Financial Accounting

Course Instructor: Dr. Md. Rezaul Kabir

A101

Submitted by Group 6
Roll: 68, 74, 102, 106, 108
2008
1) The following items appeared on the Trial Balance of Beauty Plc as at 31st October 2008:
Share capital £1,002,000, Share Premium £200,000 and
General Reserve £100,000

It is proposedthat a dividend @ 10% needs to be providedin the current year’s accounts.What is

the amount of proposed dividendthat needs to be shown in the profitand loss statement by way
of appropriation?

A £130,200 B £120,200 C £100,200

Solution: C

Proposed dividend = Dividend payout ratio * Share capital

or, Proposed dividend = 10% * £1,002,000

∴Proposed dividend = £100,200

2) If the total net assets ofa business totalled £540 000 and its liabilities totalled
£316 800, its total assets on that date would amount to:

A £540 000
B £856 800
C £633 600
D £223 200

Solution: B

Net Assets/Owner’s Equity = Assets – Liabilities

So, Total Net Assets + Liabilities = Total Assets
or, Total Assets = £(540 000 + 316 800)

⸫ Total Assets = £856 800

3) If a business commenced the day with
£14 200, paid out £58 900 during the day Solution: D
and has £22 900 by the end of the day, it
should have received during the day: Given,
Initial cash balance = £14,200
A £50 200 Cash paid out = £58,900
B £1 400 Ending cash balance = £22,900
C £21 800
D £67 600 Initial cash balance + cash received during day - Cash paid out =
Ending cash balance

or, £14200 + Cash received during day -£58900= £22 900

So, Cash received = £(22900+58900- 14200)

= £67600
 Solution: C

4) A trader who commenced businesson 1 Now,

January 20x5 reports the balances,as at 31 COGS = Purchases+ Opening Inventory- Closing Inventory
December 20x5, in the Purchases account Given,
and Sales account as Purchases = £346,800
£346 800 and £479 500 respectively. The Closing Inventory = £54,400
total of the balances in all other expense Assuming Opening Inventory is zero,
accounts is £112 200. Identify the net profit COGS = £346,800 + £0 - £54,400 = £292,400
in the first year of operation. The cost of Now,
goods remaining unsold by the year end Sales = £479,500
was £54 400. Gross Profit = Sales - COGS
Gross Profit = £479,500 - £292,400
A £20 500 Gross Profit = £187,100
B £24 600 Now,
C £74 900 Net Profit = Gross Profit - Total Expenses
Given,
Total Expenses= £112,200
Net Profit = £187,100 - £112,200
Net Profit= £74,900
 Solution: A
5) The following are business transactions
of a retailer: Cost of goods sold (COGS):
COGS = Number of items sold * Cost per item
Purchased 150 items at cost £4 each for ⸫ COGS = 110 items * £4/item = £440
cash.
Delivered 110 items to customers for cash Revenue from Items Sold:
at a selling price of £6.50 per item. What is Revenue = Number of items sold * Selling price per item
the total profit of the retailer? Revenue = 110 items * £6.50/item
Revenue = £715
A £275
B £875 Now, let's calculate the total profit:
C £440 Profit = Revenue - COGS Profit
D £115 = £715 - £440 Profit = £275

So, the total profit of the retailer is £275

 Solution: A
Since Jayantha sold all the goods purchased ,the COGS will be
6) Jayantha commenced business on 1 equal to the amount spent on purchasing goods:
January 20x6 with a capital in cash of COGS = £92,400
£10 000. Duringthe year endingon 31 Jayantha wants to write off 10% of the furniture cost as
December 20x6 he paid £12 000 for depreciation
furniture, £92 400 for purchasing goods for So, Depreciation expense= Furniture cost * Depreciation rate
sale and £31 450 for various expenses.He = £12,000 * 10% = £1,200
received £139 250 by sale of goods. Again,
IdentifyJayantha’s profit for the year to 31 Total expenses= COGS + Other expenses+ Depreciation
December 20x6 in the following situation: = £92,400+ £31,450 + £1,200
Jayantha had sold out all goods purchased = £125,050
during the year and wishes to write off a Now,
tenth of the cost of furniture as Profit = Sales - Total expenses
depreciation. = £139,250 - £125,050
=£14,200
A £14 200 Therefore, Jayantha's profit for the year to 31 December 20x6 is
B £46 850 £14,200.
C £14 400
7) An electricity accrual of £400 was ignored completely when preparing a trader's income
statement (p & l account).
As a result:
A Profit was overstated by £400 and current assets overstated by £400
B Profit was overstated by £400 and current liabilities understated by £400
C Profit was overstated by £400 and current liabilities overstated by £400
D Profit was understated by £400

Solution: B

Profit was overstated by £400 and current liabilities understated by £400.

