Test 2

Question 1

Scrap value

Answer 1

• Residual / Scrap value – what the directors
imagine the Asset could be disposed of, at the end
of its useful life. Decided at time of acquisition.

Question 2

Bad debts journal entry

Answer 2

• Dr Bad Debts Exp; Cr Accounts Receivable:
Debtor’s name (if avail)

Question 3

Allowance for bad debts journal entry

Answer 3

Dr Bad Debts Expense; Cr Allowance for Doubtful Debts

Question 4

Asset definition

Answer 4

An asset is:
• a present economic resource*
• Controlled** by the entity
• as a result of past events.

Question 5

Current asset definition

Answer 5

According to IAS 1, an asset is classified as
a current asset when:
• it is expected to be realised within 12
months after the end of reporting period;
or
• it holds the asset mainly for the purpose
of trading; or
• it expects to realise the asset, or intends
to sell or consume it, in its normal
operating cycle; or
• it is cash or a cash equivalent.
All other assets are Non-Current Assets

Question 6

Liability definition

Answer 6

a present obligation of the
entity
•to transfer an economic
resource
• as a result of past events.

Question 7

Current liability definition

Answer 7

According to IAS 1, a liability is classified as
a current liability when:
• it is due to be settled within 12 months
after the end of the reporting period; or
• it holds the liability mainly for the purpose
of trading; or
• it expects to settle the liability in its
normal operating cycle;
• the entity does not have an unconditional
right to defer settlement of the liability for
at least 12 months after the end of the
reporting period.

Question 8

Revaluation journal entry

Answer 8

Increased value recorded (DR Asset Type CR Reval
Surplus/Gain)
Recorded as an item in other comprehensive income

Question 9

Equity

Answer 9

Equity is the transactions with the owners (shareholders). The
residual interest in the assets of the entity after deducting all its
liabilities. (Assets – Liabilities) AKA Net Asset Value or net ‘wealth’
of the entity. The amount due to owners (s/h) if all assets
liquidated and liabilities paid

Question 10

Income

Answer 10

increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets (Bank/AR)
or decreases of liabilities (Inc Recd in Adv) that result in increases
in equity, other than those relating to contributions from equity
participants.

Question 11

Expense

Answer 11

decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets
(Bank/Expenses Prep) or incurrences of liabilities (AP) that result
in decreases in equity, other than those relating to distributions to
equity participants.

Question 12

Bad debt journal entry

Answer 12

Dr Bad Debts Exp; Cr Accounts Receivable: Debtor’s
name (if avail

Question 13

Accrued meaning

Answer 13

Payment that is outstanding

Question 14

Three rates of VAT

Answer 14

Zero rate - financial / educational / health services / energy
saving (solar panels / heat pumps etc) / gambling?????
• Reduced rate - health and safety – power (elect & gas) / car
seats for children / aids to stop smoking
• Standard rate – everything else

Question 15

Who should register for VAT

Answer 15

You should register for VAT if you supply goods
other than VAT Exempt goods and
• your total VAT taxable turnover for the last
12 months was over £85,000 (the VAT
threshold)
• you expect your turnover to exceed £85,000
in the next 30 days

Question 16

Journal entry for VAT received on a sale

Answer 16

VAT received on a sale / service (Output Tax) is treated as a liability as it is
received on behalf of the HMRC and needs to be refunded (CL)

Question 17

Journal entry for VAT paid on expenses

Answer 17

VAT paid on expenses / services received (Input Tax) is treated as an asset
as it can be used to reduce any amount owing to the HMRC, and could be
refunded to you (CA)

Question 18

Journal entry for VAT

Answer 18

Exclusive amount + VAT amount = Inclusive amount
100% + 20% = 120%
Sales/ purchases/inventory + input/output VAT = bank

