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Advanced Accounting Course: (444)

Semester: Spring 2024 ASSIGNMENT No. 2

9
11 ‫ﮨﺎ‬
Q. 1 Khan Brothers sell several small articles of very small value on the hire- purchase system

19
om 85 ‫ﺗﮫ‬
daily and request you to recommend them a simple but satisfactory system of keeping
accounts. What will be your advice to them.

.C 5 ‫ﺳﮯ‬
For Khan Brothers who sell small articles on the hire-purchase system daily, I would recommend a
simple yet effective system of keeping accounts. Here’s a recommended approach:
Recommended System of Keeping Accounts:

‫ﻟﮑ‬
1. Sales Recording:

‫ﮭ‬
o Sales Register: Maintain a daily sales register where each hire-purchase sale is
di : 0 ‫ﯽ ﮨﻮ‬
recorded. Include details such as customer name, article sold, installment amount,
total price, and dates of installments.
o Sequential Invoicing: Issue sequential invoices or receipts for each sale. This helps
tu pp ‫ﺋﯽ ا‬
0
in tracking payments and communicating terms to customers.
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2. Payments Tracking:
Installment Tracker: Maintain a ledger or tracker to monitor installment payments
uS A ‫ﺳﺎﺋﻨﻤ‬

received from customers. Note down payment dates, amounts, and outstanding
balances.
Bank Deposits: Deposit cash and cheques received daily into the bank. Ensure all
‫ﻨ‬

o
A a ‫ﭧد‬

payments are accounted for and reconcile with the sales register.
3. Inventory Management:
o Stock Control: Keep a simple inventory system to track stock levels of articles
Stock
‫ﺳ‬

available for hire-purchase. Update the inventory as articles are sold and payments
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io ts

received.
4. Accounting for Expenses:
o Expense Recording: Record all relevant expenses such as transportation, storage, and
‫ﮨﯿﮟ‬

operational costs in a separate expense ledger.

h

o Periodic Review: Review expenses periodically to ensure they are within budget and
are accounted for correctly against revenue.
5. Customer Accounts:

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o Customer Ledger: Maintain individual customer accounts summarizing sales,
payments received, outstanding balances, and any overdue amounts.
o Follow-up: Regularly follow up with customers regarding overdue payments to
maintain cash flow.

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6. Financial Reporting:

11 ‫ﮨﺎ‬
19
om 85 ‫ﺗﮫ‬
o Monthly Statements: Prepare monthly statements summarizing sales, payments
received, expenses incurred, and overall profit or loss.

.C 5 ‫ﺳﮯ‬
o Tax Compliance: Ensure compliance with tax regulations regarding sales tax, if
applicable, and maintain records for audit purposes.
7. Software and Tools:

‫ﻟﮑ‬
o Consider using accounting software or apps designed for small businesses to automate
and streamline accounting processes.

‫ﮭ‬
di : 0 ‫ﯽ ﮨﻮ‬
o Alternatively, use spreadsheets like Excel for recording and tracking sales, expenses,
and customer accounts.
Additional Tips:
tu pp ‫ﺋﯽ ا‬


0
Consistency: Maintain consistency in recording transactions daily to avoid errors and ensure
accuracy.
o9 3
 Training: Provide training to staff involved in sales and accounts to ensure they understand
uS A ‫ﺳﺎﺋﻨﻤ‬

the system and can input data correctly.

 Review: Regularly review the system to identify any areas for improvement and ensure it
meets the needs of Khan Brothers as their business grows.
‫ﻨ‬
A a ‫ﭧد‬

Q. 2 Mr. Azan acquired a car from Shah Corporation on January 02, 2023 and enters into lease
agreement for 5 years. Annual rentals are payable at the end of each year amounting Rs.
180,000. Useful life of the machine is 10 years and interest rate implicit in the lease was agreed
‫ﺳ‬

15%. Fair value of the machine was Rs. 900,000.

W ‫ﺘﯿﺎب‬

You are required to identify the type of lease and pass the necessary journal entries in the
io ts

books of lessor and lessee both to record the rental payment.

Based on the information provided, let's analyze the lease agreement between Mr. Azan (lessee) and
Shah Corporation (lessor) and then proceed to record the necessary journal entries in the books of
‫ﮨﯿﮟ‬
h

both parties.
Type of Lease Identification:
1. Type of Lease:
o The lease term (5 years) is 50% of the useful life of the asset (10 years), which
exceeds 75% threshold often used to determine the lease term.

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o The present value of minimum lease payments (5 × Rs. 180,000 = Rs. 900,000) is
equal to the fair value of the machine (Rs. 900,000).
o There is no transfer of ownership to the lessee at the end of the lease term.
Therefore, based on these criteria, this lease appears to be a finance lease (capital lease).

