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A company purchased a machine on January 1, 2023 for Rs. 90,000 and spent Rs. 10,000 on its installation. The…

(a) A company purchased a machine on January 1, 2023 for Rs. 90,000 and spent Rs. 10,000 on its installation. The company writes off depreciation @ 10% p.a. on straight line method. At the end of June 2025, the company sold the machine at Rs. 90,000. The books are closed on 31st December every year.

Required: Machinery account for the first three years.

(b) Differentiate between capital and revenue expenditures.

Solution

(b)

A business spends money on two kinds of items: fixed assets, whose benefit lasts for years (capital expenditure), and routine items, whose benefit is short-lived (revenue expenditure).

The differences between capital and revenue expenditures are given below:

BasisCapital expenditureRevenue expenditure
1. MeaningSpending on acquiring or improving fixed assets, such as land, building, machinery or patentsSpending on day-to-day running of the business, such as salaries, rent, stationery or repairs
2. Period of benefitBenefit lasts for a number of yearsBenefit is used up within the accounting year
3. FrequencyNon-recurringRecurring
4. TreatmentCapitalized in the balance sheet and written off gradually through depreciationWritten off fully in the income statement of the same year
5. Effect on profitDoes not reduce the year's profit directlyReduces the year's profit

Examples: the installation cost of a new machine, or the reconditioning of second-hand machinery, is capital expenditure. Repairs, whitewashing and the insurance premium on that machine are revenue expenditure.

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  1. 1.

    Describe the users of accounting information. Why do they need such information? Explain.

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  2. 2.

    The following are the financial statements of a company:

    Liabilities Last Year Current year Assets Last Year Current year
    Share capital150,000300,000Fixed assets250,000360,000
    Pref. share capital60,00090,000Investment60,00075,000
    10% bank loan75,00030,000Sundry debtors45,00060,000
    Accounts payable40,00030,000Inventories30,00075,000
    Retained earnings30,00075,000Cash at bank15,00030,000
    Prov. for dividend15,00030,000
    Prov. for tax30,00045,000
    Total400,000600,000Total400,000600,000

    Income Statement for the current year

    Particulars Rs. Rs.
    Sales300,000
    Less: Cost of goods sold120,000
    Gross profit180,000
    Less: Operating expenses (including depreciation Rs. 30,000 and interest Rs. 12,000)87,000
    Provision for tax45,000
    Provision for dividend30,000162,000
    18,000
    Add: Gain on sale of plant (cost Rs. 30,000, accumulated depreciation Rs. 15,000)12,000
    Interest on investment15,000
    Net income45,000

    Required: Cash flow statement by using direct method.

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  3. 3.

    Following are the transaction of a company.

    a. Started business with cash Rs. 100,000 and bank balance Rs. 40,000.

    b. Purchased office equipment for Rs. 100,000 and paid 25% cash and balance through cheque.

    c. Purchased merchandise goods for Rs. 50,000 on account.

    d. Sold merchandise goods on account for Rs. 170,000.

    e. Received a cheque from customer Rs. 145,000 in full settlement of Rs. 150,000.

    f. Paid Rs. 45,000 to supplier by issuing a cheque after deducting 10% discount.

    g. Rs. 12,000 was paid for insurance premium.

    h. Paid electricity bill Rs. 15,000.

    i. Paid office salary Rs. 20,000.

    j. Rent paid in advance Rs. 15,000 through cheque.

    Additional Information

    a) Ending inventory Rs. 20,000.

    b) Office salary due Rs. 4,000

    c) Depreciation on office equipment @25%

    Required:

    a. Journal entries.

    b. Triple column cash book.

    c. Accounts receivable and payable account.

    d. Adjusted trial balance.

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  4. 4.

    Define source of documents. Write down the objectives of the source of documents.

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  5. 5.

    Write down the meaning and types of lease. Also, point out the criteria for identifying capital lease.

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  6. 6.

    (a) On Chaitra 2081, Bank Statement disclosed a balance of Rs.10,000 and Cash Book showed the balance of Rs.8,900.

    i) Undeposited cheque Rs. 3,000

    ii) Outstanding cheque Rs. 4,000.

    iii) Notes receivable and interest collected by the bank Rs. 1,000 and Rs. 200 respectively.

    iv) A customer's cheque for Rs. 1,000 was returned by the bank due to insufficient fund.

    v) Bank charge Rs. 100 for the service provided by the bank.

    Required:

    a. Bank Reconciliation Statement as on 31st Chaitra

    b. Bank balance to be reported on company's balance sheet as on 31st Chaitra.

    (b) Differentiate between accounting and accountancy.

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