Chapter 1: Introduction to accounting

1 D Part of the cost of getting the asset into working condition. A and B represent restoration to a
previous level of condition, and C is the acquisition of an asset that would be classified as
inventories.
2 A Purchase of fixed shelving units Capital. This is because the asset will be used to assist in
the business process and lasts more than one year.
Payment of wages Revenue. The benefits of paying wages (the ability to sell
goods and services), are consumed during the year on a
time basis.
Repairs to fixed shelving units Revenue. This is because repairs represent a restoration of a
product to a previous level of performance.
3 D Payment of local property tax Revenue
Purchase of premises Capital
Installation of solar panels Capital
External audit fee Revenue
4 C This is because it is enhancing the performance/capacity of the premises. A represents restoration
of the asset, B is consumption of the asset over time, and D is in relation to inventory.
5 C An aspect of professional behaviour is the avoidance of any action that discredits the profession.
6 D Non-current assets are carried at Accruals (depreciation matches cost to
at cost less depreciation periods over which the asset is used)
Expenses incurred but for which invoices have Accruals
not yet been received are included in the
financial statements

7 D The accruals concept is also known as 'matching’ - transactions are recognised in the period in
which they occur.
8 C Only legitimate business expenses paid by the owner are relevant and will be included.
9 B The ISSB has stated that it will initially focus on climate-related disclosures due to the urgent need
for information on climate-related matters.

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 Chapter 2: The accounting equation
1 D This represents a decrease in capital. A is a decrease in an asset (cash) and a liability (payables), B
is an increase in an asset (inventory), and a decrease in another (cash),
C is an increase in one asset (non-current assets), and a decrease in another (cash).
2 D A, B and C are all concerned with the value of a business as a whole, but its actual purpose
focuses on the cost/value of individual assets and liabilities at a point in time.
3 D Assets (receivables) will decrease and liabilities (the overdraft) will also decrease.
4 A Assets will increase due to the inventory and liabilities will increase as the business now owes
money to the supplier.
5 A Assets increase as cash increases from the loan and liabilities will increase as the loan is a liability.
6 B Assets will increase as there is an increase in cash of £1,000 and a decrease in inventory of £700
(net increase of £300) and capital will increase due to the profit of £300.
7 B The owner is a separate entity to the business and therefore any personal expenses paid by the
entity must be accounted for as drawings. This is an example of the business entity concept.
8 B This is because the computer will be used in the business over more than one reporting period. A
is a reduction in capital, C is an increase in assets (inventory), D would be treated as an expense.
9 C

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ICAEW 2024 Answer bank 3
 Chapter 4: Ledger accounting and double entry
1 A DR Trade receivables £2,880, CR Sales £2,400, CR VAT £480.
2 C Receipt of an invoice for the purchase of a non-current asset.
3 D Debit entries decrease income and increase assets.
4 B Lei owes money to George, so Statement 1 is false. Lei has drawings of £500, so Statement 2 is
true.
5 B Note that receipts from cash sales are not entered in trade receivables, which is for credit sales
only.
TRADE RECEIVABLES

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 £ £
Purchases (25,200  1/6) 4,200 B/d 2,000
Cash at bank 9,420 Sales (100,800  1/6) 16,800
C/d () 5,180
18,800 18,800

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 16 C
Debit Credit
£ £
Salaries expense (1,500 + 160) 1,660
Cash at bank (1,500 – 300 – 150) 1,050
HMRC (300 + 150 + 160) 610
17 D
Debit Credit
£ £
Salaries expense (1,500 + 160) 1,660
Cash at bank (1,500 – 300 – 150) 1,050
HMRC (300 + 150 + 160) 610
18 D Increase liability Credit
Decrease asset Credit
19 A Increase asset Debit
Decrease capital Debit

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ICAEW 2024 Answer bank 7
 Chapter 6: Errors and corrections to accounting
records and financial statements
1 B £4,270
CASH AT BANK

2 D
TRADE RECEIVABLES

3 A
£
Balance per bank statement 2,000
Less uncleared payment (1,000)
Add outstanding lodgement 600
Balance per cash at bank account 1,600
4 A The difference with Turks does not require adjustment as it is a timing difference. The contra with
the receivables ledger in respect of Caicos requires the payables ledger balance to be reduced and
therefore trade payables to be decreased.
5 A, C
D and E are credits in the trade payables account, while B is an entry in the trade receivables
account.
6 A, D
Both the electronic transfers made on 30 June 20X5 and the uncleared lodgement have been
entered in the cash at bank account – there is merely a timing difference between their entry in the
cash at bank account and appearance on the bank statement.
The two matters that will require an adjustment are therefore the bank charges and the returned
payment.

