Fundamental of Taxation and Auditing

(Mgt.218) | BBS Third Year | 4 Years Program |

Model Question | With SOLUTION
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Year: III Year (Third Year)/MGMT

Program: BBS 4 Years Program

DRG Vlogs https://www.dhanraj.com.np presents you the new MODEL Question

with Solution of the subject Fundamental of Taxation and Auditing Mgt.218 BBS
3rd Third Year 4 Years Program.

Also Check:

Download PDF Fundamentals of Taxation and Auditing | Mgt.218 | Question Paper |

2077-2021 | BBS Third Year.

Candidates are required to give their answer in their own words as far as
practicable.

The figure in the margin indicate full marks.

Part-I : Taxation

Brief answer questions: (5x2=10)

Attempt ALL Questions:

1. Define direct tax. State any two merits of direct tax.

Answer: A direct tax is paid by the person which is legally imposed. In direct tax,
which can not shift to other tax bearing and paying persons are same.

The two merits of direct tax are as follows:

i. It is equitable as it is imposed on person as per size of property or income.

ii. Time procedures and amount of tax to be paid is known with certainty.

2. Enumarate the heads of income as per section-5 of Income Tax Act.

Answer: Income Tax Act 2058 section-5 has made broad classification of income.
They are:

i. Income from employment.

ii. Income from business.
iii. Income from investment.
iv. Casual gain.

3. Mr. Thapa is working in a private company at regular salary of Rs. 85,000/- per
month. The company has provided him a quarter (flat) facility for his residences
and a car for private as well as official purpose.

Required:

↺ Total amount to be included in employment income of Mr. Thapa.

Answer:

Statement of Income from employment of Mr. Thapa.

Annual Salary (85,000x12) 1,020,000

Dashain Allowance 85,000

House Facility (2% of 1,020,000) 20,400

Vehicle Facility (0.5% of 1,020,000x1/2) 2550

Total Annual Income 1,127,950

Note:

↺ The company also provided Dashain Allowance.

↺ Vehicle was used for office and person is 50% assumed.

4. Miss Parajuli, a disable person having only employment income is working as an

office assistant in a firm located at remote area - D.

Required:

↺ Various exemptions and rebates available to her under Income Tax Act.

Answer: According to the Income Tax Act 2058, Miss Parajuli has tax rebate as
following way:
i. She can have reduction of 50% of basic assumption for disabled individuals.
ii. She can have reduction of Rs. 20,000/- as remote care under group D.
iii. Due to woman having remuneration income only she entitled to rebate of 10% on
tax liability.

5. A special industry which is in operation from last six years in a highly
undeveloped area has shown it's taxable income for the year ended Rs. 1,000,000/-.
The industry is providing direct employment to 350 Nepalsese citizens through the
year.

Required:

↺ Applicable rate of income tax for the industry.

Answer: Applicable tax ratefor undeveloped (remote) area = 10% of 20 = 2%.

Applicable tax rate for providing employment to 350

Nepalese citizen = 90% of 20 = 18%

Hence, tax liability = 1,000,000 x (20-2-18) = Nil

The company operates high underdeveloped area 1st 10 years taxed at 50% of
normal rate, their after tax liability for year 10 = Nil.

Short answer questions: (4x10=40)

Attempt ALL Questions:

6.

a) B and Sons a dealer provided the following detail regarding it's transactions
during the month of Bhadra:

i. Purchased merchandise for Rs. 75,000 (no VAT was paid on it).
ii. Purchased merchandise for Rs. 67,800 (Including VAT).
iii. All the merchandise were sold for Rs. 2,26,000 (Including VAT).
iv. The dealer submitted VAT return to the office on 5th Kartik.

