Sunway Tes Financial Accounting ACCA Chapter Assessment

ACCA – FA: FINANCIAL ACCOUNTING
ACCA - FA
FINANCIAL
ACCOUNTING
Sunway TES
Chapter Assessments
(Student Copy)
Version: January 2020
1
CONTENTS
CONTENTS
Chapter 1: The Context and Purpose of Financial Reporting ..............................................................3

Chapter 2: The Qualitative Characteristics of Financial Information .................................................. 5
Chapter 3: The Use of Double-Entry And Accounting Systems ......................................................... 13
Chapter 4: Trial Balance ................................................................................................................... 22
Chapter 5: Sales and Purchases ........................................................................................................ 30
Chapter 6: Control Accounts and Reconciliations ............................................................................. 37
Chapter 7: Cash ................................................................................................................................ 42
Chapter 8: Bank Reconciliation ........................................................................................................ 44
Chapter 9: Correction of Errors and Suspense Account .................................................................... 49
Chapter 10: Inventory ...................................................................................................................... 55
Chapter 11: Tangible Non-Current Assets and Depreciation ............................................................ 63
Chapter 12: Intangible Non-Current Assets and Amortization ......................................................... 73
Chapter 13: Accruals and Prepayments ............................................................................................ 76
Chapter 14: Irrecoverable Debt and Allowances .............................................................................. 82
Chapter 15: Incomplete Records ...................................................................................................... 96
Chapter 16: Provisions and Contingencies...................................................................................... 100
Chapter 17: Capital Structure and Finance Costs ............................................................................ 103
Chapter 18: Limited Liability Company Financial Statements ......................................................... 114
Chapter 19: Disclosure Notes ......................................................................................................... 126
Chapter 20: Events After the Reporting Period .............................................................................. 129
Chapter 21: Statement of Cash Flows............................................................................................. 131
Chapter 22: Group .......................................................................................................................... 150
Chapter 23: Associates ................................................................................................................... 173
Chapter 24: Ratio Analysis (Interpretation of Financial Statements).............................................. 175
2
Chapter 1: The Context and Purpose of Financial Reporting
1. Please state whether the following statements are true or false in relation to a limited liability
company:
(i) is owned by shareholders and managed by directors (true or false)

(ii) Not a separate legal entity from its owner (true or false)
(iii) Legal requirement to publish financial statements (true or false)

(iv) Shareholders have limited liabilities if the business is liquidated (true or false)
(v) The company ceased trading on the death of a shareholder (true or false)
(vi) Profit distributed in the form of dividends (true or false)
(vii) The company’s exposure to debts and liability is limited (true or false)
(viii) Drawings will appear in the financial statements (true or false)

(ix) Only companies have share capital as compared to sole traders and partnership (true or
false)
LO A1b, A1c, A1d
2. Please state whether the following statements are true or false in relation to a partnership:
(i) Equal sharing of profits among partners in the absence of any agreement (true or false)
(ii) All partners have limited liabilities if the business is liquidated (true or false)
(iii) Must registered under the Companies Act (true or false)

(iv) No legal requirement to publish financial statements (true or false)
LO A1b, A1c, A1d
3. Please state whether the following statements are true or false in relation to a sole trader:
(i) Has unlimited liabilities (true or false)
(ii) A ‘one-man-band’ business (true or false)

(iii) Ownership and management of the business are separated (true or false)
(iv) No legal requirement to publish financial statements (true or false)
(v) Drawings will appear in the financial statements (true or false)

LO A1b, A1c, A1d
3
4. Which of the following business entities, an owner has the obligation to repay debts of the
business entity using his/her personal property if the business goes into bankruptcy?
(i) A sole trader
(ii) A partnership
(iii) A limited company
(iv) A public limited company
LO A1b, A1c, A1d
5. Please state which of the following is true about the advantages of limited liability companies:
(i) High knowledge and expertise (true or false)
(ii) Formation of the company is simple as compared to partnership (true or false)
(iii) Growth rate of the company is fast as compared to sole trader (true or false)
(iv) Shareholders has limited liability (true or false)
(v) Taxation rate is low as compared to sole trader (true or false)
LO A1b, A1c, A1d
4
Chapter 2: The Qualitative Characteristics of Financial Information
1. According to IASB's Conceptual Framework for Financial Reporting, which two of the following
make information faithfully represented?
A. It is neutral
B. It is relevant
C. Use of information that has the ability to influence decisions

D. Information that is free from material error
LO B1a
2. Which one of the following statements is true of the historical cost convention?
A. It fails to take account of changing price levels over time
B. It records only past transactions
C. It values all assets at their cost to the business, without any adjustment for depreciation
D. It has been replaced in accounting records by a system of current cost accounting
LO B1b
3. Which one of the following is the main aim of accounting?
A. To maintain ledger accounts for every asset and liability

B. To provide financial information to users of such information
C. To produce a trial balance

D. To record every financial transaction individually
LO A1a, A1e
4. Which accounting concept or convention which, in times of rising prices, tends to understate
asset values and overstate profits?
A. The going concern concept
B. The prudence concept
C. The realisation concept
D. The historical cost convention

LO B1a, B1b
5
5. Which accounting concept which requires assets to be valued at their net book value, rather than
their 'break-up' value?
A. The materiality concept
B. The going concern concept

C. The historical cost convention
D. The business entity convention
LO B1b
6. Which accounting concept should be considered if the owner of a business takes goods from
inventory for his own personal use?
A. The prudence concept

B. The capitalisation concept
C. The money measurement concept

D. The separate entity concept
LO B1b
7. Assets are usually valued under which basis?

A. Replacement cost
B. Historical cost
C. Net realisable value
D. Accruals basis
LO B1b
8. The IFRS Advisory Council are responsible for:
1) issuing guidance in relation to emerging issues

2) advising the IASB on major standard-setting projects
A. 1 and 2
B. 1 only
C. 2 only
D. neither 1 nor 2
LO A4a
6
9. The accounting concept which dictates that non-current assets should be valued at cost less
accumulated depreciation, rather than at their enforced saleable value, is:
A. Understandability
B. Relevance
C. Comparability
D. Going concern
LO B1b
10. The IASB’s Conceptual Framework gives 4 enhancing qualitative characteristics. What are there
4 characteristics?
A. Consistency, understandability, faithful representation, substance over form

B. Accruals, going concern, consistency, true & fair view
C. Faithful representation, comparability, understandability, relevance

D. Comparability, timeliness, understandability, verifiability
LO B1a
11. Which of the following is not a qualitative characteristic of financial information according to the
Conceptual Framework?
A. Comparability
B. Relevance
C. Timeliness
D. Accruals
LO B1a
12. Why should financial statements be prepared on a consistent basis?

A. To make it easier to compare results from one year to the next.
B. To ensure that the capital of the business is maintained.
C. To ensure that no material error occurs in the financial statements.
D. To make the financial statements easier to understand.

LO B1b
7
13. Which of the following assumption underlie the Conceptual Framework for Financial Reporting?
A. Accruals
B. Prudence
C. Going concern
D. Consistency
LO B1a, B1b
14. Which of the following are true?
1) International accounting standards are effective only if adopted by national regulatory bodies.
2) Accounting standards provide guidance on accounting for all types of transaction.
A. 1 only
B. 2 only
C. 1 and 2
D. neither
LO A4a, LO A4b
15. Which one of the following statements is correct?

A. The prudence concept requires assets to be understated and liabilities to be overstated.
B. To comply with the law, the legal form of a transaction must always be reflected in financial
statements.
C. Materiality means that only items having physical existence may be recognised as assets.
D. In times of rising prices, the use of historical cost accounting tends to understate assets and
overstate profits.
LO B1a, B1b
16. Which of the following are fundamental characteristics of financial according to the IASB’s
Conceptual Framework for Financial Reporting?
1) Completeness
2) Relevance
3) Neutrality
4) Faithful representation
8
A. All four items
B. 2 and 3 only
C. 1 and 4 only
D. 2 and 4 only
LO B1a
17. Sales revenue should be recognised when goods and services have been supplied; costs are
incurred when goods and services have been received.
Which accounting concept governs the above?
A. The prudence concept

B. The materiality concept
C. The accruals concept
D. The dual aspect concept
LO B1b
18. Which accounting concept requires that foreseen losses should be anticipated and taken into
account immediately?
A. The consistency concept
B. The accruals concept
C. The prudence concept
D. The going concern concept

LO B1b
19. Which of the following statements about accounting concepts are correct?
1) Information is material if its omission or misstatement could influence the economic decisions
of users.
2) The prudence concept means that understating of assets and overstating of liabilities is
desirable in preparing financial statements.
3) The historical cost concept is that assets are initially recognised at their transaction cost.
4) The substance over form convention is that, whenever legally possible, the economic
substance of a transaction should be reflected in financial statements rather than simply its
legal form.
9
A. 1, 2 and 3
B. 1, 2 and 4
C. 1, 3 and 4
D. 2, 3 and 4
LO B1b
20. Listed below are some comments on accounting concepts.
1) In achieving a balance between relevance and faithful representation, the most important
consideration is satisfying as far as possible the economic decision-making needs of users.
2) Materiality means that only items having a physical existence may be recognised as assets.
3) The substance over form convention means that the legal form of a transaction must always
be shown in financial statements, even if this differs from the commercial effect.
Which, if any, of these comments is correct, according to the IASB’s Conceptual Framework for
Financial Reporting?
A. 1 only
B. 2 only
C. 3 only
D. None of them
LO B1b
21. The IASB’s Conceptual Framework for Financial Reporting identifies user groups. Which of the
following is NOT an information ned for the “Investor” group?
A. Assessment of repayment ability of an entity
B. Measuring performance, risk & return
C. Taking decision regarding holding investments
D. Taking buy/sell decisions

LO A2a
22. Which of the following statements about accounting concepts and policies is/are correct?
1) The effect of a change to an accounting policy should be disclosed as an extraordinary item if

material.
2) Information in financial statements should be presented so as to be understood by users with
a reasonable knowledge of business and accounting.
3) Companies should create hidden reserves to strengthen their financial position.
10
4) Consistency of treatment of items from one period to the next is essential to enhance
comparability between companies, and must therefore take precedence over other
accounting concepts.
A. 1 and 4
B. 2 and 3
C. 3 and 4
D. 2 only
LO B1b
23. Which, if any, of the following statements about accounting concepts and the characteristics of
financial information are correct?
1) The concept of substance over form means that the legal form of a transaction must be
reflected in financial statements, regardless of the economic substance.
2) The historical cost concept means that only items capable of being measured in monetary
terms can be recognised in financial statements.
3) It may sometimes be necessary to exclude information that is relevant and reliable from
financial statements because it is too difficult for some users to understand.
A. 1 and 2 only
B. 2 and 3 only
C. 1 and 3 only
D. None of these statements are correct
LO B1a, B1b
24. Which of the following statements correctly describes the dual aspect convention of accounting?
A. A change in the value of assets leads to an equal change in the value of liabilities plus capital
B. Only two ledger accounts will be needed to record any transaction
C. If a transaction requires two debit entries, two credit entries must also be made
D. Transactions are recorded in both a book of prime entry and the general ledger
LO C1c
11
25. What does the term IFRS cover? (Select three answers)
A. The IFRS issued by IASB
B. The IAS issued by former IASC
C. The interpretations issued by IFRIC

D. US GAAP
LO A4a
26. Which of the following is NOT an objective of IFRSF?
A. To develop a set of global accounting standards that is high quality, understandable and
enforceable
B. To promote the use and rigorous application of these standards
C. To interpret the application of IFRS and issue interpretations

D. To bring out convergence of national accounting standards with IFRS
LO A4a
12
Chapter 3: The Use of Double-Entry And Accounting Systems
1. Which of the following business transactions occurs on a daily basis in a large organization?
A. Credit sales
B. Payroll
C. Purchases of equipment
D. Payment of suppliers
LO C1f
2. Which of the transaction involves small cash transactions?
A. Payments to rent owner

B. Petty cash
C. Purchase of raw materials

D. Sales receipts
LO C1f
3. Credit note is used to:

A. Acknowledge a credit purchase
B. To review the credit worthiness of a new customer
C. Issued when a deposit is being forfeited

D. Cancels out all or part of a sales invoice
LO C1b
4. Which of the following is not an internal document generated for purchase?
A. Supplier list
B. Delivery note
C. Goods received note
D. Purchase order
LO C1b
5. What is the purpose of remittance advice?
A. To indicate items now paid
B. To identify goods received

C. To advise remittances received
D. To issue when goods are despatched
LO C1b
13
6. Which of the following document will be followed through after the goods received note, for a
purchase transaction?
A. Delivery note
B. Invoice
C. Statement
D. Remittance advice
LO C1b
7. Koko received a document from James’s Printing Supplies for papers which they have supplied a
week ago. Koko would refer to this document as a:
A. Goods received note
B. Receipt
C. Purchase invoice
D. Credit note
LO C1b
8. What will a sale invoice from a supplier be treated as by their customer?

A. Credit note
B. Debit note
C. Purchase invoice
D. Receipt
LO C1b
9. Which of the following correctly describes the function of a credit note issued by a supplier?
A. A demand for payment
B. An agreed allowance which can be deducted from the next invoice payment
C. A loan available to the customer
D. A document used by the supplier to cancel part or all of a previously issued invoice
LO C1b
10. Which of the following correctly describes the term ‘debit note’?
A. It is issued by a supplier to a customer to demand payment in full for goods supplied
B. It is issued by a customer to a supplier to request for a credit note
C. It is issued by a customer when goods are delivered
D. It is issued by a customer to a supplier to cancel an invoice received
LO C1b
14
11. Hau Yuan started his business by paying $10,000 into a business bank account.
What are the double entries?

A. Dr Capital 10,000
Cr Bank 10,000
B. Dr Bank 10,000
Cr Capital 10,000
C. Dr Bank 10,000
Cr Drawings 10,000
D. Dr Drawings 10,000
Cr Bank 10,000
LO C1c, C1d, F1a
12. Andy started his taxi business by bringing in his own car worth RM 10,500 into the business.
What are the double entries?

A. Dr Capital 10,500
Cr Motor vehicle 10,500
B. Dr Motor vehicle 10,500
Cr Drawings 10,500
C. Dr Motor vehicle 10,500
Cr Capital 10,500
D. Dr Motor vehicle 10,500
Cr Bank 10,500
LO C1a, C1d, F1a
13. Which of the following changes will not occur as a result of an entry in the bookkeeping records?
A. Asset increase, Liability increase
B. Asset increase, Capital increase
C. Capital increase, Liability increase
D. Capital increase, Liability decrease
LO C1a, C1d, F1a
14. A business has a capital of$ 10,000 and liabilities of $4,000.
Which of the following asset and liability would appear in the statement of financial position?
A. Asset 6,000 Liabilities 16,000
B. Asset 6,000 Liabilities 4,000
C. Asset 10,000 Liabilities 10,000
D. Asset 14,000 Liabilities 4,000
LO C1a, C1d, F1a
15
15. What is the double entry for receipt of cash from a trade receivable?
A. Dr Sales Cr Receivables
B. Dr Receivables Cr Cash
C. Dr Cash Cr Sales
D. Dr Cash Cr Receivables
LO C1a, C1d, F1a
16. Ali had an opening capital of $10,000 and closing capital of $4,500. During the period, he injected
capital of $4.000 and withdrawn $8,000 for his personal use.
His profit or loss during the period was:
A. $9,500 loss
B. $1,500 loss
C. $7,500 profit
D. $17,500 profit
LO C1a, C1d, F1a
17. A debit entry usually represents:

A. Asset and Income
B. Liabilities and income
C. Asset and expenses
D. Liabilities and expenses
E. LO C1a, C1d, F1a
18. The double entry to record a purchase of a motor van on credit is:
A. Dr Motor expenses Cr Cash
B. Dr Motor vehicle Cr Cash
C. Dr Motor expenses Cr Payable
D. Dr Motor vehicle Cr Payable
LO C1a, C1d, F1a
19. The double entry for a sale of inventory for cash is:
A. Dr Inventory Cr Sales
B. Dr Cash Cr Sales
C. Dr Cash Cr Inventory
D. Dr Capital Cr Inventory
LO C1a, C1d, F1a
20. A debit balance would be expected to arise for:

A. Capital
B. Sales revenue
C. Electricity
D. Loan
LO C1c, C1d, F1a
16
21. A credit balance would be expected to arise for:
A. Drawings
B. Telephone expenses
C. Trade receivables
D. Sundry payables
LO C1c, C1d, F1a
22. When a cash is received for a credit sale, the double entry would be:
A. Dr Cash Cr Trade receivable
B. Dr Cash Cr Trade payables
C. Dr Trade receivables Cr Cash
D. Dr Trade payables Cr Cash
LO C1c, C1d, F1a
23. Which one describes the concept of separate entity?

A. The non-current assets are a separate entity from current assets
B. The drawings are as separate entity from the business profits
C. The business is a separate entity from the owner
D. The owner must be independent from a lender to the business
LO F1a
24. Which of the following is classified as a current liability?

A. Trade receivables
B. Inventory
C. Bank overdraft
D. Long term loan
LO D8l
25. Which of the following is classified as a current asset?

A. Owner’s capital
B. Petty cash
C. Salesman’s motor car
D. Computer software
LO D8l
26. Which of the following statement best describes the accounting equation?
A. Net assets = Capital – Profit – Drawings
B. Net assets = Capital – Profit + Drawings
C. Net assets = Capital + Profit + Drawings
D. Net assets = Capital + Profit – Drawings
LO D1d
17
27. When the owner takes out the business’s inventory for his personal use, it will be recorded as:
A. Drawings
B. Expense
C. Inventory
D. Liability
LO A3a, A3b, D8a, D8l, F2b
28. If the owner withdraws company’s cash to meet his own expenses, it will be treated as drawings.
This is an example of:

A. Good internal control system
B. Personal ledger accounting
C. Segregation of duties
D. Separate entity principle
29. When the inventory is purchased on credit:

A. Net assets and owner’s capital do not change
B. Net assets increase and owner’s capital increase
C. Net assets decrease and owner’s capital decrease
D. Net assets increase and owner’s capital stays the same
LO C1c, C1d, F1a
30. When an expense is paid in cash:

A. Net assets increase and profit increases
B. Net assets decrease and profit decreases
C. Net assets remain the same and profit increases
D. Net assets remain the same and profit decreases
LO C1c, C1d, F1a
31. What is the nominal ledger?

A. A book where all transactions are originally recorded before being posted to ledger accounts
B. A book which contains a ledger account for each type of asset, liability, expense and income
C. A book which contains the financial statement
D. A book that record details of trade payables
LO C2d
32. What is the payables ledger

A. A record of the credit limits of each credit supplier
B. A record of the personal details of each credit supplier
C. A record of the accounts of each credit supplier
D. A record of the accounts of each credit customer
LO C2d
18
33. What is a book of prime entry?
A. A ledger account where transactions are originally recorded
B. A record where transactions are originally recorded before transferred to a ledger account
C. A separate ledger where details of a particular type of transactions are recorded in parallel to
recording in the general ledger
D. A set of memorandum ledger accounts which back up the total figures recorded in the general
ledger
LOC1a, C2a
34. Which of the following would normally be a debit balance on the ledger account?
i. Sales revenue
ii. Rental
iii. Drawings
iv. Capital
A. i and iii
B. ii and iii
C. i and iv
D. ii and iv
LO C1c, C1d, F1a
35. Which of the following is not a book of prime entry?

A. Receivables ledger
B. Sales daybook
C. Petty cash book
D. Transfer journal
LO C1a, C2a
36. A business has a bank overdraft of $350 and $50 cash in hand at the end of the period.
What balances will be brought down at the start of the next accounting period?
A. Dr Bank Cr Cash
B. Cr Bank Dr Cash
C. Dr Bank Dr Cash
D. Cr Bank Cr Cash
LO C2d
19
37. The company has paid legal fees to take legal action against its competitor that has infringed their
product patent.
What is the double entry?

A. Dr Other payables Cr Bank
B. Dr Legal fees Cr Bank
C. Dr Legal fees Cr Other payable
D. Dr Bank Cr Sales
LO C1c, C1d, F1a
38. The below entries record which of the following transactions
Dr Office premises $500,000
Cr Payables $500,000
A. The business has taken out a bank loan to refurbish the head office
B. The business has paid an outstanding invoice for repairs of office premise
C. The business has purchased a non-current asset on credit
D. The business has purchased a non-current asset for cash
39. X starts a business with $50,000 cash, buying inventory $10,000 from cash and paying business
expenses of $1,000. Inventory is purchased on credit for $5,000.
Following these transactions, what is the capital of X’s business?

A. $39,000
B. $49,000
C. $50,000
D. $54,000
40. A machine cost $5,000 is bought on credit from X. Subsequently, $1,000 of the debt to X is paid by
cheque.
Which of the following correctly records the transactions?

A. Dr X 5000 Cr Machine 5000 Dr Bank 1000 Cr X 1000
B. Dr X 5000 Cr Machine 5000 Dr X 1000 Cr Bank 1000
C. Dr Machine 5000 Cr X 5000 Dr Bank 1000 Cr X 1000
D. Dr Machine 5000 Cr X 5000 Dr X 1000 Cr Bank 1000
20
41. Nancy’s business has net assets of $13,200 as at 1/1/2016. During January, she purchases new
equipment for $1,200, makes sales on credit of $7,500, received payment from customers of $3,750
and received bills from suppliers of $2,250. These are not payable until February.
What are the net assets at the end of January?

A. $15,750
B. $18,450
C. $18,150
D. $20,700
42. Bill sets up his own computer consultancy from home. He buys a laptop for $2,000 and puts $1,000
into the business bank account. During the first month he invoices a client for $1,500 and pays $600
to a freelance programmer. The client has not yet paid.
What is Bill’s capital balance at the end of the month?

A. $1,900
B. $2,400
C. $3,900
D. $4,500
21
Chapter 4: Trial Balance
1. Which item will appear as a debit balances in the ledger accounts?

A. Capital
B. Bank overdraft
C. Trade payables
D. Inventory
LO E1a, E1b, E1c, E1d
2. Which of the following items would appear on opposite sides of a trial balance?
A. Inventory and Drawings
B. Sales and Returns outwards
C. Carriage in and Carriage outwards
D. Trade receivables and Returns outwards
3. East buys goods from South on credit.
Which one of the following is the correct double-entry for this transaction in East’s books?
A. Dr Purchases, Cr Cash
B. Dr Purchases, Cr South
C. Dr Cash, Cr Purchases
D. Dr South, Cr Purchases
4. The following are the year end balances in Sam’s ledgers:

$
Sales 43,000
Purchases 16,000
Equipment 22,000
Overdraft 8,000
Inventory 19,000
Capital 6,000
What is the trial balance total?
A. $43,000
B. $57,000
C. $63,000
D. $114,000
22
5. Which of the following is a record of prime entry?
A. Receivables ledger control account
B. Journal
C. Purchase invoice
D. Trial balance
6. Which of the following would normally be entered through the journal?

A. Credit purchase returns
B. Transfers between accounts
C. Receipts from credit customers
D. Expense payments
7. Which journal entry correctly records the credit purchase of plant and equipment?
A. Dr the supplier’s personal account, Cr Plant and Equipment
B. Dr Cash, Cr Plant and Equipment
C. Dr Plant and Equipment, Cr the supplier’s personal account
D. Dr Plant and Equipment, Cr Cash
8. The total of the discounts received column in the Cashbook is $150.
How should this item be posted in the ledger?

A. Dr Discount Allowed
B. Cr Discount Allowed
C. Dr Discount Received
D. Cr Discount Received
9. The following are the year end balances in business ledgers:
$
Sales 628,000
Cost of sales 458,000
General overheads 138,000

Trade Payables 54,000
Trade Receivables ?
Cash on deposit 61,000
Capital 86,000
23
If the trial balance balances, what is the missing figure for the trade receivables?
A. $61,000
B. $111,000
C. $233,000
D. $387,000
10. In the receivable ledger of X Co, the account of Y Co has a credit balance of $5,000.
Which of the following is a plausible explanation for this?
A. Y Co has been sent an invoice for $5,000

B. Y Co has supplied goods to X Co and these have been correctly recorded by X Co
C. Y Co has paid X Co $5,000 twice in error
D. Y Co has an overdue balance of $5,000 owing to X Co
11. What is a trial balance?

A. A list of ledger balances extracted from customer accounts
B. A list of ledger balances extracted from accounts which helps to ensure that the bookkeeping
has been accurate
C. An accounting document which a business must prepare
D. A list of all the transactions which have occurred in a period taken from ledger accounts
LO E1a
12. Which of the following statements is correct?

A. The balance on a bank loan account will appear in the debit column of a trial balance
B. The sales returns account balance will appear in the credit column of a trial balance
C. Loan interest paid will appear in the debit column of a trial balance
D. Purchase returns will appear in the debit column of a trial balance
13. The following balances have been taken from the trial balance of XYZ. Rent paid $1,800, capital
$15,000, purchases $10,000, sales $12,000, wages $5,000, sundry expenses $1,000, cash $9,200.
What is the trial balance total on the debit side?

