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QCAA Accounting practice questions

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Question 1Financial accounting

Which qualitative characteristic requires that financial information be capable of making a difference to users' decisions?

  1. Timeliness
  2. Verifiability
  3. Relevance Correct answer.
  4. Comparability

Explanation

Relevance means information is capable of influencing economic decisions by helping users evaluate past, present or future events, or confirm or correct earlier evaluations. Comparability, timeliness and verifiability are enhancing characteristics that support useful information but do not themselves make it decision-altering.

Question 2Financial accounting

A business receives $4,400 cash on 1 June for services to be performed evenly over four months from June to September. Under accrual accounting, what amount of revenue is recognised for June?

  1. $1,100 Correct answer.
  2. $0
  3. $4,400
  4. $3,300

Explanation

Under accrual accounting, revenue is recognised when the performance obligation is satisfied, not when cash is received. One quarter of the service is delivered in June, so $4,400 divided by four months gives $1,100 of revenue for that month. The remaining $3,300 is a liability for unearned revenue.

Question 3Financial accounting

Which of the following is classified as a current liability in a classified balance sheet?

  1. GST receivable from the tax authority
  2. A bank loan repayable in five years
  3. Equipment held for use in operations
  4. Accrued wages payable to employees Correct answer.

Explanation

A current liability is an obligation expected to be settled within twelve months or within the normal operating cycle. Accrued wages are owed to employees in the next pay period, so they are current. Long-term loans, receivables and non-current assets fall outside this classification.

Question 4Financial accounting

A business pays $660 cash for a one-year insurance policy on 1 July. What is the effect on the accounting equation on that date?

  1. Assets decrease $660 and liabilities decrease $660
  2. Assets decrease $660 and equity decreases $660
  3. Assets are unchanged in total and equity is unchanged Correct answer.
  4. Assets increase $660 and liabilities increase $660

Explanation

Paying cash for prepaid insurance exchanges one asset for another: cash falls and the prepaid insurance asset rises by the same amount. Total assets, liabilities and equity are therefore unaffected at the date of payment, with the expense recognised as the cover is used.

Question 5Financial accounting

Which document is issued by a seller to record a reduction in the amount owed by a customer who returned faulty goods?

  1. Statement of account
  2. Purchase order
  3. Credit note Correct answer.
  4. Remittance advice

Explanation

A credit note is issued by the seller to reduce the amount receivable when goods are returned or an allowance is granted. It records the reduction in the customer's debt and adjusts the sales figure previously invoiced.

Question 6Financial accounting

Which of the following is an example of a transaction that must be recorded in the accounting records of a business?

  1. A bank transfer received from a debtor in full settlement Correct answer.
  2. A customer enquiring about future prices
  3. An employee requesting annual leave for next year
  4. The owner's personal payment of a household bill from private funds

Explanation

Only transactions with a measurable financial effect on the entity are recorded, and the entity concept separates business from owner affairs. A cash receipt from a debtor reduces the bank asset and the accounts receivable asset, so it is recorded. Enquiries, requests and private payments have no recordable effect on the business.

Question 7Financial accounting

A firm uses the straight-line method for a vehicle costing $36,000 with a residual value of $6,000 and a useful life of five years. What is the annual depreciation expense?

  1. $6,600
  2. $7,200
  3. $8,400
  4. $6,000 Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. The depreciable amount is $30,000, which divided by five years gives $6,000 per year.

Question 8Financial accounting

Which accounting record is used to classify and summarise transactions by account before they are posted to the ledger?

  1. Bank reconciliation
  2. Journal Correct answer.
  3. Balance sheet
  4. Trial balance

Explanation

The journal is the book of original entry where transactions are analysed into debits and credits with a narration. Those entries are then posted to the ledger accounts, and the ledger balances later form the trial balance.

Question 9Financial accounting

A business has current assets of $84,000 and current liabilities of $56,000. It then pays $14,000 of accounts payable using cash. What is the current ratio after the payment?

  1. 2.00 : 1
  2. 1.50 : 1
  3. 1.40 : 1
  4. 1.67 : 1 Correct answer.

Explanation

Paying a current liability with cash reduces current assets to $70,000 and current liabilities to $42,000. The current ratio becomes $70,000 divided by $42,000, which is 1.67 to 1. Both numerator and denominator fall by the same amount, so the ratio rises from 1.50.

Question 10Financial accounting

A business reports profit of $52,000, an increase in accounts receivable of $9,000 and depreciation of $11,000. Using the indirect method, what is net cash flow from operating activities?

  1. $32,000
  2. $72,000
  3. $50,000
  4. $54,000 Correct answer.

Explanation

Under the indirect method, non-cash depreciation is added back and an increase in receivables is deducted because sales exceeded cash collected. Starting from $52,000, add $11,000 and subtract $9,000 to obtain $54,000 of operating cash inflow.

Question 11Financial accounting

Which entry correctly records a dishonoured customer cheque that was previously deposited and recorded as a receipt?

  1. Debit Accounts Receivable; credit Bank Correct answer.
  2. Debit Bank; credit Bad Debts
  3. Debit Bank; credit Accounts Receivable
  4. Debit Bad Debts; credit Accounts Receivable

Explanation

When a customer's cheque is dishonoured, the bank balance falls and the customer again owes the amount. The entry reverses the earlier receipt by debiting Accounts Receivable and crediting Bank, keeping the debt recoverable rather than writing it off.

Question 12Financial accounting

A business uses the allowance method for doubtful debts. It writes off $1,600 as bad debt against an existing allowance. What is the effect on profit and on net accounts receivable?

  1. Profit decreases; net receivables decrease
  2. Profit unchanged; net receivables unchanged Correct answer.
  3. Profit unchanged; net receivables decrease
  4. Profit decreases; net receivables unchanged

Explanation

Writing off a debt against an existing allowance debits the allowance and credits accounts receivable, so no expense is recognised at write-off and profit is unaffected. Gross receivables and the allowance fall by equal amounts, leaving net receivables unchanged.

Question 13Financial accounting

Which of the following best describes the purpose of the going concern assumption?

  1. It justifies preparing financial reports on the basis that the entity will continue operating Correct answer.
  2. It requires the owner's private assets to be included in the reports
  3. It requires assets to be recorded at their current market value
  4. It requires revenue to be recorded only when cash is received

Explanation

Going concern assumes the entity will continue in operation for the foreseeable future without liquidation. This supports classifying assets as non-current and carrying them at cost less depreciation rather than at break-up values.

Question 14Financial accounting

A business records sales of $260,000, opening inventory of $38,000, purchases of $150,000 and closing inventory of $32,000. What is the gross profit?

  1. $110,000
  2. $96,000
  3. $104,000 Correct answer.
  4. $72,000

Explanation

Cost of sales equals opening inventory plus purchases less closing inventory, giving $156,000. Gross profit is sales less cost of sales, so $260,000 less $156,000 equals $104,000.

Question 15Financial accounting

Which of the following transactions will cause the trial balance to remain in balance even though an error exists?

  1. Posting a $500 debit as $50 to one account only
  2. Omitting the credit entry for a cash purchase
  3. Recording a cash sale as a debit to Bank and no credit entry
  4. Recording a credit purchase by debiting Equipment and crediting Accounts Payable Correct answer.

Explanation

A trial balance only tests the equality of total debits and credits, not their correctness. Debiting the wrong asset account while crediting the correct liability records equal debits and credits, so the trial balance still balances although the classification is wrong.

Question 16Financial accounting

A business borrows $50,000 on 1 April at 9% per annum interest, with interest paid quarterly in arrears. What adjusting entry is required at 30 June?

  1. Debit Interest Expense $4,500; credit Bank $4,500
  2. Debit Prepaid Interest $1,125; credit Interest Expense $1,125
  3. Debit Interest Payable $1,125; credit Interest Expense $1,125
  4. Debit Interest Expense $1,125; credit Interest Payable $1,125 Correct answer.

Explanation

Three months of interest has accrued but is unpaid at 30 June. Interest is $50,000 multiplied by 9% multiplied by three-twelfths, which equals $1,125, recorded as an expense and a matching liability.

Question 17Financial accounting

A business's inventory turnover is 8 times per year and its gross profit margin is 25%. Which statement best interprets these figures?

  1. The business holds inventory for about 46 days and earns $75 gross profit per $100 of sales
  2. The business holds inventory for about 8 days and earns $75 gross profit per $100 of sales
  3. The business holds inventory for about 46 days and earns $25 gross profit per $100 of sales Correct answer.
  4. The business holds inventory for about 8 days and earns $25 gross profit per $100 of sales

Explanation

Inventory turnover of 8 times means average inventory is held for 365 divided by 8, about 46 days. A gross profit margin of 25% means each $100 of sales yields $25 of gross profit after $75 of cost of sales.

Question 18Financial accounting

Which of the following correctly states the double-entry for an owner contributing a vehicle to the business?

  1. Debit Motor Vehicle; credit Bank
  2. Debit Drawings; credit Motor Vehicle
  3. Debit Capital; credit Motor Vehicle
  4. Debit Motor Vehicle; credit Capital Correct answer.

Explanation

The business gains an asset, the vehicle, which is debited, and the owner's equity increases through a capital contribution, which is credited. No cash or bank movement occurs because the asset is contributed in kind.

Question 19Financial accounting

A company issues 20,000 ordinary shares at $2.50 each, payable $1.00 on application and $1.50 on call. All applications are received and the call is later made and fully paid. What is the balance of the share capital account after the call is paid?

  1. $70,000
  2. $20,000
  3. $50,000 Correct answer.
  4. $30,000

Explanation

Share capital records the total amount called on issued shares, regardless of the timing of instalments. Twenty thousand shares at $2.50 each gives $50,000, which is fully recognised once both the application and call amounts are received.

Question 20Financial accounting

A firm's profit before tax is $90,000 and the tax rate is 30%. It also has $6,000 of non-deductible expenses. What is the tax expense?

  1. $30,000
  2. $28,800 Correct answer.
  3. $25,200
  4. $27,000

Explanation

Non-deductible expenses are added back to accounting profit to determine taxable profit. Taxable profit is $96,000, and 30% of that is $28,800 of tax expense.

Question 21Financial accounting

Which of the following is the correct treatment of a contingent liability that is possible but not probable and cannot be reliably measured?

  1. Recognise it in the balance sheet at an estimated amount
  2. Record it as an expense in the income statement
  3. Ignore it entirely with no disclosure
  4. Disclose it in the notes to the financial statements Correct answer.

Explanation

A contingent liability that is not probable and cannot be reliably measured is not recognised in the financial statements. It is disclosed in the notes so users understand the potential obligation, because recognition requires both probability and reliable measurement.

Question 22Financial accounting

A business uses the reducing balance method at 20% per annum. Equipment costing $40,000 was purchased on 1 July and has been held for two full years. What is the carrying amount at the end of the second year?

  1. $25,600 Correct answer.
  2. $32,000
  3. $24,000
  4. $20,480

Explanation

Reducing balance applies the rate to the carrying amount each year. Year one depreciation is $8,000 leaving $32,000, and year two depreciation is $6,400 leaving a carrying amount of $25,600.

Question 23Financial accounting

A business's accounts receivable total $120,000. It estimates doubtful debts at 4% of receivables. The allowance account currently has a credit balance of $1,200. What is the doubtful debts expense for the period?

  1. $6,000
  2. $1,200
  3. $4,800
  4. $3,600 Correct answer.

Explanation

The required allowance is 4% of $120,000, which is $4,800. Because $1,200 already exists as a credit balance, the expense is the increase needed, being $4,800 less $1,200, or $3,600.

Question 24Financial accounting

A company reports profit of $180,000, a gain on sale of equipment of $12,000, depreciation of $26,000 and a decrease in inventory of $8,000. What is net cash flow from operating activities under the indirect method?

  1. $202,000 Correct answer.
  2. $186,000
  3. $214,000
  4. $226,000

Explanation

The gain on sale is a non-operating item already included in profit and is deducted, while depreciation is added back and the inventory decrease is added as a cash inflow. Thus $180,000 less $12,000 plus $26,000 plus $8,000 equals $202,000.

Question 25Financial accounting

A business reports a gross profit margin of 40% and a net profit margin of 12%. Sales are $400,000 and operating expenses include a large advertising campaign. What does the relationship between the two margins indicate?

  1. Cost of sales absorbs 40% of sales and operating expenses absorb 12% of sales
  2. Cost of sales absorbs 60% of sales and operating expenses absorb 28% of sales Correct answer.
  3. Cost of sales absorbs 12% of sales and operating expenses absorb 40% of sales
  4. Cost of sales absorbs 28% of sales and operating expenses absorb 60% of sales

Explanation

Gross profit margin of 40% means cost of sales is 60% of sales. Net profit margin of 12% means all expenses together absorb 88% of sales, so operating expenses account for the 28% between the two margins. This shows the firm's trading margin is strong but overheads erode most of it.

Question 26Financial accounting

Which qualitative characteristic of financial information requires that reports be free from material error and bias?

  1. Faithful representation Correct answer.
  2. Comparability
  3. Understandability
  4. Timeliness

Explanation

Faithful representation requires that information depicts the economic substance of transactions completely, neutrally and without material error. Comparability, timeliness and understandability are enhancing characteristics concerned with how useful information is, not with whether it truthfully depicts reality.

Question 27Financial accounting

A business receives a bank statement showing bank charges of $75 not yet recorded in its cash records. What is the correct entry in the business's records?

  1. Debit accounts payable $75; credit bank $75
  2. Debit bank $75; credit bank charges expense $75
  3. Debit bank charges expense $75; credit bank $75 Correct answer.
  4. Debit bank $75; credit accounts receivable $75

Explanation

Bank charges are an expense incurred by the business that reduce the bank balance, so the expense account is debited and the bank account is credited. The item appears on the statement before the business records it, so the business must adjust its own cash records, not the statement.

Question 28Financial accounting

Which document is issued by a seller to inform a customer that the amount owed on a previous invoice has been reduced?

  1. Credit note Correct answer.
  2. Statement of account
  3. Purchase order
  4. Remittance advice

Explanation

A credit note records a reduction in the amount a customer owes, for example for returned goods or an overcharge. It is issued by the seller and provides the source document for the return or allowance entry.

Question 29Financial accounting

Which of the following is classified as a non-current liability?

  1. Accounts payable due in 30 days
  2. GST payable to the tax office
  3. Accrued wages payable next week
  4. A ten-year debenture repayable in full at maturity Correct answer.

Explanation

A liability is classified as non-current when the obligation is not expected to be settled within twelve months of the reporting date. A ten-year debenture falls due well beyond that horizon, so it is non-current.

Question 30Financial accounting

A business purchases office supplies for $900 cash. What is the effect on the accounting equation?

  1. Assets decrease $900 and equity decreases $900 Correct answer.
  2. Assets decrease $900 and liabilities decrease $900
  3. Assets increase $900 and liabilities increase $900
  4. Equity decreases $900 and liabilities increase $900

Explanation

Paying cash for supplies converts one asset into another and the supplies consumed are an expense, which reduces equity through profit. The net effect is a fall in total assets with a matching fall in equity, so the equation stays balanced.

Question 31Financial accounting

Which of the following best describes the purpose of the general journal?

  1. To list the balances of ledger accounts to check that debits equal credits
  2. To record transactions that cannot be entered in the special journals, with an explanation of each entry Correct answer.
  3. To record all cash receipts and payments in date order
  4. To summarise the balance of each account at the end of a period

Explanation

The general journal is used for transactions that do not fit the specialised journals, such as adjusting entries, opening entries and corrections, and it includes a narration explaining each entry. This narrative function makes it the record of first entry for non-routine transactions.

Question 32Financial accounting

A business has equity of $140,000 and liabilities of $60,000. What are its total assets?

  1. $60,000
  2. $200,000 Correct answer.
  3. $140,000
  4. $80,000

Explanation

The accounting equation states that assets equal liabilities plus equity. Adding liabilities of $60,000 to equity of $140,000 gives total assets of $200,000.

Question 33Financial accounting

Which of the following costs would normally be capitalised as part of the cost of a new delivery vehicle?

  1. Annual insurance premium paid after purchase
  2. The initial registration and delivery charges to bring the vehicle into use Correct answer.
  3. The first month's fuel costs
  4. Routine servicing six months after purchase

Explanation

The cost of a non-current asset includes all costs necessary to bring the asset to the location and condition ready for its intended use. Registration and delivery charges meet this test, whereas ongoing operating costs are expenses of the periods in which they arise.

Question 34Financial accounting

A business receives $2,400 on 1 March for services to be performed evenly over the next six months. If the business records the receipt as a liability, what adjusting entry is required at 30 June?

  1. Debit service revenue $1,600; credit unearned revenue $1,600
  2. Debit unearned revenue $1,600; credit service revenue $1,600 Correct answer.
  3. Debit unearned revenue $2,400; credit service revenue $2,400
  4. Debit cash $1,600; credit service revenue $1,600

Explanation

Four of the six months have been earned by 30 June, which is $2,400 multiplied by four-sixths, equal to $1,600. The liability is reduced by a debit and the earned portion is recognised as revenue by a credit.

Question 35Financial accounting

A business has an opening allowance for doubtful debts of $2,000. At year end, receivables are $95,000 and the allowance is to be 3% of receivables. What is the adjusting entry?

