Oct/Nov 2016

A business switches from using the straight-line method of depreciation to the reducing balance method. Which accounting principle has not been followed?

Accounting for non-current assets

A trader has drawn up a draft income statement for the year, and it shows a gross profit of $64200. He then finds the following two errors. 1 Closing inventory has been overstated by $2500. 2 Sales returns of $400 have been recorded as purchases returns. What should the correct gross profit be?

Reconciliation and verification

During its trading year, a business spent $5750 on advertising. Included in this total was $500 that related to the following financial year. What impact would the proper treatment of the $500 have on the financial statements?

The accounting system

A statement of financial position dated 31 December 2015 gave the following figures: non-current assets $18000$ trade receivables $3000$ inventory $1800$ trade payables $3600$ bank $350$ credit capital (1 January 2015) $19100$ profit for the year $9200$ What amount were the owner’s drawings?

Preparation of financial statements

During its first year of trading, a trader collected $15000$ from credit customers. By the year-end, those customers still owed $600$. The amount paid to credit suppliers was $3000$, and at the end of the period $500$ was still due to them. No unsold goods remained in closing inventory. What was the gross profit for the period?

Preparation of financial statements

Abdul and Omar are partners. The details below have been taken from their current accounts. balances on 1 January 2015: Abdul $2000$ debit, Omar $3000$ credit drawings during the year: Abdul $15000$, Omar $18000$ balances on 1 January 2016: Abdul $1000$ credit, Omar $4000$ debit What was the overall profit for the year ending 31 December 2015?

The accounting system

J, H and P are partners in a partnership. The profit for the year came to $80000$. J is due a partnership salary of $5000$. Profits are divided in the ratio $2:2:1$, although P is guaranteed minimum earnings of $20000$. What total profit share was received by J?

The accounting system

The partnership of X, Y and Z divided profits and losses equally. When Z retired on 31 March 2014, the net asset valuation indicated a loss of $15000$. Unrecorded goodwill was assessed at $30000$. What was the net entry in Z’s capital account?

Types of business entity

Which statement concerning ordinary shares is incorrect?

Types of business entity

An investor holds $10000$ $5\%$ preference shares in Howdo Limited. In one year, Howdo Limited does not earn enough profits to pay the preference dividend. The investor expects profits to rise and believes the directors will settle the unpaid dividend in the next year. Which type of preference shares does the investor hold?

Types of business entity

At the start of the period, a company had issued ordinary share capital of $240000$ (nominal value $0.60$ per share). During the period, a rights issue of one share for every five held was carried out at a price of $0.90$ per share. At that point, the market price stood at $1.10$ per share. What was the issued ordinary share capital after the rights issue?

Preparation of financial statements

A company bought a lorry for $50000 on 1 January 2015. Its estimated residual value is $10000, and its useful life is four years. Depreciation is charged monthly on a straight-line basis. What will the depreciation charge be for the year ending 30 June 2015?

Accounting for non-current assets

During 2014, the company was funded wholly by equity and reserves, with a total of $1000000$. Its return on capital employed stood at $28\%$. On 1 January 2015, the company issued a $10\%$ debenture worth $300000$. Over 2015, profit from operations rose by $20\%$. No dividends were paid out. What was the return on capital employed for 2015?

Analysis and communication of accounting information

Which course of action would raise the current ratio?

Analysis and communication of accounting information

Raj, who supplies goods, has worked out the ratios below from the financial statements of a potential new customer. Which of these ratios would help Raj decide whether to supply goods or not?

Analysis and communication of accounting information

A manufacturer uses a bonus system and provides the following details. output needed from each worker $175$ units time permitted to complete output $10.5$ hours actual time spent by Fred $7$ hours A bonus of $25\%$ of the labour costs for time saved is paid, in addition to the hourly rate of $8.75$. How much did Fred receive for producing $175$ units?

Costs and cost behaviour

A possible investor examines the financial statements of four companies. Their income statements each report the same revenue and the same operating profit. The cost of buying inventory is rising. company $1$ values inventory using AVCO company $2$ values inventory using FIFO company $3$ uses absorption costing company $4$ uses marginal costing The investor wants to put money into companies with the strongest underlying profitability. Which companies ought he select?

