f) Sale of old typewriter Shs. 275 has been passed through the sales book.

Journal Entries
a) Debit Kumar's A/c 100
To Sales A/c (Cr.) 100
(Rectifying entry passed for short credit-sales A/c and short debit to Kumar's A/c)
b) Dr Plant & Machinery A/c 11,500
To Purchases A/c (Cr.) 11,500
(Rectifying entry passed to correct machinery purchased charged to Purchases A/c )
c) Drawing A/c Dr 450
To General Expense A/c 450
(Rectifying entry passed to correct drawings charged to Gen. Exp. A/c)
d) Credit Returns Inwards A/c by Shs. 150.
e) Debit Discount allowed A/c Shs. 35.
(As the amount has not been entered in the cash book there is a short debit in the Discount
Allowed A/c. Therefore the additional debit)
f) Sales A/c Dr 275
To Office Equipment A/c 275
(Rectifying entry passed to correct sale of old typewriter erroneously credited to Sales A/c instead
of Office Equipment A/c)

1. Errors Affecting The Trial Balance

a) Omission of an entry in the subsidiary book.
Credit sales to A for Shs. 2000 was omitted to be recorded in the sales book.
A's A/c Dr. 2000
To Sales A/c 2000
(Rectification entry passed for omission of credit sales to A being omitted to be recorded in sales book)
b) Wrong entry made in the subsidiary book.
- Credit purchases from Q for Shs. 3000 has been wrongly entered in the purchases book as Shs. 3300.
- Purchases book has excess debit of Shs. 300 & Q's account has an excess credit of the same amount
- Therefore, the rectifying entry will be:-
Q's A/c Dr. 300
To Purchases A/c 300
c ) Errors of principles
- These arise when a revenue expenditure is treated as a capital expenditure or vice versa e.g.
- Furniture purchased from X for Shs. 4,000 was entered in the Purchase Book.
- Wrong entry: Purchase A/c Dr. 4000
To X's A/c 4000
- Correct entry: Furniture A/c Dr. 4000
To X's A/c 4000
- Rectifying Entry: Furniture A/c Dr. 4000
To Purchase A/c 4000
d) Posting an amount in the wrong account but on the correct side
- Credit sales to Ramanthan for Shs. 1,500 has been posted to Ramamurthy's A/c
- Wrong entry: Ramamurthy's A/c Dr. 1500
To Sales A/c 1500
- Correct entry: Ramanathan A/c Dr 1500
To Sales A/c 1500
- Rectifying entry: Ramanathan A/c Dr. 1500
To Ramamurthy A/c 1500
e) Entry made in the wrong subsidiary book.
- Credit sales to Y Shs. 2,500 was wrongly entered in the Purchases Book.
- Wrong entry: Purchase A/c Dr. 2,500
To Y's A/c 2,500
- Correct entry: Y's A/c Dr. 2,500
To Sales A/c 2,500
- Rectifying Entry: Y's A/c Dr. 5,000
To Purchase A/c 2,500
To Sales A/c 2,500
f) Compensating errors.
- If effect of one error is multiplied by effect of some other errors, trial balance will agree; eg. amount
of Shs. 25 received by M is not credited to his A/c & the total of the sales books is overcast by Shs. 25.
- Credit omission to M's A/c is offset by increased credit to Sales A/c, hence the trial balance will agree.
Suspense account
- The difference in the Trial Balance may be put in an account known as the Suspense Account, where
the error causing difference can’t be located immediately & the books of accounts have to be closed.
- Suspense account is an account to which the difference in the trial balance has been put temporarily.
- If the debit side is short this account is debited and if the credit side is short it will be credited.
- However the opening of a suspense account does not mean that the errors need not be found out.
- All errors affecting the trial balance are corrected through the suspense account as these are one-
sided errors. Previously one sided errors have been corrected by making a correcting entry in the
account concerned without making an entry in any other account.
- Double entry will be complete where suspense account is opened with difference in the trial balance.
- [Link] the following errors: i) Without opening suspense account; ii) Opening a suspense account
a) The Purchases Returns Book has been totaled Shs. 80 short.
b) Goods returned by M/s Amar & Sons Shs. 150 have not been recorded anywhere.
c ) Goods bought from M/s Devi Bros Shs. 250 have been posted to their debit as Shs. 205.
d) Discount received from Hi-Fi Bros Shs. 25 has not been entered in discount column of cash book
e) A sale to Mr. Dubey Shs. 450 was wrongly credited to his account.
I. Without opening a Suspense Account :
a) Credit Purchases Returns A/c with Shs. 80.
b) Sales Returns A/c Dr 150
To M/s Amar & Sons A/c 150
(Entry passed for goods returned as it was omitted from the Sales Returns Book)
c) Credit M/s Devi Bros with Shs. 455.
M/s Devi Bros have been debited Shs. 205 instead of being credited.
(Thus shs.205 credit is given to remove wrong dr & further shs.250 credit given to record correct cr.)
d) Credit Discount Received A/c Shs. 25.
(There’s a short credit in discount received A/c by Shs.25. Hence additional credit is given to the a/c)
e) Debit Mr. Dubey's A/c with Shs. 900.
(Mr. Dubey's A/c has been credited with Shs. 450 instead of being debited. This account is now
debited with Shs. 900 to remove the wrong credit and given the correct debit.)
II. Opening a Suspense Account
a) Suspense A/c Dr. 80
To Purchase Returns A/c 80
(Correction arising from under casting of Purchases Returns Book)
b) Sales Returns A/c Dr. 150
To M/s Amar & Sons A/c 150
(Recording an entry omitted earlier)
c) Suspense A/c Dr. 455
To M/S Devi Bros A/c 455
(Entry correction which M/s Devi Bros were debited Shs.205 instead of being credited with Shs.250)
d) Suspense A/c Dr. 25
To Discount Received A/c 25
e) Mr. Dubey's A/c Dr 900
To Suspense A/c 900
(Correction of entry by which Mr. Dubey’s A/c was credited with Shs. 450 instead of being debited)

Effect of errors and their rectification on profit or loss

- Certain errors affect the firm’s profit/loss. If the error is in the nominal account the profit & loss a/c
will be affected but if it is in a personal or real account there will be no change on the profit or loss.
- Error rectification in a nominal account will change the figure of profit or loss previously arrived at.
Q: Trial balance of Ms Soles&Soles extracted on 31/3/1997 was Shs.1595 short on debit. Suspense a/c
is opened to tally the trial balance. On examination of books of accounts these errors were noticed:
a) Credit Purchases from M/s Toepuf Shs. 200 was posted as Shs. 20 in the ledger.
b) Miser the landlord was debited Shs. 250 for payment of rent.
c) Cash purchase of Shs.125 was not posted to the ledger.
d) Discount allowed column in the cash book was posted to Gen. Expenses are Shs.20.
e) Payment made to Insole & Sons Shs.1500 was posted to their credit Shs.150.
f) Received Shs.250 from Tom but posted to Thompson's A/c.
g) Credit sale of Shs.750 to Shoes & Socks Ltd entered in the Returns Outwards Book.
