PRACTICE & REVISION KIT

CA SRI LANKA CURRICULUM 2020

 First edition 2020

ISBN 9781 5097 3131 2

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ii
Contents

Page
Question Index iv
Introduction vi
How to use this Practice & Revision Kit vii
Format of the exam ix
Exam techniques x
Action verbs xi
Questions 1
Answers 91
Mock Exam Questions 129
Mock Exam Answers 153

Contents iii
 Question index

Page
Title
Question Answer
Part A: Accounting and the business environment
Chapter 1 questions: 1.1 to 1.17 2 92
Part B: Conceptual framework for financial reporting
Chapter 2 questions: 2.1 to 2.5 8 94
Chapter 3 questions: 3.1 to 3.5 9 94
Chapter 4 questions: 4.1 to 4.14 10 95
Part C: Accounting systems and functions
Part F: Financial reporting standards
Chapter 5 questions: 5.1 to 5.11 15 96
Chapter 6 questions: 6.1 to 6.18 18 97
Chapter 7 questions: 7.1 to 7.7 23 99
Chapter 8 questions: 8.1 to 8.8 25 99
Chapter 9 questions: 9.1 to 9.15 28 100
Chapter 10 questions: 10.1 to 10.8 33 103
Chapter 11 questions: 11.1 to 11.6 36 104
Chapter 12 questions: 12.1 to 12.7 38 105
Chapter 13 questions: 13.1 to 13.8 41 106
Chapter 14 Questions: 14.1 to 14.9 43 108
Chapter 15 questions: 15.1 to 15.11 48 110
Part D: Financial reporting
Part F: Financial reporting standards
Chapter 16 questions: 16.1 to 16.14 53 113
Chapter 17 questions: 17.1 to 17.7 59 116
Chapter 18 questions: 18.1 to 18.11 62 117

iv BL1 – Financial Accounting

 Page
Title
Question Answer
Chapter 19 questions: 19.1 to 19.6 66 118
Chapter 20 questions: 20.1 to 20.5 68 119
Chapter 21 questions: 21.1 to 21.10 70 120
Chapter 22 questions: 22.1 to 22.16 75 121
Chapter 23 questions: 23.1 to 23.6 80 124
Part E: Financial statements analysis
Chapter 24 questions: 24.1 to 24.24 82 126

Question Index v
 Introduction

Welcome to this Practice & Revision Kit for the Institute of Chartered Accountants of
Sri Lanka professional examinations for curriculum 2020.
One of the key criteria for achieving exam success is question practice. There is
generally a direct correlation between candidates who revise all topics and practise
exam questions and those who are successful in their real exams. This Practice &
Revision Kit gives you ample opportunity for such practice in the run up to your
exams.
The Practice & Revision Kit is structured to follow the modules of the Study Text and
comprises banks of objective test questions (OTQs). Suggested solutions to all
questions are supplied.
We welcome your feedback. If you have any comments about this Practice &
Revision Kit, or would like to suggest areas for improvement, please e-mail
[email protected].
Good luck in your exams!

BPP LEARNING MEDIA

vi BL1 – Financial Accounting

How to use this Practice & Revision Kit

This Practice & Revision Kit comprises banks of practice questions of the style that
you will encounter in your exam. It is the ideal tool to use during the revision phase of
your studies.
Questions in your exam may test any part of the syllabus so you must revise the
whole syllabus. Selective revision will limit the number of questions you can answer
and hence reduce your chances of passing. It is better to go into the exam knowing a
reasonable amount about most of the syllabus rather than concentrating on a few
topics to the exclusion of the rest. You should at all costs avoid falling into the trap of
question spotting, that is trying to predict what are likely to be popular areas for
questions, and restricting your revision and question practice to those.
Practising as many exam-style questions as possible will be the key to passing this
exam. You must do questions under timed conditions and ensure you write full
answers to the discussion parts as well as doing the calculations.
Planning your revision
When you begin your course, you should make a plan of how you will manage your
studies, taking into account the volume of work that you need to do and your other
commitments, both work and domestic.
In this time, you should go through your notes to ensure that you are happy with all
areas of the syllabus and practise as many questions as you can. You can do this in
different ways, for example:
 Revise the subject matter a module at a time and then attempt the questions
relating to that module; or
 Revise all the modules and then build an exam out of the questions in this
Practice & Revision Kit. Review the exam structure and then group together the
relevant number of OTQs from different syllabus areas to create a practice
exam.
Using the practice questions
The best approach is to select a question and then allocate to it the time that you
would have in the real exam.
However, this is an approximate guide: for example, some OTQs are very short and
just require a factual response, which you either know or you don’t, while others are
more complex, requiring calculations, which will inevitably take more time.

How to use this Practice & Revision Kit vii

 Using the suggested solutions
Avoid looking at the answer until you have finished a question. It can be very
tempting to do so, but unless you give the question a proper attempt under exam
conditions you will not know how you would have coped with it in the real exam
scenario.
When you do look at the answer, compare it with your own and give some thought to
why your answer was different, if it was.
If you did not reach the correct answer make sure that you work through the
explanation or workings provided, to see where you went wrong. If you think that
you do not understand the principle involved, go back to your own notes or your
study materials and work through and revise the point again, to ensure that you will
understand it if it occurs in the exam.
Passing the Business Level I – Financial Accounting exam
If you have honestly done your revision then you can pass this exam. What you must
do is remain calm and tackle it in a professional manner. There are a number of
points which you should bear in mind.
 You must read the question properly. Students often fail to read the question
properly and miss some of the information. Time spent reading the question a
second time would be time well spent. Make yourself do this, don't just rush into
it in a panic.
 Stick to the timings and answer all questions. Do not spend too long on one
question at the expense of others.

viii BL1 – Financial Accounting

Format of the exam

Mode: Computer based examination

Time: 2 hours
Pass Mark: 50%

The exam comprises of fifty (50) multiple choice, drag & drop, fill in the blanks,
matching questions, etc. of two marks each (including mini scenario based/functional
scenario-based questions).

Format of the Exam ix

 Exam techniques

Using the right techniques in the real exam can make all the difference between
success and failure.
Here are a few pointers:
1. Allocate the time available to the questions. You have 120 minutes to answer
50 questions which is an average 2.4 minutes per question, however this should
only be taken as a rough guide as some questions may require less time to
answer than others.
2. Make sure that you attempt every objective test question. Do not leave any
blank. If you run out of time or are not sure of an answer you should select the
option you think is most suitable. You can come back to the question later if
time permits.
3. Read the question. Read it carefully once, and then read it again to ensure that
you have picked everything up. Make sure that you understand what the
question wants you to do, rather than what you might like the question to be
asking you.
4. If you finish the exam with time to spare, use the rest of the time to review your
answers and to make sure that you answered every objective test question.

x BL1 – Financial Accounting

Action verbs checklist

Knowledge Process Verb List Verb Definitions

Tier – 1 Remember Define Describe exactly the nature, scope or meaning
Recall important Draw Produce (a picture or diagram)
information
Identify Recognise, establish or select after
consideration
List Write the connected items one below the other

Relate To establish logical or causal connections

State Express something definitely or clearly

Tier – 2 Comprehension Calculate/Compute Make a mathematical computation

Explain important Discuss Examine in detail by argument showing
information different aspects, for the purpose of arriving at
a conclusion
Explain Make a clear description in detail revealing
relevant facts
Interpret Present in understandable terms or to translate

Recognise To show validity or otherwise, using knowledge

or contextual experience
Record Enter relevant entries in detail

Summarise Give a brief statement of the main points (in

facts or figures)
Tier – 3 Application Apply Put to practical use
Use knowledge in a setting Assess Determine the value, nature, ability or quality
other than the one in which
Demonstrate Prove, especially with examples
it was learned/solve close-
ended problems Graph Represent by means of a graph

Prepare Make ready for a particular purpose

Prioritise Arrange or do in order of importance

Reconcile Make consistent with another

Solve To find a solution through calculations and/or

explanations

Action verbs checklist xi

 Knowledge Process Verb List Verb Definitions
Tier – 4 Analysis Analyse Examine in detail in order to determine the
Draw relations among ideas solution or outcome
and to compare and Compare Examine for the purpose of discovering
contrast/solve open-ended similarities
problems
Contrast Examine in order to show unlikeness or
differences
Differentiate Constitute a difference that distinguishes
something
Outline Make a summary of significant features

Tier – 5 Evaluate Advise Offer suggestions about the best course of

Formation of judgments and action in a manner suited to the recipient
decisions about the value of Convince To persuade others to believe something using
methods, ideas, people or evidence and/or argument
products
Criticise Form and express a judgment

Evaluate To determine the significance by careful

appraisal
Recommend A suggestion or proposal as to the best course
of action
Resolve Settle or find a solution to a problem or
contentious matter
Validate Check or prove the accuracy

Tier – 6 Synthesis Compile Produce by assembling information collected

Solve unfamiliar problems from various sources
by combining different Design Devise the form or structure according to a plan
aspects to form a unique or
Develop To disclose, discover, perfect or unfold a plan or
novel solution
idea
Propose To form or declare a plan or intention for
consideration or adoption

xii BL1 – Financial Accounting

Questions

Part A questions: Accounting and the business environment

Questions 1.1 to 1.17 cover Accounting and the business environment, the subject
of Chapter 1 of the Study Text.

1.1 Which of the following best describes corporate governance?

A Corporate governance is the system of rules and regulations
surrounding financial reporting.
B Corporate governance is the system by which companies and other
entities are directed and controlled.
C Corporate governance is carried out by the finance department in
preparing the financial accounts.
D Corporate governance is the system by which an entity monitors its
impact on the natural environment.
(LO 1.1.2) (2 marks)

1.2 Amila, a trainee accountant, attended a training seminar. The cost of the
train fare was Rs 2,000 but Amila did not buy a ticket. Nevertheless, he
claimed Rs 2,000 from his firm as travel expenses.
Which of the fundamental principles of the Code of Ethics of CA Sri Lanka
does this action breach?
A Confidentiality
B Objectivity
C Integrity
D Competence
(LO 1.1.2) (2 marks)

1.3 Who issues Sri Lankan accounting standards?

A Sri Lankan Accounting & Auditing Standards Monitoring Board
B Institute of Chartered Accountants of Sri Lanka
C The International Accounting Standards Board
D The Colombo Stock Exchange
(LO 1.1.2) (2 marks)

2 BL1 - Financial Accounting CA Sri Lanka

 Questions

1.4 Which of the following are advantages of trading as a limited liability

company?
1 Operating as a limited liability company makes raising finance easier
because additional shares can be issued to raise additional cash.
2 Operating as a limited liability company is riskier than operating as a
sole proprietor because the shareholders of a business are liable for all
the debts of the business whereas the sole proprietor is only liable for
the debts up to the amount they have invested.
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 or 2
(LO 1.1.2) (2 marks)

1.5 Fill in the blanks:

Financial accounting is a technique of recording, and
financial data.
(LO 1.1.1) (2 marks)

1.6 Fill in the blanks:

Businesses of whatever size or nature exist to make a

are arrangements between individuals to carry on business in

common with a view to profit.
(LO 1.1.1) (2 marks)

1.7 Fill in the blanks:

status means that the business's debts and the personal debts
of the business's owners (shareholders) are legally separate.
(LO 1.1.1) (2 marks)

1.8 Fill in the blanks:

A sole is a business owned and run by one individual, perhaps

employing one or two assistants and controlling their work.

Those charged with of a company are responsible for the

preparation of the financial statements.
(LO 1.1.1, LO 1.1.2) (2 marks)

CA Sri Lanka 3
Questions

1.9 Which of the following are TRUE of partnerships?

1 The partners' individual exposure to debt is limited.
2 Financial statements for the partnership by law must be produced and
made public.
3 A partnership is not a separate legal entity from the partners
themselves.
A 1 and 2 only
B 2 only
C 3 only
D 1 and 3 only
(LO 1.1.1) (2 marks)

1.10 Which of the following statements is/are true?

1 Directors of companies have a duty of care to show reasonable
competence in their management of the affairs of a company.
2 Directors of companies must act honestly in what they consider to be
the best interest of the company.
3 A Director's main aim should be to create wealth for the shareholders
of the company.
A 1 and 2 only
B 2 only
C 1, 2 and 3
D 1 and 3 only
(LO 1.1.2) (2 marks)

1.11 Who is responsible for the preparation of the financial statements of a

company?
1 The finance department
2 The board of directors
3 The external auditors
A 1 only
B 1 and 2 only
C 2 only
D 1, 2 and 3
(LO 1.1.2) (2 marks)

4 BL1 - Financial Accounting CA Sri Lanka

 Questions

1.12 Which TWO of the following are advantages of trading as a partnership?

1 Additional capital can be raised because more people are investing in
the business.
2 A partnership has a separate legal identity from the individual
partners.
3 Partners have limited liability and are not personally liable for the
debts of the partnership.
4 A partnership is not required to make its financial accounts publicly
available.
A 1 and 2
B 1 and 4
C 2 and 4
D 2 and 3
(LO 1.1.1) (2 marks)

1.13 Which TWO of the following are disadvantages of trading as a limited

liability company?
1 The shareholders of the company have limited liability for the debts of
the company.
2 A company must publish annual financial statements.
3 Raising finance is easier as a company, as more shares can be issued.
4 The financial statements of limited liability companies must be audited.
A 1 and 2
B 1 and 4
C 2 and 3
D 2 and 4
(LO 1.1.1) (2 marks)

CA Sri Lanka 5
Questions

1.14 What should be the main aim for a director of a company?

A To manage the affairs of the company in order to earn a good bonus
B To manage the affairs of the company in order to create wealth for the
shareholders
C To manage the affairs of the company in order to generate the largest
profits in the shortest time
D To manage the affairs of the company in order to contribute to the general
wellbeing of society
(LO 1.1.2) (2 marks)

The following information relates to question 1.15 and 1.16.

From the list below, select the word or phrase which fits into the blanks in the
following sentences:
Select from:
 Companies Act
 Conceptual Framework
 Employees
 Shareholders
 Behaviour
 Ethics
 Incorporated
 Unincorporated

1.15 Sole proprietors and partnerships are entities.

Directors manage a company on behalf of the

(LO 1.1.1, 1.1.2) (2 marks)

1.16 Duties and responsibilities of directors are set out in the

Members of the Institute of Chartered Accountants of Sri Lanka are required
to comply with the Code of issued by the Institute.
(LO 1.1.2) (2 marks)

6 BL1 - Financial Accounting CA Sri Lanka

 Questions

1.17 Which of the following statements is/are correct?

1 The business entity concept means that a business is legally separate
from its owner(s).
2 The legal versus the commercial view of accounting means that the
legal form of a transaction must always be shown in financial
statements even if this differs from the commercial effect.
3 Incorporated businesses in Sri Lanka are required to comply with the
Companies Act No. 07 of 2007.
A 2 only
B 1, 2 and 3
C 1 only
D 3 only
(LO 1.1.1, 1.1.2) (2 marks)

CA Sri Lanka 7
Questions

Part B questions: Conceptual framework for financial reporting

Questions 2.1 to 4.14 cover the Conceptual framework for financial reporting, the
subject of Chapters 2 to 4 of the Study Text.

2.1 Which two of the following are not elements of financial statements per the
IASB's Conceptual Framework for Financial Reporting?
1 Profits
2 Assets
3 Income
4 Equity
5 Losses
6 Expenses
A 2 and 4
B 1 and 5
C 3 and 4
D 5 and 6
(LO 2.4.1) (2 marks)

2.2 Fill in the blanks:

An is an economic resource by the entity as a

result of past events.
(LO 2.4.1) (2 marks)

2.3 Fill in the blanks:

A is a present of the entity to transfer an

economic resource as a result of past events.
(LO 2.4.1) (2 marks)

2.4 Fill in the blanks:

A statement of profit or loss is a record of generated and

incurred over a given period.
(LO 2.4.2) (2 marks)

8 BL1 - Financial Accounting CA Sri Lanka

 Questions

2.5 Which of the following items should be included in current assets?

1 Assets which are not intended to be converted into cash
2 Assets which will be converted into cash in the long term
3 Assets which will be converted into cash in the near future
A 1 only
B 2 only
C 3 only
D 2 and 3
(LO 2.4.2) (2 marks)

3.1 Which groups of people are most likely to be interested in the financial
statements of a sole proprietor?
1 Owners of the business
2 The business's bank manager
3 The tax authorities
4 Financial analysts
A 1 and 2 only
B 2 and 3 only
C 2, 3 and 4 only
D 1, 2 and 3 only
(LO 2.1.1, 2.1.2) (2 marks)

3.2 According to the IASB Conceptual Framework for Financial Reporting which
of the following is not part of the objective of financial statements?
A Providing information regarding the financial position of a business
B Providing information regarding the financial performance of a
business
C Enabling users to assess the management's stewardship of the entity's
economic resources
D Helping to assess the going concern status of a business
(LO 2.1.1) (2 marks)

3.3 Which of the following statements provides the best definition of the
objective of financial information?
A To provide useful information to users
B To record, categorise and summarise financial transactions
C To calculate the taxation due to the government
D To calculate the amount of dividend to pay to shareholders
(LO 2.1.1) (2 marks)

CA Sri Lanka 9
Questions

3.4 Which of the following is not an external user of financial statements?

A Shareholder
B Director
C Supplier
D Auditor
(LO 2.1.1, 2.1.2) (2 marks)

3.5 Which of the following statements is true of financial statements?

A The value of a business's employees is recognised in financial
statements.
B Financial statements show how a business's value is affected by
environmental factors.
C Financial statements will always accurately reflect the value of a
business's assets.
D Financial statements can be subject to fraud.
(LO 2.1.4) (2 marks)

4.1 Which of the following would not be taken into account in determining
profit for the year if accounts were prepared using the cash basis?
A Cash sales
B Employee wages
C Rent of premises
D Depreciation of equipment
(LO 2.3.1) (2 marks)

4.2 Sales revenue should usually be recognised when goods and services have
been supplied; costs are usually incurred when goods and services have
been received.
The accounting concept which governs the above is the:
A Comparability concept
B Materiality concept
C Accruals concept
D Going concern concept
(LO 2.3.1) (2 marks)

10 BL1 - Financial Accounting CA Sri Lanka

 Questions

4.3 Which of the following is not an accounting concept?

A Timeliness
B Comparability
C Depreciation
D Verifiability
(LO 2.2.3) (2 marks)

4.4 Making allowances for receivables and valuing inventory using the same
basis in each accounting period are examples of which accounting concepts?
Allowance for receivables Inventory valuation
A Accruals Comparability
B Accruals Going concern
C Faithful representation Comparability
D Materiality Going concern
(LO 2.2.3) (2 marks)

4.5 Which basic accounting concept is being followed when a non-current asset
is depreciated?
A Accruals
B Comparability
C Going concern
D Materiality
(LO 2.2.2) (2 marks)

4.6 Which of the following lists the four enhancing qualitative characteristics of
financial statements as defined in the IASB's Conceptual Framework for
Financial Reporting?
A Relevance, faithful representation, materiality and going concern
B Comparability, verifiability, timeliness and understandability
C Relevance, comparability, verifiability and going concern
D Timeliness, understandability, materiality and faithful representation
(LO 2.2.1) (2 marks)

4.7 Which accounting concept states that omitting or misstating information

could influence decisions that the primary users of general purpose financial
reports make on the basis of those reports?
Choose one:
A The comparability concept
B The accruals concept
C The materiality concept
D The going concern concept
(LO 2.2.3) (2 marks)

CA Sri Lanka 11
Questions

4.8 Which accounting concept should be considered if the owner of a business

takes goods from inventory for his/her own personal use?
A The fair presentation concept
B The accruals concept
C The going concern concept
D The business entity concept
(LO 2.2.3) (2 marks)

4.9 Which of the following accounting concepts means that similar items should
receive a similar accounting treatment?
A Going concern
B Accruals
C Matching
D Comparability
(LO 2.2.3) (2 marks)

4.10 Listed below are some characteristics of financial information.

1 Relevance
2 Comparability
3 Faithful representation
4 Timeliness
Which of these are fundamental characteristics, according to the IASB's
Conceptual Framework for Financial Reporting?
A 1 and 2 only
B 2 and 4 only
C 3 and 4 only
D 1 and 3 only
(LO 2.2.1) (2 marks)

12 BL1 - Financial Accounting CA Sri Lanka

 Questions

4.11 Which, if any, of the following statements about accounting concepts and the
characteristics of financial information are correct?
1 The concept of accruals requires transactions to be reflected in the
financial statements once the cash or its equivalent is received or paid.
2 Information is not material if its omission or misstatement could
influence decisions that the primary users of general purpose financial
reports make on the basis of those reports.
3 It may sometimes be necessary to exclude information that is relevant
and reliable from financial statements because it is too difficult for
some users to understand.
A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D None of these statements are correct
(LO 2.2.1) (2 marks)

4.12 According to the IASB's Conceptual Framework for Financial Reporting,

which TWO of the following are part of faithful representation?
1 It is neutral
2 It is relevant
3 It is presented fairly
4 It is free from material error
A 1 and 2
B 2 and 3
C 1 and 4
D 3 and 4
(LO 2.2.1) (2 marks)

4.13 When preparing financial statements in periods of inflation, directors

A Must reduce asset values
B Must increase asset values
C Must reduce dividends
D Need make no adjustments
(LO 2.4.5) (2 marks)

CA Sri Lanka 13
Questions

4.14 A building owned by a business is presented in the financial statements at its

current market value. This is an example of which measurement base?
A Historical cost
B Current cost
C Present value
D Fair value
(LO 2.4.4) (2 marks)

14 BL1 - Financial Accounting CA Sri Lanka

 Questions

Part C questions: Accounting systems and functions

Part F questions: Financial reporting standards
Questions 5.1 to 15.11 cover accounting systems and functions, and the financial
reporting standards; LKAS 2 Inventories, LKAS 10 Events after the reporting period,
LKAS 16 Property Plant and Equipment and LKAS 37 Provisions, Contingent
Liabilities and Contingent Assets. These are the subjects of Chapter 5 to 15 of the
Study Text.

5.1 Which one of the following is not a book of prime entry?

A The petty cash book
B The sales returns day book
C The trade receivables ledger
D The cash book
(LO 3.1.3) (2 marks)

5.2 A book of prime entry is one in which:

A The rules of double-entry bookkeeping do not apply
B Ledger accounts are maintained
C Transactions are entered prior to being recorded in the ledger account
D Subsidiary accounts are kept
(LO 3.1.3) (2 marks)

5.3 Which of the following documents should accompany a return of goods to a

supplier?
A Debit note
B Remittance advice
C Purchase invoice
D Credit note
(LO 3.1.2) (2 marks)

5.4 Which of the following are books of prime entry?

1 Sales day book
2 Cash book
3 Journal
4 Purchase ledger
A 1 and 2 only
B 1, 2 and 3 only
C 1 only
D All of them
(LO 3.1.3) (2 marks)

CA Sri Lanka 15
Questions

5.5 Which of the following statements is/are true or false?

1 Cash purchases are recorded in the purchases day book.
2 The sales day book is used to keep a list of invoices received from
suppliers.
A Both statements are true
B Both statements are false
C Statement 1 is true and statement 2 is false
D Statement 1 is false and statement 2 is true
(LO 3.1.3) (2 marks)

5.6 Which of the following would be recorded in the purchase day book?
A Cash discounts received
B Purchase invoices
C Trade discounts received
D Goods received note
(LO 3.1.3) (2 marks)

5.7 Which one of the following statements about an imprest system of petty cash
is correct?
A An imprest system for petty cash controls small cash expenditures
because a fixed amount is paid into petty cash at the beginning of each
period.
B The imprest system provides a control over petty cash spending
because the amount of cash held in petty cash at any time must be
equal to the value of the petty cash vouchers for the period.
C An imprest system for petty cash can operate without the need for
petty cash vouchers or receipts for spending.
D An imprest system for petty cash helps with management of small cash
expenditures and reduces the risk of fraud.
(LO 3.1.3) (2 marks)

5.8 Which of the following would be recorded in the sales day book?
A Discounts allowed
B Sales invoices
C Trade discounts
D Orders received
(LO 3.1.3) (2 marks)

16 BL1 - Financial Accounting CA Sri Lanka

 Questions

5.9 For each of the following transactions, indicate the source document that
will be created by drawing an arrow from each of the four boxes on the left
to one of the boxes on the right.

