1

MC
QS
(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

EACH QUESTIONS HAS FOUR POSSIBLE ANSWERS

CHOOSE THE CORRECT ANSWER: (T) Means TRUE
Answer
The main object of providing depreciation is:
(a)
To calculate true profit. (T)
(b)
To show true financial position.
(c)
To reduce tax.
(d)
To provide funds for replacement.
Depreciation arises because of:
(a)
Fall in the market value of an asst.(b)
Physical wear and tear. (T)
(c)
Fall in the value of money.
(d)
None of them.
Depreciation is a process of:
(a)
Valuation (T)
(b)
Allocation
(c)
Both valuation and allocation
(d)
None of them.
Under the straight line method of providing depreciation it:
(a)
Increase every year.(b)
Remain constant
every year. (T)
(c)
Decreases every year
(d)
None of them.
Under the diminishing balance method depreciation it:
(a)
Increases every year.(b)
Decreases every
year. (T)
(c)
Remain constant every year.
(d)
None of them.
Under the fixed installment method of providing depreciation it
is calculated on:
(a)
Original cost (T)
(b)
on balance amount(c)
On scrap value
(d)
None of them
Under the diminishing balance method, depreciation is
calculated on:
(a)
Scrap value
(b)
On original
value(c)
On book value (T)
(d)
None of them
The amount of depreciation charged on a machinery will be
debited to:
(a)
Machinery account
(b)
Depreciation
account (T)
(c)
Cash account
d)
Repair account

(9)

(10)

(11)

(12)

(13)

(14)

(15)

(16)

(17)

(18)

Loss on sale of plant and machinery should be written off

against:
(a)
Share premium(b)
Depreciation fund
account (T)
(c)
Sale account
(d)
Profit & loss account
Loss on sale of machinery will be:
(a)
Debited on machinery A/c(b)
Credited to
machinery A/c (T)
(c)
Credited to profit and loss A/c
(d)
None of them
Asset which have a limited useful life are termed as:
(a)
Limited assets
(b)
Depreciation
assets (T)
(c)
Unlimited asset
(d)
None of these
Process of becoming out of date or obsolete is termed as:
(a)
Physical deterioration
(b)
Depletion(c)
Obsolescence (T)
(d)
Amortization
Which of the term is used to write off in reference to tangible
fixed assets.
(a)
Depreciation(T) (b)
Depletion(c)
Amortization
(d)
Both (b) and (c)
The economic factors causing depreciation:
(a)
Time factor(b)
Obsolescence and
inadequacy (T)
(c)
Wear and tear
(d)
Money valuation
Profit prior to incorporation is an example of:
(a)
Capital reserve (T)
(b)
Revenue reserve(c)
Secret reserve
(d)
None of these
Total depreciation cannot exceeds its:
(a)
Scrap value
(b)
Cost value(c)
Market value
(d)
Depreciable value (T)
Depreciation value of an asset is equal to:
(a)
Cost + Scrap value
(b)
Cost + Market
price(c)
Cost Scrap value (T)
(d)
None of these
Depreciation does not depend on fluctuations as:
(a)
Market value of asset (T)
(b)
Cost of price of asset(c)
Scrap value of asset
(d)
None of these

(19)

(20)

(21)

(22)

(23)

(24)

Depreciation is:
(a)
An income
(b)
An asset(c)
A
loss (T)
(d)
A liability
The books value of an asset is obtained by deducting
depreciation from its:
(a)
Market value
(b)
Scrap value(c)
Market + Cost price
(d)
Cost (T)
Depreciation fund method is also known as:
(a)
Sinking fund method (T)
(b)
Annuity method
(c)
Sum of years digits method
(d)
None of these
The method is specially suited to natural resources (mines,
quarries, sand, pits etc.) is said to be:
(a)
Annuity method
(b)
Depletion
method (T)
(c)
Revaluation method
(d)
Sum of digits method
Double declining method is often used in the:
(a)
Pakistan
(b)
South Africa(c)
Japan
(d)
U.S.A(T)
In the provision method of depreciation the asset always appears
at:
(a)
Cost price (T) (b)
Market Price(c)
Scrap Value
(d)
None

Illustration 5. (Diminishing Balance Method): Sale of assets). Kaushal Traders purchased

a second hand machinery on 1st January, 2002 for $ 23,000 and spent $ 2,000 on its repairs.
It was decided to depreciate the machinery at 20% every year; according to diminishing
balance method. Prepare the machinery account from 2002 to 2004 and show profit or
loss as it was sold on 31st December; 2004 for $ 10,800. The accounts are closed on
December 31every year.
Solution.

