ACCA FA · Chapter 7
Accruals, prepayments and receivables MCQs with Answers
12 multiple-choice questions on Accruals, prepayments and receivables for ACCA FA Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A business with a 31 December year end rents a warehouse. The annual rent was $24,000 until 30 April 20X5, and increased to $30,000 per year from 1 May 20X5. Rent is paid quarterly in advance. What is the rent expense for the year ended 31 December 20X5?
- A) $28,000
- B) $30,500
- C) $24,000
- D) $30,000
Show answer & explanation
Answer: A) $28,000
January to April: 4 months x $24,000/12 = $8,000. May to December: 8 months x $30,000/12 = $20,000. Expense = $8,000 + $20,000 = $28,000. Any rent paid in advance for January 20X6 is a prepayment and not part of the 20X5 expense.
Question 2
At 1 January 20X5 a business had an accrual for electricity of $1,400. During 20X5 it paid electricity bills totalling $8,600. In February 20X6 it received a bill of $2,700 for the three months ended 28 February 20X6. What is the electricity expense for the year ended 31 December 20X5?
- A) $8,100
- B) $10,900
- C) $9,500
- D) $9,900
Show answer & explanation
Answer: A) $8,100
The closing accrual is for December 20X5 only: $2,700 x 1/3 = $900. Expense = payments $8,600 - opening accrual $1,400 + closing accrual $900 = $8,100. Adding the opening accrual instead of deducting it gives $10,900, and accruing the whole bill gives $9,900.
Question 3
A business failed to record a prepayment of $2,000 at the year end. What is the effect of this error?
- A) Profit is overstated by $2,000 and current liabilities are understated by $2,000
- B) Profit is understated by $2,000 and current liabilities are overstated by $2,000
- C) Profit is understated by $2,000 and current assets are understated by $2,000
- D) Profit is overstated by $2,000 and current assets are overstated by $2,000
Show answer & explanation
Answer: C) Profit is understated by $2,000 and current assets are understated by $2,000
A prepayment reduces the expense for the period and is shown as a current asset. If it is omitted, the full amount remains in expenses, so profit is understated by $2,000, and the asset (prepayment) is missing, so current assets are also understated by $2,000.
Question 4
A company with a 31 December year end pays insurance annually in advance on 1 October. It paid $6,000 on 1 October 20X4 and $7,200 on 1 October 20X5. What is the insurance expense for the year ended 31 December 20X5?
- A) $5,400
- B) $6,300
- C) $6,900
- D) $7,200
Show answer & explanation
Answer: B) $6,300
January to September 20X5 is covered by the 20X4 payment: $6,000 x 9/12 = $4,500. October to December 20X5 is covered by the 20X5 payment: $7,200 x 3/12 = $1,800. Expense = $4,500 + $1,800 = $6,300, and the prepayment at 31 December is $7,200 x 9/12 = $5,400. Applying the fractions the wrong way round gives $6,900.
Question 5
A business sublets part of its premises. During the year it received rent of $11,000 from its tenant. At the start of the year, rent received in advance was $1,500. At the end of the year, the tenant owed $2,000 of rent. What is the rental income for the year?
- A) $11,500
- B) $14,500
- C) $7,500
- D) $10,500
Show answer & explanation
Answer: B) $14,500
The opening rent received in advance ($1,500) was cash received last year for this year, so it is income of this year. The closing amount owed ($2,000) is accrued income earned this year but not yet received. Income = $11,000 + $1,500 + $2,000 = $14,500. Treating the opening balance as a deduction gives $11,500.
Question 6
What is the double entry to write off an irrecoverable debt?
- A) Debit Irrecoverable debts expense; Credit Receivables
- B) Debit Allowance for receivables; Credit Revenue
- C) Debit Revenue; Credit Receivables
- D) Debit Receivables; Credit Irrecoverable debts expense
Show answer & explanation
Answer: A) Debit Irrecoverable debts expense; Credit Receivables
When a debt is known to be irrecoverable, the receivable is removed by crediting receivables and the loss is recognised by debiting the irrecoverable debts expense in profit or loss. Revenue is not reversed, because the sale was valid when it was made.