Traditional costing methods

A company is sorting its costs into categories. It finds that, for any output level from $10000$ to $15000$ units, the freight cost for each unit remains fixed at $2$ per unit. What type of cost is this?

Costs and cost behaviour

Under what circumstances does under absorption of overheads happen?

Traditional costing methods

The information below relates to department 1. direct labour hours: actual 45000, forecast 40000 machine hours: actual 12000, forecast 10000 overheads to be apportioned to department 1: $90000 The company has been requested to provide a quotation for an order. The estimated time required in department 1 is four direct labour hours and seven machine hours. What overhead amount should be applied to the order as it moves through department 1?

Traditional costing methods

A business produces one product only. The information below is given. Selling price per unit: this year $25, predicted for next year $25 Variable cost per unit: this year $15, predicted for next year $17 Total fixed costs: this year $80000, predicted for next year $84000 Profit for the year: this year $20000 How many units will need to be sold to make the same profit next year?

Costs and cost behaviour

A company aims to sell 50000 units and make a profit of $600000. Its variable costs are $60 per unit and its total fixed overheads are $400000. What selling price per unit must it charge?

Costs and cost behaviour

The motor vehicles had an opening net book value of $150000. In the course of the year, one motor vehicle was sold for $26000, and the disposal resulted in a profit of $2000. Depreciation is charged at $10\%$ on the opening net book value. The closing net book value stood at $145000. What was the cost of motor vehicles bought during the year?

Accounting for non-current assets

A business produces a number of products. There is a shortage of direct materials. Which product should it make first?

Costs and cost behaviour

Ryan sells goods on credit to Sumit, and Sumit also provides goods to Ryan. A set-off of the balances in the purchases ledger and sales ledger is agreed. In which books of prime entry is this set-off entered?

The accounting system

A book-keeper checked the business bank statement against the cash book. He then brought the cash book up to date and, last of all, drew up a bank reconciliation statement. Why had the bank reconciliation statement been prepared?

Reconciliation and verification

A suspense account was created to record the difference shown by a trial balance. The following errors were later found. 1 Discount allowed of $2000 had been recorded only in the sales ledger control account. 2 A cheque for $1500 paid for repairs had been entered as $5100 in the repairs account. What opening balance was on the suspense account?

Reconciliation and verification

Inventory with a cost of $1200 has been damaged. Under normal circumstances, it would be sold for $1800. If repairs are carried out at a cost of $600, it can be sold for $1700. The cost of replacing the inventory would be $1000. At which amount should the damaged inventory be recorded in the financial statements?

Preparation of financial statements

A company’s trial balance reported trade receivables of $14600 together with an opening provision for doubtful debts of $470. It was then found that the trade receivables contained an irrecoverable debt of $500. In addition, a contra entry of $400 had to be posted. The provision for doubtful debts must be kept at $5\%$ of trade receivables. What amount of doubtful debts was included in the income statement?

Reconciliation and verification

A business did not keep control accounts within its double entry books of account. A check of its books showed the following mistakes. 1 The purchases journal was undercast by $100. 2 A sales invoice, $180, was entered twice in the sales journal. How did these errors affect the trial balance?

Reconciliation and verification

Which transaction is covered by the matching concept?

The accounting system

A sole trader gives the information below. Total assets at the beginning of the year: $100000 Total assets at the end of the year: $135000 Total liabilities excluding owner’s capital at the beginning of the year: $35000 Total liabilities excluding owner’s capital at the end of the year: $40000 In the course of the year, the owner withdrew drawings of $18000. What was the profit made in the year?

The accounting system

The trader did not maintain complete accounting records. The information below was available for 2015. trade payables at 1 January: $32785$ trade payables at 31 December: $43630$ cash paid to suppliers during the year: $72830$ discounts obtained during the year: $3450$ What was the amount of purchases?

Reconciliation and verification

A partnership takes in a new partner. Which statement is correct?

Types of business entity

X, Y and Z are partners and divide profits and losses in the ratio of $2:2:1$. The following details are given at 31 December. Capital account balances: X $100000$, Y $100000$, Z $50000$. Current account balances: X $20000$, Y $15000$, Z $(-5000)$. On 31 December, Z withdraws from the partnership. The total assets are then revalued upward by $45000$. Goodwill is not included. What amount will be paid to Z when he retires?

