PRINCIPLES OF ACCOUNTING

MID-TERM EXAM

25 October 2017

INSTRUCTIONS :

1. Time allowed: 2 hours Total marks: 66

2. Candidates should answer ALL questions.

3. You should submit workings for all questions requiring calculations. Any necessary
assumptions that you introduce when answering a question are to be stated.

4. You may use a non-programmable electronic calculator when answering questions on this
paper. The type of machine used must be stated clearly on the cover of your answer book. Any
devices like smart watches or mobile phones are strictly prohibited.

5. Any cheating will lead to zero mark for the exam.

GOOD LUCK!
Section A (22,5 marks) Use separate answer sheet for the Section A

Note: Section A consists of 15 multiple choice questions covering the entire syllabus in financial and management
accounting. In Section A you will need to answer ALL the questions for which the maximum mark will be 22,5 (each
question is 1.5 marks). Workings will not be marked for MCQs, the answers must be entered on a pre-printed sheet. There
will not be negative marking – you will get marks for all correct answers without deduction for wrong answers.

Q1 Which of the following statements would be considered true regarding debits and credits?
i. In any given transaction, the total pound amount of the debit and the total pound amount of the credit must be equal
ii. Debits decrease certain accounts and credits decrease certain accounts
iii. Liabilities and equity accounts usually end in credit balances while assets usually end in debit balances
A (i) only
B (i) and (ii)
C (i) and (iii)
D all of the above

Q2 Which of the following is true when a debtor pays his dues?

i. The asset side of the balance sheet will increase
ii. The liability side of the balance sheet will decrease
iii. The equity of the company will increase
iv. These is no change in total assets or total liabilities
A (i) only
B (ii) only
C (i) and (iii)
D (iv) only

Q3 Of the following, which are correct?

Account to be debited Account to be credited
i. The bank charged overdraft interest Interest Bank
ii. Wages were paid by cash Cash Wages
iii. Stock in trade was bought, all on credit Accounts payable Purchases
iv. Sales were made, all for cash Revenues Cash
A (i) only
B (ii) only
C (i) and (iii)
D (iv) only

Q4 The definition of an asset includes all of the following except:

A. Probable future economic benefit
B. Evidence of a past transaction
C. Reliably measurable in monetary terms
D. An obligation of a company toward the owner

Q5 The statement “A business and its owners are treated as two separately identifiable parties” is based on:
A. Money measurement concept
B. Going concern concept
C. Business entity concept
D. Dual aspect concept

Q6 Which of the following statement is true?

A Going concept requires that non-current assets should be valued and recorded at market value
B According to consistency concept, the results of one accounting period of a business cannot be compared with that
of in the past
C In term of conservatism concept all probable losses must be considered in computation of the income
D Maintenance costs are to be capitalized according to matching concept

Q7 Consider the following balances from a company’s trial balance:

£000
Motor vans 40
Cash 10
Bank overdraft 15
Wages 30
Borrowings 30
Inventory 10
Retained earnings 50
Trade receivables 12
What is the figure for current assets?
A £62,000
B £47,000
C £32,000
D £20,000

Q8 At 31 December, a company’s trade receivables totalled £80,000 and the allowance for doubtful receivables was
£2,000. The company decided to adjust its allowance for doubtful receivables to five per cent based on previous experience.
What figure should be included in the income statement for doubtful receivables as at 31st December?
A £1,000
B £2,000
C £4,000
D £5,000

Q9 Alfa Ltd’s ending inventory is understated by £2,000. The effects of this error on the current year’s cost of goods
sold and net profit, respectively, are:
A understated, overstated
B overstated, understated
C overstated, overstated
D understated, understated

Q10 On 1 October 2017 MBW Auto Trade Limited had 4 cars in inventory costing £32 000 each. During the month, the
following transactions occurred:
Date Buy/sell Units Price
02.10.2017 Buy 2 £33 000
11.10.2017 Sell 5 £40 000
13.10.2017 Buy 2 £35 000
 17.10.2017 Buy 1 £33 000
25.10.2017 Sell 2 £42 000
What is the (i) value of inventory at 31.10.17 and (ii) the gross profit for the month of October 2017 using the FIFO basis?
(i) Inventory (ii) Gross profit
A £66,000 £55,000
B £68,000 £57,000
C £66,000 £57,000
D £68,000 £55,000

Q11 A company has just purchased equipment for £12,000. It has an estimated useful life of four years; and the estimated
residual value is £1,000. The company uses the straight-line method of depreciation.
What would be the accumulated depreciation figure in the company’s accounts at the end of the second year?
A £2,750
B £3,000
C £5,500
D £6,500

Q12 The initial price of the equipment is £12,000 and the net book value of the equipment after 3 years will be £6,600.
If the company charges depreciation under straight-line method, the rate of depreciation will be
A 25%
B 20%
C 18%
D 15%

Q13 A company’s trial balance as at 31 December 2017 lists the balance in Rent Expense account as £210,000. This
amount includes £27,000 paid on 1 August 2017 for rent of a car over the next three years from the date. The amount to be
expensed in 2017 and reported as pre-paid as at the year-end are:
A. Expense: £210,000; Prepayment: £27,000
B. Expense: £183,000; Prepayment: £27,000
C. Expense: £186,750; Prepayment: £23,250
D. Expense: £206,250; Prepayment: £23,250

