Mock Exam 1 0%

Question 1

Carbel Ltd made a profit for the year of £18,750, after accounting for depreciation of £1,250. During the year, non-current assets were purchased for £8,000, receivables increased by £1,000, inventories decreased by £1,800 and payables increased by £350.

What was Carbel Ltd’s increase in cash and equivalents during the year?

£10,650
£12,450
£13,150
£22,350

Answer 1

£13,150

Profit for the year = 18,750
ADD Depreciation, Decrease in Inventories and Increase in Payables
SUBTRACT NC Asset Purchases and Increase in Receivables

Question 2

Churro plc recognised a provision of £25,000 in respect of a legal claim for the year ended 30 June 20X5. In the following year the company settled the claim at a cost of £23,300.

What amount should Churro plc charge or credit to the statement of profit or loss for the year ended 30 June 20X6 in respect of the legal claim?

£1,700 credit
£1,700 charge
£23,300 credit
£23,300 charge

Answer 2

£1,700 credit

The cash paid is less than the provision amount, so there is a credit to the statement of the profit or loss of £1,700

*Think Debit = INCREASE and Credit = DECREASE

Question 3

Mr. Bliss owns a business.

Although most of the business expenses are paid by cash, Mr. Bliss on certain occasions uses his own personal cheque book to pay some business expenses.

His accountant has asked to see his personal cheque book stubs so that some of these amounts may be included as expenses in the statement of profit or loss.

Mr. Bliss is confused about this and asks, “If you are going to use my personal cheque book to prepare the financial statements, why don’t you include all of the cheques as expenses instead of only some of them?”

The main reason why the accountant does not include all of the cheques is because:

Mr. Bliss has not entered the full details of some of the expenditure on the cheque stubs and, because of this uncertainty, it is more prudent not to include them in the financial statements.

There are a large number of immaterial cheque payments which would take a long time to examine.

The personal expenses of the owner are separate from those of the business and are not relevant to the statement of profit or loss.

To be consistent with last year’s financial statements only cheques above £500 are included in the statement of profit or loss.

Answer 3

The personal expenses of the owner are separate from those of the business and are not relevant to the statement of profit or loss

Question 4

Goods invoiced at £36 had been returned by Crabby Ltd to the supplier for a full refund. The only accounting entries made for the return were to debit the purchases account with £63 and credit the suspense account with £63.

Which of the following journal entries should be made to correctly record the return in the nominal ledger?

Dr Suspense £63, Cr Purchases £63

Dr Suspense £63, Cr Trade Payables £63

Dr Suspense £63, Dr Trade payables £36, Cr Purchases £99

Dr Trade payables £27, Cr Purchases £27

Answer 4

Dr Suspense £63, Dr Trade payables £36, Cr Purchases £99

Purchases have been debited but should’ve been credited and therefore needs to be DECREASED by (36+63) = 99
The suspense account needs to be removed (DR) and the amount of payables reduced (DR)

Question 5

What is included in cash flows from operating activities

Answer 5

Profit before tax

Investment income/Finance income

Finance costs

Movement in inventories

Movement in receivables

Movement in payable

Question 6

The following information has been extracted from the payroll of Radley, a sole trader, for June.

£

Gross wages and salaries = 127,600
PAYE = 31,900
Employee NIC = 11,484
Employer NIC = 14,036

What is the total wages and salaries expense to be included in the statement of profit or loss for June?

£113,564
£185,020
£141,636
£127,600

Answer 6

£141,636

Total wages and salaries expense = Gross wages and salaries + EMPLOYER NICS

Question 7

Eiris plc has the following information in its financial statements relating to machinery as at 31 July:

20X4 20X3
£ £

Cost320,000 260,000
Accumulated depreciation
97,500 90,000
_______ _______
Carrying amount
222,500 170,000
_______ _______

During the year to 31 July 20X4, the following transactions occurred in relation to machinery:

Additions £142,000

Sales proceeds from disposals £94,000

Depreciation charge £31,400

What is Eiris plc’s profit or loss on disposals of machinery in the year ended 31 July 20X4?

£35,900 loss
£35,900 profit
£4,500 profit
£4,500 loss

Answer 7

35,900 profit

1) CF Cost = BF Cost + Additions - Cost of Machinery

320,000 = 260,000 + 142,000 - Cost of Machinery

Cost of Machinery = 82,000

2) CF Acc Depr = BF Acc Depr + Depr Charge - Acc Depr on disposal

97,500 = 90,000 + 31,400 - Acc Depr on Disposal

Acc Depr on Disposal = 23,900

3) Carrying amount of machinery sold = Cost of Machinery sold - Acc Depr on disposal

= 58,100

4) P/L on disposal = Sales Proceeds - CA of machinery sold

=35,900 PROFIT

Question 8

Harry posts a debit for wages to the rent account in error.

