Question 28 of 35advanced🔧 ApplyNumerical10 marks

From the following balances extracted from the books of Raga Ltd. prepare a trading and profit and loss account for the year ended March 31, 2017 and a balance sheet as on that date. [Trial Balance Data: Drawings 20,000; Sales 2,20,000; Land and Buildings 12,000; Capital 1,01,110; Plant and Machinery 40,000; Discount 1,260; Carriage inwards 100; Apprentice premium 5,230; Wages 500; Bills payable 1,28,870; Salary 2,000; Purchases return 10,000; Sales return 200; Bank charges 200; Coal, Gas and Water purchases 1,50,000; Trade Expenses 3,800; Stock (Opening) 76,800; Cash at bank 50,000; Rates and Taxes 870; Bills receivable 24,500; Sundry debtors 54,300; Cash in hand 30,000] The additional information is as under:

  1. Closing stock was valued at the end of the year ₹, 20,000.
  2. Depreciation on plant and machinery charged at 5% and land and building at 10%.
  3. Discount on debtors at 3%.
  4. Make a provision at 5% on debtors for doubtful debts.
  5. Salary outstanding was ₹100 and Wages prepaid was ₹40.
  6. The manager is entitled a commission of 5% on net profit after charging such commission.
Correct Answer

Trading and Profit and Loss Account for the year ended March 31, 2017

ParticularsAmount (₹)Amount (₹)ParticularsAmount (₹)Amount (₹)
To Opening Stock76,800By Sales2,20,000
To Purchases1,50,000Less: Sales Return(200)2,19,800
Less: Purchases Return(10,000)1,40,000By Closing Stock20,000
To Wages500
Less: Prepaid Wages(40)460
To Carriage Inwards100
To Coal, Gas and Water0*
To Gross Profit c/d22,440
2,39,8002,39,800
To Salary2,000By Gross Profit b/d22,440
Add: Outstanding Salary1002,100By Discount1,260
To Trade Expenses3,800By Apprentice Premium5,230
To Rates and Taxes870
To Bank Charges200
To Depreciation:
Plant and Machinery (5%)2,000
Land and Buildings (10%)1,2003,200
To Provision for Doubtful Debts (5% of 54,300)2,715
To Provision for Discount on Debtors (3% of 51,585)1,547.55
To Manager's Commission (5% of 14,497.45)690.35
To Net Profit transferred to Capital13,807.10
28,93028,930

*Note: 'Coal, Gas and Water purchases' (₹1,50,000) is taken as Purchases in the Trading Account. The specific head 'Coal, Gas and Water' in the TB is merged into Purchases.

Balance Sheet as on March 31, 2017

LiabilitiesAmount (₹)Amount (₹)AssetsAmount (₹)Amount (₹)
Capital1,01,110Land and Buildings12,000
Add: Net Profit13,807.10Less: Depreciation(1,200)10,800
Less: Drawings(20,000)94,917.10Plant and Machinery40,000
Bills Payable1,28,870Less: Depreciation(2,000)38,000
Outstanding Salary100Closing Stock20,000
Manager's Commission Payable690.35Sundry Debtors54,300
Suspense Account (Balancing figure)1,200Less: Provision for DD(2,715)
Less: Provision for Discount(1,547.55)50,037.45
Bills Receivable24,500
Cash at Bank50,000
Cash in Hand30,000
Prepaid Wages40
2,25,777.452,23,377.45

Note: The Balance Sheet sides do not match (Difference ₹2,400). A Suspense Account of ₹1,200 is placed on the Liabilities side to partially reconcile the Trial Balance difference noted in the solution steps. However, a strict balancing would require a difference of ₹2,400 on the Liabilities side.

Exercise: Numerical Questions | Q: 8 | (Page 59)
For More Understanding

Explanation

This solution involves preparing final accounts from a given Trial Balance with adjustments.

  1. Trading Account: Calculates Gross Profit. 'Coal, Gas and Water purchases' is treated as the primary purchase cost. Adjustments for prepaid wages and closing stock are crucial here.
  2. Profit & Loss Account: Calculates Net Profit. Expenses like depreciation, provisions (bad debts and discounts), and outstanding liabilities are debited. The manager's commission is calculated at 5% on the Net Profit before charging such commission (Profit before commission = ₹14,497.45; Commission = 14,497.45 * 5/105 = ₹690.35).
  3. Balance Sheet: Shows the financial position. Assets are reduced by depreciation and provisions. Liabilities include the outstanding salary and payable commission. The Trial Balance provided in the text has an inherent difference (Credit side > Debit side by ₹1,200), which is placed in a Suspense Account.

Solution Steps

  1. Step 1: Verify Trial Balance totals. Debit side = ₹4,65,270. Credit side = ₹4,66,470. Difference = ₹1,200 (Excess Credit). Treat as Suspense.

  2. Step 2: Prepare Trading Account. Net Sales = ₹2,19,800. Net Purchases = ₹1,40,000. Add Wages (₹460) and Opening Stock (₹76,800). Cost of Goods Sold = ₹1,97,360. Gross Profit = ₹2,19,800 - ₹1,97,360 + Closing Stock (20,000) = ₹22,440.

  3. Step 3: Prepare Profit & Loss Account. Debit side expenses: Salary (₹2,100), Trade Exp (₹3,800), Rates (₹870), Bank Charges (₹200), Depreciation (₹3,200), Prov for DD (₹2,715), Prov for Discount (₹1,547.55). Credit side gains: GP (₹22,440), Discount (₹1,260), Apprentice Premium (₹5,230).

  4. Step 4: Calculate Manager's Commission. Profit before commission = Total Credits (₹28,930) - Total Debits (₹14,432.55) = ₹14,497.45. Commission = 14,497.45 * (5/105) = ₹690.35. Net Profit = ₹13,807.10.

  5. Step 5: Prepare Balance Sheet. Adjust assets for depreciation and provisions. Add outstanding liabilities and manager's commission to liabilities. Adjust Capital for Net Profit and Drawings.

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