Week 9 TEST

Question 1

1.1: Tom set up a business on 1st January. He bought non-current assets (property, plant and equipment) costing £53,000 and inventory costing £6,600. He had financed these in advance of starting the business with a loan of £25,000 from a bank. On 31st December of the same year, his net assets totalled £37,200. His net profit for the year was £21,100. Tom’s drawings during the year were:
A) £1,300
B) £8,900
C) £16,100
D) £18,500

Answer 1

working: 53000 + 6600-25000+21100-37200= £18,500
D) £18,500

Question 2

1.2: According to the Conceptual Framework, relevance in financial information
A) is free from bias and error
B) is measured in a similar way by different companies
C) can independently checked
D) can make a difference to a decision

Answer 2

D) can make a difference to a decision

Question 3

1.3: Which of the following is a credit balance?
A) Motor Vehicle account
B) Sales account
C) Cash account
D) Salaries account

Answer 3

B) Sales account

Question 4

1.4: If prices over an accounting period decrease, and closing inventory levels remain constant and have a minimum quantity higher than zero, which method is likely to lead to the highest COGS?
A) First-in-first-out
B) Last-in-first-out
C) Weighted average costing
D) None of the above

Answer 4

A) First-in-first-out

Question 5

1.5: Accumulated depreciation should be shown on the balance sheet:
A) as a current liability
B) as a deduction from current assets
C) as a deduction from the cost of corresponding non-current assets
D) as a part of owner’s equity

Answer 5

C) as a deduction from the cost of corresponding non-current assets

Question 6

Explain three main differences between a sole trader and a corporation. (your answer should be not over 100 words)

Answer 6

Sole Trader:
* One individual owns and operates a business
* The business is not seen as legally separate from the individual
* The individual responsible for the debts of the business
* Creditors have a claim over the individual’s personal assets if the business cannot pay.

Company/corporation
* Incorporated by law as separate legal entities
* own their own assets and can take action on their own behalf
* The owner of the company is called shareholders or equity holders, and they have limited liabilities for company’s debt
* the shareholders will only lose the value of their shares if company go bankrupt. Shareholder’s liability is limited to the amount invested in the company when buy the shares.

Question 7

Question 3: Numeric calculation

A company purchased a machine on 1 January 2023 for £300,000. It is expected to have a useful life of five years and an estimated residual value of £30,000. The company adopts the reducing balance depreciation method for the machine.
Required
(a) Calculate the annual depreciation expense and the net book value of the machine for each year in the machine’s useful life.
(b) On 31 December 2024, the company the sold machine for £150,000. Calculate the profit or loss on disposal of the machine.

You need to show all workings clearly, and round your results to the nearest 0.1.

[Total: 15 marks]

Answer 7

dep rate =1 -(30,000/300,000)^(1/5) 36.9%

Cost/OB, Annual depreciation, Net book value

Year 1 300,000 / 110,712.8 / 189,287.2
Year 2 189,287.2 / 69,855.1 / 119,432.2
Year 3 119,432.2 / 44,075.6/ 75,356.6
Year 4 75,356.6 / 27,809.8 / 47,546.8
Year 5 47,546.8 / 17,546.8 / 30,000.0

(b) Proceeds: 150,000
NBV (in 2024): 119,432.2
Profit on disposal: 30,567.8