Ignoring the electricity accrual of £400 means that the expense associated with it wasn't
accounted for in the income statement. Since expenses reduce profit, the profit would be
overstated by £400.
However, as the electricity expense was not accounted for, it would also result in the
current liabilities being understated by £400, as this expense should have been
recognized as a liability to be paid in the future.
8) A business has net assets at the beginning of 2005 of £101 700. The profitearned by the
business in 2005 was £72 500. The owner withdrew goods for his own private use which had cost
£2 500. What were the net assets at the end of 2005?
A £171 700
B £174 200
C £99 200
D £176 700

Solution: A

Start with the net assets at the beginning: £101,700 Add the profit earned in 2005:
£101,700 + £72,500 = £174,200

Subtract the value of the goods withdrawn by the owner:

£174,200 - £2,500 = £171,700
Therefore, the net assets at the end of 2005 were £171,700
9. Given that non-current (fixed) assets total £300 000, current assets total £120 000, long-term
liabilities amount to £100 000, and share capital and reserves total £230 000, the amount of
current liabilities ('creditors: amounts falling due within one year') will be:

A £50 000 B £150 000 C £190 000 D £90 000

Solution: D
Total assets = Total liabilities + Owners’ Equity where:
Total assets = non-current assets + Current assets
Total liabilities = Long-term liabilities + Current liabilities
Owners’ Equity = Share Capital + Retained Earnings/Reserves

Total Assets= £300,000 + £120,000 = £420,000

Total Liabilities = £100,000 + Current Liabilities Owners’ Equity = £230,000
Total assets= Total liabilities + Owners’ Equity
£420,000 = £100,000 + Current Liabilities + £230,000
or, Current Liabilities = £420,000 - £230,000 - £100,000
⸫ Current Liabilities = £90,000
10. Amachine costing £4 000 and having a
residual value of £500 is estimatedto have a Solution: D
useful economic life of 5 years. If it is Straight Line Depreciation
depreciated by the straight line method,what Annual Depreciation:
book value will be shown in the balance sheet Annual Depreciation = (Cost-Residual Value) / Useful Economic
for the machine after 3 years of ownership? Life(in years)
A £1500 Given:
B £4 000 Cost = £4000 Residual Value = £500
C £2 500 Useful Economic Life = 5 years
D £ 1900 Therefore, Annual Depreciation = (£4000 - £500) / 5
= £700/year
After 3 Years:
Depreciation Amount = Annual Depreciation * Number of Years
Depreciation Amount = £700/year* 3 years = £2100
Book Value after 3 Years:
Initial Cost - Accumulated Depreciation
= £4000 - £2100
= £1900
11- Which of the following are a prepayments Solution: B
or accrued income?
1. Rent paid in advance £1000 Rent paid in advance £1000: This is a prepayment, as it
2. Rent owing to us £500 represents a payment made for a good or service that will be
3. Taxation £2500 received in the future. In this case, the rent is paid for a period that
4. Subscriptions paid for next year £200 hasn't started yet.
Subscriptions paid for next year £200: This is also a
A 1 and 2 prepayment, as it represents a payment made for a service that
B 1, 2 and 4 will be received in the future (next year).
C 1 and 4
D 3 only Rent owing to us £500: This is accrued income, as it
represents income that has been earned but not yet received. In this
case, the rent has been earned for a period that has already passed,
but the payment hasn't been received yet.

Taxation £2500: This is not a prepayment or accrued

income. Taxes are an expense that the business owes, not a
payment for a future good or service.
12- If a business purchases each item for £400 and sells them each for £600 what would be its
gross profit ratio:
• 20%
• 30%
• 50%
• 33 1/3 %

Solution: D
The gross profit ratio (or gross profit margin) shows the gross profit as a percentage of net sales.
Gross profit = Sales – COGS = £ (600-400)
= £ 200

Now, Gross profit ratio = £200 / £600 = ⅓

= 33.33%
 13. Black Limited has listed the following
amounts in its balance sheet:
Your paragraph text

Cash £10 000

Solution: B
Assets = Liabilities + Shareholder’s Equity /
Buildings £75 000 What is the amount of the
Ownership Interest
ownership interest?
- Cash + Building + Trade Receivables + Plant
Trade payables (creditors) £25 000 & Equipment + Inventory
A £65 000
= Trade payables + taxes payable within one
B £190 000
Taxes payable year + Ownership Interest
year within one £15 000 C £85 000
D £170 000
10000 + 75000 + 55000 + 30000 + 60000 =
Trade receivables
(debtors) £55 000
25000 + 15000 + Ownership Interest
Ownership Interest = B. £190 000
Plant and equipment £30 000

Inventory (Stock) £60 000

14. Joe Buchanan consistently fixes his sale price at cost plus a third. In the current year his
opening inventory (stock) was £42 000, purchases 142 800 and sales £180 600. His gross profit is:

A £30 100
B £45 150
C £90 300
D £60 200

Solution: B
Total sales revenue = a third more than the cost price.
Considering COGS as X, Sales revenue ( 180600 ) = 4X/3 of COGS
COGS = £ 135450
Gross Profit = Sales Rev. – COGS = 45150
15. The trade receivables (debtors) balance in the books of a sole trader at the year end is £35
000. Of this amount £2 500 will never be paid as the debtor has been declared bankrupt. The sole
trader estimates that he should allow a provision of 2% of trade receivables (debtors) for further
bad debts. The provision for bad debts already appearing in the trial balance is £750. The trade
receivables (debtors) figure shown under current assets on the year end balance sheet should be:

A £32 500 B £31 850 C £31 750 D £34 300

Solution: B
Trade receivables – bad debts = 35000 – 2500 = 32500
Provision for bad debts = 2% of 32500 = 650
Current assets on year end balance sheet = 32500 – 650 = 31 850
16. If sales are £80 000, cost of sales is £55 000, selling expenses are £20 000and administration
expenses are £16 000, the net profit will be:
A A loss of £21 000
B A loss of £11 000
C A profit of £21 000
D A profit of £11 000

Solution: B
Sales – Cost of Sales – Selling Expense – Administration Expense
= £80 000 – £55 000 – £20 000 – £16 000
= A loss of £11 000
17) JK Builders Co purchases a new excavator, costing £40 000. Its expected useful life is 10
years, at which point it is anticipated that the excavator will have a residual value of £6 000. If the
straight-line method of depreciation is used, what is the net book value of the excavator at the
end of four years?
a) £26 400 b) £24 000 c) £13 600 d) £29 800

Solution: A
Depreciation p.a = = = £3400
Depreciation at the end of 4 years = 4*£3400 = £13600
NBV at the end of 4 years = £40 000 – £13600 = £26400
18. At 31 December Year 1, James White and Co.
carried out its annual physical stocktaking, counting 25
CD players, each of which had cost £100. During 2,
further purchases were made as follows:
Month CD Player Purchased Usual price

100 Solution: D
March 5
Total CDs = 25 + 5 + 10 + 8 + 6 + 12 = 66
Number of CDs remaining = 66 – 52 = 14
May 10 110
In FIFO stock valuation, amount of closing stock
June 8 115 = 2*120 + 12*125 = £1 740

September 6 120

Novembe 12 125
r
Annual sales totalled 52 CD players, at total sales
revenue of £9 350. Dates of sale are not recorded. If
the first-in, first-out (FIFO) method of inventory (stock)
valuation is used, what is the amount of closing
a) £2500 b)
inventory £ 5500 c) £ 1750 d) £ 1740
(stock)?
 19. Black Limited has listed the following
amounts in its balance sheet:
Your paragraph text

Cash £10 000

Solution: B
Current Asset = Cash + Trade Receivables +
Buildings £75 000 What is the amount of the
Inventory = £10 000 + £55 000 + £60 000 =
total current assets?
£125 000
Trade payables (creditors) £25 000
A £ 255 000
B £125 000
Taxes payable
year within one £15 000 C £180 000
D £170 000
Trade receivables
(debtors) £55 000

Plant and equipment £30 000

Inventory (Stock) £60 000

20. Paddy Stores had an opening inventory (stock) of £117 200, while Purchases totalled £92 240
and Sales totalled £136 800. Assuming a gross profit ratio of 40%, the cost of goods sold is:

a) £154720 b) £54720 c) £82800 d) £2127360

Solution: B
Gross profit = (Gross Profit Ratio * 100) / Sales = 40/100 *136 800 = £54,720
2009
1. Toys 4U has a year-end of November 2008, the following information has been obtained: sales
of £925,600, opening stock of £21,600, purchases of £625,000, and an initial closing stock of
£36,400. A subsequent investigation has discovered that £3,000 of the stock is worthless since it
has been water-damaged, What is the gross profit for the year?

a) £300,600 b) £315,400 c) £312,400 d) £285,800

Solution: C
COGS = Opening Stock + Purchases – Closing Stock
= £21,600 + £625,000 – (£36,400 – £3,000)
= £613200

Gross Profit = Revenue – COGS

= £925,600 – £613200
= £312,400
2. The total assets of Bridgeport total £752,000, its net assets total £456,000 and its current
liabilities total £456,000; the total long-term liabilities would amount to:

a) £296,600
b) £348,000
c) £644,000
d) £188,000

Solution: D
Long term liabilities = Total assets – Net Assets – Current Liabilities
= £752,000 – £456,000 – £456,000
= £188,000
3. A retailer has extracted the following information for the year ended 30 June 2008; opening
stock £18,000, closing stock £22,000 and cost of goods sold of £148,000. What is the cost of the
purchases it has made in the year ended 30 June 2008?

a) £166,000 b) £130,000 c) £152,000 d) £168,000

Solution: C
COGS = Opening Stock + Purchases – Closing Stock
Purchases = COGS – Opening Stock + Closing Stock
= £148,000 – £18,000 + £22,000
= £152,000
4. Serena Wright began trading on 01 April 2007 and prepares her first final accounts to 31 March
2008. An extract from her trial balance shows sales and purchases at £725,600 and £432,500
respectively, expenses as £224,800 and closing stock as at 31 March 2008 of £22,000. What is
Serena’s net profit for the year to 31 March 2008?
a) £68,300 b) £90, 300 c) £46,300 d) £92,300

Solution: B
Net profit for the year = Sales – COGS – Expenses
= £725,600 – (£432,500 – £22,000) – £224,800
= £90,300
5. Anand, a sole trader is preparing his accounts for the year ended 31st August 2009; his
trade receivables (debtor) balance at the 31st August 2009 was £18,600. Anand subsequently
discovers that one of his customers has been declared bankrupt, owing Anand £3,200. In
addition, Anand decides to make a provision for bad and doubtful receivables (debts) of 3% of
the remaining receivables balance. The receivables balance as of 01 September 2008 was
£1,200. What is the figure that will be shown for trade receivables in the balance sheet as at
a) £15,400
31 b) £14,200 c) £14,938 d) £11,200
August 2009?