A. $26,000
B. $29,000
C. $42,000
D. $27,000
24
14. These are the year end balances for Josie’s business
Sales 54,000
Purchases 21,000
Inventory 9,500
Cash 27,250
Receivables ?
Motor vehicles 7,500
Payables 5,500
Capital 18,500
If the trial balance balances, what is the missing figure for receivables?
A. $15,500
B. $13,250
C. $ 9,250
D. $12,750
15. The following is the trial balance extracted from the books of Nelson at 31 December 2009:
$ $
Capital at 1 Jan 2009 20,000
Loan account, Omega 2,000
Drawings 1,750
Freehold premises 8,000
Furniture and fittings 500
Plant and machinery 5,500
Inventory at 1 Jan 8,000
Cash at bank 650
Allowance for receivables 740
Purchases 86,046
Sales 124,450
Bad debts 304
Bad debts recovered 45
25
Accounts receivable 20,280
Accounts payable 10,056
Bank charges 120
Rent 2,000
Returns inwards 186
Returns outwards 135
Salaries 3,500
Wages 8,250
Travelling expenses 1,040
Carriage inwards 156
Discounts received 138
General expenses 2,056
Gas, electricity and water 2,560
Carriage outwards 546
Commission 5,480
Printing and stationery 640
157,564 157,564
You are required to draw up the SOPL to 31 December 2009 and the SOFP at that date, after
taking into account the following:
a) Inventory at 31 December 2009 $7,550;
b) Interest on the loan at 5% pa had not been paid at 31 December;

c) Rent includes $250 for premises paid in advance to 31 March next;
d) Depreciate plant and machinery by 10% pa;
Depreciate furniture and fittings by 5% pa;

e) Adjust the allowance for receivables to 5% of receivables;
f) show wages as part of cost of sales.
26
16. CARLOS is a sole trader, supplying building materials to local builders. He prepares his accounts to
30 June each year. At 30 June 2005, his trial balance was as follows:
$ $
Capital at 1 July 2004 55,550
Purchases and sales 324,500 625,000
Returns 2,300 1,700
Discount received 2,500
Inventory of building materials at 1 July 2004 98,200
Packing materials purchased 12,900
Distribution costs 17,000
Rent, rates and insurance 6,600
Telephone 3,200
Car expenses 2,400
Wages 71,700
Allowance for receivables at 1 July 2004 1,000
Heat and light 1,850
Sundry expenses 6,700
Delivery vehicles - cost 112,500
Delivery vehicles - depreciation at 1 July 2004 35,000
Equipment - cost 15,000
Equipment - depreciation at 1 July 2004 5,000
Receivables and payables 95,000 82,000
Loan 10,000
Loan repayments 6,400
Bank deposit account 15,000
Bank current account 26,500
817,750 817,750
27
The following additional information at 30 June 2005 is available:
(i) Closing inventories of building materials $75,300
Closing inventories of packing materials $700
There was also an unpaid invoice of $200 for packing materials received and consumed during
the year.
(ii) Prepayments:
- rent, rates and insurance $450
(iii) Accrued expenses:
- heat and light $400
- telephone $500
(iv) Wages includes $23,800 cash withdrawn by CARLOS.
(v) Accounts receivable have been analysed as follows:
Current month $60,000

30 to 60 days $20,000
60 to 90 days $12,000
over 90 days $3,000
and allowance for receivables is to be made as follows:
30 to 60 days 1%
60 to 90days 2.5%
Over 90 days 5% (writing off $600)
(vi) Sundry expenses include $3,500 for CARLOS's personal tax bill.
(vii) The loan was taken out some years ago, and is due for repayment on 31 March 2006.
The figure shown in the trial balance for `loan repayments' includes interest of $800
for the year.
28
(viii) The bank deposit account was opened on 1 January 2005 as a short term investment;
interest is credited at 31 December annually; the average rate of interest since opening
the account has been 6% per annum.
(ix) At 1 July 2004 CARLOS decided to bring one of his family cars, valued at $8,000, into the
business. No entries have been made in the business books for its introduction.
(x) Depreciation is to be provided as follows:
• at 20% on cost for delivery vehicles;
• at 25% on the reducing balance for the car;
• at 25% on the reducing balance for equipment.
Required:
(a) Prepare a SOPL for the year ended 30 June 2005.
(b) Prepare a SOFP at 30 June 2005.

29
Chapter 5: Sales and Purchases
1. Gino sold goods with a list price of $12,000. He offered customer a 5% trade discount and a 5%
settlement discount. Gino expects the customer to take up the settlement discount based on past
experience.
What amount should Gino record as his sales figures?

A. $11,400
B. $13,800
C. $13,110
D. $10,830
LO D1a, D1e, E3a
2. Emmeline sold goods on credit to James with a list price of $7,500. Emmeline offered a 10% trade
discount and a 6% settlement discount if James paid within 10 days. Based on previous experience,
Emmeline do not expect James to take up the settlement discount.
How should the sale be recorded in Emmeline’s accounts?

A. Dr Receivables $6,345 Cr Sales $6,345
B. Dr Receivables $6,750 Cr Sales $6,750
C. Dr Receivables $6,750 Dr Discounts allowed $750 Cr Sales $7,500
D. Dr Receivables $6,345 Dr Discounts allowed $405 Cr Sales $6,750
LO D1a, D1e, E3a
3. Fiona sold goods, with a list price of $31,200, on credit to Tony and gave him a 10% trade discount.
Which of the following correctly records this transaction in Fiona’s ledger accounts?
A. Dr Receivables $31,200 Cr Sales $31,200
B. Dr Receivables $31,200 Cr Sales $28,080 Cr Discounts received $3,120
C. Dr Receivables $28,080 Cr Sales $28,080
D. Dr Receivables $28,080 Dr Discounts allowed $3,120 Cr Sales $31,200
LO D1a, D1e, E3a
4. On 1 April Kimberley had the following transactions:

(a) A cash sale of $8,832
(b) A cash receipt of $6,624 in relation to a credit sale in the previous month
Both transactions were inclusive of sales tax at 15%
What amount would be recorded in the sales tax column of the cash book on 1 April?
A. $1,152
B. $1,325
C. $2,318
LO D1a, D1e, D1c, D1d, E3a
30
5. Albert sold 15 units of inventory with a list price of $40 per unit to Michael. He gives Michael a 10%
trade discount and a 5% settlement discount if Michael pays within 30 days. Albert expects Michael
to pay within the 30 days given based on past experience of dealing with him.
What will be the amount that will be credited to sales for this transaction?
A. $513
B. $600
C. $540
D. $510
LO D1a, D1e, E3a
6. Hywel purchases goods on credit with a list price of $100. The supplier gives Hywel a trade discount
of 15% and also offers a cash discount of 10% for payment within 30 days.
What is the amount that Hywel will debit to his purchases account?
A. $115·00
B. $85·00
C. $76·50
D. $75·00
LO D1a, D1f, E3b
7. Walter sells goods to Ninevah with a list price (exclusive of sales tax) of $4,300, offering a 4% trade
discount. Sales tax is 17·5%.
What amount should be recorded for this transaction in the sales account (to the nearest $1)?
A. $4,850
B. $4,128
C. $5,053
D. $3,513
8. Which of the following statements regarding sales tax in the trial balance is true?
A. Output tax and input tax are debit balances
B. Output tax and input tax are credit balances
C. Output tax is a credit balance and input tax is a debit balance
D. Output tax is a debit balance and input tax is a credit balance
LO D1c, D1d
31
9. Melanie is a sales tax registered trader. Her purchases day book shows purchases of $2,000, net of
sales tax at 17·5%.
What double entry will Melanie post at the end of her day’s trading?
A. Dr Purchases $2,000 Cr Payables $2,000
B. Dr Purchases $2,350 Cr Payables $2,350
C. Dr Payables $2,350 Cr Purchases $2,000 Cr Sales tax $350
D. Dr Purchases $2,000 Dr Sales tax $350 Cr Payables $2,350
LO D1a, D1f, E3b, D1c, D1d
10. Avalon gives his customers individual trade discounts from the list price and a general 5% cash
discount for all invoices settled within seven days of issue. A new customer, Nolava, negotiates a
25% trade discount. Avalon does not expect Novala to take up the cash discount based on past
experience. His transactions during June are:
12 June Buys goods with a $5,000 list price
15 June Returns goods with a $1,000 list price as faulty

16 June Pays half of the net balance on his account
How much does Nolava owe Avalon at the end of June?
A. $1,425
B. $1,500
C. $2,000
D. $2,850
LO D1a, D1e, E3a
11. Pimlico owes Vauxhall for some goods it recently bought. Pimlico are settling the invoice early to
obtain a discount. Vauxhall had previously recorded this transaction in his books based on the
expectation that Pimlico will not take up the settlement discount.
What is the correct double entry for this in Vauxhall’s books?

A. Dr Vauxhall Cr Bank Cr Discount received
B. Dr Vauxhall Dr Discount received Cr Bank
C. Dr Bank Dr Discount allowed Cr Pimlico
D. Dr Bank Dr Sales Cr Pimlico
LO D1a, D1f, E3b
32
12. Carion sells the following goods for cash during January:
Net Price ($) Sales Tax ($)

5 Jan To Maurice 386 68
19 Jan To Harris 715 125
28 Jan To Merton 430 75
What are the correct entries in Carion’s general ledger?
A. Dr Sales $1,799 Dr Sales tax $268 Cr Cash $2,067

B. Dr Cash $2,067 Cr Sales $1,799 Cr Sales tax $268
C. Dr Sales $1,531 Dr Sales tax $268 Cr Cash $1,799
D. Dr Cash $1,799 Cr Sales $1,531 Cr Sales tax $268
13. (1) The aged receivables analysis is used by organisations to tell them the date when they need to
pay suppliers.
(2) The aged receivables analysis shows an organisation when a customer has breached their credit
limit.
Which of the above statements are correct?

Statement 1 Statement 2
A. Correct Correct
B. Correct Incorrect
C. Incorrect Correct
D. Incorrect Incorrect
LO D8c, D8d
14. Which of the following statements in relation to the aged receivables analysis is/are correct?
1. It is an analysis of the credit periods allowed to each individual customer
2. It shows how old the supplier balances are
Statement 1 Statement 2
A. Correct Correct
B. Correct Incorrect
C. Incorrect Correct
D. Incorrect incorrect
LO D8c, D8d
33
15. On 1 August Barry made the following transactions:
1. He made a cash sale of $3,680
2. He received cash of $2,760 in relation to a credit sale in the previous month.
Both transactions were inclusive of sales tax at 15%.
How much sales tax would be recorded in the cash book for the above transactions?
A. $480
B. $360
C. $840
D. $552
LO D1c, D1d
16. Gino sold goods with a list price of $12,000 excluding sales tax. He offered customers a 5% trade
discount. Gino is registered for sales tax at 15%.
What amount should Gino record as his sales figures?

A. $10,830
B. $13,800
C. $13,110
D. $11,400
17. Maureen owed her suppliers $16,420 at the start of April. During April she bought goods costing
$39,610, she returned goods costing $2,110 and made payments of $24,620.
What is the total of the credit side of Maureen’s payables ledger control account for the month
of April?
A. $56,030
B. $43,150
C. $29,300
D. $26,730
LO D1b, D8k
18. Which of the following statements is correct?

A. Sales invoices are recorded in the sales returns daybook and are summarised and posted to the
receivables ledger
B. Purchase invoices are recorded in the purchase daybook and are summarised and posted to
the payables ledger
C. Cash received is recorded in the cash book and posted to the journal
D. Adjustments to the financial statements are recorded in the cash book and summarised and
posted to the general ledger
LO E3a, E3b
34
19. XYZ Co. has the following balances extracted from its return inwards day book for a month. Total
(including sales tax) $36,000, sales tax $6,000, net $30,000.
Which is the correct posting?

A. Dr Sales return $30,000, Dr VAT $6,000, Cr RLCA $36,000
B. Dr Purchases return $30,000, Dr VAT $6,000, Cr PLCA $36,000
C. Dr Sales return $30,000, Cr VAT $6,000, Cr RLCA $30,000
D. Dr Purchases return $30,000, Cr VAT $6,000, Cr PLCA $30,000
LO D1b, D8k
20. Which of the following correctly states the need for personal accounts for customers in a
business?
1) To deal with customer queries
2) To prepare statement
3) To monitor customer credit limits
4) To match cash received with invoices
A. 1, 2 and 4
B. 2, 3 and 4
C. 1, 3 and 4
D. 1, 2, 3 and 4
LO D1a
21. Irrecoverable debts written off appear in the financial statement as?
A. An expense in the SOFP
B. An expenses in the SOPL
C. A deduction from sales revenue
D. A deduction from receivables figure in SOFP
LO D8c, D8d
22. What is a contra entry?

A. A credit note recorded in the receivables ledger
B. An entry to record return of goods to a supplier
C. An entry in the payables ledger control account to cancel an invoice received
D. Cancellation of a debit balance on a customer account against a credit balance on a supplier’s
account (The customer and supplier are the same party)
LO D8k
35
23. Why is a personal account for a supplier kept?
A. To facilitate payments to receivables
B. To ensure the accounts are paid in full
C. To check the amount due agrees to a statement received from the supplier, prior to payment
D. To ensure discounts allowed are taken
LO D8c, D8d
24. The following entries appeared in the receivable ledger control account for June. Balance b/f 1st
June is $7,500, sales $20,000, receipts from customers $8,000, irrecoverable debts written off $900.
What the balance as at 30th June?

A. $3,600
B. $19,400
C. $19,600
D. $18,600
LO E3a
25. The following entries appeared in the payables ledger control account for February. Balance b/f 1st
February is $1,700, purchases $18,000, paid to suppliers $10,000, discount received $1,200,
purchase returns $3,000.
What is the balance as at 28th Feb?

A. $5,500
B. $2,100
C. $11,500
D. $7,900
LO E3b, E3c
26. Mary has not registered for sales tax as her turnover is below the limit. Her sales for the quarter
are $2,300 on which no sales tax is charged. Her total outgoing are $1,250, of which $750 is for
items not subject to sales tax. The prevailing sales tax rate is 20%.
If Mary had been registered for sales tax, how much would she owe to the tax authorities for the
quarter?
A. $376.67
B. $300.00
C. $251.67
D. $210.00
LO D1c, D1d
36
Chapter 6: Control Accounts and Reconciliations
1.
(a) You are preparing the reconciliation between the balance on the receivables control account in
Seema’s general ledger $69,754 and the total of the list of balances from her receivables ledger
$69,112. You have noted:
(i) a balance of $622 due from a customer was omitted from the list of balances;
(ii) a credit balance of $40 was included in the list of balances as a debit balance;
(iii) the total value of invoices in the sales daybook was overstated by $100;
(iv) an invoice for $99 was recorded as a credit note in the sales day book;
(v) $32 of cash received from a credit customer was recorded as a cash sale; and
(vi) no entries have been made to record the fact that a credit customer’s cheque for $355 was
returned by the bank.
Required:
(i) Prepare the receivables control account in Seema’s general ledger, including the necessary
adjusting entries and the corrected balance; and
(ii) Prepare the reconciliation between the list of balances from the receivables ledger and the
corrected balance on the receivables control account in Seema’s general ledger.
LO E3d, E3e, E3f
37
(b) At 30 November 2009, the balance on the payables control account in Ariadna’s general ledger was
$80,130 and the total of the list of balances on the suppliers’ personal accounts was $80,441.
Investigation of the reasons for the difference indicated the following:
(i) a credit note received from a supplier for $438 was omitted from the accounting records;
(ii) an invoice for $385 was correctly recorded in the purchase day book, but when posting to the
supplier’s personal account the value was entered as $358;
(iii) a payment of $1,000 was made to settle a balance of $1,012, but the discount was not
recorded on the supplier’s personal account;
(iv) a contra with the receivables ledger of $700 had been recorded in the supplier’s personal
account, but no entry was made in the control account;
(v) a debit balance of $63 on a supplier’s personal account was treated as a credit balance;
(vi) the purchase day book was under-cast by $900; and
(vii) a payment to a supplier for $320 was incorrectly recorded as drawings.
Required:
(i) Prepare the payables control account in the general ledger, including the necessary adjusting
entries and the corrected balance.
(ii) Prepare the reconciliation of the list of balances to the corrected balance on the payables
control account in the general ledger.
(iii) For each of the adjusting entries in the payables control account in the general ledger,
indicate which general ledger account will be used to complete the double entry.
LO E3d, E3e, E3f
38
2. A supplier sends you a statement showing a balance outstanding of $14,350. Your own records show
a balance outstanding of $14,500.
Which one of the following could be the reason for this difference?
A. The supplier sent an invoice for $150 which you have not yet received
B. The supplier has allowed you $150 cash discount which you had omitted to enter in your
ledgers
C. You have paid the supplier $150 which he has not yet accounted for
D. You have returned goods worth $150 which the supplier has not yet accounted for
LO E3d, E3e, E3f
3. The following receivables ledger control account has been prepared by a trainee accountant
Receivables ledger control account
1 Jan Balance 284,680 31 Cash received from credit 179,790

Dec customers
31 Credit sales 189,120 Contras against amounts 800
Dec owing by company in
payables ledger
Discounts allowed 3,660
(previously not expected to
be taken up)
Irrecoverable debts 1,800 Balance 303,590
written off
Sales returns 4,920
484,180 484,180
The closing balance on the account should be $______________ when the errors in it are
corrected.
LO E3d, E3e, E3f
39
4. Ordan received a statement from one of its suppliers, Alta, showing a balance due of $3,980. The
amount due according to the payables ledger account of Ordan was only $230. Comparison of the
statement and the ledger account revealed the following differences:
1) A cheque sent by Ordan for $270 has not been allowed for in Alta's statement.
2) Alta has not allowed for goods returned by Ordan $180.
3) Ordan made a contra entry, reducing the amount due to Alta by $3,200, for a balance due from
Alta in Ordan's receivables ledger. No such entry has been made in Alta's records.
What difference remains between the two companies' records after adjusting for these items?
A. $460
B. $640
C. $6,500
D. $100
LO E3d, E3e, E3f
5. The purchase day book of Kent has been undercast by $500, and the sales day book has been
overcast by $700. Kent maintains purchase and sales ledger control accounts as part of the double
entry bookkeeping system.
The effect of correcting these errors will be to:
A. make adjustments to the ledger balances of the individual customers and suppliers, with no
effect on profit
B. make adjustments to the ledger balances of the individual customers and suppliers, with a
decrease in profit of $1,200
C. make adjustments to the control accounts, with no effect on profit
D. make adjustments to the control accounts, with a decrease in profit of $1,200.

LO E3d, E3e, E3f
6. For the month of November 2000 Jason's purchases totalled $225,600 with sales tax of $33,840.
The total of $259,440 has been credited to the purchase ledger control account as $254,940.
Which of the following adjustments is correct?
Control account List of suppliers' balances
A. $4,500 Cr No adjustment
B. $4,500 Cr Increase by $4,500
40
C. $29,340 Dr No effect
D. $33,840 Dr Increase by $4,500

LO E3d, E3e, E3f
7. A payables ledger control account showed a credit balance of $768,420. The payables ledger
totalled $781,200.
Which one of the following possible errors could account in full for the difference?
A. A contra against a receivables ledger debit balance of $6,390 has been entered on the credit
side of the payables ledger control account.
B. The total of discounts allowed $28,400 was entered to the debit side of the payables ledger
control account instead of the correct figure for discounts received of $15,620.
C. $12,780 cash paid to a supplier was entered on the credit side of the supplier's account on the
payables ledger.
D. The total of discounts received $6,390 has been entered on the credit side of the payables
ledger control account.
LO E3d, E3e, E3f
8. Starbuck has received a statement of account from one of its suppliers, showing an outstanding
balance due to them of $1,350. On comparison with the ledger account, the following is
determined:
• The ledger account shows a credit balance of $260.

• The supplier has disallowed a cash discount of $80 due to late payment of an invoice.
• The supplier has not yet allowed for goods returned at the end of the period of $270.
• Cash in transit of $830 has not been received by the supplier.
Following consideration of these items, the unreconciled difference between the two records is:
A. $70
B. $90
C. $430
D. $590
LO E3d, E3e, E3f
41
Chapter 7: Cash
Chapter 7: Cash
1. Which of the following items would be likely to be paid out of petty cash?
i) Payment to window cleaner $10

ii) Hire purchase payment for a delivery van $123
iii) A payment for postage stamps $11·60
iv) A payment to a supplier for goods bought on credit of $65
A. All of the above

B. i, iii and iv
C. i only
D. i and iii
LO D2b
2. Which of the following represents the correct imprest amount in an imprest petty cash system?
A. Notes and coins in the cash box – vouchers – IOUs
B. Notes and coins in the cash box + vouchers – IOUs
C. Notes and coins in the cash box – vouchers + IOUs
D. Notes and coins in the cash box + vouchers + IOUs
LO D2b
3. Which of the following is NOT an advantage of using Imprest Petty Cash System?
A. Petty Cash float remains fixed each month
B. Offer better control
C. Need to only topped up with the amount equivalent to amount spent
D. Reimbursement of cash can be done several times during the month
LO D2b
4. Why is there a need for Reconciliation of Petty Cash?

A. to reconcile Cashbook balance to Bank Statement Balances
B. to reconcile Personnel Ledger balances with the Control account balances
C. to reconcile Petty cash funds to its records
D. to monitor Petty cash expenditure
LO D2b
5. To ensure that the Petty cash payments are being made for authentic expenditure, we need to:
A. record the vouchers immediately into the Petty Cashbook
B. ensure that the petty cash vouchers are signed
C. staple appropriate receipts into the vouchers
D. allow only certain employees to have access to Petty cash
LO D2b
42
Chapter 7: Cash
6. Kelvin has a bank overdraft of $500 at the start of the month. During the month, he has sold goods
for cash of $900 and purchased goods on credit for $700. His month end balance for cash at bank
account will be:
A. $300 credit
B. $400 debit
C. $700 debit
D. $1,400 debit
LO D2a
7. A note accompanying a cheque payment to a supplier, detailing the invoices being paid is called
a:
A. Supplier’s statement
B. Debit note
C. Remittance advice
D. Remittance list
LO D2a
8. A petty cash system operates on a $120 imprest system. At month end, there is $67.23 of valid
petty cash vouchers in the petty cash box. How much cash should be taken out of the bank account
in order to restore it to the correct amount?
A. $52.77
B. $67.23
C. $120.00
D. $187.23
LO D2b
9. Which of the following payments would petty cash NOT normally be used?
A. $9.50 for cleaning the shop windows
B. $26 for coffee and tea (for staff)
C. $125 invoice for postage via a courier
D. $37 train fare to a business conference
LO D2b
10. What is included in a bank statement?

A. The transactions on the bank account of a business
B. The transactions between customer and supplier
C. Petty cash transactions
D. Transactions on a company credit card
LO D2a, D2b
43
Chapter 8: Bank Reconciliation
1. You are preparing Ari’s current account bank reconciliation at 30 November 2010, and have the
following information:
a) at 30 November 2010 the bank statement shows an overdrawn balance of $1,723;

b) at 30 November 2010 the bank current account in the general ledger had a credit balance of
$2,678;
c) cheques with a value of $1,759 were issued in November, but have not yet been recorded on
the bank statement;
d) a lodgement for $2,820 has not yet been credited on the bank statement;
e) a cheque for $780 received from a customer was incorrectly recorded in the cash received day
book as $870;
f) Ari recorded bank interest received of $373 as bank interest paid;
g) in August, a supplier returned Ari’s cheque for $640, as it should only have been for $620. A
replacement cheque for the correct amount was issued and correctly recorded, but Ari did not
record the cancellation of the original cheque (this cheque is not included in the value of
cheques noted at (iii) above);
h) the bank agreed to reduce Ari’s fees by $180. Although Ari recorded the reduction in
November, the bank did not credit his account until 2 December; and
i) Ari has not recorded a cash withdrawal for $600, or the transfer of $1,500 from his personal
deposit account.
Required:
(i) Prepare the bank account in Ari’s general ledger, including the necessary adjusting entries
and the corrected balance; and
(ii) Prepare the reconciliation between the balance on the bank statement and the corrected
balance on the bank account in Ari’s general ledger.
LO E4c, E4d, E4e, E4f
44
2. Ravin has completed his financial statements for the year ended 31 March 2009, which showed a
profit of $81,208, when he realised that no bank reconciliation statement had been prepared for
that date. When checking the cash book against the bank statement and carrying out other checks,
he found the following.
a) A cheque for $1,000 had been entered in the cash book but had not yet been presented.
b) Cheques from customers totalling $2,890 entered in the cash book on 31 March 2009 were
credited by the bank on 1 April 2009.
c) Bank charges of $320 appear in the bank statement on 30 March 2009 but have not been
recorded by Ravin.
d) A cheque for $12,900 drawn by Ravin to pay for a new item of plant had been mistakenly
entered in the cash book and plant account as $2,900. Depreciation of $290 had been charged
in the Statement of profit or loss for this plant.
e) A cheque for $980 from a credit customer paid in on 26 March was dishonoured and Ravin
decided that the debit would have to be written off as the customer was now untraceable.
f) A cheque for $2,400 in payment for some motor repairs had been mistakenly entered in the
cash book as a debit and posted to the credit of motor vehicles account. Depreciation at 25%
per annum (straight line) is charged on motor vehicles, with a full year's charge calculated on
the balance at the end of each year.
g) The total of the payments side of the cash book had been understated by $1,000. On further
investigation it was found that the debit side of the purchases account had also been
understated by $1,000.
h) Ravin had instructed his bank to credit the interest of $160 on the deposit account maintained
for surplus business funds to the current account. This the bank had done on 28 March. Ravin
had made an entry on the payments side of the cash book for this $160 and had posted it to
the debit of interest expense account.
i) Ravin had mistakenly paid an account for $870 for repairs to his house with a cheque drawn
on the business account. The entry in the cash book had been debited to repairs on the
premises account.
j) Ravin had also mistakenly paid $540 to Paul, a trade supplier, to clear his account in the
purchases ledger, using a cheque drawn on Ravin's personal bank account. No entries have yet
been made for this transaction.
The cash book showed a debit balance of $4,890 before any correcting entries had been made. The
balance in the bank statements is to be derived from your answer.
45
Required
(i) Prepare an adjusted cash book showing the revised balance which should appear in Ravin's
statement of financial position at 31 March 2009.
(ii) Prepare a bank reconciliation statement as at 31 March 2009.
(iii) Draw up a statement for Ravin showing the effect on his profit of the adjustments necessary
to correct the errors found.
LO D2a, E4c, E4d, E4e, E4f
3. The cash book shows a bank balance of $5,675 overdrawn at 31 August 2005. It is subsequently
discovered that a standing order for $125 has been entered twice, and that a dishonoured cheque
for $450 has been debited in the cash book instead of credited.
The correct bank balance is $___________ overdrawn.

4. The bank statement on 31 October 2007 showed an overdraft of $800. On reconciling the bank
statement, it was discovered that a cheque drawn by your company for $80 had not been presented
for payment, and that a cheque for $130 from a customer had been dishonoured on 30 October
2007, but that this had not yet been notified to you by the bank.
The correct bank balance to be shown in the statement of financial position at 31 October 2007
was $___________ overdrawn.
5. Which of the following statements about bank reconciliations are correct?
1) A difference between the cash book and the bank statement must be corrected by means of
a journal entry.
2) In preparing a bank reconciliation, lodgements recorded before date in the cash book but
credited by the bank after date should reduce an overdrawn balance in the bank statement.
3) Bank charges not yet entered in the cash book should be dealt with by an adjustment in the
bank
reconciliation statement.
4) If a cheque received from a customer is dishonoured after date, a credit entry in the cash book
is required.
A. 2 and 4
B. 1 and 4
46
C. 2 and 3
D. 1 and 3
LO E4a, E4b
6. A bank reconciliation statement for Dallas at 30 June 2005 is being prepared. The following
information is available:
a) Bank charges of $2,340 have not been entered in the cash book
b) The bank statement shows a balance of $200 Dr
c) Unpresented cheques amount to $1,250

d) A direct debit of $250 has not been recorded in the ledger accounts
e) A bank error has resulted in a cheque for $97 being debited to Dallas' account instead of
Dynasty's account.
f) Cheques received but not yet banked amounted to $890.
The final balance in the cash book after all necessary adjustments should be
$____________(Dr/Cr).
7. The cash book of Worcester Ltd shows a credit balance of $1,350. Cheques of $56 have been written
to suppliers but not yet cleared the bank; uncleared lodgements amount to $128. The bank has
accidentally credited Worcester's account with interest of $15 due to another customer. A standing
order of $300 has not been accounted for in the general ledger.
The balance on the bank statement is $____________(Dr/Cr).

8. Jo's bank ledger account shows a balance of $190 credit. Her bank statement reports a balance of
$250 credit.
Which of the following will explain the difference in full?

A. Unpresented cheques of $100 and an uncleared lodgement of $30.
B. Unpresented cheques of $150, the misposting of a cash receipt of $130 to the wrong side of
the cash account and unrecorded bank interest received of $30.
C. An unrecorded direct debit of $30, a dishonoured cheque of $70 and an uncleared lodgement
of $40.
D. An unrecorded standing order of $60, an unpresented cheque of $110 and a bank error
whereby Jo's account was accidentally credited with $110.
47
9. Which of the following statements about bank reconciliations are correct?
1) In preparing a bank reconciliation, unpresented cheques must be deducted from a balance of

cash at bank shown in the bank statement.
2) A cheque from a customer paid into the bank but dishonoured must be corrected by making a
debit entry in the cashbook.
3) An error by the bank must be corrected by an entry in the cash book.

4) An overdraft is a debit balance in the bank statement.
A. 1 and 3
B. 2 and 3
C. 1 and 4
D. 2 and 4
LO E4a, E4b
10. The following information relates to a bank reconciliation.

1) The bank balance in the cash book before taking the items below into account was $8,970
overdrawn.
2) Bank charges of $550 on the bank statement have not been entered in the cash book.
3) The bank has credited the account in error with $425 which belongs to another customer.
4) Cheque payments totalling $3,275 have been entered in the cashbook but have not been
presented for payment.
5) Cheques totalling $5,380 have been correctly entered on the debit side of the cashbook but
have not been paid in at the bank.
The balance as shown by the bank statement before taking the items above into Account was
$_______________ overdrawn.
11. Sherin's bank statement at 31 October 2008 shows a balance of $13,400. She subsequently
discovers that the bank has dishonoured a customer's cheque for $300 and has charged bank
charges of $50, neither of which is recorded in the cash book.
There are unpresented cheques totalling $1,400and an automatic receipt from a customer of $195
has been recorded as a credit in Sherin's cash book.
Sherin's cash book balance, prior to correcting the errors and omissions, was $____________.
LO D2a, E4c, E4d, E4e, E4f
48
Chapter 9: Correction of Errors and Suspense Account
1. A company maintains a receivables control account in the general ledger, and includes the balance
on this account in its trial balance. It also maintains a memorandum individual receivables ledger.
The following errors relating to receivables have been discovered.
a) A credit note for $90 had been entered as if it were an invoice.

b) Sales of $400 had been entered on the wrong side of a customer's account in the individual
receivables ledger.
c) A prompt payment discount of $70 which was previously not expected to be taken up, had
been completely omitted from the records.
d) An invoice of $123 had been entered in the sales day book as $321.
e) No entry had been made to record an agreement to contra an amount owed to P of $600
against an amount owed by P of $700.
f) Irrecoverable debts of $160 had been omitted from the individual receivables accounts,
though otherwise correctly treated.
g) A payment of $200 received from B Brown was correctly recorded in the cash book but not
recorded in P Brown's account in the receivables ledger.
Required
Prepare journal entries to correct each of the errors described in (a) to (g) above. Accounts should
be fully named, but narrative descriptions are not required.
LO E2c, E5a, E5c, E5d
2. Jit Shen calculated his net profit for the year as $75,886, but is not sure how to treat the $90 (debit)
balance on the suspense account. Control accounts are not maintained.
On reviewing Jit Shen's records you note that:
a) A cash sale for $900 was recorded in the cash book, but no other entry was made
b) The purchase daybook was undercast by $900
c) A cheque paid to a supplier was correctly entered in the cash book as $540, but $450 was
posted to the supplier's account
d) A cheque received from a customer for $11,700 was accepted in full settlement of a balance
of $11,790. No entries were made for the discount.
e) Travel expenses include a payment of $405 for Jit Shen's holiday
49
Required
(i) Indicate whether or not Jit Shen's calculation of net profit was affected by each of the errors,
and calculate his corrected net profit for the year.
(ii) Show Jit Shen's suspense account including the correction of the errors.
LO E2d, E5d
3. The draft financial statements of Ong Co, a limited liability company, for the year ended 31
December 2004 showed a profit of $86,400. The trial balance did not balance, and a suspense
account with a credit balance of $3,310 was included in the statement of financial position.
In subsequent checking the following errors were found:
a) Depreciation of motor vehicles at 25 per cent was calculated for the year ended 31 December
2004 on the reducing balance basis, and should have been calculated on the straight-line basis
at 25 per cent. Relevant figures:
Cost of motor vehicles $120,000, net book value at 1 January 2004, $88,000
b) Rent received from subletting part of the office accommodation $1,200 had been put into the
petty cash box. No receivable balance had been recognised when the rent fell due and no
entries had been made in the petty cash book or elsewhere for it. The petty cash float in the
trial balance is the amount according to the records, which is $1,200 less than the actual
balance in the box.
c) Irrecoverable debts totalling $8,780 are to be written off.
d) The opening accrual on the motor repairs account of $3,020, representing repair bills due but
not paid at 31 December 2003, had not been brought down at 1 January 2004.
e) The following for December 2004 had not been posted to the account in the nominal ledger.
The figures were:
$
Discount received 290
After the necessary entries, the suspense account balanced.
Required
Prepare journal entries, with narratives, to correct the errors found, and prepare a statement
showing the necessary adjustments to the profit.
50
4. When Q's trial balance failed to agree, a suspense account was opened for the difference. The trial
balance totals were:
$
Debit 864,390
Credit 860,930
The company does not have control accounts for its receivables and payables ledgers. The following
errors were found:
1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary
share capital account as $330,000
2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited
to the plant asset account.
3) The petty cash book balance $500 had been omitted from the trial balance.
4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles
account as $87,400.
5) A contra between the receivables ledger and the payables ledger for $1,200 which should have
been credited in the receivables ledger and debited in the payables ledger was actually debited
in the receivables ledger and credited in the payables ledger.
Which of these errors will require an entry to the suspense account to correct them?
A. All five items
B. 3 and 5 only
C. 2, 4 and 5 only
D. 1, 2, 3 and 4 only
What will the balance on the suspense account be after making the necessary entries to correct
the errors affecting the suspense account?
A. $2,440 Debit
B. $15,560 Credit
C. $13,640 Debit
D. $3,440 Debit
51
5. A trial balance shows a total of debits of $347,800 and a total of credits of $362,350.
a) A credit sale of $3,670 was incorrectly entered in the sales day book as $3,760
b) A non-current asset with a carrying value of $7,890 was disposed of for $9,000. The only
accounting entry was to debit cash.
c) The allowance for receivables was increased from $8,900 to $10,200. The allowance account
was debited in error.
After adjusting for the above errors, the balance on the suspense account is $__________ (Dr/Cr).
6. The trial balance of Choi did not balance, and a suspense account was opened for the difference.
Which of the following errors would require an entry to the suspense account in correcting them?
1) A cash payment to purchase a motor van had been correctly entered in the cash book but had
been debited to the motor expenses account.
2) The debit side of the wages account had been undercast.
3) A cash refund to a customer had been recorded by debiting the cash book and crediting the
customer's account.
A. 1 and 2
B. 2 only
C. 3 only
D. 2 and 3
7. The draft accounts of Yu Chin's business for the year ended 31 July 2000 show a profit of $54,250
prior to the correction of the following errors:
a) Cash drawings of $250 have not been accounted for.
b) Debts amounting to $420, which were provided against in full during the year, should have
been written off as irrecoverable.
c) Rental income of $300 has been classified as interest receivable.

d) On the last day of the accounting period, $200 in cash was received from a customer, but no
bookkeeping entries have yet been made.
52
The correct profit of the business for the year is $_____________.
8. The trial balance of Meng, a limited liability company does not agree and a suspense account has
been opened.
Inventory bought at a tax inclusive cost of $4,700 has been credited to the purchase ledger control
account. The sales tax, at 17.5%, has been recorded in the sales tax account and the total $4,700
has been recorded in the purchases account.
What entry is required to correct the error?
A. Dr purchase ledger control account $700 Cr suspense account $700
B. Dr purchase ledger control account $822.50 Cr suspense account $822.50

C. Dr suspense account $700 Cr purchases $700
D. Dr suspense account $822.50 Cr purchases $822.50
9. The book-keeper of Sanju was instructed to make a contra entry for $270 between the supplier
account and the customer account for Jo. He recorded the transaction by debiting the customer
account and crediting the supplier account with $270. The business accounts do not include
control accounts.
Which of the following statements is correct?

A. Unless the error is corrected, profit will be over-stated by $540.
B. Unless the error is corrected, net assets will be over-stated by $270.

C. Unless the error is corrected, net assets will be over-stated by $540.
D. The errors should be corrected, but neither the profit nor the net assets are over-stated.
LO E2c, E5a, E5c, E5d, E2d
10. Wilson's trial balance at 31 October 2009 is out of agreement, with the debit side totalling $500
less than the credit side. During November, the following errors are discovered:
• The credit side of the sales account for October had been undercast by $150.
• Rent received of $240 had been credited to the rent expense account.
• The allowance for receivables, which decreased by $420, had been recorded in the allowance
for receivables account as an increase.
53
Following the correction of these errors, the balance on the suspense account would be
$__________ (Dr / Cr).
11. The trial balance of C did not agree, and a suspense account was opened for the difference.
Checking in the bookkeeping system revealed a number of errors:

Error
1) $4,600 paid for motor van repairs was correctly treated in the cash book but was credited to
motor vehicles asset account.
2) $360 received from Brown, a customer, was credited in error to the account of Green.
3) $9,500 paid for rent was debited to the rent account as $5,900.
4) No entries had been made to record a cash sale of $100.
Which of the errors above would require an entry to the suspense account as part of the process
of correcting them?
A. Errors 3 only
B. Errors I and 3 only

C. Errors 2 and 4 only
D. Errors 2 and 3 only
54
Chapter 10: Inventory
1. An item of inventory was purchased for $500. It is expected to be sold for $1,200 although $250
will need to be spent on it in order to achieve the sale.
How should the inventory be valued in the accounts?

A. $500
B. $750
C. $950
D. $650
LO D3a, D3b, D3e, D3d, D3f
2. A fire on 30 September 2010 destroyed some of a company's inventory and its inventory records.
The following information is available:
$
Inventory 1 September 2010 318,000

Sales for September 2010 612,000
Purchases for September 2010 412,000
Inventory in good condition at 30 September 2010 214,000

Standard gross profit percentage on sales is 20%
Based on this information, the value of the inventory lost is $______________.
3. Which of the following costs may be included when arriving at the cost of finished goods
inventory for inclusion in the financial statements of a manufacturing company?
1) Carriage inwards
2) Carriage outwards
3) Depreciation of factory plant
4) Finished goods storage costs
5) Factory supervisors' wages
55
A. 1 and 5 only
B. 2, 4 and 5 only
C. 1, 3 and 5 only
D. 1, 2, 3 and 4 only
LO D3a, D3b, D3e
4. Angie buys and sells inventory during the month of August as follows:
Aug 1 Opening inventory 100 units $2.52 / unit
4 Sales 20 units
8 Purchases 140 units $2.56 / unit

10 Sales 90 units
18 Purchases 200 units $2.78/unit
20 Sales 180 units
Which of the following statements is true?

A. Closing inventory is $19.50 higher when using the FIFO method instead of the periodic
weighted average
B. Closing inventory is $19.50 lower when using the FIFO method instead of the periodic
weighted average
C. Closing inventory is $17.50 higher when using the FIFO method instead of the periodic
weighted average
D. Closing inventory is $17.50 lower when using the FIFO method instead of the periodic
weighted average
LO D3a, D3b, D3e, D3d, D3f, D3g
5. Which of the following statements is true assuming that prices of inventory have fallen
throughout the year?
A. Closing inventory and profit are higher using FIFO rather than AVCO.
B. Closing inventory and profit are lower using FIFO rather than AVCO.
C. Closing inventory is higher and profit lower using FIFO rather than AVCO.
D. Closing inventory is lower and profit higher using FIFO rather than AVCO.
56
6. The closing inventory at cost of a company at 31 January 2003 amounted to $384,500.
The following items were included at cost in the total:
1) 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in
manufacture, they were all sold after the reporting date at 50% of their normal price. Selling
expenses amounted to 5% of the proceeds.
2) 800 skirts, which had cost $20 each. These too were found to be defective. Remedial work in
February 2003 cost $5 per skirt, and selling expenses for the batch totalled $800. They were
sold for $28 each.
The inventory value according to IAS 2 Inventories after considering the above items should be
$_________.
7. David performs an inventory count on 30 December 2006 ahead of the 31 December year end. He
counts 1,500 identical units, each of which cost $50. On 31 December, David sold 50 of the units for
$48 each.
The figure that should be included in David's Statement of financial position for inventory at the
year end is $__________.
8. In times of rising prices, the valuation of inventory using the First In First Out method, as opposed
to the Weighted Average Cost method, will result in which ONE of the following combinations?
Cost of sales Profit Closing inventory
A. Lower Higher Higher
B. Lower Higher Lower
C. Higher Lower Higher
D. Higher Higher Lower

9. Which of the following statements about the treatment of inventory and work in progress in
financial statements are correct?
1) Inventory should be valued at the lower of cost, net realisable value and replacement cost.
2) In valuing work in progress, materials costs, labour costs and variable and fixed production
overheads must be included.
3) Inventory items can be valued using either first in, first out (FIFO) or weighted average cost.
4) A company's financial statements: must disclose the accounting policies used in measuring
inventories.
57
A. All four statements are correct.
B. 1,2 and 3 only
C. 2,3 and 4 only
D. 1 and 4 only
10. Kiran's business received a delivery of goods on 29 June 2006, which was included in inventory at
30 June 2006. The invoice for the goods was recorded in July 2006.
Please state whether the following is true (T) or false (F) :

1) Profit for the year ended 30 June 2006 will be overstated. (T , F)
2) Inventory at 30 June 2006 will be understated. (T , F)
3) Profit for the year ended 30 June 2007 will be overstated. (T , F)

4) Inventory at 30 June 2006 will be overstated. (T , F)
11. At 1 May 2002 the company had 800 engines in inventory, valued at $190 each.
During the year ended 30 April 2003 the following transactions took place:
2002
1 July Purchased 500 engines at $220 each

1 November Sold 500 engines for $160,000
2003
1 February Purchased 300 engines at $230 each
The value of the company's closing inventory of engines using AVCO method at 30 April 2003 is
$__________.
58
12. What journals entry is required to record goods taken from inventory by the owner of a business?
A. Dr drawings Cr purchases
B. Dr sales Cr drawings
C. Dr drawings Cr inventory
D. Dr purchases Cr drawings
LO D3a, D3b, D3e, D3d
13. A business had an opening inventory of $210,000 and a closing inventory of $250,000 in its financial
statements for the year ended 31 December 2005.
Which of the following entries for these opening and closing inventory figures are made when
completing the financial records of the business?
A. Dr Inventory account 210,000

Cr SOPL 210,000
Dr SOPL 250,000
Cr Inventory account 250,000
B. Dr SOPL 210,000
Dr Inventory account 250,000

Cr SOPL 250,000
C. Dr Inventory account 40,000
Cr Purchases account 40,000
D. Dr Purchases account 40,000

59
14. What would be the effect on a company's profit of discovering inventory with cost of $1,250 and
a net realisable value of $800, assuming that the same inventory had not been included in the
original inventory count?
A. An increase of $1,250
B. An increase of $800
C. A decrease of $450
D. No effect at all
15. Ah Beng's annual inventory count took place on 7 July 2006. The inventory value on this date was
$28,950. During the period from 30 June 2006 to 7 July 2006, the following took place:
Sales $6,500
Purchases $3,250
The mark up is 25% on cost.
Ah Beng's inventory value at 30 June 2006 was $______________.

16. Please state whether the following statements are true (T) or false (F), according to IAS 2
Inventories?
1) Inventory items are normally to be valued at the higher of cost and net realisable value. (T, F)
2) The cost of goods manufactured by an entity will include materials and labour only. Overhead
costs cannot be included. (T, F)
3) LIFO (last in, first out) cannot be used to value inventory. (T, F)
4) Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable
approximation to actual cost. (T, F)
17. A company with an accounting date of 31 October carried out a physical check of inventory on 4
November 2003, leading to an inventory value at cost at this date of $383,500.
Between 1 November 2003 and 4 November 2003 the following transactions took place:
1) Goods costing $28,400 were received from suppliers.
2) Goods that had cost $14,580 were sold for $22,000.
3) A customer returned, in good condition, some goods which had been sold to him in October for
$800 and which had cost $500.
60
4) The company returned goods that had cost $1,480 in October to the supplier, and received a
credit note for them.
The figure that should appear in the company's financial statements at 31 October 2003 for
closing inventory, based on this information was $__________________.
18. In preparing its financial statements for the current year, a company's closing inventory was
understated by $300,000.
What will be the effect of this error if it remains uncorrected?

A. The current year's profit will be overstated and next year's profit will be understated
B. The current year's profit will be understated but there will be no effect on next year's profit
C. The current year's profit will be understated and next year's profit will be overstated
D. The current year's profit will be overstated but there will be no effect on next year's profit
19. Leon has closing inventory which cost $34,750. This includes some damaged items which cost
$2,660. It will cost Leon $450 to repair these. He will be able to sell them for $3,500 after the repairs
are completed.
The correct value of Leon's closing inventory is $__________.

20. Debra has the following items in its inventory as at her year end:
Cost Net realizable value
Item A 1,800 1,300
Item B 500 800
2,300 2,100
Debra’s closing inventory should be valued at $______________ in the Statement of Financial

Position.
61
21. The table shows information from a business at 30 November 2008.
Credit sales invoiced during financial year 80,000
Goods despatched to customers in November 2008 and invoiced in December 2008 5,000
Goods included in sales for November 2008 on a sale or return basis, but only sold
in December 2008:
– at invoice price 10,000
– at cost price 8,000
Which amount will appear in the trading account as sales for the year ended 30 November 2008?
A. $75 000
B. $77 000
C. $83 000
D. $85 000
62
Chapter 11: Tangible Non-Current Assets and Depreciation
1. What is the purpose of charging depreciation in accounts?

A. To allocate the cost less residual value of a non-current asset over the accounting periods
expected to benefit from its use
B. To ensure that funds are available for the eventual replacement of the asset
C. To reduce the cost of the asset in the statement of financial position to its estimated market
value
D. None of the above
LO D5a
2. Your firm bought a machine for $5,000 on 1 January 2001, which had an expected useful life of
four years and an expected residual value of $1,000; the asset was to be depreciated on the
straight-line basis. The firm's policy is to charge depreciation in the year of disposal. On 31
December 2003, the machine was sold for $1,600.
What amount should be entered in the 2003 Statement of profit or loss for profit or loss on
disposal?
A. Profit of $600
B. Loss of $600
C. Profit of $350
D. Loss of $400
LO D4e, D4f
3. An asset register showed a net book value of $57,460. A non-current asset costing $16,000 had
been sold for $5,000, making a loss on disposal of $2,250. No entries had been made in the asset
register for this disposal.
The correct balance on the asset register was $____________.

LO D4e, D4f
4. The asset register shows a carrying value for non-current assets of $85,600; the ledger accounts
include a cost balance of $185,000 and an accumulated depreciation balance of $55,000.
Which of the following may explain the discrepancy?

A. The omission of an addition of land costing $30,000 from the ledger account and the omission
of the disposal of an asset from the register (cost $25,600 and accumulated depreciation at
disposal $11,200)
B. The omission of the revaluation of an asset upwards by $16,600 and the depreciation charge
of $20,000 from the ledger account and the omission of the disposal of an asset with carrying
value $41,000 from the register.
C. The omission of the disposal of an asset from the ledger accounts (cost $25,600 and
accumulated depreciation at disposal $11,200) and the omission of an addition of land costing
$30,000 from the register.
63
D. The omission of an upwards revaluation by $16,400 from the register and the accidental
debiting of the depreciation charge of $28,000 to the accumulated depreciation ledger
account.
LO D5b, D5d, D5g
5. Jason bought an asset on the 1st January 2004 for $235,000. He has depreciated it at 30% using
the reducing balance method. On 1st January 2007, Jason revalued the asset to $300,000.
What double entry should Jason post to record the double entry?
A. Dr Non-current assets cost $65,000

Dr Accumulated depreciation $154,395
Cr Revaluation surplus $219,395
B. Dr Non-current assets cost $65,000
Dr Accumulated depreciation $211,500

Cr Revaluation surplus $276,500
C. Dr Revaluation surplus $219,395

Cr Accumulated depreciation $154,395
Cr non-current assets cost $65,000
D. Dr Revaluation surplus $276,500

Cr Accumulated depreciation $211,500
Cr Non-current assets cost $65,000

LO D4g, D4h, D5e
6. A non-current asset register is:
A. an alternative name for the non-current asset ledger account
B. a list of the physical non-current assets rather than their financial cost
C. a schedule of planned maintenance of non-current assets for use by the plant engineer
D. a schedule of the cost and other information about each individual non-current asset
LO D4a, D4b
64
7. The plant and equipment account in the records of a company for the year ended 31 December
2010 is shown below:
Plant and machinery – cost
2010 $ 2010 $
1 Jan Balance b/d 960,000 30 Sept Disposal 84,000
1 July Cash 48,000 31 Dec Balance c/d 924,000
1,008,000 1,008,000
The company's policy is to charge straight line depreciation at 20% per year on a pro rata basis.
The charge for depreciation in the company's SOPL for the year ended 31 December 2010
should be $__________________.
LO D5b, D5d, D5g
8. On 1 January 2007, a company purchased some plant. The invoice showed:

$
Cost of plant 48,000
Delivery to factory 400
One-year warranty covering breakdown during 2007 800
49,200
Modifications to the factory building costing $2,200 were necessary to enable the plant to be
installed.
The amount that should be capitalised for the plant in the company's records was $_________.
LO D4a, D4b
9. The following information is available for the year ended 31 October 2012:
Property: $
Cost as at 1 November 2011 102,000
Accumulated depreciation as at 1 November 2011 (20,400)
On 1 November 2011, the company revalued the property to $150,000. The company’s policy is to
charge depreciation on a straight-line basis over 50 years. On revaluation there was no change to
the overall useful economic life. It has also chosen not to make an annual transfer of the excess
depreciation on revaluation between the revaluation surplus and retained earnings.
65
What should be the depreciation charge as shown in the financial statements for the year ended
31 October 2012?
Answer: ___________
LO D5b, D5d, D5g
10. An organisation's asset register shows a net book value of $145,600. The non-current asset account
in the nominal ledger shows a net book value of $135,600. The difference could be due to a
disposed asset not having been deducted from the asset register.
Which one of the following could represent that asset?

