Accounting 0452 | Paper 1 Mock 01 | Multiple Choice

The correct answer is debit premises $15 000, credit revaluation account $15 000.

When premises are revalued upwards, the asset value increases: debit premises $15 000 (increasing the asset from $80 000 to $95 000).

The gain is credited to the revaluation account: credit revaluation account $15 000. The balance on the revaluation account is then shared between the existing partners in their old profit sharing ratio, as the gain was generated before the new partner joined.

Cash is not involved in a revaluation. It is a book adjustment to reflect the current value of the asset.

The correct answer is $3 100.

The customer's own purchases ledger records what the customer believes it owes. The supplier's statement shows $4 200 from the supplier's perspective. Two reconciling items need to be considered:

• The customer has sent a payment of $800 that the supplier has not yet received. This reduces the balance in the customer's books but not in the supplier's statement. So the customer's balance is lower by $800.
• An invoice of $300 appears on the supplier's statement but has not yet been recorded by the customer. This means the customer's books do not yet include this $300 liability.

Customer's ledger balance = $4 200 - $800 - $300 = $3 100.

The correct answer is Confidentiality.

Confidentiality is the ethical principle that requires an accountant to keep client or employer information private and not disclose it to unauthorised parties. Information obtained through professional work should only be shared with proper authority or legal obligation.

Integrity means being honest and straightforward in all professional dealings. Objectivity means not allowing bias or conflicts of interest to influence professional judgement. Professional competence means maintaining adequate knowledge and skill to provide competent service.

The correct answer is the registered office address of the company.

A partnership is not a company, so it does not have a registered office address. That is a requirement for limited companies under company law.

A partnership agreement typically includes: the profit and loss sharing ratio, interest allowed on capital, salaries payable to each partner, and other operational arrangements. The registered office address is relevant only to incorporated businesses (companies), not unincorporated partnerships.

The correct answer is Consistency.

The consistency concept requires that a business uses the same accounting format, methods, and policies from one period to the next. This ensures that financial statements are comparable over time, enabling users to identify trends and make meaningful comparisons. Changing methods without justification would undermine the reliability and comparability of the accounts.

Prudence requires caution in recognising income and assets. Accruals matches income and expenses to their period. Business entity separates the business from the owner's personal affairs. None of these require uniformity of format and method across periods.

The correct answer is 18%.

Return on capital employed (ROCE) is calculated as:

ROCE = (Net profit / Capital employed) x 100

= ($36,000 / $200,000) x 100

= 18%

This means the business generates 18 cents of profit for every dollar of capital employed. 36% would incorrectly double the result or misplace the figures. 5.6% would result from dividing capital employed by net profit and confusing the ratio. 24% does not correspond to any valid calculation from these figures.

The correct answer is it increases the distributable profit.

Interest on drawings is charged to partners as a deterrent against excessive withdrawals. It is debited to the partners' current accounts and credited to the appropriation account.

This credit increases the distributable profit available for sharing among the partners. The interest on drawings effectively returns some value to the partnership from partners who have withdrawn funds during the year. It does not directly reduce capital accounts or decrease the distributable profit.

The correct answer is Factory overheads.

Depreciation of factory machinery is an indirect production cost. It cannot be traced directly to a specific unit of output, so it is not a direct expense, direct material, or part of prime cost. Instead, it is classified as a factory overhead (also called indirect manufacturing cost) and added to prime cost to calculate total factory cost before adjusting for work in progress.

Direct expenses are costs that can be identified with specific production jobs, such as royalties per unit. Direct materials are raw materials physically incorporated into the product. Prime cost is the total of direct materials, direct labour, and direct expenses, and does not include any indirect costs.

The correct answer is $7 000.

The current account must balance. Total debit side items: drawings $19 000 + interest on drawings $950 + balance c/d $4 650 = $24 600.

The account must balance, so total credits = $24 600.

Total credit side items: balance b/d $2 600 + interest on capital $5 000 + salary $10 000 + share of profit = $24 600.

$17 600 + share of profit = $24 600

Share of profit = $24 600 - $17 600 = $7 000.