Transaction Source document

Reimbursement of employee for Credit note
expense by cash
Indication of which amounts owed Remittance advice note
are being paid

Till receipt
Cheque
Petty cash voucher
Invoice

(LO 3.1.2) (2 marks)

5.10 Identify which type of document would be used for the following purposes.

To inform the supplier of the

quantities required
To inform the customer of the
quantity delivered

Select from:
 Purchase order
 Credit note
 Customer order
 Delivery note
 Invoice
 Quotation
(LO 3.1.2) (2 marks)

CA Sri Lanka 17
Questions

5.11 Sadeera Co has the following transactions:

1 Purchase of goods on credit from Trading Supplies Co: Rs 450,000
2 Return of goods purchased on credit last month to Radale Co:
Rs 700,000
What are the correct ledger entries to record these transactions?
A Dr Purchases Rs 450,000
Dr Purchase Returns Rs 700,000
Cr Cash Rs 450,000
Cr Trade Payables Rs 700,000
B Dr Purchases Rs 450,000
Dr Trade Payables Rs 700,000
Cr Purchase Returns Rs 1,150,000
C Dr Purchases Rs 450,000
Dr Trade Payables Rs 250,000
Cr Purchase Returns Rs 700,000
D Dr Purchase Returns Rs 700,000
Dr Purchases Rs 450,000
Cr Trade Payables Rs 1,150,000
(LO 3.2.4) (2 marks)

6.1 Which one of the following can the accounting equation be rewritten as?
A Assets + profit – drawings - liabilities = closing capital
B Assets – liabilities – drawings = opening capital + profit
C Assets – liabilities – opening capital + drawings = profit
D Assets – profit – drawings = closing capital – liabilities
(LO 3.2.3) (2 marks)

6.2 Which of the following statements is true?

A A debit records an increase in liabilities.
B A debit records a decrease in assets.
C A credit records an increase in liabilities.
D A debit records an increase in equity.
(LO 3.2.1) (2 marks)

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 Questions

6.3 A sole proprietor took some goods costing Rs 800 from inventory for his
own use. The normal selling price of the goods is Rs 1,600.
Which of the following journal entries would correctly record this?
Dr Cr
Rs Rs
A Inventory account 800
Purchases account 800
B Drawings account 800
Purchases account 800
C Sales account 1,600
Drawings account 1,600
D Drawings account 800
Sales account 800
(LO 3.2.4) (2 marks)

6.4 J Co has the following transactions:

1 Payment of Rs 400 to Harun for a cash purchase
2 Payment of Rs 250 to Jaith in respect of an invoice for goods purchased
last month
What are the correct ledger entries to record these transactions?
A Dr Cash Rs 650
Cr Purchases Rs 650
B Dr Purchases Rs 650
Cr Cash Rs 650
C Dr Purchases Rs 400
Dr Trade Payables Rs 250
Cr Cash Rs 650
D Dr Cash Rs 650
Cr Trade Payables Rs 250
Cr Purchases Rs 400
(LO 3.2.4) (2 marks)

CA Sri Lanka 19
Questions

6.5 Which of the following is the correct format for the accounting equation?
A Assets + Liabilities = Capital
B Assets + Capital = Liabilities
C Assets – Liabilities = Capital
D Liabilities – Capital = Assets
(LO 3.2.3) (2 marks)

6.6 1 A debit entry in the cashbook will increase an overdraft.

2 A debit entry in the cashbook will increase a bank balance.
Are these statements true?
A Both true
B Both false
C 1 true and 2 false
D 1 false and 2 true
(LO 3.2.2) (2 marks)

6.7 Which of the following will not result in a debit entry in the accounts?
A Increase in expense
B Increase in revenue
C Decrease in liabilities
D Increase in assets
(LO 3.2.1) (2 marks)

6.8 Which of the following statements is correct?

A A credit entry is required to record an increase in expenses
B A credit entry is required to record an increase in income
C A debit entry is required to record an increase in income
D A debit entry is required to record a decrease in expenses
(LO 3.2.1) (2 marks)

6.9 Which of the following transactions will result in a reduction in total assets?
1 Payments to suppliers
2 Receipt of cash from customers
3 Repayment of a bank loan
4 Interest payment
A 1 and 3 only
B 1 and 2 only
C 1, 2, 3 and 4
D 1, 3 and 4 only
(LO 3.2.2) (2 marks)

20 BL1 - Financial Accounting CA Sri Lanka

 Questions

6.10 The double entry system of bookkeeping normally results in which of the
following balances on the ledger accounts?
Debit balances Credit balances
A Assets and revenues Liabilities, capital and expenses
B Revenues, capital and liabilities Assets and expenses
C Assets and expenses Liabilities, capital and revenues
D Assets, expenses and capital Liabilities and revenues
(LO 3.2.2) (2 marks)

The following information relates to questions 6.11 to 6.14

For each of the following transactions, select which account should be debited and
which account should be credited from the list below.
Select from:
 Bank
 Purchases
 Purchases ledger control
 Sales
 Sales ledger control
6.11 Purchase of goods on credit

Debit Credit

(LO 3.2.4) (2 marks)

6.12 Sale of goods on credit

Debit Credit

(LO 3.2.4) (2 marks)

6.13 Receipt of money for sale of goods on credit

Debit Credit

(LO 3.2.4) (2 marks)

CA Sri Lanka 21
Questions

6.14 Payment to a credit supplier

Debit Credit

(LO 3.2.4) (2 marks)

6.15 Which of the following are examples of payables of a business?

1 Interest owed from the bank
2 Loans and advances to employees
3 Money owed from customers
4 Tax owed to the tax authority
A 1, 3, and 4 only
B 2, 3 and 4 only
C 2 and 4 only
D 4 only
(LO 3.2.4) (2 marks)

6.16 Fill in the blanks:

The and ledgers contain the personal accounts of
individual customers and suppliers. They do not normally form part of the
double-entry system.
(LO 3.1.4) (2 marks)

6.17 A credit balance of Rs 917,000 brought down on Y's account in the books of X
means that:
A X owes Y Rs 917,000
B Y owes X Rs 917,000
C X has paid Y Rs 917,000
D Y has paid X Rs 197,000
(LO 3.2.4) (2 marks)

6.18 A credit balance on a ledger account indicates:

A An asset or an expense
B A liability or an expense
C An amount owing to the organisation
D A liability or revenue
(LO 3.2.4) (2 marks)

22 BL1 - Financial Accounting CA Sri Lanka

 Questions

7.1 Which of the following errors would cause a trial balance not to balance?
1 An error in the addition in the cash book.
2 Failure to record a transaction at all.
3 Cost of a motor vehicle debited to motor expenses account. The cash
entry was correctly made.
4 Goods taken by the proprietor of a business recorded by debiting
purchases and crediting drawings account.
A 1 only
B 1 and 2 only
C 3 and 4 only
D All four items
(LO 3.2.5) (2 marks)

7.2 A company's motor vehicles at cost account at 30 June 20X6 is as follows:

MOTOR VEHICLES – COST
Rs Rs
Balance b/d 150,500 Disposal 85,000
Additions 120,950 Balance c/d 186,450
271,450 271,450
What opening balance should be included in the following period's trial
balance for motor vehicles – cost at 1 July 20X6?
A Rs 271,450 DR
B Rs 271,450 DR
C Rs 186,450 CR
D Rs 186,450 DR
(LO 3.2.5) (2 marks)

7.3 A trial balance is made up of a list of debit balances and credit balances.
Which of the following statements is correct?
A Every debit balance represents an expense.
B Assets are represented by debit balances.
C Liabilities are represented by debit balances.
D Income is included in the list of debit balances.
(LO 3.2.4) (2 marks)

CA Sri Lanka 23
Questions

7.4 William's trial balance at 30 September 20X5 includes the following balances:
Trade receivables Rs 75,943
Receivables allowance Rs 4,751
How should these balances be reported in William's statement of financial
position as at 30 September 20X5?
A An asset of Rs 71,192
B An asset of Rs 75,943 and a liability of Rs 4,751
C A liability of Rs 71,192
D A liability of Rs 75,943 and an asset of Rs 4,751
(LO 3.2.5) (2 marks)

7.5 At 30 November 20X5 Jagathi had a bank loan of Rs 8,500,000 and a balance
of Rs 678,000 in hand in her bank account.
How should these amounts be recorded on Jagathi's opening trial balance at
1 December 20X5?
A Debit Rs 7,822,000
B Credit Rs 7,822,000
C Credit Rs 8,500,000 and Debit Rs 678,000
D Debit Rs 8,500,000 and Credit Rs 678,000
(LO 3.2.5) (2 marks)

7.6 Bigun has extracted the following list of balances from his general ledger at
31 October 20X5:
Rs'000
Sales 258,542
Opening inventory 9,649
Purchases 142,958
Expenses 34,835
Non-current assets (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525
What is the total of the debit balances in Bigun's trial balance at 31 October
20X5?
A Rs 267,049,000
B Rs 275,282,000
C Rs 283,148,000
D Rs 284,931,000
(LO 3.2.5) (2 marks)

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 Questions

7.7 In an integrated accounting system, which of the following ledgers (or

modules) is used to produce the trial balance?
A General ledger
B Asset ledger
C Trade payables ledger
D Trade receivables ledger
(LO 3.2.12) (2 marks)

8.1 The information below relates to inventory item Z.

March 1 50 units held in opening inventory at a cost of Rs 40 per unit
17 50 units purchased at a cost of Rs 50 per unit
31 60 units sold at a selling price of Rs 100 per unit
Under AVCO, what is the value of inventory held for item Z at the end of
March 31?
A Rs 4,000
B Rs 1,800
C Rs 2,000
D Rs 2,500
(LO 3.2.6, 6.1.3) (2 marks)

8.2 In preparing its financial statements for the current year, a company's
closing inventory was understated by Rs 300,000.
What will be the effect of this error if it remains uncorrected?
A The current year's profit will be overstated and next year's profit will
be understated.
B The current year's profit will be understated but there will be no effect
on next year's profit.
C The current year's profit will be understated and next year's profit will
be overstated.
D The current year's profit will be overstated but there will be no effect
on next year's profit.
(LO 3.2.6, 6.1.3) (2 marks)

8.3 Fill in the blanks:

The cost of is calculated as: Opening inventory + purchases –

closing inventory.
(LO 3.2.6) (2 marks)

CA Sri Lanka 25
Questions

8.4 Fill in the blanks:

The value of inventories is calculated at the lower of and net

value
(LO 3.2.6, 6.1.3) (2 marks)

8.5 Which of the following costs may be included when arriving at the cost of
finished goods inventory for inclusion in the financial statements of a
manufacturing company?
1 Carriage inwards
2 Carriage outwards
3 Depreciation of factory plant
4 Finished goods storage costs
5 Factory supervisors' wages
A 1 and 5 only
B 2, 4 and 5 only
C 1, 3 and 5 only
D 1, 2, 3 and 4 only
(LO 3.2.6, 6.1.3) (2 marks)

8.6 The closing inventory at cost of a company at 31 January 20X3 amounted to

Rs 28,470,000.
The following items were included at cost in the total:
1 400 coats, which had cost Rs 8,000 each and normally sold for
Rs 15,000 each. Owing to a defect in manufacture, they were all sold
after the reporting date at 50% of their normal price. Selling expenses
amounted to 5% of the proceeds.
2 800 skirts, which had cost Rs 2,000 each. These too were found to be
defective. Remedial work in February 20X3 cost Rs 500 per skirt and
selling expenses for the batch totalled Rs 80,000. They were sold for
Rs 2,800 each.
What should the inventory value be according to LKAS 2 Inventories after
considering the above items?
A Rs 28,120,000
B Rs 28,280,000
C Rs 32,920,000
D None of these
(LO 3.2.6, 6.1.3) (2 marks)

26 BL1 - Financial Accounting CA Sri Lanka

 Questions

8.7 A company values its inventory using the first in, first out (FIFO) method. At
1 May 20X2 the company had 700 units of item X in inventory, valued at
Rs 190 each.
During the year ended 30 April 20X3 the following transactions took place:
20X2
1 July Purchased 500 units of item X at Rs 220 each
1 November Sold 400 units of item X for Rs 160,000
20X3
1 February Purchased 300 units of item X at Rs 230 each
15 April Sold 250 units of item X for Rs 125,000
What is the value of the company's closing inventory of item X at 30 April
20X3?
A Rs 188,500
B Rs 195,500
C Rs 166,000
D None of these figures
(LO 3.2.6, 6.1.3) (2 marks)

8.8 The financial year of Mitex Co ended on 31 December 20X1. An inventory

count on January 4 20X2 gave a total inventory value of Rs 527,300.
The following transactions occurred between January 1 and January 4.
Rs
Purchases of goods 7,900
Sales of goods (gross profit margin 40% on sales) 15,000
Goods returned to a supplier 800
What inventory value should be included in Mitex Co's financial statements
at 31 December 20X1?
A Rs 525,400
B Rs 527,600
C Rs 529,200
D Rs 535,200
(LO 3.2.6, 6.1.3) (2 marks)

CA Sri Lanka 27
Questions

9.1 A manufacturing company receives an invoice on 29 February 20X2 for work

done on one of its machines. Rs 25,500,000 of the cost is actually for a
machine upgrade, which will improve efficiency. The accounts department
do not notice and charge the whole amount to maintenance costs. Machinery
is depreciated at 25% per annum on a straight-line basis, with a proportional
charge in the years of acquisition and disposal. By what amount will the
profit for the year to 30 June 20X2 be understated?
A Rs 19,125,000
B Rs 25,500,000
C Rs 23,375,000
D Rs 21,250,000
(LO 3.2.6) (2 marks)

9.2 A company purchased an asset on 1 January 20X3 at a cost of Rs 1,000,000. It

is depreciated over 50 years by the straight-line method (nil residual value),
with a proportionate charge for depreciation in the year of acquisition and
the year of disposal. At 31 December 20X4 the asset was re-valued to Rs
1,200,000. There was no change in the expected useful life of the asset.
The asset was sold on 30 June 20X5 for Rs 1,195,000.
What profit or loss on disposal of the asset will be reported in the statement
of profit or loss of the company for the year ended 31 December 20X5?
A Profit of Rs 7,500
B Profit of Rs 235,000
C Profit of Rs 247,500
D Loss of Rs 5,000
(LO 3.2.6) (2 marks)

9.3 Beta purchased some plant and equipment on 1 July 20X1 for Rs 40,000,000.
The scrap value of the plant in ten years' time is estimated to be
Rs 4,000,000. Beta's policy is to charge depreciation on the straight-line
basis, with a proportionate charge in the period of acquisition.
What is the depreciation charge on the plant in Beta's financial statements
for the year ended 30 September 20X1?
A Rs 900,000
B Rs 1,000,000
C Rs 3,600,000
D Rs 4,000,000
(LO 3.2.6, 6.1.3) (2 marks)

28 BL1 - Financial Accounting CA Sri Lanka

 Questions

9.4 An asset register showed a carrying value of Rs 67,460,000. A non-current

asset costing Rs 15,000,000 had been sold for Rs 4,000,000 making a loss on
disposal of Rs 1,250,000. No entries had been made in the asset register for
this disposal.
What is the correct balance on the asset register?
A Rs 42,710,000
B Rs 51,210,000
C Rs 53,710,000
D Rs 62,210,000
(LO 3.2.6, 6.1.3) (2 marks)

9.5 Which of the following best explains what is meant by 'capital expenditure'?
Capital expenditure is expenditure:
A On the repair and maintenance of non-current assets
B On expensive assets
C Relating to the issue of stated capital
D Relating to the acquisition or improvement of non-current assets
(LO 3.2.6) (2 marks)

9.6 Which of the following transactions is revenue expenditure?

A Expenditure resulting in improvements to property
B Expenditure on heat and light
C Purchasing non-current assets
D Expenditure to upgrade existing IT equipment
(LO 3.2.3) (2 marks)

9.7 Which of the following costs would be classified as capital expenditure for a
restaurant business?
A A replacement for a broken window
B Repainting the restaurant
C An illuminated sign advertising the business name
D Cleaning of the kitchen floors
(LO 3.2.6) (2 marks)

CA Sri Lanka 29
Questions

9.8 Silva Co purchased an asset for Rs 100,000 on 1.1.X1. It had an estimated

useful life of five years and it was depreciated using the reducing balance
method at a rate of 40%. On 1.1.X3 it was decided to change the method to
straight line.
What is the carrying amount of the asset at 31.12.X3?
A Rs 24,000
B Rs 76,000
C Rs 16,000
D Rs 40,000
(LO 3.2.6, 6.1.3) (2 marks)

9.9 A company's policy is to charge depreciation on plant and machinery at 20%

per year on cost, with proportional depreciation for items purchased or sold
during a year.
The company's plant and machinery at cost account for the year ended 30
September 20X3 is shown below.
PLANT AND MACHINERY – COST
Rs'000 Rs'000
20X2 20X3
1 Oct Balance 200,000 30 Jun Transfer 40,000
disposal account
30 Sep Balance 210,000
20X3
1 Apr Cash-purchase of plant 50,000
250,000 250,000
What should be the depreciation charge for plant and machinery (excluding
any profit or loss on the disposal) for the year ended 30 September 20X3?
A Rs 43,000,000
B Rs 51,000,000
C Rs 42,000,000
D Rs 45,000,000
(LO 3.2.6, 6.1.3) (2 marks)

30 BL1 - Financial Accounting CA Sri Lanka

 Questions

9.10 W bought a new printing machine. The cost of the machine was Rs 800,000.
The installation costs were Rs 50,000 and the employees received training
on how to use the machine, at a cost of Rs 20,000. Before using the machine
to print customers' orders, a test was undertaken and the paper and ink cost
Rs 10,000.
What should be the cost of the machine in the company's statement of
financial position?
A Rs 800,000
B Rs 850,000
C Rs 860,000
D Rs 880,000
(LO 3.2.6, 6.1.3) (2 marks)

9.11 What are the correct ledger entries to record an acquisition of a non-current
asset on credit?
Debit Credit
A Non-current assets – cost Receivables
B Payables Non-current assets – cost
C Non-current assets – cost Payables
D Non-current assets – cost Revaluation surplus
(LO 3.2.6) (2 marks)

9.12 Alpha sells machine B for Rs 50,000 cash on 30 April 20X4. Machine B cost
Rs 100,000 when it was purchased and has a carrying amount of Rs 65,000
at the date of disposal. What are the journal entries to record the disposal of
machine B?
A Dr Accumulated depreciation Rs 35,000
Dr Loss on disposal (SPL) Rs 15,000
Dr Cash Rs 50,000
Cr Non-current assets – cost Rs 100,000
B Dr Accumulated depreciation Rs 65,000
Dr Loss on disposal (SPL) Rs 35,000
Cr Non-current assets – cost Rs 100,000
C Dr Accumulated depreciation Rs 35,000
Dr Cash Rs 50,000
Cr Non-current assets Rs 65,000
Cr Profit on disposal (SPL) Rs 20,000
D Dr Non-current assets Rs 65,000
Dr Accumulated depreciation Rs 35,000
Cr Cash Rs 50,000
Cr Profit on disposal (SPL) Rs 50,000
(LO 3.2.6) (2 marks)

CA Sri Lanka 31
Questions

9.13 Which of the following statements are correct?

1 LKAS 16 Property, plant and equipment requires entities to disclose the
purchase date of each asset.
2 The carrying amount of a non-current asset is the cost or valuation of
that asset less accumulated depreciation.
3 LKAS 16 Property, plant and equipment permits entities to make a
transfer from the revaluation surplus to retained earnings for excess
depreciation on revalued assets.
4 Once decided, the useful life of a non-current asset should not be
changed.
A 1, 2 and 3
B 2 and 3 only
C 2 and 4 only
D 1, 2 and 4 only
(LO 3.2.6, 6.1.3, 6.1.4) (2 marks)

9.14 Which of the following should be disclosed for tangible non-current assets
according to LKAS 16 Property, plant and equipment?
1 Depreciation methods used and the total depreciation allocated for the
period
2 A reconciliation of the carrying amount of non-current assets at the
beginning and end of the period
3 For revalued assets, whether an independent valuer was involved in
the valuation
4 For revalued assets, the effective date of the revaluation
A 1, 2 and 4 only
B 1 and 2 only
C 1, 2, 3 and 4
D 1, 3 and 4 only
(LO 3.2.6) (2 marks)

32 BL1 - Financial Accounting CA Sri Lanka

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9.15 Which of the following should be included in the reconciliation of the

carrying amount of tangible non-current assets at the beginning and end of
the accounting period?
1 Additions
2 Disposals
3 Depreciation
4 Increases/decreases from revaluations
A 1 and 3 only
B 1, 2, and 3 only
C 1, 3 and 4
D 1, 2, 3 and 4
(LO 3.2.6) (2 marks)

10.1 Fill in the blanks:

are expenses which relate to an accounting period but have

not yet been paid for. They are shown in the statement of financial position
as a
(LO 3.2.6) (2 marks)

10.2 Fill in the blanks:

are expenses which have already been paid but relate to a

future accounting period.

They are shown in the statement of financial position as an

(LO 3.2.6) (2 marks)

10.3 The electricity account for the year ended 30 June 20X1 was as follows.
Rs'000
Opening balance for electricity accrued at 1 July 20X0 300
Payments made during the year
1 August 20X0 for three months to 31 July 20X0 600
1 November 20X0 for three months to 31 October 20X0 720
1 February 20X1 for three months to 31 January 20X1 900
30 June 20X1 for three months to 30 April 20X1 840
1 August 20X1 for three months to 31 July 20X1 840

CA Sri Lanka 33
Questions

Which of the following is the appropriate entry for electricity?

Accrued Charge to SPL
at 30 June 20X1 year ended 30 June 20X1
Rs'000 Rs'000
A Nil 3,060
B 460 3,320
C 560 3,320
D 560 3,420
(LO 3.2.6) (2 marks)

10.4 A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and
1 October each year. The rent was increased from Rs 9,000,000 per year to
Rs 12,000,000 per year as from 1 October 20X2.
What rent expense and accrual should be included in the company's financial
statements for the year ended 31 January 20X3?
Rent expense Accrual
Rs Rs
A 10,000,000 2,000,000
B 10,000,000 1,000,000
C 9,750,000 1,000,000
D 9,750,000 2,000,000
(LO 3.2.6) (2 marks)

10.5 Banuja's draft accounts for the year to 31 October 20X5 report a loss of Rs
1,486,000. When he prepared the accounts, Banuja did not include an
accrual of Rs 1,625,000 and a prepayment of Rs 834,000.
What is Banuja's profit or loss for the year to 31 October 20X5 following the
inclusion of the accrual and prepayment?
A A loss of Rs 695,000
B A loss of Rs 2,277,000
C A loss of Rs 3,945,000
D A profit of Rs 1,807,000
(LO 3.2.6) (2 marks)

34 BL1 - Financial Accounting CA Sri Lanka

 Questions

10.6 A business compiling its financial statements for the year to 31 July each
year pays rent quarterly in advance on 1 January, 1 April, 1 July and
1 October each year. The annual rent was increased from Rs 60,000 per year
to Rs 72,000 per year as from 1 October 20X3.
What figure should appear for rent expense in the business's statement of
profit or loss and for the year ended 31 July 20X4?
A Rs 69,000
B Rs 62,000
C Rs 70,000
D Rs 63,000
(LO 3.2.6) (2 marks)

10.7 Rent paid on 1 October 20X2 for the year to 30 September 20X3 was
Rs 1,200,000 and rent paid on 1 October 20X3 for the year to 30 September
20X4 was Rs 1,600,000.
Rent expense, as shown in the statement of profit or loss for the year ended
31 December 20X3, would be:
A Rs 1,200,000
B Rs 1,600,000
C Rs 1,300,000
D Rs 1,500,000
(LO 3.2.6) (2 marks)

10.8 A company receives rent for subletting part of its office block.
Rent, receivable quarterly in advance, is received as follows:
Date of receipt Period covered Rs'000
1 October 20X1 3 months to 31 December 20X1 7,500
30 December 20X1 3 months to 31 March 20X2 7,500
4 April 20X2 3 months to 30 June 20X2 9,000
1 July 20X2 3 months to 30 September 20X2 9,000
1 October 20X2 3 months to 31 December 20X2 9,000
What figures, based on these receipts, should appear in the company's
financial statements for the year ended 30 November 20X2?
Statement of profit or loss Statement of financial position
Rs'000 Rs'000
A 34,000 Debit Rent in arrears (Dr) 3,000
B 34,500 Credit Rent received in advance (Cr) 6,000
C 34,000 Credit Rent received in advance (Cr) 3,000
D 34,000 Credit Rent in arrears (Dr) 3,000
(LO 3.2.6) (2 marks)

CA Sri Lanka 35
Questions

11.1 At 1 July 20X3 a limited liability company had an allowance for receivables of
Rs 83,000,000.
During the year ended 30 June 20X4 debts totalling Rs 146,000,000 were
written off. At 30 June 20X4 a receivables allowance of Rs 218,000,000 was
required.
What figure should appear in the company's statement of profit or loss for
the year ended 30 June 20X4 for receivables expense?
A Rs 155,000,000
B Rs 364,000,000
C Rs 281,000,000
D Rs 11,000,000
(LO 3.2.6) (2 marks)

11.2 At 1 January 20X1, there was an allowance for receivables of Rs 3,000,000

During the year, Rs 1,000,000 of debts were written off as irrecoverable, and
Rs 800,000 of debts previously written off were recovered. At 31 December
20X1, it was decided to adjust the allowance for receivables to an amount
equivalent to 5% of receivables which are Rs 20,000,000.
What is the total receivables expense for the year?
A Rs 200,000 debit
B Rs 1,800,000 debit
C Rs 2,200,000 debit
D Rs 1,800,000 credit
(LO 3.2.6) (2 marks)

11.3 Top Co has total receivables outstanding of Rs 280,000. The accountant has
determined that an amount equivalent to 1% of these balances is unlikely to
be collected, so wishes to make an allowance of Rs 28,000. No previous
allowance has been made for receivables.
Which of the following is the correct double entry to create this allowance?
Debit Credit
A Irrecoverable debts Allowance for receivables
B Allowance for receivables Receivables
C Irrecoverable debts Receivables
D Receivables Allowance for receivables
(LO 3.2.6) (2 marks)

36 BL1 - Financial Accounting CA Sri Lanka

 Questions

11.4 At 1 January 20X3, Adeepa Co had an allowance for receivables of

Rs 35,000,000. At 31 December 20X3, the trade receivables of the company
were Rs 620,000,000. It was decided to:
1 Write off (as uncollectable) receivables totalling Rs 30,000,000; and
2 Adjust the allowance for receivables to an amount equivalent to 5% of
receivables.
What is the combined expense that should appear in the company's
statement of profit or loss for the year, for irrecoverable debts and the
allowance for receivables?
A Rs 24,500,000
B Rs 26,000,000
C Rs 34,000,000
D Rs 35,500,000
(LO 3.2.6) (2 marks)

11.5 At 31 December 20X2 a company's receivables totalled Rs 400,000 and an

allowance for receivables of Rs 50,000 had been brought forward from the
year ended 31 December 20X1.
It was decided to write off debts totalling Rs 38,000 and the new allowance
for receivables was determined to be equivalent to 10% of the net
receivables.
What charge for receivables expense should appear in the company's
statement of profit or loss for the year ended 31 December 20X2?
A Rs 74,200
B Rs 51,800
C Rs 28,000
D Rs 24,200
(LO 3.2.6) (2 marks)

CA Sri Lanka 37
Questions

11.6 A company has received cash for a debt that was previously written off.
Which of the following is the correct double entry to record the cash
received?
Debit Credit
A Irrecoverable debts expense Accounts receivable
B Cash Irrecoverable debts expense
C Allowance for receivables Accounts receivable
D Cash Allowance for receivables
(LO 3.2.6) (2 marks)

12.1 Which of the following statements about provisions and contingencies

is/are correct?
1 A company should disclose details of the change in carrying value of a
provision from the beginning to the end of the year.
2 Contingent assets must be recognised in the financial statements in
accordance with the prudence concept.
3 Contingent liabilities must be treated as actual liabilities and provided
for if it is probable that they will arise.
A 3 only
B 2 and 3 only
C 1 and 3 only
D All three statements are correct
(LO 3.2.6, 6.1.3, 6.1.4) (2 marks)

12.2 Which of the following items does this statement from LKAS 37 describe?
'A possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.'
A A provision
B A current liability
C A contingent liability
D A contingent asset
(LO 3.2.6, 6.1.2) (2 marks)

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 Questions

12.3 The following items have to be considered in finalising the financial

statements of Q Co:
1 The company gives warranties on its products. The company's
statistics show that about 5% of sales give rise to a warranty claim.
2 The company has guaranteed the overdraft of another company. The
likelihood of a liability arising under the guarantee is assessed as
possible.
According to LKAS 37 Provisions, contingent liabilities and continent assets,
what is the correct action to be taken in the financial statements for these
items?
Create a provision Disclose by note only No action
A 1 2
B 1 2
C 1, 2
D 2 1
(LO 3.2.6, 6.1.3) (2 marks)

12.4 Which of the following statements about the requirements of LKAS 37

Provisions, contingent liabilities and contingent assets are correct?
1 A contingent asset should be disclosed by note if an inflow of economic
benefits is probable.
2 No disclosure of a contingent liability is required if the possibility of a
transfer of economic benefits arising is remote.
3 Contingent assets must not be recognised in financial statements
unless an inflow of economic benefits is virtually certain to arise.
A All three statements are correct
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only
(LO 3.2.6, 6.1.4) (2 marks)

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Questions

12.5 Wanda Co allows customers to return faulty goods within 14 days of

purchase. At 30 November 20X5 a provision of Rs 6,548,000 was made for
sales returns. At 30 November 20X6, the provision was re-calculated and
should now be Rs 7,634,000.
What should be reported in Wanda Co's statement of profit or loss for the
year to 31 October 20X6 in respect of the provision?
A A debit of Rs 7,634,000
B A credit of Rs 7,634,000
C A debit of Rs 1,086,000
D A credit of Rs 1,086,000
(LO 3.2.6, 6.1.3) (2 marks)

12.6 Which one of the following is a disclosure about non-adjusting events

required by LKAS 10 Events after the reporting period?
A Dividends declared before the end of the reporting period and paid
after the end of the reporting period
B The nature of both material and non-material non-adjusting events
C The date that the non-adjusting event occurred
D An estimate of the financial effect of the non-adjusting event, unless a
reasonable estimate cannot be made
(LO 3.2.6, 6.1.4) (2 marks)

12.7 LKAS 10 Events after the reporting period regulates the extent to which
events after the reporting period should be reflected in financial statements.
Which one of the following lists of such events consists only of items that,
according to LKAS 10, should normally be classified as non-adjusting?
A Insolvency of customer with a balance owing at the end of the
reporting period, issue of shares or debentures, an acquisition of
another company
B Issue of shares or debentures, changes in foreign exchange rates, major
purchases of non-current assets
C An acquisition of another company, destruction of a major non-current
asset by fire, discovery of fraud or error which shows that the financial
statements were incorrect
D Sale of inventory which gives evidence about its value at the end of the
reporting period, issue of shares or debentures, destruction of a major
non-current asset by fire
(LO 3.2.6, 6.1.3) (2 marks)

40 BL1 - Financial Accounting CA Sri Lanka

 Questions

13.1 Which of the following statements about bank reconciliations are correct?
1 In preparing a bank reconciliation, unpresented cheques must be
deducted from a balance of cash at bank shown in the bank statement.
2 A cheque from a customer paid into the bank but dishonoured must be
corrected by making a debit entry in the cash book.
3 An error by the bank must be corrected by an entry in the cash book.
4 An overdraft is a debit balance in the bank statement.
A 1 and 3
B 2 and 3
C 1 and 4
D 2 and 4
(LO 3.2.11) (2 marks)

13.2 What is the purpose of carrying out a bank reconciliation?

A To enable the bank to decide whether to make a loan to a business
B To discover whether the bank has been over-charging its customers
C To identify and account for the differences between the general ledger
bank account and the bank statement
D To ensure that the total on the general ledger bank account is exactly
the same as that on the bank statement
(LO 3.2.10) (2 marks)

13.3 The following bank reconciliation statement has been prepared by a trainee
accountant:
Rs
Overdraft as per bank statement 3,860
Less: outstanding cheques 9,160
5,300
Add: deposits credited after date (not realised) 16,690
Cash at bank as calculated above 21,990
What should be the correct balance per the cash book?
A Rs 21,990 balance at bank as stated
B Rs 3,670 balance at bank
C Rs 11,390 balance at bank
D Rs 3,670 overdrawn
(LO 3.2.11) (2 marks)

CA Sri Lanka 41
Questions

13.4 The bank statement on 31 October 20X7 showed an overdraft of Rs 800,000.

On reconciling the bank statement, it was discovered that a cheque drawn by
your company for Rs 80,000 had not been presented for payment, and that a
cheque for Rs 130,000 from a customer had been dishonoured on
30 October 20X7.
The correct bank balance to be shown in the statement of financial position
at 31 October 20X7 is:
A Rs 1,010,000 overdrawn
B Rs 880,000 overdrawn
C Rs 750,000 overdrawn
D Rs 720,000 overdrawn
(LO 3.2.11) (2 marks)

13.5 Your firm's cash book at 30 April 20X8 shows a balance at the bank of
Rs 2,490,000. Comparison with the bank statement at the same date reveals
the following differences:
Rs'000
Unpresented cheques 840
Bank charges not in cash book 50
Receipts not yet credited by the bank 470
Dishonoured cheque not in cash book 140
The correct balance on the cash book at 30 April 20X8 is:
A Rs 1,460,000
B Rs 2,300,000
C Rs 2,580,000
D Rs 3,140,000
(LO 3.2.11) (2 marks)

13.6 Your firm's bank statement at 31 October 20X8 shows a balance of

Rs 13,400,000. You subsequently discover that the bank has dishonoured a
customer's cheque for Rs 300,000 and has charged bank charges of Rs
50,000 neither of which is recorded in your cash book. There are
unpresented cheques totalling Rs 2,400,000. Amounts paid in, but not yet
credited by the bank, amount to Rs 1,000,000. You further discover that a
direct credit from a customer of Rs 195,000 has been recorded as a credit in
your cash book.
Your cash book balance, prior to correcting the errors and omissions, was:
A Rs 11,455,000
B Rs 11,960,000
C Rs 12,000,000
D Rs 12,155,000
(LO 3.2.11) (2 marks)

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13.7 Your firm's cashbook shows a credit bank balance of Rs 1,240,000 at 30 April
20X9. Upon comparison with the bank statement, you determine that there
are unpresented cheques totalling Rs 450,000 and a receipt of Rs 140,000
which has not yet been passed through the bank account. The bank
statement shows bank charges of Rs 75,000 which have not been entered in
the cash book.
The balance on the bank statement is:
A Rs 1,005,000 overdrawn
B Rs 930,000 overdrawn
C Rs 1,475,000
D Rs 1,550,000
(LO 3.2.11) (2 marks)

13.8 Which of the following is not a valid reason for the cash book and bank
statement failing to agree?
A Timing difference
B Bank charges
C Error
D Cash receipts posted to payables rather than receivables
(LO 3.2.11) (2 marks)

14.1 From the following information, calculate the value of purchases.

Rs'000
Opening payables 142,600
Cash paid 542,300
Discounts received 13,200
Goods returned 27,500
Closing payables 137,800
A Rs 302,600,000
B Rs 506,400,000
C Rs 523,200,000
D Rs 578,200,000
(LO 3.2.9) (2 marks)

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Questions

14.2 Which one of the following is not a purpose of a receivables ledger control
account?
A A receivables ledger control account provides a check on the overall
accuracy of the personal ledger accounts.
B A receivables ledger control account ensures the trial balance balances.
C A receivables ledger control account aims to ensure there are no errors
in the personal ledger.
D Control accounts help deter fraud.
(LO 3.2.8) (2 marks)

14.3 A business commenced trading on 01 January 20X1. The following

transactions with Supplier A have been recorded in the purchase ledger.
01 January 20X1 Opening balance Rs nil
(1) 01 January 20X1 Purchase of goods Rs 50,000
(2) 01 February 20X1 Purchase of goods Rs 435,000
(3) 30 March 20X1 Payment Rs 385,000
31 March 20X1 Closing balance Rs 100,000
On 31 March 20X1, the business receives the following statement from the
supplier.
Opening balance Rs nil
(4) 1 January 20X1 Invoice #365 Rs 50,000
(5) 1 February 20X1 Invoice #490 Rs 435,000
(6) 31 March 20X1 Invoice #533 Rs 35,000
Closing balance Rs 520,000
Which transactions should be noted as reconciling items on the supplier
statement reconciliation at 31 March 20X1?
A 3 only
B 6 only
C 3 and 6 only
D 1 to 6
(LO 3.2.9) (2 marks)

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 Questions

14.4 The accountant at B Co has prepared the following reconciliation between

the balance on the trade payables ledger control account in the general
ledger and the list of balances from the suppliers ledger:
Rs
Balance on general ledger control account 68,566
Credit balance omitted from list of balances from payables
ledger (127)
68,439
Undercasting of purchases day book 99
Total of list of balances 68,538
What balance should be reported on B Co's statement of financial position
for trade payables?
A Rs 68,439
B Rs 68,538
C Rs 68,566
D Rs 68,665
(LO 3.2.9) (2 marks)

14.5 You are an accountant at Cuppa Supplies, a company that sells cups and
mugs. The following is an extract from a sales invoice raised by the
bookkeeper in your company to a customer Oasis Café.

Invoice No: 3242

Date: 31 October 20X6

Description Qty Unit Price Rs Net amt Rs

Coffee cups 200 500 100,000

Sales value 100,000

Amt payable 100,000

A discount of 5% of the full price applies

if payment is made within 7 days.
If you pay within 7 days, the discounted price is 95,000

CA Sri Lanka 45
Questions

Senior management at your company do not expect Oasis Café to take up the
discount. However, you receive a payment from Oasis Café on 3rd November
20X6.
Which one of the following gives the entries required to record both the sale
and receipt of payment?
DEBIT CREDIT
Rs Rs
A Trade receivables 95,000
Sales 95,000
Bank 95,000
Trade receivables 95,000
B Trade receivables 100,000
Sales 100,000
Bank 95,000
Trade receivables 95,000
C Trade receivables 100,000
Sales 100,000
Bank 95,000
Sales 5,000
Trade receivables 100,000
D Trade receivables 95,000
Sales 95,000
Bank 95,000
Sales 5,000
Trade receivables 100,000
(LO 3.2.4) (2 marks)

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 Questions

14.6 Your organisation sold goods to PQ Co for Rs 800,000 less trade discount of
20% and settlement discount of 5% for payment within 14 days. At the time
of the sale, you expected PQ to take up the settlement discount. The invoice
was settled by cheque five days later. Which one of the following gives the
entries required to record BOTH of these transactions?
DEBIT CREDIT
Rs'000 Rs'000
A PQ Co 608
Sales 608
Bank 608
PQ Co 608
B PQ Co 640
Sales 640
Bank 640
PQ Co 640
C PQ Co 608
Sales 608
Bank 640
PQ Co 608
Sales 32
D PQ Co 640
Sales 640
Bank 608
Sales 32
PQ Co 640
(LO 3.2.9) (2 marks)

14.7 A supplier sends you a statement showing a balance outstanding of

Rs 14,350,000. Your own records show a balance outstanding of
Rs 14,500,000.
Which one of the following could be the reason for this difference?
A The supplier sent an invoice for Rs 150,000 which you have not yet
received.
B The supplier has allowed you Rs 150,000 cash discount which you had
omitted to enter in your ledgers.
C You have paid the supplier Rs 150,000 which he has not yet accounted
for.
D You have returned goods worth Rs 150,000 which the supplier has not
yet accounted for.
(LO 3.2.9) (2 marks)

CA Sri Lanka 47
Questions

14.8 Your payables control account has a balance at 1 October 20X8 of Rs 34,500
credit. During October, credit purchases were Rs 78,400, cash purchases
were Rs 2,400 and payments made to suppliers, excluding cash purchases,
and after deducting settlement discounts of Rs 1,200, were Rs 68,900.
Purchase returns were Rs 4,700.
What was the closing balance?
A Rs 38,100
B Rs 40,500
C Rs 47,500
D Rs 49,900
(LO 3.2.9) (2 marks)

14.9 A receivables ledger control account had a closing balance of Rs 8,500,000. It

contained a contra to the payables ledger of Rs 400,000 but this had been
entered on the wrong side of the control account.
What should be the correct balance on the control account?
A Rs 7,700,000 debit
B Rs 8,100,000 debit
C Rs 8,400,000 debit
D Rs 8,900,000 debit
(LO 3.2.9) (2 marks)

15.1 The payables ledger control account below contains a number of errors:
PAYABLES LEDGER CONTROL ACCOUNT
Rs Rs
Opening balance (amounts Purchases 1,268,600
owed to suppliers) 318,600
Cash paid to suppliers 1,364,300 Contras against debit
Purchases returns 41,200 balances in receivables
ledger 48,000
Refunds received from Discounts received 8,200
suppliers 2,700
1,726,800 Closing balance 402,000

1,726,800

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 Questions

All items relate to credit purchases.

What should the closing balance be when all the errors are corrected?
A Rs 128,200
B Rs 509,000
C Rs 224,200
D Rs 144,600
(LO 3.2.7) (2 marks)

15.2 The cash book shows a bank balance of Rs 5,675,000 overdrawn at

31 August 20X5. It is subsequently discovered that a payment for Rs 125,000
has been entered twice, and that a dishonoured cheque for Rs 450,000 has
been debited in the cash book instead of credited.
The correct bank balance should be:
A Rs 5,100,000 overdrawn
B Rs 6,000,000 overdrawn
C Rs 6,250,000 overdrawn
D Rs 6,450,000 overdrawn
(LO 3.2.7) (2 marks)

15.3 SPL Plc's accounts contain two errors. An irrecoverable debt written off for
Rs 10,000 has been deducted from sales and a Rs 20,000 credit note received
has been added to sales. Before correction, revenue was Rs 1,000,000 and
cost of sales was Rs 800,000. What is the gross profit margin after correction
of these errors?
A 17.8%
B 18.8%
C 21.2%
D 22.2%
(LO 3.2.7) (2 marks)

15.4 Two types of common errors in bookkeeping are errors of principle and
errors of transposition.
Which of the following correctly states whether or not these errors will be
revealed by extracting a trial balance?
Errors of principle Errors of transposition
A Will be revealed Will not be revealed
B Will be revealed Will be revealed
C Will not be revealed Will not be revealed
D Will not be revealed Will be revealed
(LO 3.2.7) (2 marks)

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Questions

15.5 After calculating your company's profit for 20X3, you discover that:
1 A non-current asset costing Rs 50,000 has been included in the
purchases account.
2 Stationery costing Rs 10,000 has been included as closing inventory of
raw materials, instead of inventory of stationery.
These two errors have had the effect of:
A Understating gross profit by Rs 40,000 and understating profit for the
year by Rs 50,000
B Understating both gross profit and profit for the year by Rs 40,000
C Understating gross profit by Rs 60,000 and understating profit for the
year by Rs 50,000
D Overstating both gross profit and profit for the year by Rs 60,000
(LO 3.2.7) (2 marks)

15.6 The suspense account shows a debit balance of Rs 100,000. This could be
due to:
A Entering Rs 50,000 received from AT on the debit side of AT's account
B Entering Rs 50,000 received from AT on the credit side of AT's account
C Undercasting the sales day book by Rs 100,000
D Undercasting the purchases account by Rs 100,000
(LO 3.2.7) (2 marks)

15.7 A company's trial balance totals were:

Debit Rs 387,642,000
Credit Rs 379,511,000
A suspense account was opened for the difference.
Which one of the following errors would have the effect of reducing the
difference when corrected?
A The petty cash balance of Rs 500,000 has been omitted from the trial
balance.
B Rs 4,000,000 received for rent of part of the office has been correctly
recorded in the cash book and debited to rent account.
C Rs 3,000,000 paid for repairs to plant has been debited to the plant
asset account.
D An invoice for Mr A for Rs 400,000 has been posted to the account of
Mrs B in error.
(LO 3.2.7) (2 marks)

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 Questions

15.8 You are the accountant of ABC and have extracted a trial balance at
31 October 20X4. The sum of the debit column of the trial balance exceeds
the sum of the credit column by Rs 829,000. A suspense account has been
opened to record the difference. After preliminary investigations failed to
locate any errors, you have decided to prepare draft financial statements.
The suspense account balance would be treated as:
A An expense in the statement of profit or loss
B Additional income in the statement of profit of loss
C An asset in the statement of financial position
D A liability in the statement of financial position
(LO 3.2.7) (2 marks)

15.9 Where a transaction is credited to the correct ledger account, but debited
incorrectly to the repairs and renewals account instead of to the plant and
machinery account, the error is known as an error of:
A Omission
B Commission
C Principle
D Original entry
(LO 3.2.7) (2 marks)

15.10 You are given the following information:

Receivables at 1 January 20X3 Rs 10,000,000
Receivables at 31 December 20X3 Rs 9,000,000
Total receipts during 20X3 (including cash
sales of Rs 5,000,000) Rs 85,000,000
Sales on credit during 20X3 amount to:
A Rs 81,000,000
B Rs 86,000,000
C Rs 79,000,000
D Rs 84,000,000
(LO 3.2.7) (2 marks)

CA Sri Lanka 51
Questions

15.11 If a purchase return of Rs 48,000 has been wrongly posted to the debit of
the sales returns account, but has been correctly entered in the supplier's
account, the total of the trial balance would show:
A The credit side to be Rs 48,000 more than the debit side
B The debit side to be Rs 48,000 more than the credit side
C The credit side to be Rs 96,000 more than the debit side
D The debit side to be Rs 96,000 more than the credit side
(LO 3.2.7) (2 marks)

52 BL1 - Financial Accounting CA Sri Lanka

 Questions

Part D questions: Financial reporting

Part F questions: Financial reporting standards
Questions 16.1 to 23.6 cover financial reporting, and the financial reporting
standards: LKAS 1 Presentation of Financial Statements; LKAS 7 Statements of Cash
Flows; LKAS 8 Accounting Policies; LKAS 12 Income Taxes; LKAS 19 Employee
Benefits; SLFRS 15 Revenue from Contracts with Customers; and SLFRS 16 Leases.
These are the subjects of Chapters 16 to 23 of the Study Text.

16.1 The profit earned by a business in 20X7 was Rs 72,500. The proprietor
injected new capital of Rs 8,000 during the year and withdrew goods for his
private use which had cost Rs 2,200.
If net assets at the beginning of 20X7 were Rs 101,700, what were the
closing net assets?
A Rs 35,000
B Rs 39,400
C Rs 168,400
D Rs 180,000
(LO 4.1.1, 4.1.2) (2 marks)

16.2 The net assets of Ruwan, a sole proprietor, at 1 January 20X2 amounted to
Rs 128,000. During the year to 31 December 20X2 Ruwan introduced a
further Rs 50,000 of capital and made drawings of Rs 48,000. At
31 December 20X2 Ruwan's net assets totalled Rs 184,000.
What is Ruwan's total profit or loss for the year ended 31 December 20X2?
A Rs 54,000 profit
B Rs 54,000 loss
C Rs 42,000 loss
D Rs 58,000 profit
(LO 4.1.1, 4.1.2) (2 marks)

CA Sri Lanka 53
Questions

16.3 The following are balances on the accounts of Lisath, a sole proprietor, as at
the end of the current financial year and after all entries have been
processed and the profit for the year has been calculated.
Rs'000
Non-current assets 85,000
Receivables 7,000
Trade payables 3,000
Bank loan 15,000
Allowance for depreciation, non-current assets 15,000
Inventory 4,000
Accruals 1,000
Prepayments 2,000
Bank overdraft 2,000
What is the balance on Lisath's capital account?
A Rs 59,000,000
B Rs 66,000,000
C Rs 62,000,000
D Rs 64,000,000
(LO 4.1.4) (2 marks)

16.4 A sole proprietor had opening capital of Rs 10,000,000 and closing capital of
Rs 4,500,000. During the period, the owner introduced capital of
Rs 4,000,000 and withdrew Rs 8,000,000 for her own use.
Her profit or loss during the period was:
A Rs 9,500,000 loss
B Rs 1,500,000 loss
C Rs 7,500,000 profit
D Rs 17,500,000 profit
(LO 4.1.1, 4.1.2) (2 marks)

16.5 The capital of a sole proprietor would change as a result of:

A A supplier being paid his account by cheque
B Raw materials being purchased on credit
C Non-current assets being purchased on credit
D Wages being paid in cash
(LO 4.1.1, 4.1.2) (2 marks)

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 Questions

16.6 A business has the following items extracted from its accounting records.
Sales Rs 150,000, opening inventory Rs 10,000, closing inventory Rs 15,000.
The business applies a constant mark up of 25%. Calculate the total
purchases for the year.
A Rs 115,000
B Rs 145,000
C Rs 117,500
D Rs 125,000
(LO 4.1.1, 4.1.2) (2 marks)

16.7 Himeth, a sole proprietor, has calculated that his cost of sales for the year is
Rs 144,000,000. His sales figure for the year includes an amount of Rs
2,016,000 being the amount paid by Himeth himself into the business bank
account for goods withdrawn for private use. The figure of Rs 2,016,000 was
calculated by adding a mark-up of 12% to the cost of the goods. His gross
profit percentage on all other goods sold was 20%.
What is the total sales figure for the year?
A Rs 172,656,000
B Rs 177,750,000
C Rs 179,766,000
D Rs 180,000,000
(LO 4.1.1, 4.1.2) (2 marks)

CA Sri Lanka 55
Questions

16.8 At 31 December 20X1, a sole proprietor who does not keep full accounting
records, had the following balances:
Rs'000
Motor cars 2,000
Inventory 500
Trade receivables 300
Accrued Electricity Expense 50
Rent prepaid 200
At 31 December 20X2, it had:
Motor cars 2,500
Inventory 100
Trade receivables 50
Trade payables 600
Accrued Electricity Expense 100
Rent prepaid 250
The owner has drawn Rs 1,000,000 in cash over the year.
What is the profit or loss?
A Loss Rs 250,000
B Profit Rs 250,000
C Loss Rs 750,000
D Profit Rs 750,000
(LO 4.1.1, 4.1.2) (2 marks)