Solution: C
Trade Receivables less Bad Debt = £18,600 – £3,200 = £15,400
After a 3% provision for doubtful debts, trade receivables in B/S (31 August 2009) = £15,400 – 3% of
£15,400 = £14,938
6- Merchant Bakers have installed a new 30-tonne oven at a cost of £230,000, this being made
up as follows:
Cost of oven £185,600

Training costs £ 13,600

Delivery costs of oven £ 10,000

Reinforcing concrete floor £ 22,000

Three year warranty £ 9,400

Total £240,600

a) £240,600 b) £217,600 c) £227,000 d) £209,200

Ans: Option B
Fixed Asset = Cost of oven + Delivery costs + Reinforcing concrete floor = £185,600 + £ 10,000 + £
22,000 = ) £217,600
Training costs of employees do not fall under the acquisition cost of the oven. Three-year warranty too is
not part of the acquisition cost as it is more of a provision and its cost will be evenly distributed as an
opex for the next 3 years. Reinforcing concrete floor is an installation cost while delivery costs are
acquisition costs.
7. Boomerang Ltd manufactures and sells cuddly toys, at the beginning of May 2009 it had
£500 of raw materials, it made further purchases of raw materials during May 2009 and used
some of these raw materials in the manufacturing process – all of this information was
recorded on a stock card, shown below. Boomerang Ltd operates the LIFO method of stock
valuation. Calculate the value of the closing stock of raw materials at the end of May 2009

a) £784 b) £1,317 c) £1,440 d) £1,216

Ans: Option B
Total stock = 100+250+150+50 =550 kg
Closing stock = 550 – (80+230) = 240 kg
According to LIFO stock evaluation method, value of closing stock (at the end of May2009) = 50*£6.00 +
150*£5.50 + 40*£4.80 = £1,317
8. Aston Catering Ltd began trading on 1st July 2008 and is preparing its first-year accounts to
30th June 2009. Aston’s annual rent is £33,000; at the end of 30th June 2009, it had paid rent
of £30,000. What is the correct accounting treatment?
a) Profit & loss: rent £30,000; Balance sheet: prepaid £3,000
b) Profit & loss: rent £33,000; Balance sheet: prepaid £3,000
c) Profit & loss: rent £33,000; Balance sheet: accrual £3,000
d) Profit & loss: rent £30,000; Balance sheet: accrual £3,000

Ans: Option C
Since annual rent is £33,000, but at the end of 30th June 2009, it had paid £30,000; this implies that £3,000 has yet to
be paid and is the accrual. So in the P/L statement, the entire rent expense of £33,000 has been recorded while
recording the accrual of £3,000 in the balance sheet.
9. You are reviewing the accounts of Mitchell Ltd and you notice that the company has
classified repairs to its premises as capital expenditure when it should have been treated as
revenue expenditure. What is the effect of this mistake?
a) Understates expenses and overstates earnings
b) Overstates expenses and overstates assets
c) Overstates expenses and understates earnings
d) Overstates assets and understates earning

Ans: Option A

Repairs to the premises should be recorded as an opex but instead, it has been recorded as capex. That implies the
expenses have been capitalized on, which is not the case, so expenses have been understated. Again, understated
expenses imply more profit and in turn, overstated earnings.
The following data relates to questions 10 and 11
Alpha prepares its annual financial statements to 31st August each year; on 01 September
2006 it purchased plant and machinery at a cost of £230,000, residual (scrap) value of £29,808
and an estimated useful economic life of four years.
10. If Alpha adopts straight line depreciation what will be correct accounting treatment for its
annual accounts year ended 31st August 2009
a) Profit & loss: depreciation £57,500; Balance sheet: NBV £87,308
b) Profit & loss: depreciation £57,500; Balance sheet: NBV £57,500
c) Profit & loss: depreciation £50,048; Balance sheet: NBV £79,856
d) Profit & loss: depreciation £50,048; Balance sheet: NBV £50,048

Option C
The following data relates to questions 10 and 11
Alpha prepares its annual financial statements to 31st August each year; on 01 September
2006 it purchased plant and machinery at a cost of £230,000, residual (scrap) value of £29,808
and an estimated useful economic life of four years.
11- If Alpha adopts reducing balance depreciation, rate 40% what will be correct accounting
treatment for its annual accounts year ended 31st August 2009
a) Profit & loss: depreciation £92,000; Balance sheet: NBV £82,800
b) Profit & loss: depreciation £29,808; Balance sheet: NBV £49,680
c) Profit & loss: depreciation £33,120; Balance sheet: NBV £49,680
d) Profit & loss: depreciation £55,200; Balance sheet: NBV £82,800
12- Peter Jackson is preparing his annual accounts to 31st October 2008.
As at 31st October 2008 he owed £600 for electricity having paid £2,200 (by
standing order) in the year to 31st October 2008, on 1 November 2007 Peter
owed £400 for electricity. What is the correct accounting treatment for 31st
October 2008?
a) Profit & loss: electricity £2,400; Balance sheet: accrual £600
b) Profit & loss: electricity £2,400; Balance sheet: prepaid £400
c) Profit & loss: electricity £2,200; Balance sheet: accrual £600
d) Profit & loss: electricity £2,200; Balance sheet: prepaid £400