$8 000 results from omitting the opening balance. $5 200 or $6 200 arise from arithmetic errors such as adding the interest on drawings to the credit side or miscalculating the closing balance.

The correct answer is Sole trader.

A sole trader has unlimited liability, which means there is no legal distinction between the owner and the business. If the business cannot pay its debts, the owner's personal assets (such as their home or car) may be seized to settle business debts.

Public limited companies and private limited companies have limited liability, meaning shareholders can only lose the amount they have invested. A cooperative society is a separate legal entity, so members generally have limited liability.

The correct answer is: As a credit balance of $95.

Trade receivables (customers) normally have debit balances in the sales ledger, representing amounts they owe the business. When a customer overpays, the business owes money back to the customer. This reverses the normal position, creating a credit balance on that customer's account.

A debit balance would indicate the customer still owes the business, which is the opposite of an overpayment. The overpayment does appear in the control account because it affects the overall receivables position. It is not a contra entry, which involves setting off balances between the sales and purchases ledgers.

The correct answer is by debiting the remaining partners' capital accounts in their new profit sharing ratio.

When a partner retires, goodwill is first raised (debit goodwill, credit all partners' capital accounts in the old profit sharing ratio). This credits the retiring partner with their share of goodwill.

The goodwill is then immediately written off by debiting the remaining partners' capital accounts in their new profit sharing ratio and crediting the goodwill account. This removes the goodwill from the books while ensuring the retiring partner has been fairly compensated for their share.

The correct answer is: Transaction 2.

A credit sale at a profit increases assets (trade receivables rise by the selling price) and increases capital (the profit element adds to the owner's equity). Liabilities are not affected because no borrowing or payable is created.

Transaction 1 (no change to anything) represents a swap within the same category, such as buying an asset by cheque. Transaction 3 (assets and capital both decrease) represents drawings or a loss. Transaction 4 (assets and liabilities increase, capital unchanged) represents a credit purchase or taking out a loan.

The correct answer is that the partner has withdrawn more than their entitlement from the firm.

A debit balance on a partner's current account means the total of items debited (mainly drawings and interest on drawings) exceeds the total of items credited (salary, interest on capital, share of profit, and any opening credit balance). In effect, the partner owes the firm money because withdrawals have exceeded the amounts earned.

A credit balance would mean the firm owes the partner, not the other way around. The current account does not "hold" money on behalf of the partner. The balance does not represent a single year's profit figure.

The correct answer is $23 000.

Total sales comprise both cash sales and credit sales. To find cash sales:

Cash sales = Total sales - Credit sales

Cash sales = $85 000 - $62 000 = $23 000

$15 000 and $20 000 result from incorrect calculations. $27 000 could arise from a transposition or arithmetic error.

The correct answer is a loan account in the name of the retiring partner.

When a retiring partner cannot be paid the full amount owed immediately, the outstanding balance is transferred to a loan account in that partner's name. This converts the partner from an owner into a creditor of the firm. The loan is then repaid over time, usually with interest.

A suspense account is used for temporary differences in the trial balance, not for amounts owed to retiring partners. A provision for retirement account is not a recognised accounting treatment. A goodwill account may be involved in the retirement process but records the value of goodwill, not the amount owed to the retiring partner.

The correct answer is in the ratio 3:2, the same as the profit sharing ratio.

Unless the partnership agreement specifically states otherwise, losses are shared in the same ratio as profits. The Partnership Act 1890, Section 24(1), provides that partners share equally in profits and losses, but where an agreement specifies a profit-sharing ratio without mentioning losses, the courts have held that the same ratio applies to losses.

Sharing losses equally would only apply if no ratio were specified at all. An inverse ratio of 2:3 has no basis in law or practice. Losses being borne entirely by one partner would require an explicit agreement to that effect.

The correct answer is $7 000.

Interest on capital must be calculated for each period at the rate the capital was held:

1 January to 30 June (6 months): $60 000 x 10% x 6/12 = $3 000

1 July to 31 December (6 months): $80 000 x 10% x 6/12 = $4 000

Total interest on capital = $3 000 + $4 000 = $7 000

The option $8 000 incorrectly applies 10% to $80 000 for the full year. The option $6 000 incorrectly applies 10% to $60 000 for the full year. The option $4 000 only calculates the second half of the year.

