AIOU 1413 Code Solved Guess Paper

Answer:

Adjusting Entries for December 31, 2018

Introduction:
Adjusting entries are made at the end of an accounting period to record revenues earned and expenses incurred that are not yet recorded. They ensure the financial statements present an accurate and fair view of the company’s financial position in compliance with the accrual basis of accounting.

Body:

• 1. Unearned Revenue Adjustment:
  Given: Rs. 30,000 was received in advance. One-third of the work is completed.
  Calculation: Rs. 30,000 × 1/3 = Rs. 10,000 earned.
  Adjusting Entry:
  Unearned Revenue …………… Dr. 10,000
      Service Revenue ……………. Cr. 10,000
  
  
• 2. Accrued Wages:
  Given: Wages of Rs. 9,000 are earned but unpaid.
  Adjusting Entry:
  Wages Expense ……………… Dr. 9,000
      Wages Payable …………… Cr. 9,000
  
  
• 3. Depreciation Expense:
  Given: Depreciation for 2018 is Rs. 19,127.
  Adjusting Entry:
  Depreciation Expense ………. Dr. 19,127
      Accumulated Depreciation – Equipment …….. Cr. 19,127
  
  
• 4. Office Supplies Adjustment:
  Given:
  Opening balance = Rs. 480
  Purchases during 2018 = Rs. 5,349
  Total available = Rs. 5,829
  Ending inventory (physical count) = Rs. 587
  Used Supplies: Rs. 5,829 – Rs. 587 = Rs. 5,242
  Adjusting Entry:
  Office Supplies Expense …… Dr. 5,242
      Office Supplies …………. Cr. 5,242
  
  
• 5. Accrued Interest Revenue:
  Given: Rs. 750 interest earned but not yet received.
  Adjusting Entry:
  Interest Receivable ………… Dr. 750
      Interest Revenue ………. Cr. 750
  
  

Conclusion:
These adjusting entries update revenues and expenses for the period, ensuring accurate profit calculation and proper presentation of assets, liabilities, and equity in the financial statements. Without these adjustments, the financial statements would not comply with the accrual accounting principle.

Answer:

Bank Reconciliation — May 31, 2018

Step 1 — Balances given:
– Cash per books (company ledger) as of May 31: Rs. 42,754.16
– Cash per bank statement as of May 31: Rs. 52,351.46

Step 2 — Adjust the bank statement balance to arrive at adjusted bank balance:
Bank statement balance (May 31) ……………………………….. Rs. 52,351.46
Add: Deposit in transit (May 31 receipts not on bank statement) ………….. + 5,220.94
Less: Outstanding checks ………………………………………….. − 3,936.80
Add: Bank error — check of Rs. 850 charged by bank (drawn by another company) + 850.00
——————————————————————————
Adjusted bank balance ………………………………………. Rs. 54,485.60

Step 3 — Adjust the book (company) cash balance to arrive at adjusted book balance:
Cash per books (May 31) …………………………………… Rs. 42,754.16
Add: Bank collection of note (cash received by bank) …………………. +12,360.00
    (Note face = Rs. 12,000; extra Rs. 360 = interest earned on the note)
Add: Interest credited by bank on average balance …………………… + 120.00
Less: Bank service charge for May ……………………………….. − 25.00
Less: NSF check returned (Eva Mendez) ……………………………. − 183.56
Less: Correction of check recorded incorrectly in company’s books (actual Rs.1,920; recorded Rs.1,380) − 540.00
——————————————————————————
Adjusted book (company) cash balance ………………………. Rs. 54,485.60

Result: Adjusted bank balance and adjusted book balance agree at Rs. 54,485.60.

Explanation of each item

• Deposit in transit (Rs. 5,220.94) — recorded on books as cash receipts but not yet cleared by bank; added to bank.
• Outstanding checks (Rs. 3,936.80) — checks issued by company recorded in books but not yet presented to bank; deducted from bank.
• Bank error (Rs. 850.00) — bank erroneously charged a check drawn by another company; bank statement should be increased by this amount.
• Bank collection of note (Rs. 12,360.00) — bank collected a note for the company (face Rs. 12,000 plus Rs. 360 interest); this increases book cash but was not yet recorded in books.
• Interest credited by bank (Rs. 120.00) — bank interest not yet recorded in books; add to books.
• Bank service charge (Rs. 25.00) — bank fee shown on statement but not yet recorded in books; reduce book cash.
• NSF check (Rs. 183.56) — customer’s check returned unpaid by bank; reduce book cash and reinstate receivable from customer.
• Check recording error (Rs. 540.00) — company recorded a cash purchase check as Rs.1,380 but actual was Rs.1,920. Books overstate cash by Rs.540; reduce book cash and increase purchase/expense or inventory accordingly.

