ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD

(Department of Business Administration)

ASSIGNMENT No. 1
Course: Advance Accounting (8404) Semester: Autumn, 2019
Level: BBA (4 years)

Q. 1 Define and explain the following terms with examples:

a) Going Concern
b) Consistency
c) Matching Principle
d) Disclosures

Answer:

a) Going Concern:
Going concern is an accounting term for a company that has the resources needed
to continue operating indefinitely until it provides evidence to the contrary. This
term also refers to a company's ability to make enough money to stay afloat or
avoid bankruptcy. If a business is not a going concern, it means it's gone bankrupt
and its assets were liquidated. As an example, many dot-coms are no longer going
concern companies after the tech bust in the late 1990s.

Examples:

1. A company manufactures a chemical known as Chemical-X. Suddenly,

the government imposes a restriction on the manufacture, import, export,
marketing and sale of this chemical in the country. If Chemical-X is the
only product that company manufactures, the company will no longer be a
going concern.
2. The National Company is in serious financial trouble and cannot pay its
obligations. The government gives National Company a bailout and a
guarantee of all payments to creditors. The national company is a going
concern despite of its current weak financial position.

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 b) Consistency:

c) Matching Principle:
The matching principle is one of the basic underlying guidelines in accounting.
The matching principle directs a company to report an expense on its income
statement in the period in which the related revenues are earned. Further, it results
in a liability to appear on the balance sheet for the end of the accounting period.
The matching principle is associated with the accrual basis of accounting and
adjusting entries.

Examples:
1. A company has a policy to pay a bonus of 1% on its sales in a quarter, to
every single sales representative. Now if the company has 4 sales
representatives and each of them secured sales of $100,000 in the first
Quarter of the year, each of them earned a bonus of $1000. As there are 4
of them the total bonus expense to be paid by the company would be
$4,000 (4 × $1000). If for instance the company paid the bonus in the
month of May which falls in the second quarter of the year, the matching
concept requires the company to record this expense in the first quarter
and not in the second quarter, because this expense relates the revenues
generated in the first quarter.
2. A Law Firm pays $4,000/month fixed salary to 6 of its consultants. The
same Law Firm earned revenues of $230,000 and $180,000 in June and
July respectively. The expense for the two months would be the same

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 $24,000 ($4,000 × 6) as the salaries are fixed. But the profits for the
months of June and July would be $206,000 ($230,000 – $24,000) and
$156,000 ($180,000 – $24,000) respectively. This is because the salaries
expense is matched to the revenues generated for the individual months.

d) Disclosures:

In the financial world, disclosure refers to the act of releasing all relevant
information on a company that may influence an investment decision—
making public both positive and negative news, data, and other details about
its operations, or that impact its operations, in a timely fashion. Similar to
disclosure in the law, the concept is that, in the interest of fairness, all
parties should have equal access to the same set of facts.

Example:

Take a press release issued by Target Corporation (TGT) in March 2018,

announcing its Fourth Quarter and Full-Year 2017 Earnings report. In it, the
company highlighted its after-tax return on invested capital (ROIC) for 2017 as
being up from the previous year, from 15% to 15.9%.

However, Target admits, using ROIC does not adhere to the Generally Accepted
Accounting Principles (GAAP) that companies must follow when compiling
financial statements. To clear up any confusion for shareholders, Target also
added a note of disclosure to its release and earnings report, concerning the
figures, denoting the limits of non-GAAP financial measures (like ROIC), and
providing a "Reconciliation of Non-GAAP Financial Measures" section and a
schedule of its calculations "to provide additional transparency." (For related
reading, see "Is a Private Company Required to Disclose Financial Information to
the Public?")

Q. 2 Ken Hensley Enterprises, Inc. is a small recording studio in St.

Louis. Rock bands use the studio to mix the mix-quality demo
recordings distributed to talent agents. New clients are required to pay
in advance for studio services. Bands with established credit are billed
for studio services at the end of each month. Adjusting entries are
performed on am monthly basis. An unadjusted trial balance dated
December 31, 2005, follows (Bear in mind that adjusting entries

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already have been made for the first eleven months of 2005, but not
for December.

