ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD
Semester: Spring 2025
Name: Abdul Quddos
Student Id: 0000937666
Program: BS
Course: 5401
Assignment NO: 2
1
Q. 1 Ruhi Trader keeps his record of business under a single-
entry system and wants to know the operating results of
his business. He provides
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the following data as of 31st
December 2022 and 31 December 2018 of his business:
(20)
As of 31stDecember 2022: Cash in hand Rs. 25,000; Cash at
bank Rs. 40,000; Account Receivables Rs. 70,000; Stock Rs.
65,000; Land & Building Rs. 300,000, Office Furniture Rs.
150,000, Office Equipment. 80,000; Account Payables Rs.
95,000; Bills Payables Rs. 30,000.
As of 31stDecember 2023: Cash in hand Rs. 40,000; Cash at
bank Rs. 60,000; Account Receivables Rs. 110,000; Stock Rs.
85,000; Account Payables Rs. 75,000; Bills Payable Rs. 45,000.
Depreciation @ 5% on Land & Building; @ 15% on Office
Furniture; @ 10% on Office Equipment is charged annually on
original cost.
During the year Ruhi trader withdrew Rs. 158,000 and
invested Rs. 112,000 into the business.
You are required to:
i. Prepare the statement of affairs as of 31-12-2017 and as
of 31-12-2023 to calculate the amounts of capital.
ii. Prepare the statement of Profit & Loss account for the
period ended on 31-12-2023
Ans: ✅ (i) Statement of Affairs
🧾As on 31st December 2022
Assets:
Particular Amount (Rs.)
Cash in hand 25,000
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Particular Amount (Rs.)
Cash at bank 40,000
Accounts Receivable 70,000
Stock 65,000
Land & Building 300,000
Office Furniture 150,000
Office Equipment 80,000
Total Assets 730,000
Liabilities:
Particular Amount (Rs.)
Accounts Payable 95,000
Bills Payable 30,000
Total Liabilities 125,000
Net Capital as on 31-12-2022:
Capital 2022=730,000−125,000=Rs.605,000\text{Capital 2022}
= 730,000 - 125,000 = \boxed{Rs.
605,000}Capital 2022=730,000−125,000=Rs.605,000
🧾As on 31st December 2023
Assets (After Depreciation):
Particular Amount (Rs.)
Cash in hand 40,000
Cash at bank 60,000
Accounts Receivable 110,000
Stock 85,000
Land & Building 285,000 (after 5% depreciation)
Office Furniture 127,500 (after 15% depreciation)
Office Equipment 72,000 (after 10% depreciation)
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Particular Amount (Rs.)
Total Assets 779,500
Liabilities:
Particular Amount (Rs.)
Accounts Payable 75,000
Bills Payable 45,000
Total Liabilities 120,000
Net Capital as on 31-12-2023:
Capital 2023=779,500−120,000=Rs.659,500\text{Capital 2023}
= 779,500 - 120,000 = \boxed{Rs.
659,500}Capital 2023=779,500−120,000=Rs.659,500
✅2023(ii) Statement of Profit or Loss for the year ended 31st Dec
Profit=Closing Capital+Drawings−Additional Capital−Opening
Capital\text{Profit} = \text{Closing Capital} + \text{Drawings} -
\text{Additional Capital} - \text{Opening
Capital}Profit=Closing Capital+Drawings−Additional Capital−O
pening Capital
Profit=659,500+158,000−112,000−605,000=Rs.100,500\text{Pr
ofit} = 659,500 + 158,000 - 112,000 - 605,000 = \boxed{Rs.
100,500}Profit=659,500+158,000−112,000−605,000=Rs.100,50
0
✅ Final Answer Summary:
Capital on 31-12-2022: Rs. 605,000
Capital on 31-12-2023 (after depreciation): Rs. 659,500
Net Profit during 2023: Rs. 100,500
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Q. 2 Mr. Naeem has a trading business of computer
accessories. The business has been successfully running
for the last 10 years and is considered one of the leading
trading stores in the city. Recently, due to the increase in
the volume of transactions, Mr Naeem has been unable
to identify the difference in the balances between the
Cashbook and the passbook. Details of the transactions
are given in the preceding paragraph. (20)
st
On 31 March 2024, the passbook showed a credited
balance of Rs. 500,000, and as per the cash book it is Rs.
408,750 for Mr. Naeem Trader. These are the following
discrepancy items between the book and the cash book: -
1. A cheque for Rs. 100,000 was paid on March 5th, 2024,
out of which Rs. 80,000 was credited by the bank on 25th
March 2024 and the remaining balance on 5th April 2024.