The correct answer is: receiving payment from a customer whose debt was previously written off.

The journal entry shows Bank debited (money received) and Irrecoverable debts recovered credited (income recognised). This records cash received for a debt that had previously been written off as irrecoverable. When a debt is recovered after being written off, the amount received is credited to an irrecoverable debts recovered account (which is income) and debited to the bank account.

Writing off a debt would debit irrecoverable debts expense and credit trade receivables. Allowing a cash discount would involve a discount allowed account. Receiving payment for a current credit sale would credit trade receivables, not irrecoverable debts recovered.

The correct answer is $4 500.

Interest on capital is calculated as a percentage of the partner's capital balance.

Partner E's capital: $75 000.

Interest rate: 6% per annum.

Interest on capital: 6% x $75 000 = $4 500.

This amount is debited to the appropriation account and credited to Partner E's current account (or capital account in a fluctuating system). Interest on capital compensates partners for their investment in the business and is appropriated before the residual profit is shared.

The correct answer is $60 000.

When goodwill of $80 000 is written off, each remaining partner's capital account is debited with their share in the new profit-sharing ratio of 3:1.

Partner with the larger share (3/4): $80 000 x 3/4 = $60 000
Partner with the smaller share (1/4): $80 000 x 1/4 = $20 000

The option $20 000 is the smaller partner's share. The option $40 000 would result from splitting equally. The option $80 000 is the total goodwill, not one partner's share.

The correct answer is: Debit bank $2 800, debit discount allowed $200, credit trade receivables $3 000.

The customer owed $3 000 but paid only $2 800 in full settlement. The difference of $200 is a cash discount allowed by the business to encourage early payment.

The entries are:

• Debit bank $2 800 (cash received)
• Debit discount allowed $200 (expense of giving the discount)
• Credit trade receivables $3 000 (the full debt is cleared from the customer's account)

Recording only $2 800 on both sides would leave $200 still showing as owed, which is incorrect since the debt was settled in full. The discount allowed must be recorded to close the balance.

The correct answer is capital expenditure.

Capital expenditure is spending that acquires, creates, or significantly enhances a non-current asset, providing benefits beyond the current accounting period. A major overhaul that significantly improves the operating efficiency of machinery goes beyond routine maintenance. It enhances the asset's earning capacity or extends its useful life, so it is treated as capital expenditure.

Revenue expenditure would cover routine repairs or servicing that merely maintain existing performance. Capital receipt and revenue receipt relate to money received, not money spent, so neither applies here.

The correct answer is $5 345.

Starting with the cash book balance of $5 120, adjust for each item:

Bank charges of $65 are a payment out, so subtract: $5 120 - $65 = $5 055.

Interest received of $40 is money in, so add: $5 055 + $40 = $5 095.

Dishonoured cheque of $300 means a receipt previously recorded must be reversed, so subtract: $5 095 - $300 = $4 795.

Direct credit from customer of $550 is money in, so add: $4 795 + $550 = $5 345.

The updated cash book balance is $5 345.

The correct answer is Error of commission.

An error of commission occurs when a transaction is posted to the wrong personal account within the same class of account. Here, the credit entry for the purchase was posted to Supplier A's account instead of Supplier B's account. Both are trade payable accounts (same class), so this is a commission error.

An error of principle would involve posting to a completely wrong class of account (e.g., posting an expense to an asset account). An error of original entry occurs when the wrong amount is recorded in both accounts. An error of omission means the transaction was completely left out of the books.

The correct answer is: The trial balance will have a debit side $90 too high.

The purchases day book total was $12 450 but it was posted to the purchases account as $12 540. Purchases has a debit balance, so the debit side of the trial balance is overstated by $90 ($12 540 - $12 450 = $90).

The individual supplier accounts in the purchases ledger were posted correctly from the day book entries (not from the total), so the credit side is correct. Only the control/general ledger posting of the total was wrong, making the debit side $90 too high.

The correct answer is Accruals.

