Financial Management: Theory and Practice - Report Example

Problem No Original & Adjusting entries for the points 8. Entry No. Entry Type Particulars Dr. Cr Original Insurance Expense a/c Dr. To Cash a/c (Being Insurance paid). 6,550 6,550 Adjusting Insurance prepaid a/c Dr. P&L a/c Dr. To Insurance Expense a/c (Being prepaid insurance & insurance incurred correctly posted). 2,475 4,075 6,550 2. Original Cash a/c Dr. To Rent Revenue a/c (Being Rent received) 14,400 14,400 Adjusting Rent Revenue a/c Dr. To Rent received in advance To P&L a/c (Being rent received in advance and earned rent correctly posted). 14,400 12,000 2,400 3 Adjusting Depreciation a/c Dr. To Plant & Machinery a/c (Being Depreciation charged to P&M a/c) 19,300 19,300 P&L a/c Dr. To Depreciation a/c (Being Depreciation posted to P&L a/c). 19,300 19,300 4 original Goods a/c Dr. To Accounts Receivable a/c (Being goods sold) 10,000 10,000 Correction Accounts Receivable a/c Dr. To Cash a/c (Being goods sold for cash) 10,000 10,000 5 Original Salaries a/c Dr. To Cash a/c (Being Salaries paid). 32,000 32,000 Adjusting P&L a/c Dr. To Salaries a/c To Salaries unpaid a/c (Being Salaries paid and unpaid posted to P&L a/c). 36,200 32,000 4,200 6 Adjusting Bad debts a/c Dr. To Accounts Receivable a/c (Being bad debts uncollectible) 3,450 3,450 P&L a/c Dr. To Bad debts a/c (Being bad debts posted to P&L a/c). 3,450 3,450 7 Adjusting P&L a/c Dr. To Interest receivable a/c (Being Interest receivable) 1,750 1,750 8 Original Rent payable a/c Dr. To Cash a/c (Being rent payable) 24,000 24,000 Adjusting P&L a/c Dr. Rent paid in advance a/c Dr. To Rent payable a/c (Being rent paid posted to P&L and rent paid in advance a/c). 16,000 8,000 24,000 Calculations: Cost P&L BS Tot Insurance Policy 1 Remaining 2550 2550 Policy2 Original 225 2475 2700 Policy3 Original 1300 1300 4075 2475 6550 Rent 2400 12000 14400 P&M Opening 230000 Closing 156000 Sale 74000 Dep Sale 3700 Closing 15600 19300 Debit Cash a/c 10000 Credit AR /ac 10000 Debit Salaries 4200 Credit Unpaid Salaries 4200 Bad Debts 69000 3450 Int Received 70000 6% 4200 1750 Rent Paid 16000 8000 24000 Problem 2: On December 31, 2005, the company believes that it will have to sell the division. However, no formal resolution to sell the unit has been passed until the financial statements are released. Hence, the operating losses of 2004 and 2005 are not to be recorded under the discontinued operations and are to be recorded as loss suffered in the due course of business. The 2005 comparative income statement of buggy whip corporation would look as follows: Year: 2004 (comparables) Year: 2005 Particulars Continuing Discontinuing Particulars Continuing Discontinuing P&L a/c (Loss) $100,000 P&L a/c (Loss) $120,000 Since there is an operating loss for the division, there can be no incidence of taxation for the same. However, for the 2006 comparative income statement, the presentation would be done as follows: Year: 2005 (comparables) Year: 2006 Particulars Continuing Discontinuing Particulars Continuing Discontinuing P&L a/c (Loss) $120,000 P&L a/c (Loss) $50,000 P&L a/c (Loss on sale) $80,000 ---------------- Total: $130,000 ----------------- These disclosures are to be done in accordance to the guidelines of the US GAAP, FAS 144 and the IFRS – 5 on the topic: Discontinuing Operations. Other than these, assets and liabilities held for the disposal and are classified for sales are disclosed separately in the balance sheet. (Kumar.V. 2008). Problem No:5: Point 1: For Vendor A and Vendor C, as there are annual payments, the effective rate of interest is 10%. For Vendor B, as there are semi-annual payments, the effective rate of return can be calculated as follows: (1+rate of interest/number of instalments per year) to the power of the number of instalments. (1+10/2)*(1+10/2) 11.25% Point 2: Year end maintenance contract is included in the first cash outflow in case of Vendor A : $50,000 +$12,000 = $62,000 For Vendor C, the first year cash outflow includes the first maintenance cost : $115,000+$1,000 = $116,000 The cash outflows for the three vendors can be tabulated as follows: Year Vendor A % of Interest Vendor B % of Interest Vendor C %of Interest 1 $62,000 10% $16,000 11.25% $116,000 10% 2 $15,000 $16,000 $1,000 3 $15,000 $16,000 $1,000 4 $15,000 $16,000 $1,000 5 $15,000 $16,000 $1,000 6 $15,000 $16,000 $2,000 7 $15,000 $16,000 $2,000 8 $15,000 $16,000 $2,000 9 $15,000 $16,000 $2,000 10 $16,000 $2,000 11 $16,000 $2,000 12 $16,000 $2,000 13 $16,000 $2,000 14 $16,000 $2,000 15 $16,000 $2,000 16 $16,000 $3,000 17 $16,000 $3,000 18 $16,000 $3,000 19 $16,000 $3,000 20 $16,000 $3,000 NPV: ($129,112.63) ($125,357.97) ($118,689.28) Thus it is better to purchase the machine at Vendor C which includes the lowest cost. (Chandra, P. 2006). Problem No. 3: Entry No. Entry type Particulars Dr. Cr. 1. Original Purchases a/c Dr. To Cash a/c (Being invoice drawn for receiving goods). $5,000 $5,000 Reverse Cash a/c Dr. To Purchases a/c (Being receiving reporting indicating goods received after the financial closure). $5,000 $5,000 2. Original Purchases a/c Dr. To Cash a/c (Being goods shipped, received and entered before financial closure). $300 $300 Reverse No adjustment required. 3. Entry inclusion Purchases a/c Dr. To Cash a/c (Being inventory received but no entry entered). $2,000 $2,000 4. Original Purchases a/c Dr. To Cash a/c (Being merchandise invoice drawn). $500 $500 Reverse Cash a/c Dr. To Purchases a/c (Being merchandise receiving report drawn in the next financial year). $500 $500 5. Original Purchases a/c Dr. To Cash a/c (Being goods shipped, received and entered before financial closure). $500 $500 Adjustment No adjustment required. 6. Original Purchases a/c Dr. To Cash a/c (Being inventory received but no entry entered). $800 $800 7. Original Cash a/c Dr. To Sales a/c To P&L a/c (Being goods sold). 18,000 $12,000 $6,000 Problem No. 7: Dr. Keggs A/C Cr. Year Particulars Amount Particulars Amount 2000 To balance b/d $20,744 By balance c/f $20,744 Total $20,744 Total $20,744 2001 To balance b/d $20,744 To Purchases (Balancing fig). $1,275 By PPE a/c $22,019 Total $22,019 Total $22,019 Dr. Plant & Machinery A/C Cr. Year Particulars Amount Particulars Amount 2000 To balance b/d (Bal. fig.) $15,508 By Sales $565 To Purchases $5,602 By balance c/f $20,545 Total $20,545 Total $20,545 2001 To balance b/d $20,545 By Sale $56 To Purchases $3,271 By Sale (Bal.fig.) $3,620 By PPE a/c $20,150 Total $23,816 Total $23,816 . Dr. Office equipment & furniture A/C Cr. Year Particulars Amount Particulars Amount 2000 To balance b/d $5,721 By balance c/f $5,721 Total $5,721 Total $5,721 2001 To balance b/d $5,721 To Purchases (Bal.fig.) $746 By PPE a/c $6,467 Total $6.467 Total $6,467 Dr. Leasehold improvements A/C Cr. Year Particulars Amount Particulars Amount 2000 To balance b/d $3,173 By balance c/f $3,173 Total $3,173 Total $3,173 2001 To balance b/d $3,173 To Purchases (Bal.fig.) $134 By PPE a/c $3,307 Total $3,307 Total $3,307 Dr. Land A/C Cr. Year Particulars Amount Particulars Amount 2000 To balance b/d $350 By balance c/f $350 Total $350 Total $350 2001 To balance b/d $350 By PPE a/c $350 Total $350 Total $350 Dr. Building A/C Cr. Year Particulars Amount Particulars Amount 2000 To balance b/d $1,420 By balance c/f $1,420 Total $1,420 Total $1,420 2001 To balance b/d $1,420 By PPE a/c $1,420 Total $1,420 Total $1,420 Dr. Accumulated Depreciation A/C Cr. Year Particulars Amount Particulars Amount 2000 By balance b/d (Bal.fig.) $18,606 By Depreciation charged $6,300 To balance c/f $$24,906 Total $24,906 2001 To Accumulated Depreciation on Sale $1,490 By balance b/d $24,906 To PPE a/c $29,816 By Depreciation charged $6,400 Total $31,306 Total $31,306 Dr. Property Plant & Equipment A/C Cr. Year Particulars Amount Particulars Amount 2000 To Keggs a/c $22,019 By Acc. Depreciation a/c $29,816 To Plant & Machinery a/c $20,150 By Cash a/c $23,897 To Office equipment and Furniture a/c $3,307 To Leasehold improvements a/c $350 To Land a/c $350 To Building a/c $1,420 Total $53,713 Total $53,713 The Journal entry to record the disposal of Property, Plant & equipment account is as follows: Year Particulars Dr. Cr. 2001 Cash a/c Dr. To Property, Plant & Equipment a/c (Being Property, Plant & Equipment disposed off for cash). $23,897 $23,897 Book References: Chandra. P. 2006. Financial Management: Theory and Practice. Delhi. Tata Mc. Graw Hill Co. Pvt. Ltd. Pg.179. Kumar V.M.P. 2008, First Lessons in Accounting Standards. Delhi. Snow White Publications Pvt. Ltd. Pg.511-520. Book Bibliography: Tulsian. P.C. 2002. Problems and Solutions in Financial Accounting. Delhi. Tata Mc. Graw Hill Co. Pvt. Ltd. Read More