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GCE A/L Accounting practice questions

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Question 1Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under the IASB Conceptual Framework, which qualitative characteristic requires information to be capable of making a difference in users' decisions?

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

Explanation

Relevance is a fundamental qualitative characteristic: information is relevant when it has predictive value, confirmatory value, or both, so it can make a difference to decisions. Verifiability, timeliness and comparability are enhancing characteristics that increase usefulness but cannot make irrelevant information relevant.

Question 2Financial Accounting: conceptual framework, regulatory framework and accounting standards

According to the Conceptual Framework, which measurement basis is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date?

  1. Historical cost
  2. Fair value Correct answer.
  3. Value in use
  4. Current cost

Explanation

Fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Historical cost reflects the transaction price at acquisition, current cost reflects what would be paid today to acquire an equivalent asset, and value in use is an entity-specific present value of expected cash flows.

Question 3Financial Accounting: conceptual framework, regulatory framework and accounting standards

A company's financial statements are prepared on the going concern basis. Which assumption does this reflect?

  1. The entity will cease trading after the reporting period
  2. The entity's assets will be sold at fair value immediately
  3. The entity will continue in operation for the foreseeable future Correct answer.
  4. The entity will be liquidated within twelve months

Explanation

Going concern assumes the entity will continue in operation for the foreseeable future, with neither intention nor necessity to liquidate or curtail operations materially. If that assumption fails, financial statements must be prepared on a different basis, such as break-up values.

Question 4Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under the IASB Conceptual Framework, which of the following is a fundamental qualitative characteristic of useful financial information?

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

Explanation

The two fundamental qualitative characteristics are relevance and faithful representation. Comparability, timeliness and understandability are enhancing characteristics that improve usefulness but are not fundamental.

Question 5Financial Accounting: conceptual framework, regulatory framework and accounting standards

Which body is responsible for issuing International Financial Reporting Standards (IFRS)?

  1. The IFRS Interpretations Committee
  2. The Financial Reporting Council
  3. The International Accounting Standards Board Correct answer.
  4. The International Federation of Accountants

Explanation

The International Accounting Standards Board (IASB) develops and issues IFRS Standards. The IFRS Interpretations Committee reviews accounting issues arising in practice and issues interpretations, while national regulators and professional bodies do not issue IFRS.

Question 6Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under the Conceptual Framework, which of the following best describes a liability?

  1. A resource controlled by the entity expected to produce economic benefits
  2. A future obligation that may arise from a planned transaction
  3. A present obligation arising from a past event to transfer an economic resource Correct answer.
  4. An equity instrument issued to shareholders

Explanation

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The obligation must exist at the reporting date; a planned future transaction does not create a liability.

Question 7Financial Accounting: conceptual framework, regulatory framework and accounting standards

Which of the following is an enhancing qualitative characteristic under the Conceptual Framework?

  1. Faithful representation
  2. Comparability Correct answer.
  3. Prudence
  4. Relevance

Explanation

Comparability is an enhancing characteristic, allowing users to identify similarities and differences between items. Relevance and faithful representation are fundamental, and prudence is a concept supporting neutrality rather than a separate characteristic.

Question 8Financial Accounting: conceptual framework, regulatory framework and accounting standards

In the IASB Conceptual Framework, what is the primary objective of general purpose financial reporting?

  1. To provide information useful to existing and potential investors, lenders and other creditors in making decisions Correct answer.
  2. To determine the entity's taxable profit for the year
  3. To enable management to prepare budgets
  4. To satisfy statutory filing requirements only

Explanation

The objective is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Tax computation and internal budgeting are separate purposes.

Question 9Financial Accounting: conceptual framework, regulatory framework and accounting standards

A machine costs $50,000, has a residual value of $5,000 and an estimated useful life of 5 years. Using the straight-line method, what is the annual depreciation charge?

  1. $9,000 Correct answer.
  2. $10,000
  3. $8,000
  4. $11,000

Explanation

Straight-line depreciation is (cost less residual value) divided by useful life: ($50,000 - $5,000) / 5 = $9,000 per year. Residual value must be deducted because it is expected to be recovered at the end of the asset's life.

