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ACCOUNTING FOR

FINANCIAL SERVICES AS PER BANKING DIPLOMA SYLLABUS

Written By Md. Sajjad Hossain, ITP CMA (Final), MBA (Accounting & Finance), BBA (Finance), LLB Income Tax Lawyer Member – Dhaka Taxes Bar Association Income Tax and Company Law Adviser

Reviewed By Md. Nabinoor Mamun, CDCS Assistant Vice President, United Commercial Bank, Mohakhali Branch, Dhaka.

Edited By Santush Chandra Sarker ACS, ITP CMA (Inter), MBA, BBA, LLB DAIBB, DIB, ABIA, PGDHRM, PGDCM Income Tax Lawyer Member – Dhaka Taxes Bar Association Member – Chittagong Taxes Bar Association

NOBBODOY PUBLICATION DHAKA, BANGLADESH facebook.com/nobbodoy

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ACCOUNTING FOR FINANCIAL SERVICES

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: October 2018

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Accounting for Financial Services, Written By: Md. Sajjad Hossain, Presented By: Nobbodoy Publication, Dhaka, Edition: October 2018.


PREFACE

With the growing demand of commerce, Banking has gained a huge popularity. As more and more industries are coming into the country, demand for Bank has further increased. The main objective of this book is to meet the basic requirements of the Banking Diploma courses. It is helpful to the students of Bachelor of Business Administration, and Bachelor of Business Studies. It is also helpful for professional students and the persons who are intended to get admission into a professional institute. This book is written by following the curriculum of The Banking Diploma courses for the subject Accounting for Financial Services. I am grateful and deserve my thanks to the publisher, printers, and designers of this book. Any criticism, favorable or unfavorable, and any constructive suggestion in regards of this book will be gratefully received.

Date: October 2018

Md. Sajjad Hossain


DEDICATION

I would like to dedicate this publication to the honorable Bankers of Bangladesh for their incredible contribution in the field of Bank.


SYLLABUS STRUCTURE PAPER 06 - ACCOUNTING FOR FINANCIAL SERVICES

Module A: Introduction and Environment Purpose, nature, uses and users of accounting information, functional and operational definition of accounting, accounting principles, standards and regulations, forms of business organizations and accounting systems. Module B: Analysis of financial statement Objectives of financial statement analysis, financial statement analysis, horizontal and vertical analysis, comparative financial statements, communize statements, financial ratios analysis, trend percentage, specialized analysis, cash forecasts, analysis of changes in financial position, break-even analysis, cash flow statement, unadjusted trial balance and adjustments. Module C: Processing and recording of accounting information Transactions, analysis of transactions, accounting cycle, recording of transaction, double entry system, golden rule of debit and credit, posting of transactions to the ledger, T form and multi column ledger, preparation of trial balance, suspense accounts, reflection of errors, adjusting entries and closing entries, accrued and deferred revenue and expenses. Module D: Financial statements for different entities Service, merchandise and manufacturing operation: Income statement, cost of goods sold, cash flow statement, balance sheet, limitation of balance sheet. Partnership and joint stock companies: Specific characteristics of financial statements of partnership – capital account, current account, profit and loss adjustments account, distinguishing characteristics of financial statements of companies. Banks and other financial institutions: Provision of Bank Company Act, 1991 (with amendments), preparation of profit and loss account and balance sheet of banks, provisions of Financial Institutions Act, 1993 (with amendments). preparation of profit and loss account and balance sheet of financial institutions. Module E: Accounting for assets Current assets: Inventory valuation, periodic and perpetual method for ascertaining closing inventory, average, last in first out (LIFO), first in first out (FIFO), accounts receivables. Fixed assets: Depreciation methods, recording of depreciation, valuation of fixed assets, depreciation as a cost allocation.


Module F: Journal rules for journalizing Different types of journals, sub-division of journals, posting of accounts, ledger, interpretation of ledger account, writing of different types of cash book in columnar form, imprest system of petty cash, bank reconciliation system, journal proper.


BRIEF TABLE OF CONTENTS

Chapter Title

Page No.

1. Introduction and environment

11

2. Analysis of financial statement

23

3. Financial ratio analysis

106

4. Break-even analysis

128

5. Cash flow statement

168

6. Processing and recording of accounting information

261

7. Financial statements for different entities

264

8. Accounting for assets – current assets

203

9. Accounting for assets – fixed assets

350

10. Journal rules for journalizing

390

11. Bank reconciliation system

425


DETAILED TABLE OF CONTENTS

Chapter Title and Contents

Page No.

Chapter-1: 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7.

Introduction and environment Definition of accounting Purposes of accounting Nature of accounting Uses of accounting information Users of accounting information Accounting principles Forms of business organizations Self practice questions Self practice questions answer

11 11 11 11 12 13 14 16 18 19

Chapter-2: 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 2.8. 2.9. 2.10.

Analysis of financial statement Definition of financial statement analysis Objectives of financial statement analysis Parties interested in financial analysis Types of financial statement analysis Modes of financial statement analysis Horizontal and vertical analysis Differences between horizontal and vertical analysis Users of financial statement analysis Limitations of financial statement analysis Short notes Self practice questions Self practice questions answer Problems and solutions Exercises

23 23 23 24 24 24 26 26 26 27 27 29 31 39 86

Chapter-3: 3.1. 3.2. 3.3. 3.4.

Financial ratio analysis Concept of ratio analysis Advantages of ratio analysis Limitations of ratio analysis Different types of ratios Self practice questions Self practice questions answer Problems and solutions Exercises

106 106 106 107 107 110 111 112 124

Chapter-4: 4.1. 4.2. 4.3. 4.4.

Break-even analysis Contribution concept CVP analysis Assumptions of CVP analysis Limitations of CVP analysis

128 128 128 128 128


Chapter Title and Contents 4.5. 4.6. 4.7. 4.8. 4.9. 4.10. 4.11. 4.12. 4.13.

Page No.

Chart/ graph Break-even point Assumption of break-even analysis Limitations of break-even analysis Margin of safety Usefulness of margin of safety Contribution/ sales ratio Degree of operating leverage Differences between operating leverage and financial leverage Self practice questions Self practice questions answer Problems and solutions Exercises

129 129 129 129 130 130 130 130 131 133 134 137 156

Chapter-5: 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 5.7. 5.8. 5.9. 5.10. 5.11. 5.12.

Cash flow statement Definition of cash and cash equivalent Meaning of cash flows and statement of cash flows Benefits of statement of cash flows Presentation of statement of cash flows Reasons for preparing a statement of cash flows Methods of preparing a statement of cash flows Differences between direct and indirect method of cash flows Limitations of statement of cash flows Explanation of free cash flow Differences between free cash flow and operating cash flow Non-cash transactions Disclosure Self practice questions Self practice questions answer Problems and solutions Exercises

168 168 168 168 169 170 170 171 171 172 172 172 173 177 178 181 238

Chapter-6: 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7.

Processing and recording of accounting information Meaning of accounting cycle Steps involved in accounting cycle Definition of single entry system Definition of double entry system Differences between single and double entry system Golden role of debit and credit Deferred revenue and expenses

261 261 261 261 261 261 262 262

Chapter-7: 7.1. 7.2. 7.3. 7.4.

Financial statements for different entities Meaning of a statement of bank Analysis of off balance sheet items Notes to the financial statement Disclosures in financial report

264 264 264 264 265


Chapter Title and Contents 7.5. Explanation of insurance company 7.6. Functions of insurance company 7.7. Types of insurance company Problems and solutions Exercises

Page No. 265 265 266 268 289

Chapter-8: 8.1. 8.2. 8.3. 8.4. 8.5. 8.6. 8.7. 8.8. 8.9. 8.10. 8.11. 8.12. 8.13. 8.14. 8.15.

Accounting for assets – current assets Definition of inventory Types of inventory Meaning of perpetual and periodic inventory systems Distinction between perpetual and periodic inventory systems Advantages of perpetual inventory system Disadvantages of perpetual inventory system Advantages of periodic inventory system Disadvantages of periodic inventory system Best method of inventory system Inventory valuation method Measurement of inventory Concept of lower of cost or market Recognition of inventory Explanation of retail inventory method Disclosure Self practice questions Self practice questions answer Problems and solutions Exercises

303 303 303 303 304 304 305 305 306 307 307 308 309 309 309 310 311 312 315 340

Chapter-9: 9.1. 9.2. 9.3. 9.4. 9.5. 9.6. 9.7. 9.8. 9.9. 9.10. 9.11. 9.12. 9.13. 9.14. 9.15. 9.16. 9.17.

Accounting for assets – fixed assets Definition of property, plant and equipment Cost of property, plant and equipment Measurement of cost Recognition Accounting policies Meaning of depreciation Methods of depreciation Uses of two methods of depreciation Accelerated depreciation Depreciation on income statement and balance sheet differs Derecognition Explanation of depletion Methods of depletion Reasons for depletion of natural resources Concept of amortization Differences among depreciation, depletion and amortization Disclosure Self practice questions

350 350 350 350 351 351 351 352 352 352 353 353 353 354 354 355 355 355 356


Chapter Title and Contents Self practice questions answer Problems and solutions Exercises Chapter-10: 10.1. 10.2. 10.3. 10.4.

Journal rules for journalizing Definition of journal entry Meaning of adjusting entry Differences between bookkeeping and accounting Differences between gross method and net method of recording purchases 10.5. Short notes Self practice questions Self practice questions answer Problems and solutions Exercises

Chapter-11: 11.1. 11.2. 11.3. 11.4. 11.5.

Page No. 357 360 384 390 390 390 390 390 391 393 394 396 414

Bank reconciliation system Definition of reconciliation Meaning of bank reconciliation Concept of bank reconciliation statement Preparation of a bank reconciliation statement Transactions that are appeared in bank reconciliation statement Self practice questions Self practice questions answer Problems and solutions Exercises

425 425 425 425 425 425 427 428 430 452

Model exam question

464


CHAPTER - 1 INTRODUCTION AND ENVIRONMENT

1.1. DEFINITION OF ACCOUNTING Accounting is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity. 1.2. PURPOSES OF ACCOUNTING The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it. This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplier invoices, or through more specialized transactions, known as journal entries. Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents: i. Income statement ii. Balance sheet iii. Statement of cash flows iv. Statement of retained earnings v. Disclosures that accompany the financial statements The accountant may generate additional reports for special purposes, such as determining the profit on sale of a product, or the revenues generated from a particular sales region. These are usually considered to be managerial reports, rather than the financial reports issued to outsiders. Thus, the purpose of accounting centers on the collection and subsequent reporting of financial information. 1.3. NATURE OF ACCOUNTING We know Accounting is the systematic recording of financial transactions and presentation of the related information of the appropriate persons. The basic natures of accounting are as follows: i. Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting.


ii. Accounting is an art: Accounting is an art of recording, classifying, summarizing and finalizing the financial data. The word ‗art‘ refers to the way of performing something. It is a behavioral knowledge involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires applied skill and expertise. So, by nature accounting is an art. iii. Accounting is means and not an end: Accounting finds out the financial results and position of an entity and the same time, it communicates this information to its users. The users then take their own decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the primary objective of any person or entity. On the other hand, the main objective may be identified as taking decisions on the basis of financial information supplied by accounting. Thus, accounting itself is not an objective, it helps attaining a specific objective. So it is said the accounting is ‗a means to an end‘ and it is not ‗an end in itself.‘ iv. Accounting deals with financial information and transactions: Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial information. Only financial information is its subject matter. It does not deal with non-monetary information of non-financial aspect. v. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has been evolved out to meet the need of financial information required by different interested groups. 1.4. USES OF ACCOUNTING INFORMATION Accounting provides companies with various pieces of information regarding business operations. It is often conducted by a company‘s internal accounting department and reviewed by a public accounting firm. Small businesses often have significantly less financial information recorded during the accounting process. However, business owners often review this financial information to determine how well their business is operating. Accounting information can also provide insight on growing or expanding current business operations. Performance Management: A common use of accounting information is measuring the performance of various business operations. While financial statements are the classic accounting information tool used to assess business operations, business owners may conduct a more thorough analysis of this information when reviewing business operations. Financial ratios use the accounting information reported on financial statements and break it down into leading indicators. These indicators can be compared to other companies in the business environment or an industry standard. This helps business owners understand how well their companies operate compared to other established businesses.


Create Budgets: Business owners often use accounting information to create budgets for their companies. Historical financial accounting information provides business owners with a detailed analysis of how their companies have spent money on certain business functions. Business owners often take this accounting information and develop future budgets to ensure they have a financial road map for their businesses. These budgets can also be adjusted based on current accounting information to ensure a business owner does not restrict spending on critical economic resources. Business Decisions Accounting information is commonly used to make business decisions. Decisions may include expanding current operations, using different economic resources, purchasing new equipment or facilities, estimating future sales or reviewing new business opportunities. Accounting information usually provides business owners information about the cost of various resources or business operations. These costs can be compared to the potential income of new opportunities during the financial analysis process. This process helps business owners understand how current business operations will be affected when expanding or growing their businesses. Opportunities with low income potential and high costs are often rejected by business owners. Investment Decisions External business stakeholders often use accounting information to make investment decisions. Banks, lenders, venture capitalists or private investors often review a company‘s accounting information to review its financial health and operational profitability. This provides information about whether or not a small business is a wise investment decision. Many small businesses need external financing to start up or grow. The inability to provide outside lenders or investors with accounting information can severely limit financing opportunities for a small business. 1.5. USERS OF ACCOUNTING INFORMATION Accounting information helps users to make better financial decisions. Users of accounting information may be both internal and external to the organization. Internal users (Primary users) of accounting information include the following: i. Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. ii. Employees: for assessing company's profitability and its consequence on their future remuneration and job security. iii. Owners: for analyzing the viability and profitability of their investment and determining any future course of action.


External users (Secondary users) of accounting information include the following: i. Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. ii. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company. iii. Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. iv. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. v. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions. 1.6. ACCOUNTING PRINCIPLES Accounting principles are the rules and guidelines that companies must follow when reporting financial data. The common set of accounting principles is the generally accepted accounting principles (GAAP). The generally accepted accounting principles (GAAP) consists of three important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board (APB), and (3) the generally accepted industry practices. Since GAAP is founded on the basic accounting principles and guidelines, we can better understand GAAP if we understand those accounting principles. The following is a list of the ten main accounting principles and guidelines together with a highly condensed explanation of each. i. Economic Entity Assumption: The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities. ii. Monetary Unit Assumption: Economic activity is measured in money, and only transactions that can be expressed in money are recorded. Because of this basic accounting principle, it is assumed that the monetary purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. iii. Time Period Assumption: This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months


ended May 31, 2016, or the 5 weeks ended May 1, 2016. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. iv. Cost Principle: From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts. Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements–you need to look elsewhere, perhaps to a third-party appraiser. v. Full Disclosure Principle If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements. vi. Going Concern Principle This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment. The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods. vii. Matching Principle This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. viii. Revenue Recognition Principle Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report Tk.20,000 of revenue in its first month of operation but receive Tk.0 in actual cash in that month.


ix. Materiality Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial. Because of materiality, financial statements usually show amounts rounded to the nearest taka, to the nearest thousand, or to the nearest million taka depending on the size of the company. x. Conservatism If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective. The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. 1.7. FORMS OF BUSINESS ORGANIZATIONS A business organization is an entity that uses economic resources or inputs to provide goods or services to customers in exchange for money or other goods and services. Business organizations come in different types and different forms of ownership. Followings are the basic forms of business organization. i) Sole proprietorship: The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietorships own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business. Advantages of a Sole Proprietorship: • Easiest and least expensive form of ownership to organize. • Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit. • Profits from the business flow-through directly to the owner‘s personal tax return. • The business is easy to dissolve, if desired. Disadvantages of a Sole Proprietorship: • Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk. • May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans. • May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business. • Some employee benefits such as owner‘s medical insurance premiums are not directly deductible from business income (only partially as an adjustment to income). ii) Partnerships: In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The


Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. They also must decide up front how much time and capital each will contribute, etc. Advantages of a Partnership: • Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement. • With more than one owner, the ability to raise funds may be increased. • The profits from the business flow directly through to the partners‘ personal tax return. • Prospective employees may be attracted to the business if given the incentive to become a partner. • The business usually will benefit from partners who have complementary skills. Disadvantages of a Partnership: • Partners are jointly and individually liable for the actions of the other partners. • Profits must be shared with others. • Since decisions are shared, disagreements can occur. • Some employee benefits are not deductible from business income on tax returns. • The partnership may have a limited life; it may end upon the withdrawal or death of a partner. iii) Corporations: A Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A Corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. Advantages of a Corporation: • Shareholders have limited liability for the corporation‘s debts or judgments against the corporation. • Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes. • Corporations can raise additional funds through the sale of stock. • A Corporation may deduct the cost of benefits it provides to officers and employees. • Can elect S Corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership. Disadvantages of a Corporation: • The process of incorporation requires more time and money than other forms of organization. • Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations. • Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus this income can be taxed twice.


SELF PRACTICE QUESTIONS 1. What is conceptual framework? Why we need a conceptual framework in financial accounting? 2. What are the basic principles of accounting? Identify and explain which basic principle of accounting is best described in each item below: (i) ABC reports revenue in its income statement when it delivered goods instead of when the cash is collected. (ii) DEF recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. (iii) XYZ reports information about pending lawsuits in the notes to its financial statements. (iv) PQR reports land on its statement of financial position at the amount paid to acquire it, even though the estimated fair market value is greater. 3. What is IFRS Foundation? What relation does it has with IASB? 4. What is the monetary unit assumption and economic entity assumption? 5. Define full disclosure principle and cost principle. 6. Evaluate the following situations referring to appropriate accounting principle, concept or assumption: (i) Crazy Company owns land that cost Tk.5,000,000. If a ‗quick sale‘ of the land was necessary to generate cash, the company feels it would receive only Tk.4,200,000. The company continues to report the asset on the balance sheet at Tk.5,000,000. (ii) Max Corporation performed a job on account for its client and billed them Tk.115,000 in May 2015. Max collected full in settlement of the bill in June 2015 and reported the collection as revenue for June. (iii) Susan Automobiles limited took a loan of Tk.20,000 @ 15% and in their quarterly income statement they have shown interest expenses as Tk.3,000. (iv) M & W initially recorded purchase of assets at cost and adjusted the value when the market value changes. 7. What is ‗Chart of Accounts‘? Explain the need of chart of accounts in accounting briefly describing the procedure of developing the chart. 8. Explain the concept of Business Entity and Going Concern. 9. Discuss the Qualitative characteristics of Accounting Information. 10. Can you explain Interim Financial Reporting, Capital Market and Money Market? 11. What do you mean by the Conceptual Framework of Accounting?


SELF PRACTICE QUESTIONS ANSWER 1. Conceptual framework: The conceptual framework of accounting provides accountants with a constitution regarding the recording and reporting of financial information. Two main bodies exist for setting and managing the conceptual framework. These are the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Needs for conceptual framework in financial accounting: To be useful, standard setting should build on and relate to an established body of concepts and objectives. A soundly developed conceptual framework thus enables the FASB to issue more useful and consistent standards over time. A coherent set of standards and rules should result. The framework should increase financial statement users‘ understanding of and confidence in financial reporting. It should enhance comparability among companies‘ financial statements. The profession should be able to more quickly solve new and emerging practical problems by referring to an existing framework of basic theory. 2. The basic principles of accounting: (a) Cost principle (b) Expenses recognition principle (c) Revenue recognition principle (d) Matching principle (e) Going concern principle (f) Full disclosure principle Identification and explanation of best basic principles: (i) Revenue recognition principle (ii) Matching principle/ Expenses recognition principle (iii) Full disclosure principle (iv) Cost principle 3. IFRS Foundation: The IFRS Foundation is a not-for-profit, public interest organisation established to develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards—IFRS Standards—and to promote and facilitate adoption of the standards. IFRS Standards are set by the IFRS Foundation‘s standard-setting body, the International Accounting Standards Board. Relationship between IFRS and IASB: The International Accounting Standards Board (IASB) develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the oversight of the IFRS Foundation.


4. Monetary unit assumption: The monetary unit concept is an accounting principle that assumes business transactions or events can be measured and expressed in terms of monetary units and the monetary units are stable and dependable. In other words, the language of business and finance is money. Economic entity assumption: Economic entity assumption is an accounting principle that allows the accountant to keep the sole proprietor's business transactions separate from the owner's personal transactions even though a sole proprietorship is not legally separate from the owner. 5. Full disclosure principle: The full disclosure principle is an accounting concept that requires management to report all relevant information about the company‘s operations to creditors and investors in the financial statements and footnotes. In other words, GAAP requires that management tell external users material information about the company that they can use to base their decisions on. Cost principle: The cost principle is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle. The cost principle requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired. 6. (i) Historical cost assumption (ii) Revenue recognition principles (iii) Matching principles (iv) Going concern principles 7. Chart of accounts: A chart of accounts is a financial organizational tool that provides a complete listing of every account in an accounting system. An account is a unique record for each type of asset, liability, equity, revenue and expense. The need of chart of accounts in accounting: Chart of accounts is made by an organization to prefix what accounts are used in the business. It is needed for the following facilities: i. All accounts are listed here to deal with the business. ii. It ensures a definite number of account titles. iii. It indicates the scope of accounts to deal with the business. iv. It ensures the limits of transactions. v. It protects the problems of title fixation. vi. It locates the position of each account easily.


Procedure of developing chart of accounts: There are five Categories on the chart of accounts 1. Assets 2. Liabilities 3. Owner's Equity 4. Revenue 5. Expenses 8. The concept of business entity: Business entity means it is a legal entity. Business entity always runs with the going concern concept that holds that this entity will turn for a long time by its legality. The concept of going concern: Going concern concept means that business is continuing its operation in future, it will not stop in near future. It is an ongoing process for future. 9. The qualitative characteristics of accounting information: 1. Information must be reliable 2. Information must be relevant 3. It must have comparability 4. It must have consistency 5. It must be made by neutrality 10. Interim financial reporting: Interim financial reporting is a guideline that provides an overview to summarize all of a company‘s financial activity in a given period. Interim financial reports are the financial statements that cover a period of less than a full financial year. These reports are prepared quarterly. It improves the knowledge of investors and others to understand the entity better. Capital market: A capital market is a market for securities (debt or equity), where business enterprises and governments can raise long-term funds. It is a market in which money is provided for longer than one year. The capital market includes stock market (equity) and bond market (debt). Capital market is a part of financial market. Money market: A money market is a market for securities where business enterprises can raise short-term fund. It is a market in which money is provided for lower than one year. The money market includes treasury bills, commercial paper, etc. Money market is a segment of financial market.


11. The conceptual framework of accounting provides accountants with a constitution regarding the recording and reporting of financial information. Two main bodies exist for setting and managing the conceptual framework. These are the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).


CHAPTER - 2 ANALYSIS OF FINANCIAL STATEMENT

2.1. DEFINITION OF FINANCIAL STATEMENT ANALYSIS Financial statement analysis (or financial analysis) is the process of reviewing and analyzing a company's financial statements to make better economic decisions. These statements include the income statement, balance sheet, statement of cash flows, and a statement of changes in equity. Financial statement analysis is a method or process involving specific techniques for evaluating risks, performance, financial health, and future prospects of an organization. It is used by a variety of stakeholders, such as credit and equity investors, the government, the public, and decision-makers within the organization. Common methods of financial statement analysis include fundamental analysis, DuPont analysis, horizontal and vertical analysis and the use of financial ratios. 2.2. OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS (i) Assessment of past performance: Past performance is a good indicator of future performance. Investors or creditors are interested in the trend of past sales, cost of goods sold, operating expenses, net income, cash flows and return on investment. These trends offer a means for judging management's past performance and are possible indicators of future performance. (ii) Assessment of current position: Financial statement analysis shows the current position of the firm in terms of the types of assets owned by a business firm and the different liabilities due against the enterprise. (iii) Prediction of profitability and growth prospects: Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other users in judging earning potential of business enterprise. (iv) Prediction of bankruptcy and failure: Financial statement analysis is an important tool in assessing and predicting bankruptcy and probability of business failure. (v) Assessment of the operational efficiency: Financial statement analysis helps to assess the operational efficiency of the management of a company. The actual performance of the firm which are revealed in the financial statements can be compared with some standards set earlier and the deviation of any between standards and actual performance can be used as the indicator of efficiency of the management.


2.3. PARTIES INTERESTED IN FINANCIAL ANALYSIS The following parties are interested in the analysis of financial statements: (a) Investors or potential investors. (b) Management. (c) Creditors or suppliers. (d) Bankers and financial institutions. (e) Employees. (f) Government. (g) Trade associations. (h) Stock exchanges. (i) Economists and researchers. (j) Taxation authorities 2.4. TYPES OF FINANCIAL STATEMENT ANALYSIS There are four main types of financial statement analysis, which are as follows: i) Income statement: This report reveals the financial performance of an organization for the entire report period. It begins with sales, and then subtracts out all expenses incurred during the period to arrive at a net profit or loss. An earnings per share figure may also be added if the financial statements are being issued by a publicly-held company. This is usually considered the most important financial statement, since it describes performance. ii) Balance sheet: This report shows the financial position of a business as of the report date. The information is aggregated into the general classifications of assets, liabilities, and equity. Line items within the asset and liability classification are presented in their order of liquidity, so that the most liquid items are stated first. This is a key document, and so is included in most issuances of the financial statements. iii) Statement of cash flows: This report reveals the cash inflows and outflows experienced by an organization during the reporting period. These cash flows are broken down into three classifications, which are operating activities, investing activities, and financing activities. This document can be difficult to assemble, and so is more commonly issued only to outside parties. iv) Statement of changes in equity: This report documents all changes in equity during the reporting period. These changes include the issuance or purchase of shares, dividends issued, and profits or losses. This document is not usually included when the financial statements are issued internally, as the information in it is not overly useful to the management team. 2.5. METHODS OF FINANCIAL STATEMENT ANALYSIS The analysis and interpretation of financial statements is used to determine financial position and results of operation as well. The following methods of analysis are generally used:


a) Comparative financial statements: The comparative financial statements are the statements of the financial position at different periods of time. The elements are shown in a comparative form so as to give an idea of financial position at two or more periods. Generally two financial statements (balance sheet and incomestatements) are in comparative form for financial analysis. b) Trend analysis: The financial statement can be analyzed by computing the trends of services of information. This method determines the direction upwards or downwards and involves the computation of percentage relationship that each statement bears to the same item in the base year. The information for number years is taken up. c) Communize statements: A communize statement facilitates comparison of financial statements of not only a single firm over a period, but also comparison of financial statements of different companies for a given firm. Under this method all the items of the statement are presented as percentages or ratios of a particular item. Therefore even if the related absolute figures are in respect of vastly different scale of operations a common base for comparison is created. In case of a communize income statement all items are presented as percentages of net sales. A communize balance sheet shows each item as a percentage of total assets or total liabilities. A communize statement helps in determining the relative efficiency and soundless of a firm and helps in understanding its financial strategy. d) Funds flow analysis: The funds flow statement explains the various sources from which funds are raised and uses to which funds are put. It shows the change in assets and liabilities from the end period of time to the end of another period of time i.e. between the two balance sheet dates an analysis of funds flow statement helps in answering the following questions raised e) Cash flow analysis: It is an examination of a company‘s cash inflows and outflows during a specific period. The analysis begins with a starting balance and generates an ending balance after accounting for all cash receipts and paid expenses during the period. The cash flow analysis is often used for financial reporting purposes. f) Ratio analysis: Ratio analysis is a technique of analysis and interpretation of financialstatements. It is a process of establishing and interpreting various ratios for helping in certain decisions. It is only a means of better understanding of financial strengths and weakness of a firm. g) Cost-volume-profit analysis: Cost-volume-profit analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including: Sales price per unit is constant. Variable costs per unit are constant. Total fixed costs are constant.


2.6. HORIZONTAL AND VERTICAL ANALYSIS A horizontal analysis, or trend analysis, is a procedure in fundamental analysis in which an analyst compares ratios or line items in a company's financial statements over a certain period of time. The analyst uses his discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration. Vertical analysis is a method of financial statement analysis in which each entry for each of the three major categories of accounts, or assets, liabilities and equities, in a balance sheet is represented as a proportion of the total account. Vertical analysis is also used across other financial statements as a percentage measure. 2.7. DIFFERENCES BETWEEN HORIZONTAL AND VERTICAL ANALYSIS Horizontal analysis i) Horizontal analysis looks at amounts on the financial statements over the past years. ii) Horizontal analysis is used to examine changes (trends) in different balance sheet items over a period of time. iii) Horizontal analysis analyse past years performance. iv) Horizontal percentage is the change in a particular item from one period to the next. v) Horizontal analysis consists of two calculations. Taka change = Amount of item in comparison year minus amount of item in base year. Percentage change = (Taka change/Amount of the item in base year) x 100

Vertical analysis i) Vertical analysis reports each amount on a financial statement as a percentage of another item. ii) Vertical analysis is used to compare a company to another company or an industry average iii) Vertical analysis analyse the current year's performance iv) Vertical percentage expresses results as a percentage of total assets at the time the analysis was done. v) Vertical analysis is calculated as Balance sheet item/Total assets

2.8. USERS OF FINANCIAL STATEMENT ANALYSIS The analysis of financial statement is generally used by the following users: Trade creditors: Trade creditors are interested firm‘s abilit y to meet their claims over ver y short period of time. Their analysis will therefore be evaluation of the firm‘s liquidity position. Providers of long-term debit: On the other hand suppliers are concerned with firm‘s long-term solvencyand survival. They analyze firm‘s profitability over time, its ability to generate cash to be able to pay interest and repay principal and relationship between various sources.


Investors: Investors are those persons who invested their money in the firm‘s earnings. They restore confidence in that firm‘s that show steady growth in earnings.As such they concentrate on analysis of the firm‘s present and future profitability. Management: Management of the firm would be interested in every financial aspect of the financial analysis. It is their overall responsibility to see that the resources of the firm are use most effectively and efficiently and that the firm‘s financial condition is sound. 2.9. LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS Financial analysis is a powerful mechanism of determining financial strengths and weaknesses of a firm. But, the analysis is based on the information available in the financial statements. Thus, the financial analysis suffers from serious inherent limitations of financial statements. The financial analyst has also to be careful about the impact of price level changes, window-dressing of financial statements, changes in accounting policies of a firm, accounting concepts and conventions, and personal judgment , etc. Some of the important limitations of financial analysis are, however, summed up as below: (i) It is only a study of interim reports (ii) Financial analysis is based upon only monetary information and non-monetary factors are ignored. (iii) It does not consider changes in price levels. (iv) As the financial statements are prepared on the basis of a going concern, it does not give exact position. Thus accounting concepts and conventions cause a serious limitation to financial analysis. (v) Changes in accounting procedure by a firm may often make financial analysis misleading. (vi) Analysis is only a means and not an end in itself. The analyst has to make interpretation and draw his own conclusions. Different people may interpret the same analysis in different ways. 2.10. SHORT NOTES (a) Income and expenditure account: An income and expenditure account a record that summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. These records provide information about a company's ability – or lack thereof – to generate profit by increasing revenue, reducing costs, or both. The income and expenditure account is also referred to as "profit and loss account", "income statement," "statement of operations," and "statement of financial results." (b) Statement of comprehensive income: Comprehensive income is the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The statement of comprehensive income illustrates the financial performance and results of operations of a particular company or entity for a period of time.


(c) Classified balance sheet: A classified balance sheet is a financial statement that presents the assets, liabilities, and equity in relevant sub-categories that will be useful for end users. There is no required format or number of sub-categories, but the most common sub-categories are current and non-current. (d) Consolidated financial statement: Consolidated financial statements are the combined financials for a parent company and its subsidiaries. It is also possible to have consolidated financial statements for a portion of a group of companies, such as for a subsidiary and those other entities owned by the subsidiary. For example of consolidation, ABC International has Tk.5,00,000 of revenues and Tk.10,00,000 of assets appearing in its own financial statements. However, ABC also controls five subsidiaries, which in turn have revenues of Tk.1,00,000 and assets of Tk.8,00,000. Clearly, it would be extremely misleading to show the financial statements of just the parent company, when its consolidated results reveal that it is really a Tk.6,00,000 company that controls Tk.18,00,000 of assets.


SELF PRACTICE QUESTIONS 1. What is the primary objective of financial reporting? 2. What is restricted cash? How to report the same in the financial statement? 3. What is the importance of financial statement analysis? What are the tools used in financial statement analysis? 4. What are the components of a complete set of financial statements as defined in IAS-1? 5. What is overtrading? What might be the consequences of overtrading? 6. What is value added statement? 7. Define operating income, non-operating income and comprehensive income. State two broad groups to be shown in the ―statement of other comprehensive income: as per revised IAS-1. 8. Explain the recognition process of the elements of financial statements. 9. Under what circumstances, three years ―Comparative information‖ are shown in financial statements? 10. What is the purpose of financial statements as per IAS-1? 11. Distinguish between tangible and intangible assets. 12. Mohona O Mohanonda Ltd. (MML) is a well-known publisher of children‘s educational books. The finance director, Kamal Uddin, is known for his commercial acumen rather than his technical ability. He is therefore seeking your advice on two particular accounting issues. (i) Value of head of publishing MML have recently appointed a new head of publishing, Nowshad Monir, who worked with a key competitor of MML, Oronno Prokashon Ltd. (OPL). Nowshad Monir is extremely popular amongst the leading authors to attract the services of certain authors currently working for OPL. Finance Director believes that Nowshad is therefore of great value to MML and that such value should therefore be recognized in the Statement of Financial Position in the form of an asset. (ii) Finance Director is aware that Khalid Umar, one of MML‘s authors, is being accused of including ideas in his texts that have previously been published. Finance Director is certain that a legal case will face and therefore being prudent wishes to recognize a liability in the accounts now for any damages that are likely to arise. Required: Using IFRS Framework: (i) Define terms ‗asset‘, ‗liability‘ and ‗recognized‘. (ii) Prepare a brief notes for Finance Director, discussing whether the above scenarios result in an asset or liability and whether or not they should be recognized in the financial statements.


13. What is off-balance-sheet financing? Why might a company be interested in using offbalance-sheet financing? 14. Explain the suitable conditions for recording a contingent liability. 15. What are the qualitative characteristics of the financial statements which improve the usefulness of the information furnished therein? 16. ―One of the characteristics of financial statements is neutrality‖- Do you agree with this statement? 17. What is Off Balance Sheet Items? 18. What do you mean by ‗Post balance sheet events‘? Explain. 19. Describe the purpose of the balance sheet. Can you define a subsequent event? 20. Discuss the term relevance and reliability as they relate to financial accounting information. 21. Explain various possible types of contingent liabilities and there disclosure in the financial statements. 22. Define the term accruals, provisions and contingent assets.


SELF PRACTICE QUESTIONS ANSWER 1. Financial reporting is a structures representation of the financial position and financial performance of an entity. The objective of financial reporting is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial reports also show the results of the management‘s stewardship of the resources entrusted to it. To meet this objective, financial reports provide information about an entity‘s: (a) assets; (b) liabilities; (c) equity; (d) income and expenses, including gains and losses; (e) contributions by and distributions to owners in their capacity as owners; and (f) cash flows. 2. Restricted cash: Restricted cash is money that is not freely available for immediate investment use. In other words, it‘s the amount of money that a firm puts aside and holds for a particular purpose. Firms hold restricted cash to anticipate a sudden capital expenditure, a loan repayment, a plant expansion or the purchase of equipment. Reporting the restricted cash: If the restricted cash balance is material, then this balance is shown separately from cash and cash equivalents on the balance sheet. Depending on when cash is expected to be used, restricted cash can be classified as a current (short-term) or non-current (long-term) asset. In cases when restricted cash is expected to be used within one year after the balance sheet date, it should be classified as a current asset. However, if restricted cash is not expected to be used within one year after the balance sheet date, it should be classified as a noncurrent asset. It is good practice to account for restricted cash in a separate ledger account. Restricted cash can be combined with cash and cash equivalents if the restricted cash balance is not material. 3. The importance of financial statement analysis: (a) Holding of share: Shareholders are the owners of the company. The financial statement analysis provides information to the shareholders in taking decision whether they have to continue with the holdings of the company's share or sell them out.


(b) Decisions and plans: The management of the company is responsible for taking decisions and formulating plans and policies for the future. For these reasons, they always need to evaluate its performance and effectiveness of their action to realise the company's goal in the past. For that purpose, financial statement analysis is important to the company's management. (c) Extension of credit: The creditors are the providers of loan capital to the company. Therefore they may have to take decisions as to whether they have to extend their loans to the company and demand for higher interest rates. The financial statement analysis provides important information to them for their purpose. (d) Investment decision: The investors often have to decide whether to invest their capital in a company's share. The financial statement analysis is important to them because they can obtain useful information for their investment decision making purpose. The tools used in financial statement analysis: The analysis and interpretation of financial statements is used to determine financial position and results of operation as well. The following tools of analysis are generally used: (a) Comparative statements (b) Trend analysis (c) Common size statements (d) Funds flow analysis (e) Cash flow analysis (f) Ratio analysis (g) Cost-volume-profit analysis 4. The components of a complete set of financial statements as per IAS-1: 1. A statement of financial position (balance sheet) at the end of the period 2. A statement of profit or loss and other comprehensive income (income statement) for the period 3. A statement of changes in equity for the period 4. A statement of cash flows for the period 5. Notes to the financial statements that contain accounting policies and other explanations. 5. Overtrading: Overtrading is the condition of a business which enters into commitments in excess of it‘s available short-term resources. This can arise even if the entity is trading profitably. Consequences of overtrading: a) Cash shortage b) Failure to meet it‘s liabilities in due time c) Might face forceful liquidation


6. Value Added Statement is a financial statement that depicts wealth created by an organization and how is that wealth distributed among various stakeholders. The various stakeholders comprise of the employees, shareholders, government, creditors and the wealth that is retained in the business. 7. Operating income: Operating income is the net income of an entity, not including the impact of any financial activity or taxes. The measure reveals an entity's ability to generate earnings from its operational activities. Non-operating income: Non-operating income is any profit or loss generated by activities outside of the core operating activities of a business. The concept is used by outside analysts, who strip away the effects of these items in order to determine the profitability (if any) of a company's core operations. Examples of non-operating income are dividend income, gains and losses on investments, gains and losses on foreign exchange transactions, etc. Comprehensive income: Comprehensive income is a statement of all income and expenses recognized during a specified period. The statement includes revenue, finance costs, tax expenses, discontinued operations, profit share and profit/loss. 8. Reporting of information about assets, liabilities, equity, revenues and expenses in financial reports may be by way of recognition and/or by disclosure in notes in the financial report. An item may be recognised as an element either singly or in combination with other items. For example, a particular asset may be recognised by incorporation in the carrying amount of a class of assets reported in the statement of financial position. In addition, where assets and liabilities have been set off against each other, or where revenues and expenses have been netted off, in the presentation of those items in financial statements, those elements would nonetheless have been recognised. The manner in which recognised elements should be presented in financial statements, including the circumstances in which they may be set off or netted off, are matters of display which are beyond the scope of this Statement. Inclusion of an element only in notes in the financial report does not constitute recognition. 9. IAS 1 requires that comparative information to be disclosed in respect of the previous period for all amounts reported in the financial statements, both on the face of the financial statements and in the notes, unless another standard requires otherwise. An entity is required to present at least two of each of the following primary financial statements: - statement of financial position - statement of profit or loss and other comprehensive income - separate statements of profit or loss (where presented)


- statement of cash flows - statement of changes in equity - related notes for each of the above items A third statements of financial position is required to be presented if the entity retrospectively applies an accounting policy, related items or reclassifies items and those adjustments had a material effect on the information in the statement of financial position at the beginning of the comparative period. 10. The general purpose of the financial statements is to provide information about the results of operations, financial position, and cash flows of an organization. This information is used by the readers of financial statements to make decisions regarding the allocation of resources. At a more refined level, there is a different purpose associated with each of the financial statements. The income statement informs the reader about the ability of a business to generate a profit. In addition, it reveals the volume of sales, and the nature of the various types of expenses, depending upon how expense information is aggregated. When reviewed over multiple time periods, the income statement can also be used to analyze trends in the results of company operations. The purpose of the balance sheet is to inform the reader about the current status of the business as of the date listed on the balance sheet. This information is used to estimate the liquidity, funding, and debt position of an entity, and is the basis for a number of liquidity ratios. Finally, the purpose of the statement of cash flows is to show the nature of cash receipts and disbursements, by a variety of categories. This information is of considerable use, since cash flows do not always match the revenues and expenses shown in the income statement. 11. Distinction between tangible and intangible assets: Basis for comparison 1. Meaning

2. Form 3. Reduction in value 4. Liquidation 5. Residual value 6. Acceptance as collateral

Tangible assets Tangible assets are the assets owned by the firm which are having monetary value and is materially present. Physical Depreciation Easy Yes Creditors accept such assets as collateral

Intangible assets Intangible assets implies incorporeal assets which have a certain economic life and an economic value. Abstract Amortization Difficult No Creditors do not accept such asset as security


12. (i) Assets: Assets is a resources controlled by the entity as result of past events and from which future economic benefits are expected to flow into the entity. Liability: Liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Recognition: Recognition means that an item is recorded in the financial statement. An asset or liability is recognized, if - it is probable that any future economic benefit associated with the item will flow to or from the entity, and - the cost or value can be measured with reliability. (ii) Notes to Finance Director: (a) Value of head of publishing: Existence of an asset If I apply the definition of an asset from IFRS framework to the head of publishing Nowshad Monir, it is possible to argue that he has the characteristics of an asset. As a full time employee, Nowshad Monir is likely to have a contract which was signed prior to balance sheet date. the legal contract will prevent Nowshad Monir working for any other company, giving MML to unrestricted access to any benefits he may provide. If Nowshad Monir is able to persuade new authors to join the D&S team, he is creating a flow of future economic benefits – on the assumption that the authors‘ new work will prove sales worthy. However, there is uncertainty over the enforceability of Nowshad Monir‘s contract. He may recruit new authors to Oronno Prokashon, but within a short period of time might leave and join a new company; his authors are then likely to follow him. The revenue stream to result from the new authors They have not as yet been recruited and it is only possible that they will be; there are also no guarantees as to the quality of their future work and therefore the level of revenue they are likely to generate. Therefore, at this stage we cannot conclude that an asset exists. Recognition of the asset An item is recognized when it is included in the financial statements at a monetary value. Finance Director is proposing to include Nowshad Monir as an asset in the balance Sheet. However, certain criteria should be applied prior to recognition. Is there sufficient evidence of the existence of the asset? Can the asset be measured at a monetary amount with sufficient reliability?


(b) Provision for breach of copyright existence of a liability At this stage Khalid Umar has been accused of breach of copyright. From the information given, there is no opinion from lawyers as to the strength of the case or estimate of the possible value of any claim. Therefore, whilst a past transaction has allegedly occurred, there is insufficient evidence of, and uncertainty over, whether an obligation exists. Recognition of the liability To recognize the liability in the financial statements there must be sufficient evidence of the existence of the liability and it should be probable that economic benefit will flow from the entity. In this case, there is insufficient evidence of a liability and we are unable to reliably measure any potential liability. The case is at far too early to estimate the possible loss. it would therefore be overprudent and inappropriate to recognize the liability in the financial statements. 13. Off-balance-sheet items refer to assets or liabilities that do not appear on a company's balance sheet but that are nonetheless effectively assets or liabilities of the company. Assets or liabilities designated off balance sheet are typically ones that a company is not the recognized legal owner of, or in the case of a liability, does not have direct legal responsibility for. Common off-balance-sheet financing mechanisms include consignment stock, sale and repurchase (or, leaseback) arrangements, debt factoring and leasing. A company might be interested in using off-balance-sheet financing because in offbalance-sheet financing, large capital expenditures are kept off a company's balance sheet to keep the debt to equity (D/E) and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants. 14. A contingent liability that is both probable and the amount can be estimated is recorded as (a) an expense or loss on the income statement, and (b) a liability on the balance sheet. As a result, a contingent liability is also referred to as a loss contingency. Warranties are cited as a contingent liability that meets both of the required conditions (probable and the amount can be estimated). Warranties will be recorded at the time of a product's sale with a debit to Warranty Expense and a credit to Warranty Liability. 15. The qualitative characteristics of the financial statements: 1. Information must be reliable 2. Information must be relevant 3. It must have comparability 4. It must have consistency 5. It must be made by neutrality


16. Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained in financial statement must be neutral, that is free from bias. Financial statements are not neutral if by the selection or presentation of information, they influence the making of a decision or judgment in order to achieve a pre-determined result. Financial statements are said to depict the true and fair view of the business of the organization by virtue of neutrality. 17. Off balance sheet items are contingent liabilities of a bank and thus do not appear on its balance sheet. In general, off balance sheet items include direct credit substitutes in which a bank substitutes its own credit for a third party, including standby letters of credit, irrevocable letters of credit that guarantee repayment of commercial paper, sale and repurchase agreements, interest rate swaps, interest rate options and currency options and so on. 18. Post balance sheet events have a significant effect on the values shown in the accounts and occur after the balance sheet date but prior to the date on which the accounts are approved by the directors. An example of such an event is a sale of a fixed asset when the sales is agreed during the financial period but the final price is agreed after the end of the period. The final price will be reflected in the balance sheet and the P&L Account. 19. The purpose of balance sheet: 1. To report the financial position of a company at a certain period of time 2. To provide information about an enterprise‘s assets, liabilities and owner‘s equities 3. To evaluate the capital structure of the company 4. To provide information about the future cash flows 5. To analyze a company‘s liquidity Subsequent event: Subsequent event is the event that occurs between the date of financial statements and the date of auditor‘s report. Examples of subsequent event are impairment of assets, permanent decline in price of securities, etc. 20. Relevance: Information has the quality of relevance when it influences the economic decision of users by helping them in evaluating past, present or future events. To be useful, information must be relevant.


Reliability: Information has the quality of reliability when it is free from material error and bias and can be depended upon users to represent faithfully. To be useful, information must be reliable. 21. A contingent liability may be any of the followings: 1. A contingent liability may be a possible obligation that arises from past events and whose existence will be confirmed by the occurrence or non-occurrence of an uncertain future event 2. A contingent liability may be a present obligation that arises from past events but is not recognized because the amount of obligation can not be measured with sufficient reliability. Example includes claims, guarantee and warranty costs, premiums, environmental liabilities, self-insurance risks, etc. An enterprise should not recognize a contingent liability. An enterprise should disclose a contingent liability. The following disclosures should be made for each class of contingent liability at the balance sheet date: (a) A brief description of the nature of obligation (b) An estimation of the financial effect (c) An indication of the uncertainties relating to the amount (d) The possibility of any reimbursement 22. Accruals: The term accruals can be defined as the accounting method which reports income when earned and expenses when incurred. Under accrual basis accounting transactions are recorded when events occur. It records both cash and credit transactions. It shows company‘s both cash flows and accrual flows. It reflects the overall financial health of the company. Provisions: A provision is a liability of uncertain timing or amount. A liability is a present obligation of an entity arising from past events. It is assumed that an outflow of resources bringing economic benefits will be required to settle the obligations. Contingent assets: A contingent asset is a possible asset that arises from past events and whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not within the control of the enterprise.


PROBLEMS AND SOLUTIONS P-1. Basic Builders Ltd. completes the handover of a new flat to a client and raises an invoice price for Tk.800,000 on the last day of its current accounting period. This price includes after-sales support for the next two years, which is estimated to cost Tk.35,000 each year. Basic Builders Ltd. normally earns a gross profit margin of 17.5% on such support activity. Calculate the revenue to be included in Basic Builders Ltd.‘s current year income statement in respect of this sale. Solution:

Tk.35,000 X 2) 100%  17.5% Tk.35,000 = Tk.800,000 - ( X 2) 82.5% = Tk.800,000 – Tk.84,848 = Tk.715,152

Revenue in the current year = Tk.800,000 – (

P-2. Anton Company is a manufacturer of televisions. The domestic market for electronic goods is currently not doing well and therefore many entities in this business are switching to exports. As per the audited financial statements for the year ended December 31, 2017 the entity had net losses of Tk.2 million. At December 31, 2017 its current assets aggregate to Tk.20 million and the current liabilities aggregate to Tk.25 million. Due to expected favorable changes in the government policies for the electronics industry, the entity is projecting profits in the coming years. Furthermore, the shareholders of the entity have arranged alternative additional sources of finance for its expansion plans and to support its working capital needs in the next 12 months. Required: Should Anton Company prepare its financial statements under the going concern assumption? Solution: The two factors that raise doubts about the entity‘s ability to continue as a going concern are: a) The net loss for the year of Tk.2 million; b) At the balance sheet date, the working capital deficiency (current liabilities of Tk.25 million) exceeds its current assets (of Tk.20 million) by Tk.5 million. However, there are two mitigating factors: i) The shareholders‘ ability to arrange funding for the entity‘s expansion and working capital needs; ii) Projected future profitability due to expected favorable changes in government policies for the industry the entity is operating within. Based on these sets of factors – both negative and positive (mitigation) factors it may be possible for the management of the entity to argue that the going concern assumption is appropriate and that any other basis of preparation of financial statements would be


unreasonable at the moment. However, if matters deteriorate further instead of improving, then in the future another detailed assessment would be needed to ascertain whether the going concern assumption is still valid. P-3. Raising Limited has the following post-closing trial balance for 2016: Cash Accounts receivable Merchandise inventory Land Buildings Accumulated depreciation, buildings Accounts payable Interest payable Wages payable Notes payable Capital stock Retained earnings

Tk.15,000 10,000 30,000 1,30,000 1,00,000 60,000 40,700 8,000 12,000 80,000 2,00,000 50,000

During 2017, the following transactions occurred: (a) Provided services on credit, for Tk.3,00,000. (b) Merchandise inventory amounting Tk.70,000 was purchased on credit during the year 2016. Merchandise inventory of an amount of Tk.20,000 remains unused at year-end of 2016. (c) Wages payable at the beginning of 2016 were paid in 2017. Wages earned and paid during 2017 amounting Tk.1,00,000. (d) One year‘s interest @10% was paid on notes payable on July 1, 2017. (e) Property taxes were paid on Land and Buildings in the amount of Tk.20,000. (f) The buildings are being depreciated over 10 years, with no residual value. (g) The income tax rate is 35%. Required: Prepare comprehensive income statement for the year ended December 31, 2017. Solution: Raising Limited Comprehensive income statement For the year ended December 31, 2017 Amount (Tk.) Revenues: Service revenues Total revenues Less. Operating expenses: Merchandise inventory Wages Depreciation expense- building Property tax Total operating expenses Income from operation Less. Interest expense (80,000 X 10%)

Amount (Tk.)

300,000 300,000 80,000 100,000 10,000 20,000 210,000 90,000 8,000


Income before taxes Less. Income tax expense @35% Net income

82,000 28,700 53,300

P-4. The following is the 10 months pre-audit income statement of Star Cycle Company ended on 31st December 2017, which started its operations on March 1, 2017. Star Cycle Company Income Statement For Period Ended December 31, 2017 Sales Cost of goods sold: Completed units 50,000 Ending inventory 10,000 Gross profit on sales Selling expenses: Advertising Tk.1,32,000 Miscellaneous 6,00,000 General & administrative expenses: Officers‘ salaries 3,21,000 Depreciation 1,69,000 Miscellaneous 33,000 Income before income tax

Tk.49,70,000 Tk.40,10,000 8,02,000

32,08,000 17,62,000

7,32,000

5,23,000

12,55,000 5,07,000

During the course of the year-end audit, the auditors observed the following: (a) Factory depreciation of Tk.1,12,000 was included in general & administrative expenses. (b) Sales return and allowances of Tk.27,500 were not recorded. (c) Accrued sales commission of Tk.52,300 was not recorded of December 31, 2017. (d) Advertising expenses of Tk.1,32,000 paid on March 1, 2017, was for newspaper ads appearing each month for the next 12 months. (e) Income tax was charged at a 40% rate. Required: Prepare a corrected income statement for the year ended December 31, 2017 Solution: Star Cycle Company Income Statement For Period Ended December 31, 2017 Sales Less. Sales return and allowance Net sales Cost of goods sold: Completed units 50,000 Ending inventory 10,000 (N-1) Gross profit on sales

Tk.49,70,000 27,500 Tk.49,42,500 Tk.41,22,000 8,24,400

32,97,600 16,44,900


Selling expenses: Advertising (N-2) Tk.1,10,000 Miscellaneous (N-3) 6,52,300 General & administrative expenses: Officers‘ salaries 3,21,000 Depreciation (N-4) 57,000 Miscellaneous 33,000 Income before income tax Income tax (N-5) Net income

7,62,300

4,11,000

11,73,300 4,71,600 1,88,640 2,82,960

Notes:

Tk.40,10,000  Tk.1,12,000 X 10,000 = Tk.8,24,000 50,000 units 10 2. Advertising expense: Tk.1,32,000 X = Tk.1,10,000 12 3. Miscellaneous selling expense: Tk.6,00,000 + Tk.52,300 = Tk.6,52,300 1. Ending inventory:

4. Depreciation expense: Tk.1,69,000 – Tk.1,12,000 = Tk.57,000 5. Income tax: Tk.4,71,600 X 40% = Tk.1,88,640 P-5. Below is a list of account titles and balances for the Flora Limited as of January 31, 2017. Prepare a properly classified balance sheet. Account Title Accounts payable Accounts receivable Accounts depreciation – Building Accounts depreciation – Machinery Allowance for doubtful accounts Buildings Bank balance Cash in hand Surrender value of life policy Claim for tax refund Common stock Tk.20 par Income tax payable Employees income tax payable Interest payable Interest receivable Temporary investment in marketable securities

Taka Account Title 85,800 Inventory 106,000 Investment in undeveloped properties 140,000 Land 40,000 Machinery 4,200 Supplies 300,000 107,300 8,880 17,000 5,000 600,000 3,640 24,600 2,000 400 156,880

Notes payable (current) Notes payable (due 2022) Notes receivable Preferred stock, Tk.6 par Premium on common stock Prepaid insurance Retained earnings (Dr.) Salaries and wages payable

Taka 154,600 212,000 130,000 144,000 6,200 69,200 50,000 22,400 300,000 60,000 4,500 11,740 7,400


Solution: Flora Limited Classified Balance Sheet As of January 31, 2017 Tk.

Tk.

Tk.

394,000 212,000 17,000

623,000

Assets Non-current assets: Property, plant and equipment (w-1) Investment in undeveloped properties Surrender value of life insurance policy Current assets: Cash in hand Bank balance Temporary investment in marketable securities Notes receivable Accounts receivable Less: Allowance for doubtful accounts Interest receivable Claim for tax refund Inventory Prepaid insurance Supplies inventories Total assets

8,880 107,300 156,880 22,400 106,000 4,200

101,800 400 5,000 154,600 4,500 6,200

567,960 1,190,960

Stockholders’ equity and liabilities Stockholders’ equity: Preferred stock, Tk.6 par, 50,000 shares outstanding Common stock, Tk.20 par, 30,000 shares outstanding Premium on common stock Less: Retained earnings (Dr.)

300,000 600,000 60,000 960,000 11,740

Non-current liabilities: Notes payable Current liabilities: Notes payable Accounts payable Salaries and wages payable Income tax payable Interest payable Employees income tax payable Total stockholders’ equity and liabilities

948,260

50,000

69,260 85,800 7,400 3,640 2,000 24,600

192,700 1,190,960


Working: 1. Property, plant and equipment: Land Buildings Less: Accumulated depreciation Machinery Less: Accumulated depreciation

Tk.130,000 Tk.300,000 140,000 144,000 40,000

160,000 104,000 394,000

P-6. The following is a post-closing trial balance for the Mosaj & Co. at December 31, 2017, the end of the company‘s fiscal year: Accounts Title Cash Accounts receivable Allowance for doubtful accounts Inventories Investments Prepaid expenses Notes receivable Land Building Machinery Accumulated depreciation- building and machinery Accounts payable Salaries payable Interest payable Notes payable Bonds payable Common shares Retained earnings Total

Debit (Tk.) 200,000 250,000 200,000 100,000 40,000 60,000 150,000 400,000 300,000 _____1,700,000

Credit (Tk.) 50,000 250,000 300,000 70,000 30,000 200,000 400,000 150,000 250,000 1,700,000

Required: Prepare a classified balance sheet for the Mosaj & Co. at December 31, 2017. Solution: Mosaj & Co. Balance sheet As at December 31, 2017 Assets Tk. Non-current assets: Property, plant and equipment (w-1) Note receivable Investment Total non-current assets

Tk.

600,000 60,000 100,000 760,000


Current assets: Cash Accounts receivable Less. Allowance for doubtful a/c

200,000 250,000 (50,000) 200,000 200,000 40,000

Inventories Prepaid expenses Total current assets Total assets

640,000 1,400,000 Stockholders’ equity and liabilities

Stockholders’ equity: Common share Retained earnings Total stockholders‘ equity Non-current liabilities: Notes payable Bonds payable Total non-current liabilities Current liabilities: Accounts payable Salaries payable Interest payable Total current liabilities Total liabilities Total stockholders‘ equity and liabilities

150,000 250,000 400,000 200,000 400,000 600,000 300,000 70,000 30,000 400,000 1,000,000 1,400,000

Working: 1. Property, plant and equipment: Land Buildings Machinery

Tk.150,000 400,000 300,000 Tk.850,000 (250,000) Tk.600,000

Less. Accumulated depreciation Net property, plant and equipment

P-7. The following is the Trial Balance of Sonali Limited on 31.12.2017: Debtor Opening Inventory Purchases Accounts Receivable Share Call A/C Office Furniture (Cost Tk.14,000) Payroll Expenses Bad Debts Labour Expenses Interim Dividend Paid

Taka 201,980 1,457,880 174,180 2,500 7,000 100,000 2,000 123,160 20,000

Creditor Sales Purchases Returns Accounts Payable Share Capital Accumulated Profit General Reserve Miscellaneous Income

Taka 1,893,100 5,120 122,400 400,000 41,580 70,000 6,500


Insurance Office Expenses Freehold Premises Bank Balance Investment Total

2,920 76,840 170,000 100,240 100,000 2,538,700

Total

_______ 2,538,700

Prepare Income Statement for the year ended on 31.12.2017 and Balance Sheet as at that date after taking into consideration the following information: (a) Labour expenses prepaid Tk.10,000 whereas payroll expenses unpaid Tk.6,840. (b) It is the policy of the company to charge depreciation on fixed assets @ 10% on cost, and provide for bad and doubtful debts @ 5%. (c) Closing inventory Tk.290,000 (market price Tk.325,000). (d) Income of investment not yet been received Tk.10,000. (e) Assume tax rate as 35%. Solution: Sonali Limited Income statement For the year ended 31.12.2017 Taka Revenues: Sales Less. Cost of goods sold (w-1) Gross profit Miscellaneous income (d) (6,500 + 10,000) Total revenues Less. Operating and other expenses: Payroll expenses (a) (100,000 + 6,840) Bad debts Labour expenses (a) (123,160 - 10,000) Interim dividend paid Insurance Office expenses Depreciation expense- Furniture (b) 14,000 X 10% Depreciation expense- Premises (b) 170,000 X 10% Provision for bad and doubtful debts (b) (d) (174,180 + 10,000) X 5% Profit before taxation Less. Provision for taxation (f) 195,491 X 35% Net profit after tax Add. Last year‘s profit Surplus profit

Sonali Limited Balance sheet As on 31.12.2017

Taka

1,893,100 1,364,740 528,360 16,500 544,860 106,840 2,000 113,160 20,000 2,920 76,840 1,400 17,000 9,209 349,369 195,491 68,422 127,069 41,580 168,649


Assets Taka Non-current assets: Property, plant and equipment (w-2) Investment

Taka

158,600 100,000 258,600

Current assets: Accounts receivable (d) (174,180 + 10,000) Prepaid expense (a) Inventory (c) Bank balance

184,180 10,000 290,000 100,240 584,420 843,020

Total assets Stockholders’ equity and liabilities Stockholders’ equity: Share capital 400,000 Less. Share call a/c 2,500 397,500 General reserve 70,000 Surplus profit 168,649 Total stockholders‘ equity Liabilities: Accounts payable 122,400 Accrued payroll (a) 6,840 Provision for bad and doubtful debts (b) 9,209 Provision for taxation (f) 68,422 Total liabilities Total stockholder‘s equity and liabilities

636,149

206,871 843,020

Working: 1. Calculation of cost of goods sold: Taka Opening inventory Add. Net purchase: Purchase Less. Returns Goods available for sale Less. Closing inventory (c) Cost of goods sold

1,457,880 5,120

Taka 201,980

1,452,760 1,654,740 290,000 1,364,740

2. Property, plant & equipment: Office furniture Less. Accumulated depreciation (b) 7,000 + (14,000 X 10%) Freehold premises Less. Accumulated depreciation (b) 170,000 X 10%

14,000 8,400 5,600 170,000 17,000 153,000 158,600


P-8. Mr. Rohan of ABC Resort opened the business on June 1 with eight air-conditioned units. Its trial balance before adjustment on August 31 is as follows: ABC Resort Trial Balance August 31, 2018 Taka 19,600 3,300 6,000 25,000 125,000 26,000 6,500 7,400 80,000 100,000 5,000 80,000 3,600 51,000 9,400

Cash Supplies Prepaid insurance Land Cottages Furniture Accounts payable Unearned rent revenue Mortgage payable Rayhan, capital Rayhan, drawing Rent revenue Repair expenses Salaries expenses Utilities expenses

Other data: (a) Insurance expires at the rate of Tk.400 per month. (b) A count on August 31 shows Tk.600 of supplies on hand. (c) Annual depreciation is Tk.6,000 on cottages and Tk.2,400 on furniture. (d) Unearned rent revenue of Tk.4,100 was earned prior to August 31. (e) Salaries of Tk.400 were unpaid at August 31. (f) Rentals of Tk.1,000 were due from tenants at August 31, (Use accounts receivable). (g) The mortgage interest rate is 9% per year, (The mortgage was taken out on August 1). Required: (i) Journalize the adjusting entries on August 31 for the 3-month period June 01 – August 31. (ii) Prepare an adjusted trial balance on August 31. (iii) Prepare an income statement and an owner‘s equity statement for the 3 months ending August 31 and a balance sheet as of August 31. Solution: (i) ABC Resort Adjusting entries Date Aug. 31 Aug. 31

Particulars Insurance expenses Prepaid insurance Supplies expense Supplies

Dr. (Tk.) 1,200

Cr. (Tk.) 1,200

2,700 2,700


Aug. 31 Aug. 31 Aug. 31 Aug. 31 Aug. 31 Aug. 31

Depreciation expenses – Cottages Accumulated depreciation – Cottages Depreciation expenses – Furniture Accumulated depreciation – Furniture Unearned rent revenue Rent revenue Salaries expenses Salaries payable Accounts receivable Rent revenue Interest expenses Interest payable

1,500 1,500 600 600 4,100 4,100 400 400 1,000 1,000 600 600

(ii) ABC Resort Adjusted Trial Balance August 31, 2018 Cash Accounts receivable Supplies Prepaid insurance Land Cottages Accumulated depreciation – Cottages Furniture Accumulated depreciation – Furniture Accounts payable Unearned rent revenue Salaries payable Interest payable Mortgage payable Rayhan, capital Rayhan, drawing Rent revenue Depreciation expenses – Cottages Depreciation expenses – Furniture Repair expenses Supplies expenses Interest expenses Insurance expenses Salaries expense Utilities expenses

Dr. (Tk.) 19,600 1,000 600 4,800 25,000 125,000

Cr. (Tk.)

1,500 26,000 600 6,500 3,300 400 600 80,000 100,000 5,000 85,100 1,500 600 3,600 2,700 600 1,200 51,400 9,400 278,000

_____ 278,000


(iii) ABC Resort Income Statement For the three months ended August 31, 2018 Tk. Revenues: Rent revenue Expenses: Salaries expenses Utilities expenses Repair expenses Supplies expenses Insurance expenses Interest expenses Depreciation expenses – Cottages Depreciation expenses – Furniture

Tk. 85,100

51,400 9,400 3,600 2,700 1,200 600 1,500 600 71,000 14,100

Net income (iv) ABC Resort Owner‘s Equity Statement For the three months ended August 31, 2018 Tk. 100,000 14,100 114,100 5,000 109,100

Rayhan, capital, June 01 Add: Net income Less: Drawings Rayhan, capital, August 31 ABC Resort Balance Sheet As of August 31, 2018

Tk.

Tk.

Assets Non-current asset: Property, plant and equipment (w-1) Current assets: Cash Accounts receivable Supplies Prepaid insurance Total assets Owner’s equity and liabilities

173,900 19,600 1,000 600 4,800

26,000 199,900


Owner’s equity Rayhan, capital Non-current liability: Mortgage payable Current liabilities: Accounts payable Unearned rent Interest payable Salaries payable Total owner’s equity and liabilities

109,100 80,000 6,500 3,300 600 400

10,800 199,900

Working: 1. Property, plant and equipment: Land Cottages Less: Accumulated depreciation Machinery Less: Accumulated depreciation

Tk.25,000 Tk.125,000 1,500 26,000 600

123,500 25,400 173,900

P-9. From the following Trial Balance of A Co. Ltd. and the additional information given below, prepare an Income Statement for the year ended on 31.12.2017 and a Balance Sheet as at that date. Trial Balance 31.12.2017 Debtor Taka Creditor Taka Purchases 60,900 Sales 275,000 Goodwill 28,000 Return Outwards 100 Accounts Receivable 25,000 Transfer Fee Income 100 Insurance Expense 1,000 Discount Income 2,200 Rent and Taxes Expense 9,000 Bank Overdraft 12,000 Opening Inventory 30,000 Accounts Payable 13,000 Labour Expense 55,200 5% Debenture 25,000 Discount Expense 1,500 Equity Share Capital: Building 70,000 1,000 shares of Tk.100 each 100,000 Carrying Cost 3,745 Investment Income 3,000 Equipment 25,000 Loose Tools 6,000 Advertisements Expense 3,000 General Expense 4,400 Uncollectible Debts Expense 1,030 Debenture Interest Expense 625 Investments 100,000 Miscellaneous Expense 3,000 Cash Balance 3,000 _____ Total 430,400 Total 430,400


Additional information: (a) The authorized capital of the company is Tk.200,000. (b) Inventory on 31.12.2017 was Tk.55,000. (c) Depreciate equipment at 10% and revalue loose tools at Tk.4,100. (d) Labour expense due Tk.4,800 and Rent & Taxes prepaid Tk.1,000. (e) Investment income due Tk.2,000. (f) Transfer Tk.10,000 to General Reserve. (g) Assume tax rate @ 40%. Solution: A Co. Ltd. Income statement For the year ended on 31.12.2017

Sales Less. Cost of goods sold (w-1) Gross profit Add. Operating and other income: Transfer fee income Discount income Investment income (e) (3,000 + 2,000) Less. Operating and other expenses: Labour expense (d) (55,200 + 4,800) Discount expense Advertisement expense General expense Insurance expense Rent and taxes expense (d) (9,000 – 1,000) Depreciation expense - Equipment (c) (25,000 X 10%) Uncollectible debts expense Debenture interest expense Miscellaneous expense Profit before provision Less. Revaluation reserve (c) (6,000 – 4,100) Profit before taxation Less. Provision for taxation (g) (155,800 X 40%) Net profit after tax Less. Appropriation: General reserve (f) Profit for the year

A Co. Ltd. Balance Sheet As at 31.12.2017

Taka 275,000 39,545

Taka

235,455 100 2,200 5,000

60,000 1,500 3,000 4,400 1,000 8,000 2,500 1,030 625 3,000

7,300 242,755

85,055 157,700 1,900 155,800 62,320 93,480 10,000 83,480


Taka

Taka

Assets Non-current assets: Property, plant and equipment (w-2) Investments Intangible asset: Goodwill Current assets: Cash balance Accounts receivable (e) (25,000 + 2,000) Inventory (b) Prepaid rent and taxes (d)

98,500 100,000 28,000 3,000 27,000 55,000 1,000

86,000 312,500

Stockholders’ equity and liabilities Stockholders’ equity: Paid-up capital 1,000 shares of Tk.100 each Reserve fund: General reserve (f) Revaluation reserve (c) Profit for the year

100,000

10,000 1,900 83,480 Total stockholders‘ equity

Non-current liability: 5% Debenture Current liabilities: Account payable Labour payable (d) Bank overdraft Provision for income tax

195,380

25,000 13,000 4,800 12,000 62,320

Total liabilities Total stockholders‘ equity and liabilities Working: 1. Computation of cost of goods sold: Opening inventory Add. Net purchase: Purchases Less. Return outward Add. Carrying cost Goods available for sale Less. Closing inventory Cost of goods sold

Tk.30,000 Tk.60,900 100 60,800 3,745

64,545 94,545 55,000 39,545

92,120 117,120 312,500


2. Computation of Property, plant and equipment: Building Equipment Less. Accumulated depreciation (c) Loose tools

Tk.70,000 Tk.25,000 2,500

22,500 6,000 98,500

P-10. The following trial balance has been extracted from the books of account of Siksha Limited as at 31 December, 2017. Particulars Administrative expenses Common share (Par value Tk.1) Accounts receivable Bank overdraft Distribution costs Investment for 5 years Finance cost Building Retained earnings at 1 January 2017 Purchases Inventories at 1 January 2017 Accounts payable Revenue Interim dividend paid

Debit Tk.15,000

Credit Tk.30,000

5,000 50,000 10,000 101,000 14,000 100,000 40,000 60,000 10,000 20,000 2,00,00 25,000 340,000

340,000

Additional information: (a) Inventories at 31 December 2017 were valued at Tk.20,000. (b) The administrative expenses are to be increased by Tk.5,000. (c) Distribution costs Tk.6,000 was unrecorded. (d) The building is revalued to Tk.150,000. (e) In May 2018, a final dividend was proposed for 2017 of Tk.2 per common share. (f) The income tax rate for the year is 35%. Required: Prepare the followings for the year ended 31 December 2017. (i) Income statement (ii) Statement of changes in equity (iii) Balance sheet Solution: (i) Siksha Limited Income statement For the year ended 31 December, 2017


Particulars

Tk. 200,000 (50,000) 150,000 (16,000) (20,000) 114,000 (14,000) 100,000 (35,000) 65,000

Revenue Cost of sales (60,000 + 10,000 – 20,000) Gross profit Distribution costs (10,000 + 6,000) Administrative expenses (15,000 + 5,000) Profit from operations Finance cost Profit before tax Income tax @ 35% Profit for the year (ii) Siksha Limited Statement of changes in equity For the year ended 31 December, 2017 Common Revaluation Particulars share Reserve At 1 January 2017 30,000 Revaluation (150,000 – 100,000) 50,000 Profit for the year Interim dividend paid At 31 December 2017 30,000 50,000

Retained earnings 40,000 65,000 (25,000) 80,000

(iii) Siksha Limited Balance sheet As at 31 December, 2017 Taka

Taka

Assets Non-current assets: Property, plant and equipment Investment Total non-current assets Current assets: Inventories Accounts receivable Total current assets Total assets

150,000 101,000 251,000

20,000 5,000 25,000 276,000

Stockholders’ equity and liabilities Stockholders’ equity: Common share Revaluation reserve Retained earnings Total stockholders‘ equity

30,000 50,000 80,000 160,000


0

Non-current liabilities Current liabilities: Accounts payable (20,000 + 5,000 + 6,000) Borrowings Income tax payable Total current liabilities Total liabilities Total stockholders’ equity and liabilities

31,000 50,000 35,000 116,000 116,000 276,000

P-11. The following is the Trail Balance of Rohan Co. Ltd. as on 30.06.2018:

Debit Balances Accounts Receivable Advertisements Buildings Cash Patent Freight in Insurance Expenses Interest Expenses Inventory (01.07.2017) Land Long Term Investments Office Expenses Purchases Sales Returns Selling Expenses Payroll Expenses Total

Rohan Co. Ltd. Trial Balance As on 30.06.2018 Taka Credit Balances 1,120,000 Accounts Payable 80,000 Accumulated depreciation on 1,200,000 Buildings 400,000 Capital of Tk.100 each 240,000 Interest Income 60,000 Mortgage Payable 24,000 Notes Payable 44,000 Purchase Returns 1,080,000 Retained Earnings (30.06.2017) 1,160,000 Sales 210,000 268,000 2,318,000 146,000 814,000 203,000 9,367,000 Total

Taka 600,000 230,000 3,000,000 11,000 800,000 250,000 19,000 334,000 4,123,000

_______ 9,367,000

Additional information; (a) Inventory on hand on 30.06.2018 is Tk.1,512,000 (b) Buildings are depreciated at the rate of 3% p.a. (c) Accrued Selling Expenses are Tk.66,000 (d) Prepaid Insurance Expenses are Tk.12,000 (e) Accrued Income from Investment Tk.4,000 (f) Income Taxes are to be estimated at 30% (g) Authorized Capital of the company is divided into 50,000 shares of Tk.100 each (h) Directors decided to (i) transfer Tk.120,000 to General Reserve (ii) pay dividends of Tk.4 per share. Required: Income Statement for the year ended on 30.06.2018 and the Balance Sheet as at that date.


Solution: Rohan Co. Ltd. Income statement For the year ended on 30.06.2018

Sales Less. Sales return Net sales Less. Cost of goods sold (w-1) Gross profit Less. Operating expenses: Advertisements Insurance expense (d) (24,000 – 12,000) Office expense Selling expense (c) (814,000 + 66,000) Payroll expenses Depreciation expense – Building (b) (1,200,000 X 3%) Total operating expenses Profit from operation Other revenue and expenses: Income from investment (c) Interest income Interest expense Income before tax Less. Provision for tax (f) (542,000 X 30%) Net profit after tax Less. Appropriation: General reserve (h) Proposed dividend (h) (30,000 shares X Tk.4) Profit for the year Add. Retained earnings Surplus profit

Taka 4,123,000 146,000 3,977,000 1,927,000

Taka

2,050,000 80,000 12,000 268,000 880,000 203,000 36,000 1,479,000 571,000 4,000 11,000

120,000 120,000

15,000 586,000 44,000 542,000 162,600 379,400

240,000 139,400 334,000 473,400

Rohan Co. Ltd. Balance Sheet As at 30.06.2018 Taka

Taka

Assets Non-current assets: Property, plant and equipment (w-2) Long-term investments Intangible asset: Patent

2,094,000 210,000

240,000


Current assets: Cash balance Accounts receivable (e) (1,120,000 + 4,000) Inventory (a) Prepaid expenses (d) Total assets

400,000 1,124,000 15,12,000 12,000

3,048,000 5,592,000

Stockholders’ equity and liabilities Stockholders’ equity: Paid-up capital 30,000 shares of Tk.100 each Reserve fund: General reserve (h) Surplus profit

3,000,000

120,000 473,400 Total stockholders‘ equity

3,593,400

Non-current liabilities: Notes payable Mortgage payable

250,000 800,000

Current liabilities: Account payable Accrued selling expenses (c) Proposed dividend (h) Provision for income tax (f)

600,000 66,000 120,000 162,600

Total liabilities Total stockholders‘ equity and liabilities

1,050,000

948,600 1,998,600 5,592,000

Workings: 1. Computation of cost of goods sold: Opening inventory Add. Net purchase (23,18,000-19,000) Freight-in Goods available for sale Less. Closing inventory (a) Cost of goods sold

Tk.10,80,000 Tk.22,99,000 60,000

2. Computation of property, plant and equipment: Building Tk.1,200,000 Less. Accumulated depreciation (b) 266,000 (230,000 + 36,000) Land

23,59,000 15,12,000 19,27,000

934,000 1,160,000 2,094,000

P-12. P Ltd. is organized into several divisions. The following events relate to the year ended 31 December 2017: (a) The computer division supplied a computer to a customer during the year that exploded, causing a fire. P Ltd. is being sued for damages. Lawyers have advised that there is a 30% chance of successfully defending the claim. Otherwise the damages are


expected to cost Tk.10 million (present value is Tk.9.5 million). The lawyers have investigated the cause of the problem with a team of accident consultants. They have concluded that parts supplied to the computer division by M Ltd. contributed to the fire. Lawyers have estimated that M Ltd.‘s contributory negligence amounted to 40% of the total damages. Negotiations have started with M Ltd. and lawyers believe that a claim is likely to succeed. (b) On 15 December 2017, the directors of P Ltd. minuted their decision to close the operations of the loss making space technology division. The decision and an outline of a plan were immediately announced to employees and a press release was issued. The closure, which began on 4 January 2018, has an estimated date for completion, including the sale of non-current assets of the division, on 30 June 2018. The costs associated with the closure includes the following: Tk.(000) Employee redundancy costs 12,000 Lease termination costs 4,000 Relocating continuing staff to other divisions 3,000 Impairment losses 2,000 21,000 (c) P Ltd.‘s retail division provides two-year warranty to its customers. Experience has shown that, on average, 10% of sales from this division result in a warranty claim. Revenue from this division in 2017 was Tk.8 million. At 1 January 2017, P Ltd. had a warranty provision in place of Tk.1 million. During the year claims of Tk.600,000 were settled by the company. Required: Prepare the provisions and contingencies notes for the financial statements of P Ltd. for the year ended 31 December 2017. Solution: P Limited Notes to the financial statements As at 31 December 2017 (extract) Provisions: Warranty Compensation Provision for Provision Claim closure of division Tk.000 Tk.000 Tk.000 At 1 January 2017 1,000 Utilized in the year (600) Income statement charge 400 9,500 18,000 (beginning figure) At 31 December 2017 800 9,500 18,000 (w-1)

Total Tk.000 1,000 (600) 27,900 28,300

The warranty provision is in respect of two-year warranties provided to customers. The provision is based on the level of past claims. The compensation claim provision is in respect of a claim made by a customer for damages as a result of a faulty computer supplied by the company. It represents the


present value of the amount at which the company‘s legal advisers believe the claim is likely to be settled. On 15 December 2017, P. Ltd. announced that it would be closing its loss making space technology division. Details of the closure have been fully communicated to those affected. The cost of the closure, which began on 4 January 2018, is estimated at Tk.18 million and completion is expected by 30 June 2018. Contingent assets: A counter claim in respect of the compensation claim provided for above has been made against the supplier of parts for the affected computer. Lawyers have advised that this claim is likely to succeed and should amount to around 40% of the total damages (Tk.3.8 million). Working: 1. Provision for closure of division: Employee redundancy costs Lease termination costs Impairment losses

Tk.000 12,000 4,000 2,000 18,000

Warranty provision: Tk.8 million X 10% = Tk.800,000 P-13. The following balances are taken from the books of accounts of ABC Co. Ltd. on June 30, 2018: Taka Accounts receivable 29,000 Buildings 140,000 Furniture 10,000 Cash 2,000 Freight-in 7,000 Interest expenses 4,000 Salaries and allowances 20,000 Inventories (Beginning) 6,000 Purchase 81,000 Rent, rates and taxes 6,000 Salesmen, salaries 2,000 Bad debts 6,000 Dividends paid 15,000 Allowance for doubtful account 16,000 Capital 60,000 Retained earnings 7,000 Sales 200,000 Interest income 1,000 Accumulated depreciation – Furniture 4,000 Accumulated depreciation – Building 30,000 Bonds payable 10,000


Adjustments on June 30, 2018 are required as follows: (a) The inventory on hand is Tk.10,000. (b) Depreciation on furniture is to be 10% on original cost. (c) Buildings are depreciated @ 5% per annum. (d) The allowance for doubtful accounts are to be increased to a balance of Tk.19,000. (e) Accrued salaries Tk.2,000. (f) Accrued interest on bonds Tk.1,000. (g) Accrued selling expenses Tk.1,500. (h) Income tax are estimated to be 35% of the net income before taxes. Required: (i) Prepare an income statement and retained earnings statements for the year ended June 30, 2018. (ii) Prepare a statement of financial position as on June 30, 2018. Solution: (i) ABC Co. Ltd. Income Statement For the year ended June 30, 2018 Tk. Revenues: Sales Less: Cost of goods sold: Opening inventory Purchases Freight-in Cost of goods available for sale Less: Closing inventory Gross profit Operating expenses: Selling expenses: Bad debt expenses (Tk.6,000 + Tk.19,000 – Tk.16,000) Selling expenses Salesmen expenses General and administrative expenses: Rent, rate and taxes Salaries and allowances (Tk.20,000 + Tk.2,000) Depreciation expenses – Building Depreciation expenses – Furniture Total operating expenses Operating income Other revenue and expenses: Interest income

Tk. 200,000

6,000 81,000 7,000 94,000 10,000

84,000 116,000

9,000 1,500 2,000 12,500 6,000 22,000 7,000 1,000 36,000 48,500 67,500 1,000 68,500


Interest expenses (Tk.4,000 + Tk.1,000) Net income before income tax Less: Income tax @ 35% Net income after income tax

5,000 63,500 22,225 41,275

ABC Co. Ltd. Retained Earnings Statement For the year ended June 30, 2018 Balance as on July 01, 2017 Add: Net income after tax

7,000 41,275 48,275 15,000 33,275

Less: Dividend paid Balance as on June 30, 2018 ABC Co. Ltd. Statement of Financial Position As on June 30, 2018 Tk.

Tk.

Tk.

Assets Non-current assets: Fixed assets (w-1) Current assets: Cash Accounts receivable Less: Allowance for doubtful account Inventory Total assets

108,000

2,000 29,000 19,000

10,000 10,000

22,000 130,000

Stockholders’ equity and liabilities Stockholders’ equity: Capital Retained earnings

60,000 33,275

Non-current liability: Bonds payable Current-liabilities: Salaries payable Interest payable Selling expenses payable Income tax payable Total stockholders‘ equity and liabilities

93,275

10,000

2,000 1,000 1,500 22,225

26,725 130,000


Working: 1. Computation of fixed assets: Furniture Less: Accumulated depreciation Building Less: Accumulated depreciation

Tk.10,000 5,000 140,000 37,000

Tk.5,000 103,000 108,000

P-14. The accounts balances taken from the ledger of XYZ Ltd. on December 31, 2017 are given below: Debtor Taka Creditor Taka Cash in hand 10,500 Allowance for depreciation on 7,800 store equipment Notes receivables 22,000 Allowance for depreciation on 8,200 office equipment Accounts receivables 31,000 Notes payable 12,000 Merchandise, Jan. 01, 2017 55,000 Accounts payable 9,800 Unexpired insurance 800 Accrued property tax 440 Sales discount 1,250 Sales 1,80,000 Purchases 1,12,000 Capital 75,500 Freight-in 3,400 Purchase discount 1,650 Advertising expenses 1,100 Interest income 3,000 Delivery expenses 2,300 Foreign loan 40,860 Sales salaries 18,000 Allowance for bad debts 1,500 Office supplies 20,000 Office equipment 42,000 Rent 3,600 Store equipment 15,800 Interest expenses 2,000 Data for adjustment for the year ended December 31, 2017 are as follows: (a) The allowance for bad debts are to be increased to Tk.2,000. (b) Depreciation of office equipment is 8% a year. (c) Depreciation of store equipment is 10% a year. (d) Accrued advertisement expenses amounted to Tk.500. (e) Sales salaries accrued is Tk.2,500. (f) Office supplies on hand total Tk.5,520. (g) Of the Tk.3,000 reported as interest income Tk.1,200 is unearned. (h) Interest of Tk.150 has accrued on notes receivable. (i) Management is decided to charge the whole amount of exchange fluctuation loss of Tk.7,500 which took place in the year 2017. (j) Of the Tk.2,000 reported as interest expenses Tk.500 represents payment for the next year. (k) The merchandise inventory on December 31, 2017 amounted to Tk.75,000. Required: Prepare the followings: (i) Income statement. (ii) Balance sheet.


Solution: (i) XYZ Ltd. Income Statement For the year ended December 31, 2017 Tk. Sales Less: Sales discount Net sales Less: Cost of goods sold (w-1) Gross profit Less: Operating expenses: Administrative and general expenses: Rent Office supplies Less: Unused office supplies Depreciation expenses on office equipment Depreciation expenses on store equipment Total administrative and general expenses Selling and distribution expenses: Advertising expenses Add: Accrued Delivery expenses Sales salaries Add: Accrued Bad debts (Tk.2,000 – Tk.1,500) Total selling and distribution expenses Total operating expenses Operating income Financial income or expenses: Interest income Add: accrued Less: Unearned interest income Interest expenses (Tk.2,000 – Tk.500) Exchange fluctuation loss Total financial income or expenses Net income before tax

Tk. 180,000 1,250

Tk.

178,750 93,750 85,000

3,600 20,000 5,520

14,480 3,360 1,580 23,020

1,100 500 18,000 2,500

1,600 2,300 20,500 500 24,900 47,920 37,080

3,000 150 1,200

1,950 (1,500) (7,500) (7,050) 30,030

(ii) XYZ Ltd. Balance Sheet As at December 31, 2017 Tk.

Tk.

Tk.

Assets Non-current asset: Property, plant and equipment (w-1)

36,860


Current assets: Cash in hand Notes receivable Accounts receivable Less: Allowance for bad debts Merchandise inventory Office supplies on hand Unexpired insurance Advance interest expenses Accrued interest on notes receivable Total assets

10,500 22,000 31,000 2,000

Stockholders’ equity and liabilities Stockholders’ equity: Capital Retained earnings Non-current liabilities: Foreign loan Add: Fluctuation loss Current liabilities: Notes payable Accounts payable Accrued property tax Sales salaries accrued Accrued advertising Unearned interest income Total stockholders‘ equity and liabilities

29,000 75,000 5,520 800 500 150

143,470 180,330

75,500 30,030

105,530

40,860 7,500

48,360

12,000 9,800 440 2,500 500 1,200

26,440 180,330

Working: 1. Computation of property, plant and equipment: Office equipment Less: Accumulated depreciation Store equipment Less: Accumulated depreciation

Tk.42,000 11,560 15,800 9,380

Tk.30,440 6,420 36,860

P-15. Udora Company has detected a expand its operations. the book-keeper recently completed the balance sheet presented below in order obtaining additional funds for extension. Udora Company Balance Sheet As at December 31, 2017 Taka Current assets: Cash (net of bank overdraft of Tk.30,000) 200,000 Accounts receivable (net) 340,000 Prepaid expenses 12,000


Inventories at lower of average cost or market Trading securities at cost (fair value Tk.120,000) Cash surrender value of life insurance

401,000 140,000 90,000

Property, plant and equipment: Building (net) Office equipment (net) Land held for future use

570,000 160,000 175,000

Intangible assets: Goodwill

80,000

Current liabilities: Accounts payable Notes payable (due next year) Pension obligation Rent payable Premium on bonds payable

105,000 125,000 82,000 49,000 53,000

Long-term liabilities: Bonds payable

500,000

Stockholders’ equity: Common stock Tk.1.00 par, authorized 400,000 shares, issued 290,000 shares Additional paid-in capital Retained earnings

290,000 160,000 ?

Required: Prepare a revised classified balance sheet from the available information. Assume that the accumulated depreciation balance for the building is Tk.160,000 and for the office equipment Tk.105,000. The allowance for doubtful accounts has a balance of Tk.17,000. The pension obligation is considered as a long-term liability. Solution: Udora Company Balance Sheet As at December 31, 2017 Taka

Taka

Taka

730,000 265,000

995,000

Assets Non-current assets: Property, plant and equipment (w-1) Investments (w-2) Intangible assets: Goodwill Current assets: Cash

80,000

230,000


Accounts receivable Less: Allowance for doubtful debt Prepaid expenses Inventories at lower of average cost or market Trading securities at fair value Total assets

357,000 17,000

340,000 12,000 401,000 120,000

1,103,000 2,178,000

Stockholders’ equity and liabilities Stockholders’ equity: Common stock Tk.1.00 par, authorized 400,000 shares, issued 290,000 shares Additional paid-in capital Retained earnings Long-term liabilities: Bonds payable Add: Premium on bonds payable Pension obligation

290,000

500,000 53,000

Current liabilities: Accounts payable Notes payable Bank overdraft Rent payable Total stockholders‘ equity and liabilities

160,000 784,000

1,234,000

553,000 82,000

635,000

105,000 125,000 30,000 49,000

309,000 2,178,000

Workings: 1. Computation of property, plant and equipment: Building Less: Accumulated depreciation Office equipment Less: Accumulated depreciation

Tk.730,000 160,000 265,000 105,000

Tk.570,000 160,000 730,000

2. Computation of investments: Land held for future use Cash surrender value of life insurance

175,000 90,000 265,000

P-16. Multi Ltd commenced trading three years ago, on 1 January 2015. Its draft balance sheet at 31 December 2017 and its final balance sheets for the two previous years are as follows:


Non-current assets Property, plant and equipment Other Assets Current assets Total assets Capital Reserves Non-current liabilities Current liabilities Total liabilities

2017 Tk.m

2016 Tk.m

2015 Tk.m

231 169 400 800 1200 100 450 550 200 450 1200

230 120 350 800 1200 100 400 500 200 450 1150

180 120 300 800 1200 100 350 450 200 450 1100

Additional information is available as follows: 1. The profit for each of the three years was Tk.50m. 2. The movements on property, plant and equipment were as follows: 2017 2016 2015 Tk.m Tk.m Tk.m Brought forward 230 180 0 Direct cost of additions 80 90 180 Interest capitalized 10 10 20 320 280 200 Depreciation (89) (50) (20) Carried forward 231 230 180 3. Property, plant and equipment is depreciated at the rate of 10% of cost per annum. The directors now believe that more relevant information would be provided if interest was not capitalized, so the decision has been made to change the accounting policy and to recognize all interest as an expense in the year in which it is incurred. Required: Prepare the revised balance sheets at 31 December 2017 and 2016, together with extracts from the statement of changes in equity for each of the two years then ended. Solution: Multi Ltd Balance Sheet

Non-current assets: Property, plant and equipment (w-3) Other assets Current assets Total assets Capital Reserve (w-4)

2017 Tk.m

2016 Tk.m

200 169 369 800 1,169

205 120 325 800 1,125

100 419

100 375


519 200 450 1,169

Non-current liabilities Current liabilities

475 200 450 1,125

Workings: 1. Adjustment recapitalized interest:

Amount capitalized in the year Depreciation charges (20 X 10%) Depreciation charges (20 + 10) X 10% Depreciation charges (20 + 10 + 10) X 10% Revenues adjustment/ asset written Current live

2017 Tk.m 10 (4) 6 31

2016 Tk.m 10 (3) 7 25

2015 Tk.m 20 (2) 18 18

2. Adjustment to reported profit:

Profit for the year before adjustment Profit adjustment (w-1) Profit for the year restated

2017 Tk.m 50 (6) 44

2016 Tk.m 50 (7) 43

2017 Tk.m 231 (31) 200

2016 Tk.m 230 (25) 205

2017 Tk.m 400 (25) 375 44 419

2016 Tk.m 350 (18) 332 43 375

3. Property, plant and equipment:

An originally stated Write down (7 + 18) Write down (6 + 7 + 18) Restated 4. Statement of changes in equity:

Reserve brought forward as reported Adjustment write-off capitalized interest (w-1) As restated Profit for the year (w-2) Reserve earned forward

P-17. The following account balances were included in the trial balance of Mahima Traders at June 2018: Taka Sales 1,678,500 Sales discounts 31,150 Costs of goods sold 896,770 Sales salaries 56,260


Depreciation on office furniture and equipments Real estate and other local taxes Bad debt expense – selling Sales commissions Travel expense – sales persons Freight-in Entertainment expense Telephone and internet expense – sales Depreciation on sales equipment Building expense – prorated to sales Miscellaneous selling expenses Office supplies used Telephone and internet expense - administration Building expense – prorated to administration Miscellaneous office expenses Sales returns Dividends received Bond interest expense Income taxes Depreciation understatement due to error – 2015 (net of tax) Dividends declared on preferred stock Dividends declared on common stock

7,250 7,320 4,850 97,600 28,930 21,400 14,820 9,030 4,980 6,200 4,715 3,450 2,820 9,130 6,000 62,300 38,000 18,000 133,000 17,700 9,000 32,000

The retained earnings account had a balance of Tk.337,000 at June 30, 2018 before closing. There are 80,000 shares of common stock outstanding. Required: (a) Using the multiple-step form, prepare an income statement and a retained earnings statement for the year ended June 30, 2018. (b) Show earnings per share. Solution: (a) Mahima Traders Income Statement For the year ended June 30, 2018 Tk. Revenues: Sales Less: Sales discounts Sales returns Net sales Less: Cost of goods sold Gross profit Less: Operating expenses: Selling expenses (w-1) Administrative expenses (w-2) Operating income

Tk.

1,678,500 31,150 62,300 1,585,050 896,770 688,280 248,785 35,970

284,755 403,525


Other revenue and expenses: Dividend revenue Bond interest expenses Income before taxes Income taxes Net income

38,000 (18,000)

20,000 423,525 133,000 290,525

Mahima Traders Retained Earnings Statement For the year ended June 30, 2018 Retained earnings, June 30, 2018 Less: Correction for depreciation understatement (net of tax) Add: Net income Less: Dividend declared on preferred stock Dividend declared on common stock

Tk. 337,000 17,700

319,300 290,525 609,825 9,000 32,000

(b) Earnings per share: Net income Less: Dividend on preferred stock Income of common stockholders Number of common stock Earnings per share (EPS)

Tk.290,525 9,000 281,525 รท 80,000 Tk.3.52

Workings: 1. Computation of selling expenses: Sales commissions Sales salaries Travel expenses Entertainment expenses Freight-out Telephone & internet expenses Depreciation expenses on sales equipment Building expenses Bad debt expenses Miscellaneous selling expenses 2. Computation of administrative expenses: Real estate and other local taxes Building expenses Depreciation expenses on office furniture and equipments Office supplies used Telephone and internet Miscellaneous expenses

Tk.

