55 questions. Try each one, then open the answer to check yourself and read the explanation.
Which of the following is the basic accounting equation?
Answer: A (Assets = Capital + Liabilities)
Assets = Capital + Liabilities.
A sales Day Book is used for recording
Answer: A (credit sales)
The sales day book records credit sales.
An analytical cash book is used to
Answer: B (categorise petty cash payment)
An analytical (petty) cash book has columns that sort payments into types of expense.
Which of the following concepts is expected to hold when a proprietor makes a drawing of goods or cash from the business?
Answer: A (Business entity)
The business is separate from the owner, so his drawings are recorded as reducing his capital.
In a partnership business, the net profit serves as opening figure for
Answer: D (appropriation account.)
The appropriation account starts with the net profit.
Which of the following is the effect of an increase in the provision for discount allowed?
Answer: C (Decrease in net profit)
An increase in a provision is charged to profit and loss, lowering net profit.
In the preparation of manufacturing accounts, prime cost plus factory overheads equal to cost of
Answer: B (production)
Prime cost + overheads = cost of production.
Returns inwards is also called
Answer: B (sales returns)
Returns inwards are goods returned by customers: sales returns.
Tale Ltd. has 100,000 ordinary shares of N1 each and 60,000 5% preference shares of N1 each. Both were fully paid.
Profit and loss appropriation b/f N10,000
Net profit for the year N6,000
Proposed dividend on ordinary shares N4,000
Interim dividend N6,000
Goodwill written off N600
The balance of the profit and loss appropriation account as at the end of the year was
Answer: C (N5,400)
10,000 + 6,000 − 4,000 − 6,000 − 600 = N5,400 (the interim dividend is taken to include the preference dividend).
Tale Ltd. has 100,000 ordinary shares of N1 each and 60,000 5% preference shares of N1 each. Both were fully paid.
Profit and loss appropriation b/f N10,000
Net profit for the year N6,000
Proposed dividend on ordinary shares N4,000
Interim dividend N6,000
Goodwill written off N600
The authorised capital of Tale Ltd is
Answer: C (N160,000)
Only the issued shares are given (100,000 + 60,000 = N160,000); taking all shares as authorised and issued, the answer is N160,000.
Tale Ltd. has 100,000 ordinary shares of N1 each and 60,000 5% preference shares of N1 each. Both were fully paid.
Profit and loss appropriation b/f N10,000
Net profit for the year N6,000
Proposed dividend on ordinary shares N4,000
Interim dividend N6,000
Goodwill written off N600
The dividend payable to preference shareholders is
Answer: C (N3,000)
5% × N60,000 = N3,000.
Final accounts of a not-for-profit making organization is made up of
Answer: C (income and expenditure account and balance sheet)
A club's final accounts are the income and expenditure account and the balance sheet.
Which of the following is a debit entry in debtors control account?
Answer: A (Credit sales)
Credit sales increase debtors and are debited.
Opening capital N60,000
Drawings N4,000
Cost of sales N50,000
General expenses N7,000
Mark-up 50%
Net profit is
Answer: D (N18,000.)
Gross profit = 50% × 50,000 = 25,000; net profit = 25,000 − 7,000 = N18,000.
Opening capital N60,000
Drawings N4,000
Cost of sales N50,000
General expenses N7,000
Mark-up 50%
Closing capital is
Answer: C (N74,000)
60,000 + 18,000 − 4,000 = N74,000.
Which of the following is not found in a partnership balance sheet?
Answer: B (Drawings)
Drawings are transferred to the current accounts, so they do not appear separately.
The difference between factory cost of goods produced and its market value is
Answer: C (manufacturing profit)
That difference is manufacturing profit.
Which of the following is not an item in the appropriation account of a company?
Answer: C (Debenture interest)
Debenture interest is an expense in the profit and loss account.
The purchase of furniture, an asset to the company was debited to purchases account. This is an error of
Answer: C (principle)
A fixed asset entered in an expense account is an error of principle.
Which of the following terms is not used to describe the total amount stated in the memorandum of association approved by the Registrar of Companies?