Pass necessary rectifying entries. Prepare the Suspense A/c and show the effect of the rectifying
entries on the profit of business.
a) Suspense A/c Dr I 80
To M/s Toepuf A/c 180
(rectification of posting of wrong amount)
b) Rent A/c Dr 250
To Miser's A/c 250
(rectification of payment of rent posted to Miser's (landlord A/c)
c) Purchases A/c Dr 125
To Suspense A/c 125
(cash purchases not posted rectified)
d) Discount allowed A/c Dr 20
To Gen. Expense A/c 20
(posting of discount allowed to Gen Exp. rectified)
e) Insole & Sons A/c Dr 1650
To Suspense A/c 1650
(rectification of posting wrong amount i.e. Shs. 150 instead of Shs. 1500 to the credit side
instead of the debit side)
f) Thompson's A/c Dr 250
To Tom's A/c 250
(receipt from Tom posted to Thompson rectified)
g) Returns Outwards A/c Dr 750
To Sales A/c 750
(Credit sales recorded in Returns Outwards Book rectified)
Suspense A/c
Particulars Shs Particulars Shs
To Difference in Trial Balance 1595 By Purchases 125
To M/s Toepuf 180 By Insole & Sons 1650
1,775 1,775

- Effect of rectifying entries on profit: a) No effect; b) Profit reduced by Shs.250; c) Profit reduced by
Shs. 125; d) No effect; e) No effect; f) No effect; g) No effect
- In order to ascertain the profit or loss of each period separately errors should be rectified in such a
manner that the current year's income, expenses or loss are not affected.
- An error committed in 2001-02 is rectified in 2002-03. By rectifying Sales A/c would mean that it is
treated as an income of 2002-03 when it actually pertains to 2001-02.
- Thus the proper thing to do should be to open a separate account called Profit & Loss Adjustment
account and pass all debits and credits in respect of nominal accounts for errors committed in the
previous period through this account. balance of this account is transferred lo the Capital A/c.
Q. On 31/3/2003, trial balance of Mr. Good did not agree. The diff was transferred to Suspense A/c. In
May 2003, the errors of March 2003 were discovered. They are:
1) The Returns Outwards Book was overcast by Shs. 700.
2) Purchase of furniture Shs. 2000 was passed through the Purchases Book.
3) Wages to workmen for installation of machinery Shs.1250 was charged to Wages A/c.
4) Payment of rent of Mr. Goods house Shs. 750 was charged to Rent A/c.
5) Goods returned by client amounting shs.950 were taken in stock but no entry was made in book
6) Sales shs.1700 is passed thru purchases book. Customer A/c has been however debited correctly
7) Sale of Shs. 2250 to M/s Wye Ltd was credited to their A/c.
8) Sales book total while carried forward to next page was written shs.219,431 instead Shs.291,341.
9) A sale of Shs. 760 has been posted to the credit of the customer's Mr. Zed A/c as Shs. 670.
10) Cheque of Shs.1500 received from Ms Sky Bros was dishonored &posted to dr of allowances a/c
Give journal entries to rectify the above errors without affecting the current year's Profit and Loss
Adjustment A/c. Prepare the Profit & Loss Adjustment A/c.
1) P & L Adjustment A/c Dr 700
To Suspense A/c 700
2) Furniture A/c Dr 2000
To P & L Adjustment A/c 2000
3) Machinery are Dr 1250
To P & L Adjustment A/c 1250
4) Drawings A/c Dr 750
To P & L Adjustment A/c 750
5) P&L Adjustment A/c Dr. 950
To Customer’s A/c 950
6) Suspense A/c Dr 3,400
To P&L Adjustment A/c 3,400
7) M/s Wye Ltd. A/c Dr 4,500
To Suspense A/c 4,500
8) Suspense A/c Dr 71,910
To P&L Adjustment A/c 71,910
9) Suspense A/c Dr 1,430
To Mr. Z’s A/c 1,430
10) M/s Sky Bros. A/c Dr 1,500
To P&L Adjustment A/c 1,500
P&L Adjustment A/c Dr 79,160
To Capital A/c 79,160
Profit And Loss Adjustment Account
Date Details Shs Date Details Shs

To Suspense A/c 700 By furniture 2,000 Q:- Following

To Customer’s A/c 950 By machinery 1,250 mistakes
To Capital A/c (Bal. fig) 79,160 By drawings 750 occurred in a
computerised
By suspense 3,400
accounting
By suspense 71,910 system :–
M /s Sky Bros 1,500 a) Payment of
80,810 80,810 Shs. 10,000 to a
party by cheque
was recorded thru the receipt column of bank account;
b) Receipt of Shs 25,000 from a customer was entered thru’ the payment column of the bank account;
c) Purchase invoice of Shs. 51,000 was entered through the sales journal as Shs. 15,000;
d) Sales bill of Shs. 46,000 was entered through the purchase journal as Shs. 64,000;
e) Returns inwards of Shs. 6,000 was entered through the purchase journal as Shs. 60,000;
f) Returns outwards of Shs. 5,000 was entered through the sales journal as Shs. 500.
What will be the changes in final accounts on rectification of the above mistakes?
Pass the rectification entries and pinpoint the changes.
Rectification and effects
a) Sundry Debtors Dr. 20,000
To Bank Account 20,000
Effect : Liability to suppliers-reduced by Shs. 20,000; Bank balance-reduced by Shs. 20,000;
(No impact on Profit/loss)
b) Bank Account Dr. 50,000
To Sundry Creditors Account 25,000
To Sundry Debtors Account 25,000
(assuming the supplier party wrongly debited)
Effects : Dues from customers-reduced by Shs.25,000; Bank balance -increased by Shs. 50,000
Dues to supplier party-increased by Shs. 25,000; No impact on Profit/loss.
c) Purchases Account Dr. 51,000
Sales Account Dr. 15,000
To Party Account 51,000
To Sundry Account 15,000
Effect : Liabilities to suppliers-increased by Shs. 51,000;
Purchases-increased by Shs.51,000;
Sundry debtors-reduced by Shs. 15,000
Sales reduced by Shs. 15,000
Profit reduced by Shs. 66,000
d) S. Creditors Account Dr. 64,000
S. Debtors Account Dr. 46,000
To Purchases Account 64,000
To Sales Account 46,000
Effect : Personal account of the party reduced by Shs. 64,000;
Sales-increased by Shs. 46,000;
Sundry debtors-increased by Shs. 46,000;
Profit-increased by Shs. 1,100,000
e) Returns Inwards Account Dr. 6,000
Sundry creditors Account Dr. 60,000
To Sundry Debtors Account 6,000
To Purchases Account 60,000
Effect : Amount due to supplier party-reduced by Shs. 60,000;
Purchase-reduced by Shs. 6,000;
Sundry debtors-reduced by Shs. 6,000;
Profit-goes up by Shs. 54,000.
f) Returns Outwards Account Dr. 5,000
Sales Account Dr. 500
To Sundry Debtors Account 500
To Sundry Creditors account 5,000
Effect : Amount due from supplier party- reduced by Shs. 5,000;
Purchase returns-increased by Shs. 5,000;
Sales-reduced by Shs. 500; Sundry debtors-reduced by Shs. 500; Profit-goes up by Shs. 4,500.
Rules and methods regarding rectification of double sided error:
- Accounts which have not been debited will be debited and account which has been debited by
mistake will be credited.
- Accounts which have not been credited will be credited and account which has been credited by
mistake will be debited.
-Transactions omitted from books recording will be recorded now, treating as if they’ve occurred now
- Method: First of all, all the effects of error is ascertained. Then correct entry of transaction is
ascertained. Then entry is recorded to rectify wrong entry so that correct entry is entered.
 INVESTMENT ACCOUNTS
Note each side of the account has three columns on both sides:nominal, capital, income. Note interest or
dividend dates at the head of the account. Al purchases cum div. unless otherwise stated.
(a) When Purchased cum div.: Calculate accrued dividend & debit amount in income column. Debit the
balance of total cost in capital column. When dividend received, credit in income column. Balance of
income column(representing actual income for period investment held) transferred to Profit & Loss A/c.
(b) When sold cum div.: Credit income column with dividend accrued to date of sale. Credit the balance
of proceeds in capital column representing capital portion.
(c) When bought ex div.: Debit in capital column and credit in income column, proportion of dividend
from date of purchase to next dividend date. Debit whole purchase cost in capital column. (in practice,
apportionment is commonly ignored, and the whole cost debited to capital.)
(d) When sold ex div.: Debit in income column and credit in capital column, proportion of dividend from
date of sale to next dividend date. Credit total proceeds in capital column.
Note:- Except in the case of fixed-interest-bearing securities it may be necessary to debit or credit total
cost or total proceeds in capital column and adjust when dividend is received or known.
- Balance of income columns is transferred to Profit and Loss Account.
- Balance of nominal and capital columns is carried down.
- When whole investment is sold, the balance on capital column is profit or loss.
- Where part of investment is sold, carry down same proportion of capital column as of nominal column.
- Any balance on capital column is profit/loss on portion sold. If profit, &investment is one of many, carry
profit to Investment Reserve A/C. If loss, write off to Investment Reserve Account or Profit & Loss Account.
STOCKHOLDERS’ EQUITY:
12% Convertible Preferred Stock, $100 par, authorized 10,000 shares,
issued and outstanding 5,000 shares (Note 1)………………………….$ 500,000
Common Stock, $2 par, authorized 1,000,000 shares, issued and
Outstanding 350,000 shares…………………………………………… 700,000
Common Stock subscribed, 8,000 shares……………………………... 16,000
Paid-in Capital in Excess of Par: Common Stock……………………… 3,500,000
Total paid-in capital……………………………………………………. $ 4,716,000
Retained Earnings……………………………………………………… 5,262,600
TOTAL STOCKHOLDERS’ EQUITY $ 9,978,600
Note: Preferred Stock was issued at par, is callable at $105, and is convertible to common stock at a
rate of 3 Preferred Stocks for 1 Common Stock, subject to an antidilution provision.
ACCOUNTING FOR LONG-TERM ASSETS
- Long term assets (also called fixed assets) are assets that: Have a useful future life of more than one year.
- Are the production base and acquired for use in the operation of the business; are not intended for resale
to customers; Also referred to as Capital Assets. Three groups of fixed assets:
1. Tangible Assets: e.g. property, plant/equipment, land/buildings, furniture/fittings, computers, vehicles etc.
2. Natural resources; are intangible nonmonetary assets containing valuable substances that may be
extracted and sold. They are sometimes referred to as wasting assets and include standing timber, oil and
gas fields, and mineral deposits
3. Intangible Assets: Intangible assets are long-term assets that have no physical substance; they represent
certain rights and advantages available to their owner. Examples are patents, trademarks, goodwill,
copyrights, leaseholds, leasehold improvements, franchises, licenses, brand names, formulas, processes,
research and development, and organization preliminary costs.
- The major accounting problem is to apply matching rules properly to determine how much of the asset
has benefited the current period & how much should be carried forward as an asset to benefit future periods.
- The allocation of costs to different accounting periods is called:
I. Depreciation in the case of plant and equipment assets;
II. Depletion in the case of natural resources (is the allocation of a natural resource’s cost to accounting
periods based on the amount extracted each period); and
III. Amortization in the case of intangible assets is usually written off over its useful life (not exceeding
forty years) through this process called amortization.
- Because land has an unlimited useful life, its cost is never converted into an [Link] cost of an
asset is called the carrying/book value, and is equal to the asset cost less accumulated depreciation on asset.
- Asset impairment is the loss of revenue-generation potential of a long-term asset before the end of its
useful life. It is computed as the difference between the asset’s carrying value and its fair value, as
measured by the present value of the expected cash flows.
- Information about investing & financing of long-term assets is found in the statement of cash flows.
To account for long-term assets, one must determine:
1. The cost of the asset;
2. The method of matching the cost with revenues,
3. The treatment of subsequent expenditures (repairs and maintenance), and
4. The treatment of asset disposal by sale, gift, or trade-in.
1. COST OF LONG TERM ASSET:
Capital Expenditure vs. Revenue Expenditure:
- Expenditure is a payment or an obligation to make payments in the future for either assets or services.
- Capital Expenditure benefits several periods in the future and are recorded as assets in the balance sheet..
Examples purchase or expansion of a building
- Revenue Expenditure benefits only the current period and are expensed in the income statement of the
period. Examples, operation and maintenance costs.
- Errors in classifying expenditures properly such as capital expenditure be expensed/revenue expenditure
be capitalized as an asset, result in misstatements in assets and net income of the current and future periods.
- Materiality and matching rule apply here.
- Cost of an asset: purchase price + freight charges + insurance while in transit + installation costs + any
other costs incurred to put the assets in a condition to serve.
- Land cost = price paid for the land + real estate commission + lawyers’ fees + back taxes +draining,
clearing &grading costs + assessments for local improvements + landscaping + the cost (less salvage value)
of razing structures situated in the property. The entry is debited to Land Account. Land is not depreciated.
-Land Improvement (Account) = cost of driveways + parking lots + fences + signs are subject to
depreciation and thus require a separate Land Improvements Account.
- The cost of buildings purchased includes the purchase price and repairs to make the building usable.
- The cost of asset constructed includes materials, labour, overheads, and interest on the construction loan.
- The cost of equipment includes the invoice price less cash discounts, freight, insurance, taxes, tariffs,
buying expenses, installation costs, and test runs.
- Interest on loan to purchase an asset is expensed. Interest on construction loan is capitalized.
- When a lump-sum purchase is made the cost is allocated on the assets’ relative fair market values.
- All plant assets (except land) including land improvements, buildings and equipment are depreciated.
-The allocation of costs is under the matching rule. In addition to expenditures to purchase plant and
equipment, capital expenditures include additions (such as a building wing) and betterments (such as
installation of an air-conditioning system). Such a capital expenditure is recorded as an asset because it
benefits several accounting periods.
- Ordinary repairs to maintain an asset in good operating condition are considered revenue expenditures
(expensed as incurred). Extraordinary repairs increase an asset’s residual value or useful life. These capital
expenditures are debited to accumulated depreciation (and credited to Cash).
[Link] Depreciation, Asset Name XXXX(repair amount)
CR. Cash XXXX(repair amount)
Extraordinary repair to machinery.
2.(i) DEPRECIATION:
- Refers to allocation of the cost (less the residual value) of a plant asset to periods benefited by the asset.
- It does not refer to the physical deterioration or the decrease in market value of the asset; it is a process of
allocation, not of valuation.A plant asset should be depreciated over its useful life in a systematic, rational
manner. Plant assets have limited useful lives because of physical deterioration, and obsolescence.
- When an asset is purchased after the beginning of the year or is discarded before the end of the year,
depreciation is recorded for only part of the year. This is done by computing the year’s depreciation and
multiplying this figure by the fraction of the year that the asset was in use.
- When an asset is revalued future depreciation is then calculated by spreading the remaining depreciable
cost over the remaining useful life, leaving previous depreciation unchanged.
- Several factors affect the computation of depreciation:
1. Cost of assets; [Link] (Salvage/Disposal) value: estimated value at the disposal date; [Link]
Cost: equals the cost less residual value; [Link] Useful Life (in time or in units): is measured in
time or in units and requires careful consideration by the accountant.
- Journal Entry to enter depreciation:
DR. Depreciation Expense, Asset Name XXXXX
CR (Accumulated Depreciation, Asset Name) XXXXX
- The most common methods of depreciation are:
1. The straight line method (based on passage of time).
 2. The production method (based on units produced, miles driven etc.)
3. The declining-balance method (an accelerated depreciation method).
* Other Methods: 1. The sum of years digits 2. The sinking fund method
- Briefly depreciation is the logical allocation of asset cost to the periods benefited.
Depreciable assets have limited useful lives because of physical deterioration and obsolescence.
Depreciation and valuation are not the same. One may get a situation in which as asset may be appreciating,
although depreciation is being recorded periodically.
1. Straight-line Method of Depreciation:
- The depreciable value/cost is spread uniformly over the estimated useful life of the asset. Depreciation
for each year is computed as follows:
Depreciation (per annum) = Cost - Residual Value
Estimated Useful Life in Years
2. Production Method of Depreciation:
- Depreciation is based not on time but on use of the asset units. Depreciation for each year is computed as:
Depreciation (per annum) = Cost - Residual Value
Estimated Units of Useful Life
- The production method is a good application of the matching principle, but it can be used only if output
over useful life can be estimated with reasonable accuracy.
3. Declining Balance Method of Depreciation:
- Accelerated methods depreciation result in larger depreciation in the early years of asset’s life. Under the
‘declining-balance method’, depreciation is computed by multiplying existing carrying value of the asset
by fixed percentage. The ‘double-declining-balance method’ is a form of the declining balance method; it
uses a fixed percentage that is twice the straight-line percentage. Depreciation for each year is computed as:
Estimated Carrying Value/ Written Down Value X 100% X 2
Useful Life in Years
Though declining balance method doesn’t use residual value in its computation, in last year(s) depreciation
is limited to the amount necessary to bring the carrying value down to the estimated residual value.
- Thus residual value is ignored initially, but an asset may not be depreciated below its residual value.
- Under all methods, the accumulated depreciation increases and carrying value decreases over time.
- The rate of increase and decrease varies with the method used.
- An asset is never depreciated below its residual value. When an asset is still in use after it has been fully
depreciated, no more depreciation should be taken, but the asset should not be written off until its disposal
i.e. discarded as a gift/thrown into garbage, sold for cash or traded-in or exchanged for another asset.
- MACRS: In US under the Tax Reform Act of 1986 the Modified Accelerated Cost Recovery System the
write off of assets for tax purposes is generally more rapid than for financial reporting.
- Example property other than real estate is depreciated by a 200 per cent declining-balance method.
- Thus MARCS allows companies to depreciate assets for tax purposes using a 200 per cent declining
balance method over prescribed recovery periods.
Disposal of Asset:
An asset is disposed of when it is discarded, sold for cash, or traded- in and exchanged fo another asset.
When a business disposes of an asset:
1. Depreciation is recorded for the period preceding disposal.
This brings the asset’s Accumulated Depreciation account up to the date of disposal.
DR. Depreciation Expense, Asset Name XXXX
CR. Accumulated Depreciation, Asset Name XXXX
To record depreciation up to the date of disposal.
2. Closing of the Accumulated Depreciation account for that asset disposed.
And closing the Asset Account itself thus debiting Accumulated Depreciation and crediting the asset
account. If the machine has not been fully depreciated then Loss on Disposal of Asset must be debited for
the carrying value to balance the entry.
[Link] Depreciation Expense, Asset Name XXXX(Closing balance)
DR. Loss on Disposal of Machinery XXXX(carrying value)
CR. Machinery, Asset Name XXXX (cost)
Asset no longer used in the business.
3. Recording the receipt of cash or the value of asset exchanged.
DR Cash XXXX
DR. Accumulated Depreciation, Asset Name XXXX (To close)
CR. Machinery XXXX(cost)
 Sale of machinery for carrying value; no gain no loss.
DR Cash XXXX
DR. Accumulated Depreciation, Asset Name XXXX (To close)
DR. Loss on Sale of Asset XXXX(carrying value minus cash)
CR. Machinery XXXX(cost)
Sale of machinery at less than carrying value; loss recorded.
DR Cash XXXX
DR. Accumulated Depreciation, Asset NameXXXX (To close)
CR. Machinery XXXX(cost)
CR. Gain on Machinery Sale XXXX(Cash minus carrying value)
Sale of machinery at more than carrying value; gain recorded.
4. Disposal through trade-ins or exchanges:
- When the asset is traded in (exchanged) for a similar one, the gain/loss can be computed as follows:
Gain or Loss on Trade-in = Trade-in Allowance – Carrying Value of Asset Traded-in
- If exchange of dissimilar assets both gains and losses should be recognized (recorded).
- If exchange is of similar assets gains should not be recognized only losses should be recognized.
DR. Machinery (new)
DR. Accumulated Depreciation, (Old Asset)y
CR. Machinery (Old)
CR. Cash
- Exchange of machines; cost of old machine and its accumulated depreciation removed from the records;
new machine recorded at amount equal to carrying value of old machine recorded at amount equal to
carrying value of old machine plus cash paid; no loss recognized
(Note: if gain or loss must be recognized; it would be credited or debited, respectively.)
Accounting for the exchange of similar assets:
- For financial accounting purposes, losses are recognized, but gains are not.
- For tax purposes, neither gains nor losses are recognized.
Accounting for the exchange of dissimilar assets:
- Both gains and losses are recognized for both reporting and tax purposes.
Depletion of Natural Resources:
- Depletion is the allocation of the cost of a natural resource over the periods benefited.
- Depletion each year is computed as follows:
Cost – Residual Value X Actual units Extracted During Period
Estimated Units to be Extracted
- Units extracted but not sold during the year are recorded as inventory, to be charged as an expense in the
year sold. Assets acquired with natural resources that cannot be used after the natural resource is depleted
should be depreciated on the same basis as depletion.
There are 2 acceptable accounting methods for exploration and development of oil and gas reserves:
1. ‘Successful Efforts Accounting’ where only the cost of successful explorations, eg. producing wells is
capitalized &depleted, while cost of unsuccessful explorations,[Link] wells is expensed immediately
2. ‘Full Costing Method where the cost of all wells is capitalized and depleted.
DR. Depletion Expense, Coal Deposits XX(Amount allocated)
CR. Accumulated Depletion, Coal Deposits XX(amount allocated)
To record depletion of coal mine.
Amortization of Intangible Assets:
Intangible assets examples:
1. Patent: is an exclusive legal right to make a product.
2. Copyright: an exclusive legal right to publish literary, musical and other artistic materials and software.
3. Leasehold is the purchased right to rent property for a long time. Leasehold Improvements are
improvements made to leased property that revert to the lessor at the end of the lease.
4. Trademarks & brand names: exclusive rights to use registered symbols andnames to identify a product.
5. Franchise is the exclusive right to operate a business in a given territory.
6. License is the exclusive right to use a formula, technique, process, or design.
7. Research and Development encompass the development of new products, the testing of existing and
proposed products, and pure research. Cost of developing computer software is be treated as research &
development up to the point where a product is deemed technologically feasible.
 - From there onwards, software production costs should be capitalized & amortized over their useful lives
using straight line [Link] to GAAP, R&Dcosts normally should be expensed in period incurred
8. Goodwill, as the term is used in accounting, refers to a company’s ability to earn more than is normal
for its particular industry or for the amount of its capitalization (net assets). Goodwill usually is estimated
based on superior past earnings. Goodwill is recorded only when a company is purchased and equals the
excess of the purchase cost over the fair market value of the net assets purchased. Once it is recorded,
goodwill is amortized over its estimated useful life, not to exceed forty years.
- All intangible assets except for research and development should be capitalized and expensed over their
useful lives (not exceeding forty years) in accordance with the matching rule.
ACCELERATED DEPRECIATION
- With accelerated depreciation, the deduction for the depreciation expense is no longer a constant
amount. It is, rather, larger in theearlier years and then declining. But for the entire period of a capital
budgeting analysis, the PV of all of the accelerated depreciation tax deduction can be calculated.
- The present value factors for accelerated depreciation can be developed as follows. In this example,
we are interested in the factor for depreciation by the sum-of-years-digits method over a five-year
period with a 10% cost of capital.
- We first find the fraction of 1 that is received in each year, then discount thatamount at 10%. The
sum of the present values of the amounts receivedduring the five years, shown in the product column,
equals the accelerated depreciation factor (0.805 in this example).
Year” Asset Cost Depreciation Factor Product
1 5/15 0.33333 0.9091 0.303
2 4/15 0.26667 0.8264 0.220
3 3/15 0.20000 0.7513 0.150
4 2/15 0.13333 0.6830 0.091
5 1/15 0.06667 0.6209 0.041
Totals 1.00 1.0000 0.805
- To find present value of the depreciation tax savings when an investment is depreciated by an
accelerated method, we multiply the tax rate by the accelerated depreciation factor by the amount of the
investment. For a 20,000 investment:
PV = T(accelerated depreciation PV factor)Investment
= 0.4(0.805)(20,000)= 6.440.
- There are tables for both sum-of-years-digits & double declining balance depreciation methods, for
various asset lives & for different discount rates. In example W, NPV is 3,942 vs 3,660 for straight line.
- In general, NPV's are higher when accelerated depreciation is used, as the PV of the depreciation
benefit is higher than it would be under straight line depreciation.
QUIZ ON FIXED ASSETS
Q.1 Valentine Construction Corp. purchased a crane for $150,000 & planned to keep it for about five years,
after time it believed it could sell the crane for approximately $30,000.
At the end of the fourth year the company sold the crane for $60,000.
INSTRUCTIONS: Prepare journal entries to record the transactions on the crane for 4th year.
Q.2 (a) Landrover Corporation, whose fiscal year ends June 30, completed the following transactions
involving notes payable: May 21 Obtained a 60-day extension on an $18,000 trade account
payable owed to a supplier by signing a 60-day, $18,000 note. Interest is in addition to the face
value, at the rate of 14%.
Required: Make 30th June end-year adjusting entry to recognize the prepaid interest expense
(b) Pavlic Construction Co. purchased a road grader for $58,000. It is expected to have a useful life of
five years and a residual value of $4,000 at the end of that time. At the end of a second year the
road grader is traded in on a dissimilar piece of machinery costing $66,000. A trade-in allowance
of $32,000 is given, the balance is paid in cash, and gains and losses are recognized.
Required: Prepare entries in journal form to record the disposal of the road grader at the end of the
second year, assuming that the straight-line method is used.
CHAPTER 10—FIXED ASSETS AND INTANGIBLE ASSETS: TRUE/FALSE
1. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for
sale in the ordinary course of business are called fixed assets.
ANS:F DIF: 1 OBJ: 01
2. The acquisition costs of property, plant, and equipment should include all normal, reasonable and
necessary costs to get the asset in place and ready for use.
 ANS: T DIF: 1 OBJ: 01
[Link] land is purchased to construct a new building, the cost of removing any structures on the land
should be charged to the building account.
ANS: F DIF: 2 OBJ: 01
[Link] acquired as a speculation is reported under Investments on the balance sheet.
ANS: T DIF: 1 OBJ: 01
[Link] a major resort, timeshare properties would be classified as property, plant and equipment.
ANS: T DIF: 2 OBJ: 01
[Link] equipment held for use in the event of a breakdown of regular equipment is reported as
property, plant, and equipment on the balance sheet.
ANS: T DIF: 2 OBJ: 01
[Link] cost of repairing damage to a machine during installation is debited to a fixed asset account.
ANS: F DIF: 1 OBJ: 01
[Link] construction of a building, the cost of interest on a construction loan should be charged to an
expense account.
ANS: F DIF: 2 OBJ: 01
[Link] of computer equipment does not include the consultant's fee to supervise equipment installation.
ANS: F DIF: 1 OBJ: 01
[Link] depreciation occurs when a fixed asset is no longer able to provide services at the level for
which it was intended.
ANS: T DIF: 1 OBJ: 01
[Link] normal balance of the accumulated depreciation account is debit.
ANS: F DIF: 1 OBJ: 01
[Link] a company depreciates a piece of equipment, it cash flow goes up.
ANS: F DIF: 3 OBJ: 01
[Link] cities give land or buildings to a company to locate in the community, no entry is made since
there is no cost to the company.
ANS: F DIF: 2 OBJ: 01
[Link] property, plant, and equipment assets are depreciated over time.
ANS: F DIF: 2 OBJ: 01
[Link] book value of a fixed asset reported on the balance sheet represents its market value on that date.
ANS: F DIF: 1 OBJ: 01
[Link] depreciable cost of a building is the same as its acquisition cost.
ANS: F DIF: 1 OBJ: 02
[Link] is necessary for a company to use the same depreciation method for all of its depreciable assets.
ANS: F DIF: 2 OBJ: 02
[Link] is not necessary for a company to use the same depreciation method for financial statements and for
determining income taxes.
