1 1 Your Notes

FINANCIAL ACCOUNTING:
MID-TERM TEST
 2 Your Notes

PRACTICE QUESTIONS
Question 1:

Which accounting concept requires non‐current assets to be valued at cost less

accumulated depreciation, rather than at their enforced saleable value?
A. Prudence
B. Relevance
C. Comparability
D. Going concern
 3 Your Notes

RECALL KNOWLEDGE
Question 1:

Refer to Section Chapter 3

Relevant financial information is The concept is to prevent the

capable of making a difference in business from being over-
the decisions made by users. optimistic about future profits.

Relevant Prudence

Going concern Comparability

Continuing: The business will Financial information is more

continue to operate in useful if it can be compared with
approximately the same similar information of:
manner for the foreseeable • other entities
future.
• same entity for another
period or date.
 4 Your Notes

ANSWERS
Question 1:

The correct answer is D.

D is correct because if a business is a going concern, it is reasonable to assume that
non‐current assets will be used over their useful lives. It is therefore appropriate to
value a non‐current asset at cost less accumulated depreciation, which represents the
consumption of cost or value so far.
A is incorrect because prudence means the exercise of caution when making
judgements under conditions of uncertainty. The exercise of prudence means that
assets and income are not overstated, and liabilities and expenses are not understated.
B is incorrect because relevance is described as relevant financial information is
capable of making a difference in the decisions made by users… Relevance information
has predictive value, confirmatory value or both.
C is incorrect because comparability is the qualitative characteristic that enables users
to identify and understand similarities in, and differences among, items.
 5 Your Notes

PRACTICE QUESTIONS
Question 2:

Which of the following are books of prime entry?

(1) Cash book
(2) Journal
(3) Receivables ledger
(4) Purchase day book

A. 1, 2, 3 only
B. 1, 2, 4 only
C. 2 and 4
D. All of them
 6 Your Notes

RECALL KNOWLEDGE
Question 2:

Refer to Section Chapter 4. II. Books of prime entry

Books of prime entry

Sales daybook 1 5 Cash book

Purchase daybook 2 6 Petty cash book

Sales returns daybook 3 7 The journal

Purchases returns daybook 4

 7 Your Notes

ANSWERS
Question 2:

The correct answer is B.

Books of prime entry is where certain types of transaction are recorded before
recording them in the double-entry book-keeping system. That means books of prime
entry are books in which we first record transactions
The main books of prime entry are:
• Sales day book
• Purchase day book
• Sales returns day book
• Purchase returns day book
• Journal
• Cash book
• Petty cash book
Therefore, (1), (2) and (4) are correct and (3) is not correct.
 8 Your Notes

PRACTICE QUESTIONS
Question 3:

Flute Co is being sued by a customer for $2 million for breaching the contract over a
cancelled order. Flute Co has obtained legal opinion that there is 20% chance that
Flute Co will lose the case. Accordingly, Flute Co has provided $2 million in respect of
the claim. The unrecoverable legal costs of defending the action are estimated at
$100,000. These have not been provided for as the case will not go to court until next
year.
What is the amount of the provision should be made by Flute Co in accordance with
IAS 37 Provision, Contingent Liabilities and Contingent Assets?
A. $100,000
B. $400,000
C. $500,000
D. $2,100,000
 9 Your Notes

RECALL KNOWLEDGE
Question 3:

Refer to theory in Section Chapter 12. II. 1. Contingent liabilities

Contingent liability

Virtually certain
Recognize Liability
(≥ 90%)

• Recognize provision (if can estimate reliably amount)

Probable
• Recognize contingent liability (if cannot estimate
(50% ≤ X < 90%)
reliably amount)

Possible Disclose contingent liability

(5% ≤ X < 50%)

Remote
Ignore
(X < 5%)
 10 Your Notes

ANSWERS
Question 3:

The correct answer is A.