Answer: C (Issued capital)
Issued capital is what has been allotted, not the maximum in the memorandum.
A cash payment of N85 to Regina was entered in the books as N58. The entries to correct the error are: debit
Answer: A (Regina's Account N27: Credit Cash Account N27)
N27 more must be paid out: debit Regina 27, credit cash 27.
Sales Le183,400
Purchases Le168,000
Opening stock Le20,100
Closing stock Le48,900
Carriage outwards Le2,400
Carriage inwards Le5,000
Returns inwards Le10,000
Expenses Le15,000
Returns outwards Le8,000
The gross profit is
Answer: C (Le 37,200)
Net sales 173,400 − cost of sales 136,200 = Le37,200.
Sales Le183,400
Purchases Le168,000
Opening stock Le20,100
Closing stock Le48,900
Carriage outwards Le2,400
Carriage inwards Le5,000
Returns inwards Le10,000
Expenses Le15,000
Returns outwards Le8,000
The net profit is
Answer: D (Le 19,800.)
37,200 − carriage outwards 2,400 − expenses 15,000 = Le19,800.
Sales Le183,400
Purchases Le168,000
Opening stock Le20,100
Closing stock Le48,900
Carriage outwards Le2,400
Carriage inwards Le5,000
Returns inwards Le10,000
Expenses Le15,000
Returns outwards Le8,000
The cost of goods sold is
Answer: C (Le 136,200)
20,100 + 168,000 − 8,000 + 5,000 − 48,900 = Le136,200.
The class of share to which payment of dividend depends on profit is
Answer: B (ordinary shares)
Ordinary dividends vary with profit.
Payment for shares in installments is done by means of
Answer: A (calls)
Instalments on shares are collected by calls.
Mark-up on goods sent to branch are recorded in the books by crediting
Answer: A (Stock Adjustment Account; debiting Branch Stock Account)
The mark-up (loading) is credited to the branch stock adjustment account.
Which of the following is not part of cost of production?
Answer: D (Administrative overheads.)
Administration costs go to profit and loss.
Sulay Local Government (D):
Construction of classrooms D500,000
Sinking of boreholes D100,000
Staff salaries D150,000
Electricity D14,000
Transport and travels D7,000
Office expenses D9,000
Recurrent expenditure is
Answer: A (D180,000)
150,000 + 14,000 + 7,000 + 9,000 = D180,000.
Sulay Local Government (D):
Construction of classrooms D500,000
Sinking of boreholes D100,000
Staff salaries D150,000
Electricity D14,000
Transport and travels D7,000
Office expenses D9,000
Capital expenditure is
Answer: C (D600,000)
Classrooms 500,000 + boreholes 100,000 = D600,000.
Which of the following is not a subsidiary book?
Answer: C (Purchases ledger)
The purchases ledger is a ledger, not a book of original entry.
An approach for discovering missing figures in incomplete records is the use of
Answer: B (control accounts)
Control (total) accounts reveal missing sales and purchases.
A merchant paid N180,000 on rent for 18 months but charged N120,000 to profit and loss account for the year. The concept applied is
Answer: C (accrual)
Only the year's 12 months of rent are charged: accruals.
Which of the following is an advantage of the imprest system?
Answer: D (Reducing the postings for small expenses into the main ledger.)
Petty expenses are posted in column totals, reducing ledger postings.
Henik Plc has departments A and B and has made the following information available concerning its operations:
Turnover: Department A N100,000; Department B N80,000
Commission N3,600
Rent N6,000
Floor space: Department A 200 m²; Department B 100 m²
How much commission was apportioned to Department A?
Answer: C (N2,000)
By turnover: 3,600 × 100/180 = N2,000.
Henik Plc has departments A and B and has made the following information available concerning its operations:
Turnover: Department A N100,000; Department B N80,000
Commission N3,600
Rent N6,000
Floor space: Department A 200 m²; Department B 100 m²
Rent apportioned to Department B is
Answer: C (N2,000)
By floor area: 6,000 × 100/300 = N2,000; N4,000 is Department A's share.
