Accounts As Paper - 1 MCQs

ACCOUNTING
Paper - 1 (MCQ’s)
Muhammad Nauman Malik

AS-LEVEL ACCOUNTING
MULTIPLE CHOICE QUESTIONS
Topical & Yearly (2018 edition)

FCMA, MS Accounting (Gold Medalist), MBA (Finance), PIPFA, DCMA, B.Com (Gold Medalist)
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Title Accounting AS-Level MCQs P-1 Topical & Yearly

Author Muhammad Nauman Malik
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PREFACE
The current edition has been completely updated to comply with revised CIE A level Accounting syllabus 2016-
18.‘A Level Accounting’ students will now appear in only One MCQ paper from May 2016 exams.
As is usual with most subsequent editions there is more material i.e. more MCQs for the students to practice
on. These MCQs are a collection of MCQs from past papers as well as from my own efforts. Furthermore all the
MCQs have been compiled according to the year in which they were set in the past papers. Apart from this the
students will find the “Student Evaluation Card” and “Student Answer Card” quite useful. The aim is to provide
the students a chance to continuously compare their performances and focus on the weaker areas.
Each topic of the A Level (Supplement) syllabus has been covered in a separate chapter. At the end of each
chapter there are detailed answers apart from the answer key. The former have been given for the better
understanding of the students. Instructions for using this book are given in a separate section. It will be
beneficial for the students to go through these instructions before attempting the MCQs.
Gratitude is due to all those lecturers and students who made comments on the previous editions and offered
suggestions for improvements. In particular I would like to thank SajidMunir,SherazSiddiqWasim Zia and
RizwanUl Hassan for giving many helpful suggestions.
Constructive criticism and suggestions to make the subsequent editions more useful would be appreciated and
thankfully acknowledged.

Mobile No: 0300-8414262
0321-8414262
Email: nauman.kims@gmail.com
-4-
Table of Contents
PREFACE 3
CHAPTER 1 BANK RECONCILIATION STATEMENTS 7
ANSWER KEY ............................................................................................................................................................ 11
DETAILED ANSWERS ................................................................................................................................................ 11
CHAPTER 2 ACCOUNTING FOR DEPRECIATION 14
ANSWER KEY ............................................................................................................................................................ 21
CHAPTER 3 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS 25
ANSWER KEY ............................................................................................................................................................ 29
CHAPTER 4 INVENTORY VALUATION 32
ANSWER KEY ............................................................................................................................................................ 38
CHAPTER 5 BASIC FINANCIAL STATEMENTS 42
ANSWER KEY ............................................................................................................................................................ 49
CHAPTER 6 ACCOUNTING CONCEPTS AND CONVENTIONS 53
ANSWER KEY ............................................................................................................................................................ 58
CHAPTER 7 CAPITAL AND REVENUE 59
ANSWER KEY ............................................................................................................................................................ 63
CHAPTER 8 SUSPENSE ACCOUNT 65
ANSWER KEY ............................................................................................................................................................ 76
CHAPTER 9 CONTROL ACCOUNTS 82
ANSWER KEY ............................................................................................................................................................ 90
CHAPTER 10 ACCOUNTS FROM INCOMPLETE RECORDS 94
ANSWER KEY .......................................................................................................................................................... 105
DETAILED ANSWERS .............................................................................................................................................. 105
CHAPTER 11 FINANCIAL STATEMENTS OF PARTNERSHIP 113
ANSWER KEY .......................................................................................................................................................... 119
CHAPTER 12 PARTNERSHIP CHANGES & DISSOLUTION 123
ANSWER KEY ......................................................................................................................................................... 129
-5-
CHAPTER 13 COMPANY BASICS 132

ANSWER KEY .......................................................................................................................................................... 137
CHAPTER 14 COMPANY FINAL ACCOUNTS 138
ANSWER KEY .......................................................................................................................................................... 148
CHAPTER 15 ISSUE OF SHARES AND DEBENTURES 152
ANSWER KEY .......................................................................................................................................................... 166
CHAPTER 16 RATIO ANALYSIS - CALCULATION 175
ANSWER KEY .......................................................................................................................................................... 189
CHAPTER 17 RATIO ANALYSIS - INTERPRETATION 199
ANSWER KEY .......................................................................................................................................................... 210
CHAPTER 18 STATEMENTS OF CASH FLOWS 216
ANSWER KEY ......................................................................................................................................................... 224
CHAPTER 19 COSTS, CONCEPTS AND COST CLASSIFICATIONS 229
ANSWER KEY .......................................................................................................................................................... 235
CHAPTER 20 JOB AND BATCH ORDER COSTING 237
ANSWER KEY .......................................................................................................................................................... 239
CHAPTER 21 ABSORPTION COSTING 240
ANSWER KEY .......................................................................................................................................................... 246
CHAPTER 22 BREAK-EVEN AND PROFIT VOLUME ANALYSIS 250
ANSWER KEY .......................................................................................................................................................... 262
CHAPTER 23 MARGINAL COSTING AND DECISION MAKING 269
ANSWER KEY .......................................................................................................................................................... 279
CHAPTER 24 MARGINAL COSTING - LIMITING FACTORS 288
ANSWER KEY .......................................................................................................................................................... 293
CHAPTER 25 BUDGETING 297
ANSWER KEY .......................................................................................................................................................... 298
-6-
SPECIMEN PAPER 2016-18 299

ANSWER KEY .......................................................................................................................................................... 303
MAY 2016 – PAPER 12 304
ANSWER KEY .......................................................................................................................................................... 308
NOVEMBER 2016 – PAPER 12 309
ANSWER KEY .......................................................................................................................................................... 314
MAY 2017 – PAPER 12 315
ANSWER KEY .......................................................................................................................................................... 320
NOVEMEBR 2017 – PAPER 12 321
ANSWER KEY .......................................................................................................................................................... 326
Chapter 1 -7- Bank Reconciliation Statements
CHAPTER 1 BANK RECONCILIATION STATEMENTS

1 At 31 December 1997, a customer’s bank statement shows that his bank account is overdrawn by $10 136.
At that date, cheques drawn on his account, but not yet presented to the bank, totalled $4 998 and
cheques paid into his account, but not yet credited by the bank, totalled $5 896. His bank statement
shows that interest of $181 has been charged, but this has not yet been entered in the cash book.
What is the correct bank balance to be shown in the balance sheet at 31 December 1997?
A $9 057 overdrawn B $9 238 overdrawn
C $10 853 overdrawn D $11 034 overdrawn
May 98 P1 Q6 / May 03 P1 Q9/Specimen 16 P1 Q5
2 The table shows extracts from business bank reconciliation.

$
Cash book balance in hand at 31 December 2 075
Balance as per bank statement at 31 December 2 250
Bank charges per bank statement not entered in cash book 150
Outstanding cheques not presented at the year-end 325
What is the bank balance to be shown in the financial statements?
A $1 600 B $1 925 C $2 075 D $2 225
Nov 01 P1 Q8
3 In the cash book of a company the bank account showed a credit balance of $5 000. There were
unpresented cheques amounting to $1 500. The bank statement showed bank charges of $700 not in the
cash book.
What is the balance on the bank statement?
A $3 300 debit B $4 200 debit C $4 200 credit D $5 800 credit
May 02 P1 Q4/May 14 P12 Q8/Nov 14 P12 Q6
4 The balance at bank in X’s cash book at 30 April is $12 460 debit. However, a cheque for $14 470 received
from Y and a cheque for $1 740 paid to Z appears in the cash book but not on the bank statement.
Bank charges of $4 500 have not been entered in the cash book.
What is the balance shown on the bank statement at 30 April?
A $4 770 credit B $4 770 debit C $20 690 credit D $20 690 debit
Nov 02 P1 Q11/ Nov 08 P1 Q10
5 A bank reconciliation statement shows a credit balance of $400 in the Cash Book and a balance in hand of
$100 in the bank statement.
The bank reconciliation statement includes unpresented cheques of $700 in addition to cheques banked
and not yet credited in the bank statement.
What is the total of cheques banked and not yet credited?
A $200 B $400 C $1 000 D $1 200
Nov 03 P1 Q12
6 When preparing a bank reconciliation statement the following information is available.
$
Bank balance shown by the cash book 20 000 debit
Unpresented cheques 2 500
Uncleared bankings 1 400
Standing order shown on the bank statement (not in the cash book) 300
A $18 600 B $19 200
C $20 800 D $21 400
May 04 P1 Q10
7 The table shows details relating to a company’s banking transactions at 31 December.

$
Balance at bank per bank statement 22 650
Un-cleared lodgments 3 110
Un-presented cheques 6 290
Bank credit recorded twice by bank in error 650
Which balance for cash at bank should appear in the Balance Sheet at 31 December?
A $18 820 B $20 120
C $25 180 D $26 480
Nov 04 P1 Q8/May 12 P12 Q7
8 A draft Balance Sheet shows a bank balance of $1 400. The following information is now available.
$
cheques issued but not yet cleared by the bank 150
bank charges not in the cash book 45
lodgments in the cash book but not on the bank statement 220
What is the figure shown on the Bank Statement?
A $1 285 B $1 355
C $1 425 D $1 515
May 06 P1 Q12
9 A bank statement shows a credit balance of $8 360. Comparison with the cash book reveals:
 Cheques totalling $18 725, sent to suppliers, have not been presented.
 Cheques totalling $16 223, received from customers, have not been credited by the bank.
 Bank charges of $124 have not been entered in the cash book.
What is the correct cash book balance?
A $5 734 credit B $5 734 debit
C $5 858 debit D $10 986 credit
Nov 06 P1 Q11
10 The bank statement of a business shows an overdraft of $250 at the year end. There are cheques written
but not yet cleared by the bank amounting to $140. Lodgments not yet credited by the bank amount to
$220.
How would the balance in the cash book be shown in the balance sheet?
$
A current asset 170
B current asset 330
C current liability 170
D current liability 330
Nov 07 P1 Q9
11 At the year-end a cash book shows a credit balance of $4800.

The bank statement included bank charges of $25 which had not been included in the cash book.
Cheque payments entered in the cash book before the year end to the value of $250 had not yet cleared
the bank.
How would the bank balance be shown in the balance sheet?
$
A current asset 4 775
B current liability 4 825
C current asset 5 025
D current liability 5 075
May 08 P1 Q8
12 The cash book of a business shows a credit balance of $12 500 at 30 June. Bank charges of $2 000
have not yet been entered in the cash book.
A cheque for $20 000 received from a debtor, and a cheque for $3000 paid to a creditor have been entered
in the cash book, but have not yet been shown on the bank statement.
What is the balance shown on the bank statement at 30 June?
C $31 500 credit D $31 500 debit
May 11 P1 Q3
13 The following items are recorded in the cash book of a business but not yet recorded in its bank
statement:
$
Cheques drawn 3000
Amounts banked 250
The cash book shows a bank overdraft of $2600. What is the balance on the bank statement?
A $150 in hand B $150 overdraft
C $400 in hand D $400 overdraft
Nov11 P1 Q7/ May 17 P12 Q8
14 At the financial year end of a business the following information is available.

$
debit balance on the bank statement 1 000
Unpresented cheques 300
lodgements not yet credited by the bank 600
bank charges and interest charged not yet entered in the cash book 150
What is the current balance in the cash book?
A $400 credit B $400 debit C $550 credit D$550 debit
May 13 P12 Q7
15 A business is preparing a bank reconciliation and finds the following.

$
Unpresented cheques 3 190
Uncredited bankings 1 949
The cash book has a debit balance of $5 000.
Which adjustments should be made to the cash book balance to reconcile it to the bank statement?
A minus $3 190, minus $1 949 B minus $3 190, plus $1 949
C plus $3 190, minus $1 949 D plus $3 190, plus $1 949
Nov 13 P12 Q9
16 A trader made the following transactions

$
cash withdrawn from bank for business use 200
cash banked 120
What was the total effect on ledger accounts?
increase $ decrease $
A bank account 80 cash account 80
B bank account 320 cash account 320
C cash account 80 bank account 80
D cash account 320 bank account 320
May 15 P12 Q2
17 A bank reconciliation statement has been prepared by an inexperienced book-keeper.

$
bank statement balance (overdrawn) (68 100)
cheques received not paid in 141 200
209 300
cheques paid to suppliers, not yet presented (41 800)
cash book balance (overdrawn) 167 500)
What is the correct bank balance according to the cash book?
A $31 300 overdrawn B $31 300
C $167 500 overdrawn D $167 500
Nov 15 P12 Q15
18 The year-end balance in the cash book was $23 780. This was different from the balance on the bank
statement. The difference was due to the following items.
$
bank charges 216
a customer’s cheque which was dishonoured 1 375
a bank error meant a cheque was incorrectly debited to the bank account 560
What should be the value of bank in the statement of financial position?
A $21 629 B $22 189 C $25 371 D $25 931
Nov 16 P12 Q5
ANSWER KEY
1 B 6 C 11 B 16 C
2 B 7 A 12 D 17 B
3 B 8 A 13 A 18 B
4 B 9 C 14 C
5 A 10 C 15 C
DETAILED ANSWERS
1 As closing balance of adjusted cash book is shown as cash at bank in the balance sheet. This figure can be
calculated through bank reconciliation statement as follows
Bank Reconciliation Statement

$
Overdraft balance as per adjusted cash book (balancing figure) 9 238
Add Uncreditedcheques 5 896
15 124
Less Unpresented cheques (4 998)
Overdraft balance as per bank statement 10 136
* Interest is not accounted for, as this has already been recorded in the bank statement.
2 As closing balance of adjusted cash book is shown as cash at bank in the balance sheet. This figure can be
calculated through bank reconciliation statement as follows
Bank Reconciliation Statement $

Balance as per adjusted cash book [balancing figure) 1 925
Add Unpresented cheques 325
Balance as per bank statement 2 250
Alternatively $
Balance as per original cashbook 2 075
Less Bank charges accounted for (150)
Balance as per adjusted cash book 1 925
3 Bank Reconciliation Statement

$
Bank overdraft as per cash book ($5 000 + $700) 5 700
Bank balance as per bank statement (Dr) 4200
$
Balance as per adjusted cash book (Dr) ($12 460 – $4 500) 7 960
Add Unpresented cheques 1 740
Less Uncreditedcheques (14 470)
Balance as per bank statement (Dr) 4 770
$
Balance as per cash book (Cr) 400
Add Uncreditedcheques (balancing figure) 200
Less Unpresented cheques (700
Balance as per bank statement (Cr) 100
6 Adjusted Cash Book

$ $
Balance b/f 20 000 Standing order payment 300
_____ Balance c/d 19 700
20 000 20 000

Balance as per adjusted Cash book (Dr) 19 700
Add Unpresented cheques 2 500
22 200
Less Uncleared deposits (1 400)
$ $
Add Uncleared lodgments 3 110
25 760
Less Unpresented cheques 6 290
Bank credit recorded twice by bank 650 (6 940)
Balance as per adjusted cash book 18 820
8 Bank Reconciliation Statement $

Balance as per adjusted cash book ($1 400  $45) 1 355
Add Un-presented cheques 150
Less Un-credited cheques (220

$
Balance as per bank statement (cr) 8 360
Add Uncreditedcheques 16 223
Balance as per adjusted cash book (dr) 5 858
$
Balance as per bank statement (Dr) 250
Less Uncreditedcheques (220)
Balance as per adjusted cash book to be shown in balance sheet (Cr) 170

$ $
Balance c/d 4 825 Balance b/f 4 800
____ Bank charges 25
4 825 4 825
So “B” option is correct.

$ $
Balance c/d 14 500 Balance b/f 12 500
_____ Bank charges 2 000
14 500 14 500

Balance as per adjusted Cash book (Cr) 14 500
Add Uncleared deposits 20 000
34 500
Balance as per bank statement (Dr) 31 500

$
Overdraft balance as per cash book (Cr) 2 600
Add Amounts banked but not credited 250
Less Cheques drawn but not presented (3 000)
Balance as per bank statement (Cr) 150

$
1 300
Less lodgements not yet credited by the bank (600)
Balance as per adjusted cash book (Credit) 550
Adjusted Cash Book

$ $
Balance c/d (Bank reconciliation) 700 Balance b/f (balancing figure) 550
___ Bank charges and interest 150
700 700
16 Cash Bank
cash withdrawn from bank for business use 200 200
cash banked 120 120
Net change 80 80

$
Overdraft balance as per bank statement (Dr) 68 100
Add cheques paid to suppliers, not yet presented (Un-presented Cheques) 41 800
Less cheques received not paid in (Un-credited cheques) (141 200)
Balance as per adjusted cash book (Dr) 31 300

$ $
Balance b/f 23 780 Bank charges 216
Customer A/c (dishonoured cheque) 1 375
_____ Balance c/d 22 189
23 780 23 780
So “B” option is correct.
Chapter 2 -14- Accounting for Depreciation
CHAPTER 2 ACCOUNTING FOR DEPRECIATION

1 A vehicle cost $30 000. The vehicle was later sold for $9 000 and the profit on disposal was $1500
What was the accumulated depreciation of the vehicle on disposal?
A $7 500 B $19 500 C $21 000 D $22 500
May 98 P1 Q3 / Nov 02 P1 Q3/ May 09 P1 Q1
2 Which item may be included in a Balance Sheet at more than historical cost?
A goodwill B land and buildings
C research expenditures D work in progress
May 98 P1 Q5 / May 01 P1 Q7
3 What is ignored in the calculation of depreciation of non-current assets?
A original cost B maintenance cost
C estimated residual value D expected economic life
May 98 P1 Q13 / Nov 99 P1 Q9
4 A business buys a machine for $40 000 and depreciates it at the rate of 10% per year using the reducing
balance method
What is the depreciation charge for the second year of the machine’s use?
A $ 3 200 B $ 3 240
C $ 3 600 D $ 4 000
Nov 98 P1 Q9
5 Why are non-current assets depreciated?

A to allow for the increase in repairs with use
B to provide cash for replacement
C to show their current value in the balance sheet
D so that the income statement includes a charge for their use
May 99 P1 Q2 / Nov 99 P1 Q11/ Nov 05 P1 Q15/Nov 11 P1 Q17
6 A business purchases a computer for $3 200. It is estimated that it will have a useful life of 5 years and a
residual value of $700. Straight line depreciation is charged each year.
What is the net book value at the end of year 2?
A $ 1 920 B $ 2 200 C $ 2 560 D $ 2 700
May 99 P1 Q3
7 A company uses the straight line method of depreciation for all its non-current assets. On 1 January, the
company bought machinery on hire purchase. The cash price was $115 000 and the interest for the year is
$19 550. The estimated useful life of the machinery is five years with no residual value.
What is the charge for depreciation for the year ended 31 December?
A $19 000 B $23 000 C $26 910 D $42 550
Nov 99 P1 Q14 / May 03 P1 Q11/Nov 12 P12 Q18
8 A vehicle was part exchanged for a new vehicle. The value placed on the old vehicle was $12 000.
Which entries record the $12 000 part exchange?
A Dr Cash account
Cr Motor Vehicles account
B Dr Motor Vehicles account
Cr Cash account
C Dr Disposals account
Cr Motor Vehicles account
D Dr Motor Vehicles account
Cr Disposals account
Nov 00 P1 Q1/May 04 P1 Q4/Specimen 16 P1 Q4
9 A business buys a computer for $2 200 on 1 January 1998. The computer will be used for four years, after
which time it will be sold for $280. The business uses the straight-line method of depreciation.
What is the depreciation charge for the year ended 31 December 1999?
A $480 B $550 C $960 D $1 100
Nov 00 P1 Q4/May 04 P1 Q3/ May 09 P1 Q3
10 Why do businesses charge depreciation on their non-current assets?

A to ensure that sufficient cash is available to replace the assets
B to show the realisable value of the assets in the balance sheet
C to show when the assets must be replaced
D to spread the cost of the assets over their estimated useful lives
Nov 00 P1 Q7 / May 01 P1Q6 / Nov 01 P1 Q6/ Nov 08 P1 Q6
11 An asset cost $120 000 and has accumulated depreciation of $72 400. The asset is sold for $46 500.
What is the loss or profit on disposal?
A loss of $1 100 B loss of $73 500
C profit of $1 100 D profit of $73 500
Nov 00 P1Q13/ May 13 P12 Q18
12 A business sold a non-current asset. The following information is known.

$
Original Cost 500
Accumulated depreciation on date of sale 240
Profit on sale 70
What is the proceed from the sale of non-current asset?
A $170 B $ 190 C $ 310 D $ 330
May 01 P1 Q18
13 There are various methods of calculating the annual charge for depreciation.
Which curve best represents the reducing balance method?
Y
A
B
Annual
Depreciation D
($)
C
O X
Years Specimen 02 P1 Q3
14 An asset, which would not normally be depreciated, is
A building B land C patents D plant and machinery

Specimen 02 P1 Q6
15 Which asset does not need to be depreciated?

A land B an oil well
C a quarry D a revalued property
May 02 P1Q12
16 The table shows information relating to a company’s non-current assets.

$
Cost at 1 January 2002 10 500
Accumulated depreciation at 1 January 2002 4 900
Purchases for the year ended 31 December 2002 2 500
Disposals for the year ended 31 December 2002 700
Depreciation is 25% per annum on the reducing balance basis.

What is the depreciation charge for the year?
A $1 850 B $2 025 C $2 200 D $3 250
May 03 P1 Q4
17 On 1 October 2001 a company purchased machinery for $26 000. It was decided to depreciate the asset
using the reducing balance method at a rate of 20% per annum. On 30 September 2003 the asset was sold
for $12 000. What is the profit or loss on disposal?
A $3 600 loss B $3 600 profit
C $4 640 loss D $4 640 profit
Nov 03 P1 Q4/ May 07 P1 Q3/May 14 P12 Q6
18 A business has chosen to use the straight line method of providing for depreciation of equipment.
Why should it continue to use this method in subsequent years?
A accounting principles never allow accounting methods to be changed
B other methods of depreciation are unsuitable for depreciating equipment
C to ensure that profits are stated on a consistent basis over time
D to ensure that the Balance Sheet always shows the market value for equipment
Nov 03 P1 Q8/ May 06 P1 Q5
19 A non-current asset is purchased on 1 April 2000 at a cost of $240 000. It has an estimated residual value
of $40 000 at the end of its 5 years life and is to be depreciated on the reducing balance basis at the rate
of 30% each year.
What is the depreciation charge for the year ending 31 March 2002 (to the nearest $)?
A $42 000 B $50 400 C $98 000 D $117 600
May 04 P1 Q6
20 Why is a provision for depreciation made in accounts?

A to charge the cost of non-current assets against profit
B to make a provision for repairs
C to make cash available to replace non-current assets when necessary
D to show the current market values of non-current assets
Nov 05 P1 Q15
21 Non-current assets of a company were:

start of year 10 end of year 10
$ $
at cost 460 000 505 000
cumulative depreciation 215 000 237 000
net book value 245 000 268 000
During the year non-current assets costing $92 000 were purchased and non-current assets with a net
book value of $16 000 were sold.
What was the depreciation charge for the year?
A $22 000 B $23 000 C $53 000 D $69 000
Nov 07 P1 Q4/Nov 10 P1 Q3/May 11 P1 Q11/ Nov 14 P12 Q2
22 What is the purpose of providing for depreciation?

A To apply the matching principle.
B To ascertain the true value of non-current assets.
C To ensure that money is available for repair of non-current assets.
D To provide cash in the business for replacement.
Nov 07 P1 Q5/Nov 14 P12 Q10
23 The table gives information relating to the non-current assets of a business.

$
net book value at the end of the year 25 000
net book value at the beginning of the year 16 000
depreciation charge for the year 5 000
additions at cost during the year 22 000
What is the net book value of disposals during the year?
A $8 000 B $11 000
C $18 000 D $22 000
May 08 P1 Q3
24 A company has two non-current assets. Details are given in the table.
Asset date bought Cost ($) depreciation method residual value
X 1 Jan, Year 1 10 000 straight line life 5 years $2 000
Y 1 Jan, Year 1 20 000 reducing balance rate 20% Nil
What is the depreciation charge for the year ended 31 December, Year 2?
A $4 800 B $5 200
C $5 600 D $6 000
May 08 P1 Q5
25 An item of machinery cost $60 000. The machinery was later sold for $8 000 and the loss on disposal was
$3 000.
What was the accumulated depreciation on the machinery on disposal?
A $46 000 B $49 000
C $52 000 D $55 000
Nov 08 P1 Q3
26 A company's policy is to depreciate its equipment by 30 % annually using the reducing balance method.
A piece of equipment which was two years old was sold for $6000 and the profit on sale was $1590.
What was the cost price of the equipment?
A $7 590 B $9 000
C $9 600 D $11 025
May 09 P1 Q12
27 A business purchases a vehicle for $10 000. The business depreciates its non-current assets at 20 % using
the diminishing value method.
What is the depreciation charge for year 2?
A $1 600
B $2 000
C $6 400
D $8 000
May 10 P1 Q30
28 X Plc incurred the following costs as a result of purchasing a new machine.

$
purchase price 7 000
installation cost 5 000
testing the machine before use 1 000
manufacturer’s list price 10 000
advertising the new products to be made by the machine 4 000
What is the maximum initial cost of the machine that would be recognised as an asset of the
company?
A $13 000 B $16 000
C $17 000 D $20 000
Nov 10 P3 Q12
29 A sole trader owns a vehicle valued at $4000 for his own use and a vehicle valued at $2500 for business
use.
On 1 April 2012 he sold the business vehicle. On the same date he bought a new vehicle for$8000 for his
own use and transferred his old vehicle to the business. What is the change in the value of vehicles in the
business accounts?
A $1 500 B $4000 C $5500 D $6500
May 12 P12 Q5
30 The table shows extracts from the statements of financial position of a business.
2011 ($) 2012 ($)
non-current assets (at cost) 190 000 245 000
less accumulated depreciation 75 000 90 000
115 000 155 000
Other information for the financial year 2012 is as follows.
$
depreciation charged 40 000
new non-current assets purchased (at cost) 105 000
loss on sale of non-current assets 10 000
Which amount was received from the sales of the non-current assets?
A $15 000 B $25 000 C $30 000 D $35 000
Nov 13 P12 Q5
31 A vehicle is sold for $1 500. It cost $5 000 and $3 000 depreciation had been provided on it.
Which entry is needed to close the disposal account?
debit $ credit $
A disposal account 500 income statement 500
B disposal account 3 500 income statement 3 500
C income statement 500 disposal account 500
D income statement 3 500 disposal account 3 500
Nov 13 P12 Q20
32 A non-current asset is depreciated due to passage of time.
Which type of non-current asset is it?
A a computer which has become out of date
B a lease with a fixed life in terms of years
C a machine which is subject to rust and breakdown
D a mine which loses value as coal is extracted
May 14 P12 Q5
33 A business depreciates its non-current assets at 20% using the straight-line method. Depreciation is
calculated on a time basis in the year of acquisition and disposal.
$
non-current assets, at cost, 31 December 2013 200 000
purchase of machinery 1 January 2014 50 000
disposal of machinery 30 September 2014 40 000
non-current assets, at cost, 31 December 2014 210 000
What is the depreciation charge for non-current assets for the year ended 31 December 2014?
A $42 000 B $48 000
C $50 000 D $52 000
May 15 P12 Q6
34 A trader prepares a disposal account. On which sides do the cost of the asset and sale proceeds appear?
cost of the asset sale proceeds

A credit credit
B credit debit
C debit credit
D debit debit
Nov 15 P12 Q5
35 A business depreciates its motor vehicles over four years using the straight-line method. A full year’s
depreciation is charged in the year of purchase, but none in the year of sale.
A vehicle purchased on 1 July 2011 for $18 000 had an estimated residual value of $4000. The vehicle was
sold for $5000 on 31 December 2014.
Which entry appeared in the income statement for the year ended 31 December 2014?
A $1 000 loss B $2500 loss

C $2500 profit D $5000 profit
Nov 15 P12 Q13
36 A non-current asset costs $250 000 and has a useful economic life of 25 years. The estimated residual
value is $10 000.
Depreciation is provided on a straight line basis.
After 10 years the asset is sold for $120 000. Disposal costs of $20 000 are incurred.
What is the loss on disposal?

A $30 000 B $34 000
C $50 000 D $54 000
Specimen 16 P1 Q3
37 A company’s financial year ends on 31 December.
On 1 April 2015, the following payments relating to a new machine were made.
$
Purchase cost 50 000
Installation 10 000
Machinery is depreciated at 20% on cost per annum, calculated from the date of purchase.
What was the depreciation of the new machine for the year ended 31 December 2015?
A $7 500 B $9 000
C $10 000 D $12 000
May 16 P12 Q2
38 A business purchased a motor vehicle on 1 January 2012 for $24 000. The estimated useful life of the
motor vehicle was four years and the estimated residual value at the end of four years was $8 000.
The business depreciates motor vehicles at 25% per annum using the reducing balance method.
No depreciation is charged in the year of disposal. The motor vehicle was sold on 31 July 2015 for $12
000.
What was the profit on the sale of the motor vehicle?
A $1 875 B $4 000
C $5 250 D $8 000
May 16 P12 Q3
39 A disposal account is used to record the sale of a non-current asset.

Which transactions are recorded on the credit side of the disposal account?
A cost, loss on disposal and sale proceeds
B cost, profit on disposal and sale proceeds
C depreciation, loss on disposal and sale proceeds
D depreciation, profit on disposal and sale proceeds
Nov 16 P12 Q2
40 The following information was available for the disposal of a machine.

$
accumulated depreciation 45 000
profit on disposal 8 100
sale proceeds 75 600
What was the original cost of the machine?
A $22 500 B $38 700
C $112 500 D $128 700
Nov 16 P12 Q3
41 Amitav purchased a van costing $20 000. He provided an old van with a net book value of $8 000 in part
exchange. There was a profit on disposal of $1 500.
What was the cash outflow arising from the purchase?
A $9 500 B $10 500 C $12 000 D $13 500
May 17 P12 Q3
42 The net book value of a company’s non-current assets was as follows.
$
at 1 January 2016 100 000
at 31 December 2016 80 000
During 2016 assets were sold for $20 000, 20ealizing a profit on disposal of $5 000.
Depreciation charged for 2016 was $8 000.
What was the expenditure on new assets in 2016?
A $3 000 B $5 000 C $8 000 D $15 000
May 17 P12 Q4
ANSWER KEY
1 D 12 D 23 A 34 C
2 B 13 C 24 A 35 B
3 B 14 B 25 B 36 D
4 C 15 A 26 B 37 B
5 D 16 A 27 A 38 A
6 B 17 C 28 A 39 C
7 B 18 C 29 A 40 C
8 D 19 B 30 A 41 B
9 A 20 A 31 C 42 A
10 D 21 C 32 B
11 A 22 A 33 B
DETAILED ANSWERS
2 As we know
Cost  Accumulated depreciation = Book value
$30 000  X = $7 500 *
X = $30 000 – $7 500
X = $22 500
* Book value + Profit on sale = Selling price
X + $1 500 = $9 000
X = $9 000  $1 500
X = $7 500
Cost−Scrap value
3 Formula for calculating straight line depreciation is (Remaining useful life). As repair cost is not part of
formula so “B” is the right option.
4 $
Cost 40 000
Depreciation for first year ($40 000  10%) (4 000)
Depreciation for second year [($40 000  $4 000 10%] (3 600)
Cost−Scrap value
6 Annual depreciation of computer =
Remaining useful life
$3 200−$700
=
5 years
= $500
Depreciation for two years = $500  2
= $1 000
Book value at the end of year 2 = $3 200 – $1 000
= $2 200
7 Non-current assets are recorded at the cost of acquisition which is $115 000, whereas interest paid is
$115 000−zero
recorded as an expense so depreciation charge will be( )= $23 000
5 years
8 Motor Vehicle will be debited as it is being purchased whereas disposal account will be credited as the
asset within the disposal account has been sold.
Cost−Scrap value
9 Annual depreciation of computers* =
Remaining useful life
$2 200−$280
=
4 years
= $480
* This is done so, as annual depreciation for each year remains constant under straight line unless an asset
is purchased or sold during the year
11 Selling price  Book value = Profit (loss) on sales

$46 500  ($120 000 – $72 400) = $1 100
Loss on sale = $1 100
12 Cost  Accumulated depreciation = Book value

$500  $240 = $260
Sales proceed = Book value + Profit on sale
= $260 + $70
= $330
16 $ $
Cost at 1 January 2002 10 500
Add Purchases 2 500 13 000
Less Disposals 700
Accumulated depreciation 4 900 (5 600)
Written down (reduced) value of non-current assets 7 400
Depreciation for the year ($7 400  25%) = $1 850
17 $
Cost of machine sold 26 000
Depreciation for first year ($26 000  20%) (5 200)
20 800
Depreciation for second year ($20 800  20%) (4 160)
Book value of machine sold 16 640
Sales price of machine sold 12 000
Loss on machine disposal 4 640
19 $
Cost of non-current asset on 1 April 2000 240 000
Depreciation for the year ending 31 March 2001 ($240 00030%) (72 000)
168 000
Depreciation for the year ending 31 March 2002 ($168 00030%) (50 400)
21 Non-current asset Account (at book value)

$ $
Balance b/f 245 000 Asset disposal 16 000
Cash 92 000 Depreciation (balancing figure) 53 000
______ Balance c/d 268 000
337 000 337 000
22 This was a knowledge based question on depreciation. Of the options given only option A contained
reference to an accounting concept, that of matching and is the correct key.
Depreciation is a non-cash expense so it is wrong to assume that depreciation is aimed at retaining cash in
the business.

$ $
Balance b/f 16 000 Asset disposal (balancing figure) 8 000
Cash (additions) 22 000 Depreciation 5 000
_____ Balance c/d 25 000
38 000 38 000
24 $
$10 000−$2 000
Depreciation under straight line ( ) 1 600
5 years
Depreciation under reducing balance [{$20 000  ($20 000  20%)} × 20%] 3 200
Total depreciation charge for the year ended 31 December, Year 2. 4 800
25 Selling price  Book value = Profit (loss) on sales

$8 000  ($60 000 – accumulated depreciation) = ($3 000)
Accumulated depreciation = $49 000
26 Original Cost × 70% × 70% = Book value after two years
Original Cost × 70% × 70% = $6 000  $1 590
$4 410
Original Cost =
49%
Original Cost = $9 000
27 $
Cost of non-current asset 10 000
Depreciation for the first year ($10 000  20%) (2 000)
8 000
Depreciation for the second year ($8 000  20%) (1 600)
28 “A” option is correct as initial cost of machine should include purchase price, installation cost and cost of
testing the machine before use. Manufacturer list price should be ignored as it was purchased for $7 000.
In addition advertising cost is a revenue expense and cannot be treated as part of initial capital cost.
29 Vehicle transferred to the − Vehicle sold by the business = Increase in value of vehicles
business
$4000 − $2 500 = $1 500
$ $
Balance b/f 115 000 Asset disposal (balancing figure) 25 000
Cash 105 000 Depreciation 40 000
______ Balance c/d 155 000
220 000 220 000
Asset disposal Account
$ $
Non-current asset 25 000 Bank – Sales proceeds (Bal. figure) 15 000
_____ Loss on disposal 10 000
25 000 25 000
33 Depreciation [($200 000  $40 000) × 20%] + [$50 000 × 20%] + [$40 000 × 20% × 9/12] $48 000
35 $
Cost of motor vehicles sold 18 000
$18 000−$4 000
Depreciation for three years under SLM( ) 3 years (10 500)
4 years
Book value of motor vehicles sold 7 500

Sales price of motor vehicles sold (5 000)
Loss on motor vehicles disposal 2 500
36 $
Cost of non-current asset sold 250 000
$250 000−$10 000
Depreciation for ten years under SLM( ) 10 years (96 000)
25 years
Book value of non-current asset sold 154 000
Net sales price of non-current asset sold ($120 000  $20 000) (100 000)
Loss on non-current asset disposal 54 000
37 Depreciation for the year ended 31 December 2015 = [{$50 000 + $10 000)  20% × 9/12]
= $9 000
38 $
Cost of machine sold 24 000
Depreciation for 2012 ($24 000  25%) (6 000)
18 000
13 500
Book value of motor vehicle sold 10 125
Sales price of motor vehicle sold 12 000
Profit on the sale of the motor vehicle 1 875
40 Machine disposal Account

$ $
Machine - cost (Balancing figure) 112 500 Bank – Sales proceeds 75 600
Profit on disposal 8 100 Accumulated depreciation 45 000
120 600 120 600
41 Purchase price  Trade in value = Cash outflow on purchase

$20 000  ($8 000 + $1 500) = $10 500

$ $
Balance b/f 100 000 Asset disposal ($20 000  $5 000) 15 000
Cash (purchase/expenditure on asset) 3 000 Depreciation 8 000
______ Balance c/d 80 000
103 000 103 000
Chapter 3 -25- Bad Debts and Provision for Doubtful Debts
CHAPTER 3 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS

1 The figures show a calculation of the provision for doubtful debts.
1 July 1997 30 June 1998
$ $
Trade receivable X 750 nil
Trade receivable Y 1 000 2 000
Trade receivable Z nil 1 500
1 750 3 500
General provision 4 150 7 200
Total provision 5 900 10 700
During the period, X was made bankrupt and a final payment of $50 was received. What is the charge for
the year to 30 June 1998 for bad and doubtful debts?
A $3 050 B $4 750
C $4 800 D $5 500
May 98 P1 Q10
2 A company increases its provision for bad debts by $ 1 600 from $3 000.
What will be the effect of this adjustment on the year-end balance sheet?
Net profit Net trade receivables
A decrease by $1 600 decrease by $1 600
B decrease by $1 600 decrease by $4 600
C increase by $1 600 decrease by $1 600
D increase by $1 600 decrease by $4 600
3 A Company’s year-end Sales Ledger balances are shown below.
Debit $14 240
credit $960
When preparing the annual accounts, it was decided to write off bad debts of $200 and to maintain the
provision for doubtful debts at 2½%.
What will be the provision for doubtful debts at the year-end?
A $151 B $327
C $332 D $351
Nov 99 P1 Q2
4 At the beginning of the year a company has a provision for doubtful debts of $1 000. At the end of the
year required provision is $2 500. During the year debts of $1 500 are written off and $100 is received in
respect of a debt written off many years ago.
What is the net amount charged to the Income statement for bad and doubtful debts?
A $1 500
B $2 500
C $2 900
D $3 000
May 00 P1 Q14
5 The writing off of a bad debt is an example of the
A going concern concept

B matching concept
C prudence concept
D substance over form concept
Nov 00 P1 Q6/Nov 04 P1 Q6
6 The table shows information about a business.

$
Provision for Doubtful Debts at 1 January 2000 700
Trade receivables at 31 December 2000 (after writing off bad debt of $30 15 000
Charge to Income statement for bad and doubtful debts for the year ended 31
December 2000 (including bad debts written off $30 200
What is the percentage provision that has been made for doubtful debts at 31 December 2000?
A 3.3% B 4.7%
C 5.8% D 6.0%
Nov 01 P1 Q2
7 A trial balance at 30 April 2003, before making end of year adjustments, showed:
Debit ($) Credit ($)
Trade receivables 17 800 -
Provision for doubtful debts - 580
At 30 April 2003 it was decided to write off a bad debt of $800 and to make a provision for doubtful debts
of 2% of trade receivables. During the year an amount of $200 was received from a customer relating to a
debt that was written off in the year ended 30 April 2002.
What was the total bad and doubtful debt expense for the year ended 30 April 2003?
A $360 B $560
C $940 D $1 140
May 03 P1 Q3
8 At the beginning of the year a business has a provision for doubtful debts of $2 600. At the year end the
provision is to be 5% of trade receivables.
The balance on the Trade receivables Control account at the year-end is $69 200, before writing off a bad
debt of $480. The business operates a separate Bad Debts accounts.
What is the entry in the Income statement for the provision for doubtful debts?
A $836 debit B $860 debit C $836 credit D $860 credit
9 At the end of a financial period, a business has the following balances.

$
Total trade receivables balances 10 620
Bad debt not yet written off 260
Provision for doubtful debts brought forward 460
What should the business do if it wishes to maintain the bad debt provision at 5% of trade receivables?
A decrease the existing provision by $58
B increase the existing provision by $58
C decrease the existing provision by $71
D increase the existing provision by $71
May 04 P1 Q5
10 A company has the following balances.
$
Trade receivables at 31 December 2003 125 400
Provision for doubtful debts at 1 January 2003 1 800
During the year ended 31 December 2003 bad debts of $20 500 were written off. The company provides
for 5% of trade receivables at each year-end.
What is the doubtful debts expense for the year ended 31 December 2003?
A $3 445 B $4 470 C $5 245 D $6 270
Nov 04 P1 Q5
11 A business makes a provision for doubtful debts equal to 5% of its trade receivables.
At 31 March 2003 net trade receivables were shown in the Balance Sheet as $17 100.
At 31 March 2004 the balance on its Sales Ledger Control account was $19 000. In the year ended 31
March 2004 a bad debt of $800 had been written off.
How much should be debited in the Income statement for the year ended 31 March 2004 for the provision
for doubtful debts?
A $10 B $50 C $55 D $95
May 05 P1 Q4
12 On 30 September 2005 a manufacturer’s current assets totalled $28 000. The next day only two
transactions took place.
1 Inventory bought for cash. The list price of $2 000 was subject to a trade discount of 20% and a
cash discount of 5%. Payment was made immediately.
2 A bad debt of $400 was written off.
What was the total of current assets on 2 October 2005?
A $27 680 B $28 080`` C $29 520 D $29 600
May 06 P1 Q4
13 A trial balance shows:
Dr ($) Cr ($)
provision for doubtful debts 1 200
trade receivables 28 000
$2 100 of the trade receivables are irrecoverable and are to be written off. The owner of the business
wishes to make the provision for doubtful debts equal to 5 % of his outstanding trade receivables.
What is the amount debited to the income statement for the provision for doubtful debts?
A $95 B $1 295 C $1 400 D $2 600
May 07 P1 Q4
14 A trial balance at 30 June, before making end of year adjustments, showed:
debit ($) credit ($)
trade receivables 35 600 -
provision for doubtful debts - 1 160
At 30 June, it was decided to write off a bad debt of $1 600 and to make a provision for doubtful debts
equal to 2% of trade receivables.
What was the total expense in the income statement for bad and doubtful debts for the year ended 30
June?
A $680 B $1 120 C $2 080 D $2 280
May 08 P1 Q4/Nov 15 P12 Q6
15 A business makes a provision for doubtful debts equal to 5 % of its trade receivables.
At 31 March 2008 the provision for doubtful debts was $850.
At 31 March 2009 the trade receivables after the provision for doubtful debts were $17 100.
How much is the increase in the provision for doubtful debts for the year ended 31 March 2009?
A $45 B $50 C $850 D $900
Nov 09 P1 Q3
16 What is the main use of a computerised age analysis of trade receivables?

A aid debt collection procedures B match sales invoices against orders
C reconcile sales ledger balances D show credit notes issued
May 11 P1 Q14
17 Who ismost likelyto use an age analysis of debtors?
A cashier B credit controller
C sales ledger supervisor D sales manager
May 13 P12 Q9
18 A business is reviewing credit limits for its customers.

What would result in a customer’s credit limit being reduced?
A Cash discounts are always taken by the customer.
B Sales have increased to that customer.
C The customer always pays their debt on time.
D The customer has lost a major contract.
Nov 13 P12 Q21
19 Which statement is correct?

A The balance on the bad debts recovered account is carried down to the next accounting period.
B The balance on the bad debts recovered account is credited to the income statement.
C The balance on the provision for doubtful debts account is calculated before the deduction of
bad debts.
D The balance on the provision for doubtful debts account is not included in a trial balance.
May 14 P12 Q3
20 At the end of its financial year a business had trade receivables of $16 000 and had provision for doubtful
debts of $640. The provision is to be maintained at 5%.
Which amount is shown in the income statement?
A $160 credit B $160 debit
C $800 credit D $800 debit
Nov 14 P12 Q1
21 A business started on 1 January 2013. At 31 December 2014 the following information is available.
31 December 2013 31 December

($) 2014 ($)
trade receivables 80 000 100 000
increase in provision for doubtful debts in income statement 4 000 2 000
What is the rate for provision for doubtful debts in 2014?
A 2% B 3.33% C 5% D 6%
May 15 P12 Q4
ANSWER KEY
1 D 7 A 13 A 19 B
2 B 8 A 14 B 20 B
3 D 9 B 15 B 21 D
4 C 10 B 16 A
5 C 11 B 17 B
6 C 12 A 18 D
DETAILED ANSWERS
1 In Income statement changes in provision for doubtful debts & bad debts written off are recorded.
So $
Increase in provision ($10 700  $5 900 4 800
Bad debts written off ($750  $50) 700
Amount to be charged in Income statement 5 500
3 Credit balance of trade receivables is shown as liability so only debit balances will be considered to
calculate provision that is
Provision for doubtful debts = ($14 240 – $200 2½ %) = $351
4 $
Total bad debts written off 1 500
Increase in provision for doubtful debts ($2 500$1 000) 1 500
Less Bad debts recovered (100)
Net amount to be charged to Income statement 2 900
6 Increase in provision = $200  $30
= $170
So provision at 31 December = Provision on 1 January + Current year increase
= $700 + $170
= $870
As we know
Trade receivables  Provision (%) = Provision ($)
$15 000  X = $870
X = $870 ÷ $15 000  100
X = 5.8%
7
$ $
Bad debts 800
Bad debts recovery (200)
Provision for doubtful debts required [($17 800  $800) 2%] 340
Provision for doubtful debts available 580
Decrease in provision (240)
Total bad and doubtful debts 360
8 $
Provision for doubtful debts required [($69 200  $480) 5%] 3 436
Existing provision for doubtful debts 2 600
Increase in provision 836
Increase in provision for a doubtful debt involves the following entry.

Dr Income statement $836
Cr Provision for doubtful debts $836
9 $
Provision for doubtful debts required [($10 620  $260) 5%] 518
Provision for doubtful debts brought forward 460
Increase in existing provision 58
10 $
Provision for doubtful debts required ($125 400  5%) 6 270
Provision for doubtful debts at 1 January 2003 (1 800)
Doubtful expense for the year 4 470
11 $
Provision for doubtful debts required on 31 March 2004($19 000 × 5%) 950
$17 100
Provision for doubtful debts brought forward (31 March 2003 × 5%) (900)
95%
Increase in provision to be debited to Income statement 50
12 $
Total of current assets on 30 September 28 000
Increase in inventories ($2 000 × 80%) 1 600
Decrease in cash ($2 000 × 80% × 95%) (1 520)
Decrease in trade receivables due to bad debts (400)
Total of current assets on 2 October 27 680
13 $
Provision for doubtful debts required [($28 000 − $2 100) × 5%] 1 295
Existing provision for doubtful debts (1 200)
Increase in provision to be debited to income statement 95
14 $
Bad debts 1 600
Increase in provision for doubtful debts required [$1 160  {($35 600 − $1 600) × 2%}] (460)
Total expense in the income statement for bad and doubtful debts 1 120
15 $
$17 100
Provision for doubtful debts required on 31 March 2009 ( × 5%) 900
95%
Provision for doubtful debts brought forward 31 March 2008 (850)
Increase in provision to be debited to Income statement 50
18 The question requires identifying a situation where the credit limit of customers should have been
reduced. The implication here is that the customer will be less likely to pay their account on time or at all.
This, therefore, should be something negative, which was the customer losing a major contract.
20 $
Provision for doubtful debts required ($16 000 5%) 800
Existing provision for doubtful debts 640
Increase in provision 160
Increase in provision for a doubtful debt involves the following entry.
Dr Income statement $160

Cr Provision for doubtful debts $160
21 Provision at 31 December 2014 = Provision on 31 Dec 2013 + Current year increase

= $4 000 + $2 000
= $6 000
As we know
Trade receivables  Provision (%) = Provision ($)
$100 000  X = $6 000
$6 000
X =  100
$100 000
X = 6%
Chapter 4 -32- Inventory Valuation
CHAPTER 4 INVENTORY VALUATION

1 The normal selling price of an inventory item is $22 per unit.
The item originally costs $15 per unit, but can only be sold at the normal selling price after modification
cost of $14 per unit. The scrap value of the item is $7 per unit
At how much price should the item be valued in the balance sheet?
A $7 per unit B $8 per unit
C $14 per unit D $15per unit
Nov 98 P1 Q8/ Nov 07 P1 Q14
2 Inventory should be valued at the lower of cost and net realisable value. The table shows data about four
products.
Product W X Y Z
Cost ($) 18 19 17 23
Realisable value ($) 15 28 17 26
Selling cost ($) 3 2 3
At how much should the total inventories is valued?
A $72 B $77
C $78 D $87
May 99 P1 Q24/May 06 P1 Q14
3 A company’s year-end is 30 June, but because of staff shortage the inventory could not be counted
until 6 July. The inventory valuation at this date was $86 500.
However detailed records were kept of inventory movement between 30 June & 6 July
The table shows the data available
$
Sales (at cost) 1 750
Purchases 1 550
Returns inwards (at cost) 310
Returns outwards 190
What is the value of inventory on the company’s balance sheet at 30 June?
A $86 180 B $86 420 C $86 580 D $86 820
Nov 99 P1 Q10
4 How should inventories be valued in published accounts?

A cost B net realisable value
C replacement cost D the lower of cost & net realisable value
Nov 99 P1 Q21/May 08 P1 Q14
5 Which of the following is always acceptable as a means of inventory valuation under SSAP9 “Accounting
for inventories and long term contracts”?
A base inventory B FIFO
C LIFO D replacement cost
May 00 P1 Q23
6 When valuing inventory, which costs should be included?
A production
B production and administration
C production, marketing and distribution
D production, marketing, administration and distribution
May 00 P1 Q32/May 08 P1 Q11
7 The table shows information relating to the end of year inventory

$
Cost 50 000
Realisable value 45 000
Realisable costs 5 000
Replacement cost 35 000
What is the value of inventory at the balance sheet date?
A $35 000 B $40 000
C $45 000 D $50 000
Nov 00 P1 Q22/Nov 12 P12 17
8 One of the characteristics of the LIFO basis of inventory valuation is that LIFO
A determines the exact profit in historic cost terms in respect of completed jobs
B gives balance sheet values reflecting up-to-date costs
C matches revenues with up-to-date costs
D smoothes the effect of seasonal cost fluctuations
Specimen 02 P1 Q11
9 A company operates in a country where the price level is rising. The use of FIFO rather than LIFO inventory
valuation will
A raise reported profits
B lower reported profits
C lower the value of net assets shown in the Balance Sheet
D leave the value of reported profits unchanged
Specimen 02 P1 Q17
10 A company has listed its year-end inventories.

Inventory Purchase price Production costs Selling costs Sales value
Item $000 $000 $000 $000
Metal 60 10 11 65
Plastic 25 5 6 40
Wood 50 12 15 60
135 27 32 165
At what valuation should the company include its inventory in the Balance Sheet?
A $129 000 B $162 000 C $143 000 D $194 000
Specimen 02 P1 Q18
11 On 6 January 2002 a firm lost its entire inventory in a fire. Inventory had a Balance Sheet
valuation of $650000 on 31 December 2001.
In the period 1-5 January 2002 purchases were $75 000 and sales were $96 000.
The average gross profit the firm makes is 25% of selling price.
What was the value of the inventory on 5 January?
A $629 000 B $647 000 C $653 000 D $671 000
May 02 P1 Q11
12 Inventory which cost $1 200 has been damaged. It would have sold for $1 800 when perfect. It can be sold
for $1 700 if repairs are undertaken at a cost of $600. To replace the inventory would cost $1 000. At what
value should the damaged inventory be shown in the final accounts?
A $1 000 B $1 100
C $1 200 D $1 800
Nov 02 P1 Q8/May 06 P1 Q6/ Nov 09 P1 Q6
13 A business was started on 1 January. The purchases and sales of inventory for January were
Date Purchases Sales
4 January 3 @ $200 -
13 January - 2@ $400
26 January 3 @ $250 -
28 January - 2 @ $400
The business used the first in first out (FIFO) method of inventory valuation.
What was the gross profit for January?
A $650 B $700
C $750 D $1 150
May 03 P1 Q15/May 16 P12 Q23
14 A company uses the Weighted Average Cost (AVCO) method of inventory valuation. During January the
following transactions took place.
January Total ($)
1 Opening inventory 100 units @ $2.00 per unit 200
12 Received 150 units @ $2.10 per unit 315
15 Issued 100 units -
27 Received 50 units @ $2.20 per unit 110
What is the value of inventory at 31 January?
A $419 B $420 C $425 D $440
Nov 03 P1 Q16
15 A business ends its financial year on 31 December. The inventory was not counted until 10 January
when it was found to be $104 000 at cost. The following transactions took place from 1 to 10 January.
$
Inventory purchased 16 000
Inventory sold at selling price 15 000
Inventory is sold at a mark-up of 25%.
What was the value of inventory at 31 December?
A $99 250 B $100 000
C $108 000 D $108 750
May 04 P1 Q17
16 In a period of rising prices, a company has valued its inventory of goods using the Last In, First Out (LIFO)
basis. The directors have decided that the inventory should be valued using the First In, First Out (FIFO)
basis. What is the effect of the change in the valuation of the inventory on the gross and net profits of the
company?
Gross profit Net profit
A decrease no effect
B decrease decrease
C increase no effect
D increase increase
Nov 04 P1 Q13
17 A company has two items in inventory, which require to be repaired before sale.
cost selling price ($) repair costs ($)
Item 1 5 260 7 600 880
Item 2 2 360 2 450 190
What is the total inventory value of these items?
A $6 550 B $7 520
C $7 620 D $8 980
May 05 P1 Q15
18 A trader buys inventory costing $6 000.

He is entitled to trade discount at 10% and cash discount of 5%.
On the same day he discovers that he can only sell the inventory for $5 000.
Which amount should he record as the purchase price of the inventory?
A $5 000 B $5 130
C $5 400 D $6 000
Nov 06 P1 Q8/Nov 13 P12 Q8
19 A business has two items in inventory which need to be repaired before sale.
cost ($) selling price ($) repair costs ($)
item 1 2 160 2 450 190
item 2 3 190 3 060 320
What is the total inventory value of these items?
A $4 900 B $5 000
C $5 510 D $5 640
May 07 P1 Q12
20 The inventory records of a business show the following information for product X.
amount in
$
units
1 January opening balance 100 3
3 January receipts into inventory 50 4
8 January inventory issued 120 -
What is the value of the inventory issued on 8 January using the First In First Out (FIFO) method?
A $360 B $380
C $410 D $420
Nov 08 P1 Q15/ May 12 P12 Q14
21 A business uses the weighted average cost (A VCO) method of inventory valuation. During March the
following transactions took place.
$
1 March opening inventory 200 units at $6.00 per unit 1 200
14 March received 300 units at $6.50 per unit 1 950
20 March issued 250 units to production at $7.00 per unit 1 750
28 March received 100 units at $6.70 per unit 670
What is the value of inventory at 31 March?
A $2 195 B $2 245
C $2 295 D $2 450
Nov 08 P1 Q16
22 The inventory records of a business show the following information for product X during January.
amount in units cost per unit $

1 Jan opening balance 200 5
15 Jan receipts into inventory 150 6
30 Jan inventory issued to production 250 -
What is the value of inventory held at 31 January using the Last In First Out (LIFO) method?
A $500 B $600
C $1 300 D $1 400
Nov 09 P1 Q11
23 A company has the following costs for an item of inventory.

$
purchase cost 12 000
carriage in 2 000
conversion costs 18 000
storage costs 8 000
What should the inventory be valued at?
A $12 000 B $14 000 C $32 000 D $40 000
Nov 10 P3 Q10
24 At the year-end a company discovers that some inventory is damaged.
This inventory originally cost $2 000 and to replace it would now cost $1 900.
It would normally sell for $2 400 but can now only be sold for $2 200 if repairs costing $400 are
undertaken.
At what value should the damaged inventory be shown in the financial statements?
A $1 800 B $1 900 C $2 000 D $2 200
May 11 P1 Q5
25 A trader buys and sells garden fertiliser in 50 kilo units. Inventory at 1 July was 250 units valued
at $16 per unit. Purchases and sales during the month were as follows.
Date purchases (units) sales (units)
3 July sales 100
11 July purchases ($13 per unit) 200
14 July sales 200
25 July purchases ($14 per unit) 200
29 July sales 200
The FIFO method is used to value inventory.
What is the value of the closing inventory at 31 July?
A $1 950 B $2 100 C $2 400 D $4 000
Nov 11 P1 Q16
26 Draft financial statements show revenue of $106 000 and closing inventory of $2100.
There were 100 items which had cost $10 an item but which were for sale at $6 an item. At the year-end
these were with a customer on a sale or return basis. These items were treated as having been sold
although no sale had been agreed.
What are the values of revenue and inventory when the principle of prudence is applied?
Revenue ($) Inventory ($)
A 105 000 2 700
B 105 000 3 100
C 105 400 2 700
D 105 400 3 100
Nov 12 P12 Q6
27 Hedley has 100 items of inventory in his warehouse and five more with a customer on a sale or return
basis. He provides the following information.
$ per unit
historic cost paid 60
selling price 85
current replacement cost 65
Which value should appear in the statement of financial position for inventory?
A $6 000 B $6 300 C $6 825 D $8 500
May 14 P12 Q1
28 A business bought and sold the following items of inventory.

Month details units cost per unit ($)
January purchased 30 2.00
February purchased 20 2.50
March sold 10 –
It uses the AVCO method of inventory valuation.
What was the value of inventory at the end of March?
A $20 B $22 C $88 D $90
May 15 P12 Q16
29 Inventory is valued at the lower of cost and net realisable value.
What is net realisable value?
A selling price
B selling price less cash discount
C selling price less further cost to completion
D selling price less trade discount
Nov 15 P12 Q18
30 A company commences business on 1 April. It buys the following units of inventory.
date quantity unit cost
1 April 200 $250
1 September 400 $200
1 December 200 $300
During the year, it sells 500 units at $550 each.
What is the gross profit for the year using the FIFO method of inventory valuation?
A $85 000 B $155 000 C $156 250 D $165 000
Specimen 16 P1 Q23
31 A business uses the AVCO method of inventory valuation.
The following transactions took place.
1 March purchase 1 000 units at $65 per unit
2 March purchased 1 200 units at $66 per unit
4 March sold 1 850 units at $68 per unit
What was the value of closing inventory?
A $22 750 B $22 941 C $23 100 D $23 800
Nov 16 P12 Q22
32 Sam was unable to conduct a physical count of inventory at 31 December 2016.

On 3 January 2017 inventory had been sold to Abdul for $11 950. The cost price of this inventory
had been $9 560.
On 4 January 2017 inventory had been returned by Sita. It had been sold for $2 390. The cost price of this
inventory was $1 912.
Sam valued his inventory at 5 January 2017 at cost, $59 750.
What was the value of inventory at 31 December 2016?
A $50 190 B $52 012 C $67 398 D $69 310
May 17 P12 Q11
33 Jamal uses the AVCO system to value his inventory. He provides the following information:
March 1 no opening inventory
6 60 units were purchased at $120 per unit
23 110 units were sold for $150 per unit
What was the cost of sales for March?
A $5 875 B $12 925 C $13 000 D $18 800
May 17 P12 Q22
ANSWER KEY
1 B 10 A 19 A 28 C
2 A 11 C 20 B 29 C
3 C 12 B 21 B 30 D
4 D 13 C 22 A 31 B
5 B 14 A 23 C 32 C
6 A 15 B 24 A 33 B
7 B 16 D 25 B
8 C 17 B 26 C
9 A 18 C 27 B
DETAILED ANSWERS
1 Net realisable value (NRV) = ($22$14) = $8

Original cost = $15
Inventory should be valued at lower of cost or NRV i.e. $8.
2 1 2 3 2-3 Lower of Cost

Product Cost ($) Realisable Selling Cost Net Realisable & NRV ($)
Value ($) ($) Value ($)
W 18 15 - 15 15
X 19 28 3 25 19
Y 17 17 2 15 15
Z 23 26 3 23 23
72
3 $
Inventory at 6 July 86 500
Add Sales at cost 1 750
Return outwards 190
Less Purchases (1 550)
Return inwards (at cost) (310)
Inventory at 30 June 86 580
7 Net realisable value ($45 000 – $5 000) = $40 000
Cost = $50 000
So inventory should be valued at $40 000.
* Replacement cost is ignored as law does not permit this method.
10 1 2 3(1+2 4 5 6(4-5 7
Inventory Purchase Production Total cost Sale Selling Net realisable Lower of
Item price cost $000 value cost value cost and
$000 $000 $000 $000 $ 000 NRV
$000
Metal 60 10 70 65 11 54 54
Plastic 25 5 30 40 6 34 30
Wood 50 12 62 60 15 45 45
135 27 162 165 32 133 129
11 $
Opening inventory (on 31 December 2001 650 000
Add Purchases 75 000
725 000
Less Cost of sales (96 000  75%) (72 000)
Inventory on 5 January 2002 653 000
12 Inventory should be valued at lower of cost or net realisable value so it would be $1 100 ($1 700  $600).
13 $ $
Sales (2 units @ $400) + (2 units @ $400) 1 600
Cost of sales
Purchases (3 @ $200) + (3 @ $250) 1 350
Closing inventory [(3+3) – (2+2)] @ $250 (500) (850)
Gross profit 750
14 Inventory Sheet
Date Receipts Issues Balance
Jan Qty Rate Amount Qty Rate Amount Qty Rate Amount
01 100 2.00 200
12 150 2.10 315 250 2.06 515
15 100 2.06 206 150 2.06 309
27 50 2.20 110 200 2.095 419
15 $
Value of inventory at 10 January 104 000
Inventory purchased (16 000)
Inventory sold ($15 000 × 100/125) 12 000
Inventory value at 31 December 100 000
17 If a business has more than one item of inventory then each inventory item is valued separately at lower
or cost and net realisable value i.e.
Selling price – Repairs cost = Net realisable value
Item1 $7 600 – $880 = $6 720
Item2 $2 450 – $190 = $2 260
If we compare NRV with individual costs of inventory items we can see that cost of item 1 is lower
whereas net realisable value of item 2 is lower.
On the basis of above calculation total value of inventory will be $7 520 ($5 260 + $2 260).
19 As inventory is valued at lower of cost or net realisable value of each separate item so value of
inventory will be determined as
Cost ($) Net realisable value ($) Lower value ($)
Item 1 2 160 2 450 – 190 = 2 260 2 160
Item 2 3 190 3 060 – 320 = 2 740 2 740
Total 4 900
20 Inventory on 31 March is $380 [(100 units × $3 + (20 units × $4)].
21 Inventory Sheet
01 200 6.00 1 200
12 300 6.50 315 500 6.30 3 150
15 250 6.30 1 575 250 6.30 1 575
27 100 6.70 670 350 2 245
22 Inventory held at 31 January (100 units @ $5) = $500
23 Inventory should be valued at total cost of production and will include material cost $14 000 ($12000 +
$2 000 and conversion cost i.e. all production costs excluding material ($18 000) so it should be valued at
$32 000 ($14 000 + $18 000).
24 Net realisable value (NRV) = ($2200 $400) = $1 800

Original cost = $2 000
Inventory should be valued at lower of cost or NRV i.e. $1 800.
25 Inventory Sheet
Date Purchases Sales Balance
1 July 250 16 4 000
3 July 100 16 1 600 150 16 2 400
11 July 200 13 2 600 150 16
200 13 5 000
14 July 150 16
200
50 13 3 050 150 13 1 950
25 July 200 14 2 800 150 13
200 14 4 750
29 July 150 13
200
50 14 2 650 150 14 2 100
26 As inventory is recorded at net realisable value or cost whichever is lower so it will be valued at $2 700 [$2
100 + (100 × 6)]. On the other hand, the revenue will be $105 400 [$106 000  (100 × $6)].
27 Closing Inventory = 105 units @$60 = $6 300
28 Inventory Sheet
Qty Rate Amount Qty Rate Amount Qty Rate Amount
January 30 2.00 30 2.00 60
February 20 2.50 50 2.20 110
March 10 2.20 22 40 2.20 88
30 $ $
Sales (500 units @ $550 275 000
Cost of sales
Purchases [(200 @ $250) + (400 @ $200) + (200 @ $300)] 190 000
Closing inventory [(200 @ $300) + (100 @ $200)] (80 000) (110 000)
Gross profit 165 000
* Closing inventory units = [(200+400 +200) – 500 units] = 300 units
31 Inventory Sheet
Date Purchases Sales Balance
March Qty Rate Amount Qty Rate Amount Qty Rate Amount
01 1 000 65 65 000 1 000 65.000 65 000
02 1 200 66 79 200 2 200 65.545 144 200
04 1 850 65.545 121 259 350 65.545 22 941
32 $
Inventory at 5 January 59 750
Add Sales at cost 9 560
Less Return inwards (at cost) (1 912)
Inventory at 31 December 67 398
33 Inventory Sheet
Date Purchases Sales at cost Balance
March Qty Rate Amount Qty Rate Amount Qty Rate Amount
01 60 120 7 200 60 120.00 7 200
02 100 116 11 600 160 117.50 18 800
04 110 117.50 12 925 50 117.50 5 875
Chapter 5 - 42 - Basic Financial Statements
CHAPTER 5 Basic Financial Statements

1 A business has a bank balance of $4 800. It pays for material invoiced at $3 000 less trade discount of 30%
and settlement discount of 10%. A cheque for $450 is received from a trade receivable. What is the bank
balance after these transactions?
A $2 250 B $3 360 C $3 450 D $3 500
May 99 P1 Q4
2 The table shows extract from a trial balance.

