PRC- 4

Introduction to Accounting
Exam Folder

By
Muhammad Kashif Rana
[CA (Cont.) APFA, CMA(P), CFMA, CIPFA (UK), AFA]

Subscribe YouTube Channel @mkrana5089

 PRC-4
Introduction to Accounting
Exam Folder
Preparation of Financial Statements
Q.1) Following information has been extracted from the records of Falcon Traders (FT) for the year ended 31
December 2013:
Rs.
Non-Current Assets
Freehold Land 100,000
Building 610,000
Plant and Machinery 330,000
Office Equipment 115,000
Current Assets
Stock 183,000
Debtors 177,000
Bank 45,000
Non-Current Liabilities
10% long term Loan from Bank 190,000
Current Liabilities
Trade Creditors 75,000
Creditors for Office Expenses 35,000

Following information is available for the year 2014:

1. Cash sales made during the year amounted to Rs. 375,000. Credit sales were 75% of the total sales and the
amount collected from debtors was Rs. 1,035,000. Provision for doubtful debts has to be made equal to 5%
of the debtors’ balance at the end of 2014.The provision for doubtful debts at the end of 2013 was nil.
2. Payments made to trade creditors amounted to Rs. 641,450. Credit purchases were Rs. 664,950 whereas
cash purchases were 35% of the total purchases.
3. FT paid Rs. 38,000 against salaries, Rs. 30,000 against office expenses and Rs. 45,000 against selling
expenses.
4. Cash discount allowed to customers during the year amounted to Rs. 21,000 whereas discount received
from suppliers was Rs. 13,000.
5. On 1 July 2014 FT sold one of the old machinery at a loss of Rs. 15,000. On 31 December 2013 this old
machinery had a book value of Rs. 54,800. On 1 October 2014 a new machine Z was purchased in its place
at a cost of Rs. 164,800.
6. On 1 January 2014, office equipment was sold at its book value for Rs. 20,000.
7. Depreciation is to be provided on building at 10%, plant and machinery at 15% and office equipment at
20% per annum on their book value.
8. Interest on long term loan at 10% per annum together with part payment of the principal sum of Rs. 25,000
was made on 31 December 2014.
9. On 31 December 2014 closing stock was Rs. 90,000 and creditors for office expenses were Rs. 28,000.
Required:
a) Prepare a Trading and Profit or Loss Account for the year ended 31 December 2014.
b) Prepare Balance Sheet as at 31 December 2014.

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 PRC-4
Introduction to Accounting
Exam Folder
Solution 1:
Falcon Traders
Trading and Profit or Loss Account
For the year ended 31 December 2014
Rs.
Net Sales W-1 1479,000
Less Cost of Sale: W-2 (1103,000)
Gross Profit 376,000
Less Expenses W-3 (283,870)
Net Profit 92,130

Falcon Traders
Balance Sheet
As at 31 December 2014
Rs.
Assets:
Non-Current Assets:
Freehold Land 100,000
Building (610,000 – 61,000) 549,000
Plant and Machinery W-4 392,540
Office Equipment W-5 76,000
1117,540
Current Assets:
Stock 90,000
Debtor (246,000 W-6 – 12,300 W-7) 233,700
Bank W-8 172,440
Cash W-9 16,950
513,090
1630,630
Capita and Liabilities:
Capital W-10 1260,000
Add Net Profit 92,130
1352,130
Non-Current Liabilities:
Bank Loan @ 10% (190,000 – 25,000) 165,000
Current Liabilities:
Trade Creditors W-11 85,500
Accrued Expenses W-12 28,000
113,500
1630,630

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Introduction to Accounting
Exam Folder
Working Notes:
W-1: Net Sales:
Sales W-1.1 1500,000
Less Discount Allowed (21,000)
1479,000
W-1.1: Sales:
Cash Sales 375,000
Credit Sales (375,000 x 75%/25%) 1125,000
1500,000
W-2: Cost of Sales:
Opening Stock 183,000
Purchases W-2.1 1023,000
Less Discount Received (13,000)
Less Closing Stock (90,000)
1103,000
W-2.1: Purchases:
Credit Purchases 664,950
Cash Purchases (664,950 x 35%/65%) 358,050
1023,000
W-3: Expenses
Salaries 38,000
Office Expenses W-12 23,000
Selling Expenses 45,000
Interest Expense (190,000 x 10%) 19,000
Provision for Doubtful Debts W-7 12,300
Depreciation W-13 131,570
Loss on Disposal 15,000
283,870
W-4:
Plant and Machinery A/c
Bal. b/d 330,000 Disposal (54,800 – 4110) 50,690
Bank 164,800 Depreciation Expense W-13 51,570
Bal. c/d 392,540
494,800 494,800

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Introduction to Accounting
Exam Folder
W-4.1:
Plant and Machinery Disposal A/c
Plant and Machinery A/c 50,690 Bank (Bal.) 35,690
P/L 15,000
50,690 50,690
W-5:
Office Equipment A/c
Bal. b/d 115,000 Disposal A/c 20,000
Depreciation Expense W-13 19,000
Bal. c/d 76,000
115,000 115,000
W-6:
Debtors A/c
Bal. b/d 177,000 Bank 1035,000
Sales (375,000 x 75%/25%) 1125,000 Discount Allowed 21,000
Bal. c/d 246,000
1302,000 1302,000
W-7:
Provision for Doubtful Debts
Bal. b/d -
Bal. c/d (246,000 x 5%) 12,300 P/L (Bal.) 12,300
12,300 12,300
W-8:
Bank A/c
Bal. b/d 45,000 Creditors 641,450
Disposal Plant and Machinery 35,690 Salaries 38,000
Disposal Office Equipment 20,000 Office Expenses 30,000
Debtors 1035,000 Selling Expenses 45,000
Interest Expense 19,000
Plant and Machinery 164,800
Loan 25,000

