Certificate in Accounting and Finance Stage Examinations

The Institute of 7 September 2015

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Introduction to Accounting
Q.1 (a) In respect of each of the following, give example of a transaction which would result in:
(i) Decrease in a liability and increase in another liability.
(ii) Increase in an asset and decrease in another asset.
(iii) Decrease in an asset and decrease in liability.
(iv) Decrease in capital and decrease in asset. (04)
(b) While preparing the financial statements, you are faced with the following situations:
(i) The future existence of the company is uncertain.
(ii) The credit cards bills of the proprietor were paid and charged to the business.
(iii) Property, plant and equipment now costs more than the price at which it was
purchased at the inception of business. However, the current prices are not
reflected in the financial statements.
(iv) During the year, the company purchased stationery worth Rs. 30,000. The
amount has been charged to office supplies consumed, however major portion
of the stationery was consumed after year-end.
(v) The company had a poor trading year and the owners have decided to adopt
weighted average valuation method instead of FIFO.
(vi) Leased equipment have been recorded as assets although these are not owned
by the organization.
Required:
State the accounting concept that has been applied or needs to be considered in each of
the above situations. (06)

Q.2 The Accountant of Saleem Limited has made the following adjustments for the year ended
30 June 2015 in arriving at the net profit of Rs. 15,500,000.

(i) While preparing the draft financial statements, opening stock of Rs. 1,500,000 was
included as Rs. 5,100,000. The error was timely identified and the accountant reduced
the value of closing stock by Rs. 3,600,000.
(ii) Goods purchased worth Rs. 550,000 were recorded in sales journal. The error was
rectified by reducing sales by Rs. 550,000.
(iii) On 1 January 2015, miscellaneous items of machinery were purchased for
Rs. 250,000 but were recorded as Rs. 25,000. The said entry was corrected by debiting
the difference to the repairs expense account. It is the company’s policy to provide
depreciation annually on straight line basis at the rate of 10%.
(iv) Prepaid insurance amounting to Rs. 740,000 pertaining to the period from
1 July 2014 to 31 December 2014 was not brought forward from the previous year.
Difference in trial balance was removed by creating a suspense account. At year-end,
when actual error was identified, suspense account was credited by debiting prepaid
insurance.
(v) Purchase return to a supplier amounting to Rs. 400,000 was not recorded. The error
was rectified by debiting the supplier account and crediting the suspense account. The
balance in the suspense account was included in current liabilities.
Required:
Compute the correct net profit. (08)
 Introduction to Accounting Page 2 of 5

Q.3 You have been provided following information relating to the business of Ghazi Traders
(GT) for the year ended 30 June 2015.
Rupees
Sales 12,000,000
Sales return 700,000
Discount allowed 500,000
Collection from customers 8,540,000
(i) Credit sales were 80% of the total sales.
(ii) As at 1 July 2014, debtors account and provision for doubtful debts account had a
balance of Rs. 5,630,000 and 690,000 (comprising of specific provision of
Rs. 430,000) respectively.
(iii) Details of specific provision on 30 June 2014 and recoveries there against during the
year ended 30 June 2015 are as follows:
Amount due
Recoveries
and provided
--------- Rupees ---------
Sabir Enterprises 100,000 50,000
Babur Traders 150,000 75,000
Zubair Associates 180,000 30,000
430,000 155,000
Remaining debt from Zubair Associates needs to be written off.
(iv) Specific provision is also required to be made against the entire balances of the
following debtors:
Rupees
Rahil Stores 50,000
Adam Enterprises 75,000
Shahid Traders 25,000
150,000
(v) A customer Nadir who had a debit balance of Rs. 280,000 had also supplied goods to
GT worth Rs. 250,000. The two balances were adjusted with mutual consent.
(vi) Sales return and discount allowed pertain to credit sales only.
(vii) GT follows a policy of making a general provision of 5% against debtors.
(viii) Collection from customers includes recovery against debts written off during the year
ended 30 June 2014 amounted to Rs. 199,000.