A. Asset with disposal proceeds of $15,000 and a profit on disposal of $5,000
B. Asset with disposal proceeds of $15,000 and a net book value of $5,000
C. Asset with disposal proceeds of $15,000 and a loss on disposal of $5,000
D. Asset with disposal proceeds of $5,000 and a net book value of $5,000
LO D4e, D4f, D4j
11. Which one of the following would occur if the purchase of stationery was debited to the
equipment at cost account?
A. An overstatement of profit and an overstatement of non-current assets
B. An understatement of profit and an overstatement of non-current assets
C. An overstatement of profit and an understatement of non-current assets
LO D4j
12. A company's plant and machinery ledger account for the year ended 30 September 2011 was as
follows:
2010 $ 2011 $
1 Oct Balance b/d 381,200 1 Jun Disposal 36,000
1 Dec Cash 18,000 30 Sept Balance c/d 363,200
399,200 399,200
The company's policy is to charge depreciation at 20% per year on the straight line basis, with
proportionate depreciation in years of purchase and sale.
The depreciation charge for the year ended 30 September 2011 is $_________________.
LO D5b, D5d, D5g
66
13. A company bought a property four years ago on 1 January for $ 170,000. Since then property prices
have risen substantially and the property has been revalued at $210,000. The property was
estimated as having a useful life of 20 years when it was purchased.
The amount transferred to the revaluation surplus was $__________.

LO D4g, D4h, D5e
14. A non-current asset was disposed of for $2,200 during the accounting year. It had been purchased
exactly three years earlier for $6,000, with an expected residual value of $500, and had been
depreciated on the reducing balance basis, at 20% per annum.
The gain or (loss) on disposal was $_____________.

LO D4e, D4f
15. At the end of its financial year, James has the following non-current assets:
$
Plants at cost 100,400
Plants: accumulated depreciation 12,000
The company has decided to revalue its Plants at the year end to $150,000.
The amount of the adjustment on revaluation will be $____________.

LO D4g, D4h, D5e
16. Which one of the following should be accounted for as capital expenditure?
A. The cost of repainting a building
B. The replacement of windows in a building
C. The purchase of a car by a garage for re-sale
D. Solicitor fees incurred on the purchase of a building
LO D4c, D4d
17. At 30 September 2009, the following balances existed in the records of Liz:
Plant and equipment:
Cost $860,000
Accumulated depreciation $397,000
During the year ended 30 September 2010, plant with a written down value of $37,000 was sold
for $49,000. The plant had originally cost $80,000. Plant purchased during the year cost $180,000.
It is the company's policy to charge a full year's depreciation in the year of acquisition of an asset
and none in the year of sale, using a rate of 10% on the straight-line basis.
67
The net amount that should appear in Liz's statement of financial position at 30 September 2010
for plant and equipment was $______________.
LO D5b, D5d, D5g, D4e, D4f
18. Depreciation is best described as:

A. a means of spreading the payment for non-current assets over a period of years
B. a decline in the market value of the assets
C. a means of spreading the net cost of non-current assets over their estimated useful life
D. a means of estimating the amount of money needed to replace the assets
LO D5a
19. On 1 January 2008 Wootton has a building in its books at cost $380,000, net book value $260,000.
On 1 July 2008 the asset is revalued at $450,000 and Wootton wishes to include that valuation in
its books. Wootton's accounting policy is to depreciate buildings at 3% straight line.
The depreciation charge to the SOPL for the year ended 31 Dec 2008 is $_________________.
LO D4g, D4h, D5e
20. A business purchased a motor car on 1 July 2003 for $20,000. It is to be depreciated at 20% per
year on the straight-line basis, assuming a residual value at the end of five years of $4,000, with a
proportionate depreciation charge in the year of purchase.
The $20,000 cost was correctly entered in the cash book but posted to the debit of the motor
vehicles repairs account.
How will the business profit for the year ended 31 December 2003 be affected by the error?
A. Understated by $18,400
B. Understated by $16,800
C. Overstated by $18,400
LO D5b, D5g
21. A company's policy as regards depreciation of its plant and machinery is to charge depreciation at
20% per year on cost, with proportional depreciation for items purchased or sold during a year.
The company's plant and machinery at cost account for the year ended 30 September 2011 is
shown below:
68
2010 $ 2011 $
1 Oct Balance b/d 200,000 30 Jun Disposal 40,000
2011 30 Sept Balance c/d 210,000
1 Apr Cash 50,000
250,000 250,000
The depreciation charge for plant and machinery for the year ended 30 September 2011 is
$____________.
LO D5b, D5d, D5g
22. A car was purchased by a newsagent business in May 2007 for:
$
Cost 10,000
Road tax 150
Total 10,150
The business adopts a date of 31 December as its year end.

The car was traded in for a replacement vehicle in August 2010 at an agreed value of $6,000. It has
been depreciated at 20% per annum on the reducing-balance method, charging a full year's
depreciation in the year of purchase and none in the year of sale.
The profit on disposal of the vehicle during the year ended December 2010 was $_________.
LO D4e, D4f
23. The reducing balance method of depreciating non-current assets is more appropriate than the
straight-line method when:
A. there is no expected residual value for the asset
B. the expected life of the asset is not capable of being estimated
C. the asset is expected to be replaced in a short period of time
D. the asset decreases in value less in later years than in the early years of use.
LO D5c
24. Jeans bought a machine for $40,000 in 1 July 2001. The machine had an expected useful life of six
years and an expected residual value of $10,000. The machine was depreciated on the straight-
line basis. At the end of September 2004, the machine was sold for $15,000. Jeans charges pro rata
depreciation.
The gain / (loss) on disposal of the machine for the year ended 31 Dec 2004 was $__________.
LO D4e, D4f
69
25. The net book value of a company's non-current assets was $180,000 at 1 August 2000.
During the year ended 31 July 2001, the company sold non-current assets for $25,000 on which it
made a loss of $5,000. The depreciation charge of the year was $20,000.
The net book value of non-current assets at 31 July 2001 was $_____________.
LO D4e, D4f
26. Ben acquired a lorry on 1 May 2000 at a cost of $30,000. The lorry has an estimated useful life of
four years, and an estimated resale value at the end of that time of $6,000. Ben charges
depreciation on 20% reducing balance basis, with a proportionate charge in the period of
acquisition.
The depreciation charge for the lorry in Ben's accounting period to 30 September 2003 will be
$___________.
LO D5b, D5d, D5g
27. At 31 December 2003 Q, a limited liability company, owned a building that had cost $800,000 on
1 January 1994. It was being depreciated at 2% per year.
On 31 December 2003 a revaluation to $1,000,000 was recognised. At this date the building had a
remaining useful life of 40 years.
Which of the following pairs of figures correctly reflects the effects of the revaluation?
Depreciation for the year ended Revaluation surplus as at
31 Dec 2004 ($) 31 Dec 2003 ($)

A. 25,000 200,000
B. 25,000 360,000
C. 20,000 200,000
D. 20,000 360,000
LO D4g, D4h, D5e
28. A business Statement of profit or loss for the year ended 31 December 2004 showed a net profit
of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited
to motor expenses account. It is the company's policy to depreciate motor vans at 20% per year,
with a full year's charge in the year of acquisition.
The net profit be after adjusting for this error would be $________.
LO D5d, D5f, D5g
70
29. The plant and machinery cost account of a company is shown below. The company's policy is to
charge depreciation at 20% on the straight-line basis, with proportionate depreciation in years of
acquisition and disposal.
2005 $ 2005 $
1 Jan Balance b/d 280,000 30 Jun Disposal 14,000
1 Apr Cash 48,000 31 Dec Balance c/d 350,000

1 Sep Cash 36,000
364,000 364,000
The depreciation charge for the year ended 31 December 2005 should be $________________.
LO D5b, D5d, D5g
30. The plant and machinery cost account of a company is shown below. The company's policy is to
charge depreciation at 20% on the reducing balance basis, with proportionate depreciation in
years of acquisition and disposal.
2005 $ 2005 $
1 Jan Balance b/d 280,000 30 Jun Disposal 14,000

1 Apr Cash 48,000 31 Dec Balance c/d 350,000
1 Sep Cash 36,000
364,000 364,000
As at 1 Jan 2005:
(i) Total accumulated depreciation - $100,000
(ii) Accumulated depreciation of P&M disposed of - $6,000
The depreciation charge for the year ended 31 December 2005 should be $________________.
LO D5b, D5d, D5g
71
31. Which of the following statements are correct?
I. All non-current assets must be depreciated.
II. If property is revalued, the revaluation surplus appears in SOPL.
III. If a tangible non-current asset is revalued, all tangible assets of the same class should be
revalued.
IV. In a company's published statement of financial position, tangible assets and intangible assets
must be shown separately.
A. I and II
B. II and III
C. III and IV
D. I and IV
LO D4b, D4g
32. A company bought a property on 1 January 2008 for $ 170,000. Since then property prices have
risen substantially and the property has been revalued at $210,000 at 1 January 2012.
The property was estimated as having a useful life of 20 years when it was purchased. On
revaluation there was no change to the overall useful economic life. The company has also chosen
to make an annual transfer of the excess depreciation on revaluation between the revaluation
surplus and retained earnings.
What is the balance on the revaluation surplus reported in the statement of financial position as
at 31 December 2012?
Answer: $__________
LO D4g, D4h, D5e
33. On 1 January 2009 Jake Co, a manufacturer, acquired two identical grinding machines at a cost of
$10,000 each, and a duplicating machine at a cost of $3,000. The grinding machines are
depreciated at the rate of 20% per annum on a reducing balance basis, and the duplicating
machine, which has an estimated life of 10 years and a residual value of $500, is depreciated on a
straight-line basis. On 1 January 2010 one of the grinding machines was sold for $5,000 and
replaced by a new one costing $12,000.
Required:
Prepare the relevant ledger accounts dealing with the non-current assets, depreciation and the
disposal for the years to 31 December 2009 and 31 December 2010, respectively.
LO D4b, D5b, D5d, D5g, D4e, D4f
72
Chapter 12: Intangible Non-Current Assets and Amortization
1. An intangible asset is:
A. an asset with no physical substance

B. an asset generated internally by a business
C. a purchased asset which has no physical substance
D. an asset which cannot be used to generate profits in the business
LO D6a, D6b
2. How should the purchase of a right to manufacture a patented product for the next ten years be
accounted for?
A. tangible non-current asset
B. intangible non-current asset

C. current asset
D. expense
LO D6a, D6b
3. Please state whether the following statements about research and development are true (T) or
false (F)?
(a) Development expenditure shown on the statement of financial position should be amortised
over the periods expected to benefit from the product or service (T, F)
(b) Development expenditure must be capitalised if it meets various criteria (T, F)

(c) Research expenditure is always written off (T, F)
(d) Development expenditure recognised as an asset must be amortised over a period not
exceeding 5 years (T, F)
(e) Research expenditure, other than capital expenditure on research facilities, should be
recognised as an expense as incurred (T, F)
(f) In deciding whether development expenditure qualifies to be recognised as an asset, it is

necessary to consider whether there will be adequate finance available to complete the
project (T, F)
(g) If certain conditions are met, an entity may decide to capitalise development expenditure
(T, F)
(h) Capitalised development expenditure must be disclosed in the statement of financial position
under intangible non-current assets (T, F)
(i) If all the conditions specified in IAS 38 are met, development expenditure may be capitalised
if the directors decide to do so (T, F)
73
(j) Amortisation of capitalised development expenditure will appear as an item in a company's
statement of changes in equity (T, F)
(k) Goodwill is included in tangible non-current assets on the statement of financial position
(T, F)
(l) Internally generated goodwill should not be capitalized (T, F)

(m) Goodwill is always shown on the face of a company's Statement of profit or loss (T, F)
(n) If certain criteria are met, research expenditure may be recognised as an asset (T, F)
(o) Development expenditure must be capitalised if certain conditions are met (T, F)
(p) Purchased goodwill should normally be amortised through the Statement of profit or loss
(T, F)
(q) All Intangible assets must be amortised (T, F)
LO D6c, D6d, D6e
4. Mandy is engaged in a number of research and development projects:

Project A A project to investigate the properties of a chemical compound
Project B A project to develop a new process which will save time in the production of widgets.
This project was started on 1 January 2010 and met the capitalisation criteria on 31
August 2010.
Project C A development project which was completed on 30 June 2010. Related costs on the
statement of financial position at the start of the year were $290,000 Production and
sales of the new product commenced on 1 September and are expected to last 36
months.
Costs for the year ended 31 December 2010 are as follows:
Project A 34,000
Project B costs to 31 August 78,870
Project B costs from 31 August 27,800
Project C costs to 30 June 19,800
74
What amount is expensed to the SOPL in respect of these projects in the year ended 31
December 2010?
A. $147,292
B. $68,422
C. $66,222
D. $145,092
LO D6c, D6d
5. Which ONE of the following CANNOT be recognised as an intangible non-current asset in GHK’s
statement of financial position at 30 September 2011?
A. GHK spent $12,000 researching a new type of product. The research is expected to lead to a
new product line in 3 years’ time.
B. GHK purchased another entity, BN on 1 October 2010. Goodwill arising on the acquisition was
$15,000.
C. GHK purchased a brand name from a competitor on 1 November 2010, for $65,000.
D. GHK spent $21,000 during the year on the development of a new product. The product is being
launched on the market on 1 December 2011 and is expected to be profitable.
LO D6a, D6b
75
Chapter 13: Accruals and Prepayments
1. At 1 October 2005, the following balances were brought forward in the ledger accounts of XY:
Debit Credit
$ $
Rent payable account 1,000
Electricity account 800
Interest receivable account 300
Allowance for receivables account 4,800
You are told the following:
(a) Rent is payable quarterly in advance on the last day of November, February, May and August, at
the rate of $6,000 per annum.
(b) Electricity is paid as follows:

5 November 2005 $1,000 (for the period to 31 October 2005)
10 February 2006 $1,300 (for the period to 31 January 2006)
8 May 2006 $1,500 (for the period to 30 April 2006)
7 August 2006 $1,100 (for the period to 31 July 2006)
At 30 September 2006, the electricity meter shows that $900 has been consumed since the
last bill was received.
(c) Interest was received during the year as follows:
2 October 2005 $250 (for the six months to 30 September 2005)
3 April 2006 $600 (for the six months to 31 March 2006)
You estimate that interest of $300 is accrued at 30 September 2006.
(d) At 30 September 2006, the balance of receivables amounts to $125,000. The allowance for
receivables is to be amended to 5% of receivables.
76
Required: Write up the following ledger accounts and bring down the balances at 30 September
2006.
(a) Rent payable
(b) Electricity
(c) Interest receivable
(d) Allowance for receivables
LO D7a, D7b, D7c, D7d
77
2. Included in the statement of financial position of Jo Co. at 30 June 2000 were the following:
Prepayment account (insurance) 450

Accrual account (electricity) 80
The following invoices were received and paid during the year to 30 June 2001
Date paid $
5.9.00 Electricity (quarter to 31 August 2000) 309
8.12.00 Electricity (quarter to 30 November 2000) 320
2.1.01 Insurance (year to 31 December 2001) 1,000
7.3.01 Electricity (quarter to 28 February 2001) 340

6.6.01 Electricity (quarter to 31 May 2001) 321
Required:
Calculate the electricity and insurance expenses for the year ended 30 June 2001.
LO D7a, D7b, D7c, D7d
78
3. The accounting year end of a business is 31 October.
On 1 April the business rents out part of its warehouse for an annual rent of $6000. Payments were
received in equal instalments on 1 April, 1 July, 1 October and 1 January.
At 31 October what would the final accounts show?

SOPL ($) SOFP ($)
A. rental income 3500 current asset 1000
B. rental income 3500 current liability 1000
C. rental income 4500 current liability 1000

D. rental income 6000 current asset 1500
LO D7a, D7b, D7c, D7d, D7e
4. A company receives rent from a large number of properties. The total received in the year ended
31 October 2002 was $481,200.
The following were the amounts of rent in advance and in arrears at 31 October 2001 and 2002:
31 October 2001 ($) 31 October 2002 ($)
Rent received in advance 28,700 31,200
Rent in arrears (all subsequently received) 21,200 18,400
What amount of rental income should appear in the company's Statement of profit or loss for
the year ended 31 October 2002?
A. $486,500
B. $460,900
C. $501,500
D. $475,900
5. A company receives rent for subletting part of its office block.

Rent, receivable quarterly in advance, is received as follows:
Date of receipt Period covered $
1 October 2001 3 months to 31 December 2001 7,500
30 December 2001 3 months to 31 March 2002 7,500

4 April 2002 3 months to 30 June 2002 9,000
79
1 July 2002 3 months to 30 September 2002 9,000
1 October 2002 3 months to 31 December 2002 9,000
What figures, based on these receipts, should appear in the company's financial statements for
the year ended 30 November 2002?
Statement of profit or loss Statement of financial position

A. $34,000 Debit Rent in arrears (Dr) $3,000
B. $34,500 Credit Rent received in advance (Cr) $6,000
C. $34,000 Credit Rent received in advance (Cr) $3,000
D. $34,000 Credit Rent in arrears (Dr) $3,000

6. A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The
rent was increased from $90,000 per year to $120,000 per year as from 1 October 2002.
What rent expense and accrual should be included in the company's financial statements for the
year ended 31 January 2003?
Rent expense Accrual
$ $
A. 100,000 20,000
B. 100,000 10,000
C. 97,500 10,000
D. 97,500 20,000
7. At 31 March 2002 a company had oil in hand to be used for heating costing $8,200 and an unpaid
heating oil bill for $3,600.
At 31 March 2003 the heating oil in hand was $9,300 and there was an outstanding heating oil bill
of $3,200. Payments made for heating oil during the year ended 31 March 2003 totalled $34,600.
The amount that should appear in the company's Statement of profit or loss for heating oil for
the year was $____________________.
80
8. A business compiling its financial statements for the year to 31 July each year pays rent quarterly
in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased
from $60,000 per year to $72,000 per year as from 1 October 2003.
The figure that should appear for rent expense in the business Statement of profit or loss for the
year ended 31 July 2004 is $_______________.
81
ACCA FINANCIAL ACCOUNTING
ACCRUALS & PREPAYMENTS
EXAMPLES
1. Goodrun ends his motor spares business’s reporting period on 28 February each year. His
telephone was installed on 1 April 20X6 and he receives his telephone bill quarterly at the end
of each quarter.
Telephone expense for the three month ended:
30/6/20X6 $23.50
30/9/20X6 $27.20
31.12.20X6 $33.40
31.3.20X7 $36.00
All the bills were paid on the final day of each three month period.
Calculate the telephone expense to be charged to the income statement for the year ended 28
February 20X7.
2. Cindy started in business on 1 January 20X2, preparing financial statements to 31 December

20X2. Electricity bills received were as follows.
20X2 20X3
31 January - $491.52
30 April $279.47 $400.93
31 July $663.80 $700.94
31 October $117.28 $620.00
Calculate the electricity charge for the year ended 31 December 20X2. Prepare a journal entry
to record the accrual or prepayment as at 31 December 20X2 assuming she pays her bill
immediately after receiving the bill respectively.
Past Year Questions
Q1.
Q2.
Q3.
Q4.
Q5.
Q6.
Chapter 14: Irrecoverable Debt and Allowances
1. On 30 September 2009, Z Ltd had a receivable allowance of $37,000. During the year ended 30
September 2010, the company wrote off debts totalling $18,000, and at the end of the year it was
decided that the receivable allowance should be $20,000.
What should be included in the SOPL for irrecoverable debts expense?

A. $35,000 debit
B. $1,000 debit
C. $38,000 debit
D. $1,000 credit
LO D8e, D8f, D8g, D8h, D8l
2. On 1 July 2009, the receivable allowance of Q was $18,000. During the year ended 30 June 2010,
debts totalling $14,600 were written off. It was decided that the receivable allowance should be
$16,000 as at 30 June 2010.
What amount should appear in Q’s SOPL for irrecoverable debt expense for the year ended 30
June 2010?
A. $12,600
B. $16,600
C. $48,600
D. $30,600
3. On 30 September 2009, a company’s allowance for doubtful debts amounted to $38,000, which
was 5% of the receivables at that date. On 30 September 2010, receivables totaled $868,500. It
was decided that $28,500 of debts be written off as bad debts, and the allowance for receivables
kept at 5% of receivables.
How much should the charge in the statement of comprehensive income for the year ended 30
September 2010 be for irrecoverable debts?
A. $42,000
B. $33,925
C. $70,500
D. $32,500
82
4. William’s trial balance at 30 September 2010 includes the following balances:
Trade receivables $75,943
Receivables allowance $4,751
How should these balances be reported in William’s statement of financial position as at 30

September 2010?
A. An asset of $71,192
B. An asset of $75,943 and a liability of $4,751
C. A liability of $71,192
D. A liability of $75,943 and asset of $4,751
5. At 1 November 2009 Dorothy’s receivables allowance was $5,670. At 31 October 2010 she owed
$275,600 by her customers. She has determined that based on past experience, an allowance
equivalent to 2% of outstanding balances is required at 31 October 2010.
What should be reported in Dorothy’s SOPL for the year to 31 October 2010?
A. a credit of $158
B. a credit of $5,512
C. a charge of $158
D. a charge of $5,512
6. Which of the following is the correct journal entry to write off an irrecoverable debt?
A. Debit Sales
Credit Irrecoverable debt expense
B. Debit Irrecoverable debt expense

Credit Bank
C. Debit Receivables
Credit Irrecoverable debt expense

D. Debit Irrecoverable debt expense
Credit Receivables
83
7. At 31 March Sally was owed $47,744 by her customers. At the same date her receivables allowance
was $3,500.
How should these balances be reported on Sally’s statement of financial position at 31 March?
A. $44,244 as a current asset
B. $3,500 as a current asset and $47,744 as a current liability
C. $47,744 as a current asset and $3,500 as a current liability
D. $51,244 as a current asset
8. As at 30/4/2016, the total amount owed to James by his customers was $54,864. At the same date,
James calculated that his receivables allowance is $3,775.
How should these balances be reported in SOFP as at 30/4/2016?
A. $51,089 as a current asset

B. $51,089 as a current liability
C. $54,864 as a current asset and $3,775 as a current liability
D. $54,864 as a current liability, and $3,775 as a current asset
9. The total amount owed to Roy by his customers at 30/11/2017 was $78,600. He has decided that
a balance of $600 should be written off as it is irrecoverable, and that, based on past experience,
an allowance equal to 1.5% of the remaining balance should be made. His receivables allowance
at 1/12/2016 was $1,200.
a) Roy has made the entry in the receivables expense account to write off the irrecoverable
balance. What other entry does he need to make?
A. A debit entry in the sales account
B. A credit entry in the sales account
C. A debit entry in the receivables account
D. A credit entry in the receivable account
b) How should the movement in the receivable allowance be reflected in the SOPL?
A. A credit of $21
B. A charge of $21
C. A credit of $30
D. A charge of $30
84
10. As at 30/11/2016, the balance on Claire’s receivable ledger is $37,890. She has decided to write
off balances totalling $1,570. She has also calculated that an allowance equivalent to 2.5% of the
remaining the balance is required.
What value of receivables should be reported in SOFP?

A. $35,642
B. $35,412
C. $36,400
D. $37,142
11. In the year to 31/12/2016, Tracy wrote off an amount of $275 due from a customer who had
become bankrupt. She also makes a general provision of 3% of the total receivables balance at the
year end. Receivables as at 31/12/2016 were $12,000. The previous year’s provision was for $400.
What amount should be written off to the SOPL?

A. $360
B. $635
C. $315
D. $235
12. A company receives news that a major customer has been declared bankrupt. The amount he
owed had previously been allowed for as doubtful. The journal now required is:
A. Debit Allowance for receivables, Credit Receivables control
B. Debit Irrecoverable debts expense, Credit Receivables control
C. Debit Irrecoverable debts expense, Credit Allowance for receivables
D. Debit Allowance for receivables, Credit Irrecoverable debts expense
13. At 30 June 20X1 Cameron plc has decided to write off two debts of $1,300 and $2,150 respectively
and to provide an allowance for $6,631. The balance on this allowance at 1 July 20X0 was $8,540.
What is Cameron plc’s irrecoverable debts expense for the year to 30 June 20X1?
A. $1,541
B. $1,909
C. $3,450
D. $5,359
85
14. (a) Enigma plc has reduced its allowance for receivables by $600. This will increase gross profit by
$600.
A. True B. False
(b) This will increase net profit by $600.