9
Journal Entries:

11 ‫ﮨﺎ‬
19
om 85 ‫ﺗﮫ‬
1. In the Books of Lessor (Shah Corporation):
At the inception of the lease:

.C 5 ‫ﺳﮯ‬
 To record the lease receivable and the cost of the asset:

Date Particulars Debit (Rs.) Credit (Rs.)

Jan 02, 2023 Lease Receivable (Finance Income) 900,000

‫ﻟﮑ‬
Machine (Asset) 900,000

‫ﮭ‬
di : 0 ‫ﯽ ﮨﻮ‬
2. Annual Rental Payment (End of Year):
To record the receipt of rental payment:
Date Particulars Debit (Rs.) Credit (Rs.)
tu pp ‫ﺋﯽ ا‬

Dec 31, 2023

0 Cash (Bank A/c) 180,000
o9 3
Lease Receivable (Income) 180,000
uS A ‫ﺳﺎﺋﻨﻤ‬

3. In the Books of Lessee (Mr. Azan):

At the inception of the lease:
 To record the lease liability and the asset acquired under lease:
‫ﻨ‬

Date Particulars Debit (Rs.) Credit (Rs.)

A a ‫ﭧد‬

Jan 02, 2023 Machine (Asset) 900,000

Lease Liability 900,000

‫ﺳ‬

4. Annual Rental Payment (End of Year):

W ‫ﺘﯿﺎب‬
io ts

To record the payment of annual rental:

Date Particulars Debit (Rs.) Credit (Rs.)

Dec 31, 2023 Lease Expense 180,000

‫ﮨﯿﮟ‬

Cash (Bank A/c) 180,000

h

Explanation:
 Lessor's Perspective: Shah Corporation recognizes the lease receivable (present value of
lease payments) and records the asset leased out (machine).

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 Lessee's Perspective: Mr. Azan records the leased asset (machine) and the lease liability
(present value of lease payments).
Q. 3 Amjad Corporation has a registered capital of Rs. 1 million divided into shares of Rs. 10
each. The balances as per ledger of the company as of December 31, 2023, were as

9
follows:

11 ‫ﮨﺎ‬
19
om 85 ‫ﺗﮫ‬
Rs. Rs. Rs.
Premises 3,00,000 Stock (1.1.2023) 75,000 Profit & Loss Account 14,500

.C 5 ‫ﺳﮯ‬
(Cr)
Plant & Machinery 3,60,000 Fixtures 7,200 Sundry Creditors 50,000
Interim Dividend 7,500 Sundry Debtors 87,000 General Reserve 25,000

‫ﻟﮑ‬
Paid

‫ﮭ‬
Purchases
di : 0 ‫ﯽ ﮨﻮ‬ 1,85,000 Goodwill 25,000 4 % Government 60,000
Securities
Preliminary 5,000 Cash in hand 8250 Debenture Interest 9,000
Expenses
tu pp ‫ﺋﯽ ا‬

Freight
0 13,100 Cash at Bank 39,900 Share Capital (fully 460,000
called)
o9 3
Director's Fees 5,740 Wages 84,800 Bills Payable 38,000
uS A ‫ﺳﺎﺋﻨﻤ‬

Bad Debts 2,110 General 16,900 Sales 4,15,000

Expenses
6% Debentures 3,00,000 Salaries 14,500 Provision of Bad Debts 3,500
‫ﻨ‬
A a ‫ﭧد‬

Prepare the Final Accounts and the Balance Sheet relating to 2023 from the figures given
above after considering the following: -
(a) Depreciate Plant & Machinery by 15 per cent and Fixtures by 10% per cent
‫ﺳ‬

(b) Write off 1/5 of Preliminary Expenses

W ‫ﺘﯿﺎب‬
io ts

(c) Rs. 10,000 of wages were utilized in adding rooms to the premises but included in
the wages account.
(d) Leave Bad Debts Provision at 5 per cent of the Sundry Debtors
‫ﮨﯿﮟ‬

(e) Provide a final dividend of 5 per cent.

h

(f) Transfer Rs. 10,000 to General Reserve; and

(g) Make a provision for income tax to the extent of Rs. 25,000
(h) The Stock on 31st December 2023 was Rs. 151,000

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Final Accounts (Income Statement and Statement of Profit and Loss):
Income Statement (or Statement of Profit and Loss):

Particulars Amount (Rs.)