  1. Debit doubtful debts expense $2,000; credit allowance for doubtful debts $2,000
  2. Debit doubtful debts expense $850; credit allowance for doubtful debts $850 Correct answer.
  3. Debit allowance for doubtful debts $850; credit doubtful debts expense $850
  4. Debit doubtful debts expense $2,850; credit allowance for doubtful debts $2,850

Explanation

The required allowance is 3% of $95,000, which is $2,850. Because $2,000 already exists in the allowance, only the $850 increase is charged as an expense, with the allowance credited to raise it to the required balance.

Question 36Financial accounting

Which of the following errors would be detected by a trial balance that does not balance?

  1. A sale of $540 recorded as a debit of $540 and a credit of $54 Correct answer.
  2. A purchase posted to the wrong supplier's account
  3. A sale completely omitted from the records
  4. A payment of rent debited to rent expense twice in the same amount

Explanation

A trial balance fails to balance when unequal debits and credits are recorded for a transaction. Entering $540 as a debit but only $54 as a credit creates a difference of $486, which the trial balance will reveal.

Question 37Financial accounting

A business's gross profit is $90,000 on sales of $300,000. Operating expenses are $54,000. What is the net profit margin?

  1. 12% Correct answer.
  2. 70%
  3. 18%
  4. 30%

Explanation

Net profit is gross profit of $90,000 less operating expenses of $54,000, giving $36,000. Dividing $36,000 by sales of $300,000 gives a net profit margin of 12%, which measures how much of each sales dollar remains as profit after all expenses.

Question 38Financial accounting

Under the perpetual inventory system, what is the effect of a purchase return of goods originally bought on credit?

  1. Debit purchases returns; credit inventory
  2. Debit accounts payable; credit purchases returns
  3. Debit accounts payable; credit inventory Correct answer.
  4. Debit inventory; credit accounts payable

Explanation

Under perpetual inventory, the inventory account is continuously updated, so returned goods reduce inventory directly. The liability to the supplier is also reduced, giving a debit to accounts payable and a credit to inventory.

Question 39Financial accounting

A business depreciates equipment using the units-of-production method. Equipment costing $80,000 with residual value $8,000 is expected to produce 240,000 units. In the first year, 30,000 units are produced. What is the depreciation expense?

  1. $8,000
  2. $9,000 Correct answer.
  3. $12,000
  4. $10,000

Explanation

The depreciable amount is the cost less residual value, which is $72,000. Dividing by 240,000 expected units gives $0.30 per unit, and multiplying by 30,000 units produced gives $9,000 of depreciation.

Question 40Financial accounting

Which of the following would be classified as an operating activity in a statement of cash flows?

  1. Payment of wages to employees Correct answer.
  2. Repayment of the principal of a bank loan
  3. Issue of shares for cash
  4. Purchase of equipment for cash

Explanation

Operating activities are the cash flows from the entity's principal revenue-producing activities, including receipts from customers and payments to suppliers and employees. Wages are a day-to-day operating cost, so the payment is an operating outflow.

Question 41Financial accounting

A business's inventory turnover is 6 times per year and its accounts receivable turnover is 12 times per year. Which statement best interprets these results?

  1. Inventory is held for about 30 days while receivables are collected in about 61 days
  2. Inventory is held for about 61 days while receivables are collected in about 30 days Correct answer.
  3. Inventory is sold 12 times for every 6 times receivables are collected
  4. Both inventory and receivables are turned over twice as fast as the industry average

Explanation

Dividing 365 days by the turnover rate converts it into an average holding period. Inventory turnover of 6 gives about 61 days, while receivables turnover of 12 gives about 30 days, showing stock sits longer than debts take to collect.

Question 42Financial accounting

A business uses the gross method for cash discounts. It sells goods on credit for $5,000 with terms 2/10, n/30, and the customer pays within the discount period. What entry records the receipt?

  1. Debit bank $4,900; credit accounts receivable $4,900
  2. Debit discount allowed $100; credit accounts receivable $100
  3. Debit bank $5,000; credit accounts receivable $5,000
  4. Debit bank $4,900 and discount allowed $100; credit accounts receivable $5,000 Correct answer.

Explanation

The customer deducts 2% of $5,000, which is $100, so cash received is $4,900. The discount is an expense to the seller recorded as a debit, and the full receivable of $5,000 is cleared by the combined debits.

