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ICAP PRC-1 Fundamentals of Accounting study materials
ICAP PRC-1 Fundamentals of Accounting study resources

ICAP PRC-1 Fundamentals of Accounting practice questions

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Question 1Introduction to Accounting and Conceptual Framework

Under the IASB Conceptual Framework, which qualitative characteristic is enhanced when information is capable of making a difference in users' decisions?

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

Explanation

Relevance is the fundamental qualitative characteristic describing information capable of making a difference in decisions, through predictive value, confirmatory value, or both. Faithful representation is the other fundamental characteristic, while comparability and timeliness are enhancing characteristics.

Question 2Introduction to Accounting and Conceptual Framework

A business reports its inventory at the lower of cost and net realisable value. Which accounting assumption most directly supports reporting this lower figure rather than cost?

  1. Monetary unit
  2. Prudence Correct answer.
  3. Going concern
  4. Accrual basis

Explanation

Prudence is the exercise of caution when making judgements under uncertainty, so assets are not overstated; writing inventory down to net realisable value reflects that caution. Going concern, accrual and the monetary unit assumption do not themselves require the write-down.

Question 3Introduction to Accounting and Conceptual Framework

Which statement best describes the objective of general purpose financial reporting under the Conceptual Framework?

  1. To enable management to prepare internal budgets and variance reports
  2. To provide information to users for making decisions about providing resources to the entity Correct answer.
  3. To determine the exact taxable profit of an entity for tax authorities
  4. To guarantee that the entity will remain profitable in future periods

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. Taxation, internal budgeting and profit guarantees are outside that objective.

Question 4Introduction to Accounting and Conceptual Framework

An entity receives a customer deposit in December for goods to be delivered in January. Under the accrual basis, when should the revenue be recognised?

  1. Equally across December and January
  2. In December, when the cash is received
  3. In January, when the performance obligation is satisfied Correct answer.
  4. When the financial statements are authorised for issue

Explanation

Under the accrual basis, revenue is recognised when the performance obligation is satisfied, not when cash is received. The December receipt creates a liability (contract liability) that is settled by delivering the goods in January.

Question 5Introduction to Accounting and Conceptual Framework

Which of the following is an enhancing qualitative characteristic rather than a fundamental one?

  1. Relevance
  2. Faithful representation
  3. Verifiability Correct answer.
  4. Materiality

Explanation

Verifiability is one of the four enhancing characteristics, alongside comparability, timeliness and understandability. Relevance and faithful representation are the two fundamental characteristics, and materiality is an entity-specific aspect of relevance.

Question 6Introduction to Accounting and Conceptual Framework

Which item is a liability of an entity under the Conceptual Framework definition?

  1. A future obligation that will arise only if the entity chooses to expand
  2. A present obligation to transfer an economic resource as a result of past events Correct answer.
  3. An equity instrument issued to shareholders
  4. An unconditional right to receive cash from a customer next year

Explanation

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The obligation must already exist, so a possible future obligation or a right to receive resources does not qualify.

Question 7Introduction to Accounting and Conceptual Framework

An entity's only asset is equipment with a carrying amount of CU 80,000. A flood destroys it after the reporting date but before the statements are authorised for issue, and the loss is material. How should this be treated?

  1. As a non-adjusting event, with disclosure of its nature and financial effect Correct answer.
  2. As an adjusting event, restating the carrying amount to nil
  3. Ignored because it occurred after the reporting date
  4. Recognised as a prior period error

Explanation

A disaster occurring after the reporting date does not change conditions that existed at that date, so it is a non-adjusting event. Because it is material, its nature and estimated financial effect must be disclosed so users are not misled.

Question 8Introduction to Accounting and Conceptual Framework

Which of the following best illustrates the going concern assumption being applied?

  1. Recognising a provision only when a legal obligation exists
  2. Recording a machine at its forced liquidation value
  3. Recording a machine at cost less depreciation over its useful life Correct answer.
  4. Recording sales when cash is received rather than when goods are delivered

Explanation

Going concern means the entity is assumed to continue operating, so assets are measured on a basis appropriate to ongoing use, such as depreciating a machine over its useful life rather than at break-up value. Liquidation values apply only when the assumption is not appropriate.

