Question 1

Which of these would not be recorded as increasing income on 13 January?

Accepted Answer

A cash sale on 13 January would increase income immediately. A credit sale on 13 January would also increase income, even though payment will be received at a later date. A sale where part of the payment is received on 13 January would also increase income, even though the balance is not paid until a later date. However, a cash sale on 31 January would not increase income on 13 January.

Question 2

A transaction recording accrued income will:

Accepted Answer

Accrued income represents revenue that has been earned but not yet received, so the transaction recording accrued income will increase the accounts receivable (a current asset) and the sales income account. It will have no effect on cash or total assets. Accounts payable are liabilities that represent amounts owed to suppliers or vendors, so this option does not apply to the recording of accrued income.

Question 3

Machinery is purchased for $80 000.It is estimated that it has a useful life of 5 years and a residual value of $5 000.Using the straight-line method,the carrying value of the machine at the end of the fourth year of the machine's useful life is:

Accepted Answer

Annual depreciation expense = (cost of asset - expected residual value)/expected useful life = ($80 000 - $5000)/5 = $15 000. Accumulated depreciation end of year 4 = $15000 x 4 $60 000.. Carrying amount end of year 4 = asset $80 000 less accumulated depreciation $60 000 = $20 000 (one more year of depreciation of $15 000 would leave a carrying amount of $15 000, which is the expected sale amount).

Question 4

An entity's financial year ends on 30 June.On 1 May it pays a 12-month insurance premium of $24 000.Under the accrual system of accounting how much of the premium will be recognised as an expense for the current year ended 30 June and how much will be treated as an asset (prepaid insurance)?

Accepted Answer

Since the entity's financial year ends on 30 June, the insurance premium payment made on 1 May will cover the period from 1 May of the current year to 30 April of the following year. Thus, for the current financial year ended 30 June, only a part of the premium paid will be recognised as an expense and the rest will be treated as an asset (prepaid insurance). The portion of the premium that relates to the current financial year is calculated as follows:

Period covered by the premium payment = 1 May to 30 June
Proportion of the premium for the period = (2/12) = 1/6

Therefore, the expense for the current financial year is:

Expense = Total Premium x Proportion for current year
Expense = $24,000 x (1/6)
Expense = $4,000

The remaining portion of the premium ($24,000 - $4,000 = $20,000) will be treated as an asset (prepaid insurance) on the balance sheet as at 30 June.

Question 5

An owner contributes $50 000 to expand the business.This transaction would:

Accepted Answer

When the owner contributes $50,000 to expand the business, it is considered as capital. Hence, the transaction would increase capital.

Question 6

For the month of October: total sales = $125 000,total purchases = $80 000,beginning inventory = $32 000 and ending inventory = $44 000.The cost of sales for October is:

Accepted Answer

Cost of Sales = Beginning Inventory + Purchases - Ending Inventory
Cost of Sales = $32 000 + $80 000 - $44 000
Cost of Sales = $68 000

Question 7

Expenses classified by function would be categorised as:

Accepted Answer

Expenses classified by function include all costs associated with specific activities or operations within a business, such as marketing, borrowing, and selling and distribution expenses.

Question 8

Equipment is purchased for $50 000.It is to be depreciated on a diminishing balance basis using a rate of 10%.How much will be charged for depreciation expense for year 3 of the machine's life?

Accepted Answer

Diminishing balance depreciation = the carrying value of the asset x rate.
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Question 9

An entity pays wages on a fortnightly basis and the next payroll date is 8 September.If wages expense is not accrued at 31 August the effect on the financial statements for August will be:

Accepted Answer

Accruing wages expense increases liabilities (for wages payable) and decreases profit (due to the expense recognition). If wages are not accrued, liabilities will be understated (because the owed wages are not recorded) and profit will be overstated (because the expense has not been recognized).

Question 10

For a retail entity,cost of sales is calculated as follows:

Accepted Answer

Cost of sales, also known as cost of goods sold (COGS), is calculated by adding the beginning inventory to the purchases made during the relevant period and then subtracting the ending inventory from this figure. This represents the cost of the goods that were sold during the given period. Hence, the formula for COGS is beginning inventory + purchases - ending inventory. Therefore, the correct choice is D.

