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These MCQs are ideal for students, professionals, and candidates appearing for CA, CPA, ACCA, CMA and other accounting related competitive exams. Each question is written to help you understand accounting concepts, identify your strengths and weaknesses and improve your accuracy and speed. Practice now and get exam ready with our comprehensive set of accounting quiz questions.
Which of the following relationships among assets, liabilities and equity correctly represent the basic Accounting Equation?
Asset = Equity – Liabilities
Equity = Asset + Liabilities
Assets = Equity + Liabilities
Both b & c are correct
Which accounting principle requires the preparation of Financial Statements on ACCRUAL BASIS rather than on CASH BASIS?
Going Concern Principle
Matching Principle
Conservatism Principle
Economic Entity Principle
A company’s records show the following amounts at 31st December year end for various account heads.
|
Description |
Amount ($) |
|
Accounts Receivable |
50,000 |
|
Property Plant & Equipment |
175,000 |
|
Patents |
15,000 |
|
Inventory |
25,000 |
|
Prepaid Rent |
12,000 |
|
Cash |
5,000 |
|
Accounts Payable |
20,000 |
|
Stockholders’ Equity |
150,000 |
|
Long term Loan |
95,000 |
|
Interest Payable |
5,000 |
|
Wages Payable |
12,000 |
What is the balance of the company’s Working Capital at 31st December?
150,000
70,000
45,000
55,000
Which cost allocation method of inventory will provide the lowest amount for Cost of Goods Sold account if inflation in the economy is on the rise?
FIFO
LIFO
Weighted Average
Specific Identification
In which of the following Journal/Journals a narration is required?
Sales Journal
Cash Payment Journal
General Journal
All of the above
An additional set of ledger accounts that is kept outside the General Ledger for recording individual transactions for each individual debtor or creditor is known as
Subsidiary Ledger
Control Ledger
Summary Ledger
Monitoring Ledger
On 1 October 2015, Mars Corp. had invested $10,000 in a 12-month fixed-term deposit account. The interest rate was 7% per annum and the interest is to be received twice per year — on 31 March 2016 and 30 September 2016. What will be the Adjusting Entry to be passed on 31 December 2015?
|
|
Date |
Particulars |
Debit |
Credit |
|
a |
31 Dec |
Accrued Interest Revenue |
$700 |
|
|
Interest Revenue |
|
$700 |
||
|
|
||||
|
b |
31 Dec |
Cash |
$175 |
|
|
Interest Revenue |
|
$175 |
||
|
|
||||
|
c |
31 Dec |
Accrued Interest Revenue |
$175 |
|
|
Interest Revenue |
|
$175 |
||
|
|
||||
|
d |
31 Dec |
Interest Revenue |
$700 |
|
|
Accrued Interest Revenue |
|
$700 |
||
ABC Corp. is using LIFO as a cost allocation method for its inventory. It reports the following figures for the year ended 31st December 2015.
Cost of goods sold under LIFO = $15,000
Beginning Inventory = $3,000
Ending inventory = $2,000
Beginning LIFO Reserve = $1,500
Ending LIFO Reserve = $2,500
What would be the best estimate of the ABC Corp. cost of goods sold on a FIFO basis?
$15,000
$14,000
$16,000
$19,500
A company has a Current Ratio of greater than one and a Quick Ratio of less than one. What will be the impact on the Current Ratio and Quick Ratio, if the company pays accrued interest with cash?
Both the ratios will increase
Both the ratios will remain the same
The current ratio will decrease and quick ratio will increase
The current ratio will increase and quick ratio will decrease
Which journal entries convert the company’s accounting records from cash basis accounting to accrual basis accounting?
Rectification Journal Entries
Closing Journal Entries
Adjusting Journal Entries
Memorandum Journal Entries
Depreciation expense will appear in which section of the Statement of Cash Flows?
Operating
Investing
Financing
Either in Operating or Investing
In a double entry bookkeeping system, every transaction will affect how many accounts?
One account
Two accounts
Two or more accounts
Three or more accounts
Purchase of treasury stock by the company will appear in which section of the cash flow statement?
Investing
Operating
Financing
No impact on cash flow statement
If a company wishes to improve its inventory turnover ratio, it will most likely be involved in:
Overstating its working capital
Understating its earnings
Overstating its assets
All of the above
ABC Corp. purchased an equipment for $60,000 on January 1, 2015. The useful life is estimated to be 5 years and the salvage value $10,000 at the end of its useful life. The company’s year-end is 31st December. What will be the depreciation expense for the year ended 31st December 2016 if the company is using double declining method of depreciation?
