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The MCQs below are drawn from the Accountancy & Auditing subject category.
Showing 4561–4570
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4561
Which journal entry correctly records the annual depreciation expense for a fixed asset?
Under the accrual basis of accounting, depreciation is recorded by debiting the Depreciation Expense account to reflect the cost allocation for the period and crediting the Accumulated Depreciation account, which is a contra-asset account. This process reduces the carrying value of the asset on the balance sheet while recognizing the expense on the income statement, adhering to the matching principle.
4562
A machine was purchased for $20,000 two years ago and is now sold for $13,000. If the business depreciates machinery at 10% per annum on cost, and the existing provision for depreciation account balance is $28,000, what is the balance of the provision for depreciation account after this sale?
The annual depreciation is 10% of $20,000, which is $2,000. Over two years, the accumulated depreciation for this specific machine is $4,000. When the machine is sold, this $4,000 must be removed from the total provision for depreciation account. Therefore, $28,000 - $4,000 = $24,000. This adjustment ensures the provision account reflects only the depreciation of remaining assets.
4563
When a fixed asset is disposed of, where is the accumulated provision for depreciation account typically transferred?
When an asset is sold or disposed of, the accumulated depreciation associated with that specific asset must be removed from the books. This is achieved by transferring the balance of the provision for depreciation account to the asset account itself, effectively reducing the book value of the asset before calculating the final gain or loss on disposal.
4564
What is the term for the inventory remaining unsold at the conclusion of the accounting period?
Closing stock refers to the value of goods or materials that remain unsold or unused at the end of the financial year. It is a vital component in calculating the Cost of Goods Sold and is reported as a current asset on the Balance Sheet.
4565
A firm reports closing stock of $10,000, but this figure incorrectly includes a fixed asset valued at $1,000. What is the correct value of the closing inventory?
Inventory should only include assets held for sale in the ordinary course of business. Since a fixed asset worth $1,000 was erroneously included in the stock count, it must be removed to reflect the true value of the inventory. Subtracting the $1,000 fixed asset from the reported $10,000 total results in a corrected closing inventory value of $9,000.
4566
How does an overstatement of the beginning inventory by 5,000 and an overstatement of the closing inventory by 12,000 impact the net income for the current year?
An overstatement of beginning inventory increases the cost of goods sold, which decreases net income. Conversely, an overstatement of closing inventory decreases the cost of goods sold, which increases net income. The net effect is calculated as: (Overstatement of closing inventory - Overstatement of beginning inventory) = 12,000 - 5,000 = 7,000 net overstatement of income.
4567
An overstatement in the valuation of closing inventory results in the overstatement of all the following items, except:
When closing stock is overstated, the Cost of Goods Sold (COGS) is understated because COGS is calculated as Opening Stock + Purchases - Closing Stock. Consequently, an overstated closing stock leads to an overstatement of Gross Profit, Net Income, Current Assets, and Owner's Equity (Capital). Therefore, COGS is the only item listed that is understated rather than overstated.
4568
Which statement regarding closing stock is incorrect?
Closing stock represents unsold inventory held by a business at the end of an accounting period. It is an asset, not a reduction of resources. It is correctly reported as a current asset on the balance sheet and serves as the opening inventory for the subsequent period. The claim that it reduces business resources is factually incorrect.
4569
How is closing stock treated when it appears within the trial balance?
When closing stock is listed inside the trial balance, it indicates that the adjustment has already been incorporated into the purchases or cost of goods sold. Therefore, it is treated as an asset and reported solely on the Balance Sheet, rather than being adjusted again in the Trading Account.
4570
What is the implication of closing stock appearing within the Trial Balance?
When closing stock appears inside the Trial Balance, it indicates that the adjustment for the cost of goods sold has already been made, typically by adjusting the Purchases account. This means the inventory value has been incorporated into the ledger balances, and it should be treated as an asset in the Balance Sheet without further adjustment in the Trading Account.