Tk.97,600 56,260 28,930 14,820 21,400 9,030 4,980 5,200 4,850 4,715 248,785 Tk.7,320 9,130 7,250 3,450 2,820 6,000 35,970

41,000 568,825


P-18. ABC Company Limited closed its books of accounts as on June 30, 2018. The followings are the balances taken from the ledger of the company: Taka Cash and bank 240,000 Accounts receivable 672,000 Inventory on July 01, 2017 648,000 Store supplies 16,000 Office supplies 5,800 Prepaid insurance 25,000 Store equipment 170,000 Accumulated depreciation (Store equipment) 45,000 Office equipment 52,000 Accumulated depreciation (Office equipment) 16,000 Accounts payable 360,000 Mortgage notes payable (due 2023) 600,000 Capital 528,000 Sales 2,460,000 Sales discount 54,000 Sales return 33,600 Purchases 1,384,800 Purchase return 78,000 Purchase discount 31,600 Sales salaries 246,000 Delivery expenses 68,000 Rent expenses 48,000 Freight-in 36,000 Office salaries 136,000 Office expenses 15,000 Miscellaneous general expenses 13,600 Gain on disposal of assets 7,200 Interest expenses 30,000 Land 232,000 Other relevant information on June 30, 2018 are as follows: (a) The inventory on hand (b) Supplies on hand: Office supplies Store supplies (c) Insurance expired during the year: Allocable to selling expenses Allocable to general expenses (d) Equipments are depreciated at the rate of 10% per annum. (e) Accrued sales salaries (f) accrued office salaries (g) Accrued interest on the mortgage notes payable (h) Income tax is estimated at 45% of the income.

Taka 507,200 2,200 9,000 9,700 2,600 4,600 2,100 4,800


Required: Prepare (i) Statement of financial performance for the year ended June 30, 2018, and (ii) Statement of financial position as at June 30, 2018. Solution: (i) ABC Company Limited Statement of financial performance For the year ended June 30, 2018 Taka Revenues: Sales Less: Sales return Sales discount Net sales Less: Cost of goods sold (w-1) Gross profit Less: Operating expenses: Selling expenses (w-2) General and administrative expenses (w-3) Operating income Other revenue and expenses: Interest expenses Add: Accrued interest on notes payable

Taka

Taka

2,460,000 33,600 54,000

87,600 2,372,400 1,452,000 920,400 352,300 226,100

30,000 4,800

Gain and losses: Gain on disposal of assets Income from continued operation before income tax Income tax @ 45% Net income

578,400 342,000

34,800 307,200 7,200 314,400 141,480 172,920

(ii) ABC Company Limited Statement of financial position As at June 30, 2018 Taka

Taka

Assets Non-current asset: Property, plant and equipment (w-4) Current assets: Cash and bank Accounts receivable Inventory on June 30, 2018 Office supplies

370,800 240,000 672,000 507,200 2,200


Store supplies Prepaid insurance Total assets

9,000 12,700 1,443,100 1,813,900

Stockholders’ equity and liabilities Stockholders’ equity: Net income Non-current liability: Mortgage notes payable Current liabilities: Accounts payable Sales salaries payable Office salaries payable Accrued interest payable Income tax payable Total stockholders‘ equity and liabilities

700,920 600,000 360,000 4,600 2,100 4,800 141,480

512,980 1,813,900

Workings: 1. Cost of goods sold: Inventory on July 01, 2017 Add: Purchases Freight-in Delivered cost of purchases Less: Purchase return Purchase discount Goods available for sale Less: Inventory on June 30, 2018

Tk.648,000 1,384,800 36,000 1,420,800 78,000 31,600

1,311,200 1,959,200 507,200 1,452,000

2. Selling expenses: Store supplies used Depreciation expenses on store equipment Sales salaries Add: Accrued Delivery expenses Insurance expenses

Tk.7,000 17,000 Tk.246,000 4,600

250,600 68,000 9,700 352,300

3. General and administrative expenses: Office supplies used Insurance expenses Depreciation expenses on office equipment Rent expenses Office salaries Add: Accrued Office expenses Miscellaneous general expenses

Tk.3,600 2,600 5,200 48,000 Tk.136,000 2,100

138,100 15,000 13,600 226,100


4. Property, plant and equipment: Store equipment Less: Accumulated depreciation Office equipment Less: Accumulated depreciation

Tk.170,000 62,000 Tk.52,000 21,200

Tk.108,000 30,800 370,800

P-19. The selected account balances of Edora Company alongwith additional information as of December 31, 2017 are as follows: Taka Contribution to employees pension fund 290,000 Delivery expenses 425,000 Depreciation expenses – Delivery trucks 29,000 Depreciation expenses – Office buildings & equipment 35,000 Depreciation expenses – Store equipment 25,000 Dividends 150,000 Dividend revenue 5,000 Doubtful accounts expenses 22,000 Income tax – 2017 515,000 Freight-in 145,000 Gain on sale of office equipment 10,000 Interest revenue 1,500 Loss on sale of marketable securities 50,000 Loss from write-down of obsolete inventory 125,000 Inventory, January 01, 2017 1,050,000 Miscellaneous general expenses 45,000 Miscellaneous selling expenses 50,000 Office salaries 950,000 Purchase discounts 47,700 Purchases 4,633,200 Retained earnings, January 01, 2017 550,000 Sales 9,125,000 Sales discounts 55,000 Sales returns and allowances 95,000 Sales salaries 601,000 Local taxes 100,000 Store supplies expenses 50,000 Other information: (a) Inventory at year-end was valued at Tk.750,000 – Tk.875,000 cost less the Tk.125,000 write down of obsolete inventory. (b) Edora Company has 100,000 shares of common stock outstanding issued @ Tk.100 per stock with a premium of Tk.20 per stock. Required: Prepare a combined statement of income and retained earnings for the year ended December 31, 2017 (Use a multiple step form).


Solution: Edora Company Statement of income and retained earnings For the year ended December 31, 2017 Tk. Revenues: Sales Less: Sales returns and allowances Sales discounts Net sales Less: Cost of goods sold (w-1) Gross profit Less: Operating expenses: Selling expenses (w-2) General and administrative expenses (w-3) Operating income Other income and expenses: Dividend income Interest revenue

Tk.

Tk.

9,125,000 95,000 55,000

150,000 8,975,000 5,030,500 3,944,500 1,180,000 1,442,000

5,000 1,500

Gains and losses: Gains on sale of office equipment Loss on sale of marketable securities Income from continuing operations before income tax Less: Income tax Net income Net income b/f Add: Retained earnings, January 01, 2017

10,000 (50,000)

2,622,000 1,322,500

6,500 1,329,000

(40,000) 1,289,000 515,600 773,400 773,400 550,000 1,323,400 150,000 1,173,400

Less: Dividend declared Retained earnings, December 31, 2017 Earnings per share (Tk.773,400 รท 100,000 shares)

Tk.7.73

Workings: 1. Cost of goods sold: Inventory, January 01, 2017 Add: Purchases Freight-in Delivered cost of purchases Less: Purchase discount Goods available for sale Less: Inventory, December 31, 2017

Tk.1,050,000 Tk.4,633,000 145,000 4,778,200 47,700 4,730,500 5,780,500 750,000 5,030,500


2. Selling expenses: Sales salaries Delivery expenses Depreciation expenses – Delivery trucks Depreciation expenses – Store equipment Stores supplies expenses Miscellaneous selling expenses

Tk.601,000 425,000 29,000 25,000 50,000 50,000 1,180,000

3. General and administrative expenses: Office salaries Local taxes Depreciation expenses – Office buildings & equipment Contribution to employees pension fund Doubtful account expenses Miscellaneous general expenses

Tk.950,000 100,000 35,000 290,000 22,000 45,000 1,442,000

P-20. From the following trial balance of Ayan Co. Ltd. and additional information given, prepare a statement of comprehensive income for the year ended December 31, 2017 and a statement of financial position as at that date. Ayan Co. Ltd. Trial Balance For the year ended December 31, 2017 Particulars Debit (Tk.) Purchases 11,20,000 Beginning inventory 1,08,000 Import duty 84,000 Carriage inward 42,000 Carriage outward 36,000 Labor 58,000 Payroll 68,000 Petty expenses 18,000 Export duty 25,000 Discount 13,600 Commission 17,400 Advertisement 41,000 Insurance premium (upto March 31, 2017) 30,000 Notes receivable 64,000 Machinery 3,80,000 Furniture & fixtures 1,20,000 Office expenses 6,000 Rent 41,000 Bad debt expenses 3,000 Cash 37,000 Bank 61,000 Accounts receivable 1,50,000 VAT current A/c 8,400

Credit (Tk.)

17,400 18,600


Sales Discount on purchases 10% Loan (January 01, 2016) Notes payable Depreciation reserve – Machinery Depreciation reserve – Furniture & fixtures Allowances for bad debt Capital (Tk.8 per share) Accounts payable General reserve

________ 25,31,400

14,92,000 9,400 1,20,000 36,000 72,200 22,800 7,000 6,40,000 70,000 26,000 25,31,400

Additional information: (a) Ending inventory Tk.1,60,000. (b) Included in the ending inventory goods of the cost of Tk.20,000, which was sold at a profit of 20% on cost. The buyer did not take the delivery. Even it is not recorded in the books. (c) Rent payable Tk.3,000, whereas payroll paid in advance Tk.1,000. (d) VAT of Tk.900 paid on advertisement, which is included in VAT current A/c. (e) VAT of Tk.3,000 collected from customer erroneously included in sales. (f) Depreciation to be charged at 10% on the book value of machinery and furniture & fixtures. (g) Withdrawn by the owner goods of the value of Tk.2,000 (cost price Tk.1,500), which is included in sales at cost price. (h) General Manager is entitled to a commission of 5% net profit after charging his commission. (i) Yearly insurance premium of Tk.24,000 is paid upto March 31, 2018. (j) Bad debt expenses are to be increased to Tk.9,000, and an allowances for bad debt of 5% is to be created on accounts receivable. (k) Petty expense includes office consumable of the cost of Tk.5,000. (l) Capital of the company is consisted of Tk.1,00,00 shares of Tk.10 each. Solution: Ayan Co. Ltd. Comprehensive Income Statement For the year ended December 31, 2017 Sales revenue: Net sales (w-1) Less. Cost of goods sold (w-2) Gross profit Operating expenses: Sales and distribution expenses (w-5) Administrative expenses (w-6) Operating profit or loss Add. Non-operating income: Discount Commission Less. Non-operating expenses Net profit or loss

Tk.

1,97,475 1,42,000

17,400 18,600

Tk. 14,97,900 12,61,100 2,36,800

3,39,475 (1,02,675)

36,000 (12,000) (78,675)


Ayan Co. Ltd. Statement of Financial Position As at December 31, 2017 Tk.

Tk.

Assets Non-current assets: Property, plant and equipment (w-7) Notes receivable Total non-current assets Current assets: Cash Bank Accounts receivable (w-3) VAT current A/c Less: VAT on advertisement Advance insurance Advance payroll Ending inventory Total current assets Total assets Shareholders’ equity and liabilities Shareholders’ equity: Authorized capital (1,00,000 shares of Tk.10 each) Issued and subscribed capital (80,000 shares of Tk.10 each) Paid-up capital: Capital (80,000 shares of Tk.8 each) Add: General reserve Net profit or loss Less: Withdrawn Total shareholders‘ equity Non-current liabilities: Notes payable 10% Loan Total non-current liabilities Current liabilities: Accounts payable Depreciation reserve – Machinery Add: Current year Depreciation reserve – Furniture & fixtures Add: Current year Interest on loan Arrear on rent Current liabilities Total liabilities Total shareholders‘ equity and liabilities

5,00,000 64,000 5,64,000 37,000 61,000 1,55,325 8,400 900

7,500 6,000 1,000 1,40,000 4,07,825 9,71,825

10,00,000 8,00,000

6,40,000 26,000 (78,675)

(52,675) (1,500) 5,85,825 36,000 1,20,000 1,56,000 70,000

72,200 38,000 22,800 12,000

1,10,200 34,800 12,000 3,000 2,30,000 3,86,000 9,71,825


Workings: 1. Net sales: Sales Add: Unrecorded sales Less: VAT error recorded Discount Withdrawn

Tk.14,92,000 24,000 15,16,000 Tk.3,0000 13,600 1,500 18,100 14,97,900

Net sales 2. Cost of goods sold: Beginning inventory Add: Net purchases: Purchases Labor Import duty Carriage inward Less: Discount on purchases Withdrawn Cost of goods available for sale Less: Ending inventory Sale of goods

Tk.1,08,000 Tk.11,20,000 58,000 84,000 42,000 13,04,000 (9,400) (1,500) 12,93,100 14,01,100 1,60,000 20,000 1,40,000 12,61,100

Cost of goods sold 3. Total accounts receivable: Accounts receivable Add: Unrecorded sales Less: Withdrawn VAT included in sales Bad debt expenses (Tk.9,000 – Tk.3,000)

Tk.1,50,000 74,000 1,74,000 Tk.1,500 3,000 6,000 10,500 1,63,500 8,175 1,55,325

Less: Allowances for bad debt (Tk.1,66,500 X 5%) Total accounts receivable 4. Bad debt expenses: Old bad debt expenses Add. New bad debt New allowances

Less: Old allowances Total bad debt expenses

Tk.3,000 Tk.6,000 8,175 14,175 17,175 (7,000) 10,175


5. Sales and distribution expenses: Payroll Less: Advance

Tk.68,000 (1,000) Tk.67,000 36,000 25,000 17,400

Carriage outward Export duty Commission Advertisement Add: VAT expenses

41,000 900 41,900 10,175 1,97,475

Bad debt expenses (N-4) Total sales and distribution expenses 6. Administrative expenses: Petty expenses Less: Office consumable

Tk.18,000 (5,000) Tk.13,000

Insurance expenses Less: Advance insurance

30,000 (6,000)

Office expenses Add: Office consumable

6,000 5,000

24,000

11,000 Rent Add: Arrear

41,000 3,000 44,000

Depreciation – Machinery Depreciation – Furniture & fixtures

38,000 12,000 50,000 1,42,000

Total administrative expenses 7. Property, plant and equipment: Machinery Furniture & fixtures Total property, plant and equipment

Tk.3,80,000 1,20,000 5,00,000

P-21. BD Company shows the following trial balance for the year ended December 31, 2017. BD Company Trial Balance For the year ended December 31, 2017 Particulars Purchases Opening inventory Carriage on purchases Sales return Payroll and travel expenses of salesmen

Debit (Tk.) 2,32,500 19,000 13,250 3,900 16,400

Credit (Tk.)


Labor Payroll Materials Printing and stationery Bonus and entertainment Bad debt expenses Land and building Vehicle Patent (10 years) Furniture Share call A/c Income tax paid on source Accounts receivable Bank Cash Notes receivable Discount allowed Demurrage Petty cash expense Payroll paid in advance Capital General reserve Employee benevolent fund Accounts payable Notes payable Commission received Purchases return Sales VAT current A/c

10,000 12,300 9,450 7,350 9,650 1,050 87,500 37,500 15,000 30,000 2,500 2,000 34,000 14,100 49,000 17,250 3,250 2,350 2,150 4,000

______ 6,35,450

1,55,000 59,100 25,350 24,000 11,500 12,000 6,350 3,34,000 8,150 6,35,450

Relevant information: (a) Closing inventory has been valued Tk.25,000 at cost and market price Tk.23,000. (b) Sales include Tk.20,000 being goods sent on sale or return basis at a profit of 25% on cost. Confirmation of these sales have not yet been received. (c) Sales return of Tk.4,000 has not been recorded. (d) A note of Tk.2,000 was discounted, which was dishonored after maturity, not recorded in the books of accounts. (e) Allowances for bad bed to be created at 5%. (f) Furniture of Tk.20,000 was bought on account at July 1, 2017. (g) The yearly rate of depreciation for land and building, vehicle and furniture is 5%, 20% and 10% respectively. (h) Outstanding labor Tk.2,000 and commission pre-received Tk.3,000. (i) Vehicle sold at Tk.12,000 (book value Tk.20,000) included in sales. (j) Stock of materials Tk.1,450. (k) Capital of the company is consisted of 50,000 equity shares of Tk.10 each. Required: You are required to prepare a multiple steps income statement for the year ended December 31, 2017 and a classified balance sheet as at that date for the company.


Solution: BD Company Income Statement For the year ended December 31, 2017 Sales revenue: Sales Less: Sales return Unrecorded sales return Sales on return basis Discount Net sales revenue Less: Cost of goods sold: Opening inventory Add: Net purchases (w-1) Cost of goods available for sale Less: Closing inventory Sales or return basis (Tk.20,000 X 100/125) Cost of goods sold Gross profit Less: Operating expenses: Sales and distribution expenses: Payroll and travel expenses Materials less stock in hand (Tk.19,450 – Tk.1,450) Demurrage Bad debt expenses (w-3) Total sales and distribution expenses Administrative expenses: Payroll Petty expenses Printing and stationery Bonus and entertainment Income tax on source Depletion of patent Depreciation - Furniture Depreciation – Vehicle Depreciation - Land and building Total administrative expenses Total operating expenses Operating profit or loss: Add: Non-operating income: Commission received less pre-received (Tk.12,000 – Tk.3,000) Less: Non-operating expenses: Loss on sale of Vehicle Net profit or loss

Tk. 3,34,000 (3,900) (4,000) (20,000) (3,250)

Tk.

3,02,850 19,000 2,51,400 2,70,400 (23,000) 16,000 (2,31,400) 71,450

16,400 8,000 2,350 1,650 (28,400) 12,300 2,150 7,350 9,650 2,000 1,500 4,000 3,500 4,375 (46,825) (3,775)

9,000

(7,500) 1,500 (2,275)


BD Company Balance Sheet As at December 31, 2017 Tk.

Tk.

Assets Non-current assets: Property, plant and equipment (w-4) Notes receivable Total non-current assets Intangible assets: Patent Less: Depletion of patent Total intangible assets Current assets: Cash (w-5) Bank (w-6) Accounts receivable (w-2) Advance payroll Closing inventory Stock of materials Share call Total current assets Total assets Stockholders’ equity and liabilities Stockholders’ equity: Authorized capital (50,000 shares of Tk.10 each) Issued and subscribed capital Paid-up capital: Capital Add: General reserve Net profit or loss Employee benevolent fund Total capital Non-current liabilities: Notes payable Total non-current liabilities Current liabilities: Accounts payable (Tk.24,000 + Tk.20,000) Depreciation reserve – Vehicle Depreciation reserve – Furniture Depreciation reserve – Land and building Commission pre-received VAT current A/c Outstanding labor Total current liabilities Total liabilities Total stockholders‘ equity and liabilities

1,55,000 17,250 1,72,250 15,000 (1,500) 13,500 61,500 12,100 11,400 4,000 39,000 1,450 2,500 1,31,950 3,17,700

5,00,000 ______1,55,000 59,100 (2,275)

56,825 25,350 2,37,175 11,500 11,500 44,000 3,500 4,000 4,375 3,000 8,150 2,000 69,025 80,525 3,17,700


Workings: 1. Net purchases: Purchases Add: Labor Outstanding Carriage on purchases

Tk.2,32,500 Tk.10,000 2,000 13,250

Less: Purchases return Net purchases

25,250 2,57,750 (6,350) 2,51,400

2. Total accounts receivable: Accounts receivable Add: Dishonored note Less: Sale or return basis Sales return

Tk.34,000 2,000 36,000 (20,000) (4,000)

Less: Allowances for bad debt (Tk.12,000 X 5%) Total accounts receivable

(24,000) 12,000 600 11,400

3. Bad debt expenses: Old bad debt expenses Add: New allowances Total bad debt expenses

Tk.1,050 600 1,650

4. Property, plant and equipment: Land and building Vehicle Less: Sales Furniture Add: Purchases Total property, plant and equipment

Tk.87,500 Tk.37,500 (20,000) 30,000 20,000

17,500 50,000 1,55,000

5. Cash: Cash Sale of Vehicle

Tk.49,000 12,500 61,500

6. Bank: Bank Less: Dishonored note

Tk.14,100 2,000 12,100


EXERCIES E-1. Pharmacia Ltd operates in the pharmaceutical business. The following information relates to the company's activities in research and development for the year ended 31 October 2010. (i) Commercial production started on 1 June 2006 for Formula A. By 31 October 2009 Tk.43,000 had been capitalized in respect of development expenditure on this product. During the year a further Tk.10,000 was spent on development of this product. Pharmacia Ltd has taken out a patent in respect of Formula A which will last for ten years. Legal and administrative expenses in relation to this were Tk.2,000. In the current year, sales of Formula A amounted to Tk.50,000. Sales over the next three years are expected to be Tk.150,000, Tk.200,000 and Tk.100,000 respectively. (ii) The development of Formula B is at an earlier stage. Although the company believes it has a reasonable expectation of future benefits from this project it has not as yet been able to demonstrate this with sufficient certainty. Expenditure on this project in the current year was Tk.20,000. Required: Calculate the total amount to be charged to the income statement in respect of the above in the year ended 31 October 2010. Mention reference of related IAS/IFRS to justify your answer. E-2. ABC Company Ltd. has entered into the following transactions during the year ended 31 December 2010. (i) On 1 October 2010 ABC Company Ltd. received Tk.400,000 in advance subscriptions. The subscriptions are for 20 monthly issues of a magazine published by ABC Company Ltd. Three issues of the magazine had been dispatched by the year end. Each magazine is of the same value and costs approximately the same to produce. (ii) A batch of unseasoned timber, which had cost Tk.250,000, was sold to XYZ Company Ltd. for Tk.100,000 on 1 January 2010. ABC Company Ltd. has an option to repurchase the timber in 10 years' time. The repurchase price will be Tk.100,000 plus interest charged at 8% per annum from 1 January 2010 to the date of repurchase. The market value of the timber is expected to increase as it seasons. (iii) XYZ Company Ltd. made a major sale on 1 January 2010 for a fee of Tk.450,000, which related to a completed sale and after-sales support for three years. The cost of providing the after-sales support is estimated at Tk.50,000 per annum and the mark-up on similar after-sales only contracts is 20% on cost. Required: Prepare extracts from ABC Company Ltd's financial statements for the year ended 31 December 2010, clearly showing how each of the above would be reflected. Notes to the financial statements are not required. E-3. Keya & Co. is a manufacturing company which prepares financial statements to 30 June each year. Before the draft financial statements for the year ended 30 June 2011 can be finalized and approved by the directors, the following points need to be addressed. Draft net assets at 30 June 2011 were Tk.2 million. (i) Keya & Co. has renewed the unlimited guarantee given in respect of the bank overdraft of a company (Vass Ltd.) in which it holds a significant investment. Vass Ltd.'s overdraft amounted to Tk.300,000 at 30 June 2011 and it has net assets of Tk.1 million. (ii) A former director, who was dismissed from the company‘s service on 1 June 2011 for acting outside his authority, has given notice of his intention to claim substantial damages for loss of office. On 1 November 2011 a claim was received for Tk.150,000. The


company‘s legal advisers have been negotiating with the former director and believe that the claim will probably be settled at Tk.100,000. (iii) On 15 November 2011 the company sold its former head office building, for Tk.2.7 million. At the year end the building was unoccupied and Keya & Co. had not intended to sell the property for at least another year. The building's carrying amount (based on cost less accumulated depreciation) was Tk.3.1 million at the year end. (iv) An overseas division of Keya & Co. was nationalized in July 2011. The overseas authorities have refused to pay any compensation. The net assets of the division have been valued at Tk.200,000 at the year end. Required: Prepare extracts from the statement of financial position of Keya & Co. as at 30 June 2011, including any relevant notes to the financial statements. E-4. Listed below are selected items from the financial statements of RFL Ltd. for the year ended December 31, 2012:

Notes payable to Prime Bank Income taxes payable Loss contingency relating to law suit Accounts payable and accrued expenses Mortgage note payable Bonds payable Premium on bonds payable Accrued bond interest payable Pension expenses Unearned revenue

Tk. 99,000 63,000 2,00,000 1,63,230 2,40,864 22,00,000 1,406 1,10,000 61,400 25,300

Other information: 1. The note payable owed to Prime Bank is due in 30 days. RFL Ltd. has arranged with this bank to renew the note for an additional two years. 2. RFL Ltd. has been sued for Tk.2,00,000 by someone claiming the company‘s products are excessively noisy. it is reasonable possible, but not probable, that a loss has been sustained. 3. The mortgage note payable Tk.8,000 per month over the next three years. During the next 12 months, the principal amount of this note will be reduced to Tk.1,69,994. 4. The bonds payable mature in seven months. A sinking fund has been accumulated to repay the full maturity of this bond issue. Required: (i) using this information, prepare the current liabilities and long-term liabilities sections of a classified balance sheet at December 31, 2102. (ii) Explain briefly how the information in each of the four numbered paragraph under the title of other information affected your presentation of company‘s liabilities. E-5. The following is a post-closing trial balance for the Yeasmine Corporation at December 31, 2011, the end of the company‘s fiscal year:


Account Title Cash Accounts receivable Allowance for doubtful accounts Inventories Investments Prepaid expenses Note receivable (due in one month) Land Building Machinery Accumulated depreciation- building and machinery Patent (net of amortization) Accounts payable Salaries payable Interest payable Note payable Bonds payable (due in 10 years) Common shares Retained earnings Totals

Debit (Tk.) 80,000 200,000 300,000 50,000 30,000 60,000 120,000 550,000 500,000 50,000 _______1,940,000

Credits (Tk.) 20,000 450,000 170,000 40,000 10,000 100,000 500,000 400,000 250,000 1,940,000

The Tk.50,000 balance in the investment account consists of marketable equity securities of other corporations. The company‘s intention is to hold the securities for at least three years. The Tk.100,000 note payable is an installment loan. Tk.10,000 of the principal, plus interest, is due on each July 1 for the next 10 years. At the end of the year, 100,000 common shares were issued and outstanding. The company has 500,000 shares authorized. Required: Prepare a classified balance sheet for the Yeasmine Corporation at December 31, 2011. E-6. The following balances are taken from the books of accounts of Surma Ltd. on June 30, 2004: Surma Ltd. Trial Balance June 30, 2004 Name of Accounts Debit (Tk.) Credit (Tk.) Accounts Receivable 29,000 Purchases 81,000 Allowance for Doubtful Accounts 16,000 Inventories 6,000 Furniture 10,000 Accumulated Depreciation – Furniture 4,000 Building 1,40,000 Accumulated Depreciation – Building 30,000 Cash 2,000 Bad Debts 6,000 Salaries and Allowances 20,000 Interest Expenses 4,000 Rent, Rates & Taxes 6,000 -


Salesmen Salaries Freight-in Dividend Sales Interest Income Bonds Payable Capital Retained Earnings, June 30, 2003 Total

2,000 7,000 15,000 ___-__ 3,28,000

2,00,000 1,000 10,000 60,000 7,000 3,28,000

Adjustments on June 30, 2004 are required as follows: (i) Inventory on hand is Tk.10,000. (ii) Depreciation on Furniture is to be 10% on original cost. (iii) Building are depreciated @ 5% per year. (iv) The allowance for doubtful accounts are to be increased to a balance of Tk.19,000. (v) Accrued salaries Tk.2,000. (vi) Accrued interest on bonds Tk.1,000. (vii) Accrued selling expenses Tk.1,500. (viii) Income taxes are estimated to be 50% of the net income before taxes. Required: (a) Prepare a Multiple Income Statement and Retained Earnings Statement for the year ended June 30, 2004. (b) Prepare a Balance Sheet as on June 30, 2004. E-7. You have been appointed as Manager Finance of a company named ZYX Ltd. The Finance Controller of that company asked you to prepare a classified Balance Sheet in good form for the year ended 31 st December-2010 based on the following data: ZYX Ltd. Descriptions Ledger Descriptions Ledger Balance (Tk.) Balance (Tk.) Land 24,00,000 Employees‘ salary tax Building 82,00,000 payable 8,87,955 Equipments 73,50,000 0% Interest bond Goodwill 6,25,000 payable 15,00,000 Inventories 11,99,000 Discount on 0% int. Accumulated dep.bond payable 75,000 Building 8,51,000 Bank A/C- Citi N.A. 10,00,000 Accumulated dep.Bank A/C- Standard Equipment 14,60,000 Chartered 7,50,000 Notes receivable 27,28,500 Cash in hand 50,000 Notes payable to banks 13,25,000 Accounts payable 29,50,000 Income tax payable 4,91,810 Refundable over-paid Long-term notes income tax 4,88,150 payable- Unsecured 80,00,000 Rent payable- ShortLong-term rental term 2,25,000 obligations 24,00,000 Share capital @ Tk.10 Prepaid expenses 4,39,600 par value 10,00,000 Preferred share @ Tk.100 par value 7,50,000 Trading securities 6,05,000


Additional Information: (i) Cost and fair value of marketable securities are the same. (ii) Assume that notes receivable and notes payable are short-term, unless stated otherwise. (iii) Authorized share capital was 5,00,000 no. shares. (iv) Preferred share authorized was 50,000 no. shares. E-8. Yeasmine Ltd. Trial Balance As at 30 September 2016

Sales Inventories at 1 October 2015 Purchases Distribution costs Salespeople commission Administrative salaries Manufacturing wages Finance costs (interest paid) Administrative expenses 3% Debenture loans Equity share capital Retained earnings at 1 October 2015 Cash Dividends paid Revaluation reserve at 1 October 2015 Trade payables Land and building- value/ cost Accumulated depreciation- Land and building Plant and equipment Accumulated depreciation- Plant and equipment Trade receivables Accruals Total

Tk.000 5,460 67,206 8,000 2,920 2,280 2,000 540 5,000 2,685 2,820 92,578 35,000 16,395 2,42,884

Tk.000 103,500 18,000 60,000 8,495 6,000 5,861 25,000 15,313 ___715 2,42,884

Additional Information: (a) Inventories were valued at Tk.78,50,000 on September 2016. (b) Depreciation is to be provided for the year to 30 September 2016 as follows: (i) Buildings @ 10% per annum straight line basis. (ii) Plant and equipment @ 25% per annum reducing balance basis. Depreciation is to be apportioned as follows: (i) Cost of sales @ 55% (ii) Distribution costs @ 30% (iii) Administrative expenses @ 15% (c) Land and buildings in the trial balance includes a value for land at Tk.4,25,78,000. It is to be revalued at Tk. 6,10,00,000 and this revaluation is to be included in the Financial Statements for 30 September, 2016. (d) A bed debt of Tk.21,000 which is included in trade receivables is to be written-off.


(e) Administrative expenses of Tk.85,000 owing at 30 September, 2016 are to be provided for. (f) The companies‘ tax charge for the year has been estimated as Tk.15,00,000. Required: Compliance with the IAS-1: Presentation of Financial Statements, you have to prepare a Statement of Profit or Loss Accounts and a Statement of Changes in Equity for Yeasmine Ltd. for the year ended 30 September, 2016 and also a Statement of Financial Position as at that date. E-9. XYZ Company reported following ledger balances at December 31, 2012. Tk. Debit Credit Cost of goods sold 252,500 Accounts payable Land 400,000 Revenue Building 225,000 Allowance for doubtful Office equipment 125,000 accounts Long-term investments 56,000 8% Bonds payable Distribution costs 36,000 Share capital (Tk.10 par) Administrative expenses 56,000 Share premium Short term investments 45,000 Retained earnings Accounts receivables 20,800 Accumulated depreciation – Inventories 12,350 Equipment Patent 9,000 General reserve Losses from asset Investment income abandonment 3,800 Sinking fund Losses from earthquake 25,000 Loss on disposal of a discontinued division 30,000

Tk. 4,300 693,500 500 25,000 350,000 72,950 60,300 24,000 28,200 16,700 21,000

Additional Information: (a) Net realizable value of company‘s inventory at the year-end is Tk.11,700. (b) A full year interest on bonds payable is due and applicable income tax rate for the company is 40%. (c) Allowance for bad debt has to charge @ 6% on the ending balance of account receivable. But in previous years the rate was estimated and applied as 5%. if the new rate had been used in prior years, cumulated bad debt expense would have been Tk.7,250 instead of Tk.6,425. (d) Patent (to sell and distribute a special product) was acquire on 1 July 2011 with an useful life of 5 years. The annual impairment review has indicated that the patent has a recoverable value at the end of current year Tk.6,000. (e) Depreciation on equipment has to be charged @ 20% under reducing balance method. But in previous years depreciation was charged following straight line method which resulted Tk.12,000 depreciation per year. Under the new method, depreciation expense would be Tk.22,800 for 2010 and Tk.20,440 for 2011. (f) The company identified at the year-end some unrealized holding gain on available for sale securities (included in short term investment) of Tk.12,800. (g) A transfer of Tk.20,000 for the year should be made to general reserve. (h) Bonds payable will be due in June 2013 for which XYZ has been accumulated the sinking fund. A sum of Tk.3,000 should be transferred to sinking fund at the end of the year from general reserve.


Required: (i) A statement of financial position as at December 31, 2012; (ii) A statement of comprehensive income for the year ended December 31, 2012; and (iii) A statement of change in equity. E-10. You have qualified as a CMA and joined in a company named Afnan Ltd. as an Assistant Finance Controller. As per the requirement by the management of the company you were asked for current year‘s position based on following data which is not representing the true position of the company: Afnan Ltd. Statement of Financial Position As on 31.12.2012 Liabilities Amount (Tk.) Share Capital: Authorised 20,000, 10% redeemable preference share of Tk.10 each 200,000 180,000, Ordinary shares of Tk.10 each 1,800,000 2,000,000 Issued, Subscribed and Paid-up Capital: 20,000, 10% redeemable preference share of Tk.10 each 200,000 20,000, Ordinary shares of Tk.10 each 200,000 Reserve and Surplus: General reserve 240,000 Securities premium 140,000 Profit and loss account 37,000 Current liabilities & provision 23,000 840,000 Assets Fixed Assets: Gross block Tk.600,000 Less: Depreciation 200,000 400,000 Investment 200,000 Current Assets, Loans & Advances: Inventories 50,000 Debtors 50,000 Cash & Bank balance 100,000 200,000 Miscellaneous expenditure to the extent not written-off 40,000 840,000 For the year ended 31.12.2012, the company made a net profit of Tk. 30,000 after providing for Tk. 40,000 depreciation and writing off miscellaneous expenditure of Tk. 40,000. The following additional information is available with regard to company‘s operation. i. The preference dividend for the year ended 31.12.2012 was paid before 31.12.2012. ii. Except cash & balances, other current assets and current liabilities on 31.12.2012, was the same as on 31.12.2011. iii. The company redeemed the preference share at a premium of 10%. iv. The company issued bonus shares in the ratio of 1 share for every two ordinary shares held as on 31.12.2012. v. To meet the cash requirements of redemption, the company sold a portion of the investments, so as to leave a minimum balance of Tk. 60,000 after such redemption. vi. Investments were sold at 90% cost as on 30.12.2012.


Required: (i) Necessary Journal entries. (ii) Cash and Bank Account. (iii) Statement of Financial Position as on 31.12.2012. E-11. The following trial balance was extracted from the books of Friends International Ltd., a manufacturing company, as at December 2011. Taka Taka Purchase 2,678,000 Prepayments 2,000 Selling and administrative expenses 175,000 Inventories at 1 January 2011 107,000 Land and buildings at cost 840,000 Plant and machinery at cost 714,000 Accumulated depreciation on buildings 166,000 at 1 January 2011 Accumulated depreciation on plant and 368,000 machinery at 1 January 2011 Accounts payable 80,000 Warranty provision 19,000 Loan interest 8,000 Mortgage 90,000 Mortgage interest 14,000 Administrative expense 153,000 Accounts receivables 105,000 Other payables 4,000 Retained earnings at 1 January 2011 138,000 General reserve 21,000 Ordinary share capital of Tk.10 each 382,000 Bank loan 58,000 Interest income 5,000 Share premium account 199,000 Bank deposit 4,000 Bank current account 20,000 Revenue _____3,290,000 4,820,000 4,820,000 You also obtain the following information. (i) Depreciation is to be provided on the straight-line method on buildings at 2% per annum and on plant and machinery at 20% per annum. The cost of the buildings at 31 December was Tk.650,000. (ii) Inventories at 31 December 2011 comprised raw materials Tk.113,000, work in process Tk.12,000 and finished goods Tk.54,000. (iii) The original mortgage of Tk.225,000 was taken out on 1 January 2002 for a term of 15 years, repayable in equal monthly installments on the 25 th day of each month. (iv) The bank loan was granted on 1 September 2008 for a fixed term of ten years. (v) Provision is to be made for income tax @ 37.5%, based on the results of the year. (vi) A transfer of Tk.21,000 was made to the general reserve during the year. Required: Prepare Friends International Ltd.‘s Statement of Comprehensive Income for the year ended 31 December 2011 and Statement of Financial Position at that date in accordance with the requirements of BAS 1.


E-12. As on December 31, 2001 the end of annual accounting period, the trial balance of the ledger of Mahmud Store are as follows:

Si. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Mahmud Store Trial Balance December 31, 2001 Name of Accounting Cash Accounts Receivable Merchandise inventory Purchase Prepaid Insurance Store Equipment Accumulated D/P – Store Equipment Accounts Payable Mahmud – Capital Mahmud – Drawings Sales Sales Return & Allowances Sales Discount Purchase Return & Allowances Purchase Discount Freight-in Freight-out Advertising Expenses Rent Expenses Salaries Expenses General Expenses Vat Current Account

Debit Tk. 90,000 166,000 300,000 3,310,000 38,000 800,000

Credit Tk.

170,000 190,000 900,000 220,000 4,830,000 150,000 72,000 100,000 64,000

Total

122,000 75,000 155,000 200,000 395,000 165,000 ______ 6,258,000

4,000 6,258,000

Additional information: (a) Merchandise inventory on hand at December 31, 2001 is Tk. 395,000. (b) Merchandise in transit at December 31, 2001 costing Tk. 5,000, which was shipped by a supplier under the terms F.O.B Shipping point and recorded as purchase but not included in ending Merchandise inventory. (c) Insurance expired during the period is Tk. 20,000. (d) Salaries accrued but not paid Tk. 10,000. (e) Depreciation expenses are changed during the period was Tk. 80,000. (f) General expenses include Tk. 15,000 for utilities, which is to be treated as selling expenses. Required: (i) Multiple Income Statement. (ii) Owner‘s Equity Statement. (iii) Balance Sheet. E-13. The adjusted trail balance of ZAZM & Co. and other related information for the year 2009 is presented below: ZAZM & Co. Adjusted Trial balance, December 31, 2009


Accounts Accrued Expenses Notes Payable Bonds Payable Capital Stock Premium on Capital Stock Retained Earnings Cash Accounts Receivable Allowance for Doubtful Accounts Prepaid Insurance Inventory Long-term Investments Land Construction WIP Patents Equipment Accumulated Depreciation on Equipment Unamortized Discount on Bonds Payable

Debits Tk. --------------41,000 163,500 --5,900 308,500 339,000 85,000 124,000 36,000 400,000 --20,000 1,522,900

Credits Tk. 148,000 49,200 94,000 400,000 500,000 45,000 138,000 ----8,700 --------------140,000 _____--1,522,900

Additional Information: (i) 600,000 shares of common stock at par value of Tk.1 were authorized, of which 500,000 shares were issued and outstanding. (ii) The bonds payable bear interest at 11% payable every December 31 and are due January 1, 2015. (iii) The inventory has a replacement market value of Tk.353,000. (iv) The cost and fair value of the long-term investments that consist of stocks and bonds is the same. (v) The amount of the construction work-in-progress account represents the costs expended to date on a building in the process of construction. (The company rents factory space at the present time). The land on which the building is being constructed cost Tk.85,000, as shown in the trial balance. (vi) The patents were purchased by the company at a cost of Tk.40,000 and are being amortized on a straight-line basis. (vii) Of the unamortized discount on bonds payable, Tk.2,000 will be amortized in 2009. (viii) The notes payable represent bank loans that are secured by long-term investments carried at Tk.120,000. These bank loans are due in 2009. Required: Prepare a balance sheet as of December 31, 2009, so that all important information is fully disclosed. E-14. The following trial balance has been extracted from the books of accounts of Keya International Ltd. as at 31 March, 2012. Taka Taka Purchases 960,000 Inventories (at 1 April 2011) 150,000 Accounts payable 260,000


Revenue Administrative expenses Ordinary share capital Accounts receivable Advance, deposit and prepayments Bank overdraft Provision for warranty costs Distribution costs Non-current asset investments Investment income Finance cost Freehold land and buildings at cost Term loan Plant and equipment at cost Plant and equipment – Accumulated depreciation (at 31 March 2012) Retained earnings (at 1 April 2011) Final dividend paid for 2011 Interim dividend paid for 2012

210,000 470,000 200,000 420,000 560,000 10,000 200,000 550,000 -

2,010,000 600,000 80,000 205,000 75,000 200,000 220,000

65,000 35,000 3,830,000

180,000 __ _3,830,000

Additional information: (i) Inventories at 31 March 2012 were valued at Tk. 160,000. (ii) The following items are already included in the balances listed in this trial balance. Distribution Administrative Cost Expense Depreciation charge for the year 27,000 5,000 Employee expense 150,000 80,000 (iii) The income tax charge for the year is estimated at Tk. 74,000. (iv) The warranty provision is to be increased by Tk. 16,000, charged to administrative expenses. Product warranty period is 2 years. (v) Staff bonuses totaling Tk. 40,000 are to be provided for, charged equally to distribution costs and administrative expenses. (vi) The freehold land and buildings were bought on the last day of the accounting period at a bargain price. They are to be revalued to Tk. 280,000. (vii) In May 2012 a final dividend for 2012 of 10 paisa per share was proposed on each of the company‘s 600,000 ordinary shares. Required: Prepare the following in the books of Keya International Ltd. (a) Statement of Comprehensive Income for the year ended 31 March 2012. (b) Statement of Changes in Equity for the year ended 31 March 2012. (c) Statement of Financial Position as at 31 March 2012 and (d) Notes to the financial statements (if required) in accordance with the requirements of BAS I. E-15. The following trial balance relates to Infincon Bangladesh Limited as at 31 March 2010: Taka (‘000) Taka (‘000) Revenue 213,800 Cost of sales 143,800 -


Closing inventories at 31 March 2010 [note (i)] 10,500 Operating expenses 17,200 Rental income from investment property 1,200 Financial costs [note (ii)] 5,000 Land and building valuation [note (iii)] 63,000 Plant and equipment at cost [note (iv)] 36,000 Accumulated depreciation on plant and equipment 16,800 at 1 April 2009 Investment property at valuation on 1 April 2009 [note (v)] 16,000 Plant held for sale 8,000 Trade receivables 13,500 Bank overdrafts 900 Trade payable 11,800 Ordinary shares of Tk.10 each 20,000 10% Redeemable preference shares of Tk.10 each 10,000 Revaluation reserve [note (iii)] 21,000 Retained earnings at 1 April 2009 17,500 313,000 313,000 The following notes are relevant: (i) An inventory count at 31 March 2010 listed some damaged goods that had cost Tk.800,000. These items could be sold for an estimated amount of Tk.500,000. (ii) Finance cost include an ordinary dividend of Tk.1 per share that was paid in September 2009. (iii) Land and building were revalued at Tk.15 million and Tk.48 million respectively on 1 April 2009 creating a Tk.21 million revaluation reserve. At this date the remaining life of the building was 15 years. Building is depreciated on straight line basis. The Company does not make a transfer to realized profits in respect to excess depreciation. (iv) Plant and equipment is depreciated at 12.5% on the reducing balance basis. Depreciation on both the building and the plant and equipments should be charged to cost of sales. (v) On 31 March 2010 a qualified surveyor valued the investment property at Tk.13.5 million. The Company uses the fair value model as stated in BAS 40 to value investment property. (vi) The rate of corporate income tax is 37.5%. Required: (i) Prepare the income statement for the year ended 31 March 2010; and (ii) Prepare the balance sheet as at 31 March 2010. (Notes to financial statements are not required.) E-16. STAR Company Private Ltd. registered under Company Act‘ 1994. Submits the following trial balance as of 31 December, 2008. Accounts Title Cash Investment in Land Customer Receivable Inventory Prepaid Expenses Land

Dr. (Tk.) 1,20,000 1,70,000 3,02,000 56,000 54,000 2,60,000

Cr. (Tk.)


Plant & Machineries Other Assets (non-current) Sales on Accounts Contractor Payable Accrued Wages Unearned Revenue Debentures Other Liabilities Common Stock Retained Earnings Cash Sales Interest Revenue Gain on Condemnation of Land by Govt. Cost of Goods Sold Commercial and General Overhead Loss from tidal bore charge Financial Expenses Income Tax Operating Loss on discontinued business Dividends Sales Allowances Total

11,67,000 15,63,000 10,50,000 2,40,000 2,20,000 33,000 12,00,000 3,36,000 2,90,000 11,08,000 19,00,000 23,000 2,00,000 15,65,000 6,40,000 1,50,000 70,000 2,73,000 60,000 1,00,000 50,000 66,00,000

______ 66,00,000

Additional Information: (i) Inventory includes spoiled & not saleable goods worth Tk.6,000. (ii) Commercial and General Overhead incorrectly includes Tk.15,000 for office furniture purposes (other assets). The purchases were made on December‘30. (iii) The prepaid expenses were paid on September‘1 and relate to a 3 years insurance policy that went into effect on September‘1. (iv) The unearned revenue relates to rental of an unused portion of the corporate offices Tk.33,000 received on April‘1 and represents payment in advance for one year‘s rental. (v) Plant & Machineries includes Tk.10,000 for equipment repairs that were erroneously recorded as machineries purchases. The repair made on December‘30. (vi) Other assets include Tk.80,000 for miscellaneous office supplies which were purchased on mid October. At the end of the year count reveals that only Tk.6,500 of office supplies remains. (vii) It has been decided that un-collectible account expenses will be Tk.2,000 for which provision was not made earlier. The account of M/s Khan & Co. will we written off for this purpose. Required: (i) Adjusting Entries needed for above transaction; (ii) Income Statement for the year ended December 31, 2008; and (iii) Balance Sheet as on December 31, 2008. E-17. Quality Feeds Limited closed its books of Accounts as on 30.06.2014. The followings are the balances taken from the ledger of the Company:


Cash and Bank Accounts Receivable Inventory 01 July, 2013 Store Supplies Office Supplies Prepaid Insurance Store Equipment Accumulated Depreciation (Store Equipment) Office Equipment Accumulated Depreciation (Office Equipment) Accounts Payable Mortgage Notes Payable (due 2018) Capital Sales Sales Discount Sales Return Purchase Purchase Return Purchase Discount Sales Salaries Delivery Expenses Rent Expenses Freight-in Office Salaries Office Expenses Misc. General Expenses Gain on disposal of Assets Interest Expenses Land Adjustment of June 30, 2014 are as follows: a) The Inventory on hand b) Supplies on hand: Office Supplies Store Supplies c) Insurance Expires during the year: Allocable to selling expenses Allocable to general expenses d) Equipments are depreciated a the rate of 10% per annum. e) Accrued sales salaries f) Accrued office salaries g) Accrued interest on the mortgage notes payable h) Income tax is estimated at 45% of the income. Required: (a) Prepare Income Statement for the year ended June 30, 2014 and (b) Balance Sheet as at June 30, 2014. (c) Prepare adjusting entries.

Taka 240,000 672,000 648,000 16,000 5,800 25,000 170,000 45,000 52,000 16,000 360,000 600,000 528,000 2,460,000 54,000 33,600 1,384,800 78,000 31,600 246,000 68,000 48,000 36,000 136,000 15,000 13,600 7,200 30,000 232,000 507,200 2,200 9,000 9,700 2,600 4,600 2,100 4,800


E-18. The following is the Trial Balance of M/S Aziz & Co. as on December 31, 2010: Debit (Tk.) Credit (Tk.) Capital 7,05,000 Sales 18,98,550 Purchase 12,97,500 Sales Returns 5,250 Accounts Receivable 1,24,500 Cash 63,000 Petty Cash 7,500 Bank Account 3,67,500 Notes Receivable 18,000 Notes Receivable Discounted 15,000 Office Supplies 25,500 Prepaid Insurance 15,750 Accounts Payable 1,87,500 Notes Payable 75.000 Allowance for Bad Debts 9,000 Inventory (1-1-2010) 3,75,000 Delivery Equipment 4,05,000 Accumulated Depreciation-Delivery Equipment 2,02,500 Furniture and Fixtures 1,12,500 Accumulated Depreciation-Furniture and Fixtures 22,500 Machinery and Equipment 3,75,000 Accumulated Depreciation-Machinery and Equipment 75,000 Retained Earnings 69,000 Advertising 18,000 Delivery Salaries 54,000 Office Salaries 39,000 Interest Income 15,450 Interest Expenses 24,000 Suspense Account _______ 52,500 33,27,000 33,27,000 The following adjustments are to be made on December 31, 2010 before closing the books: 1. Inventory on hand at December 31, 2010 Tk. 3,90,000 2. Office supplies Tk. 10,500 3. Bad debt allowance is to be increased by Tk. 12,000 4. Depreciation is to be charged: Delivery Equipment-10%, Furniture and Fixtures-15% and Machinery and Equipment-5% 5. Accrued delivery salaries Tk. 18,000 6. Prepaid insurance Tk. 5,250 7. Unearned interest income Tk. 1,500 8. Delivery Equipment purchased 5 years back, with Book Value of Tk. 37,500 sold out at Tk. 52,500 and erroneously credited the sale proceeds to Suspense Account. 9. Advertising expense includes Tk. 8,100 for new product to be sold in 2011. Required: (i) Prepare a multiple-step income statement for the year and a classified balance sheet as on December 31, 2010. (ii) Pass adjusting and closing entries.


E-19. Square Services Ltd. has the following post-closing trial balance for 2011: Cash Accounts receivable Supplies inventory, feed Supplies inventory, straw Land Buildings Accumulated depreciation, buildings Equipment Accumulated depreciation, equipment Accounts payable Income taxes payable Interest payable Wages payable Notes payable (due in 2015) Capital stock Retained earnings

Tk.2,200 4,400 24,100 3,700 1,67,000 1,15,000 36,000 57,000 16,500 23,700 15,100 4,200 14,200 60,000 1,50,000 53,700

During 2012, the following transactions occurred: (a) Squares Services Ltd. provided services, all on credit, for Tk.2,10,300. It rented some facilities to customers and received cash Tk.20,500. It earned Tk.41,800 in cash by providing miscellaneous services. (b) It collected all the account receivable outstanding at December 31, 2011. There remains Tk.15,600 of account receivable to be collected at December 31, 2012. (c) Feed amounting Tk.62,900 was purchased on credit during the year 2012. (d) Straw was purchased for Tk.7,400 cash during the year 2012. (e) Wages payable at the beginning of 2012 were paid in 2012. Wages earned and paid during 2012 amounting Tk.1,12,000. (f) The income taxes payable for 2011 were paid in 2012. The account payable remains unpaid at year-end Tk.13,600. (g) One year‘s interest @14% was paid on notes payable on July 1, 2012. (h) Property taxes were paid on Land and Buildings in the amount of Tk.14,000. (i) Dividends were declared and paid amounting Tk.7,200. The following data are available for adjustments: (a) Feed of an amount of Tk.26,000 remained unused at year-end. Straw of an amount of Tk.4,400 remained unused at year-end. (b) The buildings are being depreciated over 15 years, with a residual value of Tk.25,000. (c) The equipment is being depreciated over 10 years, with a residual value of Tk.2,000. (d) Wages of Tk.4,000 were unrecorded and unpaid at year-end. (e) Interest for 6 months @14% on notes payable is unpaid and unrecorded at year-end. (f) The income tax rate is 30%. Required: (i) Give journal entries for the transactions of 2012. (ii) Prepare the adjusting entries. (iii) Prepare Comprehensive Income Statement.


E-20. Hussein Ltd is a company which makes exclusive furniture to customers' precise specifications. An extract from Hussein Ltd's general ledger at 31 December 2016 is as follows: Particulars Taka Taka Raw materials and consumables 1,570,000 Salaries and wages 1,250,500 Work in progress inventories at 1 January 2016 45,600 Finished goods inventories at 1 January 2016 13,400 Land and buildings at cost (cost of land Tk.2,000,000) 3,600,000 Plant and machinery at cost 520,000 Office furniture at cost 32,000 Accumulated depreciation on buildings at 1 January 2016 640,000 Accumulated depreciation on plant and machinery at 1 January 2016 375,000 Accumulated depreciation on furniture at 1 January 2016 28,500 Intangible assets 15,000 Operating expenses 10,000 Accounts and other receivables 37,500 Accounts and other payables 25,400 Retained earnings at 1 January 2016 1,968,600 Ordinary share capital of Tk.10 each 500,000 4% Redeemable preference share capital of Tk.10 each 120,000 Share premium account 200,000 Cash and cash equivalents 263,500 Revenue _______3,500,000 7,357,500 7,357,500 The following additional information is relevant: (a) Closing inventories at cost amounted to work in progress of Tk.50,200 and finished goods of Tk.15,000. The finished goods included a table with a cost of Tk.5,000. The customer who had ordered this table has been declared bankrupt. He had paid a Tk.1,000 deposit (which has been credited to revenue) and owed Tk.10,000 at the yearend in respect of other items. It is estimated that the table can be sold for Tk.4,000. (b) The old furniture were all scrapped. During the year the company used employees‘ idle time which amounted to a cost to the company of Tk.20,500 to produce new furniture for the company‘s offices. Raw materials costing Tk.54,000 were used. No adjustment has been made for these in the above. (c) Land and buildings were revalued for the first time on 1 January 2016. The surveyor performing the valuation estimated a valuation of Tk.5 million (including Tk.4 million for the land). Buildings will be continued to be depreciated on a straight line basis at a rate of 4%; but Hussein Ltd made no transfer between the revaluation reserve and retained earnings in respect of this. (d) Plant is depreciated at a reducing balance basis at a rate of 20%. Office furniture is depreciated on a 15% straight line basis. Depreciation on the building and the plant should be charged to cost of sales. (e) The intangible asset relates to a patent acquired on the purchase of a sole trader on 1 January 2016. The patent is considered to have a useful life of 20 years. The annual impairment review has indicated that the patent has a recoverable value at 31 December 2016 of Tk.14,000. (f) On 1 December 2016 the company made a 1 for 5 bonus issues of its ordinary shares against the share premium account. No entries have been made in respect of this. (g) The preference shares are redeemable in 2018. Dividends of Tk.1 per share on the ordinary shares and at the coupon rate on the preference shares were declared on 31 December 2016 and paid early in 2017. The income tax charge for the period has been estimated at Tk.250,000.


Requirement: (i) An income statement for Hussein Ltd for the year ended 31 December 2016. (ii) A balance sheet as at that date in a form suitable for publication. E-21. OTC‘s trial balance at 31 May 2016 is shown below:

5% Loan notes (issued 2013, redeemable 2024) Administrative expenses Cash received on sale of equipment Cash and cash equivalents Cost of sales Distribution costs Equity dividend paid 1 October 2015 Income tax Inventory at 31 May 2016 Land and buildings at cost at 1 June 2015 Loan interest paid Equity shares Tk.1 each, fully paid at 1 June 2015 RDX ordinary shares purchased Plant and equipment at cost at 1 June 2015 Provision for deferred tax at 1 June 2015 Provision for buildings depreciation at 1 June 2015 Provision for plant and equipment depreciation at 1 June 2015 Retained earnings at 1 June 2015 Sales revenue Share premium Trade payables Trade receivables

Notes Tk.000 (ix) 779 (v) 207 4,080 650 (vii) 335 (ii) 24 (i) 1,055 5,180 37

Tk.000 1,480 23

5,650 (viii) (v) (iii) (iv)

135 4,520 282 262

(vi)

(x)

2,590 19,592

2,260 1,990 6,780 565 300 _____ 19,592

Notes: (i) OTC has always valued its inventories using a manual system. On 1 June 2015 OTC purchased and installed a computerized inventory system and changed its inventory valuation method to the industry standard method. The impact on inventory valuation due to the change in policy was calculated as: Inventory value increase at 31 May 2015 by Tk.148,000. Inventory value increase up to 31 May 2016 by Tk.210,000. (ii) The income tax balance in the trial balance is a result of the under provision for the year ended 31 May 2015. (iii) The tax due for the year ended 31 May 2016 is estimated at Tk.160,000 and the deferred tax provision should be decreased by Tk.30,000. (iv) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land included in land and buildings is Tk.3,000,000. Buildings depreciation is treated as an administrative expense. (v) During the year OTC disposed of old equipment for Tk.23,000. The original cost of the equipment sold was Tk.57,000 and its book value at 31 May 2015 was Tk.6,000. (vi) Plant and equipment is depreciated at 20% per annum using the reducing balance method. Depreciation of plant and equipment is considered to be part of cost of sales.


OTC‘s policy is to charge full year‘s depreciation in the year of acquisition and no depreciation in the year of disposal. (vii) During the year OTC paid a dividend of Tk.335,000 for the year ended 31 May 2015. (viii) OTC purchased and cancelled 100,000 of its own equity shares on 31 May 2016 for Tk.135,000. These shares had originally been issued at a 10% premium. (ix) Long term borrowings consist of loan notes issued on 1 June 2013 at 5% interest per annum. (x) On 22 June 2016 OTC discovered that CIT, one of its customers, had gone into liquidation. OTC has been informed that it will receive none of the outstanding balance of Tk.230,000 at 31 May 2016. Required: (a) Explain how the change in inventory accounting policy should be recorded in OTC‘s financial statements for the year ended 31 May 2016, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. (b) Prepare OTC‘s statement of profit and loss and statement of changes in equity for the year to 31 May 2016 and the statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are not required, but all workings must be clearly shown. Do NOT prepare a statement of accounting policies. E-22. MNC‘s trial balance at 31 March 2016 is shown below: Notes 4% Loan notes (redeemable 2024) Administrative expenses Amortization of deferred development expenditure Cash and cash equivalents Deferred development expenditure Distribution costs Equity dividend paid 1 September 2015 Income tax Inventory at 31 March 2016 Cost of sales Land and buildings at cost at 1 April 2015 Loan interest paid Ordinary shares Tk.1 each, fully paid at 1 April 2015 Plant and equipment at cost at 1 April 2015 Provision for deferred tax at 1 April 2015 Provision for buildings depreciation at 1 April 2015 Provisions for plant and equipment depreciation at 1 April 2015 Retained earnings Sales revenue Share premium at 1 April 2015 Trade payables Trade receivables Suspense account

Tk.000

Tk.000 500

190 30 (i)

(ii)

42 150 72 62 8 214 1,605 2,410 10 930 560

(iii) (v)

86 386

(v)

185 621 2,220 310 190

(iv)

130 ___5 5,458

____ 5,458


Additional information: (i) Deferred development expenditure is being amortised at 10% p.a. on the straight line basis. (ii) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 31 March 2015. (iii) The tax due for the year ended 31 March 2015 is estimated at Tk.83,000 and the deferred tax provision needs to be increased by Tk.25,000. (iv) The suspense account is comprised of two items: • Expenditure of Tk.20,000 incurred during the year on original research aimed at possibly finding a new material for MNC to use in manufacturing its products. • Tk.15,000 cash received from disposal of some plant and equipment that had an original cost of Tk.82,000 and a carrying value of Tk.3,000. The only entries made in MNC‘s ledgers for these items were in cash and cash equivalents and suspense account. (v) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land included in land and buildings is Tk.800,000. Buildings depreciation should be included in administrative expenses. Depreciation of plant and equipment is at 12.5% on the reducing balance basis and is treated as part of the cost of sales. MNC‘s policy is to charge a full year‘s depreciation in the year of acquisition and no depreciation in the year of disposal. (vi) On 1 July 2015 one of MNC‘s customers started litigation against MNC, claiming damages caused by an allegedly faulty product. MNC has been advised that it will probably lose the case and the claim for Tk.25,000 will probably succeed. (vii) On 1 August 2016 MNC was advised that one of its customers, that had been in some financial difficulties at 31 March 2016, had gone into liquidation and that the Tk.32,000 balance outstanding at 31 March 2016 was very unlikely to be paid. MNC has not previously made any provision for legal claims or bad debts. Required: (a) Prepare journal entries, with a short narrative, to eliminate the balance on MNC‘s suspense account. (b) Prepare the statement of comprehensive income and a statement of changes in equity for MNC for the year to 31 March 2016 and a statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards. All workings must be clearly shown.


CHAPTER - 3 FINANCIAL RATIO ANALYSIS

3.1. CONCEPT OF RATIO ANALYSIS Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure to other relevant figure or figures. It is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statements. 3.2. ADVANTAGES OF RATIO ANALYSIS There are various groups of people who are interested in analysis of financial position of a company. They use the ratio analysis to workout a particular financial characteristic of the company in which they are interested. Ratio analysis helps the various groups in the following manner: a) To workout the profitability: Accounting ratio help to measure the profitability of the business by calculating the various profitability ratios. It helps the management to know about the earning capacity of the business concern. In this way profitability ratios show the actual performance of the business. b) To workout the solvency: With the help of solvency ratios, solvency of the company can be measured. These ratios show the relationship between the liabilities and assets. c) Helpful in analysis of financial statement: Ratio analysis help the outsiders just like creditors, shareholders, debenture-holders, bankers to know about the profitability and ability of the company to pay them interest and dividend etc. d) Helpful in comparative analysis of the performance: With the help of ratio analysis a company may have comparative study of its performance to the previous years. In this way company comes to know about its weak point and be able to improve them. e) To simplify the accounting information: Accounting ratios are very useful as they briefly summarise the result of detailed and complicated computations. f) To workout the operating efficiency: Ratio analysis helps to workout the operating efficiency of the company with the help of various turnover ratios. All turnover ratios are worked out to evaluate the performance of the business in utilising the resources. g) To workout short-term financial position: Ratio analysis helps to workout the shortterm financial position of the company with the help of liquidity ratios. In case short-term financial position is not healthy efforts are made to improve it.


h) Helpful for forecasting purposes: Accounting ratios indicate the trend of the business. The trend is useful for estimating future. With the help of previous years‘ ratios, estimates for future can be made. 3.3. LIMITATIONS OF RATIO ANALYSIS In spite of many advantages, there are certain limitations of the ratio analysis techniques and they should be kept in mind while using them in interpreting financial statements. The following are the main limitations of accounting ratios: a) Limited comparability: Different firms apply different accounting policies. Therefore the ratio of one firm can not always be compared with the ratio of other firm. Some firms may value the closing stock on LIFO basis while some other firms may value on FIFO basis. Similarly there may be difference in providing depreciation of fixed assets or certain of provision for doubtful debts etc. b) False results: Accounting ratios are based on data drawn from accounting records. In case that data is correct, then only the ratios will be correct. For example, valuation of stock is based on very high price, the profits of the concern will be inflated and it will indicate a wrong financial position. The data therefore must be absolutely correct. c) Effect of price level changes: Price level changes often make the comparison of figures difficult over a period of time. Changes in price affect the cost of production, sales and also the value of assets. Therefore, it is necessary to make proper adjustment for pricelevel changes before any comparison. d) Qualitative factors are ignored: Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative factors, which may be important in decision making. For example, average collection period may be equal to standard credit period, but some debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis. e) Costly technique: Ratio analysis is a costly technique and can be used by big business houses. Small business units are not able to afford it. f) Absence of standard: There are no standard ratios, which are universally accepted for comparison purposes. As such, the significance of ratio analysis technique is reduced. 3.4. DIFFERENT TYPES OF RATIOS Ratios can be classified into various groupings, according to the type of information they convey. The main groupings are as follows: a) Current ratio: The current ratio is a liquidity ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. b) Quick ratio: The quick ratio is a measure of how well a company can meet its short-term financial liabilities. It is also known as the acid-test ratio. It compares the total amount of cash + marketable securities + accounts receivable to the amount of current liabilities.


c) Asset turnover ratio: Asset turnover ratio is the ratio of the value of a company's sales or revenues generated relative to the value of its assets. The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. d) Working capital ratio: The working capital ratio is the same as the current ratio. It is the relative proportion of an entity's current assets to its current liabilities, and is intended to show the ability of a business to pay for its current liabilities with its current assets. e) Profitability (or performance) ratios: Profitability ratios indicate management's ability to convert sales taka into profits and cash flow. The common profitability ratios are gross margin, operating margin, net profit margin and return on capital employed. f) Liquidity (or solvency) ratios: The term ‗liquidity‘ refers to the ability of a concern to meet its long term obligations. The most common liquidity ratio is the current ratio, which is the ratio of current assets to current liabilities. This ratio indicates a company's ability to pay its short-term bills. g) Efficiency (or use of assets) ratios: Two common efficiency ratios are inventory turnover and receivables turnover. Inventory turnover is the ratio of cost of goods sold to inventory. The receivables turnover ratio is the ratio of credit sales to accounts receivable, which tracks outstanding credit sales. h) Capital structure (or gearing) ratios: The term capital structure refers to the relationship between various long term forms of financing such as debentures (long term), preference share capital and equity share capital including reserves and surpluses. Leverage or capital structure ratios are calculated to test the long term financial position of a firm. Generally capital gearing ratio is mainly calculated to analyse the leverage or capital structure of the firm. i) Security (or investors) ratio: Security or investors ratio is the measurement tools for company debt obligations against its assets. Security ratio allows the banker‘s to reasonably predict the future earnings of the company and to asses the risk of insolvency. This shows the overall liquidity position of company‘s current financial situation. j) Return on capital employed: Return on capital employed is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. A higher return on capital employed indicates more efficient use of capital. k) Trade receivables collecting period: The trade receivables collection period ratio represents the time lag between a credit sale and receiving payment from the customer. As trade receivables relate to credit sales so the credit sales figure should be used to calculate the ratio. However the amount of credit sale is usually not separately available in the income statement so in that case total sales could be used.


l) Trade payables payment period: The trade payables payment period ratio represents the time lag between a credit purchase and making payment to the supplier. As trade payables relate to credit purchases so credit purchases figure should be used in calculating this ratio. However as the amount of credit purchase is usually not separately available in the income statement so in that case total purchases could be used.


SELF PRACTICE QUESTIONS 1. Identify the limits of ratio analysis. 2. Discuss the steps or ways to shorten Working capital cycle. 3. State the Limitations of Ratio analysis.


SELF PRACTICE QUESTIONS ANSWER 1. In spite of many advantages, there are certain limitations of the ratio analysis techniques and they should be kept in mind while using them in interpreting financial statements. The following are the main limitations of ratio analysis: (a) Limited comparability (b) False results (c) Effect of price level changes (d) Qualitative factors are ignored (e) Costly technique (f) Absence of standard 2. The steps or ways to shorten Working capital cycle: (a) Reduce raw materials inventory holding (b) Obtain more finance from suppliers by delaying payments (c) Reduce work-in-process by reducing production volume, improving production technique and bringing more efficiency (d) Reducing finished goods inventory (e) Reduce credit given to customers (shortening credit period or offering discount incentives for quicker collection or receivables) 3. In spite of many advantages, there are certain limitations of the ratio analysis techniques and they should be kept in mind while using them in interpreting financial statements. The following are the main limitations of ratio analysis: (a) Limited comparability (b) False results (c) Effect of price level changes (d) Qualitative factors are ignored (e) Costly technique (f) Absence of standard


PROBLEMS AND SOLUTIONS P-1. Calculate inventory turnover and days inventories outstanding for ABC, Incorporation based on the information given below: Opening inventories Closing inventories Cost of goods manufactured

Tk.25,000 Tk.30,000 Tk.245,000

Solution: Cost of goods sold = Tk.25,000 + Tk.245,000 – Tk.30,000 = Tk.240,000 Tk.25,000  Tk.30,000 2 = Tk.27,500

Average inventories =

Inventory turnover ratio =

Cost of goods sold Average inventories

Tk.240,000 Tk.27,500 = 8.73 =

365 8.73 = 41.81

Days inventories outstanding =

P-2. From the following extracts of the draft balance sheet, calculate the current ratio and quick (or, acid test) ratio and also give comments. Asset: Non-current assets Current assets: Stock in trade Accounts receivable Cash at bank

Taka

10 6 4 Total

Liabilities: Non-current liabilities Current liabilities: Accounts payables Pre-paid and advances Loan repayable in five years

Taka 15

20 35 20

8 4 3 Total

15 35


Solution:

Current assets Current liabilitie s Tk.20 = Tk.15 = 1.33:1

Current Ratio =

Comment: This means for every Tk.1 owed by the company it has Tk.1.33 in assets to pay the debt. Quick (or, acid test) Ratio =

Current assets excluding stock in trade Current liabilitie s Tk.20  Tk.10 = Tk.15 = 0.67:1

Comment: This means for every Tk.1 debt, the company has most liquid assets Tk.0.67 to pay the debt. P-3. Nokia sells mobile telephones. The company has employed you as a consultant to install a balanced scorecard system of performance measurement and to benchmark the results. The financial and operating data for the year ended 31 December 2016 is available: Taka ‘000 Sales revenue 500 Opening capital employed 100 Closing capital employed 300 Opening equity 100 Closing equity 200 Operating profit 50 Calculate the following performance ratios: (a) Return on capital employed (b) Return on Sales (c) Return on equity (d) Net asset turnover Solution: (a) Return on capital employed =

Operating profit Average capital employed

Here, Tk.100,000  Tk.300,000 2 = Tk.200,000

Average capital employed =


Tk.50,000 Tk.200,000 = 25%

Return on capital employed =

Comment: This means that for every Tk.100 capital invested in the business, operating profit is generated by Tk.25.

Operatingprofit Sales revenue Tk.50,000 = Tk.500,000 = 10%

(b) Return on sales =

Comment: This means that if the company sells Tk.100, it makes operating profit Tk.10. (c) Return on equity =

Pr ofit for the year Average equity

Here, Tk.100,000  Tk.200,000 2 = Tk.150,000

Average equity =

Tk.50,000 Tk.150,000 = 33%

Return on equity =

Comment: This means that for every Tk.100 capital invested by the shareholders, final profit is generated by Tk.33. Sales revenue (d) Net asset turnover = Capital employed (or net assets) Tk.500,000 = Tk.200,000 = 2.5 times Comment: This means for every Tk.1 invested in the business Tk.2.5 of sales revenue has been generated. P-4. Income statement for the year ended December 31, 2016 and Comparative Statement of Financial Position as on December 31, 2016 of Hamid Corporation are given below: Hamid Corporation Comparative Statement of Financial Position As at December 31, 2016 Liabilities & Owners’ Equity Current Liabilities: Bank Overdraft

Taka Assets Current Asset: 30,000 Cash at Bank

Taka 30,000


Sundry Creditors: Interest expense Credit purchase

20,000 Accounts Receivables 80,000 Stock-in-trade Bill Receivables 130,000 Total Current Asset: - Long-term Asset: 130,000 Machinery & Equipment 200,000 Building 60,000 Net Long-term Asset: 90,000 480,000 Total Assets

Total Current Liabilities: Long Term Debt Total Liabilities: Common Stock (Tk.10 each) Profit & Loss Account General Reserve Total Liabilities & Owners’ Equity

70,000 140,000 10,000 250,000 80,000 150,000 230,000 480,000

Hamid Corporation Income Statement For the year ended December 31, 2016 Particulars Cost of Sales: Opening Stock Add: Purchases Less: Closing Stock Gross Profit c/d Sales expenses Office expenses Financial expenses Loss on sales of fixed assets Net Profit

Taka

Particulars Sales

90,500 559,500 650,000 140,000 510,000 340,000 850,000 30,000 Gross Profit b/d 150,000 Profit on sales of investments 15,000 Interest on investments 4,000 150,000 349,000

Taka 850,000

850,000 340,000 6,000 3,000

349,000

From the above financial statements calculate the following ratios and give your comments: (a) Gross profit margin (b) Gross profit mark-up (c) Net profit margin (d) Working capital turnover ratio (e) Return on investment ratio. Solution:

Gross profit Sales revenue Tk.340,000 = Tk.850,000 = 40%

(a) Gross profit margin =

Comment: Gross profit ratio is 40% means that the company may reduce the selling price of its products by 40% without incurring any loss.


Gross profit Cost of sales Tk.340,000 = Tk.510,000 = 67%

(b) Gross profit mark-up =

Comment: It shows that the selling price of the goods was equal to the cost of those goods plus 67 per cent of the cost.

Net profit Net sales Tk.150,000 = Tk.850,000 = 18%

(c) Net profit margin =

Comment: Net profit ratio is 18% means that the company may reduce the selling price of its products by 18% without incurring any loss. (d) Working capital turnover ratio =

Sales revenue Net working capital

Here, Net working capital = Current assets – Current liabilities = Tk.250,000 – Tk.130,000 = Tk.120,000

Tk.850,000 Tk.120,000 = 7 times

Working capital turnover ratio =

Comment: The working capital turnover ratio is 7. It means the company has turned over its working capital 7 times in 2016. Net profit Total assets Tk.150,000 = Tk.480,000 = 31%

(e) Return on investment ratio =

Comment: Return on investment ratio is 31% means that if Tk.100 is invested profit will be Tk.31. P-5. Shown below are selected data from the financial statements of Azhar & Sons, a retail furniture store:


Taka From the balance sheet: Cash Accounts receivable Inventory Plant assets (net of accumulated depreciation) Current liabilities Total stockholders‘ equity Total assets From the income statement: Net sales Cost of goods sold Operating expenses Interest expenses Income tax expenses Net income From the statement of cash flows: Net cash provided by operating activities (including interest expenses paid of Tk.79,000) Net cash used in investing activities Financing activities: Amount borrowed Repayment of amount borrowed Dividend paid Net cash provided by financing activities Net increase in cash during the year

Taka 30,000 150,000 200,000 500,000 150,000 300,000 1,000,000 1,500,000 1,080,000 315,000 84,000 6,000 15,000

40,000 (46,000) 50,000 (14,000) (20,000) 16,000 10,000

Required: (a) Explain how the interest expense shown in the income statement could be Tk.84,000, when interest payable appearing in the statement of cash flow is only Tk.79,000. (b) Compute the following (round to one decimal place): (i) Current ratio; (ii) Quick ratio; (iii) Working capital; and (iv) Debt ratio. (c) Compute the following ratios (assume that the year-end amounts of total assets and total stockholders‘ equity also represents the average amount throughout the year): (i) Return on assets; and (ii) Return on equity. (d) Compute on the company‘s performance under these measurements. Solution: (a) Cash flow statement consider cash flows and outflows only, on the other hand, income statement is reported with any expense (in this case interest expense) for a particular period irrespective which are paid in cash or not. That means cash expense is adjusted for period and accrued interest to determine the actual expense during a particular reporting period. So, the difference between cash expenses paid (Tk.79,000) and actual expenses shown in the income statement (Tk.84,000) indicate outstanding/accrued expenses for that period.


(b)

Tk.380,000 Tk.150,000 = 2.5:1

(i) Current ratio =

Tk.180,000 Tk.150,000 = 1.2:1

(ii) Quick ratio =

(iii) Working capital = Current assets – Current liabilities = Tk.380,000 – Tk.150,000 = Tk.230,000

Tk.1,000,000  Tk.300,000 X 100 Tk.1,000,000 = 70%

(iv) Debt ratio =

(c)

Operating income 1 Average total assets Tk.105,000 = X 100 Tk.1,000,000 = 10.5%

(i) Return on assets =

Net income Average total equity Tk.15,000 = X 100 Tk.300,000 = 15%

Return on equity =

(d) The company‘s profitability and liquidity position is good in spite of high debt ratio. Working: 1. Computation of operating income: Net sales Less: Cost of goods sold Less: Operating expenses Operating income

Tk.1,500,000 1,080,000 420,000 315,000 105,000

P-6. Hosaf Ltd. is a public company that would like to acquire (100%) a suitable private company. It has obtained the following draft financial statements for two companies, Padma Ltd. and Jamuna Ltd. They operate in the some industry and their managements have indicated that they would be receptive to a takeover.


Income statements for the year ended 30 September 2008 Tk. ’000 Revenue Cost of sales Gross profit Operating expenses Finance costs-loan Overdraft Lease Profit before tax Income tax expense Profit for the year Note: dividends paid during the year

Padma Ltd. Tk.’000 12,000 (10,500) 1,500 (240) (210) nil nil 1,050 (150) 900 250

Jamuna Ltd. Tk. ’000 20,500 (18,000) 2,500 (500) (300) (10) (290) 1,400 (400) 1,000 700

Statements of financial position as at 30 September 2008 Profit for the year Assets Non-current assets Freehold factory [note (i)] Owned plant [note (ii)] Leased plant [note (ii)] Current assets Inventory Trade receivables Bank Total assets Equity and liabilities Equity shares of Tk. 1 each Property revaluation reserve Retained earnings Non-current liabilities Finance lease obligations [note (iii)] 7% loan notes 10% loan notes Deferred tax Government grants Current liabilities Bank overdraft Trade payables Government grants Finance lease obligations [note (iii) Taxation Total equity and liabilities

2,000 2,400 600

900

1,000

4.400 5,000 Nil 9,400

Nil 2,200 5,300 7,500

5,000 14,400

3,600 3,700 Nil

2,000 900 2,600

Nil 3,000 Nil 600 1,200 Nil 3,100 400 Nil 600

3,500 5,500

4,800

4,100 14,400

7,300 14,800 2,000

Nil 800

3,200 Nil 3,000 100 Nil 1,200 3,800 Nil 500 200

800 2,800

6,300

5,700 14,800


Notes: (i) Both companies operate from similar premises. (ii) Additional details of the two companies‘ plant are: Padma Ltd. Jamuna Ltd. Tk. ’000 Tk. ’000 Owned plant – cost 8,000 10,000 Leased plant – original fair value Nil 7,500 There were no disposals of plant during the year by either company. (iii) The interest rate implicit within Jamuna Ltd.‘s finance leases is 7.5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest bearing borrowings. (iv) The following ratios have been calculated for Padma Ltd. and can be taken to be correct: Return on year end capital employed (ROCE) 14.8% (capital employed taken as shareholders‘ funds plus long-term interest bearing borrowings – see note (iii) above) Pre-tax return on equity (ROE) 19.1% Net asset (total assets less current liabilities) turnover 1.2 times Gross profit margin 12.5% Operation profit margin 10.5% Current ratio 1.2:1 Closing inventory holding period 70 days Trade receivables‘ collection period 73 days Trade payables‘ payment period (using cost of sales) 108 days Gearing [see note (iii) above] 35.3% Interest cover 6 times Dividend cover 3.6 times Required: (a) Calculate for Jamuna Ltd. the ratios equivalent to all those given for Padma Ltd. above. (b) Assess the relative performance and financial position of Padma Ltd. and Jamuna Ltd. for the year ended 30 September 2008 to inform the directors of Hosaf Ltd. in their acquisition decision. Solution: (a) Calculation of equivalent ratios from the financial statements of Jamuna Ltd.: Return on year end capital employed (ROCE) Tk.1,400,000  Tk.590,000 = X 100 Tk.2,800,000   Tk.3,200,000  Tk.500,000  Tk.3,000,000 = 20.9%

Tk.1,400,000 X 100 Tk.2,800,000 = 50%

Pre-tax return on equity (ROE) =

Tk.20,500,000 Tk.14,800,000  7,500,000 = 2.3 times

Net asset turnover =


Tk.2,500,000 X 100 Tk.20,500,000 = 12.2%

Gross profit margin =

Tk.2,000,000 X 100 Tk.20,500,000 = 9.8%

Operating profit margin =

Tk.7,300,000 Tk.5,700,000 = 1.3:1

Current ratio =

Tk.3,600,000 X 365 Tk.18,000,000 = 73 days

Closing inventory holding period =

Tk.3,700,000 X 365 Tk.20,500,000 = 66 days

Trade receivables‘ collection period =

Tk.3,800,000 X 365 Tk.18,000,000 = 77 days

Trade payables‘ payment period =

Tk.3,200,000  Tk.500,000  Tk.3,000,000 X 100 Tk.9,500,000 = 71%

Gearing =

Tk.2,000,000 Tk.600,000 = 3.3 times

Interest cover =

Tk.1,000,000 Tk.700,000 = 1.4 times

Dividend cover =

(b) Assessment of the relative performance and financial position of Padma Ltd. and Jamuna Ltd. for the year ended 30 September 2008. Introduction: This report is based on the draft financial statements supplied and the ratios shown in (a) abo Although covering many aspects of performance and financial position, the report has been approached from the point of view of a prospective acquisition of the entire equity of one of the two companies.


Profitability: The ROCE of 20.9% of Jamuna Ltd. is far superior to the 14.8% return achieved by Padma. ROCE is traditionally seen as a measure of management‘s overall efficiency in the use of the finance/ assets at its disposal. More detailed analysis reveals that Jamnua Ltd.‘s superior performance is due to efficiency in the use of its net assets; it achieved a net asset turnover of 2.3 times compared to only 1.2 times for Grappa. Put another way, Jamuna Ltd. makes sales of Tk. 2.30 per Tk.1 invested in net assets compared to sales of only Tk.1.20 per Tk.1 invested for Padma. The other element contributing to the ROCE is profit margins. In this area Jamuna Ltd.‘s overall performance is slightly inferior to that of Padma, gross profit margins are almost identical, but Padma‘s operating profit margin is 10. 5% compared to Jamuna Ltd.‘s 9.8%. In This situation, where one company‘s ROCE is superior to another‘s it is useful to look behind the figures and consider possible reasons for the superiority other than the obvious one of greater efficiency on Jamuna Ltd.‘s part. A major component of the ROCE is normally the carrying amount of the noncurrent assets. Consideration of these in this case reveals some interesting issues. Jamuna Ltd. does not own its premises whereas Padma Ltd. does. Such a situation would not necessarily give a ROCE advantage to either company as the increase in capital employed of company owning its factory would be compensated by a higher return due to not having a rental expense (and vice versa). If Jamuna Ltd.‘s rental cost, as a percentage of the value of the related factory, was less than its overall ROCE, then it would be contributing to its higher ROCE. There is insufficient information to determine this. Another relevant point may be that Jamuna Ltd.‘s owned plant is nearing the end of its useful life (carrying amount is only 22% of its cost) and the company seems to be replacing owned plant with leased plant. Again this does not necessarily give Jamuna Ltd. an advantage but the finance cost of the leased asset at only 7.5% is such lower than overall ROCE (of either company) and therefore this does help to improve Jamuna Ltd.‘s ROCE. The other important issue within the composition of the ROCE is the valuation basis of the companies‘ non-current assets. From the question, it appears that Padma‘s factory is at current value (there is a property revaluation reserve) and note (ii) of the question indicates the use of historical cost for plant. The use of current value for the factory (as opposed to historical cost) will be adversely impacting on Padma‘s ROCE. Jamuna Ltd. does not suffer this deterioration as it does not own it factory. The ROCE measures the overall efficiency of management: however, as Hosaf Ltd. is considering buying the equity of one of the two companies, it would be useful to consider the return on equity (ROE) - as this is wht Hosaf Ltd. is buying. The ratios call Tk. Lated are based on pre-tax profits; this takes into account finance costs, but does not cause taxation issues to distort the comparison. Clearly Jamuna Ltd.‘s ROE at 50% is far superior to Grappa‘s 19.1%. Again the issue of the revaluation Grappa‘s factory is making this ratio appear comparatively worse (than it would be if there had not been a revaluation). In these circumstances it would be more meaningful if the ROE was call Tk. lated based on the asking price of each company (which has not been disclosed) as this would effectively be the carrying amount of the relevant equity for Horsaf.


Gearing From the gearing ratio it can be seen that 71% of Jamuna Ltd.‘s assets are financed by borrowings (39% is attributable to Jamuna Ltd.‘s policy of leasing its plant). This is very high in absolute term and double Padma‘s level of gearing. The effect of gearing means that all of the profit after finance costs is attributable to the equity even though (in Jamuna Ltd.‘s case) the equity represents only 29% of the financing of the net assets. While this may seem advantageous to the equity shareholders of Jamuna Ltd., it does not come without risk. The interest cover of Jamuna Ltd. is only 3.3 time whereas that of Padma Ltd. is 6 times. Jamuna Ltd.‘s low interest cover is a direct consequence of its high gearing and it makes profits vulnerable to relatively small changes in operating activity. For rating example, small reductions in sales, profit margins or small increases in operating expenses could result in losses and mean that interest charges would not be covered. Another observation is that Padma Ltd. has been able to take advantage of the receipt of governm grants; Jamuna Ltd. has not. This may be due to Padma Ltd. purchasing its plant (which may then be eligible for grants) whereas Jamuna Ltd. leases its plant. It may be that the lessor has received any grants available on the purchase of the plant and passed some of this benefit on to Jamuna Ltd. via lower lease finance costs (at 7.5% per annum, this is considerable lower than Jamuna Ltd. has to pay on its 10% loan notes). Liquidity Both companies have relatively low liquid ratios of 1.2 and 1.3 for Padma Ltd. and Jamuna Ltd respectively, although a least Padma Ltd. has Tk.600,000 in the bank whereas Jamuna Ltd. has Tk.1.2 million overdraft. In this respect Jamuna Ltd.‘s policy of high dividend payouts (leading to a low dividend cover and low retained earnings) is very questionable. Looking in to more depth, both companies have similar inventory days; Jamuna Ltd. collects its receivables one week earlier than Padma Ltd. (perhaps its credit control procedures are more active due to its large overdraft), and of notable difference is that Padma Ltd. Receives (or takes) a lot longer credit period from its suppliers (108 days compared to 77 days). This may be a reflection of Padma Ltd. being able to negotiate better credit terms because it has a higher credit rating. Summary Although both companies may operate in a similar industry and have similar profits after tax, they would represent very different purchases. Jamun Ltd.‘s sales revenues are over 70% more than those of Padma Ltd,. it is financed by high levels of debt, it rents rather than owns property and it chooses to lease rather than buy its replacement plant. Also its remaining owned plant is nearing the end of its life. Its replacement will either require a cash injection if it is to be purchased (Jamuna Ltd.‘s overdraft of Tk.1.2 million already requires serious attention) or create even higher levels of gearing if it continues its policy of leasing. In short although Jamuna Ltd.‘s overall return seems more attractive than that of Padma, it would represent a much more risky investment. Ultimately the investment decision may be determined by Hosaf‘s attitude to risk, possible synergies with existing business activities, and not least, by the asking price for each investment.


EXERCISES E-1. Lewis Corporation experienced a fire on December 31, 2015, in which its financial records were partially destroyed. It has been able to salvage some of the records and has ascertained the following balances. December 31, 2015 December 31, 2014 Cash Tk.30,000 Tk.10,000 Receivables (net) 85,000 125,000 Inventory 200,000 180,000 Accounts payable 50,000 90,000 Notes payable 30,000 60,000 Common stock, Tk.100 par 400,000 400,000 Retained earnings 130,000 101,000 Additional information: (1) The inventory turnover is 4 times (2) The return on common stockholders‘ equity is 20%. The company had no additional paid-in capital. (3) The accounts receivable turnover is 8,6 times. (4) Total assets at December 31, 2014, were Tk.685,000. Required: (i) Cost of goods sold for 2015. (ii) Net sales (credit) for 2015. (iii) Net income for 2015. (iv) Total assets at December 31, 2015. E-2. The Income Statement and Balance Sheet of the Target Corporation and Wal-Mart Incorporation for the year 31st December 2016 are given below: Income Statement Sales Less: Sales returns and allowances Net sales Less: Cost of goods sold Gross profit Less: Selling and administrative expenses Less: Interest expense Other income Less: Income tax expenses Net income

Target Corp. Tk.62,000 (529) 61,471 (41,895) 19,576 (16,200) (647) 1,896 (1,776) 2,849

Wal-Mart Inc. Tk.375,000 (474) 374,526 (286,515) 88,011 (70,847) (1,798) 4,273 (6,908) 12,731

Balance Sheet Assets Cash Accounts receivable Inventories Prepaid expenses Total current assets Non-current assets

Target Corp.

Wal-Mart Inc.

Tk.5,000 6,000 5,000 2,906 18,906 25,654

Tk.10,000 15,000 20,000 2,585 47,585 115,929


Total Assets Liabilities and Stockholders’ Equities Accounts payable Notes payable Accrued expenses Total current liabilities Long-term debt Total liabilities Share capital Retained earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

Total Assets Total Stockholders‘ Equity Current Liabilities Total Liabilities

44,560

163,514

Tk.3,000 5,000 3,782 11,782 17,471 29,253 12,000 3,307 15,307 44,560

Tk.125,000 25,000 8,454 58,454 40,452 98,906 60,000 4,608 64,608 163,514

Target Corp. Wal-Mart Inc. Beginning of year balances Tk.37,349 Tk.151,587 15,633 61,573 11,117 52,148 21,716 90,014 Other Data Tk.7,124 Tk.3,247 6,517 34,433 4,125 20,354

Average net accounts receivables Average inventory Net cash provided by operating activities Required: (i) For each company, calculate the following ratios: 1. Current ratio 2. Accounts receivable turnover 3. Average collection period 4. Inventory turnover 5. Days in inventory 6. Profit margin 7. Asset turnover 8. Return on assets 9. Return on common stockholders‘ equity 10. Debt to assets 11. Times interest earned (ii) Compare the liquidity, profitability and solvency of the two companies.

E-3. Calculate Current Ratio, Quick Ratio, Inventory Turnover, Receivable Turnover and Payable Turnover from following Financial Statements of M Ltd: Income Statement for the year ended 31 Dec 2016: Item Sales Revenue Opening Inventory Purchases Closing Inventory Cost of Goods Sold Gross Profit

Tk.

Tk. 500,0000

25,000 305,000 (30,000) (300,000) 200,000


Other Operating Expenses 60,000 Finance Cost 24,000 Finance Cost (84,000) Profit 116,00 Statement of Financial Position as of 31 Dec 2016: Assets Non-Current Assets Current Assets Inventories Receivables Bank Account Total Non-Current Assets Total Assets Equity and Liability Shareholders’ Equity Share Capital Retained Earnings Total Equity Non-Current Liability 7% Notes Payable 10 Years Current Liability Payables Total Equity and Liability

Tk.

Tk. 540,000

30,000 62,500 7,000 99,500 639,500

125,625 256,000 381,625 200,000 57,875 639,500

E-4. The financial statements of Spider Ltd as at 31 December 2014, including comparative figures, are given below. Statement of profit or loss for the year ended 31 December. Year 2014 Tk. in’000 Revenue 17,000 Cost of Sales (13,200) Gross profit 3,800 Sales and distribution cost (887) Administrative cost (2,353) Profit/(loss) from operations 560 Finance costs (340) Profit/(loss) before tax 220 Income tax (25) Profit/(loss) for the period 195 Particulars

Year 2013 Tk. in’000 6,200 (5,064) 1,136 (475) (739) (78) (45) (173) (15) (138)

Statement of financial positions as 31 December Particulars Year 2014 Year 2013 Tk. in’000 Tk. in’000 Tk. in’000 Tk. in’000 Assets Non-current asset Property, plant and equipment Intangible assets Current assets

6,523 1,619

8,142

2,464 779

3,243


Inventories Trade and other receivables Cash and cash equivalents Total assets Equity and liabilities Capital and reserves Ordinary share capital Revaluation reserve Retained earnings Equity Non-current liabilities Long-term borrowings Current liabilities Trade and other payable Provisions Total equity and liabilities

758 794 240

2,684 955

1,792 9,934

500 195 390

1,085 4,328

100 880 2,953 3,933

100 480 2,758 3,338

2,362

232

3,639 9,934

628 130

758 4,328

Required: Assess the profitability, liquidity, solvency and efficiency of the company through ratio analysis.


CHAPTER - 4 BREAK-EVEN ANALYSIS

4.1. CONTRIBUTION CONCEPT Contribution concept indicates the profit potential of a business enterprise and also highlights the relationship between cost, sales and profit. It is the excess of sales revenue over variable expenses. According to the contribution concept, fixed expenses are deducted giving finally operating income or loss. Contribution concept is thus used to recover fixed costs. Once the fixed costs are recovered, any remaining contribution adds directly to the operating income of the firm. Contribution concept is a highly useful technique for planning and decision-making by the management. 4.2. CVP ANALYSIS Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned with the effect of sales volume and product costs on operating profit of a business. It deals with how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more different products. 4.3. ASSUMPTIONS OF CVP ANALYSIS a) Selling price is constant. The price of a product or service will not change as volume changes. b) Costs are linear and can be accurately divided into variable and fixed elements. The variable element is constant per unit, and the fixed element is constant in total over the relevant range. c) In multi-product companies, the sales mix is constant. d) In manufacturing companies, inventories do not change. The number of units produced equals the number of units sold. 4.4. LIMITATIONS OF CVP ANALYSIS 1. Segregation of total costs into its fixed and variable components is difficult to do. 2. Fixed costs are unlikely to stay constant as output increases beyond a certain range of activity. 3. The analysis is restricted to the relevant range specified and beyond that the results can be unreliable 4. Besides volume, other elements like inflation, efficiency, capacity and technology can affect costs 5. Impractical to assume sales mix remain constant since this depend on the changing demand levels. 6. The assumption of linear property of total cost and total revenue relies on the assumption that unit variable cost and selling price are constant. However, this is likely to be valid within relevant range only.