16.9 Which statement is wrong for a statement of financial position to balance?

A Net assets = Proprietor's fund
B Net assets = Capital + profit + drawings
C Net assets = Capital + profit  drawings
D Non-current assets + net current assets = capital + profit  drawings
(LO 4.1.1, 4.1.2) (2 marks)

16.10 The bookkeeper of Leggit has disappeared. There is no cash in the till and
theft is suspected. It is known that the cash balance at the beginning of the
year was Rs 240. Since then, total sales have amounted to Rs 41,250. Credit
customers owed Rs 2,100 at the beginning of the year and owe Rs 875 now.
Cheques banked from credit customers have totalled Rs 24,290. Expenses
paid from the till receipts amount to Rs 1,850 and cash receipts of Rs 9,300
have been lodged in the bank.
How much has the bookkeeper stolen during the period?
A Rs 7,275
B Rs 9,125
C Rs 12,155
D Rs 16,575
(LO 4.1.1, 4.1.2) (2 marks)

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 Questions

16.11 The following information relates to a company at its year end.

Rs'000
Inventory at beginning of year
Raw materials 10,000
Work-in-progress 2,000
Finished goods 34,000
Inventory at end of year
Raw materials 11,000
Work-in-progress 4,000
Finished goods 30,000
Purchases of raw materials 50,000
Direct wages 40,000
Production overheads 60,000
Distribution costs 55,000
Administration expenses 70,000
Sales 300,000
The cost of goods manufactured during the year is:
A Rs 147,000,000
B Rs 151,000,000
C Rs 153,000,000
D Rs 154,000,000
(LO 4.1.1, 4.1.2) (2 marks)

16.12 A manufacturer has the following figures for the year ended 30 September
20X6:
Rs'000
Direct materials 8,000
Factory overheads 12,000
Direct labour 11,000
Increase in work-in-progress 4,000
Prime cost is:
A Rs 19,000,000
B Rs 26,000,000
C Rs 30,000,000
D Rs 34,000,000
(LO 4.1.1, 4.1.2) (2 marks)

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Questions

16.13 You are given the following information for the year ended 31 October
20X7:
Rs'000
Purchases of raw materials 112,000
Returns inwards 8,000
Decrease in inventories of raw materials 8,000
Direct wages 42,000
Carriage outwards 4,000
Carriage inwards 3,000
Production overheads 27,000
Increase in work-in-progress 10,000
The value of factory cost of goods completed is:
A Rs 174,000,000
B Rs 182,000,000
C Rs 183,000,000
D Rs 202,000,000
(LO 4.1.1, 4.1.2) (2 marks)

16.14 Your firm has the following manufacturing figures.

Rs'000
Prime cost 56,000
Factory overheads 4,500
Opening work in progress 6,200
Factory cost of goods completed 57,000
Closing work-in-progress is:
A Rs 700,000
B Rs 2,700,000
C Rs 9,700,000
D Rs 11,700,000
(LO 4.1.1, 4.1.2) (2 marks)

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17.1 A business has compiled the following information for the year ended
31 October 20X2:
Rs
Opening inventory 386,200
Purchases 989,000
Closing inventory 422,700
The gross profit as a percentage of sales is always 40%
Based on these figures, what is the sales revenue for the year?
A Rs 1,333,500
B Rs 1,587,500
C Rs 2,381,250
D The sales revenue figure cannot be calculated from this information
(LO 4.1.4) (2 marks)

17.2 Which of the following calculations could produce an acceptable figure for a
proprietor 's net profit for a period if no accounting records had been kept?
A Closing net assets plus drawings minus capital introduced minus
opening net assets
B Closing net assets minus drawings plus capital introduced minus
opening net assets
C Closing net assets minus drawings minus capital introduced minus
opening net assets
D Closing net assets plus drawings plus capital introduced minus opening
net assets
(LO 4.1.4) (2 marks)

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17.3 A sole proprietor fixes his prices to achieve a gross profit percentage on sales
revenue of 40%. All his sales are for cash. He suspects that one of his sales
assistants is stealing cash from sales revenue.
The trading section of his profit or loss account for the month of June 20X3 is
as follows:
Rs'000
Recorded sales revenue 181,600
Cost of sales 114,000
Gross profit 67,600
Assuming that the cost of sales figure is correct, how much cash could the
sales assistant have taken?
A Rs 5,040,000
B Rs 8,400,000
C Rs 22,000,000
D It is not possible to calculate a figure from this information
(LO 4.1.4) (2 marks)

17.4 Adeepa does not keep proper accounting records, and it is necessary to
calculate her total purchases for the year ended 31 January 20X3 from the
following information:
Rs
Trade payables: 31 January 20X2 130,400
31 January 20X3 171,250
Payment to suppliers 888,400
Cost of goods taken from inventory by Adeepa for his personal use 1,000
Refunds received from suppliers 2,400
Discounts received 11,200
What is the figure for purchases that should be included in Adeepa's
financial statements?
A Rs 914,650
B Rs 937,050
C Rs 939,050
D Rs 941,850
(LO 4.1.4) (2 marks)

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17.5 Wasura keeps no accounting records. The following information is available

about her position and transactions for the year ended 31 December 20X4:
Rs'000
Net assets at 1 January 20X4 210,000
Drawings during 20X4 48,000
Capital introduced during 20X4 100,000
Net assets at 31 December 20X4 400,000
Based on this information, what was Wasura's profit for 20X4?
A Rs 42,000,000
B Rs 242,000,000
C Rs 138,000,000
D Rs 338,000,000
(LO 4.1.4) (2 marks)

17.6 Alpha is a sole proprietor who does not keep proper accounting records.
Alpha's first year of trading was 20X4. From reviewing Alpha's bank
statements and the incomplete records relating to cash maintained, the
following summary has been compiled.
Bank and cash summary, Alpha, 20X4
Rs
Cash received from credit customers and paid into the bank 381,600
Expenses paid out of cash received from credit customers
before banking 6,800
Cash sales 112,900
Other information, Alpha, 20X4
Irrecoverable debts written off 7,200
Discounts allowed taken by credit customers 9,400
Closing balance of trade receivables 0
Which of the following correctly represents Alpha's sales figure for 20X4?
A Rs 517,900
B Rs 112,900
C Rs 381,600
D Rs 510,900
(LO 4.1.4) (2 marks)

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17.7 On 1 September 20X6, a business had inventory of Rs 380,000. During the

month, sales totalled Rs 650,000 and purchases Rs 480,000. On
30 September 20X6 a fire destroyed some of the inventory. The undamaged
goods in inventory were valued at Rs 220,000. The business operates with a
standard gross profit margin of 30%.
Based on this information, what is the cost of the inventory destroyed in the
fire?
A Rs 185,000
B Rs 140,000
C Rs 405,000
D Rs 360,000
(LO 4.1.4) (2 marks)

18.1 What double entry is necessary to record interest earned on partners' capital
account balances?
A Debit Partners' current accounts
Credit Appropriation account
B Debit Appropriation account
Credit Partners' current accounts
C Debit Appropriation account
Credit Cash
D Debit Appropriation account
Credit Partners' capital accounts
(LO 4.2.1) (2 marks)

18.2 A partner's private petrol bills have been treated as part of the partnership's
motor vehicle expenses.
Which of the following entries is necessary to correct the error?
A Debit Drawings account
Credit Motor vehicle expenses account
B Debit Motor vehicles expenses account
Credit Drawings account
C Debit Motor vehicles expenses account
Credit Capital account
D Debit Capital account
Credit Motor vehicle expenses account
(LO 4.2.1) (2 marks)

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18.3 What double entry is necessary to record interest payable on partners'

drawings?
A Debit Partners' drawings accounts
Credit Partners' current accounts
B Debit Appropriation account
Credit Partners' drawings accounts
C Debit Partners' drawings accounts
Credit Interest payable account
D Debit Partners' current accounts
Credit Appropriation account
(LO 4.2.1) (2 marks)

18.4 Imeth and Sanya are in partnership sharing profits and losses in the ratio
3:4. The statement of profit or loss for the year to 31 May 20X6 reported a
net profit of Rs 30,709,000. Imeth is entitled to a salary of Rs 14,000,000 per
annum.
What was Sanya's share of the profit for the year to 31 May 20X6?
A Rs 7,161,000
B Rs 9,548,000
C Rs 17,548,000
D Rs 25,548,000
(LO 4.2.3, 4.2.4) (2 marks)

18.5 Adele and Kanish are in partnership. In the year to 31 October 20X6, Adele's
drawings were Rs 18,000,000 and the following entries were made in the
partnership appropriation account for Adele:
Rs'000
Salary 6,500
Interest on drawings 1,800
Share of profit 12,750
At 1 November 20X5, the balance on Adele's current account was
Rs 24,800,000 (credit).
What was the balance on Alex's current account at 31 October 20X6?
A Rs 24,250,000
B Rs 27,850,000
C Rs 42,250,000
D Rs 45,850,000
(LO 4.2.3, 4.2.4) (2 marks)

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18.6 Denul and Timari have been in partnership, sharing profit and losses in the
ratio 3:2.
At 1 July 20X3, Jaith was admitted to the partnership when the goodwill was
valued at Rs 50,000. The partners drew up a new partnership agreement
stating that profits would now be shared equally and that goodwill would
not be maintained in the accounts. On 1 July 20X3, the total value of the
capital and current balances of Denul and Timari was Rs 360,000.
How much must Jaith contribute to the partnership to ensure that his
opening capital balance is nil?
A Rs 16,667
B Rs 33,333
C Rs 50,000
D Rs 66,667
(LO 4.2.3, 4.2.4) (2 marks)

18.7 Sadeera and Thalia were equal partners in a business, each with capital of Rs
120,000,000. It was agreed that Udani should join the partnership, with all
three partners sharing profits equally. For the purpose of admitting the new
partner, the value of the goodwill of the business was agreed at
Rs 90,000,000 but goodwill would not be maintained in the accounts. Udani
introduced Rs 80,000,000 in cash to the business.
What were the balances on the capital accounts of Sadeera and Udani after
the admission of Udani to the partnership?
Sadeera Udani
A Rs 120,000,000 Rs 80,000,000
B Rs 135,000,000 Rs 50,000,000
C Rs 150,000,000 Rs 50,000,000
D Rs 165,000,000 Rs 80,000,000
(LO 4.2.3, 4.2.4) (2 marks)

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18.8 Aannya and Kian are in partnership. Aannya is entitled to a salary of

Rs 19,000,000 per annum according to the partnership agreement.
The net profit of the partnership for the year ended 31 May 20X5 was Rs
108,255,000.
The figures for interest on capital and interest on drawings for the year were
as follows:
Aannya Kian
Interest on capital Rs 10,200,000 Rs 9,300,000
Interest on drawings Rs 2,100,000 Rs 3,300,000
What was the residual profit for the year to 31 May 20X5?
A Rs 103,355,000
B Rs 83,855,000
C Rs 75,155,000
D Rs 64,354,000
(LO 4.2.3, 4.2.4) (2 marks)

18.9 Which of the following best describes a partnership?

A Two people who run a business
B A business arrangement between a number of people who share profit
equally
C A relationship that exists between persons carrying on a business in
common with a view of profit
D A business arrangement involving shareholders
(LO 4.2.1) (2 marks)

18.10 Which of the following statements about partnerships are correct?

1 In a partnership, the partners always agree to share profits equally.
2 In a partnership, the partners are carrying on a business in common
with a view to profit.
3 New partners cannot join the partnership if they previously worked as an
employee for the business.
4 The personal liability of each partner for the partnership's liabilities is
unlimited.
A 1 and 2
B 1 and 2
C 2 and 4
D 3 and 4
(LO 4.2.1) (2 marks)

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18.11 You are preparing the final accounts for a partnership, and have to include
the following items:
1 Partners' salaries
2 Staff salaries
3 Interest on a loan from a partner
Which of the items should be included in the calculation of profit for the year
in the statement of profit or loss?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
(LO 4.2.1) (2 marks)

19.1 Fill in the blanks

A company can increase its stated capital by means of a issue
or a issue of shares.
(LO 4.3.2) (2 marks)

19.2 When a company makes a rights issue of equity shares which of the
following effects will the issue have?
1 Assets are increased
2 Retained earnings are reduced
3 Revaluation reserve is reduced
A 1 only
B 1 and 2
C 3 only
D 1 and 3
(LO 4.3.2) (2 marks)

19.3 Which of these statements about limited liability companies is/are correct?
1 A company might make a bonus issue of shares to raise funds for
expansion.
2 No cash is received when a company makes a rights issue of shares,
instead other reserves are capitalised and reclassified as stated capital.
3 A rights issue of shares dilutes the shareholding of existing
shareholders if they do not take up their rights.
A 1 and 3
B 2 and 3
C 1 and 2
D 3 only
(LO 4.3.2) (2 marks)

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19.4 Evon, a limited liability company, issued 1,000,000 ordinary shares at a price
of Rs 1.10 per share, all received in cash.
What should be the accounting entries to record this issue?
A Debit: Retained earnings Rs 1,100,000
Credit: Stated capital Rs 1,100,000

B Debit: Stated capital Rs 1,100,000

Credit: Cash Rs 1,100,000

C Debit: Cash Rs 1,100,000

Credit: Stated capital Rs 1,100,000

D Debit: Cash Rs 1,100,000

Credit: Retained earnings Rs 1,100,000
(LO 4.3.3) (2 marks)

19.5 The following information is available about a company's dividends:

Rs
20X5
Sept. Final dividend for the year ended 30 June 20X5 paid 100,000
(declared August 20X5)
20X6
March Interim dividend for the year ended 30 June 20X6 40,000
paid
Sept. Final dividend for the year ended 30 June 20X6 paid 120,000
(declared August 20X6)
What figures, if any, should be disclosed in the company's statement of profit
or loss and other comprehensive income for the year ended 30 June 20X6
and its statement of financial position as at that date?
SPLOCI for the period SOFP liability
A Rs 160,000 deduction Rs 120,000
B Rs 140,000 deduction nil
C nil Rs 120,000
D nil nil
(LO 4.3.3) (2 marks)

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19.6 The issued share capital of Maelstrom (Pvt) Ltd is as follows:

Ordinary shares issued at Rs 1 each Rs 1,000,000
8% Preferred shares issued at Rs 0.50 each (redeemable) Rs 500,000
In the year ended 31 October 20X2, the company has paid the preferred
dividend for the year and an interim dividend of Rs 0.20 per share on the
ordinary shares. A final ordinary dividend of Rs 0.30 per share is declared on
30 October 20X2.
What is the amount of dividends recognised in the statement of changes in
equity relating to the year ended 31 October 20X2?
A Rs 580,000
B Rs 90,000
C Rs 130,000
D Rs 500,000
(LO 4.3.3) (2 marks)

20.1 Which of the following could appear as separate items in the statement of
changes in equity required by LKAS 1 Presentation of Financial Statements as
part of a company's financial statements?
1 Dividends on equity shares paid during the period
2 Loss on sale of non-current assets
3 Proceeds of an issue of ordinary shares
4 Dividends proposed after the year end
A 1, 3 and 4 only
B 1, 2 and 4 only
C 1 and 3 only
D All four items
(LO 4.3.1) (2 marks)

20.2 Which one of the following items does not appear under the heading
'equity and reserves' on a company statement of financial position?
A Stated capital
B Retained earnings
C Revaluation surplus
D Debentures
(LO 4.3.1) (2 marks)

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20.3 Which of the following items may appear as current liabilities in a company's
statement of financial position?
1 Revaluation surplus
2 Loan due for repayment within one year
3 Taxation
4 Preference dividend payable on redeemable preference shares
A 1, 2 and 3
B 1, 2 and 4
C 1, 3 and 4
D 2, 3 and 4
(LO 4.3.1) (2 marks)

20.4 At 31 December 20X2 the following matters require inclusion in a company's

financial statements:
1 On 1 January 20X2 the company made a loan of Rs 12,000,000 to an
employee, repayable on 30 April 20X3, charging interest at 2 per cent
per year. On the due date she repaid the loan and paid the whole of the
interest due on the loan to that date.
2 The company has paid insurance Rs 9,000,000 in 20X2, covering the
year ending 31 August 20X3.
3 In January 20X3 the company received rent from a tenant Rs 4,000,000
covering the six months to 31 December 20X2.
For these items, what total figures should be included in the company's
statement of financial position at 31 December 20X2?
Receivables and prepayments Payables and accruals
Rs'000 Rs'000
A 22,000 240
B 22,240 NIL
C 10,240 NIL
D 16,240 6,000
(LO 4.3.3) (2 marks)

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20.5 The following extract is from the statement of profit or loss of Gearing (Pvt)
Ltd for the year ended 30 April 20X8.
Rs'000
Profit before tax 68,000
Tax (32,000)
Profit for the year 36,000
In addition to the profit above:
1 Gearing (Pvt) Ltd paid a dividend of Rs 21,000,000 during the year.
2 A gain on revaluation of land resulted in a surplus of Rs 18,000,000.
What total amount will be added to retained earnings at the end of the
financial year?
A Rs 36,000,000
B Rs 33,000,000
C Rs 47,000,000
D Rs 15,000,000
(LO 4.3.3) (2 marks)

21.1 A company is preparing its statement of cash flows for the year ended
31 December 20X2. Relevant extracts from the accounts are as follows.
Statement of profit or loss Rs'000
Depreciation 15,000
Profit on sale of non-current assets 40,000
Statement of financial position 20X2 20X1
Rs'000 Rs'000
Plant and machinery – cost 185,000 250,000
Plant and machinery – depreciation 45,000 50,000
Plant and machinery additions during the year were Rs 35,000,000. What is
the cash flow arising from the sale of non-current assets?
A Rs 40,000,000
B Rs 100,000,000
C Rs 120,000,000
D Rs 135,000,000
(LO 4.1.3) (2 marks)

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21.2 A company maintains separate accounts for cost and depreciation and had
the following non-current asset transactions. Non-current assets purchased
cost Rs 1,200,000, part of the costs of these (Rs 100,000) are unpaid at the
year end. During the year non-current assets were revalued by Rs 500,000.
Non-current assets sold for Rs 50,000. Depreciation for the period is
Rs 170,000.
What is the net cash flow that is reported under Investing Activities?
A Rs 880,000 (outflow)
B Rs 1,050,000 (outflow)
C Rs 1,100,000 (outflow)
D Rs 1,150,000 (outflow)
(LO 4.1.3, 6.1.3) (2 marks)

21.3 A non-current asset note includes:

At At
31/12/X4 31/12/X3
Rs'000 Rs'000
Plant and machinery
Cost 10,500 9,400
Depreciation 3,400 4,100
Motor vehicles
Cost 12,600 10,500
Depreciation 4,100 3,600

Plant and machinery with a cost of Rs 2,000,000 and a carrying value of

Rs 1,200,000 was sold during the year.
In the statement of cash flows what is the figure for payments to acquire
non-current assets in the year to 31/12/X4?
A Rs 3,200,000
B Rs 4,400,000
C Rs 4,700,000
D Rs 5,200,000
(LO 4.1.3, 6.1.3) (2 marks)

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21.4 When comparing two statements of financial position you notice that:
1 Last year the company had included in current assets investments of
Rs 10,000,000. This year there are no investments in current assets.
2 Last year the company had an overdraft of Rs 8,000,000, this year the
overdraft is Rs 4,000,000.
In the statement of cash flows, the change in cash would be:
A Increase Rs 4,000,000
B Decrease Rs 4,000,000
C Increase Rs 6,000,000
D Decrease Rs 6,000,000
(LO 4.1.3, 6.1.3) (2 marks)

21.5 A draft statement of cash flows contains the following calculation of cash
flows from operating activities:
Rs m
Profit before tax 13
Depreciation 2
Decrease in inventories (3)
Decrease in trade and other receivables 5
Decrease in trade payables 4
Net cash inflow from operating activities 21
Which TWO of the following corrections need to be made to the calculation?
A Depreciation should be deducted, not added.
B Decrease in inventories should be added, not deducted.
C Decrease in receivables should be deducted, not added.
D Decrease in payables should be deducted, not added.
(LO 4.1.3, 6.1.3) (2 marks)

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21.6 Big Time Co had the following transactions during the year.
 Purchases from suppliers were Rs 18,500,000 of which Rs 2,550,000 was
unpaid at the year end. Brought forward payables were Rs 1,000,000.
 Wages and salaries amounted to Rs 9,500,000 of which Rs 750,000 was
unpaid at the year end. The financial statements for the previous year
showed an accrual for wages and salaries of Rs 1,500,000.
 Interest of Rs 2,100,000 on a long-term loan was paid in the year.
 Sales revenue was Rs 33,400,000 including Rs 900,000 receivables at the
year end. Brought forward receivables were Rs 400,000.
 Interest on cash deposits at the bank amounted to Rs 175,000.
 Big Time Co shows interest paid and received under operating activities.
Using the direct method, what is Big Time Co's cash flow from operating
activities?
A Rs 3,425,000
B Rs 3,775,000
C Rs 1,425,000
D Rs 6,775,000
(LO 4.1.3, 6.1.3) (2 marks)

21.7 The following information is available about the plant, property and
equipment of L Co, for the year to 31 December 20X3.
Rs'000
Carrying amount of assets at beginning of the year 462,000
Carrying amount of assets at end of the year 633,000
Increase in revaluation surplus during the year 50,000
Disposals during the year, at cost 110,000
Accumulated depreciation on the assets disposed of 65,000
Depreciation charge for the year 38,000
In the statement of cash flows, what would the 'cash paid to acquire new
property, plant and equipment' figure be:
A Rs 104,000,000
B Rs 159,000,000
C Rs 166,000,000
D Rs 204,000,000
(LO 4.1.3, 6.1.3) (2 marks)

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21.8 Which one of the following statements is correct, with regard to the
preparation of a statement of cash flows that complies with LKAS 7
Statement of Cash Flows?
A A statement of cash flows prepared using the direct method produces
the same figure for net cash from operating activities as a statement
produced by the indirect method.
B An increase in a bank overdraft during the accounting period is
included within cash flows from financing activities.
C A profit on the sale of equipment is included within cash flows from
investing activities.
D A surplus on the revaluation of property will appear within cash flows
from investing activities.
(LO 4.1.3, 6.1.3) (2 marks)

21.9 In the course of preparing a company's statement of cash flows, the following
figures are to be included in the calculation of net cash from operating
activities.
Rs
Depreciation charges 980,000
Profit on sale of non-current assets 40,000
Increase in inventories 130,000
Decrease in receivables 100,000
Increase in payables 80,000
What will the net effect of these items be in the statement of cash flows?
Rs
A Addition to operating profit 890,000
B Subtraction from operating profit (890,000)
C Addition to operating profit 1,070,000
D Addition to operating profit 990,000
(LO 4.1.3, 6.1.3) (2 marks)

21.10 Fill in the blanks:

activities are the principal revenue-producing activities of the

enterprise and other activities that are not investing or financing activities.

activities are the acquisition and disposal of non-current

assets and other investments not included in cash equivalents.
(LO 4.1.3, 6.1.3) (2 marks)

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22.1 In accordance with LKAS 8 Accounting policies, changes in estimates and

errors when can an entity make a change to an existing accounting policy?
A Once every five years
B When it will result in providing reliable and more relevant financial
information
C An entity is permitted to make a change to an accounting policy if it
wishes to do so
D Accounting policies, once adopted, cannot be changed
(LO 6.1.3) (2 marks)

22.2 From the list below, select two items which are examples of accounting
policies.
1. _____________________
2. _____________________
Select from:
• Measurement of inventory using First-In-First-Out basis
• Useful lives of non-current assets
• Provision for warranty repairs
• Allowance for receivables
• Straight-line method of calculating depreciation
• Measurement of non-current assets at historical cost
• Accruals basis of accounting
(LO 6.1.3) (2 marks)

22.3 Fill in the blanks:

According to LKAS 8, accounting policies are the specific ,

, conventions, rules and practices adopted by an entity in
preparing and presenting financial statements.
(LO 6.1.2) (2 marks)

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22.4 Y Ltd., a successful business, has made profits exceeding Rs 50 million in the
last few years. It was discovered that a computer bought in the last financial
year for Rs 75,000 was not reflected in last year's financial statements. How
should the impact of this omission be treated in the financial statements of
Y Ltd?
A Correct in this financial year's accounts
B Correct in last financial year's accounts
C No change required
D No change required but disclose as a note to the financial statements
(LO 6.1.3) (2 marks)

22.5 During the financial year ended 31 December 20X1, a business determines
that the remaining useful life of a material non-current asset will not
accurately reflect the business's consumption of economic benefits from the
asset and decides to reduce its remaining useful life. Assuming that this is a
material change, how should the effect of the change be accounted for?
A Adjustment in current period
B Adjustment in prior period
C No adjustment but disclose as a note to financial statements
D No adjustment
(LO 6.1.3) (2 marks)