Journal Entries to adjust company’s books (May 31, 2018)

1. To record bank collection of note (Rs. 12,360 — includes Rs. 360 interest):
   Cash …………………………………. Dr. 12,360.00
       Notes Receivable …………………. Cr. 12,000.00
       Interest Revenue ………………… Cr. 360.00


2. To record interest credited by bank (Rs. 120):
   Cash …………………………………. Dr. 120.00
       Interest Revenue ………………… Cr. 120.00
   (If you prefer, the interest portion in entry #1 and this entry can be combined if the bank credited both together — here they are shown separately because the note collection included Rs.360 interest and the bank also separately credited Rs.120 interest.)


3. To record bank service charge (Rs. 25):
   Bank Service Charge (or Misc. Expense) … Dr. 25.00
       Cash …………………………… Cr. 25.00


4. To record NSF check returned (Eva Mendez) (Rs. 183.56):
   Accounts Receivable — Eva Mendez …… Dr. 183.56
       Cash ………………………….. Cr. 183.56
   (Reinstate the receivable from the customer since their payment did not clear.)


5. To correct check recorded incorrectly (additional amount Rs. 540):
   Purchases (or Merchandise Inventory/Expense) Dr. 540.00
       Cash ………………………………. Cr. 540.00
   (This entry increases the purchase/cost and reduces cash to reflect the actual check amount Rs.1,920 instead of Rs.1,380 already recorded.)

Notes:

• No journal entry is required for the bank’s error (Rs. 850) because it affected only the bank statement; once the bank corrects the error the company’s bank statement will be corrected. If the bank does not correct immediately, you may keep a memo on file until corrected by bank.
• All journal entries above change the book (company ledger) cash balance so that it agrees with the adjusted bank balance of Rs. 54,485.60.

Answer:

Summary / Key calculations

• Face (par) value of bonds = Rs. 8,000,000
• Issue price = 98% of par → Cash received = 8,000,000 × 0.98 = Rs. 7,840,000
• Discount on issuance = 8,000,000 − 7,840,000 = Rs. 160,000
• Life = 5 years, semiannual periods = 5 × 2 = 10 periods
• Straight-line amortization of discount per period = 160,000 ÷ 10 = Rs. 16,000
• Semiannual cash interest = 8,000,000 × 12% ÷ 2 = Rs. 480,000
• Interest expense per period (cash interest + amortization) = 480,000 + 16,000 = Rs. 496,000

Journal Entries

1) On issuance — April 1, 2018
Cash ………………………………………. Dr. 7,840,000
Discount on Bonds Payable ……………… Dr. 160,000
    Bonds Payable ……………………… Cr. 8,000,000
(To record issuance of Rs. 8,000,000 bonds at 98 — discount of Rs.160,000.)

2) First semiannual interest payment — October 1, 2018
Interest Expense ………………………. Dr. 496,000
    Discount on Bonds Payable ………… Cr. 16,000
    Cash …………………………………. Cr. 480,000
(To record semiannual interest — cash paid Rs.480,000; amortization of discount Rs.16,000.)

3) Second semiannual interest payment — April 1, 2019
Interest Expense ………………………. Dr. 496,000
    Discount on Bonds Payable ………… Cr. 16,000
    Cash …………………………………. Cr. 480,000
(Second semiannual interest and discount amortization — same amounts under straight-line.)

Notes:

• Under straight-line amortization the same discount amount (Rs.16,000) is recognized each period.
• Interest expense each period is the cash interest (coupon) plus the amortization of the discount.
• No year-end accruals were required to be made beyond these dated entries per the problem instructions.