4.5. CHART/ GRAPH Basic break-even chart: A basic break-even chart records costs and revenues on the vertical axis (Y) and the level of activity on the horizontal axis (X). Lines are drawn on the chart to represent costs and sales revenue. The break-even point can be found where the sales revenue line cuts the total cost line. Contribution breakeven chart: One of the problems with the conventional or basic breakeven chart is that it is not possible to read contribution directly from the chart. A contribution breakeven chart is based on the same principles, but it shows the variable cost line instead of the fixed cost line. The same lines for total cost and sales revenue are shown so the breakeven point, and profit can be read off in the same way as with a conventional chart. However, it is also possible also to read the contribution for any level of activity. Profit volume graph: A profit volume graph is a graphical representation of the relationship between the sales and profits of a business. The concept is especially useful for determining the breakeven point of a business, where the sales level generates a profit of exactly zero. Breakeven information is critical for adjusting the expenditure and margin levels of a business to improve the probability that it will earn a profit. A profit volume graph can also be used to estimate the profit that will likely be earned based on a certain sales level. 4.6. BREAK-EVEN POINT The break-even point refers to the revenues needed to cover a company's total amount of fixed and variable expenses during a specified period of time. The revenues could be stated in taka (or other currencies), in units, hours of services provided, etc. 4.7. ASSUMPTION OF BREAK-EVEN ANALYSIS (i) The total costs may be classified into fixed and variable costs. It ignores semi-variable cost. (ii) The cost and revenue functions remain linear. (iii) The price of the product is assumed to be constant. (iv) The volume of sales and volume of production are equal. (v) The fixed costs remain constant over the volume under consideration. (vi) It assumes constant rate of increase in variable cost. (vii) It assumes constant technology and no improvement in labour efficiency. (viii) The price of the product is assumed to be constant. 4.8. LIMITATIONS OF BREAK-EVEN ANALYSIS (i) In the break-even analysis, we keep everything constant. The selling price is assumed to be constant and the cost function is linear. In practice, it will not be so. (ii) In the break-even analysis since we keep the function constant, we project the future with the help of past functions. This is not correct. (iii) Selling costs are specially difficult to handle break-even analysis. This is because changes in selling costs are a cause and not a result of changes in output and sales.


(iv) The simple form of a break-even chart makes no provisions for taxes, particularly corporate income tax. (v) Matching cost with output imposes another limitation on break-even analysis. Cost in a particular period need not be the result of the output in that period. 4.9. MARGIN OF SAFETY The margin of safety is the excess of budgeted (or, actual) sales over the break-even volume of sales. The formula for its calculation is: Margin of safety = Total budgeted (or, actual) sales – Break even sales The margin of safety can also be expressed in percentage form. This percentage is obtained by dividing the margin of safety in Taka terms by total budgeted (or, actual) sales. That is, M arg in of safety in Taka Margin of safety percentage = Total budgeted (or , actual ) sales 4.10. USEFULNESS OF MARGIN OF SAFETY It is a useful concept for management because it states the amount by which sales can be dropped before losses to be incurred. The higher margin of safety indicates the lower risk of not breaking even. 4.11. CONTRIBUTION/ SALES RATIO The contribution to sales (or contribution margin) ratio is a tool used in profit management. It is the difference between a company's sales and variable expenses, expressed as a percentage. The total margin generated by an entity represents the total earnings available to pay for fixed expenses and generate a profit. When used on an individual unit sale, the ratio expresses the proportion of profit generated on that specific sale. It can be calculated as follows: Contributi on m arg in Contribution margin ratio = Sales 4.12. DEGREE OF OPERATING LEVERAGE The degree of operating leverage is a measure used to evaluate how a company's operating income changes with respect to a percentage change in its sales. A company's operating leverage involves fixed costs and variable costs. It can be calculated as follows: Degree of operating leverage =

Total contributi on m arg in Net operating income


4.13. DIFFERENCES BETWEEN OPERATING LEVERAGE AND FINANCIAL LEVERAGE Basis for comparison i. Meaning

ii. Measures iii. Relates

iv. Ascertained by v. Risk vi. Formula

Operating leverage Use of such assets in the company's operations for which it has to pay fixed costs is known as Operating Leverage. Effect of fixed operating costs Sales and Earnings Before Interest and Tax (EBIT)

Financial leverage

Use of debt in a company's capital structure for which it has to pay interest expenses is known as Financial Leverage. Effect of interest expenses Earnings Before Interest and Tax (EBIT) and Earning Per Share (EPS) Company‘s cost structure Company‘s capital structure It gives rise to business risk It gives rise to financial risk Degree of operating leverage = Degree of financial leverage = Contributi on EBIT EBIT EBT


USEFUL FORMULAS 1. Contribution margin = Sales price – Variable cost 2. Contribution margin =

Total fixed cos t 1  M arg in of safety ratio

3. Contribution margin ratio =

Contributi on m arg in Sales

4. Break-even point in units sold =

Total fixed cos t Unit contributi on m arg in

5. Break-even point in sales taka =

Total fixed cos t Contributi on m arg in ratio

6. Unit sales to attain the target profit =

Total fixed cos t  T arg et profit Unit contributi on m arg in

7. Taka sales to attain the target profit =

Total fixed cos t  T arg et profit Contributi on m arg in ratio

8. Margin of safety = Total budgeted (or, actual) sales in taka – Break even sales in taka 9. Margin of safety in percentage =

M arg in of safety in taka Total budgeted (or , actual ) sales in taka

10. Degree of operating leverage =

Total contributi on m arg in Net operating income

11. CM ratio is 40% this means that variable cost is 60% of taka sales and profit is 40% of taka sales 12. CM ratio is 40% this means that for each taka change in sales, total CM and net operating income will change by 40% 13. Degree of operating leverage is Tk.5 this means that if sales are changed by 1%, the net operating income will change by 5 times of these sales


SELF PRACTICE QUESTIONS 1. The break-even chart is an excellent planning device – Discuss. How does the breakeven point move when changes occur in (i) variable expense? (ii) fixed expense? 2. What is the Basics of Cost-Volume-Profit (CVP) Analysis? Can you explain in brief the ‗Contribution Margin Ratio‘? 3. Company A and B are in the same industry. Company A is highly automated, whereas Company B relies primarily on labor to make its products. If sales and total expenses in the two companies are about the same, which would you expect to have the lower margin of safety? Why? 4. Explain how CVP analysis can be used for managerial planning? 5. What is the margin of safety and why is it a useful concept for management? 6. Explain why contribution margin per unit becomes profit per unit above break-even point? 7. Explain how a change in sales mix can change a company‘s break-even point? 8. What are the limitations of break-even analysis in managerial decision making? 9. Discuss the underlying assumption of break-even analysis. 10. What assumption is usually made concerning sales mix in CVP analysis? 11. What is the difference between segment margin and contribution margin? 12. List five limitations of break-even analysis in managerial decision making.


SELF PRACTICE QUESTIONS ANSWER 1. A break-even chart is one of the business planning tools that can help to make that determination. The Break-even chart lets the businesses to determine what they need to sell, monthly or annually, to cover the costs of doing business-- its break-even point. The Break-even chart determines a break-even point based on fixed costs, variable costs per unit of sales and revenue per unit of sales. (i) The break-even point will increase when the variable expenses increase without a corresponding increase in the selling prices. (ii) The break-even point will also increase when the amount of fixed costs and expenses increases. 2. The Basics of Cost-Volume-Profit (CVP) Analysis: Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned with the effect of sales volume and product costs on operating profit of a business. It deals with how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more different products. Contribution Margin Ratio: The contribution margin ratio is the difference between a company's sales and variable expenses, expressed as a percentage. The total margin generated by an entity represents the total earnings available to pay for fixed expenses and generate a profit. 3. Company A with its higher fixed costs and lower variable costs would have a higher break-even point than Company B. Hence, Company A also has the lower margin of safety. 4. Cost-volume-profit (CVP) analysis provides useful information for making decisions about pricing, short-term biding and deleting or adding product lines all of which a major portion of managerial planning. Management must know the CVP analysis to promote the products with high contribution margin and to reduce the emphasis on less profitable products. CVP analysis allows managers to decide whether to accept an order or not. Accountants often use computer spreadsheet programs to find cost-volume-profit answers quickly. 5. The margin of safety is the excess of budgeted (or, actual) sales over the break-even volume of sales. The formula for its calculation is: Margin of safety = Total budgeted (or, actual) sales – Break even sales


The margin of safety can also be expressed in percentage form. This percentage is obtained by dividing the margin of safety in Taka terms by total budgeted (or, actual) sales. That is, M arg in of safety in Taka Margin of safety percentage = Total budgeted (or , actual ) sales It is a useful concept for management because it states the amount by which sales can be dropped before losses to be incurred. The higher margin of safety indicates the lower risk of not breaking even. 6. From the definition we know that contribution margin is the portion of sales revenues which is contributed to recover the fixed cost and profit. And break-even point is the stage of sales where all fixed costs are recovered and profit is zero. So, above the break-even point, the entire contribution margin per unit becomes profit per unit. 7. If a company sells more than one product, break-even analysis becomes more complex than a single product. The reason is that different product will have different selling prices, different costs and different contribution margins. The break-even point depends on the mix in which the various products are sold. So, if the sales mix changes, the break-even point will also change. 8. The limitations of break-even analysis in managerial decision making: 1. Some costs are impossible to classify as either fixed or variable 2. It is only a supply side analysis 3. It assumes that fixed costs are constant. Although it is true in the short-run but in the long-run, fixed cost changes with the changes in quantity of production 4. It assumes average variable costs are constant per unit of output 5. It assumes that quantity of goods produced is equal to the quantity of goods sold 9. The underlying assumptions of break-even analysis: 1. Relevant range: A primary assumption is that the company is operating within the relevant range of activity by determining the revenue and cost information used in each of the following assumption: a) Revenue: Revenue per unit is assumed to remain constant b) Variable cost: Variable cost per unit is assumed to remain constant 2. Fixed cost: Total fixed cost is assumed to remain constant. Fixed cost includes both fixed manufacturing overhead cost and fixed selling and administrative expenses


3. Mixed cost: Mixed cost must be separated into their variable and fixed cost before they are used in CVP analysis. Any method (such as regression analysis) can be used to separate these costs. 10. Sales mix refers to the relative proportion by which a company‘s products are sold. The purpose of this sales mix is to earn a greatest amount of profit. Following assumption is usually made concerning sales mix in CVP analysis: 1. Selling price is constant 2. The price of a product or service will not charge with the change in sales volume 3. In multi-product companies, the sales mix is constant 4. In manufacturing companies, inventories do not change. The number of units produced equal to the number of units sold 11. Differences between segment margin and contribution margin: Segment margin 1.Segment margin refers to the margin available after a segment has covered all of its own costs 2.It is obtained by deducting the traceable fixed costs of a segment from the segment contribution margin 3.It is useful in assigning the overall profitability of a segment

Contribution margin 1.Contribution margin refers to the amount contributed to recover the fixed costs and profit 2.It is obtained by deducting the variable costs from the sales revenues 3. It is useful as a planning tool for business decision

12. Five limitations of break even analysis in managerial decision making: 1. All costs fall into either fixed or variable cost classification 2. Unit variable cost remains the same 3. Unit sales price and other market conditions are assumed to remain unchanged 4. Inventory changes have no impact on the analysis 5. Total fixed cost remains constant over a relevant range


PROBLEMS AND SOLUTIONS P-1. ABC Limited has the following information: Sales price per unit Variable cost per unit Direct materials Direct labor Factory overhead Marketing and administrative overhead Annual Fixed Costs: Factory overhead Marketing and administrative overhead

Taka 25 10 5 3 2 20 2,00,000 1,00,000 3,00,000

Requirements: i) Compute the break-even point in units. ii) Compute the break-even point in sales taka. iii) Without resorting to computations, what is the total contribution margin at the breakeven point? iv) Determine the units to be sold in order to earn Tk.50,000. Solution: i) The break-even point in units =

Total fixed cos t Unit contributi on m arg in

Here, Unit contribution margin = Unit sales price – Unit variable cost = Tk.25 – Tk.20 = Tk.5 Tk.3,00,000 Tk.5 = 60,000 units

The break-even point in units =

ii) The break-even point in sales taka =

Total fixed cos t CM ratio

Contributi on m arg in Sales Tk.5 = Tk.25 = 0.2 or 20%

Here, CM ratio =

Tk.3,00,000 0.2 = Tk.15,00,000

The break-even point in sales taka =


iii) The total contribution margin at the break-even point = 60,000 units X Tk.5 = Tk.3,00,000 iv) The number of units to be sold in order to earn Tk.50,000 Total fixed cos t  T arg et profit = Unit contributi on m arg in Tk.3,00,000  Tk.50,000 = Tk.5 = 70,000 units P-2. Determine the level of sales a company must attain to cover its fixed and variable costs, where the selling price is Tk.5, total fixed costs are Tk.1,60,000 and the contribution margin ratio is 40%. Required: Determine the company‘s break-even point in units and taka using algebraic approaches. Solution: Given, Selling price Total fixed cost Contribution margin ratio

Tk.5 Tk.1,60,000 40%

As, the contribution margin ratio is 40%, means that variable cost is 60% of taka sales. So, Variable cost per unit = Tk.5 X 60% = Tk.3

We know, Sales revenue = Variable cost + Fixed cost + profit Let, Sales = x units => 5x = 3x + 1,60,000 + 0 => 5x – 3x = 1,60,000 => 2x = 1,60,000 => x = 80,000 units So, break-even point in units = 80,000 units Break-even point n taka = 80,000 units X Tk.5 = Tk.4,00,000 P-3. Bright Company Limited sells a single product. The company‘s sales and expenses for a recent month as follows:


Total (Tk.) 3,00,000 2,00,000 1,00,000 80,000 20,000

Sales Less: Variable expenses Contribution margin Less: Fixed cost Operating income

Per Unit (Tk.) 30 20 10

Required: (i) What is the monthly break-even point in units sold and in sales taka? (ii) Compute the company‘s margin of safety in both taka & percentage terms. (iii) Determine the degree of operating leverage. Solution:

Total fixed cos t Unit contributi on m arg in Tk.80,000 = Tk.10 = 8,000 units

i) Monthly break-even point in units sold =

Monthly break-even point in sales taka = 8,000 units X Tk.30 = Tk.2,40,000 ii) Margin of safety in taka = Total budgeted (or, actual) sales in taka - Break even sales in taka = Tk.3,00,000 – Tk.2,40,000 = Tk.60,000

M arg in of safety in taka Total budgeted (or , actual ) sales in taka Tk.60,000 = Tk.3,00,000 = 0.2 or 20%

Margin of safety in percentage =

Total contributi on m arg in Net operating income Tk.100,000 = Tk.20,000 =5

iii) Degree of operating leverage =

P-4. Analysis of budget for the Alted Company reveals that variable manufacturing costs are Tk.25 per unit and variable marketing costs are Tk.10 per unit. Budgeted fixed factory overhead is Tk.500,000 while budgeted fixed marketing and administrative cost is Tk.250,000. Normal capacity for the plant is 160,000 units per year. The unit sales price is Tk.50.


Required: (i) Calculate the break-even point expressed in Taka. (ii) Calculate the unit that must be sold to earn a before tax income of 20 percent on sale. (iii) Annual operation for the year resulted in a margin of safety ratio of 30 percent and a contribution margin ratio of 25 percent. Determine actual income before taxes for the year assuming actual fixed costs were 5 percent more than those budgeted. Solution: (i) Total unit variable costs = Tk.25 + Tk.10 = Tk.35 Unit contribution margin = Tk.50 – Tk.35 = Tk.15 Tk.15 X 100 Tk.50 = 30%

Contribution margin ratio =

Total fixed cost = Tk.500,000 + Tk.250,00 = Tk.750,000 Total fixed cos t Break-even point in Taka = Contributi on m arg in ratio Tk.750,000 = 30% = Tk.2,500,000

Total fixed cos t Unit contributi on m arg in  Unit profit on sale Tk.750,000 = 15  (50 X 20%) Tk.750,000 = 15  10 = 150,000 units

(ii) Required sales units =

(iii) Actual fixed costs = Tk.750,000 + (Tk.750,000 X 5%) = Tk.750,000 +Tk.37,500 = Tk.787,500

Total fixed cos t 1  M arg in of safety ratio Tk.787,500 = 1  0.30 Tk.787,500 = 0.70 = Tk.1,125,000

Actual contribution margin =


Actual income before taxes = Contribution margin – Fixed costs = Tk.1,125,000 – Tk.787,5000 = Tk.337,500 P-5. Max Ltd. had the margin of safety of Tk.500,000 in year 2016-2017. The rate of posttax profit on sales was 8.75% and the degree of operating leverage was 3.2. As a publicly traded company, Max Ltd. is an un-levered firm and supposed to pay income tax @ 30%. Required: (i) Calculate the CM ratio. (ii) Calculate the Breakeven Sales in Taka. (iii) If, due to expansion in next year, fixed costs increase by Tk.60,000, then to what extent it will require to increase the sales revenue to keep the after-tax profit constant. Assume other things being unchanged. (iv) If the sales volume in next year would be Tk.17,00,000, do you support the expansion? Solution: Rate of post-tax profit = 8.75% 8.75 Rate of pre-tax profit = 1  0.30 = 12.5% Margin of safety = Tk.500,000 Degree of operating leverage = 3.2 Increase of un-levered firm: Sales = Margin of safety X Degree of operating leverage = Tk.5,000,000 X 3.2 = Tk.1,600,000

Tk.500,000 Tk.1,600,000 = 31.25%

Margin of safety ratio =

(i) Calculation CM ratio: Rate of pre-tax profit = Margin of safety ratio X CM ratio or, 12.5 = 31.25 X CM ratio 12.5 or, CM ratio = 31.25 or, CM ratio = 40% (ii) Calculation of breakeven sales in Tk. = Sales – Margin of safety = Tk.1,600,000 – Tk.500,000 = Tk.1,100,000


(iii) Increase the sales revenue to keep after tax profit constant: Breakeven sales = Fixed costs + Variable costs or, Fixed costs = Breakeven sales – Variable costs or, Fixed costs = Tk.1,100,000 – Tk.1,100,000 X (1-40%) or, Fixed costs = Tk.440,000 After tax profit in 2016-2017 = {(Tk.1,600,000 X 40%) – Tk.440,000} X (1 – 30%) = Tk.200,000 X 0.70 = Tk.140,000 Next year sales =

FC  Pr e  tax profit CM ratio

(Tk.400,000  Tk.60,000)  =

Tk.140,000 0.70

40%

Tk.700,000 40% = Tk.1,750,000

=

Income in sales = Tk.1,750 – Tk.1,600,000 = Tk.150,000 (iv) No, expansion is not supported. P-6. S Sports Company has sales of Tk.1,20,000 and a margin of safety 40% and P/V ratio 30% during the year 2017. The company expects that in 2018 the fixed cost and sales price will increase. As a result, the margin of safety and the P/V ratio will change to 35% and 40% respectively. You are to find: (i) Break even sales for 2017. (ii) Amount of profit for 2017. (iii) Break even sales for 2018. (iv) Amount of profit for 2018. Solution: (i) Break even sales for 2017: Sales – Break even sales = Margin of safety or, Break even sales = Sales – Margin of safety or, Break even sales = 100% - 40% or, Break even sales = 60% When sales is 100, then break even sales is 60 60 When sales is 1, then break even sales is 100 When sales is 120,000, then break even sales is

60 X 120,000 = Tk.72,000 100


(ii) Amount of profit for 2017: Sales – Variable cost = PV ratio or, Sales – PV = Variable cost or, 100% - 30% = 70% When sales is 100, then variable cost is 70 70 When sales is 1, then variable cost is 100 When sales is 120,000, then variable cost is

70 X 120,000 = Tk.84,000 100

Variable cost at Break even sales: When sales is 100, then variable cost is 70 70 When sales is 1, then variable cost is 100 When sales is 72,000, then variable cost is

70 X 72,000 = Tk.50,400 100

Fixed cost for 2017: Break even sales – Variable cost = Fixed cost or, Tk.72,000 – Tk.50,400 = Tk.21,600 Amount of profit for 2017: Profit = Sales - Variable cost - Fixed cost or, Profit = Tk.120,000 – Tk.84,000 – Tk.21,600 or, Profit = Tk.14,400 (iii) Break even sales for 2018: Here, the company expects that the next year the fixed cost and the sales price will increase. As a result, the margin of safety and the PV ratio will change. So, we can assume that the variable cost will not be changed and total variable cost will be same before, i.e. Tk.84,000. Sales – PV ratio = Variable cost or, 100% - 40% = 60% When variable cost is 60, then sales is 100 100 When variable cost is 1, then sales is 60

100 X 84,000 = Tk.104,000 60 Sales – margin of safety = Break even sales or, 100% - 35% = 65% When sales is 100, then break even sales is 65 65 When sales is 1, then break even sales is 100 65 When sales is 140,000, then break even sales is X 140,000 = Tk.91,000 100 When variable cost is 84,000, then sales is


(iv) Amount of profit for 2018: Net profit = Margin of safety X PV of sales or, Net profit = 35% X 40% of Tk.140,000 or, Net profit = Tk.19,600 P-7. Compute the answers to each of the following independent situations. (i) Orlando Ray sells liquid and spray mouthwash in a sales mix of 1:2, respectively. The liquid mouthwash has a contribution margin of Tk.10 per unit; the spray‘s CM is Tk.5 per unit. Annual fixed cost for the company is Tk.100,000. How many units of spray mouthwash would Orlando Ray sell at the break-even point? (ii) Piniella Company has a break-even point of 4,000 units. At BEP, variable cost is Tk.6,400 and fixed cost if Tk.1,600. If one unit over breakeven is sold, what will be the company‘s pre-tax income? (iii) Montreal Company‘s product sells for Tk.10 per bottle. Annual fixed costs are Tk.216,000 and variable cost is 40 percent of selling price. How many units would Montreal Company need to sell to earn a 25 percent pre-tax profit on sales? (iv) York Mets Company has a BEP of 2,800 units. The company currently sells 3,200 units at Tk.65 each. What is the company‘s margin of safety in units, in sales Taka, and as a percentage? Solution: (i) Each mix contains 1 unit of liquid and 2 units of spray. Thus, each mix generates contribution margin of (1 X Tk.10) + (2 X Tk.5) = Tk.20 The break-even point would be

Tk.100,000 = 5,000 mix Tk.20

Since, each mix contains 2 units of spray, at the break-even point 5,000 X 2 or, 10,000 units of spray must be sold. (ii) At the break-even point, Total CM = Total fixed cost; and the CM per unit would be Tk.1,600 = Tk.0.40. 4,000 If 1 unit is sold beyond the break-even point, net income would rise by Tk.0.40. (iii) Units need to be sold to attain the target profit: (Tk.10 x – 0.40 X Tk.10 x) – Tk.216,000 = 0.25 X Tk.10 x or, Tk.3.50 x = Tk.216,000 or, x = 61,715 units (rounded) (iv) Margin of safety in units = 3,200 – 2,800 = 400 units Margin of safety in sales Taka = 400 units X Tk.65 per unit = Tk.26,000


P-8. The following information for KK‘s Framing Supply is given for March: Taka Sales 360,000 Fixed manufacturing costs 35,000 Fixed marketing and administrative costs 25,000 Total fixed costs 60,000 Total variable costs 240,000 Unit price 90 Unit variable manufacturing cost 55 Unit variable marketing cost 5 Compute the following: i) Monthly operating profit when sales total Tk.360,000 (as above). ii) Break-even number in units. iii) Number of units sold that would produce an operating profit of Tk.120,000. iv) Sales amount (taka) required to earn an operating profit of Tk.20,000. v) Number of units sold that would produce an operating profit of 20% of sales. Solution: i) Operating profit = Sales – Variable cost – Fixed cost = Tk.360,000 – Tk.240,000 – Tk.60,000 = Tk.60,000

Fixed cos t CM per unit Tk.60,000 = Tk.90  (Tk.55  Tk.5) Tk.60,000 = Tk.30 = 2,000 units

ii) Break-even number in units =

Fixed cos t  T arg et profit CM per unit Tk.60,000  Tk.120,000 = Tk.30 = 6,000 units

iii) Target volume in units =

iv) Target volume in sales Taka =

Fixed cos t  T arg et profit CM ratio

Tk.30 Tk.90 = 0.333

Here, CM ratio =

Tk.60,000  Tk.20,000 0.333 = Tk.240,000

Target volume in sales Taka =


v) Number of units sold to produce an operating profit of 20 percent of sales (Taka): PX – VX - F= 20% of PX or, Tk.90X – Tkk.60X – 20% of Tk.90X = Tk.60,000 or, (Tk.90 – Tk.60 – Tk.18) X = Tk.60,000 Tk.60,000 or, X = Tk.12 or, X = 5,000 units P-9. Income statements for two different companies in the same industry are as follows: Particulars Sales Variable cost Contribution margin Fixed cost Operating income

Company – A Tk.500,000 Tk.400,000 Tk.100,000 Tk.50,000 Tk.50,000

Company – B Tk.500,000 Tk.200,000 Tk.300,000 Tk.250,000 Tk.50,000

Required: (i) Compute the degree of operating leverage for each company. (ii) Compute the break-even point for each company. Explain why the break-even point for Company B is higher? (iii) Suppose that both companies experience a 50 percent income in revenue. Complete the percentage change in profits for each company. Explain why the percentage increase in Company B‘s profits is so much higher than that of Company ‗A‘. Solution: (i) Degree of operating leverage =

Contributi on m arg in Operating income

Tk.100,0000 50,000 = 2.00 times

For Company A =

Tk.300,0000 50,000 = 6.00 times

For Company B =

(ii) Sales = Variable cost + Fixed cost + profit For Company A: x = 0.8x + 50,000 + 0 or, 0.2x = 50,000 or, x = Tk.250,000 For Company B: x = 0.4x + 250,000 + 0 or, 0.6x = 250,000 or, x = Tk.416,667


(iii) 50% increase in revenue: Profit increase in Company A = Tk.250,000 X 0.2 (CM ratio) = Tk.50,000 Profit increase in Company B = Tk.250,000 X 0.6 (CM ratio) = Tk.150,000 As CM ratio of Company B is bigger, the percentage increase in Company B‘s profits is so much higher than that of Company ‗A‘. P-10. Z Ltd. manufactures and sells three products with the following selling prices and variable costs: Product-A Product-B Product-C Selling price 30.00 24.50 40.00 Variable cost 12.00 16.70 26.00 The company is considering expenditure on advertising and promotion of product-A. It is hoped that such expenditure together with a reduction in the selling price of the product would increase sales. Existing sales volume of the three products are: Product-A Product-B Product-C

460,000 units 1,000,000 units 380,000 units

If Tk.600,000 per annum was to be invested in advertisement and sales promotion, sales of product-A at reduced selling prices would be expected to be: 590,000 units at Tk.27.50 per unit or 650,000 units at Tk.25.50 per unit Annual fixed costs are currently Tk.17,100,000 Required: (i) Calculate the current break-even sales revenue of the business. (ii) Advise the management of Z Ltd. as to whether the expenditure on advertising and promotion, together with selling price reduction, should be introduced on product-A. (iii) Calculate the required unit sales of product-A, at a selling price of Tk.27.50 per unit in order to justify the expenditure on advertising and promotion. Solution: (i) Current break even sales revenue of the business Product A B C Total

Sales volume (Unit) 4,60,000 10,00,000 3,80,000 18,40,000

Weight 4,60,000 / 18,40,000 10,00,000 / 18,40,000 3,80,000 / 18,40,000

= 0.25 = 0.54 = 0.21 1.00


Calculation of weighted contribution Product

Selling price (Tk.)

Variable cost (Tk.)

Unit CM (Tk.)

Weight

A B C

30.00 24.50 40.00

12.00 16.70 26.00

18.00 7.80 14.00

0.25 0.54 0.21 Total

Weighted contribution (Tk.) 4.50 4.24 2.89 11.63

Fixed cos t Total weighted contributi on Tk.1,71,00,000 = 11.63 = 14,70,282 units

Break even sales =

Product wise break even sales: Product A B C Total

Weight 0.25 0.54 0.21

Break even sales unit 3,67,571 7,99,068 3,03,643 14,70,282

Sales volume (Unit) 1,10,27,130 1,95,77,166 1,21,45,720 4,27,50,016

(ii) Particular Sales price (Tk.) Sales volume (Unit) Sales revenue (Tk.) Variable cost @ Tk.12 per unit Contribution (Tk.) Incremental cost Proposed advertising and promotion expenditure Net benefit

Current position 30 4,60,000 1,38,00,000 55,20,000 82,80,000 -

Proposal I 27.50 5,90,000 1,62,25,000 70,80,000 91,45,000 8,65,000 6,00,000

Proposal II 25.50 6,50,000 1,65,75,000 78,00,000 87,75,000 4,95,000 6,00,000

-

2,65,000

(1,05,000)

From the above table it is advised that management should refix the sales price at Tk.27.50 with the proposed advertising and promotion expenditure of Tk.6,00,000 in order to earn net benefit of Tk.2,65,000. (iii) Current contribution against 4,60,000 @ Tk.18.00 Proposed advertising and promotion expenditure Total contribution required Contribution per unit at the proposal sales price (27.50 – 12)

= Tk.82,80,000 = Tk.6,00,000 = Tk.88,80,000 = Tk.15.50


Units to be sold to earn the same net profit (

Tk.88,80,000 ) Tk.15.50

= 5,72,903 units

P-11. Topper Sports Inc. produce three tennis rackets – the Standard, the Deluxe and the Premium. Selected information on the rackets is given below:

Selling price per racket Variable expenses per racket Production Selling

Standard Tk.4,000

Deluxe Tk.6,000

Premium Tk.9,000

2,200 200

2,700 300

3,150 450

Fixed costs per month is Tk.27,000,000. Sales in units over the last two months: Standard April 2,000 May 8,000

Deluxe 1,000 1,000

Premium 5,000 3,000

Total 8,000 12,000

Required: (i) Compute the break even sales in taka for April. (ii) Has May‘s break even sales in taka gone up or gone down from April‘s break even sales? Explain without computing break even sales for May. (iii) Assume that sales of the standard racket increase by Tk.20,000, what would be the effect on net operating income? What would be the effect if Premium racket sales increased by Tk.200,000? Do not prepare income statement, use the incremental analysis approach in determining your answer. Solution: (i) Computation f break even sales in Taka for April:

Sales Less. VC CM Less. FC Net income

Topper Sports Inc. Contribution Income Statement For the month of April Standard Deluxe Premium Tk. % Tk. % Tk. % 8000,000 100 6000,000 100 45000,000 100 4800,000 60 3000,000 50 18000,000 40 3200,000 40 3000,000 50 27000,000 60

Total fixed cos t Overall CM ratio Tk.2,70,00,000 = 56% = Tk.4,79,81,916

Computation of break even point =

Total Tk. % 59000,000 100 25800,000 44 33200,000 56 27000,000 62000,000


Product wise break even point (Tk.): Standard April sales 8000,000 Percentage of total sales 13.56% Break even point (Tk.) 6506,012

Deluxe 6000,000 10.17% 4879,521

Premium 4500,000 76.27% 36596,383

Total 59000,000 100% 47981,916

(ii) May‘s break even sales have gone up from that of April because of: - Sale of items having lower contribution margin (Standard) has arisen, and - Sale of items having higher contribution margin (Premium) has fallen during this month. As a result, overall contribution margin has been decreased and break even point has gone up to recover fixed cost. (iii) CM ratio of standard racket and that of premium racket are 40% and 60% respectively, as computed in requirement (i). For increase of sales of the standard racket by Tk.20,000, net operating income will be increased by Tk.8,000 (Tk.20,000 X 40%). For increase of sales of the premium racket by Tk.200,000, net operating income will be increased by Tk.120,000 (Tk.200,000 X 60%). P-12. High Desert Campgrounds (HDC) rents spaces for recreational vehicles (RVs) by the day. HDC charges Tk.15 per day for a space. the variable costs (including cleaning, maintenance, and supplies) are Tk.7 per day. The fixed costs of NDC are Tk.60,000 per year. HDC is subject to a tax rate of 35 percent on its income. If a ―unit‖ is one space rented for one day, how many units does HDC have to rent annually to earn Tk.48,750 after taxes? Again, suppose HDC rents space for both RVs and tent camping. The price and cost characteristics for each are as follows (one unit is a tent or RV space rented for one day): Price per Unit Variable Cost Units Rented Per Unit Per Year Tent space Tk.6 Tk.3 6,000 RV space 15 7 9,000 The fixed costs of HDC are Tk.60,000 annually. Assuming the mix of tent and RV space is the same as the current mix, how many tent spaces and how many RV spaces must be rented annually for HDC to break even? Solution: After-tax profit – [(P-V)X – F] (1-t) or, Tk.48,750 = [(Tk.15 – Tk.7)X – Tk.60,000] (1-0.35) or, Tk.48,750 = (Tk.8X – Tk.60,000) (0.65) Tk.48,750 or, = Tk.8X – Tk.60,000 0.65 or, Tk.75,000 + Tk.60,000 = Tk.8X or, 8X = Tk.135,000 r, X = 16,875 units


Based on the current mix of tent spaces and RV spaces, the sales mix at HDC is 40% 6, ,000 9,000 ( ) tent spaces and 60% ( ) RV spaces. The weighted-average contribution 15,000 15,000 margin for HDC is: = 0.40 X (Tk.6 – Tk.3) + 0.60 X (Tk.15 – Tk.7) = Tk.1.2 + Tk,4.8 = Tk.6 The multiple-product break-even point can be determined by the break-even formula: X = Fixed costs + Weighted average contribution margin per unit or, X = Tk.60,000 + Tk.6 or, X = 10,000 units At the current sales mix, this would be 4,000 tent spaces (40% of 10,000 units) and 60,000 RV spaces (60% of 10,000 units) P-13. Two competing business, Alpha Ltd. and Beta Ltd. sells the same type of product in the same type of market. For the year ending 31 st December, 2016, their budgeted Profit and Loss Accounts are as follows: Alpha Ltd. Beta Ltd. Tk. Tk. Tk. Tk. Sales 3,00,000 3,00,000 Less: Variable costs 2,40,000 2,00,000 Fixed overheads 30,000 2,70,000 70,000 2,70,000 Budgeted net profit 30,000 30,000 Required: Prepare a Profit/Volume Graph. Solution: Profit/Volume Graph Beta Ltd. Alpha Ltd. Profit Tk.‘000

BEP (300,000; 30,000)

…………. Sales (Tk.‘000) Tk.‘000 Fixed cost


P-14. P Company manufactures and sells a single product called Rets. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below:

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variables selling expense Fixed selling expense Total cost

Unit Tk.15 8 3 9 4 6 Tk.45

Total Tk.450,000 240,000 90,000 270,000 120,000 180,000 Tk.1,350,000

The Rets normally sell for Tk.50 each. Fixed manufacturing overhead is constant at Tk.270,000 per year within the range of 25,000 through 30,000 Rets per year. Required: (i) Assume that due to a recession, P Company expects to sell only 25,000 Rets through regular channels nest year. A large retail chain has offered to purchase 5,000 Rets if P is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, P Company would have to purchase a special machine to engrave the retail chain‘s name on then 5,000 units. This machine would cost Tk.10,000. P Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted. (ii) Refer to the original data, assume again that P Company expects to sell only 25,000 Rets through regular channels next year. The BD Army would like to make a one-timeonly purchase of 5,000 Rets. The Army would pay a fixed fee of Tk.1.80 per Ret, and it would reimburse P Company for all costs of production (variable and fixed) associated with the units. Since the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If P Company accepts the order, by how much will profit increase or decrease for the year? (iii) Assume the same situation as that described in (ii) above, except that the company expects to sell 30,000 Rets through regular channels next year. Thus, accepting the BD Army‘s order would require giving up regular sales of 5,000 Rets. If the Army‘s order is accepted, by how much will profit increase or decrease from what they would be if the 5,000 Rets were sold through regular channels? Solution: (i) Special order of 5,000 Rest from a large retail chain: Since the fixed costs will not change as a result of the order, they are not relevant to the decision. The cost of the new machine is relevant, and this cost will have to be recovered by the current order since there is no assurance of future business from the retail chain:

Revenue from the order (Tk.50 X 84%) Less. Costs associated with the order: Direct materials

Unit total – 5,000 units Tk.42 Tk.210,000 15

75,000


Direct labor Variable manufacturing overhead Variable selling expense (Tk.4 X 25%) Special machine (Tk.10,000 ÷ 5,000 units) Total costs Net increase in profits

8 3 1 2 29 13

40,000 15,000 5,000 10,000 145,000 65,000

(ii) Special order of 5,000 Rets from BD Army: Revenue from the order: Reimbursement for costs of production (variable production costs of Tk.26, plus fixed manufacturing overhead cost of Tk.9 = Tk.35 per unit X 5,000 units) Fixed fee (Tk.180 per unit X 5,000 units) Total revenue Less. Incremental costs – variable production costs (Tk.26 per unit X 5,000 units) Net increase in profits

Tk.175,000

9,000 184,000 130,000 54,000

(iii) Special order of 5,000 Rets from BD Army and giving up regular sales of 5,000 Rets: Sales revenue: From the BD Army (above) From regular channels (Tk.50 per unit X 5,000 units) Net decrease in revenue Less. Variable expenses avoided if the Army‘s order is accepted (Tk.4 per unit X 5,000 units) Net decrease in profits if the Army‘s order is accepted

Tk.184,000 250,000 (66,000) 20,000 (46,000)

P-15. Nisei Electronics produces and markets tape recorders and electronic calculators. Its 2017 income statement is as follows: Income Statements For the year ended 31 st December 2017 Tape Recorders Electronic Calculators Company wide Total Per unit Total Per unit Total [Tk.000] [Tk.000] [Tk.000] 1,050 15.00 3,150 22.50 4,200

Sales Production costs: Materials 280 Direct labor 140 Variable factory overhead 140 Fixed factory overhead 70 Total production cost 630 Gross profit 420 Fixed marketing and administrative expenses Income before income tax Income tax (55%) Net income

4.00 2.00 2.00 1.00 9.00 6.00

630 420 280 210 1,540 1,610

4.50 3.00 2.00 1,.50 11.00 11.50

910 560 420 280 2,170 2,030 1,040 990 544.5 445.5


The tape recorder business has been fairly stable in recent years, and the company has no plans to change the tape recorder price. However, because of increasing competition and market saturation, management has decided to reduce its calculator price to Tk.20, effective January 1, 2018, and to spend an additional Tk.57,000 in 2018 for advertising. As a result, Nisei estimates that 80% of its 2018 revenue will be from electronic calculator sales. The sales units mix for tape recorders and calculators was 1:2 in 2017 and is expected to be 1:3 in 2018 at all volume levels. For 2018, material costs are expected to drop by 10% and 20% for the tape recorders and calculators respectively; however, all direct labor costs are expected to increase by 10%. Required: (i) Compute the number of tape recorders and electronic calculators to break even, using 2017 data. (ii) Determine the sales amount required to earn an after tax profit of 9% on sales, using 2018 estimates. (iii) Compute the number of tape recorders and electronic calculators to break even, using 2018 estimates. Solution: (i) The 2017 sales mix in units is 1:2 (70,000 tape recorders; 140,000 electronic calculators) Let: x = Number of tape recorders to breakeven 2x = Number of electronic calculators to breakeven At breakeven: Sales = Variable costs + Fixed costs or, Tk.15x + 2 (Tk.22.50x) = Tk.8x + 2(Tk.9.50x) + Tk.13,20,000 or, Tk.15x + Tk.45x = Tk.8x + Tk.19x + Tk.13,20,000 or, 60x = Tk.27x + Tk.13,20,000 or, 33x = Tk.13,20,000 or, x = 40,000 tape recorders 2x = 80,000 electronic calculators Fixed costs: Factory overhead Marketing and administrative Total

Tk.280,000 10,40,000 13,20,000

(ii) The following formula can be used to calculate the sales amount required to earn an after tax profit of 9% on sales, using 2018 estimates: VC ( S )  FC  P ( S ) S= 1 T Where, S = Necessary sales amount VC = Variable cost stated as a percentage of sales amount (as per W-1) FC = Fixed cost (as per W-2) P = Desired profit stated as a percentage of sales amount


T = Income tax rate 0.46S  Tk.13,77,000  0.09( S ) S= 1  0.55 or, S = 0.46S + Tk.13,77,000 + 0.2S or, 0.34S = Tk.13,77,000 or, S = Tk.40,50,000 (iii) Let: x = Number of tape recorders to breakeven 3x = Number of electronic calculators to breakeven At breakeven: Sales = Variable costs + Fixed costs or, Tk.15x + 3 (Tk.20x) = Tk.7.80x + 3(Tk.8.90x) + Tk.13,77,000 or, Tk.15x + Tk.60x = Tk.7.80x + Tk.26.70x + Tk.13,77,000 or, 75x = Tk.34.50x + Tk.13,77,000 or, 40.50x = Tk.13,77,000 or, x = 34,000 tape recorders 3x = 1,020,000 electronic calculators Workings: 1. Variable cost rate for tape recorders and electronic calculators:

Sales Variable costs: Materials Direct labor Factory overhead Total variable cost Contribution margin

Tape recorder Per unit % Tk.15 100% 3.6 2.2 2.0 7.8 7.2

52% 48%

Electronic calculators Per unit % Tk.20 100% 3.6 3.3 2.0 8.9 11.1

44.5% 55.5%

Composite variable cost rate per Taka of sales: (0.20 X Tape recorder variable cost rate) + (0.80 X Calculator variable cost rate) = (0.20 X 0.52) + (0.80 X 0.45) = 0.104 + 0.356 = 0.46 2. Fixed costs: Factory overhead Marketing and administrative Additional advertising Total

Tk.2,80,000 10,40,000 57,000 13,77,000


EXERCISES E-1. The Octopi Lawn Chair Company produces and sells a single high-priced lawn chair and in 2017 the company produced and sold 30,000 units. The 2017 income statement of the company reported the following: Octopi Lawn Chair Company Income Statement For the year ended on December 31, 2017 Particulars Amount (Tk.) Sales 18,00,000 Variable costs 13,50,000 Contribution margin 4,50,000 Fixed costs 2,40,000 Income before taxes 2,10,000 Tax expense 63,000 Income after taxes 1,47,000 Required: (i) Calculate the per unit figure for each relevant item from the information provided above. (ii) Compute the break-even point in units for the year 2017. (iii) Determine the company‘s margin of safety in units for the year 2017. (iv) Determine the company‘s degree of operating leverage at the current level of operations. If the company‘s sales in units were to increase 30%, how much would profits before taxes increase in percentage terms? (v) Compute the sales level required in units to achieve a level of profits before taxes of Tk.2,70,000. (vi) Based on the original data above, determine the sales level required if the company desires a profit after taxes of Tk.2,10,000. It is believed that the tax rate will remain at current levels. (vii) Refer to the original data above, assume the company is expecting to experience a shortage of its main raw material. This situation is expected to result in an increase in the company‘s manufacturing costs of Tk.3 per unit. Under this circumstance, and assuming that the company does not believe that it can increase its selling price, determine the company‘s break-even pint and new safety margin. (viii) Refer to the original data above, management has decided to raise the price of its product to Tk.65 per unit. It also will spend an additional Tk.1,02,000 per year for advertising. Although it has never paid commissions before, the company has decided to begin paying sales personnel Tk.1 per unit for every unit sold. Determine the new breakeven point. Also determine the safety margin of the company under this plan if sales only reach 27,000 units. E-2. The marginal costing operating statement of PP Limited for the year just ended is as follows: Sales (5,000 units at Tk.5) 20,000 Variable costs 8,000 Contribution 12,000 Fixed cost 7,500 Profit 4,500


Required: (i) Calculate the break-even point. (ii) The sales level to achieve a target profit of Tk.22,500. (iii) The selling price to be charged to earn a profit of Tk.22,500 on sales of 10,000 units. (iv) Calculate margin of safety. E-3. R & W Ltd. manufactures and sells specialized Fountain Pen. The sale price of V7 model Fountain Pens is Tk.900/unit. variable expenses are Tk.630/unit. And fixed expenses associated with the product total Tk.1,350,000/month. At present, the company is selling 8,000 Pen per month. Required: (Use Rounding Figure) 1. Compute the company‘s BEP in number of Pen and in total Tk. sales. 2. Calculate the new BEP sales if sales price reduced by 10% and variable cost increased by 5%. 3. Considering req. 2 what would be the sales unit to achieve a minimum net income of Tk.720,000 per month? 4. If the variable expenses per Pen increase as a percentage of the selling price will it result in a higher or a lower break-even point? Why? (Assume that the fixed expenses remain unchanged.) E-4. Toma Corporation wishes to market a new product at a selling price of Tk.1.50 per unit. Fixed costs for this product are Tk.100,000 for less than 500,000 units of output and Tk.150,000 for 500,000 or more units of output. The contribution-margin percentage is 20%. Compute how many units of this product must be sold to earn a target operating income of Tk.100,000. E-5. Each problem is unrelated to the others: (i) Selling price per unit Tk.25, total fixed expenses Tk.60000, variable expenses per unit Tk.15. Find break-even sales in units. (ii) Selling price per unit Tk.35, total fixed expenses Tk.37000, variable expenses per unit Tk.14. Find total sales in units to achieve a profit of Tk.7500, assuming no change in selling price. (iii) Sales Tk.50000, total fixed expenses Tk.20000, variable expenses Tk.20000, net income Tk.10000. Assume no change in selling price find net income if activity volume increases 15%. (iv) Selling price per unit Tk.45, total fixed expenses Tk.80000, variable expenses per unit Tk.25 Assume that variable expenses are reduced by 20% per unit and the total fixed expenses are increased by 12%. Find the sales in units to achieve a profit of Tk.25000. E-6. Nasir Company forecasts next year‘s sales of product to be 50000 units at a sales price of Tk.10. management is considering a price reduction to Tk.9 with the expectation that sales and profit will increase. However, the elasticity of demand ranging from an estimated low capacity of only 2000 additional units sold to a high elasticity to be Tk.5 and the variable non-manufacturing cost is estimated to be 10% of sales revenue. At the high elasticity sales level, annual programmed fixed costs are expected to increase Tk.5000 and Tk.1000 for manufacturing and non-manufacturing costs respectively. Required: Compute the changes in the contribution to other fixed cost and to income tax if the sales price is reduced and the sales volume increases (i) 2000 units (ii) 30000 units.


E-7. The income statement of a recent month of a agro food producing company is given below: Sales (19,500 unit @ Tk.30) Variable expenses Contribution Margin Fixed Cost Net Loss

Tk.5,85,000 Tk.4,09,500 Tk.1,75,500 Tk.1,80,000 (Tk.4,500)

Required: (i) Compute the company‘s CM ratio and is break even in both units & taka. (ii) The president believes that a Tk.16,000 increase in the monthly advertising budget, combined with an intensified effort by sales staff, will result in a Tk.80,000 increase in monthly sales. What will be the amount of profit or loss in this situation? (iii) The Ministry of food of the Government has proposed to give a subsidy at the rate of 13% of the variable expenses if the company reduces the selling price by 10%. Should the company accept the offer if, (1) There is no change in Sales Volume. (2) There is an increase in Sales by 15%. E-8. Jahan Company distributes software that sells for Tk.15 per unit. Variable costs are Tk.6 per unit and fixed costs total Tk.180,000 annually. Required: (i) What is the products contribution margin (CM) ratio? (ii) Use the CM ratio to determine the break-even point in sales amount. (iii) The company estimates that sales increase by Tk.45,000 during the coming year due to increased demand. By how much should net operating income increase? (iv) Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a Tk.70,000 increase in advertising expenditures, would cause annual sales in units to increase by 50%. Prepare two contribution income statements, one showing the results of last year‘s operations and one showing what the results of operations would if these changes were made. Would you recommend that the company do as the sales manager suggest? (v) Assume again that the company sold 28,000 units last year. The Managing Director feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by Tk.2 per unit. He thinks that this move, combined with some increase in advertising, would cause annual sales to double. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. (iv) Assume that the operating results for last year were as follows: Sales……………………………...….. Tk.360,000 Less: Variable expenses……………. 144,000 Contribution margin……………….. 216,000 Less: Fixed expenses……………….. 180,000 Net operating income………………. Tk.36,000 Compute the degree of operating leverage at the current level of sales.


E-9. Kiran Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of Tk. 32 per unit. The company‘s unit costs at this level of activity are given below: Direct materials………………..……… Tk.10.00 Direct labor………………………..….. 4.50 Variable manufacturing overhead….… 2.30 Fixed manufacturing overhead……….. 5.00 (Tk.300,000 total) Variable selling expenses………….…. 1.20 Fixed selling expenses………………... 3.50 (Tk.210,000 total) Total cost per unit…………………..… Tk.26.50 A number of questions relating to the production and sales of Daks follow. Each question is independent. Required: a) Assume that Kiran Company has sufficient capacity to produce 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by Tk.80,000. Would the increased fixed selling expenses be justified? b) Assume again that Kiran Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would be Tk.1.70 per unit, and costs for permits and licenses would be Tk.9,000. The only selling costs that would be associated with the order would be Tk.3.20 per unit shipping cost. Compute the per unit break-even price on this order. c) The company has 1,000 Daks on hand that have some irregularities and are therefore considered to be ―seconds‖. Due to the irregularities, it will be impssible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? Explain. d) Due to strike in its supplier‘s plant, Kiran Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Kiran Company has enough material on hand to operate at 30% of normal levels for the two-month period. As an alternative, Kiran could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? e) An outside manufacturer has offered to produce Daks and ship the directly to Kiran‘s customers. If Kiran company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Since the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. E-10. Hasan pure water products company ltd. produces and sells pure water filtration unit. The company has a good reputation in the local market and has had a steady growth in sales for the past 5 years. However, increased competition has led the President of the company to believe that an aggressive marketing company will be necessary next year to maintain the company‘s present growth. The controller of the company has prepared the


data for the current year 2014 in order to preparation for the next year‘s marketing campaign: Cost per pure water unit: Variable cost: Direct material costs Direct labour costs Variable manufacturing overhead Variable marketing distribution cost Total variable cost Fixed cost: Manufacturing Marketing distribution Total Selling price unit Expected sales Income tax rate

Tk. 325.00 Tk. 800.00 Tk. 200.00 Tk. 50.00 Tk. 1,375.00 Tk. 1,25,00,000.00 Tk. 43,75,000.00 Tk.1,68,75,000.00 Tk. 2,5000.00 20,000 units 40%

Required: (i) What is the projected net income for 2014? (ii) What is the breakeven points in units for 2014? (iii) The President has set the revenue target for 2015 at a level 22,000 units. He believes that an additional marketing cost of Tk. 11,25,000.00 for advertisement in 2015 with all other costs remaining constant will be required to attain the revenue target. What is net income for 2015 if the additional cost Tk. 11,25,000.00 is spent and the revenue target is met? (iv) What is the breakeven point in revenues for 2015 if the additional cost is spent for advertisement? (v) If the additional cost of Tk. 11,25,000.00 is spent what are required 2015 revenues for 2015 net income to equal 2014 net income. E-11. Hawaiian Candy Company is a wholesale distributor of candy. Small but steady growth in sales has been achieved by the company over the past few years while candy prices have been increasing. The company is manufacturing its plants for the coming fiscal year. Presented below are the data used to project income of $184,000. Average selling price

$4.00 per box

Average variable costs Cost of candy Selling expenses Total

$2.00 per box $0.40 per box $2.40 per box

Annual fixed costs Selling Administrative Total

$160,000 $280,000 $440,000

Expected annual sales volume (390,000 boxes) $1,560,000


The manufacturing of the candy have announced that they will increase prices of their products by 15 percent in the coming year. The company expects that all other costs will remain the same rates or levels as the current year. Required: (i) What is Hawaiian Candy Company‘s breakeven point in boxes of candy and in dollar amount for the current year? (ii) Calculate margin of safety and degree of operating leverage of the current year. What will be change in expected profit if expected sales are increased by 15%? (iii) What selling price per box must the company charge to cover the 15 percent increase in the cost of candy and still maintain the current contribution margin ratio? E-12. A private hospital is organised into separate medical units which offer specialised nursing care (e.g. maturity unit, paediatric unit). Figures for the paediatric unit for the year to 31 June 2011 have just become available. For the year in question the paediatric unit charged patients Tk.2,000 per patient day for nursing care and Tk.44 million in revenue was earned. Cost of running the unit consists of variable costs, direct staffing costs and allocated fixed costs. The charges for variable costs such as catering and laundry are based on the number of patient days spent in hospital. Staffing costs are established from the personnel requirements applicable to particular levels of patient days. Charges for fixed costs such as security, administrations etc. are based on bed capacity, currently 80 beds. The number of beds available to be occupied is regarded as bed capacity and this is agreed and held constant for the whole year. There was an agreement that a bed capacity of 80 beds would apply to the paediatric unit for the 365 days of the year to 31 June 2011. The table below shows the variable, staffing and fixed cost applicable to the paediatric unit for the year to 31 June 2011. Variable costs (based on patients days)Tk. Catering 4,050,000 Laundry 1,500,000 Pharmacy 5,000.000 11,100,000 Staffing costs Each speciality recruits its own nurses, supervisors and assistants. The staffing requirements for the paediatric unit are based on the actual patient days, see the following table: Patients Days per annum Supervisors Nurses Assistants Up to 20,500 4 10 20 20,500 to 23,000 4 13 24 Over 23,000 4 15 28 The annual costs of employment are: supervisors Tk.220,000 each, nurses Tk.160,000 each and assistants Tk.120,000 each. Fixed costs (based on bed capacity) Administration Security Rent and property

Tk. 8,500,000 800,000 7,200,000


During the year to 31 June 2011 the paediatric unit operated a 100% occupancy (i.e. all 80 beds occupied) for 100 days of the year. In fact, the demand on these days was for at least 20 beds more. As a consequence of this, in the budget for the following year to 31 June 2012, an increase in the bed capacity has been agreed. 20 extra beds will be contracted for the whole of the year. It is assumed that the 100 beds will be fully occupied for 100 days, rather than being restricted to 80 beds on those days. An increase of 10% in employment costs for the year to 31 June 2012, due to wage rate rises, will occur for all personnel. The revenue per patient day, all other cost factors and the reaming occupancy will be the same as the year to 31 June 2011. Required: (a) Determine, for the year to 31 June 2011, the actual number of patient-days, the bed occupancy percentage, the net profit/loss and the break-even numbers(s) of the patient days for the paediatric unit. (b) Determine the budget for the year to 31 June 2012 showing the revised number of patient-days required to achieve the same profit/loss as computed in (a) above. (c) The margin of safety of a certain level of sales of a company is 40%. The profit is Tk.100,000. The management wants to increase sales by 15%. What will be the expected profit after the increase of sales? Show the relationship between margin of safety and degree of operating leverage. E-13. Laws Stores Ltd. owns a large out-of-town store selling equipment. For reporting and control purposes it splits the business into four product groups: Ball sports, racquet sports, Water sports and Outdoor activities. The board of directors is dominated by the Laws family who has hears a rumor that one of the large quoted sports goods retailers is seeking planning permission to build a new store nearby. The board of Laws Store Ltd. feels that to compete they may have to decrease the prices of their products. For the forthcoming year, before any price changes and implemented, budgeted information is as follows: Ball sports Racquet sports Water sports Outdoor activities (Tk.) (Tk.) (Tk.) (Tk.) Sales 800,000 400,000 250,000 150,000 Variable costs 500,000 260,000 190,000 126,000 Fixed costs of operating the store are budgeted to be Tk.400,000. Price decreases are being contemplated as follows:

Ball sports Racquet sports Water sports Outdoor sports

Average price decrease (%) 10 5 6 4


Although these price decreases are expected to be needed to defend sales volume from the threat posed by new competition, the directors believe that sales volume for water sports and Outdoor activities might even increase as a result of the lower prices being proposed. In fact, the sales volume changes as a result of the decrease in prices are expected to be as follows: Ball sports Unchanged if prices are decreased by 10% Racquet sports Unchanged if prices are decreased by 5% Water sports Increase of 15% if prices are decreased by 6% Outdoor activities Increase of 10% if prices are decreased by 4% Required: (i) Calculate the C/S ratio and breakeven sales revenue for the store before any changes to product selling prices. (ii) Calculate the effect upon profit of the proposed price changes and suggest whether they should be implemented. (iii) Discuss the other factors that should be considered before implementing the proposed changes to product prices. E-14. Two competing business, A Ltd. and B Ltd. sells the same type of product in the same type of market. For the year ending 31st December, 2011, their budgeted Profit and Loss Accounts are as follows: A Ltd. B Ltd. Tk. Tk. Tk. Tk. Sales 6,00,000 6,00,000 Less: Variable Cost 4,80,000 4,00,000 Fixed overheads 60,000 5,40,000 1,40,000 5,40,000 Budgeted Net Profit 60,000 60,000 Required: (i) Prepare a Profit/Volume Graph. (ii) Calculate the break-even point of each business. (iii) Calculate the sales volume at which each of the two companies will make a profit of Tk.20,000. (iv) State which business is likely to earn greater profits in conditions of: (a) Low demand for the product. (b) Heavy demand for the product. Give your reasons. E-15. Bengal Travel agency specializes in flights between Dhaka and London. It books passengers on United Airlines at Tk.90,000 per round-trip ticket. Until last month, United paid Bengal a commission of 10% of the ticket price paid by each passenger. This commission was Bengal‘s only source of revenues. Bengal‘s fixed cost are Tk.14,00,000 per month (for salaries, rent, etc) and its variable costs are Tk.2,000 per ticket purchased for a passenger. This Tk.2,000 includes a Tk.1,500 per ticket delivery fee paid to DHL. Assume each round trip ticket purchased is delivered in a separate package. Thus, the Tk.1,500 delivery fee applies to each ticket. United Airlines has just announced a revised payment schedule for travel agents. It will now pay travel agents a 10% commission per ticket up to a maximum of Tk.5,000. Any


ticket costing more than Tk.50,000 generates only a Tk.5,000 commission, regardless of the ticket price. Required: (i) Under the old 10% commission structure, how many round-trip tickets must Bengal sell each month (a) to break even and (b) to earn an operating income of Tk.700,000? (ii) How does United‘s revised payment schedule affect your answer to (a) and (b) in requirement? E-16. Mr. Din Mohammad is a traveling inspector for the Environmental protection Agency. He uses his own car and the agency reimburses him at Tk.18.00 per kilometer. Mr. Din Mohammad claims that he needs Tk.22.00 per kilometer just to break-even. A scrutiny of his expenses by agency reveals the following: Oil charge for every 4,800 km Maintenance (other than oil) every 9,600 km Yearly insurance (comprehensive with accident benefits) Cost of car with an average residual value of Tk.6,00,000 and with a useful life of 3 years.

Tk.1,200 Tk.18,000 Tk.40,000 Tk.10,80,000

Petrol cost is Tk.50 a liter and Din Mohammad gets 8 km per liter in his car. When Din Mohammad is on the road, he averages 192 km a day. He works 5 days a week, his 10 days vacation in a year, besides 6 holidays, and spends 15 working days a month in the office. Required: (1) An equitable rate of reimbursement on the basis of the schedule he presently follows. (2) The number of kilometers a year he would have to travel, to break-even at the current rate of reimbursement. E-17. Dynamic Foods Ltd. which recently launched a new product, Tastewell, after initial estimation of demand and costs, would like to have a review through fresh projections based on the available information on actual production, costs and revenue. The product is sold in one kg home packs. Performance, pertaining to the previous two quarters, detailed below, can be projected to the future. There were no inventories at the end of each quarter. Tax incidence can be reckoned at 50%. First quarter Second quarter (Tk.) (Tk.) Sales 60,000 packs 96,00,000 Sales 80,000 packs 1,28,00,000 Cost of goods sold 58,00,000 70,00,000 Gross profit 38,00,000 58,00,000 Selling and administration expenses 48,00,000 52,00,000 Profit before tax (10,00,000) 6,00,000 Tax (50%) 3,00,000 Profit after tax (10,00,000) 3,00,000 Required: (i) What is the break even volume in terms of quarterly sales of home packs?


(ii) On an investment of Tk.10,00,000 for Tastewell, an after tax return of 15% is expected. What should be the volume of sales and the sales revenue for getting this return? (iii) The marketing manager of Dynamic Foods Ltd. expects a 20% increase in sales over the second quarter, if a reduction of Tk.10 per pack in price is couples with an advertisement outlay of Tk.6,00,000. Should this proposal be accepted? E-18. From the cost records of a company for a specific period for product X, the information given in the first column is extracted. The second column can be ignored since it is only one of the several projection of a cost accountant, but it may be useful to you. This period actual One of the future projections Sales in units 1,00,000 2,00,000 Profit (loss) Tk.(10,00,000) Tk.10,00,000 Fixed costs Tk.30,00,000 Tk.30,00,000 Variable cost per unit Tk.80.00 Tk.80.00 On the basis of the first column, determine. (i) What increased sales volume is required to cover an extra attractive packaging cost of Tk.5 per unit, to increase the sales price, to yield zero profit? (ii) What increased sales volume is required at the present sale price, to cover an additional publicity expense to Tk.5,00,000 for that period, while yielding a profit of Tk.5,00,000? (iii) What increased sales volume is required to reach a profit of Tk.4,00,000 while reducing the selling price by 3% per unit? E-19. Powermann Ltd. manufactures and makes a single product. The following information is available: Tk. per unit Materials 8.00 Conversion costs (variable) 6.00 Dealer‘s margin 2.00 Selling price 20.00 Fixed costs: Tk.250,000 Present sales: 80,000 units Capacity utilization: 60% There is acute competition. Extra efforts are necessary to sell. Suggestions have been made for increasing sales: (i) by reducing sales price by 5%; and (ii) by increasing dealer‘s margin by 25% over the existing rate. Required: Which of the two suggestions would you recommended if the company desires to maintain the present profit? Give reasons. E-20. The operating statement of Transcend Ltd. exhibited results for the month of June 2008: Taka Taka Net sales 1,00,000 Less: Cost of goods sold 60,000 Gross profit 40,000


Less: Distribution cost Administration cost

20,000 10,000

30,000 10,000

The breakdown of the various costs into fixed and variable is as follows: Fixed Taka 20,000 15,000 10,000

Cost of goods sold Distribution cost Administration cost

Variable Taka 40,000 5,000

Required: From the above information ascertain: (i) What the break-even point in value for June 2008 was? (ii) What effect on profit would be variable expenses come to be 50% of the sales? (iii) What the effect on the profit would be, if sales increased by 10%? E-21. Determine the level of sales a company must attain to cover its fixed and variable costs, where the selling price is Tk.5, total fixed costs are Tk.1,60,000 and the contribution margin ratio is 40%. Required: Determine the company‘s break-even point in units and taka using algebraic approaches. E-22. Samir company‘s projection for the coming year is as follows:

Sales Less Variable expenses Contribution margin Less Fixed expenses Operating income

Total (Tk.) 200,000 120,000 80,000 64,000 16,000

Per Unit (Tk.) 20 12 8

Required: (i) Compute the break-even point in units. (ii) How many units must be sold to earn a profit of Tk.30,000? (iii) Compute the contribution margin ratio. Using the ratio compute the additional profit that Samir would earn if sales were Tk.25,000 more than expected. (iv) Suppose Samir would like to earn operating income equal to 20 percent of sales revenue. How many units must be sold for this goal to be realized? Prepare an income statement to prove your answer. E-23. Miracle Enterprise produces single product. The projected income statement for 2008 based on sales of 2,00,000 units is as follows: Taka Sales 40,00,000 Variable costs 22,00,000 Contribution margin 18,00,000 Fixed costs 15,30,000 Operating income 2,70,000


Required: (i) Break-even units and sales revenue (ii) Margin of safety and operating leverage (iii) How many units must be sold to earn a profit equal to 10% of sales? (iv) Compute BEP sales revenue assuming 5% increase in selling price, 10% increase in variable costs (v) Assume the income tax rate is 40%. How many units must be sold to earn after tax profit of Tk.1,80,000


CHAPTER - 5 CASH FLOW STATEMENT

5.1. DEFINITION OF CASH AND CASH EQUIVALENTS As per IAS 7, cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash and which are subject to an insignificant risk of changes in value. An entity shall disclose the followings in respect of cash and cash equivalents: - the components of cash and cash equivalents; - a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position. 5.2. MEANING OF CASH FLOWS AND STATEMENT OF CASH FLOWS Cash flows are inflows and outflows of cash or cash equivalents. It is the amount of cash or cash equivalent which the company receives from the debtors or paid to the creditors. A statement of cash flows (also known as cash flow statement) is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents and breaks the analysis down to operating, investing and financing activities. 5.3. BENEFITS OF STATEMENT OF CASH FLOWS (a) A statement of cash flows provides information to its users about the changes in net assets of an entity, its financial structure and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. (b) Statement of cash flows is useful in an entity to determine the balance of cash and cash equivalents and enables users to compare the present value of the future cash flows of different entities. It eliminates the effects of using different accounting treatment for the same transactions and events. (c) Cash flow information is used to forecast the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices. (d) Statement of cash flows helps in efficient management of cash. One of the most important functions of an organization is to manage cash so that it can meet its short term liabilities. A statement of cash flows is a useful tool for doing so. (e) As the repayment of long term debts depends on the availability of cash, the cash flow analysis helps the management in determining the possibility of repayment of long term debts. It thus better predicts the amounts, timing and uncertainty of future cash flows.


5.4. PRESENTATION OF STATEMENT OF CASH FLOWS A statement of cash flows shall classifies and presents cash inflows and outflows during a year under following headings: (a) Cash flows from operating activities; (b) Cash flows from investing activities; and (c) Cash flows from financing activities. (a) Cash flows from operating activities: Cash flows from operating activities are derived from ongoing, regular business activities of the entity and it does not include long-term capital or investment costs. It generally results from the transactions and other events that enter into determination of profit or loss. It includes the followings: (i) cash receipts from the sale of goods and the rendering of services; (ii) cash receipts from royalty, fees, commissions and other revenue; (iii) cash payments to suppliers for goods and services; (iv) cash payments to employees; (v) cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits; (vi) cash payments or refunds of income taxes unless they can be specifically identified with investing and financing activities; and (vii) cash receipts and payments from contracts held for dealing or trading purposes. (b) Cash flows from investing activities: Cash flows from investing activities are derived from the acquisition and disposal of longterm assets and from other investments that are not included in cash equivalents. Only expenditures that result in a recognised asset in the statement of financial position are eligible to be classified as cash flows from investing activities. It includes the followings: (i) cash payments to acquire property, plant and equipment, intangible and other long-term assets; (ii) cash receipts from sale of property, plant and equipment, intangibles and other longterm assets; (iii) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures; (iv) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures; (v) cash advances and loans made to other parties; (vi) cash receipts from the repayment of advances and loans made to other parties; (vii) cash payments for future contracts, forward contracts, option contracts and swap contracts; and (viii) cash receipts from future contracts, option contracts and swap contracts. (c) Cash flows from financing activities: Cash flows from financing activities are derived from the activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.


It includes the followings: (i) cash proceeds from issue of shares or other equity instruments; (ii) cash payments to owners to acquire or redeem the entity‘s shares; (iii) cash proceeds from issue of debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings; (iv) cash repayments of amounts borrowed; and (v) cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease. 5.5. REASONS FOR PREPARING SATEMENT OF CASH FLOWS A complete set of financial statements is made up of five components. Statement of cash flows is one of them. An organization prepares statement of cash flows for many reasons. Some of the major ones are discussed below: (a) Explanation of the changes in cash: Statement of cash flows explains the reasons of the change in company‘s cash and cash equivalents during a particular accounting period by showing the details of cash generated and cash used to perform operating, investing and financing activities of the business. (b) Anticipation of future cash flows: The management, creditors, actual and perspective investors and competitors of the company are interested to know the ability of the company to generate positive cash flows in future. The statement of cash flows enables these parties to understand how company manages cash and to anticipate the impact of current cash receipts and cash disbursements on future cash flows of the business. (c) Legal requirements: In some countries, the companies are legally required to prepare and present financial statements in accordance with international financial reporting standards (IFRSs). As the statement of cash flows is one of the basic components of financial statements, its presentation is legally required in some countries. (d) Information about non-cash activities: Sometime non-cash activities have a significant impact on the future cash flows of the entity and therefore their disclosure to the users of financial statements becomes necessary. For this reason, a company disclose non-cash investing and financing activities either in the statement of cash flows or in the footnotes to the financial statements. (e) Explanation of the differences between net income: The statement of cash flows explains the reasons of the difference between the net income and the related net cash flows from operating activities. 5.6. METHODS OF PREPARING STATEMENT OF CASH FLOWS Two methods are available to prepare a statement of cash flows: (a) The direct method: The direct method is a method of creating a statement of cash flows during a given reporting period. This method uses actual cash flow information from the company's operations segment, instead of using accrual accounting values.


(b) The indirect method: The indirect method is a method for creating a statement of cash flows a company may use during any given reporting period. This method uses accrual accounting information to present the cash flows from the operations section of the statement of cash flows. The Financial Accounting Standards Board (FASB) prefers the direct method, while many businesses prefer the indirect method. Regardless of which method is used, the bottomline cash balance is the same. 5.7. DIFFERENCES BETWEEN DIRECT AND INDIRECT METHOD Direct method (a) The direct method of cash flow reports cash receipts and cash payments from operating activities. (b) This method adjusts the revenues and expenses directly to reflect the cash basis. (c) In case of direct method, to compute net cash flow from operating activities, the operating cash payment is deducted from operating cash receipts. (d) It requires a supplemental reconciliation of net income to cash flow from operating activities. (e) The direct method also called the income statement method.

Indirect method (a) The indirect method of cash flow starts with net income and converts it to net cash flow from operating activities. (b) This method adjusts the accrual net income. (c) In case of indirect method, to compute net cash flow from operating activities, non-cash items are added or deducted to net income. (d) It does not require any supplemental reconciliation of net income to cash flow from operating activities. (e) The indirect method also called the reconciliation method.

5.8. LIMITATIONS OF SATEMENT OF CASH FLOWS (a) Statement of cash flows shows only cash inflow and cash outflow. But, the cash balance disclosed by the statement cannot reveals the true liquid position of the business. It does not give complete picture of the financial position of the business concern. (b) Among all the basic financial statements, the statement of cash flows is least commanding, especially during the periods of high liquidity and solvency. When a business does not need external financing or investment opportunities, the cash flows statement tends to be ignored. (c) The transactions reflected in the statement of cash flows are specific. The transactions reflected in the statement of cash flows could not be extrapolated based on past trends unlike revenues and expenses). It cannot be used by the management as a forecasting tool. (d) Cash flow statement is not a substitute for income statement. Cash flow statement should not be equated with income statement. The net cash flow disclosed by cash flow statement does not necessarily mean net income of the business, because net income is determined by taking into account both cash and non-cash items. (e) Statement of cash flows does not measure the economic performance of a firm. So it is not applicable in making comparison the efficiency of an organization with others. It just provides the information about an organization how many cash it has paid and received.


5.9. EXPLANATION OF FREE CASH FLOW Free cash flow is the cash a company generates through its operations, less the cost of expenditures on assets. In general words, free cash flow is the cash left over after a company pays for its operating expenses and capital expenditures. It shows how efficient a company is at generating cash. Investors use free cash flow to measure whether a company might have enough cash, after funding operations and capital expenditures, to pay investors through dividends and share buybacks. To determine free cash flow from the statement of cash flows, capital expenditures are deducted from operating cash flows that can be expressed as: Free cash flow = Operating cash flow – Capital expenditure Example: Suppose, following information is gathered from a statement of cash flows of a company for the year ended December 31, 2017. Cash flows from operating activities = Tk.800,000 Capital expenditures = Tk.200,000 So, we can determine the free cash flow as below, Free cash flow = Tk.800,000 – Tk.200,000 = Tk.600,000 5.10. DIFFERENCES BETWEEN FREE CASH FLOW AND OPERATING CASH FLOW Free cash flow (a) The cash left with the company to be apportioned among the shareholders is known as free cash flow. (b) Free cash flow is the cash, a company produces through its operations after subtracting any outlays of cash for investment in fixed assets (c) It discloses the performance of the company (d) Free Cash Flow uses only cash from operating activities for its calculation. (e) It is helpful in determining a company‘s financial health.

Operating cash flow (a) The inflow and outflow of cash during a particular financial year is known as operating cash flow. (b) Operating cash flow is the net amount of cash and cash-equivalents being transferred into and out of a company. (c) It discloses the solvency of the company. (d) It is calculated by the summation of cash inflow and cash outflow activities. (e) It is helpful in determining the liquidity of a company.

5.11. NON-CASH TRANSACTIONS A non-cash transaction is an economic event in which a company doesn‘t require the use of cash or cash equivalents. Accountants sometimes call this type of transaction as a ‗nonmonetary transaction‘ or ‗non-cash item‘. Such transactions shall be excluded from a statement of cash flows. Examples of non-cash transactions are: (a) the acquisition of assets by means of a finance lease; (b) the acquisition of an entity by means of an equity issue; and (c) the conversion of debt to equity.


5.12. DISCLOSURE (a) Cash flows from dividends received and paid shall each be disclosed separately. Each shall be classified as either operating, investing or financing activities. Dividends received are usually classified as cash flows from operating activities for a financial institution because they enter into the determination of profit or loss. Alternatively, dividends received may be classified as cash flows from financing activities and cash flows from investing activities respectively, because they are costs of obtaining financial resources or returns on investments. Dividends paid may be classified as cash flows from financing activities because they are a cost of obtaining financial resources. Alternatively, dividends paid may be classified as cash flows from operating activities in order to assist users to determine the ability of an entity to pay dividends out of operating cash flows. (b) Cash flows from interest received and paid shall each be disclosed separately. Each shall be classified as either operating, investing or financing activities. Interest paid and received are usually classified as cash flows from operating activities for a financial institution. (c) Cash flows arises from income taxes shall be separately disclosed and shall be classified as cash flows from operating activities unless these are specifically identified with financing and investing activities.


FORMAT OF THE STATEMENT OF CASH FLOWS

Company name Statement of cash flows (Indirect method) For the year ended ‌‌

Currency Cash flows from operating activities: Net profit before interest and taxation Adjustments for: Depreciation/Amortisation Increase/decrease of provisions Profit/loss on disposal of assets Investment income Finance costs Operating profit before working capital changes Increase/decrease in current assets Increase/decrease in current liabilities Cash generated from operations Interest paid Taxation paid Net cash provided/used from operating activities Cash flows from investing activities: Purchase/sale of non-current assets Purchase/sale of intangibles Purchase/sale of investments Interests received Dividends received Net cash generated/used from investing activities Cash flows from financing activities: Purchase/issue of shares Proceeds/redemption of debentures Proceeds/repayments of non-current liabilities Dividends paid Net cash generated/used from financing activities Net increase/decrease in cash and cash equivalents Add. Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

Currency

X X X/(X) (X)/X (X) X X (X)/X X/(X) X (X) (X) X/(X)

(X)/X (X)/X (X)/X X X X/(X)

(X)/X X/(X) X/(X) (X) X/(X) X/(X) X X


Company name Statement of cash flows (Direct method) For the year ended ‌‌ Currency Cash flows from operating activities: Receipts from customers (N-1) Payments to suppliers (N-2) Payments to employees (N-3) Payment to other expenses (N-4) Interest paid (N-5) Taxation paid (N-6) Net cash provided/used from operating activities

X (X) (X) (X) (X) (X)

Cash flows from investing activities: Purchase/sale of non-current assets Purchase/sale of intangibles Purchase/sale of investments Interests received Dividends received Net cash generated/used from investing activities

(X)/X (X)/X (X)/X X X

Cash flows from financing activities: Purchase/issue of shares Proceeds/redemption of debentures Proceeds/repayments of non-current liabilities Dividends paid Net cash generated/used from financing activities Net increase/decrease in cash and cash equivalents Add. Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

Currency

X/(X)

X/(X)

(X)/X X/(X) X/(X) (X) X/(X) X/(X) X X

Notes: 1. Receipts from customers: Sales Add. Accounts receivable at beginning Less. Accounts receivable at end 2. Payment to suppliers: Cost of goods sold Add. Inventories at end Less. Inventories at beginning Purchase Add. Accounts payable at beginning Less. Accounts payable at end

X X (X) X X X (X) X X (X) X


3. Payment to employees: Salary expenses Add. Outstanding expenses at beginning Less. Outstanding expenses at end 4. Payment to other expenses: Other expenses Add. Increase in prepaid expenses 5. Interest paid: Interest expenses Add. Outstanding interests at beginning Less. Outstanding interests at end 6. Taxation paid: Taxation expenses Add. Outstanding taxation at beginning Less. Outstanding taxation at end

X X (X) X X X X X X (X) X X X (X) X


SELF PRACTICE QUESTIONS 1. Define cash equivalents and non-cash transaction as per IAS-7. Give some examples of non-cash transactions. How to report non-cash activities in the financial statement? 2. What is Free Cash Flow? How does it differ from Operating Cash Flow? 3. Define cash, cash equivalents, cash flows and operating activities and your definitions will be given in the light of IAS 7 and no explanation is required. 4. As per IAS-7 Para 10, Cash Flows must be analysed between operating, investing and financial activities. Being a professional accountant how you will explain operating, investing and financing activities? 5. Cash flow statements are a valuable source of information. However, there may be certain important non-cash transactions: give 4 (four) examples of such transactions. 6. Why is it necessary to convert accrual-based net income to a cash basis when preparing a statement of cash flows? 7. As a professional accountant can you compare with the direct method of cash flow and indirect method of cash flow? 8. What is the difference between cash book and cash flow statement? Explain.


SELF PRACTICE QUESTIONS ANSWER 1. Cash equivalent as per IAS-7: Cash equivalents are short-term, highly liquid investments that are readily convertible into cash. For example, treasury bill and money market accounts are two examples of cash equivalent Non-cash transactions as per IAS-7: Investing and financial transactions that do not require the use of cash or cash equivalent is known as non-cash transactions. Example includes the acquisition of assets by means of finance lease. Reporting non-cash activities: Generally, cash transactions are recorded in the statement of cash flows, but in case of non-cash transactions we cannot use the same technique. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these non-cash investing and financing activities. To record a non-cash investing and financing activity, we should include a footnote on the bottom of the statement of cash flows or in the notes of the financial statements. We can also disclose the non-cash investing and financing activity in a separate schedule or list. 2. Free Cash Flow: Free cash flow is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other purposes. Difference between operating cash flow and free cash flow: Operating cash flow Free cash flow 1. The inflow and outflow of cash during a 1. The cash left with the company to be particular financial year is known as apportioned among the shareholders is operating cash flow. known as free cash flow. 2. It discloses the solvency of the 2. discloses the performance of the company. company. 3. It is calculated by the summation of 3. Free Cash Flow uses only cash from cash inflow and cash outflow activities. operating activities for its calculation. 4. It is helpful in determining the liquidity 4. It is helpful in determining a company‘s of a company. financial health. 3. Cash: Cash comprises cash on hand and demand deposits. Cash equivalents: Cash equivalents are short-term, highly liquid investments that are readily convertible into cash. For example, treasury bill and money market accounts are two examples of cash equivalent


Cash flows: Cash flows are inflows and outflows of cash and cash equivalents. Operating activities Operating activities are the activities that directly affect an organization‘s cash inflows and outflows. Such as cash receipts from sales of goods and services and cash payments to suppliers for acquisitions of inventory. 4. Operating activities: Operating activities are the activities that directly affect an organization‘s cash inflows and outflows. Such as cash receipts from sales of goods and services and cash payments to suppliers for acquisitions of inventory. Investing activities: Investing activities involve long-term assets. It is an accounting treatment of funds related to the company‘s investments. It involves sale or purchase of equipment, plants or properties and other long-term assets not included in cash equivalent. Financing activities: Financing activities involve long-term liabilities and stockholders‘ equity items. It is an accounting treatment of funds related to the financing of a company. It involves obtaining cash from creditors and repaying the amounts borrowed. 5. The examples of non-cash transactions of cash flow statement: 1. Bonus share issued to the existing shareholders 2. Assets acquired in exchange of shares 3. Assets acquired by finance lease 4. Conversion of debt to equity 6. It is necessary to convert accrual-based net income to a cash basis when preparing a statement of cash flows because net income includes items that do not use cash. An example would be an increase in accounts receivable. If accounts receivable increases during the period, revenues reports on the accrual basis would be higher than the actual cash revenues received. So, accrual basis net income must be adjusted to reflect the net cash flow from operating activities. 7. Yes, as a professional accountant I can compare with the direct method of cash flow and indirect method of cash flow. The direct method of cash flow reports cash receipts and cash payments from operating activities. The indirect method of cash flow starts with net income and converts it to net cash flow from operating activities.


The direct method adjusts the revenues and expenses directly to reflect the cash basis. The indirect method adjusts the accrual net income. By direct method, to compute net cash flow from operating activities, the operating cash payment is deducted from operating cash receipts. By indirect method, to compute net cash flow from operating activities, non-cash items are added or deducted to net income. The direct method also called the income statement method. The indirect method also called the reconciliation method. 8. The differences between cash book and cash flow statement: Cash book Cash flow statement 1. Cash book is the book where all cash 1. Cash flow statement is a statement transactions are recorded. which reports cash receipts, cash payments and net change in cash resulting from operating, investing and financing activities of an enterprise during a period. 2. The purpose of cash book is to provide 2. The purpose of cash flow statement is to information about cash position of a provide information about cash receipts company during a period. and cash payments of a company during a period.


PROBLEMS AND SOLUTIONS P-1. Sonali Co. Ltd. had the following condensed balance sheet at the end of operations in 2016: Sonali Co. Ltd. Balance Sheet As on 31 December, 2016 Assets Cash Other current assets Investments Plant Land

Taka 10,500 30,000 50,000 75,000 60,000 ______ 2,25,500

Liabilities Current liabilities Long-term notes payable Bonds payable Capital stock Retained earnings Bank loans

Taka 25,000 30,500 35,000 90,000 25,000 20,000 2,25,500

During 2017, the following transactions occurred: (a) A piece of land was purchased for Tk.10,000. (b) Bonds payable for the amount of Tk.15,000 were retired at par. (c) An additional Tk.10,000 in capital stock was issued at par. (d) Dividends totaling Tk.9,375 were paid to shareholders. (e) Net income was Tk.45,250 after allowing depreciation of Tk.14,500. (f) Land purchased through issuance of bonds of Tk.25,000. (g) Sonali Co. Ltd. sold a part of its investment portfolio for Tk.12,875. This transaction resulted in a gain of Tk.2,000 for the company. (h) The premium paid on redemption of bank loans was Tk.2,000, which has been written off to income statement. Required: Prepare a statement of cash flow for the year ended 31 December, 2017. Solution: Sonali Co. Ltd. Statement of Cash Flow For the year ended 31 December, 2017 Amount Tk. Cash flows from operating activities: Net income Adjustments for: Depreciation expense Gain on sale of investment Premium paid on redemption of Bank loans Net cash provided from operating activities

Amount Tk.

45,250 14,500 (2,000) 2,000 59,750


Cash flows from investing activities: Purchase of land Sale of investments Net cash used from investing activities Cash flows from financing activities: Retirement of bonds payable Issue of capital stock Redemption of bank loans Cash dividends paid Net cash used from financing activities Net increase in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year

(10,000) 12,875 2,875

(15,000) 10,000 (22,000) (9,375) (36,375) 26,250 10,500 36,750

P-2. Avatar Ltd. had the following statement of financial position at 31 March 2016 and 2017: 2016 2017 Tk.’000 Tk.’000 Assets Non-current assets at cost 1,000 1,300 Accumulated depreciation (400) (600) 600 700 Currents assets Inventory 800 1,400 Receivables 2,700 3,100 Bank 200 4,300 5,200 Equity and liabilities Share capital 1,000 1,300 Share premium 500 700 Retained earnings 1,200 1,240 2,700 3,240 Currents liabilities Payables 1,300 1,580 Declared ordinary dividend 300 260 Bank overdrafts _ 120 4,300 5,200 During the year to 31 March 2017, non-current assets costing Tk.50,000 were sold for Tk.40,000 cash. Accumulated depreciation on these to 31 March 2016 was Tk.20,000. Required: Prepare the statement of cash flows for the year ending 31 March 2017.


Solution: Avatar Limited Statement of Cash Flows For the year ended 31 March 2017 Amount Tk. Cash flows from operating activities: Increase in retained earnings Depreciation expense (600,0000 – 400,000) + 20,000 Profit on sale of non-current assets 40,000 – (50,000 – 20,000) Operating profit before working capital changes Dividend declared Increase in inventory Increase in receivables Increase in payables Net cash used from operating activities Cash flows from investing activities: Sale of non-current assets Purchase of non-current assets Net cash used from investing activities Cash flows from financing activities: Issuance of shares (1300,000 + 700,000) – (1000,000 + 500,000) Dividends paid Net cash provided from financing activities Net decrease in bank balance Add: Bank balance at the beginning of year Bank balance at the end of year

Amount Tk.

40,000 220,000 (10,000) 250,000 260,000 (600,000) (400,000) 280,000 (210,000)

40,000 (350,000) (310,000)

500,000 (300,000) 200,000 (320,000) 200,000 (120,000)

P-3. The comparative balance sheet of Nixon Company as of December is presented below: Nixon Company Comparative Balance Sheet As on December 31, 2017 Assets Cash Accounts receivable Inventory Prepaid expenses Land Equipment Accumulated depreciation – equipment Building Accumulated depreciation – building

2017 (Tk.) 71,000 44,000 1,51,450 15,280 1,05,000 2,28,000 (45,000) 2,00,000 (60,000) 7,09,730

2016 (Tk.) 45,000 62,000 1,42,000 21,000 1,30,000 1,55,000 (35,000) 2,00,000 (40,000) 6,80,000


Liabilities and stockholder’s equity Accounts payable Bonds payable Common stock Tk. 1 par Retained earnings

47,730 2,60,000 2,00,000 2,02,000 7,09,730

40,000 3,00,000 1,60,000 1,80,000 6,80,000

Additional information: (a) Operating expenses include depreciation expenses of Tk. 42,000 and charges from prepaid expenses of Tk. 5,720. (b) Land was sold for cash at book value. (c) Cash dividends of Tk. 15,000 were paid. (d) Net income for 2017 was Tk. 37,000. (e) Equipment costing Tk. 22,000 with a book value of Tk. 10,000 was sold for Tk. 6000 cash. (f) Bonds were converted at face value by issuing 40,000 shares of Tk. 1 par value of common stock. Required: Prepare a statement of cash flows using the indirect method for the year ended December 31, 2017. Solution: Nixon Company Statement of cash flow For the year ended December 31, 2017 Amount Tk. Cash flows from operating activities: Net income Adjustments for: Depreciation expense Loss on sale of equipment Operating profit before working capital changes Decrease in accounts receivable Increase in inventory Decrease in prepaid expenses Increase in accounts payable Net cash provided from operating activities Cash flows from investing activities: Sale of land Purchase of equipment {228,000 – (155,000 – 22,000)} Sale of equipment Net cash used from investing activities

Amount Tk.

37,000 42,000 4,000 83,000 18,000 (9,450) 5,720 7,730 105,000

25,000 (95,000) 6,000 (64,000)


Cash flows from financing activities: Cash dividend paid Net cash used from financing activities Net increase in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year

(15,000) (15,000) 26,000 45,000 71,000

P-4. The following balances are gathered from the books of the Rose Corporation Ltd. Debits Cash Debtors Inventory Plant and equipments Investment Credits Accumulated depreciation Bank loan (long-term) Common stock Capital in excess of par Retained earnings

2016 (Tk.) 20,000 15,000 30,000 125,000 30,000 220,000

2017 (Tk.) 22,000 18,000 31,000 150,000 32,000 253,000

35,000 100,000 20,000 40,000 25,0000 220,000

45,000 110,000 22,000 46,000 30,000 253,0000

Other pertinent information for FY 2017 included: (a) Plant and equipment costing Tk.5,000 with a book value of Tk.1,000 was sold at Tk.800. (b) New investment was purchased for Tk.7,000. Old investment of Tk.5,000 was sold for Tk.6,200. (c) Repayment made against bank loan was Tk.7,000 while fresh borrowing amounted to Tk.17,000. (d) New plant and equipment was bought for Tk.30,000. (e) Common stock of Tk.2,000 was issued at Tk.8,000. (f) Depreciation on plant and equipment amounted to Tk.14,000. (g) Net income for the year was Tk.21,000. Dividend of Tk.16,000 was declared and paid. Required: Prepare a statement of cash flows for the year 2017. Solution: Rose Corporation Ltd. Statement of cash flows For the year 2017 Tk. Cash flows from operating activities: Net income Adjustments for: Depreciation on plant and equipment Loss on sale of plant and equipment

21,000 14,000 200

Tk.


Gain on sale of investment Increase in debtors Increase in inventories Net cash provided from operating activities Cash flows from investing activities: Sale of investment Sale of plant and equipment Purchase of plant and equipment Purchase of investment Net cash used from investing activities Cash flows from financing activities: Borrowing bank loan Repayment of bank loan Issue of common stock Dividend paid Net cash provided from financing activities Net increase in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year

(1,200) (3,000) (1,000) 30,000 6,200 800 (30,000) (7,000) (30,000) 17,000 (7,000) 8,000 (16,000) 2,000 2,000 20,000 22,000

P-5. The accounts balances of ZZ Corporation at December appear below: Debits Cash Accounts receivable Merchandise inventory Prepaid expenses Land Buildings Equipment Credits Accounts payable Accumulated depreciation Note payable, due 2021 Common shares Retained earnings

2017 Tk.40,000 40,000 122,000 6,000 8,000 220,000 123,000 Tk.559,000

2016 Tk.30,000 30,000 126,000 4,000 30,000 160,000 80,000 Tk.460,000

Tk.48,000 86,000 70,000 300,0000 55,000 Tk.559,000

Tk.50,000 70,000 55,000 250,000 35,000 Tk.460,000

The following additional information is available: (a) Net income for the year was Tk.40,000; income taxes expenses was Tk.4,000 and depreciation recorded on building and equipment was Tk.27,000. (b) Equipment costing Tk.30,000 was purchased; one-half was paid in cash and a 4-year promissory note signed for the balance. (c) Equipment costing Tk.50,000 was purchased in exchange for 6,000 common shares. (d) Equipment was sold for Tk.15,000 that originally cost Tk.37,000. The gain or loss was reported in net income. (e) An addition to the building was built during the year.


(f) Land costing Tk.22,000 was sold for Tk.26,000 cash during the year, The related gain was reported in the income in the income statement. (g) Cash dividends were paid. Instructions: (i) Prepare a statement of cash flows for the year December 31, 2017. (ii) What observations about ZZ Corporation can be made from this statement. Solution: (i) ZZ Corporation Statement of cash flows For the year ended December 31, 2017 Tk. Cash flows from operating activities: Net income Adjustments for: Depreciation expenses Loss on sale of equipment Gain on sale of land Income taxes paid Increase in accounts receivable Decrease in inventory Decrease in prepaid expenses Decrease in accounts payable Net cash provided from operating activities Cash flows from investing activities: Sale of land Sale of equipment Building addition Purchase of equipment Net cash used from investing activities Cash flows from financing activities: Payment of dividends Net cash used from financing activities Net increase in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year

Tk.

40,000 27,000 11,000 (4,000) (4,000) (10,000) 4,000 2.000 (2,000) 64,000

26,000 15,000 (60,000) (15,000) (34,000)

(20,000) (20,000) 10,000 30,000 40,000

(ii) ZZ Corporation has generated cash inflows of Tk.64,000 from operating activities, which is good. The corporation is advised to watch its management of accounts receivable as it has increased from Tk.30,000 to Tk.40,000 or 33% in one year. Management needs to ensure that it is collecting the accounts receivable as efficiently as possible. In terms of investing activities, it has sold land and equipment, but overall there has been cash outflows of Tk.34,000 because of the purchase of new equipment and the building addition. The ZZ Corporation was able to pay its shareholders‘ dividends of Tk.20,000. Overall, the corporation added Tk.10,000 more cash to its cash balance at the end of the year.


P-6. The comparative balance sheets for Himu Incorporation show the following information. Particulars Dec. 31, 2017 Dec. 31, 2016 Cash 38,500 13,000 Accounts receivable 12,250 10,000 Inventory 12,000 9,000 Investments 0 3,000 Buildings 0 29,750 Equipment 40,000 20,000 Patents 5,000 6,250 Total assets 107,750 91,000 Allowance for doubtful accounts 3,000 4,500 Accumulated depreciation – equipment 2,000 4,500 Accumulated depreciation – building 0 6,000 Accounts payable 5,000 3,000 Dividends payable 0 5,000 Notes payable, short-term (non-trade) 3,000 4,000 Notes payable, long-term 31,000 25,000 Common stock 43,000 33,000 Retained earnings 20,750 6,000 Total liability and equity 107,750 91,000 Additional data related to 2017 are as follows: (a) Equipment that had cost Tk.11,000 and was 30% depreciated at time of disposal was sold for Tk.2,500. (b) Tk.10,000 of the long-term notes payable was paid by issuing common stock. (c) Cash dividends paid were Tk.5,000. (d) On January 01, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were Tk.33,000 (net of Tk.4,000 taxes). (e) Investments (available-for-sale) were sold at Tk.1,500 above their cost. The company has made similar sales and investments in the past. (f) Cash was paid for the acquisition of equipment. (g) A long-term note for Tk.16,000 was issued for the acquisition of equipment. (h) Interest of Tk.2,000 and income taxes of Tk.5,000 were paid in cash. Required: (i) Use the indirect method to analyze the above information and prepare a statement of cash flows for Himu. (ii) What would you expect to observe in the operating, investing, and financing sections of a statement of cash flows of - A severely financially troubled firm? - A recently formed firm that is experiencing rapid growth? Solution: (i) Himu Incorporation Statement of cash flows For the year ended December 31, 2017


Tk. Cash flows from operating activities: Net income (w-1) Adjustments for: Depreciation expenses (w-2) Loss on sale of equipment (w-3) Gain from flood damage Gain on sale of equity investment Amortization of copyright Increase in accounts receivable (net) Increase in inventory Increase in accounts payable Net cash provided from operating activities Cash flows from investing activities: Sale of equity investments Sale of equipment Purchase of equipment Proceeds from flood damage to building Net cash provided from investing activities Cash flows from financing activities: Payment of dividends Repayment of short-term note payable Net cash used from financing activities Net increase in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year Supplemental disclosures of cash flow information: Cash paid during the year for: Interest Income taxes Non-cash investing and financing activities: Retired notes payable by issuing ordinary shares Purchased equipment by issuing notes payable

Tk.

