Practice Questions • 20 Questions
State the accruals concept and state ONE way in which it affects the preparation of the income statement. (2 marks)
Hargreaves Ltd has been making losses for three consecutive years but the directors believe the business will continue to trade. The accountant has prepared the financial statements on the going concern basis. Identify the going concern concept and state ONE consequence of applying it to the valuation of non-current assets. (2 marks)
Kensington Traders values closing inventory at the lower of cost and net realisable value (NRV). The following information relates to four lines of inventory at 30 April 2024: (a) Calculate the NRV of each item. (2 marks) (b) Calculate the total value of inventory to be included in the statement of financial position. (1 mark)
Lawson & Co uses the straight-line method of depreciation for its motor vehicles. In the current year the accountant suggested switching to the reducing balance method, which would increase the depreciation charge significantly. Identify and explain the accounting concept that would need to be considered before making this change. (4 marks)
Redstone Engineering has a highly skilled and experienced workforce. The managing director believes this is the company's greatest asset. However, it does not appear on the statement of financial position. Identify and explain the accounting concept that explains why this item is excluded, and explain ONE limitation of this concept. (4 marks)
On 25 March 2024 Oldfield Ltd dispatched goods costing £3,000 to a customer on a "sale or return" basis. The goods had a selling price of £4,500. At 31 March 2024 (the year end) the customer had not yet confirmed whether they intended to keep the goods. Explain how the realisation concept determines the accounting treatment of these goods at 31 March 2024, and state the effect on the income statement if the concept were incorrectly applied. (4 marks)
At 31 December 2024 the following information was available for Marsden & Co: (i) Rent paid in the year was £9,600. This includes £800 paid for January 2025. (ii) Electricity accrued at the year end amounted to £350. (iii) Commission received in the year was £1,200. This includes £400 received for the quarter ended 28 February 2025. (iv) Wages of £6,200 have been paid. A further £520 relating to December 2024 has not yet been paid. For each item, state: (a) the amount to be included in the income statement for the year ended 31 December 2024 (b) the item and amount to appear on the statement of financial position at 31 December 2024 (4 marks — 1 mark per item)
The following balances were extracted from the records of Whitfield Trading at 31 May 2024: Additional information at 31 May 2024: 1. Insurance of £4,800 was paid on 1 December 2023 for the year to 30 November 2024. The year end is 31 May 2024. 2. Trade receivables total £18,000. The provision for doubtful debts is to be maintained at 4% of trade receivables. 3. Rent receivable of £300 per month has been received for April and May 2024 but the June 2024 quarter's rent (£900) has not yet been received. Record the following accounts in the general ledger for the year ended 31 May 2024, showing the transfers to the income statement and/or statement of financial position. Balance each account where appropriate. (a) Insurance account (b) Provision for doubtful debts account (c) Rent receivable account (6 marks — 2 marks per account)
Southgate Ltd has trade receivables of £45,000 at its year end of 30 September 2024. The accountant has estimated that 5% of these debts may prove to be irrecoverable. (a) Name the accounting concept applied when creating a provision for doubtful debts. (1 mark) (b) Explain how the provision for doubtful debts is calculated and state the double entry required to create a new provision of £2,250 (no provision existed previously). (3 marks) (c) Explain how the provision for doubtful debts is shown in the financial statements and why it is important for users of the accounts. (2 marks)
The trial balance of Pellham Supplies at 28 February 2024 includes the following: The following adjustments are required: 1. Motor expenses include £600 of expenses relating to the owner's private vehicle. 2. Commission has been received for January–February 2024 only. Commission of £700 per month is receivable but the amounts for March and April 2024 (the next period) have not yet been received. 3. Rent payable of £12,000 covers the period 1 November 2023 to 31 October 2024 (12 months). For each adjustment, state: (i) the accounting concept applied (ii) the corrected figure to be shown in the income statement for the year ended 28 February 2024 (iii) the item and amount to appear on the statement of financial position at 28 February 2024 (6 marks — 2 marks per item)
Ashwood Properties purchased a commercial building 15 years ago for £180,000. The building is currently estimated to be worth £520,000. The building appears in the statement of financial position at its net book value of £162,000. (a) Identify the accounting concept used to value the building in the financial statements. (1 mark) (b) Explain why this concept requires the building to be recorded at £162,000 rather than £520,000. (3 marks) (c) Explain ONE advantage and ONE disadvantage to users of the accounts of using this concept to value property. (2 marks)
Tilbury Wholesale values its closing inventory at the lower of cost and net realisable value. The following data relates to four product lines at 31 August 2024: (a) For each product, calculate the NRV per unit and state the value per unit to be used in the accounts. (4 marks) (b) Calculate the total value of inventory at 31 August 2024. (2 marks) (c) Name the accounting concept applied and explain why inventory is not valued at selling price. (2 marks)
The following trial balance extract relates to Greystone Ltd at 31 October 2024: Additional information: 1. Insurance of £7,200 was paid on 1 July 2024 for the 12 months to 30 June 2025. 2. Rent receivable: the tenant pays £1,600 per quarter. Rent for August–October 2024 (quarter) has been received; rent for November 2024 – January 2025 is not yet due. 3. Electricity: a bill for £960 relating to September–October 2024 has not yet been received or paid. 4. Commission payable of £1,800 includes £450 prepaid to November 2024. Prepare the relevant sections of the income statement for the year ended 31 October 2024, showing clearly: - the adjusted figure for each item - all workings (8 marks)
Portman Electronics is a sole trader that manufactures electronic components. The owner, Gail Portman, is reviewing the draft financial statements for the year ended 31 March 2024. She has identified the following issues: 1. Gail used the business van for a personal trip costing £320 in fuel. The bookkeeper included this in motor expenses. 2. The business holds 500 units of Component X in inventory. These cost £18 each to produce. Due to a design change, they can now only be sold for £12 each with no further conversion costs required. 3. The business purchased a small coffee machine for the office for £95. The bookkeeper capitalised this as a non-current asset with a five-year life. 4. Gail has been approached by a competitor offering to purchase the business for £800,000. She believes the offer reflects the value of her loyal customer base, which is not shown in the accounts. For each issue (1–4): (a) Identify the accounting concept that should be applied. (b) Explain whether the current accounting treatment is correct and, if not, state the correction required. (10 marks — 2.5 marks per issue, awarded as 1 + 1.5)
The trial balance of Northfield Traders at 30 June 2024 includes the following figures: Additional information at 30 June 2024: 1. Closing inventory at cost = £22,800. However, 80 units of Product Z (included in this figure at a cost of £15 each) can now only be sold for £9 each. No further conversion costs are needed. 2. Rent payable of £14,400 covers 1 January 2024 to 30 September 2024. Year end is 30 June 2024. 3. Motor expenses include £750 of private fuel paid for by the owner. 4. The provision for doubtful debts is to be maintained at 4% of trade receivables. (a) Calculate the adjusted value of closing inventory. (3 marks) (b) State the corrected figures for rent payable and motor expenses to appear in the income statement. (2 marks) (c) Calculate the increase or decrease in the provision for doubtful debts and state its effect on profit. (2 marks) (d) Prepare a draft income statement for the year ended 30 June 2024 using the adjusted figures. (3 marks)