ECO 14 Solved Assignment 2021 – 22

ECO 14 Solved Assignment 2021 – 22

IGNOU Free Solved Assignment 2021 – 22

TUTOR MARKED ASSIGNMENT

COURSE CODE: ECO-14

COURSE TITLE: ACCOUNTANCY-II

ASSIGNMENT CODE: ECO-14/TMA/2021-22

COVERAGE: ALL BLOCKS

Maximum Marks: 100

Attempt all the questions:

1. What are the different types of branches? Explain various methods of keeping branch accounts in the books of Head Office. (5, 15)

Ans: Types of Branch: From the accounting point of view, branches may be classified into:

a) Dependent Branch.

b) Independent Branch.

c) Foreign Branch.

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(a) Dependent Branch: The term ‘Dependent Branch’ means a branch which does not maintain its own set of books. All records have to be maintained by the head office. When the business policies and the administration of a branch are wholly controlled by the head office, its accounts also are maintained by it. In such a case, Branch accounts are written up at the head office out of reports and returns received from the branch.

In case of a dependent branch, head office prepares branch account to find the profit or loss of the branch. This account starts with opening balance of assets and debited with all the goods and cash sent to branch and credited with all the realisation from branch and ends with closing balance of assets which is similar to debtors account prepared by a seller. That’s why this method is called debtor system.

Methods of Branch Accounting – Dependent Branch

In case of a dependent branch, the head office may keep accounts of the branch account to any of the following systems.

1) Debtors System – Most Popular Method

2) Stock and Debtors system

3) Wholesale System

4) Final Account system 

(1) Debtors System (Synthetic Method): This system is adopted in case of branches of small size. Under this system, a branch account is opened separately for each branch in the books of head office. This account is nominal account in nature and is prepared to calculate profit and loss for each branch. The goods supplied by the head office to the branch may be either at cost price or at cost plus profit.

In case of a dependent branch, head office prepares branch account to find the profit or loss of the branch. This account starts with opening balance of assets and debited with all the goods and cash sent to branch and credited with all the realisation from branch and ends with closing balance of assets which is similar to debtors account prepared by a seller. That’s why this method is called debtor system.

(2) Stock and Debtors System (Analytical method): Profit and loss of a branch can be found out by preparing branch account but there is another method for the same purpose. This method is known as stock and debtors’ method. It is a detailed method of keeping branch accounts and is very useful where the branch turnover is sufficiently high. In this method instead of branch account, separate accounts such as branch stock account, branch debtors account, goods sent to branch account, branch expenses, branch profit and loss account are prepared. Sometimes branch cash account is also prepared to record the cash transactions at branch.  If goods are sent by head office to branch at invoice price, branch adjustment account is opened to record profit included in goods sent and unsold stock.

(3) Wholesale Branch System: Manufacturers may sell goods to the consumers either through the wholesalers and approved stockists or through their branches or also do self-retailing. Sometimes head office sent goods to its branches at wholesale price. If the retail sale price of branch is more than the wholesale price of head, the difference will be the profit at branch. For example, head office sends goods costing Rs. 100 per unit to its branch at a wholesale price of Rs. 130 and branch sold the goods at Rs. 200, then the profit made by the branch will be Rs. 70 (200 – 130).

(4) Final Accounts System: The head office can also ascertain the profit or loss of a dependent branch by preparing branch trading and profit and loss a/c at cost. In this method, profit and loss of each branch can be ascertained. All expenses whether direct or indirect is shown in profit and loss account.

(b) Independent Branch and Their features

Independent branches are those which act independently within the broad policies framed by the Head office in conducting their day-to-day activities. These branches keep full system of accounting. They can purchase goods from the market, supply goods to the head office, pay cash expenses from the cash realised and deposit cash in their own account.

The main features of independent branches.

a) They need not depend on the Head office for their requirements of supplies of goods. They can make purchases themselves. Of course, they can also obtain supplies of goods from the head office as and when they want.

b) They can sell goods only for cash and credit at any price they consider profitable.

c) They need not remit the money received by them from cash sales and debtors to the Head office periodically. They can retain the funds and meet their day-to-day expenses out of those funds. Finally, if they have surplus cash in their hands, they can remit the same to the Head office.

d) They keep a complete set of books for recording their transactions. So, they can prepare their own Trial Balance, Trading and Profit and Loss Account and Balance Sheet.

e) However, as they are ultimately responsible to the Head office, at the end of every financial period, they are required to submit a copy of their Trial Balance to the Head office.

c) Foreign Branches and Its Incorporation in Head Office Book

When a branch is located in a country other than domestic country it is called a foreign branch. Such branch will keep its books of accounts in foreign currency. Foreign branch usually maintains a complete set of books under double entry principles. So, the accounting principles of a Foreign Branch will be the same as those applying to an Inland Branch. Before a Trial Balance of the Foreign Branch is incorporated in the H.O. books, it has to be converted into home currency.