Types of business entity

The information below concerns a partnership. operating profit: $90000$ interest on loan: $3200$ interest on drawings: $6000$ drawings: $40000$ interest on capital: $11000$ What amount of residual profit is to be allocated among the partners?

Types of business entity

A partnership made an average monthly profit of $15000$ over the year. At the midpoint of the year, D and E took on a new partner F, and profits were divided equally both before and after this change. In the first half of the year, D introduced his private vehicle into the partnership at a valuation of $12000$. D’s drawings totalled $60000$ for the year. By what amount did D’s current account balance increase over the year?

The accounting system

In what way would a transfer to general reserve and the issue of shares at a premium affect the revenue reserves of a limited company?

Preparation of financial statements

A business is set up with the issue of $100000$ 6% non-cumulative preference shares of $1$ each and $300000$ ordinary shares of $1$ each issued at a premium of $0.20$. Profits of $3000$, $16000$ and $31000$ are earned in the first three years of trading. The directors intend to pay an ordinary dividend of $5\%$ each year when possible. What amount of ordinary dividends is actually paid by the company in years 2 and 3?

Preparation of financial statements

A company had issued share capital made up of $400000$ ordinary shares of $1$ each. It then carried out a bonus issue of one share for every five held. After that, it made a rights issue of one share for every three held. What was the balance on the share capital account after these transactions?

The accounting system

Which action will raise the equity of a limited company?

Types of business entity

A disposal account is used to show the sale of a non-current asset. Which transactions are entered on the credit side of the disposal account?

Accounting for non-current assets

Which transaction keeps the value of working capital the same?

Analysis and communication of accounting information

Owusu Limited has stable annual sales and an unchanged gross margin. However, its inventory rises each year. Which effects will this have on the inventory holding period and on inventory turnover?

Analysis and communication of accounting information

A business applies the AVCO method to value inventory. These transactions occurred: 1 March: 1000 units were bought at $65 per unit 2 March: 1200 units were bought at $66 per unit 4 March: 1850 units were sold at $68 per unit What is the value of closing inventory?

Traditional costing methods

A manufacturing company has $20$ workers, each earning a basic wage rate of $30$ per hour for a $40$-hour week. In order to complete a special order, every worker did $50$ hours of work and received overtime pay at a premium of $40\%$ above the basic rate. What was the total amount of wages paid for the special order?

Costs and cost behaviour

A manufacturing business is presently working at full capacity. As part of an expansion programme aimed at raising production capacity, the business plans to hire one more factory supervisor. How would total supervisory salaries be classified?

Costs and cost behaviour

In a manufacturing business, the following situations may happen. 1. The actual overheads paid are lower than the budgeted overheads. 2. The actual overheads paid are higher than the budgeted overheads. 3. The actual number of units produced is lower than the budgeted number of units. 4. The actual number of units produced is higher than the budgeted number of units. Which of these situations would lead to under absorption of overhead expenditure?

Traditional costing methods

A business produces and sells one product at $12 per batch. The variable cost comes to $4 per batch. Fixed costs have been absorbed using a normal activity level of 1000 batches at $3 per batch. What is the profit under marginal costing if the company makes and sells 1500 batches?

Costs and cost behaviour

The information below was given for a product. Selling price per unit: $50 Variable cost per unit: $26 Total fixed costs: $10000 Demand: 1800 units If the selling price rises, only demand changes. When the selling price went up by $4, profit decreased by $1200. What was the reduction in demand?

Costs and cost behaviour

A business using flexible budgets displays the following information: Units of output: 100000 and 110000 Total fixed and variable costs: $400000 and $425000 What are fixed costs?

Costs and cost behaviour

For a product made by a company, the per-unit data is shown below: Selling price: $100 Direct materials: $40 Direct labour: $30 Fixed costs in total are $40000. The planned output is 1000 units. Which action should the company take to break even?

Costs and cost behaviour

The data below were given about the disposal of a machine. accumulated depreciation: 45000 profit on disposal: 8100 sale proceeds: 75600 What was the machine's original cost?

Accounting for non-current assets

What is the aim of a system of budgetary planning and control?

