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Financial Statements 2 Test 5

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Financial Statements 2 Test 5
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  • Question 1
    1 / -0
     The effect of adjustment of depreciation on net profit will be that _____.
    Solution
    Depreciation is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expense and is debited to profit and loss account. This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. The entry for providing depreciation is:
    Depreciation A/c Dr.
           To Concerned Asset A/c
    In the balance sheet, the asset will be shown at cost minus the amount of depreciation. The amount of net profit declines with the adjustment of depreciation.
  • Question 2
    1 / -0
    New bad debts are added to ______.
    Solution
    Bad debts refer to the amount that the firm has not been able to realize from the debtors. It is regarded as a  loss and is termed as bad debt. The entry for recording bad debts is:
    Bad Debts A/c Dr.
        To Debtors A/c
    Items appearing in the trial balance are transferred to Trading account or Profit and Loss account or the balance sheet. New bad debts are added to bad debts account.
  • Question 3
    1 / -0
    Bad debts is ________ to  business concern.
    Solution
    Bad debts refer to the amount that the firm has not been able to realise from its debtors. It is regarded as loss and  is termed as bad debt. The entry for recording bad debt is:
    Bad Debts A/c Dr.
        To Debtors A/c

  • Question 4
    1 / -0
    New bad debt is deducted from ______.
    Solution
    Bad debts refer to the amount that the firm has not been able to realize from its debtors. It is regarded as a  loss and is termed as bad debt. The entry for recording bad debts is:
    Bad Debts A/c Dr.
        To Debtors A/c
    If the amount of bad debts is given outside the trial balance, by way of adjustment, such bad debts are known as further bad debts. It means the amount of sundry debtors in the trial balance is prior to the amount of bad debts and given as an adjustment. New bad debts are deducted from debtors account.
  • Question 5
    1 / -0
    Irrecoverable part of debtors is called as ______.
    Solution
    Bad debts refer to the amount that the firm has not been able to realize from its debtors. It is regarded as anticipated loss and is termed as bad debt. Sometimes, some people fail to pay their dues either partially or completely. The amount that is irrecoverable is a loss and known as "Bad Debt". The following entry is passed when a debit balance becomes bad:
    Bad Debts A/c Dr.
        To Debtor's A/c
    As an effect of this entry, the debtor's account is closed and a new account called bad debts account is opened which is transferred, at the end of the year, to the Profit and Loss account (debit side).
  • Question 6
    1 / -0
    Which of following amount is debited to profit & loss account.
    Solution
    Bad debts and provision for bad debts are loss for the business and this should be debited to the profit & loss account. 

    Old bad debts are those which are already recognized during the financial year before the end of the year.

    New bad debts are those which are noticed after the balance sheet date but before the finalizing the financial accounts.

    New R.D.D. is the reserve for doubtful debts which is created on the amount of debtors based on historical pattern.

    All above are actual losses or anticipated losses and should be debited to profit & loss account of the business to arrive the true profitability.
  • Question 7
    1 / -0
    The interest can be computed on the additional capital __________.
    Solution
    Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as expense for the business and the following journal entry is recorded in the books of account:
    Interest on capital A/c Dr.
           To Capital A/c
    In the final accounts, it is shown as an expense on the debit side of the profit and loss account and added to the capital in the balance sheet.
  • Question 8
    1 / -0
    When R.D.D. is given in Trial balance, it is known as_______________.
    Solution
    Doubtful debts are those debts whose recovery is doubtful. It is not certain whether they will be recovered or not. It is anticipated loss. Therefore, suitable provisions should be made for bad and doubtful debts, so as to calculate true net profit of the business. Provision for doubtful debts is created on debtors balance (not on bad debts) at a fixed percentage. Firms make provisions for expected losses base on their prior experience. Provision for doubtful debts is made to cover for possible losses from debtors going bad. If RDD already exists in the trial balance, then the same is credited to profit and loss account since this is the old R.D.D and needs to be reversed. The effect for R.D.D appearing as an adjustment are as follows:
    A. Profit and loss A/c-Debt side (add to old bad debts)
    B. Balance Sheet-Asset side (deduct from sundry debtors)
    The journal entry for same is as follows:
    Reserve for Doubtful Debts A/c Dr.
              To Sundry Debtors A/c
  • Question 9
    1 / -0
    Net profit of a business is Rs. 220 before charging commission. If the manager is entitled to 15% of the profit before charging such commission, the commission will be _____.
    Solution
    The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the business is applied on the profit either before charging such commission or after charging such commission. 

    In the absence of any such information, it is assumed that commission is allowed  as a percentage of the net profit before charging such commission.

    Net profit of the business is Rs. 220 before charging commission, If the manager is entitled to 15% of the profit before charging such commission, the commission will be:
      = Rs. 220 X 15/100
      = Rs. 33
  • Question 10
    1 / -0
    Interest on capital is added to______.
    Solution
    Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as an expense for the business and the following entry is recorded in the books of accounts:
    Interest on Capital A/c Dr.
             To Capital A/c
    In the final accounts, it is shown as an expense on the debit side of profit and loss account and added to capital in the balance sheet.
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