Answer:

1. Journal Entries (Perpetual inventory system)

Oct. 2 — Purchase inventory on credit (Rs. 3,000):
Inventory ……………………………….. Dr. 3,000.00
    Accounts Payable …………………….. Cr. 3,000.00

Oct. 2 — Freight charges (buyer pays under FOB shipping point):
Inventory ……………………………….. Dr. 150.00
    Cash …………………………………. Cr. 150.00

Oct. 9 — Sale on credit (sales price Rs. 4,000):
Accounts Receivable …………………….. Dr. 4,000.00
    Sales Revenue ………………………… Cr. 4,000.00
Cost of Goods Sold ……………………… Dr. 2,500.00
    Inventory ……………………………. Cr. 2,500.00

Oct. 10 — Payment of Oct. 2 purchase within discount period (1% discount):
Purchase discount = 3,000 × 1% = Rs. 30.
Cash paid = 3,000 − 30 + freight (freight already paid on Oct.2) — freight not included here because already recorded on Oct.2.
Accounts Payable ……………………….. Dr. 3,000.00
    Cash …………………………………. Cr. 2,970.00
    Inventory (purchase discount) ………… Cr. 30.00
(Discount reduces Inventory under perpetual system.)

Oct. 15 — Return of defective merchandise by customer (original sale Rs. 500; cost Rs. 275):
Sales Returns & Allowances ……………. Dr. 500.00
    Accounts Receivable …………………… Cr. 500.00
Inventory ……………………………….. Dr. 275.00
    Cost of Goods Sold …………………… Cr. 275.00

Oct. 25 — Receipt of cash for Oct. 9 sale less sales discount (customer paid within 3/20):
Net receivable after return = 4,000 − 500 = Rs. 3,500.
Sales discount = 3,500 × 3% = Rs. 105.
Cash received = 3,500 − 105 = Rs. 3,395.
Cash …………………………………… Dr. 3,395.00
Sales Discounts …………………………… Dr. 105.00
    Accounts Receivable …………………… Cr. 3,500.00

Oct. 28 — Inventory lost by fire (cost Rs. 350):
Loss from Inventory (or Loss on Fire) ………. Dr. 350.00
    Inventory ……………………………. Cr. 350.00

---

2. Posting to Ledger Accounts (summarized T-accounts)

Cash
Dr | Cr
—|—
3,395 (Oct.25) | 150 (Oct.2 freight)
| 2,970 (Oct.10 payment)
Ending balance (Dr) = 3,395 − 3,120 = Rs. 275.00 (Dr)

Accounts Receivable
Dr | Cr
—|—
4,000 (Oct.9 sale) | 500 (Oct.15 return)
| 3,500 (Oct.25 cash collection)
Ending balance = Rs. 0.00

Inventory
Dr | Cr
—|—
3,000 (Oct.2 purchase)
150 (Oct.2 freight)
275 (Oct.15 return) | 2,500 (Oct.9 COGS)
| 30 (Oct.10 discount)
| 350 (Oct.28 fire loss)
Dr total = 3,425 ; Cr total = 2,880 → Ending balance (Dr) = Rs. 545.00

Accounts Payable
Dr | Cr
—|—
3,000 (Oct.10 payment) | 3,000 (Oct.2 purchase)
Ending balance = Rs. 0.00

Sales Revenue
Dr | Cr
—|—
| 4,000 (Oct.9)
Ending balance = Rs. 4,000.00 (Cr)

Sales Returns & Allowances
Dr | Cr
—|—
500 (Oct.15 return) |
Ending balance = Rs. 500.00 (Dr)

Sales Discounts
Dr | Cr
—|—
105 (Oct.25) |
Ending balance = Rs. 105.00 (Dr)

Cost of Goods Sold (COGS)
Dr | Cr
—|—
2,500 (Oct.9) | 275 (Oct.15 return)
Ending balance = 2,500 − 275 = Rs. 2,225.00 (Dr)

Loss from Inventory (Fire)
Dr | Cr
—|—
350 (Oct.28) |
Ending balance = Rs. 350.00 (Dr)

---

3. Trial Balance — October 31, 2019 (after posting the above entries)

Account	Debit (Rs.)	Credit (Rs.)
Cash	275.00
Accounts Receivable	0.00
Inventory	545.00
Sales Returns & Allowances	500.00
Sales Discounts	105.00
Cost of Goods Sold	2,225.00
Loss from Inventory (Fire)	350.00
Totals — Debits	4,000.00
Sales Revenue		4,000.00
Totals — Credits		4,000.00

Explanation / Notes:

• Perpetual inventory system is used — purchases and freight are recorded directly in Inventory; COGS updated at sale; returns adjust both Revenue and Inventory/COGS.
• Purchase discount under 1/10 is recorded on payment (Oct.10) and reduces Inventory directly (common under perpetual system).
• Sales discount is recorded when the customer pays within the discount period and is shown separately (Sales Discounts contra-revenue).
• Inventory loss by fire is recorded as an expense (Loss from Inventory) and reduces Inventory.
• The trial balance above includes only accounts and balances resulting from the October transactions (no beginning balances supplied). Debits and credits are in balance (Rs. 4,000 = Rs. 4,000).