Bal. c/d 172,440

1135,690 1135,690
W-9:
Cash A/c
Sales 375,000 Purchases (W-2.1) 358,050

Bal. c/d 16,950

375,000 375,000

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 PRC-4
Introduction to Accounting
Exam Folder
W-10: Opening Capital:
Rs.
Non-Current Assets
Freehold Land 100,000
Building 610,000
Plant and Machinery 330,000
Office Equipment 115,000
Current Assets
Stock 183,000
Debtors 177,000
Bank 45,000
Total Assets 1560,000
Non-Current Liabilities
10% long term Loan from Bank 190,000
Current Liabilities
Trade Creditors 75,000
Creditors for Office Expenses 35,000
Total Liabilities (300,000)
Capital 1260,000
W-11:
Creditors A/c
Bank 641,450 Bal. b/d 75,000
Discount Received 13,000 Purchases 664,950
Bal. c/d 85,500
739,950 739,950
W-12:
Office Expenses
Bal. b/d 35,000
Bank 30,000
Bal. c/d 28,000 P/L (Bal.) 23,000
58,000 58,000
W-13: Depreciation Expense:
Rs.
Building 610,000 x 10% 61,000
Plant and Machinery (330,000 – 54,800) x 15% 41,280
54,800 x 15% x 6/12 4110
164,800 x 15% x 3/12 6180
51,570
Office Equipment (115,000 - 20,000) x 20% 19,000
131,570

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 PRC-4
Introduction to Accounting
Exam Folder
Q.2) Azam owns a retail outlet with the name Azam Auto Parts Store. The trial balance as at 30 June 2015 is as
follows:
Debit Credit
-----Rs. in ‘000’-----
Shop equipment- net 5,880
Motor vehicles- net 3,820
Stock as at 1 July 2014 14,500
Rent 2,000
Bank 8,500
Cash 50
Bank loan @ 12% 5,050
Creditors 2,500
Accrued expenses 60
Capital 27,883
Sales 131,943
Purchases 105,950
Utility expenses 1,060
Vehicle expenses 1,205
Interest expenses 600
Renovation expenses 5,500
Salaries and wages 10,250
Depreciation expenses 2,075
Operating expenses 6,046
167,436 167,436

Additional information:
i. Closing stock as at 30 June 2015 was Rs. 24,090 thousand.
ii. Depreciation on fixed assets is charged at the rate of 20% on reducing balance method.
iii. Shop equipment was purchased on 1 July 2014 for Rs. 1,400 thousand. No depreciation has been charged
on it.
iv. Renovation expenses represent cost of fixtures purchased for the shop.
v. Rent is payable on yearly basis on 30 September. The expired rent till 30 September 2014 is included in
operating expenses.
vi. Bank loan was received on 1 July 2014. Interest payable for the month of June 2015 has been credited to
the loan account.
vii. Azam withdrew goods costing Rs. 4,000 thousand for personal use during the year. However, no entry was
made to record the withdrawal of goods.
viii. Operating expenses include annual payment of fire insurance for shop and personal expenses of Azam
amounting to Rs.725 thousand and Rs.215 thousand. Fire insurance policy would expire on 30 November
2015.
Required:
Prepare Trading and Profit or Loss Account for the year ended 30 June 2015 and Balance Sheet as at 30
June 2015.

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 PRC-4
Introduction to Accounting
Exam Folder
Solution 2:
Azam Auto Parts Store
Trading and Profit or Loss Account
For the year ended June 30, 2015
Rs.
Sales 131,943
Less Cost of Sale: W-1 (92,360)
Gross Profit 39,583
Less Expenses W-2 (23,599)
Net Profit 15,984

Azam Auto Parts Store

Balance Sheet
As at June 30, 2015
Rs.
Assets:
Non-Current Assets:
Shop Equipment (5880 – 280) 5,600
Motor Vehicles 3,820
Shop Fixture (5,500 – 1,100) 4,400
13,820
Current Assets:
Stock 24,090
Prepaid Expenses (2000 x 3/12) + (725 x 5/12) 8,02
Bank 8,500
Cash 50
33,442
47,262
Capita and Liabilities:
Capital 27,883
Add Net Profit 15,984
Less Drawings (4000 + 215) (4215)
39,652
Non-Current Liabilities:
Bank Loan @ 12% (5050 – 50) 5,000
Current Liabilities:
Trade Creditors 2,500
Accrued Expenses (60 + 50) 110
2,610
47,262

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 PRC-4
Introduction to Accounting
Exam Folder
Working Notes:
W-1: Cost of Sales:
Opening Stock 14,500
Purchases (105,950 - 4000) 101,950
Less Closing Stock (24,090)
92,360
W-2: Expenses
Utility Expenses 1,060
Vehicle Expenses 1,205
Interest Expenses 600
Salaries and Wages 10,250
Depreciation Expenses (2,075 + 280 + 1,100) 3,455
Operating Expenses (6046 + 1500 – 215 - 302) 7025
23,599

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 PRC-4
Introduction to Accounting
Exam Folder
Q.3) Following is the summarized trial balance of Rainbow Lights (RL) for the year ended 31 December 2016:
Debit Credit
Rs. in million
Capital – 1 January 2016 100
Profit and loss account – 1 January 2016 30
Drawings 50
Fixed assets – cost 270
Accumulated depreciation – 31 December 2016 150
Closing inventory 170
Trade debtors 400
Provision for doubtful debts – 1 January 2016 12
Prepayments and other receivables 45
Cash and bank 20
10% Long-term loan 120
Trade creditors 240
Accruals and other payables 28
Sales 750
Cost of sales 304
Selling and administration expenses 146
Financial charges 10
Miscellaneous income 45
1,445 1,445

