Gypsy Enterprises (GE) producing high quality low cost housekeeping instruments was started by an engineer. Jagson introduced the initial capital of ₹10,00,000 in cash and a machine costing ₹3,50,000. Before the formal inauguration of the business, Jagson executed the following transactions:

(i) Purchased furniture and fixtures for business costing ₹1,85,000, 

(ii) Paid preliminary expenses ₹90,000. On market survey, he believed that these expenses will generate the economic benefits within the four years’ time.

(iii) Purchased equipment costing ₹2,25,000 

(iv) He also purchased a second-hand car at a cost of ₹2,10,000. The car was expected to have a life of eight years with a salvage value of ₹50,000 at the end. Further, he expected to use the car for business purpose as well as for his personal use in 2:3, respectively.

After incurring these expenses, he was left out with a cash balance of ₹3,10,000 only. The inaugural day of the business was really lucky for him. On this day, he got appointed as Senior Engineer in a multinational company. Therefore, he appointed Paul as Manager-cum-Accountant to manage the business activities. Paul executed the business activities as per the guidelines set by Jagson and presented the following trial balance:

By looking at the trial balance, Jagson was surprised and asked to explain the details of the monetary transactions. Paul cross-checked all the accounts and reported back saying thereby that all the records were complete and perfect. He supported his argument with the fact that the trial balance had tallied. Therefore, there is no possibility of any mistake in the books of account. Jagson, however, was not convinced by Paul’s reply.

Discussion Question

1. Jagson has appointed you to verify the books of accounts. You have to come up with a true view of the financial position of the Gypsy Ltd.

Transcribed Image Text:

S. No. 1 2 3 45 5 6 7 8 9 10 11 12 13 14 15 16 17 Cash a/c Bank a/c Capital a/c Building a/c Patents a/c Salary a/c Name of Account Insurance Premium a/c Advertising Expense a/c Bad Debts a/c Purchase a/c Stationery a/c Freight a/c Discount a/c Sales a/c Commission Received a/c Car Expenses a/c Commission a/c Total Trial Balance As on March 31, 2010 L. F. Debit Amount (3) 74,000 93,000 2,90,000 1,74,500 31,000 10,000 31,200 5,000 78,100 650 100 200 11,000 1,250 8,00,000 Credit Amount (²) 3,10,000 500 4,88,000 1,500 8,00,000