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AC1025 Principles of accounting
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 2018–19. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading
references
Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2015).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
di↵erent editions of Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to find the relevant
section.
Comments on specific questions
Candidates should answer Sections A, B and C.
Section A of this examination consists of 15 multiple choice questions. You should attempt to
answer ALL the questions. Each question has four possible answers (A–D). There is only one
correct answer to each of the questions. The maximum mark for this part is 30.
Sections B and C: Please answer Question 16 (30 marks) of Section B; ONE question from
Section C and ONE further question from either section B or C (except for Question 16 all
questions are worth 20 marks).
For Sections B and C only, workings should be submitted for all questions requiring calculations.
Any necessary assumptions introduced in answering a question are to be stated.
Section A
Candidates should answer ALL questions from this section.
Correct answers are shown in bold.
Question 1
An expense accrual if accounted for would have the following e↵ect on the Income
Statement:
A Increase Net Profit
B Decrease Net Profit
C Increase Gross Profit
D Nil E↵ect
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Examiners’ commentaries 2020
Question 2
The firm’s policy is to depreciate motor vehicles on a straight line method. A motor
vehicle bought for £32,000 is expected to have a useful economic life of 5 years and
a scrap value of £2,000. What will the annual depreciation value be?
A £6,000,
B £6,400
C £5,666
D £7,200
Workings: (32,000 2,000)/5 = 6,000.
Question 3
Randolph Ltd has a tax expense of £77,000 in the Income Statement for the year
ended 31 December 2019. In the Statement of Financial Position, tax payable was
£70,000 for the year ended 31 December 2018 and £79,800 for the year ended 31
December 2019.
What amount will appear as tax paid in the Statement of cash flows for the year
ended 31 December 2019?
A £77,000
B £79,800
C 67,200
D £70,000
Workings: (77,000 + 70,000 79,800) = 67,200.
Question 4
A Sole Trader has a number of debtors. The total amount in the Sales Ledger at the
end of the financial year is £5,600. However, it is discovered that one debtor who
owes £400 has just been declared bankrupt. Past experience shows that
approximately 2% of debts are never repaid, and therefore a provision equal to 2%
of closing debtors is required. There is currently a provision of £80.
Which of the following is the correct adjustment for the provision for bad debts?
A Make a new provision for bad debts at £112
B Increase the current provision by £24
C Make a new provision for bad debts at £104
D Increase the current provision by £32
Workings: (5,600 400)⇥ 2% = 104(104 80) = 24.
Question 5
Hunter Ltd purchased goods for £3,400 from Deer plc payable after four months.
Having noticed that the goods were faulty, they were returned to the supplier.
How would the return of the goods be recorded?
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AC1025 Principles of accounting
A Debit payables (Deer’s personal account), credit purchases
B Credit payables (Deer’s personal account), debit purchases
C Credit sales, debit payables (Deer’s personal account)
D Debit sales, credit returns
Question 6
The following information is available from the trial balance of Electrolux Ltd as at
31 December Year 2019:
Debit Credit
£ £
Sales revenue 270,000
Inventory at 31 December 2018 19,000
Purchases 29,000
Closing inventory as at 31 December 2019 is £16,000.
Calculate the cost of goods sold.
A £48,000
B £32,000
C £238,000
D £45,000
Workings: (29,000 + 19,000 16,000) = 32,000.
Question 7
On 1 March 2019, Lambert Ltd had 40 units in inventory costing £28 each. During
the month, the following transactions occurred:
Date Buy/sell Units Price
3.3.19 Buy 70 £28
10.3.19 Sell 90 £60
15.3.19 Buy 60 £32
19.3.19 Buy 65 £29
26.3.19 Sell 100 £55
What is the (i) value of inventory at 31 March 2019 and (ii) the cost of goods sold
(COGS) for the month of March 2019 using the LIFO basis?