Question 9Introduction to Accounting and Conceptual Framework

An entity has a legal obligation for environmental restoration that has been reliably measured. Under the Conceptual Framework, recognition of the liability is appropriate because it meets which combination of criteria?

  1. It is probable and measurable, regardless of relevance
  2. It is comparable and timely
  3. It is relevant and faithfully represented, and recognition provides useful information Correct answer.
  4. It is material and verifiable

Explanation

The Conceptual Framework recognises an item when doing so provides relevant information and a faithful representation of the item. The older probability and reliable measurement thresholds have been replaced by these qualitative-characteristic-based criteria.

Question 10Introduction to Accounting and Conceptual Framework

Which of the following is the best example of a measurement uncertainty that would be disclosed rather than avoided?

  1. The par value of issued ordinary shares
  2. The face value of cash held in a bank account
  3. A provision for a warranty estimated from historical claim rates Correct answer.
  4. The invoice price of goods purchased on credit

Explanation

A warranty provision requires estimation of uncertain future outcomes, creating measurement uncertainty that should be disclosed. Cash, share par value and invoice prices are observed transaction amounts with no significant estimation uncertainty.

Question 11Introduction to Accounting and Conceptual Framework

Which statement about the difference between the Conceptual Framework's definition of equity and the accounting equation is correct?

  1. Equity is a present obligation to transfer resources
  2. Equity is the residual interest in assets after deducting liabilities, which the equation A = L + E expresses Correct answer.
  3. Equity is measured independently of assets and liabilities
  4. Equity equals total assets regardless of liabilities

Explanation

Equity is defined as the residual interest in the assets of the entity after deducting all its liabilities. The accounting equation A = L + E restates this relationship, so equity is derived from assets and liabilities rather than measured independently.

Question 12Introduction to Accounting and Conceptual Framework

A company changes an accounting policy because a new IFRS requires it. Which disclosure is most appropriate?

  1. Treat the change as a change in estimate and ignore it
  2. Restate only the current year's profit without explanation
  3. Apply the change retrospectively and disclose the nature and effect of the change Correct answer.
  4. Apply the change prospectively with no disclosure

Explanation

A change required by a new standard is generally applied retrospectively under IAS 8, with disclosure of the nature of the change and its effect on the financial statements. Prospective treatment without disclosure would impair comparability and understandability.

Question 13Introduction to Accounting and Conceptual Framework

Which of the following would be classified as a change in accounting estimate rather than a change in accounting policy?

  1. Changing the basis of consolidation following a new interpretation
  2. Adopting a new standard that requires a different measurement basis
  3. Switching from the cost model to the revaluation model for a class of assets
  4. Changing the useful life of a machine based on new information Correct answer.

Explanation

A change in estimate arises from new information or developments, such as revising a useful life, and is applied prospectively. Adopting a new standard, changing measurement models and revising consolidation bases are changes in accounting policy.

Question 14Introduction to Accounting and Conceptual Framework

An entity sells goods with a right of return. Under the Conceptual Framework and IFRS 15, how is the expected return treated at the point of sale?

  1. No revenue is recognised until the return period expires
  2. Revenue is recognised in full and a contingent asset is recorded
  3. Revenue is recognised only for goods not expected to be returned, with a refund liability for the rest Correct answer.
  4. Full revenue is recognised and returns are ignored until they occur

Explanation

Revenue is recognised to the extent it is highly probable there will not be a significant reversal, so the expected return is not recognised as revenue. A refund liability is recorded for the amount expected to be refunded to customers.

Question 15Introduction to Accounting and Conceptual Framework

Which of the following best describes the role of the Conceptual Framework in developing IFRS Standards?