Question 7
At its year end, a business has receivables of $84,000 before adjusting for an irrecoverable debt of $3,000, which is to be written off. An allowance for receivables of 5% of the remaining receivables is required. The allowance brought forward is $3,600. What is the total irrecoverable debts expense for the year?
- A) $3,600
- B) $3,450
- C) $450
- D) $7,050
Show answer & explanation
Answer: B) $3,450
Receivables after write-off = $84,000 - $3,000 = $81,000. Required allowance = 5% x $81,000 = $4,050, an increase of $4,050 - $3,600 = $450. Total expense = write-off $3,000 + increase in allowance $450 = $3,450. Calculating the allowance before the write-off gives $4,200, an increase of $600 and a total of $3,600.
Question 8
A debt of $800 that was written off as irrecoverable in a previous year is unexpectedly received in full during the current year. What is the overall double entry to record the receipt?
- A) Debit Cash $800; Credit Receivables $800
- B) Debit Cash $800; Credit Irrecoverable debts expense $800
- C) Debit Irrecoverable debts expense $800; Credit Cash $800
- D) Debit Cash $800; Credit Revenue $800
Show answer & explanation
Answer: B) Debit Cash $800; Credit Irrecoverable debts expense $800
The debt was removed from receivables when it was written off, so it is no longer in the receivables ledger. One approach reinstates it (Dr Receivables, Cr Irrecoverable debts expense) and then records the cash (Dr Cash, Cr Receivables). The net effect is Dr Cash $800, Cr Irrecoverable debts expense $800, which reduces the expense or shows as a recovery. Crediting receivables alone would leave a credit balance on an account that was already cleared, and the receipt is not new revenue because the sale was recognised previously.
Question 9
At the year end, a company's receivables are $146,000. This includes a debt of $6,000 to be written off. A specific allowance of 50% is required against another debt of $2,400, and a general allowance of 2% is required against the remaining receivables. The allowance for receivables brought forward is $5,200. What is the net irrecoverable debts expense for the year?
- A) $4,752
- B) $4,800
- C) $9,952
- D) $7,248
Show answer & explanation
Answer: A) $4,752
Receivables after write-off = $146,000 - $6,000 = $140,000. Specific allowance = $2,400 x 50% = $1,200. General allowance = 2% x ($140,000 - $2,400) = $2,752. Total allowance = $3,952, a decrease of $5,200 - $3,952 = $1,248. Expense = $6,000 - $1,248 = $4,752. Not excluding the specifically provided debt from the general allowance gives $4,800.
Question 10
How is an accrued expense presented in the statement of financial position?
- A) As a current liability
- B) As a non-current liability
- C) As a current asset
- D) As a deduction from equity
Show answer & explanation
Answer: A) As a current liability
An accrued expense is a cost incurred during the period that has not yet been paid or invoiced. It is an amount owed, normally settled within twelve months, so it is presented as a current liability. A prepayment, by contrast, is a current asset.
Question 11
A business pays its staff every Friday for the five-day week ending on that day. The weekly wages bill is $3,500. The year end falls on a Wednesday. What accrual for wages is required at the year end?
- A) $3,500
- B) $700
- C) $1,400
- D) $2,100
Show answer & explanation
Answer: D) $2,100
At the year end (Wednesday), staff have worked Monday, Tuesday and Wednesday - 3 days - for which they have not yet been paid. Daily wages = $3,500 / 5 = $700. Accrual = 3 x $700 = $2,100. $1,400 accrues only two days.
Question 12
How is the allowance for receivables presented in the statement of financial position?
- A) It is deducted from trade receivables within current assets
- B) It is shown as a current liability
- C) It is shown as a non-current liability
- D) It is added to trade receivables within current assets
Show answer & explanation
Answer: A) It is deducted from trade receivables within current assets
The allowance for receivables reduces trade receivables to the amount expected to be collected. It is therefore deducted from gross receivables in current assets. It is not a liability, because nothing is owed to anyone.