Prepayments 4 620
accruals 8 125
bank balances 14 920 3 612
trade payables 18 148
loan (10 years) 15 000
Which total for current liabilities should be disclosed in the balance sheet?
A $26 273 B $26 380
C $29 885 D $44 885
May 99 P1 Q5
3 Draft accounts included a loan due for payment in 20 months’ time, as part of the trade payables.
Which effect will the necessary adjustment have?
A increase net assets
B increase net current assets
C no effect on net current assets
D reduce net current assets
May 00 P1 Q1/ Nov 05 P1 Q4/ Nov 08 P1 Q2
4 The following debit balance appears on a trial balance at 31 December 1999, after the preparation of the
company’s annual accounts.
Stationery $8 000
What is the stationery item?
A an amount due to the company’s stationery supplier
B the annual stationery charge for 1999
C an accrual for stationery at 31 December 1999
D stationery inventory in hand at 31 December 1999
Nov 00 P1 Q2
5 A business starts trading on 1 May 2000. The table shows rent paid on the premises.
Date Period Amount
2 May 2000 1 May – 30 Jun $1 000
3 Jul 2000 1 Jul – 30 Sep $1 500
2 Oct 2000 1 Oct – 31 Dec $1 500
4 Jan 2001 1 Jan – 31 Mar $1 560
1 Apr 2001 1 Apr – 30 Jun $1 560
Which amount should be shown in the accounts for the year ended 30 April 2001 for rent prepayment?
A $520 B $1 000 C $1 040 D $1 560
May 01 P1 Q1

A carriage inward is a credit B carriage outward is a debit
C purchases return is a debit D sales return is a credit
May 01 P1 Q2/May 12 P12 Q1
7 The sales included in the trial balance of a company amounting to $880 000. This balance is made up as
follows:
$
Cash sales 215 000
Credit Sales 536 000
Goods sent on sale or return awaiting acceptance by the consignees 45 000
Goods sent on sale or return for which customers have accepted invoices 84 000
Total 880 000
The sales to be recorded in the Trading section of income statement are
A $751 000 B $796 000 C $835 000 D $880 000

Specimen 02 P1 Q2
8 When preparing a sole trader’s annual accounts, no adjustments were made for closing amounts prepaid.
What is the effect of these omissions?
A net profit overstated trade payables understated

B net profit understated trade payables understated
C current assets overstated owner’s capital overstated
D current assets understated owner’s capital understated
May 02 P1 Q2/ Nov 07 P1 Q2/ May 14 P12 Q2
9 The table shows information from the books of a business at 30 April 2002.
Invoiced $
Credit sales invoiced during financial year 79 000
Goods sent to customers on 28 April 2002 and invoiced 4 May 2002 6 100
Goods sent to customers during April 2002 on sale or return basis but not sold by 30 April
2002 8 300
What is the amount to be credited to the Trading section of income statement as sales for the year ended
30 April 2002?
A $76 800 B $85 100

C $85 300 D $93 400
May 02 P1 Q8/ May 10 P1 Q6
10 Which of the following is a tangible non-current asset?
A patents
B purchased Goodwill
C short leasehold
D trade marks
Nov 02 P1 Q5
11 A customer paid a deposit in advance for goods to be supplied at a later date.

How should this be recorded in the seller’s books?
Debit Credit
A cash customer
B cash sales
C customer prepayment
D customer sales
May 03 P1 Q2/ May 07 P1 Q2/Nov 10 P1 Q2
12 A business sells some of its inventory for $80 on credit to a customer. The inventory originally cost $50.
Which statement actually reflects the effect of this transaction on the Balance Sheet?
Current assets Owner’s capital
A decrease by $30 decrease by $30
B decrease by $30 increase by $30
C increase by $30 increase by $30
D increase by $30 decrease by $30
May 03 P1 Q12/ Nov 08 P1 Q13/ May 09 P1 Q11/May 13 P12 Q17/ Nov 14 P12 Q8
13 The accounting year end for a company is 31 October.

The table shows the company’s telephone bill received on 2 December for the three months ended 30
November.
$
telephone calls to 30 November 1 041
rental of equipment for the period from 1 September to 30 November 156
total telephone bill 1 197
Which accrual should the company make in the accounts for the year ended 31 October?
A $503 B $798 C $1 093 D $1 197
Nov 05 P1 Q2
14 In the books of Y how could a credit entry of $500 in X’s account have arisen?
A X bought goods from Y B X returned goods to Y
C Y made a payment to X D Y returned goods to X
Nov 06 P1 Q2/May 13 P12 Q1
15 The following debit balance appears on a trial balance after preparing the manufacturing account
for the year.
loose tools $18 000
What is this item?
A aliability for loose tools B the annual charge for loose tools
C a prepayment for loose tools D inventory of loose tools
May 08 P1 Q7
16 Interest receivable account shows interest of $17 500 received during the year. Interest of $1600 is due at
the year-end. How will this be shown in the final accounts?
income statement $ balance sheet $
A credit 17 500 trade receivables 1 600
B credit 19 100 trade receivables 1 600
C debit 17 500 trade payables 1 600
D debit 19 100 trade payables 1 600
Nov 08 P1 Q4
17 A business has the following assets and liabilities.
$
short-term investment 6 000
loan interest owing 1 500
loan repayable within one year 12 000
deposits from customers for orders 4 500
pre-payments 3 500
What is the amount of net current assets?
A $3 500 B $4 500 C $8 000 D $15 500
Nov 08 P1 Q17
18 The table shows information from a business at 30 November 2008.

$
Credit sales invoiced during financial year 80 000
Goods dispatched to customers in November 2008 and invoiced in December 2008 5000
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 section of income statement as sales for the year ended 30
November 2008?
A $75 000 B $77 000 C $83 000 D $85 000
May 09 P1 Q6
19 The directors of a company provide the following information.
$
bank overdraft 1 200
equipment 12 000
non-current loan 8 000
petty cash 900
inventories 2500
What is the amount of the net current assets?
A $1 200 B $2 400 C $3 600 D $5 200
May 09 P1 Q18
20 A business has a bank overdraft of $4 800. It pays for materials invoiced at $3 000 less a trade discount of
20% and a settlement discount of 5%.
A cheque for $500 is received from a trade receivable.
What is the bank balance after these transactions?
A $2 020 overdraft B $6 580 overdraft
C $7 150 overdraft D $7 580 overdraft
May 10 P1 Q2
21 Which transaction would increase the current assets of a business?
A paying invoices $950, after receiving $50 cash discount
B purchasing a machine on credit for $1200
C purchasing inventory for $1100 cash and selling it on credit for $1500
D selling inventory with an original cost of $800 at below cost price
May 11 P1 Q12
22 The following summarised information has been taken from the balance sheet of a partnership.
$
non-current assets 42 000
capital accounts 36 000
current accounts (debit) 5 000
current liabilities 7 000
non-current liabilities 15 000
What is the amount of current assets?

A $6 000 B $11 000
C $17 000 D $21 000
May 11 P1 Q13
23 A business paid $5 750 during its trading year for advertising. Part of this amount included $500 in respect
of the next financial year.
Which effects would the correct treatment of the $500 have on the financial statements?
profit for the year net current assets
A decrease decrease
B decrease increase
C increase decrease
D increase increase
May 12 P11 Q2
24 An item can be converted easily into cash.

In which section of the statement of financial position would this item appear?
A capital B current assets
C current liabilities D non-current assets
Nov 13 P12 Q6/Specimen 16 P1 Q8
25 A trader took out a 6% bank loan of $30 000 on 1 November 2013, to be repaid in full in 10 years’ time.
Interest is to be paid annually. No interest had been paid by 30 April 2014.
How should this be recorded in the statement of financial position at 30 April 2014?
current liabilities non-current liabilities
$ $
A 0 30000
B 900 30 000
C 1 800 30000
D 30 900 0
May 14 P12 Q4
26 Which statement contains the correct accounting treatment for accrued income?
A added to income and shown as a current asset
B added to income and shown as a current liability
C deducted from income and shown as a current asset
D deducted from income and shown as a current liability
May 15 P12 Q1
27 A business has extracted the following information from its books of account at31 December 2014, its first
year of trading.
$000
carriage inwards 12
carriage outwards 15
closing inventory 86
purchases 286
returns inwards 10
returns outwards 2
revenue 524
What is the gross profit for the year ended 31 December 2014?
A $301 000
B $304 000
C $320 000
D $328 000
May 15 P12 Q9
28 How are closing inventory and loss for the year treated?
closing inventory loss for the year

A debit in statement of financial position debit in capital account
credit in income statement credit in income statement
B debit in statement of financial position debit in income statement
credit in income statement credit in capital account
C debit in income statement debit in capital account
credit in statement of financial position credit in income statement
D debit in income statement debit in income statement
credit in statement of financial position credit in capital account
May 15 P12 Q11
29 Why does a trader account for accrued income?
A so that current liabilities are not overstated
B so that current liabilities are not understated
C so that profit is not overstated
D so that profit is not understated
Nov 15 P12 Q1
30 A trader sends his staff on a training course costing $100 per person. 10 staff attended in April and 4 in
May. Half the total cost had to be paid at the start of April and the balance at the end of May.
Which entry for training was made in the statement of financial position on 30 April?
A $300 accrual
B $400 accrual
C $600 prepayment
D $700 prepayment
Nov 15 P12 Q2
31 Katrina commenced business on 1 January 2015. For the year ended 31 December 2015, the following
information is available.
$
Drawings 53 500
profit for the year 62 700
Revenue 1500 000
Expenses 875 000
What was the cost of sales for the year?
A $562 300
B $571 500
C $678 000
D $687 000
May 16 P12 Q10
32 A company pays or receives the following amounts on the last day of its financial year.
$
deposit paid to a supplier 6 500
rental income received in advance 8 000
loan repayment 3 000
payment for last month’s sales commission 900
Which of these amounts will be included as other receivables in the statement of financial position?
A $6 500 B $14 500 C $17 500 D $18 400
Nov 16 P12 Q9
33 Which are examples of the accounting equation?

1 capital + assets = liabilities
2 capital = assets + liabilities
3 capital = assets – liabilities
A 1 and 3 B 1 only C 2 and 3 D 3 only
May 17 P12 Q2
34 The following information is extracted from the statement of financial position of a business at 31
December 2016.
$
bank loan (repayable 2025) 16 200
other payables 1 880
capital 20 710
drawings 19 100
inventory 14 610
other receivables 1 420
What is the value of the net current liabilities?
A $1 590 B $2 510 C $18 710 D $20 320
May 17 P12 Q7
ANSWER KEY
1 B 10 C 19 A 28 A
2 C 11 A 20 B 29 D
3 B 12 C 21 C 30 A
4 D 13 B 22 B 31 A
5 C 14 B 23 D 32 A
6 B 15 D 24 B 33 D
7 C 16 B 25 B 34 B
8 D 17 A 26 A
9 B 18 A 27 B
DETAILED ANSWERS
1 $
Bank balance at start 4 800
Less Material cost paid * (1 890)
Add Cheque received from trade receivables 450
Bank balance at end 3 360
*List price of material 3 000

Less Trade discount ($3 000  30%) (900)
2 100
Less Settlement (cash) discount ($2 10010%) (210)
Amount actually paid for material 1 890
2 As liabilities have credit nature, so only the credit side of trial balance should be considered where a non-
current loan (of 10 years) is also shown, which is obviously not part of current liabilities so we have added
accruals, bank on credit side &trade payables to calculate current liabilities.
3 The adjustment will have the following effects

Non-current liabilities 
Current liabilities 
Total liabilities No change
As we know Net assets = Total assets  Total liabilities

& Net current assets = Current assets Current liabilities
Net assets will not change as there is no change in total liabilities. Whereas decrease in current liabilities
will result in increase net current assets.
4 As trial balance is prepared after the preparation of company’s annual accounts (income statement) so it
means that trial balance includes only balance sheet items. As amount is given on the debit side so it
cannot be an accrual or liability, so it will be stationery inventory.
$1 560
5 Payment on 1 April covers period of three months i.e. from April to June so payment per month = =
3
$520. Moreover as year ends on 30 April, it means that rent for May & June has been paid in advance i.e.
$520 2 = $1 040
7 Total sales = $215 000 + $536 000 + $84 000 = $835 000
8 Effects of prepaid expenses are

Prepaid expenses  (Current assets )
Expenses  (Net profit / owner’s capital )
The omission of prepaid expenses will carry the reverse effects i.e.
Current assets 
Owner’s capital 
9 Sales is recognised as income when the goods are delivered so sales for the year will be ($79 000 + $6 100
= $85 100
12 Effects of this transaction are

Trade receivables  $80 (with sale price)
Sales  $80 (with sale price)
Cost of sales  $50 (with cost price)
Inventory  $50 (with cost price)
Net increase in current assets = $80 (receivables )  $50(inventory) = $30
Net increase in owner’s capital = $80 (sales)  $50(cost of sales) = $30
14 $
Total telephone calls due on 31 October ($1 041 2/3) 694
Equipment rental expense from 1 September to 31 October ($156 2/3) 104
Total amount accrued for telephone on 31 October 798
15 As trial balance is prepared after the preparation of company’s manufacturing account so it means that
trial balance includes only balance sheet items. As amount is given on the debit side so it cannot be a
trade payable. Moreover payment for loose tools is usually not made in advance so it will be loose tools
inventory.
17 Current Assets $ $
Short-term investment 6 000
Trade receivables 39 000
Pre-payments 3 500 48 500
Current Liabilities
Loan interest owing 1 500
Loan repayable within one year 12 000
Deposits from customers for orders 4 500
Trade payables 27 000 (45 000)
Net Current Assets 3 500
18 Sales is recognised as income when the goods are delivered to the customers whereas goods sent on sale
or return basis are not treated as sales unless they are sols so sales for the year will be ($80000 + $5 000 
$10 000 = $75 000
19 $
Current Assets ($2 500 + $2 000 + $900) 5 400
Current Liabilities ($1 200 + $3 000) (4 200)
20 $
Bank overdraft at start 4 800
Add Material cost paid * 2 280
Less Cheque received from trade receivables (500)
Bank overdraft at end 6 580
*List price of material 3 000

Less Trade discount ($3 000  20%) (600)
2 400
Less Settlement (cash) discount ($2 4005%) (120)
Amount actually paid for material 2 280
21 “C” option is correct as sale of inventory will increase receivables by $1 500 and decrease in inventory by
$1 100. Items in “A” and “B” options will reduce current assets as they involve payment of cash. “D” option
is also incorrect as inventory is sold at a price below cost price
22 $ $
Non-Current Assets 42 000
Current Assets (balancing figure) 11 000
Current liabilities (7 000)
46 000
Non-current liabilities 15 000
31 000
Capital accounts 36 000
Current accounts (debit) (5 000) 31 000
25 As bank loan is repayable after 10 years so its amount of $30 000 should be recorded as non-current
liability. On the other hand, as loan was taken 6 months before the end of the year so its unpaid amount
of $900 ($30 000 × 6% × 6/12) for 6 months will be shown as current liability.
27 $000 $000
Revenue 524
Returns inwards 10 514
Cost of sales
Purchases 286
Add Carriage inwards 12
Less Returns outwards (2)
Less Closing inventory (86) (210)
Gross profit for the year 304
28 Current Assets  Debit Statement of financial position

Effects of Closing Inventory
Cost of Sales  Credit Income statement
Capital  Debit Statement of financial position
Effects of loss for the year
Income statement Credit Income statement
29 “D” option is correct as if we omit to add accrued income in the respective income account in the income
statement then it would understate both total incomes and profit for the year.
30 Month Amount paid Income statement expense difference

April $700 (14  100) $1 000 (10  100) $300 Accrued
31 $
Sales 1 500 000
Cost of Sales ($1 500 000  $937 700) (562 300)
Gross profit ($62 700 + $875 000) 937 700
Expenses (875 000)
Profit for the year 62 700
33 Current Liabilities $ $
Other payables 1 880
Bank overdraft 11 600
Trade payables 14 110 27 590
Current Assets
Inventory 14 610
Other receivables 1 420
Trade receivables 9 050 (25 080)
Net current liabilities 2 510
Chapter 6 -53- Accounting Concepts and Conventions
CHAPTER 6 ACCOUNTING CONCEPTS AND CONVENTIONS

1 A Company decides to change from the straight-line method of depreciation to the reducing balance
method.
Which accounting concept does this proposal contravene?
A consistency B going concern
C historic cost D materiality
May 98 P1 Q4 / Specimen 02 P1 Q7/ May 07 P1 Q6
2 The capitalisation of development costs is an example of the convention of

A business entity B matching
C prudence D substance over form
Nov 98 P1 Q4/ May 09 P1 Q5
3 Which of the following is an example of the accounting principle of substance over form?
A accruing expenses in order to match items with the related revenues
B capitalising a motor vehicle bought on hire purchase
C capitalising goodwill on acquisition of a business entity
D not depreciating freehold land
May 99 P1 Q6
4 Which of the following is an example of the application of the accounting principle of substance over
form?
A capitalising assets held under finance leases
B charging operating leases rental to Income statement
C providing for expenses not yet paid
D recognising a contingent liability
Nov 99 P1 Q5
5 Which accounting convention is observed when leased assets are shown in the Balance Sheet?
A accruals B materiality
May 00 P1 Q6
6 A machine acquired on hire purchase legally belongs to the seller until the final hire purchase instalment
has been paid. However it is treated for accounting purposes as a non-current asset in the books of the
hire purchaser. This is an example of
A matching B materiality
Specimen 02 P1 Q8
7 There is great uncertainty about the continuance of a business. This has caused the proprietor to make a
large reduction in the valuation of the year-end inventory.
Which accounting concept does this illustrate?
A going concern B matching
C materiality D substance over form
May 02 P1 Q7/May 11 P1 Q2
8 The treasurer of a club has decided not to include subscriptions owing by members in the Balance Sheet
at the year-end. Which accounting concept is being applied?
A accruals B going concern
C money measurement D prudence
Nov 02 P1 Q7
9 Accountants prefer the commercial reality of a transaction to a strictly legal approach.

This is an example of
A consistency B materiality
Nov 02 P1 Q9/May 11 P1 Q1
10 Which of the following is the definition of a business as a going concern?
A the assets owned by the business exceed its liabilities.
B the business has accumulated revenue reserves.
C the business is currently liquid and able to pay its trade payables.
D the business will continue in operational existence for the foreseeable future.
May 03 P1 Q6
11 A sole trader pays private expenses from the business bank account and records them as drawings. Which
accounting principle is applied?
A business entity B going concern
C matching D prudence
May 03 P1 Q7
12 A business values obsolete inventory at net realisable value.
Which accounting principle has been applied?
C materiality D prudence
Nov 03 P1 Q7/Nov 12 P12 Q7
13 A pocket calculator costs $9.50 and has a useful life of 5 years. The bookkeeper has decided to treat the
purchase of the calculator as revenue expenditure.
Which accounting concept has been applied?
Nov 03 P1 Q9/ Nov 07 P1 Q6
14 What does the ‘going concern’ principle mean?

A a business is profitable
B a business will continue to operate for the foreseeable future
C the assets of a business exceed its liabilities
D the assets of a business should be valued at disposal value
May 04 P1 Q7
15 When a businessman introduces capital into his business, the transaction is debited in the Cash Book and
credited to his Capital account.
Of which accounting principle is this an example?
A entity B going concern
May 04 P1 Q8/ Nov 08 P1 Q7
16 A company does not include the value of skillsgained by its employees from training programmes in its
financial statements.
Which accounting principle is being applied?
C money measurement D substance over form
May 04 P1 Q9
17 Of which concept is the writing off of a bad debt an example?
Nov 04 P1 Q6
18 A company purchases machinery on hire purchase over four years but does not own the machinery until
the final payment has been made.
At the end of year 1 the company shows the machinery in its Balance Sheet as a non-current asset and
also records the liability for the amount still owed.
Nov 04 P1 Q7
19 Businesses anticipate losses but not profits in preparing their annual accounts.
Which accounting concept is being applied here?
A accruals B consistency
C going concern D prudence
May 05 P1 Q6
20 What is an example of the application of the concept of accounting for substance over form?
A accounting for inventory losses
B recording an asset acquired under a hire purchase agreement as a non-current asset
C recording the premium on the issue of ordinary shares in a share premium account
D writing off a debt from a customer in liquidation
May 05 P1 Q7
21 A business sells its freehold premises to a bank and agrees to repurchase them in five years’ time. The
business continues to use the premises on lease from the bank. The premises remain in the balance sheet
of the business.
What is the reason for this accounting treatment?
A the asset must be treated in the same way from year to year
B the commercial reality of the transaction is that the business still owns the asset
C the cost of the asset must be matched with the periods expected to benefit from its use
D the income from the sales proceeds must not be anticipated.
Nov 05 P1 Q7
22 A company excludes from its Balance Sheet machinery for which spare parts are no longer
obtainable. Which concept is being applied by the company?
A going concern B materiality
Nov 05 P1 Q8
23 Which accounting policies illustrate the matching principle?

1 charging depreciation on non-current assets
2 revaluing non-current assets on a regular basis
3 using the reducing balance method of depreciation
A 1, 2 and 3 B 1 and 2 only C 1 and 3 only D 2 and 3 only
May 06 P1 Q7/Nov 11 P1 Q4
24 The following information relates to a company’s non-current assets at 31 December.

cost price ($) disposal value ($)
motor vehicles 25 000 18 000
equipment 48 000 36 000
fixtures and fittings 12 000 5 000
The company has a serious cash shortage and will cease to trade within the next two months.
What is the total value for non-current assets in the company’s Balance Sheet at 31 December?
A $26 000 B $59 000 C $85 000 D $144 000
Nov 06 P1 Q6
25 An item of inventory originally cost $5 000, but has deteriorated badly and is written down to its
estimated net realisable value of $2 000.
May 07 P1 Q5
26 Which accounting treatments illustrate the use of the matching principle?

1 valuation of inventory at net realisable value rather than cost
2 using the First In First Out method of valuation each year
3 charging depreciation on non-current assets
A 1, 2 and 3 B 1 and 3 only
C 2 only D 3 only
Nov 07 P1 Q7
27 Which transaction applies the matching concept?
A a machine acquired on long-term rental is included in non-current assets
B computer equipment is depreciated over two years
C a building is revalued following a fall in property prices
D a waste-paper basket is treated as revenue expenditure
May 08 P1 Q6/ Nov 16 P12 Q1
28 In preparing the income statement, only realised profits and not anticipated profits must be brought into
account. In addition, all possible losses must also be taken into account.
Which accounting principle does this describe?
C going concern D prudence
May 09 P1 Q7
29 A business is separate from its owner. This results in only business transactions being recorded in the
accounts. Which accounting principle applies?
A business entity B materiality
Nov 09 P1 Q4
30 The personal spending of the owner of a business is not recognised as a business expense.
A business entity B consistency

May 10 P1 Q4
31 A business obtained a machine by means of a hire purchase agreement. It showed the machine in
its balance sheet at the cash price of $30000 although only $10 000 has been repaid.
Which accounting principle is involved?
May 10 P1 Q5
32 What does the application of the accounting principle of consistency ensure?

A that all losses are provided for
B that assets are recorded at their actual cost
C that financial statements are produced annually
D that profits are calculated the same way each year
Nov 10 P1 Q4/ May 13 P12 Q5
33 A company values its loose tools for inclusion in its balance sheet.
The tools are not very valuable and the company uses estimating when valuing them.
C going concern D materiality
Nov 11 P1 Q6
34 A business buys a machine on hire purchase for $50 000.

Although it will not own the machine until it has paid the final installment, it has made the following
entries:
debit credit
Machinery account $50 000 Bank account $5 000
Finance company account $45 000
May 12 P12 Q4
35 Which accounting principle means that a company’s financial statements are comparable from one period
to the next?
C going concern D materiality
May 12 P12 Q6
36 Which accounting principle attempts to deal with off-balance-sheet transactions?
Nov 12 P12 Q5
37 A trader recently purchased a non-current asset for his business at a cost of $6 500. A friend told him he
could buy a similar asset on-line for $5 000. The trader is now unsure how to value the asset in the books
of account.
Which principle should the trader apply?
A accruals B business entity
C historical cost D materiality
May 13 P12 Q6
38 The creation of a provision for doubtful debts is an example of which accounting concept?
A business entity B consistency
C prudence D realisation
Nov 15 P12 Q11
39 A business has a good reputation. The owner wishes to include goodwill in the financial statements. An
accountant advises against it.
Which accounting principle is the accountant applying?
Specimen 16 P1 Q1
40 When a businessman introduces capital into his business, the transaction is debited in the cash book and
credited to his capital account.
Of which accounting concept is this an example?
May 17 P12 Q1
ANSWER KEY
1 A 12 D 23 C 34 D
2 B 13 B 24 B 35 B
3 B 14 B 25 C 36 D
4 A 15 A 26 D 37 C
5 D 16 C 27 B 38 C
6 D 17 C 28 D 39 D
7 A 18 D 29 A 40 A
8 D 19 D 30 A
9 D 20 B 31 D
10 D 21 B 32 D
11 A 22 C 33 D
Chapter 7 -59- Capital and Revenue
CHAPTER 7 CAPITAL AND REVENUE

1 It is necessary to distinguish between revenue and capital expenditures.
When must this distinction be made?
A when preparing cash budgets
B when preparing investment appraisal calculations
C when preparing income statements
D when preparing purchase ledger control accounts
May 98 P1 Q1/ May 08 P1 Q1
2 Which of the following is a revenue expense?

A acquisition of another business
B auditor’s fees
C legal expenses on purchase of property
D purchase of premises
Nov 98 P1 Q1
3 Which payment should be treated as revenue expenditure in the accounts of a hotel?

A installation cost of a new alarm
B legal fees for debt collection
C legal fees incurred in the purchase of the hotel
D purchase of a computer
May 99 P1 Q1
4 On 1 January 2001 a second-hand truck was bought for $15 000.

It was discovered on the date of purchase that the truck’s engine did not work. The table shows work
subsequently carried out on the truck.
Date Work Cost($)
3 January 2001 engine replaced 8 500
15 January 2001 shelving fitted 2 100
10 October 2001 gear box replaced 1 800
How much should be debited to the truck account?
A $15 000
B $17 100
C $25 600
D $27 400
May 00 P1 Q4
5 What is an example of capital expenditure?

A payment of an electricity bill
B payment of employee’s wages
C purchase of a brand name
D purchase of inventories
May 01 P1 Q3
6 Which item is revenue expenditure?

A cost of painting new office premises during construction
B cost of repairs to factory plant and machinery
C legal fees for the purchase of new factory premises
D wages of a company’s own workmen for building an office extension
May 02 P1 Q3/ May 07 P1 Q1/Nov 12 P12 Q2
7 A business that purchases a shop incurs the following costs.

$
Purchase price of the shop 680 000
Legal fees incurred in the purchase of the shop 7 200
Cost of initial inventory 12 500
Cost of installing air conditioning 47 300
Which amount will be capitalised as the cost of the shop?

A $680 000 B $687 200 C $734 500 D $747 000
May 03 P1 Q5
8 Which item should be treated as capital expenditure?

A the addition of a back-up system on an existing computer at a cost of $900
B costs incurred in repairing a car when the costs cannot be recovered from the insurance company
C rent paid on a factory, whilst the company negotiated the purchase of that same factory
D the replacement of a wooden fence with a new fence
Nov 03 P1 Q30/ May 06 P1 Q1
9 Expenditure on a machine during a year has included the following:
$
Insurance costs 2 400
New engine – machine will now produce more products per hour 22 300
Cleaning costs 7 200
How much of this expenditure should be treated as capital expenditure?
A none B $22 300
C $24 700 D $31 900
10 An item of capital expenditure has been incorrectly treated as revenue expenditure in the accounts of a
business. What is the effect of this error on the accounts of the business?
Assets Profit
A overstated overstated
B overstated understated
C understated overstated
D understated understated
May 04 P1 Q2/ May 10 P1 Q1/ Nov 15 P12 Q4/ Nov 16 P12 Q8
11 An item of revenue expenditure has been incorrectly treated as capital expenditure in the
accounts of a business. What effect will the correction of this error have on the accounts?
Net profit Net assets
A decrease decrease
B decrease increase
C increase decrease
D increase increase
May 04 P1 Q12
12 A Spender owns a road haulage business.
Which would be classified as capital expenditure?
A purchase of number plates for new lorries
B purchase of replacement fuel pump for lorries
C purchase of replacement tyres for lorries
D purchase of road tax licence
Nov 04 P1 Q4
13 A business purchases a new van.

The table shows the purchase invoice details:
$
Purchase price 13 000
Delivery charge 500
Sign writing 200
Road tax 200
Tank of fuel 50
How much should be debited to the motor van account?

A $13 500 B $13 700 C $13 900 D $13 950
May 05 P1 Q1
14 Which item should be treated as capital expenditure?

A cost of carriage on the purchase of a non-current asset
B cost of replacement of part of a non-current asset
C depreciation of a non-current asset
D repairs to a non-current asset
Nov 05 P1 Q3/ Nov 08 P1 Q1
15 The following items of expenditure take place during the first month of a transport business.
$
Rent 1 000
insurance of building 1 300
insurance of vehicle 350
road tax 500
purchase of vehicle 15 000
number plate for vehicle 150
painting of vehicle in company colours 750
wages for lorry driver 100
wages for painting vehicle 150
What is the total capital expenditure?
A $15 000 B $15 500 C $16 050 D $16 550
Nov 05 P1 Q5
16 What would be treated as part of the capital cost of the purchase of a building?
1 legal costs of the purchase
2 redecoration of the building
3 installation of air conditioning needed for the machinery in the building
A 1 only B 1 and 3 only C 2 and 3 only D 1, 2, & 3
Nov 06 P1 Q1
17 A company’s net profit is $20 000. Capital receipts of $5 000 have been treated as revenue receipts.
Capital expenditure of $4 000 has been treated as revenue expenditure.
What is the correct net profit figure?
A $11 000 B $19 000 C $21 000 D $29 000
Nov 06 P1 Q3
18 Anna owns a plumbing business. Costs for the year were $49 500 for wages and $95 000 for materials.
These included $2 200 labour and $540 materials used by Anna in the extension of the business premises.
Additional planning and legal costs of the extension were $450.
What was Anna’s total revenue expenditure for the year?
A $141 310 B $141 760 C $142 300 D $144 500
Nov 13 P12 Q3
19 Which cost should be treated as revenue expenditure?

A installing a new sound system in a car
B purchase of a trailer for a car
C replacing a damaged engine of a car
D replacing an old car with a new one
Nov 15 P12 Q9
20 A trader made four transactions.

1 paid for repairs to manufacturing equipment
2 purchased an item to be used by the business for more than 12 months
3 took goods for resale for his own use
4 transferred his own vehicle to the business
Which items are capital expenditure?
A 1 and 2 B 2 and 3
C 2 only D 3 and 4
Specimen 16 P1 Q2
21 A building was purchased for $500 000. The following costs were also incurred.
$
adapting the new building 50 000
legal fees for the building purchase 5 000
cleaning the building 4 000
salary of building manager 20 000
What was the capital cost of the building?

A $550 000 B $555 000
C $559 000 D $579 000
May 16 P12 Q4
22 A printing company installed a large printing press. Which costs are capital expenditure in the first year of
its operation?
1 installation of the press
2 depreciation of the press
3 repairs to the press
4 upgrades to the press
A 1 and 2 B 1 and 4 C 2 and 3 D 3 and 4
Nov 16 P12 Q4
ANSWER KEY
1 C 7 C 13 B 19 C
2 B 8 A 14 A 20 C
3 B 9 B 15 C 21 B
4 C 10 D 16 B 22 B
5 C 11 A 17 B
6 B 12 A 18 B
NOTE FOR STUDENTS

Capital expenditures are shown in balance sheet as non-current assets whereas revenue expenditures are recorded
in income statement as expenses.
An expense is said to be a capital expense, if it fulfills any of the following conditions.
(i) The amount spent is incurred on acquiring the non-current assets, i.e. it includes purchase price of assets
plus costs incurred in connection with the acquisition of non-current assets e.g. installation costs on
machine, import duty on imported cars, registration charges for transfer of property rights etc.
(ii) If the expenditure is expected to benefit the business for a period more than one year.
(iii) The expenditure is incurred at the initiation of business e.g. preliminary expenses, discount on issue of
debentures etc.
(iv) The expenditure is incurred on extension of business e.g. construction or extension of building, purchase
of patents or copyrights etc.
(v) The expenditure increases the earning capacity of the business whereas revenue expenditure just
maintains the earning capacity.
DETAILED ANSWERS
4 See note (i)
5 See note (iv) and (v)
7 $
Purchase price of the shop 680 000
Legal fees incurred in the purchase of the shop 7 200
Costs of installing air conditioning 47 300
Capital cost of the shop 734 500
10 Effects of treating a capital expenditure as revenue expenditure will be:
Capital expenditure (Non-current assets) 
Revenue expenditure (Income statement expenses) 
Or Profit of the business 
So, in the light of the above “D” option is correct.
11 Revenue expenditure has been incorrectly treated as a capital expenditure, so its correction will have the
following effects.
Capital expenditure (non-current assets) 
Revenue (Income statement) expenditures 
Or Profit 
So “A” option is correct.
12 All the expenses incurred in connection with the purchase of the any non-current asset like vehicle will
become part of its cost which is $13 700 calculated as ($13 000 + $500 + $200).
13 $
Purchase of vehicle 15 000
Number plate for vehicle 150
Painting of vehicle in company colours 750
Wages for painting vehicle 150
Total capital expenditure 16 050
17 $
Net Profit before correction 20 000
Wrong inclusion of capital receipts in revenue receipts corrected (5 000)
Wrong treatment of capital expenditure as revenue expenditure corrected 4 000
Correct Net Profit 19 000
18 $
Materials ($95 000  $540) 94 460
Wages ($49 500  $2 200) 47 300
Total revenue expenditure for the year 141 760
21 Capital cost of the building = $500 000 + $50 000 + $5 000

= $555 000
Cleaning the building and salary of building manager are not included in the capital cost due to their
recurring nature and having a useful life less than one year.
Chapter 8 -65- Suspense Account
CHAPTER 8 SUSPENSE ACCOUNT

1 Which adjustment will result in an increase in a company’s stated profit?
A the amortisation of goodwill
B the application of reserves for the issue of bonus shares
C the capitalisation of development costs
D the upward revaluation of non-current assets
May 98 P1 Q27
2 A trial balance fails to agree. The debits exceed the credits.
Which single error in the nominal ledger would cause the difference?
A a contra between the trade receivables and trade payables ledgers has been entered on the
credit side of both control accounts
B a rental receipt has been entered twice in the rent receivable account
C the closing inventory for the previous period has not been entered in the inventory account
D the opening electricity accrual has been brought forward on the wrong side of the ledger account
Nov 98 P1 Q6/ Nov 06 P1 Q9
3 Sales returns of $400 have been credited to the trade receivable’s account as $40. A Suspense Account is
created to complete the trial balance. What is the balance on the Suspense Account?
A $40 DR B $40 CR C $360 DR D $360CR
Nov 98 P1 Q7 / Nov 01 P1 Q7/ Nov 15 P12 Q10
4 The directors of a company are finishing the accounts for the year ended 30 June 1997. They discover that
the inventory at 1 July 1996 was over-valued by $50 000.
What is the effect of correcting this error in the accounts?
Net profit Reserves b/f
For year-end 30 June 1997 At 1 July 1996
A decrease decrease
B decrease increase
C increase decrease
D increase increase
Nov 98 P1 Q10/ May 04 P1 Q15/ Nov 07 P1 Q16
5 A company discovers that its opening inventory was over-valued by $30 000.
This amount is considered to be significant.
Which effects will the correction of this error have on the financial statements for the year?
Retained profit
Net profit Closing inventory
brought forward
A  $30 000  $30 000 nil
B nil  $30 000  $30 000
C + $30 000  $30 000 nil
D + $30 000  $30 000  $30 000
Nov 98 P1 Q11/May 16 P12 Q12
6 A company’s trial balance shows debit balances in excess of credit balances by $1 000.
What could explain this?
A cash overstated by $540
omission of the telephone account totalling $460
B trade payables control account overstated by $450
trade receivables control account understated by $550
C omission of accumulated depreciation of $500
sales understated by $500
D purchases understated by $500 in the nominal ledger
omission of sales invoices totalling $500
May 99 P1 Q9
7 When preparing the final accounts for the year; the following errors are discovered.
1 Sales day book was understated by $300.
2 No provision had been made for accrued overtime costs, $200.
3 No account had been taken of prepaid rent, $400.
The draft net profit figure is $8 050.
What will be the net profit when the errors are corrected?
A $8 150 B $8 550 C $8 750 D $8 950
May 99 P1 Q14
8 An electricity accrual of $375 was treated as a prepayment in preparing a trader’s Income statement.
What was the effect on profit?
A overstated by $375 B overstated by $750
C understated by $375 D understated by $750
May 99 P1 Q16/Nov 10 P1 Q9
9 Motor vehicles purchased for $530 000 at the start of the year have been incorrectly depreciated for the
whole year using the straight line method at 10% instead of 25%
Ledger balances after the entries have been posted:
Motor vehicles $530 000
Provision for depreciation $53 000
Which entries will correct the error?
A debit Income statement $79 500; credit provision for depreciation of vehicles $79 500
B debit Income statement $132 500; credit provision for depreciation of vehicles $132500
C debit provision for depreciation of vehicles $79 500; credit Income statement $79 500
D debit provision for depreciation of vehicles $132 500; credit Income statement $132500
Nov 99 P1 Q3/ May 05 P1 Q10
10 A trial balance failed to agree and the difference was entered in a Suspense Account. A credit balance of
$1 530 in the Sales Ledger had been wrongly extracted as a debit balance.
Which journal entry will correct this error?
Debit Credit
A suspense $3 060 -
B suspense $1 530 sales $1 530
C suspense $3 060 sales $3 060
D sales $3 060 suspense $3 060
Nov 99 P1 Q7
11 An extract from a trial balance is shown.

Trade receivables 2 700 000
finished goods inventory 3 500 000
The following adjustments are needed:
The provision for doubtful debts is to be 4% of book value of trade receivables;
Finished goods inventory costing $50 000 is found to be un-saleable.
What is the effect of these changes on the net profit?
A decrease by $23 000
B increase by $23 000
C decrease by $77 000
D increase by $77 000
Nov 99 P1 Q13
12 The difference on a trial balance is entered in a suspense account. It is discovered that a discount received
has been debited to the discount allowed account.
Which journal entry corrects the error?
A Dr Discount received account
Cr Suspense account
B Dr Suspense account
Cr Discount allowed account
C Dr Discount allowed account
Dr Discount received account
Cr Suspense account
D Dr Suspense account
Cr Discount allowed account
Cr Discount received account
May 00 P1 Q7
13 A company’s accounts showed a gross profit of $84 200. It was found that the opening inventory had been
overstated by $4 200 and that the closing inventory had been understated by $3 700.
What is the corrected gross profit?
A $78 300 B $83 800 C $84 700 D $92 100
May 00 P1 Q11/Nov 14 P12 Q4
14 The difference on a trial balance has been entered in a suspense account. A receipt of $5 000 from a trade
receivable has been debited to the bank account and credited to the sales account.
Which journal entry is necessary to correct the error?
Debit Credit
A sales account $5 000 suspense account $5 000
B sales account $5 000 trade receivables account $5 000
C suspense account $10 000 bank account $10 000
D suspense account $5 000 bank account $5 000
May 00 P1 Q12
15 After draft accounts had been prepared, the following errors were discovered.
Opening inventory was overvalued by $2 000.
Closing inventory was undervalued by $3 000.
If the original gross profit was $90 000, what was the gross profit after the errors were corrected?
A $85 000 B $89 000 C $91 000 D $95 000
May 01 P1 Q13
16 The draft accounts of a business show a net profit of $64 000 before taking account of the following.
1. The reduction of the Provision for Doubtful Debts by $300.
2. The purchase of office stationery costing $2 400 which has not been entered in the records; only
one sixth of this stationery was used by the year-end.
What is the corrected net profit?
A $64 300 B $64 100 C $63 900 D $61 900
Nov 01 P1 Q3/May 13 P12 Q4
17 The final accounts of John Gates contain two errors. The closing inventory in trade has been overvalued by
$6 000 and an uninsured theft of inventory costing $9 000 has not been taken into account. What effects
will correction of these errors have on John Gates accounts?
Gross profit Net Profit
A reduced by $6 000 increased by $3 000
B reduced by $3 000 reduced by $3 000
C increased by $3 000 reduced by $6 000
D increased by $6 000 increased by $6 000
Specimen 02 P1 Q9
18 A trial balance has been prepared. It does not balance so a suspense account is opened. Later several
errors are found. One involves the Rent Payable Account when $234 paid in advance from the previous
year has been brought forward at the start of the current year on the wrong side of the account and as
$324.
Which journal entry will correct the situation?
Debit Credit
A rent payable $90 suspense $90
B suspense $90 rent payable $90
C suspense $558 rent payable $558
D rent payable $558 suspense $558
Specimen 02 P1 Q10
19 The trial balance of a business does not agree. The difference has been entered in a Suspense account.
The error was caused by a cheque for $400 from Omar being debited to Omar’s account.
What is the journal entry to correct this?
debit Credit with
A Bank account Suspense account $400
B Suspense account Omar’s account $400
C Suspense account Omar’s account $800
D Suspense account Bank account $800
May 02 P1 Q10
20 A transport business owned by a sole proprietor purchases a motor vehicle. This is charged to the Motor
Vehicles Running Costs account.
What are the effects of this on the end-of-year Balance Sheet?
A non-current assets understated current assets understated
B non-current assets overstated current assets overstated
C non-current assets overstated capital account overstated
D non-current assets understated capital account understated
Nov 02 P1 Q1/ May 09 P1 Q2
21 A company’s accounts showed a gross profit for the year of $32 500. After the accounts were prepared it
was found that the opening inventory had been overstated by $2 400 and the closing inventory had been
understated by $3 400.
What is the corrected gross profit for the year?
A $26 700 B $31 500 C $33 500 D $38 300
Nov 02 P1 Q6/May 12 P12 Q8
22 A trial balance does not balance and a Suspense account is opened.

Subsequently the following errors are found and the Suspense account is cleared.
1 A sales invoice for $1 240 had been omitted from the books.
2 Rent paid of $2 600 was entered correctly in the cash book but incorrectly as $6 200 in the Rent
account.
3 The purchases journal was under cast by $1 980.
What was the original balance on the Suspense account?
A $1 620 credit B $4 340 debit C $5 580 credit D $5 580 debit
Nov 02 P1 Q10
23 Which of the following would prevent a trial balance from balancing?
A a credit note from a supplier entered in the sales journal
B a discount allowed posted to the discount received account
C an invoice entered twice in the sales journal.
D a refund to a customer wrongly posted to discounts allowed account.
May 03 P1 Q8
24 A business omitted discounts allowed of $700 from its trial balance. During the year a machine had been
sold for cash of $500 but the only accounting entry made was a debit in the Bank account.
What is the balance on the Suspense account?
A $200 debit B $1 200 debit
C $200 credit D $1 200 credit
Nov 03 P1 Q10/May 16 P12 Q7
25 A business has a draft net profit of $84 000. It is discovered that the closing inventory was overvalued by
$4 000 and that discounts received of $1 500 were treated as an expense.
What is the corrected net profit?
A $81 500 B $83 000
C $89 500 D $91 000
Nov 03 P1 Q11
26 Which of the following will increase profit?

A increasing depreciation rates
B increasing distributable reserves
C increasing the provision for doubtful debts
D increasing the value of closing work-in-progress
Nov 03 P1 Q15
27 A trial balance does not balance. The difference has been entered in a Suspense account.
The following errors are found.
1 The Purchase Ledger Control account balance of $48 300 has been included as a
debit balance.
2 Provision for depreciation has been overcast by $960.
3 A cash payment of $630 for rent has been credited in the Cash book and debited to
the Bad Debts account.
What is the correcting debit entry to the Suspense account?

A $47 340 B $95 010
C $95 640 D $97 560
May 04 P1 Q11
28 A company’s trial balance includes a suspense account. It was found that the only errors were discounts
received of $240 and discounts allowed of $312, which had both been entered on the incorrect sides of
the respective ledger accounts.
Which is the double entry required to clear the Suspense account balance?
Account Dr ($) CR ($)

A Discounts Allowed 312
Discounts Received 240
Suspense 72
B Discounts Received 240
Suspense 72
Discounts Allowed 312
C Discounts Allowed 624
Discounts Received 480
Suspense 144
D Discounts Received 480
Suspense 144
Discounts Allowed 624
Nov 04 P1 Q9/Nov 13 P12 Q10
29 A suspense account has a balance of $450 debit.

What has caused this balance in the Suspense account?
A motor expenses of $225, correctly entered in the cash book, and posted to motor expenses as a
credit
B motor expenses of $225, entered in the cash book as a receipt and posted to motor expenses as a
credit
C motor expenses of $450, correctly entered in the cash book, and posted to motor vehicles as a
debit
D motor expenses of $675, entered in the cash book as a credit of $225 and posted to motor
expenses as $225 debit
May 05 P1 Q9/ Nov 16 P12 Q7
30 The wages of staff employed in getting goods into a saleable condition have been debited in the Income
statement.
What is the effect of this error?
Gross profit Net profit

A overstated no effect
B overstated overstated
C understated no effect
May 05 P1 Q14/ May 08 P1 Q17/May 13 P12 Q13
31 The following errors in the accounting records have been found and corrected:
1. a purchase invoice for $250 was omitted from the books of account
2. a sale for $120 to X was debited to the account of Y
3. the sales days book was over-added by $100
The gross profit for the year before correcting the errors was $60 200.
What is the correct gross profit for the year?
A $59 850 B $59 970
C $60 350 D $60 550
Nov 05 P1 Q10
32 A sole trader has calculated a draft net profit of $56 750.

He then discovers the following mistakes: Discounts Received of $580 and Discounts Allowed of $665 have
been recorded on the wrong sides of the Discounts Received and Allowed accounts.
What is the corrected draft net profit?
A $56 580 B $56 665
C $56 835 D $56 920
May 06 P1 Q10/Nov 14 P12 Q3
33 A cheque for payment of wages of $214 has been debited to the purchases account as $241. A
suspense account is created.
What are the correcting entries?
account to be debited $ account to be credited $
A purchases 214 wages 241
suspense 27
B wages 214 suspense 214
C wages 214 purchases 241
suspense 27
D purchases 241 wages 214
suspense 27
Nov 06 P1 Q10
34 The cost of a new machine has been debited to the repairs account. What error is this an example of?
A commission B omission
C principle D reversal of entries
May 07 P1 Q7
35 Which error would affect the balancing of a trial balance?

A A purchase invoice for $259 was entered in the purchases day book and the trade payable’s
account as $529.
B A payment for rent of $250 has been debited in the bank account. It has been entered correctly
in the rent account.
C A sales invoice for $180 was lost, before it could be entered in the sales day book.
D A sales return of $500 was debited in the trade receivable’s account and credited to the
purchases returns account.
May 07 P1 Q10
36 In the books of a trader, discounts received of $1 400 have been posted correctly in the suppliers’
accounts but debited in the discounts allowed account. What are the correcting entries?
A suspense 2 800 discounts allowed 1 400
discounts received 1 400
B discounts allowed 1 400 suspense 2 800
discounts received 1 400
C discounts received 1 400 discounts allowed 1 400
D discounts allowed 1 400 discounts received 1 400
Nov 07 P1 Q8
37 The trial balance totals are:

debit $500 150 credit $500 000
Which error could have caused the difference?
A A credit purchase has only been recorded in a trade payable’s account.
B A credit sale has not been recorded.
C A cash sale has only been recorded in the sales account.
D A credit sale has only been recorded in a trade receivable’s account.
Nov 07 P1 Q10
38 Closing inventory has been undervalued.

What is the effect on the financial statements?
net current assets net profit
A no effect understated
B overstated overstated
C understated no effect
39 A company's capital expenditure of $200 000 has been debited in error to the purchases account.
Depreciation is provided at the rate of 15 % per annum on the cost of all non-current assets held at each
year end.
How will this affect the net profit?
A $170 000 understated B $200 000 overstated
C $200 000 understated D $230 000 overstated
Nov 08 P1 Q12
40 Entries of $700 in the discount received account had not been entered in the trade payables' ledger.
During the year a machine was sold for $1 000. There was only one entry made and it was a credit in the
bank account. What is the balance on the suspense account?
C $2 700 credit D $2 700 debits
May 09 P1 Q8
41 A business has discovered several errors in its sales ledger. All the accounts in the other ledgers have been
entered correctly.
Which error will not affect the agreement of the trial balance?
A A sale to Clark of $2 000 was debited to Clarkson’s account.
B A sale to Garcia of $100 was entered in Garcia’s account as $1 000.
C A sale to Wong of $4 700 was omitted from Wong’s account.
D A sales return of $1 200 was debited to khan’s account.
Nov 09 P1 Q7
42 A trial balance fails to agree and the bookkeeper finds the following errors.
1 A bank overdraft of $100 was shown as a debit in the trial balance.
2 A telephone bill for $400 was debited to the insurance account.
3 A cash purchase of $160 was entered in the purchases account as $150; the
purchase was entered correctly in the cash account.
The bookkeeper opens a suspense account in order to correct the errors.
What is the opening entry in the suspense account?
A credit $190 B credit $210
C debit $60 D debit $550
Nov 09 P1 Q8
43 Which error will cause an entry in the suspense account?
A a transposition error when transferring a ledger account balance to the trial balance
B an error of commission where the wrong account is used for a transaction but it is the correct
type of account
C an error of omission
D an error of principle
May 10 P1 Q9
44 Which error will not affect the trial balance?
A posting of $3000 purchases to the debit of the motor vehicle account
B posting of $3000 purchases to the credit of the motor vehicle account
C posting of $3000 road tax refund to the debit of the motor vehicle account
D posting of $3000 sales to the debit of the motor vehicle account
Nov 10 P1 Q6
45 Closing inventory has been overvalued.
What is the effect on the financial statements?
net current assets profit from operations
B overstated understated
C understated overstated
D Understated understated May 11 P1 Q4
46 Which error will cause a trial balance not to balance?

A an invoice entered as a credit note on original input.
B a journal entry that does not balance.
C a transaction entered as the wrong amount on original input.
D a transaction not entered.
Nov 11 P1 Q9
47 A trial balance includes a suspense account. The bank balance of $28 412 has mistakenly been entered as
an overdraft and placed on the credit side as $28 142.
There has also been an addition error and the debit side of the trial balance has been undercast by $450.
Which entry in the suspense account would correct these errors?
A credit $56 104 B debit $56 104
C credit $57 004 D debit $57 004
Nov 12 P12 Q8
48 A draft income statement shows a profit for the year of $360 000. Interest received for the year of $1200
has been treated as interest paid.
What is the correct profit?
A $357 600 B $358 800
C $361 200 D $362 400
Nov 12 P12 Q10
49 Which error would result in the creation of a suspense account?

A crediting the commission received account with rent received
B crediting the discounts allowed account with the discounts received
C debiting the bank interest paid account with bank interest received
D debiting the petrol account with a purchase of a new car
May 13 P12 Q8
50 An error of reversal is made when recording the payment of a telephone bill for $500.
Which journal entries are required to record the correction of this error?
debit $ credit $
A bank 500 telephone 500
B bank 1 000 telephone 1 000
C telephone 500 bank 500
D telephone 1 000 bank 1 000
May 13 P12 Q10
51 A business had a profit for the year of $450 000 before correcting the following errors.
1 Closing inventory was undervalued by $15 000.
2 Sales returns of $5 000 had been recorded as purchases returns.
3 The charge for depreciation was overstated by $20 000.
What was the corrected profit?
A $435 000 B $445 000 C $475 000 D $495 000
Nov 13 P12 Q13
52 A trial balance failed to agree. A suspense account was opened. The following errors were then
discovered.
1 The sales returns journal had been undercast by $850.
2 The purchases journal had been overcast by $975.
What was the opening balance on the suspense account before the correction of the errors?
C $1 825 credit D $1 825 debit
May 14 P12 Q7
53 What would cause a trial balance not to balance?
A a casting error in the cash account
B a transposition error in extracting the trial balance
C discounts allowed posted to discounts received account
D misposting of an invoice to a creditor’s account
May 14 P12 Q9
54 A suspense account shows a debit balance of $350.

What could have caused this?
A A purchase of $350 was debited to the rent account.
B A purchase of $350 was omitted from the purchases journal.
C A sale of $350 was debited to the sales account and credited to the debtors’ control account.
D A sale of $350 was posted twice to the sales account.
Nov 14 P12 Q5
55 Rachel’s trial balance did not agree and she placed the difference in a suspense account.
The following shows how four errors have been corrected using the suspense account.
suspense account
$ $
difference in trial balance 200 discount received 310
discount allowed 160 sundry expenses 390
cash 340 ___
700 700
The profit for the year before the errors were corrected was $35 400.
What is the correct profit for the year?
A $34 520
B $34 540
C $34 860
D $35 480
Nov 15 P12 Q14
56 An invoice for purchases was credited to the purchases account.

How is the balance on the purchases account corrected?
A decrease by the value of the invoice
B decrease by twice the value of the invoice
C increase by the value of the invoice
D increase by twice the value of the invoice
Nov 15 P12 Q16
57 On 1 January 2012 a business had prepaid rent of $50. During 2012, it made three rent payments of $250
each. On 31 December 2012, the business owed $200 rent for 2012.
The business owner only charged the rent payments made during 2012 in the income statement.
What is the effect on profit for the year?
A $200 overstated
B $200 understated
C $250 overstated
D $250 understated
Specimen 16 P1 Q6
58 In an income statement carriage outwards of $5 000 has been treated as carriage inwards.
Carriage inwards of $3 000 has been treated as carriage outwards.
What are the effect(s) of these errors on the profit?
gross profit profit for the year
A overstated by $2 000 understated by $2 000
B overstated by $8 000 no effect
C understated by $2 000 no effect
D understated by $8 000 overstated by $8 000
May 16 P12 Q8
59 The following errors were found after a suspense account was opened.
1 Motor repairs of $400 were credited to the motor vehicle at cost account.
2 A payment for electricity was debited in the electricity account as $2 500 instead of $5
200.
3 A $450 cash purchase of goods for resale had been completely omitted from
the books.
4 Discount allowed of $50 had been debited to the discounts received account.
Which items would be entered in the suspense account?
May 17 P12 Q5
60 A business provides the following information.

year 1 year 2
$ $
profit for the year 30 000 40 000
cost of goods sold 240 000 320 000
The owner then discovers that at the end of year 1 the value of inventory was overstated by $2000.
What are the correct profits for the year and cost of goods sold figures?
Year 1 year 2
profit for cost of profit for cost of
the year goods sold the year goods sold
$ $ $ $
A 28 000 238 000 42 000 322 000
B 28 000 242 000 40 000 320 000
C 28 000 242 000 42 000 318 000
D 32 000 238 000 38 000 318 000
May 17 P12 Q10
ANSWER KEY
1 C 16 C 31 A 46 B
2 D 17 C 32 A 47 C
3 D 18 D 33 C 48 D
4 C 19 C 34 C 49 C
5 C 20 D 35 B 50 D
6 C 21 D 36 A 51 C
7 B 22 A 37 D 52 A
8 B 23 B 38 D 53 C
9 A 24 A 39 A 54 D
10 A 25 B 40 B 55 C
11 A 26 D 41 A 56 D
12 D 27 C 42 A 57 C
13 D 28 C 43 A 58 C
14 B 29 A 44 A 59 A
15 D 30 A 45 A 60 C
DETAILED ANSWERS
1 “C” option is correct as when development cost is treated as a capital item (Asset), costs charged to
Income statement will be reduced and profits would increase.
2 First two errors will result in overstatement of credit side. Whereas “C” will result in under cast of debit
side as closing inventory of last year is the opening inventory of current year, so its understatement will
also reduce opening inventory which is shown on the debit side of the trial balance. So “D” is the right
option as liability is shown on the wrong (debit) side resulting in overstatement of debit side.
3 Actual entry Wrong entry Rectifying entry

Sales Return $400 Sales Return $400 Suspense $360
Trade receivable $400 Trade receivable $40 Trade receivable $360
Suspense account
$ $
Trade receivables 360 Difference in trial balance 360 So “D” is the right option
360 360
4 See explanation of Question 15
5 Correction of this error will have the following effects
Opening inventory of current year 30 000

Closing inventory of last year 30 000
Decrease in closing inventory of last year will reduce the retained profit brought forward from the last year
and decrease in current year opening inventory will increase current year net profit. However closing
inventory of current year will not be affected.
7 $
Draft net profit 8 050
Add Correction of understatement of sale 300
Prepaid rent recorded 400
Less Accrued overtime expense recorded (200)
Corrected net profit 8 550
8 As accrued expense has been treated as prepayment i.e. deducted from expense instead of being added
resulting in increase in profit by double amount ($375 + $375) = $750
9 $
Correct depreciation ($530 000  25%) 132 500
Less Wrong depreciation ($530 000  10%) (53 000)
Depreciation to be recorded to correct the mistake 79 500
Journal entry to rectify the mistake will be

Income statement $79 500
Provision for depreciation $79 500
10 “A” option is correct, as there is no mistake in sales ledger’s account, so it is not corrected. As mistake lies
only in trial balance, so it is corrected by entering the amount only in suspense account.
11 (Effect on profit)
Decrease in provision for bad debts $
$135 000 – ($2 700 000  4%) 27 000 
Decrease in finished goods inventory 50 000 
Decrease in net profit 23 000 
13 $
Original gross profit before correction 84 200
Add Correction of overvaluation of opening inventory 4 200
Correction of under valuation of closing inventory 3 700
Revised gross profit 92 100

Bank 5 000 Bank 5 000 Sales 5 000
Trade receivables 5 000 Sales 5 000 Trade receivables 5 000
15 $
Original gross profit before correction 90 000
Add Correction of overvaluation of opening inventory 2 000
Correction of under valuation of closing inventory 3 000
Revised gross profit 95 000
16 $
Net Profit as per draft accounts 64 000
Add Reduction in provision for doubtful debts 300
Less Stationery expense ($2 400 × 1/6) (400)
17 $
Gross profit before correction xx xxx
Less Decrease in closing inventory (6 000)
Add Decrease in purchases 9 000
Net increase in Gross Profit 3 000
Net Profit xx xxx
Add Increase due to gross profit adjustments 3 000
Less Loss by theft (9 000)
Net decrease in Net profit (6 000)

Rent payable 234 ____ Rent payable 558
____ Rent payable 324 Suspense 558
20 Effects of this error will be
Motor vehicles (non-current assets) 
Motor vehicles cost  (profit ) capital 
21 $
Gross Profit before correction 32 500
Add Correction of overstatement of opening inventory 2 400
Correction of understatement of closing inventory 3 400
Corrected gross profit 38 300
22 Suspense account
$ $
Rent ($6 200$2 600 3 600 Difference in trial balance (*) 1 620
_____ Purchases 1 980
3 600 3 600
24 As a result of mistakes $200 ($700  $500) was overstated on the credit side of trial balance. As we know
suspense account is shown on the smaller side of trial balance to equalise the debit and credit sides so in
this case suspense account will appear on debit side with $200.
25 $
Add Treatment of discount received as expense corrected ($1500+$1500) 3 000
Less Overvaluation of closing inventory corrected (4 000)
26 “A” option will increase depreciation expense and reduce profits. “B” option will increase reserves but
decrease profits. “C” option also reduces profits as you are providing for an expense. “D” option is correct
as closing work in process is deducted from costs and increases profits.
27 Suspense Account
$ $
Purchase ledger control a/c 96 600 Difference in trial balance (*) 95 640
_____ Provision for depreciation 960
96 600 96 600
28 Actual Treatment Wrong Treatment Rectifying Treatment
$ $ $ $ $ $
Dis. Allowed 312 Dis. Received 240 Dis. Allowed 624
Dis. Received 240 Dis. Allowed 312 Dis. Received 480
Suspense 144
29 “A” option is correct as both effects are shown on the credit side resulting in a debit balance of $450.
30 Effects of this error are

Trading section expense 
Gross profit and Net profit 
Profit and losssection expense 
Net profit 
So error will overstate gross profit but will not affect net profit, as understatement of trading section
expense will be counterbalanced by overstatement of profit and loss section expenses.
31 $
Gross profit before correction 60 200
Omission of purchase invoice accounted for (250)
Sales overcast corrected (100)
Correct gross profit 59 850
32 $
Less Correction in discounts accounts * (170)
Correct net profit 56 580
* Actual Entry Wrong Entry Correcting Entry
Discount allowed $665 Discount allowed $580 Discount allowed $85
Discount received $580 Discount received $665 Discount received $85
Suspense$170
33 Actual Entry Wrong Entry Correcting Entry
Wages $214 Purchases $241 Wages $214
Cash $214 Cash $214 Suspense $27
Purchases $241
36 Actual Entry Wrong Entry Correcting Entry

Trade payables $1 400 Trade payables $1 400 Suspense $2 800
Dis. received $1 400 Dis. allowed $1 400 Dis. allowed $1 400
––– Dis. received $1 400
37 The trial balance totals suggest that debit side total is more than the total of credit side so is represented
by “D” option. “B” option does not affect agreement of trial balance, whereas “A” and “C” options result in
overstatement of credit side.
39 $
Capital expense recorded as purchases ↓ 200 000
Depreciation omitted on non-current assettreated as purchases ($200 000 × 15%) ↑ (30 000)
Net effect of errors on net profit 170 000
40 The debit side of trial balance was understated by $700 due to omission of discounts received in the trade
payables’ ledger whereas credit side of trial balance was overstated by $1 000 on account of only credit
entry in bank account. As a result suspense account balance appeared on the debit (smaller) side of trial
balance as it was understated by $1 700 due to errors.
42 Suspense Account
$ $
O/D mistake in trial balance corrected 200 Difference in trial balance (*) 190
___ Purchases 10
200 200
44 “A” option is correct because a debit item (expense) is recorded as another debit item (asset) (error of
principle). In “B” option a debit item is recorded as a credit item whereas in “C” and “D” options credit
items are recorded as debit items.
45 This error will have the increase closing inventory (net current assets) of current year, This will also reduce
Cost of sales and will overstate the current year Operating profit. However increase in opening inventory
of next year will not affect current year results.
46 “B” option is correct. Item in “A” option represents complete reversal of entries. Item in “C” option is an
example of original entry whereas item in “D” option is a case of error of omission.
47 Suspense Account
$ $
Difference in trial balance (*) 57 004 Bank a/c ($28 412 + $28142) 56 554
_____ Trial balance error corrected __ 450
57 004 57 004
In order to clear the opening debit balance in the suspense account a credit entry is needed in the
suspense account with $57 004.
48 Net profit before correction $360 000

Interest received treated as interest paid now corrected $2 400
Correct net profit $362 400
49 TheonlytransactionresultinginthecreationofasuspenseaccountwouldbeC. Bank interest received must have
been a credit entry and was wrongly debited, thus resulting in two debits and no credit resulting in the
creation of a suspense account.
$ $ $ $ $ $
Telephone 500 Bank 500 Telephone 1 000
Bank 500 Telephone 500 Bank 1 000
51 $
Add Undervaluation of closing inventory corrected 15 000
Sales returns recorded as purchases returns corrected ($5 000+$5 000) (10 000)
Overstatement of depreciation corrected 20 000
52 Suspense account
$ $
Purchases 975 Difference in trial balance (*) 125
____ Sales returns 850
975 975
55 $
Original profit for the year before correction 35 400
Add Discount allowed 160
Less Discount received (310)
Sundry expenses (390)
Correct profit for the year 34 860
56 As this is case of reversal of entry so requires correction by twice the value of the invoice on the debit side
of Purchases account.
57 $
Rent expense paid during the year and charged to income statement ($250  3) 750
Actual rent expense to be charged to income statement ($750 + $200 +$50) 1 000
Overstatement of Profit (due to understatement of rent expense in income statement) 250
58 Error 1 Error 2 Net effect Effect on gross profit Effect on net profit
Carriage inwards $5 000 $3 000 $2 000 $2 000 $2 000
Carriage outwards $5 000 $3 000 $2 000 ______ $2 000
Net effect on profit $2 000 No effect
59 ‘A’ option is correct. Item 3 is an example of error of omission and item 4 is an example of error of
commission so will not be entered in suspense account.
60 Overstatement of closing inventory of year 1 by $2 000 will result in  in cost of goods sold and  in profit
by $2 000.
Overstatement of opening inventory of year 2 by $2 000 will result in  in cost of goods sold and  in
profit by $2 000.
Chapter 9 -82- Control Accounts
CHAPTER 9 CONTROL ACCOUNTS

1 The sales day book of a business has been overcast by $800. The business maintains control
accounts as part of the double entry bookkeeping system.
The effect of correcting this error will be to make adjustments to the
A control account, with a decrease in profit of $800

B control account, with no effect on profit
C ledger balances of the individual trade receivables, with a decrease in profit of $800
D ledger balances of the individual trade receivables, with no effect on profit
May 98 P1 Q7
2 The table shows the summarised sales ledger control account at the year-end.
$
Amounts owed to the company 712 500
Amounts owed by the company for deposits received 27 700
Bad debt, previously written off, now collected from the liquidator 7 500
Payment to a debt collector for a customer’s dishonouredcheque 1 500
How will the trade receivables be shown in the balance sheet at the year-end?
A $677 300 B $678 800 C $712 500 D $714 000
May 98 P1 Q11
3 The Purchase Ledger Control Account for the year showed the following transactions.
$
Opening balance: credit 20 000
debit 4 000
Transactions for the year
Suppliers’ invoices 45 000
Discounts received 500
Credit notes received 1 500
Sales ledger contra 5 000
Closing balances: credit 23 000
Debit nil
How much cash did the company pay its trade payables during the year?
A $31 000 B $34 000 C $35 000 D $54 000
May 99 P1 Q8
4 An extract from a company’s trial balance is shown.
Debit($) Credit($)
Trade receivables Control Account – debit balances 225 000
Trade receivables Control Account – credit balances 2 800
Trade payables Control Account – debit balances 3 200
Trade payables Control Account – credit balances 261 000
Directors Loan Account 12 000
How much should be disclosed as trade receivables in the company’s financial statements?
A $222 200 B $228 200 C $237 400 D $240 200
Nov 99 P1 Q6/ May 09 P1 Q16
5 The table shows transactions for a month.

$
Credit sales 16 810
Sales returns 1 150
Discount allowed 276
Bad debts written off 100
Increase in provision for doubtful debts 600
Increase in trade receivables 5 406
How much cash was received from trade receivables during the month?
A $9 278 B $9 878 C $10 154 D $20 690
Nov 99 P1 Q8
6 A purchase ledger control account has a closing balance of $92 460. A trade receivable for $720
transferred from the sales ledger has been recorded on the wrong side of the purchase ledger control
account.
What is the correct balance on the purchase ledger control account?
A $91 020 B $91 740 C $93 180 D $93 900
May 00 P1 Q2/ Nov 08 P1 Q8
7 What would not appear in a sales ledger control account?

A cash received from trade receivables
B discounts allowed
C provision for doubtful debts
D returns inwards
May 00 P1 Q8/ May 06 P1 Q9
8 X buys from and sells goods to Y. At the end of the month, X owes Y $3 200 and Y owes X $1 941. An
agreement is in force for the Sales Ledger account and Purchase Ledger account balances to be offset, so
that only one payment is made.
Which double entry records the offset in X’s books?
Dr ($ ) Cr ( $)
A purchase ledger control account 3 200
sales ledger control account 3 200
B Y’s (purchase ledger) account 1 941
C purchases ledger control account 1 259
D purchases ledger control account 1 941
Nov 00 P1 Q8/May 14 P12 Q10
9 X Ltd maintains control accounts. The total of the Sales Day book for a month has been overstated.
Which adjustments are required as a result of this error?
Sales Ledger list of Sales

Control account Ledger balances
A Dr reduce
B Dr no change
C Cr reduce
D Cr no change
Nov 00 P1 Q9
10 The table shows an extract from a trial balance at 30 April 2000.

trade receivables control account 38 600 800
trade payables control account 1 300 26 800
In addition, a purchase invoice for goods received on 29 April 2000 for $1 000 was omitted from the trade
payables control account.
Which figure for trade payables should appear in the Balance Sheet at30 April 2000?
A $25 500 B $27 600
C $27 800 D $28 600
May 01 P1 Q9
11 Extracts from a company’s trial balance at 31 March 1996 are:

Trade receivables Control Account 67 521 5 210
Bank Account 7 000
Cash 4 500
There are no other current assets.
Which total for current assets should be disclosed in the company’s financial statements at 31 March
2000?
A $59 811 B $62 311 C $66 811 D $72 021
Specimen 02 P1 Q5
12 Given opening trade receivables $10 000, credit sales $50 000, increase in provision for bad debts $500,
amounts received from trade receivables $45 000, discounts allowed $350, dishonoured cheque $100,
sales returns $400, closing trade receivables would be:
A $14 350 B $14 650 C $14 850 D $15 150
Specimen 02 P1 Q20
13 The balance on a Sales Ledger Control account is $40 000.

The following items are then discovered:
$
Total of sales day book understated 500
Discounts allowed not entered in Sales Ledger Control account 1 200
Bad debts written off not recorded in Sales Ledger Control account 400
Provision for bad debts 2 500
What is the total of the balances in the sales ledger?
A $37 900 B $38 600 C $38 900 D $41 100
May 02 P1 Q9/ Nov 06 P1 Q12
14 The balance on the Sales Ledger Control account amounting to $43 000 has been entered in the trial
balance as $34 000. The difference on the trial balance has been entered in a Suspense account.
Which journal entry is required to correct the error?
Account to be debited Account to be credited

A sales ledger control account $9 000 suspense account $9 000
B - suspense account $9 000
C suspense account $9 000 -
D suspense account $9 000 sales ledger control account $9 000
May 03 P1 Q10
15 The accounts of a business show:
1 payments to suppliers
2 prepaid expenses
3 purchases
4 purchases returns
Which items will be debited to accounts in the purchases ledger?

A 1 and 2 B 1 and 4
C 2 and 3 D 3 and 4
Nov 04 P1 Q1
16 A business provides information:

$
opening trade payables 20 000
cash paid to trade payables 110 000
purchases on credit 120 000
balance set-off against sales ledger 2 000
discount received 3 000
What is the closing trade payables balance?

A $25 000 B $29 000
C $30 000 D $31 000
Nov 05 P1 Q11
17 The closing balance on a Purchases Ledger Control account is $163 762. The purchase day book (journal)
has been undercast by $1 000.
What should be the correct closing balance on the Purchase Ledger Control account?
A $162 762 B $163 762
C $164 762 D $165 762
May 06 P1 Q11
18 The total of the balances in the purchases ledger does not agree with the balance on the purchases ledger
control account. It is found that a credit balance of $3 100 on a supplier’s account has been listed as a
debit balance.
What is the effect of correcting the error on the total of the purchases ledger balances?
A $3 100 decrease
B $3 100 increase
C $6 200 decrease
D $6 200 increase
May 07 P1 Q9
19 A company makes purchases from X Ltd and also sells goods to X Ltd. At the year-end the company owes X
Ltd $500 and X Ltd owes the company $750.
What are the correct entries to contra (offset) these amounts?
purchases ledger control account sales ledger control account

debit ($) credit ($)
A 250 250
B 500 500
C 750 500
D 750 750
May 08 P1 Q9
20 The following information is taken from the books of a business at 30 April.

$
total of sales ledger balances 84 000
balance on sales ledger control account 83 100
What could have caused the difference between the sales ledger balances and the sales ledger control
account balance?
A an invoice for $900 not entered in the sales journal
B an invoice in the sales journal for $2 100 entered in the sales ledger account as $1 200
C the sales journal total for March overstated by $900
D the sales journal total for April, $9800, entered in the sales ledger control account as $8900
May 08 P1 Q10
21 A trade payable for $720 transferred from the purchases ledger has been entered on the wrong side of
the sales ledger control account.
The sales ledger control account has a closing balance of $92 460, before correcting the transfer. A
provision for doubtful debts of $1000 is to be made.
What is the correct balance on the sales ledger control account?
A $90 020
B $91 020
C $91 740
D $92 180
Nov 08 P1 Q8
22 The correct balance on the purchases ledger control account is $63 000 but has been entered in the trial
balance as $36 000. The difference on the trial balance has been entered in a suspense account. Which
journal entry corrects this error?

A purchases ledger control account 27 000 suspense account 27 000
B - suspense account 27 000
C suspense account 27 000 -
D suspense account 27 000 purchases ledger control account 27 000
May 09 P1 Q9
23 Who is most likely to use the trade payables' ledger?

A cashier
B credit controller
C trade payables
D purchases controller
May 09 P1 Q10
24 At 31 March the balance sheet of a company included the following.
$
During April credit sales were $64 000 and cash sales were $256 000.
Credit customers paid$56 840 net of a 2 % cash discount.
What will be the trade receivables at 30 April?
A $27 800 B $28 960 C $29 000 D $30 160

25 The following balances appear in the internal accounts of a company.

$
trade receivables’ ledger debit balances 261 000
credit balances 3 000
trade payables’ ledger credit balances 156 000
debit balances 2 000
How will the trade receivables and trade payables be shown in the published accounts?
Trade receivables ($) Trade payables ($)
A 258 000 154 000
B 261 000 156 000
C 263 000 159 000
D 264 000 158 000
Nov 09 P3 Q13
26 Which of the following items will be debited to accounts in the purchases ledger?
1 discount allowed
2 payments to suppliers
3 purchases
4 purchases returns

May 10 P1 Q3
27 Which item will be entered in a purchase ledger control account?

A discount allowed
B discount received
C prepaid rent
D returns inwards
May 10 P1 Q7
28 The total of the list of individual balances in the purchase ledger does not agree with the balance on the
purchase ledger control account.
When listing the individual suppliers' accounts a credit balance had been shown as a debit balance. What
is needed to correct the mistake on the total of the purchase ledger balances?
A decrease by the amount of the credit balance

B decrease by twice the amount of the credit balance
C increase by the amount of the credit balance
D increase by twice the amount of the credit balance
May 10 P1 Q8
29 A trial balance at 31 December shows:

Debit ($) credit ($)
trade receivables control account 48 500 2 900
trade payables control account 3 600 34 800
It is then found that an invoice, $900, issued to a trade receivable on 27 December, has not been entered
in the accounting records.
What is the correct figure for trade receivables in the balance sheet at 31 December?
A $46 500 B $49 400
C $51 200 D $53 000
May 10 P1 Q10
30 At 30 June the balance sheet of a business includes the following.

$
provision for doubtful debts 5 % 2 300
During July, sales of $350 000 were made of which 20 % were in cash. Credit customers paid $303 800
after deducting a 2 % cash discount. How much did the trade receivables owe to the business at 31 July?
A $15 200 B $16 000
C $22 200 D $76 000
Nov 10 P1 Q5
31 The trade receivable control account of Y shows a balance of $14 320. Customer X, who owes Y $1000, has
also supplied Y with $400 of goods. The supply of goods, $400, is to be offset by Y.
What is the corrected trade receivable control account balance?
A $13 720 B $13 920
C $14 720 D $14 920
Nov 10 P1 Q8
32 A company has obtained the following information for the year ended 31 December.
$
opening balance on sales ledger control account 31 000
closing balance on sales ledger control account 35 000
discount allowed 2 300
credit sales 125 400
What was the amount of cash received from the customers?
A $119 100 B $123 700
C $127 100 D $131 700
Nov 12 P12 Q9
33 A purchase ledger control account shows the following:

$
opening balance 1 200
closing balance 1 300
purchases 18 400
payments made 17 800
discount received 300
Which entry appears in the control account to record the contra with the sales ledger control account?
Nov 14 P12 Q7
34 A business purchases inventory on a credit basis.

Which item affects the amount paid to suppliers?
A bad debts B contra with the sales ledger
C discount allowed D returns inwards
May 15 P12 Q5
35 A trader maintains a sales ledger control account.

How can he calculate credit sales?
A balance carried down + receipts + balance brought down
B balance carried down + receipts – balance brought down
C balance carried down – receipts + balance brought down
D balance carried down – receipts – balance brought down
May 15 P12 Q10
36 A business provided the following information.

$
1 April purchases ledger credit balance 16 725
30 April credit purchases for the month 42 653
30 April payments made to trade payables 37 324
30 April purchases returns 723
What is the balance on the purchases ledger control account at 30 April?
A $12 119 B $21 331
C $59 378 D $62 529
Nov 15 P12 Q12
37 The purchases ledger control account has a closing balance of $15 300. Discounts received of $600 have
been entered on the wrong side of the control account.
What is the corrected balance?
A $14 100 B $14 700
C $15 900 D $16 500
Specimen 16 P1 Q9
38 Which statement about the sales ledger control account is correct?

A It is to verify the total of the customers' account balances in the sales ledger.
B It is used to calculate the gross profit on sales.
C It is used to calculate the total sales for the year.
D It is used to reconcile the cash received from customers with the bank statement.
May 16 P12 Q5
39 In which book of prime entry is the contra between the sales ledger control account and the purchase
ledger control account recorded?
A cash book
B general journal
C purchases journal
D sales journal
May 16 P12 Q6
41 At the end of the year, the balance on a firm’s sales ledger control account was $12 900. The total of the
customers’ accounts in sales ledger was $11 900.
The following errors were then discovered.
1 A customer’s account had been undercast by $700.
2 A contra with a supplier in the purchases ledger of $200 had only been entered in the
sales ledger control account.
3 The discount allowed column in the cash book totalled $500. This had not been posted
to the nominal ledger.
What was the correct balance on the sales ledger control account?
A $11 200 B $11 400 C $12 000 D $12 400

Nov 16 P12 Q6
41 Which items appear in a sales ledger control account?
1 cash discount allowed
2 credit sales
3 payments to trade payables
4 returns inwards
A 1, 2 and 3 B 1, 2 and 4 C 1, 3 and 4 D 2, 3 and 4

May 17 P12 Q6
Chapter 9 -90- Control Accoun
ANSWER KEY
1 A 12 A 23 D 34 B
2 C 13 C 24 C 35 B
3 A 14 B 25 C 36 B
4 B 15 B 26 C 37 A
5 B 16 A 27 B 38 A
6 A 17 C 28 D 39 B
7 C 18 D 29 D 40 D
8 D 19 B 30 B 41 B
9 D 20 D 31 B
10 D 21 B 32 A
11 D 22 C 33 B
DETAILED ANSWERS
2 Trade receivables will simply be shown in the balance sheet as $712 500. $27 700 represents amount
owed by the company, $1 500 represents a collection expense whereas bad debts recovery of $7 500 will
not change the trade receivables’ figure as the entries will be:
A Trade receivables 7 500
Bad Debts Recovery 7 500
B Cash 7 500
Or Cash 7 500
Bad Debts Recovery 7 500
3 Purchase Ledger Control Account

$ $
Balance b/f (Dr) 4 000 Balance b/f (Cr) 20 000
Discount received 500 Purchases (invoices) 45 000
Credit notes received (returns out) 1 500
Sale ledger contra 5 000
Cash to suppliers (balancing figure) 31 000
Balance c/d (Cr) 23 000 ______
65 000 65 000
4 Debit balances of both trade receivables’ and trade payables’ control accounts will be disclosed as trade
receivables in the balance sheet i.e. ($225 000 + $3 200 = $228 200). Although director’s loan is an asset
but is not a trade receivable as trade receivables arise purely from trading activities of the business.
5 Sales Ledger Control Account

$ $
Credit sales 16 810 Sales Returns 1 150
Discount allowed 276
Bad debts 100
Increase in trade receivables #5 406
_____ Cash from receivables (bal. figure) 9 878
16 810 16 810
#Due to increase in the amount of trade receivables the closing figure of trade receivables will be more
than its opening figure. So this increase is recorded in place of closing trade receivables.
6 Adjusted Purchase Ledger Control Account

$ $
Sale ledger contra (720+720) 1 440 Balance b/f (Cr) 92 460
Balance c/d (Cr) 91 020 _____
92 460 92 460
* As amount was recorded on the wrong side so account is debited by $720 to correct the error and
debited by $720 to record $720 on the debit sale.
7 If you pass a journal entry for provision for bad debts, you will find that it is created out of profits and
trade receivables are neither debited nor credited, so it is not shown in sales ledger control account.
8 Balances Balances Change

before adjustments after adjustments
Trade receivables 1 941 _ 1 941()Cr
Trade payables 3 200 1 259 1 941()Dr
Net trade payables 1 259
So the entry will be: Debit Credit
Purchase ledger control account $1 941
Sale ledger control account $1 941
*It will be wrong to choose B option because on the one hand an individual account is debited and total or
control account is credited on the other.
9 The correcting entry will be

Sales 
Suspense 
Decrease in sales will be credited in the sales ledger control account. While as there is no mistake in trade
receivables account so total of sales ledger balances will not be affected.
10 $
Trade payables Control account (Cr) 26 800
Trade receivables Control account (Cr) 800
Add Omission of purchase invoice now recorded 1 000
Trade payables figure to be shown in the balance sheet 28 600
11 $67 521 + $4 500 = $72 021

*$5 210 and $7 000 will not be shown as current assets as these amounts are given on the credit side.

$ $
Balance b/f (Dr) 10 000 Cash from trade receivables 45 000
Credit sales 50 000 Sales Returns 400
Bank (dishonoured cheques) 100 Discount allowed 350
_____ Balance c/d (balancing figure) 14 350
60 100 60 100
13 Adjusted Sales Ledger Control Account

$ $
Balance b/f (Dr) 40 000 Discount allowed 1 200
Sales book corrected 500 Bad debts 400
40 500 40 500
16 Trade payables’ account

$ $
Cash 110 000 Balance b/f 20 000
Contra (set-off) 2 000 Purchases 120 000
Discount received 3 000
Balance c/d (Balancing figure) 25 000 ______
140 000 140 000
$ $
Balance c/d (Balancing figure) 164 762 Balance b/f 163 762
_ ____ Purchases 1 000
164 762 164 762
19 Balances Balances
Change ($)
before adjustments ($) after adjustments ($)
Trade receivables 750 250 500()Cr
Trade payables 500 _ 500()Dr
Net trade receivables 250
So the entry will be to debit Purchase ledger control account and credit Sales ledger control account with
$500.
$ $
Balance b/f (Dr) 92 460 Sale ledger contra (720+720) 1 440
_____ Balance c/d (Dr) 91 020
92 460 92 460
* As amount was recorded on the wrong side so account is credited by $720 to correct the error and
credited by $720 to record $720 on the debit sale.
24 Trade receivables Account
$ $
Balance b/f (Dr) 23 000 Cash from trade receivables 46 840
$56 840
Credit sales 64 000 Discount allowed ( × 2%) 1 160
98%
87 000 87 000
28 Its correction requires increase in the purchase ledger credit balances with double amount; one to
eliminate effects of its wrong addition on the debit side and the other is in effort to show it correctly as a
credit balance.
29 $
Trade receivables control account (Dr) 48 500
Trade payables control account (Dr) 3 600
Add Omission of sales invoice now recorded 900
Trade receivables figure to be shown in the balance sheet 53 000
30 Trade Receivables Account

$ $
Balance b/f (Dr) 46 000 Cash from receivables 303 800
$303 800
Credit sales ($350 000 × 80%) 280 000 Discount allowed( × 2%) 6 200
98%
_ ____ Balance c/d (balancing figure) 16 000
326 000 326 000
31 Trade Receivables Control Account

$ $
Balance b/f (Dr) 14 320 Contra 400
_ ____ Balance c/d (balancing figure) 13 920
14 320 14 320

$ $
Balance b/f 31 000 Discount allowed 2 300
Credit sales 125 400 Cash from customers (bal. figure) 119 100
_____ Balance c/d 35 000
156 400 156 400

$ $
Cash (payment) 17 800 Balance b/f 1 200
Contra (set-off) - Balancing figure 200 Purchases 18 400
Discount received 300
Balance c/d 1 300 ______
19 600 19 600
34 “B” option is correct whereas items in all other options are recorded in sales ledger control accounts so do
not affect suppliers’ outstanding balances.

$ $
Cash to suppliers 37 324 Balance b/f (Cr) 16 725
Purchase returns 723 Purchases (invoices) 42 653
Balance c/d (Cr) (balancing figure) 21 331 ______
59 378 59 378
37 Adjusted Purchase Ledger Control Account
$ $
Discount received ($600 + $600) 1 200 Balance b/f (Cr) 15 300
Balance c/d (Cr) 14 100 _____
15 300 15 300

$ $
Balance b/f (Dr) 12 900 Discount allowed 500
12 900 12 900
41 Option ‘B’ is correct as item 3 is recorded in ‘purchase ledger control account’.

Chapter 10 -94- Accounts from Incomplete Records
CHAPTER 10 ACCOUNTS FROM INCOMPLETE RECORDS

1 Rent is paid by a business monthly in advance on the first day of each month. The payments during this
financial year have been as follows:
- Up to and including 1 June $500 per month
- From 1 July thereafter $600 per month
Which amount(s) will appear in the accounts for the year ended 31 October?
income statement expense Balance sheet
A $6 400 $600 prepayment
B $6 400 $600 accrual
C $6 400 
D $7 000 
May 98 P1 Q2/ May 08 P1 Q2/Nov 12 P12 Q1/ May 15 P12 Q3
2 A business makes sales with a gross profit margin of 30%. At 1st April 1997, the inventory was valued at $2
600 and at 31 March 1998 at $3 800. During the year the sales totalled $80 800.
What was the value of purchases during the year?
A $56 560 B $57 760 C $60 360 D $63 354
May 98 P1 Q9
3 A sole trader’s year-end is 31 December. Rent is paid in arrears. Until 30 April 1998, the rent was $240 per
month. This was increased to $270 per month from 1 May 1998.
What is the sole trader’s rent payable for the year ending 31 December 1998?
A $2 880 B $3 120 C $3 150 D $3 240
Nov 98 P1 Q2
4 A new business was established with opening capital of $15 000. At the end of the year net assets were
$20 000. During the year the proprietor’s drawings were $3 000 and this resulted in an overdraft at the
end of the year of $3 000.
What was the profit during the year?
A $2 000 B $3 000 C $5 000 D $8 000
May 99 P1 Q7/ Nov 09 P1 Q9
5 The table shows transactions relating to a commodity during a period.
Units Value $
purchased 50 $4
sold 30 $10
Of the remaining units, 8 are damaged and therefore worthless.
What is the profit for the period?
A $68 B $100 C $148 D $180
May 99 P1 Q15
6 The table shows opening and closing Rent Receivable Account balances.
Start of year End of year
$ $
rent received in advance 4 200 1 600
rent due in arrears 2 000 2 400
During the year, $111 000 rental income was received.
What is the total rent receivable for the year?
A $110 600 B $111 000 C $112 800 D $114 000
Nov 99 P1 Q4 / May 03 P1 Q30/May 12 P12 Q2
7 A business paid $15 000 for electricity in the year. The closing accrual was $2 000 and the opening
prepayment was $1 000.
What is the charge for electricity for that year?
A $15 000 B $16 000 C $17 000 D $18 000
8 A company purchases a product that costs $240. The company expects to make a gross profit margin of
331/3%. What is the company’s mark-up?
A $60 B $80 C $100 D $120
May 00 P1 Q10
9 A company sells goods on sale or return at a mark-up of 25%.
At the Balance Sheet date the following information is available.
Goods in warehouse $300 000 (cost)
Goods sent on sale or return $200 000 (at invoice price)
What will be the value of closing inventory in the company accounts?
A $300 000 B $450 000 C $460 000 D $500 000
May 00 P1 Q13/ Nov 04 P1 Q14
10 X Ltd rents its building to Y Ltd.
At 31 December1998, Y Ltd owed $4 500 for rent, but at 31 December 1999 he paid $3 200 in advance.
During the year X Ltd had received $17 100 in rental from Y Ltd.
What is the rental income to be shown in X LTD’s Income statement for the year ended 31 December
1999?
A $9 400 B $15 800 C $18 400 D $24 800
Nov 00 P1 Q3/ Nov 04 P1 Q2/May 13 P12 Q3
11 The table shows the following balances for a business.
Start of year End of year
$ $
Inventory 6 000 9 000
Trade payables 8 000 10 000
Total payments to trade payables were $20 000.
What is the cost of sales for the year?
A $15 000 B $19 000 C $21 000 D $25 000
Nov 00 P1 Q10
12 The bookkeeper of a company has disappeared. There is no cash in till and theft is suspected.
The following information is known
$
Cash balance at beginning of period 750
Total sales during the period 150 000
Decrease in trade receivables during the period 5 500
Receipts from trade receivables paid into bank 96 000
Expenses paid from cash received 5 000
How much cash has the bookkeeper stolen during the period?
A $44 250 B $49 750 C $55 250 D $60 250
May 01 P1 Q4 / Nov 02 P1 Q4
13 A tenant pays annual rent of $6 000. Payment is made quarterly in advance on 1 January, 1 April, 1 July
and 1 October.
Which of the following should be included in his accounts for the year ended 31 October 2001?
A $500 accrual B $500 prepayment
C $1 000 accrual D $1 000 prepayment
Nov 01 P1 Q1
14 A Company’s accounting year-end is 31 December. It always pays its insurance premiums annually, in
advance, on the due date 1 September.
During the last few years the following premiums have been paid:
1. $2 400
2. $2 760
3. $3 840
What will be the charge for insurance in the company’s Income statement for Year 3?
A $2 760 B $3 120 C $3 480 D $3 840
Nov 01 P1 Q4
15 On 6 January 2002 a firm lost its entire inventory in a fire. Inventory had a Balance Sheet valuation of
$650000 on 31 December 2001.
In the period 1-5 January 2002 purchases were $75 000 and sales were $96 000.
The average gross profit the firm makes is 25% of selling price.
What was the value of the inventory on 5 January?
A $629 000 B $647 000 C $653 000 D $671 000
May 02 P1 Q11
16 The table gives data about rental income for the year ended 31 March 2003.
$
Rents owing 31 March 2002 1 400
Rents received in advance 31 March 2002 1 300
Cash received 13 700
Rents written off 560
Rents owing at 31 March 2003 1 750
Rents paid in advance at 31 March 2003 1 600
Which figure for rental income will appear in the Income statement for the year ended 31 March 2003?
A $14 010 B $14 210 C $14 310 D $14 510
Nov 03 P1 Q2/Nov 11 P1 Q1/May 15 P12 Q14
17 The table shows information relating to the non-current assets of a business.
$
Net book value at the beginning of year 28 000
Net book value at end of year 25 000
Depreciation charge for the year 4 000
Disposals at net book value 9 000
What is the figure for non-current asset additions?

A $2 000 B $6 000
C $10 000 D $16 000
Nov 03 P1 Q5
18 A business owner suspects a loss of cash has occurred. He provides the data shown.
$
Cash balance at the start of the month 150
Cash balance at the end of the month 100
Cash banked 10 200
Cash sales per till rolls 10 500
How much cash has been lost?
A $200 B $250
C $300 D $350
Nov 03 P1 Q13/ Nov 06 P1 Q14/May 14 P12 Q14
19 You are given the following information on 31 December 2003 by X, a sole trader.
$
Total purchases for year 95 000
Returns inwards 3 000
Returns outwards 2 000
Inventory withdrawn by X for personal use 5 000
Unsold inventory on 31 December 2003 was valued at $1 000 more than on 1 January 2003.
What is the cost of sales?
A $86 000 B $87 000 C $89 000 D $97 000
Nov 04 P1 Q16
20 At the end of year 1 a company had a debit balance of $760 on its Rent Payable account.
Payments for rent in year 2 totalled $10 600 and at the end of the year rent prepaid was $1 290.
How much rent was charged against profit in year 2?
A $8 550 B $10 070 C $10 600 D $11 130
May 05 P1 Q5
21 How may net profit be calculated?

A Closing Capital + Drawings – Additional Capital – Opening Capital
B Closing Capital – Drawings + Additional Capital – Opening Capital
C Opening Capital + Drawings – Additional Capital – Closing Capital
D Opening Capital – Drawings – Additional Capital – Closing Capital
May 05 P1 Q11/ Nov 08 P1 Q11
22 A business does not keep proper accounting records.

The following information is available at the start of the year.
1 A motor car valued at $2 500
2 Inventories which cost $4 000 with a sale value of $6 000
3 Bank overdraft of $500
4 A loan to a friend from the business bank account $1 000
What is the Capital account balance at the start of the year?
A $5 000 B $7 000 C $8 000 D $9 000
May 05 P1 Q16
At 31 December year 1 the company carried forward a debit balance of $36 200 on the Rent account.
During Year 2 payments made for 12 months’ rent, to 31 March Year 3, were $157 200.
What is the amount of rent to be charged against profit in the year ended 31 December Year 2?
A $121 000 B $154 100 C $160 200 D $193 400
Nov 05 P1 Q9/Nov 13 P12 Q7
24 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 $6 000 receivable in equal
instalments on 1 April, 1 July, 1 October and 1 January.
At 31 October what would the final accounts show?
Income statement Balance Sheet

$ $
A rental income 3 500 current asset 1 000
B rental income 3 500 current liability 1 000
C rental income 4 500 current liability 1 000
D rental income 6 000 current asset 1 500
May 06 P1 Q2/ Nov 09 P1 Q1
25 The following information is taken from the stationery account of a business.

$
Inventory of stationery at beginning of the year 600
Cash paid for stationery during the year 7 000
Invoice not yet received for stationery 480
Inventory of stationery at end of year 800
How much should be debited to the Income statement for stationery?
A $6 680 B $6 800 C $7 280 D $8 080
May 06 P1 Q3/ May 09 P1 Q4
26 The following information is extracted from the records of a business.

$
At 31 December 2004:
Rent paid in advance 4 000
During the year ended 31 December 2005:
Rent paid 41 000
At 31 December 2005:
Rent paid in advance 7 000
How much will be debited for rent in the Income statement for the year ended 31 December 2005?
A $34 000 B $38 000 C $41 000 D $44 000
May 06 P1 Q8
27 At the end of a financial year the following information is available.

$
Sales 200 000
Opening inventory 15 000
Closing inventory 18 000
If the business makes a standard mark-up of 25%, what were the purchases?
A $147 000 B $153 000 C $157 000 D $163 000

May 06 P1 Q16/Nov 07 P1 Q12/ Nov 09 P3 Q24/ Nov 10 P1 Q10/May 12 P12 Q13
28 A trader does not keep double-entry records.

At the beginning of a period, suppliers are owed $43 600.
Payments of $197 320 were made in the period.
Suppliers are owed $35 390 at the end of the period.
What are the total purchases for the period?
A $118 330 B $189 110 C $205 530 D $276 310
May 06 P1 Q17
29 X has not kept proper records for his business.

Between 31 December 2004 and 31 December 2005 his net assets had increased by $30 000.
On 1 January 2005, X brought into the business his private car which had cost $12 000 but now has a re-
sale value of $8 000.
Drawings for the year ended 31 December 2005 were $16 000.
What was X’s profit for the year ended 31 December 2005?
A $22 000 B $26 000 C $34 000 D $38 000

Nov 06 P1 Q16
30 The following information relates to a business:

$
opening trade receivables 280 000
cash received during the year 520 000
discounts allowed during the year 30 000
bad debts written off during the year 15 000
closing trade receivables 265 000
What were the sales during the year?
A $490 000 B $535 000 C $550 000 D $580 000
May 07 P1 Q8
31 A trader, whose purchases are all on credit, does not keep double entry records. The following
information is available:
$
opening trade payables 51 660
payments to suppliers during the year 212 760
closing trade payables 56 340
The discount received for the year amounted to $1000.
What were the purchases for the period?
A $209 080 B $214 940 C $217 440 D $218 440
May 07 P1 Q11
32 A business does not keep complete accounting records. The following information is known:
$
capital at start of year 52 000
capital at end of year 55 000
owner’s drawings in year 13 000
capital introduced during the year 25 000
What is the net profit/loss for the year?
A net loss $9 000 B net profit $9 000
C net loss $15 000 D net profit $15 000
May 07 P1 Q13/ Nov 12 P12 Q16
33 At the beginning of the financial year inventory was valued at $15 000. During the year, sales of $21000
and purchases of $18 000 were made. Unfortunately, the entire inventory was stolen on the last day of the
financial year.
Goods are marked up by 50 % to calculate selling price. What is the cost of the stolen inventory?
A $7 500 B $11 000 C $19 000 D $22 500
May 07 P1 Q15
34 A company receives payment for 20 % of its sales in the month of sale, 50 % in the following month and 30
% two months after the month of sale.
The table shows sales for four months.
$
January 180 000
February 240 000
March 270 000
April 220 000
How much were total cash receipts in April?
A $220 000 B $228 000 C $249 000 D $251 000
May 07 P1 Q17
35 A business prepares its accounts to 31 December. Insurance premiums paid were:

date paid $
January 2006 paid for 6 months to 31 December 2005 940
July 2006 paid for 6 months to 30 June 2006 1 120
January 2007 paid for 6 months to 31 December 2006 1 245
March 2007 paid for 6 months to 30 June 2007 1 880
Which amount should be shown in the income statement for the year ended 31 December 2006?
A $1 120 B $2 060 C $2 365 D $3 305
Nov 07 P1 Q3
36 A company income statement includes:
$000
dividend 300
increase in inventory 200
overheads 400
purchases 800
If the net profit percentage is 20 %, what is the figure for sales?
A $1 120 000 B $1 250 000
C $1 625 000 D $1 750 000
May 09 P1 Q19
37 The table shows information provided by a company.
$000
sales for the year 500
purchases for the year, at cost 450
closing inventory, at selling price 50
There was no opening inventory.
What was the gross profit for the year?
A $80 000 B $90 000 C $90 909 D $110 000
May 09 P3 Q12
38 The summarised balance sheets for a business for two years are as follows.
year 1 ($) year 2 ($)
non-current assets 9 000 12 000
current assets 6 000 8 000
less current liabilities (5 000 (6 000
net assets 10 000 14 000
The drawings in year 1 were $5 000 and in year 2 $3 000.
What is the net profit for year 2?
A $1 000 B $4 000 C $5 000 D $7 000
Nov 09 P1 Q12/ May 13 P12 Q12
39 A firm has incomplete accounting records. The following figures are known.
$
owner's drawings 7 000
capital at end of year 30 000
How much profit has the firm made during the year?
A $7 000 B $17 000
C $27 000 D $30 000
May 10 P1 Q12
40 The table shows transactions relating to an inventory item during a period.

number of units per unit
bought 100 cost $16
sold 60 selling price $25
Of the remaining units, 20 are damaged and can only be sold for $10 each.
What is the profit for the period?
A $220 B $300 C $420 D $540
May 10 P1 Q14
41 On 1 January 2009 a business had prepaid rent of $50. During 2009, three rent payments were made of
$250 each. On 31 December 2009, the business still owes $200 rent on account for 2009.
The business owner has charged the rent payments made during 2009 in his income statement. What is
the effect on net profit?
A $200 too high B $200 too low
C $250 too high D $250 too low
Nov 10 P1 Q1
42 X started a business 3 years ago and now has a capital of $175 000.Over that period his profits have been
$73 000 and his drawings $52 000. In year 2 he introduced cash of $35 000 and in year 3 he took out of
the business, for his own use, a non-current asset with a net book value of $4000. How much capital did
he start the business with?
A $67 000 B $115 000 C $123 000 D $158 000
Nov 10 P1 Q16
43 A business paid $10 000 for waste disposal in the year.
The opening prepayment was $1500 and the closing accrual was $2000. What was the charge for waste
disposal for the year?
A $6 500
B $9 500
C $10 500
D $13 500
May 11 P1 Q10/Nov 15 P12 Q3
44 A new business was established with opening capital of $20 000.

At the end of the first year, assets less liabilities were $26 000. The owner withdrew $7 000 as drawings
during the year and this resulted in a bank overdraft of $5 000 at the end of the year.
What was the profit during the first year?
A $8 000 B $12 000
C $13 000 D $18 000
May 11 P1 Q17/May 15 P12 Q19
45 A business sells goods at a mark-up of 33.3%. Information for a year is given.

$000
revenue 600 000
opening inventory 53 000
closing inventory 68 000
What are the total purchases for the year?
A $415 000
B $435 000
C $450 000
D $465 000
May 11 P1 Q30
46 The table shows information for a business at 31 March in Year 1.

$
inventory 16100
trade payables 5200
other payables 2000
The information excludes the purchase of $3700 of goods. These goods were delivered on 31 March Year
1, but the invoice states that legal title to the goods does not pass until payment is received.
Which values should appear in the balance sheet on 31 March Year 1?
inventory ($) trade payables ($) other payables ($)
A 16100 5200 2000
B 16100 5200 5700
C 19800 5200 5700
D 19800 8900 2000
Nov 11 P1 Q5/May 15 P12 Q7

$
cash received from customers 200 000
opening trade receivables 40 000
closing trade receivables 30 000
discounts allowed 5 000
How much are the credit sales?
A $190 000 B $195 000 C $199 000 D $215 000
Nov 11 P1 Q8/Nov 13 P12 Q12
48 The following information is taken from a trader’s statement of financial position.

$
non-current assets 80 000
drawings 16 000
non-current liability 6 000
current assets 12 700
What is the amount of trade payables?
A $8 700 B $11 700 C $14 700 D $26 700
Nov 13 P12 Q1
49 During the month a company lost a quantity of inventory in a burglary. The table shows the company’s
results for the month.
$
opening trading inventory, at cost 30 000
Purchases 210 000
Revenue 330 000
closing trading inventory, at cost 4 000
A gross profit on all sales of 30% has been achieved.

What was the cost of the inventory lost in the burglary?
A $4 000 B $5 000 C $9 000 D $13 000
Nov 13 P12 Q11

$
revenue 140 000
Purchases 120 000
Goods are sold at cost plus 25%.
The owner has taken goods for own use but has not recorded these as drawings.
What is the value of the goods taken for own use?
A $5 500 B $10 500 C $12 500 D $17 500
May 14 P12 Q11
51 At 1 January 2014 a business had prepaid rent of $700. In July it paid an invoice for $9300 and on 31
December it transferred an expense of $9000 to the income statement.
Which value appeared in the statement of financial position at 31 December 2014?
A $400 other payables B $400 other receivables

C $1000 other payables D $1000 other receivables
Nov 15 P12 Q8
52 A business sells goods at a uniform gross profit margin of 30%. The following information is available.
$
revenue 62 000
purchases 45 000
What is the value of closing inventory?
A $10 000 B $11 600
C $16 500 D $18 600
Specimen 16 P1 Q14
53 A company received interest of $8 800 during the financial year. Interest of $700 was due at the beginning
of the year and $850 at the end of the year.
Which entry appeared in the interest received account to make the transfer to the income statement?
A $8 650 credit
B $8 650 debit
C $8 950 credit
D $8 950 debit
May 16 P12 Q9
54 The following information is available for rent and rates.
$
prepaid rent at the start of the year 1 250
accrued rates at the start of the year 1 380
Rent and rates income statement amount 8 750
Prepaid rent at the end of the year 1 104
accrued rates at the end of the year 1 000
What is the amount paid for rent and rates during the year?
A $8 516 B $8 854
C $8 880 D $8 984
May 16 P12 Q11
55 A sole trader provides the following information.

start of year end of year
$ $
total assets 100 000 135 000
total liabilities excluding owner’s capital (35 000) (40 000)
During the year the owner took drawings of $18 000.
What was the profit for the year?
A $12 000 B $30 000 C $35 000 D $48 000
Nov 16 P12 Q10
56 A trader did not keep full accounting records. The following information was available for 2015.
$
trade payables on 1 January 32 785
trade payables on 31 December 43 630
discounts received during the year 3 450
What was the value of purchases?
A $58 535 B $65 435 C $80 225 D $87 125
Nov 16 P12 Q11
57 Finn provides the following information.

$
capital at the start of the year 19 800
drawings (cash) 19 500
drawings (goods for own use) 1 100
private vehicle transferred to business use 6 000
What was Finn’s capital at the end of the year?
A $23 200 B $24 300 C $29 200 D $31 400
May 17 P12 Q9
ANSWER KEY
1 C 16 C 31 D 46 D
2 B 17 C 32 A 47 B
3 B 18 D 33 C 48 C
4 D 19 B 34 D 49 B
5 C 20 B 35 C 50 A
6 D 21 A 36 B 51 D
7 D 22 B 37 C 52 B
8 D 23 B 38 D 53 D
9 C 24 B 39 B 54 D
10 A 25 C 40 C 55 D
11 B 26 B 41 C 56 D
12 C 27 D 42 C 57 C
13 D 28 B 43 D
14 B 29 D 44 C
15 C 30 C 45 D
DETAILED ANSWERS
1 Rent expense = ($500  8 months) + ($600  4 months)
= $4 000 + $2 400
= $6 400
No amount will be shown in the balance sheet as monthly rent is paid on the first day of each month and
payment expires as the month ends.
2 $ $
Sales 80 800
Cost of sales
Add Purchases (balancing figure) 57 760
60 360
Less Closing inventory (3 800) (56 560)
Gross profit (80 800  30%) 24 240
3 Rent payable = ($240  4 months) + ($270  8 months)

= $960 + $2 160
= $3 120
4 $
Capital (net assets) at year end 20 000
Add Drawings 3 000
23 000
Less Opening capital (15 000)
Net Profit for the year 8 000
* Overdraft at end is not considered because it has already been subtracted from year-end assets resulting
in net assets of $20 000 at the year-end.
5 $
Sales (30  10) 300
Cost of sales (30 4) (120)
Gross profit 180
Loss by damage (8 4) (32)
Net profit 148
6 Rent Rent Pre-receipts Pre-receipts Accrued Accrued

=  + + 
income received at end at start at end at start
= $111 000  $1 600 + $4 200 + $2 400  $2 000
= $114 000
7 Electricity Paid + Closing Accrual + Opening Prepayment = Electricity Expense

$15 000 + $2 000 + $1 000 = $18 000
8 Sales = Cost + Profit

X = $240 + ⅓X
X 1/3X = $240
2
/3 X = $240
X = $240 3/2
= $360
Profit = $360 1/3
= $120
Alternatively Margin = 331/3% = 1
/3
To convert margin into mark-up, the value in numerator will be subtracted from denominator,
So it will be
Mark-up = 1
/3 1 = 1
/2
Profit = $240  /2
1
= $120
9 $
Cost of goods in warehouse 300 000
Cost of goods sent on “sale or return”. ($200 000 × 100/125) 160 000
Value of closing inventory 460 000
10 Rent account
$ $
Arrears b/f 4 500 Cash 17 100
Income statement(bal. figure) 9 400
Pre-received c/d 3 200 _____
17 100 17 100
11 $
Add Purchases ($20 000+$10 000$8 000) 22 000
Less Closing inventory ( 9 000)
Cost of sale 19 000
12 Cash account
$ $
Balance b/f 750 Expenses 5 000
Trade receivables 96 000 Bank 96 000
Sales * 59 500 Loss by theft(balancing figure) 55 250
156 250 156 250
* Trade receivables’ account
$ $
Decrease in trade receivables 5 500 Cash 96 000
Credit sales (balancing figure) 90 500 _____
96 000 96 000
Cash sales = $150 000 – $90 500 = $59 500
13 As last quarterly rental payment was made on 1 October, and year ends on 31 October, so it means that
rent of two months (November and December) has been paid in advance which is $1 000*
*Per month rent  2 months = $6 000 × 2/12
= $1 000
14 Rent paid in year 2 covers rent expense from September of year 2 to August of year 3; whereas rent paid
in year 3 represents rent expense from September of year 3 to August of year 4.
So rent expense of year 3 = 8 months of 4 months of
rent payment + rent payment
in year 2 in year 3
= ($2 760 × 8/12) + ($3 840 × 4/12)

= $1 840 + $1 280
= $3 120
15 $
Opening inventory (on 31 December 2001 650 000
Add Purchases 75 000
Less Cost of sales (96 000  75%) (72 000)
Inventory on 5 January 2002 653 000
16 Rent account
$ $
Owing b/f 1 400 Pre-received b/f 1 300
Income statement (balancing figure) 14 310 Cash 13 700
Pre-received c/d 1 600 Rent written off 560
_____ Owing c/d 1 750
17 310 17 310
17 Non-current assets account (at book value)

$ $
Book value b/f 28 000 Depreciation 4 000
Cash (additions) (*) 10 000 Disposals (at book value) 9 000
_____ Book value c/d 25 000
38 000 38 000
18 Cash account
$ $
Balance b/f 150 Cash banked 10 200
Cash sales 10 500 Income statement a/c (loss) 350
______ Balance c/d 100
10 650 10 650
19 $
Total purchases for the year 95 000
Return outwards (2 000)
Inventory withdrawn by X for personal use (5 000)
Net purchases for the year 88 000
Increase in inventories * (1 000)
Cost of sale 87 000
* Increase in inventories means that closing inventory is more than opening inventory by $1 000,
and as closing inventory is subtracted to calculate cost of sale so $1 000 is subtracted from
purchases to calculate cost of sales.
20 Rent Account
$ $
Prepaidb/f 760 Income statement(bal. figure) 10 070
Cash 10 600 Balance c/d (prepaid) 1 290
11 360 11 360
22 $
Assets at year start ($2 500 + $4 000+ $1 000) 7 500
Liabilities at year start (500)
Capital at year start 7 000
23 Rent account (Year 2
$ $
Balance b/f 36 200 Income statement (*) 154 100
Bank 157 200 Balance c/d ($157 200 ÷ 4) 39 300
193 400 193 400
24 Rental income for the year = $6 000 × 7/12 (April to October)

= $ 3 500
As rental income received on 1 October ($6 000 ×1/4) covers a period of 3 months, of which 2 months
(November and December) relate to next financial year so $1 000 will be recorded as a current liability.
25 Stationery account
$ $
Balance b/f (opening inventory) 600 Income statement(Balancing figure) 7 280
Cash 7 000 Balance c/d (closing inventory) 800
Balance c/d (accruals) 480 _____
8 080 8 080
26 Rent account
$ $
Balance b/f 4 000 Income statement(bal. figure) 38 000
Cash 41 000 Balance c/d 7 000
45 000 45 000
27 As we know
Sales – Cost of sales = Gross profit
$200 000 – x = 0.25 x
1.25 x = $200 000
x (Cost of sales) = $160 000
Where
Opening inventory + Purchases – Closing inventory = Cost of sales
$15 000 + Purchases – $18 000 = $160 000
Purchases = $163 000

$ $
Cash paid to suppliers 197 320 Balance b/f 43 600
Balance c/d 35 390 Purchases (balancing figure) 189 110
232 710 232 710
29 $
Increase in net assets 30 000
Add Drawings 16 000
Less Additional investment by the owner (8 000)

Net profit for the year 38 000
30 Trade receivables’ account

$ $
Balance b/f 280 000 Cash 520 000
Sales (balancing figure) 550 000 Discounts allowed 30 000
Bad debts 15 000
______ Balance c/d 265 000
830 000 830 000

$ $
Bank 212 760 Balance b/f 51 660
Discounts received 1 000 Purchases (Balancing figure) 218 440
Balance c/d 56 340 ______
270 100 270 100
32 Capital at year end + Drawings – Opening capital – Additional capital = Net profit (Loss)
$55 000 + $13 000 – $52 000 – $25 000 = ($9 000)
So net loss is $9 000.
33 Income Statement (Trading Section)

$ $
Sales 21 000
Cost of sales
Purchases 18 000
33 000
Less inventory lost by theft (balancing figure) (19 000) 14 000
Gross profit (*) 7 000
* Gross profit = Sales ×1/2 + 1

= $21 000 × 1/3
= $7 000
34 Calculation of cash receipts in April $

Cash receipts from sale of April ($220 000 × 20%) 44 000
Cash receipts from sale of March ($270 000 × 50%) 135 000
Cash receipts from sale of February ($240 000 × 30%) 72 000
251 000
35 Income statement will include insurance paid for 12 months to December 2006; so it should be $2
365 ($1 120+ $1 245).
36 Sales  Cost of Sales  overheads = Net profit

x  ($800 000  $200 000)  $400 000 = 0.20x
0.80x = $1 000 000
x (cost of sales) = $1 250 000
GrossProfit
37 Gross profit ratio = × 100
Salesrevenue
$80000
Option A = × 100 = 16.00%
$500000
$90 000
Option B = × 100 = 18.00%
$500 000
$90 909
Option C = × 100 = 18.18%
$500 000
$110 000
Option D = × 100 = 22.00%
$500 000
Now we will use “trial and error” method to find out the answer
Sales  Cost of sales = Gross profit

Option A $500 000  [$450 000  ($50 000 × 84.00%)] ≠ ($500 000 × 16.00%)
Option B $500 000  [$450 000  ($50 000 × 82.00%)] ≠ ($500 000 × 18.00%)
Option C $500 000  [$450 000  ($500 000 × 81.82%)] = ($500 000 × 18.18%) verified
Option D $500 000  [$450 000  ($500 000 × 78.00%)] ≠ ($500 000 × 22.00%)
38 Net Profit = Net assets at year end + Drawings  Net assets at year start
= $14 000 + $3 000  $10 000
= $7 000
39 Net Profit = Closing Capital + Drawings  Opening Capital

= $30 000 + $7 000  $20 000
= $17 000

$ $
Sales (60 units @ $25) 1 500
Cost of sales
Purchases (100 units @ $16) 1 600
Closing inventory [(20 units @ $16 + (20 units @ $10] (520) (1 080)
Gross profit ($240 000 × 25/125 420
41 Rent Account
$ $
Balance b/f 50 Income Statement (balancing figure) 1 000
Cash ($250 × 3) 750
Balance c/d 200 ____
1 000 1 000
As rental expense is understated by $250 ($1 000 – $750 so profit would have been overstated by $250.
42 Opening Capital + Additional capital + Net Profit  Drawings = Closing Capital

Opening Capital + $35 000 + $73 000  ($52 000 + $4 000 = $175 000
Opening Capital = $175 000  $35 000 + ($52 000 + $4 000  $73 000
Opening Capital = $123 000
43 Waste Disposals Account

$ $
Balance b/f 1 500 Income Statement charge(bal. figure) 13 500
Cash 10 000
Balance c/d 2 000 ____
13 500 13 500
44 Net Profit = Closing Capital + Drawings  Opening Capital
= $26 000 + $7 000  $20 000
= $13 000
45 Sales – Cost of sales = Gross profit

1
$600 000 – X = /3x
4
/3x = $600 000
x (Cost of sales) = $450 000
Opening inventory + Purchases – Closing inventory = Cost of sales
$53 000 + Purchases – $68 000 = $4500 000
Purchases = $465 000
46 inventory ($) trade payables ($) other payables ($)
Balances before adjustment 16100 5200 2000
Adjustment for goods purchases 3 700 3 700 -
Balances after adjustment 19 800 8 900 2 000
47 Trade Receivables Account

$ $
Balance b/f 40 000 Cash received from customers 200 000
Credit Sales (balancing figure) 195 000 Discounts allowed 5 000
______ Balance c/d 30 000
235 000 235 000
48 $ $
Total Assets ($80 000 + $12 700) 92 700
Equity ($75 000 + $13 000  $16 000) 72 000
Non-Current Liabilities 6 000 (78 000)
Trade payables 14 700

$ $ $
Revenue 330 000
Cost of sales
Purchases 210 000
Less inventory lost by theft (balancing figure) (5 000) 205 000
235 000
Closing Inventory (4 000) (231 000)
Gross profit ($330 000 ×30%) 99 000

$ $ $
Revenue 140 000
Cost of sales
Purchases 120 000
Less Drawings of goods (balancing figure) (5 500) 114 500
Closing Inventory (24500) (112 000)
Gross profit ($140 000 ×25%/125%) 28 000
51 Rent account
$ $
Balance (receivable) b/f 700 Income statement(transfer) 9 000
Cash (invoice payment) 9 300 Balance (receivable) c/d (bal. figure) 1 000
17 100 17 100
52 Sales – Cost of sales = Gross profit

$62 000 – (10 000 + 45 000  Closing inventory) = ($62 000 30%)
$62 000 – (10 000 + 45 000  Closing inventory) = $18 600
Closing inventory = $11 600
53 Interest received account

$ $
Owing b/f 700 Cash 8 800
Income statement (balancing figure) 8 950 Owing c/d 850
9 650 9 650
54 Rent and rates Account

$ $
Balance (prepaid) b/f 1 250 Balance (accrued) b/f 1 380
Cash (balancing figure) 8 984 Income Statement 8 750
Balance (accrued) c/d 1 000 Balance (prepaid) c/d 1 104
11 234 11 234
55 Profit for the year = Closing Capital + Drawings  Opening Capital

= ($135 000  $40 000) + $18 000  ($100 000  $35 000)
= $95 000 + $18 000  $65 000
= $48 000

$ $
Cash paid to suppliers 72 830 Balance b/f 32 785
Discounts received 3 450 Purchases (balancing figure) 87 125
Balance c/d 43 630 ______
119 910 119 910
57 capital at start + Additional capital + Net profit – Drawings = Capital at end

$19 800 + $6 000 + $24 000 – ($19 500 + $1 100) = $29 200
Chapter 11 -113- Financial statements of Partnerships
CHAPTER 11 FINANCIAL STATEMENTS OF PARTNERSHIP

1 The following appropriation account for a partnership contains one error.
$ $
Profit as per Profit and Loss section of income statement 18 861
Interest on capital: Able 1 000
Baker 500 1 500
17 361
Salary: Able 900
Balance of profit: 18 261
Share of balance of profit: Able 12 174
Baker 6 087 18 261
Nil
What should be Abel’s share of the balance of profit, when the error is corrected?
A $10 974 B $11 574 C $12 974 D $14 074
Nov 98 P1 Q15
2 Information from a partnership’s accounts is shown
$
Net profit before interest 15 000
Interest on a partner’s loan to the firm 1 000
Interest on capital accounts 2 000
Drawings 10 000
Which profit figure is to be appropriated between the partners?
A $3 000 B $13 000 C $14 000 D $15 000
May 99 P1 Q13
3 Interest charged on a partner’s drawings account should be
A debited to the profit and loss section of income statement
B credited to the profit and loss section of income statement
C debited to the appropriation account
D credited to the appropriation account
May 00 P1 Q9/ Nov 04 P1 Q12/May15 P12 Q12
4 Which is not an appropriation of profit?
A partner’s interest on capital B partner’s interest on drawings
C partner’s interest on loan D partner’s share of profit
May 01 P1 Q11
5 A partnership maintains both capital and current accounts for its partners.
Which is the correct accounting entry for recording interest on capital for partner X?
Debit Credit
A Appropriation A/c X’s Capital account
B Appropriation A/c X’s Current account
C X’s Capital account Appropriation A/c
D X’s Current account Appropriation A/c
Nov 02 P1 Q12/ May 06 P1 Q15/ May 17 P12 Q14
6 X, Y and Z are in partnership, sharing profits in the ratio 2:2:1. X is allowed an annual salary of $10000. Y
has made a loan to the partnership on which the partnership pays interest of $5 000 each year. Profit for
the year before appropriations is $150 000.
What is Z’s total appropriation of profit for the year?
A $27 000 B $28 000 C $29 000 D $30 000
Nov 04 P1 Q10
7 In the absence of a partnership agreement the partners claim that they are:
1 entitled to interest on the capitals at the rate of 5% per annum
2 entitled to interest on loans to the firm at 5% per annum
3 entitled to interest on loans to the firm at 10% per annum
4 not entitled to interest on capitals
5 not entitled to interest on loans to the firm
Which claims are correct?
Nov 04 P1 Q11
8 What appears as a credit in the Appropriation Account of a partnership?

A Goodwill B interest on capital
C net trading profit D partnership salaries
Nov 05 P1 Q13/May 08 P1 Q16
9 Dele and Iyabo are partners in a business and share profits in the ratio of 3:1.
Their net profit is $80 000.
The following information is available:
Dele ($) Iyabo ($)
interest on capitals 3 000 2 500
interest on drawings 500 1 000
How will the residual net profit be shared?
Dele ($000 Iyabo ($000
A 57 000 19 000
B 58 875 21 125
C 59 500 20 500
D 60 500 19 500 May 06 P1 Q18
10 Hilary and Lee commenced in partnership on 1 January 2005. There was no partnership agreement
concerning the division of interest on the loan or of profits.
Hilary ($) Lee ($)
capital contribution 5 000 600
loan to partnership - 1 000
At the year-end, 31 December 2005, net profit before the loan interest was $8 850.
What would be Hilary’s share of the profit?
A $4 400 B $4 425 C $4 800 D $4 827
Nov 06 P1 Q17
11 The following information is available for the partnership of Atul and Mansoor at 31 December:
$
net profit before appropriations 60 000
salary of Atul 9 000
drawings: Atul 12 000
Mansoor 13 000
interest on capital: Atul 400
Mansoor 500
Residual profits are shared between Atul and Mansoor in the ratio 2: 1.
What is Mansoor’s share of total profit for the year?
A $16 200 B $17 000
C $17 100 D $17 200
May 07 P1 Q14
12 Partnership capitals are $60 000 for X and $90 000 for Y. The partnership agreement provides for interest
on capitals at 10 % per annum, but makes no other financial provisions.
Profits for the current year total $75 000.
How will the total profits be divided between the partners?
X ($) Y ($)
A 30 000 45 000
B 36 000 39 000
C 37 500 37 500
D 39 000 36 000 Nov 07 P1 Q11
13 Information about the final accounts of a partnership is given.
$
net profit before interest 160 000
interest on bank loan 14 000
interest credited to capital accounts 15 000
drawings 70 000
partnership salaries 24 000
What is the remaining balance of profits to be appropriated amongst the partners?
A $66 000 B $107 000 C $121 000 D $137 000
Nov 08 P1 Q18
14 X and Y are partners in a business.
X receives an annual salary of $5000 from the partnership and the balance of profits and losses is shared
between X and Y in the ratio of 3: 2 respectively.
In the last financial year, the net profit was $30 000.
How much was credited to each partner for the year?
X ($) Y ($)
A 10 000 15 000
B 12 000 18 000
C 20 000 10 000
D 21 000 14 000 May 09 P1 Q15
15 X and Yare in partnership. Their profit and loss appropriation account shows the following.
X ($) Y ($) Total ($)
interest on capital 1 600 1 800 3 400
interest charged on drawings 500 400 900
partners’ salaries 2 000 3 000 5 000
share of profit 8 000 12 000 20 000
What is the net profit before appropriations?
A $17 500 B $22 500 C $27 500 D $29 300
Nov 09 P1 Q12
16 X, Y and Z are in partnership sharing profits and losses in the ratio 5: 2: 3. Y is entitled to a salary of
$18000 per annum. Partners receive interest at 6 % per annum on their capital account balances at the
start of the year.
At the beginning of the year, capital account balances were:
X $30 000
Y $22 000
Z $20 000
The net profit before salary and interest for the year is $140 000.
What is Y's share of the total profits?
A $23 536 B $28 000 C $42 856 D $46 000
May 10 P1 Q15
17 Land M are in partnership.

Which item should appear in the partnership appropriation account?
A additional capital contributed by M

B cash drawings of Land M during the year
C salary due to L
D salary paid to M's wife
May 10 P1 Q16
18 X and Y are in partnership, sharing residual profits and losses equally after the payments below are made.
1 2 % interest is charged on partners’ drawings
2 salary to Y of $10 000
The partners’ drawings for the year were: X $12 000
Y $8000
The net profit for the current year is $52 000.
How much will each partner receive in share of residual profits?
A $10 800 B $11 200

C $20 800 D $21 200
Nov 10 P1 Q13
19 X, Y and Z are in partnership sharing profits and losses equally. The data shown is extracted from their
books.
$
Net assets at end of year 600 000
Capital account balances at start of year 320 000
Current account balances at start of year (credit) 100 000
Partnership salary – Y 30 000
Total drawings during year 60 000
What was X’s share of net profit for the year?
A $40 000 B $60 000
C $70 000 D $80 000
Nov 10 P3 Q4
20 A partnership provides the following financial information for the year ended 30 June 2011.
$000
profit from operations 240
bank interest payable 21
interest credited to current accounts 15
Drawings 100
partnership salaries 95
What is the residual balance of profits to be appropriated between the partners?
A $9 000 B $104 000 C $109 000 D $204 000

May 11 P1 Q16
21 If partners do not draw up a partnership agreement, the provisions of the Partnership Act apply.
Which statement is true as a provision of the Partnership Act?
A Interest on drawings is charged at 5 % a year.
B Interest on loans from partners is to be at 8 % a year.
C Partners are not entitled to salaries.
D Profits are to be shared in the ratio of fixed capitals.
Nov 11 P1 Q12
22 X and Y have been business partners for several years, sharing profits in the ratio of 2:1. Y now
wishes to retire and leave X to continue with a new business partner. Y's capital account amounts
to $15 800 and his current account shows a debit balance of $3500.
Goodwill is valued at $6600. The book values of certain tangible assets are to be valued upwards
by $3000.
What is the amount due to Y on his retirement from the business?
A $13 500 B $15 500 C $20 500 D $22 500
Nov 11 P1 Q13
23 The table shows information about four partners in a partnership.
Which partner has the greatest net reward from interest on capital and interest on drawings?
fixed capital ($) annual drawings ($)
A 20 000 30 000
B 20 000 50 000
C 60 000 30 000
D 60 000 50 000
May 12 P12 Q10
24 Which items would appear in a partnership’s appropriation account?
1 partners’ interest on capital 2 partners’ introduction of new capital
3 salaries of employees 4 salaries of partners
Nov 12 P12 Q14
25 Which items would appear in a partnership’s appropriation account, in the absence of a partnership
agreement?
1 profit for the year 2 partners’ interest on drawings
3 partners’ salaries 4 partners’ share of profits
May 14 P12 Q15
26 A partnership makes a profit for the year of $108000 before taking account of appropriations.
Other financial information is as follows
X Y Z
salary – – $10 000
capital balance $50 000 $40 000 $10 000
profit sharing ratio 5 3 2
Interest on capital is allowed at 8% per annum.
What is Z’s share of the profit for the year?
A $18 000 B $18 800 C $28 000 D $28 800
May 14 P12 Q16
27 The following information is available for a partnership at 31 December 2013.
$
residual loss 3 000
total salaries to partners 5 000
total interest on capital 27 000
total drawings 14 000
total interest on drawings 700
How much is the profit for the year?

A $14 300 B $20 300 C $28 300 D $34 300
Nov 14 P12 Q13
28 In which account should a partner’s drawings appear in the partnership’s end-of-year financial
statements?
A appropriation account B income statement
C partner’s capital account D partner’s current account
Specimen 16 P1 Q11
29 X and Y are in partnership. Their income statement and appropriation account shows the following.
$
depreciation of non-current assets 5 000
interest on loan from Y 600
interest on capital 2 400
interest charged on drawings 900
partners’ salaries 5 000
remaining profit 12 000
What is the profit for the year before any appropriations?

A $18 500 B $19 100
C $20 300 D $25 900
Specimen 16 P1 Q12
30 The following information relates to a partnership.

$
profit from operation 90 000
loan interest 3 200
interest on drawings 6 000
drawings 40 000
What is the residual profit to be appropriated amongst the partners?
A $41 800 B $69 800 C $81 800 D $91 800

Nov 16 P12 Q14
ANSWER KEY
1 A 9 A 17 C 25 B
2 C 10 A 18 D 26 D
3 D 11 D 19 C 27 C
4 C 12 B 20 C 28 D
5 B 13 B 21 C 29 A
6 B 14 C 22 B 30 C
7 B 15 C 23 C
8 C 16 C 24 B
DETAILED ANSWERS
1 Salary of Able has been added to profit instead of being deducted. So if this mistake is corrected then the
$12 174
balance of profit will be $16 461 so Abel’s share will be $10 974 calculated as × $16 461.
$18 261
2 As profit can be appropriated between the partners only after paying all income statement expenses so it
will be $14 000($15 000 – $1 000).
4 “Interest on loan is correct option” as it is recorded in income statement.
6 $ $
Profit before appropriation 150 000
Less X’s salary (10 000)
140 000
Profit share: X ($140 000 2/5) 56 000
Y ($140 000 2/5) 56 000
Z ($140 000 1/5) 28 000 140 000
So “B” option is correct
9 $ $
Net profit 80 000
Add Interest on drawings ($500 + $1 000) 1 500
Less Interest on capitals ($3 000 + $2 500) (5 500)
76 000
Profit share: Dele ($76 000 × 3/4) 57 000
: Iyabo ($76 000 × 1/4) 19 000 76 000
10 $ $
Net profit before loan interest 8 850
Loan interest ($1 000 × 5%) (50)
8 800
Profit share : Hilary ($ 8 800 × 1/2) 4 400
Lee ($ 8 800 × 1/2) 4 400 8 800
* In the absence of a partnership agreement profits and losses are shared equally between the partners
and interest on partner’s loans is paid at the rate of 5%.
11 $ $
Net profit before appropriations 60 000
Less Salary : Atul (9 000
Interest on capital ($400 + $500) (900 (9 900)
50 100
Profit share : Atul (2/3) 33 400

: Mansoor (1/3) 16 700 50 100
Mansoor share in total profit $16 700 + $500 = $17 200
12 $ $
Profits for the current year 75 000
Less Interest on capitals : X ($60 000 × 10%) 6 000
: Y ($90 000 × 10%) 9 000 (15 000)
60 000
Profit share : X ($60 000 × ½) 30 000
: Y ($60 000 × ½) 30 000 60 000
So total profit share = X ($30 000 + $6 000) = $36 000

Y ($30 000 + $9 000) = $39 000
13 $
Net profit before interest 160 000
Interest on bank loan (14 000)
Interest credited to capital accounts (15 000)
Partnership salaries (24 000)
107 000
14 $ $
Profits for the current year 30 000
Less X’s salary (5 000)
25 000
Profit share : X ($25 000 × 3/5) 15 000
: Y ($25 000 ×2/5) 10 000 25 000
So total amount to be credited to partners’ accounts

X ($5 000 + $15 000) = $20 000
Y = $10 000
15 $ $
Net Profit (balancing figure) 27 500
Add Interest on drawings 900
28 400
Less Interest on capitals 3 400
Partners’ salaries 5 000 (8 400)
Profit share : X 8 000
:Y 12 000 20 000
16 $ $
Profit before salaries and interest 140 000
Less Y’s salary 18 000
Interest on capital X ($30 000  6%) 1 800
Y ($22 000  6%) 1 320
Z ($20 000  6%) 1 200 (22 320)
117 680
Profit share X ($117 680 5/10) 58 840
Y ($117 680 2/10) 23 536
Z ($117 680 3/10) 35 304 117 680
So Y will receive $42 856 ($18 000 on account of salary, $1 320 0n account of interest and $25 536 on
account of profit share).
18 $ $
Net profit 52 000
Add Interest on Drawings X ($12 000 × 2%) 240
Y ($8 000 × 2%) 160 400
Less Y’s salary (10 000)
42 400
Profit share X ($42 400 × 1/2) 21 200
Y ($42 400 × 1/2) 21 200
$42 400
19 $ $
Capitals at start 320 000
Current accounts at start 100 000
Salary Y 30 000
Drawings (60 000)
70 000
Profit share (balancing figure) 210 000 280 000
Net assets at year end 600 000
X’s s share in net profit will be $70 000 ($210 000 × 1/3).
20 $000 $000
Net profit after interest ($240 000  $21 000) 219
Less Partnership salaries 95
Interest on capitalcredited to current accounts 15 (110)
Residual balance of profits to be appropriated between the partners 109
22 Y’s Account
$ $
Current Account 3 500 Balance b/f 15 800
Total amount due (balancing figure) 15 500 Goodwill ($6 600 ×1/3) 2 200
_____ Revaluation Profit ($3 000 ×1/3) 1 000
19 000 19 000
23 ‘C’partner has the greatest net reward from interest on capital and interest on drawings as his net capital
(fixed capital – drawings) is more than the other partners.
26 The correct answer was D, which combined a salary of $10 000 plus interest on capital of $800 ($10 000 ×
8%) and a 20% share of the residual profit of $90 000 [$108 000  $10 000  {($50 000 + $40 000 + $10
000)) × 8%}], amounting to $18 000.
27 $ $
Net profit for the year (Balancing figure) 28 300
Add Interest on Drawings 700
29 000
Less Salaries to partners 5 000
Interest on capital 27 000 (32000)
Residual Loss (3 000)
29 $ $
Profit before anyappropriation ($12 000 + $7 400  $900) 18 500
Add Interest charged on drawings 900
Less Interest on capital 2 400
Partners’ salaries 5 000 (7 400)
Remaining profit available for distribution 12 000
30 $
Profit from operations 90 000
Loan interest (3 200)
Interest on drawings 6 000
Interest on capital (11 000)
Residual profit to be appropriated 81 800
Chapter 12 -123- Partnership Changes & Dissolution
CHAPTER 12 PARTNERSHIP CHANGES & DISSOLUTION

1 Two partners X and Y, each with a Capital Account of $10 000 and sharing profits and losses equally, agree
to admit Z to the partnership, with profits and losses continuing to be shared equally. Goodwill is valued at
$15 000 but is not to be retained in the books.
What will be the balance on X’s Capital account after admission of Z?
A $10 000 B $12 500 C $15 000 D $17 500

Nov 99 P1 Q12
2 X, Y and Z are in business sharing profits in the ratio 3:2:1. At the end of the year, the balance on Y’s
Capital Account is $39 400.
Y retires at the end of the year and, to determine his settlement, the assets are revalued upwards by $57
000. The partnership does not account for goodwill.
If Y takes a car valued at $4 800 as part of his settlement, what is the balance remaining on his capital
account to be settled in cash?
A $39 400 B $44 400 C $53 600 D $59 000

Nov 99 P1 Q18
3 A and B are partners in a business and share profits and losses equally. They decide to admit Z as a partner
when the goodwill was standing at $6 000. The new profit-sharing ratio between A, B and Z is to be 3:2:1.
Goodwill is now valued at $24 000 and is not to be retained in the firms books. What will be the goodwill
adjustments in the partners’ capital accounts?
Debits Credits
A ($) B ($) Z ($) A ($) B ($) Z ($)
A 9 000 6 000 3 000 9 000 9 000 Nil
B 9 000 9 000 Nil 9 000 6 000 3 000
C 12 000 8 000 4 000 9 000 9 000 Nil
D 12 000 12 000 Nil 12 000 8 000 4 000
May 00 P1 Q17
4 X and Y are partners sharing profits equally. On the admission of Z as a partner, goodwill is agreed
at $18 000 and they agree to share profits equally.
What is the effect of this change on the capital account balance of X?
A decrease $3 000 B decrease $6 000
C increase $3 000 D increase $6 000
Nov 00 P1 Q14
5 The table shows a Balance Sheet for a partnership.

$ $
Goodwill 5 000 Capital account:
Net assets 12 000 Partner X 10 000
Partner Y 7 000
17 000 17 000
X and Y share profits in the ratio 3:2. They now wish to change the profit share ratio to 2:1.
Goodwill is revalued to $10 000 and remains in the Balance Sheet at this value.
What is the new capital account balance of partner X?
A $9 000 B $10 000 C $13 000 D $13 333

Nov 01 P1 Q11
6 A partnership does not maintain a goodwill account. No adjustments were made for Goodwill in the
partners’ Capital accounts. What is the effect of this omission?
Continuing partners’ Capital New partner’s Capital
accounts total balances account balance
A overstated understated
B understated overstated
C understated understated
D overstated overstated
Nov 02 P1 Q13
7 A and B are in partnership, sharing profits and losses equally. A’s capital account is $6 000 and B’s capital
account is $5 000. Goodwill is valued at $12 000, but is not shown in the accounts. They agree to admit Z
as a new partner and to share profits and losses equally.
What is A’s new capital account balance?
A $4 000 B $8 000 C $10 000 D $12 000
Nov 04 P1 Q15
8 X and Y are in partnership, sharing profits equally. They agree to admit Z as an equal partner. Z is to
introduce capital of $100 000. The partnership goodwill is $60 000 and all adjustments are to be made in
the capital accounts.
Which shows the correct situation after the admission of Z?
Capital Accounts
X ($) Y ($) Z ($)
A credit 10 000 credit 10 000 credit 80 000
B credit 10 000 credit 10 000 debit 20 000
C credit 30 000 credit 30 000 debit 60 000
D debit 30 000 debit 30 000 credit 160 000
Nov 07 P3 Q3/ May 11 P3 Q5
9 When partners change, what is the main reason for taking goodwill into account?
A to benefit the existing partners
B to ensure fairness between the existing and incoming partners
C to record the value of goodwill
D to safeguard the rights of incoming partners
May 09 P3 Q1
10 X and Y are in partnership sharing profits equally. They each have capital accounts with credit balances of
$40 000. They admit Z into the partnership and profits are still shared equally and goodwill is valued at
$48 000. No goodwill account is to appear in the books. Z introduces $30 000 cash.
At the same date X takes a business car valued at $10 000, for personal use.
What are the balances on the capital accounts after the above transactions have taken place?
X $000 Y $000 Z $000
A 24 24 (16)
B 38 48 14
C 48 48 14
D 64 64 30 May 09 P3 Q2
11 X, Y and Z are in partnership sharing profits 40%; 40%; and 20%.
Y wishes to retire.
Capital account balances are X $120 000, Y $130 000 and Z $150 000.
Goodwill is recorded in the books as $50 000 but the partners agree it is worth $90 000.
How much will Y be entitled to withdraw?
A $136 000 B $146 000 C $150 000 D $168 000
Nov 09 P1 Q18
12 A partnership has been dissolved and $15 000 is left in the bank.
How should this be distributed between the partners?
A according to the last agreed balances on their capital accounts
B according to the last agreed profit sharing ratio
C according to the last agreed total balances on their capital and current accounts
D equally
May 10 P3 Q3
13 X and Yare equal partners. They agree to admit Z as an equal partner.

Z agrees to pay $33 000 for his share of the goodwill.
Goodwill is not to appear in the accounts.
The partnership offices are to be revalued at $60 000 more than their present book value.
What changes are needed in the partners' capital accounts to record these events?
X ($) Y ($) Z ($)
A + 16500 + 16500 -33 000
B +30 000 +30 000 +33 000
C +33 000 +33 000 +33 000
D +46500 +46500 nil
May 10 P3 Q4
14 Why is goodwill adjusted in the accounts when a new partner is admitted?

A a more accurate value of non-current assets is shown in the balance sheet
B original partners can be credited for their efforts in building up the partnership business
C partners can take higher drawings as a result of their share of the goodwill
D the new partner knows how much they have to introduce as capital
Nov 10 P3 Q2
15 X, Y & Z are in partnership sharing the profits and losses equally. The balances on their capital
accounts are $40 000, $35 000 and $32 000 respectively.
Z retires and as part of his settlement takes a car at an agreed value of $4 000. The car has a book
value of $4 600. Goodwill is valued at $15 000.
How much cash will Z receive when he leaves the partnership?
A $32 400 B $32 800

C $33 000 D $37 000
May 12 P32 Q1
16 When goodwill is not adjusted in the books which of the following statements are correct?
1 A new partner does not have to introduce an amount as capital.
2 Non-current assets are undervalued.
3 Partners do not receive credit for their efforts in building up the business.
4 Retiring partners will receive a lower amount of money when leaving the business.
A 1 and 2 B 1 and 4
C 2 and 3 D 3 and 4
May 12 P32 Q2
17 X becomes a partner in a business receiving a 25% share in the profits. He pays in $60 000 as his capital.
The goodwill of the business is valued at $40 000.
What is the balance on X’s capital account, if goodwill is not included in the books?
A $20 000 B $50 000 C $60 000 D $70 000
Nov 13 P12 Q17
18 Goodwill is adjusted in partners’ accounts when there is a change in the profit sharing ratio.
How is this recorded?
debit credit
A capital accounts in new profit sharing ratio capital accounts in old profit sharing ratio
B capital accounts in old profit sharing ratio capital accounts in new profit sharing ratio
C current accounts in new profit sharing ratio current accounts in old profit sharing ratio
D current accounts in old profit sharing ratio current accounts in new profit sharing ratio
Nov 14 P12 Q9
19 Kay and Lay share profits and losses in the ratio of 3 : 1. Capital account balances are Kay $100 000 and
Lay $84 000. There was no goodwill account in the books.
The partners change the profit sharing ratio to 4 : 1. Goodwill is valued at $54 000 and is not to be
retained in the books of account.
What is the balance on Lay’s capital account after the adjustment for goodwill?
A $70 500 B $81 300 C $86 700 D $97 500
May 15 P12 Q13
20 X and Y are in partnership with combined capital and current account balances of $125 000.
Z is admitted as a partner, introducing capital of $40 000. At that time, the assets of the partnership are
revalued upwards by $50 000 and goodwill was valued at $18 000. Goodwill was not to remain in the
books of account.
What was the total capital employed of the partnership immediately after the admission of Z?
A $183 000 B $197 000 C $215 000 D $233 000
Specimen 16 P1 Q13
21 X, Y and Z are in partnership and they have the following assets and liabilities.
$
property 400 000
fixtures and fittings 350 000
The partnership was dissolved on the following terms.
X took the property and half the fixtures and fittings at a valuation of $560 000.
The remaining fixtures and fittings and the entire inventory were sold for $140 000.
The trade receivables paid in full with the exception of one debt of $4700.
The total cost of dissolution was $2500.
What was the loss on dissolution of the partnership?
A $57 700 B $60 200 C $77 500 D $82 200
Specimen 16 P1 Q15
22 X and Y were in partnership sharing profit and losses equally. They then admitted Z into the partnership
and profits and losses were still shared equally.
1 Z introduced capital of $50 000.
2 Goodwill was valued at $30 000. No goodwill account is kept in the books of account.
3 X took a computer from the business at a value of $3 000.
After these transactions had taken place, the balance on X’s capital account was $60 000.
What was the opening balance on X’s capital account?
A $55 000 B $58 000 C $65 000 D $75 000
May 16 P12 Q13
23 A and B were in partnership sharing profits and losses equally when they decided to retire.
Details of the realisation are shown in the table.
book value realized value

$000 $000
non – current assets 50 65
current assets excluding cash and bank 25 23
cash and bank balances 4 -
costs of realization 1 -
How much profit each partner entitled to on realization?
A $8 000 B $10 000

C $12 000 D $75 000
May 16 P12 Q14
24 A partnership admits a new partner.

Which statement is correct?
A Profits will always be shared equally following the new partner’s admission.
B The new partner will always benefit if assets are later revalued upwards.
C The new partner must always contribute capital to the partnership.
D The new partner will always pay for a share of partnership goodwill.
Nov 16 P12 Q12
25 X, Y and Z are in partnership sharing the profits and losses in the ratio of 2 : 2 : 1.
At 31 December the following information is available.
X Y Z
$ $ $
capital account balances 100 000 100 000 50 000
current account balances 20 000 15 000 (5 000)
On 31 December Z retires from the partnership. Total assets are revalued upwards by $45 000.
There is no goodwill.
How much will Z be paid on his retirement?
A $54 000 B $59 000 C $60 000 D $65 000
Nov 16 P12 Q13
26 A partnership earned an average profit during the year of $15 000 per month.
Halfway through the year D and E were joined by a new partner F and profits were shared equally before
and after the change. In the first half of the year D transferred his private vehicle to the partnership at a
valuation of $12 000. D’s drawings amounted to $60 000 during the year.
What was the increase in D’s current account balance during the year?
A $15 000 B $30 000 C $75 000 D $87 000

Nov 16 P12 Q15
27 Which item is not taken into account when a partner joins a partnership?
A balances on the partners’ current accounts B capital introduced by the new partner
C changes in the profit sharing ratio D goodwill
May 17 P12 Q12
28 Ali, Bharti and Chan were in partnership sharing profit and losses in the ratio 3:2:1. Bharti retired from the
partnership on 30 June 2016.
The following were the balances available at 30 June 2016.
Ali ($) Bharti ($) Chan ($)
capital accounts 60 000 Cr 40 000 Cr 20 000 Cr
current accounts 18 650 Cr 6 100 Dr 8 950 Cr
On her retirement, Bharti retained a partnership motor vehicle at an agreed valuation of $4 000.
Goodwill was valued at $39 000.
How much was payable to Bharti on her retirement?
A $33 900 B $42 900 C $46 900 D $50 900

May 17 P12 Q13
ANSWER KEY
1 B 8 A 15 B 22 B
2 C 9 B 16 D 23 A
3 C 10 B 17 B 24 B
4 C 11 B 18 A 25 A
5 C 12 C 19 C 26 A
6 B 13 D 20 C 27 A
7 B 14 B 21 D 28 B
DETAILED ANSWERS
1 Effects on capital
X ($) Y ($) Z ($)
Goodwill $15 000 (1/2) 7 500 (1/2) 7 500 Nil
Goodwill $15 000 (1/3) 5 000 (1/3) 5 000 (1/3) 5 000
Net effect on capital 2 500 2 500 5 000
X’s capital account balance before goodwill adjustment $10 000
Increase in capital due to goodwill adjustment 2 500
X’s capital account balance after goodwill adjustment $12 500
2 Y’s Capital account

$ $
Car 4 800 Balance b/f 39 400
Cash(balancing figure) 53 600 Revaluation profit ($57 000 × 2/6) 19 000
58 400 58 400
A ($) B ($) C ($)
Goodwill $18 000* (1/2)  9 000 (1/2) 9 000 Nil
Goodwill $24 000 ** (3/6) 12 000 (2/6) 8 000 (1/6) 4 000
* Goodwill required  Existing goodwill = Goodwill required to be raised
$24 000  $6 000 = $18 000
**Total goodwill = Old + Newly raised
= $6 000 + $18 000
= $24 000
X ($) Y ($) Z ($)
Goodwill $18 000 (1/2) 9 000 (1/2) 9 000 Nil
Goodwill $18 000 (1/3) 6 000 (1/3) 6 000 (1/3) 6 000
Net effect on capital 3 000 3 000 6 000
So X’s capital will increase by $3 000
5 Journal entry to raise goodwill $ $
Goodwill ($10 000  $5 000) 5 000
X Capital (3/5) 3 000
Y Capital (2/5) 2 000
So after this adjustment X capital will become $13 000 ($10 000 + $3 000).
7 $
Original capital account balance of A 6 000
Goodwill raised ($12 000 1/2) 6 000
Goodwill written off ($12 000 1/3) (4 000)
New capital account balance of A 8 000
X ($) Y ($) Z ($)
Goodwill $60 000 (1/2) 30 000 (1/2) 30 000 Nil
Goodwill $60 000 (1/3) 20 000 (1/3) 20 000 (1/3) 20 000
Net effect on capital Cr. 10 000 Cr. 10 000 Dr. 20 000
Z’s capital will have a net credit change of $80 000 i.e. [$100 000 (Capital investment) – $20 000
(goodwill adjustment)].
X ($) Y ($) Z ($)
Opening balances of partners’ capital 40 000 40 000
New capital investment 30 000
Withdrawal of personal vehicle (10 000)
Goodwill raised $48 000 ( /2) 24 000
1
(1/2) 24 000 Nil
Goodwill $48 000 (1/3) 16 000 (1/3) 16 000 ( /3) 16 000
1
Net effect on capital 38 000 48 000 14 000
11 $
Original capital account balance of Y 130 000
Goodwill raised ($40 000  40%) 16 000
New capital account balance of Y 146 000
X ($) Y ($)
Revaluation profit ($60 000 × 1/2) 30 000 30 000
Goodwill share ($33 000 × 1/2) (1/2) 16 500 (1/2) 16 500
Net effect on capital 46 500 46 500
15 Z Capital
$ $
Car 4 000 Balance b/f 32 000
Loss on car disposal [(4600−4000) × 1/3] 200 Goodwill ($15 000 ×1/3) 5 000
Bank (balancing figure) 32 800 _____
37 000 37 000
17 X’s capital Account

$ $
Goodwill ($40 000 × 25%) 10 000 Bank 60 000
Balance c/d 50 000 _____
60 000 60 000
19 Lay’s Capital
$ $
Goodwill ($54 000 ×1/5) 10 800 Balance b/f 84 000
Balance c/d(balancing figure) 86 700 Goodwill ($54 000 ×1/4) 13 500
97 500 97 500
20 $
Capital employed before admission of X 125 000
New capital investment by Z 40 000
Upward revaluation of assets 50 000
Capital employed after admission of X 215 000
21 $
Disposal value of net assets sold [$560 000 +$140 000 + ($45 000 - $4 700)] 740 300
Less Book values of net assets sold ($400 000+ $350 000 + $25 000 + $45 000) (820 000)
Cost of dissolution (2 500)
Loss on dissolution 82 200
22 X’s Capital
$ $
Goodwill ($30 000 ×1/3) 10 000 Balance b/f (balancing figure) 58 000
Drawings (Computer) 3 000 Goodwill ($30 000 ×1/2) 15 000
Balance c/d 60 000 _____
73 000 73 000
23 Realisation Account
$ $
Non – current assets 50 000 Bank: Non – current assets 65 000
Current assets excluding cash and bank 25 000 Bank: Current assets excl. cash/bank 23 000
Bank (costs of realisation) 1 000 Discount received (18 000–14 000) 4 000
Profit share : A ($1 600 1/2) 8 000
B ($1 600 1/2) 8 000 16 000 _____
92 000 92 000
25 Z Capital
$ $
Current account 5 000 Balance b/f 50 000
Bank (balancing figure) 54 000 Revaluation profit ($45 000 × 1/5) 9 000
59 000 59 000
26 $
Profit share – first 6 months ($15 000 × 6 × 1/2) 45 000
last 6 months ($15 000 × 6 × 1/3) 30 000
Drawings (60 000)
Increase in D’s current account balance during the year 15 000
28 Bharti’s Capital
$ $
Current account 6 100 Balance b/f (balancing figure) 40 000
Drawings (vehicle) 4 000 Goodwill ($39 000 × 2/6) 13 000
Balance c/d 42 900 _____
53 000 53 000
Chapter 13 -132- Company Basics
CHAPTER 13 COMPANY BASICS

1 For which purpose can a share premium account legally be used?
A to make a rights issue B to pay an ordinary dividend
C to repay debentures D to write off preliminary expenses
May 98 P1 Q14 / May 02 P1 Q17
2 A company has just been wound up and the only assets that remain have realised $45 000.
A summary of the company’s capital structure shows:
- ordinary shares $20 000
- preference shares $40 000
- loan stock $30 000
How will $45 000 be distributed?
Ordinary shares Preference shares Loan stock
($) ($) ($)
A 10 000 20 000 15 000
B - 15 000 30 000
C 20 000 25 000 -
D - 40 000 5 000
May 98 P1 Q15 / Specimen 02 P3 Q2 / May 03 P3 Q3/Nov 10 P3 Q5
3 The data shows the income statement of a company for the year ended 31 August 1999.
$
Operating profit 40 000
Less Debenture interest (6 000
34 000
Profit on sale of investment shares 68 000
102 000
Transfer to general reserve (30 000
Unappropriated profit for year 72 000
What was the distributable profit for the accounting year ended 31 August 1999?
A $34 000 B $40 000 C $72 000 D $102 000

May 98 P1 Q28 / Nov 01 P1 Q29 / Specimen 02 P3 Q9
4 What is the meaning of a company’s authorised share capital?

A the maximum amount that it is permitted to borrow
B the maximum nominal value of shares it is permitted to issue
C the nominal value of ordinary and preference share capital in issue
D the total of shareholders’ funds
Nov 98 P1 Q27 / Nov 01 P1 Q28
5 From which of the following do revenue reserves arise?

A the issue of new shares by a company
B the revaluation of non-current assets
C the share premium received on shares issued by the company
D the trading activities of a company
May 99 P1 Q29/ Nov 04 P1 Q3
6 A cash budget shows that a company will exceed its overdraft limit.
Which item of expenditure should the directors consider delaying?
A debenture interest B dividends C rent and rates D taxation
May 99 P1 Q35
7 A company is set up with an authorised share capital of $3 million.

It plans to purchase immediately a factory with $1 million. Preliminary expenses will be $100 000 and the
immediate requirement for working capital will be $800 000. It will also require new equipment costing
$600 000 in 12 months’ time.
What is the minimum amount the company needs to raise now?
A $1 000 000 B $1 900 000 C $2 500 000 D $3 000 000
May 00 P1 Q29/May 10 P1 Q17
8 A Company has issued non-cumulative preference shares and ordinary shares. Which statement is true?
A if no preference dividend is paid, it is carried forward to a future year
B preference shareholders always get a dividend
C preference shareholders and ordinary shareholders always get a dividend
D preference shareholders may get a dividend
May 01 P1 Q14/Nov 06 P1 Q5/Nov 12 P12 Q19
9 The diagram represents the capital and reserves of a company before a dividend is proposed.
The total of the capital and reserves is $1 100 000.

What is the maximum amount that can be distributed to shareholders as dividend?
A $55 000 B $110 000 C $165 000 D $440 000
May 01 P1 Q27
10 Which of the following is a revenue reserve?

A a capital redemption reserve
B a general reserve
C a revaluation reserve
D a share premium account
Specimen 02 P1 Q1
11 Which of the following statement is not true?

A a share must have a face value
B authorised share capital is higher or the same as issued share capital
C shares can be issued at premium
D there are only two classes of share capital
Specimen 02 P1 Q22
12 What type of capital must all limited companies have?

A convertible loan stock B debentures
C ordinary shares D preference shares
Nov 02 P3 Q1
13 Which is not a source of long-term finance?

A bank overdraft B debentures
C ordinary shares D preference shares
May 03 P3 Q14/ May 08 P3 Q18
14 Which of the following is a realised gain?

A a surplus on revaluation of trade investments to current market value
B a surplus arising from professional revaluation of the company office block
C a surplus arising on the sale of patents
D goodwill arising on the purchase of another business
Nov 03 P1 Q14
15 A company has an authorised capital of $1 000 000.

Which statement must be true?
A The company must issue $1 000 000 in shares
B The company must not issue more than 1 000 000 shares
C The shares issued must not exceed $1 000 000
D The shares and debentures must not exceed $1 000 000
Nov 03 P1 Q20
16 When a company is short of liquid funds, for what purpose may the reserves be used?
A to finance the take-over of another business the company is anxious to acquire
B to maintain dividends during periods of low profitability
C to pay trade payables promptly so as to obtain discounts
D to write down assets whose value to the business has fallen
May 04 P1 Q18
17 Which transaction will cause an increase in shareholders’ capital?

A disposal of a non-current asset for more than its book value
B increasing the provision for bad debts
C receipt of a loan
D receipt of payment from trade receivable in cash
May 04 P3 Q18
18 A company has completed arrangements for the closure of part of its business next year.
What should the company create in this year’s accounts for the closure costs?
A a contingency
B a liability
C a provision
D a reserve
May 05 P1 Q2
19 Which statements are true about debentures and ordinary shares?
Debentures Ordinary shares
A can be issued at a premium are never issued at a premium
B holders are owners of a company holders are lenders of a company
C interest is a charge against profit dividends are an appropriation of profit
D interest varies from year to year dividends are paid at the same rate each year
May 05 P1 Q17/ May 17 P12 Q17
20 A company has revalued its non-current assets upwards during the most recent accounting period.
What will be the effect of this?
A to increase capital employed and increase profits
B to increase capital employed and reduce profits
C to reduce capital employed and reduce profits
D to reduce capital employed and no effect on profits
May 05 P1 Q21
21 A company has issued shares at a premium.

For what purpose may the balance on the share premium account be used?
A to provide for the premium on the redemption of shares which were issued at par
B to provide for the discount on a new issue of shares
C to write off the preliminary expenses incurred in forming the company
D to write off a loss on the revaluation of non-current assets
Nov 05 P1 Q1
22 Which of the following may be used to smooth distributable profits from one year to another?
A asset revaluation reserve B capital redemption reserve
C general reserve D provisions for depreciation
Nov 05 P3 Q19
23 A director-owned company needs additional funds.
Which method of finance might lead to a reduction of the director’s control of the business?
A bank loan B debenture
C ordinary share issue D preference share issue
Nov 06 P1 Q19
24 How should goodwill be treated by a limited company?

A Goodwill should always be written off immediately.
B Non-purchased goodwill is shown in the balance sheet.
C Purchased goodwill is shown in the balance sheet and written off over its useful life.
D Purchased goodwill remains on the balance sheet as a permanent item.
May 11 P1 Q8
25 A company has an issued share capital of 200 000 6 % cumulative preference shares of $1 each fully paid
and 800 000 ordinary shares of $1 each fully paid.
Assuming that the company earns no profit in the year, which statement is correct?
A Both preference and ordinary shares are paid a dividend in the year.
B The unpaid dividends for both preference and ordinary shares are carried forward to a future
year.
C The unpaid preference dividend is carried forward to a future year.
D The preference shares are paid a total dividend of $12 000 in the year.
May 12 P12 Q15
26 The following items appear in a statement of financial position.

• an estimate of a liability in a court case, the outcome of which is uncertain
• an unrealised surplus from the revaluation of a non-current asset
• accumulated depreciation on non-current assets
• an estimate of future loss arising from bad debts
How many of these are provisions and how many are reserves?
provisions reserves
A 1 3
B 2 2
C 3 1
D 4 0
Nov 12 P12 Q3
27 Which shares are entitled to have arrears of dividend carried forward to future years?
A cumulative preference shares B non-cumulative preference shares
C ordinary shares D redeemable shares
May 14 P12 Q20
28 The profits of Bronte Limited are as follows.

year ended 31 December 2013 nil
year ended 31 December 2014 $60 000
Bronte Limited has in issue 200 000 5% preference shares of $1 each.
What is the profit available for distribution to ordinary shareholders for the year ended 31 December
2014, if the preference shares are (i) cumulative or (ii) non-cumulative?
cumulative non-cumulative
$ $
A 40 000 40 000
B 40 000 50 000
C 50 000 40 000
D 50 000 50 000
May 15 P12 Q17
29 Which statement describes the treatment of purchased goodwill for a limited company?
A a tangible non-current asset that can be amortised
B a tangible non-current asset that can be depreciated
C an intangible non-current asset that can be amortised
D an intangible non-current asset that can be depreciated
May 17 P12 Q15
ANSWER KEY
1 D 9 C 17 A 25 C
2 B 10 B 18 C 26 C
3 D 11 D 19 C 27 A
4 B 12 C 20 B 28 B
5 D 13 A 21 C 29 C
6 B 14 C 22 C
7 B 15 C 23 C
8 D 16 D 24 C
DETAILED ANSWERS
2 As loan stockholders are the lenders of the business, so they are entitled to get their investment of $30
000 back before the shareholders.
Moreover after payment to loan stockholders, preference shareholders will be paid off as they have
preference over the ordinary shareholders to receive repayment of their capital in case of winding up of a
company. So remaining $15 000 ($45 000  $30 000) will be distributed among them.
3 Distributable profit is the profit available for distribution to the ordinary shareholders i.e.
Profit after tax and Profit before ordinary dividends
Distributable profit = =
preference dividend and transfer to reserves
and the answer would obviously be $102 000 which is profit after all the expenses but before transfer of
profits to reserves i.e. profits are distributed as dividends only when they are left after meeting all
business expenses, tax and preference dividends.
7 As immediate requirement of the company on its formation is only $1 900 000 ($1 000 000 + $100 000 +
$800 000) so that is the minimum amount to be raised by the company.
8 “D” option is correct as if profits are available they will receive dividend, but in the absence of profit no
dividend can be distributed to them nor carried forward to the next year being of non-cumulative in
nature.
9 Revenue Reserves i.e. Retained profits and General Reserves can be distributed as dividends among the
shareholders so they will be ($1 100 000 15%*) = $165 000
* 5% + 10% = 15%
14 “C” is the right option. The remaining three options do not involve any inflow of cash.
17 Statement of this Question seems to be incorrect as share capital only increases when new share capital is
issued. So this Question should state that which transaction would cause an increase in shareholders’ fund
(equity). The equity increases either due to issuance of new share capital or due to the profits made by
the company so “A” option is correct as it involves profit on sale of a non-current asset.
19 “C” option is correct as interest is shown as an expense in the Income statement whereas ordinary
dividend is shown as an appropriation in the Profit and Loss appropriation account.
20 Due to upward revaluation of non-current assets, non-current assets and capital employed will
increase. This will increase depreciation charge and as a result profits will reduce.
26 “C” option is correct as an estimate of a liability in a court case will be a provision under IAS 37 whereas
we know that provisions are made for accumulated depreciation on non-current assets (item 3 and to
provide for an estimate future loss arising from bad debts (item 4. However, an unrealised surplus from
the revaluation of a non-current asset (item 2 will be recorded as revaluation reserve.
Chapter 14 -138- Company Final Accounts
CHAPTER 14 COMPANY FINAL ACCOUNTS

1 What will be classified in a balance sheet at 31 December 1998 as a current liability?
A debentures
B preference shares
C prepaid expenses
D proposed dividend
Nov 98 P1 Q3 / May 02 P1 Q6
2 Which item will be included in a balance sheet as a liability?
A loan stock issued by the company

B preference shares issued by the company
C revaluation reserves
D share premium account
May 99 P1 Q11/ May 04 P1 Q14
3 What do the reserves of limited companies include?
A debentures
B ordinary shares
C preference shares
D share premium
May 99 P1 Q12
4 The table shows details of freehold property.
$
Historical cost 80 000
Depreciation 25 000
The property is to be shown in the balance sheet at its current valuation of $100 000. Which entries are to
be made in the ledger accounts?
Dr. $ Cr. $
A Non-current assets account 20 000 Income statement 20 000
B Non-current assets account 20 000 Revaluation reserves 45 000
Provision for depreciation 25 000
C Non-current assets account 45 000 Income statement 20 000
D Non-current assets account 20 000 Revaluation reserves 20 000
May 00 P1 Q5
5 Which should company not show as non-current asset in its Balance Sheet?
A plant bought on hire purchase

B plant fully depreciated
C plant held on finance lease
D plant held on operating lease
May 00 P1 Q21/Nov 11 P1 Q3
6 The table shows how a non-current asset appears in the Balance Sheet.
$
non-current asset at cost 120 000
accumulated depreciation (18 000
net book value 102 000
The asset is revalued at $ 136 000.
What is the journal entry to record the revaluation?
Dr.($) Cr. ($)
A Non-current asset at cost 16 000
Income statement 16 000
B Non-current asset at cost 16 000
Accumulated Depreciation 18 000
Revaluation Reserve 34 000
C Non-current asset at cost 34 000
D Non-current asset at cost 16 000
Nov 00 P1 Q5/ Nov 08 P1 Q5
7 The table shows the share capital of a company.

ordinary shares of $1 5%preference shares of $0.50
Number of shares authorised 100 000 60 000
Number of shares issued as fully paid 60 000 40 000
The directors declare an ordinary dividend of 7.5%.
What will be the total dividend for the year?
A $5 500 B $6 500 C $9 000 D $10 500
Nov 00 P1 Q12 / Nov 01 P1 Q18
8 A company issues a 5-year bond of $1 000 000. Interest for year 1 and 2 will be at the rate of 10% per
annum, and for year 3, 4 and 5 it will be 12% per annum. What will be the charge for interest shown in its
Income statement each year?
A $100 000 in each year
B $100 000 in year 1 and 2 and $120 000 in year 3, 4 and 5
C $112 000 in each year
D $120 000 in each year
Nov 00 P1 29/ Nov 06 P3 Q18/ May 09 P3 Q14
9 The table shows extract from a company’s trial balance at 31 March 2001.
Debentures (2005 18 000
Preference shares 9 000
Proposed preference dividend 900
Bad debts provision 800
Balance on trade payables ledger 1 500
Which total for current liabilities should be disclosed in the financial statements?
A $30 900 B $36 400
C $37 900 D $38 700
May 01 P1 Q5
10 The table shows an extract from the draft Balance Sheet of a company.
Non-current assets Cost Depreciation Net book value

$ $ $
Freehold buildings 700 000 200 000 500 000
Plant and machinery 450 000 100 000 350 000
Freehold buildings are to be revalued to $950 000. Plant and machinery is to be written down to $250 000.
How much will be credited to the Assets Revaluation Reserves?
A $50 000
B $150 000
C $250 000
D $450 000
Nov 01 P1 Q12
11 What adjustment will result in an increase in a company’s stated profit?

A the amortisation of goodwill
B the application of reserves for the issue of bonus shares
C the capitalisation of development costs
D the upward revaluation of non-current assets
Specimen 02 P3 Q8/Nov 03 P1 Q21
12 A Company has an authorised ordinary share capital of $1 million (50% issued), $200 000 10% fully paid-
up preference shares and $200 000 8% debentures. Operating profits for the most recent year are $100
000. If the profits were fully distributed, they would be sufficient to pay an ordinary share dividend of
A 8% B 12.8% C 16% D 16.8%
Specimen 02 P3 Q11
13 A company made the following payments:

$
1 June 2001 Final dividend for the year ended 31 March 2001 40 000
1 December 2001 Interim dividend for the year ended 31 March 2002 15 000
1 June 2002 Final dividend for the year ended 31 March 2002 50 000
What are the entries for dividends in the Profit and Loss Appropriation Account for the year ended 31
March 2002 and the Balance Sheet at that date?
Profit and Loss Appropriation Account ($) Balance Sheet ($)

A 55 000 50 000
B 55 000 65 000
C 65 000 50 000
D 65 000 65 000
May 02 P1 Q15
14 What does the Profit and Loss Appropriation Account of a limited company show?
A capital and revenue reserves B how net profit is applied
C how net profit is earned D the directors’ salaries
Nov 02 P1 Q16
15 A Company has an authorised share capital of 2 million of $0.25 ordinary shares of which 1.6 million are in
issue. It is proposed to pay a dividend totalling $40 000.
Which correctly describes the amount of dividend?
A 8% B 10%
C $0.08 per share D $0.10 per share
May 03 P1 Q16
16 A Company is financed by
10 000 $1 ordinary shares
$5 000 10% loan
Net profit before interest and taxation is $2 500. Tax payable is $400.
What is the maximum dividend per share payable from this year’s profits?
A $0.16 B $0.20
C $0.21 D $0.25
May 03 P1 Q18
17 Freehold land and buildings are shown in the accounts at a cost price of $200 000 and accumulated
depreciation of $40 000. The property is to be revalued in the books at $340 000.
What is the double entry to record this transaction?
Account DR ($) CR ($)

A Freehold land and buildings 140 000
B Freehold land and buildings 140 000
Accumulated depreciation 40 000
C Freehold land and buildings 140 000
Revaluation reserve 140 000
D Freehold land and buildings 140 000
Accumulated depreciation 40 000
Nov 03 P1 Q6//Nov 15 P12 Q7
18 An extract from a company’s Balance Sheet is given.

$
Ordinary share capital 50 000
General reserves 10 000
10% debentures 20 000
What are the ordinary shareholders’ funds?
A $50 000 B $54 000
C $64 000 D $80 000
Nov 03 P1 Q19/ May 13 P12 Q20
19 The following information is extracted from the books of a company.

$ 000
Freehold premises at cost 125
Provision for depreciation of freehold premises 50
The premises are revalued at $180 000.
Which entries are required in the company’s books to record the revaluation?
Profit and Loss Freehold Premises Provision for Revaluation

at Cost account Depreciation Reserve
A none debit $55 000 debit $50 000 credit $105 000
B debit $50 000 debit $55 000 none credit $105 000
C debit $55 000 debit $75 000 debit $50 000 credit $180 000
D debit $75 000 debit $55 000 debit $50 000 credit $180 000
May 05 P1 Q8
20 A company has the following figures at the financial year end:

$
5% debentures repayable 2010 5 000
Accruals 1 200
Share capital 20 000
Income statement balance 1 800
Prepayments 1 000
What is the figure, which should appear in the Balance Sheet under the heading “current liabilities”?
A $8 000 B $9 000 C $9 200 D $11 000
May 05 P3 Q15
21 A building cost $340 000 several years ago. At 30 June 2004 the accumulated depreciation on the building
was $47 600 and it was decided to revalue the building to its market value of $560 000.
What will be the balance on the Revaluation Reserve?
A $172 400 B $220 000 C $267 600 D $512 400
Nov 05 P1 Q16/Nov 13 P12 Q4
22 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 profit for the year?
A $250 000 B $370 000 C $385 000 D $400 000
May 06 P1 Q21/May 16 P12 Q16
23 A published Balance Sheet for a company at 1 January 2005 included:
$ million
Ordinary share capital 500
Income statement 200
The company results for the year to 31 December 2005 included:
$ million
profit before taxation 50
Taxation 15
dividends proposed 10
revaluation surplus on land 15
What was the Income statement balance at 31 December 2005?
A $225 million B $240 million C $250 million D $265 million
Nov 06 P3 Q11
24 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
May 07 P1 Q19
25 Which will show the lowest figure in the balance sheet of a company?
A authorised share capital B called-up share capital
C issued share capital D paid up share capital
May 07 P3 Q10
26 A company shows the following balance sheet extracts at 31 March 2007.

$000
general reserve 125
provision for re-organisation 90
trade payables 50
accruals 12
estimated tax refund 25
bills payable 32
bank overdraft 74
cash at bank 44
What amount is shown as current liabilities in the accounts?
A $136 000 B $168 000 C $193 000 D $258 000
Nov 07 P3 Q11
27 The table shows extracts from the trial balance of a business at 31 December 2007.
$
ordinary share capital 20 000
share premium 40 000
long term loan (repayable 2017 30 000
4 % preference share capital 50 000
7 % debentures 2012 70 000
What is total of ‘non-current liabilities' in the balance sheet?
A $100 000 B $150 000
C $160 000 D $210 000
May 08 P1 Q18/ Nov 13 P12 Q22
28 Plant and machinery is included as part of a company's non-current assets.
It decides to revalue its plant and machinery and finds that some is worth more and some worth less than
the values on the balance sheet.
As a result of the decision, which statement is true?
A It only needs to revalue plant and machinery which has lost value.
B It only needs to revalue plant and machinery which has gained value.
C It must revalue all plant and machinery.
D It must revalue all its non-current assets in the balance sheet.
May 09 P3 Q8
29 The table shows balances at the end of a year.

$
expenses prepaid 6 000
expenses accrued 4 000
loan (2015 20 000
What is the total of current liabilities?
A $16 500 B $17 400 C $28 900 D $48 900
Nov 09 P1 Q30
30 A company shows the following figures in its balance sheet.
$ 000
Goodwill 35
equipment, at cost, less depreciation 70
bank overdraft 17
loan repayable over 5 years(current liability portion $20 000 100
inventories for resale 95
trade payables 54
6 month deposit account 125
What is the figure for capital and reserves?

A $29 000 B $84 000 C $99 000 D $154000
Nov 09 P3 Q9
31 A company has the following current assets and current liabilities.
$
bank deposit account 6 000
loan interest payable 2 500
deposits from customers (for orders) 1 500
loans to employees 4 000
What is the amount of the net current assets?
A $(3500 B $4500
C $7500 D $13 500
Nov 10 P1 Q15
32 The table shows extracts from the trial balance of a company at 31 December 2009.
$
8 % preference shares 250 000
6 % debentures (2015 150 000
bank loan repayable (2012 75 000
mortgage on buildings (repayable 2010 120 000
What is the total of non-current liabilities in the balance sheet at 31 December 2009?
A $195 000 B $225 000
C $345 000 D $595 000
Nov 10 P1 Q19
33 What would not appear in the income statement of a limited company?

1 finance costs
2 revenue
3 ordinary dividends paid
4 ordinary dividends payable
A 1 and 2 B 1 and 4
C 2 and 3 D 3 and 4
Nov 11 P3 Q10
34 A non-current asset costing $206 000, with a net book value of $131 000, is revalued to $275 000.
How should the revaluation be recorded?
A Dr Asset at cost $69 000
Cr Revaluation reserve $69 000
B Dr Provision for depreciation $75 000
Dr Asset at cost $69 000
C Dr Provision for depreciation $144 000
D Dr Revaluation reserve $144 000
Cr Asset at cost $69 000
Cr Provision for depreciation $75 000
May 12 P12 Q3
35 A company’s year-end is 30 April. It purchases a factory in May 2009 at a cost of $200 000. The factory will
be depreciated over 20 years. A full year’s depreciation is charged in the year of purchase.
In May 2012 the factory is re-valued at $300 000.
How much should be included in the revaluation reserve account?
A $100 000 B $120 000
C $130 000 D $140 000
May 12 P32 Q3
36 The following information is taken from the financial statements of a limited company.
$000
retained earnings at the start of the year 50
profit attributable to equity holders 30
dividends paid during the year 15
dividends proposed payable in the next financial year 10
surplus on revaluation of land during the year 20
What are the retained earnings at the end of the year?

A $55 000 B $65 000
C $80 000 D $100 000
May 12 P32 Q15
37 A trial balance shows the following information.

$
premises at cost 150 000
accumulated depreciation on premises 25 000
On 1 January the premises are revalued at $270 000. At the same time 200 000 shares of $1 each are
issued for $300 000.
What is the value of the reserves created on 1 January?
A $120 000 B $145 000
C $220 000 D $245 000
Nov 12 P12 Q4
38 Which item appears in the financial statements of a limited company but not in those of a sole trader or
partnership?
A dividends paid B other payables
C other receivables D trade payables
Nov 12 P12 Q13
39 A company has an authorised share capital of 1 000 000 $0.50 ordinary shares. Its issued share capital is
800 000 shares. An ordinary dividend of 7½ % is declared.
How much is payable to the shareholders?
A $30 000 B $37 500 C $60 000 D $75 000
Nov 12 P12 Q20
40 Duringtheyearended31 December2012abusinessmadeaprofitof$31 000.Adividendof8% waspaidonthe200

000ordinarysharesof$0.50each,and$12 000wastransferredtogeneral reserve.
The retained earnings of the business on 31 December 2012 amounted to $68 000.
What was the balance of retained earnings on 1 January 2012?
A $41000 B $57000 C $65000 D $79000
May 13 P12 Q14
41 A company has the following expenses for the year.
$
directors’ salaries 140 000
depreciation of delivery vehicles 87 000
office salaries 90 000
loan interest 33 000
discounts allowed 12 000
What is the total of the administration overheads?

A $242 000 B $263 000 C $329 000 D $362 000
Nov 13 P12 Q15
42 A business has settled a legal dispute with a customer and expects to pay him $10000 before the end of
the next financial year.
Which heading is this amount included under in the company’s statement of financial position for this
financial year?
A capital and reserves B current liabilities
C non-current assets D non-current liabilities
May 14 P12 Q17
A All reserves are created by a transfer from retained earnings.
B Revaluation reserves appear in the non-current assets section of the statement of financial
position.
C Some reserves are treated as current liabilities at the financial year end.
D Total reserves form part of shareholders’ equity.
Specimen 16 P1 Q7
44 Which item appears in a company’s income statement?

A dividends B inventory
C trade payables D transfer to reserves
Specimen 16 P1 Q10
45 Which items will be shown in the statement of changes in equity?

1 dividends proposed
2 interest paid on debentures
3 issues of share capital
4 transfers to reserves
Specimen 16 P1 Q18
46 What might stop financial statements showing a true and fair view?
A changes in depreciation methods from year to year

B changes in dividend policy
C creation of a general reserve
D inclusion of purchased goodwill in a statement of financial position
May 16 P12 Q1
47 A company is formed with the issue of 100 000 6% non-cumulative preference shares of $1 each
and 300 000 ordinary shares of $1 each issued at a premium of $0.20.
It earned profits of $3 000, $16 000 and $31 000 in the first three years of trading. The directors
wish to pay an ordinary dividend of 5% each year when possible.
What value of ordinary dividends does the company actually pay in years 2 and 3?
year 2 year 3
$ $
A 7 000 15 000
B 7 000 18 000
C 10 000 15 000
D 10 000 18 000
Nov 16 P12 Q17
ANSWER KEY
1 D 13 C 25 D 37 D
2 A 14 B 26 B 38 A
3 D 15 B 27 A 39 A
4 B 16 A 28 C 40 B
5 D 17 D 29 C 41 A
6 B 18 C 30 D 42 B
7 A 19 A 31 B 43 D
8 C 20 C 32 B 44 B
9 C 21 C 33 D 45 D
10 D 22 B 34 B 46 A
11 C 23 A 35 C 47 C
12 B 24 A 36 B
DETAILED ANSWERS
7 Capital amount ($) Dividend(%) = Dividend in ($)

Ordinary dividend = (60 000  $1 7.5%) = 4 500
Preference dividend = (40 000  $0.5 5%) = 1 000
Total dividend 5 500
8 Interest for year 1 and 2 ($1 000 000  10%) = $100 000
Interest for year 3, 4 and 5($1 000 000  12%) = $120 000
$100 000+$100 000+$120 000 +$120 000 +$120 000

Average interest =
5 years
= $112 000
Interest on bonds which are issued with interest rates which may vary with external factors (e.g. the rates
charged by the national banks) should be shown in the Income statement at the actual cost incurred each
year then “B” option would have been correct. In this item, the total cost of interest is known at the time
of issue and should therefore be charged in the income statement in equal amounts.
9 $7 000 + $900 + $30 000 = $37 900

* Debit balances ontrade payables ledger will be shown as asset.
10 Journal entries to record revaluation will be

$ $
(i) Freehold buildings 250 000
Revaluation Reserves 450 000
(ii) Provision for depreciation 100 000
Revaluation Reserves / Income statement 100 000
Plant and Machinery 200 000
So “D” option is correct
12 $
Profits before interest 100 000
Less Debenture interest ($200 000  8%) (16 000)
84 000
Less Preference dividend ($200 000  10%) (20 000)
Profits available to pay ordinary dividend 64 000

As we know
Share capital  Dividend (%) = Dividend (in $)
(1 million 1/2) $500 000  X = $64 000
$64 000
= × 100
$500 000
= 12.8 %
Total ordinary dividend

15 Dividend (%) = × 100
Issued ordinary share capital
$40 000
= × 100
1 600 000 shares ×$0.25
= 10%

16 Dividend per share =
Number of ordinary shares
$1 600
=
10 000 shares
= $0.16 per ordinary share
* Maximum profits available for Net profit before

= – Interest – Tax
payment of ord. dividend interest and tax
= $2 500 – ($5 000  10%) – $400
= $1 600
18 Shareholders’ fund = Ordinary capital + All Reserves + Profits
= $50 000 + $10 000 + $4 000
= $64 000
20 Current liabilitieswill be $9 200 i.e. $1 500 + $1 200 + $6 500
21 Building ($560 000  $340 000) ↑ $220 000 Dr

Provision for depreciation ↓ $47 600 Dr
Revaluation reserves ↑ $267 600 Cr
22 Operating profit $465 000
Less Interest on debentures ($300 000 × 5%) (15 000)
Ordinary dividends (1 000 000 × $1 × 8%) (80 000)
Retained profits for the year $370 000
23 $million
Profit before tax 50
Tax (15)
Proposed dividends (10)
Current year profit 25
Retained profits balance b/f 200
Retained profits balance c/f 225
24 $
Profit before interest 105 000
Less Loan interest ($160 000 × 8%) (9 600)
Profits available to pay ordinary dividend 95 400
Dividend per share =
Total number of ordinary shares
$95 400
=
700 000 shares
= $0.1317
25 Current liabilities = $50 000 + $12 000 + $32 000 + $74 000 = $168 000
27 ‘Non-current liabilities'imply non-current liabilities and include long term loan of $30 000(repayable in
2017 and 7 % debentures $70 000 (repayable in 2012;so total trade payables would become $100 000($30
000 + $70 000.
29 $
Expenses accrued 4 000
28 900
30 $ 000
Total assets ($35 000 + $70 000 + $95 000 + $125 000) 325
Total liabilities ($17 000 + $100 000 + $54 000) (171)
Capital and reserves 154
31 Current Assets $ $
Bank deposit account 6 000
Loans to employees 4 000
Trade receivables 12 000 22
000
Current Liabilities
Loan interest payable 2 500
Deposits from customers (for orders) 1 500
Trade payables 9 000 (17
500)
4
Net Current Assets
500
32 Total non-current liabilities = 6% Debentures (2015) + Bank Loan Repayable
(2012)
= $150 000 + $75 000
= $225 000
Bank overdraft and mortgage on buildings (repayable in 2010 are current liabilities as payable in the
following year.
33 “D” option is correct as 3rd item is shown in the Statement of changes in equity whereas ordinary
dividends payable (4thitem) is not accounted for in the financial statements unless approved by the
ordinary shareholders in the annual general meeting.
34 Non-current asset ($275 000  $206 000) ↑ $69 000 Dr

Provision for depreciation ↓ $75 000 Dr
35 Non-current asset ($300 000  $200 000) ↑ $100 000 Dr

$200 000 × 3
Provision for depreciation ( ) ↓ $30 000 Dr
20
36 $000
Retained earnings at the start of the year 50
Profit attributable to equity holders 30
Dividends paid during the year (15)
Retained earnings at the end of the year 65
37 Increase in Revaluation reserves [$270 000  ($150 000  $25 000)] $145 000
Increase in Share premium [$300 000  (200 000 shares @ $1 each)] $100 000
Value of the reserves created on 1 January $245 000
39 Dividend payable ($) = Issued share capital  Dividend (%)

= (800 000 shares @ $0.5)  7.5%
= $30 000
40 $000
Retained earnings on 1 January 2012 (balancing figure) 57
Profit attributable to equity holders 31
Dividends paid during the year ($200 000 × $0.50 × 8%) (8)
Transfer to general reserves (12)
Retained earnings on 31 December 2012 68
41 Administration Overheads = $140 000 + $90 000 + $12 000

= $242 000
44 ‘B’ option is correct as inventory is part of ‘cost of sales’ section. Items in ‘A’ and ‘D’ options are shown in
statement of changes in equity whereas trade payables (‘C’ option) is a balance sheet item.
47 $ $
Profit for the year 16 000 31 000
Preference dividend ($100 000 × 6%) (6 000) (6 000)
Profit available to pay ordinary dividend 10 000 25 000
Ordinary dividend ($300 000 × 5%) limited to the profit available (10 000) (15 000)
Chapter 15 -152- Issue of Shares and Debentures
CHAPTER 15 ISSUE OF SHARES AND DEBENTURES

1 A company’s balance sheet includes
$
Capital and Reserves:
Ordinary shares of $0.50 each fully paid 84 000
Retained profit 50 000
134 000
The company makes a one-for-two rights issue of ordinary shares of $0.50 each, at $1.30 each. The issue
was fully subscribed. A bonus issue of two-for-three ordinary shares of $0.50 followed the rights issue
What is now the maximum possible balance of the retained profit?
A $50 000
B $41 600
C $33 200
D nil
May 98 P1 Q29 / Specimen 02 P3 Q10
2 A Company’s balance sheet includes the following extract.

$
Authorised share capital
10 million ordinary shares of $1 each 10 000 000
Issued share capital:
2 million ordinary shares of $1 each 2 000 000
Reserves:
Share premium 2 000 000
General reserves 400 000
Retained profit 1 000 000
What is the maximum number of bonus shares that could legally be issued?
A 1 400 000 B 2 400 000

C 3 000 000 D 3 400 000
May 99 P1 Q17/ Nov 04 P1 Q17
3 A shareholder in a company sells his shares to another person.

What is the effect on the Share Capital account of the company?
A it is increased by any premium paid for the shares
B it is increased by the selling price of the shares
C it is reduced by the value of shares sold
D it remains unaltered
Nov 99 P1 Q15 / Nov 01 P1 Q14 / May 03 P1 Q19/ May 14 P12 Q19
4 A Company raises cash by issuing 8% debentures.

What is the effect on the company’s profit and net current assets in the year of issue?
Profits net current assets
A decrease decrease
B decrease increase
C increase decrease
D increase increase
Nov 99 P1 Q16/ May 12 P12 Q16
5 An extract of a company balance sheet is shown.

Capital and Reserves $000
Issued Share Capital:
4 million ordinary shares of $0.50 each 2 000
Share Premium Account 800
The company decides to make a rights issue to existing shareholders. The issue was made on the basis of 1
new share for every 4 held, at a price of $3.00 a share.
What was the impact on the Share Premium Account of this rights issue?
A no change B increase by $2.5 million
C increase by $3 million D increase by $12 million
Nov 99 P1 Q29
6 A company currently has the following capital and reserves:

$
$1 ordinary share capital 400 000
Share premium account 60 000
General reserve 310 000
Retained profit 90 000
980 000
The company is about to make a 1 for 4 bonus issue. What is the maximum amount of distributable
reserves after the bonus issue?
A $300 000 B $360 000 C $400 000 D $420 000
Nov 99 P1 Q32
7 The table shows extracts from a company’s Balance Sheets at 31 December 1998 and 1999.
31 December 1998 31 December 1999
($m) ($m)
Ordinary shares of $1 each 100 130
Share premium account 50 80
Notes:
(i) On 1 July 1999 there was a bonus issue of 1 for 10.
(ii) On 1 October 1999 there was a rights issue
(iii) There are no other reserves balances.
How much cash was received from the issue of shares in the year ended 31 December 1999?
A $20m B $30m C $50m D $60m
May 00 P1 Q15 /Nov 06 P1 Q22
8 What will be the effect of a bonus issue on the share capital and net assets?
Share capital Net assets
A increase no effect
B increase reduce
C no effect no effect
D increase increase May 00 P1 Q16
9 Which event does not require entries in a company’s ledger accounts?

A A bonus issue of shares
B an issue of the company’s shares at a price above nominal value
C a rights issue of shares
D a sale by a shareholder of shares at a price above nominal value.
May 00 P1 Q28
10 A Company, with an existing issued share capital of $400 000 $1 ordinary shares, made a-1-for-5 Bonus
Issue. This was later followed by a 1- for - 3 Rights Issue.
What will be the balance on the Share Capital account after these transactions?
A $400 000
B $480 000
C $613 333
D $640 000
Nov 00 P1 Q15/ Nov 16 P12 Q18
11 A Company decides to make a rights issue to those holding ordinary shares. The issue, which was fully
subscribed, was on a 1 for 4 bases, at a price of $2.00 per share. The company’s Balance Sheet extract
immediately before the rights Issue is shown.
Capital and Reserves $’000
Issued share capital
2 million Ordinary shares of $0.50 each 1 000
l million Preference shares of $1 each 1 000
Share Premium account 400
2 400
The listed share price was $3.00
What was the impact on the Share Premium Account (SPA) of the rights issue?
A SPA did not change

B SPA increased by $375 000
C SPA increased by $750 000
D SPA increased by $1 million
Nov 00 P1 Q28
12 A company’s share capital consists of 80 000 $0.50 shares which are all issued at a premium of 20%. The
market value of each share is now $0.80.
What amount will appear in the company’s Balance Sheet for ordinary share capital?
A $40 000 B $48 000 C $51 200 D $64 000

May 01 P1 Q10
13 A limited company with an authorised share capital of $500 000 and an issued share capital of $300 000 in
$1 ordinary shares makes a 1 for 4 bonus issue followed by a 1 for 5 rights issue.
What will be the balance on the share capital following these transactions?
A $375 000 B $450 000 C $500 000 D $750 000

Nov 01 P1 Q13
14 A company has authorised capital of 500 000 $0.25 ordinary shares. By 31 December, it had issued 400
000 $0.25 ordinary shares at $0.60 per share. The market price of the shares on 31 December 2000 was
$0.75 each.
What figure is carried in the balance sheet on 31 December 2000 in respect of share capital?
A $100 000
B $125 000
C $240 000
D $300 000
Specimen 02 P1 Q23/Nov 14 P12 Q16
15 A Company’s Balance Sheet as at 31 December 2001 included:

$
Ordinary shares of $0.50 each, fully paid 320 000
Cash at bank 100 000
The following then took place:
February 2002 A one-for-two rights issue of ordinary shares of $0.50 each at $1.10. The
issue was fully subscribed.
April 2002 A bonus issue of one for four ordinary shares of $0.50 each.
Assume no other transactions took place between 31 December 2001 and 30 April 2002.
What were the balances of the Ordinary Share Capital and Bank accounts on 30 April 2002?
Ordinary Share Capital ($) Bank ($)
A 600 000 452 000
B 600 000 572 000
C 840 000 452 000
D 840 000 620 000
May 02 P1 Q18
16 A Company makes a bonus issue of shares.
What is the effect on the net assets and the reserves in the Balance Sheet?
Net assets Reserves
A increase decrease
B increase unchanged
C unchanged decrease
D unchanged increase
Nov 02 P1 Q18/ May 07 P1 Q18/Nov 10 P1 Q18
17 At the beginning of the year a company has authorised share capital of 200 000 $0.50 ordinary shares and
issued share capital of 100 000 $0.50 ordinary shares. During the year the company makes a further issue
of 50 000 $0.50 ordinary shares at a price of $1.20 each.
What is the balance on the Share Capital account at the end of the year?
A $75 000 B $110 000 C $125 000 D $160 000
Nov 02 P1 Q19/ May 09 P1 Q21
18 A Company’s share capital consists of 150 000 ordinary shares of $0.50 each.
It makes a rights issue of 1 ordinary share for every 3 already held at $1.20 per share.
It then makes a bonus issue of 1 share for every 5 held.
Which amount will be shown in the Balance Sheet for share capital?
A $120 000 B $145 000 C $155 000 D $165 000
May 04 P1 Q19
19 Which statement about bonus shares is true?

A They may be issued as repayment of debentures
B They may be issued at a premium
C They may be issued to the holders of preference share
D They may be issued using the premium received from an issue of preference share
May 04 P1 Q20
20 Which is a reason for a company issuing bonus shares to its existing shareholders?
A to capitalise reserves B to increase profits available for dividend

C to raise the market value of shares D to raise additional cash
May 04 P3 Q20
21 What will result in an increase in cash funds to a business?

A bonus issue of shares B increase in authorised share capital
C revaluation of non-current assets D rights issue of shares
Nov 04 P1 Q18
22 A company’s Balance Sheet shows the following balances

$
Ordinary shares of $1 each 100 000
Share premium 10 000
Retained profits 48 000
Bank balance 50 000
A 1 for 4 bonus issue takes place, leaving the reserves in the most useful form.
What are the new account balances?
Share Premium ($) Retained Profits ($) Bank ($)
A 33 000 50 000
B 33 000 75 000
C 10 000 23 000 50 000
D 10 000 23 000 75 000
Nov 04 P1 Q19
23 Which of the following is a reason for a company issuing bonus shares?

A to increase liquidity B to increase profitability
C to reduce gearing D to reduce revenue reserves
Nov 04 P3 Q18
24 A company makes a 1 for 4 bonus issue of ordinary shares.

What will happen to share capital and shareholders’ funds?
Share capital Shareholders’ funds
A increased by 25% decreased by 25%
B increased by 25% increased by 25%
C increased by 25% no change
D no change increased by 25%
May 05 P1 Q18
25 A company made a bonus issue of shares on the basis of 1 for every 3 held. The directors wish to keep the
reserves in the most flexible form.
Balance Sheet extract (before bonus issue) $000
Capital and reserves
ordinary shares $0.20 each 900
share premium 100
revaluation reserve 170
retained profits 130
1 300
What will be the position after the bonus issue?
Share capital Share premium Revaluation reserve Retained profits
$000 $000 $000 $000
A 1 200 nil nil 100
B 1 200 nil 70 30
C 1 200 nil 100 Nil
D 1 200 100 nil nil
Nov 05 P1 Q18
26 A limited company has an authorised share capital of $750 000 and an issued share capital of $450 000 in
$1.00 ordinary shares.
It makes a 1 for 3 rights issue of shares at $2.00 per share which is fully taken up.
What is the balance on the share capital account following this transaction?
A $600 000 B $700 000 C $750 000 D $900 000
Nov 05 P1 Q19
27 A company with an issued share capital of $200 000 of $1.00 ordinary shares makes a bonus issue of one
$1.00 ordinary share for every five already held. It also issues $80 000 debentures at a discount of 5%. The
company has a bank balance of $40 000 before the issues.
What is the bank balance after the issues?
A $76 000 B $116 000 C $120 000 D $166 000
Nov 05 P1 Q20
28 What will increase the working capital and net assets and reserves of a company?
A a bonus issue of shares
B a debenture issue
C an issue of shares at a premium
D an issue of shares at nominal value
May 06 P1 Q19
29 At January 2005 the capital structure of S Limited was as follows.
$
issued share capital 100 000 ordinary shares of $1 each 100 000
share premium account 30 000
On 1 April 2005 the company made an issue of 20 000 shares for $36 000.
On 1 June 2005 a bonus issue of one share for every six in issue was made. The share premium account
was used for the purpose.
What is the balance on the share premium account at 31 December 2005?
A $26 000 B $34 000 C $46 000 D $56 000
May 06 P1 Q20/ May 10 P1 Q18
30 A company has issued 80 000 shares of $0.50 each. These are quoted on the stock exchange at $1.60
each. The company makes a rights issue on a 1 for 4 basis at a price of $1.20 each.
What is the balance on the Share Capital account after the rights issue?
A $50 000 B $100 000 C $120 000 D $160 000

May 06 P1 Q22
31 A director-owned company needs additional funds.
Which method of finance might lead to a reduction of the director’s control of the business?
A bank loan
B debenture
C ordinary share issue
D preference share issue
Nov 06 P1 Q19

A A bonus issue of shares will increase the amount of cash available to the company.
B A rights issue of shares is always made at the nominal value of the shares.
C A rights issue of shares will increase the amount of cash available to the company.
If shares are issued at an amount that is more than the nominal value of the shares, the
D
excess must be debited to the share premium account
Nov 06 P1 Q20
33 A company balance sheet shows the following:

$000
$1 ordinary shares 500
retained earnings 400
10% debentures 300
1 200
net assets 1 200
A fully subscribed 1 for 4 rights issue at $2 per share is made and 50% of the debentures are repaid at par.
What are the net assets following these changes?
A $1 100 000
B $1 175 000
C $1 225 000
D $1 300 000
Nov 06 P1 Q21
34 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
Nov 07 P1 Q17
35 A company’s balance sheet shows:
$
share capital ordinary shares of $10 each 100 000
general reserve 60 000
retained profit 210 000
The company pays a dividend of $70 000, makes a bonus issue of 5 000 ordinary shares and raises
a debenture loan of $120 000.
What will be the total of share capital and reserves after these transactions are completed?
A $250 000
B $300 000
C $350 000
D $420 000
Nov 07 P1 Q18
36 A limited company has the following capital structure:

$
$1 ordinary shares 500
general reserve 300
retained profit 200
1 000
The following transactions will take place:

a bonus issue of 1 share for every 5 held;
an issue of 500 000 shares of $1 each at a premium of $0.50;
an issue of debentures of $250 000.
What will be the total of the share capital and reserves after the completion of these transactions?
A $1 500 000 B $1 750 000 C $1 850 000 D $2 000 000
Nov 07 P3 Q17
37 A company's capital is
$
ordinary shares of $1.00 each 200 000
revenue reserves 160 000
Changes now to be made (in the order given)
• A one for one bonus issue
• A rights issue of 100 000 ordinary shares of $1.00 each at $1.40 per share
The company wishes to maximize the amounts available to pay dividends.
What will be the ordinary capital and reserves of the company?
ordinary share capital ($) share premium ($) revenue reserves ($)
A 500 000 40 000 40 000
B 500 000 80 000 nil
C 540 000 nil 40 000
D 540 000 40 000 40 000
May 08 P1 Q19
38 What is the effect on a company's balance sheet of issuing bonus shares?

A the bank balance will be increased
B the non-current liabilities will be increased
C the reserves will be reduced
D the share capital will be reduced
Nov 08 P1 Q19
39 A company, with an existing issued share capital of 200 000 ordinary shares of $0.50 each, made a one for
four bonus issue. This was later followed by a one for two rights issue at $1.20 per share. What will be the
balance on the share capital account after these transactions?
A $125 000 B $187 500 C $270 000 D $375 000

Nov 08 P1 Q20
40 A shareholder sells some ordinary shares for more than he paid for them.
What is the effect on the company balance sheet?
ordinary share capital share premium account
A decrease decrease
B decrease increase
C no effect decrease
D no effect no effect
May 09 P1 Q20
41 An extract from a company’s balance sheet is given.

$000
issued ordinary share capital 250
issued preference shares 180
retained profit 320
share premium account 125
8 % debentures 100
What are the ordinary shareholders’ funds?
A $695 000 B $775 000 C $875 000 D $975 000
Nov 09 P1 Q15
42 An extract from a company’s balance sheet shows the following.

$000
issued ordinary shares of $0.25 each 600
The company makes a rights issue of one new ordinary share for each three held, at a price of $0.30 per
share. All shares were taken up.
What does the new balance sheet show?
issued ordinary share capital share premium
$000 $000
A 600 120
B 800 150
C 800 190
D 800 600
Nov 09 P1 Q16
43 A company’s Balance Sheet at 31 December 2008 includes:

$
Ordinary shares of $1.00 12 000
Retained profit 4000
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
Nov 09 P1 Q17
44 When is a share premium account opened?

A when shares are issued at a price above nominal value
B when shares are redeemed by the company at a premium
C when shares are sold by a shareholder at a price above their nominal value
D when the company issues bonus shares
May 10 P1 Q19
45 A company makes a 1-for-3 bonus issue of shares. The book value of its shareholders' funds immediately
before the issue is as follows.
$
retained profit 100 000
The costs of the bonus issue are $10 000.
What will be the book value of shareholders funds after the bonus issue?
A $510 000 B $520 000
C $610 000 D $620 000
May 10 P3 Q6
46 Which statement about the issue by a company of bonus shares is correct?

A They can be issued at a premium.
B They can be issued by using both capital and revenue reserves.
C They can only be issued from capital reserves.
D They can only be issued from revenue reserves.
May 10 P3 Q15
47 A company’s share capital and reserves are:
$
Non-current (fixed) assets 250 000
net current assets 125 000
share capital and reserves 375 000
150 000 shares $1 each 150 000
retained profits 25 000
375 000
The directors propose to issue bonus shares on the basis of one $1 share for every three already held.
Following this the directors intend to make a rights issue on the basis of one new $1 share for every four
shares held, at a premium of $0.20 per share.
What will the total net assets of the company be after the share issues?
A $425 000
B $435 000
C $475 000
D $485 000
Nov 10 P1 Q20
48 The equity section of a company’s balance sheet is as follows.
$
ordinary shares of $0.50 each 200 000
preference shares of $1 each 100 000
retained earnings 120 000
The following items have not yet been adjusted.

1 purchase returns of $10 000 have been credited to the sales returns account
2 a long term loan of $40 000 has not been recorded
3 a rights issue during the year of 200 000 ordinary shares at a premium of $0.10each
What will the total of equity be after the above adjustments have been made?
A $590 000
B $600 000
C $630 000
D $640 000
Nov 10 P3 Q18
49 A company issues for cash 50 000 shares of $5 each at a premium of $15 each and $300 000 4%
debentures.
By what amount will the net assets of the company increase?
A $250 000
B $550 000
C $1 000 000
D $1 300 000
May 11 P1 Q8
50 An extract from Bumble Ltd's balance sheet shows the following.
$000
ordinary shares of $0.25 each 500
share premium 100
The company makes a rights issue of 1 share for each 4 held at a price of $0.30 per share. All shares are
taken up.
What will the new balance sheet show?
A B C D
$000 $000 $000 $000
ordinary shares of $0.25 each 625 500 625 625
rights issue – 125 – –
share premium 100 125 125 100
retained earnings 300 275 300 325
May 11 P1 Q9
51 Why would convertible loan stock be issued by a company?
A to increase the equity of the company at the issue date

B to increase gearing on conversion
C to increase the market value of the company’s equity at the issue date
D to obtain low-cost finance when equity market conditions are unfavourable
May 11 P3 Q3
52 Zachary plc has the following summary balance sheet at 31 Dec 2009.
$ million
ordinary shares of $1 each 50
net assets 120
Zachary plc made a bonus issue (1 for 2 of ordinary shares on 1 January 2010 and a rights issue (1 for 5 of
ordinary shares on 31 December 2010 at $2 per share.
The share issue was fully subscribed. Retained earnings were $12 million for 2010. What were the
net assets at 31 December 2010?
A $112 million
B $150 million
C $162 million
D $187 million
May 11 P3 Q18
53 What occurs in a rights issue of shares?
A Any premium on the issue is added to a capital reserve.

B Any premium on the issue is added to a revenue reserve.
C Any premium on the issue is written off to the income statement.
D The nominal value of the issue is written off to the income statement.
Nov 11 P1 Q19
54 A company has the following items in its statement of financial position.

$
ordinary share capital, shares of $0.50 each 900000
long-term bank loan 30000
The company issues 100 000 bonus shares of $0.50 each to its shareholders.
What is the total amount of shareholders' funds after the issue of the bonus shares?
A $1 300000 B $1 350000
C $1 380000 D $1 40000
Nov 11 P3 Q3
55 An extract from a company’s statement of financial position is shown below.

$
ordinary shares at $0.50 share 500 000
premium account 100 000
900 000
The day after this statement was prepared the company made a 1 for 4 rights issue at a price that
was at 20 % below the current market price of $1 per share.
What was the balance on the share premium account after the rights issue?
A $100 000 B $137 500
C $175 000 D $200 000
May 12 P32 Q5
56 A company makes a 1 for 2 bonus issue.

What effect will this have?
A improve cash flow
B increase shareholders’ funds
C reduce an ordinary shareholder’s percentage holding
D reduce the value of an ordinary share
May 12 P32 Q6
57 A company has ordinary shares of $1 each. Each year it pays a dividend of 10% of the nominal value of the
shares.
It now wishes to raise a further $120 000 by an issue of shares. This would bring in additional profit of $10
000 and dividends paid would increase by $2 500 a year.
At which price should the company issue the new shares to maintain the percentage of dividend?
A $1.00 B $1.20 C $1.60 D $4.80

May 13 P12 Q19
58 A company issues shares at a premium.

Which effect does the issue have on the company’s statement of financial position?
net assets share capital

A decrease decrease
B decrease no effect
C increase increase
D increase no effect
May 14P12 Q21/Nov 14 P12 Q17/Nov 15 P12 Q21
59 The following balances are extracted from the books of Juno Limited.
30 April 2014 30 April 2013
$ $
ordinary shares of $0.50 each 700 000 500 000
share premium 90 000 50 000
How many ordinary shares have been issued during the year ended 30 April 2014?
A 200 000 B 240 000 C 400 000 D 480 000
Nov 14 P12 Q16
60 A limited company issues 5000 ordinary shares of $2 each at a premium of $0.50.

What is the effect on share capital and liquidity?
share capital
liquidity
$
A increase 10 000 improve
B increase 10 000 no effect
C increase 12 500 improve
D increase 12 500 no effect
May 15 P12 Q18
61 A company made a rights issue of shares.

Where is this recorded?
A Income statement and Statement of financial position

B Income statement only
C Statement of changes in equity and Statement of financial position
D Statement of financial position only
Specimen 16 P1 Q16
62 A company’s statement of financial position shows the following.

$
The following transactions then take place.
1 The company pays a dividend of $70 000.
2 The company makes a bonus issue of 5000 ordinary shares.
3 The company issues a debenture of $120 000.
A $250 000 B $300 000
C $350 000 D $420 000
Specimen 16 P1 Q17
63 A company made a bonus issue of ordinary shares.

How was this recorded in its books of account?
account debited account debited
A bank share capital
B retained earnings share capital
C share capital bank
D share capital retained earnings
Specimen 16 P1 Q19
64 A company issues 100 000 new $1 ordinary shares at a premium of $0.20 each.
Which effect does this have on the statement of financial position?
A Equity increases by the nominal value of the shares but decreases by the value of the premium.
B Equity increases by the nominal value of the shares only.
C Net assets increase by the nominal value of the shares plus the value of the premium.
D Net assets increase by the nominal value of the shares but decrease by the value of the premium.
May 16 P12 Q17
65 The trial balance on 31 December 2015 showed the following information.

$
ordinary share capital ($1 shares) 500 000
On 1 January 2016 the directors created the general reserve of $70 000. At the same time 200000
ordinary shares were issued for $300 000.
By which amount did the total reserves increase on 1 January 2016?
A $100 000 B $170 000
C $300 000 D $370 000
May 16 P12 Q18
66 How would a transfer to general reserve and the issue of shares at a premium affect the revenue reserves
of a limited company?
transfer to issue of shares
general reserve at a premium
A decrease Decrease
B decrease Increase
C no effect Increase
Nov 16 P12 Q16
67 Which action will increase the equity of a limited company?

A creating a general reserve
B issuing bonus shares
C issuing debentures
D issuing non-redeemable preference shares
Nov 16 P12 Q19
68 A company’s equity is made up as shown.

$
share premium 3 000
The following took place.
1 A bonus issue of one ordinary share for every five held was made.
2 Six months later a rights issue of one ordinary share for every four held was made.
The shares were issued at $0.30 each.
By how much did the company’s equity increase as a result of these transactions?
A $5 000 B $6 000 C $7 500 D $9 000

May 17 P12 Q16
ANSWER KEY
1 C 18 A 35 B 52 C
2 D 19 D 36 B 53 A
3 D 20 A 37 A 54 B
4 B 21 D 38 C 55 C
5 B 22 A 39 B 56 D
6 C 23 D 40 D 57 D
7 D 24 C 41 A 58 C
8 A 25 A 42 C 59 C
9 D 26 A 43 B 60 A
10 D 27 B 44 A 61 C
11 C 28 C 45 A 62 B
12 A 29 A 46 B 63 B
13 B 30 A 47 B 64 C
14 A 31 C 48 A 65 A
15 A 32 C 49 C 66 D
16 C 33 D 50 C 67 D
17 A 34 C 51 D 68 D
DETAILED ANSWERS
1 Right shares will have the following effects
Bank 1.30 × 84 000* = $109 200 (Issue price)
Ordinary share capital 0.50× 84 000 = $42 000 (Face value)
Share Premium 0.80× 84 000 = $67 200 (Premium)
$84 000
* Original number of shares =
$0.50
= 168 000
Number of right shares = 168 000 shares × 1/2 = 84 000
Bonus shares will have the following effects
Ordinary capital  168 000* × 0.5 = $84 000
Reserves 168000 × 0.5 = $84 000
* Number of bonus shares = ($168 000 + $84 0002/3)
= 168 000 shares
In order to have maximum amount of retained profit, share premium balance is used to issue bonus
shares before using retained profits. This means that out of $84 000, $67 200 should be taken from share
premium and remaining $16 800 ($84 000  $67 200) will be taken from retained profits which will then
become $33 200 ($50 000  $16 800).
2 As bonus shares are issued out of reserves i.e. Reserves share capital . As further 8 000 000 shares (10
000 000 – 2 000 000) can legally be issued whereas, total reserves of $3 400 000 ($2 000 000 + $400 000 +
$1 000 000) are available. So bonus shares can only be issued to the extent of $3 400 000, however if
authorised share capital would have been $5 000 000 then company can only be able to issue 3 000 000
shares (5 000 000 – 2 000 000).
3 As Company is not a party in this transaction, as the shares are now subject to trade have already been
issued, so this will not alter share capital.
4 Issue of Debentures has the following effects
Cash 
Debentures (non-current liability) 
Moreover interest on debentures will also be paid so interest expense will also increase. As a result profits
will decrease and net current assets will increase because of increase in cash.
5 Effects of rights issue will be
Cash/bank  3.00 × 1 million = $3.0million
Share capital 0.50× 1 million = $0.5million
Share premium 2.50 × 1 million = $2.5million
6 As distributable reserves here are general reserves and retained profits so to issue bonus shares capital
reserves i.e. share premium account, revaluation reserves should be firstly used.
$400 000
As amount of bonus issue is $100 000 ( )and capital reserves are sufficient to issue bonus shares,
4
the whole amount of general reserves and retained profits will be available after bonus issue.
7 $(m)
Ordinary shares before bonus and rights issue 100
Bonus issue ($100m 1/10) 10
Ordinary share before rights issue 110
Ordinary shares after rights issue 130
Net increase in capital A (rights issue) 20
Share premium original amount 50
Premium used for bonus issue 10
Premium before rights issue 40
Premium after rights issue 80
Net increase in premium B 40
Total increase in cash = $20m A + $40m B = $60m
8 Issue of bonus shares has the following effects:
Share capital 
Reserves 
As there is no change in any of asset or liability so net assets remains constant whereas share capital
increases due to bonus issue.
10 $
Share capital at present 400 000
Bonus shares ($400 000 1/5) 80 000
Share capital after bonus issue 480 000
Right shares ($480 000 1/3) 160 000
Share capital after rights and bonus issue 640 000
11 Number of rights shares = 2 million 1/4

= 500 000
Share premium per share = Issue price - Face price
= $2.00  $0.50 = $1.50
Increase in share premium = 500 000 shares × $1.50 = $750 000
12 As share capital is recorded at its face value so it will be 80 000 × $0.50 = $40 000
13 $
Issued share capital before rights and bonus issue 300 000
Bonus issue ($300 000 ×1/4) 75 000
375 000
Rights issue ($375 000 ×1/5) 75 000
14 As share capital is recorded at its face value so it will be 400 000 shares × $0.25 = $100 000
15 Effects of the transactions took place in February and April 2002

February 2002 : Bank (320 000 shares * × $1.10) = $352 000 
Ordinary capital (320 000 shares × $0.50) = $160 000 
Share premium (320 000 shares × $0.60) = $192 000 
$320 000 1
* Number of rights shares = ×
$0.50 2
= 320 000 shares
April 2002 : Number of bonus shares = Existing shares ×1/4

$320 000+$160 000 1
= ×
$0.50 4
= 960 000 1/4
= 240 000 shares
Effects : Ordinary share capital = 240 000 shares × $0.50 = $120 000 
Reserves = $120 000 
So balance of share capital and bank after these transactions will be
Ordinary capital Bank
Balances on 31 December 2001 320 000 100 000
Issue of right shares in February 2002 160 000 352 000
Bonus issue in April 2002 120 000 - _
Balances on 30 April 2002 600 000 452 000
16 The effects of bonus issue of shares are

Reserves 
Ordinary share capital 
As there is no change in assets and liabilities so net assets will not change.
17 $
Issued ordinary capital at start (100 000 shares × $0.50) 50 000
New issue (50 000 shares × $0.50) 25 000
Balance on the share capital at end 75 000
18 Number of right shares (150 000 shares 1/3) = 50 000 shares

Number of bonus shares [(150 000 + 50 000) 1/5] = 40 000 shares
Total number of ordinary shares = (150 000+50 000+40 000) shares
= 240 000 shares
Value of ordinary share capital = 240 000 shares @ $0.50
= $120 000
20 Because of bonus issue reserves decrease and share capital increases. In other words reserves are
converted into share capital i.e. the reserves are capitalised, so “A” option is correct.
21 Effects of the four options are:

A. Reserves  Share capital 
B. No effect in accounting records
C. Non-current assets  Revaluation Reserves (Capital) 
D. Bank  Share Capital 
As “D” option involves receipts of cash so this is the correct option.
22 Number of bonus shares (100 000 shares 1/4) = 25 000 shares

Effects of bonus issue = 25 000 × $1 = $25 000 ordinary capital 
= $10 000 share premium 
= $15 000 retained profits 
So in the light of above “A” option is correct.
23 “A” option is incorrect as cash in not generated on bonus issue. “B” option is also incorrect as bonus
shares are issued to replace cash dividends, “C” option is also wrong as bonus issue involves the
conversion of reserves into ordinary share capital and so there will be no effect on gearing level. “D”
option is correct as due to bonus issue reserves are reduced.
24 “C” option is correct as issue of bonus shares has the following effects
Reserves 
As both share capital and reserves are part of shareholders’ funds so shareholders’ fund will not change.
25 Effects of bonus shares will be Original Change New

$000 $000 $000
Ordinary Capital (900 1/3) 900 300 1 200
Share premium 100 (100) Nil
Revaluation reserves 170 (170) Nil
Retained profits ($300  $100  $170) 130 30 100
26 $
Ordinary share capital (450 000 1/3 $1)  150 000 Cr
Share premium (450 000 1/3 × $1)  150 000 Cr
Bank (450 000 1/3 $2)  300 000 Dr
New Ordinary Capital = $450 000 + $150 000 = $600 000
27 $
Bank balance before the issues 40 000
Issue of debentures ($80 000 × 95%) 76 000
Bank balance after the issues 116 000
* Bonus shares are not accounted for as they do not involve inflow of cash
28 Effects of the four options are

(A) Ordinary share capital 
Reserves 
(B) Bank (working capital) 
Debentures (long term loans) 
(C) Bank (working capital / net assets) 
Share premium (reserves)  Correct
(D) Bank (working Capital/ net assets) 
29 Share premium account

$ $
Equity capital-bonus issue ($120 0006) 20 000 Balance b/f 30 000
Balance c/d 26 000 Bank (new issue) 16 000
46 000 46 000
30 Number of ordinary shares before rights issue 80 000

Number of rights shares (80 000 × 1/4) 20 000
Total number of ordinary shares after rights issue 100 000
Face value of shares to be shown in balance sheet = 100 000 shares @ $0.50 = $50 000
33 Effects of rights issue are

(500 000 1/4 shares × $1) = $125 000  Ordinary Share Capital
(500 000 1/4 shares × $2) = $250 000  Bank
(500 000 1/4 shares × $1) = $125 000  Share Premium
Effects of repayment of debentures are

Debentures  $150 000 (300 000 1/4)
Bank  $150 000
Net assets after these changes will be $1 300 000 ($1 200 000 + $125 000 + $125 000 – $150 000)or (1 200
000 + $250 000 – $150 000).
34 Issue of ordinary shares will have the following effects

Face 1.00 × 500 000 = $500 000  Ordinary capital
Issue 3.00 × 500 000 = $1 500 000  Bank
Premium 2.00 × 500 000 = $1 000 000  Share premium
Issue of debenture will have the following effects
Face $250 000  Debentures
Issue $250 000  Bank
As a result of the above transactions asset of bank will increase by $1 750 000 ($1 500 000 + $250 000)
whereas a liability of debentures will increase by $250 000 so net asset will increase by $1500 000.
35 Effects of payments of dividends will be

Dividends  or Retained profits  $70 000
Bank $70 000
Effects of bonus issue will be

General Reserves (5 000 × $10  $50 000
Ordinary share capital $50 000
and effects of raising a debenture loan will be

Bank  $120 000
Debentures  $120 000
So total of share capital and reserves will be calculated as
$
Share capital and reserves as per balance sheet ($100 000 + $60 000 + $210 000) 370 000
Payment of dividends (reduction in profit) (70 000)
Increase in ordinary share capital (bonus issue) 50 000
Reduction in general reserves (bonus issue) (50 000)
Share capital and reserves after completion of above transactions 300 000
36 Effects of bonus shares issued

Ordinary share capital ($500 000 1/5)  $100 000
General Reserves  $100 000
Effects of issue of shares for cash

Ordinary Capital (500 000 × $1)  $500 000
Premium (500 000 × $0.5)  $250 000
Bank  $750 000
Effects of debentures issue are

Bank  $250 000
Debentures  $250 000
$
Share capital and reserves before issue of share and debentures 1 000 000
Increase in ordinary capital due to bonus issue 100 000
Decrease in general reserves due to bonus issue (100 000)
Increase in ordinary capital on issue of new shares 500 000
Increase in share premium on issue of new shares 250 000
Share capital and reserves after issue of shares and debentures 1 750 000
37 ordinary share revenue

capital premium reserves
$ $ $
Share capital and reserves as per balance sheet 200 000 80 000 160 000
Effects of bonus issue 200 000 (80 000) (120 000)
Effects of rights issue(100 000 shares×$1);(100 000 shares× 0.40) 100 000 40 000 ______
Share capital & reserves after completion of above transactions 500 000 40 000 40 000
39 $
Share capital before right and bonus issue 100 000
Bonus shares [(200 000 × 1/4) shares × $0.05] 25 000
Share capital after bonus issue 125 000
Right shares [{(200 000 + 50 000)× 1/2} shares × $0.05] 62 500
41 Ordinary shareholders’ funds = Ordinary share capital + All reserves + Retained profits
= $250 000 + $125 000 + $320 000
= $695 000
The examiner report however shows “C” as correct option. According to examiner report issued
preference shares are included in ordinary shareholders’ funds which is incorrect, however they could be
included if calculation total shareholders’ funds was asked for.
42 issued ordinary share capital share premium

Original New issue New balance Original New issue New balance
balance after issue balance after issue
$000 $000 $000 $000 $000 $000
600 200* 800 150 40* 190
*Effects of rights issue will be
Bank 0.30 × 800 000 shares** = $240 000
Share capital 0.25× 800 000 shares = $200 000
Share premium 0.05 × 800 000 shares = $40 000
600 000 shares 1
** Number of right shares = ×
$0.25 3
= 800 000 shares
43 Effects of rights issue will be

Bank  1.60 × 7 500 shares* = $12 000
Share capital 1.00× 7 500 shares = $7 500
Share premium 2.50 × 7 500 shares = $4 500
* Number of right shares = [12 000 + (12 000 × 1/4)] × 1/2
= 7 500 shares
As bonus issue does not affect cash flows so it is irrelevant in this Question.
45 Ord. share capital share premium retained profits Total
$ $ $ $
Balances before Bonus Issue 300 000 120 000 100 000 520 000
Effects of Bonus Issue 100 000 (100 000) (10 000) (10 000)
510 000
48 The effects of correction of errors will be
1 Sales returns $10 000
Purchases returns $10 000
2 Bank $40 000
Long term loans $40 000
3 Bank [200 000 × ($0.5 + $0.1)] $120 000
Ordinary capital (200 000 × $0.5) $100 000
Share premium (200 000 × $0.1) $20 000
First two transactions have no effect on total equity however rights issue will increase equity by $120 000
and it will become $590 000 ($200 000 + $100 000 + $50 000 + $120 000 +$120 000) (rights issue)] so “A”
option is correct.
49 Effects of debentures issue

Bank  $300 000
4% Debentures  $300 000
Effects of issue of shares for cash
Ordinary Capital (50 000 × $5)  $250 000
Premium (50 000 × $15)  $750 000
Bank (50 000 × $20) $1 000 000
Net assets will increase with $1 000 000 (issue price of shares); however issue of debentures will not affect
net assets as increase in bank (asset) is set-off by an increase in debentures (non- current liability).
50 Effects of rights issue are

Ordinary Capital (500 000÷ $0.25 shares) ×1/4@ $0.25  $125 000
Premium (500 000÷ $0.25 shares) ×1/4@ $0.05  $25 000
Ordinary shares Share premium Retained earnings
$000 $000 $000
Balances as per balance sheet 500 100 300
Issue of right shares 125 25 Nil
Balances after rights issue 625 125 300
52 Effects of bonus issue

Ordinary share capital(50million× 1/2) $25 million
Retained Earnings $25 million
Effects of rights issue
Bank [{(50 million+ (50million× 1/2)} × 1/5] shares @$2  $30 million
Ordinary Capital [{(50 million+ (50million× 1/2)} × 1/5] shares @$1 $15 million
Premium $15 million
Net assets will become $162 million after an increase of $42 million i.e. $30 million on account of rights
issue and $12 million on account of retained earnings for the current year. However bonus issue will not
affect net assets as increase in share capital is set-off by decrease in another equity item of retained
earnings.
54 Effects of bonus shares issued

Ordinary share capital (100 000  $0.50)  $50 000
Retained earnings  $50 000
$
Shareholders' funds before bonus issue 1 350 000
Increase in ordinary capital due to bonus issue 50 000
Decrease in retained earnings due to bonus issue (50 000)
Shareholders' fundsafterbonus issue 1 350 000
$500 000 1
55 Number of rights shares = ×
$0.50 4
= 250 000 shares
Bank (250 000 shares × $0.80) = $200 000 
Ordinary capital (250 000 shares × $0.50) = $125 000 
Share premium (250 000 shares × $0.30) = $75 000 
New Premium amount = $100 000 + $75 000

= $175 000
56 Bonus issue reduces the value of an ordinary share due to increase in number of ordinary shares in issue.
Additional Ordinary Dividend
57 Dividend rate (%) = × 100
Additional Nominal value of share capital
$2 500
10% = × 100
Additional Nominal value of share capital
Nominal value of new shares = $25 000
Issue Price of New Shares
Issue price per new share = × 100
Number of new shares issued
$120 000
= × 100
25 000 shares
= $4.80 per share
58 ‘C’ option is correct as issue of bonus shares has the following effects:
Bank (net assets) 
Share capital 
Reserves 
$700 000−$500 000

59 Number of shares issued =
$0.50
= 400 000 shares
60 Effects of issue of ordinary shares will be

Share capital 2.00 × 5 000 = $10 000
Share premium 0.50× 5 000 = $2 500
Cash/bank 2.50 × 5 000 = $12 500
62 ordinary General Retained

Total
capital Reserves Earnings
$ $ $ $
Share capital and reserves as per balance sheet 100 000 60 000 210 000 370 000
Effects of dividend paid (70 000) (70 000)
Effects of bonus issue (5 000 shares × $10) 50 000 (50 000) ______ -
Capital & reserves after dividends & bonus issue 150 000 10 000 140 000 300 000
64 Both Equity and Net assets increase with the issue price of the shares (nominal value of the shares plus
the value of the premium) so “C” option is correct.
65 Total reserves will increase by $100 000 (“A” Option) representing premium on issue of shares ($300 000
 $200 000). Creation of reserves will not have any effect on total reserves as it results in decrease in
retained profits and increase in General reserves with the same amount.
68 Ord. share capital share premium retained profits Total

$ $ $ $
Effects of Bonus Issue 5 000 (3 000) (2 000) -
Effects of Rights Issue 7 500 1 500 9 000
Total increase in equity 9 000
Chapter 16 -175- Ratio Analysis - Calculation
CHAPTER 16 RATIO ANALYSIS - CALCULATION

1 The following items appeared in a balance sheet at year-end.
$
Non-current assets 100 000
Inventory 50 000
Cash at bank 20 000
What is the quick (acid test) ratio?
A 21:1 B 11:1 C 6:1 D 2:1

May 98 P1 Q22 / Specimen 02 P1 Q24
2 The draft accounts of a company for the year ended 31 December 1997 include the following:
- Turnover $280 000
- Gross profit $60 000
It was subsequently discovered that the closing inventory was understated by $10 000.
What will be the gross profit percentage after correcting this error?
A 17.9% B 20.7% C 21.4% D 25.0%
May 98 P1 Q24 / Nov 02 P1 Q25 / Nov 14 P12 Q19
3 The opening inventory of a business is $10 000 and the cost of goods sold is $200 000. Using the average
figure for opening and closing inventories, what value of closing inventory is needed to give ainventory
turnover ratio of 10 times?
A $10 000 B $20 000 C $30 000 D $40 000

Nov 98 P1 Q22 / May 03 P1 Q23
4 The current liabilities of a business total $84 000. The current ratio was 1.2: 1 and the quick ratio (or acid
test ratio) was 0.7:1
What is the figure for inventory?
A $16 800 B $42 000 C $58 800 D $100 800
May 99 P1 Q25
5 The table shows extracts from the balance sheet of a company.
$
Inventory 25 000
Dividends payable 10 000
Short–term investment 25 000
Prepayments 5 000
Tax owing 15 000
What is the quick ratio?
A 0.96:1 B 1.15:1 C 1.24:1 D 1.33:1

Nov 99 P1 Q24
6 The table shows amounts included in a trial balance.
$
Cash sales 125 000
Credit sales 250 000
Returns: cash sales 6 000
Returns: credit sales 8 000
Other trade receivables 12 000
What is the trade receivables’ collection period?
A 38 days B 51 days C 55 days D 57 days

Nov 99 P1 Q25
7 The table shows an extract from some accounts

Year ended 31 December 1999 ($)
Sales 13 000
Cost of sales 9 000
Prepayments 100
What is the trade receivable turnover period for 1999?

May 00 P1 Q25 / Nov 01 P1 Q26
8 The profit before interest extracted from a company’s Income statement is $128 000 (interest is $8 000.
The table shows amounts included in the company’s Balance Sheet.
$
Non-current assets 485 000
Net current assets 27 000
Amounts falling due after one year :debentures 80 000
How much is the return on the total capital employed?
A 20.3 % B 21.6 % C 23.4 % D 25.0 %
May 00 P1 Q27/Nov 06 P1 Q26/May 11 P1 Q19
9 Opening inventory is valued at $13 500 and closing inventory is valued at $14 500.
What will be the resulting inventory turn from a mark-up of 25% and sales for the period of $175000?
A 10 times B 12 times C 12.5 times D 15 times
Nov 00 P1 Q24 / Specimen 02 P1 Q25
10 The table shows an extract from a business Balance Sheet.

$
Inventories 250 000
What is the current ratio?
A 1.3: 1 B 2.5: 1 C 3.0: 1 D 4.5: 1
Nov 00 P1 Q25
11 The following figures and ratios were extracted from a company’s final accounts.
Closing inventory $22 500
Trade payables $15 000
Current ratio 3.0 : 1
Acid test ratio 1.5 : 1
Which figures appeared on the Balance Sheet at the end of the year for Trade receivables and Bank?
Trade receivables ($) Bank ($)
A 10 000 5 000
B 17 500 5 000
C 25 000 12 500
D 25 000 20 000
Nov 00 P1 Q27
12 $100 000 is available for investment.

The table shows details of three businesses available for purchase.
Business Purchase price Estimated future
($) maintainable profits ($)
1 50 000 8 500
2 70 000 10 500
3 90 000 12 600
Money not used in the purchase of a business is lent at an interest rate of 13% per annum.
Which course of action will give the highest return on capital employed?
A lending $100 000
B purchasing business 1
C purchasing business 2
D purchasing business 3
May 01 P1 Q17
13 A company’s inventory turnover ratio is calculated using the cost of goods sold and the average of opening
and closing inventories. In each of the last two financial years, closing inventory was valued at $5000 more
than the corresponding opening inventory.
In both years, the inventory turnover was ten times and in the earlier year the cost of goods sold was
$125000.
What was the cost of goods sold in the second year?
A $200 000
B $175 000
C $150 000
D $125 000
May 02 P1 Q22
14 A business has the following current assets and current liabilities:

$
Cash in hand 50
The only other item in the working capital is inventory. The current ratio is 2:1.
What is the value of the inventory?
A $2 550 B $4 050 C $5 550 D $7 050
May 02 P1 Q23
15 The table shows the capital structure of a company.

$000
ordinary shares of $1 each 100
600
15 % loan stock (issued 5 years ago) 400
1 000
Operating profits average $260 000 per annum.
What is the return on shareholders’ funds?
A 26.0 % B 33.3 % C 43.3 % D 66.7 %
May 02 P3 Q13/ Nov 07 P1 Q23
16 The table shows an extract from a company’s accounts for the year ended 31 December 2001.
$
Credit sales 100 000
Cost of sales 80 000
What is the trade receivables’ collection period?
Nov 02 P1 Q21
17 Given a working capital ratio of 2.5:1 and the data below what is the figure for inventory?
$
Prepayments 600
Accruals 1 600
Long-term loan 5 000
Inventory ?
A $15 900 B $16 900 C $19 400 D $31 900

Nov 02 P1 Q23/Nov 14 P12 Q20
18 The table shows year-end information for three companies.

Sales Operating profit as Capital employed
Company
$ % of sales $
X 200 000 10 50 000
Y 500 000 15 100 000
Z 600 000 20 200 000
How should the companies be placed to show their relative orders of returns on capital employed?
Returns on capital employed
Highest Lowest
A X Y Z
B Z Y X
C Y Z X
D X Z Y
Nov02 P1 Q24/ Nov10 P1 Q24
19 A company’s trade receivables total $27 000. There is a collection period of 30 days.
The budget for the coming year provides for an increased turnover of 50% with the relevant collection
period being increased to 60 days.
What will the year-end trade receivables be?
A $13 500 B $27 000 C $40 500 D $81 000

Nov 02 P3 Q22/ May 03 P3 Q24
20 The following items are included in the Balance Sheet of a business.

$ 000
Inventory 64
Trade receivables 126
Trade payables 87
Bank (debit balance) 21
Bank loan (repayable in 2 years) 50
A 1.1: 1 B 1.2: 1 C 1.7: 1 D 2.4: 1
May 03 P1 Q21
21 The following information is available for a business.

$
Credit purchases 186 000
Trade payables at year end 24 000
What is the trade payables’ payment period?
May 03 P1 Q22
22 The following information is taken from a Balance Sheet.

$
Inventories 4 950
Cash at bank and in hand 2 500
Other short-term trade payables 4 500
A 1.8: 1 B 2.2: 1 C 2.7: 1 D 3.5: 1
Nov 03 P1 Q22
23 The following items appear on a Balance Sheet.

$
Inventory 10 000
Provision for doubtful debts 2 000
Cash and bank 4 000
The current ratio is 2: 1.How much are the trade receivables?
A $4 000 B $6 000
C $8 000 D $10 000
Nov 03 P1 Q23
24 A company’s trade receivables total $42 000 when the trade receivables’ days are 40. The company
budgets in the coming year for a 30% increase in turnover and trade receivables’ days reduced to 30.
What will the budgeted trade receivables be at the year-end?
A $24 231
B $31 500
C $40 950
D $43 077
Nov 03 P3 Q24
25 Which gives the return on capital employed?
net profit capital employed

A   100
sales sales
net profit sales
B   100
sales capital employed
sales capital employed
C   100
net profit sales
sales sales
D   100
net profit capital employed
Nov 04 P1 Q22
26 The table shows information from a company’s accounts.
$ 000
Turnover 135
Gross profit 34
Profit before interest and tax 11
Profit after tax 8
Non-current assets 59
Current assets 50
Debentures 12
Current liabilities 40
What is the return on total capital employed?

A 8.1%
B 11.3%
C 14.0%
D 15.9%
May 05 P1 Q19
27 The following information is given for a business at 31 December 2004.

Current ratio 3.6:1
Average inventory $12 000
What was the value of inventory at 1 January 2004?
A $9 400
B $10 000
C $12 000
D $14 000
May 05 P1 Q24
28 Given below are extracts from a company’s Income statement and Balance Sheet for last year.
Income statement $000
net profit before interest and tax 200
Interest paid (20
net profit before taxation 180
taxation (60
Dividends (10
retained profit for year 110
Balance Sheet $000

net assets 1 000
long term loan (100
share capital and reserves 900
What is the return on total capital employed?

A 18% B 20% C 22.2% D 25.7%
Nov 05 P1 Q24
29 The table shows an extract from a company’s final accounts:
$
purchases 28 000
cost of sales 24 000
accruals 1 100
What is the trade payables’ collection period for the year?
A 55 days B 64 days
C 69 days D 81 days
May 06 P1 Q23
30 During the year ended 31 March 2006 a business made sales of $560 000 of which 25% were for cash. The
trade receivables at 31 March 2005 were $52 000 and at 31 March 2006 they were $56000.
What is the trade receivables’ collection period based on average trade receivables?
Nov 06 P1 Q24
31 A business turns over its inventory 5 times a year. Average inventory 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
May 07 P1 Q21/May 12 P12 Q20
32 A company has the following information in its balance sheet:

$000
taxation due 40
trade receivables 150
bank overdraft 90
inventory 110
proposed dividend 70
trade payables 80
What is the liquidity (acid test or quick) ratio?
A 0.54: 1 B 0.88: 1 C 0.93: 1 D 1.85: 1
May 07 P1 Q22
33 A business has cash sales of $69 030 and credit sales of $1 406 070 in a year (360 days). The trade
receivables’ collection period is 40 days.
What is the closing trade receivables’ balance?
A $35 152 B $36 878 C $156 230 D $163 900
May 07 P1 Q23
34 A company produces the following information concerning inventory turnover (rate of inventory turn).
year 1 average inventory $60 000
Inventory turnover 10 times
year 2 average inventory double last year
cost of goods sold increased to $960 000
What will be the inventory turnover in year 2?
A 8 times B 10 times C 16 times D 20 times
Nov 07 P1 Q20
35 The table shows information for a business at the year end.
$000
average inventory 25
credit sales 150
credit purchases 112
total purchases 140
trade payables 28
What is the payment period for trade payables (to the nearest day)?
Nov 07 P1 Q21
36 The table shows the capital structure of a company.
$000
share capital $5 shares 300
10 % debenture stock (issued 3 years ago) 600
1 600
Operating profits average $150 000 a year. What is the return on shareholders’ funds?
A 9% B 9.4 % C 15 % D 18.75 %
Nov 07 P3 Q13
37 A company's sales are made evenly over a year (360 days). 10% of the sales are for cash. The trade
receivable balance is $26 700 and the trade receivable collection period is 30 days.
What are the total sales (cash and credit) for the year?
A $320 400 B $356 000 C $801 000 D $890 000
May 08 P1 Q20/May 11 P1 Q29
38 The following information has been taken from a recent balance sheet of a business.
$000
non-current assets 150
capital 170
current liabilities 5

A 3: 1 B 4: 1 C 5: 1 D 6: 1
May 08 P1 Q24/May 13 P12 Q23
39 During a financial year, a business made cash sales of $63 875 and credit sales of $146 000.
Trade receivables pay every 40 days.
What is the total trade receivables at the end of the year?
A $7 000 B $12 167 C $16 000 D $23 000
May 08 P3 Q13
40 The following information has been taken from a recent balance sheet.
non-current assets $30 000
working capital ratio 5: 1
capital $34 000
current liabilities $1 000
What is the amount of the current assets?
A $1 000 B $5 000
C $6 000 D $20 000
Nov 08 P1 Q22
41 The following data is available at the end of a financial year.
opening inventory $500 000
Purchases $2 250 000
closing inventory $750 000
gross profit margin 50%
trade receivables collection period 60 days
Sales are all on credit and accrue evenly over a 360-day accounting period.
What is the value of trade receivables at the year-end?
A $333 333 B $375 000
C $500 000 D $666 667
Nov 08 P1 Q23
42 In a year a business purchases inventory in cash for $11 680, and also on credit for $32485.
Trade payables are paid every 30 days.
What is the closing trade payables balance?
A $960 B $1 710 C $2 670 D $3 630
Nov 08 P3 Q15
43 Assets and liabilities of a business at its year end include the following information.
$
accruals 5 000
cash 600
prepayments 4 500
proposed dividend 12 000
inventory 51 800
A 0.67:1 B 1.85: 1 C 2.19: 1 D 2.54: 1
May 09 P1 Q22
44 A business has a trade receivable turnover period of 40 days based on year end trade receivables.
Annual sales are $180 000 of which 13 % are cash sales.
What is the year end trade receivables figure based on a year of 360 days?
A $2 600 B $17 400 C $20 000 D $45 200
May 09 P1 Q24
45 A company has trade payables of $80 000 and the payment period is 30 days.
The company's budget for the coming year provides for an increase in trade payables of 50 % and the
payment period taken will increase to 60 days.
What will be the budgeted trade payables' total at the end of next year?
A $120 000 B $160 000
C $240 000 D $320 000
May 09 P3 Q20
46 The following information relates to the final accounts of a business.

$000
cost of sales for year 12 500
sales for year 21 660
What was the inventory turnover in days?

A 68 B 72 C 126 D 144
Nov 09 P1 Q21
47 A business has trade payables of $8 000 and a bank overdraft of $2 000. Its current ratio is 2: 1 and its
quick (acid test) ratio is 1.5: 1.
What is the value of its inventory?
A $4 000 B $5 000 C $28 000 D $35 000

May 10 P1 Q21
48 A company's sales during a 365 day year are shown in the table.
$
cash sales 179 580
credit sales 927 100
total sales 1 106 680
The trade receivables turnover ratio at the year end is 42 days.
What is the end-of-year trade receivables balance?
A $22 074 B $98 460 C $106 680 D $127 344

May 10 P1 Q22
49 The following information is given about four products.

Which product makes the most gross profit?
inventory turnover average inventory in
mark up on cost %
(per annum) units
A 8 times 1 000 15
B 6 times 1 000 30
C 7 times 1 000 25
D 10 times 1 000 20
May 10 P1 Q23/May 14 P12 Q24
50 A business has current liabilities of $4000 at its year end. The quick (acid test) ratio is 1.5 : 1
The current ratio is 2.25 : 1
What is the value of inventory held at the year end?
A $3000 B $4000 C $9000 D $15 000
Nov 10 P1 Q21
51 A business has the following assets and liabilities.

$000 $000
Non-current (fixed) assets 420
inventory 120
430
trade payables (220
net current assets 210
total assets less current liabilities 630
long term loan (130
net assets 500
What is the business's quick (acid test) ratio?
A 1.41 : 1 B 1.95 : 1 C 2.43 : 1 D 3.86 : 1

Nov 10 P1 Q23
52 A business has a trade receivables turnover period of 40 days and annual sales of $479 970.
What is the year end trade receivables figure?
A $11 999 B $15 780
C $39 997 D $52 599
Nov 10 P3 Q13
53 The annual accounts of a business include the following.

$
revenue 160 000
Inventory turnover is 10 times. What is the gross profit?
A $20 000 B $40 000 C $60 000 D $120 000

May 11 P1 Q18
54 The following data is available at the end of a financial year.
opening inventory $60 000

purchases $420 000
closing inventory $80 000
mark up 25 %
trade receivables turnover 50 days
Sales are all on credit and accrue evenly over the year.
What is the amount of trade receivables at the end of the year (to the nearest $500?
A $55 000 B $57 500 C $68 500 D $72 000

May 11 P1 Q21
55 A company has a return on capital employed of 20% and an asset turnover of 2.5 times. What was the
company’s net profit ratio?
A 8% B 16 % C 20 % D 50 %
May 11 P3 Q14
56 A company has the following information.

$
profit before tax 300 000
profit from operations 400 000
equity 1 200 000
What is the company’s return on total capital employed?
A 15 % B 20 % C 25 % D 33.3 %
May 11 P3 Q15
57 The following data is available for the first year of trading for a business to 31 December 2010.
$
inventory at 31 December 2010 $200 000
inventory turnover during 2010 6 times
average inventory during 2010 $180 000
What was the value of inventory purchased during 2010?

A $880 000 B $1 080 000 C $1 280 000 D $1 380 000
May 11 P3 Q16
58 The following items appear on a balance sheet.

$
inventory 20 000
balance at bank 2 000
cash in hand 1 500
provision for doubtful debts 500
The current ratio is 3 :1.
How much do the trade receivables owe?
A $9500 B $10 000 C $12 000 D $12 500
Nov 11 P1 Q21
59 The table gives information about a company.
year 1 year 2
$ $
Revenue 150 000 200 000
cost of sales 105 000 130 000
45 000 70 000
administration and distribution expenses 27 000 47 500
profit from operations 18 000 22 500
non-current assets 120 000 110 000

net current assets 30 000 40 000
non-current liabilities (50 000 (10 000
What happened to gross profit margin and return on capital employed in year 2?
gross profit margin return on capital employed
A decreased decreased
B increased decreased
C decreased increased
D increased increased
May 12 P12 Q19
60 A company has the following year end information.
$000
credit sales 630
total purchases 280
total sales 840
trade payables 30
How long do the company’s credit customers take to pay?

A 35 days
B 39 days
C 47 days
D 52 days
Nov 12 P12 Q21
61 A company’s financial statements show the following.

$
finance charges 40 000
debentures 300 000
What is the return on capital employed?
A 15.2% B 16%
C 21.3% D 24%
May 13 P12 Q22
62 A company provides the following information.

$
trade payables at start of year 38 000
trade payables at end of year 49 000
payments to credit suppliers 210 000
cost of sales 250 000
What was the trade payables turnover?

A 72 days B 81 days
C 86 days D 90 days
Nov 12 P12 Q24
63 A company’s financial statements include the following.
$
profit before interest 200 000
issued share capital 500 000
reserves 160 000

A 19.2% B 21.2% C 30.3% D 40.0%
May 14 P12 Q22

$000
credit sales 800
total purchases 440
total sales 900
trade payables 40
How long does the company take to pay its trade suppliers (rounded to the nearest day)?
Specimen 16 P1 Q21
65 A business has prepared the following information for the year ended 30 April 2015.
$ $
Revenue 220 000
Purchases 120 000
closing inventory (31 000)
cost of goods sold 114 000
gross profit 106 000
What was the inventory turnover?
A 86 days B 90 days
C 95 days D 100 days
May 16 P12 Q21

$
finance costs 4 000
A 16.22% B 17.14% C 21.62% D 22.86%
May 17 P12 Q19
67 The following financial information is available for a business. All purchases and sales are made on credit.
$
purchase 121 980
revenue 209 980
trade payable 45 448
What is the average collection period?
May 17 P12 Q20
ANSWER KEY
1 C 18 C 35 C 52 D
2 D 19 D 36 A 53 B
3 C 20 C 37 B 54 C
4 B 21 C 38 C 55 A
5 B 22 A 39 C 56 B
6 D 23 C 40 B 57 C
7 B 24 C 41 D 58 B
8 D 25 B 42 C 59 D
9 A 26 D 43 B 60 C
10 C 27 B 44 B 61 A
11 B 28 B 45 A 62 B
12 B 29 A 46 A 63 A
13 B 30 C 47 B 64 B
14 D 31 D 48 C 65 B
15 B 32 A 49 D 66 C
16 C 33 C 50 A 67 A
17 C 34 A 51 A
DETAILED ANSWERS
Trade receivables+Bank
1 Quick ratio =
Current Liabilities
$40 000+$20 000
=
$10 000
= 6:1
2 To rectify the mistake, closing inventory will be increased by $10 000, which will reduce cost and increase
profit, so gross profit ratio after correcting the error will be
Gross Profit
Gross profit ratio = × 100
Sales revenue
$60 000+$10 000
= × 100
$280 000
= 25%
Cost of Sales
3 Inventory turnover ratio =
Average inventory
$200 000
10 =
X
$200 000
X =
10
= $20 000
Opening inventory+Closing inventory
Where average inventory =
2
$10 000+Closing inventory
$20 000 =
2
$40 000 = $10 000 + Closing inventory
Closing inventory = $40 000 – $10 000
= $30 000
Alternatively
Cost of Sales
Inventory turnover =
Average inventories
$200 000
10 =
($10 000+X)/2
$200 000 × 2
10 =
$10 000+X
($10 000 + X)  10 = $400 000
$100 000 + 10X = $400 000
10X = $400 000 – $100 000
10X = $300 000
X = $30 000
4 As we know that to calculate quick assets inventory is subtracted from current assets. So if we subtract
quick ratio from current ratio then we will arrive at inventory as a ratio or proportion of current liabilities
i.e.0.5: 1 (1.2 – 0.7).
It means inventory is 1/2 of current liabilities i.e. $84 000 1/2 = $42 000 is the figure for inventory.
Current Assets−Inventory
5 Quick ratio =
Current Liabilities
$125 000+$25 000+$5 000
=
$90 000+$10 000+$15 000+$20 000
= 1.15:1
Trade receivables
6 Trade receivables collection period= × 365
Credit Sales
$38 000
= × 365
$250 000−$8 000
= 57 days approximately
Liquidity position in simplest words means cash position, and out of four options only “B” option will
result in increase in cash.
Trade receivables
7 Trade receivables turnover period = × 365
Credit Sales
$1 888
= × 365
$13 000
= 53 days
Operating Profit
8 Return on Capital employed (%) = × 100
Capital Employed
$128 000
= × 100
$485 000+$27 000
= 25%
Cost of Sales∗
9 Inventory turnover =
Average inventories
$140 000
=
($13 500+$14 500)/2
$140 000
=
$14 000
= 10 times
* Cost of sales is not given but we know that
Sales = Cost + Profit

$175 000 = X + 0.25 X
$175 000 = 1.25X
$175 000
X =
1.25
= $140 000
Current Assets
10 Current ratio =
Current Liabilities
$200 000+$250 000
=
$100 000+$50 000
= 3.0:1
11 As we know that the only difference between current and acid test ratio is of inventory so we can say that
Current ratio 3.00: 1.00
Acid-test ratio (1.50: 1.00
Inventory as a ratio to current liabilities 1.50: 1.00
So if inventory is 1.5 then current liabilities = 1

1
So if inventory is 1 then current liabilities = /1.50
So if inventory is $22 500 then current liabilities = $22 500 1/1.50
= $15 000 *
This means current assets other than inventory will be $15 000  1.5 = $22 500 and no option other than
“B” has a total of $22 500 for trade receivables and Bank
Alternatively
* This problem can also be solved by assuming that trade payables is the only current liability so quick
assets will be $22 500 ($15 000  1.50 so “B” option will be the correct.
12 Option Prospective Returns $

A $100 000  13% = 13 000
B $8 500 + [($100 000  $50 000) 13%] = 15 000
C $10 500 + [($100 000 – $70 000) 13%] = 14 400
D $12 600 + [($100 000  $90 000) 13%] = 13 900
As “B” option has the highest return so it would be the right choice.
Cost of Sales
13 Inventory turnover (first year) =
Average inventories
$125 000
10 =
Average inventories
$125 000
Average inventory =
$10.0
= $12 500
As we knew that closing inventory was valued at $5 000 more than the corresponding opening inventory
so.
Average inventory =
2
X +(X+$5 000)
$12 500 =
2
2X + $5 000 = $12 500  2
2X = $25 000 – $5 000
$20 000
X =
2
= $10 000
So closing inventory at the end of year 1 and opening inventory at the start of year 2 will be $15 000 ($10
000 + $ 5 000).
Cost of Sales
Inventory turnover (in 2 year) =
Average inventories
Cost of Sales
10 =
$15 000+($15 000+$5 000)/2
Cost of Sales
10 =
$17 500
Cost of sales = $175 000
Current Assets
14 Current ratio =
Current Liabilities
$6 000+$50+Inventory
2 =
$1 500+$5 050
$6 050+Inventory
2 =
$6 550
$13 100 = $6 050 + X
X = $13 100 – $6 050
Closing Inventory = $7 050
Profit after tax and preference dividends

15 Return on shareholders’ fund = × 100
Total shareholders′ funds
$260 000−($400 000 ×15%)
= × 100
$600 000
$200 000
= × 100
$600 000
= 33.3%
Trade receivables
16 Trade receivables collection period = × 365 days
Credit Sales
$16 438
= × 365 days
$100 000
= 60 days
Current Assets
17 As Current ratio =
Current Liabilities
Current Assets excluding Inventory
Liquid ratio =
Current Liabilities
$20 600
=
$16 000
= 1.2875: 1
So if we subtract liquid ratio from current (working capital) ratio then we will have inventory value.
Thus inventory as a ratio of Current liabilities will be 1.2125:1 (2.5  1.2875
i.e.
Current liabilities  1.2125 = Inventory
$ (10 000 + 4 400 + 1 600) 1.2125 = Inventory
Closing Inventory = $16 000  1.2125
Closing Inventory = $19 400
Operating Profit
18 Return on capital employed = × 100
Capital Employed
$200 000 ×10%
X = × 100 = 40%
$50 000
$500 000 ×15%
Y = × 100 = 75%
$100 000
$600 000 × 20%
Z = × 100 = 60%
$200 000
So “C” will be the correct option.
19 Current year
Trade receivables
Trade receivable collection period = × 365
Credit Sales
$27 000
30 = × 365
Credit Sales
Credit sales = $328 500
Coming year
Trade receivables
Trade receivable collection period = × 365
Credit Sales
Trade receivables
60 = × 365
$328 500 ×150%
$492 750
Trade receivables = × 60
365
= $81 000
20 Quick ratio =
Current Liabilities
$126 000+$21 000
=
$87 000
$147 000
=
$87 000
= 1.7:1
Trade payables
21 Trade payables payment period = × 365
Credit Purchases
$24 000
= × 365
$186 000
= 47.1 Or 48 days
22 Quick ratio =
Current Liabilities
$ 7 400+$2 500
=
$1 000+ $4 500
= 1.8: 1
Current Assets
23 Current ratio =
Current Liabilities
$10000+Trade receivables−$2000+$4000
2 =
$10000
$20 000 = $12 000 + Trade receivables
Trade receivables = $8 000
Trade receivables
24 Trade receivables days (current) = × 365
Credit Sales
$42 000
40 = × 365
Credit Sales
Trade receivables
Trade receivables days (budgeted) = × 365
Credit Sales
Trade receivables
30 = × 365
$383 250 ×130%
Operating Profit
26 Return on Capital employed = × 100
Capital Employed
$11 000
= × 100
$59 000+$50 000−$40 000
= 15.9%
Current Assets
27 Current ratio =
Current Liabilities
Closing inventory+$4 000
3.6 =
$5 000
$18 000 = Inventory + $4 000
Closing Inventory = $ 18 000 – $4 000
= $14 000
Average Inventory =
2
Opening inventory+$14 000
$12 000 =
2
Opening Inventory = $24 000 – $ 14 000
= $10 000
Operating Profit
28 Return on capital employed = × 100
Capital Employed
$200 000
= × 100
$1 000 000
= 20%
Trade payables
29 Trade payables’ collection period = × 365
Credit Purchases
$4 200
= × 365
$28 000
= 55 days
Average Trade receivables
30 Trade receivables’ collection period = × 365
Credit Sales
($52 000+$56 000)/2
= × 365
$560 000 × 75%
Cost of Sales
Average inventories
Cost of Sales
5 =
$54 000
Cost of sales = $270 000
Sales = Cost of sales + profit
= $270 000 + ($270 000 1/3)
= $360 000
32 Liquidity (acid test) ratio =
Current Liabilities
$150 000
=
$40 000+$90 000+$70 000+$80 000
= 0.54
Trade receivables
Credit Sales
Trade receivables
40 = × 360
$1 406 070
Cost of Sales
34 Inventory turnover rate =
Average inventories
$960 000
=
$60 000 ×2
= 8 times
Trade payables
35 Trade payables’ payment period = × 365
Credit Purchases
$28 000
= × 365
$112 000
Profit after tax and preference dividends

36 Return on shareholders’ Equity = × 100
Total shareholders′ funds
$150 000−($600 000 ×10%)
= × 100
$300 000+$200 000+$500 000
= 9%
Trade receivables
Credit Sales
$26 700
30 = × 360
Credit sales
$320 400
As credit sales are 90% (100%  10%) of total sales so total sales would become $35600 ( ); so
90%
“B” option is correct.
Current Assets
38 Current ratio =
Current Liabilities
$170000+$5000−$150000
=
$5000
= 5:1
Trade receivables
Credit Sales
Trade receivables
40 = × 365
$146 000
Current Assets
40 Working Capital ratio =
Current Liabilities
Current Assets
5 =
$1 000
= $5 000
Trade receivables
($500 000+$2 250 000−$750 000)/0.50
Trade receivables
60 = × 360
$4 000 000
Trade payables
Credit Purchases
Trade payables
30 = × 365
$32 485
Trade payables = $2 670
Current Assets
43 Current ratio =
Current Liabilities
$600+$4 500+$51 800+$24 200
=
$5 000+$6 800+$12 000+$20 100
$81 100
=
$43 900
= 1.85:1
Trade receivables
Net Credit Sales
Trade receivables
40 = × 360
$180 000 × 87%
45 Trade payables at year end = $80 000 × 150%

= $120 000
Mark scheme suggests "C" option as correct option which could have only been correct if there were
increase of 50% in credit purchases as last year purchases were $960 000 [30=$80 000 /(credit purchases)
× 360] case and next year trade payables in that case would have been $240 000 [60 =Trade
payables/($960 000 × 150%) × 360].
Average inventories
46 Inventory turnover rate (days) = × 365
Cost of Sales
($2 470+$2 156)/2
= × 365
$12 500
47 As we know that to calculate quick assets inventory is subtracted from current assets so if we subtract
quick ratio from current ratio then we will arrive at inventory as a ratio or proportion of current liabilities
i.e. 0.5: 1 (2.0 – 1.5).
It means inventory is 1/2 of current liabilities i.e. $10 000 1/2 = $5 000 is the figure for inventory.
Trade receivables
48 Trade receivables’ turnover (days) = × 365
Net Credit Sales
Trade receivables
42 = × 365
$927 100
49 Gross Profit = Cost of Sales × Mark-up rate

A = (1 000 × 8) × 15% = $1 200
B = (1 000 × 6) × 30% = $1 800
C = (1 000 × 7) × 25% = $1 750
D = (1 000 × 10) × 20% = $2 000
50 As we know that the only difference between current and acid test ratio is of inventory so we can say that
Current ratio (current assets as a ratio to current liabilities) 2.25: 1.00
Acid-test ratio (liquid assets as a ratio to current liabilities) (1.50: 1.00)
Inventory as a ratio to current liabilities 0.75 : 1.00
So if current liabilities are 1then inventory is = 0.75
So if current liabilities are $4 000 then inventory is = $4 000  0.75
= $3 000
51 Quick (acid-test) ratio =
Current Liabilities
$310 000
=
$220 000
= 1.41:1
Trade receivables
52 Trade receivables turnover period = × 365
Credit Sales
Trade receivables
40 = × 365
$479 970
40
Trade receivables = × $479 970 = $52 599
365
Cost of Sales∗
Average inventories
Cost of Sales
10 =
($10 000+$14 000)/2
Cost of Sales = $120 000
Gross Profit = Sales  Cost of Sales

= $160 000  $120 000
= $40 000
Trade receivables
Credit Sales
Trade receivables
= × 365
($60 000+$420 000−$80 000)×1.25
Trade receivables
50 = × 365
$5 000 000
55 In order to solve the question we assume that the word ‘net’ is missing in “assets turnover ratio”. If we
divide return on capital employed by net assets turnover then we have net profit ratio as shown below.
Return on capital employed  Net assets turnover = Net profit ratio
net profit net assets (capital employed) net profit
 =
capital employed sales sales
20%  2.5 = 8%
Operating profit
56 Return on capital employed =  100
Capital employed
$400 000
=  100
$1 200 000+$800 000
= 20%
Cost of Sales
57 Inventory turnover ratio =
Average inventory
Cost of Sales
6 =
$180 000
Cost of sales = $180 000  6
Cost of sales = $1 080 000
Cost of Sales = Opening inventory + Purchases – Closing inventory
$1 080 000 = Nil + Purchases – $200 000
Purchases = $1 280 000
Current Assets
58 Current ratio =
Current Liabilities
$20 000+ $2 000+ $1 500+Trade receivables− $500
3 =
$11 000
$23 000+Trade Receivales
=
$11 000
Trade receivables = ($11 000 × 3)  $23 000
= $10 000
59 year 1 year 2
Gross Profit $45 000 $70 000
Gross profit margin × 100 × 100 × 100
Sales Revenue $150 000 $200 000
30% 35%
Operating Profit $18 000 $22 500
Return on capital employed × 100 × 100 × 100
Capital Employed $150 000 $150 000
12% 15%
As both ratios are increasing so “D” option is correct.
Trade receivables
60 Credit customers’ collection period = × 365
Credit Sales
$80 000
= × 365
$630 000
Operating Profit
Capital Employed
$160 000
= × 100
$500 000+$250 0000+$300 000
= 15.23%
Trade payables
62 Trade payables turnover = × 365
Credit Purchases
$49 000
= × 365
$210 000+$49 000−$38 000
= 80 .93 or 81 days
Operating Profit
Capital Employed
$200 000
= × 100
$500 000+$160 0000+$380 000
= 19.23%
Trade payables
Credit Purchases
$40 000
= × 365
$320 000
Average inventories
65 Inventory turnover =  360
Cost of Sales∗
($25 000+$31 000)/2
=  360
$114 000
$28 000
=  360
$114 000
= 90 days
Operating Profit
Capital Employed
$16 000
= × 100
$50 000+$4 000+$20 000
= 21.62%
Trade receivables
67 Trade receivables collection period= × 365
Credit Sales
$28 765
= × 365
$209 980
Chapter 17 -199- Ratio Analysis - Interpretation
CHAPTER 17 RATIO ANALYSIS - INTERPRETATION

1 A company wishes to improve its current ratio and its acid test ratio.
How can this be done?
A by granting increased discounts to trade receivables
B by increasing the provision for doubtful debts
C by purchasing additional inventory on credit
D by the sale of non-current assets
Nov 98 P1 Q40 / May 03 P1 Q24/Specimen 16 P1 Q22
2 From the following balance sheet extract, how can the business best improve its quick ratio?
Current Assets $000 $000
Inventory 45
Trade receivables 45
Cash at bank 35
125
Current liabilities
Trade payables (75) 50
Non-current liabilities: Debentures (30)
Net current assets less non-current liabilities 20
A by collecting all outstanding trade receivables
B by redeeming the debentures
C by selling the inventory
D by using all the cash at bank to pay trade payables
May 99 P1 Q26
3 A company is operating in a very competitive market.
Which ratios represent the reaction to the competition?
Gross profit Period of credit
Percentage allowed to trade receivables
A 20% 30 days
B 20% 45 days
C 25% 30 days
D 25% 45 days
May 99 P1 Q27
4 What is the accounting equation for capital employed?
A current assets – current liabilities
B non-current assets + current assets – current liabilities
C non-current assets + current assets + current liabilities
D net current assets – current liabilities
5 How is a company best able to reduce its working capital in the short term?
A by decreasing the rate of inventory turnover
B by disposing of some surplus non-current assets
C by reducing the trade receivable collection period by offering discounts
D by reducing the time taken to pay its suppliers
Nov 99 P1 Q23/Nov 09 P1 Q19
6 How will a company’s liquidity be improved?
A by a bonus issue of shares
B by a rights issue of shares
C by reducing the provision for doubtful debts
D by reducing the rate of depreciation on non-current assets
Nov 99 P1 Q28 / Specimen 02 P1 Q21
7 How can a business increase its current ratio?

A increase trade payables B increase trade receivables
C reduce bank balance D reduce inventory
May 00 P1 Q24
8 Which statement correctly expresses the relationship between return on capital employed, net assets
turnover and profit margin?
A net assets turnover = return on capital employed  profit margin
Profit margin
B = return on capital employed
Net assets turnover
C profit margin + net assets turnover = return on capital employed
D return on capital employed = net assets turnover  profit margin
Nov 00 P1 Q23/ May 05 P1 Q22
9 Which transaction will cause an increase in capital employed?
A disposal of a non-current asset for more than its book value
B increasing the provision for bad debts
C receipt of a loan
D receipt of payment from a trade receivable in cash
Nov 00 P1 Q26
10 Which is a correct definition of return on net capital employed?
A net profit for the year as a percentage of non-current assets
B net profit for the year as a percentage of non-current assets plus current liabilities
C net profit for the year as a percentage of non-current assets plus current assets
D net profit for the year as a percentage of non-current assets plus working capital
May 01 P1 Q8
11 A company has a current ratio of 2:1 and a quick ratio of 0.5:1.
What is the effect on the two ratios, if the company uses cash to buy inventory?
Current ratio Quick ratio
A decrease decrease
B decrease increase
C no change decrease
D no change increase
May 98 P1 Q23 / May 01 P1 Q24 / Specimen 02 P1 Q26/May 06 P1 Q25
12 The acid test (quick) ratio of a business has fallen while turnover has remained constant.
What is the reason for the fall?
A a decrease in the bank overdraft B a decrease in inventory
C an increase in cash D an increase in trade payables
Nov 01 P1 Q24/Nov 09 P1 Q20
13 The table shows extracts from a company’s Income statements for 2000 and 2001.
2000 2001
$ $
Sales 50 000 100 000
Cost of sales 15 000 34 000
What might explain the change in the profit margin?

A a cut is sales price
B an increase in sale price
C cheaper suppliers
D the loss of a major customer
Nov 01 P1 Q25
14 Excel Products Limited sells two products X and Y. The summarised results for the last financial year
include the following
X Y
$ $
Sales 50 000 100 000
Less Cost of Sales 30 000 67 500
Gross profit 20 000 32 500
The company wants to improve its gross profit to sales ratio.
Which is the best way to achieve this?
A a reduction in inventory levels.

B an increase in sales of product X
C a 10% increase in sales of X and Y.
D a reduction in the amount of variable overheads charged to the Income statement.
Specimen 02 P1 Q27
15 A business purchases inventory on credit.

Which of the following is now true?
Current ratio Acid test ratio

A decreases decreases
B increases increases
C unchanged decreases
D unchanged increases
May 02 P1 Q19
16 A business has a gross profit to sales ratio of 40%, and a net profit to sales ratio of 10%.
If the sales volume increases by 8% which of the following will generally be true?
Gross profit to sales ratio Net profit to sales ratio

A increases decreases
B increases increases
C unchanged decreases
D unchanged increases
May 02 P1 Q20/ May 08 P1 Q21
17 The current ratio of a company increases from 1.4 to 1.9.

Which of the following could explain this movement?
A an issue of more share capital for cash

B the giving of more generous credit terms to customers
C the granting of cash discounts to customers
D the purchase of some short-term investments
May 02 P1 Q21
18 Which business is likely to have the lowest Gross Profit/ Sales margin?
A a car manufacturer
B a computer software company
C a jewellery shop
D a supermarket
Nov 02 P1 Q20
19 The table gives information taken from the Balance Sheets of a company for three successive years.
Year 1 Year 2 Year 3
Inventory at valuation $ 22 000 $29 000 $27 000
Trade receivables $102 000 $91 000 $81 000
Trade payables $63 000 $76 000 $75 000
Taxation and dividends payable $17 000 $23 000 $22 000
What do these figures show about the company’s liquidity?
A It declined in year 2, but no further in year 3
B It declined in year 2, but then improved in year 3
C It has continually declined over the 3 years
D It has continually improved over the 3 years
Nov 02 P1 Q22
20 A business sells inventory to a credit customer at a selling price greater than cost. What effect will this
transaction have on the current and quick (acid test) ratios?
A both ratios will be unchanged
B both ratios will increase
C the current ratio will increase while the quick ratio will not change
D the current ratio will not change while the quick ratio will increase
May 03 P1 Q20
21 Which business should have the highest non-current asset turnover?

A a car manufacturer B a hotel
C an oil company D a retail department store
May 03 P3 Q11
22 Which of the following actions would improve the liquid (acid test) ratio of a business in the short term?
1 Trade receivables paying their debts
2 Delaying paying trade payables
3 Selling a number of surplus non-current assets
4 Selling inventory
Nov 03 P1 Q24/ Nov 07 P1 Q19
23 The table shows the gross profit margin and net profit margin of a company.
Year ended Year ended
31 March 2003 31 March 2004
Gross profit margin 38.6 % 40.1 %
Net profit margin 13.5 % 13.1 %
What caused these changes between 2003 and 2004?
A a change in products 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 price
D an increase in both production and selling costs
May 04 P1 Q21/ Nov 08 P1 Q24
24 A company wants to increase its return on capital employed in the short term.
Which course of action will achieve this?
A invest in new plant and machinery
B reduce the level of dividends paid to investors
C reduce the level of overhead expenses
D revalue freehold land and buildings upward
May 04 P1 Q22/ Nov 12 P12 Q23/May 16 P12 Q19
25 What would increase the working capital (current) ratio of a business?

A buying inventory on credit for $2 000 and selling it immediately for $3 000 cash
B paying trade payables $1 000 cash
C purchasing a non-current asset of $10 000 on credit
D selling inventory of $1 000 at cost price on credit
May 04 P1 Q23/ Nov 09 P1 Q18
26 A business calculated that its quick (acid test) ratio is lower this year than last year.
What caused the reduction in the ratio?
A an increase in trade payables B an increase in inventory
C an increase in trade receivables D an increase in bank
Nov 04 P1 Q20
27 The gross profit ratio of a business has increased.

A purchases have been obtained at reduced cost
B sales have increased
C sales returns have decreased
D inventories have decreased
Nov 04 P1 Q21
28 The trade receivables’ collection period of a business has increased from 55 to 90 days.
Which reason could not account for this?
A a large bad debt written off
B a large credit sale made just before the year-end
C a major customer in financial difficulty
D poor credit control
Nov 04 P1 Q23/Nov 10P3 Q16
29 A company has a high liquidity ratio.

Which of the following will reduce liquidity?
A doubling the annual rates of depreciation?
B making a bonus issue to existing shareholders
C converting loan stock into shares
D replacing machinery earlier than planned
May 05 P1 Q20
30 A business increases its provision for doubtful debts.

What is the effect on the current and acid test ratios?
current ratio acid test ratio

A decrease decrease
B decrease no change
C no change decrease
D no change no change
Nov 05 P1 Q21
31 Which accounting ratio is used to assess working capital management?

A gross profit ratio
B net profit ratio
C return on capital employed
D inventory turnover ratio
Nov 05 P1 Q22
32 A company’s gross profit ratio for the year ended 31 December 2003 was 25%. This increases to 28% for
the year ended 31 December 2004.
What could have been responsible for the increase?
A an increase in the cost of purchases during 2004
B an increase in the volume of sales during 2004
C an over-valuation of inventory at 31 December 2004
D an under-valuation of inventory at 31 December 2004
Nov 05 P1 Q23 /Nov 10 P1 Q22/May 15 P12 Q20
33 A company has the following gross profit and net profit ratios for two years.
Year 1 Year 2
gross profit % 26% 29%
net profit % 13% 10%
The company’s turnover has remained unchanged for both years.
What is a correct interpretation of these ratios?
cost of sales Overheads
increased decreased increased Decreased
A √ × √ ×
B √ × × √
C × √ × √
D × √ √ ×
May 06 P1 Q24
34 A business has a current ratio of 1.75:1 and a quick (acid test) ratio of 1:1. The business sells inventory on
credit at its usual mark-up.
What is the effect of this on the current ratio and quick (acid test) ratio?
current ratio Quick (acid test) ratio
A decrease decrease
B decrease increase
C increase decrease
D increase increase
Nov 06 P1 Q23
35 The following data is available:

This year ($) Last year ($)
credit sales 60 000 50 000
credit purchases 40 000 28 000
trade payables (average) 10 000 16 000
trade receivables (average) 12 000 8 000
A Trade receivables’ and trade payables’ turnover ratios have improved.
B Trade receivables’ and trade payables’ turnover ratios have worsened.
C Trade receivables are paying faster, but trade payables are being paid more slowly.
D Trade receivables are paying more slowly, but trade payables are being paid faster.
Nov 06 P1 Q25
36 What does the ratio of current assets / current liabilities show?

A asset usage
B liquidity
C profitability
D return on capital employed
May 07 P1 Q20
37 A firm has calculated the following accounting ratios for the year ended 30 June:
year ended
30 June 2005 30 June 2006
gross profit on sales 30 % 33 %
net profit on sales 15 % 14 %
What could explain the changes in the percentages?
A A fall in interest payments was equal to an increase in administration costs.
B An increase in raw material costs was covered by an increase in selling price.
C An increase in the advertising budget has allowed the firm to increase the selling price.
D An increase in the advertising budget has led to a rise in sales volume.
May 07 P1 Q24/Nov 11 P1 Q23
38 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
Nov 07 P1 Q22
39 What might cause working capital to fall?
A an amount owing by a customer has turned out to be a bad debt
B an old delivery van has been given in full exchange for a new computer
C a payment of cash has been made to a trade payable
D new inventory has been purchased on credit
May 08 P1 Q23
40 Which ratio indicates how efficiently a company controls its overheads?

A current assets / current liabilities
B gross profit / Sales
C net profit / sales
D sales / capital employed
Nov 08 P1 Q21
41 Which actions would improve the liquidity (acid test) ratio of a business in the short term?
1 trade receivables paying their debts
2 delaying paying trade payables
3 selling a number of surplus non-current assets
4 selling inventory
A 1 and 2
B 2 and 3
C 1 and 4
D 3 and 4
May 09 P1 Q23
42 A company buys and re-sells goods. It has a higher gross profit margin than its rivals.
Which reason could explain this?
A Rival companies pay less for goods than the company.
B Rival companies spend less on advertising than the company.
C The company charges a higher selling price than its rivals.
D The company charges a lower price than its rivals.
May 10 P1 Q20
43 A business has $10 000 in the bank and buys inventory for $6 000 paying by cheque. What is the effect of
this on its current ratio and quick (acid test) ratio?
current ratio quick (acid test) ratio

A decreases increases
B decreases no effect
C no effect decreases
May 11 P1 Q20
44 When is working capital most likely to increase?

A when the business increases its selling prices
B when the credit period allowed to customers is reduced
C when the credit period taken from suppliers is increased
D when the value of inventory decreases
Nov 11 P1 Q18/Nov 15 P12 Q22
45 A business has a rate of inventory turnover of 17 times a year.

What is the numerator in the calculation?
A average inventory
B closing inventory
C cost of sales
D credit sales
Nov 11 P1 Q20
46 Which ratio measures a business' average payment period?

A current ratio
B liquid ratio
C trade payables turnover
D trade receivables turnover
Nov 11 P1 Q22
47 What is a limitation of the use of accounting information that is totally outside the entity's control?
A changes in legal reporting requirements

B changes in inventory valuation method
C changes in total assets employed
D changes in working capital
Nov 11 P1 Q24
48 Which action will improve a company's quick ratio?
A collecting all outstanding debtors
B using cash at the bank to buy equipment
C using cash at bank to pay creditors
D using cash at the bank to repay a loan
Nov 11 P3 Q15
49 A business finds that it is unable to pay its trade payables because of a poor cash flow.
What should it do to improve its cash flow?
A factor its trade receivables
B increase its trade receivables
C increase its inventory
D repay its overdraft
May 12 P12 Q17
50 For some years a business has given 2% cash discount to its customers and lost 3% of its inventory to
pilferage by staff.
On 1 January, the business changed the rate of cash discount to 5% and introduced a new inventory
control system that stopped the pilferage.
Which effect do these changes have on the gross profit to sales ratio?
change in cash discount new inventory control system
A decrease no effect
B increase no effect
C no effect decrease
D no effect increase
May 12 P12 Q18
51 What is not included in the calculation of the liquid ratio (acid test)?
A accruals for rent B amounts prepaid for insurance
C inventory of finished goods D trade payables
May 12 P12 Q21/May 16 P12 Q20
52 The owner of a business has to decide whether to sell a particular type of product.
Which ratio is the most useful in making the decision?
A current ratio B gross profit ratio
C return on capital employed D trade receivables turnover
May 12 P12 Q22
53 A company has a current ratio of 2:1.

Which transactions would always increase the ratio?
1 buying goods on credit
2 debtors paying their account to us
3 converting an overdraft to a long-term bank loan
4 selling non-current assets for cash
Nov 12 P12 Q22
54 Beatrice calculates some ratios to help her understand her financial statements.
What helps her interpretation of the ratios?
A availability of previous results
B changes in the economic conditions
C her employment of an inexperienced book keeper
D the fact that Beatrice is a sole trader
Nov 12 P12 Q24
55 A company had a trade receivables collection period of 80 days in 2011 and 100 days in 2012.
Total revenue was the same for both years.
Which statement explains the change?
A Customers took advantage of cash discounts.
B Profit margins have improved.
C Several major customers suffered cash flow problems.
D The company entered into a debt factoring arrangement.
May 13 P12 Q21
56 The trade receivables turnover for a company was 100 days in 2011. This reduced to 90 days in 2012, with
no change in the sales revenue.
Which statement explains this change?
A Credit customers are paying earlier. B Credit customers are paying later.
C Credit suppliers are being paid earlier. D Credit suppliers are being paid later.
Nov 13 P12 Q23
57 A business sells a single product.

This year the gross profit margin and net profit margin were both lower than last year.
What is the reason for this change?
A decrease in carriage out B decrease in sales returns
C increase in carriage in D increase in purchases returns
May 14 P12 Q23
58 A company’s non-current asset turnover figure rises from 3.4 times in Year 1 to 4 times in Year 2.
Sales revenue has been constant.
What explains the change?
A The cost of repairs to non-current assets had decreased.
B The cost of repairs to non-current assets had increased.
C The depreciation charge for the year was higher than the cost of non-current assets
purchased.
D The depreciation charge for the year was lower than the cost of non-current assets purchased.
May 14 P12 Q25
59 Gordon sells goods on credit to Sybil.

Which information from Sybil’s financial statements is of greatest interest to him?
A current ratio B gross profit margin
C mark-up D return on capital employed
May 14 P12 Q26
60 Which ratio will give the best indication of short term liquidity?
A current ratio
B liquid (acid test) ratio
C trade payables turnover (days)
D trade receivables turnover (days)
May 15 P12 Q21
61 An investor is looking at the financial statements of a company in which he may decide to invest.
Which item helps him to rely on the financial statements?
A consistency of accounting policies from one period to the next
B estimation of accounting provisions relying on the opinion of managers
C inflation in the currency in which the financial statements are prepared
D lapse of time since the date of the statement of financial position
May 15 P12 Q22
62 John failed to write off a bad debt of $8000.

What was the effect of this omission?
A His trade payables turnover (in days) was overstated.
B His trade payables turnover (in days) was understated.
C His trade receivables turnover (in days) was overstated.
D His trade receivables turnover (in days) was understated.
Nov 15 P12 Q23
63 Which ratio measures a business’s average credit period?

A current ratio
B inventory turnover
C liquid (acid test) ratio
D trade receivables turnover
Specimen 16 P1 Q20
64 A company’s profit from operations has increased by 10% in a year, whilst its gross profit has only
increased by 5%.
Which factors could explain this?
1 a decrease in finance costs
2 a decrease in distribution costs
3 an increase in rent received
4 an increase in selling prices
May 16 P12 Q15
65 Which action leaves the value of working capital unchanged?

A disposal of a non-current asset B issuing shares for cash
C purchasing goods for resale on credit D writing off an irrecoverable debt
Nov 16 P12 Q20
66 Owusu Limited has a constant level of annual sales and a constant gross margin. Each year the inventory
increases.
Which effects does this have on the inventory holding period and on inventory turnover?
inventory holding inventory turnover

(in days) (times)
A decrease decrease
B decrease Increase
C increase decrease
D increase increase
Nov 16 P12 Q21
67 Who are internal users of accounting information?

A customers B directors
C lenders D shareholders
May 17 P12 Q18
ANSWER KEY
1 D 18 D 35 C 52 B
2 C 19 C 36 B 53 D
3 B 20 B 37 C 54 A
4 B 21 D 38 D 55 C
5 C 22 D 39 A 56 A
6 B 23 C 40 C 57 C
7 B 24 C 41 D 58 C
8 D 25 A 42 C 59 A
9 C 26 A 43 C 60 B
10 D 27 A 44 A 61 A
11 C 28 A 45 C 62 C
12 D 29 D 46 C 63 D
13 A 30 A 47 A 64 C
14 B 31 D 48 C 65 C
15 A 32 C 49 A 66 C
16 D 33 D 50 D 67 B
17 A 34 D 51 C
DETAILED ANSWERS
1 “A” option will decrease trade receivables and increase cash (with relatively low amount because of
discounts). So it will not improve the ratio.
“B” option will reduce trade receivables and consequently there will be no improvement.
“C” option will increase inventory and trade payables. In the absence of existing current ratio its behaviour
cannot be determined; however acid-test ratio will decrease, because of increase in denominator and no
change in numerator.
“D” option will decrease non-current assets and increase cash, as cash is current as well as quick asset,so
its increase will improve both ratios.
2 “A” option will increase cash and decrease trade receivables, as both are quick assets, so there will be no
change in quick ratio
“B” option will decrease both cash and debentures, as cash is quick asset so its reduction will also
decrease quick assets and quick ratio.
“C” option will decrease inventory and increase cash, as cash is quick asset so its increase will also
increase quick ratio so it is the right option.
3 In a competitive market company may earn low profits and has to offer more incentives to customers. As
in “B” option, company is earning lowest profit and allowing extended period to trade receivables for
payment. So it will be the right choice.
5 “C” option is correct as it decreases trade receivables and increases another current asset i.e. cash but
with relatively low amount.
8 Formulas for these three ratios are as under

Net Sales
Net assets turnover =
Net Assets
Operating Profit
Return on capital employed = × 100
Capital Employed or Net Assets
Operating Profit
Profit margin = × 100
Net Sales
If we put these formulas in equation one by one we will find that “D” is the right choice as
Return on capital employed = Net assets turnover  Profit margin

Operating Profit Net Sales Operating Profit
= 
Net Assets Net Assets Net Sales
You can see that equation gets verification, which shows “D”, is the right option
9 Increase in provision for bad debts will reduce trade receivables and capital employed whereas receipt of
cash from trade receivables will not change capital employed as one asset will increase with the decrease
in the other. However both “A” and “C” options will increase capital employed but the effect of receipt of a
loan (“C” option) is significant than that of “A”. However examiners’ report suggests “A” as a correct
option.
11 Effects of this transaction will be

Cash 
Inventory 
As both are included in current assets, so there will be no change in current assets and current ratio,
whereas cash is a quick asset but inventory is not; so decrease in cash will decrease quick assets and quick
ratio. So there will be no change in current ratio but quick ratio will decrease.
12 Quick ratio =
Current Liabilities
“A” option will decrease denominator and “C” option will increase numerator both of which will ultimately
improve the ratio whereas “B” option will not affect the ratio as inventory is not used in the formula. “D”
option will result in increase in denominator and hence ratio will fall.
13 “D” option is incorrect as sales have increased; “C” option is wrong as proportional increase in cost of
sales is more than sales. “B” option is also incorrect, as increase in sales price normally results in decrease
in quantity sold and increase in profit margin whereas "A" option seems to be correct as the cut in sales
price is without corresponding decrease in costs.
14 Products “X” and “Y” have gross profit ratios of 40% and 32.5% respectively, so to increase gross profit,
effort should be made to increase sale of product having higher gross profit margin i.e. product “X” so “B”
option is correct, “D” option is irrelevant as it may improve net profit but will not change gross profit.
15 If inventory is purchased on credit then it will have the following effects.

Inventory (current assets) 
Trade payables (current liabilities) 
Now assume current assets including inventory 500

Inventory 100
Current liabilities 200
So if inventory of $100 is purchased then current and acid test ratios will be
Ratios before transaction Ratios after transaction
$500 $500+$100
Current ratio = 2.5:1 = 2.0:1
$200 $300
$500−$100 $500−$100
Acid test ratio = 2.0:1 = 1.33:1
$200 $200+$100
16 Gross profit ratio normally remains constant regardless of the amount of sales revenue. Whereas increase
in sales volume will not affect fixed cost element in Income statement expenses resulting in increase in
Net profit ratio.
17 The effects of the options is given below

A Share capital 
Bank (current assets) 
C Bank (with relatively lower amount than trade receivables) 
Trade receivables 
Discount allowed 
D Short-term investment (current asset) 
Bank (current asset) 
So only "A" option will increase current assets and current ratio as a consequence.
18 Normally those businesses have lower gross profit ratio, whose sales volume is high, deal in competitive
market and in perishable goods (having nominal monetary value) like super market in this case.
19 Current ratio Year 1 Year 2 Year 3

Current Assets $124 000 $120 000 $108 000
=
Current Liabilities $80 000 $99 000 $97 000
= 1.55:1 1.21:1 1.11:1
From the above calculation it can be determined that company’s liquidity position has continually declined
cover the 3 years.

Sales and trade receivables  (at sales price)
Inventory  (at cost price)
As both trade receivables and inventories are current assets, so increase in trade receivables with higher
value will increase current assets and current ratio as well. Whereas inventory is not included for
calculating quick ratio but due to increase in trade receivables, quick assets and quick ratio will increase so
“B” option will be correct.
21 Fixed asset turnover is measured by dividing the net book value of fixed assets into turnover. Capital-
intensive industries will tend to have low non-current asset turnover. Retail department stores are, by
comparison, not capital-intensive.
22 Item 1 will increase cash and decrease trade receivables; as both assets are quick assets so will not affect
acid-test ratio. Items 3 and 4 will increase cash and Quick ratio as a consequence.
23 In the year 2004 gross profit ratio has increased whereas net profit ratio has decreased, this means that
operating expenses have increased in the second year. So, “C” option is correct as high sales prices result
in high gross profit margins whereas expenses on advertising campaign will increase income statement
expenses and net profit margin will decrease as a consequence.
Operating Profit
24 Return on capital employed is calculated by using the formula ( ). A rate of return will
Capital Employed
increase if the numerator increases at a higher rate than the denominator, or denominator decreases at a
higher rate than the numerator. So the “C” option is correct, as reduction in overhead expenses will raise
operating profits and the rate of return as a result.
25 Working capital (current) ratio increases either due to increase in current assets at a higher rate than
current liabilities, or due to decrease in current liabilities at a higher rate than those of current assets. The
effects of the four options on current assets and current liabilities will be:
$
A (i) Inventory (current asset)  2 000
Trade payables (current liability)  2 000
(ii) Cash (current asset)  3 000

Inventory (current asset)  2 000
Profit  1 000
As current assets are increased by $1 000 so the ratio will increase
B Trade payable (current Liability)  1 000
Cash (current asset)  1 000
C Non-current assets  10 000

Trade payables (current liability)  10 000
D Inventory (current asset)  1 000

Trade receivables (current asset)  1 000
26 Quick ratio is calculated as( ).Ratio will decrease either due to decrease in
Current Liabilities
numerator or increase in denominator, so as in “A” option trade payables have increased resulting in
reduction in the quick ratio.
27 Although “B” and “C” options will increase gross profit figure but not the gross profit ratio, whereas if
purchases are obtained at reduced costs (“A” option), this will reduce per unit cost and increase gross
profit ratio as a consequence.
28 Let us assume
Trade receivables
Trade receivables turnover in days (existing) = × 365
Credit Sales
$20
= × 365
$100
= 73 days
Now consider option “A” and assume that a trade receivable of $10 is written off as bad and would result
in reduction of collection period
$20−$10
Trade receivables turnover days (option “A”) = × 365
$100
= 36.5 days
So “A” option is correct, whereas all other options will increase trade receivables’ collection period.
29 “D” option is correct as all other options do not involve any outlay of cash (the most liquid asset)
32 “C” option is correct. “A” and “D” options will reduce both gross profit and gross profit ratio. “B” option
will only increase gross profit figure but gross profit ratio will not change.
33
Year 1 Year 2 Change
Gross profit % 26% 29% 3% 
Net profit % 13% 10% 3%
Overheads 13% 19% 6%
Moreover increase in “Gross Profit ratio” indicates decrease in cost of sales so “D” option is correct.
34 Sale of inventory will have the following effects
Sales (cost + profit) ↑
Trade receivables (cost + profit) ↑
Closing Inventory (cost) ↓
As both trade receivables and inventory are part of numerator of current ratio and increase in trade
receivables value is more than inventory so current ratio will increase whereas increase in trade
receivables will also increase quick ratio so “D” option is correct
35 This year Last Year

Credit Sales $60 000 $50 000
Receivables’ turnover ratio (times) =
Trade receivables $12 000 $8 000
5 times 6.25 times
Trade receivables’ collection period 365 ÷ 5 = 73 days 365÷6.25=58 days
Credit Purchases $40 000 $28 000

Payables’ turnover ratio (times) =
Trade payables $10 000 $16 000
4 times 1.75 times
Trade payables’ payment period 365 ÷ 4 = 91 days 365÷ 1.75=209 days
So in view of above “D” option is correct.
37 Year ended
30 June 2005 30 June 2006
Gross profit on sales 30% 33%
Net profit on sales 15% 14%
Expenses on sales 15% 19%
The above analysis show increase in both gross profit (mainly due to increase in selling price) and income
statement expenses (probably advertising).
38 “D” option is correct as it indicates that cost of sales has increased proportionately at a higher rate than
sales revenue. “A” option will have no effect on profit margin whereas increase in sales price (“B” option)
would increase profit margin.
42 “A” option is wrong as if rival companies pay less for goods then the company will have lower gross profit
margin than its rivals. “B” option is incorrect as advertising expense does not affect gross profit margin.
“C” option is correct as if sales price is higher and cost of sales remains constant then gross profit margin
would be higher.

Inventory 
Bank 
As both are included in current assets, so there will be no change in current assets and current ratio,
whereas bank is a quick asset but inventory is not; so decrease in bank will decrease quick assets and
quick ratio. So there will be no change in current ratio but quick ratio will decrease.
44 Statements in B, C and D options would all reduce the working capital. This left the only answer as A.
50 Increase in rate of cash discount from 3% to 5% will not affect gross profit to sales ratio as it is not used in
the calculation of gross profit. Introduction of new inventory control system to stop pilferage will,
however, increase inventory levels and gross profit to sales ratio.
53 Transaction 2 will increase cash and decrease trade receivables, as both are current assets, so there will be
no change in current ratio.
Transaction 3 will increase long-term loan and overdraft (denominator) will decrease so reduction in
overdraft will increase the ratio.
Transaction 4 will increase cash and decrease non-current assets, so due to increase in cash (numerator)
the current ratio will increase.
55 “C” option is correct as this is the only one which could result in delayed collections from trade
receivables.
58 This required candidates to consider the components in calculating non-current asset turnover. The
formula is turnover (sales) ÷ net book value of non-current assets. The result over the two years was an
increase.
The numerator was constant so the denominator must have reduced. This could only have been as a
result of C.
60 “B” option is correct as “liquid ratio” considers liquid assets only by excluding the least liquid current asset
of inventory from the calculation.
62 As bad debts are related to trade receivables so there would be no effect of omitting bad debts on trade
payables. Therefore option ‘A’ and option ‘B’ cannot be correct. Omission to write off bad debts
overstated trade receivables resulting in overstatement of trade receivables turnover (in days).
64 As profit from operations is profit before interest so change in finance costs (statement 1) will not affect it
whereas increase in selling price (statement 4) has already affected gross profit. Increase in operating
income (rent) and decrease in operating expense (distribution) will increase profit for the year without
affecting gross profit.
65 ‘C’ option is correct as it will increase inventory and trade payables with the same amount.
Chapter 18 -216- Statements of cash flows
CHAPTER 18 STATEMENTS OF CASH FLOWS

1 A Company reported a profit of $15 000 for the year, after charging the following:
- Depreciation $2 500
- Loss on sale of assets $1 000
During the year there was a decrease in working capital of $500.
What was the net cash flow generated from operations?
A $12 000 B $17 500 C $18 000 D $19 000
May 98 P1 Q18/ May 05 P3 Q1
2 The table shows data available for a company.

At 31 Dec 1996 At 31 Dec 1997
$ $
Inventory 160 000 220 000
Trade 85 000 63 000
receivables 33 000 212 000
Bank 72 000 87 000
Trade payables
Operating profit before interest and depreciation was $240 000. Depreciation charge for the year
amounted to $42 000.
What was the net cash flow from operating activities in 1997?
A $179 000 B $217 000 C $259 000 D $263 000
Nov 98 P1 Q24/ Nov 09 P3 Q2
3 In a statement of cash flows, which item will be an adjustment to operating profits, to arrive at cash flow
from operations?
A change in inventory levels B interest payable
C purchase of machinery D tax payable
May 99 P1 Q22
4 A Statement of cash flows shows the changes in

A cash B funds
C gearing D the net book value of investment
Nov 99 P1 Q20 / Specimen 02 P1 Q12 / May 03 P3 Q8
5 In a statement of cash flows which item is a cash outflow?

A a decrease in inventory
B a decrease in trade receivables
C a decrease in trade payables
D an issue of bonus shares
May 00 P1 Q19 / May 06 P3 Q1
6 During the year a business sells a non-current asset. The following information is known.
$
Original cost 500
Accumulated depreciation at data of sale 240
Profit on sale 70
What were the proceeds from the sale of the non-current asset?
A $170 B $190 C $310 D $330
May 01 P1 Q19
7 The table shows extract from Balance Sheets of a business.

2000 ($) 2001($)
Non-current assets (at cost) 190 000 245 000
Less accumulated depreciation 75 000 90 000
115 000 155 000
Other information for the financial year 2000/2001 is as follows:
$
Depreciation charged 40 000
New non-current assets purchased (at cost) 105 000
Loss on sale of non-current assets 10 000
Which amount received from the sales of the non-current assets?
A $15 000 B $25 000
C $30 000 D $35 000
Nov 01 P1 Q5
8 Where will bonus share issues appear in the statement of cash flows?
A under cash from operations as receipt
B under financing because share capital has increased
C as part of investing activities since they represent an alternative to paying a dividend
D they do not appear in a statement of cash flows
Nov 01 P1 Q9
9 The following information is taken from the Balance Sheets of a business.

2001($) 2000 ($)
Non-current assets (at cost) 370 000 280 000
Less Accumulated depreciation 135 000 150 000
Net Book Value 235 000 130 000
During 2001:
Expenditure on new non-current assets was $260 000
Loss on sale of old non-current assets was 50 000
Depreciation provided for the year was 75 000
What were the sales proceeds received on the disposal of the old non-current assets?
A $30 000 B $40 000 C $120 000 D $130 000
Specimen 02 P1 Q4
10 You have been asked to prepare statements of cash flows for the two years ended 30 June 2001. To do
this, the minimum information you require is
A income statements for the two years ended 30 June 2001
B income statements and balance sheets for the two years ended 30 June 2001
C income statements and balance sheets for the three years ended 30 June 2001
D income statements for the two years ended 30 June 2001 and balance sheets for the three years
ended 30 June 2001
Specimen 02 P1 Q16
11 A firm reported a net profit for the last financial year of $200 000. Its accounts show accumulated
depreciation of $480 000, profit of $30 000 on the sale of an asset and a decrease of $20 000 in the
provision for bad debts. Depreciation has been charged at 12% on the non-current assets, which cost $1
million. Total cash generated from operations is
A $270 000 B $630 000 C $670 000 D $690 000

Specimen 02 P1 Q19
12 How should revaluation of non-current assets be treated in statements of cash flows?

A It should be included in the cash flow from financing activities
B It should be included in the cash flow from investing activities
C It should be included in the cash flow from operations
D It should not be included in the statement of cash flows
May 02 P1 Q16
13 In its accounts, a company makes a transfer from profits to general reserve.

How will this be shown in the statement of cash flows?
A as an adjustment not involving the movement of cash
B as a source of cash
C as a use of cash
D not appear at all
May 03 P3 Q10
14 The table shows an extract taken from the financial statements of a limited company.
$
Purchase of: Machine 100 000
Vehicle 10 000
Disposal of motor vehicle
Original Cost 5 000
Net Book Value 500
Part Exchange Value 1 500
The only acquisitions and disposals were those stated above.
What will be the net cash outflow as a result of these transactions?
A $103 500 B $108 500 C $110 000 D $115 000
Nov 03 P3 Q3
15 In a statement of cash flows, which item is a cash outflow?

A a decrease in trade receivables
B an increase in inventory
C an increase in trade payables
D an issue of preference share
Nov 03 P3 Q30
16 The following are extracts from the financial statements of a company for the two years ended 30 June
2001 and 2002.
2002 ($) 2001($)

Operating profit 47 200 42 460
(after depreciation of 9 600 8 900)
Net current assets
Inventory 32 990 30 000
Trade receivables 16 200 14 000
Trade payables and accruals 10 340 10 000
What is the operating cash flow for the year ended 30 June 2002?
A $42 350
B $43 050
C $51 950
D $61 650
May 04 P3 Q2
17 The following information has been extracted from the financial statements of Company A for the last two
years.
Income statement (extract) Year 2 ($) Year 1 ($)
Operating profit for year 175 000 168 000
Taxation (55 000) (52 000)
Profit after tax 120 000 116 000
Balance Sheet (extract) Year 2($) Year 1($)
Taxation payable 57 000 50 000
What will be the amount appearing on the statement of cash flows for year 2 with respect to taxation
paid?
A $48 000 B $50 000 C $52 000 D $55 000
May 04 P3 Q3
18 A company bought new equipment costing $200 000. It paid $150 000 in cash and received a part-
exchange allowance of $50 000 on some old equipment, which had a book value of $40 000.It also sold
another item of equipment, with a book value of $20 000, for $15 000.
How should these transactions appear in a statement of cash flows?
Purchase of tangible assets ($) Sale of tangible assets ($)
A 150 000 15 000
B 150 000 65 000
C 200 000 60 000
D 200 000 65 000
Nov 04 P3 Q1
19 The following items have been extracted from the Income and Expenditure account of a club.
$
Depreciation of equipment 1 000
Subscriptions paid in advance 25
Subscriptions owing at year end 100
Expenses paid in advance 70
Expenses accrued 30
Surplus of incomes over expenditures 400
What effect will the items above have on the cash flow?
A $515 inflow B $885 inflow C $1 115 inflow D $1 285 inflow
Nov 04 P3 Q2
20 In calculating the net cash flow from operating activities, which item would be included as an adjustment
to net profit?
A accumulated depreciation B bad debts recovered
C Drawings D profit on sale of non-current assets
May 05 P3 Q3
21 Non-current asset data for a company is as follows:

$000
Net book value at 1 January 2004 2 200
Profit on sale of non-current assets 100
Depreciation of non-current assets in 2004 500
Proceeds from sale of non-current assets 800
Net book value at 31 December 2004 2 300
What was the cash outflow on non-current assets additions for 2005?
A $600 000 B $900 000 C $1 300 000 D $1 500 000
May 05 P3 Q6
22 Extracts from the Balance Sheets of a company show:
at 30 September 2004($) at 30 September 2005($)

net assets 16 000 24 000
financed by:
issued share capital 10 000 15 000
share premium account _ 2 500
revaluation reserve 500 800
Income statement 3 500 4 200
Debentures 2 000 1 500
16 000 24 000
What is the net cash movement from “Financing” for the year ended 30 September 2005?
A $7 000 B $7 300 C $7 500 D $8 000
Nov 05 P3 Q2/ Nov 08 P3 Q2
23 The following items appear in a company’s Income statement.
$
Profit, after charging or crediting the following items 16 800
annual depreciation charge 6 000
loss on sale of tangible assets 1 800
interest paid 7 500
profit on sale of tangible assets 1 100
What is the cash flow from operating activities?
A $15 700 B $29 600 C $31 000 D $33 200
Nov 05 P3 Q3
24 A company issued 10 000 $10 ordinary shares at a price of $20 each.

A month after the issue, the company used $156 000 of the proceeds to repay an 8% Loan stock including
six months’ accrued interest due. The company prepared a statement of cash flows just after payment of
the Loan stock.
What amount of net cash inflow will appear under the heading “Financing” in the statement of cash
flows?
A $38 000 B $44 000
C $50 000 D $56 000
May 06 P3 Q2
25 A company issued 100 000 10 % preference shares of $1 each on 1 April 2005 at $1.20 per share.
Dividends on the shares are payable half-yearly on 1 April and 1 October.
How much will the company show for preference dividends in its statement of cash flows for the year
ended 31 December 2005?
A $5 000 B $6 000
C $7 500 D $10 000
Nov 06 P3 Q2
26 Which decreases the net cash inflow from operating activities?
A decrease in inventory
B increase in trade payables
C increase in trade receivables
D repayment of borrowings
May 07 P3 Q1
28 During the year ended 31 March 2007, a company sold plant and machinery for $8000. This plant had cost
$60 000 and had a book value of $10 000.
An additional $140 000 was spent on new plant and machinery, which was depreciated at the end of the
year by 20 %.
In preparing the statement of cash flows at the end of the year, how are the above transactions shown
under the capital expenditure heading?
cash inflow cash outflow
$ $
A Nil 132 000
B 8 000 112 000
C 8 000 140 000
D 10 000 140 000
May 07 P3 Q2
29 In a statement of cash flows, which item is a cash outflow?
A a decrease in inventory
B a decrease in trade receivables
C a decrease in trade payables
D an issue of bonus shares
Nov 07 P3 Q1
30 The amount shown on the statement of cash flows for 2006 as taxation paid amounts to $96 000. The
income statement extract of the company is as follows.
2006 ($) 2005 ($)
operating profit for the year 350 000 336 000
provision for taxation (110 000) (104 000)
profit after taxation 240 000 232 000
The liability for taxation at the 2005 year end was $100 000.
What is the total tax provision disclosed in the balance sheet for 2006?
A $14 000
B $110 000
C $114 000
D $210 000
Nov 07 P3 Q2
31 The following information has been taken from a trader's accounts for the year ended 31
December.
$
net profit 70 600
depreciation 20 100
loss on sale of non-current assets 1 900
increase in working capital 14 300
What is the net cash flow from operating activities?
A $38 100
B $74 500
C $78 300
D $103 100
May 08 P3 Q1
32 The following extracts are taken from the financial statements of a company for the year to 30
September.
year 1 ($000) Year2 ($000)
operating profit before depreciation 1140 1220
depreciation for the year 80 110
inventory 55 68
What is the operating cash flow for year 2?
A $1 203 000 B $1 213 000
C $1 237 000 D $1 313 000
May 08 P3 Q2
33 Which increases the net cash inflow from operating activities?
A increase in inventory
B increase in trade payables
C receipt of a bank loan
D sale of non-current assets
May 10 P3 Q1
34 The following information has been extracted from the accounts of a company.
at 31 May year 1 ($) year 2 ($)
operating profit 700 000 880 000
depreciation 54 000 62 000
(loss) profit on disposal of non-current assets (8 000) 17 000
working capital (excluding cash and bank) 107 000 123 000
What is the cash flow from operating activities in the year ended 31 May, year 2?
A $909 000 B $941 000
C $943 000 D $975 000
May 10 P3 Q2
35 A company has operating profit of $326 000 after taking into account the following information.
$
depreciation 24 000
goodwill impairment 11 000
increase in inventory 18 000
What is the net cash flow from operating activities?
A $321 000 B $343 000
C $357 000 D $361 000
Nov 10 P3 Q1
36 A company has the following account balances at the end of its financial year.
$
cash in hand 1 200
cash at bank 16 000
deposit, available at 2 months’ notice 7 000
deposit, available at 6 months’ notice 5 000
What is the figure for cash and cash equivalents to appear in the statement of cash flows?
A $9200 B $16 200
C $17 200 D $21 200
Nov 10 P3 Q11
37 The non-current assets of a business are shown.

end of year start of year
$ $
Cost 360 000 300 000
accumulated depreciation 120 000 75 000
net book value 240 000 225 000
During the year, non-current assets costing $110 000 were bought and non-current assets with a net book
value of $20 000 were sold.
What was the depreciation charge for the year?
A $35 000 B $45 000 C $50 000 D $75 000
May 11 P1 Q11
38 Which is not included in a statement of cash flows?

A dividends received B investments sold
C provision for depreciation D purchase of non-current assets
May 11 P3 Q2
39 During the year a company issued one million ordinary shares at $1.20 per share. It repaid a debenture of
$1 000 000 and assets costing $500 000 were purchased.
How will these transactions be recorded in the different sections of the company's statement of cash
flow?
financing ($000) investment ($000)
A +200 500
B 200 +500
C +1 200 1 500
D 1 200 +1 500
Nov 11 P3 Q2
40 A company provided the following financial information for the year.
$000
profit from operations 570
depreciation charge for the year 250
increase in working capital for the year 60
purchase of non-current assets during the year 125
repayment of a debenture during the year 30
What was the increase in cash and cash equivalents for the year?
A $225 000 B $355 000 C $475 000 D $605 000
May 12 P32 Q11
41 A company is preparing its statement of cash flows. During the year, it sells a non-current asset for $1 500.
This results in a loss on disposal of $1 000.
What is the effect of this on the statement of cash flows?
cash from operating activities cash from investing activities
A decreases by $1 000 decreases by $1 500
B no effect increases by $1 500
C increases by $1 000 no effect
D increases by $1 000 increases by $1 500
May 12 P32 Q12
ANSWER KEY
1 D 12 D 23 C 34 A
2 B 13 D 24 C 35 B
3 A 14 B 25 A 36 B
4 A 15 B 26 A 37 D
5 C 16 C 27 C 38 C
6 D 17 A 28 C 39 A
7 A 18 A 29 C 40 D
8 D 19 D 30 C 41 D
9 A 20 D 31 C
10 D 21 C 32 A
11 A 22 A 33 B
DETAILED ANSWERS
1 $
Depreciation (being non-cash expense) 2 500
Loss on sale of assets (being non-cash expense) 1 000
Decrease in working capital 500
Net cash flow from operations 19 000
* Working capital is also known as “ net current assets” and as we know if assets decrease cash increases
& vice versa, so decrease in net current assets is added to profit.
2 $
Operating profit before interest & depreciation * 240 000
(Increase) decrease in inventory (60 000)
(Increase) decrease in trade receivables 22 000
Increase (decrease) in trade payables 15 000
Net Cash from operating activities 217 000
* The word before is important, as profit is given before depreciation so depreciation has not been added
back as it was not subtracted earlier.
3 Items, which are recorded in Income statement before operating profit and balance sheet items related to
those items as aforesaid, are adjusted to operating profit. “A” option is correct as inventories relate to cost
of sales, which are obviously recorded before operating profit.
4 As evident from the name of the statement it shows the changes in cash and cash equivalents.
5 “C” option is correct. “A” and “B” options involve receipt (inflow) of cash, whereas “D” option does not
affect cash balance.
6 $
Book value of asset sold ($500$240) 260
Add Profit on asset sold 70
Sales proceeds of asset 330
7 As loss on sale of non-current assets is given. So if book value of these assets is known, selling price can
easily be calculated so to calculate book value. We will prepare the following account.
Non-current asset Account (at book value)
$ $
Balance b/f 115 000 Disposal (balancing figure) 25 000
Cash (purchases) 105 000 Depreciation 40 000
_______ Balance c/d 155 000
220 000 220 000
Selling price = book value  loss on sale

= $25 000  $10 000
= $15 000
9 As sales proceeds are recorded in disposal account, so it is prepared as under
Non-current asset disposal account
$ $
Non-current assets* 170 000 Provision for depreciation** 90 000
Loss on sale 50 000
______ Cash (Balancing figure) 30 000
170 000 170 000
* Non-current asset Account (at cost)
$ $
Balance b/f 280 000 Disposal (balancing figure) 170 000
Cash (purchases) 260 000 Balance c/d 370 000
540 000 540 000
Balance b/d 370 000
** Provision for depreciation account
$ $
Disposal (Balancing figure) 90 000 Balance b/f 150 000
Balance c/d 135 000 Depreciation 75 000
225 000 225 000
Balance b/d 135 000
10 For preparation of statements of cash flows for two years, two years’ profit figure (two years’ income
statements) and three years’ balance sheets are required i.e. for cash flow of year 2000 balance sheets of
1999 and 2000 will be needed and for statement of cash flows of year 2001, balance sheets of 2000 and
2001 will be required.
11 $
Profit 200 000
Add Depreciation (1 000 000  12%) 120 000
Less Profit on sale of asset (being non cash income) (30 000)
Decrease in provision for bad debts (being non-cash income) (20 000)
Cash generated from operations 270 000
12 Revaluation of non-current assets has the following effects.
Non-current assets  Revaluation Reserves 
As there is the no change in cash due to revaluation so it will not be included in the statement of cash
flows.
14 Cash paid for purchase of machine $100 000
Cash paid for purchase of vehicle ($10 000  $1 500) 8 500
Net cash outflow $108 500
16 $
Depreciation 9 600
Increase in inventories ($32 990  $30 000) (2 990)
Increase in trade receivables ($16 200  $14 000) (2 200)
Increase in trade payables ($10 340  $10 000) 340
Cash from operations 51 950
17 Taxation account
$ $
Bank (balancing figure) 48 000 Balance (owing) b/f 50 000
Balance(owing) c/d 57 000 Income statement 55 000
105 000 105 000
18 In statement of cash flows receipts and payments of cash are recorded. As out of purchase price of new
equipment only $150 000 was paid in cash so this will be recorded as cash outflow. Whereas $15 000 is
received on sale of old equipment, so this amount will be shown the statement of cash flows as cash
inflow.
19 Calculation of Cash flow for the year $

Surplus of incomes over expenditures 400
Depreciation of equipment 1 000
Subscriptions paid in advance 25
Subscriptions owing (100)
Expenses paid in advance (70)
Expenses accrued 30
Net Cash inflow for the year 1 285

$000 $000
Balance b/f 2 200 Disposal ($800  $100) 700
Cash (balancing figure) 1 300 Depreciation 500
_____ Balance c/d 2 300
3 500 3 500
22 $
Issue of ordinary shares [($15 000 – $10 000) + $2 500] 7 500
Redemption of debentures ($2 000 – $1 500) (500)
Net Cash inflow from financing 7 000
23 $
Profit before interest ($16 800 + $7 500) 24 300
Add Annual depreciation 6 000
Loss on sale of tangible assets 1 800
Less Profit on sale of tangible assets (1 100)
Cash flow from operating activities 31 000
24 $
Cash received from issue of ordinary shares (10 000 shares @ $20) 200 000
$156 000
Payment for loan stock ($1.00+(0.08 ÷2)) (150 000)
Cash flow from financing 50 000
25 Preference dividend paid = 100 000 × 10% × 6/12 = $5 000.

The next half year dividend will be paid in the next year (1 April 2006) so is not shown in current year’s
statement of cash flows.
27 Items in “A” and “B” options result in cash inflow whereas items in “C” and “D” options decrease cash
inflow. Though repayment of borrowings (“D” option) reduces cash inflow but is shown in “Financing”
section of the statement of cash flows. So “C’” option is correct which reduces cash inflow from
operations.
28 In statements of cash flows proceeds from sale of non-current assets ($8 000) are recorded as cash inflow,
whereas payments to acquire non-current assets ($140 000) are recorded as cash outflow so in view of
this “C” option is correct.
30 Tax account
$ $
Cash 96 000 Balance b/f 100 000
Balance c/d (*) 114 000 Income statement 110 000
210 000 210 000
31 $
Ne t profit 70 600
Add Depreciation 20 100
Loss on sale of non-current assets 1 900
Less Increase in working capital (14 300)
32 $000
Operating profit before depreciation 1 220
Add Decrease in trade receivables ($43 000  $35 000) 8
Less Increase in inventory ($68 000  $55 000) (13)
Decrease in trade payables ($59 000  $47 000) (12)
Operating cash flow for year 2 1 203
33 “B” option is correct. Item in “A” option will decrease operating cash flow whereas items in “C” and “D”
options are respectively shown in financing and investing activities.
34 $
Add Depreciation 62 000
Less Profit on disposal of non-current assets (17 000)
Increase in working capital (16 000)
35 $
Depreciation 24 000
Goodwill impairment 11 000
Increase in inventory (18 000)
36 $
Cash in hand 1 200
Cash at bank 16 000
Deposit, available at 2 months’ notice 7 000
Bank overdraft (8 000)
Cash and cash equivalent to be shown in statement of cash flows 16 200
$ $
Balance b/f 225 000 Asset disposal 20 000
Cash 110 000 Depreciation (balancing figure) 75 000
______ Balance c/d 240 000
335 000 335 000
38 “C” option is correct. Items in “A” and “B” options are shown as cash inflows in “investing
activities”. Purchase of non-current assets in “D” option is shown as cash outflow in “investing
activities” section of statement of cash flows.
39 $
Issue of shares (1 million shares @ $1.20) 1 200 000
Less Repayment of debentures (1 000 000)
Cash inflow from financing 200 000
In addition as $500 000 is spent on purchasing assets so will be shown as investing cash outflow.
40 $000
Profit from operations 570
Add Depreciation charge for the year 250
Less Increase in working capital for the year (60)
Less Purchase of non-current assets during the year (125)
Less Repayment of a debenture during the year (30)
Increase in cash and cash equivalents for the year 605
41 Sale of a non-current asset for $1 500 will be recorded as cash from investing activities whereas loss on
disposal of $1 000 is a non-cash expense and is added back to operating profit in operating activities
section.
Chapter 19 -229- Costs, Concepts and Cost Classifications
CHAPTER 19 COSTS, CONCEPTS AND COST CLASSIFICATIONS

1 Which line in the graph best represents the behaviour of the purchase price of a stores item affected by
bulk purchase discounts?
A
B
Cost
$
C
D
Quantity May 98 P1 Q34 / Specimen 02 P3 Q12 / May 02 P1 Q28

2 What is the purpose of cost accounting?
A to aid decision making
B to calculate the value of goodwill
C to give a true and fair view of a company’s financial situation
D to value the contribution made by a firm’s workforce
Nov 98 P1 Q34 / May 02 P3 Q20/ Nov 14 P12 Q27
3 In deciding whether to undertake a project which cost would be ignored?
A incremental cost B opportunity cost
C replacement cost D sunk cost
Nov 99 P1 Q36
4 What is a variable production cost for a manufacturer?
A bought-in raw material B depreciation of equipment
C factory business rates D storekeepers’ wages
Nov 99 P1 Q37/ Nov 06 P1 Q27
5 What is shown by the graph?
Number of units
A fixed costs per unit B selling price per unit
C total semi-variable costs D variable costs per unit
May 00 P1 Q36 / Nov 01 P1 Q36
6 What would be regarded as a fixed cost in the running of a motor vehicle?

A fuel costs B maintenance every 6 months
C oil change every 6 000 miles D tyre replacement
Nov 01 P1 Q33
7 Which graph shows the fixed cost per unit produced in a manufacturing process?
May 02 P1 Q29/May 11 P1 Q28

8 The diagram shows costs and revenues of a business.
Which line represents total costs?
Nov 02 P1 Q27/May 11 P1 Q28

9 What does the diagram show?
cost per unit $
0 number of units produced
A fixed costs per unit are less as production increases

B total fixed costs are less as production increases
C total variable costs are less as production increases
D variable costs per unit are less as production increases
May 03 P1 Q28/ Nov 07 P1 Q26/Specimen 16 P1 Q25
10 The graph shows the way in which a cost increases according to the level of activity of the business.
Total cost ($)
0 level of activity (units)
Which cost follows this pattern?

A administrative salaries
B commission on sales
C depreciation of factory
D office rent
Nov 03 P1 Q26
11 Which item is a fixed cost?

A factory rent B maintenance of machinery
C postage and stationery D sales commission
May 04 P1 Q25
12 What does the diagram show about costs?
$000
Sales revenue profit
revenue
and
costs
fixed costs
1 2 3 4 5
years
A fixed costs are increasing

B total costs as a % of sales are decreasing
C variable costs per unit are decreasing
D variable costs per unit are increasing
Nov 04 P1 Q24
13 A particular cost is classified as ‘semi-variable’.

Which effect will a 20% reduction in activity have on the unit cost?
A decease by 20% B decrease by less than 20%
C increase by 20% D increase by less than 20%
May 05 P1 Q25/ Nov 09 P1 Q25
14 Which cost will fall as production is reduced?

A fixed costs per unit B total fixed costs
C total variable costs D variable costs per unit
Nov 09 P1 Q24
15 The diagram shows a break-even chart.
0 number of units
What is indicated by the line XY?
A total costs B total fixed costs
C total sales D total variable costs
Nov 10 P1 Q30/May 15 P12 Q23
16 Which cost will decrease as production is increased?
A fixed costs per unit B total fixed costs
C total variable costs D variable cost per unit
May 11 P1 Q22
17 Which line represents total variable cost?
Nov 11 P1 Q25
18 A particular cost is classified as fixed.
Which effect will a 20 % increase in activity have on the unit cost?
A decrease by 20 % B decrease by less than 20 %
C increase by 20% D increase by more than 20 %
Nov 11 P3 Q19
19 Which statement best describes a sunk cost?
A a cost which is irrelevant for the future
B a cost which must be matched against the revenue
C a cost which remains the same at all levels of production
D a cost which varies with the level of production
May 12 P12 Q23
20 Which statement best describes fixed costs?

A costs that are constant in total over a range of output.
B costs that are the same in total over any output level.
C costs that are constant per unit as output increases.
D costs that are the same as stepped costs.
May 12 P12 Q25
21 A business employs machinists to make children’s sunhats.

As demand increases more machinists are employed. Every time eight extra machinists are employed, one
extra supervisor is needed.
How are total labour costs best described?
machinists supervisors
A fixed variable
B stepped variable
C variable fixed
D variable stepped
Nov 12 P12 Q25
22 The cost of using a mobile phone is made up of a monthly rental charge and the cost of individual phone
calls. What type of cost is this?
A fixed B semi-variable
C stepped D variable
Nov 13 P12 Q26
23 A business plans to replace its computer systems. Its existing hardware was bought seven years ago and
its software five years ago.
What type of cost is the existing system?
A fixed B stepped
C sunk D variable
May 15 P12 Q27
24 Which item is classed as a direct cost?
A administration costs B carriage inwards
C carriage outwards D supervisor’s salary
Nov 15 P12 Q25
25 A company is reviewing its costs.

It discovers the following in respect of its factory supervision expenses.
output in units cost per unit/$
8 000 8.00
10 000 6.40
Which type of cost is this an example of?
A fixed cost B semi-variable cost
C stepped fixed cost D variable cost
Specimen 16 P1 Q24
26 An employee works a standard 40-hour week. In that time he is expected to make 200 complete units.
He is paid a bonus of $10 for every hour saved in production.
For week 25 he worked 44 hours and produced 250 units.
How much was his bonus payment for week 25?
A $30 B $40
C $50 D $60
May 16 P12 Q22
27 A manager is preparing a quotation for Job 88. A specialised technician is hired to work for this job only.
He will use machinery that the company already owns.
Which statement is correct about expenses for Job 88?
A Both machinery depreciation and technician wage are direct.
B Both machinery depreciation and technician wage are indirect.
C Machinery depreciation is direct and technician wage is indirect.
D Machinery depreciation is indirect and technician wage is direct.
May 16 P12 Q24
28 A manufacturing company employs 20 workers who are paid a basic rate of $30 per hour for a 40-hour
week. To meet a special order, the workers each worked 50 hours and were paid a premium of 40% over
basic rate for the overtime.
What was the value of wages paid to meet the special order?
A $30 000 B $32 400 C $33 600 D $42 000
Nov 16 P12 Q23
29 A manufacturing business is currently operating at full capacity.

As part of an expansion programme to increase production capacity, the business intends to
employ an additional factory supervisor.
How are total supervisory salaries classified?
C stepped cost D variable cost
Nov 16 P12 Q24
30 How are stepped costs best described?

A costs that are always variable
B costs that have both a fixed and variable element
C fixed costs that are always the same amount at any level of output
D fixed costs which increase in total once a certain level of output is reached
May 17 P12 Q21
31 Which statement best describes variable costs?

A costs that are the same in total up to a certain level then increase with output
B costs that are the same in total over any output level
C costs that are constant per unit as output increases
D costs that increase per unit as output increases
May 17 P12 Q24
ANSWER KEY
1 B 9 A 17 C 25 A
2 A 10 B 18 B 26 D
3 D 11 A 19 A 27 D
4 A 12 D 20 A 28 B
5 A 13 D 21 D 29 C
6 B 14 C 22 B 30 D
7 A 15 A 23 C 31 C
8 B 16 A 24 B
DETAILED ANSWERS
1 Let us take a simple example
Quantity purchased (units) Discount (%)
1 – 999 nil
1 000- 1 999 5%
2 000 and above 10%
So if per unit purchase price is $10 then cost of 999 units will be (999  $10 = $9 990. However the cost of
1000 units will be less than 999 units i.e. [(1 000  $10 – (1 000  $10  5%)] = $9 500.
So at that point cost curve will show a slight downward trend as depicted in “B” curve.
10 “B” option is correct, as the other three options are example of fixed overheads.
12 “A” option is incorrect as fixed costs line remains constant over the year, “B” and “C” options are incorrect
as gap between sales and total cost curves (profit) has reduced. “D” option is correct, as due to increase in
per unit variable costs profits will reduce as shown in the diagram.
13 A 20% reduction in activity will increase unit costs, because fixed costs will be spread over fewer units.
Because of the saving in variable costs, the increase will be less than 20%. Let us assume that total cost is
$100
$100 for 100 units of which $50 is fixed and $50 is variable so original per unit cost is $1.00( ).
100 units
A 20% reduction in activity will not change fixed cost but variable cost will become $40 ($50 × 80%). So
$90 $1.125−$1.00
new cost is $90 and new per unit cost is $1.125 ( ) so increase in per unit cost is 12.5%( ).
80 units $1.00
As increase in per unit cost is less than 20% so in view of this “D” option is correct.
18 A 20% increase in activity will decrease per unit fixed cost, because fixed costs will be spread over more
units. Let us assume that total cost is $100 for 100 units of which $50 is fixed and $50 is variable so
$100
original per unit cost is $1.00( ).
100 units
A 20% increase in activity will not change fixed cost but variable cost will become $60 ($50 × 120%). So
$110
new cost is $110 and new per unit cost is $0.917 ( ) so decrease in per unit cost is
120 units
$1.000−$0.917
8.3%( ). As decrease in per unit cost is less than 20% so in view of this “B” option is correct.
$1.00
25 This is an example of Fixed cost as its total amount is constant at $64 000 (8 000 units  $8) or (10 000
units  $6.4) whereas per unit cost reduces with the increase in output level.
26 Bonus = Time saved (hours) × $10

= 6 hours * × $10
= $60
* Time saved = Time allowed  Time taken

= [250 ÷ 5 (*)] hours  44 hours

= 6 hours
** Standard output per hour = Standard output ÷ Standard hours

= 200 units ÷ 40 hours
= 5 units
28 $
Basic wages (20 workers × 40 hours × $30) 24 000
Overtime premium (20 workers × 10 hours × $30 × 140%) 8 400
Total wages paid 32 400
Chapter 20 -237- Job and Batch Order Costing
CHAPTER 20 JOB AND BATCH ORDER COSTING

1 A department undertakes a one-off process for manufacturing calculators. At the end of the month, the
production is 1 000 units, of which 200 units are complete and 800 units are 25% complete.
Production costs $
Direct costs 60 000
Indirect costs 30 000
Departmental costs 10 000
Sales of waste realise $4 000. What is the cost per unit?
A $215 B $240 C $250 D $480
May 02 P1 Q30
2 A department makes radios. The production at the end of the month was 1 000 units, of which 600 units
were completed and 400 units were 50% complete.
$
Materials 60 000
Labour 30 000
Departmental overheads 10 000
What is the cost per unit?
A $100 B $112 C $125 D $150
Nov 02 P1 Q29/Nov 06 P1 Q30
3 A business uses job costing to calculate the cost of vehicle repair jobs. Overheads are allocated on an
absorption costing basis.
What is the effect of this method of allocation?
A overheads will include both fixed and variable overhead costs
B overheads will include direct costs only
C overheads will include fixed overhead costs only
D overheads will include variable overhead costs only
May 03 P1 Q25/Nov 09 P1 Q26
4 A soup manufacturer uses batch costing. It produces a batch of 10 000 tins of soup with a direct materials
cost of $2500.
Direct labour involved 200 hours at a cost of $2000, and overheads are absorbed at the rate of $15 per
direct labour hour.
What is the cost of a tin of soup?
A $0.25 B $0.45 C $0.55 D $0.75
May10 P1 Q24/Nov 15 P12 Q27
5 A customer places an order for 20 000 bricks.
Which costing method will the supplier use to price the order?
A batch B job C marginal D unit
May10 P1 Q26/Nov 15 P12 Q24
6 In a job costing system, what is the correct entry to record the return of unused direct materials from
production to stores?
debit credit
A cost of sales work in progress
B stores control finished goods
C stores control work in progress
D work in progress stores control
Nov 10 P1 Q25
7 A job cost sheet showed the following estimates.

$
materials 680
labour at $20 per hour 200
overheads at $10 per labour hour 100
Profit 280
price of job 1 260
The job actually took 25 % more labour hours than were estimated.
What was the profit?
A $205 B $230 C $330 D $355
Nov 10 P1 Q29
8 What is the purpose of a job cost sheet?

A to enable the business to recover its overheads
B to ensure the customer knows the split between materials and labour
C to inform the customer of the profit margin
D to let the business find the price for a quotation
May12 P12 Q30
9 Which business would use a job costing system of accounting?

A chocolate factory B a dairy milk farmer
C a house builder D an oil refinery
May13 P12 Q29
10 A company is asked to make a new machine for a customer. It provides the following estimates.
materials will cost $1 100
labour will be 30 hours at a cost of $14 per hour
The company charges overheads at $10 per labour hour and has a mark up of 30% on total cost.
What is the price on the job cost sheet?
A $1 520 B $1 820 C $1 976 D $2 366
Nov13 P12 Q29
11 Which is not a characteristic of job costing?

A Each cost unit is separately identifiable.
B Production involves repetitive operations.
C Production is based on specific customer orders.
D Production is usually of short duration.
May 15 P12 Q26
12 Which statement best describes job costing?

A a costing method that calculates the cost of meeting a specific customer order
B a costing method that calculates the cost of producing a number of identical units for a customer
C a costing method that enables overheads to be absorbed into the cost of the product
D a costing method that separates fixed costs from variable costs
Specimen 16 P1 Q28
ANSWER KEY
1 B 4 D 7 A 10 D
2 C 5 A 8 D 11 B
3 A 6 C 9 C 12 A
DETAILED ANSWERS
Total cost of production
1 Per unit cost =
Total equivalent units
$60 000+$30 000+$10 000−$4 000
=
[200 +(800 ×25%)] units
$96 000
=
400 units
= $240 per unit
Total cost of production

2 Per unit cost =
Total equivalent units
$60 000+$30 000+$10 000
=
[600 +(400 ×50%)] units
$100 000
=
800 units
= $125
Cost of 10 000 Tins

4 Per unit cost =
10 000 Tins
$2 500+$2 000+(200 hours @ $15)
=
10 000 Tins
= $0.75 per Tin
7 $
Profit as per original estimate 280
Increase in labour costs [(200/20 × 25%]hours × $20 (50
Increase in Overheads [(200/20 × 25%]hours × $10 (25
Actual profit 205
10 $
Materials 1 100
Labour (30 hours @ $14) 420
Overheads (30 hours @ $10) 300
1 820
Add Profit ($1 820 ×30%) 546
Sales price on the job 2 366
12 “A” option is correct. Statement in “B” option relates to batch costing whereas statements in “C” and “D”
options represent absorption and marginal costing respectively.
Chapter 21 -240- Absorption Costing
CHAPTER 21 ABSORPTION COSTING

1 The production overheads of a small manufacturing company are recovered on a “labour hours’ basis”.
The budgeted overheads for November were $18 000 and the planned production labour hours were 450.
The actual production labour hours in November were 400.
The production overheads were
A over – recovered by $2 250 B over – recovered by $2 000
C under – recovered by $2 250 D under – recovered by $2 000
May 98 P1 Q32
2 What is the reason for overhead absorption in a manufacturing business?
A to enable overheads to be apportioned to cost centres
B to control overhead expenditures
C to establish cost per unit of product
D to establish the net realisable value of inventory
May 00 P1 Q33 /Nov 05 P1 Q27
3 A hospital ward budgets for overheads totalling $11 500 000 for a financial year. It expects to treat 25 000
patients in the year; each patient stays an average of 10 days. The ward absorbs overheads on a
patient/day basis. Its direct costs for the year are budgeted at $25 000 000.
What is overhead absorption rate?
A $ 46 per patient day B $100 per patient day
C $146 per patient day D $460 per patient day
May 00 P1 Q34/ May 07 P1 Q29
4 The diagram shows a company’s factory. The factory is split into two departments, the sizes of which are
shown. Each department contains a metre to record the fuel for heating.
department X department Y
30 000 sqmetres 20 000 sqmetres
metre 1 metre 2
The rent for the year is $100 000. The table shows the heating bill for the year.
$
metre 1 6 000
metre 2 14 000
20 000
Which amount for rent and heating should be attributed to X?
A $54 000 B $62 000 C $66 000 D $72 000
Nov 00 P1 Q37/May 06 P1 Q30/Nov 11 P1 Q11
5 A factory incurred overheads of $261 000 and worked for 116 000 machine hours. The budgeted
production figures were 122 000 machine hours and an overhead cost of $268 400.
What was the under-or over-absorption of overheads for the quarter?
A $5 800 under-absorbed B $5 800 over-absorbed
C $7 400 under-absorbed D $7 400 over-absorbed
Nov 00 P1 Q39/May 06 P1 Q28/ May 09 P1 Q30/ May 15 P12 Q24
6 Which of the following may result in over-absorption of overhead?

A absorption based on actual expenditure and actual activity
B activity below budget
C expenditure below budget
D expenditure in excess of budget
May 01 P1 Q33/ May 05 P1 Q29 /Nov 10 P3 Q19
7 Which of the following are methods of calculating a pre-determined overhead absorption rate?
actual overheads actual overheads
(1) (2)
actual machine hours budgeted units of output
budgeted overheads budgeted overheads
(3) (4)
budgeted direct labour hours budgeted machine hours
A 1 and 3 only B 1 and 4 only C 2 and 3 only D 3 and 4 only

May 01 P1 Q36
8 When a company’s departmental accounts are being prepared, rent of premises should be apportioned to
the departments on the basis of
A departmental salaries B departmental sales
C floor area occupied D number of personnel in each department
Specimen 02 P1 Q14
9 A company manufactures a variety of products, each of which requires different materials and grades of
labour.
There is little use of machinery in the manufacture of each product.
On which basis should the Overhead Absorption Rate (OAR) be calculated?
A direct labour cost B direct material cost
C direct labourhours D machine hours
May 02 P1 Q25
10 What will result in under-absorption of fixed production overheads?

A absorption based on actual expenditure and actual activity
B actual expenditure below budget expenditure
C actual activity above budget activity
D actual activity below budget and expenditure as budgeted
May 02 P1 Q26 / May 03 P1 Q27/ May 07 P1 Q26/Nov 11 P1 Q 29/Nov 14 P12 Q 25
11 Which of the following is a benefit of absorption costing?