A. True B. False
15. At February 20X4, a company’s allowance for receivables was $38,000. At February 20X5 it was
decided to write $28,500 off receivables and to provide an allowance of $42,000.
The statement of profit and loss change for the year ended 28 February 20X5 for irrecoverable
debts is
A. $42,000
B. $28,500
C. $70,500
D. $32,500
16. During 20X5 Bow plc received $500 from a customer in respect of a balance that had previously
been written off. The closing allowance for receivables is $100 and the opening allowance was
$1,000. At the year end, a customer went bankrupt and a debt of $280 needs to be written off.
What is the irrecoverable debts debit or credit in the statement of profit and loss for the year
ended 31 December 20X5?
A. Dr $880
B. Dr $780
C. Cr $1,120
D. Cr $1,300
17. At 31 December 20X2 a company’s receivables totalled $400,000 and an allowance for receivables
of $50,000 had been brought forward from the year the year ended 31 December 20X1. It was
decided to write off debts totalling $38,000 and to adjust the allowance for receivables to $36,200.
What charge for irrecoverable debts should appear in the company’s statement of profit and
loss for the year 31 December 20X2?
A. $35,200
B. $51,800
C. $38,000
D. $24,200
86
18. At 1 July 20X2 the receivables allowance of Q plc was $18,000.
During the year ended 30 June 20X3 debts totalling $14,600 were written off. It was decided that
the receivables allowance should be $16,000 as at 30 June 20X3.
What amount should appear in Q plc’s statement of profit or loss for irrecoverable debts
expense for the year ended 30 June 20X3?
A. $12,600
B. $14,600
C. $16,600
D. $30,600
19. The receivables ledger at 1 May had balances of $32,750 debit and $1,275 credit. During May, sales
of $125,000 were made on credit. Receipts from receivables amounted of $122,500 and discounts
of $550 (previously not expected at sale) were allowed. Refunds of $1,300 were made to
customers.
The net closing debit balance at 31 May on the receivables control account was
A. $34,725
B. $33,225
C. $32,125
D. $35,825
20. At 30 June 20X4 a company’s allowance for receivables was $39,000. At 30 June 20X5 trade
receivables totalled $517,000. It was decided to write off debts totalling $37,000 and to adjust the
closing allowance for receivables to $24,000.
What figure should appear in the statement of profit and loss for irrecoverable debts expense
for the year ended 30 June 20X5?
A. $52,000
B. $22,000
C. $37,000
D. $23,850
87
21. At 1 January 20X5 a company had an allowance for receivables of $18,000. At 31 December 20X5
the company’s trade receivables were $458,000. It was decided:
(a) To write off debts totalling $28,000 as irrecoverable
(b) To adjust the allowance for receivables to $21,500.
What figure should appear in the company’s statement of profit and loss for irrecoverable debts
expense for the year ended 31 December 20X5?
A. $49,500
B. $31,500
C. $32,900
D. $50,900
22. At 1 July 20X5 a company’s allowance for receivables was $48,000.
At 30 June 20X6, receivables amounted to $838,000. It was decided to write off $72,000 of these
debts and adjust the closing allowance for receivables to $ 60,000. What are the final amounts
for inclusion in the company’s statement of financial position at 30 June 20X6? Kindly enter the
figures.
Receivables _____________
Allowance _____________
Net balance _____________

23. At 30 September 20X0 a company has receivables totalling $350,000 and an allowance for
receivables of $22,000 brought forward from the previous year. It has been decided to write off
receivables totalling $27,500. An allowance of $22,575 is required at 30 September 20X0.
The total charge for irrecoverable debts in the company’s statement of profit and loss for the
year ended 30 September 20X0 will be
A. $22,575
B. $26,925
C. $28,075
D. $50,075
88
24. If Poppy plc reduces its allowance for receivables by $300, which of the following statement is
correct?
A. Current assets decrease by $300
B. Current liabilities decrease by $300
C. Gross profit increase by $300
D. Net profit increases by $300
25. At 31 Dec 20X4, the company’s trade receivables totalled $864,000 and the opening allowance for
receivables was $48,000. It was decided that debts totalling $13,000 were to be written off and
the allowance for receivables will be adjusted to $42,550.
What figures should appear in the SOFP for net receivables (after deducting the allowance) and
in the SOPL for irrecoverable debts expense?
SOPL($) SOFP ($)

A. 7,550 803,000
B. 7,550 808,450
C. 18,450 808,450
D. 13,000 803,000
26. Which THREE of the following items could appear on the credit side of a receivables control
account?
A. Cash received from customers
B. Irrecoverable debts written off
C. Increase in the allowance for receivables
D. Discounts received
E. Sales
F. Credit for goods returned by customers
27. Trade receivables at 31.12.2005 were $76,000. You are told that:
a) An irrecoverable debt of $3,000 is to be written off;
b) Specific allowances of $700 and $2,300 are to be made against two doubtful debts;
c) A general allowance of 6% is to be maintained. The opening balance on the allowance account

is $4,000.
d) A debt of $1,500, which was written off as irrecoverable in 2004, has now been paid in full.
89
Required:
Prepare Trade receivables, Irrecoverable debts expenses and receivables allowance accounts for
the year ended 31.12.2005.
28. At 31 March the SOFP of a company included the following.
Trade debtors 23,000
Receivables allowance 1,200
During April credit sales were $64,000 and cash sales were $256,000. Credit customers paid
$56,840 net of a 2 % cash discount (previously not expected at sale).
The trade debtors at 30 April will be $______________.
29. At 31 December 2002 a company's receivables totalled $400,000 and an allowance for receivables
of $50,000 had been brought forward from the year ended 31 December 2001.
It was decided to write off debts totalling $38,000 and to adjust the allowance for receivables to
10% of the receivables.
The charge for irrecoverable debts and receivables allowance should appear in the company's
Statement of profit or loss for the year ended 31 December 2002 was $___________
30. At 1 July 2002 the receivables allowance of Q was $18,000.
During the year ended 30 June 2003 debts totaling $14,600 were written off. It was decided that
the receivables allowance should be $16,000 as at 30 June 2003.
The amount that should appear in Q's Statement of profit or loss for irrecoverable debts and
receivables allowance for the year ended 30 June 2003 was $_____________.
90
31. At 1 December 2009 Jacky’s receivables allowance was $1,488. At 30 November 2010 the balance
on his trade receivables account was $231,860. He has decided that balances totalling $2,437 are
irrecoverable and should be written off and that his receivables allowance should be revised to
0·75% of the remaining balances. Bad debts recovered of $300 has received during the year.
The amount that should be charged to Jacky’s SOPL for receivables expense in the year to 30
November 2010 (calculated to the nearest $1) is $___________________.
32. During the year ended 31 December 2009, Kent' Sales totalled $5,000,000, its accounts receivable
amounting to 4% of Sales for the year.
Kent wishes to maintain its receivables allowance at 3% of accounts receivable, and discovers that
the allowance, as a result is 25% lower than it was a year before.
During the year specific bad debts of $3,000 were written off and bad debts (written off three
years previously) of $450 were recovered.
The net charge / credit for bad and doubtful debts for the year ended 31 December 2009 is
$__________________.
33. Katty’s trial balance at 30 September 2010 included:
Debit $ Credit $
Receivables ledger control account 93,350

Allowance for doubtful debts brought forward 2,230
The following information is also available:
(a) No entries have been made in respect of cash of $1,320 received from Jason whose balance
had been written off last year; and
(b) At 30 September 2010 an irrecoverable balance of $1,450 is to be written off and the
receivables allowance is to be adjusted to 2% of the remaining balance.
91
The net figure that will be charged / credited to Statement of profit or loss for the year 30
September for bad and doubtful debts is $__________________.
The figure that will be reported in the statement of financial position at 30 September for
receivables is $__________________.
34. The following balances relate to Carlos:
Receivables at 1.1.X8 34,500
Cash received from credit customers 229,900
Contra with payables 1,200

Discounts allowed (previously not expected at sale) 17,890
Cash sales 24,000
Irrecoverable debts 18,600

Increase in allowance for receivables 12,500
Discounts received 15,670

Receivables at 31.12.X8 45,000
The revenue figure reported by Carlos in the year ended 31 December 2008 was
$______________.
35. The following account has been extracted from the nominal ledger of Boh Yee:
Sales ledger control account
Balance b/d 84,700 Irrecoverable debts 4,300
Contra with purchase ledger 5,000 Discounts (previously not expected 30,780
control account at sale)
Discount received 21,100 Cash received from credit customers 595,000

Credit sales 644,000 Increase in allowance for receivables 6,555
Cash sales 13,500 Balance c/d 131,665
768,300 768,300
92
After corrections, the receivables balance is $_____________
36. Wei Ni's sales-ledger control account shows a balance at the end of the year of $58,200 before
making the following adjustments:
(i) Wei Ni wishes to write off debts amounting to $8,900 as he believes they are irrecoverable.
(ii) She also wishes to make specific allowance for Carroll's debt of $1,350 and Juff's debt of $750.
(iii) She wishes to maintain a general allowance of 3% of the year end receivables balance.
Wei Ni's allowance for receivables at the last year end was $5,650.
The charge to the SOPL in respect of the above is $___________.

37. In the SOFP at 31 December 2005, Nelson reported net receivables of $12,000. During 2006 he
made sales on credit of $125,000 and received cash from credit customers amounting to $115,500.
At 31 December 2006, Nelson wished to write off debts of $7,100 and increase the allowance for
receivables by $950 to $2,100.
The net receivables figure at 31 December 2006 is $____________.
38. At 1 July 2005, a company's allowance for receivables was $48,000.

At 30 June 2006, trade receivables amounted to $838,000. It was decided to write off $72,000 of
these debts and adjust the allowance for receivables to $60,000.
What are the final amounts for inclusion in the company's SOFP at 30 June 2006?
Trade Allowance for
receivables receivables Net balance

$ $ $
A. 838,000 60,000 778,000
B. 766,000 60,000 706,000
C. 766,000 108,000 658,000
D. 838,000 108,000 730,000

LO D8e, D8g, D8h, D8l
93
39. On 1 January 2003 Jay Mee's trade receivables were $10,000. The following relates to the year
ended 31 December 2003:
Credit sales 100,000

Cash receipts 90,000
Discounts allowed (not expected at sale) 800
Cash receipts include $1,000 in respect of a receivable previously written off.
On 31 December 2003 receivables were $_____________.

Question 40
Included in the trade receivables balance is an amount of $3,574 which has been outstanding for just
over a year. Your client has decided to write this balance off.
The allowance for doubtful debts is to be calculated as follows:
6% of balances which have been outstanding for between 30 and 59 days;

50% of balances which have been outstanding for 60 days or more.
At the end of the previous year the allowance for doubtful debts was $4,516.
The trade receivables balances, including the irrecoverable balance of $3,574, have been analysed as
follows:
Age of debt Balance ($)
less than 30 days 36,591
30 days to 59 days 18,700
60 days and over 9,722
Total receivables 65,013
94
Required:
(i) Briefly explain the difference between a bad debt and a doubtful debt. (2 marks)
(ii) Calculate the total charge to the statement of profit or loss for the year in respect of bad and
doubtful debts and the value to be reported in the statement of financial position for trade
receivables. (6 marks)
95
ACCA Financial Accounting
Irrecoverable Debts & Allowance for Receivables
Past Year Questions

Q1.
Q2.
Q3.
Q4.
Cameron had receivable totaling $ 55,000 at the year end 30 Jun 20x1. He has decided to write
off two debts of $ 1,300 and $ 2,150 respectively and to make a specific allowance for $ 5,600.
The company’s policy is to make a general allowance of 2 %. the balance on this allowance at
1 Jul 20x0 was $ 8,540
What is the closing receivable allowance?
Chapter 15: Incomplete Records
1. A sole trader fixes his prices to achieve a gross profit percentage on sales revenue of 40%. All his
sales are for cash. He suspects that one of his sales assistants is stealing cash from sales revenue.
His trading account for the month of June 2003 is as follows:
$
Recorded sales revenue 181,600

Gross profit 67,600
Assuming that the cost of sales figure is correct, the cash that could have taken by the sales
assistant is $______________.
LO F6a
2. A sole trader fixes her prices by adding 50% to the cost of all goods purchased. On 31 October 2003
a fire destroyed a considerable part of the inventory and all inventory records.
Her trading account for the year ended 31 October 2003 included the following figures:
$ $
Sales 281,250
Opening inventory at cost 183,600

Purchases 249,200
432,800
Closing inventory at cost 204,600

228,200
Gross profit 53,050
Using this information, the amount of inventory loss would be $___________.

LO F6a
96
3. On 1 September 2008, Winston had Inventory of $380,000. During the month, sales totalled
$650,000 and purchases $480,000. On 30 September 2008 a fire destroyed some of the inventory.
The undamaged goods were valued at $220,000. The business operates with a standard gross
profit margin of 30%.
Based on this information, the cost of the inventory destroyed in the fire is $_____________.
LO F6a
4. Harry has a mark-up of 25% on cost of sales. The following information is also available:
Receivables at start of year 6,340

Receivables at end of year 5,200
Cash at start of year 620

Cash at end of year 500
Total cash payments 16,780
The only receipts during the year consisted of cash and cheques received from customers.
The gross profit for the year is $____________.

LO F6a
5. The gross profit mark-up is 40% where:

A. sales are $120,000 and gross profit is $48,000
B. sales are $120,000 and cost of sales is $72,000
C. sales are $100,800 and cost of sales is $72,000
D. sales are $100,800 and cost of sales is $60,480

LO F6a
6. A fire in the offices of Lewis has destroyed most of the accounting records.
The following information has been retrieved:
Sales 630,000
Opening inventory 24,300

Closing inventory 32,750
Opening payables 29,780
Closing payables 34,600
Gross profit for the period should represent a mark-up of 40%.
97
The total cash paid to suppliers in the year was $______________.
LO F6a
7. Jason is a sole proprietor whose accounting records are incomplete. All the sales are cash sales
and during the year $50,000 was banked, including $5,000 from the sale of a business car. He paid
$12,000 wages in cash from the till and withdrew $2,000 per month as drawings. The cash in the
till at the beginning and end of the year was $300 and $400 respectively.
The sales for the year were $____________.

LO F6a
8. Many of the records of Gwen have been destroyed by fire. The following information is available
for the period under review.
(i) Sales totalled $480,000.
(ii) Inventory at cost was opening $36,420, closing $40,680.

(iii) Trade payables were opening $29,590, closing $33,875.
(iv) Gross profit for the period should represent a mark-up on cost of 50%.
The total for the period of cash paid to suppliers was $______________.
LO F6a
9. Ker Shin's annual inventory count took place on 6 January 2006. The value of inventory on this
date was $32,780. During the period from 31 December 2005 to 6 January 2006, the
following events occurred:
Sales $8,600
Purchases $4,200
The value of inventory at 31 December 2005 was $34,600.
What is the gross margin of Ker Shin?
A. 70%
B. 72%
C. 30%
D. 43%
LO F6a
98
10. You are given the following incomplete and incorrect extract from-the SOPL of a company that
trades at a mark-up of 25% on cost:
$ $
Sales 174,258
Less: cost of goods sold
Purchases 136,527
Closing inventory X
(X)
Gross profit X
Having discovered that the sales figure should have been $174,825 and that purchase returns of
$1,084 and sales returns of $1,146 have been omitted, the closing inventory should be
$_____________.
LO F6a
11. A business purchased goods on credit for $10,000; gross profit mark-up was 120%; half the goods
were sold for cash, less trade discount of 5%.
The resulting net profit was $_______________.

LO F6a
12. A fire on 30 September 2010 destroyed some of a company's inventory and its inventory records.
The following information is available:
$
Inventory 1 September 2010 318,000
Sales for September 2010 612,000
Purchases for September 2010 412,000

Inventory in good condition at 30 September 2010 214,000
Standard gross profit percentage on sales is 20%
Based on this information, the value of the inventory lost is $______________.

LO F6a
99
Chapter 16: Provisions and Contingencies
1. AAA Co is currently in the middle of a protracted lawsuit which it is vigorously defending. The
directors are reasonably confident that the action will not be successful but are aware that the
opposite outcome is a possibility. It is difficult to quantify any potential damages, but the directors
feel they are unlikely to exceed $50,000.
How should the above item be treated in the financial statements?

A. Provision
B. Contingent liability
C. Contingent asset
LO D9a, D9b, D9c
2. How should a contingent liability and a probable contingent asset be accounted for?
A. Probable contingent assets and contingent liabilities should be disclosed in the financial
statements
B. Probable contingent assets must always be accrued and contingent liabilities must always be
disclosed in the financial statements.
C. Contingent liabilities must always be either accrued or disclosed and probable contingent
assets must always be disclosed in the financial statements.
D. Contingent liabilities must always be provided for and probable contingent assets must be
disclosed in the financial statements
LO D9a, D9b, D9c
3. Prior to the financial year end of 31 October 2010, James has received a claim of $80,000 from a
supplier for providing poor quality goods which have damaged the supplier’s plant and equipment.
James’s lawyers have stated that there is a 20% chance that James will successfully defend the
claim.
Which of the following is the correct accounting treatment for the claim in the financial
statements for the year ended 31 October 2010?
A. James should neither provide for nor disclose the claim
B. James should disclose a contingent liability of $80,000

C. James should provide for the expected cost of the claim of $80,000
D. James should provide for an expected cost of $16,000

LO D9d, D9e, D9f
100
4. A few days before his year end, Colin received a claim for $30,000 following an accident caused by
one of his lorries. He accepted liability and offered to pay $15,000. His offer was rejected and legal
proceedings were commenced. His legal advisor told him that when the claim goes to court he will
be required to pay $20,000.
What amount should Colin provide in his year-end accounts?

A. no provision is required
B. $15,000 should be provided
C. $20,000 should be provided
D. $30,000 should be provided

LO D9d, D9e, D9f
5. The following items have to be considered in finalising the financial statements of a limited liability
company:
I. The company gives warranties on its products. The company's statistics show that about 5%
of sales give rise to a warranty claim.
II. The company has guaranteed the overdraft of another company. The likelihood of a liability
arising under the guarantee is assessed as possible.
What is the correct action to be taken in the financial statements for these items?
Create a provision Disclose by note only No action
A. I II
B. I II
C. I,II
D. I,II
LO D9d, D9e, D9f
6. James guarantees his customers that they will obtain a full refund if they return goods within 30
days. At 31 March 2005 his provision for sales returns was $2,700. At 31 March 2006 he estimated
that the provision should be $3,000.
What value should be included in James’s statement of financial position as at 31 March 2006
for the movement in the provision for sales returns?
101
A. a charge of $3,000
B. a credit of $3,000
C. a charge of $300
D. a credit of $300
LO D9d, D9e, D9f
7. Please state whether the following statements about contingent assets and contingent liabilities
are true (T) or false (F)?
(a) A contingent asset should be disclosed by note if an inflow of economic benefits is probable
(T, F)
(b) A contingent liability should be disclosed by note if it is probable that a transfer of economic
benefits to settle it will be required, with no provision being made (T, F)
(c) No disclosure is required for a contingent liability if it is not probable that a transfer of
economic benefits to settle it will be required (T, F)
(d) No disclosure is required for either a contingent liability or a contingent asset if the likelihood
of a payment or receipt is remote (T, F)
(e) Contingent assets are included as assets in financial statements if it is probable that they will
arise (T, F)
(f) Contingent liabilities must be provided for in financial statements if it is probable that they will
arise (T, F)
(g) Contingent liabilities must be treated as liabilities in SOFP and provided for if it is probable that
they will arise (T, F)
(h) Contingent assets must not be recognised in financial statements unless an inflow of economic
benefits is virtually certain to arise (T, F)
(i) A company expecting future operating losses should make provision for those losses as soon
as it becomes probable that they will be incurred (T, F)
LO D9a, D9b, D9c
102
Chapter 17: Capital Structure and Finance Costs
1. The issued share capital of Clinton, a limited liability company, is as follows:
$
Ordinary shares of 10c each 1,000,000
8% Preference shares of 50c each 500,000
In the year ended 31 October 2010, the company has paid the preference dividend for the year
and an interim dividend of 2c per share on the ordinary shares. A final ordinary dividend of 5c per
share was declared, before the reporting date.
The total amount of dividends relating to the year ended 31 October 2010 was $__________.
LO D10h
2. When a company makes a rights issue, which of the following effects will the issue have?
a) Assets are increased (T, F)
b) Retained earnings are reduced (T, F)
c) Share premium account is reduced (T, F)

d) Investments are increased (T, F)
LO D10e, D10g
3. The following information is relevant to Rychard:

Closing inventory 17,900
Purchases 199,000

Administrative expenses 79,800
Audit fee 5,200

Carriage in 3,500
Carriage out 7,800

Depreciation 40,000
103
Depreciation is to be split in the ratio 30:70 between the office and factory.
The cost of sales is $_________.

LO D10j
4. Brown has $100,000 50c shares and $400,000 8% irredeemable preference shares in issue. A
dividend of 3c per ordinary share and half of the preference dividend were paid during the year.
Please state whether the following statements are true (T) or false (F)
a) An ordinary dividend of $3,000 is paid during the year (T, F)

b) A preference dividend of $16,000 is accrued at the year-end (T, F)
LO D10a, D10b
5. Which of the following items may appear as current liabilities in a company's statement of
financial position?
I. Revaluation surplus
II. Loan due for repayment within one year

III. Taxation
IV. Preference dividend payable
V. Share premium
VI. Loan notes
A. I, II and III
B. I, II, V and VI
C. II, III, IV and VI
D. II, III and IV

LO D10a, D10b, D10c, F1c
6. A company made an issue for cash of 100,000 50c shares at a premium of 30c per share.
The correct journal entries to record the issue are:
Dr_________________________ Cr_________________________
104
7. At 1 October 2006, Ozber's capital was structured as follows:
Ordinary shares of 25c $100,000
Share premium $50,000
On 10 January 2007, in order to raise finance for expansion, there was a 1 for 4 rights issue
at $1.15. The issue was fully taken up. This was followed by a 1 for 10 bonus issue on 1 June
2007.
The balance on the share premium account after these transactions is $__________.
8. Which of the following might appear as an item in a company's statement of changes in equity?
a) Profit on disposal of properties (Yes, No)
b) Surplus on revaluation of properties (Yes, No)
c) Equity dividends proposed after the reporting date (Yes, No)

d) Dividend paid during the year (Yes, No)
e) Issue of share capital (Yes, No)
f) Loss on sale of investments (Yes, No)

g) Prior year adjustments (Yes, No)
LO D10j
9. Where in the financial statements should tax on profit for the current period, and unrealised
surplus on revaluation of properties, be separately disclosed?
Tax on profit for the current period Unrealised surplus on revaluation of properties
A. SOPL SOPL
B. Statement of changes in equity SOPL
C. SOPL Statement of changes in equity

D. Statement of changes in equity Statement of changes in equity
LO D10c, F1b, F1c,10j
105
10. At 31 December 2010 the following matters require inclusion in a company's financial statements:
(i) On 1 January 2010 the company made a loan of $12,000 to an employee, repayable on 30 April
2011, charging interest at 2% per year. On the due date she repaid the loan and paid the whole
of the interest due on the loan to that date.
(ii) The company has paid annual insurance of $9,000 in 2010, covering the year ending 31 August
2011.
(iii) In January 2011 the company received rent from a tenant $4,000 covering the six months to
31 December 2010.
For these items, what total figures should be included in the company's statement of financial
position at 31 December 2010?
Current assets ($) Current liabilities ($)

A. 22,000 240
B. 22,240 NIL
C. 10,240 NIL
D. 16,240 6,000
LO D10i
11. At 31 December 2009 the capital structure of a company was as follows:

$
Ordinary share capital
100,000 shares of 50c each 50,000

Share premium account 180,000
During 2010 the company made a bonus issue of 1 share for every 2 held, using the share premium
account for the purpose, and later issued for cash another 50,000 shares at 80c per share.
What is the company's capital structure at 31 December 2010?
Ordinary share capital $_____________ Share premium account $______________

106
12. Please state whether the following statements about company financial statements are true (T)
or false (F).
a) Dividends paid and proposed should be included in the Statement of profit or loss. (T, F)
b) The statement of changes in equity must not include unrealised gains or losses. (T, F)
c) A company might make a rights issue if it wished to raise more equity capital. (T, F)
d) A rights issue might increase the share premium account whereas a bonus issue is likely to
reduce it. (T, F)
e) A rights issue will always increase the number of shareholders in a company whereas a bonus
issue will not. (T, F)
f) A bonus issue will result in the market value of each share increasing. (T, F)
g) Loan notes can be classified as current or non-current liabilities. (T, F)
h) Financial statements must disclose a company's total expense for staff costs and for
depreciation, if material. (T, F)
i) A company might make a bonus (capitalisation) issue to raise funds for expansion. (T, F)
j) The profit or loss on the disposal of part of a company's operations must be disclosed in the
Statement of profit or loss as an extraordinary item if material. (T, F)
k) Both realised and unrealised gains and losses may be included in the statement of changes in
equity required by IAS 1 Presentation of Financial Statements. (T, F)
l) Preference shares carry voting rights. (T, F)

m) Preference shares is paid out in priority to an ordinary dividend. (T, F)
n) Preference shares is related to profits. (T, F)
LO D10a, D10d, D10e, D10f, D10g, D10h, D10i, D10j
13. If a shareholder in a limited liability company sells his shares to another private investor, for less
than he paid for them, the share capital of the company will
A. Remain unchanged
B. Increase by the nominal value of the shares
C. Increase by the amount received for the shares

D. Decrease by the nominal value of the shares
LO D10a, D10b
107
14. A company has an authorised share capital of 1,000,000 50c ordinary shares and an issued share
capital of 800,000 50c ordinary shares.
If an ordinary dividend of 5% is declared, the amount payable to shareholders is $_________.
LO D10h
15. Which of the following items impact on the Statement of Changes in Equity?
(i) Issue of ordinary shares
(ii) Revaluation of a building
(iii) Profit for the period

(iv) Revaluation of a non-current asset investment
A. (i)
B. (i), (iii)
C. (ii), (iii)
D. All of the above
LO D10j
16. At 30 June 2002 a company's capital structure was as follows:

$
Ordinary share capital
500,000 shares of 25c each 125,000
Share premium account 100,000
In the year ended 30 June 2003 the company made a rights issue of 1 share for every 2 held at $1
per share and this was taken up in full. Later in the year the company made a bonus issue of 1 share
for every 5 held, using the share premium account for the purpose.
What was the company's capital structure at 30 June 2003?
Ordinary share capital $___________ Share premium account $____________

LO D10b, D10c, F1c, D10g
108
17. Flora, a limited liability company shows an overprovision of $3,400 on its tax liability account at the
end of the year ended 31 December 2008 before accounting for that year's tax charge. It estimates
tax on profits for the year to be $67,900.
What amounts should be shown in the financial statements for the year ended 31 December
2008 in respect of tax?
SOPL SOFP
A. 67,900 67,900
B. 64,500 64,500
C. 64,500 67,900
D. 71,300 67,900
LO F2e
18. The following information is available about a company's dividends:
Sept 2005 Final dividend for the year ended 30 June 2005 paid $100,000
(declared August 2005)
March 2006 Interim dividend for the year ended 30 June 2006 $40,000
paid
Sept 2006 Final dividend for the year ended 30 June 2006 paid $120,000
(declared August 2006)
What figures, if any, should be disclosed in the company's statement of profit or loss for the
year ended 30 June 2006 and its Statement of financial position at that date?
SOPL SOFP
A. $160,000 deduction $120,000
B. $140,000 deduction NIL
C. NIL $120,000
D. NIL NIL
LO D10h
109
19. At 30 June 2002 a company had $1m 8% loan notes in issue, interest being paid half-yearly on 30
June and 31 December.
On 30 September 2002 the company redeemed $250,000 of these loan notes at par, paying interest
due to that date.
On 1 April 2003 the company issued $500,000 7% loan notes, interest payable half-yearly on 31
March and 30 September.
The figure that should appear in the company's Statement of profit or loss for interest expense
in the year ended 30 June 2003 is $_____________.
LO D10i
20. Which of the following must be disclosed in the financial statements of a quoted (listed)
company, if material?
I. Total spent on research and development.
II. An analysis of operating profit into continuing and discontinued activities.