What type of error is this?

Commission

Omission

Error of principle

Compensating error

Answer 8

Commission

Commission is correct because a posting made to the wrong account in error is known as an error of commission. e.g. here the wrong expense account.

Question 9

What is an error of omission?

Answer 9

Omission refers to a balance being left out of the ledgers.

Question 10

What is an error of principle?

Answer 10

Error of principle refers to errors where completely the wrong type of account is debited or credited.

Question 11

What is a compensating error?

Answer 11

Compensating errors arise when an error affecting the one side of the ledger is matched by an equal and opposite error made on the other side.

Question 12

After settling its tax liability on profits for the year ended 30 June 20X3, Spiral Ltd has a debit balance of £500 relating to tax payable included in its trial balance extracted at 30 June 20X4. Spiral Ltd estimated that its income tax liability for the year ended 30 June 20X4 was £8,000.

What amounts of tax should Spiral be showing in its financial statements?

Statement of profit or loss: £8,000 / Statement of financial position: £8,000

Statement of profit or loss: £8,500 / Statement of financial position: £8,000

Statement of profit or loss: £7,500 / Statement of financial position: £8,500

Statement of profit or loss: £8,000 / Statement of financial position: £7,500

Answer 12

Statement of profit or loss: £8,500 / Statement of financial position: £8,000

The debit balance represents an UNDERPROVISION relating to the YE 30 June 20X3. The profit or loss charge for the YE 30 June 20X4 should be £500 UNDERPROVISION BF plus the charge for the current year of £8,000 = £8,500. The liability outstanding would be £8,000.

Question 13

Marie’s draft accounts show a loss of £25,000 for the year. Upon investigation, you discover the following:

1. A purchase of plant and equipment on the last day of the year costing £3,000 had had been incorrectly recorded as a repair expense.
2. Cash of £800, received in respect of a debt written off last year had been credited to receivables.
3. Closing inventory includes items costing £2,000 which were sold and delivered to the customer on the year end date.

What is the adjusted loss for the year?

£25,200

£23,200

£30,800

£26,800

Answer 13

£23,200

Start with loss of -25,000

ADD P+E costs and recovery of debt as they reduce the loss because they either remove an incorrect expense or add income

SUBTRACT inventory as it increases the loss because it correctly increases the CoS

Question 14

A plc’s share capital consists of 400,000 25p equity shares all of which were issued at a premium of 25%. The company made a 2 for 5 rights issue at £1.50 per share. A plc correctly debited cash at bank but recorded the other side of the transaction in the suspense account.

What adjustment should A plc make to correctly record the rights issue?

Debit Suspense £240,000, Credit Share capital £160,000, Credit Share premium £80,000

Debit Suspense £240,000, Credit Share capital £40,000, Credit Share premium £200,000

Debit Suspense £60,000, Credit Share capital £15,000, Credit Share premium £45,000

Debit Suspense £60,000 Credit Share capital £40,000, Credit Share premium £20,000

Answer 14

Debit Suspense £240,000, Credit Share capital £40,000, Credit Share premium £200,000

Number of shares issued 400,000 x 2/5 = 160,000

Share capital is based on the nominal value 25p x 160,000 = £40,000

The remainder is recorded in share premium £1.25 x 160,000 = £200,000.

The total cash received £1.50 x 160,000 = £240,000 is removed from the suspense account.

Question 15

A company buys a machine for £10,000. It has an estimated residual value of £500, a useful life of ten years and the company depreciates the asset using the straight line method.

After four years the company decides that the asset has no residual value.

The depreciation charge for the fifth year will be

£1,033

£1,000

£967

£950

Answer 15

£1,033

Annual depreciation for first 4 years = £(10,000 - 500)/10 = £950

Cumulative (total) depreciation for first 4 years = 4 × £950 = £3,800

Depreciation for year 5 = £(10,000 – 3,800)/6 = £1,033

*divided by 6 as thats how many years are left under new coniditons

Question 16

Lemon plc draws up financial statements to 31 December in each year. It pays telephone line rental charges for each year ending 30 April in two equal instalments, on 1 May and 1 November, in advance. It also pays telephone call charges quarterly in arrears at the end of February, April, July and November. The total telephone line rental for the year to 30 April 20X4 was £6,300. Telephone call charges for the year commencing 1 July 20X3 were £5,820.

What were Lemon plc’s prepayment for line rental and accrual for call charges in its statement of financial position at 31 December 20X3?