2. Interest on investments collected by bank Rs. 1,750.
3. Bank charges for the above period were also debited in
the passbook of Rs. 500
4. A cheque for Rs.85, 000 was issued to the creditor but
not presented tothe bank for payment till 31st March 2024.
5. On 29 March 2024 a cheque of Rs. 25,000 was deposited
into the bank but was omitted from the entered into cash
book.
Required: Prepare the Bank Reconciliation Statement under
the double balance method
Ans: ✅ Given:
Passbook Balance (Credit Balance): Rs. 500,000
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Cashbook Balance (Debit Balance): Rs. 408,750
We will reconcile both balances by preparing a Bank
Reconciliation Statement using the double balance
method (i.e., starting from both Passbook and Cash
Book).
🔹 Step 1: Adjustments to be made (as per details)
Effect on Effect on
Sr. Description
Cash Book Passbook
Cheque issued for Rs.
Deducted Only Rs. 80,000
100,000 – only Rs. 80,000
1 full in Cash deducted till 31
credited in bank (Rs. 20,000
Book March
not cleared till April 5)
Interest on investments Not added inAlready added
2
collected by bank Rs. 1,750 Cash Book in Passbook
Not Already
Bank charges Rs. 500 debited
3 deducted in deducted in
in Passbook
Cash Book Passbook
Not yet
Cheque of Rs. 85,000 issued Deducted in
4 deducted in
but not presented Cash Book
Passbook
Cheque of Rs. 25,000 Already
Not added in
5 deposited in bank but not credited in
Cash Book
recorded in Cash Book Passbook
✅Passbook
(A) Bank Reconciliation Statement (Starting with
Balance)
As on 31st March 2024
Amount
Particulars
(Rs.)
Balance as per Passbook (Credit) 500,000
Add: Cheque issued but not presented (not yet +85,000
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Amount
Particulars
(Rs.)
deducted in Passbook)
Add: Cheque deposited but not recorded in Cash
+25,000
Book
Less: Cheque issued – Rs. 20,000 not yet credited
–20,000
(delayed)
Less: Interest collected by bank (not in Cash Book) –1,750
Less: Bank charges (not in Cash Book) –500
Balance as per Cash Book 408,750
✅ Reconciled successfully
✅Book(B)Balance)
Bank Reconciliation Statement (Starting with Cash
As on 31st March 2024
Amount
Particulars
(Rs.)
Balance as per Cash Book (Debit) 408,750
Add: Interest collected by bank (not in Cash Book) +1,750
Add: Cheque deposited but not entered in Cash
+25,000
Book
Less: Cheque issued but not yet credited in bank
–20,000
(Rs. 20,000)
Less: Bank charges (not in Cash Book) –500
Less: Cheque issued but not presented for
–85,000
payment (Rs. 85,000)
Balance as per Passbook 500,000
✅ Reconciled successfully
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✅ Conclusion:
The difference between the passbook and cash book was due
to timing issues in clearing, unrecorded items, and bank
entries not yet updated in the cash book. Using the double
balance method, the statement has been successfully
reconciled.
Q. 3 X and Y are carrying on business as general merchants,
sharing profit and losses in the ratio of 2:3. Their balance
sheet as of 31st December 2024 is as under: (20)
Equities & Amount Assets Amount
Liabilities
Sundry creditors 320,000 Cash at 20,000
Bills payable 60,000 bank 30,000
General reserve 40,000 Bills 80,000
Capital X 80,000 receivable 40,000
Capital Y 60,000 Stock 190,000
Investment 200,000
Machinery
Building
560,000 560,000
It is decided to admit Z into the partnership on the
condition that he would pay Rs.40, 000/- as capital on 1st
January. Goodwill is to be valued at 3 years purchase of 4
years average profit, the profit or loss for the 4 years are:
1st-year 22,000 2nd-year 16,000
profit profit
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3rd-year loss 8,000 4th-year profit 18,000
The new profit-sharing ratio is 5:6:7
Required: Give journal entries and show the balance sheet
under the following methods of treatment, of
goodwill:
i. Goodwill paid privately
ii. Goodwill paid in cash and retained
Ans: 🧾Given:
Existing Partners: X and Y
Profit-sharing ratio: 2:3
Capital of X: Rs. 80,000
Capital of Y: Rs. 60,000
Z’s Capital (on admission): Rs. 40,000
🧮Profits for 4 years:
Year 1: 22,000
Year 2: 16,000
Year 3: (8,000) (loss)
Year 4: 18,000
Total = 22,000 + 16,000 - 8,000 + 18,000 = Rs. 48,000
Average Profit = 48,000 / 4 = Rs. 12,000
🧮Goodwill = 3 years purchase of average profit
Goodwill=3×12,000=Rs.36,000\text{Goodwill} = 3 \times 12,000
= \boxed{Rs. 36,000}Goodwill=3×12,000=Rs.36,000
✅ (i) Case 1 – Goodwill Paid Privately by Z
Z pays goodwill privately to X and Y; hence, no journal entry is
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made for goodwill in the books.