Additional information:
i. RL uses perpetual inventory method to record its inventory. During the physical inventory count carried
out on 31 December 2016, following matters were noted:
 Inventory shortages amounted to Rs.2 million which is considered to be normal.
 Goods costing Rs.15 million were damaged in fire and have no sales value.
 Goods costing Rs.1 million were withdrawn by the owner for his personal use but no adjustment was
made in the books.
 Goods sold on credit for Rs.7 million were returned but have not been accounted for. These goods
were sold at cost plus 40%.
ii. Goods sold on credit at a trade discount of 5% were recorded at gross amount of Rs.20 million.
iii. Rs. 2 million were recovered in full and final settlement of an old outstanding balance of Rs.3 million which
had been written-off last year. The amount recovered was credited to trade debtors account.
iv. RL maintains a provision for doubtful debts at 3% of the year-end balance.
v. Miscellaneous income includes Rs.12 million received against an annual maintenance contract expiring on
30 April 2017.
vi. Annual rent amounting to Rs.24 million was paid in advance on 1 October 2016 and charged as an expense.

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 PRC-4
Introduction to Accounting
Exam Folder
vii. Long-term loan was acquired on 1 February 2016 and is repayable in 2020. Interest thereon is due semi-
annually on 1 August and 1 February each year. Interest is charged to expenses at the time of payment.
viii. An equipment costing Rs.8 million was purchased on 1 September 2016 against advance payment. The
equipment was not used and returned on 31 December 2016. The supplier agreed to set-off the cost of the
equipment against the amount payable by RL. The return as well as reversal of depreciation is yet to be
recorded in the books.
ix. Depreciation on fixed assets is charged at 15% per annum from the month of addition to the month prior to
disposal using reducing balance method.
Required:
a) Prepare a Trading and Profit or Loss Account for the year ended 31 December 2016.
b) Prepare Balance Sheet as at 31 December 2016.

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 PRC-4
Introduction to Accounting
Exam Folder
Solution 3:
Rainbow Lights
Trading and Profit or Loss Account
For the year ended 31 December 2016
Rs.
“Million”
Net Sales (750 – 7 – 20 x 5%) 742
Less Cost of Sale: (304 + 2 – 5*)
*(7 x 100/140 = 5) (301)
Gross Profit 441
Add Miscellaneous Income (45 – 4) 41
Less Expenses W-1 (140.42)
Less Financial Charges (10 + 5*)
*(120 x 10% x 5/12 = 5) (15)
Net Profit 326.58
Rainbow Lights
Balance Sheet
As at 31 December 2016
Rs.
“Million”
Assets:
Non-Current Assets:
Fixed Assets – Cost (270 – 8) 262
Less Accumulated Depreciation (150 – 0.4) (149.6)
112.4
Current Assets:
Stock (170 – 2 – 15 – 1 + 5) 157
Debtor 400 + 2 – 7 – 1 = 394 – 11.82 382.18
Prepayments and Other (45 + 18)
63
Receivables
Cash and Bank 20
622.18
734.58
Capita and Liabilities:
Capital (100 – 30) 70
Add Net Profit 326.58
Less Drawings (50 + 1) (51)
345.58
Non-Current Liabilities:
10% Long Term Loan 120
Current Liabilities:
Trade Creditors (240 – 8) 232
Accruals and other Payables (28 + 5 + 4) 37
269
734.58

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 PRC-4
Introduction to Accounting
Exam Folder
Working Notes:
W-1: Expenses
Unadjusted Balance 146
Inventory Damaged 15
Provision for Doubtful Debts W-2 (2.18)
Prepaid Rent (24 x 9/12) (18)
Reversal of Depreciation* (8 x 15% x 4/12) (0.4)
Adjusted Expenses 140.42
Note:
* It is assumed that depreciation expense for the year 2016 is charged and part of Selling and Administration
expenses. So only reversal of depreciation is adjusted in the expenses.
W-2:
Provision for Doubtful Debts A/c
Bal. b/d 12
P/L 2.18 Bad Debts Recovered 2
Bal. c/d (394* x 3%) 11.82
(400 + 2 – 7 – 1 = 394)
14 14

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 PRC-4
Introduction to Accounting
Exam Folder
Q.4) Following summarized trial balance as at 31 December 2015 pertains to Moon Trading (MT) who deals in
office machines:
Debit Credit
Rs.in million
Fixed assets at cost 150
Accumulated depreciation at the end of year 45
Trade debtors 200
Provision for doubtful debts 6
Inventory 410
Prepayments, advances and other receivables 9
Cash and bank balances 5
Capital 50
Bank Loan 160
Trade creditors 320
Accruals and other payables 25
Sales revenue 2,840
Purchases 2,141
Selling and administration expenses 540
Interest on bank loan 8
Bank charges 2
Other income 15
Suspense account 4
3,465 3,465

Additional information:
(i) Inventory is valued under the FIFO method. Value of inventory as at 31 December 2015 amounted to
Rs.530 million.
(ii) During stock taking, it was noted that:
 A photocopy machine appearing in inventory is being used in the office since 1 October 2015. The cost
of the machine is Rs.0.78 million.
 Four computers were found to be short. It was discovered that these computers costing Rs.0.32 million
had been issued for use by the proprietor’s family members.
 Items costing Rs. 4.5 million were returned to a supplier on 31 December 2015. The return was recorded
in January 2016.
 Items having invoice value of Rs.2.4 million sold on credit were returned by a customer on 31
December 2015. A credit note was issued and recorded by MT on 12 January 2016. The profit margin
on these items was 20% of cost.
(iii) Depreciation is charged on all fixed assets at 20% per annum under the straight line method.

