED -ANSWER QUESTION)

NOTE: Attempt the following question which is compulsory.

9. Depreciation Accounting:
(a) On January 1, 2012 Asim Manufactures purchased a machine having a list price of Rs.500,000, subject to a trade discount of 10%. The creditor terms were 5/20 and n/60. The payment was made on January 20, 2012. The following expenditure were incurred on the machine on January 1, 2012:
Sales Tax@ 16%
Transportation-In               Rs.10,000
Insurance in-transit            Rs.5,000
Installation cost                  Rs.15,000
Fire insurance for the year Rs.5,000
The machine was estimated to have a useful life of 10 years and residual value of Rs.27,500.

REQUIRED: .
Compute the depreciable cost of the machine on January 1, 2012.

SOLUTION:

COMPUTATION OF COST OF MACHINE

List Price                                                                   5,00,000
Less: 10% Trade Discount                                          50,000
Invoice Price                                                             4,50,000
Less: 5% Cash Discount                                            22,500
Net Cash Price                                                          4,27,500
Add: Other Expenses
Transportation in                 10,000
Insurance in transit               5,000
Installation cost                    15,000
Total Other Expenses                                                30,000
Total Cost of Machine                                             4,57,500 
Depreciable Cost = Cost – Salvage Value
Depreciable Cost = 4,57,500 – 27,500
Depreciable Cost =       4,30,000

NOTE:
According to new Ordinance Sales Tax can not be added to Cost of Machine.

(b) (i) Distinguish between capital expenditure and revenue expenditure.
(ii) Define Depreciation from the view point of accounting, and state whether it is a loss or an expense.

SOLUTION:

(i) Capital expenditure are those payments which are made for the purchase of Asset, and which are used for more than one year, and later can be convertible into cash.
For example: Purchase of Machine, Building or Land Revenue expenditure are those “payments which are made for running expenses of the Company and it give, benefit within one year and it can not be convertible into cash.
For example: Payment of Salaries or Rent.
(ii) Depreciation is wear and Tear of all fixed assets except Land. In accounting depreciation is an expenses.

(c) The following account balances were extracted from the books of Farhan & Co. as on Dec. 31, 2011, before making any adjustments for the year.
Machine-Cost (Purchase on April 2009) Rs.300,000
Machine-Allowance for Depreciation Rs.50,250
The company uses the Diminishing Balance Method for computing depreciation charge at the rate of 10%. The accounting year closes on Dec. 31.
REQUIRED:
(i) What will be the. amount of depreciation expense for 2011? Show computation.
(ii) Give adjusting entry for Dec. 31, 2009.
(iii) Prepare Allowance for Depreciation – machine for the year ended Dec. 31, 2011.

SOLUTION:

COMPUTATION FOR DEPRECIATION
BY DIMINISHING BALANCE METHOD.

Cost (1.4.2009)                                                                3,00,000
Less Depreciation.31.12.09 (3,00,000 x 10% x 9/12)         22,500 
Diminished Balance                                                          2,77,500
Less: Depreciation 31.12.10.(2,77,500 x 10%)                    27,750 
Diminished Balance                                                          2,49,750
Less: Depreciation 31.12:11 (2,49,750 x 10%)                    24,975 
Diminished Balance                                                          2,24,775  
Depreciation expenses of 2011 Rs.24,975