TEST 4

Q1- MCQs: [1 mark each]

1.Which of the following is an example of an accrued expense?

A. Prepaid rent B. Salaries owed but not yet paid
C. Rent received in advance D. Inventory purchased and paid for in cash

2.What is the primary purpose of the accruals concept in accounting?

A. To match expenses with revenue in the period they occur B. To report only cash transactions
C. To avoid recognising liabilities D. To maximise profit

3.A company has an unpaid water bill of £150 at year-end. How should this be recorded?
A. Debit Water Expense £150; Credit Accrued Expenses £150
B. Debit Water Expense £150; Credit Prepaid Expenses £150
C. Debit Accrued Expenses £150; Credit Water Expense £150
D. Debit Cash £150; Credit Water Expense £150

4.At the end of the accounting period, how is a prepayment recorded in the financial statements?
A. As an expense in the income statement B. As a liability in the statement of financial position
C. As an asset in the statement of financial position D. As revenue in the income statement

5.Which of the following best describes a prepayment?

A. A payment received in advance from customers B. An amount paid in advance for future expenses
C. An income that has been earned but not yet received D. A liability that will be settled in the next accounting period

6.A vehicle costing £20,000 was sold for £8,000. Its accumulated depreciation was £15,000. What is the profit or loss
on disposal? A. £3,000 profit B. £3,000 loss C. £7,000 loss D. £7,000 profit

7.Which of the following would NOT result in a change to depreciation calculations?

A. A change in the residual value B. A change in the estimated useful life
C. A revaluation of the asset D. A decision to stop using the asset

8.When an asset is disposed of, the gain or loss is calculated as:

A. Selling price + Net book value B. Selling price - Cost price
C. Selling price - Accumulated depreciation D. Selling price - Net book value

9.What is the primary purpose of depreciation?

A. To allocate the cost of a non-current asset over its useful life B. To adjust the market value of a non-current asset
C. To provide funds for replacing the asset D. To improve profitability

10.Which method of depreciation is most suitable for an asset whose value diminishes more rapidly in its earlier
years?
A. Straight-line method B. Reducing balance method C. Revaluation method D. Units of production method

11.What does "net book value" mean in relation to a non-current asset?

A. The original cost of the asset B. The market value of the asset
C. The original cost less accumulated depreciation D. The residual value of the asset

12.The gain on the disposal of a non-current asset is reported in which financial statement?
A. Statement of financial position as a liability B. Income statement as other income
C. Income statement as a reduction of expenses D. Statement of cash flows as a financing activity

13.Which of the following is NOT a factor considered when calculating depreciation?

A. Cost of the asset B. Useful life of the asset C. Residual value of the asset D. Current market value of the asset

14.Which accounting concept supports the practice of charging depreciation on non-current assets?
A. Prudence B. Matching C. Consistency D. Materiality
15.Where is the allowance for doubtful debts shown in the financial statements?
A. As an expense in the income statement
B. As a liability in the statement of financial position
C. As a deduction from trade receivables in the statement of financial position
D. As a separate asset in the statement of financial position

16.Which accounting concept justifies the creation of an allowance for doubtful debts?
A. Prudence B. Accrual C. Consistency D. Going Concern

17.Where are bad debts written off shown in the financial statements?
A. Deducted from trade receivables in the statement of financial position B. As an expense in the income statement
C. As a liability in the statement of financial position D. As a deduction from equity

18.A company estimates doubtful debts at 4% of trade receivables. If trade receivables are £25,000 and there is an
existing allowance of £800, what adjustment is required?
A. Increase allowance by £200 B. Decrease allowance by £200
C. Increase allowance by £1,000 D. Decrease allowance by £1,000

19.What is the difference between bad debts and doubtful debts?

A. Bad debts are estimates, while doubtful debts are confirmed losses
B. Doubtful debts are estimates, while bad debts are confirmed losses
C. Both are recorded as expenses in the income statement
D. Both are deducted from trade receivables

20.A customer owing £3,000 is declared bankrupt, and the debt is written off. Later, the customer unexpectedly pays
£1,200. How should the recovery be recorded?
A. Debit Trade Receivables £1,200; Credit Bank £1,200
B. Debit Bank £1,200; Credit Bad Debt Recovered £1,200
C. Debit Bank £1,200; Credit Trade Receivables £1,200
D. Debit Allowance for Doubtful Debts £1,200; Credit Bank £1,200

Q2 - Emily runs a small florist shop as a sole proprietor. Prepare the necessary journal entries for the following
transactions for the year ended 31 December 2024. [20 marks]

