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accounting difficult question
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How do we calculate the under- or over-absorption of overhead for the year? One question comes every year in paper 1. eg [J06 Q28, Nov 05 Q30]
Also How do we workout the working capital cycle. This also comes alot eg [J06 Q26]??
Also How do we workout the working capital cycle. This also comes alot eg [J06 Q26]??
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Anwer for June 2006 paper 1 question no 28
We all know that the formula to calculate over head absorption rate (in terms of machine hours worked) is:
Total budgeted overheads/Total budgeted machine hours
Don't calculate it because it already given which is 2.20. it is not 2.25 because OAR is based on budgeted figures not actual figures
Now to find the over or under absorbed overheads just follow the simple format below:
Actutal overheads incurred=261000
Less Over heads absorbed
[actual activity x OAR]
[116 000 x 2.20] = (255200)
Under absorbed overheads = 5880
THUS PART A IS THE ANSWER
PLEASE NOTE THAT WHEN EVER EXPENDITURE IS LESS THAN BUDGETED IT MEANS THAT THE DIFFERENCE IS UNDER ABSORBED
AND WHEN EVER ACTIVITY (NO OF GOOD PRODUCED OR SOLD) IS GREATER THAN BUDGETED THAN STILL THE DIFFERENCE IS UNDER ABSORBED.
FOR OVER ABSORBED IT IS THE REVERSE.
THE ANSWER FOR UNDER ABSORB WILL BE A POSITIVE WHILE FOR OVER ABSORB IT WILL BE A NEGATIVE. (A TRICK)
We all know that the formula to calculate over head absorption rate (in terms of machine hours worked) is:
Total budgeted overheads/Total budgeted machine hours
Don't calculate it because it already given which is 2.20. it is not 2.25 because OAR is based on budgeted figures not actual figures
Now to find the over or under absorbed overheads just follow the simple format below:
Actutal overheads incurred=261000
Less Over heads absorbed
[actual activity x OAR]
[116 000 x 2.20] = (255200)
Under absorbed overheads = 5880
THUS PART A IS THE ANSWER
PLEASE NOTE THAT WHEN EVER EXPENDITURE IS LESS THAN BUDGETED IT MEANS THAT THE DIFFERENCE IS UNDER ABSORBED
AND WHEN EVER ACTIVITY (NO OF GOOD PRODUCED OR SOLD) IS GREATER THAN BUDGETED THAN STILL THE DIFFERENCE IS UNDER ABSORBED.
FOR OVER ABSORBED IT IS THE REVERSE.
THE ANSWER FOR UNDER ABSORB WILL BE A POSITIVE WHILE FOR OVER ABSORB IT WILL BE A NEGATIVE. (A TRICK)
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Anwer for Oct/Nov 2005 question 30
FIRST OF ALL FIND THE OVER HEAD ABSORPTION RATE
ONE UNIT TAKES 4 HOURS TO BE COMPLETED AND OVER HEADS ARE ABSORBED AT $5.40 PER DIRECT LABOUR HOUR SO OAR IS (5.40 X 4=21.6).
NOW IT IS ALL MATHEMATICS FROM HERE. YOU MANIPULATE THE FIGURES.!!!
ACTUAL PRODUCTION OVERHEADS=518,400
LESS OVER HEADS ABSORBED
[ACTUAL ACTIVITY X OAR]
[ A X 21.6] = (21.6A)
UNDER ABSORBED OVERHEADS = 32,400
518400-21.6A=32400
A=518400-32400/21.6
A= 22500 UNITS.
THUS ANSWER IS PART A.
FIRST OF ALL FIND THE OVER HEAD ABSORPTION RATE
ONE UNIT TAKES 4 HOURS TO BE COMPLETED AND OVER HEADS ARE ABSORBED AT $5.40 PER DIRECT LABOUR HOUR SO OAR IS (5.40 X 4=21.6).
NOW IT IS ALL MATHEMATICS FROM HERE. YOU MANIPULATE THE FIGURES.!!!
ACTUAL PRODUCTION OVERHEADS=518,400
LESS OVER HEADS ABSORBED
[ACTUAL ACTIVITY X OAR]
[ A X 21.6] = (21.6A)
UNDER ABSORBED OVERHEADS = 32,400
518400-21.6A=32400
A=518400-32400/21.6
A= 22500 UNITS.