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Introduction to Accounting
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(iv) A recovery of Rs.3.5 million against debts written off in prior years was credited to trade debtors. MT’s
policy is to provide doubtful debts at 3% on year-end balance.
(v) Review of other income revealed the following information:
 Services for certain contracts amounting to Rs.1.2 million were rendered in December 2015 but invoices
thereof were processed in January 2016.
 On 1 August 2015, MT received an amount of Rs.1.8 million as 50% advance against a maintenance
contract covering the period from 1 September 2015 to 31 May 2016 and was credited to other income. The
balance amount would be paid on completion of the contract.
(vi) Office supplies purchased during the year are directly debited to expenses. Unused office supplies at
beginning and close of the year amounted to Rs.0.45 million and Rs.0.6 million respectively.
(vii) The bank loan was acquired on 1 April 2015. The principal amount is repayable in five equal annual
installments on 31 March each year. Interest is payable at 10% per annum on six monthly-basis and is
recorded at the time of payment.
(viii) Suspense account represents a commission (net of bank charges amounting to Rs.0.25 million) received on
1 September 2015.
Required:
a) Prepare a Trading and Profit or Loss Account for the year ended 31 December 2015.
b) Prepare Balance Sheet as at 31 December 2015.

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Introduction to Accounting
Exam Folder
Solution 4:
Moon Trading (MT)
Trading and Profit or Loss Account
For the year ended 31 December 2015
Rs.
“Million”
Net Sales W-1 2837.6
Less Cost of Sale: W-2 (2019)
Gross Profit 818.6
Add Other Income W-3 20.25
Less Expenses W-4 (550.672)
Net Profit 288.178

Moon Trading (MT)

Balance Sheet
As at 31 December 2015
Rs.
“Million”
Assets:
Non-Current Assets:
Fixed Assets – Cost (150 + 0.78) 150.78
Less Accumulated Depreciation (45 + 0.039) (45.039)
105.741
Current Assets:
Stock W-2.2 526.4
Debtor (201.1 – 6.033) 195.067
Prepayments and Other Receivables (9 + 1.2 + 0.15) 10.35
Cash and Bank 5
736.817
842.558
Capita and Liabilities:
Capital 50
Add Net Profit 288.178
Less Drawings (0.32)
337.858
Non-Current Liabilities:
10% Long Term Loan (160 – 160/5) 128
Current Liabilities:
Current Portion of Long Term Loan (160/5) 32
Trade Creditors (320 – 4.5) 315.5
Accruals and other Payables (25 + 4 + 0.2) 29.2
376.7
842.558

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Introduction to Accounting
Exam Folder
Working Notes:
W-1: Net Sales:
Sales 2,840
Less Sales Return (2.4)
2837.6
W-2: Cost of Sales:
Opening Stock 410
Purchases W-2.1 2139.9
Less Purchases Return (4.5)
Less Closing Stock W-2.2 (526.4)
2019
W-2.1: Purchases:
Unadjusted 2141
Fixed Assets (0.78)
Drawings (0.32)
2139.9
W-2.2: Closing Stock:
Unadjusted 530
Fixed Assets (0.78)
Drawings (0.32)
Creditors (4.5)
Debtors (2.4 x 100/120) 2
526.4
W-3: Other Income:
Other Income A/c
As Given 15
Suspense 4
P/L 20.25 Finance Charges 0.25

Unearned Income 0.2 Income Receivable 1.2

20.45 20.45

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W-4: Selling and Administrative Expenses
As given 540
Depreciation expense* 0.78 x 20% x 3/12 0.039
Less Provision for Doubtful Debts W-4.1 (3.467)
Less Office Supplies in hand (0.6 – 0.45) (0.15)
Finance Charges (8 + 4) 12
Bank Charges (2 + 0.25) 2.25
550.672
Note:
* It is assumed that depreciation expense for the year 2016 is charged and part of Selling and Administration
expenses.

W-4.1:
Provision for Doubtful Debts
Bal. b/d 6
P/L 3.467 Debtors 3.5
Bal. c/d (201.1 x 3%) 6.033
9.5 9.5
W-5:
Debtors A/c
Unadjusted Bal. 200 Sales Return 2.4
Provision for Doubtful Debts 3.5
Adjusted Bal. 201.1
203.5 203.5

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 PRC-4
Introduction to Accounting
Exam Folder
Accounting Fundamentals
Q.1) If the owner of a business takes goods from inventory for his own personal use, the accounting concept
that should be applied to record the transaction is the:
a) Relevance Concept
b) Capitalization Concept
c) Money Measurement Concept
d) Separate Entity Concept

Q.2) Which concept is applied when a business records the cost of a non-current asset even though it does not
legally own it?
a) Substance over form
b) Prudence
c) Accruals
d) Going Concern

Q.3) Which of the following is incorrect?

a) A debit entry will increase non-current assets
b) A credit entry will decrease receivables
c) A debit entry will increase profit
d) A debit entry will decrease payables

Q.4) A credit balance on a ledger account indicates:

a) An asset or an expense
b) A liability or an expense
c) An amount owing to the organization
d) A liability or revenue

Q.5) The double entry system of bookkeeping normally results in which of the following balances on the
ledger accounts?
Debit Balances Credit Balances
a) Assets and Revenues Liabilities, Capital and Expenses
b) Revenue, Capital and Liabilities Assets and Expenses
c) Assets and Expenses Liabilities, Capital and Revenues
d) Assets, Expenses and Capital Liabilities and Revenues

Q.6) The main aim of accounting is to:

a) Maintain ledger accounts for every assets and liability
b) Provide financial information to users of such information
c) Produce a trial balance
d) Record every financial transaction individually

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Q.7) A credit entry could lead to:
a) An increase in assets or increase in liabilities
b) An increase in expenses or an increase in equity
c) An increase in liabilities or an increase in equity
d) An increase in liability or a decrease in sales

Q.8) Which of the following best explains what is meant by ‘capital expenditure’?
a) Expenditure on non-current assets, including repairs and maintenance
b) Expenditure on expensive assets
c) Expenditure relating to the issue of share capital
d) Expenditure relating to the acquisition or improvement of non-current assets

Q.9) Which accounting body issues IFRS Standards?

a) The Auditing Practices Board
b) The Stock Exchange
c) The International Accounting Standards Board
d) Securities and Exchange Commission of Pakistan

Answer:
1. d 2. a
3. c 4. d
5. c 6. b
7. c 8. d
9. c

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Books of Prime Entry
Q.1) Which of the following is not the purpose of a receivables ledger control account?
a) A receivables ledger control account provides a check on the arithmetic accuracy of the personal ledger.
b) A receivables ledger control account helps to locate errors in the trial balance
c) A receivables ledger control account ensures that there are no errors in the personal ledger
d) Control accounts deter fraud

Q.2) Which one of the following is a book of prime entry and not part of the double-entry system?
a) The sales ledger
b) The petty cash book
c) The sales ledger control account
d) The purchase ledger

Q.3) On 1 January 20X5, a business had trade receivables of Rs. 22,000. As at 31 December 20X5, the business
had the following ledger account balances:
Rs.
Sales for the year 120,000
Bank receipts for the year 115,000
Discount received for the year 3,000
Dishonored cheque 9,000
Contra – set off 6,000
What was the closing trade receivables balance after taking the information above into account?
Rs. ________________.

Q.4) A receivables’ ledger control account had a closing balance of Rs. 8,500. It contained a contra to the
purchase ledger of Rs. 400, but this had been entered on the wrong side of the control account.
The correct balance on the receivables’ ledger control account should be:
a) Rs. 7,700 Debit
b) Rs. 8,100 Debit
c) Rs. 8,400 Debit
d) Rs. 8,900 Debit

Q.5) The receivables’ ledger control account at 1 May had balances of Rs. 32,750 debit and Rs. 1,275 credit.
During May sales of Rs. 125,000 were made on credit. Receipts from receivables amounted to Rs. 123,050.
Refunds of Rs. 1,300 were made to customers. The closing credit balance is Rs. 2,000.
What was the total of the debit balances outstanding at 31 May?
Rs. _____________.

Q.6) A credit balance of Rs. 917 brought forward on Y’s account in the books of X means that:
a) X owes Y Rs. 917
b) Y owes X Rs. 917
c) X has paid Y Rs. 917
d) X is owed Rs. 917 by Y

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Q.7) A supplier sends you a statement showing a balance outstanding of Rs. 14,350. Your own records show a
balance outstanding of Rs. 14,500.
The reason for this difference could be that:
a) The supplier sent an invoice for Rs. 150 which you have not yet received
b) The supplier has allowed you Rs. 150 cash discount which you had omitted to enter in your ledgers
c) You have paid the supplier Rs. 150 which he has not yet accounted for
d) You have returned goods worth Rs. 150 which the supplier has not yet accounted for

Q.8) In a receivables’ ledger control account, which of the following lists is composed only of items which would
appear on the credit side of the account?
a) Cash received from customers, sales return, irrecoverable debts written off, contras against amounts
due to suppliers in the accounts payable ledger.
b) Sales, cash refunds to customers, irrecoverable debts written off.
c) Cash received from customers, interest charged on overdue accounts, irrecoverable debts written off.
d) Sales, cash refunds to customers, interest charged on overdue accounts, contras against amounts due to
suppliers in the accounts payable ledger.

Answer:
1. c 2. b
3. Rs. 30,000 4. a
5. Rs. 36,725 6. a
7. b 8. a

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 PRC-4
Introduction to Accounting
Exam Folder
Accruals and Prepayments
Q.1) The electricity account for the year ended 30 April 20X5 was as follows:
Rs.
Electricity accrued at 1 May 20X4 250
Payment made during the year in relation to:
Quarter ending 30 June 20X4 400
Quarter ending 30 September 20X4 350
Quarter ending 31 December 20X4 425
Quarter ending 31 March 20X5 450
What are the amounts for inclusion in the financial statements for the year ended 30 April 20X5?

a) Amount accrued is Nil and charged to P&L for the year is Rs. 1,525
b) Amount accrued is Rs. 450 and charged to P&L for the year is Rs. 1,525
c) Amount accrued is Rs. 150 and charged to P&L for the year is Rs. 1,625
d) Amount accrued is Rs. 150 and charged to P&L for the year is Rs. 1,525

Q.2) The year-end of X is 31 December. The entity pays for its electricity by a standing order of Rs. 100 per
month. On 1 January 20X5 the statement from the electricity supplier showed that X had overpaid by Rs.
25. X received electricity bills for the four quarters starting on 1 January 20X5 and ending on 31
December 20X5 for Rs. 350, 375, 275 and 300 respectively.
The expense for electricity in X’s statement of profit or loss for the year ended 31 December 20X5 is Rs.
_______________.

Q.3) The year-end of X is 31 December. The entity pays for its electricity by a standing order of Rs. 100 per
month. On 1 January 20X5 the statement from the electricity supplier showed that X had overpaid by Rs.
25. X received electricity bills for the four quarters starting on 1 January 20X5 and ending on 31
December 20X5 for Rs. 350, 375, 275 and 300 respectively.
What should be the amount for electricity in X’s statement of financial position for the year ended 31
December 20X5?
a) Prepaid of Rs. 75
b) Prepaid of Rs. 25
c) Accrual of Rs. 75
d) Accrual of Rs. 25

Q.4) At 1 January 20X5, Michael had a prepayment of Rs. 200 in respect of rent. He paid Rs. 1,200 on 1
March 20X5 in respect of the year ended 28 February 20X6.
The charge to the statement of profit or loss in respect of rent for the year ended 31 December 20X5 is Rs.
____________.

Q.5) At 31 December 2003, Tony had accrued Rs. 240 in respect of light and heat for the quarter ending 31
December 20X3. In January 2004 he discovered that he had under-accrued by Rs. 10.
The Bills for the next four quarters were as follows:
Amount (Rs.) Relating to Quarter Ending Data Paid
260 31 March 20X4 15 April 20X4
220 30 June 20X4 17 July 20X4
210 30 September 20X4 14 October 20X4
230 31 December 20X4 19 January 20X5
Tony always accrues for expenses based on the last bill.
The charge to the statement of profit of loss in respect of light and heat for the 15-months accounting
period 31 March 20X5 is Rs. ______________.

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 PRC-4
Introduction to Accounting
Exam Folder
Q.6) Stationery paid for during the year amounted to Rs. 1,350. At the end of the year, inventory costing Rs.
70 had been received but not yet invoiced by the supplier. At the start of the year, there was an accrual for
unpaid stationery for Rs. 80.
The expense for stationery included in the statement of profit or loss for the year is Rs. ____________.

Q.7) A business compiling its accounts for the year to 31 January each year pays rent quarterly in advance on 1
January, 1 April, 1 July and 1 Octobereach year. After remaining unchanged for some years, the rent was
increased from Rs. 24,000 per year to Rs. 30,000 per year as from 1 July 20X0.
Which of the following figures is the rent expense which should appear in the statement of profit or loss for
the year ended 31 January 20X1?
a) Rs. 27,500
b) Rs. 29,500
c) Rs. 28,000
d) Rs. 29,000

Q.8) After finalizing the draft accounts, Mr. A identified that he has treated prepaid insurance of Rs. 1,000 as
accrued expense of Rs. 100. What will be the impact of correction?
a) Profit will be increased by Rs. 1,100
b) Profit will be increased by Rs. 1,000
c) Profit will be reduced by Rs. 1,00
d) Profit will be reduced by Rs. 1,100

Q.9) Atif finalized his draft accounts and ignored a prepayment for Rs. 100 and accrued expense Rs. 300.
What will be the impact on profit for the year?
a) Understated by Rs. 100
b) Overstated by Rs. 100
c) Overstated by Rs. 200
d) Understated by Rs. 200

Q.10) On 7 November 20X1. Rs. 8,400 rent was paid for the 24 months to 31 September 20X3.
What is the charge for rent in the income statement for the year to 31 December 20X1?
a) Rs. 1,050
b) Rs. 700
c) Rs. 4,200
d) Rs. 1,400

Answer:
1. d 2. Rs. 1,300
3. c 4. Rs. 1,200
5. Rs. 1,160 6. Rs. 1,340
7. a 8. a
9. c 10. a

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 PRC-4
Introduction to Accounting
Exam Folder
Bad and Doubtful Debts
Q.1) At 30 April 20X5, Mr. A had a receivables balance of Rs. 50,000 and an allowance for receivables of Rs.
800. Following a review of receivables, Mr. A wishes to write off an irrecoverable debt of Rs. 1,000 and
increase the allowance for receivables by Rs. 1,650.
What will be the net balance included in the statement of financial position for receivables at 30 April
20X5?
a) 48,350
b) 46,550
c) 47,550
d) 47,350

Q.2) As at 31 March, Phil had receivables of Rs. 82,500. Following a review of receivables, Phil decided to write
off the following irrecoverable debts:
John Rs. 1000, Beatrice Rs. 500 and Peter Rs. 3250.
Phil adjusted the allowance for receivables to Rs. 1,250. The current balance on the allowance for
receivables account is Rs. 2,000. Phil also received Rs. 300 from a debt that had been written off at an
earlier date.
What was the charge to the statement of profit or loss in respect of irrecoverable debt expense?
a) 3,700
b) 4,000
c) 4,750
d) 5,200

Q.3) As at 31 March, Phil had receivables of Rs. 82,500. Following a review of receivables, Phil decided to write
off the following irrecoverable debts:
John Rs. 1000, Beatrice Rs. 500 and Peter Rs. 3250.
Phil adjusted the allowance for receivables to Rs. 1,250. The current balance on the allowance for
receivables account is Rs. 2,000. Phil also received Rs. 300 from a debt that had been written off at an
earlier date.
What will be the net balance included in the statement of financial position for receivables at 31 March?
a) 81,250
b) 76,500
c) 75,750
d) 80,500

Q.4) At the start of the year Joe had an allowance of Rs. 700 against receivables. During the year, of this amount,
Rs. 450 went bad and Rs. 150 was received, the balance remained unpaid at the year end. Subsequently, a
further debt of Rs. 170 went bad. At the year-end Joe decided that an allowance for receivables of Rs. 340
was required.
What was the total irrecoverable debt expense for the year?
a) 620
b) 450
c) 260
d) 170

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 PRC-4
Introduction to Accounting
Exam Folder
Q.5) Doris currently has a receivables balance of Rs. 47,800 and an allowance for receivables of Rs. 1,250. She
has just received Rs. 150 in respect of half of a debt that she had made an allowance against. She now
believes the other half of the debt to be bad and wants to write it off. She also wants to increase the allowance
for receivables to Rs. 1,500.
What is the total charge to the statement of profit or loss in respect of these items?
a) 250
b) 150
c) 1650
d) 400