1. Shop Renovation Payment: On 1 March 2024, Emily paid £12,000 for renovating her shop premises.
2. Utility Expense: Emily received an electricity bill of £450 on 20 December 2024, to be paid in January 2025.
3. Flower Supplies (Prepayment): On 1 November 2024, Emily paid £1,500 for a three-month supply of flowers,
covering November 2024 to January 2025.
4. Employee Salaries (Accrued): By 31 December 2024, Emily owes £2,200 in salaries to her staff, payable in
January 2025.
5. Advance Customer Payment: On 15 December 2024, Emily received £800 from a customer for an event order
to be delivered in January 2025.
6. Advertising Campaign: Emily spent £3,000 on a Christmas advertising campaign in December 2024, which
ran for the whole month.
7. Loan Interest (Accrued): Emily owes £550 in loan interest for the year, payable in Jan 2025.
8. Prepayment for Maintenance: On 1 October 2024, Emily paid £900 for quarterly maintenance services
covering October to December 2024.
9. Accrued Revenue: Emily provided floral arrangements worth £2,500 for a corporate event on 30 December
2024, with payment expected in January 2025.
10. Depreciation: Emily calculates annual depreciation on her delivery van, which cost £15,000 and has a useful
life of 5 years with no residual value.
11. Subscription Payment: On 1 July 2024, Emily paid £300 for a one-year subscription to an industry newsletter,
covering July 2024 to June 2025.
12. Rent Arrears: By the end of the year, Emily owes £1,000 for December rent, to be paid in January 2025.
13. Prepayment for Packaging Supplies: On 1 December 2024, Emily spent £450 on gift packaging materials to
be used over the next three months (Dec 2024 to Feb 2025).
14. Accrued Commission: Emily owes £750 in sales commissions to an event planner for securing a wedding deal
in December 2024, payable in January 2025.
15. Bad Debt Provision: Emily estimates £200 of her receivables at the end of the year are unlikely to be collected
and records a bad debt provision.
 16. Equipment Purchase: On 10 November 2024, Emily bought a flower refrigeration unit for £6,000, using cash.
The unit has a 6-year useful life.
17. Accrued Tax: Emily estimates her tax liability for the year to be £1,500, which will be paid in January 2025.
18. Loan Repayment: Emily made a loan repayment of £2,500 on 15 December 2024, which included £500 in
interest and £2,000 in principal.
19. Cash Sale: Emily made cash sales of £1,800 worth of floral arrangements at a local market on 22 December
2024.
20. Supplier Payment: Emily paid £3,200 to her flower suppliers for goods delivered earlier in the year.

Q3- Jennifer owns a manufacturing business and prepares her financial statements for the year ended 31 December
2024. The following information relates to her non-current assets:

1. Machinery Purchase: On 1 March 2024, Jennifer purchased a new piece of machinery for £60,000. Delivery
and installation costs amounted to £5,000, and an additional £2,000 was spent on initial testing before use.
The machinery has an expected useful life of 10 years and a residual value of £5,000. Straight-line
depreciation is applied.
2. Disposal of Old Machinery: On 1 August 2024, Jennifer sold an old machine for £12,000. The machine had
originally been purchased on 1 January 2020 for £40,000 and was being depreciated on a straight-line basis
over 8 years, with no residual value.
3. Revaluation of Building: Jennifer owns a building used for production purposes, originally purchased on 1
January 2015 for £200,000. It was being depreciated over 50 years on a straight-line basis. On 31 December
2024, the building was revalued to £250,000. Jennifer has decided to record the revaluation using the
revaluation surplus account.
4. Repairs and Maintenance: During the year, Jennifer spent £4,500 on repairs to another machine to restore its
operating condition after a breakdown. She also spent £8,000 on modifications to the same machine, which
extended its useful life by 3 years.
5. New Office Equipment Purchase: On 1 June 2024, Jennifer purchased office equipment for £15,000. The
equipment is expected to last for 5 years with no residual value, and the reducing balance method is used at a
rate of 20% per annum.
6. Impairment of Machinery: On 31 December 2024, Jennifer assessed one of her older machines and
determined its recoverable amount to be £10,000, while its carrying amount was £15,000.

(a) Prepare all the relevant journal entries for the year ended 31 December 2024 [8 marks]
(b) Explain the difference between capital and revenue expenditures [2 marks]

Q4- Petra owns a small manufacturing business. Her depreciation policy is as follows:

The following information in respect of plant and machinery has been extracted from the books of account for the year
ended 31 July 2021.

(a) Prepare the provision for depreciation account for plant and machinery for the year ended 31 July 2021. [5 marks]
(b) Prepare the disposal account for the year ended 31 July 2021. [7 marks]
(c) Discuss why a business may choose to depreciate plant and machinery using the reducing balance method.
[3 marks]
Q5- Zak owns a wholesale business. He makes sales on credit.
(a) Explain why it may be important for a business to maintain a provision for doubtful debts. [2marks]
Additional information: Zak has prepared an aged schedule of trade receivables at 31 December 2020.

In addition, two accounts had been outstanding for over 6 months.

$
P Limited 340
Q Limited 510

Zak’s policy is to write off as irrecoverable any amounts outstanding for more than 6 months. Zak updates the
provision for doubtful debts at each financial year end based on the estimated percentage of irrecoverable debts.
(b) Prepare a journal entry to write off the irrecoverable debts. A narrative is not required. [2 marks]
(c) State two ways in which the risk of irrecoverable debts may be reduced. [2 marks]

Additional information: At 1 January 2020 the business had a provision for doubtful debts of $980.

(d) Calculate the adjustment required to the provision for doubtful debts at 31 December 2020 [4 marks]
(e) Prepare the provision for doubtful debts account for the year ended 31 December 2020. [3 marks]
(f) State two factors that should be taken into account when setting a provision for doubtful debts. [2 marks]