THUS ANSWER IS PART A.
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ANWER FOR OCT/NOV 2005 PAPER 1 QUESTION 20
WE ALL KNOW THAT WHEN A COMPANY MAKES A BONUS ISSUE IT ONLY INCREASES THE NUMBER OF SHARES BUT NOT THE SHARE CAPITAL.
SO BEFORE THE BONUS ISSUE THE COMPANY HAD 200,000 ORDINARY SHARES.
NOW IT SAYS THAT IT MAKES A BONUS ISSUE OF ONE SHARE FOR EVERY FIVE HELD
SO NUMBER OF BONUS SHARES ISSUED ARE 200,000/5=40,000.
THIS INCREASES THE NUMBER OF ORDINARY SHARES TO 240,000.
BONUS ISSUE DOES NOT AFFECT THE BANK BALANCE SO IGNORE IT. I ONLY DID THE WORKING FOR YOUR UNDERSTANDING.
NOW DEBENTURES ARE ISSUED FOR 80,OOO DOLLARS AT 5% DISCOUNT. THIS WILL INCREASE THE BANK BALANCE BY 76000 DOLLARS. YOU HAVE TO DEDUCT THE DISCOUNT OF 5% FROM IT. IT IS A RULE.
BEFORE THE ISSUES THE BANK BALANCE WAS 40,000
NOW AFTER THE ISSUE OF DEBENTURES IT BECOMES 40,000+76,000=116,000. THUS THE ANSWER IS PART B.
IF U HAVE MORE DIFFICULT QUESTIONS PLZ ASK ME! . IT IS KIND OF A PRACTICE FOR ME TOO.
WE ALL KNOW THAT WHEN A COMPANY MAKES A BONUS ISSUE IT ONLY INCREASES THE NUMBER OF SHARES BUT NOT THE SHARE CAPITAL.
SO BEFORE THE BONUS ISSUE THE COMPANY HAD 200,000 ORDINARY SHARES.
NOW IT SAYS THAT IT MAKES A BONUS ISSUE OF ONE SHARE FOR EVERY FIVE HELD
SO NUMBER OF BONUS SHARES ISSUED ARE 200,000/5=40,000.
THIS INCREASES THE NUMBER OF ORDINARY SHARES TO 240,000.
BONUS ISSUE DOES NOT AFFECT THE BANK BALANCE SO IGNORE IT. I ONLY DID THE WORKING FOR YOUR UNDERSTANDING.
NOW DEBENTURES ARE ISSUED FOR 80,OOO DOLLARS AT 5% DISCOUNT. THIS WILL INCREASE THE BANK BALANCE BY 76000 DOLLARS. YOU HAVE TO DEDUCT THE DISCOUNT OF 5% FROM IT. IT IS A RULE.
BEFORE THE ISSUES THE BANK BALANCE WAS 40,000
NOW AFTER THE ISSUE OF DEBENTURES IT BECOMES 40,000+76,000=116,000. THUS THE ANSWER IS PART B.
IF U HAVE MORE DIFFICULT QUESTIONS PLZ ASK ME! . IT IS KIND OF A PRACTICE FOR ME TOO.
just remember simple entry of share:sonamali said:
cash/bank ***
ordinary share capital ***
eg.10000 ordinary shares of $1 each are issued.
so entry will be
cash/bank(1000 * 1) $10000
ordinary share capital 10000
share premium is when company issue its share more than its nominal price.
REMEMBER CERTAIN POINTS IN SHARE PREMIUM CASE:
+ ORDINARY SHARE CAPITAL ARE always RECORED AT NOMINAL PRICE
+SHARE PREMIUM IS DIFFERENCE BETWEEN ISSUED PRICE AND NOMINAL PRICE OF SHARE.
eg.10000 ordinary share capital of $1 each are issued at $2.5 each.
ENTRY??
CASH/BANK (10000 * 2.5) 25000
ORDINARY SHARE CAPITAL(1 * 10000) 10000
SHARE PREMIUM(2.5-1=1.5 * 10000) 15000
I HOPE THIS HELPS YOU....
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ANSWER FOR MAY/JUNE 2006 PAPER 1 QUESTION 26
WE KNOW THAT THE FORMULA FOR WORKING CAPITAL CYCLE IS:
STOCK TURNOVER (DAYS)-DEBTOR TURNOVER (DAYS)- CREDITOR TURNOVER (DAYS)
STOCK TURNOVER IN DAYS IS 16.
DEBTOR TURNOVER IN DAYS:
(DEBTORS/CREDIT SALES) X 365
(48082/650000) X 365 =26.999
CREDITOR TURNOVER IN DAYS:
(CREDITORS/CREDIT PURCHASES) X 365
(44537/508000) X 365 = 32.00
WORKING CAPITAL CYCLE:
32-26.99-16= -10.99 ~ -11
IGNORE THE NEGATIVE SIGN.
IT IS IMPORTANT THAT YOU START FROM THE HIGHEST AND COME TO THE LOWEST OR ELSE IT WILL BECOME 43 WHICH IS WRONG.
ANSWER IS OPTION A
ALTHOUGH IAM STILL DOUBTFUL REGARDING THIS QUESTION. YOU ALSO CONFIRM FORM A TEACHER.
WE KNOW THAT THE FORMULA FOR WORKING CAPITAL CYCLE IS:
STOCK TURNOVER (DAYS)-DEBTOR TURNOVER (DAYS)- CREDITOR TURNOVER (DAYS)
STOCK TURNOVER IN DAYS IS 16.
DEBTOR TURNOVER IN DAYS:
(DEBTORS/CREDIT SALES) X 365
(48082/650000) X 365 =26.999
CREDITOR TURNOVER IN DAYS:
(CREDITORS/CREDIT PURCHASES) X 365
(44537/508000) X 365 = 32.00
WORKING CAPITAL CYCLE:
32-26.99-16= -10.99 ~ -11
IGNORE THE NEGATIVE SIGN.
IT IS IMPORTANT THAT YOU START FROM THE HIGHEST AND COME TO THE LOWEST OR ELSE IT WILL BECOME 43 WHICH IS WRONG.
ANSWER IS OPTION A
ALTHOUGH IAM STILL DOUBTFUL REGARDING THIS QUESTION. YOU ALSO CONFIRM FORM A TEACHER.
RIGHT ISSUE: IT IS A ISSUES OF SHARES TO THE EXISTING SHAREHOLDERS.
THE ENTRY OF RIGHT ISSUE , IS SAME AS NORMAL ISSUES OF SHARES
EXAMPLE
COMPANY HAVE FOLLOWING BALANCES TAKEN FROM LAST YEAR:
ORDINARY SHARE $1 EACH 10000
THERE IS RIGHT ISSUES OF 2/5 @ 1.75
SO 10000 * 2/5 = 4000
ENTRY..???
CASH/Bank(4000 * 1.75)
ordinary share capital (4000 * 1) nominal value
shARE PREMIUM (4000 * 0.75)
THE ENTRY OF RIGHT ISSUE , IS SAME AS NORMAL ISSUES OF SHARES
EXAMPLE
COMPANY HAVE FOLLOWING BALANCES TAKEN FROM LAST YEAR:
ORDINARY SHARE $1 EACH 10000
THERE IS RIGHT ISSUES OF 2/5 @ 1.75
SO 10000 * 2/5 = 4000
ENTRY..???
CASH/Bank(4000 * 1.75)
ordinary share capital (4000 * 1) nominal value
shARE PREMIUM (4000 * 0.75)
BONUS ISSUES SHARE ARE NON-CASH SHARES..WHICH ARE SELL FOR FREE...THERE IS NO RECEIVE OF CASH FROM ITS SALES SO THERE IS NO AFFECT ON BANK BALANCE AFTER ISSUES OF BONUS ISSUE..
ENTRY FOR BONUS ISSUES ARE
CAPITAL RESERVE ****
OR/AND
REVENUE RESERVE ****
ORDINARY SHARE CAPITAL***
CAPITAL RESERVE
1)SHARE PREMIUM
2)REVALUATION RESERVE
REVENUE RESERVE
3)GENERAL RESERVE
4)RETAINED PROFIT
ENTRY FOR BONUS ISSUES ARE
CAPITAL RESERVE ****
OR/AND
REVENUE RESERVE ****
ORDINARY SHARE CAPITAL***
CAPITAL RESERVE
1)SHARE PREMIUM
2)REVALUATION RESERVE
REVENUE RESERVE
3)GENERAL RESERVE
4)RETAINED PROFIT
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Mohsinsrk can u do question number 17 paper 12 november 2009? PLEASEEE!!
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Answer for Oct/Nov 2009 paper 12 question 17
Number of ordinary shares of $1 are 12000
Now it says that the company made a bonus issue of 1 share for every 2 held.
keep in mind that bonus issue does NOT INCREASE THE SHARE CAPITAL BUT IT INCREASES THE NUMBER OF SHARES. Also it does NOT AFFECT THE BANK BALANCE.
so number of bonus issue shares are (12,000/4)= 3000
this will increase the total number of ordinary shares to 15,000 (12,000+3000)
Now it says that the company made a right issue OF 1 SHARE FOR EVERY 2 HELD FOR $1.60
NUMBER OF RIGHT ISSUE SHARES ARE (15,000/2) = 7500
SHARE PRICE FOR THIS RIGHT ISSUE IS 1.60
SO BANK BALANCE WILL INCREASE BY (7500 x 1.60) = 12000
ACCORDING TO MY CALCULATION IT SHOULD BE OPTION B BUT IN THE MARKING SCHEME IT SAYS C. i DONT THINK IT IS OPTION C BECAUSE I DONT KNOW FROM WHERE DOES THAT 800 BALANCE COMES.
PLEASE CAN ANY ONE ELSE SOLVE THAT 800 BALANCE AS TO FROM WHERE IT CAME.???
Number of ordinary shares of $1 are 12000
Now it says that the company made a bonus issue of 1 share for every 2 held.
keep in mind that bonus issue does NOT INCREASE THE SHARE CAPITAL BUT IT INCREASES THE NUMBER OF SHARES. Also it does NOT AFFECT THE BANK BALANCE.
so number of bonus issue shares are (12,000/4)= 3000
this will increase the total number of ordinary shares to 15,000 (12,000+3000)
Now it says that the company made a right issue OF 1 SHARE FOR EVERY 2 HELD FOR $1.60
NUMBER OF RIGHT ISSUE SHARES ARE (15,000/2) = 7500
SHARE PRICE FOR THIS RIGHT ISSUE IS 1.60
SO BANK BALANCE WILL INCREASE BY (7500 x 1.60) = 12000
ACCORDING TO MY CALCULATION IT SHOULD BE OPTION B BUT IN THE MARKING SCHEME IT SAYS C. i DONT THINK IT IS OPTION C BECAUSE I DONT KNOW FROM WHERE DOES THAT 800 BALANCE COMES.
PLEASE CAN ANY ONE ELSE SOLVE THAT 800 BALANCE AS TO FROM WHERE IT CAME.???
no. of units= 200+ 800X25/1oo = 400sonamali said:
total cost=60000+30000+10000=100000
AS THE WASTE PRODUCED WUD HAVE INCURRED COSTS SUCH AS DIRECT MTERIAL...bt as v dont consider waste as a unit we'll deduct it fron 100000
so it will be 96000/400=240
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@ kS136
IAM SORRY YOU WERE ABSOLUTELY RIGHT. WORKING CAPITAL CYCLE IS STOCK TURNOVER IN DAYS + DEBTORS IN DAys -CREDITOR IN DAYS.
IAM SORRY YOU WERE ABSOLUTELY RIGHT. WORKING CAPITAL CYCLE IS STOCK TURNOVER IN DAYS + DEBTORS IN DAys -CREDITOR IN DAYS.
Thanks KS136 
btw, This one is a very disturbing MCQ. Can anyone explain why the answer will be D for this??? May 04
18 When a company is short of liquid funds, for what purpose may the reserves be used?
A to finance the take-over of another business the company is anxious to acquire
B to maintain dividends during periods of low profitability
C to pay creditors promptly so as to obtain discounts
D to write down assets whose value to the business has fallen
btw, This one is a very disturbing MCQ. Can anyone explain why the answer will be D for this??? May 0418 When a company is short of liquid funds, for what purpose may the reserves be used?
A to finance the take-over of another business the company is anxious to acquire
B to maintain dividends during periods of low profitability
C to pay creditors promptly so as to obtain discounts
D to write down assets whose value to the business has fallen