III. Profit or loss on the disposal of a discontinued operation.
IV. Authorised share capital.
V. Finance costs.
A. II, III and IV only
B. I, II, III and V only
C. I and V only
D. All five items

LO D10b, D10c, F1c, D10i
21. A limited liability company issued 50,000 ordinary shares of 25c each at a premium of 50c per share.
The cash received was correctly recorded but the full amount was credited to the ordinary share
capital account.
What journal entries is needed to correct this error?

Debit ________________________ Credit _________________________
110
22. Extracts from the accounting records of Andrea, a company, relating to the year ended 31
December 2006 are as follows:
Revaluation surplus $230,000

Ordinary interim dividend paid $12,000
Profit before tax $178,000
Estimated current year tax liability $45,000

8% $1 Preference shares $100,000
Underprovision for tax in previous year $5,600
Proceeds of issue of 2,000 £1 ordinary Shares $5,000

Final ordinary dividend proposed $30,000
The total change reported in the statement of changes in equity for the year is $____________.
LO D10j
23. Benny, a company, issues 100,000 3% $1 redeemable preference shares during the year ended 30
September 2008 at 98c per share.
What is the correct entry to account for this transaction?

Debit $ Credit $
A. Cash 98,000 Liability 98,000
B. Cash 98,000 Share capital 100,000
Share premium 2,000
C. Cash 98,000 Share capital 98,000

D. Cash 98,000 Share capital 100,000
SOPL 2,000
LO D10a, D10b
24. Which of the following are advantages of a bonus issue?

I. It is the cheapest way for a company to raise finance through the issuing of shares
II. It makes the shares in the company more marketable

III. Earnings per share, a key performance indicator, increases
IV. Issued share capital is brought more into line with the company’s net assets
111
A. II and IV
B. I and II
C. III and IV
D. I and III
LO D10d
25. To whom do the reserves in a limited company belong?
A. creditors
B. debenture holders
C. directors
D. ordinary shareholders
LO F1b
26. A company’s SOFP at 31 December 2008 includes:

$
Ordinary shares of $1.00 12,000
Retained earnings 4,000
In January 2009, the company made a bonus issue of one share for every four held.
In June 2009, the company made a rights issue at $1.60 of one share for every two held.
By how much did these transactions increase the company’s bank balance?
A. $9,600
B. $12,000
C. $12,800
D. $19,200
LO D10d, D10e, D10f, D10g
112
27. A company issues 500,000 ordinary shares of $1 each for $3 each and $250,000 6 % debentures.
By what amount will net assets of the company increase as a result of these transactions?
A. no increase
B. $750,000
C. $1,500,000
D. $1,750,000
LO D10a, D10b, D10c, F1b, F1c, F1e, D10i
28. The capital structure of a company is shown.
$
700,000 ordinary shares of $0.25 each 175,000
8 % loan stocks 160,000
During the year the company made profits before interest of $105,000. The directors wish to
distribute as much of the profits as possible by way of dividend.

What is the dividend per share?
A. $0.1317
B. $0.15
C. $0.5268
D. $0.60
LO D10a, D10b, D10c, F1b, F1c, F1e, D10h, D10i
29. A newly formed company issues:

1,000,000 ordinary shares of $1 at $2.50 each
$300,000 5 % debentures.
Operating profit for the year was $465,000.

The directors recommend an 8 % ordinary dividend for the year.
What is the retained earnings for the year?
Answer: __________
LO D10a, D10b, D10c, F1b, F1c, F1e, D10h, D10i
113
Chapter 18: Limited Liability Company Financial Statements
1. Bayzell Co has the following trial balance as at 31 May 2011:
Dr Cr
$000 $000
Land at cost (note vii) 1,460
Plant at cost 1,362
Plant accumulated depreciation 1 June 2010 (note v) 682
Buildings at cost 4,600

Buildings accumulated depreciation 1 June 2010 (note vi) 372
Intangible assets (note viii) 384

Bank balance 232
Inventory at 1 June 2010 (note i) 990
Retained earnings at 1 June 2010 800
10% Loan notes 300

Loan interest paid 30
$1 Ordinary shares 4,400
Share premium account 486

Dividend paid 155
Revenue 11,700
Returns inwards 217
Purchases 6,850
Wages and salaries 1,120

Insurance (note iii) 108
Electricity expenses (note ii) 542
Administrative expenses 500

Allowance for receivables 1 June 2010 (note iv) 62
Trade payables 1,488
Trade receivables 1,900

Director’s remuneration 430
114
––––––– –––––––
20,880 20,880
––––––– –––––––
Additional information as at 31 May 2011

(i) Closing inventory is valued at $465,000.
(ii) There are electricity expenses of $88,000 outstanding.

(iii) Insurance expenses include $14,000 for June and July 2011.
(iv) The allowance for receivables is to be increased to 5% of trade receivables.
(v) Plant is depreciated at 20% per annum using the reducing balance method. Plant depreciation
should be apportioned in accordance with note (x).
(vi) Buildings are depreciated at 5% per annum on their original cost. Building depreciation should
be apportioned in accordance with note (x).
(vii) Land is to be valued at $1,550,000 as from 31 May 2011.
(viii) The intangible assets were purchased on 1 December 2010 and have a useful life of four years
from that date. Amortisation should be apportioned in accordance with note (x).
(ix) Tax has been calculated as $310,000 for the year.
(x) The expenses listed above should be apportioned as indicated:

Cost of Distribution Administrative
Sales Costs Expenses

Discounts received 100%
Insurance 50% 50%
Electricity expenses 60% 20% 20%
Increase in allowance for receivables 100%
Wages and salaries 40% 30% 30%

Director’s remuneration 100%
Depreciation: Plant 100%
Buildings 50% 30% 20%

Amortisation of intangible assets 100%
115
Required:
Prepare the following financial statements for Bayzell Co in accordance with IAS 1 Presentation of
Financial Statements:
(i) a Statement of profit or loss and other comprehensive income for the year ended 31 May
2011; and
(ii) a statement of financial position as at 31 May 2011.

LO F1d, F2a, F2c, F2d, F2f, F2g
116
2. The following information has been taken from the books of Jonkirst Co, a limited liability company,
as at 31 May 2010.
Dr Cr
$000 $000
Property expenses 130

Trade payables 375
Loan note interest 43

Allowance for receivables at 1 June 2009 50

Sales revenue 7,515
Cash 20
Inventory at 1 June 2009 455
Other operating expenses 366
Marketing expenses 65
Wages and salaries 878
Bank 124
Returns inward 124
Trade receivables 1,180
Purchases 4,641
7% Loan notes 614
Receivables expense 195
Land at cost 962
Motor vehicles at cost 312

Furniture and equipment at cost 1,560
Accumulated depreciation at 1 June 2009

Buildings 468
Motor vehicles 104

Furniture and equipment 546
117
––––––– –––––––
12,871 12,871
––––––– –––––––
You have also been provided with the following information:
(i) Inventory at 31 May 2010 was valued at $357,000 based on its original cost. However, $35,000
of this inventory is now obsolete and the directors have agreed to sell it in June 2010 for a cash
price of $25,000.
(ii) The marketing expenses include $10,000 which relates to June 2010.
(iii) Based on past experience the allowance for receivables is to be increased to 5% of trade
receivables.
(iv) There are wages and salaries outstanding of $55,000 for the year ended 31 May 2010.
(v) Buildings are depreciated at 5% of cost. At 31 May 2010 the buildings were professionally valued
at $2,300,000 and the directors wish this valuation to be incorporated into the accounts.
(vi) Other depreciation is to be charged for as follows:
(vii) Motor vehicles at 25% of written down value.
(viii) Furniture and equipment at 20% of cost.

(ix) Tax of $200,000 is to be provided for the year.
(x) No dividends have been paid or declared.
Required:
(a) Prepare the following statements, for internal use:
(i) the SOPL for the year ended 31 May 2010; and
(ii) the statement of financial position as at 31 May 2010

118
3. You are presented with the following trial balance of Portsmere, a limited liability company, at 31
May 2009.
Dr Cr
$000 $000
Intangible assets 50
Plant at cost 176
Plant, accumulated depreciation, at 1 June 2008 88

Buildings at cost 592
Buildings, accumulated depreciation, at 1 June 2008 48
Land at cost 188

Bank balance 30

10% Loan notes 40
Loan interest paid 4
Dividend paid 20
Revenue 1,510
Returns inwards 28
Insurance 14
Energy expenses 70
Inventory at 1 June 2008 128
Administrative expenses 64
Allowance for receivables, at 1 June 2008 8
Purchases 884
Trade payables 200
Trade receivables 256

Director’s remuneration 56
$1 Ordinary shares 570

119
–––––– ––––––
2,704 2,704
–––––– ––––––
Additional information as at 31 May 2009
(i) Closing inventory has been valued at $60,000.
(ii) Energy expenses of $12,000 for May 2009 have not been invoiced or recorded.
(iii) Insurance expenses include $2,000 for June and July 2009.
(iv) The allowance for receivables is to be increased to 5% of trade receivables. The increase should
be charged to administrative expenses.
(v) Plant is depreciated at 25% per annum using the reducing balance method. The entire charge is
to be allocated to cost of sales.
(vi) Buildings are depreciated at 5% per annum on their original cost, allocated 50% to cost of sales,
30% to distribution costs and 20% to administrative expenses.
(vii) Land was revalued at 31 May 2009 to $200,000.
(viii) The intangible assets were purchased on 1 December 2008 and have a useful life of five years
from that date. Amortisation is calculated on a monthly basis and charged to administrative
expenses.
(ix) Tax has been calculated as $40,000 for the year.

(x) The expenses listed below should be apportioned as indicated:
Cost of Distribution Administrative
Sales Costs Expenses

Discounts received 100%
Insurance 50% 50%
Energy expenses 50% 20% 30%

Wages and salaries 40% 35% 25%
Director’s remuneration 100%
(xi) The current share price of Portsmere is $1·10 per share.
120
Required:
Prepare the following financial statements for Portsmere in accordance with IAS 1 Presentation of
Financial Statements:
(i) a Statement of profit or loss and other comprehensive income for the year ended 31
May 2009;
(ii) a statement of financial position as at 31 May 2009.

121
4. The following information has been extracted from the books of Tonson, a limited liability company,
as at 31 October 2006.
Dr Cr
$000 $000
Cash 15
Insurance 75
Inventory at 1 November 2005 350

General expenses 60
Energy expenses 66
Marketing expenses 50
Retained earnings at 1 November 2005 315
Allowance for receivables at 1 November 2005 40
Sales revenue 5,780
Telephone expenses 80
Property expenses 100
Bank 94
Returns inward 95
Trade payables 290
Loan note interest 33

Trade receivables 900
Purchases 3,570
7% Loan notes 470
Bad debts 150

Accumulated depreciation at 1 November 2005
Buildings 360
Motor Vehicles 80
Furniture and equipment 420

Land at cost 740
122
Motor vehicles at cost 240
Furniture and equipment at cost 1,200
–––––– ––––––
9,899 9,899
–––––– ––––––
You have also been provided with the following information:
(i) Inventory at 31 October 2006 was valued at $275,000 based on its original cost. However,
$45,000 of this inventory has been in the warehouse for over two years and the directors have
agreed to sell it in November 2006 for a cash price of $20,000.
(ii) The marketing expenses include $5,000 which relates to November 2006.
(iii) Based on past experience the allowance for receivables is to be increased to 5% of trade
receivables.
(iv) There are wages and salaries outstanding of $40,000 for the year ended 31 October 2006.
(v) Buildings are depreciated at 5% of cost. At 31 October 2006 the buildings were professionally
valued at $1,800,000 and the directors wish this valuation to be incorporated into the accounts.
(vi) Depreciation is to be charged as follows:
Motor vehicles at 20% of written down value.
Furniture and equipment at 20% of cost.
(vii) No dividends have been paid or declared.
(viii) Tax of $150,000 is to be provided for the year.

(ix) During October 2006 a bonus (or scrip) issue of one for ten was made to ordinary shareholders.
This has not been entered into the books. The share premium account was used for this purpose.
Required:
Prepare the following statements, FOR INTERNAL USE:

(a) the SOPL for the year ended 31 October 2006; and
(b) the statement of financial position as at 31 October 2006
123
5. The trial balance of Penguin, a company as at 31 December 2010 was as follows:
Dr Cr
$ $
Sales and purchases 20,000 50,000

Opening Inventory 8,000
Administration expenses 15,550

Receivables and payables 10,000 20,000
Cash at bank 8,100
Ordinary shares 50c 8,000

10% irredeemable preference shares $1 9,000
10% loan notes 8,000

Non-current assets at net book value 35,000
Share premium 3,000
Retained earning at 1 January 2010 3,000
Loan note Interest paid 400
Preference dividend paid 450

Interim ordinary dividend paid 1,600
Income tax 500
Suspense 8,000
______ _______
109,500 109,500
The following is to be taken into account.
(i) A building whose net book value is currently $5,000 is to be revalued to $11,000.
(ii) A final ordinary dividend of 10c per share is to be proposed.
(iii) The balance on the income tax account represents an overprovision of tax for the previous year.
Income tax for the current year is estimated at $3,000.
(iv) Closing inventory is $12,000.

(v) The balance on the suspense account represents the proceeds from the issue of 4,000 ordinary
shares.
124
Prepare the following statements for the year ended 31 December 2010:
(1) Statement of profit or loss and other comprehensive income
(2) statement of financial position
(3) Statement of changes in equity

LO F1d, F2a, F2c, F2d, F2f, F2g, D10j
125
Chapter 19: Disclosure Notes
1. Which of the following best describes the purpose of disclosure notes in the financial statements?
A. To provide more detail for the users of financial statements about the information in the
statement of financial position and statement of profit or loss and other comprehensive
income,
B. To allow companies to present their financial results in a more favourable way by only
disclosing some things in the notes and not on the main financial statements.
C. To give all the detail of all the transactions that occurred during the period because the main
financial statements only present a summary.
D. To explain the accounting treatment adopted where management have chosen not to apply
accounting standards.
LO F3a
2. Which of the following are required as disclosures by IAS 2 Inventories?

I. The amount of write-downs of inventories in the period that have been recognised as an
expense
II. An original cost of inventories that are carried at net realisable value
III. The carrying amount of inventories classified by type (for example, raw materials, work in
progress)
A. I and II only
B. I and III only
C. II and III only
D. I, II and III
LO F3b
3. A certain IFRS requires that the following disclosure is made in a note the financial statements:
I. A brief description of its nature
II. Where practicable an estimate of the financial effect
III. And indication of the uncertainties relating to the amount or timing of any outflow
IV. The possibility of any reimbursement
Which of the following does the above disclosure apply to?
A. Provision
B. Contingent liabilities
C. Contingent assets
D. Events after the reporting period
LO F3b
126
4. Which of the following should be disclosed in the note to the financial statements for tangible
non-current assets?
I. The market value of all assets classified as tangible non-current assets, whether they have been
revalued or not
II. A reconciliation of the carrying amount of non-current assets at the beginning and end of the
period
III. For revalued assets, the methods and significant assumptions applied in estimating the value
IV. For revalued assets, the carrying amount of each class of assets that would have been included
in the financial statements had the assets been carried at the cost less depreciation
A. I, II and III only

B. II and III only
C. II, III and IV only
D. II only
LO F3b
5. Which one of the following is a disclosure about non-adjusting events required by IAS 10 Events
after the reporting period?
A. Dividends declared before the end of the reporting period and paid after the end of the
reporting period
B. The nature of both material and non-material non-adjusting events
C. The date that the non-adjusting event occurred
D. An estimate of the financial effect of the event, unless a reasonable estimate cannot be made
LO F3b
6. Which of the following should be disclosed in the notes to the financial statements relating to
intangible assets?
I. Accumulated amortisation charges at the start and at the end of the reporting period
II. A reconciliation of the movement in the net carrying amount of intangible assets for the
reporting period
III. A statement from the directors, explaining whether or not they believe that capitalised
development costs will be recovered at some future date
A. I only
B. II only
C. I and II
D. II and III
LO F3b
127
7. Which of the following would be a suitable accounting policy note for disclosure in the financial
statements relating to inventory?
A. Inventory is valued at lower of total cost and total net realisable value
B. Inventory is valued at lower of cost and net realisable value for each separate product or item
C. Inventory is valued at higher of cost and net realisable value for each separate product or item
D. Inventory is valued at higher of total cost and total net realisable value
LO F3b
8. Is the following statement true or false?
Non-adjusting events can be ignored when preparing the annual financial statements and
supporting disclosures notes.
A. True B. False
The estimated useful lives of the PPE and the depreciation rates used must be disclosed
A. True B. False
LO F3b
9. When dealing with non-adjusting events what information should be disclosed in the notes to
the financial statements?
I. The nature of the event
II. The names of those with responsibility for the event
III. The geographical location of the event
IV. An estimate of the financial effect of the event
A. I and II
B. I, III and IV
C. II, III and IV
D. I and IV
LO F3b
10. In relation to non-current assets, which of the following items should be disclosed in the notes
to financial statements?
I. Reconciliation of carrying amounts of non-current assets at the beginning and end of period
II. Useful lives of assets or deprecation rates used
III. Increases in asset values as a result of revaluations in the period
IV. Depreciation expense for the period
A. I and II only
B. I and III only
C. II, III and IV only
D. All of the above
LO F3b
128
Chapter 20: Events After the Reporting Period
1. Please state whether the following material events after the reporting period and before the
financial statements are approved by the directors are adjusting (A) or non-adjusting event (N)?
a) A valuation of property providing evidence of impairment in value at the reporting period (A,
N)
b) Sale of inventory held at the end of the reporting period for less than cost (A, N)
c) Discovery of fraud or error affecting the financial statements (A, N)
d) The insolvency of a customer with a debt owing at the end of the reporting period which is still
outstanding (A, N)
e) A fire destroying some of the company's inventory (A, N)
f) An issue of shares to finance expansion (A, N)
g) The sale in next year for $400,000 of some inventory items valued in the statement of financial
position at $500,000 (A, N)
h) A factory with a value of $3,000,000 was seriously damaged by a fire after the reporting period.
When the factory was back in production, its value was reduced to $2,000,000 (A, N)
i) The company issued 1,000,000 ordinary shares after the reporting period (A, N)
j) The sale of inventories valued at cost at the end of the reporting period for a figure in excess
of cost (A, N)
k) The bankruptcy of a credit customer with a balance outstanding at the end of the reporting
period (A, N)
l) A decline in the market value of investments (A, N)
m) The declaration of an ordinary dividend (A, N)
n) The determination of the cost of assets purchased before the end of the reporting period (A,
N)
LO F4a, F4b, F4c
2. Which of the following statements about provisions, contingencies and events after the
reporting period is/are correct?
a) A company expecting future operating losses should make provision for those losses as soon
as it becomes probable that they will be incurred. (T, F)
b) Details of all adjusting events after the reporting period must be disclosed by note in a
company's financial statements. (T, F)
c) Contingent assets must be recognised if it is probable that they will arise. (T, F)
d) Contingent liabilities must be treated as liabilities and provided for if it is probable that they
will arise. (T, F)
LO F4a, F4b, F4c
129
3. IAS 10 Events after the reporting period regulates the extent to which events after the reporting
period should be reflected in financial statements.
Which one of the following lists of such events consists only of items that, according to IAS 10,
should normally be classified as non-adjusting?
A. Insolvency of an account receivable which was outstanding at the end of the reporting period,
issue of shares or loan notes, a major merger with another company
B. Issue of shares or loan notes, changes in foreign exchange rates, major purchases of non-
current assets
C. A major merger with another company, destruction of a major non-current asset by fire,
discovery of fraud or error which shows that the financial statements were incorrect
D. Sale of inventory, giving evidence about its value at the end of the reporting period, issue of
shares or loan notes, destruction of a major non-current asset by fire
LO F4a, F4b, F4c
4. Which of the following statements are correct, according to IAS 10 Events after the reporting
period?
I. Details of all adjusting events must be disclosed by note to the financial statements.
II. A material loss arising from the sale, after the reporting period, of inventory valued at cost at
the end of the reporting period must be reflected in the financial statements.
III. If the market value of investments falls materially after the reporting period, the details must
be disclosed by note.
IV. Events after the reporting period are those that occur between the end of the reporting period
and the date when the financial statements are authorised for issue.
A. I and II only
B. I, III and IV
C. II and III only
D. II, III and IV
LO F4a, F4b, F4c
130
Chapter 21: Statement of Cash Flows
1. The statement of financial position for AGD Co, a limited liability company, as at 31 May 2010 is
provided below together with comparative figures for the previous year.
AGD Co
Statements of financial position as at 31 May

2010 2009
$000 $000 $000 $000
Assets
Non-current assets 625 470
Current assets
Inventory 106 72
Trade receivables 85 47
Bank 2 193 22 141

–––– –––– –––– ––––
Total assets 818 611
–––– ––––
Equity and liabilities
Capital and reserves

Ordinary share capital (shares of $1) 625 469
Share premium 32 16
Retained earnings 98 40
–––– ––––
755 525
Non-current liabilities
10% Loan note 0 20

Current liabilities
Trade payables 38 47
Taxation 25 63 19 66
–––– –––– –––– ––––
Total equity and liabilities 818 611

–––– ––––
131
Additional information for the year ended 31 May 2010
(i) Interest paid was $2,000.
(ii) There was no over or under provision of tax.
(iii) Dividends of $31,000 were paid.

(iv) Depreciation was $94,000.
(v) Non-current assets with a carrying amount of $25,000 were sold at a profit of $6,000.
Required:
(a) Calculate the profit before tax of AGD Co for the year ended 31 May 2010.
(b) Prepare a statement of cash flows for AGD Co for the year ended 31 May 2010 in accordance
with IAS 7 – Statement of cash flows, using the indirect method.
LO F5a, F5b, F5c, F5d, F5e, F5f, F5g, F5h
132
2. Traffold, a limited liability company, is preparing its statement of cash flows for the year ended 31
May 2008.
Traffold
Statements of financial position as at 31 May 2008 2007
Assets $000 $000
Non-current assets
Cost 65,251 53,525
Accumulated depreciation (14,798) (12,509)
–––––––– ––––––––
50,453 41,016
–––––––– ––––––––
Current assets
Inventory 16,503 14,563
Trade receivables 6,214 8,664
Bank 595 536
–––––––– ––––––––
23,312 23,763
–––––––– ––––––––
Total assets 73,765 64,779
–––––––– ––––––––
$1 Ordinary share capital 21,000 17,000
Share premium 7,892 6,425
Revaluation surplus 7,454 4,092

Retained earnings 19,979 18,190
–––––––– ––––––––
56,325 45,707
–––––––– ––––––––
133
9% loan notes 6,734 8,825
–––––––– ––––––––
Current liabilities
Trade payables 9,505 8,951
Taxation 1,201 1,296
–––––––– ––––––––
10,706 10,247
–––––––– ––––––––
Total equity and liabilities 73,765 64,779

–––––––– ––––––––
Traffold
SOPL for the year ended 31 May 2008 $000
Sales revenue 28,775
Cost of sales (14,821)
––––––––
Gross profit 13,954
Distribution costs (4,908)
Administrative expenses (3,410)
––––––––
Profit from operations 5,636
Interest received 57
Finance cost (794)
––––––––
Profit before tax 4,899
Taxation (1,570)
––––––––
Profit for the period 3,329
––––––––
134
Additional information
(i) Dividends paid during the year were $1,540,000.
(ii) There were no amounts outstanding in respect of interest payable or receivable as at either year
end.
(iii) Total depreciation for the year was $2,487,000.