The entries to record goods bought for cash are: debit
Answer: B (Purchases Account; Credit Cash Account)
Debit purchases, credit cash.
Carriage inwards is posted to
Answer: A (Trading Account)
Carriage inwards is part of cost of goods, in the trading account.
Repairs to air conditioners was debited to office equipment account. This is an error of
Answer: A (principle)
A revenue expense entered in an asset account is an error of principle.
The practice of identifying with one constant approach where a number of approaches exist for solving an accounting problem is the convention of
Answer: B (consistency)
Using the same method each period is consistency.
Opening debtors N40,000
Opening creditors N30,000
Credit sales N100,000
Credit purchases N80,000
Bad debts N5,500
Set-offs N65,500
Closing debtors figure is
Answer: D (N69,000.)
40,000 + 100,000 − 5,500 − 65,500 = N69,000.
Opening debtors N40,000
Opening creditors N30,000
Credit sales N100,000
Credit purchases N80,000
Bad debts N5,500
Set-offs N65,500
Closing creditors figure is
Answer: D (N44,500.)
30,000 + 80,000 − 65,500 = N44,500.
Which of the following is a nominal account?
Answer: C (Sales Account)
Sales is an income account: nominal.
Which of the following is a storage device?
Answer: A (Diskette)
A diskette stores data.
Trade creditors personal accounts are found in the
Answer: A (purchases ledger)
Suppliers' accounts are in the purchases ledger.
Which of the following is not an instrument for controlling public expenditure?
Answer: D (Memorandum of association.)
The memorandum of association governs companies, not public spending.
Section A
1. (a) State three distinguishing features between reserves and provisions. (b) State two types of reserves with an example each.
(a) Any three: reserves are appropriations of profit, provisions are charges against profit; reserves are not made for any known liability or loss, provisions are for a known liability or loss whose amount cannot be measured accurately; reserves form part of owners' capital (shareholders' funds), provisions are deducted from assets or shown as liabilities; reserves can be created only when there is profit, provisions must be made whether there is profit or not; revenue reserves can be distributed as dividends, provisions cannot.
(b) Capital reserve – e.g. share premium, revaluation surplus, capital redemption reserve. Revenue reserve – e.g. general reserve, retained profit (profit and loss balance).
Reserve = appropriation of profit; provision = charge against profit.
2. (a) Describe: (i) Bank statement; (ii) Bank reconciliation statement. (b) List eight items that cause disagreement between cash book and bank statement balances.
(a)(i) A bank statement is a copy of the customer's account prepared by the bank for a period, showing deposits (credits), withdrawals and charges (debits) and the running balance.
(ii) A bank reconciliation statement is prepared by the customer at a date to explain the difference between the cash book (bank column) balance and the bank statement balance, listing unpresented cheques, uncredited lodgements and errors.
(b) Any eight: unpresented cheques; uncredited cheques/lodgements; dishonoured cheques; bank charges; bank interest; standing orders; direct debits; credit transfers/direct credits; dividends received by the bank; errors in the cash book; errors by the bank; omissions or duplication of entries.
Describe both documents, then list eight causes.
3. Explain the following: (i) fictitious assets; (ii) intangible assets; (iii) real accounts; (iv) nominal accounts; (v) long-term liabilities.
(i) Fictitious assets: debit balances with no physical existence or realisable value, carried forward until written off, e.g. preliminary expenses, discount on issue of shares, debit balance on profit and loss.
(ii) Intangible assets: assets with value but no physical form, e.g. goodwill, patents, trademarks, copyrights.
(iii) Real accounts: accounts of assets and property, e.g. land, buildings, machinery, stock, cash.
(iv) Nominal accounts: accounts of incomes, expenses, gains and losses, e.g. rent, wages, discount received; they are closed to the profit and loss account.
(v) Long-term liabilities: debts repayable after more than one year, e.g. debentures, long-term bank loans, mortgages.
Give a definition and an example for each.