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 7 C
Results in reduced cash at bank
Point
account balance?

The cash at bank account has correctly recorded the No – the bank needs to correct the
payment and the error rests with the bank. error in its records
Bank charges debited by the bank have not yet been Yes – need to record by DR Bank
entered in the cash at bank account. charges CR Cash at bank account
The value of unprocessed payments exceeded the value No – an adjustment in the bank
of uncleared lodgements. reconciliation only (timing
difference)

8 C The recording error on stamps means there is an understatement of expenses of

(80 – 8) = £72. The top-up should have been (24 + 40 + 80) = £144 but instead it was £72, so the
petty cash balance is £72 less than it should be.
9 C Purchases have been debited but should have been credited and therefore need to be decreased by
(52 + 25) = £77 (CR). The suspense account needs to be removed (DR) and the amount of
payables reduced (DR). Therefore Debit Suspense account £52, Debit Payables £25, Credit
Purchases £77.
10 B (22,000) + (2,000) + 500 + (1,000) = £24,500.
The adjustment to closing inventory will increase cost of sales.
11 B, D
A transposition error has occurred (£1,100 instead of £1,010) and an error of principle (the debit
should have been to non-current assets cost account, not expenses).
12 B
Effect on
profit
£
Goods drawn from inventory (300  100/125) 240
Change in allowance for receivables (1,220 – 1,000) (220)
Increase 20

13 D 10,000 – 1,800 – (5,000  20/100) = 7,200

(1) The amount written off needs to be increased by £1,800 (£2,000 – £200). This will reduce
profits by £1,800.
(2) Needs to be recorded as drawings – no impact on profits.
(3) As the sale should not be recognised yet, the profit element should be removed.
14 B
£
Unadjusted profit 236,662
(1) Add back machine treated as repairs 6,480
(2) Required depreciation (56,160  25%) (14,040)
Additional depreciation on machine (6,480  25%) (1,620)
227,482

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 15 A
£
(1) Add back machine treated as repairs 10,000
Required depreciation (10,000 / 5 years  9/12 months) (1,500)
(2) Accrued bank interest (income) 400
Increase in profit 8,900
16 A
£
Opening loss (19,200)
(1) Remove closing inventory from cost of sales (1,300)
(2) Record bank charges (200)
(3) Record petty cash expenses * (100)
Loss for year (20,800)
* The amount required to reinstate the imprest balance is equal to the administrative expenses.
17 D The corrected payables ledger is:
TRADE PAYABLES

£ £
Trade receivables (contra) 3,300 Balance b/d 12,400
Purchases (Discounts received Purchases 135,900
from suppliers) 4,100
Cash at bank account 82,800
Balance c/d 58,100
148,300 148,300
18 A Recording an expense to the incorrect category is an error of commission.

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 Chapter 7: Cost of sales and inventories
1 C 20,000/50,000  100 = 40%
2 D £66,000 (£12,300 + 68,400 – 14,700)
3 A Mark up is calculated and applied on top of cost of sales (200,000  35% = 70,000) to arrive at
sales.
4 A TRADE PAYABLES

£ £
Cash at bank 130,800 B/d 11,750
C/d 12,750 Purchases (credit) (β) 131,800
143,550 143,550
WORKINGS
£
Opening inventory (β) 21,600
Cash purchases 2,800
Credit purchases (from above) 131,800
Closing inventory (8,200)
Cost of sales 148,000

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ICAEW 2024 Answer bank 12
 Normal
% £
SP 125 4,200,000
Cost (100) (3,360,000)
GP 25

£
Opening inventory 600,000
Purchases () 3,440,000
Closing inventory (680,000)
Cost of sales 3,360,000

6 A
£ £
FIFO 400 @ 3.50 1,400
300 @ 4.00 1,200
2,600

7 C In this example, cost includes both direct materials/labour and also production overheads.
NRV is expected selling price less expected selling costs.
Cost NRV Lower of cost/NRV
£ £ £
Category 1 5,484 6,384 5,484
Category 2 14,508 14,270 14,270
Category 3 2,760 2,844 2,760
22,514

