CA PRC-04

INTRODUCTION TO
ACCOUNTING
Practice Manual
 TABLE OF CONTENTS

CH. TOPIC MCQs

Questions Answers

1 ACCOUNTING FUNDAMENTALS 1 19

2 BOOKS OF PRIME ENTRY 27 42

3 LEDGERS AND TRIAL BALANCE 49 73

4 ACCRUALS AND PREPAYMENTS 77 94

5 BAD AND DOUBTFUL DEBTS 103 130

6 DEPRECIATION 164 185

7 IAS – 2 INVENTORIES 191 219

8 ACCOUNTING FOR MANUFACTURING 226 243

9 PREPARATION OF FINANCIAL STATEMENTS 250 266

10 BANK RECONCILIATIONS 270 287

 CHAPTER # 01
ACCOUNTING
FUNDAMENTALS
CHAPTER # 02
BOOKS OF
PRIME ENTRY
 CHAPTER # 03
LEDGERS AND
TRAIL BALANCE
CHAPTER # 04
ACCRUALS AND
PREPAYMENTS
CHAPTER # 05
BAD AND
DOUBTFUL
DEBTS
CHAPTER # 06
DEPRECIATION
CHAPTER # 07
IAS – 2
INVENTORIES
 CHAPTER # 08
ACCOUNTING FOR
MANUFACTURING
CHAPTER # 09
PREPARATION
OF FINANCIAL
STATEMENTS
CHAPTER # 10
BANK
RECONCILIATIONS
CHAPTER-1 ACCOUNTING FUNDAMENTALS

MULTIPLE CHOICE QUESTIONS (MCQs)

1. The main aim of accounting is to

A Maintain ledger accounts for every asset and liability
B Provide financial information to users of such information
C Produce a trial balance
D Record every financial transaction individually
2. Which of the following statements gives the best definition of the objective of accounting?
A To provide useful information to users
B To record, categorise and summarise financial transactions
C To calculate the taxation due to the government
D To calculate the amount of dividend to pay to shareholders
3. Which of the following is not an information need for the 'Investor' group?
A Assessment of repayment ability of an entity
B Measuring performance, risk and return
C Taking decisions regarding holding investments
D Taking buy/sell decisions
4. Which one of the following would not be considered one of the roles of a financial accountant?
A Reconciliation of ledger accounts
B Recording of financial transactions
C Preparation of annual budgets
D Preparation of statements of cash flows
5. Which of the following is not an external user of financial statements?
A Shareholder
B Director
C Trade payable
D Auditor
6. Which of the following statements are true?
1. Accounting can be described as the recording and summarizing of transactions
2. Financial accounting describes the production of a statement of financial position and
Statement of Profit or Loss for internal use
(a) 1 only (b) 2 only
(c) 1 and 2 both (d) Neither 1 nor 2
7. The terms accounting and book keeping are classified as
(a) Same (b) Different
(c) Opposite (d) None of these
8. The main aim of financial accounting is to:
(a) Record all transactions in the books of account.
(b) Provide management with detailed analyses of costs.
(c) Present the financial results of an organization by mean of financial statements.
(d) Calculate profit.

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

9. Which of the following is least likely to be expected from a book-keeping and accounting
system?
(a) Systematic recording of transactions
(b) Ascertaining profit or loss
(c) Ascertainment of financial position
(d) Solving tax disputes with tax authorities
10. A business has incurred following costs for the year ended 31 December 2018:
Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2
What is the amount of capital expenditure incurred during the year?
Rs. ___________
11. A business has incurred following costs for the year ended 31 December 2018:
Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2
What is the amount of revenue expenditure incurred during the year?
Rs. ___________
12. A business has incurred following information for the year ended 31 December 2018:
Rs. million
Cost of building – Opening 15.5
Cost of machinery – Opening 10.2
Extension in building – during the year 1.5
Repairs to building – during the year 0.5
Overhaul to machinery that increased production capacity 1.2
What is the cost of building after incorporating the above costs?
Rs. ___________
13. A business has incurred following information for the year ended 31 December 2018:
Rs. million
Cost of building – Opening 15.5
Cost of machinery – Opening 10.2
Extension in building – during the year 1.5
Repairs to building – during the year 0.5
Overhaul to machinery that increased production capacity 1.2
What is the cost of machinery after incorporating the above costs?
Rs. __________

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

14. A business has incurred following costs for the year ended 31 December 2018:
Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2
Profit for the year before incorporating the above adjustments is Rs. 5.6 million.
What will be the profit for year after charging the above repairs?
Rs. ___________
15. Which of the following is not a business transaction?
(a) Incurring interest on a business loan (b) Hiring a new employee
(c) Purchasing office supplies (d) Receiving fees for services
16. Expenditures which provide benefits in future period are called:
(a) Revenue expenditure (b) Outstanding expenditure
(c) Current expenditure (d) Capital expenditure
17. Which one is a capital transaction?
(a) Purchase of goods (b) Payment of wages
(c) Sale of goods (d) Purchase of machinery
18. The capital of a business would change as a result of:
(a) A supplier being paid by cheque
(b) Non-current assets being purchased on cash
(c) Non-current assets being purchased on credit
(d) Wages being paid in cash
19. Cash invested in the business by the owner is called
(a) Current asset (b) Non-current asset
(c) Liabilities (d) Capital
20. Cash or goods taken away by the proprietor is called
(a) Drawings (b) Sales
(c) Charity (d) Expense
21. Which of the following is an element of the statement of financial position?
(a) Income (b) Expense
(c) Gains (d) Liabilities
22. Which from the following is not a current asset?
(a) Equipment (b) Inventory
(c) Cash (d) Trade receivables
23. Which from the following is not a non-current asset?
(a) Intangibles (b) Property
(c) Inventory (d) Equipment

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

24. The IASB’s Conceptual Framework for Financial Reporting defines an asset as:
(a) A resource controlled by an entity which is capable of generating independent cash flows.
(b) A present economic resource controlled by the entity as a result of past events.
(c) A resource owned/controlled by an entity as a result of past events, from which future
economic benefits are expected.
(d) A resource capable of generating income for the entity.
25. The basic accounting equation is given by the formula:
Equity + Long term liabilities = ________________ + Current assets – Current liabilities.
26. Economic resources controlled by a business are called its ________.
27. According to the ________ concept, the business is regarded as separate from the personal affairs
of its owners.
28. A business has capital of Rs.10,000.
Which of the following asset and liability figures could appear in this business’s statement of
financial position?
Assets (Rs.) Liabilities (Rs.)
(a) 6,000 16,000
(b) 6,000 4,000
(c) 10,000 10,000
(d) 14,000 4,000
29. Which of the following is incorrect?
Assets (Rs.) Liabilities (Rs.) Capital (Rs.)
(a) 7,850 1,250 6,600
(b) 8,200 2,800 5,400
(c) 9,550 1,150 8,200
(d) 6,540 1,120 5,420
30. The correct form of accounting equation is
(a) Assets + Liabilities = Equity
(b) Assets – Liabilities = Equity
(c) Assets – Trade payables= Equity
(d) Assets + Receivable = Equity
31. Which of the following is not true:
(a) Revenue – Expenses = profit
(b) Revenue – Profit = Expenses
(c) Sales + Gross Profit = Revenue
(d) Revenue = Profit + Expenses
32. Expenses paid by a business decrease:
(a) Cash (b) Capital
(c) Cash and capital (d) Capital and Accounts payable
33. If during the accounting period the assets increased by Rs.7 million, and the owner's equity
decreased by Rs.3 million, then the liabilities must have;
(a) Increased by Rs.10 million (b) Increased by Rs.4 million
(c) Decreased by Rs.4 million (d) Decreases by Rs.10 million

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

34. At 31 October 2016 Zahid’s trial balance included the following balances:
Rs.
Machinery 12,890
Inventory 5,754
Trade receivables 11,745
Trade payables 7,830
Bank overdraft 1,675
Cash at bank 150
What is the value of Zahid's current assets at 31 October 2016?
(a) Rs. 17,649 (b) Rs. 17,499
(c) Rs. 15,974 (d) Rs. 13,734
35. A business has provided following information in the trial balance;
Rs.
Machinery 150,000
Equipment 120,220
Trade receivables 35,150
Trade payables 40,220
Bank overdraft 18,997
Cash at bank 32,112
What is the amount of non – current assets to be shown in the financial position?
(a) Rs. 337,482 (b) Rs. 270,220
(c) Rs. 356,479 (d) Rs. 318,485
36. Which of the following user groups require the most detailed financial information from financial
statements?
(a) The management (b) Investors and potential investors
(c) Government agencies (d) Employees
37. Which of the following explains why lenders are interested in financial statements of a business?
(a) Lenders need information about financial stability of business
(b) Lenders need information about profitability of business
(c) Lenders want to assess the entity’s capacity to pay interest and repay loan on time
(d) All of the above
38. Who is responsible to prepare financial statements in a company?
(a) Shareholders (b) Managers
(c) Directors (d) All of the above
39. Who is responsible to prepare financial statements of a partnership?
(a) Partner (for public disclosure)
(b) There may be no obligation to prepare financial statements of a partnership (other than
for tax purpose)
(c) Manager
(d) Accountant
40. Which one of the following not an external user of financial statements?
(a) Lender (b) Investor
(c) Customer (d) Management

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

41. Which one of the following not an internal user of financial statements?
(a) Employees (b) Management
(c) Supplier (d) Executive Director
42. The main source(s) of Generally Accepted Accounting Principles (GAAP) is/are:
(a) Company Law
(b) International Finance Reporting Standards (IFRSs)
(c) Tax law
(d) Sales Tax Act
43. An entity (with 31 December year-end) has bought the machine for Rs. 1,000,000 with the down
payment of Rs. 200,000and remaining payment Rs. 800,000 would be made after a month. The
transaction happened on 15 December 2011.
What would be the effect on the of transaction?
(a) Machine increased by Rs.800,000 and liabilities decreased by Rs.800,000
(b) Machine decreased by Rs.800,000 and liabilities increased by Rs.800,000
(c) Machine increased by Rs.1,000,000 and liabilities increased by Rs.800,000 while cash is
decreased by Rs.200,000
(d) Machine increased by Rs.800,000 and liabilities increased by Rs.800,000 while cash is
decreased by Rs.200,000
44. Purchase of machinery for cash
(a) Increases total assets (b) Decreases total assets
(c) Increases assets and liabilities (d) Keeps total assets unchanged
45. The investment of cash into the business results in a/an
(a) Increase in cash and a decrease in capital
(b) Increase in cash and an increase in capital
(c) Decrease in cash and an increase in capital
(d) Increase in fees earned and an increase in capital
46. Services rendered for cash will result in a/an
(a) Increase in cash and a decrease in capital
(b) Increase in cash and an increase in fees earned
(c) Decrease in cash and an increase in fees earned
(d) Increase in fees earned and an decrease in capital
47. One of the local fast-food outlets hired a first-year accounting student to oversee the cash-
collection procedures.
When the firm pays the student his weekly wage, the transaction will
(a) Increase an asset, increase a liability
(b) Decrease an asset, decrease a liability
(c) Increase an asset, increase owner's equity
(d) Decrease an asset, decrease owner's equity

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

48. QK Company records the transaction as a debit to Consultant Expense for Rs. 500,000 and an
equivalent credit to Accounts Payable.
What would be impact on elements of financial statements?
(a) Increase a liability, increase owner’s equity
(b) Decrease an asset, decrease a liability
(c) Increase a liability, decrease owner's equity
(d) Decrease an asset, decrease owner's equity
49. Which of the following will cause owner's equity to increase?
(a) Revenue (b) Expense
(c) Drawings (d) Asset’s depreciation
50. The owner contributes his personal car to the business
(a) Increase an asset, increase a liability
(b) Decrease an asset, decrease a liability
(c) Increase an asset, increase owner's equity
(d) Decrease an asset, decrease owner's equity
51. The company purchases a significant amount of office supplies on credit
(a) Decrease an asset, decrease a liability
(b) Increase an asset, increase owner's equity
(c) Decrease an asset, decrease owner's equity
(d) Increase an asset, increase a liability
52. What double entry would be made to record the purchase of an item of machinery on credit?
(a) Debit machinery, credit cash
(b) Debit machinery, credit accounts payables
(c) Debit purchases, credit trade payables
(d) Debit trade payables, credit machinery
53. What transaction is presented by the entries: debit bank, credit Receivables?
(a) Sale of goods for cash
(b) Purchase of goods for cash
(c) Receipt of cheque from receivables
(d) Payment of cheque to payables
54. A debit entry usually represents increase in:
(a) Assets and Income (b) Liabilities and Income
(c) Assets and Expenses (d) Liabilities and Expenses
55. The double entry to record the withdrawal of cash from a business bank account by the owner is?
(a) Debit: drawings Credit: bank
(b) Debit: drawings Credit: capital
(c) Debit: liability Credit cash
(d) Debit: capital Credit: drawings

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

56. A business sells Rs. 100,000 worth of goods to a customer, the customer pays Rs. 50,000 in cash
immediately and will pay the remaining Rs. 50,000 in 30 days’ time.
What is the double entry to record the purchase in the customer’s accounting records?
(a) Dr. cash Rs. 50,000; Cr. payables Rs. 50,000; Cr. purchases Rs. 50,000
(b) Dr. payables Rs. 50,000; Dr. cash Rs. 50,000 ;Cr. purchases Rs. 100,000
(c) Dr. purchases Rs. 100,000; Cr. payables Rs. 50,000; Cr. cash Rs. 50,000
(d) Debit purchases Rs. 100,000; credit cash Rs. 100,000
57. Mariam has the following transactions:
(i) Receipt of cash from Nauman in respect of an invoice for goods sold three weeks ago
(ii) Receipt of cash from Amjad for cash sales
What are the entries required to record the above transactions?
(a) Dr Cash; Cr Sales
(b) Dr Cash; Cr Sales; Cr Trade Receivables
(c) Dr Sales; Cr Cash
(d) Dr Trade Receivables; Dr Sales; Cr Cash
58. A business has purchased machinery on credit. Which of the accounts mentioned below are
affected by the transactions?
(a) Trade payables (b) Purchases
(c) Machinery (d) Capital
59. Payment of insurance through the bank involves entries in which of the two accounts
(a) Insurance account (Debit) and petty cash account (Credit)
(b) Insurance account (Debit) and bank account (Credit)
(c) Insurance account (Debit) and rent account (Credit)
(d) Insurance account (Debit) and capital account (Credit)
60. X Ltd. purchases a vehicle for Rs. 1.5 million for business use, paying by cheque, what is the
double entry:
(a) Purchases account (debit) and bank account (credit)
(b) Vehicle account (debit) and bank account (credit)
(c) Vehicle account (credit) and bank account (debit)
(d) Debit vehicle account (debit) and petty cash account (credit)
61. The double entry for return of goods purchased from Khan Limited on account is:
(a) Cash (debit) and purchases (credit)
(b) Accounts payable (debit) and purchases (credit)
(c) Accounts payable (debit) and purchases return (credit)
(d) None of the above
62. The double entry for payment of a telephone bill is;
(a) Telephone expense (debit) and cash (credit)
(b) Office equipment (debit) and cash (credit)
(c) Office supplies (debit) and cash (credit)
(d) Cash (debit) and utilities (credit)

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

63. Khalid is a dealer in electronic goods (refrigerator, washing machine, air conditioners, televisions,
etc.). He purchased two air conditioners and installed in his showroom. In the books of Khalid,
the cost two air conditioners will be debited to
(a) Drawing account
(b) Capital Account
(c) Fixed assets (non-current assets)
(d) Purchases account
64. An asset was purchased for Rs. 1,000,000 with the down payment of Rs. 200,000 and bills
accepted for Rs. 800,000/-.
What would be the effect on the total asset and total liabilities in the statement of financial
position?
(a) Assets increased by Rs.800,000 and liabilities decreased by Rs.800,000
(b) Assets decreased by Rs.800,000 and liabilities increased by Rs.800,000
(c) Assets increased by Rs.1,000,000 and liabilities increased by Rs.800,000
(d) Assets increased by Rs.800,000 and liabilities increased by Rs.800,000

65. The double-entry system of bookkeeping normally results in which of the following balances on
the ledger accounts?
Debit balances: Credit balances:
(a) Assets and revenues Liabilities, capital and expenses
(b) Revenues, capital and liabilities Assets and expenses
(c) Assets and expenses Liabilities, capital and revenues
(d) Assets, expenses and capital Liabilities and revenues
66. The bookkeeper of a business makes the following entries in the books of account:
DR Office premises Rs.500,000
CR Payables Rs.500,000
These entries record which of the following business transactions?
A The business has taken out a bank loan to refurbish the head office.
B The business has paid an outstanding invoice for repairs to office premises.
C The business has purchased a non-current asset on credit.
D The business has purchased a non-current asset for cash.
67. Which of the following explains the term 'current asset'?
A An asset currently in use by a business.
B Something a business has or uses, which is likely to be held only for a short time.
C An amount owed to somebody else which is due for repayment soon.
D Money which the business currently has in its bank account.
68. X starts a business with Rs.50,000 cash, buying inventory Rs.10 000 from cash and paying
business expenses of Rs.1,000. Inventory is purchased on credit for Rs.5,000. Following these
transactions, what is the capital of X's business?
A Rs.39,000 B Rs.49,000
C Rs.50,000 D Rs.54,000

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

69. A business receives an accountant's bill for Rs.500. Which of the following statements correctly
shows the effect upon the accounting equation of the business, assuming the bill is unpaid?
A Assets decrease, liabilities increase.
B Capital decreases, liabilities increase.
C Capital increases, liabilities decrease.
D Assets decrease, capital decreases.
70. Which of the following statements concerning a debit entry is correct?
A It records a decrease in assets.
B It records a business expense.
C It records a sale.
D It records an increase in the liabilities of a business.
71. Which of the following statements concerning credit entries is correct?
A Credit entries record decreases in capital or liabilities.
B Credit entries record increases in assets.
C Credit entries record increases in profits.
D Credit entries record increases in expenses.
72. Which of the following correctly records the repayment of a loan of Rs.10,000 plus outstanding
interest Rs.500?
A Assets - Rs.10,500, capital - Rs.10,500
B Assets + Rs.10,500, Liabilities + Rs.10,500
C Assets - Rs.10,500, Liabilities - Rs.10,000, Expenses + Rs.500
D Assets - Rs.10,500, Liabilities - Rs.10,500
73. A trade receivable is?
A A person owing money to the business in return for goods supplied.
B A person to whom the business owes money in return for goods supplied.
C A person to whom the business owes money which was lent to finance the trading
operations of the business.
D A person who has purchased goods from the business.
74. A machine (cost Rs.5,000) is bought on credit from X. Subsequently, Rs.1,000 of the debt to X is
paid by cheque. Which of the following correctly records the transactions?
A Debit X Rs.5,000, credit machine Rs.5,000. Debit bank Rs.1,000, credit X Rs.1,000.
B Debit X Rs.5,000, credit machine Rs.5,000. Debit X Rs.1,000, credit bank Rs.1,000.
C Debit machine Rs.5,000, credit X Rs.5,000. Debit bank Rs.1,000, credit X Rs.1,000.
D Debit machine Rs.5,000, credit X Rs.5,000. Debit X Rs.1,000, credit bank Rs.1,000.

75. The following entries appear in a cash account in March; payments by customers Rs.15,000, rents
received Rs.250, insurance paid Rs.150, drawings Rs.700, capital paid in Rs.2,000. The balance
at 1st March was Rs.2,000 (in hand) what was the closing balance at 31st March?
A Rs.14,400 B Rs.18,400
C Rs.15,800 D Rs.10,400

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

76. Which of the following statements concerning journal entries is correct?

A Journal entries are made for routine transactions and as such need not be authorised.
B Journal entries are used exclusively for the correction of errors.
C The journal is a ledger account in the accounting system of a business.
D All journal entries must have a narrative explanation.
77. Which of the following statements is correct?
A The balance on a bank loan account will appear in the debit column of a trial balance.
B The sales returns account balance will appear in the credit column of a trial balance.
C Loan interest paid will appear in the debit column of a trial balance.
D Purchase returns will appear in the debit column of a trial balance.
78. The following balances have been taken from the trial balance of XYZ. What is the trial balance
total on the debit side? Rent paid Rs.1,800, capital Rs.15,000, purchases Rs.10,000, sales
Rs.12,000, wages Rs.5,000 sundry expenses Rs.1,000, cash Rs.9,200.
A Rs.26,000 B Rs.29,000
C Rs.42,000 D Rs.27,000
79. Which of the following best explains what is meant by 'capital expenditure'?
Capital expenditure is expenditure
A On non-current assets, including repairs and maintenance
B On expensive assets
C Relating to the issue of share capital
D Relating to the acquisition or improvement of non-current assets
80. A sole trader had opening capital of Rs.10,000 and closing capital of Rs.4,500. During the period,
the owner introduced capital of Rs.4,000 and withdrew Rs.8,000 for her own use.
Her profit or loss during the period was
A Rs.9,500 loss B Rs.1,500 loss
C Rs.7,500 profit D Rs.17,500 profit
81. A business has incurred the following expenses. You are to complete the table indicating whether
the expenditure is capital expenditure or revenue expenditure.
Capital Revenue
Expenditure Expenditure
Redecoration of factory
New engine for machinery
Cleaning of factory
Purchase of delivery van
82. Which of the following is the correct format for the accounting equation?
A Assets + Liabilities = Capital
B Assets + Capital = Liabilities
C Assets - Liabilities = Capital
D Liabilities - Capital = Assets

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

83. Which of the following transactions is a capital transaction?

A Depreciation of plant and equipment B Expenditure on rent
C Payment of interest on loan stock D Buying shares as an investment
84. Which of the following transactions is revenue expenditure?
A Expenditure resulting in improvements to property
B Expenditure on heat and light
C Purchasing non-current assets D Repaying a bank overdraft
85. Which of the following will not result in a debit entry in the accounts?
A Increase in expense
B Increase in revenue
C Decrease in liabilities
D Increase in assets
86. Which of the following best describes income?
A. Money withdrawn by a sole trader
B. Moneys earned form the sale of goods and services during the period
C. Interest received during the period from bank deposits
D. Cash received during the year from trade receivables
87. Which of the following statements is correct?
A A credit entry is required to record an increase in expenses
B A credit entry is required to record an increase in income
C A debit entry is required to record an increase in income
D A debit entry is required to record a decrease in expenses
88. Which of the following transactions will result in a reduction in assets
(i) Payments to suppliers (ii) Receipt of cash from customers
(iii) Repayment of a bank loan (iv) Interest payment
A (i) and (iii) only B (i) and (ii) only
C (i), (ii), (iii) and (iv) D (i), (iii) and (iv) only
89. Which of the following changes could NOT occur as a result of an entry in the bookkeeping
records?
A Increase asset and increase liability
B Increase asset and increase capital
C Increase capital and increase liability
D Increase capital and decrease liability
90. What is the double entry to record receipt of cash from an account receivable?
A Debit sales Credit receivables
B Debit receivables Credit cash
C Debit cash Credit sales
D Debit cash Credit receivables

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

91. What does a debit balance usually represent?

A Assets and income B Liabilities and income
C Assets and expenses D Liabilities and expenses
92. What is the double entry required to record the purchase of a motor van on credit?
A Debit: motor expenses Credit: cash
B Debit: motor van Credit: cash
C Debit: motor expenses Credit: account payable
D Debit: motor van Credit: account payable
93. What is the double entry required to record the withdrawal of cash from a business bank account
by the owner?
A Debit: drawings Credit: Bank
B Debit: drawings Credit: capital
C Debit: liability Credit: cash
D Debit: capital Credit: drawings
94. What is the usual double entry to record the sale of inventory for cash?
A Debit: inventory account Credit: sales account
B Debit: cash account Credit: sales account
C Debit: cash account Credit: inventory account
D Debit: cash account Credit: inventory account
95. A debit balance would be expected to arise when the accounts are balanced at the period end on
which of the following accounts?
A Capital B Sales
C Electricity D Loan
96. A credit balance would be expected to arise when the accounts are balanced at the period end on
which of the following accounts?
A Drawings B Telephone
C Receivables D Payables
97. Which of the following is a liability?
A Trade receivables B Inventory
C Bank overdraft D Drawings
98. Which of the following is NOT an asset?
A Owner's capital B Petty cash
C Salesman's motor car D Computer software
99. Which of the following statements describes the accounting equation?
A Net assets = Capital - Profit - Drawings
B Net assets = Capital - Profit + Drawings
C Net assets = Capital + Profit + Drawings
D Net assets = Capital + Profit – Drawings

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

100.
When goods are taken out of the business for personal use by the owner of a business, how will
they be recorded?
A As drawings B As an expense
C As inventory D As a liability
101.
If the owner of a business withdraws cash from the business bank account in order to meet her
own expenses, this is classified as drawings.
What is this an example of?
A Internal control B Personal ledger accounting
C Segregation of duties D The separate entity principle
102.
What is the effect upon net assets when an expense is paid in cash?
A Net assets increase and profit increases
B Net assets decrease and profit decreases
C Net assets remain the same and profit increases
D Net assets remain the same and profit decreases

103.
Which of the following would normally be a debit balance on the ledger account?
(i) Sales revenues (sales)
(ii) Rent
(iii) Drawings
(iv) Capital
A (i) and (iii) B (ii) and (iii)
C (i) and (iv) D (ii)and(iv)
104.
Which of the following statements is true?
A Purchase of a salesman's car is capital expenditure and repairs to a delivery van are
revenue expenditure.
B Repairs to a delivery van are capital expenditure and rent for a factory is revenue
expenditure.
C Purchase of a salesman's car is capital expenditure and purchase of computers for office
use is revenue expenditure.
D Purchase of shelving for the office is capital expenditure and purchase of computers for
office use is revenue expenditure.
105.
Which of the following are examples of capital expenditure?
(i) Purchase of a new computer for office use
(ii) Purchase of a second hand computer for office use
(iii) Repairs to the computer
(iv) Purchase of additional hardware to enhance the computer

14
CHAPTER-1 ACCOUNTING FUNDAMENTALS

A (i) only B (i) and (iv)

C (i), (ii) and (iv) D All four
106.
Which of the following is an example of revenue expenditure?
(i) Purchase of a second hand delivery van
(ii) Purchase of stocks for resale
(iii) Repairs to the delivery van
(iv) Insurance of the delivery van
A (i), (ii) and (iii) B (i); (ii) and (iv)
C (ii), (iii) and (iv) D (iii) and (iv)
107.
Which of the following types of expenditure would be classified as capital expenditure?
A Legal fees associated with the purchase of an office
B Repairs to a delivery van
C Rent of a leasehold property for five years
D Repainting the office premises
108.
Which of the following types of expenditure would generally be classified as revenue
expenditure?
A Payment of tax
B Purchase of a delivery van by a courier service
C Extension to the office building of a toy manufacturer
D Swivel chairs for resale by an office equipment retailer
109.
Which of the following is an asset?
A Bank deposit account B Bank overdraft
C Bank loan D Proprietors' capital
110.
Which of the following is NOT an item of capital expenditure?
A Capital B Purchase of a new motor van
C Purchase of a second hand factory machine
D Replacement of the managing director's Mercedes car
111.
What does a credit entry usually represent?
A Assets and income B Liabilities and income
C Assets and expenses D Liabilities and expenses

15
CHAPTER-1 ACCOUNTING FUNDAMENTALS

112.
What is the double entry to record the purchase of plant and machinery for cash?
A Debit: plant repairs Credit: cash
B Debit: plant and machinery Credit: cash
C Debit: plant repairs Credit: account payable
D Debit: plant and machinery Credit: account payable
113.
What is the double entry to record account by the owner? the introduction of capital into a
business bank
A Debit: drawings Credit: cash
B Debit: cash Credit: drawings
C Debit: Bank Credit: capital
D Debit: capital Credit: cash
114.
A business buys goods on credit from a supplier and will pay one month later. When the payment
is made, what is the double entry required to record this?
A Debit: Cash account Credit: Accounts receivable
B Debit: Cash account Credit: Accounts payable
C Debit: Accounts receivable Credit: Cash account
D Debit: Accounts payable Credit: Cash account
115.
Which of the following a liability?
A Capital introduced B Inventory
C Bank overdraft D Drawings
116.
Which of the following is NOT an asset?
A Computer equipment B Petty cash balance
C Office photocopier D Computer maintenance
117.
Which of the following statements describes the accounting equation?
A Closing net assets = Opening capital - Profit - Drawings
B Closing net assets = Opening capital - Profit + Drawings
C Closing net assets = Opening capital + Profit + Drawings
D Closing net assets = Opening capital + Profit - Drawings
118.
Which of the following are examples of capital expenditure?
(i) Purchase of a new company car for a member of staff
(ii) Purchase of a second-hand company car for a member of staff
(iii) Repairs to company cars
(iv) Cost of insuring company cars

16
CHAPTER-1 ACCOUNTING FUNDAMENTALS

A (i) only B (i) and (ii)

C (i), (ii) and (iv) D All four
119.
Which of the following is an example of revenue expenditure?
(i) Purchase of a colour printer for the office
(ii) Purchase of paper for use in the printer
(iii) Repairs to the printer
(iv) Purchase of ink cartridges for the printer
A (i), (ii) and (iii) B (i), (ii) and (iv)
C (ii), (iii) and (iv) D (iii) and (iv)
120.
Which of the following types of expenditure should be classified as capital expenditure?
A Painting and decoration of the office B Purchase of a delivery van
C Capital introduced D Drawings
121.
What is the effect of payment of cash to an account payable?
A It will increase accounts receivable and reduce cash balance
B It will reduce cash balance and reduce current liabilities
C It will reduce accounts payable and increase purchases
D It will increase accounts payable and reduce cash balance
122.
What the accounting entries are required to record goods returned outwards?
A Credit purchases account and debit customer's account
B Credit returns outwards account and debit customer's account
C Credit returns outwards account and debit payables account
D Credit payables account and debit returns outwards account
123.
Anthony receives goods from Brad on credit terms and Anthony subsequently pays by cheque.
Anthony then discovers that the goods are faulty and cancels the cheque after it is issued but
before it is cashed by Brad.
How should Anthony record the cancellation of the cheque in his books?
A Debit payables Credit returns outwards
B Credit bank Debit payables
C Debit bank Credit returns outwards
D Credit payables Debit returns outwards
124.
What is the double entry required to record a purchase on credit?
A Debit purchases Credit receivables
B Debit inventory Credit payables
C Debit payables Credit purchases
D Debit purchases Credit payables

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CHAPTER-1 ACCOUNTING FUNDAMENTALS

125.
Carter purchased goods from Miller that were identified as faulty. What is the double entry in
Carter's accounting records to account for the return of these goods?
A Debit: purchase returns Credit: accounts payable
B Debit: accounts payable Credit: purchase returns
C Debit: sales returns Credit: accounts payable
D Debit: accounts payable Credit: sales returns

18
CHAPTER-1 ACCOUNTING FUNDAMENTALS

PRACTICE QUESTIONS (MCQs) SOLUTION

1. B Remember you were asked for the main aim.

2. A Shareholders and government are users of accounts.
3. A Correct. This information is a need for the 'lender' group.
B This is an important need, particularly relative to other investment opportunities.
C A primary need.
D A major need for existing (and prospective) investors.
4. C The management accountant would usually prepare the annual budgets. All the other
tasks would be carried out by the financial accountant.
5. B A director is an internal user of financial statements.
6. A Financial statements are not only for internal use.
7. B Book-keeping is only recording transaction, accounting is wider term which includes
summarising, analysing and reporting financial statements.
8. C (a) is book-keeping task
(b) is concerned with management accounting
(d) is part of the process but not main aim of financial accounting
9. D Solving tax disputes is not expected from a book-keeper or accountant. Usually this
service is performed by tax consultants.
10. Rs. 2.7 million = Rs. 1.5+1.2 = Rs. 2.7
11. Rs. 0.5 million Repairs to building
12. Rs. 17 million = Rs. 15.5 + 1.5 = 17
13. Rs. 11.4 million = Rs. 10.2 +1.2 = Rs. 11.4 million
14. Rs. 5.1 million Profit = Rs. 5.6 – 0.5 = Rs. 5.1
15. B Hiring an employee has no financial impact. Salary being paid or becoming due is a
business transaction.
16. D Capital expenditures provide benefits in long term future.
17. D Machinery is asset to be used for long term.
18. D Expense decreases the equity. All other transaction have same effect on asset and
liabilities.
19. D Claims of outsiders on business are liabilities and claim of owner is capital.
20. A Drawings.
21. D Income, expense and gains are recognised in statement of comprehensive income.
22. A Equipment is non-current asset.
23. C Inventory is current asset as it is usually sold in short term.
24. B All other definitions include some part of the correct answer but are incomplete.
25. Non-current assets Non-current assets
26. Assets Asset is present economic resource controlled by an entity as a result of past events.
27. Business Entity A business and its owner are differentiated in accounting.

19
CHAPTER-1 ACCOUNTING FUNDAMENTALS

28. D Capital = Assets – liabilities

10,000 = 14,000 – 4,000
29. C Rs. 9,550 – 1,150 = 8,400
30. B Equity = Assets – Liabilities
31. C Sales + Gross profit ≠ Revenue
32. C Cash and Capital both would decrease.
33. A Rs. 7 million + Rs. 3 million = Rs. 10 million
34. A 5,754 + 11,745 + 150 = Rs. 17,649
35. B 150,000 + 120,220 = Rs. 270,220
36. B The management also has access to even more detailed information from internal
sources. Government agencies and employees are interested in selective relevant
information and not detailed one.
37. C Interested in loan repayments and ability to pay interest.
38. C The directors
39. B The public disclosure of partnership accounts is not required.
40. D Management is internal user.
41. C Supplier is external user.
42. A&B Company Law and IFRSs
43. C Machine increased by Rs. 1,000,000 - Debit
Cash decreased by Rs. 200,000 - Credit
Liabilities increased by Rs. 800,000 - Credit
44. D Unchanged, one asset increased and another decreased by same amount.
45. B Increase in cash and an increase in capital
46. B Increase in cash and an increase in income
47. D Decrease in an asset (Cash)
Decrease in equity (due to wages expense)
48. C Increase in liability (Accounts payable)
Decrease in equity (due to consultant expense)
49. A Revenue (income) increases the equity.
50. C Increase an asset (Car)
Increase in equity (capital)
51. D Increase in asset (office supplies)
Increase in liability (payable)
52. B Machinery (asset increased) debit
Accounts payable (liability increased) credit
53. C Receipt of cheque from receivables
54. C Increase in asset and expenses is debit.
55. A Drawings Debit (Decrease in equity / increase in drawings)
Bank Credit (Decrease in asset)

20
CHAPTER-1 ACCOUNTING FUNDAMENTALS

56. C Purchases (Increase in expense) Debit Rs. 100,000

Cash (Decrease in asset) Credit Rs. 50,000
Payables (Increase in liability) Rs. 50,000
57. B Debit Cash (asset increased)
Credit Sales (income increased)
Credit Trade receivable (asset decreased)
58. C Machinery and payable for machinery. Trade payables are related to purchases of
inventory only.
59. B Insurance (expense increased) Debit
Bank (asset decreased) Credit
60. B Vehicle (asset increased) Debit
Bank (asset decreased) Credit
61. C Account payable (liability decreased) Debit
Purchase return (expense decreased) Credit
62. A Telephone charges (expense increased) Debit
Cash (asset decreased) Credit
63. C Non-current assets as used in showroom for long term use. Inventory is for resale.
64. D Assets increased 1,000,000 – 200,000 = 800,000
Liabilities increased 800,000
65. C
66. C Office premises are a non-current asset. Because this is a credit transaction the amount
due will be posted to payables (ie the supplier).
A the entries for this would be DR Bank, CR Loan.
B the entries for this would be DR Payables, CR Bank.
D the entries for this would be DR Office premises, CR Bank.
67. B Current assets tend to change their form rapidly eg inventory is sold, becoming a
receivable which is then collected, becoming cash.
A business assets currently in use could be 'non-current' or 'current' assets.
C this is a current liability.
D this is an example of a current asset.
68. B Rs.50,000 - Rs.10,000 cash + Rs.10,000 inventory - Rs.1,000 expenses + Rs.5,000
stock - Rs.5,000 current liability = Rs.49,000.
A you have deducted Rs.10,000 for the cash payment for inventory; but
remember the inventory then becomes an asset of the business, so the purchase
of inventory for cash has no effect on the initial capital.
C you have correctly identified that the purchase of inventory on credit and for
cash have no effect on capital, but the payment of expenses reduces profits and
ultimately capital.
D you have correctly calculated the effects of the cash inventory purchase and the
payment of the expenses. However the purchase of the inventory on credit
increases current assets by Rs.5,000 and also increases current liabilities by
Rs.5,000.

21
CHAPTER-1 ACCOUNTING FUNDAMENTALS

69. B The accountant's fees are a business expense which reduces profit and hence reduces
capital, liabilities increase as a result of the unpaid invoice from the accountant.
A as the bill has not been paid, the asset of cash will be unchanged.
C the bill is a business expense, so capital cannot increase. Liabilities will only
decrease when the bill is paid.
D assets will not decrease until the bill is paid.
70. B All the other options are credit entries.
71. C All the other entries are debit entries.
72. C Expenses increase, reducing profits and capital.
A the repayment will reduce assets but the repayment of the loan Rs.10,000
reduces a liability not capital.
B the payment of the interest represents a business expense reducing profits and
thus capital.
D assets decrease by Rs.10,500, liabilities by Rs.10,000 and capital by Rs.500.
73. A The account receivable remains until settled in full by the customer.
B this statement describes a trade payable.
C this statement describes a loan payable.
D this statement is only true if the person who purchased the goods has not yet
paid for them.
74. D Assets and liabilities have been increased and the bank has been reduced by the amount
of the payment.
A the initial entry recording the purchase has reduced assets and payables. The
payment of Rs.1,000 has been recorded as if it were a receipt from X Inc.
B the initial entry recording the purchase has reduced assets and payables. The
payment of Rs.1,000 has been correctly recorded.
C the initial purchase has been correctly recorded, but the payment has been
treated as if it were a receipt from X.
75. B Balance b/f Rs.2,000 + Rs.15,000 + Rs.250 + Rs.2,000 - Rs.150 - Rs.700 = Rs.18,400.
A you have entered the opening balance as a credit, a balance 'in hand' refers to a
debit balance.
C you have deducted the capital received and added the drawings. The correct
entries are to add capital received and deduct drawings.
D you have treated the capital paid in as a credit entry in the cash account. The
correct entry is debit cash, credit capital and you have also reversed the
opening balance.
76. D Narrative explanation is required so that the purpose and authority of each entry is
clear. Auditors will require this.
A although some journal entries are routine, others may relate to important
accounting adjustments, and so all journals should be authorised.
B journal entries can be made for other reasons, eg to transfer from one account
to another.
C the journal is one of the prime entry records from which ledgers are posted.

22
CHAPTER-1 ACCOUNTING FUNDAMENTALS

77. C Loan interest is an expense, all expense balances are debits.

A this is a liability balance, which is a credit.
B sales returns are debits, so the debit balance on the sales returns account will
appear in the debit column.
D purchase returns will be credited to the purchase returns account, any balance
will then be in the credit column.
78. D
Dr Cr
Rs. Rs.
Rent 1,800
Capital 15,000
Purchases 10,000
Sales 12,000
Wages 5,000
Sundry expenses 1,000
Cash 9,200 _____
27,000 27,000
79. D Improvements are capital expenditure, repairs and maintenance are not.
80. B
Rs.
Opening capital 10,000
Capital introduced 4,000
Drawings (8,000)
Loss (bal fig) (1,500)
Closing capital 4,500
Assets less liabilities = opening capital plus profits less drawings. Assets less liabilities
less opening capital plus drawings = profit
81. C Capital Revenue
expenditure expenditure
Redecoration of factory *
New engine for machinery *
Cleaning of factory *
Purchase of delivery van *
82. C The accounting equation is Assets = Capital + Liabilities. Rearranged, this becomes
Assets -Liabilities = Capital
83. D Only D consists solely of capital expenditure. Items A and B are revenue items
reflected in the income statement. C is a combination of both capital (improvements)
are revenue (maintenance).
84. B Items A, C and D are all capital items, reflected in the statement of financial position.
85. B An increase in revenue is a credit entry.
86. B The best description is monies earned from the sale of goods and services during the
period. A is drawings, C is other income and D is cash received.
87. B A credit entry records an increase in income. A debit entry records an increase in
expenses.

23
CHAPTER-1 ACCOUNTING FUNDAMENTALS

88. D All these will result in a decrease in cash and so a reduction in the bank asset. The
receipt of cash from customers will be neutral as bank is increased and receivables
decreased by the same amount.
89. C An increase in capital and an increase in liability both require credit entries in the
appropriate accounts. Debits and credits must match each other.
90. D Receipts in the cash book are always debits. As a receivable account exists from selling
on credit, the receivable is credited to complete the double entry.
Rs.
Closing capital 4,500
Opening capital (10,000)
Decrease in net assets (5,500)
Drawings: profit taken out 8,000
Capital introduced (4,000)
Loss for the year (1,500)
91. C Payments appear on the credit side of the cash book, so the double entry representing
the expense settled or asset purchased is a debit.
92. D The motor van account is used to record this capital expenditure. The supplier is an
account payable to the organisation until the amount outstanding is paid.
93. A When the cash or bank account is reduced, it is credited in the accounts of the business.
Drawings are, therefore, debited.
94. B The inventory account only alters at the end of the year when an inventory take occurs
and inventory is valued. When inventory is bought, is the cost is debited to the
purchases account. When it is sold, the sale is credited to the sales account. Receipts
are recorded on the debit side of the cash book.
95. C Electricity is an expense. Assets and expenses accounts have debit balances. The
remainder are examples of income and liabilities which have credit balances.
96. D Trade payables are short-term liabilities. All liabilities have credit balances. The other
items are drawings, an expense and an asset, all of which have debit balances.
97. C A bank overdraft is a liability as technically it is repayable whenever the bank demands.
Accounts receivables and inventories are assets, and drawings represent a withdrawal of capital.
98. A Petty cash, the salesman's motor car and computer software are all examples of assets.
The owner is a liability representing the amount the business owes its owner.
99. D This is a variation on the conventional accounting equation. Opening capital plus profit
less drawings is the closing capital after a period of trading.
100. A Drawings represent cash and goods withdrawn. Withdrawals by an owner are not
classified as an expense, to prevent manipulation of profit by the owner. Inventory
represents goods held for resale. A liability is an amount owed by the business.
101. D The assets of the business are separate from those of the owner.
102. B Cash, an asset, decreases. Expenses are charged against income, thus reducing profit.
103. B Income and capital have credit balances. Expenses and drawings, together with assets,
have debit balances.
104. A Anything which represents a purchase of a non-current asset or which significantly
improves a non-current asset is an example of capital expenditure. Day-to-day
expenditure, which will be used up within a year, is revenue expenditure.

24
CHAPTER-1 ACCOUNTING FUNDAMENTALS

105. C (i) , (ii) and (iv) will all last for a period longer than a year and represent investment by
the business in non-current assets and capital expenditure. Repairs simply keep the
computer going and are revenue expenditure.
106. C (ii) , (iii) and (iv) are running expenses needed to operate the business day to day and
are revenue expenditure. The purchase of a delivery van represents capital expenditure
on a non-current asset to be used in the organisation for some years
107. A The cost of a non-current asset includes expenses required in its purchase, such as legal
costs, installation costs and so on. All of these are capital expenditure. Rent and repairs
are revenue expenditure on day-to-day business expenses. Introducing capital is not
expenditure.
108. D The chairs are inventory and will not remain in the business for very long. The delivery
van and office building are long lasting and capital expenditure. Tax is an amount owed
to a government body and does not represent day-to-day or long-term expenditure for
the business itself. It is classed as an appropriation of profit.
109. A The bank deposit account is an asset. The bank overdraft and lank loan represent
examples of liabilities. The capital account represents an amount due by the business to
the proprietor, although it is not regarded as a business liability.
110. A Capital is a liability and not expenditure.
111. B Assets and expenses are debit items. Income and liabilities are credit items.
112. B This double entry correctly records an asset purchased and reduction of the cash
account.
113. C This double entry correctly records an increase in the Bank account and an increase in
the ownership interest.
114. D This double entry correctly records a reduction in the liability to the supplier and a
reduction in the cash account.
115. C Drawing and capital introduced represent transactions between the proprietor and the
business. Inventory is an asset.
116. D Computer equipment, petty cash balance and office photocopier are examples of assets.
Computer maintenance is an expense.
117. D Opening capital + profit - drawings = Closing capital. The accounting equation states
that proprietor's capital = net assets. Therefore, closing net assets = closing capital.
118. B The purchase of a car for the business, whether it is new or second-hand, is an example
of capital expenditure. Repairs and insurances costs are examples of expenses.
119. C The purchase of the printer is an example of capital expenditure. All other items are
examples of revenue expenditure.
120. B The purchase of a delivery van represents capital expenditure as the van would be
expected to be used in the business for a number of years. Painting and decoration of
the office is an example of revenue expenditure.

Cash at bank account

Rs. Rs.
Cash sales 900 Balance b/d 500
Balance c/d 400
900 900
Balance b/d 400

25
CHAPTER-1 ACCOUNTING FUNDAMENTALS

121. B Paying an account payable reduces cash by the amount of the payment and also reduces
the total amounts owed to accounts payable, a current liability.
122. C Returns outwards are purchase returns to suppliers. They can be thought of as 'negative
purchases' or 'negative expense', so we credit a returns outwards account. The returns
reduce the amount owed to payables, so we debit the payables account (reducing a
liability = debit entry)
123. C The series of transactions might be recorded as follows.
Original purchase
Debit Purchases and Credit Brad - account payable On issuing the cheque
Debit Brad - account payable and Credit Bank (cash book)
On cancellation of the cheque
Debit Bank (cash book) and Credit Returns outwards
124. D The inventory account is only used on the valuation of inventory at the end of an
accounting period.
Purchases are recorded as a debit, and purchases on credit create accounts payable.
125. B Purchase, returns represent the cost of goods returned to suppliers. Accounts payable is
debited (the liability is reduced) to reflect the fact that those goods should not be paid
for now that they have been returned.

26
CHAPTER-2 BOOKS OF PRIME ENTRY

MULTIPLE CHOICE QUESTIONS (MCQs)

01. Which of the following is not a book of prime entry?

(a) Sales day book (b) Petty cash book
(c) Journal (d) Trial balance
02. The sales day book is a book of prime entry:
(a) For recording all sales (b) For recording credit sales
(c) In which cash sales are first recorded
(d) In which credit sales are first recorded
03. The purchases day book is a book of prime entry:
(a) For recording all purchases
(b) For recording credit purchases
(c) In which cash purchases are first recorded
(d) In which credit purchases are first recorded
04. In which book of prime entry credit notes issued to customers are initially recorded?
(a) Sales Journal (b) Sales Return Journal
(c) Purchase Journal (d) Purchase return Journal
05. In which book of prime entry debit notes issued are initially recorded?
(a) Sales Journal (b) Sales Return Journal
(c) Purchase Journal (d) Purchase return Journal
06. In which book of prime entry credit notes received are initially recorded?
(a) Sales Journal (b) Sales Return Journal
(c) Purchase Journal (d) Purchase return Journal
07. Which of the following transactions shall be recorded in sales day book of an Electronics Trader?
(a) Cash sales of office furniture (b) Cash sales of electronics items
(c) Credit sales of office furniture (d) Credit sales of electronics items
08. Which of the following transactions shall be recorded in cash book of an Electronics Trader?
(a) Cash sales of office furniture (b) Cash sales of electronics items
(c) Credit sales of office furniture (d) Credit sales of electronics items
09. Which of the following transactions must be recorded in general journal of an Electronics Trader?
(a) Cash sales of office furniture (b) Cash sales of electronics items
(c) Credit sales of office furniture (d) Credit sales of electronics items
10. A business has made following sales:
• Credit sales Rs. 1,500
• Cash sales Rs. 1,200
Which statement is correct for recording of sales transactions?
(a) Sales day book Rs. 1,500, Cash receipt book Rs. 1,200
(b) Cash receipt book Rs. 2,700
(c) Sales day book Rs. 1,500, Petty cash book Rs. 1,200
(d) Sales day book Rs. 2,700

27
CHAPTER-2 BOOKS OF PRIME ENTRY

11. Usuf made following transactions during a certain month:

• Credit sales 15,000 out of which Rs. 3,000 were returned by the customers subsequently
• Cash sales amounting Rs. 8,000
• Cash received from customers Rs. 4,000
What is the total of sales day book for the month?
(a) Rs. 15,000 (b) Rs. 12,000
(c) Rs. 23,000 (d) Rs. 20,000
12. In which of the following book returns inwards are recorded?
(a) Sales returns book (b) Purchase returns books
(c) Cash receipts book (d) Cash payment book
13. Hussain runs a business of purchase and sales of furniture. During a particular period, Hussain
made following transactions:
• Sales to A Rs. 12,000
• Sales to B Rs. 10,000 list price and trade discount 2%
• Sales returns from A Rs. 3,000
What is the total of sales day book for the period?
(a) Rs. 22,000 (b) Rs. 21,800
(c) Rs. 19,000 (d) Rs. 18,800
14. A Credit Note is issued to a:
(a) Customer for return of goods (b) Supplier for return of goods
(c) Customer to accept the goods (d) Supplier to accept the goods
15. In which book of prime entry does debit notes received worth Rs.100,000 would be recorded?
(a) Accounts payable book (b) Purchase journal
(c) Return inwards journal (d) Returns outward journal
16. In which book of prime entry does sales on account of Rs. 700,000 would be recorded?
(a) Sales journal (b) Accounts receivable journal
(c) Cash book (d) Return inwards journal
17. Which of the following documents serves as a notice to the customer to inform them that the
goods have been dispatched?
(a) Quotation (b) Sales order / order confirmation
(c) Goods dispatched note (d) Delivery note
18. On 20th July, goods with list price of Rs. 80,000 were sold. The customer has been offered 2%
trade discount and 3% (of list price) further discount if he pays within 15 days. It is reasonably
expected that customer will pay within 15 days. At which amount sales should be recognised on
20th July?
(a) Rs. 80,000 (b) Rs. 78,400
(c) Rs. 76,048 (d) Rs. 76,000

28
CHAPTER-2 BOOKS OF PRIME ENTRY

19. What is correct double entry for dishonour of cheque that was given by a customer?
(a) DEBIT Sales return; CREDIT Receivables
(b) DEBIT Bank; CREDIT Receivables
(c) DEBIT Receivables; CREDIT Bank
(d) DEBIT Sales return; CREDIT Bank
20. In which book of prime entry the transaction of cheque dishonoured is recorded?
(a) Sales day book (b) Petty cash book
(c) Cash book (d) General journal
21. In the books of Faizan; Sarmad has a debit balance of Rs. 3,000 and credit balance of Rs. 1,500.
Sarmad has requested to adjust debit balance with credit.
What is the contra entry to be passed to adjust the balance?
(a) Dr Accounts receivable a/c Rs. 3,000 Cr Accounts payable a/c Rs. 3,000
(b) Dr Accounts payable a/c Rs. 3,000 Cr Accounts receivable a/c Rs. 3,000
(c) Dr Accounts receivable a/c Rs. 1,500 Cr Accounts payable a/c Rs. 1,500
(d) Dr Accounts payable a/c Rs. 1,500Cr Accounts receivable a/c Rs. 1,500
22. Which of the following document is prepared by the business’s store keeper on receiving goods
in store?
(a) Goods dispatched note (b) Goods received note
(c) Remittance advice (d) Debit note
23. Gross amount of purchases must be equal to:
(a) Total of all invoices issued to customers
(b) Total of all credit notes issued to customers
(c) Total of all debit notes sent by customers
(d) Total of all invoices received from suppliers
24. A debit note is issued to a:
(a) Customer for return of goods
(b) Supplier for return of goods
(c) Customer to accept the goods
(d) Supplier to accept the goods
25. In which book of prime entry does purchases on account of Rs. 500,000 would be recorded?
(a) Cash book (b) Accounts payable book
(c) Purchase day book (d) None of the above
26. In which book of prime entry does credit note received worth Rs.150,000 would be recorded?
(a) Accounts receivable book (b) Sales day book
(c) Return inwards journal (d) Returns outward journal
27. Which of the following document is prepared when an item is needed in the business but it is not
available in stock?
(a) Purchase requisition (b) Quotation and approval
(c) Purchase order (d) Goods received note

29
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28. Which of the following statements is correct with reference to settlement discount received from
suppliers?
(a) It is recognised as reduction of revenue.
(b) It is recognised and presented as other income
(c) It is recognised as reduction in cost of purchases
(d) It is recognised as operating expenses of the business
29. In which book of prime entry, entry for contra settlement is initially recorded?
(a) Purchase day book
(b) Purchase day book and sales day book
(c) Cash Book
(d) General Journal
30. Cash discount received is recorded:
(a) As deduction in purchase day book
(b) In purchase return journal
(c) As deduction from cost of purchase in general journal
(d) None of above
31. Samreen has made following transactions during current week:
• Sales Rs. 15,000 out of which Rs. 4,000 are on cash
• A customer paid 800 after availing discount of 2%
• Rent paid Rs. 100
What is the total of receipt column of cash book?
(a) Rs. 15,800 (b) Rs. 4,800
(c) Rs. 4,700 (d) Rs. 15,700
32. Sufyan has purchased certain goods on credit from Aliyan. List price of the goods was Rs.
10,000. Trade discount of 2% was allowed. Aliyan also offered a discount of 1% on amount due
if the amount due is paid within 10 days. Sufyan availed the discount.
For recording the above transactions by Sufyan; which books of prime entry are involved and at
what amount?
(a) Purchase day book Rs. 10,000, Cash book discount column Rs. 298 and payment column
Rs. 9,702
(b) Purchase day book Rs. 9,702, Cash book Rs. 9,702
(c) Purchase day book Rs. 9,800, Cash book discount column Rs. 98 and payment column
Rs. 9,702
(d) Sales day book Rs. 9,800, Cash book discount column Rs. 98 and receipt column Rs.
9,702
33. A businessman maintains petty cash book under imprest system. The imprest amount is Rs. 500.
During a month, payments totalling Rs. 300 were made.
How much amount will be reimbursed at the end of the month to restore the petty cash to the
imprest amount?
(a) Rs. 200 (c) Rs. 500
(b) Rs. 300 (d) Rs. 800

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34. Which of the following statement describes the nature of weekly imprest system for petty cash?
(a) Maximum amount of weekly petty cash expense is defined
(b) For maintaining a fixed float; an amount equal to weekly expenses incurred is reimbursed
(c) Proper authorization is required for all expense
(d) Business transfers an equal amount to petty cash balance at regular intervals
35. A business made following transactions during a certain period:
Credit purchases Rs. 12,000; out of which Rs. 2,000 were rejected and subsequently returned to
the supplier. Supplier allowed a discount of 1% on settlement of amount.
What is the net amount of cash paid to the supplier and amount of net purchases to be reported in
financial statements?
(a) Rs. 10,000 amount paid and Rs. 10,000 net purchases.
(b) Rs. 10,000 amount paid and Rs. 10,000 net purchases
(c) Rs. 9,900 amount paid and Rs. 9,900 net purchases
(d) Rs. 9,900 amount paid and Rs. 11,880 net purchases
36. Sadia maintains an imprest system of petty cash. Float is maintained at Rs. 1,000. During
February 2019 Sadia has made payments of Rs. 650. At end of February it is decided to increase
float by Rs. 100.
What amount is needed to achieve the required float?
Rs. ___________
37. In which book of prime entry does receipt from a debtor worth Rs.200,000 may be recorded?
(a) Petty cash book (b) Cash book
(c) Receivable ledger (d) Debtor book
38. In which book of prime entry does payment to supplier worth Rs.300,000 may be recorded?
(a) Petty cash book (b) Accounts payable journal
(c) Cash payment journal / Cash book (d) None of the above
39. In which book of prime entry does payment of entertainment expense worth Rs.150 is usually
recorded?
(a) Petty cash book (b) Cash payment journal
(c) Bank book (d) None of the above
40. In which book of prime entry does cash purchases worth Rs. 500,000 would be recorded?
(a) Petty cash book (b) Cash book
(c) Purchase day book (d) Accounts payable book
41. In which book of prime entry does cash sales worth Rs. 250,000 would be recorded?
(a) Petty cash book (b) Cash book
(c) Sales day book (d) Accounts receivable book
42. Which of the following items will be debited to payable account in journal entry?
(a) Payment to credit supplier (b) Cash purchases
(c) Refunds from a credit supplier (d) Balance due
43. Any transaction, which cannot be recorded in any other book of prime entry, is recorded in?
(a) Cash book (b) Petty cash book
(c) General journal (d) Day books

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CHAPTER-2 BOOKS OF PRIME ENTRY

44. In which book of prime entry correction of errors would usually be recorded?
(a) Cash book (b) Petty cash book
(c) Error correction book (d) General Journal
45. In which book of prime entry, year-end adjustments would usually be recorded?
(a) Cash book (b) Petty cash book
(c) Error correction book (d) General Journal
46. A voucher is:
(a) An internal document of a business entity
(b) An external document received by a business entity
(c) A book of prime entry
(d) None of above
47. Vouchers may be used:
(a) In replacement of books of prime entry
(b) In support of books of prime entry
(c) Both of above
(d) None of above
48. Which voucher is used to for payment of cheques?
(a) Journal voucher (b) Receipt voucher
(c) Payment voucher (d) None of above
49. Which voucher is used to for receipt of cheques/cash?
(a) Journal voucher (b) Receipt voucher
(c) Payment voucher (d) None of above
50. Which voucher is prepared for non-cash transactions?
(a) Journal voucher (b) Receipt voucher
(c) Payment voucher (d) None of above
51. Which of the following would be recorded in the purchase day book?
A Discounts received B Purchase invoices
C Trade discounts D Credit notes received
52. Which ONE of the following is not a book of prime entry?
A The petty cash book B The sales returns day book
C The sales ledger D The cash book
53. A book of prime entry is one in which
A The rules of double-entry bookkeeping do not apply
B Ledger accounts are maintained
C Transactions are entered prior to being recorded in the ledger account
D Subsidiary accounts are kept

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54. Which TWO of the following are not books of prime entry?
A Journal
B The sales returns day book
C The purchase ledger
D The cash book
E The petty cash book
F Sales ledger
G Purchases Day book
H Sales day book
55. A business has opening inventory of Rs.12,000 and closing inventory of Rs.18,000.
Purchase returns were Rs.5,000. The cost of goods sold was Rs.111,000.
Purchases were
A Rs.100,000 B Rs.110,000
C Rs.116,000 D Rs.122,000
56. A purchase invoice shows 10 items priced at Rs.120 less trade discount 20%. A cash
discount of 2.5% is allowed if settlement is made within the allowed credit period. How
much will be paid if the cash discount applies?
A Rs.1,170 B Rs.1,200
C Rs.936 D Rs.960
57. Discounts received Rs.800 were treated as discounts allowed when a traders' income
statement was prepared. Therefore?
A Profits were understated by Rs.800
B Profits were overstated by Rs.800
C Profits were understated by Rs.1,600
D Profits were overstated by Rs.1,600
58. What is the correct treatment of discounts allowed and discounts received?
Discounts allowed Discounts Received
A Debit payables Credit receivables
B Credit payables Credit receivables
C Debit receivables Credit payables
D Credit receivables Debit payables

59. You are given the following information:

Receivables at 1 January 20X3 Rs. 10,000
Receivables at 31 December 20X3 Rs.9,000
Total receipts during 20X3 (including cash sales of Rs.5,000) Rs.85,000
Sales on credit during 20X3 amount to
A Rs.81,000 B Rs.86,000
C Rs.79,000 D Rs.84,000

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CHAPTER-2 BOOKS OF PRIME ENTRY

60. A supplier sends you a statement showing a balance outstanding of Rs.14,350. Your own
records show a balance outstanding of Rs.14,500.
The reason for this difference could be that?
A The supplier sent an invoice for Rs.150 which you have not yet received
B The supplier has allowed you Rs.150 cash discount which you had omitted to
enter in your ledgers
C You have paid the supplier Rs.150 which he has not yet accounted for
D You have returned goods worth Rs.150 which the supplier has not yet accounted
for
61. The receivables account at 1 May had balances of Rs.32,750 debit and Rs.1.275 credit.
During May, sales of Rs.125,000 were made on credit. Receipts from receivables
amounted to Rs.122,500 and cash discounts of Rs.550 were allowed. Refunds of Rs.1,300
were made to customers. The closing balances at 31 May could be
A Rs.35,175 debit and Rs.3,000 credit
B Rs.35,675 debit and Rs.2,500 credit
C Rs.36,725 debit and Rs.2,000 credit
D Rs.36,725 debit and Rs.1,000 credit
62. A business had a balance at the bank of Rs.2,500 at the start of the month. During the
following month, it paid for materials invoiced at Rs.1,000 less trade discount of 20%
and cash discount of 10%. It received a cheque from a receivable in respect of an invoice
for Rs.200, subject to cash discount of 5%.
The balance at the bank at the end of the month was
A Rs.1,970 B Rs.1,980
C Rs.1,990 D Rs.2,000
63. A receivables account had a closing balance of Rs.8,500. It contained a contra to the
payables account of Rs.400, but this had been entered on the wrong side of the account.
The correct balance on the control account should be
A Rs.7,700 debit B Rs.8,100 debit
C Rs.8,400 debit D Rs.8,900 debit

64. Your payables account has a balance at 1 October 20X8 of Rs.34,500 credit. During
October, credit purchases were Rs.78,400, cash purchases were Rs.2,400 and payments
made to suppliers, excluding cash purchases, and after deducting cash discounts of
Rs.1,200, were Rs.68,900. Purchase returns were Rs.4,700.
The closing balance was:
A Rs.38,100 B Rs.40,500
C Rs.47,500 D Rs.49,900

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CHAPTER-2 BOOKS OF PRIME ENTRY

65. When reconciling Receivable and payable accounts to lists of balances, a casting error in
a daybook will require adjustments:
A To both the accounts and the list of balances
B To neither the accounts nor the list of balances
C To the accounts, but not the list of balances
D To the list of balances, but not the accounts

66. On 1 January 20X1, the balance on the receivables account was Rs.2,050, by 31
December it was Rs.5,000. Sales had been Rs.100,000, sales returns Rs.10,000 and cash
receipts Rs.85,500.
What was the amount settled by receivable and payable account contras?
A Rs.1,550 B Rs.3,100
C Rs.3,600 D Rs.11,550
67. Who should NOT prepare a payables account?
A Accounts supervisor B Purchases day book clerk
C Sales day book clerk D Assistant accountant
68. At 1 March, the cash book showed a balance of Rs.850. Transactions during March were:
Rs.
Cash sales 230
Credit sales 1,950
Cheques written 1,200
Remittance from receivables 1,500
What was the cash book balance at 31 March?
A Rs.1,380 B Rs.1,830
C Rs.3,100 D Rs.3,330

69. A cheque appears in the bank statement the same day as it appears in the cash book. Why
would this occur?
A It has been posted to the payee
B It has been used to withdraw cash for wages
C It has passed through the bank clearing system
D It represents payment to a shopkeeper in a foreign country
70. Which transaction is recorded in the bank before the business cash book?
A Cashed cheques B Payment of a credit card bill
C Bank charges D A cash sale

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CHAPTER-2 BOOKS OF PRIME ENTRY

71. Which of the following would not appear in a bank statement?

A A credit card purchase
B A debit card purchase
C A BACS transfer to pay wages
D An EFTPOS transfer for an internet sale

72. The receivables' ledger account at 1 May had a balance of Rs.32,750. During May, sales
of Rs.125,000 were made on credit. Receipts from receivables amounted to Rs.122,500
and there were contras with the payables' ledger account of Rs.550 were allowed.
Refunds of Rs.1,300 were made to customers.
What is the closing balance at 31 May on the receivables' ledger account?
A Rs.33,400 debit
B Rs.34,500 debit
C Rs.36,000 debit
D Rs.37,100 debit

73. The balance on a business's receivables' ledger account was Rs.1,586. It was then
discovered that the sales day book for the period had been undercast by Rs.100 and the
cash book receipts had been overcast by Rs.100.
What is the correct balance on the receivables' ledger account?
A Rs.1,386 B Rs.1,586
C Rs.1,686 D Rs.1,786

74. Receivables at 1 April were Rs.8,450. Transactions during the month were credit sales of
Rs.19,600, cheques received from receivables of Rs.22,430, sales returns of Rs.1,000 and
a contra with a credit supplier of Rs.540.
What was the balance on the receivables' account at 30 April?
A Rs.4,080 B Rs.4,620
C Rs.6,080 D Rs.12,820
75. Lancelot's receivables, which were Rs.500 on 1 July, rose to Rs.700 at the end of July.
During the month he issued cash sales receipts of Rs.280, credit sales invoices of
Rs.1,900 and credit notes of Rs.170.
How much cash was received from accounts receivable during July?
A Rs.1,250 B Rs.1,530
C Rs.1,810 D Rs.1,870

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CHAPTER-2 BOOKS OF PRIME ENTRY

76. The following information is available about a business:

Opening receivables Rs.54,550
Closing receivables Rs.52,560
Receipts from customers in the period Rs.98,460
Irrecoverable receivables written off during the period Rs.2,000
Of the receipts Rs.16,838 represented cash sales. What is the amount of sales on credit
for the period?
A Rs.85,612 B Rs.79,632
C Rs.96,470 D Rs.81,632

77. The balance on the payables' ledger account was Rs.3,446. It was then discovered that the
total from the cash book payments during the period had been posted as Rs.14,576
instead of Rs.14,756. It was also discovered that a contra with the receivables' ledger
account of Rs.392 had not been posted at all.
What is the correct balance on the payables' ledger account?
A Rs.2,874 B Rs.3,234
C Rs.3,658 D Rs.4,018

78. The following information is available about a business:

Opening payables Rs.23,450
Closing payables Rs.25,600
Payments for purchases in the period Rs.87,350
Of the payments Rs.17,850 represented cash purchases. What is the value of purchases
made on credit for the period?
A Rs.85,200 B Rs.67,350
C Rs.89,500 D Rs.71,650
79. ANO issued a supplier statement to BNO showing a balance outstanding of Rs.14,350.
BNO's records show a balance outstanding of Rs.14,500.
From BNO's perspective, which of the following statements could be a reason that
explains this difference?
A The supplier sent an invoice for Rs.150 which you have not yet received
B The supplier has allowed you Rs.150 cash discount which you had omitted to
enter in your ledgers
C You have paid the supplier Rs.150 which he has not yet accounted for
D You have returned goods worth Rs.150 which the supplier has not yet accounted
for

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CHAPTER-2 BOOKS OF PRIME ENTRY

80. A business had a trade payables' ledger account balance of Rs.32,750 at 1 May 20X7.
During May 20X7, purchases of Rs.125,000 were made on credit, payments made to
suppliers amounted to Rs.122,500 and contras with the trade receivables' ledger account
amounted to Rs.1,100. During May 20X7, goods which had cost Rs.1,300 were returned
to suppliers, for which credit notes were issued.
What was the balance on the trade payables' ledger account at 31 May 20X7?
A Rs.35,250 B Rs.35,450
C Rs.32,850 D Rs.35,050
81. A business had a trade payables' ledger account balance at 1 December 20X5 of
Rs.52,750. During the year ended 30 November 20X6, purchases of Rs.325,000 were
made on credit, payments made to suppliers amounted to Rs.322,500 and early settlement
discounts received totalled Rs.5,250. During the year ended 30 November 20X6, goods
returned to suppliers totalled Rs.6,500, for which credit notes were issued.
What was the balance on the trade payables' ledger account at 30 November 20X6?
A Rs.54,000 B Rs.43,500
C Rs.56,500 D Rs.67,000

82. A business had a trade payables' ledger account balance of Rs.34,560 as at 1 July 20X3.
During the year ended 30 June 20X4, payments were made to suppliers of Rs.260,000
and purchases made during the same period amounted to Rs.270,000. During the year
ended 30 June 20X4, early settlement discounts received totalled Rs.7,500, and faulty
goods returned to suppliers totalled Rs.4,500, for which credit notes were issued.
What was the balance on the trade payables' ledger account at 30 June 20X4?
A Rs.27,560 B Rs.47,560
C Rs.41,560 D Rs.32,560

83. A business had a trade payables' ledger account balance of Rs.55,555 as at 1 April 20X4.
During the year ended 31 March 20X5, purchases made during the year ended 31 March
20X5 amounted to Rs.395,000. During the year ended 31 March 20X5, early settlement
discounts received totalled Rs.6,500, faulty goods returned to suppliers totalled Rs.3,500,
for which credit notes were issued. At 31 March 20X5, the total on the trade payables
ledger account was Rs.50,555.
What was the total of payments made to suppliers during the year ended 31 March 20X5?
A Rs.390,000 B Rs.397,000
C Rs.403,000 D Rs.410,000

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CHAPTER-2 BOOKS OF PRIME ENTRY

84. A business had a trade payables' ledger account balance of Rs.33,250 as at 1 October
20X2. During the year ended 30 September 20X3, cash paid to settle amounts
outstanding for purchases was Rs.335,500. In addition, early settlement discounts
received totalled Rs.3,350, faulty goods returned to suppliers totalled Rs.2,500, for which
credit notes were issued. At 30 September 20X3, the total on the trade payables' ledger
account was Rs.31,750.
What was the total of purchases made on credit during the year ended 30 September
20X3?
A Rs.339,850 B Rs.333,150
C Rs.334,850 D Rs.328,150

85. The following are the year-end balances in Sam's ledgers:

Rs.
Sales 43,000
Purchases 16,000
Equipment 22,000
Overdraft 8,000
Inventory 19,000
Capital 6,000
What is the trial balance total?
A Rs.43,000 B Rs.57,000
C Rs.63,000 D Rs.114,000

86. Which of the following accounting entries is incorrect?

A Dr Cash; Cr Sales revenue
B Dr Motor vehicle; Cr Capital
C Dr Purchases; Cr Account payable (payable)
D Dr Trial balance; Cr Bank
87. The purchases day book of Arbroath has been undercast by Rs.500, and the sales day
book has been overcast by Rs.700. Arbroath maintains payables' and receivables' ledger
accounts as part of the double entry bookkeeping system.
How will these errors be corrected?
A Make adjustment to the ledger balances of the individual receivables' and
payables', with no effect on profit
B Make adjustments to the ledger balances of the individual receivables' and
payables', with a decrease in profit of Rs.1,200
C Make adjustments to the accounts, with no effect on profit
D Make adjustments to the accounts, with a decrease in profit of Rs.1,200.

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CHAPTER-2 BOOKS OF PRIME ENTRY

88. The transfer journal would be most likely to be used as the book of prime entry to record
which of the following double entries?
A A cash sale B The payment of a supplier
C The purchase of a non-current asset D Discount received
89. Following information is available about Siam:
Rs.
Receivable as on January 1, 2018 70,000
Receivable as on December 31, 2018 25,000
Cash received from customers during the year 250,000
Settlement discount allowed to customers 4,000
There are no return inwards or cash sales. Siam recorded all sales expecting that customer will
not claim early payment discount.
At what amount Sales Revenue shall be reported in financial statements?
(a) Rs. 291,000 (b) Rs. 250,000
(c) Rs. 205,000 (d) Rs. 209,000
90. Following information relates to Sales transaction of Sabir during March 2019
• Receivables as at 1 March Rs. 35,000
• Receivables as at 31 March Rs. 42,000
• Receipts during the period (after allowing discount of Rs. 4,000) Rs. 29,000
What is the amount of credit sales (net) during March?
(a) 34,000 (b) 35,000
(c) 36,000 (d) 37,000
91. A payable account contains the following relevant entries for the year ended 31 December 2018:
Rs.
Payment through bank 160,000
Credit purchases during the year 185,000
Discount received 16,000
Contra with receivable account 7,000
Balance c/d as on Dec 31, 2018 22,000
There are no other transactions related to account payable.
What is the amount of balance b/d of account payable account as on 1 January 2018?
(a) 20,000 (b) 21,000
(c) 22,000 (d) 23,000
92. A receivable ledger account at 1 June 2017 had balances of Rs. 32,850 debit.
During the year, sales (net of trade discount) of Rs. 245,000 were made on credit.
Receipts from customers amounted to Rs. 210,200 and cash discounts of Rs. 700 were allowed.
Refunds of Rs. 1,300 were made to customers.
What should be the closing balance at 31 May 2018 of account receivable account?
(a) 68,150 (b) 68,250
(c) 68,350 (d) 68,450

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CHAPTER-2 BOOKS OF PRIME ENTRY

93. Which of the following might explain a debit balance on a payable’s ledger account?
(a) The business took a settlement discount to which it was not entitled and paid less than the
amount due
(b) The business mistakenly paid an invoice twice
(c) The book-keeper failed to enter a contra with the receivable’s ledger
(d) The book-keeper failed to post a cheques paid to the account
94. Which of the following could create a debit balance on an account in the payable’s ledger?
A An underpayment to a supplier
B A duplicate payment of a supplier's account
C Trade discount received
D An overcharge on a supplier's invoice
95. Which of following is part of the double-entry system?
(a) Cash book (b) General Journal
(c) Sales Journal (d) Trial balance

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CHAPTER-2 BOOKS OF PRIME ENTRY

MULTIPLE CHOICE QUESTIONS (MCQs) SOLUTIONS

01. D Trial balance is not a book of prime entry.

02. B Only credit sales is recorded in sales day book, cash sales is recorded in cash
book.
03. B Only credit purchases are recorded in purchases day book, cash purchases are
recorded in cash book.
04. B Sales return journal
05. D Purchase return journal
06. D Purchase return journal
07. D Inventory item on credit
08. A&B All cash transactions
09. C Non-current asset sold on credit
10. A Credit sales are recorded in sales day book and cash sales are recorded in cash
receipt book
11. A Credit sales are entered in the sales day books; sales returns are entered in sales
returns day book (not deducted from sales day book total); cash sales and cash
received from customers are entered in cash receipt book
12. A Sales returns day book
13. B Total sales = Rs. 12,000+ (Rs. 10,000x0.98) = Rs. 21,800
14. A Customer as an evidence of return of goods
15. C Return inwards (we issued credit note and received debit note)
16. A Sales journal
17. C Goods dispatched note
18. D Rs. 80,000 less 2% of Rs. 80,000 less 3% of Rs. 80,000 = Rs. 76,000
19. C DEBIT Receivables; CREDIT Bank
20. C Cash book (as reversal of receipt)
21. D Payables (Liabilities) decreased, resulting in debit
Receivables (assets) decreased, resulting in credit
Only lower amount may be offset.
22. B Goods received note
23. D Total of all invoices received from suppliers
24. B Supplier for return of goods
25. C Purchase day book

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CHAPTER-2 BOOKS OF PRIME ENTRY

26. D Return outwards journal

27. A Purchase requisition
28. C It is recognised as reduction in cost of purchases.
29. D General Journal (a non-cash transaction)
30. C In general journal, as reduction in cost of purchases.
31. B Cash sales Rs. 4,000 + cash received from customer 800 = Rs. 4,800
32. C Purchase day book: Rs. 10,000 x 98% = 9,800
Discount received column in Cash book: Rs. 9,800x1%=Rs. 98
Cash payment column in cash book = Rs. 9,800 – Rs. 98 = Rs. 9,702
33. B The amount spent is reimbursed so that imprest amount becomes available
again.
34. B For maintaining a fixed float; an amount equal to weekly expenses incurred is
reimbursed
35. C Net amount payable = Rs. 12,000-Rs. 2,000 = Rs. 10,000
Cash paid = Rs. 10,000 x 99%= Rs. 9,900
The same amount will be recorded as cost of purchases (net).
36. Rs. 750 New float = Rs. 1,000+100 = Rs. 1,100
Amount required to restore and increase = Rs. 100+Rs. 650 = Rs. 750
37. B Cash transaction (not a small amount)
38. C Cash transaction of payment (not a small amount)
39. A Cash transaction (small amount)
40. B Cash transaction
41. B Cash transaction
42. A Payment to credit supplier
43. C General journal
44. D General Journal
45. D General Journal
46. A An internal document of a business entity
47. C Voucher system may be used along with books of prime entry or in its
replacement.
48. C Payment voucher
49. B Receipt voucher
50. A Journal voucher

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CHAPTER-2 BOOKS OF PRIME ENTRY

51 B Correct, invoices are listed on receipt.

A Incorrect, these are recorded in a memorandum column in the cash book prior
to posting to Payable accounts and the discount received account.
C Incorrect, the supplier will deduct trade discounts prior to raising the invoice
total.
D They would be recorded in the purchase returns day book in response to debit
notes raised on suppliers.
52 C The sales ledger. This is posted from the sales day book and cash book.
53 C Ledger accounts are posted from books of prime entry.
54 C and F are not books of prime entry, but are the memorandum ledgers.
55 D Rs.
Opening Inventory 12,000
Purchases (bal. fig) 122,000
Purchase returns (5,000)
Closing Inventory (18,000)
Cost of goods sold 111,000
56 C Correct. 10 x Rs.120 less 20% = invoice price Rs.960 less cash discount 2.5% (Rs.24).
A This is list price less cash discount.
B No discounts have been applied.
D Cash discount not taken.
57 C Correct, the effect is double the amount concerned.
58 D Both receivables and payables are being reduced.
59 C Credit sales = Rs.80,000-Rs.10,000 + Rs.9,000 = Rs.79,000.
60 B All of the other options would lead to a higher balance in the supplier's records
61 C Debits total Rs.32,750 + Rs.125,000 + Rs.1,300 = Rs.159,050. Credits total Rs.1,275 +
Rs.122,550 + Rs.550 = Rs.124,325. /.Net balance = Rs.34,725 debit.
62 A
Rs. Rs.
Opening bank balance 2,500
Payment (Rs.1,000 - Rs.200) x 90% 720
Receipt (Rs.200-Rs.10) 190
Closing bank balance _____ 1,970
2,690 2,690
63 A Rs.8,500 - (2 x Rs.400) = Rs.7,700.
64 A Rs.
Opening balance 34,500
Credit purchases 78,400
Discounts (1,200)
Payments (68,900)
Purchase returns (4,700)
38,100

65 C Remember, daybook totals are posted to the control account. Individual invoices are
posted to the individual accounts, so an error in a total does not affect the list of
balances.

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CHAPTER-2 BOOKS OF PRIME ENTRY

66 A Receivables account
B/d 2,050 10,000 Sales return
Sales 100,000 85,500 Cash
1,550 Contra
_______ 5,000 C/d
102,050 102,050
67 B The account, which is a check on the ledger, should be undertaken by someone who is
independent from the day-to-day work.
68 A
Cash book
Rs. Rs.
Balance b/d 850 Cheques written 1,200
Sales (cash) 230 Balance c/d 1,380
Receivables (remittances) 1,500
2,580 2,580

69 B Cash would be withdrawn from the bank the same day the cheque has been
requisitioned and posted to the cash book. The other instances would require time for
the cheque to be presented to the drawee bank.
70 C Bank charges may be unknown to the business until charges are placed to the business
bank account. The business owner would be advised by letter or simply receipt of the
bank statement.
71 A A credit card purchase is recorded on a credit card statement. The others reflect
relatively modern transfers which appear directly on the bank statement.
72 A
Receivables account
Rs. Rs.
Opening balance b/d 32,750
Sales 125,000 Bank 122,500
Payables contra 550
Sales returns 1,300
Closing balance 33,400
157,750 157,750
Closing balance 33,400

73 D
Receivables ledger account
Rs. Rs.
Opening balance 1,586
SDB 100
CB 100 Bal c/d 1,786
1,786 1,786

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CHAPTER-2 BOOKS OF PRIME ENTRY

74 A
Receivables account
Rs. Rs.
Balance b/d 8,450 Cheques 22,430
Sales 19,600 Sales returns 1,000
Contra 540
Balance c/d 4,080
28,050 28,050

75 B
Receivable account
Rs. Rs.
Balance b/d 500 Credit notes 170
Sales invoices 1,900 Cash (bal fig) 1,530
Balance c/d 700
2,400 2,400
76 D
Trade receivables
Rs. Rs.
Balance b/d 54,550 Cash received re credit sales 81,622
Credit sales (bal fig) 81,632 Irrecoverable receivable w/off 2,000
Balance c/d 52,560
136,182 136,182
77 A
Payables ledger account
Rs. Rs.
CB (14,576 − 14,756) 180 Opening bal. 3,446
Receivables ledger account 392
Closing bal 2,874
3,446 3,446
78 D
Trade payables
Rs. Rs.
Cash paid re credit purchases 69,500 Balance b/d 23,450
Balance c/d 25,600 Purchases (bal fig) 71,650
95,100 95,100
79 B BNO apparently owes ANO Rs.150 more than the supplier statement identifies. With
items, A, C and D the result would be that the supplier will state that you owe more,
not less. Item B is the only possible answer which could explain the situation.
80 C
Trade payables’ ledger account
Rs. Rs.
Goods returned 1,300 Opening bal 32,750
Cash paid 122,500 Purchases 125,000
Contra with TRC 1,100
Closing bal 32,850
157,750 157,750

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CHAPTER-2 BOOKS OF PRIME ENTRY

81 B
Trade payables’ ledger account
Rs. Rs.
Goods returned 6,500 Opening bal 52,750
Cash paid 322,500 Purchases 325,000
Discount received 5,250
Closing bal 43,500
377,750 377,750

82 D
Trade payables’ ledger account
Rs. Rs.
Goods returned 4,500 Opening bal 34,560
Cash paid 260,000 Purchases 270,000
Discount received 7,500
Closing bal 32,560
304,560 304,560
83 A
Trade payables’ ledger account
Rs. Rs.
Goods returned 3,500 Opening bal 55,555
Cash paid 390,000 Purchases 395,000
Discount received 6,500
Closing bal 50,555
450,555 450,555
84 A
Trade payables’ ledger account
Rs. Rs.
Goods returned 2,500 Opening bal 33,250
Cash paid 335,500 Purchases 339,850
Discount received 3,350
Closing bal 31,750
373,100 373,100
85 B
Assets Liabilities and capital
Rs. Rs.
Purchases 16,000 Sales 43,000
Equipment 22,000 Overdraft 8,000
Inventory 19,000 Capital 6,000
57,000 57,000
86 D The trial balance is a list of balances and not part of the double entry system.
87 D The purchase day book has been undercast by Rs.500 (i.e. the total is Rs.500 lower
than it should be). As a result of this, the purchases account has been debited and the
payables ledger account credited with Rs.500 too little.
The sales day book has been overcast by Rs.700. As a result, the sales account has been
credited and the receivable ledger account has been debited with Rs.700 too much.
As a result of these errors, the control account balances need to be adjusted, and profit
reduced by (Rs.500 + Rs.700) Rs.1,200, by reducing sales and increasing purchases.

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CHAPTER-2 BOOKS OF PRIME ENTRY

Neither error affects the entries in the accounts of individual receivables and payables.
88 C All non-routine asset purchases, such as those for non-current or long-term assets are
first recorded in the journal.

89 C Accounts receivables
Particulars Rs. Particulars Rs.
b/d 70,000 Cash 250,000
Sales (balancing) 209,000 Discount allowed 4,000
c/d 25,000
279,000 279,000

Sales revenue to be reported in financial statements

Rs. 209,000 as originally recorded – Rs. 4,000 revenue reversal due to discount
adjustment = Rs. 205,000
90 Rs. 36,000 Accounts receivables
Particulars Rs. Particulars Rs.
b/d 35,000 Cash 29,000
Sales (balancing) 40,000 Discount allowed 4,000
c/d 42,000
75,000 75,000
Rs. 40,000 as recorded – 4,000 discount = Rs. 36,000 net sales
91 Rs. 20,000 Accounts Payable
Particulars Rs. Particulars Rs.
Bank 160,000 b/d 20,000
Discount received 16,000 Purchases 185,000
Receivable (contra) 7,000
c/d 22,000
205,000 205,000
92 Rs. 68, 250 Accounts receivables
Particulars Rs. Particulars Rs.
b/d 32,850 Cash 210,200
Sales 245,000 Discount allowed 700
Cash (refunds) 1,300 c/d 68,250
279,150 279,150

93 B
94 B
95 A

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

MULTIPLE CHOICE QUESTIONS (MCQs)

01. The process of transferring transaction from journal to ledgers is called?

(a) Journalizing (b) Summarizing
(c) Posting (d) Analysing
02. The total of debit side of an account is Rs. 16,000 and total of credit side is Rs. 22,000. The
balance carried forward shall be written:
(a) On left side Rs. 6,000 (b) On right side Rs. 6,000
(c) On left side Rs. 38,000 (d) On right side Rs. 38,000
03. How different formats of ledgers are balanced?
(a) T account: periodically & Running balance account: periodically
(b) T account: after each transaction & Running balance account: after each transaction
(c) T account: periodically & Running balance account: after each transaction
(d) T account: after each transaction & Running balance account: periodically
04. An entity maintains running balance account ledger. A customer had balance of Rs. 18,000 debit.
A further sale of Rs. 10,000 was made to him and he paid Rs. 15,000 by cheque. What would be
his account balance after posting all transactions?
(a) Rs. 13,000 credit (b) Rs. 13,000 debit
(c) Rs. 18,000 debit (unchanged) (d) Rs. 3,000 debit
05. An entity recorded the following journal entry in its General Journal:
Furniture Rs. 500,000
Interwood (supplier) Rs. 500,000
How this would be posted in the ledger account of “Furniture”?
(a) On debit side with description “Furniture” and amount Rs. 500,000
(b) On credit side with description “Furniture” and amount Rs. 500,000
(c) On debit side with description “Interwood” and amount Rs. 500,000
(d) On credit side with description “Interwood” and amount Rs. 500,000
06. An entity recorded the following journal entry in its General Journal:
Furniture Rs. 500,000
Interwood (supplier) Rs. 500,000
How this would be posted in the ledger account of “Interwood”?
(a) On debit side with description “Furniture” and amount Rs. 500,000
(b) On credit side with description “Furniture” and amount Rs. 500,000
(c) On debit side with description “Interwood” and amount Rs. 500,000
(d) On credit side with description “Interwood” and amount Rs. 500,000
07. Which of the following would normally be a credit balance in the trial balance?
(i) Loan
(ii) Owner’s capital
(iii) Drawings
(iv) Purchases
(a) (i) and (ii) (b) (i) and (iii)
(c) (ii) and (iii) (d) (ii) and (iv)

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

08. A debit balance would be expected to arise when the accounts are balanced at the period end on
which of the following accounts?
(a) Capital (b) Sales
(c) Electricity (d) Loan
09. A company had a cash balance of Rs. 18,000 at the start of the month. During the month, the
following transactions occurred.
(i) Sales on credit Rs. 72,000
(ii) Cash from trade receivables Rs. 49,000
(iii) Purchases on credit Rs. 33,000
(iv) Payments to trade payables Rs. 35,000
What was the cash balance at the end of the month?
(a) 30,000 (b) 32,000
(c) 34,000 (d) 36,000
10. An accountant has inserted all the relevant figures into the trade payables account, but has not yet
balanced off the account.
Accounts payable a/c
Particulars Rs. Particulars Rs.
Bank a/c 100,750 b/d 250,225
Purchases 325,010

Assuming there are no other entries to be made, other than to balance off the account, what is the
closing balance on the trade payables account?
(a) 474,485 (b) 474,685
(c) 474,885 (d) 474,995
11. You are given the following information:
Rs.
Receivables at 1 January 2018 10,000
Receivables at 31 December 2018 9,000
Total receipts during 2018 (including cash sales of Rs.5,000) 85,000
What are sales on credit during 2018?
(a) 76,000 (b) 77,000
(c) 78,000 (d) 79,000
12. Alia’s Account payable ledger has a balance of Rs. 95,000 credit as on January 1, 2018. During
the month, following transactions were performed:
Rs.
Credit purchases 221,000
Cash purchases 85,000
Cheques issued to credit suppliers
(after receiving discount of Rs. 2,000) 148,000
Credit purchases return 8,000
What is the amount shown in Account payable ledger as on January 31, 2018?
(a) Rs. 158,000 (b) Rs. 160,000
(c) Rs. 243,000 (d) Rs. 245,000

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

13. A trial balance is made up of a list of debit balances and credit balances.
Which of the following statements is correct?
(a) Every debit balance represents an expense
(b) Assets are represented by debit balances
(c) Liabilities are represented by debit balances
(d) Income is included in the list of debit balances
14. Basheer has extracted the following list of balances from his general ledger at 31 October 2015:
Rs.
Sales 258,542
Purchases 142,958
Expenses 34,835
Non-current assets (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525
What is the total of the debit balances in Basheer's trial balance at 31 October 2015?
(a) Rs. 267,049 (b) Rs. 275,282
(c) Rs. 283,148 (d) Rs. 284,931
15. Which of the following are true with reference to a trial balance?
(a) Trial balance is taken as a test of arithmetical accuracy
(b) It is starting point for producing financial statements
(c) It is conclusive proof that double entry book-keeping is free from errors
(d) (a) and (b) only
16. At the end of accounting period, all credit items of income and expenses are transferred to:
(a) Debit side of Capital account (b) Credit side of Capital account
(c) Debit side of profit or loss (d) Credit side of profit or loss
17. At the end of accounting period, all debit items of income and expenses are transferred to:
(a) Debit side of Capital account (b) Credit side of Capital account
(c) Debit side of profit or loss (d) Credit side of profit or loss
18. At the end of accounting period, an entity incurred net loss of Rs. 15,000 it shall be transferred
to:
(a) Debit side of Capital account (b) Credit side of Capital account
(c) Debit side of profit or loss (d) Credit side of profit or loss
19. At the end of accounting period, drawings account has balance of Rs. 8,000, it shall be
transferred to:
(a) Debit side of Capital account (b) Credit side of Capital account
(c) Debit side of profit or loss (d) Credit side of profit or loss
20. Which statement is true?
(a) The debit balance accounts are closed at the end of accounting period while the credit
balance accounts are carried forward to next year

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

(b) The credit balance accounts are closed at the end of accounting period while the debit
balance accounts are carried forward to next year
(c) Income, expenses and drawings accounts are closed at the end of accounting period while
assets, liabilities and capital accounts are carried forward to next year
(d) Income, expenses and capital accounts are closed at the end of accounting period while
assets, liabilities and drawings accounts are carried forward to next year
21. The double-entry system of bookkeeping normally results in which of the following balances on
the ledger accounts?
Debit balances: Credit balances:
(a) Assets and revenues Liabilities, capital and expenses
(b) Revenues, capital and liabilities Assets and expenses
(c) Assets and expenses Liabilities, capital and revenues
(d) Assets, expenses and capital Liabilities and revenues
22. Which one of the following statements is correct?
(a) Assets and liabilities normally have credit balances
(b) Liabilities and revenues normally have debit balances
(c) Assets and revenues normally have credit balances
(d) Assets and expenses normally have debit balances
23. Which of the following are limitations of the trial balance?
(1) It does not include final figures to be included in the financial statements.
(2) It does not identify errors of commission.
(3) It does not identify in which accounts errors have been made.
(a) (1) and (2) (b) (2) and (3) only
(c) All of the above (d) None of the above
24. Mike wrongly paid Norman Rs. 250 twice for goods purchased on credit. Norman subsequently
reimbursed Mike for the overpayment of Rs. 250. How should Mike account for the
reimbursement received from Norman?
(a) Debit Cash received, and Credit Sales
(b) Debit Cash received, and Credit Discount received
(c) Debit Cash received, and Credit Trade receivables’ control account
(d) Debit Cash received, and Credit Trade payables’ control account
25. What is a trial balance?
A A list of ledger balances extracted from customer accounts
B A list of ledger balances extracted from accounts which helps to ensure that the
bookkeeping has been accurate
C An accounting document which a business must prepare
D A list of all the transactions which have occurred in a period taken from ledger accounts
26. Which of the following statements is correct?
A The balance on a bank loan account will appear in the debit column of a trial balance
B The sales returns account balance will appear in the credit column of a trial balance
C Loan interest paid will appear in the debit column of a trial balance
D Purchase returns will appear in the debit column of a trial balance

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

27. A list of ledgers balances shown in debit and credit columns that is prepared to check the
mathematical accuracy of account balances is known as;
(a) Income statement (b) Statement of financial position
(c) Trial balance (d) Special journal
28. Zeeco has the following opening balances on its ledger accounts.
Rs.
Cash 40,000
Equipment 60,000
Bank 70,000
Capital 100,000
Trade account receivable 15,000
Trade account payable 50,000
Note payable 35,000
What is the amount of opening assets of Zeeco?
(a) Rs. 185,000 (b) Rs.170,000
(c) Rs. 150,000 (d) Rs.190,000
29. Trail balance helps in preparing;
1. Income statement
2. Bank reconciliation statement
3. Statement of financial position
4. Cash flow statement
(a) 1 and 2 (b) 1 and 4
(c) 2 and 3 (d) 1 and 3
30. Max ltd has the following trial balance on December 31, 2008.
Debit Credit
Cash 100,000
Account receivable 64,000
Sales 30,000
Purchases 15,000
Salaries expenses 5,000
Account payable 4,000
Share capital _______ 150,000
184,000 184,000
What is the total amount of trial balance prepared on first day on next financial year as January 1,
2009,
(a) Rs. 164,000 (b) Rs. 180,000
(c) Rs. 125,000 (d) Rs. 165,000
31. In a ledger account, if the total of debit side exceeds the total of credit side it shows;
(a) Credit balance (b) Debit balance
(c) Zero balance (d) None of above
32. When ledger of machine is prepared, its opening balance, if any, is posted on;
(a) Debit side of ledger account
(b) Credit side of ledger account
(c) Is not posted any where in ledger account
(d) Can be posted on any side of ledger account

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

33. In a complete accounting period, the sales of a business were Rs. 300,000 and its cost of sales
was Rs. 220,000. Other operating expenses of the business were Rs. 25,000. What is the amount
of its profit or loss for the year?
(a) Rs. 55,000 loss (b) Rs.40,000 profit
(c) Rs.35,000 profit (d) Rs.55,000 profit
34. When ledger of Trade account payable is prepared, its opening balance, if any, is posted on;
(a) Debit side of ledger account
(b) Credit side of ledger account
(c) Is not posted anywhere in ledger account
(d) Can be posted on any side of ledger account
35. Which of the following account will transfer to the opening trial balance prepared on the first day
of next financial year;
(a) Drawing (b) Salaries expenses
(c) Sales revenue (d) Account receivable
36. Which of the following accounts normally have debit balance;
1. Trade account receivable
2. Trade account payable
3. Capital
4. Cash
5. Bank
(a) 1, 2 and 5 (b) 2, 3 and 5
(c) 1, 3 and 4 (d) 1, 4 and 5
37. If the ledger of cash at bank shows a credit balance, it shows;
(a) The amount withdrawn from bank during the year
(b) The amount deposit into bank during the year
(c) The amount withdrawn from bank over and above our bank balance
(d) The amount which is remained in our bank balance at year end
38. Which of the following items appear on the same side of the trial balance?
(a) Bank balance and payables (b) Prepaid rent and sales
(c) Carriage inwards and discount received (d) Cash and carriage outwards
39. Credit balance on a ledger account indicates:
(a) An asset or an expense
(b) Some amount receivable by the organization
(c) A liability or an income or capital
(d) A liability or an expenses

40. Receivable outstanding as on January 1, 2008, were Rs. 90,000. During the year the following
transactions took place;
• Credit sales Rs.150,000
• Cash sales Rs.70,000
• Prompt payment discount given Rs. 14,000
Payment received from customers during the year Rs.80,000

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

What is the amount of receivable shown in the closing trial balance prepared as on December 31,
2008.
(a) Rs. 146,000 (b) Rs. 240,000
(c) Rs. 80,000 (d) Rs. 90,000
41. Which of the following account is not transferred to the opening trial balance prepared on the first
day of next financial year;
(a) Cash (b) Rent expense
(c) Share capital (d) Account payable
42. Which of the following will have a debit balance in trial balance?
(a) Sales revenue (b) Discount received
(c) Carriage outward (d) Note payable
43. Which one of the following is not a part of financial statement of a business?
(a) Income statement (b) Statement of financial position
(c) Trial balance (d) Statement of changes in equity
44. Calculate cost of sales from the following items:
Rs.
Opening inventory 80,000
Closing inventory 30,000
Purchases 90,000
Transportation in 5,000
(a) Rs.145,000 (b) Rs. 165,000
(c) RS. 155,000 (d) Rs. 135,000
45. A sole trading business has a capital of Rs. 450,000 and liabilities of Rs.50,000. Its current assets
are Rs.150,000, what is the amount of its non-current assets?
(a) Rs. 250,000 (b) Rs. 350,000
(c) Rs. 150,000 (d) Rs. 50,000

46. Expenses including cost of sales of a sole trading business are Rs. 150,000, while its net profit is
Rs. 50,000. What is the amount of sales for the year?
(a) Rs. 200,000 (b) Rs. 100,000
(c) Rs. 150,000 (d) Rs. 50,000
47. Calculate cost of sales from the following items:
Rs.
Opening inventory 130,000
Closing inventory 40,000
Purchases 200,000
Transportation in 10,000
Purchase return 20,000
(a) Rs. 580,000 (b) Rs. 480,000
(c) Rs. 380,000 (d) Rs. 280,000

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

48. A firm's trial balance ...

(a) Shows its financial position.
(b) Establishes whether its accounting records are correct.
(c) Lists all of the entries in its double-entry accounting records
(d) Is a list of all of the balances brought down in its double-entry accounting records.
49. The purpose of a firm preparing a trial balance is to establish whether ...
(a) The total of the debit balances brought down in its nominal (general) ledger equals that of
the credit balances brought down.
(b) The double-entry record it has made for all transactions is correct.
(c) Its bank balance is correct.
(d) It has earned a profit or incurred a loss
50. The totals of a trial balance ...
(a) Need not always agree, as there are sometimes legitimate reasons why they should differ.
(b) Should agree in all cases except when the trial balance is prepared at the end of an
accounting period
(c) Should always agree.
(d) Need not always agree, because the trial balance is not the same as a balance sheet.
51. is the listing of all the accounts and adding together all the debit entries at the same time adding
together all the credit entries?
(a) Trial player (b) Trial balance
(c) Trial imbalance (d) Nothing
52. ______________ are form of checking on the arithmetical accuracy of the books ...
(a) Income Statement (b) Trial net
(c) Balance sheet (d) Trial balance
53. Jennifer bought a new car worth Rs.75,000 and decides to incorporate into her business. The
entry should be
Debit Credit
(a) Motor vehicles account Drawings account
(b) Capital account Motor vehicles account
(c) Motor vehicles account Capital account
(d) Bank account Capital account
54. A debit balance on Musa's account in company's sales ledger means that...
(a) Musa owes you the money
(b) You woe Musa the money
(c) Musa has just paid you that amount of money
(d) Musa has returned that amount of goods to you
55. The payment of a firm's rates from the business bank account should be recorded by...
DEBIT CREDIT
(a) Bank account Rates account
(b) Rates account Capital account
(c) Rates account Drawings account
(d) Rates account Bank account

56
CHAPTER-3 LEDGERS AND TRIAL BALANCE

56. The purchase of a new van on credit from Zaineb ltd. UK for use in business should be recorded
by...
DEBIT CREDIT
(a) Motor expenses account Bank account
(b) Purchases account Zaineb ltd. UK account
(c) Motors vehicles account Bank account
(d) Motor vehicles account Zaineb ltd. UK account
57. We returned some goods previously purchased on credit from the suppliers Brown, because they
were unsatisfactory. This should be recorded in the ledger by...
DEBIT CREDIT
(a) Brown account Returns outwards account
(b) Purchases account Brown account
(c) Bank account Returns outwards account
(d) Brown account Returns inwards account
58. After paying Hour Supplies Rs.10,000 they inform you that you were entitled to a discount of
2%. It will be "recorded as ...
DEBIT CREDIT
(a) Discount allowed account Hour Supplies account
(b) Bank account Discount allowed account
(c) Hour Supplies account Discount received account
(d) Discount received account Hour Supplies account

59. The owner of a business withdraws cash for private purpose. The entry will be
Debit Credit
(a) Capital account Drawings account
(b) Drawings account Capital account
(c) Cash account Drawings account
(d) Drawings account Cash account
60. The owner of a business withdraws stock for private consumption. He should ...
Debit Credit
(a) Bank account Stock account
(b) Profit and loss account Drawings account
(c) Capital account Stock account
(d) Drawings account Purchases account
61. Which one of the following normally has a debit balance?
(a) The capital account (b) A creditor's account
(c) The motor vehicles account (d) A loan account

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

62. A cheque is cashed from the business bank account for use as petty cash should be recorded by...
Debit Credit
(a) Drawings account Bank account
(b) Bank account Petty cash account
(c) Petty Cash account Capital account
(d) Petty Cash account Bank Account
63. The purchase of motorcar on credit from Morrison Sales Ltd. A garage for resale should be
recorded by.
Debit Credit
(a) Purchases account Bank account
(b) Bank account Purchases account
(c) Motor vehicles account Morrison Sales Ltd. Account
(d) Purchases account Morrison sales Ltd. Account
64. A cash discount given to a customer should be recorded by ...
Debit Credit
(a) Customer s account Discount received account
(b) Customer’s account Discount allowed account
(c) Discount allowed account Customer’s account
(d) Discount received account Customer’s account
65. A cash rent paid should be recorded by ..
Debit Credit
(a) Profit and loss account Cash account
(b) Cash account Rent account
(c) Rent account Cash account
(d) Profit and loss account Rent account
66. Which one of the following statements is correct?
(a) A proprietor's will remain constant if he only withdraws his Net Profit and he does not
introduce any new capital.
(b) A proprietor’s capital will increase if his drawings are higher than his Net Profit and he
does not introduce any new capital.
(c) A proprietor’s capital will decrease if his Net Profit is greater than his drawings and he
does not introduce any new capital.
(d) A proprietor's capital will remain constant if he only withdraws his Net Profit each year,
but also introduces new capital.
67. Which account usually has a debit balance?
(a) Capital account (b) Purchase account
(c) Purchases returns account (d) Sales account
68. Which ledgers entries records the purchase of a machine bought on credit?
(a) Debit creditors, credit machinery (b) Debit machinery credit creditors
(c) Debit creditors credit purchases (d) Debit purchase credit creditors

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

69. A business bought a computer for the office and paid by cheque. How will the business record the
transaction?
Debit Credit
(a) Bank Office equipment
(b) Office equipment Bank
(c) Bank Purchase
(d) Purchase Bank

70. Which of the following is prepared in order to determine a firm/s net profit (or net loss) for an
accounting period?
(a) A trading account (b) A profit and loss account
(c) A trial balance (d) A balance sheet
71. If the total of a firm’s sales for the month of May is Rs.300,000 and its gross profit is equal to
25% of its cost of sales, cost of sales for may was:
(a) Rs.60,000 (b) Rs.75,000
(c) Rs.225 000 (d) Rs.240.000
72. The following information relates to a firm's trading during the month of June.
Gross profit for the month Rs.35,000
Expenses for the month Rs.18,000
Net profit for the month equal 17% of the sales for the month
The firm's cost of sales for the month of June is:
(a) Rs.52,000 (b) Rs.53,000
(c) Rs.65 000 (d) Rs.100 000
73. If a sole trader's capital at the beginning of a year was Rs.100,000 and his net profit for the year
was Rs.20,000, his capital at the end of the year
(a) Cannot be determined form the information given
(b) Was Rs.80.000
(c) Was Rs.100,000
(d) Was Rs.120.000
74. Profit are calculated by drawing up a special account called
(a) Trading & profit and loss account (b) Profit and loss account
(c) Normal profit and loss account
(d) Appropriated profit and loss account
75. This is the excess of sales over the cost of goods sold in period
(a) Gross loss (b) Gross balance
(c) Gross hoper (d) Gross profit
76. Before drawing up a trading and profit and loss account it is must to get out the
(a) Trial balance (b) Imbalance
(c) Balance sheet (d) Profit and loss

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

77. Sales less cost of goods sold is equal to

(a) Gross loss (b) Gross profit
(c) Net loss (d) Profit
78. Opening stock add purchase and less closing stock is equal to
(a) Cost of good purchased (b) Cost of goods sold
(c) Cost of manufacturing (d) Cost of production
79. Every sale of good at a profit increase the.
(a) Capital of the proprietor (b) Asset of proprietor
(c) Current asset (d) Current loss
80. Each sale of good at loss or each item of expensed decrease the
(a) Loss in profit and loss account (b) Net profit in balance sheet
(c) Capital of the proprietor (d) No effect
81. Which accounts shows the drawings, opening capital, net profit and closing capital in an account
(a) Loss (b) Expense
(c) Asset (d) Capital
82. Where the cost of goods sold exceeds the sales figure
(a) Gross profit (b) Gross balance
(c) Gross loss (d) No where
83. Found by deducing cost of goods sold from the figure of sales
(a) Gross profit (b) Gross loss.
(c) Net profit (d) Nothing
84. Account in which net profit or loss is calculated is
(a) Balance sheet (b) Profit and loss account
(c) Trial balance (d) Ledgers
85. Account in which gross profit or gross loss is calculated is
(a) Profit and loss account (b) Balance sheet
(c) Trial balance (d) Trading accounting
86. Combined accounts in which both gross and net profits are calculated
(a) Trading and profit and loss account (b) Balance sheet
(c) Income and summary (d) No where
87. Stocks of unsold goods need to be brought into calculation in the
(a) Trading account (b) Loss portion
(c) Net loss (d) Balance sheet
88. The net profit is added in
(a) Capital account (b) Assets account
(c) No account (d) Gain and loss
89. Balance on account not closed off are
(a) Carried forward the preceding period (b) Right off
(c) Carried forward to the following period (d) No effect

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

90. A balance sheet is ...

(a) A ledger account, providing that the accounting records ‘balance’.
(b) A statement showing the market value of a firm
(c) A listing, in a particular format, of the balances brought down remaining in the double-
entry accounts after the profit and loss account has been prepared.
(d) A statement showing the market value of assets and liabilities
91. The correct heading for the balance sheet of J. Burton at the end of December 1997 a ‘Balance
Sheet’ of J. Borton....
(a) For the period ended 31 December 1997
(b) For the Period ended 01 December 1997
(c) As at 31 January 1997
(d) As at 31 December 1997
92. The balance sheet of a firm as At any particular date is intended to show....
(a) The nature of the firm's business at that date.
(b) The identity, of the firm's owners at that date.
(c) The financial position of the firm at date.
(d) The physical size of the firm at that date,

93. A firm’s fixed assets are ...

(a) All of its assets which have a long life and a substantial vale.
(b) All of its assets's which have an expected useful economic life of more than one year and
were purchased in order to be used in the firm on a continuing basis rather than solely for
resale.
(c) All assets which have a physical substance.
(d) None of the above.
94. A firm’s current assets are ...
(a) Amounts which it is due to receive within one year of its balance sheet date.
(b) Its cash and positive bank balance and other assets likely to be converted into cash or
bank balances within one year of its balance sheet date as a result of its normal trading
operations.
(c) The total of its debtors, its stocks and its cash and bank balances.
(d) Amount which it is due to receive as a result of credit sales made by it within the last
Year.
95. When preparing a firm's balance sheet, which of the following should be classified as a long-term
liability?
(a) An amount payable by the firm within six months of the date of the balance sheet.
(b) An amount payable by the firm within nine months of the date of the balance sheet.
(c) An amount payable by the firm after more than one year from the balance sheet date.
(d) None of the above.

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

96. A firm’s current liabilities at its balance sheet date, are………

(a) Its bank overdrafts, if any and any portions of its term loans which it is due to repay
within one year of that date.
(b) All liabilities which it is due to discharge within one year of that date
(c) Any trade creditors which it is due to pay within three months of that date
(d) All liabilities which it incurred in the six months prior to that date
97. Categorise the three items below as either '’Current Liabilities' or 'Long-term liabilities’ of a firm
as at 31 December 1996 and choose the option, A, B, C or D which correctly categorises all three
items.
Item 1
A bank loan repayable by the firm as a single lump sum of 31 March 1998.
Item 2
An electricity bill relating to November and December 1996 but unpaid as at 31 December 1996,
because the bill was not received by the firm until 10 January 1997, at which time it was
recorded in the appropriate ledger accounts.
Item 3
The portion of a five bank loan due to be paid by the firm in 1997. The loan was taken out on
1 January 1995 and is repayable in equal annual installments over the term of the loan.
Item 1 Item 2 Item 3
(a) Current Current Long-term
(b) Current Long-term Current
(c) Long-term Current Long-term
(d) Long-term Current Current

98. The following information relates to a sole trader.

Total of all assets at 1 June, Rs.2,300
Total to all liabilities at 1 June 2,500
Net profit earned during June 1,000
Drawings during June 700
Capital introduced during June 5,000
The sole trader’s capital at during June
(a) Rs.5,100 (b) Rs.5,300
(c) Rs.5,500 (d) Rs.5,600
99. Which of the following summarized balance sheets is correct?
Firm 1 Firm 2 Firm 3
Current Assets Rs.100 Rs.2,517 Rs.2,781
Capital 1,068 2,000 719
Long-term Loan Nil 500 300
Current Liabilities 375 1,315 950
Fixed Assets 440 1,298 812

(a) Firm 1 (b) Firm 2

(c) Firm 3 (d) None of the above
100. A sole trader’s capital at any particular date is equal to...
(a) The sum of is fixed assets plus his current assets at that date.
(b) The total of his fixed assets at that date
(c) The total of his net assets at that date plus the total amount of capital he has introduced.

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

(d) The total of his net assets at that date.

101. A firm which sells exclusively on credit has the four current assets listed below. Which of the
lists shows these assets in decreasing order of liquidity i.e., starting on the left with the most
liquid (most readily convertible into cash) of the four and ending on the night with the least liquid
(least readily convertible into cash)?
(a) Cash, Stock, Debtors, Money in a bank current account
(b) Money in a bank current account, Cash, Debtors, Stock
(c) Cash, Money in a bank current account, Stock, Debtors
(d) Cash, Money in a bank current account, Debtors, Stock
102. On 1 January a sole trader had capital of Rs.25,000. During the year, he withdraw Rs.23,000 for
his own use and, at 31 December, he had capital of Rs.31,000. If he did not introduce any new
capital during the year, his net profit for the year was:
(a) Rs.17,000 (b) Rs.23,000
(c) Rs.29,000 (d) Rs.32,000
103. Which of the following pairs of events would increase the capital of a firm?
(a) An increase in the firm's fixed assets and a corresponding decrease in its current assets.
(b) An increase in the firm's fixed assets and a corresponding increase in its liabilities.
(c) A decrease in the firm's current assets and no change in its liabilities.
(d) An increase in the firm's assets and a smaller increase its liabilities.
104. It contains the detail of asset, liabilities and capital
(a) Profit and loss department (b) Trading account
(c) Balance sheet (d) Imbalance sheet
105. _______________ is not the part of double entry?
(a) Profit and loss ledgers (b) Ledgers
(c) Journal (d) Balance sheet
106. This is simply a proof of the equality of debit and credit balances in the accounts
(a) Imbalance sheet (b) No effect
(c) Trial balance (d) Profit and loss
107. A list of balances arranged according to whether they are assets, capital or liabilities, to depict the
financial situation on a specific date
(a) Trading (b) Profit and loss account
(c). No where (d) Balance sheet
108. Assets which have long life, to be used in the business and are not bought for the purpose of
resale are called
(a) Fixed asset (b) Current asset
(c) Current liability (d) Fixed capital
109. Fixed assets are listed starting with those the business will keep the
(a) Debit the purchase account and credit the cash account
(b) Longest down to those which will not be kept so long
(c) Heaviest to lowest in size
(d) Randomly

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

110. Following is the standard sequence of fixed assets

(a) Land and building, machinery and motor vehicle, fixture and fitting
(b) Fixture and fitting, machinery and motor vehicles, land and building
(c) No sequence is required
(d) Land and building, fixture and fitting, machinery and motor vehicles
111. Current assets are listing in following order
(a) Debtors, cash, cash at bank, stock
(b) Stock, debtors, cash at bank and cash in hand
(c) Stock, cash in bank, cash in hand, debtors
(d) Debtors, stock, cash in hand, cash in bank
112. ____________ are assets held for resale at a profit or items that have a short life?
(a) Current loss (b) Current assets
(c) Current capital (d) Current movement
113. Loan which do not have to be repaid in the near future, this being taken to be the next twelve
months come under the category of
(a) Shot-term asset (b) Short-term liabilities
(c) Long-term liabilities (d) Capital assets
114. Items to be paid for in the near future or less than one year are
(a) Fixed asset (b) Current asset
(c) Current capital (d) Current liabilities
115. All balances remaining on a trial balance after the trading and profit and loss account for a period
has been drawn up are displayed
(a) In a balance sheet dated the last day of the period
(b) Debit the purchase account and credit the cash account
(c) In a balance sheet on the first day of year
(d) In the mid of year

116. Carriage inwards is included in the cost of sales calculation because.

(a) It is a cost associated with the purchase of goods
(b) It should not be shown in the balance sheet
(c) Carriage outwards is shown as an expense to the profit and loss account
(d) None of the above.

117. The cost incurred by a firm of bringing goods to a merchantable condition should be included in
……………
(a) Its trading account (b) Its profit and loss account
(c) Its balance sheet (d) None of the above

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

118. The following data relates to a firm which has been trading for several years.
1996 1995
Sales Rs.1,000,000 Rs.900,000
Cost of Sales 500,000 480,000
Stock at 31 December 200,000 150,000
Assuming that the firm’s cost of sales is calculated by reference to its purchases and stock figures
only, the total of its purchases during 1996 was;
(a) Rs.100,000 (b) Rs.1703,000
(c) Rs.450,000 (d) Rs.550,000
119. The correct way to record stock taken by the proprietor of a firm for his own personal use.
without him paying for it is
Account to Debit Account to Credit
(a) Drawings Sales
(b) Drawings Stock
(c) Sales Drawings
(d) Drawings Purchases
120. If a firm returns goods to their suppliers, it is called
(a) Returns outwards (b) Returns inwards
(c) Returns in the factory (d) Sales
121. Good returned by the customers is
(a) Debtors (b) Return inwards
(c) Return outwards (d) Capital
122. Net purchase is equal to
(a) Debit the purchase account and credit the cash account
(b) Sales less return outwards
(c) Purchase less returns outwards
(d) Purchase plus return inwards
123. Net Sales is equal to
(a) Sales less returns inwards (b) Sale plus inwards
(c) Purchase less inwards (d) Purchase add inwards
124. Carriage is
(a) Cost of sales (b) Cost of transport of goods
(c) Cost of good sold (d) Cost of asset

125. Carriage of goods out of a firm to its customers is called.

(a) Carriage inwards (b) Carriage paid
(c) Carriage outwards (d) Carriage care
126. Carriage inwards is always added to the purchase in the trading account because.
(a) Debit the purchase account and credit the cash account
(b) To keep cost of selling goods being shown on the different basis

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

(c) To keep cost of buying goods being shown on the same basis
(d) No criterion is given
127. Is not part of our firm’s expense in buying goods and is always entered in the profit and loss
account
(a) Carriage outwards (b) Carriage inwards
(c) Carriage not given (d) Carriage in room
128. In the first year of business there will be no.
(a) Closing stock (b) Opening stock
(c) Raw stock (d) Current stock
129. The cost of putting goods into saleable condition should be charged in
(a) The profit and loss account (b) The sale account
(c) The trading accounts (d) None of above
130. Term that includes the trading and profit and loss account and balance sheet.
(a) Final date (b) Trail balance
(c) Balance sheet (d) Final accounts
131. Carriage inwards is shown as an expense item in
(a) Trading account (b) Profit account
(c) Balance sheet (d) No name
132. Carriage outwards is shown as an expense in the
(a) Trading account (b) Balance sheet
(c) Ledgers (d) Profit and loss account
133. In the opening year and the second year of a business, both opening and closing stocks are
brought into
(a) The journal (b) Profit and loss portion
(c) The trading account (d) None of them
134. It is a normal practice to show cost of goods sold as a separate figure in
(a) Trading account (b) Profit and loss account
(c) Expense account (d) Loss account
135. Gross profit equals
(a) Sales minus closing stock (b) Purchases minus closing stock
(c) Net profit minus expenses (d) Sales minus cost of goods sold
136. Cost of sales another name is
(a) Sales
(b) Purchases
(c) Opening stock minus purchases plus closing stock
(d) Cost of goods sold
137. Net profit equals
(a) Gross profit minus expenses (b) Sales minus cost of sales
(c) Sales minus expenses (d) Capital minus expenses

66
CHAPTER-3 LEDGERS AND TRIAL BALANCE

138. FFC buys Rs.40,000 worth of goods and sells of them for Rs.50,000. His gross profit is
(a) Rs.10,000 (b) Rs.20,000
(c) Rs.30,000 (d) Rs.11,000
139. Net profit plus expenses equals
(a) Purchases (b) Cost of goods sold
(c) Capital (d) Gross profit
140. If sales are Rs.10,000 expenses Rs.2,000 and net profit is 10% of sales, what would be the gross
profit amount?
(a) Rs.3,000 (b) Rs.9,000
(c) Rs.10,000 (d) Rs.11,000
141. If the gross profit is Rs.5,000 and the net profit is 25% of the gross profit, what would be the
figure of expenses?
(a) Rs.1,250 (b) Rs.3,750
(c) Rs.4,150 (d) Rs.6,250
142. If sales are Rs.6,000 gross profit is 20% of sales and net profits is 10% of sales the expenses are
(a) Rs. 600 (b) Rs.1,200
(c) Rs.2,400 (d) Rs.44,800
143. Net sales equals sales minus
(a) Returns outwards (b) Cost of goods sold
(c) Returns inwards (d) Carriage on sales
144. A balance sheet is a
(a) Statement of debtors and creditors
(b) Statement of income and expenditure for the year
(c) Statement of cash received and paid through our the year
(d) Financial statement of a business's wealth on a particular scale
145. Which one of the following is a fixed asset for a builder's merchant?
(a) Cash (b) Stock
(c) Debtors (d) Typewriter
146. Which one of the following is a garage's current asset?
(a) A breakdown van
(b) The managing director’s private car
(c) The condenses in the saleroom
(d) A customer's car in for repair
147. Net current assets are the same as
(a) Working capital
(b) Total assets minus current liabilities
(c) Fixed assets minus current liabilities
(d) Capital minus current liabilities
148. Which one of the following is usually a liability?
(a) Mortgage (b) Bank
(c) Bank overdraft (d) Rent paid in advance

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

149. Which one of the following would usually be regarded as a current liability?
(a) A liability due for payment with 12 months
(b) A ability due for payment with 24 months
(c) A ability due for payment with 36 months
(d) A ability due for payment with 48 months
150. Net assets equals
(a) Current assets minus current liabilities
(b) Fixed assets minus current liabilities
(c) Total assets minus current liabilities
(d) Fictitious assets current liabilities
151. If drawings exceed opening capital plus net profit and no new capital has been introduced then
(a) Business is healthy
(b) Drawings account has a credit balance
(c) Business is bankrupt
(d) Capital account has a credit balance
152. M. Bickers, a sole trader made a gross profit of 20% on sales of Rs.642.000. The cost of goods
sold was
(a) Rs.124,000 (b) Rs.156,000
(c) Rs.99,000 (d) Rs.513,600
153. An alternative name of working capital is
(a) Assets less current capital is working (b) Total assets
(c) Net current assets (d) Net assets
154. Sale Return is also known as:
(a) Carriage inwards (b) Carriage outwards
(c) Returns inwards (d) Returns outwards
155. A sole trader provides the following information
1 January 31 December
Fixed assets 60,000 70,000
Current assets 15,000 18,000
Current liabilities 12,000 14,000
Drawing for the year were 10000 what was the net profit?
(a) 10000 (b) 13000
(c) 21000 (d) 25000
156. The following information is taken from a sole trader's account
Opening capital 24000
Closing capital 27600
Drawings 2400
What is the trader's net profit?
(a) 1200 (b) 2400
(c) 3600 (d) 6000
157. Which of the following accounts normally has a credit balance?
(a) Capital account (b) Motor vehicles account
(c) Purchases account (d) Returns inwards account

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

158. How should the cash purchases of supplies be entered in the ledger?
Account Debited Account Credited
(a) Cash Purchases
(b) Cash Supplier
(c) Purchases Cash
(d) Supplier Cash
159. X owns a shop, to find his selling price he marks up his stock by 50%. He took stock to his own
use costing 100 but did not pay for it How should this be entered in the account?
Debit Credit
(a) Debtors 100 Sales 100
(b) Drawing 100 Purchases 100
(c) Debtors 150 Sales 150
(d) Drawing 150 Purchases 150
160. Why does a business prepare a trial balance?
(a) To calculate the profit and loss
(b) To show the financial position
(c) To check the arithmetical accuracy of the ledger
(d) To check the cash and bank balances
161. Provides the following information
Sales 100000
Stock at 1 July 20000
Purchases 80000
Stock at 31 July 30000
Expenses 20000
What is net profit for July?
(a) 10000 (b) 20000
(c) 30000 (d) 40000
162. If current assets are arranged in a balance sheet in increasing order of liquidity which of the
following will be true?
(a) The easiest to turn into cash will come first
(b) The easiest to turn into cash will come last
(c) The highest value of money will come first
(d) The highest value in money will come last
163. A business buys an item of capital equipment on credit of 30 days. What is the effect of this
transaction on the balance sheet?
(a) To increase current assets and increase current liabilities
(b) To increase current assets and reduce current liabilities
(c) To increase fixed assets and reduce current assets
(d) To increase fixed assets and increase current liabilities

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

164. A sole trader takes cash and also goods for his own use form his business. Which of these will
effect his capital?
(a) The cash only (b) The goods only
(c) Both the cash and the goods (d) Neither the cash nor the goods
165. The following information relates to a business
Capital at 1 January 20000
Capital at 31 December 32000
Drawing during the year 10000
Additional capital brought in during the year 7000
What is the net profit for the year?
(a) 9000 (b) 12000
(c) 15000 (d) 2200
166. Which account could have a credit balance?
(a) Bank (b) Carriage inwards
(c) Carriage outwards (d) Cash
167. Bank account of Mr. X is as follows
Bank account
January 1 Balance b/d 100 January 10 Drawings 100
January 20 Debtor 400 January 31 Balance c/d 400
500 500
What is the nature of closing balance in the above account?
(a) Debit closing balance
(b) Credit closing balance
(c) both a and b
(d) none of the above
168 The following information relates to a sole trader.
Total of all assets Rs 2,300
Total of all liabilities 1,500
Net profit earned during the year 1,000
Drawings 700

The sole trader’s capital as per balance sheet is:

(a) Rs 1,200 (b) Rs 500
(c) Rs 5,500 (d) Rs 5,600
169. Which is a current asset?
(a) Purchase ledger balance (b) Rent received in advance
(c) Sales ledger balance (d) Wages accrued
170. A claim, which can be enforced against the assets of the firm in the curt is called
(a) Liability (b) Equity
(c) Assets (d) Current expense
171. Cost of goods sold = purchases + Stock in the beginning + Direct expenses minus
(a) Stock at the end (b) Stock in the opening
(c) Stock in the middle (d) All of above

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

172. Gross profit + Stock in the beginning + Purchases + Direct expenses - Stock at the end is equal to
(a) Sales (b) Purchase
173. Cost of sales is calculated in:
(a) Profit and loss account (b) Final accounts
(c) Balance sheet (d) Trading account
174. Current liabilities are such obligations, which are to be satisfied
(a) Within one year (b) Within two years
(c) Within five years (d) Within three years
175. Purchase of an asset is called
(a) An expense (b) An expenditure
(c) A loss (d) Profit
176. The balance appearing on the debit side of the trial balance as expenditure is shown in the
(a) Balance sheet (b) Trading accounting
(c) Profit and loss account (d) Trial balance
177. Sales are equal to
(a) Cost of goods sold + Gross profit (b) cost of goods sold – Gross profit
(c) Gross profit – Cost of goods sold (d) Gross profit only
178. The equality of debits and credits is tested periodically by preparing a?
(a) Income Statement (b) General Journal
(c) Trial balance (d) Balance sheet
179. The withdrawal of goods from the business by the proprietor should be credited to
(a) Drawings account (b) Purchases account
(c) Capital account (d) Current account
180. If there is decrease in cost of goods sold it will result in
(a) No effect (b) Increase in the gross profit
(c) Decrease in the gross profit (d) Equity in the gross profit
181. The change in the sales figures can be attributed to the following
(a) Increase or in the cost of goods sold (b) Increase or decrease in sales price
(c) Combination of the two (d) All of above
182. The change in the cost of goods sold can be due to
(a) Increase or decrease in the quantity of goods sold
(b) Increase or decrease in sales price
(c) Combination of the two
(d) None of above
183. Which of the following best describes a trial balance?
(a) Shows the financial position of a business
(b) It is a special account
(c) Shows all the entries in the books
(d) It is list of balance on the books

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

184. Is it true that the trial balance Total should agree?

(a) No there are sometimes goods reasons why they differ.
(b) Yes, except where the trial balance is extracted at the year-end.
(c) Yes, always
(d) No because it is not a balance sheet
185. The following balances have been taken from the trail balance of XYZ. What is the trial balance
total on the debit side? Rent paid Rs.1,800, capital Rs.15,000, purchases Rs.10,000, sales
Rs.12,000, wages Rs.5,000 sundry expenses Rs.1,000, cash Rs.9,200
(a) Rs.26,000 (b) Rs.29,000
(c) Rs.42,000 (d) Rs.27,000
186. It sales are Rs.8,000 and the gross profit 30% what it's the cost of sales'
(a) Rs.10,400 (b) Rs.5,600
(c) Rs.6,000
187. In an income statement cost of goods sold is:
(a) Purchase - Closing inventory + Opening inventory
(b) Purchase - Opening inventory + closing inventory
(c) Opening inventory + Purchases + closing inventory
(d) Closing inventory + Purchases - Opening inventory

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

MULTIPLE CHOICE QUESTIONS (MCQ) SOLUTIONS

01. C The process of classifying amounts from books of prime entry to ledgers is
called ‘posting’.
02. A On left side Rs. 6,000
03. C T account: periodically & Running balance account: after each transaction
04. B Rs. 18,000 + 10,000 – 15,000 = Rs. 13,000 debit
05. C On debit side with description “Interwood” and amount Rs. 500,000
06. B On credit side with description “Furniture” and amount Rs. 500,000
07. A Loan (owed) and owner’s capital
08. C Electricity (expense)
09. Rs. 32,000 Cash a/c
Particulars Rs. Particulars Rs.
b/d 18,000 Payables 35,000
Receivables 49,000 c/d 32,000
67,000 67,000

10. Rs. 474,485 Accounts payable

Particulars Rs. Particulars Rs.
Bank a/c 100,750 b/d 250,225
c/d 474,485 Purchases 325,010
575,235 575,235

11. Rs. 79,000 Accounts receivables

Particulars Rs. Particulars Rs.
b/d 10,000 Cash 80,000
Sales 79,000 c/d 9,000
89,000 89,000

12. A Accounts Payable

Particulars Rs. Particulars Rs.
Cash/Bank 148,000 b/d 95,000
Discount received 2,000 Purchases (credit) 221,000
Purchase returns 8,000
c/d 158,000
316,000 316,000
Cash purchases have no effect on payables.

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

13. B Assets are represented by debit balances

Option (a) is incorrect as a debit may represent expenses, assets and drawings.
14. B Purchases 142,958 + Expenses Rs. 34,835 + non-current assets Rs. 63,960 +
Receivables 31,746 + Cash at bank Rs. 1,783 = Total debits Rs. 275,282
15. D Trial balance is not conclusive proof of accuracy. It may be equal in spite of
certain omissions and errors.
16. D Credit side of profit or loss
17. C Debit side of profit or loss
18. A Debit side of Capital account
19. A Debit side of Capital account
20. C Income, expenses and drawings accounts are closed at the end of accounting
period while assets, liabilities and capital accounts are carried forward to next
year

21. C 22. D 23. C 24. D

25. B 26. C 27. C 28. A

29. D 30. A 31. B 32. A

33. D 34. B 35. D 36. D

37. C 38. D 39. C

40. A 41. B 42. C 43. C

44. A 45. B 46. A

47. D 48. D 49. A 50. C

51. B 52. D 53. C 54. A

55. D 56. D 57. A 58. C

59. D 60. D 61. C 62. D

63. D 64. C 65. C 66. A

67. B 68. B 69. B

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

70. B 71. D

72. C 73. D 74. A 75. D

76. A 77. B 78. B 79. A

80. C 81. D 82. C 83. A

84. B 85. D 86. A 87. A

88. A 89. C 90. C 91. D

92. C 93. B 94. B 95. C

96. B 97. D 98. A 99. B

100. D 101. D 102. C 103. D

104. C 105. D 106. C 107. D

108. A 109. B 110. D 111. B

112. B 113. C 114. D 115. A

116. A

117. A 118. D 119. D

120. A 121. B 122. C 123. A

124. B 125. C 126. C 127. A

128. B 129. C 130. D 131. A

132. D 133. C 134. A 135. D

136. D 137. A 138. A 139. D

140. A 141. B 142. A 143. C

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CHAPTER-3 LEDGERS AND TRIAL BALANCE

144. D 145. D 146. C 147. A

148. C 149. A 150. C 151. C

152. D 153. C 154. C

155. C 156. D 157. A 158. C

159. B 160. C 161. A 162. B

163. D 164. C 165. C 166. A

167. A 168. B 169. C 170. B

171. A 172. A 173. D 174. A

175. B 176. A 177. A 178. C

179. B 180. B 181. B 182. A

183. D 184. C 185. D 186. B

187. A

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CHAPTER-4 ACCRUALS AND PREPAYMENTS

MULTIPLE CHOICE QUESTIONS (MCQs)

01. In the year to 31 December 2018, Saira received Rs. 50,800 rental income. The amounts of rent
received in advance and due in arrears were as follows:
31 Dec 2018 31 Dec 2017
Rs. Rs.
Rent received in advance 4,000 3,000
Rent due in arrears (accrued) 2,500 1,700
What figure for rental income should be recorded in the statement of profit or loss for the year
ended 31 December 2018?
(a) Rs. 50,800 (b) Rs. 50,600
(c) Rs. 54,500 (d) Rs. 56,000
02. On 1 March 2017, Zahra pays an insurance premium of Rs. 2,400 for the period to 28 February
2018. What is the charge to the statement of profit or loss for the year ended 31 October 2017 and
prepayment in the Statement of Financial Position as at that date?
(a) Charge for SPL Rs. 800 and Prepayment Rs. Rs. 1,600
(b) Charge for SPL Rs. 1,600 and Prepayment Rs. 800
(c) Charge for SPL Rs. 2,400 and Prepayment 0
(d) Charge for SPL 0 and Prepayment Rs. 2,400
03. Zahra determines at year end that Salaries paid during the year include Rs. 10,000 in advance.
What is the correct year end adjustment for advance salary to be made?
(a) Dr Salaries Rs. 10,000 Cr Advance salaries Rs. 10,000
(b) Dr Salaries Rs. 10,000 Cr Accrued salaries Rs. 10,000
(c) Dr Advance salaries Rs. 10,000 Cr Salaries expense Rs. 10,000
(d) No entry required
04. On year end a business has outstanding electricity bills of Rs. 15,000. During the year electricity
bills paid are Rs. 190,000. What adjustment will be required to utilities expense account
regarding the outstanding bills?
(a) Cr Rs. 15,000 (b) Dr Rs. 15,000
(c) No impact (d) Dr Rs. 190,000
05. Atif finalized his draft accounts and ignored a prepayment for Rs. 100 and accrued expense Rs.
300.
What will be the impact on profit for the year?
(a) Understated by Rs. 100 (b) Overstated by Rs. 100
(c) Overstated by Rs. 200 (d) Understated by Rs. 200
06. On finalizing the draft accounts Minhas identified that he has Rs. 1,000 rental income receivable.
Rental income received and recorded during the year is Rs. 11,000.
What is the correct entry to record the accrued income?
(a) Dr Rental income Rs. 1,000 Cr Accrued income Rs. 1,000
(b) Dr Cash Rs. 12,000 Cr Rental income Rs. 12,000
(c) Dr Cash Rs. 11,000 Cr Rental income Rs. 11,000
(d) Dr Accrued income Rs. 1,000 Cr Rental income Rs. 1,000

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07. Which of the following is asset account?

(a) Prepaid expense
(b) Accrued expense
(c) Unearned income
(d) Rent payable
08. After finalizing the draft accounts of a business it was identified that salary expense payable for
Rs. 9,000 has been ignored. Salary expense paid during the year was Rs. 110,000.
What will be the impact of recording the salaries payable?
(a) Profit will be reduced by Rs. 9,000
(b) Profit will be increased by Rs. 9,000
(c) Profit will be reduced by Rs. 110,000
(d) Profit will be increased by Rs. 110,000
09. Jasia has taken a loan of Rs. 250,000 from HBL as on 1st March 2018 for the construction of her
office building. The construction is completed as on June 30, 2018. She rented a portion of her
office for Rs. 4,500 per month on July 1. Interest is accrued and paid annually @ 15% per annum
on December each year.
What amount of interest expenses and rent income should be shown in the statement of Profit or
Loss of Jasia’s business prepared on December 31, 2018?
(a) Interest expense Rs. 54,000, Rental income Rs. 37,500
(b) Interest expenses. 37,500, Rental income Rs. 54,000
(c) Interest expense Rs. 31,250, Rental income Rs. 27,000
(d) Interest expenses. 37,500, Rental income Rs. 4,500
10. What is the treatment of Pre - received income in the Statement of Financial Position of the
business?
(a) Treated as a non – current asset
(b) Treated as a current asset
(c) Treated as a non – current liability
(d) Treated as a current liability
11. The annual rent expense for TTT for the period 1 July 2018 to 30 June 2019 is Rs. 35,000, which
is 25% more than the previous year. Rent expense is paid on 1 July.
What is the charge of rent expense in the statement of profit or loss for the year ended 31
December 2018?
(a) Rs. 28,000 (b) Rs. 31,500
(c) Rs. 35,000 (d) Rs. 7,000
12. Which of the following statements is incorrect?
(a) Income received in advance is a current liability
(b) Accrued income is a current asset
(c) Prepaid insurance is a current liability
(d) Salaries payable is a current liability

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CHAPTER-4 ACCRUALS AND PREPAYMENTS

13. After finalizing the draft accounts Arsalan identified that he has treated prepaid insurance of Rs.
1,000 as accrued expense.
What will be the impact of correction?
(a) Profit will be increased by Rs. 2,000
(b) Profit will be increased by Rs. 1,000
(c) Profit will be reduced by Rs. 1,000
(d) Profit will be reduced by Rs. 2,000
14. A business pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year.
The rent was increased from Rs. 150,000 per year to Rs. 180,000 per year as from 1 October
2007.
What rent expense and accrual should be included in the company’s financial statements for the
year ended 31 January 2008?
Rent expense Rs. Accruals Rs.
(a) 110,000 10,000
(b) 80,000 15,000
(c) 160,000 15,000
(d) 100,000 10,000
15. Helix Corporation has sublet part of its office and in the year ended 30 November 2008 the rent
receivable was:
Until 30 June 2008 Rs. 9,000 per year
From 1 July 2008 Rs. 12,000 per year
Rent was received quarterly in advance on 1 January, April, July, and October each year.
What amounts should appear in the company’s financial statements for the year ended 30
November 2008?
Rental income Statement of Financial Position
(a) Rs. 10,800 Rs. 1,000 in sundry payables
(b) Rs. 10,900 Rs. 1,000 in sundry payables
(c) Rs. 10,250 Rs. 1,000 in sundry receivables
(d) Rs. 9,900 Rs. 2,000 in sundry receivables
16. Sitara Industries has taken a loan from Crescent Bank. Interest on the loan is payable every
quarter i.e. on March 31, June 30, September 30 and December 31. Face amount of the loan is
500,000 and the rate of interest is 10% per annum. Due to financial problems, two instalments
were not paid on September 30 and December 31.
What is the amount of the interest liability to be shown in the Statement of Financial Position
prepared as on December 31?
Rs. ___________
17. Rent paid on 1 September 2017 for the year to 31 August 2018 was Rs. 15,000, and rent paid on 1
September 2018 for the year to 31 August 2019 was Rs. 18,000.
What figure for rent expense should be shown in the statement of profit or loss for the year ended
31 December 2018?
Rs. ___________

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CHAPTER-4 ACCRUALS AND PREPAYMENTS

18. A business had deposited Rs. 500,000 into an annual fixed deposit on May 1, 2018. Interest is
accrued quarterly on March 31, June 30, September 30 and December 31 each year. Interest will
be paid only on maturity. Monthly interest amount is Rs. 3,000.
What amount of interest receivable should be shown in the Statement of Financial Position
prepared as on December 31, 2018?
Rs. ___________
19. A business has paid an annual salary of Rs. 36,000 in advance to one of its employees on 31
August 2017.
What is the amount of prepaid salaries at the end of the year on 31 December 2017?
Rs. ___________
20. A business was started on January 1, 2008 in a building which is on a 25 year lease. The rent of
the building is payable quarterly in advance. Payments of rent was made during the year as
follows:
January 1, 2008 Rs. 7,500
March 29, 2008 Rs. 7,500
June 28, 2008 Rs. 7,500
September 30, 2008 Rs. 7,500
December 30, 2008 Rs. 7,500
What will be the rent expense charged to statement of profit or loss for the year ended December
31, 2008?
Rs. ___________
21. An accrual is:
(a) An expense relating to next year but not paid in current year
(b) An expense relating to the current year and paid within current year
(c) An expense relating to the current year but not paid in current year
(d) An expense relating to next year and already paid in current year
22. Earned but not yet received income is treated as
(a) Asset (b) Liability
(c) Capital (d) Loss
23. Unearned income is classified as
(a) Assets (b) Liability
(c) Equity (d) Loss
24. A prepayment can be defined as:
(a) Payments for expenses for that are not yet incurred and classified as non-current asset
(b) Expenses incurred but not yet paid and classified as current asset
(c) Payments for expenses for that are not yet incurred and classified as current asset
(d) None
25. Expenses relevant to the accounting period which remain unpaid by period end should be:
(a) Included with expenses paid and shown as an asset at the period end
(b) Ignored until they are paid for in the next period
(c) Deducted from amount already paid and shown as a liability at the period end
(d) Include in with the expenses and shown as a liability at the period end

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26. Which of the following is not true?

(a) An accrual is an amount owing at the end of a period; a prepayment is an amount paid in
advance
(b) An accrual is a liability; a prepayment is an asset
(c) An accrual is a liability; a prepayment is always a non-current asset
(d) An accrual is a current liability; a prepayment is a current asset
27. Staff salary remaining unpaid as at the year-end should be accounted for as:
(a) Prepaid salary (debit) and Staff salary expense (credit)
(b) Staff salary expense (debit) and Cash (credit)
(c) Accrued Salary (debit) and Staff salary expense (credit)
(d) Staff salary expense (debit) and accrued salary (credit)
28. A business has a year ended 30 September and receives an invoice for rent of Rs. 600,000 for the
six months to 31 December. What accrual or prepayment is required for the invoice in the year
end accounts?
(a) Prepaid rent = Rs.300,000 (b) Accrued rent = Rs.300,000
(c) Prepaid rent = Rs.600,000 (d) Accrued rent = Rs.600,000
29. During the year, a business paid an electricity bill for Rs. 900,000 for the 3 months to November.
The year end of the business is 30 September, what accrual or prepayment is needed at the year
end?
(a) Prepaid electricity = Rs. 600,000
(b) Accrued electricity = Rs. 600,000
(c) Prepaid electricity = Rs. 300,000
(d) Accrued electricity = Rs. 300,000
30. A business has a beginning utilities accrual of Rs. 50,000, an ending accrual of Rs. 60,000, and
during the year, it pays for utilities of Rs. 80,000. What is the amount of utilities expense?
(a) Rs. 70,000 (b) Rs. 80,000
(c) Rs. 90,000 (d) Rs. 140,000
31. On 31 October 2019, a business pays annual insurance premium of Rs. 600,000. What is the
prepayment at the end of the year (31 December 2019)?
(a) Nil (b) Rs. 100,000
(c) Rs. 300,000 (d) Rs. 500,000
32. XYZ Ltd. receives interest of Rs. 100,000 on bank deposit for the month of December 2011 on
3rd January 2011. XYZ Ltd has an accounting year end of 31st December.
What would be the accounting entry for such transaction?
(a) Prepaid interest (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(b) Cash (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(c) Cash (debit) = Rs.100,000 and Prepaid interest (credit) = Rs.100,000
(d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000

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CHAPTER-4 ACCRUALS AND PREPAYMENTS

33. XYZ Ltd. receives interest of Rs. 100,000 on bank deposit for the month of December 2011 on
3rd January 2011. XYZ Ltd has an accounting year end of 31st December.
What would be the accounting entry when subsequently on 3rd January, payment for interest is
received?
(a) Prepaid interest (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(b) Cash (debit) = Rs.100,000 and Interest receivable (credit) = Rs.100,000
(c) Cash (debit) = Rs.100,000 and Prepaid interest (credit) = Rs.100,000
(d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000
34. ABC Limited receives advance rent from its tenant of Rs.1 million on 31st December in respect
of office rent for the following year.
ABC Ltd. has an accounting year end of 31st December. What accounting entry is to be passed in
this year?
(a) Cash (debit) = Rs.1 million and Advance rent – liability (credit) = Rs.1 million
(b) Cash (debit) = Rs.1 million and Accrued rent (credit) = Rs.1 million
(c) Cash (debit) = Rs.1 million and Rent income (credit) = Rs.1 million
(d) None
35. ABC Limited receives advance rent from its tenant of Rs.1 million on 31st December in respect
of office rent for the following year.
What would be the accounting entry in the following year?
(a) Accrued rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million
(b) Advanced rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million
(c) Accrued rent (debit) = Rs.1 million and prepaid rent (credit) = Rs.1 million
(d) None
36. F Limited year-end is 30 September. On 1 January 2016 the organization took out a loan of Rs.
100,000 with annual interest of 12%. The interest is payable in equal instalments on the first day
of April, July, October and January in arrears.
How much should be charged to P&L for the year ended 30 September 2016, and how much
should be accrued on the statement of financial position?
Profit or loss Statement of financial position
(a) Rs. 12,000 Rs. 3,000 accrual
(b) Rs. 9,000 Rs. 3,000 accrual
(c) Rs. 9,000 Nil
(d) Rs. 6,000 Rs. 3,000 prepayment
37. On the first day of Month 1, a business had prepaid insurance of Rs. 10,000. On the first day of
Month 8, it paid, in full, the annual insurance invoice of Rs. 36,000, to cover the following year.
The amount charged in P&L and the amount shown in the statement of financial position at the
year-end is:
Profit or loss SFP (Prepayment)
(a) Rs. 5,000 Rs. 24,000
(b) Rs. 22,000 Rs. 23,000
(c) Rs. 25,000 Rs. 21,000
(d) Rs. 36,000 Rs. 15,000

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38. An entity’s draft accounts for the year to 31st October 2015 report a loss of Rs. 1,486. When the
assistant accountant prepared the accounts, she did not include an accrual of Rs. 1,625 and a
prepayment of Rs. 834.
What is profit or loss for the year to 31st October 2015 following the inclusion of the accrual and
prepayment?
(a) A loss of Rs. 695 (b) A loss of Rs. 2,277
(c) A loss of Rs. 3,945 (d) A profit of Rs. 1,807
39. The draft year end accounts were prepared without adjusting prepayment for rent of Rs. 970.
When the adjustment is made, which of the following would be effect thereof?
(a) Profit increased by Rs. 970 and Liability increased by Rs. 970
(b) Profit decreased by Rs. 970 and Liability increased by Rs. 970
(c) Profit increased by Rs. 970 and assets increased by Rs. 970
(d) Profit increased by Rs. 970 and assets decreased by Rs. 970
40. An entity prepared the draft end year accounts, but did not adjust these for a prepayment of Rs.
1,500 and an accrual of Rs. 400.
How will profit and net assets be affected by including the prepayment and accrual?
NET PROFIT WILL NET ASSETS WILL
(a) Increase by Rs. 1,100 Reduce by Rs. 1,100
(b) Reduce by Rs. 1,900 Increase by Rs. 1,900
(c) Increase by Rs. 1,100 Increase by Rs. 1,100
(d) Reduce by Rs. 1,900 Reduce by Rs. 1,900
41. A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year.
The rent was increased from Rs. 90,000 per year to Rs. 120,000 per year as from 1 October 2012.
What rent expense and accrual should be included in the company's financial statements for the
year ended 31 January 2013?
Rent Expense (Rs.) Accrual (Rs.)
(a) 100,000 20,000
(b) 100,000 10,000
(c) 97,500 10,000
(d) 97,500 20,000
42. At 31 March 2012 a company had oil in hand to be used for heating costing Rs. 8,200 and an
unpaid heating oil bill for Rs. 3,600. At 31 March 2013 the heating oil in hand was Rs. 9,300 and
there was an outstanding heating oil bill of Rs. 3,200. Payments made for heating oil during the
year ended 31 March 2013 totalled Rs. 34,600.
Based on these figures, what amount should appear in the company's Statement of Profit or Loss
for heating oil for the year?
(a) Rs. 23,900 (b) Rs. 36,100
(c) Rs. 45,300 (d) Rs. 33,100

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43. A company has sublet part of its offices and in the year ended 30 November 2013 the rent
receivable was:
Until 30 June 2013 Rs. 8,400 per year
From 1 July 2013 Rs. 12,000 per year
Rent was paid quarterly in advance on 1 January, April, July and October each year.
What amounts should appear in the company’s financial statements for the year ended 30
November 2013?
Rent Receivable (Rs.) SOFP (Rs.)
(a) 9,900 2,000 in sundry payables
(b) 9,900 1,000 in sundry payables
(c) 10,200 1,000 in sundry payables
(d) 9,900 2,000 in sundry receivables
44. Which of the following statements is not true?
(a) Accruals decrease profit
(b) Accrued income decreases profit
(c) A prepayment is an asset
(d) All of the above statements are true
45. A business owns two properties which it rents to tenants. In the year ended 31 December 2016, it
received Rs. 278,000 in respect of property 1 and Rs. 160,000 in respect of property 2. Balance
on the rental accounts were as follows:
31 December 2016 31 December 2015
Property 1 13,400 Dr 12,300 Cr
Property 2 6,700 Cr 5,400 Dr
What amount should be credited to the Statement of P&L and OCI for the year ended 31
December 2016 in respect of rental income?
(a) Rs. 451,600 (b) Rs. 738,000
(c) Rs. 939,200 (d) Rs. 858,600
46. Zameen, a property company, received cash totalling Rs. 838,600 from tenants during the year
ended 31 December 2016. Figures for rent in advance and in arrears at the beginning and at the
end of year were:
31 December 2015 31 December 2016
Rs. Rs.
Rent receive in advance 102,600 88,700
Rent in Arrears (all subsequently received) 42,300 48,400
What amount should appear in company’s Statement of P&L for the year ended 31 December
2016 for rental income?
(a) Rs. 818,600 (b) Rs. 738,000
(c) Rs. 939,200 (d) Rs. 858,600

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CHAPTER-4 ACCRUALS AND PREPAYMENTS

47. Details of a company’s insurance policy are shown below:

Premium for year ended 31 March 2016 paid April 2015 Rs. 10,800
Premium for year ended 31 March 2017 paid April 2016 Rs. 12,000
What figure should be included in the company’s financial statements for the year ended 30 June
2016?
Statement of P&L (Rs.) Statement of financial position (Rs.)
(a) 11,100 9,000 prepayment
(b) 11,700 9,000 prepayment
(c) 11,100 9,000 accrual
(d) 11,700 9,000 accrual
48. A tenant pays annual rent of Rs. 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) Rs. 500 Accrual (b) Rs. 500 Prepayment
(c) Rs. 1,000 Accrual (d) Rs. 1,000 Prepayment
49. A company’s accounting year-end is 31st December. It always pays its insurance premiums
annually in advance, on the due date 1 September each year. During the last few years the
following premiums have been paid:
Year -1 Rs. 2,400
Year -2 Rs. 2,760
Year -3 Rs. 3,840
What will be charged for insurance in the company’s Statement of Profit or Loss account for year
3?
Rs. _____________________
50. X Ltd rents its building to Y Ltd. At 31st December 2018, Y Ltd owed Rs. 4,500 for rent, but at
31st December 2019, had paid Rs. 3,200 in advance. During the year X Ltd had received Rs.
17,100 in rental from Y Ltd.
What is the rental income to be shown in the Statement of Profit or Loss of X Ltd for the year
ended 31st December 2019?
Rs. __________________________
51 Rent paid on 1 October 20X2 for the year to 30 September 20X3 was Rs.1,200, and rent paid on 1
October 20X3 for the year to 30 September 20X4 was Rs.1,600.
Rent figure, as shown in the income statement for the year ended 31 December 20X3, would be
A Rs.1,200 B Rs.1,600
C Rs.1,300 D Rs.1,500
52 Stationery paid for during 20X5 amounted to Rs.1,350. At the beginning of 20X5 there was an
inventory of stationery on hand of Rs.165 and an outstanding invoice for Rs.80. At the end of
20X5, there was an inventory of stationery on hand of Rs.140 and an outstanding invoice for
Rs.70. The stationery figure to be shown in the income statement for 20X5 is
A Rs.1,195 B Rs.1,335
C Rs.1,365 D Rs.1,505

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53 A business received or issues the following invoices and pays or received the invoiced amounts
on the following dates:
Invoice date Invoice amount Date paid or
received
Purchase 2.6.X1 Rs.200 26.6.X1
25.6.X1 Rs.300 2.7.X1
Sales 8.6.X1 Rs.400 26.6.X1
29.6.X1 Rs.600 7.7.X1
There is no inventory at the beginning or end of June.
What is the difference between the profit for June calculated on a cash basis, and calculated on an
accruals basis?
A Nil B Rs.200
C Rs.300 D Rs.500
54 During the year, Rs.4,000 was paid to the electricity board. At the beginning of the year, Rs.1,000
was owed, and at the end of the year Rs.1,200 was owed?
What is the charge for electricity in the year's income statement?
A Rs.3,000 B Rs.4,000
C Rs.4,200 D Rs.5,200
55. On 7 November 20X1. Rs.8,400 rent was paid for the 24 months to 31 September 20X3.
What is the charge for rent in the income statement and the statement of financial position
(SOFP) entry for the year to 31 December 20X2?
Income statement SOFP
A Rs.4,200 Prepayment Rs.3,150
B Rs.4,200 Prepayment Rs.4,200
C Rs.5,250 Accrual Rs.3,150
D Rs.5,250 Accrual Rs.4,200
56. During the year Rs.5,000 rent was received. At the beginning of the year, the tenant owed
Rs.1,000, at the end of the year the tenant owed Rs.500.
What is the rental income figure for the year's income statement?
A Rs.4,000 B Rs.4,500
C Rs.5,000 D Rs.5,500
57. During the year, Rs.4,000 was paid for motor expenses. At the end of the year, the charge in the
income statement was Rs.5,000, with an accrual of Rs.2,500 in the statement of financial position.
What was in last year's statement of financial position for motor vehicles?
A Accrual Rs.1,500 B Prepayment Rs.1,500
C Accrual Rs.3,500 D Prepayment Rs.3,590
58. At 1 September, the motor expenses account showed 4-months' insurance prepaid of Rs.80 and
petrol accrued of Rs.95. During September, the outstanding petrol bill is paid, plus further bills of
Rs.245. At 30 September there is a further outstanding petrol bill of Rs.120.
The amount to be shown in the income statement for motor expenses for September is
A Rs.385 B Rs.415
C Rs.445 D Rs.460

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59. A tenant pays us rent of Rs.1,000 a month. At the year-end he had paid 3 months in advance.
During the year, Rs.16,000 was received.
What was in our last year's statement of financial position in respect of this tenant?
A Rs.1,000 debit B Rs.1,000 credit
C Rs.7,000 debit D Rs.7,000 credit
60 Which one of the following statements is true?
A Bad debts are an example of a prepayment
B Prepayments are current liabilities
C Prepayments decrease the profit in the income statement
D Prepayments are included in current assets in the statement of financial position

The following data relates to questions 61 and 62

Business rates are paid annually on 1 April, to cover the following 12 months. The business rates for
20X1/X2 are Rs.1,800, and for 20X2/20X3 are increased by 20%. Rent is paid quarterly on the first day
of May, August, November and February, in arrears. The rent has been Rs.1,200 per annum for some
time, but increases to Rs.1,600 per annum from 1 February 20X2.
61 The charge for business rates in the income statement for the year ended 30 April 20X2 is
Rs. ___________
62 The charge for rent in the income statement for the year ended 30 April 20X2 is
Rs. ___________

63 Mr. Bod has paid rent of Rs.2,400 for the period 1 January 20X8 to 31 December 20X8. His first
accounts are being drawn up for the nine months onded-3Q-Septemher 20X8.
What should his first accounts show?
A Only a rent expense of Rs.2,400
B A rent expense of Rs.1,800 and a pre-payment of Rs.600
C A rent expense of Rs.1,800 and accrued income of Rs.600
D A rent expense of Rs.2,400, with an explanatory note that this is the usual charge for 12
months
64 Jamie is preparing his trial balance at 31 October 20X7. At 1 November 20X6 he had an accrual
of Rs.297 for telephone expenses. During the year to 31 October 20X7 he paid invoices for
telephone charges up to 31 October 20X7 of Rs.4,570.
What balance should Jamie include in his initial trial balance at 31 October 20X7 for telephone
expenses?
A Rs.4,273 debit B Rs.4,273 credit
C Rs.4,867 debit D Rs.4,867 credit

65 Jean’s electricity expense account has a debit balance of Rs.1,540. Jean had no opening accrual or
prepayment for electricity. The last electricity invoice was for Rs.462 for the three months to 30
September 20X7.

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CHAPTER-4 ACCRUALS AND PREPAYMENTS

What are the correct amounts to be charged to Jean’s income statement for the year to 30
November 20X7 and reported as an accrual on her statement of financial position at 30 November
20X7 for electricity?
(2 marks)
Charge to income statement Accrual
A Rs.1,694 Rs.154
B Rs.1,694 Rs.308
C Rs.1,848 Rs.154
D Rs.1,848 Rs.308

66 After completing his final accounts, Kevin found that he had understated a prepayment.
How are Kevin’s net profit and capital affected by the correction of the error?
Net profit Capital
A Increased Increased
B Increased Decreased
C Decreased Increased
D Decreased Decreased
67 Lindsey has paid Rs.11,040 for rent for the six month period to 31 August 20X2.
What accrual or prepayment is required when preparing accounts for the year ended 30 June
20X2?
A A prepayment of Rs.1,840 B A prepayment of Rs.3,680
C An accrual of Rs.1,840 D An accrual of Rs.3,680
68 Joan's draft final accounts were prepared including a prepayment for rent of Rs.970. The
prepayment should have been Rs.1,170.
When the error is corrected, how will the net profit be affected?
A Net profit will decrease by Rs.200.
B Net profit will increase by Rs.200.
C Net profit will decrease by Rs.1,170.
D Net profit will increase by Rs.1,170.
69 Alan prepared his draft final accounts, but did not adjust these for a prepayment of Rs.1,500 and
an accrual of Rs.400.
How will Alan's profit and net assets be affected by including the prepayment and accrual?
Net Profit will: Net assets will:
A Increase by Rs.1,100 Reduce by Rs.1,100
B Reduce by Rs.1,900 Increase by Rs.1,900
C increase by Rs.1,100 Increase by Rs.1,100
D Reduce by Rs.1,900 Reduce by Rs.1,900
70 In the year to 30 September 20X3 Rena paid a total of Rs.2,850 for business car expenses. This
includes Rs.350 which Rena paid from her personal funds. There was an opening accrual of
Rs.329 on the car expenses account and the closing accrual was Rs.464.

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CHAPTER-4 ACCRUALS AND PREPAYMENTS

What is the charge for car expenses to be reported in Rena's income statement for the year to 30
September 20X3?
A Rs.2,365 B Rs.2,635
C Rs.2,715 D Rs.2,985
71. Beth's draft accounts for the year to 31 October 20X5 showed a loss of Rs.1,486. When she
prepared the accounts, Beth did not include an accrual of Rs.1,625 and a prepayment of Rs.834.
Beth subsequently adjusted the accounts to reflect the accrual and prepayment.
What was Beth's profit or loss for the year to 31 October 20X5 following the inclusion of the
accrual and prepayment?
A A loss of Rs.695 B A loss of Rs.2,277
C A loss of Rs.3,945 D A profit of Rs.1,807
72. Dave Hull is preparing his final accounts for the year to 30 April 20X6. The last payment Dave
made for electricity was in March 20X6 when he paid Rs.3,270 for the three months to 28
February 20X6.
What adjustment does Dave need to make when preparing his final accounts for the year to 30
April 20X6?
A A prepayment of Rs.1,090 B An accrual of Rs.1,090
C A prepayment of Rs.2,180 D An accrual of Rs.2,180
73. In September 20X6 Alison paid Rs.7,800 for rent for the four months from 1 October 20X6.
What should be reported on Alison's statement of financial position at 30 November 20X6?
A An accrual of Rs.3,900 B An accrual of Rs.1,950
C A prepayment of Rs.3,900 D A prepayment of Rs. 1,950

74. In the year to 30 November 20X6 Norah paid Rs.1,765 for electricity. At 1 December 20X5 she
had an accrual of Rs.264 for electricity. At 30 November 20X6 the accrual was Rs.312.
What is the charge for electricity in Norah's income statement for the year to 30 November
20X6?
A Rs.1,189 B Rs.1,717
C Rs.1,813 D Rs.2,341
75. At 1 May 20X7 Brian had an opening accrual of Rs.353 for motor expenses. During the year to
30 April 20X8 he paid invoices for motor expenses with a total value of Rs.4,728. He has no
closing accrual or prepayment at 30 April 20X8.
What balance should Brian enter on his trial balance for motor expenses?
A Rs.4,375 debit B Rs.4,375 credit
C. Rs.5,081 debit D Rs.5,081 credit
76. Maureen had an opening accrual of Rs.533 for telephone expenses. During the year she paid
invoices'" with a total value of Rs.2,974. Her closing accrual was Rs.488.
What is the correct charge for telephone expenses in Maureen's income statement?
A Rs.1,953 B Rs.2,929
C Rs.3,019 D Rs.3,995
77. Which of the following statements about accruals are correct?
(1) Accruals represent expenses that have not yet been paid.

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(2) Accruals have an effect on both the income statement and the statement of financial
position.
(3) If accruals exceed prepayments, the business is likely to go bankrupt and will need an
allowance for receivables.
A 1 and 2 only B 1 and 3 only
C 2 and 3 only D 1, 2 and 3

78 Lamb Ltd sublets part of its office accommodation to earn rental income.
The rent is received quarterly in advance on 1 January, 1 April, 1 July and 1 October. The annual
rent has been Rs. 24,000 for some years, but it was increased to Rs. 30,000 from 1 July 20X5.
What amounts for rent should appear in Lamb Ltd’s financial statements for the year ended 31
January 20X6?
A Statement of profit or loss Rs. 27,500
Statement of financial position Rs. 5,000 in accrued income
B Statement of profit or loss Rs. 27,000
Statement of financial position Rs. 2,500 in accrued income
C Statement of profit or loss Rs. 27,000
Statement of financial position Rs. 2,500 in prepaid income
D Statement of profit or loss Rs. 27,500
Statement of financial position Rs. 5,000 in prepaid income

79 Troy, a property business, received cash totalling Rs.838,600 from tenants during the year ended
31 December 20X6.
Figures for rent in advance and in arrears at the beginning and end of the year were:
31 December 31 December
20X5 20X6
Rs. Rs.
Rent received in advance 102,600 88,700
Rent in arrears (all subsequently received) 42,300 48,400
What amount should be included in Troy’s statement of profit or loss for the year ended 31
December 20X6 for rental income?

80 On 1 May 20X0, A pays a rent bill of Rs.1,800 for the period to 30 April 20X1.
What is the charge to the statement of profit or loss and the entry in the statement of financial
position for the year ended 30 November 20X0?
A Rs.1,050 charge to statement of profit or loss and prepayment of Rs.750 in the statement
of financial position.
B Rs.1,050 charge to statement of profit or loss and accrual of Rs.750 in the statement of
financial position.
C Rs.1,800 charge to statement of profit or loss and no entry in the statement of financial
position.
D Rs.750 charge to statement of profit or loss and prepayment of Rs.1,050 in the statement
of financial position.

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81 The electricity account for the year ended 30 June 20X3 was as follows:
Rs.
Opening balance for electricity accrued at 1 July 20X2 300
Payments made during the year:
1 August 20X2 for three months to 31 July 20X2 600
1 November 20X2 for three months to 31 October 20X2 720
1 February 20X3 for three months to 31 January 20X3 900
30 June 20X3 for three months to 30 April 20X3 840
Which of the following is the appropriate entry for electricity?
Charged to statement of profit or loss,
Accrued at June 20X3
year ended 30 June 20X3
A [Link] Rs.3,060
B Rs.460 Rs.3,320
C Rs.560 Rs.3,320
D Rs.560 Rs.3,420

82 Which one of the following statements is correct?

A Accruals decrease profit
B Accrued income decreases profit
C A prepayment is a liability
D An accrual is an asset
83 Flavia’s year-end is 31 March. On 1 January 20X3 she took out a loan of Rs.250,000 with annual
interest of 10%. The interest is payable in equal instalments on the first day of April, July,
October and January in arrears.
How much should be charged to the statement of profit or loss account for the year ended 31
March 20X3, and how much should be accrued on the statement of financial position?
Statement of profit or loss Statement of financial position
A Rs.25,000 Rs.18,750
B Rs.6,250 Rs.6,250
C Rs.6,250 Nil
D Rs.18,750 6,250
84 On 23 May 20X7, Julie used cash to pay the rent on her business premises for the three months to
31 August 20X7 in advance.
On 23 May, how is Julie’s accusing equation affected by this transaction?
Assets Liabilities Capital
A Unchanged Unchanged Unchanged
B Unchanged Reduced Reduced
C Reduced Unchanged Unchanged
D Reduced Unchanged Reduced

85 When he closed his ledger accounts at 30 April 20X7 Luther’s wages expense account had a debit
balance of Rs.87,963. Luther also had to make an accrual of Rs.1,268 for outstanding wages.
What is Luther’s opening credit balance for wages at 1 May 20X7?
Rs. _______________

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86 The rent account for a business was as follows:

Rent
Rs. Rs.
1/1/X5 Bal b/d 1,000
1/2/X5 Bank 3,000
1/5/X5 Bank 3,000
1/8/X5 Bank 3,600 31/12/X5 Profit or loss 13,000
1/11/X5 Bank 3,600 31/12/X5 Bal c/d 1,200
14,200 14,200
1/1/X6 Bal b/d 1,200

Which of the following best describes the rent expense?

A Cash paid Rs.13,000 Charge for year Rs.13,200
B Cash paid Rs.13,000 Charge for year Rs.13,000
C Cash paid Rs.13,200 Charge for year Rs.13,000
D Cash paid Rs.13,200 Charge for year Rs.13,200
87 On 1 June 20X2, H paid an insurance invoice of Rs.2,400 for the year to 31 May 20X3. What is
the charge to the statement of profit or loss and the entry in the statement of financial position for
the year ended 31 December 20X2?
A Rs.1,000 profit or loss and prepayment of Rs.1,400
B Rs.1,400 profit or loss and accrual of Rs.1,000
C Rs.1,400 profit or loss and prepayment of Rs.1,000
D Rs.2,400 profit or loss and no entry in the statement of financial position

88 At 31 March 20X3, accrued rent payable was Rs.300. During the year ended 31 March 20X4, rent
paid was Rs.4,000, including an invoice for Rs.1,200 for the quarter ended 30 April 20X4.
What was the charge to profit or loss for rent payable for the year ended 31 March 20X4?
Rs. ______________

89 The annual insurance premium for S for the period 1 July 20X3 to 30 June 20X4 was Rs.13,200,
which was 10% more than the previous year. Insurance premiums are paid on 1 July.
What was the profit or loss charge for insurance for the year ended 31 December 20X3?
Rs. ______________
90 Arlene has paid Rs.5,520 for rent for the six-month period to 31 August 20X1.
What prepayment is required when preparing accounts for the year ended 30 June 20X1?
Rs. ______________
91 The last electricity bill received by Graham was for the three-month period to 30 September
20X1. This bill was for Rs.2,100.
What accrual is required when preparing the accounts for the year to 30 November 20X1?
Rs. ______________
92 Jennifer is preparing her year-end accounts and she has to deal with a prepayment for rent.
Which of the following statements is correct?
A The prepayment will increase the charge to profit or loss
B The prepayment will reduce the charge to profit or loss

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C The prepayment has no effect on profit or loss

D The prepayment will only affect profit or loss
93 When he prepared his draft accounts, Ralph included Rs.1,400 as an accrual for rent for two
months. However he should have provided for only one month’s rent.
How will Ralph’s current liabilities be affected when he adjusts the accrual?
A Reduced by Rs.1,400 B Increased by Rs.1,400
C Reduced by Rs.700 D Increased by Rs.700

94 In Theo’s statement of profit or loss for the year ended 31 May 20X6 the charge for motor repairs
was Rs.2,850. This included an accrual of Rs.220.
When Theo’s opening trial balance at 1 June 20X6 is prepared, what is the correct balance on the
motor repairs account?
A Rs.220 (debit) B Rs.220 (credit)
C Rs.2,850 (debit) D Rs.2,850 (credit)

95 Information relating to two expenses was as follows:

Opening Cash paid P&L expense
accrual
Rs. Rs. Rs.
Repairs and renewals 2,000 39,500 36,500
Light and heat 1,000 25,000 25,500
For each transaction, was there an accrual or prepayment at the end of the accounting period?
Accrual Prepayment
Repairs and renewals
Light and heat
96. Which of the following is an asset account.
1. Accrued expense
2. Prepaid expense
3. Accrued income
4. Unearned income
(a) 1 only (b) 2 and 3 only
(c) 2 and 4 only (d) 1 and 4 only

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MULTIPLE CHOICE QUESTIONS (MCQ) SOLUTIONS

01. B Rent
Particulars Rs. Particulars Rs.
Bal. b/d (accrued) 1,700 Bal. b/d (Advance) 3,000
Profit or loss 50,600 Cash received 50,800
Bal. c/d (Advance) 4,000 Bal. c/d (Accrued) 2,500
56,300 56,300
02. B Charge for SPL = Rs. 2,400/12x8 = Rs. 1,600
Prepayment = Rs. 24,00 - Rs. 1,600= Rs. 800
03. C Advance salaries are prepayment and an asset, so must be debited. This reduces
the current year expense, which shall be credited.
04. B The expense must be recorded (debited) under matching concept in the year it has
been incurred, even if the bill is outstanding.
05. C Prepayments are deducted from expenses and profit is increased and accruals are
added to the expenses and profit is reduced as a result. Therefore, the profit has
been overstated due to omissions.
06. D Accrued income is income receivable and must be recorded as an asset and
corresponding increase in income (credited).
07. A Prepaid expense is an asset account. All other are liability account.
08. A Rs. 110,000 is already recorded only further Rs. 9,000 is to be recorded as expense
on accrual basis, reducing the profit by Rs. 9,000.
09. C Interest expense = (Rs. 250,000x15%) x10/12=Rs. 31,250
Rental income = Rs. 4,500 x 6 = Rs. 27,000
10. D Income received in advance is an obligation to deliver goods or services in future
and therefore a liability. As such advances are not for long term, it is treated as
current liability.
11. B Rent Rs. Rs.
1 Jan 18 – 30 June 18 (35,000/100 x 125)/12 x 6 14,000
1 July 18 – 31 Dec 18 35,000/12x6 17,500
31,500
12. C Prepaid insurance is an asset as it is right to receive benefit from insurance services
in the future.
13. A Rs. 1,000 accruals will be reversed (reduction in expense and increase in profit) &
Rs. 1,000 prepayment will be recorded (reduction in expense and increase in
profit)
14. C Rent expense Rs. Rs.
1st Feb 2007 – 30 Sep 2007 150,000/12 x 8 100,000
1st Oct2007 – 31 Jan 2008 180,000/12 x 4 60,000
160,000
Accrued rent = 180,000/12 = Rs. 15,000

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15. C Rental income Rs. Rs.

1st Dec 2007 – 30 June 2008 9,000/12 x 7 5,250
1st July 2008 – 30 Nov 2008 12,000 12 x 5 5,000
10,250
One month rent is receivable; Rs 12,000/12 = Rs. 1,000
16. Rs. 25,000 Interest per quarter = Rs. 500,000x10%=Rs. 50,000/4 Quarters
= Rs. 12,500x2 quarters =Rs. 25,000
17. Rs. 16,000 Rent for Jan to Aug 2018 = (Rs. 15,000/12x8) = Rs. 10,000
Rent for Sep to Dec 2018= (Rs. 18,000/12x4) =Rs. 6,000
Total = Rs. 16,000
18. Rs. 24,000 = Rs. 3,000x8 months = Rs. 24,000
All interest will be received on maturity, therefore, all is accrued.
19. Rs. 24,000 Advance salary = Rs. 36,000 x 8 /12 = 24,000
Four month salary is no more prepaid (services have been received against that).
20. Rs. 30,000 Rent
Particulars Rs. Particulars Rs.
SPL 30,000
Cash 7,500 x 5 37,500 c/d - advance 7,500
37,500 37,500

21. C An expense relating to the current year but not paid in current year
22. A Liability
23. B Liability
24. C Payments for expenses for that are not yet incurred and classified as current asset.
25. D Include in with the expenses and shown as a liability at the period end
26. C An accrual is a liability; a prepayment is always a non-current asset
27. D Staff salary expense (debit) and accrued salary (credit)
28. B Rs. 600,000 x 3/6 months = Rs. 300,000
29. A Prepayment (as paid in advance)
Rs. 900,000 x 2/3 months = Rs. 600,000
30. C Utilities
Particulars Rs. Particulars Rs.
Cash 80,000 b/d 50,000
c/d 60,000 PL 90,000
140,000 140,000

31. D Rs. 600,000 x 10/12 months = Rs. 500,000

32. D Interest receivable Debit
Interest income Credit
33. B Cash (debit) = Rs.100,000 and Interest receivable (credit) = Rs.100,000
34. A Cash (debit) = Rs.1 million
Advance rent – liability (credit) = Rs.1 million

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35. B Advanced rent (debit) = Rs.1 million

Rental income (credit) = Rs.1 million
36. B Rs.
Interest expense for the year 100,000 x 12% x 9/12 9,000
Payable Quarter ending 30 Sep 2016 12,000 / 4 3,000

37. C Insurance expense a/c

Date Particulars Rs. Date Particulars Rs.
b/d 10,000 SPL 25,000
Cash 36,000 c/d 36,000 / 12 x 7 21,000
46,000 46,000

38. B = 1,486+1,625-834= 2,277

39. C Profit increased by Rs. 970 and assets increased by Rs. 970
40. C Net profit and net assets to increase by Rs. 1,100 i.e. 1,500 – 400
41. B Rent expense Rs.
Rent for 01 Feb 2012 to 30 Sep 2012 Rs 90,000/12x8 60,000
Rent for 01 Oct 2012 to 31 Jan 2013 Rs. 120,000/12x4 40,000
100,000
Accrued rent is for January 2013= Rs. 10,000
42. D Heating oil a/c
Date Particulars Rs. Date Particulars Rs.
b/d oil in hand 8,200 b/d heating oil bill 3,600
Cash 34,600 SPL 33,100
c/d heating oil bill 3,200 c/d oil in hand 9,300
46,000 46,000
43. B Rent income Rs.
Rent for 01 Dec 2012 to 30 Jun 2013 Rs 8,400/12x7 4,900
Rent for 01 Jul 2013 to 30 Nov 2013 Rs. 12,000/12x5 5,000
9,900
Rent is for one month i.e. Dec 2013=12,000/12 = Rs. 1,000 (payables)
44. B Accrued income increases profit
45. A Rent income a/c
Date Particulars Rs. Date Particulars Rs.
b/d P2 5,400 b/d P1 12,300
Cash
SPL 451,600 278,000+160,000 438,000
c/d P2 6,700 c/d P1 13,400
463,700 463,700

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46. D Rent income a/c

Date Particulars Rs. Date Particulars Rs.
b/d 42,300 b/d 102,600
SPL 858,600 Cash 838,600
c/d 88,700 c/d 48,400
989,600 989,600
47. A Insurance expense Rs.
1 July 2015 to 31 Mar 2016 10,800/12 x 9 8,100
01 April 2016 to 30 June 2016 12,000/12x3 3,000
11,100
Prepayment = 12,000/12 x 9 = 9,000
48. D Prepayment = 6000/4 = 1,500/3 x 2 months = Rs. 1,000
49. Rs. 3,120
Rs.
Insurance premium 01 Jan to 31 Aug year 3 ➔ 2,760/12x8 1,840
Insurance premium 01 Sep to 31 Dec year3 ➔ 3,840/12x4 1,280
3,120

50. Rs. 9,400 Rent income a/c

Date Particulars Rs. Date Particulars Rs.
b/d 4,500 cash 17,100
SPL 9,400
c/d 3,200
17,100 17,100

51 C Prepayment b/f $900 (9/12 x $1,200) + $1,600 - prepayment c/f $1,200 (9/12 x
$1,600)
52 C
$
Opening Inventory 165
Purchases (1,35- 80 + 70) 1,340
1,505
Closing Inventory 140
Stationery in income statement 1,365
53. C On a cash basis
$
Sales 400
Purchases 200
Profit 200
On an accruals basis $
Sales 1,000
Purchases 500
Profit 500
Thus, the difference is $300.

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54 C Electricity expense account

1,000 b/d
4,200 Income statement charge
Cash 4,000
C/d 1,200
5,200 5,200
1,200 B/d
55 A $8,400 for 24 months is 350 per month. So, the charge for the year is 12 x $350, ie
$4,200. At 31/12/X2, rent has been prepaid to 31.12.X3 ie for 9 months which is 9
x $350 ie $3,150.
56 B Rent Received Income account
B/d 1,000 5,000 Cash
Income statement 4,500 500 c/d
5,500 5,500
57 A Motor expenses account
Cash 4,000 1,500 B/d
5,000 Income statement
C/d 2,500
6,500 6,500
2,500 B/d
58 A MOTOR EXPENSES
$ $
1.9 Prepayment b/d 80 1.9 Accrual b/d 95
Cash 95 30.9 Prepayment (80 x 3/4) c/d 60
Cash 245 Income statement 385
30.9 Accrual c/d 120
540 540

59 A Rent received income account

B/d 1,000 16,000 Cash
Income statement 12,000
C/d 3,000
16,000 16,000
8,000 B/d
60 D Prepayments are included in current assets. A is wrong as bad debts are an example
of the prudence concept. repayments reduce expenses and so increase profits, so C
is wrong. This leaves a choice between B and D, with D being the Correct option.
61 Rates payable = $1,830
RATES ACCOUNT
$ $
1.5.X1 Balance b/f (1,800 x 11/12) 1,650 30.4.X2 Income statement 1,830
1.4.X2Rates paid 2,160 30.4.X2 Balance c/f (2,16011/12) 1,980

3,810 3,810

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62 Rent payable = $1,300

RENT ACCOUNT
$ $
1.5.X1 Rent paid 300 1.5.X1 Balance b/f 300
1.8 X1 Rent paid 300
1.11. X1 Rent paid 300
1.2.X2Rent paid 300
30.4/2 Balance c/f (1,600/4) 400 30.4.X2 Income statement 1,300

1,600 1,600

An alternative calculation is; S

Rent payable 1.5 X1 to 31.1 .2 (1,200x9/12) 900
Rent payable 1.2.X2 to 30.4.2 (1,600x 3/12) 400
Total rent payable 1,300

63. B 9 Months expense, 3 months prepaid. Therefore the expense is 9/12 x $2,400 =
$1,800 and the prepayment is 3/12 x $2,400 = $600.
64. A 297 was accrued last year and should be deducted from this year’s charge.
65. D An accrual of $308 ($462 * 2/3) is made for the period up to November and added
to the income statement charge. The income statement charge is the sum of this
accrual and the existing balance: $1,540 + $308 = $1,848.
66. A Net profit and capital will both be increased.
67. B $11,040 x 2/6 = $3,680 prepaid
July and August 20X2 are paid in advance.
68. B A prepayment deduces expenses and therefore increases profit. The correction will
add $200 to prepayments and will therefore increase net profit by the same amount.
69. C The prepayment will add $1,500 to profit and net assets.
The accrual will reduce profit and net assets by $400.
The net effect will be to increase both by $1,100.
70. D Bear in mind that the opening accrual will actually be a reversal of the previous
year's accrual, so it will be a credit to the car expenses account. You may want to
write up the T-account for car expenses. The postings to the car expenses account
will be as follows:
$
Opening accrual (Cr.) (329)
Payments (Dr) 2,850
Closing accrual (Dr) 464
Charge to income statement (Dr balance) 2,985
71. B
$
Original loss (1,486)
Accrual (1,625)
Prepayment 834
Revised loss (2,277)
72. D Dave must accrue for two months electricity. The accrual is 2/3 x $3,270 = $2,180.

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73. C A prepayment ($7,800 x 2/4) of $3,900.

74. C $(1,765-264 + 312)
75. A
Invoices $4,728 Dr
Opening accrual $353 Cr
Closing balance $4,375 Dr
76. B
The expense account as an opening balance of $533 Cr
The total of the invoices is $2,974 Dr
The closing accrual is $488 Dr
Thus he charge to the income statement is $2,929 Dr
77. A Accruals do represent expenses that have not yet been paid. Accruals are posted as
a credit to the statement of financial position and a debit to the relevant expense in
the income statement. Accruals are a non-cash adjustment and an excess of
accruals over prepayments does not indicate a business is likely to go bankrupt.
78. D
79. $858,600
Rental income
$ $
Balance b/f 42,300 Balance b/f 102,600
Statement of profit or loss 858,600 Cash received 838,600
Balance c/f 88,700 Balance c/f 48,400
989,600 989,600

80 A
Charge to statement of profit or loss $1,800 × 7/12 = $1,050
Prepament $1,800 × 5/12 = $750
81 C
The accrual for May and June 20X3 is assumed to be 2/3 × $840 = $560.
Electricity expenses
$ $
Bank 600 Opening balance b/f 300
Bank 720
Bank 900
Bank 840
Closing balance c/f 560 Statement of profit or loss 3,320
3,620 3,620

82 A
Accrued income is income not yet received for a service already provided (income received in
arrears). Accounting for accrued income will therefore increase, rather than decrease, profit. A
prepayment is an asset and an accrual is a liability.

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83 B
The charge in the statement of profit or loss will be the amount of interest incurred from 1
January (when the loan was taken out) to 31 March (the year-end) i.e. 3/12 × 10% × $250,000 =
$6,250. This represents three months of accrued interest charges due to be paid on 1 April 20X3.
This will also be the accrual in the statement of financial position as no payment has been made
in the period to 31 March 20X3.
84 A
Tutorial note
• The reduction in cash is replaced by an increase in prepayments and therefore assets
remain unchanged.
• Liabilities are not affected and so remain unchanged.
• As Capital = Assets – Liabilities and both assets and liabilities remain unchanged, it
remains that capital is unchanged.

85 $1,268
The opening balance will represent the accrual of $1,268.
As this is an accrual (or liability), the opening trial balance will record a credit balance.
86 C
The cash paid during the year is indicated by the bank transactions (3,000 + 3,000 + 3,600 +
3,600 = 13,200). The charge to profit or loss is shown as $13,000.

87 C
Profit or loss charge for insurance:
(7 months): 7/12 × $2,400 = $1,400
Prepayment: 5 months = 5/12 × $2,400 = $1,000
88 $3,300
The situation in the question is unusual because there is an opening accrual on the account, but a
closing prepayment of 1/3 × $1,200 = $400.

Rent account
$ $
Bank 4,000 Balance b/d (accrual) 300
Profit or loss statement 3,300
Balance c/d (prepayment) 400
4,000 4,000

89 $12,600
Insurance for the year 1 July 20X2 to 30 June 20X3 was $13,200 × 1/1.1 = $12,000.

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Profit or loss charge:

Six months at $12,000 plus six months at $13,200 = $6,000 + $6,600.= $12,600
90 $1,840
The rent payment covers the period 1 March to 31 August. At 30 June, there is a prepayment of
two months (July and August). The amount of the prepayment is 2/6 × $5,520 = $1,840.

91 $1,400
There is an accrual for two months (October and November) during which electricity charges
have been incurred but no invoice has been received yet. The best estimate of the accrual is 2/3 ×
$2,100 = $1,400.
92 B
A prepaid expense will reduce the charge to profit or loss. It will also be shown as a current asset
in the statement of financial position.
93 C
The accrual should have been for $700, but was actually $1,400. Therefore it needs to be reduced
by $700.
94 B
The opening trial balance will reflect the liability brought forward. (The charge to profit or loss
has been written off, and is therefore eliminated from the expense account.)
95
Accrual Prepayment
Repairs and renewals Correct
Light and heat Correct
Repairs and renewals: $39,500 - $2,000 - $36,500 = $1,000 prepayment.
Light and heat: $25,000 - $1,000 - $25,500 = $1,500 accrual.
96. B

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

MULTIPLE CHOICE QUESTIONS (MCQs)

01. The opening balance of “allowance for doubtful debts account” is Rs. 1,000 whereas the closing
balance of Receivables account is Rs. 100,000.
What amount of allowance for doubtful debts should be charged to statement of comprehensive
income using a 5% allowance for doubtful debts for the current accounting period?
(a) Rs. 4,000 (b) Rs. 5,000
(c) Rs. 2,000 (d) Rs. 1,000
02. At December 31, 2018 an entity’s receivable totalled Rs. 600,000 and an allowance for bad and
doubtful debts of Rs. 60,000 had been brought down from last year.
It was decided to write off the debts totalling Rs. 25,000 and to adjust allowance for receivable
@ 10% of the receivable.
At what amount receivables are to be shown in statement of financial position as at 31 December
2018?
(a) Rs. 572,500 (b) Rs. 517,500
(c) Rs. 540,000 (d) Rs. 575,000
03. A business has closing receivables balance is Rs. 75,000. It includes one of the accounts
receivable named Ali, who is going through financial crisis. It is expected that he can pay 75% of
his total debt of Rs. 5,000. Business has decided to calculate an allowance for doubtful debt at
5%.
What is the amount of allowance to be deducted from receivable in statement of financial
position?
(a) Rs. 3,500 (b) Rs. 3,750
(c) Rs. 7,250 (d) Rs. 4,750
04. The nature of “Allowance for doubtful debt” account is:
(a) Contra asset account (b) Asset account
(c) Expense (d) Liability account
05. At the end of accounting period, KLM Company finds out that its total Receivables are Rs.
10,000. On scrutiny of accounts, it turned out that a bad debt amounting to Rs. 1,000 was not
recorded in the books of accounts. Furthermore, having considered the current economic
situation, management of the company decided to increase the allowance for doubtful debts by
Rs. 500.
Find out what net amount to be expensed out in the statement of comprehensive income?
(a) Rs. 10,000 (b) Rs. 1000
(c) Rs. 11,000 (d) Rs. 1500
06. At January 1, 2017 the allowances for receivable of Sidra was Rs. 35,000. During the year ended
31 December 2017 debts totalling Rs. 15,000 were written off. It was decided that the allowance
for doubtful debts should be Rs. 30,000 as at December 31, 2017.
What amount should be charged to statement of comprehensive income of Sidra for bad and
doubtful debts expense?
(a) Rs. 30,000 (b) Rs. 45,000
(c) Rs. 15,000 (d) Rs. 10,000

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07. Which of the following can be most relevant to calculation of allowance for doubtful debts?
(a) Total credit sales (b) Total credit purchases
(c) Total current assets (d) Total current liabilities
08. At January 1, 2017 the balance in allowance for receivable showed Rs. 16,000. At the end of the
year it is decided to write off Rs. 9,000 and adjust allowance for receivable to Rs. 18,000.
What will be the effect of this decision on profit for the year?
(a) Decrease by Rs. 27,000 (b) Increase by Rs. 18,000
(c) Decrease by Rs. 11,000 (d) Decrease by Rs. 9,000
09. Sania creates allowance for doubtful debts after considering the length of time the debt remains
outstanding.
She has provided following data as at 31st March 2018
Debt amount Rs. Days outstanding Allowance required
130,000 30 days Nil
75,000 31-60 2%
50,000 Over 60 days 5%
Opening balance of allowance for doubtful debts was Rs. 3,500.
What is the amount to be charged to statement of comprehensive income for the year?
(a) Rs. 4,000 (b) Rs. 3,500
(c) Rs. 500 (d) Rs. 7,500
10. Which of the following Receivables have highest probability to default on trade debts?
(a) Current month Receivables (b) Over 90 days old Receivables
(c) 60 to 90 days old Receivables (d) 30 to 60 days old Receivables
11. A business has received an amount of Rs. 1,000 from a receivable that had been previously
written off as irrecoverable.
What is the correct accounting entry to record the transaction?
(a) Dr Cash 1,000 Cr Bad and doubtful debts expense a/c Rs. 1,000
(b) Dr Cash 1,000 Cr Receivables Rs. 1,000
(c) Dr Statement of comprehensive income Rs. 1,000 Cr Receivables Rs. 1,000
(d) Dr Statement of comprehensive income Cr Cash Rs. 1,000
12. A business has provided following information;
Rs.
Opening receivables 45,000
Credit sales 55,000
Cash sales 10,000
Cash received from customers 35,000
Bad debts written off 2,000
Discount received (separate ledger) 3,000

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

The business maintains allowance at 2% of receivables each year.

What accounting entry is to be passed to record the increase/ decrease of allowance to the
statement of comprehensive income?
(a) Dr Bad and doubtful debts expense Rs. 360 Cr Allowance for doubtful debts Rs. 360
(b) Dr Allowance for doubtful debts Rs. 360 Cr Bad and doubtful debts expense Rs. 360
(c) Dr Bad and doubtful debts expense Rs. 360 Cr Receivables. 360
(d) Dr Receivables Rs. 360 Cr Bad and doubtful debts expense Rs. 360
13. At year end, the receivable balance on 31 March 2019 is Rs. 93,000. This includes a debt of Rs.
1,800 which needs to be written off.
The business maintains allowance for doubtful debts at 5% of Receivable balance. And this year
allowance has increased by 20% as compared to last year.
What was the balance of Allowance for doubtful debts at 1 April 2018?
(a) Rs. 3,875 (b) Rs. 5,472
(c) Rs. 3,800 (d) Rs. 4,560
14. At 30 September 2012 an entity’s allowance for receivables amounted to Rs. 38,000, which was
five per cent of the receivables at that date.
At 30 September 2013 receivables totalled Rs. 868,500. It was decided to write off Rs. 28,500 of
debts as irrecoverable and, based on past experience, to keep the allowance for receivables at 5%
of receivables.
What should be the charge in the statement of comprehensive income for the year ended
30 September 2013 for the total of bad debts and the allowance for receivables?
(a) Rs. 42,000 (b) Rs. 33,925
(c) Rs. 70,500 (d) Rs. 32,500
15. The allowance for receivables in the accounts at 31 October 2011 was Rs. 9,000. During the year
ended 31 October 2012, bad debts of Rs. 5,000 were written off.
The receivables balance at 31 October 2012 was Rs. 120,000 and, based on past experience, the
entity wishes to set the allowance at 5% of receivables.
What is the total charge for bad debts and the allowance for receivables in the statement of
comprehensive income for the year ended 31 October 2011?
(a) Rs. 2,000 (b) Rs. 3,000
(c) Rs. 5,000 (d) Rs. 8,000
16. Hamza has following information available for his business for the year ended 31st December
2017:
Opening allowance for doubtful debts Rs. 5,000
Bad debts written off during the year Rs. 3,000
Bad debts recovered Rs. 1,500
Closing receivables Rs. 90,000
Closing allowance for doubtful debts 5%.
What is the net charge for bad and doubtful debts for statement of comprehensive income?
Rs. ___________

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17. At June 30, 2016 an entity’s allowance for receivable amounted to Rs. 25,000 which was 2% of
the trade receivables at that date.
At June 30, 2017 trade receivable amounted to Rs. 310,000. It was decided to write off
Rs. 30,000 of debts as irrecoverable and to keep the allowance for receivable at 2% of trade
receivable.
At what amount receivables would be shown in statement of financial position at 30 June 2017?
Rs. ___________
18. At July 1, 2017Mira’s allowance for receivable was Rs. 65,000.
At June 30, 2018 trade receivable amounted to Rs. 650,000. It was decided to write off Rs.
95,000 of these debts and adjust the allowance for receivable to Rs. 75,000.
At what amount receivables (net) to be appear in statement of financial position?
Rs. ___________
19. At January 1, 2018 the balance in allowance for receivable showed Rs. 38,000. At the end of the
year it is decided to write off Rs. 16,000 and adjust allowance for receivable to Rs. 35,000.
What will be the charge for bad and doubtful debts for the year?
Rs. ___________
20. After writing off bad debts, Rashid has outstanding receivables of Rs. 238,750. He identifies two
specific amounts for which he wishes to make full allowance:
• Rs. 450 owing by Syed
• Rs. 1,200 owing by Raja
Rashid also wishes to maintain a general allowance of 5% of outstanding receivables.
What amount is shown on Rashid’s statement of financial position in respect of receivables?
Rs. ___________
21. Which of the following is the effect on net profit if a business decreases provision for doubtful
debts?
(a) It will increase net profit (b) It will decrease net profit
(c) It will increase gross and net profit (d) No effect
22. What is the nature of allowance for doubtful debt account?
(a) An asset (b) A liability
(c) An equity (d) Contra asset account
23. Is there a difference in bad and doubtful debts?
(a) No, they are inter-changeable
(b) Yes, bad debt refers to an account receivable that has been clearly identified as not being
collectible. Whereas a doubtful debt is an account receivable that might become a bad
debt at some point in the future
(c) Yes, doubtful debt refers to an account receivable that has been clearly identified as not
being collectible. Whereas a bad debt is an account receivable that might become a bad
debt at some point in the future
(d) They are synonymous

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24. What is the double entry for recording write-off of any of debts?
(a) Bad debt expense (debit) and allowance for doubtful debts (credit)
(b) Bad debt expense (debit) and accounts receivable (credit)
(c) Allowance for doubtful debts (debit) and accounts receivable (credit)
(d) None of the above
25. On June 1, Rs. 800,000 of goods are sold with credit terms of 1/10, n/30. How much should the
seller expect to receive if the buyer pays on June 8?
(a) 720,000 (b) 768,000
(c) 792,000 (d) No change
26. On June 1, Rs. 800,000 of goods are sold with credit terms of 1/10, n/30. On June 3, the customer
returned Rs. 100,000 of the goods.
How much should the seller expect to receive if the buyer pays on June 8?
(a) 692,000 (b) 693,000
(c) 694,000 (d) 700,000
27. Which account should be credited for Rs180,000 when writing off the account?
(a) Accounts receivable (b) Allowance for doubtful debts
(c) Bad debts expense (d) None of the above
28. Sorting an entity's accounts receivable into classifications such as current, 1-30 days past due, and
31-60 days past due etc. is known as the?
(a) Ratio analysis (b) Trend analysis
(c) Debtor’s analysis (d) Aging analysis
29. The opening balance of “allowance for doubtful debts account” is Rs. 1,000 whereas the closing
balance of Receivables account is Rs. 100,000.
What amount of allowance for doubtful debts should be charged to statement of profit or loss
using a 5% allowance for doubtful debts for the current accounting period?
(a) Rs.3,000 (b) Rs.4,000
(c) Rs.5,000 (d) Rs.6,000
30. The Allowance for doubtful debts account has a year-end credit balance, prior to adjustment of
Rs.500. The bad debts are estimated at 7% of Rs. 60,000 of outstanding accounts receivable.
After the appropriate adjusting entry to recognize the bad debt expense, the Allowance for
Doubtful Accounts should have a ___________ credit balance.
(a) Rs.4,200 (b) Rs.3,700
(c) Rs.3,200 (d) Rs.4,500
31. Good Traders (GT) accounts receivable totalled Rs. 80,000 at the year end. These include Rs. 900
of long overdue debts that might still be recoverable, but for which GT has created an allowance
for doubtful debts. GT has also provided an allowance of Rs. 1,582, which is 2% of the other
accounts receivable balances. What best describes GT’s doubtful debt allowance as at its year
end?
(a) A specific allowance of Rs. 900 and a general allowance of Rs. 1,582
(b) A specific allowance of Rs. 1,582 and a general allowance of Rs. 900
(c) A specific allowance of Rs. 2,482
(d) A general allowance of Rs. 2,482

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32. The opening balance on Jamal Enterprises’ receivables expense allowance was Rs. 1,000. Jamal
wrote off Rs. 4,000 of bad debts during the year. The closing balance on the doubtful debts
allowance was Rs. 1,200.
What is the total charge to Jamal Enterprises’ Statement of Profit or Loss in respect of receivables
expense for the year?
(a) Rs. 200 (b) Rs. 3,800
(c) Rs. 4,000 (d) Rs. 4,200
33. The turnover in an entity was Rs. 2 million and its accounts receivable were 5% of turnover. The
entity wishes to have an allowance for doubtful debts of 4% of receivables, which would make
the allowance one-third higher than the current allowance. How will the profit for the period
affected by the change in allowance?
(a) Profit will be reduced by Rs. 1,000
(b) Profit will be increased by Rs. 1,000
(c) Profit will be reduced by Rs. 1,333
(d) Profit will be increased by Rs. 1,333
34. The allowance for doubtful debts in the ledger of Boom Boom Traders (BBT) at 31 October 2021
was Rs. 9,000. During the year ended 31 October 2022, irrecoverable debts of Rs. 5,000 were
written off. Accounts receivable balances at 31 October 2022 were Rs. 120,000 and BBT policy
is to have a general allowance of 5%. What is the charge for bad & doubtful debts expense in the
Statement of Profit or Loss for the year ended 31 October 2022?
(a) Rs. 2,000 (b) Rs. 3,000
(c) Rs. 5,000 (d) Rs. 8,000
35. During the year ended 31 December 2019 Faisal Traders (FT) turnover totalled Rs. 3,000,000, its
accounts receivable amounting to 4% of turnover for the year. FT wishes to maintain its doubtful
debt allowance at 3% of accounts receivable, and discovers that the allowance, as a result is 25%
higher than it was a year before. During the year specific irrecoverable debts of Rs. 3,200 were
written off and irrecoverable debts (written off three years previously) of Rs. 150 were recovered.
What is the net charge for bad and doubtful debts for the year ended 31 December 2019?
(a) Rs. 720 (b) Rs. 900
(c) Rs. 3,770 (d) Rs. 3,950
36. Which of the following statements concerning an allowance for receivables is INCORRECT?
(a) All businesses may create an allowance for doubtful debts in case credit sale customers
do not pay their debts
(b) The receivables account balance is written off when a specific allowance for doubtful
debts for that customer is created
(c) Setting up an allowance for doubtful debts account ensures that receivables are not
overstated
(d) The allowance is usually expected to increase as the value of sales revenue recognized
increases as a firm expands
37. An irrecoverable debt written off two years ago is unexpectedly recovered and entered in the cash
book.
What adjustment, if any, will be necessary?
(a) Credit Receivables (b) Credit Bad debts expense
(c) Credit Suspense account (d) No adjustment will be necessary

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38. An increase in the allowance for doubtful debts results in:

(a) A decrease in current liabilities (b) An increase in net profit
(c) An increase in current assets (d) A decrease in current assets
39. At 30 September 2014, PSL Traders had an allowance for doubtful debts of Rs. 37,000. During
the year ended 30 September 2015 the PSL Traders wrote off debts totalling Rs. 18,000 and at the
end of the year it is decided that the allowance for doubtful debts should be Rs. 20,000.
What should be included in the Statement of Profit or Loss for bad and doubtful debts?
(a) Rs. 35,000 debit (b) Rs. 1,000 debit
(c) Rs. 38,000 debit (d) Rs. 1,000 credit
40. At 31 March Salma was owed Rs. 47,744 by her customers. At the same date her doubtful debts
allowance was Rs. 3,500. How should these balances be reported on Salma's statement of
financial position at 31 March?
(a) Rs. 44,244 as a current asset
(b) Rs. 3,500 as a current asset and Rs. 47,744 as a current liability
(c) Rs. 47,744 as a current asset and Rs. 3,500 as a current liability
(d) Rs. 51,244 as a current asset
41. What is the purpose of maintaining an allowance for doubtful debts?
(a) An estimate of future irrecoverable debts
(b) Records the expense of irrecoverable debts
(c) Matches the estimated cost of future irrecoverable debts against the revenue earned in
giving rise to the potential irrecoverable debts
(d) Records irrecoverable debts without taking them out of the books of an entity, thus
showing the gross and expected amount owned by trade receivables as a current asset
42. The existence of an allowance for bad or doubtful debts
(a) Increases the total of current liabilities (b) Reduces the cost of sales
(c) Reduces the total of current assets (d) None of above
43. A transfer to close the bad and doubtful debts account is to:
(a) The statement of financial position
(b) The Statement of Profit or Loss
(c) The trading account
(d) The allowance for doubtful debts account
44. At 31 December 2022 an entity's receivables totalled Rs. 400,000 and an allowance for
receivables of Rs. 50,000 had been brought forward from the year ended 31 December 2021. It
was decided to write off debts totalling Rs. 38,000 and to adjust the allowance for receivables to
10% of the receivables. What charge for bad and doubtful debts should appear in the entity's
Statement of Profit or Loss for the year ended 31 December 2022?
(a) Rs. 74,200 (b) Rs. 51,800
(c) Rs. 28,000 (d) Rs. 24,200

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

45. Saima creates allowance for doubtful debts according to the length of time the debt has been
outstanding. At 31 May 2021 the analysis of accounts receivable balances and the associated
allowance was:
Time debt has been outstanding Allowance required Balance at 31 May 2021
Less than 31 days Nil 32,700
31 – 60 days 4% of balances 16,900
Over 60 days 50% of balances 8,750
If the balance at 1st June 2020 was Rs. 5,600, what adjustment should be made to the doubtful
debts allowance?
(a) An increase of Rs. 5,051 (b) A decrease of Rs. 5,051
(c) An increase of Rs. 549 (d) A decrease of Rs. 549
46. Multan Sultans’ (MS) receivables ledger account shows a balance at the end of the year of Rs.
58,200 before making the following adjustments:
(i) MS wishes to write off debts amounting to Rs. 8,900 as he believes they are
irrecoverable.
(ii) MS also wishes to make specific allowance for Lahore Qalandars’ debt of Rs. 1,350 and
Islamabad United’s debt of Rs. 750.
(iii) MS wishes to maintain a general allowance of 3% of the year and receivables balance.
MS’s allowance for receivables at the last year end was Rs. 5,650. What is the charge to the
Statement of Profit or Loss in respect of the above?
(a) Rs. 6,766 (b) Rs. 11,034
(c) Rs. 6,829 (d) Rs. 10,971
47. In the statement of financial position at 31 December 2015, Karachi Kings (KK) reported net
receivables of Rs. 12,000. During 2016 KK made sales on credit of Rs. 125,000 and received
cash from credit customers amounting to Rs. 115,500. At 31 December 2016, KK wished to write
off debts of Rs. 7,100 and increase the allowance for receivable by Rs. 950 to Rs. 2,100. What is
the net receivables figure at 31 December 2016?
(a) Rs. 12,300 (b) Rs. 13,450
(c) Rs. 14,400 (d) Rs. 15,550
48. In the year ended 30 September 2018. Quetta Gladiators (QG) had sales of Rs. 7,000,000. Year-
end receivables amounted to 5% of annual sales. QG wishes to maintain the allowance for
receivables at 4% receivables and as a result discovers that the allowance is 20% higher than at
the previous year end. During the year irrecoverable debts amounting to Rs. 3,200 were written
off and debts amounting to Rs. 450 and previously written off were recovered.
What are the bad and doubtful debt expenses for the year?
(a) Rs. 5,083 (b) Rs. 5,550
(c) Rs. 5,583 (d) Rs. 16,750
49. Peshawar Zalmi (PZ) started the year with total receivables of Rs. 87,000 and an allowance for
receivables of Rs. 2,500. During the year, two specific debts were written off, one for Rs. 800 and
the other for Rs. 550. A debt of Rs. 350 that had been written off as irrecoverable in the previous
year was paid during the year. At the year end, total receivables were Rs. 90,000 and the
allowance for receivables was Rs. 2,300.
What is the charge to the Statement of Profit or Loss for the year in respect of bad and doubtful
debts?

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(a) Rs. 800 (b) Rs. 1,00

(c) Rs. 1,150 (d) Rs. 1,550
50. Newell’s receivables’ ledger control account shows a balance at the end of the year of Rs.58,200
before making the following adjustments:
(i) Newell wishes to write off debts amounting to Rs.8,900 as he believes that they are
irrecoverable.
(ii) He also wishes to make an allowance for Carroll’s debt of Rs.1,350 and Juff’s debt of
Rs.750.
Newell’s allowance for receivables at the last year end was Rs.5,650.
What is the total charge to the statement of profit or loss in respect of the above?
Rs. __________
51. In the statement of financial position at 31 December 20X5, Boris reported net receivables of
Rs.12,000. During 20X6 he made sales on credit of Rs.125,000 and received cash from credit
customers amounting to Rs.115,500. At 31 December 20X6, Boris wished to write off debts of
Rs.7,100 and increase the allowance for receivables by Rs.950 to Rs.2,100.
What is the net receivables figure to include in the statement of financial position at 31 December
20X6?
Rs. __________
52. At 1 July 20X5, Arthur’s allowance for receivables was Rs.48,000. At 30 June 20X6, trade
receivables amounted to Rs.838,000. It was decided to write off Rs.72,000 of these debts and
adjust the allowance for receivables to Rs.60,000.
What are the final amounts for inclusion in Arthur’s statement of financial position at 30 June
20X6?
Trade Allowance for Net balance
receivables receivables
Rs. Rs. Rs.
A 838,000 60,000 778,000
B 766,000 60,000 706,000
C 766,000 108,000 658,000
D 838,000 108,000 730,000
53. In the year ended 30 September 20X8, Fauntleroy had sales of Rs.7,000,000. Year-end
receivables amounted to 5% of annual sales. At 1 October 20X7, the allowance for receivables
was Rs.11,667 and this should be increased to Rs.14,000 at 30 September 20X8.
During the year ended 30 September 20X8, irrecoverable debts amounting to Rs.3,200 were
written off and debts amounting to Rs.450 which had been written off previously were recovered.
What is the total irrecoverable debt expense for the year?
Rs. __________

54. On 1 January 20X3 Tipton’s trade receivables were Rs.10,000. The following information relates
to the year ended 31 December 20X3:
Rs.
Credit sales 100,000
Cash receipts 90,000
Irrecoverable debts written off in year 800
Discounts received 700
Cash receipts include Rs.1,000 in respect of a receivable previously written off.

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What was the carrying amount of receivables at 31 December 20X3?

Rs. __________
55. A business has been notified that a customer who owed Rs.500 has been declared insolvent. The
business had previously made an allowance against this receivable.
What accounting entries are required to account for the amount due from the insolvent customer?
Debit Credit
A Irrecoverable debts account Receivables’ ledger control account
B Receivables’ ledger control account Irrecoverable debts account
C Allowance for receivables account Receivables’ ledger control account
D Receivables’ ledger control account Allowance for receivables account
56. Headington was owed Rs.37,500 by its customers at 1 January 20X8 and Rs.49,000 at 31
December 20X8.
During the year, cash sales of Rs.263,500 and credit sales of Rs.357,500 were made, contras with
the payables ledger control account amounted to Rs.1,750 and discounts received totalled
Rs.21,400. Irrecoverable debts of Rs.3,500 were written off and Headington wishes to increase its
allowance for receivables from Rs.7,500 to Rs.10,000.
What was the cash received from receivables during the year ended 31 December 20X8?
Rs. __________

57. What is the effect of an increase in the allowance for receivables?

A It will result in an increase in net current assets
B It will result in a decrease in net current assets
C It will result in an increase in sales
D It will result in a decrease in drawings
58. At 31 December 20X7, Chester’s receivables’ balance was Rs.230,000. He wishes to make
specific allowance for Emily’s debt of Rs.450, Lulu’s debt of Rs.980 and Sandy’s debt of
Rs.5,000.
What amount should be credited to the statement of profit or loss relating to the allowance for
receivables if the allowance at 1 January 20X7 was Rs.11,700?
Rs. __________
59. The allowance for receivables in the ledger of Bertie at 31 October 20X1 was Rs.9,000. During
the year ended 31 October 20X2, irrecoverable debts of Rs.5,000 were written off.
Accounts receivable balances at 31 October 20X2 were Rs.120,000 and, based upon a review of
receivables at that date, the allowance for receivables required was Rs.6,000.
What was the total charge for irrecoverable and debts and change in allowance for receivables in
the statement of profit or loss for the year ended 31 October 20X2?
Rs. __________
60. At 1 November 20X4 Dorothy’s receivables allowance was Rs.5,670. At 31 October 20X5 she
was owed Rs.275,600 by her customers. Following a review of receivables Dorothy has
determined that an allowance of Rs.5,512 is required at 31 October 20X5.
What amount should be credited in Dorothy’s statement of profit or loss for the year ended 31
October 20X5 relating to the change in the allowance for receivables?
Rs. __________
61. Which of the following is the correct definition of a provision?

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

A A provision is an amount that may need to be paid by a business

B A provision is a liability of uncertain timing or amount
C A provision is a specific amount that will be paid on a specified date
D A provision is an amount that may not need to be paid by a business
62. Roberto commenced trading on 1 January 20X5 selling microwave ovens at a price of Rs.300
each. He allows customers one month from the date of sale to return goods if they are
unsatisfactory for any reason and customers will be given a full refund. During his first year of
trading to 31 December 20X5, he sold 150 microwave ovens each month and, on average, five
microwave ovens are returned in the month following sale. Customer refunds are made in the
same month as the microwave is returned.
What provision should be included in Roberto’s financial statements for the year ended 31
December 20X5?
Rs. __________
63. Kate allows customers to return faulty goods within 10 days of purchase. At 31 October 20X4 she
had a provision of Rs.6,548 for sales returns. At 31 October 20X5 she calculated that the
provision required should be Rs.4,940.
What should be reported in Kate’s statement of profit or loss for the year to 31 October 20X5 in
relation to this provision?
A A charge of Rs.4,940
B A credit of Rs.4,940
C A credit of Rs.1,608
D A charge of Rs.1,608
64. Luca is a second-hand motorcycle dealer. If a motorcycle develops a fault within 60 days of the
sale, Luca will repair it under warranty free of charge. At 30 September 20X7 Luca had made a
provision for warranty repairs of Rs.5,500. At 30 September 20X6, Luca estimated that the
provision required for warranty repairs should be Rs.6,300.
What accounting entries should be made by Luca to account for the increase in the provision
required at 30 September 20X6?
A Debit Warranty repairs Rs.800, and Credit Provision Rs.800
B Debit Warranty repairs Rs.6,300, and Credit Provision Rs.6,300
C Debit Provision Rs.800, and Credit Warranty repairs Rs.800
D Debit Provision Rs.6,300, and Credit Warranty repairs Rs.6,300
65. Owen allows customers to return faulty goods within 14 days of purchase. At 30 November 20X5
he made a provision of Rs.6,548 for sales returns. At 30 November 20X6 he calculated that his
provision should be Rs.7,634.
What should be reported in Owen’s statement of profit or loss for the year to 30 November 20X6
in relation to this provision?
A A charge of Rs.7,634 B A credit of Rs.7,634
C A charge of Rs.1,086 D A credit of Rs.1,086
66. Darren is a second-hand car dealer. If a car develops a fault within 30 days of the sale, Darren
will repair it free of charge. At 30 April 20X4 Darren had made a provision for repairs of
Rs.2,500. At 30 April 20X5 he calculated that his provision should be Rs.2,000.
What entry should be made for the provision in Darren’s statement of profit or loss for the year to
30 April 20X5?
A A charge of Rs.500 B A credit of Rs.500
C A charge of Rs.2,000 D A credit of Rs.2,000

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

67. At 30 April 20X7 the total amount owed to James by his customers was Rs.54,864. At the same
date, James calculated that his receivables allowance is Rs.3,775.
How should these balances be reported in James' statement of financial position as at 30 April
20X7?
A Rs.51,089 as a current asset B Rs.51,089 as a current liability
C Rs.54,864 as a current asset and Rs.3,775 as a current liability
D Rs.54,864 as a current liability, and Rs.3,775 as a current asset
THE FOLLOWING INFORMATION RELATES TO QUESTIONS 68 AND 69
The total amount owed to Robert by his customers at 30 November 20X7 was Rs.78,600. Robert
has decided that a balance of Rs.600 should be written off as it is irrecoverable, and that, based on
past experience, an allowance equal to 1.5% of the remaining receivables balance should be
made. His receivables allowance at 1 December 20X6 was Rs.1,200.
68. Robert has made the entry in the receivables expense account to write off the irrecoverable
balance.
What other entry does he need to make?
A A debit entry in the sales account
B A credit entry in the sales account
C A debit entry in the receivables account
D A credit entry in the receivables account

69. How should the movement in the receivables allowance be reflected in the income statement?
A A credit of Rs.21 B A charge of Rs.21
C A credit of Rs.30 D A charge of Rs.30
70. Leung makes an allowance for receivables on the basis of the length of time the debt has been
outstanding. The analysis of receivables' balances at 30 May 20X2, and the related allowance is:
Balances at [Link]
Length of time debt has been outstanding Allowance required
Rs.
Less than 30 days Nil 70,866
30 days to 59 days 10% of balances 25,250
60 days and over 50% of balances 10,808
What should the allowance for receivables be?
A Rs.2,525 B Rs.5,404
C Rs.7,929 D Rs.10,808
71. Colin allows for potential irrecoverable debts on the basis of the length of time the debt has been
outstanding. The aged receivables analysis at 30 September 20X3 and the allowances required
are:
Age of debt Rs. Allowance required
0-30 days 56,800 1% of balances
31-59 days 37,700 20% of balances
60 days and over 14,900 75% of balances

At 1 October 20X2, Colin's allowance for receivables was Rs.18,765.

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

Which of the following should be reported in Colin's income statement for the year to 30
September 20X3?
A A charge of Rs.518 B A credit of Rs.518
C A charge of Rs.19,283 D A credit of Rs.19,283
72. At 30 November 20X6 the balance on Claire's receivables ledger is Rs.37,890. Clare has decided
to write off balances totaling Rs.1,570. She has also calculated that an allowance equivalent to
2.5% of the remaining balances is required.
What value of receivables should be reported in Claire's statement of financial position at 30
November 20X6?
A Rs.35,642 B Rs.35,412
C Rs.36,400 D Rs.37,142
73. What general ledger entries are required to write off an irrecoverable balance due from a
customer?
A Debit Sales
Credit Receivables expense
B Debit Receivables expense
Credit Sales
C Debit Receivables expense
Credit Trade receivables control
D Debit Trade receivables control
Credit Receivables expense
74. Shirley wishes to write off an irrecoverable receivables balance. She has made the correct entry in
the receivables expense account.
What entry is needed to complete the double entry?
A Debit receivables B Credit receivables
C Debit receivables allowance D Credit receivables allowance
75. In September 20X1, Dora wrote off an amount of Rs.120 due from a customer who had become
bankrupt. However, in January 20X2, she unexpectedly received half of the amount due from that
customer. Dora prepares her accounts to 31 December each year.
How should Dora account for this amount?
A As an accrual for Rs.60
B As sundry income of Rs.60 in the income statement
C As a new receivable of Rs.60
D As a prepayment of Rs.60
76. By setting up an allowance for receivables, what accounting principle is being applied?
A Accruals B Prudence
C Going concern D Materiality
77. A decrease in the allowance for receivables would result in
A An increase in liabilities B A decrease in working capital
C A decrease in net profit D An increase in net profit
78. A company has been notified that a receivable has been declared bankrupt. The company had
previously provided for this doubtful debt. Which of the following is the correct double entry?

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

DR CR
A Bad debts account The receivable
B The receivable Bad debt account
C Allowance for receivables The receivable
D The receivable Allowance for receivables
79. An increase in an allowance for receivables has been treated as a reduction in the financial
statements. The amount is Rs.8,000. Which of the following explains the resulting effects?
A Net profit is overstated by Rs.16,000, receivables overstated by Rs.8,000
B Net profit understated by Rs.16,000, receivables understated by Rs.16,000
C Net profit overstated by Rs.16,000, receivables overstated by Rs.16,000
D Gross profit overstated by Rs.16,000, receivables overstated by Rs.16,000
80. At 1 January 20X1, there was an allowance for receivables of Rs.3,000. During the year, Rs.1,000
of debts was written off, and Rs.800 of bad debts was recovered. At 31 December 20X1, it was
decided to adjust the allowance for receivables to 5% of receivables which are Rs.20,000.
What is the total bad debt expense for the year?
A Rs.200 debit B Rs.1,800 debit
C Rs.2,200 debit D Rs.1,800 credit

81. At the beginning of the year, allowance for receivables was Rs.1,000. At the end of the year when
receivables were Rs.18,500, a specific allowance was made for the whole of Bert's debt of Rs.500
and for 80% of Fred's debt of Rs.1,000. It was decided to make a general allowance of 2% of
remaining debts.
What was the closing balance on the allowance for receivables account?
A Rs.640 B Rs.1,640
C Rs.1,644 D Rs.2,640
82. Allowances for receivables are an example of which accounting concept?
A Accruals B Consistency
C Matching D Prudence
83. At the beginning of the year, the allowance for receivables was Rs.850. At the year-end, the
allowances required was Rs.1,000. During the year Rs.500 of debts were written off, which
includes Rs.100 previously included in the allowance for receivables.

What is the charge to income statement for bad debts and allowance for receivables for the year?
A Rs.1,500 B Rs.1,000
C Rs.650 D Rs.550
84. A debt that we will not be able to collect:
(a) Good debts (b) Normal debts
(c) Bad debts (d) All of the above

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

85. An account showing the expected amounts of debtors at the balance sheet date who will not be
able to pay their accounts:
(a) Provision for simple debts (b) Provision for depreciation
(c) Provision for goods debts (d) Provision for doubtful debts
86. Provision for bad debts is made to:
(a) Avoid having a bad debt.
(b) Get the debtors to pay more quickly.
(c) Keep the amount of debtors approximately at the same value each year.
(d) Obtain true and fair value of debtors for the balance sheet.
87. When preparing financial statements, the bad debts account is 'closed' by a transfer to...!
(a) The balance sheet (b) The profit and loss account
(c) The trading account (d) The provision for bad debts account
88. An increase in a provision will have a:
(a) Credit in the profit and loss account (b) Debit in the profit and loss account
(c) Debit in the assets account (d) Provision for depreciation
89. If allowance for receivable is increased, what is its effect on income statement?
(a) Reduction in expenses (b) Increase in expenses
(c) Increase in profit (d) No effect on income statement
90. If the Debtor's Ledger has a debit balance of Rs. 39,400 it means that
(a) There is Rs.39.400 in the bank account
(b) Customers owe to the business Rs. 39,400
(c) Business owes to creditors Rs. 39,400
(d) None of the above
91. At January 1, 2011 the balance in allowance for receivables showed Rs.15,000. At the end of the
year it is decided to write off Rs. 8,000 and adjust allowance for receivable to Rs.18,000.
What will be the effect of this decision an profit for the year?
(a) Decreases by Rs. 8,000 (b) Decreases by Rs. 18,000
(c) Increases by Rs. 8,000 (d) Decreases by Rs. 11,000
92. Debts that we are unable to collect to the customer's account and:
(a) Credited to a bad debts account (b) Debited to a bad debts account
(c) Debited to debtors account (d) Credited to suppliers account
93. Which of the following is the reason of irrecoverable debt
(a) Sales invoice is not yet sent to customer
(b) Sales invoice is not prepared properly property
(c) The amount is not yet due from customers
(d) The customer is declared bankrupt
94. At December 31, 2012 a company's receivable totaled Rs. 600,000 and an allowance for
receivable of Rs. 60,000 had been brought down from the year ended December 31, 2011. It was
decided to write off debts totaling Rs. 25,000 and to adjust allowance for receivable @10% of the
receivable.

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

What charge for bad and doubtful debts should appear in the company's income statement for the
year ended December 31, 2012?
(a) Rs.25,000 (b) Rs. 22,500
(c) Rs. 35,000 (d) Rs. 57,500
95. If allowance for receivable is decreased, what is its effect on income statement?
(a) Reduction in expenses (b) Increase in expenses
(c) Decrease in profit (d) No effect on income statement
96. These are needed otherwise the value of the debtors on the balance sheet will be showing too high
a value, and could mislead anyone looking at the balance sheet. Also this allows for more
accurate calculation of profit of profit and loss:
(a) Provision for bad debts (b) Provision for good debts
(c) Provision for simple debts (d) Provision for depreciation
97. The controlling account in the general ledger that summarizes the debits and credits to the
individual customers.
(a) Accounts Payable (b) Accounts Receivable
(c) Sales (d) Purchases
98. At January 1, 2011 the balance in allowance for receivables showed Rs. 28,000. At the end of the
year it is decided to write off Rs.16,000 and adjust allowance for receivable to Rs.25,000.
What will be the effect of this decision on profit for the year?
(a) Decreases by Rs. 16,000 (b) Decreases by Rs. 13,000
(c) Increases by Rs. 13,000 (d) Decreases by Rs. 25,000
99. At 1 July 2010 a limited liability company had an allowance for receivables of Rs. 83,000.
During the year ended 30 June 2011 debts totaling Rs. 146,000 were written off. At 30 June 2011
it was decided that a receivables allowance of Rs. 218,000 was required.
What figure should appear in the company's statement of comprehensive income statement for the
year ended 30 June 2011 for receivable/bad debts expenses?
(a) Rs. 11,000 (b) Rs.364,000
(c) Rs. 155,000 (d) Rs 281,000

100. Which TWO of the following statements are correct?

1. Credit limits are applied to customers who purchase goods using cash only.
2. Receivables are included in the statement of financial position net of the receivable
allowance
3. An aged receivables analysis shows how long invoices for each customer have been
outstanding.
4. A credit limit is a tool applied by the credit control department to make suppliers provide
goods on time.
(a) 1 and 2 (b) 1 and 3
(c) 2 and 3 (d) 3 and 4

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

101. At January 01, 2007 the allowance for receivable of Bilal was Rs. 67,000. During the year ended
December 31, 2007 debts totaling Rs. 27,000 was written off. It was decided that the allowance
for receivable should be Rs. 70,000 as at December 31, 2007.
What amount should appear in Bilal's income statement for irrecoverable debt?
(a) Rs. 27,000 (b) Rs. 30,000
(c) Rs. 97,000 (d) Rs. 70.000
102. Relative to not having a provision for bad or doubtful debts, the existence of such a provision
(a) Increase the total of current liabilities (b) Reduces the cost of sales
(c) Reduces the total of current assets (d) None of the above

103. A business writes oil bad debts through provision account at the end of the financial year. The
entries regarding bad debts write-off would be:
(a) Dr. Bad Debt Expense Cr. Provision for Bad Debt
(b) Dr. Sundry Debtors Cr. Bad Debt Expense
(c) Dr. Provision for Bad Cr. Sundry Debt
(d) None of the above
104. A credit balance on Mr. Munir's account in a firm's debtors ledger means that
(a) The amount owed by Mr. Munir is a bad debt
(b) One or more of Mr. Munir’s cheques has bounced'
(c) The firm owes money to Munir.
(d) A provision should be made specifically against Munir’s account.
105. At 1 July, 2011, the allowance for bad debts of Moiz was Rs. 18,000. During the year ended 30
June 2012 debts totaling Rs. 14,600 were written off. It was decided that the allowance for bad
debts should be Rs. 16,000 as at 30 June 2012.
What amount should appear in Moiz’s statement of comprehensive income for bad debts
expenses for the year ended 30 June 2012?
(a) Rs. 28,800 (b) Rs.14,600
(c) Rs. 12,600 (d) Rs. 16,600
106. At 1 January, 2011, a company’s allowance for receivable was Rs. 40,000
At December 31, 2011, the trade receivable amounted to Rs. 600,000. It was decided to write off
Rs. 30,000 of these debts and adjust allowance for receivable @ 2% of remaining trade
receivables.
What amount should appear in company's statement of comprehensive income for irrecoverable
debt? Rs 1,400
(a) Rs. 1,400 (b) Rs. 3,000
(c) Rs. 5,000 (d) Rs. 2,000
107. Provision for bad debts appears on the balance sheet as:
(a) A fictitious asset (b) A part of Share Capital
(b) A deduction from debtors (d) None of the above

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108. At September 30, 2011 a company's allowance for receivables amounted Rs. 26,000 which was
5% of trade receivable at that date.
At September 30, 2011 trade receivable amounted to Rs. 600,000. It was decided to write off Rs.
12,000 of debts as bad and to keep the allowance for receivable at 5% of trade receivable.
What should be the charge in the income statement for the year ended 30 September 2011 for
irrecoverable debts?
(a) Rs. 29,400 (b) Rs. 14,000
(c) Rs. 15,400 (d) Rs. 16,000

109. At 1 January, 2011, the allowance for bad debts of Bilal was Rs. 80,000. During the year ended
December 31, 2011 debts totaling Rs. 90,000 was written off. It was decided that the allowance
for bad debts should be Rs. 30,000 as at December 31, 2011.
What amount should appear in Moiz's statement of comprehensive income for bad debts expenses
for the year ended 30 June 2012?
(a) Rs. 20,000 (b) Rs. 90,000
(c) Rs. 30,000 (d) Rs. 40,000
110. At 1 January 2011, there was an allowance for bad debts of Rs. 3,000. During the year, Rs. 1,000
of debts were written off as irrecoverable, and Rs. 800 of debts previously written off were
recovered. At 31 December 2011, it was decided to adjust the allowance for bad debts to 5% of
receivables which are Rs. 20,000.
What will be the entry to record above situation at the year end?
(a) Dr Allowance for Bad Debts Rs. 1,800
Cr. Income statement Rs.1.800
(b) Of. Income statement Rs. 1,800
Cr. Allowance for bad debts Rs. 1,800
(c) Dr. Bad Debts expenses 17,200
Cr. Income statement Rs. 17,200
(d) Dr. Income statement Rs. 17,200
Cr. Bad Debts expenses 17,200
111. The decrease in allowance for receivable during the year is:
(a) Added to account receivable in Statement of Financial Position.
(b) Deducted from account receivable in Statement of Financial Position.
(c) Added to total bad and doubtful debt expense in income statement.
(d) Deducted from total bad and doubtful debt expense in income statement.

112. At the time of drawing a bill, the drawer credits:

(a) There is Rs. 39,400 in the bank account
(b) Customers owe to the business Rs. 39,400
(c) Business owes to creditors Rs. 39,400
(d) None of the above

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113. At January 1, 2010 the allowance for receivable of Shazia was Rs. 35,000.
During the year ended December 31, 2010 .debts totaling Rs. 15,000 was written off. It was
decided that the allowance for receivable should be Rs. 30,000 as at December 31, 2010. What
amount should appear in Income statement of Shazia for bad debts and doubtful debt?
(a) Rs. 30,000 (b) Rs. 45,000
(c) Rs. 15,000 (d) Rs. 10.000
114. The opening balance of on Rafay's Allowance for doubtful debts account was Rs. 4,000. Rafay
wrote off Rs. 7,000 of bad debts during the year.
The closing balance on the allowance for doubtful debts account was Rs.5,000.
What is the total charge to Rafay’s income statement in respect of bad and doubtful debts for the
year?
(a) Rs. 8,000 (b) Rs. 4,000
(c) Rs. 5,000 (d) Rs. 7,000
115. Modern Traders uses the percentage of sales method to estimate un-collectible. Net credit sales
for the current year amount to Rs. 1,000,000, and management estimates that 3% will be un-
collectible. An allowance for doubtful debts prior to adjustment has a debit balance of Rs. 1,900.
The amount of expense reported on the income statement.
(a) Rs. 30,000 (b) Rs. 31,900
(c) Rs. 28; 100 (d) Rs. 1,900
116. Which of the following is a disadvantage of allowing credit to customers?
1. Funds are stuck up in the receivable.
2. Risk of bad debt is there.
3. Management of account receivable is costly.
4. It increases sales of business.
(a) 1 Only (b) 1 and 2 Only
(c) 2. 3 and 4 Only (d) 1, 2 and 3 Only
117. The opening balance on Nimra's allowance for doubtful debts account was Rs. 9,000. Nimra
wrote off. Rs. 13,000 as bad debts during the year.
The closing balance on the allowances for doubtful debts account was Rs. 6,000.
What is the total charge to Nimra's income statement in respect of bad and doubtful debts for the
year?
(a) Rs. 9,000 (b) Rs. 13,000
(c) Rs. 10,000 (d) Rs. 22,000

118. At June 30, 2011, a company's allowance for receivable amounted to Rs. 30,000 which was 2%
of trade receivable at that date.
At June 30, 2012 trade receivable amounted to Rs. 300,000. It was decided to write off Rs.
28,000 of debts as irrecoverable and to keep the allowance for receivable at 2% of trade
receivable.

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What should be the charge in the Income statement for the year ended June 30 2012 for
irrecoverable debts?
(a) Rs. 5,440 (b) Rs. 3440
(c) Rs. 2,000 (d) Rs. 3,000
119. The increase in allowance for receivable during the year is:

(a) Added to account receivable in Statement of Financial Position.

(b) Deduction from account receivable in Statement of Financial Position.
(c) Added to total bad and doubtful debt expenses in income statement.
(d) Deducted from total bad and doubtful debt expenses in income statement.
120. At December 31, 2011, a company's allowance for receivable amounted to Rs. 55.000 which was
3% of trade receivable at that date.
At December 31. 2012 trade receivable amounted to Rs. 320,000. it was decided to write off Rs
60,000 of debts as bad and to keep the allowance for receivable at 3% of trade receivable.
What should be the charge in the Income Statement for the year ended At December 31.2012 for
bad and doubtful debts?
(a) Rs. 12,800 (b) Rs. 7,800
(c) Rs. 5,000 (d) Rs. 60,000
121. Bismillah Communication completed the following transactions during the year ended December
31, 2010.
Opening account receivable Rs. 40,000
Credit sales during the year Rs. 65,000
Collection during the year from customers Rs. 80,000
Account receivable written off during the year Rs. 1,000
What is the amount of receivable that should be shown in the Statement of Financial Position at
year end?
(a) Rs. 26,000 (b) Rs. 24,000
(c) Rs. 34,000 (d) Rs. 29,000
122. An enterprise started the year with total trade receivables of Rs. 110,000 and an allowance for
receivable of Rs.,5,000.
During the year, two specific debts were written off, one for Rs. 1,200 and the other for Rs.800. A
debt of Re. 1,500 that had been written off as irrecoverable in the previous year was recovered
during the year. At the year-end, total receivables were Rs. 130,000 and the allowance for
receivable was Rs. 6,800.
What is the charge in the income statement for the year in respect of irrecoverable debts?
(a) Rs. 2,500 (b) Rs. 2,300
(c) Rs. 2,700 (d) Rs. 2,900

123. Under which of the following concept of accounting, allowance for receivable is maintained by
the business?
(a) Historical cost concept (b) Materiality concept
(c) Prudence concept (d) Substance over form

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124. The rationale for making a provision in respect of doubtful debts is that the provision....
(a) Is estimated of future bad debts
(b) Records the expense of bad debts as they are incurred.
(c) Matches the estimated cost of future bad debt against the revenue earned in giving rise to
the potential bad debts
(d) Records bad debts without taking them out of the books of an entity, this showing the full
amount owed by debtors as a current asset
125. At April 30, 2011, a company's allowance for receivable amounted to Rs. 20,000 which was 5%
of trade receivable at that date.
At April 30, 2012 trade receivable amounted to Rs. 250,000. It was decided to write off Rs.
24,000 of debts as bad and to keep the allowance for receivable at 5% of trade receivable.
What should be the charge in the income statement for the year ended April 30 20.12 for bad and
doubtful debts?
(a) Rs. 15,440 (b) Rs. 15:300
(c) Rs. 15,000 (d) Rs. 15,860
126. At January 1, 2010 a business had trade account receivable Rs. 90,000. During the year to
December 31 2010 the following transactions took place.
a Credit sales to customers Re. 280,000.
b. Collection from customers Rs. 170,000.
c. Two customers owing Rs. 10,000 and Rs. 5,000 are declared bankrupt These two
amounts are to be written off.
What is the amount of trade account receivable as at December 31, 2010 and the irrecoverable
debts expense for the year?
Trade Irrecoverable debt
Receivable expense
(a) Rs. 230,000 Rs. 15,000
(b) Rs. 185,000 Rs. 15,000
(c) Rs. 180,000 Rs. 10,000
(d) Rs. 150,000 Rs. 15,000
127. If company's allowance for bad debts shows amounting Rs. 30,000 at the beginning of the year
and at the end of the year trade receivable is amounting Re. 590,000. Rs. 20,000 was confirming
not recoverable and adjust allowance for bad debts @ 5% of remaining debts.
What figure should appear in the company's income statement for total debts written off and
movement of allowance for the year end?
(a) Rs. 20,000 (b) Rs. 22,000
(c) Rs. 21.000 (d) Rs. 18,500

128. At January 1, 2011 the balance in allowance for receivable showed Rs. 45,000. During the year it
is decided to write off account of Nadeem, a customer Rs. 15,000 and adjust allowance for
receivable to Rs. 40,000.
What is the impact of this decision on profit of year 2011?
(a) Decrease by Rs. 30,000 (b) Decrease by Rs. 10,000
(c) Increase by Rs. 10,000 (d) Increase by Rs. 30,000

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

129. Are kept separate from the bad debts account. The amount of the provision is on the basis of the
best guess that can be made taking all the facts into account:
(a) Provision for good debts (b) Provision for normal goods
(c) Provision for depreciation (d) Provision for bad debts
130. At December 31, 2011 a company's receivable totaled Rs. 750,000 and an allowance for doubtful
debts of Rs. 50,000 had been brought down from the year ended December 31, 2010.
It was decided to write off debts totaling Rs. 45,000 and to adjust allowance doe doubtful debts
@ 15% of the receivable.
What charge for bad debts should appear in the company's income statement for the year ended
December 31, 2011.
(a) Rs. 105,750 (b) Rs. 45,000
(c) Rs 100 750 (d) Rs 95 900
131. At January 1, 2011 the allowance for receivable of a company was Rs. 60,000. During the year
ended December 31, 2011 debts totaling Rs. 65,000 was written off. It was decided that the
allowance for receivable should be Rs. 20,000 as at December 31. 2011.
What amount should appear in Income statement of the company for the bad and doubtful debts?
(a) Rs. 25,000 (b) Rs. 20,000
(c) Rs. 65,000 (d) Rs. 60,000
132. On January 1, 2011 the balance on Ali's allowance for doubtful dents account was Rs. 24,000. Ali
decided to write off Rs. 14,000 of bad debts during the year.
The closing balance on the allowance for doubtful debts account was Rs. 30,000.
What is the total charge to Ali's income statement in respect of bad and doubtful debts for the
year?
(a) Rs. 20,000 (b) Rs. 14,000
(c) Rs. 24,000 (d) Rs. 30,000
133. During the year ended 31 December 2011, the sales revenue of Neha & Nimra Industries totaled
Rs. 800,000, its trade receivables amounting to 5% of revenue for the year.
Neha & Nimra Industries wishes to maintain its allowance for doubtful debts at 4% of trade
receivables, and discovers that the allowance as a result is 25% higher than it was a year before.
During the year specific bad debts of Rs. 4,000 were written off and bad debts (written off three
years previously) of Rs. 1,000 were recovered.
What is the net charge for irrecoverable debts for the year ended 31 December 2011?
(a) Rs. 6,800 (b) Rs. 6,000
(c) Rs. 5,900 (d) Rs. 3,320

134. At July 01, 2011, a company's allowance for receivable was Rs. 75,000.
At June 30, 2012 trade receivable amounted to Rs. 550,000, it was decided to write off Rs. 85,000
of these debts and adjust the allowance for receivable to Rs.65,000.
What are the final amounts for inclusion in the company's Statement of Financial Position at June
30 2012.

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Allowance for
Trade Receivable Net Receivable
receivable
(a) Rs.550,000 Rs. 65,000 Rs. 485,000
(b) Rs. 550,000 Rs. 85,000 Rs. 465,000
(c) Rs. 465,000 Rs.85.000 Rs. 380,000
(d) Rs. 465,000 Rs. 65,000 Rs. 400,000

135. Debts that we are unable to collect are credited to the customer's account and:
(a) Credited to a bad debts account (b) Debited to a bad debts account
(c) Debited to debtors account (d) Credited to suppliers account
136. A business started the year with total trade receivables of Rs. 150,000 and an allowance for
recoverable of Rs. 8,000.
During the year, two specific debts were written off, one for Rs. 2,800 and the other for Rs.
2,200. A debt of Rs. 4,800 that had been written off as irrecoverable in the previous year was
recovered during the year. At the year-end, total receivables were Rs. 70,000 and the allowance
for receivable was Rs.4,000.
What is the charge debit or credit in the income statement for the year in respect of irrecoverable
debts?
(a) Rs. 3,800 Debit (b) Rs. 2,300 Credit
(c) Rs. 3,800 Credit (d) Rs. 2,300 Debit
137. At October 01, 2010, a company's allowance for receivable was Rs. 95,000. At September 30,
2011 trade receivable amounted to Rs. 690,000. it was decided to write off Rs. 88,000 of these
debts and adjust the allowance for receivable to Rs. 70 000
What are the final amounts for inclusion in the company's Statement of Financial Position at
September 30 2011.
Allowance for
Trade Receivable Net Receivable
receivable
(a) Rs.602,000 Rs. 95,000 Rs. 507,000
(b) Rs. 690,000 Rs. 70,000 Rs. 620,000
(c) Rs. 602,000 Rs.70.000 Rs. 532,000
(d) Rs. 602,000 Rs. 88,000 Rs. 514,000
138. At July 1, 2011, a business had trade account receivable Rs. 70,000. During the year to June 30
2012 the following transactions took place.
a. Credit sales to customers Rs. 150,000
b. Collection from customers Rs. 100,000
c Two customers owing Rs. 5,000 and Rs. 3,000 are declared bankrupt These two amounts
are to be written off
What is the amount of trade account receivable as at June 30, 2012 and the irrecoverable debt
expenses for the year
Trade Irrecoverable
receivables debt expenses
(a) Rs. 120, 000 Rs. 5,000
(b) Rs. 160,000 Rs. 3,000
(c) Rs. 200,000 Rs. 8,000
(d) Rs. 112,000 Rs. 8,000

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139. At 31 December 2012, a company’s trade receivables totalled Rs. 864,000 and the allowance for
receivables was Rs. 48,000. It was decided that debts totaling Rs. 13,000 were to be written off,
and the allowance for receivables adjusted to five per cent of the receivables.
What figures should appear in the statement of financial position for trade receivable (after
deducting the allowance) and in the statement of comprehensive income for receivables
expenses?
Statement of Statement of
Comprehensive Financial
Income Position
(a) Rs. 8,200 Rs. 807,800
(b) Rs. 7,550 Rs. 808,450
(c) Rs. 55,550 Rs. 808,450
(d) Rs. 15,450 Rs. 808,450
140. Provision for discount allowed on outstanding debtors balances should be calculated, at an
appropriate rate, on
(a) Total debtors net of any bad debts written off
(b) Total debtors before account is taken of bad debt
(c) Total debtors less total creditors
(d) Total debtors net of any bad debts written off and after deducting the cumulative amount
of any provision for doubtful debts.
141. An increase in a provision will have a:
(a) Credit in the profit and loss account (b) Debit in the profit and loss account
(c) Debit in the asset account (d) Provision for depreciation
142. A reduction in a provision will have:

(a) A debit in the profit and loss-account.

(b) A credit in trading account
(c) A credit in the profit and loss account
(d) A debit in provision for depreciation

143. When a debt is founded to be bad, what should be done in account?

(a) It must be recorded a bad sale

(b) It must be recorded as no sale
(c) It must be recorded as bad debt
(d) It must be recorded as provision for depreciation

144. For showing a correct figure in the balance sheet about debtors we use:

(a) Provision for doubtful debts

(b) Provision for depreciation
(c) Provision for asset
(d) Provision for debtors

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145. Bad debts account is used only when:

(a) Debts are provided good

(b) Debts is proved bad an is written off
(c) Debts are not secured
(d) All of above
146. What is ageing?

(a) It is a list of supplier for credit purchase

(b) It is a matter of fact
(c) It is list of debtor with respect of expected payment schedule
(d) It is list of debtors which are bad
147. Accounting entry in Year in which the provision is first made will be:

(a) Credit profit and loss account with amount of provision and debit provision for doubtful
debt
(b) On entry
(c) Debit provision for depreciation
(d) Debit profit and loss account with amount of provision and credit provision for doubtful
debts

148. When debts will be reinstating the accounting entry will be:

(a) Debtors credit and bad debts debit

(b) Debtor on sale
(c) Debtors debit and credit bad debts recovered
(d) None of above
149. When cash or cheque is later received from the debtor in settlement of the account or part thereof
the accounting entry will be:

(a) Bank credit and debtors debit

(b) Cash or bank debit and debtor's credit
(c) Cash debit and purchase credit
(d) All of above

150. To write of a debt as bad the correct procedure is to:

Debit Credit
(a) Debtor bad debts
(b) Debtor provision for bad debts
(c) Bad debts debtor
(d) Provision for bad debts profit and loss
151. At the end of the financial year the entries regarding bad debts are:
Debit Credit
(a) Profit and loss bad debts
(b) Bad debts profit and loss
(c) Debtors provision for bad debts
(d) Provision for bad debts profit and loss appropriation

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152. Firms make provisions for bad debts in order to:

(a) Avoid having any bad debts

(b) Get their debtors to pay more quickly
(c) Keep the debtors figure approximately the same value each year
(d) Obtain a true and fair debtors figure for the balance sheet

153. Provisions for bad debts should appear on the balance sheet as:

(a) A fictitious asset

(b) Part of the share capital
(c) A deduction from the debtors
(d) An addition to the goodwill

154. To make a provision for bad debts the correct procedure is to

Debit Credit
(a) Provision for bad debts account bed debts account
(b) Debtors account provision for bad debts account
(c) Provision for bad debits account Profit and loss account
(d) Profit and loss account provision for boa debts account
155. Which one of the following statements is INCORRECT From the information on given in the
accounts we known

(a) How many debts were written off dung the year as bad
(b) Whether the provision for bad debts was increased or decrease
(c) The balance on the debtors account at the end of the year
(d) The effect the bad debts have had on the profit for the year
156. Which one of the following statements about debtors, bad debts and provisions for bad debts in
incorrect?

(a) Debtors usually appear as a current asset in the balance sheet

(b) Provisions for bad debts usually have a debit balance in the ledger
(c) The bad debts account usually has a debit balance in the ledger
(d) An increase in the provision for bad debts account will reduce the profit of the form
157. Which am of the following types of business is likely to have the largest amount of book debts?

(a) A Chinese take away (b) A newsagent

(c) A bank (d) A supermarket

158. When a provision is created for the first time, double entry done would be:

(a) Debit trading and credit sale account

(b) Debit bank and credit purchase account
(c) Debit debtors and bank account
(d) Debit profit and loss and credit provision

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159. To reduce a provision amount made for bad debts, one should:
Debit Credit
(a) Profit and loss bad debts provision
(b) Profit and loss debtors
(c) Sales debtors
(d) Bad debts provision profit and loss

160. At the beginning of the year a company has a provision for doubtful debts of 1,000 at the end of
year required provision is 2,500, during the year debts of 1,500 written off and 100 is received in
respect of a deal written oft many years ago. What is the net amount charged to the profit and loss
account for bad and doubtful debts?

(a) 1,500 Rs. (b) 2,500 Rs.

(c) 2,900 Rs. (d) 3,000 Rs.

161. Debtors at year-end were 80,000 Rs., bad debts written off during the year were 1,500 Rs. and
bad debts to be written off Rs. 1,000. Provision for doubtful debts is required 3% of debtors with
an existing provision of Rs. 1,800. Compute the amount to be charged in current year profit and
loss account:

(a) 2,500 (b) 3,025

(c) 3,070 (d) 3,100

162. Provision for doubtful debts account is opened in…..

(a) Debtors ledger (b) General ledger

(c) Creditros ledger (d) Sale ledger

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MULTIPLE CHOICE QUESTIONS (MCQs) SOLUTIONS

01 A
Closing allowance = Rs. 100,000x5% = Rs. 5,000
Charge to statement of profit or loss = 5,000 - 1,000= Rs. 4,000
Dr. Provision for bad & doubtful debt account Cr.
b/d 1,000
Bad debt expense 4,000
c/d (100,000 x 5%) 5,000
5,000 5,000
02 B
Rs.
Closing receivables 600,000 - 25,000 575,000
Closing allowance 575,000x10% 57,500
Carrying amount of receivables 575,000 - 57,500 517,500

Dr. Adjusted Debtors account Cr.

Unadjusted closing balance 600,000 Bad debt expense 25,000
Closing balance-adjusted (c/d) 575,000
600,000 600,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 60,000
Bad debt expense 2,500
c/d (575,000 x 10%) 57,500
60,000 60,000

Balance sheet extract s

Debtor 575,000
Provision for bad & doubtful debt account 57,500
517,500

03 D
Closing allowance = (Rs. 75,000 - 5000) x5% = Rs. 3,500 + (Rs. 5,000 x 25%) = Rs. 4,750
Dr. Provision for bad & doubtful debt account Cr.
b/d -
Bad debt expense 4,750
c/d (W-1) 4,750
4,750 4,750

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(W-1) Calculation of provision for bad & doubtful debt

Classification Balance Provision Provision
rate amount
Good debtor - - -
Specific (Ali) 5,000 25% 1,250
General 70,000 5% 3,500
Balance 75,000 4,750

04 A
The allowance account is not liability (i.e. it is not present obligation for outflow of economic
benefits).
The allowance account is not an asset account, it is deducted from asset and therefore it is
“Contra Asset” Account.
The allowance account itself is not an expense, only changes in its balance are recognised in
profit or loss.
05 D
Expense = Bad debts + increase in allowance = Rs. 1,000+500= Rs. 1,500
Dr. Provision for bad & doubtful debt account Cr.
b/d -
Bad debt expense 500
c/d 500
500 500

Dr. Adjusted Bad debt expenses account Cr.

Debtor 1,000
Provision for bad & doubtful 500 c/d 1,500
debt
1,500 1,500

06 D
Charge = Closing Allowance-Opening allowance + debts written off
= Rs. 30,000 - Rs. 35,000 + Rs. 15,000 = Rs. 10,000
Dr. Provision for bad & doubtful debt account Cr.
b/d 35,000
Bad debt expense 5,000
c/d 30,000
35,000 35,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 15,000
Provision for bad & doubtful debt 5,000
c/d 10,000
15,000 15,000

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07 A
Allowance for doubtful debts are calculated usually on the basis of receivables. However, second
most reliable amount is of credit sales as debt arises because of credit sales and then the chance of
recoverability is calculated.
08 C
Expense = Rs. 9,000+ (Rs. 18,000-16,000) = Rs. 11,000 therefore, decrease the profit by Rs.
11,000
Dr. Provision for bad & doubtful debt account Cr.
b/d 16,000
Bad debt expense 2,000
c/d 18,000
18,000 18,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 9,000
Provision for bad & doubtful 2,000 c/d 11,000
debt
11,000 11,000
09 C
Closing allowance = (Rs. 75,000 x 2%) + (Rs. 50,000 x 5%) = Rs. 4,000
Charge to statement of profit or loss = Rs. 500
Ages Balance Provision Provision
rate amount
From 30 days 130,000 - -
31 to 60 days 75,000 2% 1,500
Over 60 days 50,000 5% 2,500
255,000 4,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 3,500
Bad debt expense 500
c/d 4,000
4,000 4,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor -
Provision for bad & doubtful 500 c/d 500
debt
500 500
10. B
The older the debt, the higher the chances of default.
11. A
The correct treatment is to reduce the expense previously recognised.

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12. A
Increase in allowance = Closing allowance – opening allowance
= (Rs. 63,000x2%) - (45,000x2%) = Rs. 360
Closing receivables = 45,000 + 55,000 - 35,000 - 2,000 = Rs. 63,000
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 45,000 Cash 35,000
Sales 55,000 Bad debt expense 25,000
Closing balance-adjusted (c/d) 63,000
100,000 100,000

Dr. Provision for bad & doubtful debt account Cr.

b/d (45,000 x 2%) 900
Bad debt expense 360
c/d (63,000 x 2%) 1,260
1,260 1,260

13. C
Closing balance of allowance
Rs. 93,000 – 1,800 bad debts = Rs. 91,200 x 5% = Rs. 4,560
Opening balance of allowance
Rs. 4,560 x 100/120 = Rs. 3,800
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 93,000
Bad debt expense 1,800
Closing balance-adjusted (c/d) 91,200
93,000 93,000

Dr. Provision for bad & doubtful debt account Cr.

b/d (4560 / 120 x 100) 3,800
Bad debt expense 760
c/d (91,200 x 5%) 4,560
4,560 4,560

14. D
Rs.
Irrecoverable debts 28,500
Allowance c/f (5% × (Rs. 868,500 – Rs. 28,500)) 42,000
Allowance b/f (38,000)
4,000
Increase in allowance 32,500

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Debtors account Cr.

Unadjusted closing balance 868,500
Bad debt expense 28,500
Closing balance-adjusted (c/d) 840,000
868,500 868,500

Dr. Provision for bad & doubtful debt account Cr.

b/d 38,000
Bad debt expense 4,000
c/d (840,000 x 5%) 42,000
42,000 42,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 28,500
Provision for bad & doubtful 4,000 c/d 32,500
debt
32,500 32,500

15. A
Rs.
Allowance at end of year (5% of Rs. 120,000) 6,000
Allowance at start of year 9,000
Decrease in allowance (3,000)
Irrecoverable debts written off 5,000
Charge to SPL 2,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 9,000
Bad debt expense 3,000
c/d (120,000 x 5%) 6,000
9,000 9,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 5,000 Provision for bad & doubtful debt 3,000
c/d 2,000
5,000 5,000

16. Rs. 1,000

Closing allowance = Rs. 90,000x5% = Rs. 4,500
Bad debts are not to be deducted because already written off.
Charge for Statement of profit or loss Rs.
Decrease in allowance (Rs. 500)
Irrecoverable debts 3,000
Bad debts recovered (1,500)
Profit or loss 1,000

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Provision for bad & doubtful debt account Cr.

b/d 5,000
Bad debt expense 500
c/d (90,000 x 5%) 4,500
5,000 5,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 3,000 Cash / bank 1,500
Provision for bad & doubtful debt 500
c/d 1,000
3,000 3,000

17. Rs. 274,400

Receivables = (Rs. 310,000-Rs. 30,000) = Rs. 280,000
Carrying amount = Rs. 280,000 – (Rs. 280,000x2%) = Rs. 274,400
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 310,000
Bad debt expense 30,000
Closing balance-adjusted (c/d) 280,000
310,000 310,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 25,000
Bad debt expense 19,400
c/d (280,000 x 2%) 5,600
25,000 25,000

Balance Sheet Extracts

Debtors 280,000
Less provision for B&D D (5,600)
274,400

18. Rs. 480,000

Rs.
Receivables Rs. 650,000 – 95,000 = 555,000
Less: Allowance (75,000)
480,000

Dr. Adjusted Debtors account Cr.

Unadjusted closing balance 650,000
Bad debt expense 95,000
Closing balance-adjusted (c/d) 555,000
650,000 650,000

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Provision for bad & doubtful debt account Cr.

b/d 65,000
Bad debt expense 10,000
c/d 75,000
75,000 75,000

Balance Sheet Extracts

Debtors 555,000
Less provision for B&D D (75,000)
480,000

19. Rs. 13,000

= Rs. 16,000 irrecoverable -Rs. 3,000 decrease in allowance =Rs. 13,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 38,000
Bad debt expense 3,000
c/d 35,000
38,000 38,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 16,000 Provision for bad & doubtful debt 3,000
c/d 13,000

16,000 16,000

20. Rs. 225,245

Allowance Rs. Rs.
Receivables 238,750
Specific allowance
Syed (450) 450
Raja (1,200) 1,200
General allowance @5% 237,100 11,855
Total allowance 13,505
Receivables (Statement of Financial Position)
Rs. 238,750 – Rs. 13,505 = Rs. 225,245

Dr. Provision for bad & doubtful debt account Cr.

b/d -
Bad debt expense 13,505
c/d 13,505
13,505 13,505

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

Balance Sheet Extracts

Debtors 238,750
Less provision for B&D D (13,505)
225,245
21. A
It will increase net profit
22. D
Contra asset account (it is deducted from asset)
23. B
Yes, bad debt refers to an account receivable that has been clearly identified as not being
collectible. Whereas a doubtful debt is an account receivable that might become a bad debt at
some point in the future
24. B
Bad debt expense (debit) and accounts receivable (credit)
25. C
Rs. 800,000 – 1% discount as payment made within 10 days = Rs. 792,000
26. B
Rs. 800,000 – 100,000 = Rs. 700,000 – 1% discount as payment made within 10 days = Rs.
693,000
27. A
Accounts receivables
28. D
Aging analysis
29. B
Rs. 100,000 x 5% = Rs. 5,000 – Rs. 1,000 opening = Rs. 4,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 1,000
Bad debt expense 4,000
c/d (100,000 x 5%) 5,000
5,000 5,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor -
Provision for bad & doubtful 4,000 c/d 4,000
debt

4,000 4,000

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

30. A
Rs. 60,000 x 7% = Rs. 4,200 (credit) closing balance.
Dr. Provision for bad & doubtful debt account Cr.
b/d 500
Bad debt expense 3,700
c/d (60,000 x 7%) 4,200
4,200 4,200

31. A
A specific allowance of Rs. 900 and a general allowance of Rs. 1,582
32. D
Rs. 4,000 bad debts + [1,200 – 1,000 doubtful debts] = Rs. 4,200
Dr. Provision for bad & doubtful debt account Cr.
b/d 1,000
Bad debt expense 200
c/d 1,200
1,200 1,200

33. A
Rs. 2,000,000 x 5% x 4% = Rs. 4,000 x 33.33/133.33 = Rs. 1,000
Increase in allowance would increase expense, resulting in reduction in profit.
Dr. Provision for bad & doubtful debt account Cr.
b/d 3,000
Bad debt expense 1,000
c/d (100,000 x 4%) 4,000
4,000 4,000
34. A
Rs. 5,000 bad debts + [(120,000 x 5%) – 9,000 doubtful debts] = Rs. 2,000
35. C
Rs. 3,200 bad debts + [3,000,000 x 4% x 3% x 25/125 doubtful debts] – 150 recovered = Rs.
3,770
Dr. Provision for bad & doubtful debt account Cr.
b/d (3,600 / 125 x 100) 2,880
Bad debt expense 720
c/d (120,000 x 3%) 3,600
3,600 3,600

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 3,200 Cash 150
Provision for bad & doubtful 720 c/d 3,770
debt

3,920 3,920

36. B
The receivables account balance is NOT written off when a specific allowance for doubtful debts
for that customer is created.
37. B
Debit Cash and Credit Bad debts expense
38. D
An increase in allowance would decrease the net receivables presented under current assets in the
statement of financial position.
39. B
Rs. 18,000 bad debts + [20,000 – 37,000 reduction in doubtful debts] = Rs. 1,000 debit (expense)
Dr. Provision for bad & doubtful debt account Cr.
b/d 37,000
Bad debt expense 17,000
c/d 20,000
37,000 37,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 18,000 Provision for bad & doubtful debt 17,000
c/d 1,000

18,000 18,000
-
40. A
Rs. 44,244 as a current asset
Balance Sheet Extracts
Debtors 47,744
Less provision for B&D D (3,500)
44,244
41. D
Records irrecoverable debts without taking them out of the books of an entity, thus showing the
gross and expected amount owned by trade receivables as a current asset.
42. C
An increase in allowance would decrease the net receivables presented under current assets in the
statement of financial position.

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

43. B
All expenses are closed to profit or loss account.
44. D
24,200
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 400,000
Bad debt expense 38,000
Closing balance-adjusted (c/d) 362,000
400,000 400,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 50,000
Bad debt expense 13,800
c/d (362,000 x 10%) 36,200
50,000 50,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 38,000 Provision for bad & doubtful debt 13,800
c/d 24,200

38,000 38,000

45. D
Allowance = (32,700 x 0%) + (16,900 x 4%) + (8,750 x 50%) = Rs. 5,051
Decrease in allowance = Rs. 5,051 – 5,600 opening = Rs. (549)
46. A
Bad debts Rs. 8,900 – reduction in allowance Rs. 2,134 = Rs. 6,766 expense
Specific allowance Rs. 1,350 +750 = Rs. 2,100
General allowance Rs. 58,200 – 8,900 – 2,100 = Rs. 47,200 x 3% = Rs. 1,416
Reduction in allowance = (2,100 + 1,416) – 5,650 opening = Rs. 2,134

Dr. Adjusted Debtors account Cr.

Unadjusted closing balance 58,200
Bad debt expense 89,000
Closing balance-adjusted (c/d) 49,300
58,200 58,200

Dr. Provision for bad & doubtful debt account Cr.

b/d 5,650
Bad debt expense 2,134
c/d 3,516
5,650 5,650

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 8,900 Provision for bad & doubtful debt 2,134
c/d 6,766

8,900 8,900

(W-1) Calculation of provision for bad & doubtful debt

Classification Balance Provision Provision
rate amount
Good debtor - - -
Specific (Lahore) 1,350 100% 1,350
Specific (Islamabad) 750 100% 750
General 47,200 3% 1,416
Balance 49,300 3,516

47. B
b/d 13,150 + sales 125,000 – cash 115,500 – bad debts 7,100 = Rs. 15,550
Rs. 15,550 – allowance 2,100 = Rs. 13,450 net
Dr. Debtors account Cr.
b/d 13,150 Cash 115,500
Sales 125,000 Bad debt expense 7,100
Closing balance (c/d) 15,550
138,150 138,150

Balance Sheet Extracts

Debtors 15,550
Less provision for B&D D (2,100)
13,450

48. A
Rs. 3,200 bad debts + [7,000,000 x 5% x 4% x 20/120 doubtful debts] – 450 recovered = Rs.
5,083
Dr. Provision for bad & doubtful debt account Cr.
b/d (14,000 / 120 x 100) 11,667
Bad debt expense 2,333
c/d (350,000 x 4%) 14,000
14,000 14,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 3,200 Bad debt recovery (Cash) 450
Provision for bad & doubtful 2,333 c/d 5,083
debt

5,533 5,533

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

49. A
Bad debts Rs. 800 + 550 = Rs. 1,350
Reduction in allowance = Rs. 2,300 – 2,500 = Rs. (200)
Bad debts recovered = Rs. (350)
Charge as expense = Rs. 1,350 – 200 – 350 = Rs. 800
Dr. Provision for bad & doubtful debt account Cr.
b/d 2,500
Bad debt expense 200
c/d 2,300
2,500 2,500

Dr. Adjusted Bad debt expenses account Cr.

Debtor 800 Bad debt recovery 350
Debtor 550 Provision for bad & doubtful debt 200
c/d 800
1,350 1,350

50. Rs.5,350
Allowance Expense
Rs. Rs. Rs.
Receivables balance (draft) 58,200
Irrecoverable debts (8,900) 8,900
49,300
Specific allowance: Carroll (1,350) 1,350
Juffs (750) 750
47,200 ––––––
Allowance c/f 2,100
Allowance b/f 5,650
Decrease in allowance 3,550 (3,550)
Total expense 5,350
Dr. Provision for bad & doubtful debt account Cr.
b/d 5,650
Bad debt expense 3550
c/d (1350+750) 2,100
5650 5,650

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing bal. 8,900 Provision for bad & doubtful debt 3,550
c/d 5,350
8,900 8,900

51. Rs.13,450

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

Receivables’ ledger control account

Rs. Rs.
Balance b/d (W) 13,150
Sales 125,000 Cash 115,500
Bad debts expense 7,100
Balance c/d 15,550
138,150 138,150

Dr. Provision for bad & doubtful debt account Cr.

b/d 1,150
Bad debt expense 950
c/d 2,100
2,100 2,100

b/d c/d
Rs. Rs.
Gross receivables 13,150 15,550
Allowance (1,150) (2,100)
Net receivables 12,000 13,450
52. B
The write off of debts will reduce the gross receivables balance by Rs.72,000 to Rs.766,000.
The allowance is to be adjusted to Rs.60,000 (hence an adjustment of Rs.12,000).
The net balance is therefore Rs.766,000 less Rs.60,000, i.e. Rs.706,000.
53. Rs.5,083
Year-end receivables 5% × Rs.7,000,000 = Rs.350,000
Year-end allowance for receivables = Rs.14,000
Allowance at start of year = Rs.11,667
Increase in allowance = Rs.2,333
Note that the irrecoverable debts had been written off during the year and have already been
excluded from the receivables balance at 30 September 20X8.

Dr. Provision for bad & doubtful debt account Cr.

b/d (14,000 / 120 x 100) 11,667
Bad debt expense 2,333
c/d (350,000 x 4%) 14,000
14,000 14,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 3,200 Bad debt recovery (Cash) 450
Provision for bad & doubtful 2,333 c/d 5,083
debt

5,533 5,533

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

54. Rs.20,200
Trade receivables
Rs. Rs.
Balance b/f 10,000 Receipts (90,000 – 1,000) 89,000
Sales 100,000 Irrecoverable in year 800
Balance c/f 20,200
110,000 110,000
55. A
When a debt is written off as irrecoverable, the transaction is recorded as:
Dr Irrecoverable debts account (expense), and Cr Receivables’ ledger control account
Any subsequent change to the allowance for receivables should be dealt with as a separate matter.
56. Rs.340,750
Cash sales do not affect receivables.
Discounts received affect payables, not receivables.
The allowance for receivables does not affect the amount of receivables, but specific
irrecoverable debts written off do affect receivables.
Receivables
Rs. Rs.
Balance b/f 37,500 Contra with payables 1,750
Sales (credit) 357,500 Irrecoverable debts written off 3,500
Bank (β) 340,750
Balance c/f 49,000
395,000 395,000
57. B
The allowance for receivables will reduce the book value of receivables. An increase in an
allowance for receivables will therefore reduce net current assets.
58. Rs.5,270
Rs. Rs.
Receivables balance 230,000
Specific allowance – Emily (450) 450
– Lulu (980) 980
– Sandy (5,000) 5,000
228,570 _______
Total allowance at end of year c/f 6,430
Allowance b/f (11,700)
Decrease in allowance = Cr to statement of profit or loss 5,270
Dr. Provision for bad & doubtful debt account Cr.
b/d 11,700
Bad debt expense 5,270
c/d 6,430
11,700 11,700

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CHAPTER-5 BAD AND DOUBTFUL DEBTS

59. Rs.2,000
The charge for irrecoverable debts and allowance for receivables is the actual amount of bad
debts written off plus the increase in the allowance for doubtful debts, or minus the decrease in
the allowance.
Rs.
Allowance required at end of year 6,000
Allowance required at start of year 9,000
Decrease in allowance (3,000)
Irrecoverable debts written off 5,000
Charge to profit or loss 2,000
Dr. Provision for bad & doubtful debt account Cr.
b/d 9,000
Bad debt expense 3,000
c/d 6,000
9,000 9,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 5,000
Provision for bad & doubtful debt 3,000
c/d 2,000
5,000 5,000

60. Rs.158
Rs.
Allowance required 5,512
Less: opening allowance (5,670)
Decrease (credit) recognised in profit or loss (158)
Dr. Provision for bad & doubtful debt account Cr.
b/d 5,670
Bad debt expense 158
c/d 5,512
5,670 5,670

61. B
62. Rs.1,500
If, on average, five microwave ovens are returned in the month following sale, and refunds are
made in that month, only expected returns in January 20X6 from sales made in December 200X5
will require a provision. This will be Rs.1,500 (Rs.300 × 5).

145
CHAPTER-5 BAD AND DOUBTFUL DEBTS

63. C
The statement of profit or loss will include the movement in the provision from one reporting date
to the next. In this case, the provision needs to be reduced by Rs.1,608 (Rs.6,548 - Rs.4,940)
which will result in a credit to the statement of profit or loss.
Dr. Provision for bad & doubtful debt account Cr.
b/d 6,548
Bad debt expense 1,608
c/d 4,940
6,548 6,548

64. A
The statement of profit or loss will include the movement in the provision from one reporting date
to the next. In this case, the provision needs to be increased by Rs.800 which will result in a
charge to the statement of profit or loss and an increase in the provision in the statement of
financial position.
65. C
Provision required Rs.7,634
Provision brought forward Rs. 6,548
Increase in provision Rs.1,086 increase in provision = charge
Dr. Provision for bad & doubtful debt account Cr.
b/d 6,548
Bad debt expense 1,086
c/d 7,634
7,634 7,634

66. B
The provision has decreased by Rs.500
Dr. Provision for bad & doubtful debt account Cr.
b/d 2,500
Bad debt expense 500
c/d 2,000
2,500 2,500

67. A The allowance is netted off against the receivables balance.

Balance Sheet Extracts

Debtors 54,864
Less provision for B&D D (3,775)
51,089

68. D A credit entry in the receivables account.

146
CHAPTER-5 BAD AND DOUBTFUL DEBTS

69. C The new balance on the receivables will be Rs.1,170 ((Rs.78,600 - Rs.600) x 1.5%) This
is a reduction of Rs.30 from the previous balance of Rs.1,200, which will be credited to
the income statement.

Dr. Adjusted Debtors account Cr.

Unadjusted closing balance 78,600
Bad debt expense 600
Closing balance-adjusted (c/d) 78,000
78,600 78,600

Dr. Provision for bad & doubtful debt account Cr.

b/d 1,200
Bad debt expense 30
c/d (78,000 x 1.5%) 1,170
1,200 1,200

70. C The answer is Rs.7,929.

Length of time debt has Allowance required Balances at Allow
been outstanding [Link]
Rs. Rs.
Less than 30 days Nil 70,866 -
30 days to 59 days 10% of balances 25,250 2,525
60 days and over 50% of balances 10,808 5,404
7,929
71. A
Colin will require the following allowance: Rs.
Rs.56,800 x 1% 568
Rs.37,700 x 20% 6,540
Rs.14,900 x 75% 11,175
19,283
Less allowance b/f (18,765)
Increase required 518

Dr. Provision for bad & doubtful debt account Cr.

b/d 18,765
Bad debt expense 518
c/d 19,283
19,283 19,283
72. B (Rs.37,890 - Rs.1,570) - (2.5% x Rs.36,320)
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 37,890
Bad debt expense 1,570
Closing balance-adjusted (c/d) 36,320
37,890 37,890

147
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Provision for bad & doubtful debt account Cr.

b/d -
Bad debt expense 908
c/d (36,320 x 2.5%) 908
908 908

Balance Sheet Extracts

Debtors 36,320
Less provision for B&D D (908)
35,412

73. C The receivables expense account is debited with the cost of the irrecoverable debt. The
credit to receivables control removes it from the receivables balance.
74. B This entry removes the irrecoverable balance from receivables.
75. B If money is received from a previously written off debt and it is received after the end of
the period in which it was written off, it can be recognised as sundry income in the
income statement.
76. B Prudence is being applied because you are recognising that not all your debts may be
fully recovered.
77. D A decrease in the allowance is written back to profit.
78. A The debt needs to be written off. The allowance previously made will be adjusted at the
year end.
79. C Correct, an increase in the allowance for receivables will reduce profits and receivables.
D Incorrect, gross profit will not be affected since allowances for receivables are
dealt with in the net profit section.

80. D Total bad debt expense = Rs.1,800 credit in the income statement account.
Dr. Provision for bad & doubtful debt account Cr.
b/d 3,000
Bad debt expense 2,000
c/d (20,000 x 5%) 1,000
3,000 3,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 1,000 Bad debt recovery 800
Provision for bad & doubtful debt 2,000
c/d 1,800
2,800 2,800

148
CHAPTER-5 BAD AND DOUBTFUL DEBTS

81. B
Dr. Provision for bad & doubtful debt account Cr.
b/d 1,000
Bad debt expense 640
c/d (W-1) 1,640
1,640 1,640

(W-1) Calculation of provision for bad & doubtful debt

Classification Balance Provision Provision
rate amount
Good debtor - - -
Specific (Bert) 500 100% 500
Specific (Fred) 1,000 80% 800
General 17,000 2% 340
Balance 18,500 1,640

82. D Prudence. The provision prevents receivables being overstated.

83. C
Dr. Provision for bad & doubtful debt account Cr.
b/d 850
Bad debt expense 150
c/d 1,000
1,000 1,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 500
Provision for bad & doubtful 150
debt
c/d 650
650 650

84. C
85. D
86. D
87. B
88 B
89. B
90. B

149
CHAPTER-5 BAD AND DOUBTFUL DEBTS

91. D
Dr. Provision for bad & doubtful debt account Cr.
b/d 15,000
Bad debt expense 3,000
c/d 18,000
18,000 18,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 8,000
Provision for bad & doubtful 3,000
debt
c/d 11,000
11,000 11,000

92. B
93. D
94. B
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 600,000
Bad debt expense 25,000
Closing balance-adjusted (c/d) 575,000
600,000 600,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 60,000
Bad debt expense 2,500
c/d (575,000 x 10%) 57,500
60,000 60,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 25,000
Provision for bad & doubtful debt 2,500
c/d 22,500
25,000 25,000
95. A
96. A
97. B

150
CHAPTER-5 BAD AND DOUBTFUL DEBTS

98. B
Dr. Provision for bad & doubtful debt account Cr.
b/d 28,000
Bad debt expense 3,000
c/d 25,000
28,000 28,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 16,000
Provision for bad & doubtful debt 3,000
c/d 13,000
16,000 16,000
99. D→281,000
Dr. Provision for bad & doubtful debt account Cr.
b/d 83,000
Bad debt expense 135,000
c/d 218,000
218,000 218,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 146,000
Provision for bad & doubtful 135,000
debt
c/d 281,000
281,000 281,000
100. C
101. B
Dr. Provision for bad & doubtful debt account Cr.
b/d 67,000
Bad debt expense 3,000
c/d 70,000
70,000 70,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 27,000
Provision for bad & doubtful 3,000
debt
c/d 30,000
30,000 30,000
102. C
103. C
104. C

151
CHAPTER-5 BAD AND DOUBTFUL DEBTS

105. C
Dr. Provision for bad & doubtful debt account Cr.
b/d 18,000
Bad debt expense 2,000
c/d 16,000
18,000 18,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 14,600
Provision for bad & doubtful debt 2,000
c/d 12,600
14,600 14,600

106. A
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 600,000
Bad debt expense 30,000
Closing balance-adjusted (c/d) 570,000
600,000 600,000

Dr. Provision for bad & doubtful debt account Cr.

Bad debt expense 28,600 b/d 40,000

c/d (570,000 x 2%) 11,400

40,000 40,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 30,000
Provision for bad & doubtful debt 28,600
c/d 1,400
30,000 30,000

107. C
108. C
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 600,000
Bad debt expense 12,000
Closing balance-adjusted (c/d) 588,000
600,000 600,000

152
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Provision for bad & doubtful debt account Cr.

b/d 26,000
Bad debt expense 3,400
c/d (588,000 x 5%) 29,400
29,400 29,400

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 12,000
Provision for bad & doubtful 3,400
debt
c/d 15,400
15,400 15,400
109. D
Dr. Provision for bad & doubtful debt account Cr.
b/d 80,000
Bad debt expense 50,000
c/d 30,000
80,000 80,000

Dr. Adjusted Bad debt expenses account Cr.

Unadjusted closing balance 90,000
Provision for bad & doubtful debt 50,000
c/d 40,000
90,000 90,000

110. A
Dr. Provision for bad & doubtful debt account Cr.
b/d 3,000
Bad debt expense 2,000
c/d 1,000
3,000 3,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 1,000 Cash 800
Provision for bad & doubtful debt 2,000
c/d 1,800
2,800 2,800

111. D
112. A

153
CHAPTER-5 BAD AND DOUBTFUL DEBTS

113. D
Dr. Provision for bad & doubtful debt account Cr.
b/d 35,000
Bad debt expense 5,000
c/d 30,000
35,000 35,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 15,000
Provision for bad & doubtful debt 5,000
c/d 10,000
15,000 15,000

114. A
Dr. Provision for bad & doubtful debt account Cr.
b/d 4,000
Bad debt expense 1,000
c/d 5,000
5,000 5,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 7,000
Provision for bad & doubtful 1,000
debt
c/d 8,000
8,000 8,000

115. A
116. D
117. C
Dr. Provision for bad & doubtful debt account Cr.
b/d 9,000
Bad debt expense 3,000
c/d 6,000
9,000 9,000

154
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Bad debt expenses account Cr.

Debtor 13,000
Provision for bad & doubtful debt 3,000
c/d 10,000
13,000 13,000

118. B
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 300,000
Bad debt expense 28,000
Closing balance-adjusted (c/d) 272,000
300,000 300,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 30,000
Bad debt expense 24,560
c/d (272,000 x 2%) 5,440
30,000 30,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 28,000
Provision for bad & doubtful debt 24,560
c/d 3,440
28,000 28,000

119. C
120. A
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 320,000
Bad debt expense 60,000
Closing balance-adjusted (c/d) 260,000
320,000 320,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 55,000
Bad debt expense 47,200
c/d (260,000 x 3%) 7,800
55,000 55,000

155
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Bad debt expenses account Cr.

Debtor 60,000
Provision for bad & doubtful debt 47,200
c/d 12,800
60,000 60,000

121. B
Dr. Debtors account Cr.
Unadjusted closing balance 40,000 Cash 80,000
Sales 65,000 Bad debt expense 1,000
Closing balance- (c/d) 24,000
105,000 105,000

122. B
Dr. Provision for bad & doubtful debt account Cr.
b/d 5,000
Bad debt expense 1,800
c/d 6,800
6,800 6,800

Dr. Adjusted Bad debt expenses account Cr.

Debtor 1,200 Cash 1,500
Debtor 800
Provision for bad & doubtful 1,800 c/d 2,300
debt
3,800 3,800
123. C
124. C
125. B
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 250,000
Bad debt expense 24,000
Closing balance-adjusted (c/d) 226,000
250,000 250,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 20,000
Bad debt expense 8,700
c/d (226,000 x 5%) 11,300
20,000 20,000

156
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Bad debt expenses account Cr.

Debtor 24,000
Provision for bad & doubtful debt 8,700
c/d 15,300
24,000 24,000

126. B
Dr. Debtors account Cr.
Balance b/d 90,000 Cash 170,000
Sales 280,000 Bad debt expense 10,000
Bad debt expense 5,000
Closing balance- (c/d) 185,000
370,000 370,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 10,000
Debtor 5,000
c/d 15,000
15,000 15,000

127. D
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 590,000
Bad debt expense 20,000
Closing balance-adjusted (c/d) 570,000
590,000 590,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 30,000
Bad debt expense 1,500
c/d (370,000 x 5%) 28,500
30,000 30,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 20,000
Provision for bad & doubtful debt 1,500
c/d 18,500
20,000 20,000

128. B

157
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Provision for bad & doubtful debt account Cr.

b/d 45,000
Bad debt expense 5,000
c/d 40,000
45,000 45,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 15,000
Provision for bad & doubtful debt 5,000
c/d 10,000
15,000 15,000

129. D
130. C
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 750,000
Bad debt expense 45,000
Closing balance-adjusted (c/d) 705,000
750,000 750,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 50,000
Bad debt expense 55,750
c/d (705,000 x 15%) 105,750
105,750 105,750

Dr. Adjusted Bad debt expenses account Cr.

Debtor 45,000
Provision for bad & doubtful 55,750
debt
c/d 100,750
100,750 100,750

131. A
Dr. Provision for bad & doubtful debt account Cr.
b/d 60,000
Bad debt expense 40,000
c/d 20,000
60,000 60,000

158
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Bad debt expenses account Cr.

Debtor 65,000
Provision for bad & doubtful debt 40,000
c/d 25,000
65,000 65,000

132. A
Dr. Provision for bad & doubtful debt account Cr.
b/d 24,000
Bad debt expense 6,000
c/d 30,000
30,000 30,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 14,000
Provision for bad & doubtful 6,000
debt
c/d 20,000
20,000 20,000

133. D
Dr. Provision for bad & doubtful debt account Cr.
b/d (1600 / 125 x 100) 1,280
Bad debt expense 320
c/d (40,000 x 4%) 1,600
1,600 1,600

Dr. Adjusted Bad debt expenses account Cr.

Debtor 4,000 Cash 1,000
Provision for bad & doubtful 320
debt
c/d 3,320
4,320 4,320

134. D
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 550,000
Bad debt expense 85,000
Closing balance-adjusted (c/d) 465,000
550,000 550,000

159
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Balance Sheet Extracts

Debtors 465,000
Less provision for B&D D (6,500)
400,000

135. A
136. C
Dr. Provision for bad & doubtful debt account Cr.
b/d 8,000
Bad debt expense 4,000
c/d 4,000
8,000 8,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 2,800 Cash 4,800
Debtor 2,200 Provision for bad & doubtful debt 4,000
c/d 3,800
8,800 8,800

137. C
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 690,000
Bad debt expense 88,000
Closing balance-adjusted (c/d) 602,000
690,000 690,000

Balance Sheet Extracts

Debtors 602,000
Less provision for B&D D (70,000)
532,000

138. D

Dr. Debtors account Cr.

Balance b/d 70,000 Cash 100,000
Sales 150,000 Bad debt expense 5,000
Bad debt expense 3,000
Closing balance- (c/d) 112,000
220,000 220,000

160
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Bad debt expenses account Cr.

Debtor 5,000
Debtor 3,000
c/d 8,000
8,000 8,000

139. B
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 864,000
Bad debt expense 13,000
Closing balance-adjusted (c/d) 851,000
864,000 864,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 48,000
Bad debt expense 5,450
c/d (851,000 x 5%) 42,550
48,000 48,000

Dr. Adjusted Bad debt expenses account Cr.

Debtor 13,000
Provision for bad & doubtful debt 5,450
c/d 7,550
13,000 13,000

Balance Sheet Extracts

Debtors 851,000
Less provision for B&D D (42,550)
808450

140. D
141. B
142. C
143. C
144. A
145. B
146. C
147. D

161
CHAPTER-5 BAD AND DOUBTFUL DEBTS

148. C
149. B
150. C
151. A
152. D
153. C
154. D 155. C
156. B
157. C
158. D
159. D
160. C
Dr. Provision for bad & doubtful debt account Cr.
b/d 1,000
Bad debt expense 1,500
c/d 2,500
2,500 2,500

Dr. Adjusted Bad debt expenses account Cr.

Debtor 1,500 Cash 100
Provision for bad & doubtful 1,500
debt
c/d 2,900
3,000 3,000

161. C
Dr. Adjusted Debtors account Cr.
Unadjusted closing balance 80,000
Bad debt expense 1,000
Closing balance-adjusted (c/d) 79,000
80,000 80,000

Dr. Provision for bad & doubtful debt account Cr.

b/d 1,800
Bad debt expense 570
c/d (79,000 x 3%) 2,370
2,370 2,370

162
CHAPTER-5 BAD AND DOUBTFUL DEBTS

Dr. Adjusted Bad debt expenses account Cr.

Debtor 1,500
Debtor 1,000
Provision for bad & doubtful 570 c/d 3,070
debt
3,070 3,070

162. B

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MULTIPLE CHOICE QUESTIONS (MCQs)

01. Which of the following cannot be classified as tangible non-current asset:

(a) A commercial generator held for use in factory in case of electricity shortage
(b) A commercial generator held for earning by renting to customers
(c) A commercial generator held for use in office in case of electricity shortage
(d) A commercial generator held for resale to customers
02. Which of the following are items of property, plant and equipment?
(i) Standby generator expected to be used for seven years
(ii) A plot of land held for resale
(iii) A bus for pick-and-drop of staff members
(iv) A generator for rental to others
(a) (i) to (iv) all (b) (i), (ii) and (iii) only
(c) (i), (iii) and (iv) only (d) (ii), (iii) and (iv) only
03. Which of the following is not a property, plant and equipment?
(a) Tangible assets
(b) Assets held for the production or supply of goods or services
(c) Assets held for sale in the normal course of business
(d) Assets expected to be used for more than one period
04. A building contractor decides to construct an office building to be occupied by his own staff.
Which TWO of the following costs incurred by the building contractor cannot be included as a
part of the cost of the office building?
(a) Cement, iron, sand and crushed stone bought for construction
(b) A proportion of the contractor’s general administration costs
(c) Hire of plant and machinery for use on the office building site
(d) Additional design work caused by initial design errors
05. Alpha Trading Limited (ATL) used its own staff, assisted by contractors when required, to
construct a new warehouse for its own use.
Identify the costs listed below that cannot be capitalized.
(a) Clearance of the site prior to commencement of construction
(b) Professional surveyor fees for managing the construction work
(c) ATL’s own staff wages for time spent working on construction
(d) A proportion of ATL’s administration costs, based on staff time spent
06. Which TWO of the following items should be capitalised within the initial carrying amount of an
item of plant?
(a) Cost of transporting the plant to the factory
(b) Cost of installing a new power supply required to operate the plant
(c) A deduction to reflect the estimated residual value
(d) Cost of a three-year maintenance agreement

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07. An entity purchased some heavy machinery. The invoice for the machinery showed the following
items:
Rs.000
Cost of machinery 46,000
Cost of delivery 900
Cost of 12-month warranty on the machinery 1,600
Total amount payable 48,500
In addition, the entity incurred Rs.3.4 million in making modifications to its factory so that the
heavy machinery could be installed.
What should be the cost of the machinery in the entity’s machinery account in the ledger?
(a) Rs. 48,500,000 (b) Rs. 46,900,000
(c) Rs. 46,000,000 (d) Rs. 50,300,000
08. A business acquired new premises at a cost of Rs.400 million on 1 January 2015. In the period to
the year end of 31 March 2015 the following further costs were incurred.
Rs.000
Costs of initial adaptation of the building 12,000
Legal costs relating to the purchase 2,500
Monthly cleaning contract 3,400
Air conditioning unit necessary for machinery to be used 2,800
Cost of machinery 12,300
What amount should appear as the cost of premises in the entity’s statement of financial position
at 31 March 2015?
(a) Rs. 414,500,000 (b) Rs. 412,000,000
(c) Rs. 425,800,000 (d) Rs. 417,800,000
09. An entity has built a new factory incurring the following costs:
Rs. '000
Land 1,200
Materials 2,400
Labour 3,000
Architect's fees 25
Surveyor's fees 15
Site overheads 300
Apportioned administrative overheads 150
Testing of fire alarms 10
Business rates for first year 12
7,112
What will be the total amount capitalised in respect of the factory?
(a) Rs. 6,112,000 (b) Rs. 6,950,000
(c) Rs. 7,112,000 (d) Rs. 7,100,000
10. On 1 March 2018 Mercury Limited (ML) acquired a machine from Plant under the following
terms:
Rs. 000
List price of machine 82,000
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900

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Purchase of a five-year maintenance contract with Plant 7,000

In addition to the above information ML was granted a trade discount of 10% on the initial list
price of the asset and a settlement discount of 5% on remaining amount if payment for the
machine was received within one month of purchase. ML expected and paid for the plant on 25
March 2018.
On what amount, the plant should be initially measured on acquisition?
(a) Rs. 98,750,000 (b) Rs. 95,060,000
(c) Rs. 91,750,000 (d) Rs. 88,060,000
11. Construction of Venice Limited’s new store began on 1 April 2019. The following costs were
incurred on the construction:
Rs. 000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
General overheads 940
The store was completed on 1 January 2020.
Calculate the amount to be included as property, plant and equipment in respect of the new store
(a) Rs. 28,170,000 (b) Rs. 29,110,000
(c) Rs. 25,770,000 (d) Rs. 23,670,000
12. On 1 March 2010 Earth Limited (EL) purchased an upgrade package from Sun Limited at a cost
of Rs. 18 million for the machine it originally purchased in 2008. The upgrade took a total of two
days where new components were added to the machine. EL agreed to purchase the package as
the new components would lead to a reduction in production time per unit of 15%. This will
enable EL to increase production without the need to purchase a new machine.
What is appropriate accounting treatment?
(a) EL should expense this additional expenditure
(b) EL should capitalise this additional expenditure in the cost of existing plant
(c) EL should capitalise the 15% of Rs. 18 million in the cost of existing plant
(d) None of the above is appropriate treatment
13. A machine price was Rs.1, 000,000 and was carried through a truck. The truck’s fares were Rs.
20,000. The engineers charged Rs. 45,000 for the installation.
The cost of the machine is?
(a) Rs.1,000,000 (b) Rs.1,020,000
(c) Rs.1,045,000 (d) Rs.1,065,000
14. Which of the following is not a component of cost of an asset?
(a) Purchase price (b) Import duties
(c) Refundable sales tax (d) Installation and assembly costs
15. Which of these cost is capitalised as cost of an asset?
(a) Professional fees (b) General overheads
(c) Initial operating losses (d) Administration expenses

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16. Which of the following is not capitalised as a directly attributable cost of a machine?
(a) Site preparation (b) Initial testing cost
(c) Carriage inwards for fuel for the machinery (d) Installation and assembly costs
17. An entity just received civil work bill from their contractor of Rs. 580,000 for construction of a
new guard room and repair of sewerage system. It is estimated that 15% of total bill relates to
repair work. What amount should be capitalised and/or charged as an expense?
(a) Capitalise Rs. 580,000
(b) Expense Rs. 580,000
(c) Capitalise Rs. 493,000 and Expense Rs. 87,000
(d) Expense Rs. 493,000 and Capitalise Rs. 87,000
18. On 22nd February an equipment was purchased for Rs. 800,000. It was delivered immediately.
The entity paid Rs. 500,000 immediately and remaining are to be paid on 4th March.
What journal entry should be recorded on 22nd February?
(a) Debit Equipment Rs. 800,000; Credit Bank Rs. 500,000; Credit Advance Rs. 300,000
(b) Debit Equipment Rs. 800,000; Credit Payables Rs. 500,000; Credit Bank Rs. 300,000
(c) Debit Equipment Rs. 800,000; Credit Bank Rs. 500,000; Credit Payables Rs. 300,000
(d) Debit Equipment Rs. 800,000; Credit Advance Rs. 500,000; Credit Payables Rs. 300,000
19. On 22nd February an equipment was ordered for Rs. 800,000 by paying 20% advance. It was
delivered on 4th March when the entity paid 50% of amount due and promised remaining to be
paid on 25th April.
What journal entry should be recorded on 4th March?
(a) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 400,000 &
Payables Rs. 240,000
(b) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 740,000
(c) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 320,000 &
Payables Rs. 320,000
(d) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Payables Rs. 640,000
20. On 22nd February an equipment was ordered for Rs. 800,000 by paying 20% advance. It was
delivered on 4th March when the entity paid 50% of total bill and promised remaining to be paid
on 25th April.
What journal entry should be recorded on 4th March?
(a) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 400,000 &
Payables Rs. 240,000
(b) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 740,000
(c) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Bank Rs. 320,000 &
Payables Rs. 320,000
(d) Debit Equipment Rs. 800,000; Credit Advance Rs. 160,000 & Payables Rs. 640,000
21. The purpose of depreciation is to:
(a) Allocate the cost less residual value on a systematic basis over the asset’s useful life
(b) Write the asset down to its realisable value each period
(c) Accumulate a fund for asset replacement
(d) Recognise that assets lose value over time

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22. Depreciable amount means;

(a) Cost of an asset + Residual value
(b) Cost of an asset – Residual value
(c) Cost of an asset – Residual value / useful life
(d) Residual value – Cost of an asset
23. What is the net amount an entity expects to obtain for an asset at the end of its useful life?
(a) Residual value (b) Depreciated value
(c) Present value (d) Fair value
24. Huge Ltd. purchases the machine for Rs.6 million. It has an estimated salvage value of Rs.1
million and a useful life of five years.
What is the depreciation charged for the year under the straight line method?
(a) Rs.1,200,000 (b) Rs.1,000,000
(c) Rs.800,000 (d) None of the above
25. Small Limited purchased a machine for Rs. 8 million. It has an estimated residual value of Rs. 1.5
million and useful life of seven years. Calculate depreciation percentage (to be applied to cost)
under straight line method.
(a) 7% (b) 12.7%
(c) 11.6% (d) 7.11%
26. An item of plant was purchased on 1 April 2008 for Rs. 2,000,000 and is being depreciated at
25% on a reducing balance basis. What would be its residual value after its useful life of 5 years?
(a) Rs. 632,809 (b) Rs. NIL
(c) Rs. 474,609 (d) Rs. 400,000
27. Small Ltd. purchases the equipment for Rs. 600,000. It has an estimated salvage value of Rs.
100,000 and a useful life of five years.
What is the book value of equipment under the reducing balance method at the end of its useful
life?
(a) Rs.163,840 (b) Rs.165,000
(c) Rs.120,000 (d) Rs.100,000
28. Small Limited purchased a machine for Rs. 8 million. It has an estimated residual value of Rs. 1.5
million and useful life of seven years. Calculate depreciation percentage (to be applied to cost)
under reducing balance method.
(a) 21.27% (b) 22.63%
(c) 23.45% (d) 24.55%
29. Under which of the following methods of depreciation the expense may be zero in the period in
which asset is not used at all?
(a) Straight line method (b) Reducing balance method
(c) Sum of units’ method (d) Sum of digits’ method
30. An aeroplane engine was acquired for Rs. 75 million and has life of 48000 flying hours. The
plane was flown 1800 hours during the year. What amount of depreciation should be charged in
profit or loss?
(a) Rs. 2,812.5 (b) Rs. 2,500,000
(c) Rs. 2,500 (d) Rs. 2,812,500

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31. A motor vehicle cost Rs. 400,000. It has an expected residual value after 5 years of Rs. 40,000.
If the sum of the digits method of depreciation is used, what will be the carrying amount of the
asset at the end of Year 2?
(a) Rs. 96,000 (b) Rs. 120,000
(c) Rs. 280,000 (d) Rs. 184,000
32. Medium Ltd. purchases the car for Rs. 2,200,000. It has an estimated salvage value of Rs.
200,000 and a useful life of five years.
What is the depreciation charge for the first year under the sum-of-the-year digit method?
(a) Rs. 400,000 (b) Rs. 555,555
(c) Rs. 666,667 (d) None of the above
33. Normal Limited purchased premises for Rs. 16 million with no salvage value and useful life of 45
years.
What is the depreciation charge for the fourth year under the sum-of-the-year digit method?
(a) Rs. 4,692,754 (b) Rs. 6,492,754
(c) Rs. 7,544,926 (d) Rs. 5,744,926
34. Hunza Limited acquired a new office building on 1 October 2014. Its initial carrying amount
consisted of:
Rs. 000
Land 2,000
Building structure 10,000
Air conditioning system 4,000
16,000
The estimated lives of the building structure and air conditioning system are 25 years and 10
years respectively.
When the air conditioning system is due for replacement, it is estimated that the old system will
be dismantled and sold for Rs. 500,000.
Depreciation is time-apportioned where appropriate.
At what amount will the non-current assets be shown in Hunza Limited’s statement of financial
position as at 31 March 2015?
(a) Rs. 15,625,000 (b) Rs. 15,250,000
(c) Rs. 15,585,000 (d) Rs. 15,600,000
35. An entity purchases land with an office building. The building has a useful life of 20 years. How
should the land be depreciated?
(a) Depreciate over 20 years
(b) Depreciate over useful life of the land
(c) Do not depreciate the land
(d) None of these
36. If an asset is idle then?
(a) Depreciation is paused
(b) Depreciation for the entire period
(c) Depreciation is ignored
(d) Depreciation continues

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37. Tom Limited runs a sports equipment manufacturing business with a year end of 31 December
2019. On 1 April 2019, Tom Limited acquired a delivery truck at a cost of Rs. 4,800,000. The
expected life of the truck is 8 years and residual value is expected to be nil. What is depreciation
charge for 2019 on straight line basis?
(a) Rs. 600,000 (b) Rs. 800,000
(c) Rs. 450,000 (d) Rs. 500,000
38. An entity which makes up its accounts annually to 31 December provides for depreciation of its
machinery at the rate of 10% per annum using the straight line method.
On 31 December 2016, the machinery consisted of three items purchased as under:
On 1 January 2014 Machine A Cost Rs. 3,000,000
On 1 April 2015 Machine B Cost Rs. 2,000,000
On 1 July 2016 Machine C Cost Rs. 4,000,000
What would be depreciation charge for the year 2016?
(a) Rs. 600,000 (b) Rs. 628,000
(c) Rs. 700,000 (d) Rs. 900,000
39. An entity which makes up its accounts annually to 31 December provides for depreciation of its
machinery at the rate of 10% per annum using the reducing balance method.
On 31 December 2016, the machinery consisted of three items purchased as under:
On 1 January 2014 Machine A Cost Rs. 3,000,000
On 1 April 2015 Machine B Cost Rs. 2,000,000
On 1 July 2016 Machine C Cost Rs. 4,000,000
What would be depreciation charge for the year 2016?
(a) Rs. 600,000 (b) Rs. 628,000
(c) Rs. 700,000 (d) Rs. 900,000
40. An entity which makes up its accounts annually to 31 December provided for depreciation of its
equipment at the rate of 10% per annum using the reducing balance method since it was bought
on 1 January 2018 for Rs. 4,000,000.
On 1 January 2021, the entity concluded that straight line method would be more appropriate for
this equipment and estimated remaining useful life of 5 years with residual value of Rs. 500,000
at the end of useful life.
What is depreciation expense for the year ended 31 December 2021?
(a) Rs. 816,097 (b) Rs. 460,000
(c) Rs. 700,000 (d) Rs. 483,200
41. An entity which makes up its accounts annually to 31 December provided for depreciation of its
equipment at the rate of 10% per annum using straight line method since it was bought on 1
January 2018 for Rs. 4,000,000.
On 1 January 2021, the entity concluded that reducing balance method would be more
appropriate for this equipment and estimated remaining useful life of 5 years with residual value
of Rs. 500,000 at the end of useful life.
What is depreciation expense for the year ended 31 December 2021?
(a) Rs. 816,097 (b) Rs. 460,000
(c) Rs. 700,000 (d) Rs. 483,200

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42. How often should the residual value of an asset be reviewed?

(a) Every six months
(b) As and when the market value will significantly change
(c) At the end of each reporting period
(d) Never
43. How often should the useful life of an asset be reviewed?
(a) Every six months
(b) As and when the market value will significantly change
(c) At the end of each reporting period
(d) Never
44. At financial year end of 31 December 2020, an entity reported the following in its statement of
financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
On 31 August 2021, the entity purchased another item of equipment for Rs. 100 million.
Depreciation is charged at 20% per annum on pro rata basis using straight line method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 192 million (b) Rs. 178.67 million
(c) Rs. 140 million (d) Rs. 126.67 million
45. At financial year end of 31 December 2020, an entity reported the following in its statement of
financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
On 31 August 2021, the entity purchased another item of equipment for Rs. 100 million.
Depreciation is charged at 20% per annum on pro rata basis using reducing balance method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 192 million (b) Rs. 178.67 million
(c) Rs. 140 million (d) Rs. 126.67 million
46. At financial year end of 31 December 2020, an entity reported the following in its statement of
financial position:
Rs. in million
Property, plant and equipment – Cost 860
– Accumulated depreciation (260)
600
The cost amount of Rs. 860 million includes Rs. 150 million relating to freehold land. On 31
August 2021, the entity purchased another item of equipment for Rs. 100 million. Depreciation is
charged at 20% per annum on pro rata basis using reducing balance method.
What is the depreciation charge for the year ended 31 December 2021?
(a) Rs. 96.67 million (b) Rs. 106.67 million
(c) Rs. 116.67 million (d) Rs. 126.67 million

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47. A non-current asset was bought for Rs. 1,400,000 on 1 January 2019. It has estimated useful life
of 3 years and residual value of Rs. 200,000. The entity uses reducing balance method of
depreciation. What would be carrying amount of this asset on 31 December 2021?
(a) Rs. 100,000 (b) Rs. 200,000
(c) Rs. 300,000 (d) Rs. 400,000
48. A non-current asset was bought for Rs. 1,400,000 on 1 January 2019. It has estimated useful life
of 3 years and residual value of Rs. 200,000. The entity uses reducing balance method of
depreciation. Calculate the total depreciation to be charged throughout the useful life of the asset?
(a) Rs. 1,000,000 (b) Rs. 1,100,000
(c) Rs. 1,200,000 (d) Rs. 1,300,000
49. The following are details for two entities as at 30 June 2021:
Entity A Entity B
Property, plant and equipment Rs. Rs.
Cost 100,000,000 25,000,000
Less: Accumulated depreciation (80,000,000) (5,000,000)
20,000,000 20,000,000
Which TWO of the following statements are correct?
(a) The details above do not provide any comparable information.
(b) Entity A has initially invested more in non-current assets as compared to Entity B
(c) Entity A has older assets as compared to Entity B
(d) Entity A profitability must be higher than Entity B
50. Jupiter Limited (JL) purchased a machine on 1 July 2017 for Rs. 500,000. It is being depreciated
on a straight line basis over its expected life of ten years. Residual value is estimated at Rs.
20,000. On 1 January 2018, following a change in legislation, JL fitted a safety guard to the
machine. The safety guard cost Rs. 25,000 and has a useful life of five years with no residual
value.
What amount will be charged to profit or loss for the year ended 31 March 2018 in respect of
depreciation on this machine?
Rs. ___________
51. W Co bought a new printing machine from abroad. The cost of the machine was Rs. 80,000. The
installation costs were Rs. 5,000 and the employees received training on how to use the machine,
at a cost of Rs. 2,000. Before using the machine to print customers’ orders, pre-production safety
testing was undertaken at a cost of Rs. 1,000.
What should be the cost of the machine in W Co’s statement of financial position?
Rs. ____________
52. Which one of the following items should be accounted for as capital expenditure?
(a) The cost of painting a building
(b) The replacement of broken windows in a building
(c) The purchase of a car by a car dealer for re-sale
(d) Legal fees incurred on the purchase of a building
53. Which of the following statements best describes depreciation?
(a) It is a means of spreading the payment for non-current assets over a period of years.
(b) It is a decline in the market value of the assets.

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(c) It is a means of spreading the net cost of non-current assets over their estimated useful
life.
(d) It is a means of estimating the amount of money needed to replace the assets.
54. The reducing balance method of depreciating non-current assets is more appropriate than the
straight-line method when:
(a) there is no expected residual value for the asset
(b) the expected life of the asset is not capable of being estimated
(c) the asset is expected to be replaced in a short period of time
(d) the asset decreases in value less in later years than in the early years of use
55. What is the purpose of charging depreciation in accounts?
(a) To allocate the cost less residual value of a non-current asset over the accounting periods
expected to benefit from its use
(b) To ensure that funds are available for the eventual replacement of the asset
(c) To reduce the cost of the asset in the statement of financial position to its estimated
market value
(d) To comply with the prudence concept
56. Recording the purchase of computer stationery by debiting the computer equipment account at
cost would result in
(a) An overstatement of profit and an overstatement of non-current assets
(b) An understatement of profit and an overstatement of non-current assets
(c) An overstatement of profit and an understatement of non-current assets
(d) An understatement of profit and an understatement of non-current assets
57. Which of the following costs would be classified as capital expenditure for a restaurant business?
(a) A replacement for a broken window
(b) Repainting the restaurant
(c) An illuminated sign advertising the business name
(d) Knives and forks for the restaurant
58. A business buys a machine for Rs. 15,000. The depreciation policy for machinery is 15% pa
reducing balance. What is the net book value of the machine after two years of use?
(a) Rs. 10,500 (b) Rs. 10,837
(c) Rs. 11,175 (d) Rs. 12,750
59. At 31 December 20X1, Tina owned equipment which had cost Rs.168,500. At that date
Rs.66,500 had been charged in respect of depreciation. Tina's accounting policy is to charge
depreciation on equipment at a rate of 25% on the reducing balance basis.
What is the depreciation charge to be included in Tina's income Statement on December 20X2?
A Rs.66,500 B Rs.42,125
C Rs.25,500 D Rs.16,625
60. By charging depreciation in the accounts, a business aims to ensure that the cost of non-current
assets is spread over the accounting periods which benefit from their use.
Which accounting principle does this relate to?
A Separate entity B Prudence
C Accruals D Going concern

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61. On 1 July 20X4 Tom bought a machine for Rs.15,500. He depreciates machinery at a rate of 20%
per annum on the reducing balance basis. A full year's depreciation is charged in the year an asset
is purchased. His year-end is 31 October.
What was the depreciation charge on the machine for the year to 31 October 20X6?
A Rs.3,100 B Rs.2,480
C Rs.2,232 D Rs.1,984
62. By charging depreciation in the accounts, a business aims to ensure that the cost of non-current
assets is spread …………………… which benefit from their use.
THE FOLLOWING DATA RELATES TO QUESTIONS 63 AND 64
On 1 January 20X1 a business purchased a laser printer costing Rs.1,800. The printer has an estimated life
of 4 years before which it will have no residual value.
63. Calculate the depreciation charge for 20X2 on the laser printer on the straight line basis:
…………………………………………………………………………………………….
…………………………………………………………………………………………….
64. Calculate the depreciation charge for 20X2 on the laser printer on the reducing balance basis at
60% per annum
…………………………………………………………………………………………….
…………………………………………………………………………………………….
65. The purpose of charging depreciation on non-current assets is to
A Put money aside to replace the assets when required
B Show the assets in the statement of financial position at their current market value
C Ensure that the profit is not understated
D Spread the net cost of the assets over their estimated useful life
66. An asset cost Rs.100,000. It is expected to last for ten years and have a scrap value of Rs.10,000.
The business is going to depreciate this asset at 20% on the reducing balance basis.
What will the depreciation charge on this asset be in its second year?
A Rs.14,400 B Rs.16,000
C Rs.18,000 D Rs.20,000
67. Esther is recording the invoice for the purchase of a new plant and equipment.
Which TWO of the following items should be capitalised as part of the cost of the asset?
(a) Cost of staff training to use the new plant and equipment
(b) Installation costs
(c) Three-year maintenance agreement
(d) Delivery costs

68. The opening balance on Derv’s motor vehicles at cost account was Rs.140,000. The opening
balance on depreciation of motor vehicles was Rs.60,000. The business purchased new vehicles
costing Rs.30,000 during the year. No vehicles were sold. The business depreciates vehicles at
25% on the reducing balance basis, with a full year’s depreciation in the year of acquisition and
none in the year of disposal.
What is the closing balance on Derv ’s depreciation of motor vehicles account?
Rs. __________

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69. Information relating to two non-current assets was as follows:

Accumulated
Depreciation
Cost depreciation at 1
charge for 20X4
January 20X4
Rs. Rs. Rs.
Asset 1 100,000 50,000 7,500
Asset 2 50,000 10,000 7,500
Which depreciation method has been applied to each asset?
15% straight- 15% reducing
line balance
Asset 1
Asset 2

70. On 1 January 20X7, a business purchased an item of plant. The invoice showed:
Rs.
Cost of plant 48,000
Delivery to factory 400
One year warranty covering breakdown 800
49,200
In addition, modifications to the factory building costing Rs.2,200 were necessary to enable the
plant to be installed.
What amount should be capitalised for the plant in the accounting records of the business?
Rs. __________
71. Which TWO of the following items should be accounted for as capital expenditure?
(a) The purchase of a car for a member of the sales department to visit clients
(b) The purchase of a car for resale by a car dealer
(c) Legal fees incurred on the purchase of a building
(d) The cost of painting a building
72. A business accounted for the repair of an item of plant and machinery as capital expenditure in
the accounting records.
What is the effect of this error upon the profit for the year and also upon the carrying value of
assets included in the statement of financial position before the error is corrected?
A Profit for the year is understated and assets on the statement of financial position are
overstated.
B Profit for the year is overstated and assets on the statement of financial position are
overstated.
C Profit for the year is understated and assets on the statement of financial position are
understated.
D Profit for the year is overstated and assets on the statement of financial position are
understated.

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73. A business accounted for the purchase of a new delivery truck as a motor expense in the
accounting records.
What is the effect of this error upon the profit for the year and also upon the carrying value of
assets included in the statement of financial position before the error is corrected?
A Profit for the year is understated and assets on the statement of financial position are
overstated.
B Profit for the year is overstated and assets on the statement of financial position are
overstated.
C Profit for the year is understated and assets on the statement of financial position are
understated.
D Profit for the year is overstated and assets on the statement of financial position are
understated.
74. Which of the following should be accounted for as capital expenditure?
A The purchase of a car by a car dealer for re-sale
B The purchase of a delivery van by a business
C The cost of repairing a delivery van by a business
D The cost of vehicle insurance by a business
75. Depreciation is
(a) A way of setting aside money to prove for the eventual replacement of fixed assets.
(b) A way of writing off the cost of fixed assess over their estimated revenue-generating
period.
(c) The writing off of the cost fixed assets evenly over their estimated useful economics
lives.
(d) Estimated useful economic lives in ever deceasing amounts.
76. Depreciation is the process:
(a) Of allocation of cost of the asset of the periods of its life
(b) Of valuation of assets
(c) Of maintenance of an asset in a state of efficiency
(d) None of the above
77. Anil purchased a vehicle on 1 November 2011 for Rs. 150,000. The estimated useful life of
vehicle is 10 years and its resale value at the end of the time is estimated to be Rs. 30,000
Anil depreciates the vehicle on the straight-line basis, with a proportionate charge in the period of
acquisition.
What will the depreciation charge for the vehicle be in Anil’s accounting year ended March 31,
2012?
(a) Rs. 12,000 (b) Rs. 10,500
(c) Rs. 5,000 (d) Rs. 8,000
78. The depreciation is en expenses accruing:
(a) From the consumption of some readily consumable assets
(b) From the use of fixed assets
(c) From the use of a various expenses
(d) None of via above

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79. Service hours method of providing depreciation (straight-line method) is useful, when
(a) Output can be effectively measured
(b) Use of an asset can be measured in terms of time
(c) Utility of the asset is directly related to its productive use
(d) None of the above
80. Ledger accounts of accumulated depreciation on depreciable non-current assets have?
(a) Debit balances (b) Credit balances
(c) Zero balances (d) Many have debit a\or credit
81. Babar purchased a machine for Rs. 25,800. The transportation charges paid were Rs. 900 and
installation costs were Rs. 500,
The machine broke down at the end of the first month in use and Rs. 900 was paid to repair it
Babar decided to depreciate machinery at 12% each year on cost assuming residual value of Rs.
4,000.
What is the net book value of the machine after one year, to the nearest dollar?
(a) Rs. 22,400 (b) Rs. 23,450
(c) Rs. 22,980 (d) Rs. 23,936
82. M/s. Khalil purchased plant and machinery on 1 October 2011, for Rs. 80,000. The scrap value of
the plant and machinery after its useful life of 6 years was estimated to be Rs. 20,000. M/s. Khalil
has adopted the policy to depreciate plant and machinery on reducing balance method @ 25% per
annum, with a proportionate charge in the period of acquisition.
What should be the depreciation charge for the period ended on June 30, 2012 in the books of
M/s Khalil.
(a) Rs. 11,250 (b) Rs. 15,000
(c) Rs. 20,000 (d) Rs. 22,000
83. Which one of the following should be accounted for accounted for as a capital expenditure?
(a) The cost of painting an old car.
(b) The cost of repairing office door
(c) Legal fees paid on the purchase of a piece of land
(d) The cost incurred on purchase of machine for re-sale purpose.
84. Nisar purchased a new press machine. The cost of the machine was Rs. 120,000. The machine
was installed at a cost of Rs. 8,000. Nisar gave training to its workers as how to use this particular
machine, at a cost of Rs. 4,000. Machine was run for testing before actual work at a cost of Rs.
1,200.
(a) Rs. 128,000 (b) Rs. 129,200
(c) Rs. 115,000 (d) Rs. 123,000
85. The purpose of charging depreciation on non-current assets and its recording in accounts is:
(a) To make funds available for the future replacement of theses assets.
(b) To reduce the cost of the asset in the Statement of Financial Position to its present market
value.
(c) To allocate the depreciable cost of non current assets over their useful life.
(d) To follow the prudence concept

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86. Which of the following best describes the "Carrying amount" of non-current asset:
(a) Cost less estimated salvage value (b) Cost less estimated loss on sale
(c) Present market value of asset (d) Cost less accumulated depreciation
87. The amount charged to depreciation goes on declining in:
(a) Depreciation fund method (b) Annuity method
(c) Written-down value method (d) All of the above
88. Wages paid for installation of machinery should be debited to:
(a) Wages account (b) Cash account
(c) Machinery account (d) Profit and loss account
89. The depreciation charge shown in the profit and loss account...
(a) Is a revenue expenses
(b) Is a capital expenditure
(c) Can be either capital expenditure or revenue expenses, depending on the nature of the
fixed asset being depreciated.
(d) None of the above
90. A plant is acquired on 1 January 2007, at a cost of Rs. 35,000. Estimated residual value is Rs.
5,000 and the estimated useful life is 8 years. The company uses straight-line depreciation. On 01
January 2010 management revises the total estimated life to be 10 years. The balance in
accumulated depreciation account on 31-December, 2010 will be:
(a) Rs. 14,643 (b) Rs. 16,300
(c) Rs. 15,000 (d) Rs. 13,929
91. Which of the following statement is true?
(a) Depreciation is a process of valuation
(b) Depreciation means that a business sets aside cash to replace assets as they become fully
depreciated
(c) Accumulated depreciation represents a growing amount of cash
(d) Accumulated depreciation is that portion of a plant asset's cost that has already been
recorded as an expense.
92. If the depreciation on a fixed asset is calculated by references to the reducing balance method
(a) Then, in relation to 'that particular fixed asset, there will be an equal depreciation charge
in the profit and loss account of each year during the life of the asset,
(b) The depreciation charge in the profit and loss account in respect of that asset will
decrease each over the life of the asset
(c) The depreciation charge in the profit and loss account relating to that asset will be greater
in the later years of the life of the asset than in the earlier years.
(d) All other things being equal, net profit will be greater in the earlier years of the life of
asset than in the later years.
93. Assets likely to appreciate rather than depreciate are:
(a) Plant & Machinery (b) Land
(c) Motor vehicles (d) Computers & Software

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94. In the case of a trader in motor vehicles which of the following is a capital expenditure?
(a) Annual cost of computer maintenance contract
(b) Legal fee relating to employee’s accident claims.
(c) The cost of constructing roof over the service station area
(d) The purchase of vehicles for re-sale.
95. Nisar purchased a vehicle on 01 June 2010 at a cost of Rs. 120,000. It has an estimated life of 5
years with salvage value of Rs. 12,000.
Nisar uses straight-line method for charging depreciation with a proportionate charge in the
period of purchase.
What will be the depreciation for the year charge in the accounting year ended on August 31,
2011.
(a) Rs. 30,000 (b) Rs. 21,600
(c) Rs. 27,000 (d) Rs. 15,000
96. Ali purchased new printing machine costing Rs. 80,000. The installation costs were Rs. 5,000 and
the employees received training on how to use the machine, at a cost of Rs. 2,000. Before using
the machine to print customer's orders, a test was undertaken and the paper and ink cost Rs.1,000.
What should be the cost of the machine in the company's statement of financial position?
(a) Rs. 80,000 (b) Rs. 88,000
(c) Rs. 85,000 (d) Rs. 86,000
97. Khalil purchased some plant on 1 January 2000 for Rs. 38,000. The payment was correctly
entered in the cash book but was entered on the debit side of plant repairs account.
Khalil charges depreciation on the straight line basis at 20% per year, with a proportionate charge
in the year of acquisition, and assuming no scrap value at the end of the life of the cost.
How will Khalil's profit for the year ended 31 March 2000 be affected by the error?
(a) Overstated by Rs. 1,900 (b) Overstated by Rs. 36,100
(c) Understated by Rs. 36,100 (d) Understated by Rs. 38,000
98. Boomer Company purchased as asset for Rs. 100,000 on 01 01-2008. It had an estimated useful
life of 5 years and it was depreciated using the straight line method. On 01-01-2010 Boomer
Company revised the remaining estimated useful life to 8 years.
What is the carrying amount of the asset at 31-December 2010?
(a) Rs. 13,333 (b) Rs. 52,500
(c) Rs. 7,500 (d) Rs. 60,000
99. B acquired a lorry on 1 May 2010, at a cost of Rs. 30,000. The lorry has an estimated useful life
of four years, and an estimated resale value at the end of that time of Rs. 6,000. B charges
depreciation on the straight line basis, with a proportionate charge in the period of acquisition.
What will the depreciation charge for the lorry be in B's accounting period to 30 September
2010?
(a) Rs. 1,500 (b) Rs. 2,500
(c) Rs. 2,000 (d) Rs. 6,000
100. Which of the following best explains what is meant by 'capital expenditure?
(a) Expenditure on non-current assets, including repairs and maintenance
(b) Expenditure on expensive assets
(c) Expenditure relating to the acquisition or improvement of non-current assets
(d) Expenditure relating to the issue of share capital

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101. A-one company purchased a machine with an estimated useful life of 10 years for Rs. 76,000 on
September 2008, the machine had a residual value of Rs. 16,000.
What are the ledger entries to record the depreciation charge for the machine in the year ended 30
Sept 2011?

(a) Dr. Depreciation charge Rs. 6,000 Cr. Accumulated depreciation Rs. 6,000
(b) Dr. Accumulated depreciation Rs. 18,000 Cr. Non-current assets Rs. 18,000
(c) Dr. Accumulated depreciation Rs. 6,000 Cr, Depreciation charge Rs. 6,000
(d) Dr. Depreciation charge Rs. 6,000 Cr. Accumulated depreciation
Dr. non-current assets Rs. 12,000 Rs. 18,000

102. A firm bought a fixed asset for Rs.500,000. The asset has an estimated useful economic life of ten
years and an estimated scrap value of Rs.50,000.
If the asset is depreciated at the rate of 20% per annum, using the reducing balance method, the
deprecation charge, in relation to this asset alone, in the second year of its life will be:
A Rs. 45,000 B Rs.72,000
C Rs.80,000 D Rs.90,000
103. A firm owns fixed assets which, in total, cost Rs.200,000. Aggregate depreciation on these assets
amount to Rs.80,000. It the firm depreciates its fixed assets at the rate of 20% per annum, using
the straight-line method, the depreciation charge in its profit and loss account for the current
accounting period is:
A Rs.16,000 B Rs.20,000
C Rs.24,000 D Rs.40,000
104. The following information relates to one of several fixed assets acquired by a firm on 1 January
1996.
Cost Rs.29,800
Estimated scrap value Rs.5,000
Estimated useful economic life 8 years
If all of the firm’s fixed assets are depreciated at the rate of 20% per annum, using the reducing
balance method, the total depreciation charged on the above asset up to 31 December 2003 will
be:
A Rs.4,960 B Rs.5,960
C Rs.24,800 D Rs.29,800
105. A firm’s financial year-end is 31 December. Its plant and equipment consists of the following
machines.
Machine Cost Date of purchase
1 Rs.10,000 1 January 1993
2 Rs.8,000 1 July 1993
3 Rs.14,000 1 April 1995
The firm provides for depreciation of its plant and equipment at the rate of 10% per annum on
strict time basis, using the reducing balance method. The depreciation charge on plant an
equipment in the firm’s accounts for 1996 was:
A Rs.2,639.60 B Rs.2,672.40
C Rs.3,095.00 D Rs.3,200.00

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106. A machine which was bought at a cost of Rs.3,200 is not expected to have any residual value. If it
is depreciated at the rate of 25% per annum, using the reducing balance method, its net book
value after two years, will be:
A Rs. 1,600 B Rs.1,800
C Rs.2,400 D None of the above
107. If there is a separate provision for depreciation account in the nominal (general) ledger for each
category of fixed asset, the double-entry to record the depreciation charge on machinery for the
current year is:
Account to Debit Account to Credit
A Profit and loss Provision for depreciation of machinery
B Machinery Profit and loss
C Profit and loss Machinery
D None of the above
108. Any balance brought down on a provision for depreciation account:
A Should be included in the trial balance as a debit balance
B Should be included in the trial balances as a credit balance
C Should sometimes be included in the trial balance as a debit balance and sometimes as a
credit balance
D Should not be included in the trial balance at all
109. The balance on a firm’s plant and machinery account on 1 January 1996 was Rs.5,000. During
the year the following transactions took place on the dates shown.
1 May Plant, which had originally cost Rs.750 sold
1 September New machinery costing Rs.3,000 was purchased
If depreciation is calculated at the rate of 10% per annum, on a strict time basis, using the straight
line method, the depreciation charge on plant and machinery for '1996, to the nearest pound, is:
A Rs. 525 B Rs. 550
C Rs. 600 D Rs. 625
110. On 1 January 1993, a firm, whose financial year-end is 31 December, bought an item of plant for
Rs.10,000. Initially, it was decided to depreciate the plant over ten years, using the straight line
method, assuming no residual value. On 1 January 1995, it became apparent that the plant would
last only another five years, over which period it would be used equally.
The depreciation charge for 1995 in respect of the above item was:
A Rs.1,000 B Rs.1,429
C Rs.1,600 D Rs.2,000
111. On 1 January 1993, a firm bought a machine for Rs.4,200. At that date, the machine’s useful
economic life was estimated to be seven years and its scrap value estimated to be zero.
On 1 January 1995 the machine’s useful economic life was re-estimated to be five years in total
and its scrap value was re-estimated to be Rs.300.
If the straight line method of depreciation was used to depreciate the machine, the depreciation
charged on it for 1995 was:
A Rs.540 B Rs.780
C Rs.840 D Rs.900

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112. On 1 April 1991, a firm bought a machine for Rs.420,000. At the date, the machine had an
expected useful economic life of five years and an expected residual value of Rs.20,000. On 1
April 1995 the firm spend Rs.240,000 on a major refurbishment of the machine which extended
its useful life by three years and revised its estimated residual value to Rs.60,000. If the firm uses
the straight line method of depreciation, the depreciation charge for this machine, to be included
in the accounts for the year ended 31 March 1996, is:
A Rs.65,000 B Rs.70,000
C Rs.80,000 D Rs.93,333
113. ___________ are assets which have long life, to be used in the business and not bought / with the
purpose of resale
A Current assets B Nominal assets
C Short term assets D Fixed assets
114. The part of the cost of the fixed asset consumed during its period of use by the firm
A Amortization B Depreciation
C Deterioration D None of above
115. __________ is an expense of the business and have to be charged against any period during
which fixed asset is bought
A Amortization B Deterioration
C Devaluation D Depreciation
116. Depreciation calculation which remains at an equal amount each ear is called
A Reducing balance method B Sum of digit method
C Straight line method D None of above
117. Depreciation calculation which is at a lesser amount every following period
A Reducing balance method B Straight digit method
C Straight line method D None of above
118. A term used instead of deprecation when assets are used up simple because of the time factor and
assets are intangible in a nature.
A Depreciation B Devaluation
C Deterioration D Amortization
119. Land is never
A Appreciated B Amortised
C Depreciated D None of the above
120. The example of appreciation is:
A Building B Land
C Car D Machinery
121. The formula of calculating the depreciation by straight line method is
A Price expectation disposal value / no useable year
B Cost - estimate disposal value / no of expected year
C Cash received from disposal no of person
D All of above

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122. Choice of method of depreciation depends on

A Nature of people B Time factor
C No criterion D Nature of the assets
123. An asset which would not normally be depreciated is
A Building B Land
C Patents D Plant and machinery
124. What is ignored in the calculation of depreciation of fixed assets?
A Original cost B Maintenance cost
C Estimated residual cost D Expected economic life
125. Motor vehicles are depreciated at 20% per annum using the diminishing balance method. A motor
which cost 20,000 is sold after two years. The sale resulted in neither a profit nor less. What was
sale price of the motor vehicles?
A 7200 B 12000
C 12800 D 16000
126. A computer network costing Rs.100,000 is depreciated by the straight line method of 25% per
annum with no residual value. What will be the net book value at the end of year 3?
A Nil B 25000
C 50000 D 7500
127. A business depreciates its fixed asset using the straight line method. Assuming there is no scrap
value, on which amount is the annual depreciation charge calculated?
A Book value B Cost
C Market value D Replacement cost
128. A machine costing Rs.60,000 is depreciated by 25% per annum on the diminishing balance
method. What is the depreciation charge at he end of the second year?
A Rs.11,250 B Rs.15,000
C Rs.26,250 D Rs.30,000
129. X is a trader in office machinery. On 31 March he purchases an office an office machine on credit
from Y, which sections will increase on X’s balance sheet on 31 March?
A Current asset only
B Current asset and current liabilities
C Fixed asset only
D Fixed asset and current liabilities
130. A machine is purchased at the start of year 1 for Rs.35,000 it is depreciated on the reducing
balance method at 20% per year. What is the net book value at the end of year 2?
A Rs.17,920 B Rs.21,000
C Rs.22,400 D Rs.28,000
131. A business buys a delivery van for Rs.12,000 its estimated useful life is four, after which its scrap
value is estimated to be Rs.4,000 depreciation is charged on the straight line basis. What is the
annual amount of depreciation?
A Rs.1,000 B Rs.2,000
C Rs.3,000 D Rs.8,000

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132. When expired utility of a physical asset is to be recorded it is known as

A Normalization B Depreciation
C Amortization D All of above
133. What is deprecation amount of a machine that costs Rs.4,500 and is estimated to have useful life
of eight year at the end of that time, its scrap value would be Rs.500.
A Rs.50 per year B Rs. 500 per year
C Rs.510 per year D Rs. 563 per year
134. In preparing of statement of financial position, provision for depreciation is:
(a) Deducted from account receivable (b) Added to account receivable
(c) Deducted from fixed assets (d) Added to fixed assets
135. How are fixed assets normally shown in balance sheet?
(a) At net book value (b) At net realisable value
(c) At replace cost (d) At scrap value

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MULTIPLE CHOICE QUESTIONS (MCQs) SOLUTIONS

01. D Items held for resale are inventories and not property, plant and equipment.
02. C Plot of land held for resale is inventory and not property, plant and equipment.
03. C Assets held for sale in the normal course of business are inventories.
04. B&D Direct costs relating to the acquisition of the asset can be included such as materials
and labour costs, the administration cost is not a direct cost. Also costs relating to
errors or wastage cannot be capitalised.
05. D Administration costs or share thereof cannot be capitalised.
06. A&B The maintenance costs should be expensed as incurred over three years. The
residual value should be taken into account for the purposes of calculating
depreciation, but not for the amount to be capitalised.
07. D Cost of machinery: Rs. 000
Cost 46,000
Cost of delivery 900
Modification cost 3,400
Total 50,300
08. A Cost of premises: Rs. 000
Cost 400,000
Adaptation 12,000
Legal fees 2,500
Total 414,500
09. B Rs. 000
Land 1,200
Materials 2,400
Labour 3,000
Architects fees 25
Surveyors fees 15
Site overheads 300
Testing fire alarms 10
6,950
10. D Rs. 000
List price of machine 82,000
Less: trade discount 10% (8,200)
73,800
Less: cash discount 5% (3,690)
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
88,060
11. A Rs. 000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
28,170

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12. B The additional amount should be capitalised as it is probable that economic benefits
would increase.
13. D Rs. 1,000,000 + 20,000 + 45,000 = Rs. 1,065,000
14. C Refundable sales tax is not a cost as it would be received back.
15. A Professional fees are directly attributable expenditure. Other items are not.
16. C Carriage inwards for fuel for the machinery are revenue expenditure.
17. C New room is improvement and the repair work is revenue expenditure.
18. C Debit Equipment Rs. 800,000; Credit Bank Rs. 500,000; Credit Payables Rs.
300,000
19. C Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 320,000 & Payables Rs. 320,000
20. A Debit Equipment Rs. 800,000;
Credit Advance Rs. 160,000 & Bank Rs. 400,000 & Payables Rs. 240,000
21. A The depreciation is systematic allocation of depreciable amount of an asset over its
useful life.
22. B Depreciable amount = Cost less residual value
23. A Residual value is amount expected at the end of useful life.
24. B (Rs. 6m – 1m) / 5 years = Rs. 1 million
25. C = 6.5m / (8m x 7 years) = 11.6%
26. C Rs. 2,000,000 x (0.75)5 = 474,609
27. D The carrying amount of an asset is equal to its residual value at the end of useful
life, under any depreciation method.
28. A = 1 – (1.5/8) (1/7) = 21.27%
29. C Sum of units’ method
30. D Rs. 75,000,000 / 48,000 x 1,800 = Rs. 2,812,500
31. D Sum of digits = 5 + 4 + 3 + 2 + 1 = 15 Rs.
Cost of asset 400,000
Year 1 Depreciation (400,000 – 40,000) x 5/15 (120,000)
Carrying amount at the end of year 1 280,000
Year 2 Depreciation (400,000 – 40,000) x 4/15 (96,000)
Carrying amount at the end of year 2 184,000
32. C (Rs. 2,200,000 – 200,000) x 5/15 = Rs. 666,667
33. B Sum of digits = [45 (45+1)] /2 = 1035
Depreciation 4th year = Rs. 160m x 42/1035 = Rs. 6,492,754
34. A Six months’ depreciation is required on the building structure and air conditioning
system.
Rs. 000
Land (not depreciated) 2,000
Building structure (10,000 – (10,000/25 × 6/12)) 9,800
Air conditioning system (4,000 – (3,500/10 × 6/12)) 3,825
15,625
35. C Land is not depreciated because it has indefinite life.
36. D Depreciation continues even if the asset is not in use.
37. C Rs. 4,800,000/8 years = Rs. 600,000 x 9/12 = Rs. 450,000
38. C Rs. 3,000,000 x 10% x 12/12 = Rs. 300,000
Rs. 2,000,000 x 10% x 12/12 = Rs. 200,000
Rs. 4,000,000 x 10% x 6/12 = Rs. 200,000
Total Rs. 700,000

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39. B (Rs. 3,000,000 – 300,000 – 270,000) x 10% x 12/12 = Rs. 243,000

(Rs. 2,000,000 – 150,000) x 10% x 12/12 = Rs. 185,000
Rs. 4,000,000 x 10% x 6/12 = Rs. 200,000
Total Rs. 628,000
40. D Carrying amount on 1 Jan 2021 = Rs. 4,000,000 x (0.90)3=Rs. 2,916,000
Depreciation 2021 = Rs. (2,916,000 – 500,000) / 5 years = Rs. 483,200
41. A Carrying amount on 1 Jan 2021
= Rs. 4,000,000 - (400,000 x 3) = Rs. 2,800,000
Depreciation rate = 1 – (500,000/2,800,000) (1/5) = 29.15%
Depreciation 2021 = Rs. 2,800,000 x 29.15% = Rs. 816,097
42. C Residual value is reviewed annually at the end of each reporting period
43. C Useful life is reviewed annually at the end of each reporting period
44. B Rs. 860 m x 20% x 12/12 = Rs. 172 million
Rs. 100 m x 20% x 4/12 = Rs. 6.67 million
Total Rs. 178.67 million
45. D Rs. 600 m x 20% x 12/12 = Rs. 120 million
Rs. 100 m x 20% x 4/12 = Rs. 6.67 million
Total Rs. 126.67 million
46. A Rs. (600 m – 150m) x 20% x 12/12 = Rs. 90 million
Rs. 100 m x 20% x 4/12 = Rs. 6.67 million
Total Rs. 96.67 million
47. B At the end of useful life, the carrying amount of asset becomes equal to its residual
value.
48. C The total depreciation throughout useful life is equal to depreciable amount.
= Rs. 1,400,000 – 200,000 = Rs. 1,200,000
49. B&C Entity A has initially invested more in non-current assets as compared to Entity B.
Entity A has older assets as compared to Entity B.
50. Rs. 37,250 Rs. '000
Machine ((500,000 – 20,000) / 10 × 9/12) 36,000
Safety guard ((25,000/5) × 3/12) 1,250
37,250
51 Rs. 86,000
Rs.
Purchase cost of machine 80,000
Installation 5,000
Pre-production safety testing 1,000
86,000
52 D 53 C 54 D
55 A 56 A
57 C
58 B
59. C The correct answer is Rs.25,500.
Rs.
Cost at 31 December 20X1 168,500
Less: Accumulated depreciation at 31 December 20X1 (66,500)
Net book value at 31 December 20X1 102,000
25% depreciation charge - year to 31 December 20X2 (25,500)
60. C The depreciation aims to apply the matching (accruals) principle.

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61. D
20X4 Rs.15,500 x 20% = Rs.3,100 NBV Rs.12,400
20X5 Rs.12,400 x 20% = Rs.2,480 NBV Rs.9,920
20X6 Rs.9,920x 20% = Rs.1,984
62. ... over the accounting periods....
63. 20X2 depreciation charge = Rs.450
Cost minus residual value
Annual depreciation =
Estimated life
Rs. 1,800 − Rs. 0
Annual depreciation =
4 years
20X2 depreciation = Rs.450
64. 20X2 depreciation charge = Rs.432
Rs.
Cost at 1.1.20X1 1,800
Depreciation 20X1 1,080 60% x Rs.1,800
Book value 1.1.20X2 720
Depreciation 20X2 432 60% x Rs.720
Book value 1.1.20X3 288
65. D Spread the net cost of the assets over their estimated useful life.
66. B
Year 1 charge = Rs.100,000 × 20% = Rs.20,000, leaving a book value of Rs.80,000.
Year 2 charge = Rs.80,000 × 20% = Rs.16,000.
67. B&D
68. Rs.87,500
Rs.
Net book value of assets at start of year (140,000 – 60,000) 80,000
Assets purchased in the year 30,000
110,000
Rs.
Depreciation at 25% of this balance: charge for the year 27,500
Opening balance, accumulated depreciation 60,000
Therefore closing balance 87,500
69.
15% straight-line 15% reducing
balance
Asset 1 Correct
Asset 2 Correct
Asset 1 – (Rs.100,000 - Rs.50,000) × 15% = Rs.7,500 calculated using the reducing balance
basis.
Asset 2 – (Rs.50,000 × 15%) = Rs.7,500 calculated using the straight-line basis.

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70. Rs.50,600
Rs.
Cost of plant 48,000
Delivery 400
Modifications 2,200
50,600
71. A&C
72. B
If an amount has been wrongly capitalised, rather than treated as an expense, the profit for the
year will be higher than it should be. In addition, assets are overstated as they include an amount
that should not have been capitalised.
73. C
If an amount has been wrongly accounted for as an expense, rather than capitalised, the profit for
the year will be lower than it should be. In addition, assets are understated as they exclude an
amount that should have been capitalised and accounted for as a noncurrent asset.
74. B

75. B 76. A 77. C 78. B

79. B 80. B 81. D

82. B 83. C 84. B

85. C 86. B

87. C

88. C 89. A 90. D

91. D

92. B 93. B 94. C

95. B

96. D 97. C 98. B

99. B 100. C 101. A

102. C 103. D

104. C 105. A 106. B

107. A 108. B

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109. B 110. C

111. D 112. B 113. D 114. B

115. D 116. C 117. A

118. D

119. C 120. B 121. B

122. D 123. B 124. B

125. C 126. B 127. B

128. A 129. D 130. C 131. B

132. B 133. B

134. C 135. A

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MULTIPLE CHOICE QUESTIONS (MCQs)

01. Which of the following is included in the cost of purchases?

(a) Administrative Salaries (b) Abnormal loss
(c) Freight in (d) Rent of store
02. Which of the following costs are included in conversion costs?
(a) Commission of selling staff (b) Carriage in
(c) Carriage outwards (d) Factory supervisor’s wages
03. After preparing draft accounts, Saima reviews her closing inventory. She discovers that some
items included at cost of Rs. 2,600 can be sold for Rs. 2,550 after incurring selling costs of
Rs. 65.
What effect will any required adjustment have on Saima’s profits?
(a) Profit decreases by Rs. 65 (b) Profit decreases by Rs. 115
(c) No change to profit (d) Profit decreases by Rs. 50
04. Tasweeb Corporation sells three products – Alpha, Beta and Gamma. The following information
was available at the yearend:
Alpha Beta Gamma
Rs. per unit Rs. per unit Rs. per unit
Original cost 10 13 15
Estimated selling price 15 14 14
Selling and distribution costs 3 5 2
Units Units Units
Inventory: units held 300 380 240
The value of inventory at the end of year should be?
(a) Rs. 8,300 (b) Rs. 5,700
(c) Rs. 9,300 (d) Rs. 6,150
05. The following information is related to a mobile dealer about his inventory at year end.
Mobile Set Cost value (Rs.) Net realisable value (Rs.)
A 5,000 3,300
B 13,000 13,500
C 14,200 13,900
D 14,900 15,000
What value of inventory should be shown in his Statement of Financial Position prepared at the
year end?
(a) Rs. 39,800 (b) Rs. 45,900
(c) Rs. 40,000 (d) Rs. 45,100
06. The closing stock of Daniel amounts to Rs. 130,200. But later on it was discovered that some
damaged items were included having cost of Rs. 25,000. Total repair cost is expected to be Rs.
3,500. After repair these could be sold for Rs. 18,000.
What is the correct value of Daniel inventory?
Rs. __________________

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07. Following is the detail of inventory of Hamid at December 31, 2018:

Product Cost value (Rs. ) Net realisable value (Rs. )
A 15,000 17,000
B 12,000 10,000
C 13,500 11,000
D 12,600 14,000
TOTAL 53,100 52,000
What value of inventory should be shown by the corporation in its Statement of Financial
Position at year end?
Rs.__________________
08. Which of the following is not permitted as a cost of inventory?
(a) Non-recoverable taxes (b) Storage costs
(c) Shipping (d) Fixed manufacturing overheads
09. An entity sold goods of worth Rs.1 million, the manufacturing cost of the goods were Rs.
600,000. The carriage outwards are Rs. 50,000 and commission paid to agent were also Rs.
50,000. What is the gross and net profit?
(a) Gross profit = 600,000 and net profit = 250,000
(b) Gross profit = 300,000 and net profit = 200,000
(c) Gross profit = 400,000 and net profit = 300,000
(d) Gross profit = 350,000 and net profit = 300,000
10. Bazuka Limited (BL) manufacturers and sells office equipment for workplaces. The stock of
equipment was included in the closing inventory as of 31 December 2019 at a cost of Rs. 50,000
per equipment.
During the final audit, the auditors noted that the subsequent selling price for the inventory at
15th January 2020 was Rs. 40,000 per item. Furthermore, inquiry reveals that during the physical
stock take, a water leakage has damaged the equipment. Accordingly, in the following week, BL
spent a total of Rs. 15,000 per equipment for repairing the equipment.
The net realizable value and inventory write-down (loss) amount to?
(a) Rs. 40,000 and Rs.10,000 respectively
(b) Rs. 25,000 and Rs. 25,000 respectively
(c) Rs. 35,000and Rs. 25,000 respectively
(d) Rs. 30,000 and Rs.15,000 respectively
11. Which of the following is allowed as a cost of inventory?
(a) Abnormal waste
(b) Storage costs
(c) Selling costs
(d) Variable manufacturing overheads
12. Spice Limited, imported raw materials from China worth Rs.10 million. They paid Rs. 800,000 as
import duties and Rs. 200,000 as import taxes (the import taxes were subsequently refunded by
the government). They paid Rs. 150,000 for transportation of the materials from China and
another Rs. 200,000 as port handling charges for loading the materials at China. Marketing
expenses were Rs. 100,000 and the general administrative overheads amounted to Rs. 200,000.
What will be the value of inventories?
(a) Rs.11,600,000 (b) Rs.11,400,000
(c) Rs.11,150,000 (d) Rs.10,950,000

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13. Any amount of write-down of inventories to net realisable value should?

