Chapter financial-statements-ii: Financial Statements - II Case Study Questions | accountancy Class 11 CBSE

Chapter financial-statements-ii: Financial Statements - II Case Study Questions | accountancy Class 11 CBSE | ByteNotes.in

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Arjun runs a stationery shop. At the end of the financial year 2016-17, his accountant found that salaries for March 2017 amounting to ₹6,000 had not yet been paid. Additionally, insurance premium of ₹12,000 was paid on October 1, 2016 for one year. The accounting year ends on March 31, 2017. Arjun's trial balance showed salaries at ₹54,000 and insurance at ₹12,000. His accountant explained that both items need adjustments before final accounts can be prepared to show the true profit. Arjun asked why these entries are needed at all if the amounts are already in the books. The accountant explained the concept of accrual basis of accounting and how revenues and expenses must be matched to the correct period.

Question 1: What is meant by outstanding expenses? Give the journal entry for outstanding salaries of ₹6,000.

Outstanding expenses are those expenses which are due but have not been paid at the end of the accounting period. They relate to the current year but remain unpaid.
Journal Entry: Salaries A/c Dr. ₹6,000 | To Outstanding Salaries A/c ₹6,000

Question 2: Calculate the amount of insurance premium to be shown in the Profit and Loss Account for the year ended March 31, 2017, and state how prepaid insurance will appear in the Balance Sheet.

Insurance paid on October 1, 2016 for one year = ₹12,000. Period covered: October 2016 to September 2017. Months in current year (Oct 2016 to Mar 2017) = 6 months. Prepaid insurance = ₹12,000 × 6/12 = ₹6,000.
Amount to be shown in P&L = ₹12,000 − ₹6,000 = ₹6,000. Prepaid Insurance of ₹6,000 will appear on the Assets side of the Balance Sheet under Current Assets.

Question 3: Explain why the accrual basis of accounting makes it necessary to record adjusting entries. What would happen to the financial statements if such adjustments were not made?

Under accrual basis, revenues are recognised when earned and expenses are recognised when incurred, regardless of cash receipt or payment. Adjusting entries ensure income and expenses are matched to the correct accounting period.
If outstanding salaries are not recorded, expenses are understated, leading to overstated profit. If prepaid insurance is not adjusted, expenses are overstated, leading to understated profit.
As a result, the financial statements would not show a true and fair view of the financial position and profitability of the business, violating the matching concept and the revenue recognition principle.

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Case Set 2

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Meena Traders had debtors of ₹80,000 in their trial balance as on March 31, 2017. During the year, bad debts of ₹3,000 had already been recorded. The accountant was given additional information: further bad debts of ₹2,000 were to be written off and a provision for doubtful debts was to be maintained at 5% on the remaining debtors. An old provision for doubtful debts of ₹2,500 also appeared in the trial balance. The business regularly allows 2% discount to prompt-paying debtors, and the owner wished to create a provision for discount on debtors as well. The accountant prepared a systematic approach to deal with all these items before finalising the accounts.

Question 1: What is meant by 'further bad debts'? Give the journal entry to record further bad debts of ₹2,000.

Further bad debts refer to additional amounts of bad debts identified at the time of preparing final accounts, which are given as additional information and have not yet been recorded in the books.
Journal Entry: Bad Debts A/c Dr. ₹2,000 | To Sundry Debtors A/c ₹2,000

Question 2: Calculate the new provision for doubtful debts and state the amount to be debited to Profit and Loss Account.

Debtors after further bad debts = ₹80,000 − ₹2,000 = ₹78,000. New provision required = 5% of ₹78,000 = ₹3,900.
Amount to be debited to Profit and Loss Account = New Provision − Old Provision = ₹3,900 − ₹2,500 = ₹1,400.

Question 3: How is provision for discount on debtors calculated? Calculate the amount for Meena Traders and explain its treatment in final accounts.