Flute Co’s chance of losing the court is estimated to be 20%, so $2 million is a
contingent liability and should be disclosed in notes to financial statements.
$100,000 is the expense that will definitely occurs in the future when Flute Co go to
court. Therefore, it satisfies the criteria to be recognized as a provision: a virtually
certain economic benefit flow out of the entity and its amount can be measured
reliably.
 11 Your Notes

PRACTICE QUESTIONS
Question 4:

On 31 December 20X9, A Co had the year-end receivables amounted to $500,000. At

the year end, the company’ s allowance for receivables was 5% of receivables, which
was 10% higher than at the previous year end.
During the year, irrecoverable debts amounting to $2,000 were written off and debts
amounting to $600 and previously written off were recovered.
What was the receivables expense for the year ended 31 December 20X9?
A. $4,273
B. $3,673
C. $5,100
D. $4,500
 12 Your Notes

GUIDANCE
Question 4:

7 steps of calculating subsequent irrecoverable debt expense

01 Take the receivables balance

02 Deduct bad debts from this receivables balance

03 Also deduct any specific allowances

04 Calculate the new allowance required

(receivables after deduction x % allowance)

05 Compare with the existing allowance balance

(i.e. balance b/f from the previous period)

06 Calculate increase or decrease required

07 Increase/ Decrease in allowance X / (X)

Irrecoverable debts written off/recover X / (X)

Statement of profit or loss charge X

 13 Your Notes

ANSWERS
Question 4:

The correct answer is B.

Year-end receivables 500,000

Year- end allowance for receivables (5% x $500,000) 25,000

Increase in allowance ($25,000 x 10/110) 2,273

Irrecoverable debt written off 2,000

Irrecoverable debt recovered 600

Receivables expense ($2,273 + $2,000 - $600) 3,673

 14 Your Notes

PRACTICE QUESTIONS
Question 5:

You are preparing the financial statements for a business. The cost of the items in
closing inventory is $41,875. This includes some items which cost $1,960 and which
were damaged in transit. You have estimated that it will cost $360 to repair the items,
and they can then be sold for $1,200.
What is the correct inventory valuation for inclusion in the financial statements?
A. $39,915
B. $40,755
C. $41,515
D. $42,995
 15 Your Notes

RECALL KNOWLEDGE
Question 5:

1. Refer to Section Chapter 7. II. 2. Valuation

The net realizable value (NRV) is calculated as:
NRV = Estimated selling price – (Estimated completion costs + Costs need to make
sales)
2. Refer to Section Chapter 7. III. 3. Accounting for opening & closing inventory

Formula for calculating COGS

Opening inventory X

Plus: purchases X

Less closing inventory (X)

Cost of goods sold X

 16 Your Notes

ANSWERS
Question 5:

The correct answer is B.

The accounting treatment of inventory is governed by an accounting standard, IAS 2
Inventories. IAS 2 states that 'inventory shall be measured at the lower of cost and net
realizable value' (para. 9)
So, we need to calculate cost and NRV of damaged items to decide value of these
items should be measured.
• Cost = $1,960
• NRV = Estimated selling price – Costs to sell = $1,200 – $360 = $840
Because NRV is lower than Cost, damaged items shall be measured at NRV.

Original inventory valuation 41,875

Costs of damaged items (1,960)

Remove the cost of damaged
NRV of damaged items 840 items and recognise their NRV

Adjusted inventory 40,755

So B is the correct answer.

 17 Your Notes

PRACTICE QUESTIONS
Question 6:

Your cash book at 31 December 20X3 shows a bank balance of $647 overdrawn.
On comparing this with your bank statement at the same date, you discover the
following.
(1) A cheque for $57 drawn by you on 29 December 20X3 has not yet been
presented for payment.
(2) A cheque for $67 from a customer, which was paid into the bank on 24
December 20X3, has been dishonored on 31 December 20X3.
What is the correct bank balance to be shown in the statement of financial
position at 31 December 20X3?
A. $714 overdrawn
B. $580 overdrawn
C. $637 overdrawn
D. $771 overdrawn
 18 Your Notes

GUIDANCE
Question 6:

ADJUSTED CASH BOOK $

Cash book balance b/f X

Add: Bank interest X
Credit transfer/Direct credit X
…
Less: Bank charges (X)
Direct debits/standing orders (X)
Dishonoured cheques (x)
…
Adjusted cash book balance X
 19 Your Notes

ANSWERS
Question 6:

The correct answer is A.

The cash book must be corrected for any errors or omissions. Any remaining
difference can then be shown to be due to timing differences between bank
statement and the cash book.
Note (1) is timing differences, so we do not need to correct the cash book.
Note (2) is a cheque received by the business from a customer, debited in the cash
book, but which had been dishonoured and not been entered in the account by the
bank, and so it is an error.
Bank balance = $647 CREDIT – $67 DEBIT (remove $67 debit according to note 2) =
$714 CREDIT ($714 overdrawn)
So A is the correct answer.
 20 Your Notes

PRACTICE QUESTIONS
Question 7:

Which of the following items would NOT lead to a difference between the total of
balance on the payables ledger and the balance on the payable ledger control
account?
A. An error in totaling the purchase day book
B. An entry posted to the wrong supplier’s account
C. An overstatement of an entry in a supplier’s account
D. An error in totaling the total payment in the cash book
 21 Your Notes

GUIDANCE
Question 7:

1. Error in totaling the purchase day book:

The purchase day book is used to record credit purchases. An error in totaling this
book will affect the amount posted to the control account, but it would not affect
the individual supplier accounts in the payables ledger, creating a discrepancy.
2. An entry posted to the wrong supplier’s account:
Posting an entry to the wrong supplier's account does not affect the overall total
owed to all suppliers. The total of the individual supplier balances would still match
the control account.
3. Overstatement of an entry in a supplier’s account:
Overstating an entry in a supplier’s account will result in a higher balance in the
payables ledger, but the control account may remain correct.
4. Error in totaling the total payment in the cash book:
The cash book is used to record payments to suppliers. If the total payment is
miscalculated, the control account will not reconcile with the payables ledger, as
one of the postings would be wrong.
 22 Your Notes

ANSWERS
Question 7:

The correct answer is B.

Items A and D result in an error in the control account. Because a control accounts
keeps a total record of a number of individual suppliers.
Item C will result in an error in the total of individual supplier account balances.
Items B will not affect either of the total, although there are errors in the individual
accounts of two suppliers affected, with one account balance too high and the other
too low by the same amount. So B is the correct answer.
 23 Your Notes

PRACTICE QUESTIONS
Question 8:

Pedantic Co receives rent from a large number of properties. The total received in the
year ended 31 December 20X3 was $525,000.
The following were the amounts of rent in advance and in arrears at 31 December
20X2 and 31 December 20X3.

31/12/20X2 31/12/20X3

Rent received in advance $15,700 $12,500

Rent in arrears $21,150 $14,560

What amount of rental income should appear in the Pedantic Co’ s statement of
profit or loss for the year ended 31 December 20X3?
A. $528,390
B. $521,610
C. $517,490
D. $535,900
 24 Your Notes

RECALL KNOWLEDGE
Question 8:

Refer to Section Chapter 10. II. 2. Accounting for accruals and prepayments

Deferred income Accrued income

1. When received deferred income 1. When received accrued income

Dr Cash (payment received in Dr Accrued income (as an

advance from the customer) ‘uninvoiced receivable’)

Cr Deferred income (liability owe Cr Sales (recognise the income

to the customer until the delivery generated as the goods have been
of goods) delivered)

2. When deliver goods and services 2. When raise the invoice for the
goods, can eliminate the accrued
income

Dr Deferred income (remove the

liability no more needed) Dr Cash/Receivables

Cr Sales (as the income has been Cr Accrued income

‘earned’ now)
 25 Your Notes

ANSWERS
Question 8:

The correct answer is B.

31/12/20X2 31/12/20X3

Rent received in advance $15,700 $12,500  Liability

Rent owing by tenants $21,150 $14,560  Asset

There are 2 methods to arrive at the right answers as follow:

Method 1:

RENT ACCOUNT

Net rent at 31/12/20X2 Rent receipt $525,000

($21,150 - $15,700) $5,450 Net rent at 31/12/20X3
Rent income $521,610 ($14,560 – $12,500) $2,060

$527,060 $527,060

*Net rent = Rent received in advance – Rent owing by tenants

 26 Your Notes

ANSWERS
Question 8:

The correct answer is B.