(a) Treated as a deferred expense and written off based on the average inventory holding
period
(b) Recognised as an expense in the period in which the write-down occurs
(c) Recognised as an expense in the subsequent period in which such write-down is
warranted
(d) Recognized as a current liability in the statement of financial position
14. The estimated selling price in the ordinary course of business less estimated cost of completion
and estimated cost of sale is called
(a) Market value (b) Fair value
(c) Net realisable value (d) Current value
15. Which of the following costs must be expensed?
(a) Costs of purchase that are paid to the suppliers of raw materials
(b) Import duties on raw materials that are paid to the authorities
(c) Variable production overheads that are allocated to each unit based on actual usage
(d) Distribution cost
16. Kamran is an antiques dealer. His inventory includes a clock which cost Rs. 158,000. Kamran
expects to spend Rs. 7,000 on repairing the clock which will mean that he will be able to sell it
for Rs. 260,000. To replace the same item of inventory would cost Rs. 255,000. At what value
should the clock be included in Kieron’s inventory?
(a) Rs. 151,000 (b) Rs. 158,000
(c) Rs. 253,000 (d) Rs. 260,000
17. What is the unit cost of the following item?
Raw Materials Rs. 500
Labour Rs. 300
Manufacturing overheads Rs. 100
Variable administrative overheads Rs. 250
(a) Rs. 500 (b) Rs. 800
(c) Rs. 900 (d) Rs. 1,150
18. Jazib Associates has 40 units of inventory, out of which 10 units are damaged. The cost per unit is
Rs. 2,554 and normal selling price is Rs. 2,900. The damaged units are expected to be sold at
60% of normal selling price. The selling cost of Rs. 150 are incurred on each unit sold, whether
normal or damaged. What is the amount of write down of inventory, if any?
(a) Rs. 964 (b) Rs. 9,640
(c) Rs. 92,520 (d) Rs. Nil
19. Ghalib Associates has 20 units of Product C4 at cost of Rs. 3,660 each. The product has been sold
at Rs. 4,000 per unit and Rs. 150 commission is paid on each unit sold.
A new product has been introduced by a competitor. It is similar to product C4 and is being
marketed at Rs. 3,200 per unit. Ghalib is of the opinion that in future, it will also have to reduce
the price to Rs. 3,500 per unit. Calculate NRV per unit of Product C4.
(a) Rs. 3,510 (b) Rs. 3,850
(c) Rs. 3,050 (d) Rs. 3,350

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20. Arma Associates has 40 units of inventory, out of which 10 units are damaged. The cost per unit
is Rs. 2,000 and normal selling price is Rs. 3,000. The damaged units are expected to be sold at
80% of normal selling price. The selling cost of Rs. 100 are incurred on each unit sold, whether
normal or damaged. What is the amount of write down of inventory, if any?
(a) Rs. 600 (b) Rs. 6,000
(c) Rs. 80,000 (d) Rs. Nil
21. 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 will 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 understated but there will be no effect on next year’s
profit
(d) The current year’s profit will be overstated but there will be no effect on next year’s
profit
22. Maria had opening inventory of 900 units at Rs. 5 units at 01 January 2019. During the month she
made following purchases and sales transactions:
January 05 Purchased 1,000 units at Rs. 6 per unit
January 09 Sold 1,250 units
January 15 Purchased 600 units at Rs. 7 per unit
January 28 Sold 550 units
Maria uses periodic weighted average cost method for inventory valuation. What is value of
closing inventory at 31 January 2019?
(a) Rs. 4,800 (b) Rs. 4,116
(c) Rs. 6,468 (d) None of the above
23. What is impact on closing inventory if an item having cost of Rs. 2,500 and a net realizable value
of Rs. 3,000 has been omitted from year - end inventory count?
(a) Understated by Rs. 2,500 (b) Understated by Rs. 3,000
(c) Overstated by Rs. 2,500 (d) Understated by Rs. 500
24. If closing inventory is accounted for as Rs.240,000 instead of Rs.180,000 then;
(a) Gross profit as well as net profit will be exaggerated
(b) Gross profit and net profit would both be understated
(c) Gross profit will be exaggerated, and net profit understated
(d) Gross profit will be exaggerated but net profit correctly reported
25. An organization had opening inventory of 35,000 units @Rs. 3.5 per unit. During the month it
made purchases of 40,000 units @Rs. 5 per unit. Sales were 50,000 units.
What is value of cost of goods sold during the month if the entity uses continuous weighted
average method for inventory valuation?
(a) Rs. 107,500 (b) Rs. 215,000
(c) Rs. 197,500 (d) Rs. 75,000

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26. On 1st July 2018, Imad had opening inventory of 50 units at a cost of Rs. 60 per unit. During July
2018 he has made following purchases and sales:
July 09 120 units purchased at a cost of Rs. 65 per unit
July 16 65 units sold
July 24 45 units purchased at a cost of Rs. 67 per unit
July 30 100 units sold
What is the value of inventory at 31 March using the FIFO method?
Rs.__________________
27. Which of the following cost models is not permitted under IAS 2?
(a) First in, First out (‘FIFO’) (b) Last in, First out (‘LIFO’)
(c) Weighted Average (d) Actual cost
28. Phill Morris Limited (PML) is in the business of procuring a specific type of machine and sells
them to international markets. During the year, PML bought four machines costing Rs.12million,
Rs.14 million, Rs.13 million and Rs.10 million respectively. During the year it sold only one
machine for Rs.14 million and follows the FIFO method of valuation.
Which of the following statements is TRUE?
(a) The cost of Inventory is Rs.37 million and the cost of sales is Rs.10 million
(b) The cost of Inventory is Rs.39 million and the cost of sales is Rs.14 million
(c) The cost of Inventory is Rs.37million and the cost of sales is Rs.12 million
(d) The cost of Inventory is Rs.37 million and the cost of sales is Rs.13 million
29. The following information relates to Shazim Enterprise (SE) for the month of March 2020:
1 March Opening inventory of 400 units @ Rs. 100 each = Rs. 40,000
8 March Purchased 100 units @ Rs. 150 each = Rs. 15,000
24 March Purchased 300 units @ Rs. 200 each = Rs. 60,000
No units were sold during March 2020. What would be cost of closing inventory per unit of SE as
at 31 March 2020 valued on weighted average (perpetual)?
(a) Rs. 110 per unit (b) Rs. 143.75 per unit
(c) Rs. 150 per unit (d) Rs. 187.5 per unit
30. The following information relates to Shazil Enterprise (SE) for the month of March 2020:
1 March Opening inventory of 400 units @ Rs. 100 each = Rs. 40,000
8 March Purchased 100 units @ Rs. 150 each = Rs. 15,000
24 March Purchased 300 units @ Rs. 200 each = Rs. 60,000
No units were sold during March 2020. What would be cost of closing inventory per unit of SE as
at 31 March 2020 valued on weighted average (periodic)?
(a) Rs. 110 per unit (b) Rs. 143.75 per unit
(c) Rs. 150 per unit (d) Rs. 187.5 per unit
31. Which of the following items should be disclosed as per the requirements of IAS 2?
(a) Average holding period of inventories of the entity as at the end of the reporting period
(b) List of major customers to whom the inventories were sold during the reporting period
(c) Amount of expense recognised due to write down of inventories
(d) Average lead time of procurement for major classes of inventories

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32. Which of the following is NOT a disclosure requirement of IAS 2?

(a) The accounting policies adopted in measuring inventories
(b) The cost formula used
(c) The amount of any write-down of inventories recognised as an expense in the period
(d) Location of each place where entity keeps its inventory
33. Super electronics bought 10 air conditioners for Rs. 50,000 each. Two of these were installed in
office, three have been sold to customers at a profit margin and remaining are held in stock for
resale. Which of the following represents correct accounting treatment?
(a) Cost of sales Rs. 100,000; Inventory Rs. 400,000
(b) Cost of sales Rs. 500,000; Inventory Rs. 400,000
(c) Cost of sales Rs. 150,000; Inventory Rs. 350,000
(d) Cost of sales Rs. 150,000; Inventory Rs. 250,000
34. Hulk Building Materials used 500 cement bags from inventory for constructing parking area of
their office building. How these 500 cement bags should be accounted for?
(a) It should remain included in inventory at cost
(b) It should remain included in inventory at lower of cost and NRV
(c) It should be charged as an expense when used
(d) It should be allocated to building asset in which it has been used
35. Which TWO of the following are recognised as expense under IAS 2?
(a) Inventory sold during the period
(b) Inventory remained unsold at the end of period
(c) Inventory pledged with the bank as security for the loan financing
(d) Amount of writ down to NRV
36. At 01 December 2018 Nida had opening inventory of Rs. 20,000 and at 31 December 2018 Nida
had closing inventory of Rs. 35,000.
Which of the following entries are required to account for opening and closing inventory when
preparing financial statements of the business?
(a) Dr Cost of sales Rs. 20,000 Cr Inventory Rs. 20,000 and Dr Inventory Rs. 35,000 Cr Cost
of sales Rs. 35,000
(b) Dr Cost of sales Rs. 35,000 Cr Inventory Rs. 35,000 and Dr Inventory Rs. 20,000 Cr Cost
of sales Rs. 20,000
(c) Dr Cost of sales Rs. 20,000 Dr Inventory Rs. 20,000 and Dr Inventory Rs. 35,000 Dr
Cost of sales Rs. 35,000
(d) Cr Cost of sales Rs. 35,000 Cr Inventory Rs. 35,000 and Cr Inventory Rs. 20,000 Cr Cost
of sales Rs. 20,000
37. Ali had opening inventory of Rs. 1,500,000. Purchases made during the period were Rs.
2,550,000. Sales during the period were Rs. 4,500,000 and he had closing inventory of Rs.
1,000,000.
Gross profit for the period was?
(a) Rs. 1,950,000 Profit (b) Rs. 450,000 Profit
(c) Rs. 1,450,000 Profit (d) Rs. 550,000 Loss

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38. What is correct entry for goods taken by owner for personal use?
(a) Cr Purchases account and Dr Drawings account with the cost price of the goods.
(b) Cr Opening Inventory account and Dr Drawings account with cost price of the goods.
(c) Cr Trading account and Dr Drawings account with the selling price of the goods.
(d) Cr Sales account and Dr Drawings account with the sale price of the goods.
39. Bulk Building Materials used 500 cement bags from inventory for constructing parking area of
their office building. How these 500 cement bags should be accounted for under periodic
inventory recording system?
(a) Debit Inventory & Credit Purchases
(b) Debit Non-Current assets & Credit Inventory
(c) Debit Non-Current assets & Credit Purchases
(d) Debit Inventory & Credit Non-current assets
40. If trial balance includes “purchase” and “purchase return” account, it is an indication of:
(a) Weighted average method
(b) FIFO method
(c) Perpetual inventory recording system
(d) Periodic inventory recording system
41. In which TWO of the following circumstances, a periodic inventory system might be more
suitable?
(a) Large size items
(b) High value items
(c) Low value items
(d) Where inventory movements are frequent
42. In which TWO of the following circumstances, a perpetual inventory system might be more
suitable?
(a) Large size items
(b) High value items
(c) Low value items
(d) Where inventory movements are frequent
43. An entity uses periodic inventory system, which of the following TWO are correct for recoding a
credit sales transaction?
(a) Debit Receivables & Credit Sales
(b) Debit Cost of sales & Credit Purchases
(c) Debit Cost of sales & Credit Inventory
(d) No other entry is required
44. An entity uses perpetual inventory system, which of the following is required to incorporate
closing year inventory at the time of preparing financial statements?
(a) Debit Inventory & Credit Cost of sales
(b) Debit Cost of sales & Credit Inventory
(c) Debit Cost of sales & Credit purchases
(d) No adjustment is required

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45. An entity uses periodic inventory system, which of the following is required to incorporate
normal loss of inventory?
(a) Debit Loss & Credit Inventory (b) Debit Loss & Credit Purchases
(c) Debit Loss & Credit Cost of sales (d) No journal entry is required
46. An entity uses periodic inventory system, which of the following TWO are correct for recoding a
credit sales return transaction?
(a) Debit Sales Return & Credit Receivables
(b) Debit Inventory & Credit Cost of sales
(c) Debit Cost of sales & Credit Inventory
(d) No other entry is required
47. Kind General Mills gave 1000 bags of flour to flood affected community for free. What is correct
journal entry to record this transaction under perpetual inventory method?
(a) No entry is required
(b) Debit Drawings & Credit Purchases
(c) Debit Expenses & Credit Inventory
(d) Debit Expenses & Credit Purchases
48. Jaffer Associates sold a generator to Sajid Enterprises for Rs. 1,440,000. This price is net of Rs.
60,000 special discount. Jaffer Associates normally sells items at 25% mark-up and uses
perpetual inventory system to record its inventory. Which of the following entry is correct to
update the inventory?
(a) Debit Cost of Sales Rs. 1,152,000 & Credit Inventory Rs. 1,152,000
(b) Debit Cost of Sales Rs. 1,200,000 & Credit Inventory Rs. 1,200,000
(c) Debit Cost of Sales Rs. 1,104,000 & Credit Inventory Rs. 1,104,000
(d) Debit Inventory Rs. 1,500,000 & Credit Cost of sales Rs. 1,500,000
49. An entity uses perpetual inventory system, which of the following TWO are correct for recoding
a credit sales return transaction?
(a) Debit Sales Return & Credit Receivables
(b) Debit Inventory & Credit Cost of sales
(c) Debit Cost of sales & Credit Inventory
(d) No other entry is required
50. An entity uses perpetual inventory system, which of the following TWO are correct for recoding
a credit sales transaction?
(a) Debit Receivables & Credit Sales
(b) Debit Cost of sales & Credit Purchases
(c) Debit Cost of sales & Credit Inventory
(d) No other entry is required
51 Slick should be Included in the balance sheet at

(a) Its cost

(b) Its net realisable value
(c) The lower of its total cost and its total net realizable value
(d) The lower of its cost ad its net realizable value on an item-by-tem or category-
by-category basis

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52. A firm has two categories of stock. The cost and net realizable value (NRV) of each are as
Cost NRV
Category 1 Rs.35,000 Rs.22,000
Category 2 22,000 25,000
The figure to be included in the firm’s balance sheet in respect of stock, is:
(a) Rs.44,000 (b) Rs.47,000
(c) Rs.57,000 (d) Rs.60,000
53. The net realizable value of an item of stock is its actual or estimated selling price....

(a) Plus all further costs to completion and all costs to be incurred in marketing, selling and
distributing the item.
(b) Less all further costs to completion.
(c) Less all further costs to completion and all costs to be incurred in marketing selling and
distributing the item.
(d) None of the above
54. If an item of stock which originally cost Rs.1,420 can be sold for Rs.1,600 after incurring further
completion costs of Rs.110 and advertising costs of Rs.130, then it should be included in the
balance sheet stock valuation at:
(a) Rs.1,360 (b) Rs.1,420
(c) Rs.1,490 (d) Rs.1,600
55. The valuation of stock at the lower of its cost and its net realizable value is an application of...
(a) The consistency concept (b) The going concern concept
(c) The produce concept (d) The accruals concept
56. The abbreviation ‘FIFO’ means……
(a) Fixed Income Financial Operations (b) Final Interest-Fee Option
(c) The First-in-First-Out method of (d) None of the above
approximating the cost of stock
57 The abbreviation ‘LIFO’ means……
(a) Large integrated Financial Organisation
(b) Least Interesting Financial Option
(c) The Last-in-First-Out method of approximating the cost of stock
(d) None of the above
58 Under which of the following method of approximating the cost of stock are the oldest stock costs
incurred unlikely to have an effect on the closing stock valuation?
(a) The first in, and (FIFO) method
(b) The last in, first out (LIFO) method
(c) The weighted average cost method
(d) None of the above

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59 If prices fall consistently throughout an accounting period the method of approximating the cost
of stock which will give the highest value to closing stock is:
(a) The first, in first and (FIFO) method
(b) The last in first out (UFO) method
(c) The weighted average cost method
(d) None of the above
60 The last-in-First-Out (LIFO) method of approximating the cast of stoat...
(a) Reflects up-to-date costs in the balance sheet value of stock
(b) Matches revenue with up-to-date costs
(c) Smoothes the effect of fluctuations in purchase prices
(d) None of the above
61 Which of the following methods of approximating the cost of stock yields a cost of sales figure
which most accurately reflects the actual cost of sales under normal circumstances?
(a) The first in, first and method (FIFO)
(b) The last in, first out method (UFO)
(c) The weighted average cost method
(d) None of the above
62 The accounting concept which prevents firms from frequently changing the stock valuation
method they use, thereby preventing them from manipulating the figures in their pry and Boss
accounts and balance sheets, is:
(a) The materiality concept
(b) The consistency concept
(c) The prudence concept
(d) The going concern concept
63 After preparing its profit and loss account for a calendar year, in which is reported a net profit and
Rs.20,000, a firm discovered that its stock at 1 January had been under-valued by Rs.2,000 and
that its stock at 31 December had been over-valued by Rs.3,000. The firm's reported net profit for
the year should have been
(a) Rs.15,000 (b) Rs.19,000
(c) Rs.21,000 (d) Rs.25,000
64 Different stock valuing methods mean that
(a) Different amount of profit will be shown for a particular period
(b) Debit cash book credit machinery disposal account
(c) Same amount of profit will be shown for a particular period
(d) All of above
65. For avoiding the overstatement of profit use the net realizable when this is lower than cost is an
example of the
(a) Consistency concept of accounting
(b) Persistent concept of accounting
(c) Matching concept of accounting
(d) Prudence concept of accounting
66 Without keeping the record of quantities of items it would be very difficult to track down
(a) Consistency (b) Stock original quality
(c) Stock of raw material (d) Theft or loss or detection of
wastage
67 A method by which the goods used are priced out at average cost
(a) BCVO (b) AVCO
(c) FIFO (d) LIFO

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68 A method by which the first good to be received are said to be the first to by sold
(a) LIFO (b) AVCO
(c) FIFO (d) WASH
69 A method by which the first good to be received are said to have come from the last lot of goods
received
(a) LIFO (b) FIFO
(c) TIFO (d) AVCO
70 The value of goods calculated as the selling price less expense before sale
(a) Gross realizable value (b) Net provision
(c) Loss on value (d) Net realizable value
71 This method says that first goods to be received are the first to be issued
(a) Last in Lasts out (b) First in No out
(c) Last in first out (d) First in First out
72 Sales value minus expenses needed before completion of sale is equal to
(a) Gross realizable value (b) No value
(c) Net realizable value (d) All of above
73 When the stock is valued which concept of accounting is used
(a) Consistency concept of accounting
(b) Prudence concept of accounting
(c) Matching concept of accounting
(d) All of above
74 The higher the value of stock the higher will be to
(a) Loss (b) Net profit
(c) Profit (d) No profit and loss
75 Increases in stock will lead to more
(a) Income (b) Profit
(c) Tax (d) Burden
76 The table shows information relating to the end of year stock
Rs.
Cost 50,000
Realizable value 45,000
Realizable cost 5,000
Replacement cost 35,000
What is the value of stock at the balance sheet date?
(a) 35,000 (b) 40,000
(c) 45,000 (d) 50,000
77 How stocks are valued in final accounts
(a) Cost (b) Net realization value
(c) Replacement cost (d) The lower of cost and net
realizable value
78. On which basis should stocks be valued?
(a) Cost
(b) Higher of cost or net realisable value
(c) Lower of cost or net realisable value
(d) Net realisable value

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79 In FIFO method issues of materials are priced in order of there

(a) Discrepancy (b) Issues
(c) Purchases (d) Sales
80 Under LIFO method the value of issues is close to
(a) Second hand price (b) Current market price
(c) Historical cost (d) All of above
81 The value of stock is shown on the assets side of the balance sheet as
(a) Liability (b) Equity
(c) Fixed asset (d) Current asset
82. Closing stock = Opening stock, + Purchase is equal to
(a) Purchase (b) Sales
(c) Cost of goods sold (d) Debtors
83. Under FIFO method the materials issued are priced at
(a) Latest purchases (b) Oldest purchases
(c) Average cost of purchases (d) Average cost of sales
84. The valuation of closing inventory under FIFO method tend to be nearer to
(a) Current market price (b) Standard cost
(c) Oldest purchases (d) New purchase
85. Opening Stock + Purchases - Closing stock =
(a) Sales (b) Cost of goods sold
(c) Gross profit (d) Cost of manufacturing
86 Stock in trade also includes
(a) Goods in the process of production for sale
(b) Items held as fixed assets
(c) Items consumed for daily use
(d) Item purchased form normal use
87 Stock should be included in the balance sheet at ....
(a) Its cost
(b) Its net realisable value
(c) The lower of its total cost and its total net realisable value
(d) The lower of its cost and its net realisable value on an item-by-item or category-by-category basis.
88. The ascertainment of value of stocks from accounting records is known as:
(a) Continuous stock taking (b) Periodic inventory
(c) Perpetual inventory (d) None of the them
89. The abbreviation 'FIFO' means
(a) Fixed Income Financial Operations
(b) Final Interest-Free Option
(c) The First-in-First-Out method of approximating the cost of stock
(d) None of the above
90. Inventory recorded in the cost of goods:
(a) Cost (b) Market value
(c) Net realisable value (d) None of theca

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91. The formula to find out the cost of goods sold is:
(a) Opening inventory + Ending inventory - Purchase
(b) Opening inventory + Purchase - Ending inventory
(c) Sales - operating expenses
(d) Opening inventory + Ending inventory - Sales
92. The ultimate objective of accounting for Inventories is the proper determination of:
(a) Profit (b) Closing stock
(c) Cost of sales (d) None of these
93. Under the periodic inventory system, purchases are accumulated in the:
(a) Purchase account (b) Merchandise account
(c) Expenses and revenue summary account (d) None of the above
94. Inventory account is maintained under:
(a) Perpetual inventory method (b) Periodic inventory method
(c) Both A & B (d) None on the above
95. According to IAS 2 Inventories, which of the following costs should be included in valuing the
inventories of a manufacturing company?
i. General administrative overheads
ii. Carriage outwards
iii Depreciation of factory plant
iv Carriage inwards
(a) (i) and (ii) (b) (i) and (iii)
(c) (ii) and (iii) (d) (iii) and (iv)
96. Which of the following is included in the cost of purchase;
(a) Salaries expenses (b) Carriage outward
(c) Carriage inward (d) Rent expenses
97. The amount of inventory affects:
(a) Cost of sales only (b) Both cost of sale and profit
(c) Profit only (d) None of these
98. The net realisable value of an item of stock is its actual or estimated selling price.
(a) Plus all further costs to completion and all costs to be incurred in marketing, selling and
distributing the item.
(b) Less all further costs to completion
(c) Less all further costs to completion and all costs to be incurred in marketing, selling and
distributing the item.
(d) None of the above
99. During the period of rising prices which method of inventory valuation would you recommend?
(a) FIFO (b) LIFO
(c) Weighted Average (d) Replacement Cost
100. The valuation of stock at the lower of its cost and its net realisable value is an application of...
(a) The consistency concept (b) The going concern concept
(c) The prudence concept (d) The accruals concept

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101. The abbreviation 'LIFO' means

(a) Large integrated Financial Operations
(b) Least Interesting Financial Option
(c) The Last-in-First-Out method of approximating the cost of stock
(d) None of the above
102. Inventory should be valued at:
(a) Cost price (b) Selling price
(c) Net realisable value (d) Law of cost of market'value
103. If an item of stock which originally cost Rs. 1,420 can be sold for Rs. 1,600, after incurring
further completion costs if Rs. 110 and advertising costs of Rs. 130, then it should be included in
the balance sheet stock valuation at:
(a) Rs. 1,360 (b) Rs. 1,420
(c) Rs. 1,490 (d) Rs. 1,600
104. If prices fall consistently throughout an accounting period, the method of approximating the cost
of stock which will give the highest value of closing stock is:
(a) The first in, first out (FIFO) method
(b) The last in, first out (LIFO) method
(c) The weighted average cost method
(d) None of the above
105. The Last-in-First-Out (LIFO) method is approximating the cost of stock....
(a) Reflects up-to-date costs in the balance sheet value of stock.
(b) Matched revenue with up-to-date costs
(c) Smoothes the effect of fluctuations in purchase prices.
(d) None of the above
106 Which of the following methods of approximating the cost of stock yields a cost of sales figure
which most accurately reflects the actual cost of sales under normal circumstances?
(a) The first in, first out method (FIFO)
(b) The last in, first out method (LIFO)
(c) The weighted average cost method
(d) None of the above
107 Which of the following statements about IAS 2 inventories are correct?
(a) Production overheads should be included in cost on the basis of a company's normal level
of activity in the period.
(b) In arriving at the realisable value of inventories, trade discounts and settlement discounts
must be deducted.
(c) In arriving at cost of inventories, FIFO, LIFO and weighted average cost formulas are
acceptable.
(d) It is permitted to value finished goods inventories at materials plus labour cost only,
without adding production overheads.
108. Under which of the following method of approximating the cost of stock are the oldest stock cost
incurred unlikely to have an effect on the closing stock valuation?
(a) The first in, first out (FIFO) method
(b) The Last in, first out (LIFO) method

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(c) The weighted average cost method

(d) None of the above
109. The cost Incurred to change the condition of raw material into finished goods Is:
(a) Cost of purchases (b) Cost of sales
(c) Conversion cost (d) Prime cost
110. While making an adjusting entry in respect of closing stock, we debit
(a) Closing stock (b) Trading account
(c) Purchase account (d) None of the above
111. Under FIFO method, closing inventory valued:
(a) At cost (b) At market price
(c) Lower of cost and market price (d) None of these
112. Which of the following inventory valuation method is not allowed by IAS-2?
(a) First in first out method (b) Last in first out method
(c) Average method (d) None of the above
113. Which of the following is not normally acceptable as a basis for approximating the cost of stock
when publishing financial statements?
(a) The first in, first out (FIFO) method
(b) The last in, first out (LIFO) method
(c) The weighted average cost method
(d) None of the above
114. Ideal Corporation uses a perpetual inventory system. The company sells merchandise costing Rs.
3,000 at a sales price of Rs. 4,300. In recording this transaction, Ideal Corporation will make all
of the following entries except:
(a) Credit sales Rs. 4,300
(b) Credit inventory Rs. 4,300
(c) Debit cost of goods sold Rs. 3,000
(d) Credit one or more amounts in the inventory subsidiary ledger for amount totaling Rs.
3,000.
115. Which of the following statement is correct?
(a) Sales - Cost of sales = Net profit
(b) Sales - Cost of sales - Operating expenses = Net profit
(c) Cost of sales + Cost of ending inventory = Net profit
(d) Cost of sales + Opening inventory - Gross Profit = Net profit
116. Khalil & Khalid are doing partnership business. The net profit earned by their business during the
year ended December 31, 2011 is Rs. 250,000. In subsequent year it was realized that ending
inventory of year 2011 was overstated by Rs. 10,000. What is its effect on the profit of last year?
(a) Profit understated by Rs. 10,000 (b) Profit understated by Rs. 20,000
(c) Profit overstated by Rs. 10,000 (d) Profit overstated by Rs. 20,000
117. If the prices of commodities are consistently falling, which of the following inventory valuation
method will result in lower costs of goods sold and higher gross profit:
(a) FIFO (b) LIFO •
(c) Average (d) None of the above

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118. When using the weighted-average cost method to determine the cost of inventory, the weighted-
average cost per unit calculated as the:
(a) Cost of goods sold divided by the number of units sold.
(b) Cost of goods sold by average number of units in inventory
(c) Cost of goods available for sale divided by the .number of units available for sale
(d) Cost of goods in ending inventor divided by the number of units in ending inventory
119. The Closing inventory at cost of a company at 31 January 2008 amounted to Rs. 284,700.
The following items were included at cost in the total:
1. 400 coats, which had cost Rs. 80 each and normally sold for Rs. 150 each. Owing to a
defect in manufacture, they were all sold after the reporting date at 50% of they normal
price. Selling expenses amounted to 5% of the proceeds.
2. 800 shirts, which had cost Rs. 20 each these too were found to be defective. Remedial
work in February 2008 cost Rs. 5 per skirt, and selling expenses for the batch totaled Rs.
800, they were sold for Rs. 28 each
What should the inventory value be according to IAS 2 inventories after considering the above
items'
(a) Rs. 281,200 (b) Rs. 282,800
(c) Rs/ 329,200 (d) None of these
120. Nida industries keeps a manufacturing plant that has a production capacity to produce 250,000
units of an item each year Last year it produced 200,000 units.
Next year, it plans to make 220,000 units, The normal capacity of the plant is [Link] units.
Annual production overhead costs are Rs. 500, 000.
As per JAS 2 "Inventories", what production overhead cost per unit Nida industries should use in
next year for the cost of production.
(a) Rs. 2.40 (b) Rs. 2.00
(c) Rs. 3.25 (d) Rs. 2.75
121. The estimated selling price of merchandise less the estimated costs of completion and the
estimated cost necessary to make the sale is:
(a) Cost value (b) Market vaiue
(c) Net realisable value (d) Book value
122. JJ corporation purchased 100 units of inventory @ Rs.500 each on June 20, 2011, Next time it
purchased 250 items @ Rs. 550 each on August 25, 2011. During the year 280 items were sold
WRs. 600 each JJ Corporation uses FIFO method of inventory valuation.
Which of the following is correct?
Cost of goods sold Rs. Gross profit Rs.
(a) 150,000 19,000
(b) 149,000 21,000
(c) 149,000 19,000
(d) 153,500 24,000

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123. How is closing inventory recorded in the book-keeping records?

(a) By a debit to inventory and a credit to the income statement.
(b) By a debit to income statement and a credit to the inventory.
(c) By a debit to inventory and a credit to purchases
(d) By writing the figure in a note beneath the trial balance
124. The closing inventory of Nitro, a giant in electronics items, amounted to Rs. 194,800 excluding
the following two inventory lines:
1. 600 items which had cost Rs. 7 each. All were sold after the Statement of Financial
position date for Rs. 6 each, with selling expenses of Rs. 300 for the batch.
2. 500 different items which had cost Rs. 40 each. These items were found to be defective at
the Statement of Financial Position. Rectification work after the Statement of Financial
Position date amounted to Rs. 1,500, after which they were sold for Rs. 38 each, with
selling expenses totaling Rs. 700.
Which of the following total figures for inventory should appear in the Statement of Financial
Position of Nitro?
(a) Rs. 219,800 (b) Rs. 198,200
(c) Rs. 212,700 (d) Rs. 214,900
125. The closing stock of a business amounts to Rs. 150,500. But later on it was discovered that the
following defective items was not accounted for:
1. Item-A: 400 units costing Rs. 20 each. Estimated selling price Rs. 31 each after tot
Estimated selling expenses to sell these 40
2. Item-B: 300 units costing Rs. 15 each. Estimated selling price Rs. 14 each after tot
Estimated selling expenses to sell these 30
What amount of inventory should be taken to statement of Financial Position of the business?
(a) Rs. 219,500 (b) Rs. 155,600
(c) Rs. 212,700 (d) Rs. 214,900
126. According to which of the following accounting concept the inventory is valued at lower of cost
and net realisable value?
(a) Going concern concept (b) Historical cost concept
(c) Prudence concept (d) Materiality concept
127. A departmental store uses a perpetual inventory system but adjusts its inventory records at year-
end to reflect the result of a complete physical inventory. In physical inventory taken at the end of
2009 & 2010, employees failed to count the merchandise in store's window displays. The cost of
this merchandise amounted to Rs. 13,000 at the end of 2009 and Rs. 19,000 at the end of 2010 as
a result of these errors the cost bf goods sold for the year will be:
(a) Understated by Rs. 19,000 (b) Overstated by Rs. 6,000
(c) Understated by Rs. 6,000 (d) None of the above
128. In times of consistency rising prices of commodities, which of the following inventory valuation
method will result In higher cost of goods sold and lower gross profit:
(a) FIFO (b) LIFO
(c) Average (d) None of above

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129. An inventory record card for item A-903 shows the following details:
March - 1 60 units in opening inventory at a cost of Rs. 70 per unit.
9 130 units purchased at a cost of Rs. 65 per unit
18 70 units sold
24 40 units purchased at a cost of Rs 80 per unit.
29 100 units sold
What is the value of inventory at 31 March using the FIFO method?
(a) Rs. 5,500 (b) Rs. 3,780
(c) Rs. 5,100 (d) Rs. 4,500
130. A fine has two categories of stock. The cost and net realizable value (NRV) of each are as
follows:
Cost NRV
Category 1 Rs,35,000 Rs.22,000
Category 2 22,000 25,000
The figure to be included in the firm's balance sheet in respect of stock is:
(a) Rs. 44,000 (b) Rs. 47,000
(c) Rs. 57,000 «0 Rs. 60,000
131. An inventory record card shows the following details:
March 1 50 units in stock at a cost of Rs. 40 per unit.
9 100 units purchased at a cost of Rs. 40 per unit
16 80 units sold
22 50 units purchased at a cost of Rs. 50 per unit
29 60 units sold
What is the value of inventory at 31-Marc using the FIFO method?
(a) Rs. 2,450) (b) Rs. 2,700
(c) Rs. 2,950 (d) Rs. 3,000

132 When inventory prices are falling, the FIFO method will generally yield a gross profit that is:
(a) Less than under the LIFO method
(b) Equal to the gross profit under FIFO method
(c) FIFO does not generally cause a gross profit that is different from that under any other
costing method
(d) Higher than under the LIFO method.
133 An organization uses perpetual inventory system and average Cost method of valuing inventories.
During December 2011, the following inventory details were recorded:
Opening balance 50 units valued at Rs.6 each,
7 December Purchases of 150 units at Rs.6 each.
15 December Issue of 70 units.
21 December Purchases of 270 units at Rs.6 each.
27 December Issue of 50 units.
The value of the balance at 31 December 2008 was:
(a) Rs. 1,740 (b) Rs. 1,693
(c) Rs. 1,890 (d) Rs. 1,500

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134. You are preparing the final accounts for a business. The cost of the items In closing Inventory is
Rs. 41,875. This Includes some Items which cost Rs.1,960 and which were damaged in transit.
You have estimated that it will cost Rs. 360 to repair the items, and they can then be sold for Rs.
1,200.
What is the correct Inventory valuation for inclusion in the final accounts? Rs. 41,875
(a) Rs. 41,875 (b) Rs. 41,115
(c) Rs. 40,755 (d) Rs. 39,915
135. Which of the following is not included in the cost of inventory?
(a) Purchase price (b) Transport handling cost
(c) Import duty and other non-refundable taxes (d) Carriage outward.
136. The closing inventory of X amounted to Rs. 116,400 excluding the following two inventory lines:
1. 400 items which had cost Rs. 4 each. Allow are sold after the reporting period for Rs. 3
each, with selling expenses of Rs. 200 for the batch.
2. 200 different items which had cost Rs. 30 each. These items were found to be defective at
the end of the reporting period. Rectification work after the statement of financial
position amounted to Rs. 1,'200, after which they were sold for Rs. 35 each, with selling
expenses totaling Rs. 300.
Which of the following total figures should appear in the statement of financial position of X for
Inventory?
(a) Rs. 122,300 (b) Rs. 121,900
(c) Rs. 123,300 (d) Rs. 122,900
137. IAS 2 Inventories defines the items may be included in computing the value of finished goods
manufactured by a business.
Which one of the following lists consists only to items which may be included in the statement of
Financial position value of such inventories, according to IAS 2?
(a) Raw materials, carriage inwards, costs of storage of finished goods, plant depreciation
(b) Plant depreciation, carriage inwards, raw materials, Supervisor’s wages
(c) Carriage outwards, raw materials, Supervisor’s wages, plant depreciation
(d) Supervisor’s wages, carriage inwards, carriage outwards, raw materials
138. The inventory value for the financial of Ever Green Pvt Ltd. For the year ended 30 June 2011 was
based on a inventory count on 7 July 2011, which gave a total Inventory value of RS. 950,000.
Between 30 June and 7 July 2011 the following transactions took place:
Rs.
Purchase of goods 11,750
Sales of goods (mark up to cost at 15%) 14,950
Goods returned by Ever Green Pvt. Ltd. To supplier 1,500
What figure should be included in the financial statements for inventories at-30 June 2011?
(a) Rs. 952,750 (b) Rs. 925,750
(c) Rs. 947,250 (d) None of the above
139. AT 30 September 2011 the closing inventory of a company amounted to RS. 386,400.
The following items were included in this total at cost:
1. 1000 items which had cost Rs. 18 each. These items were all sold in October 2011 for Rs.
15 each, with selling expenses of Rs. 800

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2 Five items which had been in inventory, when they were purchased for Rs. 100 each, sold
in October, 2011 for RS. 1,000 each, net of selling expenses.
What figure should appear in the company’s when they were purchased for Rs. 100 each, sold in
October 2011 for Rs. 1,000 each, net of selling expenses.
(a) Rs. 387,100 (b) Rs. 382,600
(c) Rs. 400,600 (d) Rs. 384,200
140. Which of the following statements about the valuation of inventory are correct, according to IAS
2 inventories?
1. LIFO (last in, first out) can not be used to value inventory
2. The cost of goods manufactured by an entity will include materials and labour only
Overhead costs can not be included.
3. Selling price less estimated profit margin may be used to arrive at cost if this gives a
reasonable approximation to actual cost.
4. Inventory items are normally to be valued at the higher of cost and net realisable value
(a) 1 and 2 (b) 1 and 3
(c) 1 and 4 (d) 3 and 4
141. The inventory value for the financial statements of M/s. Ali for the year ended 31 December 2011
was based on an inventory count on 4 January 2012, which gave a total inventory values of Rs.
836,200.
Between 31 December and 4 January 2012, the following transactions took place:
Rs.
Purchases of goods 8,600
Sales of goods (profit margin 30% of sales) 14,000
Goods returned by m/s. Ali to supplier 700
What adjusted figure should be included in the financial statements for inventories at 31
December 2011?
(a) Rs. 853,900 (b) Rs. 838,100
(c) Rs. 834,300 (d) Rs. 818,500
142. Which of the following costs may be included when arriving at the cost of finished goods
inventory for inclusion in the financial statements of a manufacturing company?
1. Depreciation of factory plant
2. Finished goods storage costs
3. Carriage outwards
4. Carriage inwards
5. Factory supervisors wages
(a) 1 and 2 (b) 1, 2 and 5
(c) 1, 3 and 5 (d) 1, 4 and 5
143. Fareed incorporation closes its books on August 31 each year. The business was unable to value
its stock on August 31, 2011. On September 12-2011, physical check of inventory was carried out
which reported inventory of cost Rs. 460,000.
Between the period of September 1 to September 12, 2011, the following events took place;
September 3 Purchased of merchandise cost
September 5 Sold merchandise costing Rs. Rs. 120,000.
September 7 Goods costing Rs. 14,000 were sold in August 2011.
September 9 Goods costing Rs. 18,000 was purchased in August 2008

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What amount of inventory should be shown in the Statement of Financial position of the business
as on August 31, 2011.
(a) Rs. 530,000 (b) Rs. 519,000
(c) Rs. 540,000 (d) Rs. 510,000
144. Gulshan Corporation deals in three types of precuts - Shirt, Skirt and Jeans, Following
information is related to these three types of inventories at year end;
Shirt per unit Skirt per unit Jeans per unit
Rs. Rs. Rs.
Cost value 25 34 30
Estimated selling price 22 36 40
Selling and distribution costs 5 7 6
Units Units Units
Inventory of inventory at the year-end should be: 500 490 370
The value of inventory at the year-end should be
(a) Rs. 33,810 (b) Rs. 35,800
(c) Rs. 30,500 (d) Rs. 29,750
145. A company values its inventory using the first in, first out (FIFO) method, At 1 May 2011 the
company had 700 engines in inventory, valued at Rs.190 each.
During the year ended 30 April 2012 the following transactions took place:
2011
1 July Purchased 500 engines at Rs. 220 each.
1 November Sold 400 engines for Rs. 160,000
2012
15 February Purchased 300 engines at Rs. 230 each.
15 April Sold 250 engines for Rs. 125,000.
What is the value of the company's closing inventory of engines at 30 April 2012?
(a) Rs. 195,500 (b) Rs. 188,500
(c) Rs. 166,000 (d) None of these
146. The closing inventory at cost of a company at 31 January 2011 amounted to Rs. 284,700. The
following items were included at cost in the total:
1. 400 costs, which had cost Rs. 80 each and normally sold for Rs. 150 each. Owing to a
defect in manufacture they were all sold after the reporting date at 50% of their normal
price. Selling expenses amounted to 5% of the proceeds.
2. 800 skirts, which had cost Rs. 20 each. These too were found to be defective. Remedial
work in February 2011 cost Rs. 5 per skirt, and selling expenses for the batch totalled Rs.
800. they were sold for Rs. 28 each.
What should be inventory value be according to IAS 2 inventories after considering the above
items?
(a) Rs. 281,200 (b) Rs. 239,200
(c) Rs. 282,800 (d) None of these
147. The closing inventory of X amounted to Rs. 116,400 excluding the following two inventory lines:
1. 400 items which had cost Rs. 4 each. Allow are sold after the reporting period for Rs. 3
each, with selling expenses of Rs. 200 for the batch.
2. 200 different items which had cost Rs. 30 each. These items were found to be defective at
the end of the reporting period. Rectification work after the statement of financial

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position amounted to Rs. 1,200, after which they were sold for RS. 35 each, with selling
expenses totaling Rs. 300.
Which of the following total figures should appear in the statement of financial position of X for
inventory?
(a) Rs. 122,300 (b) Rs. 121,900
(c) Rs. 123,300 (d) Rs. 122,900
148. M/s Tariq sells three products - Basic, super and Luxury, The following information was
available at the year-end:
Shirt per unit Skirt per unit Jeans per unit
Rs. Rs. Rs.
Cost value 6 9 18
Estimated selling price 9 12 15
Selling and distribution costs 1 4 5
Units Units Units
Inventory of inventory at the year-end should be: 500 490 370
Units of inventory 200 250 150
The value of inventory at the year-end should be:
(a) Rs. 6,150 (b) Rs. 4,700
(c) Rs. 5,700 (d) Rs. 4,200
149. It is policy of a business to fix its sales prices of items by adding 25% to the cost of all goods
purchased. On 30 June 2011 a fire destroyed a considerable part of the inventory and all
inventory records.
Rs. Rs.
Sales 380,000
Cost of opening inventory 210,000
purchases 340,000
Cost of goods available for sale 550,000
Inventory in good condition after fire 300,000 250,000
Gross profit 30,000
Find out the cost of inventory lost in fire by using the above information.
(a) Rs. 26,000 (b) Rs. 28,000
(c) Rs. 20,000 (d) Rs. 22,000
150. Following is the detail of inventory of Bilal & Rafay corporation at the year-end:
Product Cost value Rs. Net Realisable value Rs.
A 20,000 22,000
B 11,000 10,000
C 12,500 12,000
D 17,600 18,000
What value of inventory should be shown by the corporation in its Statement of Financial
position at year-end?
(a) Rs. 59,600 (b) Rs. 59,000
(c) Rs. 61,100 (d) Rs. 18,000
151. Bombay Company values its inventory using the first in, first out (FIFO) method. At July 1, 2011
the company held 800 boxes in inventory, valued at Rs. 100 each.
During the year ended June 30, 2012 the following transactions took place:
2007

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August 10 Purchased 900 boxes @ Rs. 120 each

December 15 Sold 300 boxes @ Rs. 180 each
2008
March 22 Purchased 400 boxes @ Rs. 130 each
May 20 Sold 500 boxes @Rs. 200 each
What is the value of the company's closing inventory of boxes at June 30 2012.
(a) Rs. 188,500 (b) Rs. 195,500
(c) Rs. 166,000 (d) None of these figures
152. In times of falling prices, the valuation of inventory using the FIFO method, as opposed to
average costs, will result in which one of the following combination?
Cost of Sales Gross profit Closing Inventories
(a) Lower Higher Higher
(b) Lower Higher Lower
(c) Higher Lower Lower
(d) Higher Lower Lower
153. The following information is related to a mobile dealer about his information at year end. What
value of inventory should be shown in his Statement of Financial Position prepared at year-end.
Mobile Set Cost value Rs. Net realisbale value Rs.
Nokia-X2 5,000 3,300
Nokia - C2 13,000 13,500
Nokia - X3 '14,200 13,900
Nokia - C3 14,900 15,000
(a). Rs. 39,800 (b) Rs. 45,900
(c) Rs. 40,000 (d) Rs. 45,100
154. In times of rising prices, the valuation of inventory using the FIFO method, as opposed to average
costs, will result in which one of the following combination?
Cost of Sales Gross profit Closing Inventories
(a) Lower Higher Higher
(b) Lower Higher Lower
(c) Higher Lower Higher
(d) Higher Lower Lower
155 Tim has recently commenced trading. The materials he uses in his business are subject to regular
price rises. He is unsure how to value his inventory and is trying to decide whether to use ‘first in,
first out’ (FIFO), or continuous weighted average.
Which of the following statements is correct?
A Tim’s profit will be unaffected by the method of inventory valuation
B FIFO will lead to the higher reported profit
C Continuous weighted average will lead to the higher reported profit
D The profit will be more accurate if FIFO is used

156 You are preparing the final accounts for a business. The cost of the items in closing inventory is
Rs.41,875. This includes some items which cost Rs.1,960 and which were damaged in transit.
You have estimated that it will cost Rs.360 to repair the items, and that the items could then be
sold for Rs.1,200.
What was the correct inventory valuation for inclusion in the final accounts?

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(a) 4,075 (b) 3,075

(c) 5,075 (d) 6,075
157 Bill uses the first in, first out method of inventory valuation. At 1 May 20X8 he had 60 units in
inventory at a total value of Rs.1,320. The movement on his inventory in May 20X8 was:
Receipts 14 May 120 units at Rs.22.20
26 May 150 units at Rs.22.30
Sales 18 May 90 units
28 May 80 units
What was the value of Bill’s inventory at 31 May 20X8?
(a) 7,567 (b) 3,567
(c) 2,567 (d) 4,567
158 Mark uses the periodic weighted average method of inventory valuation. At 1 August 20X6 he
had 60 units in inventory at a total value of Rs.1,320. The inventory movements during August
20X6 were as follows:
Receipts 14 Aug 120 units at Rs.22.50 per unit
26 Aug 150 units at Rs.23.36 per unit
Sales 18 Aug 90 units
28 Aug 80 units
What was the value of Mark’s inventory at 31 August 20X6?
(a) 6,648 (b) 8,648
(c) 5,648 (d) 3,648
159 Daniel uses the continuous weighted average cost method of inventory valuation. At 1 February
20X4 he had 60 units in inventory at a total value of Rs.1,320. The inventory movements during
February 20X4 were as follows:
Receipts 14 Feb 180 units at Rs.23.00 per unit
Sales 18 Feb 90 units at Rs.30.00 per unit
What was the value of Daniel’s inventory at 28 February 20X4?
A Rs.3,300.00 B Rs.3,390.00
C Rs.3,412.50 D Rs.3,450.00
160 Davina uses the continuous weighted average cost method of inventory valuation. At 1 April
20X5 she had 120 units in inventory at a unit cost of Rs.22.00. The inventory movements during
April 20X5 were as follows:
Receipts 15 Apr 360 units at Rs.23.00 per unit
Sales 25 Apr 300 units at Rs.32.00 per unit
What was Davina’s cost of sales for the month of April 20X5?
(a) 4,825 (b) 8,825
(c) 6,825 (d) 7,825

161 An item of inventory was purchased for Rs.500. It is expected to be sold for Rs.1,200 although
Rs.250 will need to be spent on it in order to achieve the sale. To replace the same item of
inventory would cost Rs.650.

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At what value should this item of inventory be valued in the financial statements?
(a) 400 (b) 200
(c) 300 (d) 500
162 Ajay’s financial year end is 30 June 20X6. However, the annual inventory count took place on 7
July 20X6. The inventory value on that date was Rs.38,950. During the period from 30 June
20X6 to 7 July 20X6, the following transactions took place:
Sales Rs.6,500
Purchases Rs.4,250
Sales are made at a mark-up on cost of 25%.
What was Ajay’s inventory valuation at 30 June 20X6?
A Rs.36,700 B Rs.41,200
C Rs.39,900 D Rs.38,000
163 Percy Pilbeam is a book wholesaler. On each sale, commission of 4% is payable to the selling
agent. The following information is available in respect of total inventories of three of his most
popular titles at his financial year-end:
Cost Selling price
Rs. Rs.
Henry VII – Shakespeare 2,280 2,900
Dissuasion – Jane Armstrong-Siddeley 4,080 4,000
Pilgrim’s Painful Progress – John Bunion 1,280 1,300
What was the total value of these items of inventory in Percy’s statement of financial position?
A Rs.7,368 B Rs.7,400
C Rs.7,560 D Rs.7,640
164 An organisation’s inventory at 1 July is 15 units at a cost of Rs.3.00 each. The following
subsequent movements occur:
3 July 20X4 5 units sold at Rs.3.30 each
8 July 20X4 10 units bought at Rs.3.50 each
12 July 20X4 8 units sold at Rs.4.00 each
At what valuation will closing inventory be included in the financial statements at 31 July, using
the first in, first out, method of inventory valuation?
A Rs.31.50 B Rs.36.00
C Rs.39.00 D Rs.41.00
165 Nigel has closing inventory which cost Rs.38,750. This includes some damaged items which cost
Rs.3,660. It will cost Nigel Rs.450 to repair these. He will be able to sell them for Rs.1,500 after
the repairs are completed.
What is the correct value of Nigel’s closing inventory?
A Rs.35,090 B Rs.36,140
C Rs.36,590 D Rs.38,750
166 Which method of inventory valuation is used when issues are assumed to be taken from inventory
in the order in which they were received?
A Net realisable value B First in, first out
C Periodic weighted average D Continuous weighted average
167 When she prepared her draft accounts, Wilma included her closing inventory at a value of
Rs.21,870. She has just found out that some items valued at Rs.2,150 had not been included in the
calculation.

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How will net profit and net assets be affected when the inventory valuation is corrected?
Net profit Net assets
A Reduced by Rs.2,150 Reduced by Rs.2,150
B Reduced by Rs.2,140 Increased by Rs.2,150
C Increased by Rs.2,150 Reduced by Rs.2,150
D Increased by Rs.2,150 Increased by Rs.2,150
168 Colin made a mistake in his calculations which resulted in the value of his closing inventory at 30
April 20X4 being overstated by Rs.900. The value was calculated correctly at 30 April 20X5.
What was the effect of the error on the profit reported in Colin’s accounts for each of the two
years?
20X4 20X5
A Overstated by Rs.900 Not affected
B Overstated by Rs.900 Understated by Rs.900
C Understated by Rs.900 Not affected
D Understated by Rs.900 Overstated by Rs.900
169 Kieron is an antiques dealer. His inventory includes a clock which cost Rs.15,800. Kieron expects
to spend Rs.700 on repairing the clock which will mean that he will be able to sell it for
Rs.26,000.
At what value should the clock be included in Kieron’s inventory?
(a) 13,800 (b) 17,800
(c) 15,800 (d) 14,800

170 LMN has just published its financial statements, which show a gross profit for the year of Rs.6.5
million. A major error in the inventory valuation has just been discovered. The opening inventory
was overstated by Rs.1.3 million, and the closing inventory has been understated by Rs.1.6
million.
What should be LMN’s correct gross profit for the year?
(a) Rs.9.1m (b) Rs.9.7m
(c) Rs.9.3m (d) Rs.9.4m
171 What is the unit cost of the following item?
Rs.
Raw materials 5.00
Labour 3.00
Manufacturing overheads 1.00
Variable administrative overheads 2.50
A Rs.5.00 B Rs.8.00
C Rs.9.00 D Rs.11.50
172 Daniel made an error when he calculated the value of his closing inventory, which resulted in an
overvaluation of inventory.
How will his net profit for the year and net assets at the end of the year be affected by this error?
Net profit Net assets
A Overstated Understated
B Overstated Overstated
C Understated Understated
D Understated Overstated

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173 What is the net realisable value of the following item?

Rs.
Selling price 20.00
Packaging costs 2.00
Delivery costs 3.00
Licence fee paid after delivery 2.50
(a) Rs.12.50 (b) Rs.12.60
(c) Rs.12.35 (d) Rs.12.45
174 Diesel fuel included in the inventory at 1 November 20X7 was Rs.12,500 and there were invoices
awaited for Rs.1,700. During the year to 31 October 20X8, diesel fuel bills of Rs.85,400 were
paid, and a delivery worth Rs.1,300 had yet to be invoiced. At 31 October 20X8, the inventory of
diesel fuel was valued at Rs.9,800.
What amount is to be charged to the statement of profit or loss for the year to 31 October 20X8
for diesel fuel?
(a) 87,400 (b) 87,900
(c) 87,700 (d) 87,200
175 Suresh & Co sells three products – Basic, Super and Luxury. The following information was
available at the year-end:
Basic Super Luxury
Rs. per unit Rs. per unit Rs. per unit
Original cost 6 9 18
Estimated selling price 9 12 15
Selling and distribution costs 1 4 5
Units Units Units
Units held 200 250 150
What should be the valuation of inventory at the end of the year?
(a) 4,100 (b) 4,700
(c) 4,500 (d) 4,200
176 In times of rising prices, what will be the effect upon profit and closing inventory valuation using
the first in, first out method of inventory valuation in comparison to the average cost method of
inventory valuation?
A A higher profit and a lower closing inventory value
B A higher profit and a higher closing inventory value
C A lower profit and a lower closing inventory value
D A lower profit and a higher inventory value
177 Arlene valued her inventory at 30 June 20X1 at its cost of Rs.22,960. This included some items
which cost Rs.1,950 which have been difficult to sell. Arlene intends to have these items
repacked at a cost of Rs.400. She then expects to sell them for Rs.900.
What was the value of closing inventory in Arlene’s accounts at 30 June 20X1?
(a) Rs.21,540 (b) Rs.21,510
(c) Rs.21,580 (d) Rs.21,570
178 At 30 November 20X1 Kim's inventory was valued at its cost of Rs.22,700. This includes items
costing Rs.1,300 which have been superseded by an updated design. Kim will be able to sell these
items through an agent for Rs.700. The agent's commission will be 10% of selling price.
What was the value of closing inventory on 30 November 20X1?
(a) 22,010 (b) 22,060
(c) 22,030 (d) 22,070

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179 Mylee uses the periodic weighted average method of inventory valuation. At 1 November 20X7
she had 60 units in inventory at a total value of Rs.1,320. The inventory movements during
August 20X6 were as follows:
Receipts 14 Nov 150 units at Rs.20.00 per unit
26 Nov 100 units at Rs.25.00 per unit
Sales 18 Nov 80 units sold for Rs.30 per unit
28 Nov 90 units sold for Rs.30 per unit
What was the value of Mylee’s inventory at 30 November 20X7?
A Rs.6,820 B Rs.3,740
C Rs.3,080 D Rs.1,760
180 Danielle uses the continuous weighted average cost method of inventory valuation. At 1 April
20X9 she had 50 units in inventory at a total value of Rs.815. The inventory movements during
February 20X4 were as follows:
Receipts 14 Apr 270 units at Rs.19.50 per unit
Sales 18 Apr 180 units at Rs.35.00 per unit
What was the cost of goods sold by Danielle for the month of April 20X9?
(a) Rs.3,410 (b) Rs.3,460
(c) Rs.3,440 (d) Rs.3,420

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MULTIPLE CHOICE QUESTIONS (MCQs) SOLUTIONS

01. C Freight in is necessary to bring the inventory in its present condition and location.
All other costs are period costs.
02. D Conversion costs include direct labour and manufacturing overheads. Only
supervisor’s wages are part of overheads.
03. B The cost is Rs. 2,600 and NRV is Rs. 2,485 (2,550 – 65)
As NRV is lower, inventory will be written down by Rs. 115 (2,600 – 2,485). This
would reduce the profit by Rs. 115 as well.
04. C
Alpha Beta Gamma
Rs. per unit Rs. per unit Rs. per unit
Original cost 10 13 15
NRV 12 9 12
Inventory: units held 300 380 240
Valuation Rs. 3,000 3,420 2,880
Total valuation = 3,000 + 3,420 + 2,880 = Rs. 9,300
05. D Rs. 3,300 + 13,000 + 13,900 + 14,900 = Rs. 45,100
06. Rs. 119,700 Balance given= Rs. 130,200
Less: cost of damaged item already included= Rs. 25,000
Add: NRV of damaged item Rs. 18,000-Rs. 3,500 = Rs. 14,500
Correct value of inventory Rs. 119,700
07. Rs. 48,600 Product A Rs. 15,000+ Product B Rs. 10,000+Product C Rs. 11,000+Product D
Rs. 12,600 = Rs. 48,600
Cost and NRV comparison are to be made on item by item basis and not on the
basis of totals.
08. B Storage costs
09. C Gross profit = Rs. 1,000,000 – 600,000 = Rs. 400,000
Net profit = Rs. 400,000 – 50,000 – 50,000 = Rs. 300,000
10. B NRV = Rs. 40,000 estimated sale price – 15,000 cost of repairs = Rs. 25,000
Write down = Rs. 50,000 Cost – Rs. 25,000 NRV = Rs. 25,000
11. D Variable manufacturing overheads
12. C Rs. 10,000,000 + 800,000 + 150,000 + 200,000 = Rs. 11,150,000
13. B Recognised as an expense in the period in which the write-down occurs
14. C Net realisable value
15. D Distribution cost
16. B Cost Rs. 158,000 is lower
NRV Rs. 253,000 (i.e. Rs. 260,000 – 7,000) is higher
Replacement cost Rs. 255,000 is irrelevant
17. C Administration costs (whether variable or fixed) are not included in cost of
inventory.
18. B No write down on normal units
Cost Rs. 2,554 and NRV Rs. 2,750
On damaged units
Cost Rs. 2,554 and NRV Rs. 1,590 (i.e. Rs. 2,900 x 60% - 150)
= Rs. 964 per unit x 10 units = Rs. 9,640
19. D Rs. 3,500 – 150 = Rs. 3,350

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20. D No write down on normal units

Cost Rs. 2,000 and NRV Rs. 2,900
No write down on damaged units
Cost Rs. 2,000 and NRV Rs. 2,300 (i.e. Rs. 3,000 x 80% - 100)
21. B Closing inventory is understated so current year’s profit will be understated as
well. However next year the effect will be opposite as it would become opening
inventory.
22. B Closing inventory units = 900+1,000+600-1,250-550 = 700
Average cost per unit = ((900x5) +(1,000x6) +(600x7))/2,500 units
= Rs. 5.88
Closing inventory = 700xRs. 5.88 = Rs. 4,116
23. A Inventory is valued at lower of cost and NRV which is Rs. 2,500 in this case.
Omission would understate the inventory.
24. A Gross profit as well as net profit will be exaggerated
25. B Cost per unit = [(35,0000x3.5) +(40,000x5)]/ (35,000+40,000) =Rs. 4.3
Cost of goods sold = 50,000 x Rs. 4.3 = Rs. 215,000
26. Rs. 3,340 The closing inventory units 50+120+45 – 65 – 100 = 50 units
45 units @ Rs. 67 per unit and 5 units @ Rs. 65 per unit = Rs. 3,340
27. B Last in, First out (LIFO)
28. C Cost of machine sold = Rs. 12 million
Cost of machines not sold yet (inventories) = Rs. 14m + 13m + 10m = Rs. 37
million
29. B 8 March (Rs. 40,000 + 15,000)/ (400+100 units) = Rs. 110 per unit
8 March (Rs. 55,000 + 60,000)/ (500+300 units) = Rs. 143.75 per unit
30. B Total value [Rs. 40,000 + (15,000 + 60,000)] = Rs. 115,000
Total Units [400 + (100 + 300)] = 800
Rate = Rs. 115,000 / 800 units = Rs. 143.75 per unit
31. C Amount of expense recognised due to write down of inventories
32. D Location of each place where entity keeps its inventory is not required disclosure
under IAS 2
33. D Cost of sales Rs. 150,000; Inventory Rs. 250,000
34. D It should be allocated to building asset in which it has been used
35. A&D Inventory sold during the period
Amount of write down to NRV
36. A Opening inventory is charged to cost of sales and closing inventory is credited in
cost of sales.
37. C Sales – costs of sales = gross profit
Rs. 4,500,000 – (Rs. 1,500,000+2,550,000-1,000,000) = Rs. 1,450,000
38. A The correct entry for drawings is Debit Drawings and Credit Purchases (or Cost of
Sales). The cost price of goods is relevant, not selling price.
39. C Debit Non-Current assets & Credit Purchases
40. D Periodic inventory recording system
41. A&C Large size items
Low value items
42. B&D High value items
Where inventory movements are frequent
43. A&D Debit Receivables & Credit Sales
No other entry is required
44. D No adjustment is required. Simply balance the inventory account.
45. D No journal entry is required
46. A&D Debit Sales Return & Credit Receivables

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No other entry is required

47. C Debit Expenses & Credit Inventory
48. B Debit Cost of Sales Rs. 1,200,000 & Credit Inventory Rs. 1,200,000
Rs. 1,440,000 + 60,000 = Rs. 1,550,000 x 100/125 = Rs. 1,200,000
49. A&B Debit Sales Return & Credit Receivables
Debit Inventory & Credit Cost of sales
50. A&C Debit Receivables & Credit Sales
Debit Cost of sales & Credit Inventory

51 D 52 A 53 C 54 A

55 C 56 C 57 C 58 A

59 B 60 B 61 B 62 B

63 A 64 A 65 D 66 D

67 B 68 C 69 A 70 D

71 D 72 C 73 B

74 C

75 C

76 B 77 D 78 C

79 C 80 B 81 D 82 C

83 B 84 A 85 C 86 A

87 D 88 C 89 C 90 A

91 B 92 A 93 A 94 A

95 D 96 C 97 B 98 C

99 A 100 C 101 C 102 D

103 A 104 B 105 B 106 B

107 A 108 A 109 C 110 A

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111 A 112 B 113 B 114 B

115 B 116 C 117 B 118 A

119 A 120 B 121 C

122 C 123 A 124 D

125 B 126 C 127 B 128 B

129 D 130 A 131 C 132 D

133 B 134 C 135 D 136 A

137 B 138 A 139 B 140 B

141 B 142 D 143 B 144 A

145 B 146 A 147 D 148 B

149 A 150 A 151 D 152 C

153 D 154 A 155 B

156 Rs.40,755
Rs. Rs.
Cost of inventory 41,875
Damaged items:
Cost 1,960
Expected sale value 1,200
Less cost of repairs 360
Net realisable value 840
Write down (Rs.1,960 – Rs.840) 1,120
Inventory valuation 40,755

157 Rs.3,567
Closing inventory is 160 units. Using FIFO, 150 of these are all deemed to be part of the final
delivery, and therefore they are valued at Rs.22.30 per unit = Rs.3,345. The remaining 10 units
are deemed to be part of the previous delivery and are therefore valued at Rs.22.20 per unit =
Rs.222.
Thus total value is Rs.3,567

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158 Rs.3,648
Unit cost Total cost
Units Rs. Rs.
Opening inventory 60 22.00 1,320.00
14 Aug Purchase 120 22.50 2,700.00
26 Aug Purchase 150 23.36 3,504.00
330 7,524.00
Periodic weighted average cost per unit = Rs.7,524.00/330 units = Rs.22.80. Inventory valuation
= 330 units – 170 sold = 160 × Rs.22.80 = Rs.3,648.00.
159 C
Unit cost Total cost
Units Rs. Rs.
Opening inventory 60 22.00 1,320.00
14 Feb Purchase 180 23.00 4,140.00
240 22.75 5,460.00
18 Feb Sale (90) 22.75 (2,047.50)
Closing inventory 150 22.75 3,412.50
Note that, using the continuous weighted average method of inventory valuation, a new weighted
average cost per unit is calculated following each purchase made.
160 Rs.6,825
Unit cost Total cost
Units Rs. Rs.
Opening inventory 120 22.00 2,640.00
15 Apr Purchase 360 23.00 8,280.00
480 22.75 10,920.00
25 Apr Sale at cost (300) 22.75 (6,825.00)
Closing inventory 180 22.75 4,095.00
Note that, using the continuous weighted average method of inventory valuation, a new weighted
average cost per unit is calculated following each purchase made. The updated weighted average
cost per unit is then used for each sale until the next purchase is made and the process is repeated.
161 Rs.500
Inventory should be valued at the lower of cost and net realisable value. Net realizable values
Rs.1,200 – Rs.250 = Rs.950, with cost of Rs.500 the lower of the two possibilities.
162 C
Rs.
Value at 7 July 20X6 38,950
Sales since year end (100/125 × Rs.6,500) 5,200
Purchase since year end (4,250)
Value at 30 June 20X6 39,900
163 A
The net realisable value of inventory items is the selling price less the 4% commission payable.
NRV Lower of cost
or NRV
Rs. Rs.
Henry VII 2,784 2,280
Dissuasion 3,840 3,840
John Bunion 1,248 1,248
7,368

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164 D
The closing inventory of 12 items (15 – 5 + 10 – 8) comprise
Rs.
10 items at Rs.3.50 each 35.00
2 items at Rs.3 each 6.00
Cost on a FIFO basis is 41.00
165 B
The damaged items have a cost of Rs.3,660, but a net realisable value of only Rs.1,050 (Rs.1,500
– Rs.450). Therefore the cost of the inventory needs to be written down by Rs.2,610 (Rs.3,660 –
Rs.1,050). The inventory will then have a correct value of Rs.36,140 (Rs.38,750 – Rs.2,610).
166 B
167 D
Closing inventory reduces the cost of sales figure. Therefore if the value of closing inventory is
increased, cost of sales will be reduced and net profit will be increased. Net assets will also be
increased.
168 B
The over-valuation in 20X4 will boost profits in 20X4 by reducing cost of sales. However, the
opening inventories in the following year will be overstated increasing cost of sales and reducing
profits.
169 Rs.15,800
Inventories are valued at the lower of cost and net realisable value. The cost of repairing the clock
will reduce the expected profit, but the clock’s net realisable value is still greater then cost and so
no reduction in value is needed.
170 Rs.9.4M
Rs.6.5m + Rs.1.6m + Rs.1.3m = Rs.9.4m
171 C
Administrative costs are not included in the statement of financial position valuation of an item in
the inventory.
172 B
173 Rs.12.50
Assuming that all the costs would be incurred by the seller (and not the customer) the net
realisable value is Rs.20 – Rs.2 – Rs.3 – Rs.2.50 = Rs.12.50.
174 Rs.87,700
Rs.
Payments for purchases 85,400
Less: Invoices for opening inventory (1,700)
Plus: Invoices due for fuel purchased 1,300
Purchases 85,000
Rs.
Opening inventory 12,500
Purchases 85,000
Closing inventory (9,800)
Cost of fuel – profit or loss 87,700

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175 Rs.4,700
Net
Lower of
realizable Units Value
cost or NRV
value
Rs. Rs. Rs.
Basic 8 6 200 1,200
Super 8 8 250 2,000
Luxury 10 10 150 1,500
Total value 4,700
176 B
With FIFO, closing inventory is the most recently purchased items, therefore when prices are
rising, closing inventory will have a higher value than if the average cost method of inventory
valuation is used. Since closing inventories will be valued higher, the cost of sales will be lower
and the profit will be higher.
177 Rs.21,510
22,960 – 1,950 – 400 + 900 = Rs.21,510
178 Rs.22,030
22,700 – 1,300 + 700 – 70 = Rs.22,030
179 C
180 Rs.3,420
Continuous average cost per unit = (Rs.815+= (270 × Rs.19.50))/320 units = Rs.19.00. Therefore
cost of goods sold = 180 × 180 units = Rs.3,420.

