ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD

(Department of Commerce)
Course: Advanced Accounting (5419) Semester: Autumn, 2023
Level: BS (A&F)

Name: Amna Maryam Student ID: 0000124880

Tutor Name:
ASSIGNMENT No. 2
Q. 1 Balance sheet of Pak Ltd. is given below: (20)

Liabilities Rs. Assets Rs.

Share Capital 320,000 Building 300,000
9% Debentures 120,000 Machinery 60,000
P & L A/c (Current 148,000 debtors 328,000
Year)
General Reserve 100,000 Stock 176,000
Current Liabilities 304,000 Bank 128,000
Net Sales for the current year is Rs. 460,000.
Required: You are required to compute to the following Ratios of Pak Ltd.
i. Net profit Ratio
ii. Current Ratio
iii. Stock Turnover Ratio
iv. Debtors Turnover Ratio
v. Debt-Equity Ratio
Q. 2 Write detailed not eon each of the following terms: (20)
i. Amalgamation
Amalgamation refers to the process of combining two or more companies into a single entity,
where the original entities cease to exist, and a new entity is formed. This consolidation is
often undertaken for various reasons, such as achieving economies of scale, improving
operational efficiency, expanding market presence, or addressing financial difficulties.
There are two primary types of amalgamation:

Merger:
In a merger, two or more companies merge their operations and assets to form a
new entity. Shareholders of the merging companies become shareholders in the
new entity.
 Absorption:
In absorption, one company absorbs the other, and the absorbed company loses its identity. The
absorbing company continues to exist, and the shareholders of the absorbed company
become shareholders in the absorbing company.
ii. Liquidation
Liquidation refers to the process of winding up a company's affairs, selling its
assets, and distributing the proceeds among creditors and shareholders. It can
occur for various reasons, such as financial insolvency, the completion of a
specific project or venture, or a decision by the company's stakeholders to cease
operations.

There are two types of liquidation:

Voluntary Liquidation:
Initiated by the shareholders of the company through a resolution. It can be a
members' voluntary liquidation if the company is solvent or a creditors' voluntary
liquidation if it is insolvent.

Involuntary Liquidation:
Forced by external parties, often creditors, through a court order. This typically happens when a
company is unable to meet its financial obligations.

iii. Absorption
Absorption occurs when one company takes over another company, and the absorbed company
loses its identity. The absorbing company continues to exist, incorporating the assets,
liabilities, and operations of the absorbed company. Absorption is a strategic move aimed
at achieving synergy, improving market share, or eliminating competition.
Key points in absorption:

The absorbed company ceases to exist as a separate legal entity.

The absorbing company continues its operations, incorporating those of the
absorbed company.
Shareholders of the absorbed company usually become shareholders of the
absorbing company.

iv. Reconstruction
Reconstruction involves a significant change in the structure, operations, or
capital of a company. It is often undertaken to address financial difficulties,
streamline operations, or adapt to changing market conditions. Reconstruction can
take various forms, such as altering the capital structure, merging with another
company, or reorganizing business operations.
 Key aspects of reconstruction:
Capital restructuring, including changes in share capital, conversion of debt into
equity, or issuance of new securities.
Operational restructuring, involving changes in business processes, product lines,
or market focus.
Legal and financial adjustments to improve the company's overall position.
Q. 3 a. Explain the difference between Hire Purchase and Installment Sales.
Hire Purchase:

Ownership:

Ownership of the asset remains with the seller until the final installment is paid.

Payment Structure:

Payments include both principal and interest, spread over a specified period.

Transfer of Ownership:
Ownership is transferred to the buyer only after the final installment is paid.

Risk and Responsibility:

The seller bears the risk of ownership during the hire period. Maintenance and insurance may be
the responsibility of the seller.
Termination:
The buyer has the option to terminate the agreement before the final payment but may lose the
asset and the payments made.
Installment Sales
Ownership:
Ownership of the asset is transferred to the buyer immediately upon the signing of the
agreement.
Payment Structure:
Payments are typically for the purchase price, not including interest
Transfer of Ownership
Ownership is transferred to the buyer at the beginning of the installment period
Risk and Responsibility:
The buyer assumes the risk and responsibility for the asset, including maintenance
and insurance.

Termination:
The buyer can terminate the agreement at any time but may lose the payments
made and the asset.

b. The D.P.F Colliery Co. Ltd., agreed to purchase a machine on the hire-
purchase system for Rs. 4,600. Rs. 600 was paid when the ,machine was acquired on 1 st
January, 2022 and the balance was to paid by annual installments of Rs. 800 plus interest at 5
percent. The colliery Company depreciates the machine each year by 10% on the original
cost.
Required: Make necessary Journal entries and Draft the various ledger accounts in the
books of the colliery company, showing the details, to completion, of this
transaction.
Q. 4 a. Describe the criteria of Capital lease for lessor. (20)
b. 0n January 1, 2020, Ahmed Company signed a lease contract with Abid
Company. The leased assets cost Ahmed Rs. 45,000 and had annual selling
price of Rs. 55,000. Three annual rentals, based on the selling price, are payable by Abid on
Juanuary1, beginning in 2020. The asset reverts to Ahmed at the end of the lease term.
December 31,2022, and is estimated to have an unguaranteed residual value on that date of
R.300. Ahmad’s implicit interest rate is 12% which is known to Abid.
Required: i. What type of lease is this for Ahmed
ii. Compute the annual lease rentals
iii. Give the lessor’s entry on January 1, 2020.
iv. Give the lessee’s entry on January 1, 2020.

Q 5 You are required to pass journal entries for the issue of the following dentures: (20)
a. 1200 10% Rs. 1,000 Debentures are issued at 5% discount and are repayable at par.
b. Another 1500 7% Rs. 1,000 Debentures are issued at 5% discount and repayable at 10%
premium.
c. Further 800 9% Rs. 1,000 Debentures are issued at 5% premium.
d. In addition, another 1400 8% Rs. 100 Debentures are issued as collateral security against a loan
of Rs. 140,000.