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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA JUNE, 2016 EXAMINATION
FOUNDATION LEVEL
SUBJECT : 001. PRINCIPLES OF ACCOUNTING.
Model Solution Solution of Question No. 1:
Requirement- (a):
Backhaus Company Bank Reconciliation Statement
December 31, 2008
Particulars Amount (Taka) Amount (Taka)
Cash Balance per bank 20,154.30
Add: Deposit in transits 1,690.40
21,844.70
Less: Outstanding checks:
No.3470 720.10
No.3474 1,050.00
No.3478 621.30
No.3481 807.40
No.3484 798.00
No.3486 1,889.50 (5,886.30)
Adjusted cash balance per bank 15,958.40
Cash balance per books 12,485.20
Add: Collection of note receivable
by bank (4,000 + 160 - 15) 4,145.00
16,630.20
Less: NSF Check 572.80
Error of overstate (540.80
– 450.80) 90.00
Error of overstate (2,954 - 2,945) 9.00 (671.80)
Adjusted cash balance per books 15,958.40
Requirement- (b):
Backhaus Company Adjusting Journal
Date Account Titles & Explanations Debit Credit
Dec. 31 Cash 4,145.00
Miscellaneous Expense 15.00
Notes Receivable 4,000.00
Interest Revenue 160.00
(To record collection of note with
interest less collection fee.)
Dec. 31 Accounts Receivable 572.80
Cash 572.80
(To record reinstalled accounts receivable
for NFS check.)
Dec. 31 Accounts Payable 90.00
Cash 90.00
Page 2 of 7
(To record increase of cash paid to accounts
payable)
Dec. 31 Accounts Receivable 9.00
Cash 9.00
(To record decrease of cash received from
Accounts Receivable)
Solution of Question No. 2:
FIFO Method
Date Purchase Sale Balance
QTY Rate Amt. QTY Rate Amt. QTY Rate Amt.
March 01 200 4.00 800.00
March 10 500 4.50 2,250.00 200 4.00 800.00
500 4.50 2,250.00
March 15 200 4.00 800.00
300 4.50 1,350.00
200 4.50 900.00
March 20 400 4.75 1,900.00 200 4.50 900.00
400 4.75 1,900.00
March 25 200 4.50 900.00
200 4.75 950.00
200 4.75 950.00
March 30 300 5.00 1,500.00 200 4.75 950.00
300 5.00 1,500.00
5,650.00 4,000.00 2,450.00
Ending Inventory
Tk. 2,450.00
Cost of Goods Sold (Tk. 800+5650-2450) Tk.
4,000.00
LIFO Method
Date Purchase Sale Balance
QTY Rate Amt. QTY Rate Amt. QTY Rate Amt.
March 01 200 4.00 800.00
March 10 500 4.50 2,250.00 200 4.00 800.00
500 4.50 2,250.00
March 15 500 4.50 2,250.00
200 4.00 800.00
March 20 400 4.75 1,900.00 200 4.00 800.00
400 4.75 1,900.00
March 25 400 4.75 1,900.00
200 4.00 800.00
March 30 300 5.00 1,500.00 200 4.00 800.00
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300 5.00 1,500.00
5,650.00 4,150.00 2,300.00
Ending Inventory
Tk. 2,300.00 Cost of Goods Sold (Tk. 800+5650-2300) Tk. 4,150.00
Average Cost Method
Date Purchase Sale Balance
QTY Rate Amt. QTY Rate Amt. QTY Rate Amt.
March 01 200 4.000 800.00
March 10 500 4.50 2,250.00 700 4.357 3,049.90
March 15 500 4.36 2,178.50 200 4.357 871.40
March 20 400 4.75 1,900.00 600 4.619 2,771.40
March 25 400 4.62 1,847.60 200 4.619 923.80
March 30 300 5.00 1,500.00 500 4.848 2,423.80
5,650.00 4,026.10 2,423.80
Ending Inventory
Tk. 2,323.80 Cost of Goods Sold (Tk. 800+5650-
2423.80) Tk. 4,026.20
Solution of Question No. 2(b):
Agree. Effective inventory management is frequently the key to successful business operations.
Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales.
Solution of Question No. 3(i):
Mr. XYZ 10 Column Work Sheet
For the year ended December 31, 2015
Trial Balance Adjustments
Adjusted Trial
Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Tk. Tk. Tk. Tk. Tk. Tk. Tk. Tk. Tk. Tk.
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Cash 55,000 55,000 55,000
Accounts Receivable 60,000 60,000 60,000
Allowance for doubtful
Accounts 2,500 1,500 4,000
4,000
Office Supplies Inventory 5,000 3,000 2,000
2,000
Prepaid Rent 15,000 12,000 3,000 3,000
Prepaid Advertising 10,000 8,000 2,000
2,000
Unexpired Insurance 6,500 4,500 2,000
2,000
Office Equipments 55,000 55,000
55,000
Accumulated Depreciation -
Office Equipments 6,000 5,500 11,500 11,500
Furniture and Fixture 40,000 40,000 40,000
Accumulates Depreciation -
Furniture and Fixture 4,000 4,000 8,000 8,000
Accounts Payable 30,000 30,000 30,000
Notes Payable (01/12/2014) 20,000 20,000 20,000
Capital 100,000 100,000 100,000
Drawings 20,000 20,000 20,000
Service Revenue 200,000 200,000 200,000
Salaries Expenses 60,000 8,000 68,000 68,000
Utilities Expenses 10,000 10,000 10,000
Delivery Expenses 5,000 5,000 5,000
Miscellaneous Expenses 21,000 21,000 21,000
Totals 362,500 362,500
Bad debt Expenses 1,500 1,500 1,500
Office Supplies Expenses 3,000 3,000 3,000
Rent Expenses 12,000 12,000 12,000
Advertisement Expenses 8,000 8,000 8,000
Insurance Expenses 4,500 4,500 4,500
Depreciation - Office
Equipment 5,500 5,500 5,500
Depreciation - Office
Furniture 4,000 4,000 4,000
Interest Expenses 2,000 2,000
2,000
Interest Payable 2,000 2,000
2,000
Salaries Payable 8,000 8,000
8,000
Net Income 55,500
55,500
Totals 48,500 48,500 383,500 383,500 200,000 200,000 239,000 239,000
Solution of Question No. 3(ii):
Adjusting Journal Entries
Date Account Title and Explanations Debit Credit
(a)Dec 31 Office Supplies Expenses 3,000
Office Supplies Inventory
3,000 (To record supplies used)
(b)Dec 31 Rent Expenses 12,000
Prepaid Rent
12,000
Page 5 of 7 (To record office used for the peroid)
(c)Dec 31 Advertising Expense 8,000
Prepaid Advertising
8,000 (To record advertising used)
(d)Dec 31 Insurance Expense 4,500
Unexpired Insurance
4,500 (To record insurance expired)
(e)Dec 31 Bad debt Expense 1,500
Allowance for doubtful Accounts
1,500 (To record bad debt for the peroid)
(f)Dec 31 Depreciation Expense Equipments 5,500 Accumulated Depreciation
office Equipments
5,500 (To record annual depreciation)
(f)Dec 31 Depreciation Expense Furniture and Fixture 4,000 Accumulated Depreciation
Furniture and Fixture (To record annual depreciation)
4,000
(g)Dec 31 Interest Expense 2,000
Interest Payable
2,000 (To record interest on notes payable)
(h)Dec 31 Salaries Expenses 8,000
Salaries Payable
8,000 (To record accrued salaries)
Solution of Question No. 4:
FRYBENDALL COMPANY Journal Entries
Date Account Title and Explanations Debit Credit
2008
Jan 5 Accounts Receivable - Klosterman Company 6,300 Sales
6,300 (Sold merchandise on account, terms n/30)
Feb 2 Notes Receivable
6,300 Accounts Receivable- Klosterman
Company 6,300
(Received a Tk.6,300, 120-day, 10% note from a customer.)