The accounting system

A printing company set up a large printing press. Which of these costs count as capital expenditure during the press's first year of operation?

Accounting for non-current assets

At the end of the year, the cash book showed a balance of $23780. This did not match the balance shown on the bank statement. The mismatch was caused by these items. bank charges: 216 a customer’s cheque was dishonoured: 1375 a bank error led to a cheque being wrongly debited to the bank account: 560 What value should bank be shown at in the statement of financial position?

Reconciliation and verification

By the end of the year, the balance shown on a firm’s sales ledger control account was $12900. The combined total of the customers’ accounts in the sales ledger was $11900. The errors below were then found.

Reconciliation and verification

A suspense account shows a $450 debit balance. What has caused this balance in the suspense account?

Reconciliation and verification

A business has wrongly recorded an item of capital expenditure as revenue expenditure in its financial statements. How will this error affect the financial statements of the business?

Accounting for non-current assets

At the close of its financial year, a company makes or receives the following amounts. deposit paid to a supplier: 6500 rental income received in advance: 8000 loan repayment: 3000 payment for sales commission from last month: 900 Which of these amounts should appear as other receivables in the statement of financial position?

Preparation of financial statements

Which item is recorded in the general journal?

The accounting system

A business has worked out its inventory turnover ratio to be 8 times. The opening inventory was $25000 and the closing inventory was $28000. What is the value of purchases?

Analysis and communication of accounting information

The information below is taken from the financial records of a trader. Capital at 1 January 2015: $65000 Capital introduced on 30 June 2015: $20000 Drawings for the year ended 31 December 2015: $35000 Capital at 31 December 2015: $90000 What profit was earned for the year ended 31 December 2015?

The accounting system

The draft financial statements included these figures: Profit for the year: $18700 Total current assets: $41200 Total current liabilities: $36050 A provision for doubtful debts of $2100 was then made. Which figures appeared in the final financial statements?

Preparation of financial statements

A book-keeper checks that the control accounts agree with the sales and purchase ledgers. Which errors are detected in this way?

Reconciliation and verification

Which statement about partnerships that are formed under a partnership agreement is always true?

Types of business entity

X and Y are partners, dividing profits and losses in the ratio $3:2$ respectively. Z has been taken in as a partner. Goodwill has been assessed at $75000$, but it is not to remain in the books of account. Non-current assets have been revalued downward from $300000$ to $250000$. The revised profit-sharing ratio will be $5:3:2$ respectively. Determine the net change in Y’s capital account?

Types of business entity

A and B are partners in a partnership. The information below applies to 2015. Profit before appropriation: $88000 Interest on drawings: A $1000, B $1000 Interest on capital: A $3000, B $1000 The profit-sharing ratio is based on the proportion of the capital account. What amount of the residual profit does A receive?

The accounting system

Which statement is the correct one?

Analysis and communication of accounting information

A limited company begins with issued share capital of 300000 $1 ordinary shares. It then carries out a bonus issue of one share for every three held, and this is then followed by a rights issue of one share for every five held. What balance will the share capital account show after these transactions?

Types of business entity

These data relate to a limited company with 280000 ordinary shares of $0.50 each. Share premium: $70000 10% debentures: $100000 Retained earnings: $73400 General reserve: $62700 What is the amount of shareholders’ equity?

Preparation of financial statements

A calculator is bought for $9.50 and is expected to last for 5 years. The book-keeper chooses to record the calculator purchase as revenue expenditure. Which accounting principle is being used?

The accounting system

Which ratio shows how effectively a company manages its overheads?

Analysis and communication of accounting information

A company has the following information. Profit from operations: $98000 Profit for the year: $91000 Equity at the end of the year: $500000 Long-term bank loan: $150000 Using these figures, what is the return on capital employed?

Analysis and communication of accounting information

A business gave the following figures. Budgeted overheads: $20000 Budgeted direct labour hours: 2000 Direct labour rate: $20 per hour The job used materials worth $45 and 6 hours of direct labour. Overheads are absorbed on the basis of direct labour hours worked. What was the total cost of the job before any profit was added?

Traditional costing methods

Give one reason why overhead absorption is used in a manufacturing business.