Answer:

Definition of Cash and Cash Equivalents

Cash includes currency, coins, checks received from customers, and funds available on deposit in banks. Cash Equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are so near to maturity (usually 3 months or less from the date of purchase) that they present insignificant risk of changes in value. Examples include treasury bills, money market funds, and short-term government securities.

Reporting of Cash and Cash Equivalents

Cash and cash equivalents are reported as a single line item under Current Assets on the balance sheet. Companies are required to disclose in the notes to the financial statements the composition of cash and cash equivalents, such as restricted cash, compensating balances, or foreign currency holdings, when significant.

Use of Documentation and Verification to Control Cash Disbursements

Strong internal control over cash disbursements helps prevent fraud, errors, and misuse of company funds. Key controls include:

• Proper Documentation: Every cash payment must be supported by adequate documentation such as purchase orders, supplier invoices, receiving reports, and check copies. This ensures payments are legitimate and authorized.
• Authorization Procedures: All disbursements should be approved by authorized personnel before payment is made. Multi-level approval helps prevent unauthorized or duplicate payments.
• Pre-numbered Checks: Using sequentially numbered checks makes it easier to account for all disbursements and detect any missing or fraudulent checks.
• Bank Reconciliation: Regular reconciliation of the company’s books with bank statements helps identify errors or unauthorized transactions promptly.
• Segregation of Duties: Different individuals should be responsible for authorizing payments, recording transactions, and handling the cash. This reduces opportunities for fraud.
• Independent Verification: Periodic internal or external audits verify that all payments are supported by valid documents and are recorded accurately.

Summary: Proper documentation and independent verification create a reliable audit trail, enhance accountability, and help safeguard company resources by ensuring that all cash disbursements are valid, authorized, and properly recorded.

Answer:

Journal Entries for Issuance of Stock for Building

Introduction:
When stock is issued in exchange for non-cash assets such as a building, the asset is recorded at its fair market value (Rs. 1,500,000). The value is allocated between Common Stock (at par, no-par, or stated value) and Additional Paid-in Capital (if any).

1. When Stock has a Par Value of Rs. 10 per Share:

    Building (Asset)..............................Dr  1,500,000
       Common Stock (50,000 × Rs. 10)..............Cr    500,000
       Additional Paid-in Capital—Common Stock.....Cr  1,000,000
    

Explanation: The building is recorded at its fair market value. Par value is credited to Common Stock, and the excess amount (Rs. 1,000,000) is credited to Additional Paid-in Capital.

2. When Stock is No-Par Stock:

    Building (Asset)..............................Dr  1,500,000
       Common Stock (No-Par)......................Cr  1,500,000
    

Explanation: Since the shares have no par value, the entire fair value of the building is credited to the Common Stock account.

3. When Stock has a Stated Value of Rs. 5 per Share:

    Building (Asset)..............................Dr  1,500,000
       Common Stock (50,000 × Rs. 5)..............Cr    250,000
       Additional Paid-in Capital—Common Stock.....Cr  1,250,000
    

Explanation: The stated value acts like par value and is credited to Common Stock. The remaining amount above stated value (Rs. 1,250,000) is credited to Additional Paid-in Capital.

Conclusion:
In all three cases, the building is recognized at fair market value (Rs. 1.5 million). The difference lies in how much is credited to Common Stock and how much is credited to Additional Paid-in Capital depending on whether the stock has a par value, no par value, or stated value.

Answer:

Step A — Carrying Value (Book Value) of the Equipment

Given:
– Cost of equipment = Rs. 36,400
– Accumulated depreciation = Rs. 18,000

Carrying value = Cost − Accumulated depreciation
Carrying value = Rs. 36,400 − Rs. 18,000 = Rs. 18,400.

