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Pancyprian Accounting practice questions

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Question 1Financial Accounting

Under the accrual basis, a sale of goods on credit is recognised as revenue when which of the following occurs?

  1. The goods are delivered and control passes to the buyer Correct answer.
  2. The invoice is mailed to the customer
  3. The order is received from the customer
  4. The customer pays the invoice

Explanation

Under accrual accounting, revenue is recognised when the performance obligation is satisfied, which for a sale of goods normally means when control of the goods transfers to the buyer. Receipt of cash and invoicing are separate events that do not determine the timing of revenue recognition.

Question 2Financial Accounting

A business pays €1,200 in advance for twelve months of insurance on 1 April. What is the correct accounting entry on 1 April?

  1. Debit Bank €1,200; credit Prepaid insurance €1,200
  2. Debit Insurance expense €1,200; credit Prepaid insurance €1,200
  3. Debit Insurance expense €1,200; credit Bank €1,200
  4. Debit Prepaid insurance €1,200; credit Bank €1,200 Correct answer.

Explanation

At the payment date no part of the cover has been consumed, so the amount is an asset (prepaid insurance) rather than an expense. The asset is debited and bank is credited because cash leaves the business. The expense is recognised later as the cover is used.

Question 3Financial Accounting

Which of the following best describes the purpose of a trial balance?

  1. To prove that every transaction has been recorded in the correct ledger account
  2. To confirm that no asset has been overstated
  3. To check that total debits equal total credits in the ledger Correct answer.
  4. To determine the profit or loss for the accounting period

Explanation

A trial balance is a list of ledger balances used to test the arithmetical equality of debits and credits. It cannot detect errors of principle, compensating errors, or transactions entirely omitted, so it is a limited check rather than proof of accuracy.

Question 4Financial Accounting

An entity buys equipment for €20,000 with an estimated residual value of €2,000 and a useful life of six years. Using straight-line depreciation, what is the annual charge?

  1. €3,000 Correct answer.
  2. €3,333
  3. €2,667
  4. €2,000

Explanation

Straight-line depreciation spreads the depreciable amount, cost less residual value, evenly over the useful life. Here (€20,000 − €2,000) ÷ 6 = €3,000 per year. Depreciating the full cost ignores the residual value.

Question 5Financial Accounting

Which of the following is a current liability?

  1. Trade payables due within 30 days Correct answer.
  2. Retained earnings
  3. Motor vehicles held for use in the business
  4. A bank loan repayable in five years

Explanation

A current liability is an obligation expected to be settled within the normal operating cycle or within twelve months. Trade payables due in 30 days meet that definition, whereas long-term borrowings are non-current.

Question 6Financial Accounting

A trader takes goods costing €300 for personal use. What is the correct double entry?

  1. Debit Capital €300; credit Bank €300
  2. Debit Drawings €300; credit Sales €300
  3. Debit Drawings €300; credit Purchases €300 Correct answer.
  4. Debit Purchases €300; credit Drawings €300

Explanation

Goods withdrawn by the owner are not sold and must be removed from the business at cost. Drawings are debited (reducing equity) and purchases are credited to remove the cost from inventory purchases. No sale has occurred, so sales are not affected.

Question 7Financial Accounting

Which qualitative characteristic requires that financial information be free from material error and bias and represent faithfully what it purports to represent?

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

Explanation

Faithful representation means information depicts the economic substance of transactions completely, neutrally and without material error. The other characteristics enhance usefulness but do not carry this definition.

Question 8Financial Accounting

A business has opening inventory €8,000, purchases €45,000 and closing inventory €10,000. What is the cost of sales?

  1. €43,000 Correct answer.
  2. €45,000
  3. €63,000
  4. €47,000

Explanation

Cost of sales equals opening inventory plus purchases less closing inventory: €8,000 + €45,000 − €10,000 = €43,000. Closing inventory is deducted because it remains an asset rather than being consumed in the period.

Question 9Financial Accounting

Which of the following errors will cause a trial balance to disagree?

  1. Omitting an entire cash sale from the books
  2. Recording a sale of €250 as €520 in both the sales and receivables accounts
  3. Recording a purchase of office equipment as a purchase of stationery
  4. Recording a sale of €500 in the sales account only, omitting the debit to receivables Correct answer.

Explanation

Posting only one side of a transaction leaves the ledger with an unmatched debit or credit, so total debits and credits will differ. Errors of principle, compensating errors and complete omissions all leave the trial balance in balance.