$10,000
$12,000
$24,000
$14,400
If the carrying value of an asset exceeds its tax base and the difference is considered to be temporary and reversible in the future, a company will record:
A deferred tax asset on its balance sheet and a deferred tax income in its income statement.
A deferred tax liability on its balance sheet and a deferred tax expense in its income statement.
A deferred tax asset on its balance sheet and a deferred tax expense in its income statement.
A deferred tax liability on its balance sheet and a deferred tax income in its income statement.
Which of the following transactions will cause the owner’s equity to increase?
Owner withdraw funds from the business for personal use.
Rent expense was paid for the year in advance.
Cash sales were made to a customer.
Loss was made on the sale of an asset.
An asset was purchased with a cost of $50,000 and is depreciated over its useful life of 5 years rather than expensing the entire amount when it is purchased. This is done due to compliance with which of the following accounting principle?
Materiality
Matching
Conservatism
Monetary Unit
Which of the following organization is most likely to present a liquidity-based balance sheet rather than a classified balance sheet?
Banking company
Services company
Manufacturing company
Retail company
Which of the following is not an example of product cost?
Direct material cost
Direct labor cost
Factory depreciation
Advertising cost
ABC Corp. trades in an old equipment which originally cost $30,000 and has accumulated depreciation of $15,000, and purchases a new vehicle costing $50,000 in return for cash of $40,000 and a trade in allowance of $10,000 on the old equipment. Assuming the transaction has commercial substance, what will be the amount of gain or loss to be recognized at the date of transaction?
$10,000 gain
$15,000 loss
$5,000 loss
$20,000 gain
ABC Corp. Cash account has a balance of $1,200 as of December 31. The bank statement for this account shows a balance of $1,800 as of December 31. There are outstanding checks of $960 and a deposit in transit of $200. The bank statement shows interest earned of $40, customer returned check of $150 and service charges of $50. After preparing the bank reconciliation statement, the reconciled balance that will appear on the company’s balance sheet on December 31 will be:
$1,200
$1,800
$1,360
$1,040
Which of the following is an off-balance sheet financing technique?
The use of Operating Leases
The use of Capital Leases
The use of LIFO method for inventory
The use of FIFO method for inventory
Which of the following is not reported on balance sheet?
Wages payable
Prepaid rent
Interest expense
Both b & c
Red Corporation records show the following figures at the year-end for various account heads at October 31.
|
Description |
Amount ($) |
|
Prepaid rent |
$1,400 |
|
Cash |
$500 |
|
Goodwill |
$600 |
|
Inventory |
$1500 |
|
Short term deposits (3 months maturity period) |
$1200 |
|
Accounts Receivable |
$700 |
|
Accounts Payable |
$1400 |
|
Wages Payable |
$320 |
|
Interest Payable |
$280 |
What will be the Quick Ratio of Red Corporation at October 31?
1.2
2.65
2.95
1.9
A company is offering bonus to its staff based on its annual earnings performance. The bonus incentive will make the managers susceptible to present an increased level of earnings through accounting manipulation by:
Presenting a purchase as an expense rather than capitalizing it.
Decreasing the useful life estimate for depreciable assets.
Reducing the estimate of uncollectible debtors.
Using a double declining balance method of depreciation instead of straight line metho
Emily decides to rent out the second floor of her shop to another business. Rent for the first 12 months is $5000 per month. The rent is to be received 3 months in advance commencing 1st November 2015. The company would record the rent received in advance as rent revenue when the cash is received on November 1st 2015. What will be the adjusting general journal entry at the end of the year on December 31 related to rent income?
|
|
Date |
Particulars |
Debit |
Credit |
|
a |
31 Dec |
Cash |
$5,000 |
|
|
Advance Rent |
|
$5,000 |
||
|
|
||||
|
b |
31 Dec |
Advance Rent |
$15,000 |
|
|
Rent Revenue |
|
$15,000 |
||
|
|
||||
|
c |
31 Dec |
Rent Revenue |
$5,000 |
|
|
Advance Rent |
|
$5,000 |
||
|
|
||||
|
d |
31 Dec |
Cash |
$5,000 |
|
|
Rent Revenue |
|
$5,000 |
||
Balance sheet is also known as
Statement of Retained Earnings
Statement of Financial Position
Statement of Operations
Both a & b are correct
Johnson Ltd. records shows the following information for the year ended December 31.
|
Description |
Amount ($) |
|
Net Income for the year |
$140,000 |
|
Depreciation expense |
$5,000 |
|
Decrease in Accounts Payable |
$25,000 |
|
Gain on sale of equipment |
$14,000 |
|
Increase in Inventory |
$12,000 |
While preparing cash flow statement for the year ended December 31, what amount will appear as cash flow from operating activities for Johnson Ltd?
