CAP-I Adjustments Mastery — Hypothecation, Cross-Postings, Drawings, SOR, Provisions & More | CAP-I लेखा Add-On Pack 2: १० दीर्घ प्रश्न–उत्तर र चरणबद्ध समाधान (ICAN नेपाल)

CAP-I Fundamentals of Accounting — More Exam-Style Questions & Long, Step-by-Step Solutions

Extra practice set for CAP-I (ICAN): adjustments, rectifications, provisions, and closing statements — with highlighted takeaways and student summary task. #CAP-I #Accounting #ICAN #TrialBalance #FinancialStatements

Q1) Bank Overdraft under Hypothecation: How do you back-solve the stock value when OD equals 80% of drawing power and drawing power is 80% of stock?

Solution (idea → formula → number): In hypothecation, the bank fixes drawing power (DP) as stock less margin. With a 20% margin, DP = 0.8 × Stock. If the question says the overdraft outstanding is itself 80% of DP, then OD = 0.8 × DP = 0.8 × (0.8 × Stock) = 0.64 × Stock. Rearranging gives Stock = OD / 0.64. This is the logic used in CAP-I suggested answers for hypothecated overdrafts with 20% margin and OD at 80% of DP. :contentReference[oaicite:0]{index=0}

#BankOverdraft#Hypothecation#DrawingPower#StockValuation#CAP-I

Reference: June 2022, Roshan Enterprises adjustments (OD vs. DP and 20% margin). :contentReference[oaicite:1]{index=1}

Q2) Investments sold at a 10% profit were wrongly booked as Sales. How do you rectify without distorting operating revenue?

Solution (reclassify & disclose): Remove the proceeds from Sales and recognize the transaction under Other income / Gain on sale of investments, keeping only revenue from core operations in Sales. The June-2022 adjustments explicitly state: “Investment was sold at 10% profit, but entire proceeds have been booked as sales,” which requires reclassification and recognition of the correct gain. :contentReference[oaicite:2]{index=2}

#InvestmentSale#RevenueRecognition#Rectification#ExamAdjustments

Reference: June 2022, Roshan Enterprises — Adjustment (b). :contentReference[oaicite:3]{index=3}

Q3) Purchases include Sales Returns and Sales include Purchase Returns. What’s the clean-up entry and effect?

Solution (netting cross-postings): Remove Sales Returns from Purchases and Purchase Returns from Sales to reinstate the correct gross figures. This mis-posting is a classic CAP-I trap and is called out directly in June-2022: “Purchase includes sales returned of Rs. 5,500 and sales include purchase return of Rs. 4,750.” Journal rectifications restore Purchases and Sales to their proper sides before preparing the Trading Account. :contentReference[oaicite:4]{index=4}

#SalesReturn#PurchaseReturn#RectificationEntry#TradingAccount

Reference: June 2022, Roshan Enterprises — Adjustment (d). :contentReference[oaicite:5]{index=5}

Q4) Goods withdrawn by proprietor for personal use were included in Purchases. What’s the impact on GP and Capital?

Solution (remove drawings from cost): Reduce Purchases and record Drawings. This increases gross profit (because cost was overstated) and reduces capital (because drawings reduce owner’s equity). June-2022 and June-2021 both feature this: Rs. 7,500 and Rs. 15,000 respectively included in Purchases that must be treated as drawings. :contentReference[oaicite:6]{index=6} :contentReference[oaicite:7]{index=7}

#Drawings#Purchases#GrossProfit#Capital

References: June 2022 (Roshan Enterprises, adj. e) and June 2021 (Mailung Suppliers, info b). :contentReference[oaicite:8]{index=8} :contentReference[oaicite:9]{index=9}

Q5) Wages for installation were charged to Wages A/c instead of capitalizing to Plant. How do you correct and why?

Solution (capitalize & depreciate): Transfer installation wages from Wages to Plant & Machinery and compute depreciation on the enhanced asset value. Both June-2022 (Rs. 750) and June-2021 (Rs. 1,500) include this adjustment because installation cost is a directly attributable capital expenditure. :contentReference[oaicite:10]{index=10} :contentReference[oaicite:11]{index=11}

#Capitalization#InstallationWages#PPE#Depreciation

References: June 2022, adj. (g); June 2021, info (g). :contentReference[oaicite:12]{index=12} :contentReference[oaicite:13]{index=13}

Q6) Compute provisions when debtors need 5% doubtful debts and 2.5% discount, and a creditor’s debit balance is wrongly inside debtors.