Question 10Financial Accounting

An entity uses the allowance method. It has receivables of €80,000 and decides that a specific debt of €3,000 is irrecoverable. What is the effect of writing off this specific debt using the allowance already provided?

  1. Total assets decrease by €3,000
  2. The allowance for doubtful debts is reduced by €3,000 and receivables are reduced by €3,000 Correct answer.
  3. Receivables are unchanged and the allowance is increased
  4. Profit for the period decreases by €3,000

Explanation

Where an allowance already exists, the write-off simply uses it: the allowance is debited and the receivable credited. Profit is not affected again because the expense was recognised when the allowance was created. Total assets are unchanged because both the gross receivable and the contra-asset fall by the same amount.

Question 11Financial Accounting

A company issues 10,000 ordinary shares of nominal value €1 at €2.50 each. What is the credit to the share premium account?

  1. €25,000
  2. €35,000
  3. €15,000 Correct answer.
  4. €10,000

Explanation

Share capital is credited with the nominal amount (10,000 × €1 = €10,000) and the excess over nominal value goes to share premium. The premium is 10,000 × €1.50 = €15,000, so total proceeds of €25,000 are split between the two equity accounts.

Question 12Financial Accounting

Goods are sold for €4,000 under terms 2/10, net 30, and the customer pays within the discount period. Using the gross method, what amount is received and how is the discount treated?

  1. €3,600 received; €400 recorded as a sales discount
  2. €4,000 received; no discount recorded
  3. €3,920 received; €80 recorded as a sales discount contra-revenue Correct answer.
  4. €3,920 received; €80 recorded as an expense

Explanation

A 2% discount on €4,000 is €80, so the customer pays €3,920. Under the gross method the discount is recorded when taken as a sales discount, which is a contra-revenue account deducted from gross sales.

Question 13Financial Accounting

A machine costing €50,000 with accumulated depreciation of €38,000 is sold for €9,000. What is the profit or loss on disposal?

  1. Profit of €3,000
  2. Loss of €12,000
  3. Profit of €9,000
  4. Loss of €3,000 Correct answer.

Explanation

Carrying amount is cost less accumulated depreciation: €50,000 − €38,000 = €12,000. Proceeds of €9,000 are €3,000 below carrying amount, giving a loss on disposal of €3,000.

Question 14Financial Accounting

Which of the following costs should be capitalised as part of the cost of a new delivery van?

  1. The cost of the first full service carried out six months after purchase
  2. The annual road tax paid after the van is in use
  3. The non-refundable registration fee paid to bring the van into use Correct answer.
  4. The driver's monthly salary

Explanation

The cost of a non-current asset includes purchase price and any directly attributable costs necessary to bring the asset to its working condition and location. A non-refundable registration fee meets that test, whereas running costs after the asset is in use are expensed.

Question 15Financial Accounting

A business receives a bank statement showing a balance of €5,200 while its cash book shows €4,700. Outstanding cheques total €900 and deposits not yet credited total €400. What is the correct adjusted cash book balance before any further items?

  1. €4,700, unchanged by outstanding cheques and deposits Correct answer.
  2. €5,700
  3. €5,200
  4. €4,200

Explanation

Outstanding cheques and deposits not yet credited are timing differences that affect the bank statement, not the cash book. They are used in the bank reconciliation statement to reconcile the bank balance, so the cash book balance remains €4,700 until items such as bank charges or errors are adjusted.

Question 16Financial Accounting

A company has profit before tax of €120,000. Depreciation charged was €15,000, an increase in inventory of €8,000 and a decrease in trade payables of €5,000 occurred. What is the net cash flow from operating activities before tax paid?

  1. €132,000
  2. €148,000
  3. €138,000
  4. €122,000 Correct answer.

Explanation

Starting with profit before tax, add back the non-cash depreciation of €15,000 and deduct the working capital outflows: the inventory increase of €8,000 and payables decrease of €5,000. That gives €120,000 + €15,000 − €8,000 − €5,000 = €122,000.

Question 17Financial Accounting

An entity's statement of financial position shows total assets of €500,000 and total liabilities of €320,000. It then declares a dividend of €30,000 that has not yet been paid. What is equity immediately after the declaration?

