Accountancy & Auditing

Explain the double- entry system of accounting.

When do accountants consider revenue to be realized? What basic question about recording revenue in accounting records is answered by the realization principle?

The CDE partnership is being liquidated. After all liabilities have been paid and all assets sold, the balances of the partners' capital accounts are as follows: Ahmad, Rs. 42,000 credit balance; Jawad, Rs. 16,000 debit balance; Ali, Rs. 53,000 credit balance. The partners share profits and losses: Ahmad, 10%; Jawad, 60%; Ali, 30%.

During the current year, East-West Airlines earned net income of Rs. 50 million from total revenue of Rs. 350 million. The company services primarily cities in Pakistan but also has service to several foreign countries. Three events are described below, along with the treatment accorded to these events in the company's financial statements. This case focuses upon the question of "materiality". Therefore, some items described below may be viewed as immaterial. a. During the year, the company purchased Rs. 5 million in spare parts to be used in aircraft maintenance. All of these purchases were charged immediately to Maintenance Expense. No adjusting entry was made at year-end to reflect approximately Rs. 50,000 in spare parts remaining on hand, because the amount was considered immaterial. b. The company's internal auditors discovered that the vice president of in-flight services had embezzled Rs. 100,000 from the airlines by authorizing payments to a fictitious supplier of in-flight meals. The vice president was fired, and criminal charges currently are pending against her, as is a civil lawsuit to recover the embezzled funds. In the income statement, this Rs. 100,000 loss was deducted from revenue as part of the Flight Operations Expenses, which totaled more than Rs. 200 million. No special disclosures were made, because the amount of the embezzlement was considered immaterial. c. Shortly after year-end, the company suspended all flight operations to a particular foreign country as a result of political unrest. These flights provided approximately 2% of the company's revenue and net income during the current year. Cancellation of service to this country was not disclosed in notes to the current year's financial statements, because operations of the current year were not affected. INSTRUCTIONS Explain whether in your own judgment you concur or disagree with the treatment accorded to these events by East-West in its current financial statements. If you recommend a different financial statement presentation, explain why you do. In each case, indicate whether or not you consider the item "material", and explain your reasons. Consider each of these three situations independently of the others.

At the end of the year, the following information was obtained from the accounting records of the Agility Office Products: Rs. Sales (all on credit) 2,700,000 Cost of goods sold 1,755,000 Average Inventory 351,000 Average accounts receivable 300,000 Interest expense 45,000 Income taxes 84,000 Net income 159,000 Average investment in assets 1,800,000 Average stockholders' equity 795,000 INSTRUCTIONS a. From the information given, compute the following: Inventory Turnover Accounts receivable turnover Total operating expenses Gross profit percentage Return on average stockholders' equity Return on average assets b. Agility has an opportunity to obtain a long-term loan at an annual interest rate of 12% and could use this additional capital at the same rate of profitability as indicated above. Would obtaining the loan be desirable from the viewpoint of the stockholders? Explain.

A tractor which cost Rs. 30,000 had an estimated useful life of 5 years and an estimated salvage value of Rs. 10,000. Straight-line depreciation was used. Give the entry (in general journal form) required by each of the following alternative assumptions: