Short Answer Question Compiled Chapter 1-6

Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.
com, 98511-78278
CHAPTER I
Inventories and Cost of Goods Sold
Short Theoretical Question

1. What is inventory? [2014 Spring Q no 1]
Answer
Inventory is the goods that a business has on its premises or on consignment. The essential role of inventory is to act as a buffer,
allowing for the smooth functioning of the production and order fulfillment processes. The four components of inventory are
defined as:
 Raw materials: - It refers to the inventory items which are held to be used in production process.
 Work in process: - It refers to the items of inventory where raw materials are started to be processed however, it has not yet
been converted to finished product.
 Finished goods: - It is an inventory items which are successfully converted into final intended products ready for sale.
 Merchandise: - It refers to an inventory items which is purchased from outside suppliers and are ready for immediate resale.
2. What is the difference between the perpetual and periodic inventory system? [2015 Spring Q no 1]
Answer
Under perpetual inventory management system, goods are recorded with each purchase and sales. Stock records are up-to-date
with information regarding cost of goods purchases, cost of goods sold and ending inventory. Store ledger is used to record for
receipt, issue and balance of inventory at various date.
Under periodic inventory management system, stock taking is undertaken at the end of specific period. Usually stock taking is
coincided with the time of preparation of financial statement. Purchase and purchase return accounts are used to record for
receipt where the cost of goods sold is determined at the time of conducting physical verification of inventory at hand. Purchase
account is adjusted to show the effect of cost of goods sold. Sales and sales return account is used to record for sales of goods.
3. Which inventory valuation method (LIFO or FIFO) will result in the higher profit, if the cost to purchase inventory is decreasing
in the industry? [2015 Spring Q no 5]
Answer
When the price of stock is decreasing consistently over the period them the cost of items purchased earlier will be costlier than
the items purchased later. Hence, using FIFO method results into higher cost, and subsequently reports the lower profit.
Meanwhile, items purchase on later date will be cheaper, hence, the cost of goods sold reported under LIFO will be lower and
subsequently the profit will be higher. Thus, the relation of change in price and reported profit can be shown as;
Increasing Trend Decreasing Trend

LIFO Higher FIFO Higher
COGS
FIFO Lower LIFO Lower
LIFO Lower FIFO Lower
Profit
FIFO Higher LIFO Higher
4. Write in short about inventory ratio or stock turnover ratio. [2015 Spring Q no 6]
Answer
Stock turnover ratio shows the ratio of Cost of Goods Sold to Average inventory. It shows the number of times in year the
company is able to turn over its inventory and convert it into sales. The higher the turnover ratio the better is the company’s
performance in terms of operational efficiency.
1
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
Inventory Turnover Ratio =
Where,
Average Inventory =
5. Write short notes on Weighted Average method of inventory valuation. [2016 Fall Q no 1]
Answer
Weighted Average Method of inventory valuation determine the value of ending inventory and cost of goods sold using average
cost of goods purchased. Instead of using same rate as of purchase, it calculates the average rate with each purchase and applies
the same.
Weighted Average Cost per Unit =
6. What is cost of goods sold? [2016 Spring Q no 1]

Answer
Cost of goods sold refers to the total cost incurred in relation to goods being sold during a given period of time. Such cost
includes the cost of purchase, freight, and any other cost incurred in bringing the goods to present sellable condition less the cost
of ending inventory.
Cost of Goods Sold = Beginning Inventory + Cost of Production – Ending Inventory
7. What do you mean by inventory error? [2017 Fall Q no 1]

Answer
Inventory error refers to unintentional mistakes incurred while accounting for inventory and affecting components. Usually error
arises due to omission or commission of inventory value which affects income statement vide cost of goods sold and balance
sheet vide ending inventory.
8. Enlist the inventory costing system.

Answer
Inventory costing system refers to the procedure to determine the rate of inventory for the valuation of cost of goods sold and
ending inventory. As far as practicable, it is required to follow the specific identification method for all the inventories value of
which can be ascertained with certainty. However, for similar substitutable products company can use any of the following
methods;
a) First-in-First-Out (FIFO)
b) Last-in-First-Out (LIFO)
c) Weighted Average
9. How the inventory valuation method affects the cost of goods sold?
Answer
Inventory valuation method affects the value of ending inventory and cost of goods sold calculated. All the inventory valuation
method is based on different cost assumption. Under FIFO method, it is assumed that the inventory purchased at first will be
issue at first, hence, takes the earlier rate to determine the cost of goods sold. Meanwhile, under LIFO method, inventory
purchased on latest date will be issued at first taking the recent date’s rate to determine the cost of goods sold. Under weighted
average method, average of total purchase will be taken as a basis. Hence, due this variation on determining the rate of inventory
for valuation purpose, results into different value of cost of goods sold and ending inventory under each of the three methods.
2
10. What the key ratios related to inventory management/
Answer
Ratio Implication
Inventory Turnover Ratio indicates the number of

times in a year the company is able to convert the
Inventory Turnover Ratio = or raw material into inventory and then sell it off from
the stock. The higher the turnover ratio, the better
the company’s performance in terms of production
and operational efficiency.
It shows the number of days it takes for company
Inventory Conversion Period = to complete cycle of production to sales of product.
ICP of 30 days states that in an average product
gets sold from stock once in every 30 days.
Average Inventory =
Cost of Goods Sold = 𝑆𝑎𝑙𝑒𝑠 ∗ (1 − 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛)
Short Practical Questions