4. Explain: (a) three errors that would affect the agreement of a trial balance; (b) a suspense account.
(a) Any three: single entry – only one side of a transaction is posted; casting errors – an account or day book total is overcast or undercast on one side; posting different amounts to the debit and credit (or transposition on one side only); a balance omitted from the trial balance or placed on the wrong side; wrong balancing of an account.
(b) A suspense account is a temporary account opened to hold the difference between the debit and credit totals of a trial balance so that it balances, until the errors are found and corrected through the journal.
Only errors that upset the equality of debits and credits affect the trial balance.
Section B – Financial Accounting Practice
5. The following balances were extracted from the books of A. Ade and Sons Ltd., a manufacturer of laundry soaps as at 31st December, 2002.
Stock 1/1/02: raw materials N18,900; work-in-progress N23,000; finished goods N17,000
Purchases of raw materials N72,000
Carriage on raw materials N840
Manufacturing wages N60,000
Rent N3,200
Rates N4,800
Selling expenses N5,100
Stock 31/12/02: raw materials N15,240; work-in-progress N36,178; finished goods N16,000
Depreciation of plant and equipment N7,200
Fuel N3,200
Office salaries N6,200
Discount allowed N2,800
Discount received N1,200
Returns inwards N2,120
Returns outwards N1,800
Factory salaries N4,540
Insurance N1,260
General expenses N4,260
Sales N228,200
Advertising N6,124
Carriage outwards N1,200
Bad debts N680
Additional information: (a) Rent, rates and insurance should be shared between factory and the office in the ratio of 4:1 respectively. (b) the goods are transferred to the sales department at cost plus 20%. (c) Salaries due are N1,200; general expenses paid in advance are N146 and insurance paid in advance is N400.
You are required to prepare manufacturing, Trading and Profit and Loss Account for the year ended 31st December, 2002.
Manufacturing account: raw materials 18,900 + purchases 72,000 + carriage 840 − returns outwards 1,800 − closing 15,240 = 74,700; manufacturing wages 60,000; prime cost 134,700.
Overheads: rent 2,560 (4/5 × 3,200); rates 3,840; insurance 688 (4/5 × 860, after the 400 prepaid); depreciation 7,200; fuel 3,200; factory salaries 4,540; total 22,028. Add opening WIP 23,000, less closing WIP 36,178: cost of production 143,550. Add 20% manufacturing profit 28,710: transfer price 172,260.
Trading: sales 228,200 − returns inwards 2,120 = 226,080; opening finished goods 17,000 + 172,260 − 16,000 = 173,260; gross profit 52,820.
Profit and loss: gross profit 52,820 + manufacturing profit 28,710 + discount received 1,200 = 82,730. Expenses: selling 5,100; office salaries 7,400 (6,200 + 1,200 due); discount allowed 2,800; rent 640; rates 960; insurance 172; general expenses 4,114 (4,260 − 146); advertising 6,124; carriage outwards 1,200; bad debts 680; total 29,190. Net profit 53,540.
Split rent, rates and insurance 4:1 after adjusting insurance for the prepayment.
6. Badgie Ltd has an authorised capital of D100,000 divided into 20,000 ordinary shares of D5 each. The whole of the shares were issued at par, payments being made as follows: On application D0.50; On allotment D1.50; First call D2.00; Second call D1.00.
Applications were received for 32,600 shares. It was decided to refund application monies on 2,600 shares and to allot the shares on the basis of two for every three applied for. The excess application monies are to be held to reduce amount payable on allotment. The calls were made and paid in full with the exception of one member holding 100 shares who paid neither the first nor the second call. All cash receipts and payments were passed through the bank.
You are required to prepare: (a) application account; (b) allotment account; (c) ordinary share capital account; (d) 1st call account; (e) 2nd call account; (f) bank account.
Workings: application money 32,600 × 0.50 = 16,300; refund 2,600 × 0.50 = 1,300; money on 30,000 shares = 15,000, of which 10,000 is needed (20,000 × 0.50) and 5,000 is set off against allotment. Allotment due 20,000 × 1.50 = 30,000, cash 25,000.