Required:

↺ Added value as well as VAT and fine payable by the dealer to the government.
(2+2+2=6)
Answer:

i. Here,

Amount of VAT = 75,000x13% = 9,750.

ii. Here,

Amount of VAT = 67,800-97,800/113 x 100 = 8,065.4867

iii. Total cost price excluding VAT

= 75,000+(67,800-8,065.4867)

= 134,734.513

Total VAT payable when purchase

= 8,065.4867+9,750

= 17,185.4867

Selling price excluding VAT

= 226,000/113 x 100

= 200,000

Value added when sales = selling price excluding VAT - Cost price

= 200,000 - 134,734.513

= 6,5265.487

Therefore, Total VAT payable to government = 226,000-200,000 = Rs. 26,000.

iv. If any registered businessman fail to payable the VAT due for each month within
25 days after complete such month tax payer is liable to pay @ 5% in VAT due up to
closing of the first full month from the date of the VAT first becomes due.

Therefore, Penalty period = 10 days (5 days in Ashwin and 5 days in Kartik)

= 26,000 x 5% x 10/360

= 36.11.
Note: Days in a year is to be assumed 360 days.

b) Mr. X an American citizen came to Nepal on 1st Falgun of previous year and
involved in a business and investment activities. He submitted the following
statement for the revelant year.

i. Income from business Rs. 400,000.

ii. Income from investment Rs. 300,000.
iii. Payment against lease of an aircraft in Nepal Rs. 500,000 (after TDS).

Required:

↺ Residental status of Mr. X.

↺ Taxable income and tax liability. (2+1+1=4)

Answer:

i. Length of stay = 1st Falgun to Ashadh end Previous year = 30 x 5 = 150 days
(approx).

ii. Calculation of taxable income.

Particular Amount (Rs.)

Income from business 400,000

Income from investment 300,000

Less, payable lease on an aircraft (500,000/85 x 100) 588,235.294

Taxable Income 111,764.71

iii. Calculation of Tax liability = 111,764.71 X 25% = Rs. 27941.178.

7.

a) Mr. Baniya, a trader presented his income statement to the tax office showing
total net assessable income amounted to Rs. 2,500,000. On scrutiny made by the
tax officer the following facts were revealed.

i. Donation to a public school Rs. 150,000 and pollution control cost Rs. 500,000
were included in total deductions.

ii. Income from investment amounted to Rs. 2,200,000 was included in total
income.
iii. The unrecovered losses of previous year Rs. 500,000 and Rs. 100,000 from
business and investment respectively were not adjusted in the profit.

Required:

↺ Statement of total taxable income. (5)

Answer:

Calculation of Income from business.

Income after Donation and P.C.C. and Investment (2,500,000+150,000+500,000) 3,150,000

Less: Income from investment 2,200,000

Assessable income from business before P.C.C. 980,000

Less: Business loss adjusted taxable income business 450,000

Less: Polution control cost (50% of 450,000 or Actual 500,000) whichever is lower 225,000

Assessable income from business 225,000

Calculation of income from investment.

Income from investment 220,000

Less: Unrecovered investment loss 100,000

Assessable Income from Investment 2,100,000

Calculation of taxable income.

Assessable income from business 225,000

Assessable income from investment 2,100,000

Total Assessable Income 2,325,000

Less: Allowable reduction Donation (5% of 2,325,000 or Actual or maximum

100,000
100,000 (lower)

Taxable Income 2,225,000

b) State the expenses which re not allowed for deduction while computing taxable
income under income Tax Act. (5)

Answer: Following cost are not allowed for deduction as per section 21 of Income
Tax Act 2058.
1. Personal Domestic Expenses: Personal or Domestic expenses are the cost
incurred by individual to satisfy their personal needs. They induce-
↺ Personal expenses for the provision of shelter as well as meals, refreshment, or
entertainment activities.
↺ Cloth expenses for the individual that is not suitable wearing outside work.
↺ Expenses for education and training of an individual does not lead to generate
degree or diploma not link to business or investment activities.
↺ Interest on loan for borrowed personal expenses.