Answer 16

Line rental charge payment of 3,150 made on Nov 1 20X3 covers six months to 30 April 20X4. Of this payment, 4 MONTHS is a PREPAYMENT covering 1 Jan to 30 April 20X4, an amount of (4/6 * 3,150) = £2,100

The call charges payment are in arrears, so when the last payment for 20X3 is made on 30 Nov, Apple Ltd STILL OWE ONE MONTH (Dec) of charges, which is (5,820 * 1/12) = £485

Question 17

On 1 April 20X7 a sole trader paid £6,380 in local property taxes for the year ending 31 March 20X8. This was an increase of 10% on the charge for the previous year.

What is the correct charge for local property taxes in her profit and loss account for the year ended 31 December 20X7?

£4,640
£6,220
£6,235
£6,540

Answer 17

£6,235

April - Dec X7 = 6,380 * 9/12 = 4,785
Jan - Marc X7 = 6,380 * 3/12 * 100/110 (10% decrease from current year) = 1,450
TOTAL = 6,235

Question 18

Picardy plc started offering an online TV streaming service from 1 March 20X5. Customers can pay annually in advance at a reduced rate, or monthly in arrears. The service has proved popular and Picardy plc has a credit balance on its subscription income account in the trial balance as at 28 February 20X6 of £25,900,000. It has yet to adjust the accounting records for subscription income received in advance for the year ended 28 February 20X7 of £2,550,000 and subscriptions still owed by customers for February 20X6 of £1,030,000.

What amount will appear for subscription income in Picardy plc’s statement of profit or loss for the year ended 28 February 20X6?

£29,480,000
£27,420,000
£24,380,000
£22,320,000

Answer 18

£24,380,000

(25,900,000
MINUS 2,550,000 (Amount received in adv for next year)
ADD 1,030,000 (Income still owed for current year))

Question 19

Which of the following statements about statements of cash flows is/are correct?

(1) A part exchange allowance is shown as a cash inflow in a statement of cash flows, being the proceeds on disposal of a non-current asset.
(2) A loss on disposal is added when calculating cash generated from operations under the indirect method in a statement of cash flows.
(3) Interest paid is shown under Cash flows from Financing Activities in a statement of cash flows.
(4) Income taxes paid this year will be the same as the income tax liability recognised in last year’s statement of financial position.

A 2 only
B 2 and 3
C 1 and 2
D 3 and 4

*Also, explain why it isnt the other options

Answer 19

A 2 only

1 - A part ex allowance is NOT a cash flow
2 - A loss on disposal must be REVERSED as it is NOT a cash flow, so must be ADDED BACK
3 - Interest paid is shown under ‘CASH FLOWS FROM OPERATING ACTIVITIES
4 - Income taxes paid this year will not typically be the same as income tax liability recognised in PY SFP because the liability is an ESTIMATE and we can expect to pay a DIFFERENT AMOUNT resulting in an OVER or UNDER provision

Question 20

For many years Meadows plc has experienced falling prices for raw material M, and has kept constant inventory levels. It uses the AVCO inventory valuation method.

If Meadows plc had used the FIFO valuation method, in the financial statements this would result in:

Lower cost of sales and higher closing inventory value

Lower cost of sales and lower closing inventory value

Higher cost of sales and lower closing inventory value

Higher cost of sales and higher closing inventory value

Answer 20

Higher cost of sales and lower closing inventory value

When raw material prices are falling, AVCO averages the EARLIER, HIGHER prices with the LATER, LOWER prices while FIFO just takes the later, lower prices. Thus FIFO would result in a lower inventory value than AVCO.

In a falling price environment, FIFO will typically result in a HIGHER CoS because it uses up the OLDER, more EXPENSIVE inventory first.

Question 21

The following information is available about Celine’s business at 31 October 20X4:

£

Leased lorry = 14,000
Loan (repayable in 4 equal annual instalments starting 1 January 20X5) = 100,000
Trade receivables = 23,800
Bank balance (a debit on the bank statement) = 3,250
Accumulated depreciation = 7,000
Trade payables = 26,050
Lease liability repayable within 12 months = 5,000
Lease liability repayable after 12 months = 10,000
Inventory = 12,560
Petty cash = 150
Property taxes payable = 1,200
Allowance for receivables = 1,500

Answer 21

Current assets: £35,010 / Current liabilities: £60,500

CURRENT ASSETS (items that are expected to be converted to cash or used up within 1 YEAR)

T rec = 23,800
Inventory = 12,560
Petty cash = 150
Allowance for rec = (1500) - used to adj t recs to a more realistic figure known as NRV