Question 11

Office supplies are purchased in bulk and recorded as an asset.They are used by staff on a daily basis.An expense recognising the use of the office supplies will normally be recorded:

Accepted Answer

Office supplies are recorded as an asset when purchased, but the expense is recognized when they are used. An end-of-period adjustment is made to account for supplies used during the accounting period. Option A is incorrect because it does not recognize the expense when the supplies are used. Option B is incorrect because paying for the supplies does not necessarily mean they have been used. Option D is also incorrect because recording the expense on a daily basis would be impractical and time-consuming.

Question 12

The statement of profit or loss:

Accepted Answer

The statement of profit or loss, also known as the income statement, presents the income and expenses of an entity for a specific period of time. It shows the net profit or loss for the period, which is then used to calculate the change in retained earnings on the statement of financial position. Therefore, choice C is the correct answer.

The other options are incorrect:
A) The statement of financial position, also known as the balance sheet, reports the assets, liabilities and equity at a specific point in time. 
B) The change in retained earnings is reported on the statement of changes in equity. 
D) The changes in assets, liabilities and equity over a period of time are reported on the statement of cash flows.

Question 13

Machinery is purchased for $140 000.It is estimated that it has a useful life of 5 years and a residual value of $20 000.Using the straight-line method,calculate the amount of annual depreciation to be charged.

Accepted Answer

Annual depreciation expense = (cost of asset - expected residual value)/expected useful life = ($140 000 - $20 000)/5 = $24 000.

Question 14

In order to comply with accounting standards,reporting entities are required to classify expenses:

Accepted Answer

Reporting entities are required to classify expenses by either their nature or function to give a clear understanding of the expenses incurred during the financial period. The nature of expenses refers to the type of expense, such as salary, rent, or supplies. The function of expenses refers to their purpose, such as administrative or production-related expenses. Classifying expenses by function allows for more useful analysis of the entity's cost structure and provides insight into the activities that drive expenses.

Question 15

Triple bottom line reporting is when entities report on their:

Accepted Answer

Triple bottom line reporting involves reporting on an entity's financial, social, and environmental performance. Therefore, the correct answer is D - all of the above.

Question 16

Which of the following will be classified as income?

Accepted Answer

Interest received, fees charged for services provided, and gain on sale of equipment are all sources of revenue and therefore considered income for accounting and tax purposes.

Question 17

Auto Care Ltd serviced a motor vehicle on 30 April and issued the invoice to the owner when the motor vehicle was picked up at the end of the day.The owner sends a cheque to Auto Care Ltd on 2 May which is received and banked by Auto Care Ltd on 6 May.Auto Care Ltd will recognise income on:

Accepted Answer

Auto Care Ltd will recognize income on 30 April, the date the service was provided and the invoice was issued, in accordance with the accrual basis of accounting.

Question 18

Under the current accounting standards,which of the following items is not included in the measurement of profit in the statement of profit or loss?

Accepted Answer

Gain on asset revaluation is typically recognized in other comprehensive income rather than the statement of profit or loss, according to most accounting standards such as IFRS and US GAAP.

Question 19

Machinery is purchased for $140 000.It is estimated that it has a useful life of 5 years and a residual value of $20 000.Using the straight-line method,the balance in the accumulated depreciation account at the end of the third year of the machine's useful life is:

Accepted Answer

Annual depreciation expense = (cost of asset - expected residual value)/expected useful life = ($140 000 - $20 000)/5 = $24 000. Accumulated depreciation end of year 1 = $24 000, year 2 = $48 000 and end of year 3 = $72 000.

Question 20

Equity is decreased by:

Accepted Answer

Expenses decrease equity as they represent a reduction in the company's assets or an increase in its liabilities. The other choices are incorrect as liabilities and assets can both increase or decrease equity depending on their nature and income generally increases equity.

Quiz 6: Statement of Profit or Loss and Statement of Changes in Equity