Solution (purify base, then layer provisions): First, remove the creditor’s debit balance from Debtors (e.g., Abdul Rs. 2,500) to get adjusted debtors. Then apply 5% for Allow. for Doubtful Debts, and on the net (Debtors − AFDD) apply 2.5% for Provision for Discount. This exact sequencing is required by June-2022 adjustments (h) & (i). :contentReference[oaicite:14]{index=14}

#Provision#BadDebts#DiscountOnDebtors#DebtorsControl

Reference: June 2022, Roshan Enterprises — Adjustments (h) and (i). :contentReference[oaicite:15]{index=15}

Q7) Sale or Return (Rs. 7,500, invoiced at 20% profit) is still returnable at period end. How should Sales, Debtors, and Closing Stock be shown?

Solution (reverse revenue, include cost in stock): Remove Rs. 7,500 from Sales and Debtors (since risks/rewards haven’t transferred). Add the goods back to Closing Stock at cost (Rs. 7,500 less 20% of sales = Rs. 6,000). This treatment and the journal entries are laid out step-by-step in the CAP-I suggested answer. :contentReference[oaicite:16]{index=16}

#SaleOrReturn#RevenueRecognition#ClosingStock#ICAN

Reference: December 2020 (Ramesh) — WN-3: SOR reversal & stock at cost. :contentReference[oaicite:17]{index=17}

Q8) Ground Rent for two years was debited to Buildings. What’s the correcting entry and Balance Sheet presentation?

Solution (expense + prepaid, reduce asset): Split the total between current year expense and prepaid, and credit Buildings to remove the misclassification. The suggested answer shows: Dr Ground Rent Expense 1,500; Dr Ground Rent Paid in Advance 1,500; Cr Buildings 3,000, and presents Buildings net of the reversal with a separate Prepaid Ground Rent under current assets. :contentReference[oaicite:18]{index=18} :contentReference[oaicite:19]{index=19}

#PrepaidExpense#ErrorCorrection#Buildings#BalanceSheet

References: December 2020 — WN-5 correcting entry; BS presentation. :contentReference[oaicite:20]{index=20} :contentReference[oaicite:21]{index=21}

Q9) Free samples and advertising: how are free samples (e.g., Rs. 2,500) treated in the Trading/P&L?

Solution (marketing, not cost of goods): Free samples are selling & distribution expenses. Remove them from Purchases/Inventory (if included) and charge to P&L as Advertising/Promotion. This appears in June-2021 information (d): “Free samples distributed for publicity costing Rs. 2,500.” :contentReference[oaicite:22]{index=22}

#FreeSamples#Advertising#COGSvsOpex#TradingPL

Reference: June 2021 (Mailung Suppliers) — Additional info (d). :contentReference[oaicite:23]{index=23}

Q10) A party appears as both Debtor and Creditor (e.g., Mr. Ramesh Dr 3,000/Cr 1,000). How do you set-off and compute reserves?

Solution (netting then layering reserves): First, set off mutual balances (reduce Debtors and Creditors by the overlapping amount). Then compute Reserve for Doubtful Debts (e.g., 5%) on the net Debtors, and Reserve for Discount (e.g., 2%) on Debtors net of the bad-debt reserve. The December-2021 working note shows exactly this sequencing and arithmetic. :contentReference[oaicite:24]{index=24}

#SetOff#Debtors#Creditors#Reserves

Reference: December 2021 — WN-1 & WN-2 (set-off + 5% & 2% reserves). :contentReference[oaicite:25]{index=25}

Big Picture (read once, then summarise): In CAP-I accounting adjustments, accuracy hinges on classifying cash-to-stock bank links (hypothecation: margin to DP, DP to OD), ring-fencing operating revenue (reclassify investment proceeds out of Sales), untangling cross-posted returns (Sales Returns vs. Purchase Returns), and purifying cost of goods (remove drawings and free samples from COGS). Capitalise installation wages to PPE; then apply depreciation on the uplifted base. For receivables, clean the ledger first (creditor debits inside debtors; set-offs) and then layer AFDD followed by discount reserve on the correct base. For conditional sales (SOR), reverse revenue and carry the goods at cost. For misclassifications like ground rent in Buildings, split between expense and prepaid, and reduce the asset. Getting these right yields a Trading/P&L and Balance Sheet that reflect real performance and true position — exactly what examiners reward.

Student Task: Make your own 6–8 line summary covering: (1) hypothecation OD→DP→Stock chain, (2) investment sale reclass, (3) cross-posted returns cleanup, (4) drawings & free samples impact, (5) install-wages capitalization & depreciation, (6) provisions order and set-off, (7) SOR at cost, (8) ground rent correction. End your summary with 3 hashtags, e.g., #CAP-I #Accounting #ICAN.