Question 19

VAT on cost of sales

Answer 19

No VAT impact on cost of sales

Question 20

Journal entry for inventory purchased on VAT

Answer 20

Debit to Inventory or Purchases (next slides/section!) – exclusive figure
• Debit to Input VAT
• Credit to Bank / Accounts Payable – inclusive

Question 21

Journal entry for sales on VAT

Answer 21

Debit to Bank / Accounts Receivable – inclusive
• Credit to Sales - exclusive
• Credit to Output VAT

Question 22

Periodic method of recording inventory

Answer 22

the inventory-on-hand figure and
therefore cost-of-sales figure are calculated
PERIODICALLY, i.e. at the end of the period, i.e. the month,
quarter or financial year.
• Using this method, when purchasing stock the journal
entry is:
• Debit Purchases (Exp), Credit Bank / Acc Payable
• When selling stock, the JE is:
• Debit Bank / Acc Receivable; Cr Sales.
• There is NO cost-of-sales entry.
• Stock-take at the end of the year determines Inventory on
Hand

Question 23

Perpetual method of recording inventory

Answer 23

Perpetually keeping inventory up to date

Question 24

Closing inventory value

Answer 24

Closing Inventory to always be valued at ‘lower of cost
and net realisable value’. Cost figure you will have, NRV is
the amount to be realised if sold, less any cost to sell.

Question 25

Overstated inventory journal entry

Answer 25

• Cost of Inventory £950. Now redundant stock,
therefore selling price £925 and cost to sell
(commission etc) £50. Therefore NRV £875. Must be
written down by £75 TO £875.
• Dr Cost of Sales, Cr Inventory £75 method – (for
longer method see 12.6.2)

Question 26

Inventory definition

Answer 26

assets that:
• are held for sale in the ordinary course
of business;
• are in the process of production for
sale;
• are held in the form of materials or
supplies to be consumed within the
business operation.

Question 27

Mark up cost formula

Answer 27

Gross profit / cost price

Question 28

Gross profit % formula

Answer 28

Gross profit / Sales price

Question 29

PPE

Answer 29

Property, Plant and Equipment
A present economic resource, controlled by
the entity, as a result of past events. (Present economic
resource – a right that has the potential to produce
economic benefits.)

Question 30

Recognition criteria for PPE

Answer 30

an item of PPE should only be
recognised if it is probable that economic benefits will
flow to the entity AND the value of the item can be
reliably measured. Conceptual framework – it results in
relevant information and it faithfully represents that
information.

Question 31

Derecognising asset

Answer 31

1. Calculate depreciation for current period. Dr Depreciation Expense Cr Accumulated Depreciation.
2. Eliminate full cost of asset from asset account. Dr Disposal Cr Assets
3. Accumulated depreciation is eliminated as a contra account. Dr accumulated depreciation Cr Disposal
4. The proceeds on Disposal are recorded. Dr Cash Cr Disposal
5. Profit or loss on Disposal is recorded. Dr Disposal Cr Profit on Disposal OR Dr loss on disposal Cr Disposal

Question 32

Journal entry for revaluation method

Answer 32

Dr Land Cr Revaluation surplus

Question 33

Private company limited by guarantee criteria

Answer 33

limited by Guarantee (The person or entity that promises to pay the debtor’s debts):
- Owned by shareholders, managed by directors, intention is to make a profit.
- Profits can be reinvested, or distributed via dividends
- Shareholder liability limited to value of share capital invested
• Private Company, no Share Capital, commonly used by charities, clubs, and community
enterprises.

