ICAP MODEL PAPER

1. Income arise from increase in assets or decrease in a liability resulting in:

(a) decrease in equity other than contribution from owners
(b) increase in equity other than contribution from owners
(c) increase in equity including contribution from owners
(d) decrease in equity including contribution from owners
Answer: Increase in assets or decrease in liability results in increase in equity because Increase in income
represents Cr. Nature and Equity is also of Cr. Nature so resulting effect is same.

2. Which TWO of the following would be considered as business transactions?

(a) Business paid the electricity bill of previous year
(b) Owner received the electricity bill of the owner's residence
(c) Owner paid the electricity bill of owner's residence from personal cash
(d) Business received electricity biI1 of office premises which will be paid in next year
Answer: When Business paid the electricity bill of previous year expense is debited and cash is credited and when
Business received electricity biI1 of office premises which will be paid in next year Liability of business increases.

3. Which TWO of the following are not part of a complete set of component of financial statement?
(a) Notes to the financial statements
(b) Statement of financial position
(c) Directors' report
(d) Auditor's report
Answer: Directors' report and Auditor's report are not part of a complete set of component of financial statement.

4. Total assets of a business would change as a result of:

(a) non-current assets being purchased on cash
(b) a supplier's balance being paid by cheque
(c) wages being paid in cash
(d) non-current assets being purchased on credit
Answer: In all other options else Charlie, the effect on total assets remains same.

5. A business commenced with capital in cash of Rs. 150,000. Inventory of Rs. 100,000 was purchased for
cash and half of inventory was sold at markup of 20% on credit. Furniture of Rs. 40,000 was purchased on
credit. What will be the accounting equation
(Assets — liabilities = Capital) after these transactions?
(a) Rs. 190,000 — Rs. 40,000 = Rs. 150,000
(b) Rs. 200,000 — Rs. 40,000 = Rs. 160,000
(c) Rs. 150,000 — Rs. 40,000 = Rs. 110,000
(d) Rs. 160,000 — Rs. 40,000 = Rs. 120,000

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Mr. Naveed Ansari FCA
6. Which TWO of the following would be recorded in General Journal?
(a) Increase in provision for doubtful debts
(b) Advance received from a customer
(c) Write-off of a trade receivable balance
(d) Receipt of a written off balance
Answer: All items which are not included in any books are recorded in General Journal. These two are recorded in
General Journal.

7. Which of the following documents would require a double entry? (02 marks)
(a) Sales orders
(b) Sales invoice
(c) Delivery note
(d) Statement of account
Answer: Entry would always be passed on Sales Invoice as it includes amounts also.

8. Match each of the following transactions with appropriate book of prime entry: (02 marks)

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9. A transaction not recorded in any other books of original entry is recorded in:
(a) Sales day book
(b) Purchases day book
(c) Cash book
(d) General journal

10. Zee bought goods on credit from Shan Traders (ST). The goods were not according to the required
specifications and therefore returned to ST. Which document should Zee send to ST?
(a) Statement of account
(b) Credit note
(c) Debit note
(d) Invoice
Answer: On Purchase return, we issues Debit note and receive Credit note
11. Which TWO of the following statements are correct regarding trial balance?
(a) Opening stock as well as closing stock appear in a trial balance
(b) Trial balance is not a book of prime entry
(c) Every credit balance represents income
(d) Return inward has debit balance
12. On 4 August 2021, goods were sold on credit for Rs. 125,000 with credit terms of 3/10, n/20. On 8 August
2021, goods of Rs. 25,000 were returned by the buyer. How much should the seller expect to receive if the
buyer pays on 12 August 2021?
(a) Rs. 100,000
(b) Rs. 121,250
(c) Rs. 125,000
(d) Rs. 97,000

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Mr. Naveed Ansari FCA
Answer: Credit terms means if he pay within 10 days he will receive 3% cash discount. So, if he pays on 12
August Buyer after return of Rs. 25,000 should pay 3 % discount on Rs. 100,000. So, seller expects to receive Rs.
97,000.