2. Interest and penalties paid under income tax act 2058 are not allowed for
deduction.

3. Fine and penalties paid to the government or it's local bodies for breach of any
law or regulation.

4. Distribution of profits by an entity (eg. dividend).

5. Capital nature expenses.

6. Foreign income tax paid: not exceeding average rate of Nepal income tax.

8. Mr. Amar Raj furnished the following information regarding his income for the
relevant income year.

i. Reciept as royalty Rs. 90,000 (net).

ii. Income from natural resources Rs. 350,000.
iii. Agriculture income Rs. 65,000.
iv. Interest income received from a Pvt. Party Rs. 185,000 (net).
v. Pension @ Rs. 18,000 p.m. for 13 months from Nepal Government.
vi. Gift received in respect of investment Rs. 10,000.
vii. Windfall gain Rs. 10,000 (net).
viii. Rent received by letting an asset Rs. 180,000 (After TDS).
ix. Divident from a non resident company (fross) Rs. 100,000.

He claimed following expenses for deduction:

i. Dividend collection charge Rs. 500.

ii. Tax paid to foreign income amounting to Rs. 15,000.
iii. Purchase of urea (chemical fertilizer) Rs. 3,000 for agriculture use.
iv. Commission to a broker 10,000 in respect of royalty.
v. Taxi fare amounting to Rs. 5,000 (total) incurred while going to receive pension
and royalty.
vi. Donation to a public hospital Rs. 25,000.
Required:

↺ Assessable income, Taxable income, Tax liability. (7+1+2=10)

Answer:

Calculation of Assessable income of Mr. Amar Raj for the relevant income year.

S.N. Particular Amount Amount

1. Income from investment

Receipt as royalty (90,000 x 100/85) 105882.353

Interest from private party (18,00 x 100/85) 217,647.059

Gift received respect of inv. 10,000

Rent from letting an assets (180,000 x 100/90) 200,000

Gross income from investment 983529412

Less: Allowable deduction

Royalty collection expenses 10,000

Dividend collection charge 500

Taxi fare for royalty (50% of 5,000) 2,500 (13,000)

2. Assessable income from employment

Pension income from employment

Pension income (13 x 180,000) 234,000

Gross income from employment 234,000

Loss: Allowable deduction

Taxi fare for pension (50% of 5,000) 2,500 (2,500)

Assessable income from employment 321,500

Calculation of taxable income.

Particular Amount Amount

Assessable income from investment 970529.412

Assessable income from employment 231,500

Total assessable income 1202029.412

Less: Allowable reduction

 Particular Amount Amount

a. Donation to public school

Actual=25,000 (25,000)
Or, 5% of 1202029.412=60,101 or maximum (whichever is less)

Less: Pension income

(62,500)
Actual (234,000) or 25% of 250,000 whichever is loss)

Total taxable income for purpose 1114529.412

Calculation of tax liability.

Particular Amount Amount

Next 100,000 @ 15% 15,000

Balance 764529.412 @ 15% 191132.353

Total liablility 208,632.353

Royalty (105882.353-90,000) (15,882.353)

Interest (217,647.059-185,000) 32,647.059

Rent (200,000-180,000) 20,000

Foreign tax credit 15,000

Total tax payable 125102.941

Average rate of Net Income Tax = Total taxable income for tax purpose =
208632.353/1114529.412 x 100 = 18.719%

Allowable foreign tax credit = 18.719% of 100,000 or Actual 15,000 whichever is

less.

9. Mr. Bir Bahadur Rana a retired army of indian government a Nepalese citizen
joined B&B Hospital as a chief security officer on 1st Baishakh of 2066 B.S. at a pay
scale of Rs. 28,000-500-35,000 plus city compensatory allowence Rs. 18,000 p.m.
He received Rs. 30,000 as dearness allowance. He received one month current
salary as a Dashain Kharcha and two months basic salary as bonus. His children
education expenses Rs. 48,000 reimburshed by the hospital. His telephone bill Rs.
10,000 pad by the office. He is getting meal and tiffin facilities in the hospital
canteen as the hospital provided to all the employees in an equal terms. Other
details furnished by Mr. Rana:

Pension from Indian government Rs. 11,000 p.m.