$168,000
$94,000
$118,000
$196,000
What is the correct sequence for recording a transaction in accounting?
Journalizing, posting to ledgers, summarizing, presenting
Summarizing, journalizing, posting to ledgers, presenting
Presenting, posting to ledgers, journalizing, summarizing
Posting to ledgers, presenting, summarizing, journalizing
Apex Consulting received money in advance for providing consultancy services to ABC Corp. Since the money was received in advance before performing the required services, Apex Consulting would record the cash received as an asset and the amount unearned as:
Revenue
Liability
Expense
Asset
Which of the following financial statement/financial statements can be prepared without following the basic accounting equation through double entry book keeping?
Income Statement
Cash Flow Statement
Balance Sheet
All of the above
Purchase of non-current asset on credit will be recorded in which of the following journals?
Cash Payment Journal
Sales Journal
Purchase Journal
General Journal
Which one of the following is an example of classification of expense by function?
Selling expense
Interest expense
Tax expense
Salaries expense
Distinction between current and non-current items on the balance sheet is referred to as a:
Liquidity based balance sheet
Classified balance sheet
Unclassified balance sheet
Both a & b are correct
Accumulated depreciation account will be having which type of closing balance?
Credit balance
Debit balance
Either credit or debit balance
It has no balance
What impact will the increase in days payable outstanding have on cash flow from operating activities, assuming other things stand equal?
A decrease in cash inflow from operating activities
An increase in cash outflow from operating activities
No impact
An increase in cash inflow from operating activities
ABC Corp. has the following turnover ratios.
|
Description |
Amount ($) |
|
Receivables turnover ratio |
5.4 |
|
Payables turnover ratio |
6.2 |
|
Inventory turnover ratio |
4 |
What is the cash conversion cycle of ABC Corp.?
100 days
218 days
36 days
30 days
Which of the following is a contra revenue account?
Accumulated depreciation account
Allowance for doubtful accounts
Sales return and allowances account
Both b & c are correct
ABC Corp. borrowed $20,000 on July 1, 2010 and signed a two-year note bearing interest at 8% per annum compounded annually. Interest is payable in full at maturity on 30 June 2013. What amount should ABC Corp. report as a liability for accrued interest on 31 December 2011?
$1,600
$2,464
$2,400
$3,200
1. Explanation: The correct answer is (c).
Assets in a business are either financed by the owners’ equity or through incurring liabilities. Thus total assets in a business are equal to the owners’ equity and liabilities.
2. Explanation: The correct answer is (b).
Matching Principle requires companies to match the revenues earned during an accounting period (month, quarter, year, etc.) with the corresponding expenses incurred during the same accounting period, irrespective of the cash received or paid.
3. Explanation: The Correct answer is (d).
Working Capital = Current Assets – Current Liabilities
Current Assets in this case are
|
Accounts Receivable |
50,000 |
|
Inventory |
25,000 |
|
Prepaid Rent |
12,000 |
|
Cash |
5,000 |
|
TOTAL |
92,000 |
Current Liabilities are
|
Accounts Payable |
20,000 |
|
Interest Payable |
5,000 |
|
Wages Payable |
12,000 |
|
TOTAL |
37,000 |
4. Explanation: The correct answer is (a).
First in First Out is the cost allocation method that will give the lowest amount of Cost of Goods Sold for a particular accounting period in an inflationary economy. Because when the prices are going up, new inventory items will be purchased at higher prices than those that are purchased earlier in the period. The FIFO method assumes that the items bought earliest in the period will be consumed first and thus the lower cost items will be allocated to the cost of goods sold account. This will result in a lower cost of goods sold amount.
5. Explanation: The correct answer is (c).
Sales Journal and Cash Payment Journal are special journals which record only the credit sales and cash payments respectively. In special journals, there is no need to provide a written description of what has occurred because all the transactions are of a similar nature. Also, the title of the special journal describes the nature of transactions recorded in it.
However, since the General Journal records a wide variety of transactions, thus it is necessary to give a brief description of the nature of transaction.