KEN HENSLEY ENTERPRISES, INC

Unadjusted Trail Balance
December 31, 2005
Cash $43170
Account receivable 81,400
Studio supplies 7,600
Unexpired insurance 500
Prepaid studio rent 4,000
Recording equipment 90,000
Accumulated depreciation: recording %52,500
equipment
Notes payable 16,000
Interest payable 840
Income Tax Payable 3,200
Unearned studio revenue 9,600
Capital stock 80,000
Retained earning 38,000
Studio revenue earned 107,000
Salaries expenses 18,000
Supplies expenses 1,200
Insurance expense 2,680
Depreciation expenses: recording 16,500
equipment
Studio rent expense 21,000
Interest expense 840
Utilities expense 2,350
Utilities expense 17,900
Income taxes expense $307,140 $307,140

Other Data:

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 1. Records show that $3,400 in studio revenue had not yet been
billed or recorded as of December 31.
2. Studio supplies on hand at December 31 amount to $3,900.
3. On August 1, 2005 the studio purchased a six month
insurance policy for &15, 00. The entire premium as initially
debited to unexpired insurance.
4. The studio is located in a rented building. On November 1,
2005 the studio paid $6,000 rent in advance for November,
December and January. The entire amount was debited to
prepaid studio rent.
5. The useful life of the studios recording equipment is
estimated to be a five years (or 60 months) the straight-line
method of depreciation is used.
6. On May 1, 2005, the studio borrowed $16,000 by signing a
12-month,
9 percent note payable to first federal bank of St. Louis. The
entire $16,000 plus 12 months interest is due in full on April
30, 2006.
7. Records show that $3,600 of cash receipts originally
recorded as unearned studio revenue had been earned as of
December 31.
8. Salaries earned by recording to technicians that remain
unpaid at December 31 amounts to $540.
9. The studios accountant estimated that income taxes expense
for the entire year ended December 31, 2005, is $19,600,
(note that $17,900 of this amount has already been recorded.

Prepare Balance Sheet as on December 31, 20015 and Profit & Loss
Statement of Ken Hensley Enterprises for the year ended December 31,
2005.

Answer:

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 General Journal

Particular Debit
Credit
S.No
Account Receivable 4400
4400
Studio Revenue Earned
1.
(To record accrued studio revenue earned in
Dec)
Supplies Expenses 700
Studio Expenses
2. 700
(To record studio supplies used in Dec)
($7,600-$6,900)
Insurance Expenses 250
Unexpired Insurance
3. 250
(To record Dec insurance expense)
($1,500 x 1/6)
Studio Rent Expense 2000
Prepaid Studio Rent
4. 2000
(To record studio rent in Dec)
($6,000 x 1/3)
Dep Expense: Recording Equipment 1500
5. Accumulated Dep: Recording Equipment
(To record dep expense in Dec) 1500
($90,000 x 1/60)
Interest Expense 120
Interest payable
6. To record accrued interest expense in Dec 120
($16000 x 9% x 1/12)

Unearned Studio Revenue 3600

7. Studio Revenue Earned 3600
To record advance collection earned in Dec
Salaries Expense 540
8. Salaries Payable 540
To record salaries accrued in Dec
Income Tax Expense 1700
Income Tax payable
9. To record income taxes accrued in Dec 1700
($19,600-$17,900)

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 Ken Hensley Enterprises, Inc.
Income Statement
For the Year Ended December 31, 2005

S.No Particular Debit Credit

1. Studio Revenue Earned $115000

2. Salaries Expense $18540

3. Supplies Expense 1900
4. Insurance Expense 1250
5. Depreciation Expense: Recording Equipment 18000
6. Studio Rent Expense 23000
7. Utilities Expense 2350
8. Interest Expense 960
9. Income Taxes Expenses 19600
10. Total Expense 85600
Net Income $29400

Ken Hensley Enterprises, Inc.

