Oct/Nov 2020

Which accounting concept is applied when depreciation is calculated?

Accounting for non-current assets

A business paid its rent in advance. How does this affect the current assets and the rent expense at the year end?

The accounting system

On 1 April 2019, the business showed a provision for doubtful debts of $3400. An examination of trade receivables on 31 March 2020 was as follows: Amounts and the provision required: - $50000: nil - $40000: $5\%$ - $1600: $20\%$ In the year, an irrecoverable debt of $3000 had been written off in the customer’s account, although no entry was recorded in the income statement. No entry had been recorded for either the rise or the fall in the provision for doubtful debts. For the year ended 31 March 2020, the income statement showed a draft profit for the year of $90000. What effect did these omissions have on the draft profit for the year?

Preparation of financial statements

X and Y were partners, and the profits and losses were divided equally between them. Z then became a partner, after which profits were still split equally among all three partners. Goodwill was revalued, but no goodwill account was to be left in the accounting records. Which journal entries were used to show the goodwill adjustment?

Types of business entity

Which of the following are not appropriations of partnership profit?

Types of business entity

L, M and N were partners and divided profits and losses in the ratio $3 : 2 : 1$. The partnership ended on 31 December 2019. Once every asset had been realised and all liabilities settled, the balances below were left in the books of account. How much cash was received by N when the dissolution had been completed?

Types of business entity

Which of the items listed would be included under equity and reserves in the statement of financial position?

Preparation of financial statements

An investor holds $5\%$ preference shares in H Limited. In one year, H Limited has insufficient profits to meet the preference dividend. The investor believes profits will rise and expects the directors to settle the unpaid dividend in the next year. Which kind of preference shares does the investor hold?

Types of business entity

The information below was extracted from a company’s accounting records on 1 January 2020. What was the total capital employed?

Preparation of financial statements

A trader has a current ratio of $2 : 1$. Which event would cause this ratio to rise?

Analysis and communication of accounting information

A company acquires and sells all of its inventory on a credit basis. The details below are given. What credit period was granted to customers?

Analysis and communication of accounting information

A company bought a new delivery vehicle. Which items would be included in the income statement?

Accounting for non-current assets

A company buys a product costing $120. The company expects to achieve a gross margin of one-third. What is the company’s mark-up?

Costs and cost behaviour

A business produces electric motors. Which cost may be classified as a direct cost?

Costs and cost behaviour

An employee earns basic pay of $16 an hour for working $7$ hours a day. Overtime is paid at time and a half. A bonus is also paid at $32 per unit for output above $9 units per day. On Monday, the employee worked $10$ hours and produced $12 units. What was the employee’s total pay for Monday?

Costs and cost behaviour

An item's inventory movements are given. Using the first in first out (FIFO) method of inventory valuation, determine the value of the closing inventory.

Traditional costing methods

What advantages does absorption costing have?

Traditional costing methods

A business works out its overhead absorption rates using direct labour hours. For October, the details below are provided. What was the under or over absorption of overheads in October?

Traditional costing methods

How is contribution worked out?

Costs and cost behaviour

A company is given the following budgeted information. Calculate its budgeted break-even sales revenue.

Costs and cost behaviour

Which statements describe the assumptions used when applying cost-volume-profit analysis?

Costs and cost behaviour

The budgeted data below refer to a business that produces two products. The fixed costs budgeted for the period are $400000. The predicted sales quantity of product X for the period is 25000 units. The business aims to make a profit of $180000 for the period. How many units of product Y need to be sold to achieve the target profit for the period?

Costs and cost behaviour

A company owns two non-current assets. Their details are listed below: Asset X: purchased on 1 Jan 2018, cost $10000, straight-line depreciation, useful life 5 years, residual value $2000. Asset Y: purchased on 1 Jan 2018, cost $20000, reducing balance depreciation, rate 20%, residual value nil. What was the combined depreciation expense shown in the income statement for the year ended 31 December 2019?

Accounting for non-current assets

In what way can budgeting assist a business in controlling its performance?