Diminishing Balance Method

Machinery Account

Note. The amount of depreciation has been calculated @ 20% on diminishing (reducing)
balances of machinery. In 2002, depreciation has been calculated on 25,000. Amount spent
on repairs to second hand machinery is capital expenditure. It was necessary to bring the old
machinery in working order. It is the part of the cost of machinery, so it has been added to its
cost. The balance of machinery reduced to $ 20,000 in 2003 and further reduced to $. 16,000
in 2004, so depreciation for 2003 has been calculated on 20,000 and for 2004 on $16,000.
Loss on sale of machinery has been calculated as under:
Book value of machinery as on January 1, 2002
$25000
Less : Depreciation :
2002 (for full year)
5,000
2003 (for full year)
4,000
2004 (for full year)
3,200
12200
Book value of machinery as on December 31, 2004
12800
Less : Amount received from sale of machinery
10800
Loss on sale of
machinery
2000
Illustration 6. (Diminishing Balance: Assets sold partly). A company whose accounting
year is the calendar year purchased on 1st April, 2001 machinery costing $ 30,000.
It further purchased machinery on 1st October, 2001 costing $ 20,000 and on 1 st July, 2002
costing $ 10,000

On 1st January. 2003 one-third of the machinery which was installed on l st April.
200l,became obsolete and was sold for $ 3,000.
Show how the machinery account would appear in the books of company. The
depreciation is charged at 10% p.a. on Written Down Value Method.
Solution.

Written Down Value Method

Machinery Account
Working Notes :
$52,025
(i) Calculation of depreciation for year 2003 :Total Written Down Value as on -8,325
January 1, 2003Less :Written Down Value of 1/3rd of
43,700
plant sold (1 0,000 750 925)
Written down value of remaining machine
4370
Depreciation at 10% on Written Down Value (43, 700 x 10/100)
(ii) Calculation of loss on sale of machinery :
Book value of I /3rd machinery purchased on April l, 200 1 as on January 2003
( 1 0,000- 750 925)
Less: Amount received from sale
Loss on sale of machinery

8325
-3000
5325

Illustration 7. (Diminishing Balance : Sale of assets). A manufacturing concern. whose

books are closed on 31st December, purchased machinery for $50,000 on 1- 1-2000.
Additional machinery was acquired for $. 10,000 on 1-7-2001 and for $ 16,061 on 1-1-2004.
Certain machinery purchased for $ 10,000 on 1-1-2000 was sold for $ 5,000 on 30-6-2003.

Give the machinery account for 5 years. Depreciation is written off at 10% per annum on
written down value method.
Solution.

Wr

itte
n Down Value Method
Machinery Account

Dr.
Working Notes
(i) Calculation of loss on sale of machinery :Book value of
machinery as on January 1, 2000Less : Depreciation according to
diminishing balance method :
2000 (for full year)
2001 (for full year)
2002 (for full year)
2003 (for six months)
Book Value of Machine sold as on June 30, 2003
Less : Amount received from sale
Loss on sale of machine

Cr.
$10,000
1,000
900
810
365
3,075
6,925
(-) 5,000
1,925
45,000

(ii) Calculation of depreciation for the year 2003 :

Book value of all machineries as on January 1, 2003
Less : Book value of machinery to be sold as on January, 1, 2003
Depreciation on 37,710@ 10% for full year
Add : Depreciation on 7,290 @ 10% for six months
Total depreciation for 2003

(-) 7,290
37,710
3,771
365
4,136

( ASSIGNMENTS )
THEORETICAL QUESTIONS
A. Objective Type Questions :
1. Indicate the alternative which you consider to be suitable :
1. Depreciation according to straight line method is calculated on .. .
(a) opening balance
(b) closing balance
(c) original cost
(d) market value.
2. Depreciation is calculated on .. .
(a) fixed assets
(b) current assets
(d) wasting assets.
(c) fictitious assets
3. Depreciation is calculated on of assets.
(a) cost price
(b) market value
(d) invoice price.
(c) book value
4. Depreciation means .. .
(a) physical wear and tear
(b) amortization

(c) fluctuation
(d) obsolescence.

5. According to diminishing balance method depreciation is charged on of assets.

(a) original cost
(b) written down value
(c) market value
(d) average cost.
6. In the straight line method, the amount of depreciation every year.
(a) increases
(b) decreases
(c) remains constant (d) either increases or decreases.
Ans. l. (c) 2. (a) 3. (c) 4. (a) 5. (b). 6. (c).
.

B Very short Question

1.Mention any three important features of depreciation.
2.
Mention names of three factors affecting the amount of depreciation
3. Mention the formula for calculating depreciation under straight line method.
4. What is depreciation?
5. A pharmaceutical manufacturer has just developed and registered a patent for a rare
medicine. Which term will appear in its profit and loss account regarding the cost of patent
written off?
Hint. Amortisation.]
C. Short Answer Type Questions :
l. Explain the following terms :
(a) Obsolescence
(b) Depletion
(c) Fluctuation
(d) Amortisation.
2. What are the different causes of depreciation ? Explain them briefly.
3. You are looking at the profit and loss account of three business enterprises. You find the
term
depreciation in first, depletion in case of second and amortisation in case of
third enterprise. State the type of business each of the enterprise is into.
[Hint. Fixed assets, exhaustion of natural resources, specific contracted business.]
4. There are two dentists Dr. Aggarwal and Dr. Mehta in your locality who are competitors.
Both
of them have recently bought machine for patients. Dr. Aggarwal has decided to
write off an equal amount of depreciation every year while Dr. Mehta wants to write off a
larger amount in earlier years. They do not know anything about the methods of depreciation.
Can you inform them more about the methods of depreciation they are applying even without
knowing anything about accounting in formal. Who is more wise in your opinion ? Give
reasons in support of your answer.
[Hint. Written down value method is more appropriate because this method is suitable for
those assets which are affected by technological changes, more over, this method is
recognised by Income tax law.]
D. Long Answer Type Questions :
1.

Explain the meaning of depreciation. Enumerate different methods of depreciation.

Explain straight line method.
2.
Why is it necessary to provide for depreciation ? Explain the effect of depreciation on
Profit and loss account and Balance Sheet.

3.

Differentiate between straight line method and written down value method of
providing depreciation.
4.
Discuss the advantages and disadvantages of fixed instalment method and diminishing
balance method.
5.
Explain the following :
(a) Obsolescence
(b) Amortisation
(c) Depletion
(d) Fluctuation.
PRACTICAL QUESTIONS
1. A firm purchased on 1st January 2005, a machinery for $. 10.000. Depreciation was to be
charged @ 20% per annum on the original cost.
You are required to show the machinery account for the first three years assuming that
accounts are closed on 31st December. [Ans. Closing balance = $ 4.000]
2. San jay purchased a machinery for $. 21.000 on 1st January, 2001. The estimated life of the
machine is 10 years after which its residual value will be $.1,000 only. Find out the amount of
depreciation and prepare machinery account for the first three years according to the fixed
installment method.
Note .Depreciation =cost price scrap valve / Life of the asses
=21,000-1,000/10=$ 2,000
(Ans . closing balance =$ .15,000)
3. A boiler was purchased from abroad for $ 10,000 .shipping and forwarding charges
amounts to $ 2,000 import duty $ three years separately for each year @ 10% on diminishing
balance method
[Ans. $ 2,000, $ 1,800 and $ 1,620; Closing balance = $ 14,580]
4. The book value of plant and machinery on 1-l-2002 was $ 2,00,000. New machinery for $.
10,000 was purchased on 1-10-2002 and for $. 20,000 on 1-7-2003. On 1-4-2004, a
machinery whose book value had been $. 30,000 on 1-1-2002 was sold for $. 16,000 and the
entire amount was credited to plant and machinery account. Depreciation had been charged at
10% per annum on straight line method. Show the plant an machinery account from 1-12002 to 31-12-2004.
[Ans. Loss on sale of machinery = S. 7,250;
Balance of machinery account on 31st December, 2004 = $1,43,750)
5. A company had bought machinery for $. 2,00,000 including a boiler was $ 20,000. The
machinery account had been credited for depreciation on the reducing instalment system for