Q.6) At the year end, Harold had a trade receivables balance of Rs. 100,000 and an allowance for receivables of
Rs. 5,000. He has not yet accounted for a receipt of Rs. 500 in respect of a debt which he had previously
made an allowance against or a receipt of Rs. 1,000 in respect of a debt which had been written off in the
previous year. Harold wishes to reduce the allowance for receivables by Rs. 1,965.
What balances will be shown in Harold’s statement of financial position at the year-end for receivables?
a) 96,465
b) 97,535
c) 98,035
d) 96,965

Q.7) James has been advised that one of his customers has ceased trading and that it is almost certain that he will
not recover the balance of Rs. 720 owed by his customer.
What accounting entries should James make in his general ledger to record this situation?
a) Dr. Receivables Cr. Irrecoverable debts
b) Dr. Irrecoverable debts Cr. Receivables
c) Dr. Receivables Cr. Bank
d) Dr. Bank Cr. Receivables

Q.8) Gordon’s receivables owe a total of Rs. 80,000 at the year end. These include Rs. 900 of long-overdue debts
that might still be recoverable, but for which Gordon has created an allowance for receivables. During the
year, Gordon also wrote off an amount of Rs. 1,582. Which of the following statements best describes
Gordon’s position regarding receivables as at the year end?
a) Trade receivables of Rs. 80,000, a specific allowance of Rs. 900 and a bad debt of Rs. 1,582
b) Trade receivables of Rs. 78,418, a specific allowance of Rs. 1,582 and a bad debt of Rs. 900
c) Trade receivables of Rs. 80,000 and a specific allowance of Rs. 2,482
d) Trade receivables of Rs. 78,418 and a specific allowance of Rs. 682

Q.9) Jackson Co.’s year end is 31 December 2005. In February 2006 a major credit customer went into
liquidation and Jackson Co believes that it will not be able to recover the Rs. 450,000 owed.
How should this item be treated in the financial statements ofJackson Co for the year ended 31 December
2005?
a) The irrecoverable debt should be disclosed by note
b) The financial statements are not affected
c) An allowance for receivables should be recognised in the financialstatements
d) The financial statements should be adjusted to reflect the irrecoverable debt

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 PRC-4
Introduction to Accounting
Exam Folder
Answer:
1. b 2. a
3. b 4. c
5. d 6. a
7. b 8. a
9. d

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 PRC-4
Introduction to Accounting
Exam Folder
Depreciation
Q.1) At 1 January 20X5, Mary had motor vehicles which cost Rs. 15,000. On 31 August 20X5 she sold a motor
vehicle for Rs. 5,000 which had originally cost Rs. 8,000 and which had a carrying amount of Rs. 4,000 at
the date of disposal. She purchased a new motor vehicle which cost Rs. 10,000 on 30 November 20X5.
Mary’s policy is to depreciate motor vehicles at a rate of 25% pa on the straight-line basis, based on the
number of months’ ownership.
What was the depreciation charge for the year ended 31 December 20X5?
a) 3958
b) 3500
c) 3291
d) 4250

Q.2) A non-current asset was purchased at the beginning of Year 1 for Rs. 2,400 and depreciated by 20% pa by
the reducing-balance method. At the beginning of Year 4 it was sold for Rs. 1,200.
What was the profit or loss on disposal of the asset?
a) Gain of Rs. 216.96
b) Loss of Rs. 28.8
c) Gain of Rs. 240
d) Loss of Rs. 240

Q.3) Mr. A bought a new machine form abroad. The machine cost Rs. 100,000 and delivery and installation
costs were Rs. 7,000. Testing it amounted to Rs. 5,000. Training employees on how to use the machine cost
of Rs. 1,000. What amount should be capitalized as the cost of the machine for inclusion in the statement
of financial position?
a) 100,000
b) 107,000
c) 112,000
d) 113,000

Q.4) Mr. J’s machinery cost account showed a balance of Rs. 5,000 at 1 January 20X5. During the year he had
the following transactions:
28 February Disposal of machine costing Rs. 300
31 March Acquired machine costing Rs. 1,000
1 November Disposal of machine costing Rs. 600
Mr. J depreciates machines at a rate of 10% pa on the straight-line basis based on the number of months.
What was the depreciation charge in respect of machinery for the year ended 31 December 20X5?
Rs. ___________________.

Q.5) B acquired a lorry on 1 May 20X0 at a cost of Rs. 30,000. The lorry has an estimated useful life of four
years, and an estimated resale value at the end of that time of Rs. 6,000. B charges depreciation on the
straight-line basis, with a proportionate charge in the period of acquisition.
What was the depreciation charge for the lorry in B’s financial statements for the year ended to 30
September 20X2?
Rs. ___________________.

Answer:
1. c 2. b
3. c 4. Rs. 540
5. Rs. 2,500

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 PRC-4
Introduction to Accounting
Exam Folder
IAS - 2 Inventory
Q.1) A business sells three products – A, B and C. The following information was available at the year-end:
A B C
Rs. Per Unit Rs. Per Unit Rs. Per Unit
Original Cost 7 10 19
Estimated Selling Price 15 13 20
Selling and Distribution Costs 2 5 6
Units of Inventory 20 25 15
What should be the inventory valuation at the year-end?
a) 550
b) 675
c) 670
d) 795

Q.2) An inventory record card shows the following details:

January 1 50 units in inventory at a cost of Rs. 10 per unit
4 90 units purchased at a cost of Rs. 15 per unit
10 65 units sold
20 30 units purchased at a cost of Rs. 20 per unit
26 40 units sold
What was the value of inventory at 31 January using the First in First out (FIFO) method?
a) 1125
b) 725
c) 975
d) 1000

