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Saturday, 11 May 2019

Financial Accounting MCQs /Page 13

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  arnot  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  answewhich  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.]

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