22.6 Fruitz Co has a tax liability relating to 20X1 brought forward in 20X2 of
Rs 16,000,000. This liability is finally agreed at Rs 18,500,000 which is paid
in 20X2.
Fruitz's accountant estimates their tax liability for profits earned in 20X2
will be Rs 20,000,000.
What should the charge for taxation be in Fruitz's statement of profit or loss
(SPL) for the year ended 31 December 20X2?
A Rs 22,500,000
B Rs 15,000,000
C Rs 17,500,000
D Rs 20,000,000
(LO 6.1.3) (2 marks)

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22.7 Fill in the blanks:

is the amount of income taxes payable (recoverable) in respect
of the taxable profits (tax loss) for a period.
(LO 6.1.2) (2 marks)

22.8 From the list below, select two items which are examples of 'other long-term
benefits' in accordance with LKAS 19 Employee Benefits.
1. ________________
2. ________________
Select from:
 Wages and salaries
 Social security contributions
 Paid annual leave
 Paid sick leave
 Paid maternity/paternity leave
 Redundancy payments
 Defined contribution plan
 Defined benefit plan
 Early retirement payments
 Deferred remuneration
 Long service awards
(LO 6.1.3) (2 marks)

22.9 From the list below, select two items which are examples of 'post-
employment benefits' in accordance with LKAS 19 Employee Benefits.
1. ________________
2. ________________
Select from:
 Wages and salaries
 Social security contributions
 Paid annual leave
 Paid sick leave
 Paid maternity/paternity leave
 Redundancy payments
 Defined contribution plan
 Defined benefit plan
 Early retirement payments
 Deferred remuneration
 Long service awards
(LO 6.1.3) (2 marks)

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22.10 Fill in the blanks:

In accordance with LKAS 19 Employee Benefits, employee benefits are all
forms of given by an entity in exchange for
rendered by employees or for the termination of employment.
(LO 6.1.2) (2 marks)

22.11 Indicate whether the following features of pensions apply either to defined
contribution plans; defined benefit plans; or both.
Defined
contribution Defined
only benefit only Both
Contributions are fixed
Pay-out from plan is fixed

(LO 6.1.3) (2 marks)

22.12 Indicate whether the following features of pensions apply to either defined
contribution plans; defined benefit plans; or both.
Defined
contribution Defined
only benefit only Both
Employer pays contributions
into plan
Employee can pay
contributions into plan

(LO 6.1.3) (2 marks)

22.13 Fill in the blanks:

A contract is, or contains, a lease if it conveys the right to the

of an identified asset for a period of time in exchange for
consideration.
(LO 6.1.2) (2 marks)

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22.14 Mountview Co, a public transport provider, has entered into a contract with
Parkbus Co under which Parkbus Co provides Mountview Co with the use of
10 buses for five years.
The buses are owned by Parkbus Co and are specified in the contract.
Mountview Co may use the buses for its public transport operations when
and where it wishes.
Should Mountview Co wish to use the vehicles for an activity other than
public transport, it may choose to do so. When the buses are not in use, they
are kept at Mountview Co's depot premises and may not be retrieved by
Parkbus Co until the end of the five-year term, unless Mountview Co has
defaulted on its payments. If a bus needs to be serviced or repaired, Parkbus
Co is obliged to provide a temporary replacement vehicle of the same type.
This arrangement is a lease, TRUE or FALSE?
(LO 6.1.3) (2 marks)

22.15 A supplier provides a customer with an asset. Which of the following

situations suggests that the arrangement constitutes a lease? Select ALL that
apply.
A The customer has the right to operate the asset throughout the period
of use, without the supplier having the right to change those operating
instructions.
B The customer designed the asset in a way that predetermines how and
for what purpose the asset will be used throughout the period of use.
C The customer has the right to direct how and for what purpose the
asset is used.
D The customer does not have the right to obtain substantially all of the
economic benefits from use of the asset throughout the period of use.
(LO 6.1.3) (2 marks)

22.16 On 1 January 20X6 Anuja hired a machine under a lease. The present value
of the minimum lease payments was Rs 3.3 million. Instalments of
Rs 700,000 are payable annually in advance with the first payment made on
1 January 20X6. The interest rate implicit in the lease is 6%.
What is the liability in respect of this lease in the statement of financial
position of Anuja at 31 December 20X7, to the nearest Rs'000?
A 1,558,000
B 2,179,000
C 2,296,000
D 2,756,000
(LO 6.1.3) (2 marks)

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Questions

The following information relates to questions 23.1 and 23.2

Jaffna Golf Club (JGC) has three types of members:
 Annual memberships are paid (in advance) for each calendar year and are
Rs 10,000 each.
 Five-year memberships cover 5 calendar years and are Rs 40,000.
 Life memberships cost Rs 70,000 and JGC's policy is to recognise the income
over 10 years.
23.1 During December 20X4 JGC received Rs 730,000, of which Rs 280,000 was
arrears for annual memberships, Rs 800,000 for five-year memberships
starting in 20X5, and 20 life memberships for 20X5.
What is the amount received in December 20X4 that will be shown as
income for 20X5?
A Rs 750,000
B Rs 1,030,000
C Rs 2,650,000
D Rs 2,930,000
(LO 4.4.2) (2 marks)

23.2 What will be the balance on the deferred income account as at 31 December
20X4 relating to the above items?
A Rs 1,900,000
B Rs 2,200,000
C Rs 2,650,000
D Rs 2,930,000
(LO 4.4.2) (2 marks)

23.3 A debit balance on an income and expenditure account prepared for a club is
dealt with by:
A Deduction from the club accumulated fund
B Addition to the bank balance in the statement of financial position
C Addition to the club accumulated fund
D Inclusion in the statement of financial position as a prepayment
(LO 4.4.2) (2 marks)

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23.4 Calculate the subscription income for the XYZ Social Club using the following
data. Arrears 1.1.20X1 Rs 700,000 prepaid in advance 1.1.20X1 Rs 1,500,000
arrears 31.12.20X1 Rs 1,200,000 paid in advance 31.12.20X1 Rs 3,200,000
cash received from members Rs 14,200,000.
A Rs 13,000,000
B Rs 14,200,000
C Rs 11,400,000
D Rs 17,000,000
(LO 4.4.2) (2 marks)

23.5 An income and expenditure account is:

A A summary of the cash and bank transactions for a period
B Another name for a receipts and payments account
C Similar to a statement of profit or loss in reflecting revenue earned and
expenses incurred during a period
D A statement of financial position as prepared for a non-profit making
organisation
(LO 4.4.2) (2 marks)

23.6 The difference between a receipts and payments account and an income and
expenditure account is:
A A receipts and payments account is prepared on an accruals basis and
an income and expenditure account on a cash basis
B A receipts and payments account is prepared on a cash basis and an
income and expenditure account on an accruals basis
C A receipts and payments account is prepared for a not for profit
organisation and an income and expenditure account for a business
D A receipts and payments account for a manufacturing business and an
income and expenditure account for a non-manufacturing business
(LO 4.4.2) (2 marks)

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Part E questions: Financial statements analysis

Questions 24.1 to 24.24 cover financial statements analysis, the subject of Chapter
24 of the Study Text.

24.1 The following figures are taken from the statement of financial position of
GEN Co.
Rs mn
Inventory 2
Receivables 3
Cash 1
Payables 3
Bank loan repayable in 5 years' time 3
What is the current ratio?
A 1.33
B 2.00
C 1.00
D 0.33
(LO 5.1.3) (2 marks)

24.2 If the current ratio for a company is equal to its quick ratio, which of the
following statements is true?
A The current ratio must be greater than one.
B The company does not carry any inventory.
C Receivables plus cash is greater than payables minus inventories.
D Working capital is positive.
(LO 5.1.3) (2 marks)

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24.3 A company measures the average time to collect receivables as:

[Receivables at end of financial year/Annual credit sales]  365 days
Accounting ratios have just been calculated from the financial statements for
the financial year that has just ended. These show an abnormally high
average time to collect receivables, compared with ratios calculated for the
previous financial year.
Which of the following may help to explain this unusually high average time
to collect trade receivables?
1 There was an unusually large sale on credit close to the end of the
financial year.
2 The company has seasonal trade, and sales in the final quarter of the
year are always higher than in the other quarters.
3 However, sales in the final quarter of the year that has just ended were
lower than in the previous year.
A Reason 1 only
B Reason 2 only
C Reason 3 only
D Reasons 1, 2 and 3
(LO 5.1.3) (2 marks)

24.4 A company's gross profit as a percentage of sales increased from 24% in the
year ended 31 December 20X1 to 27% in the year ended 31 December 20X2.
Which of the following events is most likely to have caused the increase?
A An increase in sales volume
B A purchase in December 20X1 mistakenly being recorded as happening
in January 20X2
C Overstatement of the closing inventory at 31 December 20X1
D Understatement of the closing inventory at 31 December 20X1
(LO 5.1.3) (2 marks)

24.5 Which of the following transactions would result in an increase in capital

employed?
A Selling inventory at a profit
B Writing off a bad debt
C Paying a payable in cash
D Increasing the bank overdraft to purchase a non-current asset
(LO 5.1.3) (2 marks)

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24.6 From the following information regarding the year to 31 August 20X6, what
is the accounts payable payment period? You should calculate the ratio using
purchases as the denominator.
Rs'000
Sales 43,000
Cost of sales 32,500
Opening inventory 6,000
Closing inventory 3,800
Trade accounts payable at 31 August 20X6 4,750
A 40 days
B 50 days
C 53 days
D 57 days
(LO 5.1.3) (2 marks)

The following information is relevant for questions 24.7 to 24.9.

Quality Co are drafting their financial statements. An extract from their draft
statement of financial position at 31 March 20X8 is set out below.
Rs'000 Rs'000
Non-current assets 450
Current assets: Inventory 65
Receivables 110
Prepayments 30
205
Current liabilities: Payables 30
Bank overdraft (Note) 50
80
125
575
Non-current liability: Loan (75)
500
Ordinary share capital 400
Retained profit 100
500
Note: The bank overdraft first occurred on 30 September 20X7.
24.7 What is the gearing of the company?
A 13%
B 16%
C 20%
D 24%
(LO 5.1.3) (2 marks)

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24.8 What is the quick ratio of the company?

A 1.75
B 2.56
C 2.88
D 3.20
(LO 5.1.3) (2 marks)

24.9 What is the current ratio of the company?

A 1.75
B 2.56
C 2.88
D 3.20
(LO 5.1.3) (2 marks)

24.10 Which of the following is a ratio which is used to measure how much a
business owes in relation to its size?
A Asset turnover
B Profit margin
C Gearing
D Return on capital employed
(LO 5.1.2) (2 marks)

24.11 A business operates on a gross profit margin of 331/3%. Gross profit on a

sale was Rs 800,000 and expenses were Rs 680,000.
What is the net profit margin?
A 3.75%
B 5%
C 11.25%
D 22.67%
(LO 5.1.3) (2 marks)

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24.12 A company has the following details extracted from its statement of
financial position:
Rs'000
Inventories 1,900
Receivables 1,000
Bank overdraft 100
Payables 1,000
The industry the company operates in has a current ratio norm of 1.8.
Companies who manage liquidity well in this industry have a current ratio
lower than the norm.
Which of the following statements accurately describes the company's
liquidity position?
A Liquidity appears to be well managed as the bank overdraft is
relatively low
B Liquidity appears to be poorly-controlled as shown by the large
payables balance
C Liquidity appears to be poorly-controlled as shown by the company's
relatively high current ratio
D Liquidity appears to be poorly-controlled as shown by the existence of
a bank overdraft
(LO 5.1.3) (2 marks)

24.13 Why is analysis of financial statements carried out?

A So that the analyst can determine a company's accounting policies
B So that the significance of financial statements can be better
understood through comparisons with historical performance and with
other companies
C To get back to the 'real' underlying figures, without the numbers being
altered by the requirements of accounting standards
D To produce a report that can replace the financial statements, so that
the financial statements no longer need to be looked at
(LO 5.1.1) (2 marks)

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24.14 After proposing a final dividend, K Co has a current ratio of 2.0 and a quick
ratio of 0.8.
If the company now uses its positive cash balance to pay that final dividend,
what will be the effect upon these two ratios?
A Increase current ratio and decrease quick ratio
B Increase current ratio and increase quick ratio
C Decrease current ratio and decrease quick ratio
D Decrease current ratio and increase quick ratio
(LO 5.1.3) (2 marks)

24.15 T Co's current ratio this year is 1.33:1 compared to that of 1.25:1 last year.
Which of the following would be possible explanations?
1 T Co made an unusually large sale immediately prior to the year end.
2 T Co paid its payables earlier than usual out of a bank overdraft.
3 T Co made an unusually large purchase of goods for cash immediately
prior to the year end and these goods remain in inventory.
4 T Co paid its payables earlier than usual out of a positive cash balance.
A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D 1 and 4 only
(LO 5.1.3) (2 marks)

24.16 An electrical store and a cake shop both have the same mark up on cost.
However, the gross profit margin of the electrical store is significantly higher
than that of the cake shop.
Which of the following is a possible reason for this?
A The cake shop has a higher turnover of inventory than the electrical
store.
B The electrical store takes advantage of trade-discounts for bulk buying.
C The cake shop has a higher level of wastage of inventory than the
electrical store.
D The cake shop's revenue is increasing, while that of the electrical store
is decreasing.
(LO 5.1.3) (2 marks)

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24.17 Z has a current ratio of 1.5, a quick ratio of 0.4 and a positive cash balance. If
it purchases inventory on credit, what is the effect on these ratios?
Current ratio Quick ratio
A Decrease Decrease
B Decrease Increase
C Increase Decrease
D Increase Increase
(LO 5.1.3) (2 marks)

24.18 HJ has an asset turnover of 2.0 and an operating profit margin of 10%. The
entity is about to launch a new product which is expected to generate
additional sales of Rs 1.6m and additional profit of Rs 120,000 in its first
year. To manufacture the new product HJ will need to purchase additional
assets of Rs 500,000.
What will be the effect of the new product on the following ratios of HJ?
Operating profit margin Return on capital employed
A Decrease Decrease
B Decrease Increase
C Increase Decrease
D Increase Increase
(LO 5.1.3) (2 marks)

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The following information relates to question 24.19 to 24.22

From the list below, select the terms which should go in the blanks for each of the
following ratios.
Select from:
 Market price per share
 Earnings per share
 Profit before tax
 Profit before interest and tax
 Profit after tax
 Profit after tax and preference dividends
 Interest charges
 Loan stock market value
 Number of shares
 Dividend per share
X
24.19 Interest cover =
X
(LO 5.1.2) (2 marks)

X
24.20 Earnings Per Share =
X

X
24.21 P/E ratio =
X
(LO 5.1.2) (2 marks)

X
24.22 Dividend cover =
X
(LO 5.1.2) (2 marks)

24.23 A company's quick ratio has increased from 0.9:1 at 31 December 20X1 to
1.5:1 at 31 December 20X2. Which of the following events could explain this
increase?
A Improved inventory control
B The refinancing of a long-term loan
C A reduction in payables
D An increase in payables
(LO 5.1.3) (2 marks)

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24.24 Analysis of the statement of financial position of Charon for the year ended
20X9 reveals the following relationships:
Current ratio 2:1
Sales: current assets 5:1
Acid test ratio 1.5:1
If the sales for the year were Rs 30 million, what is the value of inventory
that will appear in the statement of financial position?
A Rs 1.5 million
B Rs 10.5 million
C Rs 3.0 million
D Rs 4.5 million
(LO 5.1.3) (2 marks)

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Answers

Part A: Accounting and the business environment

1.1 B Corporate governance is the system by which companies and other

entities are directed and controlled.

1.2 C Integrity means honesty, and Amila's actions are dishonest with
respect to the train company and his firm.

1.3 B The other options may provide additional guidance on specific issues
or to address local needs.

1.4 A (2) is incorrect – shareholders are only liable for the debts of the
business up to the amount they have invested in shares, whereas sole
proprietors are liable for all of the debts of the business.

1.5 Financial accounting is a technique of recording, summarising and

analysing financial data.

1.6 Businesses of whatever size or nature exist to make a profit.

Partnerships are arrangements between individuals to carry on business in
common with a view to profit.

1.7 Limited Liability status means that the business's debts and the personal
debts of the business's owners (shareholders) are legally separate.

1.8 A sole proprietor is a business owned and run by one individual, perhaps
employing one or two assistants and controlling their work.
Those charged with governance of a company are responsible for the
preparation of the financial statements.

1.9 C Unless a partnership is a limited liability partnership, the partners'

individual exposure to debt is not limited because the partnership is
not a separate legal entity from the partners themselves. Financial
records must be maintained by a partnership, but there is no
requirement to make them publicly available unless the partnership is
a limited liability partnership.

1.10 C All three statements are true.

1.11 C The board of directors are responsible for the preparation of financial
statements. Even though the financial statements may be physically
prepared by the finance department, the board of directors still has
responsibility for them. The auditors are not responsible for the
financial statements; they are responsible for the annual audit and
producing an audit report.

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1.12 B A limited liability company has a separate legal identity to its owners.
Unless the partners have formed a limited liability partnership, the
partners are jointly liable for the debts of the business.
1.13 D 1 and 3 are advantages of trading as a limited liability company.
Publishing annual financial statements and the requirement for an
audit are disadvantages of trading as a limited liability company.
1.14 B A director's main aim should be to create wealth for the shareholders
of the company. The shareholders are the owners of the company and
the directors are managing the affairs of the company on their behalf.
This can lead to a conflict of interest and short-termism where the
directors put their own interests (ie short-term profits and earning
bonuses) ahead of the interests of the shareholders. Every company
should consider its contribution to society; this is known as corporate
social responsibility. However, this is not the main aim of a director.
1.15 Sole proprietors and partnerships are unincorporated entities.
Directors manage a company on behalf of the shareholders.
1.16 Duties and responsibilities of directors are set out in the Companies Act.
Members of the Institute of Chartered Accountants of Sri Lanka are required
to comply with the Code of Ethics issued by the Institute.
1.17 D The business entity concept means that for accounting purposes, a
business is separate from its owner. This applies to the three main
types of entity; sole proprietorships, partnerships and limited liability
companies. However, in a legal context, a limited liability company is
legally a separate entity from its owners, whereas sole proprietorships
and general partnerships are not.
Where the legal form of transaction does not reflect the commercial
reality or substance of the transaction, the transaction should be
accounted for to reflect the commercial substance rather than the legal
form.

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Part B questions: Conceptual framework for financial reporting

2.1 B The elements of financial statements are assets, liabilities and equity in
the statement of financial position and income and expenses in the
statement of profit or loss and other comprehensive income. Profits
and losses are not elements.

2.2 An asset is an economic resource controlled by the entity as a result of past

events.

2.3 A liability is a present obligation of the entity to transfer an economic

resource as a result of past events.

2.4 A statement of profit or loss is a record of income generated and expenses

incurred over a given period.

2.5 C Items 1 and 2 are non-current assets. Only item 3 is a current asset.

3.1 B A sole proprietor does not have any shareholders. The accounts are
unlikely to be of interest to a financial analyst, they are more usually
interested in the accounts of public companies.

3.2 D A, B and C are listed in the Conceptual Framework for Financial

Reporting as part of the objective of financial statements.

3.3 A There are a wide range of users of financial statements, such as

shareholders and the government, who use the information contained
in financial statements to assist their decision making.

3.4 B A director is an internal user of financial statements.

3.5 D Factors such as the value of human capital to a business, and the
impact of the environment, are not reflected in financial statements.
Such limitations can be addressed by preparing supplementary reports
such as integrated reports and sustainability reports which report such
non-financial information.
Another limitation of financial statements is that they may not
necessarily reflect the true value of assets, for example if assets are
measured at historical cost, this does not take into account changes in
price levels over time.
The preparation of financial statements will require estimates and
judgements to be made in certain areas, which can be subject to fraud
in order to present a desired result.

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4.1 D Under the cash basis of accounting, income and expenses are
recognised in the statement of profit or loss when the cash is received
and paid respectively. Applying this basis to the purchase of
equipment, the full expense is recognised in the statement of profit or
loss when the cash is paid. Depreciation is an accounting adjustment
which spreads the expense of plant, property and equipment over their
useful lives, rather than recognising the full expense in the profit or
loss when it is purchased.

4.2 C The accruals concept.

4.3 C Depreciation is an application of the accruals concept.

4.4 C In this way trade receivables are not overstated and accounts can be
compared between periods.

4.5 A Depreciation allocates the cost of an asset to the periods expected to

benefit from its use.

4.6 B Relevance and faithful representation are the two fundamental

qualitative characteristics. Materiality is an aspect of relevance. Going
concern is the underlying assumption under which financial
statements are prepared.

4.7 C The materiality concept.

4.8 D The business entity concept.

4.9 D Comparability.
To maintain comparability, the presentation and classification of items
in the financial statements should be made on a consistent basis. They
should stay the same from one period to the next, unless a change is
required by an SLFRS or unless there is a significant change in the
nature of operations or a review of the accounts indicates a more
appropriate presentation.

4.10 D Relevance and faithful representation.

4.11 D None of these statements are correct.

4.12 C Information has the quality of faithful representation when it is

complete, neutral and free from material error.
4.13 D Need make no adjustments.

4.14 D Fair value is the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market
participants at the measurement date. For a building, the most reliable
measure of its fair value is its market value.

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Part C questions: Accounting systems and functions

Part F questions: Financial reporting standards

5.1 C The trade receivables ledger. This is posted from the sales day book
and cash book.

5.2 C Ledger accounts are posted from books of prime entry.

5.3 A A debit note is sent to a supplier with a return of goods. A debit note is
in effect a request for a credit note.

5.4 B The journal, cash book and sales day book are books of prime entry.

5.5 B Cash purchases are recorded in the cash book. The sales day book lists
invoices sent to customers, not invoices received from suppliers.

5.6 B Purchase invoices are recorded in the purchase day book

5.7 D The amount paid in to replenish petty cash at the beginning of each
period should be the amount of petty cash spending in the previous
period, which is the total of expenditures shown by petty cash
vouchers for the previous period. The amount of petty cash at any time
is the maximum petty cash balance minus the value of the petty cash
vouchers for the period.

5.8 B Correct, invoices are listed on receipt.

A is incorrect, as these are recorded in a memorandum column in the
cash book prior to posting to trade receivables accounts and the
discount allowed account. C is incorrect, trade discounts will be
deducted prior to raising the invoice total. D is also incorrect, invoices,
not orders, are recorded

5.9
Transaction Source document
Reimbursement of employee for Petty cash voucher
expense by cash
Indication of which amounts that are Remittance advice note
owed are being paid

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5.10
To inform the supplier of the Purchase order
quantities required
To inform the customer of the Delivery note
quantity delivered

5.11 C Dr Purchases Rs 450,000

Dr Trade Payables Rs 250,000
Cr Purchase Returns Rs 700,000
The purchase of goods on credit is recorded as Dr Purchases, Cr Trade
payables Rs 450,000. The return of goods which were purchased on
credit is recorded as Dr Trade Payables, Cr Purchase Returns
Rs 700,000, combining both entries gives the answer above.

6.1 C Assets – liabilities = opening capital + profits – drawings. Therefore,

assets – liabilities – opening capital + drawings = profit.

6.2 C A debit records an increase in assets or a decrease in liabilities/equity.

A credit records an increase in liabilities and/or equity. Therefore, only
C is true.

6.3 B The selling price is not relevant to this adjustment.

6.4 C Dr Purchases Rs 400

Dr Trade Payables Rs 250
Cr Cash Rs 650
A payment is a credit to the cash account. The payment to Harun is a
cash purchase and so the double entry is Dr Purchases, Cr Cash.
Remember that the purchase from Jaith has already been recorded as
Dr Purchases, Cr Trade Payables, so the payment of cash to clear the
invoice should now be recorded as Dr Trade Payables, Cr Cash.

6.5 C The accounting equation is Assets = Capital + Liabilities. Rearranged,

this becomes Assets – Liabilities = Capital

6.6 D When cash is received by a business, a debit entry is made in the

cashbook. A receipt of cash decreases an overdraft and increases a
bank balance.

6.7 B An increase in revenue is a credit entry.

6.8 B A credit entry records an increase in income. A debit entry records an

increase in expenses.

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6.9 D All these will result in a decrease in cash and so a reduction in the bank
asset. The receipt of cash from customers will be neutral as bank is
increased and trade receivables decreased by the same amount.

6.10 C A = L + C. Remember that profit = I – E.

6.11 Purchase of goods on credit

Debit Credit
Purchases
Purchases ledger control

6.12 Sale of goods on credit

Debit Credit
Sales ledger control
Sales

6.13 Receipt of money for sale of goods on credit

Debit Credit
Bank
Sales ledger control

6.14 Payment to a credit supplier

Debit Credit
Purchases ledger control
Bank

6.15 D Statement (4) only is correct.

A payable is a person or institution to whom a business owes money.
Statements (1) to (3) are examples of where money is owed to the
business from others, so these are receivables. In the case of (2), if a
company makes a loan or advance to an employee, this creates a
receivable, being the repayment due from the employee.
Statement (4) is an example of where money is owed by the business to
others, so this is a payable.

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6.16 The receivables and payables ledgers contain the personal accounts of
individual customers and suppliers. They do not normally form part of the
double-entry system.