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CHAPTER-8 ACCOUNTING FOR MANUFACTURING

MULTIPLE CHOICE QUESTIONS (MCQs)

01. Prime cost means

(a) Sum of direct material and factory overhead costs
(b) Sum of direct material and selling costs
(c) Sum of indirect material and direct labour costs
(d) Sum of direct material and direct labour costs
02. Which of the following is correct for conversion cost?
(a) Cost of direct material + cost of direct labour
(b) Cost of direct material + cost of production
(c) Prime cost + production cost
(d) Cost of direct labour + production overhead
03. Direct costs are the costs that
(a) Are under the control of directors of the company
(b) Are directly charged to department
(c) Are directly under the control of a manager
(d) Can be directly identified with a product of service
04. A restaurant has the following costs in a period
1. wages of the kitchen staff
2. depreciation of kitchen equipment
3. costs of ingredients for meals
4. rent paid for the restaurant building
What are indirect costs for an individual meal?
(a) 1, 2, 3 and 4 (b) 1, 2 and 3 only
(c) 1 and 2 only (d) 2 and 4 only
05. Which item is a direct cost?
(a) Royalty paid on number of units of product SK produced
(b) Cleaning materials for the factory
(c) Factory rent
(d) Wages of the factory manager
06. Which TWO of the following are direct costs for a bakery?
(a) Chocolates chips purchased (b) Electricity bill of the bakery
(c) Hours of cake decorator’s time (d) Rent of bakery premises
07. Which TWO of the following are indirect costs for a business that produces tablecloths?
(a) 300 meters of white cotton fabric purchased
(b) 5 litres of lubricant for sewing machines purchased
(c) Wages of two sewing machine operators working 40 hours each week
(d) Electricity bill of production area

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08. Which of the following would be classified as direct labour cost as opposed to indirect labour
costs?
(a) Wages of security guards for factory
(b) Wages of operator in the cutting department
(c) Wages of storekeepers in raw materials store
(d) Wages of fork lift truck drivers who handle raw materials
09. Which of the following is most likely to be treated as an indirect cost by a house construction
contractor?
(a) Windows (b) Bricks
(c) Electricity cables (d) Nails and screws
10. Which of the following costs would be classified as an indirect cost?
(a) Flour for baking bread (b) Bill paid for icing a wedding cake
(c) Wages cost of baker (d) Depreciation of ovens
11. Which one of the following would be classified as direct labour?
(a) Human resource manager in a company servicing cars
(b) Bricklayer in a construction company
(c) General manager in a departmental store
(d) Maintenance manager in a company producing cameras
12. Which one of the following would be classified as indirect labour?
(a) Stipend of audit trainee in an audit firm
(b) Wages of assembly worker in car manufacturing business
(c) Wages of store assistant in a factory store
(d) Wages of plasterer in a building construction firm
13. Which of the following account is most unlikely to be part of factory ledger?
(a) Inventory (Work in progress)
(b) Production overheads
(c) Plant and Machinery (installed in factory premises)
(d) Direct Labour (wages control)
14. A manufacturing business has purchased material costing Rs. 204,000 on credit during the month
of March 2020. At the start of March, there were inventories of raw material of Rs. 26,000.
During the month Rs. 176,000 of direct materials and Rs. 30,000 of indirect materials were issued
for production.
What is correct accounting entry to record issue of direct materials?
(a) Dr. Inventory (Materials) Rs. 176,000 and Cr. Production Overheads Rs. 176,000
(b) Dr. Inventory (Materials) Rs. 176,000 and Cr. Inventory (WIP) Rs. 176,000
(c) Dr. Production Overheads Rs. 176,000 and Cr. Inventory (Materials) Rs. 176,000
(d) Dr. Inventory (WIP) Rs. 176,000 and Cr. Inventory (Materials) Rs. 176,000

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15. A manufacturing business has purchased material costing Rs. 204,000 on credit during the month
of March 2020. At the start of March, there were inventories of raw material of Rs. 26,000.
During the month Rs. 176,000 of direct materials and Rs. 30,000 of indirect materials were issued
for production.
What is correct accounting entry to record issue of indirect materials?
(a) Dr. Inventory (Materials) Rs. 30,000 and Cr. Production Overheads Rs. 30,000
(b) Dr. Inventory (Materials) Rs. 30,000 and Cr. Inventory (WIP) Rs. 30,000
(c) Dr. Production Overheads Rs. 30,000 and Cr. Inventory (Materials) Rs. 30,000
(d) Dr. Inventory (WIP) Rs. 30,000 and Cr. Inventory (Materials) Rs. 30,000
16. A manufacturing business started its operations on 1 September 2020 by acquiring a factory on
the same date. The cost of factory is Rs. 82 million on this date, it has useful life of 20 years and
residual value of Rs. 10 million. The two-third of the factory area is used for production and
remaining is used for office and showroom.
What is correct accounting entry for the year ended 30 June 2021 in integrated accounting
system?
(a) Dr. Work in progress Rs. 2.4 million
Dr. Operating expenses Rs. 1.2 million
Cr. Accumulated depreciation Rs. 3.6 million
(b) Dr. Production overheads Rs. 2.4 million
Dr. Operating expenses Rs. 1.2 million
Cr. Accumulated depreciation Rs. 3.6 million
(c) Dr. Work in progress Rs. 2 million
Dr. Operating expenses Rs. 1 million
Cr. Accumulated depreciation Rs. 3 million
(d) Dr. Production overheads Rs. 2 million
Dr. Operating expenses Rs. 1 million
Cr. Accumulated depreciation Rs. 3 million
17. During the month of April 2021, a manufacturing business issued Rs. 19.6 million of direct
materials to the factory and Rs. 3.2 million of indirect materials. What is the double entry for
these issues of materials?
(a) Dr. Materials Control Rs. 22.8m & Cr. WIP Rs. 19.6m & Cr. Production OH Rs. 3.2m
(b) Dr. WIP Rs. 19.6m & Dr. Production OH Rs. 3.2m & Cr. Materials Control Rs. 22.8m
(c) Dr. WIP Rs. 3.2m & Dr. Production OH Rs. 19.6m & Cr. Materials Control Rs. 22.8m
(d) Dr. Materials Control Rs. 22.8m & Cr. WIP Rs. 3.2m & Cr. Production OH Rs. 19.6m
18. In a month, the direct production workers worked for 740 hours including 110 hours of general
overtime. The indirect workers worked for 200 hours, which included 40 hours of general
overtime. The direct production workers have a basis rate of Rs. 840 per hour and the indirect
have a basic rate of Rs. 600 per hour. All overtime is paid at time plus one-third.
What is the amount that will be debited to the production overhead account?
(a) Rs. 158,800 (b) Rs. 200,800
(c) Rs. 579,600 (d) Rs. 621,600

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19. In a month, the direct production workers worked for 740 hours including 110 hours of general
overtime. The indirect workers worked for 200 hours, which included 40 hours of general
overtime. The direct production workers have a basis rate of Rs. 840 per hour and the indirect
have a basic rate of Rs. 600 per hour. All overtime is paid at time plus one-third.
What is the amount that will be transferred to Work in Progress inventory from wages control
account?
(a) Rs. 158,800 (b) Rs. 200,800
(c) Rs. 579,600 (d) Rs. 621,600
20. During the month of May 2021, a manufacturing business payroll totalled Rs. 23.7 million. Rs.
3.7 million of this amount was for indirect wages and the remainder was for direct worker wages.
What is the double entry for the above labour costs?
(a) Dr. Wages Control Rs. 23.7m & Cr. WIP Rs. 20m & Cr. Production OH Rs. 3.7m
(b) Dr. Wages Control Rs. 23.7m & Dr. WIP Rs. 3.7m & Cr. Production OH Rs. 20m
(c) Dr. WIP Rs. 20m & Dr. Production OH Rs. 3.7m & Cr. Wages Control Rs. 23.7m
(d) Dr. WIP Rs. 3.7m & Dr. Production OH Rs. 20m & Cr. Wages Control Rs. 23.7m
21. Factory overheads can be absorbed by which of the following methods?
1. Direct labour hours
2. Machine hours
3. As a percentage of prime cost
4. A fixed amount per unit of production
(a) All of above (b) 1 and 2 only
(c) 1, 2 and 3 only (d) 2, 3 and 4 only
22. What entry should be made in the cost accounting system on completion of production?
(a) Debit Finished goods & Credit Cost of sales (P&L)
(b) Debit Finished goods & Credit Inventory (WIP)
(c) Debit Inventory (WIP) & Credit Finished goods
(d) Debit Cost of sales (P&L) & Credit Finished goods
23. What entry should be made in the cost accounting system on sale of finished goods?
(a) Debit Finished goods & Credit Cost of sales (P&L)
(b) Debit Finished goods & Credit Inventory (WIP)
(c) Debit Inventory (WIP) & Credit Finished goods
(d) Debit Cost of sales (P&L) & Credit Finished goods
24. 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 budgeted overheads for the period?
(a) Rs. 5,270,000 (b) Rs. 5,638,000
(c) Rs. 5,375,400 (d) Rs. 5,500,000

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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. 5,270,000 (b) Rs. 5,638,000
(c) Rs. 5,375,400 (d) Rs. 5,500,000
26. 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 over or under absorption of overheads in the period?
(a) Rs. 105,400 over absorbed (b) Rs. 263,500 under absorbed
(c) Rs. 368,900 over absorbed (d) Rs. 368,900 under absorbed
27. Which of the following represents over-absorbed overheads?
(a) Actual overheads > Budgeted overheads
(b) Budgeted overheads > Actual overheads
(c) Actual overheads > Absorbed overheads
(d) Absorbed overheads > Actual overheads
28. Which of the following represents “Absorbed overheads”?
(a) Budgeted production x Pre-determined rate
(b) Budgeted production x Actual rate
(c) Actual production x Pre-determined rate
(d) Normal capacity x Actual rate
29. What entry should be recorded when actual overhead expenditure is incurred?
(a) Debit Production Overheads & Credit Cash / Accrual
(b) Debit Inventory (WIP) & Credit Production Overheads
(c) Debit Cost of sales (P&L) & Credit Production Overheads
(d) Debit Production Overheads & Credit Cost of sales (P&L)
30. What entry should be recorded when overheads are absorbed in production?
(a) Debit Production Overheads & Credit Cash / Accrual
(b) Debit Inventory (WIP) & Credit Production Overheads
(c) Debit Cost of sales (P&L) & Credit Production Overheads
(d) Debit Production Overheads & Credit Cost of sales (P&L)
31. What entry should be recorded for under absorbed overheads at the end of period?
(a) Debit Production Overheads & Credit Cash / Accrual
(b) Debit Inventory (WIP) & Credit Production Overheads
(c) Debit Cost of sales (P&L) & Credit Production Overheads
(d) Debit Production Overheads & Credit Cost of sales (P&L)

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32. What entry should be recorded for over absorbed overheads at the end of period?
(a) Debit Production Overheads & Credit Cash / Accrual
(b) Debit Inventory (WIP) & Credit Production Overheads
(c) Debit Cost of sales (P&L) & Credit Production Overheads
(d) Debit Production Overheads & Credit Cost of sales (P&L)
33. The following data relates to Sequence Limited who is in process of preparing manufacturing
account for the year ended December 31, 2020.
Rs.
Inventory (Materials) 1 January 2020 75,000
Inventory (Material) 31 December 2020 105,000
Purchases of direct materials during the year 410,000
Return outwards during the year 20,000
Calculate the cost of materials available for consumption.
Rs. _________________
34. The following data relates to Sequence Limited who is in process of preparing manufacturing
account for the year ended December 31, 2020.
Rs.
Inventory (Materials) 1 January 2020 75,000
Inventory (Material) 31 December 2020 105,000
Purchases of direct materials during the year 410,000
Return outwards during the year 20,000
Calculate the cost of materials consumed during the year.
Rs. _________________
35. The following data relates to Sequence Limited who is in process of preparing manufacturing
account for the year ended December 31, 2020.
Rs.
Cost of direct material consumed 360,000
Direct labour wages 60,000
Indirect labour wages and indirect materials 12,500
Depreciation (80% relates to production) 24,000
Rent and utilities expenses of factory 19,800
Royalty paid on number of units of product produced 12,000
Calculate the Prime Cost.
Rs. __________________
36. The following data relates to Sequence Limited who is in process of preparing manufacturing
account for the year ended December 31, 2020.
Rs.
Cost of direct material consumed 360,000
Direct labour wages 60,000
Indirect labour wages and indirect materials 12,500
Depreciation (80% relates to production) 24,000
Rent and utilities expenses of factory 19,800
Royalty paid on number of units of product produced 12,000
Calculate the production overheads for the year.
Rs. __________________

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37. The following data relates to Sequence Limited who is in process of preparing manufacturing
account for the year ended December 31, 2020.
Rs.
Cost of direct material consumed 360,000
Direct labour wages 60,000
Indirect labour wages and indirect materials 12,500
Depreciation (80% relates to production) 24,000
Rent and utilities expenses of factory 19,800
Royalty paid on number of units of product produced 12,000
Calculate the Total manufacturing cost for the year.
Rs. __________________
38. The following data relates to Sequence Limited who is in process of preparing manufacturing
account for the year ended December 31, 2020.
Rs.
Factory cost (Prime cost + production overheads) 483,500
Inventory (WIP) 1 January 2020 40,000
Inventory (WIP) 31 December 2020 35,000
Purchases of WIP inventory during the year to fulfil an urgent order 30,000
Calculate the Cost of goods available for manufacturing.
Rs. __________________
39. The following data relates to Sequence Limited who is in process of preparing manufacturing
account for the year ended December 31, 2020.
Rs.
Factory cost (Prime cost + production overheads) 483,500
Inventory (WIP) 1 January 2020 40,000
Inventory (WIP) 31 December 2020 35,000
Purchases of WIP inventory during the year to fulfil an urgent order 30,000
Calculate the Cost of goods manufactured/produced.
Rs. __________________
40. The following data relates to Sequence Limited who is in process of preparing annual accounts
for the year ended December 31, 2020.
Rs.
Cost of goods manufactured 518,500
Inventory (Finished goods) 1 January 2020 60,000
Inventory (Finished goods) 31 December 2020 70,000
Purchases of finished goods during the year to fulfil an urgent order 80,000
Calculate the Cost of goods available for sale.
Rs. __________________
41. The following data relates to Sequence Limited who is in process of preparing annual accounts
for the year ended December 31, 2020.
Rs.
Cost of goods manufactured 518,500
Inventory (Finished goods) 1 January 2020 60,000
Inventory (Finished goods) 31 December 2020 70,000
Purchases of finished goods during the year to fulfil an urgent order 80,000
Calculate the Cost of goods sold during the year.
Rs. __________________

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42. The following data relates to ABC Enterprises who is in process of preparing annual accounts for
the year ended December 31, 2020.
Rs.
Prime Cost 500,000
Production overheads 200,000
Selling overheads 80,000
Administrative overheads 70,000
WIP inventory at start and end of the year Nil
Calculate the Cost of goods manufactured during the year.
Rs. __________________
43. The following data relates to ABC Enterprises who is in process of preparing annual accounts for
the year ended December 31, 2020.
Rs.
Prime Cost 500,000
Production overheads 200,000
Selling overheads 80,000
Administrative overheads 70,000
WIP inventory at start and end of the year 30,000
Calculate the Cost of goods manufactured during the year.
Rs. __________________
44. The following data relates to XYZ who is in process of preparing annual accounts for the year
ended December 31, 2020.
Rs.
Cost of goods manufactured 518,500
Inventory (Finished goods) 1 January 2020 60,000
Inventory (Finished goods) 31 December 2020 70,000
Calculate the Cost of goods sold during the year.
Rs. __________________
45. Which of the following equation is correct for calculating cost of goods manufactured?
(a) = Prime Cost + Opening inventory (raw material) – Closing inventory (raw material)
(b) = Prime Cost + Opening inventory (WIP) – Closing inventory (WIP)
(c) = Factory Cost + Opening inventory (raw material) – Closing inventory (raw material)
(d) = Factory Cost + Opening inventory (WIP) – Closing inventory (WIP)
46. A manufacturing entity has policy of holding no inventory of any type whether raw materials,
WIP or finished goods. During an accounting period it only produced goods from raw material
purchased by it. Its cost of sales shall be equal to:
(a) Cost of direct materials consumed
(b) Prime Cost
(c) Direct labour + Production Overheads
(d) Prime Cost + Production Overheads

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47. Faran Limited is manufacturer of hand bags. Following figures have been provided for the month
of April 2019;
April 1 April 30
Rs. Rs.
Raw material inventory 39,000 66,000
Raw materials purchased 400,000
Direct labour cost 300,000

What is the amount of raw materials consumed for the month of April 2019?
Rs. ___________
48. Faran Limited is manufacturer of hand bags. Following figures have been provided for the month
of April 2019;
Rs.
Raw materials consumed 373,000
Direct labour cost 300,000
Indirect labour 40,000
What is the figure for prime cost for the April 2019?
Rs. ___________
49. Faran Limited is manufacturer of hand bags. Following figures have been provided for the month
of April 2019:
Rs.
Raw materials purchased 400,000
Direct labour cost 300,000
Advertising expense 150,000
Selling and administrative salaries 140,000
Rent for factory 120,000
Depreciation - Sales equipment 110,000
Depreciation - Factory equipment 70,000
Indirect labour cost 40,000
Factory utilities 20,000
Factory insurance 10,000
Only 60% of the utilities expenses and 70% of the insurance expense apply to factory operations,
the remaining amount should be charged to selling and administrative expenses.
What is the amount of factory overheads for the month?
Rs. ___________
50. Neelam & Co. has provided following data for the month of January 2019;
(i) Material purchased for Rs. 500,000.
(ii) Opening inventory of raw material is Rs. 80,000 and closing inventory is Rs. 120,000.
(iii) Gross payroll for the month was Rs. 2,000,000. The distribution of payroll was 50%
direct labour, 20% indirect labour, 20% administrative staff salaries, and 10% sales staff
salaries.
What is the amount of prime cost incurred for the month of January 2019?
Rs. ___________

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51. The following information relates to a company at its year end.

Inventory at beginning of year Rs.
Raw materials 10,000
Work-in-progress 2,000
Finished goods Inventory at end of year 34,000
Raw materials 11,000
Work-in-progress 4,000
Finished goods 30,000
Purchases of raw materials 50,000
Direct wages 40,000
Royalties on goods sold 3,000
Production overheads 60,000
Distribution costs 55,000
Administration expenses 70,000
Sales 300,000
The cost of goods manufactured during the year is
(a) Rs. 147,000 (b) Rs. 151,000
(c) Rs. 153,000 (d) Rs. 154,000
52. A manufacturer has the following figures for the year ended 30 September 2016:
Rs.
Direct materials 8,000
Factory overheads 12,000
Direct labour 10,000
Increase in work-in-progress 4,000
Prime cost is
(a) Rs. 18,000 (b) Rs. 26,000
(c) Rs. 30,000 (d) Rs. 34,000
53. You are given the following information for the year ended 31 October 2017:
Rs.
Purchases of raw materials 112,000
Returns inwards 8,000
Decrease in inventories of raw materials 8,000
Direct wages 42,000
Carriage outwards 4,000
Carriage inwards 3,000
Production overheads 27,000
Increase in work-in-progress
The value of factory cost of goods completed is 10,000
(a) Rs. 174,000 (b) Rs. 182,000
(c) Rs. 183,000 (d) Rs. 202,000
54. Your firm has the following manufacturing figures.
Rs.
Prime cost 56,000
Factory overheads 4,500
Opening work in progress 6,200
Factory cost of goods completed 57,000
Closing work-in-progress is

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(a) Rs. 700 (b) Rs. 2,700

(c) Rs. 9,700 (d) Rs. 11,700
55. The prime cost of goods manufactured is the total of
(a) All factory costs before adjusting for work-in-progress
(b) All factory costs of goods completed
(c) All materials and labour (d) Direct factory costs
56. Gross profit for 20X3 can be calculated from
A Purchases for 20X3, plus inventory at 31 December 20X3, less inventory at 1 January
20X3
B Purchases for 20X3, less inventory at 31 December 20X3, plus inventory at 1 January
20X3
C Cost of goods sold during 20X3, plus sales during 20X3
D Net profit for 20X3, plus expenses for 20X3
57. A trial balance contains the following:
Rs.
Opening inventory 1,000
Closing inventory 2,000
Purchases 10,000
Purchases returned 200
Carriage inwards 1,500
Prompt payment discounts received 800
What is the cost of sales figure?
A Rs.8,800 B Rs.9,500
C Rs.10,300 D Rs.12,300
58. In times of rising prices, the FIFO method of inventory valuation, when compared to the average
cost method of inventory valuation, will usually produce
A A higher profit and a lower closing inventory value
B A higher profit and a higher closing inventory value
C A lower profit and a lower closing inventory value
D A lower profit and a higher closing inventory value
59. Inventory is valued using FIFO. Opening inventory was To units at Rs.2 each. Purchases were 30
units at Rs.3 each, then issues of 12 units were made, followed by issues of 8 units.
Closing inventory is valued at
A Rs.50 B Rs.58
C Rs.60 D Rs.70
60. An organisation's inventory at 1 July is 15 units @ Rs.3.00 each. The following movements
occur:
• 3 July 20X6 5 units sold at Rs.3.30 each
• 8 July 20X6 10 units bought at Rs.3.50 each
• 12 July 20X6 8 units sold at Rs.4.00 each
Closing inventory at 31 July, using the FIFO method of inventory valuation would be

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A Rs.31.50 B Rs.36.00
C Rs.39.00 D Rs.41.00
61. Your organisation uses the weighted average cost method of valuing inventories. During August
20X1, the following inventory details were recorded:
Opening balance 30 units valued at Rs.2 each
5 August purchase of 50 units at Rs.2.40 each
10 August issue of 40 units
18 August purchase of 60 units at Rs.2.50 each
23 August issue of 25 units
The value of the balance at 31 August 20X1 was
A Rs.172.50 B Rs.176.25
C Rs.180.00 D Rs.187.50
62. During September, your organisation had sales of Rs.148,000, which made a gross profit of
Rs.40,000. Purchases amounted to Rs.100,000 and opening inventory was Rs.34,000.
The value of closing inventory was
A Rs.24,000 B Rs.26,000
C Rs.42,000 D Rs.54,000
63. Your firm values inventory using the weighted average cost method. At 1 October 20X8, there
were 60 units in inventory valued at Rs.12 each. On 8 October, 40 units were purchased for Rs.15
each, and a further 50 units were purchased for Rs.18 each on 14 October. On 21 October, 75
units were sold for Rs.1,200.
The value of closing inventory at 31 October 20X8 was:
A Rs.900 B Rs.1,020
C Rs.1,110 D Rs.1,125
64. Inventory movements for product X during the last quarter were as follows:
January Purchases 10 items at Rs.19.80 each
February Sales 10 items at Rs.30 each
March Purchases 20 items at Rs.24.50 each
Sales 5 items at Rs.30 each
Opening inventory at 1 January was 6 items valued at Rs.15 each
Gross profit for the quarter, using the weighted average cost method, would be
A Rs.135.75 B Rs.155.00
C Rs.174.00 D Rs.483.00
65. In times of rising prices, the valuation of inventory using the FIFO method, as opposed to average
cost, will result in which ONE of the following combinations?
Cost of sales Profit Closing inventory
A Lower Higher Higher
B Lower Higher Lower
C Higher Lower Higher
D Higher Higher Lower
66. Which of the following methods of valuing inventory are allowed under IAS 2?
(i) LIFO (ii) Average cost
(iii) FIFO (iv) Replacement cost

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A (i), (ii), (iii), (iv) B (i), (ii), (iv)

C (ii), (iii) D (iii), (iv)
67. Opening inventory of raw materials was Rs.58,000, closing inventory was Rs.63,000, purchases
were Rs.256,000, purchase returns were Rs.17,000. What was cost of sales?
A Rs.256,000 B Rs.234,000
C Rs.239,000 D Rs.244,000
68. How should a loss of inventory (value Rs.15,000) caused by flooding in the company’s
warehouse be accounted for? (Assume the inventory loss is not insured.)
A Dr Trading a/c Rs.15,000
Cr l/S a/c Rs.15,000
B Dr l/S a/c Rs.15,000
Cr Trading a/c Rs.15,000
C Dr Drawings Rs.15,000
Cr Trading a/c Rs.15,000
D Dr Inventory a/c Rs.15,000
Cr Trading a/c Rs.15,000
69. Net realisable value means? (In relation to the valuation of inventory.)
A The expected selling price of the inventory.
B The expected selling price less disposals costs less, in the case of incomplete items, the
cost of completion.
C The replacement cost of the inventory.
D The market price.
70. FIFO, LIFO and average cost are inventory valuation methods. Which of the following
statements is correct?
A When prices are rising FIFO will produce the higher profit figure of all these methods.
B When prices are rising LIFO will produce the higher profit figure of all these methods.
C LIFO is a permissible valuation method under IAS 2.
D Average cost is recomputed following every dispatch or issue of inventory.
71. A company has an annual inventory count, the factory did not cease production during the
inventory count and some goods in work in progress (cost Rs.5,500) were later counted again and
included in finished goods inventory (cost Rs.7,500). As a result profit was?
A Overstated by Rs.2,000 B Overstated by Rs.7,500
C Overstated by Rs.5,500 D Overstated by Rs.13,000
72. Which of the following statements are correct?
(i) A inventory valuation should include carriage in.
(ii) A inventory valuation should exclude carriage out.
A Both correct B Both incorrect
C (i) correct, (ii) incorrect D (i) incorrect, (ii) correct
73. A company which gives its sales personnel 5% of sales price as commission, has this inventory at
the year end:

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Quantity Cost Per unit Estimated

sales price

Beads 2,000 Rs.1.50 Rs.1.53

Buttons 1,500 Rs.1.25 Rs.1.40
Bows 2,000 Rs.1.60 Rs.1.50
At what value should this inventory be recorded in the financial statements?
A Rs.7,756 B Rs.7,632
C Rs.7,875 D Rs.8,175
74. Closing inventories are deducted from purchases and opening inventories in the income statement
in order to determine the cost of sales. Of which accounting concept is this an example?
…….………………………………………………………………………………….
75. IAS 2 recognises two main ways of calculating cost of inventories. What are they? Complete the
blanks below
1 …………………………………………………………………………………..
2 …………………………………………………………………………………..
THE FOLLOWING DATA RELATES TO QUESTIONS 76 TO 78
The trading account of T is set out below:
Trading Account for the year ended 30 April 20X1
Turnover Rs.,000 Rs.,000
Opening inventory 1,000
Purchases 200
700
Closing inventory 900
Cost of goods sold 300 600
Gross profit 400

The opening and closing inventory in T Co was valued on a FIFO basis. On a LIFO basis the opening and
closing inventory would have been valued at Rs.180,000 and Rs.270,000 respectively.
76. The gross profit if LIFO had been used for inventory valuation would have been
Rs. ……………………..
77. What are the inventory days', using average inventory during the year, on the assumption that
inventory is valued on the FIFO basis?
……………………………………………………………………………………..
……………………………………………………………………………………..
……………………………………………………………………………………..
……………………………………………………………………………………..
78. What are the ’inventory days', using the average method, on the assumption that inventory is
valued on the LIFO basis?
……………………………………………………………………………………..
……………………………………………………………………………………..
……………………………………………………………………………………..
……………………………………………………………………………………..

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79. In times of rising prices, the FIFO method of inventory valuation, when compared to the average
cost method of inventory valuation, will usually result in which-of the following?
A higher profit and a lower closing inventory value
B A higher profit and a higher closing inventory value
C A lower profit and a lower closing inventory value
D A lower profit and a higher closing inventory value
80. Daniel made an error when he calculated the value of his closing inventory, which means that the
inventory is overvalued.
How are his net profits for the year and net assets at the end of the year affected by this error?
Net profit Net assets
A Overstated Understated
B Overstated Overstated
C Understated Understated
D Understated Overstated
81. Your organisation uses the continuous weighted average cost method of valuing inventories.
During August 20X1, the following inventory details were recorded:
Opening balance 30 units valued at Rs.2 each
5 August Purchase of 50 units at Rs.2.40 each
10 August Issue of 40 units
18 August Purchase of 60 units at Rs.2.50 each
23 August Issue of 25 units
What is the value of the inventory balance at 31 August 20X1?
A Rs.172.50 B Rs.176.25
C Rs.180.00 D Rs.187.50
82. During May 20X7, Sarah's purchases were Rs.126,500, and her sales were Rs.150,000. Sarah's
gross profit was 20% of sales. The value of her inventory at 1 May 20X7 was Rs.12,5.00.
What was the value of Sarah's inventory at 31 May 20X7?
A Rs.6,000 B Rs.11,000
C Rs.14,000 D Rs.19,000
83. Paul discovered that goods with a cost of Rs.5,000 and a net realisable value of Rs.3,000 have
been omitted from the year-end inventory count.
What adjustment should be made to closing inventory?
A Increase of Rs.5,000 B Increase of Rs.3,000
C Increase of Rs.2,000 D Decrease of Rs.2,000
84. Which method of inventory valuation is used when issues are assumed to be taken from inventory
in the order in which they were received?
A Last in, first out
B First in, first out
C Periodic weighted average
D Continuous weighted average

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85. At 30 June 20X2 Dilip's inventory was valued at its cost of Rs.45,400. This included items
costing Rs.2,600 which have since been superseded by an updated design. Dilip will be able to
sell these items through an agent for Rs.1,400. The agent's commission will be 10% of selling
price.
What was the correct value of closing inventory at 30 June 20X2?
A Rs.45,400 B Rs.44,200
C Rs.44,060 D Rs.42,800
86. Lavinia valued her inventory at 31 December 20X2 at its cost of Rs.11,480. This included some
items which cost Rs.975 which have been hard to sell. Lavinia intends to have these items
repacked at a cost of Rs.225. This will allow her to sell them for Rs.450.
What was the correct value of closing inventory at 31 December 20X2?
A Rs.10,505 B Rs.10,730
C Rs.11,480 D Rs.11,705
87. Which of the following is the correct formula to calculate cost of goods sold?
A Purchases - Opening inventory - Closing inventory
B Purchases + Opening inventory + Closing inventory
C Purchases - Opening inventory + Closing inventory
D Purchases + Opening inventory - Closing inventory
88. Tim has recently commenced trading. The materials he uses in his business are subject to regular
price rises. He is unsure how to value his inventory and is trying to decide whether to use first in,
first out (FIFO), or continuous weighted average.
Which of the following statements is correct?
A Tim’s profit will be unaffected by the method of inventory valuation.
B FIFO will lead to a higher reported profit.
C Continuous weighted average will lead to a higher reported profit.
D The profit figure will be more accurate if FIFO is used.
89. When a cost manager wants to know the cost of “something” then this “something” is known as
(a) Cost centre (b) Cost object
(c) Cost unit (d) Cost behaviour
90. Which of the following is an example of financing cost
(a) Selling cost (b) Administrative cost
(c) Loan interest cost (d) Research and development cost
91. Which of the following statement is incorrect?
(a) Variable cost per unit remains fixed but varies in total
(b) Fixed cost per unit varies but remains fixed in total
(c) Selling cost is included in the cost of product
(d) Direct labour is a component of both prime cost and conversion cost
92. Among the following given costs, which can be best described as semi variable cost?
(a) Direct material cost (b) Electricity charges
(c) Basic pay of direct labour (d) Plant’s supervisor’s salary

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93. What is a direct cost

(a) Supervisor’s wages (b) Raw material used
(c) Lightening and heating (d) Depreciation of machinery
94. A particular cost is fixed in total for a period. What is the effect on the cost per unit of a reduction
in activity of 50%?
(a) Cost per unit increases by 50% (b) Cost per unit reduces by 50%
(c) Cost per unit increases by 100% (d) Cost per unit is unchanged.
95. A manufacturing company has four types of cost (identified as T1, T2, T3 and T4). The total cost
for each type at two different production levels is:
Cost f type Total cost for125 units Rs. Total cost for180 units Rs.
T1 1,000 1,260
T2 1,750 2,520
T3 2,475 2,826
T4 3,225 4,644
Which two cost types would be classified as being semi-variable?
(a) T1 and T3 (b) T1 and T4
(c) T2 and T3 (d) T2 and T4
96. Costs which are included in the costs of inventories are called
(a) Period costs (b) Selling costs
(c) Product costs (d) Distribution costs
97. A business pays a salesman a basic salary, plus commission based on how much he sells. Which
type of cost is the salesman’s total earnings?
(a) Fixed (b) Semi-variable
(c) Stepped (d) Variable
98. Which cost is treated as variable cost of a motor transport company?
(a) Advertising (b) Driver insurance
(c) Fuel (d) Vehicle licence
99. Which of the following types of cost are assumed to stay the same per unit, irrespective of the
volume of output?
(a) Overheads (b) Fixed
(c) Variable (d) Relevant
100. A semi variable cost would:
(a) be zero when output is zero and would decrease in direct proportion to output
(b) be more than zero if no products were made and would then increase in direct proportion
to output
(c) be a fixed amount when output was zero and would not increase in direct proportion to
output
(d) be zero when output is zero and would increase in direct proportion to output

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MULTIPLE CHOICE QUESTIONS (MCQ) SOLUTIONS

01. D Sum of direct material and direct labour cost

02. D Cost of direct labour + production overhead
03. D Can be directly identified with a product of service
04. D depreciation of kitchen equipment
rent paid for the restaurant building
05. A Royalty paid on number of units of product SK produced
06. A&C Chocolates chips purchased
Hours of cake decorator’s time
07. B&D 5 litres of lubricant for sewing machines purchased
Electricity bill of production area
08. B Wages of operator in the cutting department
09. D Nails and screws
10. D Depreciation of ovens
11. B Bricklayer in a construction company
12. C Wages of store assistant in a factory store
13. C Plant and Machinery (installed in factory premises)
14. D Dr. Inventory (WIP) Rs. 176,000
Cr. Inventory (Materials) Rs. 176,000
15. C Dr. Production Overheads Rs. 30,000
Cr. Inventory (Materials) Rs. 30,000
16. D Dr. Production overheads Rs. 2 million
Dr. Operating expenses Rs. 1 million
Cr. Accumulated depreciation Rs. 3 million
Rs. (82m – 10m) = Rs. 72m / 20 years = Rs. 3.6m x 10/12 = Rs. 3 million
17. B Dr. WIP Rs. 19.6m
Dr. Production OH Rs. 3.2m
Cr. Materials Control Rs. 22.8m
18. A Indirect worker base rate = Rs. 600 x 200 hours = Rs. 120,000
Indirect worker overtime = Rs. 200 x 40 hours = Rs. 8,000
Direct worker overtime = Rs. 280 x 110 hours = Rs. 30,800
Rs. 158,800
19. D Rs. 621,600 (i.e. Rs. 840 x 740 hours)
Direct workers’ general overtime premium is charged to production overheads
20. C Dr. WIP Rs. 20m & Dr. Production OH Rs. 3.7m & Cr. Wages Control Rs.
23.7m

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21. A All of the listed methods may be used for absorption.

22. B Debit Finished goods & Credit Inventory (WIP)
23. D Debit Cost of sales (P&L) & Credit Finished goods
24. A 12,400 hours’ x Rs. 425 per hour = Rs. 5,270,000
25. C Absorbed Overheads = Rs. 425 x (12400 x 102%) = Rs. 5,375,400
26. B Actual – Absorbed = Rs. 5,638,900 – 5,375,400 = Rs. 263,500 under
27. D Absorbed overheads > Actual overheads
28. C Actual production x Pre-determined rate
29. A Debit Production Overheads & Credit Cash / Accrual
30. B Debit Inventory (WIP) & Credit Production Overheads
31. C Debit Cost of sales (P&L) & Credit Production Overheads
32. D Debit Production Overheads & Credit Cost of sales (P&L)
33. Rs. 465,000 Opening inventory + Purchases (net)
Rs. 75,000 + (410,000 – 20,000) = Rs. 465,000
34. Rs. 360,000 Opening inventory + Purchases (net) – Closing inventory
Rs. 75,000 + (410,000 – 20,000) – 105,000= Rs. 360,000
35. Rs. 432,000 Prime Cost = All direct costs
Rs. 360,000 + 60,000 + 12,000 (royalty) = Rs. 432,000
36. Rs. 51,500 Rs. 12,500 indirect + Rs. 24,000 x 80% Depreciation + Rs. 19,800 rent and
utilities = Rs. 51,500
37. Rs. 483,500 Prime Cost + Production overheads
Rs. 432,000 + 51,500 = Rs. 483,500
38. Rs. 553,500 Opening WIP + Purchases of WIP + Factory Cost
Rs. 40,000 + 30,000 + 483,500 = Rs. 553,500
39. Rs. 518,500 Opening WIP + Purchases of WIP + Factory Cost – Closing (WIP)
Rs. 40,000 + 30,000 + 483,500 – 35,000 = Rs. 518,500
40. Rs. 658,500 Opening FG + Purchases FG + CGM
Rs. 60,000 + 80,000 + 518,500 = Rs. 658,500
41. Rs. 588,500 Opening FG + Purchases FG + CGM – Closing FG
Rs. 60,000 + 80,000 + 518,500 – 70,000 = Rs. 588,500
42. Rs. 700,000 Rs. 500,000 + 200,000 = Rs. 700,000
43. Rs. 700,000 Rs. 500,000 + 200,000 + 30,000 – 30,000 = Rs. 700,000
44. Rs. 508,500 Opening FG + CGM – Closing FG
Rs. 60,000 + 518,500 – 70,000 = Rs. 508,500
45. D = Factory Cost + Opening inventory (WIP) – Closing inventory (WIP)
46. D Prime Cost + Production Overheads

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47. Rs. 373,000 Rs.

Raw materials - opening 39,000
Raw material purchases 400,000
Raw material available for consumption 439,000
Raw materials - closing (66,000)
Raw material consumed 373,000

48. Rs. 673,000 Rs.

Raw materials consumed 373,000
Direct labour 300,000
Prime cost 673,000

49. Rs. 249,000 Rs.

Indirect labour cost 40,000
Rent for factory 120,000
Depreciation - Factory equipment 70,000
Factory utilities - 60% 12,000
Factory insurance – 70% 7,000
249,000

50. Rs. 1,460,000 Rs.

Raw materials - opening 80,000
Raw material purchases 500,000
Raw material available for consumption 580,000
Raw materials - closing (120,000)
Raw material consumed 460,000
Direct labour – Rs. 2,000,000 x 50% 1,000,000
Prime cost 1,460,000
51 A 52 A
53 B 54 C 55 D
56. D Gross profit - expenses = net profit.
57. C $
Purchases 10,000
Less purchase returns (200)
9,800
Add carriage inwards 1,500
Add opening Inventory 1,000
Less closing Inventory (2,000)
Cost of sales 10,300
Note. $800 prompt payment discount received will appear as income in the
Income statement. It is not deducted from cost of sales.
58. B FIFO will treat Inventory on hand as the most recent purchases, which are the
most expensive.
59. C Closing inventory = 20 units @ $3 each = $60
60. D 2 @$3.00+ 10 @$3.50 = $41.00

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61. C
Units Unit cost Total Average
$ $ $
Opening inventory 30 2.00 60
5 August purchase 50 2.40 120
80 180 2.25
10 August issue (40) 2.25 (90)
40 90
18 August purchase 60 2.50 150
100 240 2.40
23 August issue (25) 2.40 (60)
75 180
62. B
$ $
Sales 148,000
COS Opening inventory 34,000
Purchases 100,000
134,000
Closing inventory (bal fig) (26,000)
108,000
40,000
63. C
Quantity Value
$
1 October (60 x $12) 60 720
8 October (40 x $15) 100 1,320
14 October (50 x $18) 150 2,220 (ie average cost $14.80)
21 October (75 x $14.80) 75 1,110
64. B
$ No $ Average
Inventory card 6 @$15 90 6 90
10 @$19.80 198 16 288 18.00
10 @ $18 (180) 6 108 18.00
20 @ $24.50 490 26 598 23.00
5 @$23 (115) 21 483

$
Sales (15 @$30) 450
Issues (10 @ $18 + 5 @ $23) (295)
Profit 155

65. A IFO values inventory at the latest prices.

66. C IAS 2 specifically discourages the use of LIFO and replacement costs.
67. B Correct, $58,000 + $256,000 - $17,000 - $63,000 = $234,000.
A Incorrect, returns and inventory changes must be allowed for.
C Incorrect, changes in inventory levels must be allowed for.
D Incorrect, you have transposed opening and closing inventories.

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68. B Correct. This loss is not part of cost of sales.

A This is a reversal error.
C Incorrect; loss of inventory is an expense, if the inventory had been for
proprietors own use then the drawings account would be used.
D Incorrect; the inventory has disappeared, the debit to Inventory will
increase inventory!
69. B Correct. The amount which can be realised, less any further expenses.
A Incorrect.
C Incorrect.
D Incorrect.
70. A Correct, FIFO will produce the highest valuation of closing inventory of the
three methods, giving the higher profit figure.
B Incorrect, under LIFO costing closing inventory will be valued at the
earlier prices.
C Incorrect, LIFO is not permissible under IAS 2.
D Incorrect, average cost will be recalculated after every new delivery
into Inventory occurs.
71. C Correct, the inventory would be included at the lower of cost or NRV -
assuming it was saleable at a profit the appropriate cost would be that relating
to its finished goods state.
72. A Carriage out will come under distribution costs in the income statement.
73. B
Net realizable value
Quantity Cost
(95% of sales price) Valuation
Per unit Total
Beads 2,000 $1.50 $1.4535 $1.4535 2,907
Buttons 1,500 $1.25 $1.33 $1.25 1,875
Bows 2,000 $1.60 $1,425 $1,425 2,850
7,632
74. The accruals concept
75. 1. FIFO (first in, first out)
2. Average cost
76. Gross profit: FIFO $400 + adjustment opening inventory ($200 - $180) - adjustment closing
inventory ($270 - $300) = $390,000
(200 + 300)/2
77. FIFO x 365 days = 152 days
600
(180 + 270)/2
78. FIFO x 365 days = 135 days (But remember that IAS 2 does not allow LIFO)
610
79. B Lower-valued inventory has been used in production and higher-valued
inventory remains on hand.
80. B Both net profit and net assets have been overstated.

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81. C
Units Unit cost Total Average
$ $
Opening inventory 30 2.00 60
5 August purchase 50 2.40 120
80 180 2.25
10 August issue (40) 2.25 (90)
40 90
18 August purchase 60 2.50 150
100 240 2.40
23 August issue (25) 2.40 (60)
75 180
82. D
$
Opening inventory 12,500
Purchases 126,500
Sales at cost price (150,000 x 80%) (120,000)
Closing inventory 19,000
83. B The inventory has been omitted, and must be included at its net realisable value
of $3,000.
84. B First in, first out
85. C The correct answer is $44,060. $
Total sold at cost 45,400
Less: Obsolete inventory at cost (2,600)
42,800)
Add: Net realisable value of obsolete inventory
- Sales value 1,400
- 10% Commission (140) 1,260
Closing inventory 30 November 20X2 44,060
86. B The correct answer is $10,730.
The hard to sell items have a net realisable value of $450 - $225 = $225
So, the value of the closing inventory should have been:
$
Original 11$480
Less: Hard to sell inventory at cost (975)
Add: NRV 225
Closing inventory at 31 December 20X2 10,730
87. D Purchases + Opening inventory - Closing inventory
88. B FIFO will lead to higher reported profit because his cost of sales will be based
on the earliest (and. therefore cheapest) purchases.
89. B Cost object
90. C Loan interest cost
91. C Selling cost is NOT included in the cost of product.
92. B Electricity charges
93. B
94. C Cost per unit increases by 100%

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95. A T1 and T3
Cost type Total cost for 125 units Total cost for 180 units
T-1 1,000 1,260
Variable cost/unit 1,000/125 = 8/unit 1,260/180 = 7/unit
T-2 1,750 2,520
Variable cost/unit 1,750/125 = 14/unit 2,520/180 = 14/unit
T-3 2,475 2,826
2,475/125 19.8/unit 2,826/180 = 15.7/unit
T-4 3,225 4,644
Variable cost/unit 3,225/125 =25.5/unit 4,644/180 =25.8/unit

96. C Product costs

97. B Semi-variable
98. C Fuel
99. C
100. B

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MULTIPLE CHOICE QUESTIONS (MCQs)

01. A complete set of financial statement does not include;

(a) a statement of financial position as at the end of the period
(b) a statement of comprehensive income for the period
(c) Aging analysis of receivables
(d) a statement of changes in equity for the period
02. Following is the trial balance of Salman for the year ended 30 June 2014
Rs.
Insurance 2,000,000
Insurance is prepaid to the extent of Rs. 650,000.
What is the amount of insurance premium to be shown in the statement of comprehensive income
and statement of financial position?
(a) Insurance expense Rs. 2,000,000; Prepaid insurance Rs. 650,000
(b) Insurance expense Rs. 2,650,000; Prepaid insurance Rs. 650,000
(c) Insurance expense Rs. 650,000; Prepaid insurance Rs. 2,000,000
(d) Insurance expense Rs. 1,350,000; Prepaid insurance Rs. 650,000
03. Salman has prepared his trial balance for the year ended 30 June 2014.
He has provided following information relating to stock: Closing stock as on 30 June 2014
amounted to Rs. 237,500 thousand.
What is the correct accounting entry to record the adjustment?
(a) Dr inventory Rs. 237,500,000 Cr Cost of sales Rs. 237,500,000
(b) Dr Cost of sales Rs. 237,500,000 Cr Inventory Rs. 237,500,000
(c) Dr inventory Rs. 237,500,000 Cr Purchases Rs. 237,500,000
(d) Dr Purchases Rs. 237,500,000 Cr Inventory Rs. 237,500,000
04. Salman has prepared his trial balance for the year ended 30 June 2014. He has provided following
information relating to drawings:
Debit Rs. 000
Drawings 30,500
Salman’s son works as the head of administration and received a salary of Rs. 150 thousand per
month, which has been included in drawings.
What is the amount of drawings to be shown in the statement of financial position?
(a) Rs. 30,500 (b) Rs. 30,350
(c) Rs. 32,300 (d) Rs. 28,700

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05. Azam is in process of preparation of trial balance for the year ended 30 June 2015.
Debit Credit
Rs. in ‘000’
Purchases 105,950
Azam withdrew goods costing Rs. 4,000 thousand for personal use during the year. However, no
entry was made to record the withdrawal of goods.
What is the amount of purchases to be shown in statement of comprehensive income?
(a) Rs. 105,950,000 (b) Rs. 4,000,000
(c) Rs. 101,950,000 (d) Rs. 109,950,000
06. Following is the trial balance of Salman for the year ended 30 June 2014:
Rs. in ‘000
Debit Credit
Trade discount 2,432 Sales 353,300
Sales return 10,000
Discount allowed 4,500
Assistant account has informed that sales was recorded incorrectly on gross amount and trade
discount was debited to correct it.
What is the amount of sales to be shown in statement of comprehensive income?
(a) Rs. 353,300 (b) Rs. 340,868
(c) Rs. 336,368 (d) Rs. 346,368
07. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who
deals in office machines:
Debit Credit
Rs. in million
Bank loan 160
Interest on bank loan 8

Additional information
The bank loan was acquired on 1 April 2015. The principal amount is repayable in five equal
annual instalments on 31 March each year. Interest is payable at 10% per annum on six monthly
basis and is recorded at the time of payment.
What adjusting entry is required to record interest payable as at 31 December 2015?
(a) Dr Interest expense Rs. 4 million Cr Interest payable Rs. 4 million
(b) Dr Interest expense Rs. 4 million Cr Bank loan Rs. 4 million
(c) Dr Interest expense Rs. 8 million Cr Interest payable Rs. 8 million
(d) Dr Interest expense Rs. 12 million Cr Interest payable Rs. 12 million

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08. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who
deals in office machines:
Debit Credit
Rs. in million
Other income 15
Additional information
Review of other income revealed the following information:
On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and was
credited to other income. The balance amount would be paid on completion of the contract.
What is the amount of unearned income to be shown in statement of financial position?
(a) Rs. 1.8 million (b) Rs. 3.6 million
(c) Rs. 0.2 million (d) Rs. 1.6 million
09. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who
deals in office machines:
Debit Credit
Rs. in million
Other income 15
Additional information
On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and was
credited to other income. The balance amount would be paid on completion of the contract.
What is the amount of other income to be shown in statement of comprehensive income?
(a) Rs. 15 million (b) Rs. 14.8 million
(c) Rs. 13.2 (d) Rs. 11.4
10. Which of the following is not a characteristic of service organization?
(a) A large percentage of assets comprise inventory
(b) A large percentage of assets comprise receivable
(c) The funds of service companies are usually tied up towards accounts receivable
(d) There is no line item for the cost of goods sold in the income statement of service
companies.
11. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4
Bad debts 3
Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and
is unable to pay anything.
It has been decided to calculate a provision of 6% for the year.
What is the amount of closing balance of provision for doubtful debts account?
(a) Rs. 5.94 million (b) Rs. 3 million
(c) Rs. 6 million (d) Rs. 5.76 million

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12. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4.5
Bad debts 3

Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and
is unable to pay anything.
It has been decided to calculate a provision of 6% for the year.
What is the amount of bad and doubtful debts expense in statement of comprehensive income?
(a) Rs. 4.44 (b) Rs. 5.44 million
(c) Rs. 1.44 (d) Rs. 5.94
13. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4
Bad debts 3

Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and
is unable to pay anything.
It has been decided to calculate a provision of 6% for the year.
What is the number of receivables to be shown in statement of financial position?
(a) Rs. 92 million (b) Rs. 94.06
(c) Rs. 91.06 (d) Rs. 90.06
14. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Administration expenses 150
Additional information
Electricity expense of Rs. 1.5 million is outstanding. No adjustment for bill payable has been
recorded. Electricity expense paid during the year have already been included in administration
expenses.
Included in the administration expenses in trial balance advance rent is Rs. 1.2 million.
What is the amount of administration expenses to be shown in statement of comprehensive
income?
(a) Rs. 150.3 million (b) Rs. 151.5
(c) Rs. 152.7 (d) Rs. 150

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15. A business has provided following extracts from trial balance as at 31 December 2018:
Debit Credit
Rs. in million
Administration expenses 150
Additional information
Electricity expense of Rs. 1.5 million is outstanding. No adjustment for bill payable has been
recorded.
Electricity expense paid during the year have already been included in administration expenses.
Included in the administration expenses in trial balance advance rent is Rs. 1.2 million.
Which of the following is correct regarding administration expenses?
(a) Accrued expense Rs. 1.2 million; Prepayment Rs. 1.5 million
(b) Accrued expense Rs. 1.5 million; Prepayment Rs. 1.2 million
(c) Accrued expenses Rs. 2.7 million
(d) Prepayment Rs. 2.7 million
16. Following is the summarised trial balance of Fortune Traders (FT) for the year ended 30 June
2016;
Debit Credit
Rs. ‘000’
Plant & machinery – cost 6,650
Plant & mach. – Acc. Dep. as at 1 July 2015 2,414

Additional information:
(i) On 1 March 2016, FT paid an advance of Rs. 330,000 for purchase of a machine and
debited it to plant and machinery. The machine was delivered on 1 September 2016.
(ii) FT depreciates its fixed assets from the month of addition. Depreciation is to be charged
on written-down value (WDV) as follows:
Plant & machinery 10%
What is the amount of depreciation to be charged to statement of profit or loss?
Rs. ___________
17. Following is the summarised trial balance of Fortune Traders (FT) for the year ended 30 June
2016;
Debit Credit
Rs. ‘000’
Plant & machinery – cost 6,650
Plant & mach. – Acc. Dep. as at 1 July 2015 2,414
Additional information:
(i) On 1 March 2016, FT paid an advance of Rs. 330,000 for purchase of a machine and
debited it to plant and machinery. The machine was delivered on 1 September 2016.
(ii) FT depreciates its fixed assets from the month of addition. Depreciation is to be charged
on written-down value (WDV) as follows:
Plant & machinery 10%
What is the amount of Plant & machinery to be shown in statement of financial position?
Rs. ___________

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18. Azam owns a retail outlet with the name Azam Autoparts Store. The trial balance as at 30 June
2015 is as follows:
Debit Credit
Rs. in ‘000’
Bank loan 5,050
Interest expenses 600
167,436 167,436
Bank loan was received on 1 July 2014. Interest payable for the month of June 2015 has been
credited to the loan account.
What is the amount of interest payable to be shown in statement of financial position?
Rs. ___________
19. Rainbow Lights (RL) has prepared a trial for the year ended 31 December 2016:
Debit Credit
Rs. in million
Miscellaneous income 45
Additional information
Miscellaneous income includes Rs. 12 million received against an annual maintenance contract
expiring on 30 April 2017.
What is the amount of Miscellaneous income to be shown in statement of comprehensive
income?
Rs. ___________
20. Rainbow Lights (RL) has prepared a trial for the year ended 31 December 2016:
Debit Credit
Rs. in million
Miscellaneous income 45
Additional information
Miscellaneous income includes Rs. 12 million received against an annual maintenance contract
expiring on 30 April 2017.
What is the amount of Miscellaneous income to be shown in statement of financial position as
unearned income?
Rs. ___________
21. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Stock in trade 31-12-2017 3,900
Cost of sales 23,580
While carrying out the physical inventory count at year-end, following matters were identified:
• Goods costing Rs. 1,000 were slightly defective. These can be sold for Rs. 1,130 after
incurring a cost of Rs. 200.
• Goods costing Rs. 670 purchased on credit were returned to a supplier on 28 December
2017 but the return was not recorded in the books.
Calculate the “Cost of Sales” amount that would be presented in statement of comprehensive
income of TE for the year ended 31 December 2017.
Rs. _________________

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22. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Stock in trade 31-12-2017 3,900
Cost of sales 23,580
While carrying out the physical inventory count at year-end, following matters were identified:
• Goods costing Rs. 1,000 were slightly defective. These can be sold for Rs. 1,130 after
incurring a cost of Rs. 200.
• Goods costing Rs. 670 purchased on credit were returned to a supplier on 28 December
2017 but the return was not recorded in the books.
Calculate the “Inventory” amount that would be presented in statement of financial position of TE
as at 31 December 2017.
Rs. _________________
23. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Advances 450
Property, plant and equipment – Cost 12,500
Accumulated depreciation 4,630
Additional information:
• A machine costing Rs. 450 was received on 1 October 2017 against 100% advance
payment. The advance has not yet been adjusted due to non-receipt of the invoice.
• TE depreciates property, plant & equipment at 15% per annum on reducing balance
method.
Calculate the “Depreciation expense” that would be presented in statement of comprehensive
income of TE for the year ended 31 December 2017.
Rs. _________________ (to nearest rupee)
24. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Advances 450
Property, plant and equipment – Cost 12,500
Accumulated depreciation 4,630
Additional information:
• A machine costing Rs. 450 was received on 1 October 2017 against 100% advance
payment. The advance has not yet been adjusted due to non-receipt of the invoice.
• TE depreciates property, plant & equipment at 15% per annum on reducing balance
method.
Calculate “property, plant and equipment” that would be presented in statement of financial
position of TE as at 31 December 2017.
Rs. _________________ (to nearest rupee)

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25. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Accrual and other payables 1,320
Miscellaneous income 940
Additional information:
• On 1 October 2017, 50% advance received for an annual maintenance contract of Rs. 480
was credited to miscellaneous income. Remaining amount would be received at the end
of the contract. Services are rendered evenly throughout the contract period.
• Maintenance services for Rs. 150 were rendered in December 2017 but income has been
recorded in January 2018 on receipt of the amount.
Calculate “Prepayments and advances” that would be presented in statement of financial position
of TE as at 31 December 2017.
Rs. _________________
26. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Accrual and other payables 1,320
Miscellaneous income 940
Additional information:
• On 1 October 2017, 50% advance received for an annual maintenance contract of Rs. 480
was credited to miscellaneous income. Remaining amount would be received at the end
of the contract. Services are rendered evenly throughout the contract period.
• Maintenance services for Rs. 150 were rendered in December 2017 but income has been
recorded in January 2018 on receipt of the amount.
Calculate “Accrual and other payables” that would be presented in statement of financial position
of TE as at 31 December 2017.
Rs. _________________
27. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Accrual and other payables 1,320
Miscellaneous income 940
Additional information:
• On 1 October 2017, 50% advance received for an annual maintenance contract of Rs. 480
was credited to miscellaneous income. Remaining amount would be received at the end
of the contract. Services are rendered evenly throughout the contract period.
• Maintenance services for Rs. 150 were rendered in December 2017 but income has been
recorded in January 2018 on receipt of the amount.
Calculate “Miscellaneous income” that would be presented in statement of comprehensive
income of TE for the year ended 31 December 2017.
Rs. _________________

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28. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Financial charges 700
12% long term loan 5,150

Additional information:
Interest on the loan is paid in arrears on 1 April and 1 October each year. Interest accrued for the
quarter ended 31 December 2017 has been credited to loan account.
Calculate “Financial charges” that would be presented in statement of comprehensive income of
TE for the year ended 31 December 2017.
Rs. _________________
29. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Financial charges 700
12% long term loan 5,150
Additional information:
Interest on the loan is paid in arrears on 1 April and 1 October each year. Interest accrued for the
quarter ended 31 December 2017 has been credited to loan account.
Calculate “Long term loan” that would be presented in statement of financial position of TE as at
31 December 2017.
Rs. _________________
30. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Rent and insurance 2,900
Drawings 490
Rent and insurance include:
• annual insurance premium of Rs. 800 for the health policy arranged by TE for the
department heads and the owner’s family members. Premium pertaining to the owner’s
family members is Rs. 200. The policy is valid up to 30 June 2018.
• Rs. 1,200 paid against the annual rent agreement expiring on 31 August 2018. According
to the rent agreement, the rent paid would not be refunded in case the building is vacated
earlier.
Calculate “Drawings” that would be presented in statement of financial position of TE as at 31
December 2017.
Rs. _________________

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31. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Rent and insurance 2,900
Drawings 490
Rent and insurance include:
• annual insurance premium of Rs. 800 for the health policy arranged by TE for the
department heads and the owner’s family members. Premium pertaining to the owner’s
family members is Rs. 200. The policy is valid up to 30 June 2018.
• Rs. 1,200 paid against the annual rent agreement expiring on 31 August 2018. According
to the rent agreement, the rent paid would not be refunded in case the building is vacated
earlier.
Calculate “Prepayment and advances” that would be presented in statement of financial position
of TE as at 31 December 2017.
Rs. _________________
32. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Rent and insurance 2,900
Drawings 490
Rent and insurance include:
• annual insurance premium of Rs. 800 for the health policy arranged by TE for the
department heads and the owner’s family members. Premium pertaining to the owner’s
family members is Rs. 200. The policy is valid up to 30 June 2018.
• Rs. 1,200 paid against the annual rent agreement expiring on 31 August 2018. According
to the rent agreement, the rent paid would not be refunded in case the building is vacated
earlier.
Calculate “Rent and insurance” that would be presented in statement of comprehensive income of
TE for the year ended 31 December 2017.
Rs. _________________
33. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Trade receivables 4,400
Bad debts expense 230
Allowance for doubtful debts 220

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TE maintains provision for doubtful receivables according to the age analysis of the outstanding
balances. Relevant details are as under:
Trade receivables as on 31 December 2017 Total
Less than 4-6 7-12 More than
3 months months months 1 year
Outstanding balances (Rs.) 1,970 1,000 900 530 4,400
Required provision - 5% 10% 20%

Calculate “Bad and doubtful debts expense” that would be presented in statement of
comprehensive income of TE for the year ended 31 December 2017.
Rs. _________________
34. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Trade receivables 4,400
Bad debts expense 230
Allowance for doubtful debts 220
TE maintains provision for doubtful receivables according to the age analysis of the outstanding
balances. Relevant details are as under:
Trade receivables as on 31 December 2017 Total
Less than 4-6 7-12 More than
3 months months months 1 year
Outstanding balances (Rs.) 1,970 1,000 900 530 4,400
Required provision - 5% 10% 20%
Calculate “Trade receivables (net)” that would be presented in statement of financial position of
TE as at 31 December 2017.
Rs. _________________
35. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs.
Revenue 1,200,000
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Carriage outwards 6,000
Administrative expenses 360,000
Distribution costs 150,000
Return inwards 1,000

Inventory valuation at 31 December 2021 was Rs. 60,000

Calculate “Administrative expenses” that would be presented in statement of comprehensive
income of GE for the year ended 31 December 2021.
Rs. _________________

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36. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs.
Revenue 1,200,000
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Carriage outwards 6,000
Administrative expenses 360,000
Distribution costs 150,000
Return inwards 1,000

Inventory valuation at 31 December 2021 was Rs. 60,000

Calculate “Distribution costs” that would be presented in statement of comprehensive income of
GE for the year ended 31 December 2021.
Rs. _________________
37. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs.
Revenue 1,200,000
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Carriage outwards 6,000
Administrative expenses 360,000
Distribution costs 150,000
Return inwards 1,000

Inventory valuation at 31 December 2021 was Rs. 60,000

Calculate “Cost of sales” that would be presented in statement of comprehensive income of GE
for the year ended 31 December 2021.
Rs. _________________
38. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs.
Revenue 1,200,000
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Carriage outwards 6,000
Administrative expenses 360,000
Distribution costs 150,000
Return inwards 1,000

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Inventory valuation at 31 December 2021 was Rs. 60,000

Calculate “Gross profit” that would be presented in statement of comprehensive income of GE for
the year ended 31 December 2021.
Rs. _________________
39. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs. million
Freehold land and building – cost (Land Rs. 70 120
million)
Accumulated depreciation (Land and building) 1 Jan 20
2021
Plant and equipment – Cost 120
Accumulated depreciation (plant & equipment) 1 Jan 15
2021

The freehold building is depreciated on a straight line basis over its estimated useful life of 50
years. The plant and equipment is depreciated on a reducing balance basis at the rate of 15%.
There were no purchases or disposals of non-current assets during the year.
Calculate “Depreciation expense” that would be presented in statement of comprehensive income
of GE for the year ended 31 December 2021.
Rs. _________________ (million)
40. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs. million
Freehold land and building – cost (Land Rs. 70 120
million)
Accumulated depreciation (Land and building) 1 Jan 20
2021
Plant and equipment – Cost 120
Accumulated depreciation (plant & equipment) 1 Jan 15
2021

The freehold building is depreciated on a straight line basis over its estimated useful life of 50
years. The plant and equipment is depreciated on a reducing balance basis at the rate of 15%.
There were no purchases or disposals of non-current assets during the year.
Calculate “Property, plant and equipment” that would be presented in statement of financial
position of GE as at 31 December 2021.
Rs. _________________ (million)
41. The following is an extract from the trial balance of Moon Trading (MT) as at 31 December
2015:
Debit Credit
Rs. million
Prepayments and other receivables 9
Accrued expenses and unearned income 25
Other income 15

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Review of other income revealed the following information:

• Services for certain contracts amounting to Rs. 1.2 million were rendered in December
2015 but invoices thereof were processed in January 2016.
• On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and
was credited to other income. The balance amount would be paid on completion of the
contract.
Calculate “Prepayments and other receivables” that would be presented in statement of financial
position of MT as at 31 December 2015.
Rs. _________________ (million)
42. The following is an extract from the trial balance of Moon Trading (MT) as at 31 December
2015:
Debit Credit
Rs. million
Prepayments and other receivables 9
Accrued expenses and unearned income 25
Other income 15
Review of other income revealed the following information:
• Services for certain contracts amounting to Rs. 1.2 million were rendered in December
2015 but invoices thereof were processed in January 2016.
• On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and
was credited to other income. The balance amount would be paid on completion of the
contract.
Calculate “Accrued expenses and unearned income” that would be presented in statement of
financial position of MT as at 31 December 2015.
Rs. _________________ (million)
43. The following is an extract from the trial balance of Moon Trading (MT) as at 31 December
2015:
Debit Credit
Rs. million
Prepayments and other receivables 9
Accrued expenses and unearned income 25
Other income 15

Review of other income revealed the following information:

• Services for certain contracts amounting to Rs. 1.2 million were rendered in December
2015 but invoices thereof were processed in January 2016.
• On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and
was credited to other income. The balance amount would be paid on completion of the
contract.
Calculate “Other income” that would be presented in statement of comprehensive income of MT
for the year ended 31 December 2015.
Rs. _________________ (million)

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CHAPTER-09 PREPARATION OF FINANCIAL STATEMENTS

44. The following is an extract from the trial balance of Qambar Enterprises (QE) as at 31 December
2018:
Debit Credit
Rs.
Rent and insurance 545,000
Rent and insurance includes Rs. 75,000 paid for a photocopy machine. The machine was obtained
on 1 November 2018 at a fixed rent of Rs. 75,000 per quarter and an additional Re. 0.40 for each
copy. 40,000 copies have been made by QE up to 31 December 2018.
Calculate “Rent and insurance” that would be presented in statement of comprehensive income of
QE for the year ended 31 December 2018.
Rs. _________________
45. The following is an extract from the trial balance of Qambar Enterprises (QE) as at 31 December
2018:
Debit Credit
Rs.
Office and sales supplies 210,000
Office and sales supplies costing Rs. 90,000 are still unused. However, 30% of these supplies are
not usable due to deterioration in quality.
Which of the following is correct presentation in financial statements in respect of above?
(a) Current assets Rs. 63,000 and Expense Rs. 210,000
(b) Current assets Rs. 90,000 and Expense Rs. 237,000
(c) Current assets Rs. 63,000 and Expense Rs. 147,000
(d) Current assets Rs. 90,000 and Expense Rs. 237,000
46. The following is an extract from the trial balance of Qambar Enterprises (QE) as at 31 December
2018:
Debit Credit
Rs.
Capital at 1 Jan 2018 5,223,000
Goods withdrawn 644,000
Cost of office repairs amounting to Rs. 85,000 was paid by the owner from personal cash. After
adjusting for this, net profit has been correctly calculated as Rs. 880,000.
At year end, a vehicle was invested into the business by the owner at a value of Rs. 960,000
Calculate “Capital” that would be presented in statement of financial position of QE as at 31
December 2018.
Rs. _________________
47. The following is an extract from the trial balance of Delta Enterprises (DE) as at 30 June 2019:
Debit Credit
Rs. 000
Property, plant and equipment (Cost) 230,600
Prepayments 3,000
Administration expenses 25,900
Trade and other payables 41,400
On 1 October 2018, a printer was acquired on rent from Qazi & Co. The annual rent of Rs.
480,000 was paid in advance and debited to prepayments. However, the printer was purchased by
DE on 1 April 2019 for Rs. 1,240,000. The payment net of rent adjustment was made in July
2019. The purchase has not been accounted for. Ignore depreciation.