2. What is meant by default and repossession in Hire Purchase Accounts? Describe the Accounting treatment for default and repossession with suitable example. (4, 16)

Ans: Default and Repossession in Hire Purchase System and Its Accounting Treatment

When hire purchaser is not able to make the payment in time, then default is committed by him and the owner takes back the possession of goods. There are two possibilities:

1) When seller takes back the possession of complete goods called complete repossession.

2) When seller takes possession of only part of the total assets sold called partial repossession.

Complete Repossession: When the vendor takes back the possession of complete goods from the vendee in case of default in payment of installment, such process is called complete repossession of goods. In such case, the vendor closes the books of account of the hire purchaser by transferring the balance to the goods repossessed account. Similarly, the hire purchaser also closes the account of hire-vendor account by transferring the balance to assets account.

In the case accounting treatment is as follows: In the books of purchaser:

1) All entries are passed as usual up to the date of default.

2) Buyer closes the account of seller by passing the entry:

Hire vendor account                                    Dr

       To assets account

3) Any balance left in asset account is closed by transferring to P & L account.

In the books of seller

1) All entries are passed as usual up to the date of default.

2) Seller closes the purchaser account by passing:

Re possessed goods account                       Dr.

       To hire purchaser

3) Re possessed goods account or goods returned account is debited with all expenses incurred and re sale price is credited and if any balance, it is transferred to P & L account.

Partial Repossession: When the vendor takes possession of only part of the total goods sold from the vendee, such process is called partial repossession. In case of partial repossession of goods, Vendor’s Account is debited and the Asset Account is credited with the agreed value of goods repossessed. Since, the entire goods are not repossessed, Asset Account will have a balance for the goods not repossessed which will be equal to the depreciated value of the assets not repossessed and, naturally, Vendor’s Account will show a balance which will represent the amount due to the purchaser. If the agreed value of goods repossessed is not given, the same may be ascertained after charging depreciation from the original cost of the asset, i.e., written-down value at the date of repossession.

In the case accounting entries are similar to those of complete repossession. The additional precautions to be taken are:

1) Both the buyer and seller do not close seller’s account and buyer’s account in their respective books. The entry for repossession is passed with the agreed value of assets taken by the vendor.

2) The buyer finds out the value of asset still left with him using the normal rate of depreciation. This account shows the balance of asset, which is left, to him.

3) After crediting the asset account with the value of asset taken away by the seller and after keeping the balance of asset left, the difference by the asset account is transferred to P&L account.

3. How will you raise the Goodwill accounts and write it off under the following circumstances:

(i) When the partners decide that all the partners should be credited with their share of goodwill, and

Ans: Admission of a Partner

When the new partner cannot bring premium for goodwill, the adjustments for goodwill can be done by raising and writing-off goodwill. In this case, goodwill is raised at its full value by crediting the old partners in the old ratio and immediately it is written-off by debiting all the partners (including new partner) in the new ratio.

Journal Entries

(a) For raising goodwill in the books at its full value.

Particulars

L/F

Dr. (Rs.)

Cr. (Rs.)

Goodwill A/c                           Dr.  [Full value]

To Old Partner’s Capital A/c [Old ratio]

 

 

 

 (b) For writing-off goodwill

Particulars

L/F

Dr. (Rs.)

Cr. (Rs.)

All Partner’s Capital A/c          Dr.  [Full value]

To Goodwill A/c [Old ratio]

 

 

 

Retirement and Death of a Partner

In case of retirement and death of a partner, goodwill is raised by debiting goodwill account and crediting all partners’ capital account.

Journal Entries

(a) For raising goodwill in the books at its full value in case of retirement and death

Particulars

L/F

Dr. (Rs.)

Cr. (Rs.)

Goodwill A/c                             Dr.  [Full value]

To Old/All Partner’s Capital A/c [Old ratio]

 

 

 

(ii) When you find that there is an unrecorded liability, how will you record it in the books of the partnership firm? (10, 10)

Ans: While preparing final accounts of partnership firm in case of reconstitution of firm, if we find any unrecorded liability, then such liability is transferred to revaluation account by passing the following entry:

Revaluation Account                   Dr

To Unrecorded Liability

Thereafter, such unrecorded liability is shown on the liability side of balance sheet of the reconstituted firm.