The accruals (or matching) concept requires that revenue and expenses are recognised in the period in which they are earned or incurred, not when cash is received or paid. All three items in the table illustrate this: goods sold on credit are recorded as revenue at the date of sale (not when cash is received), wages earned in December are recorded as a December expense (regardless of payment date), and electricity consumed but not yet billed is accrued as an expense in the current period.

Prudence relates to caution in recognising profits. Materiality concerns whether items are significant. Business entity separates owner and business transactions. None of these explain why all three items are recognised based on when they were earned or incurred rather than when cash changed hands.

The correct answer is $1 600.

At the end of the month, the total of the sales returns journal is posted to the debit side of the sales returns account in the general ledger. The total shown at the bottom of the journal is $380 + $520 + $270 + $430 = $1 600. This full total is debited to sales returns, while the individual amounts are credited to each customer's account in the sales ledger.

$1 170, $900, and $1 380 are partial sums that do not include all four entries from the journal.

The correct answer is expenses decrease and current assets increase.

Recording a prepayment transfers part of the cash paid from the expense account to a prepayment account. The portion that relates to a future period is removed from expenses (decreasing them) and recognised as a current asset (increasing current assets).

This correctly reflects that the business has a future benefit (the prepaid service) which is an asset. Without the adjustment, expenses would be overstated and assets understated.

The correct answer is $3 250.

Under AVCO, the weighted average cost is calculated after each purchase.

Opening balance: 400 units x $6.00 = $2 400.

Purchase: 600 units x $7.00 = $4 200.

Total: 1 000 units costing $6 600.

Weighted average cost: $6 600 / 1 000 = $6.50 per unit.

After selling 500 units, remaining inventory: 1 000 - 500 = 500 units.

Closing inventory value: 500 x $6.50 = $3 250.

The correct answer is Cost minus accumulated depreciation.

Net book value (NBV) represents the carrying amount of a non-current asset in the accounting records. It is calculated as the original cost of the asset minus the total depreciation charged to date (accumulated depreciation).

Cost minus sale proceeds would give the profit or loss on disposal, not the NBV. Cost minus annual depreciation charge only deducts one year's depreciation, ignoring prior years. Cost minus residual value gives the total depreciable amount over the asset's life, not its current carrying value.

The correct answer is $13 000.

Working:

Opening capital = Opening assets - Opening liabilities = $80 000 - $25 000 = $55 000.

Closing capital = Closing assets - Closing liabilities = $95 000 - $30 000 = $65 000.

Change in capital = $65 000 - $55 000 = $10 000 increase.

Capital changes due to: Profit - Drawings + Additional capital contributions.

$10 000 = Profit - $3 000 + $0 (no additional capital).

Profit = $10 000 + $3 000 = $13 000.

The correct answer is $18 000 (net book value).

Under the going concern concept, the business is assumed to continue operating and using its assets in the normal course of business. Assets are therefore shown at their net book value (cost less accumulated depreciation), not at their resale or break-up value. The calculation is: $30 000 - $12 000 = $18 000.

$30 000 (original cost) ignores depreciation, which reflects the consumption of the asset's economic benefits over time. $12 000 (depreciation to date) is only the accumulated depreciation, not the carrying amount. Its current market or resale value would only be relevant if the going concern assumption did not apply and the business intended to sell the asset.

The correct answer is $25 000.

Preference dividends must be paid before ordinary dividends. The preference shares carry a 10% fixed dividend.

Preference dividend: 10% x $200 000 = $20 000.

Amount available for ordinary dividends: $45 000 - $20 000 = $25 000.

Preference shareholders have priority, so their fixed dividend is paid first from the available profits. The remaining $25 000 can be distributed to ordinary shareholders at the directors' discretion.

The correct answer is the general journal.

When a business is taken over as a going concern, the opening entry records all the assets acquired and all the liabilities assumed, with the difference representing the capital or goodwill. This is a non-routine transaction that does not fit into the cash book, purchases journal, or sales journal. The general journal is used specifically for such opening entries, as well as for other non-routine transactions like corrections of errors, writing off bad debts, and year-end adjustments.