Financial Statement Problem (Premlal & Sundarlal) - Solution

Financial Statement Problem

(Reference: September 2008 Exam)

Trial Balance as on 31^st March, 2006

Debit Balance	Amount (Rs.)	Credit Balance	Amount (Rs.)
Stock on 1-4-2005	90,000	Sales	3,75,000
Purchases	2,25,000	Purchase Returns	3,000
Drawings : Premlal	33,000	Discount received	3,000
Sundarlal	30,000	Sundry Creditors	90,000
Sales Return	7,200	Capital : Premlal	1,05,000
Wages : Productive	10,500	Sundarlal	1,35,000
Unproductive	1,800	Bank Overdraft	30,000
Salaries	18,600
Rent, Rates and Insurance	10,200
Bad Debts	1,200
Discount allowed	3,900
Machinery	45,000
Building	1,08,600
Sundry Debtors	1,53,000
Cash	3,000
Total	7,41,000	Total	7,41,000

Closing stock was valued on 31-03-2006 at market price Rs. 60,000 which was 20% above its cost price.
Outstanding productive wages Rs. 600.
Rent, Rates and Insurance include Insurance Rs. 1,600 paid for one year ending on 30^th June, 2006.
Maintain Reserve for doubtful debts at 5% on debtors.
Depreciate building by 5% and machinery at 10% p.a.
Goods costing Rs. 2,500 were distributed as free samples for which no record has been made in the books.
Six months interest is due on Bank Overdraft at 10% p.a.

In the books of M/s Premlal & Sundarlal

Debit		Credit
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Unproductive Wages	1,800	By Gross Profit b/d	97,200
To Salaries	18,600	By Discount Received	3,000
To Rent, Rates and Insurance	10,200
(-) Prepaid Insurance (W.N. 2)	(400)
Net Rent, Rates & Insurance	9,800
To Bad Debts	1,200
(+) New R.D.D. (W.N. 3)	7,650
Total Bad Debts & Provision	8,850
To Discount Allowed	3,900
To Depreciation (W.N. 4):
Building	5,430
Machinery	4,500
Total Depreciation	9,930
To Advertisement (Free Samples - W.N. 5)	2,500
To Interest on Bank Overdraft (W.N. 6)	1,500
To Net Profit Transferred to Capital A/c:
Premlal (1/2)	21,660
Sundarlal (1/2)	21,660
Total Net Profit	43,320
Total	1,00,200	Total	1,00,200

Liabilities		Assets
Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
Capital Accounts:		Machinery	45,000
Premlal	93,660	(-) Depreciation (W.N. 4)	(4,500)
Sundarlal	1,26,660		40,500
Total Capital	2,20,320	Building	1,08,600
Sundry Creditors	90,000	(-) Depreciation (W.N. 4)	(5,430)
Bank Overdraft	30,000		1,03,170
(+) Outstanding Interest (W.N. 6)	1,500	Sundry Debtors	1,53,000
Total Bank Overdraft	31,500	(-) R.D.D. (W.N. 3)	(7,650)
Outstanding Productive Wages	600	Net Debtors	1,45,350
		Closing Stock (W.N. 1)	50,000
		Cash	3,000
		Prepaid Insurance (W.N. 2)	400
Total Liabilities	3,42,420	Total Assets	3,42,420

Closing Stock: Market Price = Rs. 60,000 (which is 20% above Cost Price). Let Cost Price = CP. Then, Market Price = CP + 20% of CP = CP * 1.20. So, 60,000 = CP * 1.20. CP = 60,000 / 1.20 = Rs. 50,000. Stock is valued at Cost or Market Price, whichever is lower. Hence, Closing Stock = Rs. 50,000.
Prepaid Insurance: Insurance paid = Rs. 1,600 for one year ending 30th June, 2006. Financial year ends 31st March, 2006. Prepaid period = April, May, June 2006 (3 months). Prepaid Insurance = Rs. 1,600 * (3/12) = Rs. 400.
Reserve for Doubtful Debts (R.D.D.): Sundry Debtors = Rs. 1,53,000. R.D.D. to be maintained at 5% on Debtors. New R.D.D. = 5% of Rs. 1,53,000 = Rs. 7,650.
Depreciation:
- Building: 5% on Rs. 1,08,600 = Rs. 5,430.
- Machinery: 10% on Rs. 45,000 = Rs. 4,500.
Goods Distributed as Free Samples: Costing Rs. 2,500. This is treated as Advertisement expense in P&L A/c and deducted from Purchases in Trading A/c.
Interest on Bank Overdraft: Bank Overdraft = Rs. 30,000. Interest rate = 10% p.a. for 6 months. Interest Due = Rs. 30,000 * (10/100) * (6/12) = Rs. 1,500. This is an expense (P&L A/c) and an outstanding liability (Balance Sheet).