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Karnataka 1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments

1st PUC Financial Statements With Adjustments One Mark Questions and Answers

Question 1.
Why is it necessary to record the adjusting entries in the preparation of final accounts?
Answer:
It is extremely important to record the adjusting entries in the preparation of final accounts.
1. This is done in order to assess the true net profit or net loss of the business organization.

2. It helps us record those adjustments which were left or omitted and were not recorded in the accounts.

3. It assists us to separate all the financial transactions into a year-wise category. The financial statements include only those entries which belong to the current year. It rules out the previous and forth coming years’ entries which are the basis for accrual basis of accounting.

4. Further, it provides us the room for making various provisions which are made at the end of the year, after assessing the entries year’s performance.

Question 2.
What is meant by closing stock? Show its treatment in final accounts.
Answer:
Closing stock implies the value of unsold goods at the end of an accounting period. The valuation of closing stock is done on the basis of its cost price or the realizable value, whichever of the two is lesser.
Treatment of closing stock:
If closing stock is given in the adjustment, then there will be two postings.
Trading Account credit side
Balance Sheet assets side under current assets
If closing sotck is given in the trial balance, then it needs to be shown only in the assets side of the balance sheet.

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Question 3.
Write short note on
(a) Outstanding expenses
(b) Prepaid expenses
(c) Income received in advance
(d) Accrued income
Answer:
a. Outstanding expenses: These refer to those expenses which belong to and are incurred in the current accounting period but are left unpaid. In other words, we can say that the services in exchange of these payments have been realized but the payments are not made.

b. Prepaid expenses: These refer to those expenses for which the benefits have not been realized by the payments have already been made in advance. These are basically the advance payments for the next year, which are made in the current accounting period.

c. Income Received in Advance: This refers to the income received whose actual realisation of benefits will occur in the next accounting period. These are also called unearned incomes.

d. Accrued Income: This refers to those incomes which have been earned during an accounting period but have not been actually realised in the current period. These are also called earned incomes.

Question 4.
Give the proforma of income statement and balance in vertical form.
Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 1
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 2
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 3
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 70
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 71

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Question 5.
Why is it necessary to create a provision for doubtful-debts at the time of preparation of final accounts?
Answer:
The provision for doubtful-debts is created with the motive of minimizing the effect of actual loss caused by the bad-debts. The actual figure of the current year’s bad debts will be known in the next year with the realization of debtors. At that point of time, it will be known as to how many of the debtors have become bad. Thus, instead of waiting for the realization of debtors, we create a provision for doubtful-debts in order to cover the expected future loss associated with the debtors becoming bad.

Question 6.
What adjusting entries would you record for the following?
(a) Depreciation
(b) Discount on debtors
(c) Interest on capital
(d) Manager’s commission
Answer:
a. It is treated as a business expense and is debited to profit and loss account. In the balance sheet, the asset will be shown at cost minus the amount of depreciation.

b. It is treated as a business expense and is debited to profit and loss account. It will be shown as a deduction from the debtors account to portray correctly the expected reliable value of debtors.

c. It is shown as an expense on the debit side of the profit and loss account and added toe capital in the balance sheet.

d. It is shown as an expense on the debit side of the profit and loss account and on liability side in the balance sheet.

Question 7.
What do you mean by provision for discount on debtors?
Answer:
The discount is allowed to those debtors who are ready to pay a huge amount in one shot. It is given in order to encourage them to repay the debt. The provision for discount on debtors is created n good debtors.

The amount of good debtors is calculated by deducting the amount of bad debts, further bad debts and new provision for doubtful debts. The required percentage of the good debtors is calculated and the provision for discount on debtors is deducted from the Debtors’ amount in the Assets side of a Balance Sheet. As it is a loss for the business, it is shown in the debit side of the profit and loss account.

Question 8.
Give the journal entries for the following adjustments:
(a) Outstanding salary at Rs 3,500.
(b) Rent unpaid for one month at Rs 6,000 per annum.
(c) Insurance prepaid for a quarter at Rs 16,000 per annum.
(d) Purchase of furniture costing Rs 7,000 entered in the purchases book.
Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 5
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 6

Question 9.
What are adjusting entries? Why are they necessary for preparing the final accounts?
Answer:
According to the double-entry system, all the adjustments given outside the Trial Balance are psoted at two places. The adjusting entries are necessaiy they enable us to post and take into account those items which are omitted or entered with the wrong amount and/or recorded under wrong heads.
The treatment of adjusting entries is necessary:
(a) It helps us assess the true financial position of an organization based on accrual basis of accounting.
(b) It helps us know the actual figure of profit or loss.
(c) It records the omitted entries and rectifies the errors made.
(d) It helps in providing depreciation and making different provisions, such as bad debts and depreciation.

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Question 10.
What is meant by provision for doubtful-debts? How are the relevant accounts prepared and what journal entries are recorded in the final accounts? How is the amount for provision for doubtful-debts calculated?
Answer:
The provision for doubtful-debts is provided after deducting the amount of bad-debts from the debtors. The provision for doubtful-debts is provided because of the rationale that the actual amount of bad-debts will only be known in the next year, when the amount of debtors will get realised. Thus, it will only then be known as to how many of the debtors have become bad. Thus, in order to bridge-up the expected future loss, we create a provision for doubtful-debts.