Inventory COGS
£ £
A 1,410 5,430
B 1,320 5,490
C 1,420 5,630
D 1,360 5,525
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Examiners’ commentaries 2020
Workings:
Date Buy/sell Units Price Out Closing inventory
Opening 40 £28 (20) 20⇥ 28 = 560
3.3.19 Buy 70 £28 (70)
10.3.19 Sell 90 £60
15.3.19 Buy 60 £32 (35) 25⇥ 32 = 800
19.3.19 Buy 65 £29 (65)
26.3.19 Sell 100 £55
1,360
(65⇥ 29) + (35⇥ 32) + (70⇥ 28) + (20⇥ 28) = 5,525.
Question 8
The profit before tax and the profit after tax of Company Alpha for the year ended
31 December 2019 are £18m and £13m, respectively. Throughout 2019, there were
33 million shares issued.
The profit before tax and the profit after tax of Company Gamma for the year
ended 31 December 2019 are £32m and £24m, respectively. Throughout 2019, there
were 22 million shares issued.
Which of the two companies has the higher EPS (earnings per share)?
A Company Alpha
B Company Gamma
C Both companies are equally good
D It’s impossible to tell
Workings:
Company Alpha EPS = PAT/shares outstanding = 13/33 = 0.39.
Company Gamma EPS = 24/22 = 1.09.
Question 9
The year-end trial balance of Giggs plc does not agree. An investigation finds that
interest received of £2,000 has been debited to interest paid. Which accounting
entries are required to correct this error?
Interest received Interest paid Suspense account
£ £ £
A CR: £2,000 Cr: £2,000 Dr: £4,000
B Cr: £2,000 Dr: £2,000 Dr: £4,000
C Cr: £2,000 Dr: £2,000
D Cr: £2,000 Dr: £2,000
Workings:
The correct entry should have been: Cr: Interest received £2,000.
In error, Co 7 debited interest paid.
So, there has been a debit of £2,000 instead of a credit of £2,000 and therefore the TB will have
more debits than credits by £4,000 and therefore there will be a Suspense account of £4,000
credit.
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AC1025 Principles of accounting
To correct this we:
i. put in the correct entry: Cr: interest received £2,000
ii. remove the error: Cr: interest paid £2,000
iii. cancel the Suspense account: Dr: suspense account £4,000.
Question 10
A company has a gross profit ratio of 40%. The trade receivables collection period
for the company has been calculated at 53 days. If the actual gross profit earned
was £480,000, what were the trade receivables?
A £69,968
B £104,548
C £116,164
D £174,247
Workings:
If gross profit margin is 40% and gross profit is 480,000, it means revenues are 1,200,000.
Receivables days formula is (receivables/revenues)⇥ 365. In this case is
(x/1,200,000)⇥ 365 = 53, so receivables are 174,247.
Question 11
Tritox plc sells one product for which data for a budgeted period are given below:
£
Selling price per unit 120
Variable cost per unit 52
Fixed cost per unit 25
Fixed costs are based on a budgeted level of activity of 10,000 units.
Calculate Tritox plc’s break-even point in terms of units:
A 3,676
B 6,800
C 5,000
D 2,084
Workings: (250,000/(120 52) = 3,676.
Question 12
Using the information contained under question 11 calculate the number of units
Tritox plc must sell if it wishes to earn a profit of £100,000:
A 2,750
B 5,147
C 4,815
D 3,125
Workings: (250,000 + 100,000)/(120 52) = 5,147.
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Examiners’ commentaries 2020
Question 13
Matthews plc has the choice of three mutually exclusive projects, each of which will
last three years. Matthews plc has an agreed overdraft of £10,000 at an interest rate
of 10%. The estimated cash flows (which accrue equally over the year) are as follows:
Year Project X Project Y Project Z
£ £ £
Initial outflow 0 10,000 10,000 10,000
Inflow 1 3,000 5,000 4,000
Inflow 2 4,000 6,000 4,500
Inflow 3 6,000 5,000 4,000
Disposal value 3 500 500 500
Using the payback method, which is the preferred project?
