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Question 1Accounting

Under the double entry system, which of the following transactions results in one asset increasing and another asset decreasing, with no effect on total assets?

  1. Paying a supplier's account by cheque
  2. Purchasing office equipment for cash Correct answer.
  3. Purchasing office equipment on credit from a supplier
  4. Receiving cash from a customer in settlement of an account receivable

Explanation

Buying equipment for cash increases the equipment asset and decreases the cash asset by the same amount, so total assets remain unchanged. This is a pure asset swap and no liability or capital account is touched. Only transactions that cross into liabilities, capital, income or expenses alter total assets.

Question 2Accounting

A firm records a credit sale of goods in the sales day book. Which ledger entries correctly record the transaction?

  1. Debit sales account, credit receivables control account
  2. Debit cash account, credit sales account
  3. Debit receivables control account, credit sales account Correct answer.
  4. Debit sales account, credit cash account

Explanation

A credit sale creates a receivable (debit the receivables control account) and recognises income (credit the sales account). The debtor owes the firm, so the asset increases, and sales revenue increases on the credit side. Cash is untouched because the sale is on credit.

Question 3Accounting

Which of the following is a capital expenditure for a newly acquired delivery van?

  1. Monthly insurance premium
  2. Cost of fitting a custom refrigerated body to the van Correct answer.
  3. Annual road tax paid at registration
  4. Cost of the first full tank of fuel

Explanation

Capital expenditure is incurred to acquire or improve a non-current asset and benefits more than one accounting period. Fitting a custom refrigerated body permanently enhances the van's earning capacity, so it is capitalised. Recurring running costs such as tax, fuel and insurance are revenue expenditure.

Question 4Accounting

A trial balance extracted at year end shows total debits of N4,850,000 and total credits of N4,830,000. Which error could explain the N20,000 difference?

  1. A purchase of N20,000 was posted to the purchases account only Correct answer.
  2. A sale of N20,000 was completely omitted from the books
  3. A payment of N20,000 to a supplier was posted to the wrong supplier's account
  4. A discount received of N20,000 was recorded on the debit side of the discount received account

Explanation

Posting only one side of an entry leaves the trial balance out of balance by the amount of the missing side. A one-sided posting of N20,000 therefore produces exactly a N20,000 difference. A single-sided error breaks the arithmetic equality of debits and credits.

Question 5Accounting

A trader's bank statement shows a credit balance of N120,000 while the cash book shows a debit balance of N95,000. Unpresented cheques total N40,000. What is the amount of cheques paid in but not yet credited by the bank?

  1. N15,000 Correct answer.
  2. N55,000
  3. N65,000
  4. N25,000

Explanation

Starting from the bank statement credit balance of N120,000, add unpresented cheques of N40,000 to get N160,000, then compare with the cash book debit balance of N95,000. The difference of N65,000 is the deposits not yet credited, but since the cash book is lower than the adjusted statement, the uncredited lodgement is N120,000 + N40,000 − N95,000 = N65,000. Rechecking: the statement balance plus unpresented cheques less uncredited lodgements equals the cash book balance, so N120,000 + N40,000 − X = N95,000, giving X = N65,000.

Question 6Accounting

Which method of depreciation charges a constant amount each year over the asset's useful life?

  1. Sum of the years' digits method
  2. Reducing balance method
  3. Machine hour rate method
  4. Straight line method Correct answer.

Explanation

The straight line method allocates an equal depreciable amount (cost less residual value) to each year of the asset's useful life. It suits assets whose economic benefit is consumed evenly. The reducing balance and sum of the years' digits methods charge more in early years, and the machine hour rate varies with usage.

Question 7Accounting

Goods costing N80,000 were sold on credit at a mark-up of 25% on cost. Which entry records the sale in the seller's books?

  1. Debit sales N100,000, credit receivables N100,000
  2. Debit receivables N100,000, credit purchases N80,000 and credit profit N20,000
  3. Debit receivables N100,000, credit sales N100,000 Correct answer.
  4. Debit receivables N80,000, credit sales N80,000

Explanation

A mark-up of 25% on cost means selling price equals cost plus 25% of cost, that is N80,000 × 1.25 = N100,000. The double entry is to debit receivables and credit sales with the invoice value. Profit is not recorded separately at the point of sale; it emerges through the trading account.