  1. It overrides any conflicting requirement in an individual IFRS Standard
  2. It replaces the need for management judgement
  3. It provides a basis for developing consistent standards and resolving issues not covered by a standard Correct answer.
  4. It prescribes the exact chart of accounts for all entities

Explanation

The Conceptual Framework assists the IASB in developing standards based on consistent concepts and helps preparers develop policies when no standard applies. It does not override specific standards, prescribe charts of accounts or eliminate judgement.

Question 16Introduction to Accounting and Conceptual Framework

An entity reports a large one-off gain from selling a subsidiary. Which presentation choice best supports faithful representation for users assessing recurring performance?

  1. Combine the gain with operating revenue without separate disclosure
  2. Present the gain separately and describe its nature so users can assess its effect Correct answer.
  3. Report the gain net of tax only in retained earnings
  4. Defer the gain over future periods to smooth reported profit

Explanation

Faithful representation requires complete and neutral depiction, so a material one-off gain should be presented separately with its nature disclosed. Combining or deferring the gain obscures its effect and impairs neutrality.

Question 17Introduction to Accounting and Conceptual Framework

An entity has a present obligation arising from a past event, but the outflow is not probable and cannot be measured reliably. Under the Conceptual Framework, what is the most appropriate treatment?

  1. Recognise a liability at a nominal amount
  2. Do not recognise a liability, but consider disclosing the obligation Correct answer.
  3. Recognise a liability and an equal asset
  4. Recognise the liability only in the statement of cash flows

Explanation

If recognising an item would not provide relevant information or a faithful representation, it is not recognised. The entity should still consider whether disclosure of the obligation is useful to users.

Question 18Introduction to Accounting and Conceptual Framework

Which scenario best demonstrates the trade-off between relevance and faithful representation described in the Conceptual Framework?

  1. Omitting a material estimate to avoid uncertainty
  2. Reporting information only when it can be verified with certainty
  3. Reporting only historical cost because it is always verifiable
  4. Using a forward-looking estimate that is useful but subject to measurement uncertainty Correct answer.

Explanation

Relevance often requires forward-looking estimates, which introduce measurement uncertainty and can reduce faithful representation, so the two characteristics must be balanced. Reporting only certain or historical information may be faithful but less relevant.

Question 19Introduction to Accounting and Conceptual Framework

An entity recognises an asset for expected future tax refunds arising from a loss carryforward. Which concept most directly supports recognising the asset only when it is probable that future taxable profit will be available?

  1. The monetary unit assumption
  2. The historical cost basis
  3. Prudence applied to uncertain future economic benefits Correct answer.
  4. The separate entity assumption

Explanation

Recognising an asset requires that future economic benefits are probable; prudence cautions against overstating assets when recovery is uncertain. The monetary unit, historical cost and separate entity assumptions do not address the probability of future benefits.

Question 20Introduction to Accounting and Conceptual Framework

A regulator argues that an entity should recognise a provision because the outflow is 'more likely than not'. The entity applies the Conceptual Framework. Which response is most defensible?

  1. Recognise the provision only when the cash outflow has already occurred
  2. Recognise the provision automatically because a numerical probability threshold is met
  3. Never recognise provisions with any measurement uncertainty
  4. Assess whether recognition provides relevant information and a faithful representation, considering the probability and measurement uncertainty Correct answer.

Explanation

The Conceptual Framework does not set a single probability threshold; recognition depends on relevance and faithful representation, which involve considering the likelihood of the outflow and the degree of measurement uncertainty. A rigid threshold or waiting for cash payment is not the Framework's approach.

Question 21Accounting Cycle, Double Entry and Books of Prime Entry

In the double-entry system, every transaction is recorded with which of the following effects?

  1. One debit entry only, matched by a memorandum note
  2. At least two entries of equal total debit and credit value Correct answer.
  3. Two entries that may differ in amount if the difference is posted to drawings
  4. A single entry in the ledger supported by the source document

Explanation

Double entry requires that each transaction be recorded so that total debits equal total credits, which keeps the accounting equation in balance. The entries may involve more than two accounts, but the debit and credit totals must always agree.

Question 22Accounting Cycle, Double Entry and Books of Prime Entry

Which book of prime entry is used to record credit sales of goods in the ordinary course of business?