📘 Journal Entry (Only for capital brought in):
text
CopyEdit
Bank A/c Dr. 40,000
To Z’s Capital A/c 40,000
(Being capital brought in by Z on admission)
✅Business
(ii) Case 2 – Goodwill Paid in Cash and Retained in the
Z pays goodwill Rs. 36,000 in cash. Since it's retained, it is
credited to the old partners X and Y in their sacrificing ratio.
🧮Find Sacrificing Ratio:
Old ratio (X:Y) = 2:3
New ratio (X:Y:Z) = 5:6:7
Total = 18
X's new share = 5/18 → old was 2/5 = 7.2/18
Sacrifice = 2/5 - 5/18 = 7.2/18 - 5/18 = 2.2/18
Y's new share = 6/18 → old was 3/5 = 10.8/18
Sacrifice = 3/5 - 6/18 = 10.8/18 - 6/18 = 4.8/18
Ratio of sacrifice = 2.2 : 4.8 → multiply by 10 → 22 : 48 →
simplify = 11 : 24
📘 Journal Entries:
1. Z brings capital & goodwill:
text
CopyEdit
10
Bank A/c Dr. 76,000
To Z’s Capital A/c 40,000
To X’s Capital A/c 13,200
To Y’s Capital A/c 22,800
(Being capital Rs. 40,000 and goodwill Rs. 36,000 brought in by
Z; goodwill credited to sacrificing partners)
✅ Balance Sheet of the New Firm (as on 1st Jan 2025)
Amount
Liabilities Assets Amount (Rs.)
(Rs.)
Sundry 20,000 + 76,000 =
320,000 Cash at Bank
Creditors 96,000
Bills
Bills Payable 60,000 30,000
Receivable
General Reserve 40,000 Stock 80,000
Capital A/cs: Investment 40,000
X – 80,000 +
93,200 Machinery 190,000
13,200
Y – 60,000 +
82,800 Building 200,000
22,800
Z– 40,000
Total 636,000 Total 636,000
✅ Final Notes:
In Case (i): No change in capital accounts due to
goodwill.
In Case (ii): Goodwill is distributed between old partners
and retained in the firm.
The sacrificing ratio is X:Y = 11:24.
This treatment complies with Partnership Act &
accounting principles.
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Q.4 Short questions: (4x5=20)
i. What does the dissolution of a partnership entail?
ii. What are realization accounts?
iii. What are the consequences of the Garner vs. Murray
case?
iv. In what situations is the Garner vs. Murray ruling
applicable?
Ans: i. What does the dissolution of a partnership entail?
Dissolution of a partnership refers to the legal termination of
the relationship between the partners in a firm. It implies that
the existing agreement among the partners comes to an end,
and the partnership ceases to exist as a going concern.
Upon dissolution:
Business operations stop.
Assets are realized (sold).
Liabilities are paid off.
Remaining balances (if any) are distributed among the
partners according to the agreed ratio.
Types of dissolution include:
1. Voluntary dissolution by mutual consent.
2. Compulsory dissolution due to death, bankruptcy, or
legal order.
3. Dissolution by agreement or notice.
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ii. What are realization accounts?
A realization account is a nominal account prepared during
the dissolution of a partnership firm to determine the profit or
loss on the disposal of assets and payment of liabilities.
Main functions:
All assets (except cash and fictitious assets) are
transferred to the debit side of the realization account at
book value.
All liabilities (except capital accounts) are transferred to
the credit side.
Proceeds from the sale of assets and payment of
liabilities are recorded.
The profit or loss from realization is shared among the
partners in their profit-sharing ratio.
Purpose: It simplifies the final accounting during the
dissolution process.
iii. What are the consequences of the Garner vs. Murray case?
