The beginnings inventory of the current year is overstated by 5,000 and closing inventory is overstated by 12,000. These errors will cause the net income for the current year by

The beginnings inventory of the current year is overstated by 5,000 and closing inventory is overstated by 12,000. These errors will cause the net income for the current year by

A. 17,000 (overstated.
B. 12,000 (understated.
C. 7,000 (overstated.(Correct)
D. 7,000 (understated.

 

C. Overstatement of closing stock results in overstatement of profit and overstatement of
opening stock results in understatement of profit. In the instant case, there will be overstatement of
profit by 12,000 – 5,000 = 7,000.

 

The balance of which of the following accounts do not disappear, once they are debited/credited to Trading Account?

The balance of which of the following accounts do not disappear, once they are debited/credited to Trading Account?

A. Sales
B. Purchases
C. Inward returns
D. Closing stock(Correct)

 

The closing stock D. is the value of goods which remain unsold at the end of the period whose balance appears once in Trading Account and once in Balance Sheet of the business.
All other accounts sales A., purchases B. and Inward Returns C. are closed once they are absorbed by the Trading Account. Thus D. is the correct answer.

 

Which of the following items should not be capitalized relating to fixed assets?

Which of the following items should not be capitalized relating to fixed assets?

A. Interest payable on loans or deferred credits taken for the acquisition or construction of fixed assets before they are ready for use
B. Stand by equipment and servicing equipment
C. Expenditure incurred on test runs and experimental production
D. Administration and general expenses(Correct)

 

Only those expenses which relate to and specifically attributable to the asset are
capitalized. Administration and general expenses cannot be specifically attributable to the asset
and hence cannot be capitalized.

 

Which of the following is true with respect to providing depreciation under diminishing balance method?

Which of the following is true with respect to providing depreciation under diminishing balance method?

A. The amount of depreciation keeps increasing every year while the rate of depreciation keeps decreasing
B. The amount of depreciation and the rate of depreciation decrease every year
C. The amount of depreciation decreases while the rate of depreciation remains the same(Correct)
D. The amount of depreciation and the rate of depreciation increases every year

 

Under the written down value method of depreciation, the rate of percentage of depreciation is fixed, but it applies to the value of the asset at which the asset stands in the books in the beginning of the year. Therefore, the amount of depreciation decreases as the fixed rate of depreciation is charged on written down values of the asset.

 

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