MCQs / Q&A

Capital expenditure is an expenditure which

A. Benefits the current accounting period
B. Will benefit the next accounting period
C. Results in the acquisition of a permanent asset
D. Results in the acquisition of a current asset

A capital expenditure is a non- recurring expenditure whose benefit lasts for more than
one accounting period. Example is the acquisition of a fixed or permanent assets.

Which of the following should not be treated as revenue expenditure?

A. Interest on loans and debentures
B. Annual fire insurance premiums on Plant and Equipment
C. Sales tax paid in connection with the purchase of office equipment
D. Small expenditures on long- lived assets, such as ` 20 for a paper weight.

C. A revenue expenditure is an expenditure whose benefit expires within the current
accounting period and is in the nature of recurring and is therefore written off to P&L A/c. Sales tax
paid in connection with the purchase of office equipment is a non-recurring expenditure whose
benefit is going to last for more than one accounting period and hence not a revenue
expenditure

Which of the following errors affects the agreement of a Trial Balance?

A. Mistake in balancing an account
B. Omitting to record a transaction entirely in the subsidiary books
C. Recording of a wrong entry in the subsidiary books
D. Posting an entry on the correct side but in the wrong account

A. The mistake in balancing an account affects the agreement of a Trial Balance A. is the
correct answer. The other mistakes do not affect the agreement of Trial Balance. The omission to
record a transaction entirely in the subsidiary books B. will not affect the agreement of a Trial
Balance because both the aspects of a transaction are omitted to be recorded. Recording of a
wrong entry in the subsidiary books (c ) will not cause disagreement of a Trial Balance because,
the wrong entry so recorded has the effect of posting the transaction in the manner it is recorded.
Posting an entry on the correct side in the wrong account D. does not affect the tallying of a Trial
Balance because the aspect of the transaction is posted to the correct side of an account. Thus
A. is the correct answer.

The accountant of Leo Ltd. recorded a payment by cheque to a creditor for supply of materials as 1,340.56. The bank recorded the cheque at its correct amount of 3,140.56. The Company has not passed any rectification entries and the error is not detected through the bank reconciliation. The impact of this error is

A. The Trial Balance will not agree
B. The balance of creditors is understated
C. The purchases are understated
D. The favorable bank balance as per Pass Book is less than the Bank balance as per Cash book

D. The favourable bank balance as per Pass Book will be less than the bank balance as per Cash Book, since the debit in the bank account is more than the debit in the Cash Book D.. As debit and credit are for equal amount there is no disagreement of the Trial Balance; Creditors balance is overstated but not understated: The favourable bank balance as per Pass Book will be less than the Bank balance as per Cash Book, since the debit in the Bank Account is more than the debit in the Cash book. Purchases are not affected, as it is a payment to the creditor. Thus, the correct answer is D.

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.
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.

Purchase journal is kept to record_____________?

A. All purchases of goods
B. All credit purchases of goods
C. All credit purchases
D. None of these

For the past 3 years, DK Ltd. has failed to accrue unpaid wages earned by workers during the last week of the year. The amounts omitted, which were considered material, were as follows:

March 31,2010 – ` 56,000
March 31, 2011 – ` 51,000
March 31, 2012 – ` 64,000
The entry on March 31, 2012 to rectify these omissions would include a
A. Credit to wage expense for ` 64,000
B. Debit to wage expense for ` 64,000
C. Debit to wage expense for ` 51,000
D. Debit to wage expense for ` 13,000

If goods worth 1,750 returned to a supplier is wrongly entered in sales return book as 1,570, then

A. Net Profit will decrease by 3,140
B. Gross Profit will increase by 3,320
C. Gross Profit will decrease by 3,500
D. Gross Profit will decrease by 3,320

Which of the following is not correct about Errors?

A. Errors which affect one account can be errors of posting
B. Errors of omission arise when any transaction is left to be recorded
C. Errors of carry forward from one year to another year affect both Personal and Real A/c
D. Errors of commission arise when any transaction is recorded in a fundamentally incorrect manner

Error of Commission arises because of wrong recording, wrong casting, wrong carry
forward, wrong posting, wrong balancing etc.

While finalizing the current year‘s accounts, the company realized that an error was made in the calculation of closing stock of the previous year. In the previous year, closing stock was valued more by 50,000. As a result

A. Previous year‘s profit is overstated and current year‘s profit is also overstated.
B. Previous year‘s profit is understated and current year‘s profit is overstated.
C. Previous year‘s profit is overstated and current year‘s profit is understated.
D. There will be no impact on the profit of either the previous year or the current year.

C. Closing stock overstatement and opening stock understatement increases the profits
and vice versa is also equally true.