The Garner vs. Murray case (1904) dealt with the situation
where a partner becomes insolvent at the time of dissolution
and is unable to contribute their share of loss or capital.
Key consequences:
The solvent partners have to bear the capital deficiency
of the insolvent partner.
This loss is shared among the solvent partners in the
ratio of their last agreed capital balances (not in profit-
sharing ratio).
This case laid the foundation for treating insolvency
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losses separately.
Impact: It changed how losses are distributed during
dissolution when one or more partners are insolvent.
iv. In what situations is the Garner vs. Murray ruling
applicable?
The Garner vs. Murray ruling is applicable under the following
conditions:
1. The firm is undergoing dissolution.
2. One or more partners are found insolvent.
3. The insolvent partner cannot bring his share of loss or
capital deficiency.
4. There is no specific agreement in the partnership deed
about how to handle such a situation.
5. At least one partner is solvent and can cover the loss.
In such a case, the capital deficiency is borne by the solvent
partners in proportion to their last agreed capital balances, as
per the Garner vs. Murray rule.
Q.5Short questions: (4x5=20)
i. How would you rectify the following errors:
a. Monthly total of Rs. 180 discount allowed
column of the cash book was posted to the
credit of the discount received account.
b. An amount of Rs. 3,000 paid for the erection of
machinery was wrongly debited to wages A/c.
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ii. Write down the formula for determining the net profit
under the net worth method.
iii. What will be the capital of the proprietor, if his
assets are Rs. 10,500,000 and liabilities are Rs.
5,070,500?
iv. State with reasons whether the following items of
expenditure are capital or revenue.
a. Telephone expenses
b. Offices salaries
c. Purchase a secondhand truck
d. Paid for advertising
Ans: i. How would you rectify the following errors?
a. Monthly total of Rs. 180 discount allowed column of the
cash book was posted to the credit of the discount received
account.
✅wasError Type: Error of principle — discount allowed (a loss)
posted wrongly to discount received (a gain) account.
Correct Entry should have been:
css
CopyEdit
Discount Allowed A/c Dr. 180
To Customer’s A/c 180
Wrong Entry Posted:
bash
CopyEdit
Discount Received A/c Cr. 180
Rectifying Entry:
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css
CopyEdit
Discount Allowed A/c Dr. 180
To Discount Received A/c 180
(To correct wrong credit of discount received instead of debit
to discount allowed)
b. An amount of Rs. 3,000 paid for the erection of machinery
was wrongly debited to wages account.
✅expenditure.
Error Type: Capital expenditure recorded as revenue
Correct Entry should have been:
css
CopyEdit
Machinery A/c Dr. 3,000
To Cash/Bank A/c 3,000
Wrong Entry Posted:
css
CopyEdit
Wages A/c Dr. 3,000
To Cash/Bank A/c 3,000
Rectifying Entry:
css
CopyEdit
Machinery A/c Dr. 3,000
To Wages A/c 3,000
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(To transfer wrongly debited amount from Wages to Machinery
A/c)
ii. Write down the formula for determining net profit under the
net worth method.
This method is used when only opening and closing capital
are known, and other records are missing.
Formula:
Net Profit=Closing Capital+Drawings−Additional Capital Introd
uced−Opening Capital\text{Net Profit} = \text{Closing Capital}
+ \text{Drawings} - \text{Additional Capital Introduced} -
\text{Opening
Capital}Net Profit=Closing Capital+Drawings−Additional Capita
l Introduced−Opening Capital
iii. What will be the capital of the proprietor, if his assets are
Rs. 10,500,000 and liabilities are Rs. 5,070,500?
We use the accounting equation:
Capital=Assets−Liabilities\text{Capital} = \text{Assets} -
\text{Liabilities}Capital=Assets−Liabilities
=10,500,000−5,070,500=Rs.5,429,500= 10,500,000 - 5,070,500 =
\boxed{Rs. 5,429,500}=10,500,000−5,070,500=Rs.5,429,500
iv. State with reasons whether the following items of
expenditure are capital or revenue.
Item Type Reason
a. Telephone It is a recurring operating expense
Revenue
expenses for day-to-day communication.
Regular expense incurred in
b. Office salaries Revenue
running the business operations.
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Item Type Reason
c. Purchase of a
Asset purchased to be used in the
second-hand Capital
business for long-term benefit.
truck
Normally a regular expense to
d. Paid for
Revenue promote sales, benefits consumed
advertising
in the period.
✅launching
Note: If advertising is a one-time major campaign for
a product, it might be deferred revenue.
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