A Project X
B Project Y
C Project Z
D Not enough information
Workings: X and Z more than 2 years; Y instead 1 year and 304 days (5,000/6,000)⇥ 365.
Question 14
Atom plc produces 1,250,000 units in 2019. The variable production cost per unit is
£6. Fixed production overheads are £5,000,000. The variable selling cost is £2 per
unit. Fixed administrative and other operating expenses are £2,500,000 per year.
Atom sells 1,000,000 units in 2019. Assume that there is no opening inventory.
What is the valuation of closing inventory per unit if Atom plc uses absorption
costing?
A £6
B £8
C £10
D £12
Workings: Total production cost per unit = 6 + 5,000,000/1,250,000 = 10.
Question 15
Using the info contained under question 14 what is the valuation of closing
inventory per unit if Atom plc uses marginal costing?
A £6
B £8
C £10
D £12
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AC1025 Principles of accounting
Additional questions included in the portfolio for section A
Question 1
Inkmar plc purchased £4,000 of inventory, paying £1,200 cash.
How would you record this transaction using double entry bookkeeping?
A Debit cash £1,200, debit accounts payables £2,800 and credit inventory £4,000
B Credit cash £1,200, credit accounts payables £2,800 and debit inventory £4,000
C Credit cash £2,800, credit accounts payables £1,200 and debit inventory £4,000
D Credit cash £1,200, debit inventory £1,200
Question 2
The reported net profit of a company for the year is £32m, after charging a
depreciation of £6m. During the year there was an increase of £4m in inventory,
trade receivables remained constant and trade payables increased by £6m.
What is the net cash flow from operating activities?
A £16m
B £28m
C £48m
D £40m
Workings: 32 + 6 4 + 6 = 40.
Question 3
An asset was purchased for £1,000,000 on the 1 January 2018. On the date of
purchase it was estimated to have useful economic life of 5 years and residual value
of £100,000. For the year ended 31 December 2019, the residual value was revised
to £120,000.
Using straight-line method, calculate the depreciation expense for the year ended 31
December 2019.
A £175,000
B £200,000
C £195,000
D £180,000
Workings: (1,000,000 100,000)/5 = 180,000; (1,000,000 180,000 120,000)/4 = 175,000.
Question 4
In drawing up a Trial Balance, the following figures are shown:
Account Dr Cr
Bank £2,000
Cash £500
What can be deduced from the extract above?
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Examiners’ commentaries 2020
A There is a total of £2,500 in the business – £2,000 at the bank,
and £500 in the cash in hand
B There is an overdraft of £2,000 at the bank
and the cash in hand is owed £500
C The bank is showing as overdrawn by £2,000.
The cash account must be incorrect
D The bank balance is £2,000 ‘in credit’ meaning there is £2,000 at the bank.
The cash in hand is owed £500
Question 5
The selling price of inventory of Company Epsilon at 31 March is £175,000. The
company marks up its goods by 30%. One-third of the inventory has been damaged
in a flood and will be sold for £20,000. Which of the following will be the correct
value for closing inventory at 31 March in the Statement of Financial Position?
A £134,615
B £109,743
C £44,872
D £24,872
Workings:
Cost = Selling price/(1 + mark up) = 175,000/1.30 = 134,615.
Cost of 1/3 of the inventory = 44,872.
NRV = 20,000.
Stock loss = 24,872.
Closing inventory valuation = 134,615 24,872 = 109,743.
Question 6
Antares plc, an insurance company, has sent a letter to its customers saying that
their insurance premium for the year ended 31 March 2020 will be 15% more than
the premium paid in the previous year which had been £3,600. The insurance
premium is payable, in advance, each year on the 1 June. What will be the
insurance expense appearing in the Income Statement of Antares plc for the year
ended 31 March 2020?