Step B — Gain or Loss on Disposal (three scenarios)

General approach

For each disposal, remove the asset’s cost and its accumulated depreciation from the books, record cash (if any) received, and recognize the difference between proceeds and carrying value as a gain (if proceeds > carrying value) or a loss (if proceeds < carrying value).

i. Equipment discarded — no proceeds (proceeds = Rs. 0)

– Carrying value = Rs. 18,400.
– Proceeds = Rs. 0.
– Loss = Carrying value − Proceeds = Rs. 18,400 − 0 = Rs. 18,400 loss.

Journal entry on Jan 2 (discard):
Accumulated Depreciation—Equipment …… Dr. 18,000.00
Loss on Disposal of Equipment ………….. Dr. 18,400.00
    Equipment ……………………………… Cr. 36,400.00
(Removes equipment and its accumulated depreciation; records loss for the unrecovered book value.)

ii. Equipment sold for Rs. 6,000 cash

– Carrying value = Rs. 18,400.
– Proceeds (cash) = Rs. 6,000.
– Loss = Carrying value − Proceeds = Rs. 18,400 − 6,000 = Rs. 12,400 loss.

Journal entry on Jan 2 (sale for Rs. 6,000):
Cash ………………………………………… Dr. 6,000.00
Accumulated Depreciation—Equipment …… Dr. 18,000.00
Loss on Disposal of Equipment ………….. Dr. 12,400.00
    Equipment ……………………………… Cr. 36,400.00
(Records cash received, removes asset and its accumulated depreciation, and recognizes loss.)

iii. Equipment sold for Rs. 20,000 cash

– Carrying value = Rs. 18,400.
– Proceeds (cash) = Rs. 20,000.
– Gain = Proceeds − Carrying value = Rs. 20,000 − 18,400 = Rs. 1,600 gain.

Journal entry on Jan 2 (sale for Rs. 20,000):
Cash ………………………………………… Dr. 20,000.00
Accumulated Depreciation—Equipment …… Dr. 18,000.00
    Equipment ……………………………… Cr. 36,400.00
    Gain on Disposal of Equipment ………. Cr. 1,600.00
(Records cash received, removes asset and accumulated depreciation, and recognizes gain.)

Conclusion

– Carrying value (book value) of the equipment on Jan 2 = Rs. 18,400.
– Discarded (no proceeds): Loss Rs. 18,400.
– Sold for Rs. 6,000: Loss Rs. 12,400 (journal entry provided).
– Sold for Rs. 20,000: Gain Rs. 1,600 (journal entry provided).

These entries remove the asset and related accumulated depreciation from the books and properly recognize the economic effect (gain or loss) of the disposal in the period of disposal.

Answer:

Revenue

Revenue represents the total amount earned by a business from its primary activities such as selling goods or providing services. It is also known as “sales” or “income.” Revenue is recognized when it is earned and realizable, regardless of when cash is received.

Example: If a company sells products worth Rs. 50,000 on credit, the revenue is recognized immediately even if payment will be received later.

Expenses

Expenses are the costs incurred in the process of earning revenue. They reduce the overall income of the business and are matched to the revenues they help generate under the matching principle.

Example: Salaries, rent, utilities, depreciation, and cost of goods sold are common examples of expenses.

Assets

Assets are resources owned by a business that are expected to provide future economic benefits. They can be classified as current assets (cash, accounts receivable, inventory) and non-current assets (buildings, equipment, patents).

Example: A delivery truck purchased by a business is considered an asset because it helps generate future revenue.

Liabilities

Liabilities are the company’s obligations or debts that arise during business operations and must be settled in the future, usually through the transfer of money, goods, or services.

Example: Accounts payable, bank loans, and salaries payable are examples of liabilities.

Equity

Equity represents the residual interest in the assets of a business after deducting liabilities. It shows the owners’ claims on the business. Equity increases through capital contributions and profits and decreases through losses and withdrawals/dividends.

Example: If a company has total assets of Rs. 500,000 and liabilities of Rs. 300,000, the equity will be Rs. 200,000 (Assets − Liabilities).

Summary

– Revenue = Earnings from sales/services.
– Expenses = Costs incurred to earn revenue.
– Assets = Resources with future benefit.
– Liabilities = Obligations to pay in future.
– Equity = Owners’ share after liabilities are deducted.