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 8 C
£
Product X 5,000  £12 = 60,000
Less 600  £3 (£12 – £9) = (1,800)
58,200
Product Y 1,000  £6 = 6,000
Less 100  £2 (£6 – £4) = (200)
64,000
9 C Reducing the value of closing inventories decreases current assets and has the effect of increasing
cost of sales, therefore decreasing profit.
10 A
Average
Units Cost cost Value
1.6.X7 100 10 1,000
12.6.X7 50 12 600
20.6.X7 50 15 750
200 11.75 2,350
21.6.X7 (160) 11.75 (1,880)
40 11.75 470

11 B Lower of cost and NRV = £83

£
Cost
Production cost 69
Production overheads 23
92

Net realisable value £

Sales price 120
Less modification costs (25)
Less selling costs (120  10%) (12)
83

12 A
Net Lower
realisable of cost
Cost value and NRV Units Value
£ £ £ £
A 10 12 10 100 1,000
B 14 15 14 150 2,100
C 20 19 19 100 1,900
5,000

13 C (10 units @ £20) + (50 units @ £25) = £1,450

14 C If closing inventory is understated, cost of sales will be overstated so profits will be understated.
Next year opening inventory will be understated and cost of sales will be understated so profits
will be overstated.
15 A
£
Inventory count value 314,400

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 Less purchases (8,400)
Add sales (16,000  60/100) 9,600
Add goods returned 1,000
Inventory figure 316,600

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 16 C
£'000 %
Sales 325 130
Opening inventory 50
Purchases 240
290
Closing inventory (β) (40)
Cost of sales 250 100
Gross profit 75

17 B (375 – 300)/375 = 0.2

18 D
£ %
Selling price 200 125
Cost price (£200  100/125) 160 100
19 C Shipping costs – Include
Purchase price – Include
Breakdown costs – Exclude
Import duties – Include
The cost of inventory includes all expenditure incurred in the normal course of business in
bringing the product/service to its present location and condition.
The breakdown costs were a one-off cost and not in the normal course of business. Therefore they
are excluded.
20 D Closing inventory = 60 + 80 – 70 + 60 – 40 + 50 = 140 units
£
Value (FIFO) 50 units @ £11 550
60 units @ £10 600
30 units @ £9 270
140 1,420

21 A
NRV
Item Cost (SP less 4%)
£ £
X 3,800 4,032
Y 4,600 3,936
Z 1,300 1,584
Therefore, inventory value is 3,800 + 3,936 + 1,300 = £9,036
22 D The NRV of inventory is the amount for which it should be sold after deducting the additional
costs that must still be incurred to get it ready for sale and to sell it.
Hence trade discounts, costs to completion and selling costs should be included when calculating
NRV. Cash discounts received from suppliers would impact in cost of inventory rather than its
NRV and should not be included.

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 23 B, C

Item Increase in closing inventory?

Inventory taken by the proprietor for his No – if already taken will not be included in closing
own use inventory. Need to DR Drawings,
CR Purchases
Goods returned by customers Yes – goods returned by customers should be
included in inventory provided they can be resold.
Prices have been rising during the Yes – a FIFO basis will place the most recent
year and the proprietor now decides to purchases in closing inventory – so cost will be
change from a LIFO basis of valuation higher than under LIFO.
to a FIFO basis
An allowance needs to be made against No – inventory will decrease when the allowance is
several inventory lines made.

24 B Closing inventory is an asset in the statement of financial position and is deducted from cost of
sales (and hence added to profit) in the statement of profit or loss. An increase of inventory from
£9,250 to £10,560 would therefore increase net assets and increase profit (decrease losses) by
£1,310 (10,560 – 9,250).
25 A
Staff member Hourly rate Booked hours Value of work in
(£/hour) incurred progress (£)
Senior physiotherapist 70 25 1,750
Physiotherapist 50 18 900
Graduate physiotherapist 30 8 × 30 240
8 × (30 - 10%) 216
Total value of WIP 3,106
Option B uses the number of hours remaining rather than the number of hours incurred.
Option C does not take account of the 10% discount offered by the graduate physiotherapist.
Option D uses the number of hours remaining and does not take account of the 10% discount
offered.