(a) Application: Dr bank (refund) 1,300; share capital 10,000; allotment 5,000 = 16,300. Cr bank 16,300.
(b) Allotment: Dr share capital 30,000. Cr application 5,000; bank 25,000.
(c) Ordinary share capital: Cr application 10,000; allotment 30,000; first call 40,000; second call 20,000; balance 100,000.
(d) First call: Dr share capital 40,000. Cr bank 39,800; calls in arrears 200.
(e) Second call: Dr share capital 20,000. Cr bank 19,900; calls in arrears 100.
(f) Bank: Dr application 16,300; allotment 25,000; first call 39,800; second call 19,900 = 101,000. Cr refund 1,300; balance c/d 99,700.
Unpaid calls on 100 shares: 100 × 2.00 and 100 × 1.00 go to calls in arrears.
7. Kofi is a dealer in general merchandise. The following are his transactions for the month of June, 2002.
June 1: Sold goods to Mensah Le20,000 less 10% trade discount.
June 4: Purchased from Kwesi the following: 200 iron rods at Le20 each; 100 fillers at Le30 each; invoice subject to 10% trade discount.
June 6: Purchased from Asante Ltd., 10 bottles of gin at Le30 each.
June 7: Returned 60 iron rods purchased on 4th June, to Kwesi.
June 9: Sold the following to Kojo: 300 bags of cement at Le15 each, less 15% trade discount, 150 tins of target at Le10 per tin.
June 18: Kojo returned 10 bags of cement bought on the 9th of June.
June 20: Sold to Jones: 80 iron rods at Le50 each; 110 bags of cement at Le16 each; 250 fillers at Le35 each; invoice subject to 15% trade discount
June 21: Jones was allowed 50% reduction on the total invoice price for goods damaged in transit.
June 30: Purchased from Femi: 100 bags of cement at Le15 each; 50 gallons of oil paint at Le20 each; 300 metal sheets at Le18 each.
You are required to write up the following: (a) sales day book (b) sales returns book (c) purchases day book (d) purchases returns book
(a) Sales day book: June 1 Mensah 20,000 − 2,000 = 18,000. June 9 Kojo: cement 4,500 − 15% = 3,825; target 1,500; total 5,325. June 20 Jones: iron rods 4,000; cement 1,760; fillers 8,750; 14,510 − 15% (2,176.50) = 12,333.50. Total to sales account 35,658.50.
(b) Sales returns book: June 18 Kojo 10 bags × 15 less 15% = 127.50. June 21 Jones 50% × 12,333.50 = 6,166.75. Total 6,294.25.
(c) Purchases day book: June 4 Kwesi 4,000 + 3,000 = 7,000 − 10% = 6,300. June 6 Asante Ltd 300. June 30 Femi 1,500 + 1,000 + 5,400 = 7,900. Total 14,500.
(d) Purchases returns book: June 7 Kwesi 60 × 20 less 10% = 1,080.
Record invoices net of trade discount, and value returns at the net price paid.
8. Pauline, Quincy and Rosaline trade under the name BEVERLY QUEENS and Co. On 31st December 2002, they decided to dissolve their partnership. They had always shared profits in the ratio 3:2:1 respectively.
Balance sheet as at 31st December, 2002
Capital Accounts: Pauline N60,000; Quincy N50,000; Rosaline N30,000 (N140,000)
Current Accounts: Pauline N2,000; Quincy N1,000; Rosaline N5,000 (N8,000)
Creditors N17,000; total N165,000
Fixed Assets: Premises N50,000; Machinery N30,000; Motor vehicles N25,000 (N105,000)
Current Assets: Stock N18,000; Debtors N30,000 less provision for bad debts N2,000 = N28,000; Bank N14,000 (N60,000); total N165,000
Additional information: (a) Machinery was sold for N18,000 (b) Stock was sold for N19,000 (c) There were three motor vehicles, and all were taken over by the partners at agreed values as follows: Pauline N8,000; Quincy N10,000; Rosaline N5,000 (d) The premises were taken over by Rosaline at an agreed value of N85,000 (e) The amount collected from debtors was N27,000 after bad debts and discounts had been deducted. (f) The creditors were discharged for N16,000; the difference being discounts received (g) The cost of dissolution amounted to N10,000.