Traditional costing methods

A business has the inventory transactions shown below. Opening inventory on 1 January: 16 items at $525 each. Receipts on 3 January: 24 items at $675 each. Issues on 5 January: 28 items. The business uses the AVCO method to value inventory. What value did closing inventory have on 7 January?

Traditional costing methods

A business signed a contract for the maintenance of its computer systems. The arrangement involved an annual fee of $5000 and an additional $30 per hour to fix computer problems. By the end of the year, the total cost of computer support came to $11a0330. Which type of cost was this?

Costs and cost behaviour

A business allocates overheads using direct labour hours. The information below is given. Budgeted labour hours: 6600 hours. Actual labour hours: 7100 hours. Budgeted overheads: $75 900. Actual overheads: $74 250. What is the amount of overheads over or under absorbed?

Traditional costing methods

A manufacturing business operates two production departments: assembly and painting. The information below is given. Assembly: machinery with a net book value of $150 000; machinery repair costs of $14 000; machine operating hours of 60 000; number of machines 30. Painting: machinery with a net book value of $100 000; machinery repair costs of $6000; machine operating hours of 15 000; number of machines 10. The total machinery insurance cost for the year amounted to $5000. What amount of insurance should be allocated to the assembly department?

Traditional costing methods

Which costs will vary when activity rises?

Costs and cost behaviour

The table presents the production figures for one week. Forecast production: 10 000 units. Forecast production overheads: $50 000. Actual production overheads: $60 000. Under absorption of overheads: $5000. What was the actual level of production in that week?

Traditional costing methods

A vehicle was used as part exchange for a new vehicle. Which entries record the part exchange?

Accounting for non-current assets

A business produces one product only. The information below is given. Output 600 units, total cost $4200. Output 800 units, total cost $5200. What is the fixed cost per unit?

Costs and cost behaviour

As at 1 January, Ann owed Sam $400. She settled the balance on 6 January after deducting a 2% cash discount. How was this recorded by Ann?

The accounting system

What is the reason for depreciating non-current assets?

Accounting for non-current assets

A business was given the bank statement for 30 June 2016, which showed a credit balance of $6890. On this date, the cash book showed a debit balance of $7234. The following items were found. • Bank charges of $54 had not been recorded in the cash book. • Cheques of $200 drawn by suppliers had not yet been banked. • Deposits amounting to $490 paid into the bank on 30 June 2016 did not appear on the bank statement. What is the bank balance in the statement of financial position?

Reconciliation and verification

The trial balance shows a suspense account. The errors below are identified. 1. A payment of $75 for the telephone bill has been recorded correctly in the bank account, but as $750 in the telephone account. 2. A payment of $175 from a customer has been recorded correctly in the bank account, but left out of the sales ledger control account (SLCA), which is part of the double entry system. Which journal entry would correct these errors?

Reconciliation and verification

A business reported a profit for the year of $450000 before the following errors were adjusted. 1. Closing inventory had been undervalued by $15000. 2. Sales returns worth $5000 had been entered as purchases returns. 3. The depreciation charge had been overstated by $20000. What was the profit after these errors had been corrected?

Reconciliation and verification

A company pays rates once a year in advance on 1 April each year. $4000 is paid on 1 April 2014 and $4800 on 1 April 2015. The company's accounting year end is 31 December. What is the rates expense for the 2015 income statement?

The accounting system

Alan and Jack have operated as partners for a number of years, dividing profits and losses equally. They draw up financial statements each year to 30 September. On 30 September 2014, the balances on their capital accounts stood at Alan $139800$ and Jack $128000$. On 1 October 2014, several changes took place involving Max being admitted, capital being transferred to a loan account, goodwill being recognised, and a revised profit-and-loss sharing ratio.

Preparation of financial statements

Raheem is a trader who sells entirely on credit. He drew up a sales ledger control account for December 2015, but the total of customer balances failed to match the control account.

Reconciliation and verification

Excerpt from the statement of financial position of Chopin Limited at 30 June 2015, together with information for the year ended 30 June 2016.

Preparation of financial statements

Costello Limited is a manufacturing business producing a single product, a wooden bookcase, and every unit made is sold to one customer.