ANS: T DIF: 01 OBJ: 02
[Link] estimate of the amount which an asset can be sold at the end of its useful life is called residual value.
ANS: T DIF: 1 OBJ: 02
[Link] 80% of the six-hundred largest corporations use the straight line depreciation method for financial
reporting purposes.
ANS: T DIF: 1 OBJ: 02
[Link] units of production depreciation method matches expenses against revenue the best.
ANS: T DIF: 2 OBJ: 02
[Link] the useful life of a depreciable asset has been estimated and the amount to be depreciated each
year has been determined, the amounts can not be changed.
ANS: F DIF: 1 OBJ: 02
[Link] value is not relevant when calculating declining-balance depreciation.
ANS: T DIF: 1 OBJ: 02
[Link] declining-balance method is an accelerated depreciation method.
ANS: T DIF: 1 OBJ: 02
[Link] double declining balance depreciation method calculates depreciation each year by taking twice the
straight line rate times the book value of the asset at the beginning of each year.
ANS: T DIF: 1 OBJ: 02
[Link] of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an
estimated residual value of $5,000 and a useful life of 5 years, is $19,000 by the straight-line method.
ANS: F DIF: 3 OBJ: 02
[Link] amount of depreciation expense for a fixed asset costing $95,000, with an estimated residual value
of $5,000 and a useful life of 5 years or 20,000 operating hours, is $21,375 by the units-of-production
method during a period when the asset was used for 4,500 hours.
ANS: F DIF: 3 OBJ: 02
[Link] amount of the depreciation expense for the second full year of use of a fixed asset costing $100,000,
with an estimated residual value of $5,000 and a useful life of 4 years, is $25,000 by the declining-
balance method at twice the straight-line rate.
ANS: T DIF: 3 OBJ: 02
[Link] depreciation estimates are revised, all years of the asset’s life are affected.
ANS: F DIF: 2 OBJ: 02
[Link] income tax purposes most companies use an accelerated deprecation method called double
declining balance.
ANS: F DIF: 1 OBJ: 02
[Link] may be grouped according to common traits and depreciated by using a single composite rate.
ANS: T DIF: 1 OBJ: 02
[Link] expenditures are costs of acquiring, constructing, adding, or replacing property, plant and
equipment.
ANS: T DIF: 1 OBJ: 03
[Link] expenditures are costs that are charged to Stockholders' Equity accounts.
ANS: F DIF: 1 OBJ: 03
[Link] of new equipment is called revenue expenditure since it will help generate revenues in the future.
ANS: F DIF: 1 OBJ: 03
[Link] that increase operating efficiency or capacity for the remaining useful life of a fixed asset
are betterments. ANS: T DIF: 1 OBJ: 03

CHAPTER 9—INVENTORIES: TRUE/FALSE

[Link]-in is considered a cost of purchasing inventory.
ANS: T DIF: 1 OBJ: 01
[Link] many retail businesses, inventory is the largest current asset.
ANS: T DIF: 2 OBJ: 01
[Link] inventory is sold in many retail businesses, the largest expense is created.
ANS: T DIF: 2 OBJ: 01
[Link] cost of merchandise inventory is limited to the purchase price less any purchase discounts.
ANS: F DIF: 2 OBJ: 01
5.A business using the perpetual inventory system, with its detailed subsidiary records, does not need to
take a physical inventory.
ANS: F DIF: 2 OBJ: 01
[Link] of the two internal control procedures over inventory is to properly report inventory on the
financial statements.
ANS: T DIF: 2 OBJ: 01
7.A detective internal control is designed to find an error or misstatement after it has occurred.
ANS: T DIF: 2 OBJ: 01
8.A perpetual inventory system is an effective means of control over inventory.
ANS: T DIF: 2 OBJ: 01
9.A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.
ANS: T DIF: 1 OBJ: 01
[Link] to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise
to the buyer's place of business.
ANS: F DIF: 2 OBJ: 01
[Link] goods in transit should be included in the ending inventory if the goods were shipped FOB
shipping point.
ANS: T DIF: 2 OBJ: 01
[Link] goods in transit, shipped FOB destination, should be excluded from ending inventory.
 ANS: T DIF: 2 OBJ: 01
13.A consignor who has goods out on consignment with an agent should include the goods in ending
inventory even though they are not in the possession of the consignor.
ANS: T DIF: 2 OBJ: 01
[Link] consigned merchandise should be included in the consignee's inventory.
ANS: F DIF: 2 OBJ: 01
[Link] ending inventory for the year is understated, net income for the year is overstated.
ANS: F DIF: 3 OBJ: 02
[Link] ending inventory for the year is overstated, owner's equity reported on the balance sheet at the end
of the year is understated.
ANS: F DIF: 3 OBJ: 02
[Link] specific identification inventory method should be used when the inventory consists of identical,
low cost units that are purchased and sold frequently.
ANS: F DIF: 2 OBJ: 03
] [Link] the three widely used inventory costing methods (FIFO, LIFO, and average), the LIFO method of
costing inventory is based on the assumption that costs are charged against revenues in the reverse
order in which they were incurred.
ANS: T DIF: 2 OBJ: 03
[Link] using FIFO inventory costing method, the most recent costs are assigned to the cost of goods sold.
ANS: F DIF: 2 OBJ: 03
[Link] is the inventory costing method that follows the physical flow of the goods.
ANS: T DIF: 2 OBJ: 04
[Link] the perpetual inventory system is used and a physical count disclosed a shortage, the cost of
merchandise sold should be debited and the merchandise inventory account credited.
ANS: T DIF: 2 OBJ: 04
[Link] the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for
purchases of merchandise.
ANS: T DIF: 1 OBJ: 04
MULTIPLE CHOICE
1.A note receivable due in 18 months is listed on the balance sheet under the caption
a. long-term liabilities
b. fixed assets
c. current assets
d. Investments
ANS: D DIF: 2 OBJ: 01
[Link] control over receivables is achieved when the employee who handles the accounting for
receivables
a. also is involved with the operating aspects of approving credit
b. also is involved with the operating aspects of collecting receivables
c. is not involved with the operating aspects of approving credit
d. also is involved with authorizing adjustments to receivables
ANS: C DIF: 1 OBJ: 02
[Link] internal control objective most relevant to receivables is
a. safeguard assets
b. comply with laws and regulations
c. operate efficiently
d. assess risk
ANS: A DIF: 2 OBJ: 02
[Link] two methods of accounting for uncollectible receivables are the allowance method and the
A. [Link] method [Link] write-off method [Link] method [Link] method
ANS:
B. B DIF: 2 OBJ: 03
[Link] the allowance method of accounting for uncollectible receivables is used, what general ledger account
is debited to write off a customer's account as uncollectible?
a. Uncollectible Accounts Expense
b. Allowance for Doubtful Accounts
c. Accounts Receivable
 d. Interest Expense
ANS: B DIF: 1 OBJ: 04
[Link] for Doubtful Accounts has a credit balance of $800 at the end of the year (before
adjustment), and an analysis of accounts in the customers ledger indicates doubtful accounts of
$15,000. Which of the following entries records the proper provision for doubtful accounts?
a. debit Uncollectible Accounts Expense, $800; credit Allowance for Doubtful Accounts, $800
b. debit Uncollectible Accounts Expense, $14,200; credit Allowance for Doubtful Accounts, $14,200
c. debit Allowance for Doubtful Accounts, $800; credit Uncollectible Accounts Expense, $800
d. debit Allowance for Doubtful Accounts, $15,800; credit Uncollectible Accounts Expense, $15,800
ANS: B DIF: 3 OBJ: 04
[Link] for Doubtful Accounts has a debit balance of $500 at the end of the year (before adjustment),
and uncollectible accounts expense is estimated at 3% of net sales. If net sales are $600,000, the
amount of the adjusting entry to record the provision for doubtful accounts is
a. $18,500
b. $17,500
c. $18,000
d. none of the above
ANS: C DIF: 3 OBJ: 04
[Link] the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a
balance of $450,000 and Allowance for Doubtful Accounts has a balance of $25,000. What is the net
realizable value of the accounts receivable?
