Assigment Financial Acct-528

8/11/2019 Assigment Financial Acct-528

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Financial Accounting (528)

Assignment No.1

Name of Student: Muhammad Ilyas Name of Tutor: Mahmood ul Hassan

Roll #: P-503412 Address: LecturerDepatt of Business Administration Block-13 AIOU Islamabad.

Address : Flat 13, Block 1-B-, St 30,I-8/1 Islamabad

Semester: Spring-2004

Name of Course Fin AccountingCode #. 528 Submitted on:

Assig # 1Due Date 10.8.04 Student Signature:


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Question No.1

a. Differentiate the following:-

i. Matching principle Vs Realization principle.ii. Common Stock Vs Preferred Stock

Answer

i. Matching Principle

According to this principle the revenues and the relevantexpenses incurred should be correlated and matched so that a completepicture is available. Suppose a company closing its books each year on

June 30 th, producing a monthly journal, receives annual subscription inMarch 2003 and treats these as income. This will lead to distraction ofpicture since nine issues in 2003-04 will have to be su pplied without anyfurther amount being received, the net effect is that the income of 2003-04 is being transferred to 2002-2003. The proper thing to do is to treatthree month subscription as income for 2002-03 and 9 months should

be carried forward to 2003-04 and shown in balance sheet as on June

30, 2003 to indicate that t hese su bscription have been received and willinvolve su pply of nine issues.

In short that the matching principle indicate that the expensesshould be accorded in the period in which the related goods are servicesis consumed in the process of earning revenue.

Realization Principle.

Accounting is the historical record of transaction. It records whathas happened. It does not anticipated adverse effect of events that h avealready occurred are u sually recorded. This is of great importance instopping business rm from in oating their prot by recording sales an dincomes that ar e likely to accrue. Unless m oney has been realized eithercash has been received or a l egal obligation to pay has been assumed bythe customer, no sale can be said to have taken place and no prot or


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income can be said to have arisen.

In short the generally accepted accounting principle thatdetermines when revenue should be recorded in the accounting records,revenue is realized when services are rendered to customer or w hengoods so ld are delivered to customer.


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ii. Common Stock Vs Preferred Stock

Common Stock possesses the traditional right of ownership:-

Voting rights Participate in dividends Residual claim to assets in the even t of liquidation.

When any of these rights is modied the term preferred stockis u sed to describe the resu lting type of capital stock.

Characteristics of preferred Stock.

The following are the main/distinct features of preferredstock:-

Preferred as t o dividend. Cumulative dividend rights Preferred as to assets (in the eve nt of liquidation). No voting power.

b. Rent Paid:

Opening Balance - 0Rent Exp for 1999 - 2400

Total Rent to be paid - 2400 Add prepaid rent - 200 Total rent paid in 1999 - 2600

Interest Expenses


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Opening Balance Payable - 600Interest Exp for 1999 - 1800

2400Less closing Balance for 1999 - 0


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Interest paid during the year - 2400


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Salaries

Salaries payable opening Bal - 2500Salaries Exp for 1999 - 37500 Total salary to be paid - 40000

Less salary payable closing - 5000Salaries paid during the year 35000

Question No. 2

a. Write a detail note on Depreciation, Depletion and Amortization.

Answer

Depreciation

Deprecations the diminution in the value of assets due to

wear and tear or due to just passage of time. operate. True prot of a business cannot be ascertained unlessdepreciation has been allowed for. Suppose a piece of machinery has

been brought for Rs.40000/- with a life of ve yearsman would charge Rs.8000/- every year to the prot and loss account asdepreciation of machinery.

In other words, i t is the systematic allocation of cost i nrecognition of the exhaustion of assets life and is a pplicable only to thosetangible asset s that are u sed by the business.

Depletion

Natural resources, also called wasting assets, move towardsexhaustion as the physical units that such resources, comprise areremoved or sold. The withdrawal of oil, gas, cutting of timber and the


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mining of coal, sulpher, iron, copper or silver ore are examples ofprocesses leading to the exhaustion of natural resources. The redu ctionin the cost or value of natural resources a s a result of the withdrawal ofsuch resources is ref erred to as d epletion .


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Amortization

The term amortization is used to described the systematic

right of to expense of the cost of an intangible Asset over its u seful life. The usual accounting entry for amortization consist of debit toamortization expense and a credit to the intangible asset account. Thereis no theoretical objection to crediting an accumulated amortizationaccount rather than the intangible assets account, but this method isseldom en-counted in practiced.

b.

IUn-depreciated cost of machine. = 75000-21000=54000Revised estimate of useful life = 5 yearsRevised amount of annualdepreciation exp

= 54000/5= 10800


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Recording Journal Entries


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31.12.88 Depreciation exp = 10800

Accumulated depreciation(Depreciation exp for 1988

= 10800


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on machine)

ii. Factor affecting the useful life of the assets


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Machines or p lant and equipment have a limited useful lifeas a result of certain physical and functional factors. The physicalfactors t hat m ove a property items towards its u ltimate retirementare:-

a. Wear and Tear:- It rendered an assets no longeruseable.

b. Deterioration and decay:- The asset through aging whether the assets is used or not.

c. Damage and destruction:- Fire, ood, earth quakeor accident may reduce or terminate the useful life ofan asset.