6.17 A A credit balance in the books of X means that X owes Y this amount ie Y
is a payable of X.

6.18 D A liability or revenue.

7.1 A Items 2, 3 and 4 preserve double entry and so would not show up in a
trial balance.

7.2 D Balance carried down from previous period shows debits exceed
credits and so it is a debit balance brought down for the new period.

7.3 B Assets are represented by debit balances.

7.4 A The receivables allowance is deducted from trade receivables and the
net figure of Rs 71,192 (Rs 75,943 – Rs 4,751) is reported in the
statement of financial position.

7.5 C The two balances must be separately disclosed.

7.6 D The debits are as follows:

Rs'000
Opening inventory 9,649
Purchases 142,958
Expenses 34,835
Non-current assets 63,960
Receivables 31,746
Cash at bank 1,783
284,931

7.7 A The general ledger.

8.1 B
Cost Balance in
Date Units Unit cost of issues inventory
Rs Rs
1 March 50 Rs 40 2,000
17 March 50 Rs 50 2,500
100 Rs 45* 4,500
31 March – 60 Rs 45 2,700
40 Rs 45 1,800
* 4,500 / 100

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8.2 C If closing inventory is understated, cost of sales will be overstated. Next

year' opening inventory will be understated and cost of sales will be
understated.

8.3 The cost of goods sold is calculated as: Opening inventory + purchases –
closing inventory.

8.4 The value of inventories is calculated at the lower of cost and net realisable
value.

8.5 C Carriage outwards and storage are distribution costs.

8.6 A
Rs'000
Original value 28,470
Coats – Cost 400  Rs 8,000 (3,200)
– NRV (Rs 7,500  95%)  400 2,850
28,120
At 31 January 20X3 the skirts were correctly valued at costs incurred to
date of Rs 2,000 per skirt which was lower than the NRV of Rs 2,200.
Therefore, no adjustment required.

8.7 A
Rs
50 @ Rs 190 9,500
500 @ Rs 220 110,000
300 @ Rs 230 69,000
188,500

8.8 C
Rs
Inventory count, 4 January 20X2 527,300
Purchases since end of year (7,900)
Cost of sales since end of year (15,000  60%) 9,000
Purchase returns since end of year 800
Inventory at 31 December 20X1 529,200

9.1 C Cost less 4 months depreciation = 25,500,000 – 2,125,000 =

Rs 23,375,000

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9.2 A Annual depreciation was initially Rs 1,000,000/50 years = Rs 20,000.

After revaluation, annual depreciation is Rs 1,200,000/48 years =
Rs 25,000.
Rs
Valuation, 1 January 20X5 1,200,000
Accumulated depreciation to
30 June 20X5 (6/12  Rs 25,000) 12,500
Carrying amount at 30 June 20X5 1,187,500
Sale/disposal price 1,195,000
Profit on disposal in statement of
profit or loss 7,500
Note: The balance on the revaluation surplus at 30 June will be
transferred to realised profits (retained profits reserve), but this will
not be reported as profit in the statement of profit or loss.

9.3 A Rs 900,000. (Rs 36,000,000/10)  3/12

9.4 D
Rs'000
Sales proceeds 4,000
Carrying value (balancing figure) (5,250)
Loss on disposal (1,250)

Balance b/d 67,460

Less: Carrying value of non-current asset sold (5,250)
Corrected balance on the asset register 62,210

9.5 D Improvements are capital expenditure, repairs and maintenance are

not.

9.6 B Items A, C and D are all capital items, reflected in the statement of
financial position.

9.7 C An illuminated sign advertising the business name will provide long-
term benefits for the business and is therefore a non-current asset, ie
capital expenditure. A replacement for a broken window is a repair, so
it is revenue expenditure. Repainting the restaurant is a repair and
renewal expense so it would be likely to be treated as revenue
expenditure. Cleaning of the kitchen floors is a maintenance cost and
therefore is revenue expenditure.

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9.8 A At 1.1.X3, the carrying amount of the asset was Rs 36,000 (depreciation
charge in X1: 100,000  40% = Rs 40,000, X2: (100,000 – 40,000) 
40% = Rs 24,000).
The depreciation charge is calculated as the carrying amount divided
by the remaining useful life: Rs 36,000/3 years = Rs 12,000 per year.
The carrying amount at 31.12.X3 is therefore Rs 36,000 – Rs 12,000 =
Rs 24,000.

9.9 A
Rs'000
Plant held all year (200,000,000 – 40,000,000)  20% 32,000
Disposal 40,000,000  20%  9/12 6,000
Additions 50,000,000  20%  6/12 5,000
43,000

9.10 C
Rs
Cost of machine 800,000
Installation 50,000
Testing 10,000
860,000
Staff training cannot be capitalised as part of the cost of the asset.

9.11 C Dr Non-current assets – cost, Cr Payables

9.12 A Using T accounts:

PLANT AND MACHINERY ACCOUNT
Rs Rs
Balance b/d 100,000 Plant and machinery
disposals a/c 100,000
PLANT AND MACHINERY ACCUMULATED DEPRECIATION
Rs Rs
Plant and machinery Balance b/d 35,000
disposals 35,000
PLANT AND MACHINERY DISPOSALS
Rs Rs
Plant and machinery Accumulated
account 100,000 depreciation 35,000
Cash 50,000
SPL (loss on sale) 15,000
100,000 100,000

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9.13 B LKAS 16 does not require the purchase date of each asset to be
disclosed. The carrying amount of an asset = cost/valuation –
accumulated depreciation. The useful life of an asset is determined
upon acquisition and should be reviewed at least annually and
depreciation rates adjusted for the current and future periods if
expectations vary significantly from the original estimates. When an
asset is revalued, LKAS 16 permits entities to make a transfer from the
revaluation surplus to retained earnings of the excess depreciation
arising due to the revaluation.
9.14 C The disclosure requirements in LKAS 16 are comprehensive,
particularly in relation to revalued assets.

9.15 D The reconciliation should show the movement on the non-current asset
balance and include the following:
 Additions
 Disposals
 Increases/decreases from revaluations
 Reductions in carrying amount
 Depreciation
 Any other movements.

10.1 Accruals are expenses which relate to an accounting period but have not yet
been paid for. They are shown in the statement of financial position as a
liability.

10.2 Prepayments are expenses which have already been paid but relate to a
future accounting period. They are shown in the statement of financial
position as an asset.

10.3 C ELECTRICITY ACCOUNT

Rs'000 Rs'000
Balance b/fwd 300
20X0:
1 August Paid bank 600
1 November Paid bank 720
20X1:
1 February Paid bank 900
30 June Paid bank 840
30 June Accrual c/d SPL 3,320
Rs 840,000  2/3 560
3,620 3,620

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10.4 B
Rs
February to March 20X2 (2,250,000  2/3) 1,500,000
April to June 2,250,000
July to September 2,250,000
October to December 3,000,000
January 20X3 (3,000,000  1/3) 1,000,000
Rent expense for the year 10,000,000
Accrual (for January 20X3) = Rs 3,000,000  1/3 = Rs 1,000,000

10.5 B
Rs'000
Original loss (1,486)
Accrual (1,625)
Prepayment 834
Revised loss (2,277)

10.6 C
Rs
August 20X3 to September 20X3 (60,000  2/12) 10,000
October 20X3 to July 20X4 (72,000  10/12) 60,000
70,000

10.7 C Prepayment b/f Rs 900,000 (9/12  Rs 1,200,000) + Rs 1,600,000 –

prepayment c/f Rs 1,200,000 (9/12  Rs 1,600,000).

10.8 C
Rs'000
Receipt
1 October 20X1 (Rs 7,500  1/3) 2,500
30 December 20X1 7,500
4 April 20X2 9,000
1 July 20X2 9,000
1 October 20X2 (9,000  2/3) 6,000
Credit to statement of profit or loss 34,000

The rent received on 1 October 20X2 includes one month relating to

the next financial year. Therefore one month, or Rs 3,000 (9,000 x
1/3), would be recorded as rent received in advance on the statement
of financial position.

11.1 C Rs 146,000,000 + (Rs 218,000,000 – Rs 83,000,000) = Rs 281,000,000

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11.2 D
SPL charge
Rs'000 Rs'000
Receivables allowance at 31.12.X1
(15% of Rs 20,000,000) 1,000
Receivables allowance at 1.1.X1 3,000
Decrease in allowance 2,000
Irrecoverable debts written off (1,000)
Debt recovered 800
Total credit to statement of profit or loss 1,800

11.3 A When a business first establishes an allowance for receivables the full
amount of the allowance should be debited to irrecoverable debts
(statement of profit or loss) and credited to allowance for receivables
(statement of financial position).

11.4 A
Rs'000 Rs'000
Amount written off 30,000
Allowance for receivables at 31 December 20X3
5%  Rs (620,000,000 – 30,000,000) 29,500
Allowance for receivables at 1 January 20X3 35,000
Reduction in allowance for receivables (5,500)
Combined expense 24,500

11.5 D
Closing allowance required (400,000 – 38,000)  10% 36,200
Opening allowance 50,000
Decrease in allowance (13,800)
Irrecoverable debts written off 38,000
Statement of profit or loss charge 24,200

11.6 B Because the debt has been previously written off, there is no receivable
for which to offset the cash, therefore the double entry is Dr Cash, Cr
Irrecoverable debts expense.

12.1 C Contingent assets should not be recognised in the financial statements.

However, they should be disclosed if it is probable that the economic
benefits associated with the asset will flow to the entity. If it becomes
probable that a transfer of economic benefits associated with a
contingent liability will happen, then the contingent liability is no
longer contingent and a liability should be recognised in the financial
statements.

12.2 C The statement is the definition of a contingent liability.

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12.3 A A provision is required for the warranties sold, which should be

calculated at 5% as this is the value the company expects to be claimed.
2 is a contingent liability because it is possible that the company will
have to pay out, if it was probable, then a provision would be required.
If it was remote, no disclosure would be needed.

12.4 A All three statements are correct.

12.5 C The provision should be increased by Rs 1,086,000 (Rs 7,634,000 –

Rs 6,548,000), the double entry is therefore Dr Expenses, Cr Provision.

12.6 D LKAS 10 requires disclosure of the nature of material non-adjusting

events after the reporting period and either an estimate of the financial
effect of the event or a statement that a reasonable estimate cannot be
made.

12.7 B These events are adjusting if discovered between the reporting date
and the date the financial statements are authorised for issue as they
provide evidence about conditions that existed at the reporting date:
insolvency of a customer with a balance outstanding at the end of the
reporting period, discovery of fraud or error which shows that the
financial statements were incorrect, sale of inventory which gives
evidence about its value at the end of the reporting period.

13.1 C Statements 2 and 3 are incorrect. A bounced cheque is credited to the

cash book and bank errors do not go through the cash book at all.

13.2 C To identify and account for the differences between the general ledger
bank account and the bank statement.

13.3 B
Rs
Overdraft (3,860)
Outstanding cheques (9,160)
(13,020)
Outstanding lodgements 16,690
Cash at bank 3,670

13.4 B
Rs'000 Rs'000
Balance per bank statement 800
Unpresented cheque 80
Dishonoured cheque * –
Corrected balance 880
880 880
* This has already been deducted from the balance on the bank
statement.

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13.5 B
Rs'000
Cash book balance 2,490
Adjustment re charges (50)
Adjustment re dishonoured cheque (140)
2,300

13.6 B
Rs'000 Rs'000
Bank statement balance b/d 13,400
Dishonoured cheque 300
Bank charges not in cash book 50
Unpresented cheques 2,400
Uncleared bankings 1,000
Adjustment re error (2  195,000) 390
Cash book balance c/d 11,960
14,750 14,750
Cash book balance b/d 11,960
Alternative approach:
Rs'000 Rs'000
Cash book balance b/d 11,960
Dishonoured cheque 300
Bank charges not in cash book 50
Unpresented cheques 2,400
Uncleared bankings 1,000
Adjustment re error (2  195,000) 390
Bank statement balance c/d 13,400
14,750 14,750
Bank statement balance b/d 13,400

13.7 A
Rs'000 Rs'000
Cash book (the cash book has a
credit balance) 1,240
Unpresented cheques 450
Uncleared deposit 140
Bank charges 75
Bank overdraft 1,005
1,455 1,455

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13.8 D Provided that the cash receipts have been correctly posted to the cash
book, then the fact that they have incorrectly been posted to payables
instead of cash sales or receivables will not affect the bank
reconciliation.

14.1 D TRADE PAYABLES CONTROL ACCOUNT

Rs'000 Rs'000
Bank 542,300 Balance b/d 142,600
Discounts received 13,200  Purchases 578,200
Returns 27,500
Balance c/d 137,800
720,800 720,800

14.2 B A receivables ledger control account does not ensure the trial balance
balances.

14.3 C The reconciling items are (3) and (6).

The supplier statement reconciliation would read as follows with items
(3) and (6) as reconciling items. All the other transactions appear both
in the ledger and the supplier statement.
Balance per supplier's statement 31 March 20X1 520
Less reconciling items:
Payment (30 March) not on statement (3) (385)
Invoice (#533) on statement, not on payables (35)
ledger (6)
Balance per payables ledger 31 March 20X1 100
Invoice #533 would then need to be investigated with the supplier to
ensure it is not an error on their part. Once it is established it is a valid
invoice, the ledger should be corrected to record this invoice.

14.4 D
Control List of
account balances
Rs Rs
Balance/total 68,566 68,538
Credit balance omitted – 127
Undercasting of day book 99 –
68,665 68,665

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14.5 C The invoice offers a settlement discount of 5% of the invoiced amount

(Rs 5,000) for early payment. Although it is uncertain if the customer
will take up the discount, you expect that they will not, therefore the
full sales amount must be recognised as revenue when recording the
sale, ie Rs 100,000.
As the customer paid the discounted amount of Rs 95,000, this amount
is debited to bank, however this is against a receivable of Rs 100,000,
so the difference of Rs 5,000 is debited to sales, to account for the fact
that revenue has been reduced by the discount.
A, represents a situation where the customer was expected to take up
the discount at the time of the sale (and so revenue was recorded at the
discounted invoiced amount), and took up the discount when they
paid.
In B, the entry for the sale is correct. However, the entry for the
payment is incorrect, as the discount (which was not accounted for at
the time of the sale) has still not been accounted for.
In D, the entry for the payment is correct. However, the entry for the
sale is incorrect as it records the sale at the discounted amount, even
though the customer was not expected to take the discount at the time
of the sale.

14.6 A
Debit Credit Rs'000
Sales price 800
Less: 20% trade discount 120
Less: 5% settlement discount 32
Sale PQ Co Sales 608

Cash payment Bank PQ Co 608

608
Goods are sold with a trade discount of 20% (Rs 120,000) so this is
deducted from the sales price. Therefore Rs 640,000 (Rs 800,000 –
Rs 120,000) is invoiced to the customer.
The invoice also offers a settlement discount of 5% of the invoiced
amount (Rs 32,000) for early payment. Although it is uncertain if the
customer will take advantage of this, you expect that they will, and so
the settlement discount must be reflected in the amount recognised as
revenue when recording the sale. Therefore Rs 608,000 (Rs 640,000 –
Rs 32,000) is recorded in sales, with a corresponding amount for trade
receivables.

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Since the customer did pay the discounted amount of Rs 608,000 this
amount is debited to bank and credited to the trade receivables.
B represents a situation where the customer was not expected to take
up the discount at the time of the sale (and so revenue was recorded at
the full invoiced amount), and did not take up the discount when they
paid.
C represents a situation where the customer was expected to take up
the discount at the time of the sale (and so revenue was recorded at the
discounted invoiced amount), but did not take up the discount when
they paid (and so the discount not taken was credited to revenue).
D represents a situation where the customer was not expected to take
up the discount at the time of the sale (and so revenue was recorded at
the full invoiced amount), but did take up the discount when they paid
(and so the discount taken was debited to revenue).

14.7 B The other options would make the supplier's statement Rs 150,000
higher.

14.8 A
Rs
Opening balance 34,500
Credit purchases 78,400
Discounts (1,200)
Payments (68,900)
Purchase returns (4,700)
38,100

14.9 A Rs 8,500,000 – (2  Rs 400,000) = Rs 7,700,000.

15.1 A PAYABLES LEDGER CONTROL ACCOUNT

Rs Rs
Purchases returns 41,200 Bal b/f 318,600
Cash paid 1,364,300 Purchases 1,268,600
Discounts received 8,200 Refunds 2,700
Contras 48,000
Bal c/f 128,200
1,589,900 1,589,900

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15.2 D The question refers to the figure to be shown in the statement of

financial position.
Rs'000 Rs'000
Balance per cash book 5,675
Reversal – Standing order entered twice 125
Adjustment – Dishonoured cheque (450,000  2) 900
entered in error as a debit
Bank overdraft 6,450
6,575 6,575

15.3 C
Rs
Revenue Rs (1,000,000 + 10,000 – 20,000) 990,000
Cost of sales Rs (800,000 – 20,000) 780,000
Gross profit 210,000
210,000
Gross profit margin =  100 = 21.2%
990,000

15.4 D Errors of principle, such as recording a capital expenditure transaction

as revenue expenditure, would not be revealed by a trial balance
because it would not create an inequality between total debits and total
credits. Transposition errors are errors where figures (digits) are
written in the wrong order in either a credit or a debit entry. This
would create an imbalance between credits and debts, and so the error
would be indicated by extracting a trial balance.

15.5 A Both errors will affect cost of sales and therefore gross profit, making a
net effect of Rs 40,000. Profit for the year will be further reduced by Rs
10,000 missing from stationery inventories.

15.6 D A and B will only affect the personal (or memorandum) ledgers, C will
cause an incorrect double entry.

15.7 B This results in a debit to the suspense account therefore reducing the
balance.
Option A results in a credit to the suspense account and options C and
D do not affect the suspense account at all.

15.8 D Remember these are draft financial statements. No suspense account

should remain in the final version.

15.9 C An error of principle.

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15.10 C Credit sales = Rs 80,000,000 – Rs 10,000,000 + Rs 9,000,000 =

Rs 79,000,000

15.11 D Debits will exceed credits by 2  Rs 48,000 = Rs 96,000.

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Part D: Financial reporting

Part F: Financial reporting standards

16.1 D Opening capital + new capital + profit – drawings = Closing capital

101,700 + 8,000 +72,500 – 2,200 = 180,000

16.2 A Opening capital + new capital + profit – drawings = Closing capital

128,000 + 50,000 + P – 48,000 = 184,000
P = 184,000 + 48,000 – 50,000 – 128,000
P = Rs 54,000

16.3 C
Debit Credit
Rs'000 Rs'000
Non-current assets 85,000
Receivables 7,000
Trade payables 3,000
Bank loan 15,000
Allowance for depreciation, non-current assets 15,000
Inventory 4,000
Accruals 1,000
Prepayments 2,000
Bank overdraft 2,000
Capital account 62,000
98,000 98,000

16.4 B
Rs'000
Opening capital 10,000
Capital introduced 4,000
Drawings (8,000)
Loss (bal fig) (1,500)
Closing capital 4,500

16.5 D In the other three cases only statement of financial position accounts
are affected and there are equal and opposite debits and credits.

16.6 D Correct. A margin of 20% on sales equates to a gross profit of 25%

(mark up) on cost of sales. So total margin = 20%  150,000 = 30,000.
Cost of sales is 150,000 – 30,000 = 120,000. Purchases are 120,000 +
15,000 – 10,000 = 125,000.
A is incorrect, you have reversed the opening and closing inventory
figures.

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B is incorrect, you have ignored the mark up entirely.

C is also incorrect, you have applied the mark up % to sales.

16.7 C
Ordinary Private
Total sales drawings
Rs'000 Rs'000 Rs'000
Cost of sales 144,000 142,200 1,800
Mark-up:
12% on cost 216 – 216
20% on sales (= 25% on cost) 35,550 35,550
Sales 179,766 177,750 2,016

16.8 B
Rs'000
Net assets 31/12/X1
Rs (2,000 + 500 + 300 – 50 + 200)k 2,950
Net assets 31/12/X2
Rs (2,500 + 100 + 50 – 600 – 100 + 250)k 2,200
Decrease in net assets 750
From the accounting equation
Change in net assets = Capital + profit – drawings
–750k = Profit – drawings (Rs 1,000k)
–750k + 1,000k = Profit
250k = Profit

16.9 B Drawings reduce capital, so they must be deducted.

16.10 A We need to calculate credit sales first in order to calculate cash sales.
TRADE RECEIVABLES
Rs Rs
Bal b/f 2,100 Bank 24,290
 Credit sales 23,065 Bal c/f 875
25,165 25,165
CASH

Rs Rs
Balance b/f 240 Expenses 1,850
Cash sales Bank 9,300
(41,250 – 23,065) 18,185  Theft 7,275
18,425 18,425

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16.11 A
Rs'000 Rs'000
Raw materials
Opening inventory 10,000
Purchases 50,000
Closing inventory 11,000
Cost of raw materials 49,000
Direct wages 40,000
Prime cost 89,000
Production overheads 60,000
149,000
Increase in work in progress
4,000,000 – 2,000,000 (2,000)
Cost of goods manufactured 147,000

16.12 A Prime cost is equal to the direct materials plus direct labour.

16.13 B
Rs'000
Purchase of raw materials 112,000
Decrease in inventory of raw materials 8,000
Carriage inwards 3,000
Raw materials used 123,000
Direct wages 42,000
Prime cost 165,000
Production overheads 27,000
Increase in WIP (10,000)
Factory cost of finished goods 182,000

16.14 C
Rs'000
Prime cost 56,000
Factory overheads 4,500
Opening WIP 6,200
Factory cost of goods completed (57,000)
Therefore closing WIP is 9,700

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17.1 B
Rs
Opening inventory 386,200
Purchases 989,000
Closing inventory (422,700)
Cost of sales 952,500
952,500  100/60 = 1,587,500

17.2 A Closing net assets plus drawings minus capital introduced minus
opening net assets.

17.3 B Cost of sales = Rs 114,000,000

Therefore sales should be = Rs 114,000,000  100/60 = Rs 190,000,000
Theft = Rs 190,000,000 – 181,600,000 = Rs 8,400,000

17.4 B Rs 937,050
PURCHASES CONTROL ACCOUNT
Rs Rs
Payments to suppliers 888,400 Opening balance 130,400
Discounts received 11,200 Goods taken 1,000
Closing balance 171,250 Refunds received 2,400
Purchases (bal fig) 937,050
1,070,850 1,070,850

17.5 C Opening net assets + Profit + Capital introduced – Drawings = Closing

net assets
210,000,000 + Profit + 100,000,000 – 48,000,000 = 400,000,000
Profit = Rs 138,000,000

17.6 A Sales = 381,600 + 6,800 + 112,900 + 7,200 + 9,400 = Rs 517,900

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17.7 A
Rs
Sales (100%) 650,000
Cost of sales (70%) 455,000
Gross profit (30%) 195,000
Opening inventory 380,000
Purchases 480,000
860,000
Closing inventory (bal. fig.) (405,000)
Cost of sales 455,000
Calculated inventory 405,000
Actual inventory 220,000
Lost in fire 185,000

18.1 B Interest on partners' capital is an appropriation of profit (debit

appropriation account). Since partners have earned the money by their
investment in the business, their current accounts should be credited
with it. (Option D would be theoretically possible, but most firms
maintain current accounts separately from capital accounts in order to
record such items.)

18.2 A The petrol bills have been debited to motor vehicle expenses. This is
incorrect and should be revised (so credit motor vehicle expenses).
Because they are private expenses of the partner they should be
debited to his drawings account.

18.3 D Interest payable by partners increases the amounts of profits available

for appropriation (credit appropriation account). It must be charged
against the partners (debit partners' current accounts).

18.4 B ((Rs 30,709,000 – Rs 14,000,000)  4/7)

18.5 A (Rs 24,800,000 + Rs 6,500,000 – Rs 1,800,000 + Rs 12,750,000 –

Rs 18,000,000)

18.6 A When Jaith joins the partnership, the goodwill needs to be debited to
the capital accounts in the new profit sharing ratio of 1:1:1. Therefore,
a debit of Rs 16,667 (50,000/3) needs to be made, hence this is the
amount that Jaith will have to contribute so that his opening capital
balance is nil.

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18.7 B
S T U
Rs'000 Rs'000 Rs'000
Initial capital 120,000 120,000
Share of goodwill 45,000 45,000
Capital introduced 80,000
165,000 165,000 80,000
Eliminate goodwill (30,000) (30,000) (30,000)
Adjusted capital 135,000 135,000 50,000

18.8 C
Total
Rs'000
Net profit 108,255
Salary (19,000)
Interest on capital (19,500)
Interest on drawings 5,400
Residual profit 75,155

18.9 C This is the best definition of a partnership.

18.10 C It is not necessary for the partners to share the profits equally. There is
no reason why a new partner cannot have previously worked as an
employee for the business.

