Financial Accounting II – Old Question Paper 2006 | Semester: Spring

bbFinancial Accounting II
Pokhara University | Old Question Paper
Level: Bachelor
Year: 2006 | Semester: Spring

Exam 2006 Spring

1. a) Define petty cash fund. Why is a journal entry not made when a disbursement is made from a petty cash fund? [7]
b) What are the basic characteristics of a financial lease? Is a financial lease recorded in company’s books of account? Explain.  [8]

2. The following is an inventory acquisition schedule for Everest Corporation for 1998:           [15]

Units Unit Cost
Beginning inventory 5,000 Rs. 10

February 4

April 12

September 10

December 5











During the year, Everest sold 12,500 units at Rs. 12 each. All expenses except cost of goods sold and taxes amounted to Rs. 20,000. The tax rate is 30%.
a) Compute cost of goods sold and ending inventory under each of the following three methods (assume a periodic inventory system): (i) weighted average (ii) FIFO and (iii) LIFO.
b) Prepare income statements under each of the three methods.
c) Which method do you recommend so that Everest pays the least amount of taxes during 1998? Explain your answer.

3. The December 31st bank statement for ABC Company showed a balance of Rs. 6873.40. On this date, the cash account in the company’s ledger was Rs. 2994.70.                   [15]
Your review reveals:
a) Cheques under collection on December 31st, Rs. 298.70.
b) Outstanding Cheques, Rs. 1718.00
c) A cheque for Rs. 2194.90 issued to a supplier was recorded by the bank as Rs. 2914.90.
d) A bill receivable of Rs. 5,000 and interest of Rs. 300 collected by the bank have not been recorded by the bank in company’s account.
e) A cheque for Rs. 730.60 received from customer was returned by the bank owing to lack of funds with the bank.
f) Bank’s service charges Rs. 90
g) In accordance with the company’s standing instructions on December 31, the bank paid insurance premium of Rs. 1300 for the company’s car. The Accountant did not record the transaction.

i. Prepare bank reconciliation statement for ABC and company for the month of December.
ii. Pass any necessary adjusting journal entries for ABC Company as on 31st December.

4. Assume that Ganesh Trading Company (GTC) purchased machinery for office use on 1st January 2005 for Rs. 100,000. The machinery has an estimated life of 5 years and an estimated residual value of Rs. 10,000. The GTC is in a dilemma whether to consider straight line method or unit- of- production method in depreciating the machinery. Since the company is beginning a new production process, the machinery will be used to produce 5,000 units in 2005 but production in subsequent years will increase by 5,000 units each year.
a) Calculate the depreciation expense, the accumulated depreciation and the book value of the machinery under both methods for each of the five years of the asset’s life.       [5+5]
b) Do you think that the units-of-production method yields reasonable results in this situation? Justify. [5]

The Biratnagar Confectionery purchased a generator for Rs. 45,000. The generator has an estimated life of six years, with an estimated residual value of Rs. 5,000 at the end of that period. It is expected to run for 30,000 hours. The generator has worked for 8,000 hours in the first year, 5,000 hours in the second year, 2,000 hours in the third year, 7,000 hours in the fourth year and 1,000 hours each in the fifth and sixth years respectively.
a) Compute the yearly depreciation expense for each year under unit of production method and double declining balance method respectively.      [5+5]
b) Comment on the trend of yearly depreciation expense and the book value of the generator as shown by the two methods you applied.  [5]

5. a) On July 1, 1998, Jo’s Flower Shop borrowed Rs. 25,000 from the bank. Jo signed a 10-month, 8% promissory note for the entire amount. Jo’s uses a calendar year-end.                [9]
(i) Prepare the journal entry on July 1 to record the issuance of the promissory note.
(ii) Prepare any adjusting entries needed at year-end.
(iii) Prepare the journal entry on May 1 to record the payment of principal and interest.
b) Jackie Company had the following accounts and balances on December 31, 1998:      [6]

Income taxes payable Rs. 61,250
Allowance for doubtful accounts 17,800
Accounts payable 24,400
Interest receivable 5,000
Unearned revenue 4,320
Wages payable 6,000
Notes payable, 10%, due June 2, 1999 1,000
Accounts receivable 67,500
Discount on notes payable 150
Current maturities of long-term debt 6,900
Interest payable 3,010

Prepare the current liabilities section of Jackie Company’s balance sheet as of December 31, 1998.

6. The stockholders’ equity category of Jackson Company’s balance sheet as of January 1, 1998 appeared as follows:[15]

Preferred stock, Rs. 100 par, 8%, 2,000 shares issued and outstanding  

Rs. 200,000

Common stock, Rs. 10 par, 5,000 shares issued and outstanding  


Additional paid-in capital 300,000
Total contributed capital Rs. 550,000
Retained earnings 400,000
Total stockholders’ equity Rs. 950,000

The footnotes that accompany the financial statements indicate that Jackson has not paid dividends for the two years prior to 1998. On July 1, 1998, Jackson declares a dividend of Rs. 100,000 to be paid to preferred and common stockholders on August 1.
a) Determine the amounts of the dividend to be allocated to preferred and common stockholders, assuming that the preferred stock is noncumulative, nonparticipating stock.

b) Record the appropriate journal transactions on July 1 and August 1, 1998.
c) Determine the amount of the dividend to be allocated to preferred and common stockholders, assuming instead that the preferred stock is cumulative; nonparticipating stock.

7. Write short notes on (Any Two):                [2×5=10]
a) Bond amortization
b) Operating lease
c) Diminishing balance method of depreciation

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