A It allows a business to calculate the break-even point for production
B It allows a business to calculate the total cost of goods produced
C It allows a business to calculate the profit to be made on a product
D It allows decision making on utilising spare capacity by increasing production
Nov 02 P1 Q26/ Nov 08 P1 Q27/Nov 11 P1 Q 28
12 A business uses job costing to calculate the cost of vehicle repair jobs. Overheads are allocated on an
absorption costing basis.
What is the effect of this method of allocation?
A overheads will include both fixed and variable overhead costs
B overheads will include direct costs only
C overheads will include fixed overhead costs only
D overheads will include variable overhead costs only
May 03 P1 Q25
13 The following data is relevant to a business.
Budgeted labour hours 10 000
Budgeted overheads $150 000
Actual labour hours 9 500
Actual overheads $160 000
What is the amount of overhead under-absorbed?
A $7 500 B $8 000 C $10 000 D $17 500
Nov 03 P1 Q28/ Nov 08 P1 Q29/Specimen 16 P1 Q29/May 16 P12 Q25
14 Production overhead expenditure in a period totalled $102 660 compared with a budget of $105 270.
Direct labour hours are used to absorb production overheads. 8 700 direct labour hours were worked in
the period and production overhead was over-absorbed by $1 740.
What was the production overhead absorption rate per direct labour hour?
A $11.60 B $11.80 C $12.00 D $12.10
May 04 P1 Q27
15 A business provides the following data for the year.
Budgeted output (units) 10 000
Actual output (units) 8 000
Budgeted fixed production costs 1 200 000
Budgeted variable production costs 800 000
Budgeted fixed selling overhead 600 000
What is the absorption cost per unit used for inventory take?
A $200 B $250 C $260 D $325
May 04 P1 Q29/ Nov 08 P1 Q28/Nov 11 P1 Q 30
16 A business has the following budgeted and actual results for a period.
$
Budgeted fixed overheads 354 000
Budgeted number of units 118 000
Actual fixed overheads 360 000
Under absorption of overheads 3 000
The fixed overheads are absorbed per unit. What is actual level of activity in units?
A 118 000 B 119 000 C 120 000 D 121 000
May 04 P1 Q30
17 A business uses absorption costing.
Which cost is used to value finished inventory?
A full cost B prime cost
C variable cost of production D variable cost of sales
Nov 04P1 Q29
18 A company uses a predetermined direct labour rate of $5.40 per hour to absorb production overhead.
Each unit of product manufactured requires four direct labour hours.
The following information is available for a period:
actual production overhead $518 400
under-absorbed production overhead $32 400
What was the actual output of the product in the period?
A 22 500units B 24 000 units C 25 500 unitsD 30 000 units
Nov 05 P1 Q30/May 08 P1 Q27
19 A company manufactures a single product with a selling price of $75 per unit. The table shows the costs,
based on sales and production volume of 8 000 units.
$000
prime costs 158
variable manufacturing overheads 74
fixed manufacturing overheads 80
variable selling overheads 20
fixed administration overheads 100
If absorption costing is applied, what is the gross profit on each unit sold?
A $21.00 B $36.00 C $43.50 D $46.00
May 06 P1 Q29
20 What could cause over-absorption of overhead expenditure?

1. Units produced exceeding the budgeted production
2. Units produced being less than the budgeted production
3. Overhead expenditure being less than budget
4. Overhead expenditure exceeding budget
May 06 P3 Q19/ Nov 16 P12 Q25
21 The table shows figures for a week’s production.

expected production 10 000 units
expected production overhead $50 000
actual production overhead $60 000
under-absorption of overhead $5 000
What is the actual amount of production in the week?
A 9 000 units B 9 167 units C 11 000 units D 13 000 units
Nov 07 P1 Q30
22 The table contains information provided by a business.

actual direct labour hours worked 18 000
actual overhead expenditure $504 000
budgeted direct labour hours 17 000
budgeted overhead expenditure $510 000
What is the amount of the overhead over / under recovery?

A $6000 over-recovered B $6000 under-recovered
C $30 000 over-recovered D $36 000 over-recovered
Nov 07 P3 Q22/ Nov 09 P3 Q20
23 When valuing inventories of finished goods on an absorption cost basis, which costs should be included?
A production
B production and administration
C production, marketing and distribution
D production, marketing, administration and distribution
May 08 P1 Q11
24 The table contains information provided by a company.

overheads under-recovered $15 000
What is the amount of the actual overhead expenditure?
A $89 000 B $97 500 C $112 500 D $119 000
May 08 P3 Q21

budgeted direct labour hours 8 000 budgeted overhead expenditure $104 000
actual direct labour hours worked 7 500 actual overhead expenditure $112 500
What is the amount of the overhead over/under recovery?
A $7 500 under-recovered B $8 500 over-recovered
C $8 500 under-recovered D $15 000 under-recovered
Nov 08 P3 Q22
26 In January, a business had opening inventories of 25 200 units and closing inventories of 28 200 units.
The profit calculated on marginal costing principles was $100 800 and that calculated on absorption
costing principles was $120 300.
What was the fixed overhead absorption rate per unit?
A $4.00 B $4.27
C $6.17 D $6.50
Nov 09 P1 Q29/May 12 P12 Q29
27 A business provides the following information for a month.

What is the amount of the overhead over / under recovery?
A $2 000 over-recovered
B $2 000 under-recovered
C $8 000 over-recovered
D $8 000 under-recovered
May 11 P1 Q25
28 The following information is provided by a company for a month.

overheads under-recovered $12 000
What is the amount of the actual overhead expenditure?
A $60 000
B $68 000
C $72 000
D $84 000
May 11 P1 Q26
29 In July, a business had opening inventory of 10 000 units and closing inventory of 16 000 units.
The profit calculated on marginal costing principles was $220 000 and that calculated on absorption
costing principles was $268 000.
What was the fixed overhead absorption rate per unit?
A $8.00 B $13.75
C $16.75 D $22.00
Nov 11 P3 Q21
30 The following data is taken from a business.
budgeted labour hours 16 000

actual labour hours 13 000
budgeted overheads $192 000
actual overheads $188500
What is the amount of overhead under-absorbed?

A $3500 B $32500
C $36 000 D $43500
Nov 11 P3 Q22
31 A company operates three departments and apportions heat and light on the most appropriate basis.
The table shows information for a year.
department X department Y department Z total
revenue $950 000 $710 000 $690 000 $2 350 000
floor area (square metres) 500 800 680 1980
number of employees 85 60 58 203
heat and light $90 000
Which cost for heat and light is apportioned to department X?
$
A 22 727
B 30 000
C 36 383
D 37 685
Nov 12 P12 Q12/May 13 P12 Q28
32 The following data is available for the production department of a manufacturing company.
Overheads are absorbed on a direct labour hour basis.
direct labour hours total overhead costs ($)
budgeted 96 000 242 880
actual 97 600 253 760
What is the over or under absorption of overheads for the period?

A $6 832 over absorbed B $6 832 under absorbed
C $10 880 over absorbed D $10 880 under absorbed
May 13 P12 Q26
33 A business provides the following information for a cost centre.

apportioned overhead costs $160 000
re-apportioned service department costs $60 000
total labour hours 25 000
total machine hours 40 000
What is the overhead absorption rate for the cost centre?
A $4.00 per hour B $5.50 per hour C $6.40 per hour D $8.80 per hour
Nov 15 P12 Q30
34 Which statements about absorption costing are correct?

1 It apportions overheads between production and service departments.
2 It enables a company to know its break-even level of production.
3 It leads to higher inventory valuations than marginal costing.
4 It is used by management for make or buy decisions.
A 1, 2 and 3 B 1 and 3 only C 2 and 4 only D 3 and 4 only
Specimen 16 P1 Q26
35 The following details are supplied by a company for the month of August.
budgeted machine hours 36 000
actual machine hours 36 500
actual overheads $155 000
What is the under or over absorption of the overheads?
May 17 P12 Q27
ANSWER KEY
1 D 10 D 19 B 28 D
2 C 11 B 20 B 29 A
3 A 12 A 21 C 30 B
4 C 13 D 22 D 31 A
5 A 14 C 23 A 32 B
6 C 15 A 24 C 33 B
7 D 16 B 25 D 34 B
8 C 17 A 26 D 35 C
9 C 18 A 27 C
DETAILED ANSWERS
1 $
Budgeted and actual overheads for November 18 000
$18 000
Overheads recovered in November - × 400 hours (16 000)
450 hours
Under - recovered overheads 2 000
Budgeted overheads
3 Overhead absorption rate =
Budgeted patient days
$11 500 000
=
25 000 ×10
= $46 per patient day
4 $
$30 000
Rent allocated to X- $100 000 × 60 000
$30 000+$20 000
Heating attributed to X 6 000
Total amount attributed to X 66 000
5 $
Actual factory overheads 261 000
Factory overhead absorbed (116 000 hours @ 2.2 per hour *) 255 200
Under-absorbed overheads 5 800
Budgeted overheads
* FOH absorption rate =
Budgeted machine hours
$268 400
= = $2.2 per hour
122 000 hours
13 $
Actual overheads 160 000
$150 000
Overheads absorbed - × 9 500 hours 142 500
10 000 hours
Budgeted overheads
14 FOH absorption rate is calculated by using the following formula ( ). But in
Budgeted direct labour hours
this particular question the above formula cannot be used for calculating overhead absorption rate as
estimated labour hours are not given. However absorbed overheads can be calculated as follows:
Actual labour hours  Absorption rate = Absorbed Overheads
8 700 hours  Absorption rate = $102 660 + $1 740
Absorption rate = $104 400
$104 400
Absorption rate =
8 700 hours
= $12 per hour
Total budgeted production cost

15 Absorption cost per unit =
Budgeted output
$1 200 000+$800 000
=
10 000 units
= $200 per unit
16 As we know that,
Actual units  OH absorption rate = Absorbed overhead
$354 000
*Overhead absorption rate =
118 000 units
= $3.00
Actual activity level  $3* = ($360 000  $3 000
$357 000
Actual activity level =
$3
Actual activity level = 119 000 units
18 Actual production overheads $518 400

Under absorbed overheads, 32 400
Total absorbed overheads $486 000
As absorbed overheads = Actual units × Absorption rate
$486 000 = Actual units × ($5.40 × 4
$486 000
Actual units =
$21.60
= 22 500 units
19 Gross profit per unit = Selling price per unit – Cost of sales per unit
$158 000+$74 000+$80 000
= $ 75 –
8 000 units
= $ 36.00
Total absorbed overheads

21 Actual units of production =
Per unit absorption rate
$60 000−$5 000
=
$50 000/ 10 000 units
= 11 000 units
22 $
Actual overhead expenditures 504 000
Absorbed overhead expenditures [18 000 hours @ $30] 540 000
Over-recovered overheads 36 000
$501 000
*Overhead rate = = $30 per hour
17 000 hours
24 $
Actual overheads (balancing figure) 112 500
$104 000
8 000 hours
Under-recovered overheads 15 000
25 $
Factory overhead absorbed (7 500 hours @ $13 per hour*) 97 500
Budgeted overheads
Budgeted labour hours
$104 000
=
8 000 hours
= $13 per labour hour
26 Change in inventories Fixed overhead rate = Change in profits

Change in profits
Fixed overhead rate =
Changre in inventories
$120 300−$100 800
=
28 200 units−25 200 units
= $6.50 per unit
27 $
Actual overheadexpenditure 88 000
$90 000
7 500 hours
Over-recovered overheads 8 000
28 $
Actual overhead expenditure 84 000
$80 000
Overheads recovered (absorbed) - 4 500 hours × 72 000
5 000 hours
29 Change in inventories Fixed overhead rate = Change in profits

Change in profits
Fixed overhead rate =
Changre in inventories
$268 000−$220 000
=
= $8.00 per unit
30 $
$192 000
Overheads absorbed - × 13 000 hours 156000
16 000 hours
31 Heating and lighting expense is apportioned on the basis of area covered so for department X it will be
$90 000 × 500 𝑚2
$22 727 calculated as ( ).
1 980 𝑚2
32 $
Factory overhead absorbed (97 600 hours @ 2.53 per hour *) 246 928
Budgeted overheads
Budgeted labour hours
$242 880
=
96 000 hours
= $2.53 per hour
Budgeted overheads
33 FOH absorption rate =
Budgeted machine hours
$160 000+$60 000
=
40 000 hours
= $5.5 per machine hour
Machine hour base has been used rather than direct labour hours, being the larger of the two
alternatives.
34 Statements 1 and 3 are correct for Absorption costing whereas statements 2 and 4 relate to
Marginal Costing.
35 $
$162 000
36 000 hours
Over-absorbed overheads 9 250
Chapter 22 -250- Break-Even and Profit Volume Analysis
CHAPTER 22 BREAK-EVEN AND PROFIT VOLUME ANALYSIS

1 A company plans to manufacture toys and to sell them at $10 each. Its fixed costs are estimated at $10
000 per annum and the variable costs per toy $3. It has the capacity to produce 3 357 units before
expansion increases the fixed costs by 20%.
What is the break-even point in sales value?
A $14 286 B $17 143 C $33 333 D $40 000
Nov 98 P1 Q33
2 A company has sales of $192 000, fixed costs of $40 000 and a Contribution⁄Sales ratio of1⁄3.
What are its profits?
A $24 000 B $50 667 C $64 000 D $88 000
May 99 P1 Q34/ Nov 07 P1 Q24
3 An accountant prepared the following break-even chart.
costs&
revenue
($m)
The budgeted sales volume is 4.5 million units.

Calculate profit, which can be anticipated at this sales volume
A $2.5 million B $4.5 million C $7 million D $9 million
Nov 99 P1 Q33 / Specimen 02 P1 Q30/Specimen 16 P1 Q27
4 A company manufactures a single product as shown

Selling price $20 per unit
Variable costs $15 per unit
Its budgeted fixed costs are $200 000.
How many units must the company sell to make a net profit of $50 000?
Nov 99 P1 Q35 / Nov 03 P1 Q1
5 The data in the table relates to a small business.

$ $
Sales 6 000
Variable Costs 4 500
Fixed Costs 900 (5 400
Profit 600
What is the contribution to sales ratio?
A 10% B 25%
C 33.33% D 75%
May 00 P1 Q35/ Nov 05 P1 Q26/ Nov 08 P1 Q25
6 Assuming all other factors remain unchanged, the break-even point of a business can be lowered by
increasing its
A budgeted sales B fixed costs
C marginal costs D selling prices
Nov 00 P1 Q36/ May 08 P1 Q26
7 A product is sold for $100 per unit. Fixed costs are $80 000 and variable costs are 60% of the selling price.
What is the break-even sales revenue?
A $80 000 B $128 000
C $200 000 D $280 000
May 01 P1 Q32
8 A profit/volume chart is shown. Two lines indicate the break-even point for the sales of 50 units of each of
the two products.
What are the total fixed costs allocated to the two products?
A $10 000 B $15 000 C $20 000 D $25 000
May 01 P1 Q40
9 A business with fixed costs of $12 000 makes a profit of $3 000 on a turnover of $60 000. What is the
break-even point expressed in terms of sales value?
A $45 000 B $48 000 C $57 000 D $63 000
Specimen 02 P1 Q29
10 Which of the following are major assumptions in profit/volume (p/v) analysis?

1 Variable cost per unit fluctuates with the volume of activity.
2 Costs can be identified as either variable or fixed.
3 Fixed cost per unit is constant as activity rises.
4 Volume of activity is the only factor that affects revenue and costs.
A 1 and 3 only B 2 and 3 only C 2 and 4 only D 3 and 4 only
Nov 02 P1 Q28
11 The following information relates to a business for a period.

How many units were sold in the period?
$
Selling price per unit 100
Variable costs per unit 60
Total fixed costs 90 000
Net profit 15 000
A 1 500 B 1 750 C 2 250 D 2 625

May 03 P1 Q1
12 The information relates to a product. What are the variable unit costs?
$
Break- even sales revenue 15 000
Unit sales price 10
Fixed costs 6 000
A $2.00 B $2.50 C $4.00 D $6.00

May 03 P1 Q29
13 A Company makes a product for which the following information is given.
Per unit
Selling price $100
Direct materials $40
Direct labour $30
Total fixed costs are $40 000.Planned production is 1 000 units.

Which action should the company take to break-even?
Decrease cost of Increase cost of

A direct labour 30% -
B direct materials 25% -
C - direct labour 30%
D - direct materials 25%
May 03 P3 Q20/ Nov 16 P12 Q29
14 What do the break-even charts show regarding the profitability of and risk attaching to products 1 and 2?
Profitability Risk
A 1 is greater 1 is greater
B 1 is greater 1 is less
C 2 is greater 2 is greater
D 2 is greater 2 is less
Nov 03 P1 Q27/May 11 P1 Q27
15 A company has a product, which sells for $ 1 per unit. The variable costs are $0.60 per unit, and
production of 200 000 units is planned.
Fixed costs are $0.20 per unit at the budgeted production level.
What is the break-even level?
Nov 03 P1 Q29 /Nov 09 P1 Q27

$
X sales revenue
revenue and
costs total cost
Y
fixed cost
O level of activity budgeted level of activity

What does line XY represent?
A the break-even point revenue
B the margin of safety in terms of revenue
C the profit at break-even point
D the total contribution at break-even point
May 04 P1 Q26/Nov 12 P12 Q27
17 The information relates to the production of 50 000 units of a product.

Per unit $
Selling price 25
Variable costs 15
Contribution 10
The fixed costs are $300 000. The unit selling price is increased by 10%.
What is the increase in the margin of safety?
A 13.6% B 20% C 24.2% D 30%
May 04 P3 Q25/ May 08 P1 Q28
18 You are given the following information concerning a product.

$ Per unit
Selling price 10.00
Variable labour costs 3.50
Raw material costs 2.50
Break-even point 2 500 units
What is the total fixed cost?
A $10 000 B $15 000 C $16 250 D $18 750
Nov 04 P1 Q27
19 Te following information relates to a product.
$
Fixed costs 72 000
Desired profit 30 000
Selling price per unit 10
Variable cost per unit 4
How many units must be produced and sold to cover fixed costs and make the desired profit?
A 12 000 units B 17 000 units
C 18 000 units D 25 500 units
May 05 P1 Q26

$
W X
Y
Costs and
revenues
Z
0
Number of units
Which line represents the margin of safety?
A WX B WY C XY D XZ
May 05 P1 Q27/ May 08 P1 Q25
21 The following information applies to X Ltd.

Output Sales Profits
(units) $ 000 $ 000
750 750 100
1 000 1 000 250
What is the contribution to sales ratio?
A 25% B 40% C 60% D 87%

May 05 P1 Q28/May 13 P12 Q26
22 What are major assumptions in contribution/sales (c/s) analysis?

1 Costs can be identified as either variable or fixed
2 Fixed cost per unit is constant as activity rises
3 Variable cost per unit fluctuates with the volume of activity
4 Volume of activity is the only factor that affects revenue and variable costs
A 1 and 2 only
B 1 and 4 only
C 2 and 3 only
D 2 and 4 only
May 05 P1 Q30
23 A company has fixed costs of $5 000. Sales for 600 units have been made. The budgeted unit details are:
$
Selling price 26
Variable costs 19
Fixed costs 2
Profit 5
At what minimum price should an order for 200 additional units be accepted in order to break even?
A $19 B $23 C $24 D $26
May 05 P3 Q24
What is indicated by X?
A total costs B total fixed costs
C total sales D total variable costs
Nov 05 P1 Q25
25 The budget for a product is shown.

unit sales 620 000
$
selling price per unit 31
variable cost per unit 16
contribution per unit 15
fixed costs $7 500 000
If the fixed costs rise to $7 800 000, the selling price is reduced to $29 per unit, and the variable cost
remains unchanged at $16 per unit, the sales are likely to reach 660 000 units.
By what percentage will the revised break-even point increase?
A 3.8% B 4.0%
C 16.7% D 20.0%
Nov 05 P1 Q29/Nov 12 P12 Q28
26 What does the line between points X and Y on the break-even chart represent?
X
$
revenues Y
and costs
O
units
A total costs
B total gross profit
C total net profit
D total variable costs
May 06 P1 Q27
27 Cedric plans to set up a business selling hamburgers. He prepares his daily budget as follows:
$
Selling price per hamburger 5.00
cost of raw materials 1.00
daily wages and cooking costs 960.00
depreciation of equipment 100.00
What is his budgeted cash-based break-even volume each day?

A 192 B 212 C 240 D 265
May 06 P3 Q25
28 Existing fixed overheads are $100 000, unit selling price is $10 and unit variable costs are $5.
Fixed overheads are expected to increase by $20 000. What is the new break-even sales volume?
Nov 06 P1 Q28
29 A business manufactures 175 units of a product a month.
The following total information is available for the month:
$
sales income 580
variable costs 230
fixed overheads 90
What is the break-even point in units?
A 45 units B 49 units C 61 units D 88 units
Nov 06 P1 Q29
30 The break-even chart for a product is shown.
Sales
revenue
break-even point total costs

costs and
revenues
$000 X
Y
Sales volume
What does XY represent?
A fixed costs B gross profit C net loss D variable costs
May 07 P1 Q25
31 A company makes two products.
product
X ($) Y ($)
selling price 10 12
variable costs per unit 4 8
maximum sales (units) 4 000 14 000
Fixed costs are $48 000.4 000 units of X are sold.
How many units of Y must be sold to break even?
A 2 000 B 3 000 C 6 000 D 12 000
May 07 P1 Q28
32 A firm sells its product for $10 per unit and has variable costs of $6 per unit. Its fixed costs for the year are:
$
factory rent 30 000
other fixed costs 70 000
What is the break-even point?
Nov 07 P1 Q25/Nov 13 P12 Q27
33 A business provides the following information:
$
total fixed costs 10 000
unit selling price 1
variable unit production costs 0.75
What is the total sales revenue needed to break even?

A $2 500 B $7 500 C $10 000 D $40 000
Nov 07 P1 Q27
34 The total cost of making product X is shown on the graph.
What is the variable cost per unit?

A $0.50 B $0.83 C $1.00 D $1.50
Nov 07 P1 Q28/Nov 12 P12 Q26
35 A company manufactures a product. Information for the last two years is as follows:
year 1 year 2
$ $
variable unit costs 6.00 7.00
fixed overheads per annum 24 000 25 200
unit sales price 10.00 10.00
In both years, production has been at break-even level.

What is the increase in production in year 2 compared with year 1?
increase in production
A 2 400 units
B 3 600 units
C 6 000 units
D 8 400 units
Nov 07 P1 Q29
36 A company manufactures and sells a single product.

At an output of 1 000 units per month the budget shows
$
selling price 120 000
variable cost 40 000
fixed cost 50 000
profit 30 000
Fixed costs are due to increase by $10 000 per month and the selling price will be increased to maintain
the profit at $30 000.
What is the effect on the break-even point to the nearest unit?
A decrease by 42 units B increase by 42 units
C decrease by 125 units D no change
May 08 P1 Q29
37 The following information relates to the budgeted and actual sales of a product.
budgeted actual
sales volume in units 25 000 23 000
contribution per unit $3 $4
fixed costs $30 000 $30 000
Which change in the break-even point has been caused by the actual being different from the
budgeted?
A 25% better B 25% worse
C 75% better D 75% worse
May 08 P3 Q20/ May 09 P3 Q18
38 The graph shows a break-even chart.
What are the fixed costs?
A $0 B $10 000 C $20 000 D $30 000

Nov 08 P1 Q26
39 Which name is given to the difference between a company's actual sales and break-even sales?
A margin of safety
B marginal cost
C marginal C-V-P (cost-volume-profit) analysis
D marginal revenue
May 09 P1 Q26
40 What best describes cost of direct materials plus direct labour costs?
A absorption cost B marginal cost
C prime cost D total cost
May 09 P1 Q27
41 A company has the information shown below.

$
actual sales for August 320 000
break-even sales for August 400 000
total fixed costs for August 150 000
What is the margin of safety for August?
A $80 000 negative B $80 000 positive
C $170 000 negative D $250 000 positive
May 09 P1 Q28
42 A business has fixed costs of $100 000. It sells a single product for $25 per unit, and its contribution to
sales ratio is 40 %. What is the break-even point in units?
A 6 667 B 10 000
C 40 000 D 250 000
May 09 P1 Q29/Nov 14 P12 Q26
43 How is total contribution calculated?
A actual sales revenue less break-even sales revenue

B sales revenue less fixed costs
C sales revenue less total costs
D sales revenue less variable costs
Nov 09 P1 Q28
44 The graphs show projected sales and cost information for products X and Y.
$ Product X $ Product Y Sales
50 Sales 50
Total Total
40 40 cost
cost
30 30
Fixed
20 cost 20
Fixed
10 10 cost
0 0
0 10 20 30 40 0 10 20 30 40
Quantity Quantity
Which statement most accurately interprets the graphs?

A Product X breaks even at a higher number of units sold than product Y.
B Product X has lower fixed costs than product Y.
C Product X has a lower selling price per unit than product Y.
D Product X has a lower variable cost per unit than product Y.
May 10 P1 Q29
45 A product is sold for $100 per unit. Fixed costs are $90 000 and variable costs are 60 % of the selling price.
What is the break-even sales revenue?
A $36 000 B $90 000

C $150 000 D $225 000
May 10 P3 Q19
46 A company manufactures two products.

Product X product Y
$ $
selling price 20 30
direct labour (per unit) 10 20
direct materials (per unit) 4 2
Total fixed costs are $48 000.
Only 3000 units of Y can be made and sold.
How many units of product X must be made and sold to break even?
A 1800 B 3000 C 4000 D 8000
Nov 10 P1 Q26
47 A business sells its product for $50 a unit and has variable costs of $30 per unit. Its fixed costs for this year
were $200 000. Next year, fixed costs are expected to be $260 000.
How many more units will have to be sold next year to make the same profit as this year?
A 3 000 B 5 200 C 10 000 D 13 000
May 11 P1 Q23/Nov 15 P12 Q26
48 A business has sales of $250 000, fixed costs of $50 000 and a Contribution⁄Salesratio of 30%. What is the
profit?
A $25 000 B $60 000 C $75 000 D $200 000
May 11 P1 Q24
49 The following information relates to the budgeted and actual sales of a product.
Budgeted actual
sales volume in units 40 000 36 000
contribution per unit $2 $2.50
fixed costs (total) $30 000 $30 000
Whatchangeinthebreak-evenpointhasbeencausedbyactualsalesbeingdifferentfrom budget?
A 20 % better B 20 % worse
C 80 % better D 80 % worse
May 11 P3 Q22
50 A company makes and sells one product that has a variable cost of $21 and a contribution to sales ratio of
30%. Total fixed costs per month are $112 500.
How many units need to be sold each month to break-even?
A 3750 units B 5357 units
C 12 500 units D 16071 units
Nov 11 P1 Q26
51 A business has the following budget for April.

$
sales revenue 1 000 000
contribution 550 000
fixed production costs 275 000
fixed selling costs 55 000
What is the break-even sales revenue for April?
A $450 000 B $500 000 C $600 000 D $670 000
May 12 P12 Q27
52 The following relates to the production and costs of a manufacturer.

Production for the period 2 400 units
closing inventory 400 units
direct material costs $12 000
direct labour costs $6 000
factory fixed expenses $4 080
Closing inventory is valued at marginal cost.
What is the marginal cost per unit of the finished goods?
A $7.50 B $9.00 C $9.20 D $11.04
May 12 P32 Q23
53 A business produces one product.

The following details are available for the budgeted production of 150 000 units.
$
selling price per unit 1.20
variable cost per unit 0.70
fixed cost per unit 0.20
What is the break-even point in sales value?
A $30 000 B $60 000 C $72 000 D $180 000
May 13 P12 Q27
54 A company’s financial information is as follows.

$
selling price per unit 55
variable costs per unit 15
total fixed costs 33 000
If the selling price is reduced to $40, how many extra units need to be sold to break-even?
A 495 B 825 C 1 320 D 2 200
Nov 13 P12 Q28
55 Which costing method is used to calculate a break-even point?

A absorption B batch C marginal D unit
May 15 P12 Q25
56 The break-even sales of a company are 1000 units when the variable costs are $30 000 and fixed costs are
$20 000.
What is the profit if 70 units above the break-even point are sold?
A $700 B $1 400 C $2 100 D $3 500
May 16 P12 Q29
57 The budgeted income statement of J Limited shows the following.

$
sales 400 000
variable costs 240 000
fixed costs 132 000
What is the margin of safety in dollars?
A $70 000 B $160 000 C $268 000 D $330 000
May 17 P12 Q26
ANSWER KEY
1 A 16 B 31 C 46 C
2 A 17 D 32 D 47 A
3 A 18 A 33 D 48 A
4 D 19 B 34 A 49 A
5 B 20 C 35 A 50 C
6 D 21 C 36 B 51 C
7 C 22 B 37 A 52 A
8 D 23 B 38 B 53 C
9 B 24 A 39 A 54 A
10 C 25 D 40 C 55 C
11 D 26 C 41 A 56 B
12 D 27 C 42 B 57 A
13 B 28 D 43 D
14 B 29 A 44 D
15 C 30 A 45 D
DETAILED ANSWERS
Total fixed costs
1 Break-even ($) =
Contribution ratio
$10 000
=
$0.70
= $14 286
As breakeven units (14 286  $10 = 1 429 units are less than present capacity, so fixed costs will remain
constant.
2 As we know
Contribution – Fixed cost = Profit
So ($192 000 × 1/3 $40 000 = Profit
$64 000  $40 000 = $24 000
Total fixed costs+Required profit

4 Units to make profit of $50 000 =
Contribution per unit
$200 000+$50 000
=
$20−$15
$250 000
=
$5
= 50 000units
Contribution
5 Contribution to sales ratio = × 100
Sales
$6 000−$4 500
= × 100
$6 000
= 25%
Total fixed costs

7 Break-even ($) =
Contribution ratio
$80 000
=
$1.00−($1.00 ×60%)
= $200 000
8 As at zero output level cost curves are at negative values of $10 000 and $15 000 or business is incurring a
total loss of $25 000. This is because of zero revenue and fixed costs of $25 000.
Total fixed costs

9 Break-even ($) =
Contribution ratio∗
$12 000
=
0.25
= $48 000
Contribution
* Contribution ratio = × 100
Sales
$12 000+$3 000
= × 100
$60 000
= 25%

11 Sales (units) =
$90 000 +$15 000
Sales (units) =
$100−$60
= 2 625 units
Total fixed costs

12 Break even units =
$15 000 $6 000
=
$10 Contribution per unit
$6 000
Contribution per unit =
1 500 units
= $4
Variable cost per unit = $10 – $4
= $6
Total fixed costs

13 Break-even (units) =
$40 000
1 000 =
$40 000
Contribution per unit =
1 000 units
= $40 per unit
Existing contribution Option A Option B Option C Option D

($100  $40  $30 $30 $30 $30 $30
Change in contribution 9 10 (9 (10
New contribution 39 40 21 20
As “B” option will result in contribution of $40 so it is the right option.
Total fixed costs

$200 000 ×$0.20
=
$1.00−$0.60
= 100 000 units
16 “B” option is correct, as X-axis shows sales revenue and costs, so actual sales revenue (point X) in excess of
break-even sales revenue (point Y) will be the margin of safety in terms of sales revenue. “A” option is
incorrect as point Y (not the area XY) represents break-even point revenue. “C” option is also wrong, as at
break-even point, there is neither a profit nor a Loss. “D” option is also wrong as on break-even chart
contribution is not shown in the chart; this is shown in a profit-volume (contribution) chart.
17 Existing Margin of Safety (units) = Existing sales – Break-even sales

= 50 000 units – 30 000 units*
= 20 000 units
Total fixed costs

* Existing Break-even (units) =
$300 000
=
$10
= 30 000 units
Proposed Margin of safety (units) = Proposed sales– Break-even sales
= 50 000 units – 24 000 units **
= 26 000 units
Total fixed costs
** Proposed Break-even =
New contribution per unit
$300 000
=
$10.00+$2.50
= 24 000 units
Increase in Margin of Safety = × 100
20 000 units
= 30%
Total fixed costs
18 Break-even point (units) =
Total fixed costs
2 500 units =
$10−($3.50+$2.50
Total fixed cost = 2 500 units  $4
Total fixed cost = $10 000
19 Units to make profit of $30 000 =
$72 000+$30 000
=
$10−$4
$102 000
=
$6
= 17 000 units
Contribution for 250 units
21 Contribution to sales ratio = × 100
Sales for 250 units
$250 000−$100 000
= × 100
$1 000 000−$750 000
$150 000
= × 100
$250 000
= 60%
23 As existing sales volume is already covering the fixed cost of $4 200 [600 units @ ($26$19], so to cover
$800
the remaining fixed cost of $800 a contribution of $4 ( )per unit is required. This per unit
200 units
contribution of $4 can be used for calculation of minimum acceptable price for the additional output as
given below.
Required contribution per unit $4

Variable cost per unit 19
Minimum sales price per unit $23
25 Break-even point (original) $7 500 000

= = 500 000 units
$15
Break-even point (revised) $7 800 000
= = 600 000 units
$29−$16
Increase in break-even point (%) 600 000 units−500 000 units
= × 100 = 20%
500 000 units
Total cash fixed costs

27 Cash based break-even (units) =
$960.00
=
$5.00−$1.00
= 240 units
Total fixed costs

28 Break-even sales volume =
$100 000+$20 000
=
$10−$5
$120 000
=
$5
= 24 000 units
Total fixed costs
$90
=
($580−$230/175
= 45 units
Fixed costs to be contributed
31 Break-even units =
Contribution per unit for Y
$48 000−[4 000 units ×($10−$4)]
=
$12−$8
= 6 000 units
Total fixed costs

32 Break-even point =
$30 000+$70 000
=
$10−$6
= 25 000 units
Total fixed costs
33 Break even sales revenue =
$10 000
=
($1.00−$0.75/$1.00
= $40 000
Change in total costs

34 Variable cost per unit =
Change in total units
$2 000−$1 500
=
2 000 units −1 000 units
= $0.50
Total fixed costs in year 1

35 Production in year 1 =
Contribution per unit in year 1
$24 000
=
$10−$6
= 6 000 units

Production in year 2 =
$25 200
=
$10−$7
= 8 400 units
Increase in production in year 2 = 8 400 units – 6 000 units

= 2 400 units
36 Break-even point (existing) $50 000

= = 625 units
($120 000−$40 000/1 000 units
Break-even point (revised) $50 000+$10 000

= = 667 units
∗$130−$40
Increase in break-even point = 667 units  625 units

= 42 units
* Calculation of Sales price per unit for earning profit of $30 000
Quantity to earn profit of $30 000 =
($50 000+$10 000)+$30 000
1 000 units =
X−$40
X (Selling price) = $130
$30 000
37 Break-even point (budgeted) = = 10 000 units
$3
$30 000
Break-even point (actual) = = 7 500 units
$4
Change in break-even point (%) = × 100
10 000 units
= 25% better
38 As point of origin of total cost line is fixed cost so $10 000 (which is point of origin) represents fixed cost.
41 Actual Sales  Break even sales = Margin of Safety

$320 000  $400 000 =  $80 000
Total fixed costs
42 Break-even point =
$100 000
=
($25 ×40%)
= 10 000 units
43 “D” option is correct. “A” option gives definition of margin of safety whereas “C” option tells that how
profit is calculated.
Total fixed costs

Contribution to slaes ratio
$90 000
=
40%
= $225 000
Fixed costs to be contributed

46 Break-even units =
Contribution per unit for Y
$48 000−[3 000 units ×($30−$20−$2)]
=
$10−$4
= 4 000 units

47 Sales units in year 1 =
$200 000
=
$50−$30
= 10 000 units
Total fixed costs in next year

Sales units in next year =
Contribution per unit in next year
$260 000
=
$50−$30
= 13 000 units
Increase in sales units in next year = 13 000 units – 10 000 units
= 3 000 units
48 Contribution – Fixed cost = Profit

($250 000 × 30%)  $50 000 = $25 000
$30 000
49 Break-even point (budgeted) = = 15 000 units
$2
$30 000
Break-even point (actual) = = 12 000 units
$2.5
15 000 units −12 000 units
Change in break-even point (%) = × 100
15 000 units
= 20% better
Total fixed costs

50 Break-even sales ($) =
Contribution to sales ratio
$112 500
=
30%
= $375 000
Let number of units sold = x
As
Contribution ($) = Sales – Variable costs
$375 000 × 30% = $375 000 – 21 x
21 x = $262 500
$262 500
X =
21
Variable cost (x) = 12 500 units
Total fixed costs

Contribution to sales ratio
$275 000+$55 000
=
55%
= $600 000
Total Contribution
* Contribution to sales ratio = × 100
Total Sales
$550 000
= × 100
$1 000 000
= 55%
Total marginal cost of production

52 Marginal cost per unit =
Total units of production
$12 000+ $6 000
=
2 400 units
= $7.50 per unit
Total fixed costs

53 Break-even (sales value) =
Contribution ratio
$150 000 ×$0.20
=
($1.20−$0.70)÷$1.20
= $72 000
Total fixed costs

54 Existing Break-even (units) =
$33 000
=
$55−$15
= 825 units
Total fixed costs
Proposed Break-even(units) =
New contribution per unit
$33 000
=
$40− $15
= 1 320 units
Increase in Break-even units = Proposed Break-even – Existing Break-even
= 1 320 units – 825 units
= 495units
56 Profit = Units in excess of Break-even × Per unit contribution

= 70 units × $20 000 / 1 000 units
= $1 400
57 Existing Margin of Safety (units) = Existing sales – Break-even sales

= $400 000 – $330 000
= $70 000
Total fixed costs

Break even sales revenue =
Contribution to slaes ratio
$132 000
=
($160 000 ÷$400 000)
= $330 000
Chapter 23 -269- Marginal Costing and Decision Making
CHAPTER 23 MARGINAL COSTING AND DECISION MAKING

1 The data shows the budget of a small manufacturing company.
Sales in units 6 000 12 000
$ $
Direct material 18 000 36 000
Direct labour 6 000 12 000
Production overheads 33 000 45 000
Administration overheads 27 000 27 000
The units are sold for $12 each. What is the break-even point in units?
A 4 500 B 6 750 C 8 000 D 9 000
May 98 P1 Q30
2 A Company manufactures and sells widgets. The directors want to increase profitability and are
considering buying-in the widgets instead of manufacturing them.
The company should buy the widgets from an outside supplier if the price is
A less than the marginal cost of production
B more than the marginal cost of production but less than the marginal cost of sales
C more than the marginal cost of sales but less than the total cost
D more than the total cost but less than the selling price
Nov 99 P1 Q34 / Specimen 02 P1 Q8 / Nov 02 P3 Q17/Nov 05 P3 Q22/ May 09 P3 Q19
3 A business that uses flexible budgets shows the following.
Units of output 100 000 110 000
Total fixed and variable costs $400 000 $425 000
What are fixed costs?
A $150 000 B $250 000 C $275 000 D $300 000
Nov 00 P1 Q30/ Nov 16 P12 Q28
4 The table shows budgets for the next production period?
Costs of Output Output
1 000 units 2 000 units
$ $
What would be the budgeted production cost of 1 600 units?
A $48 640 B $51 040 C $52 640 D $58 240
Nov 00 P1 Q31
5 A Company’s policy is to close any branch that does not benefit the company financially. When should a
branch be closed?
A when its gross profit is declining each year
B when both its sales and its net profit are declining
C when its variable costs are greater than its sales revenue
D when its fixed costs are greater than its net profit
Nov 00 P1 Q32
6 A Company makes 500 units and sells these units at $50 each. The direct material cost $7 500, direct
labour cost $2 500 and fixed overheads are $8 400.
How much profit will be made, if the company increases the number of units to 600?
A $7 920 B $9 600 C $10 100 D $11 600
Nov 00 P1 Q33 / Nov 02 P1 Q30 /Nov 05 P3 Q23
7 Contribution is an important feature of marginal costing.

How can the total contribution from a given activity be calculated?
A total assets plus total fixed costs
B total sales minus total profit
C total fixed costs plus total profit
D total direct costs minus total profit
Nov 00 P1 Q34/Nov 05 P1 Q28
8 The table shows the annual results of a company’s three departments.

Department X Y Z
$ $ $
Sales 200 000 240 000 320 000
Less: Variable costs 130 000 150 000 100 000
Headquarter fixed costs-apportioned 80 000 90 000 130 000
(210 000 (240 000 (230 000
Net profit (loss) (10 000 - 90 000
Headquarter fixed costs will not be reduced if any department is closed.
What should the company do, on the basis of these results?
A close department X B close department Y
C close departments X and Y D keep all departments open
Nov 00 P1 Q35 / Nov 01 P1 Q34/ May 05 P3 Q25/ Nov 08 P3 Q19/Nov 10 P3 Q20
9 In marginal costing, how can the total contribution from a given activity be calculated?
A total sales – total fixed costs B total sales – total profit
C total fixed costs + total profit D total sales – total costs
May 01 P1 Q34
10 The table shows details of a production budget.

(Production)
Costs 10 000 units ($) 15 000 units ($)
Administration, selling and distribution overheads 22 000 22 000
117 000 162 000
What will be the total projected cost for an output of 12 000 units?
A $129 600 B $134 000 C $135 000 D $140 400
May 01 P1 Q35
11 The following budgets have been prepared:

What would be the budgeted production costs of 110 000 units?
Production volume
Cost 100 000 units 105 000 units
$ $
Direct materials 180 000 189 000
Overheads 330 000 335 500
A $7.00 per unit B $7.05 per unit
C $7.15 per unit D $7.25 per unit
Nov 01 P1 Q30
12 The table shows the costs involved in the production of 1 000 units.
$
Direct materials 4 000
Direct labour 6 000
Variable overheads 2 000
Fixed overheads 8 000
If production increases by 25%, what will be the effect on the total cost per unit?
A decrease of $1.60 B decrease of $5.00
C increase of $1.60 D increase of $5.00
Nov 01 P1 Q37/Nov 10 P3 Q22
13 A videocassette has a selling price of $10.
$
Direct materials 1.20
Direct labour 0.80
Factory overhead (fixed) 1.40
Royalty payment 1.00
Administration overhead (fixed) 0.60
What is the contribution per video cassette?
A $5.00 B $6.00 C $7.00 D $8.00
May 2002 P1 Q24/ May 07 P1 Q30
14 A Company manufactures a single product with a selling price of $30 per unit. Based on production and
sales of 4 000 units, costs are:
$ 000
Direct costs 48
Variable production overheads 10
Fixed production overheads 20
Variable selling overheads 5
Fixed administration overheads 17
Total costs 100
What is the gross profit per unit of the product?
A $5.00 B $10.50 C $15.50 D $18.00
May 2002 P1 Q27
15 The table shows the budget for a business.
Fixed budget
Sales and production 20 000 units
Sales $400 000
Variable costs $280 000
Fixed costs $50 000
Actual production and sales were 15 000 units. What was the actual profit?
A $30 000 B $40 000 C $52 000 D $90 000
Nov 02 P3 Q21
16 The table shows costs at three activity levels.
Activity levels 65 units ($) 90 units ($) 100 units ($)
Fixed cost ? ? ?
Variable cost ? ? ?
Total cost 15 600 19 600 21 200
What is the fixed cost?

A $1 600 B $4 000 C $5 200 D $5 600
May 03 P1 Q26/ May 10 P1 Q25
17 A company manufactures one product. It has variable costs of $600 000 and fixed costs of $300000.
If it bought all its production from another supplier, it could use its existing machinery to make a total
contribution of $400 000. Fixed costs would not change.
What is the maximum price it should pay to obtain all its production from another supplier?
A $600 000 B $700 000 C $900 000 D $1 000 000
May 03 P3 Q19/ Nov 08 P1 Q30
18 Which of the following should be considered by a manufacturer before deciding to buy-in its products
instead of manufacturing them?
A administration expenses
B alternative use of resources formerly used for production
C contribution to sales ratio
D marketing expenditure
May 03 P3 Q22
19 A company sells two products, X and Y.

X Y
Sales (units) 1000 2000
$ $
Selling price/unit 22 12
Contribution/unit 12 4
Which would increase the company’s profit by $10 000?
A a 30% increase in the sales of X
B a 50% increase in the sales of both products
C an increase in the selling price of X by $1 and Y by $6
D a reduction in variable costs of both products by $5
May 04 P1 Q28 /May 08 P1 30
20 The following figures relate to the budgeted figures for a product.

$ $
Sales 1 100 000
Direct materials 150 000
Direct labour 300 000
Fixed overheads 400 000 850 000
Profit 250 000
The volume of sales for the product increased by 20%.
What would be the increase in profit?
A 20% B 52% C 76% D 88%
May 04 P3 Q24
21 A company is about to quote a price for making a special order, which requires 1 000kg of material X and 1
500 kg of material Y.
The following information is available about these resources.
Type of Original cost Current purchase price Net realisable value
material per kg ($) per kg ($) per kg ($)
X 3 4 2
Y 5 7 6
The inventory of material X cannot be used by the company for any other product. Material Y is used
frequently for other products. Which cost of materials should be included in the quotation for the
manufacture of this special order?
A $10 500 B $11 000 C $12 500 D $14 500
May 04 P3 Q26
22 The following information relates to a unit of production.

$
Selling price 12
Direct labour 3
Direct materials 1
Fixed overhead allocation 5
Variable costs are set to increase by 10%.
What is the new contribution per unit?
A $2.10 B $2.60 C $7.60 D $7.70
Nov 04 P1 Q25
23 A business produces a single product.
Number of units
Production 15 000
The variable production cost per unit is $10 and the fixed production cost is $60 000. The sales revenue is
$360 000. Profit is $108 000 based on full absorption costing.
What is the profit based on marginal costing?
A $8 000 higher B $8 000 lower C $12 000 higher D $12 000 lower
Nov 04 P1 Q26/Nov 15 P12 Q29
24 When should a manufacturing company purchase its products from an outside supplier?
When the price is:
A less than the selling price but more than the total cost.
B less than the marginal cost of production.
C less than the marginal cost of sales but more than the marginal cost of production.
D less than the total cost but more than the marginal cost of sales.
Nov 05 P3 Q22
25 K Limited is planning an advertising campaign to promote its product. The campaign will cost $14000.
This is budgeted to increase sales volume in the second half of the year by 12%. Sales for the first half of
the accounting year are budgeted at 30 000 units at a contribution of $4.20.
How much additional net profit should be budgeted as a result of the advertising campaign?
A nil B $400 C $560 D $1 120
Nov 05 P3 Q26
26 A company is evaluating its plans to close a unit within its business. If closed, the employees at the unit
would be replaced elsewhere in the business. The costs associated with the closure are as follows:
$000
net book value of unit assets (no resale value) 35
estimated direct cost of closure of the unit 25
existing fixed overheads apportioned to unit 16
wages of unit employees 20
What is the relevant cost of closure of the unit?
A $25 000 B $41 000 C $61 000 D $96 000
May 06 P3 Q20
27 The data relates to two different levels of output in a department.
Machine hours 16 000 20 000
Overheads $214 000 $230 000
What is the amount of fixed overheads?
A $16 000 B $64 000 C $150 000 D $198 000
Nov 06 P3 Q20/May 14 P12 Q28
28 Budgets for the production of metal posts are shown.

1 000 units 1 500 units
$ $
direct materials 20 000 30 000
direct labour 30 000 45 000
production overhead 40 000 50 000
Marketing 40 000 40 000
What is the unit cost for a production run of 1 200 units to the nearest dollar?
A $70 B $87 C $112 D $120
Nov 06 P3 Q25
29 The cost of producing 2000 units of a product is shown.

$
Insurance 2 000
labour 30 000
materials 10 000
rent 6 000
telephone rental 4 000
What is the variable cost of one unit?
A $20 B $22 C $23 D $24
May 07 P1 Q27
30 The table shows budgets for the next production period.

Costs output output
2 000 units($) 4 000 units ($)
direct materials 30 000 60 000
direct labour 48 000 96 000
production overhead 76 000 92 000
154 000 248 000
What would be the budgeted production cost of 3 000 units?
A $141 000 B $147 000 C $171 000 D $201 000
May 08 P3 Q22
31 A business using flexible budgeting shows:

output in units 120 000 80 000
total fixed and variable costs $660 000 $500 000
What are the variable costs per unit?
A $1.50 B $2.25 C $3.00 D $4.00
May 08 P3 Q24
32 The following budgeted information is supplied.

selling price per unit $150
total costs per unit $120
budgeted sales 6 000 units
Variable costs are 40% of total costs.
What are the total budgeted fixed overheads for the period?
A $288 000 B $360 000 C $432 000 D $540 000
Nov 08 P3 Q25
33 The following budgeted information is supplied.

total costs per unit $80
variable costs are 30 % of total costs
budgeted sales for the period 1 000 units
What are the total budgeted fixed overheads for the period?
A $24 000 B $36 000 C $40 000 D $56 000
May 09 P3 Q23
34 When are the reported profits under marginal costing and absorption costing principles the same
amount?
A when sales revenue exceeds cost of sales
B when units produced equals sales in units
C when units produced exceeds sales in units
D when unit sales exceeds production in units
Nov 09 P1 Q23/Nov 12 P12 Q29/ May 17 P12 Q29
35 A company has total production costs of $6 000 to make 10 000 units, and $13 000 to make 24000 units.
What is its total cost to make 20 000 units?
A $1 000 B $10 000 C $11 000 D $12 000
May 10 P1 Q27
36 A business makes wedding dresses. Each machinist is paid $30 a day and each supervisor $40 a day. Each
supervisor can work with up to 10 machinists and each machinist can produce one wedding dress a day.
If 95 wedding dresses a day are produced, what is the daily labour cost?
A $2 850 B $3 210 C $3 230 D $3 250
May 10 P1 Q28/ May 17 P12 Q23
37 A factory produces a product with a variable cost of $0.60 per unit.

Fixed costs are $15 000 per quarter, including rent of $6000 per quarter.
If more than 20 000 units are made per quarter, additional space is required which increases the rent by
50 %.
What is the total cost per unit of producing 30 000 units in a quarter?
A $0.60 B $0.90 C $1.10 D $1.20
Nov 10 P1 Q27
38 A manufacturer has 700 units of finished goods in inventory on 1 March. On 31 March the total number of
units in inventory is 770.
At present, inventory is valued using the total costing method.
What would be the effect on the operating profit if the marginal costing method is used for inventory
valuation?
A increase operating profit
B no change in operating profit
C no change in operating profit but a 10 % increase in gross profit
D reduce operating profit
Nov 10 P1 Q28
39 A product has a contribution per unit of $20.

Which action would increase the total contribution by the greatest amount?
A a 10% increase in selling price B a 10% increase in the volume of sales
C a 10% reduction in variable costs D a 20 % reduction in fixed costs
Nov 11 P1 Q27
40 A business has the following costs.

raw materials $3 per unit
direct labour $2 per unit
stepped costs of $ 5 000 for every 10 000 units
What is the cost of producing 15 000 units?
A $75 000 B $82 500 C $85 000 D $105 000
May 12 P12 Q24
41 Which costing method is most suitable for fixing a selling price and which for deciding whether to make or
buy in a product?
fixing of selling price decision to make or buy in a product
A absorption costing absorption costing
B absorption costing marginal costing
C marginal costing absorption costing
D marginal costing marginal costing
May 12 P12 Q28
42 A company discovers the following information in respect of its carriage costs.

units carried total cost
2 000 $ 6 000
5 000 $13 500
It has been advised by the carrier that when more than 5 000 units are carried the cost will increase the
fixed charge by a further $2 000.
What will be the cost to carry 6 000 units?
A $15 500 B $16 200 C $18 000 D $20 000
May 12 P32 Q19
43 The details of a planned college course are shown below.

$
course fee per student 100
variable course cost per student 20
total fixed costs of the course 480
The budgeted number of students is 10. However, if a lower fee is charged 20 students would take the
course.
What is the maximum reduction in the course fee of $100, to earn the same total profit from either 10 or
20 students?
A $16 B $24 C $40 D $50
May 12 P32 Q24
44 A company uses flexible budgetary control. The following information relates to budgeted and actual data
for the month.
budgeted units 1 000 1 200
actual units 1100
Costs 1 000 units 1 200 units actual units

$ $ $
direct material 2 000 2 400 2 200
direct labour 500 600 600
fixed overheads 800 800 800
total cost 3 300 3 800 3 700
What is the difference between the actual total cost and the flexed total budgeted cost?
A $0 B $150 C $400 D $500
May 12 P32 Q25

number of labour overheads
month
hours $
May 68 000 986 000
June 134 000 1 316 000
The variable overhead rate per labour hour was $5.
What was the monthly fixed overhead cost?
A $330 000 B $340 000 C $646 000 D $670 000
Nov 12 P12 Q30/Nov 15 P12 Q28/May 16 P12 Q27
46 A company uses absorption costing and makes and sells one product. In the last month budgeted
overheads totalled $60 000. Budgeted production was 15000 units and budgeted sales were 14 000 units.
The company now decides to apply marginal costing principles for last month.
Which effect will this have on profits?
A $3 500 decrease B $3 500 increase
C $4 000 decrease D $4 000 increase
May 14 P12 Q27
47 A company is forecasting its profits at two levels of activity.
sales units 5000 8000

$ $
total fixed and variable 20 000 26 000
profit 15 000 30 000
sales revenue 35 000 56 000
Fixed costs and selling prices are unchanged within the above activity range.
What is the forecast profit if sales were 7 000 units?
A $21 000 B $25 000 C $26 000 D $26 250
May 15 P12 Q29
48 A trader runs a manufacturing business.

Which department should it close?
A department 1 where contribution exceeds fixed costs
B department 2 where contribution is less than fixed costs
C department 3 where revenue exceeds marginal costs
D department 4 where revenue is less than marginal costs
Nov 15 P12 Q19
49 Why might a business use marginal costing?

1 to calculate break-even units
2 to decide on the most profitable use of limited resources
3 to decide whether to make a product or buy it
A 1 and 2 only B 1, 2 and 3 C 2 only D 3 only
May 16 P12 Q26
50 A company uses marginal costing.

Which costs are included in its inventory valuation?
A variable manufacturing cost, fixed manufacturing overhead and variable selling expenses
B variable manufacturing cost and fixed manufacturing overhead only
C variable manufacturing cost and variable selling expenses only
D variable manufacturing cost only
May 16 P12 Q28
51 A company makes and sells a single product for $12 per batch.
The variable cost is $4 per batch.
Fixed costs have been absorbed based on a normal activity level of 1000 batches at $3 per batch.
What is the profit under marginal costing if the company makes and sells 1 500 batches?
A $6 000 B $7 500 C $9 000 D $12 000
Nov 16 P12 Q26
52 The following information was provided about a product.

variable cost per unit $26
total fixed costs $10 000
demand 1800 units
If the selling price increases only demand changes.
When the selling price increased by $4 profit fell by $1200.
What was the decrease in demand?
A 214 units B 300 units C 571 units D 657 units
Nov 16 P12 Q27
53 A company manufactures and sells chairs. The following per unit information is available.
$
selling price 25
direct material and labour 12
other variable production costs 3
variable selling costs 2
fixed costs 4
The company has the option of buying in the chairs for resale instead of making them.
At which purchase price would the company’s profit be unchanged?
A $15 B $17 C $19 D $21
May 17 P12 Q25
54 A company has fixed costs of $40 000 per month. It provided the following information.
March units April units
production 30 000 15 000
Total production costs for March were $90 000.
What were the total production costs for April?
A $45 000 B $65 000 C $70 000 D $110 000
May 17 P12 Q28
ANSWER KEY
1 C 15 B 29 A 43 C
2 A 16 C 30 D 44 B
3 A 17 D 31 D 45 C
4 B 18 B 32 C 46 C
5 C 19 B 33 D 47 B
6 B 20 B 34 B 48 D
7 C 21 C 35 C 49 B
8 D 22 C 36 D 50 D
9 C 23 C 37 D 51 C
10 C 24 B 38 D 52 B
11 B 25 D 39 A 53 A
12 A 26 A 40 C 54 B
13 C 27 C 41 B
14 B 28 D 42 C
DETAILED ANSWERS
1 Costs 6 000 units ($) 12 000 units ($) Change Variable cost
6 000 units ($) per unit ($)
Material 18 000 36 000 18 000 3.00
Labour 6 000 12 000 6 000 1.00
Production O.H 33 000 45 000 12 000 2.00
Admin O.H 27 000 27 000 - nil
6.00
Change in cost for 6 000 units
* Variable cost per unit =
Change in units (12 000−6 000
Fixed costs = Total costs  Variable costs $
Material = $18 000 (6 000 units  $3 = zero
Labour = $6 000 (6 000 units  $1 = zero
Production overheads = $33 000 (6 000 units  $2 = 21 000
Administration overheads = $27 000  nil = 27 000
48 000
Total fixed costs
Breakeven (units) =
$48 000
= = 8 000 units
$8
3 Total costs ($)  Variable costs ($) = Fixed costs ($)
$425 000−$400 000
400 000  (110 000 units −100 000units)100 000 units = 150 000
$425 000−$400 000
Or 425 000  (110 000 units −100 000units) 110 000 units = 150 000
4 Costs 1 000 units 2 000 units Change 1 000 units Change per unit*
($) ($) ($) ($)
Labour 3 400 6 800 3 400 3.4
Material 17 000 34 000 17 000 17.0
Overheads 16 000 20 000 4 000 4.0
24.4
Change in cost for 1 000 units
* =
Change in units
Fixed cost = Total cost  Variable cost = Fixed cost

Labour = $3 400  (1 000 units  $3.4 = zero
Material = $17 000  (1 000 units  $17 = zero
Overheads = $16 000  (1 000 units  $4 = 12 000
12 000
Total cost for 1 600 units = Fixed Cost + Variable Cost
= $12 000 + (1 600 units  $24.4
= $51 040
6 $ $
Sales (600 units  $50 30 000
$2 500
Less Direct labour costs ( )× 600 units 3 000
500 units
$7 500
Direct material costs ( )× 600 units 9 000
500 units
Fixed overheads 8 400 (20 400
Profit 9 600
7 Income statement is prepared under marginal costing as

Sales **
Less Variable costs (**)
Contribution **
Less Fixed costs (**)
Net profit **
So contribution can either be calculated by subtracting variable costs from sales or by adding fixed costs in
profits (i.e. by going backwards).
8 If department X or Y is closed then loss may be avoided but fixed costs of $80 000 and $90 000 will have to
be borne by the remaining departments and they are obviously more than $10 000.
10 As total costs can be divided into fixed and variable costs, so first of all we will have to calculate total fixed
costs and variable costs per unit as given below.
Costs 10 000 units 15 000 units Change for 5
($) ($) 000 units ($)
Direct labour 30 000 45 000 15 000
Direct material 50 000 75 000 25 000
Production overheads 15 000 20 000 5 000
Administration, selling and distribution overheads 22 000 22 000 -
117 000 162 000
As we know that with the change in production only variable costs change so we can calculate variable
cost per unit as:
Change in total costs for 6 000 units
Variable cost per unit =
Change in units (12 000−6 000
$15 000
Labour = = $ 3 per unit
5 000 units
$25 000
Material = = $ 5 per unit
5000 units
$5 000
Production overheads = = $ 1 per unit
5 000 units
So fixed costs will be (by taking output as 10 000 units)

Total Costs  Variable Costs = Fixed Costs

$
Labour = $30 000  (10 000 units  $3 = zero
Material = $50 000  (10 000 units  $5 = zero
Production overheads = $15 000  (10 000 units  $1 = 5 000
Administration overhead = $22 000  zero = 22 000
27 000
Variable costs for 12 000 units = 12 000  (3+5+1
= $108 000
Total Cost for $12 000 units = $108 000 + $27 000
= $135 000
11 100 000 units ($) 105 000 units ($) Change 5 000 units Change per unit ($)
($)
Direct Material 180 000 189 000 9 000 1.80
Direct labour 215 000 225 750 10 750 2.15
Overheads 330 000 335 500 5 500 1.10
5.05
As with the change in production volume only variable costs change so variable costs per unit is $5.05 and
fixed cost can be calculated by computing change in costs as a result of increase in production volume.
Total costs Total costs on 100 000 Variable costs ($) Fixed costs ($)
units ($)
Material 180 000 180 000 (100 000  1.80 Zero
Labour 215 000 215 000 (100 000  2.15 Zero
Overheads 330 000 110 000 (100 000  1.10 220 000
$220 000
So fixed cost per unit for 110 000 units =
110 000 units
= $2.00
Total per unit cost = $5.05 + $2.00
= $7.05
12 $ $
Total Costs on 1 000 units ($4 000 + $6 000 + $2 000 + $8 000 20 000
Total costs on 1 250 (1 000  125%) units
Variable [(4 000 + 6 000 + 2 000 125%] 15 000
Fixed 8 000 23 000
Per unit cost for 1 000 units = $20 000  1 000 units = $20.0
Per unit cost for 1 250 units = $23 000  1 250 units = $18.4
Decrease in per unit cost $ 1.6
13 Contribution per unit = Selling price per unit – Variable cost per unit
= $10  (1.20+0.80+1.00
= $7.00
14 Sales price per unit $30.0
$48 000+$10 000+$20 000
Less Production costs per unit ( ) 19.5
4 000 units
Gross Profit per unit $10.5
15 $
$400 000
Sales × 15 000 units 300 000
20 000 units
$280 000
Less Variable costs × 15 000 units (210 000
20 000 units
Contributions 90 000
Less Fixed costs (50 000
Profit 40 000
16 Per unit variable cost =
Change in output
$19 600−$15 600
=
90 units−65 units
$4 000
=
25 units
= $160 per unit
$
Total cost for 90 units 19 600
Less Variable cost for 90 units (90  $160 14 400
Fixed cost 5 200
17 The contribution of $400 0000 that would be made by using the existing machinery for an alternative
product would increase the price (or reduce the cost) that could be paid to an alternative supplier to $1
000 000 before a break-even point is reached.
19 Profits of the company under the four options will be: X Y Total
A Existing contribution per unit 12 4
Sales volume (1 000130%) 1 300 2 000
Total contribution 15 600 8 000 23 600
B Contribution per unit 12 4
Sales volume (1 000150%);(2 000150%) 1 500 3 000
C Contribution per unit ($12+$1;($4+$6 13 10
Sales volume 1 000 2 000
D Contribution per unit ($12+$5;($4+$5 17 9
Sales volume 1 000 2 000
Existing contribution (1 000$12 + (2 000$4 = $20 000
So “B” is correct as it will increase total contribution by $10 000
20 Increase in sales volume, by 20% will also increase sales revenue; variable expenses and contribution by
the same rate whereas fixed overheads will remain constant. So the new profit figure will be calculated as:
(Existing contribution  120%) – Fixed cost = New Profit
[($1 100 000$150 000$300 000 120%]  $400 000 = $380 000
Increase in profits ($)

So increase in profits (%) = × 100
Existing Profits ($)
$380 000−$250 000
= × 100
$250 000
= 52%
22 Contribution per unit = Selling price per unit – Variable costs per unit
= $12 – [($3 + $1 110%]
= $7.6 per unit
23 Profits under marginal costing

$
Sales revenue 360 000
Variable cost of sales (18 000 units* @ $10 (180 000
Contribution 180 000

Fixed costs (60 000
Net Profit 120 000
*As profit based on absorption costing is $108 000, this means that due to calculation of profits under
marginal costing profits will increase by $12 000 ($120 000$108 000).
25 $
Additional contribution [(30 000 × 12%)units @ 4.20] 15 120
Additional costs (advertising) (14 000
Additional profit 1 120
Change in overheads ($)

27 Variable overheads per hour =
Change in hours
$230 000−$214 000
=
20 000 hours−16 000 hours
$16 000
=
4 000 hours
= $4 per hour
Total overheads for 16 000 hours 214 000

Variable overheads for 16 000 hours (16 000 hours × $4 64 000
Fixed overheads 150 000
28
Costs 1 000 units 1 500 units Change 500 units Change per unit*
($) ($) ($) ($)
Material 20 000 30 000 10 000 20.0
Labour 30 000 45 000 15 000 30.0
Overheads 40 000 50 000 10 000 20.0
Marketing 40 000 40 000 ----
70.0
Change in cost for 500 units

* =
500 units
Fixed cost = Total cost  Variable cost = Fixed cost
Material = $20 000  (1 000 units  $20.0 = zero
Labour = $30 000  (1 000 units  $30.0 = zero
Overheads = $40 000  (1 000 units  $20.0 = 20 000
Marketing = $40 000  nil 40 000
60 000
= $60 000 + (1 200 units  $70.0
= $144 000
$144 000
Per unit cost for 1 200 units =
1 200 units
= $120
Total variable costs

29 Variable cost per unit =
Total units
$30 000+$10 000
=
2 000 units
= $20
30 4 000 units ($) 2 000 units ($) Change 2 000 Change per unit
units ($) ($)
Direct Material 60 000 30 000 30 000 15.0
Direct labour 96 000 48 000 48 000 24.0
Overheads 92 000 76 000 16 000 8.0
47.0
As with the change in production volume only variable costs change so variable costs per unit is $47.0 and
fixed cost can be calculated by computing change in costs as a result of increase in production volume.
Total costs Total costs on 4 000 units ($) Variable costs ($) Fixed costs ($)
Material 60 000 60 000 (4 000  15.0 Zero
Labour 96 000 96 000 (4 000  24.0 Zero
Overheads 92 000 32 000 (4 000  8.0 60 000
60 000
= $60 000 + (3 000 units  $47.0
= $201 000
31 Costs 120 000 units 80 000 units Change 40 000 units Change per unit*
($) ($) ($) ($)
Total costs 660 000 500 000 160 000 4.00
Change in costs
*Per unit cost =
Change in units
$160 000
=
40 000 units
= $4.00

(6 000 × 120  [6 000 units × $120 × 40%] = 432 000

(1 000 × 80  [1 000 units × $80 × 30%] = 56 000

35 Per unit variable cost =
Change in output
$13 000−$6 000
=
$7 000
=
14 000 units
= $0.50 per unit
$
Total cost for 10 000 units 6 000
Less Variable cost for 10 000 units (10 000  $0.5 5 000
Fixed cost 1 000
= $1 000 + (20 000 units  $0.5
= $11 000
36 As one machinist can produce one wedding dress a day so 95 mechanists are needed to produce 95
dresses. In addition, as one supervisor can work with up to 10 machinists so ten (10 supervisors are
needed to supervise 95 machinists. As a result total labour cost will become:
$
Mechanists pay (95  $30 2 850
Supervisors pay (10  $40 400
Total daily labour cost 3 250
Total Cost of Production (∗)
37 Per Unit Cost =
Total Units of Production
$36 000
=
30 000 units
= $1.20 per unit
* Total Costs = Total Fixed Costs + Total Variable Costs
= [($15 000  $6 000 + ($6 000  150%)] + (30 000  $0.60
= $36 000
38 As under marginal costing inventories are always valued at lower price so lower values of closing
inventory will increase operating costs and reduce operating profits.
40 $
Raw materials (15 000 × $3 45 000
Direct labour (15 000 × $2 30 000
Fixed cost ($5 000 + $5 000 10 000
Total cost of producing 15 000 units 85 000
42 $
Variable overheads for 6 000 units [6 000 units × $2.5 (W 1)] 15 000
Fixed overheads for 6 000 units [$1 000 (W 2 + $2 000] 3 000
Total overheads for 6 000 units 18000
Change in total costs ($)

(W 1) Variable overheads per hour =
Change in units
$13 500−$6 000
=
$7 500
=
3 000 hours
= $2.5 per hour
(W 2) $
Total overheads for 5 000 hours 13 500
Variable overheads for 5 000 units (5 000 units × $2.5 12 500
Fixed overheads up to output of 5 000 units 1 000
43 Existing profit = Existing sales − Existing costs

= (10 × 100) − [(10 × 20) + $480]
= $320
Quantity to earn profit of $320 =
Contribution per student
$480+$320
20 students =
X−$20
$480+$320
X − 20 =
20
X (Selling price) = $40 + $20
= $60
maximum reduction in the course fee = Existing fee − Proposed fee
= $100 − $60
= $40
44 $
Actual cost for 1 100 units 3 700
Budgeted cost for 1 100 units [(1 100 × $2.50(W 1) + $800 (W 2)] 3 550
Difference between the actual total cost and the flexed total budgeted cost 150
(W 1) 1 200 units 1 000 units Change 200 Change per

($) ($) units ($) unit ($)
direct material 2 400 2 000 400 2.00
direct labour 600 500 100 0.50
fixed overheads 800 800 Nil Nil
2.50
(W 2) Total costs Total costs on 1 000 units ($) Variable costs ($) Fixed costs ($)
direct material 2 000 (1 000  2.0) Zero
direct labour 500 (1 000  0.5) Zero
fixed overheads 800 Nil 800
800
$1 316 000−$986 000
986 000  (134 000 units − 68 000 units) 68 000 hours = 646 000
$1 316 000−$986 000
Or 1 316 000  (134 000 units −68 000 units) 134 000 hours = 646 000
$60 000
46 Closing inventory is 1 000 units (15 000 units  14 000 units). Per unit overhead rate is $4 ( )
15 000 units
which shows under valuation of inventory under marginal costing. This will reduce profits by $4 000(1 000
units @$4)
47 $
Forecast sales for 7 000 units (7 000 × 56 000/8 000) 49 000
Budgeted cost for 7 000 units [(7 000 × $2.00(W 1) + $10 000 (W 2)] 24 000
Difference between the actual total cost and the flexed total budgeted cost 25 000
(W 1) 5 000 units 8 000 units 3 000 units Change per

($) ($) ($) unit ($)
total fixed and variable 20 000 26 000 6 000 2.00
(W 2) Total costs on 5 000 units ($)  Variable costs ($) = Fixed costs ($)
20 000  (5 000  2.0) = 10 000
51 $
Sales (1 500 units @ $12 each) 18 000
Variable costs (1 500 units @ $4 each) (6 000)
Fixed costs (1 000 units @ $3 each) (3 000)
Profit under marginal costing 9 000
52 Existing profit [(1 800 units @ $24)  $10 000] $43 200
New profit after price reduction ($43 200  $1 200) $42 000
Now
[X units × $28 ($54  $26)]  $10 000 = $42 000
$42 000+$10 000
X units =
$28
New units of sales = 1 500 units

Decrease in sales units = 1 800  1 500 units
= 300 units
53 The purchase price should be equal to the marginal cost of production i.e. $15 ($12 + $3).
54 Total costs ($) = Fixed costs ($) + Variable costs ($)

[15 000 units
= $40 000 + $90 000−$40 000
×( )
30 000 units
= $65 000
Chapter 24 -288- Marginal costing - Limiting factors
CHAPTER 24 MARGINAL COSTING - LIMITING FACTORS

1 A Company manufactures three products for which the following details (per unit) are available
Product X Product Y Product Z
Sales value $12.00 $12.00 $22.50
Direct material cost $5.00 $4.00 $8.00
Labour cost $4.00 $6.00 $4.50
Labour hours 2 hours 0.8 hours 3 hours
If labour hours are restricted in supply, which order of priority should the company adopt when planning
its production?
First  Last
A Y X Z
B Y Z X
C Z X Y
D Z Y X
May 98 P1 Q35 / Specimen 02 P3 Q25 / Nov 02 P3 Q19
2 The data relates to the production of three products.