Analysis and communication of accounting information

On 1 January 2020, a business acquired a new machine for $15000, with $10000 paid by cheque. The shortfall was covered by part exchange of an old machine. The old machine had originally cost $12000 on 1 January 2018 and was estimated to last for 6 years, with a residual value of $2400. The business applies the straight-line method of depreciation. What was the loss on the disposal of the old machine?

Accounting for non-current assets

Which errors would cause the total of the individual customer account balances in the sales ledger to differ from the balance on the sales ledger control account?

Reconciliation and verification

As the financial statements for the year are being prepared, the following errors are found. The draft profit for the year is $8050. What will the profit be after the errors have been corrected?

Reconciliation and verification

The details below relate to a company’s banking transactions on 31 December. Balance at bank according to the bank statement: $22650 credit. Bankings not yet cleared: $3110. Cheques not yet presented: $6290. Bank interest received was entered twice by the bank in error: $650. What amount should be shown as the bank balance in the statement of financial position on 31 December?

Reconciliation and verification

John did not maintain sales or purchases ledger control accounts. His trial balance failed to balance, so a suspense account was opened. The errors below were found. What was the opening balance on the suspense account?

Reconciliation and verification

At the year end, a business assessed its inventory at cost as $24650. This figure ignored the items below. The business applies a mark-up of 25%. What should the inventory have been valued at?

Preparation of financial statements

Which accounting concept is followed when unpaid loan interest is included in financial statements?

The accounting system

How are profit for the year and net assets affected if accrued expenses are understated?

Preparation of financial statements

On 31 December 2019, Ali’s trade receivables amounted to $26500. He was aware that $400 of this total would be irrecoverable. He wanted the provision for doubtful debts to be $5\%$ of the trade receivables. On 1 January 2019, the balance in the provision for doubtful debts was $1200. What entry is made by Ali in the provision for doubtful debts account at 31 December 2019?

The accounting system

Adil and Bashir were in partnership, with profits and losses divided in the ratio $2:1$. Chandra enters the partnership, and profits and losses are then to be split among Adil, Bashir and Chandra in the ratio $3:2:1$. Before Chandra joins the partnership, the balances on the partners’ capital accounts are shown below: Adil: $20000$ Bashir: $10000$ Goodwill is to be valued at $36000$ and is not to remain in the books of account. What is the balance on Adil’s capital account after Chandra joined the partnership?

Preparation of financial statements

In what way is a loss on realisation recorded when a partnership is dissolved?

The accounting system

John and Brian are partners, dividing profits and losses equally. John is paid a salary of $2000$ per annum. Brian has lent the business $5000$. He receives interest at $5\%$ per annum. The profit for the year before appropriation was $24000$. In the course of the year, John withdrew drawings of $3000$. What amount of residual profit will Brian receive for the year?

Types of business entity

A company issued $100000$ ordinary shares of $1$ each at a premium of $2$. The market value stood at $4$ per share. Which statement is incorrect?

Types of business entity

Which item does not change the total equity of a limited company?

Preparation of financial statements

The following details about W Limited relate to the year ended 31 December 2019: retained earnings at 1 January 2019: $22000$ profit from operations: $83000$ dividend paid: $20000$ dividend proposed: $15000$ bank loan interest: $16000$ What amount of retained earnings was there at 31 December 2019?

Preparation of financial statements

Which financial information is not available to potential shareholders of a limited company?

Types of business entity

The figures below are given: revenue: $600000$ opening inventory: $46000$ purchases: $244000$ closing inventory: $50000$ gross profit: $360000$ expenses: $150000$ profit from operations: $210000$ Calculate the rate of inventory turnover (in times).

Analysis and communication of accounting information

What does depreciation mean?

Accounting for non-current assets

A company’s financial statements for the year ending 31 December presented these figures: issued share capital: $150000$ non-current liabilities: $280000$ reserves including retained earnings: $250000$ The company recorded a profit from operations of $160000$ and a profit for the year of $120000$. What was the return on capital employed for the company?

Analysis and communication of accounting information

Which cost can be identified as a fixed cost?