Answer: Option C
1- Profit & Loss (P&L) Account (Income Statement):
⚬ The electricity expense incurred during the year is recorded in the P&L account.
⚬ The total electricity expense paid during the year is £2,200.
⚬ Therefore, the P&L account should reflect this actual expense
2- Balance Sheet (Statement of Financial Position):
⚬ The outstanding electricity bill as of 31st October 2008 (i.e., the amount owed but not
yet paid) is £600.
⚬ This outstanding amount represents an accrual (an expense due but not yet settled).
13. Bohemian Ltd is a fashion retailer selling a limited range ofmerchandise, at the end of its
financial year it carried out a stock check, the results being as follows:
Cost
£
Dresses 25,600
Coats 16,800
Skirts 11,000
53,400

It has been agreed that the coats are out of fashion and could not be sold to
Bohemians customers; these will be sold to another retailer for £2,800. What
will be the closing stock value shown in Bohemians balance sheet?
a)£36,600 b) £39,400 c) £50,600 d) £53,400

Ans. Option B

Total Stock Valuation: £25600+£2800+ £11000= £39400

14. Frederica, the owner of a health food shop, is preparing her final accounts to 31st
December 2008. At the beginning of her financial year she had net assets of £65,800, earned a
profit of £43,800 and had net assets at the end of 2008 of £77,600. What did Frederica take
out as drawings(personal use) during 2008?
a) £22,000 b) £11,800 c) £32,000 d) £43,800

Ans. Option C

Drawings = Net Assets at the Beginning + Profit - Net Assets at the End
Substitute the given values:
Drawings = £65,800 + £43,800 - £77,600= £32,000
15- Which of the following are accruals or accrued income?
i. Rent paid in advance £1,000
ii. Arrears of rent £500
iii. Deposit paid by a customer £2,500
iv. Goods delivered to a customer £700, not yet invoiced

a) i and ii b) all of them c) ii and iii d) ii and iv

Ans. Option D
In ii and iv, the money is earned but not yet received. So it is an accrued income
16- The following information has been extracted from the accounting 1. Ans. Option B
records of Epsilon Limited at 30th September 2008. Calculate the ownership Total Assets:
interest that will be shown on Epsilon’s balance sheet as at 30th September ⚬ Total Assets = £300,000
2008. + £105,000 + £18,000
+ £8,000 + £82,000 =
Capital 242,000 £513,000
Bank overdraft 15,000 • Total Liabilities:
Five year loan 125,000 ⚬ Total Liabilities =
Profit and loss 165,000 £15,000 + £125,000 +
Goodwill 42,000 £63,000 = £203,000
Brand names 55,000 • Net Assets (Equity):
Land and Buildings 300,000 ⚬ Net Assets = Total
Plant and machinery 105,000 Assets - Total Liabilities
Stock 18,000 ⚬ Net Assets = £513,000 -
£203,000 = £310,000
Cash 8,000 So, Ownership Interest= Net
Debtors 82,000 Asset+ Brand Value+ Goodwill
Creditors 63,000 = £310,00+ £42000+
a) £533,000 b) £407,000 c) £813,000 d) £563,000z £55000
= £407, 000
17. Plastron Limited’s balance sheet as at 30 April 2009 has total assets of £89,000, total
liabilities of £41,000, share capital of £32,000, and retained profits (profit and loss) of £16,000.
During the month of May 2009 Plastron Limited made a gross profit of £22,000; incurred
depreciation expense of £2,000; paid rent to cover the quarter May 2009 to July 2009 of £12,000
and paid wages of £4,000. At the end of May 2009 there was still £1,000 owing for May's wages.
Calculate the retained profits balance as at 31 May 2009:
a) £4,000 b) £27,000 c) £20,000 d) £38,000

Solution: B
Gross profit (May 2009) = £22,000
Depreciation expense = £2,000
Rent expense (May) = £12,000 / 3 = £4,000
Wages expense (paid) = £4,000
Wages payable (May) = £1,000
Net profit = Gross profit - Total expenses
= £22,000 - £11,000
= £11,000
Retained profits (30 April, 2009) = £16,000
Retained profits (31 May, 2009)= £16,000+ £11,000
= £27,000
18. Henri sells a range of electrical equipment, one his more popular lines has a selling
price of £340. Henri buys this piece of equipment from a local supplier paying on average
£119 for each item. What is Henri’s gross profit ratio (%), to the nearest whole % on this
product?

a) 186% b) 35% c) 65% d) 50%

Solution: C
Gross Profit = Selling price - Cost price
= £340 - £119
= £221
Gross profit ratio = (Gross Profit/Selling Price) x 100%
= £221/£340 x 100%
= 65%
19. Which of the following is the correct way to record the payment of wages of £800 by a business to
one of its employees Paul, the money was paid through the bank account by direct debit?

a) Debit bank a/c £800; Credit wages a/c £800

b) Debit wages a/c £800; Credit bank a/c £800
c) Debit cash a/c £800; Credit wages a/c £800
d) Debit Paul a/c £800; Credit bank a/c £800

Solution: B
• Debiting the wages account increases the wages expense, reflecting the amount paid to the employee.
• Crediting the bank account reduces the balance in the bank account because the money is being paid out.
20. According to accepted accounting practice, how is the measurement of assets and liabilities
affected by the application of prudence?