You are required to prepare: (i) realization account; (ii) partners capital account; (iii) partners current account; (iv) bank account.
(i) Realisation account: Dr premises 50,000; machinery 30,000; motor vehicles 25,000; stock 18,000; debtors 30,000; bank (costs) 10,000 = 163,000. Cr provision for bad debts 2,000; bank – machinery 18,000, stock 19,000, debtors 27,000; motor vehicles taken by partners 23,000; premises taken by Rosaline 85,000; discount on creditors 1,000 = 175,000. Profit 12,000 shared 3:2:1: Pauline 6,000, Quincy 4,000, Rosaline 2,000.
(iii) Current accounts closed to capital: Pauline 2,000, Quincy 1,000, Rosaline 5,000.
(ii) Capital accounts: Pauline 60,000 + 2,000 + 6,000 − car 8,000 = 60,000 paid out. Quincy 50,000 + 1,000 + 4,000 − 10,000 = 45,000 paid out. Rosaline 30,000 + 5,000 + 2,000 − car 5,000 − premises 85,000 = 53,000 debit, so she pays in 53,000.
(iv) Bank account: Dr balance 14,000; machinery 18,000; stock 19,000; debtors 27,000; Rosaline 53,000 = 131,000. Cr creditors 16,000; dissolution costs 10,000; Pauline 60,000; Quincy 45,000 = 131,000.
Assets taken by partners are debited to their capital accounts; a partner left with a debit balance must pay it in.
9. Below are the final accounts of Dream Bird Ltd.
Trading, Profit, loss and appropriation accounts for the year ended 30th April, 2006 (D): Opening stock 497,250; add purchases 1,453,500 = 1,950,750; less closing stock 726,750 = 1,224,000; gross profit c/d 816,000; sales 2,040,000. Total expenses 714,000; net profit c/d 102,000. Proposed dividend 76,500; balance c/d 63,750; balance b/d 38,250; net profit b/d 102,000.
Balance Sheet as at 30th April, 2006 (D): Authorised and issued share capital 1,020,000 shares at 1D each 1,020,000; revenue reserve: general reserve 126,000, profit and loss 63,750 (189,750); long-term liability 7% debentures 63,750; current liability: creditors 382,500, proposed dividend 76,500 (459,000); total 1,732,500. Fixed assets 840,000 less depreciation 255,000 = 585,000; current assets: stock 726,750, debtors 280,500, bank 140,250 (1,147,500); total 1,732,500.
You are required to use the above final accounts of Dream Bird Ltd. to calculate the following: (a) working capital; (b) gross profit margin; (c) net profit margin; (d) current ratio; (e) quick (acid-test) ratio; (f) rate of stock turnover; (g) returns on capital employed; (h) owners equity.
(a) Working capital = 1,147,500 − 459,000 = 688,500.
(b) Gross profit margin = 816,000 ÷ 2,040,000 × 100 = 40%.
(c) Net profit margin = 102,000 ÷ 2,040,000 × 100 = 5%.
(d) Current ratio = 1,147,500 ÷ 459,000 = 2.5 : 1.
(e) Quick ratio = (1,147,500 − 726,750) ÷ 459,000 = 420,750 ÷ 459,000 = 0.92 : 1.
(f) Stock turnover = cost of sales ÷ average stock = 1,224,000 ÷ ((497,250 + 726,750) ÷ 2 = 612,000) = 2 times.
(g) Capital employed = total assets − current liabilities = 1,732,500 − 459,000 = 1,273,500; ROCE = 102,000 ÷ 1,273,500 × 100 = 8.0%.
(h) Owners' equity = share capital 1,020,000 + reserves 189,750 = 1,209,750.
Write each formula before substituting the figures.