Question 8Accounting

Which of the following best describes the accrual basis of accounting?

  1. Assets are recorded at their current market value each year
  2. Revenue and expenses are recorded in the period to which they relate, regardless of cash flow Correct answer.
  3. Revenue and expenses are recorded when cash is received or paid
  4. Only cash transactions are recorded in the books

Explanation

Under the accrual basis, income is recognised when earned and expenses when incurred, irrespective of when cash changes hands. This matches revenue with the costs of earning it and supports the matching concept. The cash basis, by contrast, records items only when cash moves.

Question 9Accounting

A business has opening capital of N500,000, drawings of N60,000 and closing capital of N620,000. Assuming no additional capital was introduced, what is the profit for the year?

  1. N180,000 Correct answer.
  2. N240,000
  3. N120,000
  4. N60,000

Explanation

Profit equals closing capital plus drawings less opening capital and any new capital introduced. Here N620,000 + N60,000 − N500,000 = N180,000. Drawings reduce capital, so they are added back to arrive at the profit generated.

Question 10Accounting

In a partnership, which of the following is normally credited to a partner's current account rather than the capital account?

  1. Additional capital introduced under the partnership agreement
  2. A share of partnership profit for the year Correct answer.
  3. The partner's original cash contribution on formation
  4. Interest on the partner's loan to the firm

Explanation

The capital account records the fixed, long-term contributions of each partner, while the current account collects fluctuating items such as profit shares, drawings and interest on capital. A share of profit for the year is therefore credited to the current account. Interest on a partner's loan is treated as an expense of the firm.

Question 11Accounting

A company issues 200,000 ordinary shares of N1 each at N1.50 per share, payable in full on application. How should the premium be treated?

  1. Credit it to a share premium account, which is a capital reserve Correct answer.
  2. Debit it to the share premium account
  3. Credit it to the share capital account
  4. Credit it to the profit and loss account as income

Explanation

Any amount received above the nominal value of shares is a share premium and must be credited to a share premium account. It is a capital reserve and is not distributable as dividend. Only the nominal value of N1 per share goes to the share capital account.

Question 12Accounting

Which of the following is a current liability in a company's statement of financial position?

  1. Share premium account
  2. Accumulated depreciation on plant
  3. Debenture repayable in ten years
  4. Dividend declared but not yet paid Correct answer.

Explanation

A dividend declared but unpaid is an obligation due within the next twelve months, so it is classified as a current liability. Debentures repayable in ten years are non-current, accumulated depreciation is a deduction from a non-current asset, and share premium is part of equity.

Question 13Accounting

A company's current assets total N900,000 and current liabilities total N600,000. Stock is N300,000. What is the quick (acid test) ratio?

  1. 1.50:1
  2. 1.00:1 Correct answer.
  3. 0.50:1
  4. 2.00:1

Explanation

The quick ratio removes stock from current assets because stock may not be quickly convertible to cash. It is (N900,000 − N300,000) ÷ N600,000 = 1.00:1. The current ratio of 1.50:1 includes stock and so overstates immediate liquidity.

Question 14Accounting

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

  1. Recording a sale of N30,000 as N3,000 in both the sales and receivables accounts Correct answer.
  2. Recording a cash receipt of N10,000 in the cash account only
  3. Recording a purchase of N50,000 in the purchases account only
  4. Posting a payment of N20,000 to the debit side of the bank account and the debit side of the payables account

Explanation

An error of original entry where the same wrong amount is entered on both sides keeps total debits equal to total credits, so the trial balance still agrees. The error is only detected by checking source documents or control accounts. One-sided postings and double-debit errors break the balance.

Question 15Accounting

A suspense account was opened with a credit balance of N18,000. On investigation, a credit sale of N18,000 had been completely omitted from the sales day book. What is the correcting entry?

