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Tuesday, May 23, 2017

IGNOU Solved Question Papers - ECO 02 (December' 2013)

Term-End Examination December, 2013
Note: Attempt any four questions, including question no. 1 which is compulsory.
1. Answer any two of the following: 7+7
(a) What is materiality concept of accounting? Explain its accounting implications with examples.
(b) Explain the functions of accounting.
Ans: Accounting: Accounting is the analysis and interpretation of book-keeping records. It includes not only maintains of accounting records but also the preparation of financial and economic information Which involves the measurement of transaction and other events pertaining to a business.
According to the American institute of certified public accounts” The arts of recordings, classifying and summarizing in a significant manner and in terms of money transaction and events which in parts, at least of a financial charter and interpreting the result there of”.
Functions of Accounting
i) Record Keeping Function: The primary function of accounting relates to recording, classification and summary of financial transactions-journalisation, posting, and preparation of final statements. These facilitate to know operating results and financial positions. The purpose of this function is to report regularly to the interested parties by means of financial statements.
ii) Managerial Function:Decision making programme is greatly assisted by accounting. The managerial function and decision making programmes, without accounting, may mislead. The day-to-day operations are compared with some predetermined standard. The variations of actual operations with pre-determined standards and their analysis is possible only with the help of accounting.
iii) Legal Requirement function: Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements. Accounting is a base and with its help various returns, documents, statements etc., are prepared.
(c) State the reasons that lead to disagreement in the balances of Cash Book and Pass Book.
Ans: Bank Reconciliation Statement: The statement which is prepared for verifying and reconciling the bank balances, shown by the cash book and pass book on a certain date and incorporates the reasons of disagreement between them is called a bank reconciliation statement.
Causes of difference between balance as par cash book and pass book
  1. Cheques issued but not presented for payment: - when cheques are issued, the entry in the cash book is made immediately. But if the cheques issued are not presented to bank for payment till the date of preparing reconciliation statement, it will be a causes of disagreement between AB and CB balances.
  2. Cheques paid into the bank but not yet cleared: - As soon as the cheques are deposited in to the bank, the entry is passed on the debit side of the bank column in the cash book. But cheques deposited may not be collected and credited by bank till date.
  3. Interest allowed by the bank: - Bank might have credited the account of the customer with the interest and have made entry in the pass book. But such entry may not be recorded in the cash book.
  4. Interest and bank charges debited by bank: - The bank debits the customers account with the interest due on bank overdraft. It also debits the account of the customers for the incidental and collection charges. The bank debits the customers account, but there entries are not made in cash book till date of preparation of B.R.S
  5. Interest, dividend etc collected by bank: - Sometime interest on government securities or dividend on share is collected by the bank and is credited to the customers account. If these items are not recorded in the cash book till the date of preparation of the reconciliation statement the balance will differ.
(d) Define Bill of exchange. Prepare an imaginary specimen of a bill of exchange.
Ans: A bill of exchange as, "an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a sum of money only to or to the order of a certain person or to the bearer of the instrument." A bill of exchange is also called a draft.
There are three parties to a bill of exchange namely:
  1. Drawer
  2. Drawee and
  3. Payee.
Drawer is the maker of the bill of exchange. A seller/creditor that is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor.
Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods upon whom the bill of exchange is drawn.
A payee is the person to whom the payment is to be made. The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment.
Specimen of Bills of Exchange
Mr. X
April 01,2010
Three months after date pay to me or my order, the sum of rupees Fifty Thousand only, for value received.
Mr. Y
Dibrugarh, Assam
Mr. X
Tinsukia, Assam

Mr. Y
Dibrugarh, Assam

2. There was a difference of Rs. 525 in Trial Balance. It was transferred to credit side of suspense Account. Later on, the following errors were discovered. Pass the rectifying journal entries and prepare suspense Account. 12
(a) An amount of Rs. 375 has been posted on the debit side of commission account instead of Rs. 275.
(b) Goods of Rs. 200 purchased from Ram have been posted to his account as Rs. 250.
(c) Total of Sales Return book was over cast by Rs. 475.
(d) Goods of Rs. 300 were sold to Mahesh, was recorded in purchase book.
3. Distinguish between: 4+4+4
(a) Outstanding expenses and unexpired expenses.
(b) Normal loss and Abnormal loss.
(c) Provision for discount on debtors and provision for discount on creditors.
4. A company had bought machinery for Rs. 1, 00,000 including therein a boiler worth Rs. 10,000. Depreciation is provided @ 10% p.a. on written down value method. During the 5th year the boiler became useless and the same is sold for Rs. 2,000. Prepare Machine account for 5 years assuming that the Boiler was sold on Ist day of 5th year. 12
Depreciation A/c
1st year
To Bank
End of 1st year
By Depreciation
By Balance c/d