Method 2:
Rent owing by tenants

$ $
31 Dec 20X2 21,150 Receipts Y1
Rent income X1 31 Dec 20X3 14,560

Rent received in advance

$ $
Rent income X2 31 Dec 20X2 15,700
31 Dec 20X3 12,500 Receipts Y2

We have the following equation:

Rent received in advance X1 = 14,560 – 21,150 + Y1  X1 = Y1 – 6,590

Rent owing by tenants X2 = 15,700 – 12,500 + Y2  X2 = Y2 + 3,200
 X1 + X2 = Y1 + Y2 – 3,390
Receipts: Y1 + Y2 = 525,000
Rent income X1 + X2 = 525,000 – 3,390 = 521,610
 27 Your Notes

PRACTICE QUESTIONS
Question 9:

What of the following items (that all generated future economic benefits, and
whose costs can be measured reliably), is an intangible non-current asset?
(1) Brand of the company itself
(2) Computer hardware owned by the company
(3) A patent bought by the company
(4) Customer list of the company

A. 1 & 3 only
B. 1, 3, and 4 only
C. 3 only
D. All 4 items
 28 Your Notes

RECALL KNOWLEDGE
Question 9:

An intangible asset is an identifiable non-monetary asset without physical substance.

(IAS 38, para 8)
As a kind of asset, Intangible NCA must simultaneously satisfy two criteria of asset
recognition:

2 criteria

A probable future The cost of the asset

economic benefit can be measured
from the asset will reliably
flow to the entity
 29 Your Notes

ANSWERS
Question 9:

The correct answer is C.

IAS 38 Intangible assets prohibits the recognition of internally generated intangible
assets such as brands, mastheads, publishing titles, customer lists and similar items.
So (1) and (4) are not intangible assets.
Intangible assets are non-current assets with no physical substance. So (2) is not an
intangible asset.
A patent bought by the company is a non-current asset with no physical substance
and can be measured reliably because it was purchased. So (3) is an intangible asset.
 30 Your Notes

PRACTICE QUESTIONS
Question 10:

Crystal‘s draft financial statements for the year to 31 Dec 20X4 report a loss of $1,250.
When she prepared the financial statement, Crystal didn’t include an accrual of $750
and recorded $510 as the expense of house rental fee for the next 3-month period.
What is Crystal‘s profit or loss for the year to 31 Dec 20X4 following the inclusion of
the accrual and prepayment?
A. A loss of $10
B. A loss of $2,510
C. A loss of $1,490
D. A profit of $1,010
 31 Your Notes

RECALL KNOWLEDGE
Question 10:
Refer to Section Chapter 10. II.1. Definition

Definition

Accruals (accrued expenses) are expenses which:

Accruals

• Incurred, but
• invoices have not yet been received and thus have
not yet been paid.
Prepayment

Prepayments (prepaid expenses) are payments which:

• Relate to the subsequence accounting period, but
• have already been paid.
 32 Your Notes

ANSWERS
Question 10:

The correct answer is C.

Year end: 31/12/20X4

Accrual of Prepayment of
$750 $510

$510 house rental fee for the next 3-month period has been recorded as expense,
which should be included in prepayment.
The double entries to record the omission of prepaid expense and accrued expense are:

Dr Prepaid expense (assets) $510

Cr Expense $510

This entry decreases expense, hence will increase profit.

Dr Expense $750
Cr Accrual expense (liabilities) $750

This entry increases expense, hence will decrease profit.