14,750 800 5,200 (13,250) (1,500) 1,250 (3,750) (3,000) (2,000) 2,500

4,500 2,500 (15,000) 37,000 29,000

(5,000) (1,000) (6,000) 25,500 13,000 38,500

Tk.2,000 Tk.5,000 Tk.7,000 Tk.10,000 Tk.16,000 Tk.26,000

(ii) Observations of the statement of cash flows: For a severely financially troubled firm: Operating activities: Probably a small cash inflow or a cash outflow. Investing activities: Probably a cash inflow as assets are sold to provide needed cash. Financing activities: Probably a cash inflow from debt financing (borrowing funds) as a source of cash at high interest cost. For a recently formed firm that is experiencing rapid growth: Operating activities: Probably a cash inflow. Investing activities: Probably a large cash outflow as the firm expands. Financing activities: Probably a large cash inflow to finance expansion.


Workings: 1. Net income = Ending retained earnings – Beginning retained earnings = Tk.20,750 – Tk.6,000 = Tk.14,750 2. Depreciation expenses = Accumulated depreciation on equipment sold – Decrease in depreciation = Tk.3,300 – Tk.2,500 = Tk.800 3. Gain or loss on sale of equipment = Sales proceed – Book value = Tk.2,500 – {Tk.11,000 – (Tk.11,000 X 30%)} = Tk.2,500 – Tk.7,700 = (Tk.5,200) P-7. The following statement was prepared by Partex Textile Ltd.‘s accountant. Partex Textiles Ltd. Statement of sources and application of cash For the year ended September 30, 2017 Sources of cash Net income Depreciation and depletion Increase in long-term debt Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt)

Tk.1,11,000 70,000 1,79,000 14,000 Tk.3,74,000

Application of cash Cash dividends Expenditure for property, plant and equipment Investments and other uses Changes in cash

Tk.60,000 2,14,000 20,000 80,000 Tk.3,74,000

The following additional information relating to Partex Textiles Ltd. is available for the year ended September 30, 2017. (a) Salaries and wages expense attributable to stock option plans was Tk.25,000 for the year. (b) Expenditure for property, plant and equipment Tk.2,50,000 Proceeds from retirements of property, plant and equipment 36,000 Net expenditures Tk.2,14,000 (c) A stock dividend of 10,000 shares of Partex Textiles Ltd. common stock was distributed to common stockholders on April 1, 2017, when the per share market price was Tk.7 and par value was Tk.1. (d) On July 1, 2017, when its market price was Tk.6 per share, 16,000 shares of Partex Textiles Ltd. common stock were issued in exchange for 4,000 shares of preferred stock. (e) Depreciation expense Tk.65,000 Depletion expense 5,000 Tk.70,000


(f) Increase in long-term debt Less. Redemption of debt Net increase

Tk.6,20,000 4,41,000 Tk.1,79,000

Instructions: (i) In general, what are the objectives of a statement of the type shown above for Partex Textiles Ltd.? Explain. (ii) Identify the weakness in the form and format of Partex Textiles Ltd.‘s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.) (iii) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable. Solution: (i) The main purpose of the statement of cash flows is to show the change in cash from one period to the next. Another objective of a statement of the type shown is to summarize the financing and investing activities of the entity, including the extent to which the company has generated cash or near cash assets from operations during the period. Another objective is to complete the disclosure of changes in financial position during the period. The information shown in such a statement is useful to a variety of users of financial statements in making economic decisions regarding the company. (ii) The following are weaknesses in form and format of Partex Textiles Ltd.‘s statement of cash flows: - The title of the statement should be Statement of Cash Flows. - The statement should add back to (or deduct from) net income certain items that did not use (or provide) cash during the period. The resulting total should be described as net cash provided by operating activities. The only apparent adjustments in this situation are the amounts to be added bask to net income for the depreciation and depletion expense, for any wage or salary expenses related to the employee share option plans, and for changes in current assets and liabilities. - The format used should separate the cash flows into investing, financing and operating activities. Non-cash investing and financing activities, if significant, should be shown in a note to the financial statements. - Individual items should not be grouped together, as was the case for the Tk.14,000 item. (iii) (a) The Tk.25,000 option plan wage and salary expense should be included in the statement as an amount added back to net income, an expenses not requiring the outlay of cash during the period.


Since the statement balances and no reference is made to the Tk.25,000 payroll expenses, it appears the expense was not recorded or that there is an offsetting error elsewhere in the statement. (b) The expenditures for plant asset acquisitions should not be reported net of the proceeds from plant asset retirements. Both the outlay for acquisitions and the proceeds from retirements should be reported as investing activities. The details provide useful information about changes in financial position during the period. (c) Share dividends or share splits need not be disclosed in the statement because these transactions do not significantly affect financial position. (d) The issuance of the 16,000 ordinary shares in exchanges for the preference shares should be shown as a non-cash financing activity. Since these transactions significantly change the corporation‘s capital structure, they should be disclosed. (e) The presentation of the combined total of depreciation and depletion is probably acceptable. The general rule is that related items should be shown separately in proximity when the result contributes information useful to the user of the statement, but immaterial items may be combined. In this situation, it is likely that no additional relevant information would be added by showing depletion as a separate item. The total should be added back to net income in the computation of the net cash flow from operating activities. (f) The details of changes in long-term debt should be shown separately. Payments should not be netted against increases in long-term borrowings. The long-term borrowing of Tk.620,000 should be shown as cash provided and the retirement of Tk.441,000 of debt should be shown as use of cash from financing activities. P-8. Atlas Company manufactures sailing dinghies. During last year it ceased production of its model XII due to competition from overseas suppliers which could manufacture a similar dinghy at a much lower price. A new model the RV3 is due into production in the next month. Its classic design is expected to result in a resurgence of demand for woodenhulled dinghies. New premises and equipment were purchased during the year in order to manufacture the RV3. Atlas has prepared the following draft accounts for the year ended 31 December, 2017: Income statement

Revenue Cost of sales Gross profit Distribution costs Administrative expenses Interest payable Profit before tax Taxation Profit after tax

Tk.’000 11,563 5,502 6,061 402 882 152 1,436 4,625 2,231 2,394


Statement of financial position 31 December 2017 2016 Tk.’000 Tk.’000 Assets Leasehold premises (net) Plant, machinery and equipment (net) Investment at cost Inventory Receivables Bank Equities and liabilities Share capital (25 paisa ordinary) Share premium Retained earnings Debenture (10%) Provision for deferred repairs Payables Overdraft Taxation

6,600 5,040 2,406 2,880 2,586 ____-_ 19,512

5,700 3,780 2,208 1,986 1,992 576 16,242

2,280 2,112 9,108 1,240 1,202 1,026 222 2,322 19,512

1,800 1,800 6,714 1,800 1,016 702 2,410 16,242

The following data is relevant: (a) The 10% debentures were redeemed at par. (b) Plant and equipment with a written down value of Tk.2,76,000 was sold for Tk.1,68,000. New plant was purchased for Tk.25,00,000. (c) Leasehold premises capital costs of Tk.13,00,000 were incurred during the year. Required: Prepare a statement of cash flows and all supporting notes in accordance with IAS-7 statement of cash flows for 2017 for Atlas Company. Solution: Atlas Company Statement of cash flows As per IAS 7 For the year 2017 Tk.’000 Cash flow from operating activities: Profit before tax Adjustments for: Interest payable Depreciation (400 + 964) (w1) Loss on sale (w2) Increase in deferred repairs provision Increase in inventory Increase in receivables Increase in payables

4,625 152 1,364 108 186 (894) (594) 324

Tk.’000


Cash generated from operations Interest paid Tax paid (w3) Net cash provided from operating activities

5,271 (152) (2,319) 2,800

Cash flow from investing activities: Purchase of investment Purchase of plant, machinery and equipment Proceeds from sale of plant, machinery and equipment Net cash used from investing activities Cash flow from financing activities: Issue of ordinary shares (480 + 312) (w4) Redemption of non-current interest bearing debt (1,800 – 1,240) Payment to acquire leasehold premises Net cash used from financing activities Net decrease in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year

(198) (2,500) 168 (2,530)

792 (560) (1,300) (1,068) (798) 576 (222)

Workings: 1. Leasehold premises Dr. Balance b/d Addition

Tk.’000 5,700 Depreciation 1,300 Balance c/d 7,000 Plant, machinery and equipment

Dr. Balance b/d Addition

Tk.’000 3,780 Disposal 2,500 Depreciation Balance c/d 6,280

Cr. Tk.’000 400 6,600 7,000 Cr. Tk.’000 276 964 5,040 6,280

2. Disposal Dr. Plant, machinery and equipment

Tk.’000 276 Cash Loss on sale 276

Cr. Tk.’000 168 108 276


3. Taxation Dr. Cash Balance c/d

Cr. Tk.’000 2,410 2,231 4,641

Tk.’000 2,319 Balance b/d 2,322 Income statement 4,641

4. Share capital Dr.

Cr. Tk.’000 1,800 480 2,280

Tk.’000 Balance c/d

Balance b/d 2,280 Cash 2,280 Share premium

Dr.

Cr. Tk.’000 1,800 312 2,112

Tk.’000 Balance c/d

Balance b/d 2,112 Cash 2,112

P-9. Below are extracts from the financial statements of Noah Limited: Noah Limited Statement of comprehensive income For the year ended 31 March 2017 Sales revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Interest receivable Finance costs Profit before tax Income tax expenses Profit for the year Other comprehensive income Gain on revaluation Total comprehensive income for the year

Noah Limited Statement of financial position

Tk.m 1,162 (866) 296 (47) (110) 139 79 (55) 163 (24) 139 251 390


31 March 2017 Tk.m

31 March 2016 Tk.m

Assets Non-current assets: Building Intangible assets Investments Current assets: Inventories Accounts receivable Cash at bank Cash at hand Total assets

1,023 277 69 1,369

600 234 68 902

246 460 180 70 956 2,325

128 373 0 124 625 1,527

29 447 251 116 843

24 377 0 26 427

755 4 759

555 _2 557

244 437 42 723 2,325

311 207 25 543 1,527

Equity and liabilities Capital and reserves: Common share Share premium Revaluation reserve Retained profit Non-current liabilities: Loan Deferred taxation Current liabilities: Accounts payable Overdrafts Taxation Total equity and liabilities

Additional information: (a) Profit from operation is after charging depreciation on building of Tk.22 million and amortisation on the intangible assets of Tk.7 million. The revaluation reserve relates wholly to the building. (b) The current asset investments were a 30 day government bond. (c) During the year ended 31 March 2017, building costing Tk.1,464 million, which had a carrying value of Tk.424 million, was sold for Tk.250 million. (d) During the year ended 31 March 2017, 25 million 20c common shares were issued at a premium of Tk.2.80. (e) Dividends paid during the year were Tk.51 million. Required: Prepare a statement of cash flows for Noah Limited for the year ended 31 March 2017 in compliance with IAS 7 Statement of Cash Flows using the indirect method.


Solution: Noah Limited Statement of cash flows As per IAS 7 (Indirect method) For the year ended 31 March 2017 Tk.m Cash flows from operating activities: Profit before tax Adjustments for: Depreciation Amortisation Loss on disposal of non-current assets (250 – 424) Interest receivable Finance costs Operating profit before working capital changes Increase in inventories Increase in accounts receivable Decrease in accounts payable Cash generated from operations Interest paid Income tax paid (w-1) Net cash provided from operating activities Cash flows from investing activities: Purchase of building (w-2) Purchase of intangibles (w-3) Purchase of investment Proceeds of building Interest received Net cash used from investing activities

Tk.m

163 22 7 174 (79) 55 342 (118) (87) (67) 70 (55) (5) 10

(618) (50) 1 250 79

Cash flows from financing activities: Proceeds from issue of common share 75 Proceeds from long-term borrowing 200 Dividend paid (51) Net cash provided from financing activities Net decrease in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year (124 – 207) Cash and cash equivalents at the end of year (180 + 70) - 437

(338)

224 (104) (83) (187)

Workings: 1. Income tax Bank (Balancing figure) Balance c/d (Current) Balance c/d (Deferred)

5 42 4 51

Balance b/d (Current) Balance b/d (Deferred) Income statement

25 2 24 51


2. Building Balance b/d Revaluation Bank (Balancing figure)

600 251 618 1,469

Depreciation Disposal Balance c/d

22 424 1,023 1,469

3. Intangible assets Balance b/d Bank (Balancing figure)

234 50 284

Amortisation Balance c/d

7 277 284

P-10. The following information was assembled for M/s. ABC Pipeline Company: M/s. ABC Pipeline Company Balance Sheet December 31 2017 2016 Taka Taka Assets Cash (Overdraft in 2015) 38,625 (5,625) Accounts receivable 82,000 95,500 Inventories 73,250 50,000 Long-term investments 12,000 27,000 Land, building and equipment 130,000 95,000 Less. Accumulated depreciation 21,500 108,500 20,000 75,000 Patents ____-35,000 Total assets 314,375 276,875 Liabilities and stockholders’ equity Accounts payable 55,875 49,375 Bonds payable 50,000 20,000 Premium on bonds payable 2,375 -Preferred stock, Tk.100 par -50,000 Common stock, Tk.10 par 160,000 100,000 Premium on common stock 24,000 -Retained earnings 22,125 57,500 Total liabilities and stockholders’ equity 314,375 276,875 Account: Retained earnings Date Item

Debit Taka

Credit Taka

2016 Jan. 1 Oct. 15 Dec. 12 Dec. 31

Balance Cash dividends Premium on retirement of preferred stock Net loss

Balance

-25,000 5,000

----

Debit Taka ----

5,375

--

--

Credit Taka 57,500 32,500 27,500 22,125


Income statement data for the year ended December 31, 2017, summarized operations as follows: Loss before extraordinary items Tk.4,375 Extraordinary loss on retirement of bonds 1,000 Net loss Tk.5,375 Equipment cost Tk.15,000, book value Tk.3,000 was scrapped, salvage value of Tk.900 being recovered on the disposal. Additional equipment, cost Tk.50,000 was acquired during the year. Long-term investments cost Tk.15,000 were sold for Tk.18,250; 7% bonds, face value Tk.20,000 were called in at 105 and new 10 year, 5% bonds of Tk.50,000 were issued at 105 on July 1. Preferred stock was retired at a cost of Tk.110 while 6,000 shares of common stock were issued at Tk.14. Depreciation on building and equipment for the year was Tk.13,500. Patents costing Tk.35,000 were written off. Bonds premium was amortized for Tk.125. Required: Prepare a statement of cash flows for the year ended December 31, 2017. Solution: M/s. ABC Pipeline Company Statement of cash flows For the year ended December 31, 2017 Taka Cash flow from operating activities: Income before extraordinary items (4,375) Adjustments for: Depreciation 13,500 (21,500 – 20,000) + (15,000 – 3,000) Written off patent 35,000 Bonds premium amortization (125) Loss on disposal of equipment (Tk.3000 – Tk.900) 2,100 Gain on sale of investment (3,250) Decrease in accounts receivable 13,500 Increase in inventory (23,250) Increase in accounts payable 6,500 Net cash provided from operating activities Cash from investing activities: Purchase of equipment (50,000) Disposal of equipment 900 Sale of investments 18,250 Net cash used from investing activities Cash flow from financing activities: Issuance of common stock (6000 X Tk.14) 84,000 Retirement of preferred stock (55,000) (Tk.50,000 ÷ Tk.100) X 110 Issuance of bonds (Tk.50,000 ÷ Tk.100) X 105 52,500 Retirement of bonds payable (21,000) (Tk.20,000 ÷ Tk.100) X 105 Payment of dividend (25,000) Net cash provided from financing activities Net increase in cash and cash equivalents

Taka

43,975 39,600

(30,850)

35,500 44,250


P-11. Below are the statements of financial position of Dhaka Company as at 31 March 2017 and 31 March 2016 together with the statement of profit or loss and other comprehensive income for the year ended 31 March 2017. Dhaka Company Statements of Financial Position As at 31 March 2017 and 31 march 2016 2017 Tk.’000

2016 Tk.’000

925 300 390 1,615

737 300 260 1,297

560 474 343 229 1,606 3,221

427 424 246 317 1,514 2,811

600 450 252 337 1,639

500 200 160 355 1,215

250 200 148 598

200 180 145 525

374 117 156 105 232 984 3,221

452 112 253 100 154 1,071 2,811

Assets Non-current assets: Property, plant and equipment Goodwill Development expenditure Current assets: Inventories Debtors Investments Cash

Equity and liabilities Equity: Share capital – Tk.1 ordinary shares Share premium Revaluation surplus Retained earnings Non-current liabilities: 6% debentures Finance lease liabilities Deferred tax Current liabilities: Creditors Finance lease liabilities Current tax Debenture interest Bank overdraft

Dhaka Company Statements of Profit or Loss and Other Comprehensive Income For the year ended 31 March 2017


Tk.’000 3,007 (1,962) 1,045 (257) (115) 673 (262) 411

Revenue Cost of sales Gross profit Other expenses Finance costs Profit before tax Income tax expense Profit for the year Other comprehensive income: Gain on revaluation of property, plant & equipment Total comprehensive income for the year

200 611

Additional information: (a) Goodwill arose on the acquisition of unincorporated businesses. During 2017 expenditure on development projects totaled Tk.290,000. (b) During 2017 items of property, plant and equipment with a net book value of Tk.203,000 were sold for Tk.210,000. Depreciation charged in the year on property, plant and equipment totaled Tk.157,000. Dhaka transfers extra depreciation on revalued property, plant and equipment on retained earnings as allowed by IAS 16. Depreciation based on historical cost in 2017 is Tk.149,000. Dhaka purchased Tk.156,000 of property, plant and equipment by means of finance leases, payments being made in arrears on the last day of each accounting period. (c) The current asset investments are government bonds and management has decided to class them as cash equivalents. (d) The new debentures were issued on 1 April 2016. Finance cost includes debenture interest and finance lease finance charges only. (e) During the year Dhaka made a 1 for 5 bonus issue capitalizing its retained earnings followed by a right issue. (f) Dividends totaling Tk.256,000 were paid during the year. Required: Prepare a statement of cash flows for Dhaka Company in accordance with IAS 7 using the indirect method. Solution: Dhaka Company Statement of cash flows As per IAS 7 (Indirect method) For the year ended 31 March 2017 Tk.’000 Cash flow from operating activities: Profit before tax Adjustments for: Depreciation Amortization (w-1) Interest expense Profit on disposal of assets (210,000 – 203,000) Operating profit before working capital changes

673 157 160 115 (7) 1,098

Tk.’000


Increase in debtors Increase in inventories Decrease in creditors Cash generated from operations Interest paid (w-2) Income taxes paid (w-3) Net cash provided from operating activities Cash from investing activities: Development expenditure Purchase of property, plant & equipment (w-4) Proceeds from sale of property, plant & equipment Net cash used from investing activities

(50) (133) (78) 837 (110) (356) 371

(290) (292) 210

Cash flow from financing activities: Proceeds from issue of shares 250 (600+450)-(500+200)-(500X1/5) Proceeds from issue of debentures 50 Payment of finance lease liabilities (w5) (131) Payment of dividend (256) Net cash used from financing activities Net decrease in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year

(372)

(87) (88) 317 229

Note: Property, plant and equipment: During the period, the company acquired property, plant and equipment with an aggregate cost of Tk.448000 of which Tk.156,000 was purchased by means of finance leases. Cash payments of Tk.292,000 were made to acquire property, plant and equipment. Workings: 1. Development expenditure amortization: Development expenditure Dr. Balance b/d Expenditure

Tk.’000 260 Amortization 290 Balance c/d 550

Cr. Tk.’000 160 390 550

2. Interest paid: Interest payable Dr. Paid Balance c/d

Tk.’000 110 Balance b/d 105 Profit or loss account 215

Cr. Tk.’000 100 115 215


3. Income taxes paid: Income tax payable Dr. Paid Balance c/d – current Deferred

Tk.’000 356 Balance b/d - current 156 deferred 148 Profit or loss account 660

Cr. Tk.’000 253 145 262 660

4. Purchase of property, plant & equipment: Property, plant & equipment Dr. Balance b/d Revaluations (252–160)+(157-149) Finance leases Purchase

Tk.’000 737 Depreciation 100 Disposals 156 Balance c/d 292 1,285

Cr. Tk.’000 157 203 925 1,285

5. Payment of finance lease liabilities: Finance lease liability Dr. Paid Balance c/d-noncurrent Current

Tk.’000 131 Balance b/d-noncurrent 200 current 117 New finance lease 448

Cr. Tk.’000 180 112 156 448

P-12. The financial statements of Rainbow for the year ended 31.03.2017 and 31.03.2016 are given below: Rainbow Statement of Financial Position As at 31.03.2017 and 31.03.2016 Notes 31.03.2017 31.03.2016 Tk.’000 Tk.’000 Assets Non-current assets: Property, plant and equipment (a) (b) 4,191 4,500 Intangible assets (d) 156 315 4,347 4,815 Current assets: Inventories 738 805 Trade receivables 564 480 Cash and cash equivalents 515 265 1,817 1,550 Total assets 6,164 6,365


Equity and liabilities Equity: Equity shares of Tk.1 each Preference shares Share premium Revaluation reserve Retained earnings

(e)

(g)

Non-current liabilities: 9% loan notes Deferred tax

(f)

Current liabilities: Trade payables Tax payable Provisions Interest payable Total equity and liabilities

2,180 700 968 469 901 5,218

2,180 968 353 727 4,228

225 225

1,100 220 1,320

535 84 90 12 721 6,164

500 218 99 817 6,365

Rainbow Statement of Profit or Loss For the year ended 31.03.2017 Notes Revenue Cost of sales Gross profit Administrative expenses Distribution costs Finance costs Income tax expense Profit for the year

(c) (h)

Tk.’000 6,858 (3,552) 3,306 (2,042) (816) 448 (40) 408 (124) 284

Notes: (a) Property, plant and equipment includes properties which were revalued upwards during the year. (b) Property, plant and equipment disposed of in the year had a net book value of Tk.70,000; cash received on their disposal was Tk.92,000. (c) Depreciation charged for the year was Tk.675,000. (d) There were no additions or disposals of intangible assets during the year. (e) On 01.04.2016, Rainbow issued 700,000, 5% cumulative Tk.1 preference shares at par, redeemable at 10% premium on 01.04.2026. Issue costs of Tk.50,000 have been paid by Rainbow and included in administrative expenses. The effective rate of interest is 6.74%. The cash received for the issue of preference shares had been debited to cash and credited to equity. (f) On 01.05.2016, Rainbow purchased and cancelled all its 9% loan noted at par plus accrual interest (included finance costs).


(g) Equity dividends paid during the year were Tk.75,000 and preference share dividends paid were Tk.35,000. (h) Rainbow has been advised that it is probably going to lose a case and at 31.03.2017 has provided Tk.90,000 for the estimated cost of this case. Required: (i) Calculate Rainbow‘s revised profit before tax for the year ended 31.03.2017. (i) Prepare Rainbow‘s statement of cash flows using the indirect method for the year ended 31.03.2017 in accordance with IAS 7 Statement of Cash Flows. Notes to the financial statements are not required, but all workings must be clearly shown. Solution: (i) Calculation of Rainbow‘s revised profit before tax: Tk.’000 408 50 (44) 414

Adjusted profit before tax as per draft income statement Add. Preference share issue costs Less. Preference share finance costs (650 X 6.74%) Revised profit before tax (ii) Rainbow Statement of cash flows As per IAS 7 (Indirect method) For the year ended 31.03.2017 Tk.’000 Cash flow from operating activities: Profit before tax Adjustments: Depreciation Impairment of intangible assets (w-1) Provision for legal claim Finance cost (w-2) Gain on disposal of property, plant & equipment (w-3) Operating profit before working capital changes Decrease in inventory Increase in trade receivables Increase in trade payables Cash generated from operations Interest paid (w-4) Income taxes paid (w-5) Net cash provided from operating activities Cash from investing activities: Purchase of property, plant & equipment (w-6) Proceeds from sale of property, plant &equipment Net cash used from investing activities

Tk.’000

414 675 159 90 84 (22) 1,400 67 (84) 35 1,418 (162) (253) 1,003

(320) 92 (228)


Cash flow from financing activities: Proceeds from issue of preference shares (w-7) 650 Repayment of loans (1,100) Payment of equity dividend (75) Net cash used from financing activities Net increase in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year Workings: Tk.’000 1. Impairment of intangible assets: Balance b/f Impairment in the year (Balance) Balance c/f

315 159 156

2. Finance cost: Balance as per income statement Preference share finance charge Balance c/f

40 44 84

3. Gain on disposal of property, plant and equipment: Net book value of assets sold Cash received Gain

70 (92) 22

4. Interest paid: Balance b/f Income statement Balance c/f Interest paid Preference shares dividend paid (Classified as interest as per IAS 32)

99 40 (12) 127 35 162

5. Income taxes paid: Deferred tax: Balance b/f Income statement (Balance) Balance c/f

220 5 225

Income tax: Balance b/f Income statement (Total) Less. Deferred tax Tax paid (Balance) Balance c/f

218 124 (5)

119 337 (253) 84

(525) 250 265 515


6. Purchase of property, plant and equipment: Balance b/f Disposal (Net book value) Revaluation (469 – 353) Depreciation for the year Balance c/f Total purchase during the year

4,500 (70) 4,430 116 4,546 (675) 3,871 4,191 320

7. Proceeds from issue of preference shares: Issue of preference shares Less. Issue costs Cash received

700 (50) 650

P-13. The financial statement of PLS Company are given below: PLS Company Statement of Financial Position As at June 30 Notes

2017 Tk.’000

2016 Tk.’000

5,675 170 5,845

4,785 69 4,854

95 190 95 380 6,225

80 145 160 385 5,239

910 665 600 2,899 5,074

760 400 0 1,982 3,142

410 250 660

0 1,500 1,500

Assets Non-current assets: Property, plant and equipment Deferred development expenditure

(a) to (e) (f)

Current assets: Inventory Accounts receivables Cash and cash equivalents Total assets Equity and liabilities Equity: Share capital Share premium Revaluation reserve Retained earnings Non-current liabilities: Deferred tax Long-term debts

(g) (g)


Current liabilities: Accounts payables Income tax Interest payable Provision for restructuring costs Provision for legal claim

(i) (h)

60 321 5 0 105 491 6,225

85 305 32 100 75 597 5,239

Statement of Comprehensive Income For the year ended June 30, 2017

Revenue Cost of sales Administrative expenses and distribution costs Loss on disposal of plant Profit from operations Interest Profit before tax Income tax Profit after tax Other comprehensive income: Revaluation of property (net of deferred tax Tk.200,000) Total comprehensive income

Tk.’000 2,300 (450) 1,850 (200) (15) 1,635 (95) 1,540 (455) 1,085 600 1,685

Notes: (a) Non-current assets – property, plant and equipment, balances at June 30, 2016 were: Cost or valuation: Tk.’000 Tk.’000 Property 4,150 Plant 2,350 Equipment 985 7,485 Depreciation: Property 450 Plant 1,350 Equipment 900 2,700 Net book value 4,785 (b) Equipment was purchased during the year at a cost of Tk.275,000 and plant was purchased for Tk.215,000. (c) During the year PLS disposed of plant with a book value of Tk.30,000 and accumulated depreciation of Tk.60,000. (d) On July 1, 2016 property was revalued to Tk.4,500,000. At that time the average remaining life of property was 90 years. property is depreciated on a straight line basis. (e) Depreciation for the year was Tk.280,000 and Tk.40,000 for plant and equipment respectively. (f) Development expenditure incurred during the year to June 30, 2017 was Tk.114,000. Deferred development expenditure is amortized over its useful economic life. (g) PLS issued equity shares during the year at a premium.


(h) Provision was made by PLS for outstanding legal claims against the entity at the year end. (i) The restructuring costs relate to a comprehensive restructuring and reorganization of the entity that began in 2015. PLS‘s financial statements for the year ended June 30, 2016 included a provision for restructuring costs of Tk.100,000. Restructuring costs incurred in the year to June 30, 2017 were Tk.160,000. No further restructuring and reorganization costs are expected to occur. PLS treats restructuring costs as a cost of sales. Required: Prepare a statement of cash flows, for PLS Company for the year ended June 30, 2017 using the indirect method, in accordance with the requirements of IAS 7 Statement of Cash Flows. Solution: PLS Company Statement of cash flows For the year ended June 30, 2017 Tk.’000 Cash flows from operating activities: Profit before tax Adjustments for: Depreciation (4500,000 ÷ 90) + 280,000 + 40,000 Amortization of development expenditure (w-1) Increase in legal claim provision Restructuring provision (w-2) Finance cost Loss on disposal of non-current tangible assets Increase in inventory Increase in accounts receivable Decrease in accounts payable Cash generated from operations Interest paid (w-3) Income taxes paid (w-4) Net cash provided from operating activities Cash from investing activities: Purchase of property, plant & equipment 275,000 + 215,000 Sale of equipment Development expenditure Net cash used from investing activities Cash flow from financing activities: Issue of share capital (w-5) Repayment of long-term borrowings Payment of dividend (w-6) Net cash used from investing activities Net decreased in cash and cash equivalents Add: Cash and cash equivalents at July 1, 2016 Cash and cash equivalents at June 30, 2017

Tk.’000

1,540 370 13 30 (100) 95 15 (15) (45) (25) 1,878 (122) (229) 1,527 (490) 15 (114) (589) 415 (1,250) (168) (1,003) (65) 160 95


Workings: 1. Deferred development expenses: Balance b/f Additions Less. Balance c/f Amortization in the year

Tk.69,000 114,000 Tk.183,000 170,000 Tk.13,000

2. Restructuring costs: Provision balance at June 30, 2015 Paid during the year Net charge to income statement

Tk.100,000 160,000 Tk.60,000

Charged to cash flow

Tk.100,000

3. Interest paid: Balance b/f Income statement

Tk.32,000 95,000 Tk.127,000 5,000 Tk.122,000

Less. Balance c/f 4. Income taxes paid: Balance b/f – Corporate tax Income statement Deferred tax Less. Balance c/f – Corporate tax Deferred tax 5. Issue of share capital: Shares Share premium Received

Tk.305,000 455,000 200,000 Tk.960,000 321,000 410,000 Tk.229,000 Tk.150,000 265,000 Tk.415,000

6. Payment of dividends: Retained earnings balance b/f Profit for the year Less. Retained earnings balance c/f Dividends paid

Tk.1,982,000 1,085,000 Tk.3,067,000 2,899,000 Tk.168,000

P-14. The following information relates to the draft financial statements of Delta Limited. Delta Limited Statement of Financial Position As at 31.03.2017 and 31.03.2016


Notes

31.03.2017 Tk.

31.03.2016 Tk.

38,000 38,000

51,000 51,000

25,000 9,000 1,000 Nil 35,000 73,000

9,200 4,000 Nil 3,000 16,200 67,200

20,000 6,400 9,000 35,400

16,000 8,000 12,600 36,600

Nil 9,600 2,400 12,000

10,000 4,000 1,600 15,600

10,000 Nil 2,800 3,400 9,400 25,600 73,000

Nil 5,000 Nil 1,600 8,400 15,000 67,200

Assets Non-current assets: Property, plant and equipment Total non-current assets Current assets: Inventory Trade receivables Tax refund due Bank Total current assets Total assets

(a)

Equity and liabilities Equity: Equity shares of Tk.2 each Share premium Retained earnings Total equity Non-current liabilities: 10% loan note Finance lease obligations Deferred tax Total non-current liabilities Current liabilities: 10% loan note Tax Bank overdraft Finance lease obligations Trade payables Total current liabilities Total equity and liabilities

(b) (b)

(c)

(c)

Delta Limited Statement of Profit or Loss For the year ended 31.03.2017

Revenue Cost of sales Gross profit Operating expenses Finance costs Profit (loss) before tax Income tax relief (expense) Profit (loss) for the year

31.03.2017 Tk. 110,000 (87,600) 22,400 (24,000) (2,000) (3,600) 1,400 2,200

31.03.2016 Tk. 80,000 (50,000) 30,000 (12,000) (1,200) 16,800 (5,600) 11,200


Notes: (a) Property, plant and equipment is made up of: As at 31.03.2017 31.03.2016 Tk. Tk. Leasehold property Nil 17,600 Owned plant 25,000 28,400 Leased plant 13,000 5,000 38,000 51,000 During the year Delta sold its leasehold property for Tk.17,000 and entered into an arrangement to rent it back from the purchaser. There were no additions or disposals of owned plant during the year. The depreciation charge (to cost of sales) for the year ended 31.03.2017 were: Tk. Leasehold property 400 Owned plant 3,400 Leased plant 3,600 7,400 (b) On 01.07.2016 there was a bonus issue of shares from share premium of one new share for every 20 held. On 01.10.2016 there was a fully subscribed cash issue of shares at par. (c) The 10% loan note is due for repayment on 30.06.2017. Delta is in negotiations with the loan provider to refinance the same amount for another five years. (d) The finance costs are made up of: For year ended 31.03.2017 31.03.2016 Tk. Tk. Finance lease charges 600 200 Overdraft interest 400 Nil Loan note interest 1,000 1,000 2,000 1,200 Required: Prepare a statement of cash flows for Delta Limited for the year ended 31.03.2017 in accordance with IAS 7 Statement of Cash Flows, using the indirect method. Solution: Delta Limited Statement of cash flows As per IAS 7 (Indirect method) For the year ended 31.03.2017 Taka Cash flow from operating activities: Loss before tax Adjustments for: Depreciation (w-1) Interest expense Loss on disposal of leasehold property {17,000 – (17,600 – 400)} Operating profit before working capital changes Increase in inventory Increase in trade receivables Increase in trade payables

(3,600) 7,400 2,000 200 6,000 (15,800) (5,000) 1,000

Taka


Cash used in operations Interest paid Tax paid (w-2) Net cash used from operating activities

(13,800) (2,000) (3,800) (19,600)

Cash from investing activities: Proceeds from sale of leasehold property Net cash provided from investing activities

17,000

Cash flow from financing activities: Proceeds from issue of shares 2,400 (20,000 + 6,400) – (16,000 + 8,000) Repayment made under finance leases (w-3) (4,200) Payment of dividend (12,600 – 9,000 – 2,200) (1,400) Net cash used from financing activities Net decrease in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year

17,000

(3,200) (5,800) 3,000 (2,800)

Workings: 1. Depreciation: Property, plant and equipment Dr. Balance b/d Additions (13,000 - 5,000 + 3,600)

Tk. 51,000 Disposal (17,600 - 400) 11,600 Depreciation Balance c/d 62,600

Cr. Tk. 17,200 7,400 38,000 62,600

2. Tax paid: Income tax Dr. Profit or loss account 31.03.16 – Deferred tax Tax paid

Tk. 1,400 31.03.15 – Current tax 2,400 31.03.15 – Deferred tax 3,800 Refund due 7,600

Cr. Tk. 5,000 1,600 1,000 7,600

3. Repayment of finance leases: Finance lease liability Dr. Payments Balance b/f (9,600 + 3,400)

Tk. 4,200 Balance b/f (4,000 + 1,600) 13,000 Additions (w1) 17,200

Cr. Tk. 5,600 11,600 17,200


P-15. Consolidated financial data of Tom Cruise Company as on December 31 appear bellow: Comparative Balance Sheet Particulars 2017 2016 Assets: Cash 92,700 47,250 Accounts receivables 90,800 57,000 Inventories 121,900 102,650 Investments 84,500 87,000 Plant assets 250,000 205,000 Accumulated depreciation (49,500) (40,000) 590,400 458,900 Liabilities & stockholders’ equity: Accounts payable 57,700 48,280 Accrued expense payable 12,100 18,830 Bonds payable 100,000 70,000 Common stock 250,000 200,000 Retained earnings 170,600 121,790 590,000 458,900 Income Statement For the year ended on December 31, 2017 Particulars Taka Sales Gain on sale of plant assets Less: COGS Operating expenses (excluding depreciation) Depreciation expense Income Taxes Interest expenses Net Income

Taka 297,500 8,750 306,250

99,460 14,670 49,700 7,270 2,940 174,040 132,210

Additional information: (a) New plant costing Tk.92,000 were purchased for cash during the year. (b) Investments were sold at cost. (c) Plant costing Tk.47,000 were sold for Tk.15,550 resulting in a gain of Tk.8,750. (d) A cash dividend of Tk.83,400 was declared and paid during the year. Required: Prepare a Statement of Cash Flows using (i) Indirect method and (ii) Direct method for the year ended December 31, 2017.


Solution: (i) Tom Cruise Company Statement of cash flows (Indirect method) For the year ended December 31, 2017 Amount Tk. Cash flow from operating activities: Net income Adjustment for: Depreciation expense Gain on sale of equipment Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expense Net cash provided from operating activities Cash flow from investing activities: Purchase of plant Sale of plant Sale of investment Net cash used from investing activities Cash flow from financing activities: Issue of bonds Issue of common stock Dividend paid Net cash used from financing activities Net increase in cash and cash equivalents Add: Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year

Amount Tk. 132,210

49,700 (8,750) (33,800) (19,250) 9,420 (6,730)

(9,410) 122,800

(92,000) 15,550 2,500 (73,950)

30,000 50,000 (83,400)

(ii) Tom Cruise Company Statement of cash flows (Direct method) For the year ended December 31, 2017

(3,400) 45,450 47,250 92,700


Amount Tk. Cash flow from operating activities: Collection from customers (w-1) Payment to suppliers (w-2) Payment to other expenses (w-3) Interest paid Tax paid Cash flow from investing activities: Purchase of plant Sale of plant Sale of investment

Amount Tk. 263,700 (109,290) (21,400) (2,940) (7,270) 122,800

(92,000) 15,550 2,500 (73,950)

Cash flow from financing activities: Issue of bonds Issue of common stock Dividend paid Net increase in cash & cash equivalent Cash & cash equivalent at beginning of year Cash & cash equivalent at the end of year

30,000 50,000 (83,400) (3,400) 45,450 47,250 92,700

Workings: 1. Collection from customers: Sales Add. Accounts receivable at beginning Less. Accounts receivable at end 2. Payment to supplier: Inventories at end Add. Cost of goods sold Goods available for sale Less. Inventories at beginning Purchase Add. Accounts payable at beginning Less. Accounts payable at end 3. Payment to other expenses: Operating expense Add. Accrued expense at beginning Less. Accrued expense at end

Tk.297,500 57,000 (90,800) Tk.263,700 Tk.121,900 99,460 Tk.221,360 102,650 Tk.118,710 48,280 57,700 Tk.109,290 Tk.14,670 18,830 (12,100) Tk.21,400


P-16. 3S Excellent Company uses direct method in preparing cash flow statement. The company provided you with the following information: Net credit sales Depreciation on property, plant and equipment Accounts receivable, end of the year Operating expenses Accounts receivable, beginning of the year Purchases (on account) Trade payable, end of the year Accrued expenses, beginning of the year Trade payable, beginning of the year Accrued expenses, end of the year

Tk.5,000,000 600,000 1,500,000 3,000,000 2,500,000 4,000,000 1,900,000 500,000 2,000,000 400,000

Required: For the purposes of the cash flow statement under the direct method, you are required to compute the cash collections from customers, payments to suppliers and cash paid for operating expenses. Solution: 3S Excellent Company Direct Method Cash collection from customers: Net sales Add. Accounts receivable, beginning of the year Less. Accounts receivable, end of the year Cash collection from customers Cash paid to suppliers: Purchases Add. Accounts payable, end of the year Less. Accounts payable, beginning of the year Payments to supplier Cash paid for operating expenses: Operating expenses Add. Accrued expenses, beginning of the year Less. Accrued expenses, end of the year Less. Depreciation on property, plant and equipment Cash paid toward operating expenses

Tk.5,000,000 2,500,000 7,500,000 (1,500,000) Tk.6,000,000

Tk.4,000,000 1,900,000 7,500,000 (2,000,000) Tk.3,900,000

Tk.3,000,000 500,000 7,500,000 (400,000) (600,000) Tk.2,500,000

P-17. Joydeb Corporation uses the direct method for preparing the statement of cash flows. The following summarizing transactions took place in 2017: Taka Collected cash from customers on account 75,000 Paid interest on debt 3,000


Paid principal of note payable Sold services for cash Paid salaries and wages Paid other operating expenses Recorded depreciation expenses Paid dividends Purchased machinery Sold equipment for book value Issued common stock for cash Issued long-term debt Amortized patents Purchased treasury stock Accrued salaries Purchased on investment Acquired a computer in exchange for common stock Received dividends from investment Paid income taxes Sold an investment (and recognized a gain of Tk.3,300)

30,000 19,000 27,000 41,000 7,000 6,000 60,000 12,000 45,000 52,000 1,000 4,000 800 38,200 10,000 700 6,500 24,000

Instructions: (a) Based on the information given, prepare a statement of cash flows using the direct method. Assume the cash balance at the beginning of the year was Tk.23,000. (b) If any transactions are not used in the computation, explain why? Solution: (a) Joydeb Corporation Statement of cash flows (Direct method) For the year ended December 31, 2017 Tk. Cash flow from operating activities: Collection from customers (Tk.75,000 + Tk.19,000) Payment to employees Payment of operating expenses Interest paid Tax paid Net cash provided from operating activities

94,000 (27,000) (41,000) (3,000) (6,500)

Cash flow from investing activities: Sale of investment Sale of equipment Dividend received Purchase of investment Purchase of machinery Net cash used from investing activities

24,000 12,000 700 (38,200) (60,000)

Tk.

16,500

(61,500)


Cash flow from financing activities: Purchase of treasury stock Payment of notes payable Issuance of common stock Issuance of long-term debt Dividend paid Net cash provided from financing activities Net increase in cash and cash equivalent Cash and cash equivalent at beginning Cash and cash equivalent at end

(4,000) (30,000) 45,000 52,000 (6,000) 57,000 12,000 23,000 35,000

(b) Depreciation expense, amortization of patents, accrued salaries and acquisition of a computer in exchange for common stock are not used in the computation because noncash transactions are excluded from the statement of cash flows. P-18. The balance sheets of Shova Company for 2016 and 2017 and income statement for 2017 are given below. You are asked to prepare a statement of cash flows for the company using direct method. Shova Company Comparative Balance Sheets As of December 31, 2017 and 2016

Cash Accounts receivable Short-term investments Inventory Prepaid rent Prepaid insurance Office supplies Land Buildings Accumulated depreciation – Buildings Equipment Accumulated depreciation – Equipment Patent Total assets

2017 Tk.15,000 17,500 20,000 42,000 3,000 2,100 1,000 125,000 350,000 (105,000) 525,000 (130,000) 45,000 910,600

2016 Tk.4,000 12,950 30,000 35,000 12,000 900 750 175,000 350,000 (87,500) 400,000 (112,000) 50,000 871,100

Accounts payable Taxes payable Wages payable Short-term notes payable Long-term notes payable

Tk.27,000 5,000 5,000 10,000 60,000

Tk.32,000 4,000 3,000 10,000 70,000


Bonds payable Premium on bonds payable Common stock Paid-in capital in excess of par Retained earnings Total liabilities and equity

400,000 20,303 240,000 20,000 123,297 910,600

400,000 25,853 220,000 17,500 87,747 871,100

Shova Company Income Statement For the year ended December 31, 2017 Sales revenue Cost of goods sold Gross margin Operating expenses: Selling expenses Administrative expenses Depreciation Income from operation Other revenues and expenses: Gain on sale of land Gain on sale of short-term investment Dividend revenue Interest expense Income before taxes Income tax expense Net income Dividend to common stockholders Retained earnings

Tk.1,160,000 (748,000) 412,000 Tk.79,200 156,700 40,500

8,000 4,000 2,400 (51,750)

(276,400) 135,600

(37,350) 98,250 (39,400) 58,850 (24,300) 34,550

Solution: Shova Company Statement of cash flows (Direct method) For the year ended December 31, 2017 Tk. Cash flow from operating activities: Collection from customers (w-1) Dividends received Payment to suppliers (w-2) Payment of operating expenses (w-3) Interest paid (w-4) Tax paid (w-5) Net cash provided from operating activities

Tk.

1,155,450 2,400 (760,000) (226,350) (57,300) (38,400) 75,800


Cash flow from investing activities: Sale of available-for-sale investments (10,000 + Gain Tk.4,000) Sale of land (Tk.50,000 + Gain Tk.8,000) Purchase of equipment Net cash used from investing activities Cash flow from financing activities: Proceeds from issuance of common stock Principal payment on long-term debt Dividend paid Net cash provided from financing activities Net increase in cash and cash equivalent Cash and cash equivalent at beginning Cash and cash equivalent at end

14,000 58,000 (125,000) (53,000)

22,500 (10,000) (24,300) (11,800) 11,000 4,000 15,000

Workings: 1. Collection from customers: Sales revenue Add. Accounts receivable at beginning Less. Accounts receivable at end 2. Payment to supplier: Inventory at end Add. Cost of goods sold Goods available for sale Less. Inventory at beginning Purchase Add. Accounts payable at beginning Less. Accounts payable at end 3. Payment of operating expenses: Operating expenses Less: Depreciation Less: Decrease in prepaid rent Add. Increase in prepaid insurance Add. Increase in office supplies Less. Increase in wages payable 4. Interest paid: Interest expenses Add. Decrease in bonds premium

Tk.1,160,000 12,950 (17,500) Tk.1,155,450 Tk.42,000 748,000 Tk.790,000 35,000 Tk.755,000 32,000 (27,000) Tk.760,000 Tk.276,400 (40,500) (9,000) 1,200 250 (2,000) Tk.226,350 Tk.51,750 5,550 Tk.57,300


5. Tax paid: Interest expenses Add. Tax payable at beginning Less. Tax payable at end

Tk.39,400 4,000 (5,000) Tk.38,400

P-19. The comparative balance sheets, income statement and selected data for 2017 are shown below: Compaq Computers Comparative Balance Sheets As of December 31 2017 2016 Assets Cash Tk.54,000 Tk.37,000 Accounts receivable 68,000 26,000 Inventories 54,000 Prepaid expenses 4,000 6,000 Land 45,000 70,000 Building 200,000 200,000 Accumulated depreciation – Building (21,000) (11,000) Equipment 193,000 68,000 Accumulated depreciation – Equipment (28,000) (1,000) 569,0000 386,0000 Liabilities and Stockholders’ equity Accounts payable Bonds payable Common stock Retained earnings

33,000 110,000 220,000 206,000 569,000

40,000 150,000 60,000 136,000 386,000

Compaq Computers Income Statement For the year ended December 31, 2017 Revenues Cost of goods sold Operating expenses Interest expenses Loss on sale of equipment Income from operation Income tax expenses Net income

Tk.890,000 Tk.465,000 221,000 12,000 2,000

700,000 190,000 65,000 125.000


Additional information: (a) Operating expenses include depreciation expenses of Tk.33,000 and amortization of prepaid expenses of Tk.2,000. (b) Land was sold at its book value for cash. (c) Cash dividends of Tk.55,000 were paid in 2017. (d) Interest expenses of Tk.12,000 was paid in cash. (e) Equipment with a cost of Tk.166,000 was purchased for cash. equipment with a cost of Tk.41,000 and a book value of Tk.36,000 was sold for cash. (f) Bonds were redeemed at their book value for cash. (g) Common stock (Tk.1 par) was issued for cash. Required: Prepare a statement of cash flows for the year ended December 31, 2017 under direct method. Solution: Compaq Computers Statement of Cash Flows For the year ended December 31, 2017 Tk. Cash flow from operating activities: Collection from customers (w-1) Payment to suppliers (w-2) Payment of other expenses (w-3) Interest paid Tax paid Net cash provided from operating activities Cash flow from investing activities: Sale of land Sale of equipment Purchase of equipment Net cash used from investing activities Cash flow from financing activities: Redemption of bonds payable Dividends paid Issue of share for cash Net cash provided from financing activities Net increase in cash and cash equivalent Cash and cash equivalent at beginning Cash and cash equivalent at end

Tk.

848,000 (526,000) (186,000) (12,000) (65,000) 59,000

25,000 34,000 166,000 (107,000)

(40,000) (55,000) 160,000 65,000 17,000 37,000 54,000


Workings: 1. Collection from customers: Sales Add: Accounts receivable at beginning Less: Accounts receivable at end 2. Payment to suppliers: Inventories at end Add: Cost of goods sold Goods available for sale Less: Inventories at beginning Purchase Add: Accounts payable at beginning Less: Accounts payable at end 3. Payment of other expenses: Operating expense (excluding depreciation) Less: Decrease in prepaid expenses

Tk.890,000 26,000 68,000 848,000 Tk.54,000 465,000 519,000 0 519,000 40,000 33,000 526,000 Tk.188,000 2,000 186,000

P-20. Comparative balance sheet accounts of JS Inc. are presented below: JS Inc. Comparative Balance Sheets As of December 31, 2017 and 2016

Cash Accounts receivable Merchandise inventory Investment (available for sale) Machinery Buildings Land Total Allowance for doubtful accounts Accumulated depreciation – Machinery Accumulated depreciation – Buildings Accounts payable Accrued payable Income tax payable Long-term notes payable

2017 Tk.6,000 13,500 6,000 4,450 6,000 13,500 1,500 50,950

2016 Tk.7,250 12,000 4,800 7,700 3,750 11,250 1,500 48,250

Tk.450 1,125 2,700 6,000 675 400 5,200

Tk.300 450 1,800 4,950 525 500 6,200


Common stock, no par Retained earnings Total

30,000 4,400 50,950

25,000 8,525 48,250

JS Inc. Income Statement For the year ended December 31, 2017 Net sales Less: Cost of goods sold Gross margin Less: Operating expenses: Depreciation expenses Bad debt expenses Other operating expenses Income from operation Other revenues and expenses: Gain on sale of investments Loss on sale of machinery Income before taxes Income tax expenses Net income

Tk.108,000 76,000 32,000 Tk.1,725 1,080 21,285

750 (160)

24,090 7,910

590 8,500 3,400 5,100

The following additional data are also available: (a) Cash dividends declared and paid during the year were Tk.4,225. (b) A 20% stock dividend was declared during the year, Tk.5,000 of retained earnings was capitalized. (c) Investments that cost Tk.4,000 were sold during the year for Tk.4,750. (d) Machinery that cost Tk.750 on which Tk.150 of depreciation had accumulated, was sold for Tk.440. Required: (i) Prepare a statement of cash flows of JS Inc. for the year 2017 using direct method. (ii) Prepare a reconciliation statement showing operating cash flows from net income. Solution: (i) JS Inc. Statement of Cash Flows For the year ended December 31, 2017 Tk. Cash flow from operating activities: Collection from customers (w-1) Payment to suppliers (w-2) Payment of other expenses (w-3) Tax paid (w-4) Net cash provided from operating activities

Tk.

105,570 (76,150) (21,135) (3,500) 4,785


Cash flow from investing activities: Purchase of buildings Purchase of machinery Purchase of investments Sale of investments Sale of machinery Net cash used from investing activities Cash flow from financing activities: Repayment of long-term notes Dividends paid Net cash used from financing activities Net decrease in cash and cash equivalent Cash and cash equivalent at beginning Cash and cash equivalent at end

(2,250) (3,000) (750) 4,750 440 (810)

(1,000) (4,225) (5225) (1,250 7,250 6,000

(ii) JS Inc. Reconciliation Statement For the year ended December 31, 2017 Net income Adjustments for: Depreciation expense Gain on sale of investments Loss on sale of machinery Increase in accounts receivable (net) Increase in merchandise inventory Increase in accounts payable Increase in accrued payables Decrease in income tax payable Net cash provided from operating activities

Tk.5,100 1,725 (750) 150 (1,350) (1,200) 1,050 150 (100) 4,785

Workings: 1. Collection from customers: Net sales Add: Accounts receivable at beginning (net) Less: Accounts receivable at end (net) Less: Bad debt expenses 2. Payment to suppliers: Merchandise inventory at end Add: Cost of goods sold Goods available for sale Less: Merchandise inventory at beginning Purchase Add: Accounts payable at beginning Less: Accounts payable at end

Tk.108,000 11,700 13,050 106,650 1,080 105,570 Tk.6,000 76,000 82,000 4,800 77,200 4,950 6,000 76,150


3. Payment of other expenses: Operating expense Add: Accrued payables at beginning Less: Accrued payables at end

Tk.21,285 525 675 21,135

4. Tax paid: Income tax expense Add: Income tax payables at beginning Less: Income tax payables at end

Tk.3,400 500 400 3,500

P-21. Leads Corporation, a major retailer of Computers and accessories, operates several branches and is listed in DSE and CSE, The Income Statement for the year ended December 31, 2017 and the Comparative Statement of Financial Position as on December 31, 2016 and December 31, 2017 are given below: Leads Corporation Income Statement For the year ended December 31, 2017 Particulars Sales Cost of Goods Sold Gross Profit Expenses: Salary Interest Other Depreciation Total Expenses Operating Income Income tax Net Income

Taka 1,255,250 722,000 533,250 252,100 75,000 8,150 25,000 360,250 173,000 43,000 130,000

Leads Corporation Comparative Statement of Financial Position As at December 31, 2016 and December 31, 2017 Liabilities & Owners’ Equity Current Liabilities: Accounts Payable Outstanding: Interest expenses Salary Expenses Total Current Liabilities:

2017 (Tk.) 123000 47250 27000 197250

2016 (Tk.)

Assets

Current Asset: 115000 Cash Accounts Receivable 72000 Stock-in-trade 25000 Prepaid expenses Total current 212000 Assets:

2017 (Tk.)

2016 (Tk.)

33250 80000 210000 9000

20000 58000 250000 7000

332250

335000


LongTerm Liabilities: Bond payable Total Long Term Liabilities Total Liabilities: Owners’ Equity: Common share (Tk.10 each) Retained earnings Total Owners’Equity: Total Liabilities & Owners’ Equity

70000

100000

70000 267250

100000 312000

370000

280000

145000 515000

120000 400000

782250

712000

Long term Assets: Machinery & Equipment Less: Accumulated Depreciation Net Long term Assets: Total Assets

600000

502000

150000

125000

450000 782250

377000 712000

Additional information concerning Leads Corporation‘s transactions during the year ended December 31, 2017 is as follows: (a) All sales during the year were made on account. (b) All stocks were purchased on credit, comprising of total payable account. (c) Machinery & equipment costing Tk. 98,000 were purchased by paying in cash and issuing 5,000 share of Tk. 10 each. (d) The ‗Other Expenses ‗are related to prepaid items. (e) All income taxes incurred during the year were paid during the year. (f) In order to supplement its cash leads corporation issued 4,000 share of common stock at par value. (g) There were no penalties assessed for the retirement of bond. (h) Cash dividend of Tk. 105,000 were declared and paid at the end of the fiscal year. Required: Prepare a Statement of Cash flow for the year ended December 31, 2017, using the Direct Method as per IAS-7. Solution Leads Corporation Statement of cash flow As per IAS-7 (Direct method) For the year ended December 31, 2017 Taka Cash flow from operation activities: Collection from customer (note-1) Payment to supplier (note-2) Payment to employees (note-3) Payment of other expenses (note-4) Interest paid (note-5) Tax paid Cash inflow from operating activities

Taka

1,233,250 (674,000) (250,100) (10,150) (99,750) (43,000) 156,250


Cash flow from investing activities: Purchase of machinery & equipment Cash outflow from investing activities Cash flow from financing activities: Issue of common shares (4,000 X Tk.10) Payment of short term loan Dividend paid Cash outflow from investing activities Net increase in cash and cash equivalent Add. Cash and cash equivalent at beginning Cash and cash equivalent at end

(48,000) (48,000) 40,000 (30,000) (105,000) (95,000) 13,250 20,000 33,250

Notes: 1. Collection from customers: Sales Add. Accounts receivable at beginning Less. Accounts receivable at end 2. Payment to supplier: Stock-in-trade at end Add. Cost of goods sold Goods available for sale Less. Stock-in-trade at beginning Purchase Add. Accounts payable at beginning Less. Accounts payable at end 3. Payment to employees: Salary expense Add. Outstanding expense at beginning Less. Outstanding expense at end 4. Payment of other expenses: Other expenses Add. Increase in prepaid expenses 5. Interest paid: Interest expenses Add. Outstanding interest at beginning Less. Outstanding interest at end

Tk.1,255,250 58,000 (80,000) Tk.1,233,250 Tk.210,000 722,000 Tk.932,000 250,000 Tk.68,200 115,000 (123,000) Tk.674,000 Tk.252,100 25,000 (27,000) Tk.250,100 Tk.8,150 2,000 Tk.10,150 Tk.75,000 72,000 (47,250) Tk.99,750

P-22. Financial information for Tremendous Enterprise Inc. for the year ended December 31, 2017 and 2016 are as follows:


Tremendous Enterprise Inc. Statement of Financial Position As of December 31, 2017 and 2016

Assets Cash and cash equivalents Trade receivables Inventory Intangible assets, net Due from associates Property, plant, and equipment, cost Accumulated depreciation Property, plant, and equipment, net Total assets Liabilities Accounts payable Income taxes payable Deferred taxes payable Total liabilities Shareholders‘ equity Share capital Retained earnings Total shareholders‘ equity Total liabilities and shareholders’ equity

2017

2016

Tk.4,500 7,500 3,000 1,500 28,500 18,000 (7,500) 10,500 55,500

Tk.1,500 3,750 2,250 2,250 28,500 33,750 (9,000) 24,750 63,000

Tk.7,500 3,000 4,500 15,000

Tk.18,750 1,500 3,000 23,250

Tk.9,750 30,750 Tk.40,500 Tk.55,500

Tk.9,750 30,000 Tk.39,750 Tk.63,000

Tremendous Enterprise Inc. Income Statement For the Year Ended December 31, 2017 Sales Cost of sales Gross operating income Administrative and selling expenses Interest expenses Depreciation of property, plant, and equipment Amortization of intangible asset Investment income Net income before taxation Taxes on income Net income

Tk.45,000 (15,000) 30,000 (3,000) (3,000) (3,000) (750) 4,500 24,750 (6,000) Tk.18,750

Additional Information This additional information is relevant to the preparation of the statement of cash flows: (a) All sales made by Tremendous Enterprise Inc. are credit sales. All purchases are on account. (b) Interest expense for the year 2017 was Tk.3,000, which was fully paid during the year. (c) The company pays salaries and other employee dues before the end of each month. All administration and selling expenses incurred were paid before December 31, 2017.


(d) Investment income comprises dividend income from investments in shares of Forex Company. This was received before December 31, 2017. (e) Equipment with a net book value of Tk.11,250 and original cost of Tk.15,750 was sold for Tk.11,250. (f) The company declared and paid dividends of Tk.18,000 to its shareholders during 2017. (g) Income tax expense for the year 2017 was Tk.6,000, against which the company paid Tk.3,000 during 2017 as an estimate. Required: Using the given financial information for Tremendous Enterprise Inc., prepare the statement of cash flows under the direct method. Solution: Tremendous Enterprise Inc. Statement of cash flows (Direct method) December 31, 2017

Cash flow from operating activities: Cash received from customers (w1) Cash paid to suppliers & employees (w2) Cash provided by operations Interest paid Taxes paid Cash from investing activities: Proceeds from sale of equipment Dividends received Cash flow from financing activities: Dividends paid Net increase in cash and cash equivalents Cash and cash equivalents at beginning Cash and cash balance at end

Taka

Taka

41,250 (30,000) 11,250 (3,000) (3,000)

5,250

11,250 4,500

15,750

(18,000)

(18,000) 3,000 1,500 4,500

Workings: 1. Cash received from customers: Sales Add. Trade receivables at beginning Less. Trade receivables at end 2. Cash paid to supplier & employees: Inventory at end Add. Cost of goods sold Goods available for sale Less. Inventories at beginning Purchase

Tk.45,000 3,750 (7,500) Tk.41,250 Tk.3,000 15,000 Tk.18,000 (2,250) Tk.15,750


Add. Accounts payable at beginning Less. Accounts payable at end

18,750 (7,500) Tk.27,000 3,000 Tk.30,000

Add. Administrative and selling expenses

P-23. From the following income statement and additional information, prepare a statement of cash flows under direct method. X Ltd. Income Statement For the year ended December 31, 2017 Tk. Revenues: Net sales Interest income Gain on sale of marketable securities Total revenue and gains Costs and expenses: Cost of goods sold Operating expenses including depreciation of Tk.700,000 Interest expenses Income taxes Loss on sale of plant Net income

Tk. 9,500,000 320,000 70,000 9,890,000

4,860,000 3,740,000 270,000 300,000 90,000

9,260,000 630,000

Changes in the company‘s balance sheet over the year are summarized as follows: (a) Accounts receivable decreased by Tk.85,000. (b) Accrued interest receivable increased by Tk.15,000. (c) Inventory decreased by Tk.280,000 and accounts payable to suppliers of merchandise decreased by Tk.240,000. (d) Short-term prepayments of operating expenses decreased by Tk.18,000 and accrued liabilities for operating expenses increased by Tk.35,000. (e) The liability for interest payable decreased by Tk.16,000 during the year. (f) The liability for income taxes payable increased by Tk.25,000 during the year. (g) The following schedule summarizes the total debt and credit entries during the year in the balance sheet: Debit Credit Marketable securities Tk.120,000 Tk.210,000 Notes receivable (cash loan given) 250,000 190,000 Plant assets (see note-h) 3,800,000 360,000 Notes payable (short-term borrowing) 620,000 740,000 Bonds payable 1,100,000 Capital stock 50,000 Additional paid-in capital 840,000 Retained earnings (see note-i) 320,000 630,000


(h) The Tk.360,000 in credit entries to the plant asset accounts is net of any debit to accumulated depreciation when plant assets were retired. Thus the Tk.360,000 in credit entries represents the book value of all plant assets sold or retired during the year. (i) The Tk.320,000 debit to retained earnings represents dividends declared and paid during the year. The Tk.630,000 credit entry represents the net income for the year. (j) All investing and financing activities were cash transactions. (k) Cash and cash equivalents amounted to Tk.448,000 at the beginning of the year and to Tk.330,000 at the year-end. Solution: X Ltd. Statement of Cash Flows For the year ended December 31, 2017 Tk. Cash flow from operating activities: Collection from customers Interest received Payment to suppliers (w-1) Payment of other expenses (w-2) Interest paid Tax paid Net cash provided from operating activities

9,585,000 305,000 (4,820,000) (2,987,000) (286,000) (275,000)

Cash flow from investing activities: Purchase of marketable securities Sale of marketable securities Loans paid to borrowers Collection on loans Cash paid to acquire plant assets Proceeds from sale of plant assets Net cash used from investing activities

(120,000) 280,000 (250,000) 190,000 (3,800,000) 270,000

Cash flow from financing activities: Proceeds from short-term borrowings Payment of short-term debt Issuance of bonds Issuance of capital stock Dividends paid Net cash provided from financing activities Net decrease in cash and cash equivalent Cash and cash equivalent at beginning Cash and cash equivalent at end

Tk.

1,522,000

(3,430,000)

740,000 (620,000) 1,100,000 890,000 (320,000) 1,790,000 (118,000) 448,000 330,000


Workings: 1. Payment to suppliers: Add: Cost of goods sold Less: Decrease in inventory Purchase Add: Decrease in accounts payable

Tk.4,860,000 (280,000) 4,580,000 240,000 4,820,000

2. Payment of other expenses: Operating expense Less: Depreciation Less: Decrease in prepayments Less: Increase in liabilities

Tk.3,740,000 (700,000) (18,000) (35,000) 2,987,000

P-24. Financial information for Maple Leaf Company for the year ended December 31, are presented below: Maple Leaf Company Balance Sheet December 31

Assets Cash Accounts receivable Inventories Land Plant and equipment (net of accumulated depreciation) Patents Total Liabilities and equity Accounts payable Staff expense payable Future income tax liability Borrowings, bonds Ordinary shares Retained earnings Total

2017 Tk.’000

2016 Tk.’000

50.0 105.0 130.0 162.5 245.0

45.0 70.0 110.0 100.0 266.5

15.0 707.5

16.5 608.0

130.0 100.0 70.0 65.0 241.5 101.0 707.5

100.0 105.0 50.0 90.0 190.0 73.0 608.0

Maple Leaf Company Income Statement

Sales Cost of sales Gross margin

2017 Tk.’000 500.0 280.0 220.0


Staff expenses Depreciation Amortization of patents Interest expenses Gain on retirement of bonds Miscellaneous expenses Loss on sale of equipment Profit before income tax Income tax – current Income tax – future Profit

95.0 10.0 1.5 8.0 (10.0) 3.5 2.0 110.0 29.5 20.0 60.5

Additional information: (a) On March 3, 2017, the company issued a 10% stock dividend. The market price per share of the ordinary stock was Tk.7.50 on March 3, 2017. (b) On April 2, 2017, the company issued 3,800 shares of ordinary stock for land. The company stock and land had current market value of approximately Tk.20,000. (c) On May 16, 2017, the company retired borrowings, bonds with a face value of Tk.25,000. (d) On July 31, 2017, the company sold equipment costing Tk.26,500 with a book value of Tk.11,500 for Tk.9,500. (e) On October 31, 2017, the company declared and paid a Tk.0.02 per share cash dividend. (f) On November 10, 2017, the company purchased land for Tk.42,500 cash. (g) The future income tax liability represents a temporary difference relating to the use of depreciation allowed for income tax reporting and straight-line depreciation allowed for financial statement reporting. (h) Borrowings, bonds mature December 31, 2019. (i) Ordinary shares outstanding on December 31, 2016, were 42,000 and at December 31, 2017 were 50,000. Required: (i) Prepare a statement of cash flow in good form using the direct method to present the operating activities section. (ii) Compute the 2017 ratios to evaluate solvency. (iii) Provide an assessment of the company‘s solvency and liquidity based on the two above requirements. Solution: (i) Maple Leaf Company Statement of cash flow (Direct method) December 31, 2017 Taka Cash flow from operating activities: Cash received from customers (w-1) Cash paid to suppliers (w-2)

465,000 (270,000)

Taka


Cash paid to employees (w-3) Cash paid to other expenses Interest paid Tax paid

(100,000) (3,500) (8,000) (29,500) 54,000

Cash from investing activities: Purchase of land Sale of equipment

(42,500) 9,500 (33,000)

Cash flow from financing activities: Repayment of bonds (90 – 65) – 10 Dividends (w-4) Change in cash and cash equivalent Opening cash and cash equivalent Closing cash and cash equivalent

(15,000) (1,000) (16,000) 5,000 45,000 50,000

(ii)

Tk.130,000  Tk.100,000  Tk.70,000  Tk.65,000 Tk.241,500  Tk.101,000 = 1.07 Tk.70,000  Tk.65,000 Debt to total capitalization ratio = Tk.70,000  Tk.65,000 Tk.241,500  Tk.101,000 = 0.28 Debt to equity ratio =

(iii) Maple Leaf generated Tk.54,000 from operations, spent a net Tk.33,000 on property, plant and equipment, and retired a portion of its long-term debt. The cash position showed a modest increase. Overall, the company has modest levels of long-term debt. Total debt is more significant, since there is Tk.1.07 of debt for each taka of equity. However, long-term debt only represents 28% of total capitalization and times interest earned is a healthy 15 times. Short-term debt is not excessive when viewed as part of the total picture, as debt is only 25% of total assets. Short-term debt introduces some additional risk into the financial management picture, but is low or no cost debt to the organization. Workings: 1. Cash received from customers: Sales Add. Accounts receivable at beginning Less. Accounts receivable at end 2. Cash paid to suppliers: Inventories at end Add. Cost of goods sold Goods available for sale Less. Inventories at beginning Purchase

Tk.500,000 70,000 (105,000) Tk.465,000 Tk.130,000 280,000 Tk.410,000 110,000 Tk.300,000


Add. Accounts payable at beginning Less. Accounts payable at end 3. Cash paid to employees: Staff expense Add. Staff expense payable at beginning Less. Staff expense payable at end 4. Dividends: {42,000 shares + (42,000 shares X 10%) + 3,800 shares} X Tk.0.02 = 50,000 shares X Tk.0.02 = Tk.1,000

100,000 (130,000) Tk.270,000 Tk.95,000 105,000 (100,000) Tk.100,000


EXERCIES E-1. MONYEM Company had the following Balance Sheet at December 31, 2013. MONYEM Company BALANCE SHEET DECEMBER 31, 2013 Cash Accounts receivable Investments Plant assets (net) Land

Tk.20,000 21,200 32,000 81,000 40,000 Tk.194,200

Accounts payable Long-term notes payable Common stock Retained earnings

Tk.30,000 41,000 100,000 23,200 _____Tk.194,200

During the year 2014 the following events occurred: 1. MONYEM Company sold part of its investment portfolio for Tk.17,000. This transaction resulted in a gain of Tk.3,400 for the company. The company classifies its investments as available-for-sale. 2. A piece of land was purchased for Tk.18,000 by cash. 3. Long-term notes payable in amount of Tk.16,000 were retired before maturity by paying Tk.16,000 cash. 4. An additional Tk.24,000 in Common Stock was issued at par. 5. Dividends totaling Tk.8,200 was declared and paid to the Stockholders. 6. Net income for the year 2013 was Tk.32,000 after allowing for depreciation of Tk.12,000. 7. Land was purchased through the issuance of Tk.30,000 in Bonds. 8. At the December 31, 2014: - Cash was Tk.39,000 - Accounts Receivable was Tk.41,600 and - Accounts Payable remained at Tk.30,000. Required: (i) Prepare a Statement of Cash Flows for the year 2014. (ii) Prepare the Balance Sheet as it would appear at December 31, 2014. (iii) How might the statement of cash flows help the user of the financial statements? Compute any one Cash Flow Ratio. E-2. Rahim and Karim are examining the following statement of cash flows for Jamuna Clothing Store‘s first year operations. Pacific Clothing Store Statement of Cash Flows For the year ended January 31, 2012 Sources of cash From sales of merchandise Tk.382,000 From sale of capital stock 380,000 From sale of investment 120,000 From depreciation 80,000 From issuance of note for truck 30,000 From interest on investments 8,000 Total sources of cash 1,000,000


Uses of cash For purchase of fixtures and equipment For merchandise of purchase For operating expenses (including depreciation) For purchase of investment For purchase of truck by issuance of note For purchase of treasury stock For interest on note Total uses of cash Net increase in cash

330,000 253,000 170,000 95,000 30,000 10,000 3,000 891,000 Tk.109,000

Rahim claims that Jamuna‘s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing Tk.109,000. Karim replies that it was not a superb first year that the year was an operating failure, the statement was incorrectly presented, and Tk.109,000 is not the actual increase in cash. Required: (a) With whom do you agree, Rahim or Karim? Explain your position. (b) Using the data provided, prepare a statement of cash flows in proper indirect method form. The only non-cash items in income are depreciation and gain from the sale of the investment (purchase and sale are related). E-3. Balance Sheet of 3M Limited is given below: 3M Limited Balance Sheet As at Liabilities Share capital (50,000 shares @ Tk.10/- each) 9% Debentures Sundry creditors Profit and Loss A/c Depreciation fund Contingency reserve Outstanding expenses

31.12.2011 (Tk.) 500,000 200,000 230,000 40,000 80,000 140,000 30,000 1,220,000

31.12.2012 (Tk.) 500,000 160,000 216,000 54,000 88,000 110,000 48,000 11,76,000

300,000 164,000 200,000 170,000 120,000 262,000 4,000 1,220,000

300,000 180,000 228,000 162,000 110,000 190,000 6,000 11,76,000

Assets Land & building Machinery Stock-in-trade Sundry debtors Cash & bank balances Current investment Prepaid expenses


The following information is furnished: (i) One old machinery which has original cost of Tk.30,000 was sold for Tk.10,000. The accumulated depreciation in respect of the said machinery amounts to Tk.16,000. (ii) One new machinery was acquired for Tk.46,000. (iii) 9% Debentures were redeemed at a discount of 4% of their face value. (iv) Dividend at 12% was declared and paid in cash. (v) Income-tax liability of Tk.30,000 paid was debited to contingency reserve. Required: Prepare a Cash Flow Statement in accordance with the Bangladesh Accounting Standard – 7 (BAS-7). E-4. Condensed financial data of Pat Metheny Company for 2005 and 2004 are given below: Pat Metheny Company Comparative Balance Sheet As of December 31, 2005 and 2004 Particulars Year 2005 Year 2004 Cash Tk.1,800 Tk.1,150 Receivables 1,750 1,300 Inventory 1,600 1,900 Plant Assets 1,900 1,700 Accumulated Depreciation (1,200) (1,170) Long-term Investments (Held to Maturity) 1,300 1,420 Total Tk.7,150 Tk.6,300 Accounts Payable Accrued liabilities Bonds Payable Capital Stock Retained Earning Total

Tk.1,200 200 1,400 1,900 2,450 Tk.7,150

Tk.900 250 1,550 1,700 1,900 Tk.6,300

Pat Metheny Company Income Statement For the year ended December 31, 2005 Sales Cost of goods sold Gross margin Selling and admin expenses Income from operation Other revenues and gains: Gain on sale of investments Income before tax Income tax expense Net income Cash dividends Income retained in business

Tk.6,900 4,700 2,200 930 1,270 80 1,350 540 810 260 550


Additional Information: During the year, Tk.70 Common Stock was issued in exchange for plant assets. No plant assets were sold in 2005. Required: A statement of Cash Flow using the indirect method. E-5. From the following information, prepare a cash flow statement for Ranges Company Ltd: Ranges Company Ltd. Balance Sheet as at December 31, 2009 Particulars Assets: Cash Accounts Receivables, net Inventories Prepaid Equipment (net) Patent Total Liabilities and Stockholders‘ Equity: Accounts Payable Salaries Payable Interest Payable Income Tax Payable Mortgage Payable Bonds payable Premium on Bonds Payable Common Stock Retained Earnings Total

31.12.2009 (Taka) 62,000 80,000 20,000 10,000 500,000 70,000 742,000

31.12.2008 (Taka) 200,000 60,000 12,000 6,000 300,000 90,000 668,000

60,000 50,000 9,000 20,000 110,000 100,000 3,000 170,000 220,000 742,000

40,000 60,000 6,000 12,000 120,000 200,000 8,000 150,000 72,000 668,000

Ranges Company Ltd. Income Statement For the year ended December 31, 2009 Particulars Sales Cost of goods sold Depreciation Amortization of Patent Other Expenses Gain (excess of insurance proceeds over book value of equipment destroyed) Interest Expenses Income Tax Expenses Extraordinary loss on Bond retirement (net of Tk.1,000 tax) Net Income

(Taka) 820,000 (380,000) (100,000) (20,000) (46,000) 10,000 (22,000) (72,000) (2,000) 188,000


Additional Information: (i) Ranges declared Tk.40,000 of dividends in 2009. (ii) Equipment which costs Tk.100,000 book value of Tk.40,000 was destroyed by fire. Claim proceeds from insurance company for Tk.50,000 was received by the company. (iii) Bonds were retired on January 01, 2009 at Tk.107, applicable taxes Tk.1,000. E-6. From the following information, prepare a cash flow statement for Texaco Company. Texaco Company Balance Sheet as at December 31, 2010 Particulars 31.12.2010 Assets: (Taka) Cash 900,000 Account Receivable 450,000 Notes Receivable 150,000 Inventories 750,000 Building 1,000,000 Plant and Equipment 900,000 Accumulated Depreciation (350,000) Land 380,000 Total 4,180,000 Liabilities and stockholders‘ equity: Account Payable 800,000 Salaries Payable 100,000 Expense Payable 50,000 Bonds Payable 12% 1,080,000 Common Stock 600,000 Additional paid in Capital 300,000 Retained Earnings 1,250,000 Total 4,180,000 Texaco Company Income Statement for the year ended December 31, 2010 Particulars Revenues Cost of goods sold Depreciation Expense Salaries Expense Interest Expense Gain on sale of Equipment Net Income

31.12.2009 (Taka) 500,000 550,000 150,000 1,000,000 1,000,000 1,000,000 (400,000) 300,000 4,100,000 700,000 50,000 50,000 1,100,000 800,000 400,000 1,000,000 4,100,000

(Taka) 2,500,000 (1,200,000) (250,000) (400,000) (100,000) 100,000 650,000

Additional information: (i) A piece of machinery with an original cost of Tk.500,000 and accumulated depreciation of Tk.300,000 was sold for Tk.300,000. (ii) Common stock originally issued for Tk.300,000 was acquired for Tk.350,000 and retired. The difference of Tk.50,000 was deleted to retained earnings. (iii) The total dividends declared and paid during 2010 was Tk.350,000.


E-7. The following are the Balance Sheets of Moonlight Ltd. as at 30 June 2011 and 2010: Assets Cash in Hand Trade Debtors

2011 (Taka) 8000000 11280000

Stock in Trade Fixed Assets

18500000 33070000

Accumulated Depreciation Investment in B Ltd. Loan Receivable Total

(11650000) 3050000 2700000 64950000

2010 Liabilities and Equity (Taka) 7000000 Accounts Payable 11680000 Income Tax Payable 17150000 Dividend Payable 29670000 Finance Lease Obligations (10400000) Share Capital 2750000 Share Premium _______- Unappropriated Profit 57850000 Total

2011 (Taka) 10150000 300000

2010 (Taka) 9550000 500000

800000 4000000

900000 -

5000000

5000000

15000000

15000,000

29700000 64950000

26900000 57850000

Additional information: i) On 30 June 2010, Moonlight Ltd. acquired 25% shares of B Ltd. For Tk.27,50,000. On that date the carrying value of B‘s assets and liabilities, approximately their fair value was Tk.1,10,00,000. B Ltd. reported income of Tk.12,00,000 for the year ended 30 June 2011. ii) During financial year 2011, Moonlight lent Tk.30,00,000 to sunlight Ltd. sunlight paid the 1st installment (including interest) of Tk.3,00,000 on 1st April 2011. iii) On 2 July 2010, Moonlight Ltd. sold equipment costing Tk.6,00,000 with a carrying amount of Tk.3,50,000 for Tk.4,00,000. iv) On 30 June 2011, Moonlight Ltd. entered into finance lease for machinery. The PV of the rental payment is Tk.40,00,000 which equals the fair value. Moonlight Ltd. made the first rental payment for Tk.6,00,000 when due on 2 July 2011. v) Net income for the year 2011 was Tk.36,00,000. vi) Moonlight Ltd. declared and paid cash dividend as follows: 2011 2010 Declared 15 June 2011 15 June 2010 Paid 30 August 2011 30 August 2010 Amount Tk.8,00,000 Tk.9,00,000 Required: Prepare the cash flow statement following the IAS-7 (indirect basis). Also show your workings. E-8. The balance sheet of Shaad Chemical Industries Ltd. As at 30 June 2012, including comparative figures, is given below: Assets 2012 (Tk.) 2011 (Tk.) Non-current assets Property, plant and equipment 333,000 311,000 Less: Accumulated depreciation (70,000) (69,000) 263,000 242,000 Investment 50,000 ______Total non-current assets 313,000 242,000 Current assets Inventories 12,000 11,000 Trade and other receivables 29,000 27,000 Cash and cash receivables 20,000 10,000 Total current assets 61,000 48,000 Total assets 374,000 290,000


Equity and liabilities Capital and reserves Ordinary share capital (Tk.1 per ordinary share) Share premium Revaluation reserve Retained earnings Total Capital and reserve Non-current liabilities Interest-bearing borrowings (12% Debenture) Current liabilities Trade and other payables Provisions Accruals Tax liability Total current liability Total equity and liabilities

95,000 15,000 12,000 149,000 271,000

50,000 10,000 12,000 115,000 187,000

50,000

60,000

27,000 19,000 7,000 53,000 374,000

19,000 2,000 19,000 3,000 43,000 290,000

You are also given the following information which is already reflected correctly in the accounts. (i) During the year a bonus issue of 1 for 10 was made on the ordinary shares in issue utilizing available profits at 30 June 2011. (ii) New share were issued on 1 July 2011. Part of the proceeds was used to redeem Tk.10,000, 12% debentures at par. (iii) Trade and other payable include Tk.5,000 for 2012 relating to the fixed asset purchases. (iv) During the year certain tangible non-current assets were disposed of for Tk.20,000. The assets had originally cost Tk.40,000 and had a net book value at the disposal date of Tk.18,000. (v) The corporation tax charge for the year is Tk.7,000. Required: Prepare a cash flow statement using indirect method for the year ended 30 June 2012 and the note reconciling profit before tax with cash generated from operations. E-9. General Motors Ltd. has prepared the balance sheet as set out below: Balance Sheet as at 31 March 2011 (Tk. ’000) Assets Non-current assets Property, plant and equipment 30,946 Investments 7,100 38,046 Current assets Inventories 16,487 Trade and other receivables 12,347 Cash and cash equivalents 863 29,697 67,743

2010 (Tk. ’000)

25,141 ______25,141 15,892 8,104 724 24,720 49,861


Equity and liabilities Capital and reserves Ordinary share capital (Tk.1 per ordinary share) Share premium Revaluation reserve Retained earnings Non-current liabilities Current liabilities Trade payables Accruals Tax liability

13,000 12,500 7,450 24,776 57,726 3,250

10,000 5,000 2,650 22,856 40,506 4,250

2,771 1,200 2,796 6,767 67,743

2,632 1,235 1,238 5,105 49,861

Total equity and liabilities The following notes are relevant: (i) Profit before tax was Tk.5,404,000 for the year ended 31 March 2011. (ii) Provision for tax was Tk.2,634,000 for the year ended 31 March 2011. Taxation provided at 31 March 2010 was settled at a figure lower than the amount provided. (iii) Analysis of property, plant and equipment 2011 (Tk.‘000) 2010 (Tk.‘000) Freehold building 25,100 19,780 Fixtures and fittings 5,846 5,361 30,946 25,141 (iv) Depreciation has not been provided on freehold buildings. During the year a professional revaluation of building taking account of additions during the year has been incorporated into the books of account. There were no disposals during the year. (v) Additions to fixtures and fittings during the year totaled Tk.1,365,000 at cost. There were no disposals. (vi) During the year the company made a right issue of shares on the basis of three new shares for every ten shares held at a price of Tk.3.5 per share. Pending the purchase of new plant part of the proceeds of the issue has been invested in share in other listed companies. Required: From the above information, prepare a cash flow statement using the indirect method in accordance with BAS 7 Cash Flow Statements for the year ended 31 March 2011. E-10. The following balance sheets relates to Ruma Chemical Company. Ruma Chemical Company Comparative Balance Sheets as at December 31 Assets 2013 Cash and cash equivalent Tk. 24,42,000 Accounts Receivable 16,00,000 Marketable Securities 2,10,000 Inventories 32,01,000 Prepaid insurance 27,500 Land and buildings 21,45,000 Equipment 31,90,000 Treasury stock (at cost) 55,000 Discount on bond payable 93,500 Total 1,29,64,000

2012 Tk. 5,50,000 11,00,000 4,40,000 33,00,000 22,000 21,45,000 18,70,000 1,10,000 99,000 96,36,000


Liabilities and stockholder’s Equity Allowance for doubtful accounts Accumulated depreciation on buildings Accumulated depreciation on equipment Accounts payable Notes payable (current) Expense payable (current) Tax payable Un-earned revenues Note payable long term Bonds payable Deferred income tax liability Common stock Retained earnings appropriated Retained earnings Paid in capital in excess of par Total

60,000 2,88,750 4,37,250 6,05,000 7,70,000 1,98,000 3,85,000 11,000 4,40,000 27,50,000 5,17,000 39,53,400 5,71,000 8,64,600 11,13,000 1,29,64,000

Income Statement For the year ended December 31, 2013 Income before extra-ordinary items Add. Gain on marketable securities Loss on sale of equipment 11,000 Decline in value of securities 44,000 Income before income tax Less: income tax Net income

55,000 2,47,000 3,02,000 6,60,000 2,20,000 95,700 1,10,000 99,000 6,60,000 27,50,000 5,86,000 22,00,000 3,63,000 12,32,000 55,000 96,36,000

Tk. 7,92,000 132,000 9,24,000 55,000 8,69,000 3,85,000 4,84,000

Additional Information: All purchases and sales were on account. A six months note payable for Tk.5,50,000 was issued toward the purchase of new equipment. Long term notes payable requires the payment of Tk.2,20,000 per year plus interest until paid. Equipment with original cost Tk.164,000 was sold for Tk.77,000. Treasury stock was sold for Tk.11,000 more than its costs and the surplus was created to additional paid in capital in excess of par. Equipment was overvalued, extending its useful life at a cost of Tk.66,000. The cost was debited accumulated depreciation equipment. During the year a 30% stock dividend was declared and issued. At the time there were 2,20,000 shares of Tk.10 per common stock outstanding. However 2,200 of those shares were held as treasury stock at the time were prohibited from the participation in the stock dividend. Market price was Tk.15 per share at the time the dividend was declared. Selling and general expenses include: building depreciation Tk.41,250, equipment depreciation Tk.2,77,750, doubtful accounts expenses Tk.44,000, interest expenses Tk.198,000. Additional 110,000 shares of common stock were sold in cash at Tk.23,10,000. A cash dividend of Tk.88,000 was paid during the year.


Required: From the above information, prepare a statement of cash flows using the indirect method in accordance with BAS 7 for the year ended 31 December 2013. E-11. The net changes in the balance sheet accounts of Uttara Company for the year 2011 are shown below: Account Debit Credit Cash Tk. 94,200 Accounts receivable Tk. 48,000 Allowance for doubtful accounts 10,500 Inventory 162,900 Prepaid expenses 15,000 Long-term investments 108,000 Land 225,000 Buildings 450,000 Machinery 75,000 Office equipment 21,000 Accumulated depreciation: Buildings 18,000 Machinery 15,000 Office equipment 9,000 Accounts payable 137,400 Accrued liabilities 54,000 Dividend payable 96,000 Premium on bonds 24,000 Bonds payable 600,000 Preferred stock (Tk. 50 par) 45,000 Common stock (Tk. 10 par) 117,000 Additional paid-in capital-common stock 167,400 Retained earnings 65400 Tk.1,278,900 Tk.1,278,900 Additional Information: (i) Cash dividends of Tk. 96,000 were declared December 15, 2011, payable January 15, 2012. A 5% stock dividend was issued March 31, 2011, when the market value was Tk. 22.00 per share. (ii) The long-term investments were sold for Tk. 105,000. (iii) A building and land which cost Tk. 360,000 and had a book value of Tk. 225,000 were sold for Tk. 300,000. The cost of the land, included in the cost and book value above, was Tk. 15,000. (iv) The following entry was made to record an exchange of an old machine for a new one: Machinery ........................................................ 120,000 Accumulated depreciation- Machinery.................... 30,000 Machinery............................................... 45,000 Cash ...................................................... 105,000 (v) A fully depreciated copier machine which cost Tk. 21,000 was written off. (vi) Preferred stock of Tk. 45,000 par value was redeemed for Tk. 60,000. (vii) The company sold 9,000 shares of its common stock (Tk. 10 par) on June 15, 2011 for Tk. 25 a Share. There were 65,700 shares outstanding on December 31, 2011. (viii) Bonds were sold at Tk. 104 on December 31, 2011. (ix) Land was condemned had a book value of Tk. 180,000.