A. $25,000 B. $425,000 C. $450,000 D. $455,000
ANS: B DIF: 2 OBJ: 04
[Link] the allowance method of accounting for uncollectible receivables is used, what general ledger account
is credited to write off a customer's account as uncollectible?
a. Uncollectible Accounts Expense
b. Accounts Receivable
c. Allowance for Doubtful Accounts
d. Interest Expense
ANS: B DIF: 1 OBJ: 04
[Link] for Doubtful Accounts is listed on the balance sheet under the caption
a. owner's equity
b. investments
c. fixed assets
d. current assets
ANS: D DIF: 1 OBJ: 04
[Link] the balance sheet, the amount shown for the Allowance for Doubtful Accounts is equal to the
a. Uncollectible accounts expense for the year
b. total of the accounts receivables written-off during the year
c. total estimated uncollectible accounts as of the end of the year
d. sum of all accounts that are past due.
ANS: C DIF: 2 OBJ: 04
[Link] for Doubtful Accounts has a credit balance of $1,100 at the end of the year (before
adjustment), and an analysis of customers' accounts indicates doubtful accounts of $12,900. Which
of the following entries records the proper provision for doubtful accounts?
a. debit Uncollectible Accounts Expense, $14,000; credit Allowance for Doubtful Accounts, $14,000
b. debit Allowance for Doubtful Accounts, $14,000; credit Uncollectible Accounts Expense, $14,000
c. debit Allowance for Doubtful Accounts, $11,800; credit Uncollectible Accounts Expense, $11,800
d. debit Uncollectible Accounts Expense, $11,800; credit Allowance for Doubtful Accounts, $11,800
ANS: D DIF: 3 OBJ: 04
[Link] for Doubtful Accounts has a credit balance of $1,500 at the end of the year (before
adjustment), and an analysis of customers' accounts indicates doubtful accounts of $17,900. Which
of the following entries records the proper provision for doubtful accounts?
a. debit Allowance for Doubtful Accounts, $16,400; credit Uncollectible Accounts Expense, $16,400
b. debit Allowance for Doubtful Accounts, $19,400; credit Uncollectible Accounts Expense, $19,400
c. debit Uncollectible Accounts Expense, $19,400; credit Allowance for Doubtful Accounts, $19,400
 d. debit Uncollectible Accounts Expense, $16,400; credit Allowance for Doubtful Accounts, $16,400
ANS: D DIF: 3 OBJ: 04
[Link] is the type of account and normal balance of Allowance for Doubtful Accounts?
a. Contra asset, credit
b. Asset, debit
c. Asset, credit
d. Contra asset, debit
ANS: A DIF: 2 OBJ: 04
15. A company uses the estimate of sales method to account for uncollectible accounts. When the firm
writes off a specific customer's account receivable
a. total current assets are reduced
b. total expenses for the period are increased
c. total current assets are reduced and total expenses are increased
d. there is no effect on total current assets or total expenses
ANS: D DIF: 3 OBJ: 04
16. An estimate based on an analysis of receivables shows that $780 of accounts receivables are
uncollectible. The Allowance for Doubtful Accounts has a debit balance of $110. After preparing
the adjusting entry at the end of the year, the balance in the Uncollectible Accounts Expense is
A. $110 B. $780 C.$670 D.$890
ANS: D DIF: 3 OBJ: 04
[Link] company uses the estimate of sales method of accounting for uncollectible accounts. ABC
estimates that 3% of all credit sales will be uncollectible. On January 1, 2005, the Allowance for
Doubtful Accounts had a credit balance of $2,400. During 2005, ABC wrote-off accounts receivable
totaling $1,800 and made credit sales of $100,000. After the adjusting entry, the December 31, 2005,
balance in the Uncollectible Accounts Expense would be
A. $1,200 B. $3,000 C. $3,600 D. $7,200
ANS: B DIF: 3 OBJ: 04
[Link] balance in Allowance for Doubtful Accounts must be carefully considered prior to the end of the
year adjustment when applying which method?
a. direct write-off method
b. estimate based on sales
c. estimate based on an analysis of receivables
d. both (b) and (c)
ANS: C DIF: 2 STO: 04
[Link] Company uses the estimate based on analysis of receivables to account for uncollectible
accounts. The company has determined that the Irish Company account is uncollectible. To write-off
this account, Donovan should debit
a. Uncollectible Accounts Expense and credit Accounts Receivable
b. Uncollectible Accounts Expense and credit Allowance for Doubtful Accounts
c. Allowance for Doubtful Accounts and credit Accounts Receivable
d. Accounts receivable and credit Allowance for Doubtful Accounts
ANS: C DIF: 2 OBJ: 04
[Link] the estimate based on sales method of accounting for uncollectible accounts, the entry to
reinstate a specific receivable previously written off would include a
a. credit to Allowance for Doubtful Accounts
b. credit to Accounts Receivable
c. debit to Allowance for Doubtful Accounts
d. debit to Accounts Receivable
ANS: D DIF: 2 OBJ: 04

TEST
Q.1 Which of the following accounts do not show a balance after closing entries are prepared and posted?
a. Insurance Expense. b. Accounts Receivable c. Commission Revenue.
d. Prepaid Insurance. e. Owner's Withdrawals.
 Q.2-5 Read the following statements and then match the concepts indicated below with the best
descriptions in these statements that describe that concept.
A. Journal entries made at the end of an accounting period that set the stage for the next
accounting period by clearing the temporary accounts of their balances, and that summarize a
period's revenues and expenses.
B. Accounts that show the accumulation of revenues and expenses over one accounting period; at
the end of the accounting period, these accounting balances are transferred to Owner's Equity.
Also called nominal accounts.
C. A journal entry dated the first day of a new accounting period that is the exact opposite of an
adjusting entry made on the last day of the prior accounting period.
D. A type of paper used as a preliminary step in recording adjusting and closing entries and in the
preparation of financial statements.
Q.2 Which of the following statements refers to REVERSING ENTRIES?
Q.3 Which of the following statements refers to WORK SHEET?
Q.4 Which of the following statements refers to TEMPORARY ACCOUNTS?
Q.5 Which of the following statements refers to CLOSING ENTRIES?
q.6-10 Coast Airline was established in 2002. On Jan.5th the firm purchased six small passenger jets for
local use at a total cost of $12 million. The firm had planned to use the planes for 10 years, after
which it believes they can be sold for a total of $2 million. Within the 10 years the total
estimated flying hours for all the six jets is 50,000 hours. In 2002 the jets flew 4,000 hours and in
2003 the jet planes flew 6,000 hours. The firm's accounting year ends December 31.
INSTRUCTIONS: for Qs.6-10: The Depreciation Expense amounts for all the six jets (maintained
in one Ledger Account) for the year 2002 is:
A. 181,818. B.800,000 C.1,000,000. D.1,200,000. E.2,400,000.
Indicate which of the above figures (a-e) is the correct amount of Depreciation Expense under
each of the following methods: Straight-Line Depreciation Method;
Q.7-11 A piece of equipment that cost $32,400 and on which $18,000 of accumulated depreciation had
been recorded was disposed of on January 2, the first day of business of the current year.
Q.7 Will there be a gain or loss on disposal and the correct amount of such gain or loss if it was discarded
as having no value?
A. Gain on Disposal of $14,400. [Link] on Disposal of $14,400. C. Gain on Disposal of $8,400.
D. Loss on Disposal of $8,400. E. Gain on Disposal of $3,600.
Q.8 Will there be a gain/loss on disposal & the correct amount of such gain/loss if it sold for $6,000 cash?
A. Gain on Disposal of $14,400. [Link] on Disposal of $14,400. C. Gain on Disposal of $8,400.
D. Loss on Disposal of $8,400. E. Gain on Disposal of $3,600.
Q.9 Will there be a gain or loss on disposal and the correct amount of such gain or loss if it was sold for
$18,000 cash?
A. Gain on Disposal of $14,400. [Link] on Disposal of $3,600. C. Gain on Disposal of $1,800.
D. Loss on Disposal of $1,800. E. Gain on Disposal of $6,900.
Q.10 Will there be a gain or loss on disposal and the correct amount of such gain or loss if it was traded in
on dissimilar equipment having a list price of $48,000. A $ 16,200 trade-in was allowed, and the
balance was paid in cash?
A. Gain on Disposal of $14,400. [Link] on Disposal of $3,600. C. Gain on Disposal of $1,800.
D. Loss on Disposal of $1,800. E. Gain on Disposal of $6,900.
Q.11 Will there be a gain or loss on disposal and the correct amount of such gain or loss if it was traded
in on dissimilar equipment having a list price of $48,000. A $ 7,500 trade-in was allowed, and
the balance was paid in cash?
A. Gain on Disposal of $14,400. [Link] on Disposal of $3,600. C. Gain on Disposal of $1,800.
D. Loss on Disposal of $1,800. E. Gain on Disposal of $6,900.

Revision
Q.1 The information for Speedy Print is given below:
1. On 1/10/2001, Speedy Print purchased a colour photocopy machine at cost of $20,000. Estimated
useful life is 8yrs & a residual value of $4,000. It uses straight-line depreciation in financial statements.
Speedy Print found that not many of its customers used the colour copier.
 Therefore, on March 1,2003, Speedy Print sold this machine to Commercial Graphics Company for
$10,000 cash. This transaction has not been entered in the books yet by mistake.
2. On Nov.1, 2003 borrowed $235,000 from Sun National Bank at an interest rate of 12% per annum;
signed a 90-day note payable.
3. The credit manager of Speedy Print has gathered the following information about the company’s
accounts receivable and credit losses during the current year:
Net credit sales for the year…………………………..$3,000,000
Accounts receivable at year-end……………………… 360,000
- Uncollectible accounts receivable(Uses the direct write-off method):
- Estimated portion of year-end receivable expected to prove uncollectible & be written off…$18000
- Uncollectible accounts expense is estimated at an amount equal to 1 ½% (one and a half %) of net
credit sales.
4. A complete physical inventory taken at December, 31 2003 indicates merchandise costing $96,000
remain in stock.
5. All other long term/fixed assets are depreciated over 10 years economic life with zero salvage value.
INSTRUCTIONS: Prepare adjusting journal entries(in general journal form) to record the above
transactions. Use a 360-day year in making the interest calculations.
Q. 2 A company has a credit balance of $600 in its Allowance for Doubtful; Accounts. The amount of credit
sales for the period is $80,000 and the balance in Accounts Receivable is $15,000. Assume that the bad
debt estimates are as follows(a) related to Accounts Receivable, 9 percent, and (b) related to credit sales,
0.5 percent. Complete the following tabulation after the adjusting entry is made for bad debts.
Account (a) Based on Accounts Receivables (b) Based on Credit Sales
Bad debt expense $……… $………….
Allowance for Doubtful Accounts $……… $………….
Q.3. QQ Bank that has very stringent customer scrutiny before advancing short-term loans. Thus the bank
thought it appropriate to use Direct Write Off Method for writing off bad debts. In year ended 31/12/2003
due to unfortunate collapse &business closure of one of its clients, the bank has to write-off the client’s
short-term loan of Shs.10,000,000. Thus the journal entries for the writing off of this bad debt would be:
DR. SHS.10,000,000
CR. SHS.10,000,000
Q.4. Referring to the question in Q.3) above, If instead QQ Bank used INDIRECT WRITE-OFF METHOD to
write off bad debts And by March 31, 2004 the liquidators of the former collapsed customer paid back to
QQ Bank some of the bad debt previously written off of Shs.5,000,000 .Therefore the journal entries on
March 31, 2004 would be?
Q.5. Andrew Jack, a tour operator traded-in 10 combis at CMC Motors for [Link].4,000,000 and paid the
difference of [Link].6,000,000 in cash to buy 10 new combis cars. The old fleet of 10 combis traded in were
bought two years ago for [Link].8,000,000 and at the time of sale/ trade-in their Net Book Value is
[Link].5,000,000. The journal entries to capture these transaction are:
Q.6. Company sold its MD’s Mercedes Benz which costed Shs.7,000,000 in 2001 for [Link].1,000,000 in
2003. The car was estimated to have economic life of 4 years with zero salvage value. It was depreciated
for two years using sum-of-years-digits method of depreciation. It was sold at the end of two years. When
sold January 1, 2003 in year 3, the entries to recognize this disposal would be:
Q.7. Kenya Airways Ltd & Subsidiaries had the following information appearing in its Balance Sheet of for
year ended March 31 2003:
Authorised:- 1,000,000,000 ordinary shares of [Link]. 5 each
Issued and Fully paid:- 461,615,484 ordinary shares of [Link]. 5 each =[Link]. 2,308,077,420
Reserves:- KShs.4,672,000
Show in good form the equity section of the Balance Sheet as of March 31, 2003.
Q.8. Corporation Kaka was organized in 2000. The company was authorized to issue 25,000 shares of $10
par value common and 1,000 shares of cumulative preferred stock. All of the preferred stock were issued
at $103 and 20,000 shares of common were issued at $32 each. preferred stock was callable at $105, with
$100 par value &was entitled to dividends at 6% before any dividends were paid to common stock holders.
Prepare in good form the stockholders’ equity section of the balance sheet as of December 31, 2003.