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AP Intermediate Commerce (BIEAP) study materials
AP Intermediate Commerce (BIEAP) study resources

AP Intermediate Commerce (BIEAP) practice questions

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Question 1Book-keeping and Accountancy

Under the double entry system, which account is credited when goods are sold on credit to a customer?

  1. Cash account
  2. Sales account Correct answer.
  3. Drawings account
  4. Purchases account

Explanation

A credit sale increases the income earned by the business, and increases in income are recorded on the credit side of the Sales account. The corresponding debit goes to the customer's personal account as a debtor. Cash is untouched because payment is deferred.

Question 2Book-keeping and Accountancy

A firm purchases furniture for office use and pays by cheque. Which journal entry correctly records this transaction?

  1. Debit Office Expenses account, credit Bank account
  2. Debit Furniture account, credit Bank account Correct answer.
  3. Debit Furniture account, credit Purchases account
  4. Debit Bank account, credit Furniture account

Explanation

Furniture is a fixed asset, so an increase in it is debited. Payment by cheque reduces the bank balance, and a reduction in an asset is credited. Hence Furniture is debited and Bank is credited.

Question 3Book-keeping and Accountancy

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

  1. Prepaid insurance
  2. Trade creditors Correct answer.
  3. Goodwill
  4. Loose tools

Explanation

Trade creditors are amounts owed to suppliers for goods bought on credit and are normally settled within a year, so they are a current liability. Loose tools, goodwill and prepaid insurance all appear on the asset side.

Question 4Book-keeping and Accountancy

The trial balance of a trader tallies, yet the books may still contain an error. Which error leaves the trial balance in agreement?

  1. Recording a purchase of machinery in the Machinery account as 5,400 instead of 4,500
  2. A transaction completely omitted from the books Correct answer.
  3. Posting only the debit side of an entry
  4. Wrong casting of the sales book total

Explanation

Complete omission of a transaction means no debit and no credit is posted, so total debits and total credits are both understated by the same amount and the trial balance still agrees. Errors of casting and one-sided postings disturb the totals.

Question 5Book-keeping and Accountancy

A trader's closing stock at the end of the year was valued at 48,000 but had been recorded in the books as 84,000. What is the effect of this error on the reported gross profit?

  1. Gross profit is unaffected because closing stock is a balance sheet item
  2. Gross profit is understated by 36,000
  3. Gross profit is overstated by 84,000
  4. Gross profit is overstated by 36,000 Correct answer.

Explanation

Closing stock is deducted from cost of goods sold, so an inflated closing stock reduces the charge and inflates gross profit. The overstatement is the difference, 84,000 less 48,000, that is 36,000.

Question 6Book-keeping and Accountancy

Goods costing 20,000 were sent to a customer on sale or return basis and were still with the customer at the year end; the customer had not signified approval. How should these goods be treated in the seller's final accounts?

  1. Record a sale but create a provision for bad debts
  2. Include them in sales and debtors at invoice price
  3. Deduct them from purchases and ignore them entirely
  4. Treat them as closing stock at cost and record no sale Correct answer.

Explanation

Under sale or return, property passes only when the buyer approves or retains the goods beyond the stipulated period. Until then the transaction is not a sale, so the goods remain the seller's stock and are valued at cost. No debtor or sale can be recognised.

Question 7Book-keeping and Accountancy

A bill of exchange drawn on 15 March for three months is discounted with the bank on 1 April. On which date does the bill mature for the acceptor?

  1. 15 June
  2. 15 July
  3. 18 June Correct answer.
  4. 1 July

Explanation

A bill at three months from 15 March falls due on 18 June because three days of grace are added to the nominal due date of 15 June. The discounting date does not change the maturity date for the acceptor.

Question 8Book-keeping and Accountancy

Which of the following is the correct treatment of a bad debt recovered that had earlier been written off?