13. Which TWO of the following would be appearing in the trial balance?
(a) Gross profit
(b) Discount allowed
(c) Trade discount received
(d) Accumulated depreciation

14. How will these assets expire? (02 marks)

Prepaid rent
a) Through use and consumption
b) Through use and consumption
c) With the passage of time
d) With the passage of time
Office supplies
With the passage of time
Through use and consumption
Through use and consumption
With the passage of time

15. Consider the following statement(s):

I) Higher closing prepaid balance than previous year means that payment for the year exceeds the
expense for the year.
II) Higher closing accrued income balance than previous year means that receipt for the year exceeds
the income for the year.
Which of the above statements is/are correct?
(a) None is correct
(b) Only (I) is correct
(c) Only (II) is correct
(d) Both are correct

16. On 1 February 2019, a loan of Rs. 6,000,000 was taken from a bank for acquisition of an office building. A
portion of the building was rented out on 1 August 2019 at a monthly rent of Rs. 45,000. Interest is
payable at 15% per annum on 31 January each year and rent is received half yearly in advance.
What amounts of interest payable and unearned rent should be shown in the statement of financial position
as on 31 December 2019?
(a) Interest payable Rs. 900,000; Unearned rent Rs. 270,000
(b) Interest payable Rs. 450,000; Unearned rent Rs. 45,000
(c) Interest payable Rs. 825,000; Unearned rent Rs. 45,000
(d) Interest payable Rs. 825.000; Unearned rent Rs. 250,000
Answer:
Loan on 01.02.19 is 6,000,000
Interest rate is 15% per anum.
90,000 x 11/12 = 82,500 (Interest Payable)
Portion of a building rented out on 01.08.19. We received half yearly rent out in advance.

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Mr. Naveed Ansari FCA
 Total Rent received = 45,000 x 6 = 270,000
Unearned income for only one month = 45,000.

17. An entity received electricity biil for the month of June 2020. The bill will be paid on 10 July 2020. The
entity's financial year ends on 30 June. How would the payment be recorded?
(a) Debit utilities payable and credit electricity expense
(b) Debit utilities payable and credit cash
(c) Debit electricity expense and credit utilities payable
(d) Debit electricity expense and credit cash

18. On 1 July 2019, a business acquired a shop on rent which is payable quarterly in advance. Payments of
rent were made as follows

Date Rupees
1 July 2019 75,000
30 September 2019 75,000
31 December 2019 75,000
31 March 2020 75,000
30 June 2020 75,000

What will be the rent expense charged to statement of profit or loss for the year ended 31 August 2020?
(a) Rs. 75,000
(b) Rs. 375,000
(c) Rs. 300,000
(d) Rs. 225,000
Answer:
Rent of 1 Quarter = 75,000
For 1 Financial Year in P/L = 4 x 75,000 = 300,000
Un-earned = 75,000

19. At 31 December 2019 an entity's allowance for doubtful receivables amounted to Rs. 48,000, which was
five percent of the receivables at that date. At 31 December 2020, receivables totaled Rs. 1,085,000. It was
decided to write off Rs. 53,000 of debts as irrecoverable and, based on past experience, to keep the
allowance far doubtful receivables at 5% of receivables.
What should be the charge in the statement of profit or loss for the year ended 31 December 2020 for Bad
and doubtful receivables expense?
(a) Rs. 59,250
(b) Rs. 56,600
(c) Rs. 49,400
(d) Rs. 46,750

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Answer:

Dr. Adjusted Debtors account Cr.

Unadjusted closing balance 1,085,000
Bad debt expense 53,000
Closing balance-adjusted (c/d) 1,032,000
1,085,000 1,085,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 48,000
Bad debt expense 3600
c/d (120,000 x 3%) 51,600
51,600 51,600

(e)Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 53,000
Provision for bad & doubtful 3,600
debt
c/d 56,600
56,600 56,600

20. At 31 December 2020, receivables totaled Rs. 785,000 before making following adjustments.
• It was decided to write off Rs. 20,000 of debts as irrecoverable and create specific allowance of 80%
against balances of Rs. 75,000.
• General allowance for receivables is to be maintained at 5% of receivables.
Allowance for doubtful receivables as at 31 December 2019 amounted to Rs. 31,000.
What should be the total allowance for doubtful receivables as at December 2020?
(a) Rs. 110,500
(b) Rs. 109,500
(c) Rs. 95,500
(d) Rs. 94,500
Answer:
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 785,000
Bad debt expense 20,000
Closing balance-adjusted (c/d) 765,000
785,000 785,000

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Mr. Naveed Ansari FCA
 Dr. Provision for bad & doubtful debt account Cr.
b/d 31,000
Bad debt expense 63,500
c/d 94,500
94,500 94,500

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 20,000
Provision for bad & doubtful 63,500
debt
c/d 83,500
83,500 83,500

21. What is the purpose of maintaining an allowance for doubtful debts account?
(a) Records irrecoverable debts without taking them out of the books of an entity
(b) Records the expense of irrecoverable debts
(c) Have an estimate of future irrecoverable debts
(d) Matches the estimated cost of future irrecoverable debts against the revenue earned in giving rise to the
potential irrecoverable debts
Answer: ICAP book Mcqz # 41.
22. For reconciling bank balances, unpresented cheques should be:
(a) deducted from balance of bank statement or added to balance of cash book
(b) added to balance of bank statement or deducted from balance of cash book
(c) deducted from balance of bank statement and added to balance of cash book
(d) added to balance of bank statement and deducted from balance of cash book
23. Which of the following statements is correct?
(a) Credit balance as per bank statement means a bank overdraft
(b) Debit balance as per bank statement means a bank overdraft
(c) Debit balance as per cash book means a bank overdraft
(d) Credit balance as per cash book means an asset
24. Determine the balance as per bank statement using the following information:

Rupees
Balance as per cash book 49,100
Cheques received and deposited into the bank, but not yet credited in the bank
4,600
statement
Unpresented cheques 6,300
Credit transfers appearing in the bank statement but not entered
in the cash book 3,400

(a) Rs. 52,500

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Mr. Naveed Ansari FCA
 (b) Rs. 54,200
(c) Rs. 58,800
(d) Rs. 50,800
Answer: 49,100 + 3,400 + 6,300 – 4,600 = 54,200

25. A business has an overhead absorption rate of Rs. 425 per machine hour, based on a budgeted activity level
of 12,400 hours. In the period covered by the budget, actual machine hours worked were 2% more than the
budgeted hours and actual overhead expenditure incurred was Rs. 5,638,900. What was the total absorbed
overheads for the period?
(a) Rs. 5,638,000
(b) Rs. 5,375,400
(c) Rs. 5,270,000
(d) Rs. 5,500,000
Answer:
Absorption rate = 425
Budgeted hours = 12,400 + 2% = 12,648
Total Absorption = 425 x 12,648 = 5,375,400
5,375,400 < 5,638,900 (Under-absorbed)

26. What entry should be recorded when actual overhead expenditure is incurred?
(a) Debit: Cost of sales / P&L and Credit: Production Overheads
(b) Debit: Inventory (WIP) and Credit: Production Overheads
(c) Debit: Production Overheads and Credit: Cash / Accrual
(d) Debit: Production Overheads and Credit: Cost of sales / P&L

27. Consider the following diagram:

Level of activity

Which of the following Costs would be most likely to be illustrated by the diagram given above?

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Mr. Naveed Ansari FCA
 (a) Indirect material cost
(b) Direct materials Cost
(c) Factory rent
(d) Labour cost

28. Which of the following best describes a period cost?

(a) A cost that is identified with a unit produced during the period, is included in the value of inventory. The
cost is treated as an expense for the period vyhen the inventory is actually said
(b) A cost that can be easily allocated to a particular period, without the need for arbitrary apportionment
between periods
(c) A cost that relates to a time period, is not included in the inventory valuation. The entire cost is
treated as an expense for the period
(d) A cost that is incurred regularly every period, eg every month or quarter

29. Which TWO of the following items would be appearing in analysis of expenses by nature?
(a) Salaries expense
(b) Administrative expenses
(c) Distribution expense
(d) Finance cost

30. A liability is classified as current liability if it is paid:

(a) out of current assets
(b) within one year or the normal operating cycle, whichever is longer
(c) out of non-current assets
(d) within one year or the normal operating cycle, whichever is shorter

31. The purpose of depreciation is to:

(a) recognise that assets lose value over time
(b) write the asset down to its realisable value at the end of each period
(c) allocate the depreciable cost an a systematic basis over the asset's useful life
(d) accumulate a fund for asset replacement
Answer: ICAP book-Definition of Depreciation

32. Which of the following is NOT an asset that falls under the scope of IAS 16 Property, Plant and
Equipment?
(a) Assets held for the production or supply of goods or services
(b) Tangible assets
(c) Assets held for sale in the normal course of business
(d) Assets expected to be used for more than one period
Answer: Assets held for Sale is inventory and not the PPE.