11. 2014 Spring Q no 8
A Company has annual sales of Rs 300,000 and it has 30% gross profit margin. If it has Rs 400,000 total assets and Rs 60,000
inventory. Calculate inventory turnover ratio.
Solution
We have,
,
Inventory Turnover Ratio = = = 3.5 times
,
Therefore, the company in an average turns over its inventory 3.5 times a year.
Where,
Cost of Goods Sold = Sales *(1- Gross Profit Ratio) = 300,000*(1-0.30) = 210,000
12. 2015 Fall Q no 10
Aplha began the year with Rs 130,000 in merchandize inventory and ended the year with Rs 190,000. Sales and cost of goods
sold for the year were Rs 900,000 and Rs 640,000 respectively.
Required: Inventory Turnover Ratio and length of inventory cycle.
Solution
, ,
Average Inventory = = =160,000
Now,
3
,
Inventory Turnover Ratio = = = 4 times
,
Again,
Inventory Conversion Cycle = = =90 days
Therefore, it takes company to sale 90 days in an average to sell each product once completed.
You are given the following information and required to determine gross profit ratio. Net Sales revenue Rs 500,000; Opening
Stock Rs 35,000; net purchase Rs 365,000 and closing stock Rs 50,000
Solution
Cost of Goods Sold = Opening stock + Net purchase – Closing Stock = 35,000+365,000-50,000 =350,000
Gross Profit = Net Sales Revenue – Cost of Goods Sold = 500,000-350,000 = 150,000
Now,
,
Gross Profit Margin = *100 = ∗ 100 = 30%
,
Thus, the gross profit margin is 30 % on sales.
14. 2016 Spring Q no 10
Sidney began the year with Rs 130,000 in merchandize inventory and end the year with Rs 190,000. Sales and cost of goods
sold for the year were Rs 900,000 and Rs 640,000 respectively.
Required: Inventory turnover ratio and length of inventory cycle.
Solution
, ,
Average Inventory = = =160,000
,
Inventory Turnover Ratio = = =4 times
,
Again,
Inventory Conversion Cycle = = =90 days
Therefore, it takes company to sale 90 days in an average to sell each product once completed.
15. 2017 Fall Q no 8
A company has a gross profit on sales is 20% and inventory turnover ratio is 5 times. If averages inventory was 40,000 then find
the amount of sales.
Solution
Inventory Turnover ratio =
5=
,
Cost of goods sold = 40,000*5 = 200,000
4
Now,
,
Sales = = = 250,000
.
16. Sales Revenue = Rs 500,000

Sales Return & Allowance = Rs 50,000
Cost of Goods Sold = Rs 405,000
Find gross profit and gross profit ratio
Solution
Net Sales = Sales Revenue – Sales Return & Allowances = 500,000-50,000 = 450,000
Gross Profit = Net Sales – Cost of Goods Sold = 450,000 – 405,000 = 45,000
,
Gross Profit Ratio = * 100 = ∗ 100 = 10%
,
17. Beginning Inventory = Rs 10,000

Purchase = Rs 40,000
Carriage Inward = Rs 10,000
Purchase Return = Rs 5,000
Ending Inventory = Rs 20,000
Required: Cost of Goods Sold and Inventory Turnover Ratio
Solution
Cost of Goods Sold = Beginning Inventory + Purchase – Purchase Return + Carriage Inward – Ending Inventory
= 10,000+40,000-5,000+10,000-20,000 =Rs 35,000
Now,
,
Inventory Turnover Ratio = = =2.33 times
,
Where,
( ) , ,
Average Inventory = = = Rs 15,000
18. Following information of a month
Cost of Goods Sold = Rs 100,000
Beginning Inventory is Rs 10,000 less than ending inventory if inventory turnover ratio is 4 times.
Calculate beginning and ending inventory
Solution
We have,
Inventory Turnover Ratio =
,
or, 4 =
or, Average Inventory = 25,000
Now,
5
Let us suppose, the value of beginning inventory be x, then the value of ending inventory is (x+10,000);
( )
or, Average Inventory =
,
or, 25,000 =
or, x= 20,000
Hence, the beginning inventory is Rs 20,000 and ending inventory is 30,000 (20,000+10,000).
19. Following information is of a manufacturing company

Net Value of Inventory at cost = Rs 10,000
Claim accepted by insurance company = Rs 2,000
Required: Prepare Journal entire for insurance reimbursement
Solution
Journal Entries
Insurance Company A/c Dr 2,000

Inventory lost a/c Dr 8,000
Inventory A/c 10,000
(To record for claim settlement by insurance company)
20. Bhatbateni’s gross profit ratio increased by 20% over the prior year. Net Sale and cost of goods sold for the prior year were
Rs 120,000 and Rs 90,000 respectively. Cost of goods sold for the current year is Rs 140,000.
Required:
Determine the amount of Bhatbhateni’s sales for the current year.
Solution
,
Gross Profit Ratio (Prior Year) = ∗ 100 = ,
∗ 100 =25%
Where,
Gross Profit = Net Sales – Cost of Goods Sold = 120,000-90,000= 30,000
Now,
Current Year Gros Profit Margin = 25% +25%*20% = 30%
Again,
,
Sales = = = 200,000
.
Therefore, the sales for current year is 200,000/.
6
CHAPTER II
Accounting for Accounts Receivable
Very Short Answer Question
Short Theory Question
21. What are two ways that decrease the account receivable?
Answer
Following are the two ways which results into decrease in accounts receivable;
a. Due to collection on account during the year
b. Due to bad debt written off during the year
22. What do credit term 3/20 n 60 means?

Answer
Credit term 3/20 net 60 means that the total credit period is for 60 days however if paid within 20 days 3 percentage discount
will be availed.
23. Briefly explain the methods of estimating bad debts.

Answer
Under allowance for doubtful debt method, there are two bases with which the bad debt expenses is estimated;
a) As a percentage of Credit sales: - Under this method, the bad debt expenses are estimated based on credit sales made during the
year. It is based on additivity principal where estimated bad debt expense is added to existing balance of allowance for doubtful
debt.
b) As a percentage of Ending Balance of Accounts Receivable: - Under this method, the bad debt expenses are estimated based on
ending balance of accounts receivable during the year. Accounting adjustment is undertaken as such to make the ending balance
on allowance for doubtful debt equal to estimated bad debt expenses based on year end account receivable value.
24. Define notes receivable

Answer
A note receivable is a written promise to receive a specific amount of cash from another party on one or more future
dates. This is treated as an asset by the holder of the note. Overdue accounts receivable is sometimes converted into notes
receivable, thereby giving the debtor more time to pay, while also sometimes including a personal guarantee by the owner
of the debtor.
Example: - If ABC Company accepts the written promissory note against the open account receivable from its debtor
then it is referred to as a Notes Receivable.
25. Define Receivables.

Answer
Receivable is the amount to be collected from various parties due to credit sales transactions. Receivable is considered as current
assets as it is expected to result into inflow of cash or cash equivalent upon settlement.
26. What are the types of notes receivable?

Answer
Notes receivable can be classified under two categories. They are a) Interest Bearing Note b) Non-Interest-Bearing note;
Interest Bearing Notes
Interest bearing notes refers to the promissory note accepted by debtor against accounts receivable for which the rate of interest
is explicitly mentioned on the face of promissory note. Acceptor of the note will have to pay interest on the face value of note
for the period of note being held.
7
Non-Interest-Bearing Notes
Non-interest-bearing notes refers to the promissory note accepted by debtor against the accounts receivable for which the rate
of interest is not mentioned on the face of promissory note. Amount of interest is buried within the amount of notes receivable
hence, the applicable interest on notes is implied and not explicit. Under non-interest-bearing notes, deferred income account of
discount on notes is used to show the amount of interest until the such interest is earned. When notes are held during the period,
then the interest revenue is recognized by writing off the deferred revenue account. i:e debiting “ Discount on Notes A/c “ and
crediting the corresponding amount to “ Interest Revenue A/c”.
27. Briefly explain about promissory note.

Answer:
A promissory note is a written unconditional promise to pay for the stated amount along with stated interest rate at maturity or
upon presentation.
28. Briefly explain about the aging schedule.

Answer
Aging schedule is a systematic way of segregating the accounts receivable based on its due date. The purpose of aging schedule
is to properly disclose the information about accounts receivable and the number of days it’s been outstanding. Lower number
of due dates represents good account receivables, meanwhile, with the increase in due date the likeliness of collection of accounts
receivable decreases. It facilitates in estimating possible bad debt expenses.
29. What do you mean by sales of receivables to factors?

Answer
Factors are the companies who specializes on management of account receivable. Companies turns towards factor companies to
sell their receivable in case of need of fund for working capital. Factor agrees to purchase the accounts receivable against the
certain factor commission and service charges. While doing so receivable of company is endorsed to factor company and selling
company receives the discounted cash against the sold receivable.
Numerical Short Problem

30. 2014 Spring Q.no.10
A company has total sales of Rs 1,500,000 of which 80% are credit sales for 2014 and its ending account receivable as on 31
December 2014 is Rs 60,000. Calculate days sales in receivable for the period.
Solution:
Credit Sales = Total Sales * % Credit Sales

= 1500,000*80%= 1200,000
Now,
Credit Sales 1200,000

Accounts Receivable Turnover Ratio = = =20 times
Ending Accounts Receivable 60,000
Again,
360 360
Days Sales Receivable period = = =18 days
Accounts Receivable Turnover Ratio 20
31. 2015 Spring Q.No.9

City Centre accepts credit card from its customer. It records the weekly sales. On October 15 end of the week the credit card
sales total Rs 25,000 and remit the bill to credit card company on October 17. City Centre received Rs 23,750 from the credit
card company.
Required: Necessary entries related to credit sales. What percentage of collection fee charges by the credit card company.
8
Solution
Journal Entry
Date Particulars LF Debit Credit
Accounts Receivable – Credit Card Co. A/c Dr 25,000
Sales A/c 25,000
(To record for credit card sales)
Cash A/c Dr 23,750
Collection Fees A/c Dr 1,250
Accounts Receivable – Credit Card Co. A/c 25,000
(To record for collection from Credit Card Co.)
Now, Calculating for percentage collection fee from credit card co;
1,250
Percentage cost = *100 = *100 = 5%
25,000

On 1st November 2014, Pokhara Company received a 6 month, 12% notes for Rs 100,000. The company’s accounting year ends
on 31st December each year. You are required to prepare the necessary journal entry in the books of Pokhara Company to record
collection of notes receivable on due date.
Solution
1st May 2014 Cash a/c Dr 106,000

Interest Receivable A/c 2,000
Interest Income A/c 4,000
12% Notes Receivable A/c 100,000
(To Record for maturity of notes)
33. 2016 Fall Q no 16

A firm has sales during the year of Rs 80,000, 25% on cash and remaining on credit. It had beginning receivable Rs 20,000 and
ending receivable Rs 24,000. Find the value of days sales outstanding.
Solution
Net Credit Sales 60,000
Receivable Turnover Ratio = = =2.72 times
Average Accounts Receivable 22,000
Again,
360 360
Days Sales Outstanding = = =132 days
Receivable Turnover Ratio 2.72
Therefore, it would take in an average 132 days for business to convert its receivable into cash.
Working Notes:
Net Credit Sales = Total Sales * Credit Percentage = 80,000*75% = 60,000
Begining Accounts Receivable+Ending Accounts Receivable 20,000+24,000
Average Accounts Receivable = = =22,000
2 2
34. 2017 Fall Q no 7

A company received Rs 2000 from a customer which was previously written off bad debt.
Prepare necessary journal entries to record bad debt recovered.
9
Solution
Accounts Receivable A/c Dr 2,000

Allowance for Doubtful Debt A/c 2,000
(To record for reversal of bad debt written off)
Cash A/c Dr 2,000

Accounts Receivable A/c 2,000
(To record for recovery of bad debt)
35. Find the amount of bad debt expenses if the company has a policy of maintaining 5% of credit sales. Total sales for the year was
Rs 100,000 out of which 20% was on cash.
Solution
Estimated Bad debt expenses = Total Sales * Credit Percentage * % Bad debt
= 100,000*0.80*0.05 =Rs 4,000
Therefore, the estimated bad debt expenses for the year is Rs 4000.
36. At the beginning of the year accounts receivable balance was Rs 50,000. During the year total sales was Rs 200,000 out of which
80% on credit. During the year total receivable collected was Rs 150,000 and Rs 10,000 written as uncollectible.
Required: Finding ending accounts receivable
Solution
Calculating for ending accounts receivable

Beginning balance of accounts receivable 50,000
Add: Credit Sales (200,000*0.80) 160,000
Less: Collection on Accounts (150,000)
Less: Bad debt written off (10,000)
Ending Balance of Accounts Receivable Rs 50,000
37. A company issued a note payable for Rs 120,000 for six months on 1st October at an annual interest rate of 10%. Find the amount
of interest expenses at year end.
Solution
Interest Expenses from 1st October to 31st December = 120,000*0.10*3/12 = Rs 3000
Interest Expenses A/c Dr 3,000

Interest Expenses Payable A/c 3,000
(To record for accrued interest expenses)
38. Asian paints records sales of Rs 240,000 for the year. Accounts receivable amounted to Rs 40,000 at the beginning of the year
and Rs 20,000 at the end of the year. Compute the company’s accounts receivable turnover for the year.
Solution
Total Sales 240,000
Accounts Receivable Turnover Ratio = = =8 times
Average Accounts Receivable 30,000
Where,
Beginning Accounts Receivable+Ending Accounts Receivable 40,000+20,000

Average Accounts Receivable = = = 30,000
2 2
39. On November 1, 2012, Oasis Co. received a Rs 50,000, 6%, 90 days promissory notes. Prepare necessary journal entry on
December 31, the end of the company’s fiscal year.
10
Solution
Interest on Note from 1st November to 31st December = 50,000*6% *2/12 =Rs 500
Journal Entries
31st December Interest Receivable A/c Dr 500

Interest Revenue A/c 500
(To record for accrued interest income)
40. Delta company recorded sales of Rs 300,000 for the year of which 90% on credit. Delta company average collection period is
40 days. Its account receivable amounted to Rs 20,000 at the beginning of the year. Compute the year end account receivable.
Assume 360 days in a year.
Solution
We have;
360 360
Receivable Turnover Ratio = = = 9 times
Average Collection Period 40
Again,
Net Credit Sales 300,000∗90%
Average Accounts Receivable = = = 30,000
Receivable Turnover Ratio 9
Again,
Begining Accounts Receivable+Ending Accounts Receivable
or Average Accounts Receivable =
2
20,000+Ending Accounts Receivable

or, 30,000 =
2
or, Ending Accounts Receivable = Rs 40,000
Therefore, the ending balance of accounts receivable is Rs 40,000/-
41. You received an invoice from a supplier for Rs 50,000 on January 1 with term 3/15 net 30. If you pay before January 16, how
much must you pay? If you pay after January 16, how much must you pay? What is annual discount rate?
Solution
If payment made before January 16 = 50,000 – 50,000*3% = 48,500
Again,
IF payment is made after January 16, the it is required to pay the full amount of Rs 50,000.
Now,
Discount Rate 360
Annual Discount Rate = ∗ ∗ 100
1−Discount Rate Credit Preiod−Discount Period
3 360
= ∗ *100 = 74.23%
100−3 30−15
Therefore, the annual discount rate is 74.23%.
11
CHAPTER III
Accounting for Property Plant and Equipment
42. How do you determine the rate of double declining balance method of depreciation?
Answer
Rate of depreciation under double declining method is determined as under;
200%
Rate of Depreciation =
Life of assets
43. What are most common intangible assets? Write the general guidelines to amortize intangible assets?
Answer
An intangible asset is an asset that is not physical in nature. The most common intangible assets are: - Goodwill, brand
recognition and intellectual property, such as patents, trademarks and copyrights. Value of intangible assets are written off over
its economic useful life or physical life whichever is earlier.
44. How depreciation for the year is calculated under unit of production method?
Answer
Under unit of production unit method, depreciation is calculated as under;
Cost of Assets−Salvage Value

Depreciation per unit =
Total Units Produced
Now,
Depreciation Expenses = Unit Produced During the year * Depreciation per unit
45. What is meant by current assets?