(x) Income statement Data for Year Ended December 31, 2011 Income before extraordinary item Tk. 204,000 Extraordinary loss: Condemnation on land 99,000 Net income Tk. 105,000 Required: Prepared a statement of cash flows for 2011 using the indirect method. E-12. Comparative balance sheets for Eddie Murphy Company are presented below: Eddie Murphy Company Comparative Balance Sheets on December 31 Assets 2012 2011 Cash and cash equivalent Tk. 12,21,000 Tk. 2,75,000 Accounts receivable 8,00,000 5,50,000 Marketable securities 1,05,000 2,20,000 Inventories 16,00,500 16,50,000 Prepaid insurance 13,750 11,000 Land and buildings 10,72,500 10,72,500 Equipment 15,95,000 9,35,000 Treasury stock (at cost) 27,500 55,000 Discount on bond payable 46,750 49,500 Total 64,82,000 48,18,000 Liabilities and Stockholder’s Equity Allowance for doubtful accounts 30,000 27,500 Accumulated depreciation on buildings 1,44,375 1,23,750 Accumulated depreciation on equipment 2,18,625 1,51,250 Accounts payable 3,02,500 3,30,000 Notes payable (current) 3,85,000 1,10,000 Expense payable 99,000 47,850 Tax payable 1,92,500 55,000 Un-earned revenues 5,500 49,500 Note payable long term 2,20,000 3,30,000 Bonds payable 13,75,000 13,75,000 Deferred income tax liability 2,58,500 2,93,150 Common stock 19,76,700 11,00,000 Retained earnings appropriated 2,85,500 1,81,500 Retained earnings 4,32,300 6,16,000 Paid in capital in excess of par 5,56,500 27,500 Total 64,82,000 48,18,000 Income Statement For the year ended December 31, 2012 Income before extra-ordinary items Tk. 3,96,000 Add: Gain on marketable securities 66,000 4,62,000 Less: Loss on sale of equipment 5,500 Decline in value of securities 22,000 27,500 Income before income tax 4,34,500 Less: Income tax 1,92,500 Net income 2,42,000


Additional Information: 1. All purchases and sales were on account. 2. Equipment with an original cost of Tk.82,500 was sold for Tk.38,500. 3. A six months note payable for Tk.2,75,000 was issued toward the purchase of new equipment. 4. Long term notes payable requires the payment of Tk.1,10,000 per year plus interest until paid. 5. Treasury stock was sold for Tk.5,500 more than its costs and the surplus was created to additional paid in capital in excess of par. 6. Equipment was overvalued, extending its useful life at a cost of Tk.33,000. The cost was debited accumulated depreciation equipment. 7. During the year a 30% stock dividend was declared and issued. At the time there were 1,10,000 shares of Tk.10 per common stock outstanding. However 1,100 of those shares were held as treasury stock at the time were prohibited from the participation in the stock dividend. Market price was Tk.15 per share at the time the dividend was declared. 8. A cash dividend of Tk.44,000 was paid during the year. 9. Additional 55,000 shares of common stock were sold in cash at Tk.11,55,000. 10. Selling and general expenses include: building depreciation Tk. 20,625, equipment depreciation Tk. 1,38,875, doubtful accounts expenses Tk. 22,000, interest expenses Tk. 99,000. Required: Prepare a statement of cash flows for 2012 using the indirect method. E-13. The following is Method man Corp.‘s comparative balance sheet accounts work sheet at December 31, 2005 and 2004, with a column showing the increase (decrease) from 2004 to 2005. Comparative Balance Sheets Taka Taka Increase 2005 2004 (Decrease) Cash 807,500 700,000 107,500 Accounts receivable 1,128,000 1,168,000 (40,000) Inventories 1,850,000 1,715,000 135,000 Property, plant and equipment 3,307,000 2,967,000 340,000 Accumulated depreciation (1,165,000) (1,040,000) (125,000) Investment in Blige Co. 305,000 275,000 30,000 Loan receivable 262,500 ______262,500 Total assets 6,495,000 5,785,000 710,000 Accounts payable 1,015,000 955,000 60,000 Income taxes payable 30,000 50,000 (20,000) Dividends payable 80,000 100,000 (20,000) Capital lease obligation 400,000 400,000 Capital stock, common, Tk.1 par 500,000 500,000 Additional paid-in capital 1,500,000 1,500,000 Retained earnings 2,970,000 2,680,000 2,90,000 Total liabilities and stockholders’ equity 6,495,000 5,785,000 710,000 Additional information: (1) On December 31, 2004, Method Man acquired 25% of Blige Co.‘s common stock Tk.275,000. On that date, the carrying value of Blige‘s assets and liabilities, which approximated their fair values, was Tk.1,100,000. Blige reported income of Tk.120,000


for the year ended December 31, 2005. No dividends was paid on Blige‘s common stock during the year. (2) During 2005, Method Man loaned Tk.300,000 to TLC Co., an unrelated company. TLC made the first semi-annual principal repayment of Tk.37,500, plus interest at 10%, on December 31, 2005. (3) On January 2, 2005, Method Man sold equipment costing Tk.60,000 with a carrying amount of Tk.35,000 for Tk.40,000 cash. (4) On December 31, 2005, Method Man entered into a capital lease for an office building. The present value of the annual rental payment is Tk.400,000, which equals the fair value of the building. Method Man made the first rental payment for Tk.60,000 when due on January 2, 2006. (5) Net income for 2005 was Tk.370,000. (6) Method Man declared and paid cash dividends for 2005 and 2004 as follows: 2005 2004 Declared December 15, 2015 December 15, 2004 Paid February 28, 2006 February 28, 2005 Amount Tk.80,000 Tk.100,000 Required: Prepare a statement of cash flows for Method Man Corp. for the year ended December 31, 2005, using the indirect method. E-14. The comparative statement of Financial Position for XYZ Company shows the following information: Statement of Financial Position As on 31st December Assets 2012 2011 Equity and Liabilities 2012 2011 Non-Current Capital and Reserves Assets Property, plant and 418500 345300 Share capital (Tk.10 280000 225000 equipment Par) Less: Accumulated 90000 78000 Share premium 18000 10000 depreciation 328500 267300 Revaluation reserve 13000 5000 Patent 65000 73000 Retained earnings 123500 111800 Current Assets Non-Current Liabilities Inventories 30000 21000 8% Debentures 45000 65000 Account 45000 37000 Current Liabilities receivables Cash and cash 40500 47300 Accounts payable 20500 17200 equivalent Prepaid expenses 6500 8700 Outstanding expenses 2800 4000 Income tax liability 12000 16000 Interest payable 700 300 Total Assets 515500 454300 Total Equity and 515500 454300 Liability


Additional Information: (a) Details of property, plant and equipment: Cost

Accumulated Depreciation 2011 2012 2011 2012 Freehold building 175,000 200,000 0 0 Furniture and fixtures 45,300 73,000 22,500 28,700 Equipment 125,000 145,500 55,500 61,300 Total 345,300 418,500 78,000 90,000 (i) No Depreciation has been provided for freehold building, however, during the year a professional revaluation of buildings taking account of additions during the year has been incorporated into the books of accounts. There were no disposals during the year. (ii) Account payables includes Tk.15,000 for purchase of furniture during the year. (iii) Equipment with original cost of Tk.45,000 was sold for Tk.18,000 during the year. (b) Profit before interest and tax was Tk.47,800 for the year which includes loss on sale of equipment Tk.2,500. (c) Company paid interest of Tk.1,800 on the outstanding balance of debenture. (d) Corporate tax rate applicable for the firm is 35%. (e) On February 2012 the company made a right issue of 1 for 5 shares at Tk.11.50 per share. (f) New shares were issued at June 2012. Part of the proceeds was used to redeem 8% Debenture at a Premium of 4% of their face value. (g) On November 2012 cash dividend was declared and paid by the company. Required: Prepare a statement of cash flow for XYZ Company following BAS-7. E-15. The following balance sheet relates to Provati Housing Limited, a small private company. Provati Housing Limited Balance sheet as at 31 March 2010 and 2011 2011 (Taka) 2010 (Taka) Non-current assets 102,500 91,700 Land and building at valuation 62,300 49,200 Less. Accumulated depreciation (6,800) (5,000) 55,500 44,200 Equipment at cost 84,600 70,000 Less. Accumulated depreciation (37,600) (22,500) 47,000 47,500 Investment at cost 8,200 16,900 Current assets 100,900 87,200 Inventory 43,300 57,400 Trade receivables 50,400 28,600 Bank 1,200 Advance income tax 7,200 Total assets 211,600 195,800 Equity Ordinary shares of Tk.1 each Share premium Revaluation reserve Retained earnings

142,900 50,000 2,500 18,000 72,400

112,300 25,000 5,000 12,000 70,300


Non-current liabilities Bank loan Current liabilities Trade payables Bank overdraft Taxation Accrued bank loan interest Total equity and liabilities

39,800 28,900 26,700 1,900 300 211,600

43,200 40,300 31,400 8,900 195,800

The following notes are relevant: (i) The profit before interest and tax was Tk.22,100 for the year ended 31 March 2011. (ii) There was no disposal of land and buildings during the year. The increase in the revaluation reserve was entirely due to the revaluation of the Company‘s land. (iii) Equipments with a net book value of Tk.12,000 (cost Tk.23,000) were sold during the year for Tk.7,800. The loss on sale has been included in the profit before interest and tax. (iv) Investments with a cost of Tk.8,700 were sold during the year for Tk.11,000. The profit has been included in the profit before interest and tax. There were no further purchases of investments. (v) On 10 October 2010, a bonus issue of 1 for 10 ordinary shares was made utilizing the share premium account. The remainder of the increase in ordinary shares was due to an issue for cash on 30 October 2010. (vi) During the year Tk.20,000 and Tk.1,400 were paid as dividend and interest on bank loan respectively. Tax provision for the current year has not yet been made. Required: From the above information, prepare a cash flow statement using the indirect method in accordance with BAS 7 Cash Flow Statement for the year ended 31 March 2011. E-16. XYZ Ltd. a major retailer of accessories operates several stores and is listed with Dhaka Stock Exchange. The comparative statement of financial position and income statement for XYZ Ltd. as a June 30, 2010 are shown below to prepare its statement of cash flow: XYZ Ltd. Comparative Statement of Financial Position As a June 30, 2009 and June 30, 2010

Current Assets: Cash Debtors Stock-in-trade Prepaid expenses Total current assets Long-term Assets: Machinery and equipments Less: Accumulated depreciation Net long-term assets Total assets

2010 (Taka)

2009 (Taka)

33,250 80,000 210,000 9,000 332,250

20,000 58,000 250,000 7,000 335,000

600,000 (150,000) 450,000 782,250

502,000 (125,000) 377,000 712,000


Current Liabilities: Creditors Payable: Interest Salary Short-term loan Total current liabilities

123,000 47,250 27,000 70,000 267,250

115,000 72,000 25,000 100,000 312,000

Shareholders’ equity: Common shares (Tk. 10/- each) Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

370,000 145,000 515,000 782,250

280,000 120,000 400,000 712,000

XYZ Ltd. Income Statement for the year ended June 30, 2010 Taka 1,255,250 (722,000) 533,250

Sales Cost of goods sold Total contribution Expenses: Payroll expenses Interest expenses Other expenses Depreciation Total expenses EBT Tax EAT

(252,100) (75,000) (8,150) (25,000) 360,250 173,000 (43,000) 130,000

Other information for consideration: (i) During the year all sales were made on account; (ii) All stocks was purchased on account, comprising trade creditors account; (iii) Machinery and equipments costing Tk.98,000/- were purchased by paying Tk.48,000/- in cash and issuing 5,000 shares of Tk.10/- each; (iv) Income taxes incurred during the year were paid during the year; (v) In order to supplement its cash, XYZ Ltd. issued 4,000 shares at par value; (vi) Cash dividends of Tk.105,000/- were declared and paid at the end of fiscal year; (vii) The ‗other expenses‘ are related to prepaid items. Required: Prepare a statement of cash flows as per IAS-7 for XYZ Ltd. for the year ended June 30, 2010 using the direct method. E-17. The following schedule shows the account balance of Eldora Company at the beginning and end of the fiscal year ended October 31, 2008. Debits

October 31, 2008 (Amount in Taka)

November 01, 2007 (Amount in Taka)

Increase (Decrease) (Amount in Taka)


Cash Accounts Receivable Inventories Prepaid Insurance Long-term Investment (at cost) Sinking Fund Land and Building Equipment Discount on Bonds Payable Treasury Stock (Cost) Cost of Goods Sold Selling and General Expenses Income Tax Loss on Sale of Equipment Total Debits Credits

Allowance for doubtful Accounts Accumulated Depreciation- Building Accumulated Depreciation- Equipment Accounts Payable Notes Payable- Current Miscellaneous Expenses Payable Taxes Payable Unearned Revenue Notes Payable- Long-term Bond Payable- Long-term Common Stock Retained Earnings Appropriated for Sinking Fund Unappropriated Retained earnings Paid-in Capital in Excess of Par Value Sales Gain on Sale of Investments Total Credits

2,26,000 1,48,000 2,91,000 2,500 10,000 90,000 1,95,000 2,15,000 8,500 5,000 5,39,000 2,87,000 35,000 1,000 20,53,000 October 31, 2008 (Amount in Taka) 8,000 26,250 39,750 55,000 70,000 18,000 35,000 1,000 40,000 2,50,000 3,00,000 90,000

50,000 1,00,000 3,00,000 2,000 40,000 80,000 1,95,000 90,000 9,000 10,000 --------------------8,76,000 November 01, 2007 (Amount in Taka) 5,000 22,500 27,500 60,000 20,000 15,000 10,000 9,000 60,000 2,50,000 2,00,000 80,000

1,76,000 48,000 (9,000) 500 (30,000) 10,000 --1,25,000 (500) (5,000) 5,39,000 2,87,000 35,000 1,000 11,77,000 Increase (Decrease) (Amount in Taka) 3,000 3,750 12,250 (5,000) 50,000 3,000 25,000 (8,000) (20,000) ----1,00,000 10,000

94,000 1,16,000 8,98,000 12,000 20,53,000

1,12,000 5,000 ----------8,76,000

(18,000) 1,11,000 8,98,000 12,000 11,77,000

The following information was also available: (a) All purchase and sales were on account. (b) The sinking fund will be used to retire the long term bonds. (c) Equipment with and original cost of Tk.15,000 was sold for Tk.7,000. (d) Selling and general expenses include the following expenses: Building depreciation Tk.3,750 Equipment depreciation Tk.19,250 Doubtful accounts expenses Tk.4,000 Interest expenses Tk.18,000 (e) A six month note payable for Tk.50,000 was issued forward the purchase of new equipment.


(f) The long-term note payable requires the payment of Tk.20,000 per year plus interest until paid. (g) Treasury stock was sold for Tk.1,000 more than its cost. (h) All dividends were paid by cash. Required: Prepare statement of cash flow for 2008. Also show your workings. E-18. OMEGA‘s financial statements for 2015/2016 include the following: OMEGA statement of profit or loss and other comprehensive income for the year ended 30 November 2016 Note Tk.000 Revenue 58,292 Cost of sales (27,605) Gross profit 30,687 Administrative expenses (7,246) Distribution costs (2,410) Profit from operations 21,031 Finance cost (2,461) Profit before tax 18,570 Income tax expense (1,646) Profit for the period 16,924 Other comprehensive income – items that will not be reclassified subsequently to profit or loss (ii) 3,750 Revaluation gain on properties 20,674 OMEGA Statement of financial position at 30 November Note Non-current assets Property, plant and equipment Deferred development expenditure Current assets Inventories Trade receivables Investments Cash in hand and at bank Total assets Equity and liabilities Equity Equity shares Share premium Revaluation reserve Retained earnings Total equity Non-current liabilities Long-term loans Deferred tax Finance lease payable Current liabilities Total equity and liabilities

(i);(ii);(iii)&(iv) (v)

(vi)

(vii)

(ix)

2016 2015 Tk.000 Tk.000 Tk.000 Tk.000 104,450 2,150 4,664 2,901 0 237

106,600

7,802 114,402

27,350 10,835 3,750 39,119

88,680 2,548 3,780 5,046 350 712

(iv) (viii)

26,350 1,258 1,491

9,888 101,116

18,350 1,835 0 24,732 81,054

(x)

91,228

29,099 4,249 114,402

44,917 49,099 890 438

50,578 5,621 101,116


(i) Property, plant and equipment are comprised of: 2016 Tk.000 Property 62,120 Plant and equipment 42,330

2015 Tk.000 52,000 36,680

Plant and equipment with a carrying value of Tk.196,000 was sold during the year for Tk.365,000. Any gain/loss on disposal is included in profit or loss. (ii) Properties were revalued on 30 November 2016. (iii) Depreciation charged during the year to 30 November 2016 was Tk.1,040,000 for property and Tk.4,115,000 for plant and equipment. (iv) OMEGA acquired new plant and equipment on a finance lease on 1 December 2015, debiting Tk.1,500,000 to plant and equipment at that date. The total interest on finance leases for the year was Tk.143,000. (v) Deferred development expenditure at 30 November 2015 comprised two projects re as follows: Project A Tk.2,260,000 – completed. Amortization commenced on 1 December 2015 at 10% per year. Project B Tk.288,000 – on 1 December 2015, OMEGA decided to discontinue project B. During the year ended 30 December 2015, OMEGA capitalized expenditure on a new project, Project C. (vi) The current asset investment, disposed of during the year, was a 30 day government bond. (vii) OMEGA issued 9,000,000 Tk.1 equity shares at a premium of Tk.1 on 30 November 2015. (viii) Current liabilities: 2016 2015 Tk.000 Tk.000 Trade payable 1,250 1,850 Loan interest payable 1,166 2,024 Tax payable 1,490 1,620 Finance lease payable 343 127 Total current liabilities 4,249 5,621 Required: Prepare OMEGA‘s statement of cash flows, using the indirect method, for the year ended 30 November 2016 in accordance with IAS 7 Statement of Cash Flows. Notes to the financial statements are not required, but all workings must be clearly shown. E-19. The financial statements of MNC are given below: Statement of Financial Position as at: 31 Oct 2015 Tk.000 Tk.000 Non-current Assets Property, plant and equipment Development expenditure

4,676 417

5,093

31 Oct 2014 Tk.000 Tk.000 4,248 494

4,742


Current Assets Inventory Trade receivables Cash and cash equivalents Total Assets Equity and Liabilities Equity shares of Tk.1 each Share premium Revaluation reserve Retained earnings Non-current liabilities Long term borrowings Deferred tax Current liabilities Trade payables Current tax Accrued interest Provision for redundancy costs Total Equity and Liabilities

606 456 1,989

3,780 1,420 560 1,314 360 210

425 70 5 0

3,051 8,144

509 372 205

1,086 5,828

7,074

2,180 620 260 1,250

4,310

570

715 170

885

500 8,144

310 170 3 150

633 5,828

Statement of Comprehensive Income for the year ended 31 October 2015 Tk.000 Revenue Cost of sales Administrative expenses Distribution costs Finance cost Taxation Profit for the year Other Comprehensive Income Gain on revaluation of property, plant and equipment

(2,040) (788)

Tk.000 6,640 (3,530) 3,110 (2,828) 282 (16) 266 120 146 300 446

Additional information: (i) On 1 November 2014, MNC issued 1,600,000 Tk.1 ordinary shares at a premium of 50%. No other finance was raised during the year. (ii) MNC paid a dividend during the year. (iii) Plant and equipment disposed of in the year had a net book value of Tk.70,000; cash received on disposal was Tk.66,000. Any gain or loss on disposal has been included under cost of sales. (iv) Cost of sales includes Tk.145,000 for development expenditure amortised during the year. (v) Depreciation charged for the year was Tk.250,000.


(vi) The income tax expense for the year to 31 October 2015 is made up as follows: Tk.000 Corporate income tax 80 Deferred tax 40 120 During the year to 31 October 2014 MNC set up a provision for redundancy costs arising from the closure of one of its activities. During the year to 31 October 2015, MNC spent Tk.177,000 on redundancy costs, the additional cost being charged to administrative expenses. Required: (i) Prepare a statement of cash flows, using the indirect method, for MNC for the year ended 31 October 2015, in accordance with IAS 7 Statement of Cash Flows. (ii) One of your friend heard that you work for MNC, a well known international entity. There are rumors in the press that MNC‘s latest share issue was to raise cash to enable it to launch a takeover bid for another entity. Your friend wants to treat you to dinner at an expensive local restaurant, so that you can give him details of the proposed takeover before it is made public. Explain how you would respond to your friend considering Professional Ethics. E-20. GLORY LTD is a public listed manufacturer. Its summarized consolidated financial statements for the year ended 30 June 2017 (with 2016 comparatives) are as follows: Glory Ltd: Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June. 2017 2016 Million (Tk.) Million (Tk.) Revenue 18,410 16,200 Cost of sales (15,200) (11,100) Gross profit 3,210 5,100 Operating costs (3,750) (3,600) Gains on revaluation of financial assets 20 40 Finance costs (49) (33) Profit (loss) before taxation (569) (1,507) Income tax expense (80) (180) Profit for the year (649) (1,327) Profit for the year attributable to: Owners of the parent (654) 1,327 Non-controlling interests 5 Profit for the year (649) 1,327 Glory Ltd: Consolidated Statement of Financial Position as at 30 June:

Non-current assets: Property, plant and equipment Intangible assets Goodwill Financial assets

2017 Million (Tk.)

2016 Million (Tk.)

2,360 350 60 210 2,980

2,400 350 0 180 2,930


Current assets: Inventory Trade receivables Bank Total assets Equity: Equity shares of Tk.1 each Share premium Retained earnings Non-controlling interest Non-current liabilities: 6% Bonds 2022 Current liabilities: Trade payables and provisions Bank overdraft Current tax payable Total equity and liabilities

400 460 860 3,840

275 340 230 845 3,775

1,400 500 504 2,404 50 2,454

1,300 350 1,205 2,855 0 2,855

680

550

466 160 80 706 3,840

280 --90 370 3,775

The following notes should be taken into account, if relevant: (i) On 1 July 2016, Glory bought an 80% stake in another equity, Dolly Ltd. The cost of the stake was Tk.200 million, satisfied by Glory issuing 48 million equity shares valued at Tk.2.50 each and Tk.80 million in cash. The fair value of the net assets acquired on the acquisition date was Tk.180 million, consisting of the following: • Property, plant & equipment Tk.120m • Intangible assets Tk.30m • Inventory Tk.25m • Cash Tk.20m • Trade payables (Tk.15m) Tk.180m The fair value of the non-controlling interest at the acquisition date was Tk.47 million. Glory Ltd. uses the full goodwill method in all acquisitions. Goodwill was impairment tested at 30 June 2017, and any impairment loss was correctly accounted for through operating expenses. (ii) There were no disposals of non-current assets during the period. No intangible assets were acquired apart from those acquired through the acquisition of Dolly Plc. Depreciation of property, plant & equipment amounted to Tk.207 million, charged to operating expenses. Amortization of intangible assets was also charged to operating expenses. (iii) There were no non-cash adjustments to the 6% Bonds. (iv) Include in the figure for ―trade payables and provisions‖ at 30 June 2017 is a provision for warranty claims amounting to Tk.27 million (2016: Tk.14 million). (v) Equity dividends were paid during the by Glory and Dolly. (vi) Financial assets which had cost Tk.60 million, and had a carrying value on 30 June 2016 of Tk.75 million, were sold during the year for Tk.78 million.


Required: (a) Prepare a Consolidated Statement of Cash Flows for the Glory Group in accordance with IAS-7. (b) Evaluate, using suitable ratios where relevant, any insights revealed by the statement of cash flows into the financial performance and position of the group as at 30 June 2017.


CHAPTER - 6 PROCESSING AND RECORDING OF ACCOUNTING INFORMATION

6.1. MEANING OF ACCOUNTING CYCLE Accounting cycle is the financial process starting with recording business transactions and leading up to the preparation of financial statements. It is a set of steps that are repeated in the same order every period. The culmination of these steps is the preparation of financial statements. Some companies prepare financial statements on a quarterly basis whereas other companies prepare them annually. This means that quarterly companies complete one entire accounting cycle every three months while annual companies only complete one accounting cycle per year. 6.2. STEPS INVOLVED IN ACCOUNTING CYCLE Following steps are involved in an accounting cycle: i) Identify business events, analyze these transactions, and record them as journal entries ii) Post journal entries to applicable T-accounts or ledger accounts iii) Prepare an unadjusted trial balance from the general ledger iv) Analyze the trial balance and make end of period adjusting entries v) Post adjusting journal entries and prepare the adjusted trial balance vi) Use the adjusted trial balance to prepare financial statements vii) Close all temporary income statement accounts with closing entries viii) Prepare the post-closing trial balance for the next accounting period ix) Prepare reversing entries to cancel temporary adjusting entries if applicable 6.3. DEFINITION OF SINGLE ENTRY SYSTEM A single entry system records each accounting transaction with a single entry to the accounting records, rather than the vastly more widespread double entry system. The single entry system is centered on the results of a business that are reported in the income statement. The core information tracked in a single entry system is cash disbursements and cash receipts. Asset and liability records are usually not tracked in a single entry system; these items must be tracked separately. 6.4. DEFINITION OF DOUBLE ENTRY SYSTEM The double entry system means that every business transaction will involves two accounts. For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. The basic principle of double entry system is that there are always two entries for every transaction. One entry is known as a credit entry and the other a debit entry. 6.5. DIFFERENCES BETWEEN SINGLE AND DOUBLE ENTRY SYSTEM Basis for Comparison

Single entry system

Double entry system


i. Meaning

ii. Type of recording iii. Ledger iv. Preparation of financial statement v. Financial position

The system of accounting in which only one sided entry is required to record financial transactions is single entry system. Incomplete

The accounting system, in which every transaction affects two accounts simultaneously is known as the double entry system. Complete

Personal and cash account Difficult

Personal, account Easy

Can not be ascertained easily

Can be ascertained easily

real

and

nominal

6.6. GOLDEN ROLE OF DEBIT AND CREDIT Golden rule is said to be the foundation stone of accounting. This is the rule using by which all accounting and Financial report are built. The term ‗Golden rules of accounting‘ is popularly used in Indian Accounting. In other part of the world it is called rules of Debit and Credit. This is the rules of journalising the transactions. In double entry system, there are two aspects for each aspect of transactions are called ‗Debit‘ and Credit. The journal entry wrote after analyzing these two aspects. The three golden rules of accounting are as follows: (i) Debit the receiver, credit the giver This principle is used in the case of personal accounts. When a person gives something to the organization, it becomes an inflow and therefore the person must be credit in the books of accounts. The converse of this is also true, which is why the receiver needs to be debited. (ii) Debit what comes in, credit what goes out: This principle is applied in case of real accounts. Real accounts involve machinery, land and building etc. They have a debit balance by default. Thus when you debit what comes in, you are adding to the existing account balance. This is exactly what needs to be done. Similarly when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the organization. (iii) Debit all expenses and losses, credit all incomes and gains: This rule is applied when the account in question is a nominal account. The capital of the company is a liability. Therefore it has a default credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses and losses, you decrease the capital. This is exactly what needs to be done for the system to stay in balance. 6.7. DEFERRED REVENUE AND EXPENSES Deferred revenue is not yet revenue. It is an amount that was received by a company in advance of earning it. The amount unearned (and therefore deferred) as of the date of the financial statements should be reported as a liability. The title of the liability account might be Unearned Revenues or Deferred Revenues. When the deferred revenue


becomes earned, an adjusting entry is prepared that will debit the Unearned Revenues or Deferred Revenues account and will credit Sales Revenues or Service Revenues. A deferred expense is a cost that has already been incurred, but which has not yet been consumed. The cost is recorded as an asset until such time as the underlying goods or services are consumed; at that point, the cost is charged to expense. A deferred expense is initially recorded as an asset, so that it appears on the balance sheet (usually as a current asset, since it will probably be consumed within one year).


CHAPTER - 7

FINANCIAL STATEMENTS FOR DIFFERENT ENTITIES

7.1. MEANING OF A STATEMENT OF BANK A statement of bank is a record, typically sent to the account holder every month, summarizing all the transactions in an account throughout the time from the previous statement to the current statement. The opening balance from the previous month added to the total of all transactions during the period results in the closing balance for the current statement. Consumers should carefully review their bank statements and keep them for their own financial records. 7.2. ANALYSIS OF OFF BALANCE SHEET ITEMS Off balance sheet items refer to assets or liabilities that do not appear on a company's balance sheet but that are nonetheless effectively assets or liabilities of the company. Assets or liabilities designated off balance sheet are typically ones that a company is not the recognized legal owner of, or in the case of a liability, does not have direct legal responsibility for. As an example, although loans issued by a bank are ordinarily kept on the bank's balance sheet, when some loans are securitized and sold off as investments, that securitized debt will be kept off the bank's books, and an operating lease is one of the most common off-balance items. 7.3. NOTES TO THE FINANCIAL STATEMENT Notes to the financial statement present all such information which cannot be presented on the face of income statement, balance sheet, statement of cash flows and statement of changes in equity. Typical notes to the financial statement are: (a) An introduction of the business outlining its legal status, its country of incorporation and the name of its parents if any and a statement about the company's areas of business and its operations. (b) A summary of accounting policies related to revenue recognition, inventories, property, plant and equipment, financial instruments, etc. (c) A schedule of property plant and equipment showing the addition and deletion of assets, related movement in the accumulated depreciation account and book value. (d) A breakup of cost of sales, selling expenses and administrative expenses. (e) A detailed disclosure of different classes of financial instruments and their related risks. (f) A breakup of the gross amounts and present values of lease obligations of the business. (g) A detail of transactions with related parties. (h) A detail of contingencies that may affect the business in future, for example legal proceedings against the business. (i) A description of major events that occurred after the balance sheet date, etc.


7.4. DISCLOSURES IN FINANCIAL REPORT A business‘s financial report is much more than just the financial statements; a financial report needs additional information, called disclosures. Footnotes are one form of disclosure included in a financial report. Virtually all financial statements need footnotes to provide additional information for several of the account balances. Footnotes for financial reports come in two types: (a) One or more footnotes are included to identify the major accounting policies and methods that the business uses. The business must reveal which accounting methods it uses for booking its revenue and expenses. In particular, the business must identify its cost of goods sold expense (and inventory) method and its depreciation methods. (b) Other footnotes provide additional information and details for many assets and liabilities. Details about stock option plans for executives are the main type of footnote to the capital stock account in the owners‘ equity section of the balance sheet. 7.5. EXPLANATION OF INSURANCE COMPANY An insurance company is a company that offers insurance policies to the public, either by selling directly to an individual or through another source such as an employee's benefit plan. An insurance company is usually comprised of multiple insurance agents. An insurance company can specialize in one type of insurance, such as life insurance, health insurance, or auto insurance, or offer multiple types of insurance. 7.6. FUNCTIONS OF INSURANCE COMPANY The functions of insurance can be studied into two parts (a) Primary functions, and (b) Secondary functions. (a) Primary functions: (i) Insurance provides certainty: Insurance provides certainty of payment at the uncertainty of loss. The uncertainty of loss can be reduced by better planning and administration. But, the insurance relieves the person from such difficult task. Moreover, if the subject matters are not adequate, the selfprovision may prove costlier. (ii) Insurance provides protection: The main function of the insurance is to provide protection against the probable chances of loss. The time and amount of loss are uncertain and at the happening of risk, the person will suffer loss in absence of insurance. The insurance guarantees the payment of loss and thus protects the assured from sufferings. The insurance cannot check the happening of risk but can provide for losses at the happening of the risk. (iii) Risk-sharing: The risk is uncertain, and therefore, the loss arising from the risk is also uncertain. When risk takes place, the loss is shared by all the persons who are exposed to the risk. The risksharing in ancient time was done only at time of damage or death; but today, on the basis of probability of risk, the share is obtained from each and every insured in the shape of premium without which protection is not guaranteed by the insurer.


(b) Secondary functions: Besides the above primary functions, the insurance works for the following functions: (i) Prevention of loss: The insurance joins hands with those institutions which are engaged in preventing the losses of the society because the reduction in loss causes lesser payment to the assured and so more saving is possible which will assist in reducing the premium. Lesser premium invites more business and more business cause lesser share to the assured. So again premium is reduced to, which will stimulate more business and more protection to the masses. Therefore, the insurance assist financially to the health organisation, fire brigade, educational institutions and other organisations which are engaged in preventing the losses of the masses from death or damage. (ii) Provides capital: The insurance provides capital to the society. The accumulated funds are invested in productive channel. The dearth of capital of the society is minimised to a greater extent with the help of investment of insurance. The industry, the business and the individual are benefited by the investment and loans of the insurers. (iii) Improves efficiency: The insurance eliminates worries and miseries of losses at death and destruction of property. The carefree person can devote his body and soul together for better achievement. It improves not only his efficiency, but the efficiencies of the masses are also advanced. (iv) Helps in economic progress: The insurance by protecting the society from huge losses of damage, destruction and death, provides an initiative to work hard for the betterment of the masses. The next factor of economic progress, the capital, is also immensely provided by the masses. The property, the valuable assets, the man, the machine and the society cannot lose much at the disaster. 7.7. TYPES OF INSURANCE COMPANY There are many types of insurance companies. It is useful to be aware of the general types, since the differences can impact the kinds of insurance that a business chooses to buy. The more common categories of insurance company include: Captive insurance company: This is an entity that exists to underwrite the risks of its parent owner. The concept can also be used to provide insurance for a group of participating entities. The risk of loss is confined to the captive entity. Domestic: This is an insurance company that is incorporated in the state within which it is domiciled. This entity is considered a domestic insurer within that specific state, and a foreign insurer within all other states (though it can still be licensed to do business in other states). Alien: This is an insurance company that is incorporated under the laws of another country. It is considered an alien entity from the perspective of any other country within which it does business.


Mutual: The policy holders own this type of business, so earnings are distributed back as dividends. Losses are not usually charged back to policy holders, based on the terms of their insurance agreements. Stock company: This is an entity organized as a corporation, with shareholders. Any excess earnings of this type of business may be distributed as dividends to the shareholders. An insurance company may also be classified by the type of insurance services that it offers. As an example, a monoline company issues only a particular type of insurance, while a multiple line company offers several types of insurance. Further, a financial services company can provide not only insurance products, but also other types of financial services.


PROBLEMS AND SOLUTIONS P-1. Compute the amount of statutory reserve of a commercial bank from the under mentioned data: Net profit before provision Tk. 1,00,000 Net profit before tax Tk. 75,500 Net profit after tax Tk. 55,500 Solution: Statutory reserve = Tk.75,550 X 20% = Tk.15,100 P-2. From the following particulars of a Commercial Bank compute the amounts of statutory reserve required: Profit before tax Tk. 29,30,507 Profit after tax Tk. 19,62,907 Balance of statutory reserve fund Tk. 5,00,000 Balance of share premium Tk. 50,000 Paid-up share capital Tk. 10,00,000 Solution: Statutory reserve = Tk.29,30,507 X 20% = Tk.58,601 We know, Statutory reserve + Share premium ≤ Paid-up capital Now, Balance of statutory reserve fund Add. New statutory reserve Balance of share premium

Tk.5,00,000 58,601 50,000 11,36,101 10,00,000 1,36,101

Less. Paid-up share capital Excess amount

Required statutory reserve = Tk.5,86,101 – Tk.1,36,101 = Tk.4,50,000 P-3. Redraft the following Balance 2017 as per IAS-30‘s format: Liabilities Accumulated depreciation Borrowings Provision for bad debts Fixed deposits Bills payable Current account Savings bank deposit Sundry creditors

Sheet of National Bank Limited as on December 31, Taka 1,65,000 7,00,000 25,000 9,50,000 8,00,000 80,00,000 30,00,000 30,000

Assets Investment (cost) Money at call and short notice Cash in hand Loans, cash credits and overdrafts Cash with Bangladesh Bank

Taka 30,00,000 3,00,000 60,000 70,00,000 13,00,000


Branch adjustment Statutory reserve New statutory reserve Proposed dividend Provision for taxation Surplus of profit and loss A/C Paid-up share capital Rebate on bills discounted Unclaimed dividend Total

50,000 3,50,000 49,000 75,000 1,00,000 1,81,000 5,00,000 5,000 30,000 1,50,10,000

Cash with other Banks Bills discounted and purchased Premises Non-banking assets

Total

15,00,000 5,00,000 13,00,000 50,000

1,50,10,000

Solution: National Bank Limited Balance Sheet As on December 31, 2017 Particulars Property and assets Cash: Cash in hand Cash with Bangladesh Bank Cash with other Banks Money at call and short notice Investment (at cost) Loans and advances: Loans, cash credit and overdrafts Less. Provision for bad debts Bills discounted and purchased

Taka

Taka

60,000 13,00,000 15,00,000 28,60,000 3,00,000 30,00,000 70,00,000 25,000 69,75,000 5,00,000 74,75,000

Premises and fixed assets: Premises Less. Accumulated depreciation

13,00,000 1,65,000 11,35,000 50,000 1,48,20,000

Non-banking assets Total assets Liabilities and stockholders’ equity Liabilities Borrowings Deposit and other accounts: Fixed deposit Saving bank deposit Current account Bills payable

7,00,000 9,50,000 30,00,000 80,00,000 8,00,000 1,27,50,000


Other liabilities: Sundry creditors Unclaimed dividend Proposed dividend Rebate on bills discounted Provision for taxation Branch adjustment (Cr.)

30,000 30,000 75,000 5,000 1,00,000 50,000 2,90,000 1,37,40,000

Total liabilities Stockholders’ equity Paid-up share capital Reserve fund: Statutory reserve 3,50,000 Add. New 49,000

5,00,000

3,99,000 1,81,000

Surplus profit and loss account Total stockholders’ equity Total liabilities and stockholders’ equity

10,80,000 1,48,20,000

P-4. From the following balances prepare a Balance Sheet of Commerce Bank Ltd. as at 31.12.2010: Non-Banking Assets 120,000 Notes Payable 350,000 Reserve Fund 170,500 Unclaimed Dividend 25,000 Premises at cost 650,000 Money at Call and Short 340,000 Notice Depreciation on Premises 62,500 Accounts Payable 60,000 Retained Earnings 187,000 Investments 1,450,000 Allowances for Doubtful 30,000 Borrowing from Other Banks 480,000 Debts Paid-up Capital 250,000 Fixed Deposits 320,000 Loans. Overdrafts & Cash 3,500,000 Saving Bank Deposits 1,780,000 Credit Notes Purchased and 250,000 Current Deposits 3,875,000 Discounted Cash in Hand 780,000 Cash with Other Banks 500,000 Solution: Commerce Bank Ltd. Balance Sheet As on 31.12.2010 Assets Cash: Cash in hand Cash with other Banks

Amount Tk.

Amount Tk.

780,000 500,000

1280,000


Money at call and short notice Investments Loans and advances: Loans, overdrafts & cash credit Less. Allowances for doubtful debts Add. Notes purchased and discounted Premises and fixed assets: Premises at cost Less. Depreciation on premises Non-Banking Assets

340,000 1450,000 3500,000 (30,000) 3470,000 250,000 650,000 (62,500)

3720,000

587,500 120,000 7497,500

Liabilities and stockholder’s equity Liabilities: Borrowing from other Banks Deposits and other accounts: Current deposits Fixed deposits Saving Bank deposits Accounts payable Notes payable Other liabilities: Unclaimed dividend

480,000 3875,000 320,000 1780,000 60,000 350,000

6385,000 25,000 6890,000

Stockholder’s equity: Paid-up capital Reserve fund Retained earnings Total stockholder‘s equity Total liabilities and stockholder‘s equity

250,000 170,500 187,000 607,500 7497,500

P-5. Following is the trail balance of R Bank Ltd. as on 31.12.2010: Debtor Law charges Salaries Rent, rates & taxes Auditors charges Interest on deposits Loans Furniture Postage & telegrams Cash Bank

Taka 10,000 150,000 50,000 10,000 400,000 2,300,000 20,000 5,000 250,000 650,000

Creditor Unclaimed dividend Current & savings deposits Interest Com. Ex. & Brokerage Fixed deposits Share Capital Reserve Fund Accumulated profit

Taka 5,000 2,500,000 500,000 300,000 2,000,000 1,000,000 385,000 110,000


Contribution to PF Premises Director‘s fees Printing and stationery Investment at cost Cash credit and overdraft Local bills discounted Loss on sale of investment Total

40,000 90,000 10,000 30,000 475,000 1,400,000 900,000 10,000 6,800,000

Total

6,800,000

Required: (a) Income Statement; and (b) Balance Sheet. Solution: (a) R Bank Ltd. Income statement For the year ended 31.12.2010 Amount (Tk.) Revenues: Interest Less. Interest on deposit Net interest income Com. Ex. & Brokerage Total revenue Less. Operating & other expenses: Salaries (150,000 + 40,000) Rent, rates & taxes Law charges Auditors charges Postage & telegrams Director‘s fees Printing and stationery Loss on sale of investment

Amount (Tk.)

500,000 400,000 100,000 300,000 400,000 190,000 50,000 10,000 10,000 5,000 10,000 30,000 10,000

Profit before appropriation Less. Appropriation: Statutory reserve (85,000 X 20%) Add. Last year‘s profit Surplus profit (b) R Bank Ltd. Balance sheet As on 31.12.2010

315,000 85,000 17,000 68,000 110,000 178,000


Assets Cash: Cash Bank Loans and advances: Loans Cash credit and overdraft Local bills discounted Investment at cost Premises and fixed assets: Premises Furniture Total assets

Amount (Tk.)

Amount (Tk.)

250,000 650,000

900,000

2,300,000 1,400,000 900,000

90,000 20,000

4,600,000 475,000

110,000 6,085,000

Liabilities & stockholders’ equity Liabilities: Deposits and other accounts: Fixed deposits Current & savings deposits

2,000,000 2,500,000 4,500,000

Other liabilities: Unclaimed dividend Total liabilities Stockholders‘ equity: Share capital Reserve funds: Reserves Add. New

5,000 4,505,000

1,000,000 385,000 17,000

Surplus profit Total stockholders‘ equity Total liabilities and stockholders‘ equity

402,000 178,000 1,580,000 6,085,000

P-6. The following is the Trail Balance of a commercial bank as on 31.12.2009 Trial Balance 30.06.09 Debit Balances Cash in hand Cash in BB Money at Call and Short Notice Bills discounted Loans to customers Premises Investment in Shares

Taka Credit Balances 341,644 Share Capital: 621,858 88,750 shares of Tk.10 each Reserves 279,416 Current Deposits 833,483 Fixed Deposits 342,120 Savings Bank Deposits 260,000 Accumulated Profits 248,000 (01.01.2009)

Taka 887,500 518,000 2,581,343 685,135 56,005 128,139


Investment in NDB Balance with other Banks Govt. Securities Interest Paid General Expenses Salaries & Allowances Furniture Total

168,000 242,220 618,358 42,048 91,363 100,000 88,193 5,276,703

Interest Income Discount Charges Commission Charges Dividend Received less tax

Total

141,010 38,461 154,859 86,251

5,276,703

You are required to prepare an Income Statement for the year ended on 31.12.2009 and the Balance Sheet as at that date after taking into account the following information: a) Interest accrued and outstanding were Tk.123,395. b) Salaries includes Tk.10,000 paid to the Managing Director. c) Provide Tk.17,500 for depreciation. d) Liabilities for Acceptance, Endorsements etc. Tk.450,000. e) Tax rate is 35%. f) Transfer Tk.100,000 to General Reserve. Solution: Commercial bank Income statement For the year ended 31.12.2009 Amount (Tk.) Revenues: Interest income Commission charges Discount charges Dividend received less tax Total revenues Less. Operating & other expenses: Salaries and allowances (b) (100,000-10,000) Managing director remuneration (b) General expenses Interest expenses (a) (42,048+123,395) Depreciation expense- Premises (c) Total expenses Income before tax Less. Provision for tax (e) (46,275 X 35%) Net profit after tax Add. Last year‘s profit Less. Appropriation: Statutory reserve (46,275 X 20%) General reserve (f) Surplus profit

Amount (Tk.) 141,010 154,859 38,461 86,251 420,581

90,000 10,000 91,363 165,443 17,500 374,306 46,275 16,196 30,079 128,139 158,218 9,225 100,000 109,255 48,963


Commercial bank Balance sheet As on 31.12.2009 Assets Cash: Cash in hand Cash with BB Balance with other banks

Amount (Tk.)

Amount (Tk.)

341,644 621,858 242,220

1,205,722

Money at call and short notice

279,416

Loans and advances: Loans to customers Bills discounted Investment: Investment in shares Investment in NDB Govt. securities Premises and fixed assets: Premises Less. Accumulated depreciation (c) Furniture Total assets

260,000 17,500

Liabilities & stockholders’ equity Liabilities: Deposits and other accounts: Current deposits Fixed deposits Savings bank deposits Other liabilities: Accrued interest Provision for taxation Total liabilities Stockholders‘ equity: Share capital 88,750 shares of Tk.10 each Reserve funds: Reserves Add. New (f)

1,342,120 833,483

2,175,603

248,000 168,000 618,358

1,034,358

242,500 88,193

2,581,343 685,135 56,005

123,395 16,196

330,693 5,025,792

3,322,483

139,591 3,462,074

887,300

518,000 100,000 618,000 9,255

Statutory reserve Surplus profit Total stockholders‘ equity Total liabilities and stockholders‘ equity

627,255 48,963 1,563,718 5,025,792


Off balance sheet items Liabilities for acceptances, endorsements, etc.

Amount (Tk.) 450,000 450,000

P-7. Given below a profit and loss account and a balance sheet prepared by a nonprofessional accountant and also some additional information of Bank Asia Ltd.: Bank Asia Ltd. Profit and Loss Account For the year ended on 31.12.2017 Expenditure Taka Income Taka Interest accrued and paid 200,000 Interest and discount 650,000 Management expenses: Commission, exchange, brokerage, etc Salary 80,000 15,000 Rent paid 20,000 General expenses 15,000 Stationery 8,000 Auditor‘s fees 2,000 Dividend paid for 2016 50,000 Net profit 290,000 ______ 665,000 665,000 Bank Asia Ltd. Balance Sheet As on 31.12.2017 Capital and Liabilities Taka Assets Taka Borrowed from Banks 700,000 Premises (Less. Accumulated Paid-up capital 500,000 depreciation upto 31.12.16) 1,200,000 Reserve fund 350,000 Money at call and short notice 300,000 Profit and loss account Cash in hand 60,000 (01.01.17) Tk.210,000 Investment 3,000,000 + Net profit Tk.290,000 Cash with other Banks 1,300,000 500,000 Bills discounted and Bills payable 800,000 purchased 500,000 Branch adjustment 50,000 Cash with Bangladesh Bank 1,500,000 Unclaimed dividends 30,000 Non-banking assets 50,000 Sundry creditors 30,000 Loans, cash credits and Fixed deposits account 950,000 overdrafts 7,000,000 Savings Bank deposits 3,000,000 Bills for collection as per Current accounts 8,000,000 contra 140,000 Bills for collection as per Acceptances and contra 140,000 endorsements as per contra 200,000 Acceptances and 15250000 endorsements as per contra 200,000 15250000 Additional information: (a) Rebate on bills discounted and purchased for un-expired terms amounted to Tk.5,000. (b) A provision for doubtful debts amounting to Tk.25,000 is required. (c) Provide for taxation Tk.100,000. (d) Allow 5% depreciation on premises on original cost. (e) The directors recommended 15% dividend for the year 2017.


You are required to prepare: (i) A profit and loss account; and (ii) A balance sheet as per format given in the Bank Companies Act, 1991. Solution: (i)

Bank Asia Ltd. Profit and Loss Account For the year ended on 31.12.2017 Particulars Interest and discount (after adjusting unexpired discount) Less. Interest accrued and paid Add. Commission, exchange and brokerage, etc. Total operating income Less. Operating expenses: Salary Rent General expenses Stationery Auditors‘ fees Depreciation – premises Total operating expenses Profit before provision Less. Provision for doubtful debts Profit before taxation Less. Provision for tax Profit after tax Less. Appropriations: Statutory reserve Proposed dividend

Taka 6,45,000 2,00,000

4,45,000 15,000 4,60,000 80,000 20,000 15,000 8,000 2,000 65,000 1,90,000 2,70,000 25,000 2,45,000 1,00,000 1,45,000 49,000 75,000 1,24,000 21,000 2,10,000 2,31,000 50,000 1,81,000

Retained earnings Add. Profit of last year Less. Dividend for last year Surplus profit (ii)

Bank Asia Ltd. Balance Sheet As on 31.12.2017 Particulars Property and assets

Cash: Cash in hand Cash with Bangladesh Bank Cash with other Banks Money at call and short notice Investment (at cost)

Taka

Taka

Taka

60,000 15,00,000 13,00,000 28,60,000 3,00,000 30,00,000


Loans and advances: Loans, cash credit and overdrafts Less. Provision for doubtful debts Bills discounted and purchased

70,00,000 25,000 69,75,000 5,00,000 74,75,000

Premises and fixed assets: Premises (12,00,000 + 1,00,000) Less. Accumulated depreciation (1,00,000 + 5% of 13,00,000) Non-banking assets Total assets Liabilities and stockholders’ equity Liabilities Borrowed from Banks Deposit and other accounts: Fixed deposits Saving bank deposits Current accounts Bills payable

13,00,000 1,65,000 11,35,000 50,000 1,48,20,000

7,00,000 9,50,000 30,00,000 80,00,000 8,00,000 1,27,50,000

Other liabilities: Sundry creditors Unclaimed dividends Proposed dividend (5,00,000 X 15%) Rebate on bills discounted and purchased Provision for taxation Branch adjustment (Cr.) Total liabilities Stockholders’ equity Share capital Reserve funds Add. New

30,000 30,000 75,000 5,000 1,00,000 50,000 2,90,000 1,37,40,000 5,00,000

3,50,000 49,000

Surplus profit Total stockholders’ equity Total liabilities and stockholders’ equity

3,99,000 1,81,000 10,80,000 1,48,20,000

P-8. After the valuation of March 31, 2017 in the books of Axis Life Insurance Company Ltd. the actuary‘s certificate disclosed the net liability on policies and annuities at 5,040,000. From the following information prepare the Revenue Account and ascertain profit and loss made by the company. It was further decided by the directors to transfer a sum of Tk.100,000 to the investment fluctuation fund which stood at Tk.200,000 on that date to write down investments from Tk.4,900,000 to Tk.4,600,000 if the valuation revealed a surplus:


Particulars Bonus in cash Bonus in reduction of premiums Surrenders Premiums Interest, dividends and rent (net) Claims

Taka Particulars 100,000 Expenses of management Commission 10,000 Annuities 200,000 Consideration of annuities 3,500,000 granted Life insurance fund on 1,200,000 1.4.2016 2,200,000 Interim bonus paid for the valuation period

Taka 250,000 100,000 800,000 1,200,000 4,000,000 150,000

As a result of valuation it was decided that a reversionary bonus of Tk.150 per Taka 10,000 be granted and the company gave the policy holders the option to get bonus in cash @ Tk.60 per Taka 10,000. The total business in force was Tk.9 crores. One third of the policy holders in value decided to get the bonus in cash. Required: Draft the journal entries for the above decisions, giving effect to utilization of the surplus; show how much the policy holders can get by way of share in profit (Ignore taxation). Solution: Axis Life Insurance Company Ltd. Revenue Account For the year ended March 31, 2017 Expenditure Tk. Income Annuities 800,000 Life assurance fund on Claims 2200,000 01.04.2016 Surrenders 200,000 Premiums Bonus 100,000 Consideration for annuities Add. Bonus in granted reduction of premium 10,000 110,000 Interest, dividends and rent Expenses of management 250,000 (net) Transfer to investment fluctuation fund 100,000 Commission 100,000 Life assurance fund on 31.03.2017 6140,000 9900,000

Tk. 4000,000 3500,000 1200,000 1200,000

_______ 9900,000

Valuation balance sheet As on March 31, 2017 Tk. Net liability as per actuary‘s valuation Surplus

Life assurance fund on 5040,000 31.03.2017 1100,000 6140,000

Tk. 6140,000 _______ 6140,000


Determination of the amount the policy holders can get: Surplus Add. Interim bonus paid True surplus Policy holders will get @ 90% (Tk.1100,000 ÷ Tk.1250,000) X 100% = 90% Less. Interim bonus paid Amount due to policy holders

Tk.1100,000 (150,000) 1250,000 1125,000 (150,000) 975,000

Journal Date 2014 March 31 March 31

March 31

Particulars Life assurance fund Profit & loss account Profit & loss account Bonus in cash 1 9 crores X = 3 crores 3 Tk.3,00,00,000 = 3,000 Tk.10,000 3,000 X Tk.60 = Tk.180,000 Profit & loss account Life assurance fund 9 crores – 3 crores = 6 crores Tk.6,00,00,000 = 6,000 Tk.10,000 6,000 X Tk.60 = Tk.360,000

Dr. (Tk.) 1100,000

Cr. (Tk.)

1100,000 180,000 180,000

360,000 360,000

P-9. From the following figures taken from the books of Standard Insurance Company Limited, prepare revenue account and profit & loss account for the year 2016-2017. Particulars Tk.’000 Particulars Tk.’000 Fire fund as on 1.4.2016 930,000 Commission on direct business 299,777 General reserve 450,000 Commission on reinsurance 60,038 Investments 3,600,000 Outstanding premium 22,300 Premium 2,701,533 Claim intimated but not paid as Claims paid 602,815 on 1.4.2016 60,000 Share capital- Dividend into Expenses of management 431,947 equity shares of Tk.100 each 900,000 Audit fees (General) 36,000 Additional reserve as on Rent & taxes (General) 5,804 1.4.2016 330,000 Rents (General) 67,500 Profit & loss A/C (Cr.) 75,000 Income from investments 153,000 Reinsurance premium 112,525 Sundry creditors 22,500 Claims received from Cash on hand and Bank balances 184,462 reinsurance 21,119 Commission on reinsurance ceded 48,016 Advance income tax paid 250,000 Agents‘ balances (Dr.) 20,000


The following further information may also be noted: (a) Expenses of management include survey fees and legal expenses of Tk.36,000 thousands and Tk.20,000 thousands relating to claims; (b) Claims intimated but not paid on 31 March 2015 Tk.104,000 thousands; (c) Income-tax to be provided at 55%; (d) Transfer to general reserve, Tk.200,000 thousands; (e) Proposed dividend 8% on share capital; (f) Reserve for unexpired risks to be kept at 40% of net premium. Solution: Standard Insurance Company Limited Revenue Account For the year ended 31st March 2017 Particulars Premiums earned (net) (Note – 1) Profit/ loss on sale/ redemption of investments Other income Interest, dividend and rent (gross) Total (A) Claims incurred (net) (Note – 2) Commission (Note – 3) Operating expenses related to insurance business (Note – 4) Total (B) Operating profit from fire business (A) + (B)

(Tk.’000) 24,83,405 _______24,83,405 6,81,696 3,11,799 3,75,947 13,69,442 11,13,963

Standard Insurance Company Limited Profit & Loss Account For the year ended 31st March 2017 Particulars Operating profit from fire insurance Income from investments Other income Total (A) Provisions (other than taxation) Other expenses: Rents Tk.67,000 Rates & taxes Tk.5,804 Audit fees Tk.36,000 Total (B) Profit before tax (A) – (B) Less. Provision for taxation @ 55% of Tk.11,57,659 Appropriations: Proposed dividend @ 8% of Tk.9,00,000 share capital Transfer to general reserve Balance carried forward to balance sheet

(Tk.’000) 11,13,963 1,53,000 _______12,66,963 -

1,09,304 1,09,304 11,57,659 6,36,713 5,20,946 7,20,000 2,00,000 2,48,946 5,20,946


Notes: 1. Premiums earned (net): Particulars Premium from direct business Less. Reinsurance premium Net premium Less. Adjustment for increase in reserve for unexpired risks Reserve for unexpired risk at the end of the year: 40% of Tk.25,89,008 net premium Tk.10,35,603 Additional reserve (opening) to be continued Tk.3,30,000 Tk.13,65,603 Less. Reserve for unexpired risks at the beginning of the year Tk.12,60,000

(Tk.’000) 27,01,533 1,12,525 25,89,008

1,05,603 24,83,405

2. Claims incurred (net): Particulars Claims paid: Direct Add. Survey fees relating to claims Legal expenses relating to claims Less. Claims received from reinsurers Net claims paid Add. Claims outstanding at the end of the year Less. Claims outstanding at the beginning of the year

(Tk.’000) 6,02,815 36,000 20,000 6,58,815 21,119 6,27,696 1,04,000 7,41,696 60,000 6,81,696

3. Commission: Particulars Commission paid on direct business Add. Commission on reinsurance accepted Less. Commission on reinsurance ceded

(Tk.’000) 2,99,777 60,038 3,59,815 40,016 3,11,799

4. Operating expenses related to insurance business: Particulars Expenses of management (excluding survey fees and legal expenses)

(Tk.’000) 3,75,947


P-10. The following are the balance of Zarifa Insurance Co. Ltd. on 31 st December 2017. You are required to prepare the Balance Sheet and Revenue Account. Particulars Amount Particulars Amount Taka Taka Capital 30,000 Transfer Fees 100 Reserve for Bad Debt 2,000 Income Tax Paid 12,000 Balance of Fund as on Sundry Debtors 2,500 01.01.2017 Mortgage Loans 97,500 Fire Insurance Account 85,410 Govt. Securities deposit with Marine Insurance Account 95,000 Sonali Bank 3,700 Accident Insurance Account 16,455 Bangladeshi Govt. Securities 102,000 Unclaimed Dividends 850 Debentures of Public Bodies 46,550 Due to Insurance Company 3,450 Ordinary Shares of Jt. Stock Co. 22,500 Sundry Creditors 7,250 Claims less Re-insurance: Deposit & Suspense Account Fire Insurance 45,000 (Cr.) 2,280 Marine Insurance 35,890 P & L Account (Cr.) 8,040 Accident Insurance 6,800 Agents Balance (Dr.) 13,500 Premium less Re-insurance: Interest Accrued but not due 2,250 Fire 176,250 Dues from Insurance 6,450 Marine 102,250 Cash in hand 350 Accident 26,225 Balance with C.A with Bank 7,480 Interest & Dividend received: Furniture & Fixtures (Cost Fire Insurance Account 2,340 Tk.8,400) 5,800 Marine 750 Stationery Stock 140 Accident 360 Refund of excess Profit Tax 3,000 General P & L Account 2,400 Expenses of Management: Commission: Fire Insurance Account 28,000 Fire Insurance 50,000 Marine Insurance Account 16,000 Marine Insurance 35,000 Accident Insurance Account 4,000 Accident Insurance 8,000 General P & L Account 3,000 51,000 Foreign Taxes, Marine Insurance 800 Outstanding Premium 8,200 Donation Paid 1,000 You are required to make provision for the following: Depreciation on Furniture Transfer to General Reserve Transfer to Investment Reserve Outstanding Claims as on 31 December 2017 Fire Marine Accident

Taka 2,000 10,000 10,000

20,000 5,000 3,250 28,250 The Funds (reserve for unexpired risks) are to be provided on the basis of 50% of the premium income of the year for Fire & Accident and 100% for Marine Insurance. There is an uncalled liability of Tk.7,500 in respect of partly paid shares of joint stock companies held by the company.


Solution: Revenue Account Zarifa Insurance Co. Ltd. For the year ended 31 st December 2017 Particulars Claims under policies Less. Reinsurances: Paid during the year Total estimated liability in respect of outstanding claims at the end of the year whether due or intimated Commission Expenses of management Foreign taxes Profit transfer to P&L account Balance of account at the end of the year: Reserved for unexpired risks being 50%, 100% & 50% respectively of the premium

Fire Taka 45000

Marine Taka 35890

Accident taka 6800

20000 65000 50000 28000 -

5000 40890 35000 16000 800

3250 10050 8000 4000 -

32875

3060

7877

80125 264000

102250 198000

13113 43040

Particulars Balance of account at the beginning of the year: Reserve for unexpired risks Premium less reinsurance Interest & dividend

Fire Taka

Marine Taka

Accident taka

85410

95000

16455

176250 2340

102250 750

26225 360

______ 264000

______ 198000

______ 43040

Balance Sheet Zarifa Insurance Co. Ltd. As on 31st December 2017 Particulars Taka Particulars Capital 30000 Loans: Reserve or contingency A/c: Loans on mortgage General reserve 10000 Investment: Investment reserve 10000 Govt. securities deposit with Reserve for bad debts 2000 Sonali Bank Profit &Loss appropriation A/c 19352 Bangladesh govt. securities Balance of funds & accounts: Debenture of public bodies Fire insurance business A/c 88125 Ordinary shares in Joint Stock Marine insurance business A/c 102250 Company Accident insurance business A/c 13113 Agents‘ balance Estimated liability- claims Outstanding premium outstanding 28250 Interest accrued but not due Amount due to other insurers 3450 Due from other insurers Sundry creditors 7250 Sundry debtors Other accounts: Cash: Deposits & suspenses 2280 Cash with Bank on current A/c Unclaimed dividend 850 Cash in hand Other accounts: Furniture at cost 8400 Less. Depreciation 4600 ______ Stationery stock 316920

Taka 97500

3700 102000 46550 22500 13500 8200 2250 6450 2500 7480 350

3800 140 316920


Notes: 1. Profit & Loss Account of Zarifa Insurance Co. Ltd. for the year ended 31 st December 2017: Particulars Taka Particulars Taka Income tax 12000 Interest & dividends 2400 Expenses of management 3000 Transfer fees 100 Depreciation on furniture 2000 Profit from fire insurance Donations 1000 revenue account 32875 Profit from marine insurance revenue account 3060 Balance carried forward to Profit from accident insurance appropriation account 28312 revenue account 7877 46312 46312 2. Profit & Loss Appropriation Account: Particulars Transferred to general reserve Transferred to investment reserve Balance at the end of the year shown to balance sheet

Taka Particulars 10000 Interest & dividends 10000 Transfer fees Profit from fire insurance 19352 39352

Taka 8040 28312 3000 _____ 39352

P-11. The following are the balances extracted from the books of the Sadharan Bima Corporation: Accounts Title Dr. (Tk.) Cr. (Tk.) Claims Paid (F) 56,000 Claims Paid (M) 53,700 Commission and Organizer‘s Remuneration (F) 54,800 Commission and Organizer‘s Remuneration (M) 44,700 Expenses of Management (F) 36,600 Expenses of Management (M) 14,200 Income Tax on Investment 1,900 Directors‘ Sitting Fees and Traveling Expenses 5,800 Depreciation on Furniture 400 Contribution to Staff Provident Fund 1,500 Deposit with Bangladesh Bank in Treasury Bills 259,100 Co-operative Land Mortgage Bank Debentures 293,500 Municipal Loans 52,000 National Savings Certificate 100,000 Shares in Companies 30,000 Outstanding Premiums (F) 70,400 Outstanding Premiums (M) 59,600 Interest Accrued 3,600 Sundry Debtors 7,300 Fixed Deposit (Staff Security) 6,500 Fixed Deposit (Employees Provident Fund Investment) 6,800 Cash and Bank Balances 65,400 Furniture less depreciation 3,200 Library Books 1,000


Reserve for Unexpired Risk (F) Reserve for Unexpired Risk (M) Additional Reserve (F) Additional Reserve (M) Premiums less Reinsurance (F) Premiums less Reinsurance (M) Claims outstanding, 1st January, 2017 (F) Claims outstanding, 1st January, 2017 (M) Share Capital, 35,000 shares of Tk.10 each General Reserve Staff Security Deposit Staff Provident Fund Sundry Creditors Contingency Reserve Investment Fluctuation Reserve Total

______ 1,228,000

122,000 65,000 71,400 7,500 165,300 111,800 1,900 100 350,000 127,800 6,500 6,800 138,000 28,000 6,000 1,228,000

(a) Estimated liability in respect of claims outstanding at 31 st December, 2017 was fire Tk.300 and Marine – Tk.6,700. (b) Provide Tk.10,000 for reserve for taxes. (c) Provide for additional reserve for unexpired risks at 10% of the Net Premium in addition to the Opening Balance. Required: Prepare Fire and Marine Revenue Account, Profit and Loss Account and the Balance Sheet. Solution: Sadharan Bima Corporation Fire Department Revenue Account For the year ended on 31st December, 2017 Particulars Claims under policies, less reinsurance Paid during the year Tk.56000 Total estimated liability in respect of outstanding claims at the end of the year whether due or intimated 300 56300 Less. Outstanding at the end of previous year 1,900 Commission & organizer‘s remuneration Expenses of management Reserve for unexpired risk @ 10% of net premium received P&L Account transfer

Taka

Particulars Balance of account at the beginning of the year: Reserve for unexpired risk Tk.122000 Add. Additional reserve 71400 Premium less reinsurance

Taka

193400 165300

54400 54800 36600 16530 196370 358700

______ 358700


Sadharan Bima Corporation Marine Department Revenue Account For the year ended on 31st December, 2017 Particulars Claims under policies, less reinsurance Paid during the year Tk.53700 Total estimated liability in respect of outstanding claims at the end of the year whether due or intimated 6,700 60,400 Less. Outstanding at the end of previous year 100 Commission & organizer‘s remuneration Expenses of management Reserve for unexpired risk @ 10% of net premium received P&L Account transfer

Taka

Particulars Balance of account at the beginning of the year: Reserve for unexpired risk Tk.65100 Add. Additional reserve 7500 Premium less reinsurance

Taka

72600 111800

60500 44700 14200 11180 54020 184400

______ 184400

Sadharan Bima Corporation Profit & Loss Account For the year ended on 31st December, 2017 Particulars Income tax on investments Director‘s sitting fees & travelling expenses Depreciation on furniture Contribution to staff provident fund Provision for taxation Balance carried to P&L appropriation account

Taka Particulars 1900 Interest on investment Miscellaneous receipts 5800 Profit transferred: 400 Fire department 1500 Marine department 10000 250590 270190

Taka 1900 100 196370 54020

______ 270190

Sadharan Bima Corporation Balance Sheet As at 31st December, 2017 Capital and liabilities Share capital, 35000 shares of Tk.10 each Reserve or contingency accounts: Contingency reserve General reserve Investment fluctuation reserve Balance of funds and accounts:

Taka

Assets

Loans: 350000 Municipal loans Investments: 28000 Deposit with Bangladesh 127800 Bank in treasury bills 6000 Co-operative land mortgage Bank debentures

Taka 52000

259100 293500


Fire insurance fund Marine insurance fund Staff provident fund Staff security deposit Provision for taxation Sundry creditors Claims less reinsurances outstanding P&L appropriation account balance

16530 11180 6800 6500 10000 138000 7000 250590

National savings certificates Shares in companies Sundry debtors Interest accrued Outstanding premiums Cash: Fixed deposits (staff security) Fixed deposits (employees P.F. investment) In hand Furniture less depreciation ______ Library books 958400

100000 30000 7300 3600 130000

6500 6803 65400 3200 1000 958400


EXERCISES E-1. Given below the profit and loss account, balances of different accounts and additional information of the South-East Bank Ltd. for the year ended 31st December, 2010: South-East Bank Ltd. Profit and Loss Account For the year ended 31 st December, 2010 Income and expenditure Taka Taka Interest and discount (after adjusting unexpired discount) 6,45,000 (-) Interest accrued and paid 2,00,000 4,45,000 (+) Commission, exchange and brokerage, etc. 15,000 Total operating income 4,60,000 (-) Operating expenses: Salary 80,000 Rent 20,000 General expenses 15,000 Stationery 8,000 Auditors‘ fees 2,000 Depreciation – premises 65,000 Total operating expenses 1,90,000 Profit before provision 2,70,000 (-) Provision for doubtful debts 25,000 Profit before taxation 2,45,000 (-) Provision for tax 1,00,000 Profit after tax 1,45,000 (-) Appropriations: Statutory reserve 49,000 Proposed dividend 75,000 1,24,000 Retained earnings 21,000 (+) Profit of last year 2,10,000 2,31,000 (-) Dividend for last year 50,000 Surplus profit 1,81,000 Balance of different accounts: Account titles Share capital - authorized and issued 10,000 shares of Tk.100 each, Tk.50 paid Reserve fund Fixed deposit accounts Savings bank deposits Current accounts Money at call and short notice Investment (at cost) Non-banking assets Premises (Less depreciation upto 31.12.2010 Tk.1,00,000) Cash in hand Cash with Bangladesh Bank

Taka 5,00,000 3,50,000 9,50,000 30,00,000 80,00,000 3,00,000 30,00,000 50,000 12,00,000 60,000 15,00,000


Cash with other Banks Borrowed from Banks Branch adjustment (Cr.) Bills discounted and purchased Bills payable Loans, cash credits and overdraft Unclaimed dividends Sundry creditors

13,00,000 7,00,000 50,000 5,00,000 8,00,000 70,00,000 30,000 30,000

Additional information: (i) Rebate on bills discounted and purchased for unexpired terms amounted to Tk.5,000. (ii) A provision for doubtful debts amounting to Tk.25,000 is required. (iii) The market value of investments amounted Tk.34,50,000. (iv) Provide for taxation Tk.1,00,000. (v) The directors recommended 15% dividend for the year 2017. (vi) Allow 5% depreciation on premises on original cost. (vii) Bills for collection Tk.1,40,000. (viii) Acceptance and endorsements on behalf of customers Tk.2,00,000. Required: Balance sheet as at 31st December, 2010 as per IAS-30‘s format. E-2. From the following details of MMH Bank Ltd., prepare Profit and Loss Account for the year ended 31st December, 2014. Account titles Amount (Tk.) Interest paid on deposits, borrowings, etc. 1,30,00,000 Interest and discount income 3,10,00,000 Rent received 1,20,000 Net profit on sale of investments 1,000 Salaries, allowances and provident fund 1,25,00,000 Commission, exchange and brokerage 18,00,000 Law charges 20,000 Rent and taxes 3,00,000 Postage and telegrams 1,10,000 Auditors‘ fees 50,000 Directors‘ fees 25,000 Printing and stationery 2,20,000 Depreciation on property 1,90,000 Miscellaneous receipts 85,000 Miscellaneous expenditure 2,60,000 Repairs to property 40,000 Telephone and stamps 1,50,000 Advertisement 35,000 Bad debts 50,000 Insurance and lighting 2,00,000 The Chairman is paid salary @ Tk.4000 per month and allowances at Tk.1,000 per month. 8% is contributed to provident fund on the basis of basic salary. No sitting fees nor any bonus has been paid to him. Perquisite for free quarters and motor car is valued at Tk.6,000.


Opening balances of unexpired discount, reserve for bad debts and reserve for taxation were Tk.10,00,000, Tk.6,00,000 and Tk.30,00,000 respectively. Closing balance required in unexpired discount account and bad debts reserve account are Tk.8,60,000 and Tk.7,50,000 respectively. Tk.25,00,000 income tax has been adjusted against advance payment of tax amounting to Tk.30,00,000 and Tk.35,00,000 provision at the end of the year is required. E-3. Following is balances of Popular Commercial Bank Ltd as on December 31, 2011. Prepare Profit and loss Account for the year ended December 31, 2011 and a Balance Sheet as on that date from the balances and other information mentioned below. Particulars Amount (Tk.) Cash in Hand 473,828 Salaries and Allowances 593,257 Borrowing from other banks and financial institutions 2,178,448 Interest income 6,247,494 Rent, Taxes, Insurances, Electricity etc. 119,729 Current deposits and other accounts 5,325,633 Provision for income tax 2,617,154 Balance with Bangladesh Bank and its Agent Bank 3,286,540 Investment income 1,012,991 Legal Expenses 4,528 Bills payable 724,131 Savings bank deposits 4,935,720 Commission, exchange and brokerage 1,177,502 Provision for off-balance exposures 246,021 Auditor‘s fees 365 Interest paid on deposits and borrowings 4,498,017 Balance with Other Banks & Financial Institutions 1,346,434 Other operating income 189,532 Postage, Stamps, Telecommunication etc. 32,038 Money at call and on short notice 1,524,305 Directors' fees 832 Fixed deposits Loans, Cash Credit, Overdrafts etc. Other Liabilities Stationery, Printing, Advertising etc. Interest Payable Bills Purchased and Discounted Investments Provision for loans and advances Share capital (Authorized- 445,000, shares of Tk. 10 each; Issued, Subscribed and Paid up -214,481 of Tk.10 each – fully paid) Statutory reserve Revaluation reserve

43,847,332 45,805,970 1,591,267 55,612 4,461,948 9,663,097 978,311 2,144,810 1,557,013 306,401


Fixed Assets including Premises, Furniture & Fixtures Accumulated Depreciation on fixed assets Exchange equalization reserve Other Assets Other expenses Managing Director's salaries and fees Retained earnings

1,374,805 356,430 3,339 2,607,007 530,344 3,452 942,579

Other information: (a) Depreciate Tk.143,774 for fixed assets. (b) Make general provision of Tk.128,410 and specific provision of Tk.119,009 against loans and advances and make provision for off-balance sheet item of Tk.83,425. (c) The off-balance sheet items of the bank were: Acceptance and endorsement Tk.5,970,538 Irrevocable Letter of credit Tk.15,668,004 Letter of guarantee Tk.3,182,998 Bill for collection Tk.3,157,281 (d) Provide Tk.1,040,600 for income tax. (e) Provide 20% of pretax profit as statutory reserve. E-4. From the following Trial Balance as on 31.12.09 and other details of a Private Bank Ltd. draw the Balance Sheet as at that date and a Profit and Loss Account for the year ended on that date: Tk. Credits Tk. Debits Share Capital 10,00,00,000 Reserves 7,00,00,000 Bills Purchased: 2,00,00,000 Fixed Deposits 20,00,00,000 Payable in Bangladesh Payable outside Bangladesh 1,00,000 Saving Deposit 15,00,00,000 Debts due by Directors or Provident Fund 1,00,00,000 Officers: Either severally or jointly with 1,50,00,000 other person fully secured Debts considered good for Current Deposits 27,00,00,000 which The bank holds no other security than the debtor‘s 1,00,00,000 personal security Cash with other banks in C/A 10,47,40,000 Contingent Accounts 3,00,00,000 Debts considered good secured by personal liability 2,00,00,000 Bills Payable (Drafts) 40,00,000 of parties in addition Doubtful Debt. (provision to be Receivable for 2,00,000 Bills made) collection: Building at cost Debts due by companies in which the Directors are interested fully secured Furniture and fixtures at cost Land and building acquired in satisfaction of claims at cost

2,00,00,000 Payable in Bangladesh

3,00,00,000

outside 42,60,000 Payable Bangladesh

10,00,000

Fund on 40,00,000 Depreciation Buildings Depreciation Fund on 5,00,000 Furniture etc.

60,00,000 10,00,000


Bills receivable for collection: 3,00,00,000 Profit and Loss A/C Payable in Bangladesh Payable outside Bangladesh 10,00,000 Interest Loans considered good, fully 41,64,00,000 Discount Secured Bills Discounted: Payable in Commission Bangladesh 3,00,00,000 Payable outside Bangladesh 4,00,000 Exchange Cash with Bangladesh bank 3,00,00,000 Brokerage Loans to banks: Fully secured 1,60,00,000 Rent Cash in hand 7,00,00,000 Share Transfer Fees Sundry receipts Government of BD. Bonds(face value Tk. 85,000,000) 7,95,00,000 95,00,000 States loan bonds (F.V. Tk.10000000) Ordinary Shares: Fully paid up 20,00,000 Partly paid up 10,00,000 30,00,000 (Uncalled amount Tk. 500,000) Money at call & short Notice 50,00,000 Interest accrued on Investments 10,00,000 Interest paid on deposits 60,00,000 Traveling Allowance 1,00,000 Chairman‘s remuneration 4,50,000 Salaries and Allowances 60,00,000 Stationary and Printing 5,00,000 Director‘s Fees and allowances 2,00,000 Advertisements etc. 3,00,000 2,50,000 Provident Fund Contributions (other than Chairman) Depreciation 3,00,000 Rent and Taxes 6,00,000 Audit Fees 4,00,000 Insurance 1,00,000 Electric Charges 2,00,000 Law Charges 1,00,000 3,00,000 Postage, Telegram & Telephone -----------Total Debit 90,64,00,000 Total Credit

60,00,000 1,80,00,000 47,00,000 40,00,000 2,00,000 9,00,000 5,00,000 10,000 90,000

-------------90,64,00,000

The following information is available: (a) Maximum amount of loan to Directors and Officer and to companies etc. in which Directors are interested are Tk. 200 lakh and Tk. 60 lakh respectively. (b) The Bank declares 6% dividend for the year ending 31 st December, 2008 on called up capital of 20000000 shares at Tk. 500 (Face Value Tk. 1000). All the authorised capital was issued and subscribed. (c) In addition to dividend Tk. 20 lakh and Tk. 10 lakh were appropriated towards reserve for contingencies and Bonus respectively. Balance in Profit and Loss account of 1.1.09 was Tk. 15000000.


(d) In 2009 Buildings and Furniture costing Tk. 2000000 and Tk. 500000 respectively were acquired. Furniture (cost Tk. 100000) was sold for the same amount. (e) Tk. 2000000 is to be provided for taxation from current year income. (f) On 31.12.09 Tk. 500000 Bills Discounted (accompanied by documents of title) are on behalf of Directors. (g) Acceptances on behalf of clients on that day amount to Tk. 5000000. Tk. 9500000 Government of Bangladesh Bonds (F.V. Tk. 10000000) represent Provident Fund Investment. E-5. The following balances as at 31 December 2009 have been extracted from the books of Jiban-Pradip Life Assurance Co. Ltd.: Life Assurance Fund as on 1 January 2009 Tk.30,000,000 Annuities paid 200,000 Surrenders paid 690,000 Reserve Fund 6,650,000 Deposit with Central Bank 3,000,000 Government Securities 43,250,000 Loans on Company‘s Policies 6,700,000 Lease hold Ground Rent 580,000 Other Securities 13,500,000 Share Capital 50,000,000 Mortgages 16,360,000 Cash at Bank – Current A/c 300,000 Cash at Bank - Savings A/c 160,000 Cash on hand 105,000 Furniture and Fixture 400,000 Outstanding Premium 680,000 Due from Re-insurers 390,000 Due to Re-insurers 490,000 Agents‘ balances 200,000 Interest Outstanding 150,000 Accounts payable 40,000 Premium less re-insurance 7,000,000 Bonus of Policy-holders 300,000 Commission 600,000 Claims less re-insurances (on death : Tk. 4,000,000 9,000,000 on maturity : Tk. 5,000,000) Consideration for annuities granted 400,000 Salaries 500,000 Directors‘ fees 60,000 Auditors‘ fees 80,000 Law charges 20,000 Rent paid 40,000 Other expenses of management 15,000 Interest and rent (Less taxes Tk. 600,000) 3,000,000 Interest accrued but not due 300,000 Required: Prepare Revenue Account for the year ended 31 December 2009 and Balance Sheet as at 31 December 2009 of Jibon-Pradip Life Assurance Co. Ltd.


E-6. The following is the trial balance of Apex Life Insurance Company as at 31.12.2009: Account titles Taka Account titles Taka Cash in hand 5,200 Paid-up capital 1,00,000 Cash at bank 15,600 Premium 2,53,500 Bonus 92,000 Life assurance fund on 33,91,390 Annuities 25,000 (01.01.2009) Management expenses 1,02,000 Consideration for annuities 95,500 Claims paid 1,72,500 granted Agent‘s balance 4,600 Interest and dividends 1,52,900 Income tax on interest and 13,500 Profit on sale of investment 8,000 dividends General reserve 1,50,000 Surrenders 24,500 Fees and fines 910 Bad debts 2,800 Investment fluctuation fund 1,80,000 Free hold property 70,000 Sundry creditors 22,000 Outstanding premium 16,000 Bills payable 25,000 Outstanding interest and 27,500 dividends Mortgage loan 3,20,000 Loans on policies 1,12,000 Investment 33,50,000 Depreciation on furniture 26,000 Total 43,79,200 Total 43,79,200 Adjustments: (i) Unpaid claims – Tk.25,000; (ii) Commission payable to agents – Tk.5,600; (iii) Bonus used in reduction of premium – Tk.3,000; (iv) Advance premium – Tk.2,500 and (v) Transfer Tk.20,000 to investment fluctuation fund. Required: (a) Revenue account (b) Balance sheet after considering above trial balance and adjustments. E-7. The following Trial Balance was extracted from the books of the MUTTAKEEN LIFE INSURANCE COMPANY as on December 31, 2013: Account titles Dr. (Tk.) Cr. (Tk.) Issued and Subscribed Capital: 10,000 shares of Tk.15 1,00,000 each, Tk.10 called Life Assurance Fund on 01.01.2013 29,00,300 Dividend Paid 16,000 Bonus to policy-holders 30,500 Premium received 2,33,500 Claims paid 1,97,000 Commission paid 9,300 Management expenses 32,200 Mortgage in Bangladesh 4,92,200 Interest and Dividend received 1,12,700 Agent‘s Balances 9,300 Freehold premises 40,000 -


Investments Loan on company‘s policies Cash Deposits Cash in hand Surrenders Total

23,00,000 1,78,600 27,000 7,300 7,000 33,46,500

33,46,500

Adjustments: (i) Claims admitted but not paid Tk.10,000; (ii) Management expenses due Tk.1,200; (iii) Interest accrued Tk.21,300; (iv) Premiums outstanding Tk.10,000; (v) Bonus utilized in reduction of premium Tk.6,000; and (vi) Claims covered under re-insurance Tk.2,300. Required: (a) Revenue Account; and (b) Balance Sheet. E-8. The following balances appraised in the books of Pioneer Life Assurance Company as at 31st December, 2008: Tk. Tk. Claims by: Death 2,00,000 Contingency reserve 17,68,000 Maturity 14,90,000 Sundry creditors 3,50.000 House property 52,00,000 Furniture- Depreciation A/c 40,000 Investments 5,17,000 Share capital 17,20,000 Loans on policies 32,50,000 Building- Depreciation A/c 3,00,000 Mortgage loans 59,53,500 Premium deposits 10,50,000 Income tax on interest, Life fund (opening) 90,00,000 dividends and rents 5,00,000 Premium 51,82,000 Income tax 4,50,000 Claims due (1.1.08) Agents‘ balance due 1,00,000 By Death 80,000 Debtors 50,000 By Maturity 6,00,000 Advance payment of tax 50,000 Balance pending adjustments 60,000 Annuities 6,000 Income tax reserve 3,00,000 Furniture at cost 2,50,000 Sundry deposits 1,00,000 Stationery 77,000 Registration and other fees 2,000 Bank balance 13,50,000 Consideration for annuities Cash in hand 10,000 granted 1,02,000 Surrenders 40,000 Interest, dividend and rents 20,00,000 Commission 2,50,000 Management expenses 30,00,000 Deposit with DESCO 500 Adjustments: (i) Premium outstanding Tk.18,35,000; (ii) Bonds utilized in reduction of premium Tk.40,000; (iii) Claims outstanding at the end of the year: By death Tk.1,50,000 and By Maturity Tk.90,000; (iv) Depreciation on: Building Tk.45,000 and Furniture Tk.18,000.


Required: (i) Revenue Account, and (ii) Balance Sheet. E-9. The following are account balances and other information of Godhuli General Insurance Co. Ltd as on December 31, 2012. Prepare Revenue Accounts, Profit & Loss Account, Profit & Loss Appropriation Account for the Year ended December 31, 2012 and a Balance Sheet as on that date. Particulars Share Capital (Authorized-100,000,000 shares of Tk. 10 each; Issued, Subscribed and Paid up- 19,965,000 shares of Tk. 10 each- fully paid) 199,650,000 Profit and Loss Appropriation Account 13,865,000 Amount Due to Other Persons or Bodies Carrying on Insurance Business 61,284,000 Amount Due from Other Persons or Bodies Carrying on Insurance Business 70,543,000 Deposit Premium 43,336,000 Sundry Creditors 24,983,000 Statutory Deposit with Bangladesh Bank 9,000,000 Investment in shares 4,536,000 Advance, Deposits and Prepayments 100,212,000 Fixed Deposits with Banks 273,905,000 Cash in hand and with banks 53,421,000 Fixed Assets Less Depreciation 28,825,000 Stock of Printing, Stationery and Stamp 1,219,000 Reserve for Unexpired Risk-Fire (01.01.2012) 20,294,000 Reserve for Unexpired Risk-Marine (01.01.2012) 35,367,000 Reserve for Unexpired Risk-Motor (01.01.2012) 10,658,000 Reserve for Unexpired Risk-Misc. (01.01.2012) 5,590,000 Premium less Re-Insurance- Fire 110,978,000 Premium less Re-Insurance- Marine 131,399,000 Premium less Re-Insurance- Motor 35,459,000 Premium less Re-Insurance- Misc. 7,168,000 Outstanding claim- Fire ( 01.01.2012) 2,959,000 Outstanding claim- Marine ( 01.01.2012) 1,817,000 Outstanding claim- Motor ( 01.01.2012) 385,000 Outstanding claim- Misc. ( 01.01.2012) 33,000 Commission on Re-Insurance Ceded- Fire 13,221,000 Commission on Re-Insurance Ceded-Marine 14,714,000 Commission on Re-Insurance Ceded-Motor 62,000 Commission on Re-Insurance Ceded-Misc. 1,702,000 Commission- Fire 22,542,000 Commission-Marine 24,480,000 Commission-Motor 5,347,000 Commission-Misc. 1,073,000 Claims Paid – Fire 4,514,000


Claims Paid –Marine Claims Paid –Motor Claims Paid -Misc. Expenses of Management-Fire Expenses of Management-Marine Expenses of Management-Motor Expenses of Management-Misc. Insurance Stamp Consumed-Fire Insurance Stamp Consumed-Motor Insurance Stamp Consumed-Misc. Interest Income Other Income Advertisement Audit Fee Bima Fee Directors' Fee Donation and Subscription Renewal and Registration Fee Depreciation Fees and Charges

37,794,000 11,582,000 8,174,000 34,657,000 39,974,000 8,253,000 5,979,000 361,000 125,000 21,000 30,818,000 372,000 4,075,000 207,000 19,000 38,000 840,000 2,037,000 10,001,000 2,360,000

Other Information: (a) Provide Tk. 86,25,000 for Exceptional Loss. (b) Provide Tk. 16,500,000 for income tax. (c) Estimated liability in respect of outstanding claim as on 31.12.2012: Fire- Tk. 5,366,000, Marine- Tk. 751,000, Motor- Tk. 2,287,000 and Misc.- Tk. 234,000. (d) Maintain reserve for unexpired risk @ 40% of premium income. (e) The company declared a dividend of 5% on paid up capital. E-10. The Trial Balance for the General Fund of Dhaka South City Corporation as of December 31, 2011 is presented below: Dhaka South City Corporation The General Fund Trial Balance December 31, 2011 Accounts Title Cash Property Tax Receivable Estimated Uncollectible Taxes Due from Trust Fund Vouchers Payable Reserve for encumbrances Unreserved Fund Balance

Debit Tk. 8,30,000 45,000

Credit Tk.

20,000 50,000

9,25,000

4,60,000 30,000 4,15,000 9,25,000


Transactions for the year ended December 31, 2012, are summarized as follows: 1. The city council adopted a budget for the year with estimated revenue of Tk.7,35,000 and appropriation of Tk.7,00,000. 2. Property Taxes in the amount of Tk.5,90,000 were levied for the current year. It is estimated that Tk.24,000 of the taxes levied will prove to be uncollectible. 3. Proceeds from the sale of equipment in the amount of Tk.35,000 were received by the General Fund. 4. License and Fees in the amount of Tk.1,10,000 were collected. 5. The total amount encumbrances against fund resources for the year was Tk.6,42,500. 6. An invoice in the amount of Tk.28,000 was received for goods ordered in 2012. The invoice was approved for payment. 7. Property Taxes amounted Tk.5,70,000 were collected. 8. Vouchers in the amount of Tk.4,75,000 were paid. 9. Tk.50,000 was transferred to the general fund from the trust fund. 10. The Dhaka South City Corporation authorized the write-off of Tk.30,000 in uncollectible property taxes. Required: (i) Prepare Journal entries to record the transactions for the year ended December 31, 2012. (ii) Prepare pre-closing trial balance for the general fund as of December 31, 2012. (iii) Prepare necessary closing entries for the year ended December 31, 2012. (iv) Prepare a Balance Sheet as at December 31, 2012. E-11. The account balance in the general fund of the Dhaka City Corporation - South on June 30, 2012 Taka (‗000) Cash in Hand 500 Bank balances: Sonali Bank STD 60,000 Janata Bank STD 50,000 Agrani Bank Current A/C 25,000 Dutch Bangla Bank Current A/c 35,500 FDR at BKB 1,00,000 Holding Tax Receivable 1,89,500 Notes Payable 33,500 Wages Payable 21,500 Reserve for Encumbrances 9,400 Estimated Revenues 28,12,000 Revenues 28,30,100 Appropriations 27,90,000 Expenditures 27,94,600 Encumbrances 9,400 The balances of the Revenue ledger are as follows: Drs. Crs. Taka (‗000) Taka (‗000) Holding Taxes 2 1,50,000 21,67,000 City Corporation Taxes 5,10,000 5,01,500 Motor Vehicle Licenses 95,000 97,000 Interest on Bank Accounts 22,000 23,100 Miscellaneous 35,000 41,500


Data from the expenditure ledgers are as follows: Expenditure Taka (‗000) General Government 9,36,400 Police Department 5,50,000 Fire Department 4,28,900 Streets & Roads 4,15,000 Sanitation 2,94,300 Public Welfare 1,70,000

Budget Appropriation Taka (‗000) 9,25,000 5,55,000 4,40,000 4,00,000 2,95,000 1,75,000

The Encumbrances balances in the expenditure ledger are as follows: Taka ('000) General Government 3,600 Fire Department 2,100 Sanitation 3,700 Required: i) Prepare a statement of Revenues and Expenditures - Budget & Actual ii)Prepare a Statement of Changes in Fund Balance assuming the balance of fund at the beginning of the year was Tk. 37,00,00,000 iii) Prepare a Balance Sheet. E-12. Following is the receipts and payments of M3 recreation club for the year ended 30 th June 2014: RECEIPTS AND PAYMENTS ACCOUNTS For the year ended 30th June, 2014 Receipts To Cash in Hand To Subscription To Entrance Fees To Sale of Refreshments To Sale of Dance Tickets To Interests on Investments @ 7%

Total

Amount (USD) 8,320 26,000 3,900 9,880 5,850 4,550

USD 58,500

Payments

Amount (USD) 3,600 5,200

By Rent of Hall By Salaries By Purchase of Sports Equipment 16,640 By Dance Expenses 4,940 By Supply of Refreshment 6,760 By Honorarium 1,040 By Sundry Expenses 3,250 By Electricity Changes 1,820 By Cash at Bank 15,210 Total USD 58,500

Following additional information are also provided to you: (i) Following were the assets and liabilities on 30th June, 2013: Sports equipment USD 6,760, subscription in arrears USD 1,950, furniture USD 12,480; Liabilities – accrued rent USD 780 and subscription received in advance USD 520. (ii) Following were the assets and liabilities on 30th June, 2014: Sports equipment USD 19,760, subscription in arrears USD 1,690, furniture USD 11,180; Liabilities – accrued rent USD 390 and subscription received in advance USD 2,340. (iii) Entrance Fees is to be capitalized.


Required: (a) Prepare income and expenditure account for the year ended 30 th June, 2014; and (b) Balance Sheet as on that date. E-13. MMH Golf Club prepared the following data: (i) Non-current assets of the club on January 1, 2013 include the following: Tk. Investment 12,000 Club Ground 50,000 Furniture 2,000 Sports Equipment 15,500 (ii) Depreciation to be provided @ 20% per annum on sports equipment and @ 5% on furniture. (iii) Subscription for 2013 collected in 2012: Tk.500; (iv) Unpaid subscriptions for 2013: Tk.300; (v) Sports equipment purchased on 01.09.2013; (vi) Receipts and Payments Account for the year ended December 31, 2013: Receipts Amount Payments Amount (Tk.) (Tk.) Opening balance b/f 3,800 Sports equipments 10,000 Subscription: Tournament expenses 4,000 2012 2,000 Electricity 500 2013 18,500 Printing 300 2014 900 Salaries and wages 3,400 Entrance fees (capital 800 Expenses for exhibition 2,100 receipts) Closing balance c/f 7,200 Interest on investment 1,500 27,500 27,500 Required: Prepare income statement and balance sheet for the year 2013. E-14. MMH Golf Club prepared the following data: Following is the Receipt & Payment Account of Chittagong Club for the year ending 31 st December 2012: Receipts Balance at Bank and in hand Subscriptions, Arrears Subscriptions, Current year Subscriptions, Next year Sale of Furniture at book value Donation for a stage Interest on Investments Charges for Refreshments Total

Taka 2,000 200 7,500 400 200 4,000 900 4,300 19,500

Payments Salaries Printing and Stationary Investments (at par) Expenditure on Refreshments Expensed of last year Improvements to Buildings Cost of Gold Medal Balance at Bank and in hand Total

Taka 5,600 1,750 4,000 3,200 200 3,000 350 1,400 19,500

In addition to the above, the following further information is available from the accounts of the club:-


(1) The assets on 1st January 2012 include Building Tk.20,000, 6% Investments Tk.10,000 at par (including Prize Fund) and Furniture Tk.1,000. Liabilities as on 1 st January 2012 include an account styled ―Prizes Fund Account‖ Tk.8,000. (2) Of salaries Tk.400 pertains to last year and Tk.500 still owes. As regards subscriptions in arrears of Tk.200 received during the year, a provision of Tk.150 was made in the accounts last year. Tk.400 subscriptions for 2012 are outstanding. (3) Stock of Refreshments at the end of the year was valued at Tk.100. (4) Sports Equipment worth Tk.1,000 was donated during the year by a member. (5) Printers bill Tk.100 is outstanding on 31-12-2012. (6) A bill for Tk.500 for purchase of furniture is outstanding. (7) The investments (6%) were purchased during the second half and the interest has not been collected. (8) The opening balance of general fund on 1st January 2012 was Tk.24,850. Required: (i) An Income and Expenditure Account for the year ending 31 st December 2012. st (ii) A Balance Sheet as at 31 December 2012.


CHAPTER - 8

ACCOUNTING FOR ASSETS – CURRENT ASSETS

8.1. DEFINITION OF INVENTORY As per IAS 2, inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories encompass goods purchased and held for resale including merchandise purchased by a retailer and held for resale, or land and other property held for resale. Inventories also encompass finished goods produced or work-in-progress being produced by the entity and include materials and supplies use in the production process. In case of a service provider, inventories include the costs of service for which the entity has not yet recognized related revenue. 8.2. TYPES OF INVENTORY There are several types of inventory. We are discussing below three major types of inventory. Raw materials: Raw materials are inventory that are used in the manufacturing process to produce a component. These are the commodity that the organization or its subsidiary has produced. They also may be purchased from the outside market. If the item is partially assembled or is considered as finished goods to the supplier (not the buyer), the buyer may classify it as raw material. Example of raw materials are ore, minerals, petroleum, chemicals, wood, paper, steel, food items, etc. Work-in-process: Work-in-process is the materials that are being processed or waiting to be processed within the system. It includes all materials that has been released for initial processing and is considered as work-in-process up to inclusion in finished goods. The materials that has been completed process and is awaiting for final inspection is also known as work-in-process. Finished goods: A finished good is a completed item that is ready for use. However, finished goods is the stock of completed products. These goods have passed final inspection requirements and they can be transferred out from work-in-process to finished goods inventory. It can be sold directly to their final users. 8.3. MEANING OF PERPETUAL AND PERIODIC INVENTORY SYSTEMS Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software.


A periodic inventory system or the periodic inventory method is an accounting method in which the amount of inventory is determined at the end of each accounting period or in specified periods. 8.4. DISTINCTION BETWEEN PERPETUAL AND PERIODIC INVENTORY SYSTEMS Perpetual inventory system (a) Under the perpetual inventory system, there are continual updates to either the general ledger or inventory journal as inventory related transactions occur.

Periodic inventory system (a) Under a periodic inventory system, there is no cost of goods sold account entry at all in an accounting period until such time as there is a physical count, which is then used to derive the cost of goods sold. (b) It is impossible to manually maintain (b) The simplicity of a periodic inventory the records for a perpetual inventory system allows for the use of manual record system, since there may be thousands of keeping for very small inventories. transactions at the unit level in every accounting period. (c) A group of experienced permanent (c) Under periodic inventory system, no employees is needed for the application of separate group of employees is needed for the perpetual inventory system. the stocking purpose. (d) Under the perpetual system, there are (d) Under the periodic inventory system, continual updates to the cost of goods sold the cost of goods sold is calculated in a account as each sale is made. lump sum at the end of the reporting period, by adding total purchases to the beginning inventory and subtracting ending inventory. (e) Under the perpetual inventory system, (e) Under a periodic inventory system, all inventory purchases are recorded in either purchases are recorded into a purchases the raw materials inventory account or asset account, and there are no individual merchandise account (depending on the inventory records to which any unit-count nature of the purchase), while there is also information could be added. a unit-count entry into the individual record that is kept for each inventory item. 8.5. ADVANTAGES OF PERPETUAL INVENTORY SYSTEM Easier method: Perpetual inventory system is the easier and more convenient methods to keep control over merchandise inventory. It is easy to maintain and suitable for large organization. Many companies use this system - especially those using a job order cost accounting system, or selling many different types of inventory. Immediately identify balance: In a perpetual inventory system, inventories are recorded when purchased or sold. This enables an organization to immediately identify inventory balances that are running low. It also prevents being out-of-stock and losing customers because of it.