18.11 C Partners' salaries are an appropriation of profit, not an expense.

19.1 A company can increase its stated capital by means of a rights issue or a
bonus issue of shares.

19.2 A A rights issue will increase cash and therefore assets. Retained
earnings remain the same and the stated capital account will be
increased.

19.3 D A bonus issue does not raise any funds, instead other reserves are
capitalised and reclassified as stated capital. A rights issue is an issue of
shares for cash, the right to buy the shares are initially offered to
existing shareholders. If the existing shareholders do not take up their
right to buy the shares, then their shareholding will be diluted.

19.4 C
Rs'000
Debit cash 1,100,000
Credit stated capital 1,100,000

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19.5 D Dividends are shown in the SOCIE, not the statement of profit or loss
and other comprehensive income. Also, dividends declared after the
end of the reporting period are disclosed by way of note to the financial
statements.

19.6 D (0.20 + 0.30)  1,000,000. The final ordinary dividend is declared

before the year end and so is accrued for. The preference dividend is
classified as a finance cost and would appear in the statement of profit
or loss. It would be part of the 'profit for the year' figures in the SOCIE
rather than appearing in 'dividends paid'.

20.1 C The loss on sale of the non-current assets will have been recognised in
the statement of profit or loss and other comprehensive income.
Dividends proposed after the year end are disclosed in the notes, they
are not recognised in the accounts.

20.2 D Debentures are a non-current liability.

20.3 D The revaluation surplus is part of equity. Dividends paid on

redeemable preference shares are treated like interest paid on loans,
and are therefore accrued for as finance costs in the financial
statements.

20.4 B
Rs'000
Receivables and prepayments
Insurance 9,000,000  8/12 prepayment 6,000
Loan (receivable) 12,000
Interest due 12,000,000  2% (receivable) 240
Rent due (receivable) 4,000
22,240

20.5 D
Rs'000
Profit before tax 36,000
Dividend (21,000)
Added to retained earnings 15,000

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21.1 C Rs 120,000,000
Rs'000
Sale proceeds (balancing figure) 120,000
Carrying amount (see below) 80,000
Profit on sale 40,000
Carrying amount at 31 December 20X1
(250,000 – 50,000)k 200,000
Additions 35,000
235,000
Carrying amount of disposals (balancing figure) (80,000)
Depreciation (15,000)
Carrying amount at 31 December 20X2
(185,000 – 45,000)k 140,000

21.2 B Correct (Rs 1,200,000 – 100,000)  Rs 50,000.

A is incorrect, you have added depreciation which is reported under
'operating cash flows'.
C is incorrect, (Rs 1,200,000 – 100,000) + (Rs 500,000) = Rs 1,100,000
outflow but you have ignored receipts and also included the
revaluation. Revaluations have no impact on cash flows.
D is also incorrect, you have included the non-current asset payable as
a cash flow.

21.3 D
Plant and Motor
machinery vehicles
Rs'000 Rs'000
Increase in cost (from non-current asset note) 1,100 2,100
Sold asset cost 2,000
Total cost of assets acquired 3,100 + 2,100
= 5,200

21.4 A The reduction in the overdraft is an increase in cash of Rs 4,000,000.

The reduction in short term investments (of Rs 10,000,000) would be
included in investing activities unless the investments qualify as cash
equivalents, which is not normally the case.

21.5 B and D

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21.6 B
Cash flows from operating activities
Rs'000
Cash received from customers Rs (400 + 33,400 – 900)k 32,900
Cash paid to suppliers Rs (1,000 + 18,500 – 2,550)k (16,950)
Cash paid to employees Rs (1,500 + 9,500 – 750)k (10,250)
Interest paid (2,100)
Interest received 175
Net cash flow from operating activities 3,775

21.7 D
Rs'000
Carrying amount of assets at beginning of the year 462,000
Increase in revaluation surplus during the year 50,000
Book value of assets disposed of (110 – 65)m (45,000)
Depreciation charge for the year (38,000)
429,000
Carrying amount of assets at end of the year 633,000
Purchases of property, plant and equipment during the
year 204,000

21.8 A The net cash flows from operating activities will be the same using the
two methods.

21.9 D
Rs
Add: depreciation charge 980,000
Less: profit on sale of assets (40,000)
Less: increase in inventories (130,000)
Add: decrease in receivables 100,000
Add: increase in payables 80,000
Addition to operating profit 990,000

21.10 Operating activities are the principal revenue-producing activities of

the enterprise and other activities that are not investing or financing
activities.
Investing activities are the acquisition and disposal of non-current
assets and other investments not included in cash equivalents.

22.1 B According to LKAS 8, a change in accounting policy should be made

only if:
(a) The change is required by a LKAS/SLFRS; or
(b) The change will result in the financial statements, providing more
reliable and relevant information.

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22.2 Any 2 from:

• Measurement of inventory using First-In-First-Out basis
• Measurement of non-current assets at historical cost
• Accruals basis of accounting

22.3 According to LKAS 8, accounting policies are the specific principles, bases,
conventions, rules and practices adopted by an entity in preparing and
presenting financial statements.

22.4 A Due to the value of the error in relation to the size of profits of the
company, the effect of the error is unlikely to be material and therefore
the error can be corrected in the current period. If it was material, an
adjustment would have to be made prospectively, ie a prior period
adjustment.
Note that materiality of an item is not necessarily determined by size,
but also by its nature.

22.5 A A change in useful life is a change in estimate and therefore the change
can be applied prospectively, ie in current and future periods.

22.6 A The under provision for the previous year of Rs 2,500,000 plus the
provision for the current year of Rs 20,000,000 gives a charge to the
SPL of Rs 22,500,000.

22.7 Current tax is the amount of income taxes payable (recoverable) in respect
of the taxable profits (tax loss) for a period.

22.8 • Long service awards

• Deferred remuneration

22.9 • Defined contribution plan

• Defined benefit plan

22.10 In accordance with LKAS 19 Employee Benefits, employee benefits are all
forms of consideration given by an entity in exchange for service rendered
by employees or for the termination of employment.

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22.11

Defined Defined
contribution only benefit only Both
Contributions are fixed ✓
Pay-out from plan is ✓
fixed

Under a defined contribution plan the employer agrees to pay a fixed amount
of contributions to the plan, and has no further liability. The contributions
are invested and the pay-out of the plan upon retirement is dependent on
the performance of the investments.
Defined benefit plans pay a fixed pay-out upon retirement; the defined
benefit. Contributions are calculated based on the investments expected to
return the amount of the defined benefit. If the performance of the
investments is not sufficient to return this amount, the employer is required
to make additional contributions to make up the shortfall.

22.12

Defined Defined
contribution only benefit only Both
Employer pays ✓
contributions into plan
Employee can pay ✓
contributions into plan

Employers are required to make contributions to both plans. Employees can

also make contributions.

22.13 A contract is, or contains, a lease if it conveys the right to control the use of
an identified asset for a period of time in exchange for consideration.

22.14 TRUE
This is a lease. The contract contains a lease for an identifiable asset, the 10
buses which are explicitly specified and which Mountview Co has the right to
use for five years. Mountview Co can control the use of the buses for the
lease term. Parkbus Co does not have the right to substitute the buses except
for service or repair.

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22.15 A, B and C are indicators that would suggest that the arrangement is a lease.
Option D points to an arrangement other than a lease.

22.16 B A is the answer obtained if the lease payment had been made in arrears,
rather than in advance each year. C is the answer obtained if the interest
for each year had been incorrectly calculated as 6% of Rs 3.3 million. D
is the liability at 31 December 20X6.
Rs'000
PVMLPs 3,300
Payment (700)
2,600
Interest 6% 156
Balance 31.12.X6 2,756
Payment (700)
2,056
Interest 6% 123
Balance 31.12.X7 2,179

23.1 A
Annual memberships 730k-280k Rs 450,000
Five-year memberships 800,000/5 Rs 160,000
Life memberships 20  70,000/10 Rs 140,000
Total Rs 750,000

23.2 C As the question asks about the impact as at 31 December 20X4, this is
before any of the income has been recognised for 20X5:
Annual memberships for 20X5 (730k-280k) Rs 450,000
Five-year memberships Rs 800,000
Life memberships 20  70,000 Rs 1,400,000
Total Rs 2,650,000

23.3 A Correct, the debit balance represents a deficit for the year.
B is incorrect, as the debit balance represents a surplus of expenditure
over income not an asset.
C is incorrect, surpluses would be added, deficits are deducted.
D is also incorrect, Incorrect, the debit balance is not an asset.

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23.4 A Correct.
SUBSCRIPTIONS A/C
Rs'000 Rs'000
Arrears b/f 700 Prepaid b/f 1,500
I and E a/c (balance) 13,000 Bank 14,200
Prepaid c/f 3,200 Arrears c/f 1,200
16,900 16,900
B is incorrect, this is the amount of cash received and the receivables
and prepayments have been ignored.
C is incorrect, you have transposed the opening balances.
D is also incorrect, you have transposed the closing balances.

23.5 C It is similar to a statement of profit or loss and based on the accruals

concept.

23.6 B Both are prepared for not-for-profit organisations.

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Part E Financial statements analysis

24.1 B This is the ratio of current assets to current liabilities. C is wrong as the
five-year bank loan would not normally be included with current
liabilities. A is the quick ratio (excludes inventory).

24.2 B The company does not carry any inventory.

24.3 A If there has been a large credit sale near the end of the financial year,
the amount owed will be included within receivables at the year end
and trade receivables may be unusually high. If so, the average time for
receivables to pay may be distorted, because year-end receivables are
used to calculate the turnover ratio.
A large volume of sales in the final quarter of every year may explain
why the measurement of the average collection period is long every
year, but not why the collection period should be unusually long
compared with the previous year.
Comparatively low sales in the final quarter would be more likely to
result in a shorter-than-normal measurement of the average collection
period.

24.4 D Understatement of the December 20X1 closing inventory will lead to

understatement of December 20X2 opening inventory and therefore
understatement of cost of sales.

24.5 A Profit will be an addition to owner's capital.

24.6 D Purchases = Rs (32,500,000 – 6,000,000 + 3,800,000)

= Rs 30,300,000
4,750,000
 Accounts payable payment period =  365 = 57 days
30,300,000

24.7 A Gearing =
Total long term debt 75,000
= = 13%
Total long term debt + share holders equity 75,000+500,000

Current assets – Inventory 205,000 – 65,000

24.8 A Quick ratio = = = 1.75
Current liabilities 80,000

Current assets 205,000

24.9 B Current ratio = = = 2.56
Current liabilities 80,000

24.10 C The gearing ratio is used to assess how much the company owes in
relation to its size.

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24.11 B
% Rs'000
Sales 100 2,400
Cost of sales 66 2/3 1,600
Gross profit 33 1/3 800
Expenses 28 1/3 680
Net profit 5 120

24.12 C Current ratio is 2,900 : 1,100 = 2.6: 1 ie high compared to the industry
norm.

24.13 B Analysis of financial statements is carried out so that the significance of

the financial statements can be better understood. Comparisons
through time and with other companies help to show how well the
company is doing.

24.14 C The correct answer is decrease current ratio and decrease quick ratio.
Proposed dividends are not accrued for, so the only impact on the
financial statements is to decrease cash.

24.15 D Option 3, goods purchased for cash is incorrect as current assets

remain the same. Payables paid out of an overdraft is incorrect as
current liabilities remain the same.

24.16 C Wastage of inventory means that cost of sales is high relative to

revenue.

24.17 A Using example values of Rs 1,000,000 for current liabilities before the
purchase, this gives a value of Rs (1,000,000  1.5) 1,500,000 for
current assets, and Rs (1,000,000  0.4) 400,000 for current assets less
inventory. Suppose the entity purchases inventory worth Rs 300,000:
Current ratio Quick ratio
1,500 400
Before = 1.5 = 0.4
1,000 1,000
1,800 400
After = 1.4 = 0.3
1,300 1,300

24.18 B Calculate the ratios relating to the new product:

120
Operating profit margin: = 7.5% (less than existing margin of 10%)
1, 600
120
ROCE: = 24% (greater than existing ROCE of 20%)
500
Existing ROCE is 10%  2 = 20%.

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Profit before interest and tax

24.19 Interest cover =
Interest charges

Profit after tax and preference dividends

24.20 Earnings Per Share =
Number of shares

Market price per share

24.21 P/E ratio =
Earnings per share

Earnings per share

24.22 Dividend cover =
Dividend per share

24.23 C Quick ratio = current assets excluding inventories / current liabilities.

24.24 A Sales: current assets = 5:1

Therefore, current assets (Rs 30m/5) = Rs 6m
Current ratio = 2:1
Therefore, current liabilities (Rs 6m/2) = Rs 3m
Acid test ratio = 1.5:1
Therefore, current assets – inventory (Rs 3m  1.5) = Rs 4.5m
Hence, Inventory (Rs 6m – Rs 4.5m) = Rs 1.5m

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All questions are compulsory. There are 50 OTQs of 2 marks each. Total marks for
this section are 100 marks.

1 Which of the following statements is/are true?

1 The directors of a company are ultimately responsible for the
preparation of financial statements, even if the majority of the work on
them is performed by the finance department.
2 If financial statements are audited, then the responsibility for those
financial statements instead falls on the auditors instead of the
directors.
3 There are generally no laws surrounding the duties of directors in
managing the affairs of a company.
A 1 only
B 1 and 2 only
C 1, 2 and 3
D 1 and 3 only
(LO 1.1.2) (2 marks)

2 Which of the following are true?

1 A sole proprietor's financial statements are private; a company's
financial statements are sent to shareholders and may be publicly filed
2 Only companies, and not sole proprietors, have capital invested into
the business
3 A sole proprietor is fully and personally liable for any losses that the
business might make; a company's shareholders are not personally liable
for any losses that the company might make
A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D 1, 2 and 3
(LO 1.1.1) (2 marks)

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3 Which of the following correctly defines 'equity' according to the IASB's

Conceptual Framework for Financial Reporting?
A A present obligation of the entity to transfer an economic resource as a
result of past events.
B A present economic resource controlled by the entity as a result of past
events.
C The residual interest in the assets of the entity after deducting all its
liabilities.
D A record of income generated and expenditure incurred over a given
period.
(LO 2.4.1) (2 Marks)

4 Which of the following statements is/are true?

1 A supplier of goods on credit is interested only in the statement of
financial position, ie an indication of the current state of affairs.
2 The objective of financial statements is to provide financial information
about the reporting entity's assets, liabilities, equity, income and
expenses. This information is useful in assessing the prospects for
future net cash inflows to the reporting entity and in assessing
management's stewardship of the entity's economic resources.
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 or 2
(LO 2.1.1) (2 marks)

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5 At 31 October 20X6 Roger's trial balance included the following balances:

Rs
Machinery at cost 12,890
Accumulated depreciation 8,950
Inventory 5,754
Trade receivables 11,745
Trade payables 7,830
Bank overdraft 1,675
Cash at bank 150
What is the value of Roger's current assets at 31 October 20X6?
A Rs 17,649
B Rs 17,499
C Rs 15,974
D Rs 13,734
(LO 2.4.2) (2 marks)

6 Listed below are some possible characteristics of financial information.

1 Relevance
2 Comparability
3 Faithful representation
4 Accuracy
Which of these are qualitative characteristics of financial information
according to the IASB's Conceptual Framework for Financial Reporting?
A 1 and 2 only
B 2 and 4 only
C 3 and 4 only
D 1 and 3 only
(LO 2.2.1) (2 marks)

7 Which of the following best describes the historical cost convention?

A Fails to take account of changing price levels over time
B Records only past transactions
C Values all assets at their cost to the business, without any adjustment
for depreciation
D Has been replaced in accounting records by a system of current cost
accounting
(LO 2.4.4) (2 marks)

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8 At the end of the financial year, a company records a rental expense for the
last quarter in its accounts, but has not yet received the invoice for this
charge. This adjustment is in accordance with the concept of:
A Materiality
B Accruals
C Consistency
D Objectivity
(LO 2.3.1) (2 marks)

9 Which ONE of the following statements describes faithful representation, a

qualitative characteristic of financial information?
A Revenue earned must be matched against the expenditure incurred in
earning it.
B Having information available to decision-makers in time to be capable
of influencing their decisions
C The presentation and classification of items in the financial statements
should stay the same from one period to the next.
D Financial information should be complete, neutral and free from error.
(LO 2.2.1) (2 marks)

10 According to the Conceptual Framework for Financial Reporting, which of the

following statements are true regarding the recognition of elements in the
financial statements?
1 All items that meet the definition of an asset in the framework should
be recognised as assets in the financial statements.
2 A commitment to purchase a non-current asset in the future requires
an entity to recognise a liability.
3 An entity should always derecognise an asset once it no longer owns it.
A 1 only
B 2 only
C 3 only
D None of the above
(LO 2.4.4) (2 marks)

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11 A company uses the imprest system to control its petty cash, keeping a float
of Rs 5,000.
Since the cash was last replenished the company spent the following
amounts:
(i) Rs 1,250 to the milk supplier
(ii) Rs 1,000 on taxis
(iii) Rs 570 on stationery
(iv) Rs 2,000 advance taken by the director for a taxi fare, returned unused
(v) Rs 1,850 to the cleaner
How much should now be drawn out of the bank?
A Rs 5,000
B Rs 4,170
C Rs 4,670
D Rs 3,170
(LO 3.2.4) (2 marks)

12 For each of the following transactions, indicate the source document that
will be created, by drawing an arrow from each box on the left to one of the
boxes on the right.
Transaction Source document
Sale of goods for cash Credit note
Return of goods purchased on credit Remittance advice note
Till receipt
Cheque
Petty cash voucher
Invoice

(LO 3.1.2) (2 marks)

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13 From the list below, select which type of source document would be used for
the following purposes:

Purpose Source document

A document which is used for
internal purposes, to record the
quantity of items received from a
supplier in relation to a purchase
A document which is used for both
internal and external purposes;
internally, to record the sale of goods
or services to a customer on credit,
and externally, to request payment
from the customer

Select from:
• Delivery note
• Goods received note
• Invoice
• Credit note
• Purchase order
• Remittance advice note
(LO 3.1.3) (2 marks)

14 A trader's net profit for the year may be computed by using which of the
following formulae?
A Opening capital + drawings – capital introduced – closing capital
B Closing capital + drawings – capital introduced – opening capital
C Opening capital – drawings + capital introduced – closing capital
D Opening capital – drawings – capital introduced – closing capital
(LO 3.2.2) (2 marks)

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15 Manugi has the following transactions:

1 Receipt of cash from Anishka in respect of an invoice for goods sold
three weeks ago
2 Receipt of cash from Nadeeja for cash sales
Which of the following ledger entries is required to record the above
transactions?
A Dr Cash
Cr Sales
B Dr Cash
Cr Sales
Cr Trade Receivables
C Dr Sales
Cr Cash
D Dr Trade Receivables
Dr Sales
Cr Cash
(LO 3.2.4) (2 marks)

16 Tharin had the following transactions:

1 Sale of goods on credit for Rs 150,000 to Raini
2 Return of goods from Budwin originally sold for Rs 300,000 in cash to
Budwin
What are the correct ledger entries to record these transactions?
A Dr Trade Receivables Rs 150,000
Dr Sales Returns Rs 300,000
Cr Sales Rs 150,000
Cr Cash Rs 300,000
B Dr Sales Rs 150,000
Dr Cash Rs 300,000
Cr Trade Receivables Rs 150,000
Cr Sales Returns Rs 300,000
C Dr Receivables Rs 450,000
Cr Sales Rs 150,000
Cr Sales Returns Rs 300,000
D Dr Sales Returns Rs 300,000
Dr Sales Rs 150,000
Cr Cash Rs 450,000
(LO 3.2.4) (2 marks)

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17 A company's trade payables account at 30 September 20X1 is as follows:

TRADE PAYABLES ACCOUNT
Rs Rs
Cash at bank 21,600 Balance b/d 14,000
Balance c/d 11,900 Purchases 19,500
33,500 33,500
What was the balance for trade payables in the trial balance at 1 October
20X0?
A Rs 14,000 DR
B Rs 14,000 CR
C Rs 11,900 DR
D Rs 11,900 CR
(LO 3.2.5) (2 marks)

18 The inventory value for the financial statements of Global Plc for the year
ended 30 June 20X3 was based on an inventory count on 7 July 20X3, which
gave a total inventory value of Rs 950,000.
Between 30 June and 7 July 20X6, the following transactions took place.
Rs
Purchase of goods 11,750
Sale of goods (mark up on cost at 15%) 14,950
Goods returned by Global Plc to supplier 1,500
What figure should be included in the financial statements for inventories at
30 June 20X3?
A Rs 952,750
B Rs 949,750
C Rs 926,750
D Rs 958,950
(LO 3.2.6) (2 marks)

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19 S & Co sell three products – A, B and C. The following information was

available at the year end.
A B C
Rs'000 Rs'000 Rs'000
Per unit Per unit Per unit
Original cost 10 9 20
Estimated selling price 9 12 26
Selling and distribution costs 1 4 5
units units Units
Units of inventory 500 1,250 580
In accordance with LKAS 2 Inventories, what is the value of inventory at the
year end?
A Rs 23,500,000
B Rs 31,000,000
C Rs 31,850,000
D Rs 32,750,000
(LO 3.2.6, LO 6.1.3) (2 marks)

20 A company with an accounting date of 31 October carried out a physical

check of inventory on 4 November 20X3, leading to an inventory value at
cost at this date of Rs 483,700.
Between 1 November 20X3 and 4 November 20X3 the following transactions
took place:
1 Goods costing Rs 38,400 were received from suppliers.
2 Goods that had cost Rs 14,800 were sold for Rs 20,000.
3 A customer returned, in good condition, some goods which had been
sold to him in October for Rs 600 and which had cost Rs 400.
4 The company returned goods that had cost Rs 1,800 to the supplier,
and received a credit note for them.
What figure should appear in the company's financial statements at
31 October 20X3 for closing inventory, based on this information?
A Rs 458,700
B Rs 505,900
C Rs 508,700
D Rs 461,500
(LO 3.2.6) (2 marks)

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21 Jaith Co values inventories on the first in first out (FIFO) basis. Jaith Co has
120 items of product A valued at Rs 8,000 each in inventory at 1 October
20X9. During October 20X9, the following transactions in product A took
place.
3 October Purchases 180 items at Rs 9,000 each
4 October Sales 150 items at Rs 12,000 each
8 October Sales 80 items at Rs 15,000 each
18 October Purchases 300 items at Rs 10,000 each
22 October Sales 100 items at Rs 15,000 each
What is the closing balance on the inventory account at 31 October 20X9?
A Rs 1,500,000
B Rs 2,560,000
C Rs 2,628,000
D Rs 2,700,000
(LO 3.2.6) (2 marks)

22 A company bought a property four years ago on 1 January 20X1 for

Rs 170,000,000. Since then property prices have risen substantially and the
property has been revalued at Rs 210,000,000 at 31 December 20X4.
The property was estimated as having a useful life of 20 years when it was
purchased. The depreciation method used is straight-line and there is no
residual value. What is the balance on the revaluation surplus reported in
the equity section of the statement of financial position at 31 December
20X4?
A Rs 210,000,000
B Rs 136,000,000
C Rs 74,000,000
D Rs 34,000,000
(LO 3.2.6, 6.1.3) (2 marks)

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The following information is relevant for questions 23 and 24.