10

the past four years at the rate of 10%. During the fifth year. i.e., the present year, the boiler
became useless on account of damage to some of its vital parts and the damaged boiler is sold
for$. 4,000. Write up the machinery account.
[Ans. Loss on sale=$ 9,122; Closing balance = $ 1,06,288]
6. The original cost of furniture amounted to$ 4,000 and it is decided to write off S per cent
on the original cost as depreciation at the end of each year. Show the ledger account as it will
appear during the first four years Show also how the same account will appear if it was
decided to written off 5% on the diminishing balance.
[Ans. Closing balance : (i) Straight line method = $ 3,200 ; (ii) Diminishing balance = $
3,258]
7. On 1st January, 2002 machinery was purchased for $. 20.000. On 1st July, 2003 another
machine was purchased for $. 10,000 and on 1st January, 2004 one more machine was
purchased for $. 5,000 .. The firm depreciates its machines@ 20% on the diminishing balance
method. Show machine account for four years.
[Ans. Closing balance =$ 17, I 52]
8. A company purchased a machine on 1st January, 2003 for $ 30,000 and immediately spent
$ 4,000 on its repair and $ 1,000 on its installation. On July I, 2005 the machine was sold for
$. 25,000. Prepare machine account after charging depreciation @ 10% p.a. by diminishing
balance method.
[Ans. Loss on sale of machine = $ 1932.50]
9. On 1st January, 2001 a merchant purchased a furniture costing $ 55,000. It is estimated that
its working life is 1 0 years at the end of which it will fetch $ 5,000. Additions are made on 1
st Jan., 2002 and 1st July, 2004 to the value of $. 9.500 and $. 8,400 (residual values $ 500
and $. 400 respectively). Show the furniture account for the first four years, if depreciation is
written off according to the straight line method.
[Ans. Balance furniture account on 1st Jan., 2005 =$. 49,800]
10. A joint stock company had bought machinery for$ 1,00,000 including therein a boiler
worth $ 10,000. The machinery account was for the first four years credited for depreciation
on the reducing instalment system at the rate of I 0% per annum. During the fifth year, i.e.,
the current year, the boiler becomes useless on account of damage to its parts. The damaged
boiler is sold for $ 2,000 which amount is credited to machinery account. Prepare the
machinery account for the current year, adjusting therein the cash received and the loss
suffered
on the damage boiler and the depreciation of the machinery for the current year.

11

[Ans. Loss on sale of boiler=$. 4,561 ; Closing balance of machinery account= $ 53, 144]
11. Kumar & Company purchased a machinery on 1st January, 2003 for $ 54,000 and spent $
6.000 on its installation. On 1st September. 2004 it purchased another machine for $ 30,000.
On 3 1st March. 2005 the first machine purchased on 1st January, 2005 is sold for $ 36.000
and on the same date it purchased a new machinery for $ 80,000
On September I. 2006 the second machine (purchased on September 1, 2004) was also sold
off for $ 26.000. Depreciation was provided on machinery @ 10% p.a. on original cost
method annually on 31st December. Give the machinery account from 2005 to 2006.
[Ans. Loss on sale of First Machine $ 10.500, profit on sale of Second Machine = $
2,000 :
Balance of Machinery a/c on 31st December. 2006 $
66.000]
12. A company purchased a machine on 1st January, 2004 for $ 30.000 and immediately spent
$ 4.000 on its repairs and $1,000 on its installation. On July I, 2006 the machine was sold for
$ 25.000. Prepare machine account after charging depreciation @ /0% p.a. by rliminishing
balance method. Also prepare machinery Disposal A/c.
[Ans. Loss
on sale of machine = $ 1932.50]
13. A company, whose accounting year is calendar year, purchased on 1st April, 2003
machinery costing $ 30,000.
It purchased further machinery on 1st Oct, 2003 costing $ 20,000 and on 1st July, 2004
costing $ 10,000. On 1st January, 2005, one third of the machinery installed on 1st April,
2003 became obsolete and was sold for $ 3,000.
Show how machinery account would appear in the books of company, it being given that
machinery was depreciated by fixed instalment method at 10% p.a. What would be the
balance of machinery account on 1st January.
2006?
[Ans. Balance of Machinery A/C on 1st January, 2006 = $ 38,500]
14. The original cost of furniture and fixtures amounted to $ 4.000 and it is decided to write
off 5% o.1 the diminishing value of assets as depreciated at the end of each year. Show the
ledger account as it will appear during the first four
years.
[Ans. Balance of
Machinery Account after four years $ 3258.03]