6. Explanation: The correct answer is (a).
Every organization keeps an additional set of subsidiary ledgers by the name of Debtor (Subsidiary) Ledger and Creditors (Subsidiary) Ledger that contain a separate account for each individual debtor and creditor respectively. A General Ledger only contains summary accounts for all the debtors and creditors by the name of Debtors Control Account and Creditors Control Account respectively. Further details are provided in the Subsidiary Ledgers.
7. Explanation: The correct answer is (c).
Interest earned but not yet received is a current asset for the organization and it has to be recorded as a current asset at the end of the reporting period by passing an adjusting entry in the General Journal. The purpose of an adjusting entry is to ensure that profit can be calculated accurately, by comparing revenue earned against expenses incurred in the current Reporting Period.
Interest Revenue (For October 2010 to March 2011) = $10,000*7%*6/12 = $350
Accrued Interest Revenue (For October 2010 to December 2010) = $350 * 3/6 = $175
8. Explanation: The correct answer is (b).
COGS under FIFO = COGS LIFO – (Ending LIFO Reserve – Beginning LIFO Reserve)
9. Explanation: The correct answer is (d).
Accrued Interest is a current liability and cash is a current asset. Both Current Ratio (Current Assets / Current Liabilities) and Quick Ratio {(Current Assets – Inventory – Prepayments) / Current Liabilities} include the cash and accrued interest. By paying accrued interest with cash, we reduce the numerator and denominator of both the ratios by an equal amount. If we reduce the numerator and denominator by same amount, it will increase a ratio that is greater than one and decrease a ratio that is less than one.
10. Explanation: The correct answer is (c).
Adjusting entries are passed at the year end to make a change to a revenue or expense account on closing date so that revenue accounts show revenues earned and expense accounts show expenses incurred in a particular reporting period, thus converting company’s accounting records from cash basis to accrual basis.
Closing entries are passed at the period end to close temporary accounts (revenue and expense accounts). Rectification entries are passes to rectify a mistake made while passing any journal entry. Memorandum entry is not a complete journal entry, rather it is a short message entered in to the journal for future reference.
11. Explanation: The correct answer is (a).
Depreciation expense appears in the operating activities section of the cash flow statement. It is a non-cash expense and since it has reduced the net income of the company thus it is added back to net income in the operating activities section of the cash flow statement.
12. Explanation: The correct answer is (c).
In a double entry system of recording transactions, every transaction will affect at minimum two accounts. However, there can also be more than two accounts affected by a single transaction.
13. Explanation: The correct answer is (c).
Any change in the stockholders’ equity and long term liabilities appears in the financing section of the cash flow statement. Purchase of treasury stock will result in a reduction in stockholders’ equity and thus it will be shown in the financing activities section of the cash flow statement.
14. Explanation: The correct answer is (b).
A company can show an improved Inventory turnover ratio (cost of goods sold / average inventory) either by understating the denominator of this ratio (average inventory) which would understate the working capital and total assets or it can overstate the numerator (cost of goods sold) which would understate earnings.
15. Explanation: The correct answer is (d).
Double declining balance method is a technique of accelerated depreciation in which majority of the depreciation expense is recognized during the first few years of the asset’s useful life.
The formula for double declining balance method of deprecation is
Book value at the beginning of the year * Straight Line rate * 2
Book Value = Cost – Accumulated Depreciation
Straight Line Rate = 1 / Useful Life (1/5 = 0.2)
Deprecation year 1 = $60,000 * 0.2 * 2 = 24,000
Depreciation year 2 = ($60,000 – $24,000) * 0.2 * 2 = $14,400
16. Explanation: The correct answer is (b).
If the carrying value of an asset exceeds its tax base, a deferred tax liability is recorded in the balance sheet along with a corresponding tax expense in the income statement. Accounting for deferred tax is based on the principle that the tax consequence of an item should be recognized in the same period as the item is recognized.
A deferred tax asset and a corresponding deferred tax income arises when the tax base of the asset exceeds its carrying amount.
17. Explanation: The correct answer is (c).
Owner’s drawings, expenses and losses all will be having an impact of reduction in the stockholders’ equity. Cash sales will increase the net income for the year which is added to the retained earnings in equity at the year end, and thus it will increase the equity.
18. Explanation: The correct answer is (b).
The matching principle requires that expenses be matched to the related revenues earned during the accounting period. Economic benefits are obtained from the use of the asset by generating revenue, and in order to match this revenue with the related expense in the accounting period, the asset is depreciated over its useful life.