Product X Y Z
Contribution per unit $160 $175 $190
Fixed overhead per unit $125 $130 $160
Labour hours per unit 1 1.25 0.75
The company is experiencing a shortage of labour
In which order should the products be ranked to maximise profit?
1 2 3
A X Y Z
B Y X Z
C Z X Y
D Z Y X
May 99 P1 Q36/ May 04 P3 Q23/ May 14 P12 Q29
3 A Company manufactures three products X, Y and Z. The table provides information concerning the three
products.
$ $ $
Selling price per unit 100.00 120.00 130.00
Direct material cost per unit 40.00 45.00 48.00
Direct labour cost per unit 20.00 25.50 29.00
Variable overhead cost per unit 15.00 18.00 20.00
Fixed overhead cost per unit 18.00 18.00 27.00
Profit per unit 7.00 13.50 6.00
All three products are made from the same material. If the material is in short supply, which
manufacturing pattern will maximise profits?
Order of priority
1 2 3
A Y X Z
B Y Z X
C Z Y X
D Z X Y
May 2002 P3 Q21
4 A company has an inventory of 10 000 units of finished goods. It budgets to produce 110 000 units which,
after sales, will increase its inventory to 20 000 units.
The table shows the resources required for the budgeted production, and the available resources.
Resources required per unit Resources available
Material (kilos) 3.0 315 000
Direct labour hours 2.5 300 000
Machine hours 0.5 110 000
Market research shows that the demand for the product will be for 90 000 units.
What is the principal limiting factor in this case?
A direct labour B machine hours
C material D sales
Nov 02 P1 Q23/ Nov 07 P3 Q20
5 A Company makes three products for which the following details are given.
The same material is used by all three products and its cost $3.00 per kilo. There is a shortage of material.
Product P Product Q Product R
Selling price per unit $20 $24 $36
Direct material per unit $9 $12 $15
Direct labour per unit $5 $3 $9
In which order of priority should the products be made in order to achieve maximum profit from the
available material?
First Next Last
A P Q R
B Q R P
C R P Q
D R Q P
May 03 P3 Q17/ Nov 08 P3 Q20
6 A Company makes three products for which details per unit are given.
Selling price $18 $35 $50
Direct materials $4 $5 $5
Direct labour hours 0.5 2 2.5
The direct labour rate is $8.00 per hour. Direct labour hours are limited.
In which order should the products be ranked to achieve the maximum profit with the available labour
hours?
First Next Last
A X Y Z
B Y Z X
C Z X Y
D X Z Y
Nov 03 P3 Q18 /May 06 P3 Q22
7 A company manufactures products W, X, Y and Z using a common material.

Product W Product X Product Y Product Z
Contribution per unit $10 $12 $14 $16
Units of material required 5 litres 4 litres 6 litres 7 litres
If there is only enough material to make three of the products, which product should be discontinued?
A product W B product X C product Y D product Z
Nov 04 P3 Q23
8 The data is given for four products.

product number of units selling price per unit variable cost per total fixed cost
to be made ($) unit ($) of product ($)
1 1 000 5.00 3.50 700
2 2 000 6.00 4.80 1 500
3 1 000 7.00 5.00 1 400
4 3 000 4.00 2.50 3 800
The fixed cost of each product will be incurred only if the product is made.
There is sufficient capacity in the factory to make only three of the product lines.
Which choice of products will give the greatest profit?
A 1, 2 and 3 B 1, 2 and 4 C 1, 3 and 4 D 2, 3 and 4
Nov 05 P3 Q21
9 The table contains information for the two products of a company.

Product X Y
contribution per unit $12 $9
Machine hours required per unit 6 3
estimated sales demand 200 200
Required machine hours 1 200 600
Machine capacity limited to 1 200 hours
What is the maximum possible contribution?
A $2 100 B $3 000 C $3 300 D $4 200
Nov 06 P3 Q19/ May 10 P3 Q20
10 A company manufactures four products using different quantities of the same material, which is in short
supply. The following data is given:
Y1 Y2 Y3 Y4
Product
$ per unit $ per unit $ per unit $ per unit
Selling price 64 68 84 100
Materials, $6 per kg 18 24 27 30
Production costs 37 30 36 33
Profit 9 14 21 37
Machine time per unit (in minutes) 45 30 40 30
The production costs include fixed costs which have been absorbed using a machine hour rate of $36.
Which product gives the most profitable use the raw materials?
A Y1 B Y2 C Y3 D Y4
Nov 06 P3 Q22
11 The table shows the budgeted resources required for production and sales, and the available resources.
Market research shows sales demand for 120 000 units.
resources required per unit resources available
Material 4.0 460 000 kg
direct labour hours 3.0 400 000 hours
machine hours 0.5 70 000 hours
What is the principal limiting factor in this case?
A direct labour hours B machine hours
C material D sales
May 07 P3 Q18/Nov 10 P3 Q21/Nov 11 P3 Q20
12 A company manufactures four different qualities of carpet. The details of these products, with costs etc.,
are shown in the table.
In this manufacturing process, labour is in short supply and this limiting factor is taken into account when
selecting products for manufacture.
carpet 1 ($) carpet 2 ($) Carpet 3 ($) carpet 4 ($)
selling price 200 168 180 220
material cost ($20 per unit) 60 20 60 80
labour cost ($16 per unit) 32 48 16 48
variable overhead 20 28 24 16
fixed costs 24 28 20 8
profit 64 44 60 68
200 168 180 220
Sales demand (units) 50 000 40 000 60 000 30 000
Which quality of carpet should be chosen first?
A 1 B 2
C 3 D 4
May 07 P3 Q21
13 A company makes three products for which the following details are given.
product X product Y product Z
$ $ $
selling price per unit 40 48 72
direct material per unit 18 24 30
direct labour per unit 10 6 18
The same labour is used by all three products and it costs $2.00 per hour.
There is a shortage of labour.
In which priority should the product be made in order to achieve maximum profit from the available
labour?
First  Last
A X Y Z
B Y Z X
C Y X Z
D Z X Y
Nov 09 P3 Q18
14 A company manufactures three products. The following information is obtained in respect of next
month’s budgeted production.
product X product Y product Z
contribution per unit $7 $6 $8
contribution per kilo $3 $4 $6
kilos of material required for production 400 600 1 000
Due to problems with suppliers, the company has been advised that only 1 800 kilos of material will be
available for production next month.
What is the maximum contribution the company can earn?
A $9 000
B $9 600
C $13 000
D $13 200
May 12 P32 Q21
15 A company has ordered a new machine, to be delivered in six months. In the short term, the machine
hours will be a limiting factor. It has made the following calculations.
Product X product Y product Z
contribution per unit made $24 $12 $20
machine hours used per unit 6 1 2
What will be the most profitable ranking order for production?
A X→Y→Z B X→Z→Y C Y→Z→X D Z→Y→X
May 13 P12 Q24
16 A company makes three products.

Contribution contribution
per unit $ per hour $
product 1 14 2.1
product 2 13 2.6
product 3 8 2.4
Total available labour hours are insufficient to make enough of each product to meet demand.
In what order should the products be produced to 292aximize profit?
A 1, 2, 3 B 1, 3, 2 C 2, 3, 1 D 3, 2, 1
Nov13 P12 Q25
17 A business manufactures three products which all use the same material. The following information is
available.
X Y Z
$000 $000 $000
selling price 160 190 240
direct material 56 68 90
direct labour 35 32 50
variable overhead 28 34 45
contribution 41 56 55
Direct material is in short supply.
In which order should the products be manufactured to 292aximize profits?
A X→Y→Z
B Y→X→Z
C Y→Z→X
D Z→Y→X
May 15 P12 Q28
ANSWER KEY
1 D 6 D 11 C 16 C
2 C 7 A 12 C 17 B
3 B 8 B 13 B
4 D 9 B 14 A
5 D 10 A 15 C
DETAILED ANSWERS
1 To have maximum utilisation of available resources, those products should be produced first, which have
greater contribution per unit of scarce (limiting) factor, the calculation of which is given below.
Products
Per unit X ($) Y ($) Z ($)
Sales value 12.00 12.00 22.50
Less Variable costs
Direct material (5.00 (4.00 (8.00
Direct labour (4.00 (6.00 (4.50
Contribution 3.00 2.00 10.00
Contribution per direct labour hour = $3.00 $2.00 $10.00

2.00 hours 0.80 hours 3.00 hours
= 1.50 per hr 2.50 per hr 3.33 per hr
Priority order = 3 2 1
Last Second First
2 X Y Z
$160 $175 $190
Contribution per labour hour
1.00 hour 1.25 hours 0.75 hour
$160 $140 $253.33
Production ranking 2nd 3rd 1st
3 If any factor is limited in supply, then efforts are made to use it in the manner that maximizes profits
within the given constraints. So to select the priority order with which production should be undertaken,
contribution per unit of scarce factor should be determined as given below.
= × 100
Material cost per unit
$100−($40+$20+$15
Product X = × 100 = 62.5% (3rd)
$40
$120−($45+$25.5+$18
Product Y = × 100 = 70.0% (1st)
$45
$130−($48+$29+$20
Product Z = × 100 = 68.75% (2nd)
$48
4 Sale is the limiting factor as demand for sales is 90 000 units whereas budgeted production is 110000 units
and budgeted sales volume is 100 000 units [110000 units(20 000 units10 000 units)]
5 Products
P ($) Q ($) R ($)
Selling price per unit 20 24 36
Direct material per unit (9 (12 (15
Direct labour per unit (5 (3 (9
Contribution per unit 6 9 12

9 12 15
Material (kg) per unit ( ; ; ) 3 4  5
3 3 3
Contribution per kg of material 2.00 2.25 2.40
Priority order last second First
6 Products
X ($) Y ($) Z ($)
Selling price 18 35 50
Less Direct materials (4 (5 (5
Direct labour (@ $8 per hour) (4 (16 (20
÷ Labour hours worked per unit 0.5 2.0 2.5
Contribution per direct labour per hour 20 7 10
Production ranking first last Next
7 Products
W X Y Z
Contribution per unit $10 $12 $14 $16
Units of material required per unit 5 litres 4 litres 6 litres 7 litres
Contribution per litre 2.00 3.00 2.33 2.29
Production priority (order) 4th 1st 2nd 3rd
As product “W” (“A” option) has the least contribution per litre of material (limiting factor) so it should be
discontinued.
8 Calculation of profits
Product Contribution – Total Fixed Cost Profit
1 1 000 units × ($5.0 – $ 3.5 – $700 = $800
2 2 000 units × ($6.0 – $ 4.8 – $1 500 = $900
3 1 000 units × ($7.0 – $ 5.0 – $1 400 = $600
4 3 000 units × ($4.0 – $ 2.5 – $3 800 = $700
As products 1, 2 and 4 have maximum profits so they should be produced.
9 X Y
12 9
Contribution Per machine
6 3
2 3
Production Ranking 2nd 1st
Production of units Y = 200 units

Hours available for producing X
X =
Hours required to produce one unit of X
1 200 hours – 600 hours
=
6 hours
= 100 units
Maximum possible contribution X (100 units @ 12 = 1 200

Y (200 units @ 9 = 1 800
3 000
10 Y1 Y2 Y3 Y4
Contributionperunit (note) $36 $32 $45 $55
Materialrequiredperunit 18 ÷ 6 24 ÷ 6 27 ÷ 6 30 ÷ 6
Contribution per kg 12 8 10 11
Ranking 1st 4th 3rd 2nd
Note
45 30 40 30
Profit + Fixed cost 9+ × 36 14+ × 36 21+ × 36 37+ × 36
60 60 60 60
Contribution per unit 36 32 45 55
11 Resources required Resources required to meet Resources

Item
per unit sales demand available
material 4.0 480 000 (120 000 × 4 460 000 kg
labour hours 3.0 360 000 (120 000 × 3 400 000 hours
machine hours 0.5 60 000 (120 000 × 0.5 70 000 hours
As availability of material is less than requirement so it is the principal limiting factor in this case.
12 Carpet 1 Carpet 2 Carpet 3 Carpet 4

Profit 64 44 60 68
Add Fixed cost 24 28 20 8
Contribution per unit 88 72 80 76
32 48 16 48
÷ Labour cost per unit ( ; ; ; ) 2 3 1 3
16 16 16 16
Contribution per $ of labour 44 24 80 25.3
Ranking 2nd 4th 1st 3rd
So “C” option is correct.
13 Products
X Y Z
$ $ $
Selling price per unit 40 48 72
Direct material per unit (18 (24 (30
Direct labour per unit (10 (6 (18
10 6 18
Labour hours per unit ( ; ; ) 5 3  9
2 2 2
Contribution per kg of material 2.40 6.00 2.67
Priority order last first second
14 As products X has the lowest contribution per kilo so it can only be produced if some material is left after
producing products Y and Z (the latter has the maximum contribution per kilo).
$
Material used for producing product Z (1 000 × $6 6 000
Material used for producing product Y (600 × $4 2 400
Total material available for producing X (1800 – 1 000 – 600 kilos (200 × $3 600
Maximum possible contribution for the company 9 000
15 Products
X ($) Y ($) Z ($)
Machine hours used per unit 6 1 2
Contribution per kg of material 4 12 10
Priority order last First second
16 Product 1 Product 2 Product 3

Contribution per hour 2.1 2.6 2.4
Priority order last First second
17 X Y Z
$41 000 $56 000 $55 000
Contribution per $ of material
$56 000 $68 000 $90 000
0.73 0.82 0.61
Production ranking 2nd 1st 3rd
Chapter 25 -297- Budgeting
CHAPTER 25 BUDGETING
1 Which of the following is an advantage of using a budgetary control system?
A Calculation of bad debt provisions
B calculation of depreciation
C making “make or buy’’ decisions
D monitoring management performance
May 03 P3 Q23
2 What is not a purpose of a budget?

A to communicate strategies and objectives downwards to staff at all levels
B to design an action plan to help achieve the next year’s objectives
C to develop a long-term strategy
D to prepare an operational plan for the immediate future
Nov 04 P3 Q27
3 What should be identified as a priority in the budgeting process?

A the budgeted cash inflow
B the budgeted net profit
C the master budget outcome
D the principal budget factor
May 05 P3 Q27
4 What is the starting point in the preparation of a budget for a manufacturing organisation?
A a cash forecast
B amending last year’s budget to take account of the effects of inflation
C forecasting employee numbers
D identifying the key budget factor
Nov 09 P32 Q21
5 Which statement is true about the operation of an effective budgetary control system?
A It will only use past data which means that it is not forward looking.
B It will help a company plan and control the use of its financial and other resources.
C It will help a company prepare its annual statutory accounts.
D It will stop managers cooperating with each other.
Nov 09 P32 Q22
6 What is an advantage of an effective budgetary control system?

A Managers spend a lot of their time in preparing budgets.
B Resources of an organisation are given their fullest and most economical use.
C The budget figures are not changed once they have been set, whatever happens during the
trading year.
D The budget may be imposed from the top down by senior managers.
May 10 P3 Q21
7 What is regarded as a problem when operating a budgetary control system?

A All managers participate in the budgetary process to feel involved in its achievement.
B Budgetary slack is built in by managers, meaning standards are of little use in measuring
performance.
C Financial incentives and rewards for managers are based on their achievement of the budget.
D Managers are provided with regular feedback on their performance against budget.
Nov 12 P32 Q24
Chapter 25 -298- Budgeting
8 Which objectives are achieved by the introduction of a budgetary control system?

1 co-ordinating of the business’s activities
2 encouraging communications between departments
3 ensuring wage rises do not occur
A 1 and 2 only B 1 and 3 only
C 1, 2 and 3 D 2 and 3 only
Specimen 16 P12 Q30
9 Who should be on the budget committee?

A accounting and finance staff only
B sales manager and production manager only
C sales staff only
D senior management representing every department in the organization
May 16 P12 Q30
10 What is the objective of a system of budgetary planning and control?

A to determine next year’s production
B to determine next year’s profits
C to motivate the manufacturing staff
D to provide a system for communication, coordination and control
Nov 16 P12 Q30
11 Which statement is not a reason why a business prepares budgets?

A to ensure coordination of the business activities
B to identify potential problems in the future
C to identify the responsibilities of managers
D to prepare the financial statements for the year
May 17 P12 Q30
ANSWER KEY
1 D 4 D 7 B 10 D
2 C 5 B 8 A 11 D
3 D 6 B 9 D 12
Specimen Paper 2016-18 -299- Paper 1
SPECIMEN PAPER 2016-18

1 A business has a good reputation. The owner wishes to include goodwill in the financial statements. An
accountant advises against it.
Which accounting principle is the accountant applying?
2 A trader made four transactions.

1 paid for repairs to manufacturing equipment
2 purchased an item to be used by the business for more than 12 months
3 took goods for resale for his own use
4 transferred his own vehicle to the business
Which items are capital expenditure?
A 1 and 2 B 2 and 3
C 2 only D 3 and 4
3 A non-current asset costs $250 000 and has a useful economic life of 25 years. The estimated residual
value is $10 000.
Depreciation is provided on a straight line basis.
After 10 years the asset is sold for $120 000. Disposal costs of $20 000 are incurred.
What is the loss on disposal?
A $30 000 B $34 000
C $50 000 D $54 000
4 A vehicle was part exchanged for a new vehicle.

Which entries record the part exchange?
account debited account credited

A cash motor vehicles
B disposal motor vehicles
C motor vehicles cash
D motor vehicles disposal
5 Alfredo received his bank statement which showed a balance of $937 overdrawn. This did not agree with
his cash book.
On investigation he noted the following.
Bank charges of $76 had not been entered in the cash book.
There was an unpresented cheque paid to suppliers of $214.
Alfredo had recorded $35 cash paid into his bank account, but this was not showing on the
statement.
At which value was the bank overdraft shown in the statement of financial position?
A $758 B $937 C $1116 D $1192
6 On 1 January 2012 a business had prepaid rent of $50. During 2012, it made three rent payments of $250
each. On 31 December 2012, the business owed $200 rent for 2012.
The business owner only charged the rent payments made during 2012 in the income statement.
What is the effect on profit for the year?
A $200 overstated B $200 understated

C $250 overstated D $250 understated

A All reserves are created by a transfer from retained earnings.
B Revaluation reserves appear in the non-current assets section of the statement of financial
position.
C Some reserves are treated as current liabilities at the financial year end.
D Total reserves form part of shareholders’ equity.
8 An item can be converted easily into cash.

In which section of the statement of financial position would this item appear?
A capital B current assets
C current liabilities D non-current assets
9 The purchases ledger control account has a closing balance of $15 300. Discounts received of
$600 have been entered on the wrong side of the control account.
What is the corrected balance?
A $14 100 B $14 700 C $15 900 D $16 500
10 Which item appears in a company’s income statement?

A dividends B inventory
C trade payables D transfer to reserves
11 In which account should a partner’s drawings appear in the partnership’s end-of-year financial
statements?
A appropriation account B income statement
C partner’s capital account D partner’s current account
12 X and Y are in partnership. Their income statement and appropriation account shows the following.
$
depreciation of non-current assets 5 000
interest on loan from Y 600
interest charged on drawings 900
partners’ salaries 5 000
remaining profit 12 000
What is the profit for the year before any appropriations?

A $18 500 B $19 100 C $20 300 D $25 900
13 X and Y are in partnership with combined capital and current account balances of $125 000.
Z is admitted as a partner, introducing capital of $40 000. At that time, the assets of the partnership are
revalued upwards by $50 000 and goodwill was valued at $18 000. Goodwill was not to remain in the
books of account.
What was the total capital employed of the partnership immediately after the admission of Z?
A $183 000 B $197 000 C $215 000 D $233 000
14 A business sells goods at a uniform gross profit margin of 30%. The following information is available.
$
revenue 62 000
purchases 45 000
What is the value of closing inventory?
A $10 000 B $11 600 C $16 500 D $18 600
15 X, Y and Z are in partnership and they have the following assets and liabilities.
$
property 400 000
fixtures and fittings 350 000
The partnership was dissolved on the following terms.
X took the property and half the fixtures and fittings at a valuation of $560 000.
The remaining fixtures and fittings and the entire inventory were sold for $140 000.
The trade receivables paid in full with the exception of one debt of $4700.
The total cost of dissolution was $2500.
What was the loss on dissolution of the partnership?
A $57 700 B $60 200 C $77 500 D $82 200
16 A company made a rights issue of shares.

Where is this recorded?
A Income statement and Statement of financial position
B Income statement only
C Statement of changes in equity and Statement of financial position
D Statement of financial position only
17 A company’s statement of financial position shows the following.

$
The following transactions then take place.
1 The company pays a dividend of $70 000.
2 The company makes a bonus issue of 5000 ordinary shares.
3 The company issues a debenture of $120 000.
A $250 000 B $300 000 C $350 000 D $420 000
18 Which items will be shown in the statement of changes in equity?

1 dividends proposed
2 interest paid on debentures
3 issues of share capital
4 transfers to reserves
19 A company made a bonus issue of ordinary shares.

How was this recorded in its books of account?
account debited account debited

A bank share capital
B retained earnings share capital
C share capital bank
D share capital retained earnings
20 Which ratio measures a business’s average credit period?

A current ratio B inventory turnover
C liquid (acid test) ratio D trade receivables turnover

$000
credit sales 800
total purchases 440
total sales 900
trade payables 40
How long does the company take to pay its trade suppliers (rounded to the nearest day)?
22 A company wishes to improve its current ratio and its liquid (acid test) ratio.
How can this be done?
A increasing discounts to trade receivables
B increasing the provision for doubtful debts
C purchasing additional inventory on credit
D selling non-current assets
23 A company commences business on 1 April. It buys the following units of inventory.

date quantity unit cost
1 April 200 $250
1 September 400 $200
1 December 200 $300
During the year, it sells 500 units at $550 each.
What is the gross profit for the year using the FIFO method of inventory valuation?
A $85 000 B $155 000 C $156 250 D $165 000
24 A company is reviewing its costs.

It discovers the following in respect of its factory supervision expenses.
output in units cost per unit/$
8 000 8.00
10 000 6.40
Which type of cost is this an example of?
A fixed cost` B semi-variable cost
C stepped fixed cost D variable cost
A Fixed costs per unit decrease as production increases.

B Total fixed costs decrease as production increases.
C Total variable costs decrease as production increases.
D Variable costs per unit decrease as production increases.
26 Which statements about absorption costing are correct?

1 It apportions overheads between production and service departments.
2 It enables a company to know its break-even level of production.
3 It leads to higher inventory valuations than marginal costing.
4 It is used by management for make or buy decisions.
A 1, 2 and 3 B 1 and 3 only
C 2 and 4 only D 3 and 4 only
27 An accountant prepared the following break-even chart.

10 sales revenue
budget
8
total costs
costs
and 6
revenues
($m) 4
2 fixed costs
0
0 1 2 3 4 5
sales volume (millions of units)
The budgeted sales volume is 4.5 million units.
Which profit can be anticipated at this level?
A $2.5 million B $4.5 million C $7 million D $9 million
28 Which statement best describes job costing?

A a costing method that calculates the cost of meeting a specific customer order
B a costing method that calculates the cost of producing a number of identical units for a customer
C a costing method that enables overheads to be absorbed into the cost of the product
D a costing method that separates fixed costs from variable costs
29 The following data applies to a business.
budgeted labour hours 10 000

actual labour hours 9 500
What is the amount of overhead over or under absorbed?

A $10 000 over B $10 000 under C $17 500 over D $17 500 under
30 Which objectives are achieved by the introduction of a budgetary control system?

1 co-ordinating of the business’s activities
2 encouraging communications between departments
3 ensuring wage rises do not occur
A 1 and 2 only B 1 and 3 only C 1, 2 and 3 D 2 and 3 only
ANSWER KEY
1 D 9 A 17 B 25 A
2 C 10 B 18 D 26 B
3 D 11 D 19 B 27 A
4 D 12 A 20 D 28 A
5 C 13 C 21 B 29 D
6 C 14 B 22 D 30 A
7 D 15 D 23 D
8 B 16 C 24 A
May 2016 -304- Paper 12
MAY 2016 – PAPER 12

1 What might stop financial statements showing a true and fair view?
A changes in depreciation methods from year to year
B changes in dividend policy
C creation of a general reserve
D inclusion of purchased goodwill in a statement of financial position

On 1 April 2015, the following payments relating to a new machine were made.
$
Purchase cost 50 000
Installation 10 000
Machinery is depreciated at 20% on cost per annum, calculated from the date of purchase.
What was the depreciation of the new machine for the year ended 31 December 2015?
A $7500 B $9000 C $10 000 D $12 000
3 A business purchased a motor vehicle on 1 January 2012 for $24 000. The estimated useful life ofthe
motor vehicle was four years and the estimated residual value at the end of four years was$8000.
The business depreciates motor vehicles at 25% per annum using the reducing balance method.
No depreciation is charged in the year of disposal. The motor vehicle was sold on 31 July 2015 for $12
000.
What was the profit on the sale of the motor vehicle?
A $1875 B $4000 C $5250 D $8000
4 A building was purchased for $500 000. The following costs were also incurred.
$
adapting the new building 50 000
legal fees for the building purchase 5 000
cleaning the building 4 000
salary of building manager 20 000
What was the capital cost of the building?

A $550 000 B $555 000 C $559 000 D $579 000
5 Which statement about the sales ledger control account is correct?

A It is to verify the total of the customers' account balances in the sales ledger.
B It is used to calculate the gross profit on sales.
C It is used to calculate the total sales for the year.
D It is used to reconcile the cash received from customers with the bank statement.
6 In which book of prime entry is the contra between the sales ledger control account and thepurchase
ledger control account recorded?
A cash book B general journal C purchases journal D sales journal
7 A business omitted discounts allowed of $700 from its trial balance. During the year a machinehad been
sold for cash of $500 but the only accounting entry made was a debit in the bankaccount.
What is the balance on the suspense account before these errors are corrected?
A $200 debit B $1200 debit C $200 credit D $1200 credit

May 2016 -305- Paper 12
8 In an income statement carriage outwards of $5000 has been treated as carriage inwards.
Carriage inwards of $3000 has been treated as carriage outwards.
What are the effect(s) of these errors on the profit?
gross profit profit for the year
A overstated by $2000 understated by $2000
B overstated by $8000 no effect
C understated by $2000 no effect
D understated by $8000 overstated by $8000
9 A company received interest of $8800 during the financial year. Interest of $700 was due at thebeginning
of the year and $850 at the end of the year.
Which entry appeared in the interest received account to make the transfer to the incomestatement?
A $8650 credit
B $8650 debit
C $8950 credit
D $8950 debit
10 Katrina commenced business on 1 January 2015. For the year ended 31 December 2015, thefollowing
information is available.
$
Drawings 53 500
Revenue 1500 000
Expenses 875 000
A $562 300 B $571 500
C $678 000 D $687 000
11 The following information is available for rent and rates.

$
prepaid rent at the start of the year 1250
accrued rates at the start of the year 1380
Rent and rates income statement amount 8750
Prepaid rent at the end of the year 1104
accrued rates at the end of the year 1000
A $8516 B $8854
C $8880 D $8984
12 The directors of a company are completing the financial statements for the year ended30 April 2016. They
discover that the inventory at 1 May 2015 was over-valued by $50 000.
What are the effects of correcting this error?
profit for the year retained earning
ended 30 April 2016 brought forward
at 1 May 2015
A Decrease decrease
B decrease increase
C increase decrease
D Increase increase
May 2016 -306- Paper 12
13 X and Y were in partnership sharing profit and losses equally. They then admitted Z into thepartnership
and profits and losses were still shared equally.
1 Z introduced capital of $50 000.
2 Goodwill was valued at $30 000. No goodwill account is kept in the books ofaccount.
3 X took a computer from the business at a value of $3000.
After these transactions had taken place, the balance on X’s capital account was $60 000.
What was the opening balance on X’s capital account?
A $55 000 B $58 000 C $65 000 D $75 000
14 A and B were in partnership sharing profits and losses equally when they decided to retire.
Details of the realisation are shown in the table.
book value realized value
$000 $000
non – current assets 50 65
current assets excluding cash and bank 25 23
cash and bank balances 4 -
costs of realization 1 -
How much profit each partner entitled to on realization?
A $8000 B $10 000 C $12 000 D $75 000
15 A company’s profit from operations has increased by 10% in a year, whilst its gross profit hasonly
increased by 5%.
Which factors could explain this?
1 a decrease in finance costs
2 a decrease in distribution costs
3 an increase in rent received
4 an increase in selling prices
16 A company has 1 000 000 ordinary shares of $1 issued at $2.50. It also has a 5% debenture of$300 000.
Profit from operations for the year was $465 000.
The directors paid an 8% ordinary share dividend during the year.
By which amount did the retained earnings increase during the year?
A $250 000 B $370 000 C $385 000 D $400 000
17 A company issues 100 000 new $1 ordinary shares at a premium of $0.20 each.
Which effect does this have on the statement of financial position?
A Equity increases by the nominal value of the shares but decreases by the value of thepremium.
B Equity increases by the nominal value of the shares only.
C Net assets increase by the nominal value of the shares plus the value of the premium.
D Net assets increase by the nominal value of the shares but decrease by the value of thepremium.
18 The trial balance on 31 December 2015 showed the following information.

$
On 1 January 2016 the directors created the general reserve of $70 000. At the same time200000 ordinary
shares were issued for $300 000.
By which amount did the total reserves increase on 1 January 2016?
A $100 000 B $170 000 C $300 000 D $370 000
May 2016 -307- Paper 12
19 A company wants to increase its return on capital employed in the short term.
Which course of action will achieve this?
A invest in new plant and machinery
B make a bonus issue of shares
C reduce overhead expenses
D reduce the dividends paid to investors
20 Which item is included in the current ratio but notthe liquid (acid test) ratio?
A cash at bank B inventory
C trade payables D trade receivables
21 A business has prepared the following information for the year ended 30 April 2015.
$ $
Revenue 220 000
Purchases 120 000
closing inventory (31 000)
cost of goods sold 114 000
gross profit 106 000
What was the inventory turnover?
22 An employee works a standard 40-hour week. In that time he is expected to make 200 complete units.
He is paid a bonus of $10 for every hour saved in production.
For week 25 he worked 44 hours and produced 250 units.
How much was his bonus payment for week 25?
A $30 B $40 C $50 D $60
23 A business was started on 1 January. The purchases and sales of inventory for January were as follows.
date purchases sales
4 January 3 at $200 each -
13 January - 2 at $400 each
26 January 3 at $250 each -
28January - 2 at $400 each
The business used the first in first out (FIFO) method of inventory valuation.
What was the gross profit for January?
A $250 B $650 C $700 D $750
24 A manager is preparing a quotation for Job 88. A specialised technician is hired to work for this job only.
He will use machinery that the company already owns.
Which statement is correct about expenses for Job 88?
A Both machinery depreciation and technician wage are direct.
B Both machinery depreciation and technician wage are indirect.
C Machinery depreciation is direct and technician wage is indirect.
D Machinery depreciation is indirect and technician wage is direct.
25 Budgeted overhead expenditure was $180 000 and budgeted labour hours were 12 000. Actualoverheads
amounted to $196 000 and actual labour hours were 12 200.
What was the under or over absorption of overheads?
A $3000 over B $3000 under
C $13 000 over D $13 000 under
May 2016 -308- Paper 12
26 Why might a business use marginal costing?

1 to calculate break-even units
2 to decide on the most profitable use of limited resources
3 to decide whether to make a product or buy it
A 1 and 2 only B 1, 2 and 3
C 2 only D 3 only
27 A business provided the following information for the past two months.
month number of total overheads
labour hours $
February 64 000 918 000
March 76 000 1 062 000
What was the monthly fixed overhead cost?
A $144 000 B $150 000
C $768 000 D $912 000
28 A company uses marginal costing.

Which costs are included in its inventory valuation?
A variable manufacturing cost, fixed manufacturing overhead and variable selling expenses
B variable manufacturing cost and fixed manufacturing overhead only
C variable manufacturing cost and variable selling expenses only
D variable manufacturing cost only
29 The break-even sales of a company are 1000 units when the variable costs are $30 000 and fixedcosts are
$20 000.
What is the profit if 70 units above the break-even point are sold?
A $700 B $1400
C $2100 D $3500
30 Who should be on the budget committee?

A accounting and finance staff only
B sales manager and production manager only
C sales staff only
D senior management representing every department in the organization
ANSWER KEY
1 A 9 D 17 C 25 D
2 B 10 A 18 A 26 B
3 A 11 D 19 C 27 B
4 B 12 C 20 B 28 D
5 A 13 B 21 B 29 B
6 B 14 A 22 D 30 D
7 A 15 C 23 D
8 C 16 B 24 D
November 2016 -309- Paper 12
NOVEMBER 2016 – PAPER 12

1 Which transaction applies the matching concept?
A A machine acquired on long-term rental is included in non-current assets.
B Computer equipment is depreciated over two years.
C A building is revalued following a fall in property prices.
D A waste-paper basket is treated as revenue expenditure.
2 A disposal account is used to record the sale of a non-current asset.

Which transactions are recorded on the credit side of the disposal account?
A cost, loss on disposal and sale proceeds
B cost, profit on disposal and sale proceeds
C depreciation, loss on disposal and sale proceeds
D depreciation, profit on disposal and sale proceeds
3 The following information was available for the disposal of a machine.

$
accumulated depreciation 45 000
profit on disposal 8 100
sale proceeds 75 600
What was the original cost of the machine?
A $22 500 B $38 700 C $112 500 D $128 700
4 A printing company installed a large printing press.

Which costs are capital expenditure in the first year of its operation?
1 installation of the press
2 depreciation of the press
3 repairs to the press
4 upgrades to the press
5 The year-end balance in the cash book was $23 780. This was different from the balance on the bank
statement. The difference was due to the following items.
$
bank charges 216
a customer’s cheque which was dishonoured 1 375
a bank error meant a cheque was incorrectly debited to the bank account 560
What should be the value of bank in the statement of financial position?
A $21 629 B $22 189 C $25 371 D $25 931
6 At the end of the year, the balance on a firm’s sales ledger control account was $12 900. The total of the
customers’ accounts in sales ledger was $11 900.
The following errors were then discovered.
1 A customer’s account had been undercast by $700.
2 A contra with a supplier in the purchases ledger of $200 had only been entered in the
sales ledger control account.
3 The discount allowed column in the cash book totalled $500. This had not been posted
to the nominal ledger.
What was the correct balance on the sales ledger control account?
A $11 200 B $11 400 C $12 000 D $12 400
7 A suspense account has a balance of $450 debit.

What has caused this balance in the suspense account?
A motor expenses of $225, correctly entered in cash book, & posted to motor expenses as a credit
B motor expenses of $225, entered in cash book as a receipt & posted to motor expenses as credit
C motor expenses of $450, correctly entered in cash book, & posted to motor vehicles as a debit
D motor expenses of $675, entered in the cash book as a credit of $225 and posted to motor
expenses as $225 debit
8 An item of capital expenditure has been incorrectly treated as revenue expenditure in the financial
statements of a business.
What is the effect of this error on the financial statements of the business?
assets profit
B Overstated understated
C Understand overstated
D Understand understated
9 A company pays or receives the following amounts on the last day of its financial year.
$
deposit paid to a supplier 6 500
rental income received in advance 8 000
loan repayment 3 000
payment for last month’s sales commission 900
Which of these amounts will be included as other receivables in the statement of financial position?
A $6 500 B $14 500 C $17 500 D $18 400
10 A sole trader provides the following information.

start of year end of year
$ $
total assets 100 000 135 000
total liabilities excluding owner’s capital (35 000) (40 000)
During the year the owner took drawings of $18 000.
What was the profit for the year?
A $12 000 B $30 000 C $35 000 D $48 000
11 A trader did not keep full accounting records. The following information was available for 2015.
$
trade payables on 1 January 32 785
trade payables on 31 December 43 630
discounts received during the year 3 450
What was the value of purchases?
A $58 535 B $65 435 C $80 225 D $87 125
12 A partnership admits a new partner.

A Profits will always be shared equally following the new partner’s admission.
B The new partner will always benefit if assets are later revalued upwards.
C The new partner must always contribute capital to the partnership.
D The new partner will always pay for a share of partnership goodwill.
13 X, Y and Z are in partnership sharing the profits and losses in the ratio of 2 : 2 : 1.
At 31 December the following information is available.
X Y Z
$ $ $
capital account balances 100 000 100 000 50 000
current account balances 20 000 15 000 (5 000)
On 31 December Z retires from the partnership. Total assets are revalued upwards by $45 000.
There is no goodwill.
How much will Z be paid on his retirement?
A $54 000 B $59 000
C $60 000 D $65 000
14 The following information relates to a partnership.

$
profit from operation 90 000
loan interest 3 200
interest on drawings 6 000
drawings 40 000
What is the residual profit to be appropriated amongst the partners?
A $41 800 B $69 800
C $81 800 D $91 800
15 A partnership earned an average profit during the year of $15 000 per month.
Halfway through the year D and E were joined by a new partner F and profits were shared equally before
and after the change. In the first half of the year D transferred his private vehicle to the partnership at a
valuation of $12 000. D’s drawings amounted to $60 000 during the year.
What was the increase in D’s current account balance during the year?
A $15 000 B $30 000 C $75 000 D $87 000
16 How would a transfer to general reserve and the issue of shares at a premium affect the revenue reserves
of a limited company?
transfer to issue of shares
general reserve at a premium
A decrease decrease
B decrease increase
C no effect increase
17 A company is formed with the issue of 100 000 6% non-cumulative preference shares of $1 each
and 300 000 ordinary shares of $1 each issued at a premium of $0.20.
It earned profits of $3 000, $16 000 and $31 000 in the first three years of trading. The directors
wish to pay an ordinary dividend of 5% each year when possible.
What value of ordinary dividends does the company actually pay in years 2 and 3?
year 2 year 3
$ $
A 7 000 15 000
B 7 000 18 000
C 10 000 15 000
D 10 000 18 000
18 A company had an issued share capital of 400 000 ordinary shares of $1 each. It then made a bonus issue
of one share for every five held. This was later followed by a rights issue of one share for every three held.
What was the balance on the share capital account after these transactions?
A $480 000 B $533 333
C $613 333 D $640 000
19 Which action will increase the equity of a limited company?

A creating a general reserve
B issuing bonus shares
C issuing debentures
D issuing non-redeemable preference shares
20 Which action leaves the value of working capital unchanged?

A disposal of a non-current asset
B issuing shares for cash
C purchasing goods for resale on credit
D writing off an irrecoverable debt
21 Owusu Limited has a constant level of annual sales and a constant gross margin. Each year the inventory
increases.
Which effects does this have on the inventory holding period and on inventory turnover?
inventory holding inventory turnover
(in days) (times)
A decrease decrease
B decrease Increase
C increase decrease
D increase increase
22 A business uses the AVCO method of inventory valuation.

1 March purchase 1 000 units at $65 per unit
2 March purchased 1 200 units at $66 per unit
4 March sold 1 850 units at $68 per unit
What was the value of closing inventory?
A $22 750 B $22 941
C $23 100 D $23 800
23 A manufacturing company employs 20 workers who are paid a basic rate of $30 per hour for a 40-hour
week. To meet a special order, the workers each worked 50 hours and were paid a premium of 40% over
basic rate for the overtime. What was the value of wages paid to meet the special order?
A $30 000 B $32 400
C $33 600 D $42 000
24 A manufacturing business is currently operating at full capacity.

As part of an expansion programme to increase production capacity, the business intends to
employ an additional factory supervisor.
How are total supervisory salaries classified?
C stepped cost D variable cost
25 In a manufacturing business the following could occur.

1 Actual overheads paid are less than budgeted overheads.
2 Actual overheads paid are more than budgeted overheads.
3 Actual units produced are less than budgeted units.
4 Actual units produced are more than budgeted units.
Which situations would result in an under absorption of overhead expenditure?
A 1 and 3 B 1 and 4
C 2 and 3 D 2 and 4
26 A company makes and sells a single product for $12 per batch.
The variable cost is $4 per batch.
Fixed costs have been absorbed based on a normal activity level of 1 000 batches at $3 per batch.
What is the profit under marginal costing if the company makes and sells 1 500 batches?
A $6 000 B $7 500
C $9 000 D $12 000
27 The following information was provided about a product.

variable cost per unit $26
total fixed costs $10 000
demand 1800 units
If the selling price increases only demand changes.
When the selling price increased by $4 profit fell by $1200.
What was the decrease in demand?
A 214 units B 300 units
C 571 units D 657 units
28 A business that uses flexible budgets shows the following:
units of output 100 000 110 000

total fixed and variable costs $400 000 $425 000
What are fixed costs?
A $125 000 B $150 000
C $250 000 D $275 000
29 A company makes a product for which the following information is given.

per unit
$
selling price 100
direct materials 40
direct labour 30
Total fixed costs are $40 000.
Planned production is 1000 units.
Which action should the company take to break-even?
A decrease direct labour cost by 30%
B decrease direct material cost by 25%
C increase direct labour cost by 30%
D increase direct materials cost by 25%
30 What is the objective of a system of budgetary planning and control?

A to determine next year’s production
B to determine next year’s profits
C to motivate the manufacturing staff
D to provide a system for communication, coordination and control
ANSWER KEY
1 B 11 D 21 C
2 C 12 B 22 B
3 C 13 A 23 B
4 B 14 C 24 C
5 B 15 A 25 C
6 D 16 D 26 C
7 A 17 C 27 B
8 D 18 D 28 B
9 A 19 D 29 B
10 D 20 C 30 D
May 2017 -315- Paper 12
MAY 2017 – PAPER 12

1 When a businessman introduces capital into his business, the transaction is debited in the cash book and
credited to his capital account.
Of which accounting concept is this an example?
2 Which are examples of the accounting equation?

1 capital + assets = liabilities
2 capital = assets + liabilities
3 capital = assets – liabilities
A 1 and 3 B 1 only
C 2 and 3 D 3 only
3 Amitav purchased a van costing $20 000. He provided an old van with a net book value of $8 000 in part
exchange. There was a profit on disposal of $1 500.
What was the cash outflow arising from the purchase?
A $9 500 B $10 500
C $12 000 D $13 500
4 The net book value of a company’s non-current assets was as follows.

$
at 1 January 2016 100 000
at 31 December 2016 80 000
During 2016 assets were sold for $20 000, realising a profit on disposal of $5 000.
Depreciation charged for 2016 was $8 000.
What was the expenditure on new assets in 2016?
A $3 000 B $5 000
C $8 000 D $15 000
5 The following errors were found after a suspense account was opened.
1 Motor repairs of $400 were credited to the motor vehicle at cost account.
2 A payment for electricity was debited in the electricity account as $2 500 instead of
$5200.
3 A $450 cash purchase of goods for resale had been completely omitted from
the books.
4 Discount allowed of $50 had been debited to the discounts received account.
Which items would be entered in the suspense account?
A 1 and 2 B 2 and 3
C 2 and 4 D 3 and 4
6 Which items appear in a sales ledger control account?

1 cash discount allowed
2 credit sales
3 payments to trade payables
4 returns inwards
A 1, 2 and 3 B 1, 2 and 4
C 1, 3 and 4 D 2, 3 and 4
May 2017 -316- Paper 12
7 The following information is extracted from the statement of financial position of a business at 31
December 2016.
$
bank loan (repayable 2025) 16 200
other payables 1 880
capital 20 710
drawings 19 100
inventory 14 610
other receivables 1 420
What is the value of the net current liabilities?
A $1 590 B $2 510 C $18 710 D $20 320
8 The following items are recorded in the cash book of a business but not yet recorded in its bank
statement.
$
cheques drawn 3000
amounts banked 250
The cash book shows a bank balance of $2600 credit.
9 Finn provides the following information.

$
capital at the start of the year 19 800
drawings (cash) 19 500
drawings (goods for own use) 1 100
private vehicle transferred to business use 6 000
What was Finn’s capital at the end of the year?
A $23 200 B $24 300 C $29 200 D $31 400

year 1 year 2
$ $
profit for the year 30 000 40 000
cost of goods sold 240 000 320 000
The owner then discovers that at the end of year 1 the value of inventory was overstated by $2000.
What are the correct profits for the year and cost of goods sold figures?
year 1 year 2
profit for cost of profit for cost of
the year goods sold the year goods sold
$ $ $ $
A 28 000 238 000 42 000 322 000
B 28 000 242 000 40 000 320 000
C 28 000 242 000 42 000 318 000
D 32 000 238 000 38 000 318 000
May 2017 -317- Paper 12
11 Sam was unable to conduct a physical count of inventory at 31 December 2016.

On 3 January 2017 inventory had been sold to Abdul for $11 950. The cost price of this inventory
had been $9 560. On 4 January 2017 inventory had been returned by Sita. It had been sold for $2 390. The
cost price of this inventory was $1 912.
Sam valued his inventory at 5 January 2017 at cost, $59 750.
What was the value of inventory at 31 December 2016?
A $50 190 B $52 012 C $67 398 D $69 310
12 Which item is not taken into account when a partner joins a partnership?
A balances on the partners’ current accounts
B capital introduced by the new partner
C changes in the profit sharing ratio
D goodwill
13 Ali, Bharti and Chan were in partnership sharing profit and losses in the ratio 3 : 2 : 1. Bharti retired from
the partnership on 30 June 2016. The following were the balances available at 30 June 2016.
Ali ($) Bharti ($) Chan ($)
capital accounts 60 000 Cr 40 000 Cr 20 000 Cr
current accounts 18 650 Cr 6 100 Dr 8 950 Cr
On her retirement, Bharti retained a partnership motor vehicle at an agreed valuation of $4 000.
How much was payable to Bharti on her retirement?
A $33 900 B $42 900 C $46 900 D $50 900
14 A partnership maintains both capital and current accounts for its partners.
What is the correct accounting entry for recording interest on capital for partner X?
account to be debited account to be credited
A appropriation X’s capital
B appropriation X’s current
C X’s capital Appropriation
D X’s current Appropriation
15 Which statement describes the treatment of purchased goodwill for a limited company?
A a tangible non-current asset that can be amortised
B a tangible non-current asset that can be depreciated
C an intangible non-current asset that can be amortised
D an intangible non-current asset that can be depreciated
16 A company’s equity is made up as shown.

$
share premium 3 000
The following took place.
1 A bonus issue of one ordinary share for every five held was made.
2 Six months later a rights issue of one ordinary share for every four held was made.
The shares were issued at $0.30 each.
By how much did the company’s equity increase as a result of these transactions?
A $5 000 B $6 000 C $7 500 D $9 000
May 2017 -318- Paper 12
17 Which statement about ordinary shares is correct?

A dividends on ordinary shares are an appropriation of profit
B dividends on ordinary shares are paid at the same rate each year
C ordinary shares are never issued at a premium
D the holders of ordinary shares are creditors of a company
18 Who are internal users of accounting information?

A customers B directors
C lenders D shareholders

$
finance costs 4 000
A 16.22% B 17.14% C 21.62% D 22.86%
20 The following financial information is available for a business. All purchases and sales are made on credit.
$
purchase 121 980
revenue 209 980
trade payable 45 448
What is the average collection period?
A 50 days B 79 days
C 86 days D 136 days
21 How are stepped costs best described?

A costs that are always variable
B costs that have both a fixed and variable element
C fixed costs that are always the same amount at any level of output
D fixed costs which increase in total once a certain level of output is reached
22 Jamal uses the AVCO system to value his inventory. He provides the following information:
March 1 no opening inventory
23 110 units were sold for $150 per unit
What was the cost of sales for March?
A $5 875 B $12 925
C $13 000 D $18 800
23 A business makes wedding dresses. Each machinist is paid $30 a day and each supervisor $40 a day. Each
supervisor can work with up to 10 machinists and each machinist can produce one wedding dress a day.
If 95 wedding dresses a day are produced, what is the daily labour cost?
A $2 850 B $3 210
C $3 230 D $3 250
May 2017 -319- Paper 12
24 Which statement best describes variable costs?

A costs that are the same in total up to a certain level then increase with output
B costs that are the same in total over any output level
C costs that are constant per unit as output increases
D costs that increase per unit as output increases
25 A company manufactures and sells chairs. The following per unit information is available.
$
selling price 25
direct material and labour 12
other variable production costs 3
variable selling costs 2
fixed costs 4
The company has the option of buying in the chairs for resale instead of making them.
At which purchase price would the company’s profit be unchanged?
A $15 B $17 C $19 D $21
26 The budgeted income statement of J Limited shows the following.

$
sales 400 000
variable costs 240 000
fixed costs 132 000
What is the margin of safety in dollars?
A $70 000 B $160 000 C $268 000 D $330 000
27 The following details are supplied by a company for the month of August.
budgeted machine hours 36 000
actual machine hours 36 500
What is the under or over absorption of the overheads?
28 A company has fixed costs of $40 000 per month. It provided the following information.
March units April units
production 30 000 15 000
Total production costs for March were $90 000.
What were the total production costs for April?
A $45 000 B $65 000
C $70 000 D $110 000
29 A company’s profits using marginal costing and absorption costing principles were identical.
Which statement is true about the company’s production units?
A they were greater than break-even units
B they were greater than the sales units
C they were the same as the break-even units
D they were the same as the sales units
May 2017 -320- Paper 12
30 Which statement is not a reason why a business prepares budgets?

A to ensure coordination of the business activities
B to identify potential problems in the future
C to identify the responsibilities of managers
D to prepare the financial statements for the year
ANSWER KEY
1 A 11 C 21 D
2 D 12 A 22 B
3 B 13 B 23 D
4 A 14 B 24 C
5 A 15 C 25 A
6 B 16 D 26 A
7 B 17 A 27 C
8 A 18 B 28 B
9 C 19 C 29 D
10 C 20 A 30 D
NOVEMEBR 2017 – PAPER 12

1 Which item is classed as revenue expenditure?
A installation costs of machinery
B legal fees on the purchase of premises
C number plates on a new motor vehicle
D redecorating office premises
2 What is the purpose of depreciation?

A to allocate the cost of the assets over their lives
B to improve liquidity ratios of the business
C to provide sufficient funds to replace the assets
D to show the assets at their market values
3 A company’s year end is 30 April. It purchases a factory in May 2014 at a cost of $200 000. The factory will
be depreciated over 20 years. A full year’s depreciation is charged in the year of purchase.
In May 2017 the factory is revalued at $300 000.
How much should be included in the revaluation reserve account?
A $100 000 B $120 000 C $130 000 D $140 000
4 A business has a year end of 31 December. It purchased a non-current asset on 1 January 2014 for
$100000. It was depreciated using the reducing balance method at 20% per annum. It was sold for $40
000 on 1 January 2016.
What was the loss on disposal?
A $20 000 B $24 000 C $40 000 D $60 000
5 Why does a business keep a sales ledger control account?

1 It helps deter fraud.
2 It helps with the preparation of financial statements.
3 It identifies doubtful debt easily.
4 It predicts the sales for the coming year.
6 A sales ledger control account had a debit balance of $38 600. The total of individual sales ledger debit
balances was $36 500. The only errors found were as follows.
An irrecoverable debt had been recorded in the ledger of Smith but not the control account.
The sales journal was undercast by $1500.
A contra of $1750 had been correctly recorded in the control account but only $1250 recorded in
the ledgers.
What was the value of the irrecoverable debt?
A $100 B $1100 C $3100 D $4100
7 The following information is available.

$
provision for doubtful debts at the beginning of the year 6250
trade receivables at the end of the year 93750
Provision for doubtful debts is to be maintained at 6% of trade receivables.
Which effect will the provision for doubtful debts have on profit for the year in the income statement?
A decrease by $625
B decrease by $5625
C increase by $625
D increase by $5625
8 At 31 December the following information is available about a company’s banking transactions.

$
balance at bank per bank statement 22 650
uncleared deposits 3 110
unpresented cheques 6 290
bank credit recorded twice by bank in error 650
Which value for bank should be recorded in the statement of financial position at 31 December?
A $18 820 B $20 120 C $25 180 D $26 480
9 Hedley has 100 items of inventory in his warehouse and five more with a customer on a sale or return
basis. He provides the following information.
$ per unit
historic cost paid 60
selling price 85
current replacement cost 65
Which value should appear in the statement of financial position for inventory?
A $6000 B $6300 C $6825 D $8500
10 A business does not keep complete accounting records. The following information is known for the year.
$
capital at start 52 000
capital at end 55 000
Drawings 13 000
capital introduced 25 000
What is the profit or loss for the year?
A loss $9000 B profit $9000 C loss $15 000 D profit $15 000
11 A business has 500 items of inventory at a cost price of $3 each. The selling price per unit is based on a
mark-up of 20%. Before sale, the items need to be repaired at a total cost of $400.
What is the net realisable value of the inventory?
A $1400 B $1475 C $2200 D $2275
12 The following information is available for the year ended 31 December 2016.
$
Revenue 75 000
Purchases 32 000
carriage inwards 5 400
carriage outwards 4 500
inventory at 1 January 2016 6 300
inventory at 31 December 2016 7 600
What was the gross profit for the year ended 31 December 2016?
A $36 300 B $37 200 C $38 900 D $39 800
13 A partnership maintains capital accounts and current accounts.

Which statements are correct?
1 The capital accounts show the total amount owed to each partner.
2 The capital accounts represent the retained earnings of the business.
3 The capital and current accounts equal the net assets.
A 1 and 2 B 1 and 3 C 2 only D 3 only
14 X, Y and Z had been in partnership, sharing profits and losses in the ratio of 2 : 2 : 1.
On 1 January 2017, Y retired. The balances of his capital and current accounts were as shown.
capital account current account

$50 000 $6400 debit
Y took over a motor van at an agreed value of $3800. The net book value of the motor van was $4800.
The value of all other assets at 1 January 2017 would remain unchanged.
How much cash was Y entitled to when he retired?
A $51 400 B $51 800 C $55 200 D $64 200
15 S and T are in partnership, sharing profits and losses in the ratio 2 : 1. The balances on their capital
accounts at 31 March 2017 were:
$
capital account S 40 000
capital account T 20 000
60 000
On 1 April 2017 the partners decide to change the profit-sharing ratio to 3 : 2. Goodwill is to be valued at
$30 000 and is not to be retained in the books of account.
What is the new balance of T’s capital account?
A $18 000 B $20 000 C $22 000 D $30 000
16 A partnership provides the following financial information for the year ended 30 June 2017.
$
bank interest payable 21 000
Drawings 50 000
partnership salaries 45 000
What is the residual balance of profits to be appropriated between the partners?

A $109 000 B $154 000 C $159 000 D $204 000
17 Which accounting entry could record the issue of bonus shares?

Debit credit
A Bank share capital
B general reserve share capital
C general reserve share premium
D share capital general reserve
18 From which accounts can a company pay dividends?

1 general reserve
2 retained earnings
3 revaluation reserve
4 share capital
19 A company provides the following data on 1 January 2016.

$
10% debentures (2020) 200 000
bank loan (2017) 130 000
bank loan (2018) 10 000
What is the total value of non-current liabilities at 31 December 2016?
A $154 000 B $210 000 C $340 000 D $364 000
20 Calculation of which ratio does not include revenue?

A gross margin
B mark-up
C non-current asset turnover
D profit margin
21 Bradshaw does not keep proper books of account. The following information is available for the year.
cost of sales $750 000

mark-up 20%
cash sales $300 000
trade receivables $46 000
What are total sales and trade receivables turnover?

trade
total sales
receivables
$
turnover (days)
A 900 000 19
B 900 000 28
C 937 500 18
D 937 500 27
22 The financial statements of a company showed the following.
$
ordinary shares 120 000
interest paid 11 000
Profit for the year was $23 000.

What was the return on capital employed?
A 10.65% B 13.07% C 15.74% D 19.32%
23 Which item is an indirect cost?
A carriage inwards
B production materials
C wages of machine operators
D wages of stores staff
24 The following information is forecast for next period.

Units
$
profit using marginal costing 300 600
profit using absorption costing 390 780
What is the overhead absorption rate per unit?
A $5.00 B $6.50 C $7.20 D $15.43
25 A business has total fixed costs of $240 000. Products have a unit selling price of $25 and a unit variable
cost of $15.
How many units need to be sold to break even?
A 6000 B 9600 C 16 000 D 24 000

budgeted direct labour hours 8000
actual direct labour hours worked 7500
What is the over or under recovery of overheads?
A $8500 over recovered
B $8500 under recovered
C $15 000 over recovered
D $15 000 under recovered
27 The diagram illustrates the cost behaviour of a typical telephone invoice.
total cost
$
0 level of activity
Which term best describes the behaviour of this cost?

A fixed
B semi-variable
C stepped
D variable
28 Which statements about the limitations of marginal costing are correct?

1 Finance costs are not included in the manufacturing overheads.
2 Variable cost per unit changes at different levels of activity.
3 Some costs may be semi-variable costs.
29 A product has a variable cost of $31.32 per unit. Total fixed costs are $93 600.
When production is 13 000 units the margin of safety is 5000 units.
What is the selling price per unit?
A $36.52 B $38.52 C $43.02 D $50.04
30 Why is planning important to a business?

1 to ensure that the business always makes a profit
2 to employ the correct number of workers
3 to reduce the risk of running out of inventory
ANSWER KEY
1 D 11 A 21 B
2 A 12 C 22 C
3 C 13 D 23 D
4 B 14 A 24 D
5 A 15 A 25 D
6 D 16 C 26 D
7 C 17 B 27 B
8 A 18 A 28 D
9 B 19 B 29 C
10 A 20 B 30 C

Accounts As Paper - 1 MCQs

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Accounts As Paper - 1 MCQs

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ACCOUNTING

Muhammad Nauman Malik

Muhammad Nauman Malik

3-C, Gulberg II , Lahore. 042-35714038

Title Accounting AS-Level MCQs P-1 Topical & Yearly

Muhammad Nauman Malik

CHAPTER 13 COMPANY BASICS 132

SPECIMEN PAPER 2016-18 299

CHAPTER 1 BANK RECONCILIATION STATEMENTS

2 The table shows extracts from business bank reconciliation.

7 The table shows details relating to a company’s banking transactions at 31 December.

11 At the year-end a cash book shows a credit balance of $4800.

14 At the financial year end of a business the following information is available.

15 A business is preparing a bank reconciliation and finds the following.

16 A trader made the following transactions

17 A bank reconciliation statement has been prepared by an inexperienced book-keeper.

Bank Reconciliation Statement

Bank Reconciliation Statement $

3 Bank Reconciliation Statement

6 Adjusted Cash Book

Bank Reconciliation Statement $

8 Bank Reconciliation Statement $

9 Bank Reconciliation Statement

11 Adjusted Cash Book

12 Adjusted Cash Book

Bank Reconciliation Statement $

13 Bank Reconciliation Statement

14 Bank Reconciliation Statement

Adjusted Cash Book

17 Bank Reconciliation Statement

18 Adjusted Cash Book

CHAPTER 2 ACCOUNTING FOR DEPRECIATION

5 Why are non-current assets depreciated?

10 Why do businesses charge depreciation on their non-current assets?

12 A business sold a non-current asset. The following information is known.

14 An asset, which would not normally be depreciated, is

A building B land C patents D plant and machinery

15 Which asset does not need to be depreciated?

16 The table shows information relating to a company’s non-current assets.

Depreciation is 25% per annum on the reducing balance basis.

20 Why is a provision for depreciation made in accounts?

21 Non-current assets of a company were:

22 What is the purpose of providing for depreciation?

23 The table gives information relating to the non-current assets of a business.

28 X Plc incurred the following costs as a result of purchasing a new machine.

cost of the asset sale proceeds

A $1 000 loss B $2500 loss

What is the loss on disposal?

39 A disposal account is used to record the sale of a non-current asset.

40 The following information was available for the disposal of a machine.

Depreciation for second year [($40 000  $4 000 10%] (3 600)

11 Selling price  Book value = Profit (loss) on sales

12 Cost  Accumulated depreciation = Book value

Depreciation for the year ($7 400  25%) = $1 850

21 Non-current asset Account (at book value)

23 Non-current asset Account (at book value)

25 Selling price  Book value = Profit (loss) on sales

Book value of motor vehicles sold 7 500

40 Machine disposal Account

41 Purchase price  Trade in value = Cash outflow on purchase

42 Non-current asset Account (at book value)

CHAPTER 3 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS

A going concern concept