Answer
Current assets represent those assets which can be converted into cash or cash equivalent within one accounting year or within
a business cycle. E: g: - Accounts Receivable, Inventory, Debtors, Cash and Bank ..etc.
46. When production unit of method of depreciation is suitable to use?

Answer
Company should use the depreciation method that best represents the use of assets. For those companies whose assets use is
more reasonably expected to be used based on its production units, then such company should use unit of production method.
47. Define unit of production method of depreciation. How per unit depreciation under this method is calculated?
Answer
Unit of production is a depreciation method which estimate the depreciation based on the number of units produced during the
year. Under unit of production method, depreciation is calculated as;
Cost of Assets−Salvage Value
Depreciation per unit =
Total Units Produced
Now,
Depreciation Expenses = Unit Produced During the year * Depreciation per unit
48. Define revenue expenditure

Answer
Revenue expenditure refers to those expenses the benefit of which is expected to incur to the company within one accounting
year. All the revenue expenditure is expensed during the corresponding year of incurrence. Revenue expenditure reduces the
profit reported during the year.
12
49. Identify from the following transaction which are capital expenditure and which are revenue expenditures
i. Repair charge on second hand machine immediately after purchase
ii. Installation charge on machinery – Capital expenditure
iii. Damage at the time of installation of machinery -
iv. Insurance for the first year
Answer:
i. Revenue expenditure if it is expected to maintain the current usability of the assets.

ii. Capital expenditure
iii. Revenue expenditure
iv. Revenue expenditure
Short Practical Question

A Company uses the double declining balance method of depreciation. The company acquired an asset for Rs 400,000. It
expects assets’ total useful life is 10 years with salvage value of Rs 4,000. What amount of depreciation will be charged in the
first year?
Solution
200% 200%
Rate of depreciation = = = 20%
Life of Assets 10
Depreciation Expenses = Cost of Assets * Rate of Depreciation = 400,000*20% = 80,000
51. A Company’s annual report shows the beginning total assets of Rs 2000,000 and ending total assets of Rs 30,00,000. The net
income is reported to be Rs 750,000 and net sales Rs 750,000.
Required:
a) Return on Assets Ratio
b) Assets Turnover Ratio
Solution
Net Income 750,000
Return on Assets Ratio = *100 = *100 = 30%
Average Total Assets 2500,000
Again,
Net Sales 7500,000
Assets Turnover Ratio = = = 3 times
Average Total Assets 2500,000
52. A Company reports the following assets;

Plant Assets Rs 2,000,000
Land Rs 5,000,000
Furniture Rs 1,000,000
Patent and Trademark Rs 5,000,000
Goodwill Rs 1,000,000
Building Rs 3,000,000
Building Improvements Rs 500,000
Accumulated Depreciation Rs 2,200,000
Amortization Rs 1000,000
Required
A Partial balance sheet showing the assets
13
Solution
A Company
Balance Sheet
as on year end
Particulars Details Amount
Assets
Property, Plant and Equipment
Land 5,000,000
Plant Assets 2,000,000
Furniture 1,000,000
Building 3,000,000
Building Improvements 500,000
6,500,000
Less: Accumulated Depreciation (2,200,000)
Net Book Value of Tangible Assets 4,300,000
Goodwill 1,000,000
Patent and Trademark 500,000
1,500,000
Less: Amortization (1,000,000)
Net Book Value of Intangible Assets 500,000
Total Assets 9,800,000
53. Calculate return on assets ratio and assets turnover ratio of the companies for two years
Net Income 2061 $ 100

Total Assets 12-31-2061 $ 1,560
Total Assets 12-31-2060 $ 1,780
Net Sales, 2061 $ 1,800
ROA = ∗ 100
For 2061
100
ROA = ∗ 100 = 5.98%
1670
Again,
Net Sales 1800
Assets Turnover Ratio = = = 1.078 times
Average Total Assets 1670
54. On January 1st, Payton Company purchased a building and the land for Rs 100,000. The accountant was able to establish that
the fair market values of the two assets on January 1st were as follows;
Land Rs 30,000
Building Rs 90,000
Required:
What is the acquisition cost of each assets? Prepare journal entry to record the acquisition
Solution
Market Value Acquisition Cost

Land 30,000 25,000
Building 90,000 75,000
120,000 100,000
14
Journal Entries
Land A/c Dr 25,000

Building A/c Dr 75,000
Cash A/c 100,000
(To record for purchase of land and building)
55. Find the net gain/loss if a machinery is sold at Rs 50,000 which was purchased 2 years ago for Rs 100,000 having 5 years of
life with no salvage value. (Use Straight Line Method)
Solution
Cost of Assets−Salvage Value 100,000−0

Depreciation on Assets = = = 20,000
Life of Assets 5
Calculating for Gain or Loss on sales of Machinery
Cost of Machinery Rs 100,000

Less: Accumulated Depreciation (20,000*2) Rs 40,000
Book Value of Machinery Rs 60,000
Cash Value of Machinery Rs 50,000
Loss on Sales of Machinery Rs 10,000
56. A machine was purchased for Rs 100,000 the company use double declining balance method. The useful life of assets is 10
years. Find the depreciation for second year.
Solution:
200% 200%
Rate of Depreciation = = =20%
Life of Assets 10
Depreciation Schedule
Year Beginning BV Depreciation Expenses Accumulated Depreciation Ending BV