Question 10Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity purchases equipment for $100,000 with a 10% trade discount and payment terms of 2/10, net 30. The entity pays within the discount period. Under IAS 16, at what amount should the equipment initially be measured?

  1. $98,000
  2. $88,200 Correct answer.
  3. $100,000
  4. $88,000

Explanation

IAS 16 requires initial measurement at cost, which is the cash price equivalent after trade discounts and settlement discounts. Trade discount reduces the price to $90,000, and the 2% settlement discount reduces it further to $88,200.

Question 11Financial Accounting: conceptual framework, regulatory framework and accounting standards

Which of the following costs should be capitalised as part of the cost of a new factory building under IAS 16?

  1. Staff training costs for operators of the new plant
  2. Legal fees directly attributable to the acquisition of the site Correct answer.
  3. General administrative overheads
  4. Costs of relocating staff to the new site

Explanation

IAS 16 allows capitalisation of costs directly attributable to bringing the asset to the location and condition necessary for its intended use, which includes legal fees on acquiring the site. Training, relocation and general overheads are excluded because they are not necessary to bring the asset to its working condition.

Question 12Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under IAS 16, which depreciation method results in a higher depreciation charge in the early years of an asset's life?

  1. Sum of the years' digits applied to residual value only
  2. Straight-line method
  3. Reducing balance method Correct answer.
  4. Units of production method applied evenly

Explanation

The reducing balance method applies a constant rate to a declining carrying amount, producing higher charges in earlier years. Straight-line spreads cost evenly, and units of production depends on usage rather than time.

Question 13Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity revalues its building upward under the revaluation model in IAS 16. Where should the increase be recognised?

  1. As a reduction of the deferred tax liability
  2. In other comprehensive income and accumulated in equity as a revaluation surplus Correct answer.
  3. As an increase in share capital
  4. In profit or loss as a gain

Explanation

An upward revaluation is recognised in other comprehensive income and accumulated in equity under the heading revaluation surplus. It is not taken to profit or loss, although a reversal of a previous downward revaluation recognised in profit or loss is credited to profit or loss.

Question 14Financial Accounting: conceptual framework, regulatory framework and accounting standards

Which of the following is the correct definition of fair value under IFRS 13?

  1. The amount paid to acquire an asset in a forced transaction
  2. The present value of expected future cash flows specific to the entity
  3. The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date Correct answer.
  4. The historical cost of the asset less accumulated depreciation

Explanation

IFRS 13 defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is a market-based exit price, not an entity-specific or forced-transaction amount.

Question 15Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under IAS 36, when should an impairment loss on an asset be recognised?

  1. When the asset's carrying amount is less than its fair value
  2. When the asset's carrying amount exceeds its recoverable amount Correct answer.
  3. When the entity reports a net loss for the year
  4. When the asset's market value rises above cost

Explanation

IAS 36 requires an impairment loss when the carrying amount exceeds recoverable amount, which is the higher of fair value less costs of disposal and value in use. The loss is the excess of carrying amount over recoverable amount.

Question 16Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity has an asset with a carrying amount of $120,000. Its fair value less costs of disposal is $100,000 and its value in use is $110,000. What is the impairment loss under IAS 36?

  1. $10,000 Correct answer.
  2. $30,000
  3. $20,000
  4. $0

Explanation

Recoverable amount is the higher of fair value less costs of disposal ($100,000) and value in use ($110,000), so it is $110,000. The impairment loss is the carrying amount less recoverable amount: $120,000 - $110,000 = $10,000.

Question 17Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under IAS 37, how should a provision be measured?

  1. At the best estimate of the expenditure required to settle the present obligation at the reporting date Correct answer.
  2. At the amount claimed by the claimant in a legal action
  3. At the amount already paid to settle similar obligations
  4. At the maximum possible amount the entity could be required to pay

Explanation

IAS 37 requires a provision to be measured at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, taking account of risks and uncertainties. It is not the maximum, the claim amount, or past payments.

Question 18Financial Accounting: conceptual framework, regulatory framework and accounting standards

Which of the following is a condition for recognising a provision under IAS 37?