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 Chapter 8: Irrecoverable debts and allowance for
receivables
1 B The bookkeeper has recorded the write-off as £24,000 but it should have been £42,000. An
increase (DR) in the irrecoverable debt expense and a decrease (CR) in the trade receivables
balance is needed.
2 C No effect as the entry is to administrative expenses, which is deducted from gross profit to arrive
at profit for the year.
3 D
£
Allowance at 28 February 20X6 (18,600)
Add Allowance at 28 February 20X7 24,000
Add Irrecoverable debt written off 3,000
Charge 8,400
4 A

5 A

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ICAEW 2024 Answer bank 19
 7 A
£
Trade receivables at 30 September 20X7 128,000
Less irrecoverable debt written off (10,500)
Less allowance for receivables at 30 September 20X7 (3,000)
114,500

8 B DR Irrecoverable debt expense £11,630, CR Trade receivables £10,600,

CR Allowance for receivables £1,030.
9 A When the cash is received: DR Cash at bank £25, CR Trade receivables £25 in the usual way.
To recognise the irrecoverable debt: DR Irrecoverable debts expense £75, CR Trade receivables
£75.
Overall: DR Cash at bank £25, DR Irrecoverable debts expense £75,
CR Trade receivables £100

10 B
£
Irrecoverable debt recovered (900)
Irrecoverable debt written off 2,100
Increase in allowance (7,170 – 5,558) 1,612
Charge 2,812
11 A, C
Irrecoverable debt written off and increase in allowance for receivables.
12 C
£
Increase in allowance (£2,130 – £1,000) 1,130
Irrecoverable debts written off 500
Irrecoverable debt recovered (50)
Charge 1,580

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 Chapter 9: Accruals and prepayments
1 A Statement of profit or loss (8/12  120,000) + (4/12  96,000) = £112,000
Statement of financial position (2/12  120,000) = £20,000
2 A (2/3  364.20) + 313.70 + 335.80 + 361.20 + (1/3  403.80) = £1,388.10
3 D RENT RECEIVABLE

£ £
Arrears b/d 28,700 Advances b/d 18,300
Statement of profit or loss 319,400 Cash at bank 325,600
Advances c/d 19,200 Arrears c/d 23,400
367,300 367,300

4 B £1,050 has been deducted from instead of added to profit. Therefore to cancel the error, you have to add it
back then to post the correct entry you have to add it on again.
5 C

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ICAEW 2024 Answer bank 22
 8 A £600 + £100 + £130 = £830
9 C (6/12  20,000) + (6/12  22,000) = £21,000
10 B
£
Draft profit 23,800
Increase in accruals (80)
Prepayment 310
24,030

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 11 B RENT RECEIVABLE

£ £
Arrears 8,100 Cash 72,000
Statement of profit or
loss (W) 57,600
Advances 6,300
72,000 72,000

WORKINGS
£
Statement of profit or loss
1 July 20X6 – 31 October 20X6 (54,000  4/12) 18,000
1 November 20X6 – 30 June 20X7 (54,000  8/12  110%) 39,600
57,600

12 B, E
Statement of profit or loss = 12m  £1,800 / 18 = £1,200
Prepayment = 3/18  £1,800 = £300
13 D SUBSCRIPTIONS RECEIVABLE

£ £
Accrued income b/d 1,620 Deferred income b/d 260
Statement of profit or loss 5,500 Cash at bank 7,100
Deferred income c/d 240
7,360 7,360

14 A The balance on the energy expense account at 31 December 20X6 is (£200,000  3/12) + (£200,000 
110%  9/12) = £215,000. This is a debit balance and, therefore, to transfer the balance to the profit and
loss ledger account: DR Profit or loss ledger account £215,000 and CR Energy expense (Option A).
Option B reverses the journal entry. Options C and D ignore the 10% increase in energy costs.
15 C The insurance expense for the year ended 31 March 20X8 is £4,980, being the £1,980 prepayment plus
£3,000 (£3,600  10/12). This is a debit balance on the insurance expense account and therefore to
transfer the balance to the profit and loss ledger account, we must debit the profit and loss ledger account
and credit the insurance expense account with £4,980 (option C). Option D reverses the journal entry.
Options (A) and (B) incorrectly calculate the insurance expense.
16 A The £4,800 paid covers the period 1 October 20X4 to 30 September 20X5. As such,
3 months (July – September 20X5) have been prepaid. The prepayment is therefore £4,800  3/12 =
£1,200. The date on which the payment was made is not relevant.
17 B The quarterly rent received is £30,000/4 = £7,500. Rent is received on 1 January 20X6 for the period to
31 March 20X6, hence 2/3 months has been received in advance. This should be removed from rental
income (DR) and recorded as deferred income (CR).

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