Provision for discount on debtors is calculated on good debtors, i.e., debtors remaining after deducting further bad debts and the new provision for doubtful debts.
Good Debtors = ₹78,000 − ₹3,900 = ₹74,100. Provision for Discount on Debtors = 2% of ₹74,100 = ₹1,482.
Treatment: ₹1,482 is debited to Profit and Loss Account as an expense. It is shown as a deduction from debtors in the Balance Sheet, so that debtors appear at their expected realisable value.

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Rajesh & Sons purchased machinery worth ₹1,00,000 on April 1, 2014. The firm uses the straight-line method of depreciation at 10% per annum. At the end of financial year 2016-17 (March 31, 2017), the accountant was preparing the Balance Sheet. The trial balance showed the machinery at ₹70,000 (after three years of depreciation). Additionally, the firm had furniture worth ₹20,000 on which depreciation at 15% was to be charged. The owner wanted to understand how depreciation reduces the book value of assets and why it is treated as an expense, even though no actual cash is paid for it during the year.

Question 1: Give the journal entry for depreciation on furniture of ₹20,000 at 15%, and show how it will be treated in the Profit and Loss Account.

Depreciation on Furniture = 15% of ₹20,000 = ₹3,000. Journal Entry: Depreciation A/c Dr. ₹3,000 | To Furniture A/c ₹3,000
In the Profit and Loss Account, ₹3,000 will be shown on the debit side as an expense under the head 'Depreciation'.

Question 2: How is the machinery shown in the Balance Sheet as on March 31, 2017? What is its book value?

The machinery was purchased at ₹1,00,000 on April 1, 2014. After 3 years of depreciation at 10%, accumulated depreciation = 3 × ₹10,000 = ₹30,000. Book value = ₹1,00,000 − ₹30,000 = ₹70,000 (which matches the trial balance).
In the Balance Sheet, machinery is shown at cost minus accumulated depreciation, i.e., ₹70,000 on the assets side. Current year depreciation of ₹10,000 will further reduce it to ₹60,000 in the current year's balance sheet.

Question 3: Why is depreciation treated as a business expense even though no cash is paid? Explain the impact of not charging depreciation on the financial statements.

Depreciation represents the allocation of the cost of an asset over its useful life. The asset helps earn revenue each year, so a portion of its cost must be charged as an expense each year to match revenues with expenses (matching concept).
Even though no cash is paid for depreciation, it reduces the carrying value of the asset and accounts for the economic benefit consumed during the year.
If depreciation is not charged, expenses are understated, profit is overstated, and assets are shown at inflated values. This gives a misleading picture of the firm's financial position and violates the going concern and matching concepts of accounting.

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Case Set 4

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Priya Enterprises had a net profit of ₹1,10,000 before charging manager's commission for the year ended March 31, 2017. The firm had two proposals: first, to give the manager a commission of 10% on net profit before charging such commission; second, to give 10% on net profit after charging such commission. The owner, Mr. Priya, was confused about the difference in the two methods and the final impact on profit. The accountant explained both methods using formulas. The manager's commission, once calculated, is treated as a liability and charged to Profit and Loss Account.

Question 1: Calculate manager's commission if it is 10% of net profit before charging such commission.

Net profit before commission = ₹1,10,000.
Manager's Commission = 10% of ₹1,10,000 = ₹11,000.

Question 2: Calculate manager's commission if it is 10% of net profit after charging such commission.

Formula: Commission = Net Profit before Commission × Rate / (100 + Rate)
Commission = ₹1,10,000 × 10 / (100 + 10) = ₹1,10,000 × 10/110 = ₹10,000.

Question 3: Give the journal entry for manager's commission (using commission after charging method) and show its treatment in Profit and Loss Account and Balance Sheet.

Journal Entry: Profit and Loss A/c Dr. ₹10,000 | To Manager's Commission A/c ₹10,000 (Being commission payable to manager at 10% on net profit after charging such commission).
In the Profit and Loss Account: ₹10,000 is shown on the debit side as an expense, reducing net profit from ₹1,10,000 to ₹1,00,000.
In the Balance Sheet: Manager's Commission of ₹10,000 appears on the liabilities side under Current Liabilities as 'Manager's Commission Outstanding', since it is payable but not yet paid.