2nd year
To Balance b/d
End of 2nd year
By Depreciation
By Balance c/d



3rd year
To Balance b/d
End of 3rd year
By Depreciation
By balance c/d



4th year
To Balance b/d
End of 4th year
By Depreciation
By Balance c/d



5th year
To Balance b/d
End of 5th year
By Bank
By P/L A/c
( Loss on Sale )
By Depreciation
By Balance c/d




Working Note:
(i) WDV of boiler at the end of 4th year = 10,000 x 90% x 90% x 90% x 90%
= 6561
(ii) Loss on Sale = 6,561 – 2,000
= 4,561

5. (a) Distinguish between consignment and Joint Venture. 6+6
Ans: Difference between Consignment and Joint Venture:
Basis of Difference
Joint Venture
There are two parties i.e. the principal and the agent.
The numbers of parties are two or more where all the parties are of equal status i.e., each is principal and agent at the time like partners.
The relationship between consignor and consignee is principal and the agent.
Co-ventures are principal as well as agent.
Term (Period):
Consignment is not confined to any specific term or period.
Joint venture is confined only to a specific venture.
Accounting Methods
Accounts are prepared only by single method.
Accounts are prepared by four methods.
The ownership of consignment is always with consignor and the agent has no right of ownership in the goods.
In case of joint venture, all the co-ventures are the joint owner.
Sharing of Profit or Loss
The profit on the consignment belongs to the principal (Consignor).
The profit or loss is shared equally by all the concerned parties, unless otherwise decided.
Account Sale
Account sale is prepared
No need to prepare account sale

(b) How is valuation of closing stock in consignment accounts done when abnormal and normal losses occur simultaneously? Explain it with an example.
Ans: Valuation of Unsold Stock: Usually, at the time of closing of the books some of the goods remain unsold. For correct accounting it is necessary that such unsold stock should be valued properly. The general principal of valuing stock on the basis of cost of market price, whichever is lower applies in this cost also. However, the meaning of cost should be properly considered. If the expected selling price of stock on hand is lower than the cost the value put on the stock should be net expected selling price only, i.e. expected selling price less delivery expenses,ect.
In addition to the purchase price, those expenses which are necessary to put the goods in their present place and condition must also be taken into account. Usually all expenses till the goods are placed in the consignee’s Godown are treated as part of cost. Instances of such expenses are freight, insurance in transit, customs duty, Octroi duty, Cartage, etc to the godown of the consignee.
Expenses incurred after the goods reach the consignee’s godown, such as rent and insurance for the godown, interest, etc, do not add to the value of goods. Such expenses, therefore, are not considered while valuing stock. The journal entry for unsold stock is:
Stock on Consignment A/c……Dr
To Consignment Account
Calculation of Unsold Stock
Cost of unsold stock
Add: Proportionate expenses of consignor  (all expenses/net goods sent on consignment*unsold stock)
Add: Proportionate expenses of consignee (all expenses incurred by consignee till the goods reach his premises*unsold stock/goods received by him)

6. (a) What is a secret reserve? State the various ways in which it is created. 6+6
Ans:  Secret Reserve: Secret reserve is a reserve which does not appear in the balance sheet. It may also help to reduce the disclosed profits and also the tax liability. The secret reserve can be merged with the profits during the lean periods to show improved profits. Management may resort to creation of secret reserve by charging higher depreciation than required. It is termed as ‘Secret Reserve’, as it is not known to outside stakeholders.
Secret reserve can also be created by way of:
    1. Undervaluation of inventories/stock
    2. Charging capital expenditure to profit and loss account
    3. Making excessive provision for doubtful debts
    4. Showing contingent liabilities as actual liabilities
Creation of secret reserves within reasonable limits is justifiable on grounds of expediency, prudence and preventing competition from other firms.
(b) Ascertain the cost of goods sold and gross profit from the following figures:

Stock at the beginning
Purchases less Returns
Carriage Inwards
Cartage and Freight
Carriage Outwards
Direct Wages
Sales less Returns
Closing Stock

Ans: Calculation of cost of goods sold = Opening stock + Purchases – Closing stock + All Direct Expenses
= 60,000 + 6, 00,000 + 80,000 – 40,000
= 7, 40,000 – 40,000
= 7, 00,000

Gross Profit = Sales – COGS
= 12, 00,000 – 7, 00,000

= 5, 00,000