MIX 2 (FFA)

Transactions and events should be recorded in the accounting records according to their commercial substance, rather than their strict legal form.

Which accounting concept is this in accordance with?

• Going concern

• Offsetting

• Substance over form

• Business entity

Which of the following statements concerning the exercise of prudence is correct?

• It means that assets and income are not understated.

• It allows for the overstatement of liabilities or expenses.

• It requires asymmetry between the recognition of assets and the recognition of liabilities.

• Itrequires caution when making judgements under conditions of uncertainty.

Which of the following statements is correct?

• The going concern concept guarantees that a business will continue in operational existence for at least twelve months after the reporting date.

• To comply with the law, the legal form of a transaction must always be reflected in financial statements.

• If a non-current asset initially recognised at cost is revalued, the surplus must be credited in the statement of cash flows.

• In times of rising prices, the use of historical cost accounting tends to understate assets and overstate profits.

Which accounting concept requires non-current assets to be valued at cost less accumulated depreciation, rather than at their enforced saleable value?

• Prudence

• Relevance

• Comparability

• Going concern

Answer explanation

If a business is a going concern, it is reasonable to assume that non-current assets will be used over their useful lives. It is therefore appropriate to value a non-current asset at cost less accumulated depreciation, which represents the consumption of cost or value so far.

The cash at bank ledger account of Worcester shows a credit balance of $1,350. Cheques

totalling $56 have been written to suppliers but not yet cleared the bank; uncleared

lodgements amount to $128. The bank has accidentally credited Worcester’s account with

interest of $15 due to another customer. A standing order of 5300 has not been accounted for in the general ledger.

What is the balance on the bank statement?

• $993 Cr

• $993 Dr

• $1,707 Cr

• $1,707 Dr

Answer explanation

A bank reconciliation statement for Dallas at 30 June 20X5 is being prepared. The following information is available:

1 Bank charges of $350 have not been entered in the cash at bank ledger account.

2 The bank statement shows a debit balance of $200.

3 Unpresented cheques amount to $1,250.

4 A direct debit of $250 has not been recorded in the ledger accounts.

5 A bank error has resulted in a cheque for $97 being debited to Dallas’ account instead of Dynasty’s account.

6 Cheques received but not yet banked amounted to $890.

What will be the final balance in the cash at bank ledger account after all necessary adjustments?

Answer explanation

Answer explanation

The bank statement of a business at 31 October 20X7 showed an overdraft of $800. On reconciling the bank statement, it was discovered that a cheque drawn in favour of Smith for $80 had not been presented for payment, and that a cheque for $130 from a customer had been dishonoured on 30 October 20X7, but that this had not yet been notified to you by the bank.

What is the correct bank balance to be shown in the statement of financial position at 31 October 20X7?

• $1,010 overdrawn

• $880 overdrawn

• $750 overdrawn

• $720 overdrawn

Answer explanation

The bookkeeperof High Hurdles was instructed to make a contra entry for $270 between the payables and receivables accounts in the general ledger. The bookkeeper recorded the transaction by debiting receivables and crediting payables with $270.

Which of the following statements is correct?

• Unless the error is corrected, profit will be over-stated by $540

• Unless the error is corrected, net assets will be over-stated by $270

• Unless the error is corrected, net assets will be over-stated by $540

• The errors should be corrected, but neither the profit nor the net assets are overstated

Answer explanation

The error has been to debit the receivables account and credit the payables account, instead

of debiting the supplier account and crediting the customer account. As a result, receivables

are over-stated by 2 x $270 = $540, and payables are over-stated by $540. The error must be

corrected, but sales and purchases are unaffected, so profit is unaffected. Total assets

(receivables) and total liabilities (payables) are both $540 too high, so that net assets are

unchanged.

The statement of profit or loss for a business for the year ended 31 July 20X8 showed a net profit of $57,400. It was later discovered that a suite of office furniture had been purchased on 1 February 20X8 at a cost of $15,500 had been charged to the office expenses account. The suite of office furniture had an estimated useful life of ten years with an estimated residual value of $1,500. Depreciation is charged on a monthly basis, commencing with the month of purchase.

What was the net profit for the year ended 31 July 20X8 after adjusting for this error?

Answer explanation

Answer: 557,400 + $15,500 — ((($15,500 — $1,500)/10) x 6/12) = $72,200