Dividend from an Indian company Rs. 90,000 for which he paid Rs. 15,000 income
tax to the indian government.
Dividend from Nepal Investment Bank Rs. 28,500.
Donation to a public sport Club Rs. 12,000.

Required:

↺ Assessable income from employment Statement of taxable income.

↺ Tax payable by Mr. Rana. (6+2+2=10)

Answer:

Computation of assessable income from employment of Mr. Bir Bahadur Rana for
the previous year.

Particular Amount Amount

Salary (30,000x9+30,500x3) 361,500

City compensatory allowance (1,800x12) 21,600

Dearness Allowable 30,000

Bonus (28,000x2) 56,000

Children education expenses paid by Hospital 48,000

Telephone bill paid by office 10,000

Assessable income from employment 557,100

Dividend from Indian company 90,000

Assessable income from Investment 90,000

Statement of taxable income

Assessable income from employment 557,100

Assessable income from Investment 90,000

Total Assessable Income 647,000

Less: Allowable Deduction

Donation to public sports 5% of 647,000 or actual or maximum 100,000

12,000
which is less

Calculation of Tax liabilities.

1st 250,000 (Assumed single) @ 1% 2,500

Next 100,000 @ 15% 15,000

Balance 285,00 @ 25% 71,250

1st 250,000 (Assumed single) @ 1% 2,500

Less: Tax Liabilities 88,750

Foreign tax credit (13.97% of 90,000) 12,573

Total Tax Payable 76,177

Working Note:

Calculation of Salary.
Income year 2066/67 = 28,000
Income year 2067/68 = 28,000x9+28,500x3
Income year 2068/69 = 28,500x9+29,000x3
Income year 2069/70 = 29,000x9+29,500x3
Income year 2070/71 = 29,500x9+30,000x3
Income year 2071/72 = 30,000x9+30,500x3

Note:

Lack of information company will not provide contribution fund. Pension income
from foreign government is not taxable income.

Average Income Tax for foreign tax credit = Total tax liability/tax payable income
for tax purpose = 88,750/635,000 x 100 = 13.97%

Therefore, 13.97% of 90,000 or actual (15,000) whichever is lower.

Comprehensive questions: (2x15=30)

Attempt any TWO Questions:

10.

a) Define "Jeopardy Assessment of Tax". In which circumstance this method is

applied? (8)

Answer: Jeopardy Assessment is a special assessment done by inland revenue

department. It is a tax assessment baseon the best judgement of IRD.

The act has given the authority to carryout jeopardy assessment under the
following circumstances:
↺ A person becomes bankrupt, is wound up or goes into liquidation.
↺ A person about to leave Nepal indefinitely.
↺ A person is otherwise.
↺ Is about cease activity in Nepal
↺ The Department consider it is appropriate.

b) 'Value Added Tax is one of the major sources of income of Nepal Government'.
Justify this statement analyzing it's contribution to the national revenue for last
three years. (7)

Answer: Value Added Tax (VAT) is a modern taxation system, under this system
tax burden is born by final customer although it is charged ab each stage of
production and distribution chains.

The main features of Value Added Tax (VAT) are as follows:

↺ It is based on self assessmeny system.

↺ It holds mass participation.
↺ It avoids cascading problem of sales tax which protect the tax payers from huge
amount of tax burden.

It is practiced in Nepal since 2053 by in acting VAT Act 2052. Now a day is applied
13% VAT Rate. It has been compiled all types of tax which replace sales tax,
entertainment tax, etc.

11.

a) A individual running special industry furnished the following information

regarding it's assets under block - D:

i. Beginning depreciation base Rs. 1,000,000.

ii. Purchase during the year.
↺ Chaitra 29, - Rs. 600,000
↺ Ashadh 15, - Rs. 300,000
iii. Disposal during the year.
↺ Book value at the beginning Rs. 100,000 sold for Rs. 150,000.
iv. Actual repair cost - Rs. 100,000.