12

15. What is depreciation and how it is calculated? Distinguish between straight line method
and written down method of depreciation. If an asset was purchased for $ 50,000 on 1st
Jan., 2006, what would be its value three years after if it was depreciated by both these
methods@ 10% p.a.
[Ans. Straight line method $ 35,000 W.D.V. method $36,450]
16. (a) Define depreciation. Why is it charged ? (b) A machine was bought for$ 9,500 and
was installed by companys workers, who were paid $ 50Ufor this. Show how it will be
depreciated reducing installment and reducing instalment method assuming that its working
life is 10 years. What would be its balance after 5 years, if it is depreciated@ 10% in each
case.
[Ans. Balance of Machinery Account. Straight line method $ 5,000.
(educing Instalment method$. 5,905]
17. On 1-1-2005, Mrs. Neelam Sharma bought a machine for $ 25,000 on which she spent $
5.000 for carriage and freight $ 1,000 for brokerage of the middle-man. $ 3,500 for
installation and $ 500 for an iron pad. The machine is depreciated @ 10% per annum on
written down value basis. After three years the machine was sold to Deepa for $ 30,500 and $
500 was paid as ccmmission to the broker through whom the sale was effected. Find out the
Profit or Loss on sale of machine if the accounts are closed on 31st December every year.
[Ans. Profit on sale of machine= $ 4,485]
18. The following information relates to the business of Maharaja Enterprises for the year
ended Dec. 31. 2001.
(a) A debit balance of plant and machinery account on Jan. 1, 2001 $ 26,840.
(b) During the year 2001 three machines standing in the books at $ 1.286 were sold for $
600.
(c) On April I, 200 I new machines costing $ 5,880 were purchased and were installed by
the manufacturers workman at an expenditure of $ 216 (i.e., wages $ 174 and materials $
42.)
(d) It is practice of the business to write-off IS% depreciation to all additions to the plant
during a year and 0% to all old plants. Prepare the plant and machinery account as it would
appear on Dec. 31, 200 I.
[Ans. Balance of Machinery Ale $ 25,626 approximate]
19. Nagi Road Transport Corporation (NRTC) purchased 5 minibuses at $ 2,00.000 each on 1
April 2000. On 1st October, 2002. One of the buses met an accident and was completely
destroyed. Insurance Co. paid $ 90.000 in full settlement of the claim. On the same day,
NRTC purchased a used minibus for $ 1,00.000 and spent $ 20.000 on its over/hauling.

13

Prepare minibus account for 3 years ending on 31 Dec. 2002. The depreciation is charged @
20% on straight line basis.
[Ans. Loss on bus destroyed 10,000: Balance of bus account $ 4,74.000]
[Ans. Loss on sale of machine $ 25.500 : Balance of Machinery Ale $ 6,00.000]

1. On January 1, 1992 there was a balance of Rs. 4,000 in the plant and machinery account.
An addition of Rs. 2,000 was made on July 1, 1992. Accounts were closed for the year on
December, 31, 1992. If depreciation was charged 10% per annum, the balance in the plant
and machinery account on the closing date would be:
(a) Rs. 5,300
(b) Rs. 5,400
(c) Rs. 5,500
(d) Rs. 5,600
Ans. (c)
2. A machinery having a residual value of Rs. 5,000 was purchased on 1-1-1988 for Rs. 1,
00,000 and was depreciated @ 9.5% on a straight line method. On 1-1-91, it was estimated
that its useful life has been reduced to eight years. Under the changed circumstances, the
annual depreciation charges for the year 1991 and onwards will be:
(a) Rs. 11,875
(b) Rs. 13,300
(c) Rs. 9,500
(d) Rs. 12,500
Ans. (b)
3. In which one of the following methods of charging depreciation shall the balance never be
reduced to zero?
(a) Fixed installment method
(b) Depreciation fund method
(c) Diminishing balance method

14

(d) Depletion unit method

Ans. (c)
4. Match List-I with List-II and select the correct answer using the following codes given
below the lists:
List-I
(Types of accounts)

List-II
(Principles)

A. Real Accounts

1. Debit the receiver, credit the give.

B. Nominal Accounts

2. Debit what comes in credit what goes out.

C. Personal Accounts

3. Debit all expenses, credit all gains.

Codes:
ABC
(a) 3 2 1
(b) 1 3 2
(c) 2 3 1
(d) 1 2 3
Ans. (c)
5. Which one of the following branches of accounting primarily deals with processing and
Goodwill presenting of accounting data for internal one?
(a) Financial Accounting
(b) Tax Accounting
(c) Management Accounting
(d) Inflation Accounting
Ans. (c)
6. Holding gains in relation to stocks should not be used for payment of Dividend. Which
one of the following accounting principles is involved in this?
(a) Consistency

15

(b) Cost
(c) Materiality
(d) Realization
Ans. (d)
7. X started business with a capital of Rs. 20,000 and purchased goods worth Rs. 2,000 on
credit. These transactions may be expressed in the form of Accounting Equation such as:
(a) Rs. 22,000 = Rs. 20,000 Rs. 2,000
(b) Rs. 20,000 = Rs. 22,000 Rs. 2,000
(c) Rs. 22,000 = Rs. 22,000 + 0
(d) Rs. 22,000 = 0 + Rs. 22,000
Ans. (b)
8. Accounting records transaction in terms of:
(a) commodity units
(b) monetary units
(c) production units
(d) none of the above
Ans. (b)
9. Market price or actual cost, whichever is less, is the generally accepted accounting
principle for valuation of:
(a) Stock in trade
(b) Fixed assets
(c) Current assets
(d) All assets
Ans. (a)
10. Capital employed in a business is Rs.1, 50,000. Profits are Rs. 50,000 and the normal rate
of profits is 20%. The amount of goodwill as per capitalization method would be:

16

(a) Rs. 1, 00,000

(b) Rs. 1, 50,000
(c) Rs. 2, 00,000
(d) Rs. 3, 00,000
Ans. (a)
11. Consider the following data:
Jan. 1, 1989 Opening Stock 500 units Rs. 5 per unit
Jan. 15, 1989 Purchases 400 units @ Rs. 6 per unit
Jan. 30, 1989 issued 300 units
Feb. 15, 1989 Purchases 200 units Rs. 7 per unit
Feb. 28, 1989 Issued 300 units
March 25, 1989 Purchases 200 units @ Rs. 8 per unit
Based on the above data, the value of inventory in hand on 31st March, 1989 as per First in
First out (FIFO) method will be:
(a) Rs. 3,700
(b) Rs. 3,600
(c) Rs. 4,800
(d) None of the above
Ans. (c)
12. Renewal fee for Patents is a:
(a) capital expenditure
(b) revenue expenditure
(c) deferred revenue expenditure
(d) development expenditure
Ans. (a)

17

13. A manufacturing company spent the following amounts on the import and installation of a
machine:
Rs. 50,000 Price of the machine
Rs. 5,000 Freight
Rs, 1,050 Insurance premium
Rs. 6,000 Replacement of a part damaged in transit, not covered under the insurance policy.
Based on the above data, Capital expenditure would be:
(a) Rs. 50, 000
(b) Rs. 56, 050
(c) Rs. 62, 050
(d) Rs.57, 050
Ans. (b)
14. Given, subscription received in 1990:
For the year 1989 Rs. 500
For the year 1990 Rs. 7,000
For the year 1991 Rs 400
1990-Subscription outstanding Rs. 250.
The amount of subscription to be posted to Income on 31st December 1990 and Expenditure
account of 1990 is:
(a) Rs. 7,000
(b) Rs. 7,250
(c) Rs. 7,900
(d) Rs. 8,150
Ans. (b)
15. What is the correct sequence of the preparation of the following accounts and statements
of a non-profit organization?

18

1. Income and Expenditure account

2. Receipts and Payment account
3. Balance Sheet
Select the correct answer from the codes given below:
(a) 1, 2, 3
(b) 1, 3, 2
(c) 2, 1, 3
(d) 2, 3, 1
Ans. (c)
16. Profit as per accounts from incomplete records may be construed as equivalent of:
(a) excess of assets over liabilities at the close of the period.
(b) excess of capital at the end over the capital at the beginning
(c) excess of assets over liabilities at the commencement of the period
(d) excess of capital at the beginning over the capital at the beginning
Ans. (b)
17. If the rate of gross profit is 20% on cost of goods sold and the sales are Rs. 1, 50,000 then
the total gross profit would be:
(a) Rs. 25,000
(b) Rs. 30,000
(c) Rs. 37,500
(d) None of the above
Ans. (a)
18. According to records of a firm which does not keep its accounts on double entry system,
all sales were made on credit so as to realize a profit of 33 % sale proceeds. The
3

19

stock of unsold goods at the beginning and at the end of the trading period were valued at Rs.
21,000 and Rs. 18,000 respectively. Goods worth Rs.1, 39,500 were purchased for resale
during the period. The proprietor withdrew goods worth Rs. 1, 500 during the accounting
period for personal use. What were the total sales during the period?
(a) Rs. 1, 80,000
(b) Rs. 2, 11,500
(c) Rs. 2, 25,000
(d) Rs. 2, 31,500
Ans. (b)
19. In the absence of partnership deed provision of Partnership Act, 1932 became applicable
under which a partner is entitled to interest on money advances to the firm at:
(a) 4% p.a.
(b) 5% p.a.
(c) 6% p.a.
(d) 10% pa.
Ans. (c)
20. Which one of the following as not applicable to a co-operative form of business
organization?
(a) Membership is open to all having a common interest
(b) Transferability of shares is permitted among general public
(c) Policy decisions are taken by the members in a general meeting
(d) Major portion of profit is distributed to members by way of dividend
Ans. (d)
21. Which one of the following statements is correct?
(a) A company consists of heterogeneous members
(b) A body corporate includes a co-operative society
(c) The expression corporation or Body corporate are the same

20

(d) A partner cannot contract with his firm, whereas a member of a company can
Ans. (d)
22. Dividend declared and paid by a company is:
(a) an expense of the company
(b) an income of the company
(c)the distribution of profit earned by the company
(d) the source of fund for the company
Ans. (c)
23. Long term liabilities are:
(a) fixed assets minus current assets
(b) fixed assets minus current liabilities
(c) current Assets plus current liabilities
(d) total liabilities minus current liabilities
Ans. (d)
24. A business entity has assets of Rs. 26,000 and liabilities of Rs. 6,000. Owners equity in
this case is:
(a) Rs. 32,000
(b) Rs. 26,000
(c) Rs. 20,000
(d) Rs. 6,000
Ans. (c)
25. While preparing Annual Financial Statements, credit balance shown by the Bank pass
book should be treated as:
(a) a liability
(b) an income