Costs and cost behaviour

An employee is paid at an hourly wage of $8$ for a $40$-hour week. She is given a bonus equal to $30\%$ of the hourly rate for every unit made in time saved. The planned production time is $30$ minutes per unit. In the previous week, she worked $40$ hours and completed $90$ units. Calculate her gross earnings for the week.

Costs and cost behaviour

A business values its inventory using the weighted average (AVCO) method. It bought these inventory units: 100 units at $36$ with a cost of $3600$ 120 units at $48$ with a cost of $5760$ 80 units at $54$ with a cost of $4320$ Once these items had been received, $250$ units were issued to production. What was the value of the issue?

Traditional costing methods

A business has provided the information below: April: $34000$ machine hours, overheads $493000$ May: $67000$ machine hours, overheads $625000$ The variable overhead rate for each machine hour was $4$. What was the fixed overhead cost per month?

Costs and cost behaviour

A business allocates its fixed overheads on the basis of direct labour hours. The information below is given. overheads: actual $600000$, budgeted $508000$ labour hours: actual $14300$, budgeted $12700$ Which statement is correct?

Traditional costing methods

A company markets one product at $24 for each unit sold. Its variable cost comes to $8 per unit. Fixed costs have been absorbed using a normal activity level of $1000$ units, at $6 per unit. Calculate the profit under marginal costing when the company produces and sells $1250$ units?

Costs and cost behaviour

A product shows the following revenue and costs per unit. sale price: $40 marginal cost: $22 fixed manufacturing overhead: $6 non-manufacturing overhead: $2 What is the contribution to sales ratio?

Costs and cost behaviour

Which of the following statements about cost-volume-profit analysis are accurate?

Costs and cost behaviour

The total costs at two output levels are shown below. units $10000$, total costs $230000 units $16000$, total costs $320000 Fixed costs will rise by $30000 if more than $20000 units are produced. What will the total costs be if $25000 units are produced?

Costs and cost behaviour

A trader charges depreciation on fixtures and fittings at the rate of $10\%$ per annum based on cost. On 1 January 2019, a purchase of new fixtures and fittings, $5000, was entered in error in the advertising account. What impact did this error have on the trader’s capital account on 31 December 2019?

Accounting for non-current assets

What are the advantages of a budgetary control system?

Costs and cost behaviour

A company owned a non-current asset that originally cost $370000. The asset had a useful life of 10 years and an estimated residual value of $20000. A full year’s depreciation charge is taken in each year the asset is used. After 4 years, the asset was sold. The loss on disposal was $30000 and the disposal costs were $10000. What were the sale proceeds?

Accounting for non-current assets

Which item is entered on the debit side of a sales ledger control account?

The accounting system

A trader drew up a trial balance that failed to balance. The difference was transferred to a suspense account. The following errors have now been discovered. 1 The returns inwards account had been overcast by $90. 2 A payment of $200 for rent was recorded correctly in the cash book but had not been posted to the rent account. What was the opening balance of the suspense account?

Reconciliation and verification

In Y’s books of account, how might a credit entry of $500 in X’s account have come about?

The accounting system

A purchases invoice was entered on the credit side of the purchases account. How should the balance on the purchases account be adjusted?

The accounting system

A business pays rent monthly in advance on the first day of every month. The payments made in a financial year were as follows. up to and including 1 June: $500 per month from 1 July: $600 per month Which amounts will be shown in the financial statements for the year ended 31 October?

Preparation of financial statements

A company chose not to capitalise the purchase of a stapler for use in its office. Which accounting concept was the company using?

The accounting system

The details below refer to rent receivable for the year ended 31 March 2020: on 1 April 2019, rent due from the tenants was $700; on 1 April 2019, rent paid in advance by the tenants was $1200; rent collected during the year was $7800; and on 31 March 2020, rent due from the tenants was $1000. What amount of rental income is recorded in the income statement for the year ended 31 March 2020?