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Mr. Naveed Ansari FCA
 33. A motor vehicle was purchased for Rs. 1,395,000 on 1 July 2018. it has an estimated useful life of 5 years
and a residual value of Rs. 255,000. If the sum of the digits method of depreciation is used, what will be
the carrying amount of motor vehicle as at 30 June 2020?
(a) Rs. 303,000
(b) Rs. 456,000
(c) Rs. 711,000
(d) Rs. 558,000
Answer:
Sum of Year Digit = n(n+1)/2 = 5(5+1)/2 = 15
= 1,395,000 – 255,000 / 15 = 76,000
= 76,000 x 5 = 380,000

= 76,000 x 4 = 304,000
= 684,000
= 1,395,000 – 684,000 = 711,000

34. During the year 2019, an entity purchased a machine for Rs. 20 million to be used for 6 years. Which of
the following would represent residual value of this machine in 2019?
(a) Rs. 4 million can be currently obtained from disposal of a 6 year old similar machine
(b) Rs. 15 million can be currently obtained from disposal of the machine in present condition
(c) Rs. 18 million can be obtained in 2025 from disposal of the machine in present condition
(d) Rs. 7 million can be obtained in 2025 from disposal of a 6 year old similar machine
Answer:
= (20 – 0) / 6 = 3.33 or approximately 4
If any machine is disposed off after 6 years it would depreciate of about 4 million per year

35. If a property, plant and equipment remains idle for whole year, the depreciation expense for the year will
be NIL under:
(a) straight line method
(b) units of production method
(c) reducing balance method
(d) all of the above methods
Answer: In all others, Depreciation would be charged even if asset remains Idle.
36. Which of the following does not require journal entry in periodic inventory method?
(a) Goods returned by a supplier
(b) Closing inventory
(c) Abnormal loss
(d) Normal loss

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 37. A company purchased an inventory item at purchase price at Rs. 1,800 and also incurred freight in cost of
Rs. 155. The item will be sold at margin of 15% after incurring freight out and packing cost of Rs. 200 and
Rs. 150 respectively. At which value the item should be carried in the books?
(a) Rs. 1,800
(b) Rs. 1,955
(c) Rs. 1,950
(d) Rs. 2,300
(e) Rs. 2,150
(f) Rs. 2,100

Answer:
Cost = 1,800 + 155 = 1,955 S.P = 100% = 1,955/85 x 100 = 2,300
S.P = 2,300 Profit = 15%
Less Selling Costs = 2,300 – 200 – 150 = 1,950 Cost = 85% = 1,955
NRV = 1,950
Cost or NRV whichever is Lower = 1,950
38. Which TWO of the following is included in cost of inventory? (02 marks)
(a) Recoverable taxes paid on purchase
(b) Normal wastage of material
(c) Selling cost
(d) Fixed manufacturing overheads

39. Bilal has started a trading business. He deals in goods where prices are usually rising over the time. Which
of the following statements is correct regarding selection of ’FIFO or Average method’ in this case?
(a) FIFO will result in Power reported profits
(b) Average method will give more accurate profit
(c) Average method will lead will higher cost of ending inventory
(d) Profit will be unaffected by the selection of inventory method

40. In preparing its financial statements for the current year, an entity's closing inventory was understated by
Rs. 200,000. What will be the effect of this error if it remains uncorrected?
(a) The current year's profit will be overstated and next year's profit wifi be understated
(b) The current year's profit will be understated and next year's profit will be overstated
(c) The current year's profit will be overstated but there will be no effect on next year's profit
(d) The current year's profit will be understated but there will be no effect on next year's profit