19. Explanation: The correct answer is (a).
Banks prepare balance sheet on a liquidity based presentation because this presentation is more relevant and reliable for them than a classification based presentation. Companies in other industries mostly present a classified balance sheet.
20. Explanation: The correct answer is (d).
Advertising cost is an example of period cost as it does not specifically relate to the acquisition or production of goods. Costs that become part of the cost of goods manufactured are called product costs. Such costs are incurred on manufacturing process either directly as material and labor costs or indirectly as overheads (factory depreciation).
21. Explanation: The correct answer is (c).
If a transaction, involving exchange of non-monetary assets, has a commercial substance, then gain or loss to be recognized should be computed as follows.
Fair value of the asset surrendered – Book value of the asset surrendered
Fair value = Trade in allowance of $10,000
Book value = $30,000 (Cost) – $15,000 (Accumulated Depreciation) = $15,000
22. Explanation: The correct answer is (d).
A bank reconciliation statement will be prepared by following the two steps mentioned below.
Step 1: Adjust the balance as per Bank Statement
|
Balance as per Bank Statement as of December 31 |
$1,800 |
|
Add: Deposit in transit |
$200 |
|
Less: Outstanding Checks |
$960 |
|
Adjusted Balance as per Bank |
$1040 |
Step 2: Adjust the balance as per Cash Book
|
Balance as per Company’s Cash Book as of December 31 |
$1,200 |
|
Add: Interest earned |
$40 |
|
Less: Checks returned by customers |
$150 |
|
Less: Service Charges |
$50 |
|
Adjusted Cash Book Balance |
$1040 |
23. Explanation: The correct answer is (a).
Operating leases are used for off-balance sheet financing because neither the asset nor the liability appear on the lessee’s balance sheet. Only rent expense is shown in the Income Statement. Capital leases and inventory are shown on the balance sheet and thus they can’t be used as an off-balance sheet financing items.
24. Explanation: The correct answer is (c).
Interest expense for the year is reported in the income statement. Wages payable is a current liability and prepaid rent is a current asset and both of these are presented on the balance sheet.
25. Explanation: The correct answer is (a).
The quick ratio is a liquidity ratio that measures the company’s ability to pay its short term obligations with its most liquid assets (quick assets). Quick assets are current assets that can be readily converted in to cash, within 90 days or in a shorter time period. Quick assets include all current assets except inventory and prepayments as these items can’t be converted in to cash easily.
Quick assets
|
Description |
Amount ($) |
|
Cash |
$500 |
|
Short term deposits (3 months maturity period) |
$1200 |
|
Accounts Receivable |
$700 |
|
TOTAL |
$2,400 |
Current liabilities
|
Description |
Amount ($) |
|
Accounts Payable |
$1400 |
|
Wages Payable |
$320 |
|
Interest Payable |
$280 |
|
TOTAL |
$2000 |
Quick ratio = quick assets / current liabilities
$2,400 / $2000 = 1.2
26. Explanation: The correct answer is (c).
If the manager manipulates the number by reducing the allowance for bad debts and the bad debt expense reported in the period, a higher net income will appear in the income statement for the year. Answer (a) is wrong because presenting purchases as an expense will reduce the net income. Answers (b) and (d) are wrong because, both, decrease in useful life estimate and introducing a double declining balance method for depreciable assets will be having an impact of increasing the depreciation expense for the year which will ultimately reduce the net income for the year.
27. Explanation: The correct answer is (c).
Rent is received in advance for three months on 1st November 2015. The company records this as rent revenue when it received the cash. Since the remaining one month rent has not yet been earned by the company as it has been received in advance, hence it has to be shown as a current liability at the end of the year. Thus, rent revenue for one month is reversed by debiting the rent revenue account and crediting the current liability account (advance rent).
28. Explanation: The correct answer is (b).
Another name used for balance sheet is statement of financial position. Statement of retained earnings present a reconciliation between opening and closing balance of retained earnings during the year. Statement of operations is another name for income statement.