Q14 On 1st October 2017 a company sold a delivery van for £8,500 which it had acquired on 31 March 2014 at a cost of
£16,000. The company depreciates delivery vehicles at 20% per year using reducing balance method. Its policy is to provide
for depreciation in the year of purchase but not in the year of sale. The gain / loss on disposal or the year ended 31st December
2017 will be
A £1,946, gain
B £308, gain
C £308, loss
D £1,740, loss

Q15 The following is an extract of balances for a company for the year:
£
Water and electricity 28,000
Rent 22,000
Equipment (at cost) 100,000
Gross profit has already been calculated as being £50,000.
The company uses the straight-line method of depreciation, at 25% per annum. At the end of the year, water and electricity
accrued is £4,000, and rent prepaid is £2,000. No adjustment was made yet.
The net profit for the year is:
A £27,000
B £23,000
C £19,000
D £16,000
Section B -21 marks in total - USE SEPARATE HANDOUT FOR SOLUTION
Question 1 21 marks
The following is the trial balance of Cool Accountning Services Ltd. at 31 December 2015:

£ £
Share capital 158,855
Freehold buildings: cost 150,000
Freehold buildings: accumulated depreciation 13,000
Plant and machinery: cost 75,000
Plant and machinery: accumulated depreciation 12,650
Provision for doubtful debts 860
Wages and salaries 5,948
Bad debts written off 656
Goodwill 10,000
Bank deposit 4,873
Purchases / Sales 78,493 130,846
Other expenses 250
Directors’ remuneration 13,000
Insurances 596
Dividends received 310
Retained earnings 3,522
Light and heat 1,520
Audit fee 764
10% debentures 30,000
Inventories, as at 1 January 2015 9,436
Trade receivables / payables 11,600 8,450
Bank 3,643
£362,136 £362,136
Additional information:

1. Tax on the profits for the year is estimated at £2,544.

2. Insurances include £200 for the half-year ended on 31 March 2016.
3. Electricity for the quarter to 31 January 2015 of £330 has not been accounted for.
4. The provision for doubtful debts is to be adjusted to 5% of the trade receivables at the end of the year.
5. The amounts shown in the trial balance for non-current assets (freehold buildings, plant and machinery and
development costs) are balances at 1 January 2015. Provision is required for depreciation and amortisation for the
year ended 31 December 2015. The Company’s depreciation and amortisation methods are as follows:
Freehold buildings: Straight-line over 50 years
Plant and machinery: 20% on the reducing balance method Development costs: 10% straight-line
6. Inventory at 31 December 2015 was £12,456. It contains some stock purchased for £550 with current selling price
of £380. It could be sold next month after some updates (re-packing and etc.) which cost £45 to perform.
7. The debenture interest are outstanding at the end of the year.

Required:

Prepare Cool Accountning Services Ltd’s:

Income statement for the year ended 31 December 2015.

[11,5 marks]
Statement of financial position as at 31 December 2015.
[9,5 marks]
Section C – 22,5 marks in total - USE SEPARATE HANDOUT FOR SOLUTION
Question 2 (8,5 marks)

Eagle runs a small book shop. The accounting year end of his business is 30th June. On the morning of 29th June 2017 a
flood in the shop destroyed all of the stock of books and the computer on which the accounting records were maintained.
Eagle is preparing an insurance claim for the lost stock and has compiled the following information from the remaining
records.

a. The balance at bank on 1st July 2016 was £1,000 and cheques totaling £79,400 had been paid out up to the end of
28th June 2017. All takings are banked and no cash was left in the till on 28th June. The bank balance at That date
was £1,500.
b. Purchases of books represent approximately 80% of the cheques paid and there were no opening or closing
creditors.
c. Eagle has one customer who is given credit terms and this customer owed £500 on 1st July 2016 and £700 on 28th
June 2017.
d. The business operates at a consistent gross profit margin of 25%
e. Stock in hand at 1st July 2016 was £11,800.
Required:
Give calculations to show the stock on hand before the flood on 29th June 2017 as far as it can be calculated from the
above information.

Question 3 (8 marks)

The following data show the trading transactions of Othello Ltd for its first six months of trading. The company operates
the weighted average assumption for calculation of cost of sales.
Closing inventory and the cost of sales is calculated whenever a sale is made.
(1)

(2) The 20 units purchased in November incurred a transport charge of £2,500 to move them to the company premises.
This amount is not included in the cost of £700 per unit.
(3) The 20 units purchased in December had been made to order for a customer who has now gone into liquidation.
Othello Ltd can only sell these for a price of £1,000 per unit after a modification costing £150 per unit.
(4) Operating expenses for the six months amounted to 10% of sales revenue.

Required:
Prepare the Income Statement for Othello Ltd for the six months to 31st December 2011 from the above information

Question 4 (6 marks)

Happy Ltd commenced business on 1st October 2015. Tangible fixed assets of the company for the two years to 30th
September 2017 were:
(1) Plant
1st October 2015 purchased plant for £35,000 with a residual value of £3,000.
1st November 2016 purchased plant for £16,000 with a residual value of nil.
Depreciation for plant is on a straight-line basis over 8 years.
(2) Motor vehicles
1st October 2015 purchased a vehicle for £16,000.
1st December 2016 sold the vehicle for £7,500.
5th January 2017 purchased a new vehicle for £18,500.
Depreciation for motor vehicles is 20% on the reducing balance method.
Happy Ltd charges a full year’s depreciation in the year of purchase and none in the year of disposal.

Required:
Show extracts for tangible fixed assets from the profit and loss accounts for the years ended 30th September 2016 and
2017 and balance sheets of Happy Ltd as at those dates.