21

(c) an excess of payments over receipts

(d) an asset
Ans. (d)
26. If the trial balance does not tally in spite of through scruting and the difference is
substantial, then which one of the following courses should an accountant adopt?
(a) Defer preparation of financial statements
(b) Open suspense account.
(c) Write off the difference to profit and losses A/c
(d) Ignore the difference and prepare financial statements
Ans. (b)
27. A and B are sharing profit and losses in the ratio of 4 I. C is admitted as a new partner
for 1/3rd share of profits for which he pays Rs. 30,000 as goodwill. Lf A and B agree to
share future profits equally, then the amount of goodwill to be credited to A would be:
(a) Rs. 30.000
(b) Rs. 90,000
(c) Rs. 48,000
(d) Rs. 42,000
Ans. (d)
28. The joint life policy account received on the death of a partner is credited to the:
(a) Joint life policy reserve account
(b) Capital accounts of all the partners in their profit sharing ratio
(c) General Reserve account
(d) Profit and Loss Account
Ans. (b)
29. In setting the accounts of a firm after its dissolution, the assets of the firm shall be applied
first in paying:

22

(a) each partner proportionately what is due to him on account of loans advanced by him
(b) each partner proportionately what is due to him account of capital
(c) each partner proportionately what is due to him on account of past profits
(d) the debts of the firm to the third parties
Ans. (d)
30. A limited company issued equity shares of Rs. 100 each. It has called up Rs. 75 on each
share but received only Rs. 60 per share. The share capital account will be credited with:
(a) Rs. 60 per share
(b) Rs. 75 per share
(c) Rs. 100 per share
(d) None of the above
Ans. (b)
31. Redeemable preference shares can be redeemed:
(a) only if they are fully paid
(b) even if they are partly paid
(c) if they are paid not less than 50% of the nominal value of shares
(d) only if they are issued at a premium
Ans. (a)
32. Where all the debentures are redeemed, the balance left in the Debenture Sinking Fund
Account is transferable to:
(a) Debentures Account
(b) Sinking Fund Investment Account
(c) Capital Redemption Reserve
(d) General Reserve
Ans. (d)

23

33. The balance in share forfeiture account, after the reissue of all forfeited shares, should be:
(a) added to paid up capital
(b) transferred to goodwill account
(c) transferred to capital reserve account
(d) shown as share forfeiture account
Ans. (c)
34. A company issued Rs. 20,000, 4% bonds repayable on equal installments over 10 years.
What is the amount required in the initial year, to pay interest and to redeem the bonds
(ignore tax and DCF)?
(a) Rs. 56,000
(b) Rs. 28,000
(c) Rs. 20,000
(d) Rs. 8,000
Ans. (b)
35. Match List-I with List-II and select the correct answer using the codes given below the
lists:
List-I

List-II

A. Deferred shares

1. Repayment obligation

B. Preference shares

2. Resembles Stock dividend

C. Bonus shares

3. No dividend obligation

D. Equity Shares

4. Not being used

Codes:
ABCD
(a) 4 3 1 2
(b) 4 1 3 2
(c) 3 2 1 4

24

(d) 4 1 2 3
Ans. (d)
36. Which one of the following statements is false?
(a) The process of issue of bonus shares is also known as capitalization of reserves
(b) Fully paid bonus shares are issued only out of capital reserves
(c) Only revenue reserves should be used when bonus is declared in order to make partly paid
shares into fully paid shares.
(d) Bonus shares one shares issued without payment.
Ans. (b)
37. The Balance Sheet of a company showed the following balances at the end of the year
under the head Reserves and surplus: General Reserve Rs. 5,00,000; Share Premium
account Rs. 50,000; Premium on issue of Debentures account Rs. 20,000; Dividends
equalization fund Rs. 40,000; Surplus on revaluation of assets Rs. 30,000 Profit and Loss
account (credit) Rs. 60,000. Maximum amount available for distribution as dividend to the
shareholders of the company will be:
(a) Rs. 60,000
(b) Rs.1, 00,000
(c) Rs. 6, 00,000
(d) Rs.6, 70,000
Ans. (c)
38. Capital Gearing ratio denotes the relationship between:
(a) assets and capital
(b) loan and capital
(c) equity shareholders fund and long term borrowed funds
(d) debentures and share capital
Ans. (c)
39. The following balances appear on the liability side of a companys Balance Sheet:

