Journal Entries and Depreciation

First and final dividend of 60 paise means we receive 60% of Rs. 1000 = Rs. 600. The loss is Rs. 400 (40% of Rs. 1000). This unrecoverable amount is treated as bad debt. The correct entry is to debit Bad Debt Account with Rs. 400 and credit Rajan's Account.

A cash discount of Rs. 25 allowed on early payment of Rs. 975 (presumably against a debt of Rs. 1000) is recorded in the cash book itself. The cash book captures both the actual cash received (Rs. 975) and the discount allowed (Rs. 25) in a single entry. The cash book has a discount column specifically for recording such cash discounts given or received.

When a foreign currency loan is taken specifically for purchasing machinery (a capital asset), any loss from devaluation of that loan is treated as a capital loss. This is because the loss relates directly to the acquisition of a capital asset. Had it been a trading loan or for working capital, the devaluation loss would be revenue in nature. The capital connection determines the classification.

Spending Rs. 5,000 on overhauling second-hand machines makes them operational and fit for use. This expenditure adds to the asset's value and provides benefits over multiple years, not just the current accounting period. Such expenditures that bring an asset to working condition or enhance its capabilities are capital expenditures, not revenue expenditures which merely maintain existing capacity.

All expenditures incurred to bring an asset to its working condition should be capitalized to the asset account. This includes purchase price (Rs. 1,00,000) + repair costs (Rs. 10,000) + registration expenses (Rs. 5,000) + dealer's commission (Rs. 10,200) = Rs. 1,25,200. All these are necessary to make the car usable and therefore form part of the car's cost.

When a sale of Rs. 20,000 is wrongly entered in the purchase book, it means sales are understated by Rs. 20,000 AND purchases are overstated by Rs. 20,000. The combined effect on gross profit is Rs. 40,000 decrease (Rs. 20,000 from reduced sales + Rs. 20,000 from increased purchases). Both errors pull the profit in the same downward direction.

Mr. X is following the matching principle, which requires matching expenses of a period with revenues of the same period. He sold 3/5th of goods for Rs. 5,00,000, so COGS is 3/5 of Rs. 5,00,000 = Rs. 3,00,000. Sales (Rs. 5,00,000) - COGS (Rs. 3,00,000) - Expenses (Rs. 1,50,000) = Rs. 50,000 profit. The expenses are matched against the revenue they helped generate.

The sale of goods worth Rs. 10,000 is a transaction because it involves an exchange (goods for money/credit). The closing stock of Rs. 20,000 existing on March 31, 2007 is merely an event - it's a state of affairs or fact at a specific date, not an exchange transaction. An event is something that happens or exists, while a transaction involves giving and taking.

Creating a reserve for discount on sundry creditors anticipates a future benefit (the discount). The conservatism (prudence) principle states that you should anticipate all losses but NOT anticipate profits. By creating a reserve for a discount that hasn't been taken yet, Mr. X is effectively anticipating a profit/gain, which violates the conservatism principle. The cost principle requires recording at historical cost, and consistency requires uniform treatment over time - neither is violated here.

Let's verify the calculation: Total purchases = Rs. 1,00,000 (COGS). First sale: 60% of goods sold for Rs. 90,000. Second sale: 40% of remaining 40% = 16% of original sold for Rs. 60,000. Total sales = Rs. 90,000 + Rs. 60,000 = Rs. 150,000. Operating expenses = Rs. 10,000. Operating profit = Sales - COGS - Operating expenses = 150,000 - 100,000 - 10,000 = Rs. 40,000. The calculation is correct and follows proper accounting principles - expenses are matched to the period, unsold inventory remains as asset at cost. Therefore, no principle has been violated.

  Correct Income = 100000 - (5000 + 2000 + 10000) + 10000                          = 93000 Answer.

The measurement bases are: (1) Historical cost = original purchase price paid, (2) Current cost = replacement cost (cost to acquire same asset now), (3) Realisable value = selling price less disposal costs, (4) Present value = discounted future cash flows. Statement (iv) says: Mr. X purchased an asset for Rs. 50,000 but its fair value was Rs. 60,000 on purchase date, and he recorded it at Rs. 60,000. This violates the historical cost principle, which requires recording at the amount actually paid (Rs. 50,000). Therefore, the measurement base that SHOULD be followed is Historical Cost (A). Fair value at acquisition is irrelevant - what matters is what you actually paid.

Statement (ii): Mr. X is anticipating a profit of Rs. 5,000 on the future sale of a car. The conservation (or prudence) principle states: do NOT anticipate profits, but DO anticipate all losses. By including anticipated profit from a future sale in current profit, Mr. X is violating the conservation principle. Profits should only be recognized when realized (when the sale actually occurs). Materiality (B) is about whether an amount is significant enough to affect decisions - Rs. 5,000 may or may not be material, but that's not the issue here. Historical cost (C) is about recording at purchase price. Accrual (D) is about recognizing expenses when incurred, not about anticipating future profits. Therefore, the conservation principle should be followed (A).

Statement (iii): Salary of Rs. 200 payable in the financial year has not been taken into account. The accrual principle requires that expenses be recognized when they are INCURRED, not when cash is paid. Since the salary was earned by employees in the financial year (service was provided), it is an expense of that year regardless of when it's actually paid. Mr. X should accrue this expense - record Rs. 200 as salary expense and create a liability (outstanding salary). Materiality (A) might argue that Rs. 200 is too small to matter, but accrual still applies even for small amounts. Historical cost (B) and Current cost (C) relate to asset valuation, not expense recognition. Therefore, Accrual (D) is the correct concept.