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Functional factor t hat limit the life of a property item are:-

1. Inadequacy2. Obsolescence

As assets may be lose its usefulness when, as a result ofaltered business requ irements, it can no longer carr y the productive loadand require replacement. Although the assets is still useable, itsinadequacy for present purposes has cut short its service life.

Technological advancement also result in the change of asset


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Question No.3

Answer

a. Cost ow assumptions

If the item in inventory are Homogeneous in nature(identical), it is not necessary for the seller to use the specicidentication method. Rather he may follow the more convenient practiceof using a cost ow assumption.

There are various ow assumption:-

1. Average cost2. First in, rst out (FIFO)3. Last in, rst out (LIFO)

Average Cost

This assumption values all merchandise units sold and unitsremaining in inventory at the average per unit cost. It is assumed thatunits are drawn is random order.

First in, rst out (FIFO)

Goods sold at the rst units that were purchased i.e theoldest goods on hand. Thus the remaining inventory is comprised of themost recent purchases

Last in, rst out (LIFO)

The units sold are assume to be those most recentlyacquire. The rem aining inventory, therefore, is assumed to consist of theearliest purchase.

The use of ow assumption eliminates the need for


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repeatedly identifying each unit wold and looking up its a ctual cost. Theassumption should be used consistently for reliable measurement of costof goods so ld.

b.

i.Estimated amount of uncorrectable AccountDecember 31 st

Classication Balances In $

Bad DebitExperience %

Estimated amountof un-collectablein $

Not yet due 300,000 1% 3,0001-30 days past due 100,000 3% 3,00031-60 days past due 70,000 10% 7,00061-90 days past due 50,000 20% 10,000Over 90 days past due 20,000 50% 10,000 Total:- 540,000 33,000

ii.

Allowance for doubt full account before adjustment atDecember 31, showed a credit balance of $7,000.

Now we made the entry for bring the allowance account uptothe required balance.

Total estimated un-collectable = 33,000 Allowance for bad debits = 7,000

Required amount for increase The allowance for bad debits

= 26,000

Bad debits are = 26,000 Allowance for bad debits

(adjustment made for allowancefor b ad debits a re)

= 26,000


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Question No.4

a.

i.

Date Particulars Dr Cr


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1 Cash 4,750,000


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Discount on Bonds 250,000Bonds payable

(6% bonds issued for ten years at 5%)

5,000,000


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3Bonds interest exp 150,000


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Cash/Bank

(semiannually payment of bondsinterest)

150,000


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Discount on bonds 25,000Cash

(semiannually payment of i nterest on bonds and discount on bonds

amortized 250,000 / 10= 25,000)

150,000

ii.


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Discount on bonds 25,000Cash

(semiannually payment of intereston bonds and discount on bondsamortized 250,000 / 10= 25,000)

150,000


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3Bonds payable 5,000,000


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Cash 5,000,000


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b.

Methods of Calculation of Depreciation


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1. Straight line Method:- Under this method a suitablepercentage of original cost i s written off the assets every year. Thus if anassets cost Rs.20,000 and 10% depreciation is thought proper Rs.2000

would be written of each year.

Cost Scrape valueEstimated life

This method is useful when the service is rendered by the year to year.

2. Written down value Method:- Under this method the rate orpercentage of depreciation is xed, but it ap plies to the value at whichthe asset stand in the books in beginning of the year. In the rst year,

depreciation is written off proportionate to the actual period in use. Thedepreciation on Rs.20,000 the cost of the asset @ of 10% will be Rs.2000in the rst year. This will reduce the book value of asset to Rs.18,000.Depreciation in second year will be Rs.1,800 i.e 10% of Rs.18,000. In thethird year it will be Rs.1,600.

3. Sum of the Digit Method:- Under this method, the amount ofdepreciation to be written off each year is ca lculated by the formula.

Remaining life o f the asset (including the year)

X Cost of the Asset

Sum of a ll the digits of t he life of t he asset in years


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10/55 x 50,000 = 9091

The depreciation to be provided in the second year


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4. Machine Hours Rate Method

Instead of the usual method of estimating the life of a machine in years, it is estimated in hours. Then an accura

the numbers of hours each machine is run and deprecation is calculatedaccordingly. For Example:- The effective life of a machine may be30,000 hours, if the cost of the machine is Rs. 450,000 the hourlydepreciation is Rs.450,000/30,000 hours = to Rs.15 per hour. Thedepreciation of a particular year during which the machine runs for2,500 hours will be 2,500 x 15 = 37,500.

Other methods are

Annuity Method

Depreciation fund Method Insurance Policy Method Revaluation Method Depletion Method.

Question No-5

Answer

The following adjusting entries are made according the TrialBalance for the Month of March.

i.

1. Deprecation Exp 142.50 Accumulated Depreciation

(Depreciation recorded for March)

142.50

2. Salaries Exp 800Salaries P ayable

(Salaries recorded)

800


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3. Rent Exp 300Prepaid Rent

Rent recorded for March

300

4. Office Supplies Exp 325Office Supplies 325

5. Insurance Exp 200Un-expired Insurance

(Insurance Exp for March

200

ii.

The monthly rent of XYZ company will decrease as a result of goingto new office as cl ear from the rent expense. The rent expense recordedfor the month of January and February was Rs.1500 ( i.e. 750/- permonth) as shown in Trial Balance. Where as the monthly rent for newoffice comes to Rs.300/- only i.e Rs.2700/9 months = Rs.300 p.m.


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Assigment Financial Acct-528

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