Question

1. The Framework states that an asset should be recognised when and only when:

(i) the asset possesses a cost or other value that can be measured reliably

(ii) it is legally owned by the entity

(iii) it is probable that the future economic benefits embodied in the asset will eventuate.

A.         (i) and (ii) only

B.         (i) and (iii) only

C.         (ii) and (iii) only

D.         (i), (ii) and (iii)

E.         (ii) only

2.     In which of the following transactions or events are the debit entries NOT equal to the credit entries?

A.         Wages owing are recorded as increasing an expense and decreasing a liability

B.         Credit purchase of supplies is recorded as increasing an asset and increasing a liability

C.         Cash sales are recorded as increasing revenue and increasing an asset

D.         Receipt from a customer for the amount previously owed is recorded as increasing an asset and decreasing another asset

E.         Credit sales are recorded as increasing revenue and increasing an asset

3. Given only the following information, what is the balance of shareholders’ equity?

                                                                  $

Cash                                                     10,000

Inventory                                               30,000

Equipment                                           200,000

Accounts payable                                   50,000

Taxes payable                                       40,000

Loans to the company                          100,000

A.         $40,000

B.         $50,000

C.         $100,000

D.         $140,000

E.         None of the above

4. Accounts that have normal debit balances include:

1. Debtors, drawings, wages, accumulated depreciation
2. Debtors, drawings, equipment, depreciation expense
3. Creditors, capital, revenues, depreciation expense
4. Equipment, drawings, accumulated depreciation, inventory
5. Equipment, drawings, advertising, inventory gain

5. The owner of a business completed an electronic funds transfer of $5,000 from her personal bank account to Valley Motors as deposit on a new vehicle for the business costing $28,999. The balance owing is due in 60 days and will be paid for by the business.
   Identify the overall effect on the businesses’ accounting equation:

1. Assets decrease, liabilities increase and owners equity decreases
2. Assets increase, liabilities increase and owners equity decreases
3. Assets increase, liabilities increase and no effect on owners equity
4. Assets increase, liabilities increase and owners equity increases
5. None of the above

6. Suzie Yang runs a catering business. She received a phone booking for a function on 1 January. Susie catered for the birthday function on 28^th January, and received payment on 16^th February. Which of the following statements is correct?

1. If Susie were using cash-basis accounting, the revenue would be recorded in January;
2. If Susie were using cash-basis accounting, the revenue would be recorded in February;
3. If Susie were using accrual-basis accounting, the revenue would be recorded when received in February;
4. If Susie were using accrual-basis accounting, the revenue would be recorded when the booking was made;
5. None of the above.

7. Zia Company reports the following balance sheet information for 2020:

                                                                                           1 July 2019                30 June 2020

                        Assets                                                              $60,000                        $70,000

                        Liabilities                                                          $12,000                        $14,000

Assume that capital contributions during 2020 were $3,000 and that dividends were $12,000. Net profit for the year ended 30 June 2020 must have been:

1. $8,000
2. $11,000
3. $23,000
4. $17,000
5. $9,000

8. Failure to prepare an adjusting entry at the end of a reporting period to record an accrued expense would cause:

1. An overstatement of liabilities and an overstatement of expenses.
2. An overstatement of assets and an understatement of expenses.
3. An understatement of liabilities and an understatement of expenses.
4. An understatement of expenses and an overstatement of liabilities.
5. None of the above

Answer 1

Answer 1

The correct answer is option B. (i) and (iii) only

Explanation: The Framework states that an asset should be recognised when and only when it is probable that the future economic benefits embodied in the asset will eventuate and its cost can be measured reliably. Also, the framework states that substance matters more than form, so even if asset is not legally owned by the entity, but in substance, entity have its ownership and possession, then also it can be recognised as an asset in the books of the entity.

Answer 2

The correct answer is option A. Wages owing are recorded as increasing an expense and decreasing a liability.

Explanation: Wages owing are recorded as increasing an expense and increase in liability since the wages are outstanding and due to be paid, it becomes a liability for the entity.

Rest other option’s debit entries is equal to its credit entries.

Answer 3

The correct answer is option B. $50,000

Explanation: Calculation of the balance of shareholders’ equity:

Particulars	Amount ($)
ASSETS
Cash	10,000
Inventory	30,000
Equipment	200,000
Total Assets (A)	240,000
LIABILITIES
Accounts payable	50,000
Taxes payable	40,000
Loans to the company	100,000
Total Liabilities (B)	190,000
Shareholders’ equity (A) – (B)	50,000

Answer 4

The correct answer is option B. Debtors, drawings, equipment, depreciation expense

Explanation: Debtors, drawings, equipment, depreciation expense normally have debit balances while all the other option mentioned normally have credit balances.

Answer 5

The correct answer is option D. Assets increase, liabilities increase and owner’s equity increases

Explanation: The journal entry for recording such transaction would be:

In the books of Valley Motors

         Journal Entry

Date	Particulars	Debit ($)	Credit ($)
	Vehicle A/C                                                                  DR.	28,999
	To Accounts payable A/C		23,999
	To Owner’s Capital A/C		5,000
	(Being vehicle purchased and owner paid $ 5,000 from personal account)

Answer 6

The correct answer is option B. If Susie were using cash-basis accounting, the revenue would be recorded in February

Explanation: If Susie were using cash-basis accounting, the revenue would be recorded in February when the payment for the services provided is received by Susie, whereas if Susie were using accrual-basis accounting, the revenue would be recorded in January, when services was provided and payment was due.

Answer 7

The correct answer is option D. $ 17,000

Explanation: Calculation of net profit for the year ended 30 June 2020:

Date	Particulars	Amount ($)	Date	Particulars	Amount ($)
2019			2019
	To Dividend A/C	12,000	July 1	By Balance B/D ($ 60,000- $ 12,000)	48,000
2020				By Cash A/C (Capital contribution)	3,000
June 30	To Balance C/D ($ 70,000- $ 14,000)	56,000	2020
			June 30	By Profit for the year B/F	17,000
		68,000			68,000

Note: Balance of Shareholder’s equity = Assets – Liabilities

Answer 8

The correct answer is option C. An understatement of liabilities and an understatement of expenses

Explanation:

Failure to prepare an adjusting entry at the end of a reporting period to record an accrued expense would cause the liabilities to be understated as an expense which is payable is not recorded and also the expense incurred during the year is not recorded which leads to understatement of expenses.