  1. The general journal
  2. The purchases day book
  3. The sales day book Correct answer.
  4. The cash book

Explanation

Credit sales are first entered in the sales day book (sales journal), from which totals are later posted to the sales account and individual amounts to receivables ledgers. The general journal is reserved for items that do not fit a specialised book.

Question 23Accounting Cycle, Double Entry and Books of Prime Entry

A business pays a supplier's invoice by bank transfer. Which pair of entries correctly records this transaction?

  1. Debit payables, credit bank Correct answer.
  2. Debit purchases, credit bank
  3. Debit bank, credit payables
  4. Debit bank, credit purchases

Explanation

Paying a supplier reduces the liability owed, so payables are debited, and it reduces the bank balance, so bank is credited. Purchases were already recognised when the invoice was received.

Question 24Accounting Cycle, Double Entry and Books of Prime Entry

Which of the following is a book of prime entry rather than a ledger account?

  1. The sales returns day book Correct answer.
  2. The plant and machinery account
  3. The receivables ledger control account
  4. The capital account

Explanation

Books of prime entry are the initial records of transactions before posting to the ledger, and the sales returns day book records goods returned by credit customers. The other items are ledger accounts to which entries are posted.

Question 25Accounting Cycle, Double Entry and Books of Prime Entry

What is the primary purpose of preparing a trial balance?

  1. To detect arithmetical errors in the ledger by checking debit and credit totals agree Correct answer.
  2. To prove that no transaction has been omitted from the books
  3. To confirm that every ledger account shows the correct balance
  4. To calculate the profit or loss for the period

Explanation

A trial balance lists ledger balances in debit and credit columns and checks that the totals agree, which reveals certain arithmetical and posting errors. It cannot detect errors of principle, omission or complete reversal.

Question 26Accounting Cycle, Double Entry and Books of Prime Entry

In the accounting equation, which element is increased by a credit entry?

  1. A liability Correct answer.
  2. Drawings
  3. An expense
  4. An asset

Explanation

Liabilities and capital are on the credit side of the accounting equation, so they increase with credits. Assets, expenses and drawings all increase with debits.

Question 27Accounting Cycle, Double Entry and Books of Prime Entry

Which document is the source document for recording a credit purchase of goods from a supplier?

  1. A credit note issued by the business
  2. A remittance advice sent with a payment
  3. A supplier's invoice received by the business Correct answer.
  4. A purchase requisition from a department

Explanation

The supplier's invoice is the external source document that evidences a credit purchase and provides the details for the purchases day book. Credit notes issued and remittance advices relate to returns and payments respectively.

Question 28Accounting Cycle, Double Entry and Books of Prime Entry

A sole trader takes goods from the business for personal use. Which entry records this?

  1. Debit expenses, credit inventory
  2. Debit drawings, credit purchases Correct answer.
  3. Debit drawings, credit cash
  4. Debit purchases, credit drawings

Explanation

Goods taken by the owner reduce the goods available for sale and increase the owner's drawings, so drawings are debited and purchases credited. No cash movement occurs, so the cash book is unaffected.

Question 29Accounting Cycle, Double Entry and Books of Prime Entry

A business records a credit sale of 800 in the sales day book but posts it to the sales account as 80. Which type of error is this?

  1. An error of principle
  2. An error of complete omission
  3. An error of commission affecting only the trial balance
  4. An error of original entry Correct answer.

Explanation

An error of original entry occurs when the wrong amount is entered in a book of prime entry and both the debit and credit are posted using that same wrong amount. The trial balance still agrees because both sides carry the same incorrect figure.

Question 30Accounting Cycle, Double Entry and Books of Prime Entry

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

  1. A debit entry of 500 posted without the corresponding credit entry
  2. A purchase of a non-current asset debited to the purchases account Correct answer.
  3. A credit entry of 300 posted twice to the same account
  4. A debit balance of 250 entered in the credit column of the trial balance

Explanation

Posting a non-current asset purchase to purchases is an error of principle: debits and credits still balance, so the trial balance agrees. The other errors upset the equality of debit and credit totals.