Gusna Co purchased a building on 1 January 20X2 for Rs 750,000,000. At the date
of acquisition, the useful life of the building was estimated to be 25 years and
depreciation is calculated using the straight-line method. At 31 December 20X6,
an independent valuer valued the building at Rs 1,000,000,000 and the
revaluation was recognised in the financial statements. Gusna's accounting
policies state that excess depreciation arising on revaluation of non-current assets
can be transferred from the revaluation surplus to retained earnings.
23 What is the depreciation charge on the building for the year ended
31 December 20X7?
A Rs 40,000,000
B Rs 50,000,000
C Rs 30,000,000
D Rs 42,500,000
(LO 3.2.6) (2 marks)

24 What is the journal entry to record the transfer of excess depreciation from
the revaluation surplus to retained earnings?
A Dr Revaluation surplus Rs 20,000,000
Cr Retained earnings Rs 20,000,000
B Dr Revaluation surplus Rs 12,500,000
Cr Retained earnings Rs 12,500,000
C Dr Retained earnings Rs 20,000,000
Cr Revaluation surplus Rs 20,000,000
D Dr Revaluation surplus Rs 12,500,000
Cr Retained earnings Rs 12,500,000
(LO 3.2.6) (2 marks)

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25 A car was purchased by a business in May 20X1 for:

Rs'000
Cost 10,000
Road tax 150
Total 10,150
The business adopts a date of 31 December as its year end.
The car was traded in for a replacement vehicle in August 20X4 at an agreed
value of Rs 5,000,000.
It has been depreciated at 25% per annum on the reducing-balance method,
charging a full year's depreciation in the year of purchase and none in the
year of sale.
What was the profit or loss on disposal of the vehicle during the year ended
December 20X4 to the nearest Rs'000?
A Loss of Rs 2,890,000
B Profit of Rs 781,000
C Profit of Rs 2,500,000
D Profit of Rs 3,750,000
(LO 3.2.6, 6.1.3) (2 marks)

26 At 1 January 20X3, Adeepa Co had an allowance for receivables of Rs

35,000,000. At 31 December 20X3, the trade receivables of the company
were Rs 620,000,000. It was decided to:
1 Write off (as uncollectable) receivables totalling Rs 30,000,000 and
2 Adjust the allowance for receivables to an amount equivalent to 5% of
receivables.
What is the combined expense that should appear in the company's
statement of profit or loss for the year, for irrecoverable debts and the
allowance for receivables?
A Rs 24,500,000
B Rs 26,000,000
C Rs 34,000,000
D Rs 35,500,000
(LO 3.2.6) (2 marks)

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27 Fill in the blanks:

A liability must not be recognised as a liability in the financial

statements. Instead it should be in the notes to the financial
statements.
(LO 3.2.6, 6.1.3) (2 marks)

28 An ex-director of X company has commenced an action against the company

claiming substantial damages for wrongful dismissal. The company's
solicitors have advised that the ex-director is unlikely to succeed with his
claim, although the chance of X paying any monies to the ex-director is not
remote. The solicitors' estimates of the company's potential liabilities are:
Rs'000
Legal costs (to be incurred whether the claim is successful or not) 50,000
Settlement of claim if successful 500,000
550,000

According to LKAS 37 Provisions, contingent liabilities and contingent assets,

how should this claim be treated in the financial statements?
A Provision of Rs 550,000,000
B Disclose a contingent liability of Rs 550,000,000
C Make a provision of Rs 50,000,000 and disclose a contingent liability of
Rs 500,000,000
D Provision for Rs 500,000,000 and a contingent liability of
Rs 50,000,000
(LO 3.2.6) (2 marks)

29 Fill in the blanks:

A bank is a comparison of a bank with the cash

book.
(LO 3.2.10) (2 marks)

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30 Your cash book at 31 December 20X3 shows a bank balance of Rs 565,000

overdrawn. On comparing this with your bank statement at the same date,
you discover the following.
(i) A cheque for Rs 57,000 drawn by you on 29 December 20X3 has not
yet been presented for payment.
(ii) A cheque for Rs 92,000 from a customer, which was paid into the bank
on 24 December 20X3, has been dishonoured on 31 December 20X3.
The correct bank balance to be shown in the statement of financial position
at 31 December 20X3 is:
A Rs 714,000 overdrawn
B Rs 657,000 overdrawn
C Rs 473,000 overdrawn
D Rs 53,000 overdrawn
(LO 3.2.11) (2 marks)

31 These figures relate to receivables:

Rs'000
Balance at 1/1/X1 2,500
Balance at 31/12/X1 2,000
Cash from receivables 10,600
Contra with payables ledger 5,000
Increase in allowance for receivables 580
What were sales during the year?
A Rs 5,100,000
B Rs 14,520,000
C Rs 15,100,000
D Rs 15,680,000 (2 marks)

32 Which of the following items could appear on the credit side of a receivables
ledger control account?
1 Cash received from customers
2 Irrecoverable debts written off
3 Increase in allowance for receivables
4 Contras
5 Sales
6 Credits for goods returned by customers
7 Cash refunds to customers
A 1, 2, 4 and 6
B 1, 2, 4 and 7
C 3, 4, 5 and 6
D 5 and 7
(LO 3.2.9) (2 marks)

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33 During the year ended 31 December 20X1, Alpha Rescue had the following
transactions on the receivables ledger.
Rs'000
Receivables at 1 January 20X1 100,000
Receivables at 31 December 20X1 107,250
Goods returned 12,750
Amounts paid into the bank from receivables 230,000
What were the sales for the year?
A Rs 107,250,000
B Rs 240,000,000
C Rs 250,000,000
D Rs 320,000,000
(LO 3.2.9) (2 marks)

34 Y (Pvt) Ltd keeps a receivables ledger control account as part of its

accounting system.
The following transactions take place in March:
(1) Invoices totalling Rs 5,000,000 are raised to Customer X in March.
These invoices offer the customer a 5% discount if they pay within 14
days. Of these invoices, Y (Pvt) Ltd expects invoices amounting to Rs
2,000,000 to be paid with the discount taken.
(2) Customer Z pays cash of Rs 2,850,000 for invoices which were raised
for Rs 3,000,000, as they took up discounts totalling Rs 150,000 for
early payment. However Y (Pvt) Ltd had not expected Customer Z to
take up the discounts.
Which of the following entries correctly record these transactions?
A (Transaction 1)
DR Receivables ledger control Rs 5,000,000
CR Sales Rs 5,000,000
(Transaction 2)
DR Cash Rs 2,850,000
CR Receivables ledger control Rs 2,850,000
B (Transaction 1)
DR Receivables ledger control Rs 4,900,000
CR Sales Rs 4,900,000
(Transaction 2)
DR Cash Rs 2,850,000
DR Sales Rs 150,000
CR Receivables ledger control Rs 3,000,000

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C (Transaction 1)
DR Receivables ledger control Rs 5,000,000
CR Sales Rs 5,000,000
(Transaction 2)
DR Cash Rs 2,850,000
DR Sales Rs 150,000
CR Receivables ledger control Rs 3,000,000
D (Transaction 1)
DR Receivables ledger control Rs 4,900,000
CR Sales Rs 4,900,000
(Transaction 2)
DR Cash Rs 2,850,000
CR Receivables ledger control Rs 2,850,000
(LO 3.2.4) (2 marks)

35 The following receivables ledger control account has been prepared by a

trainee accountant:
Rs Rs
20X3 20X3
1 Jan Balance 284,680 31 Dec Cash received
from credit customers 179,790
31 Dec Credit sales 189,120
Irrecoverable debts Contras against amounts
owing
written off 5,460 by company in payables
ledger 800
Sales returns 4,920 Balance 303,590
484,180 484,180
What should the closing balance on the account be when the errors in it are
corrected?
A Rs 292,670
B Rs 293,750
C Rs 282,830
D Rs 284,430
(LO 3.2.7) (2 marks)

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The following information is relevant for questions 36 and 37.

A is a sole proprietor who does not keep full accounting records. The following
details relate to her transactions with credit customers and suppliers for the year
ended 30 November 20X3.
Rs'000
Trade receivables, 1 December 20X2 130,000
Trade payables, 1 December 20X2 60,000
Cash received from customers 687,800
Cash paid to suppliers 302,800
Discounts received 2,960
Irrecoverable debts 4,160
Amount due from a customer who is also a supplier offset
against an amount due for goods supplied by them 2,000
Trade receivables, 30 November 20X3 181,000
Trade payables, 30 November 20X3 84,000
36 Based on the above information, what figure should appear in A's statement
of profit or loss for the year ended 30 November 20X3 for sales revenue?
A Rs 748,960,000
B Rs 748,800,000
C Rs 744,960,000
D Rs 743,560,000
(LO 4.1.4) (2 marks)

37 Based on the above information, what figure should appear in A's statement
of profit or loss for the year ended 30 November 20X3 for purchases?
A Rs 283,760,000
B Rs 325,840,000
C Rs 329,760,000
D Rs 331,760,000
(LO 4.1.4) (2 marks)

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38 A fire on 30 September 20X2 destroyed some of a company's inventory and

its inventory records.
The following information is available:
Rs
Inventory 1 September 20X2 318,000
Sales for September 20X2 612,000
Purchases for September 20X2 412,000
Inventory in good condition at 30 September 20X2 214,000
Standard gross profit percentage on sales is 25%
Based on this information, what is the value of the inventory lost?
A Rs 96,000
B Rs 271,000
C Rs 26,400
D Rs 57,000
(LO 4.1.4) (2 marks)

39 Achira and Chalani are in partnership, sharing profits and losses in the ratio
3:2. The statement of profit or loss for the year to 31 October 20X8 reported
a profit of Rs 98,500,000.
Interest on capital has been calculated as:
Achira Rs 7,900,000
Chalani Rs 5,100,000
Both capital and current accounts are maintained in the books of the
partnership. Neither partner made any drawings in the year to 31 October
20X8.
What was the increase in the balance on Chalani's current account in the
year to 31 October 20X8?
A Rs 34,200,000
B Rs 39,300,000
C Rs 39,400,000
D Rs 49,700,000
(LO 4.2.3, LO 4.2.4) (2 marks)

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40 Brinal and Lasal have been in a partnership for several years and share
profits and losses equally. On 1 January 20X1, they are going to be joined by
a new partner, Eshani. Brinal and Lasal estimate that at this date they have
goodwill of Rs 12,000,000. They decide that they will not maintain the
goodwill in the partnership's accounts. The new profit-sharing ratio between
Bruce, Larry and Eddie is 2:2:1.
What adjustments should be made in the partners' capital accounts when the
goodwill is removed from the accounts?
A Debit the capital accounts Rs 6,000,000 (Brinal) and Rs 6,000,000
(Lasal)
B Credit the capital accounts Rs 6,000,000 (Brinal) and Rs 6,000,000
(Lasal)
C Debit the capital accounts Rs 4,800,000 (Brinal), Rs 4,800,000 (Lasal)
and Rs 2,400,000 (Eshani)
D Credit the capital accounts Rs 4,800,000 (Brinal), Rs 4,800,000 (Lasal)
and Rs 2,400,000 (Eshani)
(LO 4.2.3, 4.2.4) (2 marks)

41 Basith and Lakma are in partnership. The balances on their capital and
current accounts at the start of the financial year were as follows:
Basith Lakma
Rs'000 Rs'000
Capital account 100,000 50,000
Current account 12,000 credit 14,000 credit
Lakma is paid a salary of Rs 40,000,000 per year. Both partners take interest
on capital at 6% per year. The residual profits are shared between Basith
and Lakma in the ratio 4:3. During the year just ended, the partnership profit
was Rs 199,500,000 and Basith drew Rs 7,500,000 each month from the
business.
What were the balances on Basith and Lakma's current accounts at the end
of the year?
Basith Lakma
A Rs 1,800,000 Rs 107,500,000
B Rs 4,000,000 Rs 121,500,000
C Rs 9,800,000 Rs 118,500,000
D Rs 14,000,000 Rs 121,500,000
(LO 4.2.3, 4.2.4) (2 marks)

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42 According to LKAS 1 Presentation of financial statements, where should

dividends paid during the year be disclosed?
A Statement of profit or loss and other comprehensive income
B Statement of changes in equity
C Statement of financial position
D None of these
(LO 4.3.1, 6.1.4) (2 marks)

43 Which of the following might appear as an item in a company's statement of

changes in equity?
1 Profit on disposal of properties
2 Surplus on revaluation of properties
3 Equity dividends proposed after the reporting date
4 Issue of stated capital
A 1, 3 and 4 only
B 2 and 4 only
C 1 and 2 only
D 3 and 4 only
(LO 4.3.1) (2 marks)

44 LKAS 7 requires the statement of cash flows to open with the calculation of
net cash from operating activities, arrived at by adjusting net profit before
taxation.
Which one of the following lists consists only of items which could appear in
such a calculation?
A Depreciation, increase in receivables, decrease in payables, proceeds
from sale of equipment, increase in inventories
B Increase in payables, decrease in inventories, profit on sale of plant,
depreciation, decrease in receivables
C Increase in payables, proceeds from sale of equipment, depreciation,
decrease in receivables, increase in inventories
D Depreciation, interest paid, proceeds from sale of equipment, decrease
in inventories
(LO 4.1.3, 6.1.3) (2 marks)

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45 From the list below, select two items which are examples of accounting
estimates.
1. _______________________________
2. _______________________________
Select from:
• Measurement of inventory using First-In-First-Out basis
• Useful lives of non-current assets
• Provision for warranty repairs
• Allowance for receivables
• Straight line method of calculating depreciation
• Measurement of non-current assets at historical cost
• Accruals basis of accounting
(LO 6.1.3) (2 marks)

46 From the list below, select two items which are examples of short-term
employee benefits.
1. _______________________________
2. _______________________________
Select from:
• Wages and salaries
• Social security contributions
• Paid annual leave
• Paid sick leave
• Paid maternity/paternity leave
• Defined contribution plan
• Defined benefit plan
• Early retirement payments
• Bonuses
• Deferred remuneration
• Long service awards
(LO 6.1.3) (2 marks)

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47 Utah Plc leased a fleet of motor vehicles on 31 May 20X5 from Omaha Bank
for a period of four years. The present value of future lease payments at the
commencement date was Rs 60,000,000. Utah is required to pay an annual
rental of Rs 18,930,000 every 31 May starting on 31 May 20X6. The interest
rate implicit in the lease agreement was 10% per annum.
What is the lease liability at 31 May 20X6?
Rs'000
A 36,963
B 41,070
C 47,070
D 54,000
(LO 6.1.3) (2 marks)

48 A club has 200 members, each should pay Rs 20,000 for subscriptions. At the
start of the year 20 members owed subscriptions, at the end of the year five
members had prepaid subscriptions. Three members subscriptions were
unpaid and written off as irrecoverable during the year. Calculate the cash
receipts for the year. (Assume the annual subscription remains at
Rs 20,000.)
A Rs 3,640,000
B Rs 4,240,000
C Rs 4,560,000
D Rs 4,440,000
(LO 4.4.2) (2 marks)

49 Which one of the following would help a company with high gearing to
reduce its gearing ratio?
A Making a rights issue of equity shares
B Issuing further long-term debentures
C Making a bonus issue of shares
D Paying dividends on its equity shares
(LO 5.1.3) (2 marks)

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50 The figures shown in the table below are an extract from the financial
statements of Ranganathan (capital employed is Rs 1.5m).
Rs
Revenue 1,000,000
Cost of sales 400,000
Gross profit 600,000
Distribution expenses and administration cost 300,000
Profit before interest and tax 300,000
Finance cost 50,000
Profit before tax 250,000
Income tax expense 100,000
Profit after tax 150,000
What is the return on capital employed (ROCE)?
A 7%
B 10%
C 40%
D 20%
(LO 5.1.3) (2 marks)

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1 A The responsibility of the financial statements rests with the directors,

whether or not those financial statements are audited. Some of the
duties of directors are statutory duties, laid down in law, including the
duty to act within their powers, promote the success of the company
and exercise reasonable skill and care.

2 C A sole proprietor also invests capital in their business.

3 C Option C is the correct definition of equity. Option A is the definition of

a liability; option B is the definition of an asset and option D is the
definition of a statement of profit or loss.

4 B (2) is the Conceptual framework's description of the purpose of

financial statements. (1) is false – although the supplier needs to know
the current situation, the supplier also needs to be able to assess future
prospects to ensure the entity has the ability to pay and to support an
ongoing relationship.

5 A (5,754 + 11,745 + 150)

6 D Relevance and faithful representation.

7 A Fails to take account of changing price levels over time.

8 B Accruals. The cost of the rental expense must be recorded in the period
in which it was incurred.

9 D Financial information should be complete, neutral and free from error.

10 D Not all items that meet the definition of an asset are recognised as
assets in the financial statements. According to the Conceptual
Framework an asset or liability is only recognised if it provides users of
financial information with useful information that is relevant and
faithfully represents the asset or liability.
A future commitment is not a liability. A liability is present obligation
that exists as a result of past events. A decision to purchase assets in
the future does not, in itself, give rise to a present obligation, therefore
a future commitment is not a liability.
The key criteria for derecognition of an asset is the loss of control of
the asset. There can be situations where an entity sells an asset but still
retains control of the asset (for example, selling equipment and then
leasing the equipment back from the buyer) in which case, the
equipment needs to be recognised in the financial statements of the
seller, even though they no longer legally own the asset.

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11 C The Rs 2,000 advance has no effect as it was paid out and returned
after the imprest was last replenished.

12
Transaction Source document
Sale of goods for cash Till receipt
Return of goods purchased on credit Credit note

13
Purpose Source document
A document which is used for Goods received note
internal purposes to record the
quantity of items received from a
supplier in relation to a purchase
A document which is used for both Invoice
internal and external purposes;
internally, to record the sale of goods
or services to a customer on credit,
and externally, to request payment
from the customer

14 B Closing capital – opening capital = increase (I) in net assets. This means
that option B is equivalent to:
P = I + D – Ci
This is the correct form of the business equation.

15 B Cash received is a debit to the cash account. The cash received from
Anishka is offset against the trade receivable balance due from
Anishka: Dr Cash, Cr Trade Receivables. The cash received from Rs
Nadeeja is a cash sale: Dr Cash, Cr Sales.

16 A Dr Receivables Rs 150,000
Dr Sales Returns Rs 300,000
Cr Sales Rs 150,000
Cr Cash Rs 300,000
The double entry for the sale of goods on credit is Dr Receivables, Cr
Sales Rs 150,000. The return of goods previously sold for cash is Dr
Sales Returns, Cr Cash Rs 300,000.

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17 B The opening balance on the ledger is Rs 14,000 CR, this is the amount
that would have appeared in the trial balance at 1 October 20X0.
18 A 950,000 – 11,750 + 1,500 + (14,950  100/115) = Rs 952,750

19 B Rs 31,000,000

Net realisable Lower of cost

Cost value & NRV Units Value
Rs'000 Rs'000 Rs'000 Rs'000
A 10 8 8 500 4,000
B 9 8 8 1,250 10,000
C 20 21 20 850 17,000
31,000

20 D
Rs
Inventory check balance 483,700
Less: goods from suppliers (38,400)
Add: goods sold 14,800
Less: goods returned (400)
Add: goods returned to supplier 1,800
461,500

21 D Rs 2,700,000
No. of items Unit price Value
Date Rs'000 Rs'000
1.10.X9 Balance 120 8 960
3.10.X9 Purchases 180 9 1,620
Balance 300 2,580
4.10.X9 Sales (120) 8 (960)
Sales (30) 9 (270)
Balance 150 1,350
8.10.X9 Sales (80) 9 (720)
Balance 70 630
18.10.X9 Purchases 300 10 3,000
Balance 370 3,630
22.10.X9 Sales (70) 9 (630)
Sales (30) 10 (300)
Balance 270 2,700

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22 C
Rs'000
Valuation 210,000
Carrying amount (170,000  16/20) (136,000)
Revaluation surplus 74,000

23 B The depreciation charge is calculated based on the remaining useful life

at the date of the revaluation: 1,000,000,000/20 years = Rs 50,000,000

24 A The excess deprecation is the new depreciation amount of

Rs 50,000,000 less the old depreciation charge of Rs 30,000,000
(Rs 750,000,000/25 years) which is Rs 20,000,000. This amount
should be debited from the revaluation surplus and credited to
retained earnings each year. Remember that both retained earnings
and the revaluation surplus are credit balances in the trial balance.

25 B Rs 781,000 profit
Rs'000
Cost 10,000
20X1 Depreciation 2,500
7,500
20X2 Depreciation 1,875
5,625
20X3 Depreciation 1,406
4,219
20X4 Part exchange 5,000
Profit 781

26 A
Rs'000 Rs'000
Amount written off 30,000
Allowance for receivables at 31 December 20X3
5%  Rs (620,000,000 – 30,000,000) 29,500
Allowance for receivables at 1 January 20X3 35,000
Reduction in allowance for receivables (5,500)
Combined expense 24,500

27 A contingent liability must not be recognised as a liability in the financial

statements. Instead it should be disclosed in the notes to the financial
statements.

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28 C As the claim is unlikely to succeed, the potential settlement of Rs

500,000,000 should be disclosed as a contingent liability note.
However, given that the legal costs of Rs 50,000,000 must be paid
whether the claim is successful or not, this amount should be provided
for in the company's financial statements.

29 A bank reconciliation is a comparison of a bank statement with the cash

book.

30 B Rs (565,000) o/d – Rs 92,000 dishonoured cheque = Rs (657,000) o/d.

Remember that you are asked to calculate the figure to be shown in the
financial statements ie the adjusted cash book figure.

31 C TRADE RECEIVABLES CONTROL ACCOUNT

Rs'000 Rs'000
B/d 2,500 Cash 10,600
Trade payables:
Contras 5,000
Sales 15,100 C/d 2,000
17,600 17,600

32 A Sales and refunds are posted on the debit side, changes in the
allowance for receivables do not appear in the control account.

33 C Rs 250,000,000
RECEIVABLES LEDGER CONTROL ACCOUNT
Rs'000 Rs'000
Bal b/f 100,000 Bank 230,000
Sales (balancing
figure) 250,000
Returns 12,750
Bal c/f 107,250
350,000 350,000

34 B Sales invoices:
Invoices amounting to Rs 2,000,000 should be recorded net of the 5%
settlement discount (ie, Rs 1,900,000), since Y (Pvt) Ltd expects X to
take the discount on these. The remaining Rs 3,000,000 of invoices
should be recorded at the full amount.
Therefore, sales = (Rs 1,900,000 + Rs 3,000,000) = Rs 4,900,000 with a
corresponding amount for receivables.

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Payment received:
Y (Pvt) Ltd did not expect Z to take the settlement discount on invoices
of Rs 3,000,000 so these would have been originally recorded in sales
and receivables at the full amount of Rs 3,000,000.
However, customer Z has paid Rs 2,850,000 against receivables of
Rs 3,000,000. The difference of Rs 150,000 is debited to sales and
credited to receivables, thereby accounting for the discount.

35 C RECEIVABLES LEDGER CONTROL ACCOUNT

Rs Rs
Opening balance 284,680 Cash received 179,790
Credit sales 189,120 Irrecoverable debts
written off 5,460
Sales returns 4,920
Contras 800
Closing balance 282,830
473,800 473,800

36 C TOTAL RECEIVABLES ACCOUNT

Rs'000 Rs'000
Opening balance 130,000 Cash received 687,800
Sales (balancing
figure) 744,960
Irrecoverable debts 4,160
Contra 2,000
Closing balance 181,000
874,960 874,960

37 D TOTAL PAYABLES ACCOUNT

Rs'000 Rs'000
Cash paid 302,800 Opening balance 60,000
Discounts received 2,960 Purchases (balancing
figure) 331,760
Contra 2,000
Closing balance 84,000
391,760 391,760

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38 D
Rs
Opening inventory 318,000
Purchases 412,000
Closing inventory (214,000)
516,000
Notional cost of sales (612,000  75%) (459,000)
Inventory lost 57,000

39 B
Rs'000
Profit per statement of profit or loss 98,500
Less interest on capital Achira (Rs 7,900,000)
Chalani (Rs 5,100,000)
(13,000)
= Available for profit-sharing 85,500
Chalani's share is 2/5 or 34,200
Chalani's share of the total profit
also includes:
Interest on capital 5,100
= 39,300

40 C When it is removed, the goodwill of Rs 12,000,000 must be debited to

the partners' capital accounts in the new profit-sharing ratio ie 2:2:1.
Therefore the adjustment is to debit the capital accounts Rs 4,800,000
(Brinal), Rs 4,800,000 (Lasal), Rs 2,400,000 (Eshani).

41 D
B L Total
Rs'000 Rs'000 Rs'000
Salary 40,000 40,000
Interest on capital 6,000 3,000 9,000
Residual profit (4:3) 86,000 64,500 150,500
92,000 107,500 199,500
Opening account balance 12,000 14,000
Drawings (90,000)
Closing current account balance 14,000 121,500

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42 B The statement of changes in equity.

43 B Profit on disposal of properties will be included in profit in the

statement of profit or loss and other comprehensive income. Equity
dividends proposed after the reporting period are disclosed by note.

44 B Proceeds from sale of equipment are included in investing activities.

45 Any 2 from:
 Allowance for receivables
 Provision for warranty repairs
 Useful lives of non-current assets
 Straight line method of calculating depreciation

46 Any 2 from:
 Wages and salaries
 Bonuses
 Social security contributions
 Paid annual leave
 Paid sick leave
 Paid maternity/paternity leave

47 C
Rs'000
31 May 20X5 Present value of future lease payments 60,000
31 May 20X6 Interest @ 10% 6,000
31 May 20X6 Rental (18,930)
Lease liability at 31 May 20X6 47,070
A incorrectly assumes rent paid in advance (ie calculates 10% interest
on (60,000,000 – 18,930,000)) rather than in arrears
B incorrectly omits any addition of interest
D incorrectly omits the deduction of rent paid

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48 D Correct
SUBSCRIPTIONS A/C
Rs'000 Rs'000
Balance b/d
20  Rs 20,000 400
I and E subscriptions
200  Rs 20,000 4,000 Irrecoverable
debts
Balance c/d 3  Rs 20,000 60
5  Rs 20,000 100 Bank 4,440
4,500 4,500
A is incorrect, you have recorded the opening subscriptions in arrears
as prepaid.
B is incorrect, you have carried down the closing prepaid subscriptions
as arrears.
C is also incorrect, you have posted irrecoverable debts to the incorrect
side of the account.

49 A Issuing further debentures and paying dividends will increase gearing.

A bonus issue simply capitalises reserves, so has no effect.

50 D 20% ROCE is defined as the profit on ordinary activities before interest

and tax divided by capital employed = Rs 300,000/Rs 1.5m = 20%

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Notes

324 CA Sri Lanka