Question 43Financial accounting

Which of the following is the correct treatment of a provision for a restructuring that has been announced and is legally committed before the reporting date?

  1. Recognise a provision because a present obligation exists and an outflow is probable and measurable Correct answer.
  2. Recognise a provision only when the cash is actually paid
  3. Disclose only as a contingent liability with no journal entry
  4. Ignore it until the next reporting period

Explanation

A provision is recognised when a present obligation arises from a past event, a reliable estimate can be made and an outflow of resources is probable. A committed restructuring creates such an obligation at the reporting date, so the liability is recognised in that period.

Question 44Financial accounting

A company has 100,000 ordinary shares on issue and reports profit after tax of $250,000. It also has $50,000 of 8% preference shares classified as equity. What is earnings per share?

  1. $2.40
  2. $2.50
  3. $2.10 Correct answer.
  4. $2.00

Explanation

Preference dividends of $4,000 are deducted from profit because earnings per share measures profit attributable to ordinary shareholders. Dividing $246,000 by 100,000 ordinary shares gives $2.10 per share.

Question 45Financial accounting

A business has a current ratio of 2.0 and a quick ratio of 0.8. Which statement best explains this difference?

  1. A large proportion of current assets is held as inventory, which is excluded from the quick ratio Correct answer.
  2. The business has a high level of long-term debt
  3. The business holds too much cash relative to its current liabilities
  4. Accounts receivable are collected faster than inventory is sold

Explanation

The quick ratio removes inventory and prepayments from current assets because they may not convert to cash quickly. A current ratio of 2.0 falling to a quick ratio of 0.8 indicates that inventory makes up a substantial share of current assets.

Question 46Financial accounting

A business receives a loan of $30,000 on 1 April at 8% per annum, interest payable quarterly in arrears. It records interest only when paid. What adjusting entry is needed at 30 June?

  1. Debit interest expense $600; credit accrued interest $600 Correct answer.
  2. No entry is required because interest is paid quarterly
  3. Debit interest expense $2,400; credit accrued interest $2,400
  4. Debit accrued interest $600; credit interest expense $600

Explanation

Three months of interest have accrued by 30 June, calculated as $30,000 multiplied by 8% multiplied by three-twelfths, which equals $600. Matching requires the expense and the liability to be recognised in the period they are incurred.

Question 47Financial accounting

A machine costing $120,000 with accumulated depreciation of $45,000 is sold for $68,000. What is the result on disposal?

  1. A loss on disposal of $7,000 Correct answer.
  2. A loss on disposal of $23,000
  3. A gain on disposal of $68,000
  4. A gain on disposal of $7,000

Explanation

The carrying amount is cost of $120,000 less accumulated depreciation of $45,000, which is $75,000. Proceeds of $68,000 are $7,000 less than the carrying amount, so a loss on disposal of $7,000 is recorded.

Question 48Financial accounting

A business's profit is $84,000. It has interest expense of $12,000 and tax expense of $24,000. What is the times interest earned ratio?

  1. 7.0 times
  2. 8.0 times
  3. 10.0 times Correct answer.
  4. 12.0 times

Explanation

Times interest earned divides earnings before interest and tax by interest expense. Adding interest of $12,000 and tax of $24,000 back to profit gives $120,000, which divided by $12,000 equals 10.0 times.

Question 49Financial accounting

A business uses the revaluation model. Equipment with a carrying amount of $200,000 is revalued to $260,000. There is no previous revaluation. Which entry records the revaluation?

  1. Debit equipment $60,000; credit revaluation surplus $60,000 Correct answer.
  2. Debit equipment $60,000; credit revaluation gain in profit or loss $60,000
  3. Debit revaluation surplus $60,000; credit revaluation gain in profit or loss $60,000
  4. Debit revaluation surplus $60,000; credit equipment $60,000

Explanation

An upward revaluation with no prior downward revaluation is recognised in other comprehensive income and accumulated in a revaluation surplus within equity. The asset is increased by a debit and the surplus is credited, so profit is not affected.

Question 50Financial accounting

A business has sales of $500,000, a gross profit margin of 30% and an inventory turnover of 5 times. What is the average inventory?

  1. $150,000
  2. $100,000
  3. $30,000
  4. $70,000 Correct answer.

Explanation

Cost of goods sold is 70% of $500,000, which equals $350,000. Inventory turnover equals cost of goods sold divided by average inventory, so average inventory is $350,000 divided by 5, giving $70,000.