Q.3) What would be the effect on a business’ profit, which has been calculated including inventory at cost, of
discovering that one of its inventory items which cost Rs. 7,500 has a net realizable value of Rs. 8,500?
a) An increase of Rs. 8,500
b) An increase of Rs. 1,000
c) No effect at all
d) A decrease of Rs. 1,000

Q.4) According to IAS-2 Inventories, which two of the following costs should be included in valuing the
inventories of a manufacturing business?
a) Carriage outwards
b) Depreciation of factory plant
c) Carriage inwards
d) General admin overheads

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 PRC-4
Introduction to Accounting
Exam Folder
Q.5) The closing inventory of X amounted to Rs. 116,400 excluding the following two inventory lines:
 400 items which had cost Rs. 4 each. All were sold after the statement of financial position date for Rs.
3 each, with selling expenses of Rs. 200 for the batch.
 200 different items which had cost Rs. 30 each. These items were found to be defective at the statement
of financial position date.
Rectification work after the statement of financial position amounted to Rs. 1,200, after which the items
were sold for Rs. 35 each, with selling expenses totaling Rs. 300.
What was the inventory valuation for inclusion in the statement of financial position of X?
a) 124,000
b) 122,900
c) 123,400
d) 124,100

Q.6) ABC Co. estimated that inventory which had cost Rs. 50,000 had a net realizable value of Rs.
40,000 at 30 June 2005 and recorded it in the financial statements for the year ended 30 June 2005
at this lower value in accordance with IAS-2 Inventories. ABC Co. subsequently discovered that
the net realizable value of the inventory is likely to be only Rs. 30,000.
What adjustments, if any, should be made in the financial statementsof ABC Co. relating to this
inventory?
a) No adjustments required
b) Increase the value of inventory by Rs. 10,000
c) Decrease the value of inventory by Rs. 10,000
d) Decrease the value of inventory by Rs. 20,000

Answer:
1. a 2. a
3. c 4. b&c
5. b 6. c

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 PRC-4
Introduction to Accounting
Exam Folder
Bank Reconciliations
Q.1) The following information relates to a bank reconciliation.
 The bank balance in the cash book before taking the items below into account was Rs. 5,670 overdrawn.
 Bank charges of Rs. 250 on the bank statement have not been entered in the cash book.
 The bank has credited the account in error with Rs. 40 which belongs to another customer.
 Cheque payments totaling Rs. 325 have been correctly entered in the cash book but have not been
presented for payment.
 Cheque totaling Rs. 545 have been correctly entered on the debit side of the cash book but have not
been paid in at the bank.
What was the balance as shown by the bank statement before taking the items above into account?
a) Rs. 5,670 overdrawn
b) Rs. 5,600 overdrawn
c) Rs. 5,740 overdrawn
d) Rs. 6,100 overdrawn

Q.2) At 31 August 2005 the balance on an entity’s cash book was RS. 3,600 credit.
Examination of the bank statements revealed the following:
 Standing orders amounting to Rs. 180 had not been recorded in the cash book.
 Cheque paid to suppliers of Rs. 1,420 did not appear on the bank statements.
What was the balance on the bank statement at 31 August 2005?
a) Rs. 5,200 overdrawn
b) Rs. 5,020 overdrawn
c) Rs. 2,360 overdrawn
d) Rs. 3,780 overdrawn

Q.3) An organization’s cash book has an opening balance of Rs. 485 credit. The following transactions then took
place:
Cash sales Rs. 1,450 including sales tax of Rs. 150
Receipts from customers of debts of Rs. 2,400
Payments to payables of debts of Rs. 1,800 less 5% cash discount
Dishonored cheque from customers amounting to Rs. 250.
What was the resulting balance in the bank column of the cash book?
a) Rs. 1,405 Debit
b) Rs. 1,255 Debit
c) Rs. 135 Credit
d) Rs. 1165 Debit

Q.4) The cash book shows a bank balance of Rs. 5,675 overdrawn at 31 March 2005. It is subsequently
discovered that a standing order for Rs. 125 had been entered twice and that a dishonored cheque for Rs.
450 had been debited in the cash book instead of credited. The correct bank balance should be:
a) Rs. 5,100 overdrawn
b) Rs. 6,000 overdrawn
c) Rs. 6,250 overdrawn
d) Rs. 6,450 overdrawn

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 PRC-4
Introduction to Accounting
Exam Folder
Q.5) A bank reconciliation was prepared for Q as follows:
Rs.
Overdraft per bank statement 38,600
Add: deposits not credited 41,200
79,800
Less: outstanding cheque (3,300)
Overdraft per cash book 76,500
Assuming that the bank statement balance of Rs. 38,600 was correct, what should the cash book balance
be?
a) Rs. 700 cash at bank
b) Rs. 700 overdrawn
c) Rs. 76,500 overdrawn
d) Rs. 76,500 cash at bank

Q.6) After checking a business cash book against the bank statement, which of the following items could require
an entry in the cash book?
1. Bank charges.
2. A cheque from a customer which was dishonored.
3. Cheque not presented.
4. Deposits not credited.
5. Credit transfer entered in bank statement.
6. Standing order entered in bank statement.

a) 1, 2, 5 and 6
b) 3 and 4
c) 1, 3, 4 and 6
d) 3, 4, 5 and 6

Answer:
1. d 2. c
3. a 4. d
5. b 6. a

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 PRC-4
Introduction to Accounting
Exam Folder

“Teacher Open the Door,

But You Must Enter by Yourself”

Good Luck
Dear Students Always Be Confident, Give Your Best and Trust On Allah
Almighty. In-sha-Allah You Will Succeed.

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