PRC-1 · Chapter 4
Accruals and Prepayments MCQs with Answers
100 multiple-choice questions on Accruals and Prepayments for PRC-1 Fundamentals of Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
'Apex Consultancies' receives cash in advance from a client for services that will be provided in the following financial year. How is this unearned revenue treated in the financial statements?
- A) Asset in the statement of financial position
- B) Liability in the statement of financial position
- C) Income in the statement of profit or loss
- D) Expense in the statement of profit or loss
Show answer & explanation
Answer: B) Liability in the statement of financial position
Unearned revenue represents an obligation to provide goods or services in the future. Therefore, it is treated as a liability in the statement of financial position until the revenue is actually earned.
Question 2
'BlueSky Logistics' paid an annual insurance premium of Rs. 120,000 on 1 August. The company's financial year ends on 31 December. What amount should be recorded as prepaid insurance in the statement of financial position?
- A) Rs. 50,000
- B) Rs. 120,000
- C) Rs. 70,000
- D) Rs. 60,000
Show answer & explanation
Answer: C) Rs. 70,000
The insurance covers 12 months. From 1 August to 31 December is 5 months, so the expense is 120,000 x (5/12) = Rs. 50,000. The remaining 7 months are prepaid: 120,000 x (7/12) = Rs. 70,000.
Question 3
At the start of the year, 'Prime Retailers' had an accrued electricity balance of Rs. 40,000. During the year, cash paid for electricity was Rs. 500,000. At the year-end, the accrued electricity bill was Rs. 60,000. What is the total electricity expense to be charged to the statement of profit or loss?
- A) Rs. 500,000
- B) Rs. 520,000
- C) Rs. 480,000
- D) Rs. 600,000
Show answer & explanation
Answer: B) Rs. 520,000
The expense is calculated by taking the cash paid (Rs. 500,000), deducting the opening accrual which relates to the previous year (Rs. 40,000), and adding the closing accrual which relates to the current year (Rs. 60,000). 500k - 40k + 60k = Rs. 520,000.
Question 4
The fundamental matching concept in accounting primarily requires that a business matches:
- A) Assets with liabilities
- B) Current assets with current liabilities
- C) Income with expenses
- D) Capital with drawings
Show answer & explanation
Answer: C) Income with expenses
The matching concept requires that expenses incurred to generate revenue must be recognized and reported in the same accounting period as the related income.
Question 5
An expense that has been incurred in the current accounting period but remains unpaid at the year-end is formally termed as an:
- A) Unearned expense
- B) Accrued expense
- C) Prepaid expense
- D) Expense paid in advance
Show answer & explanation
Answer: B) Accrued expense
Any expense which is related to the current accounting period but is not paid till the year-end, and is instead payable in a subsequent year, is termed an accrued expense.
Question 6
'Zenith Properties' received two years of rent amounting to Rs. 600,000 in advance on 1 April. If the financial year ends on 31 December, what is the total unearned rental income liability at the year-end?
- A) Rs. 225,000
- B) Rs. 600,000
- C) Rs. 375,000
- D) Rs. 300,000
Show answer & explanation
Answer: C) Rs. 375,000
The total rent is for 24 months, making it Rs. 25,000 per month. From 1 April to 31 December is 9 months, so Rs. 225,000 is earned. The remaining amount (600,000 - 225,000 = Rs. 375,000) is unearned.
Question 7
Under the strict accrual basis of accounting, revenue is recognized and recorded in the financial statements when it is:
- A) Collected in physical cash
- B) Earned
- C) Contracted formally
- D) Expected to be received
Show answer & explanation
Answer: B) Earned
The accrual basis of accounting requires that revenue is recorded when it is actually earned, regardless of when the cash is collected.
Question 8
When an adjusting entry is successfully made to recognize a prepaid expense at year-end, what is the specific impact on the financial elements?
- A) Increase in expense and decrease in current liability
- B) Decrease in expense and increase in current liability
- C) Decrease in expense and increase in current asset
- D) Increase in expense and increase in current asset
Show answer & explanation
Answer: C) Decrease in expense and increase in current asset
Recognizing a prepaid expense involves shifting an already recorded expense to an asset account. This decreases the overall expense for the period and increases current assets.
Question 9
'Crescent Corp' overlooked an accrued expense of Rs. 20,000 and an accrued income of Rs. 15,000 while finalizing its year-end accounts. What is the net impact of this omission on the reported profit?
- A) Profit is understated by Rs. 5,000
- B) Profit is overstated by Rs. 5,000
- C) Profit is overstated by Rs. 35,000
- D) Profit is understated by Rs. 35,000
Show answer & explanation
Answer: B) Profit is overstated by Rs. 5,000
Omitting the accrued expense of Rs. 20,000 overstates profit by 20,000. Omitting the accrued income of Rs. 15,000 understates profit by 15,000. The net effect is an overstatement of profit by Rs. 5,000.
Question 10
A transaction recorded as 'unearned revenue' in the books of the recipient entity will conversely be recorded as what in the books of the paying entity?
- A) An accrued expense
- B) An accrued revenue
- C) A prepaid expense
- D) An unearned revenue
Show answer & explanation
Answer: C) A prepaid expense
If a receiver gets cash in advance, it is unearned revenue (liability) for them. For the payer giving the cash in advance, it is a prepaid expense (asset) until the service is received.
Question 11
'Alpha Industries' secured a bank loan of Rs. 1,000,000 at a 12% annual interest rate. Interest is payable in equal quarterly installments. If the last quarter's interest was unpaid at year-end, what is the accrued interest liability?
- A) Rs. 120,000
- B) Rs. 60,000
- C) Rs. 30,000
- D) Rs. 10,000
Show answer & explanation
Answer: C) Rs. 30,000
The total annual interest is Rs. 1,000,000 x 12% = Rs. 120,000. One quarter (three months) of interest is Rs. 120,000 x (3/12) = Rs. 30,000, which is the accrued liability.
Question 12
A company pays its sales agents a commission of 2% on total sales, which is payable in the month immediately following the sale. If total sales for December were Rs. 500,000, what is the accrued commission liability at 31 December?
- A) Rs. 10,000
- B) Rs. 5,000
- C) Rs. 20,000
- D) Rs. 0
Show answer & explanation
Answer: A) Rs. 10,000
The commission is earned by the agents in December but paid in January. Therefore, an accrual must be recorded for December. Rs. 500,000 x 2% = Rs. 10,000.
Question 13
Income that has been rightfully earned during the accounting period but has not yet been received in cash by year-end is formally classified in the statement of financial position as a:
- A) Non-current asset
- B) Current liability
- C) Current asset
- D) Capital receipt
Show answer & explanation
Answer: C) Current asset
Earned but not yet received income is treated as an accrued income (or receivable), which is classified as a current asset in the statement of financial position.
Question 14
A business had an opening accrued salaries balance of Rs. 15,000. During the year, salaries of Rs. 200,000 were paid in cash. The closing accrued salaries balance is Rs. 20,000. What is the total salaries expense for the year?
- A) Rs. 200,000
- B) Rs. 195,000
- C) Rs. 205,000
- D) Rs. 235,000
Show answer & explanation
Answer: C) Rs. 205,000
Salaries expense is calculated as: Cash paid (200,000) - Opening accrual representing last year's expense (15,000) + Closing accrual representing this year's unpaid expense (20,000) = Rs. 205,000.
Question 15
If an accrued expense of Rs. 10,000 at year-end was incorrectly recorded as a prepaid expense, what is the overall mathematical impact on the net profit?
- A) Profit is understated by Rs. 10,000
- B) Profit is overstated by Rs. 10,000
- C) Profit is understated by Rs. 20,000
- D) Profit is overstated by Rs. 20,000
Show answer & explanation
Answer: D) Profit is overstated by Rs. 20,000
An accrued expense decreases profit by 10k. A prepaid expense increases profit (by reducing expense) by 10k. Recording it backwards means the profit is overstated by double the amount of the error, which is Rs. 20,000.
Question 16
A company pays rent quarterly in advance on 1 Jan, 1 Apr, 1 Jul, and 1 Oct. The annual rent was Rs. 120,000 but increased to Rs. 160,000 on 1 October. If the financial year ends on 31 December, what is the total rent expense for the year?
- A) Rs. 120,000
- B) Rs. 130,000
- C) Rs. 160,000
- D) Rs. 140,000
Show answer & explanation
Answer: B) Rs. 130,000
The expense for the first 9 months (Jan-Sep) is Rs. 120,000 / 12 x 9 = Rs. 90,000. The expense for the final 3 months (Oct-Dec) is Rs. 160,000 / 12 x 3 = Rs. 40,000. Total expense = 90,000 + 40,000 = Rs. 130,000.
Question 17
If the closing balance of a prepaid expense account is higher than its opening balance from the previous year, this mathematically indicates that:
- A) The expense incurred for the year exceeds the cash payment made.
- B) The cash payment made during the year exceeds the expense incurred for the year.
- C) The business has failed to match revenues with expenses.
- D) An accrued liability must also be recognized.
Show answer & explanation
Answer: B) The cash payment made during the year exceeds the expense incurred for the year.
A higher closing prepaid balance means the amount of cash paid in advance has grown, indicating that payments made during the year were greater than the portion of the expense that actually expired and was charged to profit or loss.
Question 18
A company receives a one-year maintenance contract fee in advance. Which of the following accounting terms is NOT an appropriate classification for this receipt?
- A) Unearned income
- B) Income received in advance
- C) Accrued income
- D) Advance income
Show answer & explanation
Answer: C) Accrued income
Accrued income refers to money that has been earned but not yet received. Since the maintenance fee is received in advance but not yet earned, it is unearned income, not accrued income.
Question 19
An accrued income of Rs. 40,000 was mistakenly recorded in the books as unearned income of Rs. 40,000. What is the impact on the net profit for the year?
- A) Profit is understated by Rs. 80,000
- B) Profit is overstated by Rs. 80,000
- C) Profit is understated by Rs. 40,000
- D) Profit is overstated by Rs. 40,000
Show answer & explanation
Answer: A) Profit is understated by Rs. 80,000
Recording an accrued income (which increases profit by 40k) as unearned income (which reduces recognized income by 40k) creates a swing of double the amount. Thus, the profit is understated by Rs. 80,000.
Question 20
In financial accounting terminology, the term 'Outstanding Expenses' strictly refers to:
- A) Expenses paid in advance for the next year.
- B) Expenses which are extraordinarily high compared to budget.
- C) Expenses which have been incurred in the current period but remain unpaid.
- D) Capital expenditures that have not yet been depreciated.
Show answer & explanation
Answer: C) Expenses which have been incurred in the current period but remain unpaid.
Outstanding expenses is another term for accrued expenses, which are expenses incurred during the accounting period but not paid off by the balance sheet date.
Question 21
Total assets will be incorrectly overstated if an accountant completely omits the year-end adjustment for which of the following?
- A) Expired portion of prepaid insurance
- B) Accrued salaries
- C) Unearned revenue
- D) Accrued interest income
Show answer & explanation
Answer: A) Expired portion of prepaid insurance
Prepaid insurance is an asset. As it expires over time, an adjusting entry must reduce the asset and increase expense. Omitting this adjustment leaves the asset at its original, overstated value.
Question 22
How does the economic benefit of an asset like 'Prepaid Rent' typically expire and convert into an expense over the accounting period?
- A) Through physical use and consumption
- B) With the continuous passage of time
- C) Only upon the final liquidation of the business
- D) When the landlord issues a formal receipt
Show answer & explanation
Answer: B) With the continuous passage of time
Prepaid expenses like rent and insurance expire naturally with the passage of time, whereas items like office supplies expire through physical use and consumption.
Question 23
What is the standard double-entry journal record required to correctly recognize an accrued expense at the end of the financial year?
- A) Debit Prepaid Expense, Credit Expense account
- B) Debit Accrued Expense, Credit Expense account
- C) Debit Expense account, Credit Accrued Expense account
- D) Debit Expense account, Credit Prepaid Expense account
Show answer & explanation
Answer: C) Debit Expense account, Credit Accrued Expense account
To recognize an accrued expense, the expense for the year must be increased (Debit Expense) and the corresponding liability must be recorded (Credit Accrued Expense or Payable).
Question 24
A tenant pays an annual rent of Rs. 24,000. Payments are made quarterly in advance on 1 January, 1 April, 1 July, and 1 October. What is the prepaid rent balance in the tenant's books at 30 November?
- A) Rs. 6,000
- B) Rs. 4,000
- C) Rs. 2,000
- D) Rs. 0
Show answer & explanation
Answer: C) Rs. 2,000
The annual rent is Rs. 24,000, so quarterly rent is Rs. 6,000. The payment on 1 October covers October, November, and December. At 30 November, only one month (December) remains unused. 24,000 / 12 = 2,000 per month. Therefore, prepayment is Rs. 2,000.
Question 25
Which of the following pairs of accounting terms conceptually represent the exact same thing?
- A) Prepaid expense and Arrears
- B) Unearned income and Accrued income
- C) Accrued expense and Outstanding expense
- D) Outstanding income and Deferred income
Show answer & explanation
Answer: C) Accrued expense and Outstanding expense
In accounting terminology, an accrued expense is frequently referred to as an outstanding expense or an unpaid expense.
Question 26
Which of the following year-end adjustments is correctly matched with its classification in the Statement of Financial Position?
- A) Accrued interest expense -> Current Asset
- B) Rent received in advance -> Current Liability
- C) Prepaid insurance -> Non-current asset
- D) Accrued rent income -> Non-current liability
Show answer & explanation
Answer: B) Rent received in advance -> Current Liability
Rent received in advance is unearned income, which is an obligation to provide a service in the short term, making it a current liability.
Question 27
A business earned Rs. 15,000 in consulting fees during December that will not be billed or received until January. What is the adjusting entry required on December 31?
- A) Debit Accrued Income Rs. 15,000, Credit Consulting Revenue Rs. 15,000
- B) Debit Consulting Revenue Rs. 15,000, Credit Accrued Income Rs. 15,000
- C) Debit Unearned Income Rs. 15,000, Credit Consulting Revenue Rs. 15,000
- D) Debit Cash Rs. 15,000, Credit Accrued Income Rs. 15,000
Show answer & explanation
Answer: A) Debit Accrued Income Rs. 15,000, Credit Consulting Revenue Rs. 15,000
To accrue income earned but not yet received, an asset is recognized (Debit Accrued Income) and the revenue is recorded (Credit Revenue).
Question 28
'Luminous Properties' received Rs. 500,000 cash from tenants during the year. Opening rent receivable was Rs. 40,000 and closing rent receivable is Rs. 60,000. Opening unearned rent was Rs. 20,000 and closing unearned rent is Rs. 10,000. What is the total rental income for the year?
- A) Rs. 490,000
- B) Rs. 530,000
- C) Rs. 470,000
- D) Rs. 510,000
Show answer & explanation
Answer: B) Rs. 530,000
Income = Cash Received (500,000) - Opening Receivable (40,000) + Closing Receivable (60,000) + Opening Unearned (20,000) - Closing Unearned (10,000) = Rs. 530,000.
Question 29
When an entity initially records all insurance payments as an expense during the year, the necessary year-end adjusting entry for the unexpired (prepaid) portion will have what specific effect?
- A) Increase total expenses and increase current liabilities
- B) Decrease total expenses and increase current assets
- C) Increase total expenses and decrease current assets
- D) Decrease total expenses and decrease current liabilities
Show answer & explanation
Answer: B) Decrease total expenses and increase current assets
By moving the unexpired portion from the expense account to a prepaid asset account, the adjusting entry decreases the recorded expense and increases current assets.
Question 30
'Sigma Services' received a 6-month maintenance contract payment in full before any services were rendered. How must this receipt be classified on the Statement of Financial Position until the services are actually performed?
- A) Current Asset
- B) Current Liability
- C) Non-Current Liability
- D) Equity
Show answer & explanation
Answer: B) Current Liability
Money received in advance for services not yet performed is unearned revenue. Because it will be settled by providing services within the next 6 months, it is classified as a current liability.
Question 31
'TechNova' paid Rs. 100,000 in advance to 'CloudServe' for a one-year software subscription. In the books of 'TechNova', how is this advance payment classified before the software services are actually consumed?
- A) Accrued Expense
- B) Current Liability
- C) Prepaid Expense (Current Asset)
- D) Unearned Revenue
Show answer & explanation
Answer: C) Prepaid Expense (Current Asset)
When a business pays for a service in advance, it is classified as a prepaid expense. It remains a current asset on the statement of financial position until the service is consumed over time.
Question 32
'Grand Properties' received Rs. 850,000 cash for rent during the year. The opening rent in arrears was Rs. 50,000, and the closing rent in arrears is Rs. 70,000. The opening rent received in advance was Rs. 30,000, and the closing rent in advance is Rs. 40,000. What is the total rental income to be recognized for the year?
- A) Rs. 860,000
- B) Rs. 840,000
- C) Rs. 880,000
- D) Rs. 820,000
Show answer & explanation
Answer: A) Rs. 860,000
Income = Cash Received (850,000) - Opening Arrears (50,000) + Closing Arrears (70,000) + Opening Advance (30,000) - Closing Advance (40,000) = Rs. 860,000.
Question 33
'Pinnacle Manufacturers' paid Rs. 450,000 for electricity during the financial year. At the start of the year, accrued electricity was Rs. 45,000, and at the end of the year, the accrued bill was Rs. 65,000. What is the total electricity expense for the year?
- A) Rs. 450,000
- B) Rs. 470,000
- C) Rs. 430,000
- D) Rs. 560,000
Show answer & explanation
Answer: B) Rs. 470,000
Expense = Cash Paid (450,000) - Opening Accrual related to last year (45,000) + Closing Accrual related to this year (65,000) = Rs. 470,000.
Question 34
'Silver Oak Traders' pays an annual fire insurance premium of Rs. 180,000 every year on 1 September. Their financial year ends on 31 December. What is the prepaid insurance amount at the year-end?
- A) Rs. 60,000
- B) Rs. 90,000
- C) Rs. 120,000
- D) Rs. 150,000
Show answer & explanation
Answer: C) Rs. 120,000
The premium covers 12 months from 1 September to 31 August. At 31 December, 4 months have expired. The remaining 8 months (Jan to Aug) are prepaid: Rs. 180,000 x (8/12) = Rs. 120,000.
Question 35
An accrued consulting income of Rs. 25,000 was mistakenly recorded by 'Nexus Consulting' as unearned income of Rs. 25,000. What is the mathematical impact of this error on the net profit for the year?
- A) Profit is understated by Rs. 25,000
- B) Profit is overstated by Rs. 25,000
- C) Profit is understated by Rs. 50,000
- D) Profit is overstated by Rs. 50,000
Show answer & explanation
Answer: C) Profit is understated by Rs. 50,000
Recording accrued income increases profit by 25k. Recording it incorrectly as unearned income decreases recognized revenue by 25k. The total swing between the correct treatment and the incorrect treatment is an understatement of 50k.
Question 36
'Alpha Builders' acquired a bank loan of Rs. 2,000,000 at a 10% annual interest rate. Interest is paid quarterly. The last quarter's interest (October to December) was not paid by the financial year-end of 31 December. What is the accrued interest liability?
- A) Rs. 200,000
- B) Rs. 100,000
- C) Rs. 50,000
- D) Rs. 25,000
Show answer & explanation
Answer: C) Rs. 50,000
Total annual interest is Rs. 2,000,000 x 10% = Rs. 200,000. One quarter represents 3 months. Therefore, the accrued liability for one quarter is Rs. 200,000 x (3/12) = Rs. 50,000.
Question 37
At year-end, 'Omega Services' has provided IT services worth Rs. 80,000 to a client but has not yet billed them or received cash. What is the correct adjusting journal entry?
- A) Debit Cash Rs. 80,000, Credit Service Revenue Rs. 80,000
- B) Debit Accrued Income Rs. 80,000, Credit Service Revenue Rs. 80,000
- C) Debit Service Revenue Rs. 80,000, Credit Unearned Income Rs. 80,000
- D) Debit Accounts Receivable Rs. 80,000, Credit Accrued Income Rs. 80,000
Show answer & explanation
Answer: B) Debit Accrued Income Rs. 80,000, Credit Service Revenue Rs. 80,000
To record income earned but not yet billed or received, an asset is recognized (Debit Accrued Income / Receivable) and the corresponding revenue is recorded (Credit Service Revenue).
Question 38
'Crescent Retail' pays a 3% commission to its sales team in the month immediately following the sale. If total sales for December were Rs. 1,500,000, what is the accrued commission liability at 31 December?
- A) Rs. 30,000
- B) Rs. 0
- C) Rs. 45,000
- D) Rs. 15,000
Show answer & explanation
Answer: C) Rs. 45,000
The commission is an expense incurred in December because the sales happened in December. It remains unpaid until January, creating an accrual of Rs. 1,500,000 x 3% = Rs. 45,000.
Question 39
The accountant of 'Metro Logistics' forgot to record the unexpired portion of the annual vehicle insurance as a prepayment at year-end. How does this omission specifically affect the financial statements?
- A) Profit is understated, and current assets are understated.
- B) Profit is overstated, and current assets are overstated.
- C) Profit is understated, and current liabilities are overstated.
- D) Profit is overstated, and current liabilities are understated.
Show answer & explanation
Answer: A) Profit is understated, and current assets are understated.
Failing to recognize a prepayment leaves the entire amount in the expense account, overstating expenses and therefore understating profit. It also omits the asset from the balance sheet, understating current assets.
Question 40
'Global Gym' receives Rs. 36,000 cash in December for a 12-month membership starting in January of the following year. What is the initial journal entry to record this receipt in December?
- A) Debit Bank Rs. 36,000, Credit Membership Revenue Rs. 36,000
- B) Debit Bank Rs. 36,000, Credit Unearned Revenue Rs. 36,000
- C) Debit Unearned Revenue Rs. 36,000, Credit Bank Rs. 36,000
- D) Debit Prepaid Expense Rs. 36,000, Credit Bank Rs. 36,000
Show answer & explanation
Answer: B) Debit Bank Rs. 36,000, Credit Unearned Revenue Rs. 36,000
Because the cash is received before any service is provided, it must be recorded as an increase in cash (Debit Bank) and a corresponding liability (Credit Unearned Revenue).
Question 41
A photography studio recognizes revenue as soon as the wedding albums are delivered to the client, even though the client has 30 days to pay. Which accounting concept does this scenario directly illustrate?
- A) Materiality Concept
- B) Prudence Concept
- C) Realization / Accrual Concept
- D) Going Concern Concept
Show answer & explanation
Answer: C) Realization / Accrual Concept
The realization or accrual concept dictates that revenue is recognized when it is earned (e.g., when goods or services are delivered), regardless of when the physical cash changes hands.
Question 42
'Rapid Traders' pays rent quarterly. The annual rent was Rs. 240,000 but increased to Rs. 300,000 on 1 July. If the financial year ends on 31 December, what is the total rent expense to be charged to the statement of profit or loss?
- A) Rs. 270,000
- B) Rs. 240,000
- C) Rs. 300,000
- D) Rs. 285,000
Show answer & explanation
Answer: A) Rs. 270,000
The expense for the first 6 months (Jan-Jun) is Rs. 240,000 / 12 x 6 = Rs. 120,000. The expense for the last 6 months (Jul-Dec) is Rs. 300,000 / 12 x 6 = Rs. 150,000. Total = 120,000 + 150,000 = Rs. 270,000.
Question 43
'Starlight Corp' paid an advance salary of Rs. 40,000 to an employee in December for the upcoming month of January. How should this be classified in the December 31 statement of financial position?
- A) Current Liability
- B) Expense
- C) Non-Current Asset
- D) Current Asset
Show answer & explanation
Answer: D) Current Asset
Advance salary paid to an employee represents an economic benefit the business will receive in the future (the employee's work). It is a prepaid expense, which is classified as a current asset.
Question 44
If the closing balance of a prepaid expense account is lower than its opening balance from the previous year, what does this mathematically indicate about the period's transactions?
- A) Cash paid during the year was less than the expense incurred for the year.
- B) Cash paid during the year was greater than the expense incurred for the year.
- C) The business failed to pay any expenses at all.
- D) An accrued liability has automatically been created.
Show answer & explanation
Answer: A) Cash paid during the year was less than the expense incurred for the year.
A decreasing prepayment balance means the business consumed more of the pre-existing asset than it replaced with new cash payments. Therefore, the expense recognized was higher than the cash paid.
Question 45
In the 'Rent Expense' ledger account of 'Vertex Ltd' (using the single account system), the opening balance brought down (b/d) is on the credit side. What does this opening balance specifically represent?
- A) Prepaid rent from the previous period.
- B) Accrued rent from the previous period.
- C) Unearned rental income.
- D) The total rent paid during the previous year.
Show answer & explanation
Answer: B) Accrued rent from the previous period.
In an expense account, an opening credit balance signifies an amount owed (a liability) from the previous period, which is an accrued expense.
Question 46
A business paid Rs. 50,000 for the rent of the owner's personal residence and incorrectly charged it to the business's 'Rent Expense' account. What is the correcting journal entry?
- A) Debit Drawings Rs. 50,000, Credit Bank Rs. 50,000
- B) Debit Rent Expense Rs. 50,000, Credit Drawings Rs. 50,000
- C) Debit Drawings Rs. 50,000, Credit Rent Expense Rs. 50,000
- D) Debit Owner's Capital Rs. 50,000, Credit Bank Rs. 50,000
Show answer & explanation
Answer: C) Debit Drawings Rs. 50,000, Credit Rent Expense Rs. 50,000
Personal rent is a drawing, not a business expense. To correct the error, Drawings must be debited (increased), and the erroneously recorded Rent Expense must be credited (decreased).
Question 47
'Tech Support Inc.' received a Rs. 240,000 cash payment for a 1-year maintenance contract starting on 1 October. Their financial year ends on 31 December. How much of this amount should be transferred to the statement of profit or loss for the year?
- A) Rs. 240,000
- B) Rs. 60,000
- C) Rs. 180,000
- D) Rs. 0
Show answer & explanation
Answer: B) Rs. 60,000
The contract spans 12 months. From 1 October to 31 December is 3 months. Therefore, the earned portion transferred to profit or loss is Rs. 240,000 x (3/12) = Rs. 60,000.
Question 48
'Prime Builders' received an advance payment of Rs. 2 million for a large project. 60% of the work will be completed in the next 12 months, and 40% will be completed in the following year. How should this unearned revenue be classified in the statement of financial position?
- A) Entirely as a Current Liability
- B) Entirely as a Non-Current Liability
- C) Rs. 1.2m as Current Liability, Rs. 0.8m as Non-Current Liability
- D) Rs. 1.2m as Revenue, Rs. 0.8m as Current Liability
Show answer & explanation
Answer: C) Rs. 1.2m as Current Liability, Rs. 0.8m as Non-Current Liability
Unearned revenue expected to be earned within the next 12 months (60% of 2m = 1.2m) is a current liability. The portion expected to be earned beyond 12 months (40% of 2m = 0.8m) is a non-current liability.
Question 49
While finalizing accounts, an accountant completely omitted an accrued wage expense of Rs. 15,000 and a prepaid insurance asset of Rs. 10,000. What is the net effect of these two errors on the reported profit?
- A) Profit is understated by Rs. 5,000
- B) Profit is overstated by Rs. 5,000
- C) Profit is overstated by Rs. 25,000
- D) Profit is understated by Rs. 25,000
Show answer & explanation
Answer: B) Profit is overstated by Rs. 5,000
Omitting the accrued expense overstates profit by 15k. Omitting the prepaid expense understates profit by 10k (as the expense remains too high). The net effect is an overstatement of profit by 5k (+15k - 10k).
Question 50
In accounting terminology, when a tenant has not paid their rent for the current month by the reporting date, the landlord will refer to this unpaid amount as rent:
- A) In advance
- B) Prepaid
- C) In arrears
- D) Deferred
Show answer & explanation
Answer: C) In arrears
Rent 'in arrears' is synonymous with accrued rent or outstanding rent. It represents income that has been earned by the landlord but not yet received.
Question 51
Financial statements are prepared on which fundamental basis of accounting to ensure that income and expenses are recognized in the correct period?
- A) Cash basis
- B) Accrual basis
- C) Prepayment basis
- D) Realization basis
Show answer & explanation
Answer: B) Accrual basis
The accrual basis of accounting is fundamental to the preparation of financial statements. It ensures that transactions are recorded when they occur, rather than when the cash is actually paid or received.
Question 52
Mr. Aslam paid Rs. 50,000 in advance to Mr. Atif for cleaning services that will be provided next year. How is this advance payment classified in the books of Mr. Atif?
- A) Accrued income
- B) Prepaid expense
- C) Unearned income
- D) Accrued expense
Show answer & explanation
Answer: C) Unearned income
From the perspective of the recipient (Mr. Atif), receiving money for services not yet performed creates a liability to provide those services in the future, which is classified as unearned income.
Question 53
In financial accounting, the term 'Accrued Expense' fundamentally means:
- A) An expense paid in advance.
- B) An expense related to a future period.
- C) An expense that has been incurred but remains unpaid at year-end.
- D) An expense that will not be recognized until next year.
Show answer & explanation
Answer: C) An expense that has been incurred but remains unpaid at year-end.
Accrued expenses represent costs that a business has incurred during the current accounting period but has not yet paid for by the end of that period.
Question 54
If a business receives a one-year maintenance contract fee in advance, how is this 'unearned revenue' treated in the financial statements?
- A) As an asset in the statement of financial position.
- B) As an income in the statement of profit or loss.
- C) As a liability in the statement of financial position.
- D) As an expense in the statement of profit or loss.
Show answer & explanation
Answer: C) As a liability in the statement of financial position.
Unearned revenue is treated as a liability in the statement of financial position because it represents an obligation owed to the customer to provide goods or services in the future.
Question 55
What is the specific treatment of 'Pre-received income' (income received in advance) in the Statement of Financial Position?
- A) Treated as a non-current asset
- B) Treated as a current asset
- C) Treated as a non-current liability
- D) Treated as a current liability
Show answer & explanation
Answer: D) Treated as a current liability
Income received in advance constitutes a short-term obligation to provide a service or product, thus it is recognized as a current liability.
Question 56
While finalizing the accounts, an accountant completely overlooked to record an accrued expense of Rs. 37,800 and an accrued income of Rs. 16,300. What is the net impact of these omissions on the reported profit?
- A) Profit is understated by Rs. 21,500
- B) Profit is overstated by Rs. 21,500
- C) Profit is overstated by Rs. 54,100
- D) Profit is understated by Rs. 54,100
Show answer & explanation
Answer: B) Profit is overstated by Rs. 21,500
Omitting the accrued expense overstates profit by Rs. 37,800. Omitting the accrued income understates profit by Rs. 16,300. The net effect is an overstatement of Rs. 21,500 (37,800 - 16,300).
Question 57
A one-year maintenance contract fee was received by 'Delta Tech' on 1 August in advance. The company closes its books on 31 December each year. Which of the following terms is NOT related to the portion of the fee covering January to July of the next year?
- A) Unearned income
- B) Pre-received income
- C) Accrued income
- D) Liability
Show answer & explanation
Answer: C) Accrued income
The portion covering next year is money received but not yet earned, so it is unearned income, pre-received income, or a liability. It is NOT accrued income, which means earned but not yet received.
Question 58
If a business finalizes its draft accounts and entirely ignores adjusting a valid prepayment for rent of Rs. 5,000, what is the impact on the financial statements?
- A) Profit is overstated and assets are overstated.
- B) Profit is understated and assets are understated.
- C) Profit is overstated and liabilities are understated.
- D) Profit is understated and liabilities are overstated.
Show answer & explanation
Answer: B) Profit is understated and assets are understated.
Failing to recognize a prepayment means the entire amount remains in the expense account (making expenses too high and profit understated) and the asset is omitted from the balance sheet (understating assets).
Question 59
Why is it necessary for an accountant to formally account for accrued expenses at the end of the financial year?
- A) So that current liabilities are not overstated.
- B) So that profit is not understated.
- C) So that profit is not overstated.
- D) So that current assets are not understated.
Show answer & explanation
Answer: C) So that profit is not overstated.
Accrued expenses represent costs incurred during the year. If they are not recorded, total expenses will be artificially low, which in turn will cause the reported profit to be overstated.
Question 60
Similarly, why is it necessary for a business to formally account for accrued income?
- A) So that profit is not understated.
- B) So that profit is not overstated.
- C) So that current liabilities are not understated.
- D) So that current liabilities are not overstated.
Show answer & explanation
Answer: A) So that profit is not understated.
Accrued income is revenue earned but not yet received. Failing to record it means revenue will be artificially low, which would cause the net profit to be understated.
Question 61
A tenant pays an annual rent of Rs. 6,000. Payment is made quarterly in advance on 1 January, 1 April, 1 July, and 1 October. Which of the following should be included in his accounts for the year ended 31 October?
- A) Rs. 500 Accrual
- B) Rs. 500 Prepayment
- C) Rs. 1,000 Accrual
- D) Rs. 1,000 Prepayment
Show answer & explanation
Answer: D) Rs. 1,000 Prepayment
Quarterly rent is Rs. 1,500. The payment on 1 October covers October, November, and December. At the 31 October year-end, 2 months (November and December) are unused. 6000/12 = 500/month. 500 * 2 = Rs. 1,000 prepayment.
Question 62
What is the correct double-entry required to recognize an accrued expense at the end of the financial year?
- A) Debit Expense Account, Credit Accrued Expenses
- B) Debit Accrued Expenses, Credit Expense Account
- C) Debit Prepaid Expenses, Credit Expense Account
- D) Debit Expense Account, Credit Bank
Show answer & explanation
Answer: A) Debit Expense Account, Credit Accrued Expenses
To accrue an expense, you must increase the expense for the year (Debit Expense Account) and record the corresponding obligation to pay it in the future (Credit Accrued Expenses liability).
Question 63
If a business initially records all payments for insurance as an expense, what is the required adjusting entry to recognize the unexpired portion at year-end?
- A) Debit Expense Account, Credit Prepaid Expenses
- B) Debit Accrued Expenses, Credit Expense Account
- C) Debit Prepaid Expenses, Credit Expense Account
- D) Debit Prepaid Expenses, Credit Bank
Show answer & explanation
Answer: C) Debit Prepaid Expenses, Credit Expense Account
The adjusting entry moves the unexpired portion out of the expense account (Credit Expense Account to reduce it) and into an asset account (Debit Prepaid Expenses).
Question 64
Which of the following statements comparing 'prepaid expense' and 'unexpired expense' is correct?
- A) They are entirely different accounting concepts.
- B) Prepaid expenses are assets, while unexpired expenses are liabilities.
- C) Prepaid expense and unexpired expense mean exactly the same thing.
- D) Unexpired expenses are only used for physical inventory.
Show answer & explanation
Answer: C) Prepaid expense and unexpired expense mean exactly the same thing.
In accounting terminology, a prepaid expense is an expense that has been paid for but not yet consumed. This is synonymous with an 'unexpired' expense.
Question 65
Which of the following sets of accounting terms represent the same conceptual financial element?
- A) Unearned income and Accrued income
- B) Accrued expense and Outstanding expense
- C) Prepaid expense and Arrears
- D) Accrued revenue and Unearned revenue
Show answer & explanation
Answer: B) Accrued expense and Outstanding expense
An accrued expense is an expense that has been incurred but not yet paid. It is frequently referred to as an outstanding expense.
Question 66
A company has taken a bank loan of Rs. 1,200,000 at 8% per annum. Interest is payable quarterly. Due to financial problems, two installments were missed on September 30 and December 31. What is the interest liability in the Statement of Financial Position on December 31?
- A) Rs. 96,000
- B) Rs. 24,000
- C) Rs. 48,000
- D) Rs. 64,000
Show answer & explanation
Answer: C) Rs. 48,000
Annual interest is 1,200,000 x 8% = Rs. 96,000. The two missed quarters equal 6 months. Rs. 96,000 x (6/12) = Rs. 48,000 accrued liability.
Question 67
A company pays its salespeople a commission of 1% on sales, payable in the month immediately following the sale. Sales from January to November were Rs. 3,780,000, and December sales were Rs. 360,000. What is the accrued commission liability at the end of December?
- A) Rs. 3,600
- B) Rs. 37,800
- C) Rs. 41,400
- D) Rs. 0
Show answer & explanation
Answer: A) Rs. 3,600
Only the December commission remains unpaid at the end of December because previous months' commissions were paid in the following months. Rs. 360,000 x 1% = Rs. 3,600.
Question 68
A loan of Rs. 45,000 at 10% interest per year was given to a staff member. No interest has been received during the year. What are the accounting entries to accrue this interest income?
- A) Debit Accrued Interest Income, Credit Interest Income
- B) Debit Interest Income, Credit Accrued Interest Income
- C) Debit Cash, Credit Accrued Interest Income
- D) Debit Interest Income, Credit Cash
Show answer & explanation
Answer: A) Debit Accrued Interest Income, Credit Interest Income
To record earned but uncollected income, you must increase the asset (Debit Accrued Interest Income / Receivable) and increase the revenue (Credit Interest Income).
Question 69
In the year to 31 December 2018, Saira received Rs. 50,800 rental income in cash. Rent received in advance was Rs. 3,000 (2017) and Rs. 4,000 (2018). Rent in arrears was Rs. 1,700 (2017) and Rs. 2,500 (2018). What is the rental income to be reported?
- A) Rs. 49,000
- B) Rs. 50,600
- C) Rs. 52,600
- D) Rs. 50,800
Show answer & explanation
Answer: B) Rs. 50,600
Income = Cash Received (50,800) + Opening Advance (3,000) - Closing Advance (4,000) - Opening Arrears (1,700) + Closing Arrears (2,500) = Rs. 50,600.
Question 70
An entity pays rent of Rs. 600,000 for six months in advance on 1 October. The financial year ends on 31 December. What is the value of prepaid rent?
- A) Rs. 600,000
- B) Rs. 100,000
- C) Rs. 300,000
- D) Rs. 200,000
Show answer & explanation
Answer: C) Rs. 300,000
The payment covers October to March (6 months). At 31 December, 3 months (January to March) are unexpired. Rs. 600,000 x (3/6) = Rs. 300,000.
Question 71
A business has a beginning utilities accrual of Rs. 50,000 and an ending accrual of Rs. 60,000. During the year, it pays Rs. 80,000 in cash for utilities. What is the total utilities expense for the year?
- A) Rs. 90,000
- B) Rs. 70,000
- C) Rs. 80,000
- D) Rs. 190,000
Show answer & explanation
Answer: A) Rs. 90,000
Expense = Cash paid (80,000) - Opening Accrual (50,000, representing last year's expense) + Closing Accrual (60,000, representing this year's unpaid expense) = Rs. 90,000.
Question 72
A company pays rent quarterly in arrears on 1 Jan, 1 Apr, 1 Jul, and 1 Oct. The rent increased from Rs. 90,000/year to Rs. 120,000/year starting 1 October 2012. What is the rent accrual at 31 December 2012?
- A) Rs. 22,500
- B) Rs. 45,000
- C) Rs. 30,000
- D) Rs. 120,000
Show answer & explanation
Answer: C) Rs. 30,000
Because rent is paid in arrears, the 1 January payment covers the preceding Oct-Dec quarter. At 31 Dec, that quarter is unpaid. The new rate is 120,000/year. 120,000 x (3/12) = Rs. 30,000.
Question 73
Before finalizing the Statement of Financial Position, adjusting entries are required for: Rent received in advance Rs. 80,000; Unused office supplies Rs. 25,000; Accrued salary Rs. 22,500; Prepaid insurance Rs. 4,800. What is the total addition to Current Liabilities?
- A) Rs. 102,500
- B) Rs. 29,800
- C) Rs. 80,000
- D) Rs. 22,500
Show answer & explanation
Answer: A) Rs. 102,500
Current liabilities consist of the rent received in advance (unearned income) of Rs. 80,000 and the accrued salary of Rs. 22,500. Total = Rs. 102,500.
Question 74
Following the previous scenario (Rent received in advance Rs. 80,000; Unused office supplies Rs. 25,000; Accrued salary Rs. 22,500; Prepaid insurance Rs. 4,800), what is the total addition to Current Assets?
- A) Rs. 102,500
- B) Rs. 29,800
- C) Rs. 25,000
- D) Rs. 109,800
Show answer & explanation
Answer: B) Rs. 29,800
Current assets consist of unused office supplies (Rs. 25,000) and prepaid insurance (Rs. 4,800). Total = Rs. 29,800.
Question 75
In accounting terminology, when a landlord refers to rent being 'in arrears', this is synonymous with:
- A) Prepaid rent
- B) Unearned rent
- C) Rent received in advance
- D) Accrued rent
Show answer & explanation
Answer: D) Accrued rent
Rent in arrears means the rent is owed by the tenant for a past period. For the landlord, it is an accrued rental income (a receivable).
Question 76
If an entity receives Rs. 24,000 for a 12-month software subscription starting on September 1, what is the unearned revenue balance at its financial year-end of December 31?
- A) Rs. 8,000
- B) Rs. 16,000
- C) Rs. 24,000
- D) Rs. 12,000
Show answer & explanation
Answer: B) Rs. 16,000
The subscription covers September through August. By December 31, 4 months have been earned. The remaining 8 months (January to August) are unearned. 24,000 x (8/12) = Rs. 16,000.
Question 77
An entity paid Rs. 36,000 for a 12-month commercial insurance policy beginning on April 1. The financial year ends on December 31. What is the insurance expense to be recognized for the year?
- A) Rs. 36,000
- B) Rs. 9,000
- C) Rs. 27,000
- D) Rs. 18,000
Show answer & explanation
Answer: C) Rs. 27,000
The policy covers 9 months in the current financial year (April to December). Therefore, the expense recognized is 36,000 x (9/12) = Rs. 27,000.
Question 78
A business earns interest on a bank deposit of Rs. 500,000 at a rate of 6% per annum. Interest is credited by the bank half-yearly on June 30 and December 31. If the bank has not yet credited the December interest by year-end, what is the accrued interest income?
- A) Rs. 15,000
- B) Rs. 30,000
- C) Rs. 7,500
- D) Rs. 0
Show answer & explanation
Answer: A) Rs. 15,000
The unrecorded interest is for the 6-month period from July to December. Rs. 500,000 x 6% x (6/12) = Rs. 15,000.
Question 79
A landlord received Rs. 120,000 on July 1, representing one year's rent in advance. This entire amount was initially credited to the 'Unearned Rent' liability account. What adjusting entry is required on December 31?
- A) Debit Rent Income Rs. 60,000; Credit Unearned Rent Rs. 60,000
- B) Debit Unearned Rent Rs. 60,000; Credit Rent Income Rs. 60,000
- C) Debit Unearned Rent Rs. 120,000; Credit Rent Income Rs. 120,000
- D) Debit Cash Rs. 60,000; Credit Rent Income Rs. 60,000
Show answer & explanation
Answer: B) Debit Unearned Rent Rs. 60,000; Credit Rent Income Rs. 60,000
By December 31, six months of the rent has been earned (120,000 x 6/12 = 60,000). The adjusting entry must reduce the liability (Debit Unearned Rent) and recognize the income (Credit Rent Income).
Question 80
A company pays property taxes of Rs. 48,000 per year covering the period from April 1 to March 31. The payment is made in full on April 1. For the financial year ending December 31, what is the value of the prepaid property tax?
- A) Rs. 36,000
- B) Rs. 12,000
- C) Rs. 48,000
- D) Rs. 24,000
Show answer & explanation
Answer: B) Rs. 12,000
The payment covers the next year's Jan-Mar period, which is 3 months. 48,000 x (3/12) = Rs. 12,000 prepaid.
Question 81
If an accountant completely omits the year-end adjusting entry for an accrued expense, what is the specific effect on the statement of financial position?
- A) Liabilities will be overstated.
- B) Assets will be understated.
- C) Liabilities will be understated.
- D) Assets will be overstated.
Show answer & explanation
Answer: C) Liabilities will be understated.
An accrued expense creates a current liability. Failing to record it means the total liabilities reported on the balance sheet will be lower than they actually are.
Question 82
If an accountant completely omits the year-end adjusting entry for a prepaid expense (which was initially recorded as an asset), what is the effect on the statement of profit or loss?
- A) Profit will be understated.
- B) Profit will be overstated.
- C) Expenses will be overstated.
- D) No effect on profit.
Show answer & explanation
Answer: B) Profit will be overstated.
If the prepaid asset is not adjusted, the expired portion is not transferred to expenses. Because expenses are understated, the net profit will be overstated.
Question 83
If an entity fails to record an adjusting entry for accrued revenue at year-end, what is the resulting effect on its total assets?
- A) Total assets will be overstated.
- B) Total assets will be understated.
- C) Total assets will remain unaffected.
- D) Total liabilities will be understated.
Show answer & explanation
Answer: B) Total assets will be understated.
Accrued revenue is an asset (a receivable). If it is not recorded, the total assets reported on the statement of financial position will be understated.
Question 84
A business recorded Rs. 10,000 paid for next year's operational license as an expense in the current year. What adjusting journal entry is required at year-end?
- A) Debit Expense Rs. 10,000; Credit Bank Rs. 10,000
- B) Debit Prepaid License Rs. 10,000; Credit Expense Rs. 10,000
- C) Debit Accrued License Rs. 10,000; Credit Expense Rs. 10,000
- D) Debit Expense Rs. 10,000; Credit Prepaid License Rs. 10,000
Show answer & explanation
Answer: B) Debit Prepaid License Rs. 10,000; Credit Expense Rs. 10,000
Because the license is for next year, it is a prepaid asset. The adjusting entry must remove the 10k from the expense account (Credit) and set up the asset (Debit Prepaid).
Question 85
Accrued expenses, representing short-term obligations for costs already incurred, are typically classified in the statement of financial position as:
- A) Non-current liabilities
- B) Current assets
- C) Current liabilities
- D) Equity
Show answer & explanation
Answer: C) Current liabilities
Accrued expenses must typically be settled within the normal operating cycle or within 12 months, making them current liabilities.
Question 86
Unearned revenues, representing obligations to provide services or goods in the near future, are typically classified in the statement of financial position as:
- A) Current liabilities
- B) Non-current liabilities
- C) Current assets
- D) Revenue
Show answer & explanation
Answer: A) Current liabilities
Because the business owes the service or product to the customer within the next accounting period, unearned revenues are classified as current liabilities.
Question 87
If a tenant has a rent in arrears balance of Rs. 15,000, how must the landlord report this amount in their financial statements?
- A) As a Current Liability
- B) As a Current Asset (Rent Receivable)
- C) As a Non-Current Asset
- D) As an Expense
Show answer & explanation
Answer: B) As a Current Asset (Rent Receivable)
For the landlord, rent in arrears means the tenant owes them money for past occupancy. This is an accrued income, which is a current asset.
Question 88
In a T-account for a specific expense (like Insurance), on which side is the opening balance of a 'Prepaid Expense' brought down (b/d) at the start of the year?
- A) Credit side
- B) Debit side
- C) It is not brought down
- D) Both sides
Show answer & explanation
Answer: B) Debit side
A prepaid expense is an asset, and asset accounts inherently carry debit balances. Therefore, the opening balance is brought down on the debit side.
Question 89
In a T-account for a specific expense, the closing balance representing an 'Accrued Expense' is mathematically 'carried down' (c/d) on which side to equalize the totals?
- A) Debit side
- B) Credit side
- C) Below the totals
- D) It is transferred to the bank account
Show answer & explanation
Answer: A) Debit side
An accrued expense is a liability (credit balance). To balance the T-account, the closing figure (c/d) is placed on the lighter debit side, so it can be brought down (b/d) onto the credit side for the new period.
Question 90
An entity recorded an advance payment of Rs. 50,000 from a customer by directly crediting 'Sales Revenue'. The goods will be delivered next year. What adjusting entry is required at year-end?
- A) Debit Unearned Revenue Rs. 50,000; Credit Sales Revenue Rs. 50,000
- B) Debit Sales Revenue Rs. 50,000; Credit Unearned Revenue Rs. 50,000
- C) Debit Cash Rs. 50,000; Credit Unearned Revenue Rs. 50,000
- D) No entry is required.
Show answer & explanation
Answer: B) Debit Sales Revenue Rs. 50,000; Credit Unearned Revenue Rs. 50,000
Because the revenue was prematurely recognized, it must be reduced (Debit Sales Revenue) and the liability for the undelivered goods must be set up (Credit Unearned Revenue).
Question 91
On November 1, a company borrowed Rs. 2,000,000 at 9% annual interest. Interest and principal are payable in 6 months. What is the interest expense to be accrued for the year ended December 31?
- A) Rs. 180,000
- B) Rs. 90,000
- C) Rs. 30,000
- D) Rs. 15,000
Show answer & explanation
Answer: C) Rs. 30,000
The loan was outstanding for 2 months (November and December) in the current year. Rs. 2,000,000 x 9% x (2/12) = Rs. 30,000.
Question 92
Opening accrued salaries were Rs. 8,000. Salaries paid in cash during the year were Rs. 95,000. Ending accrued salaries are Rs. 12,000. What is the total salaries expense for the year?
- A) Rs. 99,000
- B) Rs. 91,000
- C) Rs. 95,000
- D) Rs. 115,000
Show answer & explanation
Answer: A) Rs. 99,000
Expense = Cash paid (95,000) - Opening Accrual (8,000) + Closing Accrual (12,000) = Rs. 99,000.
Question 93
Opening prepaid insurance was Rs. 4,000. Cash paid for insurance during the year was Rs. 18,000. The ending balance of prepaid insurance is Rs. 5,000. What is the insurance expense for the year?
- A) Rs. 18,000
- B) Rs. 17,000
- C) Rs. 19,000
- D) Rs. 27,000
Show answer & explanation
Answer: B) Rs. 17,000
Expense = Opening Prepayment (4,000, expired this year) + Cash Paid (18,000) - Closing Prepayment (5,000, pushed to next year) = Rs. 17,000.
Question 94
Opening unearned rent was Rs. 10,000. Cash received for rent during the year was Rs. 120,000. Ending unearned rent is Rs. 15,000. What is the rent income for the year?
- A) Rs. 120,000
- B) Rs. 125,000
- C) Rs. 115,000
- D) Rs. 145,000
Show answer & explanation
Answer: C) Rs. 115,000
Income = Opening Unearned (10,000, earned this year) + Cash Received (120,000) - Closing Unearned (15,000, earned next year) = Rs. 115,000.
Question 95
Which accounting principle mandates that a business must record an expense in the same period as the revenue it helped to generate, leading to the creation of accruals and prepayments?
- A) Matching (Accrual) concept
- B) Prudence concept
- C) Materiality concept
- D) Consistency concept
Show answer & explanation
Answer: A) Matching (Accrual) concept
The matching concept requires that expenses are matched against the revenues they generate in the same accounting period, which necessitates adjustments for accruals and prepayments.
Question 96
If the closing balance of an accrued expense account is higher than its opening balance, this mathematically indicates that:
- A) Cash paid during the year was greater than the expense incurred.
- B) Cash paid during the year was less than the expense incurred.
- C) The business has fully settled all its liabilities.
- D) The business is generating more revenue.
Show answer & explanation
Answer: B) Cash paid during the year was less than the expense incurred.
An increasing accrual balance means the business incurred more expense during the year than the amount of cash it actually paid out to settle those expenses.
Question 97
An entity received a Rs. 720,000 rental payment for an 18-month lease starting on July 1. Its financial year ends on December 31. What amount will be classified as a current liability at year-end?
- A) Rs. 240,000
- B) Rs. 480,000
- C) Rs. 720,000
- D) Rs. 0
Show answer & explanation
Answer: B) Rs. 480,000
The lease runs for 18 months (40k/month). By Dec 31, 6 months (240k) are earned. The remaining 12 months (480k) are unearned and will be fulfilled over the next 12 months, making it entirely a current liability.
Question 98
MPD received Rs. 720,000 rent. Opening advance was Rs. 50,000, Closing advance is Rs. 45,000. Opening accrued was Rs. 80,000, Closing accrued is Rs. 100,000. What is the rental income to be recognized?
- A) Rs. 720,000
- B) Rs. 815,000
- C) Rs. 745,000
- D) Rs. 635,000
Show answer & explanation
Answer: C) Rs. 745,000
Income = Cash Received (720k) + Beg Unearned (50k) - End Unearned (45k) - Beg Accrued (80k) + End Accrued (100k) = Rs. 745,000.
Question 99
Which of the following describes the most accurate sequence of creating a year-end adjustment for an unrecorded utility bill?
- A) Decrease cash, increase expense.
- B) Increase expense, increase current liability.
- C) Decrease liability, increase expense.
- D) Increase asset, decrease expense.
Show answer & explanation
Answer: B) Increase expense, increase current liability.
An unrecorded utility bill is an accrued expense. The adjustment requires debiting (increasing) the utility expense account and crediting (increasing) the accrued utility liability account.
Question 100
A business incorrectly records an unearned revenue of Rs. 15,000 as accrued revenue. What is the double-impact of this specific error on the reported net profit?
- A) Profit is understated by Rs. 30,000
- B) Profit is overstated by Rs. 30,000
- C) Profit is overstated by Rs. 15,000
- D) Profit is understated by Rs. 15,000
Show answer & explanation
Answer: B) Profit is overstated by Rs. 30,000
Recording unearned revenue (liability) as accrued revenue (asset) inappropriately increases recognized income by 15k instead of deferring it (which would decrease recognized income by 15k). The total swing is an overstatement of Rs. 30,000.