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Mr. Naveed Ansari FCA
 41. Following is the summarized trial balance of Valsafe Traders (VT) for the year ended 31 December 2020:
Debit Credit
------ Rs. in '000-----
Property, plant and equipment 32,500 8,750
Accumulated depreciation at 1 January 2020 - -
Inventory at 1 January 2020 34,300 -
Trade receivables 36,800 -
Prepayments 780
Advances 240
Cash and bank balances 5,550
Capital - 60,395
Drawings 8,480 -
14% Loan - 17,500
Trade and other payables - 28.740
Revenues - 181,100
Purchases 149,800 -
Selling expenses 12.450 -
Distribution expenses 8,800 -
Administrative expenses 7,460
Rent income - 1,125
Interest on bank overdraft 450 -
297,610 297,610

Additional information:
(i) Cost of closing inventory in hand on 31 December 2020 amounted to Rs. 46,300,000.Physical inventory
count revealed that goods costing Rs. 950,000 were returned by a customer for which no entry has been made.
These goods were sold for Rs. 1,300,000 on credit in last week of December 2020. VT determined that these
goods are out of fashion and can be sold at 40% of original selling price.
(ii) Prepayments include Fire insurance premium Ps. 300,000 paid for ownre's residence.
The annual policy is valid up to 31 March 2021.
(iii) On 1 June 2020, a machine was given at a quarterly rent of Rs. 375,000, receivable in advance.
(iv) Advances represent three months advance salary taken by a salesman on 1 November 2020.
(v) The loan was acquired on 1 July 2020 and the entire principal along with interest is
repayable on 30 November 2021.
(vi) Depreciation of property, plant and equipment is charged at 10% on straight line method. Depreciation
should be equally divided between distribution and administrative expenses.
(vii) Cash and bank balances include bank overdraft of Rs. 1,490,000.
Required:
(a) Prepare statement of profit or loss for the year ended 31 December 2020.
(b) Prepare statement of financial position as at 31 December 2020.

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Mr. Naveed Ansari FCA
 Val-safe Traders
Trading and Profit and Loss Account
for the year ended December 31, 2020
Rs.
Revenue (181100 – 1300) 179800
Cost of goods sold (149800 + 34300 – 45870) -138230
Gross Profit 41570
Selling Expense -12450
Distribution Expense (8800 + 1625) -10425
Administration Expense (7460 + 160 + 1625) -9245
Operating Profit 9450
Other Income (1125 – 250) 875
Financial Charges (450 + 1225) -1675
Net Profit 8650
Val-safe Traders
Balance Sheet
as on December 31, 2020
Assets
Non-Current assets
Property, Plant and equipment (32500 – 8750 – 1625 – 1625) 20500

Current assets
Inventory 45870
Trade receivables (36800 – 1300) 35500
Advance (240 – 160) 80
Prepayments (780 – 300) 480
Cash and bank balances (5550 + 1490) 7040
Total Current assets 88970
Total assets 109470

Equity and Liabilities

Equity
Capital 60395
Net Profit 8650
Drawings (8480 + 300) -8780
Closing Capital 60265
Non-Current Liabilities
Long-Term Loan 0
Current Liabilities
Trade and other payables (28740 + 250) 28990
Short term Loan 17500
Interest payable 1225
Bank Overdraft 1490

Total Current Liabilities 49205

Total Equity and Liabilities 109470

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Mr. Naveed Ansari FCA
 Workings
W-1
Sales Return 1300
Debtor 1300

Stock 45870
Cost of Sales 45870

Cost NRV Lower Carrying Value

______________ = 45350------------N/A--------------------45350
|
46300-----| = 45870
|_____________ = 950---- = 40% of 1300 = 520----------520

W-2

Drawing 300
Prepayment 300

W-3

Rent Income 250 = (375/3 x 2 = 250)

Income in advance 250

W-4

Salary Expense 160 = (240/3 x 2 = 160)

Advance 160

W-5

= 17500 x 14% x 6/12 = 1,225

Interest Expense 1225

Interest Payable 1225

W-6

= 32,500 x 10% = 3250

Depreciation in Distribution Expenses

Depreciation 1625
Acc. Depreciation 1625

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Mr. Naveed Ansari FCA
 Depreciation in Administration Expenses

Depreciation 1625
Acc. Depreciation 1625

W-7

Cash & Bank 1490

Bank OD 1490

W-8

-----------within 12 Months ------------------

01.07.20----------|-----------------------------------|------------------31.12.21
31.12.20 ----Short-term----30.11.21
11 Months

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Mr. Naveed Ansari FCA