Original loss ($1,250)

Accrued expense ($750)
Prepaid expense $510

($1,490)
 33 Your Notes

PRACTICE QUESTIONS
Question 11:

The following information relates to Plastik’s sales tax for the month of April 20X5:

Sales (net of sales tax) $120,000

Purchase (including sales tax) $73,600

Plastik‘s sales tax account showed an opening credit balance of $1,200 at the
beginning of the month and a zero balance at the end of the month. Sales tax is
charged at the rate of 15%.
What is the total sales tax paid to regulatory authorities during the month of April
20X5?
A. $9,600
B. $5,200
C. $24,400
D. $12,240
 34 Your Notes

RECALL KNOWLEDGE
Question 11:

Refer to theory in section Chapter 6. I. 4. Amount inclusive and exclusive of tax

• The gross amount of a sale or purchase is the amount inclusive of sales tax.
• The net amount of a sale or purchase is the amount exclusive of sales tax.
Gross amount
Net amount =
1 + Tax rate

SALES TAX

$ $

Input tax (Purchase sales tax) X Opening balance X

Tax paid X Output tax (sales tax) X

Closing balance X X

X X
 35 Your Notes

ANSWERS
Question 11:

The correct answer is A.

Input tax: $73,600 x 15/115 = $9,600
Output tax: $120,000 x 15% = $18,000

SALES TAX

$ $

Input sales tax 9,600 Opening balance 1,200

(Purchase sales tax )

Tax paid (Balance figure) 9,600 Output sales tax (Sales tax ) 18,000

Closing balance 0

19,200 19,200
 36 Your Notes

PRACTICE QUESTIONS
Question 12:

The trial balance of Koi did not balance, and a suspense account was opened for
the difference.
Which of the following errors would require an entry to the suspense account to
correct them?
(1) A cash payment to purchase a motor van had been correctly entered in the
cash book but had been debited to the motor expenses account.
(2) The debit side of the wages account had been undercast.
(3) The total of the discounts received column in the cash book had been
posted to the payables ledger control account correctly and debited to the
purchases account.
(4) A refund to a credit customer had been recorded by debiting the cash book
and crediting the customer’s account.

A. (1) and (2)

B. (2) and (3)
C. (3) and (4)
D. (2) and (4)
 37 Your Notes

RECALL KNOWLEDGE
Question 12:

Refer to Section Chapter 17. II. 2. Suspense account

A suspense account is a temporary account, showing a balance equal to the
difference in a trial balance.
The suspense account should be cleared as the mysteries and errors must be
corrected at the year end
Any transactions that lead to discreptancy between Debit and Credit would need
adjustment in suspense account.
 38 Your Notes

ANSWERS
Question 12:

The correct answer is B.

(1) A debit and credit are made for an equal amount (albeit to the wrong account in
the case of the debit), and therefore the suspense account is not affected.
(2) The under-casting of the debit side of the wages account will result in an
incorrect balance being extracted. This will result in an imbalance on the trial
balance and the creation of a suspense account.
(3) The correct entry for discounts received is Dr Payables ledger control account,
and Cr Discounts received. The error made will therefore result in a double debit
(correctly to the payables ledger control account, and incorrectly to purchases).
When double entry recording of transactions breaks down, a suspense account
will be created.
(4) An equal debit and credit entry are made and therefore the suspense account is
not affected.
So (2) and (3) are correct, and B is the correct answer.
 39 Your Notes

PRACTICE QUESTIONS
Question 13:

On 1 January 20X8, Wootton had a building in its books which cost $500,000 with
a carrying amount of $405,000. Wootton’s accounting policy is to depreciate
buildings at the rate of 2% on a straight‐line basis. On 1 July 20X8, the asset was
valued at $600,000 and Wootton wishes to include that valuation in its books. On
revaluation there was no change to the overall useful life.
What was depreciation charge included in the statement of profit or loss for the
year ended 31 December 20X8?
A. $10,000
B. $11,000
C. $12,000
D. $12,500
 40 Your Notes

GUIDANCE
Question 13:

1. Refer to theory in section Chapter 8. III. Depreciation

Depreciation charge = X% × (Cost − Residual value)

Double entry:
Debit Depreciation expense (statement of profit or loss)
Credit Accumulated depreciation account (statement of financial position)

2. Refer to theory in section Chapter 8. IV. Revaluation of Non-current Assets

Revaluation gain

Dr NCA - Cost Difference between the revalued & the original cost
Dr Accumulated depreciation Any historical accumulated depreciation
Cr Revaluation surplus/reserve Gain on revaluation

Revaluation loss

Dr Revaluation loss Loss on revaluation

Dr Accumulated depreciation Any historical accumulated depreciation
Cr NCA - Cost Difference between the revalued & the original cost
 41 Your Notes

ANSWERS
Question 13:

The correct answer is D.

