Question 1

Obligations of the entity that do not require payment within one year of the balance sheet date are classified as:

Accepted Answer

Obligations of the entity that do not require payment within one year of the balance sheet date are classified as non-current liabilities. This is because they do not need to be paid in the short-term, but rather over a longer period of time. Current liabilities require payment within one year, so they are not the appropriate classification. Non-current assets and current obligations do not refer to obligations that require payment, so they are also not the appropriate classification.

Question 2

On 1 July 2014 Tan Traders paid $600, representing a two-year insurance premium. The $600 was initially recorded in the Insurance expense account. After adjustment at 31 December 2015, the close of the annual accounting period:

Accepted Answer

The insurance premium covers a two-year period from 1 July 2014 to 30 June 2016. By 31 December 2015, 18 months of the insurance have been used, equating to $450 ($600/24 months * 18 months), leaving 6 months or $150 ($600/24 months * 6 months) as prepaid insurance. Therefore, the insurance expense for the period is $450, and the prepaid insurance is $150.

Question 3

In preparing its 2014 adjusting entries, the ZigZag Ltd forgot to adjust the Office Supplies (asset) account for the amount of supplies used up during the year. As a result of this error:

Accepted Answer

If the company forgot to adjust for the supplies used up, expenses would be understated, leading to an overstatement of profit. This overstatement of profit would also cause equity to be overstated because retained earnings (a component of equity) would be too high. Assets would be overstated because the supplies asset account would not have been reduced for the supplies used.

Question 4

The period of time over which a non-current asset, such as a motor vehicle, is expected to be used by the entity is known as its:

Accepted Answer

The useful life of a non-current asset refers to the period of time over which the asset is expected to be used by the entity before it is no longer viable or becomes obsolete. The carrying period, accumulated depreciation, and working life are not commonly used terms to describe the estimated useful life of an asset.

Question 5

When using a worksheet to prepare accounting reports in a manual accounting system, what is the correct set of column headings?

Accepted Answer

The correct set of column headings for a worksheet in a manual accounting system includes the unadjusted trial balance, adjustments, adjusted trial balance, income statement, and balance sheet. This sequence allows for the recording of initial balances, adjustments, and the preparation of final financial statements.

Question 6

The capital account of a sole trader was credited with $5000. Which of these items would not give rise to such a credit?

Accepted Answer

Payment of a private gambling debt from the business bank account does not give rise to a credit in the capital account. It would actually result in a debit to the cash account and a decrease in the owner's equity. Choices A, B, and C would all result in an increase in the capital account and could potentially give rise to a credit.

Question 7

To facilitate the evaluation of an entity's liquidity assets and liabilities are classified as:

Accepted Answer

Assets and liabilities are classified as current or non-current based on their expected conversion to cash or settlement within one year or beyond one year, respectively. This classification facilitates the evaluation of an entity's liquidity. The other classifications given (tangible/intangible, operating/non-operating, temporary/permanent) do not distinguish between the expected timing of conversion to cash or settlement and are therefore less relevant for assessing liquidity.

Question 8

Purple Co's employees carry out work to the value of $7500. They are paid $4500 immediately with the balance to be settled in the next accounting period. Under the accrual approach to profit measurement the amount of wages expense that will be recorded in the current period is:

Accepted Answer

Under the accrual approach to profit measurement, expenses are recognized when they are incurred, not necessarily when they are paid. In this case, the work carried out by the employees (to the value of $7500) is the expense incurred by Purple Co in the current period, regardless of the payment timing. Therefore, the full $7500 is recorded as wages expense in the current period.

Question 9

The portion of a non-current asset, such as plant and equipment, which is transferred to an expense account during an accounting period, is known as:

Accepted Answer

Depreciation is the portion of a non-current asset that is transferred to an expense account during an accounting period. Option A is incorrect because carrying amount is the original cost of the asset less accumulated depreciation. Option B is incorrect because accumulated depreciation is the total amount of depreciation charged to the asset since its acquisition. Option D is incorrect because a contra asset is an account that offsets the balance in another asset account.

Question 10

Current assets may be listed in the balance sheet in the order of their liquidity. Liquidity is:

Accepted Answer

Liquidity refers to the ease with which an asset can be converted into cash. Therefore, current assets may be listed in order of their liquidity, with the most liquid assets listed first. This means that the assets that can be converted into cash most quickly are listed first, followed by assets that may take longer to turn into cash.

