Example of the explanation expected in Question 1(a).

Using the intra-group payment of management fee as an example.

If the management fee between two companies within a group was not eliminated, then the effect would be that both management fee revenue and management fee expense would be overstated by the amount of any management fee. That is because from the perspective of the group as a single reporting entity, the management fee is simply an internal charge within the entity. If no adjustment was made, users of the financial statements might be misled into thinking such fees were with parties external to the group and were therefore more significant than they in fact are. Accordingly, eliminating this management fee is necessary to ensure the consolidated financial statements faithfully represent the revenues and expenses of the group.

Therefore, we have to reduce the amount of management fee revenue by $XXX and the amount of management fee expense by $XXX.

Dr Management fee revenue $XXX

Cr Management fee expense $XXX

SOLUTION

(a)                                                         Journal Entries

As On December 31, 2015

–       In first entry, account payable has been debited to capital account of the company with $14,400

–       in the second entry, account receivable account has been debited to customer account of the company with $16,000

–       The, the Furniture Account is debited with a total of $16, 000, depreciation account is debited with $8,000 to Capital Account with a total of $40,000.

–       Big Limited at a mark up of 40 percent on cost.

–       Of the inventory Big Limited had on hand on 1 January 2015, $21,000 had been purchased from Small Limited.

–       Of the inventory Big Limited had on hand on 31 December 2015, $52,500 had been purchased from Small Limited.

–       During the financial reporting period ending 31 December 2015, Big Limited made sales to Small Limited amounting to $225,000. Big Limited always sells goods to Small Limited at a mark up of 25 percent on cost.

–       Of the inventory Small Limited had on hand on 1 January 2015, $15,000 had been purchased from Big Limited.

–       Of the inventory Small Limited has on hand on 31 December 2015, $112,500 had been purchased from Big Limited.

–       Included in Small Limited’s management fee expense is an amount of $37,500 owed to Big Limited for providing management and administrative services for the financial reporting period ending 31 December 2015. This amount remained unpaid on 31 December 2015. The amount is included in Big Limited’s accounts receivable and Small Limited’s accounts payable at the end of the reporting period ending 31 December 2015.

–       Big Limited’s loan to Small Limited is currently charged at the interest rate of 10 percent per year.

–       On 31 December 2015, the directors decided that the goodwill arising on the acquisition of Small Limited had been impaired by 50 percent. All goodwill impairment is attributable to the financial reporting period ending 31 December 2015.

–       The tax rate is 30 percent.

(b). (I)                                          Income statement of…

As on December 31, 2015

(ii)                                                        Balance Sheet

As of December 31, 2015

(iii)                                                       Income statement of…

As On December 31, 2015

(c) The Capital method is one of the important for financial accounting. It is very much important to maintain reliable, accurate and timely accounts. With this the money is kept in a safe and secure place. Basically the money should be maintained in a lockable cash box and the cashier should keep the importance to the petty cash box in a safe place with a duplicate key being maintained by the main cashier or accountant. The box alongside the petty cash book must basically be kept in a fireproof safe or cabinet. Only the junior cashier or main cashier must be authorized to make payments of petty cash and they should obtain a signature from the person receiving the money.

One of the merits of capital method of financial accounts is that it is easy to check the petty cash at any time. This let the checks to be made on the petty cashier at several intervals to ensure that he or she is honest and the money is secure.

The techniques that any company uses in any business model are related to Management Accounting (Kaplan, 1992).Management accounting is related to gather and report internal financial information to allow the process of decision-making gets completed. It also let the business to modify the techniques of management accounting according to the demand of the company. Decision Making (Johnson, 1995) is a complete process that includes identification of the problem and criteria of decision making, assigning weights to those criteria, development, analysis and selection of an alternative that can help in resolving the problem, applying the alternative method to find to solution to those problems and finishing up with the evaluation of the effectiveness of the decision.

There many management accounting techniques (Hoque, 1991) based on the business model any company is following.

REFERENCES

Kaplan, S. Robert, 1992, Institute of Management Accountants, Implementing Activity-Based Cost Management: Moving From Analysis to Action

Johnson, H.T., 1995 ‟Relevance Lost’, Harvard Business School Press, Harvard, USA

Hoque, Zahirul AKM, 1991, Researching Management Accounting Practice: The Debate about Quantitative and Qualitative Research, Dhaka University Journal of Business Studies, 12(2): pp.19-32

Yan, J., 1951, “Criticizing Tao De’s ‘‘My Reading of ‘How to Construct China’s Theoretical Basis of Accounting”, New Accounting, pp. 19–20

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