Question 31Accounting Cycle, Double Entry and Books of Prime Entry

The sales day book totals 14,600 for the month. What is the correct posting of this total to the nominal ledger?

  1. Debit sales 14,600, credit cash 14,600
  2. Debit receivables control 14,600, credit sales 14,600 Correct answer.
  3. Debit cash 14,600, credit sales 14,600
  4. Debit sales account 14,600, credit receivables control 14,600

Explanation

Credit sales increase receivables (an asset) and increase sales income, so the receivables control account is debited and the sales account credited with the period total. Individual customer accounts are also updated from the day book.

Question 32Accounting Cycle, Double Entry and Books of Prime Entry

A business uses the imprest system for petty cash with a float of 300. Vouchers for the period total 214. How much is reimbursed to restore the imprest?

  1. 86
  2. 514
  3. 300
  4. 214 Correct answer.

Explanation

Under the imprest system the amount reimbursed equals the petty cash spent, evidenced by vouchers, so that the float returns to its fixed level. Here the vouchers of 214 are reimbursed, restoring cash on hand to 300.

Question 33Accounting Cycle, Double Entry and Books of Prime Entry

In a three-column cash book, a customer's cheque is dishonoured after being entered as a receipt. How is this recorded?

  1. Only in the general journal, with no cash book entry
  2. As a payment on the credit side of the cash book and a debit to the customer's account Correct answer.
  3. As a receipt on the debit side of the cash book and a credit to the customer's account
  4. As a contra entry between the cash and bank columns

Explanation

A dishonoured cheque reverses the earlier receipt, so it appears as a payment on the credit side of the cash book. The customer owes the amount again, so their account is debited in the receivables ledger.

Question 34Accounting Cycle, Double Entry and Books of Prime Entry

Which of the following is recorded in the general journal rather than in a specialised book of prime entry?

  1. A credit purchase of trading goods
  2. Goods returned by a credit customer
  3. The correction of an error of principle Correct answer.
  4. Cash received from a credit customer

Explanation

The general journal records non-routine entries such as corrections of errors, adjustments and opening entries. Routine cash, returns and credit purchase transactions have their own specialised books.

Question 35Accounting Cycle, Double Entry and Books of Prime Entry

A credit note received from a supplier for goods returned is recorded in which book of prime entry?

  1. The purchases returns day book Correct answer.
  2. The purchases day book
  3. The general journal
  4. The sales returns day book

Explanation

Goods returned to a supplier reduce credit purchases and are recorded in the purchases returns day book. The supplier's credit note is the source document for that entry.

Question 36Accounting Cycle, Double Entry and Books of Prime Entry

A business receives rent in advance from a tenant and records it in the rent received account. At the year end, part of the amount relates to the following period. What adjustment is required?

  1. Debit income received in advance, credit rent received
  2. Debit prepayments, credit rent received
  3. Debit rent received, credit income received in advance Correct answer.
  4. Debit rent received, credit cash

Explanation

The portion of rent relating to the next period is a liability, income received in advance, and must be removed from current income. This is done by debiting rent received and crediting the income received in advance account.

Question 37Accounting Cycle, Double Entry and Books of Prime Entry

The trial balance shows a suspense account with a credit balance of 180. Which error could have caused this?

  1. A debit of 90 posted as a credit of 90
  2. A credit entry of 180 omitted from the postings Correct answer.
  3. A purchase of machinery debited to machinery instead of purchases
  4. A debit entry of 180 posted twice

Explanation

Omitting a credit entry means debits exceed credits by 180, so a credit balance of 180 is opened in the suspense account to make the trial balance agree. The suspense account is cleared once the omission is corrected.

Question 38Accounting Cycle, Double Entry and Books of Prime Entry

What is the effect on the accounting equation when a business purchases inventory on credit?

  1. Assets decrease and liabilities decrease
  2. Liabilities increase and capital decreases
  3. Assets increase and capital increases
  4. Assets increase and liabilities increase Correct answer.