Again, if firms are not reconstituted and unrecorded liability arises at the time of preparing final accounts of the firm, then such liability is shown on the liability side of the balance sheet and loss arises due to recording of such unrecorded liability is distributed between or amongst the partners in their profit or loss sharing ratio.

Revaluation Account

Particulars

Amount

Particulars

Amount

 

 

By Unrecorded Liability

 

Balance Sheet

Liabilities

Amount

Assets

Amount

Unrecorded Liability

 

 

 

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4. What ratios are to be studied for assessing the liquidity and profitability position of a firm? Explain with suitable examples. (20)

Ans: Ratios to be studied for assessing the liquidity and profitability position of a firm:

a) Liquidity Ratios: These ratios show relationship between current assets and current liabilities of the business enterprise. Example: Current Ratio, Liquid Ratio.

b) Profitability Ratio: These ratios show relationship between profits and sales and profit & investments. It reflects overall efficiency of the organizations, its ability to earn reasonable return on capital employed and effectiveness of investment policies. Example: i) Profits and Sales: Operating Ratio, Gross Profit Ratio, Operating Net Profit Ratio, Expenses Ratio etc. ii) Profits and Investments: Return on Investments, Return on Equity Capital etc.

Now let us study these in detail:

1) Current Ratio: Current ratio is calculated in order to work out firm’s ability to pay off its short-term liabilities. This ratio is also called working capital ratio. This ratio explains the relationship between current assets and current liabilities of a business. It is calculated by applying the following formula:

Current Ratio = Current Assets/Current Liabilities

Current Assets includes Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses, Accrued Incomes etc.

Current Liabilities includes Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.

Objective and Significance: Current ratio shows the short-term financial position of the business. This ratio measures the ability of the business to pay its current liabilities. The ideal current ratio is supposed to be 2:1. In case, if this ratio is less than 2:1, the short-term financial position is not supposed to be very sound and in case, if it is more than 2:1, it indicates idleness of working capital.

2) Liquid Ratio: Liquid ratio shows short-term solvency of a business. It is also called acid-test ratio and quick ratio. It is calculated in order to know whether or not current liabilities can be paid with the help of quick assets quickly. Quick assets mean those assets, which are quickly convertible into cash.

Liquid Ratio = Liquid Assets/Current Liabilities

Liquid assets includes Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Short-term investments etc. In other words, all current assets are liquid assets except stock and prepaid expenses.

Current liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.

Objective and Significance: Liquid ratio is calculated to work out the liquidity of a business. This ratio measures the ability of the business to pay its current liabilities in a real way. The ideal liquid ratio is supposed to be 1:1. In case, this ratio is less than 1:1, it shows a very weak short-term financial position and in case, it is more than 1:1, it shows a better short-term financial position.

3) Gross Profit Ratio: Gross Profit Ratio shows the relationship between Gross Profit of the concern and its Net Sales. Gross Profit Ratio can be calculated in the following manner:

Gross Profit Ratio = Gross Profit/Net Sales x 100

Where Gross Profit = Net Sales – Cost of Goods Sold

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock

And Net Sales = Total Sales – Sales Return

Objective and Significance: Gross Profit Ratio provides guidelines to the concern whether it is earning sufficient profit to cover administration and marketing expenses and is able to cover its fixed expenses. This ratio can also be used in stock-inventory control. Maintenance of steady gross profit ratio is important. Any fall in this ratio would put the management in difficulty in the realisation of fixed overheads of the business.

4) Net Profit Ratio: Net Profit Ratio shows the relationship between Net Profit of the concern and Its Net Sales. Net Profit Ratio can be calculated in the following manner:

Net Profit Ratio = Net Profit/Net Sales x 100

Where, Net Profit = Gross Profit – Selling and Distribution Expenses – Office and Administration Expenses – Financial Expenses – Non Operating Expenses + Non-Operating Incomes.

And Net Sales = Total Sales – Sales Return

Objective and Significance: In order to work out overall efficiency of the concern Net Profit ratio is calculated. This ratio is helpful to determine the operational ability of the concern. While comparing the ratio to previous years’ ratios, the increment shows the efficiency of the concern.

5) Operating Profit Ratio: Operating Profit Ratio shows the relationship between Operating Profit and Net Sales. Operating Profit Ratio can be calculated in the following manner:

Operating Profit Ratio = (Operating Profit/Net Sales) x 100

Where Operating Profit = Gross Profit – Operating Expenses

Or Operating Profit = Net Profit + Non-Operating Expenses – Non Operating Incomes

And Net Sales = Total Sales – Sales Return

Objective and Significance: Operating Profit Ratio indicates the earning capacity of the concern on the basis of its business operations and not from earning from the other sources. It shows whether the business is able to stand in the market or not.