1 100,000 20,000 20,000 80,000
2 80,000 16,000 36,000 64,000
Therefore, the depreciation for second year is Rs 16,000/.
57. State with reasons, how you would classify the following item of expenditure
1. Overhauling expenses of Rs 25,000 for the engine of a motor car to get better efficiency
2. Inauguration expenses of Rs 29,000 incurred on the opening of new manufacturing unit in an existing business.
Answer
1. Overhaul is a major repair of an assets; hence, such expenditure is expected to increase the life, productive and efficiency
of the assets. Thus, it should be treated as a CAPITAL EXPENDITURE.
2. Such inauguration charges are the pre-operating charge of particular branch or unit, hence, if it is different profit center
then such expense is to be treated as a deferred revenue expenditure.
15
CHAPTER IV
Accounting for Current Liabilities
58. Define contingent liabilities.
Answer
A contingent liability is a potential liability that may occur depending on the outcome of an uncertain future event. A contingent
liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably
estimated. If both conditions are not met, the liability may be disclosed in a footnote on the financial statements or not reported
at all.
59. Write short note on warrants.
Answer
Warrant is a contingent liability, the incurrence of which is dependent on whether the warranted product fails to cover the warrant
coverage. Estimated warrant expenses are charged to profit and loss during the year based on reasonable estimate and same
amount is credited to estimated warrant liabilities. Upon incurrence of warrant claim, estimated warrant liabilities account is
adjusted to settle the claim.
60. What do you mean by accounts payable?
Answer
Accounts payable represents the trade obligation arising during credit purchase. If company makes a purchase on credit and
accepts to pay within specified credit period then the obligation arising till the settlement of such is called accounts payable.
61. What do you mean by notes payable?
Answer
If company signs the promissory note against the obligation arising during course of business agreeing to pay certain amount of
money, with certain interest at specified time to maturity then such promissory note is regarded as a note payable.
62. What are current liabilities? List any one difference between accounts payable and notes payable.
Answer
Current liabilities are those obligations which are to be settled within one accounting year. Examples of current liabilities are: -
accounts payable, creditors, bank overdraft, accrued expenses, unearned revenue, current portion of long-term debt…etc.
63. A company has total current liabilities Rs 100,000 its current assets was Rs 250,000. Find its current ratio.
Solution
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 250,000
Current Ratio = = = 2.5:1
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 100,000
This implies that there are 2.5 times current assets to meet each unit of current liabilities.
16
CHAPTER V
Accounting for Non-Current Liabilities
64. What are non-current liabilities?

Answer
Those obligation which are to be settled in beyond one accounting year or one business cycle is called non- current liabilities.
Usually the time to maturity or repayment for non-current liabilities are more than one year. Most commonly used non-current
liabilities of companies are: - bond, debentures, long term bank loan, lease obligations…etc.
65. Briefly define bond.

Answer
Bond refers to the debt instrument used by company to raise the necessary financing. Bond has a fixed coupon rate, face value
and time to maturity which specifies what is the amount of interest payable on bond, the principal amount and life of bond
respectively. Investors in bond of a company is called bondholders.
66. What are the characteristics of bond?

Answer
Following are some of the key characteristics of bond;
 Bond requires to pay fixed amount of interest.
 Bond has fixed time to maturity.
 Bond has a fixed par value repayable at the end of maturity period.
 Bond does not have any voting right or decision-making power to company affairs.
 Interest paid on bond is charge to the profit hence, is payable irrespective of whether profit exits or not.
 Interest on bond is tax deductible expenses.
67. Write in short about bond amortization.

Answer
Amortization is the process of adjusting the discount or premium occurred at the time of issuance of bond. Due to difference
in coupon rate and market interest rate at the time of issue of bond, there might be the case of discount or premium on issue of
bond. Discount on bond is amortized to adjust it as an expense over the life of bond whereas premium is amortized to reduce
the interest expenses over the life. At the end of maturity of bond, the balance on discount on bond and premium on bond would
be nil as it will be amortized completely over the life of bond.
68. Describe the situation where bond is issued at premium?

Answer
Bond is issued at premium when the coupon rate on bond exceed the market rate of interest. When the bond is issued at
premium, the issue price of bond exceeds the face value of bond. Premium on bond payable is amortized over the life of bond
at the time of accounting for interest expenses on bond payable.
69. What do you mean by the operating lease?

Answer
Operating lease refers to the lease arrangement whereby lessee obtain the temporary right to use the assets against the lease
payment made in the for form of rent. Significant economic benefit and risk associated with ownership of assets resides with
lessor.
17
70. What do you mean by capital lease?

Answer
A capital lease is a lease in which the lessor only finances the leased asset, and all other rights of ownership transfer to
the lessee. This results in the recordation of the asset as the lessee's property in its general ledger, as a fixed asset. The
lessee can only record the interest portion of a capital lease payment as expense, as opposed to the amount of the entire
lease payment in the case of the more common operating lease.
The criteria for a capital lease can be any one of the following four alternatives:
 Lease term. The period of the lease encompasses at least 75% of the useful life of the asset;
 Present value. The present value of the minimum lease payments required under the lease is at least 90% of the fair
value of the asset at the inception of the lease.
71. List out nay three criteria of capital lease?