Explanation

Inventory, an asset, increases and payables, a liability, increase by the same amount, so the equation remains balanced. Capital is unaffected because the transaction is not yet a profit or loss event.

Question 39Accounting Cycle, Double Entry and Books of Prime Entry

Which of the following best describes the relationship between the receivables ledger and the receivables ledger control account?

  1. Both are maintained on a double-entry basis within the nominal ledger
  2. The control account forms part of double entry while the receivables ledger is a memorandum record Correct answer.
  3. The receivables ledger replaces the control account at the year end
  4. The control account is a memorandum record and the receivables ledger is part of double entry

Explanation

The receivables ledger control account is a nominal ledger account kept on a double-entry basis and summarises total receivables. Individual customer accounts in the receivables ledger are memorandum records used for credit control.

Question 40Accounting Cycle, Double Entry and Books of Prime Entry

A business records a payment for repairs to a building by debiting the building account. Which type of error has occurred?

  1. A compensating error
  2. An error of principle Correct answer.
  3. An error of complete reversal
  4. An error of transposition

Explanation

Revenue expenditure on repairs has been treated as capital expenditure on the building, which is a wrong class of account, so this is an error of principle. The trial balance still balances because the double entry itself is complete.

Question 41Accounting Cycle, Double Entry and Books of Prime Entry

Which of the following items would be entered in the purchases day book?

  1. A credit purchase of office equipment
  2. A cash purchase of stationery
  3. A credit purchase of goods for resale Correct answer.
  4. A credit purchase of delivery van for business use

Explanation

The purchases day book records credit purchases of goods intended for resale. Credit purchases of non-current assets are recorded through the general journal, and cash purchases go through the cash book.

Question 42Accounting Cycle, Double Entry and Books of Prime Entry

A business's trial balance has debit totals of 48,000 and credit totals of 47,640. Which action correctly deals with the difference?

  1. Open a suspense account with a debit balance of 360
  2. Credit the difference to the statement of profit or loss
  3. Open a suspense account with a credit balance of 360 Correct answer.
  4. Debit the difference to the capital account

Explanation

Credits are 360 lower than debits, so a credit entry of 360 in a suspense account is needed to make the trial balance totals agree. The suspense account is then cleared when the underlying error is found and corrected.

Question 43Accounting Cycle, Double Entry and Books of Prime Entry

A business correctly records a credit sale of 450 to X, but posts the credit to the account of Y, a customer of the same name type. Which statement describes the effect?

  1. The trial balance fails to agree and a suspense account is required
  2. The trial balance still agrees but the receivables ledger balances for X and Y are wrong Correct answer.
  3. The sales account is understated by 450
  4. The error is an error of principle and affects the profit calculation

Explanation

Posting a credit to the wrong personal account of the same class is an error of commission; the double entry total is unaffected, so the trial balance agrees. However, the individual balances of X and Y in the receivables ledger are misstated and must be corrected.

Question 44Accounting Cycle, Double Entry and Books of Prime Entry

A business pays 960 for insurance on 1 April covering the twelve months to 31 March. Its year end is 31 December. What is the insurance expense for the year and the prepayment at the year end?

  1. Expense 240 and prepayment 720
  2. Expense 720 and prepayment 240 Correct answer.
  3. Expense 480 and prepayment 480
  4. Expense 960 and prepayment nil

Explanation

Nine months of cover (April to December) relates to the current year, so the expense is 960 x 9/12 = 720. The remaining three months, 960 x 3/12 = 240, is a prepayment carried forward as an asset.

Question 45Accounting Cycle, Double Entry and Books of Prime Entry

A purchases returns day book total of 1,250 is posted to the purchases returns account as 1,520, with the control account posted correctly from the day book. Which correction is required?

  1. Debit suspense 270, credit purchases returns 270
  2. Debit purchases returns 1,250, credit payables control 1,250
  3. Debit purchases returns 270, credit suspense 270 Correct answer.
  4. Debit purchases returns 1,520, credit receivables control 1,520

Explanation

The purchases returns account has been credited with 1,520 instead of 1,250, an excess credit of 270. To correct it, purchases returns is debited and the suspense account credited with 270, clearing the imbalance.