Required:

↺ Allowable depreciation for the year.

↺ Closing WDV at the end of the year. (6+2=8)
Answer:

Calculation of the Allowable depreciation for the year block (D).

Opening Depreciation base 1,000,000

Add: Additional purchase

400,000
Chaitra 29 (600,000 x 2/3)

Ashadh 15 (300,000 x 1/3) 100,000

Less: Disposed (150,000)

Depreciation basis 1,350,000

Allowable Depreciation for the year 202,500

Now, Calculation of closing WDV at the end of the year = Depreciation basis -
Allowed Depreciation for the year = 1,350,000 - 202,500 = Rs. 1,147,500.

b) The following are the operation results of a company for the last nine years:

P/L Rs. 20,000 30,000 50,000 200,000 300,000 200,000 300,000

Balance of unrecovered loss at the beginningof year 3 was Rs. 150,000 out of
which Rs. 100,000 was related to year 1 and balance was for the year 2. On the
inquiry made by the tax officer it is found that the company had paid Rs. 150,000
for R and D cost and Rs. 50,000 donation to a public hospital in the years 7. These
amounts were deducted before ascertaining the above result.

Required:

↺ Taxable income of the company giving explanation wherever necessary. (7)

Answer:

Profit (Loss) (170,000) 30,000 50,000 200,000 300,000 200,000 300,000

Add bck Donation 50,000

Adj - P/L 170,000 30,000 50,000 200,000 600,000 200,000 300,000

Adjusted P/L (170,000) 30,000 50,000 200,000 350,000 200,000 300,000

Carry forward of loss year 1,2

170,000 (30,000) (50,000) (90,000)
&3

Assessable Income Nil Nil Nil 110,000 350,000 200,000 300,000

Taxable Income Nil Nil Nil 110,000 332,500 200,000 300,000

Explanation:

↺ Loss of during year 1 and 2 also cumulate in year 3rd.

↺ Donation: 5% of assessable income (5% of 350,000) or actual or maximum
100,000 which is lower.

12. Mr. Dhungana is a sole industrialist furnishes the following Trading and Profit
and Loss accounts for the previous year.

Particular Amount (Rs) Particular Amount (Rs)

To opening stock 120,000 By sales 2,400,000

To material consumed 1,000,000 By closing stock 180,000

To labour incurred 400,000

To manufacturing expense 260,000

To gross profit 800,000

To salaries 130,000 By gross profit 800,000

To office expenses 100,000 By commission 100,000

To depreciation 160,000 By discount 150,000

To advertisement 20,000 By bad debt recovered 200,000

To insurance on inventories 20,000 By dividend income 100,000

To pollution control cost 200,000 By interest on investment 55,000

To provision of tax 40,000 By custom duty refund 5,000

To donation (60% approved0 60,000

Total 1,410,000 Total 1,410,000

Additional information:

i) Opening and closing stock both are overvalued by 20%.

ii) Opening WDV of the plant was Rs. 600,000. An asset was purchased on 1st
Asadh of the previous year of the same block, but it was not used in the
manufacturing process. The purchase cost of plant was Rs. 300,000. The
depreciation charged in the above statement is also related to this asset.
iii) Insurance on inventories include legal expenses Rs. 10,000.
iv) 50% of legal expenses is related to appeal against IT officer.
v) He is the member of an approved retirement fund and has contributed Rs.
150,000 to the fund.
vi) Previous year business loss Rs. 40,000 is not included in the above statement.
Required:

↺ Statement of total taxable income and tax liability (13+2=15)

Answer:

Particular Amount Amount

Custom duty refund 5,000

Bad debt recovery 200,000

Gross income from business 2,855,000

Less: Allowable deduction

Cost of trading stock 1,610,000

To office expenses 100,000

Legal expenses (50% of 10,000) 5,000

Insurances on inventories (20,000-10,000) 10,000

Depreciation on machinery (WN) 90,000 (1,965,000)

Assessable income before loass and pollution control cost 890,000

Less: Pollution control cost (200,000)

Assessable income from business before loss adjustment 690,000

Less Business Loss (Previous Year) (40,000)

Assessable Income from business 650,000

Interest on Investment 55,000

Assessble Income from Investment 55,000

Statement of taxable income.

