216. Which
of these is not a Business expense-
(a) Fire Insurance of other building
(b) LIC Premium of proprietor
(c) Interest
on Capital
(d)
Commission on sales
217. Cost
of goods sold excludes-
(a)
Opening Stock
(b)
Carriage inward
(c) Wages & Salary
(d) Postage &
Stamps
218. Tax deducted at source A/c appears in-
(a) Assets side
(b)
Liability
side
(c) Profit & Loss A/c
(d) Debited to
Capital A/c
219. Investment in own share A/c appears
in -
(a)
Asset side
(b) Liability side
(c) Netted from Capital
(d) Profit & Loss A/c
220. Payments received
in
advance from a
customer for a
contract can be
(a)
Shown as a deduction from contract
work-in-progress on
asset side
(b)
Shown as a liability
(c) Credited to P&L A/c
(d) Either
(a) or (b) above
[Hints: (d) Progress payments and advances received
from customers in respect of
construction contracts in relation
to the work performed thereon are disclosed
in financial statements either as a liability or shown as a deduction
from the amount of
contract
work-in-progress.
In case progress payments and advances received from
customers in respect of construction
contracts
are not
in relation
to work performed thereon,
these are
shown as a liability.
Amounts retained by customers until the satisfaction of conditions specified in the
contract for release of such amounts are either recognized in financial statements as
receivables
or alternatively indicated by way
of
a note.]
221. If a
company
has contingent liabilities, they
appear in the
(a) Balance Sheet
(b) Directors'
report
(c) Notes
on account to
Balance Sheet
(d)
Chairman's
report
[Hints: (c)
Contingent
liabilities are disclosed
in
the notes to Balance Sheet.]
222. Recent developments
have made much of a company's inventory obsolete. This
obsolete inventory
should be
(a)
Written down to
zero or its scrap value
(b)
Shown in the Balance Sheet at
its replacement cost
(c) Shown in the Balance Sheet at
cost, but classified as a non-current
asset
(d)
Carried in the accounting
records at cost
until it is sold
[Hints: (a) The cost of inventories may not be recoverable if the inventories are
damaged, if they
have
become wholly or partially obsolete, or if their
selling prices
have
declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the
estimated costs
necessary to make the sale
have increased. The practice of writing down inventories
below cost to net realizable value is consistent
with
the view that assets should not be
carried in excess of amounts expected to be realized from their
sale or use. Hence, the obsolete inventory must be written-down to
zero or scrap value.]
223. Which
of the following is
not
classified as inventory in the financial statements?
(a) Finished goods
(b)
Work-in-process
(c) Stores and spares
(d)
Advance payments made to
suppliers for raw materials
[Hints: (d)
Advance payment made to suppliers for materials is not classified as
inventory. Other items mentioned in (a), (b)
and
(c) are classified as inventory in the financial statements
as they are the components
of inventory.]
224. Which
of the following statements
is true?
(a) Inventory valuation affects only
the income statement
(b) Undercasting or overcastting of subsidiary
book
is an example of error of
commission
(c) Capital expenditure wrongly treated as revenue is an example of error of
commission
(d) Inventories should be valued at lower of historical cost and current replacement
cost
[Hints: (b) Inventory valuation affects not only income statement, Balance Sheet also.
If capital expenditure is treated as Revenue Expenditure, it is an error of principle
but
not the error of commission. Journal entry is required for any
bill endorsement.
Inventories should be valued at lower of historical cost and market value but not replacement
cost. All these statements
given in
(a) , (c ) and (d) are false. But undercasting or over casting of subsidiary book is the
example
of error of commission.
Hence (b) is correct.]
225. Which
of the following statements
is / are not correct?
(a) Provision for bad debts appears
as a liability on the Balance Sheet
(b)
The provision for bad debts
is owed to
the proprietor
(c) Bad debts
could be less than the provision for bad debts
(d) Bad debts
could exceed the provision for bad debts
[Hints: (b) Provision for bad debts is created to adjust the loss of future bad debts.
This
account is created by a debit to the Profit &
Loss Account i.e., a charge
against profits. This account shows a credit balance and appears on the liabilities side of the
Balance Sheet. Actual bad debts for a particular period may exceed the provision provided or may
be
less than the provision made.]
226. If actual bad debts
are
more than the provision for bad debts,
then there will
be
a
(a)
Credit
balance of Provision for Bad Debts
Account (b) Debit balance of Provision for Bad Debts
Account (c) Debit balance of Bad Debts
Account
(d) Debit balance of Discount on Debtors
Account
[Hints: (b) Provision for Bad Debts Account is created for writing off bad debts. Since the provision for bad debts is a credit balance account, If the actual bad debts exceed the provision created then there will be debit balance of provision for bad debts
account.]
227. The creation of provision for doubtful
debts given as
an adjustment requires
(a) Debit Profit and Loss
Account and
deduct the provision from debtors (b)
Credit Profit
& Loss Account and
deduct the provision from debtors
(c) Credit Profit and Loss Account and add the provision to
debtors
(d) Debit Profit &
Loss Account
and add the provision to
debtors
[Hints: (a) The adjustment for provision for bad debts account given
in the adjustments is to debit P&L A/c and deduct from
Sundry Debtors, the amount of provision for bad
debts. Provision for bad debts is created against Sundry Debtors
and
therefore deducted from Sundry Debtors and Debited to P&L
A/c as it is a charge against P&L A/c.]
228. Under the direct
write-off method of recognizing
a bad debt
expense. Which
of the following statements
is/are true?