Question 46Accounting Cycle, Double Entry and Books of Prime Entry

A business uses a two-column (analytical) petty cash book. Which of the following is the correct treatment of a payment for postage stamps from petty cash?

  1. Enter the amount in the postage analysis column and in the total payments column, then credit the petty cash column Correct answer.
  2. Enter the amount in the postage analysis column only, with no entry in the petty cash column
  3. Enter the amount in the petty cash column as a receipt and in the postage analysis column
  4. Enter the amount only in the total payments column and ignore the analysis column

Explanation

In an analytical petty cash book, each payment is recorded twice: once in the appropriate analysis column (here postage) and once in the total payments column, while the petty cash column itself is credited. The analysis columns exist only to classify expenditure and are totalled periodically for posting to the nominal ledger. The petty cash column must always reflect the reduction in cash held.

Question 47Accounting Cycle, Double Entry and Books of Prime Entry

A business keeps its cash book on the imprest system with a float of 250. At the end of the period the petty cash box holds 62 in cash and vouchers totalling 188. What is the amount of the reimbursement?

  1. 62
  2. 188 Correct answer.
  3. 126
  4. 250

Explanation

Under the imprest system, the reimbursement equals the total of the vouchers paid, restoring the float to its original amount. Vouchers of 188 plus remaining cash of 62 equal the 250 float, confirming the arithmetic. The reimbursement is therefore 188, not the full float.

Question 48Accounting Cycle, Double Entry and Books of Prime Entry

A business has a debit balance of 340 on the rent payable account in its nominal ledger before any adjustment. This represents rent paid in advance. Which journal entry correctly adjusts the account at the year end?

  1. Dr Rent prepaid (asset) 340; Cr Rent payable 340 Correct answer.
  2. Dr Rent payable 340; Cr Cash 340
  3. Dr Rent payable 340; Cr Rent prepaid (asset) 340
  4. Dr Rent expense 340; Cr Rent payable 340

Explanation

A debit balance on rent payable means too much has been charged as expense, so the prepaid portion must be removed from the expense account and carried forward as an asset. The correcting entry debits the prepayment (asset) account and credits rent payable, reducing the expense. The rent payable account is a charge account, so a credit reduces the expense recognised.

Question 49Accounting Cycle, Double Entry and Books of Prime Entry

A bookkeeper records a credit sale of goods to a customer by debiting the customer's account and crediting the sales account. The customer later returns part of the goods. Which entry correctly records the return in the seller's books?

  1. Dr Sales; Cr Customer's account
  2. Dr Purchases returns; Cr Customer's account
  3. Dr Customer's account; Cr Sales returns
  4. Dr Sales returns; Cr Customer's account Correct answer.

Explanation

A sales return reduces the amount owed by the customer and reduces sales revenue, so the returns account is debited and the customer's personal account is credited. Debiting the returns account (a contra-revenue account) correctly reduces net sales. The customer's account must be credited because their debt is being reduced.

Question 50Accounting Cycle, Double Entry and Books of Prime Entry

A business has a debit balance on its trial balance of 540 that has been placed in a suspense account. Investigation shows that a payment of 270 for repairs was correctly entered in the cash book but posted to the repairs account as 810. Which entry clears the suspense account?

  1. Dr Repairs 270; Cr Suspense 270
  2. Dr Suspense 270; Cr Repairs 270
  3. Dr Suspense 540; Cr Repairs 540
  4. Dr Repairs 540; Cr Suspense 540 Correct answer.

Explanation

The repairs account was debited with 810 instead of 270, an overstatement of 540 on the debit side, which caused the credit balance in the suspense account. To correct it, repairs must be credited with 540 to reduce the debit balance, and the suspense account must be debited with the same amount. The debit balance of 540 in suspense is therefore cleared by debiting suspense and crediting repairs.