Assessable income from business 650,000

Assessable income from investment 55,000

Total Assessable income 705,000

Less: Allowable reduction

Contribution to approved retirement fund (1/3rd of 705,000 or Actual or maximum

(150,000)
300,000 whichever is less)

Allowable Donation (36,000)

Total taxable income 519,000

Calculation of taxable liabilities.

1st 250,000 (assumed individual) Nil

Next 100,000 @ 15% 15,000

Balance 169,000 @ 25% 42,250

Total tax liability 57,250

WN

1. Calculation of cost of trading stock = opening stock + material consumed + labor

incurred + manufacturing expenses - closing stock = 120,000 x 100/200 +
1,000,000 + 400,000 + 260,000 - 180,000 x 100/120 = 100,000 + 1,660,000 -
150,000 = 1,610,000.

2. Calculation of depreciation (Block 'D') = Depreciation Base = Op. WDV +

Purchase - disposed off = 600,000 + 0 + 0 = 600,000

Therefore, Depreciation = 15% of 600,000 = 90,000.

3. Calculation of Pollution Control Cost.

Adjustable taxable income from business before P.C.C. = Assessable Income

before P.C.C. - Less: Business Loss (Previous Year) = 875,000 - 40,000 = 835,000.

Allowable P.C.C. = 50% of 835,000 or Actual 200,000 whichever is less.

4. Calculation of adjustable taxable income and allowable donation.

Adjusted taxable income from business Add = 890,000-40,000 = 580,000.

Assessabale income from investment = 55,000.

Less: Retirement contribution fund (allowable) = 150,000.

Therefore, Adjusted taxable income for donation = 580,000 + 55,000 - 150,000 =

755,000.

5. Allowable donation = 5% of adjusted taxable income = 5/100 x 755,000 = 37,750.

Or Actual Donation = 60% of 60,000 = 36,000.

Or Maximum Limit = 100,000 whichever is less.

Part-II : Auditing

Brief answer questions: (5x2=10)

Attempt ALL Questions:

13. Briefly explain the objectives of audit note book.

Answer: An auditary diary where matters observed during the course of audit are
recorded is known as audit note book. The objective of audit note book are as
follows:

↺ Provide detail regarding accounting and financial policies followed in the

business.
↺ To provide list of books of account maintained by the client.
↺ To provide information about technical term used in business.
↺ To copy of audit program.

14. Point out any two qualities required in a successful auditor.

Answer: In order to perform audit work properly should posses several qualities
generally following qualities are need for an auditor to success in audit work.

The qualities required in a successful auditor are-

a. Knowledge of accounting and auditing.

b. Knowledge of financial rules and regulation.
c. Tactfulness.
d. Common sense.

15. Differentiate between cash audit and cost audit.

Answer: The main differences between cash audit and cost audit are -

a. Audit work is limited to cash received and cash payment is known as cash audit
but cost audit means an audit of cost record.
b. Cash audit does not consider to the debtor and creditor but cost audit is useful
for the purpose of cost control, cost reduction and proper utilization of scare
resources.
c. Cash audit is popular only those institution where cash transcation are so larger
but cost audit is done in big manufacturing concern.

16. Mention any two advantages of internal check.

Answer: Internal check is a continuous process and is a part of day to day
activities. The main objectives of internal check is prvention and detection of error
and frauds at the earliest. Advantages of internal check are as follows:

a. Advantages to business: Internal check is based on principle of division of

labour. Work of the staff is checked automatically. So, staffs remain honest which
increase profitability of the business.
b. Advantages to an auditor: If internal check system is effective, an auditor can
apply test check rather than checking books of account in detail. So, auditor can
save his time and simultaneously saves the cost.