Question 34

Private company limited by shares criteria

Answer 34

Company name must end in Limited (Ltd). NB – different naming conventions globally!
• Share Issue Restricted. Prohibited from issuing shares to the public, offers are made
privately to investors or interested parties
• Share transfer restricted to within company, allows company to maintain control
• Minimum: Shareholder (1), Director (1), Share Capital £1
• Most common form of Company
• Examples – Google / Apple / Tesla / Meta (FB) / Microsoft

Question 35

Public company criteria

Answer 35

limited by shares
- Owned by shareholders, managed by directors, intention is to make a profit.
- Profits can be reinvested, or distributed via dividends
- Shareholder liability limited to value of share capital invested
• Company name must end in Public Liability Company (PLC)
• Shares offered to the public – information made available through a
prospectus – sold on stock exchange
• Shares easily transferable – shares are bought and sold on the stock exchange
• Minimum: Shareholder (1), Directors (2), Share Capital £50,000

Question 36

Ordinary shares

Answer 36

Main ‘risk-bearing’ shares of the organisation.
• Shareholders benefit through increased value of shares (if the
shareholder sells them) and through payment of dividends.
• Dividends: Shareholders have no rights to dividends unless
declared by Directors (and approved by s/h) at an AGM.
• Dividend is due to the shareholder in full once the dividend is
declared, regardless of when the share was bought or sold.

Question 37

Preference shares

Answer 37

Payment of dividends on Preference Shares given
preferential treatment over payment of ordinary share
dividends.
• Preference dividend is expressed as a percentage of
the issue price of the share, and amount is calculated
according to how long the share was held.
• Can be Cumulative or Non-Cumulative (dividend due
accumulates or not).
• Can also be Redeemable. (Substance over form
regarding treatment.) If redeemable at a particular time at
a particular amount, or on request by the shareholders,
these are treated as a loan (therefore Liability and not
Equity). These dividends would be treated as interest
payments and should be recorded as such in the FS.
• Dividend calculated from when the share was held. If only
held for three months when dividend declared, then 3/12.

Question 38

Debentures

Answer 38

Debentures are financial liabilities, smaller
loans obtained from a number of members of
the public, similarly to shares.
• Generally secured by a mortgage over
property or other assets.
• Fixed rate of interest and repayment terms.
• Negotiable document – i.e. can be sold to a
third party.

Question 39

Dividends on ORDINARY SHARES

Answer 39

Dividends on ORDINARY SHARES are paid PER SHARE. I.e. the number of shares
and the payment per share must be known. Then the calculation is:
• Number of shares x dividend per share (usually quoted in ‘p’).

Question 40

Dividends on PREFERENCE SHARES

Answer 40

Dividends on PREFERENCE SHARES are paid on the VALUE PER SHARE. I.e. the total
value of the shares at the given percentage rate. The calculation is:
• VALUE of shares x preference dividend percentage.

Question 41

Journal entry when you have paid for a good and not received it

Answer 41

Dr trade receivables
Cr bank

Question 42

When does depreciation start

Answer 42

When an asset becomes available for use

Question 43

Journal entry for depreciation

Answer 43

When equipment depreciates journal entry is accumulated depreciation

Question 44

Journal entry for supplies being used up

Answer 44

When supplies are used up they are entered as supplies expense

Question 45

Allowance for bad debts is written journal entry

Answer 45

allowance for doubtful debts and as bad debts expense

Question 46

billed meaning

Answer 46

receiving payment

Question 47

draw up a financial statement

Answer 47

statement of P/L
statement of changes in equity
statement of financial position (assets, liabilities and equity)

Question 48

statement of P/L sections

Answer 48

Sales, cost of sales, gross profit
Other income
Operating expenses, finance cost
Profit for the period

Question 49

statement of changes in equity

Answer 49

separated into capital and retained profit
Balance at …
Profit for the period (rp)
distributions (-rp)
capital contributions (c)

Question 50

statement of financial position

Answer 50

non-current assets (furniture and fittings, fixed deposit investment)
current assets
equity
non-current liabilities (long term borrowings)
current liabilities

Question 51

what is included in cost of sales

Answer 51

costs to bring the item to the location and conidition where ready for the purpose intended
does not include costs incurred after the sale

Question 52

Net realisable value

Answer 52

The price at which unsold inventory could be sold less expenses of selling them