Preparation of financial statements

A business has given the information below. A provision for doubtful debts was worked out at $1750. This amount represents 5% of trade receivables after an irrecoverable debt of $4200 was written off. What was the original amount of trade receivables before these adjustments were made?

Preparation of financial statements

The following details are given for a sole trader. Beginning of year / End of year Total assets: $100000 / $135000 Total liabilities excluding owner’s capital: $35000 / $40000 Over the year, the owner withdrew drawings of $18000. What was the profit for the year?

Preparation of financial statements

When a partnership is dissolved, one of the partners receives a motor vehicle as part payment of the sum owed to him. How is this recorded in the books of account?

Types of business entity

On 31 December 2019, X, Y and Z were partners, and they shared profits and losses equally. At that date, the partnership’s net assets had a value of $300000, while X’s capital account stood at $70000. X retired on 1 January 2020. The net assets were then revalued upwards by $90000. At retirement, X left half of the amount due to him as a loan to the partnership. What was the value of the partnership’s net assets after X had retired?

Types of business entity

Which of the following items would be included in a partnership’s appropriation account?

Types of business entity

Which item will alter the total equity of a limited company?

Preparation of financial statements

A company carries out a fully subscribed rights issue of 100000 ordinary shares of $1 each at $1.20 per share. At that time, the market value of one share was $1.30. Half of the rights issue proceeds were used to repay a long-term loan. By what amount did the company’s capital employed rise?

Preparation of financial statements

In the financial statements of a limited company, where are dividends paid during the year shown?

Preparation of financial statements

Which ratios show how effectively a business has used its resources?

Analysis and communication of accounting information

Which book of prime entry also serves as a ledger account?

The accounting system

At the end of the year, a business gave the following information. Non-current assets $75000 Current assets $25000 Current liabilities $18000 Profit for the year $28000 No interest charges were incurred during the year. Calculate the return on capital employed.

Analysis and communication of accounting information

Anna is paid an amount for each hour she works. She also gets an extra $0.25 for every unit produced above 200 units a week. Which method of labour remuneration is being used to pay Anna?

Costs and cost behaviour

A business applies the first in first out (FIFO) inventory system. The information below is given. 1 March: Opening inventory, 1200 units at $10.00 12 March: Purchases, 2000 units at $10.20 22 March: Sales, 3000 units at $15.00 26 March: Purchases, 800 units at $10.50 The inventory held on 31 March could be sold for $10800. What is the value of inventory that should be shown in the statement of financial position at 31 March?

Traditional costing methods

The information below relates to the production department of a manufacturing company during a period. Overheads are allocated using direct labour hours as the basis. Planned: 96000 direct labour hours, total overhead costs $242880 Actual: 97600 direct labour hours, total overhead costs $253760 What is the over or under absorption of overheads for the period?

Traditional costing methods

A company's records gave the following information. Machining department: total fixed overheads $150000, machine hours 3000 Assembly department: total fixed overheads $60000, employee hours worked 2000 What is the hourly fixed overhead absorption rate for the machining department?

Traditional costing methods

Under absorption costing, which costs are counted in inventory valuation?

Traditional costing methods

What would lead to a higher margin of safety for a product?

Costs and cost behaviour

One company produces and sells only one product at $50 per unit. The variable cost is $16 per unit. Fixed costs are absorbed using a normal activity level of 1000 units at $4 per unit. What profit will be made under marginal costing if the company produces and sells 2000 units?

Costs and cost behaviour

For what purpose is cost-volume-profit analysis used?

Costs and cost behaviour

The budgeted figures given below are provided: 7000 units carry a total cost of $15000; 9000 units carry a total cost of $19000. If output were to exceed 9000 units, fixed costs would rise by $500. What would be the total budgeted production cost for 10000 units?

Costs and cost behaviour

A motor vehicle with a cost of $8000 is depreciated at $25\%$ per annum by the reducing balance method. After two years of depreciation, it is sold for $4000. What is the profit or loss on disposal?

Accounting for non-current assets

Which of the following statements is not relevant to an efficient system of business planning?

The accounting system

A business bought a new delivery van. The total amount paid includes the basic cost of the delivery van plus the following:

Accounting for non-current assets

A business owner thinks that some cash may have gone missing. He gives the figures below: cash balance at the beginning of the month $150; cash balance at the end of the month $100; cash banked $10\,200; cash sales during the month $10\,500. What amount of cash has been lost?

Reconciliation and verification

When a trial balance fails to balance, the discrepancy is placed in a suspense account. It is then found that a discount received has been debited to the discount allowed account. Which journal entry would rectify this error?

Reconciliation and verification

Which entries will appear on the debit side of the purchases ledger control account?

The accounting system

In a business cash book, the bank column showed a debit balance of $25\,000. It was then found that the following items had been missed: direct debit payments not entered in the cash book $6500; customer sales paid straight into the bank but not entered in the cash book $5500; bank charges not entered in the cash book $1500; and a payment made by the business that had not yet appeared on the bank statement $4500. What was the correct cash book balance?

Reconciliation and verification

At the end of the year, a company finds that part of its inventory has been damaged. This inventory first cost $2000 and, at present, would cost $1900 to replace. It would usually be sold for $2400, but it can now be sold only for $2200 if repairs costing $400 are carried out. What amount should the damaged inventory be reported at in the financial statements?

Preparation of financial statements

Ismail began a retail business on 1 January 2019 with the assets and liabilities shown below. He then drafted an income statement for the year ended 31 December 2019, but it included errors.

Preparation of financial statements

Noor, who is a sole trader, prepares bank reconciliation statements at the end of every month.

Reconciliation and verification

M Limited was established five years earlier. As at 1 January 2019, the company’s statement of financial position showed these details.

Preparation of financial statements

Y Limited manufactures furniture. One of the company’s factories uses an absorption costing system.

Traditional costing methods

Anjali works as a sole trader and keeps only incomplete accounting records.

Preparation of financial statements

Khalid owns a business. His non-current assets, worth a combined $200000, consist of a motor vehicle and a machine with an expected life of 5 years. He expects the machine to manufacture goods at a constant pace over that time.

Accounting for non-current assets

Roberto and Sangeeta have been partners for many years, sharing profits and losses in the ratio $3:2$. They chose to dissolve the partnership on 31 August 2020. Their condensed statement of financial position at that date is shown below.

The accounting system

Kevin is the owner of a small manufacturing firm and is deciding which inventory valuation method to adopt.

Costs and cost behaviour

At 30 September 2020, the directors of G Limited have supplied a trial balance together with extra information.

Preparation of financial statements

Simone uses a double entry book-keeping system.

The accounting system

Giles, acting as a sole trader, supplied the details for the year ending 31 March 2020.

Analysis and communication of accounting information

Connie produces three products, A, B and C. She has supplied the following budgeted data for one unit of each product for the year ending 31 December 2021. Expected total fixed costs for the year are $100000. Forecast yearly demand for each product is 12000 units.

Costs and cost behaviour

Refer to Source A1 in the insert.

Preparation of financial statements

Refer to Source A2 in the insert.

Preparation of financial statements

Consult Source A3 in the insert.

Preparation of financial statements

See Source A4 in the insert.

Analysis and communication of accounting information

Look at Source B1 in the insert.

Activity based costing (ABC)

Consult Source B2 in the insert.

Investment appraisal

Read Source A1 from the insert.

Preparation of financial statements

Consult Source A2 in the insert.

Preparation of financial statements

Look at Source A3 in the insert.

Business acquisition and merger

Refer to Source A4 in the insert.

Analysis and communication of accounting information

Refer to Source B1 in the insert.

Budgeting and budgetary control

Consult Source B2 in the insert.

Standard costing

Look at Source A1 in the insert.

Preparation of financial statements

Refer to Source A2 in the insert.

Preparation of financial statements

Consult Source A3 in the insert.

Business acquisition and merger

Consult Source A4 in the insert.

Preparation of financial statements

Read Source B1 from the insert.

Activity based costing (ABC)

Look at Source B2 in the insert.

Standard costing