For the provision for doubtful-debts, we prepare debtors account and provision for doubtful debts account.
For recording bad-debts, the following journal entry is passed
Profit and Loss Dr
To Provision for Bad and Doubtful Debts A/c
Let us take an example to understand how bad debts and provision for doubtful debts are recorded. An extract from a trial balance on March 31, 2005 is given below:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 7
Additional information:
Write-off further bad debts ₹ 2,000 and create a provision for doubtful debts @ 5% on debtors.
In this case, the following journal entries will be recorded :
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 8
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 9
Only relevant items.
Note: The amount of new provision for doubtful debts has been calculated as follows:
₹ 62,000 × 1,550.

Question 11.
Show the treatment of prepaid expenses, depreciation and closing stock at the time of preparation of final accounts when they are gives
a. Inside the Trial Balance
b. Outside the Trial Balance
Answer:
1. Prepaid expenses: There are several items of expense which are paid in advance in the normal course of business operations. At the end of the accounting year, it is found that the benefits of such expenses have not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense in carried forward to the next year and is termed as prepaid expenses.
a. When given inside the Trial Balance: It will be posted only in the assets side of the Balance sheet.
b. When given outside the Trial Balance: It is shown on the assets side of the balance sheet. The amount of prepaid expenses is deducted from the total of expenses under a particular head for the purpose of preparing trading and profit and loss account.

2. Depreciation: It is the decline in the value of assets on account of wear and tear and passage of time etc.
a. When given inside the Trial Balance: It can be shown in the Debit side of the profit and loss A/c. it means that this depreciation amount has already been deducted from the concerned assets in the balance sheet.
b. When given outside the Trial Balance: It can be shown in the debit side of the profit and loss a/c and it deducted from the concerned assets in the balance sheet.

3. Closing stock: The closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period.
a. When given inside the trial balance: It is shown on the asset side of the balance sheet under the head current assets.
b. When given outside the trial balance: It is credited to the trading and profit and loss account, and shown on the asset side of the balance sheet under the head current assets.

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1st PUC Financial Statements With Adjustments Numerical Questions

Question 1.
Prepare a trading and profit and loss account for the year ending December 31, 2005. From the balances extracted of M/s Ramesh sons. Also prepare a balance sheet at the end of the year.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 10
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 11
Adjustments

  1. Commission received in advance ₹ 500
  2. Rent receivable ₹ 1,000.
  3. Salary outstanding ₹ 500 and insurance prepaid? 400.
  4. Further bad debts ₹ 500 and provision for bad debts @ 5% on debtors and discount on debtors @ 2%
  5. Closing stock ₹ 16,000.
  6. Depreciation on building @ 6% p.a.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 12
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 13
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 14

 

Question 2.
Prepare a trading and profit and loss account of M/s Green club Ltd. For the year ending December 31,2005. From the following figures taken form his trial balance :
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 15
Adjustments

  1. Depreciation charged on machinery @ 5% p.a.
  2. Further bad debts ₹ 3,000. Discount on debtors @5% and make a provision on debtors @ 6%.
  3. Wages prepaid ₹ 2,000.
  4. Interest on investment @ 5%
  5. Closing stock 20,000.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 16
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 17
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 18

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Question 3.
The following balances has been extracted from the trial of M/s Runway shine Ltd. Prepare a trading and profit and loss account and a balance sheet as on December 31, 2005.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 19
Adjustments

  1. Further bad debts t 1,000. Discount on debtors ₹ 500 and make a provision on debtors @ 5%.
  2. Interest received on investment @5%.
  3. Wages and interest outstanding ₹ 100 and ₹ 200 respectively.
  4. Depreciation charged on motor car @ 5% p.a.
  5. Closing stock ₹ 32,500.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 20
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 21
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 22

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Question 4.
The following balances have been extracted from the trial of M/s Haryana Chemica Ltd. You are required to prepare a trading and profit and loss account and balance sheet as on December 31, 2005 from the given information.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 23
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 24
Adjustments

  1. Closing stock was valued at the end of the year ₹ 80,000.
  2. Salary amounting ₹ 1,000 and trade expense ₹ 600 are due.
  3. Depreciation charged on building and machinery are @ 4% and @ 5% respectively.
  4. Make a provision of @ 5% on sundry debtors.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 25
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 26

Question 5.
From the following information prepare trading and profit and loss account of M/s Indian sports house for the year ending December 31, 2005.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 27
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 28
Adjustments

  1. Closing stock was ₹ 22,500
  2. Provision for bad debts is to be maintained @ 2% on debtors.
  3. Depreciation charged on : Furniture and fixture @ 5% plant and machinery’ @ 6% and motor car @ 10%.
  4. A machine of ₹ 15,000 was purchased on July 01,2005.
  5. The manager is entitle to a commission of @ 10% of the net profit after charging such commission.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 29
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 30