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Case Set 5

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Sunita started a retail business on April 1, 2016 with a capital of ₹2,00,000. On January 1, 2017, she introduced additional capital of ₹60,000. At the end of the year (March 31, 2017), she decided to charge interest on capital at 5% per annum. Sunita also withdrew ₹30,000 during the year. Her accountant explained that interest on capital is treated as a business expense and is added to the capital in the Balance Sheet. Sunita wanted to understand how this would affect her reported profit and the capital shown in her Balance Sheet.

Question 1: Calculate the interest on capital for the year ended March 31, 2017.

Interest on opening capital = 5% of ₹2,00,000 for 12 months = ₹10,000.
Interest on additional capital = 5% of ₹60,000 for 3 months (Jan to Mar 2017) = ₹60,000 × 5/100 × 3/12 = ₹750. Total interest on capital = ₹10,000 + ₹750 = ₹10,750.

Question 2: Give the journal entry for interest on capital and show how it is treated in the Profit and Loss Account.

Journal Entry: Interest on Capital A/c Dr. ₹10,750 | To Capital A/c ₹10,750
In the Profit and Loss Account, interest on capital of ₹10,750 is shown on the debit side as an expense, thus reducing the net profit by that amount.

Question 3: How does interest on capital affect the Balance Sheet? Explain with the help of the given data, showing the capital section of the Balance Sheet.

Interest on capital is added to the capital account in the Balance Sheet. Even though it is charged as an expense in P&L (reducing profit), the same amount is added back to capital, so the net effect on capital is neutral — it only redistributes between profit and capital.
Capital Section of Balance Sheet: Opening Capital ₹2,00,000 | Add: Additional Capital ₹60,000 | Add: Interest on Capital ₹10,750 | Add: Net Profit (after interest on capital) XX | Less: Drawings ₹30,000.
The overall effect is that the business shows correct profit after accounting for the opportunity cost of funds invested by the proprietor, giving a more realistic picture of business performance.

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Chapter financial-statements-ii: Financial Statements - II | Case Study Questions

Passage

Question 1: What is meant by outstanding expenses? Give the journal entry for outstanding salaries of ₹6,000.

Question 2: Calculate the amount of insurance premium to be shown in the Profit and Loss Account for the year ended March 31, 2017, and state how prepaid insurance will appear in the Balance Sheet.

Question 3: Explain why the accrual basis of accounting makes it necessary to record adjusting entries. What would happen to the financial statements if such adjustments were not made?

Passage

Question 1: What is meant by 'further bad debts'? Give the journal entry to record further bad debts of ₹2,000.

Question 2: Calculate the new provision for doubtful debts and state the amount to be debited to Profit and Loss Account.

Question 3: How is provision for discount on debtors calculated? Calculate the amount for Meena Traders and explain its treatment in final accounts.

Passage

Question 1: Give the journal entry for depreciation on furniture of ₹20,000 at 15%, and show how it will be treated in the Profit and Loss Account.

Question 2: How is the machinery shown in the Balance Sheet as on March 31, 2017? What is its book value?

Question 3: Why is depreciation treated as a business expense even though no cash is paid? Explain the impact of not charging depreciation on the financial statements.

Passage

Question 1: Calculate manager's commission if it is 10% of net profit before charging such commission.

Question 2: Calculate manager's commission if it is 10% of net profit after charging such commission.

Question 3: Give the journal entry for manager's commission (using commission after charging method) and show its treatment in Profit and Loss Account and Balance Sheet.

Passage

Question 1: Calculate the interest on capital for the year ended March 31, 2017.

Question 2: Give the journal entry for interest on capital and show how it is treated in the Profit and Loss Account.

Question 3: How does interest on capital affect the Balance Sheet? Explain with the help of the given data, showing the capital section of the Balance Sheet.

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