Required:
Prepare debtors account and provision for doubtful debts. (08)

Q.4 On 30 June 2015, the bank book of Ranjha Enterprises (RE) reflected a credit balance of
Rs. 3,450,000 whereas the bank statement showed an overdraft of Rs. 2,415,000. On
scrutinizing the record, following issues were discovered:

(i) Cheques deposited in bank in the last week of June 2015, amounting to Rs. 1,550,000
were wrongly credited in the bank book. Out of these, cheques amounting to
Rs. 1,050,000 were cleared by the bank in July 2015 whereas a cheque of Rs. 500,000
deposited on 29 June 2015 was dishonoured by the bank on 2 July 2015.
(ii) Financial charges on bank overdraft amounting to Rs. 750,000 were recorded in the
bank statement. However, review by the Accounts Officer indicated an error and RE
recorded the correct amount of Rs. 510,000 in the bank book. The error was
corrected by the bank on 10 July 2015.
(iii) A cheque issued to a supplier amounting to Rs. 4,005,000 was entered in the bank
book as Rs. 4,050,000. However, the bank erroneously recorded the amount as
Rs. 4,500,000.
 Introduction to Accounting Page 3 of 5

(iv) A supplier was issued a cheque of Rs. 125,000 in place of a time barred cheque on
25 June 2015 and was cleared on the next day. However, the cancellation of time
barred cheque was not recorded by RE.
(v) A payment of Rs. 50,000 through cheque was recorded twice in the bank book.

Required:
Determine the correct balance that should be reported in the bank book and prepare a
statement reconciling the corrected balance with that shown in the bank statement. (09)

Q.5 Azam owns a retail outlet with the name Azam Autoparts Store. The trial balance as at
30 June 2015 is as follows:

Debit Credit
Rs. in ‘000’
Shop equipment- net 5,880
Motor vehicles- net 3,820
Stock as at 1 July 2014 14,500
Prepaid rent 2,000
Bank 8,500
Cash 50
Bank loan 5,050
Creditors 2,500
Accrued expenses 60
Capital 27,883
Sales 131,943
Purchases 105,950
Utility expenses 1,060
Vehicle expenses 1,205
Interest expenses 600
Renovation expenses 5,500
Salaries and wages 10,250
Depreciation expenses 2,075
Operating expenses 6,046
167,436 167,436

Additional information:
(i) Closing stock as at 30 June 2015 was Rs. 24,090 thousand.
(ii) Depreciation on fixed assets is charged at the rate of 20% on reducing balance
method.
(iii) Shop equipment was purchased on 1 July 2014 for Rs. 1,400 thousand. No
depreciation has been charged on it.
(iv) Renovation expenses represent cost of fixtures purchased for the shop.
(v) Rent is payable on yearly basis on 30 September. The expired rent till 30 September
2014 is included in operating expenses.
(vi) Bank loan was received on 1 July 2014. Interest payable for the month of June 2015
has been credited to the loan account.
(vii) Azam withdrew goods costing Rs. 4,000 thousand for personal use during the year.
However, no entry was made to record the withdrawal of goods.
(viii) Operating expenses include annual payment of fire insurance for shop and personal
expenses of Azam amounting to Rs. 725 thousand and Rs. 215 thousand. Fire
insurance policy would expire on 30 November 2015.

Required:
Prepare statement of comprehensive income for the year ended 30 June 2015 and statement
of financial position as at 30 June 2015. (20)
 Introduction to Accounting Page 4 of 5

Q.6 A and B were in partnership sharing profits and losses in the ratio of 2:3. They agreed to
amalgamate their business on 31 August 2015 with C and D, who shared profits and losses
in the ratio of 2:1. The balance sheet of both firms on the date of amalgamation are as
follows:

AB & Co. CD & Co. AB & Co. CD & Co.

Liabilities Assets
---------Rupees--------- ---------Rupees---------
Trade creditors 1,800,000 500,000 Cash at bank 2,000,000 5,000,000
Bank overdraft 2,000,000 Inventory 200,000 1,200,000
A's current account 6,300,000 - Investment 1,200,000 1,000,000
D's current account 900,000 Debtors 200,000 400,000
Capitals:
A 6,000,000 - Fixed Assets 13,500,000 1,800,000
B 3,000,000 -
C 3,000,000
D 3,000,000
17,100,000 9,400,000 17,100,000 9,400,000

The agreed terms of amalgamation are as follows:

(i) The values of goodwill were agreed at Rs. 300,000 for AB & Co. and Rs. 100,000 for
CD & Co.
(ii) The profit and loss sharing ratio of the new firm will be 2:1:1:1 for A, B, C and D
respectively.
(iii) The capital of the new firm will be Rs. 20 million shared in the profit and loss sharing
ratio of the new firm. Any surplus or deficiency will be settled in the new firm.
(iv) No goodwill account is to be maintained in the new partnership.
(v) Creditors of AB & Co. amounting to Rs. 300,000 would be paid by B and all creditors
of CD & Co. would be settled by C and D equally.
(vi) Bank overdraft would be paid by CD & Co. before amalgamation.
(vii) All remaining assets and liabilities are taken over by the new firm. For this purpose,
the assets are revalued as follows:

AB & Co. CD & Co.

-------------- Rupees --------------
Inventory 220,000 1,050,000
Investment 1,350,000 1,300,000
Debtors 150,000 375,000
Fixed assets 14,350,000 1,150,000

Required:
Prepare the following:
(a) Realisation account of each firm (08)
(b) Capital account of each partner (07)
(c) Opening balance sheet of new firm (05)

Q.7 Explain the term ‘business transaction’ and discuss whether you would consider the
following events as business transactions:

(i) A businessman purchased a vehicle for his private use by drawing cash from business.
However, he also uses it for coming to the office.
(ii) ABC & Company has paid the electricity bill of one of its partners. However, the
amount is recoverable from that partner.
(iii) Furniture and fixtures lying in the office were destroyed by fire. Furniture was owned
by one of the partner and it was not in the use of business.
(iv) The proprietor provides a generator to the office. The generator is presently not
working and it would have to be repaired before it can be used. Previously the
generator was lying in the proprietor’s house.
(v) Balance recoverable from an employee was written off after his death. (09)
 Introduction to Accounting Page 5 of 5

Q.8 In August 2015, Ali established a stationery store named as Ali Baba Stationers. The
transactions during the month are listed below:

Date Transactions
3 August A bank account was opened with cash Rs. 5,000,000.
3 August Purchase shop furniture worth Rs. 170,000 on credit.
3 August Bought stationery on credit from The Pen Store: Rs. 450,000 less trade
discount of Rs. 25,000, The School Shop: Rs. 200,000, Galaxy Stationers:
Rs. 350,000, The Stationery Store: Rs. 400,000, The Office Store: Rs. 800,000.
5 August Supplied stationery on credit to Murjeena Traders: Rs. 200,000, Qasim and
Company: Rs. 550,000 less trade discount of Rs. 50,000, Chiragh Limited:
Rs. 250,000, Sameer Enterprises: Rs. 400,000, Hamid and Company:
Rs. 800,000.
6 August Purchase returns to Galaxy Stationers: Rs. 10,000 and The Stationery Store:
Rs. 40,000.
7 August Paid shop rent amounting to Rs. 300,000.
7 August Recovered Rs. 150,000 from Murjeena Traders, Rs. 250,000 from Qasim and
Company, Rs. 200,000 from Chiragh Limited, Rs. 300,000 from Sameer
Enterprises, Rs. 400,000 from Hamid and Company.
10 August Paid Rs. 300,000 to The Stationery Store, Rs. 290,000 to The Office Store and
Rs. 250,000 to The Pen Store after availing early payment discount of
Rs. 25,000.
11 August Paid Rs. 60,000 for shop repairs.
12 August Sold stationery on cash amounting to Rs. 250,000.
15 August Sales return from Murjeena Traders: Rs. 25,000 and Chiragh Limited:
Rs. 30,000.
18 August Bought stationery for cash Rs. 150,000
21 August Supplied stationery on credit to Murjeena Traders: Rs. 300,000, Qasim and
Company: Rs. 200,000, Chiragh Limited: Rs. 550,000, Sameer Enterprises:
Rs. 200,000.
25 August Following amounts were received from debtors:
Murjeena Traders: Rs. 150,000, Qasim and Company: Rs. 150,000 after
allowing early payment discount of Rs. 25,000, Chiragh Limited: Rs. 300,000
after allowing early payment discount of Rs. 50,000.

Required:
(a) Enter the purchase and sale transactions in the related books of prime entry other than
cash book and journal.
(b) Prepare the following:
(i) Receivables Control Account
(ii) Payables Control Account
(iii) Cash and Bank Account (16)

(THE END)