  1. A present obligation arising from a past event that will probably require an outflow of resources Correct answer.
  2. A future obligation arising from a planned business decision
  3. A possible obligation whose existence will be confirmed only by uncertain future events
  4. A contingent asset that is virtually certain

Explanation

A provision is recognised when there is a present obligation from a past event, an outflow of resources is probable, and a reliable estimate can be made. A possible obligation confirmed by future events is a contingent liability, not a provision.

Question 19Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under IAS 10, which of the following is an adjusting event after the reporting period?

  1. A fire that destroyed a factory after the year end
  2. A major business combination completed after the year end
  3. The bankruptcy of a customer whose balance was outstanding at the reporting date Correct answer.
  4. A decline in market value of investments after the year end

Explanation

A customer bankruptcy after the reporting date provides evidence of conditions existing at the reporting date, so it is an adjusting event requiring the receivable to be written down. The other events reflect conditions arising after the reporting period and are non-adjusting.

Question 20Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under IAS 1, which of the following items must be presented in other comprehensive income?

  1. Revaluation surplus on property, plant and equipment Correct answer.
  2. Sales revenue for the year
  3. Interest expense on borrowings
  4. Depreciation expense for the year

Explanation

IAS 1 requires items of other comprehensive income to be presented separately, and a revaluation surplus recognised under IAS 16 is an example of an OCI item. Depreciation, interest and revenue are recognised in profit or loss.

Question 21Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity has profit before tax of $200,000. The tax rate is 25%. Included in profit is a non-taxable government grant of $20,000 and a non-deductible expense of $10,000. What is the current tax charge?

  1. $52,500
  2. $50,000
  3. $45,000
  4. $47,500 Correct answer.

Explanation

Taxable profit is $200,000 - $20,000 + $10,000 = $190,000. Applying 25% gives a current tax charge of $47,500. The grant reduces taxable profit and the non-deductible expense increases it.

Question 22Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under IAS 12, a temporary difference arises when the carrying amount of an asset differs from its tax base. Which of the following creates a taxable temporary difference?

  1. A non-taxable government grant received in cash
  2. A permanent difference arising from non-deductible entertainment
  3. An asset whose carrying amount exceeds its tax base Correct answer.
  4. An asset whose tax base exceeds its carrying amount

Explanation

A taxable temporary difference arises where the carrying amount of an asset exceeds its tax base, meaning future taxable amounts will exceed future deductible amounts, creating a deferred tax liability. A deductible temporary difference arises where the tax base exceeds the carrying amount.

Question 23Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity recognises a revaluation surplus of $40,000 on a building. The tax rate is 25% and the revaluation is not taxable until the building is sold. What is the deferred tax effect?

  1. A deferred tax liability of $10,000 recognised in other comprehensive income Correct answer.
  2. A deferred tax liability of $40,000 recognised in profit or loss
  3. No deferred tax because the revaluation is unrealised
  4. A deferred tax asset of $10,000 recognised in profit or loss

Explanation

The revalued carrying amount exceeds the tax base, creating a taxable temporary difference of $40,000. Applying 25% gives a deferred tax liability of $10,000, and because the revaluation was recognised in OCI, the related deferred tax is also recognised in OCI.

Question 24Financial Accounting: conceptual framework, regulatory framework and accounting standards

A company prepares its financial statements under IFRS. It has a building with a carrying amount of $500,000 under the cost model, but it decides to adopt the revaluation model. Which of the following is a valid treatment under IAS 16?

  1. Revalue the building at management's estimated replacement cost
  2. Revalue only the building while leaving similar assets at cost
  3. Revalue the building to its original cost less depreciation
  4. Revalue the building and all other assets in the same class Correct answer.

Explanation

IAS 16 requires that when an item is revalued, the entire class of assets to which it belongs must be revalued to avoid selective revaluation and inconsistency. The revaluation must reflect fair value, not management's replacement estimate or cost less depreciation.

Question 25Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity has a contingent liability that is possible but not probable. Under IAS 37, how should it be treated?

  1. Recognise a provision and disclose the amount
  2. Disclose the contingent liability unless the possibility of outflow is remote Correct answer.
  3. Recognise a provision for the best estimate
  4. Ignore it entirely because it is not probable

Explanation

IAS 37 requires disclosure of a contingent liability unless the possibility of an outflow is remote. Recognition is not permitted because the outflow is not probable, and remote contingencies need not be disclosed.

Question 26Financial Accounting: conceptual framework, regulatory framework and accounting standards

Under the IASB Conceptual Framework, which of the following is an essential characteristic of an asset?

  1. A future economic benefit that is probable and can be measured reliably
  2. A right that arises from a contract and is enforceable by law
  3. A present economic resource controlled by the entity as a result of past events Correct answer.
  4. A resource that is legally owned by the entity

Explanation

The Conceptual Framework defines an asset as a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Control and past events are essential; legal ownership and enforceability are not required.

Question 27Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity is applying the IASB Conceptual Framework to select an accounting policy for a transaction that is not addressed by any IFRS. Which of the following sources should the entity consider first?

  1. The definitions, recognition criteria and measurement concepts in the Conceptual Framework
  2. The entity's own past practice for similar transactions
  3. The requirements in IFRS dealing with similar and related issues Correct answer.
  4. The most recent pronouncements of other standard-setting bodies

Explanation

When no IFRS specifically applies, IAS 8 requires management to consider requirements in IFRS dealing with similar and related issues first, followed by the Conceptual Framework's definitions, recognition criteria and measurement concepts. Pronouncements of other standard-setting bodies may also be considered if they do not conflict with those sources.

Question 28Financial Accounting: conceptual framework, regulatory framework and accounting standards

Which of the following best describes the role of the IFRS Interpretations Committee?

  1. It enforces compliance with IFRS in national jurisdictions
  2. It develops and issues new IFRS standards for approval by the IASB
  3. It reviews widespread accounting issues and provides authoritative guidance on their application Correct answer.
  4. It oversees the governance of the IFRS Foundation and appoints the IASB members

Explanation

The IFRS Interpretations Committee works with the IASB to identify and address accounting issues that are likely to receive divergent or unacceptable treatment. It issues Interpretations that have the same authoritative status as IFRS. It does not develop new standards, govern the Foundation, or enforce compliance.

Question 29Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity prepares its financial statements under IFRS. It has a building with a carrying amount of $500,000 under the cost model. At the reporting date, the building's fair value is $600,000 and its value in use is $550,000. The entity uses the revaluation model for this class of assets. What is the carrying amount of the building after revaluation?

  1. $550,000
  2. $500,000
  3. $600,000 Correct answer.
  4. $650,000

Explanation

Under the revaluation model in IAS 16, the asset is carried at its fair value at the date of revaluation less subsequent depreciation and impairment. Fair value is $600,000, which is higher than value in use and carrying amount. The revaluation surplus of $100,000 is recognised in other comprehensive income.

Question 30Financial Accounting: conceptual framework, regulatory framework and accounting standards

An entity has a defined benefit pension plan. At the reporting date, the present value of the defined benefit obligation is $1,200,000 and the fair value of plan assets is $1,000,000. The entity has not yet recognised actuarial gains and losses. Under IAS 19, how should the net defined benefit liability be presented and measured?

  1. A liability of $1,200,000, with plan assets disclosed only in the notes
  2. A liability of $200,000, with remeasurements deferred and amortised over the average remaining service life
  3. A liability of $200,000, with remeasurements recognised in other comprehensive income Correct answer.
  4. A liability of $200,000, with remeasurements recognised immediately in profit or loss

Explanation

Under IAS 19, the net defined benefit liability is the present value of the defined benefit obligation less the fair value of plan assets, giving $200,000. Remeasurements, including actuarial gains and losses, are recognised in other comprehensive income and are not reclassified to profit or loss in subsequent periods.

Question 31Preparation of financial statements for sole traders, partnerships and limited companies

A sole trader's trial balance shows closing inventory of Rs. 45,000 and purchases of Rs. 210,000. In the trading account, how is closing inventory treated?

  1. Shown as an expense in the profit and loss account
  2. Added to purchases in the trading account
  3. Deducted from purchases in the trading account Correct answer.
  4. Added to sales in the trading account

Explanation

Closing inventory is credited to the trading account and deducted from purchases (or from cost of goods available for sale) so that only goods actually sold are charged as cost of sales. It is also carried down as a current asset in the balance sheet. Adding it to sales or treating it as an expense would misstate gross profit.

Question 32Preparation of financial statements for sole traders, partnerships and limited companies

A sole trader's net profit for the year is Rs. 96,000. Drawings during the year were Rs. 58,000 and capital at the start was Rs. 300,000. What is the closing capital?

  1. Rs. 338,000 Correct answer.
  2. Rs. 242,000
  3. Rs. 454,000
  4. Rs. 396,000

Explanation

Closing capital equals opening capital plus net profit minus drawings: 300,000 + 96,000 − 58,000 = 338,000. Profit increases the owner's stake while drawings reduce it. This is the basis of the statement of affairs approach for sole traders.

Question 33Preparation of financial statements for sole traders, partnerships and limited companies

Which item appears in the partners' current accounts rather than in the capital accounts under the fixed capital method?

  1. Partner's share of residual profit Correct answer.
  2. Cash introduced by a partner on admission
  3. Revaluation gain on partnership assets
  4. Interest on partner's loan

Explanation

Under the fixed capital method, capital accounts stay constant and all appropriations such as profit shares, interest on capital, salary and drawings pass through the current accounts. New capital introduced or revaluation adjustments affect the capital accounts. Interest on a loan is an expense of the firm, not an appropriation.

Question 34Preparation of financial statements for sole traders, partnerships and limited companies

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

  1. 9:6:5
  2. 2:2:1 Correct answer.
  3. 12:8:5
  4. 3:2:1

Explanation

C takes 1/5 from A's existing 3/5, leaving A with 3/5 − 1/5 = 2/5. B is unchanged at 2/5 and C holds 1/5, so the ratio is 2:2:1. Total shares still sum to one.

Question 35Preparation of financial statements for sole traders, partnerships and limited companies

At the year end a company has issued 200,000 ordinary shares of Rs. 10 each, of which Rs. 7 per share has been called and paid. How should the unpaid amount be presented?

  1. As share premium of Rs. 600,000
  2. As a long-term liability of Rs. 600,000
  3. As called-up share capital of Rs. 2,000,000
  4. As calls in arrears of Rs. 600,000 deducted from share capital Correct answer.

Explanation

Only the called-up amount (200,000 × Rs. 7 = Rs. 1,400,000) is recognised as paid-up capital, and the uncalled amount on called shares, Rs. 600,000, is shown as calls in arrears and deducted in arriving at paid-up capital. Amounts not yet called are not a liability.

Question 36Preparation of financial statements for sole traders, partnerships and limited companies

Which of the following is presented within other comprehensive income rather than in the statement of profit or loss?

  1. Revaluation surplus on property, plant and equipment Correct answer.
  2. Loss on disposal of a motor vehicle
  3. Depreciation of plant
  4. Interest payable on debentures

Explanation

A revaluation surplus on property, plant and equipment is recognised in other comprehensive income and accumulated in equity as a revaluation reserve; it is not recycled through profit or loss on the initial revaluation. Depreciation, finance costs and disposal losses are all items of profit or loss.

Question 37Preparation of financial statements for sole traders, partnerships and limited companies

A sole trader's trial balance does not balance. Which procedure is the most appropriate first step?

  1. Prepare the financial statements using the larger side of the trial balance
  2. Write the difference off to the profit and loss account as an expense
  3. Post the difference to a suspense account and ignore it
  4. Investigate the difference by checking the ledger balances and postings Correct answer.

Explanation

A trial balance that fails to balance signals an error, so the difference should be located by checking balances, additions and postings before any statement is prepared. If the cause cannot be found quickly, a suspense account may temporarily hold the difference, but it must be investigated and cleared.

Question 38Preparation of financial statements for sole traders, partnerships and limited companies

A company's income statement shows profit before tax of Rs. 800,000 and a tax charge of Rs. 180,000. Retained earnings brought forward were Rs. 250,000. No dividends were paid. What is retained earnings carried forward?

  1. Rs. 430,000
  2. Rs. 870,000 Correct answer.
  3. Rs. 980,000
  4. Rs. 620,000

Explanation

Retained earnings carried forward equal opening retained earnings plus profit after tax: 250,000 + (800,000 − 180,000) = 870,000. Tax is deducted before arriving at profit for the year. Dividends, if any, would be deducted after this figure.

Question 39Preparation of financial statements for sole traders, partnerships and limited companies

A partnership earns profit of Rs. 120,000 before appropriations. The partnership agreement provides interest on capital of Rs. 18,000 and a partner's salary of Rs. 30,000. What is the residual profit available for sharing in the profit-sharing ratio?

  1. Rs. 48,000
  2. Rs. 102,000
  3. Rs. 72,000 Correct answer.
  4. Rs. 120,000

Explanation

Residual profit is the profit remaining after charging appropriations: 120,000 − 18,000 − 30,000 = 72,000. This residual is then divided among the partners in their agreed ratio. Interest on capital and salary are appropriations of profit, not expenses.

Question 40Preparation of financial statements for sole traders, partnerships and limited companies

Which item is classified as a non-current liability in a company's statement of financial position?

  1. Debenture stock redeemable in eight years Correct answer.
  2. Trade payables due in 45 days
  3. Bank overdraft repayable on demand
  4. Accrued electricity payable next month

Explanation

A liability is non-current when the company has an unconditional right to defer settlement for more than twelve months after the reporting date. Debenture stock redeemable in eight years meets that test. Trade payables, overdrafts and accruals are settled within the normal operating cycle or on demand.

Question 41Preparation of financial statements for sole traders, partnerships and limited companies

A sole trader's statement of financial position shows total assets of Rs. 520,000 and liabilities of Rs. 190,000. During the year drawings were Rs. 40,000 and there were no capital introductions. What was the profit for the year if opening capital was Rs. 280,000?

  1. Rs. 130,000
  2. Rs. 90,000
  3. Rs. 370,000
  4. Rs. 50,000 Correct answer.

Explanation

Closing capital equals assets minus liabilities: 520,000 − 190,000 = 330,000. Profit equals closing capital plus drawings minus opening capital: 330,000 + 40,000 − 280,000 = 90,000. This statement-of-affairs method derives profit from capital movements.

Question 42Preparation of financial statements for sole traders, partnerships and limited companies

Which of the following is a capital expenditure for a sole trader?

  1. Repainting the shop front
  2. Paying annual insurance premiums on the building
  3. Installing a new fire-alarm system required by law Correct answer.
  4. Replacing a broken window pane

Explanation

Capital expenditure acquires or improves a non-current asset or extends its useful life, so installing a new fire-alarm system is capitalised. Repairs, replacements restoring original condition and annual premiums are revenue expenditure charged to profit or loss.

Question 43Preparation of financial statements for sole traders, partnerships and limited companies

A company issues 50,000 ordinary shares of Rs. 5 each at Rs. 7.50 per share, fully payable on application. How is the transaction recorded?

  1. Share capital Rs. 250,000 and share premium Rs. 375,000
  2. Share capital Rs. 250,000 and share premium Rs. 125,000 Correct answer.
  3. Share capital Rs. 125,000 and share premium Rs. 250,000
  4. Share capital Rs. 375,000 only

Explanation

Share capital is recorded at nominal value: 50,000 × Rs. 5 = Rs. 250,000. The excess over nominal value is share premium: 50,000 × Rs. 2.50 = Rs. 125,000. Share premium is a capital reserve presented within equity.

Question 44Preparation of financial statements for sole traders, partnerships and limited companies

Which of the following errors would still allow a trial balance to balance?

  1. Posting a cash receipt to the debit side of the bank account only
  2. Recording a payment of Rs. 200 as Rs. 2,000 in the cash account only
  3. Omitting the credit entry when recording a purchase
  4. Recording a sale of Rs. 500 as Rs. 5,000 in both the sales and receivables accounts Correct answer.

Explanation

An error of original entry where the same wrong amount is entered on both the debit and credit sides keeps the trial balance in agreement. Errors of omission of one side, one-sided postings and errors of commission affecting only one account cause imbalance. Such errors are found by checking ledgers against source documents.

Question 45Preparation of financial statements for sole traders, partnerships and limited companies

A partnership's profit for the year is Rs. 90,000. The profit-sharing ratio is 2:1 and partner X is entitled to a salary of Rs. 12,000. What is X's total share of profit?

  1. Rs. 38,000
  2. Rs. 60,000
  3. Rs. 52,000 Correct answer.
  4. Rs. 64,000

Explanation

Salary is appropriated first, leaving 90,000 − 12,000 = 78,000 to share 2:1. X receives 2/3 × 78,000 = 52,000 plus the salary of 12,000, giving 64,000 in total. The salary is not part of the residual sharing.

Question 46Preparation of financial statements for sole traders, partnerships and limited companies

Which statement about the statement of changes in equity is correct?

  1. It is prepared only when a company makes a loss
  2. It reconciles opening and closing balances of each equity component Correct answer.
  3. It records only transactions with the owners during the year
  4. It replaces the statement of financial position for companies

Explanation

The statement of changes in equity reconciles the opening and closing balances of share capital, share premium, revaluation reserve and retained earnings, showing total comprehensive income, owner transactions and transfers. It supplements rather than replaces the statement of financial position.

Question 47Preparation of financial statements for sole traders, partnerships and limited companies

A sole trader's gross profit is Rs. 150,000 and net profit is Rs. 60,000. Which figure represents expenses charged in the profit and loss account?

  1. Rs. 210,000
  2. Rs. 60,000
  3. Rs. 150,000
  4. Rs. 90,000 Correct answer.

Explanation

Net profit is gross profit less expenses, so expenses equal 150,000 − 60,000 = 90,000. Gross profit arises in the trading account from sales less cost of sales; the profit and loss account then deducts operating expenses and adds other income.

Question 48Preparation of financial statements for sole traders, partnerships and limited companies

On admission of a new partner, the partnership's assets are revalued upwards by Rs. 40,000 and liabilities are reduced by Rs. 10,000. How is the total revaluation gain treated?

  1. Debited to the old partners in their old profit-sharing ratio
  2. Credited to the old partners in their old profit-sharing ratio Correct answer.
  3. Credited to all partners including the new partner equally
  4. Credited to the new partner's capital account only

Explanation

A revaluation gain arising before admission belongs to the partners who owned the business at the time, so it is credited to the old partners in their old profit-sharing ratio. The new partner should not share in gains generated before joining. The total gain here is Rs. 50,000.

Question 49Preparation of financial statements for sole traders, partnerships and limited companies

Which of the following would appear in a company's statement of financial position as a current asset?

  1. Goodwill arising on purchase of a business
  2. A long-term investment in another company's shares
  3. Motor vehicles used in the business
  4. Inventory expected to be sold within twelve months Correct answer.

Explanation

A current asset is one expected to be realised, sold or consumed within twelve months or the normal operating cycle, so inventory to be sold within the year qualifies. Goodwill, long-term investments and motor vehicles are non-current assets.

Question 50Preparation of financial statements for sole traders, partnerships and limited companies

A company has profit after tax of Rs. 400,000, an ordinary dividend of Rs. 120,000 and a preference dividend of Rs. 30,000. Retained earnings brought forward were Rs. 90,000. What is retained earnings carried forward?

  1. Rs. 460,000
  2. Rs. 490,000
  3. Rs. 280,000
  4. Rs. 340,000 Correct answer.

Explanation

Both ordinary and preference dividends are deducted from profit after tax before arriving at retained earnings for the year: 400,000 − 120,000 − 30,000 = 250,000. Adding opening retained earnings of 90,000 gives 340,000. Dividends are distributions to owners, not expenses.