Depreciation per year before revaluation: $500,000 x 2% = $10,000

$405,000 6 months
Remaining useful life at date of revaluation: - = 40 years
$10,000 12 months
$600,000
Depreciation per year after revaluation: 40 years = $15,000

1/1/20X8 Year end: 31/12/20X8

Period 1 Period 2
$10,000/year $15,000/year

1/7/20X8
Revaluation of asset
6 months
Depreciation charge 1 Jan – 30 June: $10,000 × 12 months = $5,000

6 months
Depreciation for second half of year = $15,000 × 12 months = $7,500

The total depreciation charge for the year = $5,000 + $7,500 = $12,500
So D is the correct answer.
 42 Your Notes

PRACTICE QUESTIONS
Question 14:

KIO Co sold goods with a list price of $10,000 to John which was subject to trade
discount of 10% and early settlement discount of 4% if the invoice was paid within
7 days. The normal credit period available to credit customers is 15 days from
invoice date. At the point of sale, John was not expected to take advantage of
early settlement terms offered.
If John subsequently paid within 7 days and was eligible for the settlement
discount, what accounting entries should be made by KIO Co to record
settlement of the amount outstanding?
A. Debit Cash $8,640, Debit Revenue $180 and Credit Trade receivables $8,820
B. Debit Cash $9,000, Credit Revenue $360 and Credit Trade receivables $9360
C. Debit Cash $8,640, Debit Revenue $360 and Credit Trade receivables $9,000
D. Debit Cash $8,640, and Credit Trade receivables $8,640
 43 Your Notes

RECALL KNOWLEDGE
Question 14:
Refer to Section Chapter 6. III. 2. Accounting for discounts
• Trade discounts: Discount is deducted from gross sale price
Trade discounts = Discount rate (%) x Gross revenue
• Settlement discounts:
Settlement discount allowed

1. When sell goods take up discount NOT take up discount

to customers, if
customer is
Deduct the discount Record full amount
expected to
from revenue as revenue

2. When receive NOT take up discount take up discount

cash from
customers, if it subsequently subsequently reduced
transpires that recognize the the revenue by the
customers discount as revenue amount of discount

Settlement discount = Discount rate (%) x Revenue (after trade discounts)

 44 Your Notes

ANSWERS
Question 14:

The correct answer is C.

Trade discounts = 10% x $10,000 = $1,000
Revenue after trade discounts = $10,000 - $1,000 = $9,000

Settlement discounts = 4% x $9,000 = $360

Because you expect that John will not take up the settlement discounts, then when
sale takes place, the double entry is:
Debit Trade receivables $9,000
Credit Sales $9,000

After 7 days, John settles the invoice by bank transfer, which means that Smith takes
up the settlement discounts, the double entry is:
Debit Bank ($9,000 - $360) $8,640
Debit Revenue $360
Credit Trade receivables $9,000
 45 Your Notes

PRACTICE QUESTIONS
Question 15:

After corrections, what should be the balance on the following account?

BANK

$ $

Returns of goods purchased

Overdraft at start of month 1,340 50
for cash

Reimbursement of petty
45 Payment to credit suppliers 990
cash float

Receipts from customers 4,400 Rental income 1,300

Payment of electricity bill 700

Balance c/f 2,745

5,785 5,785
A. $2,720
B. $2,675
C. $1,420
D. $1,735
 46 Your Notes

GUIDANCE
Question 15:

BANK

$ $

Opening balance
Opening balance X X
(only exist when overdrawn)

Cash receipts X Cash paid X

Closing balance
X Closing balance X
(only exist when overdrawn)

X X
 47 Your Notes

ANSWERS
Question 15:

The correct answer is B.

BANK

$ $

Overdraft at start of month 1,340

Returns of goods purchased Reimbursement of petty

50 45
for cash cash float

Rental income 1,300 Payment to credit suppliers 990

Receipts from customers 4,400 Payment of electricity bill 700

Balance c/f 2,675

5,750 5,750