(iv) The only revaluation of non-current assets was of a piece of freehold land.
(v) During the year, the company sold equipment for $766,000 realising a profit of $66,000.
Required:
Prepare a statement of cash flows for Traffold for the year ended 31 May 2008 in accordance with
IAS 7 – Statement of Cash Flows, using the indirect method.
LO F5e, F5f, F5g, F5h
135
3. You have been given the following information relating to H Marathon, a limited liability company.
The company is preparing its cash flow statement for the year ended 31 October 2006.
H Marathon
Statement of financial position as at 31 October 2006 2005
Assets $000 $000
Non-current assets
Cost 133,152 124,252
Accumulated depreciation (30,978) (25,629)
–––––––– ––––––––
102,174 98,623
–––––––– ––––––––
Current assets
Inventory 26,350 29,365
Bank 2,955 3,036
–––––––– ––––––––
42,717 48,847
–––––––– ––––––––
Total assets 144,891 147,470
–––––––– ––––––––

Ordinary share capital 23,576 21,082
Revaluation surplus 12,554 6,029

–––––––– ––––––––
106,644 91,266
–––––––– ––––––––
136
7% loan notes 5,743 22,632
–––––––– ––––––––
Current liabilities
Bank overdraft 6,869 7,842
Trade payables 23,534 23,804
Taxation 2,101 1,926

–––––––– ––––––––
32,504 33,572
–––––––– ––––––––
–––––––– ––––––––
SOPL for the year ended 31 October 2006 $000

Revenue 54,577
Cost of sales (27,128)
––––––––
Gross profit 27,449
Distribution costs (9,146)
Administrative expenses (5,766)
––––––––
Profit from operations 12,537
Interest received 101
Finance cost (1,749)
––––––––
Profit before tax 10,889
Taxation (2,570)
––––––––
Profit for the period 8,319
––––––––
137
Additional Information
(i) During the year dividends paid were $3,697,000.
(ii) There were no amounts outstanding in respect of interest payable or receivable as at either year
end.
(iii) Operating profit is stated after charging depreciation of $6,784,000.

(iv) During the year, the company sold equipment for $5,667,000 realising a profit of $1,806,000.
This equipment had never been revalued, and there were no other disposals of non-current
assets during the year.
(v) The only revaluation of non-current assets was that of a piece of freehold land.
Required:
(a) Prepare a cash flow statement for H Marathon for the year ended 31 October 2006 in accordance
with IAS 7 – Cash Flow Statements, using the indirect method
138
4. Below are the statements of financial position of Richard as at 31 March 2011 and 31 March 2010,
together with the Statement of profit or loss for the year ended 31 March 2011.
2011 2010
$'000 $'000
Non-current assets
Property, plant and equipment 825 637
Goodwill 100 100
Development expenditure 290 160
1,215 897
Current assets
Inventories 360 227

Trade receivables 274 324
Investments 143 46
Cash 29 117
806 714
2,021 1,611
Equity
Share capital – $1 ordinary shares 500 400
Share premium 350 100
Revaluation surplus 152 60

1,239 815
6% debentures 150 100

Finance lease liabilities 148 125
298 225
Current liabilities
Finance lease liabilities 17 12
Current tax 56 153
139
Debenture interest 5 –
Bank overdraft 132 54
484 571
2,021 1,611
Statement of profit or loss
$'000
Revenue 1,476
Cost of sales (962)

Gross profit 514
Other expenses (157)

Finance costs (15)
Profit before tax 342
Income tax expense (162)

Profit for the year 180
Notes
(1) During 2011 cash spent on development projects totalled $190,000.
(2) During 2011 items of property, plant and equipment with a net book value of $103,000 were sold
for $110,000. Depreciation charged in the year on property, plant and equipment totalled
$57,000. Richard transfers extra depreciation on revalued property, plant and equipment to
retained earnings as allowed by IAS 16. Depreciation based on historical cost in 2011 is $49,000.
Richard purchased $56,000 of property, plant and equipment by means of finance leases.
(3) The current asset investments are government bonds and management has decided to class them
as cash equivalents.
(4) During the year Richard made a 1 for 8 bonus issue capitalising its retained earnings followed by
a rights issue.
140
Required
(a) Prepare a statement of cash flows for Richard in accordance with IAS 7 using the indirect method.
(b) Prepare (additionally) net cash from operating activities using the direct method.
141
5. Which of the following items could appear in a company’s statement of cash flows?
I. Proceed from disposal of PPE.
II. Proceeds of issue of shares.
III. Proposed dividend.
IV. Irrecoverable debts written off.
V. Dividends received.
A. I, II and V only
B. II, III, IV, V only
C. II and V only
D. III and IV only
LO F5g
6. Part of the process of preparing a company’s statement of cash flows is the calculation of cash
inflow from operating activities.
Which of the following statements about that calculation (using the indirect method) are
correct?
I. Gain on sale of operating non-current assets should be deducted from net profit before
taxation.
II. Decrease in inventory should be deducted from operating profits.
III. Increase in payables should be added to operating profits.
IV. Depreciation charges should be added to net profit before taxation.
A. I, II and III
B. I, II and IV
C. I, III and IV
D. II, III and IV
LO F5f
7. In the course of preparing a company's statement of cash flows, the following figures are to be
included in the calculation of net cash from operating activities.
$
Depreciation charges 900,000
Profit on sale of non-current assets 50,000
Increase in inventories 140,000
Decrease in receivables 80,000
Increase in payables 60,000
The net effect of these items be in the statement of cash flows will be $______________
(Addition to / (subtraction from) operating profit)
142
8. Which state whether the following statements are true (T) / false (F)?
a) A statement of cash flows prepared using the direct method produces a different figure to net
cash from operating activities from that produced if the indirect method is used (T, F)
b) Bonus issues of shares do not feature in a statement of cash flows (T, F)
c) A surplus on revaluation of a non-current asset will not appear as an item in a statement of
cash Flows (T, F)
d) A profit on the sale of a non-current asset will appear as an item under cash flows from
investing activities in the statement of cash flows (T, F)
e) Rights issues of shares do not feature in statements of cash flows (T, F)
f) Proposed dividends will appear under cash flows from investing activities (T, F)
g) Repayment of loan will appear under cash flows from investing activities (T, F)
h) The direct method of calculating net cash from operating activities leads to a different figure
from that produced by the indirect method, but this is balanced elsewhere in the cash flow
statement (T, F)
i) A company making high profits must necessarily have a net cash inflow from operating
activities (T, F)
j) Profits and losses on disposals of non-current assets appear as items under investing activities
in the cash flow statement (T, F)
k) In preparing a statement of cash flows, either the direct or the indirect method may be used.
Both lead to the same figure for net cash from operating activities. (T, F)
9. Part of a company's draft statement of cash flows is shown below:

$
Operating profit 9,640
Depreciation charges (3,100)
Proceeds of sale of non-current assets 560

Increase in inventory (300)
Decrease in accounts payable 240
The following criticisms of the above extract have been made:

I. Depreciation charges should have been added, not deducted.
II. Increase in inventory should have been added, not deducted.
III. Decrease in accounts payable should have been deducted, not added.
IV. Proceeds of sale of non-current assets should appear in this part of the statement of cash
flows.
143
Which of these criticisms are valid?
A. II and III only

B. I and IV only
C. I and III only
D. II and IV only
10. In preparing a company's statement of cash flows complying with IAS 7, which, if any, of the
following items could form part of the calculation of cash flow from financing activities?
I. Proceeds of sale of premises
II. Dividends received
III. Bonus issue of shares
A. I only
B. II only
C. III only
D. None of them
LO F5e, F5g, F5h
11. An extract from a statement of cash flows prepared by a trainee accountant is shown below.
Cash flows from operating activities

$m
Net profit before taxation 28
Adjustments for: Depreciation (9)

Operating profit before working capital changes 19
Decrease in inventories 13
Increase in receivables (4)

Increase in payables (8)
Cash generated from operations 10
The correct figure for cash generated from operations should be $____________________.
144
12. IAS 7 requires the statement of cash flows to open with the calculation of net cash from operating
activities, arrived at by adjusting net profit before taxation.
Which one of the following lists consists only of items which could appear in such a calculation?
A. Depreciation, increase in receivables, decrease in payables, proceeds from sale of equipment,

increase in inventories
B. Increase in payables, decrease in inventories, profit on sale of plant, depreciation, decrease in
receivables
C. Increase in payables, dividend paid, depreciation, decrease in receivables, right issues of
shares, increase in inventories
D. Increase on provision, interest paid, proceeds from sale of equipment, decrease in inventories
13. Extracts from the accounts of Danny showed balances as follows:
2009 2008
$1 Share capital 300,000 120,000
A bonus issue of 1 share for every 12 held-at the 2008 year-end occurred during the year and
debentures of $300,000 were issued at par.
The net cash inflow from financing activities is $____________.
LO F5e, F5g, F5h
14. Where, in a company's financial statements complying with International accounting standards,
should you find the proceeds of non-current assets sold during the period?
A. Statement of Cash flow and Statement of Financial Position
B. Statement of changes in equity and Statement of Financial Position
C. SOPL and cash flow statement
D. Statement of Cash flow only

LO F5e, F5g, F5h
15. The figures below have been prepared for inclusion in the statement of cash flow of Brandon.
Tax and dividends paid 87,566
Increase in payables 13,899

Decrease in inventory 8,900
Redemption of loans 300,000
145
Increase in receivables 6,555
Reduction in cash and cash equivalents 3,211
Depreciation charge 10,600
Payments to acquire non-current assets 47,999

Proceeds from sale of non-current assets 13,100
The cash generated from operations are $________________.

16. A business's bank balance increased by $550,000 during its last financial year. During the same
period, it issued shares, raising $1 million and repaid a loan of $750,000. It purchased non-current
assets for $200,000 and charged depreciation of $100,000. Receivables and inventory increased
by $575000.
Its profit for the year was $_________________.

LO F5e, F5g, F5h
17. A business had non-current assets with a book value of $40,000 at the start of the financial year.
During the year the business sold assets that had cost $6,000 and had been depreciated
by $2,500. Depreciation for the year was $10,000. The book value of assets at the end of the
financial year was $66,000.
The cash that has been invested in non-current assets during the year was $________________.
LO F5e, F5g, F5h
18. A business has made a profit of $8,000 but its bank balance has fallen by $5,000.
This could be due to:
A. depreciation of $3,000 and an increase in inventories of $10,000

B. depreciation of $6,000 and the repayment of a loan of $7,000
C. depreciation of $12,000 and the purchase of new non-current assets for $25,000
D. the disposal of a non-current asset for $13,000 less than its book value
146
19. A company made a profit for the year of $18,750, after accounting for depreciation of $1,250.
During the year, non-current assets were purchased for $8,000, receivables increased by $1,000,
inventories decreased by $1800, and payables increased by $350.
The increase in cash and bank balances during the year was $______________.
LO F5e, F5g, F5h
20. A cash flow statement prepared in accordance with the indirect method reconciles profit before
tax to cash generated from operations.
Which of the following lists of items consists only of items that would be ADDED to profit before
tax?
A. Decrease in inventory, depreciation, profit on sale of non-current assets

B. Increase in payables, decrease in receivables, profit on sale of non-current assets
C. Loss on sale of non-current assets, depreciation, increase in receivables

D. Decrease in receivables, increase in payables, loss on sale of non-current assets
21. The movement on the plant and machinery account for Simon is shown below:
Cost b/f 10,000

Additions 2,000
Disposals (3,000)
Cost c/f 9,000
Depreciation b/f 2,000
Charge for the year 1,000

Disposals (1,500)
Depreciation c/f 1,500
Carrying value b/f 8,000
Carrying value c/f 7,500
The profit on the sale of the machine was $500.
147
What figures would appear in the cash flow from investing activities of Simon?
A. Movement on plant account $500 and profit on disposal of $500.
B. Movement on plant account $500 and proceeds on sale of plant $2,000.
C. Purchase of plant $2,000 and profit on disposal of $500.

D. Purchase of plant $2,000 and proceeds on sale of plant $2,000
LO F5e, F5g, F5h
22. Which of the following is not an advantage of the cash flow statement?
A. It highlights the effect of non-cash transactions

B. It helps an assessment of the liquidity off a business
C. he numbers within it cannot be manipulated through the adoption of beneficial accounting

policies
D. It helps users to estimate future cash flows
LO F5c
23. Grace is calculating its cash flow using the direct method, and has found the following information:
Cash sales $212,500

Cash purchases $4,600
Cash expenses $11,200
Payables at start of year $12,300

Payables at end of year $14,300
Credit purchases $123,780

Wages and salaries due at start of year $1,500
Wages and salaries due at end of year $2,300
Wages and salaries expense $34,600

Inventory at start of year $23,000
Inventory at end of year $17,800
All sales are made for cash.
The cash generated from operations by Grace is $____________.

LO F5e, F5f
148
24. Carton, a limited liability company, has non-current assets with a carrying value of $3,500,000 on
1 December 2007. During the year ended 30 November 2008, the following occurred:
- Depreciation of $85,000 was charged to the SOPL
- Land and buildings with a carrying value of $1,200,000 were revalued to $1,700,000
- An asset with a carrying value of $220,000 was disposed of for $250,000
The carrying value of non-current assets at 30 November 2008 was $5,400,000.
The amount that should be shown for the purchase of non-current assets in the statement of
cash flows for the year ended 30 November 2008 was $_____________________.
LO F5e, F5g, F5h
25. Where in a company's financial statements complying with International accounting standards,
should you find dividends paid?
I. SOPL
II. Statement of financial position
III. Statement of cash flow
IV. Statement of changes in equity.
A. I and III
B. II and III
C. I and IV
D. III and IV
LO F5e, F5g, F5h
149
Chapter 22: Group
Chapter 22: Group
1. You are provided with the following SOFP for Shark and Minnow.
Statements of financial position as at 31 October 2010
Shark Minnow
ASSETS $000 $000 $000 $000
Non-current assets
Plant 325 70
Fixtures 200 50
Investments:
$1 ordinary shares in Minnow at cost 200 –
–––– –––
725 120
Current assets
Inventory, at cost 220 70
Receivables 145 105
Cash and cash equivalents 100 465 0 175

––--–– ––––– ––––– ––––––
Total assets 1,190 295
–––––– ––––––
EQUITY AND LIABILITES
Capital and Reserves

$1 Ordinary shares 700 170
–––––––– –––––––
Total equity 915 220
Current liabilities
Payables 275 55
Bank overdraft 0 275 20 75
–––––– ––––– ––––– –––––
150
Chapter 22: Group
Total equity and liabilities 1,190 295
–––––– ––––––
a) Shark purchased 70% of the issued OSC of Minnow 4 years ago, when the RE of Minnow were
$20,000. There has been no impairment of goodwill.
b) For the purposes of the acquisition, plant in Minnow with a book value of $50,000 was revalued
to its fair value of $60,000. The revaluation was not recorded in the accounts of Minnow.
c) Shark sells goods to Minnow at a mark-up of 25%. At 31 Oct 2010, the inventories of Minnow
included $45,000 of goods purchased from Shark.
d) Minnow owes Shark $35,000 for goods purchased and Shark owes Minnow $15,000.
e) It is the group’s policy to value non-controlling interest at fair value.
f) The market value of the shares of the non-controlling shareholders just before the acquisition was
$1.50.
Required:
Prepare the consolidated SOFP of Shark as at 31 October 2010.

LO G1a, G1b, G1c, G1d,
151
Chapter 22: Group
2. Panther is the parent company of Northon. The following are the SOFPs for both companies as at
31 October 2007.
Panther Northon
Assets $000 $000 $000 $000

Non-current assets
Property, plant and equipment 4,200 3,300
Investments:
Shares in Northon at cost 3,345
Current assets
Inventory 1,500 800
Receivables 1,800 750

Bank 600 3,900 350 1,900

$1 Ordinary shares 9,000 4,000
9,525 4,200
Current liabilities
Payables 1,220 200

Tax 700 800
(i) Panther purchased 2,800,000 shares in Northon one year ago when Northon had retained
earnings of $60,000.
(ii) During the year Panther sold goods with an invoice value of $240,000 to Northon. These goods
were invoiced at cost plus 20%. Half of the goods are still in Northon’s inventory at the year end.
(iii) Northon owes Panther $30,000 at 31 October 2007 for goods it purchased during the year.
152
Chapter 22: Group
(iv) It is the group policy to value the non-controlling interest at full fair value. At the date of
acquisition, the directors estimated the fair value of the non-controlling interest to be $1,500,000.
(v) During the year Northon sold a plant cost $600,000 to Panther for $800,000. Depreciation charged
for the plant was 20% p.a.
(vi) At the date of acquisition Northon's land and buildings had a fair value $20,000 higher than their
book value. The fair values have not been reflected in Northon's statement of financial position.
Required:
(a) Calculate the goodwill on acquisition.
(b) Prepare the consolidated SOFP for the Panther group as at 31 0ctober 2007.
LO G1a, G1b, G1c, G1d
153
Chapter 22: Group
3. The draft SOFPs of Spiderman, a limited liability company and its subsidiary company Batman at
31 October 2005 are as follows:
Spiderman Batman
Assets $000 $000 $000 $000

Non-current assets
Tangible assets:
Land and buildings 315,000 278,000
Plant 285,000 220,000
600,000 498,000
Investment:
Shares in Batman at cost 660,000
Current assets
Inventory 357,000 252,000
Bank 158,000 1,040,000 30,000 408,000
Total assets 2,300,000 906,000

$1 Ordinary shares 1,500,000 600,000
Reserves 580,000 212,000
2,080,000 812,000
Current liabilities
Payables 220,000 94,000
Total equity and liabilities 2,300,000 906,000

(i) Spiderman purchased 480 million shares in Batman some years ago, when Batman had a credit
balance of $95 million in reserves.
(ii) At the date of acquisition, the freehold land of Batman was revalued at $70 million in excess of its
book value. The revaluation was not recorded in the accounts of Batman.
154
Chapter 22: Group
(iii) Batman’s inventory includes goods purchased from Spiderman at a price that includes a profit to
Spiderman of $12 million.
(iv) At 31 October 2005 Batman owes Spiderman $25 million for goods purchased during the year.
(v) It is group policy to value the non-controlling interest at acquisition at full (or fair) value. Just prior
to acquisition by Spiderman, Batman's shares were trading at $2.
Required:
(a) Calculate the goodwill on acquisition.
(b) Prepare the consolidated SOFP for Spiderman as at 31 October 2005.

LO G1a, G1b, G1c, G1d
155
Chapter 22: Group
4. The summarised SOPLs of Big Co and Small Co, for the year ended 31 October 2010, are provided
below.
Big Co acquired 3,600,000 ordinary shares in Small Co for $5,250,000 on 1 November 2009 when
the retained earnings of Small Co were $300,000. On the same date, Big Co also acquired 40% of
Small Co’s loan notes of $400,000.
Statement of profit or loss for the year ended 31 October 2010
Big Co Small Co
$000 $000
Revenue 9,600 3,900
Cost of sales (5,550) (2,175)

––––––– –––––––
Gross profit 4,050 1,725
Distribution costs (1,050) (480)

Administrative expenses (1,650) (735)
Finance costs – (25)
Income from Small Co: Loan note interest 10 –

Dividends 150 –
––––––– –––––––
Profit before tax 1,510 485
Income tax expense (600) (120)
––––––– –––––––
Profit for the year 910 365

––––––– –––––––

(i) Small Co’s total share capital consists of 6,000,000 ordinary shares of $1 each.
(ii) It is group policy to value the non-controlling interest at full fair value. The fair value of the non-
controlling interest at the acquisition date was $3,200,000.
(iii) During the year ended 31 October 2010, Big Co sold goods costing $200,000 to Small Co for
$300,000. At 31 October 2010, 50% of these goods remained in Small Co’s inventory.
156
Chapter 22: Group
Required:
(a) Calculate the goodwill arising on the acquisition of Small Co.
(b) Prepare the consolidated Statement of profit or loss for Big Co for the year ended 31 October
2010.
LO G1a, G1b, G1d, G1e
157
Chapter 22: Group
5. You are presented with the following information for Wealthy, a limited liability company, and its
subsidiary Brandy:
Statements of profit or loss for the year ended 31 October 2008

Wealthy Brandy
$'000 $'000
Revenue 50,000 27,400
Cost of sales (26,000) (11,000)
Distribution costs (2,700) (2,300)

Administrative expenses (7,000) (2,792)
Finance costs - (8)

Income from Bruce: Loan note interest 6 -
Post dividends from Brandy 2,100 -
Profit before tax 16,406 11,300
Income tax expense (3,700) (3,100)
Profit for the year 12,706 8,200

(i) Wealthy purchased 70% of the $1 ordinary shares in Brandy on 1 May 2008.
(ii) Wealthy owns $60,000 of Brandy’s loan notes since beginning of the year. The interest is paid
annually in arrears.
(iii) In the post period of acquisition, Brandy sold goods which originally cost $3,000,000 to
Wealthy for $5,000,000. Wealthy has only been able to sell 40% of these goods by 31 October
2008.
Prepare the consolidated SOPL for the year ended 31 October 2008.
LO G1a, G1b, G1e
158
Chapter 22: Group
6. You are presented with the following information for Bradshaw, a limited liability company, and
its subsidiary, Martin:
Bradshaw Martin
$000 $000
Revenue 125,000 77,900
Cost of sales (65,000) (38,500 )
–––––––– ––––––––
Income from Martin: Loan note interest 15 –
Dividends 5,200 –
–––––––– ––––––––
–––––––– ––––––––
––––––––– ––––––––
Bradshaw Martin
ASSETS $000 $000 $000 $000
Non-current assets
Property, plant and equipment 75,000 31,901
Investments:
$1 ordinary shares in Martin at cost 34,000 –
Martin loan notes 150 –
––––––– –––––––
109,150 31,901
Current assets
Inventory, at cost 9,750 4,162
Receivables 17,125 11,325
Cash and cash equivalents 3,150 30,025 1,255 16,742
159
Chapter 22: Group
–––––– ––––––– –––––– –––––––
––––––– –––––––
EQUITY AND LIABILITES
–––––––– –––––––
Total equity 112,362 32,688
10% Loan note – 200
Current liabilities
Payables 16,613 9,500
Tax 10,200 6,255
Total liabilities 26,813 15,755
––––––– –––––––– ––––––– ––––––
–––––––– –––––––––
(i) Bradshaw purchased 18,520,000 $1 ordinary shares in Martin on 1 November 2008. At that date
Martin’s retained earnings were $5,338,000.
(ii) It is group policy to value the non-controlling interest at full fair value. The fair value of the non-
controlling interest at the acquisition date was $7,408.
(iii) Bradshaw owns $150,000 of Martin’s loan notes. The annual interest of $15,000 due to
Bradshaw has not been paid and is included in Martin’s payables and Bradshaw’s receivables.
(iv) During the year ended 31 October 2009 Bradshaw sold goods to Martin for $15,000,000.
Bradshaw made a profit on these goods of $2,500,000. Martin still has all of these goods in
inventory at 31 October 2009.
160
Chapter 22: Group
(v) At 31 October 2009 Martin owed Bradshaw $3,000,000 for some of the goods that Bradshaw
supplied during the year.
(vi) All Martin’s dividends of $6,500,000 were paid in the financial year ended 31 October 2009.
Required:
(a) Calculate the goodwill arising on the acquisition of Martin as at 1 November 2008.
(b) Prepare the following financial statements for Bradshaw:

(i) the consolidated Statement of profit or loss for the year ended 31 October 2009;
(ii) the consolidated statement of financial position as at 31 October 2009.