Statement of Retained Earnings
For the Year Ended December 31, 2005

S.No Particular Debit Credit

1. Retained Earnings, Jan 1, 2005 $38000

2. Add: Net Income 29400
3. Less: Dividends 0
4. Retained Earnings, Dec 31, 2005 $67400

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 Ken Hensley Enterprises, Inc.
Balance Sheet
December 31, 2005

S.No Particular Debit Credit

1. Assets
Cash $44,850
Account Receivable 85,800
Studio Supplies 6,900
Unexpired Insurance 250
Prepaid Studio Rent 2000
Recording Equipment $90,000
Accumulated Dep: Recording Equipment (54,000) 36000
Total Assets $175800

2. Liabilities
Note Payable $16,000
Interest Payable 960
Income Tax Payable 4900
Salaries Payable 540
Unearned Studio Revenue 6,000
Total Liabilities $28,400

3. Owner`s Equity
Capital Stock $80,000
Retained Earnings 67,400
Total Owner`s Equity
$147400

Liabilities & Owner`s Equity $175800

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Q. 3 On May 31, following information was available with Bashir & Co.
concerning its bank account:
a) The cash book balance of the account on May 31 was Rs. 95,000.
b) Cash receipts of Rs. 12,000 were deposited on June 01.
c) Also included with the May bank statement was a debit memorandum
from the bank for Rs. 440 representing service charges.
d) Interest on deposits amounting to Rs. 670 was credited by the bank.
However, no entry was made in the cash book.
e) On May 31, outstanding cheques were amounting to Rs. 22,000/-.
f) Included in the May bank statement was a Rs. 2,700 cheque drawn on
Zahid & Co., a customer of Bashir & Co. The cheque was marked “NSF”.
It has been included in the deposit of May 23.
Prepare the bank reconciliation statement as on May 31. Also, prepare adjusting
entries based on the available information.

Answer:

Q. 4 Sky probe sells state of the art telescope to individual and

organizations interested in studying the solar system. At December 31 last
year, the company’s inventory amounted $250,000. During the first week of
January this year, the company made only one purchase and one sale. The
transactions were as follows:
Jan 2: sold one telescope costing $90,000 to central state university for cash
$117,000.
Jan 5: Purchased merchandise on amount from lunar Optics, $50,000.
Terms, net 30 days.

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 a) Prepare a journal report to record these transactions assuming that sky
Probe uses the perpetual inventory systems. Use separate entries to
record the sales revenue and the cost of goods sold for the sale on
January 2.

Answer:
DATE GENERAL JOURNAL DEBIT CREDIT
2 JAN CASH 117,000
SALES 117,000
(Sales to Cash)

2 JAN COST OF GOOD SOLD 90,000

INVENTOR 90,000
Y
(Cost of Telescope Sold)

5 JAN PURCHASES 50,000

ACCOUNT PAYABLE 50,000
(Lunar Optics)
(Purchases on Account)
b) Compute the balance of the inventory account on January 7.

Answer:

INVENTORY AT DEC. 31 250,000

(LESS) COST OF GOOD SOLD (90,000)
(ADD) PURCHASES 50,000
TOTAL INVENTORY ON JAN 7 210,000

c) Prepare journal entries to record the two transactions, assuming that

Sky probe uses the periodic inventory system.

Answer:

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 DATE GENERSL JOURNAL DEBIT CREDIT
2 JAN CASH 117,000
SALES 117,000
(Sales to Cash)

5 JAN PURCHASES 50,000

ACCOUNT PAYABLE (Lunar 50,000
Optics)
(Purchases On Account)

d) Compute the cost of goods sold for the first week of January assuming
use of a periodic inventory system. Use your answer to part b as the
ending inventory.

Answer:

INVENTORY AT JAN 1. 250,000

PURCHASES 50,000
COST OF GOODS AVAILABLE FOR SALE 300,000
ENDING INVENTORY, JAN 7 (210,000)
TOTAL 90,000

e) Which inventory system do you believe that a company such as

a Sky probe would probably use? Explain your reasoning.

Answer:

Sky probe sell telescope for a high cost and has only made one sale
transaction so far this year, I would say it is possible that they use a
perpetual inventory system.

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Q. 5 Differentiate between a share and a bond. How is accounting for
share issue and a bond issue different?
Answer:

Features Share Bond

Definition Investment instrument which Investment instrument which
provide part ownership of a act as a borrowed capital for the
public limited company in institution/organization using
exchange for a monetary them.
value.

Utility Money raised through the Money borrowed through the

means of shares is utilized means of bonds is utilized for
for the company`s growth long-term development and
and current. asset building.

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Type of Investment Equity Debt
Instrument

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14
 ASSIGNMENT No. 2
Total Marks: 100
Pass Marks: 50

This assignment is a research-oriented activity. You are required to select one of the
following topics according to the last digit of your roll number. For example, if your roll
number is D-3427185 then you will select topic number 5 (the last digit). Visit any
business/commercial organization and write a paper of about 1000 words on the topic
allotted to you. Prepare two copies of this report; submit one copy to your tutor for
evaluation and use other for presentation in the workshops, which will be held at the end
of semester prior to your final examination.

0. Uses of Statement of Financial Position

1. Transaction Processing System
2. Perpetual Inventory System
3. Periodic Inventory System
4. Errors and Timing Differences
5. Treatment of Goodwill
6. Types of stock
7. Issuance of Bonds
8. Finance Lease
9. Operating Lease

The report should follow the following format:

1. Title page
2. Acknowledgements
3. An abstract (one page summary of the paper)
4. Table of contents
5. Introduction to the issue (brief history & significance of issue assigned)
6. Practical study of the organization (with respect to the issue)
7. Data collection methods
8. SWOT analysis (strengths, weaknesses, opportunities & threats) relevant to the
issue assigned
9. Conclusion (one page brief covering important aspects of your report)
10. Recommendations (specific recommendations relevant to issue assigned)
11. References (as per APA format)
12. Annexes (if any)

GUIDELINES FOR ASSIGNMENT # 2:

 1.5 line spacing
 Use headers and subheads throughout all sections
 Organization of ideas
 Writing skills (spelling, grammar, punctuation)
 Professionalism (readability and general appearance)

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 Do more than repeat the text
 Express a point of view and defend it.
 WORKSHOPS:
The workshop presentations provide you opportunity to express your communication
skills, knowledge & understanding of concepts learned during practical study assigned in
assignment # 2.

You should use transparencies and any other material for effective presentation. The
transparencies are not the presentation, but only a tool; the presentation is the
combination of the transparencies and your speech. Workshop presentation
transparencies should only be in typed format.
The transparencies should follow the following format:
1) Title page
2) An abstract (one page summary of the paper)
3) Introduction to the issue (brief history & significance of issue assigned)
4) Practical study of the organization (with respect to the issue)
5) Data collection methods
6) SWOT analysis (strengths, weaknesses, opportunities & threats) relevant to the
issue assigned
7) Conclusion (one page brief covering important aspects of your report)
8) Recommendations (specific recommendations relevant to issue assigned)

GUIDELINES FOR WORKSHOP PRESENTATION:

 Make eye contact and react to the audience. Don't read from the transparencies or
from report, and don't look too much at the transparencies (occasional glances are
acceptable to help in recalling the topic to cover).
 A 15-minute presentation can be practiced several times in advance, so do that until
you are confident enough. Some people also use a mirror when rehearsing as a
substitute for an audience.

WEIGHTAGE OF THEORY & PRACTICAL ASPECTS IN ASSIGNMENT # 2 &

WORKSHOP PRESENTATIONS:
Assignment # 2 & workshop presentations are evaluated on the basis of theory & its
applicability. The weightage of each aspect would be:
Theory: 60%
Applicability (practical study of the organization): 40%

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 ADVANCED ACCOUNTING
COURSE OUTLINE (8404)
UNIT 1 INTRODUCTION TO ACCOUNTING
1.1 Accounting Theory & Conceptual Framework
1.2 Conceptual Understanding regarding IAS, IFRS, GAAP
1.3 Role of IASC, IASB
1.4 Classification of IFRS Financial Statements
1.5 Constraints on Relevant, Reliable Information
1.6 Accounting Conventions, Concepts and Principles (IAS 1, and 16)

UNIT 2 ACCOUNTING INFORMATION SYSTEM

2.1 Accounting Information Systems and Business Organizations
2.1.1 Information and Decisions
2.1.2 Information Systems
2.2 Transaction Processing Cycle
2.2.1 Internal Control Process
2.2.2 Elements of Internal Control Process
2.2.3 Segregation of Accounting Functions
2.3 Accounting and Information Technology
2.4 The Accountant and Systems Development
2.5 Using AIS to add Value to Business