25

Rs.
Equity Share Capital: 10,000 Shares of Rs. 10 each

1.00.000

10% Redeemable Preference shares

1, 00,000

5,000 shares of Rs 20 each

Capital redemption reserve account

40,000

14% Debentures 1, 00,000 Deb. of Rs. 2 each

RFC loan

2, 00,000
1, 50,000

Profit and Loss A/c

50,000

The Debt Equity ratio of the company is

(a) 35: 20
(b) 35: 26
(c) 35: 25
(d) 35: 21
Ans. (c)
40. Consider the following financial information in respect of two companies namely M Co.
and ZCo. :
Items of Assets and Liabilities

M Co. (Rs)

Current Assets

7, 50,000

Closing inventory

3, 00,000

Goodwill

5, 00,000

Current Liabilities

3, 00,000

Z Co. (Rs)
7, 50,000
2, 50,000
3, 50,000
5, 00,000

Based on the above data, acid test of M Co. in comparison to Z Co. is:
(a) lower
(b) equal
(c) higher

26

(d) indeterminate
Ans. (c)
41. Match List-I with List-II and select the correct answer using the codes given below the
lists:
List-I

List-II

(Names of Accounting Ratios)

(Nature of Accounting Ratios)

A. Capital gearing ratio

1. Revenue Statement Ratio

B. Stock velocity ratio

2. Coverage Ratio

C. Debtors velocity ratio

3. Market Price ratio

D. Dividend Yield ratio

4. Balance Sheet ratio

5. Balance Sheet and Revenue statement combined ratio

Codes:
ABCD
(a) 4 1 5 3
(b) 5 4 2 1
(c) 1 5 4 2
(d) 3 2 5 1
Ans. (a)
42. For the purpose of calculating ROI capital employed means:
(a) Net Fixed Assets
(b) Current Assets-Current Liabilities
(c) Gross Block
(d) Fixed Assets + Current assets Current liabilities
Ans. (d)

27

43. Given that the net profit for a certain year of company X Ltd. is Rs. 1,23,000, equityshare capital for the same period is Rs. 10,00,000 and reserve and surplus is Rs. 2,30,000 the
rate of return on owners fund would be:
(a) 12:3%
(b) 10%
(c) 9.98%
(d) none of the above
Ans. (b)
44. Consider the following data:
Costs:

Fixed =

Variable

Rs. 40,000
Rs. 30,000

Rate of income tax

= 30%

Return on capital employed = 10%

Based on the above data the sales volume required to increase the return on capital employed
to 18% would be:
(a) Rs. 5,000
(b) Rs. 7,500
(c) Rs. 8,000
(d) Rs. 8,500
Ans. (c)
45. Consider the following details of companies A B C and D:
A/Rs.

B/Rs. C/Rs. D/Rs.

Fixed Assets 100

125

150

200

Net Current

50

55

50

40

200

250

250

300

Assets
Sales

28

Contribution

150

196

200

180

Fixed Cost

20

27

30

60

If the cut off point of return on investment is l5% then which of the following companies
fulfill this criterion?
(a) A and C
(b) B and C
(c) A, B and D
(d) B, C and D
Ans. (c)
46. Which one of the following is an example of sources of funds?
(a) Decrease in share capital
(b) Increase in long term liabilities
(c) Decrease in long term liabilities
(d) Increase in Fixed assets
Ans. (b)
41. Current Assets are Rs. 3, 00,000 and current liabilities are Rs. 1, 50,000. Now, if the
debtors realized are Rs. 20,000, then its impact on working capital would be:
(a) an increase of Rs. 20,000
(b) a decrease of Rs. 40,000
(c) an increase of Rs. 40,000
(d) nil
Ans. (d)
48. Match List-I with List-II and select the correct answer using the codes given below the
lists:
List-I
A. Fund flow Analysis

List-II
1. Working Capital Management

29

B. Common Size Profit

2. Inventory Control

and Loss Account

C. ABC analysis

3. Management of receivables

D. Debt Collection Period

4. Financial Statement Analysis

Codes:
ABC D
(a) 4 1 2 3
(b) 1 4 2 3
(c) 2 3 1 4
(d) 3 1 2 4
Ans. (b)
49. The main object of audit is to:
(a) detect the errors and faults
(b) help the company in developing a sound accounting system
(c) verify the correctness of final accounts
(d) prevent commission of errors and faults
Ans. (c)
50. Surprise Checks are part of:
(a) an auditors working papers
(b) an audit programme
(c) an auditors report
(d) an accounting standard
Ans. (b)

30