MCQs / Q&A

A. Debit P&L A/c and Credit Reserve for Discount on Accounts Payable A/c
B. Debit Accounts Payable A/c and Credit P&L A/c
C. Debit Reserve for Discount on Accounts Payable A/c and Credit P&L A/c
D. Debit Reserve for Discount on Accounts Payable A/c and credit Accounts Payable A/c
The entry will be as follows:
Reserve for Discount on Creditors A/c……………………………………………… Dr.
To Profit & Loss A/c
It will be shown on the credit side as a separate item and will be shown on the Liabilities side by way of deduction from the Sundry Creditors.

i. Depreciation for 2011-2012- 7,000 understated
ii. Accrued expenses as at March 31, 2013 – 10,000 understated
The impact of this on the reported net income for the year ending March 31, 2013 is
A. 7,000 Overstated
B. 10,000 Overstated
C. 17,000 Understated
D. 17,000 Overstated

Net income will be overstated by 10,000 because the accrued expense are
understated. Under/ Overstatement of depreciation of the year 2011-2012 does not affect the net
income of current year i.e., 2012-13.]

A. Add prepaid expenses to respective expenses and show it as an asset
B. Deduct prepaid expenses from respective expenses and show it as an asset
C. Add prepaid expenses to respective expenses and show it as a liability
D. Deduct prepaid expenses from respective expenses and show it as a liability

Prepaid expense is an expense relating to the next accounting period but has been paid
in the current accounting period and hence it is a current asset. The adjustment would be to
deduct it from the respective expense account in the P&L A/c and show it as a current asset in the
Balance Sheet.

A. Credited to P&L A/c
B. Debited to P&L A/c
C. Reduced from debtors in Balance Sheet
D. Added to debtors in Balance Sheet

Bad debts earlier written–off and later recovered is a profit to the firm and hence they
are transferred to Profit & loss Account.

A. P&L A/C is debited with 1,400
B. P&L A/C is debited with 1,200
C. 200 is shown as current asset
D. Both B. and C. above

Adjustments for prepaid subscription fees:
P& L A/c Extract
Total subscription fees paid 1,400
Less: Subscription fees prepaid
Relating to next A/c period 200
Subscription fees 1200
The prepaid subscription fees of ` 200 will be shown as a current asset in the Balance Sheet as it is
an expense relating to the next accounting period but has been paid in the current accounting
period.]

A. Debited to P&L A/c
B. Shown as liability in Balance Sheet
C. Reduced from related asset in Balance Sheet
D. Both A. and C. above

Any item appearing in the Trial Balance will have one effect i.e., depreciation appearing
in the Trial Balance will be debited to the Profit & Loss Account. However, if depreciation is given in the adjustments, it will have double effect i.e., it should be debited to P&L A/c and deducted from the gross fixed asset block in the Balance Sheet also.

A. Current Asset
B. Current Liability
C. Fixed Asset
D. Income

Prepaid insurance is the expense relating to the next accounting period but has been
paid in the current accounting period and hence it is a current asset. The adjustment would be to
deduct it from the respective expense account in the P&L A/c and show it as a current asset in the
Balance Sheet.

A. An Asset in the Balance Sheet
B. A Liability
C. By adjusting it in the P & L A/c
D. Both B. and C. above
Outstanding salaries is the expense relating to the current accounting period but has not
been paid yet and therefore, it is a current liability.

A. Replacement cost – Accumulated Depreciation
B. Historical cost – Salvage Value
C. Historical cost – Depreciation portion thereof
D. Original cost adjusted for general price-level changes