Assets should not be Liabilities should not be

a) overstated understated
b) overstated overstated
c) understated understated
d) understated overstated

Solution: A

When applying the principle of prudence:

Assets should not be overstated. Liabilities should not be understated.
2010
1. The following items appeared on the Trial
Balance of Aston Plc as at 31st December
2010:
Share capital
£1,200,000
Revaluation Reserve Solution: B
£500,000 Amount of dividend = 20% of share capital
Share Premium = 20% of £1,200,000
£200,000 = £240,000
General Reserve
£100,000

It is proposed that a dividend of 20% needs

to be provided in the current year’s
accounts. What is the amount of proposed
dividend that needs to be shown in the
profit and loss statement by way of
appropriation?
 2. The XYZ Company had the
following data:

December 2010 2009 Solution: A

Beginning net book value = Beginning book value(2009) + Gain
£650,00 on sale of building
Building(net) £565,000
0
= £650,000 + £50,000
Proceeds from sale of £350,000 = £700,000
building Total depreciation = Beginning net book value + Cost of building
purchased - Proceeds from sale of building - Ending net book
Gain on sale of building £50,000
value(2010)
Cost of building
= £700,000 + £400,000 - £350,000 - £565,000
purchased during the £400,000 = £185,000
year
What is the amount of depreciation that
was recorded for the year ended
December 31, 2010?
A £185 000
B £ 56 500
C £135 000
3. At 31 December 2010, a company's trade debtors totalled £864,000, and the provision for doubtful
debts was £38,000 on 1 January 2010. It was decided that specific debts totalling £13,000 were to be
written off as the cash was considered to be irrecoverable, and the provision for doubtful debts was to
be adjusted to the equivalent of 5% of the trade debtors based on past experience. What figure
should appear in the current year’s [2010] Profit and Loss Account for
the total of bad debts and the provision for doubtful debts?

A £17,550 B £13,000 C £38,000 D £42,550

Solution: A
Adjusted allowance for receivables = 5% of (Total trade receivables - debts written off)
= 5%*(£864,000 - £13,000)
= £42,550
Expense in the statement of profit or loss = Debts written off - (Allowance for receivables -
Adjusted allowance)
= £13,000 - (£48,000 - £42,550)
= £17,550
4. Astroturf plc owns net assets that have a
book value of £400,000. The capital and
reserves side
of the balance sheet is as follows:
Share capital:
£ Solution: C
-----------------------------------------------
500,000 Ordinary shares of 50p each Preference shareholders have priority, so they will receive their
250,000 entire claim of £100,000.
-----------------------------------------------
100,000 10% Preference shares of £1 each Claims of ordinary shareholders = Book value - Preference share
100,000 = £400,000 - £100,000
= £300,000
350,000
Reserves:
50,000
Retained profits
400,000
Assume the company goes into liquidation
and that the net assets actually realize an
amount of
£400,000. Show (assuming the usual rights
5. The balance sheet of Fix Ltd includes the
following items as at 31 July 2010:
Ordinary shares of £1 each
£100,000
Share premium account
Solution: B
£62,000
Total distributable profits = Profit for year + General reserve -
Revaluation reserve
Accumulated losses
£75,000
Total distributable profits = £8,000 + £55,000 - £12,000
General reserve
= £51,000
£55,000
Accumulated losses at 1 August 2009
£12,000
Profit for year
£8,000

£288,000

What are the total profits available for

distribution on 31 July 2010?
6. The following information relates to the
rent and rates payable expense for Adams
Ltd. in
2010:
Rent paid in advance at 1 January 2010
£5000
Rates in arrears at 1 January 2010
£2000 Solution: D
Payments in 2010 Total Rent and Rates Expense = Payments in 2010-Rent paid in
£35,000 advance at Jan 1 2010+Rates in arrears at Jan 1 2010-Rates paid in
Rates paid in advance at 31 December 2010 advance at Dec 31 2010+Rent in arrears at Dec 31 2010
£4000 = £35,000 - £5,000 + £2,000 - £4,000 + £6,000
Rent in arrears at 31 December 2010 = £34,000
£6000

Which is the correct figure for rent and rates

expense in the profit and loss account for
the year
ended 31 December 2010?
A £36,000
7. An electricity expense prepayment of £400 was ignored completely when preparing a trader's
income statement (p & l account). As a result:

A Profit was understated by £400 and current assets understated by £400

B Profit was overstated by £400 and current liabilities understated by £400
C Profit was overstated by £400 and current liabilities overstated by £400
D Profit was understated by £400

Solution: B
An electricity expense prepayment of £400 means that the trader paid £400 in advance for
electricity expenses that belong to a future period. Since this prepayment was ignored when
preparing the income statement, it means the expenses were not accounted for, resulting in an
understatement of expenses and therefore an overstatement of profit.
8. Green Ltd depreciates fixed assets at 20% per annum on a reducing balance basis. All fixed
assets were purchased on 1 April 1993. The net book value on 31 March 1996 is £20,000. What
is the accumulated depreciation to the nearest thousand pounds as on that date?