LO G1a, G1b, G1c, G1d, G1e
161
Chapter 22: Group
7. You are presented with the following information for Wallace, a limited liability company, and its
subsidiary Bruce:
Wallace Bruce
$000 $000
Revenue 50,000 27,400
Cost of sales (26,000) (11,000)
–––––––– ––––––––
Income from Bruce: Loan note interest 6 –
Dividends 2,100 –
–––––––– ––––––––
–––––––– ––––––––
–––––––– –––––––––
Wallace Bruce
Assets $000 $000 $000 $000
Non-current assets
Tangible assets 30,000 14,895
Investments:
$1 ordinary shares in Bruce at cost 8,800 –
Bruce loan notes 60 –
––––––– –––––––
38,860 14,895
Current assets
Inventory, at cost 3,900 1,665
Receivables 6,850 4,530
162
Chapter 22: Group
Cash and cash equivalents 1,260 12,010 502 6,697
––––– ––––– ––––– –––––
––––––– –––––––
––––––– –––––––
Total equity 40,145 15,210
Current liabilities
Payables 6,645 3,800
Tax 4,080 2,502
Total liabilities ––––– 10,725 ––––– 6,302
––––––– –––––––
––––––– –––––––
(i) Wallace purchased 70% of the $1 ordinary shares in Bruce on 1 November 2007. At that date
Bruce’s retained earnings were $750,000.
(ii) It is group policy to value the non-controlling interest at fair value. For this purpose, the fair
value of the goodwill attributable to the non-controlling interest of Bruce is $600,000.
Consolidated goodwill was not impaired at 31 October 2008.
(iii) Wallace owns $60,000 of Bruce’s loan notes. The interest is paid annually in arrears. Interest
for the year ended 31 October 2008 is included in Bruce’s payables. Wallace has also accrued
the interest in its receivables.
(iv) During the year ended 31 October 2008 Bruce sold goods which originally cost $3,000,000 to
Wallace for $5,000,000. Wallace has only been able to sell 40% of these goods by 31 October
2008.
163
Chapter 22: Group
(v) At 31 October 2008 Wallace owed Bruce $600,000 for some of the goods that Bruce supplied
during the year.
(vi) All Bruce’s dividends were paid in the financial year ended 31 October 2008.
Required:
(a) Calculate the goodwill arising on the acquisition of Bruce as at 1 November 2007. (4 marks)
c) Prepare the following financial statements for Wallace:
(i) the consolidated Statement of profit or loss for the year ended 31 October 2008; (8 marks)
(ii) the consolidated statement of financial position as at 31 October 2008
Note: A working should be included for the retained earnings. (18 marks)
LO G1a, G1b, G1c, G1d, G1e
164
Chapter 22: Group
8. Jean Co acquired 70% of the 1,000,000 issued share capital of Kent Co on 1 July 2009 and the share
price of Kent Co was $2.00. At that date the net assets of Kent had a fair value of $1.8m. The
consideration for the purchase was $1.4m.
The fair value of the NCI at the date of acquisition is $0.6m

The Goodwill on acquisition is $______________.
LO G1d
9. Jack acquired 70% of K Co for $1,000
Fair value of K Co identifiable net assets on acquisition $1,500

Carrying amount of K Co’s net assets $1,200
Fair value of non-controlling interest $650
The Goodwill on acquisition is $______________.
LO G1d
10. X has a 40% shareholding in each of the following three companies:

P: X has the right to appoint or remove a majority of the directors of P.
Q: X has significant influence over the affairs of Q.
R: X has the power to govern the financial and operating policies of R.
Which of these companies are subsidiaries of X for financial reporting purposes?
A. Q and R only
B. P and R only
C. P and Q only
D. P, Q and R
LO G1a, G1b
11. Brandon acquired 70% of the voting equity shares of Brenda. Brenda had the following equity at
the date of acquisition:
Ordinary shares 1,200,000

165
Chapter 22: Group
The cost of the investment was $1,600,000 and the fair value of the non-controlling interest at
acquisition was $460,000.
The goodwill on acquisition of Brenda was $________________.
LO G1d
12. Zen Co acquired 80% of the ordinary share capital of Bob Co six years ago. The following information
relates to Bob Co for the year ended 30 September 2010.
$

Taxation 50,000
The profit attributable to the non-controlling interest in the consolidated Statement of profit or
loss was $_____________.
LO G1e
13. On 30 June 2002, H acquired 70% of the share capital of S. The non-controlling interest had a fair
value of $1,100,000.
Extracts from the statement of financial position of S at 30 June 2002 and 30 June 2006 are shown
below:
Statement of financial position
30 June 2002 30 June 2006
$ $
Ordinary share capital 1,000,000 1,000,000
Share premium account 500,000 500,000
Retained earnings 5,700,000 6,600,000
The figure for non-controlling interest that should appear in the consolidated statement of
financial position as at 30 June 2006 was $___________.
LO G1c
166
Chapter 22: Group
14. White Co purchased 60,000 ordinary shares in Red Co for $105,000 five years ago, when Red Co’s
retained earnings were $30,000.
Red Co’s equity and reserves at 31 July 2009 were as follows:
Ordinary shares $1 80,000

The fair value of the non-controlling interest at acquisition was $42,000.
The goodwill arising on acquisition of Red Co was $______________.
LO G1d
15. Black Co acquired 70% of the ordinary share capital of Bob Co six years ago. The following
information relates to Bob Co for the year ended 30 September 2010.
$

Taxation 50,000
During the year, Bob Co sold goods which originally cost $30,000 to Black Co for $50,000. Black
Co has only been able to sell 40% of these goods by 30 September 2010.
The profit attributable to the non-controlling interest in the consolidated Statement of profit or
loss was $_____________.
LO G1e
16. White Co purchased 60,000 ordinary shares in Red Co for $105,000.

Red Co’s equity and reserves at acquisition date were as follows:
Ordinary shares $1 80,000

The fair value of the non-controlling interest at acquisition was $42,000.
167
Chapter 22: Group
For the purposes of the acquisition, land & building with a book value of $60,000 in Red Co’s book
was revalued to its fair value of $80,000. The revaluation was not recorded in the accounts of Red
Co.
The goodwill arising on acquisition of Red Co was $______________.

LO G1d
17. On 30 June 2005, H acquired 80% of the share capital of S for $6,300,000. The non-controlling
interest had a fair value of $1,100,000.
Extracts from the statement of financial position of S at 30 June 2005 and 30 June 2006 are shown
below:
Statement of financial position
30 June 2005 30 June 2006

$ $

Share premium account 500,000 500,000
During the year, S sold NCA costing $200,000 to H for $300,000. Depreciation is charged 20% p.a.
The goodwill arising on acquisition of S was $______________.
The figure for non-controlling interest that should appear in the consolidated statement of
financial position as at 30 June 2006 was $___________.
LO G1c, G1d
18. On 30 June 2009, H acquired 80% of the share capital of S for $3,800,000 when the retained
earnings of S stood at $500,000.
Extracts from the statement of financial position of S at 30 June 2011 are shown below:
Statement of financial position as at 30 June 2011
H S
$ $
168
Chapter 22: Group
During the year, H sold NCA costing $250,000 to S for $300,000. Depreciation is charged 10% p.a.
S sold goods to H for $150,000. S made a profit on these goods of $30,000. H still has all of these
goods in inventory at 30 June 2011.
The figure for consolidated retained earnings that should appear in the consolidated statement
of financial position as at 30 June 2011 was $___________.
LO G1c
19. Brandon acquired 80% of the voting equity shares of Brenda. Brenda had the following equity at
the date of acquisition:
$
Ordinary shares $1 1,200,000
The cost of the investment was $1,600,000 and the market value of the shares of the non-
controlling shareholders just before the acquisition was $1.80.
The goodwill on acquisition of Brenda was $________________.

LO G1d
20. Brenda, a limited liability company, owns 70% of the shares in Mandy. Brenda has payables of
$144,000. Mandy has payables of $40,000 of which $6,000 is owed to Brenda. Brenda has
receivables of $360,000 and Mandy has receivables of $150,000.
What amounts should be recorded for consolidated receivables and payables in the group
accounts of Brenda?
Payables $__________ Receivables $____________

LO G1c
21. Caron has 10 million $1 issued ordinary shares. At 1 May 2009 Snowdon purchased 70% of Caron’s
$1 ordinary shares for $8,000,000. At that date Caron had net assets with a fair value of $8,750,000
and its share price was $1·30. It is group policy to value the non-controlling interest at the fair value
of the subsidiary’s identifiable net assets using the market value of the shares at acquisition.
The total goodwill arising on acquisition at 1 May 2009 was $_______________.

LO G1d
169
Chapter 22: Group
22. Kinder Co has 5 million $1 issued ordinary shares. At 1 May 2010 Peak Co purchased 60% of Kinder
Co’s $1 ordinary shares for $4,000,000. At that date Kinder Co had net assets with a fair value of
$4,750,000 and a share price of $1·10. Peak Co valued the non-controlling interest in Kinder Co at
acquisition as $2,200,000.
The total goodwill on acquisition at 1 May 2010 was $______________.

LO G1d
23. Tammy Co, a limited liability company, owns 65% of the shares in Fred Co. Fred Co owes Tammy Co
$5,000. Tammy Co has receivables of $300,000 and Fred Co has receivables of $130,000.
The consolidated receivables for Tammy Co are $_______________.

LO G1c
24. Which of the following statements apply when producing a consolidated statement of financial
position?
(i) All inter-company balances should be eliminated.
(ii) Inter-company profit in year-end inventory should be eliminated.
(iii) Closing inventory held by subsidiaries needs to be included at fair value.
A. (i) only
B. (i), (ii) and (iii)
C. (i) and (ii) only
D. (iii) only
LO G1c
25. When accounting for goodwill arising on the acquisition of an ongoing business, which of the
following statements is correct?
A. Goodwill is recorded at its initial value less impairment losses

B. Goodwill is amortised over its estimated useful life
C. Goodwill is amortised over an estimated useful life not exceeding 20 years
D. Goodwill is written off immediately after acquisition

LO G1d
170
Chapter 22: Group
26. Honey Co acquired 75% of Bee Co on 1 April 2013, paying $2 for each ordinary share acquired. The
fair value of the non-controlling interest at 1 April 2013 was $300. Bee Co’s individual financial
statements as at 30 September 2013 included:
Statement of financial position $
Ordinary share capital ($1 each) 1,000

Retained earnings 710
1,710
Statement of profit or loss
Profit after tax for the year 250
Profit accrued evenly throughout the year.
What is the goodwill on acquisition on 1 April 2013?
Answer: $_______________
LO G1d
27. Panther Co acquired 80% of the equity shares in Seal Co on 31 August 2012.
The SOPLs of Panther Co and Seal Co for the year ended 31 December 2012 showed:
Panther Co Seal Co
$ $
Revenue 100,000 62,000

Cost of sales 25,000 16,000
During October 2012, sales of $6,000 were made by Panther Co to Seal Co. None of these items
remained in inventory at the year-end.
What is the consolidated revenue for Panther Group for the year ended 31 December 2012?
Answer: $_______________
LO G1e
171
Chapter 22: Group
28. Tulip Co acquired 70% of the voting share capital of Daffodil Co on 1 March 2012.
The following extracts are from the individual statement of profit or loss of the two companies for
the year ended 31 August 2012:
Tulip Co Daffodil Co
$ $
Revenue 61,000 23,000
Cost of sales (42,700) (13,800)
Gross Profit 18,300 9,200
What should be the consolidated gross profit for the year ended 31 August 2012?
Answer: $_______________
LO G1e
172
Chapter 23: Associates
1. Which of the following statements regarding the method of consolidation is true?
I. Subsidiaries are consolidated in full

II. Associates are equity accounted
A. Neither statement
B. Statement I only
C. Both statements
D. Statement II only
LO G2a, G2b G2c
2. IAS 28 Investments in Associates governs the identification of associates.

Which of the following would suggest that an entity is an associate of another entity?
A. The investing entity has owned its share since the incorporation of the investee entity
B. The investor holds greater than 20% but less than 50% of the voting power of the investee
C. The investing entity has some influence over other entities in the same industry
D. The investor often trades with the investee
LO G2a, G2b, G2c
3. How should an associate be accounted for in the consolidated statement of profit or loss?
A. The associate’s income and expenses are added to those of the group on a line-by-line basis
B. The groups share of the associate’s income and expenses is added to the group figures on a line-by-
line basis
C. The group share of the associate’s profit after tax is recorded as one-line entry
D. Only dividends received from the associate are recorded in the group statement of profit or loss
4. IAS 28 considers accounting for associates where the investor holds a minimum for voting power:
A. 100%
B. 50%
C. 30%
D. 20%
LO G2a, G2b, G2c
173
5. Which of the following is the criterion for treatment of an investment as an associate?

A. Ownership of a majority of the equity shares
B. Ability to exercise control
C. Existence of significant influence
D. Exposure to variable returns from involvement with the investee
LO G2a, G2b, G2c
6. At 1 June 2009 Jean Group acquired 25% of the ordinary share capital of J. Co for $960,000 when the
reserves of J. Co were $1,080,000. J. Co appointed two of Jean Group’s directors to the board of J. Co.
Both companies prepare accounts to 31 May each year. The summarised statement of financial position
for J. Co at 31 May 2010 is as follows:
$’000
Called up share capital 1,200

3,585
J. Co has not issued any new shares since Jean Group acquired its holding.
What amount of investment in J. Co will appear in the consolidated statement of financial position
of Jean Group at 31 May 2010?
A. $960,000
B. $1,117,500
C. $896,250
D. $1,387,500
LO G2a, G2b, G2c
174
Chapter 24: Ratio Analysis (Interpretation of Financial Statements)
1. An investor is considering the purchase of shares in either Campbell or Giddens. Both companies are in
the same line of business and their accounts are summarised below:
Campbell Giddens
Assets $000 $000 $000 $000
Non-current assets
At cost 420 1,070
Accumulated depreciation (113) (144)
––––– ––––––
307 926
Current assets
Inventory 138 167
Receivables 69 98
Cash and cash equivalents 96 303 9 274
––––– ––––– –––––– ––––––
610 1,200
––––– ––––––
Share capital and reserves

Share capital 370 900
––––– ––––––
540 969
Current liabilities
175
Interest payable – 1
Income tax 10 70 30 151
––––– ––––– –––––– ––––––
Total equity and liabilities 610 1,200

––––– ––––––
Statement of profit or losss for the year ended 31 October 2008

Campbell Giddens
$000 $000 $000 $000

Sales revenue 596 678
Cost of sales (394) (526)
––––– ––––––
Gross profit 202 152
Expenses:
Administrative (36) (45)
Selling and distribution (53) (56)
Depreciation (14) (19)

Loan note interest – (8)
––––– ––––––
(103) (128)
––––– ––––––
Net profit 99 24
––––– ––––––
176
Required:
(a) Calculate the following ratios for both companies, clearly showing the ratio formulae and figures
used.
(i) Profitability ratio (GP margin, OP margin, ROCE, Asset turnover);
(ii) Liquidity ratio (Current ratio, Acid test ratio);

(iii) Efficiency ratio (Inventory turnover in days, Trade payables period in days, Trade receivables
collection period in days);
(iv) Gearing ratio;
(b) Comments on the performance and position of Campbell and Giddens using the ratios calculated in
part (a).
LO H2a, H2b, H3a, H3b
177
2. Which of the following will reduce a company’s gross profit ratio, when sales are increasing?
(i) A change in the product sales mix resulting in fewer sales of the more profitable products.
(ii) Increasing costs of purchases not passed on to customers.
(iii) An increase in the amount of inventory held.
A. (i) and (ii) only
B. (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)

LO H2b, H3a, H3b
3. The statement of financial position for B&W Co, a limited liability company, includes the following:
Current assets $000 Current Liabilities $000
Inventory 485 Trade payables 289
Trade receivables 286 Accrued expense 55
Prepayments 14 Taxation 116

Cash and cash equivalents 25
What is B&W Co’s current ratio?

A. 1·76
B. 70·7%
C. 0·56
D. 0·71
LO H2a
4. Which of the following would reduce the capital gearing of a company?
(i) Issuing loan notes with a long redemption date
(ii) Paying dividends to shareholders
(iii) Making a bonus issue to shareholders
(iv) Making a rights issue of ordinary shares
178
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
D. (iv) only
LO H2b, H3a, H3b
5. Please state whether the followings are true or false in relation to Gross Profit Margin:
a) Increase may be due to increases in selling prices (true or false)
b) Increase may be due to increases in sales volume (true or false)
c) Increase may be due to change in the product sales mix resulting in higher sales of the more
profitable products (true or false)
d) Decrease may be due to increases in the production / purchasing costs (true or false)
e) Decrease may indicate more competition in the market resulting in lower selling price (true or
false)
f) If GP margin has remained the same, but NP margin has dropped significantly, this may indicate
good control over expenses (true or false)
LO H2b, H3a, H3b
6. Please state whether the followings are true or false in relation to ROCE:
a) It measures how efficiently management has deployed the resources available to it (true or false)
b) Increases may due to either increases in operating profit margin or asset turnover (true or false)
c) Decreases may be due to increases in PBIT greater than the increases in capital employed (true or false)
LO H2b, H3a, H3b
7. Please state whether the followings are true or false in relation to liquidity ratio:
a) To show a healthy liquidity position, all companies must have a current ratio of 2:1, regardless of which
market sector the companies are (true or false)
b) All companies should maintain the liquidity ratio as high as possible because the higher the ratio the
more secure the company is (true or false)
c) A very high liquidity ratio may indicate that funds are being tied up in cash or other liquid assets and
the company are not earning the highest returns possible (true or false)
d) Low ratio may indicate that the company may not have sufficient assets to meet its short term
obligations (true or false)
LO H2b, H3a, H3b
179
8. Please state whether the followings are true or false in relation to receivables collection period:
a) Increases may indicate some bad debts have not been provided for (true or false)
b) Decreases may indicate poor credit control (true or false)
c) Increase may be due to the company’s policy to extend the credit period in order to stimulate higher
sales (true or false)
d) Decreases may result in potential liquidity problems (true or false)
LO H2b, H3a, H3b
9. Please state whether the followings are true or false in relation to payables payment period:
a) Low payment period may due to unrecorded payables (true or false)
b) Decreases may be due to that the company is not taking all the credit from suppliers it is entitled to
(true or false)
c) Increases may be due to that the suppliers might be shortening their credit terms (true or false)
d) High payment period may indicate poor liquidity (true or false)
e) High payment period may due to the company take advantages of discount for early settlement (true
or false)
LO H2b, H3a, H3b
10. Please state whether the followings are true or false in relation to Inventory turnover period (in days):
a) Increases may indicate a slowing down of trading (true or false)
b) Decreases may due to unnecessary build-up of inventory levels (true or false)
c) Increases may be an indication of obsolete stock (true or false)
d) Decreases may be due to poor inventory management (true or false)
e) Too short period might indicate that the company might not be able to ensure continual steady stocks
to meet customer’s demand (true or false)
LO H2b, H3a, H3b
11. Please state whether the followings are true or false in relation to Gearing ratio:
a) A company financed mainly by equity capital is considered highly geared (true or false)
b) Highly geared company may face difficulties when profits are low as fixed interest charges must be
paid regardless of profits (true or false)
c) Shareholders’ risk increases if the gearing ratio decreases (true or false)
d) In calculation of gearing ratio, preference shares are usually treated as debt (true or false)
e) Increases may be an indication of financial burden and possibly increase the risk of insolvency (true or
false)
180
f) It measures the company’s commitment to its long-term lenders against the long-term capital in the
company (true or false)
LO H2b, H3a, H3b
12. Zen has the following working capital ratios:
2009 2008
Current ratio 1·2:1 1·5:1
Receivables days 75 days 50 days
Payables days 30 days 45 days
Inventory turnover 42 days 35 days
Which of the following statements is correct?

A. Zen’s liquidity and working capital has improved in 2009
B. Zen is receiving cash from customers more quickly in 2009 than in 2008
C. Zen is suffering from a worsening liquidity position in 2009
D. Zen is taking longer to pay suppliers in 2009 than in 2008
LO H2b, H3a, H3b
13. Which of the following statements is true?

A. The interpretation of an entity’s financial statements using ratios is only useful for potential
investors
B. Ratios based on historical data can predict the future performance of an entity
C. The analysis of financial statements using ratios provides useful information when compared with
previous performance or industry averages
D. An entity’s management will not assess an entity’s performance using financial ratios
LO H1a, H1b
14. The following extracts are from Jason’s financial statements:

$
Profit before interest and tax 20,200
Interest (1,800)
Tax (6,300)
–––––––
Profit after tax 12,100
181
–––––––
Share capital 20,000
Reserves 25,600
–––––––
45,600
Loan liability 11,900
–––––––
57,500
–––––––
What is Jason’s return on capital employed?

A. 44%
B. 21%
C. 35%
D. 27%
LO H2a
15. A company’s gross profit as a percentage of sales increased from 24% in the year ended 31 December
2009 to 27% in the year ended 31 December 2010.
Which of the following events is most likely to have caused the increase?
A. An increase in sales volume
B. A purchase in December 2009 mistakenly being recorded as happening in January 2010
C. Overstatement of the closing inventory at 31 December 2009
D. Understatement of the closing inventory at 31 December 2009

LO H2b, H3a, H3b
182
16. The following information has been extracted from the accounts of Reeve Trading Ltd:
2007 2008
Sales $600 000 $700 000
Gross profit percentage 30% 31%
Net profit percentage 15% 4%
What conclusion do you draw?
A. closing stock has increased
B. expenses have increased
C. purchase prices have increased but selling prices have not

D. the company has paid a large dividend
LO H2b, H3a, H3b
17. A bank manager has reviewed the financial statements of a business. He notes that the quick ratio has
fallen but that the sales for the year have remained constant.
What explains this fall in the quick ratio?
A. a decrease in stocks of finished goods

B. a decrease in the overdraft
C. an increase in cash
D. an increase in trade creditors
LO H2b, H3a, H3b
18. The following data is available at the end of a financial year.

Opening stock $500,000
Purchases $2,250,000
Closing stock $750,000

Gross profit margin 50%
Debtor’s collection period 60days
Sales are all on credit and accrue evenly over a 360-day accounting period.
183
What is the value of debtors at the year-end?
A. $333,333
B. $375,000
C. $500,000
D. $666,667
LO H2a
19. The profit margins of a company over two years showed:
31 March 31 March
year 1 year 2
Gross profit margin 37.2 % 39.1 %

Net profit margin 12.2 % 11.8 %
What combination of factors could have caused these changes?
A. a change in the combination of goods sold leading to lower selling costs
B. a loss of trade discounts on purchases but an increase in cash discounts taken from suppliers
C. an advertising campaign to promote higher sales leading to higher selling prices
D. an increase in both production and selling costs

LO H2b, H3a, H3b
20. The accounts of a business show that it has increased its sales revenue by 50 % in one year whilst its
cost of sales has increased by 60 % over the same period.
What is the explanation for the change in profit margin?
A. an increase in marketing expenses
B. an increase in sales price

C. an increase in sales volume
D. an increase in supplier price

LO H2b, H3a, H3b
184
21. The table shows the capital structure of a company.
$000
Ordinary shares of $1 each 100
8% preference shares of $1 each 50

Retained earnings 300
650
15 % loan stock (issued 5 years ago) 400
1050
Operating profits average $260 000 per annum.
What is the return on owner’s equity?

Answer: _______________
LO H2a
22. A business turns over its stock 5 times a year. Average stock is $54 000 and sales are made at a mark-
up of one third.
How much are the sales?
A. $240 000
B. $270 000
C. $320 000
D. $360 000
LO H2a
185
23. A firm has $10 000 in the bank and buys stocks for $6000 paying by cheque.
What will be the effect on its current ratio and quick (acid test) ratio?
current ratio quick (acid test) ratio
A. no effect no effect
B. decreases increases
C. decreases no effect
D. no effect decreases
LO H2b, H3a, H3b
24. The following data is available:

this year last year
($) ($)
credit sales 60,000 50,000

credit purchases 40,000 28,000
creditors (average) 10,000 16,000
debtors (average) 12,000 8,000
Which statement is correct?

A. Debtors’ and creditors’ turnover ratios have improved.
B. Debtors’ and creditors’ turnover ratios have worsened.

C. Debtors are paying faster, but creditors are being paid more slowly.
D. Debtors are paying more slowly, but creditors are being paid faster.
LO H2b, H3a, H3b
186

Sunway Tes Financial Accounting ACCA Chapter Assessment

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ACCA – FA: FINANCIAL ACCOUNTING

Chapter 1: The Context and Purpose of Financial Reporting ..............................................................3

Chapter 1: The Context and Purpose of Financial Reporting

(i) is owned by shareholders and managed by directors (true or false)

(iii) Legal requirement to publish financial statements (true or false)

(viii) Drawings will appear in the financial statements (true or false)

(iii) Must registered under the Companies Act (true or false)

(i) Has unlimited liabilities (true or false)

(ii) A ‘one-man-band’ business (true or false)

(iv) No legal requirement to publish financial statements (true or false)

(v) Drawings will appear in the financial statements (true or false)

(iv) A public limited company

LO A1b, A1c, A1d

(ii) Formation of the company is simple as compared to partnership (true or false)

(v) Taxation rate is low as compared to sole trader (true or false)

LO A1b, A1c, A1d

Chapter 2: The Qualitative Characteristics of Financial Information

C. Use of information that has the ability to influence decisions

A. It fails to take account of changing price levels over time

B. It records only past transactions

3. Which one of the following is the main aim of accounting?

A. To maintain ledger accounts for every asset and liability

C. To produce a trial balance

C. The realisation concept

D. The historical cost convention

B. The going concern concept

D. The business entity convention

A. The prudence concept

C. The money measurement concept

7. Assets are usually valued under which basis?

C. Net realisable value

8. The IFRS Advisory Council are responsible for:

1) issuing guidance in relation to emerging issues

accumulated depreciation, rather than at their enforced saleable value, is:

A. Consistency, understandability, faithful representation, substance over form

C. Faithful representation, comparability, understandability, relevance

12. Why should financial statements be prepared on a consistent basis?

B. To ensure that the capital of the business is maintained.

C. To ensure that no material error occurs in the financial statements.

D. To make the financial statements easier to understand.

14. Which of the following are true?

2) Accounting standards provide guidance on accounting for all types of transaction.

15. Which one of the following statements is correct?

A. The prudence concept

C. The accruals concept

D. The dual aspect concept

D. The going concern concept

C. Taking decision regarding holding investments

D. Taking buy/sell decisions

1) The effect of a change to an accounting policy should be disclosed as an extraordinary item if

3) Companies should create hidden reserves to strengthen their financial position.

D. None of these statements are correct

A. The IFRS issued by IASB

B. The IAS issued by former IASC

C. The interpretations issued by IFRIC

26. Which of the following is NOT an objective of IFRSF?

B. To promote the use and rigorous application of these standards

C. To interpret the application of IFRS and issue interpretations

Chapter 3: The Use of Double-Entry And Accounting Systems

2. Which of the transaction involves small cash transactions?

A. Payments to rent owner

C. Purchase of raw materials

3. Credit note is used to: