Unit – 4
Royalty
Under the Hire Purchase System, the ownership in asset is not owned by the hirer (hire purchaser). Nevertheless, Depreciation is provided by the hire purchaser on such assets since:
(a) It is used for the business and
(b) It is likely to be owned in near future on payment of the last instalment.
Depreciation may be charged either under the Straight Line Method or the Written Down Method. It should be noted that Depreciation is charged with reference to the cost of the asset i.e. its cash price and not its hire purchase price.
Under the Instalment Payment System, the ownership is transferred by the seller to the buyer at the time of sale (at the time of signing the contract), unlike Hire Purchase System, where the ownership is transferred only upon the payment of last instalment.
Difference Between both the terms is explained with the help of following points:
Ownership: The ownership in goods is transferred from the seller to the buyer only upon the payment of last instalment.
In IP System, the ownership is transferred upon signing of the contract.
Rights: In HP System, the buyer cannot sell or transfer the goods. He is even responsible for the good condition of the hire purchased goods.
In IP System, the buyer can sell or transfer the goods, as the buyer becomes the legal owner of the goods.
Risk: All the risks are borne by the seller, till the payment of last instalment by the buyer.
In IP System, all the risks are borne by the buyer, as soon as he signs the agreement.
Returning of Goods: In HP System, the goods can be returned by the buyer to the seller, anytime before the payment of the last instalment.
In IP System, the buyer cannot return the goods to seller, once the contract comes to force between the two parties.
Q1) Mr. Shashi brought a refrigerator under Hire Purchase System for a cash price of 15,675 with the following terms:
(A) 4,500 to be paid on signing the agreement.
(B) Balance to be paid in three equal instalments of 4,500 at the end of each year.
(C) The rate of interest charged for the hire purchase is 10% per annum.
Calculate the amount of instalment interest. Also pass Journal Entries in the books of the Buyer as well as the Seller.
Solution:Cash Price, Instalment Interest and Instalment Cash Price
Particulars / Instalment | Down | 1 | 2 | 3 | Total |
(1-4) | 15,675 4,500 0 4,500 11,175 | 11,175 4,500 1,118 3,382 7,793 | 7,793 4,500 779 3,721 4,072 | 4,072 4,500 428 4,072 (0) |
18,000 2,325 15,675
|
Q2) The Car Mart company purchases a motor car from Autoriders Company on a hire purchase agreement on January 1, 2011, paying cash 10,000, and agreeing to pay further three instalments of 10,000 each on 31st December each year. The cash price of the car is 37,250 and the Autoriders Company charges interest at 5% p.a. The Car Mart Company writes off 10% p.a. As depreciation on the reducing instalments system. Compute the amount of yearly depreciation. Prepare Journal Entries in the books of Buyer & Seller.
Solution: Calculation of Closing WDV at the end of the Year 1/Year 2/Year 3
Particulars / Year | Year 1 2011 | Year 2 2012 | Year 3 2013 |
Opening W.D.V. (1-1) Less: Depreciation @ 10% on Opening W.D.V. = Closing W.D.V. (31-12) | 37,250 3,725 33,525 | 33,525 3,353 30,172 | 30,172 3,017 21,155 |
Journal Entries in the books of Car Mart Company (Buyer)
Date | Particulars | Debit | Credit |
2011 Jan 1
Dec 31
2012 Dec.31
2013 Dec.31 |
Motor Car A/c Dr. To Autoriders Company (Being the total cash price due to the hire vendor for hire purchase of car as per agreement dated….) |
37,250
10,000
1,363
10,000
3,725
5,088
931
10,000
3,353
4,284
456
10,000
3,017
3,473
1,02,940 |
37,250
10,000
1,363
10,000
3,725
1,363 3,725
931
10,000
3,353
931 3,353
456
10,000
3,017
3,473
1,02,940 |
Autoriders Company A/c Dr. To Bank A/c (Being the down payment made to hire vendor)
Interest A/c Dr. To Autoriders Company (Being the interest for the year due to hire vendor)
Autoriders Company Dr. To Bank A/c (Being the payment of instalment due)
Depreciation A/c Dr. To Motor Car A/c (Being the depreciation on motor car for the year)
Profit & Loss A/c Dr. To Interest A/c To Depreciation A/c (Being the amounts charged to P & L A/c at the year end)
Interest A/c Dr. To Autoriders Company A/c (Being the interest for the year due to hire vendor)
Autoriders Company A/c Dr. To Bank A/c (Being the payment of instalment due)
Depreciation A/c Dr. To Motor Car A/c (Being the depreciation on motor car for the year)
Profit & Loss A/c Dr. To Interest A/c To Depreciation A/c (Being the amounts charged to P & L A/c at the year end)
Interest A/c Dr. To Autoriders Company A/c (Being the interest for the year due to hire vendor)
Autoriders Company A/c Dr. To Bank A/c (Being the payment of instalment due)
Depreciation A/c Dr. To Motor Car A/c (Being depreciation charged on motor car)
Profit & Loss A/c Dr. To Interest A/c To Depreciation A/c (Being the amounts charged P & L A/c at the year end)
|
Journal Entries in the books of Autoriders Company (Seller)
Date | Particulars | Debit | Credit |
2011 Jan 1
Dec 31
2012 Dec.31
2013 Dec.31 |
Car Mart A/c Dr. To Sales (Being the total cash price due to the hire vendor for hire purchase of car as per agreement dated….)
Bank A/c Dr. To Car Mart A/c (Being the down payment received from hire vendor) Car Mart Company A/c Dr. To Interest Earned A/c (Being the interest for the year due from hire vendor)
Bank A/c Dr. To Car Mart Company Earned A/c (Being the receipt of instalment due)
Interest Earned A/c Dr. To Profit & Loss A/c (Being the interest transferred to P & L A/c at the year end )
Car Mart Company A/c Dr. To Interest Earned A/c (Being the interest for the year due from hire vendor)
Bank A/c Dr. To Car Mart Company Earned A/c (Being the receipt of instalment due)
Interest Earned A/c Dr. To Profit & Loss A/c (Being the interest transferred to P & L A/c at the year end )
Car Mart Company A/c Dr. To Interest Earned A/c (Being the interest for the year due from hire vendor)
Bank A/c Dr. To Car Mart Company Earned A/c (Being the receipt of instalment due)
Interest Earned A/c Dr. To Profit & Loss A/c (Being the interest transferred to P & L A/c at the year end )
|
37,250
10,000
1,363
10,000
1,363
931
10,000
931
456
10,000
456
|
37,250
10,000
1,363
10,000
1,363
931
10,000
931s
456
10,000
456
|
82,750 | 82,750 |
Departmental Accounts
Department is a division of a large organization, dealing with a specific area of activity. Department is distinguished from Branch. Various branches of a business are located at distinct places, generally far from each other. Department are small units, carrying out their own specific activity within a single premises of the business.
Whenever there are departments in a business, it is also necessary that profit-loss situation is also derived from each department. Hence,departmental accounts are prepared.
While preparing Departmental Accounts, following points are considered:
1) Specific expenses of each department are directly charged to that department.
2) Common expenses are allocated to each department, using some logical method
For e.g. Rent is a common expenditure paid for the whole unit of the business. So it will be allocated to each department on the basis of the area occupied by each of them.
Branch Accounts
Large business organizations may have a main office, known as Head Office (H.O.) and several offices at different geographical locations, known as Branch. Branches are opened with a view to gain larger customer base, from different geographies. It increases sales of the company.
Any business entity having Branch or Branches need to prepare different set of books of accounts for H.O separately from its Branch. This is done so that Branch Profits can be computed and management can find out the profitability of each of the branch separately.
There are two types of Branch. Dependent and Independent.
Accounting of Dependent Branch is done as per one of the two methods:
Debtors Method and
Stock and Debtors Method.
In Debtors Method, a separate branch a/c is prepared in the books of the H.O. And all items related to the specific branch are recorded in the same a/c. Accounting is different on the fact whether Goods are sent to the branch by H.O. At Cost Price or at a higher price than the cost i.e. loading price.
In Stock and Debtors Method,a separate branch a/c is prepared in the books of the H.O. But in much more detailed manner, than in the Debtors Method. In this case also, accounting depends upon the price at which goods are sent to the branch by the H.O.
Q 1) From the following particulars you are required to prepare Departmental Trading Account for Departments A and B for the year ended 31.03.2015
Particulars | Department A
| Department B |
Opening Stock Purchases Sales Closing Stock | 60,000 3,60,000 6,00,000 20,000
| 90,000 5,40,000 8,00,000 80,000
|
Solution:Departmental Trading for the year ended on 31.03.2015
Particulars | Dept.A
| Dept.B | Total | Particulars | Dept.A | Dept.B | Total |
To Opening Stock To Purchases
To Gross Profit c/d | 60,000
3,60,000
2,00,000 | 90,000
5,40,000
2,50,000 | 1,50,000
9,00,000
4,50,000 | By Sales By Closing Stock | 6,00,000 20,000
| 8,00,000 80,000
| 14,00,000 1,00,000
|
6,20,000 | 8,80,000 | 15,00,000 | 6,20,000 | 8,80,000 | 15,00,000 |
Q 2) Prepare Departmental Trading Account from the following particulars:
Particulars
| Dept. A | Dept. B | Dept. C | Total |
Purchases Sales Wages Closing Stock Carriage Inwards | 90,000 160,000 30,000 44,000
| 60,000 1,28,000 24,000 32,000 | 30,000 64,000 20,000 28,000 | - - - - 12,000 |
Additional Information:There was no Opening Stock.
Solution: Departmental Trading Account for the year ending……
Particulars | Dept. A | Dept. B | Dept. C | Particulars | Dept. A | Dept. B | Dept. C |
To purchases To Carriage inward To Wages
To Gross Profit c/d
| 90,000
6,000 30,000
78,000
| 60,000
4,000 24,000
72,000
| 30,000
2,000 20,000
40,000
| By Sales By Stock | 1,60,000 44,000
| 1,28,000 32,000
| 64,000 1,04,000
|
2,04,000 | 1,60,000 | 92,000 | 2,04,000 | 1,60,000 | 92,000 |
Note No.1:Carriage inward should be allocated in the ratio of Purchases which is 90,000 : 60,000 i.e. 3:2
PART 2 - BRANCH ACCOUNTING
Q1) Hari is having his Head Office at Patna and Branch Office at Gaya. Prepare the Branch Account in the books of the Head Office from the following transactions with the branch:
Particulars | Amount | Particulars | Amount |
Opening Balance at Branch: - Petty Cash - Stock - Debtors Goods Supplied to Branch during the year Amounts remitted by the Branch: - Cash Sales - Realisation from Debtors |
1,000 39,500 21,000
3,10,000
1,13,200 2,30,300
| Amounts remitted to the Branch for: - Petty Cash Expenses - Salary - Rent and Taxes Closing balances at Branch: - Petty Cash - Debtors - Stock |
4,000 12,000 3,500
950 53,000 26,500 |
IN THE BOOKS OF H. O.
Gaya Branch Account
Particulars | Amount | Particulars | Amount |
To Balance b/d: Branch Petty Cash Branch Stock Branch Debtors To Goods sent to Branch To Cash remitted for: Petty Cash Expenses Salary Rent To General P/L A/C (Bal. Fig.) |
1,000 39,500 21,000 3,10,000
4,000 12,000 3,500 32,950
4,23,950 | By Bank (Remittances) Cash Sales Realisation from Debtors By Balance c/d: Branch Petty Cash Branch Debtors Branch Stock |
1,13,200 2,30,300
950 53,000 26,500
4,23,950 |
Q2) Babubhai of Patna opened a branch at Gaya on 1st January, 2013. During the year ended 31st December 2013, the following transactions have taken place:
Goods sent to Gaya60,000
Cash sent to Gaya5,000
Goods returned from Gaya6,000
Cash received from Gaya58,000
Rent for Branch paid by Head Office3,000
Expenses paid by Branch:
Salaries 6,000
Conveyance500
Postage500
Carriage 4007400
Discount allowed to customers was 800. Sales on Credit amounted to 68,000. Cash Sales amounted to 8,000. On 31st December, 2013. Stock worth 6,000 was at Branch, 5,000 was due from Debtors and Cash on hand was 1,000.Show Branch Account in the books of Babubhai.
IN THE BOOKS OF H.O.Gaya Branch Account
Particulars | Amount | Particulars | Amount |
To Goods sent to Branch A/c To Cash To Cash (Rent paid) To General P/L A/c (Bal. Fig.)
| 60,000 5,000 3,000 8,000
| By Goods sent to Branch A/c (Returns) By Bank A/c (Remittances) By Balance c/d: Closing Stock Cash Debtors |
6,000 58,000
6,000 1,000 5,000
|
76,000 | 76,000 |
Notes:
1 For the following transactions no entry will be passed by H.O. In its Books: Expenses paid by branch, discount allowed to customers, sales by branch. These are recorded by the branch in its Memorandum (rough) Accounts are reflected in the closing balances c/d.
2 Since this is the first year when the branch was started, there are no opening balances.
A Partnership Firm is said to be dissolved when the business of the firm is closed down and the relation amongst the partners comes to an end. A Partnership Firm is also dissolved when any of its partner or all of its partners except one, becomes insolvent.
A court may also declare to dissolve a partnership firm on account of the following reasons-
- When a partner becomes an unsound mind person.
- When a partner is guilty of misconduct
- When the business cannot be carried on except at Losses.
Effects of dissolution:
- Upon dissolution, the activities of the firm are closed down
- The assets are disposed off, i.e. sold.
- Further, the liabilities are settled i.e. paid
- Any amount leftover is distributed amongst the partners.
According to the said rule, the loss on account of insolvency of a partner is a capital loss and so, the loss should be borne by the Solvent Partners in the ratio of their Capitals standing on the date of dissolution of the firm.
This means that, the solvent partners should bring in cash equivalent to their respective share of loss on realization and the loss due to the insolvency of a partner should be divided among the solvent partners in the ratio of capitals.
The FAMOUS Garner Vs Murray Rule:
This rule cannot be applied when all the partners have become or declared insolvent, because there is no solvent person left to pay the dues of other partners.
Q1) Sun, Moon and Star were equal Partners. Their Financial position as on 31st March, 2011 was as under.
Balance Sheet as on 31st March, 2011
LIABILITIES | AMOUNT | AMOUNT | ASSETS | AMOUNT | AMOUNT |
Capital Accounts Sun Moon Star Current Accounts Sun Moon Sundry Creditors Bills Payable
|
20,000 16,000 1,000
2,000 1,000
| 37,000
3,000
8,000 2,000 50,000 | Current Account Star Premises Machinery Debtors Less: R.D.D. Furniture Profit & Loss A/c Cash |
11,000 200 |
13,000 9,800 8,500
10,800 900 6,000 1,000 50,000 |
On the above date they decided to dissolve the partnership firms and the results of realisation were as under.
1) Sun to take over premises at an agreed value of 5,000. Machinery realised at 80% of book value and Debtors at 8,300. Furniture was given away free of charge to the office boy.
2) Sundry Creditors were paid 4,100 in full satisfaction of their claims, whereas Bill Payable were discharged by Sun at 1,000 in full settlement.
3) Realisation expenses amounted 2,000 which were met by Sun.
4) Star becomes insolvent and 7,000 could be recovered from his private estate.
Give necessary Ledger Account to close the books of the firm.
Solution: In the books of Sun, Moon and Star
Realisation Account
PARTICULARS | AMOUNT | AMOUNT | PARTICULARS | AMOUNT | AMOUNT |
To Sundry Assets A/c Premises Machinery Debtors Furniture To Cash A/c (Creditors) To Sun’s Current A/c Bills Payable Realisation exps.
|
9,800 8,500 11,000 900
1,000 1,000
| 30,200
4,100
2,000
36,300 | By Sundry Liabilities Creditors Bills Payable By R.D.D. A/c By Sun’s Current A/c (Premises taken over) By Cash A/c Machinery Debtors
By Partner’s Current A/cs Sun Moon Star (Loss transferred) |
8,000 2,000
6,800 8,300
2,000 2,000 2,000
| 10,000
200 5,000
15,100
6,000
36,300 |
Combined Partner’s Capital Accounts
PARTICULARS
| SUN | MOON | STAR | PARTICULARS | SUN | MOON | STAR |
To Current A/c To Star’s Capital A/c To Cash A/c | 5,000
4,500 10,500
20,000 | 3,000
4,500 8,500
16,000 | 17,000
- -
17,000 | By Balance b/d By Cash A/c By Sun’s Capital A/c By Moon’s Capital A/c
|
20,000 -
-
-
20,000 |
16,000 -
-
-
16,000 |
1,000 7,000
4,500
4,500
17,000 |
Combined Partner’s Current Accounts
PARTICULARS | SUN | MOON | STAR | PARTICULARS | SUN | MOON | STAR
|
To Balance b/d To Profit & Loss A/c To Realisation A/c (Premises) To Realisation A/c (Loss)
| -
2,000
5,000
2,000
9,000 | -
2,000
-
2,000
4,000 | 13,000
2,000
-
2,000
17,000 | By Balance b/d By Realisation A/c (Bills payable &exps.) By Capital A/c | 2,000 2,000
5,000
9,000 | 1,000 -
3,000
4,000 | - -
17,000
17,000 |
Cash Account
PARTICULARS | AMOUNT | PARTICUARS | AMOUNT
|
To Balance b/d To Realisation A/c To Star’s Capital A/c | 1,000 15,100 7,000
23,100 | By Realisation A/c By Sun’s Capital A/c By Moon’s Capital A/c | 4,100 10,500 8,500
23,100 |
Q2) Mohan, Anand and Krishna are equal partners, whose Balance Sheet as on 30th April, 2012 was as under:
Balance Sheet as on 30th April, 2012
LIABILITIES | AMOUNT | ASSETS | AMOUNT |
Sundry Creditors Mohan’s Loan Capital Account Mohan Krishna
| 25,000 5,000
4,000 2,500
| Cash in Hand Stock Debtors Plant and Machinery Furniture and Fixture Land and Building Anand’s Capital A/c | 250 4,000 5,000 10,000 4,000 10,000 3,250
|
TOTAL | 36,500 | TOTAL | 36,500 |
Due to weak financial position of the partners, the firm is dissolved. Mohan and Krishna are not able to contribute anything and a sum of 1,000 received from Anand. All of them are declared insolvent. The assets are realised:
Stock 2,500, Plant & Machinery 5,000, Furniture & Fittings 1,000, Land & Building 4,000 and Debtors 2,750 only. Realisation expenses amounted 250’
You are required to prepare necessary Ledger Accounts to close the books of the firm.
Solution:In the books of Mohan, Anand and Krishna
Realisation Account
PARTICULARS
| AMOUNT | AMOUNT | PARTICULARS | AMOUNT | AMOUNT |
To Sundry Assets A/c Stock Debtors Plant&Machinery Furniture&Fittings Land&Building To Cash A/c (Realisation Ex.) |
4,000 5,000 10,000 4,000 10,000 | 33,000
250
33,250 | By Cash A/c Stock Plant&Machinery Furniture&Fittings Land&Building Debtors To Partners Capital A/c (Loss) Mohan Anand Krishna
|
2,500 5,000 1,000 4,000 2,750
6,000 6,000 6,000
| 15,250
18,000
33,250 |
Cash Account
PARTICULARS | AMOUNT | PARTICULARS | AMOUNT
|
To Balance b/d To Realisation A/c (Assets realised) To Anand’s Capital A/c | 250 15,250
1,000
| By Realisation A/c (Expenses) By Sundry Creditors | 250
16,250
|
16,500 | 16,500 |
Sundry Creditors A/c
PARTICULARS | AMOUNT | PARTICULARS | AMOUNT
|
To Cash A/c To Deficiency A/c
| 16,250 8,750
25,000 | By Balance b/d | 25,000
25,000 |
Combined Partner’s Capital Accounts
Particulars | Mohan | Anand | Krishna | Particulars | Mohan | Anand | Krishna
|
To Balance b/d To Realisation A/c (Loss) To Deficiency A/c |
-
6,000
3,000
|
3,250
6,000
-
|
-
6,000
-
| By Balance b/d By Cash A/c By Deficiency A/c By Mohan’ Loan |
4,000 -
-
5,000
|
- 1,000
8,250
-
|
2,500 -
3,500
-
|
9,000 | 9,250 | 6,000 | 9,000 | 9,250 | 6,000 |
Deficiency Account
PARTICULARS | AMOUNT | PARTICULARS | AMOUNT
|
To Anand’s Capital A/c To Krishna’s Capital A/c | 8,250 3,500
| By Sundry Creditors A/c By Mohan’s Capital A/c | 8,750 3,000
|
11,750 | 11,750 |
Books Recommended :
1. J. R. Batliboi —Advanced Accounts
2. M. C. Shukla —Advanced Accounts
3. S. M. Shukla —Advanced Accounts
4. Pickles —Advanced Accounts
5. N. K. Jha —Basic Financial Accounting
6. S. K. Singh & R.U. Singh —Financial Accounting