9
Sales 4,15,000

11 ‫ﮨﺎ‬
Less: Cost of Goods Sold

19
om 85 ‫ﺗﮫ‬
- Opening Stock 75,000

- Purchases 1,85,000

.C 5 ‫ﺳﮯ‬
- Freight 13,100

- Wages (adjusted) 74,800

‫ﻟﮑ‬
- Closing Stock (151,000)

‫ﮭ‬
di : 0 ‫ﯽ ﮨﻮ‬
Gross Profit 1,86,100

Less: Operating Expenses

- Depreciation:
tu pp ‫ﺋﯽ ا‬
0
- Plant & Machinery 3,60,000 × 15%
o9 3
- Fixtures 7,200 × 10%
uS A ‫ﺳﺎﺋﻨﻤ‬

- Director's Fees 5,740

- Bad Debts Provision (87,000 × 5%)

- General Expenses 16,900

‫ﻨ‬
A a ‫ﭧد‬

Operating Profit

Less: Interest on Debentures 9,000

‫ﺳ‬

Profit before Taxation

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io ts

Less: Provision for Income Tax 25,000

Net Profit

Calculation Details:
‫ﮨﯿﮟ‬

 Depreciation on Plant & Machinery = Rs. 3,60,000 × 15% = Rs. 54,000

h

 Depreciation on Fixtures = Rs. 7,200 × 10% = Rs. 720

 Bad Debts Provision = Rs. 87,000 × 5% = Rs. 4,350

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Statement of Profit and Loss (or Income Statement):

Particulars Amount (Rs.)

Gross Profit 1,86,100

9
Less: Operating Expenses

11 ‫ﮨﺎ‬
19
- Depreciation:

om 85 ‫ﺗﮫ‬
- Plant & Machinery (54,000)

.C 5 ‫ﺳﮯ‬
- Fixtures (720)

- Director's Fees (5,740)

- Bad Debts Provision (4,350)

‫ﻟﮑ‬
- General Expenses (16,900)

‫ﮭ‬
di : 0 ‫ﯽ ﮨﻮ‬
Operating Profit 1,04,390

Less: Interest on Debentures (9,000)

Profit before Taxation 95,390

tu pp ‫ﺋﯽ ا‬
0
Less: Provision for Income Tax (25,000)
o9 3
Net Profit 70,390
uS A ‫ﺳﺎﺋﻨﻤ‬

Balance Sheet as at December 31, 2023:

Assets:

Particulars Amount (Rs.) Liabilities Amount (Rs.)

‫ﻨ‬
A a ‫ﭧد‬

Premises 3,00,000 Share Capital 4,60,000

Plant & Machinery 3,06,000 General Reserve 35,000

Fixtures 6,480 Profit & Loss Account (Cr) 14,500

‫ﺳ‬
W ‫ﺘﯿﺎب‬

Goodwill 25,000 6% Debentures 3,00,000

io ts

Stock 1,51,000 Sundry Creditors 50,000

Sundry Debtors 87,000 Bills Payable 38,000

‫ﮨﯿﮟ‬

Cash in hand 8,250 Provision for Income Tax 25,000

h

Cash at Bank 39,900

4% Government Securities 60,000

Preliminary Expenses (Net) 4,000

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Particulars Amount (Rs.) Liabilities Amount (Rs.)

Total Assets 9,87,730 Total Liabilities 9,87,730

Explanation of Adjustments:

9
1. Depreciation:

11 ‫ﮨﺎ‬
o Plant & Machinery: Rs. 3,60,000 × 15% = Rs. 54,000

19
om 85 ‫ﺗﮫ‬
o Fixtures: Rs. 7,200 × 10% = Rs. 720
2. Preliminary Expenses:

.C 5 ‫ﺳﮯ‬
o Write off 1/5th = Rs. 5,000 × 1/5 = Rs. 1,000
3. Wages Adjustment:
o Rs. 10,000 used for adding rooms to premises, adjusted in wages.

‫ﻟﮑ‬
4. Bad Debts Provision:

‫ﮭ‬
o Provision kept at 5% of Sundry Debtors = Rs. 87,000 × 5% = Rs. 4,350
di : 0 ‫ﯽ ﮨﻮ‬
5. Dividend and Reserves:
o Final Dividend of 5% = Rs. 23,000 (5% of Rs. 4,60,000)
o Transfer to General Reserve = Rs. 10,000
tu pp ‫ﺋﯽ ا‬
0
6. Income Tax Provision:
o9 3
o Provision for Income Tax = Rs. 25,000 as per requirement.
uS A ‫ﺳﺎﺋﻨﻤ‬