17. Express whether the following are frauds or errors:

i) Showing loss to avoid tax

ii) Wrong totaling of a subsidiary book
iii) Posting to wrong side of an account
iv) Concealing the receipts.

Answer:

i) Showing loss to avoid tax.

Answer: Fraud due to intentionally.

ii) Wrong totaling of a subsidiary book.
Answer: Error due to innocently.
iii) Posting to wrong side of an account.
Answer: Error due to lack of proper knowledge.
iv) Concealing the receipts.
Answer: Fraud due to internationally.

Short answer questions: (1x10=10)

Attempt any ONE Question:

18.

a) 'Vouching is the backbone of auditing'. Explain the statement with regard to

objectives of Vouching. (5)

Answer: Vouching is the truth of item appearing in the books of original entry. Only
vouching can discover clever fraud done in accounts. So, auditor should very
careful in vouching transaction. Objectives of vouching are as follows:
↺ To detect error and fraud.
↺ To know truth of account.
↺ To confirm that no transaction is left in the entering books of account.
↺ To confirm that only authorized transaction are done.

The main objectives of auditing is to ensure all transaction are record properly
which shows actual financial result according prescribed rules of the nation. It is
not possible without vouching. So, vouching can be said the back bone of the
auditing.

b) Write a note on 'Continuous Audit'. Also state any three reasons that makes
continuous audit superior to periodical audit. (5)

Answer: Continuous audit is the audit in which audit staffs examine the details of
account continuously in whole accounting period. But periodic auditing work are
performed only at the end to accounting period where transactios are completely
recorded and final statements are prepared. Continuous audit is superior than
periodic audit due to the following reasons:

↺ Continuous auditor frequently visit to check the account able to fraud and error
immediately but periodic auditor visit only at the end of the financial year. It is being
late to comers the fraud and errors.
↺ Due to continuous audit, regular supervision leads the increased efficiency and
accuracy but not help in increasing efficiency through the periodic audit.
↺ Due to continuous audit, possible detain checking of account under periodic
auditor is impossible.

19. Giving reasons for the effects of the following transactions on the profitability,
suggest rectifying entries for each of the transactions where necessary. (5X2 = 10)

i) Wages of Rs. 30,000 paid for installation of a plant was debited to wages
account.
ii) An amount of Rs. 25,000 received from Kumar has been entered in the books as
Rs. 15,000
iii) Salary paid to Mohan Rs. 20,000 wrongly debited to his personal account.
iv) A sum of Rs. 10,000 drawn by the proprietor for his private travel was debited to
the travelling expenses account.
v) Sales Book was overcast by Rs. 50,000.

Answer:

Rectification of Journal Entries.

Date Particular LF Debit Rs. Credit Rs.

(Being rectification of error)

(Being rectification of error)

(Being rectification of error)

4 Drawing A/C Dr 10,000

To Travelling A/C 10,000

(Being rectification of error)

(Being rectification of error)

Reasons:

1. It is capital expenditure so plant a/c should be debited. Wages a/c was wrongly
debited. So, it should be created to neutralized the wrong debit.

2. Kumar A/C is under credited by Rs. 10,000, so it should be created but suspense
A/C is debited and there is no account to be debited.

3. Salary is nominal A/C should be debited but personal A/C is debited there. So,
Mohan account is credited to neutralize the wrong debit.

4. It is the amount used by the personal purpose. So, Drawing A/C should be
debited. Travelling expenses should be credited rectify entry.

5. Normally, Sales is appeared in Credit side. It was debited to neutralized error.

Suspense account is credited due to non account.

Note: The students should not limit themselves to the chapters mentioned in this
Model Questions as questions can be asked from any chapter (within the syllabus)
in the examination.😊

Also Check:

Syllabus of Fundamental Of Taxation and Auditing | MGT 218 | BBS 3rd year (4
Years).

BBS 3rd Third Year Model Questions 2020., Fundamental of Taxation and Auditing
Mgt218 BBS Third Year Four Years Program Model Question with Solution., BBS
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