(a)
The bad debt
expense is not matched with the related sales
(b) Revenue is overstated in the year of sales
(c) It violates the matching principle
of accounting
(d)
All of the above
[Hints: (d) Under the direct write off method of recognizing a
bad
debt expense, the
alternative (d) is the correct answer which
the combination
of the following
statements (a) The
bad
debt expense
is not matched with the related sales because
the expense is written off in the year of occurrence and it is not matching with the related
sales. (b) Revenue is overstated in the year of Sales as a result not making any
provision for possible loss on account of non-
recoverable account. (c) It violates the matching principle of accounting as the expense
of bad debt is not matched for
the same period of income. Thus, (d) is the correct answer.]
229. At the time of preparation of financial accounts, bad debt recovered account
will be
transferred to
(a) Debtors
A/c
(b) Profit & Loss A/c
(c) Profit &
Loss Adjustment A/c
(d) Profit & Loss Appropriation
A/c
[Hints: (b) Bad debt recovered is a windfall gain and it is transferred to Profit
& Loss Account at the time of preparation of Final Accounts.
If provisions
account is there in the books it will be
transferred to Provision A/c and
the balance
if
any
in the provision account will be transferred to Profit & Loss Account. It is recovery of bad
debt written off and hence it is not transferred to Debtors Account. It is not
transferred to Profit & Loss Adjustment
Account.
It is not an appropriation to be
transferred to Profit
& Loss Appropriation Account. Thus,
the answer is (b).]
230. The balance of Revaluation Reserve pertaining to an asset
that has been disposed off
or retired can be transferred to
(a)
General Reserve
A/c
(b) Profit & Loss A/c
(c) Asset A/c
(d)
Capital Reserve A/c
[Hints: (d) According to AS-10 on disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should be charged or credited to the Profit &
Loss
Statement except that to the extent that such a loss is related to an increase which was previously
recorded
as
a
credit
to
revaluation reserve and which has not been subsequently reversed or utilized, it may be charged directly
to
that account.
This balance (no longer needed) being of capital nature should be transferred to
Capital Reserve Account.]
231. Property, Plant
and Equipment are conventionally
presented in the Balance Sheet at
(a) Replacement cost - Accumulated Depreciation
(b) Historical cost
- Salvage
Value
(c) Historical cost
- Depreciation portion
thereof
(d)
Original cost
adjusted for general price-level changes
[Hints: (c) As per AS-10 on fixed assets, property plant equipment should be presented in the Balance Sheet at
historical cost
(gross
book
value) less depreciation = net book
value.]
232. Outstanding salaries is shown as (a)
An Asset in the Balance Sheet
(b)
A Liability
(c) By adjusting it in the P
& L A/c
(d) Both (b) and (c) above
[Hints: (d) Outstanding salaries is the expense relating to the current accounting
period but has not been paid yet
and therefore,
it is a current liability.]
233. Insurance prepaid is shown as
(a)
Current
Asset
(b)
Current
Liability
(c) Fixed Asset
(d) Income
[Hints: (a) Prepaid insurance is the expense relating to the next accounting period but has been paid in the current accounting period and hence it is a current asset.
The
adjustment would be to deduct it from the respective expense account in the P&L A/c and show it as a current asset
in the Balance Sheet.]
234. Depreciation appearing in the Trial Balance should be
(a) Debited to P&L A/c
(b)
Shown as liability
in
Balance Sheet
(c) Reduced from related asset in Balance Sheet
(d) Both (a) and (c)
above
[Hints: (a) Any item appearing in the Trial Balance will have one effect i.e., depreciation
appearing in the Trial Balance will be debited to the Profit & Loss Account. However, if
depreciation is given in the adjustments, it will have double effect i.e., it should be debited to P&L A/c and deducted from the gross fixed
asset
block in the Balance Sheet
also.]
235.
A club paid subscription fees
of '1,400. Out of which '
200 is prepaid. In such case
(a) P&L A/C is debited with ' 1,400
(b) P&L A/C is debited with ' 1,200
(c)
' 200 is shown as current
asset
(d) Both (b) and (c) above
[Hints: (d)
Adjustments for prepaid subscription fees:
P& L A/c Extract
Total subscription fees paid 1,400
Less:
Subscription fees
prepaid Relating
to next A/c period 200
Subscription fees 1200
The prepaid subscription fees of ' 200 will be shown as a current asset in the Balance Sheet
as it is an expense relating to the next
accounting period but has been paid in the current accounting period.]
236.
Bad
debts recovered is
(a)
Credited to P&L
A/c
(b) Debited to P&L A/c
(c) Reduced from debtors
in Balance Sheet
(d)
Added to
debtors
in Balance Sheet
[Hints: (a) Bad debts earlier written-off and later recovered is a profit to the firm and hence
they are transferred to Profit &
loss Account.]
237.
The
adjustment to
be
made for prepaid expenses
is
(a)
Add prepaid expenses to
respective expenses and show it as an
asset
(b) Deduct
prepaid expenses
from respective expenses and show it
as an asset
(c) Add prepaid expenses to
respective expenses and show it as a liability
(d) Deduct
prepaid expenses
from respective expenses and show it
as a liability
[Hints: (b)
Prepaid expense is an expense
relating to the next
accounting period but
has been
paid
in the current accounting
period and
hence
it is a current asset. The
adjustment would
be to deduct
it from the respective
expense
account
in the P&L A/c
and
show it as a current
asset in the Balance Sheet.]