Answer:
Following are the three criteria for lease to be considered as capital lease;
a. The lease term covers more than 75% of the useful economic life of leased assets
b. The present value of minimum lease payment exceeds 90% of market value of assets
c. The significant risk associated with ownership resides with lessee although the ownership of assets remains with lessor.
72. Given any two difference between operating lease and financial lease?
Answer
Basis Operating Lease Financial Lease
Lease Term It covers relatively shorter period of time. It covers significant portion of assets
useful life. Usually exceeds 75% of
economic useful life of assets.
Lease Rent Payment made for operating lease is treated as Present value of lease payment is shows as
revenue expenditure and shown in income leased assets in assets side of balance sheet
statement only meanwhile same amount is disclosed as
lease obligation as well.
Short Practical Question

73. 2016 Fall Qno 9
10% bond issued with 5 years of maturity period. The bond has Rs 1000 maturity period. What must be the current price of the
bond at 12% market rate? Which bond is this?
Solution
Issue price of bond = Interest * PVIFA (i%, n) + Face Value *PVIF (i%, n)
Issue price of bond = 100 * PVIFA (12% 5) + 1000*PVIF (12%, 5) =927.90
Therefore, the issue price of bond is Rs 927.90/.
74. 2017 Fall Q no 9
A bond of face value Rs 100,000 was selling at discount. If the coupon rate on the bond was stated 9% then what do you think
market interest rate was higher or lower than 9%? Why?
Solution
For bond selling at discount, the market rate of interest should be greater than the coupon rate of bond. Hence, for the
aforementioned bond, the market interest rate must be higher than 9%.
18
75. Practice Set 1
Find the price of 500 bonds; Rs 1000 face value, 8% stated rate, 5 years; semi annual interest payments with 10% market
interest rate.
Solution
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 1 𝑖
Issue price of bond = * PVIFA ( , 𝑛 ∗ 2) + FV * PVIF ( , 𝑛 ∗ 2)
2 2 2
40,000 10% 10%

Issue price of bond = * PVIFA ( , 5 ∗ 2) + 500,000*PVIF( , 5 ∗ 2)
2 2 2
Issue price of bond = 20,000*7.7217 + 500,000* 0.6139
Issue price of bond = 461,382/-
76. Practice Set 2
Ram Co. signed a six years capital lease on January 1, 2011 with payments due every December. Interest is calculated annually
at 10% and the present value of the minimum lease payment is Rs 13,065.
Required: Calculate the amount of annual payment that Ram Co. must make every December 31.
Solution:
We have,
PV of Minimum Lease Payment = Lease Payment * PVIFA(i%,n)
13,065 = Lease Payment * PVIFA ( 10%, 6)

13065
Lease payment = = Rs 3,000
4.3553
Thus, the annual lease payment of Ram Co. is Rs 3000.
77. Practice Set 3
A zero-coupon bond is selling at Rs 650 with its pay value of Rs 1000. The maturity period of the bond is 5 year.
Required:
Find the coupon amount per year
Solution
Zero coupon bond does not have any interest attached to it. Hence, for aforementioned bond, the interest payable per annual is
zero.
78. Practice Set 4
IF the bond is issued at premium when the market interest rate is 10%. Determine whether the coupon interest rate should be
higher or lower than the market interest rate.
Solution:
For premium bond, the coupon rate is always higher than the market interest rate, hence, for the given bond the coupon rate
must be greater than 10%.
19
CHAPTER VI
Accounting for Shareholder’s Equity and Dividend
79. What is difference between stock dividend and stock splits?

Answer
Stock dividend is an alternative to cash dividend on providing return to shareholders. Stock dividend is distributed through
retained profit hence, it results into decrease into retained profit equal to the amount of stock dividend being declared.
Meanwhile, stock spilt is just a restructuring of common stock’s number of shares outstanding and its par value. It does not
affect any other component of shareholder’s equity. Stock split results into higher number of shares and reduces the par value
of stock by same proportion.
80. What do you mean by preferred stock?

Answer
A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock.
Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares
usually do not carry voting rights. Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that
it has the potential to appreciate in price. The details of each preferred stock depend on the issue.
81. How stock dividend is different from cash dividend?

Answer
Stock dividend results into increase in number of share outstanding. Retained earnings is used to issue the additional number
of shares transferring the amount to common stock account and additional paid in capital (if market price exceeds par value).
Overall shareholders’ equity does not change due to stock dividend.
Cash is distributed to shareholder as a divided for their investment. This reduces the overall shareholders’ equity by the amount
of declared cash dividend.
82. Mention the reasons for the repurchase of stocks?

Answer
Company buy back its stock. Some of the major reason behind stock repurchase are as follows;
a) To provide equity options to employees and promoters.
b) To enhance the earning per share of stock
c) To eliminate the possibility of hostile takeover
d) To give a positive signaling about company’s stock and enhance the value of stock
83. Make a short note on common stock.

Answer
Common stock refers to the shares in a company that are owned by people who have a right to vote at the
company's meetings and to receive part of the company's profits after the holders of preference stock have been paid. Common
stock holders are the ultimate owner of the company having residual right to profit and claim to assets.
84. Write the meaning of treasury stock.

