Pre-Requisite Competencies (PRC)

The HISAB April, 4 2022

School of Accountancy Lahore Time allowed:1.5 Hour

PRC-4 Introduction to Accounting

Instructions to examinees:
(i) Answer in black pen onl y.
(ii) Mention Name & HGI number on answer sheet.

Mock
1 Following is the summarized of Valsafe Traders (VT) for the year ended 31 December 2020:

Debit Credit
Rs. in'000----

Property, plant and equipment 32,500

Accumulated depreciation at 1 January
2020 - 8,750
Inventory at 1 January 2020 34,300 -
Trade receivables 36,800 -
Prepayments 780 -
Advances 240 -
Cash and bank balances 5,550 -
Capital - 60,395
Drawings 8,480 -
14% Loan - 17,500
Trade and Other payables - 28,740
Revenues - 181,100
Purchases 149,800 -
Selling expenses 12,450 -
Distribution expenses 8,800 -
Administrative expenses 7,460 -
Rent income - 1,125
interest on bank overdraft 450 -
297,610 297,610

Additional information:
i. Cost of closing inventory in hand on 31 December 2020 amounted to Rs. 46,300,000.
Physical inventory count reveled that goods costing Rs. 950,000 were returned by a customer for which no
entry has been made. These goods were sold for Rs. 1,300,000 on credit in last week of December
2020. VT determined that these gods are out of fashion and can be sold at 40% of original selling
price.
ii. Prepayments include fire insurance premium Rs. 300,00 paid owner’s residence.
The annual policy is valid up to 31 March 2021.
 iii. On 1 June 2020, a machine was given at quarterly rent of Rs. 375,000 receivable in advance.
iv. Advances represent three months advance salary taken by a salesman on 1 November 2020.
v. The Loan was acquired on 1 July 2020 and the entire principal along with interest is repayable on
30 November 2021.
vi. Depreciation of property, plant and equipment is charged at 10% on straight line method.
Depreciation should be equally divided between distribution and administrative expenses.
vii. Cash and bank balances include bank overdraft of Rs. 1,490,000.

Required:
a. Prepare statement of profit or loss for the year ended 31 December 2020.
b. Prepare statement of financial position as at 31 December 2020. (20)

1. In preparing its financial statements for the current year, an entity’s closing inventory was
understand by Rs. 200,000

What will be the effect of this error if it remains uncorrected? (02 marks
a) The current year’s profit will be understated and next year’s profit will be overstated
b) The current year’s profit will be overstated and next year’s profit will be understated
c) The current year’s profit will be overstated but there will be no effect on next year’s
profit
d) The current year’s profit will be understated but there will be no effect on next year’s
profit
2. Bilal has started a trading business. He deals in goods where prices are usually rising over the
time. Which of the following statements is correct regarding selection of ‘FIFO of Average
method’ in this case? (02 marks)
a) FIFO will result in lower reported profits
b) Average method will lead will higher cost of ending inventory
c) Profit will be unaffected by by the selection inventory method
d) Average method will give more accurate profit
3. Which TWO of the following is included in cost of inventory? (02 marks)
a) Recoverable taxes paid on purchases
b) Normal wastage of material
c) Selling Cost
d) Fixed manufacturing overheads.
4. A company purchased an inventory item at purchase at Rs. 1,800 and also incurred freight cost
of Rs. 155. The item will be sold at margin of 15% after incurring freight out and packing cost
of Rs. 200 and Rs, 150 respectively. At which value the item should be carried in the books?
(02 marks)
a) Rs. 1,955
b) Rs. 2,300
c) Rs. 1,950
d) Rs. 2,150
e) Rs. 1,800
f) Rs. 2,100
5. Which of the following does not require journal entry in periodic inventory method? (02
marks)
a) Goods returned by a supplier
b) Abnormal loss
c) Closing inventory
d) Normal loss
6. If a property, plant and equipment remains idle for whole year, the depreciation expense for
the year will be NIL under:
a) Reducing balance method
b) Units of production method
 c) All of the above method
d) Straight line method
7. During the year 2019, an entity purchased a machine for Rs. 20 million to be used for 6 years,
which of the following would represent residual value of this machine in 2019? (02 marks)
a) Rs. 4 million can be currently obtained from disposal of a 6 year old similar machine
b) Rs. 15 million can be currently obtained from disposal of the machine in present
condition
c) Rs. 7 million can be obtained in 2025 from disposal of a 6 year old similar machine
d) Rs. 18 million can be obtained in 2025 from disposal of the machine in present condition
8. A motor vehicle was purchased for Rs. 1,395,000 on July 2018. It estimated useful life of 5
years and residual value of Rs. 255,000. If the sum of digits method of depreciation is used,
what will be the carrying amount of motor vehicle as at 30 June 2020? (02 marks)
a) Rs. 558,000
b) Rs. 711,000
c) Rs. 456,000
d) Rs. 303,000
9. Which of the following is not an asset that falls under the scope of IAS 16 PP&E.(02 marks)
a) Assets held for sale in the normal course of business
b) Tangible assets
c) Assets expected to be used for more than one period
d) Assets held for the production or supply of goods or services
10. The purpose of depreciation is o : (02 marks)
a) Recognize that assets lose value over time
b) Allocate the depreciate cost on a systematic basis over the asset’s useful life
c) Accumulate a fund for asset replacement
d) Write the asset down to its realizable value at the end of each period
11. A liability is classified as current liability if it is paid; (02 marks)
a) Within one year or the normal operating cycle, whichever is shorter
b) Within one year or the normal operating cycle, whichever is longer
c) Out of current assets
d) Out of non-current assets
12. Which TWO of the following items would be appearing in analysis of expenses by nature? (02
marks)
a) Administrative expenses
b) Salaries expenses
c) Distribution expenses
d) Finance cost
13. Which of the following best describes a period cost? (02 marks)
a) A cost that can be easily allocated to a particular period, without the need for
arbitrary apportionment between periods
b) A cost that is identified with a unit produced during the period is included in the value of
inventory. The cost is treated as an expense for the period when the inventory is actually
sold
c) A cost that is incurred regularly every period, eg every month or quarter
d) A cost that relates to a time period is not included in the inventory valuation. The entire
cost is treated as an expense for the period.

14. Consider the following diagram

 Total Cost
(Rs.)

Level of activity

Which of the following costs would be most likely to be illustrated by the diagram given below?
a) Direct materials cost
b) Factory rent
c) Indirect material cost
d) Labor cost
15. What entry should be recorded when actual overhead expenditure is incurred? (02
marks)
a) Debit: inventory (WIP) and credit: production overheads
b) Debit: production overheads and credit: cash / Accrual
c) Debit: production overheads and credit: cost of sales / P&L
d) Debit: cost of sales / P&L and credit: production overheads
16. A business has an overhead absorption of Rs. 425 per machine hour, based on a budgeted
activity level of 12,400 hours. In the period covered by the budget, actual machine hours
worked were 2% more than the budgeted hours and actual overhead expenditure incurred
was Rs. 5,638,900. What was the total absorbed overheads for the period? (02 marks)
a) Rs. 5,638,000
b) Rs. 5,375,400
c) Rs. 5,270,000
d) Rs. 5,500,000
17. Determine the balance as per bank statement using the following information; (02 marks)

Rupees
Balance as per cash book 49,100
Cheques received and deposited into the bank, but not yet credited in the bank statement 4,600
unpresented cheques 6,300
credit transfer appearing in the bank statement but not entered in the cash book 3,400

a) Rs. 54,200
b) Rs. 50,800
c) Rs. 52,500
d) Rs. 58,800
18. Which of the following statements is correct? (02 marks)
a) Debit balance as per bank statement means a bank overdraft
b) Credit balance as per cash book means an asset
c) Debit balance as per cash book means a bank overdraft
 d) Credit balance as per bank statement means a bank overdraft
19. For reconciling bank balances, unpresented cheques should be: (02 marks)
a) Added to balance of bank statement and deducted from balance of cash book
b) Deducted from balance of bank statement or added to balance of cash book
c) Deducted from balance of bank statement and added to balance of cash book
d) Added to balance of bank statement or deducted from balance of cash book
20. What is the purpose of maintaining an allowance for doubtful debts account? (02 marks)
a) Have an estimate of future irrecoverable debts
b) Records the expenses of irrecoverable debts
c) Matches the estimated cost of future irrecoverable debts against the revenue earned in giving
rise to the potential irrecoverable debts
d) Records irrecoverable debts without taking them out of the books of an entity
21. At 31 December 2020, receivables totaled Rs. 785,000 before making adjustments.(02
marks)
 It was decided to write off Rs. 20,000 of debts as irrecoverable and create specific
allowance of 80% against balances of Rs. 75,000
 General allowance for receivables is to be maintained at 5% of receivables.
Allowance for doubtful receivables as at 31 December 2019 amounted to Rs. 31,000.
What should be the total allowance for doubtful receivables as at December 2020?
a) Rs. 94,500
b) Rs. 95,500
c) Rs. 110,500
d) Rs. 109,500
22. At December 2019 an entity’s allowance for doubtful receivables amounted to Rs. 48,000
which was five per cent of the receivables at that date. At 31 December 2020, receivables
totaled Rs. 1,085,000. It was decided to write off Rs. 53,000 of debts as irrecoverable and,
based on past experience, to keep the allowance for doubtful receivables at 5% of
receivables.
What should be the charge in the statement of profit or loss for the year ended 31
December 2020 for Bad and doubtful receivables expense? (02 marks)
a) Rs. 49,400
b) Rs. 46,750
c) Rs. 59,250
d) Rs. 56,600
23. On 1 July 2019 a business acquired a shop on rent which is payable quarterly in advance.
Payments of rent were made as follows:(02 marks)
Date Rupees
1-Jul-19 75,000
30-Sep-19 75,000
31-Dec-19 75,000
31-Mar-20 75,000
30-Jun-20 75,000