These five elements form the foundation of financial statements and help stakeholders assess the financial position and performance of a business.

Answer:

Step A — General Journal Entries

• May 2: Cash …………………………………. Dr. 15,000
  Owner’s Capital ……………………………. Cr. 15,000
  (Owner invested cash into the business)


• May 5: Computer …………………………….. Dr. 6,000
  Cash …………………………………….. Cr. 6,000
  (Purchased computer for cash)


• May 7: Supplies …………………………….. Dr. 1,600
  Accounts Payable …………………………. Cr. 1,600
  (Purchased supplies on credit)


• May 19: Cash …………………………………. Dr. 2,000
  Service Revenue ………………………….. Cr. 2,000
  (Received cash for services performed)


• May 22: Cash …………………………………. Dr. 1,800
  Unearned Revenue ………………………… Cr. 1,800
  (Received cash for services to be performed)


• May 25: Rent Expense ……………………….. Dr. 1,200
  Cash …………………………………….. Cr. 1,200
  (Paid rent for May)


• May 31: Accounts Receivable ……………….. Dr. 600
  Service Revenue ………………………….. Cr. 600
  (Billed customer for services performed)

Step B — Ledger Accounts

Cash
Debit: 15,000 (May 2), 2,000 (May 19), 1,800 (May 22)
Credit: 6,000 (May 5), 1,200 (May 25)
Balance: Rs. 12,600

Computer
Debit: 6,000 (May 5)
Credit: –
Balance: Rs. 6,000

Supplies
Debit: 1,600 (May 7)
Credit: –
Balance: Rs. 1,600

Accounts Payable
Credit: 1,600 (May 7)
Balance: Rs. 1,600

Service Revenue
Credit: 2,000 (May 19), 600 (May 31)
Balance: Rs. 2,600

Unearned Revenue
Credit: 1,800 (May 22)
Balance: Rs. 1,800

Rent Expense
Debit: 1,200 (May 25)
Balance: Rs. 1,200

Owner’s Capital
Credit: 15,000 (May 2)
Balance: Rs. 15,000

Accounts Receivable
Debit: 600 (May 31)
Balance: Rs. 600

Step C — Trial Balance as of May 31

Account	Debit (Rs.)	Credit (Rs.)
Cash	12,600	–
Computer	6,000	–
Supplies	1,600	–
Accounts Receivable	600	–
Accounts Payable	–	1,600
Unearned Revenue	–	1,800
Service Revenue	–	2,600
Rent Expense	1,200	–
Owner’s Capital	–	15,000
Total	21,000	21,000

Conclusion:
The trial balance shows that total debits equal total credits (Rs. 21,000), confirming that the journal entries were recorded and posted correctly.

Answer:

Step A — Adjusting Journal Entries

• a. Accrued Interest Income:
  Interest Receivable …………………….. Dr. 16,700
  Interest Revenue ………………………. Cr. 16,700
  (Record accrued interest income on corporate bonds)


• b. Supplies Adjustment:
  Supplies Expense ………………………. Dr. 12,130
  Supplies ………………………………. Cr. 12,130
  (Supplies used = Beginning balance + Purchases − Ending inventory = 15,000 + 12,830 − 15,700 = 12,130)


• c. Depreciation of Office Equipment:
  Depreciation Expense …………………… Dr. 15,260
  Accumulated Depreciation—Equipment ……. Cr. 15,260
  (Record annual depreciation)


• d. Unearned Revenue Earned:
  Unearned Revenue ………………………. Dr. 7,600
  Service Revenue ……………………….. Cr. 7,600
  (Recognize revenue earned that was previously received in advance)


• e. Accrued Property Taxes:
  Property Tax Expense …………………… Dr. 12,750
  Property Tax Payable …………………… Cr. 12,750
  (Record accrued property taxes for six months)

Step B — Impact on Financial Statements

• Assets: Increase Interest Receivable by Rs. 16,700; decrease Supplies by Rs. 12,130; increase Accumulated Depreciation by Rs. 15,260 (contra-asset).
• Liabilities: Increase Property Tax Payable by Rs. 12,750; decrease Unearned Revenue by Rs. 7,600.
• Equity: Retained earnings will reflect net income adjustments: increase by Rs. 16,700 + 7,600 (revenue), decrease by 12,130 + 15,260 + 12,750 (expenses).
• Income Statement: Includes Supplies Expense Rs. 12,130, Depreciation Expense Rs. 15,260, Property Tax Expense Rs. 12,750, Interest Revenue Rs. 16,700, and Service Revenue Rs. 7,600.