Prevents count error: In a periodic inventory system, the year-end inventory balance is adjusted to agree to the physical inventory count. This prevent any theft, shrinkage or even count errors as the adjustment is transferred to the account for the cost of goods sold. Produces accurate financial statement: Under perpetual inventory system, inventory value does not change during the year. As a result, both the inventory account on the balance sheet and the cost-of-goods-sold account on the profit and loss statement are incorrect throughout the year. A perpetual system keeps those balances correct and gives more accurate set of financial statements throughout the year. Provides correct turnover ratio: Under perpetual inventory system, the inventory turnover ratio can be calculated correctly. The turnover ratio tells a business owner whether sales are slowing down or whether individual products are no longer selling quickly. 8.6. DISADVANTAGES OF PERPETUAL INVENTORY SYSTEM Setup cost: One disadvantage of a perpetual inventory system involves the setup cost. Most systems require the purchase of new equipment and inventory software. Perpetual inventory systems also add to labor costs since all inventory must be entered into the system. Training on equipment: Another disadvantage to implementing a perpetual inventory system involves the increased level of training required. Employees need to know how to operate the new equipment and inventory software. Accounting personnel need training to operate the inventory system. False reliability: Perpetual inventory systems can be misleading when reviewing inventory levels. Employees can make mistakes entering quantities or recording the wrong inventory item. Monitoring cost: To overcome employee errors or customer theft, it needs continuous monitoring. Security monitors typically need to be installed and some companies hire security personnel. It needs to bear additional costs to maintain the system properly and effectively. 8.7. ADVANTAGES OF PERIODIC INVENTORY SYSTEM Easy to implement: It is remarkably easy to implement. If an organization looks for easiest inventory system, then the periodic inventory system is considered to be absolutely perfect. One can add this system to his/her business at any time. Certainly, it is less stressful than any other option for maintaining inventory. Most businesses that work with this system will roll it out once a year. Cheap to implement: To implement this inventory system, an organization needs not to invest in costly software solutions. Technically, it doesn‘t have to invest much of anything, except for the time


involved in taking a physical inventory. Furthermore, as long as an organization is willing to put in that time, its costs are never technically going to go up either. Suitable for smaller businesses: Small businesses with homogeneous inventory and high inventory turnover can use periodic inventory systems easily, larger businesses can use this system, too. In this system, inventories are not recorded when purchased or sold. In periodic system, inventories are recorded after a particular time period, i.e, weekly, monthly. So few persons are required to maintain this system. Easy record keeping: The only records needed on a monthly basis for periodic inventory are the total materials purchased and total goods sold. No accounting records for inventory counts are needed. The only physical records that are kept come from the annual inventory count completed at the year-end accounting period. Best uses: Under this method, inventories can maintain with few journal entries to the general ledger. It also allows businesses to focus on selling inventory, rather than using personnel to continually count the inventory for accuracy. Larger businesses can benefit from periodic inventory systems as well, although the amount of inventory will create longer annual physical counts and larger adjustments at year-end. 8.8. DISADVANTAGES OF PERIODIC INVENTORY SYSTEM (a) Inaccuracy: One of the main disadvantages of periodic inventory system is the fact that it deals with something that can be highly inaccurate. It can‘t ensure accuracy at all times. For small businesses, this may not be a problem, However, larger businesses are need to be aware when they use this system, inaccuracies aren‘t the norm, but they aren‘t rare either. (b) Difficult to handle correctly: When a business grows, periodic inventory system can prove to be highly problematic. Taking a physical inventory can amount to a time demand that the business really shouldn‘t try to meet. Particularly with small businesses, it can be challenging to find the time and energy to make sure a periodic inventory system is handled correctly. (c) Fails to exercise control: One more thing to consider is that exercising control over inventory is something that is going to become a good deal more difficult. The business fails to know how many inventory it owns till a particular period. As a result, exercising control over inventory becomes more difficult. (d) Information are not up-to-dated: Periodic inventory is only updated after a certain amount of time. Normally, this is around inventory time. Companies manually count their inventory on a weekly, monthly, biyearly or even yearly basis. This means that in terms of the books, the information is not regularly updated. The records do not change, even when the product is shipped or received.


(e) Theft can be undetected: Product theft can be very difficult to notice in a periodic inventory system. Some theft will not hurt a business with several different low-cost items, but for a business that sells only valuable items the periodic system is not ideal. 8.9. BEST METHOD OF INVENTORY SYSTEM The perpetual inventory system is the most popular choice for modern businesses. This system was created when customer transactions could be completed with a digital scanner, which sends information about every sale directly to a central computer. When a product is sold, the computer system knows that there is one fewer item in the businesses inventory, and it can deduct that amount from the total number of products in stock. This method requires computer software, such as Fishbows or Inflow, for owners to access details about their inventory. The proper software can alert owners when product amounts are low, or it may even order items automatically. Once it is operational, this method helps prevent human error and keeps a continuous count of every item in stock. This method also suffer from some drawbacks. The drawback to perpetual inventory system is the initial startup cost. In order to work correctly, multiple scanners, computers, and software must be purchased before any sales can be calculated. There are also barcode expenses, which must be placed on each product, and time spent when initially entering the business‘s products into the computer system. However, it is considered as best method of inventory system. 8.10. INVENTORY VALUATION METHOD An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly valued, expenses and revenues cannot provide actual scenario of financial information and a company could make poor business decisions. The most commonly used inventory valuation methods are as follows: (a) First-in, first-out (FIFO): The First-in, first-out (FIFO) formula assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. (b) Last-in, first-out (LIFO): It is a method for inventory valuation, meaning that the most recently received items are the first to be taken out of a warehouse. This method of inventory valuation assumes that the last costs incurred to purchase merchandise or direct materials are first costs charged against revenues. In other words, it assumes that the cost of merchandise sold or the cost of materials issued to production department is the cost of most recent purchases.


(c) Weighted average: Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basic, or as each additional shipment is received, depending upon the circumstances of the entity. (d) Specific identification: Specific identification of cost means that specific costs are attributed to identified items of inventory. This is the appropriate treatment for items that are segregated for a specific project, regardless of whether they have been bought or produced. However, specific identification of costs is inappropriate when there are large numbers of items of inventory that are ordinarily interchangeable. In such circumstances, the method of selecting those items that remain in inventories could be used to obtain predetermined effects on profit or loss. 8.11. MEASUREMENT OF INVENTORY Generally Accepted Accounting Principles (GAAP) require that inventory should be measured at the lower of cost and Net Realisable Value (NRV). (a) Cost: The cost of inventories include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Service providers include the labour and other costs that are directly related in providing the service, including supervisory personnel and attributable overheads, in determining the cost of inventories. Labour and other costs relating to sales and general administrative are not included in the cost of inventories but are recognised as expenses in the period in which they are incurred. The service provider does not include profit margins or nonattributable overheads to the cost of inventories. Costs of purchase: The costs of purchase of inventories include the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items can be deducted in determining the costs of purchase. Costs of conversion: The costs of conversion of inventories include direct labour costs and fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain constant regardless of the volume of production, such as depreciation and variable production overheads are those indirect costs of production that vary directly with the volume of production, such as indirect materials and indirect labour. Other costs: Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may includes non-production overhead or the costs of designing products for specific customers in the cost of inventories.


(b) Net Realisable Value (NRV): Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and disposal and other estimated costs necessary to make the sale. 8.12. CONCEPT OF LOWER OF COST OR MARKET Lower of Cost or Market (LCM) is an accounting rule for valuing and reporting inventory and under certain conditions, securities holdings. Under the Lower of Cost or Market rule, inventory should be valued, at the end of an accounting period, as the lower of cost or market value. (a) Cost of inventories: The cost of inventories include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Service providers include the labour and other costs that are directly related in providing the service, including supervisory personnel and attributable overheads, in determining the cost of inventories. Labour and other costs relating to sales and general administrative are not included in the cost of inventories but are recognised as expenses in the period in which they are incurred. The service provider does not include profit margins or nonattributable overheads to the cost of inventories. (b) Market value: Market value is the price an asset would fetch in the open marketplace. It is determined by fluctuations in supply and demand. It should be noted that market value represents what someone is willing to pay for an asset, not the value it is offered for or intrinsically worth. 8.13. RECOGNITION OF INVENTORY When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down of loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. Some inventories may be allocated to other asset accounts, for example, inventory used as a component of self-constructed property, plant or equipment. Inventories allocated to another asset in this way are recognised as an expense during the useful life of that asset. 8.14. EXPLANATION OF RETAIL INVENTORY METHOD The retail inventory method permits the estimation of inventory position whenever desired. This method of inventory is based on the relationship between the cost of merchandise and its retail price. The retail inventory method is sometimes used by retailers that resell merchandise to estimate their ending inventory balances. The method is not entirely accurate, and so should be periodically supplemented by a physical inventory count. Its results are not adequate for the year-end financial statements, for which a high


level of inventory record accuracy is needed. To determine the value of ending inventory using retail inventory method following steps should be followed: (i) Determine the retail value of goods available for sale during the period by adding the retail value of beginning inventory and retail value of goods purchased. (ii) Subtract total sales during the period from the retail value of goods available for sale. (iii) Calculate the cost to retail ratio. It is calculated using the following formula: A B CD Here, A = Cost of beginning inventory; B = Cost of inventory purchased including incidental costs such as freight-in; C = Retail value of beginning inventory; and D = Retail value of goods purchased during the period (iv) Multiply the difference obtained in step (ii) and the cost to retail ratio to obtain estimated cost of ending inventory. Illustration: Beginning inventory Purchase Goods available for sale Less: Sales Ending inventory at retail

Cost Tk.3,000 (A) Tk.2,000 (B) Tk.5,000

Retail Tk.4,000 (C) Tk.3,000 (D) Tk.7,000 Tk.2,000 Tk.5,000

A B CD Tk.5,000 = Tk.7,000 = 71.43%

Cost percentage =

Inventory balance = Tk.5,000 X 71.43% = Tk.3,572 8.15. DISCLOSURE The financial statements shall disclose the followings: (a) the accounting policies and the cost formula used in measuring inventories; (b) the total carrying amount of inventories appropriate to the entity; (c) the fair value of inventories reduced by cost of sale; (d) the amount of inventories recognised as an expense during the period; (e) the amount of write-down of inventories recognised as an expense during the period; (f) the amount of reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period; (g) the circumstances that lead to the reversal of a write-down of inventories; (h) the carrying amount of inventories pledged as security for liabilities.


SELF PRACTICE QUESTIONS 1. Discuss five measurement methods of Inventory as per IAS-2; state in brief the possible reasons for not allowing LIFO as Inventory estimation method. 2. State five inventory measurement methods as per IAS-2. 3. Explain the purpose of choosing a method for inventory valuation. 4. Write short note on ‗Perpetual Inventory System‘ and ‗Periodic Inventory System‘. 5. What effect would the use of the LIFO inventory method have upon the applicability of the gross profit method of valuing inventory? 6. Differentiate between Gross Profit Method and Retail Inventory Method of inventory estimation. Illustrate with example.


SELF PRACTICE QUESTIONS ANSWER 1. Five measurement methods of inventory as per IAS-2: (a) FIFO: The first in, first out (FIFO) method of inventory valuation is a cost flow assumption that the first goods purchased are also the first goods sold. In most companies, this assumption closely matches the actual flow of goods, and so is considered the most theoretically correct inventory valuation method. (b) Weighted average: Weighted average inventory valuation method is used where different quantities of goods are purchased at different unit costs. Under this method, weights are assigned to the cost price on the basis of the quantity of each item at each price. (c) Specific identification: Specific identification method can be applied in situations where different purchases can be physically separated. Under this method, each item sold and each item remaining in the inventory is identified. (d) Retail inventory: The retail inventory method is sometimes used by retailers that resell merchandise to estimate their ending inventory balances. This method is based on the relationship between the cost of merchandise and its retail price. (e) Standard cost: Under a standard cost system, the standard costs of the manufacturing activities will be recorded in the inventories and the cost of goods sold accounts. 2. Five inventory measurement methods as per IAS-2: a) FIFO b) Weighted average c) Specific identification d) Retail inventory e) Standard cost 3. The inventory at the end of a period is to be shown as a current asset in the balance sheet of the business. In ease the inventory is not properly valued, the balance sheet will not disclose the correct financial position of the business. Hence, a suitable method needs to be selected for valuation inventory.


4. Perpetual inventory system: It is a method of inventory in which updated are made after each purchase or sale. It maintains a continuous accounting period. It is suitable for large organization. It shows the cost of inventory on hand at any time. Periodic inventory system: It is a method of inventory in which updated are made at the end of accounting period. It maintains a specific accounting period. It is suitable for small organization. It shows the cost of inventory on hand at the end of accounting period. 5. The LIFO inventory method of valuing inventory retains the older costs in inventory and matches current costs against sales revenues. If a fluctuation in inventory position and in prices occurs during a period, the gross profit rate is determined in other periods when the inventory position was stable. 6. Gross profit method: The gross profit method of inventory estimation is based on an assumed relationship between gross profit and sales. With this method, a gross profit percentage is applied to sales to determine cost of goods sold. Then the cost of goods sold is subtracted from the cost of goods available for sale to arrive at an inventory balance. Illustration: Assume that company X has a beginning inventory of Tk.6000 and purchase of Tk.20,000. Sales for Tk.28,000. The gross profit on selling price is 30%. Calculation of inventory balance: Beginning inventory Add. Purchase Goods available for sale Less. Sales Less: Gross profit (30% of 28,000) Sales at cost Inventory balance

Tk.6,000 Tk20,000 Tk.26,000 Tk.28,000 Tk.8,400 Tk.19,600 Tk.6,400

Retail inventory method: The retail inventory method permits the estimation of inventory position whenever desired. This method of inventory is based on cost and retail. A cost percentage is computed by dividing the goods available for sale at retail. This cost percentage then can be applied to the ending inventory at retail after deducting the sales from goods available for sale.


Illustration: Beginning inventory Purchase Goods available for sale Less: Sales Ending inventory at retail

Tk.5,000 Tk.7,000 = 71.43%

Cost percentage =

Inventory balance = Tk.5,000 X 71.43% = Tk.3,572

Cost Tk.3,000 Tk.2,000 Tk.5,000

Retail Tk.4,000 Tk.3,000 Tk.7,000 Tk.2,000 Tk.5,000


PROBLEMS AND SOLUTIONS P-1. Exim Company has an opening inventory of Tk.100,000 and purchases of Tk.300,000, both at cost. Sales amount to Tk.200,000. The gross-profit on selling price for the previous four years were 10%, 15%, 25% and 30% respectively. Find out the estimated closing inventory. Solution: Exim Company Estimation of closing inventory Amount (Tk.) Opening inventory Add. Purchases Goods available for sale at cost Less. Sales at cost: Sales at selling price Less. Gross profit (20% of 200,000)

200,000 40,000 160,000 240,000

Estimated closing inventory Computation:

Amount (Tk.) 100,000 300,000 400,000

10% 15%  25%  30% 4 years = 20%

Average gross profit =

P-2. For the year ending 30th June 2018, the sales, purchases, opening stock and closing stock of a trader was Tk.1,00,000, Tk.1,20,000, Tk.80,000 and Tk.20,000 respectively. Some goods were destroyed by fire during the year. If the trader earned gross profit @ 30% on sales for the year, calculate the value of goods destroyed by fire. Solution: Amount (Tk.) Opening stock Add. Purchases Goods available for sale at cost Less. Sales at cost: Sales at selling price Less. Gross profit (20% of 100,000)

Amount (Tk.) 80,000 120,000 200,000

100,000 30,000

Closing stock

70,000 130,0000

The value of goods destroyed by fire = Tk.130,000 - Tk.20,000 = Tk.110,000 P-3. Avra Company lost all of its inventory in a fire on December 26, 2017. The accounting records showed the following gross profit data for November and December.


November Net sales Beginning inventory Purchases Purchase return and allowances Purchase discounts Freight-in Ending inventory

Tk.600,000 32,000 377,000 13,300 8,500 8,800 36,000

December (to 26/12/2017) Tk.700,000 36,000 424,000 14,900 9,500 9,900 -

Avra Company is fully insured for fire losses but must prepare a report for the insurance company. Required: (a) Compute the gross profit rate for November. (b) Using the gross profit rate for November, determine the estimated cost of inventory lost in fire. Solution: (a) Taka Net sales Less. Cost of goods sold: Beginning inventory Add. Purchases Less. Purchase return and allowances Less. Purchase discounts Add. Freight-in Cost of goods available for sale Less. Ending inventory Cost of goods sold Gross profit Gross profit rate (240,000 รท 600,000)

November Taka 600,000

32,000 377,000 (13,300) (8,500) 8,800 396,000 (36,000) 360,000 240,000 40%

(b)

Net sales Less. Estimated gross profit (700,000 X 40%) Estimated cost of goods sold

December Taka 700,000 280,000 420,000

Determination of cost of goods available for sale: Beginning inventory 36,000 Add. Purchases 424,000 Less. Purchase return and allowances (14,900) Less. Purchase discounts (9,500) Add. Freight-in 9,900 Cost of goods available for sale Less. Estimated cost of goods sold Estimated cost of the inventory lost in the fire

445,500 (420,000) 25,500

Taka


P-4. Billal Limited, a client of your consultancy firm, has approached you with the following questions regarding inventory: (a) Fabric included in year-end inventory includes fabric being shipped from USA on FOB terms (risks and rewards are therefore transferred on the date of shipment from the foreign harbour). Delivery costs associated with this special fabric are excessive (Tk.50,000 more than normal delivery costs), but are required urgently for seamless production. Can this Tk.50,000 be included in the inventory value at year-end? (b) The company used a consultant to design new baggies (a completely new product with which the company has no experience), at a total cost of Tk.30,000. This was a once-off order for a large surf store chain. The baggies were completed by year-end at a total production cost of Tk.5,00,000. Can the consultant‘s fees be included in the inventory valuation? (c) Fabric X used in production of the T-shirts, is valued at Tk.50 per metre, but can only be sold at Tk.35 per metre. Finished T-shirts are expected to sell for Tk.100 and to produce Tk.37. At what value should fabric X be recognised in the financial statements? Instruction: Respond briefly to all the above queries of your client in accordance with IAS 2. Solution: (a) In terms of IAS 2.18, any costs (regardless of the amount) that are directly attributable in bringing the inventory to the location and in a condition to be used as intended by management may be capitalised to the asset. Thus, Tk.50,000 can be included in the cost of the fabric. Note however that additional consideration must be given in calculating the net realisable value and ensuring that it is not less that this new higher cost of the fabric (or else a write down would be required). (b) Yes, the consultant‘s fees may be capitalised to the cost of the baggies inventory under IAS 2.18, any costs (regardless of the amount) that are directly attributable in bringing the inventory to the location and in a condition to be used as intended by management may be capitalised to the asset. (c) Fabric X should be valued at cost because no write down below cost to NRV is permitted if the finished goods in which the fabric is used (the T-shirts) are expected to be sold at or above cost (IAS 2.32). P-5. Many of the financial records of Bright Company were recently destroyed by fire. Management has hired you to create as much financial information as possible for the month of December. You are able to find out that the company uses a weighted average inventory costing system. You also learn that Bright makes a physical count at the end of each month in order to determine monthly inventory values. By examining various documents you are able to gather the following information: Ending inventory at December 31, 2017 Gross margin on sales for December Cost of units available for sale in December Cost of goods sold during December Cost of beginning inventory at December 1, 2017

50,000 units Tk.101,000 Tk.118,800 Tk.99,000 Tk.0.35 per unit


Purchases Date Units December 4, 2017 60,000 December 11, 2017 50,000 December 15, 2017 40,000 December 16, 2017 50,000

Unit cost Tk.0.40 Tk.0.41 Tk.0.42 Tk.0.45

You are asked to provide the following information: (a) Number of units on hand at December 1, 2017. (b) Number of units sold during December. (c) Unit cost of inventory at December 31, 2017. Solution: (a) Determination of total purchases: Units 60,000 50,000 40,000 50,000 200,000

Unit cost Tk.0.40 Tk.0.41 Tk.0.42 Tk.0.45

Total cost Tk.24,000 Tk.20,500 Tk.16,800 Tk.22,500 Tk.83,800

Beginning inventory + Purchases = Cost of units available for sale => Beginning inventory + Tk.83,800 = Tk.118,800 => Beginning inventory = Tk.118,800 – Tk.83,800 => Beginning inventory = Tk.35,000 Tk.35,000 Tk.0.35 = 100,000 units

Number of units on hand at December 1, 2017 =

(b) Sales = Beginning inventory + Purchases – Ending inventory => Sales = 100,000 units + 200,000 units – 50,000 units => Sales = 300,000 units – 50,000 units => Sales = 250,000 units Therefore, number of units sold during December = 250,000. (c) Unit cost of inventory at December 31, 2017 Cost of units available for sale = Quantity of units available for sale Tk.118,800 = (100,000  200,000) units Tk.118,800 = 300,000 units = Tk.0.396 per unit


P-6. The following particulars are furnished in respect of material X: 2018 January ,, ,, ,, ,, ,, February ,, ,, ,,

1 5 10 16 20 31 10 15 20 25

Stock on hand Purchases Issues Purchases Issues Purchases Issues Purchases Issues Purchases

100 units @ Tk.2.00 per unit 200 units @ Tk.3.00 per unit 120 units 250 units @ Tk.3.20 per unit 150 units 100 units @ Tk.3.40 per unit 300 units 200 units @ Tk.3.60 per unit 150 units 100 units @ Tk.4.00 per unit

Required: Draw up the store ledger accounts for this material using periodic simple average and weighted average method for each month. Solution: Store Ledger Periodic simple average method Date

Particulars Oty

2018 Jan.1 5 10 16 20 31 31 Feb.1 10 15 20 25

Opening Balance Purchased Issued Purchased Issued Purchases Total Opening Balance Issued Purchased Issued Purchased Total

100 200

Received Rate Value 2.00 3.00

Oty

Issued Rate Value

200 600

864

100 300 180 430 280 380 380

1,710

380 80 280 130 230 230

120 250 100 650

3.20 3.40

380

800 340 1,940

150 ___ 270 3.20a

1,076 300

200 100 680

3.60 4.00

720 400 2,196

150 ___ 450 3.80b

Oty

Balance Rate Value 2.00

200

1,076c 1,076

486d

Store Ledger Periodic weighted average method Date

Particulars Oty

2018 Jan.1 5 10

Opening Balance Purchased Issued

100 200

Received Rate Value 2.00 3.00

Oty

200 600 120

Issued Rate Value

Oty 100 300 180

Balance Rate Value 2.00

200


16 20 31 31 Feb.1 10 15 20 25

Purchased Issued Purchases Total Opening Balance Issued Purchased Issued Purchased Total

250

3.20

800

100 650

3.40

340 1,940

380

150 ___ 270 3.16e

853

430 280 380 380

1,678

380 80 280 130 230 230

1,087 300

200

3.60

720

100 680

4.00

400 2,207

150 ___ 450

3.73f

1087g 1,087

529h

Computations: Tk.3.00  Tk.3.20  Tk.3.40 3 = Tk.3.20

a. Issue rate of January =

Tk.3.60  Tk.4.00 2 = Tk.3.80

b. Issue rate of February =

c. Tk.1,940 – Tk.864 = Tk.1,076 d. Tk.2,196 – Tk.1,710 = Tk.486

Tk.600  Tk.800  Tk.340 200 units  250 units  100 units Tk.1,740 = 550 units = Tk.3.16

e. Issue rate of January =

Tk.720  Tk.400 200 units  100 units Tk.1,120 = 300 units = Tk.3.73

f. Issue rate of February =

g. Tk.1,940 – Tk.853 = Tk.1,087 h. Tk.2,207 – Tk.1,678 = Tk.529 P-7. MSR Softtech Company, a newly incorporated company, uses the latest version of a software package (EXODUS) to cost and value its inventory. The software uses the weighted-average cost method to value its inventory. The followings are the purchases and sales made by MSR Softtech Company during 2017 (as a newly set-up company, MSR Softtech Company has no beginning inventory):


Purchases January 15 March 10 September 25 Sales March 15 December 15

: : :

100 units @ Tk.250 per unit 150 units @ Tk.300 per unit 200 units @ Tk.350 per unit

: :

150 units 170 units

Required: MSR Softtech Company has appointed you to compute the value of its inventory and the cost per unit of the inventory at March 31, 2017; September 20, 2017; and December 31, 2017; under the weighted-average cost method. Solution: MSR Softtech Company Weighted-average cost method Date

2017 Jan.15 Jan.31 Mar.10 Mar.10 Mar.15 Mar.31 Sep.25 Sep.30 Dec.15 Dec.31

Particulars

Purchases Balance Purchases Balance Sales Balance Purchases Balance Sales Balance

Units

Cost per unit (Tk.)

Value of inventory (Tk.)

100 100 150 250 (150) 100 200 300 (170) 130

250 250 300 280 280 280 350 327 327 327

25,000 25,000 45,000 70,000 (42,000) 28,000 70,000 98,000 (55,590) 42,410

Weighted-average cost per unit (Tk.)

280 327 327

P-8. First Company uses a perpetual inventory system for its product. Its beginning inventory, purchases, and sales during the year 2017 are as follows: Date Jan.1 Feb.1 Mar.1 Apr.1 May 1

Particulars Opening Inventory Sales Purchases Sales Purchases Total

Purchases 200 units @ Tk.10 = Tk.2,000

Sales

Balance 200units

100 units @ Tk.20

100units 400units 50units 150units

300 units @ Tk.20 = Tk.6,000 350 units @ Tk.40 100 units @ Tk.15 = Tk.1,500 600 units = Tk.9,500

450 units

Additional information for applying specific identification: (a) February 1 sale – 100 units @ Tk.10; (b) April 1 sale – 80 units @ Tk.10, and 270 units @ Tk.20.


Required: Calculate the ending inventory and cost of goods sold under LIFO, FIFO, weighted average and specific identification method. Solution: First Company Perpetual Inventory System LIFO method: Date 2017 Jan. 1 Feb. 1 Mar. 1 Apr. 1

May 1

Purchases

Sales 100 @ 10 = 1,000

300 @ 20 = 6,000 300 @ 20 = 6,000 50 @ 10 = 500 100 @ 15 = 1,500 Cost of goods sold = Tk.7,500

Balance 200 @ 10 = 2,000 100 @ 10 = 1,000 100 @ 10 = 1,000 300 @ 20 = 6,000 50 @ 10 = 500 50 @ 10 = 500 100 @ 15 = 1,500 Ending inventory = Tk.2,000

FIFO method: Date 2017 Jan. 1 Feb. 1 Mar. 1 Apr. 1

May 1

Purchases

Sales 100 @ 10 = 1,000

300 @ 20 = 6,000 100 @ 10 = 1,000 250 @ 20 = 5,000 100 @ 15 = 1,500 Cost of goods sold = Tk.7,000

Balance 200 @ 10 = 2,000 100 @ 10 = 1,000 100 @ 10 = 1,000 300 @ 20 = 6,000 50 @ 20 = 1,000 50 @ 20 = 1,000 100 @ 15 = 1,500 Ending inventory = Tk.2,500

Weighted average method: Date 2017 Jan. 1 Feb. 1 Mar. 1 Apr. 1 May 1

Purchases

Sales 100 @ 10 = 1,000

300 @ 20 = 6,000 350 @ 17.5 = 6,125 100 @ 15 = 1,500 Cost of goods sold = Tk.7,125

Balance 200 @ 10 = 2,000 100 @ 10 = 1,000 400 @ 17.50 = 7,000 50 @ 17.50 = 875 150 @ 15.83 = 2,375 Ending inventory = Tk.2,375


Specific identification method: Date 2017 Jan. 1 Feb. 1

Purchases

Sales 100 @ 10 = 1,000

Mar. 1 Apr. 1

300 @ 20 = 6,000

May 1

100 @ 15 = 1,500

80 @ 10 = 800 270 @ 20 = 5,400

Cost of goods sold = Tk.7,200

Balance 200 @ 10 = 2,000 100 @ 10 = 1,000 100 @ 10 = 1,000 300 @ 20 = 6,000 20 @ 10 = 200 30 @ 20 = 600 20 @ 10 = 200 30 @ 20 = 600 100 @ 15 = 1,500 Ending inventory = Tk.2,300

P-9. The Neo Company had the following inventory records for the month of January 2018: Date Item Description Quantity Unit price 01/01/2018 M1 – M5 Beginning 5 Tk.20 inventory 05/01/2018 M2, M5 Sale 2 11/01/2018 M6 – M14 Purchase 9 Tk.12 28/01/2018 M1, M3, M6, M7, Sale 7 M8, M9, M14 Assuming a perpetual inventory system is used; and the store manager determine the cost of goods sold and the ending inventory as follows: Method of inventory Cost of goods sold (Tk.) Ending inventory (Tk.) FIFO 148 60 LIFO 124 84 Weighted average 138 70 Required: As a professional accountant can you agree with the above report of store manager? Determine the cost of goods sold and the ending inventory for FIFO, LIFO and weighted average. Solution: Neo Company Perpetual Inventory System FIFO method: Date 01/01/2018 05/01/2018

Purchases

11/01/2018 28/01/2018

9 @ Tk.12 = Tk.108

Sales 2 @ Tk.20 = Tk.40

3 @ Tk.20 = Tk.60 4 @ Tk.12 = Tk.48 Cost of goods sold = Tk.148

Balance 5 @ Tk.20 = Tk.100 3 @ Tk.20 = Tk.60 3 @ Tk.20 = Tk.60 9 @ Tk.12 = Tk.108 5 @ Tk.12 = Tk.60 Ending inventory = Tk.60


LIFO method: Date 01/01/2018 05/01/2018

Purchases

11/01/2018

9 @ Tk.12 = Tk.108

Sales 2 @ Tk.20 = Tk.40

28/01/2018

7 @ Tk.12 = Tk.84 Cost of goods sold = Tk.124

Balance 5 @ Tk.20 = Tk.100 3 @ Tk.20 = Tk.60 3 @ Tk.20 = Tk.60 9 @ Tk.12 = Tk.108 3 @ Tk.20 = Tk.60 2 @ Tk.12 = Tk.24 Ending inventory = Tk.84

Weighted average method: Date 01/01/2018 05/01/2018 11/01/2018 28/01/2018

Purchases

Sales 2 @ Tk.20 = Tk.40

9 @ Tk.12 = Tk.108 7 @ Tk.14 = Tk.98 Cost of goods sold = Tk.138

Balance 5 @ Tk.20 = Tk.100 3 @ Tk.20 = Tk.60 12 @ Tk.14=Tk.168 5 @ Tk.14 = Tk.70 Ending inventory = Tk.70

As the store manager‘s statement is justified, I agree with his report. P-10. A Corporation that uses a perpetual inventory system has the following transactions during June: June-1 Opening balance 200 units @ Tk.3.00 per unit June-2 Purchases 500 units @ Tk.3.20 per unit June-7 Issued 400 units June-11 Purchased 300 units @ Tk.3.30 per unit June-14 Issued 400 units June-17 Purchased 400 units @ Tk.3.20 per unit June-21 Issued 200 units June-24 Purchased 300 units @ Tk.3.40 per unit June-26 Purchased 400 units @ Tk.3.50 per unit June-29 Issued 600 units Sales were 1,600 units @ Tk.7.00 per unit; marketing and administrative expenses totaled Tk.2,100. Required: (a) Prepare a comparative income statement based on the transactions for June, using the LIFO and FIFO methods and a 40% income tax rate. (b) For each costing method, determine the cash position at the end of June, assuming that all transactions, purchases, sales, and non-manufacturing expenses were paid in cash. Solution:


(a) LIFO method: Date June-1

Purchases

June-2

500@ 3.20=Tk.1,600

June-7

Issue

400@ 3.20=Tk.1,280

June-11 June-14

300 @3.30=Tk.990

June-17

400@ 3.20=Tk.1,280

300@ 3.30=Tk.990 100@ 3.20=Tk.320

June-21

200@ 3.20=Tk.640

June-24

300@ 3.40=Tk.1,020

June-26

400@ 3.50=Tk.1,400

June-29 Purchases = Tk.6,290

400@ 3.50=Tk.1,400 200@ 3.40=Tk.680 Cost of goods sold = Tk.5,310

Balance 200@ 3.00 = Tk.600 200@ 3.00 = Tk.600 500@ 3.20=Tk.1,600 200@ 3.00 = Tk.600 100@ 3.20=Tk.320 200@ 3.00 = Tk.600 100@ 3.20=Tk.320 300@ 3.30=Tk.990 200@ 3.00 = Tk.600 200@ 3.00 = Tk.600 400@ 3.20=Tk.1,280 200@ 3.00=Tk.600 200@ 3.20=Tk.640 200@ 3.00=Tk.600 200@ 3.20=Tk.640 300@ 3.40=Tk.1,020 200@ 3.00=Tk.600 200@ 3.20=Tk.640 300@ 3.40=Tk.1,020 400@ 3.50=Tk.1,400 200@ 3.00=Tk.600 200@ 3.20=Tk.640 100@ 3.40=Tk.340 Ending inventory = Tk.1,580

FIFO method: Date June-1

Purchases

June-2 June-7

500@ 3.20=Tk.1,600

June-11 June-14

Issue

200@ 3.00=Tk.600 200@ 3.20=Tk.640 300@ 3.30=Tk.990 300@ 3.20=Tk.960 100@ 3.30=Tk.330

June-17 June-21

400@ 3.20=Tk.1,280

June-24

300@ 3.40=Tk.1,020

200@ 3.30=Tk.660

Balance 200@ 3.00 = Tk.600 200@ 3.00 = Tk.600 500@ 3.20=Tk.1,600 300@ 3.20=Tk.960 300@ 3.20=Tk.960 300@ 3.30=Tk.990 200@ 3.30 = Tk.660 200@ 3.30 = Tk.660 400@ 3.20=Tk.1,280 400@ 3.20=Tk.1,280 400@ 3.20=Tk.1,280 300@ 3.40=Tk.1,020


June-26 June-29

400@ 3.50=Tk.1,400

Purchases = Tk.6,290

400@ 3.20=Tk.1,280 200@ 3.40=Tk.680 Cost of goods sold = Tk.5,150

400@ 3.20=Tk.1,280 300@ 3.40=Tk.1,020 400@ 3.50=Tk.1,400 100@ 3.40=Tk.340 400@ 3.50=Tk.1,400 Ending inventory = Tk.1,740

Comparative Income Statement For the month of June

Sales (1,600 units @ Tk.7.00) Less. Cost of goods sold Gross profit Less. Marketing and administrative expenses Profit before tax Less. Income tax @ 40% Net profit

LIFO method Tk.11,200 5,310 5,890 2,100 3,790 1,516 2,274

FIFO method Tk.11,200 5,150 6,050 2,100 3,950 1,580 2,370

(b) Cash Position At the end of June

Sales (1,600 units @ Tk.7.00) Less. Purchases Marketing and administrative expenses Cash balance

LIFO method Tk.11,200 (6,290) (2,100) 2,810

FIFO method Tk.11,200 (6,290) (2,100) 2,810

P-11. You are provided with the following information for ABC Company for the month ended on June 30, 2018: Date Jan.1 Feb.1 Mar.1 Apr.1 May1 May1

Particulars Beginning Inventory Purchases Sales Sales Return Purchases Purchases Return

Quantity 40 60 80 20 30 10

Unit cost or selling Price Tk.20 Tk.15 Tk.10 Tk.10 Tk.40 Tk.20

Required: Calculate the ending inventory and cost of goods sold under the following methods by considering periodic inventory system. (a) LIFO; (b) FIFO; and (c) Average cost. Solution:


ABC Company Periodic inventory system Cost of goods available for sale: Jan. 1 Feb. 1 May 1 May 1

40 units 60 units 30 units (10) units 120 units

@ @ @ @

Tk.20 Tk.15 Tk.40 Tk.40

= Tk.800 = Tk.900 = Tk.1,200 = (Tk.400) = Tk.2,500

Inventory on hand = 120 units - (80 - 20) units = 120 units – 60 units = 60 units (a) LIFO method: Ending inventory Jan. 1 Feb. 1

40 units @ Tk.20 = Tk.800 20 units @ Tk.15 = Tk.300 Tk.1,100

Cost of goods sold = Tk.2,500 – Tk.1,100 = Tk.1,400 (b) FIFO method: Ending inventory May 1 Feb. 1

20 units @ Tk.40 = Tk.800 40 units @ Tk.15 = Tk.600 Tk.1,400

Cost of goods sold = Tk.2,500 – Tk.1,400 = Tk.1,100 (c) Average cost method:

Tk.2,500 120 units = Tk.20.83

Average cost per unit =

Ending inventory = 60 units X Tk.20.83 = Tk.1250 Cost of goods sold = Tk.2,500 – Tk.1,250 = Tk.1,250


P-12. The followings data are related to Dragon Company‘s beginning inventory, purchases, and sales for the year 2018. Beginning inventory Purchases: February 1 April 2 June 8

10,000 units @ Tk.2.00 5,000 units @ Tk.3.00 8,000 units @ Tk.4.00 4,000 units @ Tk.5.00 27,000 units

Sales: March 1 May 7 July 6

12,000 units 9,000 units 1,000 units 22,000 units

Required: Compute the ending inventory and cost of goods sold under each of the following methods assuming periodic inventory procedure: (a) FIFO, (b) LIFO, and (c) Weighted average. Solution: Dragon Company Periodic inventory procedure Cost of goods available for sale: Beginning Inventory February 1 April 2 June 8

10,000 units 5,000 units 8,000 units 4,000 units 27,000 units

@ Tk.2.00 @ Tk.3.00 @ Tk.4.00 @ Tk.5.00

= = = = =

Inventory on hand = 27,000 units - 22,000 units = 5,000 units (a) FIFO method: Value of ending inventory: June 8 April 2

4,000 units @ Tk.5.00 = Tk.20,000 1,000 units @ Tk.4.00 = Tk.4,000 Tk.24,000

Cost of goods sold = Tk.87,000 - Tk.24,000 = Tk.63,000 (b) LIFO method: Value of ending inventory: Beginning inventory 5,000 units @ Tk.2.00 = Tk.10,000 Cost of goods sold = Tk.87,000 - Tk.10,000 = Tk.77,000

Tk.20,000 Tk.15,000 Tk.32,000 Tk.20,000 Tk 87,000


(c) Weighted average method:

Tk.87,000 27,000 units = Tk.3.22 Value of ending inventory = 5,000 units X Tk.3.22 = Tk.16,100 Average cost per unit =

Cost of goods sold = Tk.87,000 - Tk.16,100 = Tk.70,900 P-13. Lee Company, a wholesaler, made the following purchases of Material X during 19A. Date January 7 March 30 May 10 July 5 September 2 December 14 Total

Units 8,000 8,800 12,000 16,000 6,400 7,200 58,400

Cost per unit (Tk.) 12.00 12.40 12.00 12.60 12.80 12.68

Total amount (Tk.) 96,000 109,120 144,000 201,600 81,920 91,296 723,936

On December 31, 19A, inventory was 15,200 units and on January 1, 19A, 4,000 units at Tk.11.92 each were on hand. The sales price during the year was stable at Tk.16. Required: (a) Prepare a schedule of inventory on December 31, 29A, assuming a periodic inventory system and weighted average costing method. (b) Prepare a statement showing material X‘s sales, cost of goods sold and gross profit for December 31, 19A, assuming the FIFO costing method. Solution: (a) Lee Company Schedule of inventory Assuming periodic inventory system As on December 31, 29A Inventory on January 1, 19A Purchase Weighted average Inventory at December 31, 19A

4,000 units @ Tk.11.92 58,400 units @ Tk.12.40* 62,400 units @ Tk.12.37 15,200 units @ Tk.12.37

* Tk.723,936 á 62,400 units = Tk.12.40

Tk.47,680 Tk.723,936 Tk.771,616 Tk.188,024


(b) Sales (4,000 + 58,400 – 15,200) units X Tk.16 Less. Cost of goods sold: Inventory on January 1, 19A Add. Purchases Less. Inventory on December 31, 19A (w-1)

Tk.755,200 Tk.47,680 Tk.723,936 Tk.771,616 Tk.193,376 Tk.578,240 Tk.176,960

Gross profit Working: 1. Inventory on December 31, 19A under FIFO costing: December 14 September 2 July 5

7,200 units @ Tk.12.68 = Tk.91,296 6,400 units @ Tk.12.80 = Tk.81,920 1,600 units @ Tk.12.60 = Tk.20,160 Tk.193,376

P-14. STAR-TRACK sells satellite tracking systems for receiving television broadcasts from communication satellites in space. At December 31, 2017, the company‘s inventory amounted to Tk.44,000. During the first week in January 2018, STAR-TRACK made only one purchase and one sale. These transactions were as follows: January 3 - Sold a tracking system to Mystery Mountain Resort for Tk.20,000 cash. The system consisted of seven different devices, which had a total cost to STAR-TRACK of Tk.11,200. January 7 – Purchased two Model 400 and four Model 800 satellite dishes from Yamaha Corporation. The total costs of this purchase amounted to Tk.10,000, terms 2/10, n/30. STAR-TRACK records purchases of merchandise at net cost. The company has full-time accounting personnel and uses a manual accounting system. Required: (a) Prepare journal entries to record these transactions, assuming that STAR-TRACK uses perpetual inventory system. (d) Prepare journal entries to record these transactions, assuming that STAR-TRACK uses periodic inventory system. (c) Explain what information in part (a) should be posted to subsidiary ledger accounts. (d) Compute the balance in the inventory controlling account at January 7. (e) Compute cost of goods sold for the first week of January, assuming that STARTRACK uses periodic inventory system. (f) Determine the gross profit margin on January 3 sales transaction. Solution:


(a) STAR-TRACK Journal Entries Perpetual inventory system Date 2017 January 3

January 7

Particulars Cash

Dr. (Tk.) 20,000

Sales (To record cash sales) Cost of goods sold Inventory (To record cost of goods sold) Inventory Accounts payable (To record credit purchase)

Cr. (Tk.) 20,000

11,200 11,200 10,000 10,000

(b) STAR-TRACK Journal Entries Periodic inventory system Date 2017 January 3 January 7

Particulars Cash Sales (To record cash sales) Purchases Accounts payable (To record credit purchase)

Dr. (Tk.) 20,000

Cr. (Tk.) 20,000

10,000 10,000

(c) The debits and credits of the inventory account should be posted to the appropriate account in the inventory subsidiary ledger. The information posted would be the cost and quantities of the types of merchandise purchased or sold. The accounts payable to Yamaha Corporation also should be posted to the Yamaha account in STAR-TRACK account payable ledger. No posting is required to the accounts receivable ledger, as this was a cash sale. If STAR-TRACK maintains more than one bank account, the debit to cash should be posted to the prior account in the cash subsidiary ledger. (d) The balance in the inventory controlling account at January 7 = Tk.44,000 – Tk.11,200 + (Tk.10,000 X 98%) = Tk.44,000 – Tk.11,200 + Tk.9,800 = Tk.42,600 (e) Computation of cost of goods sold: Inventory at January 1 Add. Purchases (Tk.10,000 X 98%) Cost of goods available for sale Less. Inventory at January 7 (From requirement d) Cost of goods sold

Tk.44,000 9,800 53,800 42,600 11,200


(f) Sales revenue Less. Cost of goods sold Gross profit

Tk.20,000 11,200 8,800

Tk.8,800 X 100 Tk.20,000 = 44%

Gross profit margin =

P-15. Hypo Company is a retailer that produces and sells four major products: A, B, C and D. At June 30, 2018, quantity on hand, cost per unit and Net Realizable Value (NRV) per unit of the product line are as follows: Products Quantity on hand Cost per unit NRV per unit

A 10 250 200

B 20 100 150

C 30 300 400

D 40 200 150

Required: Compute the value of inventory at June 30, 2018, under IAS-2 using ―Lower of Cost and NRV‘ principle. Solution: Hypo Company Computation of the value of inventory Under IAS -2 using Lower of cost and NRV principle At June 30, 2018 Products A B C D Total

Cost (Tk.) 2,500 2,000 9,000 8,000

NRV (Tk.) 2,000 3,000 12,000 6,000

Value of inventory (Tk.) 2,000 2,000 9,000 6,000 19,000

P-16. Royal Company has the following items as inventory as of June 30, 2018. Determine the value of inventory by applying Lower of Cost or Market. The company‘s normal profit margin is 10% of cost. Product Cost (Tk.) Replacement cost (Tk.) Estimated selling price (Tk.) Cost of completion and disposal (Tk.)

A 100 150 320 200

B 300 250 600 300

C 200 300 500 400

D 400 350 550 350


Solution: Royal Company Determination of the value of inventory By applying Lower of Cost or Market As of June 30, 2018 Product

A B C D Total

Cost (Tk.)

Replacement cost (Tk.)

100 300 200 400

150 250 300 350

NRV NRV-Profit Designated (Ceiling) (Floor) market (Tk.) (Tk.) value (Tk.) 120 110 120 300 270 270 100 80 100 200 160 200

Value of inventory (Tk.) 100 270 100 200 670

Here, NRV (Celling) = Estimated selling price - Cost of completion and disposal Floor = NRV - Normal profit margin @ 10% of cost P-17. The records of Sejuti‘s Boutique report the following data for the month of April: Sales Sales returns Markups Markup cancellations Markdowns Markdown cancellations Freight on purchases

Tk.95,000 2,000 10,000 1,500 9,300 2,800

Purchases (at cost) Purchases (at sales price) Purchase returns (at cost) Purchase returns (at sales price) Beginning inventory (at cost) Beginning inventory (at sales price)

Tk.55,000 88,000 2,0000 3,000 30,000 46,500

2,400

Required: Compute the ending inventory by the conventional retail inventory method. Solution: Sejuti‘s Boutique Computation of ending inventory By the conventional retail inventory method

Beginning inventory Purchases Purchase returns Freight on purchases Total Add: Net markups: Markups Markup cancellations Total

Cost Tk.30,000 55,000 (2,000) 2,400 85,400

Retail Tk.46,500 88,000 (3,000) _____131,500 Tk.10,000 (1,500)

______ Tk.85,400

8,500 Tk.140,000


Less: Net markdowns: Markdowns Markdown cancellations Goods available at sales price Less: Net sales: Sales Sales returns Ending inventory, at retail

9,300 (2,800) 6,500 133,500 Tk.95,000 (2,000) 93,000 Tk.40,500

Total cos t price Total retail price Tk.85,400 = Tk.140,000 = 0.61 or 61% Ending inventory at cost = Tk.40,500 X 61% = Tk.24,705

Cost to retail ratio =

P-18. Marks Garments applies the conventional retail method but wishes to use the LIFO retail method beginning in 2018. Mark Garments has the following information at 2017: At cost (Tk.) At retail (Tk.) Inventory at January 1, 2017 5,210 15,000 Net purchases in 2017 47,250 100,000 Net marks-up in 2017 7,000 Net marks-down in 2017 2,000 Sales in 2017 95,000 Requirements: (a) Compute the ending inventory at cost by applying conventional retail approach at 2017. (b) Compute the ending inventory at cost by using LIFO retail method at 2017. (c) Prepare and post the entry(s) for the differences (if any) between conventional and LIFO retail methods in the ending inventory at 2017. Solution: (a) Marks Garments Computation of ending inventory By applying conventional retail method At 2017 At cost (Tk.) At retail (Tk.) Inventory at January 1, 2017 5,210 15,000 Net purchases 47,250 100,000 Net marks-up _____7,000 52,460 122,000 Net marks-down (2,000) Sales (95,000) Inventory at December 31, 2017 25,000


Total cos t price Total retail price Tk.52,460 = Tk.122,000 = 0.43 or 43%

Cost to retail ratio =

Ending inventory at cost = Tk.25,000 X 43% = Tk.10,750 (b) Marks Garments Computation of ending inventory By using LIFO retail method At 2017 Ending inventory at cost = Retail X Ratio = Tk.25,000 X 45%* = Tk.11,250 Here, Tk.47,250 *Cost to retail ratio = Tk.100,000  Tk.7,000  Tk.2,000 = 45% (c) Differences between two methods = Tk.11,250 – Tk.10,750 = Tk.500. Thus, adjusting entry should be as follows: Inventory Adjusting to record inventory at cost

- Dr. - Cr. -

Tk.500 Tk.500

P-19. Following information are related to Agro Bazar. Assuming that Agro Bazar uses the conventional retail inventory method, compute the cost of its ending inventory at 31.12.2017. Cost Retail Inventory at 01.01.2017 Tk.40,000 Tk.70,000 Purchases 60,000 90,000 Purchase returns 10,000 15,000 Purchase discounts 5,000 10,000 Freight-in 15,000 25,000 Markdowns 25,000 Markdowns cancellation 5,000 Gross sales 52,000 Sales returns 12,000 Markups 27,000 Markup cancellations 7,000 Loss from breakage (normal) 10,000


Solution: Agro Bazar Computation of the cost of ending inventory Under conventional retail inventory method At 31.12.2017 Cost Tk. 40,000 60,000 (10,000) (5,000) 15,000

Inventory at 01.01.2017 Add. Purchases Less. Purchase returns Less. Purchase discounts Add. Freight in Add. Net markups: Markups Markup cancellations ______ Total 100,000 Less. Net markdown: Markdowns Markdown cancellation Goods available for sale at selling price Less. Net sales at selling price: Gross sales Less. Sales returns Less. Loss from breakage (normal) Ending inventory at retail

Tk.

27,000 (7,000)

25,000 (5,000)

52,000 (12,000)

Retail Tk. 70,000 90,000 (15,000) (10,000) 25,000

20,000 180,000

20,000 160,000

40,000 10,000 110,000

Total cos t price Total retail price Tk.100,000 = Tk.180,000 = 0.56 or 56%

Cost to retail ratio =

Ending inventory at cost = Tk.110,000 X 56% = Tk.61,600 P-20. ABC Company uses perpetual inventory costing for inventory item 407, which it purchases for resale. The company began its operations on January 1 and is in the process of preparing its first financial statements. Upon examining the inventory ledger and other accounting records, the following information was gathered pertaining to the first four months of operations:

Months January 2 February 2 March 2 April 2

Purchases Units Cost per unit 2,000 Tk.5.00 1,200 Tk.6.00 1,500 Tk.8.00 1,900 Tk.7.00

Months January 15 January 31 February 15 February 28

Sales Units Months 500 March 15 700 March 31 600 April 15 900 April 30

Units 600 800 700 700


On April 30, the following additional information was obtained: - Current replacement cost, Tk.6.50 per unit. - Net realizable value, Tk.8.00 per unit. - Net realizable value reduced by a normal profit margin, Tk.5.00 per unit. Management wants to decide which of the following three inventory costing methods should be selected to evaluate the cost of goods sold: (a) Average method, (b) FIFO method, and (c) LIFO method. Required: (i) Prepare a perpetual inventory ledger for the item, using each of the above methods. (ii) Prepare a comparative statement showing the effect of each method on gross profit. The sales price is Tk.10.00 per unit. (iii) Prepare the necessary adjusting entries under each of the three inventory costing methods, assuming that the company decides to show its inventory at April 30 by using the lower of cost or market. Solution: (i) (a) Average method: Date Purchases Jan.2 2,000@ 5.00=Tk.10,000 Jan.15 Jan.31 Feb.2 1,200@ 6.00=Tk.7,200 Feb.15 Feb.28 Mar.2 1,500@ 8.00=Tk.12,000 Mar.15 Mar.31 Apr.2 1,900@ 7.00=Tk.13,300 Apr.15 Apr.30 Total 6,600 units = Tk.42,500

Sales 500@ 5.00=Tk.2,500 700@ 5.00=Tk.3,500 600@ 5.60=Tk.3,360 900@ 5.60=Tk.5,040 600@ 7.40=Tk.4,440 800@ 7.40=Tk.5,920 700@ 7.10=Tk.4,970 700@ 7.10=Tk.4,970 5,500 units =Tk.34,700

Balance 2,000@ 5.00=Tk.10,000 1,500@ 5.00=Tk.7,500 800@ 5.00=Tk.4,000 2,000@ 5.60=Tk.11,200 1,400@ 5.60=Tk.7,840 500@ 5.60=Tk.2,800 2,000@ 7.40=Tk.14,800 1,400@ 7.40=Tk.10,360 600@ 7.40=Tk.4,440 2,500@ 7.10=Tk.17,740 1,800@ 7.10=Tk.12,770 1,100@ 7.10=Tk.7,800 1,100 units = Tk.7,800

(b) FIFO method: Date Jan.2 Jan.15 Jan.31

Purchases 2,000@ 5.00=Tk.10,000

Feb.2 Feb.15

1,200@ 6.00=Tk.7,200

Sales 500@ 5.00=Tk.2,500 700@ 5.00=Tk.3,500

600@ 5.00=Tk.3,000

Balance 2,000@ 5.00=Tk.10,000 1,500@ 5.00=Tk.7,500 800@ 5.00=Tk.4,000 800@ 5.00=Tk.4,000 1,200@ 6.00=Tk.7,200 200@ 5.00=Tk.1,000


1,200@ 6.00=Tk.7,200 200@ 5.00=Tk.1,000 700@ 6.00=Tk.4,200

Feb.28 Mar.2

1,500@ 8.00=Tk.12,000 500@ 6.00=Tk.3,000 100@ 8.00=Tk.800 800@ 8.00=Tk.6,400

Mar.15 Mar.31 Apr.2 Apr.15 Apr.30 Total

1,900@ 7.00=Tk.13,300

6,600 units = Tk.42,500

600@ 8.00=Tk.4,800 100@ 7.00=Tk.7,000 700@ 7.00=Tk.4,900 5,500 units =Tk.41,100

500@ 6.00=Tk.3,000 500@ 6.00=Tk.3,000 1,500@ 8.00=Tk.12,000 1,400@ 8.00=Tk.11,200 600@ 8.00=Tk.4,800 600@ 8.00=Tk.4,800 1,900@ 7.00=Tk.13,300 1,800@ 7.00=Tk.12,600 1,100@ 7.00=Tk.7,700 1,100 units = Tk.7,700

(c) LIFO method: Date Jan.2 Jan.15 Jan.31

Purchases 2,000@ 5.00=Tk.10,000

Feb.2

1,200@ 6.00=Tk.7,200

500@ 5.00=Tk.2,500 700@ 5.00=Tk.3,500

Feb.15

600@ 6.00=Tk.3,600 600@ 6.00=Tk.3,600 300@ 5.00=Tk.1,500

Feb.28 Mar.2

Sales

1,500@ 8.00=Tk.12,000

Mar.15

600@ 8.00=Tk.4,800

Mar.31

800@ 8.00=Tk.6,400

Apr.2

1,900@ 7.00=Tk.13,300

Apr.15

Apr.30 Total

700@ 7.00=Tk.4,900

6,600 units = Tk.42,500

700@ 7.00=Tk.4,900 5,500 units =Tk.35,700

(ii) ABC Company Comparative Statement

Balance 2,000@ 5.00=Tk.10,000 1,500@ 5.00=Tk.7,500 800@ 5.00=Tk.4,000 800@ 5.00=Tk.4,000 1,200@ 6.00=Tk.7,200 800@ 5.00=Tk.4,000 600@ 6.00=Tk.3,600 500@ 5.00=Tk.2,500 500@ 5.00=Tk.2,500 1,500@ 8.00=Tk.12,000 500@ 5.00=Tk.2,500 900@ 8.00=Tk.7,200 500@ 5.00=Tk.2,500 100@ 8.00=Tk.800 500@ 5.00=Tk.2,500 100@ 8.00=Tk.800 1,900@ 7.00=Tk.13,300 500@ 5.00=Tk.2,500 100@ 8.00=Tk.800 1,200@ 7.00=Tk.8,400 500@ 5.00=Tk.2,500 100@ 8.00=Tk.800 500@ 7.00=Tk.3,500 1,100 units = Tk.6,800


Particulars

Sales (5,500 units @ Tk.10.00) Less. Cost of goods sold: Opening inventory Add. Purchase Less. Closing inventory

Average Method Tk. 55,000

FIFO method Tk. 55,000

LIFO method Tk. 55,000

0 42,500 (7,800) 34,700 20,300

0 42,500 (7,700) 34,800 20,200

0 42,500 (6,800) 35,700 19,300

Average Method Tk. 7,806 7,150 8,800 5,500

FIFO method Tk. 7,700 7,150 8,800 5,500

LIFO method Tk. 6,800 7,150 8,800 5,500

7,150 7,150

7,150 7,150

7,150 6,800

Gross profit (iii) Particulars

Inventory at cost Replacement cost (1,100 units @ Tk.6.5) Net realizable value (1,100 units @ Tk.8) Net realizable value reduced by a normal profit margin (1,100 units @ Tk.5) Designated market value Inventory at April 30 Adjustment amount Tk.7,806 – Tk.7,150 Tk.7,700 – Tk.7,150 Tk.6,800 – Tk.6,800

656 550 0

Adjusting entries Dr.

Cr.

Average method: Cost of goods sold/ Factory overhead Inventory – allowances for inventory to decline in market

Tk.656 Tk.656

FIFO method: Cost of goods sold/ Factory overhead Inventory – allowances for inventory to decline in market

Tk.550 Tk.550


EXERCISES E-1. The closing inventory at cost of MMH Ltd. amounted to Tk.956,700. Shirts 350, which had cost Tk.380 each and normally sold for Tk.750 each are included in this amount of Tk.956,700. Owing to a defect in manufacture, they were all sold after the Balance Sheet date at 50% of their normal price. Selling expenses amounted to 5% of the proceeds. Required: What should be the closing inventory value as per IAS-2? E-2. BTI purchases motorcycles from various countries and exports them to Europe. BTI has incurred these expenses during – 2010: Taka (i) Cost of purchases (based on vendors‘ invoices) 2,500,000 (ii) Trade discounts on purchases 100,000 (iii) Import duties 50,000 (iv) Freight and insurance on purchases 70,000 (v) Other handling costs relating to imports 200,000 (vi) Salaries of accounting department 300,000 (vii) Brokerage commission payable to indenting agents for arranging imports 65,000 (viii) Sales commission payable to sales agents 100,000 (ix) After-sales warranty costs 400,000 Required: BTI is seeking your advice on which costs are permitted under IAS-2 to be included in cost of inventory. E-3. You are provided with the following information for CRIPSON Inc. for the month ended June 30, 2012, CRIPSON uses the periodic method for inventory. Date Description Quantity Unit cost or selling Price June 1 Beginning Inventory 25 Tk.30 4 Purchases 85 Tk.32 10 Sales 70 Tk.45 11 Sales Return 10 Tk.45 18 Purchases 35 Tk.34 18 Purchases Return 5 Tk.34 25 Sales 50 Tk.42.50 28 Purchase 20 Tk.36 Required: Calculate (a) Ending inventory, (b) Cost of goods sold, (c) Gross profit and (d) Gross profit rate under each of the following method: (i) LIFO (ii) FIFO (iii) Average Cost. E-4. Modern Company has the following Inventory and Sales for the month of March, 2009. Inventory: March 01, 2009 1,200 units @ Tk.4.00 Tk.4,800 Purchase: March 10 1,500 units @ Tk.5.00 Tk.7,500 March 20 1,400 units @ Tk.5.25 Tk.7,350 March 30 1,300 units @ Tk.5.00 Tk.6,500 Sales: March 15 1,500 units March 25 1,400 units


The physical inventory count on March 31 shows 2,500 units on hand. Required: Under a periodic inventory system, determine the cost of Inventory on hand at March 31 and the Cost of Goods Sold for March under the (a) First-in, First-out (FIFO) method, (b) last-in, First out (LIFO) method and (c) Average Cost Method. E-5. The following are data related to Atam Company‘s beginning inventory, purchases, and sales for the year 2009. Beginning inventory and purchase Sales Units Unit Cost (Tk.) Units Beginning inventory 12,500 @ 3.00 February 3 10,500 March 15 10,000 @ 3.12 May 4 9,000 May 10 17,500 @ 3.30 September 16 16,000 August 12 12,500 @ 3.48 October 9 14,500 November 20 7,500 @ 3.72 50,000 60,000 Required: Compute the ending inventory and cost of goods sold under each of the following methods assuming periodic inventory procedure: (i) Specific identification (assuming ending inventory is taken equally from the August 12 and November 20 purchases.) (ii) FIFO, LIFO, Weighted average. E-6. D & E Company has the following inventory, purchases and sales for the month of March, 2008: Inventory March 01 200 units @ Tk.4.00 Tk.800 Purchase March 10 500 units @ Tk.4.50 Tk.2,250 Purchase March 20 400 units @ Tk.4.75 Tk.1,900 Purchase March 30 300 units @ Tk.5.00 Tk.1,500 Sales March 15 500 units Sales March 25 400 units The physical Inventory count on March 31, 2008 shows 500 units on hand. Required: Under periodic inventory system, determine the cost of inventory on hand at March 31, 2008 and cost of goods sold for March under the (a) First in, First out (FIFO) method (b) last in First out (LIFO) method and (c) Weighted average cost method. E-7. National Star Company accounts for its inventory using the LIFO method under periodic inventory procedure. Purchases, Sales and inventory data for the year ended December 31, 2011, are: Merchandise inventory January 1 4,000 units @ $40.00 Purchases January 7 10,000 units @ 48.00 July 7 20,000 units @ 56.00 December 21 12,000 units @ 64.00 During 2011, 32,000 units were sold for $ 25,60,000, leaving an inventory on December 31, 2011, of 14,000 units.


Required: (a) Compute the gross margin earned on sales during 2011. (b) Compute the change in gross margin that would have resulted if the purchase of December 21 had been delayed until January 6, 2012. (c) Recompute the gross margin assuming that 18,000 units rather than 12,000 units were purchased on December 21, at the same cost per unit. (d) Solve parts (a), (b), and (c) using FIFO method. E-8. Craig Company uses a perpetual inventory system for its product. Its beginning inventory, purchases, and sales during the year 2007 follow: Date

Activity

Units Acquired at cost

Jan.-01

Beg. Inventory Sales Purchases Sales Purchases Purchases Sales Purchases Total

400 units @ Tk.14 = Tk.5,600

Jan.-15 Mar.-01 Apr.-01 May.-09 Sept.-22 Nov.-01 Nov.-28

Units sold at retail

Units inventory 400units

200 units @Tk.30

200units 400units 200units 500units 750units 450units 550units

200 units @ Tk.15 = Tk.3,000 200 units @Tk.30 300 units @ Tk.16 = Tk.4,800 250 units @ Tk.20 = Tk.5,000 300 units @Tk.35 100 units @ Tk.21 = Tk.2,100 1,250units Tk.20,500 700 units

Additional tracking data for applying specific identification: (1) January 15 sale – 200 units @ Tk.14, (2) April 1 sale – 200 units @ Tk.15, and (3) November 1 sale – 200 units @ Tk.14 and 100 units @ Tk.20 Required: Calculate Ending Inventory and Cost of Goods Sold under LIFO, FIFO, Weighted average assuming perpetual inventory system and specific identification method. E-9. The management of ROBINSON CORPORATION is revaluating the appropriateness of using its present inventory cost flow method, which is average cost. They request your help in determining the results of operations for 2011 if either the FIFO method or the LIFO method had been used. For 2011, the accounting records show the following data: Inventories Purchases and Sales -------------------------------------------------------------------------------Beginning (75,000 units) Tk.1,70,000 Total net Sales (11,25,000 units) Tk.43,25,000 Ending (1,00,000 units) Total cost of goods purchased 28,92,500 (11,50,000 units) Purchases were made quarterly as follows: Quarter Units Unit cost (Tk.) Total cost (Tk.) 1 3,00,000 2.30 6,90,000 2 2,50,000 2.50 6,25,000 3 2,50,000 2.60 6,50,000 4 3,50,000 2.65 9,27,500 11,50,000 28,92,500


Operating expenses were Tk.7,35,000 and the company‘s income tax is 30% . Required: (a) Prepare comparative condensed income statement for 2011 under FIFO and LIFO (Show computations of ending inventory). (b) Answer the following question for management: (i) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? Why? (ii) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Why? (iii) Which cost flow method (FIFO or LIFO) produces the more likely to approximate actual physical flow of goods? Why? (iv) How much additional cash will be available for management under LIFO than under FIFO? Why? (v) Will gross profit under the average cost method be higher or lower than FIFO and LIFO? (It is not necessary to quantify your answer). E-10. From the following information, determine the value of inventory: Food

Cost

Spinach Carrots Beans Peas Mixed vegetables

Tk.80,000 100,000 50,000 90,000 95,000

Replacement cost Tk.88,000 90,000 45,000 36,000 105,000

Net realizable value (ceiling) Tk.120,000 100,000 40,000 72,000 92,000

Net realizable value (floor) Tk.104,000 70,000 27,500 48,000 80,000

E-11. Pathan Furniture Ltd. is a retailer of Italian furniture and has five major products: Sofas, Dining Tables, Beds, Office Tables and Chairs. At June 30, 2012, quantity on hand, cost per unit and net realizable value (NRV) per unit of the product line are as follows: Products

Sofas

Dining Tables

Beds

Office Tables

Chairs

Descriptions Quantity on Hand Cost per unit NRV per unit

100 Tk.1,00,000 Tk.1,02,000

200 Tk.50,000 Tk.45,000

300 Tk.1,50,000 Tk.1,60,000

400 Tk.75,000 Tk.77,000

500 Tk.25,000 Tk.20,000

Required: Compute the value of the inventory of Pathan Furniture Ltd. at June 30, 2012, under IAS-2 using ―Lower of Cost and NRV‘ principle. E-12. Concord Ready Mix and Concerts Products Ltd. is a manufacture of Building precuts and has five major product lines: Engraved Tiles, Facing Block, Partition Block, Roof Tiles and Load Bearing Block. At December 31, 2014, quantity on hand, cost per unit and net realized value (NRV) per unit of the product lines are as follows:


Product line Engraved Tiles Facing Block Partition Block Roof Tiles Load Bearing Block

Quantity on hand 100 200 300 400 500

Cost per unit (Tk.) 1,000 500 1,500 750 250

NRV per unit (Tk.) 1,020 450 1,600 770 200

Required: Compute the value of the inventory of Concord Ready Mix and Concrete Products Ltd. at December 31, 2014, under IAS 2 using ―lower of cost and NRV‖ principle. E-13. Pretax Super Shop uses perpetual inventory costing for inventory item 450, which is a perishable inventory item to them. They purchase the inventory for ultimate sale with no value addition. You have been provided with the following information regarding purchase and sale of that inventory during the month of January: Units Cost per unit (Tk.) Sales Units Beginning inventory 2,000 10.00 Sales: Purchases: January 4 3,000 January 1 4,000 12.00 January 17 4,000 January 15 3,000 13.00 January 23 2,000 January 24 5,000 15.00 January 26 1,000 January 30 1,000 14.00 January 31 2,000 Ending inventory ? Required: (a) Calculate the value of ending inventory and cost of goods sold under perpetual FIFO as the company follows this for reporting the values of this type of inventory. (b) Determine the proper inventory price per unit under LCM (Lower of Cost or Market) rules considering the following information on January 31: (i) Current replacement cost, Tk.17. (ii) Estimated sales price, Tk.25. (iii) Costs of completion and disposal, Tk.4. (iv) Normal profit, Tk.3. (c) If the normal profit in requirement (b) were set at Tk.5 in lieu of Tk.3, what would be your decision in requirement (b)? E-14. At the end of year 2011, the following information for Muttakeen Ltd. Department Store was obtained: Particulars Cost Retail (Tk.‘000) (Tk.‘000) Beginning inventory 20,460 31,000 Purchases 207,735 337,271 Purchases returns 7,320 12,021 Sales -316,148 Sales returns -3,198 Required: Prepare a schedule computing Muttakeen Ltd.‘s ending inventory at cost using the Retail Method.


E-15. Presented below is information related to Prince Bazar. Assuming that Prince Bazar uses the conventional retail inventory method, compute the cost of its ending inventory at 01.06.2013. Cost Retail Retail Inventory, 01.07.12 Tk.30,000 Tk.48,000 Gross sales Tk.412,000 Purchases 339,500 520,800 Sales returns 28,300 Purchase returns 25,800 36,480 Markups 32,500 Purchase discounts 7,590 - Markup cancellations 8,320 Freight-in 8,920 - Employee discounts granted 3,400 Markdowns 12,000 Loss from breakage (normal) 2,400 E-16. The sales and cost of goods sold for Liver Company for the past five years were as follows: Year Sales (net) Cost of goods sold 2005 Tk.89,84,960 Tk.52,40,600 2006 Tk.97,94,240 Tk.57,46,400 2007 Tk.1,13,46,560 Tk.67,16,600 2008 Tk.1,09,26,080 Tk.62,72,000 2009 Tk.1,17,47,840 Tk.69,20,000 The following information is for the seven months ended July 31, 2010: Sales Tk.67,48,000 Purchases Tk.34,88,800 Purchase returns Tk.18,200 Sales returns Tk.73,760 Merchandise inventory Jan. 1, 2011 Tk.8,48,000 To secure a loan, Liver Company has been asked to present current financial statements. However, the company does not wish to take a complete physical inventory as of July 31, 2010. Required: (a) Indicate how financial statements can be prepared without taking a complete physical inventory. (b) From the data given compute the estimated inventory as of July 31, 2011. E-17. A portion of the Mower Company‘s Balance Sheet appears bellow: December 31, 2008 December 31, 2007 Assets: Cash 3,53,300 50,000 Notes receivable 25,000 Inventory To be determined 1,99,875 Liability: Accounts payable To be determined 50,000 Mower Company pays for all operating expenses with cash and purchases all Inventory on credit. During 2008, cash totaling of Tk. 4,71,000 was paid on accounts payable. Operating expenses for 2008 totaled Tk. 2,00,000. All sales are cash sales. The inventory was restocked by purchasing 1,500 units per month and valued by using periodic FIFO. The unit cost of inventory was 32.60 during January‘ 2008 and increased Tk. 0.10 per month during the year. All sales are made of Tk. 50 per unit. The ending inventory for 2007 was valued at Tk. 32.50 per unit.


Required: (i) Compute the number of units sold during 2008. (ii) Compute the December 31, 2008 accounts payable balance. (iii) Compute the beginning inventory quantity. (iv) Compute the ending inventory quantity and value. (v) Prepare an income statement for 2008 (including a detailed COGS section). Ignore income Tax. E-18. Mr. Talha Ahmed CMA, is performing a review of Sweater Company‘s inventory account. The company did not have a good year and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was Tk.37,00,000. However, the following information was not considered when determining that amount: (a) Included in the company‘s count were goods with a cost of Tk.12,50,000 that the company is holding on consignment. The goods belong to Superior Corporation. (b) The physical count did not include goods purchased by Sweater Company with a cost of Tk.2,00,000 that were shipped FOB destination on December 28 and did not arrive at Sweater Company‘s warehouse until January 3. (c) Included in the inventory account was Tk.85,000 of office supplies that were stored in the warehouse and were to be used by the company‘s supervisors and managers during the coming year. (d) The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of Tk.2,00,000 and a cost of Tk.1,50,000. The goods were not included in the count because they were sitting on the dock. (e) On December 29, Sweater Company shipped goods with a selling price of Tk.4,00,000 and a cost of Tk.3,00,000 to District Sales Corporation FOB shipping point. The goods arrived on January 3. District Sales had only ordered goods with a selling price of Tk.50,000 and a cost of Tk.40,000. However, a sales manager at Sweater Company had authorized the shipment and said that if District wanted to ship the goods back next week, it could. (f) Included in the count was Tk.2,00,000 of goods that were parts of a machine that the company no longer made. Given the high-tech nature of Sweater Company‘s products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, ―since that is what we paid for them, after all‖. Required: Prepare a schedule to determine that correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item. E-19. The Peoples Manufacturing began its operations five years ago. On august 2014 a fire broke out in the warehouse destroying all inventory and many accounting records relating to the inventory. The information available is presented below. Al sales and all purchases are on account. Period Inventory Accounts Accounts Collection on Payment of Receivable Payable Accounts Suppliers Receivable January 1, Tk.6,42,950 Tk.6,52,950 Tk.4,40,700 (Jan 1 – Aug (Jan 1 – Aug 2014 13, 2014) 13, 2014) August Tk.5,36,600 Tk.6,14,250 Tk.34,86,250 Tk.24,37,500 13, 2014


Goods out on consignment at august 13 at cost Tk.2,25,000 Preceding years sales given below: Year Sales 2011 Tk.31,30,000 2012 33,75,000 2013 34,00,000

Gross Profit on Sales Tk.10,01,600 8,77,500 10,88,000

Required: Determine the inventory loss caused by fire. E-20. A fire broke out in the warehouse of B Manufacturing Company on August 15, 2011 has destroyed all inventory and many accounting records relating to inventory. The information gathered from different sources to lodge a claim are presented below. All sales and purchases are on accounts: Jan. 01, 2008 Aug. 15, 2011 Inventory 1,28,600 Accounts receivable 1,30,600 1,10,300 Accounts payable 88,300 1,31,350 Collection on accounts receivable Jan. to Aug. 15 6,98,500 Payments to suppliers Jan. 01 to Aug. 15 4,88,300 Goods out on consignment at cost 43,500 Summary of previous years‘ sales: Sales Gross profit on sales

2008 Tk.6,50,000 Tk.2,10,000

2009 Tk.6,75,000 Tk.1,85,500

2010 Tk.6,90,000 Tk.2,10,000

Required: Calculate the inventory loss due to fire to lodge a claim with Insurance Company. E-21. On April 15, 2010, fire damaged the office and warehouse of Thomson Corporation. The only accounting record saved was the general ledger, from which the trial balance prepared: Thomson Company Trial Balance March 31, 2010 Accounts Title Debits Credits Cash Tk.20,000 Accounts receivable 40,000 Inventory, December 31, 2009 75,000 Land 35,000 Building and equipment 1,10,000 Accumulated depreciation Tk.41,300 Other assets 36,00 Accounts payable 23,700 Other expense accruals 10,200 Capital stock 1,00,000 Retained earnings 52,000


Sales Purchases Other expenses Totals

1,35,000 52,000 26,600 Tk.3,62,200

_______ Tk.3,62,200

Additional information: (i) The fiscal year of the corporation ends on December 31. (ii) An examination of the April bank statement and canceled checks revealed that checks written during the period April 1-15 totaled Tk.13,000: Tk.5,700 paid to accounts payable as of March 31, Tk.3,400 for April merchandise shipments, and Tk.3,900 paid for other expenses. Deposits during the same period amounted to Tk.12,950, which consisted of receipts on account from customers with the exception of a Tk.950 refund from a vendor for merchandise return in April. (iii) Correspondence with suppliers revealed unrecorded obligations at April 15 of Tk.10,600 for April merchandise shipments, including Tk.2,300 for shipments in transit on that date. (iv) Customers acknowledged indebtedness of Tk.36,000 at April 15, 2010. It was also estimated that customers owed another Tk.8,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, Tk.600 will probably be uncollectible. (v) The company insuring the inventory agreed that the company‘s fire-loss claim should be based on the assumption that the overall gross profit ratio for the past 2 years was in effect during the current year. The company‘s audited financial statements disclosed this information: Year Ended December 31 2009 2008 Net sales Tk.530,000 Tk.390,000 Net purchases 280,000 235,000 Beginning inventory 50,000 75,200 Ending inventory 75,000 50,000 (vi) Inventory with a cost of Tk.7,000 was salvaged and sold for Tk.3,500. The balance of the inventory was a total loss. Required: Determine the amount of inventory fire loss. The supporting schedule of the computation of the gross profit should be in good form. E-22. Latentile Ltd is a newly-formed company, which uses a chemical process to manufacture a revolutionary new roof covering, which it sells at a markup of 25% on cost. Its inventories consist of raw material, work in progress and finished goods, and at the end of its first year of trading it is having problems valuing inventories. You ascertain the following information: (a) Raw material: (i) The process needs at least 100,000 kgs of clay to continue working, but a physical inventory count reveals that the machinery contains 108,000 kgs. (ii) The original cost of the initial 100,000 kgs to set up the process was 30p per kg and you find an invoice to show that the last consignment of 20,000 kgs cost 31p per kg. all other consignments in the year (a total of 200,000 kgs) cost 32p per kg.


(b) Work in progress: (i) The work in progress is currently all 60% complete and you discover that there are 50,000 units currently going through the process. (ii) The total number of complete units for the period was, as anticipated, 8,00,000. (iii) the costs for the process for the period were as follows. Tk.‘000 Raw materials 200 Direct labour 242 Factory overheads 191 Administrative expenses attributable to production 114 Distribution costs 90 (c) Finished goods: (i) There were 70,000 units in inventories. (ii) Of (i) above, it was intended to sell 20,000 units at 75p per unit, a discount of one third on normal selling price, in a future promotional campaign (a further 10p per unit distribution costs is to be incurred). Required: (a) Explain how BAS 2 Inventories applies the accrual and the going concern bases of accounting. (b) For each of the above categories of inventory, suggest a method of valuation and show the value as it would appear in the balance sheet. (c) If the information regarding costs for the period were not available, suggest an alternative method of valuing finished goods.


CHAPTER - 9

ACCOUNTING FOR ASSETS – FIXED ASSETS

9.1. DEFINITION OF PROPERTY, PLANT AND EQUIPMENT According to IAS 16, a bearer plant is a living plant that: (a) is used in the production or supply of agricultural produce; (b) is expected to bear produce for more than one period; and (c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. 9.2. COST OF PROPERTY, PLANT AND EQUIPMENT The cost of property, plant and equipment consists of: (a) its purchase price, including import duties and purchase taxes, after deducting trade discounts and rebates. (b) any costs directly attributable to bringing the asset to the business location. (c) the cost necessary for it to be capable of operating in the manner intended by management. (c) the initial estimate of the costs of removing the item and restoring the site on which it is located. The cost of property, plant and equipment are not included the followings: (a) costs of opening a new facility; (b) costs of introducing a new product or service ; (c) costs of advertising and promotional activities; (d) costs of conducting business in a new location or with a new class of customer; (e) costs of staff training; and (f) administration and other general overhead costs. 9.3. MEASUREMENT OF COST The cost of property, plant and equipment is the cash price equivalent at the recognition date. If one or more property, plant and equipment is acquired in exchange for a nonmonetary asset or assets, or a combination of monetary and non-monetary assets, the cost of such property, plant and equipment is measured at fair value unless the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. The carrying amount of property, plant and equipment may be reduced by government grants.


9.4. RECOGNITION A property, plant and equipment shall be measured at its cost. The cost of property, plant and equipment shall be recognised as an asset if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. Spare parts, stand-by equipment and servicing equipment are recognised in accordance with property, plant and equipment when they meet the definition of property, plant and equipment. Otherwise, these are classified as inventory. 9.5. ACCOUNTING POLICIES An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. Cost Model: A property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Revaluation Model: A property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount. Revaluations shall be made with appropriate measure to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. When a property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the revalued amount. If a property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued. If an asset‘s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. If an asset‘s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. 9.6. MEANING OF DEPRECIATION Depreciation is a measurement of loss of value of a depreciable asset arising from use or obsolescence of technology on market changes. It is to be charged in each accounting period during the expected useful life of asset.


Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The depreciation charge for each period shall be recognised in profit or loss unless it is included in the carrying amount of another asset. 9.7. METHODS OF DEPRECIATION A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the units of production method. The straight-line method: It is a method of depreciation where depreciation is charged as a constant basis each year with the assumption that equal amounts of economic benefit are consumed in each year of the asset‘s life. The diminishing balance method: It is a method of depreciation that applies a decreasing charge over the useful life of an asset. Instead of spreading the cost of the asset evenly over its life, this system expenses the asset at a constant rate, which results in declining depreciation charges each successive period. The unit of production method: This method provides for depreciation by means of a fixed rate per unit of production. Under this method, one must first determine the cost per one production unit and then multiply that cost per unit with the total number of units the company produced within an accounting period to determine its depreciation expense. The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. That method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits. 9.8. USES OF TWO METHODS OF DEPRECIATION Many companies use two or more methods of depreciation. It is acceptable and common for companies to depreciate its plant assets by using the straight line method on its financial statements, while using an accelerated method on its income tax return. A company could also be depreciating its equipment over ten years for its financial statements, while using seven years for its income tax return. Even the depreciation for financial statements could consist of some assets being depreciated using the units of production or units of activity method, while other assets are depreciated using the straight line method. 9.9. ACCELERATED DEPRECIATION Accelerated depreciation refers to any one of several methods by which a company, for 'financial accounting' or tax purposes, depreciates a fixed asset in such a way that the amount of depreciation taken each year is higher during the earlier years of an asset's life.


Using accelerated depreciation on the income tax return will mean greater depreciation expense and smaller taxable income in the earlier years of an asset's life. However, it will be followed by smaller depreciation expense and greater taxable income in the later years of the asset's life. 9.10. DEPRECIATION ON INCOME STATEMENT AND BALANCE SHEET DIFFERS Depreciation on income statement and balance sheet differs because depreciation on the income statement is the amount of depreciation expense that is appropriate for the period of time indicated in the heading of the income statement. On the other hand, depreciation reported on the balance sheet is the accumulated or the cumulative total amount of depreciation that has been reported as expense on the income statement from the time the assets were acquired until the date of the balance sheet. Example: A company has only one depreciable asset that was acquired three years ago at a cost of Tk.10,000. The asset is expected to have a useful life of 10 years and no salvage value. The company uses straight-line depreciation on its monthly financial statements. In the asset's one year of service, the yearly income statement will report depreciation expense of Tk.1,000. On the balance sheet dated as of the last day of the second year, accumulated depreciation will be reported as Tk.2,000. In the third year, the income statement will report Tk.1,000 of depreciation expense. At the end of the third year, the balance sheet will report accumulated depreciation of Tk.3,000. 9.11. DERECOGNITION The carrying amount of a property, plant and equipment shall be derecognised: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of a property, plant and equipment shall be included in profit or loss when the item is derecognised (unless IFRS 16 Leases requires otherwise on a sale and leaseback). The gain or loss arising from the derecognition of property, plant and equipment shall be determined as the difference between the net disposal proceeds (if any), and the carrying amount of the item. The gain shall not be classified as revenue. 9.12. EXPLANATION OF DEPLETION Depletion is the actual physical reduction of a natural resource. For example, an oil field is depleted as oil is extracted from it over time. Depletion is commonly associated with all types of mining, as well as petroleum drilling and timberland usage. It is used to allocate the cost of extracting natural resources such as timber, minerals and oil from the earth. Unlike depreciation and amortization, which mainly describe the deduction of expenses due to the aging of equipment and property, depletion is the actual physical depletion of natural resources by companies.


9.13. METHODS OF DEPLETION Percentage depletion method: One method of calculation depletion expense is the percentage depletion method. The percentage depletion method assigns a fixed percentage to gross revenue to allocate expenses. For example, if Tk.10 million of oil is extracted and the fixed percentage is 15%, Tk.1.5 million of capitalized costs to extract the natural resource are depleted. The percentage depletion method required heavy use of estimates and is, therefore, not a heavily relied upon or accepted method of depletion. Cost depletion method: The second method of calculation depletion is the cost depletion method. Cost depletion is calculated by taking the property's basis, total recoverable units and number of units sold into account. The property‘s basis is distributed amongst the total number of recoverable units. As natural resources are extracted, they are counted and taken out from the property‘s basis. For example, the capitalized costs of Tk.1 million yields 500,000 barrels of oil. In the first year, if 100,000 barrels of oil are extracted, the depletion expense for the period is Tk.200,000 {100,000 barrels X (Tk.1,000,000 ÷ 500,000 barrels)}. 9.14. REASONS FOR DEPLETION OF NATURAL RESOURCES There are four basic reasons for the depletion of natural resources: (a) Rapid population increase: There has been a tremendous increase in world‘s population. An increase in population will decrease all types of natural resources and result in environmental pollution. Ultimately, there will be short supply, as well as deterioration in quality of natural resources. This is because increase in population will increase the demand of natural resources and environment. The world cannot meet the continuously increasing demand for natural resources. (b) Pollution: We are deteriorating our environment due to increasing population and industrial revolution. We are polluting atmosphere, lakes, streams, rivers by sewage, industrial wastes, heat, radioactive materials, detergents, fertilizers and pesticides. Besides these, we are releasing a number of toxic materials into our surroundings. The uncontrolled and indiscriminate use of pesticides has disturbed the entire food chains by which animals including man are affected. The unplanned and uncontrolled industrial growth may adversely affect or destroy the health of the society. (c) Consumption of materials: Due to tremendous increase of population, most of the natural resources are being rapidly consumed. This high rate of consumption has disturbed our ecosystems. But, on the other hand, many of the natural resources are essential basic human needs. Many industries require raw materials which are essential for the advancement of the country. However, their rapid consumption will affect adversely the quality of our environment either by unwise use of natural resources or by increasing pollution.


(d) Deterioration of land: Due to excessive consumption of minerals of the soil by cropping or soil erosion or other natural events, fertility of soil is lost and the land deteriorates gradually. Sometimes drought also results in deterioration of land and many nutrients of the top soil are destroyed and soil fertility is lost. As a result of cropping, the cycling of soil mineral nutrients is greatly reduced. 9.15. CONCEPT OF AMORTIZATION Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. In business, it refers to making regular payments over a period of time. It may refers to a stream of payments that accomplish either of the reduction of book value of intangible assets or pay-off loans or other debt. It also refers to the repayment of loan principal over time. 9.16. DIFFERENCES AMORTIZATION Depreciation (a) Depreciation is decrease in value of noncurrent assets due to use or usage. (b) Depreciation refers to prorating tangible assets cost over that assets useful life. (c) Depreciation is used to expense assets. (d) Example includes buildings, vehicles, equipment, etc.

AMONG

DEPRECIATION,

DEPLETION

Depletion Amortization (a) Depletion is decrease in (a) Amortization value of natural resources. decrease in values intangible assets,

AND

is of

(b) Depletion refers to the (b)Amortization usually allocation of the cost of refers to spreading natural resources over time. an intangible asset's cost over that asset's useful life (c) Depletion is for natural (c) Amortization is used to resources. expense intangible assets. (d) Example includes mines, (d) Example includes oil, coal, etc. goodwill, copyright, patent, computer software, etc.

9.17. DISCLOSURE For each class of property, plant and equipment, the financial statements shall disclose: (a) the measurement bases used for determining the gross carrying amount; (b) the depreciation methods used; (c) the useful lives or the depreciation rates used; (d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and (e) a reconciliation of the carrying amount at the beginning and end of the period showing: (i) additions; (ii) assets classified as held for sale or included in a disposal group; (iii) acquisitions through business combinations; (iv) increases or decreases resulting from revaluations and from impairment losses recognised in profit or loss; (v) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, and (ix) other changes.


SELF PRACTICE QUESTIONS 1. Advise how IFRS require gains or losses on re-measurement to be dealt with in the financial statements in the case of each of the following assets. The calculation of such gains or losses is not necessary, merely their accounting treatment. Your answer should indicate clearly where in the performance statement each component of gain or loss should appear. (i) property, plant & equipment held under the revaluation model of IAS 16. (ii) Investment property held under the fair value model of IAS 40. (iii) Financial assets held at fair value under IFRS 9. 2. What are the disclosure requirements with regard to property, plant and equipment in the financial statement as per IAS 16? 3. Define ‗Fair Value‘ and as per IFRS-13, briefly explain how it is calculated. 4. What are the similarities and differences among the terms depreciation, depletion and amortization? 5. What are the general rules for recording gains and losses on retirement of plant assets? 6. Distinguish between financial depreciation and physical depreciation of assets. 7. ―Depreciation is a process of cost allocation, not valuation‖- Explain the statement. 8. Why depreciation is charged on Fixed Assets? Discuss the various methods of charging depreciation.


SELF PRACTICE QUESTIONS ANSWER 1. Under the revaluation model of IAS 16 revaluation gains and losses are treated differently depending on whether they are originating or reversing. An originating gain on revaluation of PP (meaning one which is occurring for the first time, and not reversing a previously recognized loss) is recognized through ―Other Comprehensive Income (OCI)‖ in the Statement of Profit or Loss and Other Comprehensive Income (SPLOCI). This is then taken to a separate component of equity, usually called ―Revaluation Surplus‖ reserve. An originating loss on revaluation is taken to profit or loss as an expense. A revaluation gain that is reversing a previously recognized loss is taken to profit or loss as a gain until the effect of the previously recognized loss is completely reversed. This takes into account any difference in depreciation charges arising as a result of the previous loss lowering the depreciable amount. Any gain over and above the amount recognized in profit or loss is treated as an originating gain and taken to OCI. A revaluation loss that is reversing a previously recognized gain is taken to OCI until the effect of the revaluation gain is reversed. This means in effect that OCI is charged with the expense until the accumulated revaluation surplus remaining in equity has been eliminated. Any further loss is treated as an originating loss and taken to profit or loss. It should be noted that gains and losses on different assets may not be offset against each other. Any reversal must be relating to revaluations of the same asset. 2. The financial statements shall disclose, for each class of property, plant and equipment: (a) the measurement bases used for determining the gross carrying amount; (b) the depreciation methods used; (c) the useful lives or the depreciation rates used; (d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and (e) a reconciliation of the carrying amount at the beginning and end of the period. 3. Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Calculation of fair value: Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates. The actual futures price will not necessarily trade at the theoretical price, as shortterm supply and demand will cause price to fluctuate around fair value. Price


discrepancies above or below fair value should cause arbitrageurs to return the market closer to its fair value. 4. Similarities among the terms depreciation, depletion and amortization: Depreciation, depletion and amortization are all periodic allocation of cost of fixed assets, natural resources and intangible assets respectively and all are charged to the revenue account. Differences among the terms depreciation, depletion and amortization: The differences among these three items is that depreciation is related to fixed assets, such as, building, furniture, equipment, etc. and depletion is related to natural resources, such as natural gas, mine, oil, etc. and amortization is related to intangible assets, such as, goodwill, patent, trademark, etc. 5. Gains and losses on retirement of plant assets should be shown in the income statement along with other items that arise from business activities. 6. All plant or fixed assets, except land are depreciated. Physical depreciation occurs from the use of a plant asset. Financial depreciation occurs due to obsolescence factors such as technological advances and less demand for a product. The purpose of recording depreciation is to show the decline of usefulness of an asset, not a decline in its market value. Depreciation reduces the value of plant asset accounts, it does not reduce the cash account. 7. Depreciation is a process of cost allocation over the useful life of an asset. It is not a measure of value. It is used for allocation of cost among the period of production. Depreciation is charges each year to determine the actual production cost. If depreciation expense is not determined then actual production cost is distorted. 8. From the definition we know that depreciation is the allocation of cost of fixed assets over the periods benefited by the use of the fixed assets. The charge of depreciation is the recognition of the declining service value of those assets. That why, depreciation is charged on fixed assets. The various methods of charging depreciation are as follows: 1. Straight line method: It is a method of depreciation where depreciation is charged as a constant basis each year with the assumption that equal amounts of economic benefit are consumed in each year of the asset‘s life.


2. Diminishing (or, declining) balancing method: It is a method of depreciation that applies a decreasing charge over the useful life of an asset. 3. Unit of production method: It is a method of depreciation where depreciation is charged based on the expected use of the asset or units produced.


PROBLEMS AND SOLUTIONS P-1. A plant costing Tk.12,00,000 was purchased on April 1, 2017. The salvage value was estimated to be Tk.200,000. The expected production was 10,000 units. The plant was used to produce 4,000 units till the year ended December 31, 2017. Calculate the depreciation on the plant for the year ended December 31, 2017. Solution: Depreciation on the plant for the year ended December 31, 2017 Cost  Salvage value = X No. of units produced Life in no. of units Tk.12,00,000  Tk.200,000 = X 4,000 units 10,000 units = Tk.400,000 P-2. An asset has a useful life of 4 years. Cost of the asset is Tk.4,000. Residual value is Tk.400. Calculate depreciation expense for 4 years by using following methods: (a) Straight line method; (b) Reducing balance method; (c) Double declining balance method; (d) Sum-of-the-years‘ digit method. Solution: (a) Straight line method:

Cost  Re sidual value Useful life Tk.4,000  Tk.400 = 4 years = Tk.900

Depreciation expense each year =

(b) Reducing balance method: Here, Straight line depreciation rate = 25% Year-1: Depreciation expense = (Tk.4,000 – Tk.400) X 25% = Tk.3,600 X 25% = Tk.900 Year-2: Depreciation expense = {(Tk.4,000 – Tk.900) – Tk.400} X 25% = (Tk.3,100 – Tk.400) X 25% = Tk.2,700 X 25% = Tk.675


Year-3: Depreciation expense = {(Tk.3,100 – Tk.675) – Tk.400} X 25% = (Tk.2,425 – Tk.400) X 25% = Tk.2,025 X 25% = Tk.506 Year-4: Depreciation expense = (Tk.2,425 – Tk.506) – Tk.400 = Tk.1,919 – Tk.400 = Tk.1,519 (c) Double declining balance method: Here, Straight line depreciation rate = 25% So, double declining balance rate = 25% X 2 = 50% Year-1: Depreciation expense = Tk.4,000 X 50% = Tk.2,000 Year-2: Depreciation expense = (Tk.4,000 – Tk.2,000) X 50% = Tk.2,000 X 50% = Tk.1,000 Year-3: Depreciation expense = (Tk.2,000 – Tk.1,000) X 50% = Tk.1,000 X 50% = Tk.500 Year-4: Depreciation expense = (Tk.1,000 – Tk.500) – Tk.400 = Tk.500 – Tk.400 = Tk.100 (d) Sum-of-the-years’ digit method: Here, Sum of the years‘ digit = 4 + 3 + 2 + 1 = 10 Year-1: Tk.4,000  Tk.400 Depreciation expense = X4 10 = Tk.1,440 Year-2: Tk.4,000  Tk.400 Depreciation expense = X3 10 = Tk.1,080 Year-3: Tk.4,000  Tk.400 Depreciation expense = X2 10 = Tk.720


Year-4: Tk.4,000  Tk.400 X1 10 = Tk.360

Depreciation expense =

P-3. A fixed asset is purchased on January 1, 2015. Information relating to the asset is as follows: Cost of acquisition Residual value estimated at the time of acquisition Residual value revised estimate on January 1, 2016 Useful life estimated at the time of acquisition Useful life revised estimate on January 1, 2017

Tk.110,000 Tk.10,000 Nil 10 years 8 years

Required: Calculate depreciation expense for the years ended on December 31, 2015, 2016, 2017 and 2018 by using straight line method. Solution: Year 2015: Cost  Re sidual value Useful life Tk.110,000  Tk.10,000 = 10 years = Tk.10,000

Depreciation expense =

Year 2016:

(Tk.110,000  Tk.10,000)  Tk.0 9 years Tk.100,000 = 9 years = Tk.11,111

Depreciation expense =

Year 2017:

(Tk.100,000  Tk.11,111)  Tk.0 6 years Tk.88,889 = 6 years = Tk.14,815

Depreciation expense =

Year 2018: Depreciation expense for the year 2018 is equal to the depreciation expense charged in the year 2017 because there has been no change in estimates since then.