  1. Debit sales account, credit suspense account
  2. Debit suspense account, credit sales account Correct answer.
  3. Debit receivables control account, credit suspense account
  4. Debit suspense account, credit receivables control account

Explanation

The omitted credit sale requires a debit to receivables and a credit to sales, but the trial balance difference already indicates a missing credit. Clearing the credit balance in the suspense account requires debiting suspense and crediting sales. This restores both the sales figure and the trial balance.

Question 16Accounting

Which of the following inventory valuation rules is required by accounting standards?

  1. Value stock at the lower of cost and net realisable value Correct answer.
  2. Value stock at replacement cost at the year end
  3. Value stock at the higher of cost and net realisable value
  4. Value stock at selling price less a normal margin

Explanation

Inventory must be measured at the lower of cost and net realisable value, reflecting the prudence concept. If net realisable value has fallen below cost, the loss is recognised immediately. Valuing at the higher amount would overstate assets and profit.

Question 17Accounting

A firm's sales for the year are N1,200,000, opening receivables are N150,000 and closing receivables are N210,000. What is the receivables collection period, using 360 days?

  1. 63 days
  2. 45 days
  3. 54 days Correct answer.
  4. 36 days

Explanation

The collection period is average receivables divided by credit sales, multiplied by 360. Average receivables are (N150,000 + N210,000) ÷ 2 = N180,000, so the period is N180,000 ÷ N1,200,000 × 360 = 54 days. Using closing receivables alone would give 63 days.

Question 18Accounting

Which of the following is the correct treatment of a provision for doubtful debts in the financial statements?

  1. Add it to receivables as an asset
  2. Deduct it from sales revenue in the trading account
  3. Deduct it from receivables in the statement of financial position and charge it as an expense Correct answer.
  4. Show it as a current liability

Explanation

A provision for doubtful debts is a prudent estimate of receivables that may not be collected. It is deducted from the gross receivables figure in the statement of financial position, and the movement in the provision is charged to the profit and loss account. It is not a liability because no external obligation exists.

Question 19Accounting

Under the reducing balance method, an asset costing N500,000 with a residual value of N20,000 is depreciated at 20% per annum. What is the depreciation charge for the second year?

  1. N96,000
  2. N100,000
  3. N64,000
  4. N80,000 Correct answer.

Explanation

First year depreciation is 20% of N500,000 = N100,000, leaving a carrying amount of N400,000. Second year depreciation is 20% of N400,000 = N80,000. The residual value is not deducted before applying the percentage under this method.

Question 20Accounting

Which of the following distinguishes a bank overdraft from a bank loan in the statement of financial position?

  1. An overdraft is shown as a current liability and a loan may be non-current Correct answer.
  2. An overdraft is shown in equity and a loan as a liability
  3. An overdraft is an asset and a loan is a liability
  4. Both are always shown as non-current liabilities

Explanation

A bank overdraft is repayable on demand and is therefore a current liability. A bank loan may be repayable over several years and is split between current and non-current portions. Neither is an asset or part of equity.

Question 21Accounting

A manufacturer's trial balance shows factory rent of N400,000, direct wages of N900,000, raw materials consumed of N1,200,000 and factory supervisor's salary of N300,000. What is the prime cost?

  1. N2,800,000
  2. N2,500,000
  3. N1,800,000
  4. N2,100,000 Correct answer.

Explanation

Prime cost comprises direct materials, direct labour and direct expenses only. Here it is raw materials N1,200,000 plus direct wages N900,000 = N2,100,000. Factory rent and the supervisor's salary are production overheads added later to arrive at factory cost.

Question 22Accounting

Which of the following statements about the realisation concept is correct?

  1. Revenue is recognised when a customer places an order
  2. Revenue is recognised only when cash is finally collected
  3. Revenue is recognised when goods are delivered or services performed, not when an order is received Correct answer.
  4. Revenue is recognised whenever the seller issues a price list

Explanation

The realisation concept holds that revenue is recognised when the significant risks and rewards of ownership pass, normally on delivery or performance of the service. An order or a quotation does not create revenue. Waiting for cash collection would be the cash basis.

Question 23Accounting

A company's statement of financial position shows total assets of N5,000,000 and total liabilities of N2,000,000. It then declares an ordinary dividend of N300,000. What is the effect on shareholders' equity?

  1. Equity remains at N3,000,000
  2. Equity falls to N2,700,000 Correct answer.
  3. Equity falls to N2,000,000
  4. Equity rises to N3,300,000

Explanation

Equity equals assets less liabilities, which is N5,000,000 − N2,000,000 = N3,000,000 before the dividend. A dividend declaration creates a liability and reduces equity by N300,000, leaving N2,700,000. The accounting equation stays in balance because liabilities rise as equity falls.

Question 24Accounting

In a manufacturing account, which of the following is treated as a production overhead?

  1. Depreciation of factory machinery Correct answer.
  2. Carriage inwards on raw materials
  3. Cost of raw materials issued to production
  4. Royalties paid per unit produced under a patent

Explanation

Production overheads are indirect costs of running the factory that cannot be traced to a single unit. Depreciation of factory machinery is incurred for the factory as a whole and is therefore an overhead. Carriage inwards and royalties paid per unit are direct costs, and raw materials are a direct material cost.

Question 25Accounting

Which of the following would cause the bank column of a cash book to differ from the bank statement because of an error by the bank?

  1. The firm forgot to record a direct debit in the cash book
  2. The bank wrongly debited the firm's account with another customer's cheque Correct answer.
  3. The firm issued a cheque that the payee has not yet presented
  4. The firm recorded a lodgement twice in the cash book

Explanation

Errors made by the bank must be corrected by the bank and are shown in the bank reconciliation statement rather than in the cash book. A wrong debit raised against the firm's account is such an error. Unpresented cheques and unrecorded direct debits are timing or bookkeeping matters handled differently.

Question 26Accounting

A trader keeps a three-column cash book. Which of the following transactions is entered in the discount columns of that cash book?

  1. Return of goods previously sold on credit to a customer
  2. Writing off a receivable confirmed as irrecoverable
  3. Settlement of a debtor's account before the due date at a reduced amount Correct answer.
  4. Payment of a supplier's invoice in full by cheque

Explanation

The discount columns of the cash book record cash discounts, that is reductions allowed or received when a debt is settled early. They are memorandum columns and are not part of the double entry in the cash book itself. Returns and bad debts are recorded in the returns and bad debts accounts instead.

Question 27Accounting

A sole trader's trial balance shows a debit balance of N45,000 on the rent account and a credit balance of N8,000 on the rent payable (accrual) account at year end. What figure for rent appears in the statement of profit or loss?

  1. N37,000
  2. N45,000 Correct answer.
  3. N8,000
  4. N53,000

Explanation

The trial balance already shows a debit balance of N45,000 in the rent expense account. The N8,000 rent payable balance is a recorded liability, not an additional unrecorded adjustment. With no further adjustment specified, N45,000 is the rent expense reported in profit or loss; adding the payable again would double-count the accrual.

Question 28Accounting

Which of the following best explains why a provision for doubtful debts is created in the accounts of a business?

  1. To record debts that have been confirmed as irrecoverable during the year
  2. To spread the cost of credit sales evenly over the credit period allowed
  3. To reduce receivables to their estimated recoverable amount under prudence Correct answer.
  4. To set aside cash in a separate bank account for future bad debts

Explanation

A provision for doubtful debts is an estimate of the portion of receivables that may not be collected, recognised so that receivables are not overstated. It applies the prudence concept without identifying specific debts. It is a charge against profit, not a cash set-aside.

Question 29Accounting

A company's trial balance does not agree, and a suspense account is opened with a debit balance of N12,000. Which of the following errors would produce a debit balance in the suspense account?

  1. A credit sale of N12,000 entered only in the sales day book Correct answer.
  2. Purchase of a motor vehicle of N12,000 debited to motor expenses account
  3. A payment of N12,000 to a supplier entered twice in the cash book
  4. A credit purchase of N12,000 entered in the purchases account as N1,200

Explanation

A one-sided entry leaves the trial balance short on the side where the posting was omitted. Omitting the debit to the customer's account makes total debits smaller than total credits, so the suspense account is opened with a debit balance. The other errors either affect both sides equally or are errors of principle or commission that do not affect trial balance agreement.

Question 30Accounting

Which of the following is the correct accounting treatment of goods taken from inventory by the owner of a sole trading business for personal use?

  1. Debit drawings account and credit sales account
  2. Debit purchases account and credit inventory account
  3. Debit drawings account and credit purchases account Correct answer.
  4. Debit inventory account and credit drawings account

Explanation

Goods withdrawn by the owner are not business expenses; they reduce the owner's equity and are therefore debited to drawings. The credit goes to purchases so that the cost of goods available for sale reflects only goods actually sold or still held. No sale has occurred, so the sales account is unaffected.

Question 31Accounting

A business receives its bank statement showing a credit balance of N96,000, while its cash book shows a debit balance of N110,000. Cheques drawn but not yet presented total N22,000, and bank charges of N8,000 appear on the statement only. What is the balance shown by the bank statement before any of these adjustments?

  1. N96,000
  2. N80,000
  3. N124,000 Correct answer.
  4. N140,000

Explanation

Start from the adjusted cash book: the bank charges of N8,000 reduce the cash book balance to N102,000. Unpresented cheques of N22,000 have already been deducted in the cash book, so the bank statement balance is higher by that amount, giving N102,000 + N22,000 = N124,000. The stated figure of N96,000 is therefore not the reconciled balance.

Question 32Accounting

Under the imprest system, a petty cashier is given a float of N20,000 and reimbursed at the end of each month. During the month, vouchers totalling N13,500 are supported by receipts. What amount is required to restore the imprest?

  1. N33,500
  2. N20,000
  3. N13,500 Correct answer.
  4. N6,500

Explanation

The imprest system restores the float to its original amount by reimbursing exactly the amount spent, which is the total of the petty cash vouchers. Since N13,500 was spent, N13,500 is drawn to bring the cash back to N20,000. The remaining N6,500 is the cash still held by the petty cashier.

Question 33Accounting

Which of the following costs incurred by a manufacturer is classified as a production overhead in the manufacturing account?

  1. Royalties paid per unit of finished output
  2. Salaries of the sales and distribution staff
  3. Carriage inwards on raw materials purchased
  4. Depreciation of factory plant and machinery Correct answer.

Explanation

Production overheads are indirect costs of running the factory that cannot be traced directly to units produced. Depreciation of factory plant is such an indirect factory cost. Direct materials, direct labour and direct expenses are prime cost items, while selling and distribution costs are excluded from the manufacturing account.

Question 34Accounting

A business's statement of affairs at the start of the year shows capital of N400,000. During the year the owner introduced N50,000 and withdrew goods costing N15,000 for personal use. Profit for the year was N80,000. What is the closing capital?

  1. N485,000
  2. N515,000 Correct answer.
  3. N545,000
  4. N500,000

Explanation

Closing capital equals opening capital plus additional capital introduced plus profit, less drawings. Drawings are measured at the cost of the goods taken, that is N15,000. Hence N400,000 + N50,000 + N80,000 - N15,000 = N515,000.

Question 35Accounting

In the absence of a partnership agreement, which rule applies to the sharing of partnership profits under the Partnership Act?

  1. Profits are shared equally after paying interest on capital
  2. Profits are shared according to the time each partner devotes
  3. Profits are shared in proportion to capital contributed
  4. Profits are shared equally between the partners Correct answer.

Explanation

Where no agreement exists, the default statutory rule is that partners share profits and losses equally, regardless of the capital each has contributed. Interest on capital is not allowed in the absence of an agreement. This default applies only until the partners make their own arrangement.

Question 36Accounting

A partner's capital account is credited with N200,000 on admission. The partner later receives a salary of N60,000 and interest on capital of N10,000, and withdraws N40,000. Under the fluctuating capital method, what is the balance on the partner's capital account after these items?

  1. N190,000
  2. N200,000
  3. N270,000
  4. N230,000 Correct answer.

Explanation

Under the fluctuating capital method all appropriations and drawings pass through the capital account itself. The salary and interest on capital increase the balance by N70,000, while drawings reduce it by N40,000, giving N200,000 + N70,000 - N40,000 = N230,000.

Question 37Accounting

Which of the following is treated as a change in accounting policy rather than a change in accounting estimate?

  1. Increasing the rate of the provision for doubtful debts from 2% to 5%
  2. Changing the basis of valuing inventory from FIFO to weighted average Correct answer.
  3. Revising the useful life of a delivery van from five to seven years
  4. Adjusting the residual value of machinery after a reassessment

Explanation

A change in accounting policy arises when a different measurement basis or recognition principle is adopted, such as moving from FIFO to weighted average cost. Changes in useful life, residual value or provision rates are reassessments based on new information and are changes in estimate. Policy changes are applied retrospectively, while estimate changes affect current and future periods.

Question 38Accounting

A company has issued 100,000 ordinary shares of N1 each at a premium of N0.60 per share. It has also issued 20,000 preference shares of N1 each at par. What is the total share capital and share premium shown in the statement of financial position?

  1. Share capital N120,000; share premium N60,000 Correct answer.
  2. Share capital N100,000; share premium N80,000
  3. Share capital N120,000; share premium N80,000
  4. Share capital N100,000; share premium N60,000

Explanation

Share capital is the nominal value of all shares issued, that is 100,000 ordinary shares plus 20,000 preference shares at N1 each, giving N120,000. Share premium arises only on the ordinary shares at N0.60 each, giving N60,000. Preference shares issued at par create no premium.

Question 39Accounting

Which of the following items is included in the computation of a company's distributable profit for the year?

  1. A bonus issue of shares made from retained earnings
  2. A credit balance brought forward on the retained earnings account Correct answer.
  3. An unrealised gain on remeasuring an investment at fair value
  4. A transfer from the revaluation surplus on land

Explanation

Distributable profit is the accumulated realised profit available for dividend, which includes the retained earnings brought forward from earlier years. Revaluation surplus and unrealised gains are not realised and are not distributable. A bonus issue capitalises retained earnings and reduces rather than creates distributable profit.

Question 40Accounting

A company's profit before tax is N800,000. Depreciation charged was N120,000, a gain on disposal of equipment was N35,000, and trade receivables increased by N60,000 during the year. What is the net cash flow from operating activities?

  1. N755,000
  2. N965,000
  3. N895,000
  4. N825,000 Correct answer.

Explanation

Under the indirect method, non-cash depreciation is added back and a non-operating gain is deducted. An increase in receivables is deducted because cash collected is less than revenue recognised. Hence N800,000 + N120,000 - N35,000 - N60,000 = N825,000.

Question 41Accounting

Which of the following items appearing in a bank reconciliation is adjusted in the cash book rather than in the bank statement reconciliation?

  1. Cheques deposited that were later dishonoured by the bank
  2. Standing order payments shown on the bank statement only Correct answer.
  3. Cheques deposited but not yet credited by the bank
  4. Unpresented cheques issued to suppliers

Explanation

Items appearing on the bank statement but not yet recorded in the cash book, such as standing orders, direct debits and bank charges, must be entered in the cash book. Timing differences such as unpresented cheques and uncredited lodgements are dealt with in the reconciliation itself. Dishonoured cheques are already in the cash book and are adjusted there when the bank returns them.

Question 42Accounting

Which of the following errors is an error of principle?

  1. Recording a purchase of office furniture in the office equipment account
  2. Recording a credit sale of N5,000 as N500 in the sales day book
  3. Recording the purchase of a motor vehicle in the motor expenses account Correct answer.
  4. Posting a credit purchase to the wrong supplier's account

Explanation

An error of principle occurs when a transaction is entered in an account of a different class from the one required, for example treating capital expenditure as revenue expenditure. Recording a vehicle as an expense breaches that distinction. The other options are errors of commission that stay within the correct class of account.

Question 43Accounting

A firm operates a margin of 25% on selling price. Sales for the year were N800,000. Opening inventory was N60,000 and closing inventory was N90,000. What was the cost of goods purchased?

  1. N630,000 Correct answer.
  2. N660,000
  3. N570,000
  4. N690,000

Explanation

With a margin of 25% on selling price, cost of sales is 75% of sales, that is N600,000. Cost of goods purchased equals cost of sales plus closing inventory less opening inventory: N600,000 + N90,000 - N60,000 = N630,000. A mark-up on cost would give a different figure, so the basis of the percentage matters.