Conclusion:
These adjusting entries ensure that revenues are recognized in the period earned, expenses are matched to the period incurred, and the balance sheet reflects accurate assets, liabilities, and equity.

Answer:

Definition of Cash Flow Statement

A Cash Flow Statement is a financial statement that shows the inflows and outflows of cash and cash equivalents of a company over a specific period of time. It helps in understanding how cash is generated and used in operating, investing, and financing activities.

Objectives of a Cash Flow Statement

• To provide information about the cash receipts and payments of a business during a period.
• To evaluate the company’s ability to generate cash from operations.
• To assess the company’s ability to meet its obligations, pay dividends, and fund growth.
• To help investors, creditors, and management in decision-making regarding liquidity and financial health.

Significance of a Cash Flow Statement

• Provides insight into a company’s liquidity and solvency.
• Helps in assessing financial flexibility and the ability to adapt to changes in business conditions.
• Complements the income statement and balance sheet by explaining changes in cash position.
• Helps in evaluating the quality of earnings by showing whether profits translate into cash inflows.

Major Sections of a Cash Flow Statement

• 1. Operating Activities: Cash inflows and outflows from primary business operations, such as cash received from customers and cash paid to suppliers and employees.
• 2. Investing Activities: Cash flows related to the acquisition and disposal of long-term assets, like purchase or sale of property, plant, equipment, or investments.
• 3. Financing Activities: Cash flows from transactions with owners and creditors, such as issuing stock, borrowing or repaying loans, and paying dividends.

Conclusion:
The Cash Flow Statement is an essential financial report that provides a clear picture of cash generation, usage, and availability. It helps stakeholders evaluate liquidity, financial stability, and operational efficiency.

Answer:

Step A — Journal Entry for Acquisition of Treasury Stock

• Treasury Stock ……………………………….. Dr. 750,000
  Cash ………………………………………….. Cr. 750,000
  (Purchased 5,000 shares at Rs. 150 each: 5,000 × 150 = Rs. 750,000)

Step B — Equity Section of Balance Sheet

Raja Industries Ltd
Equity Section as at [Date]

Equity Component	Amount (Rs.)
Share Capital (30,000 shares × Rs. 100)	3,000,000
Share Premium / Additional Paid-in Capital (30,000 shares × Rs. 40)	1,200,000
Revenue Reserves	800,000
Retained Earnings	1,000,000
Less: Treasury Stock (5,000 shares × Rs. 150)	(750,000)
Total Equity	5,250,000

Conclusion:
The treasury stock purchase reduces total shareholders’ equity by Rs. 750,000. The remaining equity reflects the combined total of issued capital, share premium, revenue reserves, and retained earnings less the cost of treasury shares.

Answer:

Step A — Horizontal Analysis

Horizontal analysis compares financial data over multiple periods to identify trends and growth patterns. The formula used is:

Change in Amount = Current Year Amount − Prior Year Amount
Percentage Change = (Change ÷ Prior Year Amount) × 100%

Example Table — Horizontal Analysis:

Account	Prior Year (Rs.)	Current Year (Rs.)	Change (Rs.)	Percentage Change (%)
Sales Revenue	1,200,000	1,350,000	150,000	12.5%
Cost of Goods Sold	700,000	800,000	100,000	14.3%
Gross Profit	500,000	550,000	50,000	10%
Operating Expenses	200,000	220,000	20,000	10%
Net Income	300,000	330,000	30,000	10%

Step B — Analysis and Interpretation

• Sales Revenue: Increased by 12.5%, indicating growth in the company’s operations and market demand.
• Cost of Goods Sold: Increased by 14.3%, slightly higher than the revenue growth, suggesting careful monitoring of production costs is needed.
• Gross Profit: Increased by 10%, showing overall profitability improved but at a slightly slower pace than sales growth.
• Operating Expenses: Increased by 10%, indicating stable control over administrative and selling costs relative to growth.
• Net Income: Increased by 10%, reflecting overall profitability growth; the company is effectively converting revenue into profit despite rising costs.