UNIT 3ACCOUNTING FOR TRADING ORGANIZATIONS

3.1 Difference between manufacturing and merchandising organizations
3.2 Merchandizing activities
3.3 Accounting for purchases
3.4 Accounting for sales and inventory (IAS 2)
3.4.1 Physical Inventory
3.4.2 Perpetual Inventory
3.5 Returns, Allowances, and Discounts
3.6 Merchandise Reporting
3.7 Work sheet for merchandising concern
3.8 Adjusting entries
3.9 Closing entries

UNIT 4 WORKING CAPITAL ACCOUNTING

4.1 Cash control
4.1.1 Cash management
4.1.2 Internal control over cash
4.1.3 Cash receipts and disbursements
4.1.4 Reconciling the bank statements
4.1.5 The impress petty cash system
4.1.6 The statement of cash flows
4.2 Accounts receivable

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 4.2.1 Uncollectible accounts
4.2.1 Write-off methods
4.2.2 Estimation of credit losses
4.2.3 Management of accounts receivable
4.2.4 Techniques to minimize credit losses
4.2.5 Evaluating the quality of accounts receivable
4.2.6 Notes receivable and interest charges
4.2.7 Credit card sales
4.2.8 Credit risk
4.3 Short term investments
4.3.1 Purchases of marketable securities
4.3.2 Recognition of investment revenue
4.3.3 Adjusting marketable securities to market value
4.3.4 Reporting investment transaction (IAS 21,28,32)

UNIT 5 AMALGAMATION, ABSORPTION AND RECONSTRUCTION

5.1 Distinguishing Amalgamation, absorption and reconstruction
5.2 Definition of holding, subsidiary and associated undertaking,
consolidated financial statements (IAS 27)
5.3 Determination of Purchase consideration
5.3.1 Lump sum method
5.3.2 Net worth method
5.3.3 Net payment method
5.3.4 On the basis of value of shares
5.4 Accounting for amalgamation
5.5 Accounting for absorption
5.5.1 Intercompany Owings
5.5.2 Intercompany stocks
5.5.3 Intercompany holdings
5.6 Accounting for reconstruction
5.7 Reconstruction of share capital
5.8 Capital reduction and its legal provisions
5.9 Reorganization

UNIT 6 ACCOUNTS FOR JOINT STOCK COMPANIES

6.1 Corporation, advantages and disadvantages
6.2 Stockholders’ equity and dividends.
6.3 Rights of common stockholders and preferred stockholders
6.4 Issuance, face value, book value and market value of stocks
6.5 Donated capital
6.6 Continued and discontinued operations
6.7 Changes in accounting policies
6.8 Earnings per share (EPS)
6.9 Stock split and repurchase
6.10 Statement of stockholders equity

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 6.11 Statement of retained earnings
6.12 Preparation of company accounts and consolidated financial statements
as per International 6.13 Accounting Standard (IAS-27) and requirements of
Companies Ordinance 1984
UNIT 7ACCOUNTS FOR LIABILITIES
7.1. Bonds
7.2. Bond Interest
7.3. Accounting for Bonds Payable
7.3.1 Issue at Par
7.3.2 Discount
7.3.3 Premium
7.4. Year-end Adjustments for Bond Interest Expense
7.5. Bond Sinking Fund
7.6. Investment in Corporate Securities
7.7. Short-term and Long-term Investment
UNIT 8 ACCOUNTS FOR PROPERTY, PLANT AND EQUIPMENTS
8.1. Property, Plant and Equipment
8.1.1. Cost of Property, Plant and Equipment
8.1.2. Subsequent Expenditure
8.2. Depreciation
8.2.1. Depreciation Methods
8.2.2. Acquisition of Plant Assets
8.2.3. Disposal
8.2.4. Trade-in
8.2.5. Improvements
8.2.6. Intangible assets and amortization
8.2.7. Wasting assets and depletion
UNIT 9 ACCOUNTING FOR LEASES
9.1 Definition of leases and importance
9.2 Operating and Financial leases
9.3 Accounting for operating and financial leases
9.4 Reporting requirements for financial leases (IAS-17)

Recommended Books:
1. Financial and Managerial Accounting by Williams, Haka, Bettner,
Carcello
2. Advanced Accounting by M.A Ghani
3. Advanced Accountancy by R. L. Gupta, Publisher, Sultan Chand & Sons
23,
Daryaganj, New Delhi.

Other Reading Material

1. Companies Ordinance 1984
2. International Financial Reporting Standards /IAS

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