Answer
If company buy back its own stock from the market then such stocks are referred to as a treasury stock. Treasury stocks are not
an asset to the company rather it is a contra account for shareholders’ equity. Company buy back its stock for various reasons
such as to provide shares to employees under employee benefit plans, to enhance the return to existing shareholders, to eliminate
the possibility of hostile takeovers.
20
Short Numerical Problems

85. 2015 Fall Q no 7
A company reported net income during the year of Rs 90,000 and paid dividends of Rs 150,000 of its common stockholders
and Rs 10,000 to its preferred stockholder. During the year, 20,000 shares of common stock were outstanding and 10,000 shares
of preferred stock were outstanding. Calculate the earnings per share.
Solution
Net Income 90,000

Less: Preference Dividend (10,000)
Net Income Available to Common Stock Holders(A) 80,000
Number of Common Stock Outstanding (B) 20,000
Earnings Per Share (A÷B) 4
86. 2015 Fall Q no 8
A company provides the following information
Total stockholder equity Rs 1800,000, 10% preference share capital of Rs 400,000, preference dividend is arrears for two years,
number of common stock outstanding 13,200. Calculate book value per share of common stock.
Solution
Total Shareholders′ Equity−Preference Share Capital 1800,000−400,000

Book Value Per Share = = =106.06
Number of Common Stock Outstanding 13,200
Therefore, the book value per share is Rs 106.06.
87. 2015 Spring Q no 10
Ending balance sheet of a company has 10%, 5000 preferred stock and 10,000 common stock. Both the stocks are Rs 100 par
value stock. What amount of dividend to preferred stocks and common stocks are distributed if total divided of Rs 180,000 has
been declared for the period. Assume preferred stocks are non-cumulative and non-participating.
Solution
Preference shareholder has prior right to claim on profit over common stock holders. If preference share is non-cumulative and
non-participative then the amount of dividend payable for preference share is calculated as;
Dividend on Preference Stock = 500,000*10% = 50,000
And, remaining amount of dividend of Rs 130,000 (i: 180,000-50,000) is distributed to common stock holders.
A company has 20,000 authorized shares of commons tock of Rs 100 par value and 15,000 shares are issued at Rs 90 per share
for purchase of office building on January 1st 2014. You are required to prepare journal entry to record issued of shares on
January 1st, 2014.
Solution
Building A/c Dr (15000*90) 1350,000
Discount on Issue of Common Stock A/c Dr (15000*10) 150,000
Common Stock A/c (15000*100) 1500,000
(To record for issue of common stock for purchase of building)
21
The company reported net income during the year of Rs 90,000 and paid dividends of Rs 15,000 of its common stockholders
and Rs 10,000 to its preferred stock holders. During the year, 20,000 shares of common stock were outstanding and 10,000
shares of preferred stocks were outstanding.
Required: Calculate earnings per share.
Solution:
Net Income−Preference Dividend 90,000−10,000
Earnings Per Share = = = 4 per share
Number of Common Stock outstanding 20,000
22

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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.

Short Theoretical Question

Increasing Trend Decreasing Trend

Inventory Turnover Ratio =

Weighted Average Cost per Unit =

6. What is cost of goods sold? [2016 Spring Q no 1]

Cost of Goods Sold = Beginning Inventory + Cost of Production – Ending Inventory

7. What do you mean by inventory error? [2017 Fall Q no 1]

8. Enlist the inventory costing system.

10. What the key ratios related to inventory management/

Inventory Turnover Ratio indicates the number of

Cost of Goods Sold = 𝑆𝑎𝑙𝑒𝑠 ∗ (1 − 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛)

Short Practical Questions

12. 2015 Fall Q no 10

Required: Inventory Turnover Ratio and length of inventory cycle.

Inventory Conversion Cycle = = =90 days

13. 2015 Spring Q no 8

Thus, the gross profit margin is 30 % on sales.

14. 2016 Spring Q no 10

Required: Inventory turnover ratio and length of inventory cycle.

Inventory Conversion Cycle = = =90 days

15. 2017 Fall Q no 8

Inventory Turnover ratio =

Cost of goods sold = 40,000*5 = 200,000

16. Sales Revenue = Rs 500,000

17. Beginning Inventory = Rs 10,000

18. Following information of a month

Cost of Goods Sold = Rs 100,000

or, Average Inventory = 25,000

19. Following information is of a manufacturing company

Insurance Company A/c Dr 2,000

Gross Profit = Net Sales – Cost of Goods Sold = 120,000-90,000= 30,000

Current Year Gros Profit Margin = 25% +25%*20% = 30%

Therefore, the sales for current year is 200,000/.

22. What do credit term 3/20 n 60 means?

23. Briefly explain the methods of estimating bad debts.

24. Define notes receivable

25. Define Receivables.

26. What are the types of notes receivable?

27. Briefly explain about promissory note.

28. Briefly explain about the aging schedule.

29. What do you mean by sales of receivables to factors?

Numerical Short Problem

Credit Sales = Total Sales * % Credit Sales

Credit Sales 1200,000

31. 2015 Spring Q.No.9

32. 2015 Spring Q no 9

1st May 2014 Cash a/c Dr 106,000

33. 2016 Fall Q no 16

34. 2017 Fall Q no 7

Accounts Receivable A/c Dr 2,000

Cash A/c Dr 2,000

Calculating for ending accounts receivable

Interest Expenses A/c Dr 3,000

Beginning Accounts Receivable+Ending Accounts Receivable 40,000+20,000

31st December Interest Receivable A/c Dr 500

20,000+Ending Accounts Receivable

or, Ending Accounts Receivable = Rs 40,000

Therefore, the ending balance of accounts receivable is Rs 40,000/-

Therefore, the annual discount rate is 74.23%.

Cost of Assets−Salvage Value

45. What is meant by current assets?

46. When production unit of method of depreciation is suitable to use?

48. Define revenue expenditure

Issue price of bond = 20,0007.7217 + 500,000 0.6139