Conclusion:
Horizontal analysis shows that Decent Trading Company experienced positive growth in revenue, gross profit, and net income, with cost increases managed effectively. Management can use this insight for budgeting, cost control, and strategic planning.

Answer:

Difference Between Accounts Receivable and Notes Receivable

• Accounts Receivable (AR):
  • Amounts owed to a company by customers from the sale of goods or services on credit.
  • Usually informal and does not require a promissory note.
  • Short-term in nature, typically due within 30–60 days.
• Notes Receivable (NR):
  • Written promises (formal promissory notes) from customers or other parties to pay a specified amount at a future date.
  • May include interest and have legal enforceability.
  • Can be short-term or long-term depending on the maturity date.

Sources for Quickly Collecting Funds from Accounts Receivable

• 1. Factoring: Selling accounts receivable to a third party (factor) at a discount to receive immediate cash.
• 2. Collection Agencies: Hiring agencies to collect overdue receivables on behalf of the company.
• 3. Offering Early Payment Discounts: Encouraging customers to pay faster by providing small discounts for early settlement.
• 4. Pledging Receivables as Collateral: Using accounts receivable to secure short-term loans from banks or financial institutions.
• 5. Internal Collection Efforts: Prompt invoicing, regular reminders, and efficient credit policies to reduce collection time.

Conclusion:
Accounts receivable and notes receivable differ in formality, legal enforceability, and terms. Efficient collection of accounts receivable is crucial for maintaining cash flow and liquidity, and businesses can use multiple strategies like factoring, early payment discounts, or pledging to accelerate fund collection.

Answer:

Step A — Bond Issuance Journal Entry

• April 1, 2023:
  Cash ………………………………………….. Dr. 3,000,000
  Bonds Payable ……………………………….. Cr. 3,000,000
  (Issued 3,000 bonds at Rs. 1,000 each at par)

Step B — Interest Accruals and Payments

Interest is 10% per annum, payable semiannually, so each payment = 3,000,000 × 10% ÷ 2 = Rs. 150,000.

• Accrual at June 30, 2023:
  Interest Expense …………………………….. Dr. 150,000
  Interest Payable …………………………….. Cr. 150,000
  (Record accrued interest for first 6 months)


• Payment on June 30, 2023:
  Interest Payable …………………………….. Dr. 150,000
  Cash ………………………………………… Cr. 150,000
  (Paid semiannual interest)


• Subsequent semiannual interest accruals and payments will follow the same pattern until maturity.

Step C — Presentation in Financial Statements

Balance Sheet (excerpt) as of [Date]:

Liabilities	Amount (Rs.)
Bonds Payable (long-term)	3,000,000
Interest Payable (current liability)	150,000

Income Statement (excerpt) for the period ended [Date]:

• Interest Expense ……………………………. Rs. 150,000

Conclusion:
The bond issuance provides long-term financing. Interest accruals ensure expenses are matched to the period incurred, and financial statements show both current and long-term liabilities related to the bonds.

Answer:

Step A — Channel One Company Journal Entries

• (i) Issuance at par (Rs. 0.50 per share):
  Cash ………………………………………….. Dr. 50,000
  Common Stock ………………………………… Cr. 50,000
  (100,000 shares × Rs. 0.50 each at par)


• (ii) Issuance above par (Rs. 2 per share):
  Cash ………………………………………….. Dr. 200,000
  Common Stock ………………………………… Cr. 50,000
  Additional Paid-in Capital …………………….. Cr. 150,000
  (100,000 shares × Rs. 2 each; Rs. 0.50 par value, excess credited to APIC)

Step B — Selectist Company Journal Entries

• (i) Issuance for cash (Rs. 15 per share):
  Cash ………………………………………….. Dr. 1,560,000
  Common Stock ………………………………… Cr. 1,560,000
  (104,000 no-par shares × Rs. 15 cash per share)


• (ii) Issuance in exchange for land:
  Land ………………………………………….. Dr. 1,560,000
  Common Stock ………………………………… Cr. 1,560,000
  (Issued 104,000 no-par shares for land valued at Rs. 1,560,000)

Conclusion:
The journal entries show the proper recording of common stock issuances for both cash and non-cash transactions. For par-value shares, any excess over par is recorded in Additional Paid-in Capital. No-par shares are credited directly to Common Stock at the fair value received.