Question 6.
Prepare the trading and profit and loss account and a balance sheet of M/s Shine Ltd. From the following particulars.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 31
Adjustments

  1. Closing stock was valued ₹ 35,000.
  2. Depreciation charged on furniture and fixture @ 5 %.
  3. Further bad debts ₹ 1,000. Make a provision for bad debts @ 5% on sundry debtors.
  4. Depreciation charges on motor car @ 10%.
  5. Interest on drawing @ 6%.
  6. Rent, rates and taxes was outstanding? 200.
  7. Discount on debtors 2%.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 32
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 33
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 34

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Question 7.
Following balances have been extracted from the trial balance of M/s Keshav Electronics Ltd. You are required to prepare the trading and profit and loss account and a balance sheet as on December 31, 2005.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 35
The following additional information is available :

  1. Stock on December 31,2005 was ₹ 15,000.
  2. Depreciation is to be charges on buildings at 5% and motor van at 10%.
  3. Provision for doubtful debts is to be maintained at 5% on Sundry Debtors.
  4. Unexpired insurance was ₹ 300.
  5. The manager is entitled to a commission @ 5% on net profit before changing such commission.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 36
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 37
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 38

Question 8.
From the following balances extracted from the books of Raga Ltd. Prepare a trading and profit and loss account for the year ended December 31, 2005 and a balance sheet as on that date.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 39
The additional information is as under:

  1. Closing stock was valued at the end of the year ₹ 20,000.
  2. Depreciation on plant and machinery charged at 5% and land and building at 10%.
  3. Discount on debtors at 3%.
  4. Make a provision at 5% on debtors for bad debts.
  5. Salary outstanding was ₹ 100 and wages prepaid was ₹ 40.
  6. The manager is entitled a commission of 5% on net profit after charging such commission.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 40
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 41

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Question 9.
From the following balances of M/s Jyoti Exports, prepare trading and profit and loss account fo the year ended March 31, 2006 and balance sheet as on this date.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 42
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 43
Closing stock ₹ 20,000

  1. To provision for bad debts is to be maintained at 5 per cent on sundry debtors.
  2. Wages amounting to ₹ 1000 and salary amounting to ₹ 700 are outstanding.
  3. Factory rent prepaid ₹ 200.
  4. Depreciation charges on Plant and Machinery @ 5% and Building @ 10%.
  5. Outstanding insurance ₹ 200.

Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 44
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 45

Question 10.
The following balances have been extracted from the books of M/s Green House for . the year ended December 31, 2005, prepare trading and profit and loss account and balance sheet as on this date.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 46
Adjustments:
(a) Machinery is depreciated at 10% and buildings depreciated at 6%.
(b) Interest on capital @ 4%.
(c) Outstanding wages ₹ 50.
(d) Closing stock ₹ 50,000.
Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 47
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 48
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 49

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Question 11.
From the following balances extracted from the book of M/s Manju Chawla on March 31, 2005, you are requested to prepare the trading and profit and loss account and a balance sheet as on this date.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 50
Closing stock was ₹ 4,000.
(a) Interest on drawings @ 7% and interest on capital @ 5%.
(b) Land and Machinery is depreciated at 5%.
(c) Interest on investment @ 6%.
(d) Unexpired rent ₹ 200.
(e) Charge 5% depreciation on furniture.
Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 51
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 52

Question 12.
The following balances were extracted from the books of M/s Panchsheel Garments on December 31,2005.
Account Title Amount
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 53
Prepare the trading and profit and loss account for the year ended December, 31 and a balance sheet as on that date.
(a) Unexpired insurance ₹ 500.
(b) Salary due but not paid ₹ 900.
(c) Wages outstanding ₹ 100.
(d) Interest on capital 5%.
(e) Scooter is depreciated @ 5%.
(f) Furniture is depreciated ₹ @ 10%.
(g) Closing stock ₹ 7,500.
Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 54
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 55
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 56

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Question 13.
Prepare the trading and profit and loss account and balance sheet of M/s Control device India on December 31, 2006 from the following balance as on that date.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 57
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 58
Closing stock was valued ₹ 20,000.
(a) Interest on capital 10%.
(b) Interest on drawings @ 5%.
(c) Wages outstanding ₹ 50.
(d) Outstanding salary ₹ 20.
(e) Provide a depreciation @ 5% on plant and machinery.
(f) Make a 5% provision on debtors.
Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 59
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 60
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 61

Question 14.
The following balances appeared in the tria balance of M/s Kapil Traders as on March
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 62
The partners of the firm agreed to records the following adjustments in the books of the Firm: Further bad debts ₹ 300. Maintain provision for bad debts 10%. Show the following adjustments in the bad debts account, provision account, debtors account, profit and loss account and balance sheet.
Answer:
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 63
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 64
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 65

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Question 15.
Prepare the bad debts account, provision for account, profit and loss account and balance sheet from the following information as on December 31,2005
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 66
Adjustments :
Bad debts ₹ 500 provision on debtors @3%.
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 67
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 68
1st PUC Accountancy Question Bank Chapter 10 Financial Statements With Adjustments - 69

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