ICAEW AF · Chapter 8
Accruals, prepayments and deferred income MCQs with Answers
9 multiple-choice questions on Accruals, prepayments and deferred income for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A business with a 31 December year end paid an insurance premium of £3,600 on 1 April 20X4 for the year to 31 March 20X5. What prepayment should be recognised at 31 December 20X4?
- A) £2,700
- B) £900
- C) £300
- D) £3,600
Show answer & explanation
Answer: B) £900
The premium covers 12 months, of which January to March 20X5 (3 months) fall after the year end. Prepayment = 3/12 x £3,600 = £900. The remaining 9/12, £2,700, is the insurance expense for the year to 31 December 20X4.
Question 2
At the start of the year, a business had an accrual for electricity of £420. During the year it paid electricity bills of £3,860. At the year end, electricity of £510 had been used but not yet billed. What is the electricity expense for the year?
- A) £3,770
- B) £3,950
- C) £4,790
- D) £3,860
Show answer & explanation
Answer: B) £3,950
Part of the cash paid (£420) settles the previous year's accrued charge, so it is not an expense of this year. The unbilled usage of £510 must be added. Expense = £3,860 - £420 + £510 = £3,950.
Question 3
A business sublets part of its premises for £600 per month. At the start of the year, the tenant owed £1,200 of rent. During the year the business received £7,800 from the tenant. What balance relating to rent receivable is shown in the statement of financial position at the end of the year?
- A) £1,200 receivable (current asset)
- B) £600 received in advance (current liability)
- C) £1,800 receivable (current asset)
- D) £600 receivable (current asset)
Show answer & explanation
Answer: D) £600 receivable (current asset)
Rental income for the year = 12 x £600 = £7,200. Opening receivable £1,200 + income £7,200 - cash received £7,800 = £600. The balance is positive, so the tenant still owes £600 at the year end, which is accrued income, a current asset.
Question 4
A business forgot to record an accrual for a telephone bill at the year end. What is the effect of this omission on the financial statements?
- A) Profit is overstated and current assets are overstated
- B) Profit is overstated and current liabilities are understated
- C) Profit is understated and current liabilities are overstated
- D) Profit is unaffected but current liabilities are understated
Show answer & explanation
Answer: B) Profit is overstated and current liabilities are understated
An accrual records an expense that has been incurred but not yet paid, with a corresponding liability. If it is omitted, the expense is too low, so profit is overstated. The amount owed is not recorded, so current liabilities are understated.
Question 5
A business's year ends on 31 December 20X5. It pays rent of £18,000 per year until 31 March 20X5, after which the rent increases to £21,600 per year. What is the rent expense for the year to 31 December 20X5?
- A) £21,600
- B) £18,000
- C) £19,800
- D) £20,700
Show answer & explanation
Answer: D) £20,700
The expense must reflect the rate in force in each part of the year. January to March: 3/12 x £18,000 = £4,500. April to December: 9/12 x £21,600 = £16,200. Total rent expense = £20,700.
Question 6
A business's year ends on 31 December. At 1 January it had an insurance prepayment of £1,150, covering the period to 30 September. On 1 October it paid £5,400 for insurance for the year to 30 September of the following year. What is the insurance expense for the year?
- A) £6,550
- B) £1,350
- C) £2,500
- D) £5,400
Show answer & explanation
Answer: C) £2,500
The opening prepayment of £1,150 is charged in this year because it covers January to September. Of the £5,400 paid on 1 October, 3/12 = £1,350 relates to October to December, and 9/12 = £4,050 is carried forward as a prepayment. Expense = £1,150 + £5,400 - £4,050 = £2,500.
Question 7
At the year end, a business has used £780 of gas for which no invoice has yet been received. What is the double entry to record this?
- A) Debit Prepayments £780, Credit Gas expense £780
- B) Debit Accruals £780, Credit Gas expense £780
- C) Debit Gas expense £780, Credit Accruals £780
- D) Debit Gas expense £780, Credit Trade payables control £780
Show answer & explanation
Answer: C) Debit Gas expense £780, Credit Accruals £780
The gas has been consumed in the year, so the expense must be recognised under the accrual basis by debiting gas expense. As no invoice has been received, the liability is recorded as an accrual (credit) rather than in trade payables. The accrual is normally reversed at the start of the next period.
Question 8
On 1 November, a customer paid a business £6,000 in advance for six months of maintenance services starting on that date. The business's year ends on 31 December. Services are provided evenly over the period. Under IFRS 15 Revenue from Contracts with Customers, what amount should be shown as a contract liability (deferred income) at 31 December?
- A) £0
- B) £6,000
- C) £4,000
- D) £2,000
Show answer & explanation
Answer: C) £4,000
Revenue is recognised as the performance obligation is satisfied over time. By 31 December, 2 of the 6 months have been provided, so revenue = 2/6 x £6,000 = £2,000. The remaining £4,000 relates to services still to be provided and is a contract liability.
Question 9
The following information relates to a business's telephone costs for the year: Accrued call charges at start of year £280 Accrued call charges at end of year £340 Line rental prepaid at start of year £150 Line rental prepaid at end of year £175 Cash paid during the year £2,960 What is the telephone expense for the year?
- A) £3,045
- B) £2,875
- C) £2,925
- D) £2,995
Show answer & explanation
Answer: D) £2,995
Expense = cash paid - opening accrual + closing accrual + opening prepayment - closing prepayment. = £2,960 - £280 + £340 + £150 - £175 = £2,995. The opening prepayment is an expense of this year paid last year, while the closing prepayment is paid now but relates to next year.