BS1209 Introduction to Financial and Management Accounting

MIDTERM TEST – EXAMPLE (Solutions)

FINANCIAL ACCOUNTING PART

Question 1. Company A buys a building for £300,000. Company A pays 20% in cash and the
rest in credit. After this transaction, which of the following statements is true?
a) Company A will record an increase in non-current assets and a decrease in current assets
of £300,000.
b) None of the answers is true.
c) Company A will record an increase in non-current assets of £300,000, a decrease in
current assets of £60,000 and an increase in liabilities of £240,000.
d) Company A will record an increase in non-current assets of £300,000, an increase in
current assets of £60,000 and a decrease in liabilities of £240,000.
Solution:
The journal entry would be as follows:
Debit Credit
Building (non-current asset increase) 300,000
Cash (asset decrease) 60,000
Creditors (liability increase) 240,000

Question 2. Company A needs to record the following adjustments: Company A has received
the information that one of its customers will not pay £4,000. In addition, Company A sells
£2,500 in credit. After considering these two transactions, which of the following statements
is true?
a) Current assets decrease in £1,500, expenses increase in £4,000 and revenues increase in
£2,500.
b) Non-current assets increase in £1,500.
c) Current assets increase in £2,500 and expenses increase in £4,000.
d) All the answers are true.
Solution:
The journal entry recording the bad debt would be as follows:
Debit Credit
Bad debt (expense increase) 4,000
Trade receivables (asset decrease) 4,000

The journal entry recording the goods selling would be as follows:

Debit Credit
Sales revenue (revenue increase) 2,500
Trade receivables (asset increase) 2,500

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Question 3. Assume a company has sales of £20,000 for the year. The opening inventory is
valued at £2,000 and during the year the company made purchases of £3,000. What would the
Gross Profit be if the closing inventory was valued at £1,200?
a) £22,000
b) £15,000
c) £20,800
d) £16,200
Solution:
Gross Profit = Sales – Cost of Goods Sold
Gross Profit: 20,000 – (2,000+3,000-1,200) = £16,200

Question 4. Company X has the year end on 31st January. Company X bought a motor
vehicle on 1st May 2019 and paid an insurance premium of £800 for 12 months.
Considering only the journal entries related to the insurance payment, which of the following
statements is true?
a) Expenses increase in £800 and assets have a net decrease of the same amount.
b) Expenses increase in £600 and assets decrease in the same amount.
c) None of the answers is true.
d) Expenses increase in £1,000 and assets increase in the same amount.

Solution:
Nine months of the premium relates to the year ended 31st January 2019 and the other quarter
relates to the following year (i.e., year ended 31st January 2020).
The Journal entries would be as follows:

Debit Credit
Insurance expense (expense increase) 800
Cash (asset decrease) 800

Debit Credit
Insurance expense (expense decrease) 200
Insurance Prepaid (asset increase) 200

Question 5. Flowers Ltd. has an operating profit for the year on 31/12/2020 of £12,500 after
charging depreciation of £500 and made a profit on sale of a building of £1,200.

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An extract from the statement of financial position at the beginning and end of the financial
year shows the following:
31/12/2019 31/12/2020
Inventory 1,000 2,000
Trade receivables 4,500 9,000

What is the cash flow from operating activities?

a) £5,800
b) None of the answers is true.
c) £6,300
d) £8,700

Solution:
31/12/2019 31/12/2020 change
Inventory 1,000 2,000 1,000
Trade 4,500 9,000 4,500
receivables

Cash Flows from Operating Activities: 12,500 + 500 - 1,000 - 4,500 - 1,200 = 6,300

Question 6. Flowers Ltd. acquired a building on 01/07/2021 for £300,000. The building has
an estimated useful life of 20 years. The estimated residual value of the building is £25,000.
On 31/12/2021 (the accounting-year end), which is of the following statements is true related
to the building depreciation?
a) Flowers Ltd. needs to decrease non-current assets in £6,875 and increase expenses in the
same amount.
b) Flowers Ltd. needs to decrease non-current assets in £13,750 and increase expenses in the
same amount.
c) Flowers Ltd. needs to increase non-current assets in £13,750 and increase expenses in the
same amount.
d) None of the answers is true.
Solution:
Annual Depreciation expense: (300,000-25,000)/20 = £13,750
Depreciation expense corresponding to the 6 months of 2021: £13,750/2 = 6,875

Question 7. Company A shows a Trade Receivables balance of £34,000. The company

estimates that £12,500 correspond to bad debts. Which of the following statements is true?

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a) Company A would need to increase expenses in £34,000 and increase assets in the same
amount.
b) Company A would need to increase expenses in £12,500 and increase equity in the same
amount.
c) None of the answers is true.
d) Company A would need to increase expenses in £12,500 and decrease current assets in
the same amount but the trade receivables balance will remain unchanged.
Solution:
The Journal entries would be as follows:
Debit Credit
Trade Receivables (asset decrease) 12,500
Bad Debt (expense increase) 12,500

Question 8. Company A issues 1 for 2 bonus shares. Considering the below Statement of
Financial Position of Company A, which of the following statements is true?
Non-Current Assets
Buildings 30,000
Accumulated Depreciation (10,000)
Current Assets
Inventory 2,000
Cash 12,000
Total Assets 34,000

Equity
Share capital (20,000 shares of £1 each) 20,000
Retained Earnings 2,000
Share Premium 12,000
Liabilities
Total Equity and Liabilities 34,000

a) Company A needs to increase equity in £10,000.

b) Company A increases share capital in £10,000 and decreases share premium in the same
amount.
c) Company A will issue 20,000 bonus shares.
d) Company A decreases share capital in £10,000 and increases retained earnings in the
same amount.
The company issues (20,000/2) 10,000 shares. The value of the shares is 10,000x1 = £10,000.
Equity
Share Capital (30,000 shares of £1 each) 30,000
Retained Earnings 2,000
Share premium 2,000
Total Equity 34,000