P-4. On April 1, 2017 the machinery account in the books of a firm stood at Tk.85,000. A part of the machinery (whose book value on April 1, 2017 was Tk.12,000) was disposed of at Tk.5,800 on September 30, 2017 in part exchange for a new machine costing Tk.10,400. A net invoice of Tk.4,600 was passed through the purchase day book. Tk.600 paid to workmen for installation of the new machine was debited to wage account. The firm charged depreciation on machinery @ 5% p.a. on diminishing balance method. Required: Give the adjusting entries that are to be passed in respect of the above before preparing final accounts for the year ended March 31, 2018. Also show machinery account and asset disposal account. Solution: Adjusting entries Date Sep. 30, 17

Sep. 30, 17

Sep. 30, 17

Sep. 30, 17

Mar. 31, 18

Particulars Depreciation expense – Machinery Accumulated depreciation - Machinery (To record depreciation on sold machinery) New machinery Accumulated depreciation - Machinery Loss on sale of machinery Old machinery (To record disposal of machinery) New machinery Purchase (To record purchase of new machinery which was wrongly charged to wages account) Machinery Wages (To record installation cost of machinery which was wrongly charged to wages account) Depreciation expense – Machinery Accumulated depreciation - Machinery (To record depreciation)

Dr. (Tk.) 300

Cr. (Tk.) 300

5,800 300 5,900 12,000 4,600 4,600

600 600

3,650 3,650

Machinery Account Date Apr. 1, 17

Particulars Balance b/d

Taka 85,000

Date Sep. 30, 17

Taka 11,700

Sep. 30, 17

Particulars Asset disposal (5,800 + 5,900) Accu. depreciation

Sep. 30, 17 Sep. 30, 17 Sep. 30, 17

New machinery New machinery New machinery

5,800 4,600 600 96,000

Mar. 31, 18

Balance c/d

84,000 96,000

300


Asset Disposal Account Date Sep. 30, 17

Particulars Machinery A/c

Taka 11,700 _____ 11,700

Date Sep. 30, 17 Mar. 31, 18

Particulars New machinery Loss on disposal

Taka 5,800 5,900 11,700

P-5. On December 31, 2015, Faital Company acquired a machine from Plato Corporation by issuing a Tk.600,000 zero-interest-bearing note, payable in full on December 31, 2019. Faital Company‘s credit rating permits it to borrow funds from its several lines of credit at 10%. The machine is expected to have a 5-year life and a Tk.70,000 salvage value. Instructions: (a) Prepare journal entry for the purchase on December 31, 2015. (b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective-interest method) on December 31, 2016. (c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2017. Solution: (a) Journal entry: Dec.31, 15

Computer - Dr. - Tk.409,806.00 Notes payable - Cr. Tk.409,806.00 (Computer capitalized at the present value of the note) Tk.600,000 X 0.68301

(b) Adjusting entries: Dec.31, 16

Dec.31, 16

Depreciation expense - Dr. - Tk.67,961.20 Accumulated depreciation - Machine - Cr. Tk.67,961.20 Tk.409,806  Tk.70,000 5 Interest expense - Dr. - Tk.40,980.60 Notes payable - Cr. Tk.40,980.60 Schedule of note discount amortization

Date December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019

Notes payable Tk.40,980.60 45,078.66 49,586.53 54,548.21

Carrying amount of note Tk.409,806 450,786.60 495,865.26 545,451.79 600,000.00


(c) Adjusting entries: Dec.31, 17

Depreciation expense - Dr. - Tk.67,961.20 Accumulated depreciation - Machine - Cr. Tk.67,961.20

Dec.31, 17

Interest expense Notes payable

- Dr. - Tk.45,078.66 - Cr. Tk.45,078.66

P-6. Prepare the machinery component of fixed asset schedule of Nixon Company for financial year ended 31 December 2017 based on the following information: (a) Cost as at 1 January 2017: Tk.85,40,000 (b) Accumulated depreciation as at 1 January 2017: Tk.24,30,000 (c) No additions to machinery made during the period. (d) Machinery costing Tk.3,50,000 with accumulated depreciation of Tk.2,00,000 disposed of on 30 June 2017. (e) The company‘s policy is to charge proportionate depreciation expense in the year of disposal. (f) The machinery is depreciated on straight line method over 5 years. Solution: Cost: Balance at 1 January 2017 Add. Addition Less. Disposal Balance at 31 December 2017

Tk.85,40,000 0 (Tk.350,000) Tk.81,90,000

Accumulated depreciation: Balance at 1 January 2017 Add. Depreciation expense for the period (w-1) Less. Disposal adjustment (w-2) Balance as at 31 December 2017

Tk.24,30,000 Tk.16,73,000 (Tk.235,000) Tk.38,68,000

Carrying amount = Tk.81,90,000 – Tk.38,68,000 = Tk.43,22,000 Workings: 1. Depreciation expense for the period (Tk.85,40,000  Tk.3,50,000) Tk.3,50,000 6 = +( X ) 5 12 5 = Tk.16,38,000 + Tk.35,000 = Tk.16,73,000

Tk.3,50,000 6 X ) 5 12 = Tk.200,000 + Tk.35,000 = Tk.235,000

2. Disposal adjustment = Tk.200,000 + (


P-7. At the beginning of 2017, Farhan Company acquired a mine for Tk.1,000,000. Of this amount Tk.100,000 was ascribed to the land value and remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 4,000,000 units of the ore appear to be in the mine. Farhan incurred Tk.150,000 development costs associated with the mine prior to any extraction of minerals and estimates that it will require Tk.50,000 to prepare the land for an alternative use when all of the mineral has been removed. During 2017, 3,000,000 units of ore were extracted and 2,500,000 of these were sold. You are required to compute the followings: (a) The total amount of depletion of 2017. (b) The amount that is charged as an expense for 2017 for the cost of the minerals sold during 2017. Solution: (a) Depletion cost per unit

Tk.1,000,000  Tk.150,000  Tk.50,000 Tk.4,000,000 Tk.1,200,000 = Tk.4,000,000 = Tk.0.30 =

Total amount of depletion of 2016 = 3,000,000 units X Tk.0.30 = Tk.900,000 (b) The amount that is charged to the cost of the minerals sold during 2016 = 2,500,000 units X Tk.0.30 = Tk.750,000 P-8. At December 31, 2016 Alex Corporation reported the following as plant assets: Equipment Less. Accumulated depreciation Total plant assets

Tk.21,00,000 5,00,000 Tk.16,00,000

During 2017, the following cash transactions occurred: April 1 – Purchased of equipment for Tk.4,00,000. July 1 – Sold equipment that cost Tk.6,00,000 when purchased on January 1, 2016. The equipment was sold for Tk.2,50,000. Sep. 1 – Purchased equipment for Tk.36,00,000. Dec. 31 – Retired equipment that cost Tk.300,000 when purchased on December 31, 2011. No salvage value was received. Required: Prepare necessary journal and adjusting entries for the above transactions. Alex uses straight-line method of depreciation for equipment. Estimated useful life of equipment is 6 years with no salvage value.


Solution: Alex Corporation Journal & adjusting entries Date April 1 July 1

July 1

Sep. 1 Dec 31

Dec 31 Dec 31

Particulars Equipment Cash Depreciation expense – Equipment Accumulated depreciation - Equipment 6 months 600,000 ( X = Tk.50,000) 12 months 6 yrs Cash Accumulated depreciation - Equipment Loss on sale of equipment Equipment 18 months 600,000 ( X = Tk.150,000) 12 months 6 yrs Equipment Cash Depreciation expense – Equipment Accumulated depreciation –Equipment Accumulated depreciation Equipment Depreciation expense – Equipment Accumulated depreciation - Equipment 21,00,000  600,000  300,000 = 2,00,000 6 yrs 9 months 4,00,000 X = 50,000 6 yrs 12 months 4 months 36,00,000 X = 2,00,000 12 months 6 yrs 4,50,000

Dr. (Tk.) 4,00,000

Cr. (Tk.) 4,00,000

50,000 50,000

2,50,000 1,50,000 2,00,000 6,00,000

36,00,000 36,00,000 50,000 50,000 3,00,000 3,00,000 4,50,000 4,50,000

P-9. A company writes off 10% of the original cost of plant and machinery in every year till the whole cost of a particular piece of machinery is wiped off. Full depreciation is written off even if the machinery is in use for part of a year. Accounts are made upto 31 st December. On 1st January, 2016, the balance in the plant and machinery account was Tk.195,150. The original cost of the various items in use was as follows: Items bought in 2005 or earlier Items bought in 2006 Items bought in 2007 Items bought in 2008 or later

Tk.58,000 31,2000 17,000 252,000 Tk.358,000


During 2016, new plant was bought at a cost of Tk.29,500 and one machine which had cost Tk.5,500 in 2001 was sold for Tk.3500. During 2017, there were additional costing Tk.18,000 and a machine which had cost Tk.7,000 in 2009 was sold for Tk.1,500. Required: Write up the plant and machinery account for 2016 and 2017. Solution: Plant & Machinery Account Date 2016 Jan. 1

2017 Jan. 1 Dec. 31

Particulars Balance b/d

Taka Date 195,150

Particulars

Bank addition

29,500 350 225,000 194,800

Depreciation Balance c/d

29,850 194,800 225,000

18,000 800

Sale proceed Depreciation

1,500 29,950

Balance b/f Bank addition P & L A/c (Profit on sale)

Balance c/f 2017 Jan. 1

Balance b/d

213,600 182,150

Taka 350

182,150 213,600

Workings: 1. Profit on machinery sold in 2016: Written down value of the machine is zero as the same was purchased in 2001 and consequently the entire cost was completely written off by 2010. Hence, the entire sale proceeds of Tk.350 is gain. 2. Depreciation to be provided in 2016: On machinery purchased in 2007 (10% of Tk.17,000) On machinery purchased in 2008 (10% of Tk.252,000) On machinery purchased in 2016 (10% of Tk.29,500)

Tk.1,700 Tk.25,200 Tk.2,950 Tk.29,850

(No depreciation is required to be provided on machinery purchased in 2006 or earlier as this has already been completely written-off.) 3. Profit on machinery sold in 2017: Cost of machinery in 2009 Less: Depreciation written-off in 9 years (Tk.7,000 X 9) Written down value in 2017 Sale proceeds Gain

Tk.7,000 Tk.6,300 Tk.700 Tk.1,500 Tk.800


4. Depreciation to be provided in 2017: On machinery purchased in 2008 (10% of Tk.252,000) On machinery purchased in 2009 (10% of Tk.29,500) On machinery purchased in 2010 (10% of Tk.18,000)

Tk.25,200 Tk.2,950 Tk.1,800 Tk.29,950

(Machinery purchased in 2007 has already been completely written-off by 2009) P-10. X Company uses revaluation accounting for a class of equipment it uses in its golf club refurbishing business. The equipment was purchased on January 2, 2015 for Tk.500,000; it has a 10 years useful life with no residual value. X has the following information related to the equipment. (Assume that estimated useful life and residual value does not change during the periods presented below). Date January 2, 2015 December 31, 2015 December 31, 2016 December 31, 2017

Fair value Tk.500,000 Tk.468,000 Tk.380,000 Tk.355,000

Required: (a) Prepare all entries to the equipment for 2015. (b) Determine the amounts to be reported by X at December 31, 2016 and 2017 as equipment, other comprehensive income, depreciation expense, impairment loss, and accumulated other comprehensive income. (c) Prepare the entry for any revaluation adjustments at December 31, 2016 and 2017. (d) Prepare the journal entries for the sale of equipment by X on January 2, 2018 for Tk.330,000. Solution: (a)

Date Jan. 2, 15 Dec. 31, 15 Dec. 31, 15

X Company Journal entries Particulars Equipment Cash Depreciation expense (Tk.500,000 á 10 years) Accumulated depreciation Accumulated depreciation Equipment (Tk.500,000 – Tk.468,000) Unrealized gain on revaluation

Dr. (Tk.) 500,000

Cr. (Tk.) 500,000

50,000 50,000 50,000 32,000 18,000

(b) Equipment Other comprehensive income Depreciation expense Impairment loss Accumulated other comprehensive income

Dec. 31, 2016 380,000 (16,000) 52,000 20,000 (0)

Dec. 31, 2017 355,000 2,500 47,500 (20,000) 5,000


(c)

Date Dec.31,16 Dec.31,16 Dec.31,16

Dec.31,17 Dec.31,17 Dec.31,17

X Company Journal entries Particulars Depreciation expense (Tk.468,000 ÷ 9 years) Accumulated depreciation Accumulated other comprehensive income Retained earnings (Tk.52,000– Tk.50,000) Accumulated depreciation Unrealized gain on revaluation Loss on impairment (Tk.400,000 – Tk.380,000) Equipment (Tk.468,000 – Tk.380,000) Depreciation expense (Tk.380,000 ÷ 8 years) Accumulated depreciation Retained earnings (Tk.50,000 – Tk.47,500) Accumulated other comprehensive income Accumulated depreciation Recovery of impairment loss Unrealized gain on revaluation Equipment (Tk.380,000 – Tk.355,000)

Dr. (Tk.) 52,000

Cr. (Tk.) 52,000

2,000 2,000 52,000 16,000 20,000 88,000 47,500 47,500 2,500 2,500 47,500 20,000 2,500 25,000

(c)

Date Dec. 31, 18

Dec. 31, 18

X Company Journal entries Particulars Cash Loss on disposal of equipment Equipment Accumulated other comprehensive income Retained earnings

Dr. (Tk.) 330,000 25,000

Cr. (Tk.)

355,000 5,000 5,000

P-11. Linux Inc. plans to acquire an additional machine on January 1, 2017 to meet the growing demand for its product. Surot Company offers to provide the machine to Linux using either of the options listed below (each option gives Linux exactly the same machine and gives Surot Company approximately the same net present value each equivalent at 10%). Option 1 – Cash purchase Tk.800,000. Option 2 – Installment purchase requiring 15 annual payments of Tk.105,179 due December 31 each year. The expected economic life of this machine to Linux is 15 years. Salvage value at that time is estimated to be Tk.50,000. Straight-line depreciation is used. Interest expense under Option 2 is computed using the effective interest method. Required: Based upon current generally accepted accounting principles, state how, if at all, the book value of the machine and the obligation should appear on the December 31, 2017 balance sheet of Linux Inc., for each option.


Solution: Assets Machinery Accumulated depreciation Tk.800,000  Tk.50,000 15 yrs Book value

Option 1

Option 2

Tk.800,000 50,000

Tk.800,000 50,000

750,000

Liabilities Notes payable – non-current (n-1) Notes payable – current (n-1)

750,000

-

27,697 747,124

Note: 1. Present value of the notes payable on January 1, 2017 = Tk.105,179 X 7.60608 = Tk.800,000 At December 31, 2017, first installment of Tk.105,179 has been paid of which Tk.80,000 (Tk.800,000 X 10%) is interest and Tk.25,179 (Tk.105,179 – Tk.80,000) is principal amount. So, principal remains Tk.774,821 (Tk.800,000 – Tk.25,179) of which Tk.27,697 {Tk.105,179 – (Tk.774,821 X 10%) is current and Tk.747,124 (Tk.774,821 – Tk.27,697) is non-current. P-12. On January 1, 2017, Orion Co. acquired production equipment in the amount of Tk.5,00,000. The following additional costs are incurred: Delivery costs Installation costs General administration costs of an indirect nature

Tk.38,000 24,500 3,000

The installation and setting-up period took three months and an additional Tk.21,000 was spent on costs directly related to bringing the asset to its working condition. The equipment was ready for use on April 1, 2002. Monthly managerial reports indicated that for the first five months, the production quantities from this equipment resulted in an initial operating loss of Tk.15,000 because of small quantities produced. The months thereafter showed much more positive results. The equipment has an estimated useful life of 14 years and a residual value of Tk.25,000. Estimated dismantling costs are Tk.15,000. Required: As per IAS-16, what is the cost of the asset and what are the annual charges in the Statement of Comprehensive Income related to the consumption of the economic benefits embodied in the assets?


Solution: Cost of the asset = Invoice price + Delivery costs + Installation costs + Other costs directly related to bringing the asset to its working condition + Initial estimate of dismantling costs = Tk.5,00,000 + Tk.38,000 + Tk.24,500 + Tk.21,000 + Tk.15,000 = Tk.5,98,500 Tk.5,98,500  Tk.25,000 Annual charges related to the asset = 14 years = Tk.40,964 The annual charge to the Statement of Comprehensive Income is Tk.40,964. However, 9 note that in the year ending December 31, 2002, the charge will be Tk.40,964 X = 12 Tk.30,723 because the equipment was ready for use on April 1, 2012 after the installation and setting-up period. E-13. United Motors Ltd. reported the following as plant assets on December 31, 2016: Land Building Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total plant assets

Tk.60,00,000 Tk.1,32,50,000 60,50,000 2,00,00,000 25,00,000

72,00,000

1,75,00,000 3,07,00,000

During 2017, the following cash transactions occurred: April 1 Purchased land for Tk.44,00,000. May 1 Sold equipment that cost Tk.3,00,000 when purchased on January 1, 2013. The equipment was sold for Tk.1,75,000. June 1 Sold land purchased on June 1, 2009 for Tk.36,00,000. The land was purchased for Tk.10,00,000. July 1 Purchased equipment for Tk.6,00,000. Dec. 31 Retired equipment that cost Tk.2,50,000 when purchased on December 31, 2006. Required: (a) Journalize the above transactions. United Motors Ltd. uses straight-line depreciation for building and equipment. The building is estimated to have a 40 years life and no salvage value. The equipment is estimated to have a 10 years useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. (b) Record adjusting entries for depreciation for 2017. (iii) Prepare the plant assets section of United Motors Ltd. balance sheet at December 31, 2017. Solution:


(a)

Date Apr. 1, 17 May 1, 17 May 1, 17

June 1, 17

July 1, 17 July 1, 17 Dec. 31, 17

United Motors Ltd. Journal entries Particulars Land Cash Depreciation expense – Equipment Accumulated depreciation – Equipment Cash Accumulated depreciation Equipment Gain Cash Land Gain Equipment Cash Depreciation expense – Equipment Accumulated depreciation – Equipment Accumulated depreciation Equipment

Dr. (Tk.) 44,00,000

Cr. (Tk.) 44,00,000

10,000 10,000 1,75,000 1,30,000 3,00,000 5,000 36,00,000 10,00,000 26,00,000 6,00,000 6,00,000 30,000 30,000 2,50,000 2,50,000

(b)

Date Dec. 31, 17 Dec. 31, 17

United Motors Ltd. Adjusting entries Particulars Depreciation expense – Equipment Accumulated depreciation – Equipment Depreciation expense – Equipment Accumulated depreciation – Equipment

Dr. (Tk.) 3,31,250

Cr. (Tk.) 3,31,250

19,85,000 19,85,000

(c) United Motors Ltd. Balance Sheet (Plant Assets Section) At December 31, 2017 Fixed Assets Tk. Land 60,00,000 Add: Purchase 44,00,000 1,04,00,000 Less. Sold 10,00,000 Building 1,32,50,000 Less: Accumulated depreciation 63,81,250 Equipment 2,00,00,000 Less: Sold 3,00,000 Less: Retired 2,50,000 1,94,50,000 Add: Purchase 6,00,000 Less: Accumulated depreciation 41,05,000

Tk.

94,00,000 68,68,750

1,59,45,000 3,22,13,750


E-14. On January 1, 2014, Pele Company purchased the following two machines for use in its production process. Machine A: The cash price of this machine was Tk.38,000. Related expenditures included: Sales tax Tk.1,700; shipping costs Tk.150; insurance during shipping Tk.80; installation and testing costs Tk.70 and Tk.100 of oil and lubricants to be used with the machinery during its first year of operations. Pele estimates that the useful life of the machine is 5 years with a Tk.5,000 salvage value remaining at the end of that time period. Assume that the straight-line method of depreciation is used. Machine B: The recorded costs of this machine was Tk.160,000. Pele estimates that the useful life of the machine is 4 years with a Tk.10,000 salvage value remaining at the end of that time period. Required: (a) Prepare the following for Machine A: (i) The journal entry to record its purchase on January 1, 2014. (ii) The journal entry to record annual depreciation at December 31, 2014. (b) Calculate the amount of depreciation expense that Pele should record for machine B each year of its useful life under the following assumptions: (i) Pele uses the straight-line method of depreciation. (ii) Pele uses the declining-balance method. The rate used is twice the straight-line rate. (iii) Pele uses the units-of-activity method and estimates that the useful life of the machine is 125,000 units. Actual usage is as follows: Year 2014, 45,000 units; Year 2015, 35,000 units; Year 2016, 25,000 units; Year 2017, 20,000 units. (c) Which method used to calculate depreciation on Machine B reports the highest amount of depreciation expense in year 1 (2014)? The highest amount in year 4 (2017)? The highest total amount over the 4-year period? Solution: (a) (i) Purchase price Sales tax Shipping costs Insurance during shipping Installation and testing Total cost of machinery

Tk.38,000 1,700 150 80 70 40,000

Journal entry: Machinery Cash

Tk.40,000 (Dr.) Tk.40,000 (Cr.)


(ii) Recorded cost Less: salvage value Depreciable cost Years of useful life Annual depreciation

40,000 5,000 35,000 ÷5 7,000

Journal entry: Depreciation expense Accumulated depreciation

Tk.7,000 (Dr.) Tk.7,000 (Cr.)

(b) (i) Recorded cost Less: salvage value Depreciable cost Years of useful life Annual depreciation

160,000 10,000 150,000 ÷4 37,500

(ii) Book value at beginning of year 160,000 80,000 40,000 20,000

Double decliningbalance rate 50%* 50% 50% 50%

Annual depreciation expense 80,000 40,000 20,000 10,000

*100% ÷ 4 years = 25% 25% X 2 = 50% (iii)

Tk.160,000  Tk.10,000 125,000 units = Tk.1.20 per unit

Depreciation cost per unit =

Annual depreciation expenses: Year 2014 = 45,000 units X Tk.1.20 = Tk.54,000 Year 2015 = 35,000 units X Tk.1.20 = Tk.42,000 Year 2016 = 25,000 units X Tk.1.20 = Tk.30,000 Year 2017 = 20,000 units X Tk.1.20 = Tk.24,000

Accumulated depreciation 80,000 120,000 140,000 150,000


(c) The declining-balance method reports the highest amount of depreciation expense for the first year while the straight-line method reports the lowest. In the fourth year, the straight-line method reports the highest amount of depreciation expense while the declining-balance method reports the lowest. These facts occur because the declining-balance method is an accelerated depreciation method in which the largest amount of depreciation is recognized in the early years of the asset‘s life. If the straight-line method is used, the same amount of depreciation expense is recognized each year. Therefore, in the early years less depreciation expense will be recognized under this method than under the declining-balance method while more will be recognized in the later years. The amount of depreciation expense recognized using the units-of0activity method is dependent on production, so this method recognize more or less depreciation expense than the other two methods in any year depending on output. No matter which of the three methods is used, the same total amount of depreciation expense will be recognized over the four-year period. P-15. On February 2, 2015, Sabbir Enterprises paid Tk.76,000 cash for a piece of equipment to be used in its blast furnace facility. The equipment has an estimated useful life of seven years and an estimated residual value of Tk.6,000. The company‘s policy is to record a full year of depreciation in the year of purchase and no depreciation in the year of disposal. The equipment is expected to provide 33,600 hours of service over its useful life with estimated service hours of 4,200 in 2015, 4,300 in 2016, and 4,600 in 2017. The company‘s accountant has looked at several methods of depreciation that could be used for the equipment and has prepared the following schedule for the three most likely methods:

Estimated depreciation expense - 2015

Method 1 Tk.17,500

Method 2 Tk.8,750

Method 3 Tk,1000

After consideration of the methods, the company chose to use the straight-line method of depreciation. In 2016 an accident occurred which caused damage to the equipment. The equipment was repaired in 2016, at a cost of Tk.5,000, but it was determined in early 2017 that an impairment loss may have occurred. An analysis performed in early 2017 concluded that the equipment had a value in use of Tk.40,000, a net selling price of Tk.36,000 and a remaining useful life of two years with no residual value. Required: (a) Identify the depreciation method being used in each of methods 1, 2, and 3. (b) Prepare the journal entries to record depreciation expense and the Tk.5,000 expenditure in 2016. (c) Prepare the journal entries to record the impairment loss and depreciation expense for 2017. (d) Assuming Sabbir Enterprises uses the indirect method of presenting cash flows from operating activities, prepare the cash flow statement disclosures with respect to the equipment for the years 2015, 2016, and 2017.


Solution: (a) Alternative 1: Sum-of-the-year‘s-digits method Tk.76,000 Tk.6,000 = X7 (7  6  5  4  3  2  1) Tk.70,000 = X7 28 = Tk.17,500 Alternative 2: Service hours method Tk.76,000  Tk.6,000 = X 4,200 hours Tk.33,600 = Tk.2.08 X 4,200 hours = Tk.8,750 Alternative 3: Straight line method Tk.76,000  Tk.6,000 = 7 years Tk.760,000 = 7 years = Tk.10,000 (b) Sabbir Enterprises Journal entries Depreciation expense Accumulated depreciation

- Dr. - Cr. -

Tk.10,000

Repairs and maintenance Cash

- Dr. - Cr. -

Tk.5,000

Tk.10,000

Tk.5,000

(c) Sabbir Enterprises Journal entries Accumulated depreciation Impairment loss (76,000-20,000-40,000) Accumulated depreciation

- Dr. - Dr. - Cr. -

Tk.20,000 Tk.16,000

Depreciation expense (40,000÷2) Accumulated depreciation

- Dr. - Cr. -

Tk.20,000

Tk.36,000

Tk.20,000


(d) Sabbir Enterprises Cash flow statement (Indirect method) For the year 2015 Cash flow from operating activities: Net profit Add. Depreciation expense

Tk.10,000

Cash flow from investing activities: Cash paid for equipment

(Tk.76,000)

xx

For the year 2016 Cash flow from operating activities: Net profit Add. Depreciation expense

xx Tk.10,000

For the year 2017 Cash flow from operating activities: Net profit Add. Depreciation expense Impairment loss

xx Tk.20,000 Tk.16,000

P-16. Raymond Company and Laymond Company are two proprietorships that are similar in many respects. One difference is that Raymond Company uses the straight-line method and Laymond Company uses the declining-balance method at double the straight-line rate. On January 2, 2015, both companies acquired the following depreciable assets: Particulars Cost Salvage value Useful life

Building Tk.16,00,000 Tk.1,00,000 40 years

Equipment Tk.5,50,000 Tk.50,000 10 years

Including the appropriate depreciation charges, annual net income for the companies in the years 2015, 2016 and 2017 were as follows: Years 2015 2016 2017 Total

Raymond Company Tk.4,20,000 Tk.4,42,000 Tk.4,50,000 Tk.13,12,000

Laymond Company Tk.3,40,000 Tk.3,80,000 Tk.4,25,000 Tk.11,45,000


At December 31, 2017, the balance sheet of the two companies are similar except that Laymond Company has more cash than Raymond Company. Mr. Karim is interested in buying one of the companies. He comes to you for advice. Required: (a) Calculate the annual and total depreciation recorded by each company during the 3 years. (b) If Laymond Company uses the straight-line method of depreciation instead of the declining-balance method – prepare a comparative income for the 3 years. Solution: (a) Raymond Company – Straight-line method: Annual depreciation: Tk.16,00,000  Tk.1,00,000 Building ( ) 40 years Tk.5,50,000  Tk.50,000 Equipment ( ) 10 years Total annual depreciation

Tk.4,37,500 Tk.50,000 Tk.87,500

Total accumulated depreciation = Tk.87,500 X 3 years = Tk.2,62,500 Laymond Company – Double-declining balance method: Year

Asset

Computation

Annual depreciation Tk.80,000 Tk.1,10,000

2015

Building Equipment

Tk.16,00,000 X 5%* Tk.5,50,000 X 20%**

2016

Building Equipment

Tk.15,20,000 X 5% Tk.4,40,000 X 20%

Tk.76,000 Tk.88,000

2017

Building Equipment

Tk.14,44,000 X 5% Tk.3,52,000 X 20%

Tk.72,200 Tk.70,400

Accumulated depreciation

Tk.1,90,000

Tk.1,64,000

Tk.1,42,600 Tk.4,96,600 *100 ÷ 40 years = 2.5% 2.5 X 2 = 5% **100 ÷ 10 years = 10% 10 X 2 = 20%


(b) Preparation of Comparative Income Year 2015 2016 2017 Total income

Raymond Company Tk.4,20,000 Tk.4,42,000 Tk.4,50,000 Tk.13,12,000

Laymond Company Tk.4,42,500a Tk.4,56,500b Tk.4,80,100c Tk.13,79,100

Computations: a. Tk.3,40,000 + Tk.1,90,000 – Tk.87,500 = Tk.4,42,500 b. Tk.3,80,000 + Tk.1,64,000 – Tk.87,500 = Tk.4,56,500 c. Tk.4,25,000 + Tk.1,42,600 – Tk.87,500 = Tk.4,80,100 P-17. Concord Timber Company (CTC) owns 3,000 acres of timberland on the north side of Mount Khulshi, which was purchased in 2005 at a cost of Tk.550 per acre. In 2017, CTC began selectively logging this timber tract. In May of 2017, Mount Khulshi erupted, burying the timberland of CTC under a foot of ash. All of the timber on the CTC tract was downed. In addition, the logging roads, built at accost of Tk.150,000 were destroyed, as well as the logging equipment, with a net book value of Tk.300,000. At the time of the eruption, CTC had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, CTC estimated the land to have a value of Tk.200 per acre after the timber was harvested. CTC includes the logging roads in the depletion base. CTC estimates it will take 3 years to salvage the downed timber at a cost of Tk.700,000. The timber can be sold for pulp wood at an estimated price of Tk.3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties. Required: (a) Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Khulshi. (b) Prepare the journal entry to record the depletion prior to the eruption. (c) If this tract represents approximately half of the timber holdings of CTC, determine the amount of the extraordinary loss due to the eruption of Mount Khulshi for the year ended December 31, 2017. Solution: (a) Original cost (Tk.550 X 3,000) Less. Residual value of land (Tk.200 X 3,000) Add. Cost of logging road Depletion base

Tk.1,200,000 500,000 feet = Tk.2.40

Depletion cost per board foot =

Tk.1,650,000 600,000 1,050,000 150,000 Tk.1,200,000


(b) Journal entry: Inventory Accumulated depreciation – Timber

- Dr. - Cr. -

Tk.240,000 Tk.240,000

Depletion for 2016: 500,000 board feet X 20% = 100,000 board feet 100,000 board feet X Tk.2.40 = Tk.240,000 (c) Determination of the extraordinary loss: Loss of timber {Tk.1,050 – (Tk.1,050,000 X 20%)} Loss of land value Loss of logging roads {Tk.150,000 – (Tk.150,000 X 20%)} Logging equipment Cost of salvaging timber Less. Recovery (400,000 board feet X Tk.3) Extraordinary loss due to the eruption of Mount Khulshi

Tk.840,000 600,000 120,000 300,000 700,000 (1,200,000) Tk.1,360,000

P-18. Gama Company has purchased a tract of mineral land for Tk.1,200,000. It is estimated that this tract will yield 240,000 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 12,000 tons of ore will be mined the first and last year and 24,000 tons every year in between. The land will have a residual value of Tk.60,000. The company builds necessary structures and sheds on the site at a cost of Tk.72,000. It is estimated that these structures can serve 11 years but because they must be dismantled if they are to be moved, they have no scrap value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased second-hand at a cost of Tk.96,000. This machinery cost the former owner Tk.200,000 and was 50% depreciated when purchased. Gama Company estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted but that dismantling and removal cost will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining half of this machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery. Required: As a Chief Accountant of the company, you are to prepare a schedule showing estimated depletion and depreciation costs for the year of the expected life of the mine. Solution: Schedule showing estimated depletion: Depletion base Tk.1,140,000

Estimated yield 240,000 tons

Cost per ton Tk.4.75

Estimated depletion 1st & 11th years 2nd to 10th years Tk.57,000 Tk.114,000


Depletion base = Tk.1,200,000 – Tk.60,000 = Tk.1,140,000 1st & 11th years = 12,000 tons X Tk.4.75 = Tk.57,000 2nd to 10th years = 24,000 tons X Tk.4.75 = Tk.114,000 Schedule showing estimated depreciation:

Asset

Cost

Building Machinery (1/2) Machinery (1/2)

Cost per ton Tk.72,000 Tk.0.30 Tk.48,000 Tk.0.20 Tk.48,000 Tk.0.40

Building:

Tk.72,000 240,000 tons = Tk.0.30

Cost per ton =

1st & 11th years = 12,000 tons X Tk.0.30 = Tk.3,600 2nd to 10th years = 24,000 tons X Tk.0.30 = Tk.7,200 Machinery (1/2):

Tk.48,000 240,000 tons = Tk.0.20

Cost per ton =

1st & 11th years = 12,000 tons X Tk.0.20 = Tk.2,400 2nd to 10th years = 24,000 tons X Tk.0.20 = Tk.4,800 Machinery (Remaining 1/2):

Tk.48,000 240,000 / 2 tons Tk.48,000 = 120,000 tons = Tk.0.40

Cost per ton =

st

1 yr 3,600 2,400 4,800

Estimated depreciation 2 to 6th yrs 7th to th 5 yrs 10th yrs 7,200 7,200 7,200 4,800 4,800 4,800 9,600 4,800 nd

11th yrs 3,600 2,400 -


First & last years = 12,000 tons X Tk.0.40 = Tk.4,800 Remaining Tk.38,400 (Tk.48,000 – Tk.4,800 – Tk.4,800) will depreciate Tk.38,400 ÷ Tk.9,600 = 4 years 2nd to 5th years = 24,000 tons X Tk.0.40 = Tk.9,600


EXERCIES E-1. A machine was bought for Tk.100,000. Its estimated useful life is four years with a residual value of Tk.10,000. Depreciation is charged on the straight line method. What is the percentage of depreciation rate on an annual basis? E-2. A machine was bought for Tk.180,000 on 30 April 2008. The residual value was Tk.5,000 and depreciation rate was 25%. Depreciation is to be charged under the reducing balance method on month to month basis. Compute the depreciation at 31st December 2008. E-3. A motor van was bought for Tk.20,000 on 1 September 2005 with a residual value of Tk.2,000. Depreciation was charged at 20% by the reducing balance method on yearly basis. It was sold for Tk.18,000 after three years of use on 30 September 2008. Compute the profit on sale of asset. E-4. A company is exploring the impact of the two method of depreciation. On 1 January, it bought machinery for Tk.15,000. The methods are (i) straight line where useful life is 4 years and residual value is Tk.2,000 and (ii) reducing balance method – at the rate of 20% per annum. Show how the company‘s profit be affected if the straight line method is used rather than the reducing method? E-5. On January 1, 2006, a company purchased a machinery at an acquisition cost of Tk.84,000. The machinery has been depreciated by the straight line method using a 4 year service life and a Tk.12,000 salvage value. The company‘s fiscal year ends on December 31. Required: Prepare the journal entries to record the disposal of the machinery that it was: (i) Retired and scraped with no salvage value on January 1, 2010. (ii) Sold for Tk.15,000 on July 1, 2009. (iii) Traded in on a new machinery on January 1, 2009. The fair market value of the old machinery was Tk.34,000 and Tk.6,000 was paid in cash. E-6. PGS Mining Company has purchased a tract of mineral land for Tk.600,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. it is further estimated that 6,000 tons of ore will be mined in the first and last year and 12,000 tons every year in between. The land will have a residual value of Tk.30,000. Required: Prepare a schedule showing estimated depletion cost for each year of the expected life of the mine. E-7. A Ltd. Company depreciates its machinery at 10% on diminishing balance method, had on 1st January 2010 Tk.175,000 to the debit of machinery account. A part of machinery purchased on 1st January, 2008 for Tk.30,000 was sold for Tk.15,000 on July 01, 2010. A new machinery at of cost of Tk.35,000 was purchased and installed on the same date installation charge being Tk.2,500. The company wanted to change its method of depreciation from diminishing balance method to straight line method with effect from 1st January, 2010. The rate of depreciation is remained the same.


Required: (i) Pass journal entries to record the sale of the machinery. (ii) Calculate the depreciation expense of the existing machinery to be recorded in the books for 2010. E-8. Sheen Owner‘s Association purchased a truck for transportation use for its own. The following facts apply for the truck: Cost of Acquisition of the Truck………………… Estimated salvage value…………………….…… Estimated life: In years………………………………………..… In Kilo-meters driven…………………...……….

Tk.450,000 Tk.50,000 4 years 160,000 kilo meters

Required: (i) Calculate the depreciation for each year and make a journal entry to record straight-line depreciation method. (ii) Depreciation schedule under Straight-line Method showing annual depreciation, accumulated depreciation and book value. E-9. Monyem Ltd. purchased machinery from Ananto Ltd. on 30.09.2012. The machinery was ready for use on 01.12.2010. However it was actually put to use only on 01.05.2011. The price was Tk.3,80,44,000 before charging the following: i. Truncated VAT on goods sold @ 4%. ii. Giving a trade discount @ 2% on the quoted price. iii. Transport charges @ 0.25% on the quoted price and iv. Installation charges come to 1% on the quoted price. A loan of Tk.3,10,00,000 was taken from the Sonali Bank Ltd. on which interest @ 15% per annum was to be paid. Expenditure incurred on the trial run was as follows: A. Material Tk.35,000 B. Wages Tk.25,000 and C. Overhead Tk.15,005. Required: Find out the cost of the machine and suggest the accounting treatment for the expenses incurred in the internal between the dates 01.12.2010 to 01.05.2011. The entire loan amount remained unpaid on 01.05.2011. E-10. On December 31, 2012, Chrysler Inc. has a machine with a book value of Tk.940,000. The original cost and related accumulated depreciation at this date are as follows. Machine Accumulated depreciation Book value

Tk.1,300,000 360,000 Tk.940,000

Depreciation is computed at Tk.60,000 per year on a straight-line basis.


Instructions: Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal. 1. A fire completely destroys the machine on August 31, 2013. An insurance settlement of Tk.430,000 was received for this casually. Assume the settlement was received immediately. 2. On April 1, 2013, Chrysler sold the machine for Tk.1,040,000 to Avanti Company. 3. On July 31, 2013, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be Tk.1,100,000. E-11. The Star Mining Company paid Tk.29,00,000 in 2001 for property with a supply of natural resource estimated at 20,00,000 tons. The estimated cost of restoring the land for use after the resources are exhausted is Tk.3,25,000. After the land is restored it will have an estimated value of Tk.2,25,000. Development costs such as drilling and road construction were Tk.8,00,000. Building, such as, bulk houses and mess hall were constructed on the site for Tk.2,00,000. the useful lives of the buildings are expected to terminate upon exhaustion of the natural resources. Operations were not began until January 01, 2002. In 2002, resources removed totaled 6,00,000 tons. During 2003, an additional discovery was made indicating that available resources subsequent to 2003 will total 18,75,000 tons. Because of a strike, only 4,00,000 tons of resources were removed during 2003. Required: Compute the depletion and also the deprecation charge for 2001, 2002 & 2003. E-12. On 01.01.2005, a new plant was purchased by Mrs. Kalyani Basu for Tk.100,000 and a further sum of Tk.5,000 was spent on its installation. On 01.06.2006, another plant was acquired for Tk.65,000. On 02.10.2007, the first plant was totally destroyed and the amount of Tk.2,500 only was realized by selling the scrap. It was not insured. On 20.10.2007, a second hand plant was purchased for Tk.75,000 and a further sum of Tk.7,500 was spent on repairs and Tk.2,500 on its erection. It came into use on 15.11.2007. Depreciation has been provided at 10% on the original cost annually on 31 st December. It was the practice to provide depreciation for full year on all acquisitions made at any time during any year and to ignore depreciation on any item sold during the year. The accounts are closed annually on 31 st December. In December 2007, it was decided to change the method of depreciation and to follow the rate of 15% on the diminishing balance method with retrospective effect in respect of the existing items of plant and to make necessary adjustments on 31.12.2007. Required: Show Plant Account, Plant Disposal Account and Accumulated Depreciation Account for 3 years. E-13. At December 31, 2008 Khan Corporation reported the following as plant assets:


Particulars Land Building Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total plant assets

(Taka) 26,500,000 12,100,000 40,000,000 5,000,000

(Taka) 3,000,000 14,400,000 35,000,000 52,400,000

During 2009 the following selected cash transactions occurred: April 1 – Purchased land for Tk.2,200,000. May 1 – Sold equipment that cost Tk.600,000 when purchased on January 1, 2005. The equipment was sold for Tk.350,000. June 1 – Sold land purchased on June 1, 1999 for Tk.1,800,000. The land cost Tk.500,000. July 1 – Purchased equipment for Tk.1,200,000. Dec. 31 – Retired equipment that cost Tk.500,000 when purchased on December 31, 1999. No salvage value was received. Required: (i) Journalize the above transactions. Khan uses straight-line method of depreciation for building and equipment. Estimated useful life of building is 40 years with no salvage value. The equipment is estimated to have 10 years useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. (ii) Record adjusting entries for depreciation for 2009. (iii) Prepare the plant asset section of Khan‘s balance sheet at December 31, 2009. E-14. Presented below is a schedule of property dispositions for ABC Co. during 2002:

Furniture Automobile Land

SCHEDULE OF PROPERTY DISPOSITIONS Cost Accumulated Cash Fair (Taka) Depreciation Proceeds Market at 12/31/01 (Taka) Value (Taka) (Taka) 10,000 8,800 8,000 3,500 3,100 3,100 40,000 92,000 100,000

Nature of Disposition (Taka) Abandonment Sale Sale

The following additional information is available: Furniture: On January 1, 2002, furniture was tossed out in the dumpster because it was no longer adequate to serve the company‘s needs. It cost Tk.10,000 when it was acquired. Depreciation of Tk.8,800 was taken in prior years. Automobile: On January 2, 2002, an automobile was sold for Tk.3,100 cash. It had a cost of Tk.8,000 and total depreciation recorded prior to the sale date amounted to Tk.3,500. Land: On February 15, 2002, land previously used in operations was subdivided and a section was sold for Tk.100,000. A commission of Tk.8,000 went to a real estate agent. The original cost of that land segment was Tk.40,000.


Instructions: Prepare the appropriate journal entry for each of the dispositions. Show computations where appropriate. E-15. Careg Ltd manufactures and sells heavy plant. The company also hires out plant for monthly periods (or multiples thereof). You ascertain the following details: (1) Freehold land: Freehold land was acquired on 1 February 2008 for Tk. 100,000 to build a new factory. Due to planning difficulties, building has not yet been started. The directors wish to revalue the land to its fair value of Tk.130,000 at 30 September 2009. (2) Buildings: On 1 October 2008 the directors reviewed the useful life of the buildings and determined that the remaining life was 56 years. The buildings were acquired for Tk. 200,000 on 1 October 2004, when their useful life was estimated at 40 years. (3) Plant and Machinery: Plant and machinery is accounted for under the cost model accounting policy and is depreciated at the rate of 40% per annum based on carrying amount. Such plant has an estimated life of five years. (i) Plant which cost Tk. 20,000 on 1 October 2006 was classified as held for sale on 1 February 2009. The sale was agreed at Tk. 5,600 and completed on 31 March 2009. (ii) New plant acquired cost Tk. 60,000 on 1 January 2009. At 1 October 2008 the cost of plant and machinery (not leased) was Tk. 200,000, with accumulated depreciation of Tk. 72,000. (4) Computer: Previously this has been depreciated on a straight-line basis at the rate of 10% per annum on cost. The computer was acquired on 1 January 2007 for Tk. 60,000, and by the beginning of this accounting year Tk.10,500 of depreciation had been charged. In an effort to charge out computer time to departments, a record is now kept of computer time used. Management wishes to depreciate the computer on a usage basis. The manufacturer‘s estimate of total usage time of the computer‘s life is 40,000 hours. The data processing manager estimates that some 10,000 hours have been worked prior to the current accounting period. During the current year the record shows 4,800 hours worked. The computer will have a scrap value of Tk. 4,500 at the end of its useful life. Required: (i) Prepare the schedule of non-current assets which will form the note to the company‘s published balanced sheet at 30 September 2009. (ii) Briefly explain the qualitative characteristics contained in BFRS-1 Framework for the Preparation and Presentation of Financial Statements illustrating your answer with reference to the provisions of BAS 16 Property, Plant and Equipment. E-16. SBJ‘s non-current asset register gives the cost and accumulated depreciation to date for every non-current asset held by the company. Prior to charging depreciation for 20X4, the total carrying amount of all non-current assets on the register at 31 December 20X4 was $147,500. At the same date, the non-current-asset accounts in the nominal ledger showed the following balances:


________________________________________________________________________ Cost to date Accumulated depreciation Motor vehicles $48,000 $12,000 Plant and machinery 120,000 30,000 Office equipment 27,500 7,500 You are told that: (i) An item of plant costing $30,000 has been sold for $23,500 during 20X4. The loss on disposal was $800. No entries have been made for this disposal in the nominal ledger, but the asset has been removed from the non-current-asset register. (ii) A motor car was purchased on 1 October 20X4 and correctly recorded in the nominal ledger. Its cost was as follows: List price of vehicle $24,000 Trade discount 20% Sales tax added at 17.5% Insurance $360 Annual vehicle license tax $130 Painting of company name $100 (no sales tax) The vehicle has not been entered in the non-current asset register. (iii) Office equipment was purchased during 20X4, and entered on the non-current asset register but not in the nominal ledger. Until the omission can be investigated fully, its cost is deemed to be the difference between the balances on the non-current asset register and the nominal ledger at 31 December 20X4 (prior to charging depreciation for the year). (iv) Depreciation for 20X4 is to be charged as follows: Motor vehicles 25% per annum straight line on an actual time basis Plant and machinery 10% per annum straight line, with a full year‘s depreciation in the year of purchase Office equipment 10% per annum reducing balance, with a full year‘s depreciation in the year of purchase Requirements: (a) Calculate the balances at 31 December 20X4 for cost and depreciation to date on the three non-current asset accounts (prior to the charging of depreciation for 20X4). (b) Calculate the balances at 31 December 20X4 for cost and depreciation to date on the three non-current asset accounts (prior to the charging of depreciation for 20X4).


CHAPTER - 10

JOURNAL RULES FOR JOURNALIZING

10.1. DEFINITION OF JOURNAL ENTRY Journal entries are the first step in the accounting cycle and are used to record all business transactions and events in the accounting system. As business events occur throughout the accounting period, journal entries are recorded in the general journal to show how the event changed in the accounting equation. For example, when the company spends cash to purchase a new vehicle, the cash account is decreased or credited and the vehicle account is increased or debited. 10.2. MEANING OF ADJUSTING ENTRY Adjusting entries are journal entries recorded at the end of an accounting period to adjust income and expense accounts so that they comply with the accrual concept of accounting. Their main purpose is to match incomes and expenses to appropriate accounting periods. 10.3. DIFFERENCES BETWEEN BOOKKEEPING AND ACCOUNTING Bookkeeping Accounting i) Bookkeeping is a technical (i.e. i) Accounting is a more complex concept mechanical, manual) aspect of recording, that means reflection of the results of classifying, and summarizing a transaction transactions according to the principles, standards and statutory requirements in the financial statements and other business reports. ii) It is performed by Bookkeeper. ii) It is performed by Accountant. iii) The purpose of Bookkeeping is to iii) The purpose of Accounting is to record, classify and summarize interpret, prepare financial statements, etc. transactions. iv) Accountants are the users of iv) Management and employees are Bookkeeping. internal users of Accounting and owners, creditor, banks, etc. are external users of Accounting. v) Single-entry bookkeeping and Double- v) GAAP, IFRS, etc. principles are applied entry bookkeeping systems are applied in in Accounting. Bookkeeping. 10.4. DIFFERENCES BETWEEN GROSS METHOD AND NET METHOD OF RECORDING PURCHASES Gross method: The gross method initially records the purchase at gross price. After that, it depends on whether the payment is made within the discount period or after. If the payment is made within the discount period, the buyer will record the payment by debiting accounts payable


for the gross price, crediting cash for the difference of gross price and discount received and crediting purchase discounts for the discount received. If discount opportunity is missed, the journal entry is made for the full payment as usual. Net method: The net method initially records the purchase at net price (i.e. gross price less the potential discount). If the discount is availed, the journal entry is to debit accounts payable for the net price and credit cash. If the buyer fails to make payment within the discount period, the journal entry is to debit accounts payable for the net price, debit purchase discounts lost for the discount which could be availed and crediting cash for the gross price. It is interesting to note that the purchase discounts lost represents an expense. 10.5. SHORT NOTES (a) Journal: A journal is a detailed account that records all the financial transactions of a business, so that these can then be used for future reconciling and transfer to other official accounting records, such as the general ledger. It states the date of a transaction, which accounts were affected and the amounts, usually in a double-entry bookkeeping method. (b) Ledger: A ledger is a book or database in which double-entry accounting transactions are stored and summarized. This ledger is the central repository of information needed to construct the financial statements of an organization. In a manual bookkeeping system, each page in a ledger is typically assigned to a single account; pages are added if the number of recorded transactions for an account exceeds the assigned page. In a computerized environment, a ledger is simply a file containing the same information that would have been found on a ledger page in a manual system. (c) T-account: A T-account is an informal term for a set of financial records that use double-entry bookkeeping. The term T-account describes the appearance of the bookkeeping entries. If a large letter T were drawn on the page, the account title would appear just above the T, debits would be listed under the top line of the T on the left side and the credits would be listed under the top line of the T on the right side, with the middle line separating the debits from the credits. (d) Trial balance: A trial balance is a list of all the general ledger accounts (both revenue and capital) contained in the ledger of a business. This list will contain the name of each nominal ledger account and the value of that nominal ledger balance. Each nominal ledger account will hold either a debit balance or a credit balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. (e) Closing entry: A closing entry is a journal entry made at the end of an accounting period to transfer the temporary account balances to the permanent accounts. In other words, closing entries zero out or close temporary accounts and move their balances to permanent accounts to be carried forward to the next period.


(f) Reversing entry: A reversing entry is an optional journal entry that is recorded at the beginning of an accounting period to undo the prior period's adjusting entries. In other words, these entries cancel out or reverse the adjusting journal entries recorded at the end of the prior accounting period.


SELF PRACTICE QUESTIONS 1. What are the enhancing qualities of accounting information? Explain. 2. ―Book keeping and Accounting are same.‖ Do you agree? Explain. 3. Distinguish between FOB shipping point and FOB destination. 4. Explain the meaning of the credit term 2/10, N/30. 5. What do you mean by interest bearing note payable and non-interest bearing note payable?


SELF PRACTICE QUESTIONS ANSWER 1. The enhancing qualities of accounting information: Understandability: Accounting information must be comprehensible by users of the information. Verifiability: Financial reports should be checked corroborated to prove their faithful representation. Timeliness: Information must be available on time when needed if it is to influence decisions. Comparability: It must enables users to identify similarities and differences between two or more sets of economic circumstances. 2. I don‘t agree the statement. Bookkeeping is the name of keeping the financial records only while Accounting is the art of recording, classifying, analyzing, summarizing in significant manner and interpreting the result of financial event of the business. 3. Distinction between FOB shipping point and FOB destination: FOB shipping point 1. It means that goods are placed free on board to the carrier by the seller 2. Here, title passes to the buyer with the loading of goods at the point of shipment 3. Here, buyer pays the freight cost 4. After make payment of freight charge, the buyer debits freight-in

FOB destination 1. It means that goods are placed free on board to the buyer‘s place of business 2. Here, title does not passes to the buyer until goods are received by the buyer 3. Here, seller pays the freight cost 4. After make payment of freight charge, the buyer debits freight-out

4. The credit term 2/10, N/30 means the following: - ―2‖ shows the discount percentage offered by the seller - ―10‖ indicates the number of days (from the invoice date) within which the buyer should pay the invoice in order to receive the discount - ―n/30‖ states that if the buyer does not pay the full invoice amount within 10 days to qualify for the discount, then the net amount is due within 30 days after the sale invoice date.


5. Interest bearing note payable: It is a note for which the note payer pays interest with the principal amount of note to the note bearer at fixed rate of interest. It is also called non-zero coupon bond. Non-interest bearing note payable: It is a note which pays no interest or coupon and sold at a discount to its face value. It is also called zero coupon bonds.


PROBLEMS AND SOLUTIONS P-1. At the end of its first year of operations on December 31, 2017, the Nobbodoy Company‘s account shows the following: Partner Reaz Afzal Fiaz

Drawing Tk.60,000 45,000 20,000

Capital Tk.165,000 1,00,000 50,000

The capital balance represents each partner‘s capital investment. Therefore, net income or net loss for 2017 has not been closed to the partner‘s capital accounts. Required: (a) Journalize the entry to record the division of net income for 2017 under each of the following independent assumptions: (i) Net income is Tk.2,00,000. Income 5:3:2. (ii) Net income is Tk.1,50,000. Reaz and Afzal are given salary allowance of Tk.55,000 and Tk.50,000 respectively. The remainder is shared equally. (iii) Net income is Tk.1,35,000. Each partner is allowed interest of 10% on bearing capital balances. Reaz is given Tk.90,000 salary allowance. The remainder is shared equally. (b) Prepare a schedule showing the division of net income under assumption in (i) to (iii) above. Solution: (a) (i) Journal entry: Income summary Capital, Reaz (Tk.2,00,000 X 50%) Capital, Afzal (Tk.2,00,000 X 30%) Capital, Fiaz (Tk.2,00,000 X 50%)

- Dr. - Cr. - Cr. - Cr. -

Tk.2,00,000 Tk.1,00,000 60,000 40,000

Income summary Capital, Reaz (Tk.55,000 + Tk.15,000) Capital, Afzal (Tk.50,000 + Tk.15,000) Capital, Fiaz

- Dr. - Cr. - Cr. - Cr. -

Tk.1,50,000 Tk.70,000 65,000 15,000

Net income Salary allowance – Reaz Afzal Remainder

Tk.55,000 50,000

(ii) Journal entry:

To each partner (Tk.45,000 ÷ 3)

Tk.1,50,000 1,05,000 Tk.45,000 Tk.15,000


(iii) Journal entry: Income summary Capital, Reaz (16,500 + 90,000 + 45,000) Capital, Afzal (10,000 + 4,500) Capital, Fiaz (5,000 + 4,500) Net income Interest allowance – Reaz (Tk.1,65,000 X 10%) Afzal (Tk.1,00,000 X 10%) Fiaz (Tk.50,000 X 10%) Balance

- Dr. - Cr. - Cr. - Cr. Tk.16,500 10,000 5,000

Balance Salary allowance – Reaz Remainder

Tk.1,35,000 Tk.1,11,000 14,500 9,500 Tk.1,35,000

31,500 Tk.1,03,500 Tk.1,03,500 55,000 Tk.13,500

To each partner (Tk.13,500 ÷ 3)

Tk.4,500

(b) Schedule showing the division of net income: Particulars Salary allowance Interest allowance Total salary and interest Remaining income Total division

Reaz Tk. 90,000 16,500 1,06,500 4,500 1,11,000

Afzal Tk. 10,000 10,000 4,500 14,500

Fiaz Tk. 5,000 5,000 4,500 9,500

Total Tk. 90,000 31,500 1,21,500 13,500 1,35,000

P-2. Colleen Company sells portable tables to be used for message therapy. Each table has a built-in stereo system and carries a one year warranty contract that requires the company to replace defective parts and to provide the necessary repair labor. During 2017, the company sold 300 tables at a unit price of Tk.2,500. Sales occurred evenly throughout the year. The one year warranty costs to repair defective tables are estimated to average Tk.110 for parts and Tk.130 for labor per unit. Approximately 10% of the tables sold are estimated to require warranty service. During 2017, the company‘s first year of operations, 11 units were submitted for warranty work at a total cost of Tk.2,750. Required: (a) Record the adjusting journal entry at the end of 2017 to accrue the estimated warranty costs of the 2007 sales. (b) Prepare the entry to record repair costs incurred in 2017 to honor warranty contracts on 2017 sales. Solution: (a) Adjusting journal entry: Dec. 31, 2017 Warranty expense - Dr. Estimated warranty liability - Cr. (To accrue estimated warranty costs) (Tk.300 X 10%) X (Tk.110 + Tk.130) = Tk.7,200

Tk.7,200 Tk.7,200


(b) Journal entry: Dec. 31, 2017 Estimated warranty liability - Dr. Tk.2,750 Repair pars/ Wages payable - Cr. Tk.2,750 (To record honoring of 11 warranty contracts on 2017 sales) P-3. Plant acquisitions for selected companies are as follows: (a) B Co. acquired land, buildings and equipment from a bankrupt company for a lumpsum price of Tk.700,000. At the time of purchase, the seller had the following book and appraisal values: Book value Appraisal value Land Tk.200,000 Tk.150,000 Buildings 250,000 350,000 Equipment 300,000 300,000 (b) H Enterprise purchased stores equipment by making a Tk.2,000 cash down payment and signing a one-year, Tk.23,000, 10% note payable. (c) Kim Co. purchased office equipment for Tk.20,000, terms 2/10, n/30. The company policy was to take the discount facility. (d) Kissam Co. received at zero cost a piece of land from a donor. The appraisal value of the land is Tk.27,000. (e) Zabed Traders built a warehouse for Tk.600,000. It could have purchased the building for Tk.740,000. Required: Prepare the entries that should made at the date of each acquisition. Solution:

Si. No. (a) Land Building Equipment Cash Computations:

B. Co. Journal entries Particulars

Tk.150,000 = 131,250 Tk.800,000 Tk.350,000 Building = Tk.700,000 X = 306,250 Tk.800,000 Tk.300,000 Equipment = Tk.700,000 X = 262,500 Tk.800,000 Store equipment Cash Note payable Office equipment Cash (20,000 X 98%) Land Deferred stock Warehouse Cash

Dr. (Tk.) 131,250 306,250 262,500

Cr. (Tk.)

700,000

Land = Tk.700,000 X

(b)

(c) (d) (e)

25,000 2,000 23,000 19,600 19,600 27,000 27,000 600,000 600,000


P-4. Presented below are selected transactions related to Albart Corporation. January 15 Sold Albart Corporation‘s credit card for Tk.50,000. February 15 Received collections of Tk.30,000 on Albart Corporation credit-card sales and added finance charges of 2% to the remaining balances. March 10 Sold American Express credit card totaling Tk.10,000. A 5% service fee charged by American Express. March 20 Received payment in full from American Express. April 23 Sold accounts receivable of Tk.20,000 to Neon Company. A 3% service charge is applicable of the receivable amount. May 20 Wrote off Tk.40,000 of accounts receivable. Albart uses the allowance method to record bad debts. June 30 Credit sales for the first six months total Tk.1,00,000 and the bad debt percentage is 3%. July 25 One of the customers‘ accounts receivable written off in May 20 subsequently collected the amount in full. Required: Prepare the journal entries for the above transactions. Solution: Albart Corporation Journal entries Date Particulars Jan. 15 Accounts receivable Sales Feb. 15 Cash Accounts receivable Accounts receivable Interest revenue

Mar. 10

Mar. 20 Apr. 23

May 20 June 30 July 25

1 (Tk.50,000 - Tk.30,000) X 2% X 12 months Accounts receivable Service charge expense Sales Cash Accounts Receivable Cash Service charge expense (Tk.20,000 X 3%) Accounts receivable Allowance for doubtful accounts Accounts receivable Bad debts expense Allowance for doubtful accounts Accounts receivable Allowance for doubtful accounts Cash Accounts receivable

Dr. (Tk.) 50,000

Cr. (Tk.) 50,000

30,000 30,000 33 33

9,500 500 10,000 9,500 9,500 19,400 600 20,000 40,000 40,000 3,000 3,000 40,000 40,000 40,000 40,000


P-5. Expo Company uses perpetual inventory system. During 2017, the following selected transactions occurred: Jan. 12 Feb. 20 Mar. 12 Mar. 15 Apr. 30 May 10 May 20 July 30 Sep. 10

Sold Tk.10,000 of merchandise to Luxury Company, terms n/60. Sold Tk.8,000 of merchandise to Limo Company and accepted a 3 months, 10% note. Received payment in full from Luxury Company for balance due. Sold Tk.20,000 of merchandise to Bright Company, terms 2/10, n/45. Accepted a Tk.20,000, 3-months, 10% note from Bright Company for the balance due. Sold Tk.12,000 of merchandise to Nixon Company and accepted a 4 months, 10% note. Collected Limo Company note in full. Bright Company dishonors its note of April 30. It is expected that Bright will pay the amount owed. Nixon Company dishonors its note and there is no hope of future settlement.

Instructions: Journalize the transactions. Solution: Expo Company Journal entries Date 2016 Jan.12 Feb.20 Mar.12 Mar.15 Apr.30 May 10 May 20

July 30

Sep.10

Particulars

Accounts receivable- Luxury Co. Merchandise inventory Notes receivable- Limo Co. Merchandise inventory Cash Accounts receivable- Luxury Co. Accounts receivable- Bright Co. Merchandise inventory Notes receivable- Bright Co. Accounts receivable- Bright Co. Notes receivable- Nixon Co. Merchandise inventory Cash Notes receivable- Limo Co. Interest revenue Accounts receivable- Bright Co. Notes receivable- Bright Co. Interest revenue Bad debt expense Notes receivable- Nixon Co. Interest revenue

Debit (Tk.)

Credit (Tk.)

10,000 10,000 8,000 8,000 10,000 10,000 20,000 20,000 20,000 20,000 12,000 12,000 8,200 8,000 200 20,500 20,000 500 12,400 12,000 400


P-6. On January 1, 2018, the ledger of ‗Devo Co.‘ contains the following liability accounts: Accounts payable Sales tax payable Unearned service revenue

Tk.55,000 Tk.7,500 Tk.20,000

During January the following selected transactions occurred: January 1 Borrowed Tk.16,000 in cash from Exim Bank Ltd. on a 4 months, 10% note. January 6 Sold merchandise for cash totaling of Tk.15,600, which includes 4% sales tax. January 14 Provided service for customers who had made advance payment of Tk.12,000 (credit service revenue). January 20 Tax department paid Tk.7,500 sales tax collected in 2018. January 25 Sold 1,000 units of new product on credit at Tk.88 per unit, plus 4% sales tax. This new product is subject to 1 year warranty. January 28 Sold merchandise for cash totaling of Tk.22,880, which includes 4% sales tax. Required: (a) Journalize the January transactions. (b) Journalize the adjusting entries at January 31, for outstanding notes payable and warranty liability assuming warranty cash are expected equal to 8% of sales of new products. (c) Prepare the current liability section of Balance Sheet at January 31, 2018. Assume no change of accounts payable. Solution: (a) Devo Co. Journal entries Date 2018 Jan. 1

Particulars

Cash

Debit (Tk.) 16,000

10% Notes payable Jan. 6

Cash

16,000 15,600

Sales Sales tax payable ( Jan. 14 Jan. 20 Jan. 25

Credit (Tk.)

Unearned service revenue Service revenue Sales tax payable Cash Accounts receivable Sales Sales tax payable

15,000 600

Tk.15,600 X 4 ) 104

12,000 12,000 7,500 7,500 91,520 88,000 3,520


Jan. 28

Cash

22,880 Sales Sales tax payable (

22,000 880

Tk.22,880 X 4 ) 104

(b) Adjusting entries Date 2018 Jan. 31

Jan. 31

Particulars

Interest expense

Debit (Tk.)

Credit (Tk.)

133

Tk.16,000 X 10 Interest payable ( ) 100 X 12 Warranty expense Estimated warranty liability (Tk.88,000 X 8%)

133 7,040 7,040

(c) Devo Co. Balance sheet As at January 31, 2018 Current liabilities: Accounts payable 10% Notes payable Unearned service revenue (Tk.20,000 – Tk.12,000) Estimated warranty liability Sales tax payable (Tk.7,500 – Tk.7,500 + Tk.600 + Tk.3,520 + Tk.880) Interest payable Total current liabilities

Taka 5,500 16,000 8,000 7,040 5,000 133 91,173

P-7. The following selected transactions are related to Falcon Company: March 01 Sold Tk.20,000 of merchandise to Promise Company on terms 2/12, n/30. 11 Received payment in full from Promise Company for balance due. 12 Accepted Juno Company‘s Tk.20,000, 6 months, 12% note for balance due. 13 Made credit card sales for Tk.13,200. 15 Made Visa credit sales totaling Tk.6,700, a 3% service fee is charged by Visa. April 11 Sold accounts receivable of Tk.8,000 to Harbor Factory. Harbor Factory assesses a service charge of 2% of the amount of receivables sold. 13 Receive collection of Tk.8,200 on Falcon Company credit card sales and added finance charge of 1.5% of the remaining balance. May 10 Write of as uncollectible Tk.16,000 of accounts receivable. Falcon uses the percentage of sales basis to estimate bad debts. June 30 Credit sales recorded during the first 6 months total Tk.2,000,000. The bad debt percentage is 1% of credit sales. At June 30, the balance in the allowance account is Tk.3,500.


July 16 One of the accounts receivable written off in May was from Mr. Sumon, who pays the amount due, Tk.4,000, in full. Required: Record the above transactions in the book of the Falcon Company. Solution:

Date March 01 March 11

March 12

March 13

March 15

April 11

April 13

April 13

May 10

June 30

July 16

July 16

Falcon Company Journal entries Particulars Accounts receivable – Promise Co. Sales Cash Sales discount (Tk.20,000 X 2%) Accounts receivable – Promise Co. (To record collection of accounts receivable) Notes receivable Accounts receivable – Juno Co. (To record acceptance of Juno Company note) Accounts receivable Sales (To record company credit card sales) Cash Service charge expense (Tk.6,700 X 3%) Sales (To record credit card sales) Cash Service charge expense (Tk.8,000 X 2%) Accounts receivable (To record sale of receivables to factory) Cash Accounts receivable (To record collection of accounts receivable) Accounts receivable (Tk.13,200 – Tk.8,200) X 1.5% Interest revenue (To record interest on amount due) Allowance for doubtful accounts Accounts receivable (To record write-off of accounts receivable) Bad debts expense (Tk.2,000,000 X 1%) Allowance for doubtful accounts (To record estimated uncollectible accounts) Accounts receivable – Sumon Allowance for doubtful accounts (To reverse write-off of accounts receivable) Cash Accounts receivable – Sumon (To record collection of accounts receivable)

Debit (Tk.) 20,000

Credit (Tk.) 20,000

19,000 400 20,000 20,000 20,000 13,200 13,200 6,499 201 6,700 7,840 160 8,000 8,200 8,200 75 75

16,000 16,000 20,000 20,000

4,000 4,000 4,000 4,000


P-8. On January 1, 2018, Mosaj & Co. had accounts receivable Tk.56,900 and allowance for doubtful accounts Tk.4,700. Mosaj & Co. prepares financial statements annually. During the year the following selected transactions occurred. Jan. 05 Sold Tk.6,300 of merchandise to Dender Company, terms n/30. Feb. 02 Accepted a Tk.6,300, 4-month, 10% promissory note from Dender Company for the balance due. Feb. 12 Sold Tk.7,800 of merchandise to Menar Company and accepted Menar‘s Tk.7,800, 2-month, 10% note for the amount due. Feb. 26 Sold Tk.4,000 of merchandise to Look Co., terms n/10. Apr. 05 Accepted a Tk.4,000, 3-month, 8% note from Look Company for the balance due. Apr. 12 Collected Menar Company note in full. June 22 Collected Dender Company note in full. July 05 Look Company dishonors its note of April 05. It is expected that Look will eventually pay the amount owed. July 15 Sold Tk.7,000 of merchandise to Peak Company and accepted Tk.7,000, 3month,12% note for the amount due. Oct. 15 Peak Company‘s note was dishonored. Peak Company is bankrupt and there is no hope of future settlement. Required: Journalize the transactions. Solution: Solution:

Date 2018 Jan. 05

Feb. 02

Feb. 12

Feb. 26

Apr. 05

Apr. 12

Mosaj & Co. Journal entries Particulars Accounts receivable – Dender Co. Sales (Sold merchandise on account) Notes receivable Accounts receivable – Dender Co. (Received note from a customer) Notes receivable Sales (Received note for sales on account) Accounts receivable – Look Co. Sales (Sold merchandise on account) Notes receivable Accounts receivable – Look Co. (Received note from a customer) Cash Notes receivable Interest revenue (Received cash from Menar Company note at maturity)

Debit (Tk.)

Credit (Tk.)

6,300 6,300 6,300 6,300 7,800 7,800 4,0000 4,000 4,000 4,000 7,930 7,800 130


June 02

July 05

July 15

Oct. 15

Computation: Maturity value = Tk.7,800 + Tk.7,800 X 10% 60 X = Tk.7,930 360 Interest revenue = MV – FV = Tk.7,930 – Tk.7,800 = Tk.130 Cash Notes receivable Interest revenue (Received cash from Dender Company‘s note at maturity) Computation: Maturity value = Tk.6,300 + Tk.6,300 X 10% 120 X = Tk.6,510 360 Interest revenue = MV – FV = Tk.6,510 – Tk.6,300 = Tk.210 Accounts receivable – Look Co. Notes receivable Interest revenue (Look Company‘s note was dishonored and this account is debited with interest) Computation: Maturity value = Tk.4,000 + Tk.4,000 X 8% X 90 = Tk.4,080 360 Interest revenue = MV – FV = Tk.4,080 – Tk.4,000 = Tk.80 Notes receivable – Peak Co. Sales (Received note for sale on account) Bad debt expenses Notes receivable Interest revenue (Peak Company‘s note was dishonored and directly written-off this account) Computation: Maturity value = Tk.7,000 + Tk.7,000 X 12% 90 X = Tk.7,210 360 Interest revenue = MV – FV = Tk.7,210 – Tk.7,000 = Tk.210

6,510 6,300 210

4,080 4,000 80

7,000 7,000 7,210 7,000 210


P-9. Jesmin, the owner of BIJOY TRADERS‘ is a business woman. During January 2018, she completed the following selected transactions: January 2 Merchandise taken for her personal use costing of Tk.15,000. January 5 Merchandise taken for her personal use at sales price of which Tk.30,000 and cost is Tk.25,000. January 7 Merchandise cost of Tk.20,000 distributed to the potential customers as free of cost. January 9 Goods sold without profit of Tk.20,000. January 12 Merchandise costing of Tk.3,000 used to repair equipment. January 14 Merchandise costing of Tk.6,000 used as supplies. January 15 Merchandise costing of Tk.7,000 and wages of Tk.5,000 are spent for erection of new machines. January 20 Received Tk.5,000 as advance against a purchase order placed by a new customer. January 22 Supply the merchandise ordered in January 20 for Tk.100,000 (cost Tk.80,000). January 25 Merchandise destroyed by fire costing of Tk.10,000. January 31 The Progoti Insurance Company meets the claim of January 25 for compensation of Tk.8,000 as final settlement. Required: Journalize the transactions under perpetual inventory system. Solution:

Date 2018 Jan. 2 Jan. 5

Jan. 7 Jan. 9 Jan. 12 Jan. 14 Jan. 15

Jan. 20 Jan. 22

BIJOY TRADERS Journal entries Particulars

Jesmin Drawings Merchandise inventory Cost of goods sold Merchandise inventory (Profit is not considered) Advertising expense Merchandise inventory Cash Merchandise inventory Repair expense Merchandise inventory Supplies expense Merchandise inventory Equipment Merchandise inventory Cash Cash Unearned sales revenue Cash Unearned sales revenue Sales

Debit (Tk.)

Credit (Tk.)

15,000 15,000 25,000 25,000 20,000 20,000 20,000 20,000 3,000 3,000 6,000 6,000 12,000 7,000 5,000 5,000 5,000 95,000 5,000 100,000


Jan. 25 Jan. 31

Cost of goods sold Merchandise inventory Goods destroyed by fire Merchandise inventory Cash Loss on fire Goods destroyed by fire

80,000 80,000 10,000 10,000 8,000 2,000 10,000

P-10. ABC Company completes the following selected transactions during the year 2017. January 10 - An amount of Tk.30,000 was paid as advance rent for three months. February 12- Purchased equipment costing Tk.100,000 on account. March 1 - Paid Tk.40,000 cash for the purchase of equipment on Feb.12. The remaining amount was recognized as a 4 months note payable with interest rate of 10%. April 5 - Provided services to its customers and received Tk.300,000 in cash. April 30 - Paid wages to its employees for the month of April total Tk.50,000. May 20 - Provided services to its customers amounted Tk.25,000. They paid Tk.15,000 and promised to pay the remaining amount. May 25 - Received Tk.10,000 from customers for the services provided on May 20. July 1 - ABC Company paid the note payable due on March 1. August 22 - Received Tk.28,000 as an advance payment from customers for services. September 30 - Paid cash dividend Tk.80,000. October 31 - Received telephone bill of Tk.5,000. November 30 - Received electricity bill of Tk.8,000. Required: (a) Prepare journal entries for the above transactions under gross method. (b) Prepare the trial balance. Solution: (a)

Date 2016 Jan. 10 Feb. 12 Mar. 1

Apr. 5 Apr. 30 May 20

ABC Company Journal entries (Gross method) Particulars Prepaid rent Cash Equipment Accounts payable Accounts payable Cash Notes payable Cash Service revenue Wages expense Cash Cash Accounts receivable Service revenue

Dr. (Tk.)

Cr. (Tk.)

30,000 30,000 100,000 100,000 100,000 40,000 60,000 300,000 300,000 50,000 50,000 15,000 10,000 25,000


May 25 Jul. 1

Aug. 22 Sep. 30 Oct. 31 Nov. 30

Cash

10,000

Accounts receivable Notes payable Interest expense Cash Cash Unearned service revenue Dividends expense Cash Telephone expense Utilities payable Electricity expense Utilities payable

10,000 60,000 2,000 62,000 28,000 28,000 80,000 80,000 5,000 5,000 8,000 8,000

(b) ABC Company Trial balance At December 31, 2017 Particulars Cash Prepaid rent Equipment Wages expense Interest expense Telephone expense Electricity expense Dividend expense Utilities payable Service revenue Unearned service revenue

Dr. (Tk.) 91,000 30,000 100,000 50,000 2,000 5,000 8,000 80,000

Total

366,000

Cr. (Tk.)

13,000 325,000 28,000 366,000

P-11. Real Printing starts business in July, with cash Taka 20,000. During the month of July, 2018 following transactions took place: July 01 - Purchased merchandise on account from Jamal and Brothers Taka 8,000. FOB shipping point, terms 2/10, n/30. July 02 – Paid freight charges Taka 500 for the purchase of July 1. July 10 – Received credit from Jamal for defective merchandise returned Taka 1,000. July 12 – Sold merchandise on account Taka 6,000, terms 2/10, n/30. Merchandise had a cost of Taka 5,000. July 16 – Purchased merchandise on account for Taka 10,000, terms 2/10, n/30. FOB shipping point. July 19 – Paid in full for the purchase of July 1. July 20 – Received a credit from the supplier of July 16 purchase for merchandise returned Taka 2,000. July 22 – Made sale on account Taka 8,000, terms 2/10, n/30, FOB destination. Merchandise had a cost of Taka 6,500. July 24 – Paid freight charges Taka 600 for the sale of July 22. July 25 – Paid in full for the purchase July 16. July 30 – Received part payment on account from the customers Taka 5,000.


Required: Prepare journal entries under net method being perpetual inventory system. Solution:

Date 2018 July 1 July 2 July 10 July 12

July 16 July 19

July 20 July 22

July 24 July 25 July 30

Real Printing Journal entries (Net method) Particulars

Debit (Tk.)

Merchandise inventory Accounts payable Merchandise inventory Cash Accounts payable Merchandise inventory Accounts receivable Sales Cost of goods sold Merchandise inventory Merchandise inventory Accounts payable Accounts payable Purchase discount (Tk.7,000X2%) Cash (Tk.8,000-Tk.1,000) Accounts payable Merchandise inventory Accounts receivable Sales Cost of goods sold Merchandise inventory Deliver expense Cash Accounts payable Cash Cash Accounts receivable

Credit (Tk.)

7,840 7,840 500 500 980 980 6,000 6,000 5,000 5,000 9,800 9,800 6,860 140 7,000 1,960 1,960 8,000 8,000 6,500 6,500 600 600 7,840 7,840 5,000 5,000

P-12. The trial balance of Khan & Co. shows among other items, the following balances on December 31, 2017, the end of fiscal year: Accounts Receivable 9% Century City Bonds Land Buildings Accumulated Depreciation – Buildings 8% First Mortgage Bond Payable Rent Revenue Office Expenses

Tk.225,000 150,000 275,000 300,000 Tk.173,250 300,000 71,500 7,500


The following facts are ascertained on this date upon inspection of the company‘s records: (a) It is estimated that approximately 2% of accounts receivable may prove uncollectible. (b) Interest is received semiannually on the Century City Bonds on March 1 and September 1. (c) Buildings are depreciated at 5% a year; however, there were building additions of Tk.50,000 during the year. The company computes depreciation on assets acquisitions during the year at one-half the annual rate. (d) Interest on the First Mortgage Bonds is payable semiannually on February 1 and August 1. (e) Rent revenue includes Tk.3,750 that was received on November 1, representing rent on part of the buildings for the period November 1, 2017 to October 31, 2018. (f) Office supplies of Tk.2,000 are on hand on December 31. Purchases of office supplies were debited to the office expense account. Instructions: (i) Prepare the journal entries to adjust the books on December 31, 2017. (ii) Give the reversing entries that may appropriately be made at the beginning of 2018. Solution: (i) Khan & Co. Journal entries Si. No. (a)

(b)

(c)

(d)

(e)

(f)

Particulars Bad debt expenses Allowance for bad debt (Tk.225,000 X 2%) Interest receivable Interest income 4 (Tk.150,000 X 9% X ) 12 Depreciation expense Accumulated depreciation 1 (Tk.250,000 X 5% + Tk.50,000 X 5% X ) 2 Interest expense Interest payable 5 (Tk.300,000 X 8% X ) 12 Rent revenue Unearned rent revenue 10 (Tk.3,750 X ) 12 Office supplies Office expense

Debit (Tk.) 4,500

Credit (Tk.) 4,500

4,500 4,500

15,000 15,000

10,000 10,000

3,125 3,125

2,000 2,000


(ii) Reversing entries Si. No. (a) (b) (c) (d)

Particulars

Debit (Tk.) 4,500

Interest revenue Interest receivable Interest payable Interest expense Unearned rent revenue Rent revenue Office expense Office supplies

Credit (Tk.) 4,500

10,000 10,000 3,125 3,125 2,000 2,000

P-13. The trial balance of Star Repairing Company is given below: Star Repairing Company Trial Balance April 30, 2018

Cash Accounts receivable Supplies Equipment Accumulated depreciation Accounts payable Salaries payable Unearned fees Star capital Fees earned Salaries expenses Administrative expenses Miscellaneous expenses Depreciation expenses

Dr. (Tk.) 51,000 32,000 8,000 1,06,000

Cr. (Tk.)

13,500 21,000 5,000 8,900 1,39,000 54,500 33,000 4,000 2,900 5,000 Tk.2,41,900

______ Tk.2,41,900

A newly qualified CMA reviewed the records and found the following errors: (a) Cash received from a customer on account was recorded as Tk.6,500 instead of Tk.5,600. (b) The purchase, on account, of a computer costing Tk.3,400 was recorded as a debit to supplies and a credit to accounts Payable for Tk.3,400. (c) A payment of Tk.300 for advertising expenses was entered as a debit to Miscellaneous Expense Tk.300 and a credit to cash Tk.300. (d) The first salary payment of this month was for Tk.19,000, which included Tk.5,000 of salaries payable on March 31. The payment was recorded as a debit to Salaries Expenses Tk.19,000. (No reversing entries were made on April 1) (e) A cash payment of repair expense on equipment for Tk.860 was recorded as a debit to equipment Tk. 680 and a credit to cash Tk.680.


Required: (i) Show the incorrect entry; (ii) Show the correct entry; (iii) Show the correcting entry; (iv) Prepare a correct trial balance. Solution: (i)

Si. No. (a) (b) (c) (d) (e)

Star Repairing Company Incorrect entries Particulars Cash Accounts receivable Supplies Accounts receivable Miscellaneous expenses Cash Salaries expenses Cash Equipment Cash

(ii) Si. No. (a) (b) (c) (d)

(e)

(iii) Si. No. (a) (b) (c) (d)

Star Repairing Company Correct entries Particulars Cash Accounts receivable Equipment Accounts receivable Advertising expenses Cash Salaries expenses Salaries payable Cash Repair expenses Cash Star Repairing Company Correcting entries Particulars Accounts receivable Cash Equipment Supplies Advertising expenses Miscellaneous expenses Salaries payable Salaries expenses

Debit (Tk.) 6,500

Credit (Tk.) 6,500

3,400 3,400 300 300 19,000 19,000 680 680

Debit (Tk.) 5,600

Credit (Tk.) 5,600

3,400 3,400 300 300 14,000 5,000 19,000 860 860

Debit (Tk.) 900

Credit (Tk.) 900

3,400 3,400 300 300 5,000 5,000


(e)

Repair expenses Cash Equipment

Star Repairing Company Trial Balance As on April 30, 2018 Dr. (Tk.) Cash (51,000 – 900 – 180) 49,920 Accounts receivable (32,000 + 900) 32,900 Supplies (8,000 – 3,400) 4,600 Equipment (1,06,000 + 3,400 – 680) 1,08,720 Accumulated depreciation Accounts payable Salaries payable (5,000 – 5,000) Unearned fees Star capital Fees earned Salaries expenses (33,000 – 5,000) 28,000 Administrative expenses (4,000 + 3,000) 4,300 Miscellaneous expenses (2,900 – 300) 2,600 Depreciation expenses 5,000 Repair expenses __ 860 Tk.2,36,900

860 180 680

(iv)

Cr. (Tk.)

13,500 21,000 0 8,900 1,39,000 54,500

______ Tk.2,36,900


EXERCISES E-1. Ms. Antonio, a junior accounting clerk of Nike made the necessary accounting entry during the month of May 2017. But the Trial Balance of Nike did not agree at the end of month. Therefore, Ms. Antonio created a Suspense Account for the difference. The following errors were subsequently discovered by her manager which were rectified accordingly and Suspense Account was Balanced afterwards: (1) Installation cost of a new machinery charged to Repairs Account for Tk.500. (2) Purchase for Tk.650 was written in Sales Day Book, but was posted to the correct side of the party‘s account. (3) Sales Book was overcast by Tk.3,000. (4) Purchase of Furniture for Tk.6,150 passed through Purchase Book. (5) An amount of Tk.50 received form Z Inc. was posted in Z‘s name at Tk.550. (6) Purchase Return Book total on a folio was carried forward as Tk.2,150 instead of Tk.1,250. (7) A cash sale of Tk.1,235 duly entered in the cash book but posted to Sales Accounts as Tk.2,350. (8) Tk.1,000 received from Lucia has been entered in the cash book in the name of Maria Inc. (9) Tk.500 received from Sainsbury Inc. was debited to Sainsbury‘s account. Required: Give journal entries to rectify the above and prepare Suspense Account. E-2. At IBM Co.‘s year end, the trial balance contained a suspense account with a credit balance of Tk.1,040. Investigations revealed the following errors: (1) A sale of goods on credit for Tk.1,000 had been omitted from the sales account. (2) A delivery and installation cost of Tk.240 on a new item of plant has been recorded as revenue expenditure in the distribution costs account. (3) Cash discount of Tk.150 had been taken on paying a supplier, even though the payment was made outside the time limit. Mr. J is insisting that Tk.150 is still payable. (4) A raw materials purchase of Tk.350 had been recorded in the purchases account as Tk.850, but the trade payables account was correctly written up. (5) The purchases day book included a credit note for Tk.230 as an invoice in the total column. The correct entry was made in the purchases account. Required: (i) Prepare journal entries to correct each of the above errors. Narratives are not required. (ii) Open a suspense account and show the correction to be made. (iii) Before the errors were corrected, IBM Co.‘s gross profit was calculated at Tk.35,750 and the net profit for the year at Tk.18,500. Calculate the revised gross and net profit figures after correction of the errors. E-3. Alfred Inc. operates merchandising business in Virginia, USA. Following transactions took place in Alfred Inc. in the month of May 2016: May 1 Purchased merchandise on account from West Wood Inc. for $50,000, terms 2/10, n/30. May 2 Sold merchandise on account to Blue Ocean Inc. for $12,000, terms 2/10, n/30. The cost of merchandise sold was $7,000. May 3 Purchased supplies on credit from Lehman Inc. for $7,000.


May 4 May 8 May 8 May 9 May 12 May 15 May 31 May 31

Purchased Gasoline on cash for $9,000. Sold merchandise on cash for $5,000. The cost of merchandise sold was $3,000. Payment received in full from Blue Ocean Inc. as per sales/ credit term. Payment made in full to West Wood Inc. as per sales/ credit term. Sold merchandise on credit to Primark Inc. for $4,000. The cost of Merchandise sold was $2,700. Returned all sold merchandised from Primark Inc. for some quality complains. Payment made to Lehman Inc. in full. Rent accrued for the month of May 2016 for $1,300.

Required: Journalize the May transactions in Alfred Inc.‘s books of accounts using Perpetual Inventory System. E-4. The following trail balance of Water Company does not balance: Water Company Trial balance June 30, 2014 Particulars Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Service Revenue Common Stock Retained Earnings Service Revenues Wages Expenses Office Expenses

Debit Taka

Credit Taka 2,870

3,231 800 3,800 2,666 1,200 6,000 3,000 2,380 3,400 940 13,371

____ 16,916

Each of the listed accounts should have a normal balance as per the general ledger. An examination of the ledger and journal reveals the following errors: i. Cash received from a customer on account was debited for Tk.570 and accounts receivable was credited for the same amount. The actual collection was for Tk.750. ii. The purchase of a computer printer on account for Tk.500 was recorded as debit to suppliers for Taka 500 and a credit to accounts payable for Tk.500. iii. Services were performed on account for a client for Tk.890. Accounts receivable was debited for Tk.890 and service revenue credited for Tk.89. iv. A payment of Tk.65 for telephone charges was recorded a debit to office expenses for Tk.65 and a debit to cash for Tk.65. v. When the unearned service revenue account was reviewed, it was found that Tk.325 of the balance was earned prior to June 30. vi. A debit posting to wages expense of Tk.670 was omitted.


vii. A payment on account for Tk.206 was credited to cash for Tk.206 and credited to accounts payable for Tk.260. viii. A dividend of Tk.575 was debited to wages expenses for Tk.575 and credited to cash for Tk.575. Required: Prepare a correct trial balance. (Note: it may be necessary to add one or more accounts to the trial balance). E-5. On January 1, 2015, the Ledger of FARHANA Paper Mills Ltd. contains following current liability accounts: Taka Accounts Payable 62,000 VAT Payable 8,250 Unearned Service Revenue 17,000 During January the following selected transactions occurred: January 6 Sold merchandise for cash totaling Tk.35,075, which includes 15% VAT. 12 Provide services for customers who had made advance payments of Tk.10,000. 14 Paid to the Bangladesh Bank Treasury for VAT collected in December, 2014 Tk.8,250. 20 Borrowed Tk.20,000 from Agrani Bank Ltd. on a 3 months @ 12%, Tk.20,000 note. Required: Journalize the January transactions and prepare the Current Liabilities section of the Balance Sheet at January 31, 2015. E-6. The payroll liability accounts are included in the ledger of ALHAMARAH COMPANY on January 1, 2014 are as follows: FICA Taxes Payable $3,800.00 Federal Income Taxes Payable 6,023.00 State Income Taxes Payable 544.75 Federal Unemployment Taxes Payable 1,444.75 State Unemployment Taxes Payable 9,772.00 Union Dues Payable 4,350.00 United State Savings Bonds Payable 1,800.00 The following transactions occurred in January. Jan. 10 Sent check for $4,350.00 to union treasurer for union dues. 12 Check for $9,823.00 deposited in Federal Reserve Bank for FICA taxes and federal income taxes withheld. 15 Purchased United States Savings Bonds for employees by writing check for $1,800.00. 17 Paid State income taxes withheld from employees. 20 paid federal and state unemployment taxes. 31 Store wages $1,42,000.00, FICA Taxes withheld $22,000.00, federal income taxes payable $10,790.00, state income taxes payable $2,270.00, union dues payable $2,000.00, United Fund Contributions payable $9,440.00 and net pay $2,28,500.00 31 Prepared payroll checks for the net pay and distributed checks for employees.


At January 31, the company also makes the following accrued adjustments pertaining to employee compensation. 1. Employer payroll taxes: FICA taxes 8%, Federal unemployment taxes 0.8%, and state unemployment taxes 5.4%. 2. Vacation pay: 6% of gross earnings. Required: (1) Journalize the January transactions. (2) Journalize the adjustments pertaining to employee compensation at January 31. E-7. On January 1, 2008 Frybendall Company had Accounts Receivable Tk.56,900 and Allowances for Doubtful Accounts Tk.4,700. Frybendall Company prepares financial statements annually. During the year the following selected transactions occurred: Jan. 5 Sold Tk.6,300 of merchandise to Klosterman Company, terms n/30. Feb. 2 Accepted a Tk.6,300, 4-month, 10% promissory note from Klosterman Company for the balance due. Feb. 12 Sold Tk.7,800 of merchandise to Mendard Company, and accepted Mendard‘s Tk.7,800, 2 month, 10% note for the balance due. Feb. 26 Sold Tk.4,000 of Merchandise to Louk Co., terms n/10. Apr. 5 Accepted a Tk.4,000, 3-month, 8% note from Louk Co. for the balance due. Apr. 12 Collected Mendard Company note in full. June 2 Collected Klosterman Company note in full. July 5 Louk Co. dishonors its note of April 5. It is expected that Louk will eventually pay the amount owed. July 15 Sold Tk.7,000 of Merchandise to Peak Co. and accepted King‘s Tk.7,000, 3month, 12% note for the amount due. Oct. 15 Peak Co.‘s note was dishonors. Peak Co. is bankrupt, and there is no hope of future settlement. Instructions: Journalize the transactions. E-8. CP franchises its name to different people across the country. The franchise agreement requires the franchisee to make an initial payment of Tk.8,000 on the agreement date and four annual payments of Tk.4,000 each beginning one year from the agreement date. The initial payment is refundable until the date of opening. Interest rates are assumed to be 10%. The franchisor agrees to make market studies, find a location, train the employees, and a few other relatively minor services. The following transactions describe the relationship with Rania Azad, a franchisee. July 1, 2013 – Entered into a franchise agreement September 1, 2013 – Completed a market study at a cost of Tk.4,000 November 15, 2013 – Found suitable location. Service cost Tk.2,000 January 10, 2014 – Completed training program for employees, cost Tk.5,000 January 15, 2014 – Franchise outlet opened. Required: Give the journal entries in 2013 – 2014 to record these transactions, including any adjusting entries at December 31, 2013. E-9. The Accounts and other records of ABC Company Limited the following information is made available for the year ended on 30th June 2013:


i) Debit Balance of office supplies on 01-07-20162 Tk.5,000 Purchased during the year 10,500 Supplies on hand on 30-06-2013 2,000 ii) Prepaid Rent (Debit Balance) on 01-07-2012 50,000 Paid during the year Tk.60,000 which includes amount to Tk.24,000 paid as advanced on 1st March 2013, to hire a show room for one year at the rate of Tk.4,000 per month. While paying monthly rent, only 50% rent is paid in cash, while the balance 50% is adjusted against the advance paid. Other advance has expired on 30th June 2013. iii) Prepaid insurance account has a debit balance of Tk.1,38,000. It is paid against the following policies purchased during the year:Policy No. Date of Policy Life Policy Premiums A 5320 August 1, 2012 3 Tk.96,000 E 4520 October 1, 2012 2 24,000 X 3211 May 1, 2013 1 18,000 iv) During the year goods worth of Tk.1,00,000, was sold on ―Sale or return‖ basis. The cost of which was Tk.60,000. It is reported at the end of the year that only goods worth of Tk.80,000 has been sold. v) It has been observed in reconciling Bank accounts that five cheques totalsling an amount of Tk.89,650 issued two years back is still continuing as item of reconciliation and has been decided to adjust in this year‘s Accounts. vi) Repairs and maintenance debit Tk.25,00,000. This seems to be abnormally high in comparison to previous years. On checking, it was found that it includes a bill of Tk.7,50,000, paid for major overhead of a machinery which was required to keep the machinery in working condition for the period estimated previously. vii) An equipment purchased on 1 st Sept. 2010 for Tk.12,00,000, was charged with depreciation @ 10% on Book value up to 30th June 2013. Recently, an instruction has been received from loan giving agency to charge depreciation on straight line method considering 10 years life and Tk.50,000 as scrap value. Required: Give Journal entries for the above. E-10. On January 1, 2011, CANTON Company had Accounts Receivable Tk. 27,100 and Allowance for Doubtful Accounts Tk. 2,350. CANTON Company prepares financial statements annually. During the year the following selected transactions occurred. Jan. 5 Sold Tk. 3,000 of merchandises to Goppy Brooks Company, terms n/30. Feb. 2 Accepted a Tk. 3,000, 4-month, 12% promissory note from Goppy Brooks Company for balance. Feb. 12 Sold Tk. 3,600 for merchandise to Goni Company and accepted Goni‘s Tk. 3,600 two-month.10% note for balance due. Feb. 26 Sold Tk. 2,500 of merchandise to Matin Co. terms n/10. April 5 Accepted a Tk. 2,500, 3- month, 8% note from Matin Co, for balance due. April 12 Collected Goni Company note in full. June 2 Collected Goppy Brooks Company note in full. July 5 Matin Co. dishonors its note of April 5. It is expected that Matin will eventually pay the amount owed. July 15 Sold Tk. 1,500 of merchandise to Treet Inc. and accepted Treet's Tk.1,500 3-month, 12% note for the amount due. Oct 15 The Treet Inc. note was dishonored. Treet Inc. is bankrupt, and there is no hope of future settlement. Required: Journalize the transactions.