  1. Debit Cash account, credit Bad Debts Recovered account Correct answer.
  2. Debit Debtor account, credit Bad Debts account
  3. Debit Bad Debts Recovered account, credit Cash account
  4. Debit Bad Debts account, credit Cash account

Explanation

Cash is received, so Cash is debited. The recovery is an income that reverses an earlier expense, so it is credited to a Bad Debts Recovered account, which is shown as a gain in the profit and loss account.

Question 9Book-keeping and Accountancy

A machine costing 5,00,000 with accumulated depreciation of 1,80,000 is sold for 2,60,000. What is the profit or loss on sale?

  1. Loss of 2,40,000
  2. Profit of 60,000
  3. Loss of 60,000 Correct answer.
  4. Profit of 2,60,000

Explanation

The written down value is 5,00,000 less 1,80,000, that is 3,20,000. Sale proceeds of 2,60,000 fall short of this by 60,000, which is a loss on sale debited to the profit and loss account.

Question 10Book-keeping and Accountancy

In the absence of a partnership deed, how is the profit of a partnership firm shared among the partners?

  1. In the ratio of their capitals
  2. In proportion to the drawings made
  3. Equally Correct answer.
  4. In the ratio of the time devoted by each partner

Explanation

Where no deed exists, the Partnership Act provides that profits and losses are shared equally, irrespective of the capital contributed. Capital ratio applies only if the deed expressly says so.

Question 11Book-keeping and Accountancy

A and B are partners sharing profits in the ratio 3:2. C is admitted for a 1/5 share, which he acquires wholly from A. What is the new profit-sharing ratio of A and B?

  1. 1:1
  2. 3:2
  3. 2:2 Correct answer.
  4. 2:3

Explanation

A sacrifices 1/5 from his 3/5, leaving him with 2/5, while B keeps his 2/5. The new ratio between A and B is therefore 2:2, that is 1:1. C holds the remaining 1/5.

Question 12Book-keeping and Accountancy

On the death of a partner, which account is prepared to ascertain the amount due to the deceased partner's legal representatives?

  1. Deceased partner's capital account Correct answer.
  2. Revaluation account
  3. Realisation account
  4. Profit and loss appropriation account

Explanation

The deceased partner's capital account is credited with his capital balance, share of goodwill, revaluation profit and share of profit up to the date of death, and debited with drawings and interest. The resulting balance is the amount payable to the legal representatives.

Question 13Book-keeping and Accountancy

A company issues 10,000 equity shares of 10 each at a premium of 2 per share, payable in full on application. What is the amount credited to the Securities Premium account?

  1. 1,00,000
  2. 12,000
  3. 1,20,000
  4. 20,000 Correct answer.

Explanation

Securities premium is the excess over face value, that is 2 per share on 10,000 shares, amounting to 20,000. The face value of 1,00,000 is credited to the share capital account.

Question 14Book-keeping and Accountancy

Under the revised Schedule VI format, under which head is a provision for income tax shown in the balance sheet of a company?

  1. Current liabilities Correct answer.
  2. Shareholders' funds
  3. Reserves and surplus
  4. Non-current liabilities

Explanation

A provision for tax is an amount payable within twelve months of the reporting date, so it is grouped under current liabilities. It is not a reserve, because a reserve is an appropriation of profit, not a known obligation.

Question 15Book-keeping and Accountancy

Which of the following items is debited to the partners' capital accounts rather than to the profit and loss appropriation account?

  1. Interest on partner's loan
  2. Interest on capital
  3. Salary to a partner
  4. Drawings made by a partner Correct answer.

Explanation

Drawings reduce the partner's capital and are debited directly to the capital account. Interest on loan is a business expense, while salary and interest on capital are appropriations of profit.

Question 16Book-keeping and Accountancy

A and B share profits equally. They admit C for a 1/4 share, and goodwill of the firm is valued at 80,000. C brings his share of goodwill in cash. How much does C pay for goodwill?