Question 44Accounting

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 in the financial statements
  2. Disclose it in the notes to the financial statements Correct answer.
  3. Recognise it as an expense in the statement of profit or loss
  4. Recognise it as a liability in the statement of financial position

Explanation

A contingent liability that is not probable and cannot be measured reliably is not recognised because the recognition criteria are not met. It is nevertheless disclosed in the notes so that users are aware of the possible obligation. Recognition as a liability or expense is reserved for present obligations that are probable and measurable.

Question 45Accounting

A business has a gross profit ratio of 30% and a net profit ratio of 8%. Which of the following best explains the gap between the two ratios?

  1. The business has reduced the selling price of its goods
  2. Closing inventory has been overstated in the accounts
  3. Operating expenses absorb a large share of gross profit Correct answer.
  4. The cost of goods sold has increased relative to sales

Explanation

The difference between the gross profit ratio and the net profit ratio is explained by operating expenses such as administration, selling and finance costs. A large gap indicates that these expenses consume a substantial part of gross profit. Changes in cost of sales or selling prices affect the gross profit ratio itself.

Question 46Accounting

Which of the following is the correct double entry when a company makes a bonus issue of shares out of retained earnings?

  1. Debit bank and credit share capital
  2. Debit retained earnings and credit share capital Correct answer.
  3. Debit share capital and credit retained earnings
  4. Debit share premium and credit bank

Explanation

A bonus issue capitalises reserves, converting retained earnings into issued share capital without any cash inflow. The entry therefore debits retained earnings and credits share capital. No bank account is involved because shareholders pay nothing for bonus shares.

Question 47Accounting

A trader's sales ledger control account shows a debit balance of N250,000, while the total of the sales ledger balances is N246,000. Investigation reveals that a contra entry of N4,000 with the purchases ledger was omitted from the control account. What is the corrected balance on the control account?

  1. N250,000
  2. N246,000 Correct answer.
  3. N254,000
  4. N242,000

Explanation

A contra entry reduces both the receivable and the payable of the same party, so the control account must be credited by N4,000. The corrected control account balance becomes N250,000 - N4,000 = N246,000, which then agrees with the ledger total. The omission was in the control account, not the list of balances.

Question 48Accounting

Which of the following is included in the cost of an item of property, plant and equipment at initial recognition?

  1. The cost of site preparation and installation Correct answer.
  2. The cost of advertising the new product made by the asset
  3. The cost of relocating the business to new premises
  4. The cost of staff training on the new machine

Explanation

The cost of an asset includes all expenditure necessary to bring it to the location and condition for its intended use, such as site preparation, delivery and installation. Training, relocation and advertising are not part of bringing the asset itself into use. These are recognised as expenses when incurred.

Question 49Accounting

A company uses the revaluation model for its buildings. A building with a carrying amount of N600,000 is revalued to N750,000. In a later year it is revalued down to N520,000, and no previous revaluation deficit exists. How is the decrease treated?

  1. Recognise the whole N230,000 against the revaluation surplus
  2. Recognise N150,000 against revaluation surplus and N80,000 as an expense Correct answer.
  3. Recognise N80,000 against revaluation surplus and N150,000 as an expense
  4. Recognise the whole N230,000 as an expense in profit or loss

Explanation

A revaluation decrease is first offset against any credit balance in the revaluation surplus relating to the same asset. The earlier increase of N150,000 created such a surplus, so that amount is debited to the surplus and only the excess of N80,000 is charged to profit or loss. The total fall from N750,000 to N520,000 is N230,000.

Question 50Accounting

Which of the following statements about the going concern assumption is correct?

  1. It requires assets and liabilities to be measured at historical cost only
  2. It requires all revenue to be recognised when cash is received
  3. It requires assets to be valued at their forced sale values
  4. It assumes the business will continue in operation for the foreseeable future Correct answer.

Explanation

Going concern assumes the entity will continue trading for the foreseeable future without the need to liquidate or curtail operations. This supports preparing accounts on a basis other than break-up values. It does not by itself prescribe cash accounting or historical cost, and other measurement bases may still apply.