Question 11

Which of these is not an intangible asset?

Accepted Answer

Stock of books is a tangible asset as it is a physical item that can be physically counted and touched. Patents, goodwill, and brand names are all intangible assets as they represent a company's intellectual property and reputation.

Question 12

The current liability is:

Accepted Answer

Accrued delivery expenses are expenses that have been incurred but not yet paid and therefore represent a current liability. Accounts receivable (B) represent money that a company expects to receive from its customers in the near future, and therefore are not a liability. Electricity expense (C) is an expense that has already been paid and therefore is not a liability. Long-term loan (D) is a liability that is not due for more than one year, and therefore is not a current liability.

Question 13

The excess of current assets over current liabilities is known as:

Accepted Answer

Working capital is the excess of current assets over current liabilities. Choice A refers to physical assets, choice B refers to total assets minus liabilities, and choice C refers to non-physical assets such as patents or trademarks.

Question 14

On the first day of the year Mayo Resources purchased a forklift truck for $12 000 which is to be depreciated by 25% a year. At the end of the first year:

Accepted Answer

The depreciation for the first year will be 25% of the purchase price of the forklift, which is $12,000 x 25% = $3,000. This amount will be recorded as an expense in the income statement. The carrying value of the forklift in the balance sheet will be the purchase price minus the accumulated depreciation, which is $12,000 - $3,000 = $9,000. Therefore, the correct choice is C.

Question 15

The primary basis for the classification of assets and liabilities in the balance sheet is:

Accepted Answer

The primary basis for the classification of assets and liabilities in the balance sheet is liquidity, which refers to an entity's ability to meet its financial obligations as they come due. Assets and liabilities are listed in order of their expected conversion to cash. This allows users of financial statements to assess the entity's ability to meet its short-term obligations and to make informed investment and lending decisions.

Question 16

Assets that do not have a physical subsistence but which are expected to provide future benefits are known as:

Accepted Answer

Intangible assets are assets that have no physical substance but are expected to provide future benefits to the company. Examples of intangible assets include patents, trademarks, copyrights, and goodwill. Non-current assets refer to assets that are not expected to be converted into cash in the next 12 months, while tangible assets are assets that have a physical substance. Cash at bank is a current asset, as it is expected to be converted into cash in the next 12 months.

Question 17

ABC collects rents from several properties. Prior to recording adjusting entries, assume the rent income account has a credit balance of $8000. Two adjustments are to be made at the end of the financial year (1) an accrual for accrued rent income of $600 (2) the unearned rent income account is to be decreased by $200. After processing these adjusting entries the amount of rent income to be shown in the income statement is:

Accepted Answer

The initial rent income is $8000. Adding the accrued rent income of $600 increases it to $8600. Decreasing the unearned rent income by $200 further increases the total rent income to $8800.

Question 18

Indicate the order that the following current assets should be listed in the balance sheet.
I Accounts receivable
II Bank
III Stock of stationery
IV Prepaid expenses

Accepted Answer

Bank usually comes first as it is the most liquid asset, followed by accounts receivable, as they are considered less liquid than the bank. Next should be stock of stationery as it is an inventory that will eventually be sold and turned into cash, and prepaid expenses should come last as they are considered the least liquid of the current assets. Therefore, the correct order is II, I, III, IV, which is only present in choice C.

Question 19

Michael Myers & Co paid salaries of $150 000 during the year and owes $2200 for three days work carried out before the 31 December 2014 which will not be paid until January 3 2015. After the adjusting entry for the year ended 31 December 2014:

Accepted Answer

The correct answer is A because the total salaries expense recognized in the income statement for the year should include both the paid salaries of $150,000 and the accrued salaries of $2,200 for the work done before December 31, 2014, totaling $152,200. The $2,200 is also shown as accrued salaries in the balance sheet, representing an obligation to pay this amount in the future.

Question 20

Which of the following is not an advantage of preparing an adjusted trial balance?

Accepted Answer

Preparing an adjusted trial balance involves entering the adjusting entries into the ledger to ensure that the debits and credits are still equal. Therefore, option C is incorrect as adjusted entries do need to be entered into the ledger to prepare the adjusted trial balance. The other options all describe advantages of preparing an adjusted trial balance.

Quiz 4: Adjusting the Accounts and Preparing Financial Statements