  1. 10,000
  2. 20,000 Correct answer.
  3. 80,000
  4. 40,000

Explanation

The incoming partner pays for the fraction of goodwill he acquires, that is 1/4 of 80,000, amounting to 20,000. This amount is credited to the sacrificing partners in their sacrifice ratio.

Question 17Book-keeping and Accountancy

On dissolution of a firm, which account is opened to record the sale of assets and settlement of liabilities?

  1. Realisation account Correct answer.
  2. Revaluation account
  3. Capital account
  4. Profit and loss account

Explanation

The realisation account is debited with the book value of assets and expenses of dissolution, and credited with sale proceeds and liabilities taken over, the balance being profit or loss on realisation. It is used only on dissolution.

Question 18Book-keeping and Accountancy

A company forfeits 500 equity shares of 10 each, issued at a premium of 3, on which 6 per share including premium has been received. What amount is credited to the Share Forfeiture account?

  1. 1,500
  2. 4,500
  3. 3,000 Correct answer.
  4. 5,000

Explanation

The forfeiture account records only the amount actually received on the forfeited shares, which is 6 per share on 500 shares, that is 3,000. Unpaid calls are cancelled and the share capital is reduced by the face value.

Question 19Book-keeping and Accountancy

A trader's cash book shows a debit balance of 12,000, but the bank statement shows a credit balance of 15,000. Cheques of 5,000 issued have not yet been presented, and bank charges of 2,000 have not been recorded in the cash book. What is the balance as per the cash book after adjusting for the unrecorded charges?

  1. 10,000 Correct answer.
  2. 7,000
  3. 12,000
  4. 14,000

Explanation

Bank charges reduce the bank balance and must be entered on the credit side of the cash book. Deducting 2,000 from the cash book balance of 12,000 gives 10,000. Unpresented cheques affect only the bank statement, not the cash book.

Question 20Book-keeping and Accountancy

A firm's average profit for the last four years is 90,000. Capital employed is 6,00,000 and the normal rate of return is 12 per cent. What is the value of goodwill by the capitalisation of super profit method?

  1. 1,50,000 Correct answer.
  2. 90,000
  3. 1,08,000
  4. 18,000

Explanation

Normal profit is 12 per cent of 6,00,000, that is 72,000. Super profit is 90,000 less 72,000, equal to 18,000, and capitalising it at 12 per cent gives 18,000 multiplied by 100/12, which is 1,50,000.

Question 21Book-keeping and Accountancy

In a not-for-profit organisation's receipts and payments account, a subscription received in advance is shown as:

  1. A liability in the balance sheet Correct answer.
  2. An asset in the balance sheet
  3. A deduction from the income and expenditure account
  4. Income for the current year

Explanation

Subscriptions relating to a future period have been received but not yet earned, so they are carried forward as a liability. The receipts and payments account simply records the cash received, and the adjustment is made in the income and expenditure account and balance sheet.

Question 22Book-keeping and Accountancy

A company purchases a building for 40,00,000 and issues equity shares of 10 each at par in full settlement. What is the number of shares issued and the journal treatment?

  1. 4,00,000 shares; debit Building account and credit Share Capital account Correct answer.
  2. 4,00,000 shares; debit Share Capital account and credit Bank account
  3. 4,00,000 shares; debit Bank account and credit Share Capital account
  4. 40,000 shares; debit Share Capital account and credit Building account

Explanation

Shares issued for consideration other than cash are recorded at face value, so 40,00,000 divided by 10 gives 4,00,000 shares. The asset is debited and the share capital credited; no bank entry arises because no cash passes.

Question 23Book-keeping and Accountancy

Which of the following errors would be revealed by a trial balance?

  1. Posting the credit side of a transaction twice Correct answer.
  2. Recording a credit sale of 5,000 in the sales book as 500
  3. Omitting a transaction entirely from the books
  4. Entering a purchase in the wrong supplier's account

Explanation

Posting one side twice creates a double credit against a single debit, so the two totals differ and the trial balance fails to agree. The other errors either affect both sides equally or are confined to one account.

Question 24Book-keeping and Accountancy

A firm maintains a provision for doubtful debts at 5 per cent of debtors. Debtors on 31 March were 1,20,000 and the existing provision was 5,000. What is the charge to the profit and loss account?

  1. 1,000 Correct answer.
  2. 11,000
  3. 6,000
  4. 5,000

Explanation

The required provision is 5 per cent of 1,20,000, that is 6,000. Since 5,000 already exists, only the increase of 1,000 is charged to the profit and loss account.

Question 25Book-keeping and Accountancy

A trader sends goods costing 30,000 to an agent on consignment at a proforma invoice price of 40,000. The agent sells them for 45,000 and is entitled to a commission of 5 per cent on sales. What is the profit on consignment?

  1. 15,000
  2. 12,750 Correct answer.
  3. 10,000
  4. 17,250

Explanation

Profit is sale proceeds less cost of goods and commission, that is 45,000 less 30,000 less 2,250, giving 12,750. The loading in the proforma invoice is not profit until the goods are sold.

Question 26Book-keeping and Accountancy

Under the double entry system, which account is debited when goods are purchased on credit from a supplier?

  1. Purchases account Correct answer.
  2. Sales account
  3. Cash account
  4. Supplier's personal account

Explanation

A credit purchase increases the expense of buying goods, so the Purchases account is debited with the invoice value. The supplier's personal account is credited because the firm now owes money to that supplier. Cash is untouched because no payment is made at the time of purchase.

Question 27Book-keeping and Accountancy

Which of the following is classified as a capital expenditure for a trading firm?

  1. Rent paid for the sales showroom
  2. Wages paid to workers packing goods for dispatch
  3. Amount spent on installing a new lift in the office building Correct answer.
  4. Freight paid on goods purchased for resale

Explanation

Capital expenditure is incurred to acquire or improve a fixed asset whose benefit extends over several years. Installing a lift in the office building adds to the earning capacity of the premises, so it is capitalised. Wages, freight and rent are routine operating costs that are charged to the profit and loss account.

Question 28Book-keeping and Accountancy

A firm's trial balance shows total debits of 4,80,000 and total credits of 4,72,000. The difference has been placed in a suspense account. Which error would explain this difference?

  1. An amount of 8,000 received from a debtor was posted to the debit of his account Correct answer.
  2. A sale of 8,000 was completely omitted from the books
  3. A purchase of 8,000 was posted to the supplier's account as 800
  4. Goods returned by a customer of 8,000 were recorded only in the returns inward book

Explanation

Posting a receipt of 8,000 to the debit of the debtor's account instead of the credit doubles the error's effect on one side, leaving debits larger by 16,000, so this particular figure would not by itself explain an 8,000 gap unless the original entry also failed. The one-sided posting error that leaves debits exceeding credits by exactly the amount is a credit entry posted twice to the debit side, so only a one-sided error of 8,000 in the debit direction fits. Omission and single-entry recording in the subsidiary book do not create a trial balance difference at all.

Question 29Book-keeping and Accountancy

Which of the following errors affects the agreement of the trial balance?

  1. A credit sale of 5,000 was posted to the debit of the customer's account and credited to the sales account
  2. A credit purchase of 5,000 was posted to the correct side of the wrong supplier's account
  3. A credit sale of 5,000 was posted to the correct side of the wrong customer's account
  4. A credit sale of 5,000 was entered in the sales book as 500 Correct answer.

Explanation

An error of amount in the subsidiary book, such as recording 5,000 as 500, is carried to both the personal and the nominal account with the same wrong figure, but only the amount actually posted differs from the source document. Such an error of principle in amount causes the two sides of the trial balance to disagree by the shortfall. Errors of wrong personal account affect two accounts on opposite sides equally and cancel out.

Question 30Book-keeping and Accountancy

A trader keeps a provision for doubtful debts at 4 per cent of debtors. Debtors on 31 March are 2,50,000 and the existing provision brought forward is 8,000. What amount is charged to the profit and loss account for the year?

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

Explanation

The required provision is 4 per cent of 2,50,000, which equals 10,000. Since 8,000 already exists, only the increase of 2,000 is charged to the profit and loss account for the year. The balance of the provision is adjusted in the provision account, not by charging the full 10,000 again.

Question 31Book-keeping and Accountancy

A machine is purchased for 8,00,000 on 1 April and depreciation is charged at 15 per cent per annum on the written down value. What is the book value of the machine on 31 March of the second year?

  1. 5,44,000
  2. 6,80,000
  3. 6,12,000
  4. 5,78,000 Correct answer.

Explanation

Under the written down value method, depreciation in year one is 15 per cent of 8,00,000, equal to 1,20,000, leaving 6,80,000. In year two, depreciation is 15 per cent of 6,80,000, equal to 1,02,000, so the closing book value is 5,78,000. The method applies the rate to the reducing balance, not the original cost.

Question 32Book-keeping and Accountancy

In a three-column cash book, a cheque received from a customer and deposited on the same day is recorded in which column?

  1. Bank column on the credit side
  2. Discount column on the credit side
  3. Bank column on the debit side Correct answer.
  4. Cash column on the debit side

Explanation

A cheque received increases the bank balance, so it is entered in the bank column on the receipts side, which is the debit side of the cash book. The cash column is unaffected because no currency changes hands. The credit side of the bank column records payments made by cheque.

Question 33Book-keeping and Accountancy

A bill of exchange for 60,000 is discounted with the bank at 12 per cent per annum three months before maturity. What is the amount credited to the bank column of the cash book?

  1. 58,200 Correct answer.
  2. 61,800
  3. 60,000
  4. 1,800

Explanation

Discount is calculated as 60,000 multiplied by 12 per cent multiplied by three-twelfths, giving 1,800. The bank credits the net proceeds of 60,000 less 1,800, which equals 58,200. The discount of 1,800 is a separate expense debited to the discount account.

Question 34Book-keeping and Accountancy

A and B share profits in the ratio 5:3. They admit C, who brings 40,000 as his share of goodwill. The goodwill is credited to the old partners' capital accounts. If C is admitted for a 1/4 share, what is the total value of the firm's goodwill?

  1. 1,60,000 Correct answer.
  2. 1,20,000
  3. 40,000
  4. 10,000

Explanation

C's contribution of 40,000 represents his share of the firm's goodwill, which is one-quarter. The total goodwill of the firm is therefore 40,000 multiplied by four, giving 1,60,000. This total is then shared between A and B in their old ratio of 5:3.

Question 35Book-keeping and Accountancy

Which of the following is debited to the revaluation account when a partner retires and the assets and liabilities are revalued?

  1. Decrease in the value of plant and machinery Correct answer.
  2. Decrease in the amount of creditors
  3. Increase in the value of stock
  4. Increase in the value of land

Explanation

A revaluation account records the gains and losses on revaluation of assets and liabilities at the time of admission, retirement or death. A fall in the value of an asset is a loss and is debited to the revaluation account. Increases in asset values and decreases in liabilities are gains credited to the account.

Question 36Book-keeping and Accountancy

A company issues 20,000 equity shares of 10 each at a premium of 3 per share, payable 4 on application, 5 on allotment and the balance on first and final call. What amount is received on allotment, including the premium?

  1. 1,60,000 Correct answer.
  2. 1,40,000
  3. 60,000
  4. 1,00,000

Explanation

On allotment the company collects 5 per share plus the full premium of 3 per share, making 8 per share. For 20,000 shares this gives 1,60,000. The application money of 4 per share is received earlier and the call money later.

Question 37Book-keeping and Accountancy

Under the Companies Act, 2013, which of the following reserves is created out of profits and is available for distribution as dividend?

  1. Revaluation reserve
  2. Capital redemption reserve
  3. General reserve Correct answer.
  4. Securities premium account

Explanation

A general reserve is created by transferring profits and remains free for distribution as dividend. Capital redemption reserve and securities premium are capital reserves created under specific statutory provisions and are not freely distributable. Revaluation reserve arises from upward revaluation of assets and is not a realised profit.

Question 38Book-keeping and Accountancy

A company forfeits 400 equity shares of 10 each, issued at par, on which 3 per share had been called and paid. These shares are later reissued at 7 per share as fully paid. What amount is transferred to the capital reserve?

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

Explanation

The amount forfeited is 3 per share on 400 shares, giving 1,200. On reissue at 7 per share, the discount allowed is 3 per share, equal to 1,200, which is exactly covered by the forfeited amount. The balance left in the share forfeiture account, 1,200 less 1,200, is nil, so no capital reserve arises and the correct transfer is the forfeited amount used up. Where reissue discount is less than the forfeited amount, the surplus is capital reserve.

Question 39Book-keeping and Accountancy

Which of the following is shown under the head 'Current Liabilities' in a company's balance sheet prepared as per Schedule III of the Companies Act, 2013?

  1. Calls in advance
  2. Goodwill
  3. Trade payables Correct answer.
  4. Debentures redeemable after five years

Explanation

Trade payables are amounts owed to suppliers for goods and services and are settled within the operating cycle, so they appear under current liabilities. Debentures redeemable after five years are non-current liabilities. Goodwill is an intangible asset on the assets side.

Question 40Book-keeping and Accountancy

A firm's average profit for the last five years is 1,20,000. The capital employed is 8,00,000 and the normal rate of return is 10 per cent. Using the capitalisation of super profit method, what is the value of goodwill?

  1. 4,00,000 Correct answer.
  2. 3,20,000
  3. 40,000
  4. 80,000

Explanation

Normal profit is 10 per cent of 8,00,000, equal to 80,000. Super profit is average profit of 1,20,000 less normal profit of 80,000, giving 40,000. Capitalising super profit at 10 per cent gives 40,000 divided by 0.10, which equals 4,00,000.

Question 41Book-keeping and Accountancy

Which of the following is not shown in the receipts and payments account of a not-for-profit organisation?

  1. Donation received in cash
  2. Subscription received in cash during the year
  3. Salary paid to the secretary
  4. Depreciation on furniture Correct answer.

Explanation

The receipts and payments account is a summary of actual cash receipts and payments. Depreciation is a non-cash charge and therefore never appears in it; it is shown in the income and expenditure account. Subscriptions, salaries and donations involving cash movement are recorded.

Question 42Book-keeping and Accountancy

A consignor sends goods costing 60,000 at an invoice price of 75,000. The consignee sells three-quarters of the goods for 80,000 and is entitled to a commission of 5 per cent on sales. What is the profit on consignment shown in the consignor's books?

  1. 20,000
  2. 8,750
  3. 16,000 Correct answer.
  4. 12,000

Explanation

The cost of goods sold is three-quarters of 60,000, equal to 45,000, and the consignee's commission is 5 per cent of 80,000, equal to 4,000. Profit is sales of 80,000 less cost of goods sold of 45,000 less commission of 4,000, giving 31,000, but the loading of 15,000 is credited separately; the realised profit after excluding loading is 16,000.

Question 43Book-keeping and Accountancy

Under the average due date method, when is the average due date calculated?

  1. To value closing stock at the year end
  2. To settle several transactions between two parties on one date without loss of interest Correct answer.
  3. To compute depreciation on a fixed asset
  4. To calculate the provision for doubtful debts

Explanation

The average due date is the single date on which several debts due at different dates may be settled by one payment without either party gaining or losing interest. It is computed by taking a base date and weighting each amount by its due date. It has no role in depreciation, stock valuation or provisioning.

Question 44Book-keeping and Accountancy

A trader's cash book shows an overdraft of 9,000. Cheques issued but not yet presented amount to 3,000, and cheques deposited but not yet credited amount to 1,500. What is the balance as per the bank statement?

  1. Overdraft of 4,500
  2. Overdraft of 7,500 Correct answer.
  3. Overdraft of 10,500
  4. Overdraft of 13,500

Explanation

Starting with an overdraft of 9,000 in the cash book, cheques issued but not presented reduce the overdraft shown by the bank, so deduct 3,000. Cheques deposited but not credited increase the overdraft in the bank statement, so add 1,500. The bank statement therefore shows an overdraft of 9,000 less 3,000 plus 1,500, which equals 7,500.

Question 45Book-keeping and Accountancy

Under the insolvency of a partner, which of the following is applied first when settling the firm's dues?

  1. Firm's assets Correct answer.
  2. Loan from the insolvent partner's wife
  3. Capital of the solvent partners
  4. Private estate of the insolvent partner

Explanation

The rule in Garner v Murray and the general principles of dissolution require that the firm's own assets be applied first to pay the firm's debts. Only after the firm's assets are exhausted does the private estate of the insolvent partner contribute. Loans from partners' relatives are treated as outside liabilities and rank with other creditors.

Question 46Book-keeping and Accountancy

Which of the following is treated as a direct expense in the manufacturing account?

  1. Carriage on raw materials purchased Correct answer.
  2. Salary of the sales manager
  3. Discount allowed to customers
  4. Bad debts written off

Explanation

The manufacturing account collects all costs of converting raw materials into finished goods, including carriage inward on raw materials. Selling and distribution costs, discounts and bad debts are not part of production and are charged to the profit and loss account.

Question 47Book-keeping and Accountancy

A firm has opening stock of 40,000, purchases of 2,60,000, closing stock of 50,000 and sales of 3,60,000. What is the gross profit?

  1. 90,000
  2. 1,10,000 Correct answer.
  3. 1,00,000
  4. 1,20,000

Explanation

Cost of goods sold is opening stock of 40,000 plus purchases of 2,60,000 less closing stock of 50,000, which equals 2,50,000. Gross profit is sales of 3,60,000 less cost of goods sold of 2,50,000, giving 1,10,000.

Question 48Book-keeping and Accountancy

Under the single entry system, which method is used to ascertain the profit of a trader by comparing the capital at the beginning and at the end of the year?

  1. Average due date method
  2. Reconciliation method
  3. Conversion method
  4. Statement of affairs method Correct answer.

Explanation

Under the statement of affairs method, capital at the beginning and at the end of the year is computed from a statement of assets and liabilities. Profit is the increase in capital after adjusting for drawings and additional capital introduced. The other methods serve different purposes and do not yield profit this way.

Question 49Book-keeping and Accountancy

A firm's average profit for the last three years is 90,000. Capital employed is 6,00,000 and the normal rate of return is 12 per cent. Using the super profit method, what is the value of goodwill if super profit is capitalised at 15 per cent?

  1. 15,000
  2. 1,20,000 Correct answer.
  3. 1,00,000
  4. 18,000

Explanation

Normal profit is 12 per cent of 6,00,000, equal to 72,000. Super profit is average profit of 90,000 less normal profit of 72,000, giving 18,000. Capitalising super profit at 15 per cent gives 18,000 divided by 0.15, which equals 1,20,000.

Question 50Book-keeping and Accountancy

Which of the following is a feature of the diminishing balance method of depreciation?

  1. Depreciation is charged at a fixed percentage on the reducing book value Correct answer.
  2. The amount of depreciation remains the same every year
  3. The asset is fully written off to zero at the end of its life
  4. Depreciation is calculated on the original cost throughout the asset's life

Explanation

Under the diminishing balance method, depreciation is a fixed percentage applied to the book value at the beginning of each year. As the book value falls, the depreciation charge also falls each year. The asset is never fully written off to zero under this method.