Feb 12 Notes Receivable
7,800 Sales
7,800 (Received a Tk.7,800, 60-day, 10% note for sales on
account.)
Feb 26 Accounts Receivable - Louk Co.
4,000 Sales
4,000
Page 6 of 7 (Sold merchandise on account, terms n/10.)
Apr 5 Notes Receivable
4,000 Accounts Receivable - Louk Co.
4,000 (Received a Tk.4,000. 90-day, 8% note from a
customer.)
Apr 12 Cash
7,930 Notes Receivable
7,800 Interest Revenue
130 (Received cash from Menard Company note at
maturity.)
Calculations:
Maturity value = 7,800+7,800 x10% x 60/360 = 7,930
Interest revenue = MV-FV = 7,930-7,800 = 130
June 2 Cash
6,510 Notes Receivable
6,300 Interest Revenue
210 (Received cash from Klosterman Company's note at
maturity.)
Calculations:
Maturity value = 6,300+6,300 x10% x 120/360 = 6,510
Interest revenue = MV-FV = 6,510-6,300 = 210 July 5 Accounts Receivable - Louk Co.
4,080 Notes Receivable
4,000 Interest Revenue
80 (Louk Co.'s note was dishonored, and this account is debited with
interest.)
Calculations:
Maturity value = 4,000 +4,000x 8%x 90/360 =
4,080
Interest revenue = MV-FV = 4,080-4,000 = 80
July 15 Notes Receivable - Peck Co.
7,000 Sales
7,000 (Received a Tk.7,000, 90-day, 12% note for sales on
account.)
Oct 15 Bad Debt Expense
7,210 Notes Receivable
7,000 Interest Revenue
210 (Peck's note was dishonored, and directly written off this account.)
Calculations:
Maturity value = 7,000+ 7,000x 12%x 90/360 = 7,210
Interest revenue = MV-FV = 7,210-7,000 = 210
Page 7 of 7 Solution of Question No. 5:
(i)
A company can have a profit but not have cash because profit is computed using revenues and expenses, which are different from the company's cash receipts and cash disbursements. In other words, there is a difference between revenues and receipts. There is also a difference between expenses and expenditures.
To illustrate, let's assume that a new company uses the accrual method of accounting. It provides $10,000 of services to its clients in its first month and the clients are allowed to pay in 30 days. The company will have
$10,000 of revenues in its first month, but the cash will not be received until the second month. If the company's expenses are $7,000 in the first month, the company will report a profit of $3,000 but will not have received any cash from its clients.
(ii) In a periodic system, the average is a weighted average based on total goods available for sale for the period.
In a perpetual system, the average is a moving average of goods available for sale after each purchase.
(iii) A debit memo on a bank statement refers to a deduction from the bank account's balance. In other words, a debit memo has the same effect as a check written on the bank account.
A bank debit memo could be a charge for interest owed to the bank, a loan payment, a fee owed for the printing of checks, a fee for the handling of a check that was returned because of insufficient funds, a transfer of funds from the bank account to another account at the bank, and so on.
(iv) The FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Freight-in. FOB destination means that the goods are placed free on board at the buyer's place of business. Thus, the seller pays the freight and debits Freight-out.
(v) The credit term 2/10, n/30 has two parts. The first part 2/10 is called discount term, which means the buyer can take 2 percent discount facility on paying credit amount to the seller within 10 days. The second part n/30 is called credit duration, which means the buyer is allowed to keep the credit facility for net 30 days.
(vi) Net realizable value is used in connection with accounts receivable and inventory.
In the case of accounts receivable, net realizable value means the debit balance in the asset account Accounts Receivable minus the credit balance in the contra asset account Allowance for Uncollectible Accounts.
In the context of inventory, net realizable value is used in the calculation of the lower of cost or market. In this situation, net realizable value or NRV means the expected selling price in the ordinary course of business minus any costs to complete and dispose. Net realizable value amount becomes the ceiling for the replacement cost.
NRV minus the normal profit becomes the floor.
= THE END =