  1. €210,000
  2. €150,000 Correct answer.
  3. €180,000
  4. €120,000

Explanation

Equity before the dividend is €500,000 − €320,000 = €180,000. Declaring an unpaid dividend creates a liability of €30,000 and reduces equity by the same amount, giving €150,000.

Question 18Financial Accounting

Which of the following best explains why a revaluation surplus on property is credited to other comprehensive income rather than profit or loss?

  1. Property revaluations are prohibited from being recognised in the accounts
  2. The surplus represents a cash inflow that must be deferred
  3. Revaluation surpluses are always taxable in the year they arise
  4. The surplus has not yet been realised through a sale, so it is recognised outside profit or loss Correct answer.

Explanation

An upward revaluation reflects an unrealised increase in the carrying amount of the asset. It is recognised in other comprehensive income and accumulated in equity as a revaluation reserve until realised, for example on disposal.

Question 19Financial Accounting

A business has a gross profit margin of 25% and sales of €200,000. If cost of sales increases by €10,000 with sales unchanged, what is the new gross profit margin?

  1. 30%
  2. 25%
  3. 15%
  4. 20% Correct answer.

Explanation

At a 25% margin, gross profit is €50,000 and cost of sales is €150,000. An increase of €10,000 raises cost of sales to €160,000, so gross profit falls to €40,000, which is 20% of €200,000.

Question 20Financial Accounting

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

  1. Ignore it entirely because it cannot be measured
  2. Disclose it in the notes unless the possibility of outflow is remote Correct answer.
  3. Recognise it as a provision and reduce equity
  4. Recognise it as a liability in the statement of financial position

Explanation

A contingent liability is not recognised because it is not a present obligation with probable outflow that can be measured reliably. It is disclosed in the notes unless the possibility of an outflow is remote, so users are still informed.

Question 21Financial Accounting

A company's inventory at the year end cost €60,000 but its net realisable value is estimated at €52,000. What is the required accounting treatment?

  1. Carry inventory at €56,000 as an average of the two amounts
  2. Carry inventory at €52,000 and recognise an expense of €8,000 Correct answer.
  3. Carry inventory at €52,000 and recognise a revaluation surplus of €8,000
  4. Carry inventory at €60,000 and disclose the difference in the notes

Explanation

Inventory is measured at the lower of cost and net realisable value. Since net realisable value of €52,000 is below cost of €60,000, the inventory is written down by €8,000 and the write-down is recognised as an expense in profit or loss.

Question 22Financial Accounting

An entity's trade receivables are €120,000 and it maintains an allowance of 5%. It then decides that a specific debt of €4,000 is irrecoverable and writes it off against the allowance. What is the allowance balance after the write-off, before any year-end adjustment?

  1. €2,000
  2. €6,000
  3. €4,000
  4. €5,800 Correct answer.

Explanation

The allowance was 5% of €120,000 = €6,000. Writing off €4,000 against the allowance reduces it to €2,000, and receivables fall to €116,000. A 5% allowance on the remaining receivables would be €5,800, which is the year-end adjustment target.

Question 23Financial Accounting

A company uses the reducing balance method at 20% per year. An asset costing €40,000 was bought on 1 July and the year end is 31 December. What is the depreciation charge for the first year?

  1. €2,000
  2. €6,400
  3. €4,000 Correct answer.
  4. €8,000

Explanation

Reducing balance depreciation of 20% on €40,000 would be €8,000 for a full year. Since the asset was held for only six months, the charge is apportioned: €8,000 × 6/12 = €4,000.

Question 24Financial Accounting

An entity reports profit before tax of €90,000. It has a tax expense of €18,000 and an increase in the revaluation reserve of €12,000 arising from a property revaluation. What is total comprehensive income for the year?

  1. €96,000
  2. €72,000
  3. €84,000 Correct answer.
  4. €60,000

Explanation

Total comprehensive income comprises profit or loss plus other comprehensive income. Profit after tax is €90,000 − €18,000 = €72,000, and the revaluation surplus of €12,000 is other comprehensive income, giving €84,000.

Question 25Financial Accounting

A company issues a €100,000 5% bond at a discount, receiving €96,000. Interest of €5,000 is paid in the year. Using the effective interest method with an effective rate of approximately 6.5%, what is the finance cost recognised for the year?

  1. €6,240 Correct answer.
  2. €5,000
  3. €4,800
  4. €6,500

Explanation

Under the effective interest method the finance cost is the carrying amount multiplied by the effective rate: €96,000 × 6.5% = €6,240. The difference between this and the €5,000 coupon paid increases the carrying amount of the liability towards par.

Question 26Financial Accounting

Under the accruals basis, rent of €1,200 for the three months October to December was paid in December, but €900 of rent relating to November and December had been paid in advance in the previous accounting period. Which concept explains why the €900 is not treated as an expense of the current period?

  1. The accruals concept, because the expense is matched to the period whose benefit it represents Correct answer.
  2. The business entity concept, because the owner and the business are separate
  3. The prudence concept, because expenses should never be anticipated
  4. The going concern concept, because the entity is expected to continue trading

Explanation

The accruals concept requires income and expenses to be recognised in the period to which they relate, not when cash moves. The €900 was consumed in the earlier period, so it belongs to that period's statement of profit or loss and is not an expense now.

Question 27Financial Accounting

A trader keeps a three-column cash book. A cheque for €450 received from a credit customer is later dishonoured. What is the correct entry in the cash book?

  1. Credit the bank column with €450 Correct answer.
  2. Debit the discount received column with €450
  3. Credit the discount allowed column with €450
  4. Debit the bank column with €450

Explanation

A dishonoured cheque reverses the earlier receipt, so the bank balance must fall. The bank column is therefore credited with €450 and the customer's account is debited to restore the receivable.

Question 28Financial Accounting

Which of the following is a capital receipt rather than a revenue receipt for a sole trader?

  1. Rent received from a sub-let part of the premises
  2. Interest received on a bank deposit
  3. Cash sales made over the counter
  4. Proceeds from the sale of the shop's delivery van Correct answer.

Explanation

Capital receipts arise from transactions involving non-current assets or capital introduced, not from normal trading. Selling the delivery van disposes of a non-current asset, so the proceeds are capital in nature.

Question 29Financial Accounting

A business pays wages of €2,000 by bank transfer. In the double-entry system, which accounts are debited and credited?

  1. Debit wages expense; credit bank Correct answer.
  2. Debit wages payable; credit wages expense
  3. Debit bank; credit capital
  4. Debit bank; credit wages expense

Explanation

An expense increases with a debit, so the wages expense account is debited. The bank asset decreases, and assets decrease with a credit, so the bank account is credited.

Question 30Financial Accounting

An entity's trial balance totals agree. Which of the following errors would still leave the trial balance in balance?

  1. A purchase of €250 was recorded as €520 in both the purchases and payables accounts
  2. A credit sale was debited to the customer's account and credited to sales
  3. A sale of €700 was completely omitted from the books Correct answer.
  4. A payment of €90 was entered only in the bank account

Explanation

An error of complete omission removes both the debit and the credit, so the two sides of the trial balance remain equal. The trial balance tests arithmetic equality only and cannot detect an entry that was never made.

Question 31Financial Accounting

A sole trader's capital at 1 January was €40,000. During the year the owner introduced €6,000 and withdrew €9,000 for personal use, and profit for the year was €15,000. What is the capital at 31 December?

  1. €52,000 Correct answer.
  2. €70,000
  3. €58,000
  4. €46,000

Explanation

Closing capital equals opening capital plus capital introduced plus profit, less drawings. So €40,000 + €6,000 + €15,000 − €9,000 = €52,000.

Question 32Financial Accounting

A company's statement of financial position shows non-current assets of €250,000, current assets of €90,000 and current liabilities of €60,000. What is the current ratio?

  1. 1.5 : 1 Correct answer.
  2. 4.17 : 1
  3. 0.67 : 1
  4. 2.78 : 1

Explanation

The current ratio is current assets divided by current liabilities. Here €90,000 ÷ €60,000 = 1.5, expressed as 1.5 : 1.

Question 33Financial Accounting

Which of the following best describes the purpose of the statement of changes in equity?

  1. To present the assets, liabilities and equity at a single reporting date
  2. To show the cash generated from operating, investing and financing activities
  3. To explain the difference between accounting profit and taxable profit
  4. To reconcile the opening and closing equity balances by showing movements during the period Correct answer.

Explanation

The statement of changes in equity links the opening and closing equity figures by disclosing items such as profit, dividends, share issues and other comprehensive income. It explains why equity moved during the period.

Question 34Financial Accounting

A business receives an invoice for €1,800 plus VAT at 19%. The invoice is for goods intended for resale. What amount is debited to the purchases account?

  1. €1,800, because recoverable VAT is excluded from the cost of purchases Correct answer.
  2. €2,142, because the gross invoice total is the cost of the goods
  3. €2,142, because VAT is capitalised into inventory
  4. €1,800, because VAT is never recorded in any account

Explanation

Where an entity can recover input VAT, the VAT element is not a cost and is recorded as a receivable from the tax authority. The purchases account is therefore debited with the net €1,800 only.

Question 35Financial Accounting

A trader's inventory records show opening inventory of €5,000, purchases of €38,000, sales of €60,000 and closing inventory of €7,000. What is the gross profit for the period?

  1. €17,000
  2. €31,000
  3. €22,000
  4. €24,000 Correct answer.

Explanation

Cost of sales is €5,000 + €38,000 − €7,000 = €36,000. Gross profit is sales of €60,000 less cost of sales of €36,000, giving €24,000.

Question 36Financial Accounting

An entity's bank statement on 31 March shows an overdraft of €3,000. The cash book shows a credit balance of €2,400. Unpresented cheques total €1,100 and a customer's cheque of €500 paid directly into the bank has not yet been recorded in the cash book. What is the correct balance per the bank statement after reconciliation?

  1. €3,000 overdrawn Correct answer.
  2. €4,100 overdrawn
  3. €1,900 overdrawn
  4. €2,500 overdrawn

Explanation

Starting from the cash book credit balance of €2,400, deduct the €500 bank receipt not yet entered to get €2,900 overdrawn. Adding unpresented cheques of €1,100 gives €4,000, but the question states the statement balance of €3,000; the reconciliation confirms that after adjusting the cash book for the unrecorded receipt and the unpresented cheques, the statement figure of €3,000 overdrawn is consistent.

Question 37Financial Accounting

An entity depreciates a machine costing €60,000 using the straight-line method over 8 years with a residual value of €4,000. After 3 full years, what is the carrying amount?

  1. €21,000
  2. €43,500
  3. €37,500
  4. €39,000 Correct answer.

Explanation

Annual depreciation is (€60,000 − €4,000) ÷ 8 = €7,000. After three years, accumulated depreciation is €21,000, so the carrying amount is €60,000 − €21,000 = €39,000.

Question 38Financial Accounting

A company issues 20,000 ordinary shares of nominal value €1 at €3 each, fully paid. What is the effect on the statement of financial position?

  1. Share capital increases by €60,000 only
  2. Share capital increases by €20,000 and share premium by €40,000 Correct answer.
  3. Share capital increases by €40,000 and share premium by €20,000
  4. Share capital increases by €20,000 and retained earnings by €40,000

Explanation

The share capital account records the nominal value of the shares issued, 20,000 × €1 = €20,000. The excess over nominal value, 20,000 × €2 = €40,000, is credited to share premium.

Question 39Financial Accounting

A business has receivables of €50,000. It writes off a debt of €2,000 as irrecoverable and then maintains an allowance for receivables of 5% of the remaining balance. What is the allowance required after the write-off?

  1. €2,600
  2. €2,400 Correct answer.
  3. €2,500
  4. €2,300

Explanation

After writing off the €2,000 debt, receivables are €48,000. The allowance is 5% of €48,000, which equals €2,400.

Question 40Financial Accounting

Which of the following costs incurred in acquiring a machine should be treated as revenue expenditure?

  1. The cost of transporting the machine to the factory
  2. The annual servicing cost incurred after the machine is brought into use Correct answer.
  3. The cost of installing and testing the machine before use
  4. The import duty paid on the machine

Explanation

Revenue expenditure maintains the asset's existing earning capacity and is charged to the statement of profit or loss. Routine servicing after the machine is operating does not enhance the asset, so it is expensed.

Question 41Financial Accounting

An entity's profit before tax is €80,000. It has a tax expense of €16,000 and paid a dividend of €10,000 during the year. What is the retained profit for the year?

  1. €54,000 Correct answer.
  2. €64,000
  3. €80,000
  4. €70,000

Explanation

Retained profit is profit after tax less dividends. Profit after tax is €80,000 − €16,000 = €64,000, and deducting the €10,000 dividend gives €54,000.

Question 42Financial Accounting

A business has a gross profit margin of 40% and sales of €250,000. It then reduces its selling price so that sales fall to €200,000 while cost of sales remains unchanged. What is the new gross profit?

  1. €30,000
  2. €60,000
  3. €80,000
  4. €50,000 Correct answer.

Explanation

The original cost of sales is 60% of €250,000 = €150,000 and remains unchanged. New gross profit is €200,000 − €150,000 = €50,000.

Question 43Financial Accounting

Which of the following is the correct accounting treatment of a provision for a present obligation where the amount can be reliably estimated?

  1. Ignore it until the obligation is settled in cash
  2. Disclose it as a contingent liability only, with no liability recognised
  3. Recognise the provision as a liability and charge the amount to profit or loss Correct answer.
  4. Recognise the provision as a liability and debit retained earnings

Explanation

A present obligation arising from a past event, where an outflow is probable and the amount can be estimated reliably, is recognised as a provision. The corresponding debit is normally an expense in profit or loss.

Question 44Financial Accounting

An entity uses the reducing balance method at 25% per year. An asset costing €48,000 was purchased on 1 April, and the accounting year ends on 31 December. What is the depreciation charge for the first year, charged on a monthly basis?

  1. €6,750
  2. €12,000
  3. €3,000
  4. €9,000 Correct answer.

Explanation

The annual charge on cost is 25% × €48,000 = €12,000. For nine months from 1 April to 31 December, the charge is €12,000 × 9/12 = €9,000.

Question 45Financial Accounting

Which of the following errors would require a correction through the suspense account?

  1. A purchase invoice was recorded twice in the purchases day book
  2. A credit sale was completely omitted from the accounting records
  3. A payment for repairs was debited to the machinery account instead of the repairs account
  4. A debit entry of €540 was posted to the correct account while the corresponding credit was correctly entered as €450 Correct answer.

Explanation

A suspense account is used only when the trial balance fails to agree because debits and credits differ. Here the debit and credit amounts differ by €90, creating an imbalance that is initially held in a suspense account.

Question 46Financial Accounting

An entity's inventory at the year end has a cost of €45,000. It includes damaged goods costing €6,000 which can be sold for €2,500 after incurring selling costs of €500. What is the value of closing inventory?

  1. €43,500
  2. €45,000
  3. €39,000
  4. €41,000 Correct answer.

Explanation

Inventory is measured at the lower of cost and net realisable value. The damaged goods have a net realisable value of €2,500 − €500 = €2,000, a write-down of €4,000. Closing inventory is therefore €45,000 − €4,000 = €41,000.

Question 47Financial Accounting

A company's statement of cash flows shows profit before tax of €70,000, depreciation of €12,000, an increase in trade receivables of €5,000 and a decrease in trade payables of €3,000. What is the cash generated from operations?

  1. €86,000
  2. €80,000
  3. €74,000 Correct answer.
  4. €62,000

Explanation

Starting with profit before tax of €70,000, add back depreciation of €12,000, deduct the increase in receivables of €5,000 and deduct the decrease in payables of €3,000. This gives €74,000.

Question 48Financial Accounting

An entity revalues its property upwards by €50,000. It then sells the property and transfers the revaluation surplus to retained earnings. What is the accounting effect of the transfer on total equity?

  1. Total equity increases by €50,000
  2. Total equity decreases by €50,000
  3. Total equity is unchanged, because the transfer is between two components of equity Correct answer.
  4. Total equity increases by the amount of the related deferred tax only

Explanation

A transfer from revaluation surplus to retained earnings is a movement within equity, not a gain or loss. One component of equity falls while another rises by the same amount, so total equity is unaffected.

Question 49Financial Accounting

A company has profit before tax of €200,000. The tax charge for the year is €45,000, of which €5,000 relates to an under-provision from the previous year. What is the profit for the year?

  1. €160,000
  2. €145,000
  3. €150,000
  4. €155,000 Correct answer.

Explanation

Profit for the year is profit before tax less the total tax expense recognised in the period. The tax expense of €45,000 includes the €5,000 under-provision, so profit is €200,000 − €45,000 = €155,000.

Question 50Financial Accounting

An entity issues a €200,000 6% bond at a discount, receiving €188,000. Interest of €12,000 is paid in the year. Using the effective interest method with an effective rate of approximately 8%, what is the finance cost recognised for the year?

  1. €16,000
  2. €15,040 Correct answer.
  3. €13,000
  4. €12,000

Explanation

Under the effective interest method, the finance cost is the carrying amount at the start of the period multiplied by the effective rate. Here €188,000 × 8% = €15,040, which exceeds the coupon paid and increases the carrying amount of the liability.