Q. 4 Explain the terms Amalgamation, Absorption and Reconstruction, and clearly indicate
the differences among them.
Amalgamation, Absorption, and Reconstruction are terms commonly used in corporate
‫ﻨ‬

restructuring and mergers and acquisitions. While they are related concepts, each has specific
A a ‫ﭧد‬

characteristics and legal implications. Here’s an explanation of each term along with their
differences:
Amalgamation:
‫ﺳ‬

Definition: Amalgamation refers to the merger of two or more companies to form a completely new
W ‫ﺘﯿﺎب‬
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entity, where the original companies cease to exist as separate legal entities and combine to form a
new entity.
Key Features:
‫ﮨﯿﮟ‬

 Formation of New Entity: A new company is formed through the amalgamation process.
h

 Legal Extinction: The amalgamating companies lose their separate legal identities.
 Transfer of Assets and Liabilities: All assets, liabilities, rights, and obligations of the
amalgamating companies are transferred to the new entity.

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 Shareholders’ Treatment: Shareholders of the amalgamating companies become
shareholders of the new entity in proportion to their holdings.
Example: Company A and Company B merge to form Company C, and Company A and B cease to
exist as separate entities.

9
Absorption:

11 ‫ﮨﺎ‬
19
om 85 ‫ﺗﮫ‬
Definition: Absorption occurs when one company (the acquiring company) absorbs another
company (the acquired company), and the acquired company ceases to exist as a separate legal

.C 5 ‫ﺳﮯ‬
entity.
Key Features:
 Survival of Acquirer: The acquiring company survives and continues to exist, absorbing the

‫ﻟﮑ‬
assets, liabilities, and operations of the acquired company.
Legal Dissolution of Acquired Company: The acquired company is dissolved legally and

‫ﮭ‬
di : 0 ‫ﯽ ﮨﻮ‬
its assets and liabilities are taken over by the acquiring company.
 Treatment of Shareholders: Shareholders of the acquired company usually receive shares
or other consideration from the acquiring company.
tu pp ‫ﺋﯽ ا‬
0
Example: Company X absorbs Company Y, and Company Y ceases to exist independently; its
assets and liabilities are now part of Company X.
o9 3
Reconstruction:
uS A ‫ﺳﺎﺋﻨﻤ‬

Definition: Reconstruction refers to a process where a company undergoes a significant change in its
structure or operations, often involving the reorganization of its capital, assets, or business activities.
Key Features:
‫ﻨ‬
A a ‫ﭧد‬

 Capital Restructuring: It involves altering the financial structure of the company, such as
issuing new shares, consolidating shares, or converting debt into equity.
 Business Reorganization: May involve changes in business operations, product lines, or
‫ﺳ‬

market focus.
W ‫ﺘﯿﺎب‬

 Legal Continuation: The company continues to exist but undergoes substantial changes to
io ts

its financial or operational structure.

Example: Company P restructures its capital by issuing new shares and converting its debt into
equity, while also divesting certain non-core business units.
‫ﮨﯿﮟ‬
h

Differences:
1. Nature of Formation:
o Amalgamation: Forms a new entity where existing entities cease to exist.
o Absorption: Involves one company absorbing another, with the acquirer surviving.

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o Reconstruction: Involves restructuring of an existing company’s financial or
operational structure without forming a new entity.
2. Legal Status of Entities:
o Amalgamation: Results in the extinction of amalgamating entities, which are

9
replaced by a new entity.

11 ‫ﮨﺎ‬
19
om 85 ‫ﺗﮫ‬
o Absorption: The acquired company legally ceases to exist as a separate entity.
o Reconstruction: The company continues to exist but undergoes changes in its

.C 5 ‫ﺳﮯ‬
structure.
3. Focus of Change:
o Amalgamation: Focuses on creating a new entity with combined resources.

‫ﻟﮑ‬
o Absorption: Focuses on integrating the operations and assets of the acquired
company into the acquirer.

‫ﮭ‬
di : 0 ‫ﯽ ﮨﻮ‬
o Reconstruction: Focuses on restructuring capital or operations to achieve strategic
objectives.
4. Treatment of Shareholders:
tu pp ‫ﺋﯽ ا‬

o
0
Amalgamation and Absorption: Shareholders typically receive shares or other
consideration in the surviving or new entity.
o9 3
o Reconstruction: Shareholders may be affected by changes in share structure or
uS A ‫ﺳﺎﺋﻨﻤ‬

capital but the company itself continues.