= 35,010

CURRENT LIABILITES (obligations expected to be settled within 1 YEAR)

Bank balance = 3,250 (Debit on Bank Statement indicating overdraft which is a C liab)
Trade payables = 26,050
Lease liability… 12 months = 5,000
Property taxes payable = 1,200
Loan repayment (due within next 12 months, as the loan repayment is 4 equal annual instalments) = 100,000/4 = 25,000

Question 22

The Companies Act in the UK requires the following documents in the financial statements:

a profit and loss account, a balance sheet, a directors report, an auditors report.

a profit and loss, statement of financial position, directors report and an auditors report.

a statement of financial position, an income statement, a statement showing changes in equity, a statement of cash flow, accounting policies and explanatory notes.

a profit and loss account, a balance sheet, a cash flow statement, a directors report and an auditors report.

Answer 22

a profit and loss account, a balance sheet, a directors report, an auditors report.

Question 23

The VAT account in Britney Ltd’s nominal ledger currently shows output tax and input tax for the quarter at £232,618 and £142,319 respectively. A review of the account highlights the following:

1. £5608 of VAT on invoices received has been posted to output tax
2. VAT of £4201 on sales has been posted to the debit of the VAT account
3. VAT on a purchase invoice with a total invoice value (including VAT) of £126 has not been recorded at all.

The correct balance on the VAT account is:

£93,092 receivable
£87,464 payable
£84,464 receivable
£93,092 payable

Answer 23

£87,464 payable

VAT BALANCE = OUTPUT TAX - INPUT TAX

In accounting, VAT on invoices received (from suppliers) represents input VAT - VAT the business can reclaim

Output tax represents VAT the business has charged to customers on its own sales, which it needs to pay to the tax authorities

1. 5,608 of VAT on invoices should be a part of INPUT tax, not OUTPUT TAX. To correct this, reduce output tax by 5,608 and increase input tax by 5,608
2. VAT of 4,201 on sales has been wrongly posted to the DEBIT of the VAT account. The amount should’ve been put on the CREDIT side (output tax). To correct this, increase output tax by 4,201 and reduce input tax by 4,201
3. VAT on a purchase invoice with a value of £126 (INCLUDING VAT) has not been recorded.
   To fijnd the VAT portion of this purchase, we use the formula for VAT: VAT = Total Value/1 + VAT Rate * VAT Rate
   = 126/1.20 * 0.20 = 21
   21 should be added to INPUT TAX

Question 24

At 30 September 20X3 Jeff plc’s equity contained the following balances:

Equity shares of £1 each: £40m

Share premium: £20m

During the year ended 30 September 20X4, the following transactions took place:

1 - 1 December 20X3 - A one-for-four bonus issue, using share premium

2 - A fully subscribed one-for-two rights issue at £1.80 per share.

What are the balances on each account at 30 September 20X4?

Equity share capital: £75m / Share premium: £21m

Equity share capital: £75m / Share premium: £50m

Equity share capital: £75m / Share premium: £30m

Equity share capital: £70m / Share premium: £35m

Answer 24

Equity share capital: £75m / Share premium: £30m

Initial SC: 40mil
Initial SP: 20mil

(1) - one-for-four bonus issue using SP (means for every 4 shares held, 1 additional share is issued)

40mil shares/4 = 10mil shares
The SC will benefit from the 10mil new shares and SP will reduce by 10mil to cover the cost of the bonus issue

SC = 40mil + 10mil
SP = 20mil - 10mil

(2) - rights issue, one-for-two at £1.80 per share
This means that shareholders are offered 1 new share for every 2 shares they currently hold
After the bonus issue, the equity share capital was £50mil representing 50 million shares
W/ a one for two rights issue, the number of new shares issued would be = 50mil shares/2 = 25mil shares

Each new share is issued at £1.80, which includes £1 as equity SC and £0.80 as SP

Therefore:
SC increases by 25mil shares * £1 = £25mil
SP increases by 25mil shares * £0.80 = £20mil

After this transaction:
Equity SC = 50mil + 25mil = 75mil
SP = 10mil + 20mil =30mil

Question 25

Extracts from the financial statements of Double Ltd showed balances at 31 December as follows:

20X9 20X8
£ £

£1 Share capital 300,000 120,000
Share premium 260,000 100,000
Bank loan 350,000 50,000

Answer 25

Equity SC = increased by 180,000
SP = increased by 160,000

Bonus issues do not involve a cash flow as they are funded from RESERVES therefore not included in calculations

Bank loan = increased by 300,000

Thus net cash inflow = 180,000 + 160,000 + 300,000 = 640,000