6) Operating Ratio: Operating Ratio matches the operating cost to the net sales of the business. Operating Cost Means Cost of goods sold plus Operating Expenses.

Operating Ratio = Operating Cost/Net Sales x 100

Where Operating Cost = Cost of goods sold + Operating Expenses

(Operating Expenses = Selling and Distribution Expenses, Office and Administration Expenses, Repair and Maintenance.)

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock

Or Cost of Goods Sold = Net sales – Gross Profit

Objective and Significance: Operating Ratio is calculated in order to calculate the operating efficiency of the concern. As this ratio indicates about the percentage of operating cost to the net sales, so it is better for a concern to have this ratio in less percentage. The less percentage of cost means higher margin to earn profit.

5. What do you understand by consignment business? What is the difference between consignment and sale? What entries are passed in the books of consignor in this connection and what necessary accounts are opened?  (20)

Ans: Consignment Business: Business organisation sometimes sale their goods through agents as an alternative to selling goods themselves. Consignment is a kind of business expansion without opening a branch in a new potential market. In Consignment, a manufacturer or wholesaler dispatches goods to an agent who has a better knowledge of the local market, for the purpose of sale.

The person sending the goods is called the consignor and the agent who receives the goods is called the consignee. The Consignee markets the product and receives commission at a stipulated rate on the total sales. He is also entitled to recover such expenses which he incurs in connection with the consignment.

Difference between Consignment and Sale

Basis

Consignment

Sale

Ownership

Ownership remains which the principal.

Ownership passes to the buyer.

Relationship

The relations are of principal and agent, and continue till terminated

The relations terminated as soon as the goods are delivered and payment is made.

Account sales

For giving details about the goods sold and expenses incurred by him, consignee sends the account sales to consignor.

No such statement is prepared.

Expenses

The expenses incurred by the consignee to execute sale and the expenses incurred by consignor to send the goods to the consignee, both are borne by the consignor

Any expenses incurred after the sale is not borne by the seller.

Loss of goods

The risk is of consignor.

The risk is of buyer after sale.

Return of goods

Can be returned by consignee at any time.

Buyer cannot return the goods unless otherwise agreed.

Stock

The unsold stock with the consignee will be treated as a stock of the consignor.

In case of sale, the buyer’s unsold stock do not attract the seller.

Commission

Commission is the main consideration of consignment. The consignee performs the selling activity only for commission.

Profit is the main consideration of sales.

Journal Entries in the Books of Consignor:

(1)

For goods sent on consignment

 

Consignment account

Dr.

(With the cost of goods)

To Goods sent on consignment account

 

(2)

For payment of expenses by the
consignor

 

Consignment account

Dr.

(With the amount spent as expenses)

To Bank/Cash account

 

(3)

For advance or Security against
goods sent received from consignee

 

Cash or Bank or bills receivable
account

Dr.

(With the amount cash or bill)

To Consignee’s personal account

 

(4)

For maturity of Bills receivable

 

Cash or Bank account

Dr.

(With the amount cash or bill)

To Bills Receivable account

 

(5)

For sale of goods by Consignee as
per account sale

 

Consignee’s personal account

Dr.

(With gross proceeds of sales)

To Consignment account

 

(6)

For expenses incurred by the
consignee as per account sale

 

Consignment account

Dr.

(With the amount of expenses)

To Consignee’s personal account

 

(7)

For commission payable to the
consignee:-

 

Consignment account

Dr.

(With the amount of expenses)

To Consignee’s personal account

 

(8) Assuming that all the goods sent have been sold, the consignment account will show at this stage the actual profit or loss made on it. The same is transferred to profit and loss account.

The entry in case of profit is:

Consignment account

Dr.

To profit and loss account

 

In case of loss the entry is:

Profit and loss account

Dr.

To Consignment account

 

(9) Goods sent on consignment account may be closed by a transfer to trading account. Journal entry in this case will be

Goods sent on consignment account

To Trading account

(10) For Unsold Stock: When all the goods sent on consignment have not been sold. the value of unsold goods in the hands of the consignee must be ascertained and the profit or loss should be found out by taking this stock into account. The entry is:

Stock on consignment account

Dr.

To Consignment account

 

Necessary Accounts to be prepared by Consignor

1. Consignment Account

2. Consignee Account

***

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