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CHAPTER-09 PREPARATION OF FINANCIAL STATEMENTS

Calculate “Property, plant and equipment (Cost)” that would be presented in statement of
financial position of DE as at 30 June 2019.
Rs. _________________
48. The following is an extract from the trial balance of Delta Enterprises (DE) as at 30 June 2019:
Debit Credit
Rs. 000
Property, plant and equipment (Cost) 230,600
Prepayments 3,000
Administration expenses 25,900
Trade and other payables 41,400
On 1 October 2018, a printer was acquired on rent from Qazi & Co. The annual rent of Rs.
480,000 was paid in advance and debited to prepayments. However, the printer was purchased by
DE on 1 April 2019 for Rs. 1,240,000. The payment net of rent adjustment was made in July
2019. The purchase has not been accounted for. Ignore depreciation.
Calculate “Prepayments” that would be presented in statement of financial position of DE as at 30
June 2019.
Rs. _________________
49. The following is an extract from the trial balance of Delta Enterprises (DE) as at 30 June 2019:
Debit Credit
Rs. 000
Property, plant and equipment (Cost) 230,600
Prepayments 3,000
Administration expenses 25,900
Trade and other payables 41,400
On 1 October 2018, a printer was acquired on rent from Qazi & Co. The annual rent of Rs.
480,000 was paid in advance and debited to prepayments. However, the printer was purchased by
DE on 1 April 2019 for Rs. 1,240,000. The payment net of rent adjustment was made in July
2019. The purchase has not been accounted for. Ignore depreciation.
Calculate “Trade and other payables” that would be presented in statement of financial position of
DE as at 30 June 2019.
Rs. _________________
50. The following is an extract from the trial balance of Delta Enterprises (DE) as at 30 June 2019:
Debit Credit
Rs. 000
Property, plant and equipment (Cost) 230,600
Prepayments 3,000
Administration expenses 25,900
Trade and other payables 41,400
On 1 October 2018, a printer was acquired on rent from Qazi & Co. The annual rent of Rs.
480,000 was paid in advance and debited to prepayments. However, the printer was purchased by
DE on 1 April 2019 for Rs. 1,240,000. The payment net of rent adjustment was made in July
2019. The purchase has not been accounted for. Ignore depreciation.
Calculate “Administration expenses” that would be presented in statement of comprehensive
income of DE for the year ended 30 June 2019.
Rs. _________________

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CHAPTER-09 PREPARATION OF FINANCIAL STATEMENTS

MULTIPLE CHOICE QUESTIONS (MCQs) SOLUTIONS

01. C Aging analysis of receivables in not a financial statement.
02. D Prepaid insurance is deducted from the amount shown in trial to arrive at expense
for the year.
03. A Debit Inventory Rs. 237,500,000
Credit Cost of sales Rs. 237,500,000
04. D Drawings = Rs. 30,500 – (150x12) = Rs. 28,700
05. C Purchases = 105,950 – 4,000 = Rs. 101,950
06. C Rs. 000
Sales 353,300 – 2,432 trade discount – 4,500 settlement discount 346,368
Less: sales return (10,000)
336,368

07. A 160 x 10% x 3/12 = 4 million

08. C Total contract price 1.8 + 1.8 = 3.6 x 4/9 months = 1.6 less advance 1.8 = 0.2
million unearned
09. B Other income = 15 – 0.2 (unearned income) = 14.8
Total contract price 1.8 + 1.8 = 3.6 x 4/9 months = 1.6 less advance 1.8 = 0.2
million unearned
10. A Inventory is large percentage of assets in trading or manufacturing businesses.
11. A Closing provision
Rs. million
Receivables as per trial 100
Bad debts (1)
Receivables 99
Provision @ 6% 5.94
12. B Bad and doubtful debts expense
Rs. million
Bad debts 3+1 4
Increase in provision = 5.94 – 4.5 1.44
5.44
Closing provision
Rs. million
Receivables as per trial 100
Bad debts (1)
Receivables 99
Provision @ 6% 5.94

13. D Rs. million

Receivables as per trial 100
Bad debts 3+1 (4)
96
Closing provision (5.94)
90.06
Closing provision
Receivables as per trial 100
Bad debts (1)
Receivables 99
Provision @ 6% 5.94

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14. A = Rs. 150 + 1.5 -1.2 = Rs. 150.3 million

15. B Accrued expenses of Electricity Rs. 1.5 million
Prepayment of rent Rs. 1.2 million
16. Rs. Depreciation charge = [6,650 – 330-2,414] x 10% = Rs. 391,000
391,000
17. Rs. = 6,650 – 330 – 2,414 - 391 = 3,515
3,515,000 Depreciation charge = [6,650 – 330-2,414] x 10% = Rs. 391,000
18. Rs. 50,000 Interest classified to current liabilities 600 x 1/12 = 50
19. Rs. 41 Misc. income = Rs. 45 million – 4 million = Rs. 41 million
million Unearned income = 12 million x 4/12 = Rs. 4 million
20. Rs. 4 Unearned income = 12 million x 4/12 = Rs. 4 million
million
21. Rs. 23,650 Cost of sales as given Rs. 23,580 + write down Rs. 70 = Rs. 23,650
Cost Rs. 1,000 and NRV Rs. 930 (i.e.) Rs. 1,130 – 200
Write down Rs. 70
22. Rs. 3,160 Inventory as given Rs. 3,900 – write down Rs. 70 – return to supplier Rs. 670 = Rs.
3,160
23. Rs. 1,197 On opening assets (Rs. 12,500 – 4,630) x 15% = Rs. 1,180
On additions Rs. 450 x 15% x 3/12 = Rs. 17
Total Rs. 1,197
24. Rs. 7,123 At cost Rs. 12,500 + 450 = Rs. 12,950
Accumulated depreciation Rs. 4,630 + 1,197 = Rs. 5,827
Net Rs. 7,123
25. Rs. 1,440 Rs. 1,290 + 150 income receivable = Rs. 1,440
26. Rs. 1,440 Rs. 1,320 + 120 unearned income = Rs. 1,440
Unearned income Rs. 480 x 50% x 3/6 months = Rs. 120
27. Rs. 970 Rs. 940 – 120 unearned + 150 accrued = Rs. 970
28. Rs. 700 Financial charges need not be adjusted because interest expense has already been
correctly accounted for, just credited in loan account rather than interest payable.
29. Rs. 5,000 12% per annum ➔ 3% for each quarter
Currently the loan figure is @103% i.e. 100% + 3%
Rs. 5,150 x 100 / 103 = Rs. 5,000
Interest expense has already been correctly accounted for, just credited in loan
account rather than interest payable.
Rs. 150 shall be presented as interest payable under current liabilities.
30. Rs. 690 As given Rs. 490 + Rs. 200 included in rent and insurance = Rs. 690
31. Rs. 2,390 As given Rs. 1,290
Prepaid insurance Rs. 800 – 200 drawings = Rs. 600 x 6/12 = Rs. 300
Prepaid rent Rs. 1,200 x 8/12 = Rs. 800
Total Rs. 2,390
32. Rs. 1,600 As given Rs. 2,900
Less: Insurance of owner’s residence Rs. 200
Less: Prepaid insurance Rs. 600 x 6/12 = Rs. 300
Less: Prepaid rent Rs. 1,200 x 8/12 = Rs. 800
Net expense Rs. 1,600
33. Rs. 256 Bad debts written off Rs. 230
Increase in allowance Rs. 246 – 220 = Rs. 26
Total Rs. 256
Required balance of allowance
Rs. 1,000 x 5% + 900 x 10% + 530 x 20% = Rs. 246

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CHAPTER-09 PREPARATION OF FINANCIAL STATEMENTS

34. Rs. 4,154 Trade receivables Rs. 4,400 – required allowance 246 = Rs. 4,154
Required balance of allowance
Rs. 1,000 x 5% + 900 x 10% + 530 x 20% = Rs. 246
35. Rs. 360,000 No adjustment in administrative expenses is required.
36. Rs. 156,000 Rs. 150,000 + Rs. 6,000 Carriage outwards = Rs. 156,000
37. Rs. 472,000 Cost of sales Rs.
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Inventory 31 December 2021 (60,000)
472,000
\
38. Rs. 727,000 Revenue Rs. 1,200,000 – 1,000 return inwards = Rs. 1,199,000
Cost of sales Rs. 472,000
Cost of sales Rs.
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Inventory 31 December 2021 (60,000)
472,000
Gross profit Rs. 727,000
39. Rs. 16.75 Depreciation on building Rs. 120 – 70 = Rs. 50 / 50 years = Rs. 1
million Depreciation on P&E Rs. 120 – 15 = Rs. 105 x 15% = Rs. 15.75
40. Rs. 188.25 Land and building Rs. 120 – (20 + 1) = Rs. 99
million Plant and equipment Rs. 120 – (15 + 15.75) = Rs. 89.25
Total Rs. 188.25
41. Rs. As given Rs. 9 + 1.2 accrued income = Rs. 11.2 million
11.2million
42. Rs. 25.2 As given Rs. 25 + 0.2 unearned = Rs. 25.2 million
million Total contract price = Rs. 1.8 + 1.8 = Rs. 3.6 million
Earned till year end = Rs. 3.6 x 4/9 months = Rs. 1.6 million
Unearned = Rs. 1.8 advance – 1.6 earned = Rs. 0.2 million
43. Rs. 16 Rs. 15 as given + 1.2 accrued – 0.2 unearned = Rs. 16 million
million Total contract price = Rs. 1.8 + 1.8 = Rs. 3.6 million
Earned till year end = Rs. 3.6 x 4/9 months = Rs. 1.6 million
Unearned = Rs. 1.8 advance – 1.6 earned = Rs. 0.2 million
44. Rs. 536,000 As given Rs. 545,000
Less: Prepaid Rs. 75,000 x 1/3 month = Rs. 25,000
Add: Accrual of photocopies 40,000 x Re. 0.40 = Rs. 16,000
Net total Rs. 536,000
45. C Unused stock in usable condition is current asset
= Rs. 63,000 (i.e. Rs. 90,000 x 70%)
Remaining amount of Rs. 147,000 (i.e. Rs. 210,000 – 63,000) is charges as an
expense.
46. Rs. Capital Rs.
6,504,000 As given 5,223,000
Repair bill paid from personal cash 85,000
Vehicle invested 960,000
6,268,000
Net profit 880,000

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CHAPTER-09 PREPARATION OF FINANCIAL STATEMENTS

Drawings (644,000)
6,504,000
47. Rs. As given Rs. 230,600,000
231,840,000 + purchased Rs. 1,240,000
Total Rs. 231,840,000
48. Rs. As given Rs. 3,000,000
2,520,000 Less: adjusted against rent and purchase Rs. 480,000
Net Rs. 2,520,000
49. Rs. As given Rs. 41,400,000 + Payable to Qazi & Co. Rs. 1,000,000
42,400,000 = Rs. 42,400,000
Payable to Qazi & Co. Rs. 1,240,000 – 240,000 advance adjusted
=Rs. 1,000,000
Adjustable advance Rs. 480,000 – 480,000 x 6/12 = Rs. 240,000
50. Rs. As given Rs. 25,900,000
26,140,000 Advance utilised Rs. 480,000 x 6/12 months = Rs. 240,000
Total expense Rs. 26,140,000

269
CHAPTER-10 BANK RECONCILIATIONS

MULTIPLE CHOICE QUESTIONS (MCQs)

l. Your cash book at 31 December 20X3 shows a bank balance of Rs.565 overdrawn. On
comparing this with your bank statement at the same date, you discover the following.
(a) A cheque for Rs.57 drawn by you on 29 December 20X3 has not yet been
presented for payment.
(b) A cheque for Rs.92 from a customer, which was paid into the bank on 24
December 20X3, has been dishonoured on 31 December 20X3.
The correct bank balance to be shown in the statement of financial position at 31
December 20X3 is
A Rs.714 overdrawn B S657 overdrawn
C Rs.473 overdrawn D Rs.53 overdrawn
2 The cash book shows a bank balance of Rs.5,675 overdrawn at 31 August 20X5. It is
subsequently discovered that a standing order for Rs.125 has been entered twice, and that
a dishonoured cheque for Rs.450 has been debited in the cash book instead of credited.
The correct bank balance should be
A Rs.5,100 overdrawn
B Rs.6,000 overdrawn
C Rs.6,250 overdrawn
D Rs.6,450 overdrawn
3 The bank statement on 31 October 20X7 showed an overdraft of Rs.800. On reconciling
the bank statement, it was discovered that a cheque drawn by your company for Rs.80
had not been presented for payment, and that a cheque for Rs.130 from a customer had
been dishonoured on 30 October 20X7.
The correct bank balance to be shown in the statement of financial position at 31 October
20X7 is
A Rs.1,010 overdrawn B Rs.880 overdrawn
C Rs.750 overdrawn D Rs.720 overdrawn
4. Your firm's cash book at 30 April 20X8 shows a balance at the bank of Rs.2,490.
Comparison with the bank statement at the same date reveals the following differences:
Rs.
Unpresented cheques 840
Bank charges not in cash book 50
Receipts not yet credited by the bank 470
Dishonoured cheque not in cash book 140
The correct balance on the cash book at 30 April 20X8 is
A Rs.1,460 B Rs.2,300
C Rs.2,580 D Rs.3,140

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5 Your firm's bank statement at 31 October 20X8 shows a balance of Rs.13,400. You
subsequently discover that the bank has dishonoured a customer's cheque for Rs.300 and
has charged bank charges of Rs.50, neither of which is recorded in your cash book. There
are unpresented cheques totalling Rs.2,400. Amounts paid in, but not yet credited by the
bank, amount to Rs.1,000. You further discover that an automatic receipt from a
customer of Rs.195 has been recorded as a credit in your cash book.
Your cash book balance, prior to correcting the errors and omissions, was:
A Rs.11,455 B Rs.11,960
C Rs.12,000 D Rs.12,155
6 Your firm's cashbook shows a credit bank balance of Rs.1,240 at 30 April 20X9. Upon
comparison with the bank statement, you determine that there are unpresented cheques
totalling Rs.450, and a receipt of Rs.140 which has not yet been passed through the bank
account. The bank statement shows bank charges of Rs.75 which have not been entered
in the cash book.
The balance on the bank statement is
A Rs.1,005 overdrawn B Rs.930 overdrawn
C Rs.1,475 D Rs.1,550
7 Which of the following is NOT a valid reason for the cash book and bank statement
failing to agree?
A Timing difference
B Bank charges
C Error
D Cash receipts posted to payables
8. The bank statement at 31 December 20X1 shows a balance of Rs.1,000. The cash book
shows a balance of Rs.750 in hand. Which of the following is the most likely reason for
the difference.
A Receipts of Rs.250 recorded in cash book, but not yet recorded by bank
B Bank charges of Rs.250 shown on the bank statement, not in the cash book
C Standing orders of Rs.250 included on bank statement, not in the cash book
D Cheques for Rs.250 recorded in the cash book, but not yet gone through the bank
account
9. The cash book balance at 30 November 20X2 shows an overdraft of Rs.500. Cheques for
Rs.6,000 have been written and sent out, but do not yet appear on the bank statement.
Receipts of Rs.5,000 are in the cash book, but are not yet on the bank statement. What is
the balance on the bank statement?
A Rs.1,500 B Rs.500 in hand
C Rs.1,500 in hand D Rs.500 overdrawn

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10. What is the effect of debit entry in the bank statement if business have overdraft balance?
A Bank overdraft Increase
B Bank balance Decrease
C Bank overdraft Decrease
D Bank balance Increase
11. When preparing a bank reconciliation it is realised that:
(i) Cheques with a value of Rs.1,050 have been sent to suppliers and correctly
entered in the cash book, but have not yet been presented for payment.
(ii) A cheque for Rs.75 sent to a supplier has been incorrectly recorded in the cash
book as Rs.57.
(iii) Before correction, the cash book has a balance of Rs.10,500 credit.
(iv) Bank charges of Rs.175 have not been recorded in the cash book.
The balance of the cashbook after the correction is:
A Rs.10,307 overdrawn B Rs.10,343 overdrawn
C Rs.10,657 overdrawn D Rs.10,693 overdrawn
12. When preparing a bank reconciliation, it is realised that:
(i) Cheques with a value of Rs.1,050 have been sent to suppliers and correctly
entered in the cash book, but have not yet been presented for payment.
(ii) A cheque for Rs.75 sent to a supplier has been incorrectly recorded in the cash
book as Rs.57.
(iii) Before correction, the cash book has a balance of Rs.10,500 credit.
(iv) Bank charges of Rs.175 have not been recorded in the cash book.
What is the closing balance shown on the bank statement?
A Rs.9,257 overdrawn B Rs.9,643 overdrawn
C Rs.11,357 overdrawn D Rs.11,743 overdrawn
13. When preparing a bank reconciliation, it is realised that:
(i) There are unpresented cheques of Rs.8,000
(ii) There are lodgements of Rs.5,000 uncleared
(iii) Bank charges of Rs.67 have not been recorded in the cash book
What adjustment is required to the cash account?
A Debit Rs.67 B Credit Rs.67
C Debit Rs.3,067 D Credit Rs.3,067
14 A business has the following cash and bank transactions during January 20X1. Balance
1.1.20X1: cash Rs.500, bank Rs.1,000 overdrawn, receipts of cash Rs.12,600, cash paid
Rs.3,200, cash paid to bank Rs.5,500, payments by cheque Rs.8,200. Closing balances:
cash Rs.600, bank Rs.6,200 overdrawn. Calculate the total cash and bank drawings.
A Rs.14,800 (no bank drawings) B Rs.860
C Rs.11,800 D Rs.6,300

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15 A company has an opening cash book balance of Rs.5,000 debit. During the month
receivables paid Rs.26,000, cash sales were Rs.2,500 and payments were made to
payables of Rs.12,000 less 2% cash discounts. A comparison with the bank statement
showed Rs.125 bank charges had not been recorded in the cash book. What is the
adjusted cash book balance?
A Rs.21,855 credit B Rs.21,615 debit
C Rs.21,375 debit D Rs.18,875 credit
16. At 31 December 20X9 the cash book of a company shows a credit balance of Rs.901.
When the bank statement for the month of December was compared with the cash book,
it was discovered that cheques totalling Rs.2,468 had been drawn but not presented to the
bank, and cheques received totalling Rs.593 had not yet been credited by the bank.
The balance on the bank statement at 31 December 20X9 was ……………………..
A Rs. 974 B Rs. 977
C Rs. 947 D Rs. 944
17 The following bank reconciliation statement has been prepared by a business.
Bank reconciliation statement as at April 30, 2018 Rs.
Balance as per bank statement (Cr) 45,200
Add: Outstanding cheques 11,500
Less: Uncleared lodgements 13,100
Balance as per cash book (Dr) 43,600
Assuming that all items other than balance as per cash book is correct; what is the correct balance
as per cash book?
(a) Rs.43,600 Dr as per statement in question
(b) Rs.43,600 Cr
(c) Rs.46,800 Dr
(d) Rs.46,800 Cr
18 Debit balance of Rs.5,000 as per bank statement means:
(a) Rs.5,000 payable to business by the bank
(b) Rs.5,000 receivable from business by the bank
(c) Rs.5,000 deposited by the business during the month
(d) Rs.5,000 withdrawn from the bank by business during the year
19 The following bank reconciliation statement has been prepared by a trainee accountant:
Rs.
Overdraft as per bank statement 6,980
Less: Outstanding cheques 10,460
3,480
Add: Deposits credited after date 11,800
Cash at bank as per cash book 15,280
What should be the correct balance as per cash book?
(a) Rs.15,280 balance at bank as stated (b) Rs.5,640 balance at bank
(c) Rs.15,280 overdrawn (d) Rs.5,640 overdrawn

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20 At the end of 31 March 2019, balance as per cash book of Imtiaz is Rs.10,200 (Dr) which did not
agree with the balance as per the bank statement. On investigation following information was
identified;
A standing order of Rs.350 was paid by the bank did not appear in the cash book.
Dividend received directly in the bank was Rs.30
Bank credited interest for the quarter Rs.350; it was included in cash book as Rs.530
A customer cheque deposited in the bank Rs.120 was dishonoured
What is the corrected balance as per cash book?
(a) Rs.10,170 Dr (b) Rs.10,170 Cr
(c) Rs.9,580 Dr (d) Rs.9,580 Cr
21 A business identified that there is a difference between balance of cash book and the balance as
per bank statement at end of 28 February 2019. On investigation it was revealed that:
Bank debits account of business for bank charges Rs.30 and standing order Rs.150.
Bank erroneously debits bank account of business for a cheque of Rs.40.
Business has credited the bank account for quarterly interest income Rs.150.
What is the total amount of adjustment to be made in cash book of business?
(a) Rs.180 Cr and Rs.150 Dr (b) Rs.180 Cr and Rs.300 Dr
(c) Rs.220 Cr and Rs.300 Dr (d) Rs.220 Dr and Rs.300 Cr
22 Balance of bank account as per cash book is Rs.35,000 (Dr) while balance as per bank statement
is Rs.32,500 (Cr). Difference is explained as Uncleared lodgments of Rs.2,500 not included in the
bank statement.
What is the amount of bank balance to be reported in Statement of financial Position?
(a) Rs.35,000 Cash at bank (b) Rs.35,000 Overdraft
(c) Rs.32,500 Cash at bank (d) Rs.32,500 Overdraft
23 A business is in process of reconciling its cash book with banks statement.
Which of the following item require entry in cash book?
(a) Bank service charges
(b) Deposits credited by the bank after the date of the bank statement
(c) Cheque of another account erroneously credited by bank
(d) Cheques presented by suppliers after the date of bank statement
24 A business is in process of preparing its bank reconciliation statement. The balance of cash book
did not agree with the balance in bank statement. The following information is available:
• Balance as per cash book before comparing bank statement Rs.11,000 (Dr)
• Outstanding Cheques Rs.1,550
• Outstanding lodgments Rs.1,200
• Bank charges Rs.50
• Bank interest income Rs.100
What is the balance as per bank statement?
(a) Rs.11,200 Dr (b) Rs.11,400 Dr
(c) Rs.11,400 Cr (d) Rs.11,200 Cr

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25 A business received a bank statement showing a credit balance of Rs.7,400. On investigation its
accountant discovered that the bank statement does not show cheques received from customers
Rs.16,200 and banked and same for cheque payments to suppliers Rs.18,500. The bank statement
also shows bank charges of Rs.250 which has not yet been recorded in ledger.
What is the current balance as per cash book?
(a) Rs.5,350 Cr (b) Rs.5,350 Dr
(c) Rs.5,100 Dr (d) Rs.5,100 Cr
26 Following information has been collected from the books of Murtaza as at 31 January 2019:
Balance as per cash book Rs.15,000 (Dr)
On scrutiny of bank statement it was found:
• Unpresented Cheques Rs.2,500
• Uncredited lodgements Rs.1,500
• Bank charges Rs.200
• Bank debits Muratza for bank interest Rs.120 instead of Rs.150. No amount was recorded
in cash book of Murtaza
Further it was found that:
• Receipt of Rs.1,500 was recorded on credit side of cash book
• Payment of Rs.1,200 was recorded on debit side of cash book
What is the corrected cash book balance of Murtaza?
(a) Rs.15,370 Dr (b) Rs.15,250 Dr
(c) Rs.15,250 Cr (d) Rs.15,370 Cr
27 A bank statement shows a balance of Rs.4,000 in credit. On examining the bank statement, it was
found that the cheques of Rs.600 deposited in bank as per the cash book not yet on the bank
statement and cheques of Rs.1,000 issued out but not yet appeared on the bank statement.
Furthermore, the cash book shows deposit interest received of Rs.100 but this is not yet on the
statement.
What is the balance as per cash book?
(a) Rs.3,700 (b) Rs.4,500
(c) Rs.5,000 (d) Rs.3,900
28 If it was found that the receipt side of the cash book has been under-casted, then in preparing
bank reconciliation statement, it should be:
(a) Deducted from balance as per cash book
(b) Added in balance as per bank statement
(c) Added in balance as per cash book
(d) Deducted from balance as per bank statement
29 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

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30 Which of the following require deduction from cash book balance while preparing bank
reconciliation statement?
(a) Direct deposit by a customer into bank but entered in cash book
(b) Standing orders paid by the bank not yet entered in cash book
(c) Unpresented cheques not yet paid by bank
(d) Bank debits interest Rs. 2,500 instead of Rs. 5,200
31 The following information relates to bank reconciliation:
(i) The bank balance in the cash book before taking the items below into account was
Rs.9,870 overdrawn
(ii) Bank charges of Rs.750 on the bank statement have not been entered in the cash book
(iii) The bank has credited the account in error with Rs.645 which belongs to another
customer
(iv) Cheque payments totaling Rs.4,385 have been entered in the cash book but have not been
presented by payment
(v) Cheques totaling Rs.6,500 have been correctly entered on the debit side of the cash book
but have not been paid in at the bank
What was the balance as shown by the bank statement?
(a) Rs.10,970 overdrawn (b) Rs.12,200 overdrawn
(c) Rs.12,090 overdrawn (d) Rs.11,550 overdrawn
32 Balance as per bank statement of Asim was Rs.11,600 credit as on April 30, 2018 which was not
in agreement with the balance as per cash book.
On investigation the following items were detected:
• Cheques issued and paid by the bank for Rs.5,500 but recorded in the cash book as
Rs.500
• Bank service charges not entered in the cash book Rs.420
• Outstanding lodgements Rs.1,300
• Bank has erroneously debited a cheque of Rs.900 to Asim actually the cheque was issued
by Asif.
• Unpresented cheques Rs.1,200
What should be the balance as per cash book before adjustments?
Rs. __________
(a) Rs. 18,020 (b) Rs. 18,202
(c) Rs. 18,002 (d) Rs. 18,200
33 Following information is available regarding cash at bank of a business:
• Cash at bank as per bank column of the cash book Rs.4,910
• Unpresented cheques Rs.630
• Cheques received & paid into the bank, but not yet entered on the bank statement Rs.460
• Credit transfers entered on the bank statement but not entered in the cash book Rs.340
What is Cash at bank as per bank statement?
Rs. ___________
(a) Rs. 5,240 (b) Rs. 5,420
(c) Rs. 2,540 (d) Rs. 5,424

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34 The bank column of a cash book showed a credit balance of Rs.8,000. There were unpresented
cheques amounting to Rs.2,500.
The bank statement showed bank charges, Rs.900, which were not recorded in the cash book.
What is the balance on the bank statement?
Rs. __________
(a) Rs. 6,400 (b) Rs. 6,500
(c) Rs. 4,600 (d) Rs. 6,300
35 When preparing a bank reconciliation statement the following information is available.
• Balance as per cash book Rs.25,000 (Dr)
• Outstanding cheques Rs.1,500
• uncleared lodgements 1,300
• Standing order shown on the bank statement (not appearing in a cash book) Rs.200
• Dividend directly deposited in the bank (not appearing in the cash book) Rs.25
What is the balance as per bank statement?
Rs. ___________
(a) Rs.25,025 (b) Rs.20,250
(c) Rs. 25,250 (d) Rs. 25,255
36 Balance as per bank statement was Rs.1,000 in debit. Comparison of bank statement with cash
book revealed that cheques of Rs.3,200 paid in as per the cash book but not yet on the bank
statement and cheques of Rs.500 paid out but not yet appeared on the bank statement. In addition
the bank statement shows direct deposit of Rs.800 by a customer but it is not recorded in cash
book.
What is the balance as per cash book after adjustments?
Rs. __________
(a) Rs. 1,707 (Dr.) (b) Rs. 1,707 (Cr.)
(c) Rs. 1,700 (Dr.) (d) Rs. 1,700 (Cr.)
37 The main purpose of preparing a bank reconciliation statement is?
(a) To know the bank balance
(b) To know the balance of bank statement
(c) To correct the cash book
(d) To identify causes of difference between cash book and bank statement
38 Bank Reconciliation Statement is prepared by
(a) Bank (b) Accountant
(c) Customer (d) Auditors
39 Bank reconciliation statement is
(a) Part of bank statement (b) Part of the cash book
(c) A separate statement (d) A sub-division of journal
40 Favorable balance means?
(a) Credit balance in the cash book (b) Credit balance in Bank statement
(c) Debit balance in cash book (d) Both b and c

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41 Unfavorable balance means?

(a) Credit balance in the cash book (b) Credit balance in Bank statement
(c) Debit balance in cash book (d) Debit balance in petty cash book
42 When cheque is not paid by the bank, it is called?
(a) Stale cheque (b) Dishonored cheque
(c) Bearer cheque (d) None of the above
43 Which of the following would not affect bank reconciliation?
(a) Dishonored cheque (b) Bank interest
(c) Discount received (d) Unpresented cheque
44 An amount of Rs.1,000 is debited twice in the bank statement. When overdraft as per the cash
book is the starting point?
(a) Rs.1,000 will be added (b) Rs.1,000 will be deducted
(c) Rs.2,000 will be deducted (d) Rs.2,000 will be added
45 Bank sent debit advice of Rs. 50,000 to company being interest on overdraft. It was not entered in
cash book.
Identify the correct adjustment in cash book?
(a) Rs. 50,000 will be debited (b) Rs. 50,000 will be credited
(c) No adjustment (d) Rs. 100,000 will be subtracted
46 A discount of Rs. 20,000 was given to a supplier/debtor on his prompt repayment of debt but the
cashier entered the gross amount in cash book.
What should be the adjustment in cash to work out the correct balance of cash book?
(a) Rs. 20,000 will be debited in cash book
(b) Rs. 20,000 will be credited in cash book
(c) Rs. 40,000 will be debited in cash book
(d) Rs. 40,000 will be credited in the cash book
47 In the Bank reconciliation statement “Deposit in transit” is usually:
(a) Subtracted from bank balance (b) Added to bank balance
(c) Added to Cash book balance (d) Subtracted from cash book balance
48 Interest credited to bank account
(a) Add to cash book balance (b) Deduct from cash book balance
(c) Add to bank balance (d) Deduct from bank balance
49 Bank inadvertently charged your bank account for another company's bank fees
(a) Add to cash book balance (b) Deduct from cash book balance
(c) Add to bank balance (d) Deduct from bank balance
50 A company had a receipt of Rs.989,000 and correctly prepared its bank deposit slip for
Rs.989,000.
However, the company recorded the receipt in its Cash account as Rs.998,000.
How is the difference of Rs.9,000 handled on the bank reconciliation?
(a) Add to cash book balance (b) Deduct from cash book balance
(c) Add to bank balance (d) Deduct from bank balance

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51. For reconciling bank balances, un-presented cheques should be:

(a) added to balance of bank statement and deducted from balance of cash book
(b) deducted from balance of bank statement or added to 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 or deducted from balance of cash book

52. Determine the balance as per bank statement using the following information:
• Balance as per cash book Rs. 49,100
• Cheques received and deposited into the bank, but not yet credited in the bank statement
Rs. 4,600
• Un-presented cheques Rs. 6,300
• Credit transfers appearing in the bank statement but not entered in the cash book Rs.
3,400
(a) Rs. 52,500 (b) Rs. 54,200
(c) Rs. 58,800 (d) Rs. 50,800

53. The cash book of Worcester shows a credit balance of Rs.1,350. Cheques of Rs.56 have been
written to suppliers but not yet cleared the bank; uncleared lodgements amount to Rs.128. The
bank has accidentally credited Worcester's account with interest of Rs.15 due to another
customer. A standing order of Rs.300 has not been accounted for in the general ledger.
What is the balance on the bank statement?
A Rs.993 Cr B Rs.993 Dr
C Rs.1,707 Cr D Rs.1,707 Dr

54. Jo's bank ledger account shows a balance of Rs.190 credit. Her bank statement reports a balance
of Rs.250 credit.
Which of the following will explain the difference in full?
A Unpresented cheques of Rs.100 and an uncleared lodgement of Rs.30
B Unpresented cheques of Rs.150, the misposting of a cash receipt of Rs.130 to the wrong
side of the cash account and unrecorded bank interest received of Rs.30
C An unrecorded direct debit of Rs.30, a dishonoured cheque of Rs.70 and an uncleared
lodgement of Rs.40
D An unrecorded standing order of Rs.60, an unpresented cheque of Rs.110 and a bank
error whereby Jo's account was accidentally credited with Rs.110
55. Are each of the following statements true or false?
True False
When preparing a bank reconciliation, unpresented cheques must be
deducted from a balance of cash at bank shown in the bank
statement.
A cheque from a customer paid into the bank but dishonoured must
be corrected by making a debit entry in the cash book.
An error by the bank must be corrected by an entry in the cash book.
An overdraft is a debit balance in the bank statement.

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56. The following bank reconciliation statement has been prepared by an inexperienced bookkeeper
at 31 December 20X5:
Rs.
Balance per bank statement (overdrawn) 38,640
Add: Lodgements not credited 19,270
57,910
Less: Unpresented cheques 14,260
Balance per cash book 43,650
What should the final cash book balance be when all the above items have been properly
accounted for?
A Rs.43,650 overdrawn B Rs.33,630 overdrawn
C Rs.5,110 overdrawn D Rs.72,170 overdrawn
57. A bank reconciliation statement for Dallas at 30 June 20X5 is being prepared. The following
information is available:
(1) Bank charges of Rs.2,340 have not been entered in the cash book.
(2) The bank statement shows a balance of Rs.200 Dr.
(3) Unpresented cheques amount to Rs.1,250.
(4) A direct debit of Rs.250 has not been recorded in the ledger accounts.
(5) A bank error has resulted in a cheque for Rs.97 being debited to Dallas' account instead
of Dynasty's account.
(6) Cheques received but not yet banked amounted to Rs.890.
What will be the final balance in the cash book after all necessary adjustments?
A Rs.463 Dr B Rs.463 Cr
C Rs.63 Cr D Rs.63 Dr
58. The following information relates to a bank reconciliation:
(1) The bank balance in the cash book before taking the items below into account was
Rs.8,970 overdrawn.
(2) Bank charges of Rs.550 on the bank statement have not been entered in the cash book.
(3) The bank has credited the account in error with Rs.425 which belongs to another
customer.
(4) Cheque payments totalling Rs.3,275 have been entered in the cash book but have not
been presented for payment.
(5) Cheques totalling Rs.5,380 have been correctly entered on the debit side of the cash book
but have not been paid in at the bank.
What was the balance as shown by the bank statement before taking the items above into
account?
A Rs.8,970 overdrawn B Rs.11,200 overdrawn
C Rs.12,050 overdrawn D Rs.17,750 overdrawn

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59. Sharmin's bank statement at 31 October 20X8 shows a balance of Rs.13,400. She subsequently
discovers that the bank has dishonoured a customer's cheque for Rs.300 and has charged bank
charges of Rs.50, neither of which is recorded in the cash book.
There are unpresented cheques totalling Rs.1,400 and an automatic receipt from a customer of
Rs.195 has been recorded as a credit in Sharmin's cash book.
What was Sharmin's cash balance, prior to correcting the errors and omissions?
A Rs.11,455 B Rs.11,960
C Rs.12,000 D Rs.12,155
60. Wimborne's bank statement shows a balance of Rs.715 overdrawn. The statement includes bank
charges of Rs.74 which have not been entered in the cash book. There are also unpresented
cheques totalling Rs.824 and lodgements not yet credited of Rs.337. In addition the bank
statement erroneously includes a dividend receipt of Rs.25 belonging to another customer.
What should be the bank overdraft in the statement of financial position?
A Rs.253 B Rs.1,177
C Rs.1,202 D Rs.1,227
61. The cash book shows a bank balance of Rs.5,675 overdrawn at 31 August 20X5. It is
subsequently discovered that a standing order for Rs.125 has been entered twice, and that a
dishonoured cheque for Rs.450 has been debited in the cash book instead of credited.
What is the correct bank balance?
A Rs.5,100 overdrawn B Rs.6,000 overdrawn
C Rs.6,250 overdrawn D Rs.6,450 overdrawn
62. An organisation's cash book had an opening balance of Rs.485 credit. During the following week,
the following transactions took place:
Cash sales Rs.1,450.
Receipts from credit customers of Rs.2,400.
Payments to suppliers of debts of Rs.1,800 less 5% cash discount.
Dishonoured cheques from customers amounting to Rs.250.
What was the resulting balance in the cash book after the transactions had been recorded?
A Rs.1,255 debit B Rs.1,405 debit
C Rs.1,905 credit D Rs.2,375 credit
63. The bank statement at 31 October 20X7 showed an overdraft of Rs.800. On reconciling the bank
statement, it was discovered that a cheque drawn in favour of Smith for Rs.80 had not been
presented for payment, and that a cheque for Rs.130 from a customer had been dishonoured on 30
October 20X7, but that this had not yet been notified to you by the bank.
What is the correct bank balance to be shown in the statement of financial position at 31 October
20X7?
A Rs.1,010 overdrawn B Rs.880 overdrawn
C Rs.750 overdrawn D Rs.720 overdrawn

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64. Your firm's cash book at 30 April 20X8 showed a balance at the bank of Rs.2,490. Comparison
with the bank statement at the same date revealed the following differences:
Rs.
Unpresented cheques 840
Bank charges not in cash book 50
Receipts not yet credited by the bank 470
Dishonoured cheque not in cash book 140
What was the correct bank balance at 30 April 20X8?
A Rs.1,460 B Rs.2,300
C Rs.2,580 D Rs.3,140
65. Your firm's cash book shows a credit bank balance of Rs.1,240 at 30 April 20X9. On comparison
with the bank statement, you determine that there are unpresented cheques totalling Rs.450, and a
receipt of Rs.140 which has not yet been passed through the bank account. The bank statement
shows bank charges of Rs.75 which have not been entered in the cash book.
What was the balance on the bank statement?
A Rs.1,005 overdrawn B Rs.930 overdrawn
C Rs.1,475 in credit D Rs.1,550 in credit
66. Which of the following is not an 'unrecorded difference' when reconciling the balance on the cash
book to the amount shown in the bank statement?
A A standing order B Bank interest
C An uncleared lodgement D A loan interest
67. An entity has prepared its bank reconciliation at 31 March 20x4 taking the following information
into account:
Rs. Rs.
Outstanding lodgements 5,000 Unpresented cheques 2,800
Bank charges included in the bank statement but not recorded in the cash book were Rs.125. The
adjusted cash book balance per the bank reconciliation was a debit balance of Rs.1,060.
What was the balance as shown on the bank statement at 31 March 20X4?
A Rs.1,140 debit B Rs.1,140 credit
C Rs.1,265 debit D Rs.1,265 credit
68. From the following information, what is the balance as per bank statement as on December 31,
2008. Balances appearing as on December 31, 2008:
As per cash book 150,000
- Cheques deposited but not credited by the bank amounted to Rs. 30,000.
- Cheques issued but not yet presented in the bank for payment amounted to Rs. 20,000.
(a) Rs. 140,000 Dr. (b) Rs. 140,000 Cr.
(c) Rs. 410,000 Dr (d) Rs. 410,000 Cr.

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69. From the following information, what is the balance as per bank statement as on December 31,
2008. Balances appearing as on December 31, 2008:
As per cash book 270,000
Cheques deposited but not credited by the bank amounted to Rs. 30,000.
Cheques issued but not yet presented in the bank for payment amounted to Rs. 20,000.
(a) Rs. 200,000 Dr (b) Rs. 280,000 Cr
(c) Rs.260,000 Dr (d) Rs. 260,000 Cr.
70. From the following transactions, what is the balance as per bank statement as on December 31,
2011.
Balances appearing as on December 31, 2011:
As per cash book 185,000
- Cheque drawn/issued amounted to Rs. 200,000 during the month from which Rs.70,000
are still unpresented.
- Cheques lodged into bank amounted to Rs. 300,000 from which cheques amounting to
Rs. 80,000 are yet not credited.
(a) Rs.195,000 Dr. (b) Rs. 195,000 Cr.
(c) Rs.175,000 Dr (d) Rs. 175,000 Cr.
71. From the following transactions, what is the balance as per bank statement as on December 31,
2011.
Balances appearing as on December 31, 2011:
As per cash book 350,000
- Cheques given to creditors amounting to Rs. 275,000 from which cheques amounting to
Rs. 205,000 were presented till the end of the month.
- Cheques received from debtors and deposited into bank amounted to Rs. 395,000 from
which cheques of Rs. 315,000 were credited till the end of the month.
(a) Rs. 470,000 Dr. (b) Rs. 470,000 Cr.
(c) Rs. 340,000 Dr. (d) Rs. 340,000 Cr.
72. From the following transactions, what is the balance as per bank statement as on December 31,
2012.
Balances appearing as on December 31, 2012:
Adverse balance as per cash book (25,000)
- Unpresented cheques amounted to Rs. 50,000
- Uncredited cheques amounted to Rs. 20,000
(a) Rs.5,000 Dr. (b) Rs. 5,000 Cr.
(c) Rs. 55,000 Dr. (d) Rs. 55,000 Cr.
73. From the following transactions, what is the balance as per bank statement as on December 31,
2012.
Balances appearing as on December 31, 2012:
Credit balance as per cash book (25,000)
- Unpresented cheques amounted to Rs. 80,000
- Uncredited cheques amounted to Rs. 120,000
(a) Rs. 15,000 Cr. (b) Rs. 15,000 Dr.
(c) Rs. 65,000 Dr (d) Rs. 65,000 Cr

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74. From the following transactions, what is the balance as per bank statement as on December 31,
2012. Balances appearing as on December 31, 2012:
Credit balance as per cash book (360,000)
- Unpresented cheques amounted to Rs. 80,000
- Uncredited cheques amounted to Rs. 120,000
(a) Rs. 320,000 Cr. (b) Rs. 320,000 Dr.
(c) Rs. 400,000 Dr. (d) Rs. 400,000 Cr.
75. From the following information, what is the balance as per bank statement as on December 31,
2012. Balances appearing as on December 31, 2012:
Debit balance as per cash book 150,000
- Unpresented cheques amounted to Rs. 50,000
- Uncredited cheques amounted to Rs. 600,000
(a) Rs. 400,000 Dr. (b) Rs. 400,000 Cr.
(c) Rs. 700,000 Dr. (d) Rs. 700,000 Cr.
76. From following information what is the balance as per adjusted cash book and bank reconciliation
statement as on June 30, 2011:
Balances appearing as on June 30, 2011:
Balance as per bank book 185,000
- Unpresented cheques amounted to Rs. 20,000
- Uncredited cheques amounted to Rs. 15,000
- Bank commission charged by the bank but not yet incorporated in cash book Rs. 10,000.
- Profit on PLS account Rs. 30,000 not yet debited in the cash book.
- Payment made against standing order Rs. 50,000 not yet recorded in cash book.
(a) Rs. 150,000 Cr. (b) Rs. 160,000 Cr.
(c) Rs. 155,000 Dr. (d) Rs. 160,000 Dr.
77. From the following transactions, what is the balance as per adjusted cash book and bank
reconciliation statement as on 31st December 2008:
Balances appearing as on December 31, 2008:
Balance as per cash book 185,000
- Cheques issued to the customers Rs. 80,000 but only cheques of Rs.50,000 were
presented.
- Cheques from the debtors amounting to Rs. 45,000 were lodged into the bank but
cheques of Rs. 40,000 were received in bank.
- Bank commission charged by the bank but not yet incorporated in cash book Rs. 10,000.
- Profit on PLS account Rs. 30,000 not yet debited in the cash book.
- Direct debits amounted to Rs. 50,000 not yet recorded in cash book.
- Direct collection from debtors made by the bank amounted to Rs. 60,000 but not yet
recorded in the cash book.
(a) Rs. 230,000 Cr. (b) Rs. 240,000 Dr.
(c) Rs. 240,000 Cr. (d) Rs. 260,000 Cr.

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78. The cash book of Worcerster shows a credit balance of Rs. 1,350. Cheques of Rs. 56 have been
written to suppliers but not yet cleared the bank; uncleared lodgements amount to Rs. 128. The
bank has accidentally credited Worcester’s account with interest of Rs. 15 due to another
customer. A standing order of Rs. 300 has not been accounted for in the general ledger.
What is the balance on the bank statement?
(a) Rs. 993 Cr (b) Rs. 993 Dr
(c) Rs. 1,707 Cr (d) Rs. 1,707 Dr
79. Jo’s bank ledger account shows a balance of Rs. 190 credit. Her bank statement reports a balance
of Rs. 250 credit.
Which of the following will explain the difference in full?
(a) Un-presented cheques of Rs. 100 and an un-cleared lodgement of Rs. 30
(b) Un-presented cheques of Rs. 150, the misposting of a cash receipt of Rs. 130 to the
wrong side of the cash account and unrecorded bank interest received of Rs. 30
(c) An unrecorded direct debit of Rs. 30, a dishonoured cheque of Rs. 70 and an un-cleared
lodgement of Rs. 40
(d) An unrecorded standing order of Rs. 60,0 an un-presented cheque of Rs. 110 and a bank
error whereby Jo’s account was accidentally credited with Rs. 110
80. Are each of the following statements true or false?
True False
When preparing a bank reconciliation, un-presented cheques must be deducted
from a balance of cash at bank shown in the bank statement.
A cheque from a customer paid into the bank but dishonored must be corrected
by making a debit entry in the cash book.
An error by the bank must be corrected by an entry in the cash book.
An overdraft is a debit balance in the bank statement.

81. The following bank reconciliation statement has been prepared by an inexperienced bookkeeper
at 31st December 2015:
Rs.
Balance per bank statement (overdrawn) 38,640
Add: Lodgements not credited 19,270
57,910
Less: Un-presented cheques 14,260
Balance per cash book 43,650
What should the final cash book balance be when all the above items have been property
accounted for?
(a) Rs. 43,650 overdrawn (b) Rs. 33,630 overdrawn
(c) Rs. 5,110 overdrawn (d) Rs. 72,170 overdrawn
82. A bank reconciliation statement for Dallas at 30 June 2015 is being prepared. The following
information is available:
(1) Bank charges of Rs. 2,340 have not been entered in the cash book.
(2) The bank statement shows a balance of Rs. 200 Dr.
(3) Un-presented cheques amount to Rs. 1,250.
(4) A direct debit of Rs. 25 has not been recorded in the ledger accounts.

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(5) A bank error has resulted in a cheques for Rs. 97 being debited to Dallas’ account instead
of Dynasty’s account.
(6) Cheques received but not yet banked amounted to Rs. 890.
What will be the final balance in the cash book after all necessary adjustments?
(a) Rs. 463 Dr (b) Rs. 463 Cr
(c) Rs. 63 Cr (d) Rs. 63 Dr
83. Sharmin’s bank statement at 31st October, 2018 shows a balance of Rs. 13,400. She subsequently
discovers that the bank has dishonoured a customer’s cheque for Rs. 300 and has charged bank
charges of Rs. 50, neither of which is recorded in the cash book.
There are un-presented cheques totalling Rs. 1,400 and an automatic receipt form a customer of
Rs. 195 has been recorded as a credit in Sharmin’s cash book.
What was Sharmin’s cash balance, prior to correcting the errors and omissions?
(a) Rs. 11,455 (b) Rs. 11,960
(c) Rs. 12,000 (d) Rs. 12,155
84. Wimbomse’s bank statement shows a balance of Rs. 715 overdrawn. The statement includes bank
charges of Rs. 74 which have not been entered in the cash book. There are also un-presented
cheques totalling Rs. 824 and lodgements not yet credited of Rs. 337. In addition the bank
statement erroneously includes a dividend receipt of Rs. 25 belonging to another customer.
What should be the bank overdraft in the statement of financial position?
(a) Rs. 253 (b) Rs. 1,177
(c) Rs. 1,202 (d) Rs. 1,227
85. The cash book shows a bank balance of Rs. 5,675 overdrawn at 31st August 2015. It is
subsequently discovered that a standing order for Rs. 125 has been entered twice, and that a
dishonoured cheque for Rs. 450 has been debited in the cash book instead of credited.
What is the correct bank balance?
(a) Rs. 5,100 overdrawn (b) Rs. 6,000 overdrawn
(c) Rs. 6,250 overdrawn (d) Rs. 6,450 overdrawn
86. The bank statement at 31st October, 2017 showed an overdraft of Rs. 800. On reconciling the
bank statement, it was discovered that a cheque drawn in favour of smith for Rs. 80 had not been
presented for payment, and that a cheque for Rs. 130 from a customer had been dishonoured on
30th October, 2017, but that this had not yet been notified to you by the bank.
What is the correct bank balance to be shown in the statement of financial position at 31 st
October, 2017?
(a) Rs. 1,010 overdrawn (b) Rs. 880 overdrawn
(c) Rs. 750 overdrawn (d) Rs. 720 overdrawn
87. Which of the following is not an ‘unrecorded difference’ when reconciling the balance on the
cash book to the amount shown in the bank statement?
(a) A standing order (b) Bank interest
(c) An un-cleared lodgement (d) A BACS receipt

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MULTIPLE CHOICE QUESTIONS (MCQ) SOLUTIONS

1. B
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 565
Debtor 92
Adjusted closing (over 657
drawn)
657 657
2. D
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 5,675
Credit side overcast 125 Debtor 450
Adjusted closing (over 6,450 Debit side over casted 450
drawn)
6,575 6,575
3. B
Balance as per adjusted cashbook (880)
Add: unpresented 80
Less: uncredited -
Balance as per bank statement (800)
x + 80 – 0 = –800
x = –800 – 80
x = –880
4. B
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 2,490 Bank charges 50
Debtors 40
Adjusted closing 2,300
2,490 2,490
5. B
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 11,960 Debtors 300
Credit side over 195 x 2 390 Bank charges 50
Adjusted closing 1,200
12,350 12,350
(W-1)
Balance as per adjusted cashbook 12,000
Add: unpresented 2,400
Less: uncredited (1,000)
Balance as per bank statement 13,400
x + 2,400 – 1,000 = 13,400
x = –13,400 + 1,000 – 2,400
x = 12,000

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6. A
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 1,240
Unadjusted closing 1,315 Bank charges 75

1,315 1,315
BRS
Balance as per adjusted cashbook (1,315)
Add: unpresented 450

Less: uncredited (140)

Balance as per bank statement (1,005)
7 D Provided that the cash receipts have been correctly posted to the cash book, then the fact
that they have incorrectly been posted to payables instead of cash sales or receivables will
not affect the bank reconciliation.
8 D All the other options would have the bank account Rs.250 less than the cash book.
9. B
Balance as per adjusted cashbook (500)
Add: unpresented 6,000

Less: uncredited (5,000)

Balance as per bank statement 9,500
10 C When funds are paid out of a bank account, a debit entry appears on a bank statements. A
payment increases an overdraft and decreases a bank balance.
11. D
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 10,500
Credit side under stated 18
Bank charges 175
Adjusted closing 10,693
10,693 10,693
12. B
Balance as per adjusted cashbook (10,693)
Add: unpresented 1,050

Less: uncredited -
Balance as per bank statement (9,643)
(W-1)
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 10,500
Credit side under stated 18
Bank charges 175
Adjusted closing 10,693
10,693 10,693

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13. B The only adjustment that should be made to the cash account is to record the bank
charges. The cheques and lodgements will already have been recorded in the cash
account.
14. D
Cash A/c
Rs. Rs.
Balance b/d 500 3,200
12,600 5,500
Drawings 3,800
Balance c/d 600
13,100 13,100
Bank A/c
Rs. Rs.
5,500 Balance b/d 8,200
8,200
Balance c/d 6,200 Drawings 2,500
11,700 11,700
Total drawings = 3,800 + 2,500 = 6,300
15. B
Cash Book
Rs. Rs.
Bal. b/d 5,000 Creditors (12,000 x 98%) 11,760
Debtor 26,000 Bank charges 125
Sales 2,500 Balance c/d 21,615
33,500 33,500
16.
Bal. as per cash book (901)
Add: unpresented cheques 2,468
Less: uncredited cheques (593)
Balance as per bank statement 974
–901 + 2,468 – 593 = x
x = 974
17. C
Bal. as per cash book 46,800
Add: unpresented cheques 11,500
Less: uncredited cheques (13,100)
Balance as per bank statement 45,200
x + 11,500 – 13,100 = 45,200
x = 45,200 – 13,100 = 11,500
x = 46,800
18 B

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19. D
Balance as per cash book (5,640)
Add: unpresented cheques 10,460
Less: uncredited cheques (11,800)
Balance as per bank statement (6,980)
x + 10,460 – 11,800 = – 6,980
x = – 6,980 + 11,800 – 10,460
x = – 5,640
20. C
Adjusted Cash Book
Rs. Rs.
Unadjusted Closing 10,200 Standing order 350
Dividend income 30 Debit side over stated 180
Debtor 120
Adjusted closing balance 9,580
10,230 10,230
21. B
Adjusted Cash Book
Rs. Rs.
Interest income (150 x 2) 300 Bank charges 30
Standing order 150
22 A Uncleared lodgments are reconciling item cash book balance is not adjusted for those.
Balance to be reported in the statement of financial position is balance as per cash book.
23 A All other items belong to reconciliation statement
24. C
Balance as per cash book 11,050
Add: unpresented cheques 1,550
Less: uncredited cheques (1,200)
Balance as per bank statement 11,400
(W-1)
Adjusted Cash Book
Rs. Rs.
Unadjusted Closing 11,000 Bank charges 50
Interest income 100 Adjusted closing 11,050
11,100 11,100
25. B
Adjusted Cash Book
Rs. Rs.
Unadjusted Closing 11,000 Bank charges 50
Interest income 100 Adjiusted closing 11,050
11,100 11,100
(W-1)
Balance as per cash book 5,100
Add: unpresented cheques 18,500
Less: uncredited cheques (16,200)
Balance as per bank statement 7,400
x + 18,500 – 16,200 = – 7,400
x = 7,400 + 16,200 – 18,500 = 5,100

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26. B
Adjusted Cash Book
Rs. Rs.
Unadjusted Closing 15,000 Bank charges 200
Debtor 1,500 x 2 3,000 Interest expense 150
Creditor 1,200 x 2 2,400
Adjusted closing balance 12,250
18,000 18,000
27. A
Balance as per cash book 3,700
Add: unpresented cheques 1,000
Not credited by bank (100)
Less: uncredited cheques (600)
Balance as per bank statement (4,000)
x + 1,000 – 100 – 600 = 4,000
x = 4,000 – 1,000 + 100 + 600
x = 3,700
28 C Errors in cash book are adjusted to the balance as per cash book and undercasting of error
would have decreased balance of cash that needs to be increased now.
29 B Debit balance as per bank statement means business is a debtor of bank, hence, bank
overdraft.
30 B Standing order and bank charges both are payments and would be deducted from cash
book balance.
31. C
Balance as per adjusted cash book (10,620)
Add: unpresented cheques 4,385
Add: Credited by bank 645
Less: uncredited cheques (6,500)
Balance as per bank statement (12,090)

Adjusted Cash Book

Rs. Rs.
Unadjusted closing balance 9,870
Bank charges 750
Adjusted closing balance 10,620
10,620 10,620
32. A

Adjusted Cash Book

Rs. Rs.
Unadjusted closing 18,020 9,870
Credit side understated 5,000
10,620 Bank charges 420
Adjusted closing 12,600
18,020 18,020

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(W-1)
Balance as per adjusted cash book 12,600
Add: unpresented cheques 1,200
Less: uncredited cheques (1,300)
Less: wrongly debited by bank (900)
Balance as per bank statement 11,600
x + 1,200 – 1,300 – 900 = 11,600
x = 11,600 – 1,300 + 900 – 1,200
x = 12,600
33. B
Balance as per adjusted cash book 5,250
Add: unpresented cheques 630
Less: uncredited cheques (460)
Balance as per bank statement 5,420
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 4,910 9,870
340 Adjusted closing 5,250
5,250 5,250
34. A
Balance as per adjusted cash book (8,900)
Add: unpresented cheques 2,500
Less: uncredited cheques -
Balance as per bank statement (6,400)

Adjusted Cash Book

Rs. Rs.
Unadjusted closing 8,000
Adjusted closing 8,900 Bank charges 900
8,900 8,900
35. A
Balance as per adjusted cash book
Add: unpresented cheques 1,500
Less: uncredited cheques (1,300)
Balance as per bank statement -
(W-1)
Adjusted Cash Book
Rs. Rs.
Unadjusted closing balance 25,000 8,000
25 Standard order 200
8,900 Adjusted closing balance -
25,025 25,025

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36. C
Adjusted Cash Book
Rs. Rs.

Balance as per adjusted cash book 1,700

Add: unpresented cheques 500
Less: uncredited cheques (3,200)
Balance as per bank statement (1,000)
x + 500 – 3,200 = –1,000
x = –1,000 + 3,200 – 500
x = 1,700
37 D
38 B
39 C
40 D
41 A
42 B
43 C
44 A
45 B
46 B
47 B
48 A
49 C
50 B
51. B Deducted from balance of bank statement or added to balance of cash book
52. B
Balance as per adjusted cash book 52,500
Add: unpresented cheques 6,300
Less: uncredited cheques (4,600)
Balance as per bank statement 54,200
(W-1)
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 49,100
balance
3,400 Adjusted closing balance 52,500
52,500 52,500

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53. D
Balance as per adjusted cash book (1,650)
Add: Wrongly credited by bank 15
Add: uncredited cheques 56
Less: uncredited cheques (128)
Balance as per bank statement (1,707)
(W-1)
Adjusted Cash Book
Rs. Rs.
Unadjusted closing balance 1,350
Adjusted closing 1,650 Standing order 300
1,650 1,650
54. B
Note that the draft ledger account balance shows an overdraft,, however the bank
statement shows a positive balance:
Bank Ledger
statement account
Rs. Rs.
Balance per question 250 (190)
Unpresented cheques (150)
Misposting of cash receipt 260
Bank interest 30
100 100
55.
True False
When preparing a bank reconciliation, unpresented cheques ✓
must be deducted from a balance of cash at bank shown in
the bank statement.
A cheque from a customer paid into the bank but ✓
dishonoured must be corrected by making a debit entry in
the cash book.
An error by the bank must be corrected by an entry in the ✓
cash book.
An overdraft is a debit balance in the bank statement. ✓
Item 1 unpresented cheques are those issued by a business but not yet banked by the
recipient. They should be deducted from the balance shown on the bank
statement in order to reflect the true bank balance.
Item 2 a dishonoured cheque is recorded by crediting the cash book. The cheque would
previously have been debited to cash when received. The credit is the reversal of
that entry.
Item 3 a bank error should be corrected by amendment to the balance per the bank
statement.
Item 4 from the bank's perspective an overdraft means that they are owed money by the
customer. Hence it is shown as a debit (an asset to the bank) in the bank
statement.

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56. B
Balance as per adjusted cash book (33,630)
Add: unpresented cheques 14,260
Less: uncredited cheques (19,270)
Balance as per bank statement (38,640)
x + 14,260 – 19,270 = –38,640
x = –38,640 – 19,270 – 14,260
x = –33,630

57. B
Balance as per adjusted cash book (463)
Add: unpresented cheques 1,250
Less: uncredited cheques (890)
Less: Wrongly debited by bank (97)
Balance as per bank statement (200)
x + 1,250 – 890 – 97 = – 200
x = –200 + 97 + 890 – 1,250
x = –463

58. B
Balance as per adjusted cash book (9,520)
Add: unpresented cheques 3,275
Add: Wrongly debited by bank 425
Less: uncredited cheques (5,380)
Balance as per bank statement (11,200)
x – 9,520 + 3,275+ 425 – 5,380 = x
x = 11,200
Adjusted Cash Book
Rs. Rs.
Unadjusted closing balance 8,970
Adjusted closing 9,520 Bank charges 550
9520 9520

59. B
Balance as per adjusted cash book 12,000
Add: unpresented cheques 1,400
Less: uncredited cheques -
Balance as per bank statement 13,400
(W-1)
Adjusted Cash Book
Rs. Rs.
Unadjusted closing balance 11,960 8,970
debtor 195 Debtor 300
Credit side overstated 195 Bank charges 50
Adjusted closing balance 12,000
12,350 12,350

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60. D
Balance as per adjusted cash book (1,227)
Add: unpresented cheques 824
Add: Wrongly credited by bank 25
Less: uncredited cheques (337)
Balance as per bank statement (715)
x – 824 + 25 – 337 = – 715
x = –715 + 337 – 824 – 25
x = –1,227

61. D
Adjusted Cash Book
Rs. Rs.
Unadjusted closing balance 5,675
Standing order by 125 Debtor 450
Credit side overstated 450
Adjusted closing balance 6,450
6,575 6,575

62. B
Adjusted Cash Book
Rs. Rs.
Balance b/d 485
Sales 1,450 Creditor (1,800 x 95%) 1,710
Debtor 2,400 Debtor 250
Balance c/d 1,405
3,850 3,850

63. B
Balance as per adjusted cash book (880)
Add: unpresented cheques 80
Less: uncredited cheques -
Balance as per bank statement (800)

64. B
Adjusted Cash Book
Rs. Rs.
Unadjusted closing balance 2,490 Balance charges 50
Debtor 140
Adjusted closing balance 2,300
2,490 2,490
65. A
Balance as per adjusted cash book (1,315)
Add: unpresented cheques 450
Less: uncredited cheques (140)
Balance as per bank statement (1,005)

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(W-1)
Adjusted Cash Book
Rs. Rs.
Unadjusted closing balance 1,240
Adjusted closing balance 1,315 Balance charges 75

1,315 1,315
66. C
An unrecorded difference is a transaction that is reflected in the bank statement but has
not yet been entered into the cash book - usually because the accountant is not aware of
the transaction until advised by the bank.
Examples include direct debits, standing orders, bank charges, bank interest, dishonoured
cheques and direct credits. Uncleared lodgements and unpresented cheques are examples
of timing differences - amounts which have been entered into the cash book but have not
yet cleared the bank.
67. A
Balance as per adjusted cash book 1,060
Add: unpresented cheques 2,800
Less: uncredited cheques (5,000)
Balance as per bank statement (1140)
68. B
Balance as per adjusted cash book 150,000
Add: unpresented cheques 20,000
Less: uncredited cheques (30,000)
Balance as per bank statement (140,000)
69. D
Balance as per adjusted cash book 270,000
Add: unpresented cheques 20,000
Less: uncredited cheques (30,000)
Balance as per bank statement (260,000)
70. D
Balance as per adjusted cash book 185,000
Add: unpresented cheques 70,000
Less: uncredited cheques (80,000)
Balance as per bank statement 175,000
71. D
Balance as per adjusted cash book 350,000
Add: unpresented cheques (275,000 – 205,000) 70,000
Less: uncredited cheques (395,000 – 315,000) (80,000)
Balance as per bank statement 340,000
72. B
Balance as per adjusted cash book (25,000)
Add: unpresented cheques 50,000
Less: uncredited cheques (20,000)
Balance as per bank statement 5,000
x – 25,000 + 50,000 – 20,000 = 5,000

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73. C
Balance as per adjusted cash book (25,000)
Add: unpresented cheques 80,000
Less: uncredited cheques (120,000)
Balance as per bank statement (65,000)
x – 25,000 + 80,000 – 120,000 = x
x = – 65,000

74. C
Balance as per adjusted cash book (360,000)
Add: unpresented cheques 80,000
Less: uncredited cheques (120,000)
Balance as per bank statement (400,000)
x – 360,000 + 80,000 – 120,000 = x
x = – 400,000

75. A
Balance as per adjusted cash book 150,000
Add: unpresented cheques 50,000
Less: uncredited cheques (600,000)
Balance as per bank statement (400,000)

76. B
Balance as per adjusted cash book 155,000
Add: unpresented cheques 20,000
Less: uncredited cheques (15,000)
Balance as per bank statement (160,000)
Adjusted Cash Book
Rs. Rs.
Unadjusted closing 185,000 Balance charges 10,000
balance
Profit on PLS 30,000 Standing order payment 50,000
Adjusted closing balance 155,000
215,000 215,000

77. C
Balance as per adjusted cash book 215,000
Add: unpresented cheques 30,000
Less: uncredited cheques (5,000)
Balance as per bank statement (240,000)
Adjusted Cash Book
Rs. Rs.
Unadjusted cash book 185,000 Bank commission 10,000
Profit on PLS 30,000 Creditors 50,000
60,000 Adjusted closing balance 215,000
275,000 275,000

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CHAPTER-10 BANK RECONCILIATIONS

78. D
Balance as per adjusted cash book (1,650)
Add: unpresented cheques 56
Add: Wrongly credited by bank 15
Less: uncredited cheques (128)
Balance as per bank statement (1,707)
x – 1,650 + 56 + 15 – 128 = x
x = – 1,707
Adjusted Cash Book
Rs. Rs.
Unadjusted closing balance 1,350
Standing order 300
Adjusted closing balance 1,650
1,650 1,650
79. B
80.
True False
When preparing a bank reconciliation, un-presented cheques must be deducted ✓
from a balance of cash at bank shown in the bank statement.
A cheque from a customer paid into the bank but dishonored must be corrected ✓
by making a debit entry in the cash book.
An error by the bank must be corrected by an entry in the cash book. ✓
An overdraft is a debit balance in the bank statement. ✓
81. B
Balance as per adjusted cash book (33,630)
Add: unpresented cheques 14,260

Less: uncredited cheques (19,270)

Balance as per bank statement (38,640)
x + 14,260 – 19,270 = –38,640
x = – 38640 + 19270 – 14,260
x = – 33630
82. B
Balance as per adjusted cash book (462)
Add: unpresented cheques 1,250
Less: uncredited cheques (890)
Balance as per bank statement (200)
x + 1,250 – 890 – 97 = –200
x = – 200 – 1250 + 890 + 97 x = – 463
83. B
Adjusted Cash Book
Rs. Rs.
Unadjusted c/d 11,960 Bank charges 50
Debtor (195 x 2) 390 Dishonoured cheques 300
Adjusted closing 12,000
12,350 12,350

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CHAPTER-10 BANK RECONCILIATIONS

(W-1)
Balance as per adjusted cash book 12,000
Add: unpresented cheques 1,400
Less: uncredited cheques -
Balance as per bank statement 13,400

84. D
Balance as per adjusted cash book (1,227)
Add: unpresented cheques 824
Add: Wrong credit by bank 25
Less: uncredited cheques (337)
Balance as per bank statement (715)
x + 824 + 25 – 337 = –715
x = – 715 – 824 – 25 + 337
x = – 1,227
85. D
Adjusted Cash Book
Rs. Rs.
Unadjusted c/d 5,675
Credit side overstated 125 Dishonoured cheques 900
Adjusted c/d 6,450
6,575 6,575

86. B
Balance as per adjusted cash book (880)
Add: unpresented cheques 80

Less: uncredited cheques -

Balance as per bank statement (800)
x + 80 – 0 = –800
x = – 800 – 80
x = – 880
87. C

300