What will be the rent expense charged to statement of profit or loss for the year ended 31
august 2020?
a) Rs. 75,000
b) Rs. 225,000
c) Rs. 300,000
d) Rs. 375,000
24. An entity received electricity bill for the month of June 2020. The bill will be paid on 10
July 2020. The entity’s financial year ends on 30 June, how would the payment be
recorded? (02 marks)
a) Debit electricity expense and credit utilities payable
 b) Debit utilities payable and credit electricity expense
c) Debit utilities payable and credit cash
d) Debit electricity expense and credit cash
25. On 1 February 2019, a loan of Rs. 6,000,000 was taken from a bank for acquisition of an
office building. A portion of the building was rented out on 1 august 2019 are a monthly
rent of Rs. 45,000. Interest is payable at 15% per anum on 31 January each year and rent
is received half yearly in advance.
What amounts of interest payable and unearned rent should be shown in the statement of
financial position as on 31 December 2019? (02 marks)
a) Interest payable Rs. 900,000, Unearned rent Rs. 270,000.
b) Interest payable Rs. 450,000, Unearned rent Rs. 45,000.
c) Interest payable Rs. 825,000, Unearned rent Rs. 250,000.
d) Interest payable Rs. 825,000, Unearned rent Rs. 45,000.
26. Consider the following statements
i. Higher closing prepaid balance than previous year means that payments for the year
exceed the expense for the year.
ii. Higher closing accrued income balance than previous year means that receipts for the
year exceeds the income for the year.
Which of the above statements is / are correct? (02 marks)
a) Only (i) is correct
b) None is correct
c) Only (ii) is correct
d) Both are correct
27. How will these assets expire? (02 marks)
Prepaid rent Office supplies

a) Through use and consumption With the passage of time

b) With the passage of time Through use and consumption

c) Through use and consumption Through use and consumption

d) With the passage of time With the passage of time

28. Which TWO of the following would be appearing in the trail balance? (02 marks)
a) Gross Profit
b) Trade discount received
c) Discount allowed
d) Accumulated depreciation
29. On 4 August 2021, goods were sold on credit for Rs. 125,000 with credit terms of 3/10, n/20.
On 8 August 2021 goods of Rs. 25,000 were returned by the buyer. How much should the
seller expect to receive if the buyer pays on 12 August 2021? (02 marks)
a) Rs. 125,000
b) Rs. 97,000
c) Rs. 100,00
d) Rs. 121,250
30. Which TWO of the following statements are correct regarding trail balance? (02 marks)
a) Every credit balance represents income
b) Return inward has debit balance
c) Trail balance is not a book of prime entry
d) Opening stock as well as closing stock appear in a trail balance
31. Zee bought goods on credit from Shan traders (ST). The goods were not according to the
required specifications and therefore returned to ST. which document should Zee send to
ST? (02 marks)
a) Credit note
 b) Debit Note
c) Invoice
d) Statement of account
32. A transaction not recorded in any other books of original entry is recorded in: (02 marks)
a) General journal
b) Purchases day book
c) Sales day book
d) Cash book
33. Match each of the following transactions with appropriate book of prime entry: (02 marks)

Sales made on credit Sales day book

Sales made on cash Cash book

Return by credit customer Return inward journal

Purchase of non-current asset on credit

General journal

34. Which of the following would require a double entry? (02 marks)
a) Delivery note
b) Sales invoice
c) Statement of account
d) Sales order
35. Which TWO of the following would be recorded in general journal? (02 marks)
a) Increase in provision for doubtful debts
b) Receipts of a written off balance
c) Write-off of a trade receivable balance
d) Advance received from a customer
36. A business commenced with capital in cash of Rs. 150,000. Inventory of Rs. 100,000 was
purchased for cash and half of inventory was sold at markup of 20% on credit. Furniture
of Rs. 40,000 was purchased on credit. What will be the accounting equation
(Asset- Liabilities= Capital) after these transactions? (02 marks)
a) Rs 190,000 – Rs. 40,000 = Rs. 150,000
b) Rs 200,000 – Rs. 40,000 = Rs. 160,000
c) Rs 150,000 – Rs. 40,000 = Rs. 110,000
d) Rs 160,000 – Rs. 40,000 = Rs. 120,000
37. Total assets of a business would charge as a result of : (02 marks)
a) Wages being paid in cash
b) Non-current assets being purchased on cash
c) A supplier’s balance being paid by cheque
d) Non-current assets being purchased on credit
38. Which TWO of the following is not part of a complete set of component of financial
statement? (02 marks)
a) Notes to the financial statements
b) Auditor’s report
c) Statement of financial position
d) Director’s report
39. Which TWO of the following would be considered as business transactions? (02 marks)
a) Business paid the electricity bill of previous year
b) Business received electricity bill of office premises which bill be paid in next year
c) Owner paid the electricity bill of owner’s residence from personal cash
d) Owner received the electricity bill of the owner’s residence
40. Income arise from increase in assets or decrease in a liability resulting in; (02 marks)\
a) Increase in equity including contribution from owners
b) Increase in equity other than contribution from owners
c) decrease in equity other than contribution from owners
d) decrease in equity including contribution from owners