29. Explanation: The correct answer is (b).
|
Cash flow from operating activities |
Amount ($) |
|
Net Income for the year |
$140,000 |
|
Add: Depreciation expense (Deprecation is a non-cash expense and hence it has to be added back to net income) |
$5,000 |
|
Less: Decrease in Accounts Payable (Decrease in accounts payable means that the company has paid cash to its creditors and hence any decrease in accounts payable represent a decrease in cash) |
$25,000 |
|
Less: Gain on sale of equipment (Gain on sale of equipment is reported in income statement and thus included in net income for the year, however it has to be deducted from net income while preparing cash flow from operating activities to avoid double counting as the whole cash amount received from the sale of asset is reported in investing activities section of the cash flow statement) |
$14,000 |
|
Less: Increase in Inventory (Increase in inventory means the company has spent more cash to purchase raw materials and hence it has to be deducted from net income) |
$12,000 |
|
Cash flow from operating activities |
$94,000 |
30. Explanation: The correct answer is (a).
Accounting is an art of recording, classifying, summarizing and presenting financial information to various stakeholders. Recording is done through journalizing the transaction, classification through posting the debit and credit sides of journal entries in to specific ledgers, summary is prepared in the form of trial balance and finally the information is presented to various stakeholders in the form of various accounting reports such as balance sheet, income statement and cash flow statement.
31. Explanation: The correct answer is (b).
The amount unearned has to be recorded as a current liability. When the company performs the required services, it will reverse the current liability and will record revenue.
32. Explanation: The correct answer is (a).
An income statement can be prepared without following the double entry bookkeeping because it only lists the revenue and expense items and present the difference between the two as either a net profit or net loss. Balance sheet, on the other hand, requires the asset accounts to be equal to the equity and liabilities accounts which can only be achieved through following the basic accounting equation and double entry bookkeeping. Similarly, a cash flow statement matches the opening balance of cash account with its closing balance in the balance sheet by setting aside the non-cash transactions. The opening and closing balance of cash can match only if the double entry bookkeeping is followed properly.
33. Explanation: The correct answer is (d).
A general journal is used to record infrequent, non-cash transactions, which cannot be recorded in the special journals. Since the purchase of non-current asset on credit is an infrequent and non-cash transaction, hence, it will have to be recorded in the general journal. If the asset were purchased on cash, the transaction would be recorded in cash payment journal instead of general journal. Sales journal and purchase journal are two types of special journals along with cash receipt journal and cash payment journal that are used to record sale and purchase of goods and service (frequent items) on credit respectively.
34. Explanation: The correct answer is (a).
Selling expense is a classification by function. The other three represent classification by nature.
35. Explanation: The correct answer is (b).
A classified balance sheet present assets and liabilities as current and non-current, while a liquidity based balance sheet present assets and liabilities in the order of liquidity.
36. Explanation: The correct answer is (a).
Accumulated depreciation is a contra asset account. A contra account is intended to have its balance be the opposite of the normal balance for that account. Since asset accounts have a normal debit balance, thus accumulated depreciation being contra asset account will be having a credit balance.
37. Explanation: The correct answer is (d).
An increase in days payable outstanding means that the business is not paying its bills quickly and thus cash inflow from operating activities will increase.
38. Explanation: The correct answer is (a).
Cash conversion cycle is defined as the length of time in days it takes for a company to convert its inputs in to cash flows. Formula for calculating cash conversion cycle is as follows.
Cash Conversion Cycle = days sales outstanding + days inventory outstanding – days payable outstanding
Days sales outstanding = 365 / Receivables turnover ratio = 365 / 5.4 = 68
Days inventory outstanding = 365 / Inventory turnover ratio = 365 / 4 = 91
Days payable outstanding = 365 / Inventory turnover ratio = 365 / 6.2 = 59
Cash Conversion Cycle = 68 + 91 – 59 = 100
39. Explanation: The correct answer is (c).
Sales returns and allowances account is a contra revenue account associated with the revenue account Sales. Both accumulated depreciation and allowance for doubtful accounts are contra asset accounts. Accumulated depreciation is a contra account for depreciable assets and allowance for doubtful accounts is a contra account for accounts receivable.
40. Explanation: The correct answer is (b).
Accrued interest payable at 31 December 2011 is interest expense which has been incurred by 31 December 2011, but has not yet been paid by that date. The note was issued on 1 July 2010 and interest is payable in full at maturity on 30 June 2013. Therefore, there is one year and six months of unpaid interest at 31 December 2011 (1 July 2010 to 31 December 2011). Interest for the first year is $1,600 ($20,000 × 8%). Since interest is compounded annually, the new principal amount for the second year includes the original principal ($20,000) plus the first year’s interest ($1,600). Therefore, accrued interest for the second year ended 31 December 2012 is $864 ($21,600 × 8% × 6/12), and total accrued interest at 31 December 2011 is $2,464 ($1,600 + $864).
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