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CHAPTER I
Inventories and Cost of Goods Sold
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;
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
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.
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
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
Answer
Ratio Implication
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
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.
Solution
, ,
Average Inventory = = =160,000
Now,
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
,
Inventory Turnover Ratio = = = 4 times
,
Again,
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%
,
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.
Solution
, ,
Average Inventory = = =160,000
,
Inventory Turnover Ratio = = =4 times
,
Again,
Therefore, it takes company to sale 90 days in an average to sell each product once completed.
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
5=
,
4
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
Now,
,
Sales = = = 250,000
.
Gross Profit = Net Sales – Cost of Goods Sold = 450,000 – 405,000 = 45,000
,
Gross Profit Ratio = * 100 = ∗ 100 = 10%
,
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
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 =
Now,
5
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
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).
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,
Now,
Again,
,
Sales = = = 200,000
.
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
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
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.
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
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”.
Solution:
Again,
360 360
Days Sales Receivable period = = =18 days
Accounts Receivable Turnover Ratio 20
Required: Necessary entries related to credit sales. What percentage of collection fee charges by the credit card company.
8
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
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
Solution
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
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
Solution
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
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
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,
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
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
Solution
Interest on Note from 1st November to 31st December = 50,000*6% *2/12 =Rs 500
Journal Entries
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
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
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
CHAPTER III
Accounting for Property Plant and Equipment
Very Short Answer Question
Short Theory Question
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;
Now,
Depreciation Expenses = Unit Produced During the year * Depreciation per unit
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
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
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:
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
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
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
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
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
14
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
Journal Entries
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
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
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.
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
CHAPTER IV
Accounting for Current Liabilities
Very Short Answer Question
Short Theory Question
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.
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.
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.
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
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
CHAPTER V
Accounting for Non-Current Liabilities
Very Short Answer Question
17
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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.
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)
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
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
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
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,
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.
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
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
CHAPTER VI
Accounting for Shareholder’s Equity and Dividend
Very Short Answer Question
Short Theory Question
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.
Cash is distributed to shareholder as a divided for their investment. This reduces the overall shareholders’ equity by the amount
of declared cash dividend.
20
Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
Solution
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
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;
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)
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Short Answer Question, Prepared By: Bishal Shrestha, bishal.128@gmail.com, 98511-78278
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.
Solution:
Net Income−Preference Dividend 90,000−10,000
Earnings Per Share = = = 4 per share
Number of Common Stock outstanding 20,000
22