A £15,000 B £19,000 C £30,000 D £39,000

Solution: B
Original Cost = Net book value / (1 - Depreciation rate)^Number of years
= 20,000 / (1 - 20%)^3 = £39,062.50
Depreciation for Year 1 = Original Cost * Depreciation rate
= £39,062.50*20% = £7812.5
Net Book Value at the end of Year 1 = Original Cost - Depreciation for Year 1
= £39,062.50 - £7812.5 = £31,250
Depreciation for Year 2 = Net Book Value at the end of Year 1 * Depreciation rate
= £31,250 * 20% = £6250
Net Book Value at the end of Year 2 = Net Book Value at the end of Year 1 - Depreciation for Year 2
= £31,250 - £6250 = £25,000
Depreciation for Year 3 = Net Book Value at the end of Year 2 * Depreciation rate
= £25,000 * 20% = £5000
Accumulated Depreciation = £7812.5 + £6250 + £5000
= £19,062.5 ≈ £19,000
9. Vehicle that was bought on the 1 January 19X1 at a cost of £1,000, has an expected
useful economic life of 3 years, and an estimated residual value of £343. Annual
Depreciation charge has been calculated at £219. Which depreciation method has been
followed?
A Reducing balance method
B Straight line method
C Another method
D None of the above method
Solution: B
Cost of Vehicle: £1,000
Estimated Residual Value: £343
Annual Depreciation Charge: £219
Expected useful economic life - 3 years
We know for Straight Line Depreciation Method -
Annual Depreciation = (Cost - Residual Value)/Useful Economic Life
= (1,000 - 343)/3
= 657/3

∴ The method followed for determining annual depreciation charge was Straight Line Method.
= 219; which equals the stated annual depreciation charge
10. A machinery was purchased two years ago on 1st January, 2001 at a cost of £10,000.
Depreciation was charged @ 10% following the reducing balance method. What will be the annual
depreciation charge for the year ended 31st December, 2003?
A £1000
B £900
C £810
D £100
Solution: C
To find out the annual depreciation charge after 3 years, via reducing balance method, we will apply 10%
depreciation each year and calculate the net depreciation as the following -

Year Starting Value Depreciation of 10% Net Ending Value

2001 £10,000 £1,000 £9,000

2002 £9,000 £900 £8,100

2003 £8,100 £810 £7,290

∴ We see that the annual depreciation charge for the year ended 31st
December, 2003 is £810.
11. At 31 December Year 1, James White and
Solution: D
Co. carried out its annual physical stocktaking,
Total Stock = Old Stock + New Stock
counting 25 CD players, each of which had a
cost £100. During Year 2, further purchases = 25 + (5+10+8+6+12)
were made as follows: = 25 +41
CD Player
Month Usual price = 66 CD players
Purchased

∴ Closing Inventory = Total Stock - Total Sold

Total Sold = 52 CD players
March 5 100
= 66 - 52
May 10 110 = 14 CD players
Since we are going to use the FIFO method, we understand that old
June 8 115
stocks were sold first, and the latest stocks were sold at last. Which
September 6 120
means the remaining 14 CD players in the inventory consist of CDs

∴ Valuation of Closing Inventory = 2 (September) X 120=£240

purchased from the month September and November.
November 12 125
12 (November) X 125 = £1,500
Annual sales totalled 52 CD players, at total =
sales revenue of £9 350. Dates of sale are not £1,740
recorded.
If the first-in, first-out (FIFO) method of
inventory (stock) valuation is used, what is the
12. Shop fittings cost £3,000; the depreciation on
these to date is £300. Cash tills cost £2,500; the Solution: None
depreciation on these to date is £500. Stocks of
goods for re-sale cost £22,100. This includes a line
of ribbons of which both the buying and selling
prices have dropped; this line, if sold at present
selling prices, will result in a loss of £100 on cost
price to the business.
Debts due to the business from customers amount
to £8,000, of which it is considered £200 will
probably not be collected. Balance of cash in hand
is £150. Balance at bank is £6,420. There is £4,520
owing to suppliers of goods and £300 for accrued
expenses. The business owns its own premises
which had cost £12,000 and on which there is a
mortgage of £7,500. Depreciation to date on the
premise is £2,000.
Roderick’s capital invested in the business at 1
January 19X8 is £34,500 and he has drawn out
£4,964 during the year. From the above particulars
determine the balance sheet total at 31 December
19X8 for the retail business
of Roderick Glossop:
A 36,050
13. Black Limited has listed the following amounts
in its balance sheet:

Cash £10 000 Solution: C

We know that, Ownership Interest = Total Assets - Total Liabilities
Buildings £75 000 Here, Total Assets = Cash+Buildings+Trade Receivables (debtors)
+Plants and equipment+Inventory (Stock)
Trade payables (creditors) £25 000
= £(10,000+75,000+55,000+50,000+60,000)
= £250,000
Taxes payable within one
£15 000
year
Total Liabilities = Trade payables (creditors)+Taxes payable within
Trade receivables (debtors) £55 000 one year
= £(25,000+15,000)
Plant and equipment £50 000 = £40,000

Inventory (Stock) £60 000 ∴ Ownership Interest = (£250,000 - £40,000) = £210,000

What is the amount of the ownership
interest?
A £65 000
B £190 000
C £210 000
14. From the following information of Tindell
Traders determine the net profit: Solution: D
To find the net profit, we will consider the income (sales) and the
Accounts Receivable expenses in the following way -
£17,000
Administrative Expenses Net Profit = Sales - (Cost of Goods Sold + Administrative
24,000 Expenses + Depreciation Expense + Selling
Cost of Goods Sold Expenses + Wage Expense)
88,000 = 242,000 - (88,000+24,000+5,000+36,000+75,000)
Depreciation Expense = 242,000 - 228,000
5,000 = 14,000

∴ Net Profit is £14,000.

Inventory
26,000
Sales
242,000
Selling Expenses
36,000
Wage Expense
15. The trade receivables (debtors) balance in the books of a sole trader at the year end is
£350,000. Of this amount £25,000 will never be paid as the debtor has been declared
bankrupt. The sole trader estimates that he should allow a provision of 2% of trade
receivables (debtors) for further bad debts. The provision for bad debts already appearing
in the trial balance is £7,500. The trade receivables (debtors) figure shown under current
assets on the year end balance sheet should be:

A £325,000 B £318,500 C £317,500 D £343,000

Solution: B
To answer this question, we need to calculate the net trade receivables (debtors) after deducting the bad debts and
the provision for doubtful debts.
Trade receivables (debtors) £350,000
Bad debts £(25,000)
Recoverable debts £325,000
Provision for doubtful debts (325,000X2%) £6,500
Net trade receivables £318,500

The provision for bad debts of £7,500 appearing in the trial balance is irrelevant for this calculation, as it is based
on the previous year’s estimate and does not reflect the current year’s expected credit loss.
16. On October 1, 2010, the premium on a one-year insurance policy on equipment was
paid amounting to £3,000. At the end of 2010, the company would have the following
balances:

A. Insurance Expense, £3,000; Prepaid Insurance, £0

B. Insurance Expense, £1,500; Prepaid Insurance, £1,500
C. Insurance Expense, £2,250; Prepaid Insurance, £750
D. Insurance Expense, £750; Prepaid Insurance, £2,250
Solution: D

For the three months(October, November, December) of coverage in 2010,

The insurance expense incurred would be (£3,000/12)X3 = £750

And, prepaid insurance = £(3,000-750) = £2,250

17. Gary’s Groceries reported the following on its 2010 income statement:
Inventory, January 1 £240,000
Purchases 460,000
Cost of goods sold 560,000
The inventory on December 31 is:

A. £100,000 B. £140,000 C. £240,000 D. £340,000

Solution: B

We know that, Closing Stock = Opening Stock + Purchases - Cost of goods sold
= £240,000 + £460,000 - £560,000
= £140,000

∴ The inventory on December 31 is £140,000.

18. An item in inventory cost £400, computed using FIFO. The selling price is £990. The
item’s replacement cost is £375. What will this item be valued at on the balance sheet?

A. £375
B. £400
C. £990
D. Cannot be determined from the information provided

Solution: A

In this problem, we need to apply the lower of cost or market (LCM) method of inventory valuation, which states
that inventory should be recorded on the balance sheet at the lower of its historical cost or its current market
value. In this case, the historical cost of the item is £400, and the replacement cost of the item is £375, and the net
realizable value of the item is £990, which is the selling price.
Hence, the replacement cost is the lowest at £375
19. Equipment is acquired for £100,000. Freight costs are £1,800 and import duty amounted to
£1,000. Maintenance during the first year of use cost £6,000. What is the cost of the equipment to
be reported in the balance sheet?

A £102,800
B £100,000
C £108,800
D £101,000
Solution: A
For this problem, we need to determine the cost of the equipment that includes all the expenditures necessary to
prepare the asset for its intended use.
Therefore, Equipment = Cost+Freight Cost+Import Duty
= £(100,000+1,800+1,000)
= £102,800

Maintenance costs are not included in the cost of the equipment, as they are not directly attributable to the
acquisition or construction of the asset, but rather to its ongoing use. Maintenance cost will be recorded in the
income statement as operating expense.

∴ The cost of the equipment to be reported in the balance sheet is £102,800.

20. Laredo Company got a long term contract to provide services for the El Dorado government.
In 20X3, the 5 year contract is set for 100 million pounds cash. Services are to be provided
evenly over 20X3 through 20X7.

A In 20X3 Laredo should recognize no revenue.

B In 20X3 Laredo should recognize 100 million in revenue.
C In 20X4 Laredo should recognize no revenue.
D In 20X4 Laredo should recognize 20 million in revenue.

Solution: D

Since service is provided over five years, Laredo recognizes £20 million in revenue (1/5th of £100 million) every
year, not the entire £100 million.
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