A-AS Level (CIE) Accounting Paper-1: Specimen Questions with Answers 41 - 42 of 93

Question 41

Question

MCQ▾

A capital reserve is generally created out of profits or gains of a capital nature. Which of the following activity is not a profit of capital nature?

Choices

Choice (4)

a.

Profit on sale of goods

b.

Profit on sale of fixed assets

c.

Profit on reissue of forfeited shares

d.

Profit prior to incorporation

Answer

a.

Explanation

Capital reserve is an account created on the balance sheet to help the company to handle any unforeseen events like inflation, instability, need to expand the business or to get into a new and urgent project. Those reserve created out of profits of capital nature and not out of operating profits, premium on issue of shares and debentures, premium on reissue of forfeited shares, profit on fixed assets sale, profit on revaluation of fixed assets.

Question 42

Question

MCQ▾

When an incoming partner purchases his share from one of the existing partners

Choices

Choice (4)

a.

The total assets of the firm do not change

b.

The assets of the firm will be augmented to the extent of the payment received from the new partner

c.

The changes in the total assets of the firm will depend upon the structure of the assets

d.

The total assets of the firm will be reduced if the existing partner withdraws the share surrendered

Answer

b.

Explanation

  • When the incoming partner purchases his share of from one or more existing partners, the amount brought in by him will be paid to other existing partners from whom he has purchased the shares and the amount of assets of the firm changes to the extent of shares purchased by him.
  • The other way of admission is when an incoming partner contributes to the assets of the firm. In this case the capital of the new partner is the addition to the capital of others thus the firm՚s assets are augmented.

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