Costs and cost behaviour

Tom and Jerry are partners, and there is no formal partnership agreement in place. The information below relates to the partnership for the year ended 30 November 2015.

Types of business entity

The directors of Rebuild Limited are in the process of preparing the financial statements for the year ended 31 December 2015.

Preparation of financial statements

Contador, who is a sole trader, has been given an extract from the trial balance for the year ended 31 March 2015 and does not keep control accounts in his accounting records.

Reconciliation and verification

Rodriguez Limited runs a manufacturing operation that makes two products, Product X and Product Y. The budgeted figures for the next month are given below.

Costs and cost behaviour

Maneesh has not kept a complete set of accounting records for the year ended 31 December 2015. The information below has been supplied.

Preparation of financial statements

Alice, Eve and Jean are partners, sharing profits and losses in the ratio $5:3:2$ respectively. The partnership statement of financial position at 30 June 2016 is given.

Types of business entity

Dolphin Limited runs a bakery business that supplies goods wholesale. The company’s issued share capital stands at 300 000 ordinary shares of $2 each. The directors then offered a further 125 000 ordinary shares to family and friends. Issue terms were: 1 April 2016 - $1.00 per share payable on application; 30 June 2016 - $1.10 per share as the final payment. Applications were received for 150 000 shares. Every amount received was posted to a holding account named ‘Application for Shares’. Transfers were then made from this account into the appropriate ledger accounts. Shares were allotted to the applicants and all final payments arrived on the due date. Any surplus application money was returned to the applicants.

Types of business entity

Rajesh manufactures goods and has a trading year end of 31 December. He presently applies absorption costing. The business has two production cost centres and two service cost centres. The information on these centres and the budgeted overheads for the whole business for the year ended 31 December 2015 is shown below.

Traditional costing methods

International Dancing is a dance club that requires each member to pay an annual subscription of $500.

Investment appraisal

At 31 March, the directors of Hank Limited issue statements of financial position.

Preparation of financial statements

Alpha plc and Beta plc operate in the same industry. Their annual sales revenue is identical, and neither company has any preference shares in issue.

Analysis and communication of accounting information

Scrumpton plc has been operating successfully for many years. The company needed extra finance to replace its plant.

Preparation of financial statements

Billyjo manufactures one product. The business uses a standard costing system, and every item produced in the month is sold, with no inventory carried.

Standard costing

Alexander is planning to launch a new project that will make either Product X or Product Y. Producing either product will need an extra capital cost of $50000. Each product is forecast to run for 4 years.

Investment appraisal

Sunshine Social Club operates a gift shop. Items are sold only to members at a discounted price. Selected balances for the gift shop at 31 December are given, along with a summarised receipts and payments account and further information.

Preparation of financial statements

Alpha Limited is a manufacturing business that produces just one product. Each year, it manufactures and sells 1000 units, and the only stock held is raw materials. Financial information for the year ended 30 April 2016 is given.

Preparation of financial statements

Husna has operated as a sole trader for many years and has chosen to retire.

Business acquisition and merger

Soames Limited’s turnover has been rising, so the directors are now required to prepare audited accounts and appoint an auditor.

Regulatory and ethical considerations

The quotation says that what matters is the reason for a cost, rather than whether that cost is fixed or variable. Haruka Limited makes one product only and runs for 5 days each week over 50 weeks in a year, with one batch of 200 units made each day. Overheads come to $79000 a year.

Activity based costing (ABC)

The directors of Slanting Stores Limited have drawn up a cash budget.

Budgeting and budgetary control

M Limited produces just one product. The balances below were taken from the ledgers for the year ended 31 December 2015.

Preparation of financial statements

AB Cricket Club operates as a not-for-profit organisation.

Preparation of financial statements

XY Limited has been operating for many years. Before the end of year audit, the chairman announced that profit for the year ended 31 March 2016 had risen from $86000 to $174000. Several matters came to light during the audit.

Regulatory and ethical considerations

Hamid and Patel deal with one another on a regular basis. Hamid dispatched goods to Patel on consignment. Information about sales, expenses and settlement is provided.

Preparation of financial statements

N Limited is considering a new project that requires an initial outlay of $225\,000.

Investment appraisal

Sunil is putting together the annual budgets for his manufacturing business.

Budgeting and budgetary control