E-11. Zobayer Siraj, a former professional tennis star operates his own tennis shop, ‗ZS Tennis Shop‘. At the beginning of the current season his business holds the following inventory balances. No. of units Cost price Selling price Per unit Per unit Racquets 10 Tk.400 Tk.850 Tennis shoes 20 250 600 Shirts and Shorts 35 300 750 The following transactions were completed during June: June 04 : Purchase 30 racquets from Reeve Co. @ Tk. 450 each; FOB destination, terms 1/10, n/60. The appropriate party paid the freight cost of Tk. 200 06 : Received credit of Tk. 450 from Reeve Co. for a damaged racquet that was returned. 08 : Sold tennis shoes of 5 units to members; FOB shipping point, terms 2/10, n/30. The appropriate party paid the freight cost of Tk.100. 12 : Purchase Shirts and Shorts from Lee Enterprise Tk. 2,400; FOB shipping point, terms 3/15, n/25. The appropriate party paid the freight cost of Tk. 150. 15 : Paid Reeve Co. in full. 16 : Sold racquets of 15 units to DD Enterprise for cash; FOB Destination. The appropriate party paid the freight cost of Tk.300 17 : Receive cash payment from members for the merchandise sold on June 8. 20 : Purchase supplies on account Tk. 500 from Lesner Supply Co. 22 : Made refund of Tk.1,700 to DD Enterprise for merchandise returned by them. 25 : Paid Lee enterprise in full. Required: Journalize the June transactions using a perpetual inventory system. ZS Tennis Shop applies FIFO method to value inventories. E-12. The following transactions occurred during 2010. Assume that depreciation of 10% per year is charged on all machineries and 5% per year on buildings, on a straight line basis, with no estimated salvage value. Depreciation charged for a full year on all fixed assets acquired during the year and no depreciation is charged on fixed assets disposed of during the year. January 25 A building that cost Tk.1,320,000 in 1993 is torn down to make room for a new building. The wrecking contractor was paid Tk.51,000 and was permitted to keep all materials salvages. March 10 Machinery that was purchased in 2003 for Tk.160,000 is sold for Tk.29,000 cash, FOB purchaser‘s plant freight of Tk.3,000 is paid on this machinery. May 18 A special base installed for a machine in 2004 when the machine was purchased has to be replaced at a cost of Tk.55,000 because of defective workmanship on the original base. The cost of the machinery was Tk.142,000 is 2004. The cost of the base was Tk.35,000 and this amount was charged to the machinery account in 2004. June 23 One of the buildings is repainted at a cost of Tk.69,000. It had not been painted since it was constructed in 2006.


Required: Prepare necessary general journal entries for the transactions. E-13. Jalal Printing starts business in July, with cash Taka 20,000. During the month of July, 2010 following transactions took place: July 01 - Purchased merchandise on account from Jamal and Brothers Taka 8,000. FOB shipping point, terms 2/10, n/30. July 02 – Paid freight charges Taka 500 for the purchase of July 1. July 10 – Received credit from Jamal for defective merchandise returned Taka 1,000. July 12 – Sold merchandise on account Taka 6,000, terms 2/10, n/30. Merchandise had a cost of Taka 5,000. July 16 – Purchased merchandise on account for Taka 10,000, terms 2/10, n/30. FOB shipping point. July 19 – Paid in full for the purchase of July 1. July 20 – Received a credit from the supplier of July 16 purchase for merchandise returned Taka 2,000. July 22 – Made sale on account Taka 8,000, terms 2/10, n/30, FOB destination. Merchandise had a cost of Taka 6,500. July 24 – Paid freight charges Taka 600 for the sale of July 22. July 25 – Paid in full for the purchase July 16. July 30 – Received part payment on account from the customers Taka 5,000. Required: Prepare journal entries under net price method being perpetual inventory system. E-14. Presented below are selected transactions related to Bin-Dawod Corporation. March 1 Sold Tk.40,000 of merchandise to Podder Company, terms 2/10, n/30. 11 Received payment in full from Podder Company for balance due. 12 Accepted Jumbo Company‘s Tk.40,000 6 months, 12% note for balance due. 13 Made Dawod Corporation credit Sales for Tk.26,400. 15 Made American Express Credit-sales totaling Tk.13,400. A 5% service fee charged by American Express. 30 Received payment in full from American Express Company less 5% service charge. April 11 Sold accounts receivable of Tk.16,000 to Hemo Foaz Assesses a service charge of 2% of the amount of receivable sold. 13 Received collections of Tk.16,400 on Dawod Corporation credit-card sales and added finance charges of 1.5% to the remaining balances. May 10 Wrote off as uncollectible Tk.32,000 of accounts receivable. Dawod uses the percentage of sales basis to estimate bad debts. June 30 Credit sales for the first six months total Tk.40,00,000 and the bad debt percentage is 1%. At June 30, the balance in the allowance account is Tk.7000. July 16 One of the accounts receivable written off in May pays the amount due Tk.8,000 in full. Required: Prepare the journal entries for the above transactions. E-15. Star Commercial Properties Inc. has an accounting period of one year, ending on July 31. On July 1, 2008, the balance of certain ledger accounts are notes receivable Tk.6,540; and notes payable Tk.9,000. A schedule of the notes receivable is as follows:


Face Amount Tk.2,700 1,200 2,640

Maker Prodip Co. Dohar Co. Famcy Co.

Date of Note 15/5/2008 31/5/2008 15/6/2008

Life 60 days 60 days 30 days

Interest Rate 12% 12% 10%

The note payable is a 60-day bank loan dated May 20, 2008 – Notes Payable – Discount was debited for the discount of Tk.60. Following are the company‘s transactions during July: July – 1: Star Commercial Properties Inc. discounted its own Tk.900, 60-day noninterest bearing note at Kaza Bank. The discount rate is 10% and the note was dated today. July – 3: Received a 20-day 12% rate, dated today, from Sosil Company in settlement of an account receivable of Tk.360. July – 6: Purchased merchandise from Lanka Company, Tk.2,880 and issued a 60day, 12% note, dated today for the purchase. July – 8: Sold merchandise to Fatah Company, Tk.3,600, a 30-day, 12% note, dated today, received to cover the sale. July – 14: Received payment on the Prodip Company note dated June 15, 2008. July – 15: Fancy Company sent a Tk.1,200, 30-day, 12% note, dated today and a cheque to cover the part of the old note not covered by the new note, plus all interest expense incurred on the prior notice. July – 19: The note payable dated May 20, 2008 was paid in full. July – 21: Sosil Company dishonored its note of July 3 and sent a cheque for the interest on the dishonored note and a new 30-day 12% note dated July 23, 2008. July – 30: The Dohar Company note dated May 31, 2008 was paid with interest in full. Required: Prepare dated journal entries for transactions and necessary July 31 adjusting entries. E-16. Journalize the following transactions: (i) Materials purchased and received on account Tk. 2,00,000. (ii) Materials requisitioned for production Tk. 1,60,000 and for indirect factory use Tk. 24,000 during the month. (iii) The distribution of the payroll was; Direct Labour 60%, Indirect factory Labour 15%; Marketing Salaries 18% and administrative Salaries 7%. (iv) Factory overhead consisting of Depreciation Tk. 17,000; Prepaid insurance Tk. 2,400. (v) General factory overhead costs (not itemized) Tk. 52,680; 70% of these expenses were paid in cash, the balance was credited to Account Payable. (vi) Amount received from customers in Payment of their accounts Tk. 4,10,000. (vii) Liabilities of Accounts Payable Tk. 4,14,000; Estimated Income Tax Tk. 71,400 and Due on Long-term debt Tk. 20,000 were paid. (viii) Factory overhead accumulated in the factory overhead control accounts was transferred to the work in process account. (ix) Work completed and transferred to finished goods Tk. 6,40,000. (x) Provision for income tax Tk. 52,000. E-17. Clayco Company completes the following selected transactions during the year 2009.


July 14 Writes off a Tk.750 Account Receivable arising from a sale to Briggs Company that dates to months ago. (Clayco Company uses the allowance method). July 30 Clayco Company receives a Tk.1,000, 90 days, 10% note in exchange for merchandise sold to Sumrell Company (the merchandise cost Tk.600). August 15 Receives Tk.2,000 cash plus a Tk.10,000 note from JT Co. in exchange for Merchandise that sells for Tk.12,000 (its cost is Tk.8,000. The note is dated August 15, bears 12% interest, and matures in 120 days. Nov.01 Competed a Tk.200 credit Card sale with a 4% fee (the cost of sale is Tk.150). The cash is received immediately from the credit card company. Nov.03 Sumrell Company refuses to pay the note that was due to Clayco Company on October 28. Nov.05 Completed a Tk.500 credit card sale with a 5% fee (the cost of sale is Tk.300). The payment from the credit card Company is received on Nov.9. Nov.15 Received the full amount of Tk.750 from Bridge Company that was previously written off on July 14. Record the bad debts recovery. Dec.13 Received payment of principle plus interest from JT for the August 15 note. Required: Prepare the Journal Entries to record these transactions on Clayco Company books. E-18. The Ainge Company values its perpetual inventory at the lower of FIFO cost or market. The inventory accounts at December 31, 2009 had the following balances: Taka Raw Materials 81,000 Allowance of Reduce Raw Material Inventory from cost to market 5,700 Work in Process 1,31,520 Finish Goods 2,05,200 The following are some of the transactions that affected the inventory of the Ainge Company during 2009: Feb 10 Purchased raw materials at an invoice price of Tk.30,000; terms 3/15, n/30 Ainge Company uses the net method of valuing inventories. March 15 Ainge Company repossessed an inventory item from a customer who was overdue in making payment. The unpaid balance on the sale was Tk.175. The repossessed merchandise is to be refinished and placed on sales. It is expected that the item can be sold for Tk.250 after estimated refinishing cost of Tk.50. The normal profit for this item is considered to be Tk.40. Apr 01 Refinishing costs of Tk.55 are incurred on the repossessed item. Apr 10 The repossessed item is resold for Tk.250 on account; 20% down. May 30 A sales on account is made of finished goods that have a list price of Tk.740 and a cost of Tk.480. A reduction from the list price of Tk.100 is granted as a trade-in allowance. The trade-in item is to be priced to sell at Tk.80 as is. The normal profit on this type of inventory is 25% of the sales price. Nov 30 Ordered materials to be delivered January 31, 2010, at a cost of Tk.21,600. No discount terms were included. Dec 31 The following information was available to adjust the accounts for the annual statements:


Additional information: (a) The market value of items ordered on November 30 had declined to Tk.18,000. (b) The raw material; inventory account had a cost balance of Tk.1,10,400. Current market value was Tk.1,01,400. (c) The finished goods inventory account had a cost balance of Tk.1,77,600. Current market value was Tk.1,89,000. Required: Record this information in journal entry form, including any required adjusting entries at December 2009. E-19. Plant acquisitions for selected companies are as follows: (i) B. Co. acquired land, building and equipment from a bankrupt co. for a lumpsum price of Tk.700,000. At the time of purchase, the seller had the following book and appraisal values: Head Book value Appraisal value Land Tk.200,000 Tk.150,000 Buildings 250,000 350,000 Equipment 300,000 300,000 (ii) H. Enterprise purchased stores equipment by making a Tk.2,000 cash down payment and signing a one year, Tk.23,000, 10% note payable. (iii) Kim Com. purchased office equipment for Tk.20,000, terms 2/10, n/30. The company policy was to take the discount facility. (iv) Kissam Co. received at zero cost a piece of land from a donor. The appraisal value of the land is Tk.27,000. (v) Zabed Traders built a warehouse for Tk.600,000. It could have purchased the building for Tk.140,000. Required: Prepare the entries that should be made at the date of each acquisition. E-20. The following selected transactions relate to ABC Company: March-1: Sold on credit Tk.20,000 to Aziz Brothers Terms 2/0, n/30. March-11: Received payment in full from Aziz Brothers for balance due. March-12: Accepted Juno Company‘s Tk.20,000; 6 months 12% note for balance due. March-13: Made ABC Company Credit Card sales for Tk.13,200. March-15: Made American Express Credit Card sales totaling Tk.6,700. A 5% service fee is charged. March-30: American express company made full payment. April-11: Sold Accounts Receivable of Tk.8,000 to XYZ factor. They take a service charge of 2% of the account of receivables sold. April-13: Received collections of Tk.8,200 on ABC Company credit card sales and added finance charges of 1.5% on the remaining balances. May-10: Wrote off as uncollectible Tk.16,000 of Accounts Receivable. ABC uses the percentage of sales as basis to estimate bad debts.


June-30:

July-16:

Credit sales for the first six months total Tk.20,00,000. The bad debts percentage is 1% of credit sales. At June 30, the balance in the allowance account is Tk.3,500. One of the accounts receivable written off in May was from Mr. Salim who pays the amount due Tk.4,000 in full.

Required: Prepare the journal entries for the above transactions.


CHAPTER - 11

BANK RECONCILIATION SYSTEM

11.1. DEFINITION OF RECONCILIATION In accounting, reconciliation is the process of ensuring that two sets of records (usually the balances of two accounts) are in agreement. Reconciliation is used to ensure that the money leaving an account matches the actual money spent. This is done by making sure the balances match at the end of a particular accounting period. 11.2. MEANING OF BANK RECONCILIATION In bookkeeping, a bank reconciliation is a process that explains the difference on a specified date between the bank balance shown in an organization's bank statement, as supplied by the bank, and the corresponding amount shown in the organization's own accounting records. 11.3. CONCEPT OF BANK RECONCILIATION STATEMENT A bank reconciliation statement is a summary of banking and business activity that reconciles an entity‘s bank account with its financial records. The statement outlines the deposits, withdrawals, and other activity impacting a bank account for a specific period. A bank reconciliation statement is a useful financial internal control tool used to thwart fraud. 11.4. PREPARATION OF A BANK RECONCILIATION STATEMENT Following steps are to be followed to prepare a bank reconciliation statement: i. Record the ending balance as per the bank statement. ii. Calculate a subtotal by adding the deposits in transit to the ending balance as per the bank statement. iii. Prepare a detailed listing of all outstanding checks as of the bank statement date below the subtotal. iv. Subtract the outstanding checks from the subtotal previously calculated to arrive at the adjusted bank balance. v. Review the bank statement for account fees and error adjustments posted by the bank. Record these fees if they have not already been posted. vi. Compare the adjusted bank statement balance as per reconciliation to the adjusted cash balance. 11.5. TRANSACTIONS THAT ARE APPEARED IN BANK RECONCILIATION STATEMENT Followings are the transactions which usually appear in company's records but not in the bank statement:


i. Deposits in Transit: Deposits which have been sent by the company to the bank but have not been received by the bank at proper time before the issuance of bank statement. ii. Checks Outstanding: Checks which have been issued by the company but were not presented or cleared before the issuance of bank statement. Followings are the transactions which usually appear in bank statement but not in company's cash account: i. Service Charges: Service charges may have been deducted by the bank. Such charges are usually not known to the company before the issuance of bank statement. ii. Interest Income: If any interest income has been earned by the company on its bank account, it is not usually entered in company's cash account before the issuance of bank statement. iii. NSF Checks: NSF stands for "not sufficient funds". These are the checks deposited by the company in bank account but the bank is unable to receive payment on those checks due to insufficient funds in the payer's account.


SELF PRACTICE QUESTIONS 1. What is petty cash account? Do we need to maintain a petty cash account for cash control? Explain your position. 2. Differentiate between debit memo and credit memo in preparing bank reconciliation statement. 3. Explain the term ‗Bank reconciliation‘ and state the reasons for its preparation. 4. Why need reconciliation in Bank Balance with Balance of cash account? 5. Explain the term ―bank reconciliation‖ and state the reasons for its preparation.


SELF PRACTICE QUESTIONS ANSWER 1. Petty cash account: Petty cash is a small amount of cash that is kept on the company premises to pay for minor cash needs. Examples of these payments are office supplies, cards, flowers, and so forth. Petty cash is stored in a petty cash drawer or box near where it is most needed. There may be several petty cash locations in a larger business, probably one per building or even one per department. A separate accounting system is used to track petty cash transactions. Need for petty cash account: Yes, we need to maintain a petty cash account for cash control because petty cash is of very high importance as certain immediate expenses come up for example someone gets hurt to provide immediate medication when senior managers are not available in the office. Petty cash fund is very important for the business to effectively manage small amount of expenses in the day to day business. Effectively managing the petty cash helps us control various expenses as well as compare miscellaneous expenses from period to period. It reduces the need to issue checks thereby reducing the work of the head of accounts/accountant as it is usually managed by a petty cash custodian with the help of a petty cash book. 2. A bank credit memo is an item on a company's bank statement that increases a company's checking account balance. A bank debit memo is an item on the bank statement that reduces the company's checking account balance. Since these items are already on the bank statement, the only adjustment that could be required is in the company's accounting records. The old rule for the bank reconciliation "Put it where it isn't" means that the bank's credit memo amount must be added to the company's accounting records, if it is not yet in the company's accounts. Since the bank credit memo increased the checking account balance, the company's cash account will have to be debited and another account will need to be credited. For example, if the bank statement shows a credit memo for Tk.2,000 for interest earned, the company will need to have a debit of Tk.2,000 in its cash account and will need a credit of Tk.2,000 in interest revenue or interest income. If the bank statement shows a debit memo of Tk.1,000 for a service fee, the bank statement balance was decreased by Tk.1,000. As part of the bank reconciliation process the following entry must be made if the item has not yet been recorded in the company's records: debit bank fee expense or miscellaneous expense Tk.1,000 and credit cash Tk.1,000. 3. The bank reconciliation is a process of comparing the bank‘s balance of an account with the company‘s balance of that account and explaining any difference to make them agree. It is prepared for the following reasons: i. To reconcile the balance per book and the balance per bank to their adjusted balance ii. To avoid the disagreement of deposits and withdrawals between bank and the company iii. To explain any difference to make them agree


4. Reconciliation in bank balance with balance of cash account is needed for the following reasons: i. To reconcile the balance per book and the balance per bank to their adjusted balance; ii. To avoid the disagreement of deposits and withdrawals between bank and the company; iii. To explain any difference to make them agree. 5. The bank reconciliation is a process of comparing the bank‘s balance of an account with the company‘s balance of that account and explaining any difference to make them agree. It is prepared for the following reasons: 1. To reconcile the balance per book and the balance per bank to their adjusted balance 2. To avoid the disagreement of deposits and withdrawals between bank and the company 3. To explain any difference to make them agree


PROBLEMS AND SOLUTIONS P-1. Suruz Company's bank statement shows a balance of Tk.30,000 on dated December 31, 2017. The company's cash book shows a balance of Tk.25,000 on the same date. Following additional information is available: (a) Following checks issued by the company to its customers are still outstanding: Check No. 111 issued on November 20 for Tk.2,000 Check No. 222 issued on December 25 for Tk.1,000 (b) A deposit of Tk.5,000 made on December 31 does not appear on bank statement. (c) An NSF check of Tk.3,900 was returned by the bank with the bank statement. (d) The bank charged Tk.40 as service fee. (e) Interest income earned on the company's average cash balance at bank was Tk.4,000. (f) The bank collected a note receivable on behalf of the company. Amount received by the bank on the note was Tk.6,000. This includes Tk.500 interest income. The bank charged a collection fee of Tk.100. (g) A deposit of Tk.600 was incorrectly entered as Tk.60 in the company's cash records. Required: Prepare a bank reconciliation statement using the above information. Solution:

Suruz Company Bank Reconciliation Statement As of December 31, 2017

Cash balance as per bank statement Add: Deposit in transit Deduct: Outstanding cheques: Cheque no. 111 222 Adjusted bank balance Cash balance as per cash book Add: Interest income Notes receivable collected by bank Interest income from notes receivable Deposit understated (600 – 60) Deduct: NSF cheque Bank service fee Bank collection fee Adjusted cash balance

Tk.30,000 5,000 Tk.35,000 Tk.2,000 1,000

Tk.4,000 6,000 500 540 3,900 40 100

Tk.3,000 Tk.32,000 Tk.25,000

Tk.11,040 Tk.36,040

Tk.4,040 Tk.32,000

P-2. The following information is available to reconcile ABC Company‘s book balance of cash with its bank balance as of July 31, 2018. (a) The July 31 cash balance according to accounting records is Tk.80,000 and the bank statement balance on that date is Tk.100,000. (b) An examination of deposit slips revealed that daily cash receipts of Tk.20,000 were placed in the bank‘s evening depository on July 31, which do not appear on the July 31 bank statement.


(c) Two Cheques, No.111 for Tk.5,000 and No.222 for Tk.10,000, were outstanding on the most recent June 30 reconciliation. While Cheque No.111 is included in the July cancelled cheque list, but Cheque No.222 is not listed. (d) Two debit memoranda are enclosed with the statement and are unrecorded at the time of reconciliation. One of it is for Tk.9,500 and debit with an NSF cheque for Tk.9,300 that had been received from a customer. The bank assessed a Tk.200 fee for processing it. The second debit memorandum is a Tk.400 charge for cheque printing. (e) A credit memorandum indicates that the bank collected Tk.40,000 on a note receivable for the company, deducted a Tk.100 collection fee, and credited the balance to the company account. Required: (i) Prepare Bank Reconciliation Statement as of July 31, 2018 bringing both balances to the correct position. (ii) Prepare the necessary journal entries to adjust the cash. Solution: (i) ABC Company Bank Reconciliation Statement As of July 31, 2018 Cash balance as per bank statement (a) Add: Deposit not recorded by bank (b) Deduct: Outstanding cheques: (c) Checque No. 222 Adjusted bank balance Cash balance as per depositor‘s records (a) Add: Notes collected by bank: Notes (e) Less: Collection fee (e) Deduct: NSF cheque (d) Cheque printing charge (d) Corrected cash balance

Tk.100,000 20,000 Tk.120,000 10,000 110,000 Tk.80,000 Tk.40,000 100

39,900 Tk.119,900

Tk.9,500 400

Tk.9,900 Tk.110,000

(ii) ABC Company Journal entries Date July 31, 2018

July 31, 2018

Particulars Cash Collection fee (v) Notes receivable (v) Accounts receivable (iv) Cash

Dr. (Tk.) 39,900 100

Cr. (Tk.)

40,000 9,500 9,500


P-3. The Cash in Bank account in the ledger of XYZ Company Ltd. at December, 31 2017 indicated a balance of Tk.400,000. The Bank Statement indicated a balance of Tk.500,000 on the same date. A comparison of the bank statement and the Cash book disclosed the following reconciling items: (a) Cheques issued but not presented Tk.200,000. (b) A deposit of Tk.100,000 on December 31 did not appear on the Bank Statement of December. (c) A cheque of Tk.50,000 drawn by ABC Traders Ltd. had been wrongly charged by the Bank to the Account of ABC Company Ltd. (d) The Bank had collected for ABC Company Ltd. Tk.43,000 on account of notes receivable sent for collection. The face value of the note was Tk.40,000. (e) Bank service charges for December 2017 amounted to Tk.200 debited on the statement. (f) A customers cheque for Tk.10,000 had been entered in the cash book as Tk.1,000. (g) A cheque issued for Th.7,500 had been entered in the cash book as Tk.5,700. Required: (i) A bank reconciliation statement using the form where both cash book and bank statement balances are bought to corrected balance. (ii) Journal entries to rectify the cash book balance. Solution: (i) XYZ Company Ltd. Bank Reconciliation Statement As of December 31, 2017 Cash balance as per bank statement Add: Deposit in transit (b) Wrongly charged by the bank (c)

Tk.500,000 Tk.100,000 50,000

Deduct: Outstanding cheques: (a) Corrected bank balance Cash balance as per depositor‘s records Add: Notes collected by bank: Notes (d) Add: Interest (d) Error in recording customer cheque (f) 10,000 – 1,000 Deduct: Bank service charge (e) Cheque issued recorded erroneously (gi) 7,500 – 5,700 Corrected cash balance

150,000 650,000 200,000 450,000 400,000

Tk.40,000 3,000

43,000 9,000 52,000 452,000

200 1,800 Tk.2,000 Tk.450,00


(ii) XYZ Company Ltd. Journal entries Particulars

Si. No. i)

ii) iii) iv)

Bank Notes receivable Interest income Service charge Bank Bank Accounts receivable Accounts payable Bank

Dr. (Tk.) 43,000

Cr. (Tk.) 40,000 3,000

200 200 9,000 9,000 1,800 1,800

P-4. The cash account of ABC company showed a ledger balance of Tk.3,969.85 on June 30, 2018. The bank statement as of that date showed a balance of Tk.4,150.00. Upon comparing the statement with cash records, the following facts were determined. (a) There were bank service charges for June of Tk.25.00. (b) A bank memo stated that XYZ‘s note for Tk.1,200.00 and interest of Tk.36 had been collected on June 29, and the bank had made a charge of Tk.5.50 on the collection. (No entry had been made on ABC‘s book when XYZ‘s note was sent to the bank for collection.) (c) Receipts for June 30 for Tk.3,390.00 were not deposited until July 2. (d) Cheques outstanding on June 30 totaled Tk.2,136.05. (e) The bank had charged the ABC‘s account for a customer‘s uncollectible chaque amounting to Tk.253.20 on June 29. (f) A customer‘s chaque for Tk.90.00 had been entered as Tk.60.00 in the cash receipts journal by ABC on June 15. (g) Cheque No. 742 in the amount of Tk.491.00 had been entered in the cash journal as Tk.419.00 and chaque no. 747 in the amount of Tk.58.20 had been entered as Tk.582.00. Both cheques had been issued to pay for purchases of equipment. Required: (i) Prepare a bank reconciliation dated June 30, 2018, proceeding to a correct cash balance. (ii) Prepare any entries necessary to make the books correct and complete. Solution: (i) ABC Company Bank reconciliation June 30, 2018 Tk. Balance as per bank, June 30, 2018 Add: Deposit in transit Deduct: Outstanding chaques Corrected cash balance, June 30, 2018

Tk. 4,150.00 3,390.00 2,136.05 5,403.95


Balance as per books, June 30, 2018 Add: Error in recording deposit (Tk.90 – Tk.60) Error on check no. 747 (Tk.582.00 – Tk.58.20) Note collection (Tk.1,200 + Tk.36) Deduct: NSF chaque Error on chaque no. 742 (Tk.491 – Tk.419) Bank service charges (Tk.25 + Tk.5.50) Corrected cash balance, June 30, 2018

3,969.85 30.00 523.80 1,236.00 253.20 72.00 30.50

1,789.80 5,759.65

355.70 5,403.95

(ii) ABC Company Journal entries Particulars Cash Accounts receivable Accounts payable Notes receivable Interest revenue Accounts receivable Accounts payable Office expenses (bank charges) Cash

Dr. (Tk.) 1,789.80

Cr. (Tk.) 30.00a 523.80b 1,200.00 36.00

253.20 72.00c 30.50 355.70

a. Considering that sale was on account and not a cash sale b. Considering that the purchase of the equipment was recorded at its proper price. If a straight cash purchase, then equipment should be credited instead of accounts payable. c. If a straight cash purchase, then equipment should be debited instead of accounts payable. P-5. Analysis of the December bank statement for Nobbodoy Company discloses the following information: (a) Statement balance of December 31, 2017 was Tk.33,350. (b) Check issued by Ludmia Corporation for Tk.630 was charged to Meghna Company in error. (c) December bank charges Tk.60. (d) Deposit of Tk.1,400 was erroneously credited to Meghna Company account by the bank. (e) Outstanding cheque at December 31, 2017 were Tk.10,560. They included Tk.600 cheque outstanding for 8 months to Amco Products which was cancelled in December and a new cheque issued. No entry was made for this cancellation. (f) Receipts on December 31 were Tk.9,000. Receipts were deposited on January 2. (g) An error in addition was made on the December 23 deposit slip. This slip showed a total of Tk.2,220. The correct balance as credited to the account by the bank was Tk.2,020. A count of cash on hand showed an average of Tk.200 as of December 31. (h) The cash in Bank balance in the general ledger as of December 31, 2017 was Tk.31,280.


Required: (i) Prepare a bank reconciliation statement which reconciles the bank balance with the balance per books. (ii) Give all entries required on the books of December 31, 2017. Solution: (i) Nobbodoy Company Bank Reconciliation Statement As of December 31, 2017 Balance as per bank statement Add: Cheque charged to account in error Service charges Deposit in transit Error on deposit slips Deduct: Erroneous deposit by bank Outstanding cheques (less Tk.600) Amco products cheques cancelled Balance as per bank statement

Tk.33,350 Tk.630 60 9,000 200

9,890 43,240

1,400 9,960 600

11,960 31,280

(ii) Nobbodoy Company Journal entries Particulars Bank Accounts payable (To record cancellation of Amco products cheque) Miscellaneous general expenses Bank (To record bank service charge for December) Cash Bank (To correct error made on December 23 bank deposit)

Dr. (Tk.) 600

Cr. (Tk.) 600

60 60 200 200

P-6. The cash at bank account in the ledger of KK Company Ltd. at 31 st December 2017 indicated a balance of Tk.486,006. The bank statement indicated a balance of Tk.640,748 on the same date. A comparison of the bank statement and the cash book disclosed the following reconciling items: (a) Cheques issued but not presented Tk.202,687. (b) A deposit of Tk.89,017 on 31st December did not appear on the bank statement of December. (c) A chaque of Tk.20,000 drawn by ABC Traders Ltd. had been wrongly charged by the bank to the account of KK Company Ltd. (d) The bank had collected for KK Company Ltd. Tk.51,000 on account of notes receivable sent for collection. The face value of the notes was Tk.50,000. (e) Bank service charges for December 2017 amounted to Tk.675 debited on the statement.


(f) Interest credited by the bank for Tk.10,000. (g) A customer‘s chaque for Tk.900 had been entered as Tk.90 by the depositor. (h) A chaque issued for Tk.392 had been entered in the cash book as Tk.329. Required: (i) A bank reconciliation statement using the form where both cash book and bank statement balances are bought to corrected balance. (ii) Journal entries to rectify the cash book balance. Solution: (i) KK Company Bank Reconciliation Statement 31st December, 2017 Balance as per bank statement, 31st Dec. 2017 Add: Deposit in transit Wrongly charged by bank

Tk.

Tk. 640,748

89,017 20,000

109,017 749,765 202,687 547,078

Deduct: Outstanding cheques Corrected bank balance, 31st Dec. 2017 Balance as per ledger, 31st Dec. 2017 Add: Notes receivable collected by bank with interest Interest credited by bank Customer chaque recorded in error (Tk.900 – Tk.90)

486,006 51,000 10,000 810

61,810 547,816

Less: Bank service charges Issued cheque recorded in error (Tk.392 – Tk.329)

675

63

738 547,078

Corrected ledger balance, 31st Dec. 2017 (ii)

Si. No. (d) Bank

(e) (f) (g) (h)

KK Company Journal entries Particulars

Notes receivable Interest income Bank service charges Bank Bank Interest income Bank Accounts receivable Accounts payable Bank

Dr. (Tk.) 51,000

Cr. (Tk.) 50,000 1,000

675 675 10,000 10,000 810 810 63 63


P-7. The cash account of United Motors Ltd. disclosed a balance of Tk.17,056 on June 30, 2017. The bank statement as of June 30, showed a balance of Tk.21,209. Upon comparing the bank statement with the cash records the following facts were developed: (a) United Motor‘s account has been charged for a customer‘s uncollectible cheque amounting to Tk.1,143 on June 30. (b) A customer‘s cheque for Tk.725 had been entered as Tk.625 both by the depositor and the bank but was later corrected by the bank. (c) A two month 9% Tk.3,000 customer‘s note dated April 28 discounted on June 5 had been posted on June 29 and the bank had charged United Motor for Tk.3,050 which included a protest fee of Tk.5. (d) Cheque No. 0151 for Tk.1,242 had been entered in the cash book as Tk.1,224 and cheque No. 0159 for Tk.629 had been entered as Tk.926. The company uses the voucher system. (e) There were bank service charges for June Tk.41 not yet recorded on the books. (f) A bank memo statement stated that note receivable for Tk.2,500 and interest of Tk.75 had been collected on June 28 and the bank had made a charge of Tk.25. (No entry had been made on the books when sent to the bank for collection). (g) Cheques outstanding on June 30 were Tk.12,308. (h) Receipts of June 30 for Tk.6,850 were deposited July 02. Required: (i) Prepare a bank reconciliation statement using where both bank and book balance is brought to corrected cash balance. (ii) Give necessary journal entries in United Motor‘s book. Solution: (i) United Motors Ltd. Bank Reconciliation Statement As of June 30 Balance as per bank statement Add: Deposit in transit

Tk.21,209 6,850 28,059 12,308 15,751

Less. Outstanding cheque Adjusted balance Balance as per cash book Add: Collection of notes receivable Error in recording cheque Error in recording cheque Less: Customer‘s uncollectible cheque Dishonored notes receivable Error in recording cheque Bank charges Adjusted balance

17,056 Tk.2,550 100 297 1,143 3,050 18 49

2,947 20,003

4,252 15,751


(ii)

Si. No. i)

ii) iii) iv) v) vi) vii)

United Motors Ltd. Journal entries Particulars Cash Bank charges Notes receivable Interest income Cash Accounts receivable Cash Accounts receivable Accounts receivable Cash Accounts receivable Cash Accounts payable Cash Bank charges Cash

Dr. (Tk.) 2,550 25

Cr. (Tk.)

2,500 75 100 100 297 297 1,143 1,143 3,050 3,050 18 18 41 41

P-8. The bank statement of TASNIM Trade Ltd. having account with the AB Bank shows: Tk. Balance on June 30, 2018 Deposit Less. Cheque dedusted Service charge

60,000 100

Tk. 1,40,000 50,000 1,90,000 60,100 1,29,900

(a) Balance as per ledger account as of July 31, Tk.1,24,084. (b) A credit memorandum included with the cancelled cheques returned indicates the collection of a note by the bank for the TASNIM Trade Ltd. Tk.2,000. (c) An NSF cheque for the amount of Tk.920 is returned by the bank and included in the total of cheques deducted on the bank statement. (d) Deposit in transit as of July 31, Tk.15,000 and as of June 30, Tk.2,400. (e) Cheques outstanding as of June 30, all of which cleared by the bank in July Tk.3,400, cheques outstanding as of July 31, Tk.8,200. (f) Deposit of Jesmin Traders credited to TASNIM Trade Ltd. account by bank Tk.2,000. (g) Cheques of Jesmin Traders charged against TASNIM Trade Ltd. account by bank Tk.400. (h) Deposit of July 21, recorded by the company as Tk.1,637 and by the bank at actual amount of Tk.1,673. The receipts for the day were from collection on account. Required: (i) Prepare a Bank Reconciliation Statement as of July 31, 2018 for the TASNIM Trade Ltd. (ii) Prepare adjusting journals needed in July 31, 2018.


Solution: (i) TASNIM Trade Ltd. Bank Reconciliation Statement As of July 31, 2018 Balance as per cash book Add: Deposit understated (Tk.1,673 – Tk.1,637) Note collection

Tk.124,084 Tk.36 2,000

Less: NSF cheque Service charge Corrected balance

2,036 126,120

920 100

Balance as per bank statement Add: Deposit in transit Wrongly debited by bank

1,020 125,100 129,900

5,000 400

Less: Outstanding cheques Wrongly credited by bank Corrected balance

5,400 135,300

8,200 2,000

10,200 125,100

(ii) TASNIM Trade Ltd. Journal entries Si. No. 1 2

Particulars

Dr. (Tk.) 2,036

Cash Accounts receivable (36 + 2,000) Accounts receivable Service charge Cash

Cr. (Tk.) 2,036

920 100 1,020

P-9. The following is a summary of the Cash Book of Miss Tasnia Hoque, a dealer in Ladies Garments, for the month of December, 2017:

Receipts Balance c/f

Taka 1,469 Balance b/f 554 Payments 2,023

Taka 761 1,262 2,023

All receipts are banked and payments made by cheque. On investigation you discover: (a) Bank charge of Tk.136 entered on the bank Statement had not been entered in the Cash Book. (b) Cheque drawn amounting to Tk.267 had not been presented to the Bank for payment. (c) Cheque received totaling Tk.1,762 had been entered in the Cash Book and paid into the bank, but had not been credited by the Bank until January 2018. (d) A cheque for Tk.122 had been entered as receipt in the Cash Book instead of as a payment.


(e) The Bank in error had debited a cheque for Tk.125. (f) A cheque received for Tk.80 had been returned by the Bank and marked ―No funds available‖. No adjustment had been made in the Cash Book. (g) All dividends receivable are credited directly to the Bank Account. During December the Bank credited amounts totaling Tk.262 and no entries were made in the Cash Book. (h) A cheque drawn for Tk.60 in favor of a creditor had been incorrectly entered in the Cash Book as Tk.600. (i) The balance brought forward should have been Tk.711. (j) The bank Statements as on 31st December 2017 showed an overdraft of Tk.1,782. Required: (i) Show the adjustment required in the Cash Book; and (ii) Prepare a Bank Reconciliation Statement as on 31st December 2017. Solution: (i) Dr. Date Particulars 31.12.17 Dividend (g) ,, Creditors cheque (viii) 600 – 60 ,, Balance b/f (i) 761 – 711 ,, Balance c/f

Miss Tasnia Hoque Cash book Taka Date Particulars 262 31.12.17 Balance b/f 540 ,, Bank charge (a) 50 ,, 162 ,, 1,014

Error in payment of cheque (d)122 X 2 NSF cheque (f)

Cr. Taka 554 136 244 80 1,014

(ii) Miss Tasnia Hoque Bank Reconciliation Statement As on 31st December 2017 Bank balance as per cash book (overdraft) Add. Cheque deposited but not credited by bank (iii) Cheque debited by the bank in error (v) Less: Cheque issued but not presented for payment (ii) Bank balance as per bank statement (overdraft)

Tk.162 Tk.1,762 125

1,887 2,049 267 1,782

P-10. A bank statement for M/s Badrul & Co. showed a balance of Tk.96,140 as on December 31, 2017. The cash account for the company as of this date showed a balance of Tk.42,357. In reconciling the statement with the books. The following items were discovered: (a) The cash balance included Tk.5,000 representing change cash on hand. When the cash on hand was counted only Tk.4,684 was found. The cash balance included Tk.6,250 representing a petty cash fund. Inspection of the petty cash fund revealed cash of Tk.5,250 on hand and a replenishing chaque drawn on December 31 for Tk.1,000.


(c) Proceeds from cash sales of Tk.8,625 for December 28 were stolen. The company expected to recover this amount from the insurance company and had made no entry for the loss. (d) The bank statement showed the depositor charged with a customer‘s chaque for Tk.1,573, bank service charge for Tk.494 and a chaque for Tk.1,700 drown by M/s Badrul & Co. and incorrectly cleared through this account. (e) The bank statement did not show receipts of December 31 of Tk.22,963 which were deposited on January 03. (f) Cheques outstanding were found to be Tk.100,388. This included the chaque transferred to the petty cash fund and also two cheques for Tk.2,275 each payable to Mr. Kabir, who had notified the company that he had lost the original chaque and had been sent a second chaque. The company stopped payment on the first chaque. Among the cheques outstanding, one for Tk.1,500 had been outstanding for fourteen months and it was decided to cancel this item since the payee could not be found and payment might never be claimed. Required: (i) Prepare a bank reconciliation statement using the form where both bank and book balance are bought to corrected cash balance at December 31, 2017. (ii) Give the correcting entries required by the foregoing as on December 31, 2017. Solution: (i) M/s Badrul & Co. Bank Reconciliation Statement December 31, 2017 Tk. Balance as per bank statement Add: Deposit in transit Cheque charged erroneously

22,963 1,700

Less: Outstanding chaque (Tk.100,388 – Tk.1,500 – Tk.2,275) Corrected bank balance Balance as per cash book Add: Cheque under stop payment Cancellation of outstanding chaque Less: Change fund Petty cash fund Miscellaneous general expenses (Loss by theft) Customers chaque uncollectible Bank charge Corrected cash balance

Tk. 96,140 24,663 120,803 96,613 24,190 42,357

2,275 1,500 5,000 6,250 8,625 1,573 494

3,775 46,132

21,942 24,190


(ii) M/s Badrul & Co. Journal entries Si. No. Particulars (a) Cash change fund Cash short and over Cash (b) Petty cash fund Cash (c) Recoverable from Insurance Co. Cash (d) Accounts receivable Cash (e) Miscellaneous general expenses Cash (f) Cash Accounts payable (Tk.2,275 + Tk.1,500)

Dr. (Tk.) 4,684 316

Cr. (Tk.)

5,000 6,250 6,250 8,625 8,625 1,573 1,573 494 494 3,775 3,775

P-11. The following information is available for reconciling the bank statement of Navana Ltd. on September 2018. (a) Cash account in ledger on 30th September showed a balance of Tk.6,276,194. The bank statement on the same day indicated a balance of Tk.5,973,470. (b) Cash receipts of 30th September worth Tk.584,620 had been mailed to the bank on that date but did not appear among the deposits in the bank statement. (c) The paid chaque returned with the September bank statement disclosed two errors in the company cash record chaque no. 1936 for Tk.50,400 had been erroneously recorded as Tk.5,040 in the cash payment journal and chaque no. 1942 of Tk.24,550 had been recorded as Tk.25,450. Cheque no. 1936 was issued in payment of advertising expenses and chaque no. 1942 was for acquisition of office equipment. (d) Included with the September bank statement was an NSF chaque for Tk.22,000 signed by a customer Mr. Marsh. This amount had been charged against bank account on September 30. (e) Of the cheques issued in September 2006, following were not included among the paid cheques returned by the bank. (f) Of the cheques issued in September 2018, following were not included among the paid cheques returned by the bank. Cheque No. Amount Cheque No. Amount 1924 Tk.13,625 1944 Tk.9,500 1940 10,500 1945 71,615 1941 1,146 1946 6,000 1943 82,670 (g) A service charge for Tk.34,000 by bank has been made in error against the Navana. (h) A non-interest bearing note receivable for Tk.189,000 owned by the Navana Ltd. had been left with the bank for collection on September 30, the company received a memorandum from the indication that the note had been collected and credited to the company account after deduction of Tk.500 collection charge. No entry had been made by the company to record collection on note.


(i) A debit memorandum for Tk.1,200 was disclosed with the paid chaque at September 30. This charge covered the printing of chaque books bearing the Navana Ltd. company name and ADDRESS. Required: (i) Prepare a bank reconciliation statement on 30th September 2018. (ii) Prepare journal entries at September 30 to bring the records upto date. Solution: (i) Navana Ltd. Bank Reconciliation Statement 30th September, 2018 Tk. Balance as per bank statement Add: Deposit in transit Erroneous service charge

584,620 34,000

Less: Outstanding cheques Corrected bank balance Balance as per cash book Add: Cheque overstated (Tk.25,450 – Tk.24,550) Proceeds of note collection Less: Cheque understated (Tk.50,400 – Tk.5,040) NSF chaque Collection fee of note Bank charge Corrected cash balance

Tk. 5,973,470 618,620 6,592,090 195,056 6,397,034 6,276,194

900 189,000 45,360 22,000 500 1,200

189,900 6,466,094

69,060 6,397,034

(ii) Navana Ltd. Journal entries Date 30th Sept. Cash

Particulars

Accounts payable Notes receivable th 30 Sept. Accounts payable Accounts receivable Note collection fee Bank charge Cash

Dr. (Tk.) 189,900

Cr. (Tk.) 900 189,000

45,360 22,000 500 1,200 69,060


P-12. The bank balance as per books of M/s. Lenny Fashions Ltd. showed a balance of Tk.3,78,085 on 30.06.2018. The bank statement as on that date showed a balance of Tk.4,99,720. While compared the difference in cash book and bank statement the following facts were discovered: (a) A customer cheque no. 600312 amounting to Tk.15,000 deposited in the bank on 26.06.2018 discounted by the customers bank due to insufficient balance in the account. (b) An amount of Tk.3,500 credited by the bank on account of interest for the period. (c) Cheque no. 1864 and 5038 for total of Tk.8,900 entered in the cash book on 28.06.2018 given to the office bearer to deposit in the bank but erroneously kept in his pocket up to 02.07.2018. (d) Bank account debited by an amount of Tk.365 for bank charges on collection of cheques and remittances. (e) An amount of Tk.95,000 transferred by a customer on 29.06.2018 from Khulna in settlement of invoice no. 2006 dated 25.05.2018. The intimation has not been reached to the cashier as yet. (f) The following cheques were issued by the company not yet presented to the bank for payment: Cheque no. 300113 Tk.25,600 Cheque no. 300115 Tk.7,900 Cheque no. 300117 Tk.18,200 Cheque no. 300128 Tk.3,000 (g) Cheque no. 300130 issued to M/s. Jamuna Ltd. A/c Payee only for an amount of Tk.25,000 on 28.06.2018 reported to be lost by an employee of M/s. Jamuna Ltd. This has been informed to the bank by a written statement which was finally caught by the bank on 07.07.2018 and reported to the Police. However, the depositor of the stolen cheque not be traced yet. The case is under investigation. (h) An amount of Tk.9,000 deposited to the bank on 30.06.2018 which was credited in the bank account correctly but the Cashier Mr. Rahim debited the cash book erroneously for Tk.6,900. (i) As per standing order bank is paying Tk.35,000 to Mr. Rahman on the last working day of every month which has not been recorded by the Cashier. Required: (i) Pre[are a bank reconciliation statement showing the correct bank balance as on 30.06.2018. (ii) Make journal entries in order to bring the cash book in agreement with the bank balance. Solution: (i) M/s. Lenny Fashions Ltd. Bank Reconciliation Statement As on 30.06.2018 Taka Cash balance as per bank statement Add. Cheque not yet deposited

Taka 499,720 8,900 508,620


Less. Outstanding checks: Check number 300113 300115 300117 300128 Cheque issued to M/s. Jamuna Ltd. Corrected bank balance Cash balance as per book Add. Interest credited by bank Proceeds of draft Error in entering deposit

25,600 7,900 18,200 3,000 54,700 25,000

79,700 428,920 378,085

3,500 95,000 2,700

101,200 479,285

Deduct. Customer‘s cheque uncollectible 15,000 Bank charges 365 Installment payment to Mr. Rahman 35,000 Corrected book balance

50,365 428,920

(ii) M/s. Lenny Fashions Ltd. Journal entries Si. No. 1

2

Particulars Cash

Dr. (Tk.) 101,200

Notes receivable Interest income Suspense account Accounts receivable Bank charge Mr. Rahim Cash

Cr. (Tk.) 95,000 3,500 2,700

15,000 365 35,000 50,365

P-13. The following extract from the cash book of Apex Limited for the month of November shows the company‘s bank transactions:

Balance b/d Sales ledger Cash sales Sales ledger

Tk. 12,800 5,000 6,000 7,000

Purchase ledger Employees‘ income tax Sales tax payable Cheque cashed Balance c/d

30,800 The company‘s bank statement for the same period is as follows:

Tk. 3,000 1,500 3,800 2,500 20,000 30,800


Debit (Tk.) Opening balance Lodgement 00111 Cheque 00221 Insurance Lodgement 00112 Cheque 00222 Cheque 00223 Cheque 00224 Lodgement 00113 Bank charge

Credit (Tk.) 4,000

1,000 2,400 5,000 3,000 1,500 2,500 6,000 400

Balance (Tk.) 10,000 14,000 13,000 10,600 15,600 12,600 11,100 8,600 14,400 14,000

You are required to reconcile the balances shown in the cash book and the bank statement. Solution: Apex Limited Bank reconciliation statement For the month of November Tk. Balance as shown in cash book Less. Insurance Bank charge Corrected cash book balance Balance as per bank statement Add. Uncleared lodgement Less. Unpresented cheque Balance as per cash book

2,400 400

Tk. 20,000

(2,800) 17,200 14,000 7,000 21,000 (3,800) 17,200

P-14. The bank position of the bank reconciliation for Backhaus Company at November 30, 2017 was as follows: Backhaus Company Bank Reconciliation November 30, 2017 Taka Cash balance as per bank 14,367.90 Add. Deposits in transit 2,530.20 16,898.10 Less. Outstanding checks: Check number Check amount (Taka) 3451 2,260.40 3470 720.10 3471 844.50 3472 1,426.80 3474 1,050.00 6,301.80 Adjusted cash balance as per bank 10,596.30


The adjusted cash balance as per bank agreed with the cash balance as per books at November 30. The December bank statement showed the following checks and deposits: Bank Statement Checks Deposits Date Number Amount (Taka) Date Amount (Taka) 1-Dec 3451 2,260.40 1-Dec 2,530.20 2-Dec 3471 844.50 4-Dec 1,211.60 7-Dec 3472 1,426.80 8-Dec 2,365.10 4-Dec 3475 1,640.70 16-Dec 2,672.70 8-Dec 3476 1,300.00 21-Dec 2,945.00 10-Dec 3477 2,130.00 26-Dec 2,567.30 15-Dec 3479 3,080.00 29-Dec 2,836.00 27-Dec 3480 600.00 30-Dec 1,025.00 30-Dec 3482 475.50 29-Dec 3483 1,140.00 31-Dec 3485 540.80 Total 15,438.70 Total 18,152.90 The cash records as per book for December showed the following: Cash payments journal Cash receipts journal Date Number Amount (Taka) Date Amount (Taka) 1-Dec 3475 1,640.70 3-Dec 1,211.60 2-Dec 3476 1,300.00 7-Dec 2,365.10 2-Dec 3477 2,130.00 15-Dec 2,672.70 4-Dec 3478 621.30 20-Dec 2,954.00 8-Dec 3479 3,080.00 25-Dec 2,567.30 10-Dec 3480 600.00 28-Dec 2,836.00 17-Dec 3481 807.40 30-Dec 1,025.00 20-Dec 3482 475.50 31-Dec 1,690.40 22-Dec 3483 1,140.00 23-Dec 3484 798.00 24-Dec 3485 450.80 30-Dec 3486 1,889.50 Total 14,933.20 Total 17,322.10 The bank statement contained two bank memoranda: (a) A credit of Taka 4,145 for the collection of a Taka 4,000 note for Backhaus Company plus interest of Taka 160 and less a collection fee of Taka 15. Backhaus Company has not accounted for the collection. (b) A debit of Taka 572.80 for NSF check written by D. Chagnon, a customer. At December 31, the check had not been redeposited in the bank. At December 31, the cash balance as per books was Taka 12,485.20 and the cash balance as per bank statement was Taka 20,154.30. The bank did not make any error, but two errors were made by Backhaus Company.


Required: (i) Prepare a bank reconciliation at December 31. (ii) Prepare the adjusting entries based on the reconciliation. Solution: (i) Backhaus Company Bank Reconciliation December 31, 2017 Taka Cash balance as per bank Add. Deposits in transit Less. Outstanding checks: Check number 3470 3474 3478 3481 3484 3486 Adjusted cash balance as per bank

720.10 1,050.00 621.30 807.40 798.00 1,889.50

Cash balance as per book Add. Collection of note receivable by bank (Tk.4,000 + Tk.160 – Tk.15) Less. NSF check Error of overstate (Tk.540 - Tk.450) Error of overstate (Tk.2,954 - Tk.2,945) Adjusted cash balance as per book

Taka 20,154.30 1,690.40 21,844.70

5,886.30 15,958.40 12,485.20 4,145.00 16,630.20

572.80 90.00 9.00

671.80 15,958.40

(ii) Backhaus Company Adjusting Entries Date 2017 Dec. 31

Dec. 31

Particulars Cash Miscellaneous expense Notes receivable Interest revenue (To record collection of note with interest less collection fee) Accounts receivable Cash (To record reinstalled accounts receivable for NSF check)

Debit (Tk.) 4,145.00 15.00

Credit (Tk.)

4,000.00 160.00

572.80 572.80


Dec. 31

Dec. 31

Accounts payable Cash (To record increase of cash paid to accounts payable) Accounts receivable Cash (To record decrease of cash received from accounts receivable)

90.00 90.00

9.00 9.00

P-15. Shown below is selected transactions of Gulf Corp. during the month of December: Dec. 5 – Sold 2,000 shares of General Motors capital stock at Tk.53 per share, less a brokerage commission of Tk.200. These marketable securities had been acquired nine months earlier at a total cost of Tk.1,12,000. Dec. 8 – An account receivable from S. Willis in the amount of Tk.700 is determined to be uncollectible and is written off against the allowance for doubtful accounts. Dec. 15 – Unexpectedly received Tk.200 from F. Hill in full payment of her account. The Tk.200 account receivable from Hill previously had been written off as uncollectible. Dec. 20 – Sold 1,000 shares of Merek & Company capital stock at a price of Tk.60 per share, less a brokerage commission of Tk.150. These investment shares had been acquired at a total cost of T.52,000. Dec. 31 – Replenished the petty cash fund. Petty cash vouchers indicated office supplies expense Tk.44; miscellaneous expense Tk.32. Dec. 31 – The month-end bank reconciliation includes the following items: Outstanding checks Tk.12,320; deposit in transit Tk.3,150; check from customer T. Jones returned ―NSF‖ Tk.358; bank service charges Tk.10; bank collected Tk.20,000 in maturity treasury bills (a cash equivalent) on the company‘s benefit. (These treasury bills had costs Tk.19,670). Other information: (a) An aging of account receivable indicates probable uncollectible account totaling Tk.9,000. Prior to the month-end adjustment, the allowance for doubtful accounts had been a credit balance of Tk.5,210. (b) Prior to any year-end adjustment, the balance in the marketable securities account was Tk.213,800. At year-end marketable securities owned had a cost of Tk.1,98,000 and a market value of Tk.210,000. Required: (i) Prepare entries in general journal entry form for the December transactions. In adjusting the accounting records from the bank reconciliation, make one entry to record any increase in the cash account and a separate entry to record any decrease. (ii) Prepare the month-end adjustments indicated by the two numbered paragraphs of other information. (iii) What is the adjusted balance in the unrealized gain (or loss) in investments account at December 31? Where in the financial statements does this account appear? Solution:


(i)

Date Dec. 5

Dec. 8

Dec. 15

Dec. 15

Dec. 20

Dec. 31

Dec. 31

Dec. 31

Gulf Corporation General Journal Entries Particulars Cash Loss on sale of investment Marketable securities (Sold 2,000 shares of General Motors capital stock at a price below cost) Allowance for doubtful account Accounts receivable – S. Wills (To write off receivables from S. Wills as uncollectible) Accounts receivables – F. Hills Allowance for doubtful account (To reinstate accounts receivable previously written off as uncollectible) Cash Accounts receivable – F. Hill (To record collection of accounts receivable) Cash Marketable securities Gain on sale of investments (Sold 1,000 shares of Merck and Co. at a price above cost) Office supplies expenses Miscellaneous expenses Cash (To replenish petty cash fund) Cash Cash equivalents Interest revenue (To record collection of maturing T-bills) Accounts receivable Bank service charge Cash (To record bank service charge and to reclassify NSF check from T. Jones as an accounts receivable)

Debit (Tk.) 105,800 6,200

Credit (Tk.)

112,000

700 700

200 200

200 200

59,850 52,000 7,850

44 32 76 20,000 19,670 330 358 10 368

(ii) Adjusting Entries Date Dec. 31

Particulars Uncollectible account expenses Allowance for doubtful accounts (To increase allowance for doubtful accounts to Tk.9,000) Tk.9,000 – Tk.5,210 = Tk.3,790

Debit (Tk.) 3,790

Credit (Tk.) 3,790


Dec. 31

Unrealized gain or loss on investment Marketable securities (To reduce the balance in the marketable securities account to a market value of Tk.210,000)

3,800 3,800

(iii) The unrealized gain (or loss) on investment account has a Tk.12,000 credit balance representing the gain on securities owned as of December 31. The unrealized gain is equal to the Tk.210,000 market value of securities, less their Tk.198,000 cost. The account appears in the stockholders‘ equity section of Gulf. Corporation sheet.


EXERCISES E-1. Silenac Inc. is maintaining a Bank account in Orlando Bank Ltd. At the end of the month December, 2017, the cash book of Silenac Inc. shows a Bank balance of Tk.12,600. On the other hand, the bank statement covering the month of December shows an ending balance of Tk.13,995. The following additional information was obtained by Silenac Inc. (1) A chaque paid to a vendor for Tk.650 had been entered in the cash book as Tk.860. (2) Cash deposited to the bank for Tk.960 had been entered in the cash book as Tk.690. (3) A Transfer of Tk.720 from the account to another Bank account in Loyds Bank was not recorded in cash book. (4) Dividend received by Orlando Bank on behalf of Silenac Inc. for Tk.120 was not informed to Silenac Inc. and yet to be recorded in the cash book. (5) Cheque written in December but not charged to the December Bank statement for Tk.870. (6) Bank charges of Tk.350 was not recorded in Cash Book. (7) A standing order payment for Tk.110 had not been entered in Cash Book. (8) A chaque received from an old customer for Tk.650 was deposited in the Bank for collection; however, it was returned by the bank marking ‗Not Sufficient Fund‘. (9) Overdue interest charge of Tk.70 was not yet recorded in cash book. (10) A customer directly deposited Tk.2,000 in the bank account which was not yet recorded in cash book. (11) The bank incorrectly charged a chaque of N Oil Co. for the amount of Tk.175 to Silenac Inc. account. Required: Prepare the bank reconciliation Statement for Silenac Inc. for the month of December, 2017 proceeding to a corrected cash balance. E-2. The cash account of ABC Company showed a ledger balance of Tk.3,969.85 on June 30, 2015. The bank statement as of that date showed a balance of Tk.4,150. Upon comparing the statement with cash records, the following facts were determined: (1) There were bank service charge for June of Tk.25. (2) A bank memo stated that XYZ‘s note for Tk.1,200 and interest of Tk.36 had been collected on June 29, and the bank had made a charge of Tk.5.50 on the collection (No entry had been made on ABC‘s book when XYZ‘s note was sent to the bank for collection). (3) Receipts for June 30 for Tk.3,390 were not deposited until July 2. (4) Checks outstanding on June 30 totaled Tk.2,136.05. (5) The bank had charged the ABC‘s account for a customer‘s uncollectible check amounting to Tk.253.20 on June 29. (6) A customer‘s check for Tk.90 had been entered as Tk.60 in the cash receipts journal by ABC on June 15. (7) Check no. 742 in the amount of Tk.491 had been entered in the cash journal as Tk.419 and check no. 747 in the amount of Tk.58.20 had been entered as Tk.582. Both checks had been issued to pay for purchase of equipment. Required: (i) Prepare a bank reconciliation dated June 30, 2015, proceeding to a correct cash balance. (ii) Prepare any entries necessary to make the books correct and complete.


E-3. The Secretary of the Info. Club has prepared the following draft balance sheet of the club as on September 30, 2016: Tk. Tk. Capital account: Fixtures and fittings: Balance, 30th September 2016 14,300 As on 30th September 2016 10,600 Less: Loss for the year 2,100 Less: Dep. for the year 1,000 12,200 9,600 Subscription in advance 600 Inventories 3,200 Accounts payable 2,400 Accounts receivable 1,400 Balance of bank 950 Cash in hand 50 15,200 15,200 You ascertain the following: (1) The amount of the loss was only a balancing figure as the books had been kept on a single entry. (2) The balance at bank was that shown by the bank statement at close of business on September 30, 2016. (3) The following amounts had been paid into the bank on September 30, 2016 but had not been credited by the bank: (i) Two cheques for Tk.50 each which had been cashed for members. One had since been duly honored but other had been returned marked ‗refer to drawer‘; on being approached, this member repaid Tk.50 in cash. (ii) A member‘s subscription of Tk.80 for the year 2016-2017. (4) The following cheques had been drawn and dispatched in September but had not been presented until October: (i) Tk.480 for bar suppliers which had been delivered but not had been included in inventories. (ii) Tk.350 for office supplies received on October 2. (iii) Tk.100 bonus to the professional included under accounts payable. (iv) Tk.140 for fuel which had been included in the inventories figure, but not in the Accounts Payable. This cheque was dated October 1. Required: (i) Prepare a bank reconciliation statement as on September 30, 2016 showing the cashbook balance. (ii) Prepare a revised balance sheet as on that date to give effect to the consequential adjustments, assuming that, otherwise, the items in the draft balance sheet were correct. E-4. At his year end of 30 June 2010 Sadik‘s cash book showed that he had an overdraft of Tk.300 on his current account at the bank. A bank statement as at 30 June 2010 showed that Sadik has an overdraft of Tk.35. On checking the cash book and the bank statement you find the following: (i) Cheques drawn amounting to Tk.500, had been entered in the cash book but had not yet been presented. (ii) Cheques received, amounting to Tk.400, had been entered in the cash book, but had not yet been presented. (iii) On instructions from Sadik on 30 June 2010 the bank had transferred Tk.60 interest received on his savings account to his current account, but it only recorded the transfer on 5 July 2010. This amount was credited in the cash book on 30 June 2010.


(iv) Bank charges of Tk.35 shown in the bank statement had not been entered in the cash book. (v) The payments side of the cash book had been undercast by Tk.10. (vi) Dividends received of Tk.200 had been paid direct into the bank and not entered in the cash book. (vii) A cheque for Tk.50 from Shahin was recorded and banked on 24 June. This was returned unpaid on 30 June and then shown as a debit on the bank statement. No entry has been made in the cash book for the unpaid Cheque. (viii) A Cheque issued to Jahir for Tk.25 was replaced when it was more than 6 months old, at which time it had become ‗out of date‘ and the bank would have refused to pay. It was entered again in the cash book, no other entry being made. Both cheques were included in the total of unpresented cheques shown above. Required: Make the appropriate adjustments in the cash book, and prepare a bank reconciliation statement. E-5. Nafisa Company maintains a checking account at the Commerce Bank. At July 31, selected data from the ledger balance and the bank statement as follows:

Balance, July 1 July Receipts July Credits July Disbursements July Debits Balance, July 31

Cash Balance Per Books Per Bank Tk.17,600 Tk.16,800 81,400 82,470 77,150 74,756 Tk.21,850 Tk.24,514

Analysis of the bank data reveals that the Credits consist of Tk.79,000 of July deposits and a credit memorandum of Tk.3,470 for the collection of a Tk.3,400 note plus interest revenue of Tk.70. The July debits per bank consists of checks cleared Tk.74,700 and a debit memorandum of Tk.56 for printing additional company checks. You also discover the following errors involving July checks: (1) A check for Tk.230 to a creditor on account that cleared the bank in July was journalized and posted for Tk.320. (2) A salary check to an employee for Tk.255 was recorded by the bank for Tk.155. The June 30 bank statement contained only two reconciling items: deposits in transit Tk.7,000 and outstanding checks of Tk.6,200. Instructions: (i) Prepare a bank reconciliation at July 31. (ii) Journalize the adjusting entries to be made by Nafisa Company at July 31, 2010. Assume the interest on the note has been accrued. E-6. The following information is available to reconcile ABC Company‘s book balance of cash with its bank balance as of July 31, 2014. (i) The July 31 cash balance according to accounting records is Tk.80,756.60 and the bank statement balance on that date is Tk.93,644.80.


(ii) An examination of deposit slips revealed that daily cash receipts of Tk.19,166.20 were placed in the bank‘s evening depository on July 31, which do not appear on the July 31 bank statement. (iii) When the July Cheques are compared, it is found that Cheque No. 1437 had been correctly drawn for Tk.6,918 to pay for office supplier but was erroneously in the accounting records as Tk.6,981. (iv) Cheque No. 1244 for Tk.9,178.60 and Cheque No.1284 for Tk.800.00 both written and entered in the cash book in July, are not among the cancelled Cheques. Two Cheques, No.1211 for Tk.4,578 and No.1223 for Tk.820.80, were outstanding on the most recent June 30 reconciliation. While Cheque No.1211 is included in the July cancelled cheque list, but Cheque No.1223 is not listed. (v) Two debit memoranda are enclosed with the statement and are unrecorded at the time of reconciliation. One of it is for Tk.1,525 and debit with an NSF cheque for Tk.1,490 that had been received from a customer, BM Company. The bank assessed a Tk.35 fee for processing it. The second debit memorandum is a Tk.198 charge for cheque printing. (vi) A credit memorandum indicates that the bank collected Tk.38,000 on a note receivable for the company, deducted a Tk.40 collection fee, and credited the balance to the company account. (vii) A two-month, 7% Tk.15,000 customer‘s note dated May 28, discounted on July 15, had been retested on July 28, and the bank had charged the company for Tk.15,045 which included a pretest fee of Tk.45. Required: (i) Prepare Bank Reconciliation Statement as of July 31, 2014 bringing both balances to the correct position. (ii) Prepare the necessary journal entries to adjust the cash. E-7. The Cash in Bank account in the ledger of ABC Company Ltd. at 31 st December 2013 indicated a balance of Tk.4,86,006.00. The Bank Statement indicated a balance of Tk.6,40,748.00 on the same date. A comparison of the bank statement and the Cash book disclosed the following reconciling items: (i) Cheques issued but not presented Tk.2,02,687.00. (ii) A deposit of Tk.89,017.00 on 31st December did not appear on the Bank Statement of December. (iii) A cheque of Tk.20,000 drawn by ABC Traders Ltd. had been wrongly charged by the Bank to the Account of ABC Company Ltd. (iv) The Bank had collected for ABC Company Ltd. Tk.51,000.00 on account of notes receivable sent for collection. The face value of the note was Tk.50,000.00. (v) Bank service charges for December 2013 amounted to Tk.675.00 debited on the statement. (vi) Interest credited by the Bank for Tk.10,000.00. (vii) A customers cheque for Tk.900.00 had been entered in the cash book as Tk.329.00. (viii) A cheque issued for Th.392.00 had been entered in the cash book as Tk.329.00. Required: (a) A bank reconciliation statement using the form where both cash book and bank statement balances are bought to corrected balance. (b) Journal entries to rectify the cash book balance.


E-8. The cash account of M/S. JOTI Enterprise disclosed a balance of Tk.24,50,471 on 31st July 2014. The Bank statement as of July 31, 2014 showed a balance of Tk.27,74,650. The causes of difference between the two balances reveal the followings:(i) A deposit (cash sale of tender document) of Tk.27,500 was in transit. It had been sent of the Bank on July 31,2014. (ii) Cheques those are not presented for cash in which to be issued for utilities bill for factory office:Cheque No. 0156667 for Tk.178,580 Cheque No. 0156681 for Tk.133,560 (iii) Bank informed with the statement a memo covering N.S.F cheque of Taj Enterprise for Tk.36,250. (iv) Also accompanying the bank statement there was a canceled cheque for Tk.5,750 of Mamun & Co. The Bank had been deducted this cheque from the account of M/S. JOTI Enterprise erroneously. (v) The executive of JOTI Enterprise had recorded a cheque received from Romana Enterprise for credit sales earlier erroneously a Tk.14,050 cheque as Tk.1,405. (vi) Bank had collected a cheque drawn on JOTI Enterprise from Khulna for credit sales. The cheque was for the Tk.68,909. Bank had charged a collection fee Tk.100 plus 15% VAT. (vii) JOTI‘s Bank charges all charges at in end of the year, i.e; December 31. Required: Prepare a Bank reconciliation statement as on July 31, 2014 bringing both balance to the correct position. E-9. ABC, a sole trader received his bank statement for the month of June 2001. At that date the bank balance was Tk. 706,500 whereas his cash book balance was Tk. 2,366,500. His accountant investigated the matter and discovered the following discrepancies: 1. Bank charges of Tk. 3,000 had not been entered in the cashbook. 2. Cheques drawn by ABC totaling Tk. 22,500 had not yet been presented to the bank. 3. He had not entered receipts of Tk. 26,500 in his cashbook. 4. The bank had not credited Mr. ABC with receipts of Tk. 98,500 paid into the bank on 30 June 2001. 5. Standing order payments amounting to Tk. 62,000 had not been entered into the cashbook. 6. In the cashbook ABC had entered a payment of Tk. 74,900 as Tk. 79,400. 7. A cheque for Tk.15,000 from a debtor had been returned by the bank marked ―refer to drawer‖ but had not been written back into the cashbook. 8. ABC had brought forward the opening cash balance of Tk. 329,250 as a debit balance instead of a credit balance. 9. An old cheque payment amounting to Tk. 44,000 had been written back in the cashbook but the bank had already honored it. 10. Some of ABC‘s customers had agreed to settle their debts by paying directly into his bank account. Unfortunately, the bank had credited some deposits amounting to Tk. 832,500 to another customer‘s account. However acting on information from his customers ABC had actually entered the expected receipts from the debtors in is cashbook. Required: (i) A statement showing ABC‘s adjusted cashbook balance as at 30 June 2001. (ii) A bank reconciliation statement as at 30 June 2001.


E-10. The cashbook of Y Ltd. showed a balance of Tk. 41,004 on 31st December 2011. It received the bank statement from The City Bank Ltd. in the first week of January 2012. The balance shown by the statement is Tk. 44,380 on 31st December 2011. The following data were available for recording the statement: (i) The bank charges Tk. 76, which was not yet recorded by the company. (ii) The company mailed a deposit of Tk. 7,000 on December but not appeared on the bank statement. (iii) Cheques issued in December but not charged to the December bank statement. Cheque No: 007 Tk.300 008 8,000 009 62 010 1,640 (iv) The company has not yet recorded the interest of Tk. 1,200 collected by the bank in December. (v) The bank returned one of our customer‘s cheques of Tk. 400 with the bank statement and marked it as ‗NSF‘. The bank recorded it as a payment from the bank balance. (vi) The company identified that it incorrectly recorded it as a payment of Tk. 262 to an account as payable as Tk. 622. (vii) A cheque for P Company in the amount of Tk. 710 that had been incorrectly charged to Q Company by the bank. Required: Prepare a bank reconciliation statement as on 31st December 2011. E-11. On May 31, 2011, MONALISA Company had a cash balance per books of $ 28,907.50. The bank statement from National Commercial Bank on that date showed a balance of $34,023.00.A comparison of the statement with the cash account revealed the following facts: 1. The statement includes a debit memo of $ 200.00 for the printing of additional company checks. 2. Cash sales of $ 4,180.75 on May 12, were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $ 4,230.75. The bank credited Monalisa Company for the correct amount. 3. Outstanding checks at May 31, totaled $ 6,381.25 and deposits in transit were $ 4,680.75. 4. On May 18, the company issued check no. 1181 for $ 3,425.00 to M. Helal, on account. The check, which cleared the bank in May, was incorrectly journalized and posted by Monalisa Company for $ 3,290.00. 5. A $ 10,000.00 note receivable was collected by the bank for Monalisa Company on May 31, plus $ 400.00 interest. The bank charged a collection fee $ 100.00. No interest has been accrued on the note. 6. Included with the cancelled checks was a check issued by Taher Company to P. Jamal for $ 3,000.00 that was incorrectly charged to Monalisa Company by the bank. 7. On May 31, the bank statement showed on NSF charge of $ 3,500.00 for a check issued by W. Huda, a customer, to Monalisa Company on account. Required: (1) Prepare a bank reconciliation at May 31, 2011. (2) Prepare necessary adjusting entries for Monalisa Company at May 31, 2011.


E-12. Mr. Omayer has received his bank statement for the month ended 31 st October 2011. At the date, his balance as per bank statement is Tk. 14,130 whereas his own cash book showed a balance of Tk. 47,330. His accountant investigated the matter, and discovered the following discrepancies: (a) Bank charges of Tk. 60 had not been entered in the cash book. (b) Checks drawn by Omayer totaling Tk. 450 had not yet been presented to the bank. (c) Omayer had not entered receipts from a customer of Tk. 530 in his cash book. (d) The bank had not credited Omayer with receipts of Tk. 1,970 paid into the bank on 31 st October 2011. (e) Standing order payments against a loan amounting to Tk. 1,240 had not been entered in the cash book. (f) Omayer had entered a payment to suppliers of Tk. 560 in his cash book as Tk. 650. (g) A check received for Tk. 300 from a debtor had been returned by the bank marked ―refer to drawer‖, but this had not been written back in the cash book. (h) Omayer had brought down his opening cash book balance of Tk. 6,585 as a debit balance instead of as a credit balance. (i) An old check payment amounting to Tk. 880 had been written back in the cash book, but the bank had already honoured it. (j) Some of Omayer‘s customers had paid to settle their debts by direct debit. Unfortunately, the bank had credited some direct debits amounting to Tk. 16,650 to another customer‘s account. Required: (i) Prepare a statement showing Omayer‘s adjusted cash book balance as at 31 st October 2011. (ii) Prepare a bank reconciliation statement as at 31st October 2011. (iii) Journalize the errors to rectify bank balance. E-13. The cash Account of M/S Dipak and Sons disclosed a balance of Tk. 3,895.82 on 31st December, 2011. The bank statement as of December 31, 2011 showed a balance of Tk. 5,738.73. Upon comparing the statement with the cash records, the following were developed: (i) Accompanying the bank statement was a debit memo covering on N.S.F. Cheque of ABC Company for Tk. 77.32. (ii) Cheque outstanding as of December, 2011 were as follows: Cheque No. 157 for Tk. 902.68 and Cheque No. 162 for Tk. 1,005.00 (iii) Also accompanying the bank statement was a cancelled cheque for Tk. 57.62 of King Company; the bank had deducted this cheque from the account from the account of M/S. Dipak and Sons erroneously. (iv) On December 29, 2011 the bank had collected a non – interest bearing note for M/S Dipak & Sons. The note was for Tk. 152.50; the bank had charged a collection of Tk. 2.50. (v) A deposit of Tk. 157.63 was in transit; it had been mailed to the bank on December 31, 2011. (vi) The book keeper of M/S. Dipak & Sons had recorded a cheque received on account from Baker Company erroneously been recorded a Tk.90.00 cheque as Tk.9.00. (vii) The service charge on the account for December, 2011 amounting to Tk. 3.20 a debit memo in this amount was returned with the bank statement.


Required: (1) Construct a bank reconciliation statement beginning with bank balance as well as cash balance using the form where both bank and book balance are brought to a corrected cash balance. (2) Give the journal entries required as result of the information given above. E-14. The Bank Balance as per book of M/s. Philips Bangladesh Ltd. showed a Balance of Tk.378,085 on 30.06.11. The Bank Statement as on that date showed a Balance of Tk.4,99,720. While compared the difference in Cash Book and Bank Statement the following facts were discovered: (a) A Customer cheque No.600312 amounting to Tk.15,000 deposited in the Bank on 26.06.11 discounted by the Customers Bank due to insufficient balance in the account. (b) An amount of Tk. 3,500 credited by the Bank on Account of interest for the period. (c) Cheque No. 1864 and 5038 for total amount of Tk. 8,960 entered in the cash book on 28.06.11 given to the office bearer to deposit in the Bank but erroneously kept in his pocket up to 02.07.11. (d) Bank Account debited by an amount of Tk. 365 for bank charges on collection of cheques and remittances. (e) An amount of Tk. 95,000 transferred by a Customer on 29.06.11 from Rajshahi in settlement of invoice No. R-1015 dated 25.05.11. The intimation has not been reached to the cashier as yet. (f) The following cheques were issued by the company not yet presented to the Bank for payment. Cheque No. 30113 Tk.25600 ,, ,, 30117 Tk.7,900 ,, ,, 30118 Tk.18,200 ,, ,, 30126 Tk.3,000 (g) As per standing order bank is paying Tk. 35,000 to Mr. Rahman on the last working day of every month which has not been recorded by the Cashier. (h) Cheque No. 30130 issued to M/S Habib & Sons A/C payee only for an amount of Tk. 25,000 on 28.06.2011 reported to be lost by an employee of Mr. Habib. This has been informed to the Bank by a written statement which was finally caught by the Bank on 07.07.2011 and reported to the police. However the depositor of the stolen cheque could not be traced yet. The case is under investigation. (i) An amount Tk. 9,600 deposited to the Bank on 30.06.2011 which was credited in the bank account correctly but cashier Mr. Anis debited the cash book erroneously for Tk. 6,900. Required: (i) Prepare a Bank Reconciliation statement showing the corrected Bank balance as on 30.06.11. (ii) Make Journal entries in order to bring the Cash Book in agreement with the Bank Balance. E-15. The cash account of Standard Furniture Service Inc. disclosed a balance of Tk.34,112.96 on October, 31. 2009. The bank statements as of October, 31, showed a balance of Tk.42,418.90. Upon comparing the statement with the cash records, the following facts were developed: (i) Standard‘s account had been charged for a customer‘s uncollectible check amounting to Tk.2,286 on October 26.


(ii) A customer‘s check for Tk.1,450 had been entered as Tk.1,250 both by the depositor and the bank but was later corrected by the bank. (iii) A two month, 9%, Tk.6,000 customer‘s note dated August 25, discounted on October 12, had been protested October 26, and the bank had charged Standard for Tk.6,101.66, which included a protest fee of Tk.11.66. (iv) Cheque no. 551 for Tk.2,485 had been entered in the cash book as Tk.2,449, and cheque no. 542 for Tk.65.80 had been entered as Tk.658. The company uses the voucher system. (v) There were bank service charges for October of Tk.78.86 not yet recorded on the books. (vi) A bank memo stated that M. Sumon‘s note for Tk.5,000 and interest of Tk.125 had been collected on October 29, and the bank had been made a charge of Tk.13.00 (no entry had been made on the books when the note was sent to bank for collection.) (vii) Receipt of October 29, for Tk.13,700 was deposited November 1. The following cheques were outstanding on October 31: No. 520 ------------Tk. 2,500.00 No. 571 -----------Tk. 1,465.00 521 ----------Tk. 6,896.46 573 -----------Tk. 375.80 532 ----------Tk. 4,810.50 575 -----------Tk. 551.44 670 ----------Tk. 3,550.76 576 -----------Tk. 4,466.30 Required: (1) Construct a bank reconciliation statement, using the form where both bank and book balances are brought to a corrected cash balance. (2) Give the journal entries where necessary. E-16. On June 30, 2010 Ragib‘s Cash Book showed that he had an overdraft of Tk. 3,000 on his current account at the Bank. On checking the cash Book with the Bank statement you find the following: (i) A cheque of Tk. 500 drawn on Deposit Account had been shown in the cash Book as drawn on current account. (ii) Dividends amounting to Tk. 2,000 had been paid direct into the Bank and not entered in the Cash Book. (iii) A cheque issued to Sanjib for Tk. 250 was replaced when out of date. It was entered again in the Cash Book, no other entry being made. Both the cheques were included in the total of un-presented cheques. (iv) The payment side of the Cash Book had been under cast by Tk. 100. (v) On instruction from Ragib, the Bank had transferred profit Tk. 600 from his Deposit Account to his Current Account, recording the transfer on 15th July, 2010. (vi) Bank charges Tk. 350 shown in the Bank Statement had not been entered in the Cash Book. (vii) Cheque drawn amounting to Tk. 5,000 had been entered in the Cash Book, but had not been presented. (viii) Cheques received amounting to Tk. 4,000 had been entered in the Cash Book, but had not been credited by the Bank. Required: Bank Reconciliation Statement as on 30th June, 2010.


E-17. The following information is available for Lee Company as of June 30, 2009. (a) Cash on the books as of June 30, 2009 amounted to Tk. 1,891. Cash on the Bank Statement for the same date was Tk. 3,252. (b) A matching of debits to the Cash Account on the books with deposits to the Bank Statement showed that the Tk. 452 receipts of June 30, 2009 were included in Cash but not included as a deposit on the Bank Statement. This deposit was in the Bank‘s night deposit chute on June 30, 2009. A comparison of cheques issued with cheques that had cleared the Bank showed three cheques outstanding: No. 9544 Tk. 322 No. 9545 Tk. 168 No. 9546 Tk. 223 Total Tk. 713 (c) Included with the Bank statement was a credit memo for Tk. 1,225 (principal of Tk.1,200 + interest of Tk.25) for collection of a note owed to Lee by Shipley Company. (d) Included with the Bank Statement was a Tk. 102 debit memo for an NSF Cheque written by R. Jonsons and deposited by Lee. (e) Charges made to Lee‘s Account include Tk. 15 for safe-deposit box rent and Tk. 8 for service charges. Required: (i) Prepare Bank Reconciliation Statement as of June 30, 2009. (ii) Prepare the necessary Journal Entries to adjust the Cash Account. E-18. The following information is available for H. Company as of June 30, 2009: (a) Cash on the books as of June 30 amounted to Tk.1,13,675. Cash on the Bank Statement on the same date was Tk.1,41,717. (b) A deposit of Tk.14,250 representing cash receipts of June 30, did not appear on the Bank Statement. (c) Outstanding cheque totaled Tk.7,294. (d) A cheque for Tk.2,420 returned with the statement was recorded incorrectly in the cash payments journal as Tk.2,024. The cheque was for advertising. (e) The Bank service charge for June amounted Tk.26. (f) The Bank collected Tk.36,400 for H. Company on a note. The face value of the note was Tk.36,000. (g) An NSF cheque for Tk.1,140 from a customer returned with the statement. (h) The Bank mistakenly deducted a cheque for Tk.800 drawn by M company. (i) The Bank reported that it had credited the account for Tk.960 for interest on the average balance. Required: (i) Prepare Bank Reconciliation Statement as of June 30, 2009. (ii) Pass necessary Journal Entries to adjust the Cash Account. E-19. This information is available for Navana Company as of July 31, 2009. Cash on the books as of July 31, 2009 amounted to Tk. 21,327. Cash on Bank Statement for the same date was Tk. 26,176. A deposit of Tk. 2,610, representing cash receipts of July 31, did not appear on the bank statement. A cheque for Tk. 960 returned with the statement was recorded incorrectly in the cheque registrar as Tk. 690. The cheque was made for a cash purchase of merchandise.


Outstanding cheque totaled Tk. 1,968. Bank service charge for July amounted Tk. 12. The bank collection for Navana Company Tk. 6,120 on a note. The face value of the note was Tk. 6,000. An NSF cheque for Tk. 92 from a client, Jalil Traders, came bank with the statement. The bank mistakenly charged to the company account a cheque for Tk. 425 drawn by another company. The bank reported that it had credited the account for Tk. 170 in interest on the average balance on July. Required: (i) Prepare Bank Reconciliation Statement as of July 31, 2009. (ii) Prepare the necessary Journal Entries to adjust the Cash Account. E-20. S. A. Merchant maintains two bank accounts No.-1 account is his business account and No.-2 account is his private account. On June 30, 2006, there was a balance of Tk.890 outstanding to his credit in No.-1 account. It is discovered that: (a) The receipt column of the cash book has been overcast by Tk.1,000. (b) Cheques outstanding to Tk.3,760 entered in the cash book as paid into the bank have not been cleared. (c) Cheques issued amounting to Tk.5,230 have not been presented. (d) Discount allowed Tk.110 has been included through mistake in the cheque entered in the bank column of the cash book. (e) A trade credit note Tk.290, was received in June, 2006, but not recorded in the books. (f) A cheque for Tk.100, originally issued in 2005 was replaced when out of date and entered again in the cash book. It was still outstanding (and not out of date) on June 30, 2006. Both the cheques were included in the total of unpresented cheques Tk.5,230. (g) The bank has charged the No-2 account with a cheque for Tk.2,000 in error. This should have been charged to No.-1 account. Requirements: (i) Make the appropriate correction/adjustment in the cash book. (ii) Prepare a bank reconciliation statement to show the bank balance as per No.-1 account. E-21. On January 31, 2008 Orbit Company Limited has a cash balance per books of Tk.6,781.50. The Bank Statement from Bank Asia on that date showed a balance of Tk.6,404.60. A comparison of the statement with the cash account revealed the followings: (i) The statement includes a debit memo of Tk.40 for the printing of company cheques. (ii) Cash sales of Tk.836.15 on January 12, were deposited in the Bank. The cash receipts journal entry and the deposit slip were incorrectly made for Tk.886.15. The Bank credited Orbit Company for the correct amount. (iii) Outstanding cheques at January 31 totaled of 576.25, deposit in-transit were Tk.1,916.15. (iv) On January 18, the company issued Cheque No.1181 for Tk.685 to Moon Limited on account was incorrectly journalized and posted by Orbit Company Limited for Tk.658.


(v) A Note Receivable of Tk.2,500 was collected by the bank for Orbit Company Limited on January 31 plus Tk.80 interest. The Bank charged a collection fee of Tk.20. No interest has been accrued on the Note in the books of the company. (vi) Included in the cancelled cheques was a cheque issued by Neptune Company Limited to Sun Limited for Tk.800 that was incorrectly charged to Orbit Company Limited on account. (vii) On January 31, the bank statement showed a NSF cheque of Tk.680 for a cheque issued by Profip Nag, a customer, to Orbit Company Limited on account. Required: (a) Prepare a Bank Reconciliation statement as on January 31, 2008. (b) Prepare the necessary adjusting entries for Orbit Company Limited at January 31, 2008. E-22. The July bank statement sent by the bank to Parkview Company show a balance of cash on deposit at July 31, 2007 of Tk.5,000.17. Assume that on July 31, 2007 Parkview‘s ledger shows a bank balance of Tk.4,262.83. The employee preparing the bank reconciliation has identified the following reconciling items: 1. A deposit of Tk.410.90 made after banking hours on July 31, 2007 does not appear in the bank statement. 2. Four cheques issued in July have not yet cleared by the bank. These cheques are: Cheque No. Date Amount 881 July 01 Tk.100.00 888 July 14 Tk.10.20 890 July 16 Tk.402.50 891 July 17 Tk.205.00 3. Two credit memoranda were included in the bank statement: Date Amount Explanation July 22 Tk.500.00 Proceeds from collection of a non-interest bearing notes receivable from J. David. The bank‘s collection department collected this note for Parkview Company. July 31 Tk.24.74 Interest earned on average account balance during July. 4. The debit memoranda accompanied the bank statement: Date Amount Explanation July 22 Tk.5.00 Fee charged by bank for handling collection of notes receivable. July 30 Tk.50.25 Cheque from customer J.B. Ball deposited by Parkview Company charged bank as NSF. July 31 Tk.12.00 Service charge by bank for the month of July. 5. Cheque No.875 was issued to the telephone company in the amount of Tk.85.00 but was erroneously recorded in the cash payments journal as Tk.58.00. The cheque, in payment of telephone expense, was paid by the bank and correctly listed at Tk.85.00 in the bank statement. In Parkview‘s ledger, the cash account is overstated by Tk.27.00 because of this error. (Tk.85.00 – Tk.58.00 = Tk.27.00). Required: (a) Prepare bank reconciliation statement as at July 31, 2007. (b) Prepare Journal entries for the adjustments.


MODEL EXAM QUESTION ACCOUNTING FOR FINANCIAL SERVICES Time – 3 hours; Full Marks – 100; Pass Marks – 50 [N.B. – The figures in the right margin indicate full marks. Answer any five questions including question no.9. Different parts of each question must be answered in the same place.] 1. (a) What is chart of accounts? Explain the need of chart of accounts in accounting. 10 (b) ―Book keeping and Accounting are same.‖ Do you agree? Explain. 8 2. (a) What is the basic accounting equation? What items affect owner‘s equity? 8 (b) Briefly narrate the golden rule of debit and credit. 5 (c) Who are the users of accounting information? 5 3. (a) Explain the meaning of the credit term 2/10, N/30. 6 (b) ABC Company completes the following selected transactions during the year 2016. Jan. 10 - An amount of Tk.30,000 was paid as advance rent for three months. Feb. 12- Purchased equipment costing Tk.100,000 on account. Mar. 1 - Paid Tk.40,000 cash for the purchase of equipment on Feb.12. The remaining amount was recognized as a 4 months note payable with interest rate of 10%. Apr. 5 - Provided services to its customers and received Tk.300,000 in cash. Apr. 30 - Paid wages to its employees for the month of April total Tk.50,000. May 20 - Provided services to its customers amounted Tk.25,000. They paid Tk.15,000 and promised to pay the remaining amount. May 25 - Received Tk.10,000 from customers for the services provided on May 20. Jul. 1 - ABC Company paid the note payable due on March 1. Aug. 22 - Received Tk.28,000 as an advance payment from customers for services. Sep. 30 - Paid cash dividend Tk.80,000. Oct. 31 - Received telephone bill of Tk.5,000. Nov. 30 - Received electricity bill of Tk.8,000. Required: (i) Prepare journal entries for the above transactions under perpetual method. 8 (ii) Prepare the trial balance. 4 4. (a) Why do accrual basis financial statements provide more useful information than cash basis statements? 6 (b) Distinguish between FOB shipping point and FOB destination. 6 (c) Explain objectivity principle in accounting. 6 5. (a) Write short note on Perpetual and Periodic Inventory System. 6 (b) Modern Company has the following Inventory and Sales for the month of March, 2016. Inventory: March 01, 2016 1,200 units @ Tk.4.00 Tk.4,800 Purchase: March 10 1,500 units @ Tk.5.00 Tk.7,500 March 20 1,400 units @ Tk.5.25 Tk.7,350 March 30 1,300 units @ Tk.5.00 Tk.6,500 Sales: March 15 1,500 units March 25 1,400 units The physical Inventory count on March 31 shows 2,500 units on hand.


Required: Under a periodic Inventory system, determine the cost of Inventory on hand at March 31 and the Cost of Goods Sold for March under the (a) First-in, First-out (FIFO) method, (b) last-in, First out (LIFO) method and (c) Average Cost Method. 12 6. (a) What is meant by break-even analysis? What are the assumptions of break-even analysis? 6 (b) Miracle Enterprise produces single product. The projected income statement for 2008 based on sales of 2,00,000 units is as follows: Taka Sales 40,00,000 Variable costs 22,00,000 Contribution margin 18,00,000 Fixed costs 15,30,000 Operating income 2,70,000 Required: (i) Break-even units and sales revenue. 4 (ii) Margin of safety and operating leverage. 4 (iii) How many units must be sold to earn a profit equal to 10% of sales? 4 7. (a) Why depreciation is charged on Fixed Assets? Discuss the various methods of charging depreciation. 6 (b) ―Depreciation is a process of cost allocation, not valuation‖- Explain the statement.4 (c) A fixed asset is purchased on January 1, 2013. Information relating to the asset is as follows: Cost of acquisition Tk.110,000 Residual value estimated at the time of acquisition Tk.10,000 Residual value revised estimate on January 1, 2014 Nil Useful life estimated at the time of acquisition 10 years Useful life revised estimate on January 1, 2015 8 years Required: Calculate depreciation expense for the years ended on December 31, 2013, 2014, 2015 and 2016 by using straight line method. 8 8. (a) What steps are to be followed in preparing a bank reconciliation statement? 6 (b) Suruz Company's bank statement shows a balance of Tk.30,000 on dated December 31, 2017. The company's cash book shows a balance of Tk.25,000 on the same date. Following additional information is available: (a) Following checks issued by the company to its customers are still outstanding: Check No. 111 issued on November 20 for Tk.2,000 Check No. 222 issued on December 25 for Tk.1,000 (b) A deposit of Tk.5,000 made on December 31 does not appear on bank statement. (c) An NSF check of Tk.3,900 was returned by the bank with the bank statement. (d) The bank charged Tk.40 as service fee. (e) Interest income earned on the company's average cash balance at bank was Tk.4,000. (f) The bank collected a note receivable on behalf of the company. Amount received by the bank on the note was Tk.6,000. This includes Tk.500 interest income. The bank charged a collection fee of Tk.100. (g) A deposit of Tk.600 was incorrectly entered as Tk.60 in the company's cash records.


Required: Prepare a bank reconciliation statement using the above information. 12 9. (a) What do you mean by ‗Post balance sheet events‘? Explain. 4 (b) X Ltd. has the following post-closing trial balance for 2015: Heads of Account Amount in Taka Cash 2,200 Accounts Receivable 4,400 Supplies inventory 24,100 Land 1,67,000 Buildings 1,15,000 Accumulated depreciation, buildings 36,000 Accounts payable 23,700 Income taxes payable 15,100 Interest payable 4,200 Wages payable 14,200 Notes payable (due in 2028) 60,000 Capital stock 1,50,000 Retained earnings 53,700 During 2016, the following transactions occurred: (a) X Ltd. provided services, all on credit, for Tk.2,10,300. It rented some facilities to customers and received cash Tk.20,500. It earned Tk.41,800 in cash by providing miscellaneous services. (b) It collected all the account receivable outstanding at December 31, 2015. There remains Tk.15,600 of account receivable to be collected at December 31, 2016. (c) Feed amounting Tk.62,900 was purchased on credit during the year 2016. (d) Straw was purchased for Tk.7,400 cash during the year 2016. (e) Wages payable at the beginning of 2016 were paid in 2016. Wages earned and paid during 2015 amounting Tk.1,12,000. (f) The income taxes payable for 2015 were paid in 2016. The account payable remains unpaid at the year end Tk.13,600. (g) One year‘s interest @14% was paid on notes payable on July 1, 2016. (h) Property taxes were paid on Land and Buildings in the amount of Tk.14,000. (i) Dividends were declared and paid amounting Tk.7,200. The following data are available for adjustments: (a) Feed of an amount of Tk.26,000 remains unused at year-end. Straw of an amount of Tk.4,400 remained unused at year-end. (b) The buildings are being depreciated over 15 years, with a residual value of Tk.25,000. (c) The equipment is being depreciated over 10 years, with a residual value of Tk.2,000. (d) Wages of Tk.4,000 were unrecorded and unpaid at year-end. (e) Interest for 6 months @14% on notes payable is unpaid and unrecorded at yearend. (f) The income tax rate is 30%. Required: (i) Give journal entries for the transactions of 2016. 6 (ii) Prepare the adjusting entries. 6 (iii) Prepare multiple step income statement. 6 (iv) Prepare classified balance sheet. 6


10. Write short notes (any six) (a) Cost Principle; (d) Off-balance Sheet Items; (g) Working Capital;

(b) Deferred Revenue; (e) Reversing Entry; (h) Bank Reconciliation;

3X6=18 (c) Contingent Asset; (f) Cash Equivalent; (i) Opportunity Cost.

Accounting for Financial Services  

As Per Banking Diploma Syllabus

Accounting for Financial Services  

As Per Banking Diploma Syllabus

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