Q. 5 ABC corporations report the following figures, you are required to Compute to following
Ratios from the data (i) Current Ratio (ii) Acid Test Ratio (iii) Assets Turnover Ratio (iv)
‫ﻨ‬
A a ‫ﭧد‬

Inventory turnover Ratio (v) Average Collection Period (vi) Average Payment Period

Account Receivables
Account Rs. 73,500 Opening Stock Rs. 82,250
‫ﺳ‬

Net Credit Sales 441,000 Bank 14,000

W ‫ﺘﯿﺎب‬

Provision for bad debts 3,500 Bills Receivable 26,250

io ts

Sundry Creditors 56,000 Provision for Taxation 26,250

Loose tools 7,000 Bills Payable 50,750
‫ﮨﯿﮟ‬

Net Credit Purchases 315,000 Marketable securities 14,000

h

Cash 17,500 Closing stock 92,750

To compute the required financial ratios for ABC Corporation, we will use the given data to
calculate each ratio step by step. Here are the formulas and calculations for each ratio:

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(i) Current Ratio
The current ratio measures the company's ability to pay its short-term obligations with its short-term
assets.

9
11 ‫ﮨﺎ‬
19
om 85 ‫ﺗﮫ‬
Given Data:
 Current Assets:

.C 5 ‫ﺳﮯ‬
o Account Receivables: Rs. 73,500
o Bills Receivable: Rs. 26,250
o Bank: Rs. 14,000

‫ﻟﮑ‬
o Marketable securities: Rs. 14,000

‫ﮭ‬
Cash: Rs. 17,500
di : 0 ‫ﯽ ﮨﻮ‬
o

o Total Current Assets = Rs. 73,500 + Rs. 26,250 + Rs. 14,000 + Rs. 14,000 + Rs.
17,500 = Rs. 1,45,250
 Current Liabilities:
tu pp ‫ﺋﯽ ا‬

o
0 Sundry Creditors: Rs. 56,000
o9 3
o Bills Payable: Rs. 50,750
uS A ‫ﺳﺎﺋﻨﻤ‬

o Total Current Liabilities = Rs. 56,000 + Rs. 50,750 = Rs. 1,06,750

Calculation: Current Ratio=1,45,2501,06,750≈1.36\text{Current Ratio} =
\frac{1,45,250}{1,06,750} \approx 1.36Current Ratio=1,06,7501,45,250≈1.36
‫ﻨ‬

(ii) Acid Test Ratio (Quick Ratio)

A a ‫ﭧد‬

The acid test ratio or quick ratio measures the company's ability to pay its short-term obligations
with its most liquid assets.
‫ﺳ‬
W ‫ﺘﯿﺎب‬
io ts

Given Data:
 Current Assets (excluding Inventory):
‫ﮨﯿﮟ‬

o Total Current Assets = Rs. 1,45,250

h

o Inventory (Closing Stock): Rs. 92,750

 Current Liabilities:
o Total Current Liabilities = Rs. 1,06,750
Calculation:

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(iii) Assets Turnover Ratio

The assets turnover ratio measures how efficiently the company is using its assets to generate sales.

9
Formula:

11 ‫ﮨﺎ‬
19
om 85 ‫ﺗﮫ‬
Given Data:

.C 5 ‫ﺳﮯ‬
 Net Credit Sales: Rs. 4,41,000
 Average Total Assets = (Opening Stock + Closing Stock) / 2 + Net Credit Purchases + Net
Credit Sales

‫ﻟﮑ‬
Calculation:

‫ﮭ‬
di : 0 ‫ﯽ ﮨﻮ‬
(iv) Inventory Turnover Ratio
tu pp ‫ﺋﯽ ا‬
0
The inventory turnover ratio measures how many times a company's inventory is sold and replaced
o9 3
over a period.
uS A ‫ﺳﺎﺋﻨﻤ‬

Formula:
‫ﻨ‬
A a ‫ﭧد‬ ‫ﺳ‬
W ‫ﺘﯿﺎب‬
io ts
‫ﮨﯿﮟ‬
h

(v) Average Collection Period

The average collection period measures the average number of days taken by the company to collect
its receivables.
Formula:

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9
11 ‫ﮨﺎ‬
19
om 85 ‫ﺗﮫ‬
.C 5 ‫ﺳﮯ‬
‫ﮭ‬ ‫ﻟﮑ‬
di : 0 ‫ﯽ ﮨﻮ‬
(vi) Average Payment Period
The average payment period measures the average number of days the company takes to pay its
suppliers.
tu pp ‫ﺋﯽ ا‬

Formula:
0
o9 3
uS A ‫ﺳﺎﺋﻨﻤ‬
‫ﻨ‬
A a ‫ﭧد‬ ‫ﺳ‬
W ‫ﺘﯿﺎب‬
io ts
‫ﮨﯿﮟ‬
h

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